File No. 33-715
File No. 811-4427
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
Pre-Effective Amendment No. _____
Post-Effective Amendment No. 18
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT
OF 1940 X
Amendment No. 18
UNITED MUNICIPAL HIGH INCOME FUND, INC.
(Exact Name as Specified in Charter)
6300 Lamar Avenue, Shawnee Mission, Kansas 66202-4200
(Address of Principal Executive Office) (Zip Code)
Registrant's Telephone Number, including Area Code (913) 236-2000
Sharon K. Pappas, P. O. Box 29217, Shawnee Mission, Kansas 66201-9217
(Name and Address of Agent for Service)
It is proposed that this filing will become effective
_____ immediately upon filing pursuant to paragraph (b)
__X__ on December 31, 1996 pursuant to paragraph (b)
_____ 60 days after filing pursuant to paragraph (a)
_____ on (date) pursuant to paragraph (a) of Rule 485
_____ 75 days pursuant to paragraph (a)(2)
_____ on (date) pursuant to paragraph (a)(2) of Rule 485
_____ this post-effective amendment designates a new effective
date for a previously filed post-effective amendment
======================================================================
DECLARATION REQUIRED BY RULE 24f-2(a)(1)
The issuer has registered an indefinite amount of its securities
under the Securities Act of 1933 pursuant to Rule 24f-2(a)(1). Notice for
the Registrant's fiscal year ended September 30, 1996 was filed on
November 26, 1996.
<PAGE>
UNITED MUNICIPAL HIGH INCOME FUND, INC.
=======================================
Cross Reference Sheet
=====================
Part A of
Form N-1A
Item No. Prospectus Caption
- --------- ------------------
1 ........................ Cover Page
2(a) ..................... Expenses
(b) ..................... An Overview of the Fund
(c) ..................... An Overview of the Fund
3(a) ..................... Financial Highlights
(b) ..................... *
(c) ..................... Performance
(d)...................... Performance; About Your Account
4(a) ..................... About the Investment Principles of the Fund;
About the Management and Expenses of the Fund
(b) ..................... About the Investment Principles of the Fund
(c) ..................... An Overview of the Fund; About the Investment
Principles of the Fund
5(a) ..................... About the Management and Expenses of the Fund
(b)...................... Inside Back Cover; About the Management and
Expenses of the Fund
(c) ..................... About the Management and Expenses of the Fund
(d) ..................... About the Management and Expenses of the Fund
(e) ..................... Inside Back Cover; About the Management and
Expenses of the Fund
(f) ..................... Expenses; About the Management and Expenses
of the Fund
(g)...................... *
5A......................... **
6(a) ..................... About the Management and Expenses of the Fund
(b) ..................... *
(c) ..................... *
(d) ..................... About the Management and Expenses of the Fund
(e) ..................... About Your Account
(f)...................... About Your Account
(g) ..................... About Your Account
(h) ..................... About the Management and Expenses of the Fund
7(a) ..................... Inside Back Cover; About Your Account; About
the Management and Expenses of the Fund
(b) ..................... About Your Account
(c) ..................... About Your Account
(d) ..................... About Your Account
(e) ..................... *
(f) ..................... About the Management and Expenses of the Fund
8(a) ..................... About Your Account
(b) ..................... *
(c) ..................... About Your Account
(d) ..................... About Your Account
9 ........................ *
Part B of
Form N-1A
Item No. SAI Caption
- --------- -----------
10(a) ..................... Cover Page
(b) ..................... *
11 ........................ Cover Page
12 ........................ *
13(a) ..................... Goals and Investment Policies
(b) ..................... Goals and Investment Policies
(c) ..................... Goals and Investment Policies
(d) ..................... Goals and Investment Policies
14(a) ..................... Directors and Officers
(b) ..................... Directors and Officers
(c) ..................... Directors and Officers
15(a) ..................... *
(b) ..................... Directors and Officers
(c) ..................... Directors and Officers
16(a)(i) .................. Investment Management and Other Services
(a)(ii) ................. Directors and Officers
(a)(iii) ................ Investment Management and Other Services
(b) ..................... Investment Management and Other Services
(c) ..................... *
(d) ..................... Investment Management and Other Services
(e) ..................... *
(f) ..................... Investment Management and Other Services
(g) ..................... *
(h) ..................... Investment Management and Other Services
(i) ..................... Investment Management and Other Services
17(a) ..................... Portfolio Transactions and Brokerage
(b) ..................... *
(c) ..................... Portfolio Transactions and Brokerage
(d) ..................... Portfolio Transactions and Brokerage
(e) ..................... *
18(a) ..................... Other Information
(b) ..................... *
19(a) ..................... Purchase, Redemption and Pricing of Shares
(b) ..................... Purchase, Redemption and Pricing of Shares
(c) ..................... Purchase, Redemption and Pricing of Shares
20 ........................ Payments to Shareholders; Taxes
21(a) ..................... Investment Management and Other Services
(b) ..................... Investment Management and Other Services
(c) ..................... *
22(a) ..................... *
(b)(i) .................. Performance Information
(b)(ii) ................. Performance Information
(b)(iii) ................ Performance Information
(b)(iv) ................. Performance Information
23 ........................ Financial Statements
- ---------------------------------------------------------------------------
*Not Applicable or Negative Answer
**Contained in the Annual Report to Shareholders
<PAGE>
Please read this Prospectus before investing, and keep it on file for
future reference. It sets forth concisely the information about the Fund
that you ought to know before investing.
Additional information has been filed with the Securities and Exchange
Commission and is contained in a Statement of Additional Information
("SAI") dated December 31, 1996. The SAI is available free upon request to
the Fund or Waddell & Reed, Inc., the Fund's underwriter, at the address or
telephone number below. The SAI is incorporated by reference into this
Prospectus and you will not be aware of all facts unless you read both this
Prospectus and the SAI.
THE FUND INVESTS AT LEAST 75% OF ITS ASSETS IN MUNICIPAL BONDS RATED BELOW
INVESTMENT GRADE, COMMONLY KNOWN AS "JUNK BONDS," WHICH ENTAIL GREATER
RISKS, INCLUDING DEFAULT RISKS, THAN THOSE FOUND IN HIGHER RATED
SECURITIES. INVESTORS SHOULD CAREFULLY CONSIDER THESE RISKS BEFORE
INVESTING. SEE "ABOUT THE INVESTMENT PRINCIPLES OF THE FUND" INCLUDED IN
THIS PROSPECTUS FOR A DISCUSSION OF THE RISKS ASSOCIATED WITH NON-
INVESTMENT GRADE DEBT SECURITIES. SEE APPENDIX A FOR A DISCUSSION OF BOND
RATINGS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
United Municipal High Income Fund, Inc.
Class A Shares
This Fund seeks to provide a high level of income that is not subject to
Federal income tax.
This Prospectus describes one class of shares of the Fund -- Class A
Shares.
Prospectus
December 31, 1996
UNITED MUNICIPAL HIGH INCOME FUND, INC.
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
913-236-2000
<PAGE>
Table of Contents
AN OVERVIEW OF THE FUND......................................3
EXPENSES........................................................5
FINANCIAL HIGHLIGHTS............................................6
PERFORMANCE.....................................................8
Explanation of Terms ..........................................8
ABOUT WADDELL & REED...........................................10
ABOUT THE INVESTMENT PRINCIPLES OF THE FUND....................11
Investment Goals and Principles ..............................11
Risk Considerations ........................................11
Securities and Investment Practices ..........................12
ABOUT YOUR ACCOUNT.............................................23
Ways to Set Up Your Account ..................................23
Buying Shares ................................................23
Minimum Investments ..........................................25
Adding to Your Account .......................................25
Selling Shares ...............................................26
Shareholder Services .........................................28
Personal Service ...........................................28
Reports ....................................................28
Exchanges ..................................................28
Automatic Transactions .....................................28
Distributions and Taxes ......................................29
Distributions ..............................................29
Taxes ......................................................29
ABOUT THE MANAGEMENT AND EXPENSES OF THE FUND..................32
WRIMCO and Its Affiliates ....................................33
Breakdown of Expenses ........................................34
Management Fee .............................................34
Other Expenses .............................................35
APPENDIX A.....................................................36
DESCRIPTION OF BOND RATINGS ..................................36
DESCRIPTION OF MUNICIPAL NOTE RATINGS ........................40
DESCRIPTION OF COMMERCIAL PAPER RATINGS ......................41
<PAGE>
An Overview of the Fund
The Fund: This Prospectus describes the Class A shares of United Municipal
High Income Fund, Inc., an open-end, diversified management investment
company.
Goals and Strategies: United Municipal High Income Fund, Inc. (the
"Fund") seeks to provide a high level of income that is not subject to
Federal income tax. The Fund seeks to achieve this goal through a
diversified portfolio consisting mainly of medium- and lower-rated tax-
exempt bonds, as classified by recognized rating agencies. See "About the
Investment Principles of the Fund" for further information.
Management: Waddell & Reed Investment Management Company ("WRIMCO")
provides investment advice to the Fund and manages the Fund's investments.
WRIMCO is a wholly-owned subsidiary of Waddell & Reed, Inc. WRIMCO,
Waddell & Reed, Inc. and its predecessors have provided investment
management services to registered investment companies since 1940. See
"About the Management and Expenses of the Fund" for further information
about management fees.
Distributor: Waddell & Reed, Inc. acts as principal underwriter and
distributor of the shares of the Fund.
Purchases: You may buy Class A shares of the Fund through Waddell & Reed,
Inc. and its account representatives. The price to buy a Class A share of
the Fund is the net asset value of a Class A share plus a sales charge.
See "About Your Account" for information on how to purchase Class A shares.
Redemptions: You may redeem your shares at net asset value. When you sell
your shares, they may be worth more or less than what you paid for them.
See "About Your Account" for a description of redemption and reinvestment
procedures.
Who May Want to Invest: The Fund is for an investor looking for a higher
level of primarily tax-free income than is normally available with
securities in the higher-rated categories. The Fund is not suitable for
all investors. You should consider whether the Fund fits with your
particular investment objectives.
Risk Considerations: The Fund invests primarily in medium- and lower-
quality municipal bonds which may vary widely as to their interest rates,
degree of security and maturity. Investments in high-yield, high-risk
securities ("junk bonds") may entail risks that are different or more
pronounced than those involved in higher-rated securities. The value of
the Fund's investments and the income generated will vary from day to day,
generally reflecting changes in interest rates, market conditions and other
company and economic news. Performance will also depend on WRIMCO's skill
in selecting investments. See "About the Investment Principles of the
Fund" for information about the risks associated with the Fund's
investments.
<PAGE>
Expenses
Shareholder transaction expenses are charges you pay when you buy or sell
shares of a fund.
Maximum sales load
on purchases 4.25%
(as a percentage of offering price)
Maximum sales load
on reinvested
dividends None
Deferred
sales load None
Redemption fees None
Exchange fee None
Annual Fund operating expenses (as a percentage of average net assets).
Management fees 0.51%
12b-1 fees 0.14%
Other expenses1 0.17%
Total Fund operating expenses 0.82%
Example: You would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return2 and (2) redemption at the end of each time
period:
1 year $ 51
3 years $ 68
5 years $ 86
10 years $140
The purpose of this table is to assist you in understanding the various
costs and expenses that a shareholder of the Class A shares of the Fund
will bear directly or indirectly. The example should not be considered a
representation of past or future expenses; actual expenses may be greater
or lesser than those shown. For a more complete discussion of certain
expenses and fees, see "Breakdown of Expenses."
1Expense information has been restated to reflect the current
shareholder servicing fee which became effective April 1, 1996.
2Use of an assumed annual return of 5% is for illustration purposes only
and is not a representation of the Fund's future performance, which may be
greater or lesser.
<PAGE>
Financial Highlights
(Audited)
The following information has been audited by Price Waterhouse LLP,
independent accountants, and should be read in conjunction with the
financial statements and notes thereto, together with the report of Price
Waterhouse LLP, included in the SAI.
For a Class A share outstanding throughout each period.*
<TABLE>
For the fiscal year ended September 30,
----------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period ..... $5.27 $5.12 $5.53 $5.23 $5.05 $4.85 $4.96 $4.84 $4.96 $5.22
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Income from investment
operations:
Net investment income ... 0.34 0.35 0.34 0.35 0.36 0.38 0.39 0.41 0.43 0.43
Net realized and unrealized gain
(loss) on investments 0.04 0.17 (0.34) 0.34 0.18 0.20 (0.11) 0.12 (0.09) (0.24)
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total from investment
operations .............. 0.38 0.52 0.00 0.69 0.54 0.58 0.28 0.53 0.34 0.19
Less distributions:
Dividends declared from net
investment income ..... (0.34) (0.35) (0.34) (0.35) (0.36) (0.38) (0.39) (0.41) (0.43) (0.43)
Distribution from
capital gains ......... (0.00) (0.00) (0.07) (0.04) (0.00) (0.00) (0.00) (0.00) (0.03) (0.02)
Distribution in excess of
capital gains ......... (0.00) (0.02) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00)
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total distributions ....... (0.34) (0.37) (0.41) (0.39) (0.36) (0.38) (0.39) (0.41) (0.46) (0.45)
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
End of period ........... $5.31 $5.27 $5.12 $5.53 $5.23 $5.05 $4.85 $4.96 $4.84 $4.96
===== ===== ===== ===== ===== ===== ===== ===== ===== =====
Total return** ............ 7.40% 10.63% 0.05% 13.77% 11.08% 12.35% 5.89% 11.38% 7.27% 3.57%
Net assets, end of period (000
omitted) ................$399,824 $382,805 $345,162 $329,373 $260,777 $224,945 $192,440 $168,838 $117,838 $72,403
Ratio of expenses to average net
assets .................. 0.81% 0.76% 0.76% 0.70% 0.72% 0.77% 0.75% 0.75% 0.80% 0.86%
Ratio of net investment income to
average net assets ...... 6.41% 6.75% 6.39% 6.49% 7.08% 7.63% 7.97% 8.36% 8.76% 8.42%
Portfolio turnover rate ... 26.91% 19.07% 26.26% 26.13% 54.18% 60.83% 27.31% 38.94% 44.49% 56.93%
*On January 30, 1996, the Fund began offering Class Y shares to the public. Fund shares outstanding prior to that date were
designated Class A shares.
**Total return calculated without taking into account the sales load deducted on an initial purchase.
</TABLE>
<PAGE>
Performance
Mutual fund performance is commonly measured as total return. The
Fund may also advertise its performance by showing yield and performance
rankings. Performance information is calculated and presented separately
for each class of Fund shares.
Explanation of Terms
Total Return is the overall change in value of an investment in the
Fund over a given period, assuming reinvestment of any dividends and other
distributions. A cumulative total return reflects actual performance over
a stated period of time. An average annual total return is a hypothetical
rate of return that, if achieved annually, would have produced the same
cumulative total return if performance had been constant over the entire
period. Average annual total returns smooth out variations in performance;
they are not the same as actual year-by-year results. Non-standardized
total return may not reflect deduction of the applicable sales charge or
may be for periods other than those required to be presented or may
otherwise differ from standardized total return. Total return quotations
that do not reflect the applicable sales charge will reflect a higher rate
of return.
Yield refers to the income generated by an investment in the Fund over
a given period of time, expressed as an annual percentage rate. The Fund's
yield is based on a 30-day period ending on a specific date and is computed
by dividing the Fund's net investment income per share earned during the
period by the Fund's maximum offering price per share on the last day of
the period. Tax equivalent yield is calculated by applying the stated
income tax rate to only the net investment income exempt from taxation
according to a standard formula.
Performance Rankings are comparisons of the Fund's performance to the
performance of other selected mutual funds, selected recognized market
indicators such as the Standard & Poor's 500 Stock Index and the Dow Jones
Industrial Average, or non-market indices or averages of mutual fund
industry groups. The Fund may quote its performance rankings and/or other
information as published by recognized independent mutual fund statistical
services or by publications of general interest. In connection with a
ranking, the Fund may provide additional information, such as the
particular category to which it relates, the number of funds in the
category, the criteria upon which the ranking is based, and the effect of
sales charges, fee waivers and/or expense reimbursements.
All performance information that the Fund advertises or includes in
information provided to present or prospective shareholders is historical
in nature and is not intended to represent or guarantee future results.
The value of the Fund's shares when redeemed may be more or less than their
original cost.
The Fund's recent performance and holdings will be detailed twice a
year in the Fund's annual and semiannual reports, which are sent to all
Fund shareholders.
<PAGE>
About Waddell & Reed
Since 1937, Waddell & Reed has been helping people make the most of
their financial future by helping them take advantage of various financial
services. Today, Waddell & Reed has over 2500 account representatives
located throughout the United States. Your primary contact in your
dealings with Waddell & Reed will be your local account representative.
However, the Waddell & Reed shareholder services department, which is part
of the Waddell & Reed headquarters operations in Overland Park, Kansas, is
available to assist you and your Waddell & Reed account representative.
You may speak with a customer service representative by calling 913-236-
2000.
<PAGE>
About the Investment Principles of the Fund
Investment Goals and Principles
The goal of the Fund is to provide a high level of income that is not
subject to Federal income tax. The Fund seeks to achieve this goal by
investing in medium- and lower-quality municipal bonds that provide higher
yields than bonds of higher quality. There is no assurance that the Fund
will achieve its goal.
As used in this Prospectus, "municipal bonds" mean obligations the
interest on which is not includible in gross income for Federal income tax
purposes. See "Distributions and Taxes" concerning the alternative minimum
tax ("AMT"). The Fund anticipates that not more than 40% of the dividends
it will pay to shareholders will be treated as a preference item for AMT
purposes. The Fund and WRIMCO rely on the opinion of bond counsel for the
issuer in determining whether obligations are municipal bonds.
Subject to the 20% limitation described below, WRIMCO may choose to
invest in debt securities other than municipal bonds ("taxable
obligations") under normal conditions in order to keep assets invested
until appropriate investments in municipal bonds may be made and may hold
such obligations in connection with investment in futures contracts.
Sometimes, WRIMCO may believe that a full or partial defensive position is
desirable temporarily due to present or anticipated market or economic
conditions that are affecting or could affect the values of municipal
bonds. During such periods, the Fund may invest up to all of its assets in
taxable obligations, which would result in a higher proportion of the
Fund's income being subject to Federal income tax.
Risk Considerations
There are risks inherent in any investment. The Fund is subject to
varying degrees of market risk, financial risk and, in some cases,
prepayment risk. Market risk is the potential for fluctuations in the
price of the security because of market factors. Because of market risk,
you should anticipate that the share price of the Fund will fluctuate.
Financial risk is based on the financial situation of the issuer. The
financial risk of the Fund depends on the credit quality of the underlying
securities. Prepayment risk is the possibility that, during periods of
falling interest rates, a debt security with a high stated interest rate
will be prepaid prior to its expected maturity date.
Certain types of instruments in which the Fund may invest, and certain
strategies WRIMCO may employ in pursuit of the Fund's goals, involve
special risks. Lower-quality debt securities (commonly called "junk
bonds") are considered to be speculative and involve greater risk of
default or price changes due to changes in the issuer's creditworthiness.
The market prices of these securities may fluctuate more than higher-
quality securities and may decline significantly in periods of general
economic difficulty.
The Fund can use various techniques to increase or decrease its
exposure to changing security prices, interest rates or other factors that
affect security values. These techniques may involve derivative
instruments, including options, futures contracts, options on futures
contracts, indexed securities, mortgage-backed securities and stripped
securities. If WRIMCO judges market conditions incorrectly or employs a
strategy that does not correlate well with the Fund's investments, these
techniques could result in a loss, regardless of whether the intent was to
reduce risk or increase return. These techniques may increase the
volatility of the Fund and may involve a small investment of cash relative
to the magnitude of the risk assumed. In addition, these techniques could
result in a loss if the counterparty to the transaction does not perform as
promised or if there is not a liquid secondary market to close out a
position that the Fund has entered into. See "Risks of Derivative
Instruments" for further information on the risks of investing in these
instruments.
Income from taxable obligations, repurchase agreements, options and
futures contracts will be subject to Federal income tax.
Securities and Investment Practices
The following pages contain more detailed information about types
of instruments in which the Fund may invest and strategies WRIMCO may
employ in pursuit of the Fund's investment goal. A summary of risks
associated with these instrument types and investment practices is included
as well.
WRIMCO might not buy all of these instruments or use all of these
techniques to the full extent permitted by the Fund's investment policies
and restrictions unless it believes that doing so will help the Fund
achieve its goal.
Certain of the investment policies and restrictions of the Fund are
also stated below. A fundamental policy of the Fund may not be changed
without the approval of the shareholders of the Fund. Operating policies
may be changed by the Board of Directors without the approval of the
affected shareholders. The goal of the Fund and the types of securities
and other assets in which it may invest are fundamental policies. Unless
otherwise indicated, other policies are operating policies.
Policies and limitations are typically considered at the time of
purchase; the sale of instruments is usually not required in the event of a
subsequent change in circumstances.
Please see the SAI for further information concerning the following
instruments and associated risks and the Fund's investment policies and
restrictions.
Municipal bonds are issued by a wide range of state and local
governments, agencies and authorities for various purposes. The two main
kinds of municipal bonds are "general obligation" bonds and "revenue"
bonds. 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.
Industrial development bonds are revenue bonds issued by or on behalf
of public authorities to obtain funds to finance privately-operated
facilities. Their credit quality is generally dependent on the credit
standing of the company involved. To the extent that the Fund invests in
municipal bonds the payment of principal and interest on which is derived
from revenue of similar projects, or in municipal bonds of issuers located
in the same geographic area, the Fund may be more susceptible to the risks
associated with economic, political or regulatory occurrences that might
adversely affect particular projects or areas. Similarly, to the extent
the Fund invests up to 25% of its assets in industrial revenue bonds issued
for any one industry, the Fund may be susceptible to the risks associated
with a particular industry. See the SAI for examples of the types of
projects in which the Fund may invest from time to time and for a
discussion of the risks associated with such projects.
Other municipal obligations include municipal lease obligations of
municipal authorities or entities and participations in these obligations
(collectively, "lease obligations"). WRIMCO determines liquidity of lease
obligations in accordance with guidelines established by the Fund's Board
of Directors. Unrated municipal lease obligations are considered to be
illiquid. In determining the credit quality of unrated municipal lease
obligations, one of the factors, among others, to be considered will be the
likelihood that the lease will not be canceled. Certain "non-
appropriation" lease obligations may present special risks because the
municipality's obligation to make future lease or installment payments
depends on money being appropriated each year for this purpose.
Municipal bonds vary widely as to their interest rates, degree of
security and maturity. Bonds are selected on the basis of quality, yield
and diversification. Factors that affect the yield on municipal bonds
include general money market conditions, municipal bond market conditions,
the size of a particular offering, the maturity of the obligation and the
nature of the issue. Lower-rated bonds usually, but not always, have
higher yields than similar but higher-rated bonds.
Medium- or lower-rated municipal securities are frequently traded only
in markets where the number of potential purchasers and sellers, if any, is
very limited. This factor may have the effect of limiting the availability
of the securities for purchase by the Fund and may also limit the ability
of the Fund to sell such securities at their fair value either to meet
redemption requests or in response to changes in the economy or the
financial markets.
Lower-quality debt securities are considered to be speculative and
involve greater risk of default or price changes due to changes in the
issuer's creditworthiness. The market prices of these securities may
fluctuate more than high-quality securities and may decline significantly
in periods of general economic difficulty. While the market for high-
yield, high-risk corporate debt securities has been in existence for many
years and has weathered previous economic downturns, the 1980s brought a
dramatic increase in the use of such securities to fund highly-leveraged
corporate acquisitions and restructurings. Past experience may not provide
an accurate indication of the future performance of the high-yield, high-
risk bond market, especially during periods of economic recession. The
market for lower-rated debt securities may be thinner and less active than
that for higher-rated debt securities, which can adversely affect the
prices at which the former are sold. Adverse publicity and changing
investor perceptions may decrease the values and liquidity of lower-rated
debt securities, especially in a thinly-traded market. Valuation becomes
more difficult and judgment plays a greater role in valuing lower-rated
debt securities than with respect to securities for which more external
sources of quotations and last sale information are available. Since the
risk of default is higher for lower-rated debt securities, WRIMCO's
research and credit analysis are an especially important part of managing
securities of this type held by the Fund. WRIMCO continuously monitors the
issuers of lower-rated debt securities in the Fund's portfolio in an
attempt to determine if the issuers will have sufficient cash flow and
profits to meet required principal and interest payments. The Fund may
choose, at its expense or in conjunction with others, to pursue litigation
or otherwise to exercise its rights as a security holder to seek to protect
the interests of security holders if it determines this to be in the best
interest of the Fund's shareholders.
While credit ratings are only one factor WRIMCO relies on in
evaluating high-yield debt securities, certain risks are associated with
credit ratings. Credit ratings evaluate the safety of principal and
interest payments, not market value risk. Credit ratings for individual
securities may change from time to time, and the Fund may retain a
portfolio security whose rating has been changed.
Under normal market conditions, the Fund will be substantially
invested in bonds with maturities of 10 to 30 years.
Policies and Restrictions: As a fundamental policy, at least 80% of
the Fund's assets will be invested during normal market conditions in
municipal bonds.
During normal market conditions, at least 75% of the Fund's assets
will be invested in medium- and lower-quality municipal bonds, which are
bonds rated BBB through D by Standard & Poor's Ratings Services ("S&P"), or
Baa through C by Moody's Investors Service, Inc. ("MIS"), or, if unrated,
are, in the opinion of WRIMCO, of similar quality to rated municipal bonds
in these categories. See Appendix A for a description of bond ratings.
The Fund may invest in higher-quality municipal bonds, and have less
than 75% of its assets in medium- and lower-quality municipal bonds, at
times when yield spreads are narrow and the higher yields do not justify
the increased risk and when, in the opinion of WRIMCO, there is a lack of
medium- and lower-quality issues in which to invest.
The Fund may invest 25% or more of its assets in industrial
development bonds, and may have 25% or more of its assets in securities the
payment of principal and interest on which is derived from revenue of
similar projects, or in municipal bonds of issuers located in the same
geographic area. As a fundamental policy, it will not, however, have more
than 25% of its assets in industrial development bonds issued for any one
industry or in any one state. The Fund will not purchase an industrial
development bond if it would then have more than 5% of its assets invested
in industrial development bonds of companies with less than three years
operating history.
Debt Securities. Bonds and other debt instruments are used by issuers
to borrow money from investors. The issuer pays the investor a fixed or
variable rate of interest, and must repay the amount borrowed at maturity.
Some debt securities, such as zero coupon bonds, do not pay current
interest, but are purchased at a discount from their face values.
Debt securities have varying levels of sensitivity to changes in
interest rates and varying degrees of quality. As a general matter,
however, when interest rates rise, the values of fixed-rate debt securities
fall and, conversely, when interest rates fall, the values of fixed-rate
debt securities rise. The values of floating and adjustable-rate debt
securities are not as sensitive to changes in interest rates as the values
of fixed-rate debt securities. Longer-term bonds are generally more
sensitive to interest rate changes than shorter-term bonds.
U.S. Government Securities are high-quality instruments issued or
guaranteed as to principal or interest by the U.S. Treasury or by an agency
or instrumentality of the U.S. Government. Not all U.S. Government
Securities are backed by the full faith and credit of the United States.
Some are backed by the right of the issuer to borrow from the U.S.
Treasury; others are backed by discretionary authority of the U.S.
Government to purchase the agencies' obligations; while others are
supported only by the credit of the instrumentality. In the case of
securities not backed by the full faith and credit of the United States,
the investor must look principally to the agency issuing or guaranteeing
the obligation for ultimate repayment.
Zero coupon bonds do not make interest payments; instead, they are
sold at a deep discount from their face value and are redeemed at face
value when they mature. Because zero coupon bonds do not pay current
income, their prices can be very volatile when interest rates change. In
calculating its income, the Fund takes into account as income a portion of
the difference between a zero coupon bond's purchase price and its face
value.
Money market instruments are high-quality, short-term debt instruments
that present minimal credit risk. They may include U.S. Government
Securities, commercial paper and other short-term corporate obligations,
and certificates of deposit, bankers' acceptances, bank deposits and other
financial institution obligations. These instruments may carry fixed or
variable interest rates.
Policies and Restrictions: As a fundamental policy, during normal
market conditions, up to 20% of the Fund's assets may be invested in a
combination of taxable obligations, and Debt Futures and Municipal Bond
Index Futures (defined below).
As a fundamental policy, the only taxable obligations that the Fund
may purchase are (i) U.S. Government Securities, (ii) bank obligations of
domestic banks or savings and loan associations that are subject to
regulation by the U.S. Government (these obligations may include
certificates of deposit and acceptances), (iii) commercial paper rated at
least A by S&P or MIS, and (iv) repurchase agreements.
Options, Futures and Other Strategies. The Fund may use certain
options and indexed securities to attempt to enhance income or yield or may
attempt to reduce the overall risk of its investments by using certain
options, futures contracts and certain other strategies described herein.
The strategies described below may be used in an attempt to manage certain
risks of the Fund's investments that can affect fluctuation in its net
asset value.
The Fund's ability to use these strategies may be limited by market
conditions, regulatory limits and tax considerations. The Fund might not
use any of these strategies, and there can be no assurance that any
strategy that is used will succeed. The risks associated with such
strategies are described below. Also see the SAI for more information on
these instruments and strategies and their risk considerations.
Options. The Fund may engage in certain strategies involving options
to attempt to enhance the Fund's income or yield or to attempt to reduce
the overall risk of its investments. A call option gives the purchaser the
right to buy, and obligates the writer to sell, the underlying investment
at the agreed upon exercise price during the option period. A put option
gives the purchaser the right to sell, and obligates the writer to buy, the
underlying investment at the agreed upon exercise price during the option
period. Purchasers of options pay an amount, known as a premium, to the
option writer in exchange for the right under the option contract.
Options offer large amounts of leverage, which will result in the
Fund's net asset value being more sensitive to changes in the value of the
related investment. There is no assurance that a liquid secondary market
will exist for exchange-listed options. The Fund will be able to close a
position in an option it has written only if there is a market for the put
or call. If the Fund is not able to enter into a closing transaction on an
option it has written, it will be required to maintain the securities, or
cash in the case of an option on an index, subject to the call or the
collateral underlying the put until a closing purchase transaction can be
entered into or the option expires. Because index options are settled in
cash, the Fund cannot provide in advance for its potential settlement
obligations on a call it has written on an index by holding the underlying
securities. The Fund bears the risk that the value of the securities it
holds will vary from the value of the index.
Policies and Restrictions: As a fundamental policy, the Fund may
purchase and write (sell) put and call options only on domestic debt
securities and municipal bond indices, and the options on futures contracts
described below, subject to certain restrictions that are set forth in the
SAI.
The Fund may purchase and write (sell) options on domestic debt
securities and municipal bond indices only if they are listed on a national
securities exchange.
The Fund will only write puts on domestic debt securities if it would
be willing to purchase the underlying security at the exercise price.
Futures Contracts and Options on Futures Contracts. When the Fund
purchases a futures contract, it incurs an obligation to take delivery of a
specified amount of the obligation underlying the contract at a specified
time in the future for a specified price. When the Fund sells a futures
contract, it incurs an obligation to deliver the specified amount of the
underlying obligation at a specified time in return for an agreed upon
price.
When the Fund writes an option on a futures contract, it becomes
obligated, in return for the premium paid, to assume a position in a
futures contract at a specified exercise price at any time during the term
of the option. If the Fund has written a call, it assumes a short futures
position. If it has written a put, it assumes a long futures position.
When the Fund purchases an option on a futures contract, it acquires a
right in return for the premium it pays to assume a position in a futures
contract (a long position if the option is a call and a short position if
the option is a put).
Policies and Restrictions: As a fundamental policy, the Fund may only
buy and sell futures contracts relating to domestic debt securities ("Debt
Futures"), futures contracts relating to municipal bond indices ("Municipal
Bond Index Futures") and options on Debt Futures.
The Fund intends to use futures contracts and options thereon only to
attempt to hedge against market risks that could adversely affect the value
of its portfolio.
During normal market conditions, up to 20% of the Fund's assets may be
invested in a combination of taxable obligations, Debt Futures and
Municipal Bond Index Futures.
Indexed Securities. The Fund may purchase indexed securities,
which are securities the value of which varies in relation to the value 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. The performance of indexed
securities depends to a great extent on the performance of the security,
currency, or other instrument to which they are indexed, and may also be
influenced by interest rate changes in the United States and abroad. At
the same time, indexed securities are subject to the credit risks
associated with the issuer of the security, and their values may decline
substantially if the issuer's creditworthiness deteriorates. Indexed
securities may be more volatile than the underlying instruments.
Policies and Restrictions: The Fund does not intend to invest more
than 25% of its total assets in indexed securities.
Mortgage-Backed Securities may include pools of mortgages, such as
collateralized mortgage obligations, and stripped mortgage-backed
securities. The value of these securities may be significantly affected by
changes in interest rates, the market's perception of the issuers and the
creditworthiness of the parties involved.
The yield characteristics of mortgage-backed securities differ from
those of traditional debt securities. Among the major differences are that
interest and principal payments are made more frequently on mortgage-backed
securities and that principal may be prepaid at any time because the
underlying mortgage loans generally may be prepaid at any time. As a
result, if the Fund purchases these securities at a premium, a prepayment
rate that is faster than expected will reduce yield to maturity while a
prepayment rate that is slower than expected will have the opposite effect
of increasing yield to maturity. Conversely, if the Fund purchases these
securities at a discount, faster than expected prepayments will increase,
while slower than expected prepayments will reduce, yield to maturity.
Accelerated prepayments on securities purchased by the Fund at a premium
also impose a risk of loss of principal because the premium may not have
been fully amortized at the time the principal is repaid in full.
Timely payment of principal and interest on pass-through securities of
the Government National Mortgage Association (but not the Federal Home Loan
Mortgage Corporation or the Federal National Mortgage Association) is
guaranteed by the full faith and credit of the United States. This is not
a guarantee against market decline of the value of these securities or
shares of the Fund. It is possible that the availability and marketability
(i.e., liquidity) of these securities could be adversely affected by
actions of the U.S. Government to tighten the availability of its credit.
Policies and Restrictions: The Fund may invest in mortgage-backed
securities 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.
Stripped Securities are the separate income or principal components of
a debt instrument. These involve risks that are similar to those of other
debt securities, although they may be more volatile. The prices of
stripped mortgage-backed securities may be particularly affected by changes
in interest rates.
Policies and Restrictions: The Fund may invest in stripped
securities as long as WRIMCO determines that it is consistent with the
Fund's goal and investment policies. The Fund intends to invest less than
5% of its total assets in stripped securities.
Risks of Derivative Instruments. The use of options, futures
contracts and options on futures contracts, and the investment in indexed
securities, stripped securities and mortgage-backed securities, involve
special risks, including (i) possible imperfect or no correlation between
price movements of the portfolio investments (held or intended to be
purchased) involved in the transaction and price movements of the
instruments involved in the transaction, (ii) possible lack of a liquid
secondary market for any particular instrument at a particular time, (iii)
the need for additional portfolio management skills and techniques, (iv)
losses due to unanticipated market price movements, (v) the fact that,
while such strategies can reduce the risk of loss, they can also reduce the
opportunity for gain, or even result in losses, by offsetting favorable
price movements in investments involved in the transaction, (vi) incorrect
forecasts by WRIMCO concerning interest rates or direction of price
fluctuations of the investment involved in the transaction, which may
result in the strategy being ineffective, (vii) loss of premiums paid by
the Fund on options it purchases, and (viii) the possible inability of the
Fund to purchase or sell a portfolio security at a time when it would
otherwise be favorable for it to do so, or the possible need for the Fund
to sell a portfolio security at a disadvantageous time, due to the need for
the Fund to maintain "cover" or to segregate securities in connection with
such transactions and the possible inability of the Fund to close out or
liquidate its position.
For a hedging strategy to be completely effective, the price change of
the hedging instrument must equal the price change of the investment being
hedged. The risk of imperfect correlation of these price changes increases
as the composition of the Fund's portfolio diverges from instruments
underlying a hedging instrument. Such equal price changes are not always
possible because the investment underlying the hedging instruments may not
be the same investment that is being hedged. WRIMCO will attempt to create
a closely correlated hedge but hedging activity may not be completely
successful in eliminating market value fluctuation.
WRIMCO may use derivative instruments, including securities with
embedded derivatives, for hedging purposes to adjust the risk
characteristics of the Fund's portfolio of investments and may use some of
these instruments to adjust the return characteristics of the Fund's
portfolio of investments. An embedded derivative is a derivative that is
part of another financial instrument. Embedded derivatives typically, but
not always, are debt securities whose return of principal or interest, in
part, is determined by reference to something that is not intrinsic to the
security itself. The use of derivative techniques for speculative purposes
can increase investment risk. If WRIMCO judges market conditions
incorrectly or employs a strategy that does not correlate well with the
Fund's investments, these techniques could result in a loss, regardless of
whether the intent was to reduce risk or increase return. These techniques
may increase the volatility of the Fund and may involve a small investment
of cash relative to the magnitude of the risk assumed. In addition, these
techniques could result in a loss if the counterparty to the transaction
does not perform as promised or if there is not a liquid secondary market
to close out a position that the Fund has entered into.
The ordinary spreads between prices in the cash and futures markets,
due to the differences in the natures of those markets, are subject to
distortion. Due to the possibility of distortion, a correct forecast of
general interest rate trends by WRIMCO may still not result in a successful
transaction. WRIMCO may be incorrect in its expectations as to the extent
of various interest rate movements or the time span within which the
movements take place.
Options and futures transactions may increase portfolio turnover
rates, which results in correspondingly greater commission expenses and
transaction costs and may result in certain tax consequences. See the SAI
for further information regarding these and other risks.
New financial products and risk management techniques continue to be
developed. The Fund may use these instruments and techniques to the extent
consistent with its goal, investment policies and regulatory requirements
applicable to investment companies.
When-Issued and Delayed-Delivery Transactions are trading practices in
which payment and delivery for the securities take place at a future date.
The market value of a security could change during this period, which could
affect the Fund's yield.
The Fund may purchase municipal bonds on a when-issued or delayed-
delivery basis and sell municipal bonds on a delayed-delivery basis. When
purchasing municipal bonds on a delayed-delivery basis, the Fund assumes
the rights and risks of ownership, including the risk of price and yield
fluctuations. When the Fund has sold a municipal bond on a delayed-
delivery basis, the Fund does not participate in further gains or losses
with respect to the bond. If the other party to a delayed-delivery
transaction fails to deliver or pay for the bonds, the Fund could miss a
favorable price or yield opportunity, or could suffer a loss.
Repurchase Agreements. In a repurchase agreement, the Fund buys a
security at one price and simultaneously agrees to sell it back at a higher
price. Delays or losses could result if the other party to the agreement
defaults or becomes insolvent.
Policies and Restrictions: The Fund may not enter into a
repurchase agreement if, as a result, more than 10% of its net assets would
consist of illiquid investments, which include repurchase agreements not
terminable within seven days.
Restricted Securities and Illiquid Investments. Restricted
securities are securities that are subject to legal or contractual
restrictions on resale. Restricted securities may be illiquid due to
restrictions on their resale. Certain restricted securities may be
determined to be liquid in accordance with guidelines adopted by the Fund's
Board of Directors.
Illiquid investments may be difficult to sell promptly at an
acceptable price. Difficulty in selling securities may result in a loss or
may be costly to the Fund.
Policies and Restrictions: The Fund may not purchase a security if,
as a result, more than 10% of its net assets would consist of illiquid
investments.
Diversification. Diversifying the Fund's investment portfolio can
reduce the risks of investing. This may include limiting the amount of
money invested in any one issuer or, on a broader scale, in any one
industry.
Policies and Restrictions: As a fundamental policy, the Fund may not
purchase the securities of any "issuer" if more than 5% of the Fund's total
assets would then be invested in that "issuer." This restriction does not
apply to cash or cash items, or U.S. Government Securities.
There is a question as to who is the issuer of certain types of
municipal bonds. For example, municipal bonds may be created by a
particular government but be backed only by the assets and revenues of a
subdivision of that government such as an agency, instrumentality,
authority or other subdivision. In such case, the Fund would consider that
such subdivision is the issuer for the purposes of this 5% restriction. In
the case of industrial development bonds, the nongovernmental user of
facilities financed by them is also considered as a separate issuer. The
method of determining who is an issuer may be changed without shareholder
vote. The Fund considers a guarantee of a municipal bond by a government
or other entity to be a separate security that would be given a value and
included in the 5% restriction if the value of all municipal bonds created
by the government or entity and owned by the Fund exceeds 10% of the value
of the Fund's total assets.
Borrowing. If the Fund borrows money, its share price may be subject
to greater fluctuation until the borrowing is paid off.
If the Fund makes additional investments while borrowings are
outstanding, this may be considered a form of leverage.
Policies and Restrictions: As a fundamental policy, the Fund may
not borrow money or pledge 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 its total assets.
Other Instruments may include securities of closed-end investment
companies. As a shareholder in an investment company, the Fund would bear
its pro rata share of that investment company's expenses, which could
result in duplication of certain fees, including management and
administrative fees.
Policies and Restrictions: As a fundamental policy, the Fund may buy
shares of other investment companies that do not redeem their shares only
if it does so in a regular transaction in the open market and then does not
have more than 10% of its total assets invested in these shares.
<PAGE>
About Your Account
The different ways to set up (register) your account are listed below.
Ways to Set Up Your Account
- -------------------------------------------------
Individual or Joint Tenants
For your general investment needs
Individual accounts are owned by one person. Joint accounts have two or
more owners (tenants).
- -------------------------------------------------
Business or Organization
For investment needs of corporations, associations, partnerships,
institutions or other groups
- -------------------------------------------------
Gifts or Transfers to a Minor
To invest for a child's education or other future needs
These custodial accounts provide a way to give money to a child and
obtain tax benefits. An individual can give up to $10,000 a year per child
without paying Federal transfer tax. Depending on state laws, you can set
up a custodial account under the Uniform Gifts to Minors Act ("UGMA") or
the Uniform Transfers to Minors Act ("UTMA").
- -------------------------------------------------
Trust
For money being invested by a trust
The trust must be established before an account can be opened, or you may
use a trust form made available by Waddell & Reed. Contact your Waddell &
Reed account representative for the form.
- -------------------------------------------------
Buying Shares
You may buy shares of the Fund through Waddell & Reed, Inc. and its
account representatives. To open your account you must complete and sign
an application. Your Waddell & Reed account representative can help you
with any questions you might have.
The price to buy a share of the Fund, called the offering price, is
calculated every business day.
The offering price of a Class A share (price to buy one Class A share)
is the Fund's Class A net asset value ("NAV") plus the sales charge shown
in the table below.
Sales
Sales Charge
Charge as
as Approx.
PercentPercent
of of
Size of Offering Amount
Purchase Price Invested
- -----------------------
Under
$100,000 4.25% 4.44%
$100,000
to less
than
$300,000 3.25 3.36
$300,000
to less
than
$500,000 2.50 2.56
$500,000
to less
than
$1,000,0001.75 1.78
$1,000,000
to less
than
$2,000,0001.00 1.01
$2,000,000
and over 0.00 0.00
The Fund's Class A NAV is the value of a single share. The Class A
NAV is computed by adding, with respect to that class, the value of the
Fund's investments, cash and other assets, subtracting its liabilities, and
then dividing the result by the number of Class A shares outstanding.
The securities in the Fund's portfolio that are listed or traded on
an exchange are valued primarily using market quotations or, if market
quotations are not available, at their fair value in a manner determined in
good faith by or at the direction of the Board of Directors. Bonds are
generally valued according to prices quoted by an independent pricing
service. Short-term debt securities are valued at amortized cost, which
approximates market value. Other assets are valued at their fair value by
or at the direction of the Board of Directors.
The Fund is open for business each day the New York Stock Exchange
(the "NYSE") is open. The Fund normally calculates the NAVs of its shares
as of the later of the close of business of the NYSE, normally 4 p.m.
Eastern time, or the close of the regular session of any other securities
or commodities exchange on which an option held by the Fund is traded.
When you place an order to buy shares, your order will be processed at
the next offering price calculated after your order is received and
accepted. Note the following:
Orders are accepted only at the home office of Waddell & Reed, Inc.
All of your purchases must be made in U.S. dollars.
If you buy shares by check, and then sell those shares by any method
other than by exchange to another fund in the United Group, the payment
may be delayed for up to ten days to ensure that your previous
investment has cleared.
When you sign your account application, you will be asked to
certify that your Social Security or other taxpayer identification number
is correct and whether you are subject to backup withholding for failing
to report income to the IRS.
Waddell & Reed, Inc. reserves the right to reject any purchase orders,
including purchases by exchange, and it and the Fund reserve the right to
discontinue offering Fund shares for purchase.
Lower sales charges are available by combining additional purchases
of Class A shares of the Fund or Class A shares of United Municipal Bond
Fund, Inc. and United Government Securities Fund, Inc. with the NAV of
Class A shares already held ("rights of accumulation") and by grouping all
purchases of Class A shares made during a thirteen-month period ("Statement
of Intention"). Class A shares of another fund purchased through a
contractual plan may not be included unless the plan has been completed.
Purchases by certain related persons may be grouped. Additional
information and applicable forms are available from Waddell & Reed account
representatives.
Class A shares may be purchased at NAV by the Directors and
officers of the Fund, employees of Waddell & Reed, Inc., employees of their
affiliates, account representatives of Waddell & Reed, Inc. and the spouse,
children, parents, children's spouses and spouse's parents of each such
Director, officer, employee and account representative. Shares may also be
issued at NAV in a merger, acquisition or exchange offer made pursuant to a
plan of reorganization to which the Fund is a party.
Minimum Investments
To Open an Account $500
For certain exchanges $100
For certain accounts opened with Automatic Investment Service $50
For certain accounts opened through payroll deductions for or by employees
of WRIMCO, Waddell & Reed, Inc. and their affiliates $25
To Add to an Account
For certain exchanges $100
For Automatic Investment Service $25
Adding to Your Account
Subject to the minimums described under "Minimum Investments," you can
make additional investments of any amount at any time.
To add to your account, make your check payable to Waddell & Reed,
Inc. Mail the check along with:
the detachable form that accompanies the confirmation of a prior
purchase by you or your year-to-date statement; or
a letter stating your account number, the account registration and that
you wish to purchase Class A shares of the Fund.
Mail to Waddell & Reed, Inc. at the address printed on your
confirmation or year-to-date statement.
Selling Shares
You can arrange to take money out of your Fund account at any time by
selling (redeeming) some or all of your shares.
The redemption price (price to sell one Class A share) is the Fund's
Class A NAV.
To sell shares, your request must be made in writing.
Complete an Account Service Request form, available from your Waddell
& Reed account representative, or write a letter of instruction with:
the name on the account registration;
the Fund's name;
the Fund account number;
the dollar amount or number of shares to be redeemed; and
any other applicable requirements listed in the table below.
Deliver the form or your letter to your Waddell & Reed account
representative, or mail it to:
Waddell & Reed, Inc.
P. O. Box 29217
Shawnee Mission, Kansas
66201-9217
Unless otherwise instructed, Waddell & Reed will send a check to the
address on the account.
Special Requirements for Selling Shares
Account Type Special Requirements
Individual or The written instructions must
Joint Tenant be signed by all persons
required to sign for
transactions, exactly as their
names appear on the account.
Sole The written instructions must
Proprietorship be signed by the individual
owner of the business.
UGMA, UTMA The custodian must sign the
written instructions
indicating capacity as
custodian.
Trust The trustee must sign the
written instructions
indicating capacity as
trustee. If the trustee's
name is not in the account
registration, provide a
currently certified copy of
the trust document.
Business or At least one person authorized
Organization by corporate resolution to act
on the account must sign the
written instructions.
Conservator, The written instructions must
Guardian or be signed by the person
Other Fiduciary properly authorized by court
order to act in the particular
fiduciary capacity.
When you place an order to sell shares, your shares will be sold at
the next NAV calculated after receipt of a written request for redemption
in good order by Waddell & Reed, Inc. at its home office. Note the
following:
If more than one person owns the shares, each owner must sign the
written request.
If you hold a certificate, it must be properly endorsed and sent to the
Fund.
If you recently purchased the shares by check, the Fund may delay
payment of redemption proceeds. You may arrange for the bank upon which
the purchase check was drawn to provide to the Fund telephone or written
assurance, satisfactory to the Fund, that the check has cleared and been
honored. If no such assurance is given, payment of the redemption
proceeds on these shares will be delayed until the earlier of 10 days or
the date the Fund is able to verify that your purchase check has cleared
and been honored.
Redemptions may be suspended or payment dates postponed on days when the
NYSE is closed (other than weekends or holidays), when trading on the
NYSE is restricted, or as permitted by the Securities and Exchange
Commission.
Payment is normally made in cash, although under extraordinary
conditions redemptions may be made in portfolio securities.
The Fund reserves the right to require a signature guarantee on
certain redemption requests. This requirement is designed to protect you
and Waddell & Reed from fraud. The Fund may require a signature guarantee
in certain situations such as:
the request for redemption is made by a corporation, partnership or
fiduciary;
the request for redemption is made by someone other than the owner of
record; or
the check is being made payable to someone other than the owner of
record.
The Fund will accept a signature guarantee from a national bank, a
federally chartered savings and loan or a member firm of a national stock
exchange or other eligible guarantor in accordance with procedures of the
Fund's transfer agent. A notary public cannot provide a signature
guarantee.
The Fund reserves the right to redeem at NAV all shares of the Fund
owned or held by you having an aggregate NAV of less than $500. The Fund
will give you notice of its intention to redeem your shares and a 60-day
opportunity to purchase a sufficient number of additional shares to bring
the aggregate NAV of your shares to $500.
You may reinvest without charge all or part of the amount you redeemed
by sending to the Fund the amount you want to reinvest. The reinvested
amounts must be received by the Fund within thirty days after the date of
your redemption. You may do this only once as to Class A shares of the
Fund.
Shareholder Services
Waddell & Reed provides a variety of services to help you manage your
account.
Personal Service
Your local Waddell & Reed account representative is available to
provide personal service. Additionally, the Waddell & Reed Customer
Services staff is available to respond promptly to your inquiries and
requests.
Reports
Statements and reports sent to you include the following:
confirmation statements (after every purchase, other than those
purchases made through Automatic Investment Service, and after every
exchange, transfer or redemption)
year-to-date statements (quarterly)
annual and semiannual reports (every six months)
To reduce expenses, only one copy of annual and semiannual reports
will be mailed to your household, even if you have more than one account
with the Fund. Call 913-236-2000 if you need copies of annual or
semiannual reports or historical account information.
Exchanges
You may sell your Class A shares and buy Class A shares of other
funds in the United Group.
You may exchange any Class A shares of the Fund that you have held
for at least six months and any Class A shares of the Fund acquired as
payment of a dividend or distribution for Class A shares of any other fund
in the United Group. You may exchange any Class A shares of the Fund that
you have held for less than six months only for Class A shares of United
Municipal Bond Fund, Inc. or United Government Securities Fund, Inc.
You may exchange only into funds that are legally registered for sale
in your state of residence. Note that exchanges out of the Fund may have
tax consequences for you. Before exchanging into a fund, read its
prospectus.
The Fund reserves the right to terminate or modify these exchange
privileges at any time, upon notice in certain instances.
Automatic Transactions
Flexible withdrawal service lets you set up monthly, quarterly,
semiannual or annual redemptions from your account.
Regular Investment Plans allow you to transfer money into your Fund
account automatically. While Regular Investment Plans do not guarantee a
profit and will not protect you against loss in a declining market, they
can be an excellent way to invest for retirement, a home, educational
expenses and other long-term financial goals.
Regular Investment Plans
Automatic Investment Service
To move money from your bank account to an existing Fund account
Minimum Frequency
$25 Monthly
Funds Plus Service To move money from United Cash Management, Inc. to the
Fund whether in the same or a different account
Minimum Frequency
$100 Monthly
Distributions and Taxes
Distributions
The Fund distributes substantially all of its net investment income
and net capital gains to shareholders each year. Dividends are declared
daily from the Fund's net investment income, which includes accrued
interest, earned discount and other income earned on portfolio assets less
expenses. Ordinarily, dividends are distributed monthly on the 27th day of
the month or on the last business day prior to the 27th if the 27th falls
on a weekend or holiday. Net capital gains ordinarily are distributed in
December. The Fund may make additional distributions if necessary to avoid
Federal income or excise taxes on certain undistributed income and capital
gains.
Distribution Options. When you open an account, specify on your
application how you want to receive your distributions. The Fund offers
three options:
1. Share Payment Option. Your dividend and capital gains distributions
will be automatically paid in additional Class A shares of the Fund.
If you do not indicate a choice on your application, you will be
assigned this option.
2. Income-Earned Option. Your capital gains distributions will be
automatically paid in Class A shares, but you will be sent a check for
each dividend distribution.
3. Cash Option. You will be sent a check for your dividend and capital
gains distributions.
Taxes
The Fund has qualified and intends to continue to qualify for
treatment as a regulated investment company under the Internal Revenue Code
of 1986, as amended (the "Code"), so that it will be relieved of Federal
income tax on that part of its investment company taxable income
(consisting generally of taxable net investment income and net short-term
capital gain) and net capital gain (the excess of net long-term capital
gain over net short-term capital loss) that are distributed to its
shareholders. In addition, the Fund intends to continue to qualify to pay
"exempt-interest" dividends, which requires, among other things, that at
the close of each calendar quarter at least 50% of the value of its total
assets must consist of obligations the interest on which is excludable from
gross income under section 103(a) of the Code.
There are certain tax requirements that the Fund must follow in order
to avoid Federal taxation. In its effort to adhere to these requirements,
the Fund may have to limit its investment activity in some types of
instruments.
As with any investment, you should consider how your investment in the
Fund will be taxed. You should be aware of the following tax implications:
Taxes on distributions. The distributions by the Fund that are
designated by it as exempt-interest dividends generally may be excluded by
you from your gross income. Dividends from the Fund's investment company
taxable income are taxable to you as ordinary income, whether received in
cash or paid in additional Fund shares. Distributions of the Fund's net
capital gain, when designated as such, are taxable to you as long-term
capital gain, whether received in cash or paid in additional Fund shares
and regardless of the length of time you have owned your shares. None of
the dividends paid by the Fund is expected to be eligible for the
dividends-received deduction allowed to corporations. The Fund notifies
you after each calendar year-end as to the amounts of dividends and other
distributions paid (or deemed paid) to you for that year.
Exempt-interest dividends paid by the Fund may be subject to income
taxation under state and local tax laws. In addition, a portion of those
dividends is expected to be attributable to interest on certain bonds that
must be treated by you as a "tax preference item" for purposes of
calculating your liability, if any, for the AMT; the Fund anticipates such
portion will be not more than 40% of the dividends it will pay to its
shareholders. The Fund will provide you with information concerning the
amount of distributions subject to the AMT after the end of each calendar
year. Shareholders who may be subject to the AMT should consult with their
tax advisers concerning investment in the Fund.
Entities or other persons who are "substantial users" (or persons
related to "substantial users") of facilities financed by private activity
bonds ("PABs") should consult their tax advisers before purchasing Fund
shares because, for users of certain of these facilities, the interest on
PABs is not exempt from Federal income tax. For these purposes, the term
"substantial user" is defined generally to include a "non-exempt person"
who regularly uses in trade or business a part of a facility financed from
the proceeds of PABs.
Withholding. The Fund is required to withhold 31% of all taxable
dividends, capital gains distributions and redemption proceeds payable to
individuals and certain other noncorporate shareholders who do not furnish
the Fund with a correct taxpayer identification number. Withholding at
that rate from taxable dividends and capital gains distributions also is
required for such shareholders who otherwise are subject to backup
withholding.
Taxes on transactions. Your redemption of Fund shares will result
in taxable gain or loss to you, depending on whether the redemption
proceeds are more or less than your adjusted basis for the redeemed shares
(which normally includes any sales charge paid). An exchange of Fund
shares for shares of any other fund in the United Group generally will have
similar tax consequences. However, special rules apply when you dispose of
Fund shares through a redemption or exchange within ninety days after your
purchase thereof and subsequently reacquire Fund shares or acquire shares
of another fund in the United Group without paying a sales charge due to
the thirty-day reinvestment privilege or exchange privilege. See "About
Your Account." In these cases, any gain on the disposition of the original
Fund shares would be increased, or loss decreased, by the amount of the
sales charge you paid when those shares were acquired, and that amount will
increase the adjusted basis of the shares subsequently acquired. In
addition, if you purchase Fund shares within thirty days before or after
redeeming other Fund shares (regardless of class) at a loss, part or all of
that loss will not be deductible and will increase the basis of the newly-
purchased shares.
Interest on indebtedness incurred or continued to purchase or carry
shares of the Fund will not be deductible for Federal income tax purposes
to the extent the Fund's distributions consist of exempt-interest
dividends. Proposals may be introduced before Congress for the purpose of
restricting or eliminating the Federal income tax exemption for interest on
municipal bonds. If such a proposal were enacted, the availability of
municipal bonds for investment by the Fund and the value of its portfolio
would be affected. In that event, the Fund may decide to reevaluate its
investment goal and policies.
The foregoing is only a summary of some of the important Federal
tax considerations generally affecting the Fund and its shareholders; see
the SAI for a more detailed discussion. There may be other Federal, state
or local tax considerations applicable to a particular investor. You are
urged to consult your own tax adviser.
<PAGE>
About the Management and Expenses of the Fund
United Municipal High Income Fund, Inc. is a mutual fund: an
investment that pools shareholders' money and invests it toward a specified
goal. In technical terms, the Fund is an open-end, diversified management
investment company organized as a corporation under Maryland law on
September 9, 1985.
The Fund is governed by a Board of Directors, which has overall
responsibility for the management of its affairs. The majority of
directors are not affiliated with Waddell & Reed, Inc.
The Fund has two classes of shares. 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, which are offered by this
Prospectus. In addition, the Fund offers Class Y shares through a separate
prospectus. Class Y shares are designed for institutional investors.
Class Y shares are not subject to a sales charge on purchases and are not
subject to redemption fees. Class Y shares are not subject to a Rule 12b-1
fee. Additional information about Class Y shares may be obtained by
calling 913-236-2000 or by writing to Waddell & Reed, Inc. at the address
on the inside back cover of this Prospectus.
The Fund does not hold annual meetings of shareholders; however,
certain significant corporate matters, such as the approval of a new
investment advisory agreement or a change in a fundamental investment
policy, which require shareholder approval will be presented to
shareholders at a meeting called by the Board of Directors for such
purpose.
Special meetings of shareholders may be called for any purpose upon
receipt by the Fund of a request in writing signed by shareholders holding
not less than 25% of all shares entitled to vote at such meeting, provided
certain conditions stated in the Bylaws of the Fund are met. There will
normally be no meeting of the shareholders for the purpose of electing
directors until such time as less than a majority of directors holding
office have been elected by shareholders, at which time the directors then
in office will call a shareholders' meeting for the election of directors.
To the extent that Section 16(c) of the Investment Company Act of 1940, as
amended (the "1940 Act"), applies to the Fund, the directors are required
to call a meeting of shareholders for the purpose of voting upon the
question of removal of any director when requested in writing to do so by
the shareholders of record of not less than 10% of the Fund's outstanding
shares.
Each share (regardless of class) has one vote. All shares of the Fund
vote together as a single class, except as to any matter for which a
separate vote of any class is required by the 1940 Act, and except as to
any matter which affects the interests of one or more particular classes,
in which case only the shareholders of the affected classes are entitled to
vote, each as a separate class. Shares are fully paid and nonassessable
when purchased.
WRIMCO and Its Affiliates
The Fund is managed by WRIMCO, subject to the authority of the
Fund's Board of Directors. WRIMCO provides investment advice to the Fund
and supervises the Fund's investments. Waddell & Reed, Inc. and its
predecessors have served as investment manager to each of the registered
investment companies in the United Group of Mutual Funds, except United
Asset Strategy Fund, Inc., since 1940 or the inception of the company,
whichever was later, and to TMK/United Funds, Inc. since that fund's
inception, until January 8, 1992, when it assigned its duties as investment
manager and assigned its professional staff for investment management
services to WRIMCO. WRIMCO has also served as investment manager for
Waddell & Reed Funds, Inc. since its inception in September 1992 and United
Asset Strategy Fund, Inc. since it commenced operations in March 1995.
John M. Holliday is primarily responsible for the day-to-day
management of the portfolio of the Fund. Mr. Holliday has held his Fund
responsibilities since January 20, 1986. He is Senior Vice President of
WRIMCO, Senior Vice President of Waddell & Reed Asset Management Company,
an affiliate of WRIMCO, Vice President of the Fund and Vice President of
other investment companies for which WRIMCO serves as investment manager.
Mr. Holliday has served as the portfolio manager for investment companies
managed by Waddell & Reed, Inc. and its successor, WRIMCO, since August
1979, and has been an employee of Waddell & Reed, Inc. and its successor,
WRIMCO, since April 1978. Other members of WRIMCO's investment management
department provide input on market outlook, economic conditions, investment
research and other considerations relating to the Fund's investments.
Waddell & Reed, Inc. serves as the Fund's underwriter and as
underwriter for each of the other funds in the United Group of Mutual Funds
and Waddell & Reed Funds, Inc. and acts as the principal underwriter and
distributor for variable life insurance and variable annuity policies
issued by United Investors Life Insurance Company, for which TMK/United
Funds, Inc. is the underlying investment vehicle.
Waddell & Reed Services Company acts as transfer agent ("Shareholder
Servicing Agent") for the Fund and processes the payments of dividends.
Waddell & Reed Services Company also acts as agent ("Accounting Services
Agent") in providing bookkeeping and accounting services and assistance to
the Fund and pricing daily the value of its shares.
WRIMCO and Waddell & Reed Services Company are subsidiaries of Waddell
& Reed, Inc. Waddell & Reed, Inc. is a direct subsidiary of Waddell & Reed
Financial Services, Inc., a holding company, and an indirect subsidiary of
United Investors Management Company, a holding company, and Torchmark
Corporation, a holding company.
WRIMCO places transactions for the portfolio of the Fund and in doing
so may consider sales of shares of the Fund and other funds it manages as a
factor in the selection of brokers to execute portfolio transactions.
Breakdown of Expenses
Like all mutual funds, the Fund pays fees related to its daily
operations. Expenses paid out of the Fund's assets are reflected in its
share price or dividends; they are neither billed directly to shareholders
nor deducted from shareholder accounts.
The Fund pays a management fee to WRIMCO for providing investment
advice and supervising its investments. The Fund also pays other expenses,
which are explained below.
Management Fee
The management fee of the Fund is calculated by adding a group fee to
a specific fee. It is accrued and paid to WRIMCO daily.
The specific fee is computed on the Fund's net asset value as of the
close of business each day at the annual rate of .10 of 1% of its net
assets. The group fee is a pro rata participation based on the relative
net asset size of the Fund in the group fee computed each day on the
combined net asset values of all the funds in the United Group at the
annual rates shown in the following table:
Group Fee Rate
Annual
Group Net Group
Asset Level Fee Rate
(all dollars For Each
in millions) Level
- ------------ --------
From $0
to $750 .51 of 1%
From $750
to $1,500 .49 of 1%
From $1,500
to $2,250 .47 of 1%
From $2,250
to $3,000 .45 of 1%
From $3,000
to $3,750 .43 of 1%
From $3,750
to $7,500 .40 of 1%
From $7,500
to $12,000 .38 of 1%
Over $12,000 .36 of 1%
Growth in assets of the United Group assures a lower group fee rate.
The combined net asset values of all of the funds in the United
Group were approximately $14.7 billion as of September 30, 1996.
Management fees for the fiscal year ended September 30, 1996 were 0.51% of
the Fund's average net assets.
Other Expenses
While the management fee is a significant component of the Fund's
annual operating costs, the Fund has other expenses as well.
The Fund pays the Accounting Services Agent a monthly fee based on the
average net assets of the Fund for accounting services. With respect to
its Class A shares, the Fund pays the Shareholder Servicing Agent a monthly
fee for each Class A shareholder account that was in existence at any time
during the month, and a fee for each account on which a dividend or
distribution had a record date during the month.
The Fund has adopted a Service Plan pursuant to Rule 12b-1 of the 1940
Act with respect to its Class A shares. Under the Plan, the Fund may pay
monthly a fee to Waddell & Reed, Inc. in an amount not to exceed .25% of
the Fund's average annual net assets of its Class A shares. The fee is to
be paid to reimburse Waddell & Reed, Inc. for amounts it expends in
connection with the provision of personal services to Class A shareholders
and/or maintenance of Class A shareholder accounts. In particular, the
Service Plan and a related Service Agreement between the Fund and Waddell &
Reed, Inc. contemplate that these expenditures may include costs and
expenses incurred by Waddell & Reed, Inc. and its affiliates in
compensating, training and supporting registered account representatives,
sales managers and/or other appropriate personnel in providing personal
services to Class A shareholders and/or maintaining Class A shareholder
accounts; increasing services provided to Class A shareholders by office
personnel located at field sales offices; engaging in other activities
useful in providing personal services to Class A shareholders and/or the
maintenance of Class A shareholder accounts; and in compensating broker-
dealers who may regularly sell Class A shares, and other third parties, for
providing Class A shareholder services and/or maintaining Class A
shareholder accounts.
The total expenses for the fiscal year ended September 30, 1996 for
the Fund's Class A shares were 0.81% of the average net assets of the
Fund's Class A shares.
The Fund cannot precisely predict what its portfolio turnover rate
will be, but the Fund may have a high portfolio turnover. A higher
turnover will increase transaction and commission costs and could generate
taxable income or loss.
<PAGE>
APPENDIX A
The following are descriptions of some of the ratings of securities
that the Fund may use. The Fund may also use ratings provided by other
nationally recognized statistical rating organizations in determining the
securities eligible for investment.
DESCRIPTION OF BOND RATINGS
Standard & Poor's Ratings Services. An S&P corporate or municipal
bond rating is a current assessment of the creditworthiness of an obligor
with respect to a specific obligation. This assessment of creditworthiness
may take into consideration obligors such as guarantors, insurers or
lessees.
The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability
for a particular investor.
The ratings are based on current information furnished to S&P by the
issuer or obtained by S&P from other sources it considers reliable. S&P
does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be
changed, suspended or withdrawn as a result of changes in, or
unavailability of, such information, or based on other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of default -- capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in
accordance with the terms of the obligation;
2. Nature of and provisions of the obligation;
3. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization or other arrangement under the
laws of bankruptcy and other laws affecting creditors' rights.
A brief description of the applicable S&P rating symbols and their
meanings follow:
AAA -- Debt rated AAA has the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely strong.
AA -- Debt rated AA also qualifies as high quality debt. Capacity to
pay interest and repay principal is very strong, and debt rated AA differs
from AAA issues only in small degree.
A -- Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than debt in higher
rated categories.
BBB -- Debt rated BBB is regarded as having an adequate capacity to
pay interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher rated
categories.
BB, B, CCC, CC, C - Debt rated BB, B, CCC, CC and C is regarded as
having predominantly speculative characteristics with respect to capacity
to pay interest and repay principal in accordance with the terms of the
obligation. BB indicates the lowest degree of speculation and C the
highest degree of speculation. While such debt will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major exposures to adverse conditions.
BB -- Debt rated BB has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could
lead to inadequate capacity to meet timely interest and principal payments.
The BB rating category is also used for debt subordinated to senior debt
that is assigned an actual or implied BBB- rating.
B -- Debt rated B has a greater vulnerability to default but currently
has the capacity to meet interest payments and principal repayments.
Adverse business, financial, or economic conditions will likely impair
capacity or willingness to pay interest and repay principal. The B rating
category is also used for debt subordinated to senior debt that is assigned
an actual or implied BB or BB- rating.
CCC -- Debt rated CCC has a currently indefinable vulnerability to
default, and is dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal.
In the event of adverse business, financial or economic conditions, it is
not likely to have the capacity to pay interest and repay principal. The
CCC rating category is also used for debt subordinated to senior debt that
is assigned an actual or implied B or B- rating.
CC -- The rating CC is typically applied to debt subordinated to
senior debt that is assigned an actual or implied CCC rating.
C -- The rating C is typically applied to debt subordinated to senior
debt which is assigned an actual or implied CCC- debt rating. The C rating
may be used to cover a situation where a bankruptcy petition has been
filed, but debt service payments are continued.
CI -- The rating CI is reserved for income bonds on which no interest
is being paid.
D -- Debt rated D is in payment default. It is used when interest
payments or principal payments are not made on a due date even if the
applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace periods. The D rating will also be
used upon a filing of a bankruptcy petition if debt service payments are
jeopardized.
Plus (+) or Minus (-) -- To provide more detailed indications of
credit quality, the ratings from AA to CCC may be modified by the addition
of a plus or minus sign to show relative standing within the major rating
categories.
NR -- Indicates that no public rating has been requested, that there
is insufficient information on which to base a rating, or that S&P does not
rate a particular type of obligation as a matter of policy.
Debt Obligations of issuers outside the United States and its
territories are rated on the same basis as domestic corporate and municipal
issues. The ratings measure the creditworthiness of the obligor but do not
take into account currency exchange and related uncertainties.
Bond Investment Quality Standards: Under present commercial bank
regulations issued by the Comptroller of the Currency, bonds rated in the
top four categories (AAA, AA, A, BBB, commonly known as "investment grade"
ratings) are generally regarded as eligible for bank investment. In
addition, the laws of various states governing legal investments may impose
certain rating or other standards for obligations eligible for investment
by savings banks, trust companies, insurance companies and fiduciaries
generally.
Moody's Investors Service, Inc. A brief description of the applicable
MIS rating symbols and their meanings follows:
Aaa -- Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally
referred to as "gilt edge." Interest payments are protected by a large or
by an exceptionally stable margin and principal is secure. While the
various protective elements are likely to change such changes as can be
visualized are most unlikely to impair the fundamentally strong position of
such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities or
fluctuations of protective elements may be of greater amplitude or there
may be other elements present which make the long-term risks appear
somewhat larger than in Aaa securities.
A -- Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade obligations.
Factors giving security to principal and interest are considered adequate,
but elements may be present which suggest a susceptibility to impairment
sometime in the future.
Baa -- Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present
but certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Some bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
NOTE: Bonds within the above categories which possess the strongest
investment attributes are designated by the symbol "1" following the
rating.
Ba -- Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and
thereby not well safeguarded during good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may
be small.
Caa -- Bonds which are rated Caa are of poor standing. Such issues
may be in default or there may be present elements of danger with respect
to principal or interest.
Ca -- Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have
other marked shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
DESCRIPTION OF MUNICIPAL NOTE RATINGS
An S&P note rating reflects the liquidity factors and market access
risks unique to notes. Notes maturing in 3 years or less will likely
receive a note rating. Notes maturing beyond 3 years will most likely
receive a long-term debt rating. The following criteria will be used in
making that assessment.
- --Amortization schedule (the larger the final maturity relative to other
maturities, the more likely the issue is to be treated as a note).
- --Source of Payment (the more the issue depends on the market for its
refinancing, the more likely it is to be treated as a note.)
The note rating symbols and definitions are as follows:
SP-1 Strong capacity to pay principal and interest. Issues determined to
possess very strong characteristics are given a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the term
of the notes.
SP-3 Speculative capacity to pay principal and interest.
Moody's Short-Term Loan Ratings -- MIS ratings for state and municipal
short-term obligations will be designated Moody's Investment Grade (MIG).
This distinction is in recognition of the differences between short-term
credit risk and long-term risk. Factors affecting the liquidity of the
borrower are uppermost in importance in short-term borrowing, while various
factors of major importance in bond risk are of lesser importance over the
short run. Rating symbols and their meanings follow:
MIG 1 -- This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
MIG 2 -- This designation denotes high quality. Margins of protection
are ample although not so large as in the preceding group.
MIG 3 -- This designation denotes favorable quality. All security
elements are accounted for but this is lacking the undeniable strength of
the preceding grades. Liquidity and cash flow protection may be narrow and
market access for refinancing is likely to be less well established.
MIG 4 -- This designation denotes adequate quality. Protection
commonly regarded as required of an investment security is present and
although not distinctly or predominantly speculative, there is specific
risk.
DESCRIPTION OF COMMERCIAL PAPER RATINGS
An S&P commercial paper rating is a current assessment of the
likelihood of timely payment of debt considered short-term in the relevant
market. Ratings are graded into several categories, ranging from "A-1" for
the highest quality obligations to D for the lowest. Issuers rated A are
further referred to by use of numbers 1, 2 and 3 to indicate the relative
degree of safety. Issues assigned an A rating (the highest rating) are
regarded as having the greatest capacity for timely payment. An A-1
designation indicates that the degree of safety regarding timely payment is
strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation. An A-2
rating indicates that capacity for timely payment is satisfactory; however,
the relative degree of safety is not as high as for issues designated A-1.
Issues rated A-3 have adequate capacity for timely payment; however, they
are more vulnerable to the adverse effects of changes in circumstances than
obligations carrying the higher designations. Issues rated B are regarded
as having only speculative capacity for timely payment. A C rating is
assigned to short-term debt obligations with a doubtful capacity for
payment. Debt rated D is in payment default, which occurs when interest
payments or principal payments are not made on the date due, even if the
applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period.
MIS commercial paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. MIS employs the designations of Prime 1, Prime 2
and Prime 3, all judged to be investment grade, to indicate the relative
repayment capacity of rated issuers. Issuers rated Prime 1 have a superior
capacity for repayment of short-term promissory obligations and repayment
capacity will normally be evidenced by (1) lending market positions in well
established industries; (2) high rates of return on funds employed; (3)
conservative capitalization structures with moderate reliance on debt and
ample asset protection; (4) broad margins in earnings coverage of fixed
financial charges and high internal cash generation; and (5) well
established access to a range of financial markets and assured sources of
alternate liquidity. Issuers rated Prime 2 also have a strong capacity for
repayment of short-term promissory obligations as will normally be
evidenced by many of the characteristics described above for Prime 1
issuers, but to a lesser degree. Earnings trends and coverage ratios,
while sound, will be more subject to variation; capitalization
characteristics, while still appropriate, may be more affected by external
conditions; and ample alternate liquidity is maintained. Issuers rated
Prime 3 have an acceptable capacity for repayment of short-term promissory
obligations, as will normally be evidenced by many of the characteristics
above for Prime 1 issuers, but to a lesser degree. The effect of industry
characteristics and market composition may be more pronounced; variability
in earnings and profitability may result in changes in the level of debt
protection measurements and requirement for relatively high financial
leverage; and adequate alternate liquidity is maintained.
<PAGE>
United Municipal High Income Fund, Inc.
Custodian Underwriter
UMB Bank, n.a. Waddell & Reed, Inc.
Kansas City, Missouri 6300 Lamar Avenue
P. O. Box 29217
Legal Counsel Shawnee Mission, Kansas
Kirkpatrick & Lockhart LLP 66201-9217
1800 Massachusetts Avenue, N.W. (913) 236-2000
Washington, D. C. 20036
Shareholder Servicing Agent
Independent Accountants Waddell & Reed
Deloitte & Touche LLP Services Company
Kansas City, Missouri 6300 Lamar Avenue
P. O. Box 29217
Investment Manager Shawnee Mission, Kansas
Waddell & Reed Investment 66201-9217
Management Company (913) 236-2000
6300 Lamar Avenue
P. O. Box 29217 Accounting Services Agent
Shawnee Mission, Kansas Waddell & Reed
66201-9217 Services Company
(913) 236-2000 6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas
66201-9217
(913) 236-2000
Our INTERNET address is:
http://www.waddell.com
<PAGE>
United Municipal High Income Fund, Inc.
Class A Shares
PROSPECTUS
December 31, 1996
The United Group of Mutual Funds
United Asset Strategy Fund, Inc.
United Cash Management, Inc.
United Continental Income Fund, Inc.
United Funds, Inc.
United Bond Fund
United Income Fund
United Accumulative Fund
United Science and Technology Fund
United Gold & Government Fund, Inc.
United Government Securities Fund, Inc.
United High Income Fund, Inc.
United High Income Fund II, Inc.
United International Growth Fund, Inc.
United Municipal Bond Fund, Inc.
United Municipal High Income Fund, Inc.
United New Concepts Fund, Inc.
United Retirement Shares, Inc.
United Vanguard Fund, Inc.
NUP1014(12-96)
printed on recycled paper
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Please read this Prospectus before investing, and keep it on file for
future reference. It sets forth concisely the information about the Fund
that you ought to know before investing.
Additional information has been filed with the Securities and Exchange
Commission and is contained in a Statement of Additional Information
("SAI") dated December 31, 1996. The SAI is available free upon request to
the Fund or Waddell & Reed, Inc., the Fund's underwriter, at the address or
telephone number below. The SAI is incorporated by reference into this
Prospectus and you will not be aware of all facts unless you read both this
Prospectus and the SAI.
THE FUND INVESTS AT LEAST 75% OF ITS ASSETS IN MUNICIPAL BONDS RATED BELOW
INVESTMENT GRADE, COMMONLY KNOWN AS "JUNK BONDS," WHICH ENTAIL GREATER
RISKS, INCLUDING DEFAULT RISKS, THAN THOSE FOUND IN HIGHER RATED
SECURITIES. INVESTORS SHOULD CAREFULLY CONSIDER THESE RISKS BEFORE
INVESTING. SEE "ABOUT THE INVESTMENT PRINCIPLES OF THE FUND" INCLUDED IN
THIS PROSPECTUS FOR A DISCUSSION OF THE RISKS ASSOCIATED WITH NON-
INVESTMENT GRADE DEBT SECURITIES. SEE APPENDIX A FOR A DISCUSSION OF BOND
RATINGS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
United Municipal High Income Fund, Inc.
Class Y Shares
This Fund seeks to provide a high level of income that is not subject to
Federal income tax.
This Prospectus describes one class of shares of the Fund -- Class Y
Shares.
Prospectus
December 31, 1996
UNITED MUNICIPAL HIGH INCOME FUND, INC.
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
913-236-2000
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Table of Contents
AN OVERVIEW OF THE FUND......................................3
EXPENSES........................................................5
FINANCIAL HIGHLIGHTS............................................6
PERFORMANCE.....................................................7
Explanation of Terms ..........................................7
ABOUT WADDELL & REED............................................9
ABOUT THE INVESTMENT PRINCIPLES OF THE FUND.....................9
Investment Goals and Principles ..............................10
Risk Considerations ........................................10
Securities and Investment Practices ..........................11
ABOUT YOUR ACCOUNT.............................................22
Buying Shares ................................................22
Minimum Investments ..........................................23
Adding to Your Account .......................................23
Selling Shares ...............................................24
Telephone Transactions .......................................26
Shareholder Services .........................................26
Personal Service ...........................................26
Reports ....................................................26
Exchanges ..................................................26
Distributions and Taxes ......................................26
Distributions ..............................................26
Taxes ......................................................27
ABOUT THE MANAGEMENT AND EXPENSES OF THE FUND..................30
WRIMCO and Its Affiliates ....................................31
Breakdown of Expenses ........................................32
Management Fee .............................................32
Other Expenses .............................................33
APPENDIX A.....................................................34
DESCRIPTION OF BOND RATINGS ..................................34
DESCRIPTION OF MUNICIPAL NOTE RATINGS ........................38
DESCRIPTION OF COMMERCIAL PAPER RATINGS ......................39
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An Overview of the Fund
The Fund: This Prospectus describes the Class Y shares of United Municipal
High Income Fund, Inc., an open-end, diversified management investment
company.
Goals and Strategies: United Municipal High Income Fund, Inc. (the
"Fund") seeks to provide a high level of income which is not subject to
Federal income tax. The Fund seeks to achieve this goal through a
diversified portfolio consisting mainly of medium- and lower-rated tax-
exempt bonds, as classified by recognized rating agencies. See "About the
Investment Principles of the Fund" for further information.
Management: Waddell & Reed Investment Management Company ("WRIMCO")
provides investment advice to the Fund and manages the Fund's investments.
WRIMCO is a wholly-owned subsidiary of Waddell & Reed, Inc. WRIMCO,
Waddell & Reed, Inc. and its predecessors have provided investment
management services to registered investment companies since 1940. See
"About the Management and Expenses of the Fund" for further information
about management fees.
Distributor: Waddell & Reed, Inc. acts as principal underwriter and
distributor of the shares of the Fund.
Purchases: You may buy Class Y shares of the Fund through Waddell & Reed,
Inc. and its account representatives. The price to buy a Class Y share of
the Fund is the net asset value of a Class Y share. There is no sales
charge incurred upon purchase of Class Y shares of the Fund. See "About
Your Account" for information on how to purchase Class Y shares.
Redemptions: You may redeem your shares at net asset value. When you sell
your shares, they may be worth more or less than what you paid for them.
See "About Your Account" for a description of redemption procedures.
Who May Want to Invest: The Fund is for an investor looking for a higher
level of primarily tax-free income than is normally available with
securities in the higher-rated categories. The Fund is not suitable for
all investors. You should consider whether the Fund fits with your
particular investment objectives.
Risk Considerations: The Fund invests primarily in medium- and lower-
quality municipal bonds which may vary widely as to their interest rates,
degree of security and maturity. Investments in high-yield, high-risk
securities ("junk bonds") may entail risks that are different or more
pronounced than those involved in higher-rated securities. The value of
the Fund's investments and the income generated will vary from day to day,
generally reflecting changes in interest rates, market conditions and other
company and economic news. Performance will also depend on WRIMCO's skill
in selecting investments. See "About the Investment Principles of the
Fund" for information about the risks associated with the Fund's
investments.
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Expenses
Shareholder transaction expenses are charges you pay when you buy or sell
shares of a fund.
Maximum sales load
on purchases None
Maximum sales load
on reinvested
dividends None
Deferred
sales load None
Redemption fees None
Exchange fee None
Annual Fund operating expenses (as a percentage of average net assets).3
Management fees 0.51%
12b-1 fees None
Other expenses 0.23%
Total Fund operating expenses 0.74%
Example: You would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return4 and (2) redemption at the end of each time
period:
1 year $ 8
3 years $24
The purpose of this table is to assist you in understanding the various
costs and expenses that a shareholder of the Class Y shares of the Fund
will bear directly or indirectly. The example should not be considered a
representation of past or future expenses; actual expenses may be greater
or lesser than those shown. For a more complete discussion of certain
expenses and fees, see "Breakdown of Expenses."
3Expense ratios are based on the management fees and other Fund-level
expenses of the Fund for the fiscal year ended September 30, 1996, and the
other expenses attributable to the Class Y shares that are anticipated for
the current year. Actual expenses may be greater or lesser than those
shown.
4Use of an assumed annual return of 5% is for illustration purposes only
and is not a representation of the Fund's future performance, which may be
greater or lesser.
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Financial Highlights
Financial Highlights for Class Y shares are not included because the Fund
had no Class Y shares outstanding during the fiscal year ended September
30, 1996.
<PAGE>
Performance
Mutual fund performance is commonly measured as total return. The
Fund may also advertise its performance by showing yield and performance
rankings. Performance information is calculated and presented separately
for each class of Fund shares.
Explanation of Terms
Total Return is the overall change in value of an investment in the
Fund over a given period, assuming reinvestment of any dividends and other
distributions. A cumulative total return reflects actual performance over
a stated period of time. An average annual total return is a hypothetical
rate of return that, if achieved annually, would have produced the same
cumulative total return if performance had been constant over the entire
period. Average annual total returns smooth out variations in performance;
they are not the same as actual year-by-year results. Non-standardized
total return may be for periods other than those required to be presented
or may otherwise differ from standardized total return.
Yield refers to the income generated by an investment in the Fund over
a given period of time, expressed as an annual percentage rate. The Fund's
yield is based on a 30-day period ending on a specific date and is computed
by dividing the Fund's net investment income per share earned during the
period by the Fund's maximum offering price per share on the last day of
the period. Tax equivalent yield is calculated by applying the stated
income tax rate to only the net investment income exempt from taxation
according to a standard formula.
Performance Rankings are comparisons of the Fund's performance to the
performance of other selected mutual funds, selected recognized market
indicators such as the Standard & Poor's 500 Stock Index and the Dow Jones
Industrial Average, or non-market indices or averages of mutual fund
industry groups. The Fund may quote its performance rankings and/or other
information as published by recognized independent mutual fund statistical
services or by publications of general interest. In connection with a
ranking, the Fund may provide additional information, such as the
particular category to which it relates, the number of funds in the
category, the criteria upon which the ranking is based, and the effect of
sales charges, fee waivers and/or expense reimbursements.
All performance information that the Fund advertises or includes in
information provided to present or prospective shareholders is historical
in nature and is not intended to represent or guarantee future results.
The value of the Fund's shares when redeemed may be more or less than their
original cost.
The Fund's recent performance and holdings will be detailed twice a
year in the Fund's annual and semiannual reports, which are sent to all
Fund shareholders.
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About Waddell & Reed
Since 1937, Waddell & Reed has been helping people make the most of
their financial future by helping them take advantage of various financial
services. Today, Waddell & Reed has over 2500 account representatives
located throughout the United States. Your primary contact in your
dealings with Waddell & Reed will be your local account representative.
However, the Waddell & Reed shareholder services department, which is part
of the Waddell & Reed headquarters operations in Overland Park, Kansas, is
available to assist you and your Waddell & Reed account representative.
You may speak with a customer service representative by calling 913-236-
2000.
<PAGE>
About the Investment Principles of the Fund
Investment Goals and Principles
The goal of the Fund is to provide a high level of income that is not
subject to Federal income tax. The Fund seeks to achieve this goal by
investing in medium- and lower-quality municipal bonds that provide higher
yields than bonds of higher quality. There is no assurance that the Fund
will achieve its goal.
As used in this Prospectus, "municipal bonds" mean obligations the
interest on which is not includible in gross income for Federal income tax
purposes. See "Distributions and Taxes" concerning the alternative minimum
tax ("AMT"). The Fund anticipates that not more than 40% of the dividends
it will pay to shareholders will be treated as a preference item for AMT
purposes. The Fund and WRIMCO rely on the opinion of bond counsel for the
issuer in determining whether obligations are municipal bonds.
Subject to the 20% limitation described below, WRIMCO may choose to
invest in debt securities other than municipal bonds ("taxable
obligations") under normal conditions in order to keep assets invested
until appropriate investments in municipal bonds may be made and may hold
such obligations in connection with investment in futures contracts.
Sometimes, WRIMCO may believe that a full or partial defensive position is
desirable temporarily due to present or anticipated market or economic
conditions that are affecting or could affect the values of municipal
bonds. During such periods, the Fund may invest up to all of its assets in
taxable obligations, which would result in a higher proportion of the
Fund's income being subject to Federal income tax.
Risk Considerations
There are risks inherent in any investment. The Fund is subject to
varying degrees of market risk, financial risk and, in some cases,
prepayment risk. Market risk is the potential for fluctuations in the
price of the security because of market factors. Because of market risk,
you should anticipate that the share price of the Fund will fluctuate.
Financial risk is based on the financial situation of the issuer. The
financial risk of the Fund depends on the credit quality of the underlying
securities. Prepayment risk is the possibility that, during periods of
falling interest rates, a debt security with a high stated interest rate
will be prepaid prior to its expected maturity date.
Certain types of instruments in which the Fund may invest, and certain
strategies WRIMCO may employ in pursuit of the Fund's goals, involve
special risks. Lower-quality debt securities (commonly called "junk
bonds") are considered to be speculative and involve greater risk of
default or price changes due to changes in the issuer's creditworthiness.
The market prices of these securities may fluctuate more than higher-
quality securities and may decline significantly in periods of general
economic difficulty.
The Fund can use various techniques to increase or decrease its
exposure to changing security prices, interest rates or other factors that
affect security values. These techniques may involve derivative
instruments, including options, futures contracts, options on futures
contracts, indexed securities, mortgage-backed securities and stripped
securities. If WRIMCO judges market conditions incorrectly or employs a
strategy that does not correlate well with the Fund's investments, these
techniques could result in a loss, regardless of whether the intent was to
reduce risk or increase return. These techniques may increase the
volatility of the Fund and may involve a small investment of cash relative
to the magnitude of the risk assumed. In addition, these techniques could
result in a loss if the counterparty to the transaction does not perform as
promised or if there is not a liquid secondary market to close out a
position that the Fund has entered into. See "Risks of Derivative
Instruments" for further information on the risks of investing in these
instruments.
Income from taxable obligations, repurchase agreements, options and
futures contracts will be subject to Federal income tax.
Securities and Investment Practices
The following pages contain more detailed information about types
of instruments in which the Fund may invest and strategies WRIMCO may
employ in pursuit of the Fund's investment goal. A summary of risks
associated with these instrument types and investment practices is included
as well.
WRIMCO might not buy all of these instruments or use all of these
techniques to the full extent permitted by the Fund's investment policies
and restrictions unless it believes that doing so will help the Fund
achieve its goal.
Certain of the investment policies and restrictions of the Fund are
also stated below. A fundamental policy of the Fund may not be changed
without the approval of the shareholders of the Fund. Operating policies
may be changed by the Board of Directors without the approval of the
affected shareholders. The goal of the Fund and the types of securities
and other assets in which it may invest are fundamental policies. Unless
otherwise indicated, other policies are operating policies.
Policies and limitations are typically considered at the time of
purchase; the sale of instruments is usually not required in the event of a
subsequent change in circumstances.
Please see the SAI for further information concerning the following
instruments and associated risks and the Fund's investment policies and
restrictions.
Municipal bonds are issued by a wide range of state and local
governments, agencies and authorities for various purposes. The two main
kinds of municipal bonds are "general obligation" bonds and "revenue"
bonds. 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.
Industrial development bonds are revenue bonds issued by or on behalf
of public authorities to obtain funds to finance privately-operated
facilities. Their credit quality is generally dependent on the credit
standing of the company involved. To the extent that the Fund invests in
municipal bonds the payment of principal and interest on which is derived
from revenue of similar projects, or in municipal bonds of issuers located
in the same geographic area, the Fund may be more susceptible to the risks
associated with economic, political or regulatory occurrences that might
adversely affect particular projects or areas. Similarly, to the extent
the Fund invests up to 25% of its assets in industrial revenue bonds issued
for any one industry, the Fund may be susceptible to the risks associated
with a particular industry. See the SAI for examples of the types of
projects in which the Fund may invest from time to time and for a
discussion of the risks associated with such projects.
Other municipal obligations include municipal lease obligations of
municipal authorities or entities and participations in these obligations
(collectively, "lease obligations"). WRIMCO determines liquidity of lease
obligations in accordance with guidelines established by the Fund's Board
of Directors. Unrated municipal lease obligations are considered to be
illiquid. In determining the credit quality of unrated municipal lease
obligations, one of the factors, among others, to be considered will be the
likelihood that the lease will not be canceled. Certain "non-
appropriation" lease obligations may present special risks because the
municipality's obligation to make future lease or installment payments
depends on money being appropriated each year for this purpose.
Municipal bonds vary widely as to their interest rates, degree of
security and maturity. Bonds are selected on the basis of quality, yield
and diversification. Factors that affect the yield on municipal bonds
include general money market conditions, municipal bond market conditions,
the size of a particular offering, the maturity of the obligation and the
nature of the issue. Lower-rated bonds usually, but not always, have
higher yields than similar but higher-rated bonds.
Medium- or lower-rated municipal securities are frequently traded only
in markets where the number of potential purchasers and sellers, if any, is
very limited. This factor may have the effect of limiting the availability
of the securities for purchase by the Fund and may also limit the ability
of the Fund to sell such securities at their fair value either to meet
redemption requests or in response to changes in the economy or the
financial markets.
Lower-quality debt securities are considered to be speculative and
involve greater risk of default or price changes due to changes in the
issuer's creditworthiness. The market prices of these securities may
fluctuate more than high-quality securities and may decline significantly
in periods of general economic difficulty. While the market for high-
yield, high-risk corporate debt securities has been in existence for many
years and has weathered previous economic downturns, the 1980s brought a
dramatic increase in the use of such securities to fund highly-leveraged
corporate acquisitions and restructurings. Past experience may not provide
an accurate indication of the future performance of the high-yield, high-
risk bond market, especially during periods of economic recession. The
market for lower-rated debt securities may be thinner and less active than
that for higher-rated debt securities, which can adversely affect the
prices at which the former are sold. Adverse publicity and changing
investor perceptions may decrease the values and liquidity of lower-rated
debt securities, especially in a thinly-traded market. Valuation becomes
more difficult and judgment plays a greater role in valuing lower-rated
debt securities than with respect to securities for which more external
sources of quotations and last sale information are available. Since the
risk of default is higher for lower-rated debt securities, WRIMCO's
research and credit analysis are an especially important part of managing
securities of this type held by the Fund. WRIMCO continuously monitors the
issuers of lower-rated debt securities in the Fund's portfolio in an
attempt to determine if the issuers will have sufficient cash flow and
profits to meet required principal and interest payments. The Fund may
choose, at its expense or in conjunction with others, to pursue litigation
or otherwise to exercise its rights as a security holder to seek to protect
the interests of security holders if it determines this to be in the best
interest of the Fund's shareholders.
While credit ratings are only one factor WRIMCO relies on in
evaluating high-yield debt securities, certain risks are associated with
credit ratings. Credit ratings evaluate the safety of principal and
interest payments, not market value risk. Credit ratings for individual
securities may change from time to time, and the Fund may retain a
portfolio security whose rating has been changed.
Under normal market conditions, the Fund will be substantially
invested in bonds with maturities of 10 to 30 years.
Policies and Restrictions: As a fundamental policy, at least 80% of
the Fund's assets will be invested during normal market conditions in
municipal bonds.
During normal market conditions, at least 75% of the Fund's assets
will be invested in medium- and lower-quality municipal bonds, which are
bonds rated BBB through D by Standard & Poor's Ratings Services ("S&P"), or
Baa through C by Moody's Investors Service, Inc. ("MIS"), or, if unrated,
are, in the opinion of WRIMCO, of similar quality to rated municipal bonds
in these categories. See Appendix A for a description of bond ratings.
The Fund may invest in higher-quality municipal bonds, and have less
than 75% of its assets in medium- and lower-quality municipal bonds, at
times when yield spreads are narrow and the higher yields do not justify
the increased risk and when, in the opinion of WRIMCO, there is a lack of
medium- and lower-quality issues in which to invest.
The Fund may invest 25% or more of its assets in industrial
development bonds, and may have 25% or more of its assets in securities the
payment of principal and interest on which is derived from revenue of
similar projects, or in municipal bonds of issuers located in the same
geographic area. As a fundamental policy, it will not, however, have more
than 25% of its assets in industrial development bonds issued for any one
industry or in any one state. The Fund will not purchase an industrial
development bond if it would then have more than 5% of its assets invested
in industrial development bonds of companies with less than three years
operating history.
Debt Securities. Bonds and other debt instruments are used by issuers
to borrow money from investors. The issuer pays the investor a fixed or
variable rate of interest, and must repay the amount borrowed at maturity.
Some debt securities, such as zero coupon bonds, do not pay current
interest, but are purchased at a discount from their face values.
Debt securities have varying levels of sensitivity to changes in
interest rates and varying degrees of quality. As a general matter,
however, when interest rates rise, the values of fixed-rate debt securities
fall and, conversely, when interest rates fall, the values of fixed-rate
debt securities rise. The values of floating and adjustable-rate debt
securities are not as sensitive to changes in interest rates as the values
of fixed-rate debt securities. Longer-term bonds are generally more
sensitive to interest rate changes than shorter-term bonds.
U.S. Government Securities are high-quality instruments issued or
guaranteed as to principal or interest by the U.S. Treasury or by an agency
or instrumentality of the U.S. Government. Not all U.S. Government
Securities are backed by the full faith and credit of the United States.
Some are backed by the right of the issuer to borrow from the U.S.
Treasury; others are backed by discretionary authority of the U.S.
Government to purchase the agencies' obligations; while others are
supported only by the credit of the instrumentality. In the case of
securities not backed by the full faith and credit of the United States,
the investor must look principally to the agency issuing or guaranteeing
the obligation for ultimate repayment.
Zero coupon bonds do not make interest payments; instead, they are
sold at a deep discount from their face value and are redeemed at face
value when they mature. Because zero coupon bonds do not pay current
income, their prices can be very volatile when interest rates change. In
calculating its income, the Fund takes into account as income a portion of
the difference between a zero coupon bond's purchase price and its face
value.
Money market instruments are high-quality, short-term debt instruments
that present minimal credit risk. They may include U.S. Government
Securities, commercial paper and other short-term corporate obligations,
and certificates of deposit, bankers' acceptances, bank deposits and other
financial institution obligations. These instruments may carry fixed or
variable interest rates.
Policies and Restrictions: As a fundamental policy, during normal
market conditions, up to 20% of the Fund's assets may be invested in a
combination of taxable obligations, and Debt Futures and Municipal Bond
Index Futures (defined below).
As a fundamental policy, the only taxable obligations that the Fund
may purchase are (i) U.S. Government Securities, (ii) bank obligations of
domestic banks or savings and loan associations that are subject to
regulation by the U.S. Government (these obligations may include
certificates of deposit and acceptances), (iii) commercial paper rated at
least A by S&P or MIS, and (iv) repurchase agreements.
Options, Futures and Other Strategies. The Fund may use certain
options and indexed securities to attempt to enhance income or yield or may
attempt to reduce the overall risk of its investments by using certain
options, futures contracts and certain other strategies described herein.
The strategies described below may be used in an attempt to manage certain
risks of the Fund's investments that can affect fluctuation in its net
asset value.
The Fund's ability to use these strategies may be limited by market
conditions, regulatory limits and tax considerations. The Fund might not
use any of these strategies, and there can be no assurance that any
strategy that is used will succeed. The risks associated with such
strategies are described below. Also see the SAI for more information on
these instruments and strategies and their risk considerations.
Options. The Fund may engage in certain strategies involving options
to attempt to enhance the Fund's income or yield or to attempt to reduce
the overall risk of its investments. A call option gives the purchaser the
right to buy, and obligates the writer to sell, the underlying investment
at the agreed upon exercise price during the option period. A put option
gives the purchaser the right to sell, and obligates the writer to buy, the
underlying investment at the agreed upon exercise price during the option
period. Purchasers of options pay an amount, known as a premium, to the
option writer in exchange for the right under the option contract.
Options offer large amounts of leverage, which will result in the
Fund's net asset value being more sensitive to changes in the value of the
related investment. There is no assurance that a liquid secondary market
will exist for exchange-listed options. The Fund will be able to close a
position in an option it has written only if there is a market for the put
or call. If the Fund is not able to enter into a closing transaction on an
option it has written, it will be required to maintain the securities, or
cash in the case of an option on an index, subject to the call or the
collateral underlying the put until a closing purchase transaction can be
entered into or the option expires. Because index options are settled in
cash, the Fund cannot provide in advance for its potential settlement
obligations on a call it has written on an index by holding the underlying
securities. The Fund bears the risk that the value of the securities it
holds will vary from the value of the index.
Policies and Restrictions: As a fundamental policy, the Fund may
purchase and write (sell) put and call options only on domestic debt
securities and municipal bond indices, and the options on futures contracts
described below, subject to certain restrictions that are set forth in the
SAI.
The Fund may purchase and write (sell) options on domestic debt
securities and municipal bond indices only if they are listed on a national
securities exchange.
The Fund will only write puts on domestic debt securities if it would
be willing to purchase the underlying security at the exercise price.
Futures Contracts and Options on Futures Contracts. When the Fund
purchases a futures contract, it incurs an obligation to take delivery of a
specified amount of the obligation underlying the contract at a specified
time in the future for a specified price. When the Fund sells a futures
contract, it incurs an obligation to deliver the specified amount of the
underlying obligation at a specified time in return for an agreed upon
price.
When the Fund writes an option on a futures contract, it becomes
obligated, in return for the premium paid, to assume a position in a
futures contract at a specified exercise price at any time during the term
of the option. If the Fund has written a call, it assumes a short futures
position. If it has written a put, it assumes a long futures position.
When the Fund purchases an option on a futures contract, it acquires a
right in return for the premium it pays to assume a position in a futures
contract (a long position if the option is a call and a short position if
the option is a put).
Policies and Restrictions: As a fundamental policy, the Fund may only
buy and sell futures contracts relating to domestic debt securities ("Debt
Futures"), futures contracts relating to municipal bond indices ("Municipal
Bond Index Futures") and options on Debt Futures.
The Fund intends to use futures contracts and options thereon only to
attempt to hedge against market risks that could adversely affect the value
of its portfolio.
During normal market conditions, up to 20% of the Fund's assets may be
invested in a combination of taxable obligations, Debt Futures and
Municipal Bond Index Futures.
Indexed Securities. The Fund may purchase indexed securities,
which are securities the value of which varies in relation to the value 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. The performance of indexed
securities depends to a great extent on the performance of the security,
currency, or other instrument to which they are indexed, and may also be
influenced by interest rate changes in the United States and abroad. At
the same time, indexed securities are subject to the credit risks
associated with the issuer of the security, and their values may decline
substantially if the issuer's creditworthiness deteriorates. Indexed
securities may be more volatile than the underlying instruments.
Policies and Restrictions: The Fund does not intend to invest more
than 25% of its total assets in indexed securities.
Mortgage-Backed Securities may include pools of mortgages, such as
collateralized mortgage obligations, and stripped mortgage-backed
securities. The value of these securities may be significantly affected by
changes in interest rates, the market's perception of the issuers and the
creditworthiness of the parties involved.
The yield characteristics of mortgage-backed securities differ from
those of traditional debt securities. Among the major differences are that
interest and principal payments are made more frequently on mortgage-backed
securities and that principal may be prepaid at any time because the
underlying mortgage loans generally may be prepaid at any time. As a
result, if the Fund purchases these securities at a premium, a prepayment
rate that is faster than expected will reduce yield to maturity while a
prepayment rate that is slower than expected will have the opposite effect
of increasing yield to maturity. Conversely, if the Fund purchases these
securities at a discount, faster than expected prepayments will increase,
while slower than expected prepayments will reduce, yield to maturity.
Accelerated prepayments on securities purchased by the Fund at a premium
also impose a risk of loss of principal because the premium may not have
been fully amortized at the time the principal is repaid in full.
Timely payment of principal and interest on pass-through securities of
the Government National Mortgage Association (but not the Federal Home Loan
Mortgage Corporation or the Federal National Mortgage Association) is
guaranteed by the full faith and credit of the United States. This is not
a guarantee against market decline of the value of these securities or
shares of the Fund. It is possible that the availability and marketability
(i.e., liquidity) of these securities could be adversely affected by
actions of the U.S. Government to tighten the availability of its credit.
Policies and Restrictions: The Fund may invest in mortgage-backed
securities 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.
Stripped Securities are the separate income or principal components of
a debt instrument. These involve risks that are similar to those of other
debt securities, although they may be more volatile. The prices of
stripped mortgage-backed securities may be particularly affected by changes
in interest rates.
Policies and Restrictions: The Fund may invest in stripped
securities as long as WRIMCO determines that it is consistent with the
Fund's goal and investment policies. The Fund intends to invest less than
5% of its total assets in stripped securities.
Risks of Derivative Instruments. The use of options, futures
contracts and options on futures contracts, and the investment in indexed
securities, stripped securities and mortgage-backed securities, involve
special risks, including (i) possible imperfect or no correlation between
price movements of the portfolio investments (held or intended to be
purchased) involved in the transaction and price movements of the
instruments involved in the transaction, (ii) possible lack of a liquid
secondary market for any particular instrument at a particular time, (iii)
the need for additional portfolio management skills and techniques, (iv)
losses due to unanticipated market price movements, (v) the fact that,
while such strategies can reduce the risk of loss, they can also reduce the
opportunity for gain, or even result in losses, by offsetting favorable
price movements in investments involved in the transaction, (vi) incorrect
forecasts by WRIMCO concerning interest rates or direction of price
fluctuations of the investment involved in the transaction, which may
result in the strategy being ineffective, (vii) loss of premiums paid by
the Fund on options it purchases, and (viii) the possible inability of the
Fund to purchase or sell a portfolio security at a time when it would
otherwise be favorable for it to do so, or the possible need for the Fund
to sell a portfolio security at a disadvantageous time, due to the need for
the Fund to maintain "cover" or to segregate securities in connection with
such transactions and the possible inability of the Fund to close out or
liquidate its position.
For a hedging strategy to be completely effective, the price change of
the hedging instrument must equal the price change of the investment being
hedged. The risk of imperfect correlation of these price changes increases
as the composition of the Fund's portfolio diverges from instruments
underlying a hedging instrument. Such equal price changes are not always
possible because the investment underlying the hedging instruments may not
be the same investment that is being hedged. WRIMCO will attempt to create
a closely correlated hedge but hedging activity may not be completely
successful in eliminating market value fluctuation.
WRIMCO may use derivative instruments, including securities with
embedded derivatives, for hedging purposes to adjust the risk
characteristics of the Fund's portfolio of investments and may use some of
these instruments to adjust the return characteristics of the Fund's
portfolio of investments. An embedded derivative is a derivative that is
part of another financial instrument. Embedded derivatives typically, but
not always, are debt securities whose return of principal or interest, in
part, is determined by reference to something that is not intrinsic to the
security itself. The use of derivative techniques for speculative purposes
can increase investment risk. If WRIMCO judges market conditions
incorrectly or employs a strategy that does not correlate well with the
Fund's investments, these techniques could result in a loss, regardless of
whether the intent was to reduce risk or increase return. These techniques
may increase the volatility of the Fund and may involve a small investment
of cash relative to the magnitude of the risk assumed. In addition, these
techniques could result in a loss if the counterparty to the transaction
does not perform as promised or if there is not a liquid secondary market
to close out a position that the Fund has entered into.
The ordinary spreads between prices in the cash and futures markets,
due to the differences in the natures of those markets, are subject to
distortion. Due to the possibility of distortion, a correct forecast of
general interest rate trends by WRIMCO may still not result in a successful
transaction. WRIMCO may be incorrect in its expectations as to the extent
of various interest rate movements or the time span within which the
movements take place.
Options and futures transactions may increase portfolio turnover
rates, which results in correspondingly greater commission expenses and
transaction costs and may result in certain tax consequences. See the SAI
for further information regarding these and other risks.
New financial products and risk management techniques continue to be
developed. The Fund may use these instruments and techniques to the extent
consistent with its goal, investment policies and regulatory requirements
applicable to investment companies.
When-Issued and Delayed-Delivery Transactions are trading practices in
which payment and delivery for the securities take place at a future date.
The market value of a security could change during this period, which could
affect the Fund's yield.
The Fund may purchase municipal bonds on a when-issued or delayed-
delivery basis and sell municipal bonds on a delayed-delivery basis. When
purchasing municipal bonds on a delayed-delivery basis, the Fund assumes
the rights and risks of ownership, including the risk of price and yield
fluctuations. When the Fund has sold a municipal bond on a delayed-
delivery basis, the Fund does not participate in further gains or losses
with respect to the bond. If the other party to a delayed-delivery
transaction fails to deliver or pay for the bonds, the Fund could miss a
favorable price or yield opportunity, or could suffer a loss.
Repurchase Agreements. In a repurchase agreement, the Fund buys a
security at one price and simultaneously agrees to sell it back at a higher
price. Delays or losses could result if the other party to the agreement
defaults or becomes insolvent.
Policies and Restrictions: The Fund may not enter into a
repurchase agreement if, as a result, more than 10% of its net assets would
consist of illiquid investments, which include repurchase agreements not
terminable within seven days.
Restricted Securities and Illiquid Investments. Restricted securities
are securities that are subject to legal or contractual restrictions on
resale. Restricted securities may be illiquid due to restrictions on their
resale. Certain restricted securities may be determined to be liquid in
accordance with guidelines adopted by the Fund's Board of Directors.
Illiquid investments may be difficult to sell promptly at an
acceptable price. Difficulty in selling securities may result in a loss or
may be costly to the Fund.
Policies and Restrictions: The Fund may not purchase a security if,
as a result, more than 10% of its net assets would consist of illiquid
investments.
Diversification. Diversifying the Fund's investment portfolio can
reduce the risks of investing. This may include limiting the amount of
money invested in any one issuer or, on a broader scale, in any one
industry.
Policies and Restrictions: As a fundamental policy, the Fund may not
purchase the securities of any "issuer" if more than 5% of the Fund's total
assets would then be invested in that "issuer." This restriction does not
apply to cash or cash items, or U.S. Government Securities.
There is a question as to who is the issuer of certain types of
municipal bonds. For example, municipal bonds may be created by a
particular government but be backed only by the assets and revenues of a
subdivision of that government such as an agency, instrumentality,
authority or other subdivision. In such case, the Fund would consider that
such subdivision is the issuer for the purposes of this 5% restriction. In
the case of industrial development bonds, the nongovernmental user of
facilities financed by them is also considered as a separate issuer. The
method of determining who is an issuer may be changed without shareholder
vote. The Fund considers a guarantee of a municipal bond by a government
or other entity to be a separate security that would be given a value and
included in the 5% restriction if the value of all municipal bonds created
by the government or entity and owned by the Fund exceeds 10% of the value
of the Fund's total assets.
Borrowing. If the Fund borrows money, its share price may be subject
to greater fluctuation until the borrowing is paid off.
If the Fund makes additional investments while borrowings are
outstanding, this may be considered a form of leverage.
Policies and Restrictions: As a fundamental policy, the Fund may
not borrow money or pledge 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 its total assets.
Other Instruments may include securities of closed-end investment
companies. As a shareholder in an investment company, the Fund would bear
its pro rata share of that investment company's expenses, which could
result in duplication of certain fees, including management and
administrative fees.
Policies and Restrictions: As a fundamental policy, the Fund may buy
shares of other investment companies that do not redeem their shares only
if it does so in a regular transaction in the open market and then does not
have more than 10% of its total assets invested in these shares.
<PAGE>
About Your Account
Class Y shares are designed for institutional investors. Class Y
shares are available for purchase by:
participants of employee benefit plans established under section 403(b)
or section 457, or qualified under section 401, including 401(k) plans,
of the Internal Revenue Code of 1986, as amended (the "Code"), when the
plan has 100 or more eligible employees and holds the shares in an
omnibus account on the Fund's records;
banks, trust institutions, investment fund administrators and other
third parties investing for their own accounts or for the accounts of
their customers where such investments for customer accounts are held in
an omnibus account on the Fund's records;
government entities or authorities and corporations whose investment
within the first twelve months after initial investment is $10 million
or more; and
certain retirement plans and trusts for employees and account
representatives of Waddell & Reed, Inc. and its affiliates.
Buying Shares
You may buy shares of the Fund through Waddell & Reed, Inc. and its
account representatives. To open your account you must complete and sign
an application. Your Waddell & Reed account representative can help you
with any questions you might have.
The price to buy a share of the Fund, called the offering price, is
calculated every business day.
The offering price of a Class Y share (price to buy one Class Y share)
is the Fund's Class Y net asset value ("NAV"). The Fund's Class Y shares
are sold without a sales charge.
To purchase by wire, you must first obtain an account number by
calling 1-800-366-2520, then mail a completed application to Waddell &
Reed, Inc., P. O. Box 29217, Shawnee Mission, Kansas 66201-9217, or fax it
to 913-236-5044. Instruct your bank to wire the amount you wish to invest
to UMB Bank, n.a., ABA Number 101000695, W&R Underwriter Account Number
0007978, FBO Customer Name and Account Number.
To purchase by check, make your check payable to Waddell & Reed, Inc.
Mail the check, along with your completed application, to Waddell & Reed,
Inc., P.O. Box 29217, Shawnee Mission, Kansas 66201-9217.
The Fund's Class Y NAV is the value of a single share. The Class Y
NAV is computed by adding, with respect to that class, the value of the
Fund's investments, cash and other assets, subtracting its liabilities, and
then dividing the result by the number of Class Y shares outstanding.
The securities in the Fund's portfolio that are listed or traded on
an exchange are valued primarily using market quotations or, if market
quotations are not available, at their fair value in a manner determined in
good faith by or at the direction of the Board of Directors. Bonds are
generally valued according to prices quoted by an independent pricing
service. Short-term debt securities are valued at amortized cost, which
approximates market value. Other assets are valued at their fair value by
or at the direction of the Board of Directors.
The Fund is open for business each day the New York Stock Exchange
(the "NYSE") is open. The Fund normally calculates the NAVs of its shares
as of the later of the close of business of the NYSE, normally 4 p.m.
Eastern time, or the close of the regular session of any other securities
or commodities exchange on which an option held by the Fund is traded.
When you place an order to buy shares, your order will be processed at
the next offering price calculated after your order is received and
accepted. Note the following:
Orders are accepted only at the home office of Waddell & Reed, Inc.
All of your purchases must be made in U.S. dollars.
If you buy shares by check, and then sell those shares by any method
other than by exchange to another fund in the United Group, the payment
may be delayed for up to ten days to ensure that your previous
investment has cleared.
The Fund does not issue certificates representing Class Y shares of the
Fund.
When you sign your account application, you will be asked to
certify that your Social Security or other taxpayer identification number
is correct and whether you are subject to backup withholding for failing to
report income to the IRS.
Waddell & Reed, Inc. reserves the right to reject any purchase orders,
including purchases by exchange, and it and the Fund reserve the right to
discontinue offering Fund shares for purchase.
Minimum Investments
To Open an Account
For a government entity or authority or for a corporation: $10 million
(within
first
twelve
months)
For other
investors: Any amount
Adding to Your Account
You can make additional investments of any amount at any time.
To add to your account by wire: Instruct your bank to wire the amount
you wish to invest, along with the account number and registration, to UMB
Bank, n.a., ABA Number 101000695, W&R Underwriter Account Number 0007978,
FBO Customer Name and Account Number.
To add to your account by mail: Make your check payable to Waddell
& Reed, Inc. Mail the check along with a letter stating your account
number, the account registration and that you wish to purchase Class Y
shares of the Fund to:
Waddell & Reed, Inc.
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
Selling Shares
You can arrange to take money out of your Fund account at any time by
selling (redeeming) some or all of your shares.
The redemption price (price to sell one Class Y share) is the Fund's
Class Y NAV.
To sell shares by telephone or fax: If you have elected this method
in your application or by subsequent authorization, call 1-800-366-5465 or
fax your request to 913-236-5044 and give your instructions to redeem
shares and make payment by wire to your pre-designated bank account or by
check to you at the address on the account.
To sell shares by written request: Complete an Account Service
Request form, available from your Waddell & Reed account representative, or
write a letter of instruction with:
the name on the account registration;
the Fund's name;
the Fund account number;
the dollar amount or number of shares to be redeemed; and
any other applicable requirements listed in the table below.
Deliver the form or your letter to your Waddell & Reed account
representative, or mail it to:
Waddell & Reed, Inc.
P. O. Box 29217
Shawnee Mission, Kansas
66201-9217
Unless otherwise instructed, Waddell & Reed will send a check to the
address on the account.
Special Requirements for Selling Shares
Account Type Special Requirements
Retirement The written instructions must
Account be signed by a properly
authorized person.
Trust The trustee must sign the
written instructions
indicating capacity as
trustee. If the trustee's
name is not in the account
registration, provide a
currently certified copy of
the trust document.
Business or At least one person authorized
Organization by corporate resolution to act
on the account must sign the
written instructions.
When you place an order to sell shares, your shares will be sold at
the next NAV calculated after receipt of a written request for redemption
in good order by Waddell & Reed, Inc. at its home office. Note the
following:
If more than one person owns the shares, each owner must sign the
written request.
If you recently purchased the shares by check, the Fund may delay
payment of redemption proceeds. You may arrange for the bank upon which
the purchase check was drawn to provide to the Fund telephone or written
assurance, satisfactory to the Fund, that the check has cleared and been
honored. If no such assurance is given, payment of the redemption
proceeds on these shares will be delayed until the earlier of 10 days or
the date the Fund is able to verify that your purchase check has cleared
and been honored.
Redemptions may be suspended or payment dates postponed on days when the
NYSE is closed (other than weekends or holidays), when trading on the
NYSE is restricted or as permitted by the Securities and Exchange
Commission.
Payment is normally made in cash, although under extraordinary
conditions redemptions may be made in portfolio securities.
The Fund reserves the right to require a signature guarantee on
certain redemption requests. This requirement is designed to protect you
and Waddell & Reed from fraud. The Fund may require a signature guarantee
in certain situations such as:
the request for redemption is made by a corporation, partnership or
fiduciary;
the request for redemption is made by someone other than the owner of
record; or
the check is being made payable to someone other than the owner of
record.
The Fund will accept a signature guarantee from a national bank, a
federally chartered savings and loan or a member firm of a national stock
exchange or other eligible guarantor in accordance with procedures of the
Fund's transfer agent. A notary public cannot provide a signature
guarantee.
The Fund reserves the right to redeem at NAV all shares of the Fund
owned or held by you having an aggregate NAV of less than $500. The Fund
will give you notice of its intention to redeem your shares and a 60-day
opportunity to purchase a sufficient number of additional shares to bring
the aggregate NAV of your shares to $500.
Telephone Transactions
The Fund and its agents will not be liable for following instructions
communicated by telephone that they reasonably believe to be genuine. The
Fund will employ reasonable procedures to confirm that instructions
communicated by telephone are genuine. If the Fund fails to do so, the
Fund may be liable for losses due to unauthorized or fraudulent
instructions. Current procedures relating to instructions communicated by
telephone include tape recording instructions, requiring personal
identification and providing written confirmations of transactions effected
pursuant to such instructions.
Shareholder Services
Waddell & Reed provides a variety of services to help you manage your
account.
Personal Service
Your local Waddell & Reed account representative is available to
provide personal service. Additionally, the Waddell & Reed Customer
Services staff is available to respond promptly to your inquiries and
requests.
Reports
Statements and reports sent to you include the following:
confirmation statements (after every purchase, exchange, transfer or
redemption)
year-to-date statements (quarterly)
annual and semiannual reports (every six months)
To reduce expenses, only one copy of most annual and semiannual
reports will be mailed to your household, even if you have more than one
account with the Fund. Call 913-236-2000 if you need copies of annual or
semiannual reports or historical account information.
Exchanges
You may sell your Class Y shares and buy Class Y shares of other funds
in the United Group. You may exchange only into funds that are legally
registered for sale in your state of residence. Note that exchanges out of
the Fund may have tax consequences for you. Before exchanging into a fund,
read its prospectus.
The Fund reserves the right to terminate or modify these exchange
privileges at any time, upon notice in certain instances.
Distributions and Taxes
Distributions
The Fund distributes substantially all of its net investment income
and net capital gains to shareholders each year. Dividends are declared
daily from the Fund's net investment income, which includes accrued
interest, earned discount and other income earned on portfolio assets less
expenses. Ordinarily, dividends are distributed monthly on the 27th day of
the month or on the last business day prior to the 27th if the 27th falls
on a weekend or holiday.
Net capital gains ordinarily are distributed in December. The Fund
may make additional distributions if necessary to avoid Federal income or
excise taxes on certain undistributed income and capital gains.
Distribution Options. When you open an account, specify on your
application how you want to receive your distributions. The Fund offers
three options:
1. Share Payment Option. Your dividend and capital gains distributions
will be automatically paid in additional Class Y shares of the Fund.
If you do not indicate a choice on your application, you will be
assigned this option.
2. Income-Earned Option. Your capital gains distributions will be
automatically paid in Class Y shares, but you will be sent a check for
each dividend distribution.
3. Cash Option. You will be sent a check for your dividend and capital
gains distributions.
For retirement accounts, all distributions are automatically paid in
Class Y shares.
Taxes
The Fund has qualified and intends to continue to qualify for
treatment as a regulated investment company under the Code so that it will
be relieved of Federal income tax on that part of its investment company
taxable income (consisting generally of taxable net investment income and
net short-term capital gain) and net capital gain (the excess of net long-
term capital gain over net short-term capital loss) that are distributed to
its shareholders. In addition, the Fund intends to continue to qualify to
pay "exempt-interest" dividends, which requires, among other things, that
at the close of each calendar quarter at least 50% of the value of its
total assets must consist of obligations the interest on which is
excludable from gross income under section 103(a) of the Code.
There are certain tax requirements that the Fund must follow in order
to avoid Federal taxation. In its effort to adhere to these requirements,
the Fund may have to limit its investment activity in some types of
instruments.
As with any investment, you should consider how your investment in the
Fund will be taxed. You should be aware of the following tax implications:
Taxes on distributions. The distributions by the Fund that are
designated by it as exempt-interest dividends generally may be excluded by
you from your gross income. Dividends from the Fund's investment company
taxable income are taxable to you as ordinary income, whether received in
cash or paid in additional Fund shares. Distributions of the Fund's net
capital gain, when designated as such, are taxable to you as long-term
capital gain, whether received in cash or paid in additional Fund shares
and regardless of the length of time you have owned your shares. None of
the dividends paid by the Fund is expected to be eligible for the
dividends-received deduction allowed to corporations. The Fund notifies
you after each calendar year-end as to the amounts of dividends and other
distributions paid (or deemed paid) to you for that year.
Exempt-interest dividends paid by the Fund may be subject to income
taxation under state and local tax laws. In addition, a portion of those
dividends is expected to be attributable to interest on certain bonds that
must be treated by you as a "tax preference item" for purposes of
calculating your liability, if any, for the AMT; the Fund anticipates such
portion will be not more than 40% of the dividends it will pay to its
shareholders. The Fund will provide you with information concerning the
amount of distributions subject to the AMT after the end of each calendar
year. Shareholders who may be subject to the AMT should consult with their
tax advisers concerning investment in the Fund.
Entities or other persons who are "substantial users" (or persons
related to "substantial users") of facilities financed by private activity
bonds ("PABs") should consult their tax advisers before purchasing Fund
shares because, for users of certain of these facilities, the interest on
PABs is not exempt from Federal income tax. For these purposes, the term
"substantial user" is defined generally to include a "non-exempt person"
who regularly uses in trade or business a part of a facility financed from
the proceeds of PABs.
Withholding. The Fund is required to withhold 31% of all taxable
dividends, capital gains distributions and redemption proceeds payable to
individuals and certain other noncorporate shareholders who do not furnish
the Fund with a correct taxpayer identification number. Withholding at
that rate from taxable dividends and capital gains distributions also is
required for such shareholders who otherwise are subject to backup
withholding.
Taxes on transactions. Your redemption of Fund shares will result in
taxable gain or loss to you, depending on whether the redemption proceeds
are more or less than your adjusted basis for the redeemed shares. An
exchange of Fund shares for shares of any other fund in the United Group
generally will have similar tax consequences. In addition, if you purchase
Fund shares within thirty days before or after redeeming other Fund shares
(regardless of class) at a loss, part or all of that loss will not be
deductible and will increase the basis of the newly-purchased shares.
Interest on indebtedness incurred or continued to purchase or carry
shares of the Fund will not be deductible for Federal income tax purposes
to the extent the Fund's distributions consist of exempt-interest
dividends. Proposals may be introduced before Congress for the purpose of
restricting or eliminating the Federal income tax exemption for interest on
municipal bonds. If such a proposal were enacted, the availability of
municipal bonds for investment by the Fund and the value of its portfolio
would be affected. In that event, the Fund may decide to reevaluate its
investment goal and policies.
The foregoing is only a summary of some of the important Federal
tax considerations generally affecting the Fund and its shareholders; see
the SAI for a more detailed discussion. There may be other Federal, state
or local tax considerations applicable to a particular investor. You are
urged to consult your own tax adviser.
<PAGE>
About the Management and Expenses of the Fund
United Municipal High Income Fund, Inc. is a mutual fund: an
investment that pools shareholders' money and invests it toward a specified
goal. In technical terms, the Fund is an open-end, diversified management
investment company organized as a corporation under Maryland law on
September 9, 1985.
The Fund is governed by a Board of Directors, which has overall
responsibility for the management of its affairs. The majority of
directors are not affiliated with Waddell & Reed, Inc.
The Fund has two classes of shares. In addition to the Class Y shares
offered by this Prospectus, the Fund has issued and outstanding Class A
shares which are offered by Waddell & Reed, Inc. through a separate
Prospectus. 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. Class A shares are subject to a sales charge on purchases
but are not subject to redemption fees. Class A shares are subject to a
Rule 12b-1 fee at an annual rate of up to 0.25% of the Fund's average net
assets attributable to Class A shares. Additional information about Class
A shares may be obtained by calling 913-236-2000 or by writing to Waddell &
Reed, Inc. at the address on the inside back cover of the Prospectus.
The Fund does not hold annual meetings of shareholders; however,
certain significant corporate matters, such as the approval of a new
investment advisory agreement or a change in a fundamental investment
policy, which require shareholder approval will be presented to
shareholders at a meeting called by the Board of Directors for such
purpose.
Special meetings of shareholders may be called for any purpose upon
receipt by the Fund of a request in writing signed by shareholders holding
not less than 25% of all shares entitled to vote at such meeting, provided
certain conditions stated in the Bylaws of the Fund are met. There will
normally be no meeting of the shareholders for the purpose of electing
directors until such time as less than a majority of directors holding
office have been elected by shareholders, at which time the directors then
in office will call a shareholders' meeting for the election of directors.
To the extent that Section 16(c) of the Investment Company Act of 1940, as
amended (the "1940 Act"), applies to the Fund, the directors are required
to call a meeting of shareholders for the purpose of voting upon the
question of removal of any director when requested in writing to do so by
the shareholders of record of not less than 10% of the Fund's outstanding
shares.
Each share (regardless of class) has one vote. All shares of the Fund
vote together as a single class, except as to any matter for which a
separate vote of any class is required by the 1940 Act, and except as to
any matter which affects the interests of one or more particular classes,
in which case only the shareholders of the affected classes are entitled to
vote, each as a separate class. Shares are fully paid and nonassessable
when purchased.
WRIMCO and Its Affiliates
The Fund is managed by WRIMCO, subject to the authority of the
Fund's Board of Directors. WRIMCO provides investment advice to the Fund
and supervises the Fund's investments. Waddell & Reed, Inc. and its
predecessors have served as investment manager to each of the registered
investment companies in the United Group of Mutual Funds, except United
Asset Strategy Fund, Inc., since 1940 or the inception of the company,
whichever was later, and to TMK/United Funds, Inc. since that fund's
inception, until January 8, 1992, when it assigned its duties as investment
manager and assigned its professional staff for investment management
services to WRIMCO. WRIMCO has also served as investment manager for
Waddell & Reed Funds, Inc. since its inception in September 1992 and United
Asset Strategy Fund, Inc. since it commenced operations in March 1995.
John M. Holliday is primarily responsible for the day-to-day
management of the portfolio of the Fund. Mr. Holliday has held his Fund
responsibilities since January 20, 1986. He is Senior Vice President of
WRIMCO, Senior Vice President of Waddell & Reed Asset Management Company,
an affiliate of WRIMCO, Vice President of the Fund and Vice President of
other investment companies for which WRIMCO serves as investment manager.
Mr. Holliday has served as the portfolio manager for investment companies
managed by Waddell & Reed, Inc. and its successor, WRIMCO, since August
1979 and has been an employee of Waddell & Reed, Inc. and its successor,
WRIMCO, since April 1978. Other members of WRIMCO's investment management
department provide input on market outlook, economic conditions, investment
research and other considerations relating to the Fund's investments.
Waddell & Reed, Inc. serves as the Fund's underwriter and as
underwriter for each of the other funds in the United Group of Mutual Funds
and Waddell & Reed Funds, Inc. and acts as the principal underwriter and
distributor for variable life insurance and variable annuity policies
issued by United Investors Life Insurance Company for which TMK/United
Funds, Inc. is the underlying investment vehicle.
Waddell & Reed Services Company acts as transfer agent ("Shareholder
Servicing Agent") for the Fund and processes the payments of dividends.
Waddell & Reed Services Company also acts as agent ("Accounting Services
Agent") in providing bookkeeping and accounting services and assistance to
the Fund and pricing daily the value of its shares.
WRIMCO and Waddell & Reed Services Company are subsidiaries of Waddell
& Reed, Inc. Waddell & Reed, Inc. is a direct subsidiary of Waddell & Reed
Financial Services, Inc., a holding company, and an indirect subsidiary of
United Investors Management Company, a holding company, and Torchmark
Corporation, a holding company.
WRIMCO places transactions for the portfolio of the Fund and in doing
so may consider sales of shares of the Fund and other funds it manages as a
factor in the selection of brokers to execute portfolio transactions.
Breakdown of Expenses
Like all mutual funds, the Fund pays fees related to its daily
operations. Expenses paid out of the Fund's assets are reflected in its
share price or dividends; they are neither billed directly to shareholders
nor deducted from shareholder accounts.
The Fund pays a management fee to WRIMCO for providing investment
advice and supervising its investments. The Fund also pays other expenses,
which are explained below.
Management Fee
The management fee of the Fund is calculated by adding a group fee to
a specific fee. It is accrued and paid to WRIMCO daily.
The specific fee is computed on the Fund's net asset value as of the
close of business each day at the annual rate of .10 of 1% of its net
assets. The group fee is a pro rata participation based on the relative
net asset size of the Fund in the group fee computed each day on the
combined net asset values of all the funds in the United Group at the
annual rates shown in the following table:
Group Fee Rate
Annual
Group Net Group
Asset Level Fee Rate
(all dollars For Each
in millions) Level
- ------------ --------
From $0
to $750 .51 of 1%
From $750
to $1,500 .49 of 1%
From $1,500
to $2,250 .47 of 1%
From $2,250
to $3,000 .45 of 1%
From $3,000
to $3,750 .43 of 1%
From $3,750
to $7,500 .40 of 1%
From $7,500
to $12,000 .38 of 1%
Over $12,000 .36 of 1%
Growth in assets of the United Group assures a lower group fee rate.
The combined net asset values of all of the funds in the United
Group were approximately $14.7 billion as of September 30, 1996.
Management fees for the fiscal year ended September 30, 1996 were 0.51% of
the Fund's average net assets, which during that period consisted only of
the Fund's Class A shares.
Other Expenses
While the management fee is a significant component of the Fund's
annual operating costs, the Fund has other expenses as well.
The Fund pays the Accounting Services Agent a monthly fee based on the
average net assets of the Fund for accounting services. With respect to
its Class Y shares, the Fund pays the Shareholder Servicing Agent a monthly
fee based on the average daily net assets of the class for the preceding
month.
The Fund also pays other expenses, such as fees and expenses of
certain directors, audit and outside legal fees, costs of materials sent to
shareholders, taxes, brokerage commissions, interest, insurance premiums,
custodian fees, fees payable by the Fund under federal or other securities
laws and to the Investment Company Institute, and extraordinary expenses
including litigation and indemnification relative to litigation.
The Fund cannot precisely predict what its portfolio turnover rate
will be, but the Fund may have a high portfolio turnover. A higher
turnover will increase transaction and commission costs and could generate
taxable income or loss.
<PAGE>
APPENDIX A
The following are descriptions of some of the ratings of securities
which the Fund may use. The Fund may also use ratings provided by other
nationally recognized statistical rating organizations in determining the
securities eligible for investment.
DESCRIPTION OF BOND RATINGS
Standard & Poor's Ratings Services. An S&P corporate or municipal
bond rating is a current assessment of the creditworthiness of an obligor
with respect to a specific obligation. This assessment of creditworthiness
may take into consideration obligors such as guarantors, insurers or
lessees.
The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability
for a particular investor.
The ratings are based on current information furnished to S&P by the
issuer or obtained by S&P from other sources it considers reliable. S&P
does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be
changed, suspended or withdrawn as a result of changes in, or
unavailability of, such information, or based on other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of default -- capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in
accordance with the terms of the obligation;
2. Nature of and provisions of the obligation;
3. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization or other arrangement under the
laws of bankruptcy and other laws affecting creditors' rights.
A brief description of the applicable S&P rating symbols and their
meanings follow:
AAA -- Debt rated AAA has the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely strong.
AA -- Debt rated AA also qualifies as high quality debt. Capacity to
pay interest and repay principal is very strong, and debt rated AA differs
from AAA issues only in small degree.
A -- Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than debt in higher
rated categories.
BBB -- Debt rated BBB is regarded as having an adequate capacity to
pay interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher rated
categories.
BB, B, CCC, CC, C - Debt rated BB, B, CCC, CC and C is regarded as
having predominantly speculative characteristics with respect to capacity
to pay interest and repay principal in accordance with the terms of the
obligation. BB indicates the lowest degree of speculation and C the
highest degree of speculation. While such debt will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major exposures to adverse conditions.
BB -- Debt rated BB has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could
lead to inadequate capacity to meet timely interest and principal payments.
The BB rating category is also used for debt subordinated to senior debt
that is assigned an actual or implied BBB- rating.
B -- Debt rated B has a greater vulnerability to default but currently
has the capacity to meet interest payments and principal repayments.
Adverse business, financial, or economic conditions will likely impair
capacity or willingness to pay interest and repay principal. The B rating
category is also used for debt subordinated to senior debt that is assigned
an actual or implied BB or BB- rating.
CCC -- Debt rated CCC has a currently indefinable vulnerability to
default, and is dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal.
In the event of adverse business, financial or economic conditions, it is
not likely to have the capacity to pay interest and repay principal. The
CCC rating category is also used for debt subordinated to senior debt that
is assigned an actual or implied B or B- rating.
CC -- The rating CC is typically applied to debt subordinated to
senior debt that is assigned an actual or implied CCC rating.
C -- The rating C is typically applied to debt subordinated to senior
debt which is assigned an actual or implied CCC- debt rating. The C rating
may be used to cover a situation where a bankruptcy petition has been
filed, but debt service payments are continued.
CI -- The rating CI is reserved for income bonds on which no interest
is being paid.
D -- Debt rated D is in payment default. It is used when interest
payments or principal payments are not made on a due date even if the
applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace periods. The D rating will also be
used upon a filing of a bankruptcy petition if debt service payments are
jeopardized.
Plus (+) or Minus (-) -- To provide more detailed indications of
credit quality, the ratings from AA to CCC may be modified by the addition
of a plus or minus sign to show relative standing within the major rating
categories.
NR -- Indicates that no public rating has been requested, that there
is insufficient information on which to base a rating, or that S&P does not
rate a particular type of obligation as a matter of policy.
Debt Obligations of issuers outside the United States and its
territories are rated on the same basis as domestic corporate and municipal
issues. The ratings measure the creditworthiness of the obligor but do not
take into account currency exchange and related uncertainties.
Bond Investment Quality Standards: Under present commercial bank
regulations issued by the Comptroller of the Currency, bonds rated in the
top four categories (AAA, AA, A, BBB, commonly known as "investment grade"
ratings) are generally regarded as eligible for bank investment. In
addition, the laws of various states governing legal investments may impose
certain rating or other standards for obligations eligible for investment
by savings banks, trust companies, insurance companies and fiduciaries
generally.
Moody's Investors Service, Inc. A brief description of the applicable
MIS rating symbols and their meanings follows:
Aaa -- Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally
referred to as "gilt edge." Interest payments are protected by a large or
by an exceptionally stable margin and principal is secure. While the
various protective elements are likely to change such changes as can be
visualized are most unlikely to impair the fundamentally strong position of
such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities or
fluctuations of protective elements may be of greater amplitude or there
may be other elements present which make the long-term risks appear
somewhat larger than in Aaa securities.
A -- Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade obligations.
Factors giving security to principal and interest are considered adequate,
but elements may be present which suggest a susceptibility to impairment
sometime in the future.
Baa -- Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present
but certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Some bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
NOTE: Bonds within the above categories which possess the strongest
investment attributes are designated by the symbol "1" following the
rating.
Ba -- Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and
thereby not well safeguarded during good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may
be small.
Caa -- Bonds which are rated Caa are of poor standing. Such issues
may be in default or there may be present elements of danger with respect
to principal or interest.
Ca -- Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have
other marked shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
DESCRIPTION OF MUNICIPAL NOTE RATINGS
An S&P note rating reflects the liquidity factors and market access
risks unique to notes. Notes maturing in 3 years or less will likely
receive a note rating. Notes maturing beyond 3 years will most likely
receive a long-term debt rating. The following criteria will be used in
making that assessment.
- --Amortization schedule (the larger the final maturity relative to other
maturities, the more likely the issue is to be treated as a note).
- --Source of Payment (the more the issue depends on the market for its
refinancing, the more likely it is to be treated as a note.)
The note rating symbols and definitions are as follows:
SP-1 Strong capacity to pay principal and interest. Issues determined to
possess very strong characteristics are given a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the term
of the notes.
SP-3 Speculative capacity to pay principal and interest.
Moody's Short-Term Loan Ratings -- MIS ratings for state and municipal
short-term obligations will be designated Moody's Investment Grade (MIG).
This distinction is in recognition of the differences between short-term
credit risk and long-term risk. Factors affecting the liquidity of the
borrower are uppermost in importance in short-term borrowing, while various
factors of major importance in bond risk are of lesser importance over the
short run. Rating symbols and their meanings follow:
MIG 1 -- This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
MIG 2 -- This designation denotes high quality. Margins of protection
are ample although not so large as in the preceding group.
MIG 3 -- This designation denotes favorable quality. All security
elements are accounted for but this is lacking the undeniable strength of
the preceding grades. Liquidity and cash flow protection may be narrow and
market access for refinancing is likely to be less well established.
MIG 4 -- This designation denotes adequate quality. Protection
commonly regarded as required of an investment security is present and
although not distinctly or predominantly speculative, there is specific
risk.
DESCRIPTION OF COMMERCIAL PAPER RATINGS
An S&P commercial paper rating is a current assessment of the
likelihood of timely payment of debt considered short-term in the relevant
market. Ratings are graded into several categories, ranging from "A-1" for
the highest quality obligations to D for the lowest. Issuers rated A are
further referred to by use of numbers 1, 2 and 3 to indicate the relative
degree of safety. Issues assigned an A rating (the highest rating) are
regarded as having the greatest capacity for timely payment. An A-1
designation indicates that the degree of safety regarding timely payment is
strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation. An A-2
rating indicates that capacity for timely payment is satisfactory; however,
the relative degree of safety is not as high as for issues designated A-1.
Issues rated A-3 have adequate capacity for timely payment; however, they
are more vulnerable to the adverse effects of changes in circumstances than
obligations carrying the higher designations. Issues rated B are regarded
as having only speculative capacity for timely payment. A C rating is
assigned to short-term debt obligations with a doubtful capacity for
payment. Debt rated D is in payment default, which occurs when interest
payments or principal payments are not made on the date due, even if the
applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period.
MIS commercial paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. MIS employs the designations of Prime 1, Prime 2
and Prime 3, all judged to be investment grade, to indicate the relative
repayment capacity of rated issuers. Issuers rated Prime 1 have a superior
capacity for repayment of short-term promissory obligations and repayment
capacity will normally be evidenced by (1) lending market positions in well
established industries; (2) high rates of return on funds employed; (3)
conservative capitalization structures with moderate reliance on debt and
ample asset protection; (4) broad margins in earnings coverage of fixed
financial charges and high internal cash generation; and (5) well
established access to a range of financial markets and assured sources of
alternate liquidity. Issuers rated Prime 2 also have a strong capacity for
repayment of short-term promissory obligations as will normally be
evidenced by many of the characteristics described above for Prime 1
issuers, but to a lesser degree. Earnings trends and coverage ratios,
while sound, will be more subject to variation; capitalization
characteristics, while still appropriate, may be more affected by external
conditions; and ample alternate liquidity is maintained. Issuers rated
Prime 3 have an acceptable capacity for repayment of short-term promissory
obligations, as will normally be evidenced by many of the characteristics
above for Prime 1 issuers, but to a lesser degree. The effect of industry
characteristics and market composition may be more pronounced; variability
in earnings and profitability may result in changes in the level of debt
protection measurements and requirement for relatively high financial
leverage; and adequate alternate liquidity is maintained.
<PAGE>
United Municipal High Income Fund, Inc.
Custodian Underwriter
UMB Bank, n.a. Waddell & Reed, Inc.
Kansas City, Missouri 6300 Lamar Avenue
P. O. Box 29217
Legal Counsel Shawnee Mission, Kansas
Kirkpatrick & Lockhart LLP 66201-9217
1800 Massachusetts Avenue, N. W.(913) 236-2000
Washington, D. C. 20036
Shareholder Servicing Agent
Independent Accountants Waddell & Reed
Deloitte & Touche LLP Services Company
Kansas City, Missouri 6300 Lamar Avenue
P. O. Box 29217
Investment Manager Shawnee Mission, Kansas
Waddell & Reed Investment 66201-9217
Management Company (913) 236-2000
6300 Lamar Avenue
P. O. Box 29217 Accounting Services Agent
Shawnee Mission, Kansas Waddell & Reed
66201-9217 Services Company
(913) 236-2000 6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas
66201-9217
(913) 236-2000
Our INTERNET address is:
http://www.waddell.com
<PAGE>
United Municipal High Income Fund, Inc.
Class Y Shares
PROSPECTUS
December 31, 1996
The United Group of Mutual Funds
United Asset Strategy Fund, Inc.
United Cash Management, Inc.
United Continental Income Fund, Inc.
United Funds, Inc.
United Bond Fund
United Income Fund
United Accumulative Fund
United Science and Technology Fund
United Gold & Government Fund, Inc.
United Government Securities Fund, Inc.
United High Income Fund, Inc.
United High Income Fund II, Inc.
United International Growth Fund, Inc.
United Municipal Bond Fund, Inc.
United Municipal High Income Fund, Inc.
United New Concepts Fund, Inc.
United Retirement Shares, Inc.
United Vanguard Fund, Inc.
NUP1014-Y(12-96)
printed on recycled paper
<PAGE>
UNITED MUNICIPAL HIGH INCOME FUND, INC.
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
(913) 236-2000
December 31, 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
December 31, 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, 1996, 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, 1995 to
September 30, 1996: 2.84% 7.40%
Five-year period from October 1, 1991 to
September 30, 1996: 7.54% 8.48%
Ten-year period from October 1, 1986 to
September 30, 1996: 7.79% 8.26%
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, 1996, the date of the
most recent balance sheet included in this SAI, is 5.96%.
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, 1996, the date of the most recent
balance sheet included in this SAI, is 7.00%, 8.26%, 8.62%, 9.28% and 9.83%
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
("IDBs"). The Fund may purchase IDBs only if the interest on them is free
from Federal income taxation, although such interest is an item of tax
preference for purposes of the alternative minimum tax. In general, IDBs
are revenue bonds and are issued by or on behalf of public authorities to
obtain funds to finance privately operated facilities for business and
manufacturing, sports and pollution control. IDBs are also used to finance
public facilities such as airports or mass transit systems. The credit
quality of IDBs is usually directly related to the credit standing of the
user of the facilities being financed. The Fund may invest an unlimited
percentage of its assets in municipal bonds that are IDBs.
Municipal leases and participation interests therein are another
type of municipal bond. The factors to be considered in determining
whether or not any rated municipal lease obligations are liquid include (i)
the frequency of trades and quotes for the obligations; (ii) the number of
dealers willing to purchase or sell the security and the number of other
potential buyers; (iii) the willingness of dealers to undertake to make a
market in the securities; (iv) the nature of marketplace trades, including
the time needed to dispose of the security, the method of soliciting offers
and the mechanics of transfer; (v) the likelihood that the marketability of
the obligation will be maintained through the time the instrument is held;
(vi) the credit quality of the issuer and the lessee; and (vii) the
essentiality to the lessee of the property covered by the lease. Unrated
municipal lease obligations are considered illiquid. These obligations,
which may take the form of a lease, an installment purchase, or a
conditional sale contract, are issued by state and local governments and
authorities to acquire land and a variety of equipment and facilities. The
Fund has not held and does not intend to hold such obligations directly as
a lessor of the property, but may from time to time purchase a
participation interest in a municipal obligation from a bank or other third
party. A participation interest gives the Fund a specified, undivided
interest in the obligation in proportion to its purchased interest in the
total amount of the obligation. Municipal leases frequently have risks
distinct from those associated with general obligation or revenue bonds.
State constitutions and statutes set forth requirements that states or
municipalities must meet to incur debt, including voter referenda, interest
rate limits or public sale requirements. Leases, installment purchases or
conditional sale contracts have evolved as a means for governmental issuers
to acquire property and equipment without being required to meet these
constitutional and statutory requirements. Many leases and contracts
include "non-appropriation clauses" providing that the governmental issuer
has no obligation to make future payments under the lease or contract
unless money is appropriated for such purpose by the legislative body on a
yearly or other periodic basis. Non-appropriation clauses free the issuer
from debt issuance limitations. In determining the liquidity of a
municipal lease obligation, Waddell & Reed Investment Management Company
("WRIMCO"), the Fund's investment manager, will differentiate between
direct interests in municipal leases and municipal lease-backed securities,
the latter of which may take the form of a lease-backed revenue bond, a
tax-exempt asset-backed security or any other investment structure using a
municipal lease-purchased agreement as its base. See "Asset-Backed
Securities." While the former may present liquidity issues, the latter are
based on a well established method of securing payment of a municipal lease
obligation.
WRIMCO and the Fund rely on the opinion of bond counsel for the issuer
in determining whether obligations are municipal bonds. If a court holds
that an obligation held by the Fund is not a municipal bond (i.e., that the
interest thereon is taxable), the Fund will sell the obligation as soon as
possible, but it might incur a loss upon such sale.
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 is fixed on the transaction
date. The Fund will enter into when-issued or delayed-delivery
transactions in order to secure what is considered to be an advantageous
price and yield at the time of entering into the transaction. No interest
accrues to the Fund until delivery and payment is completed. When the Fund
makes a commitment to purchase municipal bonds on a when-issued or delayed-
delivery basis, it will record the transaction and thereafter reflect the
value of the bonds in determining its net asset value per share. The
municipal bonds sold by the Fund on a delayed-delivery basis are also
subject to market fluctuation; their value when the Fund delivers them may
be more than the purchase price the Fund receives. When the Fund makes a
commitment to sell municipal bonds on a delayed basis, it will record the
transaction and thereafter value the bonds at the sales price in
determining the Fund's net asset value per share.
Ordinarily the Fund purchases municipal bonds on a when-issued or
delayed-delivery basis with the intention of actually taking delivery of
the bonds. However, before the bonds are delivered to the Fund and before
it has paid for them (the "settlement date"), the Fund could sell the bonds
if WRIMCO decided it was advisable to do so for investment reasons. The
Fund will hold aside or segregate cash or other securities, other than
those purchased on a when-issued or delayed-delivery basis, at least equal
to the amount it will have to pay on the settlement date; these other
securities may, however, be sold at or before the settlement date to pay
the purchase price of the when-issued or delayed-delivery bonds.
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 ("Fannie Mae"),
Farmers Home Administration, Export-Import Bank of the United States, Small
Business Administration, Government National Mortgage Association ("Ginnie
Mae"), General Services Administration, Central Bank for Cooperatives,
Federal Home Loan Banks, Federal Home Loan Mortgage Corporation ("Freddie
Mac"), Farm Credit Banks, Maritime Administration, the Tennessee Valley
Authority, the Resolution Funding Corporation, and the Student Loan
Marketing Association.
Securities issued or guaranteed by U.S. Government agencies and
instrumentalities are not always supported by the full faith and credit of
the United States. Some, such as securities issued by the Federal Home
Loan Banks, are backed by the right of the agency or instrumentality to
borrow from the Treasury. Others, such as securities issued by Fannie Mae,
are supported only by the credit of the instrumentality and by a pool of
mortgage assets. If the securities are not backed by the full faith and
credit of the United States, the owner of the securities must look
principally to the agency issuing the obligation for repayment and may not
be able to assert a claim against the United States in the event that the
agency or instrumentality does not meet its commitment.
U.S. Government Securities may include mortgage-backed securities
issued by U.S. Government agencies or instrumentalities including, but not
limited to, Ginnie Mae, Freddie Mac and Fannie Mae. These mortgage-backed
securities include "pass-through" securities 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. 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.
Asset-Backed Securities
Asset-backed securities represent interests in pools of consumer loans
(generally unrelated to mortgage loans) and most often are structured as
pass-through securities. Interest and principal payments ultimately depend
upon payment of the underlying loans by individuals, although the
securities may be supported by letters of credit or other credit
enhancements. The value of asset-backed securities may also depend on the
creditworthiness of the servicing agent for the loan pool, the originator
of the loans, or the financial institution providing the credit
enhancement.
Variable or Floating Rate Instruments
Variable or floating rate instruments (including notes purchased
directly from issuers) bear variable or floating interest rates and may
carry rights that permit holders to demand payment of the unpaid principal
balance plus accrued interest from the issuers or certain financial
intermediaries on dates prior to their stated maturities. Floating rate
securities have interest rates that change whenever there is a change in a
designated base rate while variable rate instruments provide for a
specified periodic adjustment in the interest rate. These formulas are
designed to result in a market value for the instrument that approximates
its par value.
Indexed Securities
The Fund may purchase securities the value of which varies in
relation to the value of other securities, securities indices, 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.
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.
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"). 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 and liquid assets with a value, marked-to-market
daily, sufficient to cover its potential obligations to the extent not
covered as provided in (1) above. The Fund will comply with SEC guidelines
regarding cover for these instruments and will, if the guidelines so
require, set aside cash or liquid assets in a segregated account with its
custodian in the prescribed amount as determined daily.
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 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"; or
(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 26.91%
for the fiscal year ended September 30, 1996 and 19.07% for the fiscal year
ended September 30, 1995.
INVESTMENT MANAGEMENT AND OTHER SERVICES
The Management Agreement
The Fund has an Investment Management Agreement (the "Management
Agreement") with Waddell & Reed, Inc. On January 8, 1992, subject to the
authority of the Fund's Board of Directors, Waddell & Reed, Inc. assigned
the Management Agreement and all related investment management duties (and
related professional staff) to WRIMCO, a wholly-owned subsidiary of Waddell
& Reed, Inc. Under the Management Agreement, WRIMCO is employed to
supervise the investments of the Fund and provide investment advice to the
Fund. The address of WRIMCO and Waddell & Reed, Inc. is 6300 Lamar Avenue,
P.O. Box 29217, Shawnee Mission, Kansas 66201-9217. Waddell & Reed, Inc.
is the Fund's underwriter.
The Management Agreement permits Waddell & Reed, Inc. or an affiliate
of Waddell & Reed, Inc. to enter into a separate agreement for transfer
agency services ("Shareholder Servicing Agreement") and a separate
agreement for accounting services ("Accounting Services Agreement") with
the Fund. The Management Agreement contains detailed provisions as to the
matters to be considered by the Fund's Board of Directors prior to
approving any Shareholder Servicing Agreement or Accounting Services
Agreement.
Torchmark Corporation and United Investors Management Company
WRIMCO is a wholly-owned subsidiary of Waddell & Reed, Inc. Waddell &
Reed, Inc. is a wholly-owned subsidiary of Waddell & Reed Financial
Services, Inc., a holding company. Waddell & Reed Financial Services, Inc.
is a wholly-owned subsidiary of United Investors Management Company.
United Investors Management Company is a wholly-owned subsidiary of
Torchmark Corporation. Torchmark Corporation is a publicly-held company.
The address of Torchmark Corporation and United Investors Management
Company is 2001 Third Avenue South, Birmingham, Alabama 35233.
Waddell & Reed, Inc. and its predecessors served as investment
manager to each of the registered investment companies in the United Group
of Mutual Funds, except United Asset Strategy Fund, Inc., since 1940 or the
company's inception date, whichever was later, and to TMK/United Funds,
Inc. since that fund's inception, until January 8, 1992 when it assigned
its duties as investment manager for these funds (and the related
professional staff) to WRIMCO. WRIMCO has also served as investment
manager for Waddell & Reed Funds, Inc. since its inception in September
1992, and United Asset Strategy Fund, Inc. since it commenced operations in
March 1995. Waddell & Reed, Inc. serves as principal underwriter for the
investment companies in the United Group of Mutual Funds and Waddell & Reed
Funds, Inc. and acts as principal underwriter and distributor for variable
life insurance and variable annuity policies issued by United Investors
Life Insurance Company, for which TMK/United Funds, Inc. is the underlying
investment vehicle.
Shareholder Services
Under the Shareholder Servicing Agreement entered into between the
Fund and Waddell & Reed Services Company (the "Agent"), a subsidiary of
Waddell & Reed, Inc., the Agent performs shareholder servicing functions,
including the maintenance of shareholder accounts, the issuance, transfer
and redemption of shares, distribution of dividends and payment of
redemptions, the furnishing of related information to the Fund and handling
of shareholder inquiries. A new Shareholder Servicing Agreement, or
amendments to the existing one, may be approved by the Fund's Board of
Directors without shareholder approval.
Accounting Services
Under the Accounting Services Agreement entered into between the Fund
and the Agent, the Agent provides the Fund with bookkeeping and accounting
services and assistance, including maintenance of the Fund's records,
pricing of the Fund's shares, and preparation of prospectuses for existing
shareholders, proxy statements and certain reports. A new Accounting
Services Agreement, or amendments to an existing one, may be approved by
the Fund's Board of Directors without shareholder approval.
Payments by the Fund for Management, Accounting and Shareholder Services
Under the Management Agreement, for WRIMCO's management services, the
Fund pays WRIMCO a fee as described in the Prospectus.
The management fees paid to WRIMCO for the fiscal years ended
September 30, 1996, 1995 and 1994 were $1,985,305, $1,860,352 and
$1,756,750, 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 $1.3125 ($1.0208 prior to
April 1, 1996) 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,
1996, 1995 and 1994 were $60,000, $56,667 and $50,000, respectively.
Since the Fund pays a management fee for investment supervision and an
accounting services fee for accounting services as discussed above, WRIMCO
and the Agent, respectively, pay all of their own expenses in providing
these services. Amounts paid by the Fund under the Shareholder Servicing
Agreement are described above. Waddell & Reed, Inc. and affiliates pay the
Fund's Directors and officers who are affiliated with WRIMCO and its
affiliates. The Fund pays the fees and expenses of the Fund's other
Directors.
Waddell & Reed, Inc., under an agreement separate from the
Management Agreement, Shareholder Servicing Agreement and Accounting
Services Agreement, acts as the Fund's underwriter, i.e., sells its shares on
a continuous basis. Waddell & Reed, Inc. is not required to sell any
particular number of shares, and thus sells shares only for purchase orders
received. Under this agreement, Waddell & Reed, Inc. pays the costs of
sales literature, including the costs of shareholder reports used as sales
literature, and the costs of printing the prospectus furnished to it by the
Fund. The aggregate dollar amount of underwriting commissions for Class A
shares for the fiscal years ended September 30, 1996, 1995 and 1994 were
$1,000,554, $1,016,772 and $1,486,258, respectively. The amounts retained
by Waddell & Reed, Inc. for each period were $442,057, $430,473 and
$649,284, 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 $542,524 were
paid (or accrued) by the Fund with respect to Class A shares for the fiscal
year ended September 30, 1996.
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. Deloitte & Touche LLP, Kansas City, Missouri, the Fund's
independent accountants, audits the Fund's financial statements.
PURCHASE, REDEMPTION AND PRICING OF SHARES
Determination of Offering Price
The net asset value of each class of the shares of the Fund is the
value of the assets of that class, less that class's liabilities, divided
by the total number of outstanding shares of that class.
Class A shares of the Fund are sold at their next determined net
asset value plus the sales charge described in the Prospectus. The price
makeup as of September 30, 1996 was as follows:
Net asset value per Class A share (Class A net assets
divided by Class A shares outstanding) .............$5.31
Add: selling commission (4.25% of offering price) ..... .24
-----
Maximum offering price per Class A share (Class A
net asset value per Class A share divided
by 95.75%) .........................................$5.55
=====
The offering price of a Class A share is its net asset value next
determined following acceptance of a purchase order plus the sales charge.
The offering price of a Class Y share is its net asset value next
determined following acceptance of a purchase order. The number of shares
you receive for your purchase depends on the next offering price after
Waddell & Reed, Inc. receives and accepts your order at its principal
business office at the address shown on the cover of this SAI. You will be
sent a confirmation after your purchase which will indicate how many shares
you have purchased. Shares are normally issued for cash only.
Waddell & Reed, Inc. need not accept any purchase order, and it or the
Fund may determine to discontinue offering Fund shares for purchase.
The net asset value and offering price per share are ordinarily
computed once on each day that the New York Stock Exchange (the "NYSE") is
open for trading as of the later of the close of the regular session of the
NYSE or the close of the regular session of any domestic securities or
commodities exchange on which an option or future held by the Fund is
traded. The NYSE annually announces the days on which it will not be open
for trading. The most recent announcement indicates that the NYSE will not
be open on the following days: New Year's Day, 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 (Applicable to Class A Shares Only)
Account Grouping)
Large purchases of Class A shares are subject to lower sales charges.
The schedule of sales charges appears in the Prospectus for Class A shares.
For the purpose of taking advantage of the lower sales charges available
for large purchases, a purchase in any of categories 1 through 7 listed
below made by an individual or deemed to be made by an individual may be
grouped with purchases in any other of these categories. References to
purchases in an Individual Retirement Account ("IRA") or other retirement
plan (for which investments in the Fund would not be appropriate) are made
only to illustrate how purchases of Fund shares may be grouped with
purchases made in other funds in the United Group.
1. Purchases by an individual for his or her own account (includes
purchases under the United Funds Revocable Trust Form);
2. Purchases by that individual's spouse purchasing for his or her own
account (includes United Funds Revocable Trust Form of spouse);
3. Purchases by that individual or his or her spouse in their joint
account;
4. Purchases by that individual or his or her spouse for the account of
their child under age 21;
5. Purchase by any custodian for the child of that individual or spouse
in a Uniform 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 such plan may be combined with the
additional purchase only if the contractual plan has been completed.
Statement of Intention
The benefit of a reduced sales charge for larger purchases of Class A
shares is also available under a Statement of Intention. By signing a
Statement of Intention form, which is available from Waddell & Reed, Inc.,
the purchaser indicates an intention to invest, over a 13-month period, a
dollar amount which is sufficient to qualify for a reduced sales charge.
The 13-month period begins on the date the first purchase made under the
Statement of Intention is accepted by Waddell & Reed, Inc. Each purchase
made from time to time under the Statement of Intention is treated as if
the purchaser were buying at one time the total amount which he or she
intends to invest. The sales charge applicable to all purchases of Class A
shares made under the terms of the Statement of Intention will be the sales
charge in effect on the beginning date of the 13-month period.
In determining the amount which the purchaser must invest in order to
qualify for a reduced sales charge under a Statement of Intention, the
investor's Rights of Accumulation (see above) will be taken into account;
that is, Class A shares already held in the same account in which the
purchase is being made or in any account eligible for grouping with that
account, as described above, will be included.
Example: H signs a Statement of Intention indicating his intent to invest
in his own name a dollar amount sufficient to entitle him to
purchase Class A shares at the sales charge applicable to a
purchase of $300,000. H has an UGMA 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 shares 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 of shares 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 for Class A shares, there
are a number of instances in which the Fund's Class A shares are sold or
issued on a basis other than the maximum public offering price, that is,
the net asset value plus the highest sales charge. Some of these relate to
lower or eliminated sales charges for larger purchases of Class A shares,
whether made at one time or over a period of time as under a Statement of
Intention or right of accumulation. See the table of sales charges in the
Prospectus. The reasons for these quantity discounts are, in general, that
(i) they are traditional and have long been permitted in the industry and
are therefore necessary to meet competition as to sales of shares of other
funds having such discounts, (ii) certain quantity discounts are required
by rules of the National Association of Securities Dealers, Inc. (as are
elimination of sales charges on the reinvestment of dividends and
distributions), and (iii) they are designed to avoid an unduly large dollar
amount of sales charge on substantial purchases in view of reduced selling
expenses. Quantity discounts are made available to certain related persons
for reasons of family unity and to provide a benefit to tax-exempt plans
and organizations.
The reasons for the other instances in which there are reduced or
eliminated sales charges for Class A shares are as follows. Exchanges at
net asset value are permitted because a sales charge has already been paid
on the shares exchanged. Sales of Class A shares without sales charge are
permitted to Directors, officers and certain others due to reduced or
eliminated selling expenses and since such sales may aid in the development
of a sound employee organization, encourage incentive, responsibility and
interest in the United Group and an identification with its aims and
policies. Limited reinvestments of redemptions of Class A shares at no
sales charge are permitted to attempt to protect against mistaken or not
fully informed redemption decisions. Class A shares may be issued at no
sales charge in plans of reorganization due to reduced or eliminated sales
expenses and since, in some cases, such issuance is exempted by the 1940
Act from the otherwise applicable restrictions as to what sales charge must
be imposed. In no case in which there is a reduced or eliminated sales
charge are the interests of existing shareholders adversely affected since,
in each case, the Fund receives the net asset value per share of all shares
sold or issued.
Redemptions
The Prospectus gives information as to redemption procedures.
Redemption payments are made within seven days unless delayed because of
emergency conditions determined by the SEC, when the NYSE is closed other
than for weekends or holidays, or when trading on the NYSE is restricted.
Payment is made in cash, although under extraordinary conditions
redemptions may be made in portfolio securities. Payment for redemption of
shares of the Fund may be made in portfolio securities when the Fund's
Board of Directors determines that conditions exist making cash payments
undesirable. Securities used for payment of redemptions are valued at the
value used in figuring net asset value. There would be brokerage costs to
the redeeming shareholder in selling such securities. The Fund, however,
has elected to be governed by Rule 18f-1 under the 1940 Act, pursuant to
which it is obligated to redeem shares solely in cash up to the lesser of
$250,000 or 1% of its net asset value during any 90-day period for any one
shareholder.
Flexible Withdrawal Service for Class A Shareholders
If you qualify, you may arrange to receive through the Flexible
Withdrawal Service (the "Service") regular monthly, quarterly, semiannual
or annual payments by redeeming on a regular basis Class A shares that you
own of the Fund, or of any of the funds in the United Group. It would be a
disadvantage to an investor to make additional purchases of shares while a
withdrawal program is in effect because it would result in duplication of
sales charges. Applicable forms to start the Service are available from
Waddell & Reed, Inc.
To qualify for the Service, you must have invested at least $10,000 in
Class A shares which you still own of any of the funds in the United Group;
or, you must own Class A shares having a value of at least $10,000. The
value for this purpose is the value at the offering price.
You can choose to have your shares redeemed to receive:
1. a monthly, quarterly, semiannual or annual payment of $50 or more;
2. a monthly payment, which will change each month, equal to one-
twelfth of a percentage of the value of the shares in the account (you
select the percentage); or
3. a monthly or quarterly payment, which will change each month or
quarter, by redeeming a number of shares fixed by you (at least five
shares).
Shares are redeemed on the 20th day of the month in which the payment
is to be made, or on the prior business day if the 20th is not a business
day. Payments are made within five days of the redemption.
If you have a share certificate for the shares you want to make
available for the Service, you must enclose the certificate with the form
initiating the Service.
The dividends and distributions on shares you have made available
for the Service are paid in additional Class A shares. All payments under
the Service are made by redeeming Class A shares, which may involve a gain
or loss for tax purposes. To the extent that payments exceed dividends and
distributions, the number of Class A shares you own will decrease. When
all of the shares in your account are redeemed, you will not receive any
further payments. Thus, the payments are not an annuity or an income or
return on your investment.
You may, at any time, change the manner in which you have chosen to
have shares redeemed to any of the other choices originally available to
you. You may, at any time, redeem part or all of the shares in your
account; if you redeem all of the shares, the Service is terminated. The
Fund can also terminate the Service by notifying you in writing.
After the end of each calendar year, information on shares redeemed
will be sent to you to assist you in completing your Federal income tax
return.
Exchanges for Shares of Other Funds in the United Group
Class A Share Exchanges
You may decide you would rather own 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. Wise is a member of the Fund's Board of
Directors. The other persons are officers but not members of the Board of
Directors. For purposes of this section, the term "Fund Complex" includes
each of the registered investment companies in the United Group of Mutual
Funds, Waddell & Reed Funds, Inc. and TMK/United Funds, Inc. Each of the
Fund's Directors is also a Director of each of the other funds in the Fund
Complex and each of its officers is also an officer of one or more of the
funds in the Fund Complex.
RONALD K. RICHEY*
2001 Third Avenue South
Birmingham, Alabama 35233
Chairman of the Board of Directors of the Fund and each of the other
funds in the Fund Complex; Chairman of the Board of Directors of Waddell &
Reed Financial Services, Inc., United Investors Management Company and
United Investors Life Insurance Company; Chairman of the Board of Directors
and Chief Executive Officer of Torchmark Corporation; Chairman of the Board
of Directors of Vesta Insurance Group, Inc.; 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, an actuarial consulting
company; President, Buchanan Ranch Corporation; formerly, Professor and
Chairman 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; Director of Central Kansas
Bankshares; Director of Central Properties, Inc.; Chairman, Gilliland &
Hayes, P.A., a law firm; formerly, President, 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.
WILLIAM T. MORGAN*
928 Glorietta Blvd.
Coronado, California 92118
Retired; formerly, Chairman of the Board of Directors and President of
the Fund and each fund in the Fund Complex then in existence. (Mr. Morgan
retired as Chairman of the Board of Directors and President of the funds in
the Fund Complex then in existence on April 30, 1993); formerly, President,
Director and Chief Executive Officer of WRIMCO and Waddell & Reed, Inc.;
formerly, Chairman of the Board of Directors of Waddell & Reed Services
Company; formerly, Director of Waddell & Reed Asset Management Company,
United Investors Management Company and United Investors Life Insurance
Company, affiliates of Waddell & Reed, Inc.
DOYLE PATTERSON
1030 West 56th Street
Kansas City, Missouri 64113
Associated with Republic Real Estate, engaged in real estate
management and investment.
WILLIAM L. ROGERS
1999 Avenue of the Stars
Los Angeles, California 90067
Principal, Colony Capital, Inc., a real estate related investment
company; formerly, partner in Trivest, a private investment concern.
FRANK J. ROSS, JR.*
700 West 47th Street
Kansas City, Missouri 64112
Partner, Polsinelli, White, Vardeman & Shalton, a law firm.
ELEANOR B. SCHWARTZ
5100 Rockhill Road
Kansas City, Missouri 64113
Chancellor, University of Missouri-Kansas City; formerly, Interim
Chancellor, 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.
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, six of the Fund's Directors may be
deemed to be "interested persons" as defined in the 1940 Act of its
underwriter, Waddell & Reed, Inc., or of WRIMCO. The Directors who may be
deemed to be "interested persons" are indicated as such by an asterisk.
The Board of Directors has created an honorary position of Director
Emeritus, which position a director may elect after resignation from the
Board provided the director has attained the age of 75 and has served as a
director of the funds in the United Group for a total of at least five
years. A Director Emeritus receives fees in recognition of his 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. Mr. Leslie S. Wright retired as a Director of the Fund and of
each of the funds in the Fund Complex effective April 1, 1996, and has
elected a position as Director Emeritus. During the Fund's fiscal year
ended September 30, 1996, Mr. Wright received total compensation for his
service as a Director of $43,000 from the Fund Complex and aggregate
compensation from the Fund of $2,792.
The funds in the United Group, TMK/United Funds, Inc. and Waddell &
Reed Funds, Inc. pay to each Director a total of $44,000 per year, plus
$1,000 for each meeting of the Board of Directors attended (prior to April
1, 1996, the Funds in the United Group (with the exception of United Asset
Strategy Fund, Inc.), TMK/United Funds, Inc. and Waddell & Reed Funds, Inc.
paid to each Director a fee of $40,000 per year plus $1,000 for each
meeting of the Board of Directors attended) and $500 for each committee
meeting attended which is not in conjunction with a Board of Directors
meeting, other than Directors who are affiliates of Waddell & Reed, Inc.
The fees to the Directors who receive them are divided among the funds in
the United Group, TMK/United Funds, Inc. and Waddell & Reed Funds, Inc.
based on their relative size. During the Fund's fiscal year ended
September 30, 1996, 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 1,219 0 48,000
Dodds I. Buchanan 1,219 0 48,000
Jay B. Dillingham 1,219 0 48,000
Linda Graves 1,219 0 48,000
John F. Hayes 1,219 0 48,000
Glendon E. Johnson 1,219 0 48,000
William T. Morgan 1,219 0 48,000
Doyle Patterson 1,219 0 47,000
Eleanor B. Schwartz 1,194 0 48,000
Frederick Vogel III 1,219 0 48,000
Paul S. Wise 1,219 0 48,000
Mr. Rogers and Mr. Ross were elected Directors on October 16, 1996.
The officers are paid by WRIMCO or its affiliates.
Shareholdings
As of November 30, 1996, 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 net
realized capital 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 attributable to that difference, less losses from
sales of securities at a price lower than the Fund's basis therein; these
gains can be either long-term or short-term, depending on how long the Fund
has owned the securities before it sells them. The payments made to
shareholders from net investment income and net short-term capital gains
are called dividends.
The Fund pays distributions from net capital gains (the excess of net
long-term capital gains over net short-term capital losses). It may or may
not have such gain, depending on whether securities are sold and at what
price. If the Fund has net capital gains, it will pay distributions once
each year, in the latter part of the fourth calendar quarter, except to the
extent it has prior year net capital 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 Fund of the same class as
that with respect to which they were paid, or (iii) you want cash for your
dividends and want your distributions paid in shares of the Fund of the
same class as that with respect to which they were paid. You can change
your instructions at any time. If you give no instructions, your dividends
and distributions will be paid in shares of the Fund of the same class as
that with respect to which they were paid. All payments in Fund shares are
at net asset value without any sales charge. The net asset value used for
this purpose is that computed as of the record date for the dividend or
distribution, although this could be changed by the Board of Directors.
Even if you get dividends and distributions on Class A shares in cash,
you can thereafter reinvest them (or distributions only) in Class A shares
of the Fund at net asset value (i.e., with no sales charge) next determined
after receipt by Waddell & Reed, Inc. of the amount clearly identified as a
reinvestment. The reinvestment must be within 45 days after the
payment.
TAXES
General
In order to continue to qualify for treatment as a regulated
investment company ("RIC") under the Internal Revenue Code of 1986, as
amended (the "Code"), the Fund must distribute to its shareholders for each
taxable year at least 90% of the sum of its investment company taxable
income (consisting generally of taxable net investment income, net short-
term capital gains and net gains from certain foreign currency
transactions) plus its net interest income excludable from gross income
under section 103(a) of the Code ("Distribution Requirement"), and must
meet several additional requirements. These requirements include the
following: (1) the Fund must derive at least 90% of its gross income each
taxable year from dividends, interest, payments with respect to securities
loans and gains from the sale or other disposition of securities or foreign
currencies, or other income (including gains from options, futures
contracts or forward contracts) derived with respect to its business of
investing in securities or those currencies ("Income Requirement"); (2) 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 (other than those on foreign currencies) 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 reported by, and (except for exempt-interest
dividends) taxed to you for the year in which that December 31 falls.
If Fund shares are sold at a loss after being held for six months
or less, the loss will be disallowed to the extent of any exempt-interest
dividends received on those shares and any balance of the loss that is not
disallowed will be treated as long-term, instead of short-term, capital
loss to the extent of any distributions received on those shares.
Investors also should be aware that if shares are purchased shortly before
the record date for a taxable dividend or distribution, the investor will
receive some portion of the purchase price back as a taxable dividend or
distribution.
The Fund will be subject to a nondeductible 4% excise tax ("Excise
Tax") to the extent it fails to distribute by the end of any calendar year
substantially all of its ordinary taxable income for that year and capital
gain net income for the one-year period ending on October 31 of that year,
plus certain other amounts. It is the Fund's policy to pay sufficient
dividends and distributions each year to avoid imposition of the Excise
Tax. The Fund may defer into the next calendar year net capital losses
incurred between November 1 and the end of the current calendar year.
Income from Options and Futures Contracts
The use of hedging strategies, such as writing (selling) and
purchasing options and futures, 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. Gains 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 treated as short-
term capital gain. If the Fund enters into a closing purchase transaction,
it will have a short-term capital gain or loss based on the difference
between the premium it received for the option it wrote and the premium it
pays for the option it buys. If an option written by the Fund lapses
without being exercised, the premium it received 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. The Fund must
distribute any such gains to its shareholders even though it may not have
closed the transactions and received cash to pay the distributions.
Code section 1092 (dealing with straddles) also may affect the
taxation of options and futures contracts in which the Fund may invest.
That section defines a "straddle" as offsetting positions with respect to
personal property; for these purposes, options and futures contracts are
personal property. Section 1092 generally provides that any loss from the
disposition of a position in a straddle may be deducted only to the extent
the loss exceeds the unrealized gain on the offsetting position(s) of the
straddle. Section 1092 also provides certain "wash sale" rules, that apply
to transactions where a position is sold at a loss and a new offsetting
position is acquired within a prescribed period, and "short sale" rules
applicable to straddles. If the Fund makes certain elections, the amount,
character and timing of the recognition of gains and losses from the
affected straddle positions will be determined under rules that vary
according to the elections made. Because only a few of the regulations
implementing the straddle rules have been promulgated, the tax consequences
of straddle transactions to the Fund are not entirely clear.
Zero Coupon Securities
The Fund may acquire zero coupon or other securities issued with
original issue discount. As a holder of those securities, the Fund must
account for the portion of 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 accrued original issue discount, in order to satisfy
the Distribution Requirement 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, 1996
Principal
Amount in
Thousands Value
MUNICIPAL BONDS
ALABAMA - 1.76%
The Industrial Development Board of the Town of
Courtland (Alabama), Solid Waste Disposal
Revenue Bonds (Champion International
Corporation Project), Series 1995A,
6.5%, 9-1-2025 ........................ $ 5,000 $ 4,987,500
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 1,047,500
The Marshall County Health Care Authority,
Hospital Revenue Refunding Bonds,
Series 1992 (Guntersville-Arab
Medical Center),
7.0%, 10-1-2013 ....................... 1,000 1,008,750
Total ................................. 7,043,750
ALASKA - 1.25%
City of Seward, Alaska, Revenue Bonds, 1996
(Alaska Sealife Center Project),
7.65%, 10-1-2016 ...................... 2,000 2,010,000
Anchorage Parking Authority, Lease Revenue
Refunding Bonds, Series 1993 (5th Avenue
Garage Project),
6.75%, 12-1-2008 ...................... 1,500 1,565,625
Alaska Industrial Development and Export
Authority, Refunding Revenue Bonds, Series
1989 (American President Lines Project),
8.0%, 11-1-2009 ....................... 1,320 1,419,000
Total ................................. 4,994,625
ARIZONA - 0.63%
Hayden-Winkelman Unified School District
No. 41 of Gila County, Arizona, Capital
Appreciation Refunding Bonds, Series 1995,
0.0%, 7-1-2010 ........................ 6,145 2,504,087
ARKANSAS - 0.44%
The Fayetteville Public Facilities Board,
Refunding and Improvement Revenue Bonds,
Series 1989A (Butterfield Trail Village
Project),
9.5%, 9-1-2014 ........................ 1,600 1,746,000
See Notes to Schedule of Investments on page .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1996
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
CALIFORNIA - 5.64%
Foothill/Eastern Transportation Corridor
Agency, Toll Road Revenue Bonds, Series
1995A,
0.0%, 1-1-2013 (A) .................... $11,925 $ 7,453,125
San Joaquin Hills Transportation Corridor
Agency (Orange County, California):
Junior Lien Toll Road Revenue Bonds,
0.0%, 1-1-2002 ........................ 2,755 2,014,594
Senior Lien Toll Road Revenue Bonds,
0.0%, 1-1-2011 (A) .................... 2,500 1,946,875
Hi-Desert Memorial Hospital District,
Revenue Bonds, Series 1994A,
8.0%, 10-1-2019 ....................... 3,000 3,146,250
Huntington Beach Public Financing Authority
(Orange County, California), 1992 Revenue
Bonds (Huntington Beach Redevelopment
Projects),
7.0%, 8-1-2024 ........................ 3,000 2,962,500
Certificates of Participation (1991 Capital
Improvement Project), Bella Vista Water
District (California),
7.375%, 10-1-2017 ..................... 1,500 1,608,750
Carson Redevelopment Agency (California),
Redevelopment Project Area No. 1,
Tax Allocation Bonds, Series 1993B,
6.0%, 10-1-2016 ....................... 1,500 1,449,375
Kings County Waste Management Authority,
Solid Waste Revenue Bonds, Series 1994
(California),
7.2%, 10-1-2014 ....................... 1,000 1,068,750
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 ........................ 880 914,100
Total ................................. 22,564,319
See Notes to Schedule of Investments on page .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1996
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
COLORADO - 4.41%
City of Central, Gilpin County, Colorado:
General Obligation Water Bonds:
Series 1996,
6.3%, 12-1-2011 ....................... 2,250 2,174,062
Series 1992,
7.5%, 12-1-2012 ....................... 1,500 1,713,750
Water Revenue Bonds, Series 1991,
8.625%, 9-15-2011 ..................... 500 596,250
City and County of Denver, Colorado,
Airport System Revenue Bonds,
Series 1994A,
7.5%, 11-15-2023 ...................... $ 3,000 $ 3,281,250
City and County of Denver, Colorado,
Revenue Bonds (Jewish Community Centers
of Denver Project), Series 1994:
8.25%, 3-1-2024 ....................... 2,390 2,440,788
7.875%, 3-1-2019 ...................... 815 832,319
City of Colorado Springs, Colorado,
Airport System Revenue Bonds, Series 1992A,
7.0%, 1-1-2022 ........................ 2,200 2,301,750
Pitkin County, Colorado, Lease Purchase
Agreement, Certificates of Participation
(County Administration Building Project),
Series 1991,
7.4%, 10-1-2011 ....................... 1,500 1,610,625
Mountain Village Metropolitan District, San
Miguel County, Colorado, General
Obligation Refunding Bonds, Series 1992,
8.1%, 12-1-2011 ....................... 1,435 1,576,706
Bachelor Gulch Metropolitan District,
Eagle County, Colorado, General Obligation
Bonds, Series 1996,
7.0%, 12-1-2015 ....................... 1,095 1,084,050
Total ................................. 17,611,550
See Notes to Schedule of Investments on page .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1996
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
CONNECTICUT - 1.53%
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 $ 2,684,375
Congregational Avery Nursing Facilities
Project - 1991 Series,
8.5%, 4-1-2021 ........................ 1,490 1,577,537
Eastern Connecticut Resource Recovery
Authority, Solid Waste Revenue Bonds
(Wheelabrator Lisbon Project),
Series 1993A,
5.5%, 1-1-2014 ........................ 2,000 1,860,000
Total ................................. 6,121,912
DISTRICT OF COLUMBIA - 1.27%
Certificates of Participation, Series 1993,
District of Columbia,
7.3%, 1-1-2013 ........................ 3,000 3,015,000
District of Columbia Revenue Bonds
(National Public Radio Issue),
Series 1992,
7.625%, 1-1-2013 ...................... 2,000 2,070,000
Total ................................. 5,085,000
FLORIDA - 3.19%
Sanford Airport Authority (Florida),
Industrial Development Revenue Bonds
(Central Florida Terminals, Inc. Project),
Series 1995A,
7.75%, 5-1-2021 ....................... 4,000 3,970,000
Lake County, Florida, Resource Recovery
Industrial Development Refunding Revenue
Bonds (NRG/Recovery Group Project),
Series 1993A,
5.95%, 10-1-2013 ...................... 4,060 3,948,350
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 2,045,000
See Notes to Schedule of Investments on page .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1996
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
FLORIDA (Continued)
City of Fort Walton Beach, First Mortgage
Industrial Development Revenue Bonds,
Series 1986 (Ft. Walton Beach Ventures,
Inc. Project),
10.5%, 12-1-2016 ...................... $ 1,315 $ 1,361,025
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 ..................... 700 745,500
Sarasota County (Florida) Health Facilities
Authority, Health Care Facilities Revenue
Bonds, Series 1996 (Sarasota Manatee
Jewish Housing Council, Inc. Project),
7.125%, 7-1-2026 ...................... 700 685,125
Total ................................. 12,755,000
GUAM - 0.77%
Guam Airport Authority, General Revenue
Bonds, 1993 Series B,
6.6%, 10-1-2010 ....................... 3,000 3,075,000
IDAHO - 0.54%
Idaho Health Facilities Authority, Hospital
Revenue Refunding Bonds, Series 1992
(IHC Hospitals, Inc.), Indexed Inverse
Floating Rate Securities,
8.57%, 2-15-2021 (B) .................. 2,000 2,167,500
ILLINOIS - 5.33%
Illinois Health Facilities Authority:
Revenue Refunding Bonds,
Series 1995A (Fairview Obligated
Group),
7.125%, 8-15-2017 ..................... 2,765 2,678,594
Revenue Bonds, Series 1995 (Mercy
Center for Health Care Services),
6.375%, 10-1-2015 ..................... 2,500 2,406,250
See Notes to Schedule of Investments on page .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1996
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
ILLINOIS (Continued)
City of Hillsboro, Montgomery County,
Illinois, General Obligation Bonds
(Alternate Revenue Source), Series 1991,
7.5%, 12-1-2021 ....................... $ 2,640 $ 2,834,700
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 2,775,000
Illinois Development Finance Authority
Revenue Bonds, Series 1993C (Catholic
Charities Housing Development
Corporation Project),
6.1%, 1-1-2020 ........................ 2,500 2,409,375
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 2,140,000
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 2,107,500
Village of Hodgkins, Cook County, Illinois,
Tax Increment Revenue Refunding Bonds,
Series 1995A,
7.625%, 12-1-2013 ..................... 1,750 1,802,500
Village of Bourbonnais, Kankakee County,
Illinois, Sewerage Revenue Bonds,
Series 1993,
7.25%, 12-1-2012 ...................... 1,085 1,146,031
City of Eureka, Woodford County, Illinois,
General Obligation Refunding Bonds
(Alternate Revenue Source), Series 1993,
6.25%, 7-1-2013 ....................... 1,000 996,250
Total ................................. 21,296,200
See Notes to Schedule of Investments on page .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1996
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
INDIANA - 5.67%
Indianapolis Airport Authority, Special
Facilities Revenue Bonds:
Series 1995A, United Air Lines, Inc.,
Indianapolis Maintenance Center Project,
6.5%, 11-15-2031 ...................... $ 6,000 $ 6,007,500
Series 1994, Federal Express
Corporation Project,
7.1%, 1-15-2017 ....................... 4,500 4,775,625
Indiana Health Facility Financing Authority,
Hospital Revenue Bonds, Series 1990
(Hancock Memorial Hospital Project),
8.3%, 8-15-2020 ....................... 3,000 3,202,500
City of East Chicago, Indiana, Pollution
Control Refunding Revenue Bonds, Inland
Steel Company Project No. 10,
Series 1993,
6.8%, 6-1-2013 ........................ 3,000 3,000,000
Indiana Development Finance Authority, Pollution
Control Refunding Revenue Bonds (Inland Steel
Company Project No. 12), Series 1995,
6.85%, 12-1-2012 ...................... 2,500 2,568,750
City of Carmel, Indiana, Retirement Rental
Housing Revenue Refunding Bonds (Beverly
Enterprises - Indiana, Inc. Project),
Series 1992,
8.75%, 12-1-2008 ...................... 1,500 1,631,250
Indiana Health Facility Financing
Authority, Hospital Revenue Bonds,
Series 1992 (Fayette Memorial Hospital
Project),
7.2%, 10-1-2022 ....................... 1,000 1,015,000
Indiana Housing Finance Authority, Residential
Mortgage Bonds, 1988 Series R-A,
0.0%, 1-1-2013 ........................ 1,885 473,606
Total ................................. 22,674,231
See Notes to Schedule of Investments on page .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1996
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
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 $ 1,431,813
KANSAS - 1.28%
Kansas Development Finance Authority,
Community Provider Loan Program (Community
Living Opportunities, Inc.), Series
1992A Revenue Bonds,
8.875%, 9-1-2011 ...................... 2,790 2,967,862
City of Prairie Village, Kansas, Claridge
Court Project Revenue Bonds, Series 1993A:
8.75%, 8-15-2023 ...................... 1,000 1,087,500
8.5%, 8-15-2004 ....................... 1,000 1,056,250
Total ................................. 5,111,612
KENTUCKY - 1.06%
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 3,210,000
County of Perry, Kentucky, Solid Waste
Disposal Revenue Bonds (TJ International
Project), Series 1994,
7.0%, 6-1-2024 ........................ 1,000 1,027,500
Total ................................. 4,237,500
LOUISIANA - 1.98%
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 2,866,875
Pollution Control Revenue Bonds
(Union Carbide Project),
Series 1992,
7.35%, 11-1-2022 ...................... 2,000 2,150,000
Board of Commissioners of the Port of New
Orleans, Industrial Development Revenue
Refunding Bonds (Continental Grain Company
Project), Series 1993,
7.5%, 7-1-2013 ........................ 2,000 2,075,000
See Notes to Schedule of Investments on page .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1996
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
LOUISIANA (Continued)
LaFourche Parish Home Mortgage Authority,
Tax-Exempt Capital Appreciation Refunding
Bonds, Series 1990-B, Class B-2,
0.0%, 5-20-2014 ....................... $ 3,300 $ 808,500
Total ................................. 7,900,375
MAINE - 0.69%
Maine Veterans' Homes, Revenue Bonds,
1995 Series,
7.75%, 10-1-2020 ...................... 2,810 2,778,387
MARYLAND - 1.08%
Maryland Economic Development Corporation,
Senior Lien Revenue Bonds (Rocky Gap
Golf Course and Hotel/Meeting Center
Project), Series 1996 A,
8.375%, 10-1-2009 ..................... 3,250 3,270,312
Baltimore County, Maryland, Pollution
Control Revenue Refunding Bonds,
Series 1994A (Bethlehem Steel
Corporation Project),
7.55%, 6-1-2017 ....................... 1,000 1,047,500
Total ................................. 4,317,812
MASSACHUSETTS - 5.58%
Massachusetts Industrial Finance Agency:
First Mortgage Revenue Bonds, Reeds
Landing Project, Series 1993,
8.625%, 10-1-2023 ..................... 7,445 8,003,375
Resource Recovery Revenue Bonds (SEMASS
Project), Series 1991B,
9.25%, 7-1-2015 ....................... 5,000 5,656,250
Revenue Bonds:
Glenmeadow Retirement
Community Project, Series 1996C:
8.625%, 2-15-2026 ..................... 2,200 2,150,500
8.375%, 2-15-2018 ..................... 1,260 1,219,050
Beaver Country Day School Issue,
Series 1992, Subseries A,
8.1%, 3-1-2008 ........................ 1,590 1,615,838
Massachusetts Health and Educational
Facilities Authority, Revenue Bonds,
New England Deaconess Hospital Issue,
Series D,
6.875%, 4-1-2022 ...................... 3,490 3,660,138
Total ................................. 22,305,151
See Notes to Schedule of Investments on page .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1996
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
MICHIGAN - 0.50%
Michigan Strategic Fund, Limited Obligation
Revenue Bonds:
Knollwood Corporation Project, Series A,
10.146%, 10-1-2016 (C) ................ $ 1,300 $ 1,105,000
Mercy Services for Aging Project,
Series 1990,
9.4%, 5-15-2020 ....................... 800 903,000
Total ................................. 2,008,000
MINNESOTA - 1.33%
City of St. Anthony, Minnesota, Housing
Development Refunding Revenue Bonds
(Autumn Woods Project), Series 1992,
6.875%, 7-1-2022 ...................... 1,500 1,528,125
City of Woodbury, Minnesota, Gross Revenue
Golf Course Bonds, Series 1996B,
6.75%, 2-1-2022 ....................... 1,500 1,494,375
Minneapolis Community Development Agency,
Limited Tax Supported Development Revenue
Bonds, Common Bond Fund Series 1995-1,
7.25%, 12-1-2015 ...................... 1,310 1,331,288
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 ...................... 855 977,906
Total ................................. 5,331,694
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,
8.57%, 4-1-2022 (D) ................... 2,000 2,215,000
Adams County, Mississippi, Hospital Revenue
Bonds, Series 1991 (Jefferson Davis Memorial
Hospital Project),
8.0%, 10-1-2016 ....................... 1,200 1,375,500
Total ................................. 3,590,500
See Notes to Schedule of Investments on page .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1996
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
MISSOURI - 7.06%
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 $ 4,763,150
8.25%, 4-1-2002 ....................... 620 661,850
Lake of the Ozarks Community Bridge
Corporation, Bridge System Revenue Bonds,
Series 1996,
6.4%, 12-1-2025 ....................... 3,500 3,351,250
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 3,262,500
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 3,009,475
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 ........................ 2,250 2,812,500
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 1,650,000
7.75%, 8-15-2001 ...................... 780 819,975
Certificates of Participation,
Series 1994, Public Water
Supply District No. 2 of St. Charles
County, Missouri,
8.25%, 12-1-2020 ...................... 2,000 2,085,000
See Notes to Schedule of Investments on page .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1996
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
MISSOURI (Continued)
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 $ 2,062,500
The Industrial Development Authority of
the City of St. Louis, Missouri,
Industrial Revenue Refunding Bonds
(Kiel Center Multipurpose Arena Project),
Series 1992,
7.75%, 12-1-2013 ...................... 1,500 1,603,125
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 ..................... 1,150 1,178,969
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 ....................... 900 969,750
Total ................................. 28,230,044
NEVADA - 1.07%
Clark County, Nevada, Industrial Development
Revenue Bonds (Southwest Gas Corporation),
1992 Series B,
7.5%, 9-1-2032 ........................ 4,000 4,260,000
See Notes to Schedule of Investments on page .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1996
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
NEW HAMPSHIRE - 4.83%
New Hampshire Higher Educational and Health
Facilities Authority:
First Mortgage Revenue Bonds:
RiverMead at Peterborough Issue,
Series 1994,
8.5%, 7-1-2024 ........................ $ 4,110 $ 4,361,738
RiverWoods at Exeter Issue,
Series 1993,
9.0%, 3-1-2023 ........................ 2,000 2,167,500
Hospital Revenue Bonds:
Catholic Medical
Center Issue, Series 1989,
8.25%, 7-1-2013 ....................... 3,000 3,206,250
Monadnock Community Hospital
Issue, Series 1990,
9.125%, 10-1-2020 ..................... 1,455 1,553,213
St. Joseph Hospital Issue,
Series 1991,
7.5%, 1-1-2016 ........................ 1,000 1,051,250
Revenue Bonds, New Hampshire Catholic
Charities Issue, Series 1991,
8.4%, 8-1-2011 ........................ 1,700 1,829,625
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 2,035,000
1991 Tax-Exempt Series C,
7.65%, 5-1-2021 ....................... 2,000 2,035,000
Lisbon Regional School District, New
Hampshire, General Obligation Capital
Appreciation School Bonds,
0.0%, 2-1-2013 ........................ 1,830 1,084,275
Total ................................. 19,323,851
See Notes to Schedule of Investments on page .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1996
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
NEW JERSEY - 4.94%
New Jersey Economic Development Authority:
First Mortgage Revenue Fixed Rate Bonds:
Franciscan Oaks Project - Series 1992A,
8.5%, 10-1-2023 ....................... $ 3,500 $ 3,745,000
Winchester Gardens at Ward Homestead
Project - Series 1996A,
8.625%, 11-1-2025 ..................... 3,000 3,033,750
Fellowship Village Project - Series 1995A,
9.25%, 1-1-2025 ....................... 2,500 2,725,000
Senior Mortgage Revenue Bonds, Arbor
Glen of Bridgewater Project, Series
1996A Bonds,
8.75%, 5-15-2026 ...................... 3,000 3,033,750
First Mortgage Revenue Bonds, The
Evergreens - Series 1992,
9.25%, 10-1-2022 ...................... 2,000 2,240,000
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 ....................... 5,000 4,993,750
Total ................................. 19,771,250
NEW MEXICO - 1.63%
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 3,565,625
New Mexico Educational Assistance
Foundation, Student Loan Purchase Bonds,
Second Subordinate 1994 Series II-C (AMT),
6.0%, 12-1-2008 ....................... 3,000 2,962,500
Total ................................. 6,528,125
See Notes to Schedule of Investments on page .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1996
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
NEW YORK - 1.06%
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 $ 2,178,400
New York City Industrial Development Agency,
Civic Facility Revenue Bonds (YMCA of
Greater New York Project),
8.0%, 8-1-2016 ........................ 1,000 1,066,250
Tompkins County Industrial Development
Agency, Life Care Community Revenue Bonds,
1994 (Kendal at Ithaca, Inc. Project),
7.875%, 6-1-2024 ...................... 1,000 1,006,250
Total ................................. 4,250,900
OHIO - 0.78%
Hamilton County, Ohio, Health System Revenue
Bonds, Providence Hospital Issue,
Series 1992,
6.875%, 7-1-2015 ...................... 2,000 2,045,000
County of Lorain, Ohio, First Mortgage
Revenue Bonds, 1992 Series A (Kendal at
Oberlin Project),
8.625%, 2-1-2022 ...................... 1,000 1,082,500
Total ................................. 3,127,500
OKLAHOMA - 3.74%
Oklahoma County Industrial Authority,
Industrial Development Revenue Bonds:
1986 Series B (Choctaw Nursing
Center Project):
10.25%, 9-1-2016 (E) .................. 1,230 1,168,500
10.125%, 9-1-2006 (E) ................. 525 498,750
1986 Series A (Westlake Nursing Center
Project):
10.25%, 9-1-2016 ...................... 905 933,281
10.125%, 9-1-2006 ..................... 430 442,363
Bixby Public Works Authority, Utility
System Revenue Bonds, Refunding
Series 1994,
7.25%, 11-1-2019 ...................... 2,685 2,866,237
The Clinton Public Works Authority,
Refunding and Improvement Revenue
Bonds, Series 1994,
6.25%, 1-1-2019 ....................... 2,575 2,523,500
See Notes to Schedule of Investments on page .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1996
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
OKLAHOMA (Continued)
The Broken Arrow Public Golf Authority
(Broken Arrow, Oklahoma), Recreational
Facilities Revenue Bonds, Series 1995,
7.25%, 8-1-2020 ....................... $ 2,025 $ 2,068,031
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 1,728,000
The Guthrie Public Works Authority
(Guthrie, Oklahoma), Utility System
Revenue Bonds, Series 1994A,
6.75%, 9-1-2019 ....................... 1,415 1,455,681
Holdenville Industrial Authority,
Correctional Facility Revenue Bonds,
Series 1995,
6.7%, 7-1-2015 ........................ 1,250 1,268,750
Total ................................. 14,953,093
OREGON - 1.66%
Klamath Falls Intercommunity Hospital
Authority, Gross Revenue Bonds,
Series 1994 (Merle West Medical Center
Project),
7.1%, 9-1-2024 ........................ 3,500 3,701,250
Myrtle Creek Building Authority, Gross
Revenue Bonds, Series 1996A (Myrtle Creek
Golf Course Project),
8.0%, 6-1-2021 ........................ 3,000 2,932,500
Total ................................. 6,633,750
PENNSYLVANIA - 7.72%
Delaware County Authority (Pennsylvania),
First Mortgage Revenue Bonds
(Riddle Village Project):
Series 1992,
9.25%, 6-1-2022 ....................... 6,000 6,652,500
Series 1994,
8.25%, 6-1-2022 ....................... 4,000 4,315,000
See Notes to Schedule of Investments on page .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1996
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 $ 2,095,000
Exempt Facilities Revenue Bonds, 1992
Series B (Pennsylvania Gas and Water
Company Project),
7.125%, 12-1-2022 ..................... 1,000 1,041,250
Allegheny County Industrial Development
Authority (Pennsylvania), Environmental
Improvement Revenue Bonds (USX Corporation
Project), Refunding Series A 1994,
6.7%, 12-1-2020 ....................... 3,000 3,097,500
McKeesport Hospital Authority (Commonwealth
of Pennsylvania), Hospital Revenue Bonds,
Series of 1993 (McKeesport Hospital Project),
6.5%, 7-1-2008 ........................ 2,500 2,484,375
Pennsylvania Economic Development Financing
Authority, Exempt Facilities Revenue Bonds
(MacMillan Bloedel Clarion Limited
Partnership Project), Series of 1995,
7.6%, 12-1-2020 ....................... 2,000 2,215,000
Allentown Area Hospital Authority, Hospital
Revenue Bonds (Sacred Heart Hospital of
Allentown), Series A of 1993,
6.75%, 11-15-2014 ..................... 2,115 2,144,081
Clearfield Hospital Authority, Hospital
Revenue and Refunding Bonds (Clearfield
Hospital Project), Series 1994,
6.875%, 6-1-2016 ...................... 2,000 1,982,500
South Wayne County Water and Sewer Authority
(Wayne County, Pennsylvania), Sewer Revenue
Bonds, Series of 1992,
8.2%, 4-15-2013 ....................... 1,830 1,855,163
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 1,488,600
See Notes to Schedule of Investments on page .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1996
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
PENNSYLVANIA (Continued)
Clarion County Industrial Development Authority
(Pennsylvania), Health Facilities Revenue
Refunding Bonds (Beverly Enterprises
Project), Series 1985,
10.125%, 5-1-2007 ..................... $ 830 $ 905,737
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 ....................... 525 586,688
Total ................................. 30,863,394
RHODE ISLAND - 1.23%
City of Providence, Rhode Island, Special
Obligation Tax Increment Bonds, Series D,
6.65%, 6-1-2016 ....................... 2,000 2,042,500
Pawtucket Public Buildings Authority (Water
System Project), Revenue Bonds, Series 1991:
7.6%, 7-1-2010 ........................ 840 954,450
7.6%, 7-1-2009 ........................ 785 891,956
Rhode Island Health and Educational Building
Corporation, Hospital Financing Revenue Bonds,
South County Hospital Issue - Series 1991,
7.25%, 11-1-2011 ...................... 1,000 1,043,750
Total ................................. 4,932,656
SOUTH CAROLINA - 0.92%
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 2,170,000
McCormick County, South Carolina, Hospital
Facilities Revenue Bonds, Series 1988
(McCormick Health Care Center Project),
10.5%, 3-1-2018 ....................... 1,455 1,489,134
Total ................................. 3,659,134
SOUTH DAKOTA - 0.49%
South Dakota Health and Educational
Facilities Authority, Refunding Revenue
Bonds (Westhills Village Retirement
Community Issue), Series 1993,
7.25%, 9-1-2013 ....................... 2,000 1,970,000
See Notes to Schedule of Investments on page .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1996
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
TENNESSEE - 1.78%
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 $ 2,147,500
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 2,052,500
The Industrial Development Board of the
Metropolitan Government of Nashville and
Davidson County, Multi-Family Housing
Revenue Bonds (River Retreat II, Ltd.
Project), Series 1986,
9.5%, 5-1-2017 ........................ 1,500 1,518,960
Upper Cumberland Gas Utility District
(of Cumberland County, Tennessee),
Gas System Revenue Bonds, Series 1996,
7.0%, 3-1-2016 ........................ 1,400 1,408,750
Total ................................. 7,127,710
TEXAS - 5.37%
Alliance Airport Authority, Inc., Special
Facilities Revenue Bonds:
American Airlines, Inc. Project:
Series 1990,
7.5%, 12-1-2029 ....................... 7,885 8,387,669
Series 1991,
7.0%, 12-1-2011 ....................... 4,500 4,921,875
Federal Express Corporation Project,
Series 1996,
6.375%, 4-1-2021 ...................... 3,500 3,465,000
Dallas-Fort Worth International Airport
Facility Improvement Corporation:
American Airlines, Inc., Revenue Bonds,
Series 1990,
7.5%, 11-1-2025 ....................... 2,000 2,132,500
Delta Air Lines, Inc. Revenue Bonds,
Series 1991,
7.6%, 11-1-2011........................ 1,300 1,404,000
See Notes to Schedule of Investments on page .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1996
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
TEXAS (Continued)
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 $ 1,176,000
Total ................................. 21,487,044
UTAH - 0.88%
Carbon County, Utah, Solid Waste Disposal
Refunding Revenue Bonds, Series 1991
(Sunnyside Cogeneration Associates Project),
9.25%, 7-1-2018 ....................... 2,500 1,750,000
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 1,749,150
Total ................................. 3,499,150
VERMONT - 1.89%
Vermont Industrial Development Authority,
Mortgage Revenue Bonds, Wake Robin
Corporation Project, Series 1993A:
8.75%, 4-1-2023 ....................... 4,465 4,838,944
8.75%, 3-1-2023 ....................... 2,500 2,709,375
Total ................................. 7,548,319
VIRGIN ISLANDS - 0.37%
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 1,489,250
VIRGINIA - 0.68%
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 2,706,250
See Notes to Schedule of Investments on page .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1996
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
WEST VIRGINIA - 0.39%
Upshur County, West Virginia, Solid Waste
Disposal Revenue Bonds (TJ International
Project), Series 1995,
7.0%, 7-15-2025 ....................... $ 1,500 $ 1,545,000
WISCONSIN - 1.59%
Wisconsin Health and Educational Facilities
Authority, Revenue Bonds, Series 1995:
Hess Memorial Hospital Association, Inc.
Project,
7.75%, 11-1-2015 ...................... 3,400 3,357,500
National Regency of New Berlin, Inc.
Project,
8.0%, 8-15-2025 ....................... 3,000 2,988,750
Total ................................. 6,346,250
WYOMING - 0.65%
Sweetwater County, Wyoming, Solid Waste
Disposal Revenue Bonds (FMC Corporation
Project), Series 1994B,
6.9%, 9-1-2024 ........................ 2,500 2,609,375
TOTAL MUNICIPAL BONDS - 97.92% $391,514,063
(Cost: $375,141,448)
TOTAL SHORT-TERM SECURITIES - 1.41% $ 5,628,822
(Cost: $5,628,822)
TOTAL INVESTMENT SECURITIES - 99.33% $397,142,885
(Cost: $380,770,270)
CASH AND OTHER ASSETS, NET OF LIABILITIES - 0.67% 2,680,808
NET ASSETS - 100.00% $399,823,693
See Notes to Schedule of Investments on page .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1996
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, 1996
Assets
Investment securities - at value
(Notes 1 and 3) ................................. $397,142,885
Cash ............................................. 157,206
Receivables:
Interest ........................................ 8,367,753
Fund shares sold ................................ 593,158
Prepaid insurance premium ........................ 11,213
------------
Total assets .................................. 406,272,215
------------
Liabilities
Payable for investment securities purchased ...... 4,515,690
Payable for Fund shares redeemed ................. 1,520,960
Dividends payable ................................ 206,153
Accrued service fee .............................. 114,800
Accrued transfer agency and dividend disbursing .. 27,434
Accrued accounting services fee .................. 5,000
Other ............................................ 58,485
------------
Total liabilities ............................. 6,448,522
------------
Total net assets ............................. $399,823,693
============
Net Assets
$1.00 par value capital stock, authorized --
100,000,000; shares outstanding -- 75,252,656
Capital stock ................................... $ 75,252,656
Additional paid-in capital ...................... 308,690,937
Accumulated undistributed income (loss):
Accumulated undistributed net realized
loss on investment transactions ............... (492,515)
Net unrealized appreciation in value of
investments at end of period .................. 16,372,615
------------
Net assets applicable to outstanding
units of capital ............................. $399,823,693
============
Net asset value per share (net assets divided
by shares outstanding) ........................... $5.31
=====
See notes to financial statements.
<PAGE>
UNITED MUNICIPAL HIGH INCOME FUND, INC.
STATEMENT OF OPERATIONS
For the Fiscal Year Ended SEPTEMBER 30, 1996
Investment Income
Interest ......................................... $28,206,563
-----------
Expenses (Note 2):
Investment management fee ....................... 1,985,305
Service fee ..................................... 542,524
Transfer agency and dividend disbursing ......... 331,300
Legal fees ...................................... 82,152
Accounting services fee ......................... 60,000
Audit fees ...................................... 28,795
Custodian fees .................................. 20,964
Other ........................................... 116,004
-----------
Total expenses ................................ 3,167,044
-----------
Net investment income ........................ 25,039,519
-----------
Realized and Unrealized Gain on Investments
Realized net gain on investments ................. 2,528,353
Unrealized appreciation in value of investments
during the period ............................... 772,319
-----------
Net gain on investments ......................... 3,300,672
-----------
Net increase in net assets resulting
from operations .............................. $28,340,191
===========
See notes to financial statements.
<PAGE>
UNITED MUNICIPAL HIGH INCOME FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
For the fiscal year
ended September 30,
-----------------------------
1996 1995
-------------- ------------
Increase in Net Assets
Operations:
Net investment income ...............$ 25,039,519 $ 24,427,319
Realized net gain (loss)
on investments .................... 2,528,353 (2,721,891)
Unrealized appreciation ............. 772,319 15,084,134
------------ ------------
Net increase in net assets
resulting from operations ........ 28,340,191 36,789,562
------------ ------------
Dividends to shareholders:*
From net investment income .......... (25,039,519) (24,427,319)
In excess of realized net gain
from investment transactions ...... --- (1,673,583)
------------ ------------
(25,039,519) (26,100,902)
------------ ------------
Capital share transactions:
Proceeds from sale of shares
(7,034,526 and 9,693,367 shares,
respectively) ..................... 37,292,742 49,317,843
Proceeds from reinvestment of
dividends and/or capital gains
distribution (3,840,968 and 3,868,221
shares, respectively) ............. 20,390,179 19,837,687
Payments for shares redeemed
(8,297,041 and 8,253,031 shares,
respectively) ..................... (43,964,829) (42,201,117)
------------ ------------
Net increase in net assets
resulting from capital
share transactions ............... 13,718,092 26,954,413
------------ ------------
Total increase ................... 17,018,764 37,643,073
Net Assets
Beginning of period .................. 382,804,929 345,161,856
------------ ------------
End of period ........................$399,823,693 $382,804,929
============ ============
Undistributed net investment
income ............................ $--- $---
==== ====
*See "Financial Highlights" on page .
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,
------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
Net asset value,
beginning of
period ........... $5.27 $5.12 $5.53 $5.23 $5.05
----- ----- ----- ----- -----
Income from investment
operations:
Net investment
income........... .34 .35 .34 .35 .36
Net realized and
unrealized gain
(loss) on
investments ..... .04 .17 (0.34) .34 .18
----- ----- ----- ----- -----
Total from investment
operations ....... .38 .52 0.00 .69 .54
----- ----- ----- ----- -----
Less distributions:
Dividends declared from
net investment
income .......... (0.34) (0.35) (0.34) (0.35) (0.36)
Distribution from
capital gains ... (0.00) (0.00) (0.07) (0.04) (0.00)
Distribution in excess
of capital gains. (0.00) (0.02) (0.00) (0.00) (0.00)
----- ----- ----- ----- -----
Total distributions. (0.34) (0.37) (0.41) (0.39) (0.36)
----- ----- ----- ----- -----
Net asset value, end
of period ........ $5.31 $5.27 $5.12 $5.53 $5.23
===== ===== ===== ===== =====
Total return* ...... 7.40% 10.63% 0.05% 13.77% 11.08%
Net assets, end
of period (000
omitted) .......... $399,824$382,805$345,162$329,373$260,777
Ratio of expenses to
average net
assets ........... 0.81% 0.76% 0.76% 0.70% 0.72%
Ratio of net investment
income to average
net assets ....... 6.41% 6.75% 6.39% 6.49% 7.08%
Portfolio turnover
rate ............. 26.91% 19.07% 26.26% 26.13% 54.18%
*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, 1996
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. Its investment objective is to provide a
high level of income which is not subject to Federal income taxation. The
following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles.
A. Security valuation -- Municipal bonds and the taxable obligations in
the Fund's investment portfolio are not listed or traded on any
securities exchange. Therefore, municipal bonds are valued using a
pricing system provided by a pricing service or dealer in bonds.
Short-term debt securities, whether taxable or nontaxable, are valued
at amortized cost, which approximates market.
B. Security transactions and related investment income -- Security
transactions are accounted for on the trade date (date the order to
buy or sell is executed). Securities gains and losses are calculated
on the identified cost basis. Original issue discount (as defined 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 as of the close of the preceding business
day. 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.
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the
financial statements. Actual results could differ from those estimates.
NOTE 2 -- Investment Management and Payments to Affiliated Persons
The Fund pays a fee for investment management services. The fee is
computed daily based on the net asset value at the close of business. The
fee consists of two elements: (i) a "Specific" fee computed on net asset
value as of the close of business each day at the annual rate of .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 $14.7 billion of combined net assets at September 30, 1996)
at annual rates of .51% of the first $750 million of combined net assets,
.49% on that amount between $750 million and $1.5 billion, .47% between
$1.5 billion and $2.25 billion, .45% between $2.25 billion and $3 billion,
.43% between $3 billion and $3.75 billion, .40% between $3.75 billion and
$7.5 billion, .38% between $7.5 billion and $12 billion, and .36% of that
amount over $12 billion. The Fund accrues and pays this fee daily.
Pursuant to assignment of the Investment Management Agreement between
the Fund and Waddell & Reed, Inc. ("W&R"), Waddell & Reed Investment
Management Company ("WRIMCO"), a wholly-owned subsidiary of W&R, serves as
the Fund's investment manager.
The Fund has an Accounting Services Agreement with Waddell & Reed
Services Company ("WARSCO"), a wholly-owned subsidiary of W&R. Under the
agreement, WARSCO acts as the agent in providing accounting services and
assistance to the Fund and pricing daily the value of shares of the Fund.
For these services, the Fund pays WARSCO a monthly fee of one-twelfth of
the annual fee shown in the following table.
Accounting Services Fee
Average
Net Asset Level Annual Fee
(all dollars in millions) Rate for Each Level
------------------------- -------------------
From $ 0 to $ 10 $ 0
From $ 10 to $ 25 $ 10,000
From $ 25 to $ 50 $ 20,000
From $ 50 to $ 100 $ 30,000
From $ 100 to $ 200 $ 40,000
From $ 200 to $ 350 $ 50,000
From $ 350 to $ 550 $ 60,000
From $ 550 to $ 750 $ 70,000
From $ 750 to $1,000 $ 85,000
$1,000 and Over $100,000
The Fund also pays WARSCO a monthly per account charge for transfer
agency and dividend disbursement services of $1.3125 for each shareholder
account which was in existence at any time during the prior month ($1.0208
per account prior to April 1, 1996), 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 $1,000,554, out of which W&R paid sales commissions of $558,497 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 $15,106.
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 $113,817,344, while proceeds from
maturities and sales aggregated $102,880,776. Purchases of short-term
securities aggregated $131,082,029, while proceeds from maturities and
sales aggregated $127,600,561. No U.S. Government securities were bought
or sold during the period ended September 30, 1996.
For Federal income tax purposes, cost of investments owned at
September 30, 1996 was $381,544,055, resulting in net unrealized
appreciation of $15,598,830, of which $17,584,973 related to appreciated
securities and $1,986,143 related to depreciated securities.
NOTE 4 -- Federal Income Tax Matters
For Federal income tax purposes, the Fund realized net capital gain
net income of $279,195 during its fiscal year ended September 30, 1996,
which included losses of $1,960,745 deferred from the year ended September
30, 1995 (see discussion below). The capital gain 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 incurred between each November 1 and
the end of its next fiscal year ("post-October losses"). From November 1,
1994 through September 30, 1995, the Fund incurred net capital losses of
$1,960,745, which were deferred to the fiscal year ended September 30,
1996.
NOTE 5 -- Multiclass Operations
On January 30, 1996, the Fund was authorized to offer investors a
choice of two classes of shares, Class A and Class Y, each of which has
equal rights as to assets and voting privileges. Class A shares represent
existing shareholders; Class Y shares are offered through a separate
Prospectus to certain institutional investors. Class Y shares are not
subject to a sales charge on purchases; they are not subject to a Rule 12b-
1 Service Plan and have a separate transfer agency and dividend
disbursement services fee structure. As of September 30, 1996, the Fund
had not commenced multiclass operations.
<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, 1996, the
results of its operations for the year then ended and the changes in its
net assets and the financial highlights for each of 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, 1996
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 8, 1996
<PAGE>
REGISTRATION STATEMENT
PART C
OTHER INFORMATION
24. Financial Statements and Exhibits
---------------------------------
(a) Financial Statements -- United Municipal High Income Fund, Inc.
Included in Part B:
-------------------
As of September 30, 1996
Statements of Assets and Liabilities
For the year ended September 30, 1996
Statements of Operations
For the two years ended September 30, 1996
Statement of Changes in Net Assets
Schedule I -- Investment Securities as of September 30, 1996
Report of Independent Accountants
Included in Part C:
-------------------
Financial Data Schedule
Other schedules prescribed by Regulation S-X are not filed
because the required matter is not present or is insignificant.
<PAGE>
(b) Exhibits:
(1) Articles of Incorporation, as amended, filed December 1,
1995 as EX-99.B1-charter to Post-Effective Amendment No. 17
to the Registration Statement on Form N-1A*
Articles Supplementary filed December 1, 1995 as EX-99.B1-
mhartsup to Post-Effective Amendment No. 17 to the
Registration Statement on Form N-1A*
(2) Bylaws, as amended, attached hereto as EX-99.B2-mhbylaw
(3) Not applicable
(4) Article FIFTH and Article SEVENTH of the Articles of
Incorporation of Registrant filed December 1, 1995 as EX-
99.B1-charter to Post-Effective Amendment No. 17 to the
Registration Statement on Form N-1A*; Article I, Article IV
and Article VII of the Bylaws of the Registrant attached
hereto as EX-99.B2-mhbylaw
(5) Investment Management Agreement filed December 1, 1995 as
EX-99.B5-mhima to Post-Effective Amendment No. 17 to the
Registration Statement on Form N-1A*
Assignment of the Investment Management Agreement filed
December 1, 1995 as EX-99.B5-mhassign to Post-Effective
Amendment No. 17 to the Registration Statement on Form N-1A*
(6) Underwriting Agreement filed December 1, 1995 as EX-99.B6-
mhua to Post-Effective Amendment No. 17 to the Registration
Statement on Form N-1A*
(7) Not applicable
(8) Custodian Agreement filed December 1, 1995 as EX-99.B8-mhca
to Post-Effective Amendment No. 17 to the Registration
Statement on Form N-1A*
(9) (a) Shareholder Servicing Agreement attached hereto as EX-
99.B9-mhssa
(b) Fund Class A Application filed December 1, 1995 as EX-
99.B9-mhappca to Post-Effective Amendment No. 17 to the
Registration Statement on Form N-1A*
(c) Fund Class Y Application filed December 1, 1995 as EX-
99.B9-mhappcy to Post-Effective Amendment No. 17 to the
Registration Statement on Form N-1A*
(d) Fund NAV Application filed December 1, 1995 as EX-
99.B9-mhnavapp to Post-Effective Amendment No. 17 to
the Registration Statement on Form N-1A*
(e) Accounting Services Agreement filed December 1, 1995 as
EX-99.B9-mhasa to Post-Effective Amendment No. 17 to
the Registration Statement on Form N-1A*
(f) Service Agreement filed by electronic format on July
30, 1993 as Exhibit (b)(15) to Post-Effective Amendment
No. 14 to the Registration Statement on Form N-1A*
(g) Amendment to Service Agreement filed December 1, 1995
- ---------------------------------
*Incorporated herein by reference
as EX-99.B9-mhsaa to Post-Effective Amendment No. 17 to
the Registration Statement on Form N-1A*
(h) Class Y letter of understanding attached hereto as EX-
99.B9-mhlou
(10) Not applicable
(11) Consent of Independent Accountants attached hereto as EX-
99.B9-mhconsnt
(12) Not applicable
(13) Not applicable
(14) Not applicable
(15) Service Plan filed December 1, 1995 as EX-99.B9-mhspca to
Post-Effective Amendment No. 17 to the Registration
Statement on Form N-1A*
(16) (a) Computation of average annual total return performance
quotations for Class A shares filed by electronic
format on July 30, 1993 as Exhibit (b)(16)(1) to Post-
Effective Amendment No. 14 to the Registration
Statement on Form N-1A*
(b) Computation of yield performance quotation and tax
equivalent yield performance quotation for Class A
shares attached hereto as EX-99.B16-mhyldcla
(17) Financial Data Schedule attached hereto as EX-27.B17-mhfds
(18) Multiple Class Plan filed December 1, 1995 as EX-99.B18-
mhmcp to Post-Effective Amendment No. 17 to the Registration
Statement on Form N-1A*
25. Persons Controlled by or under common control with Registrant
-------------------------------------------------------------
None
26. Number of Holders of Securities
-------------------------------
Number of Holders of Securities
Title of Class September 30, 1996
-------------- -------------------------------
Class A Common Stock 16,292
Class Y Common Stock 0
27. Indemnification
---------------
Reference is made to Section (7)(c) of Article SEVENTH of the Articles
of Incorporation of Registrant filed December 1, 1995 as EX-99.B1-
charter to Post-Effective Amendment No. 17 to the Registration
Statement on Form N-1A*, and to Article IV of the Underwriting
Agreement filed December 1, 1995 as EX-99.B6-mhua to Post-Effective
Amendment No. 17 to the Registration Statement on Form N-1A*, both of
which provide indemnification. Also refer to Section 2-418 of the
Maryland General Corporation Law regarding indemnification of
directors, officers, employees and agents.
- ---------------------------------
*Incorporated herein by reference
28. Business and Other Connections of Investment Manager
----------------------------------------------------
Waddell & Reed Investment Management Company is the investment manager
of the Registrant. Under the terms of an Investment Management
Agreement between Waddell & Reed, Inc. and the Registrant, Waddell &
Reed, Inc. is to provide investment management services to the
Registrant. Waddell & Reed, Inc. assigned its investment management
duties under this agreement to Waddell & Reed Investment Management
Company on January 8, 1992. Waddell & Reed Investment Management
Company is not engaged in any business other than the provision of
investment management services to those registered investment
companies described in Part A and Part B of this Post-Effective
Amendment.
Each director and executive officer of Waddell & Reed Investment
Management Company has had as his sole business, profession, vocation
or employment during the past two years only his duties as an
executive officer and/or employee of Waddell & Reed Investment
Management Company or its predecessors, except as to persons who are
directors and/or officers of the Registrant and have served in the
capacities shown in the Statement of Additional Information of the
Registrant, and except for Mr. Ronald K. Richey. Mr. Richey is
Chairman of the Board and Chief Executive Officer of Torchmark
Corporation, the parent company of Waddell & Reed, Inc., and Chairman
of the Board of United Investors Management Company, a holding company
of which Waddell & Reed, Inc. is an indirect subsidiary. Mr. Richey's
address is 2001 Third Avenue South, Birmingham, Alabama 35233. The
address of the others is 6300 Lamar Avenue, Shawnee Mission, Kansas
66202-4200.
As to each director and officer of Waddell & Reed Investment
Management Company, reference is made to the Prospectus and SAI of
this Registrant.
29. Principal Underwriter
---------------------
(a) Waddell & Reed, Inc. is the principal underwriter of the
Registrant. It is also the principal underwriter to the
following investment companies:
United Funds, Inc.
United International Growth Fund, Inc.
United Continental Income Fund, Inc.
United Vanguard Fund, Inc.
United Retirement Shares, Inc.
United Municipal Bond Fund, Inc.
United High Income Fund, Inc.
United Cash Management, Inc.
United Government Securities Fund, Inc.
United New Concepts Fund, Inc.
United Gold & Government Fund, Inc.
United High Income Fund II, Inc.
United Asset Strategy Fund, Inc.
TMK/United Funds, Inc.
Waddell & Reed Funds, Inc.
and is depositor of the following unit investment trusts:
United Periodic Investment Plans to acquire shares of United
Science and Energy Fund
United Periodic Investment Plans to acquire shares of United
- ---------------------------------
*Incorporated herein by reference
Accumulative Fund
United Income Investment Programs
United International Growth Investment Programs
United Continental Income Investment Programs
United Vanguard Investment Programs
(b) The information contained in the underwriter's application on
form BD, under the Securities Exchange Act of 1934, is herein
incorporated by reference.
(c) No compensation was paid by the Registrant to any principal
underwriter who is not an affiliated person of the Registrant or
any affiliated person of such affiliated person.
30. Location of Accounts and Records
--------------------------------
The accounts, books and other documents required to be maintained by
Registrant pursuant to Section 31(a) of the Investment Company Act and
rules promulgated thereunder are under the possession of Mr. Robert L.
Hechler and Ms. Sharon K. Pappas, as officers of the Registrant, each
of whose business address is Post Office Box 29217, Shawnee Mission,
Kansas 66201-9217.
31. Management Services
-------------------
There is no service contract other than as discussed in Part A and B
of this Post-Effective Amendment and as listed in response to Items
(b)(9) and (b)(15) hereof.
32. Undertakings
------------
(a) Not applicable
(b) Not applicable
(c) The Fund agrees to furnish to each person to whom a prospectus is
delivered a copy of the Fund's latest annual report to
shareholders upon request and without charge.
(d) To the extent that Section 16(c) of the Investment Company Act of
1940, as amended, applies to the Fund, the Fund agrees, if
requested in writing by the shareholders of record of not less
than 10% of the Fund's outstanding shares, to call a meeting of
the shareholders of the Fund for the purpose of voting upon the
question of removal of any director and to assist in
communications with other shareholders as required by Section
16(c).
---------------------------------
*Incorporated herein by reference
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all
of the requirements for effectiveness of this Post-Effective Amendment
pursuant to Rule 485(b) of the Securities Act of 1933 and has duly caused
this Post-Effective Amendment to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Overland Park, and
State of Kansas, on the 27th day of December, 1996.
UNITED MUNICIPAL HIGH INCOME FUND, INC.
(Registrant)
By /s/ Keith A. Tucker*
------------------------
Keith A. Tucker, President
Pursuant to the requirements of the Securities Act of 1933, and/or the
Investment Company Act of 1940, this Post-Effective Amendment has been
signed below by the following persons in the capacities and on the date
indicated.
Signatures Title
---------- -----
/s/Ronald K. Richey* Chairman of the Board December 27, 1996
- ---------------------- ----------------
Ronald K. Richey
/s/Keith A. Tucker* President and Director December 27, 1996
- ---------------------- (Principal Executive Officer) ----------------
Keith A. Tucker
/s/Theodore W. Howard* Vice President, Treasurer December 27, 1996
- ---------------------- and Principal Accounting ----------------
Theodore W. Howard Officer
/s/Robert L. Hechler* Vice President and December 27, 1996
- ---------------------- Principal Financial ----------------
Robert L. Hechler Officer
/s/Henry L. Bellmon* Director December 27, 1996
- ---------------------- ----------------
Henry L. Bellmon
/s/Dodds I. Buchanan* Director December 27, 1996
- --------------------- ----------------
Dodds I. Buchanan
/s/Jay B. Dillingham* Director December 27, 1996
- -------------------- ----------------
Jay B. Dillingham
/s/Linda Graves* Director December 27, 1996
- ------------------ ----------------
Linda Graves
/s/John F. Hayes* Director December 27, 1996
- ------------------- ----------------
John F. Hayes
/s/Glendon E. Johnson* Director December 27, 1996
- ------------------- ----------------
Glendon E. Johnson
/s/William T. Morgan* Director December 27, 1996
- ------------------- ----------------
William T. Morgan
/s/Doyle Patterson Director December 27, 1996
- ------------------- ----------------
Doyle Patterson
/s/William L. Rogers* Director December 27, 1996
- ------------------ ----------------
William L. Rogers
/s/Frank J. Ross, Jr.* Director December 27, 1996
- ------------------ ----------------
Frank J. Ross, Jr.
/s/Eleanor B Schwartz* Director December 27, 1996
- ------------------- ----------------
Eleanor B. Schwartz
/s/Frederick Vogel III* Director December 27, 1996
- ------------------- ----------------
Frederick Vogel III
/s/Paul S. Wise* Director December 27, 1996
- ------------------- ----------------
Paul S. Wise
*By
Sharon K. Pappas
Attorney-in-Fact
ATTEST:
Sheryl Strauss
Assistant Secretary
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, That each of the undersigned, UNITED FUNDS,
INC., UNITED INTERNATIONAL GROWTH FUND, INC., UNITED MUNICIPAL BOND FUND, INC.,
UNITED VANGUARD FUND, INC., UNITED HIGH INCOME FUND, INC., UNITED CASH
MANAGEMENT, INC., UNITED NEW CONCEPTS FUND, INC., UNITED GOVERNMENT SECURITIES
FUND, INC., UNITED MUNICIPAL HIGH INCOME FUND, INC., UNITED GOLD & GOVERNMENT
FUND, INC., UNITED HIGH INCOME FUND II, INC., UNITED CONTINENTAL INCOME FUND,
INC., UNITED RETIREMENT SHARES, INC., UNITED ASSET STRATEGY FUND, INC.,
TMK/UNITED FUNDS, INC. AND WADDELL & REED FUNDS, INC. (each hereinafter called
the "Corporation"), and certain directors and officers for the Corporation, do
hereby constitute and appoint KEITH A. TUCKER, ROBERT L. HECHLER, and SHARON K.
PAPPAS, and each of them individually, their true and lawful attorneys and
agents to take any and all action and execute any and all instruments which said
attorneys and agents may deem necessary or advisable to enable each Corporation
to comply with the Securities Act of 1933 and/or the Investment Company Act of
1940, as amended, and any rules, regulations, orders or other requirements of
the United States Securities and Exchange Commission thereunder, in connection
with the registration under the Securities Act of 1933 and/or the Investment
Company Act of 1940, as amended, including specifically, but without limitation
of the foregoing, power and authority to sign the names of each of such
directors and officers in his/her behalf as such director or officer as
indicated below opposite his/her signature hereto, to any Registration Statement
and to any amendment or supplement to the Registration Statement filed with the
Securities and Exchange Commission under the Securities Act of 1933 and/or the
Investment Company Act of 1940, as amended, and to any instruments or documents
filed or to be filed as a part of or in connection with such Registration
Statement or amendment or supplement thereto; and each of the undersigned hereby
ratifies and confirms all that said attorneys and agents shall do or cause to be
done by virtue hereof.
Date: October 16, 1996 /s/Keith A. Tucker
--------------------------
Keith A. Tucker, President
/s/Ronald K. Richey Chairman of the Board October 16, 1996
- -------------------- ----------------
Ronald K. Richey
/s/Keith A. Tucker President and Director October 16, 1996
- -------------------- (Principal Executive ----------------
Keith A. Tucker Officer)
/s/Theodore W. Howard Vice President, Treasurer October 16, 1996
- -------------------- and Principal Accounting ----------------
Theodore W. Howard Officer
/s/Robert L. Hechler Vice President and October 16, 1996
- -------------------- Principal Financial ----------------
Robert L. Hechler Officer
/s/Henry L. Bellmon Director October 16, 1996
- -------------------- ----------------
Henry L. Bellmon
/s/Dodds I. Buchanan Director October 16, 1996
- -------------------- ----------------
Dodds I. Buchanan
/s/Jay B. Dillingham Director October 16, 1996
- -------------------- ----------------
Jay B. Dillingham
/s/Linda Graves Director October 16, 1996
- -------------------- ----------------
Linda Graves
/s/John F. Hayes Director October 16, 1996
- -------------------- ----------------
John F. Hayes
/s/Glendon E. Johnson Director October 16, 1996
- -------------------- ----------------
Glendon E. Johnson
/s/William T. Morgan Director October 16, 1996
- -------------------- ----------------
William T. Morgan
/s/Doyle Patterson Director October 16, 1996
- -------------------- ----------------
Doyle Patterson
/s/William L. Rogers Director October 16, 1996
- -------------------- ----------------
William L. Rogers
/s/Frank J. Ross, Jr. Director October 16, 1996
- -------------------- ----------------
Frank J. Ross, Jr.
/s/Eleanor Schwartz Director October 16, 1996
- -------------------- ----------------
Eleanor Schwartz
/s/Frederick Vogel III Director October 16, 1996
- -------------------- ----------------
Frederick Vogel III
/s/Paul S. Wise Director October 16, 1996
- -------------------- ----------------
Paul S. Wise
Attest:
/s/Sharon K. Pappas
- --------------------------------
Sharon K. Pappas, Vice President
and Secretary
EX-99.B2-mhbylaw
UNITED MUNICIPAL HIGH INCOME FUND, INC.
BY-LAWS
ARTICLE I
STOCKHOLDERS
Section 1. Place of Meeting. All meetings of the stockholders shall be
held at the principal office of the Corporation or at such other place within or
without the State of Maryland as may from time to time be designated by the
Board of Directors and stated in the notice of meeting.
Section 2. Annual Meeting. The annual meeting of the stockholders of the
Corporation shall be held at such hour as may be determined by the Board of
Directors and as shall be designated in the notice of meeting on such date
within 31 days after the 1st day of June in each year as may be fixed by the
Board of Directors for the purpose of electing directors for the ensuing year
and for the transaction of such other business as may properly be brought before
the meeting. The Corporation shall not be required to hold an annual meeting in
any year in which the election of directors is not required to be acted upon
under the Investment Company Act of 1940.
Section 3. Special or Extraordinary Meetings. Special or extraordinary
meetings of the stockholders for any purpose or purposes may be called by the
Chairman of the Board of Directors, if any, or by the President or by the Board
of Directors and shall be called by the Secretary upon receipt of the request in
writing signed by stockholders holding not less than one fourth in amount of the
entire capital stock issued and outstanding and entitled to vote thereat. Such
request shall state the purpose or purposes of the proposed meeting.
Section 4. Notice of Meetings of Stockholders. Not less than ten days'
and not more than ninety days' written or printed notice of every meeting of
stockholders, stating the time and place thereof (and the general nature of the
business proposed to be transacted at any special or extraordinary meeting),
shall be given to each stockholder entitled to vote thereat by leaving the same
with him or at his residence or usual place of business or by mailing it,
postage prepaid, and addressed to him at his address as it appears upon the
books of the Corporation.
No notice of the time, place or purpose of any meeting of stockholders need
be given to any stockholder who attends in person or by proxy or to any
stockholder who, in writing executed and filed with the records of the meeting,
either before or after the holding thereof, waives such notice.
Section 5. Record Dates. The Board of Directors may fix, in advance, a
date, not exceeding ninety days and not less than ten days preceding the date of
any meeting of stockholders, and not exceeding ninety days preceding any
dividend payment date or any date for the allotment of rights, as a record date
for the determination of the stockholders entitled to receive such dividends or
rights, as the case may be; and only stockholders of record on such date shall
be entitled to notice of and to vote at such meeting or to receive such
dividends or rights, as the case may be.
Section 6. Quorum, Adjournment of Meetings. The presence in person or by
proxy of the holders of record of a majority of the shares of the stock of the
Corporation issued and outstanding and entitled to vote thereat, shall
constitute a quorum at all meetings of the stockholders. If at any meeting of
the stockholders there shall be less than a quorum present, the stockholders
present at such meeting may, without further notice, adjourn the same from time
to time until a quorum shall attend, but no business shall be transacted at any
such adjourned meeting except such as might have been lawfully transacted had
the meeting not been adjourned.
Section 7. Voting and Inspectors. At all meetings of stockholders every
stockholder of record entitled to vote thereat shall be entitled to vote at
such meeting either in person or by proxy appointed by instrument in writing
subscribed by such stockholder or his duly authorized attorney. No proxy which
is dated more than three months before the meeting at which it is offered shall
be accepted, unless such proxy shall, on its face, name a longer period for
which it is to remain in force.
All elections shall be had and all questions decided by a majority of the
votes cast at a duly constituted meeting, except as otherwise provided in the
Articles of Incorporation or in these By-Laws or by specific statutory provision
superseding the restrictions and limitations contained in the Articles of
Incorporation or in these By-Laws.
At any election of Directors, the Board of Directors prior thereto may, or,
if they have not so acted, the Chairman of the meeting may, and upon the request
of the holders of ten per cent (10%) of the stock entitled to vote at such
election shall, appoint two inspectors of election who shall first subscribe an
oath or affirmation to execute faithfully the duties of inspectors at such
election with strict impartiality and according to the best of their ability,
and shall after the election make a certificate of the result of the vote taken.
No candidate for the office of Director shall be appointed such Inspector.
The Chairman of the meeting may cause a vote by ballot to be taken upon any
election or matter, and such vote shall be taken upon the request of the holders
of ten per cent (10%) of the stock entitled to vote on such election or matter.
Section 8. Conduct of Stockholders' Meetings. The meetings of the
stockholders shall be presided over by the Chairman of the Board of Directors,
if any, or if he shall not be present, by the President, or if he shall not be
present, by a Vice-President, or if neither the Chairman of the Board of
Directors, the President nor any Vice President is present, by a chairman to be
elected at the meeting. The Secretary of the Corporation, if present, shall act
as Secretary of such meetings, or if he is not present, an Assistant Secretary
shall so act, if neither the Secretary nor an Assistant Secretary is present,
then the meeting shall elect its secretary.
Section 9. Concerning Validity of Proxies, Ballots, Etc. At every meeting
of the stockholders, all proxies shall be received and taken in charge of and
all ballots shall be received and canvassed by the secretary of the meeting, who
shall decide all questions touching the qualification of voters, the validity of
the proxies, and the acceptance or rejection of votes, unless inspectors of
election shall have been appointed as provided in Section 7, in which event such
inspectors of election shall decide all such questions.
ARTICLE II
BOARD OF DIRECTORS
Section 1. Number and Tenure of Office. The business and property of the
Corporation shall be conducted and managed by a Board of Directors consisting of
eleven Directors, which number may be increased or decreased as provided in
Section 2 of this Article. Each director shall hold office until the annual
meeting of stockholders of the Corporation next succeeding his election or until
his successor is duly elected and qualifies. Directors need not be
stockholders.
Section 2. Increase or Decrease in Number of Directors. The Board of
Directors, by the vote of a majority of the entire Board, may increase the
number of Directors to a number not exceeding twenty, and may elect Directors to
fill the vacancies created by any such increase in the number of Directors until
the next annual meeting or until their successors are duly elected and qualify;
the Board of Directors, by the vote of a majority of the entire Board, may
likewise decrease the number of Directors to a number not less than three.
Vacancies occurring other than by reason of any such increase shall be filled as
provided by the Maryland General Corporation Law.
Section 3. Place of Meeting. The Directors may hold their meetings, have
one or more offices, and keep the books of the Corporation outside the State of
Maryland, at any office or offices of the Corporation or at any other place as
they may from time to time by resolution determine, or, in the case of meetings,
as they may from time to time by resolution determine or as shall be specified
or fixed in the respective notices or waivers of notice thereof.
Section 4. Regular Meetings. Regular meetings of the Board of Directors
shall be held at such time and on such notice, if any, as the Directors may from
time to time determine.
The annual meeting of the Board of Directors shall be held as soon as
practicable after the annual meeting of the stockholders for the election of
Directors.
Section 5. Special Meetings. Special meetings of the Board of Directors
may be held from time to time upon call of the Chairman of the Board of
Directors, if any, the President or two or more of the Directors, by oral or
telegraphic or written notice duly served on or sent or mailed to each Director
not less than one day before such meeting. No notice need be given to any
Director who attends in person or to any Director who, in writing executed and
filed with the records of the meeting either before or after the holding
thereof, waives such notice. Such notice or waiver of notice need not state the
purpose or purposes of such meeting.
Section 6. Quorum. One-third of the Directors then in office shall
constitute a quorum for the transaction of business, provided that a quorum
shall in no case be less than two Directors. If at any meeting of the Board
there shall be less than a quorum present, a majority of those present may
adjourn the meeting from time to time until a quorum shall have been obtained.
The act of the majority of the Directors present at any meeting at which there
is a quorum shall be the act of the Directors, except as may be otherwise
specifically provided by statute, by the Articles of Incorporation or by these
By-Laws.
Section 7. Executive Committee. The Board of Directors may, by the
affirmative vote of a majority of the entire Board, elect from the Directors an
Executive Committee to consist of such number of Directors as the Board may from
time to time determine. The Board of Directors by such affirmative vote shall
have power at any time to change the members of such Committee and may fill
vacancies in the Committee by election from the Directors. When the Board of
Directors is not in session, the Executive Committee shall have and may exercise
any or all of the powers of the Board of Directors in the management of the
business and affairs of the Corporation (including the power to authorize the
seal of the Corporation to be affixed to all papers which may require it) except
as provided by law and except the power to increase or decrease the size of, or
fill vacancies on the Board. The Executive Committee may fix its own rules of
procedure, and may meet, when and as provided by such rules or by resolution of
the Board of Directors, but in every case the presence of a majority shall be
necessary to constitute a quorum. In the absence of any member of the Executive
Committee the members thereof present at any meeting, whether or not they
constitute a quorum, may appoint a member of the Board of Directors to act in
the place of such absent member.
Section 8. Other Committees. The Board of Directors, by the affirmative
vote of a majority of the entire Board; may appoint other committees which shall
in each case consist of such number of members (not less than two) and shall
have and may exercise such powers as the Board may determine in the resolution
appointing them. A majority of all members of any such committee may determine
its action, and fix the time and place of its meetings, unless the Board of
Directors shall otherwise provide. The Board of Directors shall have power at
any time to change the members and powers of any such committee, to fill
vacancies, and to discharge any such committee.
Section 9. Informal Action by Directors and Committees. Any action
required or permitted to be taken at any meeting of the Board of Directors or
any committee thereof may be taken without a meeting, if a written consent to
such action is signed by all members of the Board, or of such committee, as the
case may be.
Section 10. Compensation of Directors. Directors shall be entitled to
receive such compensation from the Corporation for their services as may from
time to time be voted by the Board of Directors.
Section 11. Investment Company Act. No person shall be elected as a
Director of this Corporation if as a result thereof the Corporation would be in
violation of Section 10 of the Investment Company Act of 1940; nor shall any
action be taken pursuant to Section 9 of this ARTICLE if such action is required
to be taken under Section 15 of said Act by vote cast in person at a meeting
called for the purpose.
Section 12. Power to Declare Dividends and/or Distributions. The Board of
Directors, from time to time as it may deem advisable, may declare and pay
dividends and/or distributions in shares of the Fund, cash or other property of
the Corporation, as determined by resolution of the Board of Directors out of
any source available for dividends and/or distributions, to the stockholders
according to their respective rights and interests in accordance with the
provisions of the Articles of Incorporation.
ARTICLE III
OFFICERS
Section 1. Executive Officers. The executive officers of the Corporation
shall be chosen by the Board of Directors as soon as may be practicable after
the annual meeting of the stockholders. These may include a Chairman of the
Board of Directors, and shall include a President, one or more Vice Presidents
(the number thereof to be determined by the Board of Directors), a Secretary and
a Treasurer. The Chairman of the Board of Directors, if any, and the President
shall be selected from among the Directors. The Board of Directors may also in
its discretion appoint Assistant Secretaries, Assistant Treasurers, and other
officers, agents and employees, who shall have such authority and perform such
duties as the Board or the Executive Committee may determine. The Board of
Directors may fill any vacancy which may occur in any office. Any two offices,
except those of President and Vice-President, may be held by the same person,
but no officer shall execute, acknowledge or verify any instrument in more than
one capacity, if such instrument is required by law or these By-Laws to be
executed, acknowledged or verified by two or more officers.
Section 2. Term of Office. The term of office of all officers shall be
one year and until their respective successors are chosen and qualify; however,
any officer may be removed from office at any time with or without cause by the
vote of a majority of the entire Board of Directors.
Section 3. Powers and Duties. The officers of the Corporation shall have
such powers and duties as generally pertain to their respective offices, as well
as such powers and duties as may from time to time be conferred by the Board of
Directors or the Executive Committee.
ARTICLE IV
CAPITAL STOCK
Section 1. Certificates of Shares. Each stockholder of the Corporation
shall be entitled to a certificate or certificates for the full shares of the
class of stock of the Corporation owned by them in such form as the Board of
Directors may from time to time prescribe.
Section 2. Transfer of Shares. Shares of the Corporation shall be
transferable on the books of the Corporation by the holder thereof in person or
by his duly authorized attorney or legal representative, upon surrender and
cancellation of certificates, if any, for the same number of shares, duly
endorsed or accompanied by proper instruments of assignment and transfer, with
such proof of the authenticity of the signature as the Corporation or its agents
may reasonably require, in the case of shares not represented by certificates,
the same or similar requirements may be imposed by the Board of Directors.
Section 3. Stock Ledgers. The stock ledgers of the Corporation,
containing the name and address of the stockholders and the number of shares
held by them respectively, shall be kept at the principal offices of the
Corporation or, if the Corporation employs a transfer agent, at the offices of
the transfer agent of the Corporation.
Section 4. Lost, Stolen or Destroyed Certificates. The Board of Directors
may determine the conditions upon which a new certificate of stock of the
Corporation of any class may be issued in place of a certificate which is
alleged to have been lost, stolen or destroyed; and may, in their discretion,
require the owner of such certificate or his legal representative to give High
Income, with sufficient surety to the Corporation and the transfer agent, if
any, to indemnify it and such transfer agent against any and all loss or claims
which may arise by reason of the issue of a new certificate in the place of the
one so lost, stolen or destroyed.
ARTICLE V
CORPORATE SEAL
The Board of Directors shall provide a suitable corporate seal, in such
form and bearing such inscriptions as it may determine.
ARTICLE VI
FISCAL YEAR
The fiscal year of the Corporation shall be fixed by the Board of
Directors.
ARTICLE VII
AMENDMENT OF BY-LAWS
The By-Laws of the Corporation may be altered, amended, added to or
repealed by the stockholders or by majority vote of the entire Board of
Directors; but any such alteration, amendment, addition or repeal of the By-Laws
by action of the Board of Directors may be altered or repealed by the
stockholders.
EX-99.B9-mhssa
SHAREHOLDER SERVICING AGREEMENT
THIS AGREEMENT, made as of the 1ST day of November, 1992, by and between
UNITED MUNICIPAL HIGH INCOME FUND, INC., and Waddell & Reed Services Company
(the "Agent"), as amended and restated as of April 1, 1996,
W I T N E S S E T H :
WHEREAS, The Company wishes, as applicable, to appoint the Agent or to
continue the appointment of the Agent to be its shareholder servicing agent
upon, and subject to, the terms and provisions of this Agreement;
NOW THEREFORE, in consideration of the mutual covenants contained in this
Agreement, the parties agree as follows:
1. Appointment of Agent as Shareholder Servicing Agent for the Company;
Acceptance.
(1) The Company hereby appoints the Agent to act as Shareholder
Servicing Agent for the Company upon, and subject to, the terms and provisions
of this Agreement.
(2) The Agent hereby accepts the appointment as Shareholder Servicing
Agent for the Company and agrees to act as such upon, and subject to, the terms
and provisions of this Agreement.
(3) The Agent may appoint an entity or entities approved by the
Company in writing to perform any portion of Agent's duties hereunder (the
"Subagent").
2. Definitions.
(1) In this Agreement -
(a) The term the "Act" means the Investment Company Act of 1940
as amended from time to time;
(b) The term "account" means the shares of the Company
registered on the books of the Company in the name of a shareholder under a
particular account registration number and includes shares subject to
instructions by the shareholder with respect to periodic redemptions and/or
reinvestment in additional shares of any dividends payable on said shares;
(c) The term "affiliate" of a person shall mean a person
controlling, controlled by, or under common control with that person;
(d) The term "Class" shall mean each separate sub-class of a
class of shares of the Company, as may now or in the future exist;
(e) The term "Fund" shall mean each separate class of shares of
the Company, as may now or in the future exist;
(f) The term "officers' instruction" means an instruction given
on behalf of the Company to the Agent and signed on behalf of the Company by any
one or more persons authorized to do so by the Company's Board of Directors;
(g) The term "prospectus" means the prospectus and Statement of
Additional Information of the applicable Fund or Class from time to time in
effect;
(h) The term "shares" means shares including fractional shares
of capital stock of the Company, whether or not such shares are evidenced by an
outstanding stock certificate issued by the Company;
(i) The term "shareholder" shall mean the owner of record of
shares of the Company;
(j) The term "stock certificate" means a certificate
representing shares in the form then currently in use by the Company.
3. Duties of the Agent.
The Agent shall perform such duties as shall be set forth in this
paragraph 3 and in accordance with the practice stated in Exhibit A of this
Agreement or any amendment thereof, any or all of which duties may be delegated
to or performed by one or more Subagents pursuant to Paragraph (3) above.
(1) Transfers.
Subject to the provisions of this Agreement the Agent hereby
agrees to perform the following functions as transfer agent for the Company:
(a) Recording the ownership, transfer, exchange and cancellation
of ownership of shares of the Company on the books of the Company;
(b) Causing the issuance, transfer, exchange and cancellation of
stock certificates;
(c) Establishing and maintaining records of accounts;
(d) Computing and causing to be prepared and mailed or otherwise
delivered to shareholders payment checks and notices of reinvestment in
additional shares of dividends, stock dividends or stock splits declared by the
Company on shares and of redemption proceeds due by the Company on redemption of
shares;
(e) Furnishing to shareholders such information as may be
reasonably required by the Company, including appropriate income tax
information;
(f) Addressing and mailing to shareholders prospectuses, annual
and semi-annual reports and proxy materials for shareholder meetings prepared by
or on behalf of the Company;
(g) Replacing allegedly lost, stolen or destroyed stock
certificates in accordance with and subject to procedures and conditions agreed
upon and set out in officers' instructions;
(h) Maintaining such books and records relating to transactions
effected by the Agent pursuant to this Agreement as are required by the Act, or
by rules or regulations thereunder, or by any other applicable provisions of
law, to be maintained by the Company or its transfer agent with respect to such
transactions; preserving, or causing to be preserved, any such books and records
for such periods as may be required by any such law, rule or regulation;
furnishing the Company such information as to such transactions and at such time
as may be reasonably required by it to comply with applicable laws and
regulations;
(i) Providing such services and carrying out such
responsibilities on behalf of the Company, or imposed on the Agent as the
Company's transfer agent, not otherwise expressly provided for in this Paragraph
3, as may be required by or be reasonably necessary to comply with any statute,
act, governmental rule, regulation or directive or court order, including,
without limitation, the requirements imposed by the Tax Equity and Fiscal
Responsibility Act of 1982 and the Income and Dividend Tax Compliance Act of
1983 relating to the withholding of tax from distributions to shareholders.
(2) Correspondence.
The Agent agrees to deal with and answer all correspondence from
or on behalf of shareholders relating to its functions under this Agreement.
4. Compensation of the Agent.
The Company agrees to pay the Agent for its services under this
Agreement in accordance with the schedule as then in effect set forth in Exhibit
B of this Agreement or any amendment thereof. In addition, the Company agrees
to reimburse the Agent for the following "out-of-pocket" expenses of the Agent
within five days after receipt of an itemized statement of such expenses, to the
extent that payment of such expenses has not been or is not to be made directly
by the Company: (i) costs of stationery, appropriate forms, envelopes, checks,
postage, printing (except cost of printing prospectuses, annual and semi-annual
reports and proxy materials) and mailing charges, including returned mail and
proxies, incurred by the Agent with respect to materials and communications sent
to shareholders in carrying out its duties to the Company under this Agreement;
(ii) long distance telephone costs incurred by the Agent for telephone
communications and microfilm and storage costs for transfer agency records and
documents; (iii) costs of all ancillary and supporting services and related
expenses (other than insurance premiums) reasonably required by and provided to
the Agent, other than by its employees or employees of an affiliate, with
respect to functions of the Company being performed by it in its capacity as
Agent hereunder, including legal advice and representation in litigation to the
extent that such payments are permitted under Paragraph 7 of this Agreement and
charges to Agent made by any Subagent; (iv) costs for special reports or
information furnished on request pursuant to this Agreement and not specifically
required by the Agent by Paragraph 3 of this Agreement; and (v) reasonable costs
and expenses incurred by the Agent in connection with the duties of the Agent
described in Paragraph (3)(1)(i). In addition, the Company agrees to promptly
pay over to the Agent any fees or payment of charges it may receive from a
shareholder for services furnished to the shareholder by the Agent.
Services and operations incident to the sale and distribution of the
Company's shares, including sales communications, confirmations of investments
(not including reinvestment of dividends) and the clearing or collection of
payments will not be for the account or at the expense of the Company under this
Agreement.
5. Right of Company to Inspect Records, etc.
The Company will have the right under this Agreement to perform on
site inspection of records and accounts and to perform audits directly
pertaining to the Company shareholder accounts serviced by the Agent hereunder
at the Agent's or any Subagent's facilities in accordance with reasonable
procedures at the frequency necessary to assure proper administration of the
Agreement. The Agent will cooperate with the Company's auditors or
representatives of appropriate regulatory agencies and furnish all reasonably
requested records and data.
6. Insurance.
The Agent now has the insurance coverage described in Exhibit C,
attached hereto, and the Agent will not take any action to eliminate or decrease
such coverage during the term of this Agreement without receiving the approval
of the Fund in advance of any change, except the Agent, after giving reasonable
notice to the Company, may eliminate or decrease any coverage if the premiums
for such coverage are substantially increased.
7. Standard of Care; Indemnification.
The Agent will at all times exercise due diligence and good faith in
performing its duties hereunder. The Agent will make every reasonable effort
and take all reasonably available measures to assure the adequacy of its
personnel and facilities as well as the accurate performance of all services to
be performed by it hereunder within, at a minimum, the time requirements of any
applicable statutes, rules or regulations or as set forth in the prospectus.
The Agent shall not be responsible for, and the Company agrees to
indemnify the Agent for any losses, damages or expenses (including reasonable
counsel fees and expenses) (i) resulting from any claim, demand, action or suit
not resulting from the Agent's failure to exercise good faith or due diligence
and arising out of or in connection with the Agent's duties on behalf of the
Company hereunder; (ii) for any delay, error or omission by reason of
circumstances beyond its control, including acts of civil or military authority,
national emergencies, labor difficulties (except with respect to the Agent's
employees), fire, mechanical breakdown beyond its control, flood or catastrophe,
acts of God, insurrection, war, riots, or failure beyond its control of
transportation, communication or power supply; or (iii) for any action taken or
omitted to be taken by the Agent in good faith in reliance on (a) the
authenticity of any instrument or communication reasonably believed by it to be
genuine and to have been properly made and signed or endorsed by an appropriate
person, (b) the accuracy of any records or information provided to it by the
Company, (c) any authorization or instruction contained in any officers'
instruction, or (d) with respect to the functions performed for the Company
listed under Paragraph 3(1) of this Agreement, any advice of counsel approved by
the Company who may be internally employed counsel or outside counsel, in either
case for the Company and/or the Agent.
In order for the rights to indemnification to apply, it is understood
that if in any case the Company may be asked to indemnify or hold the Agent
harmless, the Company shall be advised of all pertinent facts concerning the
situation in question, and it is further understood that the Agent will use
reasonable care to identify and notify the Company promptly concerning any
situation which presents or appears likely to present a claim for
indemnification against the Company. The Company shall have the option to
defend the Agent against any claim which may be the subject of this
indemnification and, in the event that the Company so elects, it will so notify
the Agent and thereupon the Company shall take over complete defense of the
claim and the Agent shall sustain no further legal or other expenses in such
situation for which the Agent shall seek indemnification under this paragraph.
The Agent will in no case confess any claim or make any compromise in any case
in which the Company will be asked to indemnify the Agent except with the
Company's prior written consent.
8. Term of the Agreement; Taking Effect; Amendments.
This Agreement shall become effective at the start of business on the
date hereof and shall continue, unless terminated as hereinafter provided, for a
period of one year and from year to year thereafter, provided that such
continuance shall be specifically approved as provided below.
This Agreement shall go into effect, or may be continued, or may be
amended or a new agreement between the Company and the Agent covering the
substance of this Agreement may be entered into only if the terms of this
Agreement, such continuance, the terms of such amendment or the terms of such
new agreement have been approved by the Board of Directors of the Company,
including the vote of a majority of the directors who are not "interested
persons," as defined in the Act, of either party to this Agreement or of Waddell
& Reed Investment Management Company, cast in person at a meeting called for the
purpose of voting on such approval. Such a vote is hereinafter referred to as a
"disinterested director vote."
Any disinterested director vote shall include a determination that (i)
the Agreement, amendment, new agreement or continuance in question is in the
best interests of the Company and its shareholders; (ii) the services to be
performed under the Agreement, the Agreement as amended, new agreement or
agreement to be continued, are services required for the operation of the
Company; (iii) the Agent can provide services the nature and quality of which
are at least equal to those provided by others offering the same or similar
services; and (iv) the fees for such services are fair and reasonable in the
light of the usual and customary charges made by others for services of the same
nature and quality.
9. Termination.
(1) This Agreement may be terminated by the Agent at any time without
penalty upon giving the Company 120 days' written notice (which notice may be
waived by the Company) and may be terminated by the Company at any time without
penalty upon giving the Agent sixty (60) days' written notice (which notice may
be waived by the Agent), provided that such termination by the Company shall be
directed or approved by the vote of a majority of the Board of Directors of the
Company in office at the time or by the vote of the holders of a majority (as
defined in or under the Act) of the outstanding shares of the Company.
(2) On termination, the Agent will deliver to the Company or its
designee all files, documents and records of the Company used, kept or
maintained by the Agent in the performance of its services hereunder, including
such of the Company's records in machine readable form as may be maintained by
the Agent, as well as such summary and/or control data relating thereto used by
or available to the Agent.
(3) In the event of any termination which involves the appointment of
a new shareholder servicing agent, including the Company's acting as such on its
own behalf, the Company shall have the non-exclusive right to the use of the
data processing programs used by the Agent in connection with the performance of
its duties under this Agreement without charge.
(4) In addition, on such termination or in preparation therefore, at
the request of the Company and at the Company's expense the Agent shall provide
to the extent that its capabilities then permit such documentation, personnel
and equipment as may be reasonably necessary in order for a new agent or the
Company to fully assume and commence to perform the agency functions described
in this Agreement with a minimum disruption to the Company's activities.
10. Construction; Governing Law.
The headings used in this Agreement are for convenience only and shall
not be deemed to constitute a part hereof. Whenever the context requires, words
denoting singular shall be read to include the plural. This Agreement and the
rights and obligations of the parties hereunder, shall be construed and
interpreted in accordance with the laws of the State of Kansas, except to the
extent that the laws of the State of Maryland apply with respect to share
transactions.
11. Representations and Warranties of Agent.
Agent represents and warrants that it is a corporation duly organized
and existing and in good standing under the laws of the State of Missouri, that
it is duly qualified to carry on its business in the State of Kansas and
wherever its duties require, that it has the power and authority under laws and
by its Articles of Incorporation and Bylaws to enter into this Shareholder
Servicing Agreement and to perform the services contemplated by this Agreement.
12. Entire Agreement.
This Agreement and the Exhibits annexed hereto constitutes the entire
and complete agreement between the parties hereto relating to the subject matter
hereof, supersedes and merges all prior discussions between the parties hereto,
and may not be modified or amended orally.
IN WITNESS WHEREOF, the parties have hereto caused this Agreement to
be duly executed on the day and year first above written.
UNITED MUNICIPAL HIGH INCOME FUND, INC.
By:_________________________________
Sharon K. Pappas, Vice President
ATTEST:
By:____________________________
Sheryl Strauss, Assistant Secretary
WADDELL & REED SERVICES COMPANY
By:__________________________________
Robert L. Hechler, President
ATTEST:
By:___________________________
Sharon K. Pappas, Secretary
<PAGE>
EXHIBIT A
A. DUTIES IN SHARE TRANSFERS AND REGISTRATION
1. The Agent in carrying out its duties shall follow general commercial
practices and the Rules of the Stock Transfer Association, Inc. except as they
may conflict or be inconsistent with the specific provisions of the Company's
Articles of Incorporation and Bylaws, prospectus, applicable Federal and state
laws and regulations and this Agreement.
2. The Agent shall not require that the signature of the appropriate
person be guaranteed, witnessed or verified in order to effect a redemption,
transfer, exchange or change of address except as may from time to time be
directed by the Company as set forth in an officers' instruction. In the event
a signature guarantee is required by the Company, the Agent shall not inquire as
to the genuineness of the guarantee.
3. The Agent shall not replace a lost, stolen or misplaced stock
certificate without requiring and being furnished with an open penalty surety
bond protecting the Company and the Agent against loss.
B. The practices, procedures and requirements specified in A above may be
modified, altered, varied or supplemented as from time to time may be mutually
agreed upon by the Company and the Agent and evidenced on behalf of the Company
by an officers' instruction. Any such change shall not be deemed to be an
amendment to the Agreement within the meaning of Paragraph 8 of the Agreement.
<PAGE>
EXHIBIT B
COMPENSATION
Class A Shares
An amount payable on the first day of each month of $1.3125 for each account of
the Company which was in existence during any portion of the immediately
preceding month and, in addition, to pay to the Agent the sum of $0.30 for each
account for which, during such month, a record date was established for payment
of a dividend, in cash or otherwise (which term includes a distribution),
irrespective of whether such dividend was payable in that month or later or was
payable directly or was to be reinvested.
Class Y Shares
An amount payable on the first day of each month equal to 1/12 of .15 of 1% of
the average daily net assets of the Class for the preceding month.
<PAGE>
EXHIBIT C
Bond or
Name of Bond Policy No. Insurer
Investment Company 87015196B ICI Mutual
Blanket Bond Form Insurance
Company
Fidelity $18,500,000
Audit Expense 500,000
On Premises 18,500,000
In Transit 18,500,000
Forgery or Alteration 18,500,000
Securities 18,500,000
Counterfeit Currency 18,500,000
Uncollectible Items of Deposit 25,000
Total Limit 18,500,000
Directors and Officers/ 87015196D ICI Mutual
Errors and Omissions Liability Insurance
Insurance Form Company
Total Limit $ 5,000,000
Blanket Lost Instrument Bond 30S100639551 Aetna Life
& Casualty
Blanket Undertaking Lost Instrument
and Waiver of Probate 42SUN339806 Hartford
Casualty
Insurance
EX-99.B9-mhlou
DATE
ADDRESS
Dear:
The purpose of this Letter of Understanding is to confirm our mutual
understanding regarding the establishment of an account in the United Funds on
behalf of [NAME OF INSTITUTION OF PLAN] and our agreement as to subsequent
administrative procedures.
It is our understanding that the Plan wishes to establish an account in the
United Funds for the purpose of utilizing [FUND NAME] as a participant-directed
investment alternative. This Letter of Understanding shall serve as a
substitute application to open the account.
We will establish the mutual fund account upon receipt of the initial share
purchase with the following registration:
The Federal Tax Identification Number to be shown on the account is
.
We will set up the account to have dividend and capital gains (securities
profits) distributions reinvested rather than paid in cash. Exhibit A reflects
the frequency of anticipated distributions.
[The next two paragraphs are included only for employee benefit plan/accounts:]
By approving and signing the Letter of Understanding, you certify that the [PLAN
NAME] is a [401(k) / 403(b) / 457] plan having 100 or more eligible employees,
thereby qualifying the plan to establish an omnibus account, under the terms of
the [FUND NAME] Prospectus, for making purchases of Class Y shares, which are
priced at net asset value (no sales load).
The undersigned trustee on behalf of the Plan also certifies that it has the
authority to open such an account on behalf of [PLAN NAME].
It is our understanding that funds will be wire transferred from your bank for
the purpose of purchasing [FUND NAME] shares. To insure timely investment, any
wire must be received by United Missouri Bank by 2:00 p.m. (Central) on the day
of the wire. The following wire order instructions should be used:
United Missouri Bank, N.A.
ABA #101000695; United K.C.;
For Waddell & Reed Account #000-797-8
FBO (Registration of
Account)
Account No. (To be provided for each
account)
Notify Control Depart. 236-1978
When funds are to be wired from the account to your bank in accordance with your
request, the wire must be received by your bank by 1:00 p.m. Eastern on the day
of the wire. The following wire order instructions are to be used:
We offer to provide an enhanced level of service to ...your institution / the
Plan... and its authorized representatives. Contained in Exhibits B and C
hereto is information provided to allow us to provide this service. We cannot
overemphasize that our ability to serve the institutional client is dependent
upon the Plan's representatives interfacing with the members of our
institutional support staff as identified in Exhibit C.
If any of the above does not conform to your understanding and/or instructions,
or if you have questions or need additional information, please do not hesitate
to call me at the number shown on Exhibit C. We are very much looking forward
to our relationship with [NAME OF INSTITUTION OR NAMES OF PLAN AND TRUSTEE] and
are determined to provide the best possible service.
Sincerely,
SALES REP NAME
SALES REP TITLE
ACKNOWLEDGED AND APPROVED
[If signed by a plan trustee, add next line:]
AS TRUSTEE FOR
By:
Title:
Date:
The above signatory certifies that the following
persons are authorized to instruct transactions in the
account (type or print):
For Waddell & Reed use only:
Accepted:
<PAGE>
EXHIBIT A
FREQUENCY OF DIVIDEND AND CAPITAL GAIN DISTRIBUTIONS
[FUND NAME] ordinarily distributes investment income by way of a dividend once
per [NORMAL DIVIDEND FREQUENCY].
[FUND NAME] generally distributes capital gains (securities profits), if capital
gains are available for distribution, once each year in December, on the same
date as the December dividend distribution.
For the Fund and in the case of reinvested dividend and capital gain
distributions, the record date and the reinvestment date are the same. The per
share distribution amounts are applied to the share balance in the account after
the posting of that day's activity.
For the remainder of [YEAR], the ordinary dividend distribution dates would be
[DATES].
<PAGE>
EXHIBIT B
ADDITIONAL SERVICES WE WILL PROVIDE
The following services can be provided by us on an ongoing basis:
1. Coordinating purchases by notifying Waddell & Reed Services Company of each
incoming wire transfer and verifying the posting of the purchase(s) the
following business morning.
2. Confirming the purchase to you including: the date and dollar amount of the
investment, the purchase price and number of shares purchased, and the new Fund
account share balance.
3. Notifying you of dividend and/or capital gains distributions and
reinvestments including: the per share and dollar amount of distributions, the
date of reinvestment, the reinvestment price and number of shares purchased, and
the new Fund account share balance.
4. Processing redemptions based on your request by notifying Waddell & Reed
Services Company of the redemption, instructing them as to the outgoing wire
transfer, and verifying the posting of the redemption the following business
morning.
5. Confirming the redemption to you including: the date and dollar amount of
the redemption, the selling price and number of shares redeemed, and the new
Fund account share balance.
6. At the end of each month following the initial investment, we will provide
a report, if desired, which reflects all transactions in the account during the
previous month, and the share balance, net asset value per share and total
market value of the account.
Each of the confirmations, notifications and reports identified above will be
made available at your request, by telephone or facsimile transmission, as
appropriate to whomever you request.
<PAGE>
EXHIBIT C
LIST OF WADDELL & REED CONTACTS
During the period of account setup and initial wire transfer, your contacts at
Waddell & Reed are the following:
PRIMARY SECONDARY
Cynthia LaGree James McCroy
913-236-1722 913-236-1744
On an ongoing basis once the account is operational, your contacts are as
follows:
PRIMARY SECONDARY
Julie Herrick Dana Arth
913-236-1854 913-236-1853
BACKUP
Cynthia LaGree
913-236-1722
Our fax numbers are:
Primary: 913-236-1801
Secondary: 913-236-1888
EX-99.B11-MHCONSNT
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 18 to the Registration
Statement on Form N-1A (the "Registration Statement") of our report dated
November 8, 1996, relating to the financial statements and the financial
highlights of United Municipal High Income Fund, Inc., which appears in such
Statement of Additional Information, and to the incorporation by reference of
our report into the Class A Shares Prospectus and the Class Y Shares Prospectus
which constitute part of this Registration Statement. We also consent to the
reference to us under the heading "Financial Highlights" in the Class A Shares
Prospectus.
Price Waterhouse LLP
Kansas City, Missouri
December 27, 1996
<TABLE>
1FDCSY2 PAGE 19
RUN DATE: 12/27/96, TIME: 14:08:50
0 SEC ADVERTISING YIELD SECURITY INCOME DETAIL
FOR THE PERIOD 08/31/96 THROUGH 09/30/96
0 UNITED MUNICIPAL HIGH INCOME FUND, INC. 000000000000062
0SECURITY SHORT NAME METHOD INCOME ANNUAL RATE COMMENT CALCULATION ERROR
--------- ------------------------- -------- ------------- --------------- -------------------- --------------------
<S> <S> <S> <C> <C> <S>
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017292RK1TEALLEGHENY CNTY PA DEV RE C.YTM-CALL 16,714.95 6.29457030 STANDARD YTM
018347DX9 ALLENTOWN PA HOSP SACRED YTM 12,151.41 6.61765980 OID/STANDARD
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01852LAB6 ALLIANCE AIRPORT TX AMER YTM 25,431.44 6.04598330 STANDARD YTM
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033240AH5 ANCHORAGE PKG AUTH REV RE..YTM-CALL 8,232.32 57 6.15610590 STANDARD YTM
05635LAL9 BACHELOR GULCH CO MET DST..YTM 0.00 33 0.00000000 TAX EXEMPT OID
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078206AL3 BELLA VISTA CA WATER DIST..YTM-CALL 8,445.73 6.02339310 STANDARD YTM
088630AB4 BI-STATE DEV AGENCY MO-IL..YTM-CALL 16,299.42 78 5.80939310 STANDARD YTM
091781AR5 BIXBY OKLAHOMA PUB WKS YTM-CALL 15,769.75 6.36099200 STANDARD YTM
10202EAL8 BOURBONNAIS IL SEWERAGE 1 YTM-CALL 6,324.37 6.39907280 STANDARD YTM PAGE 13
109159AQ6 BRIGHAM CITY UT SPEC ASSE YTM-CALL 12,736.00 8.58651560 STANDARD YTM
11212MAP7 BROKEN ARROW OK PUB FAC SEYTM-CALLIS 12,151.07 UR 6.92241590 ILSTANDARD YTM
131168AB2 CALLAWAY CNTY MO IDA AP G YTM-CALL 5,883.46 7.02855250 STANDARD YTM PAGE 14
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132814AT1 CAMDEN COUNTY NJ RESCO SESEYTM IS 31,933.20 UR 7.50000060 ILTAX EXEMPT OID
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152879BE1 CENTRAL CITY CO YTM-CALL 7,064.84 4.80191660 STANDARD YTM PAGE 16
152879BU5 CENTRAL CITY CO G/O WATER YTM 12,213.08 6.65646890 OID/STANDARD
152888AU7 CENTRAL CITY CO WATER REVSEYTM-CALLIS 2,480.71 UR 4.86387360 ILSTANDARD YTM
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180519AA8 CLARION PA-BEVERLY ENTERP YTM-CALL 5,699.75 7.26122680 STANDARD YTM PAGE 18
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184840BQ8 CLEARFIELD PA HOSP AUTH SEYTM IS 0.00 UR 0.00000000 ILTAX EXEMPT OID
188406AS1 CLINTON OK PUB WRKS REV BFOYTM RI 13,637.36 HR 6.34069880 TAX EXEMPT OID
196612BS3TECOLORADO SPRINGS CO AIRPOC.YTM-CALL 12,548.22 6.35493450 STANDARD YTM
207902FU6 CT DEV AUTH CHURCH HOMES YTM-CALL 17,139.53 7.34051960 STANDARD YTM
207902HQ3 CT DEV AUTH-AVERY NURSING YTM-CALL 10,047.04 7.32746470 STANDARD YTM
222734AH8 COURTLAND AL IDB SW CHAMP YTM 27,218.41 6.51877670 OID/STANDARD
227677CA7 CROSSVILLE TN HLTH & ED S..YTM-CALL 11,326.00 79 6.39590320 STANDARD YTM
233905DN5 DADE CNTY FL MI CEREBRAL ..YTM-CALL 13,586.60 03 7.76917100 STANDARD YTM
235035AA0 DALLAS-FT WORTH TX AMER A..YTM-CALL 1 11,246.10 99 6.08078200 STANDARD YTM
235035AD4 DFW TX INTL ARPT DELTA ..YTM-CALL 7,397.04 00 6.08695310 STANDARD YTM
245913BF4 DELAWARE COUNTY PA RIDDLE..YTM-CALL 42,461.61 7.43984160 STANDARD YTM
245913CL0 DEL CNTY PA REV RIDDLE VG..YTM-CALL 26,564.25 90 7.19328830 STANDARD YTM
249181LM8 DENVER CITY ARPT YTM 18,892.89 6.74164250 STANDARD YTM
249191ES2 DENVER CO REV BONDS SER'9 YTM 5,344.45 7.67401180 STANDARD YTM PAGE 19
249191ET0 DENVER CO REV SER '94 YTM 16,449.86 8.05564330 STANDARD YTM
254761AC3 DISTRICT COLUMBI CTFS PARSEYTM IS 18,505.63 UR 7.24543610 ILSTANDARD YTM
1FDCSY2 PAGE 20
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0 SEC ADVERTISING YIELD SECURITY INCOME DETAIL
FOR THE PERIOD 08/31/96 THROUGH 09/30/96
0 UNITED MUNICIPAL HIGH INCOME FUND, INC. 000000000000062
0SECURITY SHORT NAME METHOD INCOME ANNUAL RATE COMMENT CALCULATION ERROR
--------- ------------------------- -------- ------------- --------------- -------------------- --------------------
254839GP2 DC NATIONAL PUBLIC RADIO FOYTM-CALLRI 12,631.42 HR 7.17616100 STANDARD YTM
271613BR1 EAST CHICAGO IN INLAND ST YTM 17,337.56 6.79870940 OID/STANDARD
276318AB8 EASTERN CONN RES RECOVERY YTM 9,388.79 5.67914300 TAX EXEMPT OID
298545AN4 EUREKA IL G/O WATER REV ..YTM 5,276.29 46 6.25000020 TAX EXEMPT OID
312670AK8 FAYETTEVILLE AR PUB FAC B..YTM-CALL 9,764.62 57 6.63841850 STANDARD YTM
345105BS8 FOOTHILL E. TRNS CA TOLL ..YTM 18,277.39 33 2.91284360 OID/STANDARD
349131AY8 FT WALTON BEACH FL SER 19..YTM-CALL 11,680.67 00 9.92545310 STANDARD YTM
36232JK76 GTE CORP MLP..ACTUAL 9,801.00 5.40000000
370334MN1 GENERAL MILLS, INC ..ACTUAL 2,753.83 78 0.00000000
375242CG7 GILA CNTY AZ SCH DIST #41 YTM 13,818.34 6.63520240 OID/STANDARD
400648BK6 GUAM AIRPORT SERIES B YTM 16,740.33 6.32816310 STANDARD YTM PAGE 13
403455CD8 GUTHRIE PUB WKS UT SE A YTM 7,933.24 6.50629430 STANDARD YTM
40727JBN5 HAMILTON COUNTY OH HEALTHSEYTM IS 11,524.34 UR 6.66178260 ILSTANDARD YTM
410632AA1 IDA OF HANNIBAL MO S-1992 YTM-CALL 15,318.01 6.50122840 STANDARD YTM PAGE 14
411131AD7 HANOVER PARK IL WINDSOR P YTM-CALL 14,377.78 7.91062830 STANDARD YTM
428346AY6 HI DESERT MEM HOSP SER A SEYTM IS 20,508.93 UR 7.55010230 ILSTANDARD YTM
431794AR7 HILLSBORO IL G/O BONDS 19 YTM-CALL 15,385.10 6.30612530 STANDARD YTM PAGE 15
434329AD0 HODGKINS ILL TAX REV SER YTM-CALL 11,284.56 7.32451290 STANDARD YTM
43485EAQ6 HOLDENVILLE OK CORR FAC SEYTM IS 4,178.19 UR 6.56057370 ILSTANDARD YTM
446216BG7 HUNTINGTON BEACH CA YTM 17,691.79 7.10251940 OID/STANDARD PAGE 16
451295KE8 ID HLTH FAC IHC HOSP 92 ACTUAL 13,754.65 6.65000000
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454913AA2 IN ST DFA PCR FOYTM-CALLRI 14,382.77 HR 6.53589420 STANDARD YTM
455050EV2TEIN STATE HOUSING FINANCE C.YTM 3,487.72 8.87050570 OID/STANDARD
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485426US7 KS DEV FIN COMMUNITY LIVI..YTM-CALL 19,030.36 03 7.63603090 STANDARD YTM
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495806AL5 KINGS CNTY CA WASTE MGMT ..YTM 6,033.40 00 6.54438280 STANDARD YTM
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1FDCSY2 PAGE 21
RUN DATE: 12/27/96, TIME: 14:08:50
0 SEC ADVERTISING YIELD SECURITY INCOME DETAIL
FOR THE PERIOD 08/31/96 THROUGH 09/30/96
0 UNITED MUNICIPAL HIGH INCOME FUND, INC. 000000000000062
0SECURITY SHORT NAME METHOD INCOME ANNUAL RATE COMMENT CALCULATION ERROR
--------- ------------------------- -------- ------------- --------------- -------------------- --------------------
543613AH6 LORAIN OH KENDAL @ OBERLIFOYTM-CALLRI 6,456.62 HR 7.05435180 STANDARD YTM
54877EAA4 LOWNDES CTY MS PCR WEYERH..ACTUAL 13,754.64 57 6.70000000
550722AE2 LUZERNE COUNTY PA GAS & W..YTM-CALL 11,868.00 33 6.50899850 STANDARD YTM
550722AF9 LUZERNE CNTY PA GAS & WTR..YTM-CALL 5,874.70 00 6.56663080 STANDARD YTM
560590AH4 MAINE VET'S HM REV SER 95..YTM 18,817.43 7.80058540 TAX EXEMPT OID
572067AT3 MARSHALL CNTY AL HLTH CAR..YTM 6,003.58 78 6.91168460 STANDARD YTM
574205BU3 MD STATE EDC ROCK GAP A YTM 23,352.23 8.29549620 STANDARD YTM
575851DM9 MA ST HEALTH & EDL NE DEA YTM 20,393.86 6.48168890 STANDARD YTM PAGE 13
575912AW0 MA STATE IND FIN AGENCY S YTM-CALL 31,524.76 6.53658170 STANDARD YTM
575914XJ0 MA IFA BEAVER CNTY A P/P SEYTM IS 10,671.83 UR 7.88017360 ILSTANDARD YTM
575914ZU3 MA IFA REEDS LANDING YTM-CALL 52,924.02 7.55875100 STANDARD YTM PAGE 14
5759144Z6 MA IFA GLENMEADOW 96 C YTM 8,907.32 8.65241410 TAX EXEMPT OID
5759145A0 MA IFA GLENMEADOW 96 C SEYTM IS 15,951.54 UR 8.75273420 ILTAX EXEMPT OID
579766AA4 MCCORMICK CNTY SC NURSING YTM-CALL 11,779.81 9.37583820 STANDARD YTM PAGE 15
581429BG1 MCKEESPORT HOSPITAL AUTH YTM 13,850.00 6.57555390 OID/STANDARD
582361AA9 MCMINN CTY TN IDB BOWATERSEYTM-CALLIS 11,448.89 UR 6.21117970 ILSTANDARD YTM
592065TS5 MET NASHVILLE TN RIVER RE YTM 12,260.77 9.35875910 STANDARD YTM PAGE 16
594692CM5 MI STRATEGIC FD KNOLLWOOD YTM 11,503.43 10.14564010 TAX EXEMPT OID
594692XT7 MI-MERCY SERVICES FOR AGISEYTM-CALLIS 4,580.86 UR 5.87258940 ILSTANDARD YTM
603919PH8 MINNEAPOLIS DEV SERIES 19 YTM 8,049.16 7.09228160 STANDARD YTM PAGE 17
60635EAC0 MO TRI-COUNTY WTR/SWR YTM 3,885.18 6.76059280 STANDARD YTM PAGE 18
60635EAF3 MO TRI-COUNTY WTR/SWR YTM-CALL 28,537.25 6.89568950 STANDARD YTM
624506CN9 MOUNTAIN VILLAGE METRO DISEYTM-CALLIS 8,458.01 UR 6.27723470 ILSTANDARD YTM
628599AA0 MYRTLE CRK OR BDG SER 96AFOYTM RI 20,632.58 HR 8.21200550 OID/STANDARD
644618SK7TENH HIGHER ED & HLTH HOSP C.YTM-CALL 16,907.18 6.16774000 STANDARD YTM
644618US7 NH HIGHER ED & HLTH FAC A YTM-CALL 10,250.97 7.57551020 STANDARD YTM
644618VX5 NH HIGHER ED CATHOLIC CHA YTM-CALL 10,894.80 7.03990700 STANDARD YTM
644618WF3 NH HIGHER ED ST JOSEPH HO YTM-CALL 5,865.89 6.51256000 STANDARD YTM
644618ZD5 NH HIGHER ED RVRWOODS @ E..YTM-CALL 13,981.42 79 7.69040160 STANDARD YTM
644618Z94 NH HIGH ED RIVERMEAD @ PE..YTM 29,390.05 03 7.94808260 STANDARD YTM
644688EV1 NH IDA PCR PS CO OF NH SE..YTM 1 13,079.54 99 7.49227750 STANDARD YTM
644688EX7 NH IDA PCR PS CO OF NH SE..YTM 13,079.54 00 7.49227750 STANDARD YTM
645776NC5 NJ ECON DEV AUTH THE EVER..YTM-CALL 13,692.22 7.03793300 STANDARD YTM
645776NL5 NJ ECON DEV FRANCISCAN OA..YTM-CALL 23,722.13 90 7.30980620 STANDARD YTM
645905TU4 NJ ECO 1ST FELLO PJ-A YTM 19,448.97 8.40913620 STANDARD YTM
645905XW5 NJ ECON DAR WINCH GARD-A YTM-CALL 22,461.07 8.51922770 STANDARD YTM PAGE 19
645905YB0 NJ EDA ARBOR GLEN SER A YTM 22,286.51 8.64359690 OID/STANDARD
647111CB7 NM ED ASSIST SER IIC SEYTM IS 15,256.60 UR 5.99513180 ILTAX EXEMPT OID
64971CCP7 NYC IDA YMCA OF GREATER N YTM-CALL 6,069.16 6.72576040 STANDARD YTM PAGE 20
676017AF3 ODESSA TX HOUSING AUTH 93 YTM 6,754.49 6.50051160 TAX EXEMPT OID
678693BM3 OK CNTY OK CHOCTAW NURSNGSEYTM IS 0.00 UR 0.00000000 ILOID/STANDARD OID PRICE CALC ERROR
678693BN1 OK CNTY OK WESTLAKE NURS YTM 3,579.22 9.66535290 STANDARD YTM PAGE 21
678693CH3 OK CNTY OK CHOCTAW NURSNG YTM 0.00 0.00000000 OID/STANDARD OID PRICE CALC ERROR
678693CJ9 OK CNTY OK WESTLAKE NURS SEYTM IS 7,722.43 UR 9.88619120 ILSTANDARD YTM
1FDCSY2 PAGE 22
RUN DATE: 12/27/96, TIME: 14:08:50
0 SEC ADVERTISING YIELD SECURITY INCOME DETAIL
FOR THE PERIOD 08/31/96 THROUGH 09/30/96
0 UNITED MUNICIPAL HIGH INCOME FUND, INC. 000000000000062
0SECURITY SHORT NAME METHOD INCOME ANNUAL RATE COMMENT CALCULATION ERROR
--------- ------------------------- -------- ------------- --------------- -------------------- --------------------
679068AQ9 OK ORDNANCE WORKS AP GREEFOYTM-CALLRI 10,477.41 HR 7.03927260 STANDARD YTM
689736BQ8 OTTUMWA IA HOSPITAL REV ..YTM 8,026.74 6.16822160 TAX EXEMPT OID
692543AD3 OZARK AL US HLTH & HSG ..YTM-CALL 7,997.30 78 8.76503230 STANDARD YTM
704190AU1 PAWTUCKET RI PUB BLD AUTH YTM 4,594.30 6.05004040 STANDARD YTM
704190AV9 PAWTUCKET RI PBA SER 91 YTM 4,968.99 6.11887120 STANDARD YTM PAGE 13
708686AA8 PA ECON DEV MACMILLAN YTM 12,630.15 6.69511510 STANDARD YTM
714562AA3 COUNTY OF PERRY KY TJ INTSEYTM IS 5,923.79 UR 6.77755070 ILSTANDARD YTM
724386BE6 PITKIN CNTY CO CNTY ADM B YTM-CALL 8,497.92 6.10195120 STANDARD YTM PAGE 14
73358EAA2 PORT AUTHORITY OF NY & NJ YTM-CALL 11,668.95 6.23530530 STANDARD YTM
734786AP1 PORT OF NEW ORLEANS CONT SEYTM-CALLIS 12,397.25 UR 7.02649730 ILSTANDARD YTM
73971EAH4 PRAIRIE VILLAGE KS CLARID YTM-CALL 6,747.91 7.33303480 STANDARD YTM PAGE 15
73971EAJ0 PRAIRIE VILLAGE KS CLARID YTM-CALL 6,812.06 7.65608500 STANDARD YTM
741756AN0 PRINCE WILLIAM VA WESTMINSEYTM-CALLIS 19,214.14 UR 8.33377220 ILSTANDARD YTM
743950BV8 PROVIDENCE RI TAX INCR D YTM-CALL 11,282.14 6.38605120 STANDARD YTM PAGE 16
762241U39 RI HLTH & ED SOUTH COUNTY YTM-CALL 5,776.93 6.39631550 STANDARD YTM
787266AS4 ST ANTHONY MN HSG AUTUMN SEYTM IS 8,684.36 UR 6.71974780 ILSTANDARD YTM
78764YAA5 ST CHAS CNTY MO PWSD #2 YTM 13,969.71 7.85317260 STANDARD YTM PAGE 17
788050AH5 ST CHS LA P&L SER PCR YTM-CALL 15,606.90 6.37300630 STANDARD YTM PAGE 18
788070BV1 ST CHAS LA PCR UNION CARB YTM-CALL 11,402.06 6.12949270 STANDARD YTM
791305KE4 ST LOUIS MO IDA KIEL CENTSEYTM-CALLIS 9,100.31 UR 6.63850970 ILSTANDARD YTM
791687AA4 ST LOUIS MO CONV & SPORT FOYTM RI 4,496.35 HR 6.50359620 STANDARD YTM
791687AB2TECITY OF ST LOUIS 91C C.YTM 9,749.41 7.04143660 STANDARD YTM
792906AA7 ST PAUL MN HSG & REDEV NR YTM-CALL 3,666.33 4.31578820 STANDARD YTM
798111AC4 SAN JOAQUIN HILLS CA TRAN YTM 10,349.20 6.13986260 OID/STANDARD
798111AN0 SAN JOAQUIN HILLS CA TRAN YTM 2,901.05 1.76221980 OID/STANDARD
80046PAF9 SANFORD FL ARPT IDR PJ-A ..YTM 26,653.08 79 7.81814520 OID/STANDARD
802078BS3 SANTA FE NM INDL REV BOND..YTM 21,202.04 03 6.96777750 STANDARD YTM
803111MN0 SARA LEE CORP ..ACTUAL 1 6,384.04 99 0.00000000
80329LBH1 SARASOTA FL HFA JEWISH HG..YTM 10,805.41 00 7.29964090 OID/STANDARD
818404AC9 SEWARD AK REV AK SEALIFE ..YTM 13,110.91 7.60094380 OID/STANDARD
83712EAG9 SC HSG UNITED DOMINION-PL..YTM-CALL 12,818.83 90 6.80883940 STANDARD YTM
8375592L6 SD HEALTH & ED WESTHILLS YTM 12,195.44 7.40312160 TAX EXEMPT OID
840626AN5 SOUTH WAYNE CNTY PA W&S YTM 12,876.59 8.04749670 STANDARD YTM PAGE 19
851001CZ8 SPRINGFIELD MO IDA/IDR HL YTM 10,022.19 9.91165280 STANDARD YTM
870522AB5 SWEETWATER CNTY WYO SOLIDSEYTM IS 14,315.32 UR 6.55586100 ILSTANDARD YTM
890099AL8 TOMPKINS COUNTY NY IDA YTM 6,706.33 7.81798230 STANDARD YTM PAGE 20
895402FR1 TRI CITY HOSP AUTH GA HOS YTM 5,509.23 6.44925740 TAX EXEMPT OID
911596MN1 U S BANCORP SEACTUAL IS 2,928.80 UR 0.00000000 IL
915627AL7 UPPER CUMBERLD TN GAS UTL YTM 0.00 0.00000000 STANDARD YTM PAGE 21
916738AA5 UPSHUR CO. W VA SLD WST T YTM 8,813.02 6.76097700 STANDARD YTM
92420JAM9 VT IDA WAKE ROBIN SER A SEYTM-CALLIS 30,309.00 UR 7.45538740 ILSTANDARD YTM
92420JAP2 VT IDA WARE ROBIN CORP YTM-CALL 16,970.33 7.45538740 STANDARD YTM PAGE 22
927676CF1 VIRGIN ISLAND PUB FINANCE YTM-CALL 8,094.47 6.24011880 STANDARD YTM
968422BT1 WILKINS AREA PA NON-REF SEYTM IS 4,392.28 UR 8.81562600 ILSTANDARD YTM
1FDCSY2 PAGE 23
RUN DATE: 12/27/96, TIME: 14:08:50
0 SEC ADVERTISING YIELD SECURITY INCOME DETAIL
FOR THE PERIOD 08/31/96 THROUGH 09/30/96
0 UNITED MUNICIPAL HIGH INCOME FUND, INC. 000000000000062
0SECURITY SHORT NAME METHOD INCOME ANNUAL RATE COMMENT CALCULATION ERROR
--------- ------------------------- -------- ------------- --------------- -------------------- --------------------
97710AW75 WI ST HLTH & ED FAR N BERFOYTM RI 20,183.01 HR 8.03225840 OID/STANDARD
97710AW91 WI HEFA HESS MEM SER 95 YTM 22,596.32 7.75070290 TAX EXEMPT OID PAGE 13
979139AL6 WOODBURY MN GR REV GOLF YTM 8,571.59 6.77911530 OID/STANDARD
1FDCSY2 PAGE 24
RUN DATE: 12/27/96, TIME: 14:08:50
0 SEC ADVERTISING YIELD SECURITY INCOME DETAIL
FOR THE PERIOD 08/31/96 THROUGH 09/30/96
0 UNITED MUNICIPAL HIGH INCOME FUND, INC. 000000000000062
0 S U M M A R Y D A T A CLASS 01
0 TOTAL INCOME.................. 2,310,694.17
0 TOTAL EXPENSES................ 267,456.04-
0 AVERAGE SHARES................ 75,008,074.8468
0 MAXIMUM OFFERING PRICE........ 5.550000
0 EXPONENT USED IN FORMULA...... 6
0 SEC ADVERTISED YIELD.......... 5.962524
0
</TABLE>
UNITED MUNICIPAL HIGH INCOME FUND, INC.
Yield for Advertising
For the 30 days ended September 30, 1996
Tax-exempt income $2,288,827
Taxable Income $21,868
Gross income $2,310,694
Yield 5.96%
Ratio of tax-exempt income to gross income 99.0536%
Portion of yield that is tax-exempt 5.9061%
Portion of yield that is taxable 0.0564%
Tax-equivalent yield for 15% marginal tax bracket 7.0048%
Tax-equivalent yield for 28% marginal tax bracket 8.2593%
Tax-equivalent yield for 31% marginal tax bracket 8.6160%
Tax-equivalent yield for 36% marginal tax bracket 9.2847%
Tax-equivalent yield for 39.6% marginal tax bracket 9.8347%
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE ANNUAL REPORT TO
SHAREHOLDERS DATED SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000778807
<NAME> UNITED MUNICIPAL HIGH INCOME FUND, INC.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
<INVESTMENTS-AT-COST> 375,141,448
<INVESTMENTS-AT-VALUE> 397,142,885
<RECEIVABLES> 8,960,911
<ASSETS-OTHER> 11,213
<OTHER-ITEMS-ASSETS> 157,206
<TOTAL-ASSETS> 406,272,215
<PAYABLE-FOR-SECURITIES> 4,515,690
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,932,832
<TOTAL-LIABILITIES> 6,448,522
<SENIOR-EQUITY> 75,252,656
<PAID-IN-CAPITAL-COMMON> 308,690,937
<SHARES-COMMON-STOCK> 75,252,656
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (492,515)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 16,372,615
<NET-ASSETS> 399,823,693
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 28,206,563
<OTHER-INCOME> 0
<EXPENSES-NET> (3,167,044)
<NET-INVESTMENT-INCOME> 25,039,519
<REALIZED-GAINS-CURRENT> 2,528,353
<APPREC-INCREASE-CURRENT> 772,319
<NET-CHANGE-FROM-OPS> 28,340,191
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (25,039,519)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 7,034,526
<NUMBER-OF-SHARES-REDEEMED> (8,297,041)
<SHARES-REINVESTED> 3,840,968
<NET-CHANGE-IN-ASSETS> 17,018,764
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,985,305
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3,167,044
<AVERAGE-NET-ASSETS> 390,732,972
<PER-SHARE-NAV-BEGIN> 5.27
<PER-SHARE-NII> .34
<PER-SHARE-GAIN-APPREC> .04
<PER-SHARE-DIVIDEND> (.34)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 5.31
<EXPENSE-RATIO> 0.81
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
December 27, 1996
SECURITIES AND EXCHANGE COMMISSION
450 Fifth Street, N. W.
Judiciary Plaza
Washington, D. C. 20549
RE: United Municipal Bond Fund, Inc.
Post-Effective Amendment No. 36
Dear Sir or Madam:
In connection with the filing of the above referenced Post-Effective Amendment,
I hereby represent that the Amendment does not contain disclosures which would
render it ineligible to become effective pursuant to paragraph (b) of Rule 485.
Very truly yours,
Sharon K. Pappas
General Counsel
SKP:fr
