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. 19
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT
OF 1940 X
Amendment No. 19
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)
_____ on (date) pursuant to paragraph (b)
_____ 60 days after filing pursuant to paragraph (a)
__X__ on July 31, 1997 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 July 31, 1997. 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
July 31, 1997
UNITED MUNICIPAL HIGH INCOME FUND, INC.
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
913-236-2000
800-366-5465
<PAGE>
Table of Contents
AN OVERVIEW OF THE FUND..............
EXPENSES.............................
FINANCIAL HIGHLIGHTS.................
PERFORMANCE..........................
Explanation of Terms ...............
ABOUT WADDELL & REED.................
ABOUT THE INVESTMENT PRINCIPLES OF THE FUND
Investment Goals and Principles ....
Risk Considerations ..............
Securities and Investment Practices
ABOUT YOUR ACCOUNT...................
Ways to Set Up Your Account ........
Buying Shares ......................
Minimum Investments ................
Adding to Your Account .............
Selling Shares .....................
Shareholder Services ...............
Personal Service .................
Reports ..........................
Exchanges ........................
Automatic Transactions ...........
Distributions and Taxes ............
Distributions ....................
Taxes ............................
ABOUT THE MANAGEMENT AND EXPENSES OF THE FUND
WRIMCO and Its Affiliates ..........
Breakdown of Expenses ..............
Management Fee ...................
Other Expenses ...................
APPENDIX A...........................
DESCRIPTION OF BOND RATINGS ........
DESCRIPTION OF MUNICIPAL NOTE RATINGS
DESCRIPTION OF COMMERCIAL PAPER RATINGS
<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 fees1 0.14%
Other expenses2 0.17%
Total Fund operating
expenses 0.82%
Example: You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return3 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."
1It is possible that long-term shareholders of the Fund may bear 12b-1
distribution fees which are more than the maximum front-end sales charge
permitted under the rules of the National Association of Securities Dealers,
Inc. See "Breakdown of Expenses."
2Expense information has been restated to reflect the current shareholder
servicing fee which became effective April 1, 1996.
3Use 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
The following information has been audited in conjunction with the audits
of the Financial Statements of the Fund. Financial Statements for the six
months ended March 31, 1997 and the independent auditors' report of Deloitte &
Touche LLP thereon, and the Financial Statements for the fiscal year ended
September 30, 1996 and the independent auditors' report of Price Waterhouse LLP
thereon, are included in the SAI and should be read in conjunction with the
Financial Highlights.
For a Class A share outstanding throughout each period.*
<TABLE>
For the six For the fiscal year ended September 30,
months ended -----------------------------------------------------------------------------------------------
3-31-97 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
------------ ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period ........... $5.31 $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 ......... 0.17 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 .... 0.05 0.04 0.17 (0.34) 0.34 0.18 0.20 (0.11) 0.12 (0.09) (0.24)
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total from investment
operations ....... 0.22 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 (0.17) (0.34) (0.35) (0.34) (0.35) (0.36) (0.38) (0.39) (0.41) (0.43) (0.43)
Distribution from
capital gains .. (0.01) (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) (0.00) (0.02) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00)
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total distributions (0.18) (0.34) (0.37) (0.41) (0.39) (0.36) (0.38) (0.39) (0.41) (0.46) (0.45)
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
End of period .... $5.35 $5.31 $5.27 $5.12 $5.53 $5.23 $5.05 $4.85 $4.96 $4.84 $4.96
===== ===== ===== ===== ===== ===== ===== ===== ===== ===== =====
Total return** ..... 8.03% 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) .........$417,997 $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%*** 0.81% 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 ....... 6.29%*** 6.41% 6.75% 6.39% 6.49% 7.08% 7.63% 7.97% 8.36% 8.76% 8.42%
Portfolio turnover
rate ............. 12.57% 26.91% 19.07% 26.26% 26.13% 54.18% 60.83% 27.31% 38.94% 44.49% 56.93%
*On January 30, 1996, Fund shares outstanding were designated Class A shares.
**Total return calculated without taking into account the sales load deducted on an initial purchase.
***Annualized.
</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 Composite Stock Price 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 the telephone number listed on the inside back
cover of this Prospectus.
<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 may also invest in certain derivative instruments, including
options, futures contracts, options on futures contracts, swaps, caps, collars,
floors, indexed securities, stripped securities and mortgage-backed and other
asset-backed securities. The use of derivative instruments involves special
risks. See "Risks of Derivative Instruments" for further information on the
risks of investing in these instruments.
Income from taxable obligations, repurchase agreements and deriative
instruments 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. For "general
obligation" bonds, the issuer has pledged its full faith, credit and taxing
power for the payment of principal and interest. "Revenue" bonds are payable
only from specific sources; these may include revenues from a particular
facility or class of facilities or special tax or other revenue source.
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 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, a division of The McGraw-Hill Companies, Inc.
("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 ("U.S. Government Securities"). 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.
The Fund may invest in zero coupon securities that are "stripped" U.S.
Treasury notes and bonds, zero coupon bonds of municipal and corporate issuers
and other securities that are issued with original issue discount ("OID"). Zero
coupon bonds are debt obligations that do not entitle the holder to any periodic
payment of interest prior to maturity or that specify a future date when the
securities begin to pay current interest; instead, they are sold at a deep
discount from their face value and are redeemed at face value when they mature.
Because zero coupon bonds do not pay current income, their prices can be very
volatile when interest rates change and generally are subject to greater
fluctuations in response to changing interest rates than the prices of debt
obligations of comparable maturities that make current distributions of interest
in cash.
The Federal tax law requires that a holder of a security with OID accrue as
income (or, in the case of a municipal OID security, otherwise take into
account) each year a ratable portion of the OID on the security, even though the
holder may receive no interest payment on the security during the year.
Accordingly, although the Fund will receive no payments on its zero coupon bonds
prior to their maturity or disposition, it will have current taxable and/or tax-
exempt income attributable to those securities. Nevertheless, for income and
excise tax purposes the Fund annually must distribute to its shareholders
substantially all of its taxable net investment income, including OID, and also
must distribute substantially all of its tax-exempt income. Accordingly, the
Fund will be required to include in its dividends an amount equal to the income
attributable to its zero coupon and other OID bonds. See "Taxes" in the SAI.
Those dividends will be paid from the Fund's cash assets or by liquidation of
portfolio securities, if necessary, at a time when the Fund otherwise might not
have done so.
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 options, futures contracts and other derivative
instruments.
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 (which obligations may include certificates of deposit and
acceptances), (iii) commercial paper rated at least A by S&P or MIS, and (iv)
repurchase agreements.
Debt Holdings, by Ratings. During the fiscal year ended September 30,
1996, the percentage of the assets of the Fund invested in debt securities in
each of the rating categories of S&P and the debt securities not rated by an
established rating service, determined on a dollar-weighted average, were as
follows:
Rated Percentage of
by S&P Fund Assets of
- ------ ----------------
AAA 0.1%
AA 1.7
A 3.5
BBB 27.4
BB 9.8
B 0.8
CCC 0.0
CC 0.0
C 0.0
D 0.1
Unrated 55.5
The percentage of assets in each category was calculated on the basis of a
monthly dollar-weighted average. The monthly dollar-weighted average was
calculated using the market value of the securities in the Fund's portfolio at
the end of each month in the thirteen-month period ended with its last fiscal
year, averaged over its last fiscal year. The rating used for each security is
that security's rating as of the end of each month and, as ratings may change
over time, does not necessarily indicate past or future ratings of any
particular security or the ratings of securities in the Fund's portfolio in
general. Asset composition of the Fund by rating categories at any particular
time does not necessarily indicate future asset composition by rating
categories.
Options, Futures and Other Strategies. The Fund may use certain options,
futures contracts, swaps, caps, collars, floors, indexed securities, mortgage-
backed and other asset-backed securities and certain other strategies described
herein to attempt to enhance income or yield or to attempt to reduce the risk of
its investments. 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 may also use various techniques to increase or
decrease its exposure to changing security prices, interest rates or other
factors that affect security values.
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.
Policies and Restrictions: Subject to the Fund's fundamental policies and
the further limitations stated in the SAI, generally, the Fund may purchase and
sell any type of derivative instrument (including, without limitation, futures
contracts, options, forward contracts, swaps, caps, collars and floors and
indexed securities). However, the Fund will only purchase or sell a particular
derivative instrument if the Fund is authorized to invest in the type of asset
by which the return on, or value of, the derivative instrument is primarily
measured. Dividends paid by the Fund that are attributable to income from
taxable obligations and derivative instruments are subject to Federal income
tax. See "Distributions and Taxes."
Options. The Fund may engage in certain strategies involving options to
attempt to enhance its 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 market for options that are not listed on an
exchange may be less active than the market 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.
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 the futures contract at
a specified exercise price at any time during the term of the option. If the
Fund writes a call, it assumes a short futures position. If it writes a put, it
assumes a long futures position. When the Fund purchases an option on a futures
contract, it acquires the right, in return for the premium it pays, to assume a
position in the futures contract (a long position if the option is a call and a
short position if the option is a put).
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 or other financial indicators, subject to its
operating policy regarding derivative instruments. Indexed securities
typically, but not always, are debt securities or deposits whose value at
maturity or coupon rate is determined by reference to a specific instrument or
statistic. The performance of indexed securities depends to a great extent on
the performance of the security, 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.
Swaps, Caps, Collars and Floors. The Fund may enter into swaps, caps,
collars and floors as described below. The Fund may enter into these
transactions to preserve a return or spread on a particular investment or
portion of its portfolio, to protect against any increase in the price of
securities the Fund anticipates purchasing at a later date or to attempt to
enhance income or yield.
Swaps involve the exchange by the Fund with another party of their
respective commitments to pay or receive cash flows, e.g., an exchange of
floating rate payments for fixed rate payments. The purchase of a cap entitles
the purchaser, to the extent that a specified index exceeds a predetermined
value, to receive payments on a notional principal amount from the party selling
such cap. The purchase of a floor entitles the purchaser, to the extent that a
specified index falls below a predetermined value, to receive payments on a
notional principal amount from the party selling such floor. An interest rate
collar combines elements of buying a cap and selling a floor.
Depending on how they are used, the swap, cap, collar and floor agreements
used by the Fund may also increase or decrease the overall volatility of its
investments and its share price and yield. The most significant factor in the
performance of these agreements is the change in the specific interest rate or
other factors that determine the amounts of payments due to and from the Fund.
The Fund usually will enter into swaps on a net basis, i.e., the two
payment streams are netted out, with the Fund receiving or paying, as the case
may be, only the net amount of the two payments. If, however, an agreement
calls for payments by the Fund, the Fund must be prepared to make such payments
when due. The creditworthiness of firms with which the Fund enters into swaps,
caps, collars or floors will be monitored by WRIMCO in accordance with
procedures adopted by the Board of Directors. If a firm's creditworthiness
declines, the value of an agreement would be likely to decline, potentially
resulting in losses. If a default occurs by the other party to such
transaction, the Fund will have contractual remedies pursuant to the agreements
related to the transaction.
The Fund understands that the position of the staff of the Securities and
Exchange Commission is that assets involved in such transactions are illiquid
securities and are, therefore, subject to the limitations on investment in
illiquid securities as described in the SAI.
Mortgage-Backed and Other Asset-Backed Securities are bonds backed by
specific types of assets. Mortgage-backed securities represent direct or
indirect interests in pools of underlying mortgage loans that are secured by
real property. U.S. Government mortgage-backed securities are issued or
guaranteed as to principal and interest (but not as to market value) by the
Government National Mortgage Association, Fannie Mae (formerly, the Federal
National Mortgage Association), the Federal Home Loan Mortgage Corporation or
other government-sponsored enterprises. Other mortgage-backed securities are
sponsored or issued by private entities, including investment banking firms and
mortgage originators.
Mortgage-backed securities may be composed of one or more classes and may
be structured either as pass-through securities or collateralized debt
obligations. Multiple-class mortgage-backed securities are referred to in this
Prospectus as "CMOs." Some CMOs are directly supported by other CMOs, which in
turn are supported by mortgage pools. Investors typically receive payments out
of the interest and principal on the underlying mortgages. The portions of
these payments that investors receive, as well as the priority of their rights
to receive payments, are determined by the specific terms of the CMO class.
For example, interest-only ("IO") classes are entitled to receive all or a
portion of the interest, but none (or only a nominal amount) of the principal
payments, from the underlying mortgage assets. If the mortgage assets
underlying an IO experience greater than anticipated principal prepayments, then
the total amount of interest payments allocable to the IO class, and therefore
the yield to investors, generally will be reduced. In some instances, an
investor in an IO may fail to recoup all of his or her initial investment, even
if the security is government guaranteed or considered to be of the highest
quality. Conversely, principal-only ("PO") classes are entitled to receive all
or a portion of the principal payments, but none of the interest, from the
underlying mortgage assets. PO classes are purchased at substantial discounts
from par, and the yield to investors will be reduced if principal payments are
slower than expected. IOs, POs and other CMOs involve special risks, and
evaluating them requires special knowledge.
When interest rates decline and homeowners refinance their mortgages,
mortgage-backed bonds may be paid off more quickly than investors expect. When
interest rates rise, mortgage-backed bonds may be paid off more slowly than
originally expected. Changes in the rate or "speed" of these prepayments can
cause the value of mortgage-backed securities to fluctuate rapidly.
Other asset-backed securities are similar to mortgage-backed securities,
except that the underlying assets are different. These underlying assets may be
nearly any type of financial asset or receivable, such as motor vehicle
installment sales contracts, home equity loans, leases of various types of real
and personal property and receivables from credit cards.
The yield characteristics of mortgage-backed and other asset-backed
securities differ from those of traditional debt securities. Among the major
differences are that interest and principal payments are made more frequently
and that principal may be prepaid at any time because the underlying mortgage
loans or other assets generally may be prepaid at any time. Generally,
prepayments on fixed-rate mortgage loans will increase during a period of
falling interest rates and decrease during a period of rising interest rates.
Mortgage-backed and other asset-backed securities may also decrease in value as
a result of increases in interest rates and, because of prepayments, may benefit
less than other bonds from declining interest rates. Reinvestments of
prepayments may occur at lower interest rates than the original investment, thus
adversely affecting the Fund's yield. Actual prepayment experience may cause
the yield of a mortgage-backed security to differ from what was assumed when the
Fund purchased the security.
The market for privately issued mortgage-backed and other asset-backed
securities is smaller and less liquid than the market for U.S. Government
mortgage-backed securities. CMO classes may be specially structured in a manner
that provides any of a wide variety of investment characteristics, such as
yield, effective maturity and interest rate sensitivity. As market conditions
change, however, and especially during periods of rapid or unanticipated changes
in market interest rates, the attractiveness of some CMO classes and the ability
of the structure to provide the anticipated investment characteristics may be
significantly reduced. These changes can result in volatility in the market
value, and in some instances reduced liquidity, of the CMO class.
Policies and Restrictions: The Fund may invest in mortgage-backed and
other asset-backed securities as long as WRIMCO determines that it is consistent
with the Fund's goal and investment policies.
Risks of Derivative Instruments. The use of options, futures contracts,
options on futures contracts, swaps, caps, collars and floors, and the
investment in indexed securities, stripped securities and mortgage-backed and
other asset-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 assets 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 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. 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.
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 sells 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, with
respect to 75% of its total assets, purchase securities of any one issuer (other
than cash items and "Government Securities" as defined in the Investment Company
Act of 1940, as amended (the "1940 Act")), if immediately after and as a result
of such purchase, the value of the holdings of the Fund in the securities of
such issuer exceeds 5% of the value of the Fund's total assets.
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, 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. The Fund may not pledge its assets in connection with
any permitted borrowings; however, this policy does not prevent the Fund from
pledging its assets in connection with its purchase and sale of futures
contracts, options, forward contracts, swaps, caps, collars, floors and other
financial instruments.
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 Internal Revenue Service.
Waddell & Reed, Inc. reserves the right to reject any purchase orders,
including purchases by exchange, and it and the Fund reserve the right to
discontinue offering Fund shares for purchase.
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 the telephone number listed on the inside back cover of this Prospectus 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 its shareholders each year. Dividends are declared daily from
the Fund's net investment income, which includes accrued interest, earned OID
and market 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 gain ordinarily is 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 and other
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 and other 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
and other 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
generally are taxable to you as ordinary income, whether received in cash or
paid in additional Fund shares. Distributions of the Fund's net capital 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 that must be
treated as a preference item after the end of each calendar year. Shareholders
who may be subject to the AMT should consult with their tax advisers concerning
investment in the Fund.
Entities or other persons who are "substantial users" (or persons related
to "substantial users") of facilities financed by private activity bonds
("PABs") should consult their tax advisers before purchasing Fund shares
because, for users of certain of these facilities, the interest on PABs is not
exempt from Federal income tax. For these purposes, the term "substantial user"
is defined generally to include a "non-exempt person" who regularly uses in
trade or business a part of a facility financed from the proceeds of PABs.
Withholding. The Fund 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). If you have a gain on a redemption of Fund
shares, the entire gain will be taxable even though a portion of the gain may
represent municipal bond interest earned by the Fund but not yet paid out as a
dividend. If the redemption is not made until after record date, however, that
interest will be received by you as a dividend that is tax-exempt rather than as
part of a taxable gain. Ordinarily, record date is the first Friday after the
9th day of each month.
An exchange of Fund shares for shares of any other fund in the United Group
generally will have similar tax consequences. However, special rules apply when
you dispose of 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 or writing to Waddell & Reed, Inc. at the
telephone number or 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 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 Fund shares as a factor in the selection of brokers to
execute portfolio transactions, subject to best execution. For further
information concerning Fund portfolio transactions, please see "Portfolio
Transactions and Brokerage" in the SAI.
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 other distribution had
a record date during the month.
The Fund has adopted a Distribution and Service Plan (the "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 0.25% 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 distribution of the Class A shares, and/or provision of
personal services to Class A shareholders and maintenance of Class A shareholder
accounts.
There are two parts to this fee: all or a portion of the fee may be paid
to Waddell & Reed, Inc. for distribution services and distribution expenses,
including commissions paid by Waddell & Reed, Inc. to its account
representatives, account managers and/or other broker-dealers (the "distribution
fee") with respect to the Fund's Class A shares; and all or a portion of the fee
may be paid to Waddell & Reed, Inc. for the provision by Waddell & Reed, Inc.,
Waddell & Reed Services Company and/or other third parties (including broker-
dealers who may sell Class A shares), of personal services to Class A
shareholders and other services to maintain Class A shareholder accounts (the
"service fee"). However, the total amount of the distribution fee and service
fee paid by the Fund pursuant to the Plan will not exceed, on an annual basis,
0.25% of the average annual net assets of the Fund's Class A shares.
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, a division of The McGraw-Hill Companies, Inc. An S&P
corporate or municipal bond rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment of creditworthiness may take into consideration obligors such as
guarantors, insurers or lessees.
The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.
The ratings are based on current information furnished to S&P by the issuer
or obtained by S&P from other sources it considers reliable. S&P does not
perform an audit in connection with any rating and may, on occasion, rely on
unaudited financial information. The ratings may be changed, suspended or
withdrawn as a result of changes in, or unavailability of, such information, or
based on other circumstances.
The ratings are based, in varying degrees, on the following considerations:
1. Likelihood of default -- capacity and willingness of the obligor as to the
timely payment of interest and repayment of principal in accordance with
the terms of the obligation;
2. Nature of and provisions of the obligation;
3. Protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
A brief description of the applicable S&P rating symbols and their meanings
follow:
AAA -- Debt rated AAA has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
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 (800) 366-5465
Independent Accountants Shareholder Servicing Agent
Deloitte & Touche LLP Waddell & Reed
1010 Grand Avenue Services Company
Kansas City, Missouri 6300 Lamar Avenue
64106-2232 P. O. Box 29217
Shawnee Mission, Kansas
Investment Manager 66201-9217
Waddell & Reed Investment (913) 236-2000
Management Company (800) 366-5465
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
(800) 366-5465 P. O. Box 29217
Shawnee Mission, Kansas
66201-9217
(913) 236-2000
(800) 366-5465
Our INTERNET address is:
http://www.waddell.com
<PAGE>
United Municipal High Income Fund, Inc.
Class A Shares
PROSPECTUS
July 31, 1997
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.
NUP2014(7-97)
printed on recycled paper
<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 July 31, 1997. 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
July 31, 1997
UNITED MUNICIPAL HIGH INCOME FUND, INC.
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
913-236-2000
800-366-5465
<PAGE>
Table of Contents
AN OVERVIEW OF THE FUND..............
EXPENSES.............................
FINANCIAL HIGHLIGHTS.................
PERFORMANCE..........................
Explanation of Terms ...............
ABOUT WADDELL & REED.................
ABOUT THE INVESTMENT PRINCIPLES OF THE FUND
Investment Goals and Principles ....
ABOUT YOUR ACCOUNT...................
Buying Shares ......................
Minimum Investments ................
Adding to Your Account .............
Selling Shares .....................
Telephone Transactions .............
Shareholder Services ...............
Personal Service .................
Reports ..........................
Exchanges ........................
Distributions and Taxes ............
Distributions ....................
Taxes ............................
ABOUT THE MANAGEMENT AND EXPENSES OF THE FUND
WRIMCO and Its Affiliates ..........
Breakdown of Expenses ..............
Management Fee ...................
Other Expenses ...................
APPENDIX A...........................
DESCRIPTION OF BOND RATINGS ........
DESCRIPTION OF MUNICIPAL NOTE RATINGS
DESCRIPTION OF COMMERCIAL PAPER RATING
<PAGE>
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.
<PAGE>
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).4
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 return5 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."
4Expense 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.
5Use 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
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 or
the six-month period ended March 31, 1997.
<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 Composite Stock Price 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 the telephone number listed on the inside back
cover of this Prospectus.
<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 may also invest in certain derivative instruments, including
options, futures contracts, options on futures contracts, swaps, caps, collars,
floors, indexed securities, stripped securities and mortgage-backed and other
asset-backed securities. The use of derivative instruments involves special
risks. See "Risks of Derivative Instruments" for further information on the
risks of investing in these instruments.
Income from taxable obligations, repurchase agreements and deriative
instruments 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. For "general
obligation" bonds, the issuer has pledged its full faith, credit and taxing
power for the payment of principal and interest. "Revenue" bonds are payable
only from specific sources; these may include revenues from a particular
facility or class of facilities or special tax or other revenue source.
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 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, a division of The McGraw-Hill Companies, Inc.
("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 ("U.S. Government Securities"). 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.
The Fund may invest in zero coupon securities that are "stripped" U.S.
Treasury notes and bonds, zero coupon bonds of municipal and corporate issuers
and other securities that are issued with original issue discount ("OID"). Zero
coupon bonds are debt obligations that do not entitle the holder to any periodic
payment of interest prior to maturity or that specify a future date when the
securities begin to pay current interest; instead, they are sold at a deep
discount from their face value and are redeemed at face value when they mature.
Because zero coupon bonds do not pay current income, their prices can be very
volatile when interest rates change and generally are subject to greater
fluctuations in response to changing interest rates than the prices of debt
obligations of comparable maturities that make current distributions of interest
in cash.
The Federal tax law requires that a holder of a security with OID accrue as
income (or, in the case of a municipal OID security, otherwise take into
account) each year a ratable portion of the OID on the security, even though the
holder may receive no interest payment on the security during the year.
Accordingly, although the Fund will receive no payments on its zero coupon bonds
prior to their maturity or disposition, it will have current taxable and/or tax-
exempt income attributable to those securities. Nevertheless, for income and
excise tax purposes the Fund annually must distribute to its shareholders
substantially all of its taxable net investment income, including OID, and also
must distribute substantially all of its tax-exempt income. Accordingly, the
Fund will be required to include in its dividends an amount equal to the income
attributable to its zero coupon and other OID bonds. See "Taxes" in the SAI.
Those dividends will be paid from the Fund's cash assets or by liquidation of
portfolio securities, if necessary, at a time when the Fund otherwise might not
have done so.
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 options, futures contracts and other derivative
instruments.
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 (which obligations may include certificates of deposit and
acceptances), (iii) commercial paper rated at least A by S&P or MIS, and (iv)
repurchase agreements.
Debt Holdings, by Ratings. During the fiscal year ended September 30,
1996, the percentage of the assets of the Fund invested in debt securities in
each of the rating categories of S&P and the debt securities not rated by an
established rating service, determined on a dollar-weighted average, were as
follows:
Rated Percentage of
by S&P Fund Assets of
- ------ ----------------
AAA 0.1%
AA 1.7
A 3.5
BBB 27.4
BB 9.8
B 0.8
CCC 0.0
CC 0.0
C 0.0
D 0.1
Unrated 55.5
The percentage of assets in each category was calculated on the basis of a
monthly dollar-weighted average. The monthly dollar-weighted average was
calculated using the market value of the securities in the Fund's portfolio at
the end of each month in the thirteen-month period ended with its last fiscal
year, averaged over its last fiscal year. The rating used for each security is
that security's rating as of the end of each month and, as ratings may change
over time, does not necessarily indicate past or future ratings of any
particular security or the ratings of securities in the Fund's portfolio in
general. Asset composition of the Fund by rating categories at any particular
time does not necessarily indicate future asset composition by rating
categories.
Options, Futures and Other Strategies. The Fund may use certain options,
futures contracts, swaps, caps, collars, floors, indexed securities, mortgage-
backed and other asset-backed securities and certain other strategies described
herein to attempt to enhance income or yield or to attempt to reduce the risk of
its investments. 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 may also use various techniques to increase or
decrease its exposure to changing security prices, interest rates or other
factors that affect security values.
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.
Policies and Restrictions: Subject to the Fund's fundamental policies and
the further limitations stated in the SAI, generally, the Fund may purchase and
sell any type of derivative instrument (including, without limitation, futures
contracts, options, forward contracts, swaps, caps, collars and floors and
indexed securities). However, the Fund will only purchase or sell a particular
derivative instrument if the Fund is authorized to invest in the type of asset
by which the return on, or value of, the derivative instrument is primarily
measured. Dividends paid by the Fund that are attributable to income from
taxable obligations and derivative instruments are subject to Federal income
tax. See "Distributions and Taxes."
Options. The Fund may engage in certain strategies involving options to
attempt to enhance its 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 market for options that are not listed on an
exchange may be less active than the market 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.
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 the futures contract at
a specified exercise price at any time during the term of the option. If the
Fund writes a call, it assumes a short futures position. If it writes a put, it
assumes a long futures position. When the Fund purchases an option on a futures
contract, it acquires the right, in return for the premium it pays, to assume a
position in the futures contract (a long position if the option is a call and a
short position if the option is a put).
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 or other financial indicators, subject to its
operating policy regarding derivative instruments. Indexed securities
typically, but not always, are debt securities or deposits whose value at
maturity or coupon rate is determined by reference to a specific instrument or
statistic. The performance of indexed securities depends to a great extent on
the performance of the security, 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.
Swaps, Caps, Collars and Floors. The Fund may enter into swaps, caps,
collars and floors as described below. The Fund may enter into these
transactions to preserve a return or spread on a particular investment or
portion of its portfolio, to protect against any increase in the price of
securities the Fund anticipates purchasing at a later date or to attempt to
enhance income or yield.
Swaps involve the exchange by the Fund with another party of their
respective commitments to pay or receive cash flows, e.g., an exchange of
floating rate payments for fixed rate payments. The purchase of a cap entitles
the purchaser, to the extent that a specified index exceeds a predetermined
value, to receive payments on a notional principal amount from the party selling
such cap. The purchase of a floor entitles the purchaser, to the extent that a
specified index falls below a predetermined value, to receive payments on a
notional principal amount from the party selling such floor. An interest rate
collar combines elements of buying a cap and selling a floor.
Depending on how they are used, the swap, cap, collar and floor agreements
used by the Fund may also increase or decrease the overall volatility of its
investments and its share price and yield. The most significant factor in the
performance of these agreements is the change in the specific interest rate or
other factors that determine the amounts of payments due to and from the Fund.
The Fund usually will enter into swaps on a net basis, i.e., the two
payment streams are netted out, with the Fund receiving or paying, as the case
may be, only the net amount of the two payments. If, however, an agreement
calls for payments by the Fund, the Fund must be prepared to make such payments
when due. The creditworthiness of firms with which the Fund enters into swaps,
caps, collars or floors will be monitored by WRIMCO in accordance with
procedures adopted by the Board of Directors. If a firm's creditworthiness
declines, the value of an agreement would be likely to decline, potentially
resulting in losses. If a default occurs by the other party to such
transaction, the Fund will have contractual remedies pursuant to the agreements
related to the transaction.
The Fund understands that the position of the staff of the Securities and
Exchange Commission is that assets involved in such transactions are illiquid
securities and are, therefore, subject to the limitations on investment in
illiquid securities as described in the SAI.
Mortgage-Backed and Other Asset-Backed Securities are bonds backed by
specific types of assets. Mortgage-backed securities represent direct or
indirect interests in pools of underlying mortgage loans that are secured by
real property. U.S. Government mortgage-backed securities are issued or
guaranteed as to principal and interest (but not as to market value) by the
Government National Mortgage Association, Fannie Mae (formerly, the Federal
National Mortgage Association), the Federal Home Loan Mortgage Corporation or
other government-sponsored enterprises. Other mortgage-backed securities are
sponsored or issued by private entities, including investment banking firms and
mortgage originators.
Mortgage-backed securities may be composed of one or more classes and may
be structured either as pass-through securities or collateralized debt
obligations. Multiple-class mortgage-backed securities are referred to in this
Prospectus as "CMOs." Some CMOs are directly supported by other CMOs, which in
turn are supported by mortgage pools. Investors typically receive payments out
of the interest and principal on the underlying mortgages. The portions of
these payments that investors receive, as well as the priority of their rights
to receive payments, are determined by the specific terms of the CMO class.
For example, interest-only ("IO") classes are entitled to receive all or a
portion of the interest, but none (or only a nominal amount) of the principal
payments, from the underlying mortgage assets. If the mortgage assets
underlying an IO experience greater than anticipated principal prepayments, then
the total amount of interest payments allocable to the IO class, and therefore
the yield to investors, generally will be reduced. In some instances, an
investor in an IO may fail to recoup all of his or her initial investment, even
if the security is government guaranteed or considered to be of the highest
quality. Conversely, principal-only ("PO") classes are entitled to receive all
or a portion of the principal payments, but none of the interest, from the
underlying mortgage assets. PO classes are purchased at substantial discounts
from par, and the yield to investors will be reduced if principal payments are
slower than expected. IOs, POs and other CMOs involve special risks, and
evaluating them requires special knowledge.
When interest rates decline and homeowners refinance their mortgages,
mortgage-backed bonds may be paid off more quickly than investors expect. When
interest rates rise, mortgage-backed bonds may be paid off more slowly than
originally expected. Changes in the rate or "speed" of these prepayments can
cause the value of mortgage-backed securities to fluctuate rapidly.
Other asset-backed securities are similar to mortgage-backed securities,
except that the underlying assets are different. These underlying assets may be
nearly any type of financial asset or receivable, such as motor vehicle
installment sales contracts, home equity loans, leases of various types of real
and personal property and receivables from credit cards.
The yield characteristics of mortgage-backed and other asset-backed
securities differ from those of traditional debt securities. Among the major
differences are that interest and principal payments are made more frequently
and that principal may be prepaid at any time because the underlying mortgage
loans or other assets generally may be prepaid at any time. Generally,
prepayments on fixed-rate mortgage loans will increase during a period of
falling interest rates and decrease during a period of rising interest rates.
Mortgage-backed and other asset-backed securities may also decrease in value as
a result of increases in interest rates and, because of prepayments, may benefit
less than other bonds from declining interest rates. Reinvestments of
prepayments may occur at lower interest rates than the original investment, thus
adversely affecting the Fund's yield. Actual prepayment experience may cause
the yield of a mortgage-backed security to differ from what was assumed when the
Fund purchased the security.
The market for privately issued mortgage-backed and other asset-backed
securities is smaller and less liquid than the market for U.S. Government
mortgage-backed securities. CMO classes may be specially structured in a manner
that provides any of a wide variety of investment characteristics, such as
yield, effective maturity and interest rate sensitivity. As market conditions
change, however, and especially during periods of rapid or unanticipated changes
in market interest rates, the attractiveness of some CMO classes and the ability
of the structure to provide the anticipated investment characteristics may be
significantly reduced. These changes can result in volatility in the market
value, and in some instances reduced liquidity, of the CMO class.
Policies and Restrictions: The Fund may invest in mortgage-backed and
other asset-backed securities as long as WRIMCO determines that it is consistent
with the Fund's goal and investment policies.
Risks of Derivative Instruments. The use of options, futures contracts,
options on futures contracts, swaps, caps, collars and floors, and the
investment in indexed securities, stripped securities and mortgage-backed and
other asset-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 assets 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 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. 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.
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 sells 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, with
respect to 75% of its total assets, purchase securities of any one issuer (other
than cash items and "Government Securities" as defined in the Investment Company
Act of 1940, as amended (the "1940 Act")), if immediately after and as a result
of such purchase, the value of the holdings of the Fund in the securities of
such issuer exceeds 5% of the value of the Fund's total assets.
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, 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. The Fund may not pledge its assets in connection with
any permitted borrowings; however, this policy does not prevent the Fund from
pledging its assets in connection with its purchase and sale of futures
contracts, options, forward contracts, swaps, caps, collars, floors and other
financial instruments.
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 Internal Revenue Service.
Waddell & Reed, Inc. reserves the right to reject any purchase orders,
including purchases by exchange, and it and the Fund reserve the right to
discontinue offering Fund shares for purchase.
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 the telephone number listed on the inside back cover of this
Prospectus 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 its shareholders each year. Dividends are declared daily from
the Fund's net investment income, which includes accrued interest, earned OID
and market 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 and other
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 and other 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
and other 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
generally are taxable to you as ordinary income, whether received in cash or
paid in additional Fund shares. Distributions of the Fund's net capital 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 that must be
treated as a preference item after the end of each calendar year. Shareholders
who may be subject to the AMT should consult with their tax advisers concerning
investment in the Fund.
Entities or other persons who are "substantial users" (or persons related
to "substantial users") of facilities financed by private activity bonds
("PABs") should consult their tax advisers before purchasing Fund shares
because, for users of certain of these facilities, the interest on PABs is not
exempt from Federal income tax. For these purposes, the term "substantial user"
is defined generally to include a "non-exempt person" who regularly uses in
trade or business a part of a facility financed from the proceeds of PABs.
Withholding. The Fund 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
or writing to Waddell & Reed, Inc. at the telephone number or 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 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 Fund shares as a factor in the selection of brokers to
execute portfolio transactions, subject to best execution. For further
information concerning Fund portfolio transactions, please see "Portfolio
Transactions and Brokerage" in the SAI.
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, a division of The McGraw-Hill Companies, Inc. An S&P
corporate or municipal bond rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment of creditworthiness may take into consideration obligors such as
guarantors, insurers or lessees.
The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.
The ratings are based on current information furnished to S&P by the issuer
or obtained by S&P from other sources it considers reliable. S&P does not
perform an audit in connection with any rating and may, on occasion, rely on
unaudited financial information. The ratings may be changed, suspended or
withdrawn as a result of changes in, or unavailability of, such information, or
based on other circumstances.
The ratings are based, in varying degrees, on the following considerations:
1. Likelihood of default -- capacity and willingness of the obligor as to the
timely payment of interest and repayment of principal in accordance with
the terms of the obligation;
2. Nature of and provisions of the obligation;
3. Protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
A brief description of the applicable S&P rating symbols and their meanings
follow:
AAA -- Debt rated AAA has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
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 (800) 366-5465
Independent Accountants Shareholder Servicing Agent
Deloitte & Touche LLP Waddell & Reed
1010 Grand Avenue Services Company
Kansas City, Missouri 6300 Lamar Avenue
64106-2232 P. O. Box 29217
Shawnee Mission, Kansas
Investment Manager 66201-9217
Waddell & Reed Investment (913) 236-2000
Management Company (800) 366-5465
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
(800) 366-5465 P. O. Box 29217
Shawnee Mission, Kansas
66201-9217
(913) 236-2000
(800) 366-5465
Our INTERNET address is:
http://www.waddell.com
<PAGE>
United Municipal High Income Fund, Inc.
Class Y Shares
PROSPECTUS
July 31, 1997
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.
NUP2014-Y(7-97)
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
(800) 366-5465
July 31, 1997
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 July 31, 1997, 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
Goal and Investment Policies ....................... 4
Investment Management and Other Services ........... 26
Purchase, Redemption and Pricing of Shares ......... 30
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 March
31, 1997, 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 April 1, 1996 to
March 31, 1997: 3.44% 8.03%
Five-year period from April 1, 1991 to
March 31, 1997: 7.49% 8.43%
Ten-year period from April 1, 1986 to
March 31, 1997: 7.60% 8.07%
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 March 31, 1997, the date of the most recent
balance sheet included in this SAI, is 5.83%.
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 March 31, 1997, the date of the most recent balance sheet
included in this SAI, is 6.85%, 8.08%, 8.43%, 9.08% and 9.62% 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 Composite Stock Price Index and the Dow Jones Industrial
Average. Performance information may be quoted numerically or presented in a
table, graph or other illustration.
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.
GOAL AND INVESTMENT POLICIES
The goal 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 Federal alternative minimum tax. In general, IDBs are revenue bonds and are
issued by or on behalf of public authorities to obtain funds to finance
privately operated facilities for business and manufacturing, sports and
pollution control. IDBs are also used to finance public facilities such as
airports 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 IDBs. As discussed above under "Municipal
Bonds," the entity responsible for payment of the principal and interest on IDBs
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 IDBs 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,
Fannie Mae (formerly, the Federal National Mortgage Association), Farmers Home
Administration, Export-Import Bank of the United States, Small Business
Administration, Government National Mortgage Association ("Ginnie Mae"), General
Services Administration, Central Bank for Cooperatives, Federal Home Loan Banks,
Federal Home Loan Mortgage Corporation ("Freddie Mac"), Farm Credit Banks,
Maritime Administration, the Tennessee Valley Authority, the Resolution Funding
Corporation, and the Student Loan Marketing Association.
Securities issued or guaranteed by U.S. Government agencies and
instrumentalities are not always supported by the full faith and credit of the
United States. Some, such as securities issued by the Federal Home Loan Banks,
are backed by the right of the agency or instrumentality to borrow from the
Treasury. Others, such as securities issued by Fannie Mae, are supported only
by the credit of the instrumentality and by a pool of mortgage assets. If the
securities are not backed by the full faith and credit of the United States, the
owner of the securities must look principally to the agency issuing the
obligation for repayment and may not be able to assert a claim against the
United States in the event that the agency or instrumentality does not meet its
commitment.
U.S. Government Securities may include mortgage-backed securities issued by
U.S. Government agencies or instrumentalities including, but not limited to,
Ginnie Mae, Freddie Mac and Fannie Mae. These mortgage-backed securities
include "pass-through" securities, "participation certificates" and
collateralized mortgage obligations. See "Mortgage-Backed Securities" and
"Asset-Backed Securities." Timely payment of principal and interest on Ginnie
Mae pass-throughs is guaranteed by the full faith and credit of the United
States. Freddie Mac and Fannie Mae are both instrumentalities of the U.S.
Government, but their obligations are not backed by the full faith and credit of
the United States. It is possible that the availability and the marketability
(i.e., liquidity) of the securities discussed in this section could be adversely
affected by actions of the U.S. Government to tighten the availability of its
credit.
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
Mortgage-backed securities represent direct or indirect participations in,
or are secured by and payable from, mortgage loans secured by real property and
include single- and multi-class pass-through securities and collateralized
mortgage obligations. Multi-class pass-through securities and collateralized
mortgage obligations are collectively referred to in this SAI as "CMOs." The
U.S. Government mortgage-backed securities in which the Fund may invest include
mortgage-backed securities issued or guaranteed as to the payment of principal
and interest (but not as to market value) by Ginnie Mae, Fannie Mae or Freddie
Mac. Other mortgage-backed securities are issued by private issuers, generally
originators of and investors in mortgage loans, including savings associations,
mortgage bankers, commercial banks, investment bankers and special purpose
entities. Payments of principal and interest (but not the market value) of such
private mortgage-backed securities may be supported by pools of mortgage loans
or other mortgage-backed securities that are guaranteed, directly or indirectly,
by the U.S. Government or one of its agencies or instrumentalities, or they may
be issued without any government guarantee of the underlying mortgage assets but
with some form of non-government credit enhancement. These credit enhancements
do not protect investors from changes in market value.
The Fund may purchase mortgage-backed securities issued by both government
and non-government entities, such as banks, mortgage lenders, or other financial
institutions, as long as WRIMCO determines that it is consistent with the Fund's
goal and investment policies. Other types of mortgage-backed securities will
likely be developed in the future, and the Fund may invest in them if WRIMCO
determines they are consistent with the Fund's goal and investment policies.
Stripped Mortgage-Backed Securities
Stripped mortgage-backed securities are created when a U.S. Government
agency or a financial institution separates the interest and principal
components of a mortgage-backed security and sells them as individual
securities. The holder of the "principal-only" security ("PO") receives the
principal payments made by the underlying mortgage-backed security, while the
holder of the "interest-only" security ("IO") receives interest payments from
the same underlying security.
Asset-Backed Securities
Asset-backed securities have structural characteristics similar to
mortgage-backed securities, as discussed above. However, the underlying assets
are not first lien mortgage loans or interests therein, but include assets such
as motor vehicle installment sales contracts, other installment sale contracts,
home equity loans, leases of various types of real and personal property and
receivables from revolving credit (credit card) agreements. Such assets are
securitized through the use of trusts or special purpose corporations. Payments
or distributions of principal and interest may be guaranteed up to a certain
amount and for a certain time period by a letter of credit or pool insurance
policy issued by a financial institution unaffiliated with the issuer, or other
credit enhancements may be present. The value of asset-backed securities may
also depend on the creditworthiness of the servicing agent for the loan pool,
the originator of the loans or the financial institution providing the credit
enhancement.
Special Characteristics of Mortgage-Backed and Asset-Backed Securities.
The yield characteristics of mortgage-backed and asset-backed securities
differ from those of traditional debt securities. Among the major differences
are that interest and principal payments are made more frequently, usually
monthly, and that principal may be prepaid at any time because the underlying
mortgage loans or other obligations generally may be prepaid at any time.
Prepayments on a pool of mortgage loans are influenced by a variety of economic,
geographic, social and other factors, including changes in mortgagors' housing
needs, job transfers, unemployment, mortgagors' net equity in the mortgaged
properties and servicing decisions. Generally, however, prepayments on fixed-
rate mortgage loans will increase during a period of falling interest rates and
decrease during a period of rising interest rates. Similar factors apply to
prepayments on asset-backed securities, but the receivables underlying asset-
backed securities generally are of a shorter maturity and thus are likely to
experience substantial prepayments. Such securities, however, often provide
that for a specified time period the issuers will replace receivables in the
pool that are repaid with comparable obligations. If the issuer is unable to do
so, repayment of principal on the asset-backed securities may commence at an
earlier date.
The rate of interest on mortgage-backed securities is lower than the
interest rates paid on the mortgages included in the underlying pool due to the
annual fees paid to the servicer of the mortgage pool for passing through
monthly payments to certificateholders and to any guarantor, and due to any
yield retained by the issuer. Actual yield to the holder may vary from the
coupon rate, even if adjustable, if the mortgage-backed securities are purchased
or traded in the secondary market at a premium or discount. In addition, there
is normally some delay between the time the issuer receives mortgage payments
from the servicer and the time the issuer makes the payments on the mortgage-
backed securities, and this delay reduces the effective yield to the holder of
such securities.
Yields on pass-through securities are typically quoted by investment
dealers and vendors based on the maturity of the underlying instruments and the
associated average life assumption. The average life of pass-through pools
varies with the maturities of the underlying mortgage loans. A pool's term may
be shortened by unscheduled or early payments of principal on the underlying
mortgages. Because prepayment rates of individual pools vary widely, it is not
possible to predict accurately the average life of a particular pool. In the
past, a common industry practice has been to assume that prepayments on pools of
fixed rate 30-year mortgages would result in a 12-year average life for the
pool. At present, mortgage pools, particularly those with loans with other
maturities or different characteristics, are priced on an assumption of average
life determined for each pool. In periods of declining interest rates, the rate
of prepayment tends to increase, thereby shortening the actual average life of a
pool of mortgage-related securities. Conversely, in periods of rising interest
rates, the rate of prepayment tends to decrease, thereby lengthening the actual
average life of the pool. However, these effects may not be present, or may
differ in degree, if the mortgage loans in the pools have adjustable interest
rates or other special payment terms, such as a prepayment charge. Actual
prepayment experience may cause the yield of mortgage-backed securities to
differ from the assumed average life yield.
Variable or Floating Rate Instruments
Variable or floating rate instruments (including notes purchased directly
from issuers) bear variable or floating interest rates and may carry rights that
permit holders to demand payment of the unpaid principal balance plus accrued
interest from the issuers or certain financial intermediaries on dates prior to
their stated maturities. Floating rate securities have interest rates that
change whenever there is a change in a designated base rate while variable rate
instruments provide for a specified periodic adjustment in the interest rate.
These formulas are designed to result in a market value for the instrument that
approximates its par value.
Indexed Securities
The Fund may purchase securities the value of which varies in relation to
the value of other securities, securities indices or other financial indicators,
subject to its operating policy regarding derivative instruments. Indexed
securities typically, but not always, are debt securities or deposits whose
value at maturity or coupon rate is determined by reference to a specific
instrument or statistic.
Recent issuers of indexed securities have included banks, corporations, and
certain U.S. Government agencies. Certain indexed securities that are not
traded on an established market may be deemed illiquid.
Restricted Securities
Restricted securities are 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; (iv) restricted
securities not determined to be liquid pursuant to guidelines established by the
Fund's Board of Directors; (v) securities involved in swap, cap, collar and
floor transactions; (vi) non-government stripped fixed-rate mortgage-backed
securities; and (vii) over-the-counter ("OTC") options and their underlying
collateral. The assets used as cover for OTC options written by the Fund will
be considered illiquid unless the OTC options are sold to qualified dealers who
agree that the Fund may repurchase any OTC option it writes at a maximum price
to be calculated by a formula set forth in the option agreement. The cover for
an OTC option written subject to this procedure would be considered illiquid
only to the extent that the maximum repurchase price under the formula exceeds
the intrinsic value of the option.
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. In other
words, the value of the underlying securities, which will be held by the Fund's
custodian bank or by a third party that qualifies as a custodian under Section
17(f) of the Investment Company Act of 1940, as amended (the "1940 Act"), is
and, during the entire term of the agreement, will remain at least equal to the
value of the loan, including the accrued interest earned thereon. Repurchase
agreements are entered into only with those entities approved by WRIMCO 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,
futures contracts (sometimes referred to as "futures"), options on futures
contracts, swaps, caps, collars, floors and indexed securities (collectively,
"Financial Instruments") to attempt to enhance income or yield or to attempt to
hedge the Fund's investments. Generally, the Fund may purchase and sell any
type of Financial Instrument. However, as an operating policy, the Fund will
only purchase or sell a particular Financial Instrument if the Fund is
authorized to invest in the type of asset by which the return on, or value of,
the Financial Instrument is primarily measured.
Hedging strategies can be broadly categorized as "short hedges" and "long
hedges." A short hedge is a purchase or sale of a Financial Instrument intended
partially or fully to offset potential declines in the value of one or more
investments held in the Fund's portfolio. Thus, in a short hedge, the Fund
takes a position in a Financial Instrument whose price is expected to move in
the opposite direction of the price of the investment being hedged.
Conversely, a long hedge is a purchase or sale of a Financial Instrument
intended partially or fully to offset potential increases in the acquisition
cost of one or more investments that the Fund intends to acquire. Thus, in a
long hedge, the Fund takes a position in a Financial Instrument whose price is
expected to move in the same direction as the price of the prospective
investment being hedged. A long hedge is sometimes referred to as an
anticipatory hedge. In an anticipatory hedge transaction, the Fund does not own
a corresponding security and, therefore, the transaction does not relate to a
security the Fund owns. Rather, it relates to a security that the Fund intends
to acquire. If the Fund does not complete the hedge by purchasing the security
it anticipated purchasing, the effect on the Fund's portfolio is the same as if
the transaction were entered into for speculative purposes.
Financial Instruments on securities generally are used to attempt to hedge
against price movements in one or more particular securities positions that the
Fund owns or intends to acquire. Financial Instruments on indices, in contrast,
generally are used to attempt to hedge against price movements in market sectors
in which the Fund has invested or expects to invest. Financial Instruments on
debt securities may be used to hedge either individual securities or broad debt
market sectors.
The use of Financial Instruments is subject to applicable regulations of
the Securities and Exchange Commission (the "SEC"), the several exchanges upon
which they are traded and the Commodity Futures Trading Commission (the "CFTC").
In addition, the Fund's ability to use Financial Instruments 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 Financial Instruments and other similar or related techniques.
These new opportunities may become available as WRIMCO develops new techniques,
as regulatory authorities broaden the range of permitted transactions and as new
Financial Instruments or other techniques are developed. WRIMCO may utilize
these opportunities to the extent that they are consistent with the Fund's goal
and permitted by the Fund's investment limitations and applicable regulatory
authorities. The Fund'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 an
account with its custodian in the prescribed amount as determined daily.
Assets used as cover or held in an account cannot be sold while the
position in the corresponding Financial Instrument is open, unless they are
replaced with other appropriate assets. As a result, the commitment of a large
portion of the Fund's assets to cover or accounts could impede portfolio
management or the Fund's ability to meet redemption requests or other current
obligations.
Options. The purchase of call options can serve as a long hedge, and the
purchase of put options can serve as a short hedge. Writing put or call options
can enable the Fund to enhance income or yield by reason of the premiums paid by
the purchasers of such options. However, if the market price of the security
underlying a put option declines to less than the exercise price of the option,
minus the premium received, the Fund would expect to suffer a loss.
Writing call options can serve as a limited short hedge, because declines
in the value of the hedged investment would be offset to the extent of the
premium received for writing the option. However, if the security appreciates
to a price higher than the exercise price of the call option, it can be expected
that the option will be exercised and the Fund will be obligated to sell the
security at less than its market value. If the call option is an OTC option,
the securities or other assets used as cover would be considered illiquid to the
extent described under "Illiquid Investments."
Writing put options can serve as a limited long hedge because increases in
the value of the hedged investment would be offset to the extent of the premium
received for writing the option. However, if the security depreciates to a
price lower than the exercise price of the put option, it can be expected that
the put option will be exercised and the Fund will be obligated to purchase the
security at more than its market value. If the put option is an OTC option, the
securities or other assets used as cover would be considered illiquid to the
extent described under "Illiquid Investments."
The value of an option position will reflect, among other things, the
current market value of the underlying investment, the time remaining until
expiration, the relationship of the exercise price to the market price of the
underlying investment, the historical price volatility of the underlying
investment and general market conditions. Options that expire unexercised have
no value.
The Fund may effectively terminate its right or obligation under an option
by entering into a closing transaction. For example, the Fund may terminate its
obligation under a call or put option that it had written by purchasing an
identical call or put option; this is known as a closing purchase transaction.
Conversely, the Fund may terminate a position in a put or call option it had
purchased by writing an identical put or call option; this is known as a closing
sale transaction. Closing transactions permit the Fund to realize profits or
limit losses on an option position prior to its exercise or expiration.
A type of put that the Fund may purchase is an "optional delivery standby
commitment," which is entered into by parties selling debt securities to the
Fund. An optional delivery standby commitment gives the Fund the right to sell
the security back to the seller on specified terms. This right is provided as
an inducement to purchase the security.
Risks of Options on Securities. The Fund may purchase or write both
exchange-traded and OTC options. Exchange-traded options in the United States
are issued by a clearing organization affiliated with the exchange on which the
option is listed that, in effect, guarantees completion of every exchange-traded
option transaction. In contrast, OTC options are contracts between the Fund and
its counterparty (usually a securities dealer or a bank) with no clearing
organization guarantee. Thus, when the Fund purchases an OTC option, it relies
on the counterparty from whom it purchased the option to make or take delivery
of the underlying investment upon exercise of the option. Failure by the
counterparty to do so would result in the loss of any premium paid by the Fund
as well as the loss of any expected benefit of the transaction.
The Fund's ability to establish and close out positions in exchange-listed
options depends on the existence of a liquid market. However, there can be no
assurance that such a market will exist at any particular time. Closing
transactions can be made for OTC options only by negotiating directly with the
counterparty, or by a transaction in the secondary market if any such market
exists. There can be no assurance that the Fund will in fact be able to close
out an OTC option position at a favorable price prior to expiration. In the
event of insolvency of the counterparty, the Fund might be unable to close out
an OTC option position at any time prior to its expiration.
If the Fund were unable to effect a closing transaction for an option it
had purchased, it would have to exercise the option to realize any profit. The
inability to enter into a closing purchase transaction for a covered call option
written by the Fund could cause material losses because the Fund would be unable
to sell the investment used as cover for the written option until the option
expires or is exercised.
Options on Indices. Puts and calls on indices are similar to puts and
calls on securities or futures contracts except that all settlements are in cash
and gain or loss depends on changes in the index in question rather than on
price movements in individual securities or futures contracts. When the Fund
writes a call on an index, it receives a premium and agrees that, prior to the
expiration date, the purchaser of the call, upon exercise of the call, will
receive from the Fund an amount of cash if the closing level of the index upon
which the call is based is greater than the exercise price of the call. The
amount of cash is equal to the difference between the closing price of the index
and the exercise price of the call times a specified multiple ("multiplier"),
which determines the total dollar value for each point of such difference. When
the Fund buys a call on an index, it pays a premium and has the same rights as
to such call as are indicated above. When the Fund buys a put on an index, it
pays a premium and has the right, prior to the expiration date, to require the
seller of the put, upon the Fund's exercise of the put, to deliver to the Fund
an amount of cash if the closing level of the index upon which the put is based
is less than the exercise price of the put, which amount of cash is determined
by the multiplier, as described above for calls. When the Fund writes a put on
an index, it receives a premium and the purchaser of the put has the right,
prior to the expiration date, to require the Fund to deliver to it an amount of
cash equal to the difference between the closing level of the index and the
exercise price times the multiplier if the closing level is less than the
exercise price.
Risks of Options on Indices. The risks of investment in options on indices
may be greater than options on securities. Because index options are settled in
cash, when the Fund writes a call on an index it cannot provide in advance for
its potential settlement obligations by acquiring and holding the underlying
securities. The Fund can offset some of the risk of writing a call index option
by holding a diversified portfolio of securities similar to those on which the
underlying index is based. However, the Fund cannot, as a practical matter,
acquire and hold a portfolio containing exactly the same securities as underlie
the index and, as a result, bears a risk that the value of the securities held
will vary from the value of the index.
Even if the Fund could assemble a portfolio that exactly reproduced the
composition of the underlying index, it still would not be fully covered from a
risk standpoint because of the "timing risk" inherent in writing index options.
When an index option is exercised, the amount of cash that the holder is
entitled to receive is determined by the difference between the exercise price
and the closing index level on the date when the option is exercised. As with
other kinds of options, the Fund as the call writer will not learn that the Fund
has been assigned until the next business day at the earliest. The time lag
between exercise and notice of assignment poses no risk for the writer of a
covered call on a specific underlying security, such as a debt security, because
there the writer's obligation is to deliver the underlying security, not to pay
its value as of a fixed time in the past. So long as the writer already owns
the underlying security, it can satisfy its settlement obligations by simply
delivering it, and the risk that its value may have declined since the exercise
date is borne by the exercising holder. In contrast, even if the writer of an
index call holds securities that exactly match the composition of the underlying
index, it will not be able to satisfy its assignment obligations by delivering
those securities against payment of the exercise price. Instead, it will be
required to pay cash in an amount based on the closing index value on the
exercise date. By the time it learns that it has been assigned, the index may
have declined, with a corresponding decline in the value of its portfolio. This
"timing risk" is an inherent limitation on the ability of index call writers to
cover their risk exposure by holding securities 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.
OTC Options. Unlike exchange-traded options, which are standardized with
respect to the underlying instrument, expiration date, contract size and strike
price, the terms of OTC options (options not traded on exchanges) generally are
established through negotiation with the other party to the option contract.
While this type of arrangement allows the Fund great flexibility to tailor the
option to its needs, OTC options generally involve greater risk than exchange-
traded options, which are guaranteed by the clearing organization of the
exchanges where they are traded.
Futures Contracts and Options on Futures Contracts. The purchase of
futures 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. Futures contracts and options on futures contracts can also
be purchased and sold to attempt to enhance income or yield.
In addition, futures strategies can be used to manage the average duration
of the Fund's fixed-income portfolio. If WRIMCO wishes to shorten the average
duration of the Fund's fixed-income portfolio, the Fund may sell a debt futures
contract or a call option thereon, or purchase a put option on that futures
contract. If WRIMCO wishes to lengthen the average duration of the Fund's
fixed-income portfolio, the Fund may buy a debt futures contract or a call
option thereon, or sell a put option thereon.
No price is paid upon entering into a futures contract. Instead, at the
inception of a futures contract the Fund is required to deposit "initial margin"
in an amount generally equal to 10% or less of the contract value. Margin must
also be deposited when writing a call or put option on a futures contract, in
accordance with applicable exchange rules. Unlike margin in securities
transactions, initial margin on futures contracts does not represent a
borrowing, but rather is in the nature of a performance bond or good-faith
deposit that is returned to the Fund at the termination of the transaction if
all contractual obligations have been satisfied. Under certain 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. However, there can be no assurance that a liquid secondary market will
exist for a particular contract at a particular time. In such event, it may not
be possible to close a futures contract or options position.
Under certain circumstances, futures exchanges may establish daily limits
on the amount that the price of a futures contract or an option on a futures
contract can vary from the previous day's settlement price; once that limit is
reached, no trades may be made that day at a price beyond the limit. Daily
price limits do not limit potential losses because prices could move to the
daily limit for several consecutive days with little or no trading, thereby
preventing liquidation of unfavorable positions.
If the Fund were unable to liquidate a futures contract or an option on a
futures position due to the absence of a liquid secondary market or the
imposition of price limits, it could incur substantial losses. The Fund would
continue to be subject to market risk with respect to the position. In
addition, except in the case of purchased options, the Fund would continue to be
required to make daily variation margin payments and might be required to
maintain the position being hedged by the futures contract or option or to
maintain cash or liquid assets in an account.
Risks of Futures Contracts and Options Thereon. The ordinary spreads
between prices in the cash and futures markets (including the options on futures
market), due to the differences in the natures of those markets, are subject to
the following factors, which may create distortions. First, all participants in
the futures market are subject to margin deposit and maintenance requirements.
Rather than meeting additional margin deposit requirements, investors may close
futures contracts through offsetting transactions, which could distort the
normal relationship between the cash and futures markets. Second, the liquidity
of the futures market depends on participants entering into offsetting
transactions rather than making or taking delivery. To the extent participants
decide to make or take delivery, liquidity in the futures market could be
reduced, thus producing distortion. Third, from the point of view of
speculators, the deposit requirements in the futures market are less onerous
than margin requirements in the securities market. Therefore, increased
participation by speculators in the futures market may cause temporary price
distortions. Due to the possibility of distortion, a correct forecast of
general interest rate or debt market trends by WRIMCO may still not result in a
successful transaction. WRIMCO may be incorrect in its expectations as to the
extent of various interest rate or debt market movements or the time span within
which the movements take place.
Index Futures. The risk of imperfect correlation between movements in the
price of an index future and movements in the price of the securities that are
the subject of the hedge increases as the composition of the Fund's portfolio
diverges from the securities included in the applicable index. The price of the
index futures may move more than or less than the price of the securities being
hedged. If the price of the index future moves less than the price of the
securities that are the subject of the hedge, the hedge will not be fully
effective but, if the price of the securities being hedged has moved in an
unfavorable direction, the Fund would be in a better position than if it had not
hedged at all. If the price of the securities being hedged has moved in a
favorable direction, this advantage will be partially offset by the futures
contract. If the price of the futures contract moves more than the price of the
securities, the Fund will experience either a loss or a gain on the futures
contract that will not be completely offset by movements in the price of the
securities that are the subject of the hedge. To compensate for the imperfect
correlation of movements in the price of the securities being hedged and
movements in the price of the index futures, the Fund may buy or sell index
futures in a greater dollar amount than the dollar amount of the securities
being hedged if the historical volatility of the prices of such securities being
hedged is more than the historical volatility of the prices of the securities
included in the index. It is also possible that, where the Fund has sold index
futures contracts to hedge against decline in the market, the market may advance
and the value of the securities held in the portfolio may decline. If this
occurred, the Fund would lose money on the futures contract and also experience
a decline in value of its portfolio securities. However, while this could occur
for a very brief period or to a very small degree, over time the value of a
diversified portfolio of securities will tend to move in the same direction as
the market indices on which the futures contracts are based.
Where index futures are purchased to hedge against a possible increase in
the price of securities before the Fund is able to invest in them in an orderly
fashion, it is possible that the market may decline instead. If the Fund then
concludes not to invest in them at that time because of concern as to possible
further market decline or for other reasons, it will realize a loss on the
futures contract that is not offset by a reduction in the price of the
securities it had anticipated purchasing.
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.
Combined Positions. The Fund may purchase and write options in combination
with each other, or in combination with futures contracts, to adjust the risk
and return characteristics of its overall position. For example, the Fund may
purchase a put option and write a call option on the same underlying instrument,
in order to construct a combined position whose risk and return characteristics
are similar to selling a futures contract. Another possible combined position
would involve writing a call option at one strike price and buying a call option
at a lower price, in order to reduce the risk of the written call option in the
event of a substantial price increase. Because combined options positions
involve multiple trades, they result in higher transaction costs and may be more
difficult to open and close out.
Turnover. The Fund's options and futures activities may affect its
turnover rate and brokerage commission payments. The exercise of calls or puts
written by the Fund, and the sale or purchase of futures contracts, may cause it
to sell or purchase related investments, thus increasing its turnover rate.
Once the Fund has received an exercise notice on an option it has written, it
cannot effect a closing transaction in order to terminate its obligation under
the option and must deliver or receive the underlying securities at the exercise
price. The exercise of puts purchased by the Fund may also cause the sale of
related investments, also increasing turnover; although such exercise is within
the Fund's control, holding a protective put might cause it to sell the related
investments for reasons that would not exist in the absence of the put. The
Fund will pay a brokerage commission each time it buys or sells a put or call or
purchases or sells a futures contract. Such commissions may be higher than
those that would apply to direct purchases or sales.
Swaps, Caps, Collars and Floors. Swap agreements, including caps, collars
and floors, can be individually negotiated and structured to include exposure to
a variety of different types of investments or market factors. Depending on
their structure, swap agreements may increase or decrease the Fund's exposure to
long- or short-term interest rates, mortgage-backed security values, corporate
borrowing rates or other factors such as security prices or inflation rates.
Swap agreements will tend to shift the Fund's investment exposure from one
type of investment to another. Caps and floors have an effect similar to buying
or writing options.
The creditworthiness of firms with which the Fund enters into swaps, caps
or floors will be monitored by WRIMCO in accordance with procedures adopted by
the Fund's Board of Directors. If a default occurs by the other party to such
transaction, the Fund will have contractual remedies pursuant to the agreements
related to the transaction.
The net amount of the excess, if any, of the Fund's obligations over its
entitlements with respect to each swap will be accrued on a daily basis and an
amount of cash or liquid assets having an aggregate net asset value at least
equal to the accrued excess will be maintained in an account with the Fund's
custodian that satisfies the requirements of the 1940 Act. The Fund will also
establish and maintain such account with respect to its total obligations under
any swaps that are not entered into on a net basis and with respect to any caps
or floors that are written by the Fund. WRIMCO and the Fund believe that such
obligations do not constitute senior securities under the 1940 Act and,
accordingly, will not treat them as being subject to the Fund's borrowing
restrictions.
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; purchase or sell physical
commodities; however, this policy shall not prevent the Fund from
purchasing and selling foreign currency, futures contracts, options,
forward contracts, swaps, caps, collars, floors and other financial
instruments, or purchase any real estate or interests in real estate
investment trusts;
(iii) May not lend money or other assets (neither purchasing debt securities
and other obligations consistent with its goal and its other
investment policies and restrictions or engaging in repurchase
agreements is considered "lending");
(iv) May not borrow money 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;
(v) May not invest for the purpose of exercising control or management of
other companies;
(vi) May not sell securities short (unless it owns or has the right to
obtain securities equivalent in kind and amount to the securities sold
short) or purchase securities on margin, except that (1) this policy
does not prevent the Fund from entering into short positions in
foreign currency, futures contracts, options, forward contracts,
swaps, caps, collars, floors and other financial instruments, (2) the
Fund may obtain such short-term credits as are necessary for the
clearance of transactions, and (3) the Fund may make margin payments
in connection with futures contracts, options, forward contracts,
swaps, caps, collars, floors and other financial instruments;
(vii) May not participate on a joint, or a joint and several basis, in any
trading account in securities;
(viii) May not engage in the underwriting of securities;
(ix) With respect to 75% of its total assets, may not purchase securities
of any one issuer (other than cash items and "Government Securities"
as defined in the 1940 Act), if immediately after and as a result of
such purchase, the value of the holdings of the Fund in the securities
of such issuer exceeds 5% of the value of the Fund's total assets;
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 Distribution and 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 distribution of the Class A shares and/or the
service and/or maintenance of Class A shareholder accounts.
Waddell & Reed, Inc. offers the Fund's shares through its registered
representatives and sales managers (sales force) unless it elects, which is not
currently contemplated, to make distribution of shares also through other
broker-dealers. In distributing shares through its sales force, Waddell & Reed,
Inc. will pay commissions and incentives to the sales force at or about the time
of sale and will incur other expenses including for prospectuses, sales
literature, advertisements, sales office maintenance, processing of orders and
general overhead with respect to its efforts to distribute the Fund's shares.
The Plan permits Waddell & Reed, Inc. to receive reimbursement for these
distribution activities through the distribution fee, subject to the limit
contained in the Plan. The Plan also permits Waddell & Reed, Inc. to 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 was approved by the Fund's Board of Directors, including the
Directors who are not interested persons of the Fund and who have no direct or
indirect financial interest in the operations of the Plan or any agreement
referred to in the Plan (hereafter, the "Plan Directors"). The 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 options trading
on national securities exchanges is 4:10 p.m. Eastern time and the close of the
regular session for commodities exchanges is 4:15 p.m. Eastern time. Futures
contracts will be valued with reference to established futures exchanges. The
value of a futures contract purchased by the Fund will be either the closing
price of that contract or the bid price. Conversely, the value of a futures
contract sold by the Fund will be either the closing price or the asked price.
Minimum Initial and Subsequent Investments
For Class A 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. Date of birth: June 16, 1926.
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. Date of birth: February 11, 1945.
HENRY L. BELLMON
Route 1
P. O. Box 26
Red Rock, Oklahoma 74651
Rancher; Professor, Oklahoma State University; formerly, Governor of
Oklahoma. Date of birth: September 3, 1921.
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. Date of birth: April
18, 1931.
JAMES M. CONCANNON
950 Docking Road
Topeka, Kansas 66615
Dean and Professor of Law, Washburn University School of Law. Date of
birth: October 2, 1947.
JOHN A. DILLINGHAM
4040 Northwest Claymont Drive
Kansas City, Missouri 64116
Director and consultant, McDougal Construction Company; formerly Senior
Vice President-Sales and Marketing, Garney Companies, Inc., a specialty utility
contractor. Date of birth: January 9, 1939.
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. Date of birth: July 29, 1953.
JOHN F. HAYES*
20 West 2nd Avenue
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. Date of birth: December 11,
1919.
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. Date of birth: February 19, 1924.
WILLIAM T. MORGAN*
928 Glorietta Blvd.
Coronado, California 92118
Retired; formerly, Chairman of the Board of Directors and President of 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.
Date of birth: April 27, 1928.
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. Date of birth:
September 8, 1946.
FRANK J. ROSS, JR.*
700 West 47th Street
Kansas City, Missouri 64112
Partner, Polsinelli, White, Vardeman & Shalton, a law firm. Date of birth:
April 9, 1953.
ELEANOR B. SCHWARTZ
5100 Rockhill Road
Kansas City, Missouri 64113
Chancellor, University of Missouri-Kansas City; formerly, Interim
Chancellor, University of Missouri-Kansas City. Date of birth: January 1,
1937.
FREDERICK VOGEL III
1805 West Bradley Road
Milwaukee, Wisconsin 53217
Retired. Date of birth: August 7, 1935.
PAUL S. WISE
P. O. Box 5248
8648 Silver Saddle Drive
Carefree, Arizona 85377
Director of Potash Corporation of Saskatchewan. Date of birth: July 16,
1920.
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. Date of birth: November 12, 1936.
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. Date of birth: December 8,
1942.
Theodore W. Howard
Vice President, Treasurer and Principal Accounting Officer of the Fund and
each of the other funds in the Fund Complex; Vice President of Waddell & Reed
Services Company. Date of birth: July 18, 1942.
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. Date of birth:
February 9, 1959.
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 or her past services whether or not
services are rendered in his or her capacity as Director Emeritus, but has no
authority or responsibility with respect to management of the Fund. Messrs.
Doyle Patterson and Jay B. Dillingham retired as Directors of the Fund and of
each of the funds in the Fund Complex effective January 1, 1997 and January 14,
1997, respectively, and each has elected a position as Director Emeritus.
During the Fund's fiscal year ended September 30, 1996, Mr. Patterson received
total compensation for his service as a Director of $47,000 from the Fund
Complex and the Fund and aggregate compensation from the Fund of $1,219. During
the Fund's fiscal year ended September 30, 1996, Mr. Dillingham received total
compensation for his service as a Director of $48,000 from the Fund Complex and
the Fund and aggregate compensation from the Fund of $1,219.
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
Total
Aggregate Compensation
Compensation From Fund
From and Fund
Director Fund Complex*
- -------- ------------ ------------
Ronald K. Richey $ 0 $ 0
Keith A Tucker 0 0
Henry L. Bellmon 1,219 48,000
Dodds I. Buchanan 1,219 48,000
Linda Graves 1,219 48,000
John F. Hayes 1,219 48,000
Glendon E. Johnson 1,219 48,000
William T. Morgan 1,219 48,000
Eleanor B. Schwartz 1,194 48,000
Frederick Vogel III 1,219 48,000
Paul S. Wise 1,219 48,000
*No pension or retirement benefits have been accrued as a part of Fund expenses.
Mr. Rogers and Mr. Ross were elected Directors on October 16, 1996. Mr.
Concannon and Mr. Dillingham were elected Directors on July 24, 1997. The
officers are paid by WRIMCO or its affiliates.
Shareholdings
As of June 30, 1997, 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 net investment income, which is derived
from the interest and earned discount on the securities the Fund holds, less
expenses (which will vary by class). The second source is net realized capital
gains, which are derived from the proceeds received from the sale of securities
at a price higher than the Fund's tax basis (usually cost) in such securities,
less losses from sales of securities at a price lower than the Fund's basis
therein; these gains can be either long-term or short-term, depending on how
long the Fund has owned the securities before it sells them. The payments made
to shareholders from net investment income and net short-term capital gains are
called dividends.
The Fund pays distributions from net capital gains (the excess of net long-
term capital gains over net short-term capital losses). It may or may not have
such gain, depending on whether securities are sold and at what price. If the
Fund has net capital gains, it will pay distributions once each year, in the
latter part of the fourth calendar quarter, except to the extent it has net
capital losses from a prior year or years to offset the gains.
Choices You Have on Your Dividends and Distributions
On your application form, you can give instructions that (i) you want cash
for your dividends and distributions, (ii) you want your dividends and
distributions paid in shares of the Fund of the same class as that with respect
to which they were paid, or (iii) you want cash for your dividends and want your
distributions paid in shares of the Fund of the same class as that with respect
to which they were paid. 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 gain 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 -- options, futures contracts or forward contracts (other
than those on foreign currencies) or 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
issuer's outstanding voting securities ("50% Diversification Requirement"); 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 shareholders' gross income, if the Fund satisfies
the additional requirement that, at the close of each quarter of its taxable
year, at least 50% of the value of its total assets consists of securities the
interest on which is excludable from gross income under section 103(a); the Fund
intends to continue to satisfy this requirement. The aggregate dividends
excludable from all shareholders' gross income may not exceed the Fund's net
tax-exempt income. The Fund uses the average annual method to determine the
exempt income portion of each distribution, and the percentage of income
designated as tax-exempt for any particular distribution may be substantially
different from the percentage of the Fund's income that was tax-exempt during
the period covered by the distribution. The treatment of dividends from the
Fund under state and local income tax laws may differ from the treatment thereof
under the Code.
Up to 85% of social security and railroad retirement benefits may be
included in taxable income for recipients whose adjusted gross income (including
income from tax-exempt sources such as the Fund) plus 50% of their benefits
exceeds certain base amounts. Exempt-interest dividends from the Fund still are
tax-exempt to the extent described above; they are only included in the
calculation of whether a recipient's income exceeds the established amounts.
If the Fund invests in any instruments that generate taxable income, under
the circumstances described in the Prospectus, distributions of the interest
earned thereon will be taxable to shareholders as ordinary income to the extent
of the Fund's earnings and profits. Moreover, if the Fund realizes capital
gains as a result of market transactions, any distribution of that gain will be
taxable to shareholders. There also may be collateral Federal income tax
consequences regarding the receipt of tax-exempt dividends by shareholders such
as S corporations, financial institutions and property and casualty insurance
companies. Any shareholder that falls into any of these categories should
consult its tax adviser concerning its investment in Fund shares.
Dividends and distributions declared by the Fund in October, November or
December of any year and payable to shareholders of record on a date in any of
those months are deemed to have been paid by the Fund and received by the
shareholders on December 31 of that year even if they are paid by the Fund
during the following January. Accordingly, those dividends and distributions
will be reported by, and (except for exempt-interest dividends) taxed to the
shareholders for the year in which that December 31 falls.
If Fund shares are sold at a loss after being held for six months or less,
the loss will be disallowed to the extent of any exempt-interest dividends
received on those shares and any balance of the loss that is not disallowed will
be treated as long-term, instead of short-term, capital loss to the extent of
any distributions received on those shares. Investors also should be aware that
if shares are purchased shortly before the record date for a taxable dividend or
distribution, the investor will receive some portion of the purchase price back
as a taxable dividend or distribution.
The Fund will be subject to a nondeductible 4% excise tax ("Excise Tax") to
the extent it fails to distribute by the end of any calendar year substantially
all of its ordinary taxable income for that year and capital gain net income for
the one-year period ending on October 31 of that year, plus certain other
amounts. It is the Fund's policy to pay sufficient taxable dividends and
distributions each year to avoid imposition of the Excise Tax. The Fund may
defer into the next calendar year net capital losses incurred between November 1
and the end of the current calendar year.
Income from Options and Futures Contracts
The use of hedging and option income strategies, such as writing (selling)
and purchasing options and futures contracts, 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 contracts 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 contracts 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 contracts 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 receives for the option it wrote and the premium it pays for the
option it buys. If an option written by the Fund lapses without being
exercised, the premium it 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 in which the Fund may invest may be "section
1256 contracts." Section 1256 contracts held by the Fund at the end of its
taxable year, other than 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 are 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 may
need to distribute any such gains to its shareholders to satisfy the
Distribution Requirement and/or avoid imposition of the Excise Tax even though
it may not have closed the transactions and received cash to pay the
distributions.
Code section 1092 (dealing with straddles) may also affect the taxation of
options and futures contracts in which the Fund may invest. That section
defines a "straddle" as offsetting positions with respect to personal property;
for these purposes, options and futures contracts are personal property.
Section 1092 generally provides that any loss from the disposition of a position
in a straddle may be deducted only to the extent the loss exceeds the unrealized
gain on the offsetting position(s) of the straddle. 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 ("OID"). As a holder of those securities, the Fund must account
for the portion of the OID that accrues on such tax-exempt securities during the
taxable year and must include in its income any OID that accrues on such 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 OID, 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 contracts 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 sales of Fund shares as a
factor in the selection of broker-dealers to execute portfolio transactions. No
allocation of brokerage or principal business is made to provide any other
benefits to WRIMCO 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.
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.
MARCH 31, 1997
Principal
Amount in
Thousands Value
MUNICIPAL BONDS
ALABAMA - 1.69%
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 $ 4,975,000
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 1,046,250
The Marshall County Health Care Authority,
Hospital Revenue Refunding Bonds,
Series 1992 (Guntersville-Arab
Medical Center),
7.0%, 10-1-2013 ....................... 1,000 1,022,500
Total ................................. 7,043,750
ALASKA - 0.86%
City of Seward, Alaska, Revenue Bonds, 1996
(Alaska Sealife Center Project),
7.65%, 10-1-2016 ...................... 2,000 2,025,000
Anchorage Parking Authority, Lease Revenue
Refunding Bonds, Series 1993 (5th Avenue
Garage Project),
6.75%, 12-1-2008 ...................... 1,500 1,565,625
Total ................................. 3,590,625
ARIZONA - 0.62%
Hayden-Winkelman Unified School District
No. 41 of Gila County, Arizona, Capital
Appreciation Refunding Bonds, Series 1995,
0.0%, 7-1-2010 ........................ 6,145 2,596,262
ARKANSAS - 0.42%
The Fayetteville Public Facilities Board,
Refunding and Improvement Revenue Bonds,
Series 1989A (Butterfield Trail Village
Project),
9.5%, 9-1-2014 ........................ 1,600 1,742,000
See Notes to Schedule of Investments on page .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
MARCH 31, 1997
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
CALIFORNIA - 5.90%
Foothill/Eastern Transportation Corridor
Agency, Toll Road Revenue Bonds, Series
1995A,
0.0%, 1-1-2013 (A) .................... $11,925 $ 7,810,875
San Joaquin Hills Transportation Corridor
Agency (Orange County, California):
Junior Lien Toll Road Revenue Bonds,
0.0%, 1-1-2002 ........................ 2,755 2,152,344
Senior Lien Toll Road Revenue Bonds,
0.0%, 1-1-2011 (A) .................... 2,500 2,053,125
Hi-Desert Memorial Hospital District,
Revenue Bonds, Series 1994A,
8.0%, 10-1-2019 ....................... 3,000 3,157,500
Sierra Kings Health Care District Revenue
Bonds, Series 1996,
6.5%, 12-1-2026 ....................... 3,000 2,898,750
Student Education Loan Marketing Corporation,
Student Loan Program Revenue Bonds,
Junior Subordinate Series III-D-2 Bonds,
6.75%, 7-1-2008 ....................... 2,500 2,500,000
Certificates of Participation (1991 Capital
Improvement Project), Bella Vista Water
District (California),
7.375%, 10-1-2017 ..................... 1,500 1,588,125
Carson Redevelopment Agency (California),
Redevelopment Project Area No. 1,
Tax Allocation Bonds, Series 1993B,
6.0%, 10-1-2016 ....................... 1,500 1,455,000
Kings County Waste Management Authority,
Solid Waste Revenue Bonds, Series 1994
(California),
7.2%, 10-1-2014 ....................... 1,000 1,053,750
Total ................................. 24,669,469
See Notes to Schedule of Investments on page .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
MARCH 31, 1997
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
COLORADO - 3.76%
City and County of Denver, Colorado:
Revenue Bonds (Jewish Community Centers
of Denver Project), Series 1994:
8.25%, 3-1-2024 ....................... $ 2,390 $ 2,452,738
7.875%, 3-1-2019 ...................... 815 837,412
Airport System Revenue Bonds,
Series 1994A,
7.5%, 11-15-2023 ...................... 3,000 3,285,000
Special Facilities Airport Revenue Bonds
(United Air Lines Project), Series 1992A,
6.875%, 10-1-2032 ..................... 2,500 2,556,250
City of Colorado Springs, Colorado,
Airport System Revenue Bonds, Series 1992A,
7.0%, 1-1-2022 ........................ 2,200 2,282,500
Pitkin County, Colorado, Lease Purchase
Agreement, Certificates of Participation
(County Administration Building Project),
Series 1991,
7.4%, 10-1-2011 ....................... 1,500 1,603,125
Mountain Village Metropolitan District, San
Miguel County, Colorado, General
Obligation Refunding Bonds, Series 1992,
8.1%, 12-1-2011 ....................... 1,435 1,596,438
Bachelor Gulch Metropolitan District,
Eagle County, Colorado, General Obligation
Bonds, Series 1996,
7.0%, 12-1-2015 ....................... 1,095 1,110,056
Total ................................. 15,723,519
See Notes to Schedule of Investments on page .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
MARCH 31, 1997
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
CONNECTICUT - 1.47%
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 $ 2,700,000
Congregational Avery Nursing Facilities
Project - 1991 Series,
8.5%, 4-1-2021 ........................ 1,490 1,586,850
Eastern Connecticut Resource Recovery
Authority, Solid Waste Revenue Bonds
(Wheelabrator Lisbon Project),
Series 1993A,
5.5%, 1-1-2014 ........................ 2,000 1,857,500
Total ................................. 6,144,350
DISTRICT OF COLUMBIA - 1.26%
Certificates of Participation, Series 1993,
District of Columbia,
7.3%, 1-1-2013 ........................ 3,000 3,172,500
District of Columbia Revenue Bonds
(National Public Radio Issue),
Series 1992,
7.625%, 1-1-2013 ...................... 2,000 2,080,000
Total ................................. 5,252,500
FLORIDA - 4.79%
Lake County, Florida, Resource Recovery
Industrial Development Refunding Revenue
Bonds (NRG/Recovery Group Project),
Series 1993A,
5.95%, 10-1-2013 ...................... 8,350 8,141,250
Sanford Airport Authority (Florida),
Industrial Development Revenue Bonds
(Central Florida Terminals, Inc. Project):
Series 1995A,
7.75%, 5-1-2021 ....................... 4,000 4,040,000
Series 1995C,
7.5%, 5-1-2021 ........................ 500 493,125
St. Johns County Industrial Development
Authority, Health Care Revenue Bonds,
Tax Exempt Series 1997A (Bayview Project),
7.1%, 10-1-2026 ....................... 4,000 3,930,000
See Notes to Schedule of Investments on page .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
MARCH 31, 1997
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
FLORIDA (Continued)
Dade County Industrial Development Authority,
Industrial Development Revenue Bonds,
Series 1995 (Miami Cerebral Palsy
Residential Services, Inc. Project),
8.0%, 6-1-2022 ........................ $ 2,000 $ 2,060,000
City of Fort Walton Beach, First Mortgage
Industrial Development Revenue Bonds,
Series 1986 (Ft. Walton Beach Ventures,
Inc. Project),
10.5%, 12-1-2016 ...................... 1,295 1,338,706
Total ................................. 20,003,081
GEORGIA - 1.18%
Coffee County Hospital Authority (Georgia),
Revenue Anticipation Certificates (Coffee
Regional Medical Center, Inc. Project),
Series 1997A,
6.75%, 12-1-2016 ...................... 5,000 4,925,000
GUAM - 0.73%
Guam Airport Authority, General Revenue
Bonds, 1993 Series B,
6.6%, 10-1-2010 ....................... 3,000 3,071,250
IDAHO - 0.51%
Idaho Health Facilities Authority, Hospital
Revenue Refunding Bonds, Series 1992
(IHC Hospitals, Inc.), Indexed Inverse
Floating Rate Securities,
8.49%, 2-15-2021 (B) .................. 2,000 2,132,500
ILLINOIS - 4.73%
Illinois Health Facilities Authority:
Revenue Refunding Bonds,
Series 1995A (Fairview Obligated
Group),
7.125%, 8-15-2017 ..................... 3,525 3,454,500
Revenue Bonds, Series 1995 (Mercy
Center for Health Care Services),
6.375%, 10-1-2015 ..................... 2,500 2,453,125
See Notes to Schedule of Investments on page .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
MARCH 31, 1997
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 $ 2,814,900
Illinois Development Finance Authority
Revenue Bonds, Series 1993C (Catholic
Charities Housing Development
Corporation Project),
6.1%, 1-1-2020 ........................ 2,500 2,403,125
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 2,098,080
Village of Hodgkins, Cook County, Illinois,
Tax Increment Revenue Refunding Bonds,
Series 1995A,
7.625%, 12-1-2013 ..................... 1,750 1,813,438
Village of Carol Stream, DuPage County,
Illinois, First Mortgage Revenue
Refunding Bonds, Series 1997 (Windsor
Park Manor Project),
7.0%, 12-1-2013 ....................... 1,500 1,464,375
Village of Bourbonnais, Kankakee County,
Illinois, Sewerage Revenue Bonds,
Series 1993,
7.25%, 12-1-2012 ...................... 1,085 1,136,537
Total ................................. 19,778,080
See Notes to Schedule of Investments on page .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
MARCH 31, 1997
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
INDIANA - 4.96%
Indianapolis Airport Authority, Special
Facilities Revenue Bonds:
Series 1995A, United Air Lines, Inc.,
Indianapolis Maintenance Center Project,
6.5%, 11-15-2031 ...................... $ 6,000 $ 6,060,000
Series 1994, Federal Express
Corporation Project,
7.1%, 1-15-2017 ....................... 4,500 4,770,000
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 3,037,500
Indiana Development Finance Authority, Pollution
Control Refunding Revenue Bonds (Inland Steel
Company Project No. 12), Series 1995,
6.85%, 12-1-2012 ...................... 2,500 2,528,125
Indiana Health Facility Financing Authority:
Hospital Revenue Refunding Bonds, Series 1996
(Hancock Memorial Hospital and Health Services),
6.125%, 8-15-2017 ..................... 1,250 1,203,125
Hospital Revenue Bonds, Series 1992
(Fayette Memorial Hospital Project),
7.2%, 10-1-2022 ....................... 1,000 1,046,250
City of Carmel, Indiana, Retirement Rental
Housing Revenue Refunding Bonds (Beverly
Enterprises - Indiana, Inc. Project),
Series 1992,
8.75%, 12-1-2008 ...................... 1,500 1,642,500
Indiana Housing Finance Authority, Residential
Mortgage Bonds, 1988 Series R-A,
0.0%, 1-1-2013 ........................ 1,725 450,656
Total ................................. 20,738,156
See Notes to Schedule of Investments on page .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
MARCH 31, 1997
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
IOWA - 0.34%
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 $ 1,429,875
KANSAS - 1.23%
Kansas Development Finance Authority,
Community Provider Loan Program (Community
Living Opportunities, Inc.), Series
1992A Revenue Bonds,
8.875%, 9-1-2011 ...................... 2,790 2,967,863
City of Prairie Village, Kansas, Claridge
Court Project Revenue Bonds, Series 1993A:
8.5%, 8-15-2004 ....................... 1,000 1,085,000
8.75%, 8-15-2023 ...................... 1,000 1,085,000
Total ................................. 5,137,863
KENTUCKY - 1.01%
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 3,206,250
County of Perry, Kentucky, Solid Waste
Disposal Revenue Bonds (TJ International
Project), Series 1994,
7.0%, 6-1-2024 ........................ 1,000 1,033,750
Total ................................. 4,240,000
LOUISIANA - 1.94%
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 2,856,563
Pollution Control Revenue Bonds
(Union Carbide Project),
Series 1992,
7.35%, 11-1-2022 ...................... 2,000 2,140,000
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 2,145,000
See Notes to Schedule of Investments on page .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
MARCH 31, 1997
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 $ 973,500
Total ................................. 8,115,063
MAINE - 0.66%
Maine Veterans' Homes, Revenue Bonds,
1995 Series,
7.75%, 10-1-2020 ...................... 2,810 2,778,387
MARYLAND - 1.04%
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 3,278,437
Baltimore County, Maryland, Pollution
Control Revenue Refunding Bonds,
Series 1994A (Bethlehem Steel
Corporation Project),
7.55%, 6-1-2017 ....................... 1,000 1,050,000
Total ................................. 4,328,437
MASSACHUSETTS - 6.01%
Massachusetts Industrial Finance Agency:
First Mortgage Revenue Bonds, Reeds
Landing Project, Series 1993,
8.625%, 10-1-2023 ..................... 9,945 10,740,600
Resource Recovery Revenue Bonds (SEMASS
Project), Series 1991B,
9.25%, 7-1-2015 ....................... 5,000 5,662,500
Revenue Bonds, Glenmeadow Retirement
Community Project, Series 1996C:
8.625%, 2-15-2026 ..................... 2,200 2,205,500
8.375%, 2-15-2018 ..................... 1,260 1,247,400
Revenue Bonds, Beaver Country Day School
Issue, Series 1992, Subseries A,
8.1%, 3-1-2008 ........................ 1,505 1,548,269
Massachusetts Health and Educational
Facilities Authority, Revenue Bonds,
New England Deaconess Hospital Issue,
Series D,
6.875%, 4-1-2022 ...................... 3,490 3,699,400
Total ................................. 25,103,669
See Notes to Schedule of Investments on page .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
MARCH 31, 1997
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
MICHIGAN - 0.48%
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 ....................... 800 890,000
Total ................................. 1,995,000
MISSISSIPPI - 0.52%
Lowndes County, Mississippi, Solid Waste
Disposal and Pollution Control Refunding
Revenue Bonds (Weyerhaeuser Company
Project), Series 1992B, Indexed Inverse
Floating/Fixed Term Bonds,
8.49%, 4-1-2022 (D) ................... 2,000 2,172,500
MISSOURI - 4.63%
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 4,757,725
8.25%, 4-1-2002 ....................... 620 661,075
Lake of the Ozarks Community Bridge
Corporation, Bridge System Revenue Bonds,
Series 1996,
6.4%, 12-1-2025 ....................... 3,500 3,425,625
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 3,057,656
See Notes to Schedule of Investments on page .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
MARCH 31, 1997
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 $ 2,072,500
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 1,665,000
The Industrial Development Authority of
the City of St. Louis, Missouri,
Industrial Revenue Refunding Bonds
(Kiel Center Multipurpose Arena Project),
Series 1992,
7.75%, 12-1-2013 ...................... 1,500 1,606,875
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 ..................... 1,130 1,158,838
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 ....................... 900 967,500
Total ................................. 19,372,794
NEVADA - 1.62%
Clark County, Nevada, Industrial Development
Revenue Bonds (Southwest Gas Corporation),
1992 Series B,
7.5%, 9-1-2032 ........................ 4,000 4,245,000
Reno-Sparks Convention & Visitors Authority,
Nevada, Limited Obligation Medium-Term
Refunding Bonds, Series November 1, 1996,
6.0%, 11-1-2006 ....................... 2,640 2,541,000
Total ................................. 6,786,000
See Notes to Schedule of Investments on page .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
MARCH 31, 1997
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
NEW HAMPSHIRE - 4.63%
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 $ 4,464,487
RiverWoods at Exeter Issue,
Series 1993,
9.0%, 3-1-2023 ........................ 2,000 2,177,500
Hospital Revenue Bonds:
Catholic Medical Center Issue,
Series 1989,
8.25%, 7-1-2013 ....................... 3,000 3,187,500
Monadnock Community Hospital
Issue, Series 1990,
9.125%, 10-1-2020 ..................... 1,440 1,553,400
St. Joseph Hospital Issue,
Series 1991,
7.5%, 1-1-2016 ........................ 1,000 1,046,250
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 ........................ 1,720 1,019,100
Total ................................. 19,347,862
See Notes to Schedule of Investments on page .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
MARCH 31, 1997
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
NEW JERSEY - 4.83%
New Jersey Economic Development Authority:
First Mortgage Revenue Fixed Rate Bonds:
Franciscan Oaks Project - Series 1992A,
8.5%, 10-1-2023 ....................... $ 3,500 $ 3,797,500
Winchester Gardens at Ward Homestead
Project - Series 1996A,
8.625%, 11-1-2025 ..................... 3,000 3,116,250
Fellowship Village Project - Series 1995A,
9.25%, 1-1-2025 ....................... 2,500 2,843,750
Senior Mortgage Revenue Bonds, Arbor
Glen of Bridgewater Project - Series
1996A Bonds,
8.75%, 5-15-2026 ...................... 3,000 3,176,250
First Mortgage Revenue Bonds, The
Evergreens - Series 1992,
9.25%, 10-1-2022 ...................... 2,000 2,255,000
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 5,012,500
Total ................................. 20,201,250
NEW MEXICO - 1.56%
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 3,587,500
New Mexico Educational Assistance
Foundation, Student Loan Purchase Bonds,
Second Subordinate 1994 Series II-C (AMT),
6.0%, 12-1-2008 ....................... 3,000 2,940,000
Total ................................. 6,527,500
See Notes to Schedule of Investments on page .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
MARCH 31, 1997
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
NEW YORK - 0.91%
Tompkins County Industrial Development
Agency, Life Care Community Revenue Bonds,
1994 (Kendal at Ithaca, Inc. Project),
7.875%, 6-1-2024 ...................... $ 3,700 $ 3,815,625
OHIO - 0.76%
Hamilton County, Ohio, Health System Revenue
Bonds, Providence Hospital Issue,
Series 1992,
6.875%, 7-1-2015 ...................... 2,000 2,090,000
County of Lorain, Ohio, First Mortgage
Revenue Bonds, 1992 Series A (Kendal at
Oberlin Project),
8.625%, 2-1-2022 ...................... 1,000 1,085,000
Total ................................. 3,175,000
OKLAHOMA - 3.55%
Oklahoma County Industrial Authority,
Industrial Development Revenue Bonds:
1986 Series B (Choctaw Nursing
Center Project):
10.25%, 9-1-2016 (C) .................. 1,230 1,045,500
10.125%, 9-1-2006 (C) ................. 525 446,250
1986 Series A (Westlake Nursing Center
Project):
10.25%, 9-1-2016 ...................... 905 928,240
10.125%, 9-1-2006 ..................... 430 441,042
Bixby Public Works Authority, Utility
System Revenue Bonds, Refunding
Series 1994,
7.25%, 11-1-2019 ...................... 2,685 2,839,387
The Clinton Public Works Authority,
Refunding and Improvement Revenue
Bonds, Series 1994,
6.25%, 1-1-2019 ....................... 2,575 2,594,313
See Notes to Schedule of Investments on page .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
MARCH 31, 1997
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 $ 2,052,844
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 1,482,213
Holdenville Industrial Authority,
Correctional Facility Revenue Bonds,
Series 1995,
6.7%, 7-1-2015 ........................ 1,250 1,262,500
Total ................................. 14,820,289
OREGON - 1.59%
Klamath Falls Intercommunity Hospital
Authority, Gross Revenue Bonds,
Series 1994 (Merle West Medical Center
Project),
7.1%, 9-1-2024 ........................ 3,500 3,688,125
Myrtle Creek Building Authority, Gross
Revenue Bonds, Series 1996A (Myrtle Creek
Golf Course Project),
8.0%, 6-1-2021 ........................ 3,000 2,966,250
Total ................................. 6,654,375
PENNSYLVANIA - 8.30%
Delaware County Authority (Pennsylvania),
First Mortgage Revenue Bonds
(Riddle Village Project):
Series 1992,
9.25%, 6-1-2022 ....................... 6,000 7,230,000
Series 1994,
8.25%, 6-1-2022 ....................... 4,000 4,805,000
See Notes to Schedule of Investments on page .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
MARCH 31, 1997
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 $ 2,115,000
Exempt Facilities Revenue Bonds, 1992
Series B (Pennsylvania Gas and Water
Company Project),
7.125%, 12-1-2022 ..................... 1,000 1,053,750
Philadelphia Authority for Industrial
Development, Commercial Development Revenue
Refunding Bonds (Doubletree Guest Suites
Project), Series 1997A,
6.5%, 10-1-2027........................ 3,500 3,399,375
Allegheny County Industrial Development
Authority (Pennsylvania), Environmental
Improvement Revenue Bonds (USX Corporation
Project), Refunding Series A 1994,
6.7%, 12-1-2020 ....................... 3,000 3,105,000
McKeesport Hospital Authority (Commonwealth
of Pennsylvania), Hospital Revenue Bonds,
Series of 1993 (McKeesport Hospital Project),
6.5%, 7-1-2008 ........................ 2,500 2,537,500
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 2,212,500
Allentown Area Hospital Authority, Hospital
Revenue Bonds (Sacred Heart Hospital of
Allentown), Series A of 1993,
6.75%, 11-15-2014 ..................... 2,115 2,178,450
Clearfield Hospital Authority, Hospital
Revenue and Refunding Bonds (Clearfield
Hospital Project), Series 1994,
6.875%, 6-1-2016 ...................... 2,000 2,057,500
South Wayne County Water and Sewer Authority
(Wayne County, Pennsylvania), Sewer Revenue
Bonds, Series of 1992,
8.2%, 4-15-2013 ....................... 1,830 1,864,312
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 1,504,800
See Notes to Schedule of Investments on page .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
MARCH 31, 1997
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
PENNSYLVANIA (Continued)
Wilkins Area Industrial Development Authority
(Pennsylvania), First Mortgage Revenue
Bonds (Longwood at Oakmont, Inc. Continuing
Care Retirement Community Project),
Series 1991A,
10.0%, 1-1-2021 ....................... $ 525 $ 584,719
Clarion County Industrial Development Authority
(Pennsylvania), Health Facilities Revenue
Refunding Bonds (Beverly Enterprises
Project), Series 1985,
10.125%, 5-1-2007 ..................... 35 37,844
Total ................................. 34,685,750
RHODE ISLAND - 0.49%
City of Providence, Rhode Island, Special
Obligation Tax Increment Bonds, Series D,
6.65%, 6-1-2016 ....................... 2,000 2,030,000
SOUTH CAROLINA - 0.87%
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 2,160,000
McCormick County, South Carolina, Hospital
Facilities Revenue Bonds, Series 1988
(McCormick Health Care Center Project),
10.5%, 3-1-2018 ....................... 1,440 1,474,733
Total ................................. 3,634,733
SOUTH DAKOTA - 0.48%
South Dakota Health and Educational
Facilities Authority, Refunding Revenue
Bonds (Westhills Village Retirement
Community Issue), Series 1993,
7.25%, 9-1-2013 ....................... 2,000 2,000,000
See Notes to Schedule of Investments on page .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
MARCH 31, 1997
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
TENNESSEE - 1.34%
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 $ 2,140,000
The Health and Educational Facilities
Board of the City of Crossville, Tennessee,
Hospital Revenue Improvement Bonds,
Series 1992 (Cumberland Medical Center),
6.75%, 11-1-2012 ...................... 2,000 2,045,000
Upper Cumberland Gas Utility District
(of Cumberland County, Tennessee),
Gas System Revenue Bonds, Series 1996,
7.0%, 3-1-2016 ........................ 1,400 1,396,500
Total ................................. 5,581,500
TEXAS - 7.22%
AllianceAirport 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 4,905,000
Federal Express Corporation Project,
Series 1996,
6.375%, 4-1-2021 ...................... 8,500 8,393,750
Dallas-Fort Worth International Airport
Facility Improvement Corporation:
American Airlines, Inc., Revenue Bonds,
Series 1990,
7.5%, 11-1-2025 ....................... 2,000 2,125,000
Delta Air Lines, Inc. Revenue Bonds,
Series 1991,
7.6%, 11-1-2011........................ 1,300 1,399,125
See Notes to Schedule of Investments on page .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
MARCH 31, 1997
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
TEXAS (Continued)
City of Houston Housing Corporation
No. 1, First Lien Revenue Refunding
Bonds, Series 1996 (6800 Long Drive
Apartments - Section 8 New Construction
Program), Houston, Texas,
6.625%, 2-1-2020 ...................... $ 2,305 $ 2,273,306
Tyler Health Facilities Development
Corporation, Hospital Revenue Bonds
(East Texas Medical Center Regional
Healthcare System Project),
Series 1993B,
6.75%, 11-1-2025 ...................... 1,500 1,533,750
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 1,180,594
Total ................................. 30,198,194
UTAH - 0.85%
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 1,801,962
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
Total ................................. 3,551,962
VERMONT - 1.79%
Vermont Industrial Development Authority,
Mortgage Revenue Bonds, Wake Robin
Corporation Project, Series 1993A:
8.75%, 4-1-2023 ....................... 4,465 4,799,875
8.75%, 3-1-2023 ....................... 2,500 2,687,500
Total ................................. 7,487,375
VIRGIN ISLANDS - 0.36%
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 1,503,250
See Notes to Schedule of Investments on page .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
MARCH 31, 1997
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
VIRGINIA - 1.56%
Norfolk Redevelopment and Housing Authority,
Multifamily Rental Housing Facility
Revenue Bonds, Series 1996 (1016 Limited
Partnership-Sussex Apartments Project),
8.0%, 9-1-2026 ........................ $3,500 $ 3,515,575
Fairfax County Redevelopment and Housing
Authority, Multifamily Housing Revenue
Refunding Bonds (Burke Shire Commons
Apartments Project), Series 1996,
7.6%, 10-1-2036 ....................... 3,000 3,000,000
Total ................................. 6,515,575
WEST VIRGINIA - 0.37%
Upshur County, West Virginia, Solid Waste
Disposal Revenue Bonds (TJ International
Project), Series 1995,
7.0%, 7-15-2025 ....................... 1,500 1,554,375
WISCONSIN - 2.36%
Wisconsin Health and Educational Facilities
Authority, Revenue Bonds, Series 1995:
National Regency of New Berlin, Inc.
Project,
8.0%, 8-15-2025 ....................... 4,500 4,590,000
Hess Memorial Hospital Association, Inc.
Project,
7.75%, 11-1-2015 ...................... 3,400 3,446,750
City of Superior, Wisconsin, Water Supply
Facilities Revenue Refunding Bonds
(Superior Water, Light and Power Company
Project), Series 1996,
6.125%, 11-1-2021 ..................... 1,910 1,821,663
Total ................................. 9,858,413
WYOMING - 0.62%
Sweetwater County, Wyoming, Solid Waste
Disposal Revenue Bonds (FMC Corporation
Project), Series 1994B,
6.9%, 9-1-2024 ........................ 2,500 2,612,500
TOTAL MUNICIPAL BONDS - 96.80% $404,625,658
(Cost: $388,536,929)
TOTAL SHORT-TERM SECURITIES - 2.33% $ 9,728,601
(Cost: $9,728,601)
See Notes to Schedule of Investments on page .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
MARCH 31, 1997
Value
TOTAL INVESTMENT SECURITIES - 99.13% $414,354,259
(Cost: $398,265,530)
CASH AND OTHER ASSETS, NET OF LIABILITIES - 0.87% 3,642,915
NET ASSETS - 100.00% $417,997,174
See Notes to Schedule of Investments on page .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
MARCH 31, 1997
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 based on the formula 11.95% less the Kenny S&P Index.
Minimum coupon rate is 0%. On February 15, 1999, rate becomes fixed at
6.65%.
(C) Non-income producing as the issuer has either missed its most recent
interest payment or declared bankruptcy.
(D) Coupon resets weekly based on the formula 11.95% less the Kenny S&P Index.
Minimum coupon rate is 0%. On April 1, 1999, rate becomes fixed at 6.70%.
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
MARCH 31, 1997
Assets
Investment securities - at value
(Notes 1 and 3) ................................. $414,354,259
Cash ............................................. 65,319
Receivables:
Interest ........................................ 8,562,201
Fund shares sold ................................ 775,207
Prepaid insurance premium ........................ 7,871
Other ............................................ 2,682
------------
Total assets .................................. 423,767,539
------------
Liabilities
Payable for investment securities purchased ...... 3,500,000
Payable for Fund shares redeemed ................. 1,831,568
Dividends payable ................................ 284,456
Accrued service fee (Note 2) ..................... 114,854
Accrued transfer agency and dividend
disbursing (Note 2) ............................. 28,726
Accrued management fee (Note 2) .................. 5,761
Accrued accounting services fee (Note 2) ......... 5,000
------------
Total liabilities ............................. 5,770,365
------------
Total net assets ............................. $417,997,174
============
Net Assets
$1.00 par value capital stock, authorized --
100,000,000; shares outstanding -- 78,071,377
Capital stock ................................... $ 78,071,377
Additional paid-in capital ...................... 321,042,208
Accumulated undistributed income:
Accumulated undistributed net realized
gain on investment transactions ............... 2,794,860
Net unrealized appreciation in value of
investments ................................... 16,088,729
------------
Net assets applicable to outstanding
units of capital ............................. $417,997,174
============
Net asset value per share (net assets divided
by shares outstanding) ........................... $5.35
=====
See notes to financial statements.
<PAGE>
UNITED MUNICIPAL HIGH INCOME FUND, INC.
STATEMENT OF OPERATIONS
For the Six Months Ended MARCH 31, 1997
Investment Income
Interest and amortization (Note 1B) .............. $14,516,031
-----------
Expenses (Note 2):
Investment management fee ....................... 1,027,732
Service fee ..................................... 301,320
Transfer agency and dividend disbursing ......... 177,577
Accounting services fee ......................... 30,000
Audit fees ...................................... 12,332
Custodian fees .................................. 12,347
Legal fees ...................................... 11,684
Other ........................................... 81,084
-----------
Total expenses ................................ 1,654,076
-----------
Net investment income ........................ 12,861,955
-----------
Realized and Unrealized Gain (Loss) on Investments
(Notes 1 and 3)
Realized net gain on investments ................. 4,389,249
Unrealized depreciation in value of investments
during the period ............................... (283,886)
-----------
Net gain on investments ......................... 4,105,363
-----------
Net increase in net assets resulting
from operations .............................. $16,967,318
===========
See notes to financial statements.
<PAGE>
UNITED MUNICIPAL HIGH INCOME FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
For the For the
six months fiscal year
ended ended
March 31, September 30,
1997 1996
------------ ------------
Increase in Net Assets
Operations:
Net investment income ...............$ 12,861,955 $ 25,039,519
Realized net gain on
investments ....................... 4,389,249 2,528,353
Unrealized appreciation
(depreciation) ..................... (283,886) 772,319
------------ ------------
Net increase in net assets
resulting from operations ........ 16,967,318 28,340,191
------------ ------------
Dividends to shareholders (Note 1D):*
From net investment income .......... (12,861,955) (25,039,519)
Realized net gain on investment
transactions ...................... (1,101,874) ---
------------ ------------
(13,963,829) (25,039,519)
------------ ------------
Capital share transactions:
Proceeds from sale of shares
(4,848,547 and 7,034,526 shares,
respectively) ..................... 26,087,984 37,292,742
Proceeds from reinvestment of
dividends and/or capital gains
distribution (2,124,658 and 3,840,968
shares, respectively) ............. 11,429,623 20,390,179
Payments for shares redeemed
(4,154,484 and 8,297,041 shares,
respectively) ..................... (22,347,615) (43,964,829)
------------ ------------
Net increase in net assets
resulting from capital
share transactions ............... 15,169,992 13,718,092
------------ ------------
Total increase ................... 18,173,481 17,018,764
Net Assets
Beginning of period .................. 399,823,693 382,804,929
------------ ------------
End of period ........................$417,997,174 $399,823,693
============ ============
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
six For the fiscal year ended
months September 30,
ended ------------------------------------
3/31/97 1996 1995 1994 1993 1992
------- ------ ------ ------ ------ ------
Net asset value,
beginning of
period ........... $5.31 $5.27 $5.12 $5.53 $5.23 $5.05
----- ----- ----- ----- ----- -----
Income from investment
operations:
Net investment
income........... 0.17 .34 .35 .34 .35 .36
Net realized and
unrealized gain
(loss) on
investments ..... 0.05 .04 .17 (0.34) .34 .18
----- ----- ----- ----- ----- -----
Total from investment
operations ....... 0.22 .38 .52 0.00 .69 .54
----- ----- ----- ----- ----- -----
Less distributions:
Dividends declared from
net investment
income .......... (0.17) (0.34) (0.35) (0.34) (0.35) (0.36)
Distribution from
capital gains ... (0.01) (0.00) (0.00) (0.07) (0.04) (0.00)
Distribution in excess
of capital gains. (0.00) (0.00) (0.02) (0.00) (0.00) (0.00)
----- ----- ----- ----- ----- -----
Total distributions. (0.18) (0.34) (0.37) (0.41) (0.39) (0.36)
----- ----- ----- ----- ----- -----
Net asset value, end
of period ........ $5.35 $5.31 $5.27 $5.12 $5.53 $5.23
===== ===== ===== ===== ===== =====
Total return* ...... 8.03% 7.40% 10.63% 0.05% 13.77% 11.08%
Net assets, end
of period (000
omitted) ..........$417,997$399,824$382,805$345,162$329,373$260,777
Ratio of expenses to
average net
assets ........... 0.81%** 0.81% 0.76% 0.76% 0.70% 0.72%
Ratio of net investment
income to average
net assets ....... 6.29%** 6.41% 6.75% 6.39% 6.49% 7.08%
Portfolio turnover
rate ............. 12.57% 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.
**Annualized.
See notes to financial statements.
<PAGE>
UNITED MUNICIPAL HIGH INCOME FUND, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1997
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 Subchapter M of the
Internal Revenue Code. The Fund intends to pay distributions as required
to avoid imposition of excise tax. Accordingly, provision has not been
made for Federal income taxes. In addition, the Fund intends to meet
requirements of the Internal Revenue Code which will permit it to pay
dividends from net investment income, substantially all of which will be
exempt from Federal income tax. See Note 4 -- Federal Income Tax Matters.
D. Dividends and distributions -- 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 dividends and capital gains distributions are determined
in accordance with income tax regulations which may differ from generally
accepted accounting principles. These differences are due to differing
treatments for items such as deferral of wash sales and post-October
losses, net operating losses and expiring capital loss 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 $15.0 billion of
combined net assets at March 31, 1997) 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, 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 gross sales
commissions (which are not an expense of the Fund) of $657,909, out of which W&R
paid sales commissions of $363,749 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 $8,583, which are included in other
expenses.
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 $59,459,325, while proceeds from maturities and
sales aggregated $50,566,424. Purchases of short-term securities aggregated
$61,489,613, while proceeds from maturities and sales aggregated $57,460,036.
No U.S. Government securities were bought or sold during the period ended March
31, 1997.
For Federal income tax purposes, cost of investments owned at March 31,
1997 was $399,039,315, resulting in net unrealized appreciation of $15,314,944,
of which $17,454,941 related to appreciated securities and $2,139,997 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 has been 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 March
31, 1997, the Fund had not commenced multiclass operations.
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
United Municipal High Income Fund, Inc.:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of United Municipal High Income
Fund, Inc. (the "Fund") as of March 31, 1997, the related statements of
operations and changes in net assets for the six-month period then ended,
and the financial highlights for the six-month period then ended. These
financial statements and the financial highlights are the responsibility
of the Fund's management. Our responsibility is to express an opinion on
these financial statements and the financial highlights based on our
audit. The financial statements and the financial highlights of the Fund
for each of the periods presented in the five-year period ended September
30, 1996 were audited by other auditors whose report, dated November 8,
1996, expressed an unqualified opinion on those statements and financial
highlights.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
the financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included
confirmation of securities owned at March 31, 1997 by correspondence with
the custodian and broker. An audit also includes assessing the
accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights
present fairly, in all material respects, the financial position of the
United Municipal High Income Fund, Inc. as of March 31, 1997, the
results of its operations, the changes in its net assets, and the
financial highlights for the six-month period then ended in conformity
with generally accepted accounting principles.
Deloitte & Touche LLP
Kansas City, Missouri
May 7, 1997
<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 76.
<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 76.
<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 76.
<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 76.
<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 76.
<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 76.
<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 76.
<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 76.
<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 76.
<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 76.
<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 76.
<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 76.
<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 76.
<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 76.
<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 76.
<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 76.
<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 76.
<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 76.
<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 76.
<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 76.
<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 76.
<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 80.
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 and the six-month period ending March 31,
1997
Statements of Assets and Liabilities
For the year ended September 30, 1996 and the six-month period ending
March 31, 1997
Statements of Operations
For the two years ended September 30, 1996 and the six-month period
ending March 31, 1997
Statement of Changes in Net Assets
Schedule I -- Investment Securities as of September 30, 1996 and the
six-month period ending March 31, 1997
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.
(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, filed December 27, 1996 as EX-99.B2-mhbylaw
to Post-Effective Amendment No. 18 to the Registration Statement
on Form N-1A*
(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, as amended, attached hereto as EX-99.B8-mhca
(9) (a) Shareholder Servicing Agreement filed December 27, 1996 as
EX-99.B9-mhssa to Post-Effective Amendment No. 18 to the
Registration Statement on Form N-1A*
(b) Fund Class A Application, as amended, attached hereto as EX-
99.B9-mhappca
(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 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 filed December 27, 1996 as
EX-99.B9-mhlou to Post-Effective Amendment No. 18 to the
Registration Statement on Form N-1A*
(10) Not applicable
(11) Consent of Deloitte & Touche LLP, Independent Accountants,
attached hereto as EX-99.B11-mhconsnt
Consent of Price Waterhouse LLP, Independent Accountants,
attached hereto as EX-99.B11-mhpwcon
Opinion of Price Waterhouse LLP attached hereto as EX-99.B11-
mhpwopin
(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
filed December 27, 1996 as EX-99.B16-mhyldcla to Post-
Effective Amendment No. 18 to the Registration Statement on
Form N-1A*
(17) Financial Data Schedules attached hereto as EX-27.B17-mhfds1 and
EX-27.B17-mhfds2
(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 April 30, 1997
-------------- -------------------------------
Class A Common Stock 16,490
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.
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.
(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(a) 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 30th
day of May, 1997.
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 May 30, 1997
- ---------------------- ----------------
Ronald K. Richey
/s/Keith A. Tucker* President and Director May 30, 1997
- ---------------------- (Principal Executive Officer) ----------------
Keith A. Tucker
/s/Theodore W. Howard* Vice President, Treasurer May 30, 1997
- ---------------------- and Principal Accounting ----------------
Theodore W. Howard Officer
/s/Robert L. Hechler* Vice President and May 30, 1997
- ---------------------- Principal Financial ----------------
Robert L. Hechler Officer
/s/Henry L. Bellmon* Director May 30, 1997
- ---------------------- ----------------
Henry L. Bellmon
/s/Dodds I. Buchanan* Director May 30, 1997
- --------------------- ----------------
Dodds I. Buchanan
/s/Linda Graves* Director May 30, 1997
- ------------------ ----------------
Linda Graves
/s/John F. Hayes* Director May 30, 1997
- ------------------- ----------------
John F. Hayes
/s/Glendon E. Johnson* Director May 30, 1997
- ------------------- ----------------
Glendon E. Johnson
/s/William T. Morgan* Director May 30, 1997
- ------------------- ----------------
William T. Morgan
/s/William L. Rogers* Director May 30, 1997
- ------------------ ----------------
William L. Rogers
/s/Frank J. Ross, Jr.* Director May 30, 1997
- ------------------ ----------------
Frank J. Ross, Jr.
/s/Eleanor B Schwartz* Director May 30, 1997
- ------------------- ----------------
Eleanor B. Schwartz
/s/Frederick Vogel III* Director May 30, 1997
- ------------------- ----------------
Frederick Vogel III
/s/Paul S. Wise* Director May 30, 1997
- ------------------- ----------------
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: February 5, 1997 /s/Keith A. Tucker
--------------------------
Keith A. Tucker, President
/s/Ronald K. Richey Chairman of the Board February 5, 1997
- -------------------- ----------------
Ronald K. Richey
/s/Keith A. Tucker President and Director February 5, 1997
- -------------------- (Principal Executive ----------------
Keith A. Tucker Officer)
/s/Theodore W. Howard Vice President, Treasurer February 5, 1997
- -------------------- and Principal Accounting ----------------
Theodore W. Howard Officer
/s/Robert L. Hechler Vice President and February 5, 1997
- -------------------- Principal Financial ----------------
Robert L. Hechler Officer
/s/Henry L. Bellmon Director February 5, 1997
- -------------------- ----------------
Henry L. Bellmon
/s/Dodds I. Buchanan Director February 5, 1997
- -------------------- ----------------
Dodds I. Buchanan
/s/Linda Graves Director February 5, 1997
- -------------------- ----------------
Linda Graves
/s/John F. Hayes Director February 5, 1997
- -------------------- ----------------
John F. Hayes
/s/Glendon E. Johnson Director February 5, 1997
- -------------------- ----------------
Glendon E. Johnson
/s/William T. Morgan Director February 5, 1997
- -------------------- ----------------
William T. Morgan
/s/William L. Rogers Director February 5, 1997
- -------------------- ----------------
William L. Rogers
/s/Frank J. Ross, Jr. Director February 5, 1997
- -------------------- ----------------
Frank J. Ross, Jr.
/s/Eleanor Schwartz Director February 5, 1997
- -------------------- ----------------
Eleanor Schwartz
/s/Frederick Vogel III Director February 5, 1997
- -------------------- ----------------
Frederick Vogel III
/s/Paul S. Wise Director February 5, 1997
- -------------------- ----------------
Paul S. Wise
Attest:
/s/Sharon K. Pappas
- --------------------------------
Sharon K. Pappas, Vice President
and Secretary
<PAGE>
EX-99.B8-mhca
CUSTODIAN AGREEMENT
Dated as of November 26, 1991
Between
UNITED MISSOURI BANK, n.a.
and
UNITED MUNICIPAL HIGH INCOME FUND, INC.
<PAGE>
Table of Contents
ARTICLE
I. Appointment of Custodian
II. Powers and Duties of Custodian
2.01 Safekeeping
2.02 Manner of Holding Securities
2.03 Purchase of Assets
2.04 Exchanges of Securities
2.05 Sales of Securities
2.06 Depositary Receipts
2.07 Exercise of Rights, Tender Offers, Etc.
2.08 Stock Dividends, Rights, Etc.
2.09 Options
2.10 Futures Contracts
2.11 Borrowing
2.12 Interest Bearing Deposit
2.13 Foreign Exchange Transactions
2.14 Securities Loan
2.15 Collections
2.16 Dividends, Distributions and Redemptions
2.17 Proceeds from Shares Sold
2.18 Proxies, Notices, Etc.
2.19 Bills and Other Disbursements
2.20 Nondiscretionary Functions
2.21 Bank Accounts
2.22 Deposit of Fund Assets in Securities System
2.23 Other Transfers
2.24 Establishment of Segregated Account
2.25 Custodian's Books and Records
2.26 Opinion of Fund's Independent
Certified Public Accountants
2.27 Reports by Independent Certified Public
Accountants
2.28 Overdraft Facility
III. Proper Instructions, Special Instructions
and Related Matters
3.01 Proper Instruction and Special Instructions
3.02 Authorized Persons
3.03 Persons Having Access to Assets of the Portfolios
3.04 Actions of Custodian Based on Proper
Instructions and Special Instructions
IV. Subcustodians
4.01 Domestic Subcustodians
4.02 Foreign Sub-Subcustodians and
Interim Sub-Subcustodians
4.03 Special Subcustodians
4.04 Termination of a Subcustodian
4.05 Certification Regarding Foreign Sub-Subcustodians
V. Standard of Care, Indemnification
5.01 Standard of Care
5.02 Liability of the Custodian for Actions
of Other Person
5.03 Indemnification by Fund
5.04 Investment Limitations
5.05 Fund's Right to Proceed
5.06 Indemnification by Custodian
5.07 Custodian's Right to Proceed
VI. Compensation
VII. Termination
VIII. Defined Terms
IX. Miscellaneous
9.01 Execution of Documents, Etc.
9.02 Representations and Warranties
9.03 Entire Agreement
9.04 Waivers and Amendments
9.05 Interpretation
9.06 Captions
9.07 Governing Law
9.08 Notices
9.09 Assignment
9.10 Counterparts
9.11 Confidentiality
Appendices
Appendix "A"
Appendix "B"
<PAGE>
CUSTODIAN AGREEMENT
AGREEMENT made as of the 26th day of November, 1991 between United
Municipal High Income Fund, Inc. (the "Fund") and United Missouri Bank, n.a.
(the "Custodian").
WITNESSETH
WHEREAS, the Fund desires to appoint the Custodian as custodian on behalf
of the Fund in accordance with the provisions of the Investment Company Act of
1940, as amended (the "1940 Act") and the rules and regulations thereunder,
under the terms and conditions set forth in this Agreement, and the Custodian
has agreed so to act as custodian.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, the parties hereto agree as follows:
ARTICLE I
APPOINTMENT OF CUSTODIAN
Subject to the terms and provisions of this Agreement, the Fund hereby
employs and appoints the Custodian as a custodian of the cash, securities and
other assets owned by the Fund and deposited from time to time with the
Custodian ("Assets"). The Fund shall deliver to the Custodian, or shall cause
to be delivered to the Custodian, Assets during the term of this Agreement. The
Custodian is authorized to act under the terms and conditions of this Agreement
as the Fund's agent and shall be representing the Fund when acting within the
scope of this Agreement. The Custodian hereby accepts such appointment as
custodian and shall perform the duties and responsibilities set forth herein on
the terms and conditions set forth herein.
ARTICLE II
POWERS AND DUTIES OF CUSTODIAN
As custodian, the Custodian shall have and perform the powers and duties
set forth in this Article II. Pursuant to and in accordance with Article IV
hereof, the Custodian may appoint one or more Subcustodians (as hereinafter
defined) to exercise the powers and perform the duties of the Custodian set
forth in this Article II and references to the Custodian in this Article II
shall include any Subcustodian so appointed.
Section 2.01. Safekeeping. The Custodian shall accept delivery of and
keep safely the Assets in accordance with the terms and conditions hereof on
behalf of the Fund.
Section 2.02. Manner of Holding Securities.
(a) The Custodian shall at all times hold securities of the Fund either:
(i) by physical possession of the share certificates or other instruments
representing such securities in registered or bearer form; or (ii) in book-entry
form by a Securities System (as hereinafter defined) in accordance with the
provisions of Section 2.22 below.
(b) The Custodian may at all times hold registered securities of the Fund
in the name of the Fund or the Fund's nominee, or in the nominee name of the
Custodian unless specifically directed by Proper Instructions (as hereinafter
defined) to hold such registered securities in so-called street name; provided
that, in any event, all Assets shall be held in an account of the Custodian
containing only assets of the Fund. Notwithstanding the foregoing, unless it
receives Proper Instructions to the contrary, the Custodian shall register all
securities in the name of the Custodian's nominee as authorized by the Fund.
All securities held directly or indirectly by the Custodian hereunder shall at
all times be identifiable on the records of the Custodian. Except as otherwise
provided herein, the Custodian shall keep the Assets physically segregated from
those of other persons or entities. The Custodian shall execute and deliver all
certificates and documents in connection with registration of securities as may
be required by the applicable provisions of the Internal Revenue Code, the laws
of any State or territory of the United States and the laws of any jurisdiction
in which the securities are held.
Section 2.03. Purchase of Assets.
(a) Security Purchases. Upon receipt of Proper Instructions, the
Custodian shall pay for and receive securities purchased for the account of the
Fund, provided that payment shall be made by Custodian only upon receipt of the
securities: (a) by the Custodian; (b) by a clearing corporation of a national
securities exchange of which the Custodian is a member; or (c) by a Securities
System. Notwithstanding the foregoing, upon receipt of Proper Instructions:
(i) in the case of a repurchase agreement, the Custodian may release funds to a
Securities System prior to the receipt of advice from the Securities System that
the securities underlying such repurchase agreement have been transferred by
book-entry into the Account (as hereinafter defined) maintained with such
Securities System by the Custodian, provided that the Custodian's instructions
to the Securities System require that the Securities System may make payment of
such funds to the other party to the repurchase agreement only upon transfer by
book-entry of the securities underlying the repurchase agreement into the
Account; (ii) in the case of time deposits, call account deposits, currency
deposits and other deposits, foreign exchange transactions, futures contracts or
options, pursuant to Sections 2.09, 2.10, 2.12 and 2.13 hereof, the Custodian
may make payment therefor before receipt of an advice or transaction; and (iii)
in the case of the purchase of securities, the settlement of which occurs
outside of the United States of America, the Custodian may make payment therefor
and receive delivery of such securities in accordance with local custom and
practice generally accepted by Institutional Clients (as hereinafter defined) in
the country in which the settlement occurs, but in all events subject to the
standard of care set forth in Article V hereof. For purposes of this Agreement,
an "Institutional Client" shall mean a major commercial bank, corporation,
insurance company, or substantially similar institution, which, as a substantial
part of its business operations, purchases or sells securities and makes use of
custodial services.
(b) Other Asset Purchases. Upon receipt of Proper Instructions and except
as otherwise provided herein, the Custodian shall pay for and receive other
Assets for the account of the Fund as provided in Proper Instructions.
Section 2.04. Exchanges of Securities. Upon receipt of Proper
Instructions, the Custodian shall exchange securities held by it for the account
of the Fund for other securities in connection with any reorganization,
recapitalization, split-up of shares, change of par value, conversion or other
event relating to the securities or the issuer of such securities, and shall
deposit any such securities in accordance with the terms of any reorganization
or protective plan. The Custodian shall, without receiving Proper Instructions:
surrender securities for transfer into the name of the Fund, the Fund's nominee
or the nominee name of the Custodian as permitted by Section 2.02(b); and
surrender securities for a different number of certificates or instruments
representing the same number of shares or same principal amount of indebtedness,
provided that the securities to be issued will be delivered to the Custodian.
Section 2.05. Sales of Securities. Upon receipt of Proper Instructions,
the Custodian shall make delivery of securities which have been sold for the
account of the Fund, but only against payment therefor in the form of: (a)
cash, certified check, bank cashier's check, bank credit, or bank wire transfer;
(b) credit to the account of the Custodian with a clearing corporation of a
national securities exchange of which the Custodian is a member; or (c) credit
to the Account of the Custodian with a Securities System, in accordance with the
provisions of Section 2.22 hereof. Notwithstanding the foregoing: (i) in the
case of the sale of securities, the settlement of which occurs outside of the
United States of America, such securities shall be delivered and paid for in
accordance with local custom and practice generally accepted by Institutional
Clients in the country in which the settlement occurs, but in all events subject
to the standard of care set forth in Article V hereof; and (ii) in the case of
securities held in physical form, such securities shall be delivered and paid
for in accordance with "street delivery custom" to a broker or its clearing
agent, against delivery to the Custodian of a receipt for such securities,
provided that the Custodian shall have taken reasonable steps to ensure prompt
collection of the payment for, or return of, such securities by the broker or
its clearing agent, and provided further that, subject to the standard of care
set forth in Article V hereof, the Custodian shall not be responsible for the
selection of or the failure or inability to perform of such broker or its
clearing agent.
Section 2.06. Depositary Receipts. Upon receipt of Proper Instructions,
the Custodian shall surrender securities to the depositary used for such
securities by an issuer of American Depositary Receipts or International
Depositary Receipts (hereinafter referred to, collectively , a "ADRs"), against
a written receipt therefor adequately describing such securities and written
evidence satisfactory to the Custodian that the depositary has acknowledged
receipt of instructions to issue ADRs with respect to such securities in the
name of the Custodian or a nominee of the Custodian, for delivery to the
Custodian at such place as the Custodian may from time to time designate. Upon
receipt of Proper Instructions, the Custodian shall surrender ADRs to the issuer
thereof, against a written receipt therefor adequately describing the ADRs
surrendered and written evidence satisfactory to the Custodian that the issuer
of the ADRs has acknowledged receipt of instructions to cause its depository to
deliver the securities underlying such ADRs to the Custodian.
Section 2.07. Exercise of Rights, Tender Offers, Etc. Upon receipt of
Proper Instructions, the Custodian shall: (a) deliver warrants, puts, calls,
rights or similar securities to the issuer or trustee thereof (or to the agent
of such issuer or trustee) for the purpose of exercise or sale, provided that
the new securities, cash or other Assets, if any, acquired as a result of such
actions are to be delivered to the Custodian; and (b) deposit securities upon
invitations for tenders thereof, provided that the consideration for such
securities is to be paid or delivered to the Custodian, or the tendered
securities are to be returned to the Custodian. Notwithstanding any provision
of this Agreement to the contrary, the Custodian shall promptly notify the Fund
in writing of (i) any default in payment of funds on securities; (ii) any
securities that have matured, been called or redeemed; and (iii) to the extent
the Custodian has notice which is contained in services to which it normally
subscribes for such purposes, or actual knowledge if not contained in such
services, any other default involving securities; and all announcements of
defaults, bankruptcies, reorganizations, mergers, consolidations,
recapitalizations or rights or privileges to subscribe, convert, exchange, put,
redeem or tender securities held subject to this Agreement. The Custodian
shall, following receipt or knowledge, convey such information to the Fund in a
timely manner based upon the circumstances of each particular case. Whenever
any such rights or privileges exist, the Fund will, in a timely manner based
upon the circumstances of each particular case, provide the Custodian with
Proper Instructions. Absent the Custodian's timely receipt of Proper
Instructions, the Custodian shall not be liable for not taking any action or not
exercising such rights prior to their expiration unless such failure is due to
Custodian's failure to give timely notice to the Fund in accordance with this
Section 2.07.
Section 2.08. Stock Dividends, Rights, Etc. The Custodian shall receive
and collect all stock dividends, rights and other items of like nature and, upon
receipt of Proper Instructions, take action with respect to the same as directed
in such Proper Instructions.
Section 2.09. Options. Upon receipt of Proper Instructions and in
accordance with the provisions of any agreement between the Custodian, any
registered broker-dealer and, if necessary, the Fund relating to compliance with
the rules of the Options Clearing Corporation (the "OCC") or of any registered
national securities exchange or similar organization(s), the Custodian shall:
(a) receive and retain confirmations or other documents, if any, evidencing the
purchase or writing of an option by the Fund; (b) deposit and maintain in a
segregated account, securities (either physically or by book-entry in a
Securities System), cash or other Assets; and (c) pay, release and/or transfer
such securities, cash or other Assets in accordance with any such agreement and
with notices or other communications evidencing the expiration, termination or
exercise of such options furnished by the OCC, the securities or options
exchange on which such options are traded or such other organization as may be
responsible for handling such option transactions. The Fund and the broker-
dealer shall be responsible for determining the sufficiency of assets held in
any segregated account established in compliance with applicable margin
maintenance requirements and the performance of other terms of any option
contract; provided, however, that the Custodian shall be liable for performance
of its duties under this Agreement and in accordance with Proper Instructions,
and shall be liable for performance of its duties under any other agreement
between the Custodian, any registered broker-dealer and, if necessary, the Fund.
Notwithstanding anything herein to the contrary, if the Fund issues Proper
Instructions to sell a naked option (including stock index options), then as
part of the transaction, the Custodian, the Fund and the broker-dealer shall
have entered into a tri-party agreement, as described above.
Section 2.10. Futures Contracts. Upon receipt of Proper Instructions,
or pursuant to the provisions of any futures margin procedural agreement among
the Fund, the Custodian and any futures commission merchant (a "Procedural
Agreement"), the Custodian shall: (a) receive and retain confirmations, if any
evidencing the purchase of or sale of a futures contract or an option on a
futures contract by the Fund; (b) deposit and maintain in a segregated account
cash, securities and other Assets designated as initial, maintenance or
variation "margin" deposits intended to secure the Fund's performance of its
obligations under any futures contracts purchased or sold or any options on
futures contracts written by the Fund, in accordance with the provisions of the
Commodity Futures Trading Commission and/or any commodity exchange or contract
market (such as the Chicago Board of Trade), or any similar organization(s),
regarding such margin deposits; and (c) release assets from and/or transfer
assets into such margin accounts only in accordance with any such Procedural
Agreements. The Fund and such futures commission merchant shall be responsible
for determining the sufficiency of assets held in the segregated account in
compliance with applicable margin maintenance requirements and the performance
of any futures contract or option on a futures contract in accordance with its
terms; provided, however, that the Custodian shall be liable for performance of
its duties under this Agreement and in accordance with Proper Instructions, and
shall be liable for performance of its duties under any Procedural Agreement.
Section 2.11. Borrowing. Upon receipt of Proper Instructions, the
Custodian shall deliver securities of the Fund to lenders or their agents, or
otherwise establish a segregated account as agreed to by the Fund and the
Custodian, as collateral for borrowings effected by the Fund, provided that such
borrowed money is payable by the lender (a) to or upon the Custodian's order, as
Custodian for the Fund, and (b) concurrently with delivery of such securities.
Section 2.12. Interest Bearing Deposits. Upon receipt of Proper
Instructions directing the Custodian to purchase interest bearing fixed term and
call deposits (hereinafter referred to collectively, as "Interest Bearing
Deposits") for the account of the Fund, the Custodian shall purchase such
Interest Bearing Deposits in the name of the Fund with such banks or trust
companies (including the Custodian, any Subcustodian or any subsidiary or
affiliate of the Custodian) (hereinafter referred to as "Banking Institutions")
and in such amounts as the Fund may direct pursuant to Proper Instructions.
Such Interest Bearing Deposits may be denominated in U.S. Dollars or other
currencies, as the Fund may determine and direct pursuant to Proper
Instructions. The Custodian shall include in its records with respect to the
Assets of the Fund appropriate notation as to the amount and currency of each
such Interest Bearing Deposit, the accepting Banking Institution and all other
appropriate details, and shall retain such forms of advice or receipt evidencing
such account, if any, as may be forwarded to the Custodian by the Banking
Institution. The responsibilities of the Custodian to the Fund for Interest
Bearing Deposits accepted on the Custodian's books in the United States shall be
that of a U.S. bank for a similar deposit. With respect to Interest Bearing
Deposits other than those accepted on the Custodian's books, (a) the Custodian
shall be responsible for the collection of income as set forth in Section 2.15
and the transmission of cash and instructions to and from such accounts; and
(b) the Custodian shall have no duty with respect to the selection of the
Banking Institution or, so long as the Custodian acts in accordance with Proper
Instructions and the terms and conditions of this Agreement, for the failure of
such Banking Institution to pay upon demand. Upon receipt of Proper
Instructions, the Custodian shall take such reasonable actions as the Fund deems
necessary or appropriate to cause each such Interest Bearing Deposit account to
be insured to the maximum extent possible by all applicable deposit insurers
including, without limitation, the Federal Deposit Insurance Corporation.
Section 2.13. Foreign Exchange Transactions.
(a) Foreign Exchange Transactions Other than as Principal. Upon receipt
of Proper Instructions, the Custodian shall settle foreign exchange contracts or
options to purchase and sell foreign currencies for spot and future delivery on
behalf of and for the account of the Fund with such currency brokers or Banking
Institutions as the Fund may determine and direct pursuant to Proper
Instructions. The Fund accepts full responsibility for its use of third party
foreign exchange brokers (any dealer other than the Foreign Subcustodian) (as
hereinafter defined) and for execution of said foreign exchange contracts and
understands that the Fund shall be responsible for any and all costs and
interest charges which may be incurred as a result of the failure or delay of
its third party broker to deliver foreign exchange unless such loss, damage, or
expense is caused by, or results from the negligence, misfeasance or misconduct
of the Custodian. Notwithstanding the foregoing, the Custodian shall be
responsible for the transmission of cash and instructions to and from the
currency broker or Banking Institution with which the contract or option is
made, the safekeeping of all certificates and other documents and agreements
evidencing or relating to such foreign exchange transactions and the maintenance
of proper records as set forth in Section 2.25. The Custodian shall have no
duty with respect to the selection of the currency brokers or Banking
Institutions with which the Fund deals or, so long as the Custodian acts in
accordance with Proper Instructions, for the failure of such brokers or Banking
Institutions to comply with the terms of any contract or option.
(b) Foreign Exchange Contracts as Principal. The Custodian shall not be
obligated to enter into foreign exchange transactions as principal. However, if
the Custodian has made available to the Fund its services as a principal in
foreign exchange transactions, upon receipt of Proper Instructions, the
Custodian shall enter into foreign currencies for spot and future delivery on
behalf of and for the account of the Fund with the Custodian as principal. The
Custodian shall be responsible for the selection of the currency brokers or
Banking Institutions and the failure of such currency brokers or Banking
Institutions to comply with the terms of any contract or option.
(c) Payments. Notwithstanding anything to the contrary contained herein,
upon receipt of Proper Instructions the Custodian may, in connection with a
foreign exchange contract, make free outgoing payments of cash in the form of
U.S. Dollars or foreign currency prior to receipt of confirmation of such
foreign exchange contract or confirmation that the countervalue currency
completing such contract has been delivered or received.
Section 2.14. Securities Loans. Upon receipt of Proper Instructions,
the Custodian shall, in connection with loans of securities by the Fund, deliver
securities of the Fund to the borrower thereof and may, except as otherwise
provided below, deliver such securities prior to receipt of the collateral, if
any, for such borrowing; provided that, in cases of loans of securities secured
by cash collateral, the Custodian's instructions to the Securities System shall
require that the Securities System deliver the securities of the Fund to the
borrower thereof only upon receipt of the collateral for such borrowing. The
Custodian shall retain on the Fund's behalf the right to any dividends, interest
or distribution on such loaned securities and any other rights specified in
Proper Instructions. Upon receipt of Proper Instructions and the loaned
securities, the Custodian will release the collateral to the borrower.
Section 2.15. Collections. The Custodian shall: (a) collect amounts
due and payable to the Fund with respect to portfolio securities and other
Assets; (b) promptly credit to the account of the Fund all income and other
payments relating to portfolio securities and other Assets held by the Custodian
hereunder upon Custodian's receipt of such income or payments or as otherwise
agreed in writing by the Custodian and the Fund; (c) promptly endorse and
deliver any instruments required to effect such collection; and (d) promptly
execute ownership and other certificates and affidavits for all federal, state,
local and foreign tax purposes in connection with receipt of income or other
payments with respect to portfolio securities and other Assets, or in connection
with the transfer of such securities or other Assets; provided, however, that
with respect to portfolio securities registered in so-called street name, or
physical securities with variable interest rates, the Custodian shall use its
best efforts to collect amounts due and payable to the Fund. The Custodian
shall promptly notify the Fund in writing by facsimile transmission or in such
other manner as the Fund and Custodian may agree in writing if any amount
payable with respect to portfolio securities or other Assets is not received by
the Custodian when due. The Custodian shall not be responsible for the
collection of amounts due and payable with respect to portfolio securities or
other Assets that are in default.
Section 2.16. Dividends, Distributions and Redemptions. To enable the
Fund to pay dividends or other distributions to shareholders of the Fund and to
make payment to shareholders who have requested repurchase or redemption of
their shares of the Fund (collectively, the "Shares"), the Custodian shall
promptly release cash or securities (a) in the case of cash, upon receipt of
Proper Instructions, to one or more Distribution Accounts (as hereinafter
defined) designated by the Fund in such Proper Instructions; or (b) in the case
of securities, upon the receipt of Special Instructions (as hereinafter defined)
to such entity or account designated by the Fund in such Special Instructions.
For purposes of this Agreement, a "Distribution Account" shall mean an account
established at a Banking Institution designated by the Fund in Special
Instructions.
Section 2.17. Proceeds from Shares Sold. The Custodian shall receive
funds representing cash payments received for Shares issued or sold from time to
time by the Fund, and shall promptly credit such funds to the account of the
Fund. The Custodian shall promptly notify the Fund of Custodian's receipt of
cash in payment for Shares issued by the Fund by facsimile transmission or in
such other manner as the Fund and Custodian may agree in writing. Upon receipt
of Proper Instructions, the Custodian shall: (a) deliver all federal funds
received by the Custodian in payment for Shares in payment for such investments
as may be set forth in such Proper Instructions and at a time agreed upon
between the Custodian and the Fund; and (b) make federal funds available to the
Fund as of specified times agreed upon from time to time by the Fund and the
Custodian, in the amount of checks received in payment for Shares which are
deposited to the accounts of the Fund.
Section 2.18. Proxies, Notices, Etc. The Custodian shall deliver or
cause to be delivered to the Fund, in the most expeditious manner practicable,
all forms of proxies, all notices of meetings, and any other notices or
announcements affecting or relating to securities owned by the Fund that are
received by the Custodian, any Subcustodian, or any nominee of either of them,
and, upon receipt of Proper Instructions, the Custodian shall execute and
deliver, or cause such Subcustodian or nominee to execute and deliver, such
proxies or other authorizations as may be required. Except as directed pursuant
to Proper Instructions, neither the Custodian nor any Subcustodian or nominee
shall vote upon any such securities, or execute any proxy to vote thereon, or
give any consent or take any other action with respect thereto. The Custodian
will not release the identity of the Fund to an issuer which requests such
information pursuant to the Shareholder Communications Act of 1985, for the
specific purpose of direct communications between such issuer and the Fund
unless the Fund directs the Custodian otherwise in writing.
Section 2.19. Bills and Other Disbursements. Upon receipt of Proper
Instructions, the Custodian shall pay or cause to be paid, all bills,
statements, or other obligations of the Fund.
Section 2.20. Nondiscretionary Functions. The Custodian shall attend
to all nondiscretionary details not specifically covered by this Agreement in
accordance with industry standards in connection with the sale, exchange,
substitution, purchase, transfer or other dealings with securities or other
Assets held by the Custodian, except as otherwise directed from time to time
pursuant to Proper Instructions.
Section 2.21. Bank Accounts.
(a) Accounts with the Custodian. The Custodian shall open and operate a
bank account or accounts (hereinafter referred to collectively, as "Bank
Accounts") on the books of the Custodian; provided that such Bank Account(s)
shall be in the name of the Custodian or a nominee thereof, for the account of
the Fund, and shall be subject only to draft or order of the Custodian. The
responsibilities of the Custodian to the Fund for deposits accepted on the
Custodian's books shall be that of a U.S. bank for a similar deposit.
(b) Deposit Insurance. Upon receipt of Proper Instructions, the
Custodian shall take such action as the Fund deems necessary or appropriate to
cause each deposit account established by the Custodian pursuant to this Section
2.21 to be insured to the maximum extent possible by all applicable deposit
insurers, including, without limitation, the Federal Deposit Insurance
Corporation.
Section 2.22. Deposit of Fund Assets in Securities Systems. The
Custodian may deposit and/or maintain domestic securities owned by the Fund in:
(a) The Depository Trust Company; (b) the Participants Trust Company; (c) any
book-entry system as provided in (i) Subpart O of Treasury Circular No. 300, 31
CFR 306.115 (ii) Subpart B of Treasury Circular Public Debt Series No. 27-76, 31
CFR 350.2, or (iii) the book-entry regulations of federal agencies substantially
in the form of 31 CFR 306.115; or (d) any other domestic clearing agency
registered with the Securities and Exchange Commission ("SEC") under Section 17A
of the Securities Exchange Act of 1934 (or as may otherwise be authorized by the
Securities and Exchange Commission to serve in the capacity of depository or
clearing agent for the securities or other assets of investment companies) which
acts as a securities depository; provided, however, that no such deposit or
maintenance of securities may be made except with respect to those agencies and
entities the use of which the Fund has previously approved by Special
Instructions (each of the foregoing being referred to in this Agreement as a
"Securities System"). Use of a Securities System shall be in accordance with
applicable Federal Reserve Board and SEC rules and regulations, if any, and
subject to the following provisions:
(A) The Custodian or any Subcustodian may deposit and/or maintain
securities held hereunder in a Securities System, provided that such securities
are represented in an account ("Account") of the Custodian in the Securities
System which Account shall not contain any assets of the Custodian other than
assets held as fiduciary, custodian or otherwise for customers.
(B) The books and records of the Custodian shall at all times identify
those securities belonging to the Fund which are maintained in a Securities
System.
(C) The Custodian shall pay for securities purchased for the account of the
Fund only upon (i) receipt of advice from the Securities System that such
securities have been transferred to the Account of the Custodian, and (ii) the
making of an entry on the records of the Custodian to reflect such payment and
transfer for the account of the Fund. The Custodian shall transfer securities
sold for the account of the Fund only upon (iii) receipt of advice from the
Securities System that payment for such securities has been transferred to the
Account of the Custodian, and (iv) the making of an entry on the records of the
Custodian to reflect such transfer and payment for the account of the Fund.
Copies of all advices from the Securities System relating to transfers of
securities for the account of the Fund shall identify the Fund, and shall be
maintained for the Fund by the Custodian. The Custodian shall deliver to the
Fund on the next succeeding business day daily transaction reports which shall
include each day's transactions in the Securities System for the account of the
Fund. Such transaction reports shall be delivered to the Fund or any agent
designated by the Fund pursuant to Proper Instructions, by computer or in such
other manner as the Fund and Custodian may agree in writing.
(D) The Custodian shall, if requested by the Fund pursuant to Proper
Instructions, provide the Fund with all reports obtained by the Custodian or any
Subcustodian with respect to a Securities System's accounting system, internal
accounting control and procedures for safeguarding securities deposited in the
Securities System.
(E) Upon receipt of Special Instructions, the Custodian shall terminate the
use of any Securities System (except the federal book-entry system) on behalf of
the Fund as promptly as practicable and shall take all actions reasonably
practicable to safeguard the securities of the Fund maintained with such
Securities System.
Section 2.23. Other Transfers. Upon receipt of Special Instructions,
the Custodian shall make such other dispositions of securities, funds, or other
Assets of the Fund in a manner or for purposes other than as expressly set forth
in this Agreement, provided that the Special Instructions relating to such
disposition shall include a statement of the purposes for which the delivery is
to be made, the amount of funds, Assets and/or securities to be delivered and
the name of the person or persons to whom delivery is to be made, and shall
otherwise comply with the provisions of Sections 3.01 and 3.03 hereof.
Section 2.24. Establishment of Segregated Account. Upon receipt of
Proper Instructions, the Custodian shall establish and maintain on its books a
segregated account or accounts for and on behalf of the Fund, into which account
or accounts may be transferred cash and/or securities or other Assets of the
Fund, including securities maintained by the Custodian in a Securities System
pursuant to Section 2.22 hereof, said account or accounts to be maintained: (a)
for the purposes set forth in Section 2.09, 2.10 and 2.11 hereof; (b) for the
purposes of compliance by the Fund with the procedures required by Investment
Company Act Release No. 10666, or any subsequent release or releases of the SEC
relating to the maintenance of segregated accounts by registered investment
companies; or (c) for such other purposes as may be set forth, from time to
time, in Special Instructions. The Custodian shall not be responsible for the
determination of the type or amount of Assets to be held in any segregated
account referred to in this Section 2.24.
Section 2.25. Custodian's Books and Records. The Custodian shall
provide any assistance reasonably requested by the Fund in the preparation of
reports to Fund shareholders and others, audits of accounts, and other
ministerial matters of like nature. The Custodian shall maintain complete and
accurate records with respect to securities and other Assets held for the
accounts of the Fund as required by the rules and regulations of the SEC
applicable to investment companies registered under the 1940 Act, including, but
not limited to: (a) journals or other records of original entry containing a
detailed and itemized daily record of all receipts and deliveries of securities
(including certificate and transaction identification numbers, if any), and all
receipts and disbursements of cash; (b) ledgers or other records reflecting (i)
securities in transfer, (ii) securities in physical possession, (iii) securities
borrowed, loaned or collateralizing obligations of the Fund, (iv) monies
borrowed and monies loaned (together with a record of the collateral therefor
and substitutions of such collateral), and (v) dividends and interest received;
and (c) cancelled checks and bank records relating thereto. The Custodian shall
keep such other books and records of the Fund as the Fund shall reasonably
request. All such books and records maintained by the Custodian shall be
maintained in a form acceptable to the Fund and in compliance with the rules and
regulations of the SEC, including, but not limited to, books and records
required to be maintained by Section 31(a) of the 1940 Act and the rules and
regulations from time to time adopted thereunder. All books and records
maintained by the Custodian pursuant to this Agreement shall at all times be the
property of the Fund and shall be available during normal business hours for
inspection and use by the Fund and its agents, including without limitation, its
independent certified public accountants. Notwithstanding the preceding
sentence, the Funds shall not take any actions or cause the Custodian to take
any actions which would knowingly cause, either directly or indirectly, the
Custodian to violate any applicable laws, regulations or orders.
Notwithstanding the provisions of this Section 2.25, in the event the Fund
purchases cash, securities and other Assets requiring the use of a Domestic
Subcustodian or Foreign Sub-Subcustodian, the Custodian shall be entitled to
rely upon and use the books, records and accountings of the Domestic
Subcustodian as its means of accounting to the Fund for all cash, securities and
other Assets deposited with such entities; provided however, that such books,
records and accountings on which the Bank may rely must be maintained in the
United States by such Domestic Subcustodian and, provided further, that any
agreement between the Custodian and such Domestic Subcustodian must state that
the Domestic Subcustodian agrees to make any records available upon request and
preserve, for the periods described in Rule 31a-2 of the 1940 Act, the records
required to be maintained by Rule 31a-1 of the 1940 Act. In no event shall the
Custodian be entitled to rely upon and use books, records and accountings which
are maintained outside of the United States.
Section 2.26. Opinion of Fund's Independent Certified Public
Accountants. The Custodian shall take all reasonable action as the Fund may
request to obtain from year to year favorable opinions from the Fund's
independent certified public accountants with respect to the Custodian's
activities hereunder in connection with the preparation of the Fund's Form N-1A
and the Fund's Form N-SAR or other periodic reports to the SEC and with respect
to any other requirements of the SEC.
Section 2.27. Reports by Independent Certified Public Accountants. At
the request of the Fund, the Custodian shall deliver to the Fund a written
report prepared by the Custodian's independent certified public accountants with
respect to the services provided by the Custodian under this Agreement,
including, without limitation, the Custodian's accounting system, internal
accounting control and procedures for safeguarding cash, securities and other
assets, including cash, securities and other assets deposited and/or maintained
in a Securities System or with a Subcustodian. Such report shall be of
sufficient scope and in sufficient detail as may reasonably be required by the
Fund and as may reasonably be obtained by the Custodian.
Section 2.28. Overdraft Facility. In the event that the Custodian is
directed by Proper Instructions to make any payment or transfer of funds on
behalf of the Fund for which there would be, at the close of business on the
date of such payment or transfer, insufficient funds held by the Custodian on
behalf of the Fund, the Custodian may, in its sole discretion, provide an
overdraft (an "Overdraft") to the Fund in an amount sufficient to allow the
completion of such payment. Any Overdraft provided hereunder: (a) shall be
payable on the next business day, unless otherwise agreed by the Fund and the
Custodian; and (b) shall accrue interest from the date of the Overdraft to the
date of payment in full by the Fund at a rate agreed upon in writing, from time
to time, by the Custodian and the Fund. The purpose of such Overdrafts is to
temporarily finance extraordinary or emergency expenses not reasonably
foreseeable by the Fund. The Custodian shall promptly notify the Fund in
writing ("Overdraft Notice") of any Overdraft by facsimile transmission or in
such other manner as the Fund and the Custodian may agree in writing. The
Custodian shall have a right of set-off against all Assets (except for Assets
held in a segregated margin account or otherwise pledged in connection with
options or futures contracts held for the benefit of the Fund and for Assets
allocated to any other Overdraft or loan made hereunder); provided, however, the
Custodian shall promptly notify the Fund in writing of any intent to exercise a
right of set-off against Assets hereunder and shall not exercise any such right
of set-off against Assets hereunder unless and until the Fund has failed to pay
(within ten (10) days after the Fund's receipt of such notice of intent to
exercise a right of set-off), any Overdraft, together with all accrued interest
thereon. Notwithstanding the provisions of any applicable law, including,
without limitation, the Uniform Commercial Code, the only rights or remedies
which the Custodian is entitled to with respect to Overdrafts is the right of
set-off granted herein.
ARTICLE III
PROPER INSTRUCTIONS, SPECIAL INSTRUCTIONS
AND RELATED MATTERS
Section 3.01. Proper Instructions and Special Instructions.
(a) Proper Instructions. As used herein, the term "Proper Instructions"
shall mean: (i) a tested telex, a written (including, without limitation,
facsimile transmission) request, direction, instruction or certification signed
or initialed by or on behalf of the Fund by two or more Authorized Persons (as
hereinafter defined); (ii) a telephonic or other oral communication by one or
more Authorized Persons; or (iii) a communication effected directly between an
electro-mechanical or electronic device or system (including, without
limitation, computers) by or on behalf of the Fund by one or more Authorized
Persons; provided, however, that communications of the types described in
clauses (ii) and (iii) above purporting to be given by an Authorized Person
shall be considered Proper Instructions only if the Custodian reasonably
believes such communications to have been given by an Authorized Person with
respect to the transaction involved. Proper Instructions in the form of oral
communications shall be confirmed by the Fund by tested telex or in writing in
the manner set forth in clause (i) above, but the lack of such confirmation
shall in no way affect any action taken by the Custodian in reliance upon such
oral instructions prior to the Custodian's receipt of such confirmation. The
Fund and the Custodian are hereby authorized to record any and all telephonic or
other oral instructions communicated to the Custodian. Proper Instructions may
relate to specific transactions or to types or classes of transactions, and may
be in the form of standing instructions.
(b) Special Instructions. As used herein, the term "Special Instructions"
shall mean Proper Instructions countersigned or confirmed in writing by the
Treasurer or any Assistant Treasurer of the Fund or any other person designated
by the Treasurer of the Fund in writing, which countersignature or confirmation
shall be (i) included on the same instrument containing the Proper Instructions
or on a separate instrument relating thereto, and (ii) delivered by hand, by
facsimile transmission or in such other manner as the Fund and the Custodian
agree in writing.
(c) Address for Proper Instructions and Special Instructions. Proper
Instructions and Special Instructions shall be delivered to the Custodian at the
address and/or telephone, telecopy or telex number agreed upon from time to time
by the Custodian and the Fund.
Section 3.02. Authorized Persons. Concurrently with the execution of
this Agreement and from time to time thereafter, as appropriate, the Fund shall
deliver to the Custodian, duly certified as appropriate by a Treasurer or
Assistant Treasurer of the Fund, a certificate setting forth: (a) the names,
titles, signatures, and scope of authority of all persons authorized to give
Proper Instructions or any other notice, request, direction, instruction,
certificate or instrument on behalf of the Fund (collectively, the "Authorized
Persons" and individually, an "Authorized Person"); and (b) the names, titles
and signatures of those persons authorized to issue Special Instructions. Such
certificate may be accepted and relied upon by the Custodian as conclusive
evidence of the facts set forth therein and shall be considered to be in full
force and effect until delivery to the Custodian of a similar certificate to the
contrary. Upon delivery of a certificate which deletes or does not include the
name(s) of a person previously authorized to give Proper Instructions or to
issue Special Instructions, such persons shall no longer be considered an
Authorized Person or authorized to issue Special Instructions.
Section 3.03. Persons Having Access to Assets of the Portfolios.
Notwithstanding anything to the contrary contained in this Agreement, no
Authorized Person, Director, officer, employee or agent of the Fund shall have
physical access to the Assets of the Fund held by the Custodian nor shall the
Custodian deliver any Assets of the Fund to an account of such person; provided,
however, that nothing in this Section 3.03 shall prohibit (a) any Authorized
Person from giving Proper Instructions, or any person authorized to issue
Special Instructions from issuing Special Instructions, so long as such action
does not result in delivery of or access to Assets of the Fund prohibited by
this Section 3.03; or (b) the Fund's independent certified public accountants
from examining or reviewing the Assets of the Fund held by the Custodian. The
Fund will deliver from time to time a written certificate executed by two
Authorized Persons identifying such Authorized Persons, Directors, officers,
employees and agents of the Fund. Notwithstanding the foregoing, to the extent
that the person acting on behalf of the Custodian in making such delivery has
actual knowledge that any person is an Authorized Person, Director, officer,
employee or agent of the Fund, the Custodian will comply with this Section 3.03
as if the name of such Authorized Person, Director, officer, employee or agent
had been contained in a written certificate provided pursuant to this Section
3.03.
Section 3.04. Actions of Custodian Based on Proper Instructions and
Special Instructions. So long as and to the extent that the Custodian acts in
accordance with (a) Proper Instructions or Special Instructions, as the case may
be, and (b) the terms of this Agreement, the Custodian shall not be responsible
for the title, validity or genuineness of any property, or evidence of title
thereof, received by it or delivered by it pursuant to this Agreement.
ARTICLE IV
SUBCUSTODIANS
From time to time, in accordance with the relevant provisions of this
Agreement, (i) the Custodian may appoint one or more Domestic Subcustodians and
Special Subcustodians (each, as hereinafter defined) to act on behalf of the
Fund; and (ii) any Domestic Subcustodian so appointed may appoint a Foreign Sub-
Subcustodian or Interim Sub-Subcustodian (as each are hereinafter defined) in
accordance with this Article IV. For purposes of this Agreement, all Domestic
Subcustodians, Special Subcustodians, Foreign Sub-Subcustodians and Interim Sub-
Subcustodians shall be referred to collectively as "Subcustodians".
Section 4.01. Domestic Subcustodians. The Custodian may, at any time
and from time to time, appoint any bank as defined in Section 2(a)(5) of the
1940 Act or any trust company or other entity any of which meet requirements of
a custodian under Section 17(f) of the 1940 Act and the rules and regulations
thereunder, to act as agent for the Custodian on behalf of the Fund as a
subcustodian for purposes of holding cash, securities and other Assets of the
Fund and performing other functions of the Custodian within the United States (a
"Domestic Subcustodian"); provided, that, the Custodian shall notify the Fund in
writing of the identity and qualifications of any proposed Domestic Subcustodian
at least sixty (60) days prior to the desired appointment of such Domestic
Subcustodian, and the Fund will notify the Custodian, in writing signed by two
or more Authorized Persons, of approval or disapproval of the appointment of the
proposed Domestic Subcustodian; and provided, further, that the Custodian may
not appoint any such Domestic Subcustodian without such prior written approval
of the Fund by such Authorized Persons. Each such duly approved Domestic
Subcustodian and the countries where, Foreign Sub-Subcustodians and the
securities depositories and clearing agencies through which they may hold
securities and other Assets of the Fund shall be as agreed upon by the parties
hereto in writing, from time to time, in accordance with the provisions of
Section 9.04 hereof (the "Subcustodian List").
Section 4.02. Foreign Sub-Subcustodians and Interim Sub-Subcustodians.
(a) Foreign Sub-Subcustodians. The Custodian may at any time appoint, or
cause a Domestic Subcustodian to appoint: (i) any bank, trust company or other
entity meeting requirements of an "eligible foreign custodian" under Section
17(f) of the 1940 Act and the rules and regulations thereunder or by order of
the Securities and Exchange Commission exempted therefrom, or (ii) any bank as
defined in Section 2(a)(5) of the 1940 Act meeting the requirements of a
custodian under Section 17(f) of the 1940 Act and the rules and regulations
thereunder to act on behalf of the Fund as a sub-subcustodian for purposes of
holding cash, securities and other Assets of the Fund and performing other
functions of the Domestic Subcustodian in countries other than the United States
of America (a "Foreign Sub-Subcustodian"); provided that, prior to the
appointment or approval of any Foreign Sub-Subcustodian the Custodian shall, or
shall cause the Domestic Subcustodian to, notify the Fund, in writing, of the
identity and qualifications of the proposed Foreign Sub-Subcustodian and make a
copy of the proposed sub-subcustodian agreement available to the Fund at least
sixty (60) days prior to the desired appointment; and provided further that the
Custodian shall have obtained written confirmation from two or more Authorized
Persons of the approval of the Board of Directors or other governing body of the
Fund (which approval may be withheld in the sole discretion of such Board of
Directors or other governing body or entity) with respect to (i) the identity
and qualifications of any proposed Foreign Sub-Subcustodian, and (ii) the
country or countries in which, and the securities depositories or clearing
agencies (hereinafter "Securities Depositories and Clearing Agencies"), if any,
through which, any proposed Foreign Sub-Subcustodian is authorized to hold
securities and other Assets of the Fund. Each such duly approved Foreign Sub-
Subcustodian and the countries where and the Securities Depositories and
Clearing Agencies through which they may hold securities and other Assets of the
Fund shall be listed on the Subcustodian List. The Fund shall be responsible
for informing the Custodian sufficiently in advance of a proposed investment
which is to be held in a country in which no Foreign Sub-Subcustodian is
authorized to act, in order that there shall be sufficient time for the
Custodian or any Domestic Subcustodian to effect the appropriate arrangements
with a proposed Foreign Sub-Subcustodian, including obtaining approval as
provided in this Section 4.02(a). In connection with the appointment of any
Foreign Sub-Subcustodian, the Custodian shall, or shall cause the Domestic
Subcustodian to, enter into a sub-subcustodian agreement with the Foreign Sub-
Subcustodian in form and substance approved by the Fund, provided that the
agreement shall, in all events, comply with the provisions of the 1940 Act and
the rules and regulations thereunder, and the terms and provisions of this
Agreement. The Custodian shall not and shall cause any Domestic Subcustodian
not to consent to the amendment of any sub-subcustodian agreement entered into
with a Foreign Sub-Subcustodian, or agree to any changes thereunder, or waive
any rights under such agreement, except upon prior approval pursuant to Special
Instructions.
(b) Interim Sub-Subcustodians. Notwithstanding the foregoing, in the
event that the Fund shall invest in a security or other Asset to be held in a
country in which no Foreign Sub-Subcustodian is authorized to act, the Custodian
shall, or shall cause the Domestic Subcustodian to, promptly notify the Fund in
writing by facsimile transmission or in such other manner as the Fund and
Custodian shall agree in writing of the unavailability of an approved Foreign
Sub-Subcustodian in such country; and upon the receipt of Special Instructions,
the Custodian shall, or shall cause the Domestic Subcustodian to, appoint or
approve any Person (as hereinafter defined) designated by the Fund in such
Special Instructions, to hold such security or other Asset. (Any Person
appointed or approved as a sub-subcustodian pursuant to this Section 4.02(b) is
hereinafter referred to as an "Interim Sub-Subcustodian.")
Section 4.03. Special Subcustodians. Upon receipt of Special
Instructions, the Custodian shall, on behalf of the Fund, appoint one or more
banks, trust companies or other entities designated in such Special Instructions
to act as a subcustodian for the purpose of (i) effecting third-party repurchase
transactions with banks, brokers, dealers or other entities, (ii) providing
depository and clearing agency services with respect to certain variable rate
demand note securities; and (iii) effecting any other transactions designated by
the Fund in Special Instructions. (Each such designated subcustodian is
hereinafter referred to as a "Special Subcustodian.") Each such duly appointed
Special Subcustodian shall be listed on the Subcustodian List. In connection
with the appointment of any Special Subcustodian, the Custodian shall enter into
a subcustodian agreement with the Special Subcustodian in form and substance
approved by the Fund, provided that such agreement shall in all events comply
with the provisions of the 1940 Act and the rules and regulations thereunder and
the terms and provisions of this Agreement. The Custodian shall not amend any
subcustodian agreement entered into with a Special Subcustodian, or agree to
change or permit any changes thereunder, or waive any rights under such
agreement, except upon prior approval pursuant to Special Instructions.
Section 4.04. Termination of a Subcustodian. The Custodian shall (i)
cause each Domestic Subcustodian to, and (ii) use its best efforts to cause each
Interim Sub-Subcustodian and Special Subcustodian to, perform all of its
obligations in accordance with the terms and conditions of the subcustodian
agreement between the Custodian and such Domestic Subcustodian and Special
Subcustodian or between the Domestic Subcustodian and a Foreign Sub-Subcustodian
or Interim Sub-Subcustodian. In the event that the Custodian is unable to cause
such subcustodian or sub-subcustodian to fully perform its obligations
thereunder, the Custodian shall promptly notify the Fund in writing and
forthwith, upon the receipt of Special Instructions, terminate or cause the
termination of such Subcustodian or Sub-Subcustodian with respect to the Fund
and, if necessary or desirable, appoint or cause the appointment of a
replacement Subcustodian or Sub-Subcustodian in accordance with the provisions
of this Article IV. In addition to the foregoing, the Custodian (A) may, at any
time in its discretion, upon written notification to the Fund, terminate any
Domestic Subcustodian, and (B) shall, upon receipt of Special Instructions,
terminate any Special Subcustodian with respect to the Fund, in accordance with
the termination provisions under the applicable subcustodian agreement, and (C)
shall, upon receipt of Special Instructions, cause the Domestic Subcustodian to
terminate any Foreign Sub-Subcustodian or Interim Sub-Subcustodian as to its use
of such entities with respect to the Fund, in accordance with the termination
provisions under the applicable sub-subcustodian agreement.
Section 4.05. Certification Regarding Foreign Sub-Subcustodians. Upon
request of the Fund, the Custodian shall deliver to the Fund a certificate
stating: (i) the identity of each Foreign Sub-Subcustodian then acting on
behalf of the Custodian; (ii) the countries in which and the Securities
Depositories and Clearing Agents through which each such Foreign Sub-
Subcustodian is then holding cash, securities and other Assets of the Fund; and
(iii) such other information as may be requested by the Fund to ensure
compliance with rules and regulations under the 1940 Act.
ARTICLE V
STANDARD OF CARE: INDEMNIFICATION
Section 5.01. Standard of Care.
(a) General Standard of Care. The Custodian shall exercise reasonable
care and diligence in carrying out all of its duties and obligations under this
Agreement, and shall be liable to the Fund for all loss, damage and expense
suffered or incurred by the Fund resulting from the failure of the Custodian to
exercise such reasonable care and diligence.
(b) Actions Prohibited by Applicable Law, Etc. In no event shall the
Custodian incur liability hereunder if the Custodian or any Subcustodian or
Securities System, or any subcustodian, Securities Depository or Clearing Agency
utilized by any such Subcustodian, or any nominee of the Custodian or any
Subcustodian (individually, a "Person") is prevented, forbidden or delayed from
performing, or omits to perform, any act or thing which this Agreement provides
shall be performed or omitted to be performed, by reason of: (i) any provision
of any present or future law or regulation or order of the United States of
America, or any state thereof, or of any foreign country, or political
subdivision thereof or of any court of competent jurisdiction (and the Custodian
nor any other Person shall not be obligated to take any action contrary
thereto); or (ii) any act of God or war or other similar circumstance beyond the
control of the Custodian unless in each case, such delay or nonperformance is
caused by the negligence, misfeasance or misconduct of the Custodian.
(c) Mitigation by Custodian. Upon the occurrence of any event which
causes or may cause any loss, damage or expense to the Fund, (i) the Custodian
shall, (ii) the Custodian shall cause any applicable Domestic Subcustodian or
Foreign Sub-Subcustodian to, and (iii) the Custodian shall use its best efforts
to cause any applicable Interim Sub-Subcustodian or Special Subcustodian to, use
all commercially reasonable efforts and take all reasonable steps under the
circumstances to mitigate the effects of such event and to avoid continuing harm
to the Fund.
(d) Advice of Counsel. The Custodian shall be without liability for any
action reasonably taken or omitted in good faith pursuant to the written advise
of (i) counsel for the Fund, or (ii) at the expense of the Custodian, such other
counsel as the Fund and the Custodian may agree upon in writing; provided,
however, with respect to the performance of any action or omission of any action
upon such advice, the Custodian shall be required to conform to the standard of
care set forth in Section 5.01 (a).
(e) Expenses of the Fund. In addition to the liability of the Custodian
under this Article V, the Custodian shall be liable to the Fund for all
reasonable costs and expenses incurred by the Fund in connection with any claim
by the Fund against the Custodian arising from the obligations of the Custodian
hereunder including, without limitation, all reasonable attorneys' fees and
expenses incurred by the Fund in asserting any such claim, and all expenses
incurred by the Fund in connection with any investigations, lawsuits or
proceedings relating to such claim; provided however, that the Fund has
recovered from the Custodian for such claim.
(f) Liability for Past Records. The Custodian shall have no liability in
respect of any loss, damage or expense suffered by the Fund, insofar as such
loss, damage or expense arises from the performance of the Custodian in reliance
upon records that were maintained for the Fund by entities other than the
Custodian prior to the Custodian's employment hereunder which the Custodian has
no reason to believe are inaccurate or incomplete after reasonable inquiry.
Section 5.02. Liability of the Custodian for Actions of Other Persons.
(a) Domestic Subcustodian and Foreign Sub-Subcustodian. The Custodian
shall be liable for the actions or omissions of any Domestic Subcustodian or
Foreign Sub-Subcustodian (excluding any Securities Depository or Clearing Agency
appointed by them) to the same extent as if such actions or omissions were
performed by the Custodian itself. In the event of any loss, damage or expense
suffered or incurred by the Fund caused by or resulting from the actions or
omissions of any Domestic Subcustodian or Foreign Sub-Subcustodian for which the
Custodian would otherwise be liable, the Custodian shall promptly reimburse the
Fund in the amount of any such loss, damage or expense.
(b) Special Subcustodians, Interim Sub-Subcustodians, Security Systems,
Securities Depositories and Clearing Agencies. The Custodian shall not be
liable to the Fund for any loss, damage or expense suffered or incurred by the
Fund resulting from the actions or omissions of a Special Subcustodian, Interim
Sub-Subcustodian, Securities System, Securities Depository or Clearing Agency
unless such loss, damage or expense is caused by, or results from, the
negligence, misfeasance or misconduct of the Custodian; provided, however, in
the event of any such loss, damage or expense, the Custodian shall take all
reasonable steps to enforce such rights as it may have against such Special
Subcustodian, Interim Sub-Subcustodian, Security System, Securities Depository
or Clearing Agency to protect the interest of the Fund.
(c) Reimbursement of Expenses. The Fund agrees to reimburse the
Custodian for all reasonable out-of-pocket expenses incurred by the Custodian in
connection with the fulfillment of its obligations under Section 5.01(c) as it
relates to Interim Sub-Subcustodians and Special Subcustodians and 5.02(b);
provided however, that such reimbursement shall not apply to expenses occasioned
by or resulting from the negligence, misfeasance or misconduct of the Custodian.
Section 5.03. Indemnification by Fund.
(a) Indemnification Obligations of Fund. Subject to the limitations set
forth in this Agreement, the Fund agrees to indemnify and hold harmless the
Custodian and its nominees from all loss, damage and expense (including
reasonable attorneys' fees) suffered or incurred by the Custodian or its nominee
caused by or arising from actions taken by the Custodian, its employees or
agents in the performance of its duties and obligations under this Agreement;
provided, however, that such indemnity shall not apply to loss, damage and
expense occasioned by or resulting from the negligence, misfeasance or
misconduct of the Custodian or its nominee. In addition, the Fund agrees to
indemnify any Person against liability incurred by reason of taxes assessed to
such Person resulting from the fact that securities and other property of the
Fund are registered in the name of such Person in accordance with the provisions
of this Agreement; provided, however, that in no event shall such
indemnification be applicable to income, franchise or similar taxes which may be
imposed or assessed against any Person. It is also understood that the Fund
agrees to indemnify and hold harmless the Custodian and its nominee for any loss
arising from a foreign currency transaction or contract, where the loss results
from a Sovereign Risk (as hereinafter defined) or where any Person maintaining
securities, currencies, deposits or other Assets of the Fund in connection with
any such transactions has exercised reasonable care maintaining such property or
in connection with any such transaction involving such Assets. A "Sovereign
Risk" shall mean nationalization, expropriation, devaluation, revaluation,
confiscation, seizure, cancellation, destruction or similar action by any
governmental authority, de facto or de jure; or enactment, promulgation,
imposition or enforcement by any such governmental authority of currency
restrictions, exchange controls, taxes, levies or other charges affecting the
Fund's property; or acts of war, terrorism, insurrection or revolution.
(b) Notice of Litigation. Right to Prosecute, Etc. The Fund shall not
be liable for indemnification under this Section 5.03 unless a Person shall have
promptly notified the Fund in writing of the commencement of any litigation or
proceeding brought against the Custodian or other Person in respect of which
indemnity may be sought under this Section 5.03. With respect to claims in such
litigation or proceedings for which indemnity by the Fund may be sought and
subject to applicable law and the ruling of any court of competent jurisdiction,
the Fund shall be entitled to participate in any such litigation or proceeding
with counsel of its choice at its own expense in respect of that portion of the
litigation for which the Fund may be subject to an indemnification obligation;
provided, however, a Person shall be entitled to participate in (but not
control) at its own cost and expense, the defense of any such litigation or
proceeding if the Fund has not acknowledged in writing it obligation to
indemnify the Person with respect to such litigation or proceeding. If the Fund
is not permitted to participate or control such litigation or proceeding under
applicable law or by a ruling of a court of competent jurisdiction, or if the
Fund chooses not to so participate, the Custodian or other Person shall not
consent to the entry of any judgment or enter into any settlement in any such
litigation or proceeding without providing the Fund with adequate notice of any
such settlement or judgment, and without the Fund's prior written consent which
consent shall not be unreasonably withheld or delayed. All Persons shall submit
written evidence to the Fund with respect to any cost or expense for which they
are seeking indemnification in such form and detail as the Fund may reasonably
request.
Section 5.04. Investment Limitations. If the Custodian has otherwise
complied with the terms and conditions of this Agreement in performing its duty
generally, and more particularly in connection with the purchase, sale or
exchange of securities made by or for the Fund, the Custodian shall not be
liable to the Fund and the Fund agrees to indemnify the Custodian and its
nominees, for any loss, damage or expense suffered or incurred by the Custodian
and its nominees arising out of any violation of any investment or other
limitation to which the Fund is subject except for violations of which the
Custodian has actual knowledge. For purposes of this Section 5.04 the term
"actual knowledge" shall mean knowledge gained by the Custodian by means other
than from any prospectus published by the Fund or contained in any filing by the
Fund with the SEC.
Section 5.05. Fund's Right to Proceed. Notwithstanding anything to the
contrary contained herein, the Fund shall have, at its election upon reasonable
notice to the Custodian, the right to enforce, to the extent permitted by any
applicable agreement and applicable law, the Custodian's rights against any
Subcustodian, Securities System or other Person for loss, damage or expense
caused the Fund by such Subcustodian, Securities System or other Person, which
the Custodian may have as a consequence of any such loss, damage or expense, if
and to the extent that the Fund has not been made whole for any such loss,
expense or damage. If the Custodian makes the Fund whole for any such loss,
expense or damage, the Custodian shall retain the ability to enforce its rights
directly against such Subcustodian, Securities System or other Person. Upon the
Fund's election to enforce any rights of the Custodian under this Section 5.05,
the Fund shall reasonably prosecute all actions and proceedings directly
relating to the rights of the Custodian in respect of the loss, damage or
expense incurred by the Fund; provided that, so long as the Fund has
acknowledged in writing its obligation to indemnify the Custodian under Section
5.03 hereof with respect to such claim, the Fund shall retain the right to
settle, compromise and/or terminate any action or proceeding in respect of the
loss, damage or expense incurred by the Fund without the Custodian's consent and
provided further, that if the Fund has not made an acknowledgement of its
obligation to indemnify, the Fund shall not settle, compromise or terminate any
such action or proceeding without the written consent of the Custodian, which
consent shall not be unreasonably withheld or delayed. The Custodian agrees to
cooperate with the Fund and take all actions reasonably requested by the Fund in
connection with the Fund's enforcement of any rights of the Custodian. Nothing
contained in this Section 5.05 shall be construed as an obligation of the Fund
to enforce the Custodian's rights. The Fund agrees to reimburse the Custodian
for out-of-pocket expenses incurred by it in connection with the fulfillment of
its obligations under this Section 5.05; provided, however, that such
reimbursement shall not apply to expenses occasioned by or resulting from the
negligence, misfeasance or misconduct of the Custodian.
Section 5.06. Indemnification by Custodian.
(a) Indemnification Obligations of Custodian. Subject to the limitations
set forth in this Agreement and in addition to the reimbursement obligations
provided in Section 5.02(a), the Custodian agrees to indemnify and hold harmless
the Fund and its nominees from all loss, damage and expense (including
reasonable attorneys' fees) suffered or incurred by the Fund or its nominee
caused by or arising from the failure of the Custodian, its nominee, employees
or agents to comply with the terms or conditions of this Agreement or arising
out of the negligence, misfeasance or misconduct of the Custodian or its
nominee.
(b) Notice of Litigation, Right to Prosecute, Etc. The Custodian shall
not be liable for indemnification under this Section 5.06 unless the Fund shall
have promptly notified the Custodian in writing of the commencement of any
litigation or proceeding brought against the Fund in respect of which indemnity
may be sought under this Section 5.06. With respect to claims in such
litigation or proceedings for which indemnity by the Custodian may be sought and
subject to applicable law and the ruling of any court of competent jurisdiction,
the Custodian shall be entitled to participate in any such litigation or
proceeding with counsel of its choice at its own expense in respect of that
portion of the litigation for which the Custodian may be subject to an
indemnification obligation; provided, however, the Fund shall be entitled to
participate in (but not control) at its own cost and expense, the defense of any
such litigation or proceeding if the Custodian has not acknowledged in writing
its obligation to indemnify the Fund with respect to such litigation or
proceeding. If the Custodian is not permitted to participate or control such
litigation or proceeding under applicable law or by a ruling of a court of
competent jurisdiction, or if the Custodian chooses not to so participate, the
Fund shall not consent to the entry of any judgement or enter into any
settlement in any such litigation or proceeding without providing the Custodian
with adequate notice of any such settlement or judgement, and without the
Custodian's prior written consent which consent shall not be unreasonably
withheld or delayed. The Fund shall submit written evidence to the Custodian
with respect to any cost or expense for which it is seeking indemnification in
such form and detail as the Custodian may reasonably request.
Section 5.07. Custodian's Right to Proceed. Notwithstanding anything
to the contrary contained herein, the Custodian shall have, at its election upon
reasonable notice to the Fund, the right to enforce, to the extent permitted by
any applicable agreement and applicable law, the Fund's rights against any
Subcustodian, Securities System or other Person for loss, damage or expense
caused the Custodian by such Subcustodian, Securities System or other Person,
which the Fund may have as a consequence of any such loss, damage or expense, if
and to the extent that the Custodian has not been made whole for any such loss,
expense or damage. If the Fund makes the Custodian whole for any such loss,
expense or damage, the Fund shall retain the ability to enforce its rights
directly against such Subcustodian, Securities System or other Person. Upon the
Custodian's election to enforce any rights of the Fund under this Section 5.07,
the Custodian shall reasonably prosecute all actions and proceedings directly
relating to the rights of the Fund in respect of the loss, damage and expense
incurred by the Custodian; provided that, so long as the Custodian has
acknowledged in writing its obligation to indemnify the Fund under Section 5.06
hereof with respect to such claim, the Custodian shall retain the right to
settle, compromise and/or terminate any action or proceeding in respect of the
loss, damage or expense incurred by the Custodian without the Fund's consent and
provided further, that if the Custodian has not made an acknowledgement of its
obligation to indemnify, the Custodian shall not settle, compromise or terminate
any such action or proceeding without the written consent of the Fund, which
consent shall not be unreasonably withheld or delayed. The Fund agrees to
cooperate with the Custodian and take all actions reasonably requested by the
Custodian in connection with the Custodian's enforcement of any rights of the
Fund. Nothing contained in this Section 5.07 shall be construed as an
obligation of the Custodian to enforce the Fund's rights. The Custodian agrees
to reimburse the Fund for out-of-pocket expenses incurred by it in connection
with the fulfillment of its obligations under this Section 5.07; provided,
however, that such reimbursement shall not apply to expenses occasioned by or
resulting from the negligence, misfeasance or misconduct of the Fund.
ARTICLE VI
COMPENSATION
For the initial three year period beginning on the effective date of this
Agreement, the Fund shall compensate the Custodian in the amount and at the
times specified in Appendix "B" attached hereto. Thereafter, the Fund shall
compensate the Custodian in the amount, and at times, as may be agreed upon in
writing, from time to time, by the Custodian and the Fund.
ARTICLE VII
TERMINATION
This Agreement shall continue in full force and effect until the first to
occur of: (a) termination by the Custodian by an instrument in writing
delivered or mailed (certified mail, return receipt requested) to the Fund, such
termination to take effect not sooner than ninety (90) days after the date of
such delivery or receipt; (b) termination by the Fund by an instrument in
writing delivered or mailed (certified mail, return receipt requested) to the
Custodian, such termination to take effect not sooner than ninety (90) days
after the date of such delivery or receipt; or (c) termination by the Fund by an
instrument in writing delivered to the Custodian, based upon the Fund's
determination that there is reasonable basis to conclude that the Custodian is
insolvent or that the financial condition of the Custodian is deteriorating in
any material respect, in which case termination shall take effect upon the
Custodian's receipt of such notice or at such later time as the Fund shall
designate. In the event of termination pursuant to this Article VII, the Fund
shall make payment of all accrued fees and unreimbursed expenses within a
reasonable time following termination and delivery of a statement to the Fund
setting forth such fees and expenses. The Fund shall identify in any notice of
termination a successor custodian to which the cash, securities and other Assets
of the Fund shall, upon termination of this Agreement, be delivered. In the
event that securities and other Assets remain in the possession of the Custodian
after the date of termination hereof owing to failure of the Fund to appoint a
successor custodian, the Custodian shall be entitled to compensation for its
services in accordance with the fee schedule most recently in effect, for such
period as the Custodian retains possession of such securities and other Assets,
and the provisions of this Agreement relating to the duties and obligations of
the Custodian and the Fund shall remain in full force and effect for such
period. In the event of the appointment of a successor custodian, the cash,
securities and other Assets owned by the Fund and held by the Custodian, any
Subcustodian or nominee shall be delivered, at the terminating party's expense,
to the successor custodian; and the Custodian agrees to cooperate with the Fund
in the execution of documents and performance of other actions necessary or
desirable in order to substitute the successor custodian for the Custodian under
this Agreement.
ARTICLE VIII
DEFINED TERMS
The following terms are defined in the following sections:
Term Section
Account 2.22(A)
ADRs 2.06
Assets Article I
Authorized Person 3.02
Banking Institution 2.12
Bank Accounts 2.21
Clearing Agency 4.02(a)
Distribution Account 2.16
Domestic Subcustodian 4.01
Foreign Sub-Subcustodian 4.02(a)
Institutional Client 2.03
Interest Bearing Deposit 2.12
Interim Sub-Subcustodian 4.02(b)
OCC 2.09
Overdraft 2.28
Overdraft Notice 2.28
Person 5.01(b)
Procedural Agreement 2.10
Proper Instruction 3.01(a)
SEC 2.22
Securities Depositories 4.02(a)
Securities System 2.22
Shares 2.16
Sovereign Risk 5.03(a)
Special Instruction 3.01(b)
Special Subcustodian 4.03
Subcustodian Article IV
1940 Act Preamble
ARTICLE IX
MISCELLANEOUS
Section 9.01. Execution of Documents, Etc.
(a) Actions by the Fund. Upon request, the Fund shall execute and
deliver to the Custodian such proxies, powers of attorney or other instruments
as may be reasonable and necessary or desirable in connection with the
performance by the Custodian or any Subcustodian of their respective obligations
under this Agreement or any applicable subcustodian agreement, provided that the
exercise by the Custodian or any Subcustodian of any such rights shall in all
events be in compliance with the terms of this Agreement.
(b) Actions by Custodian. Upon receipt of Proper Instructions, the
Custodian shall execute and deliver to the Fund or to such other parties as the
Fund may designate in such Proper Instructions, all such documents, instruments
or agreements as may be reasonable and necessary or desirable in order to
effectuate any of the transactions contemplated hereby and designated therein.
Section 9.02. Representations and Warranties.
(a) Representations and Warranties of the Fund. The Fund hereby
represents and warrants that each of the following shall be true, correct and
complete as of the date of execution of this Agreement and, unless notice to the
contrary is provided by the Fund to the Custodian, at all times during the term
of this Agreement: (i) the Fund is duly organized under the laws of its
jurisdiction of organization and is registered as an open-end management
investment company under the 1940 Act or is a series of portfolio of such
entity; and (ii) the execution, delivery and performance by the Fund of this
Agreement are (w) within its power, (x) have been duly authorized by all
necessary action, and (y) will not (A) contribute to or result in a breach of or
default under or conflict with any existing law, order, regulation or ruling of
any governmental or regulatory agency or authority, or (B) violate any provision
of the Fund's corporate charter or other organizational document, or bylaws, or
any amendment thereof or any provision of its most recent Prospectus or
Statement of Additional Information.
(b) Representations and Warranties of the Custodian. The Custodian
hereby represents and warrants that each of the following shall be true, correct
and complete as of the date of execution of this Agreement and, unless notice to
the contrary is provided by the Custodian to the Fund, at all times during the
term of this Agreement: (i) the Custodian is duly organized under the laws of
its jurisdiction of organization and qualifies to serve as a custodian to open-
end management investment companies under the provisions of the 1940 Act; and
(ii) the execution, delivery and performance by the Custodian of this Agreement
are (w) within its power (x) have been duly authorized by all necessary action,
and (y) will not (A) contribute to or result in a breach of or default under or
conflict with any existing law, order, regulation or ruling of any governmental
or regulatory agency or authority, or (B) violate any provision of the
Custodian's corporate charter, or other organizational document, or bylaws, or
any amendment thereof. The Custodian acknowledges receipt of a copy of the
Fund's most recent Prospectus and Statement of Additional Information.
Section 9.03. Entire Agreement. This Agreement constitutes the entire
understanding and agreement of the parties hereto with respect to the subject
matter hereof and accordingly, supersedes as of the effective date of this
Agreement any custodian agreement heretofore in effect between the Fund and the
Custodian.
Section 9.04. Waivers and Amendments. No provisions of this Agreement
may be waived, amended or deleted except by a statement in writing signed by the
party against which enforcement of such waiver, amendment or deletion is sought;
provided, however, the Subcustodian List may be amended from time to time by the
Fund's execution and delivery to the Custodian of an amended Subcustodian List,
in which case such amendment shall take effect immediately upon execution by the
Custodian.
Section 9.05. Interpretation. In connection with the operation of this
Agreement, the Custodian and the Fund may agree in writing from time to time on
such provisions interpretative of or in addition to the provisions of this
Agreement as may in their joint opinion be consistent with the general tenor of
this Agreement. No interpretative or additional provisions made as provided in
the preceding sentence shall be deemed to be an amendment of this Agreement.
Section 9.06. Captions. Headings contained in this Agreement, which
are included as convenient references only, shall have no bearing upon the
interpretation of the terms of the Agreement or the obligations of the parties
hereto.
Section 9.07. Governing Law. This Agreement shall be construed in
accordance with and governed by the laws of the State of Missouri, in each case
without giving effect to principles of conflicts of law.
Section 9.08. Notices. Except in the case of Proper Instructions or
Special Instructions, and as otherwise provided in this Agreement, notices and
other writings contemplated by this Agreement shall be delivered by hand or by
facsimile transmission or as otherwise agreed to by the Fund and the Custodian
in writing (provided that in the case of delivery by facsimile transmission,
notice shall also be mailed postage prepaid) to the parties at the following
addresses:
(a) If to the Fund:
United Municipal High Income Fund, Inc.
6300 Lamar Avenue
Overland Park, Kansas 66202
Attn: Fund Treasurer
Telephone: 913-236-2000
Telefax: 913-236-1595
(b) If to the Custodian:
United Missouri Bank, n.a.
928 Grand Avenue, 10th Floor
Kansas City, Missouri 64106
Attn: Securities Administration
Telephone: 816-860-7764
Telefax: 816-860-4869
or such other address as either party may have designated in writing to the
other party hereto.
Section 9.09. Assignment. This Agreement shall be binding on and shall
inure to the benefit of the Fund and the Custodian and their respective
successors and assigns, provided that, subject to the provisions of Section 7.01
hereof, neither party hereto may assign this Agreement or any of its rights or
obligations hereunder without the prior written consent of the other party.
Section 9.10. Counterparts. This Agreement may be executed in any
number of counterparts, each of which shall be deemed an original. This
Agreement shall become effective when one or more counterparts have been signed
and delivered by each of the parties.
Section 9.11. Confidentiality; Survival of Obligations. The parties
hereto agree that each shall treat confidentially the terms and conditions of
this Agreement and all information provided by each party to the other regarding
its business and operations. All confidential information provided by a party
hereto shall be used by any other party hereto solely for the purpose of
rendering services pursuant to this Agreement and, except as may be required in
carrying out this Agreement, shall not be disclosed to any third party without
the prior consent of such providing party. The foregoing shall not be
applicable to any information that is publicly available when provided or
thereafter becomes publicly available other than through a breach of this
Agreement, or that is required to be disclosed by any bank examiner of the
Custodian or any Subcustodians, any auditor or examiner of the parties hereto,
by judicial or administrative process or otherwise by applicable law or
regulation. The provisions of this Section 9.11 and Section 9.01, 9.07, Section
2.28, Section 3.04, Section 4.05, Section 7.01, Article V and Article VI hereof
and any other rights or obligations incurred or accrued by any party hereto
prior to termination of this Agreement shall survive any termination of this
Agreement.
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed in its name and behalf on the day and year first above written.
UNITED MUNICIPAL HIGH INCOME FUND, INC. UNITED MISSOURI BANK, n.a.
By: /s/Rodney O. McWhinney By: /s/David F. Larrabee
Name: Rodney O. McWhinney Name: David F. Larrabee
Title: Vice President Title: Vice President
APPENDIX "A"
TO CUSTODIAN AGREEMENT
BETWEEN
UNITED MUNICIPAL HIGH INCOME FUND, INC.
AND
UMB BANK, n.a.
Dated as of April 25, 1997
This Appendix A relates to the Custodian Agreements between UMB Bank, n.a.
and each of the following funds dated the date specified by the fund's name, as
amended:
Fund Date
United Asset Strategy Fund, Inc. February 22, 1995
United Cash Management, Inc. November 26, 1991
United Continental Income Fund, Inc. November 26, 1991
United Gold & Government Fund, Inc. November 26, 1991
United Government Securities Fund, Inc. November 26, 1991
United High Income Fund, Inc. November 26, 1991
United High Income Fund II, Inc. November 26, 1991
United International Growth Fund, Inc. November 26, 1991
United Municipal Bond Fund, Inc. November 26, 1991
United Municipal High Income Fund, Inc. November 26, 1991
United New Concepts Fund, Inc. November 26, 1991
United Retirement Shares, Inc. November 26, 1991
United Vanguard Fund, Inc. November 26, 1991
United Funds, Inc.
United Bond Fund November 26, 1991
United Income Fund November 26, 1991
United Accumulative Fund November 26, 1991
United Science and Technology Fund November 26, 1991
TMK/United Funds, Inc.
High Income Portfolio November 26, 1991
Money Market Portfolio November 26, 1991
Bond Portfolio November 26, 1991
Income Portfolio November 26, 1991
Growth Portfolio November 26, 1991
Balanced Portfolio April 29, 1994
International Portfolio April 29, 1994
Limited-Term Bond Portfolio April 29, 1994
Asset Strategy Portfolio May 1, 1995
Science and Technology Portfolio April 4, 1997
Waddell & Reed Funds, Inc.
Total Return Fund April 24, 1992
Municipal Bond Fund April 24, 1992
Limited-Term Bond Fund April 24, 1992
International Growth Fund April 24, 1992
Growth Fund April 24, 1992
Asset Strategy Fund April 20, 1995
The following is a list of Domestic Subcustodians, Foreign Subcustodian and
Special Subcustodians under the Custodian Agreement as amended:
A. Domestic Custodians:
Brown Brothers Harriman & Co.
United Missouri Trust Company of New York
B. Foreign Sub-Custodians
Country Sub-Custodian Depository
Argentina Citibank, n.a. CDV; CRYL
Australia National Australia Bank Ltd. AUSTRACLEAR, RITs
Austria Creditanstalt Bankverein KONTROLLBANK (OEKB)
Belgium Banque Bruxelles Lambert CIK, BNB
Brazil First National Bank of Boston, BOVESPA, CLC
Brazil
Canada Canadian Imperial Bank of Commerce CDS; The Bank of Canada
Chile Citibank, n.a. None
China Standard Chartered Bank SSCCRC; SSCC
Czech Republic Ceskoslovenska Obchodni CNB; SCP
Banka A.S.
Denmark Den Danske Bank VP
Finland Merita Securities Association; Finnish
Central
Securities Depository Ltd.
France Banque Indosuez SICOVAM; Banque de France
Germany Deutsche Bank KASSENVEREIN
Hungary Citibank, N.A. KELER Ltd.
Hong Kong HongKong & Shanghai Banking Corp. HongKong Securities Clearing
Company
India Citibank, N.A., Mumbai National Securities Depository
Limited
Indonesia Citibank, n.a. None
Ireland Allied Irish Banks PLC Gilt Settlement Office
Israel Bank Hapoalim B.M. TASE Clearinghouse Ltd.
Italy Banca Commerciale Italiana MONTE TITOLI, Banca D'Italia
Japan The Bank of Tokyo, Ltd. JASDEC, Bank of Japan
Korea Citibank, n.a. Korean Securities Depository
Corporation (KSD)
Malaysia Hong Kong Bank Malaysia Berhad MCD; Bank Negara Malaysia
Mexico Citibank Mexico, s.a. INDEVAL; Banco De Mexico
Netherlands ABN - Amro Bank NECIGER; De
Nederlandsche Bank
Norway Christiana Bank VPS
Peru Citibank, n.a. Caja De Valores (CAVAL)
Philippines Citibank, n.a. Phillipines Central
Depository, Inc.
Poland Bank Polska Kasa Opieki S.A. NPB
Portugal Banco Espirito Santo E Comercial Interbolsa
De Lisboa
Singapore HongKong & Shanghai Banking Corp. CDP
Spain Banco Santander SCLV; Banco De Espana
Sweden Skandinaviska Enskilda Banken VPC
Switzerland Union Bank of Switzerland SEGA
Taiwan Standard Chartered Bank, Taipei TSCD
Thailand HongKong & Shanghai Banking Corp. Share Depository Center (SDC)
Turkey Citibank, n.a. TvS, Central Bank of Turkey
United Kingdom Midland Securities PLC CMO; CGO; CrestCo
C. Special Subcustodians:
Wilmington Trust Co.
The Bank of New York, n.a.
Euroclear
<PAGE>
APPENDIX "B"
TO
CUSTODIAN AGREEMENT
BETWEEN
UNITED MUNICIPAL HIGH INCOME FUND, INC.
AND
UMB BANK, N.A.
Dated as of May 1, 1997
The Fund shall be responsible for providing the Custodian the net asset
levels the Custodian requires to calculate the net asset portion of the
Custodian's fees. Such determinations shall be based upon the average monthly
assets of each Fund and shall specify the level of domestic assets and foreign
assets by country, as appropriate. Domestic assets shall include all assets
held in the United States including but not limited to American Depositary
Receipts. Foreign assets shall include all assets held outside the United
States including but not limited to securities which clear through Euroclear or
CEDEL. The Custodian will provide as soon as practicable after receiving the
information provided by the Fund with respect to the net asset level numbers, a
bill for the Fund, including such reasonable detail in support of each bill as
may be reasonably requested by the Fund. As used in this Appendix "B", "United
Funds" shall mean all funds in the United Group of Funds, TMK/United Funds, Inc.
and Waddell & Reed Funds, Inc.
DOMESTIC CUSTODY FEE SCHEDULE
A. Annual Fee (combining all domestic assets):
An annual fee to be computed as of month end and payable each month of the
Fund's fiscal year (after receipt of the bill issued to each Fund based
upon its portion of domestic assets), at the annual rate of:
.00005 for the first $5,000,000,000 of the net assets of all the United
Funds, plus
.00004 for any net assets exceeding $5,000,000,000 of the assets of all the
United Funds.
B. Portfolio Transaction Fees (billed to each Fund):
(a)For each portfolio transaction* processed through a
Depository (DTC, PTC or Fed) $ 7.00
(b)For each portfolio transaction* processed through
the New York office (physical settlement) $20.00
(c)For each futures/option contract written $25.00
(d)For each principal/interest paydown $ 6.00
(e)For each interfund note transaction $ 5.00
* A portfolio transaction includes a receive, delivery, maturity, free
security movement and corporate action.
C. Earnings Credits:
Positive earnings credits will be applied on all collected custody and cash
management balances of each Fund at the Custodian to earn the Custodian's
daily repurchase agreement rate less reserve requirements and FDIC
premiums. Negative earnings credits will be charged on all uncollected
custody and cash management balances of each Fund at the Custodian's prime
rate less 150 basis points on each day a negative balance occurs. Positive
and/or negative earnings credits will be monitored daily for each Fund and
the net positive or negative amount for each Fund will be included in the
monthly statements. Excess positive credits for each Fund will be carried
forward indefinitely.
D. Out-of-Pocket Expenses (passed directly from Special Subcustodians):
Includes all charges by any Special Subcustodian to the Custodian as
Custodian for any Assets held at the Special Subcustodian.
GLOBAL CUSTODY FEE SCHEDULE
A. Global Fee Schedule:
Market: Annual Asset Fees Transaction Fees
Argentina .0037 $85
Australia .0009 $85
Austria .0011 $70
Belgium .0011 $60
Brazil .0035 $60
Canada .0008 $35
Chile .0045 $85
China .0045 $75
Czech Republic .0055 $135
Denmark .0011 $60
Finland .0011 $85
France .0011 $85
Germany .0008 $60
Hong Kong .0009 $85
Hungary .0065 $210
India .0055 $135
Indonesia .0009 $85
Ireland .0011 $60
Israel .0035 $160
Italy .0011 $70
Japan .0008 $40
Korea .0035 $60
Malaysia .0009 $85
Mexico .0016 $60
Netherlands .0011 $35
New Zealand .0009 $85
Norway .0011 $85
Peru .0070 $160
Phillippines .0035 $95
Poland .0060 $110
Portugal .0035 $145
Singapore .0009 $85
Spain .0009 $85
Sweden .0011 $70
Switzerland .0009 $85
Taiwan .0035 $85
Thailand .0009 $85
Turkey .0045 $110
U.K. .0011 $60
Note: Fee Schedule eliminates sub-custodian asset and transaction-based out-
of-pocket expenses. Other sub-custodian out-of-pocket expenses (i.e. Scrip
fees, stamp duties, certificate fees, etc.)
B. Out-of-Pocket Expenses (passed directly from Brown Brothers Harriman &
Co.):
Includes, but is not limited to telex, legal, telephones, postage, and
direct expenses including but not limited to tax reclaim, customized
systems programming, certificate fees, duties, and registration fees.
C. Short-term Dollar Denominated Global Assets
Eurodollar CDs, Time Deposits:
(1) An annual fee to be computed as of month end and payable each month of
the Fund's fiscal year (after receipt of the bill issued to the Fund
based upon its portion of short-term dollar denominated assets), at
the annual rate of:
.0004 on all short-term dollar denominated assets of the United Funds.
(2) Portfolio Transaction Fees:
First Chicago Clearing Centre-Trades with Members $136.00
First Chicago Clearing Centre-Trades with Non-members $153.00
First Chicago Clearing Centre-Income Collection $ 64.00
D. Euroclear Eligible Issues:
(1) An annual fee to be computed as of month end and payable each month of
the Fund's fiscal year (after receipt of the bill issued to the Fund
based upon its portion of Euroclear issues), at the annual rate of:
2.5 basis points on all United Funds Euroclear assets held in account
at UMB Bank, n.a.
(2) Portfolio Transaction Fees:
Euroclear $60.00
EX-99.B9-rsappca
(REVISED)
Waddell & Reed, Inc.
P.O. Box 29217 United Group of Funds Division Office
Stamp
Shawnee Mission, Kansas 66201-9217 APPLICATION
I (We) make application for an account to be established as follows:
________________________________________________________________________________
__________
REGISTRATION TYPE (one only) Trans Code: _________ Date Transmitted:
________________
________________________________________________________________________________
__________
NON RETIREMENT PLAN
[ ] Single Name [ ] Joint Tenants W/ROS [ ] Declaration of Trust Revocable
(Attach CUF0022)
[ ] Uniform Gifts (Transfers) To Minors [ ] Other: ______________________
(Use this section for
Retirement Plans with
Custodians other than
Fiduciary Trust Co.)
________________________________________________________________________________
__________
RETIREMENT PLAN (Fiduciary Trust Co. -- Cust., except for 457 Plans) See
Retirement Plan and Custody Agreement for annual custodian fees
[ ] Individual IRA
[ ] Spousal IRA [ ] SIMPLE IRA (For a new Plan, attach
MRP1659-AA)
[ ] Rollover (Qual. plan lump [ ] Owner-Only Profit Sharing Plan
sum distr.) (For a new Plan, attach MRP0651-AP)
[ ] Simplified Pension Plan (SEP) [ ] Owner-Only Money Purchase Plan
(For a new Plan, attach (For a new Plan, attach MRP0651-AM)
MRP1166-AA)
[ ] TSA _____________________________________
[ ] 457 Employer's Name (Do Not Abbreviate)
(For a new Plan,
______________________________________________________
attach MRP1401) Street City State
Zip
________________________________________________________________________________
______
REGISTRATION [ ]NEW ACCOUNT or [ ]NEW FUND FOR EXISTING ACCOUNT: [][][][][][][]-
[]
(Must have same ownership) Date of Birth
________________________________________________________________________________
______
Individual Name (exactly as desired) If spousal IRA, name of working spouse
______________________
Month Day Year
________________________________________________________________________________
______
Joint Name (if any, exactly as desired) If spousal IRA, name of non-working
spouse
______________________ ______________
Month Day Year Relationship (For grouping purposes)
________________________________________________________________________________
______
Mailing Address
_______________ ______________ ____________ _____/__________-________________
City State Zip Telephone
CITIZENSHIP __________________________
(Required in VA.)
Social Security #:[][][]-[][]-[][][][] or Taxpayer Identification #:[][]-
[][][][][][][]
________________________________________________________________________________
_______
BENEFICIARY: For Retirement Plan Accounts Only
Full Name of Beneficiary Tax Identification Number Date of Birth
________________________ _________________________ _____________
________________________ _________________________ _____________
________________________ _________________________ _____________
Relationship Percent
____________ _______%
____________ _______%
____________ _______%
________________________________________________________________________________
_______
INVESTMENTS: Make check payable to Waddell & Reed
Code Code
621 - Income 626 - Gold & Government
622 - Science and Technology 627 - Continental Income
623 - Accumulative 628 - High Income
624 - Bond 629 - Vanguard
625 - International Growth 630 - New Concepts
Code Code
634 - High Income II 760 - Municipal Bond (not available
680 - Retirement Shares for Ret. Plans)
684 - Asset Strategy 762 - Municipal High Income (not
750 - Cash Management available for Reg. Plan)
________________________________________________________________________________
_______
IF RETIREMENT PLAN
FUND Amount Trade Yr. Deductible or
(enter code) Enclosed Number of Contr. Non-Deductible
[][][] $__________ _________ 19_____ __________
[][][] $__________ _________ 19_____ __________
[][][] $__________ _________ 19_____ __________
[][][] $__________ _________ 19_____ __________
[][][] $__________ _________ 19_____ __________
Total $__________
Monthly DIV/C.G. Distr** Certificate
TOP From AIS* (Assumes RR) Desired
Another Carrier (if any) RR CC CR (Specify)
[] $______________ [] [] [] _________
[] $______________ [] [] [] _________
[] $______________ [] [] [] _________
[] $______________ [] [] [] _________
[] $______________ [] [] [] _________
$______________
________________________________________________________________________________
___________
*Attach AIS Authorization Form #CUF0714 **RR=Reinvest Div/Cap Gain CC=Cash/Div
/Cap Gain CR=Cash Div/Reinvest Cap Gain
________________________________________________________________________________
___________
This purchase is entitled to a reduced sales load charge for the following
reason:
[ ] Statement of Intention to Invest $______ [ ] 600 Products [ ] 700
Products
[] New SOI (Attach CUF0671) [] Existing SOI
[ ] Rights of Accumulation With Accounts ______, ______, ______, or Group
________
[ ] Identify Other Accounts Established At This Time:
_____________________________________
________________________________________________________________________________
___________
CHECK SERVICE Send information to establish redemption checking account for:
[ ] United Government Securities [ ] United Cash Management
________________________________________________________________________________
___________
EXPEDITED REDEMPTION: For United Cash Management (UCM) Only.
______________________________________________
___________________________________________
Name and Address of Bank/Financial Institution ABA/Routing # of Bank/Financial
Institution
_________________________________________________________
_______________________________
Street Customer's Account
Number
_________________________________________________________
City State Zip
On UCM Accounts where expedited redemption is requested, Waddell & Reed, Inc. is
authorized to honor any requests from anyone for redemption of fund shares so
long as the proceeds are transmitted to the identified account. All wires must
be transmitted exactly as registered on the UCM Account.
________________________________________________________________________________
__
CONFIDENTIAL DATA (Required for New Accounts/New Products) 1. Marital Status:
____ (Required in VA.) 2. Gross Family Income: $____ 3. Taxable Income $_____ 4.
Number of Dependents ____ 5. Occupation:_________________________ 6. Employer
Name: ________________________ 7. Employer Address:
________________________________________
8. Savings and Liquid Assets: $_____ 9. Other Assets (excluding home,
furnishings, cars): $_____ 10. Net Worth (Assets minus liabilities): $___ 11.
Are you associated with an NASD Member? Yes ___ No ___ 12. Investment Objectives
(mark all that apply):
[ ] Retirement Savings [ ] Children's College [ ]
Reserves
[ ] Income [ ] Other needs/goals (specify in Special
Remarks)
13. Special Remarks/Considerations:
_______________________________________________
________________________________________________________________________________
___
14. Residence Address:
____________________________________________________________
(if different from Street City State
Zip
Mailing Address on
Reverse Side)
15. Was this investment solicited by a W&R Representative? Yes/No
16. Has any beneficial owner of this account conducted any prior investment
activity? Yes/No
If yes, which owner(s) _____________________________________________________
17. Are proceeds from the sale of another security being used to open this
account? Yes/No
If yes, specify:
___________________________________________________________________
(Questions 15, 16 and 17 are required in CT.)
________________________________________________________________________________
____________
ACKNOWLEDGMENT
* I (we) have received a copy of the current prospectus of the Funds
selected.
* If purchasing an IRA, I (we) certify that I (we) have read the Retirement
Plan
and Custody Agreement and agree to the terms and conditions set forth
therein,
and do hereby establish the Individual Retirement Plan.
* Under penalties of perjury, I certify that the social security number or
other
taxpayer identification number shown on reverse side is correct (or I am
waiting for
a number to be issued to me) and (strike the following if not true) that I
am not
subject to tax withholding because (a) I am exempt from backup
withholding, or (b) I
have not been notified by the IRS that I am subject to backup withholding
as a
result of a failure to report all interest and dividends, or (c) the IRS
has
notified me that I am no longer subject to backup withholding.
Signature(s) of Purchaser (all joint purchasers must sign). Sign exactly as
name(s) appear in registration.
"The Internal Revenue Service does not require your consent to any provision of
this document other than the certification required to avoid backup
withholding."
_________________________ _________________________ _________________________
(Signature) (Printed Name) (Title, if any)
_________________________ _________________________ _________________________
(Signature) (Printed Name) (Title, if any)
_________________________ ____________________________
Representative Signature Date
[] [] [] [] []
Representative Number
If a Retirement Plan, Fiduciary Trust Company of New Hampshire accepts
appointment as Custodian in accordance with the Custody Agreement, as evidence
by the authorized signature/initials in the adjacent OSJ box. [OSJ: (H.O.USE)
]
Check Any Items Enclosed With Application
[] Declaration Trust Revocable (CUF0022)
[] Statement of Intention (CUF0671)
[] AIS Authorization (CUF0714)
[] Funds Plus (CUF1444)
[] Additional Applications ____________________________________
[] Check enclosed $___________________________
[] Signature Card (UCM/UGS only)
[] Other _____________________________________
CAP0001(1/97)
EX-99.B11-mhconsnt
INDEPENDENT AUDITORS' CONSENT
We consent to the use in Post-Effective Amendment No. 19 to Registration
Statement No. 33-715 of our report dated May 7, 1997 appearing in the Statement
of Additional Information, which is a part of such Registration Statement, and
to the reference to us under the caption "Financial Highlights" appearing in the
Prospectus, which also is a part of such Registration Statement.
Deloitte & Touche LLP
Kansas City, Missouri
May 29, 1997
EX-99.B11-mhpwcon
Consent of Independent Accountants
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 19 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
May 29, 1997
EX-99.B11-mhpwopin
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. We have not audited the financial statements
of United Municipal High Income Fund, Inc. for any period subsequent to
September 30, 1996.
Price Waterhouse LLP
Kansas City, Missouri
November 8, 1996
<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>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE SEMIANNUAL REPORT
TO SHAREHOLDERS DATED MARCH 31, 1997 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> 6-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> MAR-31-1997
<INVESTMENTS-AT-COST> 398,265,530
<INVESTMENTS-AT-VALUE> 414,354,259
<RECEIVABLES> 9,337,408
<ASSETS-OTHER> 10,553
<OTHER-ITEMS-ASSETS> 65,319
<TOTAL-ASSETS> 423,767,539
<PAYABLE-FOR-SECURITIES> 3,500,000
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,270,365
<TOTAL-LIABILITIES> 5,770,365
<SENIOR-EQUITY> 78,071,377
<PAID-IN-CAPITAL-COMMON> 321,042,208
<SHARES-COMMON-STOCK> 78,071,377
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 2,794,860
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 16,088,729
<NET-ASSETS> 417,997,174
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 14,516,031
<OTHER-INCOME> 0
<EXPENSES-NET> (1,654,076)
<NET-INVESTMENT-INCOME> 12,861,955
<REALIZED-GAINS-CURRENT> 4,389,249
<APPREC-INCREASE-CURRENT> (283,886)
<NET-CHANGE-FROM-OPS> 16,967,318
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (12,861,955)
<DISTRIBUTIONS-OF-GAINS> (1,101,874)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4,848,547
<NUMBER-OF-SHARES-REDEEMED> (4,154,484)
<SHARES-REINVESTED> 2,124,658
<NET-CHANGE-IN-ASSETS> 18,173,481
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,027,732
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,654,076
<AVERAGE-NET-ASSETS> 410,314,220
<PER-SHARE-NAV-BEGIN> 5.31
<PER-SHARE-NII> 0.17
<PER-SHARE-GAIN-APPREC> 0.05
<PER-SHARE-DIVIDEND> (0.17)
<PER-SHARE-DISTRIBUTIONS> (0.01)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 5.35
<EXPENSE-RATIO> 0.81
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
