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. 21
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT
OF 1940 |X|
Amendment No. 21
UNITED MUNICIPAL HIGH INCOME FUND, INC.
- -------------------------------------------------------------------------
(Exact Name as Specified in Charter)
6300 Lamar Avenue, Shawnee Mission, Kansas 66202-4200
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(Address of Principal Executive Office) (Zip Code)
Registrant's Telephone Number, including Area Code (913) 236-2000
Kristen A. Richards, P. O. Box 29217, Shawnee Mission, Kansas 66201-9217
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(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)(1)
__X__ on January 31, 1999 pursuant to paragraph (a)(1)
_____ 75 days after filing 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, 1998 will be filed on or about
December 28, 1998.
<PAGE>
January 31, 1999
[GRAPHIC LOGO]
UNITED MUNICIPAL HIGH INCOME FUND, INC.
Class A Shares
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This Fund seeks to provide a high level of income
that is not subject to Federal income tax.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT
APPROVED OR DISAPPROVED THE FUND'S SHARES, OR
DETERMINED WHETHER THIS PROSPECTUS IS ACCURATE OR
COMPLETE. IT IS A CRIMINAL OFFENSE TO STATE
OTHERWISE.
P R O S P E C T U S
<PAGE>
AN OVERVIEW OF THE FUND 3
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PERFORMANCE 5
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EXPENSES 6
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THE INVESTMENT PRINCIPLES
OF THE FUND 7
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Investment Goal and Principal
Strategies 7
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Principal Risk Considerations 9
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FINANCIAL HIGHLIGHTS 10
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YOUR ACCOUNT 11
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Ways to Set Up Your Account 11
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Buying Shares 11
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Sales Charge Reductions and
Waivers 13
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Waivers for Certain Investors 13
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Minimum Investments 14
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Adding to Your Account 14
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Selling Shares 15
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Shareholder Services 17
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Personal Service 17
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Reports 18
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Exchanges 18
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Automatic Transactions 18
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Distributions and Taxes 19
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Distributions 19
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Taxes 20
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THE MANAGEMENT OF THE FUND 22
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Portfolio Management 22
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Management Fee 22
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T A B L E O F C O N T E N T S
<PAGE>
An
Overview
of the
Fund
[GRAPHIC LOGO]
Goal:
United Municipal High Income Fund, Inc. (the "Fund") seeks to provide a high
level of income that is not subject to Federal income tax.
Strategy:
The Fund seeks to achieve its goal through a diversified portfolio consisting
mainly of medium- and lower-rated tax-exempt municipal bonds, as classified by
recognized rating agencies or, if unrated, judged to be of similar quality by
Waddell & Reed Investment Management Company ("WRIMCO"), the Fund's investment
manager. "Municipal bonds" mean obligations the interest on which is not
includable in gross income for Federal income tax purposes. The Fund
diversifies its holdings among two main types of municipal bonds:
o general obligation bonds, which are backed by the full faith, credit and
taxing power of the governmental authority, and
o revenue bonds, which are payable only from specific sources, such as the
revenue from a particular facility or a special tax. Revenue bonds include
industrial development bonds ("IDBs"), which finance privately operated
facilities.
The Fund may invest significantly in (i) IDBs in general, (ii) revenue bonds
payable from similar projects and (iii) municipal bonds of issuers located in
the same geographic area.
Principal Risks of Investing in the Fund:
Because the Fund primarily owns fixed income securities issued by municipal
authorities, a variety of factors can affect its investment performance, such
as:
o changes in interest rates
o changes in the maturities of bonds owned by the Fund
o the credit quality of the issuers whose securities the Fund owns or of the
private companies involved in revenue bond-financed projects
o the local economic, political or regulatory environment affecting bonds owned
by the Fund
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o failure of a bond's interest to qualify as tax-exempt
o municipal bond market conditions, generally
o general economic news
o the skill of WRIMCO in evaluating and managing the interest rate and credit
risks of the Fund's portfolio
As with any mutual fund, the value of the Fund's shares will change and you
could lose money on your investment.
Who May Want to Invest:
The Fund is designed for investors seeking current income that is primarily
free from Federal income tax, through a highly diversified, actively managed
portfolio. The Fund is not suitable for all investors. You should consider
whether the Fund fits with your particular investment objectives.
4
<PAGE>
Performance
[GRAPHIC LOGO]
The chart and table below show the past performance of the Fund's Class A
shares:
o The chart presents the annual returns and shows how performance has varied
from year to year for the past ten years.
o The table shows Class A average annual returns and compares them to the
market indicators listed.
o Both the chart and the table assume reinvestment of dividends and
distributions. As with all mutual funds, the Fund's past performance does
not necessarily indicate how it will perform in the future.
Note that the performance information in the chart and table is based on
calendar-year periods, while the information shown in the Financial Highlights
section of this Prospectus and in the Fund's shareholder reports is based on
the Fund's fiscal year.
CHART OF YEAR-BY-YEAR RETURNS
as of December 31 each year (%)
[Bar Chart]
'89 ......................................... 10.79%
'90 ......................................... 7.19%
'91 ......................................... 11.67%
'92 ......................................... 10.15%
'93 ......................................... 13.19%
'94 ......................................... -3.12%
'95 ......................................... 16.74%
'96 ......................................... 6.90%
'97 ......................................... 11.77%
'98 ......................................... -- %
In the period shown in the chart, the highest quarterly return was 6.77% (the
first quarter of 1995) and the lowest quarterly return was -3.3% (the first
quarter of 1994).
The chart does not reflect any sales charge that you may be required to pay
upon purchase of the Fund's Class A shares. If the sales charge were included,
the returns would be less than those shown.
AVERAGE ANNUAL TOTAL RETURNS
as of December 31, 1998 (%)
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
<S> <C> <C> <C>
Class A Shares of the Fund % % %
Lehman Brothers
Municipal Bond Index
Lipper High Yield
Municipal Bond Fund
Universe Average
</TABLE>
The indexes shown are broad-based, securities market indexes that are
unmanaged. The Lipper average is a composite of mutual funds with goals similar
to that of the Fund.
5
<PAGE>
Expenses
[GRAPHIC LOGO]
The following table describes the fees and expenses that you may pay if you buy
and hold shares of the Fund:
Shareholder Fees
(fees deducted directly from your investment)
Maximum sales charge (load) on purchases
(as a percentage of offering price) 4.25%
Maximum sales charge (load) on
reinvested dividends None
Deferred sales charge (load) None
Redemption fees None
Exchange fee None
Annual Fund Operating Expenses
(expenses deducted from Fund assets,
as a percentage of average net assets).
Management fees 0.49%
Distribution and Service (12b-1) fees 1 0.20%
Other expenses 0.12%
Total Fund operating expenses 0.81%
(1)It 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.
Example:
This example is intended to help you compare the cost of investing in the Class
A shares of the Fund with the cost of investing in other mutual funds. The
example assumes that (a) you invest $10,000 in the Fund for each time period
specified, (b) your investment has a 5%(2) return each year, and (c) the
Class A expenses remain the same. Although your actual costs may be higher or
lower, based on these assumptions, your costs would be:
1 year $ 504
3 years $ 673
5 years $ 856
10 years $1,384
(2)Use of an assumed annual return of 5% is for illustration purposes only and
is not a representation of the Fund's performance, which may be greater
or lesser.
Your costs would be the same whether or not you redeemed your shares at the end
of each time period. For a more complete discussion of certain expenses and
fees, see "Management Fee."
6
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The Investment Principles
of the Fund
[GRAPHIC LOGO]
Investment Goal and Principal Strategies
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 guarantee that the Fund will achieve its goal.
As used in this Prospectus, "municipal bonds" mean obligations the interest on
which is not included in gross income for Federal income tax purposes. The Fund
anticipates that not more than 40% of the dividends it will pay to shareholders
will be treated as a tax preference item for alternative minimum tax ("AMT")
purposes. The Fund and WRIMCO rely on the opinion of bond counsel for the
issuer in determining whether obligations are municipal bonds. Municipal bonds
are issued by a wide range of state and local governments, agencies and
authorities for various purposes.
The two main types 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 a special tax or other revenue
sources. Industrial development bonds are revenue bonds issued by or on behalf
of public authorities to obtain funds to finance privately operated facilities.
Other municipal obligations include lease obligations of municipal authorities
or entities and participations in these obligations.
Under normal market conditions, the Fund:
o will be substantially invested in bonds with maturities of 10 to 30 years;
o have at least 80% of its assets invested in municipal bonds; and
o have at least 75% of its assets 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.
7
<PAGE>
("MIS"), or, if unrated, are determined by WRIMCO to be of comparable quality.
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
securities in which to invest.
The Fund may invest 25% or more of its assets in industrial development bonds,
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. The Fund will not, however, have more than 25% of its
assets in industrial development bonds issued for any one industry or in any
one state.
During normal market conditions, the Fund may invest up to 20% of its assets in
a combination of taxable obligations, and options, futures contracts and other
derivative instruments. These taxable obligations must be either:
o U.S. Government securities,
o obligations of domestic banks and certain savings and loan associations,
o commercial paper rated at least A by S&P or MIS, and
o repurchase agreements. Income from taxable obligations and derivative
instruments will be subject to Federal income tax.
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.
The Fund may also invest in certain derivative instruments if it is permitted
to invest in the type of asset by which the return on, or value of, the
derivative is measured. See the SAI for more information about the Fund's
permitted investments and strategies, as well as the restrictions that apply to
them.
8
<PAGE>
Principal Risk Considerations
Risks exist in any investment. The Fund is subject to market risk, financial
risk and, in some cases, prepayment risk. Market risk is the possibility of a
change in the price of the security because of market factors. Because of
market risk, the share price of the Fund will likely change, as well. Financial
risk is based on the financial situation of the issuer of the security. The
financial risk of the Fund depends on the credit quality of the securities in
which it is invested. Prepayment risk is the possibility that, during periods
of falling interest rates, a debt security with a high stated interest rate
will be prepaid before its expected maturity date. Because the Fund owns
different types of investments, its performance will be affected by a variety
of factors. In general, the value of the Fund's investments and the income it
generates will vary from day to day, generally due to changes in interest
rates, market conditions, and other company and economic news. Performance will
also depend on WRIMCO's skill in selecting investments.
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. For IDBs, 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. 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.
9
<PAGE>
Financial Highlights
[GRAPHIC LOGO]
The following information is to help you understand the financial performance of
the Fund's Class A* shares for the fiscal periods shown. "Total return" shows
how much your investment would have increased (or decreased) during each period,
assuming reinvestment of all dividends and distributions. This information has
been audited with the audits of the Financial Statements of the Fund. Financial
Statements for the fiscal year ended September 30, 1998 and the Independent
Auditors' Report of Deloitte & Touche LLP are included in the SAI, which is
available upon request.
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED SEPTEMBER 30,
<S> <C> <C> <C> <C> <C>
Per-share Data 1998 1997 1996 1995 1994
Net asset value,
beginning of period $5.55 $5.31 $5.27 $ 5.12 $ 5.53
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Income from investment operations:
Net investment
income 0.32 0.34 0.34 0.35 0.34
Net realized and
unrealized gain (loss)
on investments 0.21 0.25 0.04 0.17 (0.34)
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Total from investment
operations 0.53 0.59 0.38 0.52 0.00
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Less distributions:
Declared from net
investment income (0.32) (0.34) (0.34) (0.35) (0.34)
From capital gains (0.07) (0.01) (0.00) (0.00) (0.07)
In excess of capital
gains (0.00) (0.00) (0.00) (0.02) (0.00)
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Total distributions (0.39) (0.35) (0.34) (0.37) (0.41)
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Net asset value, end
of period $ 5.69 $ 5.55 $ 5.31 $ 5.27 $ 5.12
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Total return** 9.88% 11.45% 7.40% 10.63% 0.05%
Ratios/Supplemental Data
Net assets, end of
period (in millions) $522 $474 $400 $383 $345
Ratio of expenses to
average net assets 0.82% 0.78% 0.81% 0.76% 0.76%
Ratio of net
investment income
to average net assets 5.72% 6.19% 6.41% 6.75% 6.39%
Portfolio turnover
rate 35.16% 19.47% 26.91% 19.07% 26.26%
</TABLE>
*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.
10
<PAGE>
Your Account
[GRAPHIC LOGO]
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 free of Federal
transfer tax consequences. 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
financial advisor for the form.
Buying Shares
You may buy shares of the Fund through Waddell & Reed, Inc. and its financial
advisors. To open your account you must complete and sign an application. Your
Waddell & Reed financial advisor 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.
11
<PAGE>
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.
<TABLE>
<CAPTION>
Sales Charge Sales Charge as
as Percent of Approx. Percent of
Size of Purchase Offering Price Amount Invested
<S> <C> <C>
Under $100,000 4.25% 4.44%
$100,000 to less than
$300,000 3.25 3.36
$300,000 to less than
$500,000 2.50 2.56
$500,000 to less than
$1,000,000 1.75 1.78
$1,000,000 to less than
$2,000,000 1.00 1.01
$2,000,000 and over 0.00 0.00
</TABLE>
The Fund's Class A NAV is the value of a single share.
o The securities in the Fund's portfolio that are listed or traded on an
exchange are valued primarily using market prices.
o Bonds are generally valued according to prices quoted by an independent
pricing service.
o Short-term debt securities are valued at amortized cost, which approximates
market value.
o Other investment assets for which market prices are unavailable 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 or futures contract 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:
o Orders are accepted only at the home office of Waddell & Reed, Inc.
o All of your purchases must be made in U.S. dollars.
12
<PAGE>
o 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 identifica-tion 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.
Sales Charge Reductions and Waivers
Lower sales charges are available by:
o combining additional purchases of Class A shares of any of the funds in the
United Group, except United Cash Management, Inc., with the NAV of Class A
shares already held ("rights of accumulation").
o 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.
o grouping purchases by certain related persons. Additional information and
applicable forms are available from Waddell & Reed financial advisors.
Waivers for Certain Investors
Class A shares may be purchased at NAV by:
o the Directors and officers of the Fund, employees of Waddell & Reed, Inc.,
employees of their affiliates, financial advisors of Waddell & Reed, Inc.
and the spouse, children, parents, children's spouses and spouse's parents
of each.
o purchases of Class A shares in certain retirement plans and certain trusts
for these persons.
o purchases of Class A shares in a 401(k) plan having 100 or more eligible
employees and purchases of Class A shares in a 457 plan having 100 or more
eligible employees. 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.
13
<PAGE>
The Fund has adopted a Distribution and Service Plan ("Plan") pursuant to Rule
12b-1 under the Investment Company Act of 1940. Under the Plan, the Fund may
pay Waddell & Reed, Inc. a fee of up to 0.25%, on an annual basis, of the
average daily net assets of the Class A shares. This fee is to reimburse
Waddell & Reed, Inc. for the amounts it spends for distributing the Fund's
Class A shares, providing services to Class A shareholders or maintaining Class
A shareholder accounts. Because the Plan fees are paid out of the Class A
assets on an on-going basis, over time these fees will increase the cost of
your investment and may cost you more than paying other types of sales charges.
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:
o the detachable form that accompanies the confirmation of a prior purchase or
your year-to-date statement; or
o 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.
14
<PAGE>
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
financial advisor, or write a letter of instruction with:
o the name on the account registration;
o the Fund's name;
o the Fund account number;
o the dollar amount or number of shares to be redeemed; and
o any other applicable requirements listed in the table below.
Deliver the form or your letter to your Waddell & Reed financial advisor, 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.
15
<PAGE>
Special Requirements for Selling Shares
Account Type Special Requirements
The written instructions must be signed by all
Individual or Joint persons required to sign for transactions, exactly
Tenant as their names appear on the account.
The written instructions must be signed by the
Sole Proprietorship individual owner of the business.
The custodian must sign the written instructions
UGMA, UTMA indicating capacity as custodian.
The trustee must sign the written instructions
indicating capacity as trustee. If the trustee's
Trust name is not in the account registration, provide a
currently certified copy of the trust document.
At least one person authorized by corporate
Business or Organization resolution to act on the account must sign the
written instructions.
The written instructions must be signed by the
Conservator, Guardian person properly authorized by court order to act in
or Other Fiduciary 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:
o If more than one person owns the shares, each owner must sign the written
request.
o If you hold a certificate, it must be properly endorsed and sent to the Fund.
o 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 that
the check has cleared and been honored. If not, payment of the redemption
proceeds on these shares will be delayed until the earlier of 10 days or
the date the Fund can verify that your purchase check has cleared and been
honored.
o 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.
o Payment is normally made in cash, although under extraordinary conditions
redemptions may be made in portfolio securities.
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<PAGE>
The Fund may require a signature guarantee in certain situations such as:
o a redemption request made by a corporation, partnership or fiduciary;
o a redemption request made by someone other than the owner of record; or
o the check is made payable to someone other than the owner of record.
This requirement protects you and Waddell & Reed from fraud. You can obtain a
signature guarantee from most banks and securities dealers, but not from a
notary public.
The Fund reserves the right to redeem at NAV all shares of the Fund owned by
you having an aggregate NAV of less than $500. The Fund will give you notice
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 with 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 financial advisor is available to provide personal
service. Additionally, one toll-free call, 1-800-366-5465, connects you to a
Customer Service Representative or TeleWaddell, our automated customer
telephone service. During normal business hours, our Customer Services staff is
available to answer your questions or update your account records. At almost
any time of the day or night, you may access TeleWaddell from a touch-tone
phone to:
o obtain information about your accounts;
o obtain price information about other funds in the United Group; or
o request duplicate statements.
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<PAGE>
Reports
Statements and reports sent to you include the following:
o confirmation statements (after every purchase, other than those purchases
made through Automatic Investment Service, and after every exchange,
transfer or redemption)
o year-to-date statements (quarterly)
o annual and semiannual reports (every six months)
To reduce expenses, only one copy of the most recent 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 above for Customer
Service if you need copies of annual or semiannual reports or 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 permitted 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 ongoing 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.
18
<PAGE>
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.
Usually the Fund distributes net investment income 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. Dividends declared for a particular day are paid to
shareholders of record on the prior business day except for dividends declared
for Friday, Saturday and Sunday, which are paid to shareholders of record on
the preceding Thursday. Net capital gains usually are distributed in December.
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 dividends, 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 dividends, capital gains and
other distributions.
19
<PAGE>
Taxes
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 gains, when
designated as such, are taxable to you as long-term capital gains, whether
received in cash or paid in additional Fund shares and regardless of the length
of time you have owned your shares. For Federal income tax purposes, your
long-term capital gains (if you are a noncorporate shareholder of the Fund)
generally are taxed at a maximum rate of 20%. 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 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.
20
<PAGE>
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 what you paid for the redeemed shares (which normally includes any
sales charge paid).
An exchange of Fund shares for shares of any other fund in the United Group
generally will have similar tax consequences. However, special rules apply when
you dispose of Fund shares through a redemption or exchange within ninety days
after your purchase thereof and subsequently reacquire Fund shares or acquire
shares of another fund in the United Group without paying a sales charge due to
the thirty-day reinvestment privilege or exchange privilege. See "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 more information. There may be other Federal, state or local tax
considerations applicable to a particular investor. You are urged to consult
your own tax adviser.
21
<PAGE>
The Management of the Fund
[GRAPHIC LOGO]
Portfolio Management
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 Target/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 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, Vice President of the Fund and
Vice President of other investment companies for which WRIMCO serves as
investment manager. From July 1986 to March 1998, Mr. Holliday was Senior Vice
President of Waddell & Reed Asset Management Company, a former affiliate of
WRIMCO. 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.
WRIMCO is located at 6300 Lamar Avenue, P.O. Box 29217, Shawnee Mission, Kansas
66201-9217.
Management Fee
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
22
<PAGE>
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.
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
Group Net Asset Level Annual Group Fee Rate
(all dollars in millions) For Each Level
From $0 to $750 .51 of 1%
From $750 to $1,500 .49 of 1%
From $1,500 to $2,250 .47 of 1%
From $2,250 to $3,000 .45 of 1%
From $3,000 to $3,750 .43 of 1%
From $3,750 to $7,500 .40 of 1%
From $7,500 to $12,000 .38 of 1%
Over $12,000 .36 of 1%
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 $18.9 billion as of September 30, 1998. Management fees for the
fiscal year ended September 30, 1998 were 0.49% of the Fund's average net
assets.
23
<PAGE>
United
Municipal
High
Income
Fund, Inc.
[GRAPHIC LOGO]
Custodian
UMB Bank, n.a.
Kansas City, Missouri
Legal Counsel
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, N. W.
Washington, D. C. 20036
Independent Auditors
Deloitte & Touche LLP
1010 Grand Avenue
Kansas City, Missouri 64106-2232
Investment Manager
Waddell & Reed Investment
Management Company
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
(913) 236-2000
(800) 366-5465
Underwriter
Waddell & Reed, Inc.
6300 Lamar Avenue
P.O. Box 29217
Shawnee Mission, Kansas
66201-9217
(913) 236-2000
(800) 366-5465
Shareholder Servicing Agent
Waddell & Reed
Services Company
6300 Lamar Avenue
P.O. Box 29217
Shawnee Mission, Kansas
66201-9217
(913) 236-2000
(800) 366-5465
Accounting Services Agent
Waddell & Reed
Services Company
6300 Lamar Avenue
P.O. Box 29217
Shawnee Mission, Kansas
66201-9217
(913) 236-2000
(800) 366-5465
24
<PAGE>
[GRAPHIC LOGO]
UNITED
MUNICIPAL
HIGH INCOME
FUND, INC.
You can get more information about the Fund in--
o its Statement of Additional Information (SAI) dated January 31, 1999, which
contains detailed information about the Fund, particularly its investment
policies and practices. You may not be aware of important information
about the Fund unless you read both the Prospectus and the SAI. The
current SAI is on file with the Securities and Exchange Commission (SEC)
and it is incorporated into this Prospectus by reference (that is, the SAI
is legally part of the Prospectus).
o its Annual and Semiannual Reports to Shareholders, which detail the Fund's
actual investments and include financial statements as of the close of the
particular annual or semiannual period. The annual report also contains a
discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during the year covered by
the report.
To request a copy of the current SAI or copies of the Fund's most recent Annual
and Semiannual reports, without charge, or for other inquiries, contact the
Fund or Waddell & Reed, Inc. at the address and telephone number below.
Information about the Fund (including its current SAI and most recent Annual
and Semiannual Reports) is available from the SEC's web site at
http://www.sec.gov and from the SEC's Public Reference Room in Washington, D.C.
You can find out about the operation of the Public Reference Room and
applicable copying charges by calling 1-800-SEC-0330.
The Fund's SEC file number is: 811-4427.
[GRAPHIC WADDELL & REED LOGO]
Waddell & Reed, Inc.
6300 Lamar Avenue, P. O. Box 29217
Shawnee Mission, Kansas, 66201-9217
(913) 236-2000, (800) 366-5465
printed on recycled paper NUP2014(1-99)
<PAGE>
The Securities and Exchange Commission has not approved or disapproved the
Fund's shares, or determined whether this Prospectus is accurate or complete. It
is a criminal offense to state otherwise.
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.
Prospectus
January 31, 1999
1
<PAGE>
Table of Contents
An Overview of the Fund.......................................................3
Performance...................................................................5
Expenses......................................................................7
The Investment Principles of the Fund.........................................8
Financial Highlights..........................................................9
Your Account.................................................................10
Buying Shares.............................................................10
Minimum Investments.......................................................12
Adding to Your Account....................................................12
Selling Shares............................................................12
Telephone Transactions....................................................15
Shareholder Services......................................................15
Personal Service........................................................15
Reports.................................................................15
Exchanges...............................................................16
Distributions and Taxes...................................................16
Distributions...........................................................16
Taxes...................................................................16
The Management of the Fund...................................................19
Portfolio Management......................................................19
Management Fee............................................................19
2
<PAGE>
An Overview of the Fund
Goal: United Municipal High Income Fund, Inc. (the "Fund") seeks to provide a
high level of income which is not subject to Federal income tax.
Strategy: The Fund seeks to achieve its goal through a diversified portfolio
consisting mainly of medium- and lower-rated tax-exempt municipal bonds, as
classified by recognized rating agencies or, if unrated, judged to be of similar
quality by Waddell & Reed Investment Management Company ("WRIMCO"), the Fund's
investment manager. "Municipal bonds" mean obligations the interest on which is
not includable in gross income for Federal income tax purposes. The Fund
diversifies its holdings among two main types of municipal bonds:
o general obligation bonds, which are backed by the full faith, credit and
taxing power of the governmental authority, and
o revenue bonds, which are payable only from specific sources, such as
the revenue from a particular facility or a special tax. Revenue bonds
include industrial development bonds ("IDBs"), which finance
privately operated facilities.
The Fund may invest significantly in (i) IDBs in general, (ii) revenue bonds
payable from similar projects and (iii) municipal bonds of issuers located in
the same geographic area.
Principal Risks of Investing in the Fund:
Because the Fund primarily owns fixed income securities issued by municipal
authorities, a variety of factors can affect its investment performance, such
as:
o changes in interest rates
o changes in the maturities of bonds owned by the Fund
o the credit quality of the issuers whose securities the Fund owns or
of the private companies involved in revenue bond-financed projects
o the local economic, political or regulatory environment affecting bonds
owned by the Fund
o failure of a bond's interest to qualify as tax-exempt
o municipal bond market conditions, generally
o general economic news
o the skill of WRIMCO in evaluating and managing the interest rate and
credit risks of the Fund's portfolio
As with any mutual fund, the value of the Fund's shares will change and you
could lose money on your investment.
3
<PAGE>
Who May Want to Invest: The Fund is designed for investors seeking current
income that is primarily free from Federal income tax, through a highly
diversified, actively managed portfolio, and that is higher 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.
4
<PAGE>
Performance
The chart and table below show the past performance of the Fund's Class A
shares. Class A performance is given because there were no Class Y shares
outstanding at September 30, 1998:
o The chart presents the Class A annual returns and shows how performance has
varied from year to year for the past ten years.
o The table shows Class A average annual returns and compares them to the
market indicators listed.
o Both the chart and the table assume reinvestment of dividends and
distributions. As with all mutual funds, the Fund's past performance does
not necessarily indicate how it will perform in the future.
Note that the performance information in the chart and table is based on
calendar-year periods, while the information shown in the Fund's shareholder
reports is based on the Fund's fiscal year.
<TABLE>
<CAPTION>
Chart of Year-by-Year Returns
as of December 31 each year (%)
<S> <C>
1998 %
1997 11.77%
1996 6.90%
1995 16.74%
1994 -3.12%
1993 13.19%
1992 10.15%
1991 11.67%
1990 7.19%
1989 10.79%
</TABLE>
In the period shown in the chart, the highest quarterly return was 6.77%
(the first quarter of 1995) and the lowest quarterly return was -3.3%
(the first quarter of 1994).
The chart does not reflect any sales charge that you may be required to
pay upon purchase of the Fund's Class A shares. If the sales charge were
included, the returns would be less than those shown.
- --------
(1) Class A shares, which are designed for retail investors and not offered by
this Prospectus, would have annual returns substantially similar to those
of Class Y shares because both classes invest in the same portfolio of Fund
securities. The annual returns of these classes would differ only to the
extent that the classes do not have the same expenses.
5
<PAGE>
<TABLE>
<CAPTION>
Average Annual Total Returns
as of December 31, 1998 (%)
<S> <C> <C> <C>
1 year 5 years 10 years
------ ------- --------
Class A Shares of the Fund
Lehman Brothers Municipal Bond Index
Lipper High Yield Municipal Bond
Fund Universe Average
</TABLE>
The indexes shown are broad-based, securities market indexes that are unmanaged.
The Lipper average is a composite of mutual funds with goals similar to that of
the Fund.
6
<PAGE>
Expenses
The following table describes the fees and expenses that you may pay if you buy
or hold shares of the Fund:
Shareholder fees (fees deducted directly from your investment).
Maximum sales charge (load)
on purchases None
Maximum sales charge (load)
on reinvested
dividends None
Deferred
sales charge (load) None
Redemption fees None
Exchange fee None
Annual Fund operating expenses (expenses deducted from Fund assets, as a
percentage of average net assets).(2)
Management fees 0.49%
Distribution and
Service (12b-1) fees None
Other expenses 0.20%
Total Fund operating
expenses 0.69%
Example: This example is intended to help you compare the cost of investing in
the Class Y shares of the Fund with the cost of investing in other mutual funds.
The example assumes that (a) you invest $10,000 in the Fund for each time period
specified, (b) your investment has a 5%(3) return each year, and (c) the Class Y
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions, your costs would be:
1 year $ 70
3 years $221
Your costs would be the same whether or not you redeemed your shares at the end
of each time period. For a more complete discussion of certain expenses and
fees, see "Management Fee."
- --------
(2) Expense ratios are based on the management fees and other Fund-level
expenses of the Fund for the fiscal year ended September 30, 1998, 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.
(3) Use 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.
7
<PAGE>
The Investment Principles of the Fund
[GRAPHIC LOGO]
Investment Goal and Principal Strategies
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 guarantee that the Fund will achieve its goal.
As used in this Prospectus, "municipal bonds" mean obligations the interest on
which is not included in gross income for Federal income tax purposes. The Fund
anticipates that not more than 40% of the dividends it will pay to shareholders
will be treated as a tax preference item for alternative minimum tax ("AMT")
purposes. The Fund and WRIMCO rely on the opinion of bond counsel for the
issuer in determining whether obligations are municipal bonds. Municipal bonds
are issued by a wide range of state and local governments, agencies and
authorities for various purposes.
The two main types 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 a special tax or other revenue
sources. Industrial development bonds are revenue bonds issued by or on behalf
of public authorities to obtain funds to finance privately operated facilities.
Other municipal obligations include lease obligations of municipal authorities
or entities and participations in these obligations.
Under normal market conditions, the Fund:
o will be substantially invested in bonds with maturities of 10 to 30 years;
o have at least 80% of its assets invested in municipal bonds; and
o have at least 75% of its assets 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.
<PAGE>
("MIS"), or, if unrated, are determined by WRIMCO to be of comparable quality.
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
securities in which to invest.
The Fund may invest 25% or more of its assets in industrial development bonds,
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. The Fund will not, however, have more than 25% of its
assets in industrial development bonds issued for any one industry or in any
one state.
During normal market conditions, the Fund may invest up to 20% of its assets in
a combination of taxable obligations, and options, futures contracts and other
derivative instruments. These taxable obligations must be either:
o U.S. Government securities,
o obligations of domestic banks and certain savings and loan associations,
o commercial paper rated at least A by S&P or MIS, and
o repurchase agreements. Income from taxable obligations and derivative
instruments will be subject to Federal income tax.
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.
The Fund may also invest in certain derivative instruments if it is permitted
to invest in the type of asset by which the return on, or value of, the
derivative is measured. See the SAI for more information about the Fund's
permitted investments and strategies, as well as the restrictions that apply to
them.
<PAGE>
Principal Risk Considerations
Risks exist in any investment. The Fund is subject to market risk, financial
risk and, in some cases, prepayment risk. Market risk is the possibility of a
change in the price of the security because of market factors. Because of
market risk, the share price of the Fund will likely change, as well. Financial
risk is based on the financial situation of the issuer of the security. The
financial risk of the Fund depends on the credit quality of the securities in
which it is invested. Prepayment risk is the possibility that, during periods
of falling interest rates, a debt security with a high stated interest rate
will be prepaid before its expected maturity date. Because the Fund owns
different types of investments, its performance will be affected by a variety
of factors. In general, the value of the Fund's investments and the income it
generates will vary from day to day, generally due to changes in interest
rates, market conditions, and other company and economic news. Performance will
also depend on WRIMCO's skill in selecting investments.
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. For IDBs, 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. 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.
8
<PAGE>
Financial Highlights
Financial Highlights for Class Y shares are not included because the Fund had no
Class Y shares outstanding at September 30, 1998.
9
<PAGE>
Your Account
Class Y shares are designed for institutional investors or others
investing through certain intermediaries. Class Y shares are available for
purchase by:
o 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;
o 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;
o government entities or authorities and corporations whose investment within
the first twelve months after initial investment is $10 million or more; and
o certain retirement plans and trusts for employees and financial advisors
of Waddell & Reed, Inc. and its affiliates.
Buying Shares
You may buy shares of the Fund through Waddell & Reed, Inc. and its
financial advisors. To open your account you must complete and sign an
application. Your Waddell & Reed financial adivisor 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
1-800-366-5465, 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.
10
<PAGE>
You may also buy shares of the Fund indirectly through certain
broker-dealers, banks and other third parties, some of which may charge you a
fee. These firms may have additional requirements to buy shares.
o The securities in the Fund's portfolio that are listed or traded on an
exchange are valued primarily using market prices.
o Bonds are generally valued according to prices quoted by an independent
pricing service.
o Short-term debt securities are valued at amortized cost, which approximates
market value.
o Other investment assets for which market prices are unavailable 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 or futures contract 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:
o Orders are accepted only at the home office of Waddell & Reed, Inc.
o All of your purchases must be made in U.S. dollars.
o 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.
o The Fund does not issue certificates representing Class Y shares of the
Fund.
o If you purchase Fund shares from certain broker-dealers, banks or other
authorized third parties, the Fund will be deemed to have received your
purchase order when that third party (or its designee) has received
your order. Your order will receive the offering price next calculated
after the order has been received in proper form by the authorized
third party (or its designee). You should consult that firm to
determine the time by which it must receive your order for you to
purchase Fund shares at that day's price.
When you sign your account application, you will be asked to certify
that your Social Security or other taxpayer
11
<PAGE>
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
If you purchase Fund shares from certain broker-dealers, banks or other
authorized third parties, additional purchases may be made through those firms.
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.
12
<PAGE>
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 financial advisor, or write a
letter of instruction with:
o the name on the account registration;
o the Fund's name;
o the Fund account number;
o the dollar amount or number of shares to be redeemed; and
o any other applicable requirements listed in the table below.
Deliver the form or your letter to your Waddell & Reed financial
advisor, 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 Account The written instructions must 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 Organization At least one person authorized 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
13
<PAGE>
request for redemption in good order by Waddell & Reed, Inc. at its home office.
Note the following:
o If more than one person owns the shares, each owner must sign the written
request.
o 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 that
the check has cleared and been honored. If not, payment of the redemption
proceeds on these shares will be delayed until the earlier of 10 days or the
date the Fund can verify that your purchase check has cleared and been
honored.
o 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.
o Payment is normally made in cash, although under extraordinary conditions
redemptions may be made in portfolio securities.
o If you purchased Fund shares from certain broker-dealers, banks or other
authorized third parties, you may sell those shares through those firms,
some of which may charge you a fee and may have additional requirements to
sell Fund shares. The Fund will be deemed to have received your order
to sell shares when that firm (or its designee) has received your order.
Your order will receive the offering price next calculated after the
order has been received in proper form by the authorized firm (or its
designee). You should consult that firm to determine the time by which
it must receive your order for you to sell Fund shares at that day's price.
The Fund may require a signature guarantee in certain situations such
as:
o a redemption request is made by a corporation, partnership or fiduciary;
o a redemption request is made by someone other than the owner of record; or
o the check is made payable to someone other than the owner of record.
This requirement protects you and Waddell & Reed from fraud. You can
obtain a signature guarantee from most banks and securities dealers, but not
from a notary public.
The Fund reserves the right to redeem at NAV all shares of the Fund
owned by you having an aggregate NAV of less than $500. The Fund will give you
notice and a 60-day opportunity to purchase a sufficient number of additional
shares to bring the aggregate NAV of your shares to $500.
14
<PAGE>
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 financial advisor is available to provide
personal service. Additionally, one toll-free call, 1-800-366-5465, connects you
to a Customer Service Representative or TeleWaddell, our automated customer
telephone service. During normal business hours, our Customer Service staff is
available to answer your questions or update your account records. At almost any
time of the day or night, you may access TeleWaddell from a touch-tone phone to:
o Obtain information about your accounts;
o Obtain price information about other funds in the United Group; or
o Request duplicate statements.
Reports
Statements and reports sent to you include the following:
o confirmation statements (after every purchase, exchange, transfer or
redemption)
o year-to-date statements (quarterly)
o annual and semiannual reports (every six months)
To reduce expenses, only one copy of the most recent 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 above for Customer
Service if you need copies of annual or semiannual reports or account
information.
15
<PAGE>
Exchanges
You may sell your Class Y shares and buy Class Y shares of other funds
in the United Group or Class A shares of United Cash Management, Inc. You may
exchange only into funds that are legally permitted 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.
Usually the Fund distributes net investment income 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. Dividends declared for a particular day are paid to
shareholders of record on the prior business day except for dividends declared
for Friday, Saturday and Sunday, which are paid to shareholders of record on the
preceding Thursday. Net capital gains usually are distributed in December.
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, 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, capital gains
and other distributions.
For retirement accounts, all distributions are automatically paid in
Class Y shares.
Taxes
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:
16
<PAGE>
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
gains, when designated as such, are taxable to you as long-term capital gains,
whether received in cash or paid in additional Fund shares and regardless of the
length of time you have owned your shares. For Federal income tax purposes, your
long-term capital gains (if you are a noncorporate shareholder of the Fund)
generally are taxed at a maximum rate of 20%. 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 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 what you paid for the redeemed shares.
17
<PAGE>
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 more information. There may be other Federal, state or local tax
considerations applicable to a particular investor. You are urged to consult
your own tax adviser.
18
<PAGE>
The Management of the Fund
Portfolio Management
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 Target/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, Vice President of
the Fund and Vice President of other investment companies for which WRIMCO
serves as investment manager. From July 1986 to March 1998, Mr. Holliday was
Senior Vice President of Waddell & Reed Asset Management Company, a former
affiliate of WRIMCO. 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.
WRIMCO is located at 6300 Lamar Avenue, P.O. Box 29217, Shawnee Mission,
Kansas 66201-9217.
Management Fee
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.
19
<PAGE>
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
<TABLE>
<CAPTION>
Annual
Group Net Group
Asset Level Fee Rate
(all dollars For Each
in millions) Level
- ------------ --------
<S> <C>
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%
</TABLE>
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 $18.9 billion as of September 30, 1998. Management fees for
the fiscal year ended September 30, 1998 were 0.49% of the Fund's average net
assets, which during most of that period consisted only of the Fund's Class A
shares.
20
<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 Auditors 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
21
<PAGE>
United Municipal High Income Fund, Inc.
Class Y Shares
PROSPECTUS
January 31, 1999
You can get more information about the Fund in--
o its Statement of Additional Information (SAI) dated January 31, 1999,
which contains detailed information about the Fund, particularly its
investment policies and practices. You may not be aware of important
information about the Fund unless you read both the Prospectus and
the SAI. The current SAI is on file with the Securities and Exchange
Commission (SEC) and it incorporated into this Prospectus by
reference (that is, the SAI is legally part of the Prospectus).
o its Annual and Semiannual Reports to Shareholders, which detail the
Fund's actual investments and include financial statements as of the
close of the particular annual or semiannual period. The annual
report also contains a discussion of the market conditions and
investment strategies that significantly affected the Fund's
performance during the year covered by the report.
To request a copy of the current SAI or copies of the Fund's most recent Annual
and Semiannual reports, without charge, or for other inquiries, contact the Fund
or Waddell & Reed, Inc. at the address and telephone number below or through
certain third parties through which shares of the Fund may be purchased.
Information about the Fund (including its current SAI and most recent Annual and
Semiannual Reports) is available from the SEC's web site at http://www.sec.gov
and from the Public Reference Room in Washington, D.C. You can find out about
the operation of the Public Reference Room and applicable copying charges by
calling 1-800-SEC-0330.
The Fund's SEC file number is: 811-4427.
WADDELL & REED, INC.
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
913-236-2000
800-366-5465
printed on recycled paper NUP2014-Y(1-99)
22
<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
January 31, 1999
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information (the "SAI") is not a
prospectus. Investors should read this SAI in conjunction with a prospectus
("Prospectus") for the Class A shares or the Class Y shares, as applicable, of
United Municipal High Income Fund, Inc. (the "Fund") dated January 31, 1999,
which may be obtained from the Fund or its underwriter, Waddell & Reed, Inc., at
the address or telephone number shown above.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
Performance Information ....................................... 2
Goal and Investment Policies .................................. 4
Investment Management and Other Services ...................... 27
Purchase, Redemption and Pricing of Shares .................... 31
Directors and Officers ........................................ 42
Payments to Shareholders ...................................... 48
Taxes ......................................................... 49
Portfolio Transactions and Brokerage .......................... 52
Other Information ............................................. 54
Financial Statements .......................................... 55
</TABLE>
<PAGE>
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 company
organized as a Maryland corporation on September 9, 1985.
PERFORMANCE INFORMATION
Waddell & Reed, Inc., the Fund's underwriter, or the Fund may, from
time to time, publish the Fund's total return information, yield information
and/or performance rankings in advertisements and sales materials.
Total Return
Total return is the overall change in the value of an investment over a
given period of time. An average annual total return quotation is computed by
finding the average annual compounded rates of return over the one-, five-, and
ten-year periods that would equate the initial amount invested to the ending
redeemable value. Standardized total return information is calculated by
assuming an initial $1,000 investment and, for Class A shares deducting the
maximum sales load of 4.25%. All dividends and distributions are assumed to be
reinvested in shares of the applicable class at net asset value for the class as
of the day the dividend or distribution is paid. No sales load is charged on
reinvested dividends or distributions on Class A shares. The formula used to
calculate the total return for a particular class of the Fund is:
n
P(1 + T) = ERV
Where : P = $1,000 initial payment
T = Average annual total return
n = Number of years
ERV = Ending redeemable value of the $1,000 investment for the
periods shown.
Non-standardized performance information may also be presented. For
example, the Fund may also compute total return for its Class A shares without
deduction of the sales load in which case the same formula noted above will be
used but the entire amount of the $1,000 initial payment will be assumed to have
been invested. If the sales charge applicable to Class A shares were reflected,
it would reduce the performance quoted for that class.
The average annual total return quotations for Class A shares as of
September 30, 1998, which is the most recent balance sheet included in this SAI,
for the periods shown were as follows:
2
<PAGE>
<TABLE>
<CAPTION>
With Without
Sales Load Sales Load
Deducted Deducted
<S> <C> <C>
One-year period from October 1, 1997 to
September 30, 1998: 5.21% 9.88%
Five-year period from October 1, 1993 to
September 30, 1998: 6.87% 7.80%
Ten-year period from October 1, 1988 to
September 30, 1998: 8.85% 9.32%
</TABLE>
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
Yield refers to the income generated by an investment in the Fund over
a given period of time. A yield quoted for a class of the Fund is computed by
dividing the net investment income per share of that class earned during the
period for which the yield is shown by the maximum offering price per share of
that class on the last day of that period according to the following formula:
6
Yield = 2((((a - b)/cd)+1) -1)
Where with respect to a particular class of the Fund:
a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares of the class outstanding
during the period that were entitled to receive dividends.
d = the maximum offering price per share of the class on the last
day of the period.
The yield for Class A shares of the Fund computed according to the
formula for the 30-day period ended on September 30, 1998, the date of the most
recent balance sheet included in this SAI, is 4.80%.
3
<PAGE>
The Fund may also advertise or include in sales material its
tax-equivalent yield, which is calculated by applying the stated income tax rate
to only the net investment income exempt from taxation according to a standard
formula which provides for computation of tax-equivalent yield by dividing that
portion of the Fund's yield which is tax exempt by one minus a stated income tax
rate and adding the product to that portion, if any, of the yield of the Fund
that is not tax-exempt.
The tax-equivalent yield for Class A shares computed according to the
formula for the 30-day period ended on September 30, 1998, the date of the most
recent balance sheet included in this SAI, is %, %, %, % and % 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. In connection with a ranking, the Fund may
provide additional information, such as the particular category to which it
related, the number of funds in the category, the criteria upon which the
ranking is based, and the effect of sales charges, fee waivers and/or expense
reimbursements.
All performance information that the Fund advertises or includes in
sales material is historical in nature and is not intended to represent or
guarantee future results. The value of the Fund's shares when redeemed may be
more or less than their original cost.
INVESTMENT STRATEGIES, POLICIES AND PRACTICES
This SAI supplements the information contained in the Prospectus and
contains more detailed information about the investment strategies and policies
the Fund's investment manager,
4
<PAGE>
Waddell & Reed Investment Management Company ("WRIMCO"), may employ and the
types of instruments in which the Fund may invest, in pursuit of the Fund's
goal. A summary of the risks associated with these instrument types and
investment practices is included as well.
WRIMCO might not buy all of these instruments or use all of these
techniques, or use them to the full extent permitted by the Fund's investment
policies and restrictions. WRIMCO buys an instrument or uses a technique only if
it believes that doing so will help the Fund achieve its goal. See "Investment
Restrictions" for a listing of the fundamental and non-fundamental (e.g.,
operating) investment restrictions and policies of the Fund.
Municipal Bonds
Municipal bonds are issued by a wide range of state and local
governments, agencies and authorities for various public purposes. The two main
kinds of municipal bonds are "general obligation" bonds and "revenue" bonds. For
"general obligation" bonds, the issuer has pledged its full faith, credit and
taxing power for the payment of principal and interest. "Revenue" bonds are
payable only from specific sources; these may include revenues from a particular
facility or class of facilities or special tax or other revenue source.
A special class of municipal bonds issued by state and local government
authorities and agencies are industrial development bonds ("IDBs"). 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 (collectively, "Lease Obligations"). These obligations, which
may take the form of a lease, an installment purchase, or a conditional sale
contract, are issued by state and local governments and authorities to acquire
land and a variety of equipment and facilities. The factors to be considered in
determining whether or not any rated
5
<PAGE>
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.
The Fund has not held and does not intend to hold municipal lease
obligations directly as a lessor of the property, but may from time to time
purchase a participation interest in a municipal obligation from a bank or other
third party. A participation interest gives the Fund a specified, undivided
interest in the obligation in proportion to its purchased interest in the total
amount of the obligation. Municipal leases frequently have risks distinct from
those associated with general obligation or revenue bonds. State constitutions
and statutes set forth requirements that states or municipalities must meet to
incur debt, including voter referenda, interest rate limits or public sale
requirements. Leases, installment purchases or conditional sale contracts have
evolved as 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, WRIMCO will differentiate between direct interests in
municipal leases and municipal lease-backed securities, the latter of which may
take the form of a lease-backed revenue bond, a tax-exempt asset-backed security
or any other investment structure using a municipal lease-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
6
<PAGE>
taxable), the Fund will sell the obligation as soon as possible, but it might
incur a loss upon such sale.
Municipal bonds vary widely as to their interest rates, degree of
security and maturity. Bonds are selected on the basis of quality, yield and
diversification. Factors that affect the yield on municipal bonds include
general money market conditions, municipal bond market conditions, the size of a
particular offering, the maturity of the obligation and the nature of the 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. 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
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has been changed. See Appendix A for a description of bond ratings.
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 IDBs. 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
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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. In either case,
payment and delivery for the bonds take place at a future date. The bonds so
purchased or sold by the Fund are subject to market fluctuation; their value may
be less or more when delivered than the purchase price paid or received. When
purchasing bonds on a when-issued or delayed-delivery basis, the Fund assumes
the rights and risks of ownership, including the risk of price and yield
fluctuations. No interest accrues to the Fund until delivery and payment is
completed. When the Fund makes a commitment to purchase municipal bonds on a
when-issued or delayed-delivery basis, it will record the transaction and
thereafter reflect the value of the bonds in determining its net asset value per
share.
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When the Fund sells a municipal bond on a delayed-delivery basis, the Fund does
not participate in further gains or losses with respect to the bond. When the
Fund makes a commitment to sell municipal bonds on a delayed basis, it will
record the transaction and thereafter value the bonds at the sales price in
determining the Fund's net asset value per share. If the other party to a
delayed-delivery transaction fails to deliver or pay for the bonds, the Fund
could miss a favorable price or yield opportunity, or could suffer a loss.
Ordinarily the Fund purchases municipal bonds on a when-issued or
delayed-delivery basis with the intention of actually taking delivery of the
bonds. However, before the bonds are delivered to the Fund and before it has
paid for them (the "settlement date"), the Fund could sell the bonds if WRIMCO
decided it was advisable to do so for investment reasons. The Fund will hold
aside or segregate cash or other securities, other than those purchased on a
when-issued or delayed-delivery basis, at least equal to the amount it will have
to pay on the settlement date; these other securities may, however, be sold at
or before the settlement date to pay the purchase price of the when-issued or
delayed-delivery bonds.
Limited Investment in Other Debt Securities
All of the Fund's invested assets, other than cash or receivables, must
be invested in municipal bonds, except that a limited amount of assets may be
invested in specified debt securities that are referred to in the Prospectus as
taxable obligations and in repurchase agreements and certain derivative
instruments (see discussion below). Under normal conditions, the Fund may invest
in taxable obligations only if, after any such investment, not more than 10% of
its assets would consist of taxable obligations. However, as a temporary
defensive measure, the Fund may invest up to all of its assets in taxable
obligations. The only taxable obligations that the Fund may purchase are (i)
obligations issued or guaranteed by the U.S. Government or its agencies or
instrumentalities ("U.S. Government Securities"), (ii) bank obligations of
domestic banks or savings and loan associations that are subject to regulation
by the U.S. Government (which obligations may include certificates of deposit,
letters of credit and acceptances), and (iii) commercial paper. The taxable
commercial paper the Fund may buy must, at the time of purchase, be rated at
least A by S&P or MIS. See Appendix A for a description of these ratings.
U.S. Government Securities
U.S. Government Securities are high quality debt instruments issued or
guaranteed as to principal or interest by the U.S. Treasury or an agency or
instrumentality of the U.S. Government. These securities include Treasury Bills
(which mature within one year of the date they are issued), Treasury Notes
(which have
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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.
Money Market Instruments
Money market instruments are high-quality, short-term debt instruments
that present minimal credit risk. They may include U.S. Government Securities,
commercial paper and other short-term corporate obligations, and certificates of
deposit and other financial institution obligations. These instruments may carry
fixed or variable interest rates.
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Zero Coupon Securities
Zero coupon securities are debt obligations that do not entitle the
holder to any periodic payment of interest prior to maturity or that specify a
future date when the securities begin to pay current interest; instead, they are
sold at a deep discount from their face value and are redeemed at face value
when they mature. Because zero coupon securities do not pay current income,
their prices can be very volatile when interest rates change and generally are
subject to greater price fluctuations in response to changing interest rates
than prices of comparable maturities that make current distributions of interest
in cash.
The Fund may invest in zero coupon securities that are zero coupon
bonds of municipal and corporate issuers, "stripped" U.S. Treasury notes and
bonds, and other securities that are issued with original issue discount
("OID"). The Federal tax law requires that a holder of a security with OID
accrue a ratable portion of the OID on the security as income each year, 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
securities prior to their maturity or disposition, it will have current income
attributable to those securities and includable in the dividends paid to its
shareholders. 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.
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 and Asset-Backed Securities
Mortgage-Backed Securities. Mortgage-backed securities represent direct
or indirect participations in, or are secured by and payable from, mortgage
loans secured by real property and include single- and multi-class pass-through
securities and collateralized mortgage obligations. Multi-class pass-through
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securities and collateralized mortgage obligations are collectively referred to
in this SAI as "CMOs." Some CMOs are directly supported by other CMOs, which in
turn are supported by mortgage pools. Investors typically receive payments out
of the interest and principal on the underlying mortgages. The portions of the
payments that investors receive, as well as the priority of their rights to
receive payments, are determined by the specific terms of the CMO class.
The U.S. Government mortgage-backed securities in which the Fund may
invest include mortgage-backed securities issued or guaranteed as to the payment
of principal and interest (but not as to market value) by Ginnie Mae, Fannie Mae
or Freddie Mac. Other mortgage-backed securities are issued by private issuers,
generally originators of and investors in mortgage loans, including savings
associations, mortgage bankers, commercial banks, investment bankers and special
purpose entities. Payments of principal and interest (but not the market value)
of such private mortgage-backed securities may be supported by pools of mortgage
loans or other mortgage-backed securities that are guaranteed, directly or
indirectly, by the U.S. Government or one of its agencies or instrumentalities,
or they may be issued without any government guarantee of the underlying
mortgage assets but with some form of non-government credit enhancement. These
credit enhancements do not protect investors from changes in market value.
The Fund may purchase mortgage-backed securities issued by both
government and non-government entities, such as banks, mortgage lenders, or
other financial institutions, as long as WRIMCO determines that it is consistent
with the Fund's goal and investment policies. Other types of mortgage-backed
securities will likely be developed in the future, and the Fund may invest in
them if WRIMCO determines they are consistent with the Fund's goal and
investment policies.
Stripped Mortgage-Backed Securities. Stripped mortgage-backed
securities are created when a U.S. Government agency or a financial institution
separates the interest and principal components of a mortgage-backed security
and sells them as individual securities. The holder of the "principal-only"
security ("PO") receives the principal payments made by the underlying
mortgage-backed security, while the holder of the "interest-only" security
("IO") receives interest payments from the same underlying security.
For example, interest-only ("IO") classes are entitled to receive all
or a portion of the interest, but none (or only a nominal amount) of the
principal payments, from the underlying mortgage assets. If the mortgage assets
underlying an IO experience greater than anticipated principal prepayments, then
the total amount of interest allocable to the IO class, and therefore the yield
to investors, generally will be reduced. In some instances, an investor in an IO
may fail to recoup all of the investor's initial investment, even if the
security is
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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.
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-Back 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
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certificateholders and to any guarantor, and due to any yield retained by the
issuer. Actual yield to the holder may vary from the coupon rate, even if
adjustable, if the mortgage-backed securities are purchased or traded in the
secondary market at a premium or discount. In addition, there is normally some
delay between the time the issuer receives mortgage payments from the servicer
and the time the issuer makes the payments on the mortgage-backed securities,
and this delay reduces the effective yield to the holder of such securities.
Yields on pass-through securities are typically quoted by investment
dealers and vendors based on the maturity of the underlying instruments and the
associated average life assumption. The average life of pass-through pools
varies with the maturities of the underlying mortgage loans. A pool's term may
be shortened by unscheduled or early payments of principal on the underlying
mortgages. Because prepayment rates of individual pools vary widely, it is not
possible to predict accurately the average life of a particular pool. In the
past, a common industry practice has been to assume that prepayments on pools of
fixed rate 30-year mortgages would result in a 12-year average life for the
pool. At present, mortgage pools, particularly those with loans with other
maturities or different characteristics, are priced on an assumption of average
life determined for each pool. In periods of declining interest rates, the rate
of prepayment tends to increase, thereby shortening the actual average life of a
pool of mortgage-related securities. Conversely, in periods of rising interest
rates, the rate of prepayment tends to decrease, thereby lengthening the actual
average life of the pool. Changes in the rate or "speed" of these payments can
cause the value of the mortgage-backed securities to fluctuate rapidly. However,
these effects may not be present, or may differ in degree, if the mortgage loans
in the pools have adjustable interest rates or other special payment terms, such
as a prepayment charge. Actual prepayment experience may cause the yield of
mortgage-backed securities to differ from the assumed average life yield.
The market for privately issued mortgage-backed and asset-backed
securities is smaller and less liquid than the market for U.S. Government
mortgage-backed securities. CMO classes may be specifically structured in a
manner that provides any of a wide variety of investment characteristics, such
as yield, effective maturity and interest rate sensitivity. As market conditions
change, however, and especially during periods of rapid or unanticipated changes
in market interest rates, the attractiveness of some CMO classes and the ability
of the structure to provide the anticipated investment characteristics may be
reduced. These changes can result in volatility in the market value and in some
instances reduced liquidity of the CMO class.
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Variable or Floating Rate Instruments
Variable or floating rate instruments (including notes purchased
directly from issuers) bear variable or floating interest rates and may carry
rights that permit holders to demand payment of the unpaid principal balance
plus accrued interest from the issuers or certain financial intermediaries on
dates prior to their stated maturities. Floating rate securities have interest
rates that change whenever there is a change in a designated base rate while
variable rate instruments provide for a specified periodic adjustment in the
interest rate. These formulas are designed to result in a market value for the
instrument that approximates its par value.
Indexed Securities
The Fund may purchase securities the value of which varies in relation
to the value of other securities, securities indices or other financial
indicators, subject to its operating policy regarding derivative instruments.
Indexed securities typically, but not always, are debt securities or deposits
whose value at maturity or coupon rate is determined by reference to a specific
instrument or statistic. The performance of indexed securities depends to a
great extent on the performance of the security or other instrument to which
they are indexed and may also be influenced by interest rate changes in the
United States and abroad. At the same time, indexed securities are subject to
the credit risks associated with the issuer of the security and their values may
decline substantially if the issuer's creditworthiness deteriorates. Indexed
securities may be more volatile than the underlying investments.
Recent issuers of indexed securities have included banks, corporations,
and certain U.S. Government agencies. Certain indexed securities that are not
traded on an established market may be deemed illiquid.
Restricted Securities
Restricted securities are securities that are subject to legal or
contractual restrictions on resale. However, restricted securities generally can
be sold in privately negotiated transactions, pursuant to an exemption from
registration under the Securities Act of 1933, as amended, (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.
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There are risks associated with investment in restricted securities in
that there can be no assurance of a ready market for resale. Also, the
contractual restrictions on resale might prevent the Fund from reselling the
securities at a time when such sale would be desirable. Restricted securities in
which the Fund seeks to invest need not be listed or admitted to trading on a
foreign or domestic exchange and may be less liquid than listed securities.
Certain restricted securities may be determined to be liquid in accordance with
guidelines adopted by the Board of Directors. See "Illiquid Investments" below.
Investment Company Securities
The Fund may purchase 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.
Illiquid Investments
The Fund may not purchase a security if, as a result, more than 10% of
its net assets would consist of illiquid investments. Investments currently
considered to be illiquid include: (i) repurchase agreements not terminable
within seven days; (ii) bank deposits, unless they are payable at principal plus
accrued interest on demand or within seven days after demand; (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. If through a change in values, or other
circumstances, the Fund were in a position where more than 10% of its net assets
were invested in illiquid securities, it would seek to take appropriate steps to
protect liquidity.
Repurchase Agreements
The Fund may purchase securities subject to repurchase agreements
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,
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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. WRIMCO may use certain options, futures contracts (sometimes
referred to as "futures"), options on futures contracts, swaps, caps, collars,
floors, indexed securities and other derivative instruments (collectively,
"Financial Instruments") to attempt to (i) enhance income or yield, (ii) hedge
the Fund's investments, or (iii) manage other risks of the Fund's investments
that can affect fluctuation in its net asset value.
Generally, the Fund may purchase and sell any type of Financial
Instrument. However, as an operating policy, the Fund will only purchase or sell
a particular Financial Instrument if the Fund is authorized to invest in the
type of asset by which the return on, or value of, the Financial Instrument is
primarily measured.
Hedging strategies can be broadly categorized as "short hedges" and
"long hedges." A short hedge is a purchase or sale of a Financial Instrument
intended partially or fully to offset potential declines in the value of one or
more investments held in the Fund's portfolio. Thus, in a short hedge, the Fund
takes a position in a Financial Instrument whose price is expected to
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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 may be
limited by tax considerations. See "Taxes."
In addition to the instruments, strategies and risks described below,
WRIMCO expects to discover additional opportunities in connection with Financial
Instruments and other similar or related techniques. These new opportunities may
become available as WRIMCO develops new techniques, as regulatory authorities
broaden the range of permitted transactions and as new Financial Instruments or
other techniques are developed. WRIMCO may utilize these opportunities to the
extent that they are consistent with the Fund's goal and permitted by the Fund's
investment limitations and applicable regulatory authorities. The Fund might not
use any of these strategies, and there can be no assurance that any strategy
used will succeed. The Fund's Prospectus or SAI will be supplemented to the
extent that new products or techniques involve materially different risks than
those described below or in the Prospectus.
Special Risks. The use of Financial Instruments involves special
considerations and risks, certain of which are described below. In general,
these techniques may increase the volatility of the Fund and may involve a small
investment of cash relative
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to the magnitude of the risk assumed. Risks pertaining to particular Financial
Instruments are described in the sections that follow.
(1) Successful use of most Financial Instruments depends upon WRIMCO's
ability to predict movements of the overall securities and interest rate
markets, which requires different skills than predicting changes in the prices
of individual securities. There can be no assurance that any particular strategy
will succeed, and use of Financial Instruments could result in a loss,
regardless of whether the intent was to reduce risk or increase return.
(2) There might be imperfect correlation, or even no correlation,
between price movements of a Financial Instrument and price movements of the
investments being hedged. For example, if the value of a Financial Instrument
used in a short hedge increased by less than the decline in value of the hedged
investment, the hedge would not be fully successful. Such a lack of correlation
might occur due to factors unrelated to the value 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
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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 accounts or make margin payments when it takes positions in
Financial Instruments involving obligations to third parties (i.e., Financial
Instruments other than purchased options). If the Fund were unable to close out
its positions in such Financial Instruments, it might be required to continue to
maintain such assets or accounts or make such payments until the position
expired or matured. These requirements might impair the Fund's ability to sell a
portfolio security or make an investment at a time when it would otherwise be
favorable to do so, or require that the Fund sell a portfolio security at a
disadvantageous time.
(5) The Fund's ability to close out a position in a Financial
Instrument prior to expiration or maturity depends on the existence of a liquid
secondary market or, in the absence of such a market, the ability and
willingness of the other party to the transaction ("counterparty") to enter into
a transaction closing out the position. Therefore, there is no assurance that
any position can be closed out at a time and price that is favorable to the
Fund.
Cover. Transactions using Financial Instruments, other than purchased
options, expose the Fund to an obligation to another party. The Fund will 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
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open, unless they are replaced with other appropriate assets. As a result, the
commitment of a large portion of the Fund's assets to cover or accounts could
impede portfolio management or the Fund's ability to meet redemption requests or
other current obligations.
Options. A call option gives the purchaser the right to buy, and
obligates the writer to sell, the underlying investment at the agreed-upon price
during the option period. A put option gives the purchaser the right to sell,
and obligates the writer to buy, the underlying investment at the agreed-upon
price during the option period. Purchasers of options pay an amount, known as a
premium, to the option writer in exchange for the right under the option
contract.
The purchase of call options can serve as a long hedge, and the
purchase of put options can serve as a short hedge. Writing put or call options
can enable the Fund to enhance income or yield by reason of the premiums paid by
the purchasers of such options. However, if the market price of the security
underlying a put option declines to less than the exercise price of the option,
minus the premium received, the Fund would expect to suffer a loss.
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.
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The Fund may effectively terminate its right or obligation under an
option by entering into a closing transaction. For example, the Fund may
terminate its obligation under a call or put option that it had written by
purchasing an identical call or put option; this is known as a closing purchase
transaction. Conversely, the Fund may terminate a position in a put or call
option it had purchased by writing an identical put or call option; this is
known as a closing sale transaction. Closing transactions permit the Fund to
realize profits or limit losses on an option position prior to its exercise or
expiration.
A type of put that the Fund may purchase is an "optional delivery
standby commitment," which is entered into by parties selling debt securities to
the Fund. An optional delivery standby commitment gives the Fund the right to
sell the security back to the seller on specified terms. This right is provided
as an inducement to purchase the security.
Risks of Options on Securities. Options offer large amounts of
leverage, which will result in the Fund's net asset value being more sensitive
to changes in the value of the related instrument. The Fund may purchase or
write both exchange-traded and OTC options. Exchange-traded options in the
United States 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.
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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
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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 contracts or call options on futures contracts can serve as a long
hedge, and the sale of futures contracts or the purchase of put options on
futures contracts can serve as a short hedge. Writing call options on futures
contracts can serve as a limited short hedge, using a strategy similar to that
used for writing call options on securities or indices. Similarly, writing put
options on futures contracts can serve as a limited long hedge. Futures
contracts and options on futures contracts can also be purchased and sold to
attempt to enhance income or yield.
In addition, futures strategies can be used to manage the average
duration of the Fund's fixed-income portfolio. If WRIMCO wishes to shorten the
average duration of the Fund's fixed-income portfolio, the Fund may sell a debt
futures contract or a call option thereon, or purchase a put option on that
futures contract. If WRIMCO wishes to lengthen the average duration of
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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
contracts can enter into offsetting closing transactions, similar to closing
transactions in options, by selling or purchasing, respectively, an instrument
identical to the instrument purchased or sold. Positions in futures contracts
and options on futures contracts may be closed only on an exchange or board of
trade that provides a secondary market. However, there can be no assurance that
a liquid secondary market will exist for a particular contract at a particular
time. In such event, it may not be possible to close a futures contract or
options position.
Under certain circumstances, futures exchanges may establish daily
limits on the amount that the price of a futures contract or an option on a
futures contract can vary from the previous day's settlement price; once that
limit is reached, no trades may be made that day at a price beyond the limit.
Daily price limits do not limit potential losses because prices could move to
the daily limit for several consecutive days with little or no trading, thereby
preventing liquidation of unfavorable positions.
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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
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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.
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
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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. The Fund may enter into swaps, caps,
collars and floors to preserve a return or a spread on a particular investment
or portion of its portfolio, to protect against any increase in the price of
securities the Fund anticipates purchasing at a later date or to attempt to
enhance yield. Swaps involve the exchange by the Fund with another party 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
the cap. The purchase of a floor entitles the purchaser, to the extent that a
specified index falls below a predetermined value, to receive payments on a
notional principal amount from the party selling the floor. A collar combines
elements of buying a cap and selling a floor.
Swap agreements, including caps, 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 overall volatility of the Fund's
investments and its share price and yield because, and to the extent, these
agreements affect the Fund's exposure to long- or short-term interest rates,
mortgage-backed security values, corporate borrowing rates or other factors such
as security prices or inflation rates.
Swap agreements will tend to shift the Fund's investment exposure from
one type of investment to another. Caps and floors have an effect similar to
buying or writing options.
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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 firm's creditworthiness declines, the
value of the agreement would be likely to decline, potentially resulting in
losses. If a default occurs by the other party to such transaction, the Fund
will have contractual remedies pursuant to the agreements related to the
transaction.
The net amount of the excess, if any, of the Fund's obligations over
its entitlements with respect to each swap will be accrued on a daily basis and
an amount of cash or liquid assets having an aggregate net asset value at least
equal to the accrued excess will be maintained in an account with the Fund's
custodian that satisfies the requirements of the 1940 Act. The Fund will also
establish and maintain such account with respect to its total obligations under
any swaps that are not entered into on a net basis and with respect to any caps
or floors that are written by the Fund. WRIMCO and the Fund believe that such
obligations do not constitute senior securities under the 1940 Act and,
accordingly, will not treat them as being subject to the Fund's borrowing
restrictions. The position of the SEC is that assets involved in swap
transactions are illiquid and are, therefore, subject to the limitations on
investing in illiquid securities.
Investment Restrictions and Limitations
Certain of the Fund's investment restrictions, policies and other
limitations are described in the Prospectus and this SAI. The following are the
Fund's fundamental investment limitations set forth in their entirety, which,
like the Fund's goal, cannot be changed without shareholder approval. For this
purpose, shareholder approval means the approval, at a meeting of Fund
shareholders, by the lesser of (1) the holders of 67% or more of the Fund's
shares represented at the meeting, if more than 50% of the Fund's outstanding
shares are present in person or by proxy or (2) more than 50% of the Fund's
outstanding shares. The Fund may not:
(i) Make any investments other than in municipal bonds and in the
taxable obligations, options, futures contracts and other
financial instruments described in the Prospectus;
(ii) 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;
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(iii) 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) 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) Invest for the purpose of exercising control or management of
other companies;
(vi) 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) Participate on a joint, or a joint and several basis, in any
trading account in securities;
(viii) Engage in the underwriting of securities;
(ix) With respect to 75% of its total assets, purchase securities
of any one issuer (other than cash items and "Government
securities" as defined in the 1940 Act), if immediately after
and as a result of such purchase, the value of the holdings of
the Fund in the securities of such issuer exceeds 5% of the
value of the Fund's total assets; or
(x) 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; or
(xi) issue senior securities.
The following investment restrictions are not fundamental and may be
changed by the Board of Directors without shareholder approval:
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<PAGE>
(i) 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 determined by WRIMCO to be of comparable
quality. 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 WRIMCO's opinion, there is a lack of medium- and
lower-quality issues in which to invest.
(ii) The Fund may invest 25% or more of its assets in IDBs and may
have 25% or more of its assets invested 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.
(iii) The Fund will not purchase an IDB if it would then have more
than 5% of its assets invested in IDBs of companies with less
than three years of continuous operation.
(iv) The Fund may not purchase a security if, as a result, more
than 10% of its net assets would consist of illiquid
investments.
The method of determining who is an issuer for purposes of the 5%
limitation in fundamental restriction (ix) is non-fundamental. In particular, in
applying this limitation:
(a) For municipal bonds created by a particular
government but backed only by the assets and revenues
of a subdivision of that government, such as an
agency, instrumentality, authority or other
subdivision, the Fund considers such subdivision to
be the issuer;
(b) For IDBs, the nongovernmental user of facilities
financed by them is considered a separate issuer; and
(c) The Fund considers a guarantee of a municipal bond to
be a separate security that would be given a value
and included in the limitation if the value of all
municipal bonds created by the guarantor and owned by
the Fund exceeds 10% of the value of the Fund's total
assets.
An investment policy or limitation that states a maximum percentage of
the Fund's assets that may be so invested or
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<PAGE>
prescribes quality standards is typically applied immediately after, and based
on, the Fund's acquisition of an asset. Accordingly, a subsequent change in the
asset's value, net assets, or other circumstances will not be considered when
determining whether the investment complies with the Fund's investment policies
and limitations.
Portfolio Turnover
A portfolio turnover rate is, in general, the percentage computed by
taking the lesser of purchases or sales of portfolio securities for a year and
dividing it by the monthly average of the market value of such securities during
the year, excluding certain short-term securities. The Fund's turnover rate may
vary greatly from year to year, as well as within a particular year, and may be
affected by cash requirements for the redemption of its shares. The Fund's
portfolio turnover rate was 35.16% for the fiscal year ended September 30, 1998
and 19.47% for the fiscal year ended September 30, 1997.
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.
Waddell & Reed Financial, Inc.
WRIMCO is a wholly owned subsidiary of Waddell & Reed, Inc. Waddell &
Reed, Inc. is a wholly owned subsidiary of Waddell &
33
<PAGE>
Reed Financial Services, Inc., a holding company. Waddell & Reed Financial
Services, Inc. is a wholly owned subsidiary of Waddell & Reed Financial, Inc., a
publicly held company. The address of these companies is 6300 Lamar Avenue, P.O.
Box 29217, Shawnee Mission, Kansas 66201-9217.
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 Target/United Funds, Inc. since that
fund's inception, until January 8, 1992, when it assigned its duties as
investment manager for these funds (and the related professional staff) to
WRIMCO. WRIMCO has also served as investment manager for 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 Target/United Funds, Inc. is
the underlying investment vehicle.
Shareholder Services
Under the Shareholder Servicing Agreement entered into between the Fund
and Waddell & Reed Services Company (the "Agent"), a subsidiary of Waddell &
Reed, Inc., the Agent performs shareholder servicing functions, including the
maintenance of shareholder accounts, the issuance, transfer and redemption of
shares, distribution of dividends and payment of redemptions, the furnishing of
related information to the Fund and handling of shareholder inquiries. A new
Shareholder Servicing Agreement, or amendments to the existing one, may be
approved by the Fund's Board of Directors without shareholder approval.
Accounting Services
Under the Accounting Services Agreement entered into between the Fund
and the Agent, the Agent provides the Fund with bookkeeping and accounting
services and assistance, including maintenance of the Fund's records, pricing of
the Fund's shares, 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.
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<PAGE>
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, 1998, 1997 and 1996 were $2,461,306, $2,131,973 and $1,985,305,
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 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
<TABLE>
<CAPTION>
Average
Net Asset Level Annual Fee
(all dollars in millions) Rate for Each Level
------------------------- -------------------
<S> <C>
From $ 0 to $ 10 $ 0
From $ 10 to $ 25 $ 10,000
From $ 25 to $ 50 $ 20,000
From $ 50 to $ 100 $ 30,000
From $ 100 to $ 200 $ 40,000
From $ 200 to $ 350 $ 50,000
From $ 350 to $ 550 $ 60,000
From $ 550 to $ 750 $ 70,000
From $ 750 to $1,000 $ 85,000
$1,000 and Over $100,000
</TABLE>
The fees paid to the Agent for the fiscal years ended September 30,
1998, 1997 and 1996 were $60,000, $60,000 and $60,000, respectively.
35
<PAGE>
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, 1998, 1997 and 1996 were $1,691,251, $1,450,698 and $1,000,554,
respectively. The amounts retained by Waddell & Reed, Inc. for each period were
$713,220, $649,321 and $442,057, respectively.
No portion of the sales charge is reallowed to dealers. 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 0.25% of the Fund's average annual net assets attributable to Class A
shares, paid monthly, to reimburse Waddell & Reed, Inc. for its costs and
expenses in connection with 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 for Class A shares, to make distribution of shares also
through other broker-dealers. In distributing shares through its sales force,
Waddell
36
<PAGE>
& Reed, Inc. will pay commissions and incentives to the sales force at or about
the time of sale and will incur other expenses including costs for prospectuses,
sales literature, advertisements, sales office maintenance, processing of orders
and general overhead with respect to its efforts to distribute the Fund's
shares. The Plan permits Waddell & Reed, Inc. to receive reimbursement for these
Class A-related distribution activities through the distribution fee, subject to
the limit contained in the Plan. The 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 and distribution fees in the amount of $991,342 and
$5,618, respectively, were paid (or accrued) by the Fund with respect to Class A
shares for the fiscal year ended September 30, 1998. To the extent that Waddell
& Reed, Inc. incurs expenses for which reimbursement may be made under the Plan
that relate to distribution activities also involving another fund in the United
Group of Funds or Waddell & Reed Funds, Inc., Waddell & Reed, Inc. typically
determines the amount attributable to the Fund's expenses under the Plan on the
basis of a combination of the respective classes' relative net assets and number
of shareholder accounts.
The only Directors or interested persons, as defined in the 1940 Act,
of the Fund who have a direct or indirect financial interest in the operation of
the Plan are the officers and Directors who are also officers of either Waddell
& Reed, Inc. or its affiliate(s) or who are shareholders of Waddell & Reed
Financial, Inc., the indirect parent company of Waddell & Reed, Inc. The Plan is
anticipated to benefit the Fund and its Class A shareholders through Waddell &
Reed, Inc.'s activities not only to distribute the Class A shares of the Fund
but also to provide personal services to Class A shareholders and thereby
promote the maintenance of their accounts with the Fund. The Fund anticipates
that Class A shareholders may benefit to the extent that Waddell & Reed's
activities are successful in increasing the assets of the Fund, through
increased sales or reduced redemptions, or a combination of these, and reducing
a Class A shareholder's share of Fund and Class A expenses. Increased Fund
assets may also provide greater resources with which to pursue the goal of the
Fund. Further, continuing sales of Class A shares may also reduce the likelihood
that it will be necessary to liquidate portfolio securities, in amounts or at
times that
37
<PAGE>
may be disadvantageous to the Fund, to meet redemption demands. In addition, the
Fund anticipates that the revenues from the Plan will provide Waddell & Reed,
Inc. with greater resources to make the financial commitments necessary to
continue to improve the quality and level of services to the Fund and Class A
shareholders. 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
auditors, audits the Fund's financial statements.
Year 2000 Issue
Like other mutual funds, financial and business organizations and
individuals around the world, the Fund could be adversely affected if the
computer systems used by WRIMCO and the Fund's other service providers do not
properly process and calculate date-related information and data from and after
January 1, 2000. This is commonly known as the "Year 2000 Problem." WRIMCO is
taking steps that it believes are reasonably designed to address the Year 2000
Problem with respect to the computer systems that it uses and to obtain
assurances that comparable steps are being taken by the Fund's other, major
service providers. Although there can be no assurances, WRIMCO believes these
steps will be sufficient to avoid any adverse impact on the Fund.
38
<PAGE>
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 sales charge is
paid to Waddell & Reed, Inc., the Fund's underwriter. The price makeup as of
September 30, 1998, was as follows:
<TABLE>
<S> <C>
Net asset value per Class A share (Class A net assets divided by Class
A shares
outstanding) ............................................................. $5.69
Add: selling commission (4.25% of offering
price) ................................................................... .25
-----
Maximum offering price per Class A share (Class A net asset value per
Class A share divided
by 95.75%) ............................................................... $5.94
=====
</TABLE>
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, Martin Luther King, Jr. Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
However, it is possible that the NYSE may close
39
<PAGE>
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."
40
<PAGE>
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 Gifts 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,
salary reduction plan account under Section 457 of the Internal Revenue
Code of 1986, as amended (the "Code"), provided that such purchases are
subject to a sales charge (see "Net Asset Value Purchases"),
tax-sheltered annuity account ("TSA") 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).
41
<PAGE>
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
42
<PAGE>
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
43
<PAGE>
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.
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Other Funds in the United Group
Reduced sales charges for larger purchases of Class A shares apply to
purchases of any of the Class A shares of any of the funds in the United Group
subject to a sales charge. A purchase of Class A shares, or Class A shares held,
in any of the funds in the United Group subject to a sales charge will be
treated as an investment in the Fund in determining the applicable sales charge.
For these purposes, Class A shares of United Cash Management, Inc. that were
acquired by exchange of another United Group fund's Class A shares on which a
sales charge was paid, plus the shares paid as dividends on those acquired
shares, are also taken into account.
Net Asset Value Purchases of Class A Shares
As stated in the Prospectus, Class A shares of the Fund may be
purchased at 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
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<PAGE>
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
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<PAGE>
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 an ongoing 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
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<PAGE>
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.
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<PAGE>
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.
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
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<PAGE>
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 majority of the
Directors is not affiliated with Waddell & Reed, Inc.
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. Vogel 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
Target/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.
KEITH A. TUCKER*
Chairman of the Board of Directors of the Fund and each of the other
funds in the Fund Complex; Chairman of the Board of Directors, Chief Executive
Officer, Principal Financial Officer and Director of Waddell & Reed Financial,
Inc.; President, Chairman of the Board of Directors and Chief Executive Officer
of Waddell & Reed Financial Services, Inc.; Chairman of the Board of Directors
of WRIMCO, Waddell & Reed, Inc., Waddell & Reed Services Company, Waddell & Reed
Development, Inc., a business development company, and Waddell & Reed
Distributors, Inc.; formerly, President of the Fund and each of the other funds
in the Fund Complex; formerly, Vice Chairman of the Board of Directors of
Torchmark Corporation; formerly, Chairman of the Board of Directors of Waddell &
Reed Asset Management Company, a former affiliate of Waddell & Reed Financial,
Inc.; formerly, Director of Vesta Insurance Group, Inc.; formerly, Director of
Southwestern Life Corporation. Date of birth: February 11, 1945.
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<PAGE>
JAMES M. CONCANNON
950 Docking Road
Topeka, Kansas 66615
Dean and Professor of Law, Washburn University School of Law; Director,
AmVestors CBO II Inc. Date of birth: October 2, 1947.
JOHN A. DILLINGHAM
4040 Northwest Claymont Drive
Kansas City, Missouri 64116
President, JoDill Corp., an agricultural company; President and
Director of Dillingham Enterprises Inc.; formerly, Director and consultant,
McDougal Construction Company; formerly, Instructor at Central Missouri State
University; formerly, Member of the Board of Police Commissioners, Kansas City,
Missouri; formerly, Senior Vice President-Sales and Marketing, Garney Companies,
Inc., a specialty utility contractor. Date of birth: January 9, 1939.
DAVID P. GARDNER
525 Middlefield Road, Suite 200
Menlo Park, California 94025
President of Hewlett Foundation and Chairman of George S. and Delores
Dori Eccles Foundation. Director of First Security Corp., a bank holding
company, and Director of Fluor Corp., a company with interests in coal. Date of
birth: March 24, 1933.
LINDA K. GRAVES*
1 South West Cedar Crest Road
Topeka, Kansas 66606
First Lady of Kansas. Daughter of Ronald K. Richey, Director of the
Fund and each of the other funds in the Fund Complex. Date of birth: July 29,
1953.
JOSEPH HARROZ, JR.
125 South Creekdale Drive
Norman, Oklahoma 73072
General Counsel of the Board of Regents and Adjunct Professor of Law at
the University of Oklahoma College of Law; formerly, Vice President for
Executive Affairs of the University of Oklahoma; formerly, an Attorney with
Crowe & Dunlevy, a law firm. Date of birth:
January 17, 1967.
JOHN F. HAYES*
20 West 2nd Avenue
P. O. Box 2977
Hutchinson, Kansas 67504-2977
Director of Central Bank and Trust; Director of Central Financial
Corporation; Director of Central Properties, Inc.; Chairman of the Board of
Directors, Gilliland & Hayes, P.A., a law firm; formerly, President, Gilliland &
Hayes, P.A. Date of birth: December 11, 1919.
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<PAGE>
ROBERT L. HECHLER*
President and Principal Financial Officer of the Fund and each of the
other funds in the Fund Complex; Executive Vice President, Chief Operating
Officer and Director of Waddell & Reed Financial, Inc.; Vice President, Chief
Operating Officer, Director and Treasurer of Waddell & Reed Financial Services,
Inc.; Executive Vice President, Principal Financial Officer, Director and
Treasurer of WRIMCO; President, Chief Executive Officer, Principal Financial
Officer, Director and Treasurer of Waddell & Reed, Inc.; President, Director and
Treasurer of Waddell & Reed Services Company; President, Treasurer and Director
of Waddell & Reed Distributors, Inc.; President of Waddell & Reed Development,
Inc., a business development company; formerly, Vice President of the Fund and
each of the other funds in the Fund Complex; formerly, Director and Treasurer of
Waddell & Reed Asset Management Company. Date of birth: November 12, 1936.
HENRY J. HERRMANN*
Vice President of the Fund and each of the other funds in the Fund
Complex; President, Chief Investment Officer, Treasurer and Director of Waddell
& Reed Financial, Inc.; 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; Director of Waddell & Reed Development, Inc., a business development
company. Formerly, President, Chief Executive Officer, Chief Investment Officer
and Director of Waddell & Reed Asset Management Company. Date of birth: December
8, 1942.
GLENDON E. JOHNSON
13635 Deering Bay Drive
Unit 284
Miami, Florida 33158
Retired. Formerly, Director and Chief Executive Officer of John Alden
Financial Corporation and 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, Waddell & Reed Financial,
Inc. and United Investors Life Insurance Company, affiliates of Waddell & Reed,
Inc. Date of birth: April 27, 1928.
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<PAGE>
RONALD C. REIMER
2601 Verona Road
Mission Hills, Kansas 66208
Retired. Co-founder and teacher at Servant Leadership School of Kansas
City; Director of Network Rehabilitation Services; formerly, Employment
Counselor and Director of McCue-Parker Center. Date of birth: August 3, 1934.
FRANK J. ROSS, JR.*
700 West 47th Street
Kansas City, Missouri 64112
Shareholder, Polsinelli, White, Vardeman & Shalton, a law firm. Date of
birth: April 9, 1953.
ELEANOR B. SCHWARTZ
5100 Rockhill Road
Kansas City, Missouri 64113
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.
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.
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John M. Holliday
Vice President of the Fund and eight other funds in the Fund complex;
Senior Vice President of WRIMCO; formerly, Senior Vice President of Waddell &
Reed Asset Management Company; formerly, Senior Vice President of Waddell &
Reed, Inc. Date of birth: June 11, 1935.
The address of each person is 6300 Lamar Avenue, P.O. Box 29217,
Shawnee Mission, Kansas 66201-9217 unless a different address is given.
The Directors who may be deemed to be "interested persons" as defined
in the 1940 Act of the Fund's underwriter, Waddell & Reed, Inc., or of its
manager, WRIMCO, are indicated as such by an asterisk.
The Board of Directors has created an honorary position of Director
Emeritus, which position a director may elect after resignation from the Board
provided the director has attained the age of 70 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.
Henry L. Bellmon, Jay B. Dillingham, Doyle Patterson, Ronald K. Richey and Paul
S. Wise retired as Directors of the Fund and of each of the funds in the Fund
Complex and elected a position as Director Emeritus.
The funds in the United Group, Target/United Funds, Inc. and Waddell &
Reed Funds, Inc. pay to each Director a total of $48,000 per year, plus $2,500
for each meeting of the Board of Directors attended and $500 for each committee
meeting attended which is not in conjunction with a Board of Directors meeting,
other than Directors who are affiliates of Waddell & Reed, Inc. The fees to the
Directors who receive them are divided among the funds in the United Group,
Target/United Funds, Inc. and Waddell & Reed Funds, Inc. based on their relative
size. During the Fund's fiscal year ended September 30, 1998, the Fund's
Directors received the following fees for service as a director:
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<PAGE>
COMPENSATION TABLE
<TABLE>
<CAPTION>
Total
Aggregate Compensation
Compensation From Fund
From and Fund
Director Fund Complex*
- -------- ------------ ------------
<S> <C> <C>
Robert L. Hechler $ 0 $ 0
Henry J. Herrmann 0 0
Keith A Tucker 0 0
James M. Concannon 1,279 56,000
John A. Dillingham 1,279 56,000
David P. Gardner 0 0
Linda K. Graves 1,279 56,000
Joseph Harroz, Jr. 0 0
John F. Hayes 1,279 56,000
Glendon E. Johnson 1,255 55,000
William T. Morgan 1,279 56,000
Ronald C. Reimer 0 0
Frank J. Ross, Jr. 1,279 56,000
Eleanor B. Schwartz 1,279 56,000
Frederick Vogel III 1,279 56,000
</TABLE>
*No pension or retirement benefits have been accrued as a part of Fund expenses.
Mr. Gardner was elected as a Director on August 19, 1998. Messrs.
Harroz, Hechler, Herrmann and Reimer were elected as Directors on November 18,
1998. The officers are paid by WRIMCO or its affiliates.
Shareholdings
As of November 30, 1998, 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
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payments when you redeem your shares. The first source is net investment income,
which is derived from the interest and earned discount on the securities the
Fund holds, less expenses (which will vary by class). The second source is net
realized capital gains, which are derived from the proceeds received from the
Fund's sale of securities at a price higher than the Fund's tax basis (usually
cost) in such securities, less losses from sales of securities at a price lower
than the Fund's basis therein; these gains can be either long-term or
short-term, depending on how long the Fund has owned the securities before it
sells them. The payments made to shareholders from net investment income and net
short-term capital gains are called dividends.
The Fund pays distributions from net capital gains (the excess of net
long-term capital gains over net short-term capital losses). It may or may not
have such gains, depending on whether securities are sold and at what price. If
the Fund has net capital gains, it will pay distributions once each year, in the
latter part of the fourth calendar quarter, except to the extent it has net
capital losses carried over from a prior year or years to offset the gains.
Choices You Have on Your Dividends and Distributions
On your application form, you can give instructions that (i) you want
cash for your dividends and distributions, (ii) you want your dividends and
distributions paid in shares of the Fund of the same class as that with respect
to which they were paid, or (iii) you want cash for your dividends and want your
distributions paid in shares of the Fund of the same class as that with respect
to which they were paid. 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.
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TAXES
General
The Fund has qualified for treatment as a regulated investment company
("RIC") under the Internal Revenue Code of 1986, as amended (the "Code"), so
that it is relieved of Federal income tax on that part of its investment company
taxable income (consisting generally of taxable net investment income, net
short-term capital gains and net gains from certain foreign currency
transactions) that is distributed to its shareholders. To continue to qualify as
a RIC, the Fund must distribute to its shareholders for each taxable year at
least 90% of the sum of its investment company taxable income plus its net
interest income excludable from gross income under Section 103(a) of the Code
("Distribution Requirement"), and must meet several additional requirements.
These requirements include the following: (1) the Fund must derive at least 90%
of its gross income each taxable year from dividends, interest, payments with
respect to securities loans and gains from the sale or other disposition of
securities or foreign currencies, or other income (including gains from options,
futures contracts or forward contracts) derived with respect to its business of
investing in securities or those currencies ("Income Requirement"); (2) at the
close of each quarter of the Fund's taxable year, at least 50% of the value of
its total assets must be represented by cash and cash items, U.S. Government
Securities, securities of other RICs and other securities that are limited, in
respect of any one issuer, to an amount that does not exceed 5% of the value of
the Fund's total assets and that does not represent more than 10% of the
issuer's outstanding voting securities ("50% Diversification Requirement"); and
(3) at the close of each quarter of the Fund's taxable year, not more than 25%
of the value of its total assets may be invested in securities (other than U.S.
Government Securities or the securities of other RICs) of any one issuer.
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
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<PAGE>
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 those
gains will be taxable to shareholders. There also may be collateral Federal
income tax consequences regarding the receipt of tax-exempt dividends by
shareholders such as S corporations, financial institutions and property and
casualty insurance companies. Any shareholder that falls into any of these
categories should consult its tax adviser concerning its investment in Fund
shares.
Dividends and distributions declared by the Fund in October, November
or December of any year and payable to shareholders of record on a date in any
of those months are deemed to have been paid by the Fund and received by the
shareholders on December 31 of that year even if they are paid by the Fund
during the following January. Accordingly, those dividends and distributions
will be reported by, and (except for exempt-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
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<PAGE>
capital losses incurred between November 1 and the end of the current calendar
year.
Income from Options and Futures Contracts
The use of hedging strategies, such as writing (selling) and purchasing
options and futures contracts, involves complex rules that will determine for
income tax purposes the amount, character and timing of recognition of the gains
and losses the Fund realizes in connection therewith. Gains from 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.
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.
Certain options and futures contracts in which the Fund may invest may
be "section 1256 contracts." Section 1256 contracts held by the Fund at the end
of its taxable year, other than contracts subject to a "mixed straddle" election
made by the Fund are "marked-to-market" (that is, treated as sold at that time
for their fair market value) for Federal income tax purposes, with the result
that unrealized gains or losses are treated as though they were realized. Sixty
percent of any net gain or loss recognized on these deemed sales, and 60% of any
net realized gain or loss from any actual sales of section 1256 contracts, are
treated as long-term capital gains or losses, and the balance is treated as
short-term capital gains or losses. That 60% portion will qualify for the 20%
(10% for taxpayers in the 15% marginal tax bracket) maximum tax rate on net
capital gains enacted by the Taxpayer Relief Act of 1997. Section 1256 contracts
also may be marked-to-market for purposes of the Excise Tax and other purposes.
The Fund may need to distribute any mark-to-market gains to its shareholders to
satisfy the Distribution Requirement
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<PAGE>
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. The regulations under section
1092 also provide 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.
If the Fund has an appreciated financial position -- generally, an
interest (including an interest through an option, futures contract or short
sale) with respect to any stock, debt instrument (other than "straight debt") or
partnership interest the fair market value of which exceeds its adjusted basis
- -- and enters into a "constructive sale" of the same or substantially similar
property, the Fund will be treated as having made an actual sale thereof, with
the result that gain will be recognized at that time. A constructive sale
generally consists of a short sale, an offsetting notional principal contract or
futures contract entered into by the Fund or a related person with respect to
the same or substantially similar property. In addition, if the appreciated
financial position is itself a short sale such a contract, acquisition of the
underlying property or substantially similar property will be deemed a
constructive sale.
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 OID that accrues on such tax-exempt securities and must include
in its income the OID that accrues on such taxable securities during the taxable
year, even if the Fund receives no corresponding payment on the securities
during the year. Because the Fund annually must distribute substantially all of
its investment company taxable income and net income excludable from gross
income under section 103(a), including any accrued OID, to satisfy the
Distribution Requirement and avoid imposition of the Excise Tax, it may be
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<PAGE>
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 gains.
PORTFOLIO TRANSACTIONS AND BROKERAGE
One of the duties undertaken by WRIMCO pursuant to the Management
Agreement is to arrange the purchase and sale of securities for the portfolio of
the Fund. Purchases are made directly from issuers or from underwriters, dealers
or banks. Purchases from underwriters include a commission or concession paid by
the issuer to the underwriter. Purchases from dealers will include the spread
between the bid and asked prices. Brokerage commissions are paid primarily for
effecting transactions in securities traded on an exchange and otherwise only if
it appears likely that a better price or execution can be obtained. The
individual who manages the Fund may manage other advisory accounts with similar
investment objectives. It can be anticipated that the manager will frequently
place concurrent orders for all or most accounts for which the manager has
responsibility or WRIMCO may otherwise combine orders for the Fund with those of
other funds in the United Group, Target/United Funds, Inc. and Waddell & Reed
Funds, Inc. or other accounts for which it has investment discretion.
Transactions effected pursuant to such combined orders are averaged as to price
and allocated in accordance with the purchase or sale orders actually placed for
each fund or advisory account, except where the combined order is not filled
completely. In this case, WRIMCO will ordinarily allocate the transaction pro
rata based on the orders placed. Sharing in large transactions could affect the
price the Fund pays or receives or the amount it buys or sells. However,
sometimes a better negotiated price is available through combined orders.
To effect the portfolio transactions of the Fund, WRIMCO is authorized
to engage broker-dealers ("brokers") which, in its best judgment based on all
relevant factors, will implement the policy of the Fund to seek "best execution"
(prompt and reliable execution at the best price obtainable) for reasonable and
competitive commissions or spreads, as applicable. The Fund has not effected
transactions through brokers and does not anticipate doing so. However, if
WRIMCO were to effect brokerage transactions, it need not seek competitive
commission bidding but is expected to minimize the commissions paid to the
extent consistent with the interests and policies of the Fund. Subject to review
by the Board of Directors, such policies include the selection of brokers which
provide execution and/or research services and other services, including pricing
or quotation services directly or through others ("research and brokerage
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<PAGE>
services") considered by WRIMCO to be useful or desirable for its investment
management of the Fund and/or the other funds and accounts over which WRIMCO has
investment discretion.
Research and brokerage services are, in general, defined by reference
to Section 28(e) of the Securities Exchange Act of 1934 as including (i) advice,
either directly or through publications or writings, as to the value of
securities, the advisability of investing in, purchasing or selling securities
and the availability of securities and purchasers or sellers; (ii) furnishing
analyses and reports; or (iii) effecting securities transactions and performing
functions incidental thereto (such as clearance, settlement and custody).
"Investment discretion" is, in general, defined as having authorization to
determine what securities shall be purchased or sold for an account, or making
those decisions even though someone else has responsibility.
The commissions paid to brokers that provide such research and/or
brokerage services may be higher than another qualified broker would charge for
effecting comparable transactions if a good faith determination is made by
WRIMCO that the commission is reasonable in relation to the research or
brokerage services provided. Subject to the foregoing considerations, WRIMCO may
also consider sales of Fund shares as a factor in the selection of
broker-dealers to execute portfolio transactions. No allocation of brokerage or
principal business is made to provide any other benefits to WRIMCO.
The investment research provided by a particular broker may be useful
only to one or more of the other advisory accounts of WRIMCO and investment
research received for the commissions of those other accounts may be useful both
to the Fund and one or more of such other accounts. To the extent that
electronic or other products provided by such brokers to assist WRIMCO in making
investment management decisions are used for administration or other
non-research purposes, a reasonable allocation of the cost of the product
attributable to its non-research use is made by WRIMCO.
Such investment research (which may be supplied by a third party at the
request of a broker) includes information on particular companies and industries
as well as market, economic or institutional activity areas. It serves to
broaden the scope and supplement the research activities of WRIMCO; serves to
make available additional views for consideration and comparisons; and enables
WRIMCO to obtain market information on the price of securities held in the
Fund's portfolio or being considered for purchase.
The Fund, WRIMCO and Waddell & Reed, Inc. have adopted a Code of Ethics
which imposes restrictions on the personal investment activities of their
employees, officers and interested directors.
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<PAGE>
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 distribution and/or service fee and Class
Y shares, which are designated for institutional investors, have no sales charge
nor ongoing distribution and/or service fee; each class may bear differing
amounts of certain class-specific expenses; and each class has a separate
exchange privilege. The Fund does not anticipate that there will be any
conflicts between the interests of holders of the different classes of shares of
the Fund by virtue of those classes. On an ongoing basis, the Board of Directors
will consider whether any such conflict exists and, if so, take appropriate
action. Each share of the Fund is entitled to equal voting, dividend,
liquidation and redemption rights, except that due to the differing expenses
borne by the 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. Shares are fully paid and nonassessable when purchased.
The Fund does not hold annual meetings of shareholders; however,
certain significant corporate matters, such as the approval of a new investment
advisory agreement or a change in fundamental investment policy, which require
shareholder approval will be presented to shareholders at a meeting called by
the Board of Directors for such purpose.
Special meetings of shareholders may be called for any purpose upon
receipt by the Fund of a request in writing signed by shareholders holding not
less than 25% of all shares entitled to vote at such meeting, provided certain
conditions stated in the bylaws are met. There will normally be no meeting of
the shareholders for the purpose of electing directors until such time as less
than a majority of directors holding office have been elected by shareholders,
at 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
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<PAGE>
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.
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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.
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<PAGE>
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
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<PAGE>
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
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<PAGE>
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
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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,
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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.
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<TABLE>
<CAPTION>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1998
Principal
Amount in
Thousands Value
<S> <C> <C>
MUNICIPAL BONDS
ALABAMA - 0.41%
The Marshall County Health Care Authority,
Hospital Revenue Refunding Bonds,
Series 1992 (Guntersville-Arab
Medical Center),
7.0%, 10-1-2013 ............................... $1,000 $ 1,081,250
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 1,039,410
Total ......................................... 2,120,660
ALASKA - 0.73%
City of Seward, Alaska, Revenue Bonds, 1996
(Alaska Sealife Center Project),
7.65%, 10-1-2016 .............................. 2,000 2,160,000
Anchorage Parking Authority, Lease Revenue
Refunding Bonds, Series 1993 (5th Avenue
Garage Project),
6.75%, 12-1-2008 .............................. 1,500 1,633,125
Total ......................................... 3,793,125
ARIZONA - 1.58%
The Industrial Development Authority of the
County of Gila, Arizona, Environmental
Revenue Refunding Bonds (ASARCO Incorporated
Project), Series 1998,
5.55%, 1-1-2027 ............................... 4,750 4,833,125
Hayden-Winkelman Unified School District No.
41 of Gila County, Arizona, Capital
Appreciation Refunding Bonds, Series 1995,
0.0%, 7-1-2010 ................................ 6,145 3,395,112
Total ......................................... 8,228,237
ARKANSAS - 0.31%
City of Little Rock, Arkansas, Capital
Improvement Revenue Bonds (Parks and
Recreation Projects), Series 1998A,
5.8%, 1-1-2023 ................................ 1,600 1,614,000
See Notes to Schedule of Investments on page .
72
<PAGE>
<CAPTION>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1998
Principal
Amount in
Thousands Value
<S> <C> <C>
MUNICIPAL BONDS (Continued)
CALIFORNIA - 7.53%
California Statewide Communities Development
Authority:
Special Facilities Lease Revenue Bonds, 1997
Series A (United Air Lines, Inc. - San Francisco
International Airport Projects),
5.7%, 10-1-2033 ............................... $ 8,000 $ 8,330,000
Hospital Refunding Revenue Certificates
of Participation, Series 1993, Cedars-Sinai
Medical Center, Inverse Floating Rate Security,
7.068%, 11-1-2015 (A) ......................... 4,000 4,195,000
Foothill/Eastern Transportation Corridor
Agency, Toll Road Revenue Bonds, Series
1995A,
0.0%, 1-1-2013 (B) ............................ 11,925 10,195,875
Hi-Desert Memorial Hospital District,
Revenue Bonds, Series 1994A,
8.0%, 10-1-2019 ............................... 3,000 3,720,000
Sierra Kings Health Care District Revenue
Bonds, Series 1996,
6.5%, 12-1-2026 ............................... 3,000 3,120,000
Transmission Agency of Northern California,
California-Oregon Transmission Project,
Revenue Refunding Bonds, 1993 Series A,
INFLOS,
6.782%, 4-29-2024 (A) ......................... 2,500 2,728,125
San Joaquin Hills Transportation Corridor
Agency (Orange County, California),
Senior Lien Toll Road Revenue Bonds,
0.0%, 1-1-2011 (B) ............................ 2,500 2,621,875
Certificates of Participation (1991 Capital
Improvement Project), Bella Vista Water
District (California),
7.375%, 10-1-2017 ............................. 1,500 1,651,875
Carson Redevelopment Agency (California),
Redevelopment Project Area No. 1,
Tax Allocation Bonds, Series 1993B,
6.0%, 10-1-2016 ............................... 1,500 1,606,875
Kings County Waste Management Authority,
Solid Waste Revenue Bonds, Series 1994
(California),
7.2%, 10-1-2014 ............................... 1,000 1,168,750
Total ......................................... 39,338,375
See Notes to Schedule of Investments on page .
73
<PAGE>
<CAPTION>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1998
Principal
Amount in
Thousands Value
<S> <C> <C>
MUNICIPAL BONDS (Continued)
COLORADO - 5.97%
Colorado Housing and Finance Authority,
Single Family Program Bonds:
1998 Series A-2 Senior Bonds (AMT),
6.6%, 5-1-2028 ................................ $ 2,500 $ 2,803,125
1997 Series B-2, Senior Bonds (AMT),
7.0%, 5-1-2026 ................................ 2,250 2,539,688
Sand Creek Metropolitan District, Adams
County and City and County of Denver,
Colorado, General Obligation Limited
Tax Bonds:
Series 1998,
6.625%, 12-1-2017 ............................. 3,070 3,089,188
Series 1997,
7.125%, 12-1-2016 ............................. 2,000 2,070,000
Boulder County, Colorado, Hospital Development
Revenue Bonds (Longmont United Hospital
Project), Series 1997,
5.6%, 12-1-2027 ............................... 4,000 4,125,000
City and County of Denver, Colorado,
Revenue Bonds (Jewish Community Centers
of Denver Project), Series 1994:
8.25%, 3-1-2024 ............................... 2,390 2,575,225
7.875%, 3-1-2019 .............................. 815 870,012
Colorado Health Facilities Authority:
Revenue Bonds (National Jewish Medical
and Research Center Project),
Series 1998,
5.375%, 1-1-2028 .............................. 2,000 1,987,500
Hospital Revenue Bonds (Steamboat Springs
Health Care Association Project),
Series 1997,
5.75%, 9-15-2022 .............................. 1,000 1,025,000
Parker Jordan Metropolitan District,
Arapahoe County, Colorado, General
Obligation Bonds, Series 1998B,
6.1%, 12-1-2017 ............................... 1,935 1,910,813
Pitkin County, Colorado, Lease Purchase
Agreement, Certificates of Participation
(County Administration Building Project),
Series 1991,
7.4%, 10-1-2011 ............................... 1,500 1,635,000
Highlands Ranch Metropolitan District No. 3,
Douglas County, Colorado, General Obligation
Bonds, Series 1998A,
5.25%, 12-1-2018 .............................. 1,500 1,520,625
See Notes to Schedule of Investments on page .
74
<PAGE>
<CAPTION>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1998
Principal
Amount in
Thousands Value
<S> <C> <C>
MUNICIPAL BONDS (Continued)
COLORADO (Continued)
City of Black Hawk, Colorado, Device Tax
Revenue Bonds, Series 1998,
5.625%, 12-1-2021 ............................. $ 1,250 $ 1,242,187
Bachelor Gulch Metropolitan District,
Eagle County, Colorado, General Obligation
Bonds, Series 1996,
7.0%, 12-1-2015 ............................... 1,095 1,156,594
Eaglebend Affordable Housing Corporation,
Multifamily Housing Project Revenue
Refunding Bonds, Series 1997A,
6.45%, 7-1-2021 ............................... 1,000 1,070,000
Town of Erie, Colorado (In Boulder and
Weld Counties), Water Enterprise
Revenue Bonds, Series 1997B,
6.125%, 12-1-2021 ............................. 1,000 1,050,000
Mountain Village Metropolitan District, San
Miguel County, Colorado, General
Obligation Refunding Bonds, Series 1992,
8.1%, 12-1-2011 ............................... 465 519,638
Total ......................................... 31,189,595
CONNECTICUT - 2.19%
Eastern Connecticut Resource Recovery
Authority, Solid Waste Revenue Bonds
(Wheelabrator Lisbon Project),
Series 1993A,
5.5%, 1-1-2014 ................................ 5,250 5,341,875
State of Connecticut Health and
Education Facilities Authority,
Revenue Bonds, Edgehill Issue
Series A (Fixed Rate),
6.875%, 7-1-2027 .............................. 2,400 2,541,000
Connecticut Development Authority, Pollution
Control Revenue Refunding Bonds (The
Connecticut Light and Power Company
Project - 1993B Series),
5.95%, 9-1-2028 ............................... 2,500 2,528,125
Connecticut Development Authority, First
Mortgage Gross Revenue Health Care
Project Refunding Bonds (Church Homes,
Inc., Congregational Avery Heights
Project - 1997 Series),
5.8%, 4-1-2021 ................................ 1,000 1,030,000
Total ......................................... 11,441,000
See Notes to Schedule of Investments on page .
75
<PAGE>
<CAPTION>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1998
Principal
Amount in
Thousands Value
<S> <C> <C>
MUNICIPAL BONDS (Continued)
DISTRICT OF COLUMBIA - 1.07%
Certificates of Participation, Series 1993,
District of Columbia,
7.3%, 1-1-2013 ................................ $ 3,000 $ 3,375,000
District of Columbia Revenue Bonds
(National Public Radio Issue),
Series 1992,
7.625%, 1-1-2013 .............................. 2,000 2,200,000
Total ......................................... 5,575,000
FLORIDA - 5.10%
Lake County, Florida, Resource Recovery
Industrial Development Refunding Revenue
Bonds (NRG/Recovery Group Project),
Series 1993A,
5.95%, 10-1-2013 .............................. 6,850 7,261,000
St. Johns County Industrial Development
Authority (Florida):
Health Care Revenue Bonds, Tax Exempt
Series 1997A (Bayview Project),
7.1%, 10-1-2026 ............................... 4,000 4,380,000
Industrial Development Revenue Bonds,
Series 1997A (Professional Golf Hall of
Fame Project),
5.5%, 3-1-2017 ................................ 1,000 1,066,250
Sanford Airport Authority (Florida),
Industrial Development Revenue Bonds
(Central Florida Terminals, Inc. Project):
Series 1995A,
7.75%, 5-1-2021 ............................... 4,000 4,415,000
Series 1995C,
7.5%, 5-1-2021 ................................ 500 547,500
Sarasota County (Florida) Health Facilities
Authority, Health Care Facilities
Revenue Refunding Bonds, Series 1995 (Sarasota-
Manatee Jewish Housing Council, Inc.
Project),
6.7%, 7-1-2025 ................................ 3,000 3,180,000
Housing Finance Authority of Broward
County, Florida, Multifamily Housing
Revenue Bonds:
Pembroke Park Apartments Project,
Series 1998,
5.75%, 4-1-2038 ............................... 1,385 1,400,581
Stirling Apartments Project,
Series 1998,
5.75%, 4-1-2038 ............................... 1,000 1,011,250
See Notes to Schedule of Investments on page .
76
<PAGE>
<CAPTION>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1998
Principal
Amount in
Thousands Value
<S> <C> <C>
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 ................................ $ 1,900 $ 2,063,875
City of Fort Walton Beach, First Mortgage
Industrial Development Revenue Bonds,
Series 1986 (Ft. Walton Beach Ventures,
Inc. Project),
10.5%, 12-1-2016 .............................. 1,270 1,309,878
Total ......................................... 26,635,334
GEORGIA - 1.34%
Coffee County Hospital Authority (Georgia),
Revenue Anticipation Certificates (Coffee
Regional Medical Center, Inc. Project),
Series 1997A,
6.75%, 12-1-2016 .............................. 5,000 5,243,750
Development Authority of Fulton County
(Georgia), Special Facilities Revenue Bonds
(Delta Air Lines, Inc. Project), Series 1998,
5.5%, 5-1-2033 ................................ 1,750 1,752,187
Total ......................................... 6,995,937
HAWAII - 0.57%
Department of Transportation of the State
of Hawaii, Special Facility Revenue Bonds
(Continental Airlines, Inc.), Series 1997,
5.625%, 11-15-2027 ............................ 3,000 3,000,000
IDAHO - 0.48%
Idaho Health Facilities Authority, Hospital
Revenue Refunding Bonds, Series 1992
(IHC Hospitals, Inc.), Indexed Inverse
Floating Rate Securities,
8.25%, 2-15-2021 (A) .......................... 2,000 2,490,000
See Notes to Schedule of Investments on page .
77
<PAGE>
<CAPTION>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1998
Principal
Amount in
Thousands Value
<S> <C> <C>
MUNICIPAL BONDS (Continued)
ILLINOIS - 3.55%
Illinois Health Facilities Authority:
Revenue Refunding Bonds, Series
1995A (Fairview Obligated Group),
7.125%, 8-15-2017 ............................. $ 3,525 $ 3,881,906
Revenue Refunding Bonds, Series 1998
(Lifelink Corporation Obligated Group),
5.7%, 2-15-2024 ............................... 2,200 2,164,250
City of Hillsboro, Montgomery County,
Illinois, General Obligation Bonds
(Alternate Revenue Source), Series 1991,
7.5%, 12-1-2021 ............................... 2,640 2,940,300
Illinois Development Finance Authority
Revenue Bonds, Series 1993C (Catholic
Charities Housing Development
Corporation Project),
6.1%, 1-1-2020 ................................ 2,500 2,628,125
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 2,217,500
Village of Hodgkins, Cook County, Illinois,
Tax Increment Revenue Refunding Bonds,
Series 1995A,
7.625%, 12-1-2013 ............................. 1,750 1,955,625
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 1,578,750
Village of Bourbonnais, Kankakee County,
Illinois, Sewerage Revenue Bonds,
Series 1993,
7.25%, 12-1-2012 .............................. 1,085 1,182,650
Total ......................................... 18,549,106
See Notes to Schedule of Investments on page .
78
<PAGE>
<CAPTION>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1998
Principal
Amount in
Thousands Value
<S> <C> <C>
MUNICIPAL BONDS (Continued)
INDIANA - 3.57%
Indiana Health Facility Financing Authority:
Revenue Refunding Bonds, Series 1998
(Greenwood Village South Project),
5.625%, 5-15-2028 ............................. $ 4,100 $ 4,079,500
Hospital Revenue Refunding Bonds, Series 1998
(Jackson County Schneck Memorial Hospital Project),
5.25%, 2-15-2022 .............................. 1,600 1,600,000
Hospital Revenue Refunding Bonds, Series 1996
(Hancock Memorial Hospital and Health Services),
6.125%, 8-15-2017 ............................. 1,250 1,342,187
Hospital Revenue Bonds, Series 1992
(Fayette Memorial Hospital Project),
7.2%, 10-1-2022 ............................... 1,000 1,085,000
Indianapolis Airport Authority, Special
Facilities Revenue Bonds,
Series 1995 A, United Air Lines, Inc.,
Indianapolis Maintenance Center Project,
6.5%, 11-15-2031 .............................. 6,000 6,540,000
City of Goshen, Indiana, Revenue Bonds,
Series 1998 (Greencroft Obligated Group),
5.75%, 8-15-2028 .............................. 2,000 1,970,000
City of Carmel, Indiana, Retirement Rental
Housing Revenue Refunding Bonds (Beverly
Enterprises - Indiana, Inc. Project),
Series 1992,
8.75%, 12-1-2008 .............................. 1,450 1,620,375
Indiana Housing Finance Authority, Residential
Mortgage Bonds, 1988 Series R-A,
0.0%, 1-1-2013 ................................ 1,315 391,213
Total ......................................... 18,628,275
IOWA - 2.43%
City of Creston, Iowa, Industrial Development
Revenue Bonds, Series 1997A (CF Processing,
L.C. Project),
8.0%, 8-1-2026 ................................ 5,000 5,187,500
City of Cedar Rapids, Iowa, First Mortgage
Revenue Bonds, Series 1998-A (Cottage Grove
Place Project),
5.875%, 7-1-2028 .............................. 5,000 4,931,250
Iowa Finance Authority, Community Rehabilitation
Providers Revenue Bonds (Lutheran Children's
Home Society - Bremwood Project), Series 1998,
5.8%, 12-1-2024 ............................... 2,545 2,560,906
Total ......................................... 12,679,656
See Notes to Schedule of Investments on page .
79
<PAGE>
<CAPTION>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1998
Principal
Amount in
Thousands Value
<S> <C> <C>
MUNICIPAL BONDS (Continued)
KANSAS - 1.94%
Certificates of Participation, Series 1998A,
Evidencing Proportionate Interests of the
Owners Thereof in Rental Payments to be
Made by the City of Spring Hill, Kansas, to
Spring Hill Golf Corporation,
6.5%, 1-15-2028 ............................... $ 4,000 $ 3,895,000
Kansas Development Finance Authority,
Community Provider Loan Program (Community
Living Opportunities, Inc.), Series
1992A Revenue Bonds,
8.875%, 9-1-2011 .............................. 2,790 2,988,788
City of Prairie Village, Kansas, Revenue Bonds,
(Claridge Court Project), Series 1993A:
8.75%, 8-15-2023 .............................. 1,000 1,108,750
8.5%, 8-15-2004 ............................... 890 989,013
Sedgwick County, Kansas and Shawnee County,
Kansas, Single Family Mortgage Revenue
Bonds (Mortgage-Backed Securities Program),
1997 Series A-1 (AMT),
5.5%, 6-1-2029 ................................ 1,000 1,141,250
Total ......................................... 10,122,801
KENTUCKY - 1.05%
Kentucky Economic Development Finance Authority,
Health Care Facilities Revenue Bonds, Series
1998 (The Christian Church Homes of Kentucky,
Inc. Obligated Group),
5.5%, 11-15-2030 .............................. 4,425 4,413,937
County of Perry, Kentucky, Solid Waste
Disposal Revenue Bonds (TJ International
Project), Series 1994,
7.0%, 6-1-2024 ................................ 1,000 1,093,750
Total ......................................... 5,507,687
LOUISIANA - 1.18%
Louisiana Public Facilities Authority,
Hospital Revenue and Refunding Bonds
(Pendleton Memorial Methodist Hospital
Project), Series 1998,
5.25%, 6-1-2028 ............................... 3,000 2,868,750
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 2,215,000
See Notes to Schedule of Investments on page .
80
<PAGE>
<CAPTION>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1998
Principal
Amount in
Thousands Value
<S> <C> <C>
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 $ 1,093,125
Total ......................................... 6,176,875
MAINE - 0.57%
Maine Veterans' Homes, Revenue Bonds,
1995 Series,
7.75%, 10-1-2020 .............................. 2,810 2,957,525
MARYLAND - 0.69%
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 3,579,062
MASSACHUSETTS - 7.63%
Massachusetts Industrial Finance Agency:
First Mortgage Revenue Bonds, Reeds
Landing Project, Series 1993,
8.625%, 10-1-2023 ............................. 9,945 11,411,888
Resource Recovery Revenue Bonds (SEMASS
Project), Series 1991B,
9.25%, 7-1-2015 ............................... 4,800 5,400,000
Revenue Bonds, Glenmeadow Retirement
Community Project, Series 1996C:
8.625%, 2-15-2026 ............................. 2,200 2,868,250
8.375%, 2-15-2018 ............................. 1,260 1,622,250
Resource Recovery Revenue Refunding Bonds
(Ogden Haverhill Project),
Series 1998A Bonds,
5.6%, 12-1-2019 ............................... 2,500 2,525,000
Revenue Bonds, Beaver Country Day School
Issue, Series 1992, Subseries A,
8.1%, 3-1-2008 ................................ 1,415 1,503,437
Massachusetts Municipal Wholesale Electric
Company, Power Supply System Revenue Bonds,
1993 Series A INFLOS,
6.966%, 7-1-2018 (A) .......................... 8,000 8,750,000
See Notes to Schedule of Investments on page .
81
<PAGE>
<CAPTION>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1998
Principal
Amount in
Thousands Value
<S> <C> <C>
MUNICIPAL BONDS (Continued)
MASSACHUSETTS (Continued)
Massachusetts Health and Educational
Facilities Authority, Revenue Bonds,
Beth Israel Hospital Issue, Series G-4,
Inverse Floating Rate Securities,
8.471%, 7-1-2025 (A) .......................... $ 5,000 $ 5,756,250
Total ......................................... 39,837,075
MICHIGAN - 0.24%
City of Flint Hospital Building Authority,
Revenue Rental Bonds, Series 1998B
(Hurley Medical Center),
5.375%, 7-1-2028 .............................. 1,250 1,264,062
MISSISSIPPI - 0.47%
Lowndes County, Mississippi, Solid Waste
Disposal and Pollution Control Refunding
Revenue Bonds (Weyerhaeuser Company
Project), Series 1992B, Indexed Inverse
Floating/Fixed Term Bonds,
8.25%, 4-1-2022 (A) ........................... 2,000 2,472,500
MISSOURI - 5.99%
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 4,779,425
8.25%, 4-1-2002 ............................... 445 477,819
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 3,268,913
Multifamily Housing Revenue Bonds (Village
Green Apartments Project),
Series 1998,
6.25%, 4-1-2030 ............................... 1,750 1,765,312
The Industrial Development Authority of the
City of Bridgeton, Missouri, Senior Housing
Revenue Bonds (The Sarah Community Project),
Series 1998,
5.9%, 5-1-2028 ................................ 5,000 5,012,500
See Notes to Schedule of Investments on page .
82
<PAGE>
<CAPTION>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1998
Principal
Amount in
Thousands Value
<S> <C> <C>
MUNICIPAL BONDS (Continued)
MISSOURI (Continued)
The Industrial Development Authority of the
County of Taney, Missouri, Hospital Revenue
Bonds (The Skaggs Community Hospital
Association), Series 1998,
5.4%, 5-15-2028 ............................... $ 2,860 $ 2,910,050
The Industrial Development Authority of the
City of Bolivar, Missouri, Health
Facility Refunding and Improvement
Revenue Bonds (Citizens Memorial Health
Care Foundation), Series 1998:
5.75%, 7-1-2017 ............................... 1,215 1,208,925
5.625%, 7-1-2010 .............................. 1,095 1,090,894
The Industrial Development Authority of
St. Joseph, Missouri, Multifamily Housing
Revenue Bonds (Hillcrest Village Apartments
Project), Series 1998A,
6.375%, 9-1-2028 .............................. 2,250 2,258,437
Health and Educational Facilities Authority
of the State of Missouri, Educational
Facilities Revenue Bonds (Southwest Baptist
University Project), Series 1998,
5.375%, 10-1-2023 ............................. 2,100 2,155,125
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 2,145,000
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 1,653,750
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 ............................. 1,060 1,070,240
See Notes to Schedule of Investments on page .
83
<PAGE>
<CAPTION>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1998
Principal
Amount in
Thousands Value
<S> <C> <C>
MUNICIPAL BONDS (Continued)
MISSOURI (Continued)
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 $ 979,875
Certificates of Participation, Series 1998A,
City of Lake Saint Louis, Missouri, Lessee,
6.25%, 6-1-2005 ............................... 500 504,375
Total ......................................... 31,280,640
NEVADA - 0.52%
Reno-Sparks Convention & Visitors Authority,
Nevada, Limited Obligation Medium-Term
Refunding Bonds, Series November 1, 1996,
6.0%, 11-1-2006 ............................... 2,640 2,732,400
NEW HAMPSHIRE - 1.74%
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 5,086,125
Hospital Revenue Bonds, St. Joseph
Hospital Issue, Series 1991,
7.5%, 1-1-2016 ................................ 1,000 1,076,250
Revenue Bonds, RiverWoods at Exeter
Issue, Series 1997A,
6.5%, 3-1-2023 ................................ 1,000 1,047,500
Revenue Bonds, RiverMead at Peterborough
Issue, Series 1998,
5.75%, 7-1-2028 ............................... 665 668,325
Lisbon Regional School District, New
Hampshire, General Obligation Capital
Appreciation School Bonds,
0.0%, 2-1-2013 ................................ 1,610 1,193,413
Total ......................................... 9,071,613
See Notes to Schedule of Investments on page .
84
<PAGE>
<CAPTION>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1998
Principal
Amount in
Thousands Value
<S> <C> <C>
MUNICIPAL BONDS (Continued)
NEW JERSEY - 2.08%
New Jersey Economic Development Authority:
Senior Mortgage Revenue Bonds, Arbor
Glen of Bridgewater Project - Series
1996A Bonds,
8.75%, 5-15-2026 .............................. $ 3,525 $ 4,207,969
First Mortgage Revenue Fixed Rate Bonds,
Winchester Gardens at Ward Homestead
Project - Series 1996A,
8.625%, 11-1-2025 ............................. 3,000 3,483,750
New Jersey Economic Development Authority,
Economic Development Bonds, Kapkowski
Road Landfill Reclamation Improvement
District Project (City of Elizabeth),
Series 1998A:
6.357%, 4-1-2018 .............................. 2,385 2,399,906
0.0%, 4-1-2011 ................................ 1,740 787,350
Total ......................................... 10,878,975
NEW MEXICO - 1.58%
New Mexico Educational Assistance Foundation:
Student Loan Purchase Bonds, Second Subordinate
1994 Series II-C (AMT),
6.0%, 12-1-2008 ............................... 2,460 2,543,025
Education Loan Bonds, Second Subordinate
Series 1998C-1,
5.5%, 11-1-2010 ............................... 2,000 1,995,000
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 3,718,750
Total ......................................... 8,256,775
NEW YORK - 1.99%
Tompkins County Industrial Development
Agency, Life Care Community Revenue Bonds,
1994 (Kendal at Ithaca, Inc. Project),
7.875%, 6-1-2024 .............................. 4,035 4,282,144
New York City Industrial Development Agency,
Industrial Development Revenue Bonds
(Brooklyn Navy Yard Cogeneration Partners,
L.P. Project), Series 1997,
5.75%, 10-1-2036 .............................. 3,000 3,108,750
New York City Municipal Water Finance Authority,
Water and Sewer System Revenue Bonds, Inverse
Rate Securities, Fiscal 1994 Series E,
6.779%, 6-15-2012 (A) ......................... 2,750 3,011,250
Total.......................................... 10,402,144
See Notes to Schedule of Investments on page .
85
<PAGE>
<CAPTION>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1998
Principal
Amount in
Thousands Value
<S> <C> <C>
MUNICIPAL BONDS (Continued)
NORTH CAROLINA - 0.84%
City of Durham, North Carolina, Multifamily
Housing Revenue Bonds (Ivy Commons Project),
Series 1997,
8.0%, 3-1-2029 ................................ $ 2,250 $ 2,317,500
City of Charlotte, North Carolina, Charlotte/
Douglas International Airport, Special
Facility Refunding Revenue Bonds, Series 1998
(US Airways, Inc. Project),
5.6%, 7-1-2027 ................................ 2,075 2,077,594
Total ......................................... 4,395,094
NORTH DAKOTA - 0.69%
City of Grand Forks, North Dakota, Senior
Housing Revenue Bonds (4000 Valley
Square Project), Series 1997:
6.25%, 12-1-2034 .............................. 2,000 2,045,000
6.375%, 12-1-2034 ............................. 1,500 1,537,500
Total ......................................... 3,582,500
OHIO - 1.96%
Ohio Water Development Authority, State of
Ohio, Solid Waste Disposal Revenue Bonds
(Bay Shore Power Project), Tax-Exempt
Series 1998 A,
5.875%, 9-1-2020 .............................. 4,000 4,065,000
City of Toledo, Ohio, Multifamily Housing
Mortgage Revenue Bonds, Series 1998-A
(Hillcrest Apartments Project),
6.125%, 12-1-2029 ............................. 4,000 4,000,000
Hamilton County, Ohio, Health System Revenue
Bonds, Providence Hospital Issue,
Series 1992,
6.875%, 7-1-2015 .............................. 2,000 2,177,500
Total ......................................... 10,242,500
OKLAHOMA - 2.65%
Bixby Public Works Authority, Utility
System Revenue Bonds, Refunding
Series 1994,
7.25%, 11-1-2019 .............................. 2,685 2,987,062
The Clinton Public Works Authority,
Refunding and Improvement Revenue
Bonds, Series 1994,
6.25%, 1-1-2019 ............................... 2,575 2,729,500
See Notes to Schedule of Investments on page .
86
<PAGE>
<CAPTION>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1998
Principal
Amount in
Thousands Value
<S> <C> <C>
MUNICIPAL BONDS (Continued)
OKLAHOMA (Continued)
Oklahoma County Industrial Authority,
Industrial Development Revenue Bonds:
1986 Series B (Choctaw Nursing
Center Project):
10.25%, 9-1-2016 (C) .......................... $ 1,230 $ 861,000
10.125%, 9-1-2006 (C) ......................... 525 367,500
1986 Series A (Westlake Nursing Center
Project):
10.25%, 9-1-2016 .............................. 905 930,729
10.125%, 9-1-2006 ............................. 430 442,229
The Broken Arrow Public Golf Authority
(Broken Arrow, Oklahoma), Recreational
Facilities Revenue Bonds, Series 1995,
7.25%, 8-1-2020 ............................... 2,025 2,207,250
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 1,764,000
The Guthrie Public Works Authority
(Guthrie, Oklahoma), Utility System
Revenue Bonds, Series 1994A,
6.75%, 9-1-2019 ............................... 1,415 1,558,269
Total ......................................... 13,847,539
OREGON - 1.35%
Klamath Falls Intercommunity Hospital
Authority, Gross Revenue Bonds,
Series 1994 (Merle West Medical Center
Project),
7.1%, 9-1-2024 ................................ 3,500 3,893,750
Myrtle Creek Building Authority, Gross
Revenue Bonds, Series 1996A (Myrtle Creek
Golf Course Project),
8.0%, 6-1-2021 ................................ 3,000 3,138,750
Total ......................................... 7,032,500
PENNSYLVANIA - 3.02%
Delaware County Authority (Pennsylvania),
First Mortgage Revenue Bonds
(Riddle Village Project),
Series 1994,
8.25%, 6-1-2022 ............................... 4,000 4,900,000
See Notes to Schedule of Investments on page .
87
<PAGE>
<CAPTION>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1998
Principal
Amount in
Thousands Value
<S> <C> <C>
MUNICIPAL BONDS (Continued)
PENNSYLVANIA (Continued)
Philadelphia Authority for Industrial
Development, Commercial Development Revenue
Refunding Bonds (Doubletree Guest Suites
Project), Series 1997A,
6.5%, 10-1-2027................................ $ 3,500 $ 3,745,000
Allentown Area Hospital Authority, Hospital
Revenue Bonds (Sacred Heart Hospital of
Allentown), Series A of 1993,
6.75%, 11-15-2014 ............................. 2,865 3,133,594
Clearfield Hospital Authority, Hospital
Revenue and Refunding Bonds (Clearfield
Hospital Project), Series 1994,
6.875%, 6-1-2016 .............................. 2,000 2,155,000
South Wayne County Water and Sewer Authority
(Wayne County, Pennsylvania), Sewer Revenue
Bonds, Series of 1992,
8.2%, 4-15-2013 ............................... 1,725 1,811,250
Total ......................................... 15,744,844
RHODE ISLAND - 0.42%
City of Providence, Rhode Island, Special
Obligation Tax Increment Bonds, Series D,
6.65%, 6-1-2016 ............................... 2,000 2,212,500
SOUTH CAROLINA - 2.45%
South Carolina Jobs - Economic Development
Authority, Solid Waste Recycling Facilities
Revenue Bonds (Santee River Rubber Project),
Tax-Exempt Series 1998A,
8.0%, 12-1-2014 ............................... 4,000 4,030,000
Connector 2000 Association, Inc., Toll Road
Revenue Bonds (Southern Connector Project,
Greenville, South Carolina):
Senior Capital Appreciation Bonds, Series 1998B,
0.0%, 1-1-2035 ................................ 17,000 2,103,750
Senior Current Interest Bonds, Series 1998A,
5.25%, 1-1-2023 ............................... 2,000 1,872,500
McCormick County, South Carolina, Hospital
Facilities Revenue Refunding and Improvement
Bonds, Series 1997 (McCormick Health Care
Center Project),
7.0%, 3-1-2018 ................................ 2,530 2,612,225
See Notes to Schedule of Investments on page .
88
<PAGE>
<CAPTION>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1998
Principal
Amount in
Thousands Value
<S> <C> <C>
MUNICIPAL BONDS (Continued)
SOUTH CAROLINA (Continued)
South Carolina State Housing, Finance
and Development Authority, Multifamily
Housing Mortgage Revenue Bonds (United
Dominion-Plum Chase), Series 1991,
8.5%, 10-1-2021 ............................... $ 2,000 $ 2,190,000
Total ......................................... 12,808,475
SOUTH DAKOTA - 0.40%
South Dakota Health and Educational
Facilities Authority, Refunding Revenue
Bonds (Westhills Village Retirement
Community Issue), Series 1993,
7.25%, 9-1-2013 ............................... 2,000 2,092,500
TENNESSEE - 1.50%
The Health, Educational and Housing Facility
Board of the County of Shelby, Tennessee,
Health Care Facilities Revenue Bonds,
Series 1997A (Kirby Pines Retirement
Community Project),
6.375%, 11-15-2025 ............................ 2,100 2,186,625
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 2,167,500
The Health and Educational Facilities Board
of the Metropolitan Government of Nashville
and Davidson County, Tennessee, Revenue
Refunding Bonds, Series 1998 (The
Blakeford at Green Hills),
5.65%, 7-1-2024 ............................... 2,000 1,990,000
See Notes to Schedule of Investments on page .
89
<PAGE>
<CAPTION>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1998
Principal
Amount in
Thousands Value
<S> <C> <C>
MUNICIPAL BONDS (Continued)
TENNESSEE (Continued)
Upper Cumberland Gas Utility District
(of Cumberland County, Tennessee),
Gas System Revenue Bonds, Series 1996,
7.0%, 3-1-2016 ................................ $ 1,400 $ 1,512,000
Total ......................................... 7,856,125
TEXAS - 4.34%
AllianceAirport Authority, Inc., Special
Facilities Revenue Bonds:
American Airlines, Inc. Project,
Series 1991,
7.0%, 12-1-2011 ............................... 4,700 5,663,500
Federal Express Corporation Project,
Series 1996,
6.375%, 4-1-2021 .............................. 4,000 4,355,000
Gulf Coast Waste Disposal Authority, Waste
Disposal Revenue Bonds (Valero Energy
Corporation Project), Series 1998,
5.6%, 4-1-2032 ................................ 3,490 3,529,263
Alvarado Industrial Development Corporation,
Industrial Development Revenue Bonds
(Rich-Mix Products of Texas, Inc. Project),
Series 1996,
7.75%, 3-1-2010 ............................... 2,955 3,036,262
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 2,385,675
City of Houston, Texas, Airport System
Special Facilities Revenue Bonds
(Continental Airlines, Inc. Terminal
Improvement Projects), Series 1997B,
6.125%, 7-15-2027 ............................. 2,000 2,085,000
See Notes to Schedule of Investments on page .
90
<PAGE>
<CAPTION>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1998
Principal
Amount in
Thousands Value
<S> <C> <C>
MUNICIPAL BONDS (Continued)
TEXAS (Continued)
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 $ 1,625,625
Total ......................................... 22,680,325
UTAH - 4.92%
Tooele County, Utah, Hazardous Waste
Treatment Revenue Bonds (Union Pacific
Corporation/USPCI, Inc. Project),
Series A,
5.7%, 11-1-2026 ............................... 15,000 15,187,500
IPA (a political subdivision of the State of
Utah), Power Supply Revenue Refunding Bonds,
1993 Series A, Inverse Floating Rate
Securities,
7.266%, 7-1-2021 (A) .......................... 5,950 6,448,312
Utah Housing Finance Agency, Revenue Bonds
(RHA Community Services of Utah, Inc.
Project), Series 1997A,
6.875%, 7-1-2027 .............................. 2,440 2,568,100
Carbon County, Utah, Solid Waste Disposal
Refunding Revenue Bonds, Series 1991
(Sunnyside Cogeneration Associates Project),
9.25%, 7-1-2018 (C) ........................... 2,500 1,500,000
Total ......................................... 25,703,912
VERMONT - 1.52%
Vermont Industrial Development Authority,
Mortgage Revenue Bonds, Wake Robin
Corporation Project, Series 1993A:
8.75%, 4-1-2023 ............................... 4,465 5,073,356
8.75%, 3-1-2023 ............................... 2,500 2,840,625
Total ......................................... 7,913,981
VIRGIN ISLANDS - 0.49%
Virgin Islands Public Finance Authority
Revenue and Refunding Bonds (Virgin
Islands Matching Fund Loan Notes),
Series 1998 A (Senior Lien/Refunding):
5.625%, 10-1-2025 ............................. 1,500 1,546,875
5.5%, 10-1-2018 ............................... 1,000 1,025,000
Total ......................................... 2,571,875
See Notes to Schedule of Investments on page .
91
<PAGE>
<CAPTION>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1998
Principal
Amount in
Thousands Value
<S> <C> <C>
MUNICIPAL BONDS (Continued)
VIRGINIA - 1.86%
Norfolk Redevelopment and Housing Authority,
Multifamily Rental Housing Facility
Revenue Bonds, Series 1996 (1016 Limited
Partnership-Sussex Apartments Project),
8.0%, 9-1-2026 ................................ $ 3,495 $ 3,661,013
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 3,123,750
Pocahontas Parkway Association, Route 895
Connector, Toll Road Revenue Bonds, Senior
Capital Appreciation Bonds, Series 1998B,
0.0%, 8-15-2018 ............................... 9,000 2,925,000
Total ......................................... 9,709,763
WASHINGTON - 1.19%
Port of Anacortes, Washington, Revenue and
Refunding Bonds, 1998 Series A (AMT),
5.625%, 9-1-2016 .............................. 3,790 3,794,737
Housing Authority of the City of Seattle,
Low-Income Housing Assistance Revenue
Bonds, 1995 (GNMA Collateralized Mortgage
Loan - Kin On Project),
7.4%, 11-20-2036 .............................. 1,142 1,343,278
Pilchuck Development Public Corporation
(State of Washington), Special Facilities
Airport Revenue Bonds, Series 1993
(TRAMCO, INC. Project),
6.0%, 8-1-2023 ................................ 1,000 1,050,000
Total ......................................... 6,188,015
WEST VIRGINIA - 0.32%
Upshur County, West Virginia, Solid Waste
Disposal Revenue Bonds (TJ International
Project), Series 1995,
7.0%, 7-15-2025 ............................... 1,500 1,651,875
See Notes to Schedule of Investments on page .
92
<PAGE>
<CAPTION>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1998
Principal
Amount in
Thousands Value
<S> <C> <C>
MUNICIPAL BONDS (Continued)
WISCONSIN - 2.11%
Wisconsin Health and Educational Facilities
Authority, Revenue Bonds, Series 1995:
National Regency of New Berlin, Inc.
Project,
8.0%, 8-15-2025 ............................... $ 4,500 $ 5,096,250
Hess Memorial Hospital Association, Inc.
Project,
7.75%, 11-1-2015 .............................. 3,400 3,905,750
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 2,005,500
Total ......................................... 11,007,500
WYOMING - 0.20%
Teton County Hospital District (St. John's
Hospital and Living Center), Jackson Hole,
Wyoming, Hospital Refunding and Improvement
Revenue Bonds, Series 1998,
5.8%, 12-1-2017 ............................... 1,000 1,041,250
TOTAL MUNICIPAL BONDS - 96.73% $505,101,507
(Cost: $469,171,706)
TOTAL SHORT-TERM SECURITIES - 1.53% $ 8,001,584
(Cost: $8,001,584)
TOTAL INVESTMENT SECURITIES - 98.26% $513,103,091
(Cost: $477,173,290)
CASH AND OTHER ASSETS, NET OF LIABILITIES - 1.74% 9,092,028
NET ASSETS - 100.00% $522,195,119
</TABLE>
See Notes to Schedule of Investments on page .
93
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1998
Notes to Schedule of Investments
(A) The interest rate is subject to change periodically and inversely based
upon prevailing market rates. The interest rate shown is the rate in effect
at September 30, 1998.
(B) The security does not bear interest for an initial period of time and
subsequently becomes interest bearing.
(C) 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.
94
<PAGE>
UNITED MUNICIPAL HIGH INCOME FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1998
(In Thousands, Except for Per Share Amounts)
<TABLE>
<S> <C>
Assets
Investment securities - at value
(Notes 1 and 3) ........................................... $513,103
Cash ....................................................... 2,500
Receivables:
Interest .................................................. 8,854
Investment securities sold ................................ 1,655
Fund shares sold .......................................... 487
Prepaid insurance premium ................................... 12
--------
Total assets ............................................ 526,611
--------
Liabilities
Payable for investment securities purchased ................. 2,500
Payable to Fund shareholders ................................ 1,374
Dividends payable ........................................... 399
Accrued service fee (Note 2) ................................ 92
Accrued transfer agency and dividend
disbursing (Note 2) ....................................... 32
Accrued management fee (Note 2) ............................. 7
Accrued accounting services fee (Note 2) .................... 5
Accrued distribution fee (Note 2) ........................... 1
Other ...................................................... 6
--------
Total liabilities ....................................... 4,416
--------
Total net assets ...................................... $522,195
========
Net Assets
$1.00 par value capital stock, authorized --
100,000; shares outstanding -- 91,701
Capital stock ............................................. $ 91,701
Additional paid-in capital ................................ 383,028
Accumulated undistributed income:
Accumulated undistributed net realized
gain on investment transactions ......................... 11,536
Net unrealized appreciation in value of
investments ............................................. 35,930
--------
Net assets applicable to outstanding
units of capital ...................................... $522,195
========
Net asset value per share (net assets divided
by shares outstanding) ...................................... $5.69
=====
</TABLE>
See notes to financial statements.
95
<PAGE>
UNITED MUNICIPAL HIGH INCOME FUND, INC.
STATEMENT OF OPERATIONS
For the Fiscal Year Ended SEPTEMBER 30, 1998
(In Thousands)
<TABLE>
<S> <C>
Investment Income
Interest and amortization (Note 1B) ......................... $32,609
-------
Expenses (Note 2):
Investment management fee ................................. 2,461
Service fee ............................................... 991
Transfer agency and dividend disbursing ................... 374
Accounting services fee ................................... 60
Custodian fees ............................................ 25
Audit fees ................................................ 16
Distribution fees ......................................... 6
Legal fees ................................................ 5
Other ..................................................... 152
-------
Total expenses .......................................... 4,090
-------
Net investment income ................................. 28,519
-------
Realized and Unrealized Gain on Investments
(Notes 1 and 3)
Realized net gain on investments ............................ 12,638
Unrealized appreciation in value of
investments during the period ............................. 5,793
-------
Net gain on investments ................................... 18,431
-------
Net increase in net assets resulting
from operations ....................................... $46,950
=======
</TABLE>
See notes to financial statements.
96
<PAGE>
UNITED MUNICIPAL HIGH INCOME FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
(Dollars In Thousands)
<TABLE>
<CAPTION>
For the fiscal year
ended September 30,
----------------------------
1998 1997
----------- ----------
<S> <C> <C>
Increase in Net Assets
Operations:
Net investment income ...................... $ 28,519 $ 26,384
Realized net gain on
investments .............................. 12,638 6,520
Unrealized appreciation .................... 5,793 13,764
-------- --------
Net increase in net assets
resulting from operations .............. 46,950 46,668
-------- --------
Distributions to shareholders from (Note 1D):*
Net investment income ...................... (28,519) (26,384)
Realized net gains on investment
transactions ............................. (6,027) (1,102)
-------- --------
(34,546) (27,486)
-------- --------
Capital share transactions:
Proceeds from sale of shares:
Class A (11,013,539 and 14,043,014
shares, respectively) .................. 62,198 76,429
Class Y (3,493 and 0 shares,
respectively) .......................... 20 ---
Proceeds from reinvestment of
dividends and/or capital gains
distribution:
Class A (4,977,786 and 4,105,285
shares, respectively) .................. 27,654 22,249
Class Y (15 and 0 shares,
respectively) .......................... --- ---
Payments for shares redeemed:
Class A (9,576,509 and 8,115,149
shares, respectively) .................. (53,817) (43,928)
Class Y (3,508 and 0 shares,
respectively) .......................... (20) ---
-------- --------
Net increase in net assets
resulting from capital
share transactions ..................... 36,035 54,750
-------- --------
Total increase ......................... 48,439 73,932
Net Assets
Beginning of period .......................... 473,756 399,824
-------- --------
End of period ................................ $522,195 $473,756
======== ========
Undistributed net investment
income ................................... $--- $---
==== ====
</TABLE>
*See "Financial Highlights" on pages - .
See notes to financial statements.
97
<PAGE>
UNITED MUNICIPAL HIGH INCOME FUND, INC.
FINANCIAL HIGHLIGHTS
Class A Shares
For a Share of Capital Stock Outstanding
Throughout Each Period:
<TABLE>
<CAPTION>
For the fiscal year ended
September 30,
-----------------------------------------
1998 1997 1996 1995 1994
----- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period ............... $5.55 $5.31 $5.27 $5.12 $5.53
----- ----- ----- ----- -----
Income from investment
operations:
Net investment
income.............. .32 .34 .34 .35 .34
Net realized and
unrealized gain
(loss) on
investments ........ .21 .25 .04 .17 (0.34)
----- ----- ----- ----- -----
Total from investment
operations ........... .53 .59 .38 .52 0.00
----- ----- ----- ----- -----
Less distributions:
Declared from net
investment income .. (0.32) (0.34) (0.34) (0.35) (0.34)
From capital gains ... (0.07) (0.01) (0.00) (0.00) (0.07)
In excess
of capital gains.... (0.00) (0.00) (0.00) (0.02) (0.00)
----- ----- ----- ----- -----
Total distributions..... (0.39) (0.35) (0.34) (0.37) (0.41)
----- ----- ----- ----- -----
Net asset value, end
of period ............ $5.69 $5.55 $5.31 $5.27 $5.12
===== ===== ===== ===== =====
Total return* .......... 9.88% 11.45% 7.40% 10.63% 0.05%
Net assets, end
of period (in
millions)............. $522 $474 $400 $383 $345
Ratio of expenses to
average net
assets ............... 0.82% 0.78% 0.81% 0.76% 0.76%
Ratio of net investment
income to average
net assets ........... 5.72% 6.19% 6.41% 6.75% 6.39%
Portfolio turnover
rate ................. 35.16% 19.47% 26.91% 19.07% 26.26%
</TABLE>
*Total return calculated without taking into account the sales load deducted on
an initial purchase.
See notes to financial statements.
98
<PAGE>
UNITED MUNICIPAL HIGH INCOME FUND, INC.
FINANCIAL HIGHLIGHTS
Class Y Shares
For a Share of Capital Stock Outstanding
Throughout the Period:
<TABLE>
<CAPTION>
For the period
from July 1, 1998*
to August 25, 1998
------------------
<S> <C>
Net asset value,
beginning of
period ............... $5.64
-----
Income from investment
operations:
Net investment
income.............. 0.05
Net realized and
unrealized gain on
investments ........ 0.01
-----
Total from investment
operations ........... 0.06
Less distributions
declared from net
investment income .... (0.05)
-----
Net asset value, end
of period ............ $5.65
=====
Total return ........... 1.07%
Net assets, end
of period (000
omitted).............. $0
Ratio of expenses to
average net
assets ............... 0.61%**
Ratio of net investment
income to average
net assets ........... 5.99%**
Portfolio turnover
rate ................. 35.16%**
</TABLE>
*Class Y shares commenced operations on July 1, 1998 and continued operations
until August 25, 1998 when all outstanding Class Y shares were redeemed at the
ending net asset value shown in the table.
**Annualized.
See notes to financial statements.
99
<PAGE>
UNITED MUNICIPAL HIGH INCOME FUND, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
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 in the Internal
Revenue Code) and premiums on the purchase of bonds are amortized for both
financial and tax reporting purposes over the remaining lives of the bonds.
Interest income is recorded on the accrual basis. See Note 3 -- Investment
Security Transactions.
C. Federal income taxes -- The Fund intends to distribute all of its net
investment income and capital gains to its shareholders and otherwise
qualify as a regulated investment company under Subchapter M of the
Internal Revenue Code. The Fund intends to pay distributions as required to
avoid imposition of excise tax. Accordingly, provision has not been made
for Federal income taxes. In addition, the Fund intends to meet
requirements of the Internal Revenue Code which will permit it to pay
dividends from net investment income, substantially all of which will be
exempt from Federal income tax. See Note 4 -- Federal Income Tax Matters.
D. Dividends and distributions -- 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 carryovers.
100
<PAGE>
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 $18.9 billion of combined net
assets at September 30, 1998) 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.
<TABLE>
<CAPTION>
Accounting Services Fee
Average
Net Asset Level Annual Fee
(all dollars in millions) Rate for Each Level
------------------------- -------------------
<S> <C>
From $ 0 to $ 10 $ 0
From $ 10 to $ 25 $ 10,000
From $ 25 to $ 50 $ 20,000
From $ 50 to $ 100 $ 30,000
From $ 100 to $ 200 $ 40,000
From $ 200 to $ 350 $ 50,000
From $ 350 to $ 550 $ 60,000
From $ 550 to $ 750 $ 70,000
From $ 750 to $1,000 $ 85,000
$1,000 and Over $100,000
</TABLE>
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
101
<PAGE>
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 $1,691,251 out of which
W&R paid sales commissions of $978,031 and all expenses in connection with the
sale of Fund shares, except for registration fees and related expenses.
Under a Distribution and Service Plan for Class A shares adopted by the
Fund pursuant to Rule 12b-1 under the Investment Company Act of 1940, the Fund
may pay monthly a distribution and/or service fee to W&R in an amount not to
exceed .25% of the Fund's Class A average annual net assets. The fee is to be
paid to reimburse W&R for amounts it expends in connection with the distribution
of the Class A shares and/or provision of personal services to Fund shareholders
and/or maintenance of shareholder accounts.
The Fund paid Directors' fees of $17,478, which are included in other
expenses.
W&R is a subsidiary of Waddell & Reed Financial, Inc., a holding company,
and a direct subsidiary of Waddell & Reed Financial Services, Inc., a holding
company.
NOTE 3 -- Investment Security Transactions
Purchases of investment securities, other than U.S. Government and
short-term securities, aggregated $194,695,718, while proceeds from maturities
and sales aggregated $172,055,386. Purchases of short-term securities aggregated
$241,461,705, while proceeds from maturities and sales aggregated $240,009,290.
No U.S. Government securities were bought or sold during the period ended
September 30, 1998.
For Federal income tax purposes, cost of investments owned at September 30,
1998 was $477,286,097, resulting in net unrealized appreciation of $35,816,994,
of which $37,380,404 related to appreciated securities and $1,563,410 related to
depreciated securities.
NOTE 4 -- Federal Income Tax Matters
For Federal income tax purposes, the Fund realized capital gain net income
of $12,280,208 during its fiscal year ended September 30, 1998, of which a
portion was paid to shareholders during the period ended September 30, 1998.
Remaining net capital gains will be distributed to the Fund's shareholders.
NOTE 5 -- Multiclass Operations
On January 30, 1996, the Fund was authorized to offer investors two classes
of shares, Class A and Class Y, each of which has equal rights as to assets and
voting privileges.
102
<PAGE>
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 Distribution and Service Plan and have a separate transfer agency and
dividend disbursement services fee structure.
103
<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 September 30, 1998, and the related statements of operations for
the fiscal year then ended and changes in net assets for each of the fiscal
years in the two-year period then ended, and the financial highlights for each
of the fiscal periods in the five-year 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 the financial
statements and the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at
September 30, 1998 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of United Municipal
High Income Fund, Inc. as of September 30, 1998, the results of its operations,
the changes in its net assets and the financial highlights for the respective
stated periods in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Kansas City, Missouri
November 6, 1998
104
<PAGE>
REGISTRATION STATEMENT
PART C
OTHER INFORMATION
22. Financial Statements
---------------------
(a) Financial Statements -- United Municipal High Income Fund, Inc.
Included in Part B:
-------------------
As of September 30, 1998
Statements of Assets and Liabilities
For the year ended September 30, 1998
Statements of Operations
For the two years ended September 30, 1998
Statement of Changes in Net Assets
Schedule I -- Investment Securities as of September 30, 1998
Report of Independent Accountants
<PAGE>
23. Exhibits:
---------
(a) 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*
(b) 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*
(c) Not applicable
(d) 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*
(e) 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*
(f) Not applicable
(g) Custodian Agreement, as amended, attached hereto as EX-99.B8-mhca
(h) Shareholder Servicing Agreement attached hereto as EX-99.B9-mhssa
Fund Class A Application, as amended, filed May 30, 1997 as
EX-99.B9-mhappca to Post-Effective Amendment No. 19 to the
Registration Statement on Form N-1A*
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*
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*
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*
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*
<PAGE>
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*
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*
(i) Not applicable
(j) Consent of Deloitte & Touche LLP, Independent Accountants,
attached hereto as EX-99.B11-mhconsnt
(k) Not applicable
(l) Not applicable
(m) Service Plan filed December 1, 1995 as EX-99.B15-mhspca to
Post-Effective Amendment No. 17 to the Registration Statement on
Form N-1A*
Distribution and Service Plan for Class A shares filed December
29, 1997 as EX-99.B15-mhdsp to Post-Effective Amendment No. 20 to
the Registration Statement on Form N-1A*
(n) Financial Data Schedule attached hereto as EX-27.B17-mhfds
(o) 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*
24. Persons Controlled by or under common control with Registrant
-------------------------------------------------------------
None
25. Indemnification
---------------
Reference is made to Section (7)(c) of Article SEVENTH of the Articles
of Incorporation of Registrant attached hereto as EX-99.B1-charter, 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.
26. 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
<PAGE>
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 and to other investment advisory clients.
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.
As to each director and officer of Waddell & Reed Investment Management
Company, reference is made to the Prospectus and SAI of this Registrant.
27. 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.
Advantage I
Advantage II
Advantage Plus
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.
<PAGE>
28. 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. Kristen A. Richards, as officers of the Registrant, each
of whose business address is Post Office Box 29217, Shawnee Mission,
Kansas 66201-9217.
29. 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 Item 23.
30. Undertakings
------------
Not applicable
---------------------------------
*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 1st day of
December, 1998.
UNITED MUNICIPAL HIGH INCOME FUND, INC.
(Registrant)
By /s/ Robert L. Hechler*
------------------------
Robert L. Hechler, 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/Keith A. Tucker* Chairman of the Board December 1, 1998
- ---------------------- ----------------
Keith A. Tucker
/s/Robert L. Hechler* President, Principal December 1, 1998
- ---------------------- Financial Officer and ----------------
Robert L. Hechler Director
/s/Henry J. Herrmann* Vice President and December 1, 1998
- ---------------------- Director ----------------
Henry J. Herrmann
/s/Theodore W. Howard* Vice President, Treasurer December 1, 1998
- ---------------------- and Principal Accounting ----------------
Theodore W. Howard Officer
/s/James M. Concannon* Director December 1, 1998
- ------------------ ----------------
James M. Concannon
/s/John A. Dillingham* Director December 1, 1998
- ------------------ ----------------
John A. Dillingham
<PAGE>
/s/David P. Gardner* Director December 1, 1998
- ------------------ ----------------
David P. Gardner
/s/Linda K. Graves* Director December 1, 1998
- ------------------ ----------------
Linda K. Graves
/s/Joseph Harroz, Jr.* Director December 1, 1998
- ------------------ ----------------
Joseph Harroz, Jr.
/s/John F. Hayes* Director December 1, 1998
- ------------------- ----------------
John F. Hayes
/s/Glendon E. Johnson Director December 1, 1998
- ------------------- ----------------
Glendon E. Johnson
/s/William T. Morgan* Director December 1, 1998
- ------------------- ----------------
William T. Morgan
/s/Ronald C. Reimer* Director December 1, 1998
- ------------------ ----------------
Ronald C. Reimer
/s/Frank J. Ross, Jr.* Director December 1, 1998
- ------------------ ----------------
Frank J. Ross, Jr.
/s/Eleanor B Schwartz* Director December 1, 1998
- ------------------- ----------------
Eleanor B. Schwartz
/s/Frederick Vogel III* Director December 1, 1998
- ------------------- ----------------
Frederick Vogel III
*By
Kristen A. Richards
Attorney-in-Fact
ATTEST:
David R. Burford
Assistant Secretary
<PAGE>
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.,
TARGET/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 KRISTEN A. RICHARDS, 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: November 18, 1998 /s/Robert L. Hechler
--------------------------
Robert L. Hechler, President
/s/Keith A. Tucker Chairman of the Board November 18, 1998
- ------------------- -----------------
Keith A. Tucker
/s/Robert L. Hechler President, Principal November 18, 1998
- -------------------- Financial Officer and ----------------
Robert L. Hechler Director
/s/Henry J. Herrmann Vice President and November 18, 1998
- -------------------- Director ----------------
Henry J. Herrmann
/s/Theodore W. Howard Vice President, Treasurer November 18, 1998
- -------------------- and Principal Accounting ----------------
Theodore W. Howard Officer
<PAGE>
/s/James M. Concannon Director November 18, 1998
- -------------------- ----------------
James M. Concannon
/s/John A. Dillingham Director November 18, 1998
- -------------------- ----------------
John A. Dillingham
/s/David P. Gardner Director November 18, 1998
- ------------------- ----------------
David P. Gardner
/s/Linda K. Graves Director November 18, 1998
- -------------------- ----------------
Linda K. Graves
/s/Joseph Harroz, Jr. Director November 18, 1998
- -------------------- ----------------
Joseph Harroz, Jr.
/s/John F. Hayes Director November 18, 1998
- -------------------- ----------------
John F. Hayes
/s/Glendon E. Johnson Director November 18, 1998
- -------------------- ----------------
Glendon E. Johnson
/s/William T. Morgan Director November 18, 1998
- -------------------- ----------------
William T. Morgan
/s/Ronald C. Reimer Director November 18, 1998
- -------------------- ----------------
Ronald C. Reimer
/s/Frank J. Ross, Jr. Director November 18, 1998
- -------------------- ----------------
Frank J. Ross, Jr.
/s/Eleanor B. Schwartz Director November 18, 1998
- -------------------- ----------------
Eleanor B. Schwartz
<PAGE>
/s/Frederick Vogel III Director November 18, 1998
- -------------------- ----------------
Frederick Vogel III
Attest:
/s/Kristen A. Richards
- --------------------------------
Kristen A. Richards
Assistant Secretary
EX-99.B8-mhca
CUSTODIAN AGREEMENT
Dated as of November 26, 1991
Amended and Restated as of May 13, 1998
Between
UMB 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 Deposits
2.13 Foreign Exchange Transactions
2.14 Securities Loans
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
<PAGE>
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; Survival of Obligations
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 UMB Bank, n.a., formerly,
United Missouri Bank, n.a. (the "Custodian") and as amended and restated as of
May 13, 1998.
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.
<PAGE>
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
<PAGE>
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.
<PAGE>
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 , as "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.
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<PAGE>
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.
<PAGE>
(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,
<PAGE>
(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.
<PAGE>
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.
<PAGE>
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
<PAGE>
(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 and which has been
designated as a Foreign Custody Manager (as such term is defined in Rule 17f-5
of the 1940 Act) by the Custodian and approved by the Fund's board ("Approved
Foreign Custody Manager") may appoint a Foreign Sub-
<PAGE>
Subcustodian or Interim Sub-Subcustodian (as each are hereinafter defined) in
accordance with this Article IV; provided that the Fund's board also has
approved the agreement between the Custodian and the Foreign Custody Manager
specifying the Foreign Custody Manager's duties ("Delegation Agreement"). 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. Provided that the Custodian of a Domestic
Subcustodian is an Approved Foreign Custody Manager, the Custodian or any such
Domestic Subcustodian, as applicable, may appoint any (1)(a) "Qualified Foreign
Bank" (as such term is defined in Rule 17f-5) meeting the requirements of an
"Eligible Foreign Custodian" (as such term is defined in Rule 17f-5) or by SEC
order exempt therefrom; (b) majority-owned direct or indirect subsidiary of a
"U.S. bank" (as such term is defined in Rule 17f-5) or bank holding company
meeting the requirements of an Eligible Foreign Custodian or exempt by SEC order
therefrom; or (c) any bank (as such term is 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 (each a "Foreign
Sub-Subcustodian") or (2) any "Securities Depository" (as such term is defined
in Rule 17f-5) or clearing agency meeting the requirements of an Eligible
Foreign Custodian or exempt by SEC order therefrom ("Securities Depositories and
Clearing Agencies"), provided that the Foreign Custody Manager's appointments of
<PAGE>
such Eligible Foreign Custodians shall at all times be governed by the
Delegation Agreement.
(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 the Foreign Custody Manager has not appointed an Eligible
Foreign Custodian, 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
<PAGE>
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 which is not an approved Foreign
Custody Manager, and (B) shall, upon receipt of Special Instructions, terminate
any Special Subcustodian or Domestic Subcustodian which is an Approved Foreign
Custody Manager 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.
<PAGE>
(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.
<PAGE>
(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
<PAGE>
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
<PAGE>
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,
<PAGE>
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.
<PAGE>
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.
<PAGE>
ARTICLE VIII
DEFINED TERMS
The following terms are defined in the following sections:
Term Section
Account 2.22(A)
ADRs 2.06
Approved Foreign Custody Manager Article IV
Assets Article I
Authorized Person 3.02
Banking Institution 2.12
Bank Accounts 2.21
Clearing Agency 4.02(a)
Delegation Agreement Article IV
Distribution Account 2.16
Domestic Subcustodian 4.01
Eligible Foreign Custodian 4.02(a)
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.
<PAGE>
(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.
<PAGE>
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.
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:
UMB 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.
<PAGE>
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. UMB BANK, n.a.
By: /s/Sharon K. Pappas By: /s/Ralph Santoro
Name: Sharon K. Pappas Name: Ralph Santoro
Title: Vice President Title: Senior Vice President
<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
<PAGE>
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.
<PAGE>
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
<PAGE>
SUBCUSTODIAN LIST
PURSUANT TO CUSTODIAN AGREEMENT
BETWEEN
UNITED MUNICIPAL HIGH INCOME FUND, INC.
AND
UMB BANK, n.a.
Dated as of August 31, 1998
This Subcustodian List 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 subsequently amended and restated:
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
Target/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
Small Cap 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
High Income Fund July 31, 1997
Science and Technology Fund July 31, 1997
*Formerly, TMK/United Funds, Inc.
The following is a list of Domestic Subcustodians, Foreign Subcustodian and
Special Subcustodians under the Custodian Agreement as amended:
<PAGE>
A. Domestic Custodians:
Brown Brothers Harriman & Co.
United Missouri Trust Company of New York
B. Foreign Sub-Custodians
<TABLE>
<CAPTION>
Country Sub-Custodian Depository
------- ------------- ----------
<S> <C> <C>
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
</TABLE>
C. Special Subcustodians:
Wilmington Trust Co.
The Bank of New York, n.a.
Euroclear
EX-99.B9-mhssa
SHAREHOLDER SERVICING AGREEMENT
THIS AGREEMENT, made as of the 1ST day of November, 1992, by and between
UNITED MUNICIPAL HIGH INCOME FUND, INC., and Waddell & Reed Services Company
(the "Agent"), as amended and restated as of April 1, 1996,
W I T N E S S E T H :
WHEREAS, The Company wishes, as applicable, to appoint the Agent or to
continue the appointment of the Agent to be its shareholder servicing agent
upon, and subject to, the terms and provisions of this Agreement;
NOW THEREFORE, in consideration of the mutual covenants contained in
this Agreement, the parties agree as follows:
1. Appointment of Agent as Shareholder Servicing Agent for the
Company; Acceptance.
(1) The Company hereby appoints the Agent to act as Shareholder
Servicing Agent for the Company upon, and subject to, the terms and provisions
of this Agreement.
(2) The Agent hereby accepts the appointment as Shareholder
Servicing Agent for the Company and agrees to act as such upon, and subject to,
the terms and provisions of this Agreement.
(3) The Agent may appoint an entity or entities approved by the
Company in writing to perform any portion of Agent's duties hereunder (the
"Subagent").
2. Definitions.
(1) In this Agreement -
(a) The term the "Act" means the Investment Company Act
of 1940 as amended from time to time;
(b) The term "account" means the shares of the Company
registered on the books of the Company in the name of a shareholder under a
particular account registration number and includes shares subject to
instructions by the shareholder with respect to periodic redemptions and/or
reinvestment in additional shares of any dividends payable on said shares;
(c) The term "affiliate" of a person shall mean a person
controlling, controlled by, or under common control with that person;
<PAGE>
(d) The term "Class" shall mean each separate sub-class of
a class of shares of the Company, as may now or in the future exist;
(e) The term "Fund" shall mean each separate class of
shares of the Company, as may now or in the future exist;
(f) The term "officers' instruction" means an instruction
given on behalf of the Company to the Agent and signed on behalf of the Company
by any one or more persons authorized to do so by the Company's
Board of Directors;
(g) The term "prospectus" means the prospectus and
Statement of Additional Information of the applicable Fund or Class from time
to time in effect;
(h) The term "shares" means shares including fractional
shares of capital stock of the Company, whether or not such shares are
evidenced by an outstanding stock certificate issued by the Company;
(i) The term "shareholder" shall mean the owner of record
of shares of the Company;
(j) The term "stock certificate" means a certificate
representing shares in the form then currently in use by the Company.
3. Duties of the Agent.
The Agent shall perform such duties as shall be set forth in this
paragraph 3 and in accordance with the practice stated in Exhibit A of this
Agreement or any amendment thereof, any or all of which duties may be delegated
to or performed by one or more Subagents pursuant to Paragraph (3) above.
(1) Transfers.
Subject to the provisions of this Agreement the Agent
hereby agrees to perform the following functions as transfer agent for the
Company:
(a) Recording the ownership, transfer, exchange and
cancellation of ownership of shares of the Company on the books of the Company;
(b) Causing the issuance, transfer, exchange and
cancellation of stock certificates;
(c) Establishing and maintaining records of accounts;
(d) Computing and causing to be prepared and mailed or
otherwise delivered to shareholders payment checks and notices of
<PAGE>
reinvestment in additional shares of dividends, stock dividends or stock splits
declared by the Company on shares and of redemption proceeds due by the Company
on redemption of shares;
(e) Furnishing to shareholders such information as may
be reasonably required by the Company, including appropriate income tax
information;
(f) Addressing and mailing to shareholders
prospectuses, annual and semi-annual reports and proxy materials for shareholder
meetings prepared by or on behalf of the Company;
(g) Replacing allegedly lost, stolen or destroyed stock
certificates in accordance with and subject to procedures and conditions agreed
upon and set out in officers' instructions;
(h) Maintaining such books and records relating to
transactions effected by the Agent pursuant to this Agreement as are required by
the Act, or by rules or regulations thereunder, or by any other applicable
provisions of law, to be maintained by the Company or its transfer agent with
respect to such transactions; preserving, or causing to be preserved, any such
books and records for such periods as may be required by any such law, rule or
regulation; furnishing the Company such information as to such transactions and
at such time as may be reasonably required by it to comply with applicable laws
and regulations;
(i) Providing such services and carrying out such
responsibilities on behalf of the Company, or imposed on the Agent as the
Company's transfer agent, not otherwise expressly provided for in this Paragraph
3, as may be required by or be reasonably necessary to comply with any statute,
act, governmental rule, regulation or directive or court order, including,
without limitation, the requirements imposed by the Tax Equity and Fiscal
Responsibility Act of 1982 and the Income and Dividend Tax Compliance Act of
1983 relating to the withholding of tax from distributions to shareholders.
(2) Correspondence.
The Agent agrees to deal with and answer all
correspondence from or on behalf of shareholders relating to its functions under
this Agreement.
4. Compensation of the Agent.
The Company agrees to pay the Agent for its services under this
Agreement in accordance with the schedule as then in effect set forth in Exhibit
B of this Agreement or any amendment thereof. In addition, the Company agrees to
reimburse the Agent for the following "out-of-pocket" expenses of the Agent
within five days after receipt of an itemized statement of such expenses, to the
extent that payment of such expenses has
<PAGE>
not been or is not to be made directly by the Company: (i) costs of stationery,
appropriate forms, envelopes, checks, postage, printing (except cost of printing
prospectuses, annual and semi-annual reports and proxy materials) and mailing
charges, including returned mail and proxies, incurred by the Agent with respect
to materials and communications sent to shareholders in carrying out its duties
to the Company under this Agreement; (ii) long distance telephone costs incurred
by the Agent for telephone communications and microfilm and storage costs for
transfer agency records and documents; (iii) costs of all ancillary and
supporting services and related expenses (other than insurance premiums)
reasonably required by and provided to the Agent, other than by its employees or
employees of an affiliate, with respect to functions of the Company being
performed by it in its capacity as Agent hereunder, including legal advice and
representation in litigation to the extent that such payments are permitted
under Paragraph 7 of this Agreement and charges to Agent made by any Subagent;
(iv) costs for special reports or information furnished on request pursuant to
this Agreement and not specifically required by the Agent by Paragraph 3 of this
Agreement; and (v) reasonable costs and expenses incurred by the Agent in
connection with the duties of the Agent described in Paragraph (3)(1)(i). In
addition, the Company agrees to promptly pay over to the Agent any fees or
payment of charges it may receive from a shareholder for services furnished to
the shareholder by the Agent.
Services and operations incident to the sale and distribution of
the Company's shares, including sales communications, confirmations of
investments (not including reinvestment of dividends) and the clearing or
collection of payments will not be for the account or at the expense of the
Company under this Agreement.
5. Right of Company to Inspect Records, etc.
The Company will have the right under this Agreement to perform
on site inspection of records and accounts and to perform audits directly
pertaining to the Company shareholder accounts serviced by the Agent hereunder
at the Agent's or any Subagent's facilities in accordance with reasonable
procedures at the frequency necessary to assure proper administration of the
Agreement. The Agent will cooperate with the Company's auditors or
representatives of appropriate regulatory agencies and furnish all reasonably
requested records and data.
6. Insurance.
The Agent now has the insurance coverage described in Exhibit C,
attached hereto, and the Agent will not take any action to eliminate or decrease
such coverage during the term of this Agreement without receiving the approval
of the Fund in advance of any change, except the Agent, after giving reasonable
notice to the Company, may eliminate or decrease any coverage if the premiums
for such coverage are substantially increased.
<PAGE>
7. Standard of Care; Indemnification.
The Agent will at all times exercise due diligence and good faith
in performing its duties hereunder. The Agent will make every reasonable effort
and take all reasonably available measures to assure the adequacy of its
personnel and facilities as well as the accurate performance of all services to
be performed by it hereunder within, at a minimum, the time requirements of any
applicable statutes, rules or regulations or as set forth in the prospectus.
The Agent shall not be responsible for, and the Company agrees to
indemnify the Agent for any losses, damages or expenses (including reasonable
counsel fees and expenses) (i) resulting from any claim, demand, action or suit
not resulting from the Agent's failure to exercise good faith or due diligence
and arising out of or in connection with the Agent's duties on behalf of the
Company hereunder; (ii) for any delay, error or omission by reason of
circumstances beyond its control, including acts of civil or military authority,
national emergencies, labor difficulties (except with respect to the Agent's
employees), fire, mechanical breakdown beyond its control, flood or catastrophe,
acts of God, insurrection, war, riots, or failure beyond its control of
transportation, communication or power supply; or (iii) for any action taken or
omitted to be taken by the Agent in good faith in reliance on (a) the
authenticity of any instrument or communication reasonably believed by it to be
genuine and to have been properly made and signed or endorsed by an appropriate
person, (b) the accuracy of any records or information provided to it by the
Company, (c) any authorization or instruction contained in any officers'
instruction, or (d) with respect to the functions performed for the Company
listed under Paragraph 3(1) of this Agreement, any advice of counsel approved by
the Company who may be internally employed counsel or outside counsel, in either
case for the Company and/or the Agent.
In order for the rights to indemnification to apply, it is
understood that if in any case the Company may be asked to indemnify or hold the
Agent harmless, the Company shall be advised of all pertinent facts concerning
the situation in question, and it is further understood that the Agent will use
reasonable care to identify and notify the Company promptly concerning any
situation which presents or appears likely to present a claim for
indemnification against the Company. The Company shall have the option to defend
the Agent against any claim which may be the subject of this indemnification
and, in the event that the Company so elects, it will so notify the Agent and
thereupon the Company shall take over complete defense of the claim and the
Agent shall sustain no further legal or other expenses in such situation for
which the Agent shall seek indemnification under this paragraph. The Agent will
in no case confess any claim or make any compromise in any case in which the
Company will be asked to indemnify the Agent except with the Company's prior
written consent.
<PAGE>
8. Term of the Agreement; Taking Effect; Amendments.
This Agreement shall become effective at the start of business on
the date hereof and shall continue, unless terminated as hereinafter provided,
for a period of one year and from year to year thereafter, provided that such
continuance shall be specifically approved as provided below.
This Agreement shall go into effect, or may be continued, or may
be amended or a new agreement between the Company and the Agent covering the
substance of this Agreement may be entered into only if the terms of this
Agreement, such continuance, the terms of such amendment or the terms of such
new agreement have been approved by the Board of Directors of the Company,
including the vote of a majority of the directors who are not "interested
persons," as defined in the Act, of either party to this Agreement or of Waddell
& Reed Investment Management Company, cast in person at a meeting called for the
purpose of voting on such approval. Such a vote is hereinafter referred to as a
"disinterested director vote."
Any disinterested director vote shall include a determination
that (i) the Agreement, amendment, new agreement or continuance in question is
in the best interests of the Company and its shareholders; (ii) the services to
be performed under the Agreement, the Agreement as amended, new agreement or
agreement to be continued, are services required for the operation of the
Company; (iii) the Agent can provide services the nature and quality of which
are at least equal to those provided by others offering the same or similar
services; and (iv) the fees for such services are fair and reasonable in the
light of the usual and customary charges made by others for services of the same
nature and quality.
9. Termination.
(1) This Agreement may be terminated by the Agent at any time
without penalty upon giving the Company 120 days' written notice (which notice
may be waived by the Company) and may be terminated by the Company at any time
without penalty upon giving the Agent sixty (60) days' written notice (which
notice may be waived by the Agent), provided that such termination by the
Company shall be directed or approved by the vote of a majority of the Board of
Directors of the Company in office at the time or by the vote of the holders of
a majority (as defined in or under the Act) of the outstanding shares of the
Company.
(2) On termination, the Agent will deliver to the Company or its
designee all files, documents and records of the Company used, kept or
maintained by the Agent in the performance of its services hereunder, including
such of the Company's records in machine readable form as may be maintained by
the Agent, as well as such summary and/or control data relating thereto used by
or available to the Agent.
(3) In the event of any termination which involves the
appointment of a new shareholder servicing agent, including the Company's
<PAGE>
acting as such on its own behalf, the Company shall have the non-exclusive right
to the use of the data processing programs used by the Agent in connection with
the performance of its duties under this Agreement without charge.
(4) In addition, on such termination or in preparation therefore,
at the request of the Company and at the Company's expense the Agent shall
provide to the extent that its capabilities then permit such documentation,
personnel and equipment as may be reasonably necessary in order for a new agent
or the Company to fully assume and commence to perform the agency functions
described in this Agreement with a minimum disruption to the Company's
activities.
10. Construction; Governing Law.
The headings used in this Agreement are for convenience only and
shall not be deemed to constitute a part hereof. Whenever the context requires,
words denoting singular shall be read to include the plural. This Agreement and
the rights and obligations of the parties hereunder, shall be construed and
interpreted in accordance with the laws of the State of Kansas, except to the
extent that the laws of the State of Maryland apply with respect to share
transactions.
11. Representations and Warranties of Agent.
Agent represents and warrants that it is a corporation duly
organized and existing and in good standing under the laws of the State of
Missouri, that it is duly qualified to carry on its business in the State of
Kansas and wherever its duties require, that it has the power and authority
under laws and by its Articles of Incorporation and Bylaws to enter into this
Shareholder Servicing Agreement and to perform the services contemplated by this
Agreement.
12. Entire Agreement.
This Agreement and the Exhibits annexed hereto constitutes the
entire and complete agreement between the parties hereto relating to the subject
matter hereof, supersedes and merges all prior discussions between the parties
hereto, and may not be modified or amended orally.
IN WITNESS WHEREOF, the parties have hereto caused this Agreement
to be duly executed on the day and year first above written.
UNITED MUNICIPAL HIGH INCOME FUND, INC.
By:_________________________________
Sharon K. Pappas, Vice President
ATTEST:
By:____________________________
Sheryl Strauss, Assistant Secretary
WADDELL & REED SERVICES COMPANY
By:__________________________________
Robert L. Hechler, President
ATTEST:
By:___________________________
Sharon K. Pappas, Secretary
<PAGE>
EXHIBIT A
A. DUTIES IN SHARE TRANSFERS AND REGISTRATION
1. The Agent in carrying out its duties shall follow general commercial
practices and the Rules of the Stock Transfer Association, Inc. except as they
may conflict or be inconsistent with the specific provisions of the Company's
Articles of Incorporation and Bylaws, prospectus, applicable Federal and state
laws and regulations and this Agreement.
2. The Agent shall not require that the signature of the appropriate
person be guaranteed, witnessed or verified in order to effect a redemption,
transfer, exchange or change of address except as may from time to time be
directed by the Company as set forth in an officers' instruction. In the event a
signature guarantee is required by the Company, the Agent shall not inquire as
to the genuineness of the guarantee.
3. The Agent shall not replace a lost, stolen or misplaced stock
certificate without requiring and being furnished with an open penalty surety
bond protecting the Company and the Agent against loss.
B. The practices, procedures and requirements specified in A above may be
modified, altered, varied or supplemented as from time to time may be mutually
agreed upon by the Company and the Agent and evidenced on behalf of the Company
by an officers' instruction. Any such change shall not be deemed to be an
amendment to the Agreement within the meaning of Paragraph 8 of the Agreement.
<PAGE>
EXHIBIT B
COMPENSATION
Class A Shares
An amount payable on the first day of each month of $1.3125 for each account of
the Company which was in existence during any portion of the immediately
preceding month and, in addition, to pay to the Agent the sum of $0.30 for each
account for which, during such month, a record date was established for payment
of a dividend, in cash or otherwise (which term includes a distribution),
irrespective of whether such dividend was payable in that month or later or was
payable directly or was to be reinvested.
Class Y Shares
An amount payable on the first day of each month equal to 1/12 of .15 of 1% of
the average daily net assets of the Class for the preceding month.
<PAGE>
EXHIBIT C
<TABLE>
<CAPTION>
Bond or
Name of Bond Policy No. Insurer
- ------------ ---------- -------
<S> <C> <C>
Investment Company 87015198B ICI
Blanket Bond Form Mutual
Insurance
Company
Fidelity $20,400,000
Audit Expense 50,000
On Premises 20,400,000
In Transit 20,400,000
Forgery or Alteration 20,400,000
Securities 20,400,000
Counterfeit Currency 20,400,000
Uncollectible Items of
Deposit 25,000
Phone-Initiated Transactions 500,000
Total Limit 20,400,000
Directors and Officers/ 87015198D ICI
Errors and Omissions Liability Mutual
Insurance Form Insurance
Total Limit $ 5,000,000 Company
Blanket Lost Instrument Bond (Mail Loss) 30S100639551 Aetna
Life &
casualty
Blanket Undertaking Lost Instrument
Waiver of Probate 42SUN339806 Hartford
Casualty
Insurance
</TABLE>
EX-99.B11-mhconsnt
INDEPENDENT AUDITORS' CONSENT
We consent to the use in Post-Effective Amendment No. 21 to Registration
Statement No. 33-715 of our report dated November 6, 1998 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 Prospectuses, which also are a part of such Registration
Statement.
Deloitte & Touche LLP
Kansas City, Missouri
November 27, 1998
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE ANNUAL REPORT TO
SHAREHOLDERS DATED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000778807
<NAME> UNITED MUNICIPAL HIGH INCOME FUND, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 477,173
<INVESTMENTS-AT-VALUE> 513,103
<RECEIVABLES> 10,996
<ASSETS-OTHER> 12
<OTHER-ITEMS-ASSETS> 2,500
<TOTAL-ASSETS> 526,611
<PAYABLE-FOR-SECURITIES> 2,500
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,916
<TOTAL-LIABILITIES> 4,416
<SENIOR-EQUITY> 91,701
<PAID-IN-CAPITAL-COMMON> 383,028
<SHARES-COMMON-STOCK> 91,701
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 11,536
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 35,930
<NET-ASSETS> 522,195
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 32,609
<OTHER-INCOME> 0
<EXPENSES-NET> (4,090)
<NET-INVESTMENT-INCOME> 28,519
<REALIZED-GAINS-CURRENT> 12,638
<APPREC-INCREASE-CURRENT> 5,793
<NET-CHANGE-FROM-OPS> 46,950
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (28,519)
<DISTRIBUTIONS-OF-GAINS> (6,027)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 11,017
<NUMBER-OF-SHARES-REDEEMED> (9,580)
<SHARES-REINVESTED> 4,978
<NET-CHANGE-IN-ASSETS> 48,439
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,461
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 4,090
<AVERAGE-NET-ASSETS> 498,312
<PER-SHARE-NAV-BEGIN> 5.55
<PER-SHARE-NII> .32
<PER-SHARE-GAIN-APPREC> .21
<PER-SHARE-DIVIDEND> (.32)
<PER-SHARE-DISTRIBUTIONS> (.07)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 5.69
<EXPENSE-RATIO> 0.82
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
