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. 23
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT
OF 1940 X
Amendment No. 23
UNITED MUNICIPAL HIGH INCOME FUND, INC.
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(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)
__X__ on December 31, 1999 pursuant to paragraph (b)
_____ 60 days after filing pursuant to paragraph (a)(1)
_____ on (date) 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, 1999 was filed on December 16, 1999.
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United Municipal High Income Fund, Inc.
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 securities, or determined whether this Prospectus is accurate or
adequate. It is a criminal offense to state otherwise.
Prospectus
December 31, 1999
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Table of Contents
AN OVERVIEW OF THE FUND......................................................3
PERFORMANCE..................................................................6
FEES AND EXPENSES............................................................8
THE INVESTMENT PRINCIPLES OF THE FUND.......................................10
Investment Goal, Principal Strategies and Other Investments...............10
Risk Considerations of Principal Strategies and Other Investments.........11
Year 2000 Issue...........................................................12
YOUR ACCOUNT................................................................14
Choosing a Share Class....................................................14
Sales Charge Reductions and Waivers.....................................16
Waivers for Certain Investors...........................................16
Ways to Set Up Your Account...............................................20
Buying Shares.............................................................20
Minimum Investments.......................................................22
Adding to Your Account....................................................23
Selling Shares............................................................23
Telephone Transactions....................................................26
Shareholder Services......................................................26
Personal Service........................................................26
Reports.................................................................26
Exchanges...............................................................27
Automatic Transactions for Class A, Class B and Class C Shareholders....27
Distributions and Taxes...................................................28
Distributions...........................................................28
Taxes...................................................................29
THE MANAGEMENT OF THE FUND..................................................31
Portfolio Management......................................................31
Management Fee............................................................31
FINANCIAL HIGHLIGHTS........................................................33
2
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An Overview of the Fund
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.
Principal Strategy
The Fund seeks to achieve its goal through a diversified portfolio consisting
mainly of tax-exempt municipal bonds. These bonds are rated primarily in the
lower tier of investment grade (BBB by Standard & Poor's ("S&P") and Baa by
Moody's Investors Service, Inc. ("MIS")) or lower, including bonds rated below
investment grade, junk bonds (rated BB and lower by S&P and Ba and lower by
MIS), 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") and private activity bonds ("PABs"),
which finance privately operated facilities.
WRIMCO may look at a number of factors in selecting securities for the Fund's
portfolio. These include:
o the security's current coupon;
o the maturity of the security;
o the relative value of the security;
o the creditworthiness of the particular issuer or of the private company
involved; and
o the structure of the security, including whether it has a put or a call
feature.
Generally, in determining whether to sell a security, WRIMCO will use the same
type of analysis that is used in buying securities in order to determine whether
the security continues to be a desired investment for the Fund. As well, WRIMCO
may sell a
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security to take advantage of more attractive investment opportunities or to
raise cash.
The Fund may invest significantly in IDBs and PABs in general, revenue bonds
payable from similar projects and municipal bonds of issuers located in the same
geographic area.
The Fund typically invests in municipal bonds with remaining maturities of 10 to
30 years.
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 an increase in interest rates, which may cause the value of the Fund's
holdings, especially bonds with longer maturities, to decline;
o the credit quality of the issuers whose securities the Fund owns or of the
private companies involved in IDB- or PAB- financed projects;
o changes in the maturities of bonds owned by the Fund;
o prepayment of asset-backed or other higher-yielding bonds held by the Fund
("prepayment risk")
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 legislation affecting the tax status of municipal bond interest;
o adverse bond and stock market conditions, sometimes in response to general
economic or industry news, that may cause the prices of the Fund's
holdings to fall as part of a broad market decline; and
o the skill of WRIMCO in evaluating and managing the interest rate and
credit risks of the Fund's portfolio.
4
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A significant portion of the Fund's municipal bond interest may subject
investors to the Federal alternative minimum tax ("AMT"); this would have the
effect of reducing the Fund's return to any such investor.
As with any mutual fund, the value of the Fund's shares will change and you
could lose money on your investment. An investment in the Fund is not a bank
deposit and is not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency.
Who May Want to Invest
The Fund is designed for investors seeking current income that is primarily free
from Federal income tax and that is higher than is normally available with
securities in the higher-rated categories, through a highly diversified
portfolio. The Fund is not suitable for all investors. You should consider
whether the Fund fits your particular investment objectives.
5
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Performance
The bar chart and performance table below provide some indication of the risks
of investing in the Fund by showing changes in the Fund's performance from year
to year and by showing how the Fund's average annual total returns for the
periods shown compare with those of a broad measure of market performance and a
peer group average.
o The bar chart presents the average annual total returns for Class A and
shows how performance has varied from year to year for the past ten
calendar years.
o The bar 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 was
included, the returns would be less than those shown.
o The performance table shows Class A average annual total returns and
compares them to the market indicators listed. No performance information
is provided for Class B, Class C or Class Y shares since Class B and Class
C do not have annual returns for at least one calendar year and Class Y
did not have a full calendar year of continuous operations.
o The bar chart and the performance table assume payment of dividends and
other distributions in shares. 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 bar chart and performance 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 (%)
1989 10.79%
1990 7.19%
1991 11.67%
1992 10.15%
1993 13.19%
1994 -3.12%
1995 16.74%
1996 6.90%
1997 11.77%
1998 6.82%
In the period shown in the chart, the highest quarterly return was 6.77%
(the first quarter of 1995) and the lowest
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quarterly return was -3.3% (the first quarter of 1994). The Fund's return
for its Class A shares for the year through September 30, 1999 was -2.05%.
AVERAGE ANNUAL TOTAL RETURNS
as of December 31, 1998 (%)
1 Year 5 Years 10 Years
--------------------------------
Class A Shares of the Fund 2.28% 6.69% 8.64%
Lehman Brothers Municipal Bond Index 6.48% 6.23% 8.22%
Lipper High Yield Municipal Bond
Fund Universe Average 5.25% 5.98% 7.58%
The index shown is a broad-based, securities market index that is unmanaged. The
Lipper average is a composite of mutual funds with goals similar to the goal of
the Fund.
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Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
Shareholder Fees Class A Class B Class C Class Y
(fees paid directly Shares Shares Shares Shares
from your investment) ------- ------- ------- -------
Maximum Sales Charge (Load)
Imposed on Purchases
(as a percentage of
offering price) 4.25% None None None
Maximum Deferred
Sales Charge (Load)(1)
(as a percentage of
lesser of amount invested
or redemption value) None 5% 1% None
Annual Fund Operating Expenses(2)
(expenses that are deducted from Fund assets)
Management Fees 0.52% 0.52% 0.52% 0.52%
Distribution and
Service (12b-1) Fees 0.23% 1.00% 1.00% None
Other Expenses 0.14% 0.14% 0.14% 0.30%
Total Annual Fund
Operating Expenses 0.89% 1.66% 1.66% 0.82%
Example: This example is intended to help you compare the cost of investing in
the shares of the Fund with the cost of investing in other mutual funds. The
example assumes that (a) you invest $10,000 in the particular Class A, Class B,
Class C or Class Y shares for each time period specified, (b) your investment
has a 5% return each year, and (c) the expenses remain the same. Although your
actual costs may be higher or lower, based on these assumptions, your costs
would be:
- ----------
(1) The contingent deferred sales charge ("CDSC"), which is imposed on the
lesser of amount invested or redemption value of Class B shares, declines
from 5% for redemptions made within the first calendar year of purchase,
to 4% for redemptions made within the second calendar year, to 3% for
redemptions made within the third and fourth calendar years, to 2% for
redemptions made within the fifth calendar year, to 1% for redemptions
made within the sixth calendar year and to 0% for redemptions made after
the sixth calendar year. Please note that the CDSC is not based on the
length of time that Class B shares are held. Instead, the CDSC is based on
the calendar year of purchase and the calendar year of redemption. For
Class C shares, a 1% CDSC applies to the lesser of amount invested or
redemption value of Class C shares redeemed within twelve months.
(2) Management Fees and Total Annual Fund Operating Expenses have been
restated to reflect the change in management fees effective June 30, 1999;
otherwise, expense ratios are based on other Fund-level expenses for the
fiscal year ended September 30, 1999, and for Class B, Class C and Class
Y, the expenses attributable to each class that are anticipated for the
current year. Actual expenses may be greater or less than those shown.
8
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If shares are redeemed
at end of period: 1 Year 3 Years 5 Years 10 Years
Class A Shares $512 $697 $ 897 $1,474
Class B Shares $569 $823 $1,002 $1,686*
Class C Shares $269 $523 $ 902 $1,965
Class Y Shares $ 84 $262 $ 455 $1,014
If shares are not
redeemed at end
of period: 1 Year 3 Years 5 Years 10 Years
Class A Shares $512 $697 $897 $1,474
Class B Shares $169 $523 $902 $1,686*
Class C Shares $169 $523 $902 $1,965
Class Y Shares $ 84 $262 $455 $1,014
* Reflects annual operating expenses of Class A after conversion of Class B
shares into Class A shares at the end of the seventh calendar year following
the first calendar year of purchase.
9
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The Investment Principles of the Fund
Investment Goal, Principal Strategies and Other Investments
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 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. IDBs and PABs 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 will:
o substantially invest in bonds with remaining maturities of 10 to 30 years;
o invest at least 80% of its total assets in municipal bonds; and
o invest at least 75% of its total assets in medium and lower-quality
municipal bonds, which are bonds rated BBB through D by S&P, or Baa
through C by MIS, or, if unrated, are determined by WRIMCO to be of
comparable quality.
The Fund may invest in higher-quality municipal bonds, and invest less than 75%
of its total 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/or when, in the opinion of WRIMCO, there is a lack of medium and
lower-quality securities in which to invest.
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The Fund may invest 25% or more of its total assets in IDBs and PABs, 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
total assets in IDBs and PABs issued for any one industry or in any one state.
During normal market conditions, the Fund may invest up to 20% of its total
assets in a combination of taxable obligations and in options, futures contracts
and other taxable derivative instruments. The 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/or
o any of the foregoing obligations subject to repurchase agreements.
The Fund may 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. Income from taxable obligations and certain derivative instruments
will be subject to Federal income tax. At this time, the Fund has limited
exposure to derivative instruments.
At times 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 (and
thus its dividends) being subject to Federal income tax. By taking a temporary
defensive position, the Fund may not achieve its investment objective.
You will find more information about the Fund's permitted investments and
strategies, as well as the restrictions that apply to them, in the Statement of
Additional Information ("SAI").
11
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Risk Considerations of Principal Strategies and Other Investments
Risks exist in any investment. The Fund is subject to market risk, financial
risk and, in some cases, prepayment risk.
o Market risk is the possibility of a change in the price of the security
because of market factors, including changes in interest rates. Bonds with
longer maturities are more interest-rate sensitive. For example, if
interest rates increase, the value of a bond with a longer maturity is
more likely to decrease. Because of market risk, the share price of the
Fund will likely change, as well.
o 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 invests.
o 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.
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 and PABs, 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. Currently, the Fund invests a significant portion
of its assets in IDBs and PABs associated with healthcare-oriented projects. The
risks particular to these types of projects are construction risk and occupancy
risk.
You will find more information in the SAI about the types of projects in which
the Fund may invest from time to time and a discussion of the risks associated
with such projects.
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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.
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.
WRIMCO has taken steps that it believes are reasonably designed to address Year
2000 computer-related problems 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.
Similarly, the companies and other issuers in which the Fund invests could be
adversely affected by Year 2000 computer-related problems, and there can be no
assurance that the steps taken, if any, by these issuers will be sufficient to
avoid any adverse impact on the Fund.
13
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Your Account
Choosing a Share Class
This Prospectus offers four classes of shares for the Fund: Class A, Class B,
Class C and Class Y. Each class has its own sales charge, if any, and expense
structure. The decision as to which class of shares is best suited to your needs
depends on a number of factors that you should discuss with your financial
advisor. Some factors to consider are how much you plan to invest and how long
you plan to hold your investment. If you are investing a substantial amount and
plan to hold your shares for a long time, Class A shares may be the most
appropriate for you. Class B and Class C shares are not available for
investments of $2 million or more. If you are investing a lesser amount, you may
want to consider Class B shares (if investing for at least seven calendar years)
or Class C shares (if investing for less than seven calendar years). Class Y
shares are designed for institutional investors and others investing through
certain intermediaries, as described below.
Since your objectives may change over time, you may want to consider another
class when you buy additional Fund shares. All of your future investments in the
Fund will be made in the class you select when you open your account, unless you
inform the Fund otherwise, in writing, when you make a future investment.
General Comparison of Class A, Class B and Class C Shares
Class A Class B Class C
o Initial sales charge o No initial sales o No initial sales
charge charge
o No deferred sales o Deferred sales charge o A 1% deferred sales
charge on shares you sell charge on shares
within six calendar you sell within
years after purchase twelve months
o Maximum distribution o Maximum distribution o Maximum distribution
and service (12b-1) and service (12b-1) and service (12b-1)
fees of 0.25% fees of 1.00% fees of 1.00%
o For an investment o Converts to Class A o Does not convert to
of $2 million or shares at the end of Class A shares, so
more, only Class A the seventh calendar annual expenses do
shares are available year following the not decrease
year of purchase,
thus reducing future
annual expenses
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o For an investment of
$300,000 or more
Waddell & Reed
financial advisors
typically will
recommend purchase
of Class A shares
due to a reduced
sales charge and
lower annual
expenses
The Fund has adopted a Distribution and Service Plan ("Plan") pursuant to Rule
12b-1 under the Investment Company Act of 1940, as amended, for each of its
Class A, Class B and Class C shares. Under the Class A 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 service to Class A shareholders and/or maintaining Class A shareholder
accounts. Under the Class B Plan and the Class C Plan, the Fund may pay Waddell
& Reed, Inc., on an annual basis, a service fee of up to 0.25% of the average
daily net assets of the class to compensate Waddell & Reed, Inc. for providing
service to shareholders of that class and/or maintaining shareholder accounts
for that class and a distribution fee of up to 0.75% of the average daily net
assets of the class to compensate Waddell & Reed, Inc. for distributing shares
of that class. Because a class's fees are paid out of the assets of that class
on an ongoing basis, over time these fees will increase the cost of your
investment and may cost you more than paying other types of sales charges.
Class A shares are subject to an initial sales charge when you buy them, based
on the amount of your investment, according to the table below. Class A shares
pay an annual 12b-1 fee of up to 0.25% of average Class A net assets. The
ongoing expenses of this class are lower than those for Class B or Class C
shares and higher than those for Class Y shares.
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Sales
Sales Charge
Charge as
as Approx.
Percent Percent
of of
Size of Offering Amount
Purchase Price Invested
- -------- -------- -------
Under
$100,000 4.25% 4.44%
$100,000
to less
than
$300,000 3.25 3.36
$300,000
to less
than
$500,000 2.50 2.56
$500,000
to less
than
$1,000,000 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
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 shares of United Cash Management, Inc. unless
acquired by exchange for Class A shares on which a sales charge was paid
(or as a dividend or distribution on such acquired shares), with the net
asset value ("NAV") of Class A shares already held ("Rights of
Accumulation");
o Grouping all purchases of Class A shares, except shares of United Cash
Management, Inc., made during a thirteen-month period ("Letter of
Intent"); and
o Grouping purchases by certain related persons.
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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 or of any affiliated entity of
Waddell & Reed, Inc., 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; and
o Certain trusts for these persons.
You will find more information in the SAI about sales charge reductions and
waivers.
Contingent Deferred Sales Charge. A contingent deferred sales charge ("CDSC")
may be assessed against your redemption amount of Class B and Class C shares and
paid to Waddell & Reed, Inc. (the "Distributor"), as further described below.
The purpose of the CDSC is to compensate the Distributor for the costs incurred
by it in connection with the sale of the Fund's Class B or Class C shares. The
CDSC will not be imposed on Class B or Class C shares representing payment of
dividends or other distributions or on amounts which represent an increase in
the value of a shareholder's account resulting from capital appreciation above
the amount paid for Class B or Class C shares purchased during the CDSC period.
The CDSC is applied to the lesser of amount invested or redemption value.
To keep your CDSC as low as possible, each time you place a request to redeem
shares, the Fund first redeems shares in your account representing payment of
dividends and other distributions. If there are not enough of these to meet your
request, the Fund will next redeem your Class B shares in the order they were
purchased.
Unless instructed otherwise, the Fund, when requested to redeem a specific
dollar amount, will redeem additional Class B or Class C shares equal in value
to the CDSC. For example, should you
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request a $1,000 redemption and the applicable CDSC is $27, the Fund will redeem
shares having an aggregate NAV of $1,027, absent different instructions.
Class B shares are not subject to an initial sales charge when you buy them.
However, you may pay a CDSC if you sell your Class B shares within six calendar
years of their purchase, based on the table below. Class B shares pay an annual
12b-1 service fee of up to 0.25% of average net assets and a distribution fee of
up to 0.75% of average net assets. Over time, these fees will increase the cost
of your investment and may cost you more than if you had bought Class A shares.
Class B shares will automatically convert to Class A shares of the Fund at the
end of the seventh calendar year following the year of purchase. The Class A
shares have lower ongoing expenses.
The Fund will redeem your Class B shares at their NAV next calculated after
receipt of a written request for redemption in good order, subject to the CDSC
discussed below.
Deferred
Date of Sales
Redemption Charge
- ---------- ------
anytime within 1st calendar year 5%
anytime within 2nd calendar year 4%
anytime within 3rd calendar year 3%
anytime within 4th calendar year 3%
anytime within 5th calendar year 2%
anytime within 6th calendar year 1%
after 6th calendar year 0%
All Class B investments made during a calendar year are deemed a single
investment during that calendar year for purposes of calculating the CDSC. For
Class B, the date of redemption is measured, in calendar years, from the first
calendar year of purchase. For example, if a shareholder opens an account on
November 1, 1999, then redeems all Class B shares on March 1, 2000, the
shareholder will pay a CDSC of 4%, the rate applicable to redemptions made
within the second calendar year of purchase. Please note that the CDSC is not
based on the length of time that shares are held. Instead, the CDSC is based on
the calendar year of purchase and the calendar year of redemption.
Class C shares are not subject to an initial sales charge when you buy them, but
if you sell your Class C shares within twelve months of buying them, you will
pay a 1% CDSC. For purposes of a CDSC, purchases of Class C shares within a
month will be
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considered as being purchased on the first day of the month. Class C shares pay
an annual 12b-1 service fee of up to 0.25% of average net assets and a
distribution fee of up to 0.75% of average net assets. Over time, these fees
will increase the cost of your investment and may cost you more than if you had
bought Class A shares. Class C shares do not convert to any other class.
For Class C shares, the CDSC will be applied to the lesser of amount invested or
redemption value of shares that have been held for twelve months or less.
The CDSC will not apply in the following circumstances:
o redemptions of Class B or Class C shares requested within one year of the
shareholder's death or disability, provided the Fund is notified of the
death or disability at the time of the request and furnished proof of such
event satisfactory to the Distributor.
o redemptions of Class B or Class C shares made pursuant to a shareholder's
participation in any systematic withdrawal service adopted for a Fund.
(The service and this exclusion from the CDSC do not apply to a one-time
withdrawal.)
o redemptions the proceeds of which are reinvested in Class B or Class C
shares (must be reinvested in the same class as that which was redeemed)
of the Fund within forty-five days after such redemption.
o the exercise of certain exchange privileges.
o redemptions effected pursuant to the Fund's right to liquidate a
shareholder's Class B or Class C shares if the aggregate NAV of those
shares is less than $500.
o redemptions effected by another registered investment company by virtue of
a merger or other reorganization with the Fund or by a former shareholder
of such investment company of Class B or Class C shares of the Fund
acquired pursuant to such reorganization.
These exceptions may be modified or eliminated by the Fund at any time without
prior notice to shareholders, except with respect to redemptions effected
pursuant to the Fund's right to liquidate a shareholder's shares, which requires
certain notices.
Class Y shares are not subject to a sales charge or annual 12b-1 fees.
Class Y shares are only available for purchase by:
19
<PAGE>
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; and
o government entities or authorities and corporations whose investment
within the first twelve months after initial investment is $10 million or
more.
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
20
<PAGE>
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.
To purchase any class of shares 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
To purchase Class Y shares by wire, you must first obtain an account number by
calling 800-366-2520, then mail a completed application to Waddell & Reed, Inc.,
P.O. Box 29217, Shawnee Mission, Kansas 66201-9217, or fax it to 913-236-5044.
Instruct your bank to wire the amount you wish to invest, along with the account
number and registration, to UMB Bank, n.a., ABA Number 101000695, for the
account of Waddell & Reed Number 0007978, FBO Customer Name and Account Number.
You may also buy Class Y 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 regarding the purchase of
Class Y shares.
The price to buy a share of the Fund, called the offering price, is calculated
every business day.
The offering price of a share (the price to buy one share of a particular class)
is the next NAV calculated per share of that class plus, for Class A shares, the
sales charge shown in the table above.
In the calculation of the Fund's NAV:
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.
21
<PAGE>
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 close of
business of the NYSE, normally 4 p.m. Eastern time, except that an option or
futures contract held by the Fund may be priced at the close of the regular
session of any other securities or commodities exchange on which that instrument
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 B, Class C or
Class Y shares of the Fund.
o If you purchase Class Y shares of the Fund 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 Class Y 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
shares of the Fund at that day's price.
When you sign your account application, you will be asked to certify that your
Social Security or other taxpayer identification number is correct and whether
you are subject to backup withholding for failing to report income to the
Internal Revenue Service.
Waddell & Reed, Inc. reserves the right to reject any purchase orders, including
purchases by exchange, and it and the Fund reserve the right to discontinue
offering Fund shares for purchase.
22
<PAGE>
Minimum Investments
For Class A, Class B and Class C:
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 Any amount
For certain exchanges $100
For Automatic Investment Service $25
For Class Y:
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
To Add to an Account Any amount
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 to Waddell & Reed, Inc., 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 the
class of shares that you wish to purchase.
To add to your Class Y 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,
23
<PAGE>
for the account of Waddell & Reed Number 0007978, FBO Customer Name and Account
Number.
If you purchase Class Y 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.
The redemption price (price to sell one share of a particular class) is the NAV
per share of that class, subject to any CDSC applicable to Class B or Class C
shares.
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, and the class, 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 Services Company
P. O. Box 29217
Shawnee Mission, Kansas
66201-9217
Unless otherwise instructed, Waddell & Reed Services Company will send a check
to the address on the account.
To sell Class Y shares by telephone or fax: If you have elected this method in
your application or by subsequent authorization, call 800-366-5465, or fax your
request to 913-236-5044, and give your instructions to redeem Class Y shares and
make payment by wire to your predesignated bank account or by check to you at
the address on the account.
When you place an order to sell shares, your shares will be sold at the next NAV
calculated, subject to any applicable CDSC, after receipt of a written request
for redemption in good order by
24
<PAGE>
Waddell & Reed Services Company at the address listed above. 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 you do 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 when the Fund's Board of
Directors determines that conditions exist making cash payments
undesirable. The Fund is obligated to redeem shares solely in cash up to
the lesser of $250,000 or 1% of its NAV during any 90-day period for any
one shareholder.
o If you purchased Class Y 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 Class Y shares when that firm (or its designee) has
received your order. Your order will receive the Class Y NAV 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
Class Y shares at that day's price.
25
<PAGE>
Special Requirements for Selling Shares
Account Type Special Requirements
Individual or Joint The written instructions must be signed by all persons
Tenant required to sign for transactions, exactly as their names
appear on the account.
Sole Proprietorship The written instructions must be signed by the individual
owner of the business.
UGMA, UTMA The custodian must sign the written instructions
indicating capacity as custodian.
Trust The trustee must sign the written instructions indicating
capacity as trustee. If the trustee's name is not in the
account registration, provide a currently certified copy
of the trust document.
Business or At least one person authorized by corporate resolution to
Organization act on the account must sign the written instructions.
Conservator, The written instructions must be signed by the person
Guardian or Other properly authorized by court order to act in the
Fiduciary particular fiduciary capacity.
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 is intended to protect you and Waddell & Reed from fraud. You
can obtain a signature guarantee from most banks and securities dealers, but not
from a notary public.
You may reinvest, without charge, all or part of the amount of Class A shares
you redeemed by sending to the Fund the amount you want to reinvest. The
reinvested amounts must be received by the Fund within forty-five days after the
date of your
26
<PAGE>
redemption. You may do this only once with Class A shares of the Fund.
The CDSC will not apply to the proceeds of Class B or Class C shares which are
redeemed and then reinvested in Class B or Class C shares, as applicable, within
forty-five days after such redemption. The Distributor will, with your
reinvestment, restore an amount equal to the deferred sales charge attributable
to the amount reinvested by adding the deferred sales charge amount to your
reinvestment. For purposes of determining future deferred sales charges, the
reinvestment will be treated as a new investment. You may do this only once as
to Class B shares of the Fund and once as to Class C shares of the Fund.
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, a toll-free call, 800-366-5465, connects you to a
Customer Service Representative or 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 your account information from a touch-tone phone, or from
our web site, www.waddell.com, to:
o obtain information about your accounts;
o obtain price information about other funds in the United Group; or
o request duplicate statements.
27
<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 to shareholders (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 additional copies of annual or semiannual reports or account
information.
Exchanges
You may sell your shares and buy shares of the same class of other funds in the
United Group without the payment of an additional sales charge if you buy Class
A shares or payment of a CDSC when you exchange Class B or Class C shares. For
Class B and Class C shares, the time period for the CDSC will continue to run.
In addition, exchanging Class Y shareholders may buy Class A shares of United
Cash Management, Inc.
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., United
Government Securities Fund, Inc. or 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.
Automatic Transactions for Class A, Class B and Class C Shareholders
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
28
<PAGE>
declining market, they can be an excellent way to invest for retirement, a home,
educational expenses and other long-term financial goals.
Regular Investment Plans
Automatic Investment Service
To move money from your bank account to an existing Fund account
Minimum Amount 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 in the same class
Minimum Amount 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 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 with respect to a class will be automatically paid in
additional shares of the same class 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 non-dividend
distributions with respect to a class will be automatically paid in shares
of the same class, but you will be sent a check for each dividend
distribution. However, if the dividend distribution is less than five
dollars, the distribution will be automatically paid in additional shares
of the same class of the Fund.
29
<PAGE>
3. Cash Option. You will be sent a check for your dividends, capital gains
and other distributions if the total distribution is equal to or greater
than five dollars. If the distribution is less than five dollars, it will
be automatically paid in additional shares of the same class of the Fund.
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. Distributions by the Fund that are designated by it as
exempt-interest dividends generally may be excluded by you from your gross
income for Federal income tax purposes. Dividends from the Fund's investment
company taxable income (which includes net short-term gains),if any, 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 generally are taxed at a maximum rate of 20%. None of
the dividends paid by the Fund are expected to be eligible for the dividends
received deduction allowed to corporations.
The Fund notifies you after each calendar year-end as to the amounts of
dividends and other distributions paid (or deemed paid) to you for that year.
Exempt-interest dividends paid by the Fund may be subject to state and local
income tax. 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 that 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 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
30
<PAGE>
uses in trade or business a part of a facility financed from the proceeds of
PABs.
Withholding. The Fund must withhold 31% of all taxable dividends, capital gains
and other 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, capital gains and other distributions also is required for
shareholders subject to backup withholding.
Taxes on transactions. Your redemption of Fund shares will result in a 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 Class A Fund shares through a redemption or exchange within
ninety days after your purchase and then reacquire Class A Fund shares or
acquire Class A shares of another fund in the United Group without paying a
sales charge due to the forty-five day reinvestment privilege or exchange
privilege. See "Your Account." In these cases, any gain on the disposition of
the original Class A 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; you will find
more information in the SAI. There may be other Federal, state or local tax
considerations applicable to a particular investor. You are urged to consult
your own tax adviser.
31
<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. WRIMCO and its predecessors have served as investment
manager to each of the registered investment companies in the United Group of
Mutual Funds, Waddell & Reed Funds, Inc. and Target/United Funds, Inc. since the
inception of the company. WRIMCO is located at 6300 Lamar Avenue, P.O. Box
29217, Shawnee Mission, Kansas 66201-9217.
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, and a portfolio manager for, Waddell & Reed Asset Management Company, a
former affiliate of WRIMCO. Mr. Holliday has served as the portfolio manager for
investment companies managed by WRIMCO and its predecessors since August 1979
and has been an employee of such 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.
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 in the SAI.
The management fee is payable by the Fund at the annual rate of: 0.525% of net
assets up to $500 million, 0.50% of net assets over $500 million and up to $1
billion, 0.45% of net assets over $1 billion and up to $1.5 billion, and 0.40%
of net assets over $1.5 billion.
Prior to June 30, 1999, the management fee of the Fund was calculated by adding
a group fee to a specific fee. The specific fee was computed on the Fund's NAV
as of the close of business each day at the annual rate of .10 of 1% of its net
assets. The group fee was determined on the basis of the
32
<PAGE>
combined NAVs of all the funds in the United Group and then allocated pro rata
to the Fund based on its relative net assets at the annual rates shown in the
following table:
Group Fee Rate
Annual
Group Net Group
Asset Level Fee Rate
(all dollars For Each
in millions) Level
- ------------ --------
From $0
to $750 .51 of 1%
From $750
to $1,500 .49 of 1%
From $1,500
to $2,250 .47 of 1%
From $2,250
to $3,000 .45 of 1%
From $3,000
to $3,750 .43 of 1%
From $3,750
to $7,500 .40 of 1%
From $7,500
to $12,000 .38 of 1%
Over $12,000 .36 of 1%
Management fees for the fiscal year ended September 30, 1999 were 0.50% of the
Fund's average net assets.
33
<PAGE>
Financial Highlights
The following information is to help you understand the financial performance of
the Fund's Class A and Class Y shares for the fiscal periods shown. Certain
information reflects financial results for a single Fund share. "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 by Deloitte & Touche LLP, whose independent
auditors' report, along with the Fund's financial statements for the fiscal year
ended September 30, 1999, is included in the SAI, which is available upon
request.
For a Class A share outstanding throughout each period*:
For the fiscal year ended
September 30,
---------------------------------------------
1999 1998 1997 1996 1995
----- ----- ----- ----- -----
Class A Per-Share Data
Net asset value,
beginning of
period ....................... $5.69 $5.55 $5.31 $5.27 $5.12
----- ----- ----- ----- -----
Income from investment
operations:
Net investment
income ..................... 0.31 0.32 0.34 0.34 0.35
Net realized and
unrealized gain
(loss) on
investments ................ (0.37) 0.21 0.25 0.04 0.17
----- ----- ----- ----- -----
Total from investment
operations ................... (0.06) 0.53 0.59 0.38 0.52
----- ----- ----- ----- -----
Less distributions:
Declared from net
investment income .......... (0.31) (0.32) (0.34) (0.34) (0.35)
From capital gains ........... (0.13) (0.07) (0.01) (0.00) (0.00)
In excess of capital
gains** .................... (0.00) (0.00) (0.00) (0.00) (0.02)
----- ----- ----- ----- -----
Total distributions ............ (0.44) (0.39) (0.35) (0.34) (0.37)
----- ----- ----- ----- -----
Net asset value, end
of period .................... $5.19 $5.69 $5.55 $5.31 $5.27
===== ===== ===== ===== =====
Class A Ratios/Supplemental Data
Total return*** ................ -1.22% 9.88% 11.45% 7.40% 10.63%
Net assets, end
of period (in
millions) .................... $510 $522 $474 $400 $383
Ratio of expenses to
average net
assets ....................... 0.87% 0.82% 0.78% 0.81% 0.76%
Ratio of net investment
income to average
net assets ................... 5.59% 5.72% 6.19% 6.41% 6.75%
Portfolio turnover
rate ......................... 26.83% 35.16% 19.47% 26.91% 19.07%
* On January 30, 1996, Fund shares outstanding were designated Class A
shares.
** Amount in 1999 not shown due to rounding.
*** Total return calculated without taking into account the sales load
deducted on an initial purchase.
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<PAGE>
For a Class Y share outstanding throughout each period:
For the period For the period
from 12/30/98* from 7/1/98*
to 9/30/99 to 8/25/98
-------------- --------------
Class Y Per-Share Data
Net asset value,
beginning of
period .................................... $5.65 $5.64
----- -----
Income from investment
operations:
Net investment
income .................................. 0.24 0.05
Net realized and
unrealized gain (loss)
on investments .......................... (0.33) 0.01
----- -----
Total from investment
operations ................................ (0.09) 0.06
----- -----
Less distributions:
Declared from net
investment income ....................... (0.24) (0.05)
From capital gains ........................ (0.13) (0.00)
In excess of capital
gains** ................................. (0.00) (0.00)
----- -----
Total distributions ......................... (0.37) (0.05)
----- -----
Net asset value, end
of period ................................. $5.19 $5.65
===== =====
Class Y Ratios/Supplemental Data
Total return ................................ -1.53% 1.07%
Net assets, end
of period (000
omitted) .................................. $2 $0
Ratio of expenses to
average net
assets .................................... 0.80%*** 0.61%***
Ratio of net investment
income to average
net assets ................................ 5.68%*** 5.99%***
Portfolio turnover
rate ...................................... 26.83%**** 35.16%***
* 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. Operations
recommenced on December 30, 1998.
** Amount in 1999 not shown due to rounding.
*** Annualized.
**** For the fiscal year ended September 30, 1999.
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<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
36
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United Municipal High Income Fund, Inc.
You can get more information about the Fund in--
o its Statement of Additional Information (SAI), 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. Copies of the
SAI, Annual and/or Semiannual reports may also be requested via e-mail at
[email protected].
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 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
NUP2014(12-99)
37
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UNITED MUNICIPAL HIGH INCOME FUND, INC.
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
(913) 236-2000
(800) 366-5465
December 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 the prospectus ("Prospectus")
for the United Municipal High Income Fund, Inc. (the "Fund") dated December 31,
1999, which may be obtained from the Fund or its underwriter, Waddell & Reed,
Inc., at the address or telephone number shown above.
TABLE OF CONTENTS
Performance Information ....................................... 2
Investment Strategies, Policies and Practices.................. 5
Investment Management and Other Services ...................... 33
Purchase, Redemption and Pricing of Shares .................... 39
Directors and Officers ........................................ 51
Payments to Shareholders ...................................... 57
Taxes ......................................................... 58
Portfolio Transactions and Brokerage .......................... 62
Other Information ............................................. 64
Appendix A..................................................... 66
Financial Statements .......................................... 72
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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.
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The average annual total return quotations for Class A shares as of
September 30, 1999, which is the most recent balance sheet included in this SAI,
for the periods shown were as follows:
With Without
Sales Load Sales Load
Deducted Deducted
One-year period from October 1, 1998 to
September 30, 1999: -5.42% -1.22%
Five-year period from October 1, 1994 to
September 30, 1999: 6.60% 7.53%
Ten-year period from October 1, 1989 to
September 30, 1999: 7.55% 8.02%
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.
No total return information is provided for Class B, Class C or Class Y
shares since Class B and Class C had not commenced operations, and Class Y did
not have a full year of operations, as of September 30, 1999.
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)
3
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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, 1999, the date of the most recent
balance sheet included in this SAI, is 5.26%. The yield for Class Y shares of
the Fund for the 30-day period ended on September 30, 1999 is 5.53%.
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, 1999, the date of the most
recent balance sheet included in this SAI, is 6.12%, 7.15%, 7.44%, 7.99% and
8.45% for marginal tax brackets of 15%, 28%, 31%, 36% and 39.6%, respectively.
The tax-equivalent yield for Class Y shares for the 30-day period ended on
September 30, 1999 is 6.43%, 7.51%, 7.82%, 8.40% and 8.87% for marginal tax
brackets of 15%, 28%, 31%, 36% and 39.6%, respectively.
No yield information is provided for Class B or Class C since neither had
commenced operations as of September 30, 1999.
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
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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, 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
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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"), which are
also generally referred to as private activity bonds ("PABs"). The Fund may
purchase IDBs and PABs 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 and PABs are revenue bonds
and are issued by or on behalf of public authorities to obtain funds to finance
privately operated facilities (i.e. energy and pollution control). IDBs and PABs
are also used to finance public facilities such as airports or mass transit
systems. The credit quality of IDBs and PABs 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 or
PABs.
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 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
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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 methods 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-purchase
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 (with the result that the
interest thereon is taxable), the Fund will sell the obligation as soon as
possible, but it might incur a loss upon such sale.
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.
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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 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 total 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
8
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than 25% of its total assets invested in issuers in the same geographic area,
but will not have more than 25% of its total 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 and PABs. It is likely that more than 25% of the Fund's total
assets will be invested in IDBs and PABs. As discussed above under "Municipal
Bonds," the entity responsible for payment of the principal and interest on IDBs
and PABs 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
total assets in bonds issued by entities in any one industry, it will be subject
to the risks inherent in the industry to which the issuer belongs.
For example, a hospital's gross receipts and net income available to
service its debt are influenced by demand for hospital services, the ability of
the hospital to provide the services required, management and medical
capabilities, economic developments in the service area, efforts by insurers and
government agencies to limit rates and expenses, confidence in the hospital,
service area economic developments, competition, availability and expense of
malpractice insurance, Medicaid and Medicare funding, and possible Federal
legislation limiting the rates of increase of hospital charges. Significant
events impacting the hospital industry in any one of these areas might adversely
affect the industry's ability to service its debt or to pay principal when due.
Life care facilities are an alternative form of long-term housing for the
elderly. They are subject to a wide variety of risks. Primarily, the projects
must maintain adequate occupancy levels to be able to provide revenues adequate
to maintain debt service payments. Moreover, since a portion of housing, medical
care and other services may be financed by an initial deposit it is important
that the facility maintain adequate financial reserves to secure estimated
actuarial liabilities. The ability of management to accurately forecast
inflationary cost pressures weighs importantly in the process. The facilities
may also be impacted by regulatory cost restrictions applied to health care
delivery in general, particularly state regulations or changes in Medicare and
Medicaid payments or qualifications, or restrictions imposed by medical
insurance companies. They may also face competition from alternative health care
or conventional housing facilities in the private or public sector.
Certain problems facing the generating industry in general may or may not
affect its ability to meet obligations on bonds. These problems include the
effects of (i) inflation on financing large construction programs, (ii) cost
increases and delays
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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 and PABs 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. 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
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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 20% of
its total assets would consist of taxable obligations including options, futures
contracts and other taxable derivative instruments. 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), (iii) commercial paper and (iv) repurchase
agreements. The taxable commercial paper the Fund may buy must, at the time of
purchase, be rated at least A by Standard & Poor's ("S&P"), or Moody's Investors
Service, Inc. ("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 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 (also known as the Federal National Mortgage Association), Farmers
Home Administration, Export-Import Bank of the United States, Small
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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 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.
Zero Coupon Securities
Zero coupon securities are debt obligations that do not entitle the holder
to any periodic payment of interest prior to
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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 (and include the accrued OID on a taxable
security as income) each year, even though the holder may receive no interest
payment on the security during the year. Because the Fund annually must
distribute substantially all of its taxable income and net tax-exempt income,
including any tax-exempt OID, to continue to qualify for treatment as a
regulated investment company ("RIC"), it may be required in a particular year to
distribute as a dividend an amount that is greater than the total amount of cash
it actually receives. Those 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. The Fund may realize capital gains or losses
from those sales, which would increase or decrease its taxable income and or net
capital gains.
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.
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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
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
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"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 guaranteed by the government 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-Backed and Asset-Backed Securities.
The yield characteristics of mortgage-backed and asset-backed securities differ
from those of traditional debt securities. Among the major differences are that
interest and principal payments are made more frequently, usually monthly, and
that principal may be prepaid at any time because the underlying mortgage loans
or other obligations generally may be prepaid at any time. Prepayments on a pool
of mortgage loans are influenced by a variety of economic, geographic, social
and other factors, including changes in mortgagors' housing needs, job
transfers, unemployment, mortgagors' net equity in the mortgaged properties
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and servicing decisions. Generally, however, prepayments on fixed-rate mortgage
loans will increase during a period of falling interest rates and decrease
during a period of rising interest rates. Similar factors apply to prepayments
on asset-backed securities, but the receivables underlying asset-backed
securities generally are of a shorter maturity and thus are likely to experience
substantial prepayments. Such securities, however, often provide that for a
specified time period the issuers will replace receivables in the pool that are
repaid with comparable obligations. If the issuer is unable to do so, repayment
of principal on the asset-backed securities may commence at an earlier date.
The rate of interest on mortgage-backed securities is lower than the
interest rates paid on the mortgages included in the underlying pool due to the
annual fees paid to the servicer of the mortgage pool for passing through
monthly payments to certificateholders and to any guarantor, and due to any
yield retained by the issuer. Actual yield to the holder may vary from the
coupon rate, even if adjustable, if the mortgage-backed securities are purchased
or traded in the secondary market at a premium or discount. In addition, there
is normally some delay between the time the issuer receives mortgage payments
from the servicer and the time the issuer makes the payments on the
mortgage-backed securities, and this delay reduces the effective yield to the
holder of such securities.
Yields on pass-through securities are typically quoted by investment
dealers and vendors based on the maturity of the underlying instruments and the
associated average life assumption. The average life of pass-through pools
varies with the maturities of the underlying mortgage loans. A pool's term may
be shortened by unscheduled or early payments of principal on the underlying
mortgages. Because prepayment rates of individual pools vary widely, it is not
possible to predict accurately the average life of a particular pool. In the
past, a common industry practice has been to assume that prepayments on pools of
fixed rate 30-year mortgages would result in a 12-year average life for the
pool. At present, mortgage pools, particularly those with loans with other
maturities or different characteristics, are priced on an assumption of average
life determined for each pool. In periods of declining interest rates, the rate
of prepayment tends to increase, thereby shortening the actual average life of a
pool of mortgage-related securities. Conversely, in periods of rising interest
rates, the rate of prepayment tends to decrease, thereby lengthening the actual
average life of the pool. 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
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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.
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.
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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, or in a registered
public offering. Where registration is required, the Fund may be obligated to
pay all or part of the registration expense and a considerable period may elapse
between the time it decides to seek registration and the time the Fund may be
permitted to sell a security under an effective registration statement. If,
during such a period, adverse market conditions were to develop, the Fund might
obtain a less favorable price than prevailed when it decided to seek
registration of the security.
There are risks associated with investment in restricted securities in
that there can be no assurance of a ready market for resale. Also, the
contractual restrictions on resale might prevent the Fund from reselling the
securities at a time when such sale would be desirable. Restricted securities in
which the Fund seeks to invest need not be listed or admitted to trading on a
foreign or domestic exchange and may be less liquid than listed securities.
Certain restricted securities, e.g., Rule 144A securities, may be determined to
be liquid in accordance with guidelines adopted by the Board of Directors. See
"Illiquid Investments".
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
Illiquid investments are investments that cannot be sold or disposed of in
the ordinary course of business within seven days at approximately the prices at
which they are valued. Investments currently considered to be illiquid include:
(i) repurchase agreements not terminable within seven days;
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(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, floor and collar 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. The
Fund will not enter into a repurchase transaction that will cause more than 10%
of its net assets to be invested in illiquid investments, which include
repurchase agreements not terminable within seven days. See "Illiquid
Investments." A repurchase agreement is an instrument under which the Fund
purchases a security and the seller (normally a commercial bank or
broker-dealer) agrees, at the time of purchase, that it will repurchase the
security at a specified time and price. The amount by which the resale price is
greater than the purchase price reflects an agreed-upon market interest rate
effective for the period of the agreement. The return on the securities subject
to
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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 will 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, floors,
collars, 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 move
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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.
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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 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
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markets, from structural differences in how options and futures and securities
are traded, or from imposition of daily price fluctuation limits or trading
halts. The Fund may purchase or sell options and futures contracts with a
greater or lesser value than the securities it wishes to hedge or intends to
purchase in order to attempt to compensate for differences in volatility between
the contract and the securities, although this may not be successful in all
cases. If price changes in the Fund's options or futures positions are poorly
correlated with its other investments, the positions may fail to produce
anticipated gains or result in losses that are not offset by gains in other
investments.
(3) If successful, the above-discussed strategies can reduce risk of loss
by wholly or partially offsetting the negative effect of unfavorable price
movements. However, such strategies can also reduce opportunity for gain by
offsetting the positive effect of favorable price movements. For example, if the
Fund entered into a short hedge because WRIMCO projected a decline in the price
of a security in the Fund's portfolio, and the price of that security increased
instead, the gain from that increase might be wholly or partially offset by a
decline in the price of the Financial Instrument. Moreover, if the price of the
Financial Instrument declined by more than the increase in the price of the
security, the Fund could suffer a loss. In either such case, the Fund would have
been in a better position had it not attempted to hedge at all.
(4) As described below, the Fund might be required to maintain assets as
"cover," maintain 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.
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Cover. Transactions using Financial Instruments, other than purchased
options, expose the Fund to an obligation to another party. The Fund will not
enter into any such transactions unless it owns either (1) an offsetting
("covered") position in securities or other options or futures contracts, or (2)
cash and liquid assets with a value, marked-to-market daily, sufficient to cover
its potential obligations to the extent not covered as provided in (1) above.
The Fund will comply with SEC guidelines regarding cover for these instruments
and will, if the guidelines so require, set aside cash or liquid assets in an
account with its custodian in the prescribed amount as determined daily.
Assets used as cover or held in an account cannot be sold while the
position in the corresponding Financial Instrument is open, unless they are
replaced with other appropriate assets. As a result, the commitment of a large
portion of the Fund's assets to cover or accounts could impede portfolio
management or the Fund's ability to meet redemption requests or other current
obligations.
Options. 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."
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Writing put options can serve as a limited long hedge because increases in
the value of the hedged investment would be offset to the extent of the premium
received for writing the option. However, if the security depreciates to a price
lower than the exercise price of the put option, it can be expected that the put
option will be exercised and the Fund will be obligated to purchase the security
at more than its market value. If the put option is an OTC option, the
securities or other assets used as cover would be considered illiquid to the
extent described under "Illiquid Investments."
The value of an option position will reflect, among other things, the
current market value of the underlying investment, the time remaining until
expiration, the relationship of the exercise price to the market price of the
underlying investment, the historical price volatility of the underlying
investment and general market conditions. Options that expire unexercised have
no value.
The Fund may effectively terminate its right or obligation under an option
by entering into a closing transaction. For example, the Fund may terminate its
obligation under a call or put option that it had written by purchasing an
identical call or put option; this is known as a closing purchase transaction.
Conversely, the Fund may terminate a position in a put or call option it had
purchased by writing an identical put or call option; this is known as a closing
sale transaction. Closing transactions permit the Fund to realize profits or
limit losses on an option position prior to its exercise or expiration.
A type of put that the Fund may purchase is an "optional delivery standby
commitment," which is entered into by parties selling debt securities to the
Fund. An optional delivery standby commitment gives the Fund the right to sell
the security back to the seller on specified terms. This right is provided as an
inducement to purchase the security.
Risks of Options on Securities. 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
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exercise of the option. Failure by the counterparty to do so would result in the
loss of any premium paid by the Fund as well as the loss of any expected benefit
of the transaction.
The Fund's ability to establish and close out positions in exchange-listed
options depends on the existence of a liquid market. However, there can be no
assurance that such a market will exist at any particular time. Closing
transactions can be made for OTC options only by negotiating directly with the
counterparty, or by a transaction in the secondary market if any such market
exists. There can be no assurance that the Fund will in fact be able to close
out an OTC option position at a favorable price prior to expiration. In the
event of insolvency of the counterparty, the Fund might be unable to close out
an OTC option position at any time prior to its expiration.
If the Fund were unable to effect a closing transaction for an option it
had purchased, it would have to exercise the option to realize any profit. The
inability to enter into a closing purchase transaction for a covered call option
written by the Fund could cause material losses because the Fund would be unable
to sell the investment used as cover for the written option until the option
expires or is exercised.
Options on Indices. Puts and calls on indices are similar to puts and
calls on securities or futures contracts except that all settlements are in cash
and gain or loss depends on changes in the index in question rather than on
price movements in individual securities or futures contracts. When the Fund
writes a call on an index, it receives a premium and agrees that, prior to the
expiration date, the purchaser of the call, upon exercise of the call, will
receive from the Fund an amount of cash if the closing level of the index upon
which the call is based is greater than the exercise price of the call. The
amount of cash is equal to the difference between the closing price of the index
and the exercise price of the call times a specified multiple ("multiplier"),
which determines the total dollar value for each point of such difference. When
the Fund buys a call on an index, it pays a premium and has the same rights as
to such call as are indicated above. When the Fund buys a put on an index, it
pays a premium and has the right, prior to the expiration date, to require the
seller of the put, upon the Fund's exercise of the put, to deliver to the Fund
an amount of cash if the closing level of the index upon which the put is based
is less than the exercise price of the put, which amount of cash is determined
by the multiplier, as described above for calls. When the Fund writes a put on
an index, it receives a premium and the purchaser of the put has the right,
prior to the expiration date, to require the Fund to deliver to it an amount of
cash equal to the difference between the closing level of the index and the
exercise price
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times the multiplier if the closing level is less than the exercise price.
Risks of Options on Indices. The risks of investment in options on indices
may be greater than options on securities. Because index options are settled in
cash, when the Fund writes a call on an index it cannot provide in advance for
its potential settlement obligations by acquiring and holding the underlying
securities. The Fund can offset some of the risk of writing a call index option
by holding a diversified portfolio of securities similar to those on which the
underlying index is based. However, the Fund cannot, as a practical matter,
acquire and hold a portfolio containing exactly the same securities as underlie
the index and, as a result, bears a risk that the value of the securities held
will vary from the value of the index.
Even if the Fund could assemble a portfolio that exactly reproduced the
composition of the underlying index, it still would not be fully covered from a
risk standpoint because of the "timing risk" inherent in writing index options.
When an index option is exercised, the amount of cash that the holder is
entitled to receive is determined by the difference between the exercise price
and the closing index level on the date when the option is exercised. As with
other kinds of options, the Fund as the call writer will not learn that the Fund
has been assigned until the next business day at the earliest. The time lag
between exercise and notice of assignment poses no risk for the writer of a
covered call on a specific underlying security, such as a debt security, because
there the writer's obligation is to deliver the underlying security, not to pay
its value as of a fixed time in the past. So long as the writer already owns the
underlying security, it can satisfy its settlement obligations by simply
delivering it, and the risk that its value may have declined since the exercise
date is borne by the exercising holder. In contrast, even if the writer of an
index call holds securities that exactly match the composition of the underlying
index, it will not be able to satisfy its assignment obligations by delivering
those securities against payment of the exercise price. Instead, it will be
required to pay cash in an amount based on the closing index value on the
exercise date. By the time it learns that it has been assigned, the index may
have declined, with a corresponding decline in the value of its portfolio. This
"timing risk" is an inherent limitation on the ability of index call writers to
cover their risk exposure by holding securities positions.
If the Fund has purchased an index option and exercises it before the
closing index value for that day is available, it runs the risk that the level
of the underlying index may subsequently change. If such a change causes the
exercised option to fall out-of-the-money, the Fund will be required to pay the
difference
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<PAGE>
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 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.
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<PAGE>
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.
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
29
<PAGE>
futures market are subject to margin deposit and maintenance requirements.
Rather than meeting additional margin deposit requirements, investors may close
futures contracts through offsetting transactions, which could distort the
normal relationship between the cash and futures markets. Second, the liquidity
of the futures market depends on participants entering into offsetting
transactions rather than making or taking delivery. To the extent participants
decide to make or take delivery, liquidity in the futures market could be
reduced, thus producing distortion. Third, from the point of view of
speculators, the deposit requirements in the futures market are less onerous
than margin requirements in the securities market. Therefore, increased
participation by speculators in the futures market may cause temporary price
distortions. Due to the possibility of distortion, a correct forecast of general
interest rate or debt market trends by WRIMCO may still not result in a
successful transaction. WRIMCO may be incorrect in its expectations as to the
extent of various interest rate or debt market movements or the time span within
which the movements take place.
Index Futures. The risk of imperfect correlation between movements in the
price of an index future and movements in the price of the securities that are
the subject of the hedge increases as the composition of the Fund's portfolio
diverges from the securities included in the applicable index. The price of the
index futures may move more than or less than the price of the securities being
hedged. If the price of the index future moves less than the price of the
securities that are the subject of the hedge, the hedge will not be fully
effective but, if the price of the securities being hedged has moved in an
unfavorable direction, the Fund would be in a better position than if it had not
hedged at all. If the price of the securities being hedged has moved in a
favorable direction, this advantage will be partially offset by the futures
contract. If the price of the futures contract moves more than the price of the
securities, the Fund will experience either a loss or a gain on the futures
contract that will not be completely offset by movements in the price of the
securities that are the subject of the hedge. To compensate for the imperfect
correlation of movements in the price of the securities being hedged and
movements in the price of the index futures, the Fund may buy or sell index
futures in a greater dollar amount than the dollar amount of the securities
being hedged if the historical volatility of the prices of such securities being
hedged is more than the historical volatility of the prices of the securities
included in the index. It is also possible that, where the Fund has sold index
futures contracts to hedge against decline in the market, the market may advance
and the value of the securities held in the portfolio may decline. If this
occurred, the Fund would lose money on the futures contract and also experience
a
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<PAGE>
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 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
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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, Floors and Collars. The Fund may enter into swaps, caps,
floors and collars 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 on a notional
principal amount, 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, floors and collars, 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.
The creditworthiness of firms with which the Fund enters into swaps, caps
or floors will be monitored by WRIMCO. If a firm's creditworthiness declines,
the value of the agreement would be
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<PAGE>
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 accounts 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 Fund understands that 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.
Borrowing
The Fund may borrow money, but only from banks and for emergency or
extraordinary purposes. If the Fund does borrow, its share price may be subject
to greater fluctuation until the borrowing is paid off.
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 and types of securities in which the Fund may invest,
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;
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<PAGE>
(ii) Purchase any voting securities; purchase or sell physical
commodities; however, this policy shall not prevent the Fund from
purchasing and selling futures contracts, options, forward
contracts, swaps, caps, floors ,collars and other financial
instruments; or purchase any real estate or interests in real
estate investment trusts;
(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.
The Fund may not pledge its assets in connection with any
permitted borrowings; however, this policy does not prevent the
Fund from pledging its assets in connection with its purchase and
sale of futures contracts, options, forward contracts, swaps,
caps, floors, collars and other financial instruments;
(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 futures contracts, options, forward contracts, swaps,
caps, floors, collars 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, floors, collars 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
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<PAGE>
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;
(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;
(xi) Invest more than 25% of its assets in IDBs issued for any one
industry or in any one state; or
(xii) Issue senior securities.
The following investment restrictions are not fundamental and may be
changed by the Board of Directors without shareholder approval:
(i) During normal market conditions, at least 75% of the Fund's total
assets will be invested in medium- and lower-quality municipal
bonds, which are bonds rated BBB through D by S&P, or Baa through C
by 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 total 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 total assets in IDBs and PABs
and may have 25% or more of its total 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 or PAB if it would then have more
than 5% of its total assets invested in IDBs and PABs 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.
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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 and PABs, 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 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 for the fiscal years ended September 30, 1999 and 1998
was 26.83% and 35.16%, respectively.
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,
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<PAGE>
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 WRIMCO, or an affiliate of WRIMCO, 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 & Reed Financial Services,
Inc., a holding company which 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 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
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, United Asset Strategy Fund, Inc.
since it commenced operations in March 1995, and United Small Cap Fund, Inc.
since it commenced operations in October 1999. 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 for which
Target/United Funds, Inc. is the underlying investment vehicle.
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<PAGE>
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, preparation of prospectuses for existing shareholders,
preparation of proxy statements and certain shareholder reports. A new
Accounting Services Agreement, or amendments to an existing one, may be approved
by the Fund's Board of Directors without shareholder approval.
Payments by the Fund for Management, Accounting and Shareholder Services
Under the Management Agreement, for WRIMCO's management services, the Fund
pays WRIMCO a fee as described in the Prospectus.
The management fees paid to WRIMCO for the fiscal years ended September
30, 1999, 1998 and 1997 were $2,626,158, $2,461,306 and $2,131,973,
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, Class
B and Class C 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,
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<PAGE>
microfilm and storage costs for certain documents, forms, printing and mailing
costs, and costs of legal and special services not provided by Waddell & Reed,
Inc., WRIMCO or the Agent.
Under the Accounting Services Agreement, the Fund pays the Agent a monthly
fee of one-twelfth of the annual fee shown in the following table.
Accounting Services Fee
Average
Net Asset Level Annual Fee
(all dollars in millions) Rate for Each Level
------------------------- -------------------
From $ 0 to $ 10 $ 0
From $ 10 to $ 25 $ 10,000
From $ 25 to $ 50 $ 20,000
From $ 50 to $ 100 $ 30,000
From $ 100 to $ 200 $ 40,000
From $ 200 to $ 350 $ 50,000
From $ 350 to $ 550 $ 60,000
From $ 550 to $ 750 $ 70,000
From $ 750 to $1,000 $ 85,000
$1,000 and Over $100,000
The fees paid to the Agent for the fiscal years ended September 30, 1999,
1998 and 1997 were $60,000, $60,000 and $60,000, respectively.
Since the Fund pays a management fee for investment supervision and an
accounting services fee for accounting services as discussed above, WRIMCO and
the Agent, respectively, pay all of their own expenses in providing these
services. Amounts paid by the Fund under the Shareholder Servicing Agreement are
described above. Waddell & Reed, Inc. and affiliates pay the Fund's Directors
and officers who are affiliated with WRIMCO and its affiliates. The Fund pays
the fees and expenses of the Fund's other Directors.
Waddell & Reed, Inc., under an agreement separate from the Management
Agreement, Shareholder Servicing Agreement and Accounting Services Agreement,
acts as the Fund's underwriter, i.e., sells its shares on a continuous basis.
Waddell & Reed, Inc. is not required to sell any particular number of shares,
and thus sells shares only for purchase orders received. Under this agreement,
Waddell & Reed, Inc. pays the costs of sales literature, including the costs of
shareholder reports used as sales literature, and the costs of printing the
prospectus furnished to it by the Fund. The aggregate dollar amount of
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<PAGE>
underwriting commissions for Class A shares for the fiscal years ended September
30, 1999, 1998 and 1997 were $1,439,099, $1,691,251 and $1,450,698,
respectively. The amounts retained by Waddell & Reed, Inc. for each period were
$618,700, $713,220 and $649,321, respectively.
No portion of the sales charge is reallowed to dealers. A major portion of
the sales charge for Class A shares and the contingent deferred sales charge for
Class B and Class C shares is paid to financial advisors and managers of Waddell
& Reed, Inc. Waddell & Reed, Inc. may compensate its financial advisors as to
purchases for which there is no sales or deferred 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 the Distribution and Service Plan (the "Plan") for Class A shares
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.
Under the Plans adopted by the Fund for Class B and Class C shares,
respectively, the Fund may pay Waddell & Reed, Inc., on an annual basis, a
service fee of up to 0.25% of the average daily net assets of the class to
compensate Waddell & Reed, Inc. for providing services to shareholders of that
class and/or maintaining shareholder accounts for that class and a distribution
fee of up to 0.75% of the average daily net assets of the class to compensate
Waddell & Reed, Inc. for distributing the shares of that class. The Class B Plan
and the Class C Plan each permit Waddell & Reed, Inc. to receive compensation,
through the distribution and service fee, respectively, for its distribution
activities for that class, which are similar to the distribution activities
described with respect to the Class A Plan, and for its activities in providing
personal services to shareholders of that class and/or maintaining shareholder
accounts of that class, which are similar to the corresponding activities for
which it is entitled to reimbursement under the Class A Plan.
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Waddell & Reed, Inc. offers the Fund's shares through its financial
advisors, registered representatives and sales managers ("sales force") unless
it elects, which is not currently contemplated for Class A, Class B and Class C
shares, to make distribution of shares also through other broker-dealers. In
distributing shares through its sales force, Waddell & Reed, Inc. will pay
commissions and incentives to the sales force at or about the time of sale and
will incur other expenses including 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 Class
A 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 Class A Plan also permits Waddell & Reed, Inc.
to be reimbursed for amounts it expends in compensating, training and supporting
registered financial advisors, 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 amounts of $1,114,884 and $77,821, respectively,
were paid (or accrued) by the Fund under the Class A Plan for the fiscal year
ended September 30, 1999. 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.
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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 a
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. Each Plan
is anticipated to benefit the Fund and its shareholders of the affected class
through Waddell & Reed, Inc.'s activities not only to distribute the shares of
the affected class but also to provide personal services to shareholders of that
class and thereby promote the maintenance of their accounts with the Fund. The
Fund anticipates that shareholders of a particular class 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 shareholder's share of Fund and class expenses. Increased
Fund assets may also provide greater resources with which to pursue the goal of
the Fund. Further, continuing sales of shares may also reduce the likelihood
that it will be necessary to liquidate portfolio securities, in amounts or at
times that 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 the shareholders of the affected class. Each 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 Class A Plan was also approved by the affected shareholders of
the Fund.
Among other things, each Plan provides that (i) Waddell & Reed, Inc. will
provide to the Directors of the Fund at least quarterly, and the Directors will
review, a report of amounts expended under the Plan and the purposes for which
such expenditures were made, (ii) the Plan will continue in effect only so long
as it is approved at least annually, and any material amendments thereto will be
effective only if approved, by the Directors including the Plan Directors acting
in person at a meeting called for that purpose, (iii) amounts to be paid by the
Fund under the Plan may not be materially increased without the vote of the
holders of a majority of the outstanding shares of the
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affected class 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.
PURCHASE, REDEMPTION AND PRICING OF SHARES
Determination of Offering Price
The net asset value ("NAV")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 NAV 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, 1999,
which is the most recent balance sheet included in this SAI, was as follows:
NAV per Class A share (Class A
net assets divided by Class A shares
outstanding) ...................................... $5.19
Add: selling commission (4.25% of offering
price) ............................................ .23
-----
Maximum offering price per Class A share (Class A
NAV per Class A share divided
by 95.75%) ........................................ $5.42
=====
The offering price of a Class A share is its NAV next calculated following
acceptance of a purchase order plus the sales charge. The offering price of a
Class B, Class C or a Class Y share is its NAV next calculated 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
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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 NAV 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 futures contract 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 on other days. The NAV 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 value. 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 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
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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, Class B and Class C shares, initial investments must be at
least $500 with the exceptions described in this paragraph. A minimum initial
investment of $25 is applicable to purchases made through payroll deduction for
or by employees of WRIMCO, Waddell & Reed, Inc. or their affiliates. A $50
minimum initial investment pertains to accounts for which an investor has
arranged, at the time of initial investment, to make subsequent purchases for
the account by having regular monthly withdrawals of $25 or more made from a
bank account. A $100 minimum initial investment pertains to certain exchanges of
shares from another fund in the United Group. Except with respect to certain
exchanges and automatic withdrawals from a bank account, a shareholder may make
subsequent investments of any amount. See "Exchanges for Shares of Other Funds
in the United Group."
For Class Y shares, investments by government entities or authorities or
by corporations must total at least $10 million within the first twelve months
after initial investment. There is no initial investment minimum for other Class
Y investors.
Reduced Sales Charges (Applicable to Class A Shares Only)
Account Grouping
Large purchases of Class A shares are subject to lower sales charges. The
schedule of sales charges appears in the Prospectus for Class A shares. For the
purpose of taking advantage of the lower sales charges available for large
purchases, a purchase in any of categories 1 through 7 listed below made by an
individual or deemed to be made by an individual may be grouped with purchases
in any other of these categories. References to purchases in an Individual
Retirement Account ("IRA") or other tax-advantaged 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 shares of 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);
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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, or
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"), or his or her
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).
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
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transferred to R as trustee; a purchase in the account may not be
grouped with R's individual account. (If X's spouse, Y, was
successor trustee, this purchase could be grouped with Y's
individual account.)
Account grouping as described above is available under the following
circumstances.
One-time Purchases
A one-time purchase of Class A shares in accounts eligible for grouping
may be combined for purposes of determining the availability of a reduced sales
charge. In order for an eligible purchase to be grouped, the investor must
advise Waddell & Reed, Inc. at the time the purchase is made that it is eligible
for grouping and identify the accounts with which it may be grouped.
Example: H and W open an account in the Fund and invest $100,000; at the same
time, H's parents open up two UGMA accounts for H and W's two minor
children and invest $100,000 in each child's name; the combined
purchases of Class A shares are subject to the reduced sales load
applicable to a purchase of $300,000 provided that Waddell & Reed,
Inc. is advised that the purchases are entitled to grouping.
Rights of Accumulation
If Class A shares are held in any account and an additional purchase is
made in that account or in any account eligible for grouping with that account,
the additional purchase is combined with the NAV 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 NAV 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
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<PAGE>
the name and number of the existing account(s) 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.
Letter of Intent
The benefit of a reduced sales charge for larger purchases of Class A
shares is also available under a Letter of Intent. By signing a Letter of Intent
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 Letter of Intent is accepted by Waddell &
Reed, Inc. Each purchase made from time to time under the Letter of Intent 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 Letter of Intent 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 Letter of Intent, 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 Letter of Intent indicating his intent to invest in his
own name a dollar amount sufficient to entitle him to purchase Class
A shares at the sales charge applicable to a purchase of $300,000. H
has an UGMA for his child and the Class A shares held in the account
have a NAV as of the date the Letter of Intent 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 NAV as of the date of
acceptance of the Letter of Intent 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.
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A copy of the Letter of Intent 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 Letter of Intent is 5% of the
dollar amount which must be invested under the Letter of Intent. An amount equal
to 5% of the purchase required under the Letter of Intent will be held "in
escrow." If a purchaser does not, during the period covered by the Letter of
Intent, invest the amount required to qualify for the reduced sales charge under
the terms of the Letter of Intent, 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 Letter of Intent
which is not completed will be collected by redeeming part of the shares
purchased under the Letter of Intent 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 Letter of Intent, the lower sales charge will apply.
A Letter of Intent does not bind the purchaser to buy, or Waddell & Reed,
Inc. to sell, the shares covered by the Letter of Intent.
With respect to Letters of Intent for $2,000,000 or purchases otherwise
qualifying for no sales charge under the terms of the Letter of Intent, the
initial investment must be at least $200,000.
The value of any shares redeemed during the 13-month period which were
acquired under the Letter of Intent will be deducted in computing the aggregate
purchases under the Letter of Intent.
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
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<PAGE>
paid as dividends on those acquired shares, are also taken into account.
Net Asset Value Purchases of Class A Shares
Class A shares of the Fund may be purchased at NAV by the Directors and
officers of the Fund, or of any affiliated entity of Waddell & Reed, Inc.,
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 such Director, officer, employee and
financial advisor. "Child" includes stepchild; "parent" includes stepparent.
Trusts under which the grantor and the trustee or a co-trustee are each an
eligible purchaser are also eligible for NAV purchases of Class A shares.
"Employees" include retired employees. A "retired employee" is an individual
separated from service from Waddell & Reed, Inc. or from an affiliated company,
with a vested interest in any Employee Benefit Plan sponsored by Waddell & Reed,
Inc. or any of its affiliated companies. "Employees" also include individuals
who, on November 6, 1998, were employees (including retired employees) of a
company that on that date was an affiliate of Waddell & Reed, Inc. "Financial
advisors" include retired financial advisors. A "retired financial advisor" is
any financial advisor who was, at the time of separation from service from
Waddell & Reed, Inc., a Senior Financial Advisor. A custodian under the UGMA or
UTMA purchasing for the child or grandchild of any employee or financial advisor
may purchase Class A shares at NAV whether or not the custodian himself is an
eligible purchaser.
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.
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 at the maximum public offering price, that is, the NAV plus the
highest sales charge. Some of these instances 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 Letter of Intent or Rights 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
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discounts, (ii) certain quantity discounts are required by rules of the National
Association of Securities Dealers, Inc. (as is 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 NAV are
permitted because a sales charge has already been paid on the shares exchanged.
Sales of Class A shares without a 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 responsibility and interest in the United Group and an identification
with its aims and policies. Limited reinvestments of redemptions of Class A
shares at no sales charge are permitted to attempt to protect against mistaken
or not fully informed redemption decisions. Class A shares may be issued at no
sales charge in plans of reorganization due to reduced or eliminated sales
expenses and since, in some cases, such issuance is exempted by the 1940 Act
from the otherwise applicable restrictions as to what sales charge must be
imposed. In no case in which there is a reduced or eliminated sales charge are
the interests of existing shareholders adversely affected since, in each case,
the Fund receives the NAV per share of all shares sold or issued.
Redemptions
The Prospectus gives information as to redemption procedures. Redemption
payments are made within seven days from receipt of request 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 determining NAV.
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
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cash up to the lesser of $250,000 or 1% of its NAV during any 90-day period for
any one shareholder.
Flexible Withdrawal Service for Class A, Class B and Class C 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, Class B or Class C 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 Class A shares
while the Service is in effect because it would result in duplication of sales
charges. Class B and Class C shares redeemed under the Service are not subject
to a CDSC. Applicable forms to start the Service are available through Waddell &
Reed Services Company.
The maximum amount of the withdrawal for monthly, quarterly, semiannual
and annual withdrawals is 2%, 6%, 12% and 24% respectively of the value of your
account at the time the Service is established. The withdrawal proceeds are not
subject to the deferred sales charge, but only within these percentage
limitations. The minimum withdrawal is $50. The Service, and this exclusion from
the deferred sales charge, does not apply to a one-time withdrawal.
To qualify for the Service, you must have invested at least $10,000 in
Class A, Class B or Class C shares which you still own of any of the funds in
the United Group; or, you must own Class A, Class B or Class C shares having a
value of at least $10,000. The value for this purpose is the value at the
current offering price.
You can choose to have your shares redeemed to receive:
1. a monthly, quarterly, semiannual or annual payment of $50 or more;
2. a monthly payment, which will change each month, equal to one-twelfth
of a percentage of the value of the shares in the account (you select the
percentage); or
3. a monthly or quarterly payment, which will change each month or
quarter, by redeeming a number of shares fixed by you (at least five shares).
Shares are redeemed on the 20th day of the month in which the payment is
to be made, or on the prior business day if the 20th is
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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 of a class you have made
available for the Service are paid in additional shares of that class. All
payments under the Service are made by redeeming shares, which may involve a
gain or loss for tax purposes. To the extent that payments exceed dividends and
distributions, the number of shares you own will decrease. When all of the
shares in your account are redeemed, you will not receive any further payments.
Thus, the payments are not an annuity, 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., United
Municipal Bond Fund, Inc. or United Cash Management, Inc. 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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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, provided you already own Class A shares of the fund.
The shares of United Cash Management, Inc. which you designate for automatic
exchange must be worth at least $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 the Fund and use the proceeds to
purchase Class Y shares of the Fund if you meet the criteria for purchasing
Class Y shares.
Class B Share Exchanges
You may exchange Class B shares of the Fund for Class B shares of other
Funds in the United Group without charge.
The redemption of the Fund's Class B shares as part of an exchange is not
subject to the deferred sales charge. For purposes of computing the deferred
sales charge, if any, applicable to the redemption of the shares acquired in the
exchange, those acquired shares are treated as having been purchased when the
original redeemed shares were purchased.
You may have a specific dollar amount of Class B shares of United Cash
Management, Inc. automatically exchanged each month into Class B shares of the
Fund or any other fund in the United Group, provided you already own Class B
shares of a fund. The shares of United Cash Management, Inc. which you designate
for automatic exchange must be worth at least $100, which may be allocated among
different funds 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.
Class C Share Exchanges
You may exchange Class C shares of the Fund for Class C shares of other
Funds in the United Group without charge.
The redemption of the Fund's Class C shares as part of an exchange is not
subject to the deferred sales charge. For purposes of computing the deferred
sales charge, if any, applicable to the redemption of the shares acquired in the
exchange, those acquired shares are treated as having been purchased when the
original redeemed shares were purchased.
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You may have a specific dollar amount of Class C shares of United Cash
Management, Inc. automatically exchanged each month into Class C shares of the
Fund or any other fund in the United Group, provided you already own Class C
shares of a fund. The shares of United Cash Management, Inc. which you designate
for exchange must be worth at least $100, which may be allocated among different
funds 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.
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 NAV 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 Fund offers a one-time reinvestment privilege that allows you to
reinvest without charge all or part of any amount of Class A shares you redeem
at the NAV next calculated after the Fund receives the returned amount. Your
written request to reinvest and the amount to be reinvested must be received
within forty-five days after your redemption request was received, and the Fund
must be offering Class A shares at the time your reinvestment request is
received. You can do this only once as to Class A shares of the Fund.
There is also a reinvestment privilege for Class B and Class C shares
under which you may reinvest all or part of any amount of Class B or Class C
shares you redeemed and have the corresponding amount of the deferred sales
charge, if any, which you paid restored to your account by adding the amount of
that charge to the amount you are reinvesting in Class B or Class C shares, as
applicable. If Class B or Class C shares of the Fund are then being offered, you
can put all or part of your redemption payment back into the Class B or Class C
shares of the Fund at the NAV next calculated after you have returned the
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amount. Your written request to do this must be received within forty-five days
after your redemption request was received. You can do this only once as to
Class B shares of the Fund and only once as to Class C shares of the Fund. For
purposes of determining future deferred sales charges, the reinvestment will be
treated as a new investment.
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 NAV 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 are 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.
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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
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. and
Waddell & Reed Services Company; formerly, President of each of the funds in the
Fund Complex; formerly, Chairman of the Board of Directors of Waddell & Reed
Asset Management Company, a former affiliate of Waddell & Reed Financial, Inc.
Date of birth: February 11, 1945.
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 of 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 of Garney Companies, Inc., a
specialty utility contractor. Date of birth: January 9, 1939.
DAVID P. GARDNER
263 West 3rd Avenue
San Mateo, California 94402
Chairman and Chief Executive Officer of George S. and Delores Dor'e Eccles
Foundation; Director of First Security Corp., a bank holding company, and
Director of Fluor Corp., a company with interests in coal; formerly, President
of Hewlett Foundation. Date of birth: March 24, 1933.
LINDA K. GRAVES*
1 South West Cedar Crest Road
Topeka, Kansas 66606
First Lady of Kansas. Date of birth: July 29, 1953.
JOSEPH HARROZ, JR.
125 South Creekdale Drive
Norman, Oklahoma 73072
General Counsel of the Board of Regents at the University of Oklahoma;
Adjunct Professor of Law at the University of Oklahoma
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College of Law; Managing Member, Harroz Investments, L.L.C.; formerly, Vice
President for Executive Affairs of the University of Oklahoma; formerly,
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; Chairman of the Board of Directors, Gilliland & Hayes, P.A., a law
firm; formerly, President of Gilliland & Hayes, P.A.; formerly, Director of
Central Properties, Inc. Date of birth: December 11, 1919.
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.; Director and Treasurer
of Waddell & Reed Services Company; Chairman, Chief Executive Officer, President
and Director of Fiduciary Trust Company of New Hampshire, an affiliate of
Waddell & Reed, Inc.; formerly, Vice President of each of the funds in the Fund
Complex; formerly, Director and Treasurer of Waddell & Reed Asset Management
Company; formerly, President of Waddell & Reed Services 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 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; Chairman of the Board of Directors of Austin, Calvert & Flavin, Inc., an
affiliate of WRIMCO; formerly, President, Chief Executive Officer, Chief
Investment Officer and Director of Waddell & Reed Asset Management Company. Date
of birth: December 8, 1942.
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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 its 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
each of the funds 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. Date of birth:
April 27, 1928.
RONALD C. REIMER
2601 Verona Road
Mission Hills, Kansas 66208
Retired. Co-founder and teacher at Servant Leadership School of Kansas
City; Director and Vice President of Network Rehabilitation Services; Board
Member, Member of Executive Committee and Finance Committee of Truman Medical
Center; 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; Director
of Columbian Bank and Trust. Date of birth: April 9, 1953.
ELEANOR B. SCHWARTZ
1213 West 95th Court, Chartwell 4
Kansas City, Missouri 64114
Professor of Business Administration, University of Missouri-Kansas City;
formerly, 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.
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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 seven 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 he or she
has no authority or responsibility with respect to the 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 each elected a position as Director Emeritus.
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<PAGE>
The funds in the United Group, Target/United Funds, Inc. and Waddell &
Reed Funds, Inc. pay to each Director, effective October 1, 1999, an annual base
fee of $50,000, plus $3,000 for each meeting of the Board of Directors attended
and effective January 1, 2000, an annual base fee of $52,000 plus $3,250 for
each meeting of the Board of Directors attended, plus reimbursement of expenses
for attending such meeting 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. (prior to October 1, 1999, the funds in
the United Group, Target/United Funds, Inc. and Waddell & Reed Funds, Inc. paid
to each Director an annual base fee of $48,000 plus $2,500 for each meeting of
the Board of Directors attended plus reimbursement of expenses of attending such
meeting 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 are divided among the funds in
the United Group, Target/United Funds, Inc. and Waddell & Reed Funds, Inc. based
on the funds' relative size. During the Fund's fiscal year ended September 30,
1999, the Fund's Directors received the following fees for service as a
director:
COMPENSATION TABLE
Total
Aggregate Compensation
Compensation From Fund
From and Fund
Director Fund Complex*
- -------- ------------ ------------
Robert L. Hechler $ 0 $ 0
Henry J. Herrmann 0 0
Keith A. Tucker 0 0
James M. Concannon 1,284 59,000
John A. Dillingham 1,284 59,000
David P. Gardner 1,230 56,500
Linda K. Graves 1,284 59,000
Joseph Harroz, Jr. 1,209 56,500
John F. Hayes 1,284 59,000
Glendon E. Johnson 1,295 59,500
William T. Morgan 1,284 59,000
Ronald C. Reimer 1,202 56,500
Frank J. Ross, Jr. 1,284 59,000
Eleanor B. Schwartz 1,295 59,500
Frederick Vogel III 1,295 59,500
*No pension or retirement benefits have been accrued as a part of Fund expenses.
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<PAGE>
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, 1999, all of the Fund's Directors and officers as a
group owned less than 1% of the outstanding shares of the Fund. The following
table sets forth information with respect to the Fund, as of November 30, 1999,
regarding the ownership of the Fund's shares.
Shares owned
Name and Address Beneficially
of Beneficial Owner Class or of Record Percent
- ------------------- ----- ------------ -------
Estelle Wilson Tod Class B 4,403 10.32%
Evelyn T. Miller
7300 W 107th St Apt 328
Overland Park KS 66212-6603
Jeanne D. Perks Class B 9,862 23.11%
P. O. Box 18074
Reno NV 89510-0074
Ruth M. Weinhardt Ttee Class B 2,260 5.30%
U/A dtd 11-16-93
3800 Carmen Dr #206A
Lake Oswego OR 97035-2459
George F. Minges Class B 6,942 16.27%
2924 Kelly St
Hayward CA 94541-3409
Donald E. Spurrier (TOD) Class B 2,975 6.97%
18 N Kansas
Chanute KS 66720-1529
Sandra E. Buck (TOD) Class C 1,964 3.78%
Jeffrey T. Miller
3427 F Rd
Clifton CO 81520-8432
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Kathleen R. Class C 5,888 11.33%
Christopherson (TOD)
9 Claymont Ct
Springfield IL 62704-1207
Randy J. Dircks & Class C 7,944 15.28%
Kathryn M. Holipitza Jtn Ros
109 Jennifer Dr
Chester NH 03036-4121
Robert Kaplan Tr Class C 9,460 18.20%
U/A dtd 1-26-86
L & S Kaplan Family Trust
6585 Hawarden Dr
Riverside CA 92506-5109
Alex Morgan & Class C 2,790 5.37%
Maryann Morgan Jtn Ros
15 Cable Rd
Levittown PA 19057-1607
Northwest Shoe Corp Class C 2,978 5.73%
DBA Oggs Shoes
2901 Brooks Southdate Mall
Missoula MT 59801-7722
Jo Anne Y Nagel (TOD) Class C 2,926 5.63%
4490 Laurel Grove Rd
Federalsburg MD 21632-2257
Steven Murachver Class C 7,630 14.68%
42 Middle St
West Newbury MA 01985-2108
Waddell & Reed, Inc. Class Y 382 100.00%
Attn: Mike Strohm
P. O. Box 29217
Shawnee Mission KS 66201-9217
PAYMENTS TO SHAREHOLDERS
General
There are two sources for the payments the Fund makes to you as a
shareholder of a class of shares of the Fund, other than payments when you
redeem your shares. The first source is net investment income, which is derived
from the interest and earned discount on the securities the Fund holds, less
expenses (which will vary by class). The second source is net realized capital
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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. However, a total dividend and/or distribution amount
less than five dollars will be automatically 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 NAV without
any sales charge. The NAV 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 receive dividends and distributions on Fund shares in cash,
you can thereafter reinvest them (or distributions only) in shares of the Fund
at NAV (i.e., with no sales charge) next calculated after receipt by Waddell &
Reed, Inc. of the amount clearly identified as a reinvestment. The reinvestment
must be within forty-five days after the payment.
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TAXES
General
The Fund has qualified since inception for treatment as a RIC under 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 and net short-term capital gains that it distributes to its
shareholders. To continue to qualify for treatment as a RIC, the Fund must
distribute to its shareholders for each taxable year at least 90% 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.
If the Fund failed to qualify for treatment as a RIC for any taxable year,
(a) it would be taxed as an ordinary corporation on the full amount of its
taxable income for that year (even is it distributed that income to its
shareholders) and (b) the shareholders would treat all distributions out of its
earnings and profits, including distributions that otherwise would be
"exempt-interest dividends" described in the following paragraph and
distributions of net capital gain, as taxable dividends (that is, ordinary
income). In addition, the Fund could be required to recognize unrealized gains,
pay substantial taxes and interest and make substantial distributions before
requalifying for RIC treatment.
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Dividends paid by the Fund will qualify as "exempt-interest dividends,"
and thus will be excludable from shareholders' gross income, if the Fund
satisfies the additional requirement that, at the close of each quarter of its
taxable year, at least 50% of the value of its total assets consists of
securities the interest on which is excludable from gross income under section
103(a); the Fund intends to continue to satisfy this requirement. The aggregate
dividends excludable from all shareholders' gross income may not exceed the
Fund's net tax-exempt income. The Fund uses the average annual method to
determine the exempt income portion of each distribution, and the percentage of
income designated as tax-exempt for any particular distribution may be
substantially different from the percentage of the Fund's income that was
tax-exempt during the period covered by the distribution. The treatment of
dividends from the Fund under state and local income tax laws may differ from
the treatment thereof under the Code.
Up to 85% of social security and railroad retirement benefits may be
included in taxable income for recipients whose adjusted gross income (including
income from tax-exempt sources such as the Fund) plus 50% of their benefits
exceeds certain base amounts. Exempt-interest dividends from the Fund still are
tax-exempt to the extent described above; they are only included in the
calculation of whether a recipient's income exceeds the established amounts.
If the Fund invests in any instruments that generate taxable income, under
the circumstances described in the Prospectus, distributions of the interest
earned thereon will be taxable to shareholders as ordinary income to the extent
of the Fund's earnings and profits. Moreover, if the Fund realizes capital gains
as a result of market transactions, any distribution of the 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.
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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. For these purposes the Fund may defer into the next
calendar year net capital losses incurred between November 1 and the end of the
current calendar year. It is the Fund's policy to pay sufficient taxable
dividends and distributions each year to avoid imposition of the Excise Tax.
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 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.
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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. 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 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. In addition, these rules may
postpone the recognition of a loss that would otherwise be recognized under the
mark-to-market rules discussed above. The regulations under section 1092 also
provide certain "wash sale" rules, which apply to transactions where a position
is sold at a loss and a new offsetting position is acquired within a prescribed
period, and "short sale" rules applicable to straddles. If the Fund makes
certain elections, the amount, character and timing of the recognition of gains
and losses from the affected straddle positions will be determined under rules
that vary according to the elections made. Because only a few of the regulations
implementing the straddle rules have been promulgated, the tax consequences of
straddle transactions to the Fund are not entirely clear.
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
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position, 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 identical property. In addition, if the appreciated
financial position is itself a short sale such a contract, acquisition of the
underlying property or substantially identical property will be deemed a
constructive sale. The foregoing will not apply, however, to any transaction
during any taxable year that otherwise would be treated as a constructive sale
if the transaction is closed within 30 days after the end of that year and the
Fund holds the appreciated financial position unhedged for 60 days after that
closing (i.e., at no time during that 60-day period is the Fund's risk of loss
regarding that position reduced by reason of certain specified transactions with
respect to substantially identical or related property, such as having an option
to sell, being contractually obligated to sell, making a short sale, or granting
an option to buy substantially identical stock or securities).
Zero Coupon Securities
The Fund may acquire zero coupon or other securities issued with 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 tax-exempt income, including any accrued OID, to satisfy the
Distribution Requirement and (with respect to taxable income) avoid imposition
of the Excise Tax, it may be required in a particular year to distribute as a
dividend an amount that is greater than the total amount of cash it actually
receives. Those distributions will be made from the Fund's cash assets or from
the proceeds of sales of portfolio securities, if necessary. The Fund may
realize capital gains or losses from those sales, which would increase or
decrease its investment company taxable income and/or net capital 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.
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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, including
accounts affiliated with WRIMCO. Under current written procedures, 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, subject to certain variances provided for in the written
procedures. 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
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
71
<PAGE>
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 the commission 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.
72
<PAGE>
OTHER INFORMATION
The Shares of the Fund
The Fund offers four classes of shares: Class A, Class B, Class C and
Class Y. 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
appropriately limited to that class; Class A shares are subject to an initial
sales charge and to an ongoing distribution and/or service fee; Class B and
Class C are subject to a contingent deferred sales charge and to ongoing
distribution and service fees; Class B shares convert at the end of the seventh
calendar year following the first year of purchase to Class A shares; 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 classes, dividends and liquidation proceeds of Class B shares and
Class C shares are expected to be lower than for Class A shares, which in turn
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 a fundamental investment policy, which require
shareholder approval will be presented to shareholders at a meeting called by
the Board of Directors for such purpose.
Special meetings of shareholders may be called for any purpose upon
receipt by the Fund of a request in writing signed by shareholders holding not
less than 25% of all shares entitled to vote at such meeting, provided certain
conditions stated in the Bylaws 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
73
<PAGE>
directors. To the extent that Section 16(c) of the 1940 Act applies to the Fund,
the directors are required to call a meeting of shareholders for the purpose of
voting upon the question of removal of any director when requested in writing to
do so by the shareholders of record of not less than 10% of the Fund's
outstanding shares.
Each share (regardless of class) has one vote. All shares of the Fund vote
together as a single class, except as to any matter for which a separate vote of
any class is required by the 1940 Act, and except as to any matter which affects
the interests of one or more particular classes, in which case only the
shareholders of the affected classes are entitled to vote, each as a separate
class.
74
<PAGE>
APPENDIX A
The following are descriptions of some of the ratings of securities that
the Fund may use. The Fund may also use ratings provided by other nationally
recognized statistical rating organizations in determining the securities
eligible for investment.
DESCRIPTION OF BOND RATINGS
Standard & Poor's, a division of The McGraw-Hill Companies, Inc. An S&P
corporate or municipal bond rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment of creditworthiness may take into consideration obligors such as
guarantors, insurers or lessees.
The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.
The ratings are based on current information furnished to S&P by the
issuer or obtained by S&P from other sources it considers reliable. S&P does not
perform an audit in connection with any rating and may, on occasion, rely on
unaudited financial information. The ratings may be changed, suspended or
withdrawn as a result of changes in, or unavailability of, such information, or
based on other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of default -- capacity and willingness of the obligor as to the
timely payment of interest and repayment of principal in accordance with
the terms of the obligation;
2. Nature of and provisions of the obligation;
3. Protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
A brief description of the applicable S&P rating symbols and their
meanings follow:
AAA -- Debt rated AAA has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
75
<PAGE>
AA -- Debt rated AA also qualifies as high quality debt. Capacity to pay
interest and repay principal is very strong, and debt rated AA differs from AAA
issues only in small degree.
A -- Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
BBB -- Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B, CCC, CC, C - Debt rated BB, B, CCC, CC and C is regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal in accordance with the terms of the obligation. BB
indicates the lowest degree of speculation and C the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major exposures
to adverse conditions.
BB -- Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating.
B -- Debt rated B has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB or BB- rating.
CCC -- Debt rated CCC has a currently indefinable vulnerability to
default, and is dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal. In the
event of adverse business, financial or economic conditions, it is not likely to
have the capacity to pay interest and repay principal. The CCC rating category
is also used for debt subordinated to senior debt that is assigned an actual or
implied B or B- rating.
76
<PAGE>
CC -- The rating CC is typically applied to debt subordinated to senior
debt that is assigned an actual or implied CCC rating.
C -- The rating C is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC- debt rating. The C rating may be
used to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
CI -- The rating CI is reserved for income bonds on which no interest is
being paid.
D -- Debt rated D is in payment default. It is used when interest payments
or principal payments are not made on a due date even if the applicable grace
period has not expired, unless S&P believes that such payments will be made
during such grace periods. The D rating will also be used upon a filing of a
bankruptcy petition if debt service payments are jeopardized.
Plus (+) or Minus (-) -- To provide more detailed indications of credit
quality, the ratings from AA to CCC may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.
NR -- Indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
Debt Obligations of issuers outside the United States and its territories
are rated on the same basis as domestic corporate and municipal issues. The
ratings measure the creditworthiness of the obligor but do not take into account
currency exchange and related uncertainties.
Bond Investment Quality Standards: Under present commercial bank
regulations issued by the Comptroller of the Currency, bonds rated in the top
four categories (AAA, AA, A, BBB, commonly known as "investment grade" ratings)
are generally regarded as eligible for bank investment. In addition, the laws of
various states governing legal investments may impose certain rating or other
standards for obligations eligible for investment by savings banks, trust
companies, insurance companies and fiduciaries generally.
Moody's Investors Service, Inc. A brief description of the applicable MIS
rating symbols and their meanings follows:
77
<PAGE>
Aaa -- Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuations of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A -- Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa -- Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Some bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
NOTE: Bonds within the above categories which possess the strongest
investment attributes are designated by the symbol "1" following the rating.
Ba -- Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
78
<PAGE>
Caa -- Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
Ca -- Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
DESCRIPTION OF MUNICIPAL NOTE RATINGS
An S&P note rating reflects the liquidity factors and market access risks
unique to notes. Notes maturing in 3 years or less will likely receive a note
rating. Notes maturing beyond 3 years will most likely receive a long-term debt
rating. The following criteria will be used in making that assessment.
- -- Amortization schedule (the larger the final maturity relative to other
maturities, the more likely the issue is to be treated as a note).
- -- Source of Payment (the more the issue depends on the market for its
refinancing, the more likely it is to be treated as a note.)
The note rating symbols and definitions are as follows:
SP-1 Strong capacity to pay principal and interest. Issues determined to
possess very strong characteristics are given a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the term of
the notes.
SP-3 Speculative capacity to pay principal and interest.
Moody's Short-Term Loan Ratings -- MIS ratings for state and municipal
short-term obligations will be designated Moody's Investment Grade (MIG). This
distinction is in recognition of the differences between short-term credit risk
and long-term risk. Factors affecting the liquidity of the borrower are
uppermost in importance in short-term borrowing, while various factors of major
importance in bond risk are of lesser importance over the short run. Rating
symbols and their meanings follow:
MIG 1 -- This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or demonstrated
broad-based access to the market for refinancing.
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<PAGE>
MIG 2 -- This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
MIG 3 -- This designation denotes favorable quality. All security elements
are accounted for but this is lacking the undeniable strength of the preceding
grades. Liquidity and cash flow protection may be narrow and market access for
refinancing is likely to be less well established.
MIG 4 -- This designation denotes adequate quality. Protection commonly
regarded as required of an investment security is present and although not
distinctly or predominantly speculative, there is specific risk.
DESCRIPTION OF COMMERCIAL PAPER RATINGS
An S&P commercial paper rating is a current assessment of the likelihood
of timely payment of debt considered short-term in the relevant market. Ratings
are graded into several categories, ranging from "A-1" for the highest quality
obligations to D for the lowest. Issuers rated A are further referred to by use
of numbers 1, 2 and 3 to indicate the relative degree of safety. Issues assigned
an A rating (the highest rating) are regarded as having the greatest capacity
for timely payment. An A-1 designation indicates that the degree of safety
regarding timely payment is strong. Those issues determined to possess extremely
strong safety characteristics are denoted with a plus sign (+) designation. An
A-2 rating indicates that capacity for timely payment is satisfactory; however,
the relative degree of safety is not as high as for issues designated A-1.
Issues rated A-3 have adequate capacity for timely payment; however, they are
more vulnerable to the adverse effects of changes in circumstances than
obligations carrying the higher designations. Issues rated B are regarded as
having only speculative capacity for timely payment. A C rating is assigned to
short-term debt obligations with a doubtful capacity for payment. Debt rated D
is in payment default, which occurs when interest payments or principal payments
are not made on the date due, even if the applicable grace period has not
expired, unless S&P believes that such payments will be made during such grace
period.
MIS commercial paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. MIS employs the designations of Prime 1, Prime 2 and
Prime 3, all judged to be investment grade, to indicate the relative repayment
capacity of rated issuers. Issuers rated Prime 1 have a superior capacity for
80
<PAGE>
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.
81
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1999
Principal
Amount in
Thousands Value
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 $ 1,048,750
The Medical Clinic Board of the City of Ozark,
Alabama, First Mortgage Revenue Bonds (United
States Health & Housing Foundation, Inc.
Project), Series 1988-A,
10.0%, 10-1-2015 .............................. 1,000 1,031,530
Total ......................................... 2,080,280
ALASKA - 0.41%
City of Seward, Alaska, Revenue Bonds, 1996
(Alaska Sealife Center Project),
7.65%, 10-1-2016 .............................. 2,000 2,067,500
ARIZONA - 1.48%
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 4,269,063
Hayden-Winkelman Unified School District No.
41 of Gila County, Arizona, Capital
Appreciation Refunding Bonds, Series 1995,
0.0%, 7-1-2010 ................................ 6,145 3,302,937
Total ......................................... 7,572,000
ARKANSAS - 0.30%
City of Little Rock, Arkansas, Capital
Improvement Revenue Bonds (Parks and
Recreation Projects), Series 1998A,
5.8%, 1-1-2023 ................................ 1,600 1,506,000
See Notes to Schedule of Investments on page .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1999
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
CALIFORNIA - 5.96%
Foothill/Eastern Transportation Corridor Agency:
Toll Road Refunding Revenue Bonds:
Toll Road Revenue Bonds,
Series 1995A,
0.0%, 1-1-2013 (A) ............................ $11,925 $ 10,061,719
Series 1999 Convertible Capital Appreciation Bonds:
0.0%, 1-15-2023 (A) ........................... 10,000 5,362,500
0.0%, 1-15-2020 (A) ........................... 4,000 2,170,000
California Statewide Communities Development
Authority, Hospital Refunding Revenue Certificates
of Participation, Series 1993, Cedars-Sinai
Medical Center, Inverse Floating Rate
Security (INFLOS),
7.17%, 11-1-2015 (B) .......................... 4,000 3,610,000
Sierra Kings Health Care District Revenue
Bonds, Series 1996,
6.5%, 12-1-2026 ............................... 3,000 2,733,750
Transmission Agency of Northern California,
California-Oregon Transmission Project,
Revenue Refunding Bonds, 1993 Series A,
Residual Interest Bonds (RIBS),
7.339%, 4-29-2024 (B) ......................... 2,500 2,284,375
Certificates of Participation (1991 Capital
Improvement Project), Bella Vista Water
District (California),
7.375%, 10-1-2017 ............................. 1,500 1,590,000
Carson Redevelopment Agency (California),
Redevelopment Project Area No. 1,
Tax Allocation Bonds, Series 1993B,
6.0%, 10-1-2016 ............................... 1,500 1,524,375
Kings County Waste Management Authority,
Solid Waste Revenue Bonds, Series 1994
(California),
7.2%, 10-1-2014 ............................... 940 1,028,125
Total ......................................... 30,364,844
See Notes to Schedule of Investments on page .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1999
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
COLORADO - 4.01%
City and County of Denver, Colorado,
Revenue Bonds (Jewish Community Centers
of Denver Project), Series 1994:
8.25%, 3-1-2024 ............................... $ 2,390 $ 2,491,575
7.875%, 3-1-2019 .............................. 815 839,450
Hospital Revenue Bonds (Steamboat Springs
Health Care Association Project),
Series 1999,
5.7%, 9-15-2023 ............................... 3,700 3,297,625
Colorado Housing and Finance Authority,
Single Family Program Bonds:
1998 Series A-2 Senior Bonds (AMT),
6.6%, 5-1-2028 ................................ 2,500 2,634,375
1997 Series B-2, Senior Bonds (AMT),
7.0%, 5-1-2026 ................................ 2,250 2,418,750
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 2,951,038
Series 1997,
7.125%, 12-1-2016 ............................. 2,000 2,025,000
City of Black Hawk, Colorado, Device Tax
Revenue Bonds, Series 1998,
5.625%, 12-1-2021 ............................. 1,250 1,190,625
Bachelor Gulch Metropolitan District,
Eagle County, Colorado, General Obligation
Bonds, Series 1996,
7.0%, 12-1-2015 ............................... 1,095 1,116,900
Eaglebend Affordable Housing Corporation,
Multifamily Housing Project Revenue
Refunding Bonds, Series 1997A,
6.45%, 7-1-2021 ............................... 1,000 1,003,750
See Notes to Schedule of Investments on page .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1999
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
COLORADO (Continued)
Mountain Village Metropolitan District, San
Miguel County, Colorado, General
Obligation Refunding Bonds, Series 1992,
8.1%, 12-1-2011 ............................... $ 465 $ 501,619
Total ......................................... 20,470,707
CONNECTICUT - 1.88%
Eastern Connecticut Resource Recovery
Authority, Solid Waste Revenue Bonds
(Wheelabrator Lisbon Project),
Series 1993A,
5.5%, 1-1-2014 ................................ 5,250 4,895,625
State of Connecticut Health and
Education Facilities Authority,
Revenue Bonds, Edgehill Issue
Series A (Fixed Rate),
6.875%, 7-1-2027 .............................. 2,300 2,363,250
Connecticut Development Authority, Pollution
Control Revenue Refunding Bonds (The
Connecticut Light and Power Company
Project - 1993B Series),
5.95%, 9-1-2028 ............................... 2,500 2,337,500
Total ......................................... 9,596,375
DISTRICT OF COLUMBIA - 1.06%
Certificates of Participation, Series 1993,
District of Columbia,
7.3%, 1-1-2013 ................................ 3,000 3,225,000
District of Columbia Revenue Bonds
(National Public Radio Issue),
Series 1992,
7.625%, 1-1-2013 .............................. 2,000 2,160,000
Total ......................................... 5,385,000
See Notes to Schedule of Investments on page .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1999
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
FLORIDA - 4.16%
St. Johns County Industrial Development
Authority (Florida):
Health Care Revenue Bonds, Tax Exempt
Series 1997A (Bayview Project),
7.1%, 10-1-2026 ............................... $ 4,000 $ 4,255,000
Industrial Development Revenue Bonds,
Series 1997A (Professional Golf Hall of
Fame Project),
5.5%, 3-1-2017 ................................ 1,000 986,250
Lake County, Florida, Resource Recovery
Industrial Development Refunding Revenue
Bonds (NRG/Recovery Group Project),
Series 1993A,
5.95%, 10-1-2013 .............................. 4,850 4,831,812
Sanford Airport Authority (Florida),
Industrial Development Revenue Bonds
(Central Florida Terminals, Inc. Project):
Series 1995A,
7.75%, 5-1-2021 ............................... 4,000 4,295,000
Series 1995C,
7.5%, 5-1-2021 ................................ 500 531,875
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 3,060,000
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 1,992,625
City of Fort Walton Beach, First Mortgage
Industrial Development Revenue Bonds,
Series 1986 (Ft. Walton Beach Ventures,
Inc. Project),
10.5%, 12-1-2016 .............................. 1,240 1,277,200
Total ......................................... 21,229,762
See Notes to Schedule of Investments on page .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1999
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
GEORGIA - 1.59%
Coffee County Hospital Authority (Georgia),
Revenue Anticipation Certificates (Coffee
Regional Medical Center, Inc. Project),
Series 1997A,
6.75%, 12-1-2016 .............................. $ 5,000 $ 5,075,000
Savannah Economic Development Authority,
First Mortgage Revenue Bonds (Senior Care
Group, Inc. - Shadowmoss Project),
Series 1999A,
6.75%, 7-1-2029 ............................... 3,185 3,017,788
Total ......................................... 8,092,788
HAWAII - 0.52%
Department of Transportation of the State
of Hawaii, Special Facility Revenue Bonds
(Continental Airlines, Inc.), Series 1997,
5.625%, 11-15-2027 ............................ 3,000 2,651,250
IDAHO - 0.44%
Idaho Health Facilities Authority, Hospital
Revenue Refunding Bonds, Series 1992
(IHC Hospitals, Inc.), Indexed Inverse Floating
Rate Securities (Indexed INFLOS),
6.65%, 2-15-2021 (B) .......................... 2,000 2,220,000
ILLINOIS - 3.40%
Illinois Health Facilities Authority:
Revenue Refunding Bonds, Series
1995A (Fairview Obligated Group),
7.125%, 8-15-2017 ............................. 3,525 3,736,500
Revenue Refunding Bonds, Series 1998
(Lifelink Corporation Obligated Group),
5.7%, 2-15-2024 ............................... 1,750 1,594,687
City of Hillsboro, Montgomery County,
Illinois, General Obligation Bonds
(Alternate Revenue Source), Series 1991,
7.5%, 12-1-2021 ............................... 2,640 2,814,900
Illinois Development Finance Authority
Revenue Bonds, Series 1993C (Catholic
Charities Housing Development
Corporation Project),
6.1%, 1-1-2020 ................................ 2,500 2,471,875
See Notes to Schedule of Investments on page .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1999
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
ILLINOIS (Continued)
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 $ 2,135,000
Village of Hodgkins, Cook County, Illinois,
Tax Increment Revenue Refunding Bonds,
Series 1995A,
7.625%, 12-1-2013 ............................. 1,750 1,881,250
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 1,541,250
Village of Bourbonnais, Kankakee County,
Illinois, Sewerage Revenue Bonds,
Series 1993,
7.25%, 12-1-2012 .............................. 1,085 1,136,538
Total ......................................... 17,312,000
INDIANA - 2.73%
Indiana Health Facility Financing Authority:
Hospital Revenue Bonds (Charity Obligated
Group), Series 1999D,
5.5%, 11-15-2024 .............................. 5,000 4,706,250
Revenue Refunding Bonds, Series 1998
(Greenwood Village South Project),
5.625%, 5-15-2028 ............................. 4,100 3,628,500
Hospital Revenue Refunding Bonds, Series 1996
(Hancock Memorial Hospital and Health Services),
6.125%, 8-15-2017 ............................. 1,250 1,235,937
Hospital Revenue Bonds, Series 1992
(Fayette Memorial Hospital Project),
7.2%, 10-1-2022 ............................... 1,000 1,053,750
City of Goshen, Indiana, Revenue Bonds,
Series 1998 (Greencroft Obligated Group),
5.75%, 8-15-2028 .............................. 2,000 1,792,500
City of Carmel, Indiana, Retirement Rental
Housing Revenue Refunding Bonds (Beverly
Enterprises - Indiana, Inc. Project),
Series 1992,
8.75%, 12-1-2008 .............................. 1,400 1,513,750
Total ......................................... 13,930,687
See Notes to Schedule of Investments on page .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1999
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
IOWA - 2.90% Iowa Finance Authority:
Community Provider Revenue Bonds (Boys and
Girls Home and Family Services, Inc. Project),
Series 1998,
6.25%, 12-1-2028 .............................. $ 4,000 $ 3,715,000
Community Rehabilitation Providers
Revenue Bonds (Lutheran Children's Home
Society - Bremwood Project), Series 1998,
5.8%, 12-1-2024 ............................... 1,500 1,411,875
City of Creston, Iowa, Industrial Development
Revenue Bonds, Series 1997A (CF Processing,
L.C. Project),
8.0%, 8-1-2026 ................................ 5,000 5,062,500
City of Cedar Rapids, Iowa, First Mortgage
Revenue Bonds, Series 1998-A (Cottage Grove
Place Project),
5.875%, 7-1-2028 .............................. 5,000 4,606,250
Total ......................................... 14,795,625
KANSAS - 3.57%
Kansas Development Finance Authority:
Revenue Bonds (Village Shalom Obligated Group),
Series 1998 AA,
5.625%, 11-15-2028 ............................ 5,500 4,860,625
Multifamily Housing Revenue Bonds, Series 1998K
(Pioneer Olde Town Apartments Project),
6.5%, 10-1-2030 ............................... 3,200 2,972,000
Community Provider Loan Program (Community
Living Opportunities, Inc.), Series
1992A Revenue Bonds,
8.875%, 9-1-2011 .............................. 2,790 2,912,063
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 3,650,000
City of Prairie Village, Kansas, Revenue Bonds,
(Claridge Court Project), Series 1993A:
8.75%, 8-15-2023 .............................. 1,000 1,111,250
8.5%, 8-15-2004 ............................... 770 854,700
City of Wichita, Kansas, Health Care Facilities
Refunding and Improvement Revenue Bonds,
Series I, 1999 (Larksfield Place),
5.875%, 5-15-2027 ............................. 2,000 1,855,000
Total ......................................... 18,215,638
See Notes to Schedule of Investments on page .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1999
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
KENTUCKY - 0.91%
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 .............................. $ 4,000 $ 3,580,000
County of Perry, Kentucky, Solid Waste
Disposal Revenue Bonds (TJ International
Project), Series 1994,
7.0%, 6-1-2024 ................................ 1,000 1,055,000
Total ......................................... 4,635,000
LOUISIANA - 1.34%
Louisiana Public Facilities Authority:
Revenue Bonds (Progressive Healthcare
Providers/Louisiana, Inc. Project), Series 1998:
6.375%, 10-1-2020 ............................. 2,000 1,865,000
6.375%, 10-1-2028 ............................. 2,000 1,832,500
Board of Commissioners of the Port of New
Orleans, Industrial Development Revenue
Refunding Bonds (Continental Grain Company
Project), Series 1993,
7.5%, 7-1-2013 ................................ 2,000 1,992,500
LaFourche Parish Home Mortgage Authority,
Tax-Exempt Capital Appreciation Refunding
Bonds, Series 1990-B, Class B-2,
0.0%, 5-20-2014 ............................... 3,300 1,167,375
Total ......................................... 6,857,375
MAINE - 0.55%
Maine Veterans' Homes, Revenue Bonds,
1995 Series,
7.75%, 10-1-2020 .............................. 2,810 2,820,537
MARYLAND - 0.66%
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 3,347,500
See Notes to Schedule of Investments on page .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1999
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
MASSACHUSETTS - 6.38%
Massachusetts Industrial Finance Agency:
First Mortgage Revenue Bonds, Reeds
Landing Project, Series 1993,
8.625%, 10-1-2023 ............................. $ 9,945 $ 10,976,794
Resource Recovery Revenue Bonds (SEMASS
Project), Series 1991B,
9.25%, 7-1-2015 ............................... 5,000 5,456,250
Resource Recovery Revenue Refunding Bonds
(Ogden Haverhill Project),
Series 1998A Bonds,
5.6%, 12-1-2019 ............................... 2,500 2,384,375
Revenue Bonds, Beaver Country Day School
Issue, Series 1992, Subseries A,
8.1%, 3-1-2008 ................................ 1,320 1,359,600
Massachusetts Municipal Wholesale Electric
Company, Power Supply System Revenue Bonds,
1993 Series A, Inverse Floating Rate
Security (INFLOS),
7.17%, 7-1-2018 (B) ........................... 8,000 7,310,000
Massachusetts Health and Educational
Facilities Authority, Revenue Bonds,
Beth Israel Hospital Issue, Series G-4,
Inverse Floating Rate Securities (INFLOS),
8.674%, 7-1-2025 (B) .......................... 5,000 5,037,500
Total ......................................... 32,524,519
MINNESOTA - 0.87%
City of Victoria, Minnesota, Private School
Facility Revenue Bonds (Holy Family Catholic
High School Project), Series 1999A,
5.85%, 9-1-2024 ............................... 3,200 3,052,000
City of Coon Rapids, Minnesota, Multifamily
Housing Revenue Bonds (Wedum Redwood
Terrace, LLC Project), Series 1999A,
6.375%, 11-1-2029 ............................. 1,450 1,402,875
Total ......................................... 4,454,875
MISSISSIPPI - 0.43%
Lowndes County, Mississippi, Solid Waste
Disposal and Pollution Control Refunding
Revenue Bonds (Weyerhaeuser Company
Project), Series 1992B, Indexed Inverse
Floating/Fixed Term Bonds,
6.7%, 4-1-2022 ................................ 2,000 2,195,000
See Notes to Schedule of Investments on page .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1999
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
MISSOURI - 5.54%
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 $ 4,860,800
8.25%, 4-1-2002 ............................... 345 363,113
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 3,168,844
Multifamily Housing Revenue Bonds (Village
Green Apartments Project), Series 1998,
6.25%, 4-1-2030 ............................... 1,750 1,634,062
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 4,631,250
Missouri Housing Development Commission,
Multifamily Housing Revenue Bonds (The Mansion
Apartments Phase II Project), Series 1999,
6.17%, 10-1-2032 .............................. 3,915 3,645,844
Tax Increment Financing Commission of Kansas City,
Missouri, Tax Increment Refunding and Improvement
Revenue Bonds (Briarcliff West Project),
Series 1999,
6.0%, 8-1-2021 ................................ 2,250 2,134,688
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 2,089,687
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 2,155,000
See Notes to Schedule of Investments on page .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1999
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
MISSOURI (Continued)
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 $ 1,599,375
The Industrial Development Authority of the
City of Springfield, Missouri,
Industrial Development Refunding Revenue
Bonds (Health Care Realty of Springfield,
Ltd. Project), Series 1988,
10.25%, 12-1-2010 ............................. 1,015 1,022,856
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 ............................... 900 949,221
Total ......................................... 28,254,740
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 2,636,700
NEW HAMPSHIRE - 1.11%
State of New Hampshire, Turnpike System Revenue
Bonds, 1994 Series C, Residual Interest Bonds (RIBS),
6.351%, 2-1-2024 (B) .......................... 5,600 4,676,000
Lisbon Regional School District, New
Hampshire, General Obligation Capital
Appreciation School Bonds,
0.0%, 2-1-2013 ................................ 1,500 965,625
Total ......................................... 5,641,625
See Notes to Schedule of Investments on page .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1999
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
NEW JERSEY - 1.88%
First Mortgage Revenue Fixed Rate Bonds
(Winchester Gardens at Ward Homestead
Project) Series 1996A,
8.625%, 11-1-2025 ............................. $ 3,000 $ 3,348,750
New Jersey Economic Development Authority:
Senior Mortgage Revenue and Revenue Refunding
Bonds (Arbor Glen of Bridgewater Project),
Series 1998A,
6.0%, 5-15-2028 ............................... 3,250 3,050,938
Economic Development Bonds, Kapkowski
Road Landfill Reclamation Improvement
District Project (City of Elizabeth),
Series 1998A:
6.375%, 4-1-2018 .............................. 2,385 2,390,962
0.0%, 4-1-2011 ................................ 1,740 819,975
Total ......................................... 9,610,625
NEW MEXICO - 0.71%
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 3,644,375
NEW YORK - 1.37%
Tompkins County Industrial Development
Agency, Life Care Community Revenue Bonds,
1994 (Kendal at Ithaca, Inc. Project),
7.875%, 6-1-2024 .............................. 4,035 4,251,881
New York City Municipal Water Finance Authority,
Water and Sewer System Revenue Bonds, Inverse
Rate Securities, Fiscal 1994 Series E,
7.06%, 6-15-2012 (B) .......................... 2,750 2,732,813
Total.......................................... 6,984,694
NORTH CAROLINA - 0.94%
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 ................................ 3,075 2,609,906
City of Durham, North Carolina, Multifamily
Housing Revenue Bonds (Ivy Commons Project),
Series 1997,
8.0%, 3-1-2029 ................................ 2,250 2,193,750
Total ......................................... 4,803,656
See Notes to Schedule of Investments on page .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1999
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
NORTH DAKOTA - 0.66%
City of Grand Forks, North Dakota, Senior
Housing Revenue Bonds (4000 Valley
Square Project), Series 1997:
6.25%, 12-1-2034 .............................. $ 2,000 $ 1,917,500
6.375%, 12-1-2034 ............................. 1,500 1,445,625
Total ......................................... 3,363,125
OHIO - 1.85%
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 .............................. 6,000 5,677,500
City of Toledo, Ohio, Multifamily Housing
Mortgage Revenue Bonds, Series 1998-A
(Hillcrest Apartments Project),
6.125%, 12-1-2029 ............................. 4,000 3,750,000
Total ......................................... 9,427,500
OKLAHOMA - 2.57%
Bixby Public Works Authority, Utility
System Revenue Bonds, Refunding
Series 1994,
7.25%, 11-1-2019 .............................. 2,685 2,809,181
The Clinton Public Works Authority,
Refunding and Improvement Revenue
Bonds, Series 1994,
6.25%, 1-1-2019 ............................... 2,575 2,652,250
Oklahoma County Industrial Authority,
Industrial Development Revenue Bonds:
1986 Series A (Westlake Nursing Center
Project):
10.25%, 9-1-2016 .............................. 905 919,616
10.125%, 9-1-2006 ............................. 430 436,979
1986 Series B (Choctaw Nursing
Center Project):
10.25%, 9-1-2016 (C) .......................... 1,230 713,400
10.125%, 9-1-2006 (C) ......................... 525 304,500
The Broken Arrow Public Golf Authority
(Broken Arrow, Oklahoma), Recreational
Facilities Revenue Bonds, Series 1995,
7.25%, 8-1-2020 ............................... 2,025 2,068,031
See Notes to Schedule of Investments on page .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1999
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
OKLAHOMA (Continued)
Trustees of the Oklahoma Ordnance Works
Authority, Industrial Development Revenue
Refunding Bonds (A.P. Green Industries,
Inc. Project), Series 1992,
8.5%, 5-1-2008 ................................ $ 1,600 $ 1,706,000
The Guthrie Public Works Authority
(Guthrie, Oklahoma), Utility System
Revenue Bonds, Series 1994A,
6.75%, 9-1-2019 ............................... 1,415 1,476,906
Total ......................................... 13,086,863
OREGON - 2.21%
Klamath Falls Intercommunity Hospital
Authority, Gross Revenue Bonds,
Series 1994 (Merle West Medical Center
Project),
7.1%, 9-1-2024 ................................ 3,500 3,692,500
City of Klamath Falls, Oregon, Tax-Exempt
Senior Lien Electric Revenue Refunding
Bonds (Klamath Cogeneration Project),
Series 1999,
6.0%, 1-1-2025 ................................ 3,000 2,838,750
Myrtle Creek Building Authority, Gross
Revenue Bonds, Series 1996A (Myrtle Creek
Golf Course Project),
8.0%, 6-1-2021 (C) ............................ 3,000 2,550,000
Hospital Facility Authority of Clackamas
County, Oregon, Senior Living Facility
Revenue Bonds (Mary's Woods at Marylhurst,
Inc. Project), Series 1999A Fixed Rate
Revenue Bonds,
6.625%, 5-15-2029 ............................. 2,250 2,196,563
Total ......................................... 11,277,813
PENNSYLVANIA - 5.38%
Monroeville Hospital Authority, Hospital
Revenue Bonds, Series of 1992 (Forbes
Health System):
7.0%, 10-1-2013 ............................... 3,630 3,593,700
6.25%, 10-1-2015 .............................. 2,110 2,065,163
Delaware County Authority (Pennsylvania),
First Mortgage Revenue Bonds
(Riddle Village Project),
Series 1994,
8.25%, 6-1-2022 ............................... 4,000 4,675,000
See Notes to Schedule of Investments on page .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1999
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
PENNSYLVANIA (Continued)
Pennsylvania Higher Educational Facilities
Authority (Commonwealth of Pennsylvania),
Revenue Bonds (Allegheny General Hospital),
1991 Series A,
7.125%, 9-1-2007 .............................. $ 3,670 $ 3,647,062
Philadelphia Authority for Industrial
Development, Commercial Development Revenue
Refunding Bonds (Doubletree Guest Suites
Project), Series 1997A,
6.5%, 10-1-2027................................ 3,500 3,543,750
Clearfield Hospital Authority, Hospital
Revenue and Refunding Bonds (Clearfield
Hospital Project), Series 1994,
6.875%, 6-1-2016 .............................. 3,350 3,458,875
Allentown Area Hospital Authority, Hospital
Revenue Bonds (Sacred Heart Hospital of
Allentown), Series A of 1993,
6.75%, 11-15-2014 ............................. 2,865 3,004,669
Susquehanna Area Regional Airport Authority,
Airport Facilities Revenue Bonds (Aero
Harrisburg, LLC Project), Series 1999,
5.5%, 1-1-2024 ................................ 2,000 1,760,000
South Wayne County Water and Sewer Authority
(Wayne County, Pennsylvania), Sewer Revenue
Bonds, Series of 1992,
8.2%, 4-15-2013 ............................... 1,665 1,698,300
Total ......................................... 27,446,519
RHODE ISLAND - 0.41%
City of Providence, Rhode Island, Special
Obligation Tax Increment Bonds, Series D,
6.65%, 6-1-2016 ............................... 2,000 2,067,500
SOUTH CAROLINA - 2.95%
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 3,825,000
Tax-Exempt Series 1998B,
9.0%, 12-1-2011 ............................... 2,460 2,460,000
See Notes to Schedule of Investments on page .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1999
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
SOUTH CAROLINA (Continued)
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 $ 1,508,750
0.0%, 1-1-2036 ................................ 11,000 907,500
Senior Current Interest Bonds, Series 1998A,
5.25%, 1-1-2023 ............................... 2,000 1,735,000
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 2,485,725
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 2,117,500
Total ......................................... 15,039,475
SOUTH DAKOTA - 0.41%
South Dakota Health and Educational
Facilities Authority, Refunding Revenue
Bonds (Westhills Village Retirement
Community Issue), Series 1993,
7.25%, 9-1-2013 ............................... 2,000 2,077,500
TENNESSEE - 0.68%
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 2,075,000
Upper Cumberland Gas Utility District
(of Cumberland County, Tennessee),
Gas System Revenue Bonds, Series 1996,
7.0%, 3-1-2016 ................................ 1,400 1,408,750
Total ......................................... 3,483,750
TEXAS - 5.26%
AllianceAirport Authority, Inc., Special
Facilities Revenue Bonds:
Series 1991 (American Airlines, Inc. Project),
7.0%, 12-1-2011 ............................... 4,700 5,181,750
Series 1996 (Federal Express Corporation Project),
6.375%, 4-1-2021 .............................. 4,000 4,035,000
See Notes to Schedule of Investments on page .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1999
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
TEXAS (Continued)
Lubbock Health Facilities Development Corporation,
Fixed Rate First Mortgage Revenue Bonds
(Carillon, Inc. Project), Series 1999A,
6.5%, 7-1-2019 ................................ $ 6,000 $ 5,737,500
Gulf Coast Waste Disposal Authority, Waste
Disposal Revenue Bonds (Valero Energy
Corporation Project):
Series 1998,
5.6%, 4-1-2032 ................................ 3,490 3,097,375
Series 1999,
5.7%, 4-1-2032 ................................ 2,000 1,802,500
Alvarado Industrial Development Corporation,
Industrial Development Revenue Bonds
(Rich-Mix Products of Texas, Inc. Project),
Series 1996,
7.75%, 3-1-2010 ............................... 2,795 2,774,038
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 2,264,662
City of Houston, Texas, Airport System
Special Facilities Revenue Bonds
(Continental Airlines, Inc. Terminal
Improvement Projects), Series 1997B,
6.125%, 7-15-2017 ............................. 2,000 1,937,500
Total ......................................... 26,830,325
UTAH - 4.86%
Tooele County, Utah, Hazardous Waste
Treatment Revenue Bonds (Union Pacific
Corporation/USPCI, Inc. Project),
Series A,
5.7%, 11-1-2026 ............................... 17,000 15,512,500
Intermountain Power Agency, Power Supply
Revenue Refunding Bonds, 1993 Series A,
Inverse Floating Rate Securities (INFLOS),
7.266%, 7-1-2021 (B) .......................... 5,950 5,481,437
Utah Housing Finance Agency, Revenue Bonds
(RHA Community Services of Utah, Inc.
Project), Series 1997A,
6.875%, 7-1-2027 .............................. 2,440 2,446,100
See Notes to Schedule of Investments on page .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1999
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
UTAH (Continued)
Carbon County, Utah, Solid Waste Disposal
Refunding Revenue Bonds (Sunnyside Cogeneration
Project and Sunnyside Generation, LLC):
Series 1999A,
7.1%, 8-15-2023 ............................... $ 1,270 $ 1,270,000
Series 1999B,
0.0%, 8-15-2024 ............................... 390 64,350
Total ......................................... 24,774,387
VERMONT - 2.07%
Vermont Industrial Development Authority,
Mortgage Revenue Bonds, Wake Robin
Corporation Project, Series 1993A:
8.75%, 4-1-2023 ............................... 4,465 5,173,819
8.75%, 3-1-2023 ............................... 2,500 2,896,875
Vermont Economic Development Authority,
Mortgage Revenue Bonds, Wake Robin
Corporation Project, Series 1999A,
6.3%, 3-1-2033 ................................ 2,500 2,493,750
Total ......................................... 10,564,444
VIRGINIA - 2.77%
Peninsula Ports Authority of Virginia,
Port Facility Refunding Revenue Bonds
(Ziegler Coal Project), Series 1997 (Non-AMT),
6.9%, 5-2-2022 ................................ 5,000 4,862,500
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 3,490,631
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 2,985,000
Pocahontas Parkway Association, Route 895
Connector, Toll Road Revenue Bonds, Senior
Capital Appreciation Bonds, Series 1998B,
0.0%, 8-15-2018 ............................... 9,000 2,778,750
Total ......................................... 14,116,881
See Notes to Schedule of Investments on page .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1999
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
WASHINGTON - 0.95%
Port of Anacortes, Washington, Revenue and
Refunding Bonds, 1998 Series A (AMT),
5.625%, 9-1-2016 .............................. $ 3,790 $ 3,562,600
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 1,279,040
Total ......................................... 4,841,640
WEST VIRGINIA - 0.31%
Upshur County, West Virginia, Solid Waste
Disposal Revenue Bonds (TJ International
Project), Series 1995,
7.0%, 7-15-2025 ............................... 1,500 1,586,250
WISCONSIN - 2.06%
Wisconsin Health and Educational Facilities
Authority, Revenue Bonds, Series 1995:
National Regency of New Berlin, Inc.
Project,
8.0%, 8-15-2025 ............................... 4,480 4,894,400
Hess Memorial Hospital Association, Inc.
Project,
7.75%, 11-1-2015 .............................. 3,400 3,740,000
City of Superior, Wisconsin, Water Supply
Facilities Revenue Refunding Bonds
(Superior Water, Light and Power Company
Project), Series 1996,
6.125%, 11-1-2021 ............................. 1,910 1,845,537
Total ......................................... 10,479,937
TOTAL MUNICIPAL BONDS - 93.43% $476,365,586
(Cost: $477,745,976)
TOTAL SHORT-TERM SECURITIES - 4.98% $ 25,383,451
(Cost: $25,383,451)
TOTAL INVESTMENT SECURITIES - 98.41% $501,749,037
(Cost: $503,129,427)
CASH AND OTHER ASSETS, NET OF LIABILITIES - 1.59% 8,118,011
NET ASSETS - 100.00% $509,867,048
See Notes to Schedule of Investments on page .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1999
Notes to Schedule of Investments
(A) The security does not bear interest for an initial period of time and
subsequently becomes interest bearing.
(B) 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, 1999.
(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.
<PAGE>
UNITED MUNICIPAL HIGH INCOME FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1999
(In Thousands, Except for Per Share and Share Amounts)
Assets
Investment securities - at value
(Notes 1 and 3) ........................................... $501,749
Cash ....................................................... 221
Receivables:
Interest .................................................. 8,530
Fund shares sold .......................................... 1,314
Investment securities sold ................................ 997
Prepaid insurance premium ................................... 11
--------
Total assets ............................................ 512,822
--------
Liabilities
Payable to Fund shareholders ................................ 2,474
Dividends payable ........................................... 302
Accrued service fee (Note 2) ................................ 97
Accrued transfer agency and dividend
disbursing (Note 2) ....................................... 55
Accrued distribution fee (Note 2) ........................... 7
Accrued management fee (Note 2) ............................. 7
Accrued accounting services fee (Note 2) .................... 5
Other ...................................................... 8
--------
Total liabilities ....................................... 2,955
--------
Total net assets ...................................... $509,867
========
Net Assets
$1.00 par value capital stock
Capital stock ............................................. $ 98,306
Additional paid-in capital ................................ 412,960
Accumulated undistributed income (loss):
Distribution in excess of net realized
gain on investment transactions ......................... (19)
Net unrealized depreciation in value of
investments ............................................. (1,380)
--------
Net assets applicable to outstanding
units of capital ...................................... $509,867
========
Net asset value per share (net assets divided
by shares outstanding)
Class A ..................................................... $5.19
Class Y ..................................................... $5.19
Capital shares outstanding
Class A ..................................................... 98,305,330
Class Y ..................................................... 377
Capital shares authorized ..................................... 300,000,000
See notes to financial statements.
<PAGE>
UNITED MUNICIPAL HIGH INCOME FUND, INC.
STATEMENT OF OPERATIONS
For the Fiscal Year Ended SEPTEMBER 30, 1999
(In Thousands)
Investment Income
Interest and amortization (Note 1B) ......................... $33,977
-------
Expenses (Note 2):
Investment management fee ................................. 2,626
Service fee - Class A ..................................... 1,115
Transfer agency and dividend disbursing - Class A ......... 481
Distribution fee - Class A ................................ 78
Accounting services fee ................................... 60
Custodian fees ............................................ 24
Audit fees ................................................ 17
Legal fees ................................................ 9
Other ..................................................... 169
-------
Total expenses .......................................... 4,579
-------
Net investment income ................................. 29,398
-------
Realized and Unrealized Gain (Loss) on Investments
(Notes 1 and 3)
Realized net gain on investments ............................ 721
Unrealized depreciation in value of
investments during the period ............................. (37,310)
-------
Net loss on investments ................................... (36,589)
-------
Net decrease in net assets resulting
from operations ....................................... $(7,191)
=======
See notes to financial statements.
<PAGE>
UNITED MUNICIPAL HIGH INCOME FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
(Dollars In Thousands)
For the fiscal year
ended September 30,
----------------------------
1999 1998
Increase (Decrease) in Net Assets ----------- ------------
Operations:
Net investment income ...................... $29,398 $ 28,519
Realized net gain on investments ........... 721 12,638
Unrealized appreciation (depreciation) ..... (37,310) 5,793
-------- --------
Net increase (decrease) in net assets
resulting from operations .............. (7,191) 46,950
-------- --------
Distributions to shareholders (Note 1D):*
From net investment income:
Class A .................................. (29,398) (28,519)
Class Y** ................................ --- ---
From realized net gains on investment
transactions:
Class A .................................. (12,257) (6,027)
Class Y** ................................ --- ---
In excess of realized capital gains:
Class A .................................. (19) ---
Class Y** ................................ --- ---
-------- --------
(41,674) (34,546)
-------- --------
Capital share transactions:
Proceeds from sale of shares:
Class A (12,671,972 and 11,013,539
shares, respectively) .................. 69,498 62,198
Class Y (354 and 3,493 shares,
respectively) .......................... 2 20
Proceeds from reinvestment of dividends
and/or capital gains distribution:
Class A (6,355,577 and 4,977,786
shares, respectively) .................. 34,776 27,654
Class Y (23 and 15 shares,
respectively)** ........................ --- ---
Payments for shares redeemed:
Class A (12,422,841 and 9,576,509
shares, respectively) .................. (67,739) (53,817)
Class Y (0 and 3,508 shares,
respectively) .......................... --- (20)
-------- --------
Net increase in net assets resulting
from capital share transactions ....... 36,537 36,035
-------- --------
Total increase (decrease) ............. (12,328) 48,439
Net Assets
Beginning of period .......................... 522,195 473,756
-------- --------
End of period ................................ $509,867 522,195
======== ========
Undistributed net investment income ........ $--- $---
==== ====
*See "Financial Highlights" on pages - .
**Amounts not shown due to rounding.
See notes to financial statements.
<PAGE>
UNITED MUNICIPAL HIGH INCOME FUND, INC.
FINANCIAL HIGHLIGHTS
Class A Shares
For a Share of Capital Stock Outstanding
Throughout Each Period:
For the fiscal year ended
September 30,
------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
Net asset value,
beginning of
period ............... $5.69 $5.55 $5.31 $5.27 $5.12
----- ----- ----- ----- -----
Income from investment
operations:
Net investment
income.............. 0.31 0.32 0.34 0.34 0.35
Net realized and
unrealized gain
(loss) on
investments ........ (0.37) 0.21 0.25 0.04 0.17
----- ----- ----- ----- -----
Total from investment
operations ........... (0.06) 0.53 0.59 0.38 0.52
----- ----- ----- ----- -----
Less distributions:
Declared from net
investment income .. (0.31) (0.32) (0.34) (0.34) (0.35)
From capital gains ... (0.13) (0.07) (0.01) (0.00) (0.00)
In excess of capital
gains* ............. (0.00) (0.00) (0.00) (0.00) (0.02)
----- ----- ----- ----- -----
Total distributions..... (0.44) (0.39) (0.35) (0.34) (0.37)
----- ----- ----- ----- -----
Net asset value, end
of period ............ $5.19 $5.69 $5.55 $5.31 $5.27
===== ===== ===== ===== =====
Total return** ......... -1.22% 9.88% 11.45% 7.40% 10.63%
Net assets, end
of period (in
millions)............. $510 $522 $474 $400 $383
Ratio of expenses to
average net
assets ............... 0.87% 0.82% 0.78% 0.81% 0.76%
Ratio of net investment
income to average
net assets ........... 5.59% 5.72% 6.19% 6.41% 6.75%
Portfolio turnover
rate ................. 26.83% 35.16% 19.47% 26.91% 19.07%
*Amount in 1999 not shown due to rounding.
**Total return calculated without taking into account the sales load deducted on
an initial purchase.
See notes to financial statements.
<PAGE>
UNITED MUNICIPAL HIGH INCOME FUND, INC.
FINANCIAL HIGHLIGHTS
Class Y Shares
For a Share of Capital Stock Outstanding
Throughout Each Period:
For the period For the period
from 12/30/98* from 7/1/98*
to 9/30/99 to 8/25/98
------------------- -------------------
Net asset value,
beginning of
period ............... $5.65 $5.64
----- -----
Income from investment
operations:
Net investment
income.............. 0.24 0.05
Net realized and
unrealized gain (loss)
on investments ..... (0.33) 0.01
----- -----
Total from investment
operations ........... (0.09) 0.06
.................... ----- -----
Less distributions:
Declared from net
investment income .. (0.24) (0.05)
From capital gains ... (0.13) (0.00)
In excess of capital
gains** ............ (0.00) (0.00)
----- -----
Total distributions (0.37) (0.05)
----- -----
Net asset value, end
of period ............ $5.19 $5.65
===== =====
Total return ........... -1.53% 1.07%
Net assets, end
of period (000
omitted).............. $2 $0
Ratio of expenses to
average net
assets ............... 0.80%*** 0.61%***
Ratio of net investment
income to average
net assets ........... 5.68%*** 5.99%***
Portfolio turnover
rate ................. 26.83%**** 35.16%***
*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. Operations recommenced on
December 30, 1998.
**Amount in 1999 not shown due to rounding.
***Annualized.
****For the fiscal year ended September 30, 1999.
See notes to financial statements.
<PAGE>
UNITED MUNICIPAL HIGH INCOME FUND, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
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 seek to provide a high level
of income which is not subject to Federal income tax. 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.
<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. As of June
30, 1999, the fee is payable by the Fund at the annual rate of 0.525% of net
assets up to $500 million, 0.50% of net assets over $500 million and up to $1
billion, 0.45% of net assets over $1 billion and up to $1.5 billion, and 0.40%
of net assets over $1.5 billion. Prior to June 30, 1999, the fee consisted 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 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 the fee daily.
Pursuant to assignment of the Investment Management Agreement between the
Fund and Waddell & Reed, Inc. ("W&R"), Waddell & Reed Investment Management
Company ("WRIMCO"), a wholly owned subsidiary of W&R, serves as the Fund's
investment manager.
The Fund has an Accounting Services Agreement with Waddell & Reed Services
Company ("WARSCO"), a wholly owned subsidiary of W&R. Under the agreement,
WARSCO acts as the agent in providing accounting services and assistance to the
Fund and pricing daily the value of shares of the Fund. For these services, the
Fund pays WARSCO a monthly fee of one-twelfth of the annual fee shown in the
following table.
Accounting Services Fee
Average
Net Asset Level Annual Fee
(all dollars in millions) Rate for Each Level
------------------------- -------------------
From $ 0 to $ 10 $ 0
From $ 10 to $ 25 $ 10,000
From $ 25 to $ 50 $ 20,000
From $ 50 to $ 100 $ 30,000
From $ 100 to $ 200 $ 40,000
From $ 200 to $ 350 $ 50,000
From $ 350 to $ 550 $ 60,000
From $ 550 to $ 750 $ 70,000
From $ 750 to $1,000 $ 85,000
$1,000 and Over $100,000
<PAGE>
The Fund also pays WARSCO a monthly per account charge for transfer agency
and dividend disbursement services of $1.3125 for each shareholder account which
was in existence at any time during the prior month, plus $0.30 for each account
on which a dividend or distribution of cash or shares was paid in that month.
The Fund also reimburses W&R and WARSCO for certain out-of-pocket costs.
As principal underwriter for the Fund's shares, W&R received gross sales
commissions (which are not an expense of the Fund) of $1,439,099, out of which
W&R paid sales commissions of $820,399 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 $20,095, 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 $144,206,857, while proceeds from maturities
and sales aggregated $137,546,936. Purchases of short-term securities aggregated
$463,351,846, while proceeds from maturities and sales aggregated $446,356,030.
No U.S. Government securities were bought or sold during the period ended
September 30, 1999.
For Federal income tax purposes, cost of investments owned at September
30, 1999 was $503,242,234, resulting in net unrealized depreciation of
$1,493,197, of which $14,858,737 related to appreciated securities and
$16,351,934 related to depreciated securities.
NOTE 4 -- Federal Income Tax Matters
For Federal income tax purposes, the Fund realized capital gain net income
of $720,801 during its fiscal year ended September 30, 1999, of which a portion
was paid to shareholders during the period ended September 30, 1999. Remaining
capital gain net income will be distributed to the Fund's shareholders.
NOTE 5 -- Multiclass Operations
The Fund is authorized to offer four classes of shares, Class A, Class B,
Class C and Class Y, each of which have equal rights
<PAGE>
as to assets and voting privileges. Only Class A and Class Y shares were issued
during the six months ended September 30, 1999. Class Y shares are not subject
to a sales charge on purchases, are not subject to a Rule 12b-1 Distribution and
Service Plan and are subject to a separate transfer agency and dividend
disbursement services fee structure. A comprehensive discussion of the terms
under which shares of either class are offered is contained in the Prospectus
and the Statement of Additional Information for the Fund.
Income, non-class specific expenses, and realized and unrealized gains and
losses are allocated daily to each class of shares based on the value of their
relative net assets as of the beginning of each day adjusted for the prior day's
capital share activity.
<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, 1999, and the related statement of operations for
the fiscal year then ended, the statements of changes in net assets for each of
the two fiscal years in the period then ended, and the financial highlights for
each of the five fiscal years in the period then ended. These financial
statements and the financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and the financial highlights based on our 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 as of
September 30, 1999, by correspondence with the custodian. 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, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of United
Municipal High Income Fund, Inc. as of September 30, 1999, the results of its
operations for the fiscal year then ended, the changes in its net assets for
each of the two fiscal years in the period then ended, and the financial
highlights for each of the five fiscal years in the period then ended in
conformity with generally accepted accounting principles.
/s/Deloitte & Touche LLP
- ------------------------
Deloitte & Touche LLP
Kansas City, Missouri
November 5, 1999
<PAGE>
REGISTRATION STATEMENT
PART C
OTHER INFORMATION
23. Exhibits:
---------
(a) Articles of Incorporation, as amended, filed by EDGAR on 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 by EDGAR on December 1, 1995 as
EX-99.B1-mhartsup to Post-Effective Amendment No. 17 to the
Registration Statement on Form N-1A*
Articles Supplementary filed by EDGAR on July 2, 1999 as
EX-99.B(a)mhsuppbc to Post-Effective Amendment No. 22 to the
Registration Statement on Form N-1A*
(b) Bylaws, as amended, filed by EDGAR on December 27, 1996 as
EX-99.B2-mhbylaw to Post-Effective Amendment No. 18 to the
Registration Statement on Form N-1A*
Amendment to Bylaws filed by EDGAR on July 2, 1999 as
EX-99.B(b)mhbylaw2 to Post-Effective Amendment No. 22 to the
Registration Statement on Form N-1A*
(c) Not applicable
(d) Investment Management Agreement filed by EDGAR on 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 by EDGAR on
December 1, 1995 as EX-99.B5-mhassign to Post-Effective Amendment
No. 17 to the Registration Statement on Form N-1A*
Fee schedule (Exhibit A) to the Investment Management Agreement, as
amended, filed by EDGAR on July 2, 1999 as EX-99.B(d)mhimafee to
Post-Effective Amendment No. 22 to the Registration Statement on
Form N-1A*
(e) Underwriting Agreement filed by EDGAR on 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.B(g)mhca
(h) Shareholder Servicing Agreement filed by EDGAR on December 1, 1998
as EX-99.B9-mhssa to Post-Effective Amendment No. 21 to the
Registration Statement on Form N-1A*
<PAGE>
Compensation table (Exhibit B) to the Shareholder Servicing
Agreement, as amended, filed by EDGAR on July 2, 1999 as
EX-99.B(h)mhssacom to Post-Effective Amendment No. 22 to the
Registration Statement on Form N-1A*
Fund Class Y Application filed by EDGAR on 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 by EDGAR on December 1, 1995 as
EX-99.B9-mhnavapp to Post-Effective Amendment No. 17 to the
Registration Statement on Form N-1A*
Fund Class A Application, as amended, filed by EDGAR on May 30, 1997
as EX-99.B9-mhappca to Post-Effective Amendment No. 19 to the
Registration Statement on Form N-1A*
Accounting Services Agreement filed by EDGAR on 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 EDGAR on electronic format on July 30,
1993 as Exhibit (b)(15) to Post-Effective Amendment No. 14 to the
Registration Statement on Form N-1A*
Amendment to Service Agreement filed by EDGAR on 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 by EDGAR on December 27, 1996
as EX-99.B9-mhlou to Post-Effective Amendment No. 18 to the
Registration Statement on Form N-1A*
Fidelity Bond Coverage (Exhibit C) to the Shareholder Servicing
Agreement, as amended, attached hereto as EX-99.B(h)mhssafid
Fund Class A, B and C Application (Non-Retirement Plan) attached
hereto as EX-99.B(h)mhappnon
(i) Opinion and Consent of Counsel attached hereto as EX-99.B(i)mhlegopn
(j) Consent of Deloitte & Touche LLP, Independent Accountants, attached
hereto as EX-99.B(j)mhconsnt
(k) Not applicable
(l) Not applicable
(m) Service Plan filed by EDGAR on December 1, 1995 as EX-99.B15-mhspca
to Post-Effective Amendment No. 17 to the Registration Statement on
Form N-1A*
<PAGE>
Distribution and Service Plan for Class A shares filed by EDGAR on
December 29, 1997 as EX-99.B15-mhdsp to Post-Effective Amendment No.
20 to the Registration Statement on Form N-1A*
Distribution and Service Plan for Class B shares filed by EDGAR on
July 2, 1999 as EX-99.B(m)mhdspb to Post-Effective Amendment No. 22
to the Registration Statement on Form N-1A*
Distribution and Service Plan for Class C shares filed by EDGAR on
July 2, 1999 as EX-99.B(m)mhdspc to Post-Effective Amendment No. 22
to the Registration Statement on Form N-1A*
(n) Not applicable
(o) Multiple Class Plan, as amended, attached hereto as EX-99.B(o)mhmcp
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 filed by EDGAR on December 1, 1998 as
EX-99.B1-charter to Post-Effective Amendment No. 21 to the Registration
Statement on Form N-1A*, and to Article IV of the Underwriting Agreement
filed by EDGAR on 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 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
<PAGE>
directors and/or officers of the Registrant and have served in the
capacities shown in the Statement of Additional Information of the
Registrant. The address of the officers is 6300 Lamar Avenue, P.O. Box
29217, Shawnee Mission, Kansas 66201-9217.
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 High Income Fund II, Inc.
United Asset Strategy Fund, Inc.
United Small Cap 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.
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
<PAGE>
There is no service contract other than as discussed in Part A and B of
this Post-Effective Amendment and as listed in response to Items 23.(h)
and 23.(m) hereof.
30. Undertakings
Not applicable
---------------------------------
*Incorporated herein by reference
<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., UNITED
SMALL CAP FUND, INC., UNITED TAX-MANAGED EQUITY 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, HELGE K. LEE 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 17, 1999 /s/Robert L. Hechler
--------------------------
Robert L. Hechler, President
/s/Keith A. Tucker Chairman of the Board November 17, 1999
- ------------------- -----------------
Keith A. Tucker
/s/Robert L. Hechler President, Principal November 17, 1999
- -------------------- Financial Officer and -----------------
Robert L. Hechler Director
<PAGE>
/s/Henry J. Herrmann Vice President and November 17, 1999
- -------------------- Director -----------------
Henry J. Herrmann
/s/Theodore W. Howard Vice President, Treasurer November 17, 1999
- -------------------- and Principal Accounting -----------------
Theodore W. Howard Officer
/s/James M. Concannon Director November 17, 1999
- -------------------- -----------------
James M. Concannon
/s/John A. Dillingham Director November 17, 1999
- -------------------- -----------------
John A. Dillingham
/s/David P. Gardner Director November 17, 1999
- ------------------- -----------------
David P. Gardner
/s/Linda K. Graves Director November 17, 1999
- -------------------- -----------------
Linda K. Graves
/s/Joseph Harroz, Jr. Director November 17, 1999
- -------------------- -----------------
Joseph Harroz, Jr.
/s/John F. Hayes Director November 17, 1999
- -------------------- -----------------
John F. Hayes
/s/Glendon E. Johnson Director November 17, 1999
- -------------------- -----------------
Glendon E. Johnson
/s/William T. Morgan Director November 17, 1999
- -------------------- -----------------
William T. Morgan
<PAGE>
/s/Ronald C. Reimer Director November 17, 1999
- -------------------- -----------------
Ronald C. Reimer
/s/Frank J. Ross, Jr. Director November 17, 1999
- -------------------- -----------------
Frank J. Ross, Jr.
/s/Eleanor B. Schwartz Director November 17, 1999
- -------------------- -----------------
Eleanor B. Schwartz
/s/Frederick Vogel III Director November 17, 1999
- -------------------- -----------------
Frederick Vogel III
Attest:
/s/Kristen A. Richards
- ----------------------
Kristen A. Richards
Assistant Secretary
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it meets all of the
requirements for effectiveness of this Post-Effective Amendment pursuant to Rule
485(b) of the Securities Act of 1933 and has duly caused this Post-Effective
Amendment to be signed on its behalf by the undersigned, thereunto duly
authorized, in the city of Overland Park, and State of Kansas, on the 29th day
of December, 1999.
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 29, 1999
- ---------------------- ----------------
Keith A. Tucker
/s/Robert L. Hechler* President, Principal December 29, 1999
- ---------------------- Financial Officer and ----------------
Robert L. Hechler Director
/s/Henry J. Herrmann* Vice President and December 29, 1999
- ---------------------- Director ----------------
Henry J. Herrmann
/s/Theodore W. Howard* Vice President, Treasurer December 29, 1999
- ---------------------- and Principal Accounting ----------------
Theodore W. Howard Officer
/s/James M. Concannon* Director December 29, 1999
- ------------------ ----------------
James M. Concannon
<PAGE>
/s/John A. Dillingham* Director December 29, 1999
- ------------------ ----------------
John A. Dillingham
/s/David P. Gardner* Director December 29, 1999
- ------------------ ----------------
David P. Gardner
/s/Linda K. Graves* Director December 29, 1999
- ------------------ ----------------
Linda K. Graves
/s/Joseph Harroz, Jr.* Director December 29, 1999
- ------------------ ----------------
Joseph Harroz, Jr.
/s/John F. Hayes* Director December 29, 1999
- ------------------- ----------------
John F. Hayes
/s/Glendon E. Johnson* Director December 29, 1999
- ------------------- ----------------
Glendon E. Johnson
/s/William T. Morgan* Director December 29, 1999
- ------------------- ----------------
William T. Morgan
/s/Ronald C. Reimer* Director December 29, 1999
- ------------------ ----------------
Ronald C. Reimer
/s/Frank J. Ross, Jr.* Director December 29, 1999
- ------------------ ----------------
Frank J. Ross, Jr.
/s/Eleanor B Schwartz* Director December 29, 1999
- ------------------- ----------------
Eleanor B. Schwartz
/s/Frederick Vogel III* Director December 29, 1999
- ------------------- ----------------
Frederick Vogel III
*By
Robert L. Hechler
Attorney-in-Fact
ATTEST:
Kristen A. Richards
Assistant Secretary
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 "A"
<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.
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.
<PAGE>
(b) The Custodian may at all times hold registered securities of the Fund
in the name of the Fund or the Fund's nominee, or in the nominee name of the
Custodian unless specifically directed by Proper Instructions (as hereinafter
defined) to hold such registered securities in so-called street name; provided
that, in any event, all Assets shall be held in an account of the Custodian
containing only assets of the Fund. Notwithstanding the foregoing, unless it
receives Proper Instructions to the contrary, the Custodian shall register all
securities in the name of the Custodian's nominee as authorized by the Fund. All
securities held directly or indirectly by the Custodian hereunder shall at all
times be identifiable on the records of the Custodian. Except as otherwise
provided herein, the Custodian shall keep the Assets physically segregated from
those of other persons or entities. The Custodian shall execute and deliver all
certificates and documents in connection with registration of securities as may
be required by the applicable provisions of the Internal Revenue Code, the laws
of any State or territory of the United States and the laws of any jurisdiction
in which the securities are held.
Section 2.03. Purchase of Assets.
(a) Security Purchases. Upon receipt of Proper Instructions, the Custodian
shall pay for and receive securities purchased for the account of the Fund,
provided that payment shall be made by Custodian only upon receipt of the
securities: (a) by the Custodian; (b) by a clearing corporation of a national
securities exchange of which the Custodian is a member; or (c) by a Securities
System. Notwithstanding the foregoing, upon receipt of Proper Instructions: (i)
in the case of a repurchase agreement, the Custodian may release funds to a
Securities System prior to the receipt of advice from the Securities System that
the securities underlying such repurchase agreement have been transferred by
book-entry into the Account (as hereinafter defined) maintained with such
Securities System by the Custodian, provided that the Custodian's instructions
to the Securities System require that the Securities System may make payment of
such funds to the other party to the repurchase agreement only upon transfer by
book-entry of the securities underlying the repurchase agreement into the
Account; (ii) in the case of time deposits, call account deposits, currency
deposits and other deposits, foreign exchange transactions, futures contracts or
options, pursuant to Sections 2.09, 2.10, 2.12 and 2.13 hereof, the Custodian
may make payment therefor before receipt of an advice or transaction; and (iii)
in the case of the purchase of securities, the settlement of which occurs
outside of the United States of America, the Custodian may make payment therefor
and receive delivery of such securities in accordance with local custom and
practice generally accepted by Institutional Clients (as hereinafter defined) in
the country in which the settlement occurs, but in all events subject to the
standard of care set forth in Article V hereof. For purposes of this Agreement,
an "Institutional Client" shall mean a major commercial bank, corporation,
insurance company, or substantially similar institution, which, as a substantial
part of its business operations, purchases or sells securities and makes use of
custodial services.
(b) Other Asset Purchases. Upon receipt of Proper Instructions and except
as otherwise provided herein, the Custodian shall pay for and receive other
Assets for the account of the Fund as provided in Proper Instructions.
<PAGE>
Section 2.04. Exchanges of Securities. Upon receipt of Proper
Instructions, the Custodian shall exchange securities held by it for the account
of the Fund for other securities in connection with any reorganization,
recapitalization, split-up of shares, change of par value, conversion or other
event relating to the securities or the issuer of such securities, and shall
deposit any such securities in accordance with the terms of any reorganization
or protective plan. The Custodian shall, without receiving Proper Instructions:
surrender securities for transfer into the name of the Fund, the Fund's nominee
or the nominee name of the Custodian as permitted by Section 2.02(b); and
surrender securities for a different number of certificates or instruments
representing the same number of shares or same principal amount of indebtedness,
provided that the securities to be issued will be delivered to the Custodian.
Section 2.05. Sales of Securities. Upon receipt of Proper Instructions,
the Custodian shall make delivery of securities which have been sold for the
account of the Fund, but only against payment therefor in the form of: (a) cash,
certified check, bank cashier's check, bank credit, or bank wire transfer; (b)
credit to the account of the Custodian with a clearing corporation of a national
securities exchange of which the Custodian is a member; or (c) credit to the
Account of the Custodian with a Securities System, in accordance with the
provisions of Section 2.22 hereof. Notwithstanding the foregoing: (i) in the
case of the sale of securities, the settlement of which occurs outside of the
United States of America, such securities shall be delivered and paid for in
accordance with local custom and practice generally accepted by Institutional
Clients in the country in which the settlement occurs, but in all events subject
to the standard of care set forth in Article V hereof; and (ii) in the case of
securities held in physical form, such securities shall be delivered and paid
for in accordance with "street delivery custom" to a broker or its clearing
agent, against delivery to the Custodian of a receipt for such securities,
provided that the Custodian shall have taken reasonable steps to ensure prompt
collection of the payment for, or return of, such securities by the broker or
its clearing agent, and provided further that, subject to the standard of care
set forth in Article V hereof, the Custodian shall not be responsible for the
selection of or the failure or inability to perform of such broker or its
clearing agent.
Section 2.06. Depositary Receipts. Upon receipt of Proper Instructions,
the Custodian shall surrender securities to the depositary used for such
securities by an issuer of American Depositary Receipts or International
Depositary Receipts (hereinafter referred to, collectively , 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,
<PAGE>
calls, rights or similar securities to the issuer or trustee thereof (or to the
agent of such issuer or trustee) for the purpose of exercise or sale, provided
that the new securities, cash or other Assets, if any, acquired as a result of
such actions are to be delivered to the Custodian; and (b) deposit securities
upon invitations for tenders thereof, provided that the consideration for such
securities is to be paid or delivered to the Custodian, or the tendered
securities are to be returned to the Custodian. Notwithstanding any provision of
this Agreement to the contrary, the Custodian shall promptly notify the Fund in
writing of (i) any default in payment of funds on securities; (ii) any
securities that have matured, been called or redeemed; and (iii) to the extent
the Custodian has notice which is contained in services to which it normally
subscribes for such purposes, or actual knowledge if not contained in such
services, any other default involving securities; and all announcements of
defaults, bankruptcies, reorganizations, mergers, consolidations,
recapitalizations or rights or privileges to subscribe, convert, exchange, put,
redeem or tender securities held subject to this Agreement. The Custodian shall,
following receipt or knowledge, convey such information to the Fund in a timely
manner based upon the circumstances of each particular case. Whenever any such
rights or privileges exist, the Fund will, in a timely manner based upon the
circumstances of each particular case, provide the Custodian with Proper
Instructions. Absent the Custodian's timely receipt of Proper Instructions, the
Custodian shall not be liable for not taking any action or not exercising such
rights prior to their expiration unless such failure is due to Custodian's
failure to give timely notice to the Fund in accordance with this Section 2.07.
Section 2.08. Stock Dividends, Rights, Etc. The Custodian shall receive
and collect all stock dividends, rights and other items of like nature and, upon
receipt of Proper Instructions, take action with respect to the same as directed
in such Proper Instructions.
Section 2.09. Options. Upon receipt of Proper Instructions and in
accordance with the provisions of any agreement between the Custodian, any
registered broker-dealer and, if necessary, the Fund relating to compliance with
the rules of the Options Clearing Corporation (the "OCC") or of any registered
national securities exchange or similar organization(s), the Custodian shall:
(a) receive and retain confirmations or other documents, if any, evidencing the
purchase or writing of an option by the Fund; (b) deposit and maintain in a
segregated account, securities (either physically or by book-entry in a
Securities System), cash or other Assets; and (c) pay, release and/or transfer
such securities, cash or other Assets in accordance with any such agreement and
with notices or other communications evidencing the expiration, termination or
exercise of such options furnished by the OCC, the securities or options
exchange on which such options are traded or such other organization as may be
responsible for handling such option transactions. The Fund and the
broker-dealer shall be responsible for determining the sufficiency of assets
held in any segregated account established in compliance with applicable margin
maintenance requirements and the performance of other terms of any option
contract; provided, however, that the Custodian shall be liable for performance
of its duties under this Agreement and in accordance with Proper Instructions,
and shall be liable for performance of its duties under any other agreement
between the Custodian, any registered broker-dealer and, if necessary, the Fund.
Notwithstanding anything herein to the contrary, if the Fund issues Proper
Instructions to sell a naked option
<PAGE>
(including stock index options), then as part of the transaction, the Custodian,
the Fund and the broker-dealer shall have entered into a tri-party agreement, as
described above.
Section 2.10. Futures Contracts. Upon receipt of Proper Instructions, or
pursuant to the provisions of any futures margin procedural agreement among the
Fund, the Custodian and any futures commission merchant (a "Procedural
Agreement"), the Custodian shall: (a) receive and retain confirmations, if any
evidencing the purchase of or sale of a futures contract or an option on a
futures contract by the Fund; (b) deposit and maintain in a segregated account
cash, securities and other Assets designated as initial, maintenance or
variation "margin" deposits intended to secure the Fund's performance of its
obligations under any futures contracts purchased or sold or any options on
futures contracts written by the Fund, in accordance with the provisions of the
Commodity Futures Trading Commission and/or any commodity exchange or contract
market (such as the Chicago Board of Trade), or any similar organization(s),
regarding such margin deposits; and (c) release assets from and/or transfer
assets into such margin accounts only in accordance with any such Procedural
Agreements. The Fund and such futures commission merchant shall be responsible
for determining the sufficiency of assets held in the segregated account in
compliance with applicable margin maintenance requirements and the performance
of any futures contract or option on a futures contract in accordance with its
terms; provided, however, that the Custodian shall be liable for performance of
its duties under this Agreement and in accordance with Proper Instructions, and
shall be liable for performance of its duties under any Procedural Agreement.
Section 2.11. Borrowing. Upon receipt of Proper Instructions, the
Custodian shall deliver securities of the Fund to lenders or their agents, or
otherwise establish a segregated account as agreed to by the Fund and the
Custodian, as collateral for borrowings effected by the Fund, provided that such
borrowed money is payable by the lender (a) to or upon the Custodian's order, as
Custodian for the Fund, and (b) concurrently with delivery of such securities.
Section 2.12. Interest Bearing Deposits. Upon receipt of Proper
Instructions directing the Custodian to purchase interest bearing fixed term and
call deposits (hereinafter referred to collectively, as "Interest Bearing
Deposits") for the account of the Fund, the Custodian shall purchase such
Interest Bearing Deposits in the name of the Fund with such banks or trust
companies (including the Custodian, any Subcustodian or any subsidiary or
affiliate of the Custodian) (hereinafter referred to as "Banking Institutions")
and in such amounts as the Fund may direct pursuant to Proper Instructions. Such
Interest Bearing Deposits may be denominated in U.S. Dollars or other
currencies, as the Fund may determine and direct pursuant to Proper
Instructions. The Custodian shall include in its records with respect to the
Assets of the Fund appropriate notation as to the amount and currency of each
such Interest Bearing Deposit, the accepting Banking Institution and all other
appropriate details, and shall retain such forms of advice or receipt evidencing
such account, if any, as may be forwarded to the Custodian by the Banking
Institution. The responsibilities of the Custodian to the Fund for Interest
Bearing Deposits accepted on the Custodian's books in the United States shall be
that of a U.S. bank for a similar deposit. With respect to Interest Bearing
Deposits other than those accepted on the Custodian's books, (a) the Custodian
shall
<PAGE>
be responsible for the collection of income as set forth in Section 2.15 and the
transmission of cash and instructions to and from such accounts; and (b) the
Custodian shall have no duty with respect to the selection of the Banking
Institution or, so long as the Custodian acts in accordance with Proper
Instructions and the terms and conditions of this Agreement, for the failure of
such Banking Institution to pay upon demand. Upon receipt of Proper
Instructions, the Custodian shall take such reasonable actions as the Fund deems
necessary or appropriate to cause each such Interest Bearing Deposit account to
be insured to the maximum extent possible by all applicable deposit insurers
including, without limitation, the Federal Deposit Insurance Corporation.
Section 2.13. Foreign Exchange Transactions.
(a) Foreign Exchange Transactions Other than as Principal. Upon receipt of
Proper Instructions, the Custodian shall settle foreign exchange contracts or
options to purchase and sell foreign currencies for spot and future delivery on
behalf of and for the account of the Fund with such currency brokers or Banking
Institutions as the Fund may determine and direct pursuant to Proper
Instructions. The Fund accepts full responsibility for its use of third party
foreign exchange brokers (any dealer other than the Foreign Subcustodian) (as
hereinafter defined) and for execution of said foreign exchange contracts and
understands that the Fund shall be responsible for any and all costs and
interest charges which may be incurred as a result of the failure or delay of
its third party broker to deliver foreign exchange unless such loss, damage, or
expense is caused by, or results from the negligence, misfeasance or misconduct
of the Custodian. Notwithstanding the foregoing, the Custodian shall be
responsible for the transmission of cash and instructions to and from the
currency broker or Banking Institution with which the contract or option is
made, the safekeeping of all certificates and other documents and agreements
evidencing or relating to such foreign exchange transactions and the maintenance
of proper records as set forth in Section 2.25. The Custodian shall have no duty
with respect to the selection of the currency brokers or Banking Institutions
with which the Fund deals or, so long as the Custodian acts in accordance with
Proper Instructions, for the failure of such brokers or Banking Institutions to
comply with the terms of any contract or option.
(b) Foreign Exchange Contracts as Principal. The Custodian shall not be
obligated to enter into foreign exchange transactions as principal. However, if
the Custodian has made available to the Fund its services as a principal in
foreign exchange transactions, upon receipt of Proper Instructions, the
Custodian shall enter into foreign currencies for spot and future delivery on
behalf of and for the account of the Fund with the Custodian as principal. The
Custodian shall be responsible for the selection of the currency brokers or
Banking Institutions and the failure of such currency brokers or Banking
Institutions to comply with the terms of any contract or option.
(c) Payments. Notwithstanding anything to the contrary contained herein,
upon receipt of Proper Instructions the Custodian may, in connection with a
foreign exchange contract, make free outgoing payments of cash in the form of
U.S. Dollars or foreign currency prior to receipt of confirmation of such
foreign exchange contract or confirmation that the
<PAGE>
countervalue currency completing such contract has been delivered or received.
Section 2.14. Securities Loans. Upon receipt of Proper Instructions, the
Custodian shall, in connection with loans of securities by the Fund, deliver
securities of the Fund to the borrower thereof and may, except as otherwise
provided below, deliver such securities prior to receipt of the collateral, if
any, for such borrowing; provided that, in cases of loans of securities secured
by cash collateral, the Custodian's instructions to the Securities System shall
require that the Securities System deliver the securities of the Fund to the
borrower thereof only upon receipt of the collateral for such borrowing. The
Custodian shall retain on the Fund's behalf the right to any dividends, interest
or distribution on such loaned securities and any other rights specified in
Proper Instructions. Upon receipt of Proper Instructions and the loaned
securities, the Custodian will release the collateral to the borrower.
Section 2.15. Collections. The Custodian shall: (a) collect amounts due
and payable to the Fund with respect to portfolio securities and other Assets;
(b) promptly credit to the account of the Fund all income and other payments
relating to portfolio securities and other Assets held by the Custodian
hereunder upon Custodian's receipt of such income or payments or as otherwise
agreed in writing by the Custodian and the Fund; (c) promptly endorse and
deliver any instruments required to effect such collection; and (d) promptly
execute ownership and other certificates and affidavits for all federal, state,
local and foreign tax purposes in connection with receipt of income or other
payments with respect to portfolio securities and other Assets, or in connection
with the transfer of such securities or other Assets; provided, however, that
with respect to portfolio securities registered in so-called street name, or
physical securities with variable interest rates, the Custodian shall use its
best efforts to collect amounts due and payable to the Fund. The Custodian shall
promptly notify the Fund in writing by facsimile transmission or in such other
manner as the Fund and Custodian may agree in writing if any amount payable with
respect to portfolio securities or other Assets is not received by the Custodian
when due. The Custodian shall not be responsible for the collection of amounts
due and payable with respect to portfolio securities or other Assets that are in
default.
Section 2.16. Dividends, Distributions and Redemptions. To enable the Fund
to pay dividends or other distributions to shareholders of the Fund and to make
payment to shareholders who have requested repurchase or redemption of their
shares of the Fund (collectively, the "Shares"), the Custodian shall promptly
release cash or securities (a) in the case of cash, upon receipt of Proper
Instructions, to one or more Distribution Accounts (as hereinafter defined)
designated by the Fund in such Proper Instructions; or (b) in the case of
securities, upon the receipt of Special Instructions (as hereinafter defined) to
such entity or account designated by the Fund in such Special Instructions. For
purposes of this Agreement, a "Distribution Account" shall mean an account
established at a Banking Institution designated by the Fund in Special
Instructions.
Section 2.17. Proceeds from Shares Sold. The Custodian shall receive funds
representing cash payments received for Shares issued or sold from time to time
by the Fund, and shall promptly credit such funds to the account of the Fund.
The Custodian shall promptly notify the Fund of
<PAGE>
Custodian's receipt of cash in payment for Shares issued by the Fund by
facsimile transmission or in such other manner as the Fund and Custodian may
agree in writing. Upon receipt of Proper Instructions, the Custodian shall: (a)
deliver all federal funds received by the Custodian in payment for Shares in
payment for such investments as may be set forth in such Proper Instructions and
at a time agreed upon between the Custodian and the Fund; and (b) make federal
funds available to the Fund as of specified times agreed upon from time to time
by the Fund and the Custodian, in the amount of checks received in payment for
Shares which are deposited to the accounts of the Fund.
Section 2.18. Proxies, Notices, Etc. The Custodian shall deliver or cause
to be delivered to the Fund, in the most expeditious manner practicable, all
forms of proxies, all notices of meetings, and any other notices or
announcements affecting or relating to securities owned by the Fund that are
received by the Custodian, any Subcustodian, or any nominee of either of them,
and, upon receipt of Proper Instructions, the Custodian shall execute and
deliver, or cause such Subcustodian or nominee to execute and deliver, such
proxies or other authorizations as may be required. Except as directed pursuant
to Proper Instructions, neither the Custodian nor any Subcustodian or nominee
shall vote upon any such securities, or execute any proxy to vote thereon, or
give any consent or take any other action with respect thereto. The Custodian
will not release the identity of the Fund to an issuer which requests such
information pursuant to the Shareholder Communications Act of 1985, for the
specific purpose of direct communications between such issuer and the Fund
unless the Fund directs the Custodian otherwise in writing.
Section 2.19. Bills and Other Disbursements. Upon receipt of Proper
Instructions, the Custodian shall pay or cause to be paid, all bills,
statements, or other obligations of the Fund.
Section 2.20. Nondiscretionary Functions. The Custodian shall attend to
all nondiscretionary details not specifically covered by this Agreement in
accordance with industry standards in connection with the sale, exchange,
substitution, purchase, transfer or other dealings with securities or other
Assets held by the Custodian, except as otherwise directed from time to time
pursuant to Proper Instructions.
Section 2.21. Bank Accounts.
(a) Accounts with the Custodian. The Custodian shall open and operate a
bank account or accounts (hereinafter referred to collectively, as "Bank
Accounts") on the books of the Custodian; provided that such Bank Account(s)
shall be in the name of the Custodian or a nominee thereof, for the account of
the Fund, and shall be subject only to draft or order of the Custodian. The
responsibilities of the Custodian to the Fund for deposits accepted on the
Custodian's books shall be that of a U.S. bank for a similar deposit.
(b) Deposit Insurance. Upon receipt of Proper Instructions, the Custodian
shall take such action as the Fund deems necessary or appropriate to cause each
deposit account established by the Custodian pursuant to this Section 2.21 to be
insured to the maximum extent possible by all applicable deposit insurers,
including, without limitation, the Federal Deposit Insurance Corporation.
<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.
(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.
<PAGE>
(E) Upon receipt of Special Instructions, the Custodian shall terminate
the use of any Securities System (except the federal book-entry system) on
behalf of the Fund as promptly as practicable and shall take all actions
reasonably practicable to safeguard the securities of the Fund maintained with
such Securities System.
Section 2.23. Other Transfers. Upon receipt of Special Instructions, the
Custodian shall make such other dispositions of securities, funds, or other
Assets of the Fund in a manner or for purposes other than as expressly set forth
in this Agreement, provided that the Special Instructions relating to such
disposition shall include a statement of the purposes for which the delivery is
to be made, the amount of funds, Assets and/or securities to be delivered and
the name of the person or persons to whom delivery is to be made, and shall
otherwise comply with the provisions of Sections 3.01 and 3.03 hereof.
Section 2.24. Establishment of Segregated Account. Upon receipt of Proper
Instructions, the Custodian shall establish and maintain on its books a
segregated account or accounts for and on behalf of the Fund, into which account
or accounts may be transferred cash and/or securities or other Assets of the
Fund, including securities maintained by the Custodian in a Securities System
pursuant to Section 2.22 hereof, said account or accounts to be maintained: (a)
for the purposes set forth in Section 2.09, 2.10 and 2.11 hereof; (b) for the
purposes of compliance by the Fund with the procedures required by Investment
Company Act Release No. 10666, or any subsequent release or releases of the SEC
relating to the maintenance of segregated accounts by registered investment
companies; or (c) for such other purposes as may be set forth, from time to
time, in Special Instructions. The Custodian shall not be responsible for the
determination of the type or amount of Assets to be held in any segregated
account referred to in this Section 2.24.
Section 2.25. Custodian's Books and Records. The Custodian shall provide
any assistance reasonably requested by the Fund in the preparation of reports to
Fund shareholders and others, audits of accounts, and other ministerial matters
of like nature. The Custodian shall maintain complete and accurate records with
respect to securities and other Assets held for the accounts of the Fund as
required by the rules and regulations of the SEC applicable to investment
companies registered under the 1940 Act, including, but not limited to: (a)
journals or other records of original entry containing a detailed and itemized
daily record of all receipts and deliveries of securities (including certificate
and transaction identification numbers, if any), and all receipts and
disbursements of cash; (b) ledgers or other records reflecting (i) securities in
transfer, (ii) securities in physical possession, (iii) securities borrowed,
loaned or collateralizing obligations of the Fund, (iv) monies borrowed and
monies loaned (together with a record of the collateral therefor and
substitutions of such collateral), and (v) dividends and interest received; and
(c) cancelled checks and bank records relating thereto. The Custodian shall keep
such other books and records of the Fund as the Fund shall reasonably request.
All such books and records maintained by the Custodian shall be maintained in a
form acceptable to the Fund and in compliance with the rules and regulations of
the SEC, including, but not limited to, books and records required to be
maintained by Section 31(a) of the 1940 Act and the rules and regulations from
time to time adopted thereunder. All books and
<PAGE>
records maintained by the Custodian pursuant to this Agreement shall at all
times be the property of the Fund and shall be available during normal business
hours for inspection and use by the Fund and its agents, including without
limitation, its independent certified public accountants. Notwithstanding the
preceding sentence, the Funds shall not take any actions or cause the Custodian
to take any actions which would knowingly cause, either directly or indirectly,
the Custodian to violate any applicable laws, regulations or orders.
Notwithstanding the provisions of this Section 2.25, in the event the Fund
purchases cash, securities and other Assets requiring the use of a Domestic
Subcustodian or Foreign Sub-Subcustodian, the Custodian shall be entitled to
rely upon and use the books, records and accountings of the Domestic
Subcustodian as its means of accounting to the Fund for all cash, securities and
other Assets deposited with such entities; provided however, that such books,
records and accountings on which the Bank may rely must be maintained in the
United States by such Domestic Subcustodian and, provided further, that any
agreement between the Custodian and such Domestic Subcustodian must state that
the Domestic Subcustodian agrees to make any records available upon request and
preserve, for the periods described in Rule 31a-2 of the 1940 Act, the records
required to be maintained by Rule 31a-1 of the 1940 Act. In no event shall the
Custodian be entitled to rely upon and use books, records and accountings which
are maintained outside of the United States.
Section 2.26. Opinion of Fund's Independent Certified Public Accountants.
The Custodian shall take all reasonable action as the Fund may request to obtain
from year to year favorable opinions from the Fund's independent certified
public accountants with respect to the Custodian's activities hereunder in
connection with the preparation of the Fund's Form N-1A and the Fund's Form
N-SAR or other periodic reports to the SEC and with respect to any other
requirements of the SEC.
Section 2.27. Reports by Independent Certified Public Accountants. At the
request of the Fund, the Custodian shall deliver to the Fund a written report
prepared by the Custodian's independent certified public accountants with
respect to the services provided by the Custodian under this Agreement,
including, without limitation, the Custodian's accounting system, internal
accounting control and procedures for safeguarding cash, securities and other
assets, including cash, securities and other assets deposited and/or maintained
in a Securities System or with a Subcustodian. Such report shall be of
sufficient scope and in sufficient detail as may reasonably be required by the
Fund and as may reasonably be obtained by the Custodian.
Section 2.28. Overdraft Facility. In the event that the Custodian is
directed by Proper Instructions to make any payment or transfer of funds on
behalf of the Fund for which there would be, at the close of business on the
date of such payment or transfer, insufficient funds held by the Custodian on
behalf of the Fund, the Custodian may, in its sole discretion, provide an
overdraft (an "Overdraft") to the Fund in an amount sufficient to allow the
completion of such payment. Any Overdraft provided hereunder: (a) shall be
payable on the next business day, unless otherwise agreed by the Fund and the
Custodian; and (b) shall accrue interest from the date of the Overdraft to the
date of payment in full by the Fund at a rate agreed upon in writing, from time
to time, by the Custodian and the Fund. The purpose of such Overdrafts is to
temporarily finance extraordinary or emergency expenses not reasonably
foreseeable by the Fund. The Custodian
<PAGE>
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 (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
<PAGE>
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-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
<PAGE>
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. ADomestic Subcustodian which is an Approved
Foreign Custody Manager, or the Domestic Subcustodian, 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 such Eligible Foreign Custodians shall at all times be
governed by the Delegation Agreement, except that the Fund's investment adviser,
Waddell & Reed Investment Management Company, shall be responsible for the
appointment of a compulsory depository, as applicable.
(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.")
<PAGE>
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 an Interim
Sub-Subcustodian. In the event that the Custodian is unable to cause such
subcustodian or sub-subcustodian to fully perform its obligations thereunder,
the Custodian shall promptly notify the Fund in writing and forthwith, upon the
receipt of Special Instructions, terminate or cause the termination of such
Subcustodian or Sub-Subcustodian with respect to the Fund and, if necessary or
desirable, appoint or cause the appointment of a replacement Subcustodian or
Sub-Subcustodian in accordance with the provisions of this Article IV. In
addition to the foregoing, the Custodian (A) may, at any time in its discretion,
upon written notification to the Fund, terminate any Domestic Subcustodian 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, or cause any Domestic
Subcustodian that has been approved as a Foreign Custody Manager to 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
<PAGE>
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); (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; or (iii)
any "Sovereign Risk", which for the purpose of this Agreement shall mean
nationalization, expropriation, devaluation, revaluation, confiscation, seizure,
cancellation, destruction or similar action by any governmental authority, de
facto or de jure, or enactment, promulgation, imposition or enforcement by any
such governmental authority of currency restrictions, exchange controls, taxes,
levies or other charges affecting the Fund's property; or acts of war,
terrorism, insurrection or revolution, civil commotion, nuclear fission or
fusion or radioactivity.
(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).
<PAGE>
(e) Expenses of the Fund. In addition to the liability of the Custodian
under this Article V, the Custodian shall be liable to the Fund for all
reasonable costs and expenses incurred by the Fund in connection with any claim
by the Fund against the Custodian arising from the obligations of the Custodian
hereunder including, without limitation, all reasonable attorneys' fees and
expenses incurred by the Fund in asserting any such claim, and all expenses
incurred by the Fund in connection with any investigations, lawsuits or
proceedings relating to such claim; provided however, that the Fund has
recovered from the Custodian for such claim.
(f) Liability for Past Records. The Custodian shall have no liability in
respect of any loss, damage or expense suffered by the Fund, insofar as such
loss, damage or expense arises from the performance of the Custodian in reliance
upon records that were maintained for the Fund by entities other than the
Custodian prior to the Custodian's employment hereunder which the Custodian has
no reason to believe are inaccurate or incomplete after reasonable inquiry.
Section 5.02. Liability of the Custodian for Actions of Other Persons.
(a) Domestic Subcustodian and Foreign Sub-Subcustodian. The Custodian
shall be liable for the actions or omissions of any Domestic Subcustodian or
Foreign Sub-Subcustodian (excluding any Securities Depository or Clearing Agency
appointed by them) to the same extent as if such actions or omissions were
performed by the Custodian itself. In the event of any loss, damage or expense
suffered or incurred by the Fund caused by or resulting from the actions or
omissions of any Domestic Subcustodian or Foreign Sub-Subcustodian for which the
Custodian would otherwise be liable, the Custodian shall promptly reimburse the
Fund in the amount of any such loss, damage or expense.
(b) Special Subcustodians, Interim Sub-Subcustodians, Security Systems,
Securities Depositories and Clearing Agencies. The Custodian shall not be liable
to the Fund for any loss, damage or expense suffered or incurred by the Fund
resulting from the actions or omissions of a Special Subcustodian, Interim
Sub-Subcustodian, Securities System, Securities Depository or Clearing Agency
unless such loss, damage or expense is caused by, or results from, the
negligence, misfeasance or misconduct of the Custodian; provided, however, in
the event of any such loss, damage or expense, the Custodian shall take all
reasonable steps to enforce such rights as it may have against such Special
Subcustodian, Interim Sub-Subcustodian, Security System, Securities Depository
or Clearing Agency to protect the interest of the Fund.
(c) Reimbursement of Expenses. The Fund agrees to reimburse the Custodian
for all reasonable out-of-pocket expenses incurred by the Custodian in
connection with the fulfillment of its obligations under Section 5.01(c) as it
relates to Interim Sub-Subcustodians and Special Subcustodians and 5.02(b);
provided however, that such reimbursement shall not apply to expenses occasioned
by or resulting from the negligence, misfeasance or misconduct of the Custodian.
Section 5.03. Indemnification by Fund.
<PAGE>
(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 (defined in Section 5.01(b)) or where any Person
maintaining securities, currencies, deposits or other Assets of the Fund in
connection with any such transactions has exercised reasonable care maintaining
such property or in connection with any such transaction involving such Assets.
A "Sovereign Risk" shall mean nationalization, expropriation, devaluation,
revaluation, confiscation, seizure, cancellation, destruction or similar action
by any governmental authority, de facto or de jure; or enactment, promulgation,
imposition or enforcement by any such governmental authority of currency
restrictions, exchange controls, taxes, levies or other charges affecting the
Fund's property; or acts of war, terrorism, insurrection or revolution.
(b) Notice of Litigation. Right to Prosecute, Etc. The Fund shall not be
liable for indemnification under this Section 5.03 unless a Person shall have
promptly notified the Fund in writing of the commencement of any litigation or
proceeding brought against the Custodian or other Person in respect of which
indemnity may be sought under this Section 5.03. With respect to claims in such
litigation or proceedings for which indemnity by the Fund may be sought and
subject to applicable law and the ruling of any court of competent jurisdiction,
the Fund shall be entitled to participate in any such litigation or proceeding
with counsel of its choice at its own expense in respect of that portion of the
litigation for which the Fund may be subject to an indemnification obligation;
provided, however, a Person shall be entitled to participate in (but not
control) at its own cost and expense, the defense of any such litigation or
proceeding if the Fund has not acknowledged in writing it obligation to
indemnify the Person with respect to such litigation or proceeding. If the Fund
is not permitted to participate or control such litigation or proceeding under
applicable law or by a ruling of a court of competent jurisdiction, or if the
Fund chooses not to so participate, the Custodian or other Person shall not
consent to the entry of any judgment or enter into any settlement in any such
litigation or proceeding without providing the Fund with adequate notice of any
such settlement or judgment, and without the Fund's prior written consent which
consent shall not be unreasonably withheld or delayed. All Persons shall submit
written evidence to the Fund with respect to any cost or expense for which they
are seeking indemnification in such form and detail as the Fund may reasonably
request.
<PAGE>
Section 5.04. Investment Limitations. If the Custodian has otherwise
complied with the terms and conditions of this Agreement in performing its duty
generally, and more particularly in connection with the purchase, sale or
exchange of securities made by or for the Fund, the Custodian shall not be
liable to the Fund and the Fund agrees to indemnify the Custodian and its
nominees, for any loss, damage or expense suffered or incurred by the Custodian
and its nominees arising out of any violation of any investment or other
limitation to which the Fund is subject except for violations of which the
Custodian has actual knowledge. For purposes of this Section 5.04 the term
"actual knowledge" shall mean knowledge gained by the Custodian by means other
than from any prospectus published by the Fund or contained in any filing by the
Fund with the SEC.
Section 5.05. Fund's Right to Proceed. Notwithstanding anything to the
contrary contained herein, the Fund shall have, at its election upon reasonable
notice to the Custodian, the right to enforce, to the extent permitted by any
applicable agreement and applicable law, the Custodian's rights against any
Subcustodian, Securities System or other Person for loss, damage or expense
caused the Fund by such Subcustodian, Securities System or other Person, which
the Custodian may have as a consequence of any such loss, damage or expense, if
and to the extent that the Fund has not been made whole for any such loss,
expense or damage. If the Custodian makes the Fund whole for any such loss,
expense or damage, the Custodian shall retain the ability to enforce its rights
directly against such Subcustodian, Securities System or other Person. Upon the
Fund's election to enforce any rights of the Custodian under this Section 5.05,
the Fund shall reasonably prosecute all actions and proceedings directly
relating to the rights of the Custodian in respect of the loss, damage or
expense incurred by the Fund; provided that, so long as the Fund has
acknowledged in writing its obligation to indemnify the Custodian under Section
5.03 hereof with respect to such claim, the Fund shall retain the right to
settle, compromise and/or terminate any action or proceeding in respect of the
loss, damage or expense incurred by the Fund without the Custodian's consent and
provided further, that if the Fund has not made an acknowledgement of its
obligation to indemnify, the Fund shall not settle, compromise or terminate any
such action or proceeding without the written consent of the Custodian, which
consent shall not be unreasonably withheld or delayed. The Custodian agrees to
cooperate with the Fund and take all actions reasonably requested by the Fund in
connection with the Fund's enforcement of any rights of the Custodian. Nothing
contained in this Section 5.05 shall be construed as an obligation of the Fund
to enforce the Custodian's rights. The Fund agrees to reimburse the Custodian
for out-of-pocket expenses incurred by it in connection with the fulfillment of
its obligations under this Section 5.05; provided, however, that such
reimbursement shall not apply to expenses occasioned by or resulting from the
negligence, misfeasance or misconduct of the Custodian.
Section 5.06. Indemnification by Custodian.
(a) Indemnification Obligations of Custodian. Subject to the limitations
set forth in this Agreement and in addition to the reimbursement obligations
provided in Section 5.02(a), the Custodian agrees to indemnify and hold harmless
the Fund and its nominees from all loss, damage and expense (including
reasonable attorneys' fees) suffered or incurred by the Fund or its nominee
caused by or arising from the failure of the Custodian, its nominee, employees
or agents to comply with the terms
<PAGE>
or conditions of this Agreement or arising out of the negligence, misfeasance or
misconduct of the Custodian or its nominee.
(b) Notice of Litigation, Right to Prosecute, Etc. The Custodian shall not
be liable for indemnification under this Section 5.06 unless the Fund shall have
promptly notified the Custodian in writing of the commencement of any litigation
or proceeding brought against the Fund in respect of which indemnity may be
sought under this Section 5.06. With respect to claims in such litigation or
proceedings for which indemnity by the Custodian may be sought and subject to
applicable law and the ruling of any court of competent jurisdiction, the
Custodian shall be entitled to participate in any such litigation or proceeding
with counsel of its choice at its own expense in respect of that portion of the
litigation for which the Custodian may be subject to an indemnification
obligation; provided, however, the Fund shall be entitled to participate in (but
not control) at its own cost and expense, the defense of any such litigation or
proceeding if the Custodian has not acknowledged in writing its obligation to
indemnify the Fund with respect to such litigation or proceeding. If the
Custodian is not permitted to participate or control such litigation or
proceeding under applicable law or by a ruling of a court of competent
jurisdiction, or if the Custodian chooses not to so participate, the Fund shall
not consent to the entry of any judgement or enter into any settlement in any
such litigation or proceeding without providing the Custodian with adequate
notice of any such settlement or judgement, and without the Custodian's prior
written consent which consent shall not be unreasonably withheld or delayed. The
Fund shall submit written evidence to the Custodian with respect to any cost or
expense for which it is seeking indemnification in such form and detail as the
Custodian may reasonably request.
Section 5.07. Custodian's Right to Proceed. Notwithstanding anything to
the contrary contained herein, the Custodian shall have, at its election upon
reasonable notice to the Fund, the right to enforce, to the extent permitted by
any applicable agreement and applicable law, the Fund's rights against any
Subcustodian, Securities System or other Person for loss, damage or expense
caused the Custodian by such Subcustodian, Securities System or other Person,
which the Fund may have as a consequence of any such loss, damage or expense, if
and to the extent that the Custodian has not been made whole for any such loss,
expense or damage. If the Fund makes the Custodian whole for any such loss,
expense or damage, the Fund shall retain the ability to enforce its rights
directly against such Subcustodian, Securities System or other Person. Upon the
Custodian's election to enforce any rights of the Fund under this Section 5.07,
the Custodian shall reasonably prosecute all actions and proceedings directly
relating to the rights of the Fund in respect of the loss, damage and expense
incurred by the Custodian; provided that, so long as the Custodian has
acknowledged in writing its obligation to indemnify the Fund under Section 5.06
hereof with respect to such claim, the Custodian shall retain the right to
settle, compromise and/or terminate any action or proceeding in respect of the
loss, damage or expense incurred by the Custodian without the Fund's consent and
provided further, that if the Custodian has not made an acknowledgement of its
obligation to indemnify, the Custodian shall not settle, compromise or terminate
any such action or proceeding without the written consent of the Fund, which
consent shall not be unreasonably withheld or delayed. The Fund agrees to
cooperate with the Custodian and take all actions reasonably requested by the
Custodian in connection with
<PAGE>
the Custodian's enforcement of any rights of the Fund. Nothing contained in this
Section 5.07 shall be construed as an obligation of the Custodian to enforce the
Fund's rights. The Custodian agrees to reimburse the Fund for out-of-pocket
expenses incurred by it in connection with the fulfillment of its obligations
under this Section 5.07; provided, however, that such reimbursement shall not
apply to expenses occasioned by or resulting from the negligence, misfeasance or
misconduct of the Fund.
ARTICLE VI
COMPENSATION
For the initial three year period beginning on the effective date of this
Agreement, the Fund shall compensate the Custodian in the amount and at the
times specified in Appendix "A" 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 and Clearing Agencies 4.02(a)
Securities System 2.22
Shares 2.16
Sovereign Risk 5.03(a)
Special Instruction 3.01(b)
Special Subcustodian 4.03
Subcustodian Article IV
1940 Act Preamble
ARTICLE IX
MISCELLANEOUS
Section 9.01. Execution of Documents, Etc.
(a) Actions by the Fund. Upon request, the Fund shall execute and deliver
to the Custodian such proxies, powers of attorney or other instruments as may be
reasonable and necessary or desirable in connection with the performance by the
Custodian or any Subcustodian of their respective obligations under this
Agreement or any applicable subcustodian agreement, provided that the exercise
by the Custodian or any Subcustodian of any such rights shall in all events be
in compliance with the terms of this Agreement.
(b) Actions by Custodian. Upon receipt of Proper Instructions, the
Custodian shall execute and deliver to the Fund or to such other parties as the
Fund may designate in such Proper Instructions, all such documents, instruments
or agreements as may be reasonable and necessary or desirable
<PAGE>
in order to effectuate any of the transactions contemplated hereby and
designated therein.
Section 9.02. Representations and Warranties.
(a) Representations and Warranties of the Fund. The Fund hereby represents
and warrants that each of the following shall be true, correct and complete as
of the date of execution of this Agreement and, unless notice to the contrary is
provided by the Fund to the Custodian, at all times during the term of this
Agreement: (i) the Fund is duly organized under the laws of its jurisdiction of
organization and is registered as an open-end management investment company
under the 1940 Act or is a series of portfolio of such entity; and (ii) the
execution, delivery and performance by the Fund of this Agreement are (w) within
its power, (x) have been duly authorized by all necessary action, and (y) will
not (A) contribute to or result in a breach of or default under or conflict with
any existing law, order, regulation or ruling of any governmental or regulatory
agency or authority, or (B) violate any provision of the Fund's corporate
charter or other organizational document, or bylaws, or any amendment thereof or
any provision of its most recent Prospectus or Statement of Additional
Information.
(b) Representations and Warranties of the Custodian. The Custodian hereby
represents and warrants that each of the following shall be true, correct and
complete as of the date of execution of this Agreement and, unless notice to the
contrary is provided by the Custodian to the Fund, at all times during the term
of this Agreement: (i) the Custodian is duly organized under the laws of its
jurisdiction of organization and qualifies to serve as a custodian to open-end
management investment companies under the provisions of the 1940 Act; and (ii)
the execution, delivery and performance by the Custodian of this Agreement are
(w) within its power (x) have been duly authorized by all necessary action, and
(y) will not (A) contribute to or result in a breach of or default under or
conflict with any existing law, order, regulation or ruling of any governmental
or regulatory agency or authority, or (B) violate any provision of the
Custodian's corporate charter, or other organizational document, or bylaws, or
any amendment thereof. The Custodian acknowledges receipt of a copy of the
Fund's most recent Prospectus and Statement of Additional Information.
Section 9.03. Entire Agreement. This Agreement constitutes the entire
understanding and agreement of the parties hereto with respect to the subject
matter hereof and accordingly, supersedes as of the effective date of this
Agreement any custodian agreement heretofore in effect between the Fund and the
Custodian.
Section 9.04. Waivers and Amendments. No provisions of this Agreement may
be waived, amended or deleted except by a statement in writing signed by the
party against which enforcement of such waiver, amendment or deletion is sought.
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
<PAGE>
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.
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
<PAGE>
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/Robert L. Hechler By: /s/Ralph Santoro
-------------------- ----------------
Name: Robert L. Hechler Name: Ralph Santoro
Title: President Title: Senior Vice President
<PAGE>
APPENDIX "A"
TO
CUSTODIAN AGREEMENT
BETWEEN
UNITED MUNICIPAL HIGH INCOME FUND, INC.
AND
UMB BANK, N.A.
Dated as of May 13, 1998
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 "A", "United Funds"
shall mean all funds in the United Group of Funds, TMK/United Funds, Inc. and
Waddell & Reed Funds, Inc.
DOMESTIC CUSTODY FEE SCHEDULE
A. Annual Fee (combining all domestic assets):
An annual fee to be computed as of month end and payable each month of the
Fund's fiscal year (after receipt of the bill issued to each Fund based
upon its portion of domestic assets), at the annual rate of:
.00005 for the first $5,000,000,000 of the net assets of all the United
Funds, plus .00004 for any net assets exceeding $5,000,000,000 of the
assets of all the United Funds.
B. Portfolio Transaction Fees (billed to each Fund):
(a) For each portfolio transaction* processed through a
Depository (DTC, PTC or Fed) $ 7.00
(b) For each portfolio transaction* processed through
the New York office (physical settlement) $20.00
(c) For each futures/option contract written $25.00
(d) For each principal/interest paydown $ 6.00
(e) For each interfund note transaction $ 5.00
* A portfolio transaction includes a receive, delivery, maturity, free
security movement and corporate action.
C. Earnings Credits:
Positive earnings credits will be applied on all collected custody and
cash management balances of each Fund at the Custodian to earn the
Custodian's daily repurchase agreement rate less reserve requirements and
FDIC premiums. Negative earnings credits will be charged on all
uncollected custody and cash management balances of each Fund at the
Custodian's prime rate less 150 basis points on each day a negative
balance occurs. Positive and/or negative earnings credits will be
monitored daily for each Fund and the net positive or negative amount for
each Fund will be included in the monthly statements. Excess positive
credits for each Fund will be carried forward indefinitely.
D. Out-of-Pocket Expenses (passed directly from Special Subcustodians):
Includes all charges by any Special Subcustodian to the Custodian as
Custodian for any Assets held at the Special Subcustodian.
<PAGE>
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
Segregated Account Fee: $175 monthly charge per fund holding foreign
assets.
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 18, 1999
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
United Small Cap Fund, Inc. August 18, 1999
*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:
Republic National Bank of New York
The Bank of New York, n.a.
EX-99.B(h)mhssafid
EXHIBIT C
<TABLE>
<CAPTION>
Bond or
Name of Bond Policy No. Insurer
<S> <C> <C> <C>
Investment Company 87015199B 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 20,400,000
Total Limit 20,400,000
Directors and Officers/ 87015199D ICI
Errors and Omissions Liability Mutual
Insurance Form Insurance
Total Limit $10,000,000 Company
Blanket Lost Instrument Bond (Mail Loss) 30S100639551 Aetna
Life &
casualty
Blanket Undertaking Lost Instrument
Waiver of Probate 42SUN339806 Hartford
Casualty
Insurance
</TABLE>
<TABLE>
<S> <C> <C>
Waddell & Reed, Inc. United Group of Funds Division Office Stamp
P.O. Box 29217 APPLICATION
Shawnee Mission, KS
66201-9217 (NON-RETIREMENT PLAN) Trans Code:________________________
Date Transmitted:__________________
</TABLE>
1 ------------------------------------------------------------------------------
I (We) make application for an account to be established as follows:
REGISTRATION TYPE (check one only)
<TABLE>
<S> <C>
[ ] Single Name [ ] Joint Tenants W/ROS [ ] Declaration of Trust Revocable (Attach CUF 0022)
TOD (Transfer On Death) [ ] Yes [ ] No NOT AVAILABLE IN ILLINOIS
[ ] Uniform Gifts (Transfers) To Minors (UGMA/UTMA) [ ] Other:_______________________________________
[ ] Dated Trust Date of Trust_________________
</TABLE>
------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
__________________
REGISTRATION [ ] NEW ACCOUNT or [ ] NEW FUND FOR EXISTING ACCOUNT | |
(must have same ownership): |__________________|
</TABLE>
<TABLE>
<S> <C>
--------------------------------------------------------------------------------------
Individual Name (exactly as desired)/Trustee/Custodian (Tax-responsible party)
------------------------------------------------------- ------------------------------
[ ] Social Security # or [ ] Taxpayer Identification # Date of Birth (Month/Day/Year)
--------------------------------------------------------------------------------------
Joint Name (if any, exactly as desired)/Co-Trustee/Minor (for UGMA/UTMA)
------------------------------------------------------- ------------------------------
[ ] Social Security # or [ ] Taxpayer Identification # Date of Birth (Month/Day/Year)
</TABLE>
-----------------------------------------------------------------------------
Name of Trust
-----------------------------------------------------------------------------
Mailing Address
-----------------------------------------------------------------------------
City/State/Zip
-----------------------------------------------------------------------------
Telephone (home) Telephone (work) Citizenship (Required in VA)
------------------------------------------------------------------------------
INVESTMENTS Make check payable to Waddell & Reed, Inc.
<TABLE>
<CAPTION>
Monthly Div/C.G. Distr*
Fund Amount AIS (Assumes RR)
(enter code) Enclosed (If Any) RR CC CR
<S> <C> <C> <C> <C> <C> <C>
CLASS OF SHARES ____________
(ONLY ONE) | |
|____________| $_______ $_______ [ ] [ ] [ ]
____________
| |
A [ ] B [ ] C [ ] |____________| $_______ $_______ [ ] [ ] [ ]
____________
| |
IF NOT CHECKED, |____________| $_______ $_______ [ ] [ ] [ ]
ASSUME A ____________
| |
|____________| $_______ $_______ [ ] [ ] [ ]
____________
| |
|____________| $_______ $_______ [ ] [ ] [ ]
Total $_______ Total $_______
</TABLE>
* RR = Reinvest Div/Cap Gain CC = Cash Div/Cap Gain CR = Cash Div/Reinvest
Cap Gain All Dividends/Capital Gains under $5.00 will be Reinvested. See
Section 12 if you wish your distribution to go to another Fund or Account.
<TABLE>
<CAPTION>
FUNDS CODES A B C A B C A B C
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Income 621 121 321 High Income 628 128 328 Asset Strategy 684 184 384
Science & Technology 622 122 322 Vanguard 629 129 329 Cash Management 750 150 350
Accumulative 623 123 323 New Concepts 630 130 330 Government Securities 753 153 353
Bond 624 124 324 High Income II 634 134 334 Municipal Bond 760 160 360
International Growth 625 125 325 Small Cap 677 177 377 Municipal High Income 762 162 362
Continental Income 627 127 327 Retirement Shares 680 180 380
</TABLE>
------------------------------------------------------------------------------
CLASS A ONLY
This purchase is entitled to a reduced sales load charge for the following
reason:
<TABLE>
<S> <C>
[ ] Letter of Intent To Invest $_____________ LOI Number____________
[ ] Cumulative discount number____________ or Rights of Accumulation With Existing Accounts____________
[ ] Identify Other New Accounts Established At This Time:________________________
</TABLE>
------------------------------------------------------------------------------
2 ------------------------------------------------------------------------------
LETTER OF INTENT (CLASS A SHARES ONLY) I agree to the terms of the Letter of
Intent conditions set forth in the Statement of Additional Information
(including the escrowing of shares). Although I am not obligated to do so, it
is my intention to invest over a 13-month period in shares of one or more
United funds in an aggregate amount at least equal to:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
[ ] $100,000 [ ] $200,000 [ ] $300,00 [ ] $500,00 [ ] $1,000,000 [ ] $2,000,000 See Section 9
</TABLE>
------------------------------------------------------------------------------
CAP1 Page 1 of 6
<PAGE>
3 ------------------------------------------------------------------------------
BENEFICIARY: For TOD (Transfer On Death) Accounts Only
To designate contingent beneficiaries or per stirpes distribution,
use MRP-0972 or MRP-1588
<TABLE>
<CAPTION>
Full Name of Beneficiary Tax Identification Number Date of Birth Relationship Percent
<S> <C> <C> <C> <C>
---------------------------- ----------------------------- -----/-----/----- ---------------- -----------%
MO DA YR
---------------------------- ----------------------------- -----/-----/----- ---------------- -----------%
MO DA YR
---------------------------- ----------------------------- -----/-----/----- ---------------- -----------%
MO DA YR
---------------------------- ----------------------------- -----/-----/----- ---------------- -----------%
MO DA YR
</TABLE>
------------------------------------------------------------------------------
4 ------------------------------------------------------------------------------
EXPEDITED REDEMPTION: For United Cash Management A [ ] B [ ] C [ ]
<TABLE>
<S> <C>
-------------------------------------------------- -------------------------------------------------
Name & Address of Bank/Financial Institution ABA/Routing # of Bank/Financial Institution
-------------------------------------------------- -------------------------------------------------
Street Customer's Bank Account Number
-------------------------------------------------- -------------------------------------------------
City/State/Zip
</TABLE>
On UCM Accounts where expedited redemption is requested, Waddell & Reed, Inc.
is authorized to honor any requests from anyone for redemption of fund shares
as long as the proceeds are transmitted to the identified account. All wires
must be transmitted exactly as registered on the UCM Account.
------------------------------------------------------------------------------
5 ------------------------------------------------------------------------------
CHECK SERVICE (CLASS "A" SHARES ONLY)
(Complete signature card)
[ ] United Government Securities [ ] United Cash Management (UCM)
SIGNATURE CARD FOR UNITED CASH MANAGEMENT/GOVERNMENT SECURITIES CLASS "A"
SHARES ONLY
The payment of funds on the conditions set forth below is authorized by the
persons signing below (the Shareholder).
UMB BANK, N.A. (the Bank) is authorized by the Shareholder to honor any
checks for not less than $250 presented against this account and is directed
to forward said checks to the redemption agent of United Cash Management,
Inc. and United Government Securities, Inc. (the "Mutual Funds") as authority
to pay the checks. Checks will be paid by redeeming a sufficient number of
shares for which share certificates have not been issued in the Shareholder's
account with the Mutual Funds.
Checks will be subject to the Bank's rules and regulations governing such
checks, including the right of the Bank not to honor checks in amounts
exceeding the value of the Shareholder's account with the Mutual Funds at the
time the check is presented for payment.
Shareholder hereby authorizes the Mutual Funds or their redemption agent to
honor redemption requests presented in the above manner by the Bank.
It is further agreed as follows:
1. Shareholder(s) below waive the right to receive the cancelled check(s)
after each check is processed and the underlying shares of the Mutual
Funds have been redeemed.
2. The account may not be used for any purpose other than the presentment,
forwarding and payment of checks relating to an account in the Mutual
Funds.
3. The Bank reserves the right to change, modify or terminate this agreement
at any time upon notification mailed to the address noted on the reverse
side of this card.
BY SIGNING BELOW, THE SIGNATOR(S) SIGNIFIES HIS (THEIR) AGREEMENT TO BE
SUBJECT TO THE RULES AND REGULATIONS OF UMB BANK, N.A. PERTAINING THERETO AND
AS AMENDED FROM TIME TO TIME, AND TO THE CONDITIONS PRINTED ABOVE.
Authorized Signature(s) "A" SHARES ONLY [ ] Check box if more than one
signature required on checks
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
------------------------------------------------------------------------------
Page 2 of 6
<PAGE>
6 ------------------------------------------------------------------------------
Establish NEW Automatic Investment Service
REGISTRATION INFORMATION
------------------------------------------------
Individual Name (exactly as registered)
------------------------------------------------
Joint Name (if any, exactly as registered)
<TABLE>
<CAPTION>
Fund Draft Is To Begin On
(Enter code) (Month/Day/Year) Draft Amount Special Instructions
<S> <C> <C> <C>
___________
| |
|___________| ____________________ $_____________ ______________________________
___________
| |
|___________| ____________________ $_____________ ______________________________
___________
| |
|___________| ____________________ $_____________ ______________________________
___________
| |
|___________| ____________________ $_____________ ______________________________
___________
| |
|___________| ____________________ $_____________ ______________________________
</TABLE>
Authorization to honor checks drawn by Waddell & Reed, Inc.
As a convenience to me, I hereby request and authorize you to pay and charge
to my or our account identified below, debit entries drawn on the account by
Waddell & Reed, Inc. provided there are sufficient funds in the account to
pay the same on presentation. This authorization shall remain in effect until
revoked by me in writing and until you actually receive such notice. I agree
that you shall be fully protected by honoring any such debit entry. I agree
that your rights in respect to any debit entry shall be the same as if it
were a check signed personally by me. I further agree, that if any such debit
entry be dishonored, whether intentionally or inadvertently, you shall be
under no liability whatsoever.
PLEASE COMPLETE THE FOLLOWING IN ITS ENTIRETY.
<TABLE>
<S> <C>
----------------------------------------------------- -------------------------
NAME OF DEPOSITOR (as shown on bank records(s)) Bank Account Number
----------------------------------------------------- See Section 10
BANK NAME
-----------------------------------------------------
BANK ADDRESS
-----------------------------------------------------
CITY/STATE/ZIP
</TABLE>
------------------------------------------------------------------------------
7 ------------------------------------------------------------------------------
Establish NEW Funds Plus Service
<TABLE>
<S> <C> <C> <C>
___________
REGISTRATION INFORMATION [ ] NEW ACCOUNT W/UCM or [ ] EXISTING ACCOUNT W/UCM |___________|
</TABLE>
-----------------------------------------------------
Individual Name (exactly as registered)
-----------------------------------------------------
Joint Name (if any, exactly as registered)
<TABLE>
<CAPTION>
FUNDS PLUS Service
Account(s) to RECEIVE Fund If new, Is To Begin On FUNDS PLUS
FUNDS PLUS Investment (Enter code) mark box (Month/Day/Year) Investment Amount
<S> <C> <C> <C> <C>
_____________________________ __________
| | | | [ ]
|_____________________________| |__________| __________________ $__________________
_____________________________ __________
| | | | [ ]
|_____________________________| |__________| __________________ $__________________
_____________________________ __________
| | | | [ ]
|_____________________________| |__________| __________________ $__________________
_____________________________ __________
| | | | [ ]
|_____________________________| |__________| __________________ $__________________
_____________________________ __________
| | | | [ ]
|_____________________________| |__________| __________________ $__________________
</TABLE>
------------------------------------------------------------------------------
Page 3 of 6
<PAGE>
8 ------------------------------------------------------------------------------
Establish NEW Flexible Withdrawal Service (See Section 11)
<TABLE>
<CAPTION>
Fund Changes To Be
(See Reverse Effective Beginning Amount
for Codes) (Month) (Year) Indicate dollars, shares or percentage Frequency Make Payable
<S> <C> <C> <C> <C>
____________ _________________ ______________
| | | | 20 | | | |
|____________| |_____|______|____| |______________| [ ] $ [ ] SH [ ] % [ ] monthly [ ] To registered owner(s)
____________ _________________ ______________
| | | | 20 | | | | [ ] quarterly [ ] To Alternate Payee
|____________| |_____|______|____| |______________| [ ] $ [ ] SH [ ] %
____________ _________________ ______________ [ ] semi-annually [ ] To registered owner(s)
| | | | 20 | | | | at alternate address
|____________| |_____|______|____| |______________| [ ] $ [ ] SH [ ] % [ ] annually
____________ _________________ ______________
| | | | 20 | | | | (If left blank,
|____________| |_____|______|____| |______________| [ ] $ [ ] SH [ ] % annual payments
will be assumed)
</TABLE>
------------------------------------------------------------------------------
------------------------------------------------------------------------------
Designate Alternate Payee or Address (for Electronic Deposits of FWS, see
section 10)
Complete this section if the check is TO BE PAYABLE TO AN ALTERNATE PAYEE
(other than as registered) or SENT TO AN ALTERNATE ADDRESS. If sending FWS to
another fund/account please indicate account/fund. Must be same class.
<TABLE>
<CAPTION>
Alternate Payee Alternate Address (check will be payable as registered and sent to the following)
<S> <C>
---------------------------------------------- ----------------------------------------------
Name or institution C/O Name
---------------------------------------------- ----------------------------------------------
Street Street
---------------------------------------------- ----------------------------------------------
City/State/Zip City/State/Zip
---------------------------------------------- ----------------------------------------------
Bank Account Number (if applicable) Bank Account Number (if applicable)
</TABLE>
------------------------------------------------------------------------------
9 ------------------------------------------------------------------------------
LOI TERMS AND CONDITIONS
1. This Agreement does not bind the investor to buy, or Waddell & Reed, Inc.
to sell, any shares.
2. This Agreement can only be terminated before the 13 months has elapsed by
submitting a written request signed by all owners.
3. Any purchase made under this Agreement will be made at the offering price
applicable to a one-time purchase of the amount the investor has checked
on the front of this Agreement as described in the prospectus of the fund
or funds being purchased.
4. If the amount invested during the 13-month period covered by this
Agreement exceeds the required amount and is large enough to qualify for a
sales charge lower than that available under this Agreement, the lower
sales charge will be applied to the amount invested. Upon termination of
this Agreement, a price adjustment will be made to give effect to the
lower sales charge and the amount of the price adjustment will be
reinvested in additional shares of the fund(s) on the date of termination.
5. If the amount invested during the 13-month period covered by this
Agreement is less than the required amount, the sales charge for the
investments reverts back to that outlined in the Fund Prospectus, as if
the Agreement had not been executed. Waddell & Reed, Inc. will subtract
shares equal in value to the amount of the additional sales charge due
from escrowed shares. The investor hereby irrevocably appoints Waddell &
Reed, Inc. or its successors or assigns, as attorney to surrender for
redemption shares in an amount equal to the additional sales charge owed
on the purchases made. This appointment and the authority granted herein
shall be binding on the heirs, legal representatives, successors and
assigns of the investor.
6. While the value of purchases made prior to the acceptance date of this
Agreement will be considered in determining the Intended Investment, the
sales charge imposed on prior purchases will not be retroactively reduced.
7. Shares purchased directly to United Cash Management, Inc. will not be
considered when determining the net asset value of shares presently held
by the investor as of the date of acceptance of this Agreement, nor for
determining the amount invested under this Agreement. However,
non-commissionable shares are considered for there purposes.
------------------------------------------------------------------------------
Page 4 of 6
<PAGE>
10------------------------------------------------------------------------------
BANK ACCOUNT OR CREDIT UNION INFORMATION (optional)
This information will be used for
[ ] Div / Cap gain distributions taken in cash (Sec. 1)
[ ] Systematic investments (Sec. 6)
[ ] Flexible withdrawals (Sec. 8)
<TABLE>
<S> <C> <C>
--------------------------------------- ---------------------------------------
Checking account Bank or credit union's ABA route number Bank or credit union account number
--------------------------------------- ---------------------------------------
Savings account Bank or credit union's ABA route number Bank or credit union account number
</TABLE>
Tape your voided check or deposit slip here
Bank and credit union routing information
For deposits or withdrawals to your checking account, please tape a voided
check so we may get bank or credit union account information.
For deposits or withdrawals to a savings account, please tape a preprinted
deposit slip. (Do not staple the slips.)
------------------------------------------------------------------------------
11------------------------------------------------------------------------------
FLEXIBLE WITHDRAWAL REQUIREMENTS AND CONSIDERATIONS
1. This application directs Waddell & Reed Services Company to redeem the
amounts listed on the 20th day of the indicated month, or if not a
business day, on the preceding business day.
2. Allow five days from the date your instructions are received in the home
office for processing of any changes and/or initiation of a Flexible
Withdrawal Service.
3. The aggregate total investment, or the present net asset value of the
shareholder's United Group of Funds/or W&R Funds combined accounts should
exceed $10,000. You may add to your account by additional investments of
at least $1,000, except in United Cash Management, Inc., which has no
minimum additional investment amount.
4. Minimum withdrawals for dollars or shares are $50 aggregate or a 5 share
minimum per fund.
5. If withdrawals are to be made monthly, 1/12th of the indicated percentage
of the asset value of the shares in the account will be redeemed. If
withdrawals are to be made quarterly, 1/4th of the indicated percentage of
the asset value of the shares in the account will be redeemed. If
withdrawals are to be made semi-annually, 1/2 of the indicated percentage
will be redeemed.
6. Dividends and capital gains distributions are automatically reinvested.
Information about the federal tax status of shares redeemed through the
Flexible Withdrawal Services will be mailed to shareholders annually.
------------------------------------------------------------------------------
12------------------------------------------------------------------------------
ALTERNATE PAYEE/ADDRESS
To send systematic withdrawals (Section 8) or distributions (Section 1) to a
third party, or to another United Fund account, please fill in the
appropriate information below.
This address will be used for (check one):
[ ] Flexible Withdrawals
[ ] Div/Cap Gains
<TABLE>
<S> <C>
------------------------------------------------------------- To another United Fund
Name
------------------------------------------------------------- ---------------------------------
Address (including apartment or box number) Account # Fund #
Must be to same class of shares
-------------------------------------------------------------
City/State/Zip
</TABLE>
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Page 5 of 6
<PAGE>
13------------------------------------------------------------------------------
CONFIDENTIAL DATA (Required)
1. Marital Status:__________
(Required in VA)
2. Gross Family Income: $__________
3. Taxable Income: $__________
4. Number of Dependents:__________
5. Occupation:______________________________________________________________
6. Employer Name:___________________________________________________________
7. Employer Address:________________________________________________________
8. Savings and Liquid Assets: $__________
9. Other Assets (excluding home, furnishings, cars): $__________
10. Net Worth (Assets minus liabilities): $__________
11. Are you associated with an NASD Member? [ ] Yes [ ] No
12. Investment Objectives (mark all that apply):
[ ] Retirement Savings [ ] Reserves [ ] College Funds [ ] Buy Major Asset
[ ] Other Needs/Goals (specify in Special Remarks)
13. Special Remarks/Considerations:__________________________________________
_____________________________________________________________________________
14. Residence Address:_______________________________________________________
(if different from Street City State Zip
Mailing Address
on reverse side)
<TABLE>
<S> <C> <C>
(Required in CT)
15. Was this investment solicited by a W&R Advisor/Representative? [ ] Yes [ ] No
(Required in CT)
16. Has any beneficial owner of this account conducted any prior investment activity? [ ] Yes [ ] No
If yes, which owner(s)?_________________________________________________________________________
17. Are proceeds from the sale of another security being used to open this account? [ ] Yes [ ] No
If yes, specify:________________________________________________________________________________
________________________________________________________________________________
</TABLE>
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14------------------------------------------------------------------------------
ACKNOWLEDGEMENT
o I (We) have received a copy of the current prospectus of the Funds
selected, and agree to the terms therein and herein.
o Under penalties of perjury, I certify that the social security number or
other taxpayer identification number shown in Section 1 is correct (or I
am waiting for a number to be issued to me) and (strike the following if
not true) that I am not subject to backup withholding because (a) I am
exempt from backup withholding, or (b) I have not been notified by the IRS
that I am subject to backup withholding as a result of a failure to report
all interest and dividends, or (c) the IRS has notified me that I am no
longer subject to backup withholding.
o I (we) understand that there maybe a deferred sales charge upon the
redemption of any Class B or C shares held in the account for less than
the time specified in the prospectus.
Signature(s) of Purchasers (all joint purchasers must sign). Sign exactly as
name(s) appear in registration.
"The Internal Revenue Service does not require your consent to any provision
of this document other than the certification required to avoid backup
withholding."
<TABLE>
<S> <C> <C>
------------------------------------- ------------------------------------- -------------------------------------
(Signature) (Printed Name) (Title, if any)
------------------------------------- ------------------------------------- -------------------------------------
(Signature) (Printed Name) (Title, if any)
------------------------------------- --------------------
(Advisor/Representative Signature) (Date)
</TABLE>
_____________________________
| |
Advisor/Representative Number |_____________________________|
------------------------------------------------------------------------------
-----------------------------------------------|
Check Any Items Enclosed With Application |
|
[ ] Declaration Trust Revocable (CUF0022) |
|---------------|
[ ] Additional Applications______ |OSJ: |
|(H.O. USE) |
[ ] Check enclosed #______ | |
| |
[ ] Other:______ | |
-----------------------------------------------|---------------|
Page 6 of 6
EX-99.B(i)mhlegopn
December 29, 1999
United Municipal High Income Fund, Inc.
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
RE: United Municipal High Income Fund, Inc.
Post-Effective Amendment No. 23
Dear Sir or Madam:
In connection with the public offering of shares of Capital Stock of United
Municipal High Income Fund, Inc. (the "Fund"), I have examined such corporate
records and documents and have made such further investigation and examination
as I deemed necessary for the purpose of this opinion.
It is my opinion that the indefinite number of shares of such Capital Stock
covered by the Fund's Registration Statement on Form N-1A, when issued and paid
for in accordance with the terms of the offering, as set forth in the Prospectus
and Statement of Additional Information forming a part of the Registration
Statement, will be, when such Registration shall have become effective, legally
issued, fully paid and non-assessable by the Fund.
I hereby consent to the filing of this opinion as an Exhibit to the said
Registration Statement and to the reference to me in such Statement of
Additional Information.
Yours truly,
/s/ Kristen A. Richards
- --------------------------
Kristen A. Richards
Assistant Secretary
KAR/fr
EX-99.B(j)mhconsnt
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Post-Effective Amendment No. 23 to Registration
Statement No. 33-715 of United Municipal High Income Fund, Inc. on Form N-1A of
our report dated November 5, 1999 appearing in the Statement of Additional
Information, which is part of such Registration Statement, and to the reference
to us under the caption "Financial Highlights" appearing in such Prospectus.
/s/Deloitte & Touche LLP
- ------------------------
Deloitte & Touche LLP
Kansas City, Missouri
December 27, 1999
EX-99.B(o)mhmcp
UNITED MUNICIPAL HIGH INCOME FUND, INC.
MULTIPLE CLASS PLAN PURSUANT TO RULE 18f-3
This Multiple Class Plan ("Plan") pursuant to Rule 18f-3 under the
Investment Company Act of 1940, as amended ("1940 Act"), sets forth the multiple
class structure for United Municipal High Income Fund, Inc. ("Fund"). This
multiple class structure was approved by the Board of Directors of the Fund on
February 8, 1995, under an order of exemption issued by the Securities and
Exchange Commission on January 11, 1995. Subsequent to such approval, Rule 18f-3
under the 1940 Act was adopted. It was determined that the Fund operate under
Rule 18f-3, and this Plan was adopted pursuant to Rule 18f-3. This Plan
describes the classes of shares of stock of the Fund -- Class A shares and Class
Y shares -- offered to the public on or after January 30, 1996 ("Implementation
Date").
General Description of the Classes:
Class A Shares. Class A shares will be sold to the general public subject
to an initial sales charge. The maximum sales charge is 4.25% of the amount
invested and declines to 0% based on discounts for volume purchases. The initial
sales charge is waived for certain eligible purchasers.
Class A shares also will be subject to a service fee charged pursuant to a
Service Plan adopted pursuant to Rule 12b-1 under the 1940 Act ("Rule 12b-1")
that provides for a maximum fee of .25% of the average annual net assets of the
Class A shares of the Fund. All of the shares of the Fund issued pursuant to a
Fund prospectus effective prior to the Implementation Date and that are
outstanding on the Implementation Date will be designated as Class A shares.
Class B Shares. Class B shares will be sold subject to a contingent
deferred sales charge, which will be imposed on redemption proceeds. The maximum
contingent deferred sales charge will be 5.0% and will decline 1% per year after
the first full calendar year after investment to 0% after seven years, as
follows: in the first year, the contingent deferred sales charge will be 5%; in
the second year, 4%; in the third and fourth years, 3%; in the fifth year, 2%;
in the sixth year, 1%; and in the seventh year, 0%. Class B shares will also be
subject to distribution and service fees charged pursuant to a Distribution and
Service Plan adopted pursuant to Rule 12b-1 that provides for a maximum service
fee of 0.25% and a maximum distribution fee of 0.75% of the average annual net
assets of the Class B shares of the Fund. Class B shares convert automatically
into Class A shares in the eighth year held.
<PAGE>
Class C Shares. Class C shares will be sold without an initial sales
charge and will be subject to a contingent deferred sales charge of 1% if the
shares are redeemed within twelve months of purchase. Class C shares will be
subject to distribution and service fees charged pursuant to a Distribution and
Service Plan adopted pursuant to Rule 12b-1 that provides for a maximum service
fee of 0.25% and a maximum distribution fee of 0.75% of the average annual net
assets of the Class C shares of the Fund.
Class Y Shares. Class Y shares will be sold without an initial sales
charge and without a Rule 12b-1 fee. Class Y shares are designed for
institutional investors and will be available for purchase by: (i) 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; and (ii) government entities or authorities and corporations whose
investment within the first twelve months after initial investment is $10
million or more.
Expense Allocations of Each Class:
In addition to the difference with respect to 12b-1 fees, Class A, Class B
and Class C shares differ from Class Y shares of the Fund with respect to the
applicable shareholder servicing fees. Class A, Class B and Class C shares,
respectively, pay a monthly shareholder servicing fee of $1.0208 for each Class
A, Class B or Class C shareholder account which was in existence during the
prior month, plus $0.30 for each Class A, Class B or Class C account on which a
dividend or distribution had a record date in that month. Class Y shares pay a
monthly shareholder servicing fee equal to one-twelfth of .15 of 1% of the
average daily net Class Y assets for the preceding month.
Each Class may also pay a different amount of the following other
expenses:
(a) stationery, printing, postage and delivery expenses related to
preparing and distributing materials such as shareholder reports,
prospectuses, and proxy statements to current shareholders of a specific
Class of shares;
(b) Blue Sky registration fees incurred by a specific Class of
shares;
(c) SEC registration fees incurred by a specific Class of shares;
(d) expenses of administrative personnel and services required to
support the shareholders of a specific Class of shares;
(e) Directors' fees or expenses incurred as a result of issues
relating to a specific Class of shares;
<PAGE>
(f) accounting expenses relating solely to a specific Class of
shares;
(g) auditors' fees, litigation expenses, and legal fees and expenses
relating to a specific Class of shares; and
(h) expenses incurred in connection with shareholders meetings as a
result of issues relating to a specific Class of shares.
These expenses may, but are not required to, be directly attributed and
charged to a particular Class. The shareholder servicing fees and other expenses
listed above that are attributed and charged to a particular Class are borne on
a pro rata basis by the outstanding shares of that Class.
Certain expenses that may be attributable to the Fund, but not a
particular Class, are allocated based on the relative daily net assets of that
Class.
Exchange Privileges:
Class A shares of the Fund may be exchanged for Class A shares of any
other fund in the United Group of Mutual Funds.
Class B shares of the Fund may be exchanged for Class B shares of any
other fund in the United Group of Mutual Funds.
Class C shares of the Fund may be exchanged for Class C shares of any
other fund in the United Group of Mutual Funds.
Class Y shares of the Fund may be exchanged for Class Y shares of any
other fund in the United Group of Mutual Funds.
These exchange privileges may be modified or terminated by a Fund, and
exchanges may only be made into funds that are legally registered for sale in
the investor's state of residence.
Additional Information:
This Plan is qualified by and subject to the terms of the then current
prospectus for the applicable Class after the Implementation Date; provided,
however, that none of the terms set forth in any such prospectus shall be
inconsistent with the terms of the Classes contained in this Plan. The
prospectus for each Class contains additional information about that Class and
the Fund's multiple class structure.
Adopted: December 1, 1995
As Amended: December 6, 1995, Effective: January 30, 1996
As Amended: February 10, 1999, Effective: September 1, 1999
