United
Continental
Income Fund,
Inc.
ANNUAL
REPORT
----------------------------------------
For the fiscal year ended March 31, 1997
<PAGE>
FUND MANAGER'S LETTER
- -----------------------------------------------------------------
MARCH 31, 1997
Dear Shareholder:
This report relates to the operation of United Continental Income Fund for
the fiscal year ended March 31, 1997. The following discussion, graphs and
tables provide you with information regarding the Fund's performance during that
period.
During the last fiscal year, the economy experienced modest growth with
continuing low interest and inflation rates. However, perceptions regarding the
direction and strength of the economy varied widely during the past fiscal year,
contributing to volatility and uncertainty in both the equity and fixed income
markets. Inflation concerns, prompted by upward wage pressures and increased
energy prices, affected the performance of both the equity and fixed income
markets and caused investors to gravitate towards companies that enjoy a
perception of stability regardless of economic strength.
We continued to pursue a strategy of attempting to increase total return
while striving to preserve capital during the past fiscal year. In an attempt
to reduce investment risk, we continued to diversify the Fund's investments
across a broad section of industries. We maintained some cash during the past
fiscal year to enable us to react to interest rate changes and take advantage of
investment opportunities we perceived as being attractive.
The strategies and techniques we applied resulted in the direction of the
Fund's performance remaining below that of the equity indexes and above that of
the fixed income indexes charted on the following page. Those indexes reflect
the performance of securities that generally represent the stock market (the S&P
500 Index), the bond market (the Salomon Brothers Treasury/Government
Sponsored/Corporate Bond Index) and the universe of funds with similar
investment objectives (the Lipper Balanced Fund Universe Average). Multiple
indexes are presented because the Fund invests in both stocks and bonds. We
have chosen to use the Salomon Brothers Index beginning with this year's Annual
Report, instead of the Lehman Brothers Government/Corporate Bond Index that had
been presented in prior years. We believe that the Salomon Brothers Index
provides a more accurate basis for comparing the Fund's performance to the
performance of the types of fixed income securities in which the Fund invests.
Both indexes are presented on the following page in this year's Annual Report
for comparison purposes. The Fund's performance relative to the equity indexes
was negatively impacted by exposure to bonds, a cash position and a more diverse
equity portfolio, particularly in cyclical issues that underperformed the more
stable growth issues during the latter part of the fiscal year.
The Federal Reserve's recent increase in the Federal Funds Rate signals its
concern that the strength in economic data during the last fiscal quarter may
raise inflationary pressures. Future increases in short-term interest rates
seem likely based on prevailing economic conditions. In light of the above,
corporate profits growth could start to come into question as a result of
increased interest expenses and wage pressures. We anticipate that the markets
will remain vulnerable. Accordingly, we expect to maintain a diversified and
defensive position, while continuing to invest in securities that present the
opportunity for positive long-term returns consistent with the Fund's
objectives.
Thank you very much for your continued support and confidence in our
organization.
Respectfully,
Cynthia P. Prince-Fox
Manager, United Continental Income Fund
<PAGE>
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
UNITED CONTINENTAL INCOME FUND, INC. CLASS A SHARES,
THE STANDARD & POOR'S 500 COMPOSITE STOCK PRICE INDEX,
THE LEHMAN BROTHERS GOVERNMENT/CORPORATE BOND INDEX,
THE SALOMON BROTHERS TREASURY/GOVERNMENT SPONSORED/ CORPORATE INDEX,
AND THE LIPPER BALANCED FUND UNIVERSE AVERAGE
Salomon
United S&P Lehman Brothers
Continental500BrothersTreasury/ Lipper
IncomeCompositeGovernment/GovernmentBalanced
Fund, StockCorporateSponsored/ Fund
Class Price Bond Corporate Universe
A SharesIndex Index Index Average
------------------------------------------------
03/31/87 Purchase9,42510,000 10,000 10,000 10,000
03/31/88 8,328 9,167 10,443 10,479 9,712
03/31/89 9,099 10,831 10,965 11,020 10,661
03/31/90 10,546 12,918 12,248 12,296 11,940
03/31/91 11,243 14,780 13,779 13,817 13,412
03/31/92 12,927 16,412 15,347 15,426 15,102
03/31/93 14,748 18,911 17,542 17,634 17,038
03/31/94 15,692 19,190 18,029 18,139 17,520
03/31/95 16,695 22,177 18,856 18,974 18,722
03/31/96 20,585 29,296 20,915 21,056 22,624
03/31/97 21,797 35,105 21,849 22,006 25,059
===== United Continental Income Fund, Class A Shares* -- $21,797
+++++ S&P 500 Index -- $35,105
- - - - Lehman Brothers Government/Corporate Bond Index - $21,849
**** Salomon Brothers Treasury/Government Sponsored/Corporate Index - $22,006
- ---- Lipper Balanced Fund Universe Average -- $25,059
*The value of the investment in the Fund is impacted by the sales load at the
time of the investment and by the ongoing expenses of the Fund.
Annual Average Total Return +
Class A++ Class Y
-----------------------------
Year Ended
3/31/97 -0.21% 6.08%
5 Years Ended
3/31/97 9.70% N/A
10 Years Ended
3/31/97 8.10% N/A
Life of Class Y+++ N/A 7.93%
+ Total return for the Class Y shares may be greater than that of the Class A
shares because the Fund's Class Y shares are not subject to a sales load or
12b-1 fees.
++ Performance data quoted represents past performance and is based on
deduction of a 5.75% sales load on the initial purchase in each of the
three periods. Investment return and principal value will fluctuate and an
investor's shares, when redeemed, may be worth more or less than their
original cost.
+++ 1/4/96 (the date on which Fund Class Y shares were first acquired by
shareholders) through 3/31/97.
Past performance is not predictive of future performance. Indexes are
unmanaged.
<PAGE>
SHAREHOLDER SUMMARY
- --------------------------------------------------------------
United Continental Income Fund, Inc.
PORTFOLIO STRATEGY:
Normally not more than OBJECTIVE: Current income with a
75% Common Stocks secondary objective of
long-term capital
appreciation.
Normally at least 25%
Debt Securities or STRATEGY: Invests in debt
Preferred Stock securities, preferred
stock and common stock.
Generally less than 10% (May purchase securities
Foreign Securities subject to repurchase
agreements. May invest
Cash Reserves in certain options or
futures.)
The use of cash reserves (often invested
in money market securities) for
defensive purposes is a strategy that
may be utilized by the Continental
Income Fund from time to time.
Moving into cash reserve positions at
times thought to be near a major stock
market peak allows the Fund the
opportunity to capture profits and
attempts to cushion the impact of market
declines. The added flexibility
provided by our CASH RESERVES STRATEGY
has from time to time been an important
element in our past success and, when
deemed appropriate, may be used in the
management of the portfolio in the
future.
FOUNDED: 1970
SCHEDULED DIVIDEND FREQUENCY: QUARTERLY (March, June, September,
December)
PERFORMANCE SUMMARY -- Class A Shares
PER SHARE DATA
For the Fiscal Year Ended March 31, 1997
- ----------------------------------------
DIVIDENDS PAID $ 0.73
======
CAPITAL GAINS DISTRIBUTION $ 1.93
======
NET ASSET VALUE ON
3/31/97 22.72 adjusted to: $24.65(A)
3/31/96 24.00
------
CHANGE PER SHARE $ 0.65
======
(A)This number includes the capital gains distribution of $1.93 paid in December
1996 added to the actual net asset value on March 31, 1997.
Past performance is not necessarily indicative of future results.
TOTAL RETURN HISTORY
Average Annual Total Return
---------------------------
With Without
Period Sales Load* Sales Load**
- ------ ----------- ------------
1-year period ended 3-31-97 -0.21% 5.88%
5-year period ended 3-31-97 9.70% 11.01%
10-year period ended 3-31-97 8.10% 8.74%
Performance data quoted represents past performance and is based on deduction of
5.75% sales load on the initial purchase in each of the three periods.
Performance data quoted in this column represents past performance without
taking into account the sales load deducted on an initial purchase.
Investment return and principal value will fluctuate and an investor's shares,
when redeemed, may be worth more or less than their original cost.
<PAGE>
PORTFOLIO HIGHLIGHTS
On March 31, 1997, United Continental Income Fund, Inc. had net assets totaling
$513,754,366 invested in a diversified portfolio of:
58.58% Common Stocks
33.93% Debt Securities
7.49% Cash and Cash Equivalents
As a shareholder of United Continental Income Fund, Inc., for every $100 you had
invested on March 31, 1997, your Fund owned:
$28.12 Manufacturing Stocks
25.03 United States Government Securities
8.90 Corporate Debt Securities
8.52 Transportation, Communication, Electric
and Sanitary Services Stocks
7.64 Finance, Insurance and Real Estate Stocks
7.49 Cash and Cash Equivalents
3.98 Wholesale and Retail Trade Stocks
3.54 Miscellaneous Investing Institutions Stocks
3.38 Mining Stocks
1.82 Services Stocks
1.06 Agriculture, Forestry and Fisheries Stocks
0.52 Contract Construction Stocks
<PAGE>
THE INVESTMENTS OF
UNITED CONTINENTAL INCOME FUND, INC.
MARCH 31, 1997
Shares Value
COMMON STOCKS
Apparel and Accessory Stores - 0.91%
Gap, Inc. (The) ......................... 140,000 $ 4,690,000
Apparel and Other Textile Products - 1.27%
Liz Claiborne, Inc. .................... 150,000 6,543,750
Automotive Dealers and Service Stations - 0.40%
Circuit City Stores, Inc.* ............. 135,300 2,029,500
Chemicals and Allied Products - 10.31%
American Home Products Corporation ..... 125,000 7,500,000
Astra AB, Class A (A) .................. 150,000 7,263,271
Avon Products, Inc. .................... 70,000 3,675,000
Dow Chemical Company (The) ............. 80,000 6,400,000
du Pont (E.I.) de Nemours and Company .. 65,000 6,890,000
IMC Global, Inc. ....................... 145,000 5,238,125
Merck & Co., Inc. ...................... 95,000 8,003,750
Pfizer Inc. ............................ 95,000 7,991,875
Total ................................. 52,962,021
Communication - 4.27%
GTE Corporation ........................ 150,000 6,993,750
Nokia Corporation, Series ADR .......... 98,400 5,731,800
SBC Communications Inc. ................ 175,000 9,209,375
Total ................................. 21,934,925
Depository Institutions - 4.47%
BankAmerica Corporation ................ 98,771 9,951,178
Citicorp ............................... 64,476 6,979,527
Wells Fargo & Company .................. 21,300 6,051,863
Total ................................. 22,982,568
Eating and Drinking Places - 0.31%
Einstein/Noah Bagel Corp.* ............. 62,500 1,566,375
Electric, Gas and Sanitary Services - 2.83%
Baltimore Gas and Electric Company ...... 110,000 2,942,500
Houston Industries Incorporated ........ 240,000 5,010,000
PECO Energy Company .................... 160,000 3,260,000
Unicom Corporation ..................... 170,000 3,315,000
Total ................................. 14,527,500
Electronic and Other Electric Equipment - 3.97%
AMP Incorporated ....................... 190,000 6,531,250
Emerson Electric Co. ................... 180,000 8,100,000
LSI Logic Corporation* ................. 165,000 5,733,750
Total ................................. 20,365,000
See Notes to Schedule of Investments on page 12.
<PAGE>
THE INVESTMENTS OF
UNITED CONTINENTAL INCOME FUND, INC.
MARCH 31, 1997
Shares Value
COMMON STOCKS (Continued)
Forestry - 1.06%
Georgia-Pacific Corporation ............ 75,000 $ 5,437,500
General Merchandise Stores - 0.62%
May Department Stores Company (The) .... 70,000 3,185,000
Health Services - 1.82%
Tenet Healthcare Corporation* .......... 380,000 9,357,500
Heavy Construction, Excluding Building - 0.52%
Foster Wheeler Corporation ............. 75,000 2,653,125
Holding and Other Investment Offices - 3.54%
LTC Properties, Inc. ................... 370,000 6,151,250
National Health Investors, Inc. ........ 133,930 4,972,151
VEBA AG (A) ............................ 50,000 2,831,235
Zurich Insurance Company (A) ........... 13,500 4,251,303
Total ................................. 18,205,939
Industrial Machinery and Equipment - 3.60%
Applied Materials, Inc.* ............... 130,000 6,020,560
Deere & Company ........................ 190,000 8,265,000
York International Corporation ......... 100,000 4,187,500
Total ................................. 18,473,060
Instruments and Related Products - 0.72%
St. Jude Medical, Inc.* ................ 110,000 3,671,250
Insurance Carriers - 3.17%
Berkshire Hathaway Inc., Class B* ...... 3,000 3,630,000
ITT Group, Inc. ........................ 112,000 8,078,000
United HealthCare Corporation .......... 96,000 4,572,000
Total ................................. 16,280,000
Metal Mining - 0.88%
Homestake Mining Company ............... 300,000 4,537,500
Oil and Gas Extraction - 2.50%
Noble Affiliates, Inc. ................. 85,000 3,208,750
Schlumberger Limited ................... 90,000 9,652,500
Total ................................. 12,861,250
Paper and Allied Products - 0.92%
Union Camp Corporation ................. 100,000 4,712,500
See Notes to Schedule of Investments on page 12.
<PAGE>
THE INVESTMENTS OF
UNITED CONTINENTAL INCOME FUND, INC.
MARCH 31, 1997
Shares Value
COMMON STOCKS (Continued)
Petroleum and Coal Products - 1.36%
Royal Dutch Petroleum Company .......... 40,000 $ 7,000,000
Primary Metal Industries - 0.71%
Nucor Corporation ...................... 80,000 3,660,000
Printing and Publishing - 3.95%
Belo (A. H.) Corporation, Class A ...... 90,000 3,330,000
Gannett Co., Inc. ...................... 45,700 3,924,488
McGraw-Hill, Inc. ...................... 100,000 5,112,500
Meredith Corporation ................... 200,000 4,625,000
Viacom Inc., Class B* .................. 100,000 3,312,500
Total ................................. 20,304,488
Rubber and Miscellaneous Plastics Products - 0.13%
Vans, Inc.* ............................ 57,500 682,813
Textile Mill Products - 1.18%
Sara Lee Corporation ................... 150,000 6,075,000
Transportation by Air - 1.42%
Delta Air Lines, Inc. .................. 68,445 5,757,936
Southwest Airlines Co. ................. 70,000 1,548,750
Total ................................. 7,306,686
Wholesale Trade - Nondurable Goods - 1.74%
Gillette Company (The) ................. 103,000 7,480,375
Nu Skin Asia Pacific, Inc.- Class A* ... 60,500 1,459,563
Total.................................. 8,939,938
TOTAL COMMON STOCKS - 58.58% $300,945,188
(Cost: $242,639,436)
See Notes to Schedule of Investments on page 12.
<PAGE>
THE INVESTMENTS OF
UNITED CONTINENTAL INCOME FUND, INC.
MARCH 31, 1997
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES
Communication - 0.64%
BellSouth Savings and Security ESOP Trust,
9.125%, 7-1-2003 ...................... $3,154 $ 3,283,664
Electronic and Other Electric Equipment - 0.90%
Cooper Industries, Inc.,
6.0%, 1-1-99 (Exchangeable) ........... 3,416 4,617,250
Fabricated Metal Products - 0.97%
Mark IV Industries, Inc.,
8.75%, 4-1-2003 ....................... 5,000 4,975,000
General Merchandise Stores - 0.45%
JCP Master Credit Card Trust,
9.625%, 6-15-2000 ..................... 2,250 2,322,405
Health Services - 0.49%
ARV Assisted Living, Inc., Convertible,
6.75%, 4-1-2006 (B) ................... 3,000 2,535,000
Nondepository Institutions - 3.19%
Ford Motor Credit Company,
8.875%, 6-15-99 ....................... 3,000 3,125,880
General Electric Capital Corporation,
8.3%, 9-20-2009 ....................... 6,500 6,981,325
General Motors Acceptance Corporation,
8.4%, 10-15-99 ........................ 3,000 3,109,380
Merrill Lynch Mortgage Investors, Inc.,
8.3%, 4-15-2012 ....................... 3,100 3,148,422
Total ................................. 16,365,007
Oil and Gas Extraction - 0.50%
Enron Corp.,
6.25%, 12-13-98 (Exchangeable) ........ 2,588 2,558,500
Petroleum and Coal Products - 0.73%
BP America Inc.,
10.0%, 7-1-2018 ....................... 3,500 3,775,170
Security and Commodity Brokers - 1.03%
Salomon Inc.,
7.625%, 5-15-99 (Exchangeable) ........ 4,793 5,310,000
TOTAL CORPORATE DEBT SECURITIES - 8.90% $ 45,741,996
(Cost: $43,055,913)
See Notes to Schedule of Investments on page 12.
<PAGE>
THE INVESTMENTS OF
UNITED CONTINENTAL INCOME FUND, INC.
MARCH 31, 1997
Principal
Amount in
Thousands Value
UNITED STATES GOVERNMENT SECURITIES
Federal National Mortgage Association:
7.5%, 4-25-2002 ....................... $ 3,000 $ 2,948,430
6.0%, 6-25-2007 ....................... 3,000 2,880,000
8.25%, 6-1-2008 ....................... 541 543,426
Government National Mortgage Association:
9.0%, 7-15-2016 ....................... 127 134,683
9.0%, 8-15-2016 ....................... 277 293,154
9.0%, 10-15-2016 ...................... 980 1,037,014
9.0%, 11-15-2016 ...................... 288 304,812
9.0%, 1-15-2017 ....................... 103 108,720
9.0%, 3-15-2017 ....................... 312 330,401
9.0%, 4-15-2017 ....................... 279 295,491
9.0%, 7-15-2017 ....................... 220 233,438
United States Treasury:
5.625%, 8-31-97 ....................... 6,000 5,994,360
5.125%, 2-28-98 ....................... 4,000 3,965,640
5.5%, 2-28-99 ......................... 7,000 6,884,080
7.125%, 2-29-2000 ..................... 6,000 6,080,640
8.875%, 5-15-2000 ..................... 17,000 18,073,040
8.0%, 5-15-2001 ....................... 23,000 24,031,320
6.375%, 8-15-2002 ..................... 12,000 11,780,640
7.5%, 2-15-2005 ....................... 33,000 34,139,490
7.25%, 5-15-2016 ...................... 8,500 8,538,505
TOTAL UNITED STATES GOVERNMENT SECURITIES - 25.03% $128,597,284
(Cost: $129,793,414)
SHORT-TERM SECURITIES
Commercial Paper
Communication - 0.97%
Dominion Resources, Inc.,
5.45%, 4-16-97 ........................ 5,000 4,988,646
Depository Institutions - 1.00%
Creditanstalt Finance Inc.,
5.3%, 4-3-97 .......................... 5,065 5,063,509
U.S. Bancorp,
Master Note ........................... 43 43,000
Total ................................. 5,106,509
Electric, Gas and Sanitary Services - 0.38%
Western Resources, Inc.,
5.57%, 4-28-97 ........................ 1,970 1,961,770
See Notes to Schedule of Investments on page 12.
<PAGE>
THE INVESTMENTS OF
UNITED CONTINENTAL INCOME FUND, INC.
MARCH 31, 1997
Principal
Amount in
Thousands Value
SHORT-TERM SECURITIES (Continued)
Commercial Paper (Continued)
Food and Kindred Products - 1.43%
General Mills, Inc.,
Master Note ........................... $ 420 $ 420,000
Hercules, Inc.:
5.4%, 4-17-97 ......................... 4,545 4,534,092
5.65%, 4-21-97 ........................ 2,395 2,387,482
Total ................................. 7,341,574
Metal Mining - 1.31%
BHP Finance (USA) Inc.,
5.32%, 4-4-97 ......................... 6,730 6,727,016
Nondepository Institutions - 0.83%
Whirlpool Financial Corp.,
5.63%, 4-18-97 ........................ 4,275 4,263,635
Textile Mill Products - 0.17%
Sara Lee Corporation,
Master Note ........................... 864 864,000
Total Commercial Paper - 6.09% 31,253,150
Municipal Obligation - 0.97%
Oregon
City of Portland, Oregon, Pension Reserve
Limited Tax Revenue Bonds (Federally
Taxable), Series 1996B (Union Bank of
Switzerland),
5.41%, 5-7-97 ......................... 5,000 5,000,000
TOTAL SHORT-TERM SECURITIES - 7.06% $ 36,253,150
(Cost: $36,253,150)
TOTAL INVESTMENT SECURITIES - 99.57% $511,537,618
(Cost: $451,741,913)
CASH AND OTHER ASSETS, NET OF LIABILITIES - 0.43% 2,216,748
NET ASSETS - 100.00% $513,754,366
See Notes to Schedule of Investments on page 12.
<PAGE>
THE INVESTMENTS OF
UNITED CONTINENTAL INCOME FUND, INC.
MARCH 31, 1997
Notes To Schedule of Investments
*No income dividends were paid during the preceding 12 months.
(A) Listed on an exchange outside the United States.
(B) As of March 31, 1997, the following restricted security was owned:
Principal
Acquisition Amount Market
Security Date in 000's Cost Value
-------- ----------- --------------------------------
ARV Assisted Living,
Inc., Convertible,
6.75%, 4-1-2006 3/28/96 $3,000$3,000,000 $2,535,000
========= ==========
The total market value of this restricted security represents approximately
0.49% of the total net assets at March 31, 1997.
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 CONTINENTAL INCOME FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 1997
Assets
Investment securities - at value
(Notes 1 and 3) ................................. $511,537,618
Cash ............................................. 14,044
Receivables:
Dividends and interest .......................... 3,762,500
Fund shares sold ................................ 537,847
Prepaid insurance premium ........................ 19,240
------------
Total assets .................................. 515,871,249
------------
Liabilities
Payable for Fund shares redeemed ................. 1,127,059
Payable for investment securities purchased ...... 731,940
Accrued service fee (Note 2) ..................... 153,267
Accrued transfer agency and dividend
disbursing (Note 2) ............................. 74,358
Accrued management fee (Note 2) .................. 7,787
Accrued accounting services fee (Note 2) ......... 5,000
Other ............................................ 17,472
------------
Total liabilities ............................. 2,116,883
------------
Total net assets ............................. $513,754,366
============
Net Assets
$1.00 par value capital stock
Capital stock ................................... $ 22,610,323
Additional paid-in capital ...................... 415,990,981
Accumulated undistributed income:
Accumulated undistributed net investment income . 729,491
Accumulated undistributed net realized gain
on investment transactions .................... 14,627,866
Net unrealized appreciation in value of
investments at end of period .................. 59,795,705
------------
Net assets applicable to outstanding
units of capital ............................. $513,754,366
============
Net asset value per share (net assets divided
by shares outstanding)
Class A .......................................... $22.72
Class Y .......................................... $22.72
Capital shares outstanding
Class A .......................................... 22,334,056
Class Y .......................................... 276,267
Capital shares authorized .......................... 100,000,000
See notes to financial statements.
<PAGE>
UNITED CONTINENTAL INCOME FUND, INC.
STATEMENT OF OPERATIONS
For the Fiscal Year Ended MARCH 31, 1997
Investment Income
Income (Note 1B):
Interest and amortization........................ $13,705,947
Dividends ....................................... 6,533,066
-----------
Total income .................................. 20,239,013
-----------
Expenses (Note 2):
Investment management fee ....................... 2,843,556
Transfer agency and dividend
disbursing - Class A .......................... 844,771
Service fee - Class A ........................... 806,498
Accounting services fee ......................... 60,000
Custodian fees .................................. 38,814
Audit fees ...................................... 17,291
Shareholder servicing - Class Y ................. 9,230
Legal fees ...................................... 7,910
Other ........................................... 139,661
-----------
Total expenses ................................ 4,767,731
-----------
Net investment income ........................ 15,471,282
-----------
Realized and Unrealized Gain (Loss) on
Investments (Notes 1 and 3)
Realized net gain on securities .................. 32,444,068
Realized net gain on foreign
currency transactions ........................... 16,624
-----------
Realized net gain on investments ................ 32,460,692
Unrealized depreciation in value of investments
during the period ............................... (18,522,005)
-----------
Net gain on investments ....................... 13,938,687
-----------
Net increase in net assets resulting from
operations ................................. $29,409,969
===========
See notes to financial statements.
<PAGE>
UNITED CONTINENTAL INCOME FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
For the fiscal year ended
March 31,
------------------------
1997 1996
Increase in Net Assets ------------ ------------
Operations:
Net investment income ...............$ 15,471,282 $ 14,492,651
Realized net gain on investments .... 32,460,692 31,402,590
Unrealized appreciation (depreciation)(18,522,005) 52,611,352
------------ ------------
Net increase in net assets
resulting from operations ........ 29,409,969 98,506,593
------------ ------------
Dividends to shareholders from (Note 1E):*
Net investment income
Class A ........................... (15,354,424) (13,953,021)
Class Y ........................... (196,761) (38,201)
Realized gains on securities transactions
Class A ........................... (39,714,405) (18,608,382)
Class Y ........................... (482,163) ---
------------ ------------
(55,747,753) (32,599,604)
------------ ------------
Capital share transactions:
Proceeds from sale of shares
Class A (1,328,053 and 1,201,223
shares, respectively) ............ 31,639,891 27,526,704
Class Y (65,939 and 229,596
shares, respectively) ............ 1,571,523 5,539,710
Proceeds from reinvestment of dividends
and/or capital gains distribution
Class A (2,330,266 and 1,363,819
shares, respectively) ............ 53,263,591 31,366,543
Class Y (29,687 and 1,606
shares, respectively) ............ 678,923 38,201
Payments for shares redeemed
Class A (2,249,136 and 2,417,223
shares, respectively)............. (53,683,778) (55,539,467)
Class Y (47,142 and 3,419
shares, respectively) ............ (1,131,539) (82,402)
------------ ------------
Net increase in net assets
resulting from capital
share transactions................ 32,338,611 8,849,289
------------ ------------
Total increase ................... 6,000,827 74,756,278
Net Assets
Beginning of period .................. 507,753,539 432,997,261
------------ ------------
End of period, including undistributed
net investment income of $729,491 and
$792,770, respectively...............$513,754,366 $507,753,539
============ ============
*See "Financial Highlights" on pages 16 - 17.
See notes to financial statements.
<PAGE>
UNITED CONTINENTAL INCOME FUND, INC.
FINANCIAL HIGHLIGHTS
Class A Shares
For a Share of Capital Stock Outstanding
Throughout Each Period:
For the fiscal year ended March 31,
-----------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
Net asset value,
beginning of
period ........... $24.00 $20.84 $20.67 $20.45 $18.70
------ ------ ------ ------ ------
Income from investment
operations:
Net investment
income .......... 0.72 0.71 0.70 0.70 0.83
Net realized and
unrealized gain
on investments .. 0.66 4.05 0.58 0.61 1.75
------ ------ ------ ------ ------
Total from investment
operations ....... 1.38 4.76 1.28 1.31 2.58
------ ------ ------ ------ ------
Less distributions:
Dividends from net
investment
income .......... (0.73) (0.68) (0.70) (0.70) (0.83)
Distribution from
capital gains ... (1.93) (0.92) (0.41) (0.39) (0.00)
------ ------ ------ ------ ------
Total
distributions .... (2.66) (1.60) (1.11) (1.09) (0.83)
------ ------ ------ ------ ------
Net asset value,
end of period .... $22.72 $24.00 $20.84 $20.67 $20.45
====== ====== ====== ====== ======
Total return* ...... 5.88% 23.29% 6.39% 6.40% 14.08%
Net assets, end of
period (000
omitted) ......... $507,477$502,285$432,997$412,843$387,381
Ratio of expenses to
average net assets 0.93% 0.89% 0.89% 0.81% 0.77%
Ratio of net investment
income to average net
assets ........... 3.01% 3.06% 3.37% 3.29% 4.24%
Portfolio turnover
rate ............. 40.29% 41.34% 41.30% 41.01% 111.36%
Average commission
rate paid ......... $0.0603
*Total return calculated without taking into account the sales load
deducted on an initial purchase.
See notes to financial statements.
<PAGE>
UNITED CONTINENTAL INCOME FUND, INC.
FINANCIAL HIGHLIGHTS
Class Y Shares
For a Share of Capital Stock Outstanding
Throughout Each Period:
For the For the
fiscal period
year from 1/4/96*
ended through
3/31/97 3/31/96
-------- --------
Net asset value,
beginning of period $24.01 $23.35
------ ------
Income from investment
operations:
Net investment
income .......... 0.78 0.07
Net realized and
unrealized gain
on investments... 0.63 0.76
------ ------
Total from investment
operations ........ 1.41 0.83
------ ------
Less distributions:
Dividends from net
investment
income........... (0.77) (0.17)
Distribution from
capital gains.... (1.93) (0.00)
------ ------
Total distributions. (2.70) (0.17)
------ ------
Net asset value,
end of period ..... $22.72 $24.01
====== ======
Total return ....... 6.07% 3.53%
Net assets, end of
period (000
omitted) ......... $6,277 $5,469
Ratio of expenses
to average net
assets ............ 0.75% 0.80%**
Ratio of net
investment income
to average net
assets ............ 3.20% 3.35%**
Portfolio
turnover rate ..... 40.29% 41.34%**
Average commission
rate paid ......... $0.0603
*Commencement of operations.
See notes to financial statements.
<PAGE>
UNITED CONTINENTAL INCOME FUND, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1997
NOTE 1 -- Significant Accounting Policies
United Continental Income Fund, Inc. (the "Fund") is registered under the
Investment Company Act of 1940 as a diversified, open-end management investment
company. Its investment objective is to provide current income to the extent
that, in the opinion of the Fund's investment manager, market and economic
conditions permit. As a secondary goal, this Fund seeks long-term appreciation
of capital. 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 -- Each stock and convertible bond is valued at the
latest sale price thereof on the last business day of the fiscal period as
reported by the principal securities exchange on which the issue is traded
or, if no sale is reported for a stock, the average of the latest bid and
asked prices. Bonds, other than convertible bonds, are valued using a
pricing system provided by a pricing service or dealer in bonds.
Convertible bonds are valued using this pricing system only on days when
there is no sale reported. Stocks which are traded over-the-counter are
priced using Nasdaq (National Association of Securities Dealers Automated
Quotations system) which provides information on bid and asked or closing
prices quoted by major dealers in such stocks. Restricted securities and
securities for which market quotations are not readily available are valued
at fair value as determined in good faith under procedures established by
and under the general supervision of the Fund's Board of Directors. Short-
term debt securities 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), premiums on the purchase of bonds and post-1984 market
discount are amortized for both financial and tax reporting purposes over
the remaining lives of the bonds. Dividend income is recorded on the ex-
dividend date. Interest income is recorded on the accrual basis. See Note
3 -- Investment Security Transactions.
C. Foreign currency translations -- All assets and liabilities denominated in
foreign currencies are translated into U.S. dollars daily. Purchases and
sales of investment securities and accruals of income and expenses are
translated at the rate of exchange prevailing on the date of the
transaction. For assets and liabilities other than investments in
securities, net realized and unrealized gains and losses from foreign
currency translations arise from changes in currency exchange rates. The
Fund combines fluctuations from currency exchange rates and fluctuations in
market value when computing net realized and unrealized gain or loss from
investments.
D. Federal income taxes -- It is the Fund's policy to distribute all of its
taxable income and capital gains to its shareholders and otherwise qualify
as a regulated investment company under Subchapter M of the Internal
Revenue Code. In addition, the Fund intends to pay distributions as
required to avoid imposition of excise tax. Accordingly, provision has not
been made for Federal income taxes. See Note 4 -- Federal Income Tax
Matters.
E. Dividends and distributions -- Dividends and distributions to shareholders
are recorded by the Fund on the record date. 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, foreign currency
transactions, net operating losses and expiring capital loss carryforwards.
At March 31, 1997, $16,624 was reclassified between accumulated
undistributed net investment income and accumulated undistributed net
realized gain on investment transactions.
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the financial
statements. Actual results could differ from those estimates.
NOTE 2 -- Investment Management and Payments to Affiliated Persons
The Fund pays a fee for investment management services. The fee is
computed daily based on the net asset value at the close of business. The fee
consists of two elements: (i) a "Specific" fee computed on net asset value as of
the close of business each day at the annual rate of .10% of net assets and (ii)
a "Group" fee computed each day on the combined net asset values of all of the
funds in the United Group of mutual funds (approximately $15.0 billion of
combined net assets at March 31, 1997) at annual rates of .51% of the first $750
million of combined net assets, .49% on that amount between $750 million and
$1.5 billion, .47% between $1.5 billion and $2.25 billion, .45% between $2.25
billion and $3 billion, .43% between $3 billion and $3.75 billion, .40% between
$3.75 billion and $7.5 billion, .38% between $7.5 billion and $12 billion, and
.36% of that amount over $12 billion. The Fund accrues and pays this fee daily.
Pursuant to assignment of the Investment Management Agreement between the
Fund and Waddell & Reed, Inc. ("W&R"), Waddell & Reed Investment Management
Company ("WRIMCO"), a wholly-owned subsidiary of W&R, serves as the Fund's
investment manager.
The Fund has an Accounting Services Agreement with Waddell & Reed Services
Company ("WARSCO"), a wholly-owned subsidiary of W&R. Under the agreement,
WARSCO acts as the agent in providing accounting services and assistance to the
Fund and pricing daily the value of shares of the Fund. For these services, the
Fund pays WARSCO a monthly fee of one-twelfth of the annual fee shown in the
following table.
Accounting Services Fee
Average
Net Asset Level Annual Fee
(all dollars in millions) Rate for Each Level
------------------------- -------------------
From $ 0 to $ 10 $ 0
From $ 10 to $ 25 $ 10,000
From $ 25 to $ 50 $ 20,000
From $ 50 to $ 100 $ 30,000
From $ 100 to $ 200 $ 40,000
From $ 200 to $ 350 $ 50,000
From $ 350 to $ 550 $ 60,000
From $ 550 to $ 750 $ 70,000
From $ 750 to $1,000 $ 85,000
$1,000 and Over $100,000
For Class A shares, the Fund also pays WARSCO a monthly per account charge
for transfer agency and dividend disbursement services of $1.3125 for each
shareholder account which was in existence at any time during the prior month
($1.0208 per account prior to April 1, 1996), plus $0.30 for each account on
which a dividend or distribution of cash or shares had a record date in that
month. With respect to Class Y shares, the Fund pays WARSCO a monthly fee at an
annual rate of .15% of the average daily net assets of the class for the
preceding 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 for Class A shares (which are not an expense of the Fund) of
$1,174,128, out of which W&R paid sales commissions of $670,264 and all expenses
in connection with the sale of Fund shares, except for registration fees and
related expenses.
Under a 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
fee to W&R in an amount not to exceed .25% of the Fund's average annual net
assets. The fee is to be paid to reimburse W&R for amounts it expends in
connection with the provision of personal services to Fund shareholders and/or
maintenance of shareholder accounts.
The Fund paid Directors' fees of $20,038, which are included in other
expenses.
W&R is an indirect subsidiary of Torchmark Corporation, a holding company,
and United Investors Management Company, a holding company, and a direct
subsidiary of Waddell & Reed Financial Services, Inc., a holding company.
NOTE 3 -- Investment Security Transactions
Purchases of investment securities, other than U.S. Government obligations
and short-term securities, aggregated $175,843,499 while proceeds from
maturities and sales aggregated $211,702,530. Purchases of short-term
securities and U.S. Government securities aggregated $476,426,336 and
$16,768,901, respectively. Proceeds from maturities and sales of short-term
securities and U.S. Government securities aggregated $465,793,811 and $635,039,
respectively.
For Federal income tax purposes, cost of investments owned at March 31,
1997 was $451,771,839, resulting in net unrealized appreciation of $59,765,779,
of which $70,740,551 related to appreciated securities and $10,974,772 related
to depreciated securities.
NOTE 4 -- Federal Income Tax Matters
For Federal income tax purposes, the Fund realized capital gain net income
of $32,444,068 during the year ended March 31, 1997, of which a portion was paid
to shareholders during the period ended March 31, 1997. Remaining capital gain
net income will be distributed to the Fund's shareholders.
NOTE 5 -- Multiclass Operations
On August 29, 1995, the Fund was authorized to offer investors a choice of
two classes of shares, Class A and Class Y, each of which has equal rights as to
assets and voting privileges. Class Y shares are not subject to a sales charge
on purchases; they are not subject to a Rule 12b-1 Service Plan and have a
separate transfer agency and dividend disbursement services fee structure. 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
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 Continental Income Fund, Inc.:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of United Continental Income Fund,
Inc.(the ``Fund''), as of March 31, 1997, the related statements
of operations and changes in net assets for the year then ended, and
the financial highlights for the year then ended. These financial statements
and the financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these
financial statements and the financial highlights based on our audit.
The financial statements and the financial highlights of the Fund for
each of the years presented in the four-year period ended March 31, 1996
were audited by other auditors whose report, dated May 10, 1996,
expressed an unqualified opinion on those statements and financial
highlights.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
the financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included
confirmation of securities owned at March 31, 1997 by correspondence with
the custodian and broker. An audit also includes assessing the
accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights
present fairly, in all material respects, the financial position of the
United Continental Income Fund, Inc. as of March 31, 1997, the results of
its operations, the changes in its net assets, and the financial
highlights for the year then ended in conformity with generally accepted
accounting principles.
Deloitte & Touche LLP
Kansas City, Missouri
May 7, 1997
<PAGE>
INCOME TAX INFORMATION
The amounts of the dividends and long-term capital gains below, multiplied by
the number of shares owned by you on the record dates, will give you the total
amounts to be reported in your Federal income tax return for the years in which
they were received or reinvested.
PER-SHARE AMOUNTS REPORTABLE AS:
-----------------------------------------------
For Individuals For Corporations
----------------- -----------------------------
Record Ordinary Long-Term Non- Long-Term
Date Total IncomeCapital GainQualifyingQualifyingCapital Gain
- --------- ----- ---------------------------------------------------
Class A
06-14-96 $0.170 $0.1700 $0.0000 $0.0710 $0.0990 $0.0000
09-13-96 0.170 0.1700 0.0000 0.0656 0.1044 0.0000
12-13-96 2.150 0.6420 1.5080 0.0849 0.5571 1.5080
03-14-97 0.170 0.1700 0.0000 0.0737 0.0963 0.0000
------- ------- ------- ------- ------- -------
Total $2.660$ $1.1520 $1.5080 $0.2952 $0.8568 $1.5080
======= ======= ======= ======= ======= =======
Class Y
06-14-96$0.180$ $0.1800 $0.0000 $0.0752 $0.1048 $0.0000
09-13-96 0.183 0.1830 0.0000 0.0706 0.1124 0.0000
12-13-96 2.163 0.6550 1.5080 0.0899 0.5651 1.5080
03-14-97 0.177 0.1770 0.0000 0.0767 0.1003 0.0000
------ ------- ------- ------- ------- -------
Total $2.703 $1.1950 $1.5080 $0.3124 $0.8826 $1.5080
====== ======= ======= ======= ======= =======
CORPORATION DEDUCTIONS -- Under Federal tax law, the amounts reportable as
Qualifying Dividends are eligible for the dividends received deduction in the
year received as provided by Section 243 of the Internal Revenue Code.
The tax status of dividends paid will be reported to you on Form 1099-DIV after
the close of the applicable calendar year.
Shareholders are advised to consult with their tax adviser concerning the tax
treatment of dividends and distributions from the Fund.
<PAGE>
DIRECTORS
Ronald K. Richey, Birmingham, Alabama, Chairman of the Board
Henry L. Bellmon, Red Rock, Oklahoma
Dodds I. Buchanan, Boulder, Colorado
Linda Graves, Topeka, Kansas
John F. Hayes, Hutchinson, Kansas
Glendon E. Johnson, Miami, Florida
William T. Morgan, Coronado, California
William L. Rogers, Los Angeles, California
Frank J. Ross, Jr., Kansas City, Missouri
Eleanor B. Schwartz, Kansas City, Missouri
Keith A. Tucker, Overland Park, Kansas
Frederick Vogel III, Milwaukee, Wisconsin
Paul S. Wise, Carefree, Arizona
OFFICERS
Keith A. Tucker, President
Robert L. Hechler, Vice President
Henry J. Herrmann, Vice President
Theodore W. Howard, Vice President and Treasurer
Sharon K. Pappas, Vice President and Secretary
Cynthia P. Prince-Fox, Vice President
Carl E. Sturgeon, Vice President
This report is submitted for the general information of the shareholders of
United Continental Income Fund, Inc. It is not authorized for distribution to
prospective investors in the Fund unless accompanied with or preceded by the
United Continental Income Fund, Inc. current prospectus.
To all IRA Planholders:
As required by law, income tax will automatically be withheld from any
distribution or withdrawal from an IRA unless you make a written election not to
have taxes withheld. The election may be made by submitting forms provided by
Waddell & Reed, Inc. which can be obtained from your Waddell & Reed
representative or by submitting Internal Revenue Service form W-4P. Once made,
an election can be revoked by providing written notice to Waddell & Reed, Inc.
If you elect not to have tax withheld you may be required to make payments of
estimated tax. Penalties may be imposed by the IRS if withholding and estimated
tax payments are not adequate.
<PAGE>
The United Group of Mutual Funds
United Cash Management, Inc.
United Government Securities Fund, Inc.
United Bond Fund
United Municipal Bond Fund, Inc.
United Municipal High Income Fund, Inc.
United High Income Fund, Inc.
United High Income Fund II, Inc.
United Continental Income Fund, Inc.
United Retirement Shares, Inc.
United Asset Strategy Fund, Inc.
United Income Fund
United Accumulative Fund
United Vanguard Fund, Inc.
United New Concepts Fund, Inc.
United Science and Technology Fund
United International Growth Fund, Inc.
United Gold & Government Fund, Inc.
FOR MORE INFORMATION:
Contact your representative, or your
local office as listed on your
Account Statement, or contact:
WADDELL & REED
CUSTOMER SERVICE
6300 Lamar Avenue
P.O. Box 29217
Shawnee Mission, KS 66201-9217
(800) 366-5465
Our INTERNET address is:
http://www.waddell.com
NUR1004A(3-97)
printed on recycled paper
