United
Continental
Income Fund,
Inc.
SEMIANNUAL
REPORT
----------------------------------------
For the six months ended September 30, 1998<PAGE>
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.
<PAGE>
PRESIDENT'S LETTER
SEPTEMBER 30, 1998
Dear Shareholder:
As president of your Fund, I would like to thank you for your continued
confidence as an investor. From every area of Waddell & Reed, including your
personal financial advisor, our goal has been to provide the best service
possible to our shareholders.
While it is impossible to predict the future direction of the markets, there are
some basic principles that we stand by that can help investors achieve their
objectives:
. Develop a financial plan that helps you pinpoint your financial objectives,
and identify specific strategies for turning your dreams into reality. There
is no better way to plan for your future.
. Invest on a regular basis. It can be one of the best ways to invest long
term and provide a hedge against market volatility.
. Adopt a long-term view to take advantage of compounding. The key to
successful investing is time, not timing. The power of compounding is
awesome and, on a long-term basis, can overwhelm any nuances of timing.
. Review your financial plan regularly. Financial planning is an ongoing
process that requires periodic review.
Waddell & Reed is positioned to assist you as you work toward your financial
goals. We will continue to offer quality investment products and personal
service to make the financial planning and investment process convenient and
accessible to you. Our locally based financial advisors are ready to assist you
with your total financial plan to help you plan for your retirement, to help you
meet your education funding goals or to achieve other financial objectives.
We look forward to assisting you in the future. If you have any questions about
your account, wish to review your financial plan or have other financial issues
that are important to you, contact your financial advisor or your local Waddell
& Reed office.
Respectfully,
Robert L. Hechler
President
<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%
Foreign Securities
Cash Reserves 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. For more
information about the Fund's cash
reserves flexibility, please consult the
Prospectus.
FOUNDED: 1970
SCHEDULED DIVIDEND FREQUENCY: QUARTERLY (March, June, September,
December)
<PAGE>
PERFORMANCE SUMMARY -- Class A Shares
PER SHARE DATA
For the Six Months Ended September 30, 1998
(Restated to reflect the 200% stock
dividend effected June 26, 1998.)
- -------------------------------------------
DIVIDENDS PAID $0.21
=====
NET ASSET VALUE ON
9/30/98 $ 7.78
3/31/98 8.32
------
CHANGE PER SHARE $(0.54)
======
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 9-30-98 -2.65% 3.29%
5-year period ended 9-30-98 9.22% 10.52%
10-year period ended 9-30-98 11.01% 11.67%
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 September 30, 1998, United Continental Income Fund, Inc. had net assets
totaling $563,714,275 invested in a diversified portfolio of:
47.28% Common Stocks
42.40% Debt Securities
10.32% Cash and Cash Equivalents
As a shareholder of United Continental Income Fund, Inc., for every $100 you had
invested on September 30, 1998, your Fund owned:
$32.42 United States Government Securities
22.54 Manufacturing Stocks
10.32 Cash and Cash Equivalents
9.98 Corporate Debt Securities
9.87 Transportation, Communication, Electric
and Sanitary Services Stocks
5.96 Finance, Insurance and Real Estate Stocks
4.02 Wholesale and Retail Trade Stocks
3.02 Miscellaneous Investing Institutions Stocks
1.75 Services Stocks
0.12 Mining Stocks
<PAGE>
THE INVESTMENTS OF
UNITED CONTINENTAL INCOME FUND, INC.
SEPTEMBER 30, 1998
Shares Value
COMMON STOCKS
Apparel and Accessory Stores - 1.11%
Kohl's Corporation* .................... 160,000 $ 6,240,000
Chemicals and Allied Products - 6.09%
Dow Chemical Company (The) ............. 40,000 3,417,500
Lilly (Eli) and Company ................ 100,000 7,831,250
Novartis, AG (A) ....................... 3,500 5,612,038
Pfizer Inc. ............................ 118,000 12,500,625
Procter & Gamble Company (The) ......... 70,000 4,965,625
Total ................................. 34,327,038
Communication - 6.36%
AT&T Corporation ....................... 90,000 5,259,375
Cox Communications, Inc., Class A* ..... 100,000 5,462,500
MediaOne Group, Inc.* .................. 215,000 9,554,063
SBC Communications Inc. ................ 350,000 15,553,125
Total ................................. 35,829,063
Depository Institutions - 1.65%
BankAmerica Corporation ................ 63,542 3,820,463
Comerica Incorporated .................. 100,000 5,481,250
Total ................................. 9,301,713
Electric, Gas and Sanitary Services - 2.45%
Houston Industries Incorporated ........ 240,000 7,470,000
Unicom Corporation ..................... 170,000 6,353,750
Total ................................. 13,823,750
Electronic and Other Electric Equipment - 2.41%
Emerson Electric Co. ................... 100,000 6,225,000
Texas Instruments Incorporated ......... 80,000 4,220,000
U. S. Industries, Inc. ................. 210,000 3,163,125
Total ................................. 13,608,125
Food and Kindred Products - 1.93%
General Mills, Inc. .................... 80,000 5,600,000
Ralston-Ralston Purina Group ........... 180,000 5,265,000
Total ................................. 10,865,000
General Merchandise Stores - 1.65%
Wal-Mart Stores, Inc. .................. 170,000 9,286,250
Health Services - 1.75%
Columbia/HCA Healthcare Corporation .... 220,000 4,413,750
Tenet Healthcare Corporation* .......... 190,000 5,462,500
Total ................................. 9,876,250
See Notes to Schedule of Investments on page 11.
<PAGE>
THE INVESTMENTS OF
UNITED CONTINENTAL INCOME FUND, INC.
SEPTEMBER 30, 1998
Shares Value
COMMON STOCKS (Continued)
Holding and Other Investment Offices - 3.02%
Berkshire Hathaway Inc., Class B* ...... 3,000 $ 5,979,000
LTC Properties, Inc. ................... 393,900 6,868,631
National Health Investors, Inc. ........ 133,930 4,151,830
Total ................................. 16,999,461
Industrial Machinery and Equipment - 1.01%
EMC Corporation* ....................... 100,000 5,718,750
Instruments and Related Products - 0.45%
St. Jude Medical, Inc.* ................ 110,000 2,543,750
Insurance Carriers - 3.26%
Chubb Corporation (The) ................ 65,000 4,095,000
Hartford Financial Services
Group Inc. (The) ...................... 224,000 10,626,000
MGIC Investment Corporation ............ 100,000 3,687,500
Total ................................. 18,408,500
Miscellaneous Manufacturing Industries - 0.72%
Mattel, Inc. ........................... 145,000 4,060,000
Miscellaneous Retail - 1.26%
Costco Companies, Inc.* ................ 150,000 7,106,250
Nondepository Institutions - 1.05%
Freddie Mac ............................ 120,000 5,932,500
Oil and Gas Extraction - 0.12%
Noble Affiliates, Inc. ................. 20,700 659,813
Petroleum and Coal Products - 3.38%
British Petroleum Company
p.l.c. (The), ADR ..................... 66,048 5,762,688
Mobil Corporation ...................... 75,000 5,695,312
Royal Dutch Petroleum Company .......... 160,000 7,620,000
Total ................................. 19,078,000
Primary Metal Industries - 0.60%
British Steel plc, ADR ................. 185,000 3,364,687
Printing and Publishing - 4.09%
Gannett Co., Inc. ...................... 95,000 5,088,438
McGraw-Hill Companies, Inc. (The) ...... 100,000 7,925,000
Meredith Corporation ................... 150,000 4,800,000
New York Times Company (The), Class A .. 190,000 5,225,000
Total ................................. 23,038,438
See Notes to Schedule of Investments on page 11.
<PAGE>
THE INVESTMENTS OF
UNITED CONTINENTAL INCOME FUND, INC.
SEPTEMBER 30, 1998
Shares Value
COMMON STOCKS (Continued)
Rubber and Miscellaneous Plastics Products - 1.04%
A. Schulman, Inc. ...................... 165,000 $ 2,289,375
Goodyear Tire & Rubber Company (The) ... 60,000 3,082,500
Vans, Inc.* ............................ 57,500 477,969
Total ................................. 5,849,844
Stone, Clay and Glass Products - 0.82%
Newell Co. ............................. 100,000 4,606,250
Transportation Services - 1.06%
Dial Corporation (The) ................. 290,000 5,981,250
TOTAL COMMON STOCKS - 47.28% $266,504,682
(Cost: $222,834,460)
Principal
Amount in
Thousands
CORPORATE DEBT SECURITIES
Chemicals and Allied Products - 0.45%
American Home Products Corporation,
7.9%, 2-15-2005 ....................... $2,250 2,570,850
Communication - 1.29%
Bell Atlantic Financial Services, Inc.,
Convertible,
5.75%, 4-1-2003 (B) ................... 3,000 3,037,500
BellSouth Savings and Security ESOP Trust,
9.125%, 7-1-2003 ...................... 2,565 2,824,085
Southwestern Bell Telephone Company,
5.77%, 10-14-2003 ..................... 1,350 1,395,994
Total ................................. 7,257,579
Depository Institutions - 0.42%
Wachovia Corporation,
6.25%, 8-4-2008 ....................... 2,250 2,364,480
Electric, Gas and Sanitary Services - 0.32%
California Infrastructure and Economic Development
Bank, Special Purpose Trust SCE-1,
6.38%, 9-25-2008 ...................... 1,750 1,804,775
Electronic and Other Electric Equipment - 0.58%
Cooper Industries, Inc.,
6.0%, 1-1-99 (Exchangeable) ........... 3,416 3,257,375
See Notes to Schedule of Investments on page 11.
<PAGE>
THE INVESTMENTS OF
UNITED CONTINENTAL INCOME FUND, INC.
SEPTEMBER 30, 1998
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Fabricated Metal Products - 0.59%
Mark IV Industries, Inc., Convertible,
4.75%, 11-1-2004, (B) ................. $ 4,000 $ 3,340,000
Food and Kindred Products - 0.87%
Coca-Cola Enterprises Inc.,
6.7%, 10-15-2036 ...................... 4,500 4,884,165
General Merchandise Stores - 0.42%
JCP Master Credit Card Trust,
9.625%, 6-15-2000 ..................... 2,250 2,360,385
Health Services - 0.33%
ARV Assisted Living, Inc., Convertible,
6.75%, 4-1-2006 (B) ................... 3,000 1,886,250
Miscellaneous Manufacturing Industries - 0.42%
Tyco International Group S.A.,
6.375%, 6-15-2005 ..................... 2,250 2,371,635
Nondepository Institutions - 2.69%
Ford Motor Credit Company,
8.875%, 6-15-99 ....................... 3,000 3,070,980
General Electric Capital Corporation,
8.3%, 9-20-2009 ....................... 6,500 8,059,870
General Motors Acceptance Corporation,
8.4%, 10-15-99 ........................ 3,000 3,090,030
Merrill Lynch Mortgage Investors, Inc.,
8.3%, 4-15-2012 ....................... 939 943,256
Total ................................. 15,164,136
Personal Services - 0.57%
Equity Corporation International,
Convertible,
4.5%, 12-31-2004 (B) .................. 3,000 3,210,000
Transportation by Air - 0.66%
Southwest Airlines Co.,
7.875%, 9-1-2007 ...................... 3,300 3,743,718
Wholesale Trade - Nondurable Goods - 0.37%
Enron Corp.,
6.25%, 12-13-98 (Exchangeable) ........ 2,588 2,067,625
TOTAL CORPORATE DEBT SECURITIES - 9.98% $ 56,282,973
(Cost: $55,693,677)
See Notes to Schedule of Investments on page 11.
<PAGE>
THE INVESTMENTS OF
UNITED CONTINENTAL INCOME FUND, INC.
SEPTEMBER 30, 1998
Principal
Amount in
Thousands Value
UNITED STATES GOVERNMENT SECURITIES
Federal National Mortgage Association:
7.5%, 4-25-2002 ....................... $ 2,260 $ 2,321,135
6.0%, 6-25-2007 ....................... 3,000 3,056,250
6.51%, 5-6-2008 ....................... 6,750 7,179,233
8.25%, 6-1-2008 ....................... 373 387,417
6.19%, 7-7-2008 ....................... 4,500 4,720,770
Government National Mortgage Association:
9.0%, 7-15-2016 ....................... 75 80,171
9.0%, 8-15-2016 ....................... 268 287,229
9.0%, 10-15-2016 ...................... 680 728,447
9.0%, 11-15-2016 ...................... 239 255,966
9.0%, 1-15-2017 ....................... 62 66,378
9.0%, 3-15-2017 ....................... 221 237,383
9.0%, 4-15-2017 ....................... 210 225,320
9.0%, 7-15-2017 ....................... 116 124,114
6.5%, 8-15-2028 ....................... 10,090 10,314,251
United States Treasury:
5.5%, 2-28-99 ......................... 7,000 7,022,960
7.125%, 2-29-2000 ..................... 6,000 6,214,680
8.875%, 5-15-2000 ..................... 17,000 18,163,480
8.0%, 5-15-2001 ....................... 23,000 25,041,250
6.375%, 8-15-2002 ..................... 12,000 12,849,360
7.5%, 2-15-2005 ....................... 33,000 38,599,770
7.25%, 5-15-2016 ...................... 8,500 10,550,625
6.25%, 8-15-2023 ...................... 30,000 34,335,900
TOTAL UNITED STATES GOVERNMENT SECURITIES - 32.42% $182,762,089
(Cost: $171,804,101)
TOTAL SHORT-TERM SECURITIES - 9.72% $ 54,806,789
(Cost: $54,806,789)
TOTAL INVESTMENT SECURITIES - 99.40% $560,356,533
(Cost: $505,139,027)
CASH AND OTHER ASSETS, NET OF LIABILITIES - 0.60% 3,357,742
NET ASSETS - 100.00% $563,714,275
See Notes to Schedule of Investments on page 11.
<PAGE>
THE INVESTMENTS OF
UNITED CONTINENTAL INCOME FUND, INC.
SEPTEMBER 30, 1998
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) Security was purchased pursuant to Rule 144a under the Securities Act of
1933 and may be resold in transactions exempt from registration, normally
to qualified institutional buyers. At September 30, 1998, the value of
these securities amounted to $11,473,750 or 2.04% of net assets.
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
SEPTEMBER 30, 1998
(In Thousands, Except for Per Share Amounts)
Assets
Investment securities - at value
(Notes 1 and 3) ................................. $560,357
Cash ............................................ 1
Receivables:
Dividends and interest .......................... 3,999
Fund shares sold ................................ 529
Prepaid insurance premium ........................ 23
--------
Total assets .................................. 564,909
--------
Liabilities
Payable to Fund shareholders ..................... 968
Accrued service fee (Note 2) ..................... 117
Accrued transfer agency and dividend
disbursing (Note 2) ............................. 85
Accrued management fee (Note 2) .................. 9
Accrued accounting services fee (Note 2) ......... 6
Accrued distribution fee (Note 2) ................ 1
Other ............................................ 9
--------
Total liabilities ............................. 1,195
--------
Total net assets ............................. $563,714
========
Net Assets
$1.00 par value capital stock
Capital stock ................................... $ 72,467
Additional paid-in capital ...................... 400,348
Accumulated undistributed income:
Accumulated undistributed net investment income . 631
Accumulated undistributed net realized gain
on investment transactions .................... 35,050
Net unrealized appreciation in value of
investments ................................... 55,218
--------
Net assets applicable to outstanding
units of capital ............................. $563,714
========
Net asset value per share (net assets divided
by shares outstanding)
Class A .......................................... $7.78
Class Y .......................................... $7.78
Capital shares outstanding
Class A .......................................... 71,080
Class Y .......................................... 1,387
Capital shares authorized .......................... 200,000
See notes to financial statements.
<PAGE>
UNITED CONTINENTAL INCOME FUND, INC.
STATEMENT OF OPERATIONS
For the Six Months Ended SEPTEMBER 30, 1998
(In Thousands)
Investment Income
Income (Note 1B):
Interest and amortization........................ $ 7,521
Dividends ....................................... 3,357
--------
Total income .................................. 10,878
--------
Expenses (Note 2):
Investment management fee ....................... 1,618
Service fee - Class A ........................... 760
Transfer agency and dividend
disbursing - Class A .......................... 419
Accounting services fee ......................... 35
Custodian fees .................................. 18
Audit fees ...................................... 10
Distribution fees - Class A ..................... 9
Shareholder servicing - Class Y ................. 9
Legal fees ...................................... 5
Other ........................................... 80
--------
Total expenses ................................ 2,963
--------
Net investment income ........................ 7,915
--------
Realized and Unrealized Gain (Loss) on
Investments (Notes 1 and 3)
Realized net gain on securities .................. 25,263
Realized net loss on foreign
currency transactions ........................... (19)
--------
Realized net gain on investments ................ 25,244
Unrealized depreciation in value of investments
during the period ............................... (64,883)
--------
Net loss on investments ....................... (39,639)
--------
Net decrease in net assets resulting from
operations ................................. $(31,724)
========
See notes to financial statements.
<PAGE>
UNITED CONTINENTAL INCOME FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
(Dollars In Thousands)
For the For the
six months fiscal year
ended ended
September 30, March 31,
1998 1998
Increase (Decrease) in Net Assets ------------ ------------
Operations:
Net investment income ............... $ 7,915 $ 16,284
Realized net gain on investments .... 25,244 49,742
Unrealized appreciation (depreciation) (64,883) 60,305
-------- --------
Net increase (decrease) in net assets
resulting from operations ........ (31,724) 126,331
-------- --------
Distributions to shareholders from (Note 1E):*
Net investment income:
Class A ........................... (7,628) (16,306)
Class Y ........................... (157) (256)
Realized gains on securities transactions:
Class A ........................... --- (53,686)
Class Y ........................... --- (827)
-------- --------
(7,785) (71,075)
-------- --------
Capital share transactions:
Proceeds from sale of shares:
Class A (2,767,794 and 1,395,794
shares, respectively) ............ 22,677 34,176
Class Y (198,910 and 148,864
shares, respectively) ............ 1,636 3,659
Proceeds from reinvestment of dividends
and/or capital gains distribution:
Class A (920,037 and 2,894,602
shares, respectively) ............ 7,304 67,675
Class Y (19,755 and 46,351
shares, respectively) ............ 156 1,084
Payments for shares redeemed:
Class A (4,624,152 and 2,618,993
shares, respectively)............. (37,833) (64,317)
Class Y (127,963 and 39,543
shares, respectively) ............ (1,037) (967)
-------- --------
Net increase (decrease) in net
assets resulting from capital
share transactions................ (7,097) 41,310
-------- --------
Total increase (decrease) ........ (46,606) 96,566
Net Assets
Beginning of period .................. 610,320 513,754
-------- --------
End of period, including undistributed
net investment income of $631 and
$520, respectively................... $563,714 $610,320
======== ========
*See "Financial Highlights" on pages 15 - 16.
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
six months For the fiscal year ended March 31,
ended -----------------------------------
9/30/98 1998 1997 1996 1995 1994
------- ------ ------ ------ ------ ------
Net asset value,
beginning of
period ........... $8.32 $7.57 $8.00 $6.95 $6.89 $6.82
----- ----- ----- ----- ----- -----
Income from investment
operations:
Net investment
income .......... 0.22 0.24 0.24 0.24 0.23 0.23
Net realized and
unrealized gain (loss)
on investments .. (0.55) 1.58 0.22 1.35 0.20 0.20
----- ----- ----- ----- ----- -----
Total from investment
operations ....... (0.33) 1.82 0.46 1.59 0.43 0.43
----- ----- ----- ----- ----- -----
Less distributions:
From net investment
income .......... (0.21) (0.24) (0.24) (0.23) (0.23) (0.23)
From capital gains (0.00) (0.83) (0.65) (0.31) (0.14) (0.13)
----- ----- ----- ----- ----- -----
Total
distributions .... (0.21) (1.07) (0.89) (0.54) (0.37) (0.36)
----- ----- ----- ----- ----- -----
Net asset value,
end of period .... $7.78 $8.32 $7.57 $8.00 $6.95 $6.89
===== ===== ===== ===== ===== =====
Total return** ..... -5.26% 25.20% 5.88% 23.29% 6.39% 6.40%
Net assets, end of
period (in
millions) ........ $553 $599 $508 $502 $433 $413
Ratio of expenses to
average net assets 1.00%***0.91% 0.93% 0.89% 0.89% 0.81%
Ratio of net investment
income to average net
assets ........... 2.65%***2.88% 3.01% 3.06% 3.37% 3.29%
Portfolio turnover
rate ............. 22.29% 55.46% 40.29% 41.34% 41.30% 41.01%
*Per-share and share amounts have been adjusted retroactively to
reflect the 200% stock dividend effected June 26, 1998.
**Total return calculated without taking into account the sales load deducted
on an initial purchase.
***Annualized.
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 For the
six year ended period
months March 31, from 1/4/96**
ended -------------- through
9/30/98 1998 1997 3/31/96
------- ------ ------ --------
Net asset value,
beginning of period $8.33 $7.57 $8.00 $7.78
----- ----- ----- -----
Income from investment
operations:
Net investment
income .......... 0.23 0.26 0.26 0.03
Net realized and
unrealized gain (loss)
on investments .. (0.55) 1.58 0.21 0.25
----- ----- ----- -----
Total from investment
operations ....... (0.32) 1.84 0.47 0.28
----- ----- ----- -----
Less distributions:
From net investment
income .......... (0.23) (0.26) (0.26) (0.06)
From capital gains (0.00) (0.82) (0.64) (0.00)
----- ----- ----- -----
Total distributions (0.23) (1.08) (0.90) (0.06)
----- ----- ----- -----
Net asset value,
end of period .... $7.78 $8.33 $7.57 $8.00
===== ===== ===== =====
Total return ....... -5.21% 25.43% 6.07% 3.53%
Net assets, end of
period (in
millions) ........ $11 $11 $6 $6
Ratio of expenses
to average net
assets ........... 0.73%***0.75% 0.75% 0.80%***
Ratio of net
investment income
to average net
assets ........... 2.92%***3.01% 3.20% 3.35%***
Portfolio
turnover rate .... 22.29% 55.46% 40.29% 41.34%***
*Per-share and share amounts have been adjusted retroactively to
reflect the 200% stock dividend effected June 26, 1998.
**Commencement of operations.
***Annualized.
See notes to financial statements.
<PAGE>
UNITED CONTINENTAL INCOME FUND, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
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 the Nasdaq Stock Market, which provides information on bid and
asked 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
<PAGE>
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 carryovers.
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 .15% of net assets and (ii)
a "Group" fee computed each day on the combined net asset values of all of the
funds in the United Group of mutual funds (approximately $18.9 billion of
combined net assets at September 30, 1998) at annual rates of .51% of the first
$750 million of combined net assets, .49% on that amount between $750 million
and $1.5 billion, .47% between $1.5 billion and $2.25 billion, .45% between
$2.25 billion and $3 billion, .43% between $3 billion and $3.75 billion, .40%
between $3.75 billion and $7.5 billion, .38% between $7.5 billion and $12
billion, and .36% of that amount over $12 billion. The Fund accrues and pays
this fee daily.
Pursuant to assignment of the Investment Management Agreement between the
Fund and Waddell & Reed, Inc. ("W&R"), Waddell & Reed Investment Management
Company ("WRIMCO"), a wholly owned subsidiary of W&R, serves as the Fund's
investment manager.
The Fund has an Accounting Services Agreement with Waddell & Reed Services
Company ("WARSCO"), a wholly owned subsidiary of W&R. Under the agreement,
WARSCO acts as the agent in providing accounting services and assistance to the
Fund and pricing daily the value of shares of the Fund. For these services, the
Fund pays WARSCO a monthly fee of one-twelfth of the annual fee shown in the
following table.
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,
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
$749,370, out of which W&R paid sales commissions of $431,313 and all expenses
<PAGE>
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 $10,335, 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 obligations
and short-term securities, aggregated $65,885,198 while proceeds from maturities
and sales aggregated $166,406,250. Purchases of short-term securities and U.S
Government securities aggregated $476,218,774 and $54,424,981, respectively.
Proceeds from maturities and sales of short-term securities and U.S. Government
securities aggregated $438,805,803 and $619,484, respectively.
For Federal income tax purposes, cost of investments owned at September 30,
1998 was $505,139,027, resulting in net unrealized appreciation of $55,217,506,
of which $77,540,202 related to appreciated securities and $22,322,696 related
to depreciated securities.
NOTE 4 -- Federal Income Tax Matters
For Federal income tax purposes, the Fund realized capital gain net income
of $49,642,762 during the year ended March 31, 1998, of which a portion was paid
to shareholders during the period ended March 31, 1998. 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 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 Distribution and 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.
Note 6 -- Stock Dividend
The Fund's Board of Directors approved on February 11, 1998 a stock
dividend of 200% effected on June 26, 1998. Authorized shares of the Fund were
accordingly increased by 100,000,000 shares.
<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 September 30, 1998, and the related statements of operations for
the six-month period then ended and changes in net assets for the six-month
period then ended and the fiscal year ended March 31, 1998, and the financial
highlights for the periods presented. 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 at
September 30, 1998 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, such financial statements and financial highlights present
fairly, in all material respects, the financial position of United Continental
Income Fund, Inc. as of September 30, 1998, the results of its operations, the
changes in its net assets, and the financial highlights for the respective
stated periods in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Kansas City, Missouri
November 6, 1998
<PAGE>
DIRECTORS
Keith A. Tucker, Overland Park, Kansas, Chairman of the Board
James M. Concannon, Topeka, Kansas
John A. Dillingham, Kansas City, Missouri
David P. Gardner, Menlo Park, California
Linda Graves, Topeka, Kansas
Joseph Harroz, Jr., Norman, Oklahoma
John F. Hayes, Hutchinson, Kansas
Robert L. Hechler, Overland Park, Kansas
Henry J. Herrmann, Overland Park, Kansas
Glendon E. Johnson, Miami, Florida
William T. Morgan, Coronado, California
Ronald C. Reimer, Mission Hills, Kansas
Frank J. Ross, Jr., Kansas City, Missouri
Eleanor B. Schwartz, Kansas City, Missouri
Frederick Vogel III, Milwaukee, Wisconsin
OFFICERS
Robert L. Hechler, President
Henry J. Herrmann, Vice President
Theodore W. Howard, Vice President and Treasurer
Cynthia P. Prince-Fox, Vice President
To all traditional IRA Planholders:
As required by law, income tax will automatically be withheld from any
distribution or withdrawal from a traditional 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
NUR1004SA(9-98)
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