<PAGE> 1
[COVER IMAGE]
AIM
INCOME FUND
[AIM LOGO APPEARS HERE] ANNUAL REPORT DECEMBER 31, 1998
INVEST WITH DISCIPLINE
-- Registered Trademark --
<PAGE> 2
[COVER IMAGE]
-------------------------------------
THE BOAT AT GIVERNY BY CLAUDE MONET (1840-1926, FRENCH)
IN MONET'S CAPTIVATING PAINTING, THREE WOMEN GENTLY GUIDE A
SMALL BOAT OVER A TRANQUIL BODY OF WATER. SIMILARLY, AIM
INCOME FUND RELIES PRIMARILY ON THREE ASSET CLASSES--DOMESTIC
INVESTMENT-GRADE BONDS, HIGH-YIELD BONDS, AND FOREIGN BONDS--
TO STEER IT TO ITS FINANCIAL DESTINATION.
-------------------------------------
AIM Income Fund is for shareholders who seek a high level of current income
consistent with a reasonable concern for safety of principal by investing in a
portfolio consisting primarily of fixed-rate corporate debt and U.S. government
obligations.
ABOUT FUND PERFORMANCE AND PORTFOLIO DATA THROUGHOUT THIS REPORT:
o AIM Income Fund's performance figures are historical and reflect
reinvestment of all distributions and changes in net asset value. Unless
otherwise indicated, the Fund's performance is computed at net asset value
without a sales charge.
o When sales charges are included in performance figures, Class A share
performance reflects the maximum 4.75% sales charge, and Class B and Class
C share performance reflects the applicable contingent deferred sales
charge (CDSC) for the period involved. The CDSC on Class B shares declines
from 5% beginning at the time of purchase to 0% at the beginning of the
seventh year. The CDSC on Class C shares is 1% for the first year after
purchase. The performance of the Fund's Class B and Class C shares will
differ from that of Class A shares due to differences in sales charge
structures and class expenses.
o The 30-day yield is calculated on the basis of a formula defined by the
SEC. The formula is based on the portfolio's potential earnings from
dividends, interest, yield-to-maturity, or yield-to-call of the bonds in
the portfolio, net of all expenses and expressed on an annualized basis.
o The Fund's annualized distribution rate reflects the Fund's most recent
monthly dividend distribution multiplied by 12 and divided by the most
recent month-end net asset value.
o The Fund's investment return and principal value will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their
original cost.
o The Fund invests in higher-yielding, lower-rated corporate bonds, commonly
known as "junk bonds." These bonds have greater risk of price fluctuation
and loss of principal than U.S. government securities, such as U.S.
Treasury bonds and bills, which offer a government guarantee as to the
repayment of principal and interest if held to maturity.
o International investing presents certain risks not associated with
investing solely in the United States. These include risks relating to
fluctuations in the value of the U.S. dollar relative to the values of
other currencies, the custody arrangements made for the Fund's foreign
holdings, differences in accounting, political risks, and the lesser degree
of public information required to be provided by non-U.S. companies.
o Past performance cannot guarantee comparable future results.
ABOUT INDEXES AND OTHER PERFORMANCE BENCHMARKS CITED IN THIS REPORT:
o The Lehman Aggregate Bond Index is an unmanaged index generally regarded as
representative of intermediate- and long-term government and
investment-grade corporate debt securities. It is compiled by Lehman
Brothers, a well-known global investment bank.
o Government securities, such as U.S. Treasury bills, notes and bonds, offer
a high degree of safety and are guaranteed as to the timely payment of
principal and interest if held to maturity. Fund shares are not insured,
and their value will vary with market conditions.
o An investment cannot be made in any index listed. Unless otherwise
indicated, index results include reinvested dividends and do not reflect
sales charges.
AN INVESTMENT IN THE FUND IS NOT A DEPOSIT OF A BANK AND IS NOT INSURED
OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY
OTHER GOVERNMENT AGENCY. THERE IS A RISK THAT YOU COULD LOSE A
PORTION OR ALL OF YOUR MONEY.
This report may be distributed only to current shareholders or
to persons who have received a current prospectus of the Fund.
AIM INCOME FUND
<PAGE> 3
ANNUAL REPORT / CHAIRMAN'S LETTER
Dear Fellow Shareholder:
As the fiscal year opened, markets were recovering from the
[PHOTO OF concerns produced by financial crises in Asia during 1997,
Charles T. and this optimism early in 1998 led several equity market
Bauer, indexes to all-time highs in spring and early summer.
Chairman of However, the year was to bring two particularly serious
the Board of financial shocks, first the debt default by Russia, and
THE FUND later the gathering crisis in Brazil, which devalued its
APPEARS HERE] currency shortly after the fiscal year closed. The result
was another year of significant volatility in both equity
and fixed-income markets.
MARKET RECAP
Buoyant equity markets and healthy economic growth in Europe
and the U.S. kept bond prices relatively stable early in
1998. But optimism turned to profound pessimism over the summer as global
financial crises caused a worldwide loss of confidence. Investors flocked to
securities perceived as safe and liquid, especially U.S. Treasuries. Even
high-quality corporate bonds went out of favor, and high-yield corporate bonds
plummeted. Beginning in late September, the U.S. Federal Reserve Board
intervened to pump liquidity and confidence into markets. Numerous interest rate
cuts in other countries followed. Investors responded favorably, and by year
end, bond market volatility had generally subsided.
HOW SHOULD INVESTORS RESPOND?
We understood how unnerving 1998's level of volatility could have been. Our
repeated message to you is to keep a long-term outlook on investments rather
than responding to short-term fluctuations. And we are pleased to note that
most mutual fund shareholders remained cool headed and did not pull out of
the markets during 1998. In the end, most were rewarded for their long-term
perspective.
In view of recent volatility and the divergent performance of market
sectors, this may be a very good time to meet with your financial consultant to
review your current asset allocation and the diversification of your portfolio.
Broad portfolio diversification remains one of the most fundamental principles
of investing, along with long-term thinking and realistic expectations.
YOUR FUND MANAGERS' COMMENTS
On the pages that follow, your Fund's managers, experienced professionals who
have weathered previous periods of market turbulence, offer more detailed
discussion of how markets behaved, how they managed the portfolio in light of
recent volatility, and what they foresee for markets and your Fund. We hope
you find their discussion informative.
YEAR 2000 CONCERN
Many of our shareholders have asked us about AIM's year 2000 readiness
status. We appreciate these concerns, and we take the year 2000 issue
seriously. AIM has devoted considerable effort to creating a comprehensive
plan for assessing, correcting and testing our in-house systems. We will also
participate in an industrywide testing effort scheduled to begin in March.
But no matter how well we prepare and test, no one can know for sure what the
year 2000 will bring. Our industry's systems are connected in complex ways to
many third parties, and there may be unforeseen problems when the year 2000
actually arrives. Though we cannot predict what all those problems might be,
we are working with our business recovery team to develop contingency plans
appropriate for a variety of year 2000 scenarios.
We are pleased to send you this report on your Fund's fiscal year. If you
have any questions or comments, please contact our Client Services department at
800-959-4246, or e-mail your inquiry to us at [email protected]. You can
access information about your account through our AIM Investor Line at
800-246-5463 or at our Web site, www.aimfunds.com. We often post market updates
on our Web site.
We thank you for your continued participation in The AIM Family of
Funds--Registered Trademark--.
Sincerely,
/s/ CHARLES T. BAUER
Charles T. Bauer
Chairman, A I M Advisors, Inc.
------------------------------------
. . . WE ARE PLEASED
TO NOTE THAT MOST
MUTUAL FUND
SHAREHOLDERS REMAINED
COOL HEADED AND
DID NOT PULL OUT OF THE
MARKETS DURING 1998.
------------------------------------
AIM INCOME FUND
<PAGE> 4
ANNUAL REPORT / MANAGERS' OVERVIEW
FUND CONTENDS WITH FLIGHT TO QUALITY
IN BOND MARKET
THE BOND-MARKET RALLY WAS VERY NARROW FOR MUCH OF THE YEAR. HOW DID AIM INCOME
FUND PERFORM?
The Fund continued to provide a high level of current income. As of December 31,
1998, the Fund's 30-day distribution rate at net asset value was 6.59%, 5.73%
and 5.74% for Class A, B and C shares, respectively. The Fund's 30-day yield at
maximum offering price was 6.49% for Class A shares and 6.06% for Class B and
Class C shares. That compared favorably to the 5.09% yield of the 30-year U.S.
Treasury bond at the end of the reporting period.
An extremely narrow market environment, favoring the highest-rated
government bonds--particularly U.S. Treasury securities--detracted from the
Fund's total return. For the year ended December 31, 1998, total return was
4.94%, 4.20% and 4.21% for Class A, B and C shares, respectively.
During the six months since our last report, the Fund's net assets grew
from $547 million to $638 million.
WHY WAS THE BOND-MARKET RALLY SO NARROW?
An assortment of global crises created an aversion to risk among investors.
These crises included severe economic problems in Asia, Russia and Latin America
as well as political controversy in the United States. In this unsettled market
environment, investors favored U.S. Treasury securities because of their
relative safety and liquidity over lower-rated bonds. Such a phenomenon is known
as a "flight to quality."
DID YOU CHANGE YOUR INVESTMENT STRATEGY, GIVEN THE UNUSUAL MARKET
ENVIRONMENT?
No, we adhered to our disciplined strategy of investing in three major bond
classes: domestic investment-grade bonds, high-yield securities and foreign
bonds. We believe the unusual narrowness that pervaded the global bond market
during much of the reporting period will eventually give way to more normal
conditions. Moreover, we remain confident that our diversified approach to
investing will enhance returns and reduce risk over the long term.
At the end of the reporting period, the Fund's total assets were divided as
follows: domestic investment-grade bonds, 39.16%, high-yield bonds, 23.69%;
foreign bonds, 26.00%; and other assets, 11.15%.
HOW DID U.S. DOMESTIC INVESTMENT-GRADE BONDS FARE?
U.S. Treasury securities soared in price, sending their yields to historic lows.
For example, the yield of the benchmark 30-year Treasury bond fell from 5.92% at
the beginning of the year to 4.71% on October 5--its lowest level since this
issue came into existence in 1977--before ending 1998 at 5.09%.
While the Treasury market skyrocketed, other investment-grade bonds
appreciated less dramatically in value. Investment grade corporate bonds, for
example, underperformed Treasuries because of declining company profits and an
overabundance of supply. That caused the yield differentials between Treasuries
and investment-grade corporate bonds to widen substantially.
However, the Federal Reserve Board (the Fed), in an effort to infuse
liquidity into the broader financial market, cut interest rates three times in
the fall. Yield spreads between Treasuries and investment-grade corporate bonds
began to contract, but remained relatively wide at the end of the year.
WHAT ABOUT HIGH-YIELD BONDS?
High-yield bonds were among the asset classes most adversely affected by the
flight to quality. The performance of this sector had been solid early in the
year when economic growth was robust and corporate profits were strong. However,
it deteriorated significantly after April in the wake of declining growth in
corporate profits and rising default
TOP FIVE BOND HOLDINGS
As of 12/31/98, based on total net assets
================================================================================
COUPON MATURITY % OF
ASSETS
- --------------------------------------------------------------------------------
[S] [C] [C] [C]
Coca-Cola 7.24% 06/2020 2.97%
Enterprises Inc.
- --------------------------------------------------------------------------------
International 5.50- 07/2000- 2.69
Bank for 7.25 11/2008
Reconstruction
and
Development
- --------------------------------------------------------------------------------
Time Warner, 6.85- 02/2023- 2.57
Inc. 9.15 02/2026
- --------------------------------------------------------------------------------
Federal National 07/2019 2.34
Mortgage
Associations
STRIPS
- --------------------------------------------------------------------------------
U.S. 5.50- 08/2027- 1.90
Treasury Bonds 6.375 08/2028
================================================================================
HOLDINGS BY TYPE CLASSIFICATION
Investment-grade
bonds 39.16%
Other 11.15%
Foreign bonds
26%
[Pie Chart]
High-yield bonds
23.69%
Please keep in mind the Fund's portfolio is subject to change and there is no
assurance the Fund will continue to hold any particular security.
See important Fund and index disclosures inside front cover.
AIM INCOME FUND
2
<PAGE> 5
ANNUAL REPORT / MANAGERS' OVERVIEW
rates. The performance of high-yield bonds perked up following the Fed's rate
cuts, but it was still lackluster for the year. We believe the drop in
high-yield bond prices could create some attractive buying opportunities in this
sector.
WHAT WERE SOME OF THE MAJOR THEMES IN THE FOREIGN BOND MARKETS?
Europe and other developed markets were relative safe havens from the
economic turmoil that swept across other parts of the world during the year.
In most developed countries, higher-rated bonds were the beneficiaries of a
low-inflation, low-interest-rate environment and the efforts of foreign
governments to balance their budgets and reduce deficits. Bond markets we
liked included the United Kingdom, Canada, Germany and New Zealand.
For much of 1998, the U.S. dollar was strong relative to most other major
currencies, although it did weaken toward the end of the fiscal year. The
general strength of the dollar diminished returns for U.S. investors early in
the year, but its weakening added to some countries' returns later in the year.
We mitigated the effect of a strong dollar by selectively hedging some of the
Fund's currency exposure.
Russia's default in August had a disastrous impact on emerging market debt,
which was already languishing as a result of the economic malaise in Asia.
However, the poor performance of emerging-market debt was of little consequence
to the Fund because it invests primarily in developed markets and had no
exposure to Russia.
HOW WAS THE FUND STRUCTURED AT THE END OF THE REPORTING PERIOD?
The Fund had 205 holdings as of December 31, 1998. The weighted average
maturity of the portfolio was 14.12 years and its duration was 8.26 years.
The Fund had an average portfolio quality rating of BBB/Baa as measured by
Standard & Poor's Corporation (S&P) and Moody's Investors Service, Inc.
(Moody's), two widely known credit rating agencies. These ratings are
historical and are based on analysis of the credit quality of the individual
securities in the Fund's portfolio.
WHAT IS YOUR OUTLOOK?
At the close of the fiscal year, the environment appeared favorable for bonds
in the United States, Europe and other developed countries. Perhaps most
important, inflation and interest rates were low. Economic growth was still
healthy, although it was expected to moderate in the months ahead.
While the concerns that precipitated the flight to Treasuries were still
lurking in the background, the Fed appeared ready to make additional interest
rate cuts, if deemed necessary, to promote liquidity in the market. Moreover,
other leading economic powers along with the United States were pursuing
policies aimed at creating a favorable global investment climate. In late
October, the Group of Seven nations--the U.S., the United Kingdom, Canada,
Germany, Italy, France and Japan--approved a plan designed to prop up financial
markets in developing nations. That plan allows the International Monetary Fund
to provide loans to financially troubled countries before foreign investors pull
out.
Entering 1999, wider spreads on corporate bonds, both investment grade and
non-investment grade, provided attractive total return opportunities. Regardless
of market trends, we plan to stick to our strategy of investing in domestic
investment-grade, high-yield and foreign bonds in an effort to reduce risk and
enhance potential return.
WELCOME THE EURO
On January 1, 1999, Europe launched a brand new currency--the euro. At first,
only 11 countries will adopt it: Austria, Belgium, Finland, France, Germany,
Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain. These
countries have met the financial and economic criteria required for membership
in the European Economic and Monetary Union (EMU), and they have agreed to
follow certain monetary, exchange rate, and budgetary policies.
The changeover to euro will take place gradually. New coins and paper
currency will not be introduced until January 2002. Until then, Spanish
shoppers will still use pesetas and the French will still use francs, but these
will be thought of simply as denominations of the euro--the same way that a
quarter is a denomination of a dollar.
A NEW BUSINESS ENVIRONMENT
The euro is expected to bring greater unity to the European business world:
o Price comparison of goods, services, and labor across Europe will be much
easier.
o Because of this "price transparency," European companies will be forced to
become more competitive. An increase in merger and acquisition activity is
expected.
o The equity markets are likely to become broader and more liquid, since
European companies may find it easier to attract capital across borders.
o Europe's fixed-income markets could also be transformed. Since currency
risk will be reduced, Europe's investors can focus on credit risk.
Eventually, the euro-denominated debt market could be as large and liquid
as that of the U.S.
The introduction of a new currency can present unique risks and
uncertainties for investors. Please see your prospectus for more information
about these risk factors.
See important Fund and index disclosures inside front cover.
AIM INCOME FUND
3
<PAGE> 6
ANNUAL REPORT / PERFORMANCE HISTORY
YOUR FUND'S LONG-TERM PERFORMANCE
RESULTS OF A $10,000 INVESTMENT
AIM INCOME FUND, CLASS A SHARES, VS. BENCHMARK INDEX
12/31/88-12/31/98
- --------------------------------------------------------------------------------
AIM INCOME FUND, LEHMAN AGGREGATE
CLASS A SHARES BOND INDEX
- --------------------------------------------------------------------------------
in thousands
12/88 9,520 10,000
12/89 10,810 11,453
12/90 11,204 12,479
12/91 13,222 14,476
12/92 14,203 15,547
12/93 16,387 17,063
12/94 15,134 16,565
12/95 18,580 19,626
12/96 20,174 20,338
12/97 22,580 22,302
12/98 23,666 24,240
================================================================================
PAST PERFORMANCE CANNOT GUARANTEE COMPARABLE FUTURE RESULTS.
================================================================================
================================================================================
AVERAGE ANNUAL TOTAL RETURNS
As of 12/31/98, including sales charges
CLASS A SHARES
10 years 9.00%
5 years 6.62
1 year -0.07*
*4.94% excluding sales charges
CLASS B SHARES
Inception (9/7/93) 6.07%
5 years 6.48
1 year -0.69**
**4.20% excluding CDSC
CLASS C SHARES
Inception (8/4/97) 6.57%
1 year 3.23***
***4.21% excluding CDSC
================================================================================
SOURCE: TOWERS DATA SYSTEMS HYPO -- Registered Trademark --.
================================================================================
The performance of the Fund's Class B and Class C shares will differ from that
of Class A shares due to differing fees and expenses. For Fund performance
calculations and descriptions of indexes cited on this page, please refer to the
inside front cover.
MARKET VOLATILITY CAN SIGNIFICANTLY AFFECT SHORT-TERM PERFORMANCE. RESULTS OF
AN INVESTMENT MADE TODAY MAY DIFFER SUBSTANTIALLY FROM THE HISTORICAL
PERFORMANCE SHOWN.
ABOUT THIS CHART
The chart below compares your Fund's Class A shares to a benchmark index. It is
intended to give you a general idea of how your Fund performed compared to the
bond market over the period 12/31/88- 12/31/98. It is important to understand
the difference between your Fund and an index. Your Fund's total return is shown
with a sales charge and includes Fund expenses and management fees. An index
measures the performance of a hypothetical portfolio, in this case the Lehman
Aggregate Bond Index. Market indexes are not managed, incurring no sales
charges, expenses, or fees. If you could buy all the securities that make up a
market index, you would incur expenses that would affect your investment's
return.
AIM INCOME FUND
4
<PAGE> 7
ANNUAL REPORT / FOR CONSIDERATION
WHAT DO BOND RATINGS MEAN?
The preceding discussion of your Fund's performance mentions the quality of the
bonds in the Fund's portfolio. Just what are bond quality ratings?
Two well-known rating agencies, Moody's and Standard & Poor's (S&P), assign
ratings to bond issues. The chart shows a summary of the definitions of these
ratings.
HOW BONDS ARE RATED
Bond ratings are essentially based on the issuer's risk of default, or
nonpayment of principal and/or interest, on the bond. How does a bond rating
come about? Say a company wants to raise $5 million for expansion by issuing a
five-year bond, meaning that in five years' time, the company will repay $5
million plus interest to the investor(s) in the bond issue. The company, or
issuer, pays a fee to have its bond rated by a qualified rating agency. The
selected rating agency sends representatives to the company to meet with
management and evaluate the company's short- and long-term risk profile--the
company's ability and willingness to pay the principal and interest of the bond
issue at its maturity, in this case five years. Other rating factors include:
o the make-up and terms of the particular issue;
o the level and predictability of the issuer's cash flow;
o how well-protected the issue is in the event of bankruptcy, reorganization
or other arrangement;
o possible adverse economic conditions both in general and in the company's
sector; and
o currency risk in the case of foreign issues.
After considering these and any other factors deemed necessary by agency
representatives, the rating agency assigns a rating, such as "A," to the issue.
The rating is made public before the issue is offered to investors so that
investors know the relative quality of the bond. Investors can then decide for
themselves if they wish to invest in a particular bond issue.
Moody's Definition S&P
INVESTMENT GRADE
Aaa Bonds of the highest quality, with the AAA
lowest degree of long-term investment risk.
Issuers' ability to repay is very high.
Aa Bonds of high quality with slightly greater
long-term investment risk. AA
A Bonds with favorable investment attributes A
but elements making them more susceptible
to adversity.
Baa Medium-grade bonds that are currently BBB
secure but may be unreliable over time.
NON-INVESTMENT GRADE (High-Yield or Junk)
Ba Bonds with speculative elements that make BB
them not well safeguarded and uncertain.
B Bonds with low long-term assurance of B
payment.
Caa Bonds of poor standing that may be in CCC
default or in danger of default.
Ca Bonds of highly speculative quality that are CC
often in default.
C Lowest rated bonds with poor prospects C
of ever being upgraded to investment
standing.
- - Bonds in default. Issuer cannot repay. D
AIM INCOME FUND
(continued on page 6)
5
<PAGE> 8
(continued from page 5)
WHAT BOND RATINGS MEAN
Although the rating systems of the two agencies differ slightly, their hierarchy
is essentially the same: the highest rated bonds, Aaa for Moody's and AAA for
S&P, are those which show the best capacity for repayment of the principal (face
value) plus interest to the bondholder. These high-rated bonds have a lower
return because they are a lower-risk investment. In other words, rating and risk
and return move conversely for bonds--the lower the rating, the higher the
potential risk and return, and vice versa. So although investment grade bonds
such as U.S. Treasury issues are one of the safest investments around, more
speculative junk bonds can yield significantly higher returns if an investor can
tolerate the risk.
Moody's and S&P sometimes use modifiers along with their standard ratings.
Moody's may add a 1, 2 or 3 to a rating (e.g., Aa2), with a 1 denoting an issue
ranking in the higher end of its category, a 2 denoting a mid-range ranking, and
a 3 denoting a lower-end ranking. Similarly, S&P may add a plus (+) or minus (-)
to show an issue's relative standing within a category (e.g., B+).
Once assigned, bond ratings are not often altered. However, if major
changes occur in an issuer's short- or long-term credit outlook, a rating agency
may review the rating for possible modification. Contributing factors may
include shifts in industry demand, new technologies, government intervention,
regulatory changes, or changes in macroeconomic variables such as oil prices.
Events such as these are weighed to determine how much they will affect the
issuer's operations and future direction.
UNRATED BONDS
What about unrated bonds? Just because a bond is unrated does not mean it is a
"bad" bond. Some organizations simply choose not to pay to have their bonds
rated. Often the issuer of an unrated bond is a small entity such as a town or
district that does not have extra money to pay for a rating. In those cases,
independent research is necessary on the part of the investor to put together a
risk profile of the issuer.
- --------------------------------------------------------------------------------
YOUR FUND'S PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION
SHOW THE MAXIMUM PERCENTAGE, IF ANY, THAT YOUR FUND CAN INVEST IN
NON-INVESTMENT GRADE BONDS. MANY BOND FUNDS MAINTAIN DIVERSITY
ACROSS BOND RATINGS BY HOLDING SHARES IN BOTH INVESTMENT GRADE
AND NON-INVESTMENT GRADE BONDS. BECAUSE OF THIS DIVERSIFICATION, [Photo]
INVESTMENT IN SUCH A FUND MAY ENTAIL LESS RISK AND GREATER
POTENTIAL REWARD THAN INVESTMENT IN AN INDIVIDUAL
NON-INVESTMENT-GRADE BOND. SEE YOUR FINANCIAL CONSULTANT TO
DETERMINE WHAT KINDS OF BOND FUNDS ARE APPROPRIATE FOR YOUR
FINANCIAL OBJECTIVES AND RISK TOLERANCE.
- --------------------------------------------------------------------------------
AIM INCOME FUND
6
<PAGE> 9
SCHEDULE OF INVESTMENTS
December 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT(a) VALUE
<S> <C> <C>
U.S. DOLLAR DENOMINATED NON-CONVERTIBLE BONDS & NOTES-70.64%
AEROSPACE/DEFENSE-0.21%
Pacific Aerospace & Electronics,
Sr. Sub Notes, 11.25%, 08/01/05
(Acquired 07/24/98; Cost
$1,750,000)(b) $ 1,750,000 $ 1,321,250
- --------------------------------------------------------------
AIR FREIGHT-0.28%
Atlas Air, Inc., Sr. Notes,
10.75%, 08/01/05 1,720,000 1,814,600
- --------------------------------------------------------------
AIRLINES-1.88%
Airplanes Pass Through Trust,
Series D Gtd. Sub. Bonds,
10.875%, 03/15/19 1,810,000 1,901,640
- --------------------------------------------------------------
Delta Air Lines, Inc.,
Deb., 9.00%, 05/15/16 500,000 574,495
- --------------------------------------------------------------
Equipment Trust Certificates,
10.50%, 04/30/16 5,000,000 6,683,300
- --------------------------------------------------------------
United Air Lines, Inc., Pass
Through Certificates, 9.56%,
10/19/18 2,325,000 2,853,472
- --------------------------------------------------------------
12,012,907
- --------------------------------------------------------------
AUTO PARTS & EQUIPMENT-0.32%
Advance Stores Co. Inc., Series B
Sr. Unsec. Gtd. Sub. Notes,
10.25%, 04/15/08 2,000,000 2,040,000
- --------------------------------------------------------------
AUTOMOBILES-1.33%
General Motors Corp., Deb., 8.80%,
03/01/21 6,700,000 8,475,031
- --------------------------------------------------------------
BANKS (MAJOR REGIONAL)-0.66%
Regions Financial Corp., Sub.
Notes, 7.75%, 09/15/24 3,650,000 4,204,909
- --------------------------------------------------------------
BANKS (MONEY CENTER)-0.91%
First Union Bancorp, Sub. Deb.,
7.50%, 04/15/35 5,300,000 5,816,008
- --------------------------------------------------------------
BANKS (REGIONAL)-1.24%
Mercantile Bancorp Inc., Unsec.
Sub. Notes, 7.30%, 06/15/07 5,000,000 5,479,500
- --------------------------------------------------------------
US Bancorp, Sub. Deb., 7.50%,
06/01/26 2,200,000 2,457,862
- --------------------------------------------------------------
7,937,362
- --------------------------------------------------------------
BEVERAGES (NON-ALCOHOLIC)-2.97%
Coca-Cola Enterprises, Inc.,
Putable Notes, 7.24%,
06/20/20(c) 74,000,000 18,976,560
- --------------------------------------------------------------
BROADCASTING (TELEVISION, RADIO & CABLE)-3.18%
CSC Holdings Inc., Series B Sr.
Unsec. Deb., 7.625%, 07/15/18 3,000,000 3,071,760
- --------------------------------------------------------------
EchoStar DBS Corp., Sr. Sec. Gtd.
Notes, 12.50%, 07/01/02 2,340,000 2,714,400
- --------------------------------------------------------------
Kabelmedia Holdings GmbH
(Germany), Sr. Yankee Unsec
Disc. Notes, 13.625%,
08/01/06(d) 1,400,000 1,162,000
- --------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT(a) VALUE
<S> <C> <C>
BROADCASTING (TELEVISION, RADIO & CABLE)-(CONTINUED)
Knology Holdings, Inc., Sr. Disc.
Notes, 11.875% 10/15/07(d) $ 4,100,000 $ 1,896,250
- --------------------------------------------------------------
TCI Communications Inc., Deb.,
8.75%, 08/01/15 6,000,000 7,442,760
- --------------------------------------------------------------
USA Networks, Inc., Sr. Notes,
6.75%, 11/15/05 (Acquired
11/18/98-11/30/98; Cost
$3,988,340)(b) 4,000,000 4,010,640
- --------------------------------------------------------------
20,297,810
- --------------------------------------------------------------
BUILDING MATERIALS-0.51%
Owens Corning, Unsec. Bonds,
7.50%, 08/01/18 3,250,000 3,232,515
- --------------------------------------------------------------
CHEMICALS-1.77%
Nova Gas Transmission Ltd.
(Canada), Yankee Deb., 8.50%,
12/15/12 3,000,000 3,641,400
- --------------------------------------------------------------
Solutia Inc., Bonds, 6.72%,
10/15/37 5,000,000 5,080,000
- --------------------------------------------------------------
Sterling Chemicals, Inc., Sr.
Unsec. Sub. Notes, 11.75%,
08/15/06 3,000,000 2,595,000
- --------------------------------------------------------------
11,316,400
- --------------------------------------------------------------
COMMUNICATIONS EQUIPMENT-0.40%
Dialog Corp. PLC (United Kingdom),
Series A Sr. Sub. Notes, 11.00%,
11/15/07 1,500,000 1,500,000
- --------------------------------------------------------------
ProNet, Inc., Sr. Sub. Notes,
11.875%, 06/15/05 1,000,000 1,065,000
- --------------------------------------------------------------
2,565,000
- --------------------------------------------------------------
COMPUTERS (NETWORKING)-0.41%
Exodus Communications, Sr. Unsec.
Notes, 11.25%, 07/01/08 2,600,000 2,626,000
- --------------------------------------------------------------
CONSUMER FINANCE-0.26%
Commercial Credit Co., Putable
Notes, 7.875%, 02/01/25 1,400,000 1,654,828
- --------------------------------------------------------------
CONTAINERS & PACKAGING (PAPER)-0.24%
BPC Holding Corp., Series B Sr.
Sec. Notes, 12.50%, 06/15/06 785,000 820,325
- --------------------------------------------------------------
MVE Inc., Sr. Sec. Notes, 12.50%,
02/15/02 750,000 738,750
- --------------------------------------------------------------
1,559,075
- --------------------------------------------------------------
ELECTRIC COMPANIES-4.52%
Cleveland Electric Illumination,
Series D Sr. Sec. Notes, 7.88%,
11/01/17 3,800,000 4,011,249
- --------------------------------------------------------------
El Paso Electric Co.,
Series D Sec. First Mortgage
Bonds, 8.90%,
02/01/06 2,500,000 2,816,250
- --------------------------------------------------------------
Series E Sec. First Mortgage
Bonds, 9.40%,
05/01/11 4,600,000 5,223,622
- --------------------------------------------------------------
</TABLE>
7
<PAGE> 10
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT(a) VALUE
<S> <C> <C>
ELECTRIC COMPANIES-(CONTINUED)
Niagara Mohawk Power Corp.,
First Mortgage Notes, 7.75%,
05/15/06 $ 4,300,000 $ 4,765,002
- --------------------------------------------------------------
Sr. Unsec. Disc. Notes, 8.50%,
07/01/10(d) 8,000,000 6,221,040
- --------------------------------------------------------------
Western Resources Inc., Sr. Notes,
7.125%, 08/01/09 5,352,000 5,826,187
- --------------------------------------------------------------
28,863,350
- --------------------------------------------------------------
ELECTRICAL EQUIPMENT-0.21%
Electronic Retailing Systems
International, Inc., Sr. Disc.
Notes, 13.25%, 02/01/04(d) 3,630,000 1,324,950
- --------------------------------------------------------------
ENTERTAINMENT-2.71%
Ascent Entertainment Group, Sr.
Sec. Disc. Notes, 11.875%,
12/15/04(d) 1,460,000 883,300
- --------------------------------------------------------------
Time Warner, Inc.,
Deb., 9.15%, 02/01/23 8,500,000 11,140,355
- --------------------------------------------------------------
Unsec. Deb., 6.85%, 01/15/26 5,000,000 5,260,200
- --------------------------------------------------------------
17,283,855
- --------------------------------------------------------------
FINANCIAL (DIVERSIFIED)-1.59%
Associates Corp. of North America,
Bonds, 6.95%, 11/01/18 3,000,000 3,192,780
- --------------------------------------------------------------
Series B Sr. Deb., 7.95%,
02/15/10 6,000,000 6,943,260
- --------------------------------------------------------------
10,136,040
- --------------------------------------------------------------
FOODS-2.41%
AmeriServ Food Co., Gtd. Notes,
10.125%, 07/15/07 1,750,000 1,531,250
- --------------------------------------------------------------
ConAgra Inc., Sr. Unsec. Notes,
7.125%, 10/01/26 6,100,000 6,517,484
- --------------------------------------------------------------
Del Monte Corp./Foods Co., Sr.
Unsec. Sub. Notes, 12.25%,
04/15/07 1,600,000 1,824,000
- --------------------------------------------------------------
Grand Metro Investment, Gtd.
Bonds, 7.45%, 04/15/35 5,000,000 5,528,000
- --------------------------------------------------------------
15,400,734
- --------------------------------------------------------------
GAMING, LOTTERY & PARIMUTUEL COMPANIES-0.44%
Venetian Casino Resort LLC, Gtd.
Mortgage Notes, 12.25%, 11/15/04 3,000,000 2,820,000
- --------------------------------------------------------------
HEALTH CARE (DRUGS-GENERIC & OTHER)-0.16%
Watson Pharmaceuticals Inc., Sr.
Notes, 7.125%, 05/15/08 1,000,000 1,016,890
- --------------------------------------------------------------
HEALTH CARE (HOSPITAL MANAGEMENT)-0.64%
Tenet Healthcare Corp., Sr. Notes,
8.00%, 01/15/05 4,000,000 4,106,360
- --------------------------------------------------------------
HEALTH CARE (LONG TERM CARE)-0.31%
Mariner Post-Acute Network, Inc.,
Series B Sr. Unsec. Disc. Sub.
Notes, 10.50%, 11/01/07(d) 1,580,000 687,300
- --------------------------------------------------------------
Series B Sr. Unsec. Sub. Notes,
9.50%, 11/01/07 1,630,000 1,263,250
- --------------------------------------------------------------
1,950,550
- --------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT(a) VALUE
<S> <C> <C>
HEALTH CARE (MEDICAL PRODUCTS & SUPPLIES)-1.04%
Beckman Coulter, Sr. Unsec. Gtd.
Notes, 7.45%, 03/04/08 $ 3,500,000 $ 3,560,515
- --------------------------------------------------------------
Dade International Inc., Series B
Sr. Sub. Notes, 11.125%,
05/01/06 1,000,000 1,112,500
- --------------------------------------------------------------
Mediq, Inc., Sr. Unsec. Gtd. Sub.
Notes, 11.00%, 06/01/08 2,060,000 1,987,900
- --------------------------------------------------------------
6,660,915
- --------------------------------------------------------------
HOMEBUILDING-0.12%
D.R. Horton, Inc., Unsec. Gtd.
Notes, 10.00%, 04/15/06 745,000 793,425
- --------------------------------------------------------------
HOUSEWARES-0.37%
Decora Industries, Inc., Series B
Sr. Sec. Gtd. Notes, 11.00%,
05/01/05 2,500,000 2,362,500
- --------------------------------------------------------------
INSURANCE (LIFE/HEALTH)-1.38%
Americo Life Inc., Sr. Sub. Notes,
9.25%, 06/01/05 1,000,000 1,030,000
- --------------------------------------------------------------
Sun Life Canada Capital Trust,
Gtd. Notes, 8.526%, 05/29/49
(Acquired 11/05/98; Cost
$3,152,490)(b) 3,000,000 3,256,230
- --------------------------------------------------------------
Torchmark Corp., Notes, 7.875%,
05/15/23 4,350,000 4,521,912
- --------------------------------------------------------------
8,808,142
- --------------------------------------------------------------
INSURANCE (PROPERTY-CASUALTY)-2.10%
Orion Capital Trust II, Gtd.
Notes, 7.701%, 04/15/28 3,800,000 3,491,516
- --------------------------------------------------------------
Terra Nova Holdings, Co. (United
Kingdom),
Sr. Unsec. Gtd. Notes, 7.00%,
05/15/08 2,000,000 2,037,420
- --------------------------------------------------------------
Sr. Yankee Sec. Gtd. Notes,
7.20%, 08/15/07 2,200,000 2,271,610
- --------------------------------------------------------------
USF&G Corp., Gtd. Bonds, 8.47%,
01/10/27 5,000,000 5,615,550
- --------------------------------------------------------------
13,416,096
- --------------------------------------------------------------
IRON & STEEL-0.18%
Acme Metal Inc., Sr. Unsec. Gtd.
Deb., 10.875%, 12/15/07(e) 3,240,000 437,400
- --------------------------------------------------------------
GS Industries, Inc., Sr. Gtd.
Notes, 12.00%, 09/01/04 1,000,000 685,000
- --------------------------------------------------------------
1,122,400
- --------------------------------------------------------------
LODGING-HOTELS-2.05%
Coast Hotels & Casinos Inc.,
Series B Sec. First Mortgage
Gtd. Notes, 13.00%, 12/15/02 1,160,000 1,310,800
- --------------------------------------------------------------
Hilton Hotels Corp., Notes, 7.20%,
12/15/09 5,000,000 4,970,550
- --------------------------------------------------------------
ITT Corp., Unsec. Gtd. Deb.,
7.375%, 11/15/15 3,350,000 2,850,180
- --------------------------------------------------------------
John Q. Hammons Hotels Inc., Sec.
First Mortgage Notes, 9.75%,
10/01/05 2,000,000 1,880,000
- --------------------------------------------------------------
Stena Line A.B. (Sweden), Sr.
Yankee Notes, 10.625%, 06/01/08 2,300,000 2,081,500
- --------------------------------------------------------------
13,093,030
- --------------------------------------------------------------
</TABLE>
8
<PAGE> 11
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT(a) VALUE
<S> <C> <C>
MACHINERY (DIVERSIFIED)-1.01%
Caterpillar Inc., Deb., 9.375%,
08/15/11 $ 5,000,000 $ 6,431,850
- --------------------------------------------------------------
MANUFACTURING (DIVERSIFIED)-0.50%
Anthony Crane Rentals, Sr. Notes,
10.375%, 08/01/08 (Acquired
09/08/98; Cost $1,396,820)(b) 1,500,000 1,447,500
- --------------------------------------------------------------
Elgin National Industries, Sr.
Unsec. Gtd. Sub. Notes, 11.00%,
11/01/07 1,690,000 1,706,900
- --------------------------------------------------------------
3,154,400
- --------------------------------------------------------------
MANUFACTURING (SPECIALIZED)-0.59%
Brand Scaffold Services, Sr.
Unsec. Notes, 10.25%, 02/15/08 1,600,000 1,528,000
- --------------------------------------------------------------
MMI Products Inc., Sr. Unsec. Sub.
Notes, 11.25%, 04/15/07 2,070,000 2,245,950
- --------------------------------------------------------------
3,773,950
- --------------------------------------------------------------
METAL MINING-0.96%
Centaur Mining & Exploration Ltd.
(Australia), Sr. Yankee Sec.
Gtd. Notes, 11.00%, 12/01/07 2,500,000 2,287,500
- --------------------------------------------------------------
Rio Algom Ltd. (Canada), Yankee
Unsec. Deb., 7.05%, 11/01/05 3,500,000 3,804,780
- --------------------------------------------------------------
6,092,280
- --------------------------------------------------------------
NATURAL GAS-2.51%
Dynegy Inc., Sr. Unsec. Deb.,
7.125%, 05/15/18 4,000,000 3,946,840
- --------------------------------------------------------------
Enron Corp., Sr. Sub. Deb., 8.25%,
09/15/12 4,100,000 4,654,033
- --------------------------------------------------------------
Ferrellgas Partners, Series B Sr.
Sec. Gtd. Notes, 9.375%,
06/15/06 2,100,000 2,110,500
- --------------------------------------------------------------
K N Energy, Inc., Unsec. Deb.,
7.35%, 08/01/26 5,000,000 5,275,750
- --------------------------------------------------------------
15,987,123
- --------------------------------------------------------------
OFFICE EQUIPMENT & SUPPLIES-0.21%
United Stationer Supply, Sr. Sub.
Notes, 12.75%, 05/01/05 1,170,000 1,310,400
- --------------------------------------------------------------
OIL (INTERNATIONAL INTEGRATED)-1.12%
Gulf Canada Resources, Ltd.
(Canada), Sr. Yankee Unsec.
Notes, 8.35%, 08/01/06 5,100,000 5,136,567
- --------------------------------------------------------------
Husky Oil Ltd., Sr. Yankee Notes,
7.125%, 11/15/06 2,000,000 2,012,280
- --------------------------------------------------------------
7,148,847
- --------------------------------------------------------------
OIL & GAS (DRILLING & EQUIPMENT)-1.18%
Petroleum Geo-Services A.S.A.
(Norway), Sr. Yankee Unsec.
Notes, 7.125%, 03/30/28 3,500,000 3,303,755
- --------------------------------------------------------------
R & B Falcon Corp., Sr. Notes,
9.50%, 12/15/08 (Acquired
12/17/98; Cost $1,425,000)(b) 1,425,000 1,432,125
- --------------------------------------------------------------
Series B Sr. Unsec. Notes,
6.95%, 04/15/08 3,225,000 2,801,138
- --------------------------------------------------------------
7,537,018
- --------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT(a) VALUE
<S> <C> <C>
OIL & GAS (EXPLORATION & PRODUCTION)-2.77%
Abraxas Petroleum Corp., Series D
Sr. Unsec. Gtd. Notes, 11.50%,
11/01/04 $ 900,000 $ 688,500
- --------------------------------------------------------------
Anadarko Petroleum Corp., Deb.,
7.25%, 03/15/25 5,395,000 5,615,440
- --------------------------------------------------------------
Chesapeake Energy Corp., Series B
Unsec. Sr. Notes, 9.625%,
05/01/05 1,200,000 942,000
- --------------------------------------------------------------
Kelley Oil & Gas Corp., Series B
Sr. Gtd. Sub. Notes, 10.375%,
10/15/06 1,500,000 1,117,500
- --------------------------------------------------------------
Louis Dreyfus Natural Gas, Sr.
Sub. Notes, 9.25%, 06/15/04 3,700,000 3,992,929
- --------------------------------------------------------------
Queen Sand Resources, Inc., Sr.
Unsec. Gtd. Notes, 12.50%,
07/01/08 2,000,000 1,410,000
- --------------------------------------------------------------
Talisman Energy, Inc. (Canada),
Yankee Deb., 7.125%, 06/01/07 3,750,000 3,877,650
- --------------------------------------------------------------
17,644,019
- --------------------------------------------------------------
OIL & GAS (REFINING & MARKETING)-1.63%
Sun Co., Inc., Deb., 9.00%,
11/01/24 4,000,000 4,778,520
- --------------------------------------------------------------
Texas Petrochemical Corp., Sr.
Unsec. Sub. Notes, 11.125%,
07/01/06 2,010,000 1,989,900
- --------------------------------------------------------------
Tosco Corp., Deb., 7.80%, 01/01/27 3,400,000 3,597,676
- --------------------------------------------------------------
10,366,096
- --------------------------------------------------------------
PERSONAL CARE-0.66%
Alberto-Culver Corp., Notes,
6.375%, 06/15/28 4,000,000 4,191,520
- --------------------------------------------------------------
POWER PRODUCERS (INDEPENDENT)-1.60%
AES Corp., Sr. Sub. Notes, 10.25%,
07/15/06 1,000,000 1,082,500
- --------------------------------------------------------------
Indiana Michigan Power, Sec. Lease
Obligation Bonds, 9.82%,
12/07/22 4,969,144 6,743,973
- --------------------------------------------------------------
Kincaid Generation LLC, Sec.
Bonds, 7.33%, 06/15/20 (Acquired
04/30/98; Cost $2,004,940)(b) 2,000,000 1,997,150
- --------------------------------------------------------------
Panda Global Energy Co. (China),
Sr. Yankee Sec. Gtd. Notes,
12.50%, 04/15/04 850,000 386,750
- --------------------------------------------------------------
10,210,373
- --------------------------------------------------------------
PUBLISHING (NEWSPAPERS)-1.56%
News America Holdings, Inc.,
Sr. Gtd. Deb., 9.25%, 02/01/13 7,100,000 8,862,007
- --------------------------------------------------------------
Sr. Gtd. Putable Bonds, 7.43%,
10/01/26 1,000,000 1,087,120
- --------------------------------------------------------------
9,949,127
- --------------------------------------------------------------
RAILROADS-0.93%
CSX Corp., Series C Medium Term
Notes, 6.80%, 12/01/28 2,850,000 2,842,875
- --------------------------------------------------------------
Norfolk Southern Corp., Putable
Bonds, 7.05%, 05/01/37 2,750,000 3,105,355
- --------------------------------------------------------------
5,948,230
- --------------------------------------------------------------
REAL ESTATE INVESTMENT TRUSTS-1.47%
Glenborough Properties, Series B
Sr. Unsec. Notes, 7.625%,
03/15/05 3,400,000 3,258,893
- --------------------------------------------------------------
</TABLE>
9
<PAGE> 12
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT(a) VALUE
<S> <C> <C>
REAL ESTATE INVESTMENT TRUSTS-(CONTINUED)
Health Care REIT, Inc., Sr. Unsec.
Notes, 7.625%, 03/15/08 $ 3,000,000 $ 2,894,910
- --------------------------------------------------------------
Spieker Properties LP, Unsec.
Deb., 7.35%, 12/01/17 3,500,000 3,217,025
- --------------------------------------------------------------
9,370,828
- --------------------------------------------------------------
RETAIL (GENERAL MERCHANDISE)-0.58%
Fred Meyer, Inc., Sr. Notes,
7.45%, 03/01/08 2,200,000 2,374,922
- --------------------------------------------------------------
Plainwell, Inc., Series B Sr.
Unsec. Sub. Notes, 11.00%,
03/01/08 1,710,000 1,342,350
- --------------------------------------------------------------
3,717,272
- --------------------------------------------------------------
RETAIL (SPECIALTY)-1.14%
CEX Holdings, Inc., Series B Sr.
Unsec. Gtd. Sub. Notes, 9.625%,
06/01/08 1,810,000 1,638,050
- --------------------------------------------------------------
CSK Auto Inc., Sr. Gtd. Sub. Deb.,
11.00%, 11/01/06 715,000 754,325
- --------------------------------------------------------------
Neff Corp., Sr. Sub. Notes,
10.25%, 06/01/08 (Acquired
12/02/98; Cost $1,980,172)(b) 2,010,000 1,949,700
- --------------------------------------------------------------
Renters Choice Inc., Sr. Sub.
Notes, 11.00%, 08/15/08
(Acquired 08/13/98; Cost
$2,500,000)(b) 2,500,000 2,550,000
- --------------------------------------------------------------
Wilson's-The Leather Experts,
Inc., Sr. Notes, 11.25%,
08/15/04 360,000 354,600
- --------------------------------------------------------------
7,246,675
- --------------------------------------------------------------
RETAIL (SPECIALTY-APPAREL)-0.49%
Big 5 Corp., Sr. Unsec. Notes,
10.875%, 11/15/07 2,000,000 2,030,000
- --------------------------------------------------------------
J Crew Operating Corp., Sr. Sub.
Notes, 10.375%, 10/15/07 1,255,000 1,085,575
- --------------------------------------------------------------
3,115,575
- --------------------------------------------------------------
SAVINGS & LOAN COMPANIES-0.83%
Sovereign Bancorp, Inc., Sub.
Notes, 8.00%, 03/15/03 5,050,000 5,312,650
- --------------------------------------------------------------
SERVICES (COMMERCIAL & CONSUMER)-2.24%
Choice Hotels International, Inc.,
Sr. Unsec. Gtd. Sub. Notes,
7.125%, 05/01/08 2,250,000 2,330,611
- --------------------------------------------------------------
Laidlaw Inc. (Canada),
Yankee Deb., 6.72%, 10/01/27 2,000,000 1,985,720
- --------------------------------------------------------------
Yankee Unsec. Deb., 6.70%,
05/01/08 3,550,000 3,471,794
- --------------------------------------------------------------
Pegasus Shipping Hellas Co.
(Bermuda), Series A Sr. Yankee
Sec. Gtd. Mortgage Notes,
11.875%, 11/15/04 2,850,000 2,465,250
- --------------------------------------------------------------
Protection One, Inc., Sr. Notes,
7.375%, 08/15/05 (Acquired
08/12/98; Cost $3,991,120)(b) 4,000,000 4,038,160
- --------------------------------------------------------------
14,291,535
- --------------------------------------------------------------
SERVICES (EMPLOYMENT)-0.30%
MSX International Inc., Sr. Unsec.
Gtd. Sub. Notes, 11.375%,
01/15/08 1,980,000 1,895,850
- --------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT(a) VALUE
<S> <C> <C>
SERVICES (FACILITIES & ENVIRONMENTAL)-0.02%
ATC Group Services Inc., Sr.
Unsec. Gtd. Sub. Notes, 12.00%,
01/15/08 $ 1,150,000 $ 109,250
- --------------------------------------------------------------
SHIPPING-0.34%
Pacific & Atlantic Holdings
(Liberia), Yankee First Mortgage
Notes, 11.50%, 05/30/08 2,800,000 2,170,000
- --------------------------------------------------------------
SOVEREIGN DEBT-2.62%
Province of Manitoba (Canada),
Yankee Bonds, 7.75%, 07/17/16 7,500,000 8,853,450
- --------------------------------------------------------------
Province of Quebec (Canada),
Series A Yankee Notes, 5.735%,
03/02/26 3,500,000 3,943,450
- --------------------------------------------------------------
Medium Term Notes, 6.29%,
03/06/26 3,500,000 3,925,180
- --------------------------------------------------------------
16,722,080
- --------------------------------------------------------------
TELECOMMUNICATIONS (CELLULAR/WIRELESS)-1.34%
Clearnet Communications Inc.
(Canada), Sr. Yankee Unsec Disc.
Notes, 14.75%, 12/15/05(d) 920,000 795,800
- --------------------------------------------------------------
Metrocall Inc., Sr. Sub. Notes,
11.00%, 09/15/08 (Acquired
12/17/98; Cost $2,482,600)(b) 2,500,000 2,525,000
- --------------------------------------------------------------
Nextel Communications, Inc., Sr.
Notes, 12.00%, 11/01/08
(Acquired 10/28/98; Cost
$3,327,008)(b) 3,375,000 3,712,500
- --------------------------------------------------------------
PageMart Wireless, Inc., Sr. Sub.
Disc. Notes, 11.25%, 02/01/08(d) 3,110,000 1,508,350
- --------------------------------------------------------------
8,541,650
- --------------------------------------------------------------
TELECOMMUNICATIONS (LONG DISTANCE)-2.06%
Centel Capital, Deb., 9.00%,
10/15/19 3,800,000 4,888,852
- --------------------------------------------------------------
Esprit Telecom Group PLC (United
Kingdom), Sr. Yankee Notes,
11.50%, 12/15/07 1,500,000 1,560,000
- --------------------------------------------------------------
MCI Communications Corp., Sr.
Putable Sr. Unsec. Deb., 7.125%,
06/15/27 5,000,000 5,317,500
- --------------------------------------------------------------
Versatel Telecom BV (Netherlands),
Sr. Notes, 13.25%, 05/15/08(f) 1,370,000 1,397,400
- --------------------------------------------------------------
13,163,752
- --------------------------------------------------------------
TELEPHONE-1.51%
Cable & Wireless Communications
PLC (United Kingdom), Yankee
Notes, 6.75%, 03/06/08 1,250,000 1,279,425
- --------------------------------------------------------------
ICG Services Inc., Sr. Unsec.
Disc. Notes, 10.00%, 02/15/08(d) 4,000,000 2,170,000
- --------------------------------------------------------------
NTL Inc., Sr. Notes, 11.50%,
10/01/08 (Acquired 10/26/98;
Cost $2,655,000)(b) 2,655,000 2,907,225
- --------------------------------------------------------------
SBC Communications Inc., Deb.,
7.375%, 07/15/43 3,000,000 3,273,660
- --------------------------------------------------------------
9,630,310
- --------------------------------------------------------------
TEXTILES (APPAREL)-0.51%
Fruit of the Loom, Notes, 6.50%,
11/15/03 3,450,000 3,278,052
- --------------------------------------------------------------
</TABLE>
10
<PAGE> 13
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT(a) VALUE
<S> <C> <C>
TRUCKERS-0.34%
Travelcenters of America Inc., Sr.
Unsec. Gtd. Sub. Deb., 10.25%,
04/01/07 $ 2,180,000 $ 2,180,000
- --------------------------------------------------------------
WASTE MANAGEMENT-0.82%
WMX Technologies, Inc., Unsec.
Notes, 7.10%, 08/01/26 5,000,000 5,236,150
- --------------------------------------------------------------
Total U.S. Dollar Denominated
Non-Convertible Bonds &
Notes (Cost $441,982,500) 450,736,354
- --------------------------------------------------------------
U.S. DOLLAR DENOMINATED CONVERTIBLE BONDS & NOTES-1.55%
COMPUTERS (HARDWARE)-0.28%
Candescent Technology Corp., Conv.
Sr. Sub. Deb., 7.00%, 05/01/03
(Acquired 04/20/98; Cost
$2,000,000)(b) 2,000,000 1,800,000
- --------------------------------------------------------------
COMPUTERS (PERIPHERALS)-0.59%
EMC Corp., Conv. Sub. Notes,
3.25%, 03/15/02 (Acquired
03/06/97; Cost $1,000,000)(b) 1,000,000 3,770,000
- --------------------------------------------------------------
HEALTH CARE (SPECIALIZED SERVICES)-0.34%
Omnicare, Inc., Conv. Sub. Deb.,
5.00%, 12/01/07 (Acquired
12/04/97; Cost $2,000,000)(b) 2,000,000 2,172,500
- --------------------------------------------------------------
SHIPPING-0.34%
Hutchison Delta Finance (Cayman
Islands), Conv. Unsec. Notes,
7.00%, 11/08/01 2,000,000 2,150,000
- --------------------------------------------------------------
Total U.S. Dollar Denominated
Convertible Bonds & Notes
(Cost $7,110,000) 9,892,500
- --------------------------------------------------------------
NON-U.S. DOLLAR DENOMINATED NON- CONVERTIBLE BONDS
& NOTES(g)-7.98%
CANADA-4.31%
Bank of Montreal (Banks-Money
Center), Sub. Deb., 7.92%,
07/31/12 CAD 4,000,000 3,029,281
- --------------------------------------------------------------
Bell Canada
(Telecommunications-Cellular/
Wireless), Unsec. Deb., 10.875%,
10/11/04 3,000,000 2,483,175
- --------------------------------------------------------------
Bell Mobility Cellular Inc.
(Telecommunications-Cellular/Wireless),
Deb., 6.55%, 06/02/08 2,250,000 1,505,808
- --------------------------------------------------------------
Clearnet Communications Inc.
(Telecommunications-Cellular/Wireless),
Sr. Disc. Notes, 11.75%,
08/13/07(d) 8,200,000 3,229,085
- --------------------------------------------------------------
Sr. Disc. Notes, 10.40%,
05/15/08(d) 9,050,000 3,149,755
- --------------------------------------------------------------
Microcell Telecommunications Inc.
(Telecommunications-Cellular/Wireless),
Sr. Disc. Notes, 11.125%,
10/15/07(d) 3,500,000 1,263,888
- --------------------------------------------------------------
NAV Canada (Services-Commercial &
Consumer), Bonds, 7.40%,
06/01/27 2,500,000 2,001,928
- --------------------------------------------------------------
Poco Petroleums Ltd. (Oil & Gas-
Exploration & Production),
Unsec. Deb., 6.60%, 09/11/07 4,150,000 2,660,774
- --------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT(a) VALUE
<S> <C> <C>
CANADA-(CONTINUED)
Telegobe Canada, Inc. (Telephone),
Unsec. Deb., 8.35%, 06/20/03 $ 5,000,000 $ 3,653,170
- --------------------------------------------------------------
Trans-Canada Pipelines (Natural
Gas),
Series Q Deb., 10.625%, 10/20/09 1,750,000 1,576,441
- --------------------------------------------------------------
Unsec. Notes, 8.55%, 02/01/06 3,000,000 2,286,059
- --------------------------------------------------------------
Westcoast Energy, Inc. (Natural
Gas), Deb., 6.45%,12/18/06 1,000,000 692,170
- --------------------------------------------------------------
27,531,534
- --------------------------------------------------------------
GERMANY-0.35%
LKB Global
(Financial-Diversified), Gtd.
Notes, 6.00%, 01/25/06 DEM 3,300,000 2,218,290
- --------------------------------------------------------------
NEW ZEALAND-1.90%
International Bank of
Reconstruction & Development
(Banks-Money Center),
Sr. Unsec. Notes, 6.77%,
08/20/07(c) NZD 8,000,000 2,428,375
- --------------------------------------------------------------
Sr. Unsub., 5.50%, 11/03/08 8,750,000 4,388,857
- --------------------------------------------------------------
Sr. Unsub. Notes, 7.25%,
05/27/03 9,600,000 5,286,106
- --------------------------------------------------------------
12,103,338
- --------------------------------------------------------------
UNITED KINGDOM-1.42%
International Bank for
Reconstruction & Development
(Banks-Money Center), Sr. Unsec.
Notes, 6.875%, 07/14/00 GBP 3,000,000 5,079,480
- --------------------------------------------------------------
Sutton Bridge Financial Ltd.
(Financial- Diversified), Gtd.
Eurobonds 8.625%, 06/03/22 2,000,000 4,005,687
- --------------------------------------------------------------
9,085,167
- --------------------------------------------------------------
Total Non-U.S. Dollar
Denominated Non-Convertible
Bonds & Notes (Cost
$52,220,928) 50,938,329
- --------------------------------------------------------------
NON-U.S. DOLLAR DENOMINATED CONVERTIBLE BONDS & NOTES-2.60%
GERMANY-1.10%
Daimler-Benz A.G. (Automobiles),
Conv. Gtd. Unsub. Eurobonds,
4.125%, 07/05/03 DEM 6,440,000 6,994,959
- --------------------------------------------------------------
UNITED KINGDOM-1.50%
Airtours PLC (Services-Commercial
& Consumer), Conv. Sub. Notes,
5.75%, 01/05/04 (Acquired
12/09/98; Cost $3,091,887)(b)GBP 1,869,000 3,191,508
- --------------------------------------------------------------
COLT Telecom Group PLC
(Telephone), Conv. Notes, 2.00%,
08/06/05 DEM 2,750,000 1,712,149
- --------------------------------------------------------------
National Grid Co. PLC (Electric
Companies), Conv. Bonds, 4.25%,
02/17/08 (Acquired 02/05/98;
Cost $3,729,375)(b) GBP 2,250,000 4,674,093
- --------------------------------------------------------------
9,577,750
- --------------------------------------------------------------
Total Non-U.S. Dollar
Denominated Convertible
Bonds & Notes (Cost
$13,523,177) 16,572,709
- --------------------------------------------------------------
</TABLE>
11
<PAGE> 14
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT(a) VALUE
<S> <C> <C>
NON-U.S. DOLLAR DENOMINATED GOVERNMENT BONDS & NOTES(g)-6.51%
BRITISH POUND STERLING-3.04%
Federal National Mortgage
Association, Sr. Unsec. Notes,
6.875%, 06/07/02 GBP $ 2,400,000 $ 4,241,147
- --------------------------------------------------------------
Ontario Province, Deb., 11.125%,
02/14/01 2,000,000 3,654,381
- --------------------------------------------------------------
United Kingdom Treasury,
Bonds, 8.00%, 12/07/00 1,500,000 2,634,561
- --------------------------------------------------------------
Bonds, 7.50%, 12/07/06 3,100,000 6,195,858
- --------------------------------------------------------------
Gtd. Notes, 7.00%, 11/06/01 1,500,000 2,644,532
- --------------------------------------------------------------
19,370,479
- --------------------------------------------------------------
CANADIAN DOLLARS-0.94%
Ontario Province, Sr. Unsec.
Unsub. Global Bonds, 8.00%,
03/11/03 CAD 5,350,000 3,892,415
- --------------------------------------------------------------
Ontario Hydro, Deb., 8.47%,
02/06/20(c) 10,750,000 2,109,810
- --------------------------------------------------------------
6,002,225
- --------------------------------------------------------------
NEW ZEALAND DOLLARS-1.20%
Canadian Government, Bonds,
6.625%, 10/03/07 NZD 6,300,000 3,404,250
- --------------------------------------------------------------
Federal National Mortgage
Association, Notes, 7.25%,
06/20/02 5,400,000 2,949,048
- --------------------------------------------------------------
Ontario Province, Unsec. Unsub.
Notes, 6.25%, 12/03/08 2,500,000 1,292,648
- --------------------------------------------------------------
7,645,946
- --------------------------------------------------------------
SWEDISH KRONA-1.33%
Swedish Government,
Bonds, 6.00%, 02/09/05 SEK 20,000,000 2,739,862
- --------------------------------------------------------------
Bonds, 6.50%, 10/25/06 20,000,000 2,867,709
- --------------------------------------------------------------
Bonds, 5.00%, 01/28/09 22,000,000 2,884,910
- --------------------------------------------------------------
8,492,481
- --------------------------------------------------------------
Total Non-U.S. Dollar
Denominated Government Bonds
& Notes (Cost $39,246,462) 41,511,131
- --------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SHARES
<S> <C> <C>
DOMESTIC COMMON STOCKS-0.18%
MANUFACTURING (SPECIALIZED)-0.16%
US Filter Corp.(a) 43,636 998,185
- --------------------------------------------------------------
TELECOMMUNICATION (CELLULAR/WIRELESS)-0.02%
Nextel Communications, Inc.-Class
A(h) 4,601 108,699
- --------------------------------------------------------------
Total Domestic Common Stocks
(Cost $1,467,047) 1,106,884
- --------------------------------------------------------------
DOMESTIC CONVERTIBLE PREFERRED STOCKS-1.86%
BANKS (REGIONAL)-0.47%
Westpac Banking Corp. STRYPES
Trust-$3.135 Conv. Pfd. 95,000 2,998,438
- --------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
MARKET
SHARES VALUE
<S> <C> <C>
COMPUTERS (SOFTWARE & SERVICES)-0.27%
Microsoft Corp., Series A-$2.196
Conv. Pfd. 18,000 $ 1,759,500
- --------------------------------------------------------------
ELECTRIC COMPANIES-0.37%
Houston Industries Inc.-$3.22
Conv. Pfd. 22,000 2,340,250
- --------------------------------------------------------------
FOODS-0.19%
Ralston Purina Co.-$4.34 Conv.
Pfd. 23,000 1,201,750
- --------------------------------------------------------------
OIL & GAS (REFINING & MARKETING)-0.15%
Tosco Financing Trust-$2.875 Conv.
Pfd. (Acquired
12/10/96-12/11/96; Cost
$1,006,950)(b) 20,000 962,500
- --------------------------------------------------------------
SERVICES (COMMERCIAL & CONSUMER)-0.41%
Cendant Corp.-$3.75 Conv. PRIDES 78,000 2,603,250
- --------------------------------------------------------------
Total Domestic Convertible
Preferred Stocks (Cost
$11,290,537) 11,865,688
- --------------------------------------------------------------
FOREIGN STOCKS & OTHER EQUITY INTERESTS-0.12%
CANADA-0.12%
PowerGen PLC-ADR (Electric
Companies) 14,000 749,000
- --------------------------------------------------------------
Total Foreign Stocks & Other
Equity Interests (Cost
$467,674) 749,000
- --------------------------------------------------------------
WARRANTS-0.01%
BROADCASTING (TELEVISION, RADIO & CABLE)-0.00%
Knology Holdings, Inc., expiring
10/15/07(b)(i) (Acquired
03/12/98; Cost $0) 4,100 9,225
- --------------------------------------------------------------
ELECTRICAL EQUIPMENT-0.00%
Electronic Retailing Systems
International, expiring
02/01/04(i) 3,630 18,150
- --------------------------------------------------------------
HEALTH CARE (MEDICAL PRODUCTS & SUPPLIES)-0.00%
MVE Inc., expiring 02/15/02(i) 1,000 10,000
- --------------------------------------------------------------
METAL FABRICATORS-0.00%
Gulf States Steel, Inc., expiring
04/15/03(i)() 1,650 17
- --------------------------------------------------------------
PERSONAL CARE-0.00%
IHF Capital Inc., Series I,
expiring 11/14/99(i)() 1,200 600
- --------------------------------------------------------------
TELECOMMUNICATIONS (CELLULAR/WIRELESS)-0.01%
Clearnet Communications Inc.
(Canada), expiring 09/15/05(i)() 5,874 41,118
- --------------------------------------------------------------
Loral Space & Communications Ltd.
expiring 01/15/07(i)() 3,400 36,550
- --------------------------------------------------------------
77,668
- --------------------------------------------------------------
TELECOMMUNICATIONS (LONG DISTANCE)-0.00%
Versatel Telecom BV (Netherlands),
expiring 05/15/08(i)() 1,370 13,871
- --------------------------------------------------------------
Total Warrants (Cost $50,050) 129,531
- --------------------------------------------------------------
</TABLE>
12
<PAGE> 15
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
<S> <C> <C>
U.S. GOVERNMENT SECURITIES-4.24%
U.S. GOVERNMENT AGENCY-2.34%
Federal National Mortgage
Association, STRIPS, 5.899%,
10/09/19(j) $50,000,000 $ 14,950,500
- --------------------------------------------------------------
U.S. TREASURY BONDS-1.90%
U.S. Treasury Bonds, 6.125%,
11/15/27 5,950,000 6,663,405
- --------------------------------------------------------------
U.S. Treasury Bonds, 6.375%,
08/15/27 3,000,000 3,449,730
- --------------------------------------------------------------
U.S. Treasury Bonds, 5.50%,
08/15/28 1,900,000 1,989,243
- --------------------------------------------------------------
12,102,378
- --------------------------------------------------------------
Total U.S. Government
Securities (Cost
$26,742,820) 27,052,878
- --------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
<S> <C> <C>
REPURCHASE AGREEMENT(k)-2.60%
Goldman, Sachs & Co., 4.40%,
01/04/99 (Cost $16,570,735)(l) $16,570,735 $ 16,570,735
- --------------------------------------------------------------
TOTAL INVESTMENTS-98.29% 627,125,739
- --------------------------------------------------------------
OTHER ASSETS LESS LIABILITIES-1.71% 10,939,773
- --------------------------------------------------------------
NET ASSETS-100.00% $638,065,512
==============================================================
</TABLE>
Abbreviations:
ADR - American Depositary Receipts
CAD - Canadian Dollar
Conv. - Convertible
Deb. - Debentures
DEM - German Deutsche Mark
Disc. - Discounted
Pfd. - Preferred
GBP - British Pound Sterling
Gtd. - Guaranteed
PRIDES - Preferred Redemption Increase Dividend Equity Security
NZD - New Zealand Dollar
REIT - Real Estate Investment Trust
Sec. - Secured
SEK - Swedish Krona
Sr. - Senior
STRIPS - Separately Traded Registered Interest and Principal Security
STRYPES - Structured Yield Product Exchangeable Per Stock
Sub. - Subordinated
Unsec. - Unsecured
Unsub. - Unsubordinated
(a) Principal amount is in U.S. Dollars, except as indicated by note (f).
(b) Restricted security. May be resold to qualified institutional buyers in
accordance with the provisions of Rule 144A under the Securities Act of
1933, as amended. The valuation of these securities has been determined in
accordance with procedures established by the Board of Trustees. The
aggregate market value of these securities at 12/31/98 was $47,727,306 which
represented 7.48% of the Fund's net assets.
(c) Zero coupon bond issued at a discount. The interest rate shown represents
the rate of original issue discount.
(d) Discounted bond at purchase. The interest rate represents the coupon rate at
which the bond will accrue at a specified future date.
(e) Defaulted security. Currently, the issuer is partially in default with
respect to interest payments.
(f) Issued as a unit. This unit includes 1 Sr. Note plus one warrant to purchase
6.667 shares of common stock.
(g) Foreign denominated security. Par value and coupon are denominated in
currency of country indicated.
(h) Non-income producing security.
(i) Non-income producing security acquired as part of a unit with or in exchange
for other securities.
(j) STRIPS are traded on a discount basis. In such cases the interest rate shown
represents the rate of discount paid or received at the time of purchase by
the Fund.
(k) Collateral on repurchase agreements, including the Fund's pro-rata interest
in joint repurchase agreements, is taken into possession by the Fund upon
entering into the repurchase agreement. The collateral is marked to market
daily to ensure its market value is at least 102% of the sales price of the
repurchase agreement. The investments in some repurchase agreements are
through participation in joint accounts with other mutual funds, private
accounts and certain non-registered investment companies managed by the
investment advisor or its affiliates.
(l) Joint repurchase agreement entered into 12/31/98 with a maturing value of
$700,342,222. Collateralized by $646,494,000 U.S. Government obligations, 0%
to 11.75% due 02/15/99 to 04/15/28 with an aggregate market value at
12/31/98 of $714,694,897.
See Notes to Financial Statements.
13
<PAGE> 16
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
<TABLE>
<S> <C>
ASSETS:
Investments, at market value (cost
$610,671,930) $627,125,739
- ---------------------------------------------------------
Foreign currencies, at value (cost
$272,798) 275,091
- ---------------------------------------------------------
Receivables for:
Forward currency contracts 699,230
- ---------------------------------------------------------
Fund shares sold 2,918,110
- ---------------------------------------------------------
Interest and dividends 10,629,596
- ---------------------------------------------------------
Investment for deferred compensation plan 74,658
- ---------------------------------------------------------
Other assets 40,884
- ---------------------------------------------------------
Total assets 641,763,308
- ---------------------------------------------------------
LIABILITIES:
Payables for:
Forward currency contracts 313,693
- ---------------------------------------------------------
Fund shares reacquired 1,569,160
- ---------------------------------------------------------
Dividends 790,765
- ---------------------------------------------------------
Deferred compensation plan 74,658
- ---------------------------------------------------------
Accrued advisory fees 225,704
- ---------------------------------------------------------
Accrued distribution fees 497,683
- ---------------------------------------------------------
Accrued transfer agent fees 74,377
- ---------------------------------------------------------
Accrued operating expenses 151,756
- ---------------------------------------------------------
Total liabilities 3,697,796
- ---------------------------------------------------------
Net assets applicable to shares outstanding $638,065,512
- ---------------------------------------------------------
NET ASSETS:
Class A $399,701,085
=========================================================
Class B $219,032,588
=========================================================
Class C $ 19,331,839
=========================================================
SHARES OUTSTANDING, $0.01 PAR VALUE PER SHARE:
Class A 47,685,072
=========================================================
Class B 26,168,120
=========================================================
Class C 2,313,165
=========================================================
Class A:
Net asset value and redemption price per
share $ 8.38
- ---------------------------------------------------------
Offering price per share:
(Net asset value of $8.38
divided by 95.25%) $ 8.80
=========================================================
Class B:
Net asset value and offering price per
share $ 8.37
=========================================================
Class C:
Net asset value and offering price per
share $ 8.36
=========================================================
</TABLE>
See Notes to Financial Statements.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest $ 40,914,357
- ---------------------------------------------------------
Dividends (net of $5,002 foreign
withholding tax) 905,180
- ---------------------------------------------------------
Total investment income 41,819,537
- ---------------------------------------------------------
EXPENSES:
Advisory fees 2,375,487
- ---------------------------------------------------------
Administrative services fees 87,349
- ---------------------------------------------------------
Custodian fees 94,813
- ---------------------------------------------------------
Trustees' fees 12,447
- ---------------------------------------------------------
Distribution fees -- Class A 932,865
- ---------------------------------------------------------
Distribution fees -- Class B 1,670,317
- ---------------------------------------------------------
Distribution fees -- Class C 99,616
- ---------------------------------------------------------
Transfer agent fees -- Class A 561,090
- ---------------------------------------------------------
Transfer agent fees -- Class B 261,052
- ---------------------------------------------------------
Transfer agent fees -- Class C 15,569
- ---------------------------------------------------------
Other 235,343
- ---------------------------------------------------------
Total expenses 6,345,948
- ---------------------------------------------------------
Less: Expenses paid indirectly (10,506)
- ---------------------------------------------------------
Net expenses 6,335,442
- ---------------------------------------------------------
Net investment income 35,484,095
- ---------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) FROM
INVESTMENT SECURITIES, FOREIGN CURRENCIES
AND FORWARD CURRENCY CONTRACTS:
Net realized gain (loss) from:
Investment securities (4,575,354)
- ---------------------------------------------------------
Foreign currencies 168,901
- ---------------------------------------------------------
Forward currency contracts 1,735,917
- ---------------------------------------------------------
(2,670,536)
- ---------------------------------------------------------
Net unrealized appreciation (depreciation)
of:
Investment securities (6,318,544)
- ---------------------------------------------------------
Foreign currencies 41,984
- ---------------------------------------------------------
Forward currency contracts (2,117,169)
- ---------------------------------------------------------
(8,393,729)
- ---------------------------------------------------------
Net gain (loss) from investment
securities, foreign currencies and
forward currency contracts (11,064,265)
- ---------------------------------------------------------
Net increase in net assets resulting from
operations $ 24,419,830
- ---------------------------------------------------------
</TABLE>
14
<PAGE> 17
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
OPERATIONS:
Net investment income $ 35,484,095 $ 25,483,371
- --------------------------------------------------------------------------------------------
Net realized gain (loss) from investment securities,
foreign currencies, forward currency contracts and
futures contracts (2,670,536) 10,912,543
- --------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of investment
securities, foreign currencies and forward currency
contracts (8,393,729) 8,736,614
- --------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 24,419,830 45,132,528
- --------------------------------------------------------------------------------------------
Distributions to shareholders from net investment income:
Class A (24,056,371) (18,740,017)
- --------------------------------------------------------------------------------------------
Class B (9,376,348) (5,379,787)
- --------------------------------------------------------------------------------------------
Class C (561,222) (8,381)
- --------------------------------------------------------------------------------------------
Distributions to shareholders from net realized gains:
Class A (2,510,957) (3,481,635)
- --------------------------------------------------------------------------------------------
Class B (1,354,867) (1,280,178)
- --------------------------------------------------------------------------------------------
Class C (120,997) (19,105)
- --------------------------------------------------------------------------------------------
Share transactions-net:
Class A 67,975,662 42,455,896
- --------------------------------------------------------------------------------------------
Class B 97,469,590 36,284,875
- --------------------------------------------------------------------------------------------
Class C 17,151,361 2,539,241
- --------------------------------------------------------------------------------------------
Net increase in net assets 169,035,681 97,503,437
- --------------------------------------------------------------------------------------------
NET ASSETS:
Beginning of period 469,029,831 371,526,394
- --------------------------------------------------------------------------------------------
End of period $638,065,512 $469,029,831
============================================================================================
NET ASSETS CONSIST OF:
Shares of beneficial interest $624,536,057 $441,939,444
- --------------------------------------------------------------------------------------------
Undistributed net investment income 68,804 (57,239)
- --------------------------------------------------------------------------------------------
Undistributed net realized gain (loss) from investment
securities, foreign currencies, forward currency
contracts and futures contracts (3,384,384) 1,908,862
- --------------------------------------------------------------------------------------------
Unrealized appreciation of investment securities, foreign
currencies and forward currency contracts 16,845,035 25,238,764
- --------------------------------------------------------------------------------------------
$638,065,512 $469,029,831
============================================================================================
</TABLE>
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 1-SIGNIFICANT ACCOUNTING POLICIES
AIM Income Fund (the "Fund") is a series portfolio of AIM Funds Group (the
"Trust"). The Trust is a Delaware business trust registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end series
management investment company consisting of nine separate series portfolios,
each having an unlimited number of shares of beneficial interest. The Fund
currently offers three different classes of shares: Class A shares, Class B
shares and Class C shares. Class A shares are sold with a front-end sales
charge. Class B and Class C shares are sold with a contingent deferred sales
charge. Matters affecting each portfolio or class will be voted on exclusively
by the shareholders of such portfolio or class. The assets, liabilities and
operations of each portfolio are accounted for separately. Information presented
in these financial statements pertains only to the Fund. The Fund's investment
objective is to seek to achieve a high level of current income consistent with
reasonable concern for safety of principal by investing primarily in fixed rate
corporate debt and U.S. Government obligations.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. The following is a summary of significant accounting policies
followed by the Fund in the preparation of its financial statements.
15
<PAGE> 18
A. Security Valuations-Debt obligations (including convertible bonds) are
valued on the basis of prices provided by an independent pricing service.
Prices provided by the pricing service may be determined without exclusive
reliance on quoted prices, and may reflect appropriate factors such as
institution-size trading in similar groups of securities, developments
related to special securities, yield, quality, coupon rate, maturity, type
of issue, individual trading characteristics and other market data.
Investment securities for which prices are not provided by the pricing
service and which are listed or traded on an exchange (except convertible
bonds) are valued at the last sales price on the exchange where the security
is principally traded or, lacking any sales on a particular day, at the mean
between the closing bid and asked prices on that day unless the Board of
Trustees, or persons designated by the Board of Trustees, determines that
the over-the-counter quotations more closely reflect the current market
value of the security. Securities traded in the over-the-counter market,
except (i) securities priced by the pricing service, (ii) securities for
which representative exchange prices are available, and (iii) securities
reported in the NASDAQ National Market System, are valued at the mean
between representative last bid and asked prices obtained from an electronic
quotation reporting system, if such prices are available, or from
established market makers. Each security reported in the NASDAQ National
Market System is valued at the last sales price on the valuation date or
absent a last sales price, at the mean of the closing bid and asked prices.
Securities for which market quotations are either not readily available or
are questionable are valued at fair value as determined in good faith by or
under the supervision of the Trust's officers in a manner specifically
authorized by the Board of Trustees. Short-term obligations having 60 days
or less to maturity are valued at amortized cost which approximates market
value. Generally, trading in foreign securities, as well as corporate bonds
and U.S. Government securities, is substantially completed each day at
various times prior to the close of the New York Stock Exchange. The values
of such securities used in computing the net asset value of the Fund's
shares are determined as of such times. Foreign currency exchange rates are
also generally determined prior to the close of the New York Stock Exchange.
Occasionally, events affecting the values of such securities and such
exchange rates may occur between the times at which they are determined and
the close of the New York Stock Exchange which will not be reflected in the
computation of the Fund's net asset value. If events materially affecting
the value of such securities occur during such period, then these securities
will be valued at their fair value as determined in good faith by or under
the supervision of the Board of Trustees.
B. Bond Premiums-It is the policy of the Fund not to amortize market premiums
on bonds for financial reporting purposes.
C. Foreign Currency Translations-Portfolio securities and other assets and
liabilities denominated in foreign currencies are translated into U.S.
dollar amounts at date of valuation. Purchases and sales of portfolio
securities and income items denominated in foreign currencies are translated
into U.S. dollar amounts on the respective dates of such transactions. The
Fund does not separately account for that portion of the results of
operations resulting from changes in foreign exchange rates on investments
and the fluctuations arising from changes in market prices of securities
held. Such fluctuations are included with the net realized and unrealized
gain or loss from investments.
D. Foreign Currency Contracts-A foreign currency contract is an obligation to
purchase or sell a specific currency for an agreed-upon price at a future
date. The Fund may enter into a foreign currency contract to attempt to
minimize the risk to the Fund from adverse changes in the relationship
between currencies. The Fund may also enter into a foreign currency contract
for the purchase or sale of a security denominated in a foreign currency in
order to "lock-in" the U.S. dollar price of that security. The Fund could be
exposed to risk if counterparties to the contracts are unable to meet the
terms of their contracts or if the value of the foreign currency changes
unfavorably. Outstanding forward currency contracts at December 31, 1998
were as follows:
<TABLE>
<CAPTION>
Contract to Unrealized
Settlement ------------------------- Appreciation
Date Deliver Receive Value (Depreciation)
- ---------- ----------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C>
2/4/99 CAD 24,000,000 $15,751,339 $15,685,805 $ 65,534
1/15/99 DEM 2,100,000 1,249,026 1,261,170 (12,144)
2/26/99 DEM 14,500,000 8,542,980 8,726,439 (183,459)
1/14/99 GBP 6,000,000 10,114,440 9,958,596 155,844
2/26/99 GBP 13,000,000 21,441,810 21,499,732 (57,922)
1/13/99 NZD 12,000,000 6,249,000 6,309,168 (60,168)
2/4/99 NZD 8,000,000 4,252,960 4,205,681 47,279
2/26/99 NZD 16,000,000 8,527,200 8,410,874 116,326
1/29/99 SEK 65,500,000 8,391,519 8,077,272 314,247
----------- ----------- ---------
$84,520,274 $84,134,737 $ 385,537
=========== =========== =========
</TABLE>
E. Securities Transactions, Investment Income and Distributions-Securities
transactions are accounted for on a trade date basis. Realized gains or
losses on sales are computed on the basis of specific identification of the
securities sold. Interest income is recorded as earned from settlement date
and is recorded on the accrual basis. Dividend income is recorded on the
ex-dividend date. It is the policy of the Fund to declare daily dividends
from net investment income. Such dividends are paid monthly. Distributions
from net realized capital gains, if any, are recorded on ex-dividend date
and are paid annually. On December 31, 1998 undistributed net investment
income was decreased by $1,364,111 and undistributed net realized gains was
increased by $1,364,111 as a result of differing book/tax treatment of
foreign currency transactions and market discount reclassifications in order
to comply with the requirements of the American Institute of Certified
Public Accountants Statement of Position 93-2. Net assets of the Fund were
unaffected by the reclassifications discussed above.
F. Federal Income Taxes-The Fund intends to comply with the requirements of the
Internal Revenue Code necessary to qualify as a regulated investment company
and, as such, will not be subject to federal income taxes on otherwise
taxable income (including net realized capital gains) which is distributed
to shareholders. Therefore, no provision for federal income taxes is
recorded in the financial statements. The Fund has a capital
16
<PAGE> 19
loss carryforward of $1,419,489 (which may be carried forward to offset
future taxable capital gains, if any) which expires, if not previously
utilized, through the year 2006. The fund cannot distribute capital gains to
shareholders until the tax loss carryforwards have been utilized.
G. Expenses-Distribution and transfer agency expenses directly attributable to
a class of shares are charged to that class' operations. All other expenses
which are attributable to more than one class are allocated among the
classes.
NOTE 2-ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES
The Trust has entered into a master investment advisory agreement with A I M
Advisors, Inc. ("AIM"). Under the terms of the master investment advisory
agreement, the Fund pays AIM an advisory fee at an annual rate of 0.50% of the
first $200 million of the Fund's average daily net assets, plus 0.40% of the
Fund's average daily net assets in excess of $200 million to and including $500
million, plus 0.35% of the Fund's average daily net assets in excess of $500
million to and including $1 billion, plus 0.30% of the Fund's average daily net
assets in excess of $1 billion.
The Fund, pursuant to a master administrative services agreement with AIM, has
agreed to reimburse AIM for certain administrative costs incurred in providing
accounting services to the Fund. During the year ended December 31, 1998, AIM
was reimbursed $87,349 for such services.
The Fund, pursuant to a transfer agency and service agreement, has agreed to
pay A I M Fund Services, Inc. ("AFS") a fee for providing transfer agency and
shareholder services to the Fund. During the year ended December 31, 1998, the
Fund paid AFS $491,433 for such services.
The Trust has entered into master distribution agreements with A I M
Distributors, Inc. ("AIM Distributors") to serve as the distributor for the
Class A, Class B and Class C shares of the Fund. The Trust has adopted
distribution plans pursuant to Rule 12b-1 under the 1940 Act with respect to the
Fund's Class A shares and Class C shares (the "Class A and C Plan"), and the
Fund's Class B shares (the "Class B Plan") (collectively, the "Plans"). The
Fund, pursuant to the Class A and C Plan, pays AIM Distributors compensation at
an annual rate of 0.25% of the average daily net assets of the Class A shares
and 1.00% of the average daily net assets of the Class C shares. The Fund,
pursuant to the Class B Plan, pays AIM Distributors compensation at an annual
rate of 1.00% of the average daily net assets of the Class B shares. Of these
amounts, the Fund may pay a service fee of 0.25% of the average daily net assets
of the Class A, Class B or Class C shares to selected dealers and financial
institutions who furnish continuing personal shareholder services to their
customers who purchase and own the appropriate class of shares of the Fund. Any
amounts not paid as a service fee under the Plans would constitute an
asset-based sales charge. The Plans also impose a cap on the total sales
charges, including asset-based sales charges that may be paid by the respective
classes. During the year ended December 31, 1998, the Class A, Class B and Class
C shares paid AIM Distributors $932,865, $1,670,317 and $99,616, respectively,
as compensation under the Plans.
AIM Distributors received commissions of $340,185 from sales of the Class A
shares of the Fund during the year ended December 31, 1998. Such commissions are
not an expense of the Fund. They are deducted from, and are not included in, the
proceeds from sales of Class A shares. During the year ended December 31, 1998,
AIM Distributors received $99,010 in contingent deferred sales charges imposed
on redemptions of Fund shares. Certain officers and trustees of the Trust are
officers and directors of AIM, AIM Distributors and AFS.
During the year ended December 31, 1998, the Fund paid legal fees of $4,444
for services rendered by Kramer, Levin, Naftalis & Frankel as counsel to the
Board of Trustees. A member of that firm is a trustee of the Trust.
NOTE 3-INDIRECT EXPENSES
During the year ended December 31, 1998, the Fund received reductions in
transfer agency fees from AFS (an affiliate of AIM) and reductions in custodian
fees of $6,082 and $4,424, respectively, under expense offset arrangements. The
effect of the above arrangements resulted in a reduction of the Fund's total
expenses of $10,506 during the year ended December 31, 1998.
NOTE 4-TRUSTEES' FEES
Trustees' fees represent remuneration paid or accrued to each trustee who is not
an "interested person" of AIM. The Trust may invest trustees' fees, if so
elected by a trustee, in mutual fund shares in accordance with a deferred
compensation plan.
NOTE 5-BANK BORROWINGS
The Fund is a participant in a committed line of credit facility with a
syndicate administered by The Chase Manhattan Bank. The Fund may borrow up to
the lesser of (i) $1,000,000,000 or (ii) the limits set by its prospectus for
borrowings. The Fund and other funds advised by AIM which are parties to the
line of credit may borrow on a first come, first served basis. Interest on
borrowings under the line of credit is payable on maturity or prepayment date.
Prior to an amendment of the line of credit on May 1, 1998, the Fund was limited
to borrowing up to the lesser of (i) $500,000,000 or (ii) the limits set by its
prospectus for borrowings. During the year ended December 31, 1998 the Fund did
not borrow under the line of credit agreement. The funds which are parties to
the line of credit are charged a commitment fee of 0.05% on the unused balance
of the committed line. The commitment fee is allocated among such funds based on
their respective average net assets for the period.
NOTE 6-INVESTMENT SECURITIES
The aggregate amount of investment securities (other than short-term securities)
purchased and sold by the Fund during the year ended December 31, 1998 was
$383,577,456 and $220,008,587, respectively.
The amount of unrealized appreciation (depreciation) of investment securities,
on a tax basis, as of December 31, 1998 was as follows:
<TABLE>
<S> <C>
Aggregate unrealized appreciation of
investment securities $ 36,616,733
- ------------------------------------------------------------
Aggregate unrealized (depreciation) of
investment securities (20,171,779)
- ------------------------------------------------------------
Net unrealized appreciation of investment
securities $ 16,444,954
============================================================
Cost of investments for tax purposes is $610,680,785.
</TABLE>
17
<PAGE> 20
NOTE 7-SHARE INFORMATION
Changes in shares outstanding during the years ended December 31, 1998 and 1997
were as follows:
<TABLE>
<CAPTION>
1998 1997
-------------------------- -----------------------
SHARES AMOUNT SHARES AMOUNT
----------- ------------ --------- -----------
<S> <C> <C> <C> <C>
Sold:
Class A 18,358,462 $156,866,536 12,161,983 101,688,372
- ------------------------------------------------------------------------------------------------------------------
Class B 15,156,529 128,945,810 6,428,479 53,514,758
- ------------------------------------------------------------------------------------------------------------------
Class C* 2,530,069 21,507,916 309,134 2,628,227
- ------------------------------------------------------------------------------------------------------------------
Issued as reinvestment of dividends:
Class A 2,575,274 21,978,433 1,967,802 16,363,229
- ------------------------------------------------------------------------------------------------------------------
Class B 956,975 8,134,643 490,120 4,073,672
- ------------------------------------------------------------------------------------------------------------------
Class C* 65,508 553,356 1,676 14,278
- ------------------------------------------------------------------------------------------------------------------
Reacquired:
Class A (12,996,807) (110,869,307) (9,099,096) (75,595,705)
- ------------------------------------------------------------------------------------------------------------------
Class B (4,664,899) (39,610,863) (2,573,466) (21,303,555)
- ------------------------------------------------------------------------------------------------------------------
Class C* (581,112) (4,909,911) (12,110) (103,264)
- ------------------------------------------------------------------------------------------------------------------
21,399,999 $182,596,613 9,674,522 $81,280,012
==================================================================================================================
</TABLE>
* Class C shares commenced sales on August 4, 1997.
NOTE 8-FINANCIAL HIGHLIGHTS
Shown below are the financial highlights for a share of Class A and a share of
Class B outstanding during each of the years in the five-year period ended
December 31, 1998; and for a share of Class C outstanding during the year ended
December 31, 1998 and the period August 4, 1997 (date sales commenced) through
December 31, 1997.
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 8.57 $ 8.24 $ 8.17 $ 7.20 $ 8.45
- ------------------------------------------------------------ -------- -------- -------- -------- --------
Income from investment operations:
Net investment income 0.57 0.55 0.57 0.58 0.58
- ------------------------------------------------------------ -------- -------- -------- -------- --------
Net gains (losses) on securities (both realized and
unrealized) (0.16) 0.39 0.09 1.00 (1.22)
- ------------------------------------------------------------ -------- -------- -------- -------- --------
Total from investment operations 0.41 0.94 0.66 1.58 (0.64)
- ------------------------------------------------------------ -------- -------- -------- -------- --------
Less distributions:
Dividends from net investment income (0.55) (0.52) (0.59) (0.61) (0.49)
- ------------------------------------------------------------ -------- -------- -------- -------- --------
Distributions from net realized gains (0.05) (0.09) -- -- (0.01)
- ------------------------------------------------------------ -------- -------- -------- -------- --------
Return of capital -- -- -- -- (0.11)
- ------------------------------------------------------------ -------- -------- -------- -------- --------
Total distributions (0.60) (0.61) (0.59) (0.61) (0.61)
- ------------------------------------------------------------ -------- -------- -------- -------- --------
Net asset value, end of period $ 8.38 $ 8.57 $ 8.24 $ 8.17 $ 7.20
============================================================ ======== ======== ======== ======== ========
Total return(a) 4.94% 11.92% 8.58% 22.77% (7.65)%
============================================================ ======== ======== ======== ======== ========
Ratios/supplemental data:
Net assets, end of period (000s omitted) $399,701 $340,608 $286,183 $251,280 $201,677
============================================================ ======== ======== ======== ======== ========
Ratio of expenses to average net assets 0.91%(b) 0.94% 0.98% 0.98% 0.98%
============================================================ ======== ======== ======== ======== ========
Ratio of net investment income to average net assets 6.69%(b) 6.55% 7.13% 7.52% 7.53%
============================================================ ======== ======== ======== ======== ========
Portfolio turnover rate 41% 54% 80% 227% 185%
============================================================ ======== ======== ======== ======== ========
</TABLE>
(a) Does not deduct sales charges.
(b) Ratios are based on average net assets of $373,145,874.
18
<PAGE> 21
NOTE 8-FINANCIAL HIGHLIGHTS (continued)
<TABLE>
<CAPTION>
CLASS B CLASS C
------------------------------------------------------- -----------------------
1998 1997 1996 1995 1994 1998 1997
-------- -------- ------- ------- ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 8.55 $ 8.23 $ 8.15 $ 7.18 $ 8.43 $ 8.54 $ 8.38
- -------------------------------------------- -------- -------- ------- ------- ------- ------- -------
Income from investment operations:
Net investment income 0.50 0.48 0.50 0.53 0.52 0.50 0.19
- -------------------------------------------- -------- -------- ------- ------- ------- ------- -------
Net gains (losses) on securities (both
realized and unrealized) (0.15) 0.38 0.11 0.98 (1.23) (0.15) 0.22
- -------------------------------------------- -------- -------- ------- ------- ------- ------- -------
Total from investment operations 0.35 0.86 0.61 1.51 (0.71) 0.35 0.41
- -------------------------------------------- -------- -------- ------- ------- ------- ------- -------
Less distributions:
Dividends from net investment income (0.48) (0.45) (0.53) (0.54) (0.42) (0.48) (0.16)
- -------------------------------------------- -------- -------- ------- ------- ------- ------- -------
Distributions from net realized gains (0.05) (0.09) -- -- (0.01) (0.05) (0.09)
- -------------------------------------------- -------- -------- ------- ------- ------- ------- -------
Return of capital -- -- -- -- (0.11) -- --
- -------------------------------------------- -------- -------- ------- ------- ------- ------- -------
Total distributions (0.53) (0.54) (0.53) (0.54) (0.54) (0.53) (0.25)
- -------------------------------------------- -------- -------- ------- ------- ------- ------- -------
Net asset value, end of period $ 8.37 $ 8.55 $ 8.23 $ 8.15 $ 7.18 $ 8.36 $ 8.54
- -------------------------------------------- -------- -------- ------- ------- ------- ------- -------
Total return(a) 4.20% 10.89% 7.87% 21.72% (8.46)% 4.21% 4.96%
- -------------------------------------------- -------- -------- ------- ------- ------- ------- -------
Ratios/supplemental data:
Net assets, end of period (000s omitted) $219,033 $125,871 $85,343 $44,304 $12,321 $19,332 $ 2,552
- -------------------------------------------- -------- -------- ------- ------- ------- ------- -------
Ratio of expenses to average net assets 1.66%(b) 1.69% 1.80% 1.79% 1.83%(c) 1.66%(b) 1.69%(d)
- -------------------------------------------- -------- -------- ------- ------- ------- ------- -------
Ratio of net investment income to average
net assets 5.94%(b) 5.80% 6.30% 6.71% 6.69%(e) 5.94%(b) 5.80%(d)
- -------------------------------------------- -------- -------- ------- ------- ------- ------- -------
Portfolio turnover rate 41% 54% 80% 227% 185% 41% 54%
- -------------------------------------------- -------- -------- ------- ------- ------- ------- -------
</TABLE>
(a) Does not deduct contingent deferred sales charges and is not annualized for
periods less than one year.
(b) Ratios are based on average net assets of $167,031,738 and $9,961,552 for
Class B and Class C, respectively.
(c) After fee waivers and/or expense reimbursements. Ratios of expenses to
average net assets prior to fee waivers and/or expense reimbursements were
2.04% for 1994.
(d) Annualized.
(e) After fee waivers and/or expense reimbursements. Ratios of net investment
income to average net assets prior to fee waivers and/or expense
reimbursements were 6.48% for 1994.
19
<PAGE> 22
INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Shareholders of
AIM Income Fund:
We have audited the accompanying statement of assets and
liabilities of AIM Income Fund (a portfolio of AIM Funds
Group), including the schedule of investments, as of
December 31, 1998, and the related statement of
operations for the year then ended, the statement of
changes in net assets for each of the years in the
two-year period then ended, and the financial highlights
for each of the years in the five-year period then ended.
These financial statements and financial highlights are
the responsibility of the Fund's management. Our
responsibility is to express an opinion on these
financial statements and 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
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 December 31, 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 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 AIM Income
Fund as of December 31, 1998, the results of its
operations for the year then ended, the changes in its
net assets for each of the years in the two-year period
then ended and the financial highlights for each of the
years in the five-year period then ended, in conformity
with generally accepted accounting principles.
KPMG LLP
Houston, Texas
February 5, 1999
20
<PAGE> 23
<TABLE>
<CAPTION>
BOARD OF DIRECTORS OFFICERS OFFICE OF THE FUND
<S> <C> <C>
Charles T. Bauer Charles T. Bauer 11 Greenway Plaza
Chairman Chairman Suite 100
A I M Management Group Inc. Houston, TX 77046
Robert H. Graham
Bruce L. Crockett President INVESTMENT ADVISOR
Director
ACE Limited; John J. Arthur A I M Advisors, Inc.
Formerly Director, President, and Senior Vice President and Treasurer 11 Greenway Plaza
Chief Executive Officer Suite 100
COMSAT Corporation Carol F. Relihan Houston, TX 77046
Senior Vice President and Secretary
Owen Daly II TRANSFER AGENT
Director Gary T. Crum
Cortland Trust Inc. Senior Vice President A I M Fund Services, Inc.
P.O. Box 4739
Edward K. Dunn Jr. Dana R. Sutton Houston, TX 77210-4739
Chairman, Mercantile Mortgage Corp.; Vice President and Assistant Treasurer
Formerly Vice Chairman and President, CUSTODIAN
Mercantile-Safe Deposit & Trust Co.; and Robert G. Alley
President, Mercantile Bankshares Vice President State Street Bank and Trust Company
225 Franklin Street
Jack Fields Stuart W. Coco Boston, MA 02110
Chief Executive Officer Vice President
Texana Global, Inc.; COUNSEL TO THE FUND
Formerly Member Melville B. Cox
of the U.S. House of Representatives Vice President Ballard Spahr
Andrews & Ingersoll, LLP
Carl Frischling Karen Dunn Kelley 1735 Market Street
Partner Vice President Philadelphia, PA 19103
Kramer, Levin, Naftalis & Frankel
Jonathan C. Schoolar COUNSEL TO THE DIRECTORS
Robert H. Graham Vice President
President and Chief Executive Officer Kramer, Levin, Naftalis & Frankel
A I M Management Group Inc. Renee A. Friedli 919 Third Avenue
Assistant Secretary New York, NY 10022
Prema Mathai-Davis
Chief Executive Officer, YWCA of the U.S.A.: P. Michelle Grace DISTRIBUTOR
Commissioner, New York City Dept. for Assistant Secretary
the Aging; and member of the Board of Director A I M Distributors, Inc.
Metropolitan Transportation Authority of Jeffrey H. Kupor 11 Greenway Plaza
New York State Assistant Secretary Suite 100
Houston, TX 77046
Lewis F. Pennock Nancy L. Martin
Attorney Assistant Secretary AUDITORS
Ian W. Robinson Ofelia M. Mayo KPMG LLP
Consultant; Formerly Executive Assistant Secretary 700 Louisiana
Vice President and Houston, TX 77002
Chief Financial Officer Lisa A. Moss
Bell Atlantic Management Assistant Secretary
Services, Inc.
Kathleen J. Pflueger
Louis S. Sklar Assistant Secretary
Executive Vice President
Hines Interests Samuel D. Sirko
Limited Partnership Assistant Secretary
Stephen I. Winer
Assistant Secretary
Mary J. Benson
Assistant Treasurer
</TABLE>
REQUIRED FEDERAL INCOME TAX INFORMATION
AIM Income Fund Class A, Class B and Class C shares paid ordinary dividends in
the amount of $0.5726, $0.5006 and $0.5006 per share, respectively, to
shareholders during its tax year ended December 31, 1998. Of these amounts,
2.56% is eligible for the dividends received deduction for corporations.
The Fund also distributed long-term capital gains of $2,443,023 for the
Fund's tax year ended December 31, 1998. Of long-term capital gains distributed,
100% is 20% rate gain.
STATE INCOME TAX INFORMATION
Of the total income dividends paid, 1.06% for Class A, Class B, and Class C
shares was derived from U.S. Treasury obligations.
<PAGE> 24
THE AIM FAMILY OF FUNDS--Registered Trademark--
<TABLE>
<S> <C> <C>
GROWTH FUNDS INTERNATIONAL GROWTH FUNDS A I M Management Group Inc. has provided
AIM Aggressive Growth Fund(1) AIM Advisor International Value Fund leadership in the mutual fund industry
AIM Blue Chip Fund AIM Asian Growth Fund since 1976 and managed approximately $109
AIM Capital Development Fund AIM Developing Markets Fund(2) billion in assets for more than 6.2 million
AIM Constellation Fund AIM Europe Growth Fund(2) shareholders, including individual investors,
AIM Mid Cap Equity Fund(2), (A) AIM European Development Fund corporate clients, and financial institutions,
AIM Select Growth Fund(3) AIM International Equity Fund as of December 31, 1998.
AIM Small Cap Growth Fund(2), (B) AIM Japan Growth Fund(2) The AIM Family of Funds--Registered Trademark--
AIM Small Cap Opportunities Fund AIM Latin American Growth Fund(2) is distributed nationwide, and AIM today is the
AIM Value Fund AIM New Pacific Growth Fund(2) 10th-largest mutual fund complex in the U.S. in
AIM Weingarten Fund assets under management, according to Strategic
GLOBAL GROWTH FUNDS Insight, an independent mutual fund monitor.
GROWTH & INCOME FUNDS AIM Global Aggressive Growth Fund
AIM Advisor Flex Fund AIM Global Growth Fund
AIM Advisor Large Cap Value Fund
AIM Advisor MultiFlex Fund GLOBAL GROWTH & INCOME FUNDS
AIM Advisor Real Estate Fund AIM Global Growth & Income Fund(2)
AIM Balanced Fund AIM Global Utilities Fund
AIM Basic Value Fund(2), (C)
AIM Charter Fund GLOBAL INCOME FUNDS
AIM Emerging Markets Debt Fund(2), (D)
INCOME FUNDS AIM Global Government Income Fund(2)
AIM Floating Rate Fund(2) AIM Global Income Fund
AIM High Yield Fund AIM Strategic Income Fund(2)
AIM High Yield Fund II
AIM Income Fund THEME FUNDS
AIM Intermediate Government Fund AIM Global Consumer Products and Services Fund(2)
AIM Limited Maturity Treasury Fund AIM Global Financial Services Fund(2)
AIM Global Health Care Fund(2)
TAX-FREE INCOME FUNDS AIM Global Infrastructure Fund(2)
AIM High Income Municipal Fund AIM Global Resources Fund(2)
AIM Municipal Bond Fund AIM Global Telecommunications Fund(2)
AIM Tax-Exempt Bond Fund of Connecticut AIM Global Trends Fund(2), (E)
AIM Tax-Free Intermediate Fund
MONEY MARKET FUNDS
AIM Money Market Fund
AIM Tax-Exempt Cash Fund
</TABLE>
(1) AIM Aggressive Growth Fund reopened to new investors November 16, 1998. (2)
Effective May 29, 1998, A I M Advisors, Inc. became advisor to the former GT
Global Funds. (3) On May 1, 1998, AIM Growth Fund was renamed AIM Select Growth
Fund. (A) On September 8, 1998, AIM Mid Cap Growth Fund was renamed AIM Mid Cap
Equity Fund. (B) On September 8, 1998, AIM Small Cap Equity Fund was renamed AIM
Small Cap Growth Fund. (C) On September 8, 1998, AIM America Value Fund was
renamed AIM Basic Value Fund. (D) On September 8, 1998, AIM Global High Income
Fund was renamed AIM Emerging Markets Debt Fund. (E) On September 8, 1998, AIM
New Dimension Fund was renamed AIM Global Trends Fund. For more complete
information about any AIM Fund(s), including sales charges and expenses, ask
your financial consultant or securities dealer for a free prospectus(es). Please
read the prospectus(es) carefully before you invest or send money.
