<PAGE>
BEA Income Fund, Inc.
153 East 53rd Street
New York, NY 10022
---------------------------------------------
OFFICERS AND DIRECTORS
<TABLE>
<S> <C>
Daniel H. Sigg Michael A. Pignataro
CHAIRMAN AND CHIEF ASSISTANT VICE
EXECUTIVE OFFICER PRESIDENT
Robert J. Moore AND ASSISTANT
PRESIDENT AND CHIEF SECRETARY
INVESTMENT OFFICER Hal Liebes
Prof. Enrique R. SECRETARY
Arzac Harvey M. Rosen
DIRECTOR TREASURER
Lawrence J. Fox Paul P. Stamler
DIRECTOR ASSISTANT TREASURER
James S. Pasman, Jr. John M. Corcoran
DIRECTOR ASSISTANT TREASURER
Richard J. Lindquist
VICE PRESIDENT
</TABLE>
---------------------------------------------
INVESTMENT ADVISER
BEA Associates
153 East 53rd Street
New York, New York 10022
--------------------------------------------------------
ADMINISTRATOR
The Chase Manhattan Bank, N.A.
73 Tremont Street
Boston, Massachusetts 02108
--------------------------------------------------------
CUSTODIAN
The Chase Manhattan Bank, N.A.
770 Broadway
New York, New York 10003
--------------------------------------------------------
SHAREHOLDER SERVICING AGENT
The Chase Manhattan Bank, N.A.
770 Broadway
New York, New York 10003
Phone 1-800-428-8890
--------------------------------------------------------
LEGAL COUNSEL
Willkie Farr & Gallagher
153 East 53rd Street
New York, New York 10022
--------------------------------------------------------
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
--------------------------------------------------------
INCREASE YOUR FUND HOLDINGS THROUGH DIVIDEND REINVESTMENT AND DIRECT CASH
PURCHASES
The Fund offers the opportunity for all shareholders to participate in the
Fund's Dividend Reinvestment and Cash Purchase Plan (the "Plan"). Under the
Plan, participating shareholders receive, in lieu of cash dividends, common
stock of the Fund. In addition, participants in the Plan have the option of
making voluntary cash payments of $100 to $3,000 (per investment period), plus
any dividends received in cash, to the Plan Agent to purchase Fund shares in the
open market. A brochure further describing the Plan and additional information
concerning terms and conditions, and any applicable charges relating to the
Plan, can be obtained from the Plan's agent at (800) 428-8890.
[LOGO]
BEA Income Fund, Inc.
[LOGO]
ANNUAL REPORT
December 31, 1995
<PAGE>
BEA INCOME FUND, INC.
- ----------
Dear Shareholders: February 8, 1996
We are pleased to report on the results of the BEA Income Fund, Inc. (the
"Fund") for the year ended December 31, 1995.
At December 31, 1995 the Fund's net asset value (NAV) was $8.63, compared to
an NAV of $8.05 at December 31, 1994. As a result, the Fund's total return
(based on NAV and assuming reinvestment of dividends) was 17.41%.
Many investors will remember 1995 primarily as a great year for the U.S.
equity market. In fact, last year was equally notable as a superb period for the
world's bond markets. Viewed in local currency terms, every major bond market
produced a strong positive return for the year, falling in a range from a low
return of around 14% in Japan and New Zealand to a high of more than 19% in such
markets as Australia, Denmark, Spain and Sweden. Buoyed by an increasingly
positive interest rate environment, the U.S. bond market came in near the top of
this range.
During the fourth quarter, the bond market continued to rally, as a result
of a sharp decline in interest rates across the maturity curve. The yield curve
steepened modestly, with two and three year notes rallying 65 basis points,
while ten and thirty year bonds rallied 55 basis points. Both quarterly and
annual returns for the major domestic fixed income sectors were clustered rather
closely together, with mortgages and asset-backed securities being the only real
laggards.
We continue to favor sectors where we can achieve additional yield relative
to that of Treasury securities. In the government sector, our strategy continues
to be neutral with regard to both duration and the yield curve. We continue to
be defensive in our traditional investment grade exposure. While our exposure in
this sector remains light, we continue to hold positions in BBB-rated
industrials and high-quality financials which outperform similar-rated
industrials. The portfolio continues to be underweighted in traditional high
grade utilities due to concerns regarding new regulations on competition. We are
closely monitoring the situation and will look to add positions in the first
half of 1996.
The mortgage backed securities market had an unusual year, as the dominant
investors became money managers and the mortgage agencies themselves (FHLMC and
FNMA), as opposed to yield-oriented insurance companies, banks or mutual funds.
During the first half of the year, the sharp drop in interest rates brought back
memories of rapid prepayments causing mortgage securi-
ties to become underpriced relative to their actual risk.
Believing that substantial prepayments were not likely to materialize (and they
have not), we increased our mortgage allocation at the height of prepayment
fears in June. Soon the market adjusted for its overreaction as substantial
prepayments did not materialize.
During the third and fourth quarters, two new events caused prices to
decline in this sector. First, FASB allowed a one-time window for financial
institutions to reclassify securities. This led to fears of massive selling of
mortgage securities, which never actually materialized. The second event was a
statement by the S&P rating agency that insurance companies would be penalized
for holding mortgages, causing concern that insurance companies may shy away
from the sector. Looking into 1996, we expect that investors will realize that
mortgage-backed securities, compared with corporates, provide the best relative
value to treasuries. We will continue to participate in this sector primarily
through investments in seasoned agency passthroughs. We will diversify our asset
backed securities allocation to include different collateral types and increase
our exposure to the commercial mortgage market as increasing attention from
mainstream fixed income investors will lead to spread compression in these
sectors.
For the fourth quarter of 1995, the U.S. High Yield market, as measured by
the Salomon Brothers High Yield Index, posted positive performance of 4.03% as
new cash buyers continued to enter the market. High yield spreads widened versus
treasuries, however, as interest rates drifted lower during the fourth quarter.
The U.S. High Yield market's positive return was driven by a gain of 4.69% in
the CCC-rated sector followed by gains of 4.39% in the BB-rated sector and 3.38%
in the B-rated sector. During the quarter, the cash-pay sector posted a total
return of 3.83% versus 6.66% in the deferred interest sector and 4.00% in the
bankrupt sector. High yield mutual fund investors continued to enter the market,
with AMG Data Services reporting inflows of $2.8 billion during the quarter. Net
High Yield inflows of $10.7 billion for 1995 can be compared with net inflows of
$1.4 billion for 1994. Net issuance for the fourth quarter totaled $12.2 billion
and for 1995 totaled 48.2 billion versus 42.1 billion in 1994. The average
market weighted new issue offer yield for the fourth quarter of 1995 was 10.41%.
Our long term outlook continues to be positive for the credit fundamentals
of many U.S. high yield issuers. We remain positive on selected gaming
companies, partic-
2
<PAGE>
ularly Atlantic City and Las Vegas, and industry sectors such as health care and
cable where we have witnessed continued merger activity, on most sectors of the
telecommunications industry and a few selected cyclical sectors. The expectation
of lower interest rates should also benefit the U.S. High Yield market as money
should continue to flow into the market from yield seeking investors.
Looking forward, our primary concerns for the next three to six months are
focused on the increased potential for negative surprises (budget impasse or no
further rate cuts) and their potential impact on the market. This could manifest
itself in higher interest rates and volatility and lower liquidity.
We appreciate your interest in the Fund and would be pleased to respond to
your questions or comments. Any questions regarding net asset value,
performance, dividends, portfolio allocations, or management can be directed to
BEA Associates at (800) 293-1232. All other inquiries regarding account
information or requests for a
prospectus or other reports should be directed to the Shareholder Servicing
Agent at (800) 428-8890.
Sincerely yours,
[SIGN]
Robert J. Moore
PRESIDENT AND CHIEF INVESTMENT OFFICER*
[SIG]
Daniel H. Sigg
CHAIRMAN AND CHIEF EXECUTIVE OFFICER*
*Robert J. Moore, who is a member of the Executive Committee of BEA
Associates and holds the offices of Executive Director and Chief Operating
Officer of BEA Associates, is primarily responsible for management of the Fund's
assets. He has served in such capacity since BEA Associates became the
Investment Adviser to the Fund on June 13, 1995. Mr. Moore joined BEA Associates
in 1987. Mr. Moore is President and Chief Investment Officer of the Fund and is
also President and Chief Investment Officer of the BEA Strategic Income Fund,
Inc.
Daniel H. Sigg is a member of the Executive Committee of BEA Associates and
holds the offices of Executive Director and Chief Financial Officer of BEA
Associates. Mr. Sigg joined BEA Associates in 1990. Mr. Sigg is Chairman of the
Board and Chief Executive Officer of the Fund. He has served in such capacity
since BEA Associates became the Investment Adviser to the Fund on June 13, 1995.
He is also Chairman of the Board and Chief Executive Officer of the BEA
Strategic Income Fund, Inc. and Director and Senior Vice President of The
Brazilian Equity Fund, Inc., The Chile Fund, Inc., The Emerging Markets
Infrastructure Fund, Inc., The Emerging Markets Telecommunications Fund, Inc.,
The First Israel Fund, Inc., The Indonesia Fund, Inc., The Latin America Equity
Fund, Inc., The Latin America Investment Fund, Inc., and The Portugal Fund, Inc.
3
<PAGE>
PORTFOLIO OF INVESTMENTS
- -----------------
DECEMBER 31, 1995
<TABLE>
<CAPTION>
Face
Moody's Amount Value
Ratings (000) (Note A-1)
<C> <S> <C> <C> <C>
- ----------------------------------------------------------------------------------
- -----------------
CORPORATE OBLIGATIONS (81.7%)
- ----------------------------------------------------------------------------------
- -----------------
COMMUNICATIONS (17.0%)
(4) Adelphia Communications,
Series B, Sr. Notes
9.50%, 2/15/04 B3 $ 574 $ 467,748
(8) American Telecasting, Inc.
Sr. Discount Notes
0.00%, 6/15/04 Caa 113 77,688
A+ Network, Inc.
Sr. Sub. Notes
11.875, 11/1/05 Caa 750 750,000
Cablevision Industries Corp.
Sr. Debentures
9.25%, 4/1/08 B1 975 1,043,250
Cablevision Systems Corp.
Sr. Sub. Debentures
9.875%, 2/15/13 B3 750 798,750
Century Communications Corp.
Sr. Notes
9.75%, 2/15/02 Ba3 500 515,000
Chancellor Broadcasting Co.
Gtd. Sr. Sub. Notes
12.50%, 10/1/04 B3 1,000 1,067,500
Citicasters, Inc.,
Series B, Sr. Sub. Notes
9.75%, 2/15/04 N/R 1,500 1,530,000
Comcast Corp.:
Sr. Sub. Notes
9.125%, 10/15/06 B1 750 780,937
Sr. Sub. Notes
9.375%, 5/15/05 B1 300 313,500
(8) Commodore Media, Inc.
Sr. Sub. Notes
7.50%, 5/1/03 B3 300 282,000
Continental Cablevision, Inc.:
Sr. Debentures
9.50%, 8/1/13 Ba2 1,250 1,331,250
Sr. Sub. Debentures
11.00%, 6/1/07 B1 1,150 1,285,125
(8) Dial Call Communications
Sr. Discount Notes
0.00%, 4/15/04 Caa 750 427,500
(8) Diamond Cable Communications
Co.
Yankee Sr. Discount Notes
0.00%, 12/15/05 B3 1,850 1,089,188
<CAPTION>
Face
Moody's Amount Value
Ratings (000) (Note A-1)
<C> <S> <C> <C> <C>
- ----------------------------------------------------------------------------------
- -----------------
(4) Falcon Holdings Group L.P.
Sr. Sub. Notes
11.00%, 9/15/03 N/R $ 1,597 $ 1,516,688
Galaxy Telecommunications L.P.
Sr. Sub. Notes
12.375%, 10/1/05 B3 300 299,250
General Media, Inc.,
Sr. Notes
10.625%, 12/31/00 Caa 625 437,500
Granite Broadcasting Corp.
Sr. Sub. Notes
10.375%, 5/15/05 B3 300 307,875
(8) Helicon Group L.P.
Sr. Secured Notes
9.00%, 11/1/03 B1 2,000 1,940,000
Heritage Media Corp.
Gtd. Sr. Sub. Notes
11.00%, 10/1/02 B2 1,500 1,578,750
(8) Imax Corp.,
Series B, Yankee Sr. Notes
7.00%, 3/1/01 B1 1,000 992,500
(6)(8) In-Flight Phone Corp.,
Series B, Sr. Discount Notes
0.00%, 5/15/02 Caa 1,000 330,000
(8) IntelCom Group, Inc.
Sr. Discount Notes
0.00%, 9/15/05 N/R 650 370,500
Jones Intercable, Inc.
Sr. Sub. Debentures
11.50%, 7/15/04 B1 1,000 1,110,000
Lenfest Communications, Inc.
Sr. Notes
8.375%, 11/1/05 Ba3 250 250,625
Metrocall, Inc.
Sr. Sub. Notes
10.375%, 10/1/07 B2 500 530,000
(8) MFS Communications Co., Inc.
Discount Notes
0.00%, 1/15/04 B1 1,000 807,500
Mobile Telecommunications
Technologies Corp.
Sr. Sub. Notes
13.50%, 12/15/02 B2 500 557,500
(8) Nextel Communications
Sr. Notes
0.00%, 8/15/04 B3 2,300 1,247,750
NWCG Holding Corp.,
Series B, Sr. Discount Notes
Zero Coupon, 6/15/99 Caa 1,000 670,000
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
Face
Moody's Amount Value
Ratings (000) (Note A-1)
- ----------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
- -----------------
(8) Pagemart Nationwide, Inc.,
Sr. Disc. Notes
0.00%, 2/1/05 N/R $ 2,000 $ 1,300,000
Paging Network, Inc.
Sr. Sub. Notes
10.125%, 8/1/07 B2 1,000 1,088,750
Pegasus Media & Communications,
Inc.,
Series B, Notes
12.50%, 7/1/05 B3 250 247,500
(8) PriCellular Wireless Corp.
Sr. Discount Notes
0.00%, 10/1/03 B3 500 386,250
Rogers Cablesystems Ltd.,
Series A, Yankee Sr. Secured
2nd Priority Notes
10.00%, 3/15/05 Ba3 300 322,500
(2) Scott Cable Communications,
Inc.
Sub. Debentures
12.25%, 4/15/01 B3 500 325,000
(2)(6) Simmons Cable
Sr. Sub. Notes
15.747%, 4/30/96 N/R 750 375,000
Sinclair Broadcast Group
Sr. Sub. Notes
10.00%, 9/30/05 B1 500 511,250
Spanish Broadcasting Systems
Sr. Notes
7.50%, 6/15/02 B3 1,500 1,468,125
Summit Communications
Sr. Sub. Debentures
10.50%, 4/15/05 B1 500 557,500
United International Holdings:
Discount Notes
Zero Coupon, 1/15/99 B3 3,000 1,890,000
Sr. Secured Debentures Zero
Coupon, 11/15/99 B3 500 302,500
Univision Network Holding L.P.
Sub. Notes
Zero Coupon, 12/17/02 N/R 1,500 945,000
(8) Videotron Holdings plc
Yankee Discount Notes
0.00%, 8/15/05 B3 2,000 1,240,000
------------
GROUP TOTAL 35,665,249
------------
- ----------------------------------------------------------------------------------
- -----------------
<CAPTION>
Face
Moody's Amount Value
Ratings (000) (Note A-1)
<C> <S> <C> <C> <C>
- ----------------------------------------------------------------------------------
- -----------------
CONSUMER PRODUCTS (4.6%)
American Rice, Inc.
Secured Mortgage Notes
13.00%, 7/31/02 B3 $ 500 $ 470,000
Fort Howard Corp.
Sub. Notes
10.00%, 3/15/03 B2 1,250 1,287,500
Jordan Industries, Inc
Sr. Notes
10.375%, 8/1/03 B3 1,200 1,068,000
Mail-Well Corp.
Sr. Sub. Notes
10.50%, 2/15/04 B2 1,500 1,447,500
Marvel III Holdings, Inc.,
Series B, Sr. Secured
Debentures
9.125%, 2/15/98 Caa 1,100 1,012,000
Renaissance Cosmetics, Inc.,
Series B, Sr. Notes
13.75%, 8/15/01 N/R 1,500 1,492,500
Revlon Consumer Products, Inc.,
Series B, Sr. Sub. Notes
10.50%, 2/15/03 B3 1,000 1,020,000
Revlon Worldwide Corp.
Sr. Secured Discount Notes
Zero Coupon, 3/15/98 B3 850 631,125
Sherritt, Inc.
Yankee Debentures
10.50%, 3/31/14 B1 375 400,312
(8) Specialty Foods Acquisition
Corp.,
Series B, Sr. Secured
Discount Debentures
0.00%, 8/15/05 Ca 2,000 920,000
------------
GROUP TOTAL 9,748,937
------------
- ----------------------------------------------------------------------------------
- -----------------
FINANCE (7.5%)
American Express Co.
Eurobond
Zero Coupon, 12/12/00 N/R 5,000 3,746,500
GMAC
Medium Term Notes
5.95%, 12/14/98 A3 4,000 4,025,480
(3) Goldman Sachs Group L.P.
Medium Term Notes
6.20%, 2/15/01 A1 3,000 2,970,000
GPA Holland B.V.
Medium Term Notes
(3) 8.50%, 3/3/97 N/R 550 536,250
(3) 8.625%, 1/15/99 Caa 750 674,062
(3) 9.12%, 2/24/99 Caa 250 227,188
Tiphook Financial Corp.
Gtd. Notes
8.00%, 3/15/00 Caa 697 484,415
Western National Corp.
Sr. Notes
7.125%, 2/15/04 Baa1 3,000 3,089,010
------------
GROUP TOTAL 15,752,905
------------
- ----------------------------------------------------------------------------------
- -----------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
Face
Moody's Amount Value
Ratings (000) (Note A-1)
- ----------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
- -----------------
INDUSTRIAL (13.9%)
AK Steel Corp.
Gtd. Sr. Notes
10.75%, 4/1/04 Ba3 $ 950 $ 1,050,937
(3) Alpine Group, Inc.
Gtd. Sr. Notes
12.25%, 7/15/03 B3 1,750 1,715,000
Arcadian Partners L.P.,
Series B, Sr. Notes
10.75%, 5/1/05 B2 900 994,500
Armco, Inc.
Sr. Notes
11.375%, 10/15/99 B2 815 847,600
Bayou Steel Corp.
First Mortgage Notes
10.25%, 3/1/01 B2 500 442,500
Berg Electronics Inc.,
Gtd. Sub. Debentures
11.375%, 5/1/03 B3 1,000 1,100,000
Boise Cascade Corp.
Notes
9.85%, 6/15/02 Baa3 3,000 3,465,000
Container Corp. of America
Gtd. Sr. Notes
9.75%, 4/1/03 B1 500 487,500
Crown Paper Co.
Sr. Sub. Notes
11.00%, 9/1/05 B3 500 437,500
Doman Industries Ltd.
Yankee Gtd. Sr. Notes
8.75%, 3/15/04 Ba3 650 624,000
Easco Corp.,
Series B, Sr. Notes
10.00%, 3/15/01 B1 500 500,000
Geneva Steel Co.
Sr. Notes
9.50%, 1/15/04 B1 250 195,000
Genmar Holdings,
Series A, Sr. Sub. Notes
13.50%, 7/15/01 Caa 500 465,000
GNF Corp.,
Series B, First Mortgage Notes
10.625%, 4/1/03 B2 1,200 1,119,000
Grupo Industrial
Durango Yankee Notes
12.00%, 7/15/01 B1 150 125,250
Gulf States Steel Corp.,
First Mortgage Notes
13.50%, 4/15/03 B1 400 346,000
(3) Hanson America, Inc.
Conv. Sr. Discount Notes
2.39%, 3/1/01 A3 2,000 1,670,000
Harris Chemical N.A.:
(8) Sr. Secured Debentures
0.00%, 7/15/01 B2 1,700 1,615,000
Notes
10.75%, 10/15/03 B3 250 227,500
Huntsman Corp.
First Mortgage Notes
11.00%, 4/15/04 B1 750 859,500
<CAPTION>
Face
Moody's Amount Value
Ratings (000) (Note A-1)
<C> <S> <C> <C> <C>
- ----------------------------------------------------------------------------------
- -----------------
(8) INDSPEC Chemical Corp.
Sr. Sub. Discount Notes
0.00%, 12/1/03 B3 $ 1,496 $ 1,196,800
Malette, Inc.
Sr. Secured Debentures
12.25%, 7/15/04 Ba3 1,000 1,120,000
NL Industries:
Sr. Secured Debentures
11.75%, 10/15/03 B1 500 533,750
(8) Sr. Secured Discount Debentures
0.00%, 10/15/05 B2 1,000 750,000
Repap Wisconsin, Inc.
Sr. Secured Debentures
9.875%, 5/1/06 B3 400 379,000
Trans-Resources, Inc.
Sr. Sub. Notes
11.875%, 7/1/02 B2 500 458,750
UCC Investor's Holdings, Inc.
Sr. Sub. Notes
11.00%, 5/1/03 B3 1,500 1,515,000
Uniroyal Technology Corp.
Sr. Secured Debentures
11.75%, 6/1/03 B2 500 467,500
USX Corp.
Notes
9.625%, 8/15/03 Baa3 3,000 3,501,810
WCI Steel, Inc.,
Series B, Sr. Notes
10.50%, 3/1/02 B1 600 582,000
WHX Corp.
Sr. Notes
9.375%, 11/15/03 B1 500 472,500
------------
GROUP TOTAL 29,263,897
------------
- ----------------------------------------------------------------------------------
- -----------------
MANUFACTURING (12.8%)
(8) American Standard, Inc.
Sr. Sub. Debentures
0.00%, 6/1/05 B1 2,100 1,800,750
Associated Materials, Inc.
Sr. Sub. Notes
11.50%, 8/15/03 B3 500 395,000
Atlantis Group, Inc.
Sr. Notes
11.00%, 2/15/03 B2 585 511,875
(8) Building Materials Corp.
Series B, Notes
0.00%, 7/1/04 B1 1,200 816,000
Consoltex Group, Inc.
Series B, Gtd. Sr. Sub. Notes
11.00%, 10/1/03 B2 1,000 900,000
(8) Crown Packaging Holdings,
Series B, Sr. Sub. Notes
0.00%, 11/1/03 Caa 2,550 1,122,000
Domtar, Inc.
Yankee Debentures
11.25%, 9/15/17 Ba1 1,250 1,329,687
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
<TABLE>
<CAPTION>
Face
Moody's Amount Value
Ratings (000) (Note A-1)
- ----------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
- -----------------
(8) Exide Corp.
Sr. Sub. Debentures
0.00%, 12/15/04 B2 $ 1,000 $ 840,000
Gaylord Container Corp.:
Sr. Notes
11.50%, 5/15/01 B3 1,700 1,751,000
(8) Sr. Sub. Debentures
0.00%, 5/15/05 Caa 1,000 985,000
G.I. Holdings, Inc.,
Series B, Sr. Deferred Notes
Zero Coupon,
10/1/98 Ba3 1,000 775,000
Interlake Corp.
Sr. Sub. Debentures
12.125%, 3/1/02 B3 1,000 950,000
(2) Ithaca Industries, Inc.
Sr. Sub. Notes
11.125%, 12/15/02 Ca 900 360,000
(8) Ivex Holdings Corp.
Sr. Debentures
0.00%, 3/15/05 Caa 1,500 840,000
Mafco, Inc.
Sr. Sub. Notes
11.875%, 11/15/02 B3 550 563,063
MVE Inc.,
Sr. Secured Debentures
12.50%, 2/15/02 B3 650 650,000
Plastic Specialties &
Technology
Sr. Secured Debentures
11.25%, 12/1/03 B3 500 452,500
Rexene Corp.
Sr. Notes
11.75%, 12/1/04 B1 1,000 1,047,500
Riverwood International Corp.
Sr. Sub. Notes
10.375%, 6/30/04 B1 500 556,250
Sheffield Steel Corp.
First Mortgage Notes
12.00%, 11/1/01 B3 1,250 1,087,500
(8) Silgan Holdings, Inc.
Sr. Debentures
0.00%, 12/15/02 B3 1,000 945,000
Specialty Equipment Co., Inc.
Sr. Sub. Notes
11.375%, 12/1/03 B3 1,500 1,522,500
Stone Container Corp.
First Mortgage Notes
10.75%, 10/1/02 B1 1,450 1,497,125
Synthetic Industries, Inc.
Sr. Sub. Notes
12.75%, 12/1/02 B3 1,450 1,421,000
(3) Terex Corp.
Gtd. Sr. Notes
13.75%, 5/15/02 Caa 1,500 1,312,500
Tracor, Inc.,
Series A, Gtd. Sr. Sub. Notes
10.875%, 8/15/01 B2 500 517,500
U.S. Leather, Inc.
Sr. Notes
10.25%, 7/31/03 B3 1,750 1,478,750
<CAPTION>
Face
Moody's Amount Value
Ratings (000) (Note A-1)
<C> <S> <C> <C> <C>
- ----------------------------------------------------------------------------------
- -----------------
USG Corp.,
Series B, Sr. Sec. Debentures
9.25%, 9/15/01 Ba3 $ 500 $ 535,000
------------
GROUP TOTAL 26,962,500
------------
- ----------------------------------------------------------------------------------
- -----------------
OIL, GAS & ELECTRIC (3.6%)
Energy Ventures, Inc.,
Series B, Gtd. Sr. Notes
10.25%, 3/15/04 B1 500 522,500
Forest Oil Corp.
Sr. Sub. Notes
11.25%, 9/1/03 B3 500 475,000
Giant Industries, Inc.
Sr. Sub. Notes
9.75%, 11/15/03 B2 500 500,000
Gulf Canada Resources Ltd.
Sr. Sub. Debentures
9.25%, 1/15/04 Ba3 850 863,813
H.S. Resources, Inc.
Sr. Sub. Notes
9.875%, 12/1/03 B1 500 489,375
Mesa, Inc.
Secured Notes
12.75%, 6/30/98 Caa 1,725 1,526,625
Petro PSC Properties L.P.
Senior Notes
12.50%, 6/1/02 B3 500 475,000
Southeastern Public Service Co.
Sr. Sub. Debentures
11.875%, 2/1/98 Caa 628 632,710
Tesoro Petroleum Corp.
Notes
13.00%, 12/1/00 B2 1,000 1,030,000
Wilrig A/S
Sr. Secured Debentures
11.25%, 3/15/04 B2 1,000 1,110,000
------------
GROUP TOTAL 7,625,023
------------
- ----------------------------------------------------------------------------------
- -----------------
RETAIL TRADE (5.5%)
Big V Supermarkets, Inc.
Sr. Sub. Notes
11.00%, 2/15/04 B3 1,675 1,308,594
Brylane L.P.
Gtd. Sr. Sub. Notes
10.00%, 9/1/03 B2 500 442,500
County Seat Stores, Inc.
Sr. Sub. Notes
12.00%, 10/1/02 B3 1,520 1,307,200
Dairy Mart Conveniences Stores,
Inc.
Sr. Sub. Notes
10.25%, 3/15/04 B3 1,750 1,505,000
Duane Reade Corp.
Sr. Notes
12.00%, 9/15/02 B3 1,500 1,417,500
Farm Fresh, Inc.
Sr. Notes
12.25%, 10/1/00 B2 1,360 1,128,800
</TABLE>
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
<TABLE>
<CAPTION>
Face
Moody's Amount Value
Ratings (000) (Note A-1)
- ----------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
- -----------------
Great American Cookie,
Series B, Sr. Sec. Debentures
10.875%, 1/15/01 B3 $ 1,250 $ 1,056,250
Hills Stores Co.
Sr. Notes
10.25%, 9/30/03 B1 1,250 1,101,563
Pathmark Stores, Inc.
(8) Jr. Sub. Notes
0.00%, 11/1/03 B3 1,650 1,010,625
Sr. Sub. Notes
9.625%, 5/1/03 B2 250 243,125
(4) Town & Country Corp.
Sr. Sub. Notes
13.00%, 5/31/98 Caa 878 434,698
Waban, Inc.
Sr. Sub. Notes
11.00%, 5/15/04 Ba3 500 511,250
------------
GROUP TOTAL 11,467,105
------------
- ----------------------------------------------------------------------------------
- -----------------
SERVICES (14.2%)
Allied Waste Industries
Sr. Sub. Notes
12.00%, 2/1/04 B3 400 432,500
American Banknote Corp.,
Series B, Sr. Notes
11.625%, 8/1/02 B2 750 337,500
American Restaurant Group,
Inc.,
Series A, Notes
12.00%, 9/15/98 B2 1,500 1,125,000
Bally's Casino Holdings, Inc.
Sr. Discount Notes Zero
Coupon, 6/15/98 B2 1,500 1,207,500
Bally's Health & Tennis
Sr. Sub. Notes
13.00%, 1/15/03 B3 1,000 820,000
Bally's Park Place Funding,
Inc.
First Mortgage Notes
9.25%, 3/15/04 Ba3 400 404,000
Boomtown, Inc.
First Mortgage Notes
11.50%, 11/1/03 B1 500 410,000
Casino America, Inc.
First Mortgage Bonds
11.50%, 11/15/01 B1 1,000 925,000
CCP Insurance, Inc.
Sr. Notes
10.50%, 12/15/04 Ba2 3,000 3,210,000
Cinemark USA, Inc.
Sr. Secured Debentures
12.00%, 6/1/02 B1 500 545,000
(3) Coinmach Corp.
Sr. Notes
11.75%, 11/15/05 B2 1,055 1,070,825
Community Health Systems
Sr. Sub. Debentures
10.25%, 11/30/03 B2 500 540,000
<CAPTION>
Face
Moody's Amount Value
Ratings (000) (Note A-1)
<C> <S> <C> <C> <C>
- ----------------------------------------------------------------------------------
- -----------------
(2) Elsinore Corp.
First Mortgage Notes
12.50%, 10/1/00 N/R $ 1,500 $ 675,000
G.B. Property Funding Corp.
First Mortgage Notes
10.875%, 1/15/04 B2 1,000 877,500
(4) General Medical Corp.,
Series A, Sub. Debentures
12.125%, 8/15/05 Caa 1,887 1,971,915
Gillett Holdings, Inc.
Sr. Sub. Notes
12.25%, 6/30/02 N/R 744 786,686
Grand Casinos, Inc.,
First Mortgage Notes
10.125%, 12/1/03 Ba3 1,000 1,042,500
Griffin Gaming & Entertainment
Sr. Notes
11.00%, 9/15/03 N/R 1,000 935,000
(2)(4)(6) Hemmeter Enterprises, Inc.
Sr. Notes
12.00%, 12/15/00 N/R 892 356,630
ICON Health & Fitness, Inc.
Series B, Sr. Sub. Notes
13.00%, 7/15/02 B3 500 540,000
Magellan Health Services, Inc.
Series A, Sr. Sub. Notes
11.25%, 4/15/04 B2 250 273,750
Meditrust
Convertible Debentures
7.50%, 3/1/01 Baa3 3,000 3,060,000
Motels of America, Inc.,
Series B, Sr. Sub. Notes
12.00%, 4/15/04 B3 500 496,875
OrNda HealthCorp.
Sr. Sub. Notes
12.25%, 5/15/02 B2 1,000 1,100,000
Red Roof Inns, Inc.
Sr. Exchange Notes
9.625%, 12/15/03 B3 900 882,000
Regency Health Services, Inc.
Gtd. Sr. Sub. Notes
9.875%, 10/15/02 B2 600 594,000
Santa Fe Hotel, Inc.
First Mortgage Notes
11.00%, 12/15/00 B2 363 228,690
Sea Containers Ltd.
Sr. Sub. Debentures
12.50%, 12/1/04 B1 500 540,000
Station Casinos, Inc.
Sr. Sub. Notes
9.625%, 6/1/03 B2 450 443,813
Trump's Castle Funding, Inc.
Mortgage Bonds
11.75%, 11/15/03 Caa 500 432,500
Trump Plaza Funding, Inc.
First Mortgage Notes
10.875%, 6/15/01 B3 850 879,750
</TABLE>
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
<TABLE>
<CAPTION>
Face
Moody's Amount Value
Ratings (000) (Note A-1)
- ----------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
- -----------------
(4)(10) Trump Taj Mahal Funding, Inc.
Series A, Debentures
11.35%, 11/15/99 Caa $ 1,804 $ 1,736,679
Wright Medical Technology
Series B, Sr. Secured
Debentures
10.75%, 7/1/00 B3 1,000 1,030,000
------------
GROUP TOTAL 29,910,613
------------
- ----------------------------------------------------------------------------------
- -----------------
TRANSPORTATION (2.6%)
(3) Ameritruck Distribution Corp.
Gtd. Sr. Sub. Notes
12.25%, 11/15/05 B3 250 247,500
CHC Helicopter Corp.
Yankee Sr. Sub. Notes
11.50%, 7/15/02 B3 750 663,750
Ferrovie dello Stato
Notes
9.125%, 7/6/09 N/R 3,000 3,672,000
USAir, Inc.
Gtd. Sr. Notes
10.00%, 7/1/03 B3 1,000 870,000
------------
GROUP TOTAL 5,453,250
------------
- ----------------------------------------------------------------------------------
- -----------------
TOTAL CORPORATE OBLIGATIONS
(Cost $174,549,342) 171,849,479
------------
- ----------------------------------------------------------------------------------
- -----------------
GOVERNMENT & AGENCY SECURITIES (3.3%)
- ----------------------------------------------------------------------------------
- -----------------
COLLATERALIZED MORTGAGE OBLIGATIONS (2.9%)
Federal National Mortgage Association
REMIC-PAC Series 1989-23,
Class D
10.20%, 9/25/18 Aaa 4,348 4,655,056
STRIPS, Series H, Class 2
11.50%, 5/1/09 Aaa 1,342 1,473,219
------------
GROUP TOTAL 6,128,275
------------
- ----------------------------------------------------------------------------------
- -----------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (0.2%)
Various Pools:
10.50%, 9/15/15-8/15/16 Aaa 345 385,784
------------
- ----------------------------------------------------------------------------------
- -----------------
U.S. TREASURY BOND (0.2%)
7.125%, 2/15/23 Aaa 290 331,598
------------
- ----------------------------------------------------------------------------------
- -----------------
TOTAL GOVERNMENT & AGENCY SECURITIES
(Cost $6,685,739) 6,845,657
------------
- ----------------------------------------------------------------------------------
- -----------------
<CAPTION>
Face
Moody's Amount Value
Ratings (000) (Note A-1)
<C> <S> <C> <C> <C>
- ----------------------------------------------------------------------------------
- -----------------
COLLATERALIZED SECURITY (3.5%)
- ----------------------------------------------------------------------------------
- -----------------
COLLATERALIZED MORTGAGE OBLIGATIONS (3.5%)
Drexel, Burnham & Lambert Trust
REMIC-PAC, Series S, Class 2
9.00%, 8/1/18 Aaa $ 7,260 $ 7,437,046
------------
- ----------------------------------------------------------------------------------
- -----------------
TOTAL COLLATERALIZED SECURITY
(Cost $7,741,098) 7,437,046
------------
- ----------------------------------------------------------------------------------
- -----------------
ASSET BACKED OBLIGATIONS (3.2%)
- ----------------------------------------------------------------------------------
- -----------------
Green Tree Financial Corp.
Manufactured Housing
Installment Sale Contracts
Series 1993-4, Class B1
7.20%, 1/15/19 Baa3 2,000 2,010,000
Household Affinity Credit Card
Master Trust I
Series 1993-3, Class B
4.95%, 3/15/99 A2 2,500 2,482,800
(9) Merrill Lynch Home Equity
Acceptance Trust
Series 1994-A, Class A2
6.656%, 7/17/22 A3 2,215 2,211,982
- ----------------------------------------------------------------------------------
- -----------------
TOTAL ASSET BACKED OBLIGATIONS
(Cost $6,558,742) 6,704,782
------------
- ----------------------------------------------------------------------------------
- -----------------
<CAPTION>
Shares
<C> <S> <C> <C> <C>
- ----------------------------------------------------------------------------------
- -----------------
COMMON STOCKS (0.6%)
- ----------------------------------------------------------------------------------
- -----------------
COMMUNICATIONS (0.0%)
Pagemart, Inc. 7,000 0
Pegasus Media & Communications,
Inc. 25 0
------------
GROUP TOTAL 0
------------
- ----------------------------------------------------------------------------------
- -----------------
CONSUMER PRODUCTS (0.3%)
(1)(5)(6) Applause Enterprises, Inc.
(acquired 11/8/91, cost
$144,400) 3,800 11,400
(1) Specialty Foods, Inc. 30,000 30,000
(1)(5)(6) TLC Beatrice International
Holdings, Inc.
(acquired 11/19/91-11/26/91,
cost $1,018,750) 25,000 575,000
------------
GROUP TOTAL 616,400
------------
- ----------------------------------------------------------------------------------
- -----------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
<TABLE>
<CAPTION>
Value
Shares (Note A-1)
- ----------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
- -----------------
FINANCE (0.0%)
(1)(5)(6)(7) Westfed Holdings, Inc., Class B
(acquired 9/20/88, cost $383) 12,670 $ 0
------------
- ----------------------------------------------------------------------------------
- -----------------
INDUSTRIAL (0.2%)
Ampex Corp., Class A 90,000 360,000
------------
- ----------------------------------------------------------------------------------
- -----------------
MANUFACTURING (0.1%)
(1)(5)(6)(7) CIC I Acquisition Corp.
(acquired 10/18/89, cost
$1,076,715) 2,944 200,192
(1) Polyvision Corp. 6,731 13,883
------------
GROUP TOTAL 214,075
------------
- ----------------------------------------------------------------------------------
- -----------------
RETAIL TRADE (0.0%)
(1)(5)(6) Jewel Recovery L.P.
(acquired 7/30/93, cost $0) 49,559 0
------------
- ----------------------------------------------------------------------------------
- -----------------
SERVICES (0.0%)
Capital Gaming International 6,667 533
(1)(5)(6) Lady Luck Gaming Corp.
(acquired 2/15/94-2/22/94,
cost $144,532) 11,040 4,416
(1)(3) Motels of America, Inc. 500 37,500
------------
GROUP TOTAL 42,449
------------
- ----------------------------------------------------------------------------------
- -----------------
TOTAL COMMON STOCKS
(Cost $2,869,075) 1,232,924
------------
- ----------------------------------------------------------------------------------
- -----------------
PREFERRED STOCKS (1.0%)
- ----------------------------------------------------------------------------------
- -----------------
COMMUNICATIONS (0.2%)
(3) SD Warren Co. 12,000 378,000
------------
- ----------------------------------------------------------------------------------
- -----------------
FINANCE (0.0%)
(1)(5)(6)(7) Westfed Holdings, Inc., Class A
(acquired 9/20/88-6/18/93,
cost $3,611,992) 42,759 0
------------
- ----------------------------------------------------------------------------------
- -----------------
MANUFACTURING (0.1%)
(1) Alpine Group, Inc. 3,696 166,320
------------
- ----------------------------------------------------------------------------------
- -----------------
OIL, GAS & ELECTRIC (0.7%)
(1) Consolidated Hydro, Inc., Class
H 3,000 1,635,000
------------
- ----------------------------------------------------------------------------------
- -----------------
TOTAL PREFERRED STOCKS
(Cost $5,515,638) 2,179,320
------------
- ----------------------------------------------------------------------------------
- -----------------
<CAPTION>
Value
Shares (Note A-1)
<C> <S> <C> <C> <C>
- ----------------------------------------------------------------------------------
- -----------------
WARRANTS (0.3%)
- ----------------------------------------------------------------------------------
- -----------------
(1) American Telecasting, Inc.,
expiring 6/23/99 525 $ 2,625
(1)(3) Boomtown, Inc.,
expiring 11/1/98 500 0
(1)(3)(6) Capital Gaming International,
expiring 2/1/99 5,687 57
(1) Casino America, Inc.,
expiring 11/15/96 3,263 0
(1) Casino Magic Corp.,
expiring 10/14/96 9,000 450
(1) CHC Helicopter Corp.,
expiring 12/15/00 6,000 3,900
(1) Commodore Media, Inc.,
expiring 5/1/00 300 3,150
(1) Consolidated Hydro, Inc.,
expiring 12/31/03 5,400 27,000
(1) County Seat Stores,
expiring 10/15/98 1,520 1,520
(1)(6) Crown Packaging Holdings,
expiring 11/1/03 2,000 16,000
(1) Dial Call Communications,
expiring 4/25/99 750 8
(1)(3)(6) Elsinore Corp.,
expiring 10/8/98 79,941 0
General Media,
(1) expiring 12/22/00 500 2,500
(1) expiring 12/31/00 625 3,125
(1)(3) Great American Cookie,
expiring 1/30/00 225 0
(1) Gulf States Steel Acquisition
Corp,
expiring 4/15/00 400 0
(1) Hemmeter,
expiring 12/15/99 9,000 0
(1) Icon Health & Fitness, Inc.,
expiring 11/14/99 500 0
(1)(3) In-Flight Phone Corp.,
expiring 8/31/02 1,000 0
(1)(3) IntelCom Group, Inc.,
expiring 9/15/05 2,145 0
(1) MVE Inc.,
expiring 2/15/02 650 0
(1) Petro Shopping Centers L.P.,
expiring 6/1/97 500 17,000
(1) Presidential Riverboat Casinos,
expiring 9/23/96 6,000 0
(1)(3) Purity Supreme,
expiring 8/1/97 5,198 0
(1)(3) Renaissance Cosmetics,
expiring 4/3/01 3,000 67,500
(1) SD Warren Co.,
expiring 12/15/06 12,000 60,000
(1) Sheffield Steel Corp.,
expiring 11/1/01 6,250 31,250
- ----------------------------------------------------------------------------------
- -----------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
10
<PAGE>
<TABLE>
<CAPTION>
Value
Shares (Note A-1)
- ----------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
- -----------------
(1) Spanish Broadcasting System,
expiring 6/29/99 1,500 $ 255,000
(1) Uniroyal Technology Corp.,
expiring 6/1/03 5,000 12,500
(1) United International Holdings,
expiring 11/15/99 2,950 0
(1)(3) Wright Medical Technology,
expiring 6/30/03 618 101,911
- ----------------------------------------------------------------------------------
- -----------------
TOTAL WARRANTS
(Cost $435,671) 605,496
------------
- ----------------------------------------------------------------------------------
- -----------------
RIGHTS (0.0%)
- ----------------------------------------------------------------------------------
- -----------------
(1) Terex Corp.,
expiring 5/15/02 (Cost $0) 6,000 0
------------
- ----------------------------------------------------------------------------------
- -----------------
<CAPTION>
Face
Moody's Amount
Ratings (000)
<C> <S> <C> <C> <C>
- ----------------------------------------------------------------------------------
- -----------------
UNITS (2.2%)
- ----------------------------------------------------------------------------------
- -----------------
(3)(8) American Communication
Services, Inc.
Sr. Discount Notes
0.00%, 11/1/05 N/R $ 2,000 1,095,000
Cellular Communications
International, Inc. Notes
Zero Coupon, 8/15/00 B3 2,000 1,245,000
Decorative Home Accents, Inc.
Sr. Notes
13.00%, 6/30/02 B2 500 500,000
(3)(8) GST Telecommunications
Sr. Discount Notes
0.00%, 12/15/05 N/R 200 920,800
Horseshoe Gaming L.L.C.
12.75%, 9/15/00 B1 500 498,125
(3)(8) Winstar Communications
0.00%, 10/15/05 N/R 250 391,250
- ----------------------------------------------------------------------------------
- -----------------
TOTAL UNITS
(Cost $4,481,891) 4,650,175
------------
- ----------------------------------------------------------------------------------
- -----------------
<CAPTION>
Face
Amount Value
(000) (Note A-1)
<C> <S> <C> <C> <C>
- ----------------------------------------------------------------------------------
- -----------------
SHORT-TERM INVESTMENT (2.5%)
- ----------------------------------------------------------------------------------
- -----------------
REPURCHASE AGREEMENT (2.5%)
Paine Webber, 5.80%, dated 12/29/95, due
1/2/96, to be repurchased at $5,355,449,
collateralized by $5,750,000 U.S. Treasury
Bills, due 12/12/96, valued at $5,457,285
(Cost $5,352,000) $ 5,352 $ 5,352,000
------------
- ----------------------------------------------------------------------------------
- -----------------
TOTAL INVESTMENTS (98.3%)
(Cost $214,189,196) 206,856,879
------------
- ----------------------------------------------------------------------------------
- -----------------
OTHER ASSETS IN EXCESS OF LIABILITIES (1.7%)
3,584,083
------------
- ----------------------------------------------------------------------------------
- -----------------
NET ASSETS (100%)
Applicable to 24,385,367 issued and
outstanding $.001 par value shares
(authorized 100,000,000 shares) $210,440,962
------------
------------
- ----------------------------------------------------------------------------------
- -----------------
N/R--Not Rated.
PAC--Planned Amortization Class.
REMIC--Real Estate Mortgage Investment Conduit.
STRIPS--Separate Trading of Registered Interest and Principal Securities.
(1) Non-income producing security.
(2) Defaulted security.
(3) 144A Security. Certain conditions for public sale may exist.
(4) Payment in kind bond. Market value includes accrued interest.
(5) Restricted as to private and public resale. Total cost of restricted
securities at December 31, 1995 aggregated $5,996,772. Total market value of
restricted securities owned at December 31, 1995 was $791,008 or 0.4% of net
assets.
(6) Private Placement.
(7) Securities for which market quotations are not readily available are valued at
fair value as determined in good faith by the Board of Directors.
(8) Step Bond--Coupon rate is low or zero for an initial period and then increases
to a higher coupon rate thereafter. Maturity date disclosed is the ultimate
maturity.
(9) Floating Rate--The interest rate changes on these instruments based upon a
designated base rate. The rates shown are those in effect at December 31,
1995.
(10) 9.375% of 11.35% represents amount paid in cash, the remainder is payment in
kind.
</TABLE>
The accompanying notes are an integral part of the financial statements.
11
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES December 31, 1995
<S> <C>
- --------------------------------------------------------------------------
ASSETS:
Investments at Value
(Cost $208,837,196) (Note A-1)........................ $201,504,879
Repurchase Agreement at Value
(Cost $5,352,000) (Note A-3).......................... 5,352,000
Interest Receivable (Note A-4).......................... 3,981,098
Other Assets............................................ 17,004
- --------------------------------------------------------------------------
Total Assets........................................ 210,854,981
- --------------------------------------------------------------------------
LIABILITIES:
Payables:
Investment Advisory Fees (Note B)..................... 263,645
Professional Fees..................................... 42,850
Shareholders' Reports................................. 39,420
Shareholder Servicing Fees............................ 35,395
Administrative Fees (Note C).......................... 22,792
Custodian Fees........................................ 9,105
Directors' Fees....................................... 812
- --------------------------------------------------------------------------
Total Liabilities................................... 414,019
- --------------------------------------------------------------------------
NET ASSETS.................................................. $210,440,962
NET ASSETS CONSIST OF:
Capital Shares at $.001 Par Value....................... $ 24,385
Capital Paid in Excess of Par Value..................... 224,976,068
Undistributed Net Investment Income..................... 5,506,988
Accumulated Net Realized Loss........................... (12,734,162)
Unrealized Depreciation on Investments.................. (7,332,317)
NET ASSETS APPLICABLE TO 24,385,367 ISSUED AND OUTSTANDING
SHARES (AUTHORIZED 100,000,000 SHARES).................... $210,440,962
NET ASSET VALUE PER SHARE................................... $ 8.63
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS Year Ended
December 31, 1995
<S> <C>
- ---------------------------------------------------------------------------
INVESTMENT INCOME:
Interest (Note A-4)..................................... $22,848,542
Dividends (Note A-4).................................... 4,264
- ---------------------------------------------------------------------------
Total Income.......................................... 22,852,806
- ---------------------------------------------------------------------------
EXPENSES:
Investment Advisory Fees (Note B)....................... 1,026,453
Administrative Fees (Note C)............................ 262,926
Shareholder Servicing Fees.............................. 179,009
Shareholders' Reports................................... 110,412
Interest Expense........................................ 52,080
Professional Fees....................................... 49,169
Custodian Fees.......................................... 45,374
Directors' Fees and Expenses............................ 39,358
Other................................................... 124,482
- ---------------------------------------------------------------------------
Total Expenses........................................ 1,889,263
- ---------------------------------------------------------------------------
Net Investment Income............................... 20,963,543
- ---------------------------------------------------------------------------
NET REALIZED LOSS ON INVESTMENTS............................ (841,746)
- ---------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION/ DEPRECIATION ON
INVESTMENTS............................................... 12,472,856
- ---------------------------------------------------------------------------
Net Realized Loss and Change in Unrealized
Appreciation/Depreciation................................. 11,631,110
- ---------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations........ $32,594,653
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
12
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
<S> <C> <C>
Year Ended
Year Ended December 31,
December 31, 1995 1994
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net Investment Income....................................................... $ 20,963,543 $ 20,163,636
Net Realized Gain (Loss) on Investments..................................... (841,746) 950,302
Change in Unrealized Appreciation/Depreciation on Investments............... 12,472,856 (26,532,132)
- -----------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS................. 32,594,653 (5,418,194)
- -----------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
Net Investment Income....................................................... (18,532,879) (17,557,465)
- -----------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net Assets................................... 14,061,774 (22,975,659)
- -----------------------------------------------------------------------------------------------------------------------
NET ASSETS:
Beginning of Year........................................................... 196,379,188 219,354,847
- -----------------------------------------------------------------------------------------------------------------------
End of Year (Including undistributed net investment income of $5,506,988 and
$3,076,324, respectively).................................................. $210,440,962 $196,379,188
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Year Ended December 31,
------------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS 1995* 1994 1993 1992 1991
PER SHARE OPERATING
PERFORMANCE:
- ----------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF
YEAR............... $ 8.05 $ 9.00 $ 8.42 $ 8.28 $ 7.25
- ----------------------------------------------------------------------------------------------------------
Investment
Activities:
Net Investment
Income......... 0.86 0.83 0.91 0.89 0.89
Net Realized and
Unrealized Gain
(Loss) on
Investments.... 0.48 (1.06) 0.57 0.08 1.04
- ----------------------------------------------------------------------------------------------------------
Total from
Investment
Activities... 1.34 (0.23) 1.48 0.97 1.93
- ----------------------------------------------------------------------------------------------------------
Distributions:
Net Investment
Income......... (0.76) (0.72) (0.90) (0.83) (0.90)
- ----------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END
OF YEAR............ $ 8.63 $ 8.05 $ 9.00 $ 8.42 $ 8.28
- ----------------------------------------------------------------------------------------------------------
PER SHARE MARKET
VALUE, END OF
YEAR............... $ 7.88 $ 7.00 $ 8.50 $ 8.38 $ 8.38
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT
RETURN:
Net Asset
Value (1)...... 17.41% (2.67)% 18.47% 11.95% 27.71%
Market Value.... 24.34% (9.48)% 12.46% 12.09% 50.81%
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
RATIOS AND
SUPPLEMENTAL DATA:
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
Net Assets, End of
Year (Thousands)... $210,441 $196,379 $219,355 $203,846 $199,857
- ----------------------------------------------------------------------------------------------------------
Ratio of Expenses to
Average Net
Assets............. 0.92% 0.83% 0.88% 0.86% 0.87%
Ratio of Net
Investment Income
to Average Net
Assets............. 10.22% 9.75% 10.34% 10.38% 11.12%
Portfolio Turnover
Rate............... 44.1% 70.6% 117.5% 115.2% 53.3%
- ----------------------------------------------------------------------------------------------------------
*BEA Associates replaced CS First Boston Investment Management as the Fund's investment adviser effective
June 13, 1995, as explained in Note B.
(1)Total investment return based on per share net asset value reflects the effects of change in net asset
value on the performance of the Fund during each period, and assumes dividends and capital gains
distributions, if any, were reinvested. These percentages are not an indication of the performance of a
shareholder's investment in the Fund based on market value due to differences between the market price
of the stock and the net asset value of the Fund.
Note:Current period permanent book-tax differences, if any, are not included in the calculation of net
investment income per share.
</TABLE>
The accompanying notes are an integral part of the financial statements.
13
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- ------------
BEA Income Fund, Inc. (the "Fund"), formerly CS First Boston Income Fund, Inc.,
was incorporated on February 11, 1987 and is registered as a diversified,
closed-end investment company under the Investment Company Act of 1940. The
Fund's investment objective is to seek current income through investments
primarily in debt securities.
A. The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements. Generally accepted
accounting principles may require management to make estimates and assumptions
that affect the amounts and disclosures in the financial statements. Actual
reported results could differ from those estimates.
1. SECURITY VALUATION: Market values for fixed income securities are valued at
the latest quoted bid price in the over-the-counter market. However, fixed
income securities may be valued on the basis of prices provided by a pricing
service which are based primarily on institutional size trading in similar
groups of securities. Other securities listed on an exchange are valued at
the latest quoted sales prices on the day of valuation or if there was no
sale on such day, the last bid price quoted on such day. Securities purchased
with remaining maturities of 60 days or less are valued at amortized cost, if
it approximates market value. Securities for which market quotations are not
readily available (including investments which are subject to limitations as
to their sale) are valued at fair value as determined in good faith by the
Board of Directors. Such securities have a value of $200,192 (or 0.10% of net
assets) at December 31, 1995. In determining fair value, consideration is
given to cost, operating and other financial data.
The Fund may invest up to 10% of its total assets in securities which are not
readily marketable, including those which are restricted as to disposition
under securities law ("restricted securities"). These securities are valued
pursuant to the valuation procedures noted above.
2. FEDERAL INCOME TAXES: It is the Fund's intention to continue to qualify as a
regulated investment company and distribute all of its taxable income to
shareholders. Accordingly, no provision for Federal income taxes is required
in the financial statements.
Paid in capital, undistributed net investment income and accumulated net
realized loss have been adjusted for prior period permanent book-tax
differences.
3. REPURCHASE AGREEMENTS: In connection with transactions in repurchase
agreements, a bank as custodian for the Fund takes possession of the
underlying securities, the value of which exceeds the principal amount of the
repurchase transaction, including accrued interest. To the extent that any
repurchase transaction exceeds one business day, the value of the collateral
is marked-to-market on a daily basis to determine the adequacy of the
collateral. In the event of default on the obligation to repurchase, the Fund
has the right to liquidate the collateral and apply the proceeds in
satisfaction of the obligation. In the event of default or bankruptcy by the
other party to the agreement, realization and/or retention of the collateral
or proceeds may be subject to legal proceedings.
4. SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Security transactions are
accounted for on the date the securities are purchased or sold. Costs used in
determining realized gains and losses on the sale of investment securities
are those of specific securities sold. Interest income is recognized on the
accrual basis. Discounts on securities purchased are amortized according to
the effective yield method over their respective lives. Discount or premium
on mortgage backed securities is recognized upon receipt of principal
payments on the underlying mortgage pools. Dividend income is recorded on the
ex-dividend date.
5. DIVIDENDS AND DISTRIBUTIONS: The Fund pays dividends of net investment income
monthly and makes distributions at least annually of any net capital gains in
excess of applicable capital losses, including capital loss carryforward.
Dividends and distributions are recorded on the ex-dividend date.
Income distributions and capital gains distributions are determined in
accordance with U.S. Federal Income Tax regulations which may differ from
generally accepted accounting principles. These differences are principally due
to the timing of the recognition of defaulted bond interest.
B. Effective June 13, 1995, BEA Associates (the "Adviser") provides investment
advisory services to the Fund under the terms of an Advisory Agreement. Under
the Advisory Agreement, the Adviser is paid a fee, computed weekly and payable
quarterly at an annual rate of .50% of average weekly net assets. Prior to June
13, 1995, CS First Boston Investment Management Corporation provided investment
advisory services to the Fund under substantially the same terms, conditions and
fees as stated above.
C. Effective September 1, 1995, The Chase Manhattan Bank, N.A. ("Chase"),
through its affiliate Chase Global Funds Services Company ("CGFSC" or the
"Administrator"), formerly Mutual Funds Service Company ("MFSC"), provides
administrative services to the Fund under the terms of an Administration
Agreement. Under the Agreement, the Administrator is paid a fee, computed weekly
and payable monthly, at an annual rate of .15% of the Fund's first $100 million
of average weekly net assets, .10% of the Fund's next $300 million of average
weekly net assets and .05% of the Fund's average weekly net assets in excess of
$400 million. Prior to September 1, 1995, MFSC provided administrative services
to the Fund under substantially the same terms, conditions and fees as stated
above.
Effective September 1, 1995, Chase provides custodial services to the Fund.
Under the Custody Agreement, Chase is paid a fee, computed weekly and payable
monthly, at an annual rate of .03% of the Fund's first $50 million of average
weekly net assets, .02% of the Fund's next $50 million of average weekly net
assets and .01% of the Fund's average
14
<PAGE>
weekly net assets in excess of $100 million. Prior to September 1, 1995, United
States Trust Company of New York ("U.S. Trust") provided custodial services to
the Fund under substantially the same terms, conditions and fees as stated
above.
Effective September 1, 1995, CGFSC, provides transfer agent services to the
Fund. Under the Transfer Agent Agreement, CGFSC is paid a fee based on the
number of accounts in the Fund per year. In addition, the Fund is charged
certain out-of-pocket expenses by CGFSC. Prior to September 1, 1995, U.S. Trust
provided transfer agent services to the Fund under substantially the same terms,
conditions and fees as stated above.
D. During the year ended December 31, 1995, the Fund made purchases of
$80,995,008 and sales of $83,905,164 of investment securities other than U.S.
Government securities and short term investments. During the year ended December
31, 1995, purchases and sales of U.S. Government securities were $7,741,379 and
$6,294,630, respectively. At December 31, 1995, the cost of investments for
Federal income tax purposes was $214,189,196. Accordingly, net unrealized
depreciation for Federal income tax purposes aggregated $7,332,317, of which
$7,521,067 related to appreciated securities and $14,853,384 related to
depreciated securities.
At December 31, 1995 the Fund had a capital loss carryforward of $12,734,162
available to offset future capital gains of which $1,138,924, $4,585,038,
$882,969, $3,865,851 and $2,261,380 will expire on December 31, 1997, 1998,
1999, 2000 and 2003, respectively.
E. At December 31, 1995, 68.5% of the Fund's net assets comprised high yield
fixed income securities. The financial condition of the issuers of the
securities and general economic conditions may affect the issuers' ability to
make payments of income and principal, as well as the market value of the
securities. Such investments may also be less liquid and more volatile than
investments in higher rated fixed income securities.
F. The Fund's Board of Directors has approved a share repurchase program
authorizing the Fund from time to time to make open-market purchases on the New
York Stock Exchange of up to 10 percent of the Fund's shares outstanding as of
December 11, 1990. There were no repurchases of shares during the year ended
December 31, 1995.
<TABLE>
<CAPTION>
G. Summary of quarterly results of operations (Unaudited):
AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS
THREE MONTHS ENDED
--------------------------------------------------------------------------------------
MARCH 31, 1995 JUNE 30, 1995 SEPTEMBER 30, 1995 DECEMBER 31, 1995
-------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment Income........................ $ 5,429 $ 0.22 $ 6,009 $ 0.25 $ 5,703 $ 0.23 $ 5,712 $ 0.23
Net Investment Income.................... 4,969 0.20 5,582 0.23 5,205 0.21 5,208 0.22
Net Realized Gain/Loss and Change in
Unrealized Appreciation/Depreciation on
Investments............................. 5,992 0.25 4,955 0.20 343 0.02 341 0.01
Net Increase in Net Assets Resulting from
Operations.............................. 10,961 0.45 10,537 0.43 5,548 0.23 5,549 0.23
<CAPTION>
MARCH 31, 1994 JUNE 30, 1994 SEPTEMBER 30, 1994 DECEMBER 31, 1994
-------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment Income........................ $ 5,427 $ 0.22 $ 5,532 $ 0.23 $ 5,512 $ 0.23 $ 5,412 $ 0.22
Net Investment Income.................... 4,954 0.20 5,093 0.21 5,105 0.21 5,011 0.21
Net Realized Gain/Loss and Change in
Unrealized Appreciation/Depreciation on
Investments............................. (6,727) (0.28) (7,923) (0.32) (6,059) (0.25) (4,873) (0.21)
Net Increase (Decrease) in Net Assets
Resulting from Operations............... (1,773) (0.08) (2,830) (0.11) (954) (0.04) 138 0.00
</TABLE>
15
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
- ------
To the Shareholders and Board of Directors of
BEA Income Fund, Inc.
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of BEA Income Fund, Inc. (the "Fund")
at December 31, 1995, the results of its operations for the year then ended, the
changes in its net assets for each of the two years in the period then ended and
the financial highlights for each of the five years in the period then ended, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 1995 by
correspondence with the custodian, provide a reasonable basis for the opinion
expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York
February 13, 1996
16
<PAGE>
DESCRIPTION OF DIVIDEND REINVESTMENT
AND CASH PURCHASE PLAN
- -----------------
Pursuant to the BEA Income Fund, Inc.'s (the "Fund") Dividend Reinvestment
and Cash Purchase Plan (the "Plan"), each shareholder will be deemed to have
elected, unless the Fund's transfer agent as the Plan Agent (the "Plan Agent"),
is otherwise instructed by the shareholder in writing, to have all dividends and
distributions, net of any applicable U.S. withholding tax, automatically
reinvested in additional shares of the Fund. Shareholders who do not participate
in the Plan will receive all dividends and distributions in cash, net of any
applicable U.S. withholding tax, paid in dollars by check mailed directly to the
shareholder by the Plan Agent, as dividend-paying agent. Shareholders who do not
wish to have dividends and distributions automatically reinvested should notify
the Plan Agent for the Fund, at the address set forth below. Dividends and
distributions with respect to shares registered in the name of a broker-dealer
or other nominee (i.e., in "street name") will be reinvested under the Plan
unless such service is not provided by the broker or nominee or the shareholder
elects to receive dividends and distributions in cash. A shareholder whose
shares are held by a broker or nominee that does not provide a dividend
reinvestment program may be required to have his shares registered in his own
name to participate in the Plan. Investors who own shares of the Fund's common
stock registered in street name should contact the broker or nominee for details
concerning participation in the Plan.
Certain distributions of cash attributable to (a) some of the dividends and
interest amounts paid to the Fund and (b) certain capital gains earned by the
Fund that are derived from securities of certain foreign issuers are subject to
taxes payable by the Fund at the time amounts are remitted. Such taxes, if any,
will be borne by the Fund and allocated to all shareholders in proportion to
their interests in the Fund.
The Plan Agent serves as agent for the shareholders in administering the
Plan. If the Board of Directors of the Fund declares an income dividend or a
capital gains distribution payable either in the Fund's common stock or in cash,
as shareholders may have elected, nonparticipants in the Plan will receive cash
and participants in the Plan will receive the equivalent in shares of the Fund
valued at the lower of market price or net asset value as determined at the time
of purchase (generally on the payable date of the dividend) as set forth below.
Whenever market price is equal to or exceeds net asset value at the time shares
are valued for the purpose of determining the number of shares equivalent to the
cash dividend or distribution, participants will be issued shares of the Fund at
a price equal to net asset value but not less than 95% of the then current
market price of the Fund shares. The Fund will not issue shares under the Plan
below net asset value. If net asset value determined as at the time of purchase
exceeds the market price of Fund shares at such time, or if the Fund should
declare a dividend or other distribution payable only in cash (i.e., if the
Board of Directors should preclude reinvestment at net asset value), the Agent
will, as agent for the participants, endeavor to buy Fund shares in the open
market, on the New York Stock Exchange or elsewhere, on behalf of all
participants, and will allocate to you your pro rata portion based on the
average price paid (including brokerage commissions) for all shares purchased.
Shares acquired on behalf of participants in the open market will be purchased
at the prevailing market price. Fractions of a share allocated to you will be
computed to four decimal places. If, before the Agent has completed its
purchases, the market price exceeds the net asset value of a Fund share, the
average per share purchase price paid by the Agent may exceed the net asset
value of the Fund's shares, resulting in the acquisition of fewer shares than if
the dividend or distribution had been paid in shares issued by the Fund.
For all purposes of the Plan: (a) the market price of the Fund's common
stock on a dividend payment date shall be the last sale price on the New York
Stock Exchange on that date, or, if there is no such sale, then the mean between
the closing bid and asked quotations for such stock, and (b) net asset value per
share of the Fund's commons stock on a particular date shall be as determined by
or on behalf of the Fund.
Participants in the Plan have the option of making additional cash payments
to the Plan Agent, monthly, in any amount from $100 to $3,000, for investment in
the Fund's common stock. Shareholders should be aware that cash contributions
will be used to purchase shares of the Fund in the open market regardless of
whether such shares are selling above, at or below the net asset value of the
Fund. As a result, shareholders may be purchasing shares at a market price that
reflects a premium to the Fund's net asset value.
Cash contributions should be in the form of a check or money order and made
payable in U.S. dollars and directed to The Chase Manhattan Bank N.A., Dividend
Reinvestment Department -- Retail, 770 Broadway, New York, NY 10003-9598.
Deliveries to any other address do not constitute valid delivery.
A detachable form for use in making voluntary cash payments will be attached
to each Dividend Reinvestment Plan statement you receive. The same amount of
money need not be sent each month and there is no obligation to make an optional
cash payment each month.
Payments received by the Agent will be used to purchase stock under the
Plan. Prior to such purchase of stock by the Agent, no interest will be paid on
such funds sent to the Agent. Therefore, voluntary cash payments should be sent
to reach the Agent shortly (but at least five business days) before the dividend
payment date. Voluntary cash payments received after the five business day
deadline will be invested by the Agent on the next succeeding dividend payment
date. Dividend payment dates are expected to be the 15th (or next business day)
of each month.
17
<PAGE>
You may obtain a refund of any voluntary cash payment if a request for such
a refund is received in writing by the Agent not less than 48 hours before the
next succeeding dividend payment.
There is no charge to participants for reinvesting dividends or capital
gains distributions. The Agent's fees for the handling of reinvestment of
dividends and distributions will be paid by the Fund. There will be no brokerage
charges with respect to shares issued directly by the Fund as a result of
dividends or capital gains distributions payable either in shares or in cash.
However, each participant will pay a pro rata share of brokerage commissions
incurred with respect to the Agent's open market purchases in connection with
the reinvestment of dividends, capital gains distributions, or voluntary cash
payments.
Brokerage charges for purchasing small amounts of stock for individual
accounts through the Plan are expected to be less than the usual brokerage
charges for such transactions because the Agent will be purchasing stock for all
participants in blocks and pro rating the lower commissions thus attainable.
The receipt of dividends and distributions in stock under the Plan will not
relieve participants of any income tax (including withholding tax) that may be
payable on such dividends and distributions.
While the Fund presently intends to continue the Plan indefinitely,
experience under the Plan may indicate that changes are desirable. Accordingly,
the Fund reserves the right to amend or terminate the Plan as applied to any
voluntary cash payments made and any dividend or distribution paid subsequent to
notice of the change sent to all shareholders of the Fund at least 30 days
before the record date for such dividend or distribution. The Plan also may be
amended or terminated by the Agent by at least 30 days' written notice to all
shareholders of the Fund.
Any notices, questions or other correspondence regarding the Plan should be
addressed to The Chase Manhattan Bank, N.A., Customer Service Department, 770
Broadway, New York, NY 10003-9598. Be sure to include a reference to BEA Income
Fund, Inc. or you may call (800) 428-8890.
18
