<PAGE>
BEA Income Fund, Inc.
153 East 53rd Street
New York, NY 10022
---------------------------------------------
OFFICERS AND DIRECTORS
William W. Priest, Jr. Suzanne E. Moran
CHAIRMAN OF THE BOARD INVESTMENT OFFICER
Prof. Enrique R. Arzac Michael A. Pignataro
DIRECTOR SECRETARY
Lawrence J. Fox Wendy S. Setnicka
DIRECTOR ASSISTANT VICE PRESIDENT
James S. Pasman, Jr. AND ASSISTANT SECRETARY
DIRECTOR Paul P. Stamler
Richard J. Lindquist TREASURER
PRESIDENT AND CHIEF John M. Corcoran
INVESTMENT OFFICER ASSISTANT TREASURER
--------------------------------------------------------
INVESTMENT ADVISER
BEA Associates
153 East 53rd Street
New York, New York 10022
--------------------------------------------------------
ADMINISTRATOR
Chase Global Funds Services Company
73 Tremont Street
Boston, Massachusetts 02108
--------------------------------------------------------
CUSTODIAN
The Chase Manhattan Bank
3 Chase MetroTech Center
Brooklyn, New York 11245
--------------------------------------------------------
SHAREHOLDER SERVICING AGENT
The Chase Manhattan Bank
4 New York Plaza
New York, New York 10004
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.
- --------------------------------------------------------
BEA Income Fund, Inc.
- ---------------------------------------------
ANNUAL REPORT
December 31, 1996
<PAGE>
BEA INCOME FUND, INC.
- ----------
Dear Shareholders: February 10, 1997
We are pleased to report on the activities of the BEA Income Fund, Inc. ("the
Fund") for the year ended December 31, 1996.
At December 31, 1996, the Fund's net asset value (NAV) was $8.12, compared
to an NAV of $8.63 at December 31, 1995. As a result, the Fund's total return
(based on NAV and assuming reinvestment of dividends of $0.90 per share) for the
period was 10.59%. At December 31, 1996, $183.6 million was invested in
high-yield debt securities; $88.6 million was invested in investment-grade debt
securities; and the balance of the Fund's investments, $9.1 million, was
invested in equity securities. The investment-grade component consisted of short
and intermediate-term mortgages, asset-backed securities and corporate bonds of
intermediate maturity. Of the debt securities, the largest concentration
(44.95%) was in B-rated issues.
In late October, the Fund completed an offering of rights to existing
shareholders to purchase new shares. Due to oversubscription, the original
quantity of rights was increased by 25%. A total of 10.2 million shares were
issued at a price of $7.15 per share to generate net proceeds of $69.4 million.
THE MARKET
High yield was the top performer among major U.S. fixed income categories in
1996. As measured by the Salomon Brothers High Yield Market Index, high yield
returned 11.28% versus 2.76% for government bonds, 3.32% for investment-grade
corporate bonds and 5.37% for mortgages. [All returns cited from the
corresponding Salomon Brothers index.]
Investment in high yield mutual funds by individuals reached an all-time
high in 1996. According to AMG Data Services, net fund inflows totaled $15.9
billion, nearly 50% higher than the previous annual record of $10.7 billion set
in 1995.
As reflected by the level of new issuance, institutions also found high
yield very attractive. Aggregate new issuance for 1996 was $73.2 billion, a 55%
jump over last year's $47.2 billion. The average market-weighted new-issue offer
yield was 10.40% at year-end, versus 10.93% for 1995 as a whole.
HIGH YIELD SECURITIES
The high yield market is being driven by good fundamentals and strong
technicals. On the technical side is demand, which was strong throughout 1996
and remains so. This is a result both of the search by investors for more yield
than is available from investment-grade instruments and the increasing
acceptance of high yield as a mainstream asset class. Fundamentally, the U.S.
macro-economic environment, which is a benign mixture of moderate growth, little
threat of inflation and relatively stable interest rates, continues to be
positive for high yield issuers. Under such conditions, demand ought to stay
strong and issuer defaults should be below historical averages.
In managing the Fund, our general investment approach is to assign high
portfolio allocations to industries that we believe have a good operating
outlook and could benefit from consolidation trends. More specifically, we favor
companies that we believe offer long-term operating performance improvement and
deleveraging potential; those whose core operations should perform relatively
well regardless of the state of the economy; and those that may be desirable
candidates for future mergers and acquisitions activity.
Over the last few months, we have revised our views on several of our
industry concentrations.
The Fund's largest position remains in telecommunications, primarily based
on good growth prospects and the potential for further consolidation. In
particular, merger and acquisition activity among providers of traditional
telephony has been brisk over the last few months, with significant deals
announced between British Telecom and MCI Communications as well as WorldCom and
MFS Communications. The securities of many telecom companies tend to benefit in
this type of environment.
As our focus on telephony sharpens, we are reducing positions in other
segments of the telecommunications sector, notably wireless communications and
paging.
Debt issues of the gaming industry also occupy a significant position in the
portfolio. Although our investment thesis regarding gaming is very much intact
(i.e., it is growing and consolidating and is relatively less affected by the
macroeconomic environment), we are taking a more cautious view on the industry's
presence in Atlantic City. For the time being, then, we consider it most
appropriate to maintain existing positions without replacing bonds that have
been redeemed.
MORTGAGE AND ASSET-BACKED SECURITIES
We continue to find both mortgage and asset-backed securities (known as
"MBS" and "ABS", respectively)
2
<PAGE>
attractive. Within the general investment-grade category, they possess good
value relative to government and corporate bonds.
MBS's fundamentals and supply/demand dynamics are quite positive. In recent
months we have observed enormous buying by Fannie Mae and Freddie Mac (in 1996,
they consumed roughly half of all new MBS issues). There has also been strong
demand from investment managers who, because of their frequent trading activity,
help to keep the market liquid.
ABS retain a place in the portfolio because they offer a desirable
combination of high quality, low prepayment risk and compelling value. Prices
have tightened over the last few months in response to rising demand.
OUTLOOK
In the near term, we expect conditions in the high yield market to remain
fairly stable, since the macroeconomic climate continues to be favorable and is
showing few substantive signs of overheating. Default risk ought to stay low and
overall corporate performance should stay positive. The surge in demand that
occurred in 1996 still appears to be in place, and should persist if there are
no major shocks in the financial markets.
We note here that institutional interest in high yield is rising as time
progresses, prompted by the rapid growth of retirement plan assets. It is
becoming more attractive as institutions seek new ways to diversify their
portfolios' overall risk. In addition, many institutions have already added
emerging markets debt (whose credit quality is similar to that of high yield) to
their asset mixes and, therefore, are becoming more comfortable with the concept
of below-investment-grade fixed income.
We would like to take this opportunity to report on some important
organizational developments. Daniel H. Sigg has resigned from the Fund as
Chairman of the Board, President and Chief Executive Officer. We are grateful
for his contributions. We are pleased to announce that Richard J. Lindquist, the
Fund's Chief Investment Officer, has been elected to the office of President of
the Fund. The Fund's new Chairman of the Board is William W. Priest, Jr., Chief
Executive Officer of BEA Associates.
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 management or allocations should 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 Fund's Shareholder Servicing Agent at (800) 428-8890.
Sincerely yours,
/s/ Richard J. Lindquist
Richard J. Lindquist*
PRESIDENT AND CHIEF INVESTMENT OFFICER
/s/ William W. Priest, Jr.
William W. Priest, Jr.*
CHAIRMAN OF THE BOARD
*Richard J. Lindquist, who is a member of the Executive Committee and is a
Managing Director of BEA Associates, is primarily responsible for management of
the Fund's assets. He has served in such capacity since November 21, 1996. Prior
to November 21, 1996, he served as Vice President to the Fund, a position he
assumed on August 15, 1989. Mr. Lindquist joined BEA Associates on May 1, 1995
as a result of BEA's acquisition of CS First Boston Investment Management
Corporation ("CSFBIM"). Prior to joining BEA Associates, Mr. Lindquist served
various offices at CSFBIM beginning in July, 1989. Mr. Lindquist is also
President and Chief Investment Officer of BEA Strategic Income Fund, Inc.
William W. Priest, Jr., who is Chairman of the Executive Committee and holds
the offices of Executive Director and Chief Executive Officer of BEA Associates,
joined BEA Associates in 1972. Mr. Priest is Director and President of The
Indonesia Fund, Inc. and Director and Chairman of the Board of BEA Strategic
Income Fund, Inc., 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 Latin America
Equity Fund, Inc., The Latin America Investment Fund, Inc. and The Portugal
Fund, Inc., all of which are managed by BEA Associates.
3
<PAGE>
PORTFOLIO OF INVESTMENTS
- ---------
DECEMBER 31, 1996
<TABLE>
<CAPTION>
Moody's Face
Ratings Amount Value
(Unaudited) (000) (Note A-1)
<C> <S> <C> <C> <C>
- ---------------------------------------------------------------------
- -----------------
CORPORATE OBLIGATIONS (76.6%)
- ----------------------------------------------------------------------------------
- -----------------
AEROSPACE/DEFENSE (0.5%)
GPA Holland B.V.
Series C, Medium Term Notes: N/R $ 750 $ 751,875
8.625%, 1/15/99
(3) 9.12%, 2/24/99 N/R 250 251,250
Tracor, Inc.
Series A, Gtd. Sr. Sub. Notes
10.875%, 8/15/01 B2 500 527,500
-------------
GROUP TOTAL 1,530,625
-------------
- ----------------------------------------------------------------------------------
- -----------------
BROADCASTING (4.7%)
Chancellor Broadcasting Co.
Gtd. Sr. Sub. Notes
12.50%, 10/1/04 B3 750 851,250
(8) Commodore Media, Inc.
Gtd. Sr. Sub. Notes
7.50%, 5/1/03 B3 300 315,750
(8) EchoStar Communications Corp.
Gtd. Sr. Discount Notes
0.00%, 6/1/04 B2 1,500 1,241,250
Granite Broadcasting Corp.
Sr. Sub. Notes
9.375%, 12/1/05 B3 300 288,000
NWCG Holding Corp.
Series B, Sr. Discount Notes
0.00%, 6/15/99 Caa 1,000 825,000
Park Broadcasting Inc.
Series B, Sr. Notes
11.75%, 5/15/04 B2 675 793,125
Pegasus Media &
Communications, Inc.
Series B, Notes
12.50%, 7/1/05 B3 250 270,625
SFX Broadcasting, Inc.
Series B, Sr. Sub. Notes
10.75%, 5/15/06 B3 1,000 1,057,500
Sinclair Broadcast Group
Sr. Sub. Notes
10.00%, 9/30/05 B2 1,000 1,015,000
(8) Spanish Broadcasting Systems
Sr. Notes
7.50%, 6/15/02 B3 1,500 1,582,500
(8) UIH Australia / Pacific, Inc.
Series B, Sr. Discount Notes
0.00%, 5/15/06 B3 1,500 795,000
United International Holdings:
Sr. Discount Notes
0.00%, 11/15/99 B3 3,000 2,130,000
Sr. Secured Discount Notes,
Series B
0.00%, 11/15/99 B3 1,000 727,500
Univision Network Holding
L.P .
Sub. Notes
0.00%, 12/17/02 N/R 1,500 1,020,000
Young Broadcasting, Inc.
Series B, Gtd. Sr. Sub. Notes
9.00%, 1/15/06 B2 300 292,500
-------------
GROUP TOTAL 13,205,000
-------------
<CAPTION>
Moody's Face
Ratings Amount Value
(Unaudited) (000) (Note A-1)
<C> <S> <C> <C> <C>
- ----------------------------------------------------------------------------------
- -----------------
BUSINESS SERVICES (0.4%)
(3) Intertek Finance plc
Yankee Sr. Sub. Notes
10.25%, 11/1/06 B2 $ 600 $ 621,000
(3)(8) Real Time Data, Inc. Units
0.00%, 8/15/06 N/R 1,114 601,560
-------------
GROUP TOTAL 1,222,560
-------------
- ----------------------------------------------------------------------------------
- -----------------
CABLE (5.6%)
(8) American Telecasting, Inc.
Sr. Discount Notes
0.00%, 6/15/04 Caa 613 251,330
(3)(8) Australis Holdings
Pty Ltd.
Yankee Units
0.00%, 11/1/02 B2 2,250 1,327,500
Cablevision System Corp.:
Sr. Sub. Debentures
9.875%, 2/15/13 B2 500 495,000
Sr. Sub. Notes
9.875%, 5/15/06 B2 400 408,500
Century Communications Corp.
Sr. Notes
9.75%, 2/15/02 Ba3 500 515,000
Charter Communications
Southeast L.P.
Series B, Sr. Notes
11.25%, 3/15/06 B3 450 470,250
Comcast Corp.
Sr. Sub. Notes:
9.375%, 5/15/05 B1 180 186,750
9.125%, 10/15/06 B1 750 768,750
(3)(8) DIVA Systems Corp.
Units
0.00%, 5/15/06 N/R 1,925 1,032,281
(4) Falcon Holding Group L.P.
Sr. Sub. Notes
11.00%, 9/15/03 N/R 1,811 1,620,725
(8) Helicon Group L.P.
Series B, Sr. Secured Notes
11.00%, 11/1/03 B1 2,000 2,050,000
International CableTel, Inc.:
(8) Series A, Sr. Deferred
Coupon Notes
0.00%, 4/15/05 B3 1,000 747,500
(8) Series B, Sr. Deferred
Coupon Notes
0.00%, 2/1/06 B3 900 612,000
Lenfest Communications, Inc.
Sr. Sub. Notes
10.50%, 6/15/06 B2 1,000 1,052,500
(3) Olympus Communication
L.P./Olympus Capital Corp.
Sr. Notes
10.625%, 11/15/06 B1 2,000 2,045,000
(8) People's Choice TV Corp.
Units
0.00%, 6/1/04 Caa 500 212,500
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
Moody's Face
Ratings Amount Value
(Unaudited) (000) (Note A-1)
<C> <S> <C> <C> <C>
- ----------------------------------------------------------------------------------
- -----------------
(2) Scott Cable Communications,
Inc.
Sub. Debentures
12.25%, 4/15/01 B3 $ 500 $ 350,000
(8) Telewest Communications plc
Yankee Sr. Discount
Debentures
0.00%, 10/1/07 B1 2,050 1,429,875
-------------
GROUP TOTAL 15,575,461
-------------
- ----------------------------------------------------------------------------------
- -----------------
CHEMICALS (2.5%)
(8) Harris Chemical N.A.
Sr. Secured Debentures
10.25%, 7/15/01 B2 1,700 1,765,875
(3) ISP Holdings Inc.
Sr. Notes
9.75%, 2/15/02 Ba3 433 443,825
NL Industries Inc.:
(8) Sr. Secured Discount
Debentures
0.00%, 10/15/05 B2 1,000 860,000
Sr. Secured Debentures
11.75%, 10/15/03 B1 500 530,000
Rexene Corp.
Sr. Notes
11.75%, 12/1/04 B1 1,000 1,122,500
(8) Sterling Chemical Holdings,
Inc.
Sr. Discount Notes
0.00%, 8/15/08 Caa 1,300 754,000
UCC Investor's Holdings, Inc.
Sr. Sub. Notes
11.00%, 5/1/03 B3 1,500 1,590,000
-------------
GROUP TOTAL 7,066,200
-------------
- ----------------------------------------------------------------------------------
- -----------------
CONSTRUCTION & BUILDING MATERIALS (1.0%)
(3) Atrium Companies Inc.
Sr. Sub. Notes
10.50%, 11/15/06 B3 1,500 1,518,750
(8) Building Materials Corp.
Series B, Sr. Deferred Notes
0.00%, 7/1/04 Ba3 900 778,500
(8) Waxman Industries Inc.
Series B, Sr. Secured
Deferred Notes
0.00%, 6/1/04 Caa 600 439,500
-------------
GROUP TOTAL 2,736,750
-------------
- ----------------------------------------------------------------------------------
- -----------------
CONSUMER PRODUCTS & SERVICES (2.1%)
(3)(8) Coinstar Inc.
Units
0.00%, 10/1/06 N/R 1,700 1,200,625
Jordan Industries, Inc.
Sr. Notes
10.375%, 8/1/03 B3 1,200 1,182,000
(2) Marvel III Holdings, Inc.
Series B, Sr. Secured
Debentures
9.125%, 2/15/98 C 1,100 203,500
<CAPTION>
Moody's Face
Ratings Amount Value
(Unaudited) (000) (Note A-1)
<C> <S> <C> <C> <C>
- ----------------------------------------------------------------------------------
- -----------------
Renaissance Cosmetics, Inc.
Series B, Sr. Notes
13.75%, 8/15/01 N/R $ 1,500 $ 1,747,500
Revlon Consumer Products, Inc.
Series B, Sr. Sub. Notes
10.50%, 2/15/03 B3 800 840,000
(4) Town & Country Corp.
Sr. Sub. Notes
13.00%, 5/31/98 Caa 878 588,379
-------------
GROUP TOTAL 5,762,004
-------------
- ----------------------------------------------------------------------------------
- -----------------
ELECTRONICS (1.3%)
Advanced Micro Devices, Inc.
Sr. Secured Notes
11.00%, 8/1/03 Ba1 850 920,125
(3) Celestica International Inc.
Gtd. Sr. Sub. Yankee Notes
10.50%, 12/31/06 B2 1,100 1,156,375
Unisys Corp.:
Series B, Sr. Notes
12.00%, 4/15/03 B1 1,000 1,065,000
Sr. Notes
11.75%, 10/15/04 B1 425 453,687
-------------
GROUP TOTAL 3,595,187
-------------
- ----------------------------------------------------------------------------------
- -----------------
ENERGY (2.6%)
(3) Abraxas Petroleum Corp.
Sr. Notes
11.50%, 11/1/04 B2 1,550 1,654,625
Gulf Canada Resources Ltd.
Yankee Sr. Sub. Debentures
9.25%, 1/15/04 Ba3 750 791,250
H.S. Resources, Inc.
Sr. Sub. Notes
9.875%, 12/1/03 B2 500 522,500
Maxus Energy Corp.:
Notes
9.375%, 11/1/03 B1 350 355,250
Series B Notes
9.375%, 11/1/03 B1 450 454,500
(8) Mesa Operating Co.
Gtd. Sr. Sub. Discount Notes
0.00%, 7/1/06 B2 900 623,250
(3) National Energy Group, Inc.
Sr. Notes
10.75%, 11/1/06 B1 1,000 1,042,500
Noble Drilling Corp.
Sr. Notes
9.125%, 7/1/06 Ba2 500 537,500
(3) Parker Drilling Co.
Gtd. Sr. Notes
9.75%, 11/15/06 B1 300 316,500
Plains Resources Inc.
Series B, Gtd. Sr. Sub. Notes
10.25%, 3/15/06 B2 500 534,374
TransTexas Gas Corp.
Sr. Secured Debentures
11.50%, 6/15/02 B2 400 432,000
-------------
GROUP TOTAL 7,264,249
-------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
Moody's Face
Ratings Amount Value
(Unaudited) (000) (Note A-1)
<C> <S> <C> <C> <C>
- ----------------------------------------------------------------------------------
- -----------------
ENTERTAINMENT (2.3%)
(3) American Skiing Company
Sr. Sub. Notes
12.00%, 7/15/06 B3 $ 425 $ 449,437
Genmar Holdings, Inc.
Series A, Sr. Sub. Notes
13.50%, 7/15/01 Caa 500 487,500
Gillett Holdings, Inc.
Series A, Sr. Sub. Notes
12.25%, 6/30/02 N/R 535 562,846
(8) Imax Corp.,
Yankee Sr. Notes
0.00%, 3/1/01 B1 1,000 991,250
(3) Stuart Entertainment, Inc.
Sr. Sub. Notes
12.50%, 11/15/04 B3 3,000 2,992,500
Time Warner Inc.
Debentures
6.85%, 1/15/26 Ba1 1,095 1,067,658
-------------
GROUP TOTAL 6,551,191
-------------
- ----------------------------------------------------------------------------------
- -----------------
FINANCIAL SERVICES (9.5%)
AT&T Capital Corp.
Series 3, Medium Term Notes
8.03%, 10/27/97 Baa3 1,100 1,099,450
American Banknote Corp.
Series B, Sr. Notes
11.625%, 8/1/02 B2 750 723,750
BellSouth Capital Funding
Corp. Debentures
6.04%, 11/15/26 Aa1 1,700 1,690,446
Chase Manhattan Corp.
Sub. Notes
6.25%, 1/15/06 A2 800 757,672
Citicorp:
Sr. Notes
5.625%, 2/15/01 A1 1,500 1,447,500
Sub. Notes
7.625%, 5/1/05 A2 485 501,577
Conseco, Inc.
Sr. Notes
10.50%, 12/15/04 Ba1 550 649,149
Consorcio G Grupo Dina
S.A./MCII Holdings
(U.S.A.), Inc.
Sr. Secured Notes
0.00%, 11/15/02 N/R 1,950 1,611,188
(3) Dollar Financial Group, Inc.
Sr. Notes
10.875%, 11/15/06 B2 1,000 1,030,000
(6) GMAC Medium Term Notes
6.90%, 6/6/00 A3 2,000 2,025,160
General Electric Capital Corp.
Notes
6.29%, 12/15/07 Aaa 2,150 2,119,922
(3) Goldman Sachs Group L.P.
Medium Term Notes
6.20%, 2/15/01 A1 3,000 2,936,250
L'Auxiliare Du Credit
Foncier de France
Sr. Unsub. Notes
8.00%, 1/14/02 A3 750 793,594
<CAPTION>
Moody's Face
Ratings Amount Value
(Unaudited) (000) (Note A-1)
<C> <S> <C> <C> <C>
- ----------------------------------------------------------------------------------
- -----------------
(9) National Westminster Bank plc
Series B, Perpetual Sub.
5.875%, 8/29/49 Aa3 $ 360 $ 319,500
Norwest Financial Inc.
Sr. Notes
7.50%, 4/15/05 Aa3 1,100 1,135,871
(9) Skandinaviska Enskilda
Banken AB,
Perpetual Sub.
6.625%, 3/29/49 Baa1 1,300 1,267,500
State Street Boston Corp.
Debentures
7.35%, 6/15/26 A1 500 519,885
Trans Financial Bank N.A.:
Notes
6.48%, 10/23/98 Baa3 1,250 1,248,675
Sr. Notes
6.32%, 10/17/97 Baa3 1,750 1,757,244
Travelers Group, Inc.
Sr. Notes
6.625%, 9/15/05 A1 500 487,175
Western National Corp. Sr.
Notes
7.125%, 2/15/04 Baa1 1,500 1,516,500
(2) Westfed Holdings
Sr. Debentures
15.50%, 9/15/99 N/R 1,750 962,500
-------------
GROUP TOTAL 26,600,508
-------------
- ----------------------------------------------------------------------------------
- -----------------
FOOD & BEVERAGES (1.7%)
Fresh Del Monte Produce N.V.
Series B, Yankee Sr. Notes
10.00%, 5/1/03 Caa 900 859,500
(3) Gorges/Quick-To-Fix Foods,
Inc.
Sr. Sub. Notes
11.50%, 12/1/06 B3 1,000 1,030,000
(3) International Home Foods, Inc.
Sr. Sub. Notes
10.375%, 11/1/06 B2 1,000 1,037,500
Specialty Foods Acquisition
Corp.
Series B, Sr. Sub. Notes
11.25%, 8/15/03 Caa 2,500 1,875,000
-------------
GROUP TOTAL 4,802,000
-------------
- ----------------------------------------------------------------------------------
- -----------------
HEALTH CARE (3.5%)
(4) General Medical Corp.
Series A, Sub. Debentures
12.125%, 8/15/05 Caa 1,915 1,941,331
ICON Health & Fitness, Inc.
Series B, Sr. Sub. Notes
13.00%, 7/15/02 B3 500 561,250
(3) Integrated Health Services,
Inc.
Sr. Sub Notes
10.25%, 4/30/06 B1 400 420,000
McKesson Corp.
Conv. Sub. Debentures
4.50%, 3/1/04 A3 550 484,688
Meditrust
Conv. Debentures
7.50%, 3/1/01 Baa3 3,000 3,127,500
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
<TABLE>
<CAPTION>
Moody's Face
Ratings Amount Value
(Unaudited) (000) (Note A-1)
<C> <S> <C> <C> <C>
- ----------------------------------------------------------------------------------
- -----------------
Paracelsus Healthcare
Sr. Sub. Notes
10.00%, 8/15/06 B1 $ 1,900 $ 1,786,000
Regency Health Services, Inc.
Gtd Sr. Sub. Notes
9.875%, 10/15/02 B2 600 609,000
(3) Unison HealthCare Corp.
Gtd. Sr. Notes
12.25%, 11/1/06 B3 1,000 1,025,000
-------------
GROUP TOTAL 9,954,769
-------------
- ----------------------------------------------------------------------------------
- -----------------
INDUSTRIAL GOODS & MATERIALS (5.2%)
(3) AMTROL Acquisition Inc.
Sr. Sub. Notes
10.625%, 12/31/06 B3 400 406,000
Alpine Group, Inc.
Series B, Gtd. Sr. Secured
Notes
12.25%, 7/15/03 B3 1,449 1,564,920
Atlantis Group, Inc.
Sr. Notes
11.00%, 2/15/03 B2 585 593,775
(3) CLARK Material Handling Co.
Sr. Notes
10.75%, 11/15/06 B1 550 572,000
Haynes International, Inc. Sr.
Notes
11.625%, 9/1/04 B3 500 527,500
Interlake Corp.
Sr. Sub. Debentures
12.125%, 3/1/02 B3 1,000 1,035,000
(3) International Knife & Saw,
Inc.
Sr. Sub. Notes
11.375%, 11/15/06 B3 750 778,125
MVE Inc.
Sr. Secured Debentures
12.50%, 2/15/02 B3 650 689,000
Mafco, Inc.
Sr. Sub. Notes
11.875%, 11/15/02 B3 550 583,000
(3) Motors and Gears Inc.
Series A, Sr. Notes
10.75%, 11/15/06 B3 1,500 1,546,875
Plastic Specialties &
Technologies, Inc.
Sr. Secured Debentures
11.25%, 12/1/03 B3 500 520,000
Repap New Brunswick, Inc.
Sr. Secured Debentures
10.625%, 4/15/05 B3 300 318,750
(3) SRI Receivables Purchase Co.,
Inc.
Trust Certificate-Backed
Notes
12.50%, 12/15/00 N/R 1,500 1,530,000
Specialty Equipment Companies,
Inc.
Sr. Sub. Notes
11.375%, 12/1/03 B3 1,500 1,638,750
Tenneco Inc.
Notes
8.075%, 10/1/02 Baa1 630 659,925
<CAPTION>
Moody's Face
Ratings Amount Value
(Unaudited) (000) (Note A-1)
<C> <S> <C> <C> <C>
- ----------------------------------------------------------------------------------
- -----------------
Terex Corp.
Series B, Sr. Secured Notes
13.25%, 5/15/02 Caa $ 1,500 $ 1,616,250
-------------
GROUP TOTAL 14,579,870
-------------
- ----------------------------------------------------------------------------------
- -----------------
METALS & MINING (3.2%)
AK Steel Corp.
Gtd. Sr. Notes
10.75%, 4/1/04 Ba2 1,450 1,584,125
Algoma Steel, Inc.
Yankee First Mortgage Notes
12.375%, 7/15/05 B1 500 540,000
Armco, Inc.
Sr. Notes
11.375%, 10/15/99 B2 815 843,525
Bayou Steel Corp.
First Mortgage Notes
10.25%, 3/1/01 B2 500 477,500
Gulf States Steel, Inc.
First Mortgage Notes
13.50%, 4/15/03 B1 600 567,000
(3) Kaiser Aluminum & Chemical
Corp.
Sr. Notes
10.875%, 10/15/06 B1 1,500 1,584,375
Sheffield Steel Corp.
First Mortgage Notes
12.00%, 11/1/01 Caa 1,250 1,187,500
(8) Silgan Holdings, Inc. Sr.
Discount Debentures
13.25%, 12/15/02 B3 277 278,731
(3) WCI Steel Inc.
Sr. Notes
10.00%, 12/1/04 B2 1,250 1,265,625
Weirton Steel Corp.
Sr. Notes
11.375%, 7/1/04 B2 700 710,500
-------------
GROUP TOTAL 9,038,881
-------------
- ----------------------------------------------------------------------------------
- -----------------
PACKAGING/CONTAINERS (3.3%)
BPC Holding Corp.
Series B, Sr. Secured Notes
12.50%, 6/15/06 Caa 1,000 1,062,500
Container Corp. of America
Gtd. Sr. Notes
9.75%, 4/1/03 B1 500 525,000
(3)(8) Crown Packaging Enterprises
Ltd.
Units
0.00%, 8/1/06 Ca 1,950 516,750
(8) Crown Packaging Holdings Ltd.
Series B, Sr. Sub.
Discount Notes
0.00%, 11/1/03 Ca 2,550 714,000
Four M Corp.
Series B, Sr. Secured Notes
12.00%, 6/1/06 B2 500 520,000
Gaylord Container Corp.
Sr. Sub. Discount Debentures
12.75%, 5/15/05 Caa 2,250 2,486,250
</TABLE>
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
<TABLE>
<CAPTION>
Moody's Face
Ratings Amount Value
(Unaudited) (000) (Note A-1)
<C> <S> <C> <C> <C>
- ----------------------------------------------------------------------------------
- -----------------
(8) Ivex Holdings Corp.
Series B, Sr. Discount
Debentures
0.00%, 3/15/05 Caa $ 1,500 $ 1,166,250
(3) Radnor Holdings Corp.
Sr. Notes
10.00%, 12/1/03 B2 700 714,000
(3) Spinnaker Industries Inc.
Sr. Secured Notes
10.75%, 10/15/06 B3 500 517,500
(3) Stone Container Finance Co.
Yankee Gtd. Sr. Notes
11.50%, 8/15/06 B1 1,000 1,012,500
-------------
GROUP TOTAL 9,234,750
-------------
- ----------------------------------------------------------------------------------
- -----------------
PAPER & FOREST PRODUCTS (1.7%)
Crown Paper Co.
Sr. Sub. Notes
11.00%, 9/1/05 B3 700 658,000
Fort Howard Corp.
Sub. Notes
10.00%, 3/15/03 B2 1,250 1,301,563
Mail-Well Corp.
Sr. Sub. Notes
10.50%, 2/15/04 B2 1,500 1,485,000
Malette, Inc.
Yankee Sr. Secured Debentures
12.25%, 7/15/04 Ba3 850 913,750
Repap Wisconsin, Inc.
Sr. Secured Debentures
9.875%, 5/1/06 Caa 400 407,000
-------------
GROUP TOTAL 4,765,313
-------------
- ----------------------------------------------------------------------------------
- -----------------
PUBLISHING & INFORMATION SERVICES (1.5%)
General Media, Inc.
Sr. Notes
10.625%, 12/31/00 Caa 625 476,562
(3)(8) InterAct Systems Inc.
Units
0.00%, 8/1/03 N/R 750 510,000
Lamar Advertising Co.
Gtd. Sr. Sub. Notes
9.625%, 12/1/06 B1 1,000 1,030,000
Park Newspapers Inc.
Sr. Notes
11.875%, 5/15/04 B2 500 587,500
(3) Petersen Publishing Co.,
L.L.C./Peterson Capital Corp.
Gtd. Sr. Sub. Notes
11.125%, 11/15/06 B3 450 471,376
(3) Universal Outdoor, Inc.
Sr. Sub. Notes
9.75%, 10/15/06 B1 1,200 1,239,000
-------------
GROUP TOTAL 4,314,438
-------------
- ----------------------------------------------------------------------------------
- -----------------
RESTAURANTS, HOTELS & GAMING (5.8%)
Argosy Gaming Company
Gtd. First Mortgage Notes
13.25%, 6/1/04 B2 300 282,750
Boomtown, Inc.
First Mortgage Notes
11.50%, 11/1/03 B1 500 527,500
<CAPTION>
Moody's Face
Ratings Amount Value
(Unaudited) (000) (Note A-1)
<C> <S> <C> <C> <C>
- ----------------------------------------------------------------------------------
- -----------------
(2) Capital Gaming International,
Inc.
Promissory Notes
0.00%, 8/1/95 N/R $ 1 $ 62
Casino America, Inc.
Gtd. Sr. Notes
12.50%, 8/1/03 B1 1,400 1,330,000
(3) Casino Magic of Louisiana,
Corp.
First Mortgage Notes
13.00%, 8/15/03 B3 1,400 1,365,000
(4) Colorado Gaming &
Entertainment, Co.
Gtd. Sr. Notes
12.00%, 6/1/03 N/R 265 247,113
(2) Elsinore Corp.
First Mortgage Notes
12.50%, 10/1/00 N/R 1,500 780,000
G.B. Property Funding Corp.
First Mortgage Notes
10.875%, 1/15/04 B3 900 756,000
HMC Acquisition Properties,
Series B, Gtd. Sr. Notes
9.00%, 12/15/07 Ba3 450 455,625
Horseshoe Gaming L.L.C.
Series B, Sr. Notes
12.75%, 9/30/00 B1 750 805,312
Mohegan Tribal Gaming
Authority
Series B, Sr. Secured Notes
13.50%, 11/15/02 N/R 900 1,170,000
Prime Hospitality Corp.
Secured First Mortgage Notes
9.25%, 1/15/06 Ba3 650 661,376
Red Roof Inns, Inc.
Sr. Exchange Notes
9.625%, 12/15/03 B2 900 900,000
Resorts International
Hotel Casino, Inc.
Mortgage Notes
11.00%, 9/15/03 N/R 1,000 1,075,000
Santa Fe Hotel, Inc.
First Mortgage Notes
11.00%, 12/15/00 Caa 354 263,730
Trump Atlantic City
Secured First Mortgage Notes
11.25%, 5/1/06 B1 1,400 1,386,000
Trump's Castle Funding, Inc.
Mortgage Bonds
11.75%, 11/15/03 Caa 2,750 2,420,000
(3) Waterford Gaming L.L.C./
Waterford Gaming Finance
Corp.
Sr. Notes
12.75%, 11/15/03 N/R 1,600 1,672,000
Wyndham Hotel Corp.
Gtd. Sr. Sub Notes
10.50%, 5/15/06 B2 300 319,500
-------------
GROUP TOTAL 16,416,968
-------------
- ----------------------------------------------------------------------------------
- -----------------
RETAIL (4.1%)
Big V Supermarkets, Inc.
Sr. Sub. Notes
11.00%, 2/15/04 B3 1,675 1,549,375
</TABLE>
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
<TABLE>
<CAPTION>
Moody's Face
Ratings Amount Value
(Unaudited) (000) (Note A-1)
<C> <S> <C> <C> <C>
- ----------------------------------------------------------------------------------
- -----------------
Brylane L.P.
Gtd. Sr. Sub. Notes
10.00%, 9/1/03 B2 $ 500 $ 515,000
(2) County Seat Stores, Inc.
Sr. Sub. Notes
12.00%, 10/1/02 Ca 1,520 456,000
Dairy Mart Conveniences
Stores, Inc.
Sr. Sub. Notes
10.25%, 3/15/04 B3 1,750 1,697,500
Duane Reade Corp.
Sr. Notes
12.00%, 9/15/02 B3 750 761,250
Farm Fresh, Inc.
Sr. Notes
12.25%, 10/1/00 B3 1,360 1,101,600
Great American Cookie Co.
Series B, Sr. Secured
Debentures
10.875%, 1/15/01 B3 1,250 1,100,000
Hills Stores Co.
Gtd. Sr. Notes
12.50%, 7/1/03 B1 500 443,750
Jitney-Jungle Stores of
America, Inc.
Gtd. Sr. Notes
12.00%, 3/1/06 B2 250 264,375
K Mart Corp.
Debentures
7.75%, 10/1/12 Ba3 1,000 837,500
Pathmark Stores, Inc.:
(8) Jr. Sub. Notes
0.00%, 11/1/03 Caa 1,400 899,500
Sr. Sub. Notes
9.625%, 5/1/03 B3 700 670,250
Petro PSC Properties L.P.
Sr. Notes
12.50%, 6/1/02 B3 500 510,000
Waban, Inc.
Sr. Sub. Notes
11.00%, 5/15/04 Ba3 500 555,000
-------------
GROUP TOTAL 11,361,100
-------------
- ----------------------------------------------------------------------------------
- -----------------
TELECOMMUNICATIONS (10.4%)
(8) American Communications
Services, Inc.
Sr. Discount Notes
0.00%, 11/1/05 N/R 2,100 1,260,000
(8) Arch Communications Group,
Inc.
Sr. Discount Notes
0.00%, 3/15/08 B3 750 427,500
Brooks Fiber Properties, Inc.
Sr. Discount Notes:
(3)(8) 0.00%, 11/1/06 N/R 2,000 1,340,000
(8) 0.00%, 3/1/06 N/R 1,000 640,000
(8) COLT Telecom Group plc
Yankee Units
0.00%, 12/15/06 N/R 800 480,000
Cellular Communications
International, Inc.
Units
0.00%, 8/15/00 B3 2,000 1,420,000
<CAPTION>
Moody's Face
Ratings Amount Value
(Unaudited) (000) (Note A-1)
<C> <S> <C> <C> <C>
- ----------------------------------------------------------------------------------
- -----------------
(8) Dial Call Communications
Sr. Discount Notes
0.00%, 4/15/04 B3 $ 750 $ 540,000
(8) Diamond Cable Communications
plc
Yankee Discount Notes
0.00%, 12/15/05 B3 1,850 1,332,000
(3)(8) GST Telecommunications, Inc.
Conv. Sr. Sub. Discount Notes
0.00%, 12/15/05 N/R 200 156,000
(8) GST USA, Inc.
Gtd. Sr. Discount Notes
0.00%, 12/15/05 N/R 1,700 1,020,000
Geotek Communications, Inc.
Sr. Sub Conv. Notes
12.00%, 2/15/01 Caa 1,000 1,000,000
(8) Hyperion
Telecommunications, Inc.
Series B, Sr. Discount Notes
0.00%, 4/15/03 N/R 1,750 984,375
(8) ICG Holdings, Inc.
Sr. Discount Notes
0.00%, 9/15/05 N/R 650 458,250
(8) In-Flight Phone Corp.
Series B, Sr. Discount Notes
0.00%, 5/15/02 Caa 750 123,750
(8) IntelCom Group (U.S.A.) Inc.
Gtd. Sr. Exchangeable
Discount Notes
0.00%, 5/1/06 N/R 600 388,500
(3) InterMedia Capital Partners IV
L.P./InterMedia Partners IV
Capital Corp.
Sr. Notes
11.25%, 8/1/06 B2 650 668,688
(8) MFS Communications Co., Inc.
Discount Notes
0.00%, 1/15/04 B1 850 737,375
Metrocall, Inc.
Sr. Sub. Notes
10.375%, 10/1/07 B3 1,000 860,000
Mobile Telecommunications
Technologies Corp.
Sr. Sub. Notes
13.50%, 12/15/02 B3 535 535,000
(8) Nextel Communications, Inc.
Sr. Notes
0.00%, 8/15/04 B3 1,800 1,228,500
(3) Omnipoint Corp.
Series A, Sr. Notes
11.625%, 8/15/06 B3 1,000 1,042,500
(3) Orbcomm Global L.P./ Orbcomm
Global Capital Corp.
Gtd. Sr. Notes
14.00%, 8/15/04 B3 650 661,375
(8) Pagemart Nationwide, Inc.
Sr. Discount Notes
0.00%, 2/1/05 N/R 1,750 1,216,250
Paging Network, Inc.
Sr. Sub. Notes
10.125%, 8/1/07 B2 340 346,800
</TABLE>
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
<TABLE>
<CAPTION>
Moody's Face
Ratings Amount Value
(Unaudited) (000) (Note A-1)
<C> <S> <C> <C> <C>
- ----------------------------------------------------------------------------------
- -----------------
Petersburg Long Distance Inc.:
(3) Conv. Sub. Notes
9.00%, 6/1/06 N/R $ 230 $ 242,363
(3)(8) Units
0.00%, 6/1/04 N/R 1,610 1,320,200
PriCellular Wireless Corp.:
(8) Discount Notes
0.00%, 10/1/03 B3 750 641,250
(3) Sr. Notes
10.75%, 11/1/04 B1 300 314,250
Rogers Cablesystems Ltd.
Series B, Yankee Sr. Secured
2nd Priority Notes
10.00%, 3/15/05 Ba3 300 319,500
Rogers Cantel Inc.
Sr. Secured Debentures
9.375%, 6/1/08 Ba3 350 366,625
Sprint Spectrum L.P./Sprint
Spectrum Finance Corp.
Sr. Notes
11.00%, 8/15/06 B2 1,400 1,519,000
(9) TCI Communications, Inc.
Remarket Floating Rate Reset
Notes
6.185%, 9/15/03 Ba1 1,140 1,132,875
Teleport Communications Group,
Inc.:
Sr. Notes
9.875%, 7/1/06 B1 750 800,625
(8) Sr. Discount Notes
0.00%, 7/1/07 B1 1,150 787,750
(8) Videotron Holdings plc
Yankee Discount Notes
0.00%, 8/15/05 B3 2,000 1,610,000
Western Wireless Corp.
Sr. Sub. Notes
10.50%, 2/1/07 B3 500 518,750
WinStar Communications, Inc.:
(8) Conv. Sr. Discount Notes
0.00%, 10/15/05 N/R 250 180,624
(8) Sr. Discount Notes
0.00%, 10/15/05 N/R 500 305,000
(8) Wireless One, Inc.
Units
0.00%, 8/1/06 B3 750 341,250
-------------
GROUP TOTAL 29,266,925
-------------
- ----------------------------------------------------------------------------------
- -----------------
TEXTILES/APPAREL (1.7%)
Collins & Aikman Products
Sr. Sub Notes
11.50%, 4/15/06 B3 650 708,500
Parisian, Inc.
Sr. Sub. Notes
9.875%, 7/15/03 B1 1,500 1,515,000
(3) Pillowtex Corp.
Sr. Sub. Notes
10.00%, 11/15/06 B2 500 515,000
Synthetic Industries, Inc.
Sr. Sub. Notes
12.75%, 12/1/02 B3 1,450 1,598,625
(3) William Carter Co.
Sr. Sub. Notes
10.375%, 12/1/06 B3 500 512,500
-------------
GROUP TOTAL 4,849,625
-------------
<CAPTION>
Moody's Face
Ratings Amount Value
(Unaudited) (000) (Note A-1)
<C> <S> <C> <C> <C>
- ----------------------------------------------------------------------------------
- -----------------
TRANSPORTATION (1.0%)
CHC Helicopter Corp.
Yankee Sr. Sub. Notes
11.50%, 7/15/02 B3 $ 750 $ 769,688
USAir, Inc.
Gtd. Sr. Notes
10.00%, 7/1/03 B3 1,900 1,923,750
-------------
GROUP TOTAL 2,693,438
-------------
- ----------------------------------------------------------------------------------
- -----------------
UTILITIES (0.5%)
(3) Israel Electric Corp. Ltd.
Sr. Notes
7.25%, 12/15/08 A3 1,390 1,377,838
-------------
- ----------------------------------------------------------------------------------
- -----------------
WASTE MANAGEMENT (0.5%)
(10) WMX Technologies Inc.
Sr. Notes
7.10%, 8/1/26 A1 1,250 1,293,075
-------------
- ---------------------------------------------------------------------
- -----------------
TOTAL CORPORATE OBLIGATIONS
(Cost $215,360,896) 215,058,725
-------------
- ---------------------------------------------------------------------
- -----------------
GOVERNMENT & AGENCY SECURITIES (8.2%)
- ----------------------------------------------------------------------------------
- -----------------
FEDERAL HOME LOAN MORTGAGE CORPORATION (1.5%)
Pool# G00613
7.00%, 12/1/25 Aaa 4,250 4,167,635
-------------
- ----------------------------------------------------------------------------------
- -----------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION (3.9%)
30-year TBA
7.50%, 12/31/27 Aaa 3,250 3,247,953
REMIC-PAC Series 1989-23,
Class D
10.20%, 9/25/18 Aaa 3,110 3,254,036
STRIPS, Series H, Class 2
11.50%, 5/1/09 Aaa 1,076 1,160,439
Various Pools:
7.00%, 11/1/25-12/31/25 Aaa 3,384 3,309,752
-------------
GROUP TOTAL 10,972,180
-------------
- ----------------------------------------------------------------------------------
- -----------------
GOVERNMENT & AGENCY SECURITIES (0.5%)
Tennessee Valley Authority
Bonds
5.98%, 4/1/36 N/R 1,250 1,269,550
-------------
- ----------------------------------------------------------------------------------
- -----------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (0.1%)
Various Pools:
10.50%, 9/15/15-8/15/16 Aaa 293 325,832
-------------
- ----------------------------------------------------------------------------------
- -----------------
UNITED STATES DEPARTMENT OF VETERANS AFFAIRS (0.1%)
Vendee Mortgage Trust REMIC
Series 1994-2, Class 3F
6.50%, 10/15/15 N/R 400 379,748
-------------
- ----------------------------------------------------------------------------------
- -----------------
UNITED STATES TREASURY NOTES (2.1%)
(6) 7.75%, 11/30/99 Aaa 2,100 2,194,164
6.625%, 6/30/01 Aaa 900 914,481
7.875%, 11/15/04 Aaa 2,500 2,728,125
-------------
GROUP TOTAL 5,836,770
-------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
10
<PAGE>
<TABLE>
<CAPTION>
Moody's Face
Ratings Amount Value
(Unaudited) (000) (Note A-1)
<C> <S> <C> <C> <C>
- ----------------------------------------------------------------------------------
- -----------------
TOTAL GOVERNMENT & AGENCY SECURITIES
(Cost $23,094,176) $ 22,951,715
-------------
- ---------------------------------------------------------------------
- -----------------
COLLATERALIZED MORTGAGE OBLIGATIONS (3.0%)
- ----------------------------------------------------------------------------------
- -----------------
Asset Securitization Corp.:
Series 1995-MD4, Class A1
7.10%, 8/13/29 N/R 1,231 1,229,425
Series 1996-D3, Class A1B
7.21%, 10/13/26 Aaa 600 612,750
Series 1996-MD6, Class A6
7.108%, 11/13/26 Baa2 420 424,855
Chase Commercial
Mortgage Securities Corp.
Series 1996-2, Class A2
6.90%, 9/19/06 N/R 550 556,188
Drexel, Burnham & Lambert
Trust REMIC-PAC,
Series S, Class 2
9.00%, 8/1/18 Aaa 5,426 5,468,458
Merrill Lynch Mortgage
Investors, Inc.
Series 1996-C2,
Class A2
6.82%, 11/21/28 N/R 310 310,629
- ---------------------------------------------------------------------
- -----------------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS
(Cost $7,451,223) 8,602,305
-------------
- ---------------------------------------------------------------------
- -----------------
ASSET BACKED OBLIGATIONS (4.1%)
Capita Equipment Receivables
Trust, Series 1996-1, Class
A3
6.11%, 7/15/99 Aaa 1,250 1,251,952
Green Tree Financial Corp.
Manufactured Housing
Installment Sale Contracts:
Series 1995-4, Class A3
6.30%, 7/15/25 Aaa 350 349,780
Series 1995-7 Class A2
6.15%, 11/15/26 Aaa 1,450 1,451,349
Series 1995-7, Class A3
6.35%, 11/15/26 Aaa 1,300 1,296,844
Series 1993-4, Class B1
7.20%, 1/15/19 Baa3 2,000 1,969,360
Household Affinity Credit Card
Master Trust I,
Series 1993-3, Class B
4.95%, 3/15/99 A2 2,500 2,499,200
(9) Merrill Lynch Home Equity
Acceptance Trust,
Series 1994-A, Class A-2
6.125%, 7/17/22 A3 1,574 1,574,077
Nationscredit Grantor Trust,
Retail Installment Sale
Contracts
Series 1996-1, Class A
5.85%, 9/15/11 Aaa 1,081 1,063,154
-------------
<CAPTION>
Moody's Face
Ratings Amount Value
(Unaudited) (000) (Note A-1)
<C> <S> <C> <C> <C>
- ----------------------------------------------------------------------------------
- -----------------
TOTAL ASSET BACKED OBLIGATIONS
(Cost $12,816,300) $ 11,455,716
-------------
- ----------------------------------------------------------------------------------
- -----------------
<CAPTION>
Shares
<C> <S> <C> <C> <C>
- ---------------------------------------------------------------------
- -----------------
COMMON STOCKS (0.8%)
- ----------------------------------------------------------------------------------
- -----------------
BROADCASTING (0.0%)
(1)(3) Pegasus Media &
Communications, Inc.
Class B 25 8,125
-------------
- ----------------------------------------------------------------------------------
- -----------------
CONSUMER PRODUCTS & SERVICES (0.0%)
(1)(5) Applause Enterprises, Inc.
(acquired 11/8/91, cost
$144,400) 3,800 11,400
-------------
- ----------------------------------------------------------------------------------
- -----------------
ENTERTAINMENT (0.6%)
(1) Gillett Holdings, Inc. 42,500 1,615,000
-------------
- ----------------------------------------------------------------------------------
- -----------------
FINANCIAL SERVICES (0.0%)
(1)(5)(7) Westfed Holdings Inc. Class B
(acquired 9/20/88, cost $383) 12,670 0
-------------
- ----------------------------------------------------------------------------------
- -----------------
FOOD & BEVERAGE (0.0%)
(1) Specialty Foods Acquisition
Corp. 30,000 600
-------------
- ----------------------------------------------------------------------------------
- -----------------
INDUSTRIAL GOODS & MATERIALS (0.1%)
(1)(5)(7) CIC I Acquisition Corp.
(acquired 10/18/89, cost
$1,076,715) 2,944 200,192
-------------
- ----------------------------------------------------------------------------------
- -----------------
PAPER & FOREST PRODUCTS (0.0%)
(1)(3) Mail-Well, Inc. 7,102 113,632
-------------
- ----------------------------------------------------------------------------------
- -----------------
RESTAURANTS, HOTELS & GAMING (0.1%)
(1) Capital Gaming International,
Inc. 6,667 167
(1) Casino America Inc. 14,947 44,841
(1) Colorado Gaming &
Entertainment, Co. 26,465 79,395
(1)(3) Motels of America, Inc. 500 35,000
-------------
GROUP TOTAL 159,403
-------------
- ----------------------------------------------------------------------------------
- -----------------
RETAIL (0.0%)
(1) Barry's Jewelers, Inc. 64,521 145,172
(1)(5) Jewel Recovery L.P.
(acquired 7/30/93, cost $0) 49,559 0
-------------
GROUP TOTAL 145,172
-------------
- ----------------------------------------------------------------------------------
- -----------------
TELECOMMUNICATIONS (0.0%)
(1)(3) Pagemart Nationwide, Inc. 7,000 50,750
-------------
- ---------------------------------------------------------------------
- -----------------
TOTAL COMMON STOCKS
(Cost $2,973,838) 2,304,274
-------------
- ----------------------------------------------------------------------------------
- -----------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
11
<PAGE>
<TABLE>
<CAPTION>
Value
Shares (Note A-1)
<C> <S> <C> <C> <C>
- ----------------------------------------------------------------------------------
- -----------------
PREFERRED STOCKS (2.1%)
- ----------------------------------------------------------------------------------
- -----------------
AEROSPACE/DEFENSE (0.5%)
(1) GPA Group plc
7% Second Preference Cum.
Conv. 2,875,000 $ 1,259,250
-------------
- ----------------------------------------------------------------------------------
- -----------------
CONSUMER PRODUCTS & SERVICES (0.1%)
Renaissance Cosmetics, Inc.:
(3) Units 300 312,000
(3) 14% Sr. Redeemable, Series B 10 10,400
-------------
GROUP TOTAL 322,400
-------------
- ----------------------------------------------------------------------------------
- -----------------
ENERGY (0.1%)
(1)(7) Consolidated Hydro, Inc.
13.50% Series H, Conv. 3,000 300,000
-------------
- ----------------------------------------------------------------------------------
- -----------------
FINANCIAL SERVICES (0.7%)
Chevy Chase Bank, F.S.B.
10.375% Series A, Conv. 40,000 2,030,000
(1)(5)(7) WestFed Holdings, Inc.
Cum. Class A
(acquired 9/20/88-6/18/93,
cost $3,611,992) 42,759 42,759
-------------
GROUP TOTAL 2,072,759
-------------
- ----------------------------------------------------------------------------------
- -----------------
PAPER & FOREST PRODUCTS (0.3%)
(1) SD Warren Co.
14% Exchangeable 21,459 783,254
-------------
- ----------------------------------------------------------------------------------
- -----------------
PUBLISHING & INFORMATION SERVICES (0.2%)
K-III Communications Corp. 10%
Exchangeable, Series D 5,000 450,000
-------------
- ----------------------------------------------------------------------------------
- -----------------
RESTAURANTS, HOTELS & GAMING (0.2%)
(1) Lady Luck Gaming Corp.
Series A 20,000 640,000
-------------
- ---------------------------------------------------------------------
- -----------------
TOTAL PREFERRED STOCKS
(Cost $10,141,843) 5,827,663
-------------
- ---------------------------------------------------------------------
- -----------------
RIGHTS (0.0%)
- ----------------------------------------------------------------------------------
- -----------------
(1)(3) Terex Corp.
expiring 5/15/02 (cost $0) 6,000 12,000
-------------
- ---------------------------------------------------------------------
- -----------------
WARRANTS (0.4%)
- ----------------------------------------------------------------------------------
- -----------------
(1)(3) American Communications
Services, Inc.
expiring 11/1/05 2,000 180,000
(1) American Telecasting, Inc.
expiring 6/23/99 525 262
(1)(3) Boomtown, Inc.
expiring 11/1/98 500 30
<CAPTION>
Value
Shares (Note A-1)
<C> <S> <C> <C> <C>
- ----------------------------------------------------------------------------------
- -----------------
(1) CHC Helicopter Corp.
expiring 12/15/00 6,000 $ 3,000
(1)(3) Capital Gaming International,
Inc.
expiring 2/1/99 5,687 6
(1) Casino America, Inc.
expiring 5/03/01 2,646 2,646
(1)(3)(7) Consolidated Hydro, Inc.
expiring 12/31/03 5,400 0
(1) County Seat Stores, Inc.
expiring 10/15/98 1,520 15
(1)(3) Crown Packaging Holdings Ltd.
expiring 11/1/03 2,000 250
(1) Dairy Mart Conveniences
Stores, Inc.
expiring 5/13/98 11,665 29,163
(1)(3) Elsinore Corp.
expiring 10/8/98 79,941 0
(1) General Media Inc.
expiring 12/22/00 500 500
(1) General Media Inc.
expiring 12/31/00 625 625
(1)(3) Great American Cookie Co.
expiring 1/30/00 225 2,250
(1)(3) Hemmeter Enterprises, Inc.
expiring 12/15/99 9,000 0
(1)(3) Hyperion
Telecommunications, Inc.
expiring 4/15/01 1,750 35,000
(1) IHF Capital, Inc.
expiring 11/14/99 500 5,000
(1)(3) In-Flight Phone Corp.
expiring 8/31/02 1,000 0
(1)(3) IntelCom Group, Inc.
expiring 9/01/05 2,145 30,030
(1) Nextel Communications, Inc.
expiring 4/25/99 750 7
(1) Petro Shopping Centers L.P.
expiring 6/1/97 500 25,000
(1)(3) Purity Supreme
expiring 8/1/97 5,198 0
(1)(3) Renaissance Cosmetics, Inc.
expiring 8/31/06 3,000 150,000
(1)(3) SD Warren Co.
expiring 12/15/06 12,000 61,800
(1) Sheffield Steel Corp.
expiring 11/1/01 6,250 18,750
(1) Spanish Broadcasting Systems
expiring 6/29/99 1,500 300,000
(1) United International Holdings
expiring 11/15/99 2,950 59,000
(1)(3) Wright Medical Technology
expiring 6/30/03 618 80,294
-------------
- ---------------------------------------------------------------------
- -----------------
TOTAL WARRANTS
(Cost $401,721) 983,628
-------------
- ----------------------------------------------------------------------------------
- -----------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
12
<PAGE>
<TABLE>
<CAPTION>
Moody's Face
Ratings Amount Value
(Unaudited) (00) (Note A-1)
<C> <S> <C> <C> <C>
- ----------------------------------------------------------------------------------
- -----------------
SHORT TERM INVESTMENTS (5.1%)
- ----------------------------------------------------------------------------------
- -----------------
FEDERAL HOME LOAN BANK DISCOUNT NOTE (5.1%)
0.00%, 1/2/97 (cost
$14,197,633) N/R $ 14,200 $ 14,197,633
-------------
- ---------------------------------------------------------------------
- -----------------
TOTAL INVESTMENTS (100.3%)
(Cost $286,437,630) 281,393,659
-------------
- ----------------------------------------------------------------------------------
- -----------------
LIABILITIES IN EXCESS OF OTHER ASSETS (-0.3%)
(760,073)
-------------
- ---------------------------------------------------------------------
- -----------------
NET ASSETS (100%)
Applicable to 34,545,937 issued and outstanding $.001 par
value shares (authorized 100,000,000 shares) $ 280,633,586
-------------
-------------
- ----------------------------------------------------------------------------------
- -----------------
N/R--Not Rated.
PAC--Planned Amortization Class.
REMIC--Real Estate Mortgage Investment Conduit.
STRIPS--Separate Trading of Registered Interest and Principal Securities.
TBA--To Be Announced. Security is subject to delayed delivery.
(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, 1996 aggregated $4,833,490. Total market value of restricted
securities owned at December 31, 1996 was $254,351 or 0.09% of net assets.
(6) All or a portion of this security was pledged as collateral for delayed delivery
securities.
(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, 1996.
</TABLE>
The accompanying notes are an integral part of the financial statements.
13
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES December 31,
1996
<S> <C>
- --------------------------------------------------------------------------
ASSETS:
Investments at Value (Cost $286,437,630) (Note A-1)..... $281,393,659
Cash.................................................... 5,906
Interest Receivable (Note A-4).......................... 4,402,177
Receivable for Investments Sold......................... 269,250
Dividend Receivable (Note A-4).......................... 16,715
Other Assets............................................ 12,252
- --------------------------------------------------------------------------
Total Assets........................................ 286,099,959
- --------------------------------------------------------------------------
LIABILITIES:
Payables:
Investments Purchased................................. 4,762,228
Investment Advisory Fees (Note B)..................... 324,804
Shareholders' Reports................................. 75,987
Professional Fees..................................... 48,593
Shareholder Servicing Fees............................ 31,880
Administrative Fees (Note C).......................... 28,461
Custodian Fees........................................ 11,396
Directors' Fees....................................... 200
Other Liabilities....................................... 182,824
- --------------------------------------------------------------------------
Total Liabilities................................... 5,466,373
- --------------------------------------------------------------------------
NET ASSETS.................................................. $280,633,586
------------
------------
NET ASSETS CONSIST OF:
Capital Shares at $.001 Par Value....................... $34,546
Capital Paid in Excess of Par Value..................... 294,155,673
Undistributed Net Investment Income..................... 2,882,156
Accumulated Net Realized Loss........................... (11,394,818)
Unrealized Depreciation on Investments.................. (5,043,971)
------------
NET ASSETS APPLICABLE TO 34,545,937 ISSUED AND OUTSTANDING
SHARES (AUTHORIZED 100,000,000 SHARES).................... $280,633,586
------------
------------
NET ASSET VALUE PER SHARE................................... $8.12
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS Year Ended
December 31,
1996
<S> <C>
- --------------------------------------------------------------------------
INVESTMENT INCOME:
Interest (Note A-4)..................................... $22,324,219
Dividends (Note A-4).................................... 58,076
- --------------------------------------------------------------------------
Total Income.......................................... 22,382,295
- --------------------------------------------------------------------------
EXPENSES:
Investment Advisory Fees (Note B)....................... 1,100,825
Administrative Fees (Note C)............................ 276,830
Shareholders' Reports................................... 167,588
Shareholder Servicing Fees.............................. 156,349
Professional Fees....................................... 71,951
Custodian Fees.......................................... 61,340
Directors' Fees and Expenses............................ 39,101
Other................................................... 209,279
- --------------------------------------------------------------------------
Total Expenses........................................ 2,083,263
- --------------------------------------------------------------------------
Expense Offset (Note A-4)............................... (15,580)
- --------------------------------------------------------------------------
Net Expenses.......................................... 2,067,683
- --------------------------------------------------------------------------
Net Investment Income............................... 20,314,612
- --------------------------------------------------------------------------
NET REALIZED GAIN ON INVESTMENTS............................ 1,381,989
- --------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION/ DEPRECIATION ON
INVESTMENTS............................................... 2,288,346
- --------------------------------------------------------------------------
Net Realized Gain and Change in Unrealized
Appreciation/Depreciation................................. 3,670,335
- --------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations........ $23,984,947
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
14
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
Year Ended Year Ended
December 31, 1996 December 31, 1995
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net Investment Income............................................................ $ 20,314,612 $ 20,963,543
Net Realized Gain (Loss) on Investments.......................................... 1,381,989 (841,746)
Change in Unrealized Appreciation/Depreciation on Investments.................... 2,288,346 12,472,856
- ---------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................. 23,984,947 32,594,653
- ---------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
Net Investment Income............................................................ (23,166,099) (18,532,879)
- ---------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS:
Common Stock Issued through Rights Offering (10,160,570 shares).................. 69,923,776 --
Offering Costs................................................................... (550,000) --
- ---------------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Capital Share Transactions........... 69,373,776 --
- ---------------------------------------------------------------------------------------------------------------------------
Total Increase in Net Assets................................................... 70,192,624 14,061,774
- ---------------------------------------------------------------------------------------------------------------------------
NET ASSETS:
Beginning of Year................................................................ 210,440,962 196,379,188
- ---------------------------------------------------------------------------------------------------------------------------
End of Year (Including undistributed net investment income of $2,882,156 and
$5,506,988, respectively)....................................................... $280,633,586 $210,440,962
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE: 1996 1995Section 1994 1993 1992
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF YEAR................ $ 8.63 $ 8.05 $ 9.00 $ 8.42 $ 8.28
- -----------------------------------------------------------------------------------------------------------------
Offering Costs.................................... (0.02) -- -- -- --
- -----------------------------------------------------------------------------------------------------------------
Investment Activities:
Net Investment Income......................... 0.75 0.86 0.83 0.91 0.89
Net Realized and Unrealized Gain (Loss) on
Investments.................................. 0.18 0.48 (1.06) 0.57 0.08
- -----------------------------------------------------------------------------------------------------------------
Total from Investment Activities............ 0.93 1.34 (0.23) 1.48 0.97
- -----------------------------------------------------------------------------------------------------------------
Distributions:
Net Investment Income......................... (0.90) (0.76) (0.72) (0.90) (0.83)
- -----------------------------------------------------------------------------------------------------------------
Decrease in Net Asset Value due to Shares Issued
through Rights Offering.......................... (0.52) -- -- -- --
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR...................... $ 8.12 $ 8.63 $ 8.05 $ 9.00 $ 8.42
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
PER SHARE MARKET VALUE, END OF YEAR............... $ 7.63 $ 7.88 $ 7.00 $ 8.50 $ 8.38
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:
Net Asset Value (1)........................... 10.59%+ 17.41% (2.67)% 18.47% 11.95%
Market Value.................................. 10.05%+ 24.34% (9.48)% 12.46% 12.09%
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA:
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (Thousands)........... $280,634 $210,441 $196,379 $219,355 $203,846
- -----------------------------------------------------------------------------------------------------------------
Ratio of Expenses to Average Net Assets Including
Expense Offsets.................................. 0.94% 0.92% 0.83% 0.88% 0.86%
Ratio of Expenses to Average Net Assets........... 0.95% -- -- -- --
Ratio of Net Investment Income to Average Net
Assets........................................... 9.23% 10.22% 9.75% 10.34% 10.38%
Portfolio Turnover Rate........................... 81.0% 44.1% 70.6% 117.5% 115.2%
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
Section BEA Associates replaced CS First Boston Investment Management as the
Fund's investment adviser effective June 13, 1995.
+ Adjusted for Rights Offering.
(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.
The accompanying notes are an integral part of the financial statements.
15
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- ------------
BEA Income Fund, Inc. (the "Fund"), 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 $542,951 (or 0.19% of net
assets) at December 31, 1996. 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.
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.
Custodian fees for the Fund have been increased to include expense offsets for
custodian balance credits.
5. DELAYED DELIVERY COMMITMENTS: The Fund may purchase or sell securities on a
when-issued or forward commitment basis. Payment and delivery may take place
a month or more after the date of the transaction. The price of the
underlying securities and the date when the securities will be delivered and
paid for are fixed at the time the transaction is negotiated.
6. 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 timing of the recognition of defaulted bond interest.
Permanent book and tax differences relating to shareholder distributions may
result in reclassifications to undistributed net investment income (loss),
undistributed net realized gain (loss) and paid in capital.
B. 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.
C. The Chase Manhattan Bank ("Chase"), through its affiliate Chase Global Funds
Services Company ("CGFSC" or the "Administrator"), 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.
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
16
<PAGE>
the Fund's next $50 million of average weekly net assets and .01% of the Fund's
average weekly net assets in excess of $100 million.
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.
D. During the year ended December 31, 1996, the Fund made purchases of
$191,910,086 and sales of $144,542,582 of investment securities other than U.S.
Government securities and short term investments. During the year ended December
31, 1996, purchases and sales of U.S. Government securities were $50,499,112 and
$40,248,162, respectively. At December 31, 1996, the cost of investments for
Federal income tax purposes was $286,453,396. Accordingly, net unrealized
depreciation for Federal income tax purposes aggregated $5,059,737, of which
$9,954,537 related to appreciated securities and $15,014,274 related to
depreciated securities.
At December 31, 1996 the Fund had a capital loss carryforward of $11,235,467
available to offset future capital gains of which $4,225,267, $882,969,
$3,865,851 and $2,261,380 will expire on December 31, 1998, 1999, 2000 and 2003,
respectively. Net capital losses incurred after October 31 and within the
taxable year are deemed to arise on the first business day of the Fund's next
taxable year. For the period from November 1, 1996 to December 31, 1996 the Fund
incurred and elected to defer until January 1, 1997 for U.S. Federal income tax
purposes net losses of approximately $143,584.
E. At December 31, 1996, 65.44% 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, 1996.
G. The Fund issued to its shareholders of record as of the close of business on
September 27, 1996 non-transferable Rights to subscribe for up to an aggregate
of 10,160,570 shares of Common Stock of the Fund at a rate of one share of
Common Stock for three Rights held at the subscription price of $7.15 per share.
During October 1996, the Fund issued a total of 10,160,570 shares of Common
Stock on exercize of such Rights. Rights' offering costs of $550,000 were
charged directly against the proceeds of the Offering.
17
<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, 1996, 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 the securities at December 31, 1996 by
correspondence with the custodian and brokers and the application of alternative
auditing procedures where confirmations from brokers were not received, provide
a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York
February 3, 1997
18
<PAGE>
SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):
<TABLE>
<CAPTION>
AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS
THREE MONTHS ENDED
--------------------------------------------------------------------------------------
MARCH 31, 1996 JUNE 30, 1996 SEPTEMBER 30, 1996 DECEMBER 31, 1996
-------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment Income........................ $ 5,283 $ 0.22 $ 5,408 $ 0.22 $ 5,922 $ 0.24 $ 5,769 $ 0.15
Net Investment Income.................... 4,771 0.20 4,924 0.20 5,445 0.22 5,175 0.13
Net Realized Gain (Loss) and Change in
Unrealized Appreciation/Depreciation on
Investments............................. 1,294 0.05 (648) (0.03) 1,811 0.08 1,213 0.08
Net Increase in Net Assets Resulting from
Operations.............................. 6,065 0.25 4,276 0.17 7,256 0.30 6,388 0.21
<CAPTION>
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
</TABLE>
SUPPLEMENTAL PROXY INFORMATION (UNAUDITED)
The Annual Meeting of the Stockholders of the BEA Income Fund, Inc. was held on
Thursday, May 16, 1996 at the offices of Willkie Farr & Gallagher, One Citicorp
Center, 153 East 53rd Street, New York City. The following is a summary of each
proposal presented and the total number of shares voted:
<TABLE>
<CAPTION>
VOTES IN VOTES VOTES
PROPOSAL FAVOR OF AGAINST ABSTAINED
- ------------------------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
1. To elect the following four Directors:
Messrs. Daniel H. Sigg, Enrique R. Arzac,
Lawrence J. Fox and James S. Pasman Jr. 21,112,564 241,634 --
2. To ratify the selection of Price Waterhouse
LLP as independent public accountants of the
Fund until the next annual meeting. 21,059,305 95,476 199,417
</TABLE>
FEDERAL INCOME TAX INFORMATION (UNAUDITED):
For the year ended December 31, 1996, the percentage of dividends paid that
qualify for the 70% dividend received deduction for corporate shareholders is
0.28%.
19
<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 may elect to have all
dividends and distributions, net of any applicable U.S. withholding tax,
automatically reinvested in additional shares of the Fund by The Chase Manhattan
Bank, as the plan agent (the "Plan Agent"). Shareholders who do not make this
election 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 wish
to have dividends and distributions automatically reinvested should notify the
Plan Agent for the Fund at Dividend Reinvestment Department -- Retail, 4 New
York Plaza, New York, NY 10004. 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, Dividend
Reinvestment Department -- Retail, 4 New York Plaza, New York, NY 10004.
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.
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
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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, Customer Service Department, 4 New York
Plaza, New York, NY 10004. Be sure to include a reference to BEA Income Fund,
Inc. or you may call (800) 428-8890.
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