<PAGE>
BEA Income Fund, Inc.
153 East 53rd Street
New York, NY 10022
---------------------------------------------
OFFICERS AND DIRECTORS
William W. Priest, Jr. Hal Liebes
CHAIRMAN OF THE BOARD SENIOR VICE PRESIDENT
Prof. Enrique R. Arzac Michael A. Pignataro
DIRECTOR SECRETARY
Lawrence J. Fox Wendy S. Setnicka
DIRECTOR VICE PRESIDENT
James S. Pasman, Jr. AND ASSISTANT SECRETARY
DIRECTOR Paul P. Stamler
Richard J. Lindquist TREASURER
PRESIDENT AND CHIEF Paul Roselli
INVESTMENT OFFICER ASSISTANT TREASURER
Suzanne E. Moran
INVESTMENT OFFICER
--------------------------------------------------------
INVESTMENT ADVISER
BEA Associates
153 East 53rd Street
New York, New York 10022
Phone 1-800-293-1232
--------------------------------------------------------
ADMINISTRATOR
Chase Global Funds Services Co.
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 description of the Plan and additional information concerning
terms and conditions, and any applicable charges relating to the Plan, is
included at the back of this report.
--------------------------------------------------------
BEA Income Fund, Inc.
---------------------------------------------
ANNUAL REPORT
December 31, 1997
<PAGE>
BEA INCOME FUND, INC.
- ----------
Dear Shareholders: January 30, 1998
We are pleased to report on the activities of the BEA Income Fund, Inc. ("the
Fund") for the year ended December 31, 1997 and discuss our investment strategy.
At December 31, 1997, the Fund's net asset value ("NAV") was $8.44, compared
to an NAV of $8.12 at December 31, 1996. As a result, the Fund's total return
(based on NAV and assuming reinvestment of dividends of $0.76 per share) for the
year was 14.03%. For the quarter ended December 31, 1997, the Fund gained 2.40%.
At December 31, 1997, $183.6 million was invested in high yield debt
securities; $86.6 million was invested in investment grade debt securities;
$19.2 was invested in equity securities; and the balance of $1.7 million was
invested in cash equivalents. 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 (43.6%)
was invested in B-rated issues.
THE MARKET
The key dynamic in the U.S. fixed income markets during the fourth quarter
was the effort by investors to grapple with the implications of the financial
crisis occurring in Asia. Assumptions concerning such vital factors as global
liquidity, sovereign risk and worldwide economic growth prospects were
reassessed in light of the crisis and, ultimately, reflected in the marketplace
via price adjustments. The presence of so much uncertainty resulted in a classic
"flight to quality" in which high-caliber instruments like United States
Treasury bonds and investment-grade corporate debt fared best, while prices of
securities most dependent on growth prospects and liquidity conditions suffered
the greatest declines.
One could reasonably expect that high yield debt would sell off in this type
of environment. Such was not the case, however, as the sector actually
benefited. Not only did high yield generate positive returns during the quarter,
but it also attracted substantial cash inflows from investors exiting the
relatively riskier emerging debt markets.
The flight to quality additionally favored high yield debt securities by
pushing down interest rates. The yield on the bellwether 30-year Treasury bond,
for example, fell to 5.92% at year-end from 6.39% at the end of the third
quarter. With rates declining on one hand and higher-yielding emerging market
debt selling off on the other, yield-hungry investors had few other places to
go.
Overall, 1997 was a banner year for the high yield market. The Salomon
Brothers High Yield Market Index's 13.2% return handily exceeded the 9.65%
return of the Lehman Brothers Aggregate Bond Index, a standard benchmark for the
investment-grade sector. According to Chase Securities, new records were set in
mutual fund inflows ($21.5 billion, up 35.2% from 1996), new issue volume
($125.5 billion, up 70.5%) and total market size ($452.3 billion, up 28.2%). The
average yield for the overall high yield market fell to 9.31% from 9.47% on
January 1, 1997.
PORTFOLIO REVIEW
The Fund's outperformance of the broad high yield market (as represented by
the Salomon Brothers index) throughout 1997 was primarily attributable to our
emphasis on security selection and sector weightings. Both of these fundamental
elements of our strategy remain essentially unchanged.
The most prominent contributor to outperformance was telecommunications,
which continues as one of the portfolio's most heavily weighted sectors. Our
overweighting of the telecom sector compared to the market further enhanced
performance by magnifying the beneficial impact of our individual telecom
holdings' strong returns. Other positive factors included our relative
underweighting in energy, which sold off as oil prices declined; and our
avoidance of certain poorly performing companies in the automobile sector.
We also note that events in Asia had little effect on the Fund. This was
mainly because our three largest sector weightings (I.E., cable and media,
telecom, gaming), which account for approximately one-third of total assets, are
almost exclusively focused on the domestic U.S. market. In addition, the
portfolio contains relatively low exposure to steel, paper and chemicals, which
are the high yield market's cyclical industry groups most negatively affected by
the Asian turmoil.
2
<PAGE>
OUTLOOK
In our view, the two drivers of a positive 1998 outlook for the high yield
market remain intact. These are the ongoing macroeconomic backdrop of moderate
growth and stable-to-declining interest rates, as well as the vibrance of
corporate merger and acquisitions (M&A) activity.
We believe that a somewhat cautious investment stance in the near term is
most appropriate, however, as we expect to see a higher level of volatility in
the market over the coming months. In particular, we see the current decoupling
of the bond and stock markets as a mixed blessing for high yield. Bonds are
doing well as a result of the flight to quality and its byproduct of falling
yields, while the fall in stock prices, if longer-lived, would be negative for
M&A. The relevance of trends in both for high yield suggests that achieving
above-market returns should be more difficult than in 1997.
Our strategy will continue to include a preference for issues at the higher
end of the high yield credit spectrum (I.E., single-B) and the retention of our
largest sector allocations in cable and media, telecommunications and gaming.
During the fourth quarter, in fact, we raised exposure to these sectors even
further because of their brighter prospects relative to those of cyclicals.
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,
[SIGNATURE]
Richard J. Lindquist
PRESIDENT AND CHIEF INVESTMENT OFFICER*
[SIGNATURE]
William W. Priest, Jr.
CHAIRMAN OF THE BOARD*
*Richard J. Lindquist, who is a member of the Executive Committee and is an
Executive 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 Global 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
Global 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.
3
<PAGE>
PORTFOLIO OF INVESTMENTS
- ---------
DECEMBER 31, 1997
<TABLE>
<CAPTION>
Moody's Face
Ratings Amount Value
(Unaudited) (000) (Note A-1)
<C> <S> <C> <C> <C>
- --------------------------------------------------------------------------------
- -------------
DOMESTIC SECURITIES (97.6%)
- --------------------------------------------------------------------------------
- -------------
CORPORATE OBLIGATIONS (73.4%)
- --------------------------------------------------------------------------------
- -------------
AEROSPACE/DEFENSE (0.1%)
Wyman-Gordon Co.
Sr. Notes
8.00%, 12/15/07 Ba2 $ 150 $ 152,063
-------------
- --------------------------------------------------------------------------------
- -------------
AUTOMOTIVE (1.3%)
(3) Cambridge Industries, Inc.
Sr. Sub. Notes
10.25%, 7/15/07 B3 500 521,875
Collins & Aikman
Products Corp.
Sr. Sub. Notes
11.50%, 4/15/06 B3 650 730,438
Consorcio G Grupo
Dina S.A./MCII Holdings
(U.S.A.), Inc.
Sr. Secured Notes
Zero Coupon, 11/15/02 N/R 1,950 1,757,438
Safety Components
International, Inc.
Series B, Gtd.
Sr. Sub. Notes
10.125%, 7/15/07 B3 500 516,875
(3) Walbro Corp.
Gtd. Sr. Notes
10.125%, 12/15/07 B2 300 306,000
-------------
GROUP TOTAL 3,832,626
-------------
- --------------------------------------------------------------------------------
- -------------
BROADCASTING (5.1%)
(8) Australis Holdings Pty. Ltd.
Yankee Sr. Secured
Discount Notes
0.00%, 11/1/02 N/R 2,250 659,339
(8) Capstar Broadcasting Partners,
Inc.
Sr. Discount Notes
0.00%, 2/1/09 N/R 2,000 1,425,000
(8) Commodore Media, Inc.
Gtd. Sr. Sub. Notes
7.50%, 5/1/03 B2 300 334,500
(3) Digital Television Services,
L.L.C./DTS Capital, Inc.
Gtd. Sr. Sub. Notes
12.50%, 8/1/07 B3 750 841,875
(8) EchoStar Communications Corp.
Gtd. Sr. Discount Notes
0.00%, 6/1/04 B2 450 411,750
(3) Fox Kids Worldwide Inc.
Sr. Notes
9.25%, 11/1/07 B1 1,000 970,000
Granite Broadcasting Corp.
Sr. Sub. Notes
9.375%, 12/1/05 B3 300 303,750
<CAPTION>
Moody's Face
Ratings Amount Value
(Unaudited) (000) (Note A-1)
<C> <S> <C> <C> <C>
- --------------------------------------------------------------------
- -------------
Pegasus Media &
Communications, Inc.
Series B, Notes
12.50%, 7/1/05 B2 $ 250 $ 285,625
SFX Broadcasting, Inc.
Series B, Sr. Sub. Notes
10.75%, 5/15/06 B3 650 713,375
Sinclair Broadcast Group, Inc.
Gtd. Sr. Sub. Notes
8.75%, 12/15/07 B2 350 353,500
Sr. Sub. Notes
10.00%, 9/30/05 B2 900 954,000
(3) Source Media, Inc.
Sr. Secured Notes
12.00%, 11/1/04 B3 200 198,000
Spanish Broadcasting System,
Inc.
Sr. Notes
12.50%, 6/15/02 B2 500 573,750
Turner Broadcasting Systems,
Inc.
Sr. Notes
7.40%, 2/1/04 Ba1 1,820 1,881,425
United International Holdings:
Sr. Secured Discount Notes
Zero Coupon, 11/15/99 B3 2,200 1,804,000
Series B, Sr. Secured
Discount Notes
Zero Coupon, 11/15/99 B3 750 615,000
Univision Network Holding L.P.
Sub. Notes
Zero Coupon, 12/17/02 N/R 1,500 1,606,875
Young Broadcasting, Inc.:
Series B, Gtd. Sr. Sub. Notes
9.00%, 1/15/06 B2 300 299,250
Series B, Sr. Discount Notes
8.75%, 6/15/07 B2 750 744,375
-------------
GROUP TOTAL 14,975,389
-------------
- --------------------------------------------------------------------------------
- -------------
BUSINESS SERVICES (0.1%)
(3) Iron Mountain Inc.
Sr. Notes
8.75%, 9/30/09 B3 200 205,500
-------------
- --------------------------------------------------------------------------------
- -------------
CABLE (7.0%)
CCA Holdings Corp.
Sr. Sub. Notes
13.00%, 12/31/99 N/R 1,500 2,145,000
Cablevision Systems Corp.:
Series B, Sr. Debentures
8.125%, 8/15/09 Ba2 250 258,750
Sr. Sub. Debentures
9.875%, 2/15/13 B1 850 941,375
</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>
- --------------------------------------------------------------------
- -------------
Sr. Sub. Notes
9.875%, 5/15/06 B1 $ 400 $ 439,000
Century Communications Corp.:
Sr. Notes
9.75%, 2/15/02 Ba3 500 525,000
8.75%, 10/1/07 Ba3 400 409,000
Charter Communications
Southeast L.P.
Series B, Sr. Notes
11.25%, 3/15/06 B3 450 495,000
Comcast Corp.
Sr. Sub. Notes:
9.375%, 5/15/05 Ba3 180 192,839
9.125%, 10/15/06 Ba3 750 810,000
(8) Diamond Cable Communications
plc
Yankee Discount Notes
0.00%, 12/15/05 B3 1,800 1,399,500
(3)(8) DIVA Systems Corp.
Units
0.00%, 5/15/06 N/R 1,925 1,159,813
(4) Falcon Holding Group L.P.
Sr. Sub. Notes
11.00%, 9/15/03 N/R 1,752 1,887,552
Helicon Group L.P.
Series B, Sr. Secured Notes
11.00%, 11/1/03 B1 500 537,500
InterMedia Capital Partners IV
L.P./ InterMedia Partners
Capital Corp.
Sr. Notes
11.25%, 8/1/06 B2 650 723,125
Lenfest Communications, Inc.:
Sr. Notes
8.375%, 11/1/05 Ba3 500 516,250
Sr. Sub. Notes
10.50%, 6/15/06 B2 1,000 1,115,000
(8) Marcus Cable Co.
Sr. Discount Notes
0.00%, 12/15/05 Caa1 1,600 1,388,000
NTL, Inc.:
(8) Series A, Sr. Deferred Coupon
Notes
0.00%, 4/15/05 B3 1,000 840,000
(8) Series B, Sr. Deferred Coupon
Notes
0.00%, 2/1/06 B3 700 549,500
Series B, Sr. Notes
10.00%, 2/15/07 B3 500 531,250
Olympus Communications, L.P./
Olympus Capital Corp.
Series B, Sr. Notes
10.625%, 11/15/06 B1 1,000 1,105,000
OpTel, Inc.
Series B, Sr. Notes
13.00%, 2/15/05 B3 500 521,250
<CAPTION>
Moody's Face
Ratings Amount Value
(Unaudited) (000) (Note A-1)
<C> <S> <C> <C> <C>
- --------------------------------------------------------------------
- -------------
(8) Telewest
Communications plc
Yankee Sr. Sub. Discount
Debentures
0.00%, 10/1/07 B1 $ 2,450 $ 1,911,000
-------------
GROUP TOTAL 20,400,704
-------------
- --------------------------------------------------------------------------------
- -------------
CHEMICALS (1.9%)
Harris Chemical N.A.
Sr. Secured Debentures
10.25%, 7/15/01 B2 1,050 1,102,500
Huntsman Polymers Corp.
Sr. Notes
11.75%, 12/1/04 B1 1,000 1,121,250
NL Industries Inc.:
Sr. Secured Notes
11.75%, 10/15/03 B1 250 276,250
(8) Sr. Secured Discount
Debentures
0.00%, 10/15/05 B2 800 796,000
(8) Sterling Chemical
Holdings, Inc.
Sr. Secured Discount Notes
0.00%, 8/15/08 Caa1 1,000 610,000
Texas Petrochemical Corp.
Series B, Sr. Sub. Notes
11.125%, 7/1/06 B3 350 382,813
UCC Investor's
Holdings, Inc.
Sr. Sub. Notes
11.00%, 5/1/03 B2 1,200 1,296,000
-------------
GROUP TOTAL 5,584,813
-------------
- --------------------------------------------------------------------------------
- -------------
CONSTRUCTION & BUILDING MATERIALS (0.7%)
(3) American Architectural
Products Corp.
Sr. Notes
11.75%, 12/1/07 Caa1 650 653,250
(8) Building Materials Corp.
Series B, Sr. Deferred Notes
0.00%, 7/1/04 Ba3 200 189,000
Collins & Aikman Floor
Coverings, Inc.
Series B, Sr. Sub. Notes
10.00%, 1/15/07 B3 550 572,000
(8) Waxman Industries Inc.
Series B, Sr. Secured
Deferred Notes
0.00%, 6/1/04 Caa1 600 522,000
-------------
GROUP TOTAL 1,936,250
-------------
- --------------------------------------------------------------------------------
- -------------
CONSUMER PRODUCTS & SERVICES (1.7%)
(8) Coinstar Inc.
Sr. Discount Notes
0.00%, 10/1/06 N/R 1,700 1,326,000
</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>
- --------------------------------------------------------------------
- -------------
(3) Doskocil Manufacturing Co.,
Inc.
Gtd. Sr. Sub. Notes
10.125%, 9/15/07 B3 $ 500 $ 517,500
(3) Holmes Products Corp.
Gtd. Sr. Sub. Notes
9.875%, 11/15/07 B3 300 306,750
Jordan Industries, Inc.
Series B, Sr. Notes
10.375%, 8/1/07 N/R 750 765,000
Playtex Products, Inc.
Series B, Gtd. Sr. Notes
8.875%, 7/15/04 B1 225 228,937
Renaissance Cosmetics, Inc.
Gtd. Sr. Notes
11.75%, 2/15/04 B3 650 639,438
Revlon Consumer Products, Inc.
Series B, Sr. Sub. Notes
10.50%, 2/15/03 B3 700 745,500
(3) Sealy Mattress Co.
Gtd. Sr. Sub. Notes
9.875%, 12/15/07 B3 200 203,000
(2) Town & Country Corp.
Sr. Sub. Notes
13.00%, 5/31/98 Ca 878 364,444
-------------
GROUP TOTAL 5,096,569
-------------
- --------------------------------------------------------------------------------
- -------------
ELECTRONICS (1.7%)
Advanced Micro Devices, Inc.
Sr. Secured Notes
11.00%, 8/1/03 Ba1 850 913,750
Celestica
International, Inc.
Yankee Gtd. Sr. Sub.
Notes
10.50%, 12/31/06 N/R 600 651,000
DecisionOne Corp.
Sr. Sub. Notes
9.75%, 8/1/07 B3 500 521,250
(8) DecisionOne
Holdings Corp.
Units
0.00%, 8/1/08 N/R 700 455,000
(3) Flextronics International Ltd.
Sr. Sub Notes
8.75%, 10/15/07 B2 500 498,750
Unisys Corp.:
Series B, Sr. Notes
12.00%, 4/15/03 B1 1,000 1,132,500
Sr. Notes
11.75%, 10/15/04 B1 225 257,625
Viasystems, Inc.
Sr. Sub. Notes
9.75%, 6/1/07 B3 400 413,500
-------------
GROUP TOTAL 4,843,375
-------------
- --------------------------------------------------------------------
- -------------
<CAPTION>
Moody's Face
Ratings Amount Value
(Unaudited) (000) (Note A-1)
<C> <S> <C> <C> <C>
- --------------------------------------------------------------------
- -------------
ENERGY (3.1%)
Abraxas Petroleum Corp.
Series B, Sr. Notes
11.50%, 11/1/04 B2 $ 1,550 $ 1,689,500
Belden & Blake
Energy Co.
Series B, Gtd. Sr. Sub Notes
9.875%, 6/15/07 N/R 200 202,750
Bellwether
Exploration Co.
Gtd. Sr. Sub. Notes
10.875%, 4/1/07 B3 1,450 1,595,000
Cliffs Drilling Co.
Series D, Gtd. Sr.
Notes
10.25%, 5/15/03 N/R 1,100 1,199,000
Dawson Production Services,
Inc.
Sr. Notes
9.375%, 2/1/07 B1 150 157,500
(3) Giant Industries, Inc.
Gtd. Sr. Sub. Notes
9.00%, 9/1/07 B2 500 498,750
H.S. Resources, Inc.:
Gtd. Sr. Sub. Notes
9.25%, 11/15/06 B2 600 616,500
Sr. Sub. Notes
9.875%, 12/1/03 B2 500 517,500
(3) Hurricane
Hydrocarbons Ltd.
Gtd. Sr. Notes
11.75%, 11/1/04 B3 500 480,000
Noble Drilling Corp.
Sr. Notes
9.125%, 7/1/06 Baa2 100 110,500
Parker Drilling Co.
Series B, Gtd. Sr. Notes
9.75%, 11/15/06 B1 300 324,000
Plains Resources, Inc.
Series B, Gtd. Sr. Sub. Notes
10.25%, 3/15/06 B2 375 404,063
(3) Southwest Royalties, Inc.
Gtd. Sr. Notes
10.50%, 10/15/04 B3 500 495,000
(3) TransAmerican Energy Corp.
Sr. Secured Notes
11.50%, 6/15/02 N/R 350 343,875
Wiser Oil Co.
Gtd. Sr. Sub. Notes
9.50%, 5/15/07 B2 450 441,000
-------------
GROUP TOTAL 9,074,938
-------------
- --------------------------------------------------------------------
- -------------
ENTERTAINMENT (1.5%)
American Skiing Co.
Series B, Sr. Sub. Notes
12.00%, 7/15/06 B3 425 469,625
</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>
- --------------------------------------------------------------------
- -------------
(3)(8) Ascent Entertainment Group,
Inc.
Sr. Discount Notes
0.00%, 12/15/04 B3 $ 400 $ 228,500
(3) Bally Total Fitness Holding
Corp.
Sr. Sub. Notes
9.875%, 10/15/07 B3 350 353,500
Booth Creek Ski Holdings, Inc.
Series B, Sr. Notes
12.50%, 3/15/07 Caa1 1,000 982,500
Cinemark U.S.A., Inc.
Series D, Sr. Sub. Notes
9.625%, 8/1/08 N/R 250 260,000
Genmar Holdings, Inc.
Series A, Sr. Sub. Notes
13.50%, 7/15/01 Caa2 500 507,500
(3) Hollywood Theaters, Inc.
Gtd. Sr. Sub. Notes
10.625%, 8/1/07 B3 400 426,000
Time Warner Inc.
Debentures
6.85%, 1/15/26 Ba1 1,095 1,131,956
-------------
GROUP TOTAL 4,359,581
-------------
- --------------------------------------------------------------------------------
- -------------
FINANCIAL SERVICES (7.0%)
AT&T Capital Corp.
Series 4, Medium Term Notes
6.26%, 2/18/99 Baa3 290 291,087
6.92%, 4/29/99 Baa3 1,100 1,112,375
6.47%, 12/3/99 Baa3 60 60,101
Associates Corp. of
North America
Sr. Debentures
5.96%, 5/15/37 Aa3 1,215 1,224,112
BellSouth Capital Funding
Corp.
Debentures
6.04%, 11/15/26 Aa1 1,700 1,738,352
Citicorp
Sr. Notes
5.625%, 2/15/01 Aa3 1,500 1,473,750
GMAC
Medium Term Notes
6.90%, 6/6/00 A3 2,000 2,031,760
(9) General Electric Capital Corp.
Remarketed Reset Notes
6.29%, 12/15/07 Aaa 2,150 2,160,470
(3) Goldman Sachs
Group L.P.
Medium Term Notes
6.20%, 2/15/01 A1 3,000 2,985,000
Long Island Savings
Bank F.S.B.
Notes
7.00%, 6/13/02 Baa3 770 785,400
National Australia Bank Yankee
Sub. Notes
6.60%, 12/10/07 A1 180 182,025
<CAPTION>
Moody's Face
Ratings Amount Value
(Unaudited) (000) (Note A-1)
<C> <S> <C> <C> <C>
- --------------------------------------------------------------------
- -------------
Olympic Financial, Ltd.
Units
11.50%, 3/15/07 B2 $ 475 $ 471,438
(3)(8) PTC International
Finance B.V.
Gtd. Sr. Sub. Notes
0.00%, 7/1/07 B3 350 226,187
Toyota Motor Credit Corp.
Sr. Unsecured Bonds
7.00%, 6/11/07 Aaa 1,050 1,102,308
Trans Financial Bank N.A.
Notes
6.48%, 10/23/98 Baa3 1,250 1,250,988
Western Financial
Bank, F.S.B.
Sub. Capital Debentures
8.875%, 8/1/07 B1 500 483,750
(2) Westfed Holdings
Sr. Debentures
15.50%, 9/15/99 N/R 1,750 1,610,000
(3) Wilshire Financial Services
Group, Inc.
Series A, Sr. Notes
13.00%, 8/15/04 N/R 1,250 1,296,875
-------------
GROUP TOTAL 20,485,978
-------------
- --------------------------------------------------------------------------------
- -------------
FOOD & BEVERAGES (1.1%)
AmeriServ Food Distribution,
Inc.
Gtd. Sr. Notes
8.875%, 10/15/06 B1 650 658,125
Archibald Candy Corp.
Gtd. Sr. Secured Notes
10.25%, 7/1/04 B2 550 576,125
(3) Fleming Companies, Inc.
Sr. Sub. Notes
10.50%, 12/1/04 B3 500 525,000
Fresh Del Monte
Produce N.V.
Series B, Yankee Sr. Notes
10.00%, 5/1/03 B2 455 476,043
International Home Foods, Inc.
Gtd. Sr. Sub. Notes
10.375%, 11/1/06 B2 1,000 1,100,000
-------------
GROUP TOTAL 3,335,293
-------------
- --------------------------------------------------------------------------------
- -------------
HEALTH CARE (3.1%)
(9) Health & Retirement Property
Trust
Remarketed Reset Notes
6.20%, 7/9/07 Baa2 1,050 1,046,063
ICON Health & Fitness, Inc.
Series B, Sr. Sub. Notes
13.00%, 7/15/02 B3 500 561,250
IMAGYN Medical Technologies,
Inc.
Gtd. Sr. Sub. Notes
12.50%, 4/1/04 N/R 150 143,812
</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>
- --------------------------------------------------------------------
- -------------
Integrated Health Services,
Inc.
Series A, Sr. Sub. Notes
10.25%, 4/30/06 N/R $ 400 $ 424,000
(3) Sr. Sub. Notes
9.25%, 1/15/08 B2 100 102,000
Meditrust:
(9) Remarketed Reset Notes Baa3 550 547,937
6.325%, 8/15/02
Conv. Debentures
7.50%, 3/1/01 Baa3 3,000 3,661,560
Merck & Co.
Series B, Medium Term Notes
5.76%, 5/3/37 Aaa 1,650 1,687,125
Paracelsus Healthcare
Sr. Sub. Notes
10.00%, 8/15/06 B1 750 765,000
-------------
GROUP TOTAL 8,938,747
-------------
- --------------------------------------------------------------------------------
- -------------
INDUSTRIAL GOODS & MATERIALS (5.2%)
AMTROL Acquisition Inc.
Sr. Sub. Notes
10.625%, 12/31/06 B3 400 413,000
Alpine Group, Inc.
Series B, Gtd. Sr. Secured
Notes
12.25%, 7/15/03 B3 500 550,000
Atlantis Group, Inc.
Sr. Notes
11.00%, 2/15/03 B2 585 614,250
CLARK Material
Handling Co.
Gtd. Sr. Notes
10.75%, 11/15/06 B1 550 585,750
(3) Golden Ocean
Group, Ltd.
Units
10.00%, 8/31/01 B3 1,032 887,520
Haynes International, Inc.
Sr. Notes
11.625%, 9/1/04 B3 500 576,875
(8) IHF Holdings, Inc.
Series B, Sr. Sec.
Discount Notes
0.00%, 11/15/04 Caa2 1,250 1,087,500
Interlake Corp.
Sr. Sub. Debentures
12.125%, 3/1/02 B3 1,000 1,050,000
International Knife & Saw,
Inc.
Sr. Sub. Notes
11.375%, 11/15/06 B3 750 813,750
MVE, Inc.
Sr. Secured Debentures
12.50%, 2/15/02 B3 850 864,875
Motors and Gears, Inc.
Series B, Sr. Notes
10.75%, 10/15/06 B3 1,500 1,597,500
Neenah Corp.
Series B, Sr. Sub. Notes
11.50%, 5/1/07 B3 500 550,000
<CAPTION>
Moody's Face
Ratings Amount Value
(Unaudited) (000) (Note A-1)
<C> <S> <C> <C> <C>
- --------------------------------------------------------------------
- -------------
(3) Park-Ohio Industries, Inc.
Sr. Sub. Notes
9.25%, 12/1/07 B2 $ 400 $ 410,500
Plastic Specialties &
Technologies, Inc.
Sr. Secured Debentures
11.25%, 12/1/03 B3 500 535,000
SRI Receivables Purchase Co.,
Inc.
Series B, Notes
12.50%, 12/15/00 N/R 1,500 1,575,000
Seagate Technology, Inc.
Sr. Debentures
7.45%, 3/1/37 Baa3 900 950,625
Specialty Equipment Companies,
Inc.
Sr. Sub. Notes
11.375%, 12/1/03 B3 1,000 1,082,500
Terex Corp.
Series B, Sr. Secured Notes
13.25%, 5/15/02 B2 1,000 1,142,500
-------------
GROUP TOTAL 15,287,145
-------------
- --------------------------------------------------------------------------------
- -------------
METALS & MINING (3.2%)
AK Steel Corp.
Gtd. Sr. Notes
10.75%, 4/1/04 Ba2 1,200 1,284,000
Algoma Steel, Inc.
Yankee First Mortgage Notes
12.375%, 7/15/05 B1 450 522,000
Bayou Steel Corp.
First Mortgage Notes
10.25%, 3/1/01 B2 400 415,000
Gulf States Steel, Inc.
First Mortgage Notes
13.50%, 4/15/03 B1 1,200 1,236,000
Kaiser Aluminum & Chemical
Corp.
Series D, Sr. Notes
10.875%, 10/15/06 B1 875 953,750
(3) Metallurg, Inc.
Gtd. Sr. Notes
11.00%, 12/1/07 B3 650 671,125
(3) Production Resource Group
L.L.C./PRG Finance Group
Sr. Sub. Notes
11.50%, 1/15/08 Caa2 750 753,750
Republic Engineered Steel,
Inc.
First Mortgage Bonds
9.875%, 12/15/01 Caa1 785 745,750
(3) Sheffield Steel Corp.
First Mortgage Notes
11.50%, 12/1/05 Caa2 750 761,250
WCI Steel, Inc.
Series B, Sr. Secured Notes
10.00%, 12/1/04 B2 725 744,937
</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>
- --------------------------------------------------------------------
- -------------
(3) WHX Corporation
Gtd. Sr. Notes
9.25%, 11/15/07 B2 $ 750 $ 736,875
Weirton Steel Corp.
Sr. Notes
11.375%, 7/1/04 B2 625 650,000
-------------
GROUP TOTAL 9,474,437
-------------
- --------------------------------------------------------------------------------
- -------------
PACKAGING/CONTAINERS (1.9%)
(3) AEP Industries, Inc.
Sr. Sub. Notes
9.875%, 11/15/07 B2 250 257,500
BPC Holding Corp.
Series B, Sr. Secured Notes
12.50%, 6/15/06 Caa3 950 1,045,000
Container Corp. of America
Gtd. Sr. Notes
9.75%, 4/1/03 B1 500 537,500
(8) Crown Packaging Enterprises
Ltd.
Yankee Sr. Secured
Discount Notes
0.00%, 8/1/06 Ca 1,950 468,000
Four M Corp.
Series B, Sr. Secured Notes
12.00%, 6/1/06 B3 500 532,500
Gaylord Container Corp.:
Series B, Sr. Notes
9.75%, 6/15/07 B3 700 684,250
Sr. Sub. Discount Debentures
12.75%, 5/15/05 Caa1 775 829,250
(3) Radnor Holdings Inc.
Series B, Sr. Notes
10.00%, 12/1/03 B2 250 260,000
Sr. Notes
10.00%, 12/1/03 B2 250 260,000
(3) Stone Container
Finance Co.
Yankee Gtd. Sr. Notes
11.50%, 8/15/06 B2 530 556,500
-------------
GROUP TOTAL 5,430,500
-------------
- --------------------------------------------------------------------------------
- -------------
PAPER & FOREST PRODUCTS (1.1%)
(3) Ainsworth Lumber
Co. Ltd.
Yankee Sr. Secured Notes
12.50%, 7/15/07 B3 500 506,250
Crown Paper Co.
Sr. Sub. Notes
11.00%, 9/1/05 B3 550 561,000
Mail-Well Corp.
Sr. Sub. Notes
10.50%, 2/15/04 B1 1,500 1,608,750
Malette, Inc.
Yankee Sr. Secured Debentures
12.25%, 7/15/04 Ba3 180 201,600
<CAPTION>
Moody's Face
Ratings Amount Value
(Unaudited) (000) (Note A-1)
<C> <S> <C> <C> <C>
- --------------------------------------------------------------------
- -------------
QUNO Corp.
Yankee Sr. Notes
9.125%, 5/15/05 Baa3 $ 315 $ 328,781
-------------
GROUP TOTAL 3,206,381
-------------
- --------------------------------------------------------------------------------
- -------------
PUBLISHING & INFORMATION SERVICES (1.6%)
(3)(8) American Lawyer Media
Holdings, Inc.
Sr. Discount Notes
0.00%, 12/15/08 B3 2,725 1,536,219
Belo (A.H.) Corp.
Sr. Notes
6.875%, 6/1/02 Baa2 750 766,875
General Media, Inc.
Sr. Notes
10.625%, 12/31/00 Caa2 625 546,875
(8) InterAct Systems, Inc.
Sr. Discount Notes
0.00%, 8/1/03 N/R 750 305,625
Lamar Advertising Co.
Gtd. Sr. Sub. Notes
9.625%, 12/1/06 B1 250 270,000
Peterson Publishing Co.,
L.L.C./Peterson Capital Corp.
Series B, Gtd. Sr. Sub. Notes
11.125%, 11/15/06 B3 338 382,785
Universal Outdoor, Inc.
Series B, Sr. Sub. Notes
9.75%, 10/15/06 B1 750 843,750
-------------
GROUP TOTAL 4,652,129
-------------
- --------------------------------------------------------------------------------
- -------------
REAL ESTATE (0.2%)
(9) Camden Property Trust
Remarketed Reset Notes
6.097%, 5/9/02 Baa3 600 600,312
-------------
- --------------------------------------------------------------------------------
- -------------
RESTAURANTS, HOTELS & GAMING (5.9%)
(3) Boyd Gaming Corp.
Sr. Sub Notes
9.50%, 7/15/07 B1 150 157,875
(2) Capital Gaming International,
Inc.
Promissory Notes
10.125%, 8/1/95 N/R 1 63
CapStar Hotel Co.
Sr. Sub. Notes
8.75%, 8/15/07 B1 375 387,187
Casino America, Inc.
Gtd. Sr. Notes
12.50%, 8/1/03 B1 1,400 1,519,000
Casino Magic of Louisiana,
Corp.
Series B, Gtd.
First Mortgage Notes
13.00%, 8/15/03 B3 1,900 1,800,250
</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>
- --------------------------------------------------------------------
- -------------
Colorado Gaming &
Entertainment, Co.
Gtd. Sr. Notes
12.00%, 6/1/03 N/R $ 1,480 $ 1,598,800
Elsinore Corp.
Second Mortgage Notes
13.50%, 8/20/01 N/R 790 790,000
Empress River Casino Finance
Corp.
Gtd. Sr. Notes
10.75%, 4/1/02 Ba3 500 538,125
Friendly Ice Cream Corp.
Gtd. Sr. Notes
10.50%, 12/1/07 B1 500 503,750
G.B. Property
Funding Corp.
Gtd. First
Mortgage Notes
10.875%, 1/15/04 Caa1 1,100 924,000
HMC Acquisition Properties,
Series B, Gtd. Sr. Notes
9.00%, 12/15/07 Ba3 450 462,937
(3) Hollywood Park, Inc.
Sr. Sub. Notes
9.50%, 8/1/07 B2 675 722,250
Horseshoe Gaming L.L.C.:
Series B, Gtd. Sr. Notes
12.75%, 9/30/00 B1 750 828,750
(3) Series B, Sr. Sub. Notes
9.375%, 6/15/07 B3 1,500 1,575,000
Majestic Star Casino L.L.C.
Sr. Exchange
Secured Notes
12.75%, 5/15/03 B2 200 215,500
Mohegan Tribal Gaming
Authority
Series B, Sr. Secured Notes
13.50%, 11/15/02 Ba1 900 1,164,375
Prime Hospitality Corp.
Secured First Mortgage Notes
9.25%, 1/15/06 Ba2 975 1,037,155
Red Roof Inns, Inc.
Sr. Exchange Notes
9.625%, 12/15/03 B2 700 724,500
Santa Fe Hotel, Inc.
Gtd. First Mortgage Notes
11.00%, 12/15/00 Caa2 354 322,140
Waterford Gaming L.L.C./
Waterford Gaming Finance
Corp.
Sr. Notes
12.75%, 11/15/03 N/R 1,514 1,672,970
Wyndham Hotel Corp.
Gtd. Sr. Sub. Notes
10.50%, 5/15/06 B2 300 348,000
-------------
GROUP TOTAL 17,292,627
-------------
- --------------------------------------------------------------------
- -------------
<CAPTION>
Moody's Face
Ratings Amount Value
(Unaudited) (000) (Note A-1)
<C> <S> <C> <C> <C>
- --------------------------------------------------------------------
- -------------
RETAIL (2.7%)
Brylane L.P.
Gtd. Sr. Sub. Notes
10.00%, 9/1/03 B1 $ 500 $ 530,625
(3) County Seat Stores, Inc.
Units
12.75%, 11/1/04 N/R 1,100 1,149,500
Dairy Mart Convenience
Stores, Inc.
Sr. Sub. Notes
10.25%, 3/15/04 B3 750 748,125
Great American Cookie Co.
Series B, Sr. Secured
Debentures
10.875%, 1/15/01 B3 1,250 1,278,125
Jitney-Jungle Stores of
America, Inc.:
Gtd. Sr. Sub. Notes
10.375%, 9/15/07 N/R 500 518,750
Gtd. Sr. Notes
12.00%, 3/1/06 B2 250 283,750
K Mart Corp.
Debentures
7.75%, 10/1/12 Ba3 1,175 1,120,656
(3) Mrs. Field's Original Cookies
Gtd. Sr. Notes
10.125%, 12/1/04 B2 300 302,250
(3) Pantry, Inc.
Sr. Sub. Notes
10.25%, 10/15/07 B3 650 666,250
Parisian, Inc.
Sr. Sub. Notes
9.875%, 7/15/03 B1 1,200 1,284,000
-------------
GROUP TOTAL 7,882,031
-------------
- --------------------------------------------------------------------------------
- -------------
TELECOMMUNICATIONS (13.6%)
Advanced Radio
Telecommunications Corp.
Sr. Notes
14.00%, 2/15/07 Caa2 900 864,000
(8) American Communications
Services, Inc.
Sr. Discount Notes
0.00%, 11/1/05 N/R 1,700 1,368,500
Brooks Fiber Properties, Inc.:
(8) Sr. Discount Notes:
0.00%, 3/1/06 N/R 1,000 830,000
0.00%, 11/1/06 N/R 1,625 1,295,937
Sr. Notes
10.00%, 6/1/07 N/R 1,050 1,202,250
(8) COLT Telecom Group plc
Yankee Units
0.00%, 12/15/06 B3 400 313,000
Cellular Communications
International, Inc.
Units
Zero Coupon, 8/15/00 B3 2,000 1,605,000
</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>
- --------------------------------------------------------------------
- -------------
(3) Concentric Network Corp.
Units
12.75%, 12/15/07 N/R $ 750 $ 770,625
(8) Dial Call Communications
Sr. Discount Notes
0.00%, 4/15/04 B3 1,100 1,050,500
(8) EchoStar Satellite
Broadcasting Corp.
Sr. Secured Discount Notes
0.00%, 3/15/04 B3 750 639,375
Fox/Liberty Networks L.L.C.
Sr. Notes
8.875%, 8/15/07 B1 500 500,000
(3)(8) GST Telecommunications, Inc.
Conv. Sr. Sub. Discount Notes
0.00%, 12/15/05 N/R 200 154,000
(8) GST USA, Inc.
Gtd. Sr. Discount Notes
0.00%, 12/15/05 N/R 1,800 1,381,500
Geotek Communications, Inc.
Conv. Sr. Sub. Notes
12.00%, 12/15/01 Caa1 1,100 880,000
(3) Globalstar, L.P. / Globalstar
Capital Corp.
Sr. Notes
10.75%, 11/1/04 B3 1,000 980,000
(8) ICG Holdings, Inc.:
Gtd. Sr. Exchange Discount
Notes
0.00%, 5/1/06 N/R 600 453,000
0.00%, 3/15/07 N/R 2,000 1,360,000
Gtd. Sr. Discount Notes
0.00%, 9/15/05 N/R 650 533,813
ITC DeltaCom, Inc.
Sr. Notes
11.00%, 6/1/07 B2 400 442,000
(3) Intermedia Communications,
Inc.
Sr. Notes
8.875%, 11/1/07 B2 200 206,500
Iridium LLC / Iridium Capital
Corp.
Series B, Sr. Notes
14.00%, 7/15/05 B3 500 548,750
(8) Jordan Telecommunications
Products, Inc.
Series B, Sr. Discount Notes
0.00%, 8/1/07 N/R 625 503,125
(8) McCaw International Ltd.
Sr. Discount Notes
0.00%, 4/15/07 N/R 1,000 585,000
McLeod USA, Inc.:
(3) Sr. Notes
9.25%, 7/15/07 B3 400 419,000
<CAPTION>
Moody's Face
Ratings Amount Value
(Unaudited) (000) (Note A-1)
<C> <S> <C> <C> <C>
- --------------------------------------------------------------------
- -------------
(8) Sr. Discount Notes
0.00%, 3/1/07 B3 $ 400 $ 291,000
(3)(8) MetroNet Communications Corp.
Sr. Discount Notes
0.00%, 11/1/07 N/R 1,100 673,750
(8) Microcell Telecommunications,
Inc.
Series B, Yankee Sr. Discount
Notes
0.00%, 6/1/06 N/R 400 270,000
NEXTLINK Communications, Inc.
Sr. Notes
12.50%, 4/15/06 B3 350 400,312
(3)(8) Nextel Communications, Inc.
Sr. Discount Notes
0.00%, 8/15/04 B3 2,200 1,958,000
Orion Network Systems, Inc.
Gtd. Sr. Notes
11.25%, 1/15/07 B2 500 568,125
(8) Pagemart Nationwide, Inc.
Sr. Discount Notes
0.00%, 2/1/05 B3 1,750 1,566,250
Petersburg Long Distance,
Inc.:
(8) Units
0.00%, 6/1/04 N/R 1,610 1,529,500
Conv. Sub. Notes
9.00%, 6/1/06 N/R 230 286,638
PriCellular Wireless Corp.:
(8) Discount Notes
0.00%, 10/1/03 B1 250 274,062
Sr. Notes
10.75%, 11/1/04 B3 650 659,750
(3)(8) Price Communications
Corp./Price Communications
Cellular Holdings, Inc.
Units
0.00%, 8/1/07 Caa1 1,150 718,750
(3)(8) Qwest Communications
International, Inc.
Sr. Discount Notes
0.00%, 10/15/07 B2 600 408,000
Rogers Cablesystems Ltd.
Series B, Yankee Sr.
Secured 2nd Priority Notes
10.00%, 3/15/05 Ba3 300 330,000
Rogers Cantel, Inc.
Yankee Sr. Secured
Debentures
9.375%, 6/1/08 Ba3 350 371,000
Sprint Spectrum L.P./
Sprint Spectrum Finance Corp.
Sr. Notes
11.00%, 8/15/06 B2 1,400 1,575,000
</TABLE>
The accompanying notes are an integral part of the financial statements.
11
<PAGE>
<TABLE>
<CAPTION>
Moody's Face
Ratings Amount Value
(Unaudited) (000) (Note A-1)
<C> <S> <C> <C> <C>
- --------------------------------------------------------------------
- -------------
(3) Star Choice Communications,
Inc.
Units
13.00%, 12/15/05 B3 $ 500 $ 516,250
(3) TCI Satellite Entertainment,
Inc.:
Sr. Sub. Discount Notes
(8) 0.00%, 2/15/07 B3 250 167,500
Sr. Sub. Notes
10.875%, 2/15/07 B3 700 742,000
(3) Talton Holdings Inc.
Gtd. Sr. Notes
11.00%, 6/30/07 B2 500 538,750
Teleport Communications
Group, Inc.:
Sr. Notes
9.875%, 7/1/06 B1 750 846,562
(8) Sr. Discount Notes
0.00%, 7/1/07 Baa3 1,150 937,250
(3)(8) Telesystem International
Wireless, Inc.
Sr. Discount Notes
0.00%, 6/30/07 Caa1 400 251,000
(3) Teletrac Inc./Teletrac
Holdings, Inc.
Sr. Notes
14.00%, 8/1/07 Caa2 350 364,000
UNIFI Communications, Inc.
Sr. Notes
14.00%, 3/1/04 N/R 1,000 986,250
(3)(8) USN Communications Inc.
Units
0.00%, 8/15/04 Caa1 760 583,300
(8) Videotron Holdings plc
Yankee Discount Notes
0.00%, 8/15/05 Baa3 1,500 1,326,735
Western Wireless Corp.
Sr. Sub. Notes
10.50%, 2/1/07 B3 350 378,875
(8) WinStar Communications, Inc.
Sr. Discount Notes
0.00%, 10/15/05 Caa1 1,500 1,192,500
-------------
GROUP TOTAL 39,596,984
-------------
- --------------------------------------------------------------------------------
- -------------
TEXTILES/APPAREL (0.6%)
(3) Maxim Group, Inc.
Gtd. Sr. Sub. Notes
9.25%, 10/15/07 B2 700 693,000
Pillowtex Corp. Gtd.
Gtd. Sr. Sub. Notes
10.00%, 11/15/06 B2 500 535,000
William Carter Co.
Series A, Sr. Sub. Notes
10.375%, 12/1/06 B3 500 528,750
-------------
GROUP TOTAL 1,756,750
-------------
- --------------------------------------------------------------------
- -------------
<CAPTION>
Moody's Face
Ratings Amount Value
(Unaudited) (000) (Note A-1)
<C> <S> <C> <C> <C>
- --------------------------------------------------------------------
- -------------
TRANSPORTATION (1.8%)
CHC Helicopter Corp.
Yankee Sr. Sub. Notes
11.50%, 7/15/02 B3 $ 750 $ 798,750
Norfolk Southern Corp.:
Notes
7.875%, 2/15/04 Baa1 700 750,750
7.05%, 5/1/37 Baa1 815 864,919
(3) Pegasus Shipping Ltd.
Gtd. Sr. Mortgage Notes
11.875%, 11/15/04 Caa1 300 296,625
USAir, Inc.
Gtd. Sr. Notes
10.00%, 7/1/03 B3 1,500 1,545,000
(3) ValueJet, Inc.
Sr. Notes
10.50%, 4/15/01 B2 1,000 1,000,000
-------------
GROUP TOTAL 5,256,044
-------------
- --------------------------------------------------------------------------------
- -------------
WASTE MANAGEMENT (0.2%)
Allied Waste North
America, Inc.
Gtd. Sr. Sub. Notes
10.25%, 12/1/06 B2 550 602,250
-------------
- --------------------------------------------------------------------------------
- -------------
TOTAL CORPORATE OBLIGATIONS
(Cost $205,212,236) 214,259,416
-------------
- --------------------------------------------------------------------
- -------------
MUNICIPAL SECURITIES (0.7%)
--------------------------------------------------------------------------------
- -------------
New Jersey Economic
Development Authority
Series B, Revenue Bonds:
Zero Coupon, 2/15/03 Aaa 1,605 1,186,047
Zero Coupon, 2/15/07 Aaa 1,280 728,153
-------------
- --------------------------------------------------------------------------------
- -------------
TOTAL MUNICIPAL SECURITIES
(Cost $1,821,209) 1,914,200
-------------
- --------------------------------------------------------------------
- -------------
GOVERNMENT & AGENCY SECURITIES (7.6%)
- --------------------------------------------------------------------------------
- -------------
FEDERAL HOME LOAN MORTGAGE CORPORATION (2.1%)
REMIC-PAC:
Series 1262, Class H 4.50%,
11/15/20 Aaa 850 774,563
Series 1660, Class E
6.00%, 1/15/07 Aaa 1,370 1,366,575
Various Pools:
7.00%, 3/1/11 Aaa 717 730,587
7.00%, 5/1/12 Aaa 1,325 1,347,128
8.50%, 5/1/17 Aaa 990 1,046,155
8.50%, 9/1/20 Aaa 243 256,188
8.50%, 7/1/21 Aaa 666 703,252
-------------
GROUP TOTAL 6,224,448
-------------
- --------------------------------------------------------------------
- -------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
12
<PAGE>
<TABLE>
<CAPTION>
Moody's Face
Ratings Amount Value
(Unaudited) (000) (Note A-1)
<C> <S> <C> <C> <C>
- --------------------------------------------------------------------
- -------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION (2.8%)
30-Year TBA
6.50%, 1/15/28 Aaa $ 3,050 $ 3,011,875
Various Pools:
7.00%, 3/1/11 Aaa 1,842 1,874,420
8.50%, 11/1/17 Aaa 334 351,791
REMIC-PAC Series 1989-23,
Class D
10.20%, 9/25/18 Aaa 1,769 1,825,061
STRIPS, Series H, Class 2
11.50%, 5/1/09 Aaa 888 978,140
-------------
GROUP TOTAL 8,041,287
-------------
- --------------------------------------------------------------------------------
- -------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (0.1%)
Various Pools:
10.50%, 9/15/15-8/15/16 Aaa 227 255,040
-------------
- --------------------------------------------------------------------------------
- -------------
TENNESSEE VALLEY AUTHORITY (0.3%)
Power Bonds, 1996
Series A
5.88%, 4/1/36 Aaa 840 841,050
-------------
- --------------------------------------------------------------------------------
- -------------
UNITED STATES DEPARTMENT OF VETERANS AFFAIRS (0.1%)
Vendee Mortgage Trust REMIC
Series 1994-2, Class 3F
6.50%, 10/15/15 N/R 400 399,000
-------------
- --------------------------------------------------------------------------------
- -------------
UNITED STATES TREASURY NOTES (2.2%)
5.625%, 10/31/99 Aaa 790 789,257
7.875%, 11/15/04 Aaa 5,010 5,601,030
-------------
GROUP TOTAL 6,390,287
-------------
- --------------------------------------------------------------------------------
- -------------
TOTAL GOVERNMENT & AGENCY SECURITIES
(Cost $21,884,211) 22,151,112
-------------
- --------------------------------------------------------------------------------
- -------------
COLLATERALIZED MORTGAGE OBLIGATIONS (2.7%)
- --------------------------------------------------------------------
- -------------
Asset Securitization Corp.:
Series 1997-D5, Class A1D
6.85%, 2/14/41 Aaa 650 665,944
Series 1996-MD6, Class A6
7.108%, 11/13/26 Baa2 420 434,503
Chase Commercial Mortgage
Securities Corp.
Series 1996-2, Class A2
6.90%, 9/19/06 N/R 550 558,745
<CAPTION>
Moody's Face
Ratings Amount Value
(Unaudited) (000) (Note A-1)
<C> <S> <C> <C> <C>
- --------------------------------------------------------------------
- -------------
Drexel, Burnham & Lambert
Trust
REMIC-PAC, Series S,
Class 2
9.00%, 8/1/18 Aaa $ 4,355 $ 4,356,372
Fleetwood Credit Corp.
Grantor Trust
Series 1997-B, Class A
6.40%, 5/15/13 Aaa 916 921,873
Kidder Peabody
Acceptance Corp.
Series 1994-C1 Class C1 B
6.85%, 2/1/06 N/R 910 922,740
-------------
- --------------------------------------------------------------------------------
- -------------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS
(Cost $8,115,395) 7,860,177
-------------
- --------------------------------------------------------------------------------
- -------------
ASSET BACKED OBLIGATIONS (6.1%)
- --------------------------------------------------------------------
- -------------
American Express Credit
Account Master Trust,
Credit Card Receivables
Series 1997-1, Class A
6.40%, 4/15/05 Aaa 370 374,969
California Infrastructure and
Economic Development Bank,
Special Purpose Trust,
Rate Reduction Certificates:
Series 1997-1, Class A6
6.32%, 9/25/05 Aaa 700 705,691
Series 1997-1, Class A5
6.28%, 9/25/05 Aaa 340 342,179
Series 1997-1, Class A5
6.19%, 9/25/05 Aaa 210 210,525
Capita Equipment
Receivables Trust,
Series 1996-1, Class A3
6.11%, 7/15/99 Aaa 1,250 1,250,588
(3) Constellation
Finance L.L.C.
Airline Receivable
Asset Backed Notes
Series 1997-1
9.80%, 12/14/02 N/R 500 502,500
First U.S.A. Credit Card
Master Trust,
Visa/MasterCard
Credit Card Receivables,
Series 1997-6, Class A
6.42%, 3/17/05 Aaa 730 738,366
</TABLE>
The accompanying notes are an integral part of the financial statements.
13
<PAGE>
<TABLE>
<CAPTION>
Moody's Face
Ratings Amount Value
(Unaudited) (000) (Note A-1)
<C> <S> <C> <C> <C>
- --------------------------------------------------------------------
- -------------
Green Tree Financial Corp.
Manufactured Housing
Installment Sale Contracts:
Series 1997-3, Class A3
6.73%, 7/15/28 Aaa $ 1,650 $ 1,667,012
Series 1995-7, Class A3
6.35%, 11/15/26 Aaa 1,300 1,304,129
Series 1993-4, Class B1
7.20%, 1/15/19 Baa3 2,000 2,015,000
Series 1995-7, Class A2
6.15%, 11/15/26 Aaa 778 778,395
Series 1995-4, Class A3
6.30%, 7/15/25 Aaa 350 350,217
Green Tree Recreational,
Equipment & Consumer
Trust, Consumer Products &
Equipment Retail Installment
Sale Contracts,
Series 1997-C, Class A-1
6.49%, 2/15/18 N/R 1,027 1,034,545
Metris Master Trust,
MasterCard Credit Card
Receivables,
Series 1997-1, Class A
6.87%, 10/20/05 Aaa 900 923,904
Nationscredit Grantor Trust,
Boat Retail Installment Sale
Contracts,
Series 1996-1, Class A
5.85%, 9/15/11 Aaa 801 794,584
Sears Credit Account Master
Trust, Credit Card
Receivables:
Series 1996-1, Class A
6.20%, 2/16/06 Aaa 1,750 1,755,191
Series 1997-1, Class A
6.20%, 7/16/07 Aaa 710 709,553
Standard Credit Card Master
Trust, Visa/ MasterCard
Credit Card Receivables:
Series 1994-2, Class A
7.25%, 4/7/08 Aaa 460 486,593
Series 1994-4, Class A
8.25%, 11/7/03 Aaa 570 610,613
Toyota Auto Lease Trust,
Automobile Receivables,
Series 1997-A, Class A2
6.35%, 4/26/04 Aaa 1,150 1,152,151
-------------
- --------------------------------------------------------------------
- -------------
TOTAL ASSET BACKED OBLIGATIONS
(Cost $17,421,396) 17,706,705
-------------
- --------------------------------------------------------------------
- -------------
</TABLE>
<TABLE>
<CAPTION>
Shares/ Value
Units (Note A-1)
<C> <S> <C> <C>
- -------------------------------------------------------------------------
- ----------------
COMMON STOCKS (1.0%)
- -------------------------------------------------------------------------
- ----------------
BROADCASTING (0.0%)
(1) Pegasus Communications Corp. 564 $ 6
-------------
- --------------------------------------------------------------------
- -------------
CABLE (0.0%)
(1) OpTel, Inc. 500 5
-------------
- -------------------------------------------------------------------------
- ----------------
CONSUMER PRODUCTS & SERVICES (0.0%)
(1) Coinstar, Inc. 11,887 98,068
-------------
- --------------------------------------------------------------------
- -------------
FINANCIAL SERVICES (0.0%)
(1)(5) Westfed Holdings, Inc.
Class B (acquired 9/20/88,
$383) 12,670 0
-------------
- --------------------------------------------------------------------
- -------------
FOOD & BEVERAGES (0.6%)
(1)(5) Dr. Pepper Bottling Holdings,
Inc.
Class A (acquired 2/25/97,
cost $1,181,250) 75,000 1,725,000
(1)(3) Specialty Foods Corp. 30,000 3,000
-------------
GROUP TOTAL 1,728,000
-------------
- -------------------------------------------------------------------------
- ----------------
INDUSTRIAL GOODS & MATERIALS (0.1%)
(1)(5)(7) CIC I Acquisition Corp.
(acquired 10/18/89, cost
$1,076,715) 2,944 200,192
-------------
- -------------------------------------------------------------------------
- ----------------
METALS & MINING (0.0%)
Sheffield Steel Corp. 6,250 12,500
-------------
- -------------------------------------------------------------------------
- ----------------
PACKAGING/CONTAINERS (0.0%)
(1) Crown Packaging Enterprises
Ltd. 253,500 2,535
-------------
- -------------------------------------------------------------------------
- ----------------
PAPER & FOREST PRODUCTS (0.1%)
(1) Mail-Well, Inc. 10,653 428,112
-------------
- -------------------------------------------------------------------------
- ----------------
RESTAURANTS, HOTELS & GAMING (0.1%)
(1) Casino America, Inc. 14,947 35,962
(1) Colorado Gaming &
Entertainment, Co. 26,465 145,558
(1) Elsinore Corp. 86,538 194,711
(1) Motels of America, Inc. 500 9,000
-------------
GROUP TOTAL 385,231
-------------
- -------------------------------------------------------------------------
- ----------------
RETAIL (0.0%)
(1)(5) Jewel Recovery L.P.
(acquired 7/30/93, cost $0) 49,559 0
-------------
- --------------------------------------------------------------------
- -------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
14
<PAGE>
<TABLE>
<CAPTION>
Shares/ Value
Units (Note A-1)
- --------------------------------------------------------------------
<C> <S> <C> <C>
- -------------
TELECOMMUNICATIONS (0.1%)
(1) Nextel Communications, Inc.
Class A 6,661 $ 124,736
(1) Pagemart Nationwide, Inc. 7,000 59,500
-------------
GROUP TOTAL 184,236
-------------
- -------------------------------------------------------------------------
- ----------------
TOTAL COMMON STOCKS
(Cost $3,303,075) 3,038,885
-------------
- --------------------------------------------------------------------
- -------------
PREFERRED STOCKS (5.0%)
- -------------------------------------------------------------------------
- ----------------
AEROSPACE/DEFENSE (0.4%)
GPA Group plc
7% Second Preference Cum.
Conv. 2,125,000 1,136,875
-------------
- -------------------------------------------------------------------------
- ----------------
BROADCASTING (1.2%)
(1) Pegasus Communications Corp.:
Units 250 278,125
12.75% Cum. Exchangeable,
Series A 28 30,240
Source Media, Inc.
13.5% Units 55,000 1,388,750
Spanish Broadcasting System,
Inc.
14.25% Cum. Exchangeable 16,000 1,704,000
-------------
GROUP TOTAL 3,401,115
-------------
- -------------------------------------------------------------------------
- ----------------
CABLE (1.4%)
(3) Adelphia Communications Corp.
13% Cum. Exchangeable, Series
B 5,000 596,250
DIVA Systems Corp.
Series D 56,913 626,043
NTL, Inc.
13% Exchangeable 1,604 1,852,100
(3) Nextel Communications, Inc.
13% Cum. Exchangeable, Series
D 824 952,020
-------------
GROUP TOTAL 4,026,413
-------------
- -------------------------------------------------------------------------
- ----------------
CONSUMER PRODUCTS & SERVICES (0.1%)
Renaissance Cosmetics, Inc.
14% Cumulative 354 177,000
-------------
- -------------------------------------------------------------------------
- ----------------
FINANCIAL SERVICES (0.0%)
(5)(7) West Fed Holdings, Inc.
Class A (acquired
9/20/88-6/18/93, cost
$3,611,992) 42,759 42,759
-------------
- -------------------------------------------------------------------------
- ----------------
PAPER & FOREST PRODUCTS (0.3%)
(1) SD Warren Co.
14% Cum. Exchangeable, Series
B 21,459 1,051,491
-------------
- -------------------------------------------------------------------------
- ----------------
PUBLISHING & INFORMATION SERVICES (0.2%)
Primedia, Inc.
10% Cum. Exchangeable, Series
D 5,000 516,250
-------------
- -------------------------------------------------------------------------
- ----------------
RESTAURANTS, HOTELS & GAMING (0.1%)
AmeriKing, Inc.
13% Cum. Exchangeable 16,510 437,507
-------------
- --------------------------------------------------------------------
- -------------
<CAPTION>
Shares/ Value
Units (Note A-1)
<C> <S> <C> <C>
- --------------------------------------------------------------------
- -------------
RETAIL (0.5%)
(1) Jitney-Jungle Stores of
America, Inc.
15.00% Class A 9,250 $ 1,406,000
-------------
- -------------------------------------------------------------------------
- ----------------
TELECOMMUNICATIONS (0.8%)
(3) Intermedia Communications,
Inc.
7% Jr. Convertible, Series E 44,000 1,265,000
13.5% Exchangeable, Series B 2,790 344,819
NEXTLINK Communications, Inc.
14% Cum. Exchangeable 10,536 653,232
-------------
GROUP TOTAL 2,263,051
-------------
- -------------------------------------------------------------------------
- ----------------
TOTAL PREFERRED STOCKS
(Cost $15,809,358) 14,458,461
-------------
- --------------------------------------------------------------------
- -------------
RIGHTS (0.0%)
- -------------------------------------------------------------------------
- ----------------
Terex Corp.,
expiring 5/15/02 (Cost $0) 6,000 120,000
-------------
- --------------------------------------------------------------------
- -------------
WARRANTS (0.5%)
- -------------------------------------------------------------------------
- ----------------
(1) Advanced Radio
Telecommunications Corp.,
expiring 2/15/07 13,500 138,915
(1) American Communications
Services, Inc.
expiring 11/1/05 2,000 180,000
(1) American Telecasting, Inc.
expiring 6/23/99 525 0
(1) Australis Holdings Pty Ltd.
expiring 10/30/01 2,250 15
(1) Boomtown, Inc.
expiring 11/1/98 500 5
(1) CHC Helicopter Corp.
expiring 12/15/00 6,000 19,500
(1)(7) Chi Energy, Inc.
Series B
expiring 11/8/03 7,578 18,195
expiring 11/8/05 4,919 11,811
(1) Capital Gaming International,
Inc.
expiring 2/1/99 5,704 0
(1) Casino America, Inc.
expiring 5/3/01 2,646 26
(1)(7) Consolidated Hydro, Inc.
expiring 12/31/03 5,400 0
(1) County Seat Stores, Inc.
expiring 10/15/98 1,520 15
(1) Crown Packaging Holdings Ltd.
expiring 11/1/03 2,000 250
(1) Dairy Mart Convenience Stores,
Inc.
expiring 5/13/98 11,666 5,834
(1) Elsinore Corp.
expiring 10/8/98 79,941 0
(1) General Media, Inc.:
expiring 12/22/00 500 500
expiring 12/31/00 625 625
(1) Golden Ocean Group, Ltd.
expiring 8/31/01 1,032 5,160
</TABLE>
The accompanying notes are an integral part of the financial statements.
15
<PAGE>
<TABLE>
<CAPTION>
Shares/ Value
Units (Note A-1)
- --------------------------------------------------------------------
<C> <S> <C> <C>
- -------------
(1) Great American Cookie Co.
expiring 1/30/00 225 $ 2,250
(1) Hemmeter Enterprises, Inc.
expiring 12/15/99 9,000 0
(1) IHF Capital, Inc.
expiring 11/14/99 500 27,500
(1) In-Flight Phone Corp.
expiring 8/31/02 1,000 0
(1) IntelCom Group, Inc.
expiring 9/1/05 2,145 30,030
(1) Interact Systems, Inc.
expiring 8/1/03 750 0
(1) McCaw International Ltd.
expiring 4/15/07 1,000 2,500
(1) Microcell Telecommunications:
expiring 12/31/97 1,600 16
expiring 12/31/97 1,600 21,904
(1) NEXTLINK Communications, Inc.
expiring 2/1/09 9,500 95
(1) Nextel Communications, Inc.
expiring 4/25/99 750 2,250
(1) Orion Network Systems, Inc.
expiring 1/15/07 500 6,000
(1) Price Communications Corp.
expiring 8/1/07 3,956 39,560
(1) Renaissance Cosmetics, Inc.:
expiring 4/3/01 3,000 30,000
expiring 8/31/06 300 3
(1) SD Warren Co.
expiring 12/15/06 12,000 60,000
(1) Spanish Broadcasting Systems:
expiring 6/29/99 1,500 525,000
expiring 6/30/99 1,500 352,500
(1) Teletrac, Inc.
expiring 8/1/07 350 1,925
(1) UNIFI Communications, Inc.
expiring 3/1/07 1,000 10
(1) UROHEALTH Systems, Inc.
expiring 4/10/04 150 375
(1) USN Communications, Inc.
expiring 10/15/04 7,600 76
(1) United International Holdings
expiring 11/15/99 2,950 35,400
(1) Wright Medical Technology
expiring 6/30/03 618 61,765
-------------
- -------------------------------------------------------------------------
- ----------------
TOTAL WARRANTS
(Cost $1,911,600) 1,580,010
-------------
- -------------------------------------------------------------------------
- ----------------
<CAPTION>
Moody's Face
Ratings Amount
(Unaudited) (000)
<C> <S> <C> <C> <C>
- --------------------------------------------------------------------------------
- ----------------
SHORT-TERM INVESTMENTS (0.6%)
--------------------------------------------------------------------------------
- ----------------
Federal Home Loan Bank
Discount Note
Zero Coupon, 1/2/98
(Cost $1,723,725) N/R $ 1,724 1,723,725
------------
- --------------------------------------------------------------------
- -------------
TOTAL DOMESTIC SECURITIES
(Cost $277,202,205) 284,812,691
------------
- --------------------------------------------------------------------
- -------------
<CAPTION>
Moody's Face
Ratings Amount Value
(Unaudited) (000) (Note A-1)
<C> <S> <C> <C> <C>
- --------------------------------------------------------------------
- -------------
FOREIGN SECURITIES (2.1%)
--------------------------------------------------------------------------------
- ----------------
CORPORATE OBLIGATIONS (1.4%)
--------------------------------------------------------------------------------
- ----------------
FINLAND (0.1%)
(9) Okobank
Perpetual Medium Term Notes
6.406% A3 USD 530 $ 524,700
------------
- --------------------------------------------------------------------
- -------------
FRANCE (0.3%)
L'Auxiliare du Credit Foncier
de France:
Sr. Unsub. Notes
8.00%, 1/14/02 A3 USD 320 335,400
(9) Gtd. Sub. Notes
5.75%, 10/22/02 Baa3 USD 680 656,743
------------
992,143
------------
- --------------------------------------------------------------------
- -------------
SOUTH KOREA (0.1%)
Korea Development Bank
Global Bonds
6.50%, 11/15/02 Ba1 USD 230 182,563
------------
- --------------------------------------------------------------------
- -------------
SWEDEN (0.8%)
(9) ForeningsSparbanken AB
Perpetual Jr. Sub.
Medium Term Notes 6.656% A3 USD 700 699,580
(9) Skandinaviska Enskilda Banken
AB
Perpetual Sub. Notes:
7.50% N/R USD 1,250 1,273,475
6.625% Baa1 USD 400 399,188
------------
2,372,243
------------
- --------------------------------------------------------------------
- -------------
UNITED KINGDOM (0.1%)
(9) National Westminster Bank plc
Series A, Perpetual Sub.
Notes
6.063% Aa3 USD 230 202,998
------------
- --------------------------------------------------------------------
- -------------
TOTAL CORPORATE OBLIGATIONS
(Cost $4,243,108) 4,274,647
------------
--------------------------------------------------------------------------------
- ----------------
GOVERNMENT OBLIGATIONS (0.7%)
--------------------------------------------------------------------------------
- ----------------
POLAND (0.5%)
(3)(8) Republic of Poland
Past Due Interest Bonds
4.00%, 10/27/14 Baa3 USD 1,555 1,347,896
------------
- --------------------------------------------------------------------
- -------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
16
<PAGE>
<TABLE>
<CAPTION>
Moody's Face
Ratings Amount Value
(Unaudited) (000) (Note A-1)
<C> <S> <C> <C> <C>
- --------------------------------------------------------------------
- -------------
VENEZUELA (0.2%)
(9) Republic of Venezuela
Debt Conversion Bonds, Series
DL
6.813%, 12/18/07 Ba2 USD 714 $ 640,629
------------
- --------------------------------------------------------------------
- -------------
TOTAL GOVERNMENT OBLIGATIONS
(Cost $2,014,989) 1,988,525
------------
- --------------------------------------------------------------------
- -------------
TOTAL FOREIGN SECURITIES
(Cost $6,258,097) 6,263,172
------------
- --------------------------------------------------------------------
- -------------
TOTAL INVESTMENTS (99.7%)
(Cost $283,460,302) 291,075,863
------------
- --------------------------------------------------------------------
- -------------
OTHER ASSETS IN EXCESS OF LIABILITIES (0.3%)
882,877
------------
- --------------------------------------------------------------------
- -------------
NET ASSETS (100%)
Applicable to 34,611,843 issued and outstanding $.001
par value shares (authorized 100,000,000 shares) $291,958,740
------------
------------
- --------------------------------------------------------------------
- -------------
</TABLE>
N/R--Not Rated.
PAC--Planned Amortization Class.
REMIC--Real Estate Mortgage Investment Conduit.
STRIPS--Separate Trading of Registered Interest and Principal Securities.
TBA--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, 1997 aggregated $5,870,339. Total market
value of restricted securities owned at December 31, 1997 was $1,967,951
or 0.7% of net assets.
(6) All or a portion of this security was pledged as collateral for delayed
delivery of 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 lower 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, 1997
The accompanying notes are an integral part of the financial statements.
17
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES December 31, 1997
<S> <C>
- ---------------------------------------------------------------------------------------------------
ASSETS:
Investments at Value
(Cost $283,460,302) (Note A-1)............................................ $291,075,863
Interest Receivable (Note A-4).............................................. 4,454,815
Receivable for Investments Sold............................................. 693,896
Receivable for Paydowns..................................................... 53,255
Other Assets................................................................ 46,441
- ---------------------------------------------------------------------------------------------------
Total Assets............................................................ 296,324,270
- ---------------------------------------------------------------------------------------------------
LIABILITIES:
Investments Purchased..................................................... 2,989,953
Bank Overdraft............................................................ 742,019
Investment Advisory Fees (Note B)......................................... 366,532
Shareholders' Reports..................................................... 94,921
Professional Fees......................................................... 71,048
Shareholder Servicing Fees................................................ 38,798
Custodian Fees............................................................ 32,182
Administrative Fees (Note C).............................................. 30,077
- ---------------------------------------------------------------------------------------------------
Total Liabilities....................................................... 4,365,530
- ---------------------------------------------------------------------------------------------------
NET ASSETS...................................................................... $291,958,740
-----------------
-----------------
NET ASSETS CONSIST OF:
Capital Shares at $.001 Par Value........................................... $ 34,612
Capital Paid in Excess of Par Value......................................... 294,867,066
Undistributed Net Investment Income......................................... 292,866
Accumulated Net Realized Loss............................................... (10,851,365)
7,615,561
Unrealized Appreciation on Investments......................................
NET ASSETS APPLICABLE TO 34,611,843 ISSUED AND OUTSTANDING SHARES (AUTHORIZED
100,000,000 SHARES)........................................................... $291,958,740
-----------------
-----------------
NET ASSET VALUE PER SHARE....................................................... $ 8.44
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS Year Ended
December 31,
1997
<S> <C>
- --------------------------------------------------------------------------------------------------
INVESTMENT INCOME:
Interest (Note A-4)......................................................... $26,028,572
Dividends (Note A-4)........................................................ 368,154
- --------------------------------------------------------------------------------------------------
Total Income.............................................................. 26,396,726
- --------------------------------------------------------------------------------------------------
EXPENSES:
Investment Advisory Fees (Note B)........................................... 1,419,055
Administrative Fees (Note C)................................................ 344,665
Shareholder Servicing Fees.................................................. 168,380
Shareholders' Reports....................................................... 139,705
Professional Fees........................................................... 79,635
Custodian Fees.............................................................. 71,803
Directors' Fees and Expenses................................................ 38,001
Other....................................................................... 112,985
- --------------------------------------------------------------------------------------------------
Total Expenses............................................................ 2,374,229
- --------------------------------------------------------------------------------------------------
Expense Offset (Note A-4)................................................... (2,473)
- --------------------------------------------------------------------------------------------------
Net Expenses.............................................................. 2,371,756
- --------------------------------------------------------------------------------------------------
Net Investment Income..................................................... 24,024,970
- --------------------------------------------------------------------------------------------------
NET REALIZED GAIN ON INVESTMENTS................................................ 381,883
- --------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION/ DEPRECIATION ON INVESTMENTS.................. 12,659,532
- --------------------------------------------------------------------------------------------------
Net Realized Gain and Change in Unrealized Appreciation/Depreciation............ 13,041,415
- --------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations............................ $37,066,385
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
18
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
<S> <C> <C>
Year Ended
December 31, Year Ended
1997 December 31, 1996
- ----------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net Investment Income....................................................... $ 24,024,970 $ 20,314,612
Net Realized Gain (Loss) on Investments..................................... 381,883 1,381,989
Change in Unrealized Appreciation / Depreciaion on Investments.............. 12,659,532 2,288,346
- ----------------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS............................ 37,066,385 23,984,947
- ----------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
Net Investment Income....................................................... (26,270,243) (23,166,099)
- ----------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS:
Common Stock Issued through Rights Offering (10,160,570 shares)............. -- 69,923,776
Offering Costs.............................................................. -- (550,000)
Net Increase in Shares Resulting From the Reinvestment of Dividends (65,906
shares).................................................................... 529,012 --
- ----------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Capital Share Transactions...... 529,012 69,373,776
- ----------------------------------------------------------------------------------------------------------------------
Total Increase in Net Assets.............................................. 11,325,154 70,192,624
- ----------------------------------------------------------------------------------------------------------------------
NET ASSETS:
Beginning of Year........................................................... 280,633,586 210,440,962
- ----------------------------------------------------------------------------------------------------------------------
End of Year (Including undistributed net investment income of $292,866 and
$2,882,156, respectively).................................................. $291,958,740 $280,633,586
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
FINANCIAL HIGHLIGHTS ------------------------------------------------------
PER SHARE OPERATING PERFORMANCE: 1997 1996 1995Section 1994 1993
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF YEAR................ $ 8.12 $ 8.63 $ 8.05 $ 9.00 $ 8.42
- ----------------------------------------------------------------------------------------------------------
Offering Costs.................................... -- (0.02) -- -- --
- ----------------------------------------------------------------------------------------------------------
Investment Activities:
Net Investment Income......................... 0.69 0.75 0.86 0.83 0.91
Net Realized and Unrealized Gain (Loss) on
Investments.................................. 0.39 0.18 0.48 (1.06) 0.57
- ----------------------------------------------------------------------------------------------------------
Total from Investment Activities............ 1.08 0.93 1.34 (0.23) 1.48
- ----------------------------------------------------------------------------------------------------------
Distributions:
Net Investment Income......................... (0.76) (0.90) (0.76) (0.72) (0.90)
- ----------------------------------------------------------------------------------------------------------
Decrease in Net Asset Value due to Shares Issued
through Rights Offering.......................... -- (0.52) -- -- --
- ----------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR...................... $ 8.44 $ 8.12 $ 8.63 $ 8.05 $ 9.00
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
PER SHARE MARKET VALUE, END OF YEAR............... $ 8.75 $ 7.63 $ 7.88 $ 7.00 $ 8.50
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:
Net Asset Value (1)........................... 14.03% 10.59%+ 17.41% (2.67)% 18.47%
Market Value.................................. 25.90% 10.05%+ 24.34% (9.48)% 12.46%
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA:
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
Net Assets, End of Year (Thousands)............... $291,959 $280,634 $210,441 $196,379 $219,355
- ----------------------------------------------------------------------------------------------------------
Ratio of Expenses to Average Net Assets Including
Expense Offsets.................................. 0.84% 0.94% 0.92% 0.83% 0.88%
Ratio of Expenses to Average Net Assets........... 0.84% 0.95% -- -- --
Ratio of Net Investment Income to Average Net
Assets........................................... 8.47% 9.23% 10.22% 9.75% 10.34%
Portfolio Turnover Rate........................... 97.7% 81.0% 44.1% 70.6% 117.5%
- ----------------------------------------------------------------------------------------------------------
</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.
19
<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 $272,957 (or 0.09% of net
assets) at December 31, 1997. 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.
The Fund maintains a cash balance with its custodian and receives a reduction
of its custody fees and expenses for the amount of interest earned on such
uninvested cash balances. For the year ended December 31, 1997, custodian
fees and expense offsets were increased by $2,473. There was no effect on net
investment income. The Fund could have invested such cash amounts in income
producing assets if it had not agreed to a reduction of fees or expenses
under the expense offset arangement with its custodian.
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
20
<PAGE>
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 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, 1997, the Fund made purchases of
$244,706,103 and sales of $238,467,012 of investment securities other than U.S.
Government securities and short term investments. During the year ended December
31, 1997, purchases and sales of U.S. Government securities were $65,485,303 and
$64,173,523, respectively. At December 31, 1997, the cost of investments for
federal income tax purposes was $283,486,318. Accordingly, net unrealized
appreciation for Federal income tax purposes aggregated $7,589,545, of which
$18,181,635 related to appreciated securities and $10,592,090 related to
depreciated securities.
At December 31, 1997 the Fund had a capital loss carryforward of $10,825,349
available to offset future capital gains of which $3,815,149, $882,969,
$3,865,851 and $2,261,380 will expire on December 31, 1998, 1999, 2000 and 2003,
respectively.
E. At December 31, 1997, 62.77% 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, 1997.
G. The Fund issued to its shareholders of record as of the close of business on
September 27, 1996 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
exercise of such Rights. Rights' offering costs of $550,000 were charged
directly against the proceeds of the Offering.
21
<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, 1997, 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, 1997 by
correspondence with the custodian and brokers and the application of alternative
auditing procedures where confirmation 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 16, 1998
22
<PAGE>
SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):
<TABLE>
<CAPTION>
AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS
THREE MONTHS ENDED
----------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31,
MARCH 31, 1997 JUNE 30, 1997 1997 1997
----------------- ------------------ ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment Income............. $ 7,183 $ 0.21 $ 6,361 $ 0.18 $ 6,479 $ 0.19 $ 6,374 $ 0.18
Net Investment Income......... 6,609 0.19 5,782 0.17 5,881 0.17 5,753 0.16
Net Realized Gain (Loss) and
Change in Unrealized
Appreciation/Depreciation on
Investments.................. (2,551) (0.07) 6,315 0.18 3,142 0.09 6,133 0.19
Net Increase in Net Assets
Resulting from Operations.... 4,058 0.12 12,097 0.35 9,023 0.26 11,886 0.35
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
MARCH 31, 1996 JUNE 30, 1996 1996 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
</TABLE>
SUPPLEMENTAL PROXY INFORMATION (UNAUDITED)
The Annual Meeting of the Stockholders of the BEA Income Fund, Inc. was held on
Monday, May 12, 1997 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. Enrique R. Arzac, Lawrence J. Fox,
James S. Pasman Jr. and William W. Priest Jr. 24,991,346 286,487 --
2. To ratify the selection of Price Waterhouse
LLP as independent public accountants of the
Fund until the next annual meeting. 24,940,895 81,290 255,648
</TABLE>
23
<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 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
24
<PAGE>
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.
25
