AMERICAN EXPRESS Financial Direct
Strategist Income Fund, Inc.
1998 Semiannual Report
Strategist Government Income Fund
Strategist High Yield Fund
Strategist Quality Income Fund
<PAGE>
Table of Contents
From the Portfolio Manager (Strategist Government Income Fund) 1
From the Portfolio Manager (Strategist High Yield Fund) 3
From the Portfolio Manager (Strategist Quality Income Fund) 5
Financial Statements (Strategist Income Fund, Inc.) 7
Notes to Financial Statements (Strategist Income Fund, Inc.) 12
Financial Statements (Government Income Portfolio) 19
Notes to Financial Statements (Government Income Portfolio) 22
Investments in Securities (Government Income Portfolio) 27
Financial Statements (High Yield Portfolio) 37
Notes to Financial Statements (High Yield Portfolio) 40
Investments in Securities (High Yield Portfolio) 44
Financial Statements (Quality Income Portfolio) 80
Notes to Financial Statements (Quality Income Portfolio) 83
Investments in Securities (Quality Income Portfolio) 87
<PAGE>
From the Portfolio Manager
Strategist Government Income Fund
(picture of) James W. Snyder
James W. Snyder
Portfolio Manager
Falling interest rates continued to provide support for the bond market and
Strategist Government Income Fund during the first half of the fiscal year. For
the period -- June through November 1998 -- the Fund generated a total return
(net asset value change and interest income) of 3.35%.
Continuing the trend of recent years, the inflation rate -- the key influence on
interest rates and, thus, the bond market -- remained remarkably low over the
six months. Adding to the positive environment was another outbreak of the
so-called "Asian flu," the financial illness that first struck Southeast Asia in
the fall of 1997. This time, the victims were Russia and Latin America, whose
crumbling financial markets sent shock waves throughout the world, including the
U.S.
The upshot of the financial turmoil was a "flight to quality" on the part of
many concerned investors, who took refuge in U.S. Treasury securities. Their
heavy buying helped drive down interest rates, which in turn drove up prices for
Treasuries. Other sectors, including mortgage-backed bonds issued by federal
government agencies, were essentially ignored by investors and, therefore,
barely participated in the rally.
PORTFOLIO SHIFT
For the Fund, this meant that about half the portfolio benefited fully from the
upturn, as its asset mix of mortgage-backed bonds and short- and
intermediate-term Treasuries was roughly 50/50 when the fiscal year began. As
the period progressed, I shifted more money into mortgage bonds, concentrating
on low-coupon issues, which are less vulnerable to mortgage refinancing and,
consequently, a decline in value. By the end of the six months, mortgages made
up close to 80% of the portfolio, with Treasuries accounting for most of the
rest.
Because I thought interest rates were likely to come down, I maintained a
slightly long duration in the portfolio. (Duration, a function of the average
maturity of the bonds held in the portfolio, determines how sensitive the Fund's
value is to interest-rate changes. The longer the duration, the greater the
sensitivity.) Therefore, when rates declined, the Fund's performance was
enhanced somewhat. As is usually the case, I also maintained a small investment
in interest-rate futures contracts -- a form of "derivatives" -- to shield the
Fund from the possibility of a sharp rise in interest rates.
With its increased emphasis on mortgage-backed bonds, the Fund is positioned for
what I think will be a comparatively stable interest-rate environment in the
second half of the fiscal year. If that proves true, interest income will become
more important to performance, and mortgages hold an advantage over Treasuries
in that regard.
James W. Snyder
<PAGE>
From the Portfolio Manager
Strategist High Yield Fund
(picture of) Jack Utter
Jack Utter
Portfolio Manager
Concerns about a potential slowdown in economic growth led to a sell-off in the
high-yield bond market during the first half of the fiscal year. Although
Strategist High Yield Fund continued to provide substantial interest income, the
decline in bond values resulted in the Fund losing 8.13% for the period -- June
through November 1998.
The environment for high-yield bonds was still relatively good when the period
began. The economy was rolling along, inflation showed no signs of increasing,
and the financial upheaval that struck Asia in the fall of 1997 seemed to have
settled down. But by mid-summer, another bout of the "Asian flu" hit, this time
in Russia and, soon after, Latin America.
Here at home, the upshot of the situation for investors was that the possibility
of a global recession was now considerably greater. Under that scenario, profits
could fall off sharply for American businesses as a whole and create a special
burden for the already financially strained companies that issue high-yield
bonds.
A `FLIGHT TO QUALITY'
The result was a wave of selling that swamped the high-yield market as investors
embarked on a "flight to quality" whose primary destination was U.S. Treasury
bonds, which offered the safety and liquidity they sought. Although the downturn
in the high-yield market was widespread, the Fund's holdings in the energy,
telecommunications and emerging foreign-market sectors were particularly
affected.
Still, the period would end on a positive note. Taking encouragement from three
reductions in short-term interest rates by the Federal Reserve and positive new
economic data, the high-yield market staged a powerful rally in November. Also
encouraging was the fact that telecommunications and emerging-market bonds led
the rebound for the Fund.
While such positive price momentum will be difficult to maintain in the months
ahead, I think it's reasonable to expect a better overall environment for
high-yield bonds than we had in the first half of the fiscal year. The economy
should be able to stay on its growth track, inflation shows no signs of picking
up, and the Federal Reserve appears willing to lower interest rates further if
conditions warrant. In the meantime, income-seeking investors will find the
Fund's yield at its highest level in several years.
Jack Utter
<PAGE>
From the Portfolio Manager
Strategist Quality Income Fund
(picture of) Ray Goodner
Ray Goodner
Portfolio Manager
Long-term interest rates declined during the past six months, providing solid
support for the U.S. bond market and Strategist Quality Income Fund. For the
first half of the fiscal year -- June through November 1998 -- the Fund
generated a total return, which includes net asset value change and interest
income, of 3.97%.
The low rate of inflation that has dominated the investment environment in
recent years remained in place during the period, providing reassurance for the
bond market. But this time the market got an additional boost from another
outbreak of the so-called "Asian flu," the financial malady that first struck
Asia in the fall of 1997. This past summer it was Russia and Latin America that
became infected. The result was a flood of money into the U.S. Treasury bonds,
largely from investors who were seeking what they believed to be a safe haven
for investment. The buying resulting from this "flight to quality" drove down
long-term interest rates until mid-September.
The major beneficiaries of this trend were long-term U.S. Treasury bonds, which
experienced a sharp price increase thanks to their high sensitivity to changes
in interest rates. (Falling rates inflate bond values, while rising rates
depress them.) Performance among all other bond sectors, including corporate and
mortgage-backed issues, lagged well behind until late in the period, as
investors largely ignored them in their pursuit of the safety and liquidity
offered by Treasuries.
A BOOST FROM TREASURIES
Because Treasuries comprised its largest area of investment, the Fund got its
strongest performance from that sector. Holdings among mortgage-backed bonds
issued by government agencies and investment-grade, or high-quality, corporate
bonds also performed positively, but contributed more to the Fund's interest
income than its net asset value gain. Foreign bonds, a relatively small area of
investment for the Fund (about 10% of assets for most of the period) and all
denominated in U.S. dollars, suffered price declines in the late-summer turmoil
overseas. They recovered rapidly in the fall, however.
Because I thought interest rates were likely to decline during the period, I
positioned the portfolio with a relatively long duration. (A function of the
average maturity of the bonds in the portfolio duration determines how sensitive
the Fund's net asset value is to interest-rate changes. The longer the duration,
the greater the sensitivity.) Therefore, when rates came down, the Fund
responded quite positively. I also maintained a low level of cash reserves,
preferring to keep the great majority of assets in bonds, which provided a
better return than cash.
Looking to the rest of the fiscal year, the low-inflation trend that bonds have
enjoyed for some time is still in place. In addition, the Federal Reserve has
shown a willingness to reduce short-term interest rates if it appears that the
economy may be about to undergo a meaningful slowdown. In light of those
favorable factors, I think bond investors have reason to remain optimistic.
Ray Goodner
<PAGE>
Financial Statements
Statements of assets and liabilities
Strategist Income Fund, Inc.
Nov. 30, 1998 (Unaudited)
Strategist Strategist Strategist
Government High Quality
Income Fund Yield Fund Income Fund
Assets
Investment in corresponding
Portfolio (Note 1) $843,517 $1,805,981 $749,541
Other receivables 12 124 --
Expense receivable from AEFC -- -- 383
Organizational costs (Note 1) 1,319 1,316 1,936
----- ----- -----
Total assets 844,848 1,807,421 751,860
------- --------- -------
Liabilities
Dividends payable to shareholders 675 2,717 724
Accrued distribution fee 16 37 15
Accrued transfer agency fee 5 10 3
Accrued administrative services fee 3 7 3
Other accrued expenses 54,320 16,336 7,180
------ ------ -----
Total liabilities 55,019 19,107 7,925
------ ------ -----
Net assets applicable to
outstanding capital stock $789,829 $1,788,314 $743,935
======== ========== ========
Represented by
Capital stock-- $.01 par value (Note 1) $ 1,579 $ 4,445 $ 783
Additional paid-in capital 774,478 1,974,018 704,722
Undistributed net investment income 110 310 318
Accumulated net realized gain (loss) (2,243) (9,786) 613
Unrealized appreciation (depreciation)
on investments 15,905 (180,673) 37,499
------ -------- ------
Total -- representing net assets applicable
to outstanding capital stock $789,829 $1,788,314 $743,935
======== ========== ========
Shares outstanding 157,873 444,483 78,301
------- ------- ------
Net asset value per share of
outstanding capital stock $ 5.00 $ 4.02 $ 9.50
------ --------- --------
See accompanying notes to financial statements.
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Statements of operations
Strategist Income Fund, Inc.
Six months ended Nov. 30, 1998 (Unaudited)
Strategist Strategist Strategist
Government High Quality
Income Fund Yield Fund Income Fund
Investment income
Income:
Dividends $ -- $ 8,470 $ 177
Interest 26,180 84,851 24,562
------ ------ ------
Total income 26,180 93,321 24,739
------ ------ ------
Expenses (Note 2):
Expenses allocated from corresponding Portfolio 2,094 4,852 1,903
Distribution fee 954 2,156 910
Transfer agency fee 271 602 179
Administrative services fees and expenses 191 431 182
Registration fees 69 3,830 4,096
Audit fees 1,750 1,750 1,750
Other 623 2,666 1,691
--- ----- -----
Total expenses 5,952 16,287 10,711
Less expenses reimbursed by AEFC (1,621) (6,115) (6,696)
------ ------ ------
Total net expenses 4,331 10,172 4,015
----- ------ -----
Investment income (loss)-- net 21,849 83,149 20,724
------ ------ ------
Realized and unrealized gain (loss) -- net
Net realized gain (loss) on:
Security transactions 17,350 (28,512) 3,391
Financial futures contracts (21,471) -- (320)
Options contracts written 9,886 -- 130
----- ---
Net realized gain (loss) on investments 5,765 (28,512) 3,201
Net change in unrealized appreciation
(depreciation) on investments (1,725) (213,883) 5,296
------ -------- -----
Net gain (loss) on investments 4,040 (242,395) 8,497
----- -------- -----
Net increase (decrease) in net assets
resulting from operations $25,889 $(159,246) $29,221
======= ========= =======
See accompanying notes to financial statements.
<PAGE>
Statements of changes in net assets
Strategist Income Fund, Inc.
Strategist Government Income Fund
Nov. 30, 1998 May 31, 1998
Six months ended Year ended
(Unaudited)
Operations and distributions
Investment income (loss)-- net $ 21,849 $ 37,887
Net realized gain (loss) on investments 5,765 (441)
Net change in unrealized appreciation
(depreciation) on investments (1,725) 13,121
------ ------
Net increase (decrease) in net assets resulting
from operations 25,889 50,567
------ ------
Distributions to shareholders from:
Net investment income (22,341) (39,031)
Net realized gain -- (6,249)
---- ------
Total distributions (22,341) (45,280)
------- -------
Capital share transactions (Note 3)
Proceeds from sales 111,605 64,649
Reinvestment of distributions at net asset value 21,764 45,256
Payments for redemptions (5,040) (5,096)
------ ------
Increase (decrease) in net assets from
capital share transactions 128,329 104,809
------- -------
Total increase (decrease) in net assets 131,877 110,096
Net assets at beginning of period 657,952 547,856
------- -------
Net assets at end of period $789,829 $657,952
======== ========
Undistributed net investment income $ 110 $ 602
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See accompanying notes to financial statements.
<PAGE>
Statements of changes in net assets
Strategist Income Fund, Inc.
Strategist High Yield Fund
Nov. 30, 1998 May 31, 1998
Six months ended Year ended
(Unaudited)
Operations and distributions
Investment income (loss)-- net $ 83,149 $ 97,876
Net realized gain (loss) on investments (28,512) 28,275
Net change in unrealized appreciation
(depreciation) on investments (213,883) 9,767
-------- -----
Net increase (decrease) in net assets resulting
from operations (159,246) 135,918
-------- -------
Distributions to shareholders from:
Net investment income (90,927) (91,467)
Net realized gains -- (1,142)
----- ------
Total distributions (90,927) (92,609)
------- -------
Capital share transactions (Note 3)
Proceeds from sales 1,108,869 329,677
Reinvestment of distributions at net asset value 64,835 90,463
Payments for redemptions (272,342) (286,196)
-------- --------
Increase (decrease) in net assets
from capital share transactions 901,362 133,944
------- -------
Total increase (decrease) in net assets 651,189 177,253
Net assets at beginning of period 1,137,125 959,872
--------- -------
Net assets at end of period $1,788,314 $1,137,125
========== ==========
Undistributed net investment income $ 310 $ 8,088
----- -------
See accompanying notes to financial statements.
<PAGE>
Statements of changes in net assets
Strategist Income Fund, Inc.
Strategist Quality Income Fund
Nov. 30, 1998 May 31, 1998
Six months ended Year ended
(Unaudited)
Operations and distributions
Investment income (loss)-- net $ 20,724 $ 38,121
Net realized gain (loss) on investments 3,201 (1,212)
Net change in unrealized appreciation
(depreciation) on investments 5,296 22,901
----- ------
Net increase (decrease) in net assets
resulting from operations 29,221 59,810
------ ------
Distributions to shareholders from:
Net investment income (20,943) (39,821)
Net realized gain -- (3,805)
----- ------
Total distributions (20,943) (43,626)
------- -------
Capital share transactions (Note 3)
Proceeds from sales 71,891 77,358
Reinvestment of distributions at net asset value 20,382 43,595
Payments for redemptions (29,324) (39,229)
------- -------
Increase (decrease) in net assets
from capital share transactions 62,949 81,724
------ ------
Total increase (decrease) in net assets 71,227 97,908
Net assets at beginning of period 672,708 574,800
------- -------
Net assets at end of period $743,935 $672,708
======== ========
Undistributed net investment income $ 318 $ 537
-------- --------
See accompanying notes to financial statements.
<PAGE>
Notes to Financial Statements
Strategist Income Fund, Inc.
(Unaudited as to Nov. 30, 1998)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Strategist Government Income Fund (Government Income Fund), Strategist High
Yield Fund (High Yield Fund), and Strategist Quality Income Fund (Quality Income
Fund) are series of capital stock within Strategist Income Fund, Inc. Each Fund
is registered under the Investment Company Act of 1940 (as amended) as a
diversified, open-end management investment company. Each Fund has 3 billion
authorized shares of capital stock.
Investments in Portfolios
Each of the Funds seeks to achieve its investment objectives by investing all of
its net investable assets in a corresponding series (the Portfolio) of Income
Trust (the Trust).
Government Income Fund invests all of its assets in the Government Income
Portfolio, an open-end investment company that has the same objectives as the
Fund. Government Income Portfolio invests primarily in U.S. government and
government agency securities.
High Yield Fund invests all of its assets in the High Yield Portfolio, an
open-end investment company that has the same objectives as the Fund. High Yield
Portfolio invests primarily in long-term corporate bonds in the lower ranking
categories, commonly known as junk bonds. Quality Income Fund invests all of its
assets in the Quality Income Portfolio, an open-end investment company that has
the same objectives as the Fund. Quality Income Portfolio invests primarily in
investment-grade bonds.
Each Fund records daily its share of the corresponding Portfolio's income,
expenses and realized and unrealized gains and losses. The financial statements
of the Portfolios are included elsewhere in this report and should be read in
conjunction with the Funds' financial statements. Each Fund records its
investment in the corresponding Portfolio at value that is equal to the Fund's
proportionate ownership interest in the Portfolios' net assets. As of Nov. 30,
1998, the percentages of the corresponding Portfolio owned by Government Income
Fund, High Yield Fund and Quality Income
Fund were 0.03%, 0.05% and 0.05%, respectively. Valuation of securities held by
the Portfolios is discussed in Note 1 of the Portfolios' "Notes to financial
statements" (included elsewhere in this report).
Use of estimates
Preparing financial statements that conform to generally accepted accounting
principles requires management to make estimates (e.g., on assets and
liabilities) that could differ from actual results.
Organizational costs
Each Fund incurred organizational expenses in connection with the start-up and
initial registration of the Fund. These costs will be amortized over 60 months
on a straight-line basis beginning with the commencement of operations. If any
or all of the shares held by AEFC representing initial capital of the Fund are
redeemed during the amortization period, the redemption proceeds will be reduced
by the pro rata portion of the unamortized organizational cost balance.
Federal taxes
The Fund's policy is to comply with all sections of the Internal Revenue Code
that apply to regulated investment companies and to distribute all of its
taxable income to the shareholders. No provision for income or excise taxes is
thus required.
Net investment income (loss) and net realized gains (losses) may differ for
financial statement and tax purposes primarily because of deferred losses on
certain futures contracts, the recognition of certain foreign currency gains
(losses) as ordinary income (loss) for tax purposes, and losses deferred due to
"wash sale" transactions. The character of distributions made during the year
from net investment income or net realized gains may differ from their ultimate
characterization for federal income tax purposes. Also, due to the timing of
dividend distributions, the fiscal year in which amounts are distributed may
differ from the year that the income or realized gains (losses) were recorded by
the Funds.
Dividends to shareholders Dividends from net investment income, declared daily
and paid monthly for Government Income Fund, High Yield Fund, and Quality Income
Fund, are reinvested in additional shares of the Funds at net asset value or
payable in cash. Capital gains, when available, are distributed along with the
last income dividend of the calendar year.
Other
As of Nov. 30, 1998, AEFC owned 121,238 shares of Government Income Fund,
144,685 shares of High Yield Fund and 65,366 shares of Quality Income Fund.
2. EXPENSES AND SALES CHARGES
In addition to the expenses allocated from the Portfolio, each Fund accrues its
own expenses as follows:
Each Fund entered into an agreement with AEFC to provide administrative
services. Under its Administrative Services Agreement, each Fund pays AEFC a fee
for administration and accounting services at a percentage of the Fund's average
daily net assets in reducing percentages from 0.05% to 0.025% annually.
Under a separate Transfer Agency Agreement, American Express Client Service
Corporation (AECSC) maintains shareholder accounts and records. Each Fund pays
AECSC an annual fee per shareholder account of $25.
Under a Plan and Agreement of Distribution, each Fund pays American Express
Service Corporation (the Distributor) a distribution fee at an annual rate of
0.25% of the Fund's average daily net assets for distribution services.
A redemption fee of 0.50% is applied and retained by High Yield Fund if shares
are redeemed or exchanged within 180 days of purchase.
AEFC and the Distributor have agreed to waive certain fees and to absorb certain
other of Fund expenses until Dec. 31, 1999. Under this agreement, each Fund's
total expenses will not exceed 1.10% (1.20% for High Yield Fund) of each of the
Fund's average daily net assets. In addition, for the six months ended Nov. 30,
1998, AEFC futher voluntarily agreed to waive certain fees and expenses to 1.14%
for Government Income Fund and 1.18% for High Yield Fund.
3. CAPITAL SHARE TRANSACTIONS
Transactions in shares of capital stock for the periods indicated are as
follows:
Six months ended Nov. 30, 1998
Government High Quality
Income Yield Income
Fund Fund Fund
Sold 22,341 246,906 7,632
Reinvested dividends 4,345 15,544 2,164
Redemptions (1,010) (64,834) (3,097)
------ ------- ------
Net increase (decrease) 25,676 197,616 6,699
Year ended May 31, 1998
Government High Quality
Income Yield Income
Fund Fund Fund
Sold 12,987 72,018 8,274
Reinvested dividends 9,111 19,661 4,670
Redemptions (1,024) (62,293) (4,179)
------ ------- ------
Net increase (decrease) 21,074 29,386 8,765
4. FINANCIAL HIGHLIGHTS
The tables below show certain important financial information for evaluating
each Fund's results.
Government Income Fund
Fiscal period ended May 31,
Per share income and capital changesa
1998c 1998 1997b
Net asset value, beginning of period $4.98 $4.93 $4.91
Income from investment operations:
Net investment income (loss) .14 .32 .30
Net gains (losses) (both realized and unrealized) .03 .11 .06
Total from investment operations .17 .43 .36
Less distributions:
Dividends from net investment income (.15) (.33) (.30)
Distributions from realized gains -- (.05) (.04)
Total distributions (.15) (.38) (.34)
Net asset value, end of period $5.00 $4.98 $4.93
Ratios/supplemental data
1998c 1998 1997b
Net assets, end of period (in thousands) $790 $658 $548
Ratio of expenses to average daily net assetsc 1.14%e 1.09% 1.10%e
Ratio of net investment income (loss)
to average daily net assets 5.73%e 6.44% 6.48%e
Portfolio turnover rate
(excluding short-term securities) 129% 159% 146%
Total return 3.35% 9.04% 7.59%
a For a share outstanding throughout the period. Rounded to the nearest cent.
b Inception date was June 10, 1996.
c Six months ended Nov. 30, 1998 (Unaudited).
d The Advisor and Distributor voluntarily limited total operating expenses.
Without this agreement, the ratio of expenses to average daily net assets
would have been 1.56% for the six months ended Nov. 30, 1998 and 1.57% and
25.68% for the periods ended May 31, 1998 and 1997, respectively.
e Adjusted to an annual basis.
<PAGE>
High Yield Fund
Fiscal period ended May 31,
Per share income and capital changesa
1998c 1998 1997b
Net asset value, beginning of period $4.61 $4.41 $4.31
Income from investment operations:
Net investment income (loss) .21 .43 .38
Net gains (losses) (both realized and unrealized) (.58) .17 .09
Total from investment operations (.37) .60 .47
Less distributions:
Dividends from net investment income (.22) (.40) (.37)
Net asset value, end of period $4.02 $4.61 $4.41
Ratios/supplemental data
1998c 1998 1997b
Net assets, end of period (in thousands) $1,788 $1,137 $960
Ratio of expenses to average daily net assetsd 1.18%e .72% 1.19%e
Ratio of net investment income (loss)
to average daily net assets 9.64%e 9.28% 8.90%e
Portfolio turnover rate
(excluding short-term securities) 23% 81% 92%
Total return (8.13%) 14.02% 11.40%
a For a share outstanding throughout the period. Rounded to the nearest cent.
b Inception date was June 10, 1996.
c Six months ended Nov. 30, 1998 (Unaudited).
d The Advisor and Distributor voluntarily limited total operating expenses.
Without this agreement, the ratio of expenses to average daily net assets
would have been 1.89% for the six months ended Nov. 30, 1998 and 2.15% and
11.48% for the periods ended 1998 and 1997, respectively.
e Adjusted to an annual basis.
<PAGE>
Quality Income Fund
Fiscal period ended May 31,
Per share income and capital changesa
1998c 1998 1997b
Net asset value, beginning of period $9.40 $9.15 $8.95
Income from investment operations:
Net investment income (loss) .27 .58 .55
Net gains (losses) (both realized and unrealized) .10 .34 .18
Total from investment operations .37 .92 .73
Less distributions:
Dividends from net investment income (.27) (.61) (.53)
Dividends from realized gains -- (.06) --
Total distributions (.27) (.67) (.53)
Net asset value, end of period $9.50 $9.40 $9.15
Ratios/supplemental data
Net assets, end of period (in thousands) $744 $673 $575
Ratio of expenses to average daily net assetsd 1.10%e .97% 1.10%e
Ratio of net investment income (loss)
to average daily net assets 5.69%e 6.22% 6.33%e
Portfolio turnover rate
(excluding short-term securities) 12% 20% 31%
Total return 3.97% 10.30% 8.31%
a For a share outstanding throughout the period. Rounded to the nearest cent.
b Inception date was June 10, 1996.
c Six months ended Nov. 30, 1998 (Unaudited).
d The Advisor and Distributor voluntarily limited total operating expenses.
Without this agreement, the ratio of expenses to average daily net assets
would have been 2.94% for the six months ended Nov. 30, 1998 and 1.48% and
13.34% for the periods ended May 31, 1998 and 1997, respectively.
e Adjusted to an annual basis.
<PAGE>
Financial Statements
Statement of assets and liabilities
Government Income Portfolio
Nov. 30, 1998 (Unaudited)
Assets
Investments in securities, at value (Note 1)
(identified cost $3,589,417,480) $3,668,483,822
Cash in bank on demand deposit 7,490,520
Accrued interest receivable 26,665,945
Receivable for investment securities sold 172,970,598
U.S. government securities held as collateral (Note 5) 79,721,822
----------
Total assets 3,955,332,707
=============
Liabilities
Payable for investment securities purchased 844,955,391
Payable upon return of securities loaned (Note 5) 91,009,322
Accrued investment management services fee 121,210
Option contracts written, at value
(premium received $26,805,756) (Note 6) 27,018,485
----------
Total liabilities 963,104,408
-----------
Net assets $2,992,228,299
==============
See accompanying notes to financial statements.
<PAGE>
Statement of operations
Government Income Portfolio
Six months ended Nov. 30, 1998 (Unaudited)
Investment income
Income:
Interest $ 89,294,815
------------
Expenses (Note 2):
Investment management services fee 6,946,441
Compensation of board members 7,073
Custodian fees 133,245
Audit fees 15,938
Other 35,132
------
Total expenses 7,137,829
Earnings credits on cash balances (Note 2) (7,658)
------
Total net expenses 7,130,171
---------
Investment income (loss)-- net 82,164,644
----------
Realized and unrealized gain (loss) -- net
Net realized gain (loss) on:
Security transactions (Note 3) 60,077,637
Financial futures contracts (73,927,375)
Options contracts written (Note 6) 34,546,699
- ----------
Net realized gain (loss) on investments 20,696,961
Net change in unrealized appreciation (depreciation) on investments (8,066,331)
----------
Net gain (loss) on investments 12,630,630
----------
Net increase (decrease) in net assets resulting from operations $ 94,795,274
============
See accompanying notes to financial statements.
<PAGE>
Statements of changes in net asset
Government Income Portfolio
Nov. 30, 1998 May 31, 1998
Six months ended Year ended
(Unaudited)
Operations
Investment income (loss)-- net $ 82,164,644 $ 148,446,162
Net realized gain (loss) on investments 20,696,961 (1,501,667)
Net change in unrealized appreciation
(depreciation) on investments (8,066,331) 47,320,048
---------- ----------
Net increase (decrease) in net assets
resulting from operations 94,795,274 194,264,543
Net contributions (withdrawals) from partners 328,161,864 171,023,648
----------- -----------
Total increase (decrease) in net assets 422,957,138 365,288,191
Net assets at beginning of period 2,569,271,161 2,203,982,970
------------- -------------
Net assets at end of period $2,992,228,299 $2,569,271,161
============== ==============
See accompanying notes to financial statements.
<PAGE>
Notes to Financial Statements
Government Income Portfolio
(Unaudited as to Nov. 30, 1998)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Government Income Portfolio (the Portfolio) is a series of Income Trust (the
Trust) and is registered under the Investment Company Act of 1940 (as amended)
as a diversified, open-end management investment company. Government Income
Portfolio seeks to provide a high level of current income and safety of
principal consistent with investment in U.S. government and government agency
securities. The Declaration of Trust permits the Trustees to issue
non-transferable interests in the Portfolio. On April 15, 1996, American Express
Financial Corporation (AEFC) contributed $40,000 to the Portfolio. Operations
did not formally commence until June 10, 1996, at which time an existing fund
transferred its assets to the Portfolio in return for an ownership percentage of
the Portfolio.
The Portfolio's accounting policies are summarized below:
Use of estimates
Preparing financial statements that conform to generally accepted accounting
principles requires management to make estimates (e.g., on assets and
liabilities) that could differ from actual results.
Valuation of securities
All securities are valued at the close of each business day. Securities traded
on national securities exchanges or included in national market systems are
valued at the last quoted sales price. Debt securities are generally traded in
the over-the-counter market and are valued at a price that reflects fair value
as quoted by dealers in these securities or by an independant pricing service.
Securities for which market quotations are not readily available are valued at
fair value according to methods selected in good faith by the board. Short-term
securities maturing in more than 60 days from the valuation date are valued at
the market price or approximate market value based on current interest rates;
those maturing in 60 days or less are valued at amortized cost.
Option transactions
To produce incremental earnings, protect gains and facilitate buying and selling
of securities for investments, the Portfolio may buy and sell put and call
options and write covered call options on portfolio securities and may write
cash-secured put and call options on U.S. government securities. The Portfolio
also may purchase mortgage-backed security (MBS) put spread options and write
covered MBS call spread options. MBS spread options are based upon the changes
in the price spread between a specified mortgage-backed security and a
like-duration Treasury security. The risk in writing a call option is that the
Portfolio gives up the opportunity for profit if the market price of the
security increases. The risk in writing a put option is that the Portfolio may
incur a loss if the market price of the security decreases and the option is
exercised. The risk in buying an option is that the Portfolio pays a premium
whether or not the option is exercised. The Portfolio also has the additional
risk of being unable to enter into a closing transaction if a liquid secondary
market does not exist. The Portfolio also may write over-the-counter options
where the completion of the obligation is dependent upon the credit standing of
the other party.
Option contracts are valued daily at the closing prices on their primary
exchanges and unrealized appreciation or depreciation is recorded. The Portfolio
will realize a gain or loss when the option transaction expires or closes. When
options on debt securities or futures are exercised, the Portfolio will realize
a gain or loss. When other options are exercised, the proceeds on sales for a
written call option, the purchase cost for a written put option or the cost of a
security for a purchased put or call option is adjusted by the amount of premium
received or paid.
Futures transactions To gain exposure to or protect itself from market changes,
the Portfolio may buy and sell financial futures contracts. Risks of entering
into futures contracts and related options include the possibility of an
illiquid market and that a change in the value of the contract or option may not
correlate with changes in the value of the underlying securities.
Upon entering into a futures contract, the Portfolio is required to deposit
either cash or securities in an amount (initial margin) equal to a certain
percentage of the contract value. Subsequent payments (variation margin) are
made or received by the Portfolio each day. The variation margin payments are
equal to the daily changes in the contract value and are recorded as unrealized
gains and losses. The Portfolio recognizes a realized gain or loss when the
contract is closed or expires.
Securities purchased on a when-issued basis
Delivery and payment for securities that have been purchased by the Portfolio on
a forward-commitment or when-issued basis can take place one month or more after
the transaction date. During this period, such securities are subject to market
fluctuations, and they may affect the Portfolio's gross assets the same as owned
securities. The Portfolio designates cash or liquid high-grade short-term debt
securities at least equal to the amount of its commitment. As of Nov. 30, 1998,
the Portfolio had entered into outstanding when-issued or forward-commitments of
$749,626,199.
Federal taxes
For federal income tax purposes the Portfolio qualifies as a partnership and
each investor in the Portfolio is treated as the owner of its proportionate
share of the net assets, income, expenses and realized and unrealized gains and
losses of the Portfolio. As a "pass-through" entity, the Portfolio therefore
does not pay any income dividends or capital gain distributions.
Other
Security transactions are accounted for on the date securities are purchased or
sold. Interest income, including level-yield amortization of premium and
discount, is accrued daily.
2. FEES AND EXPENSES
The Trust, on behalf of the Portfolio, has entered into an Investment Management
Services Agreement with AEFC for managing its portfolio. Under this agreement,
AEFC determines which securities will be purchased, held or sold. The management
fee is a percentage of the Portfolio's average daily net assets in reducing
percentages from 0.52% to 0.395% annually.
Under the agreement, the Trust also pays taxes, brokerage commissions and
nonadvisory expenses, which include custodian fees, audit and certain legal
fees, fidelity bond premiums, registration fees for units, office expenses,
consultants' fees, compensation of trustees, corporate filing fees, expenses
incurred in connection with lending securities of the Portfolio and any other
expenses properly payable by the Trust or Portfolio and approved by the board.
The Portfolio also pays custodian fees to American Express Trust Company, an
affiliate of AEFC.
During the six months ended Nov. 30, 1998, the Portfolio's custodian fees were
reduced by $7,658 as a result of earnings credits from overnight cash balances.
According to a Placement Agency Agreement, American Express Financial Advisors
Inc. acts as placement agent of the Trust's units.
3. SECURITIES TRANSACTIONS
Cost of purchases and proceeds from sales of securities (other than short-term
obligations) aggregated $4,723,451,339 and $4,119,162,895, respectively, for the
six months ended Nov. 30, 1998. For the same period, the portfolio turnover rate
was 129%. Realized gains and losses are determined on an identified cost basis.
4. INTEREST RATE FUTURES CONTRACTS
As of Nov. 30, 1998, investments in securities included securities valued at
$99,831,977 that were pledged as collateral to cover initial margin deposits on
5,939 open purchase contracts and 9,608 open sale contracts. The market value of
the open purchase contracts at Nov. 30, 1998, was $861,878,509 with a net
unrealized loss of $4,862,917. The market value of the open sale contracts at
Nov. 30, 1998, was $1,199,243,173 with a net unrealized loss of $18,349,868. See
"Summary of significant accounting policies."
5. LENDING OF PORTFOLIO SECURITIES
As of Nov. 30, 1998, securities valued at $87,304,957 were on loan to brokers.
For collateral, the Portfolio received $11,287,500 in cash and U.S. government
securities valued at $79,721,822. Income from securities lending amounted to
$547,868 for the year ended Nov. 30, 1998. The risks to the Portfolio of
securities lending are that the borrower may not provide additional collateral
when required or return the securities when due.
<PAGE>
<TABLE>
<CAPTION>
6. OPTIONS CONTRACTS WRITTEN
Contracts and premium amounts associated with options contracts written are
as follows:
Six months ended Nov. 30, 1998
Puts Calls MBS Puts and Calls
Contracts Premium Contracts Premium Contracts Premium
<S> <C> <C> <C> <C> <C> <C>
Balance May 31, 1998 2,146 $4,017,648 2,380 $3,811,781 12,000 $123,773,405
Opened 28,300 38,288,411 27,320 43,042,817 36,750 1,058,984
Closed (17,656) (23,121,024) (13,558)(22,531,561) (12,000) (123,773,404)
Exercised (4,831) (7,585,873) (2,263) (3,418,658) (4,250) (19,922)
Expired (2,349) (3,167,011) (3,997) (3,452,649) (20,000) (117,188)
Balance Nov. 30, 1998 5,610 $8,432,151 9,882 $17,451,730 12,500 $921,875
See "Summary of significant accounting policies."
</TABLE>
<PAGE>
Investments in Securities
Government Income Portfolio
Nov. 30, 1998 (Unaudited)
(Percentages represent value of investment compared to net assets)
Bonds (121.1%)
Issuer Coupon Principal Value(a)
rate amount
Govt Natl Mtge Assn (--%)
08-20-19 11.00% $206,773 $231,585
Mortgage-backed securities (84.4%)
Federal Home Loan Mtge Corp
08-01-00 7.50 8,995,438 9,078,800
07-01-03 6.50 66,254 66,658
07-15-03 5.75 30,750,000 31,714,923
01-15-08 5.50 42,640,000 43,234,419
09-01-09 6.50 5,339,549 5,427,972
03-01-10 5.50 42,000,000(j) 41,383,125
10-01-10 7.00 13,842,502 14,158,250
01-01-13 6.00 12,041,698 12,072,216
01-25-13 6.25 39,000,000 39,387,270
11-01-23 8.00 15,390,297 15,976,975
05-01-24 7.50 5,897,236 6,061,238
07-01-24 8.00 9,044,809 9,366,986
01-01-25 9.00 7,901,348 8,326,045
06-01-25 8.00 13,148,292 13,604,406
08-01-25 8.00 2,973,642 3,076,798
02-01-26 6.00 18,333,097 18,109,616
05-01-26 9.00 19,135,662 20,194,055
12-01-27 6.00 146,901,630 145,209,099
01-01-28 6.00 2,924,308 2,887,754
02-01-28 6.00 17,992,026 17,771,127
08-01-28 6.00 34,673,386 34,239,969
09-01-28 6.00 143,411,987 141,622,589
10-01-28 6.00 13,831,200 13,658,310
Zero Coupon
02-15-28 15.35 145,493,910(b) 1,636,807
Collateralized Mtge Obligation
08-15-03 6.50 14,652,880 14,969,037
04-15-22 8.50 9,150,000 10,008,087
11-15-22 4.00 44,310,000 41,424,958
11-15-23 4.00 8,940,984 8,691,084
11-18-25 6.50 12,750,000 12,910,321
02-15-28 .00 2,298,294 1,597,314
Interest Only
01-01-20 10.00 193,308(f) 37,379
Principal Only
09-15-03 6.46 9,272,987(e) 8,505,042
10-15-07 8.47 2,868,277(e) 2,728,000
05-15-08 8.13 7,523,918(e) 6,880,858
05-15-08 7.14 7,628,336(e) 6,721,279
03-15-09 7.38 5,669,869(e) 5,358,912
11-15-23 7.86 6,272,778(e) 6,086,008
Trust Series Z
04-25-24 8.25 29,818,998(d) 29,806,739
Federal Natl Mtge Assn
12-01-99 7.00 5,998,951 6,058,582
09-01-07 8.50 3,611,662 3,731,280
02-15-08 5.75 84,875,000 87,621,325
03-01-10 5.50 162,660,000(j) 160,220,099
03-01-10 6.00 135,750,000(j) 135,877,265
05-01-13 6.00 63,029,608 63,085,302
06-01-13 6.00 51,378,967 51,424,367
08-01-13 6.00 82,734,969 82,786,264
09-01-13 6.00 18,530,882 18,547,256
11-01-21 8.00 2,954,034 3,067,588
05-01-22 8.50 5,324,805 5,611,014
03-01-23 9.00 2,044,837 2,170,083
04-01-23 8.50 7,457,983 7,854,151
08-01-23 8.50 17,013,955 17,928,455
08-25-23 6.00 14,400,000 14,192,015
09-01-23 6.50 45,043,868(h,i) 45,367,733
09-01-23 8.50 27,190,783 28,669,418
11-01-23 6.00 10,885,218 10,769,617
12-01-23 7.00 15,666,869 15,999,790
01-01-24 6.50 16,663,442 16,783,252
06-01-24 9.00 6,321,739 6,712,928
03-01-25 6.00 208,500,000(j) 205,828,593
06-01-25 8.50 2,573,380 2,693,196
09-01-25 6.50 19,339,552 19,472,608
09-01-25 6.50 3,368,088(h,i) 3,391,260
11-01-25 6.50 22,967,924(h,i) 23,125,943
12-01-25 8.50 6,642,167 6,949,367
01-15-26 5.50 41,000,000(j) 39,629,063
02-01-26 6.00 580,119 572,688
02-01-26 8.00 2,827,617(h,i) 2,927,460
04-01-26 6.00 315,836 311,790
05-01-26 7.50 18,896,756 19,428,133
02-01-27 6.00 2,522,028 2,488,939
04-01-27 6.00 5,759,879 5,684,309
04-01-27 6.50 14,954,680 15,057,568
04-01-27 7.00 11,194,309 11,425,136
09-01-27 7.00 7,505,062 7,659,816
03-01-28 6.00 23,006,912 22,707,761
04-01-28 6.00 106,871,589 105,487,707
05-01-28 6.00 9,712,117 9,586,320
05-01-28 6.50 22,409,942 22,562,803
07-01-28 6.00 9,860,098 9,732,384
09-01-28 6.00 96,169,908 94,916,422
10-01-28 6.00 17,149,659 16,924,655
10-01-28 6.50 18,914,481 19,056,339
10-01-28 6.50 54,869,455 55,280,976
Collateralized Mtge Obligation
06-25-05 6.10 40,925,603 41,014,411
08-25-08 6.00 1,372,733 1,367,354
09-25-08 4.50 38,000,000 36,259,581
11-25-08 5.50 5,517,709 5,479,525
10-25-10 4.50 8,204,208 8,010,507
07-25-12 7.00 2,868,264 2,904,230
01-25-19 3.00 11,250,000 10,929,375
03-25-19 5.75 37,973,624 37,950,753
07-18-19 5.50 13,976,000 13,812,815
10-25-20 9.00 11,666,000 12,426,040
03-25-21 8.50 12,350,000 13,064,010
01-25-22 5.75 10,000,000 9,901,897
01-25-24 5.00 1,936,927 1,927,864
05-18-26 5.00 17,000,000 16,140,592
Interest Only
07-01-18 10.00 3,346,053(f) 638,553
08-01-18 9.50 71,077(f) 13,588
01-15-20 10.00 3,267,751(f) 940,524
09-25-20 9.50 1,025,408(f) 178,316
01-25-21 10.50 8,126,116(f) 1,650,557
11-25-21 9.50 2,678,435(f) 737,882
02-25-22 9.50 519,924(f) 112,531
02-25-22 10.00 19,299,644(f) 5,276,716
05-25-22 10.00 6,323,426(f) 1,157,701
07-25-22 8.50 11,016,845(f) 1,959,410
07-25-22 9.50 5,566,727(f) 1,128,425
Inverse Floater
08-25-23 8.08 4,979,808(g) 4,862,135
03-25-24 9.61 3,298,066(g) 3,307,186
Principal Only
06-25-21 12.57 426,430(e) 350,731
Total 2,525,816,315
Other (3.8%)
California Infrastructure
Pacific Gas & Electric
09-25-05 6.32 20,400,000 21,128,280
San Diego Gas & Electric
03-25-03 6.07 7,500,000 7,613,175
09-25-05 6.19 6,000,000 6,185,340
San Diego Gas & Electric 1st Series 1997
09-25-08 6.31 25,000,000 26,138,000
Southern California Edison
03-25-03 6.17 13,895,000 14,130,659
09-25-08 6.38 12,000,000 12,591,240
Citibank Credit Card Master Trust I
Series 1998-2 Cl A
01-15-08 6.05 15,000,000 15,557,700
GMAC Commercial Mtge Securities
Series 1997-C2 Cl A1
12-15-04 6.45 9,578,665 9,872,251
Total 113,216,645
U.S. government obligations (32.9%)
Resolution Funding Corp
10-15-19 8.13 8,000,000 10,514,946
Zero Coupon
04-15-02 6.15 11,170,000(b) 9,489,438
10-15-03 6.36 16,000,000(b) 12,618,520
04-15-06 5.74 4,803,000(b) 3,317,693
04-15-08 5.88 21,250,000(b) 13,144,460
07-15-08 6.13 48,500,000(b) 29,618,455
01-15-09 5.76 24,173,000(b) 14,381,461
07-15-09 5.91 32,646,000(b) 18,687,586
10-15-12 8.04 8,400,000(b) 3,903,645
04-15-17 7.28 37,700,000(b) 13,473,565
07-15-17 7.28 6,650,000(b) 2,343,387
01-15-18 7.20 8,000,000(b) 2,736,232
10-15-18 7.87 7,500,000(b) 2,412,065
U.S. Treasury
07-31-01 6.63 17,000,000 17,848,679
08-31-01 6.50 8,500,000(h,i) 8,906,908
11-30-01 5.88 6,000,000(h,i) 6,210,212
04-30-02 6.63 10,000,000 10,613,158
02-15-03 10.75 15,000,000 18,399,467
08-15-03 5.75 18,500,000(c) 19,341,961
05-15-04 12.38 7,000,000 9,522,430
08-15-05 6.50 5,000,000 5,506,115
08-15-05 10.75 4,750,000(h,i) 6,353,620
07-15-06 7.00 35,750,000 40,669,743
10-15-06 6.50 36,100,000 40,006,045
11-15-08 4.75 42,000,000 42,029,531
08-15-19 8.13 104,000,000(h,i) 140,012,225
08-15-20 8.75 49,000,000(h,i) 70,315,377
05-15-21 8.13 74,000,000 100,771,823
08-15-21 8.13 124,700,000 169,981,687
08-15-23 6.25 76,500,000(c,h,i) 86,099,985
11-15-27 6.13 10,000,000(c) 11,294,676
Zero Coupon
11-15-04 5.65 33,000,000(b,h,i) 24,921,993
Collateralized Mtge Acceptance Corp
12-15-30 6.50 14,239,636 14,664,974
Collateralized Mtge Securities Corp
12-20-20 14.08 3,750,000 3,803,816
Total 983,915,878
Total bonds
(Cost: $3,543,373,331) $3,623,180,423
Options purchased (--%)
Issuer Shares Exercise Expiration Value(a)
price date
Put
U.S. Treasury Bond March 99 59,500 $116 Dec. 1998 $18,594
U.S. Treasury Bond March 99 42,500 112 Feb. 1999 132,813
U.S. Treasury Bond March 99 289,000 125 Feb. 1999 225,767
Total options purchased
(Cost: $1,117,924) $377,174
Short-term securities (1.5%)
Issuer Annualized Amount Value(a)
yield on date payable at
of purchase maturity
U.S. government agencies (0.4%)
Federal Farm Credit Disc Nt
12-02-98 4.75% $4,300,000 $4,299,435
Federal Home Loan Bank Disc Nt
12-11-98 4.79 1,100,000 1,098,546
Federal Home Loan Mtge Corp Disc Nts
12-07-98 5.00 1,700,000 1,698,589
12-10-98 4.77 400,000 399,525
12-21-98 4.83 3,200,000 3,191,448
12-22-98 4.81 1,100,000 1,096,920
Federal Natl Mtge Assn Disc Nt
12-15-98 5.00 500,000 499,032
Total 12,283,495
Letter of credit (1.1%)
Student Loan Marketing Assn-
Nebraska Higher Education
12-14-98 4.86 32,700,000 32,642,730
Total short-term securities
(Cost: $44,926,225) $44,926,225
Total investments in securities
(Cost: $3,589,417,480)(k) $3,668,483,822
See accompanying notes to investments in securities.
<PAGE>
Notes to investments in securities
(a) Securities are valued by procedures described in Note 1 to the financial
statements.
(b) For zero coupon bonds, the interest rate disclosed represents the
annualized effective yield on the date of acquisition.
(c) Security is partially or fully on loan. See Note 4 to the financial
statements.
(d) This security is a collateralized mortgage obligation that pays no interest
or principal during its initial accrual period until payment of a previous
series within the trust have been paid off. Interest is accrued at an
effective yield; similar to a zero coupon bond.
(e) Principal-only represents securities that entitle holders to receive only
principal payments on the underlying mortgages. The yield to maturity of a
principal-only is sensitive to the rate of principal payments on the
underlying mortgage assets. A slow (rapid) rate of principal repayments may
have an adverse (positive) effect on yield to maturity. Interest rate
disclosed represents current yield based upon the current cost basis and
estimated timing of future cash flows.
(f) Interest-only represents securities that entitle holders to receive only
interest payments on the underlying mortgages. The yield to maturity of an
interest-only is extremely sensitive to the rate of principal payments on
the underlying mortgage assets. A rapid (slow) rate of principal repayments
may have an adverse (positive) effect on yield to maturity. The principal
amount shown is the notional amount of the underlying mortgages.
(g) Inverse floaters represent securities that pay interest at a rate that
increases (decreases) in the same magnitude as, or in a multiple of, a
decline (increase) in the LIBOR (London InterBank Offering Rate) Index.
Interest rate disclosed is the rate in effect on Nov. 30, 1998. Inverse
floaters in the aggregate represent 0.27% of the Portfolio's net assets as
of Nov. 30, 1998.
<PAGE>
(h) Partially pledged as initial deposit on the following open interest rate
futures contracts (see Note 4 to the financial statements):
Type of security Notional amount
Purchase contracts
Eurodollar Dec. 1999 $56,900,000
Eurodollar March 2000 56,900,000
Eurodollar June 2000 56,900,000
Eurodollar Sept. 2000 61,100,000
U.S. Treasury Note Dec. 1998, 5-year notes 275,400,000
U.S. Treasury Note Dec. 1998, 10-year notes 83,700,000
U.S. Treasury Note Feb. 1999, 10-year notes 3,000,000
Sale contracts
U.S. Treasury Note Dec. 1998, 2-year notes $12,600,000
U.S. Treasury Note Dec. 1998, 10-year notes 108,300,000
U.S. Treasury Note Feb. 1999, 5-year notes 198,900,000
U.S. Treasury Bond March 1999 641,000,000
(i) At Nov. 30, 1998, securities valued at $99,831,977 were held to cover open
call options written as follows:
Issuer Shares Exercise Expiration Value(a)
price date
U.S. Treasury Bond 500,000 $99 Dec. 1998 $359,375
U.S. Treasury Bond March 99 195,500 114 Feb. 1999 1,618,975
U.S. Treasury Bond March 99 42,500 119 Feb. 1999 670,701
U.S. Treasury Bond March 99 221,000 120 Feb. 1999 2,451,708
U.S. Treasury Bond March 99 17,000 128 Feb. 1999 345,312
U.S. Treasury Bond March 99 17,000 130 Feb. 1999 143,437
U.S. Treasury Bond March 99 187,000 126 Feb. 1999 8,544,372
U.S. Treasury Bond March 99 34,000 128 Feb. 1999 1,094,375
U.S. Treasury Bond March 99 204,000 130 Feb. 1999 4,398,750
U.S. Treasury Bond March 99 70,200 134 Feb. 1999 592,312
Total $20,219,317
<PAGE>
At Nov. 30, 1998, cash or short-term securities were designated to cover
open put options written as follows:
Issuer Shares Exercise Expiration Value(a)
price date
Federal Natl Mtge Assn 750,000 $97 Dec. 1998 $58,594
U.S. Treasury Bond March 99 12,800 112 Feb. 1999 56,000
U.S. Treasury Bond March 99 38,200 127 Feb. 1999 147,311
U.S. Treasury Bond March 99 191,200 126 Feb. 1999 1,881,197
U.S. Treasury Bond March 99 127,500 128 Feb. 1999 1,979,174
U.S. Treasury Bond March 99 8,500 118 Feb. 1999 71,719
U.S. Treasury Bond March 99 42,500 119 Feb. 1999 524,607
U.S. Treasury Bond March 99 8,500 128 Feb. 1999 37,187
U.S. Treasury Bond March 99 8,500 127 Feb. 1999 19,921
U.S. Treasury Bond March 99 123,300 128 Feb. 1999 2,023,458
Total $6,799,168
(j) At Nov. 30, 1998, the cost of securities purchased, including interest
purchased, on a when-issued basis was $749,626,199.
(k) At Nov. 30, 1998, the cost of securities for federal income tax purposes was
approximately $3,589,417,000 and the approximate aggregate gross
unrealized appreciation and depreciation based on that cost was:
Unrealized appreciation $93,937,822
Unrealized depreciation (14,871,000)
Net unrealized appreciation $79,066,822
<PAGE>
Financial Statements
Statement of assets and liabilities
High Yield Portfolio
Nov. 30, 1998 (Unaudited)
Assets
Investments in securities, at value (Note 1)
(identified cost $4,084,479,752) $3,746,059,791
Cash in bank on demand deposit 1,719,473
Accrued interest and dividends receivable 87,137,532
Receivable for investment securities sold 4,519,500
---------
Total assets 3,839,436,296
-------------
Liabilities
Payable for investment securities purchased 27,236,000
Accrued investment management services fee 172,920
Other accrued expenses 71,705
------
Total liabilities 27,480,625
----------
Net assets $3,811,955,671
==============
See accompanying notes to financial statements.
<PAGE>
Statement of operations
High Yield Portfolio
Six months ended Nov. 30, 1998 (Unaudited)
Investment income
Income:
Dividend $ 19,654,092
Interest 190,861,432
-----------
Total income 210,515,524
-----------
Expenses (Note 2):
Investment management services fee 11,015,616
Compensation of board members 9,118
Custodian fees 114,069
Audit fees 17,063
Other 50,684
------
Total expenses 11,206,550
Earnings credits on cash balances (Note 2) (179,751)
--------
Total net expenses 11,026,799
----------
Investment income (loss)-- net 199,488,725
-----------
Realized and unrealized gain (loss) -- net
Net realized gain (loss) on security transactions (Note 3) (63,044,118)
Net change in unrealized appreciation
(depreciation) on investments (455,945,080)
------------
Net gain (loss) on investments (518,989,198)
------------
Net increase (decrease) in net assets resulting from operation $(319,500,473)
=============
See accompanying notes to financial statements.
<PAGE>
Statements of changes in net assets
High Yield Portfolio
Nov. 30, 1998 May 31, 1998
Six months ended Year ended
(Unaudited)
Operations
Investment income (loss)-- net $ 199,488,725 $ 343,256,750
Net realized gain (loss) on security transactions (63,044,118) 107,320,343
Net change in unrealized appreciation
(depreciation) on investments (455,945,080) 8,772,357
------------ ---------
Net increase (decrease) in net assets
resulting from operations (319,500,473) 459,349,450
Net contributions (withdrawals) from partners (32,544,821) 505,587,141
----------- -----------
Total increase (decrease) in net assets (352,045,294) 964,936,591
Net assets at beginning of period 4,164,000,965 3,199,064,374
------------- -------------
Net assets at end of period $3,811,955,671 $4,164,000,965
============== ==============
See accompanying notes to financial statements.
<PAGE>
Notes to Financial Statements
High Yield Portfolio
(Unaudited as to Nov. 30, 1998)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
High Yield Portfolio (the Portfolio) is a series of Income Trust (the Trust) and
is registered under the Investment Company Act of 1940 (as amended) as a
diversified, open-end management investment company. High Yield Portfolio
invests primarily in long-term corporate bonds in the lower-rating categories,
commonly known as junk bonds. The Declaration of Trust permits the Trustees to
issue non-transferable interests in the Portfolio.
The Portfolio's significant accounting policies are summarized below:
Use of estimates
Preparing financial statements that conform to generally accepted accounting
principles requires management to make estimates (e.g., on assets and
liabilities) that could differ from actual results.
Valuation of securities
All securities are valued at the close of each business day. Securities traded
on national securities exchanges or included in national market systems are
valued at the last quoted sales price. Debt securities are generally traded in
the over-the-counter market and are valued at a price that reflects fair value
as quoted by dealers in these securities or by an independent pricing service.
Securities for which market quotations are not readily available are valued at
fair value according to methods selected in good faith by the board. Short-term
securities maturing in more than 60 days from the valuation date are valued at
the market price or approximate market value based on current interest rates;
those maturing in 60 days or less are valued at amortized cost.
Option transactions To produce incremental earnings, protect gains and
facilitate buying and selling of securities for investments, the Portfolio may
buy and write options traded on any U.S. or foreign exchange or in the
over-the-counter market where completing the obligation depends upon the credit
standing of the other party. The Portfolio also may buy and sell put and call
options and write covered call options on portfolio securities as well as write
cash-secured put options. The risk in writing a call option is that the
Portfolio gives up the opportunity for profit if the market price of the
security increases. The risk in writing a put option is that the Portfolio may
incur a loss if the market price of the security decreases and the option is
exercised. The risk in buying an option is that the Portfolio pays a premium
whether or not the option is exercised. The Portfolio also has the additional
risk of being unable to enter into a closing transaction if a liquid secondary
market does not exist.
Option contracts are valued daily at the closing prices on their primary
exchanges and unrealized appreciation or depreciation is recorded. The Portfolio
will realize a gain or loss when the option transaction expires or closes. When
options on debt securities or futures are exercised, the Portfolio will realize
a gain or loss. When other options are exercised, the proceeds on sales for a
written call option, the purchase cost for a written put option or the cost of a
security for a purchased put or call option is adjusted by the amount of premium
received or paid.
Futures transactions
To gain exposure to or protect itself from market changes, the Portfolio may buy
and sell financial futures contracts traded on any U.S. or foreign exchange. The
Portfolio also may buy and write put and call options on these futures
contracts. Risks of entering into futures contracts and related options include
the possibility of an illiquid market and that a change in the value of the
contract or option may not correlate with changes in the value of the underlying
securities.
Upon entering into a futures contract, the Portfolio is required to deposit
either cash or securities in an amount (initial margin) equal to a certain
percentage of the contract value. Subsequent payments (variation margin) are
made or received by the Portfolio each day. The variation margin payments are
equal to the daily changes in the contract value and are recorded as unrealized
gains and losses. The Portfolio recognizes a realized gain or loss when the
contract is closed or expires.
Foreign currency translations and foreign currency contracts Securities and
other assets and liabilities denominated in foreign currencies are translated
daily into U.S. dollars at the closing rate of exchange. Foreign currency
amounts related to the purchase or sale of securities and income and expenses
are translated at the exchange rate on the transaction date. The effect of
changes in foreign exchange rates on realized and unrealized security gains or
losses is reflected as a component of such gains or losses. In the statement of
operations, net realized gains or losses from foreign currency transactions, if
any, may arise from sales of foreign currency, closed forward contracts,
exchange gains or losses realized between the trade date and settlement date on
securities transactions, and other translation gains or losses on dividends,
interest income and foreign withholding taxes.
The Portfolio may enter into forward foreign currency exchange contracts for
operational purposes and to protect against adverse exchange rate fluctuation.
The net U.S. dollar value of foreign currency underlying all contractual
commitments held by the Portfolio and the resulting unrealized appreciation or
depreciation are determined using foreign currency exchange rates from an
independent pricing service. The Portfolio is subject to the credit risk that
the other party will not complete its contract obligations.
Illiquid securities
As of Nov. 30, 1998, investments in securities included issues that are illiquid
which the Portfolio currently limits to 10% of net assets, at market value, at
the time of purchase. The aggregate value of such securities at Nov. 30, 1998
was $94,817,974 representing 2.49% of net assets. According to board guidelines,
certain unregistered securities are determined to be liquid and are not included
within the 10% limitation specified above.
Federal taxes
For federal income tax purposes the Portfolio qualifies as a partnership and
each investor in the Portfolio is treated as the owner of its proportionate
share of the net assets, income, expenses and realized and unrealized gains and
losses of the Portfolio. As a "pass-through" entity, the Portfolio therefore
does not pay any income dividends or capital gain distributions.
Other
Security transactions are accounted for on the date securities are purchased or
sold. Dividend income is recognized on the ex-dividend date. For U.S. dollar
denominated bonds, interest income includes level-yield amortization of premium
and discount. For foreign bonds, except for original issue discount, the
Portfolio does not amortize premium and discount. Interest income, including
level-yield amortization of premium and discount, is accrued daily.
2. FEES AND EXPENSES
The Trust, on behalf of the Portfolio, has entered into an Investment Management
Services Agreement with AEFC for managing its portfolio. Under this agreement,
AEFC determines which securities will be purchased, held or sold. The management
fee is a percentage of the Portfolio's average daily net assets in reducing
percentages from 0.59% to 0.465% annually.
Under the agreement, the Trust also pays taxes, brokerage commissions and
nonadvisory expenses which include custodian fees, audit and certain legal fees,
fidelity bond premiums, registration fees for units, office expenses,
consultants' fees, compensation of trustees, corporate filing fees, expenses
incurred in connection with lending securities of the Portfolio and any other
expenses properly payable by the Trust or Portfolio and approved by the board.
During the six months ended Nov. 30, 1998, the Portfolio's custodian fees were
reduced by $179,751 as a result of earnings credits from overnight cash
balances.
According to a Placement Agency Agreement, American Express Financial Advisors
Inc. acts as placement agent of the Trust's units.
3. SECURITIES TRANSACTIONS
Cost of purchases and proceeds from sales of securities (other than short-term
obligations) aggregated $963,792,189 and $854,019,495, respectively, for the six
months ended Nov. 30, 1998. For the same period, the portfolio turnover rate was
23%. Realized gains and losses are determined on an identified cost basis.
<PAGE>
Investments in Securities
High Yield Portfolio
Nov. 30, 1998 (Unaudited)
(Percentages represent value of investment compared to net assets)
Bonds (85.2%)
Issuer Coupon Principal Value(a)
rate amount
Government obligations (0.6%)
Argentine Republic
(U.S. Dollar)
03-31-23 5.75% $3,950,000(c) $2,890,906
City of Moscow
(U.S. Dollar) Zero Coupon
12-31-98 10.96 3,691,890(c,f) 315,287
Govt of Algeria
(U.S. Dollar)
03-04-00 7.06 1,568,182(c) 1,372,159
09-04-06 6.60 3,136,364(c) 1,489,773
Govt of Russia
(Russian Ruble)
09-27-00 14.00 30,008,878(c) 52,537
12-15-20 6.63 10,000,000(c) 675,000
Republic of Korea
(U.S. Dollar)
04-15-08 8.88 8,450,000(c) 8,397,196
United Mexican States
(U.S. Dollar)
12-31-19 6.25 6,000,000(c) 4,601,250
05-15-26 11.50 1,875,000(c) 2,000,391
Total 21,794,499
Mortgage-backed securities (0.8%)
Federal Home Loan Mtge Corp
08-01-17 7.50 3,878(d) 3,917
11-01-28 6.00 25,000,000 24,676,184
Merrill Lynch Mtge Investors
06-15-21 8.08 5,673,253 5,337,290
Total 30,017,391
Aerospace & defense (1.7%)
BE Aerospace
Sr Sub Nts
11-01-08 9.50 5,500,000(e) 5,816,250
Compass Aerospace
Sr Sub Nts
04-15-05 10.13 16,835,000(e) 16,835,000
L-3 Communications
Sr Sub Nts Series B
05-01-07 10.38 6,145,000 6,790,225
Sequa
Sr Sub Nts
12-15-03 9.38 20,750,000 21,165,000
Stellex Inds
Sr Sub Nts Series B
11-01-07 9.50 9,450,000 8,516,813
TransDigm
Sr Sub Nts
12-01-08 10.38 6,000,000(e) 6,150,000
Total 65,273,288
Automotive & related (1.7%)
EV Intl
Company Guaranty Series A
03-15-07 11.00 10,500,000 9,030,000
Hayes Lemmerz Intl
Company Guaranty Series B
07-15-07 9.13 10,000,000 10,450,000
MSX Intl
Company Guaranty
01-15-08 11.38 13,110,000 13,175,550
Oxford Automotive
Company Guaranty Series B
06-15-07 10.13 25,120,000 24,617,600
Penda
Sr Nts Series B
03-01-04 10.75 4,500,000 4,545,000
Venture Holdings Trust
Sr Nts Series B
07-01-05 9.50 4,000,000 3,960,000
Total 65,778,150
Banks and savings & loans (0.2%)
Alfa-Russia Finance
(U.S. Dollar) Medium-term Nts Bank Guaranty
07-28-00 10.38 5,000,000(c) 850,000
CEI Citicorp Holdings
(Argentine Peso)
02-14-07 11.25 5,000,000(c,e) 3,442,405
Wilshire Financial Services
01-01-04 13.00 14,700,000(b) 2,940,000
Series B
08-15-04 13.00 8,500,000(b) 1,700,000
Total 8,932,405
Commercial finance (0.5%)
Advance Holdings
Zero Coupon
04-15-03 12.98 3,300,000(e,g) 1,947,000
Netia Holdings
(U.S. Dollar) Company Guaranty Series B
11-01-07 10.25 17,750,000(c) 15,531,250
Total 17,478,250
Communications equipment & services (14.4%)
21st Century Telecom Group
Zero Coupon Sr Disc Nts
02-15-03 12.35 15,500,000(g) 6,510,000
American Cellular
Sr Nts
05-15-08 10.50 16,500,000(e) 16,335,000
AMSC Acquisition
Company Guaranty Series B
04-01-08 12.25 8,000,000 5,360,000
Bestel
(U.S. Dollar) Zero Coupon
05-15-01 12.75 11,400,000(c,e,g) 6,840,000
Birch Telecom
06-15-08 14.00 14,000,000(e) 12,880,560
Caprock Communications
Sr Nts Series B
07-15-08 12.00 17,000,000 15,810,000
Celcaribe
03-15-04 13.50 3,800,000(e) 6,773,500
Sr Nts
03-15-04 13.50 7,350,000 7,056,000
Comcast Cellular Holdings
Sr Nts Series B
05-01-07 9.50 20,000,000 21,550,000
Crown Castle Intl
Zero Coupon Sr Disc Nts
11-15-02 8.88 14,750,000(g) 10,103,750
CTI Holdings
(U.S. Dollar) Zero Coupon Sr Nts
04-15-03 11.50 9,450,000(c,g) 3,685,500
EchoStar Communications
Zero Coupon Sr Disc Nts
06-01-99 7.95 12,000,000(g) 12,165,000
EchoStar Satellite Broadcasting
Zero Coupon Sr Disc Nts
03-15-00 11.81 30,500,000(g) 29,508,749
Esprit Telecom Group
(U.S. Dollar) Sr Nts
12-15-07 11.50 11,000,000(c) 11,275,000
06-15-08 10.88 17,000,000(c) 16,915,000
Facilicom Intl
Sr Nts Series B
01-15-08 10.50 $1,815,000 $1,506,450
GST Equipment Funding
Sr Nts
05-01-07 13.25 6,750,000 6,741,562
GST Telecom/GST Network Funding
Zero Coupon Sr Disc Nts
05-01-03 10.50 15,000,000(e,g) 7,331,250
GST Telecommunications
Sr Sub Nts
11-15-07 12.75 6,750,000 6,150,938
ICO Global Communications
08-01-05 15.00 16,000,000 12,560,000
Iridium LLC/Capital
Company Guaranty Series A
07-15-05 13.00 10,000,000 9,100,000
Company Guaranty Series C
07-15-05 11.25 1,580,000 1,350,900
Company Guaranty Series D
07-15-05 10.88 11,200,000 9,464,000
IXC Communications
Sr Sub Nts
04-15-08 9.00 15,500,000 15,655,000
Jordan Telecommunications Products
Sr Nts Series B
08-01-07 9.88 25,950,000 25,560,749
Zero Coupon Sr Disc Nts Series B
08-01-00 7.43 21,900,000(g) 17,027,250
KMC Telecom Holdings
Zero Coupon Sr Disc Nts
02-15-03 12.68 12,000,000(g) 6,120,000
Level 3 Communications
Sr Nts
05-01-08 9.13 13,400,000 13,416,750
MJD Communications
Sr Sub Nts Series B
05-01-08 9.50 4,300,000 4,364,500
Nextel Communications
Zero Coupon Sr Disc Nts
01-15-99 11.50 20,500,000(g) 19,603,125
02-15-99 8.00 9,500,000(g) 9,345,625
NEXTLINK Communications
Sr Nts
04-15-06 12.50 15,000,000 16,575,000
11-15-08 10.75 8,750,000(e) 9,176,563
Northeast Optic Network
Sr Nts
08-15-08 12.75 8,000,000 7,700,000
NTL
Zero Coupon Sr Nts Series B
02-01-01 11.48 40,000,000(g) 31,599,999
Pathnet
Sr Nts
04-15-08 12.25 13,350,000 10,546,500
PhoneTel Technologies
Sr Nts
12-15-06 12.00 23,500,000(b) 6,815,000
Price Communications Cellular Holdings
Sr Nts
08-15-08 11.25 17,500,000 17,018,750
Poland Telecom
(U.S. Dollar) Company Guaranty
06-01-04 14.00 4,000,000(c) 2,120,000
Poland Telecom Finance
(U.S. Dollar) Company Guaranty Series B
12-01-07 14.00 16,500,000(c) 15,510,000
RCN
Zero Coupon Sr Disc Nts Series B
02-15-03 9.88 12,000,000(g) 6,600,000
Satelites Mexicanos
(U.S. Dollar) Sr Nts
11-01-04 10.13 10,000,000(c,e) 8,350,000
Talton Holdings
Company Guaranty Sr Nts Series B
06-30-07 11.00 7,600,000 7,201,000
Telehub Communications
Zero Coupon
07-31-01 10.32 12,000,000(e,g) 6,813,240
Triton Communications
Zero Coupon Company Guaranty
05-01-03 10.86 22,000,000(g) 9,790,000
Unisite
Zero Coupon Sub Nts
12-15-00 13.00 9,000,000(e,g,j) 9,925,200
Versatel Telecom
(U.S. Dollar) Sr Nts
05-15-08 13.25 16,600,000(c,e) 16,724,500
Vialog
Company Guaranty
11-15-01 12.75 21,600,000 17,496,000
Total 548,027,910
Computers & office equipment (3.0%)
Anacomp
Sr Sub Nts Series B
04-01-04 10.88 8,500,000 8,733,750
Concentric Network
Sr Nts
12-15-07 12.75 5,600,000 5,432,000
Cooperative Computing
Sr Sub Nts
02-01-08 9.00 20,250,000 18,275,625
Decisionone Holdings
Zero Coupon
08-01-02 9.89 8,450,000(g) 2,112,500
Globix
Sr Nts
05-01-05 13.00 17,075,000 13,318,500
ISG Resources
04-15-08 10.00 17,445,000 17,445,000
Learning
Cv Sr Nts
11-01-00 5.50 2,500,000 2,390,625
PSINet
Sr Nts
11-01-08 11.50 6,500,000(e) 6,955,000
Sr Nts Series B
02-15-05 10.00 11,025,000 11,135,250
Read-Rite
Sub Nts
09-01-04 6.50 4,375,000 3,133,594
Unisys
Sr Nts Series B
04-15-03 12.00 5,000,000 5,625,000
Verio
Sr Nts
04-01-05 10.38 7,000,000 7,035,000
12-01-08 11.25 11,000,000(e) 11,440,000
Total 113,031,844
Electronics (0.7%)
Hyundai Semiconductor
(U.S. Dollar) Sr Nts
05-15-07 8.63 15,000,000(c,e) 10,753,923
Metromedia Fiber Network
Sr Nts
11-15-08 10.00 13,750,000(e) 14,265,625
Total 25,019,548
Energy (4.9%)
Belco Oil & Gas
Sr Sub Nts Series B
09-15-07 8.88 11,000,000 10,230,000
Canadian Forest Oil
(U.S. Dollar) Company Guaranty
09-15-07 8.75 8,500,000(c) 8,372,500
Clark R&M
Sr Sub Nts
11-15-07 8.88 10,100,000 9,191,000
Costilla Energy
Sr Nts
10-01-06 10.25 16,250,000 14,218,750
Energy Corp of America
Sr Sub Nts Series A
05-15-07 9.50 9,000,000 8,460,000
Forcenergy
Sr Sub Nts
11-01-06 9.50 5,000,000 4,262,500
Sr Sub Nts Series B
02-15-07 8.50 2,250,000 1,923,750
Houston Exploration
Sr Sub Nts Series B
01-01-08 8.63 7,550,000 7,474,500
HS Resources
Company Guaranty
11-15-06 9.25 4,250,000 4,138,438
Sr Sub Nts
12-01-03 9.88 9,700,000 9,663,625
Hurricane Hydrocarbons
(U.S. Dollar) Sr Nts
11-01-04 11.75 15,750,000(c,e) 8,347,500
Lodestar Holdings
(U.S. Dollar) Sr Nts
05-15-05 11.50 18,350,000(c,e) 14,129,500
Michael Petroleum
Sr Nts Series B
04-01-05 11.50 6,000,000 5,040,000
Nuevo Energy
Company Guaranty Series B
06-01-08 8.88 12,000,000 11,955,000
Ocean Energy
Company Guaranty Series B
07-01-08 8.38 14,000,000 14,280,000
Panda Global Energy
(U.S. Dollar) Company Guaranty
04-15-04 12.50 24,500,000(c,e) 14,669,375
Rayovac
Sr Sub Nts Series B
11-01-06 10.25 6,114,000 6,434,985
Roil
(U.S. Dollar)
12-05-02 12.78 9,140,000(c,e) 2,285,000
Tatneft Finance
(U.S. Dollar) Company Guaranty
10-29-02 9.00 3,800,000(c,e) 570,000
Tesoro Petroleum
Company Guaranty Series B
07-01-08 9.00 14,250,000 13,911,563
Transamerica Energy
06-15-02 11.50 13,960,000 5,584,000
Zero Coupon
06-15-99 17.58 9,600,000(g) 3,360,000
XCL
05-01-04 13.50 8,000,000(e) 8,080,000
Total 186,581,986
Energy equipment & services (1.4%)
Bayard Drilling
Company Guaranty Series B
06-30-05 11.00 6,300,000 6,874,875
Dailey Intl
Company Guaranty Series B
02-15-08 9.50 9,000,000 4,050,000
DI Inds
Sr Nts
07-01-07 8.88 6,000,000 4,807,500
Grant Geophysical
Company Guaranty Series B
02-15-08 9.75 7,250,000 5,510,000
Grey Wolf
Company Guaranty Series C
07-01-07 8.88 1,750,000 1,400,000
Northern Offshore ASA
(U.S. Dollar) Company Guaranty
05-15-05 10.00 21,000,000(c,e) 12,180,000
Plains Resources
Company Guaranty Series D
03-15-06 10.25 9,000,000 9,101,250
Pride Intl
Sr Nts
05-01-07 9.38 4,450,000 4,361,000
Seven Seas Petroleum
Sr Nts Series B
05-15-05 12.50 8,000,000 6,310,000
Total 54,594,625
Financial services (1.1%)
Arcadia Financial
Sr Nts
03-15-07 11.50 29,165,000 21,610,550
Gemini Inds
12-23-01 13.50 13,500,000(j) 13,500,000
Tri Polyta Finance BV
(U.S. Dollar) Company Guaranty
12-01-03 11.38 20,000,000(c) 5,600,000
Total 40,710,550
Food (2.1%)
Ameriserve Food Distributions
Company Guaranty
07-15-07 10.13 8,400,000 7,644,000
Aurora Foods
Sr Sub Nts Series D
02-15-07 9.88 10,000,000 10,900,000
Chiquita Brands Intl
Sr Nts
01-15-04 9.63 8,500,000 8,797,500
Daya Guna
(U.S. Dollar) Company Guaranty
06-01-07 10.00 10,325,000(c,e) 6,969,375
RAB Enterprises
Sr Nts
05-01-05 10.50 9,600,000(e) 8,856,000
SC Intl
09-01-07 9.25 17,650,000 18,003,000
Specialty Foods
Sr Nts Series B
08-15-01 10.25 15,000,000 12,825,000
Stroh Brewery
Sr Sub Nts
07-01-06 11.10 14,887,000 7,145,760
Total 81,140,635
Furniture & appliances (0.2%)
Lifestyle Furnishings
Company Guaranty
08-01-06 10.88 6,500,000 7,150,000
Health care (0.2%)
Alaris Medical
Zero Coupon Sr Disc Nts
08-01-03 11.12 16,000,000(e,g) 8,800,000
Health care services (2.1%)
Abbey Healthcare Group
Sr Sub Nts
11-01-02 9.50 20,750,000 18,675,000
Fountain View
Company Guaranty Series B
04-15-08 11.25 8,600,000 7,578,750
Magellan Health Services
Sr Sub Nts
02-15-08 9.00 15,000,000 13,987,500
Oxford Health Plans
Sr Nts
05-15-05 11.00 11,500,000(e) 10,522,500
Paracelsus Healthcare
Sr Sub Nts
08-15-06 10.00 14,600,000 13,450,250
Physician Sales & Service
Company Guaranty
10-01-07 8.50 15,250,000 15,898,125
Total 80,112,125
Household products (0.3%)
Revlon Worldwide
Zero Coupon Sr Disc Nts Series B
03-15-01 10.94 14,000,000(f) 9,800,000
Industrial equipment & services (3.0%)
Clark Materials Handling
Sr Nts Series D
11-15-06 10.75 13,500,000 13,837,500
Day Intl Group
Sr Nts Series B
06-01-05 11.13 1,200,000 1,240,500
Goss Graphic Systems
Sr Sub Nts
10-15-06 12.00 14,000,000 13,370,000
Grove Holdings LLC/Capital
Zero Coupon
05-01-03 11.63 4,000,000(g) 1,880,000
Grove Inds
05-01-10 14.50 2,901,549(e) 2,292,224
HDA Parts System
Sr Sub Nts with Rights
08-01-05 12.00 5,000,000(e) 4,600,000
Motor & Gears
Sr Nts Series D
11-15-06 10.75 30,500,000 31,567,500
Norcal Waste Systems
Company Guaranty Series B
11-15-05 13.50 20,300,000 22,862,875
Park-Ohio Inds
Sr Sub Nts
12-01-07 9.25 15,000,000 15,225,000
Thermadyne Holdings
Zero Coupon
06-01-03 12.49 12,000,000(g) 5,640,000
Total 112,515,599
Insurance (0.8%)
Americo Life
Sr Sub Nts
06-01-05 9.25 15,000,000 15,281,250
Veritas Holdings
(U.S. Dollar) Sr Nts
12-15-03 9.63 15,256,000(c) 15,256,000
Total 30,537,250
Leisure time & entertainment (5.9%)
Affinity Group Holdings
Sr Nts
04-01-07 11.00 9,000,000 9,191,250
Coast Hotels & Casino
Company Guaranty Series B
12-15-02 13.00 19,800,000 21,705,750
Hammons (JQ) Hotels
1st Mtge
02-15-04 8.88 12,000,000 11,100,000
Hollywood Theaters
Company Guaranty
08-01-07 10.63 5,950,000 5,057,500
Icon Health & Fitness
Sr Sub Nts Series B
07-15-02 13.00 12,500,000(b) 5,875,000
Zero Coupon Sr Disc Nts Series B
11-15-01 13.37 21,750,000(g) 217,500
Isle of Capri Casinos/Capital
1st Mtge Series B
08-31-04 13.00 16,250,000 17,103,125
Lodgenet Entertainment
Sr Nts
12-15-06 10.25 15,000,000 15,300,000
Premier Cruises
Sr Nts
03-15-08 11.00 11,000,000(b,e) 4,510,000
Premier Parks
Sr Nts
04-01-06 9.25 8,300,000 8,725,375
Regal Cinemas
Sr Sub Nts
06-01-08 9.50 8,000,000(e) 8,420,000
Riviera Holdings
Company Guaranty
08-15-04 10.00 11,000,000 9,253,750
Trump Atlantic City Assn/Funding
1st Mtge Company Guaranty
05-01-06 11.25 26,945,000 25,463,025
Trump Holdings & Funding
Sr Nts
06-15-05 15.50 28,050,000 27,699,375
United Artists Theatres
Series A
07-01-15 9.30 13,367,368 12,264,560
Sr Sub Nts Series B
04-15-08 9.75 10,000,000 9,600,000
Venetian Casino/LV Sands
Company Guaranty
11-15-99 10.00 6,000,000(h) 5,340,000
11-15-04 12.25 15,105,000 14,538,563
Waterford Gaming/LLC
Sr Nts
11-15-03 12.75 12,771,000 13,792,680
Total 225,157,453
Media (11.0%)
Adams Outdoor Advertising
Sr Nts
03-15-06 10.75 10,800,000 11,556,000
Adelphia Communications
Sr Deb
09-15-04 11.88 5,000,000 5,412,500
Sr Nts Series B
02-01-08 8.38 19,500,000 20,036,250
Australis Holdings
(U.S. Dollar) Zero Coupon Sr Disc Nts
11-01-00 14.99 17,900,000(b,c,g) 179,000
Australis Media
(U.S. Dollar)
11-01-00 14.00 5,587,791(c) 4,380,700
(U.S. Dollar) Zero Coupon
05-15-00 12.32 43,500,000(b,c,g) 4,350
(U.S. Dollar) Zero Coupon Sr Disc Nts
05-15-00 13.83 469,560(b,c,g) 47
Benedek Broadcasting
Sr Nts
03-01-05 11.88 2,500,000 2,725,000
Benedek Communications
Zero Coupon Sr Disc Nts
05-15-01 13.25 9,500,000(g) 7,030,000
Big City Radio
Zero Coupon Company Guaranty
03-15-01 11.40 10,000,000(g) 6,700,000
Cable Systems USA
06-30-99 10.75 2,205,527(j) 2,183,471
Capstar Broadcasting
Zero Coupon Sr Disc Nts
02-01-02 7.49 8,000,000(e,g) 6,580,000
CBS Radio
Pay-in-kind Sub Deb
01-15-09 11.38 9,475,300(i) 10,943,972
Central Euro Media
(U.S. Dollar) Sr Nts
08-15-04 9.38 12,175,000(c) 10,079,457
Chancellor Media
Sr Nts
11-01-08 8.00 50,000,000(e) 51,374,999
Sr Sub Nts
10-01-04 9.38 3,500,000 3,640,000
Coaxial Communications/Phoenix
Company Guaranty
08-15-06 10.00 10,000,000(e) 10,175,000
Globo Communicacoes Participacoes
(U.S. Dollar) Sr Nts
12-05-08 10.63 15,000,000(c,e) 11,227,494
Golden Sky Systems
Sr Sub Nts
08-01-06 12.38 17,000,000(e) 17,148,750
Grupo Televisa
(U.S. Dollar) Sr Nts
05-15-06 11.88 3,250,000(c) 3,355,625
Jacor Communications
Company Guaranty
12-15-06 9.75 19,000,000 21,042,500
James Cable Partners LP
Sr Nts Series B
08-15-04 10.75 3,550,000 3,745,250
Liberty Group Publishing
Company Guaranty
02-01-08 9.38 7,500,000 7,078,125
MDC Communications
(U.S. Dollar) Sr Sub Nts
12-01-06 10.50 12,100,000(c) 12,342,000
OpTel
Sr Nts Series B
02-15-05 13.00 17,000,000 17,425,000
Outdoor Systems
Company Guaranty
10-15-06 9.38 10,000,000 10,800,000
06-15-07 8.88 26,175,000 27,810,938
Paxson Communications
Sr Sub Nts
10-01-02 11.63 13,000,000 13,357,500
Pegasus Communications
Series B
07-01-05 12.50 15,400,000 16,863,000
Sr Nts Series B
10-15-05 9.63 6,500,000 6,500,000
Price Communications Wireless
Sr Nts
12-15-06 9.13 15,000,000(e) 15,600,000
Sr Sub Nts
07-15-07 11.75 10,000,000 10,875,000
Radio Unica
Zero Coupon Sr Disc Nts
08-01-02 11.74 13,000,000(e,g) 6,906,250
Sinclair Broadcast Group
Sr Sub Nts
12-15-07 8.75 1,800,000 1,818,000
Spanish Broadcasting System
Sr Nts
06-15-02 12.50 4,000,000 4,360,000
Sr Nts Series B
03-15-04 11.00 3,150,000 3,307,500
Telemundo Holdings
Zero Coupon Sr Disc Nts
08-15-03 .00 17,000,000(e,g) 9,860,000
Telewest Communications
(U.S. Dollar) Sr Nts
11-01-08 11.25 8,000,000(c,e) 9,120,000
(U.S. Dollar) Zero Coupon
10-01-00 10.90 7,000,000(c,g) 5,897,500
Veninfotel
(U.S. Dollar) Cv Pay-in-kind
03-01-02 10.00 9,450,000(c,i) 14,175,000
Viacom Intl
07-01-03 7.00 15,000,000 15,001,703
Total 418,617,881
Metals (3.2%)
Bar Technologies
Company Guaranty
04-01-01 13.50 10,000,000(e) 10,700,000
Centaur Mining & Exploration
(U.S. Dollar) Company Guaranty
12-01-07 11.00 11,500,000(c) 10,522,500
EnviroSource
Sr Nts
06-15-03 9.75 26,648,000 24,516,160
Great Central Mines
(U.S. Dollar) Sr Nts
04-01-08 8.88 10,000,000(c) 10,150,000
Great Lakes Acquisition
Zero Coupon Series B
05-15-03 13.23 8,000,000(g) 3,840,000
Great Lakes Carbon
Company Guaranty Pay-in-kind Series B
05-15-08 10.25 8,875,000(i) 8,963,750
Imexsa Export Trust
(U.S. Dollar)
05-31-03 10.13 9,609,759(c,e) 8,552,685
Maxxam Group Holdings
Sr Nts Series B
08-01-03 12.00 12,000,000 12,495,000
Neenah
Sr Sub Nts
05-01-07 11.13 3,700,000 3,857,250
NSM Steel
Company Guaranty
02-01-06 12.00 14,350,000(b) 3,731,000
02-01-08 12.25 11,700,000(b) 1,755,000
Ormet
Company Guaranty
08-15-08 11.00 17,000,000(e) 16,235,000
Sheffield Steel
1st Mtge Series B
12-01-05 11.50 10,200,000 7,866,750
Total 123,185,095
Miscellaneous (1.7%)
Bistro Trust
Sub Nts
12-31-02 9.50 10,000,000(e) 9,516,000
Comforce Operating
Sr Nts Series B
12-01-07 12.00 9,000,000 9,225,000
ECM Funding LP
06-10-02 11.92 1,576,169(j) 1,576,169
Knology Holdings
Zero Coupon Sr Disc Nts
10-15-02 12.24 11,000,000(g) 4,963,750
Outsourcing Solutions
Sr Sub Nts Series B
11-01-06 11.00 37,395,000 35,385,018
Purina Mills
Sr Sub Nts
03-15-10 9.00 5,825,000 5,941,500
Total 66,607,437
Multi-industry conglomerates (1.7%)
Communications & Power Inds
Sr Sub Nts Series B
08-01-05 12.00 10,000,000 10,537,500
Jordan Inds
Zero Coupon Sr Sub Debs Series B
04-01-02 11.75 17,692,251(g) 11,300,925
Pierce Leahy
Sr Sub Nts
07-15-06 11.13 5,433,000(e) 5,989,883
Pierce Leahy Command
Company Guaranty
05-15-08 8.13 25,150,000 24,961,375
Prime Succession
Sr Sub Nts
08-15-04 10.75 10,000,000 9,562,500
Total 62,352,183
Paper & packaging (5.5%)
APP Intl Finance
(U.S. Dollar)
10-01-05 11.75 4,500,000(c) 3,555,000
Bear Island LLC/Finance
Sr Nts Series B
12-01-07 10.00 12,500,000 12,500,000
Berry Plastics
Sr Sub Nts
04-15-04 12.25 3,250,000(e) 3,424,688
BPC Holdings
Sr Nts Series B
06-15-06 12.50 11,750,000 12,308,125
Crown Packaging
Sr Sub Nts
09-01-05 11.00 20,000,000 18,800,000
Doman Inds
(U.S. Dollar)
03-15-04 8.75 10,500,000(c) 8,951,250
(U.S. Dollar) Sr Nts Series B
11-15-07 9.25 3,500,000(c) 2,905,000
Gaylord Container
Sr Nts
06-15-07 9.75 10,500,000 10,053,750
02-15-08 9.88 36,000,000 28,799,999
Graham Packaging/GPC Capital
Zero Coupon Sr Disc Nts Series B
01-15-03 10.84 5,000,000(g) 3,350,000
Grupo Industrial Durango
(U.S. Dollar)
08-01-03 12.63 5,000,000(c) 4,562,500
Repap New Brunswick
(U.S. Dollar) Sr Nts
06-01-04 9.00 5,450,000(c) 5,395,500
04-15-05 10.63 33,000,000(c) 26,070,000
Riverwood Intl
Company Guaranty
08-01-07 10.63 5,500,000 5,665,000
04-01-08 10.88 10,000,000 9,500,000
Company Guaranty Sr Nts
04-01-06 10.25 15,000,000 15,150,000
Silgan Holdings
06-01-09 9.00 8,250,000 8,250,000
Pay-in-kind
07-15-06 13.25 5,621,000(i) 6,084,733
Stone Container
1st Mtge
10-01-02 10.75 5,000,000 5,200,000
Sr Nts
08-01-16 12.58 9,000,000 9,393,750
Tjiwi Kimia Finance Mauritius
(U.S. Dollar) Company Guaranty
08-01-04 10.00 10,000,000(c) 6,250,000
Tjiwi Kimia Intl
(U.S. Dollar) Company Guaranty
08-01-01 13.25 7,000,000(c) 5,180,000
Total 211,349,295
Restaurants & lodging (0.7%)
American Restaurant Group
Company Guaranty Series B
02-15-03 11.50 9,000,000 8,426,250
Prime Hospitality
Sr Sub Nts Series B
04-01-07 9.75 18,700,000 18,933,750
Total 27,360,000
Retail (3.8%)
Advance Stores
Sr Sub Nts
04-15-08 10.25 5,500,000(e) 5,665,000
Amazon.com
Zero Coupon Sr Disc Nts
05-01-03 10.00 24,250,000(g) 16,641,563
CEX Holdings
Sr Sub Nts
06-01-08 9.63 10,000,000(e) 9,600,000
Corporate Express
Cv
07-01-00 4.50 5,000,000 4,418,750
Dairy Mart Convenience Stores
Sr Sub Nts Series B
03-15-04 10.25 24,950,000(j) 23,764,875
Maxim Group
Company Guaranty Series B
10-15-07 9.25 12,500,000 12,515,625
Musicland Group
Company Guaranty Series B
03-15-08 9.88 16,750,000 16,750,000
Pathmark Stores
Sr Sub Nts
05-01-03 9.63 8,500,000 8,457,500
Sub Nts
06-15-02 11.63 18,000,000 18,090,000
Pueblo Xtra Intl
Sr Nts Series C
08-01-03 9.50 9,410,000 9,174,750
Stater Brothers Holdings
Sr Nts
03-01-01 11.00 14,500,000 15,152,500
United Auto Group
Sr Sub Nts Series A
07-15-07 11.00 3,500,000 3,097,500
Total 143,328,063
Textiles & apparel (2.0%)
Anvil Knitwear
Sr Nts Series B
03-15-07 10.88 14,000,000 11,917,500
Galey & Lord
Company Guaranty
03-01-08 9.13 8,000,000 7,400,000
GFSI
Sr Sub Nts Series B
03-01-07 9.63 13,000,000(e) 12,236,250
GFSI Holdings
Zero Coupon Sr Disc Nts Series B
09-15-04 10.77 13,300,000(g) 11,571,000
Hosiery Corp of America
Sr Sub Nts
08-01-02 13.75 10,000,000 10,300,000
NTEX
(U.S. Dollar) Sr Nts
06-01-06 11.50 6,900,000(c,e) 6,624,000
Pillowtex
Company Guaranty Sr Sub Nts Series B
12-15-07 9.00 5,000,000 5,225,000
Polysindo Intl Finance
(U.S. Dollar) Company Guaranty
06-15-01 13.00 2,000,000(c) 620,000
06-15-06 11.38 7,900,000(c) 2,449,000
Steel Heddle Group
Sr Sub Nts
06-01-08 10.63 4,600,000(e) 3,795,000
Zero Coupon
06-01-03 13.75 6,200,000(e,g) 2,619,500
Total 74,757,250
Transportation (1.4%)
American Architectural
Company Guaranty
12-01-07 11.75 10,000,000 8,200,000
Autopistas Del Sol
(U.S. Dollar) Sr Nts
08-01-09 10.25 13,500,000(c,e) 9,888,750
Enterprises Shipholding
(U.S. Dollar) Sr Nts
05-01-08 8.88 19,750,000(c) 17,502,758
Global Ocean Carriers
Sr Nts
07-15-07 10.25 13,500,000 8,370,000
Greater Beijing Expressway
(U.S. Dollar) Sr Nts
06-15-04 9.75 3,500,000(c,e) 1,855,000
06-15-07 10.00 5,000,000(c,e) 2,500,000
Trico Marine Services
Company Guaranty Sr Nts Series F
08-01-05 8.50 5,000,000 4,550,000
Total 52,866,508
Utilities -- electric (0.6%)
Espirito Santo Centrais
(U.S. Dollar)
07-15-07 10.00 9,000,000(c) 6,715,870
Midland Funding
Series A
07-23-05 11.75 3,500,000 4,029,375
Series B
07-23-06 13.25 10,500,000 12,744,375
Total 23,489,620
Utilities -- gas (0.5%)
Bellwether Exploration
Sr Nts
04-01-07 10.88 9,000,000 9,056,250
Empire Gas
Sr Nts
07-15-99 7.00 11,350,000(h) 8,356,438
Total 17,412,688
Utilities -- telephone (7.7%)
Allegiance Telecom
Zero Coupon Sr Disc Nts Series B
02-15-03 12.00 30,450,000(g) 15,072,750
CCPR Services
Company Guaranty
02-01-07 10.00 26,850,000 26,581,500
Colt Telecommunications Group
(U.S. Dollar) Zero Coupon
12-15-01 12.00 8,500,000(c,g) 6,715,000
Geotek Communications
Cv Sr Sub Nts
02-15-01 12.00 4,135,000(b) 5,169
Grupo Iusacell
(U.S. Dollar)
07-15-04 10.00 4,550,000(c) 3,913,000
Hyperion Telecommunications
Sr Nts Series B
09-01-04 12.25 14,000,000 14,560,000
Zero Coupon Sr Disc Nts Series B
04-15-01 15.61 2,250,000(g) 1,665,000
Intermedia Communications
Sr Nts Series B
11-01-07 8.88 11,025,000 10,914,750
06-01-08 8.60 2,400,000 2,340,000
Zero Coupon Sr Disc Nts Series B
07-15-02 10.65 22,375,000(g) 15,886,250
ITC Deltacom
Sr Nts
06-01-07 11.00 9,457,000 10,308,130
03-01-08 8.88 17,250,000 17,077,499
11-15-08 9.75 4,500,000(e) 4,753,125
McLeod USA
Sr Nts
03-15-08 8.38 7,680,000 7,718,400
Metrocall
Sr Sub Nts
10-01-07 10.38 13,750,000 14,162,500
MetroNet Communications
(U.S. Dollar) Sr Nts
08-15-07 12.00 8,750,000(c) 9,668,750
11-01-08 10.63 5,200,000(c,e) 5,590,000
(U.S. Dollar) Zero Coupon Sr Disc Nts
11-01-02 10.74 8,300,000(c,g) 5,146,000
06-15-03 9.95 16,000,000(c,g) 10,080,000
Omnipoint Communications
Sr Nts
02-17-06 8.56 16,965,195(e,h) 14,717,307
08-15-06 11.63 24,100,000 15,906,000
Panamsat Intl Systems
Pay-in-kind
04-15-05 12.75 4,000(i) 4,570
Peoples Telephone
Sr Nts
07-15-02 12.25 14,250,000 15,710,625
Philippine Long Distance Telephone
(U.S. Dollar) Medium-term Nts Series E
03-06-07 7.85 15,000,000(c,e) 13,000,020
Primus Telecommunications Group
Sr Nts
08-01-04 11.75 11,550,000 12,040,875
Sr Nts Series B
05-15-08 9.88 10,000,000 9,450,000
Pronet
Sr Sub Nts
06-15-05 11.88 19,350,000 20,462,625
RSL Communications
(U.S. Dollar) Company Guaranty
11-15-06 12.25 10,167,000(c) 10,828,351
Total 294,278,196
Total bonds
(Cost: $3,574,322,278) $3,248,057,724
See accompanying notes to investments in securities.
<PAGE>
Common stocks (0.7%)
Issuer Shares Value(a)
Arena Brands 111,111(b,j) $2,388,887
Communications & Power Inds 3,500(b) 525,000
Concentric Network 100,000(b) 2,837,500
Core Capital 222,223(j) 2,844,454
EchoStar Satellite Broadcasting 150,000(b) 5,821,875
Foodmaker 21,000(b) 406,875
Gaylord Container Cl A 1,000,000(b) 5,250,000
Global TeleSystems Group 107,700(b) 4,674,853
Nextel Communications Cl A 41,056(b) 882,704
OpTel 17,000(b,e) 68,000
Pegasus Communications 16,923(b) 283,460
Specialty Foods 300,000(b) 6,000
Wilshire Real Estate Investment Trust 140,000 472,500
Wireless One 25,000(b) 9,375
Total common stocks
(Cost: $26,415,197) $26,471,483
Preferred stocks & other (10.0%)
Issuer Shares Value(a)
21st Century Telecom Group
13.75% Pay-in-kind 2,787(b,i) $1,811,550
Warrants 2,600 78,000
Allegiance Telecom
Warrants 30,450 60,900
American Mobile Satellite
Warrants 8,000 40,000
American Restaurant Group
12.00% Pay-in-kind Series B 3,500(b,i) 3,500,000
Warrants 3,500 35
American Telecasting
Warrants 85,225 852
APP Finance II Mauritius Cl B
12.00% 22,600(c) 13,729,500
Australis Holdings
Warrants 13,400(c) 134
Bar Technologies
Warrants 10,000(d) 550,000
Belco Oil & Gas
6.50% Cv 210,000 3,018,750
Bell Technology
Warrants 17,075 170,750
Benedek Communications
Warrants 70,000 140,000
Capstar Broadcasting
12.00% Pay-in-kind Exchangeable 45,000(b,i) 5,175,000
Celcaribe
Warrants 1,195,110 3,137,164
Century Maintenance
13.25% Pay-in-kind 120,000(b,e,i) 12,120,000
Chesapeake Energy
7.00% Cv 33,300 549,450
Clark Materials Handling
13.00% 6,706(b) 5,264,210
Clearnet Communications
Warrants 42,240 274,560
Communications & Power Inds
14.00% Pay-in-kind Series B 186,202(b,i) 20,342,570
Concentric Network
13.50% Pay-in-kind Series B 11,857(b,i) 9,959,880
Warrants 5,600 672,000
Core Capital
10.00% Cv Series A/I 222,223(j) 4,633,350
Crown Packaging
Warrants 10,000 1,000
CSC Holdings
11.13% Pay-in-kind Series M 312,447(b,i) 35,150,287
11.75% Pay-in-kind Series H 141,814(b,i) 16,450,425
Dairy Mart Convenience Stores
Warrants 311,333(e) 158,780
Earthwatch
12.00% Cv Series C 700,000(b,e) 875,000
EchoStar Communications
12.13% Pay-in-kind Series B 13,934(i) 14,735,205
Fairfield Mfg
11.25% Pay-in-kind 12,880(i) 12,236,000
Geotek Communications
Warrants 872,500(k) --
Global Crossing Holdings
10.50% Pay-in-kind 80,000(b,e,i) 8,020,000
HarCor Energy
Warrants 110,000 55,000
Hemmeter Enterprises
Warrants 36,000(k) --
Hosiery Corp of America
Warrants 10,000 400,000
Hyperion Telecommunications
12.88% Pay-in-kind Series B 5,117(b,i) 4,221,525
Intermedia Communications
7.00% Cv Series F 240,000(b) 3,870,000
13.50% Pay-in-kind Series B 130,800(b,i) 13,766,699
Warrants 22,750 1,070,615
Intl Wireless Communications
Warrants 14,750 148
Iridium World Communications
Warrants 17,150 2,658,250
IXC Communications
12.50% Pay-in-kind Series B 5,238(b,i) 5,565,375
Jitney-Jungle Stores of America Cl A
15.00% 109,500(b) 14,454,000
Kelley Oil & Gas
2.63% Cv 262,500 3,740,625
KMC Telecom Holdings
Warrants 12,000 37,500
Knology Holdings
Warrants 11,000 27,500
Lady Luck Gaming
Pay-in-kind 50,000(i,j) 1,750,000
Liberty Group Publishing
14.75% Cv 496,217(b) 12,405,425
MetroNet Communications
Warrants 8,750 396,995
Nakornthai Strip Mill
Warrants 7,407,184(c) 7
Nebco Evans Holdings
11.25% Pay-in-kind 122,882(b,i) 6,512,746
Nextel Communications
11.13% Pay-in-kind Series E 7,065(b,i) 6,217,200
Warrants 18,902(k) --
NTL
13.00% Pay-in-kind Series B 24,246(b,e,i) 25,094,609
Pagemart Nationwide
Warrants 50,750 247,406
Pathnet
Warrants 13,350 133,500
Paxson Communications
12.50% Pay-in-kind Exchangeable 217,090(b,i) 19,700,918
Pegasus Communications
12.75% Pay-in-kind 62,500(b,i) 6,546,875
12.75% Pay-in-kind Series A 2,499(b,i) 2,573,970
Poland Telecom
Warrants 20,500(c) 660,040
Price Communications
Warrants 41,280 1,238,400
Primus Telecommunications Group
Warrants 11,550 231,000
RSL Communications
Warrants 9,500 902,500
SFX Broadcasting
12.63% Pay-in-kind Series E 60,722(i) 7,286,640
SGW Holdings
12.50% Pay-in-kind Series B 127,978(b,i,j) 2,175,626
Cv Series A 87,091(j) 899,940
Warrants 2,750(j) 870,375
Sinclair Capital
11.63% 140,000 15,172,500
TransDigm
Warrants 11,195(j) 11,194,642
Unifi Communications
Warrants 10,000 $100
Unisite
Warrants 4,504(j,k) --
Unisite Cl C 5,938(j) 2,935,985
Versatel Telecom
Warrants 11,000(c) 137,500
Vialog
Warrants 21,600 280,800
Warren (SD)
14.00% Series B 557,430(b) 31,216,080
Wireless One
Warrants 23,250 233
Total preferred stocks & other
(Cost: $391,714,460) $379,504,601
See accompanying notes to investment in securities
<PAGE>
Short-term securities (2.4%)
Issuer Annualized Amount Value(a)
yield on date payable at
of purchase maturity
U.S. government agencies (0.8%)
Federal Home Loan Mtge Corp Disc Nts
12-15-98 4.99% $4,600,000 $4,591,109
12-17-98 4.85 16,100,000 16,065,402
Federal Natl Mtge Assn Disc Nt
12-18-98 5.01 9,800,000 9,776,954
Total 30,433,465
Commercial paper (1.5%)
Associates Corp North America
01-14-99 5.35 6,400,000 6,356,707
BMW US Capital
12-15-98 5.15 6,500,000 6,487,033
General Electric Capital
12-01-98 5.45 8,900,000 8,900,000
GTE Funding
12-01-98 5.19 9,000,000 9,000,000
Intl Lease Finance
12-16-98 5.16 3,800,000 3,791,862
Natl Rural Utilities
12-17-98 5.20 10,100,000 10,076,747
Pioneer Hi-Bred
12-07-98 5.10 2,500,000 2,497,888
12-08-98 5.21 6,100,000 6,093,832
Reed Elsevier
12-07-98 5.15 3,300,000(l) 3,297,179
Sysco
12-18-98 5.10 2,100,000(l) 2,094,982
Total 58,596,230
Letter of credit (0.1%)
Bank of America-
AES Hawaii
12-10-98 4.96 3,000,000 2,996,288
Total short-term securities
(Cost: $92,027,817) $92,025,983
Total investments in securities
(Cost: $4,084,479,752)(m) $3,746,059,791
See accompanying notes to investments in securities.
<PAGE>
Notes to investments in securities
(a) Securities are valued by procedures described in Note 1 to the financial
statements.
(b) Non-income producing. For long-term debt securities, item identified is
in default as to payment of interest and/or principal.
(c) Foreign security values are stated in U.S. dollars. For debt securities,
principal amounts are denominated in the currency indicated. As of Nov. 30,
1998, the value of foreign securities represented 13.53% of net assets.
(d) Adjustable rate mortgage; interest rate varies to reflect current market
conditions; rate shown is the effective rate on Nov. 30, 1998.
(e) Represents a security sold under Rule 144A, which is exempt from
registration under the Securities Act of 1933, as amended. This security
has been determined to be liquid under guidelines established by the board.
(f) For zero coupon bonds, the interest rate disclosed represents the
annualized effective yield on the date of acquisition.
(g) For those zero coupon bonds that become coupon paying at a future date, the
interest rate disclosed represents the annualized effective yield from the
date of acquisition to interest reset date disclosed.
(h) Interest rate varies either based on a predetermined schedule or to reflect
current market conditions; rate shown is the effective rate on Nov. 30,
1998.
(i) Pay-in-kind securities are securities in which the issuer has the option to
make interest or dividend payments in cash or in additional securities. The
securities issued as interest or dividends usually have the same terms,
including maturity date, as the pay-in-kind securities.
(j) Identifies issues considered to be illiquid as to their marketability
(see Note 1 to the financial statements). Information concerning such
security holdings at Nov. 30, 1998, is as follows:
Security Acquisition dates Cost
Arena Brands
Common 06-20-97 $ 5,888,888
Cable Systems USA
10.75% 1999 02-05-96 2,124,518
Core Capital
Common 10-31-97 4,444,460
Preferred 10.00% Cv Series A/I 10-31-97 5,555,575
Dairy Mart Convenience Stores
Sr Sub Nts Series B 10.25% 2004 11-29-95 thru 10-22-96 5,744,975
ECM Funding LP
11.92% 2002 04-14-92 1,576,168
Gemini Inds
13.50% 2001 12-23-96 13,500,000
Lady Luck Gaming
Preferred Pay-in-kind 11-20-98 1,750,000
SGW Holdings
Preferred 12.50% Pay-in-kind Series B 08-15-97 thru 11-02-98 2,189,268
Preferred Cv Series A 08-15-97 899,998
Warrants 08-15-97 867,900
TransDigm
Warrants 09-03-93 thru 05-08-96 1,027,805
Unisite
Preferred Cl C 12-17-97 2,750,066
Warrants 12-17-97 --
Zero Coupon Sub Nts 13.00% 2000* 12-18-97 9,000,000
Veninfotel
(U.S. Dollar) Cv Pay-in-kind 10.00% 200203-05-97 thru 11-03-98 9,450,000
*Represents a security sold under Rule 144A, which is exempt from
registration under the Securities Act of 1933, as amended.
(k) Negligible market value.
(l) Commercial paper sold within terms of a private placement memorandum,
exempt from registration under Section 4(2) of the Securities Act of 1933,
as amended, and may be sold only to dealers in that program or other
"accredited investors." This security has been determined to be liquid
under guidelines established by the board.
(m) At Nov. 30, 1998, the cost of securities for federal income tax purposes
was approximately $4,083,533,000 and the approximate aggregate gross
unrealized appreciation and depreciation based on that cost was:
Unrealized appreciation $130,728,000
Unrealized depreciation (468,201,000)
------------
Net unrealized depreciation $(337,473,000)
<PAGE>
Financial Statements
Statement of assets and liabilities
Quality Income Portfolio
Nov. 30, 1998 (Unaudited)
Assets
Investments in securities, at value (Note 1)
(identified cost $1,516,912,022) $1,614,439,961
Dividends and accrued interest receivable 23,308,184
Receivable for investment securities sold 21,072,424
----------
Total assets 1,658,820,569
-------------
Liabilities
Disbursements in excess of cash on demand deposit 327,736
Accrued investment management services fee 68,980
Other accrued expenses 49,369
Options contracts written, at value
(premium received $1,427,252) (Note 4) 1,686,000
---------
Total liabilities 2,132,085
---------
Net assets $1,656,688,484
==============
See accompanying notes to financial statements.
<PAGE>
Statement of operations
Quality Income Portfolio
Six months ended Nov. 30, 1998 (Unaudited)
Investment income
Income:
Dividends $ 403,750
Interest 55,119,268
----------
Total income 55,523,018
----------
Expenses (Note 2):
Investment management services fee 4,188,850
Compensation of board members 5,846
Custodian fees 46,051
Audit fees 15,000
Other 10,748
------
Total expenses 4,266,495
Earnings credits on cash balances (Note 2) (1,406)
------
Total net expenses 4,265,089
---------
Investment income (loss)-- net 51,257,929
----------
Realized and unrealized gain (loss) -- net
Net realized gain (loss) on:
Security transactions (Note 3) 9,056,819
Financial futures contracts (714,219)
Options contacts written 342,500
-------
Net realized gain (loss) on investments 8,685,100
Net change in unrealized appreciation (depreciation) on investments
and on translation of assets and liabilities in foreign currencies 9,636,060
---------
Net gain (loss) on investments and foreign currencies 18,321,160
----------
Net increase (decrease) in net assets resulting from operations $69,579,089
===========
See accompanying notes to financial statements.
<PAGE>
Statements of changes in net assets
Quality Income Portfolio
Nov. 30, 1998 May 31, 1998
Six months ended Year ended
(Unaudited)
Operations
Investment income (loss)-- net $ 51,257,929 $ 105,079,943
Net realized gain (loss) on investments 8,685,100 (2,535,432)
Net change in unrealized appreciation
(depreciation) on investments and on
translation of assets and liabilities
in foreign currencies 9,636,060 59,167,525
--------- ----------
Net increase (decrease) in net assets
resulting from operations 69,579,089 161,712,036
Net contributions (withdrawals) from partners (19,807,045) (170,449,665)
----------- ------------
Total increase (decrease) in net assets 49,772,044 (8,737,629)
Net assets at beginning of period (Note 1) 1,606,916,440 1,615,654,069
------------- -------------
Net assets at end of period $1,656,688,484 $1,606,916,440
============== ==============
See accompanying notes to financial statements.
<PAGE>
Notes to Financial Statements
Quality Income Portfolio
(Unaudited as to Nov. 30, 1998)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Quality Income Portfolio (the Portfolio) is a series of Income Trust (the Trust)
and is registered under the Investment Company Act of 1940 (as amended) as a
diversified, open-end management investment company. Quality Income Portfolio
invests primarily in investment-grade bonds. The Declaration of Trust permits
the Trustees to issue non-transferable interests in the Portfolio.
The Portfolio's significant accounting policies are summarized below:
Use of estimates
Preparing financial statements that conform to generally accepted accounting
principles requires management to make estimates (e.g., on assets and
liabilities) that could differ from actual results.
Valuation of securities
All securities are valued at the close of each business day. Securities traded
on national securities exchanges or included in national market systems are
valued at the last quoted sales price. Debt securities are generally traded in
the over-the-counter market and are valued at a price that reflects fair value
as quoted by dealers in these securities or by an independent pricing service.
Securities for which market quotations are not readily available are valued at
fair value according to methods selected in good faith by the board. Short-term
securities maturing in more than 60 days from the valuation date are valued at
the market price or approximate market value based on current interest rates;
those maturing in 60 days or less are valued at amortized cost.
Option transactions To produce incremental earnings, protect gains and
facilitate buying and selling of securities for investments the Portfolio may
buy and write options traded on any U.S. or foreign exchange or in the
over-the-counter market where completing the obligation depends upon the credit
standing of the other party. The Portfolio also may buy and sell put and call
options and write covered call options on portfolio securities as well as write
cash-secured put options. The risk in writing a call option is that the
Portfolio gives up the opportunity for profit if the market price of the
security increases. The risk in writing a put option is that the Portfolio may
incur a loss if the market price of the security decreases and the option is
exercised. The risk in buying an option is that the Portfolio pays a premium
whether or not the option is exercised. The Portfolio also has the additional
risk of being unable to enter into a closing transaction if a liquid secondary
market does not exist.
Option contracts are valued daily at the closing prices on their primary
exchanges and unrealized appreciation or depreciation is recorded. The Portfolio
will realize a gain or loss when the option transaction expires or closes. When
options on debt securities or futures are exercised, the Portfolio will realize
a gain or loss. When other options are exercised, the proceeds on sales for a
written call option, the purchase cost for a written put option or the cost of a
security for a purchased put or call option is adjusted by the amount of premium
received or paid.
Futures transactions
To gain exposure to or protect itself from market changes, the Portfolio may buy
and sell financial futures contracts traded on any U.S. or foreign exchange. The
Portfolio also may buy and write put and call options on these futures
contracts. Risks of entering into futures contracts and related options include
the possibility of an illiquid market and that a change in the value of the
contract or option may not correlate with changes in the value of the underlying
securities.
Upon entering into a futures contract, the Portfolio is required to deposit
either cash or securities in an amount (initial margin) equal to a certain
percentage of the contract value. Subsequent payments (variation margin) are
made or received by the Portfolio each day. The variation margin payments are
equal to the daily changes in the contract value and are recorded as unrealized
gains and losses. The Portfolio recognizes a realized gain or loss when the
contract is closed or expires.
Foreign currency translations and foreign currency contracts Securities and
other assets and liabilities denominated in foreign currencies are translated
daily into U.S. dollars at the closing rate of exchange. Foreign currency
amounts related to the purchase or sale of securities and income and expenses
are translated at the exchange rate on the transaction date. The effect of
changes in foreign exchange rates on realized and unrealized security gains or
losses is reflected as a component of such gains or losses. In the statement of
operations, net realized gains or losses from foreign currency transactions, if
any, may arise from sales of foreign currency, closed forward contracts,
exchange gains or losses realized between the trade date and settlement date on
securities transactions, and other translation gains or losses on dividends,
interest income and foreign withholding taxes. The Portfolio may enter into
forward foreign currency exchange contracts for operational purposes and to
protect against adverse exchange rate fluctuation. The net U.S. dollar value of
foreign currency underlying all contractual commitments held by the Portfolio
and the resulting unrealized appreciation or depreciation are determined using
foreign currency exchange rates from an independent pricing service. The
Portfolio is subject to the credit risk that the other party will not complete
its contract obligations.
Illiquid securities
As of Nov. 30, 1998, investments in securities included issues that are illiquid
which the Portfolio currently limits to 10% of net assets, at market value, at
the time of purchase. The aggregate value of such securities at Nov. 30, 1998
was $12,260,769 representing 0.74% of net assets. According to board guidelines,
certain unregistered securities are determined to be liquid and are not included
within the 10% limitation specified above.
Federal taxes
For federal income tax purposes the Portfolio qualifies as a partnership and
each investor in the Portfolio is treated as the owner of its proportionate
share of the net assets, income, expenses and realized and unrealized gains and
losses of the Portfolio. As a "pass-through" entity, the Portfolio therefore
does not pay any income dividends or capital gain distributions.
Other
Security transactions are accounted for on the date securities are purchased or
sold. Dividend income is recognized on the ex-dividend date. For U.S. dollar
denominated bonds, interest income includes level-yield amortization of premium
and discount. For foreign bonds, except for original issue discount, the
Portfolio does not amortize premium and discount. Interest income, including
level-yield amortization of premium and discount, is accrued daily.
2. FEES AND EXPENSES
The Trust, on behalf of the Portfolio, has entered into an Investment Management
Services Agreement with AEFC for managing its portfolio. Under this agreement,
AEFC determines which securities will be purchased, held or sold. The management
fee is a percentage of the Portfolio's average daily net assets in reducing
percentages from 0.52% to 0.395% annually.
Under the agreement, the Trust also pays taxes, brokerage commissions and
nonadvisory expenses, which include custodian fees, audit and certain legal
fees, fidelity bond premiums, registration fees for units, office expenses,
consultants' fees, compensation of trustees, corporate filing fees, expenses
incurred in connection with lending securities of the Portfolio and any other
expenses properly payable by the Trust or Portfolio and approved by the board.
During the six months ended Nov. 30, 1998, the Portfolio's custodian fees were
reduced by $1,406 as a result of earnings credit from overnight cash balances.
According to a Placement Agency Agreement, American Express Financial Advisors
Inc. acts as placement agent of the Trust's units.
3. SECURITIES TRANSACTIONS
Cost of purchases and proceeds from sales of securities (other than short-term
obligations) aggregated $187,464,335 and $223,205,768, respectively, for the six
months ended Nov. 30, 1998. For the same period, the portfolio turnover rate was
12%. Realized gains and losses are determined on an identified cost basis.
Income from securities lending amounted to $30,661 for the six months ended Nov.
30, 1998. The risks to the Portfolio of securities lending are that the borrower
may not provide additional collateral when required or return the securities
when due.
4. OPTIONS CONTRACTS WRITTEN
Contracts and premium amounts associated with options contracts written are as
follows:
Six months ended Nov. 30, 1998
Calls
Contracts Premium
Balance May 31, 1998 -- $ --
Opened 1,050 1,769,752
Expired (250) (342,500)
Balance Nov. 30, 1998 800 $1,427,252
See "Summary of significant accounting policies."
<PAGE>
Investments in Securities
Quality Income Portfolio
Nov. 30, 1998 (Unaudited)
(Percentages represent value of investment compared to net assets)
Bonds (92.3%)
Issuer Coupon Principal Value(a)
rate amount
Government obligations (34.4%)
Overseas Private Investment
U.S. Govt Guaranty Series 1996A
01-15-09 6.99% $10,000,000 $10,591,300
People's Republic of China
(U.S. Dollar)
01-15-96 9.00 10,000,000(b) 10,686,941
Resolution Funding Corp
Zero Coupon
01-15-06 8.94 25,000,000(c) 17,498,953
10-15-06 8.95 68,000,000(c) 46,019,374
01-15-14 8.21 48,000,000(c) 20,635,555
07-15-14 8.27 10,000,000(c) 4,180,758
04-15-16 8.05 47,000,000(c) 17,492,972
U.S. Treasury
07-31-99 6.88 60,000,000 60,844,253
02-15-00 5.88 25,000,000 25,356,210
08-15-00 6.00 11,400,000 11,656,267
11-15-01 7.50 109,000,000 117,546,058
02-15-04 5.88 8,000,000 8,474,460
05-15-04 7.25 25,000,000 28,035,908
08-15-04 7.25 26,800,000 30,154,818
11-15-16 7.50 105,395,000 132,037,644
11-15-21 8.00 15,000,000(j) 20,242,638
TIPS
01-15-07 3.38 8,050,000(l) 8,092,538
Total 569,546,647
Mortgage-backed securities (8.9%)
Federal Home Loan Mtge Corp
07-01-16 8.00 $436 $452
01-01-17 8.00 4,877 5,057
03-01-17 8.50 133,624 140,346
06-01-17 8.50 108,270 113,987
04-01-20 9.00 1,893,044 2,000,115
04-01-21 9.00 1,243,454 1,316,892
03-01-22 8.50 2,960,149 3,118,340
08-01-22 8.50 2,681,251 2,809,441
06-01-24 7.50 11,277,571 11,591,200
02-01-25 8.00 5,515,131 5,711,580
Collateralized Mtge Obligation
09-01-19 8.50 186,487 196,102
Federal Housing Admin
01-01-24 7.43 8,826,851 9,342,671
Federal Natl Mtge Assn
11-01-02 10.00 97 101
10-01-23 6.50 9,668,282 9,737,797
11-01-26 8.00 8,676,297 8,982,657
04-01-27 7.50 10,427,629 10,717,620
06-01-27 7.50 12,922,432 13,281,805
07-01-27 8.00 9,583,283 9,923,028
08-01-27 7.50 57,622 59,225
09-01-28 6.00 14,847,201 14,652,405
Collateralized Mtge Obligation
10-25-19 8.50 1,448,659 1,590,622
01-25-21 8.00 614,815 612,909
Principal Only
09-01-18 9.50 653,532(e) 580,607
01-25-20 9.89 789,961(e) 766,813
Trust Series Z
02-25-24 6.00 22,477,520(d) 20,968,603
Govt Natl Mtge Assn
07-15-24 8.00 393,204 409,424
10-15-24 9.00 91,090 97,153
02-15-25 9.00 458 489
05-15-26 7.50 15,200,625 15,699,357
Prudential Bache
Collateralized Mtge Obligation
04-01-19 7.97 2,631,060 2,708,567
Total 147,135,365
Automotive & related (1.4%)
Daimler-Benz North America
Company Guaranty Medium-term Nts Series A
09-15-06 7.38 14,000,000 15,632,929
General Motors
05-15-03 8.88 7,050,000 7,965,758
Total 23,598,687
Banks and savings & loans (9.5%)
ABN-Amro Bank
(U.S. Dollar) Sub Nts Series B
05-15-23 7.75 12,000,000(b) 13,016,186
Banco General
(U.S. Dollar)
08-01-02 7.70 6,400,000(b,g) 6,182,499
BankAmerica
Sub Nts Series B
12-31-26 7.70 5,000,000(g) 5,349,738
BankBoston Capital
Company Guaranty Series B
12-15-26 8.25 5,000,000 5,362,343
Bayerische Landesbank
(U.S. Dollar) Deposit Nts
02-26-01 5.63 13,750,000(b) 13,896,297
Cullen/Frost Capital
Series A
02-01-27 8.42 10,000,000 10,785,420
Dao Heng Bank
(U.S. Dollar) Sub Nts
01-24-07 7.75 7,000,000(b,g) 5,591,250
First Chicago
Sr Sub Nts
06-15-99 9.00 7,900,000 8,056,888
Firstar Capital
Company Guaranty Series B
12-15-26 8.32 10,000,000 11,119,059
Greenpoint Bank
Sr Nts
07-15-02 6.70 15,000,000 15,319,651
Korea Development Bank
(U.S. Dollar)
05-15-06 7.25 4,600,000(b) 3,913,908
Morgan (JP)
Sr Sub Medium-term Nts Series A
02-15-12 4.00 9,350,000(h) 8,369,279
NationsBank
Sub Nts
11-01-01 9.25 8,950,000 9,919,392
NCNB
Sub Nts
10-15-01 9.13 10,000,000 11,073,876
Swiss Bank
Sub Deb
09-01-26 7.75 11,369,000 12,831,275
US Bancorp
Sub Nts
09-15-07 6.88 8,550,000 9,156,375
Washington Mutual Capital
Company Guaranty
06-01-27 8.38 5,800,000(g) 6,528,109
Total 156,471,545
Building materials & construction (1.0%)
Tyco Intl Group
(U.S. Dollar) Company Guaranty
06-15-05 6.38 17,000,000(b) 17,140,342
Chemicals (1.6%)
Dow Chemical
09-15-21 8.85 10,000,000 12,786,032
USA Waste Services
Sr Nts
10-01-07 7.13 11,900,000 12,907,625
Total 25,693,657
Communications equipment & services (1.7%)
BellSouth Telecommunications
12-01-95 7.00 10,000,000 11,161,295
TCI Telecommunications
Sr Nts
02-15-28 7.13 10,000,000 10,928,370
Telekom Malaysia
(U.S. Dollar)
08-01-25 7.88 10,000,000(b,g) 6,874,300
Total 28,963,965
Computers & office equipment (0.3%)
Hewlett-Packard
Zero Coupon Cv Sub Nts
10-15-17 3.13 10,000,000(c,g) 5,425,000
Electronics (0.7%)
Harris
12-01-18 10.38 3,900,000 4,113,771
Hyundai Semiconductor
(U.S. Dollar) Sr Nts
05-15-07 8.63 10,800,000(b,g) 7,742,825
Total 11,856,596
Energy (3.9%)
PDV America
Sr Nts
08-01-03 7.88 16,500,000 15,487,908
Perez Companc
(U.S. Dollar)
07-15-07 8.13 5,000,000(b,g) 4,476,861
Petronas
(U.S. Dollar)
08-15-15 7.75 10,000,000(b) 7,586,299
Phillips Petroleum
03-15-28 7.13 12,000,000 12,617,083
Texaco Capital
Gtd Deb
03-01-43 7.50 12,000,000 13,638,127
USX-Marathon Group
05-15-22 9.38 9,200,000 10,939,877
Total 64,746,155
Energy equipment & services (0.4%)
Foster Wheeler
11-15-05 6.75 5,850,000 5,859,327
Financial services (3.2%)
GMAC
Medium-term Nts
03-01-00 7.00 14,300,000 14,561,553
Greyhound Financial
Medium-term Nts Series A
07-02-99 7.95 9,600,000 9,740,701
KFW Intl Finance
(U.S. Dollar) Medium-term Nts
12-15-99 8.50 10,000,000(b) 10,307,187
Railcar Leasing
01-15-13 7.13 12,150,000(g) 13,292,991
Salomon
Sr Nts
05-15-00 7.75 5,000,000 5,143,999
Total 53,046,431
Food (0.1%)
Gruma
(U.S. Dollar) Sr Nts
10-15-07 7.63 2,000,000(b) 1,830,693
Health care (1.6%)
Baxter Intl
02-15-28 6.63 12,000,000 12,516,380
Lilly (Eli)
01-01-36 6.77 13,300,000 14,353,770
Total 26,870,150
Health care services (2.7%)
AETNA Services
08-15-03 6.38 13,650,000 14,084,257
HEALTHSOUTH
06-15-08 7.00 15,000,000 14,233,275
Service Corp Intl
03-15-08 6.50 15,350,000 15,626,156
Total 43,943,688
Industrial equipment & services (1.6%)
ARAMARK Services
08-01-04 6.75 15,000,000 15,075,045
Deere & Co
06-15-19 8.95 10,000,000 12,232,682
Total 27,307,727
Insurance (4.7%)
American United Life Insurance
03-30-26 7.75 11,175,000(k) 12,260,769
Arkwright CSN Trust
08-15-26 9.63 11,000,000(g) 13,161,402
Conseco Financing Trust
Company Guaranty
11-15-26 8.70 6,600,000 6,870,035
Equitable Life Assurance
12-01-15 7.70 5,000,000(g) 5,386,187
Nationwide CSN Trust
02-15-25 9.88 11,500,000(g) 14,343,346
SAFECO Capital
Company Guaranty
07-15-37 8.07 15,000,000 15,456,299
SunAmerica
02-01-12 9.95 8,000,000 10,431,869
Total 77,909,907
Media (0.9%)
Time Warner Entertainment
Sr Nts
07-15-33 8.38 12,000,000 14,904,427
Metals (0.6%)
Alcan Aluminum
(U.S. Dollar)
01-15-22 8.88 9,600,000(b) 10,675,063
Miscellaneous (0.7%)
Jasmine Submarine Telecom
(U.S. Dollar) Sr Nts
05-30-11 8.48 3,022,740(b,g) 2,176,373
Provident Companies
Sr Nts
03-15-28 7.25 10,027,000 10,061,817
Total 12,238,190
Multi-industry conglomerates (0.7%)
Hutchison Whampoa Finance
(U.S. Dollar) Company Guaranty
08-01-27 7.50 14,025,000(b,g) 11,724,499
Retail (1.9%)
Dayton Hudson
06-15-23 7.88 18,850,000 20,535,233
Wal-Mart CRAVE Trust
07-17-06 7.00 10,280,161(g) 10,675,845
Total 31,211,078
Transportation (1.2%)
Burlington Northern Santa Fe
12-15-25 7.00 10,000,000 10,308,455
Enterprise Rent-A-Car USA Finance
02-15-08 6.80 10,000,000 9,818,000
Total 20,126,455
Utilities -- electric (4.6%)
AEP Generating
Series F
12-07-22 9.82 4,968,432 5,341,950
Arizona Public Service
1st Mtge Sale Lease-backed Obligation
12-30-15 8.00 9,000,000 10,300,981
Cajun Electric Power
Mtge Trust
03-15-19 8.92 4,960,000 5,253,962
Commonwealth Edison
1st Mtge
04-15-00 6.50 9,000,000 9,163,602
Indiana & Michigan Power
Sale Lease-backed Obligation Series F
12-07-22 9.82 4,968,426 5,341,944
Israel Electric
(U.S. Dollar) Sr Nts
12-15-26 7.88 9,000,000(b,g) 9,098,190
Korea Electric Power
(U.S. Dollar)
07-01-02 8.00 9,000,000(b) 8,205,230
(U.S. Dollar) Zero Coupon
04-01-16 10.07 35,000,000 (b,f) 3,382,719
Salton Sea Funding
Series C
05-30-10 7.84 10,000,000 11,115,897
Wisconsin Electric Power
12-01-95 6.88 8,000,000 8,499,684
Total 75,704,159
Utilities -- telephone (4.0%)
AT&T
01-15-25 8.35 5,000,000 5,790,366
12-01-31 8.63 10,000,000 11,211,080
GTE
11-01-20 10.25 6,050,000 6,739,168
GTE Florida
02-01-28 6.86 12,450,000 13,426,500
New York Telephone
07-15-31 9.38 14,000,000 15,908,011
WorldCom
Sr Nts
08-15-28 6.95 12,000,000 12,921,365
Total 65,996,490
Total bonds
(Cost: $1,432,950,804) $1,529,926,243
See accompanying notes to investment in securities.
<PAGE>
Preferred stock (0.5%)
Issuer Shares Value(a)
Salomon Income Financing Trust
2.38% 2026 340,000 $9,052,500
Total preferred stock
(Cost: $8,500,000) $9,052,500
See accompanying notes to investment in securities.
<PAGE>
Short-term securities (4.6%)
Issuer Annualized Amount Value(a)
yield on date payable at
of purchase maturity
U.S. government agencies (1.8%)
Federal Home Loan Mtge Corp Disc Nts
12-10-98 4.83% $8,800,000 $8,789,418
12-17-98 5.07 8,900,000 8,880,024
12-22-98 4.82 7,400,000 7,379,237
Federal Natl Mtge Assn Disc Nt
12-18-98 5.01 3,400,000 3,392,004
Total 28,440,683
Commercial paper (2.8%)
BMW US Capital
12-18-98 4.88 3,800,000 3,791,261
CAFCO
12-30-98 4.92 2,100,000(i) 2,091,711
Ciesco LP
12-08-98 5.11 5,200,000 5,194,863
Daimler-Benz
12-02-98 5.15 7,000,000 6,999,003
Natl Rural Utilities
12-08-98 5.05 6,300,000 6,293,838
NBD Bank Canada
12-30-98 4.91 3,800,000 3,785,031
Paccar Financial
12-03-98 5.17 2,200,000 2,199,371
Pioneer Hi-Bred
12-02-98 5.21 500,000 499,928
12-08-98 5.21 4,400,000 4,395,551
Reed Elsevier
12-07-98 5.15 1,900,000(i) 1,898,376
12-15-98 5.17 4,400,000(i) 4,391,187
Sysco
12-18-98 5.10 1,600,000(i) 1,596,177
Xerox
12-31-98 4.87 3,900,000 3,884,238
Total 47,020,535
Total short-term securities
(Cost: $75,461,218) $75,461,218
Total investments in securities
(Cost: $1,516,912,022)(m) $1,614,439,961
See accompanying notes to investments in securities.
<PAGE>
Notes to investments in securities
(a) Securities are valued by procedures described in Note 1 to the financial
statements.
(b) Foreign security values are stated in U.S. dollars. For debt securities,
principal amounts are denominated in the currency indicated. As of Nov. 30,
1998, the value of foreign securities represented 9.33% of net assets.
(c) For zero coupon bonds, the interest rate disclosed represents the
annualized effective yield on the date of acquisition.
(d) This security is a collateralized mortgage obligation that pays no interest
or principal during its initial accrual period until payment of a previous
series within the trust have been paid off. Interest is accrued at an
effective yield; similar to a zero coupon bond.
(e) Principal-only represents securities that entitle holders to receive only
principal payments on the underlying mortgages. The yield to maturity of a
principal-only is sensitive to the rate of principal payments on the
underlying mortgage assets. A slow (rapid) rate of principal repayments may
have an adverse (positive) effect on yield to maturity. Interest rate
disclosed represents current yield based upon the current cost basis and
estimated timing of future cash flows.
(f) For those zero coupon bonds that become coupon paying at a future date, the
interest rate disclosed represents the annualized effective yield from the
date of acquisition to interest reset date disclosed.
(g) Represents a security sold under Rule 144A, which is exempt from
registration under the Securities Act of 1933, as amended. This security
has been determined to be liquid under guidelines established by the board.
(h) Interest rate varies either based on a predetermined schedule or to reflect
current market conditions; rate shown is the effective rate on Nov. 30,
1998.
(i) Commercial paper sold within terms of a private placement memorandum,
exempt from registration under Section 4(2) of the Securities Act of 1933,
as amended, and may be sold only to dealers in that program or other
"accredited investors." This security has been determined to be liquid
under guidelines established by the board.
(j) At Nov. 30, 1998, securities valued at $13,495,092 were held to cover open
call options written as follows:
Issuer Shares Exercise Expiration Value(a)
price date
U.S. Treasury Bond Nov. 98 30,000 $130 Feb. 1999 $ 607,875
U.S. Treasury Bond Nov. 98 50,000 130 Feb. 1999 1,078,125
Total $1,686,000
(k) Identifies issues considered to be illiquid as to their marketability
(see Note 1 to the financial statements).
Information concerning such security holdings at Nov. 30, 1998, is as
follows:
Security Acquisition date Cost
American United Life Insurance*
7.75% 2026 02-13-96 thru 11-05-98 $11,314,931
*Represents a security sold under Rule 144A, which is exempt from
registration under the Securities Act of 1933, as amended.
(l) U.S. Treasury inflation-protection securities (TIPS) are securities in which
the principal amount is adjusted for inflation and the semiannual
interest payments equal a fixed percentage of the inflation-adjusted
principal amount.
(m) At Nov. 30, 1998, the cost of securities for federal income tax purposes
was approximately $1,516,715,000 and the approximate aggregate gross
unrealized appreciation and depreciation based on that cost was:
Unrealized appreciation $117,901,000
Unrealized depreciation (20,176,000)
-----------
Net unrealized appreciation $97,725,000
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AMERICAN EXPRESS Financial Direct
P.O. Box 59196
Minneapolis, MN 55459-0196
American Express Service Corporation, Distributor
S-6139 D (1/99)
