<PAGE>
BEA Strategic Income Fund, Inc.
153 East 53rd Street
New York, NY 10022
---------------------------------------------
OFFICERS AND DIRECTORS
<TABLE>
<S> <C>
Daniel H. Sigg Michael A. Pignataro
CHAIRMAN AND CHIEF ASSISTANT VICE
EXECUTIVE OFFICER PRESIDENT
Robert J. Moore AND ASSISTANT
PRESIDENT AND CHIEF SECRETARY
INVESTMENT OFFICER Hal Liebes
Prof. Enrique R. Arzac SECRETARY
DIRECTOR Harvey M. Rosen
Lawrence J. Fox TREASURER
DIRECTOR Paul P. Stamler
James S. Pasman, Jr. ASSISTANT TREASURER
DIRECTOR John M. Corcoran
RICHARD J. LINDQUIST ASSISTANT TREASURER
VICE PRESIDENT
</TABLE>
--------------------------------------------------------
INVESTMENT ADVISER
BEA Associates
153 East 53rd Street
New York, New York 10022
--------------------------------------------------------
ADMINISTRATOR
The Chase Manhattan Bank, N.A.
73 Tremont Street
Boston, Massachusetts 02108
--------------------------------------------------------
CUSTODIAN
The Chase Manhattan Bank, N.A.
770 Broadway
New York, New York 10003
--------------------------------------------------------
SHAREHOLDER SERVICING AGENT
The Chase Manhattan Bank, N.A.
770 Broadway
New York, New York 10003
Phone 1-800-428-8890
--------------------------------------------------------
LEGAL COUNSEL
Willkie Farr & Gallagher
153 East 53rd Street
New York, New York 10022
--------------------------------------------------------
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
--------------------------------------------------------
INCREASE YOUR FUND HOLDINGS THROUGH DIVIDEND
REINVESTMENT AND DIRECT CASH PURCHASES
The Fund offers the opportunity for all shareholders to participate in the
Fund's Dividend Reinvestment and Cash Purchase Plan (the "Plan"). Under the
Plan, participating shareholders receive, in lieu of cash dividends, common
stock of the Fund. In addition, participants in the Plan have the option of
making voluntary cash payments of $100 to $1,000 (per investment period), plus
any dividends received in cash, to the Plan Agent to purchase Fund shares in the
open market. A brochure further describing the Plan and additional information
concerning terms and conditions, and any applicable charges relating to the
Plan, can be obtained from the Plan's agent at (800) 428-8890.
[LOGO]
BEA Strategic Income Fund, Inc.
[LOGO]
ANNUAL REPORT
December 31, 1995
<PAGE>
BEA STRATEGIC INCOME FUND, INC.
- ----------
Dear Shareholders: February 8, 1996
We are pleased to report on the results of the BEA Strategic Income Fund, Inc.
(the "Fund") for the year ended December 31, 1995.
At December 31, 1995 the Fund's net asset value (NAV) was $10.01, compared
to an NAV of $9.26 at December 31, 1994. As a result, the Fund's total return
(based on NAV and assuming reinvestment of dividends) was 17.57%.
Many investors will remember 1995 primarily as a great year for the U.S.
equity market. In fact, last year was equally notable as a superb period for the
world's bond markets. Viewed in local currency terms, every major bond market
produced a strong positive return for the year, falling in a range from a low
return of around 14% in Japan and New Zealand to a high of more than 19% in such
markets as Australia, Denmark, Spain and Sweden. Buoyed by an increasingly
positive interest rate environment, the U.S. bond market came in near the top of
this range.
During the fourth quarter, the bond market continued to rally, as a result
of a sharp decline in interest rates across the maturity curve. The yield curve
steepened modestly, with two and three year notes rallying 65 basis points,
while ten and thirty year bonds rallied 55 basis points. Both quarterly and
annual returns for the major domestic fixed income sectors were clustered rather
closely together, with mortgages and asset-backed securities being the only real
laggards.
The mortgage backed securities market had an unusual year, as the dominant
investors became money managers and the mortgage agencies themselves (FHLMC and
FNMA), as opposed to yield-oriented insurance companies, banks or mutual funds.
During the first half of the year, the sharp drop in interest rates brought back
memories of rapid prepayments causing mortgage securities to become underpriced
relative to their actual risk. Believing that substantial prepayments were not
likely to materialize (and they have not), we increased our mortgage allocation
at the height of prepayment fears in June. Soon the market adjusted for its
overreaction as substantial prepayments did not materialize.
During the third and fourth quarters, two new events caused prices to
decline in this sector. First, FASB allowed a one-time window for financial
institutions to reclassify securities. This led to fears of massive selling of
mortgage securities, which never actually materialized. The second event was a
statement by the S&P rating
agency that insurance companies would be penalized for holding mortgages,
causing concern that insurance companies may shy away from the sector. Looking
into 1996, we expect that investors will realize that mortgage-backed
securities, compared with corporates, provide the best relative value to
treasuries. We will continue to participate in this sector primarily through
investments in seasoned agency passthroughs. We will diversify our asset backed
securities allocation to include different collateral types and increase our
exposure to the commercial mortgage market as increasing attention from
mainstream fixed income investors will lead to spread compression in these
sectors.
For the fourth quarter of 1995, the U.S. High Yield market, as measured by
the Salomon Brothers High Yield Index, posted positive performance of 4.03% as
new cash buyers continued to enter the market. High yield spreads widened versus
treasuries, however, as interest rates drifted lower during the fourth quarter.
The U.S. High Yield market's positive return was driven by a gain of 4.69% in
the CCC-rated sector followed by gains of 4.39% in the BB-rated sector and 3.38%
in the B-rated sector. During the quarter, the cash pay sector posted a total
return of 3.83% versus 6.66% in the deferred interest sector and 4.00% in the
bankrupt sector. High yield mutual fund investors continued to enter the market,
with AMG Data Services reporting inflows of $2.8 billion during the quarter. Net
High Yield inflows of $10.7 billion for 1995 can be compared with net inflows of
$1.4 billion for 1994. Net issuance for the fourth quarter totaled $12.2 billion
and for 1995 totaled 48.2 billion versus 42.1 billion for 1994. The average
market weighted new issue offer yield for the fourth quarter of 1995 was 10.41%.
Our long term outlook continues to be positive for the credit fundamentals
of many U.S. high yield issuers. We remain positive on selected gaming
companies, particularly Atlantic City and Las Vegas, and industry sectors such
as health care and cable where we have witnessed continued merger activity, on
most sectors of the telecommunications industry and a few selected cyclical
sectors. The expectation of lower interest rates should also benefit the U.S.
High Yield market as money should continue to flow into the market from yield
seeking investors.
Looking at the global fixed income markets, it has become clear in recent
months that the major European markets are experiencing a significant slowdown
of
2
<PAGE>
economic growth, and Germany in particular has begun to look quite sluggish. In
recent months, it has become the consensus view (or nearly so) that these recent
signs of economic weakness will lead to continued easing of German short-term
interest rates. The waning of France's political crisis has also helped to
strengthen European markets. We continue to be relatively bullish on Europe in
the medium term, although the recent sharp drops in yields mean that valuations
no longer look as cheap as they once did, and there is some potential for
short-term profit taking. We continue to believe, however, that the U.S. dollar
will strengthen against both European currencies and the yen, so the BEA
Strategic Income Fund is largely hedged out of European currency exposure and
has no exposure to the yen.
Looking forward, our primary concerns for the next three to six months are
focused on the increased potential for negative surprises (budget impasse or no
further rate cuts) and their potential impact on the market. This could manifest
itself in higher interest rates and volatility and lower liquidity.
We appreciate your interest in the Fund and would be pleased to respond to
your questions or comments. Any questions regarding net asset value,
performance,
dividends, portfolio allocations, or management can be directed to BEA
Associates at (800) 293-1232. All other inquiries regarding account information
or requests for a prospectus or other reports should be directed to the
Shareholder Servicing Agent at (800) 428-8890.
Sincerely yours,
[SIG]
Robert J. Moore
PRESIDENT AND CHIEF INVESTMENT OFFICER*
[SIG]
Daniel H. Sigg
CHAIRMAN AND CHIEF EXECUTIVE OFFICER*
*Robert J. Moore, who is a member of the Executive Committee of BEA
Associates and holds the offices of Executive Director and Chief Operating
Officer of BEA Associates, is primarily responsible for management of the Fund's
assets. He has served in such capacity since BEA Associates became the
Investment Adviser to the Fund on June 13, 1995. Mr. Moore joined BEA Associates
in 1987. Mr. Moore is President and Chief Investment Officer of the Fund and is
also President and Chief Investment Officer of the BEA Income Fund, Inc.
Daniel H. Sigg is a member of the Executive Committee of BEA Associates and
holds the offices of Executive Director and Chief Financial Officer of BEA
Associates. Mr. Sigg joined BEA Associates in 1990. Mr. Sigg is Chairman of the
Board and Chief Executive Officer of the Fund. He has served in such capacity
since BEA Associates became the Investment Adviser to the Fund on June 13, 1995.
He is also Chairman of the Board and Chief Executive Officer of the BEA Income
Fund, Inc. and Director and Senior Vice President of the Brazilian Equity Fund,
Inc., The Chile Fund, Inc., The Emerging Markets Infrastructure Fund, Inc., The
Emerging Markets Telecommunications Fund, Inc., The First Israel Fund, Inc., The
Indonesia Fund, Inc., The Latin America Equity Fund, Inc., The Latin America
Investment Fund, Inc. and The Portugal Fund, Inc.
3
<PAGE>
PORTFOLIO OF INVESTMENTS
- ---------
DECEMBER 31, 1995
<TABLE>
<CAPTION>
Face
Moody's Amount Value
Ratings (000) (Note A-1)
<C> <S> <C> <C> <C>
- ----------------------------------------------------------------------------------
- -----------------
DOMESTIC SECURITIES (83.4%)
- ----------------------------------------------------------------------------------
- -----------------
CORPORATE OBLIGATIONS (68.0%)
- ----------------------------------------------------------------------------------
- -----------------
COMMUNICATIONS (18.7%)
(4) Adelphia Communications,
Series B, Sr. Notes
9.50%, 2/15/04 B3 $ 574 $ 467,749
(8) American Telecasting, Inc.
Sr. Discount Notes
0.00%, 6/15/04 Caa 75 51,563
A+ Network, Inc.
Sr. Sub. Notes
11.875%, 11/1/05 Caa 250 250,000
(8) Australis Media Ltd.
Yankee Sr. Sub. Disc. Notes
0.00%, 5/15/03 B3 225 163,688
Cablevision Industries Corp.
Sr. Debentures
9.25%, 4/1/08 B1 500 535,000
Chancellor Broadcasting Co.
Gtd. Sr. Sub. Notes
12.50%, 10/1/04 B3 500 533,750
Citicasters, Inc.,
Series B, Sr. Sub. Notes
9.75%, 2/15/04 N/R 500 510,000
Comcast Corp.
Sr. Sub. Notes
9.125%, 10/15/06 B1 250 260,313
(8) Comcast UK Cable Partners, Ltd.
Sr. Debentures
0.00%, 11/15/07 B2 500 288,750
Continental Cablevision, Inc.
Sr. Sub. Debentures
11.00%, 6/1/07 B1 500 558,750
(8) Dial Call Communications
Sr. Discount Notes
0.00%, 4/15/04 Caa 500 285,000
(8) Diamond Cable Communications Co.
Yankee Sr. Discount Notes
0.00%, 12/15/05 B3 1,000 588,750
(4) Falcon Holdings Group L.P.
Sr. Sub. Notes
11.00%, 9/15/03 N/R 649 616,886
Galaxy Telecommunications L.P.
Sr. Sub. Notes
12.375%, 10/1/05 B3 200 199,500
(8) Helicon Group L.P.
Sr. Secured Notes
9.00%, 11/1/03 B1 650 630,500
(8) Imax Corp.,
Series B, Yankee Sr. Notes
7.00%, 3/1/01 B1 250 248,125
<CAPTION>
Face
Moody's Amount Value
Ratings (000) (Note A-1)
<C> <S> <C> <C> <C>
- ----------------------------------------------------------------------------------
- -----------------
(6)(8) In-Flight Phone Corp.,
Series B, Sr. Discount Notes
0.00%, 5/15/02 Caa $ 500 $ 165,000
(8) IntelCom Group, Inc.
Sr. Discount Notes
0.00%, 9/15/05 N/R 350 199,500
Intermedia Communications of
Florida, Inc.,
Series B Sr. Notes
13.50%, 6/1/05 B3 300 334,500
Jones Intercable, Inc.
Sr. Sub. Debentures
11.50%, 7/15/04 B1 500 555,000
Lenfest Communications, Inc. Sr.
Notes
8.375%, 11/1/05 Ba3 250 250,625
Metrocall, Inc.
Sr. Sub. Notes
10.375%, 10/1/07 B2 250 265,000
(8) MFS Communications Co., Inc.
Discount Notes
0.00%, 1/15/04 B1 500 403,750
Mobile Telecommunications
Technologies Corp.
Sr. Sub. Notes
13.50%, 12/15/02 B2 250 278,750
(8) Nextel Communications
Sr. Notes
0.00%, 8/15/04 B3 500 271,250
NWCG Holding Corp.,
Series B, Sr. Discount Notes
Zero Coupon, 6/15/99 Caa 500 335,000
(8) Pagemart Nationwide, Inc.,
Sr. Disc. Notes
0.00%, 2/1/05 N/R 1,000 650,000
Paging Network, Inc.
Sr. Sub. Notes
10.125%, 8/1/07 B2 500 544,375
Pegasus Media & Communications,
Inc.,
Series B, Notes
12.50%, 7/1/05 B3 500 495,000
(8) PriCellular Wireless Corp.
Sr. Discount Notes
0.00%, 10/1/03 B3 350 270,375
PTI Holdings, Inc.
Sub. Notes
Zero Coupon, 12/17/02 N/R 507 319,356
Rogers Cablesystems Ltd.,
Series A, Yankee Sr. Secured
2nd Priority Notes
10.00%, 12/1/07 Ba3 500 536,250
(2) Scott Cable Communications, Inc.
Sub. Debentures
12.25%, 4/15/01 B3 500 325,000
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
Face
Moody's Amount Value
Ratings (000) (Note A-1)
- ----------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
- -----------------
Selmer Co., Inc.
Sr. Sub. Notes
11.00%, 11/5/05 N/R $ 500 $ 495,000
(2)(6) Simmons Cable
Sr. Sub. Notes
15.747%, 4/30/96 N/R 500 250,000
Sinclair Broadcast Group
Sr. Sub. Notes
10.00%, 9/30/05 B1 250 255,625
Spanish Broadcasting Systems
Sr. Notes
7.50%, 6/15/02 B3 500 489,375
United International Holdings:
Discount Notes
Zero Coupon, 1/15/99 B3 1,000 630,000
Sr. Secured Debentures Zero
Coupon, 11/15/99 B3 500 302,500
Univision Network Holding L.P.
Sub. Notes
Zero Coupon, 12/17/02 N/R 573 361,037
(8) Videotron Holdings plc
Yankee Discount Notes
0.00%, 8/15/05 B3 1,000 620,000
-----------
GROUP TOTAL 15,790,592
-----------
- ----------------------------------------------------------------------------------
- -----------------
CONSUMER PRODUCTS (5.5%)
American Rice, Inc.
Secured Mortgage Notes
13.00%, 7/31/02 B3 250 235,000
Fort Howard Corp.
Sub. Notes
10.00%, 3/15/03 B2 500 515,000
Health O Meter, Inc.
Gtd. Sr. Sub. Notes
13.00%, 8/15/02 B3 500 425,000
Jordan Industries, Inc.
Sr. Notes
10.375%, 8/1/03 B3 500 445,000
Mail-Well Corp.
Sr. Sub. Notes
10.50%, 2/15/04 B2 500 482,500
Marvel III Holdings, Inc.,
Series B, Sr. Secured
Debentures
9.125%, 2/15/98 Caa 700 644,000
Renaissance Cosmetics, Inc.,
Series B, Sr. Notes
13.75%, 8/15/01 N/R 500 497,500
Revlon Consumer Products, Inc.,
Series B, Sr. Sub. Notes
10.50%, 2/15/03 B3 450 459,000
Revlon Worldwide Corp.
Sr. Secured Discount Notes Zero
Coupon, 3/15/98 B3 350 259,875
(8)(11) Specialty Foods Acquisition
Corp.,
Series B, Sr. Secured Discount
Debentures
0.00%, 8/15/05 Ca 1,500 690,000
-----------
GROUP TOTAL 4,652,875
-----------
- ----------------------------------------------------------------------------------
- -----------------
<CAPTION>
Face
Moody's Amount Value
Ratings (000) (Note A-1)
<C> <S> <C> <C> <C>
- ----------------------------------------------------------------------------------
- -----------------
FINANCE (0.5%)
(3) GPA Holland B.V.
Medium Term Notes
8.625%, 1/15/99 Caa $ 500 $ 449,375
-----------
- ----------------------------------------------------------------------------------
- -----------------
INDUSTRIAL (11.6%)
(3) Alpine Group, Inc.
Gtd. Sr. Notes
12.25%, 7/15/03 B3 500 490,000
Arcadian Partners L.P.,
Series B, Sr. Notes
10.75%, 5/1/05 B2 500 548,750
Armco, Inc.
Sr. Notes
11.375%, 10/15/99 B2 500 520,000
Bayou Steel Corp.
First Mortgage Notes
10.25%, 3/1/01 B2 300 265,500
Berg Electronics, Inc.
Gtd. Sub. Debentures
11.375%, 5/1/03 B3 500 550,000
Container Corp. of America
Gtd. Sr. Notes
9.75%, 4/1/03 B1 250 243,750
Doman Industries Ltd.
Yankee Gtd. Sr. Notes
8.75%, 3/15/04 Ba3 650 624,000
Geneva Steel Co.
Sr. Notes
9.50%, 1/15/04 B1 250 195,000
(11) Genmar Holdings,
Series A, Sr. Sub. Notes
13.50%, 7/15/01 Caa 500 465,000
GNF Corp.,
Series B, First Mortgage Notes
10.625%, 4/1/03 B2 500 466,250
(8) Harris Chemical N.A.
Sr. Secured Debentures
0.00%, 7/15/01 B2 500 475,000
Huntsman Corp.
First Mortgage Notes
11.00%, 4/15/04 B1 500 573,000
(8) INDSPEC Chemical Corp.
Sr. Sub. Discount Notes
0.00%, 12/1/03 B3 750 600,000
Malette, Inc.
Sr. Secured Debentures
12.25%, 7/15/04 Ba3 250 280,000
NL Industries:
Sr. Secured Debentures
11.75%, 10/15/03 B1 250 266,875
(8) Sr. Secured Discount Debentures
0.00%, 10/15/05 B2 400 300,000
Presley Companies
Sr. Notes
12.50%, 7/1/01 B3 250 198,750
Repap Wisconsin, Inc.
Sr. Secured Debentures
9.875%, 5/1/06 B3 250 236,875
Republic Engineered Steel
First Mortgage Bonds
9.875%, 12/15/01 B2 350 314,125
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
Face
Moody's Amount Value
Ratings (000) (Note A-1)
- ----------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
- -----------------
(11) Stone-Consolidated Corp.
Sr. Secured Debentures
10.25%, 12/15/00 Ba1 $ 500 $ 535,000
Trans-Resources, Inc.
Sr. Sub. Notes
11.875%, 7/1/02 B2 500 458,750
UCC Investor's Holdings, Inc.
Sr. Sub. Notes
11.00%, 5/1/03 B3 500 505,000
WCI Steel, Inc.,
Series B, Sr. Notes
10.50%, 3/1/02 B1 200 194,000
WHX Corp.
Sr. Notes
9.375%, 11/15/03 B1 500 472,500
-----------
GROUP TOTAL 9,778,125
-----------
- ----------------------------------------------------------------------------------
- -----------------
MANUFACTURING (11.1%)
(8) American Standard, Inc.
Sr. Sub. Debentures
0.00%, 6/1/05 B1 500 428,750
Associated Materials, Inc.
Sr. Sub. Notes
11.50%, 8/15/03 B3 500 395,000
Atlantis Group, Inc.
Sr. Notes
11.00%, 2/15/03 B2 250 218,750
Consoltex Group, Inc.,
Series B, Gtd. Sr. Sub. Notes
11.00%, 10/1/03 B2 500 450,000
(8)(11) Crown Packaging Holdings,
Series B, Sr. Sub. Notes
0.00%, 11/1/03 Caa 1,300 572,000
(11) Domtar, Inc.
Yankee Debentures
11.25%, 9/15/17 Ba1 500 531,875
Gaylord Container Corp.:
Sr. Notes
11.50%, 5/15/01 B3 250 257,500
(8) Sr. Sub. Debentures
0.00%, 5/15/05 Caa 500 492,500
(11) G.I. Holdings, Inc.,
Series B, Sr. Deferred Notes
Zero Coupon,
10/1/98 Ba3 1,000 775,000
(8) Ivex Holdings Corp.
Sr. Debentures
0.00%, 3/15/05 Caa 1,250 700,000
MVE Inc.,
Sr. Secured Debentures
12.50%, 2/15/02 B3 500 500,000
Rexene Corp.
Sr. Notes
11.75%, 12/1/04 B1 400 419,000
Sheffield Steel Corp.
First Mortgage Notes
12.00%, 11/1/01 B3 500 435,000
(8) Silgan Holdings, Inc.
Sr. Debentures
0.00%, 12/15/02 B3 500 472,500
<CAPTION>
Face
Moody's Amount Value
Ratings (000) (Note A-1)
<C> <S> <C> <C> <C>
- ----------------------------------------------------------------------------------
- -----------------
Specialty Equipment Co., Inc.
Sr. Sub. Notes
11.375%, 12/1/03 B3 $ 700 $ 710,500
Stone Container Corp.
First Mortgage Notes
10.75%, 10/1/02 B1 250 258,125
Synthetic Industries, Inc.
Sr. Sub. Notes
12.75%, 12/1/02 B3 500 490,000
(3) Terex Corp.
Gtd. Sr. Notes
13.75%, 5/15/02 Caa 500 437,500
Tracor, Inc.,
Series A, Gtd. Sr. Sub. Notes
10.875%, 8/15/01 B2 250 258,750
U.S. Leather, Inc.
Sr. Notes
10.25%, 7/31/03 B3 700 591,500
-----------
GROUP TOTAL 9,394,250
-----------
- ----------------------------------------------------------------------------------
- -----------------
OIL, GAS & ELECTRIC (3.2%)
Falcon Drilling Co., Inc.,
Series B, Sr. Notes
9.75%, 1/15/01 B2 375 385,312
Forest Oil Corp.
Sr. Sub. Notes
11.25%, 9/1/03 B3 500 475,000
(11) Gulf Canada Resources Ltd.
Sr. Sub. Debentures
9.25%, 1/15/04 Ba3 500 508,125
Mesa, Inc.
Secured Notes
12.75%, 6/30/98 Caa 500 442,500
Southeastern Public Service Co.
Sr. Sub. Debentures
11.875%, 2/1/98 Caa 314 316,355
(11) Wilrig A/S
Sr. Secured Debentures
11.25%, 3/15/04 B2 500 555,000
-----------
GROUP TOTAL 2,682,292
-----------
- ----------------------------------------------------------------------------------
- -----------------
RETAIL TRADE (7.3%)
Big V Supermarkets, Inc.
Sr. Sub. Notes
11.00%, 2/15/04 B3 500 390,625
Brylane L.P.
Gtd. Sr. Sub. Notes
10.00%, 9/1/03 B2 500 442,500
County Seat Stores, Inc.
Sr. Sub. Notes
12.00%, 10/1/02 B3 500 430,000
Dairy Mart Conveniences Stores,
Inc.
Sr. Sub. Notes
10.25%, 3/15/04 B3 626 538,360
Duane Reade Corp.
Sr. Notes
12.00%, 9/15/02 B3 500 472,500
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
<TABLE>
<CAPTION>
Face
Moody's Amount Value
Ratings (000) (Note A-1)
- ----------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
- -----------------
Farm Fresh, Inc.
Series A, Sr. Notes
12.25%, 10/1/00 B2 $ 150 $ 124,500
(11) Sr. Notes
12.25%, 10/1/00 B2 500 415,000
(11) Great American Cookie,
Series B, Sr. Secured
Debentures
10.875%, 1/15/01 B3 500 422,500
Hills Stores Co.
Sr. Notes
10.25%, 9/30/03 B1 700 616,875
Pathmark Stores, Inc.
(8)(11) Jr. Sub. Notes
0.00%, 11/1/03 B3 850 520,625
Sr. Sub. Notes
9.625%, 5/1/03 B2 500 486,250
Ralphs Grocery Co.
Sr. Sub. Notes
11.00%, 6/15/05 B3 500 495,000
(4) Town & Country Corp.
Sr. Sub. Notes
13.00%, 5/31/98 Caa 616 304,954
Waban, Inc.
Sr. Sub. Notes
11.00%, 5/15/04 Ba3 550 562,375
-----------
GROUP TOTAL 6,222,064
-----------
- ----------------------------------------------------------------------------------
- -----------------
SERVICES (9.1%)
American Banknote Corp.,
Series B, Sr. Notes
11.625%, 8/1/02 B2 250 112,500
American Restaurant Group, Inc.,
Series A, Notes
12.00%, 9/15/98 B2 500 375,000
Bally's Casino Holdings, Inc.
Sr. Discount Notes Zero Coupon,
6/15/98 B2 600 483,000
Bally's Park Place Funding, Inc.
First Mortgage Notes
9.25%, 3/15/04 Ba3 250 252,500
Boomtown, Inc.
First Mortgage Notes
11.50%, 11/1/03 B1 500 410,000
Casino America, Inc.
First Mortgage Bonds
11.50%, 11/15/01 B1 500 462,500
(3) Coinmach Corp.
Sr. Notes
11.75%, 11/15/05 B2 527 534,905
Community Health Systems
Sr. Sub. Debentures
10.25%, 11/30/03 B2 250 270,000
(2) Elsinore Corp.
First Mortgage Notes
12.50%, 10/1/00 N/R 100 45,000
G.B. Property Funding Corp.,
First Mortgage Notes
10.875%, 1/15/04 B2 500 438,750
<CAPTION>
Face
Moody's Amount Value
Ratings (000) (Note A-1)
<C> <S> <C> <C> <C>
- ----------------------------------------------------------------------------------
- -----------------
(4)(11) General Medical Corp.,
Series A, Sub. Debentures
12.125%, 8/15/05 Caa $ 626 $ 654,170
Grand Casinos, Inc.,
First Mortgage Notes
10.125%, 12/1/03 Ba3 500 521,250
Griffin Gaming & Entertainment
Sr. Notes
11.00%, 9/15/03 N/R 500 467,500
(2)(4)(6) Hemmeter Enterprises, Inc.
Sr. Notes
12.00%, 12/15/00 N/R 297 118,877
(3) Host Marriot Corp. Acquisition
Properties
Sr. Notes
9.00%, 12/15/07 Ba3 450 454,500
Motels of America, Inc.,
Series B, Sr. Sub. Notes
12.00%, 4/15/04 B3 250 248,437
Regency Health Services, Inc.
Gtd. Sr. Sub. Notes
9.875%, 10/15/02 B2 300 297,000
Trump Plaza Funding, Inc.
First Mortgage Notes
10.875%, 6/15/01 B3 500 517,500
(4)(10) Trump Taj Mahal Funding
Series A, Debentures
11.35%, 11/15/99 Caa 510 490,755
Wright Medical Technology
Series B, Sr. Secured
Debentures
10.75%, 7/1/00 B3 500 515,000
-----------
GROUP TOTAL 7,669,144
-----------
- ----------------------------------------------------------------------------------
- -----------------
TRANSPORTATION (1.0%)
(3) Ameritruck Distribution Corp.
Gtd. Sr. Sub. Notes
12.25%, 11/15/05 B3 250 247,500
CHC Helicopter Corp.
Yankee Sr. Sub. Notes
11.50%, 7/15/02 B3 250 221,250
USAir, Inc.
Gtd. Sr. Notes
10.00%, 7/1/03 B3 500 435,000
-----------
GROUP TOTAL 903,750
-----------
- ----------------------------------------------------------------------------------
- -----------------
TOTAL CORPORATE OBLIGATIONS
(Cost $59,018,183) 57,542,467
-----------
- ----------------------------------------------------------------------------------
- -----------------
GOVERNMENT & AGENCY SECURITIES (2.5%)
- ----------------------------------------------------------------------------------
- -----------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION (2.5%)
January 30 yr. TBA
8.00%, 3/15/25 Aaa 2,000 2,071,240
-----------
- ----------------------------------------------------------------------------------
- -----------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
<TABLE>
<CAPTION>
Face
Moody's Amount Value
Ratings (000) (Note A-1)
- ----------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
- -----------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (0.0%)
Graduated Payment
12.75%, 11/15/13 Aaa $ 28 $ 32,834
-----------
- ----------------------------------------------------------------------------------
- -----------------
TOTAL GOVERNMENT & AGENCY SECURITIES
(Cost $2,089,929) 2,104,074
-----------
- ----------------------------------------------------------------------------------
- -----------------
COLLATERALIZED SECURITY (1.2%)
- ----------------------------------------------------------------------------------
- -----------------
COLLATERALIZED MORTGAGE OBLIGATION (1.2%)
(11) Drexel, Burnham & Lambert Trust
REMIC-PAC, Series S, Class 2
9.00%, 8/1/18 Aaa 968 991,606
-----------
- ----------------------------------------------------------------------------------
- -----------------
TOTAL COLLATERALIZED SECURITY
(Cost $999,778) 991,606
-----------
- ----------------------------------------------------------------------------------
- -----------------
ASSET BACKED OBLIGATIONS (6.3%)
- ----------------------------------------------------------------------------------
- -----------------
(11) Green Tree Financial Corp.
Manufactured Housing
Installment Sale Contracts,
Series 1993-4, Class B1
7.20%, 1/15/19 Baa3 1,768 1,776,840
(9) Merrill Lynch Home Equity
Acceptance Trust
Series 1994-A, Class A2
6.656%, 7/17/22 A3 1,477 1,474,654
(6) Merrill Lynch Home Equity Loan
Corp.,
Series 1991-1, Class B
9.30%, 5/15/16 A 2,023 2,093,977
-----------
- ----------------------------------------------------------------------------------
- -----------------
TOTAL ASSET BACKED OBLIGATIONS
(Cost $5,393,177) 5,345,471
-----------
- ----------------------------------------------------------------------------------
- -----------------
<CAPTION>
Shares
<C> <S> <C> <C> <C>
- ----------------------------------------------------------------------------------
- -----------------
COMMON STOCKS (1.0%)
- ----------------------------------------------------------------------------------
- -----------------
COMMUNICATIONS (0.0%)
Pagemart, Inc. 3,500 0
Pegasus Media & Communications,
Inc. 50 0
-----------
GROUP TOTAL 0
-----------
- ----------------------------------------------------------------------------------
- -----------------
CONSUMER PRODUCTS (0.5%)
(1)(5)(6) Applause Enterprises, Inc.
(acquired 11/8/91, cost
$72,200) 1,900 5,700
(1)(5)(6) Dr. Pepper Bottling Holdings,
Inc.
(acquired 10/21/88, cost
$54,000) 60,000 210,000
(1) Specialty Foods, Inc. 22,500 22,500
<CAPTION>
Value
Shares (Note A-1)
<C> <S> <C> <C> <C>
- ----------------------------------------------------------------------------------
- -----------------
(1)(5)(6) TLC Beatrice International
Holdings, Inc.
(acquired 11/26/91, cost
$307,500) 7,500 $ 172,500
-----------
GROUP TOTAL 410,700
-----------
- ----------------------------------------------------------------------------------
- -----------------
FINANCE (0.0%)
(1)(5)(6)(7) Westfed Holdings, Inc., Class B
(acquired 9/20/88, cost $127) 4,223 0
-----------
- ----------------------------------------------------------------------------------
- -----------------
INDUSTRIAL (0.3%)
Ampex Corp., Class A 60,000 240,000
-----------
- ----------------------------------------------------------------------------------
- -----------------
MANUFACTURING (0.2%)
(1)(5)(6)(7) CIC I Acquisition Corp.
(acquired 10/18/89, cost
$1,076,725) 2,944 200,192
(1) Polyvision Corp. 3,211 6,623
-----------
GROUP TOTAL 206,815
-----------
- ----------------------------------------------------------------------------------
- -----------------
RETAIL TRADE (0.0%)
(1)(5)(6) Jewel Recovery L.P.
(acquired 7/30/93, cost $0) 33,040 0
-----------
- ----------------------------------------------------------------------------------
- -----------------
SERVICES (0.0%)
(1)(3) Motels of America, Inc. 250 18,750
-----------
- ----------------------------------------------------------------------------------
- -----------------
TOTAL COMMON STOCKS
(Cost $1,787,711) 876,265
-----------
- ----------------------------------------------------------------------------------
- -----------------
PREFERRED STOCKS (1.9%)
- ----------------------------------------------------------------------------------
- -----------------
COMMUNICATIONS (0.8%)
(1) BCP/Essex Holdings 16,145 407,661
(3) SD Warren Co. 8,000 252,000
-----------
GROUP TOTAL 659,661
-----------
- ----------------------------------------------------------------------------------
- -----------------
FINANCE (0.0%)
(1)(5)(6)(7) Westfed Holdings, Inc., Class A
(acquired 9/20/88-6/18/93, cost
$1,203,480) 14,246 0
-----------
- ----------------------------------------------------------------------------------
- -----------------
MANUFACTURING (0.1%)
(1) Alpine Group, Inc. 1,664 74,880
-----------
- ----------------------------------------------------------------------------------
- -----------------
OIL, GAS & ELECTRIC (1.0%)
(1) Consolidated Hydro, Inc., Class
H 1,500 817,500
-----------
- ----------------------------------------------------------------------------------
- -----------------
TOTAL PREFERRED STOCKS
(Cost $2,586,619) 1,552,041
-----------
- ----------------------------------------------------------------------------------
- -----------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
<TABLE>
<CAPTION>
Value
Shares (Note A-1)
- ----------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
- -----------------
WARRANTS (0.3%)
- ----------------------------------------------------------------------------------
- -----------------
(1) American Telecasting, Inc.,
expiring 6/23/99 350 $ 1,750
(1) Australis Media Ltd.,
expiring 5/15/00 225 0
(1)(3) Boomtown, Inc.,
expiring 11/1/98 500 0
(1) Casino America, Inc.,
expiring 11/15/96 1,632 0
(1) Casino Magic Corp.,
expiring 10/14/96 3,000 150
(1) CHC Helicopter Corp.,
expiring 12/15/00 2,000 1,300
(1) Consolidated Hydro, Inc.,
expiring 12/31/03 2,700 13,500
(1) County Seat Stores,
expiring 10/15/98 500 500
(1)(6) Crown Packaging Holdings,
expiring 11/1/03 1,000 8,000
(1) Dial Call Communications,
expiring 4/25/99 500 5
(1)(3)(6) Elsinore Corp.,
expiring 10/8/98 5,329 0
(1)(3) Great American Cookie,
expiring 1/30/00 90 0
(1) Health O Meter,
expiring 8/15/02 500 0
(1) Hemmeter,
expiring 12/15/99 3,000 0
(1)(3) In-Flight Phone Corp.,
expiring 8/31/02 500 0
(1)(3) IntelCom Group, Inc.,
expiring 9/15/05 1,155 0
(1) Intermedia Communications of
Florida, Inc.,
expiring 6/1/00 300 3,000
(1) MVE Inc.,
expiring 2/15/02 500 0
(1) Presidential Riverboat Casinos,
expiring 9/23/96 3,000 0
(1)(3) Purity Supreme,
expiring 8/1/97 1,733 0
(1)(3) Renaissance Cosmetics,
expiring 4/3/01 1,000 22,500
(1) SD Warren Co.,
expiring 12/15/06 8,000 40,000
(1) Sheffield Steel Corp.,
expiring 11/1/01 2,500 12,500
(1) Spanish Broadcasting,
expiring 6/29/99 500 85,000
(1) United International Holdings,
expiring 11/15/99 600 0
(1)(3) Wright Medical Technology,
expiring 6/30/03 206 33,971
- ----------------------------------------------------------------------------------
- -----------------
TOTAL WARRANTS
(Cost $177,319) 222,176
-----------
- ----------------------------------------------------------------------------------
- -----------------
<CAPTION>
Value
Shares (Note A-1)
<C> <S> <C> <C> <C>
- ----------------------------------------------------------------------------------
- -----------------
RIGHTS (0.0%)
- ----------------------------------------------------------------------------------
- -----------------
(1) Terex Corp,
expiring 5/15/02 (Cost $0) 2,000 $ 0
-----------
</TABLE>
- --------------------------------------------------------------------
<TABLE>
<CAPTION>
- -------------
Face
Moody's Amount
Ratings (000)
- ----------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
- -----------------
UNITS (2.2%)
- ----------------------------------------------------------------------------------
- -----------------
(3)(8) American Communication Services,
Inc.
Sr. Discount Notes
0.00%, 11/1/05 N/R $ 1,000 547,500
Cellular Communications
International, Inc. Notes
Zero Coupon, 8/15/00 B3 1,000 622,500
(3)(8) GST Telecommunications
Sr. Discount Notes
0.00%, 12/15/05 N/R 1,000 460,400
Horseshoe Gaming L.L.C.
12.75%, 9/15/00 B1 250 249,063
- ----------------------------------------------------------------------------------
- -----------------
TOTAL UNITS
(Cost $1,799,928) 1,879,463
-----------
- ----------------------------------------------------------------------------------
- -----------------
TOTAL DOMESTIC SECURITIES
(Cost $73,852,644) 70,513,563
-----------
</TABLE>
<TABLE>
<C> <S> <C> <C> <C>
- ---------------------------------------------------------------------------------
- -----------------
FOREIGN INCOME SECURITIES (15.3%)
- ---------------------------------------------------------------------------------
- -----------------
GOVERNMENT OBLIGATIONS (15.3%)
- ---------------------------------------------------------------------------------
- -----------------
DENMARK
Kingdom of Denmark
8.00%, 3/15/06 Aaa DK 5,200 984,535
- ----------------------------------------------------------------------------------
- -----------------
FRANCE
Government of France
Debentures
7.50%, 4/25/05 Aaa FF 7,000 1,515,966
Government of France
Treasury Bill
4.75%, 4/12/99 Aaa 7,000 1,398,106
- ---------------------------------------------------------------------------------
- -----------------
GERMANY
Deutscheland Bundesbank
Debentures
6.75%, 7/15/04 Aaa DM 6,000 4,396,442
- ---------------------------------------------------------------------------------
- -----------------
SWEDEN
Kingdom of Sweden
11.00%, 1/21/99 Aaa SK 10,000 1,619,524
- ----------------------------------------------------------------------------------
- -----------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
<TABLE>
<CAPTION>
Face
Moody's Amount Value
Ratings (000) (Note A-1)
<C> <S> <C> <C> <C>
- ---------------------------------------------------------------------------------
- -----------------
UNITED KINGDOM
United Kingdom Treasury
6.00%, 8/10/99 Aaa L 2,000 $3,038,039
- ---------------------------------------------------------------------------------
- -----------------
TOTAL GOVERNMENT OBLIGATIONS
(Cost $11,337,336) 12,952,612
-----------
- ---------------------------------------------------------------------------------
- -----------------
TOTAL FOREIGN INCOME SECURITIES
(Cost $11,337,336) 12,952,612
-----------
- ---------------------------------------------------------------------------------
- -----------------
SHORT-TERM INVESTMENT (1.7%)
- ---------------------------------------------------------------------------------
- -----------------
REPURCHASE AGREEMENT (1.7%)
Paine Webber, 5.80%, dated 12/29/95, due
1/2/96, to be repurchased at $1,490,960,
collateralized by $1,475,000 U.S. Treasury
Notes, 6.625%, due
3/31/97, valued at $1,519,796 (Cost
$1,490,000) $ 1,490 1,490,000
-----------
- ---------------------------------------------------------------------------------
- -----------------
TOTAL INVESTMENTS (100.4%)
(Cost $86,679,980) 84,956,175
-----------
- ---------------------------------------------------------------------------------
- -----------------
LIABILITIES IN EXCESS OF OTHER ASSETS (-0.4%)
(337,913)
-----------
- ---------------------------------------------------------------------------------
- -----------------
NET ASSETS (100%)
Applicable to 8,454,140 issued and
outstanding $.001 par value shares
(authorized 100,000,000 shares) $84,618,262
-----------
-----------
</TABLE>
- --------------------------------------------------------------------
<TABLE>
<C> <S> <C> <C> <C>
-------------
- ----------------------------------------------------------------------------------
- -----------------
L--British Pound.
DK--Danish Krone.
DM--Deutsche Mark.
FF--French Franc.
SK--Swedish Krona.
N/R--Not Rated.
PAC--Planned Amortization Class.
REMIC--Real Estate Mortgage Investment Conduit.
TBA--Security is subject to delayed delivery.
(1) Non-income producing security.
(2) Defaulted security.
(3) 144A Security. Certain conditions for public sale may exist.
(4) Payment in kind bond. Market value includes accrued interest.
(5) Restricted as to private and public resale. Total cost of restricted
securities at December 31, 1995 aggregated $2,714,032. Total market value of
restricted securities owned at December 31, 1995 was $588,392 or 0.7% of net
assets.
(6) Private Placement.
(7) Securities for which market quotations are not readily available are valued
at fair value as determined in good faith by the Board of Directors.
(8) Step Bond--Coupon rate is low or zero for an initial period and then
increases to a higher coupon rate thereafter. Maturity date disclosed is the
ultimate maturity.
(9) Floating Rate--The interest rate changes on these instruments based upon a
designated base rate. The rates shown are those in effect at December 31,
1995.
(10) 9.375% of 11.35% represents amount paid in cash, the remainder is payment in
kind.
(11) All or a portion of this security was pledged as collateral for delayed
delivery securities.
</TABLE>
The accompanying notes are an integral part of the financial statements.
10
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES December 31,
1995
<S> <C>
- --------------------------------------------------------------------------
ASSETS:
Investments at Value
(Cost $85,189,980) (Note A-1)......................... $83,466,175
Repurchase Agreement at Value (Cost $1,490,000) (Note
A-3).................................................. 1,490,000
Receivables:
Interest (Note A-6)................................... 1,866,933
Unrealized Gain on Forward Foreign Currency Exchange
Contracts (Note A-5)................................. 56,136
Other Assets............................................ 6,272
- --------------------------------------------------------------------------
Total Assets........................................ 86,885,516
- --------------------------------------------------------------------------
LIABILITIES:
Payables:
Investment Purchased.................................. 2,060,000
Investment Advisory Fees (Note B)..................... 105,698
Professional Fees..................................... 42,264
Shareholders' Reports................................. 24,088
Shareholder Servicing Fees............................ 16,006
Administrative Fees (Note C).......................... 11,420
Custodian Fees........................................ 6,855
Directors' Fees....................................... 923
- --------------------------------------------------------------------------
Total Liabilities................................... 2,267,254
- --------------------------------------------------------------------------
NET ASSETS.................................................. $84,618,262
NET ASSETS CONSIST OF:
Capital Shares at $.001 Par Value....................... $ 8,454
Capital Paid in Excess of Par Value..................... 89,482,637
Distributions in Excess of Net Investment Income........ (1,469,664)
Accumulated Net Realized Loss........................... (1,744,722)
Unrealized Depreciation on Investments and Foreign
Currency Translations.................................. (1,658,443)
NET ASSETS APPLICABLE TO 8,454,140 ISSUED AND OUTSTANDING
SHARES (AUTHORIZED 100,000,000 SHARES).................... $84,618,262
NET ASSET VALUE PER SHARE................................... $ 10.01
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS Year Ended
December 31,
1995
<S> <C>
- --------------------------------------------------------------------------
INVESTMENT INCOME:
Interest (Note A-6) (Net of foreign taxes withheld of
$11,182)............................................... $ 8,949,431
Dividends (Note A-6).................................... 2,485
- --------------------------------------------------------------------------
Total Income.......................................... 8,951,916
- --------------------------------------------------------------------------
EXPENSES:
Investment Advisory Fees (Note B)....................... 409,946
Administrative Fees (Note C)............................ 129,233
Shareholder Servicing Fees.............................. 80,284
Shareholders' Reports................................... 68,764
Professional Fees....................................... 48,957
Interest Expense........................................ 40,967
Directors' Fees and Expenses............................ 39,469
Custodian Fees.......................................... 33,850
Other................................................... 67,991
- --------------------------------------------------------------------------
Total Expenses........................................ 919,461
- --------------------------------------------------------------------------
Net Investment Income............................... 8,032,455
- --------------------------------------------------------------------------
NET REALIZED GAIN (LOSS):
Investments............................................. 291,482
Foreign Currency........................................ (3,018,868)
- --------------------------------------------------------------------------
Total Net Realized Loss............................. (2,727,386)
- --------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION:
Investments............................................. 7,878,277
Foreign Currency Translations........................... 30,578
- --------------------------------------------------------------------------
Total Change in Unrealized
Appreciation/Depreciation.......................... 7,908,855
- --------------------------------------------------------------------------
Net Realized Loss and Change in Unrealized
Appreciation/Depreciation................................. 5,181,469
- --------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations........ $13,213,924
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
11
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1995 1994
<S> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net Investment Income...................................................... $ 8,032,455 $ 8,000,394
Net Realized Loss on Investments and Foreign Currency...................... (2,727,386) (3,815,334)
Change in Unrealized Appreciation/Depreciation on Investments and Foreign
Currency.................................................................. 7,908,855 (7,404,315)
- -----------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS................ 13,213,924 (3,219,255)
- -----------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
Net Investment Income...................................................... (6,422,578) (5,211,992)
Return of Capital.......................................................... (425,283) (1,635,871)
- -----------------------------------------------------------------------------------------------------------------
Total Distributions...................................................... (6,847,861) (6,847,863)
- -----------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net Assets................................ 6,366,063 (10,067,118)
- -----------------------------------------------------------------------------------------------------------------
NET ASSETS:
Beginning of Year.......................................................... 78,252,199 88,319,317
- -----------------------------------------------------------------------------------------------------------------
End of Year (Including distributions in excess of net investment income of
$(1,469,664) and $(60,673), respectively)................................. $ 84,618,262 $ 78,252,199
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS Year Ended December 31,
PER SHARE OPERATING ----------------------------------------------------------------------------------
PERFORMANCE: 1995Section 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF
YEAR............... $ 9.26 $ 10.45 $ 9.80 $ 9.62 $ 8.70
- --------------------------------------------------------------------------------------------------------
Investment
Activities:
Net Investment
Income......... 0.95 0.95 1.04 1.22 1.16
Net Realized and
Unrealized Gain
(Loss) on
Investments.... 0.61 (1.33) 0.66 0.01 0.96
- --------------------------------------------------------------------------------------------------------
Total from
Investment
Activities... 1.56 (0.38) 1.70 1.23 2.12
- --------------------------------------------------------------------------------------------------------
Distributions:
Net Investment
Income......... (0.76) (0.62) (1.04) (1.05) (1.20)
In Excess of Net
Investment
Income......... -- -- (0.01) -- --
Return of
Capital........ (0.05) (0.19) -- -- --
- --------------------------------------------------------------------------------------------------------
Total
Distributions... (0.81) (0.81) (1.05) (1.05) (1.20)
- --------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END
OF YEAR............ $ 10.01 $ 9.26 $ 10.45 $ 9.80 $ 9.62
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
PER SHARE MARKET
VALUE, END OF
YEAR............... $ 8.88 $ 8.25 $ 9.50 $ 9.50 $ 10.38
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT
RETURN:
Net Asset Value
(1)............ 17.57% (3.80)% 18.29% 13.28% 25.32%
Market Value.... 18.16% (4.72)% 10.94% 3.50% 53.35%
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
RATIOS AND
SUPPLEMENTAL DATA:
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
Net Assets, End of
Year (Thousands)... $84,618 $78,252 $88,319 $82,450 $80,606
- --------------------------------------------------------------------------------------------------------
Ratio of Expenses to
Average Net
Assets............. 1.12% 0.99% 1.06% 1.01% 1.00%
Ratio of Net
Investment Income
to Average Net
Assets............. 9.80% 9.66% 10.28% 12.34% 12.13%
Portfolio Turnover
Rate............... 54.5% 83.1% 128.5% 107.7% 48.0%
- --------------------------------------------------------------------------------------------------------
Section BEA Associates replaced CS First Boston Investment Management as the Fund's investment adviser
effective June 13, 1995, as explained in Note B.
(1) Total investment return based on per share net asset value reflects the effects of changes in net
asset value on the performance of the Fund during each period, and assumes dividends and capital
gains distributions, if any, were reinvested. These percentages are not an indication of the
performance of a shareholder's investment in the Fund based on market value due to differences
between the market price of the stock and the net asset value of the Fund.
Note: Current period permanent book-tax differences, if any, are not included in the calculation of
net investment income per share.
</TABLE>
The accompanying notes are an integral part of the financial statements.
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- ------------
BEA Strategic Income Fund, Inc. (the "Fund"), formerly CS First Boston Strategic
Income Fund, Inc., was incorporated on January 27, 1988 and is registered as a
diversified, closed-end investment company under the Investment Company Act of
1940. The Fund's investment objective is to seek high current income through
investments primarily in debt securities.
A. The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements. Generally accepted
accounting principles may require management to make estimates and assumptions
that affect the amounts and disclosures in the financial statements. Actual
reported results could differ from those estimates.
1. SECURITY VALUATION: Market values for fixed income securities are valued at
the latest quoted bid price in the over-the-counter market. However, fixed
income securities may be valued on the basis of prices provided by a pricing
service which are based primarily on institutional size trading in similar
groups of securities. Other securities listed on an exchange are valued at
the latest quoted sales prices on the day of valuation or if there was no
sale on such day, the last bid price quoted on such day. Quotations of
foreign security prices denominated in a foreign currency are converted to
U.S. dollars at the current exchange rate on valuation date. Securities
purchased with remaining maturities of 60 days or less are valued at
amortized cost, if it approximates market value. Securities for which market
quotations are not readily available (including investments which are
subject to limitations as to their sale) are valued at fair value as
determined in good faith by the Board of Directors. Such securities have a
value of $200,192 (or 0.24% of net assets) at December 31, 1995. In
determining fair value, consideration is given to cost, operating and other
financial data.
The Fund may invest up to 10% of its total assets in securities which are not
readily marketable, including those which are restricted as to disposition
under securities law ("restricted securities"). These securities are valued
pursuant to the valuation procedures noted above.
2. FEDERAL INCOME TAXES: It is the Fund's intention to continue to qualify as a
regulated investment company and distribute all of its taxable income to
shareholders. Accordingly, no provision for Federal income taxes is required
in the financial statements.
Paid in capital, distributions in excess of net investment income and
accumulated net realized loss have been adjusted for current and prior period
permanent book-tax differences. Current period adjustments arose principally
from differing book-tax treatments for foreign currency transactions.
3. REPURCHASE AGREEMENTS: In connection with transactions in repurchase
agreements, a bank as custodian for the Fund takes possession of the
underlying securities, the value of which exceeds the principal amount of
the repurchase transaction, including accrued interest. To the extent that
any repurchase transaction exceeds one business day, the value of the
collateral is marked-to-market on a daily basis to determine the adequacy of
the collateral. In the event of default on the obligation to repurchase, the
Fund has the right to liquidate the collateral and apply the proceeds in
satisfaction of the obligation. In the event of default or bankruptcy by the
other party to the agreement, realization and/or retention of the collateral
and proceeds may be subject to legal proceedings.
4. FOREIGN CURRENCY TRANSLATION: The books and records of the Fund are
maintained in U.S. dollars. Foreign currency amounts are translated into
U.S. dollars at the bid price of such currencies against U.S. dollars last
quoted by a major bank as follows:
- investments, other assets and liabilities at the prevailing rates of
exchange on the valuation date;
- investment transactions and investment income at the prevailing rates of
exchange on the dates of such transactions.
Although the net assets of the Fund are presented at the foreign exchange
rates and market values at the close of the period, the Fund does not isolate
that portion of the results of operations arising as a result of changes in
the foreign exchange rates from the fluctuations arising from changes in the
market prices of the securities held at period end. Similarly the fund does
not isolate the effect of changes in foreign exchange rates from the
fluctuations arising from changes in the market prices of securities sold
during the period. Accordingly, realized and unrealized foreign currency
gains (losses) are included in the reported net realized and unrealized gains
(losses) on investment transactions and balances.
Net realized losses on foreign currency transactions represent net foreign
exchange losses from sales and maturities of forward currency contracts,
disposition of foreign currencies, currency gains or losses realized between
the trade and settlement dates on securities transactions, and the difference
between the amount of investment income and foreign withholding taxes
recorded on the Fund's books and the U.S. dollar equivalent amounts actually
received or paid. Net currency gains (losses) from valuing foreign currency
denominated assets and liabilities at period end exchange rates are included
in unrealized depreciation of investments and foreign currency.
Foreign security and currency transactions may involve certain considerations
and risks not typically associated
13
<PAGE>
with those of U.S. dollar denominated transactions as a result of, among
other factors, the level of governmental supervision and regulation of
foreign securities markets and the possibility of political or economic
instability.
5. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS: The Fund may enter into forward
foreign currency exchange contracts to protect securities and related
receivables and payables against changes in future foreign exchange rates. A
forward currency contract is an agreement between two parties to buy or sell
currency at a set price on a future date. The market value of the contract
will fluctuate with changes in currency exchange rates. The contract is
marked-to-market daily using the forward rate and the change in market value
is recorded by the Fund as unrealized gain or loss. The Fund recognizes
realized gain or loss when the contract is closed equal to the difference
between the value of the contract at the time it was opened and the value at
the time it was closed. Risks may arise upon entering into these contracts
from the potential inability of counterparties to meet the terms of their
contracts and from unanticipated movements in the value of a foreign
currency relative to the U.S. dollar.
6. SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Security transactions are
accounted for on the date the securities are purchased or sold. Costs used
in determining realized gains and losses on the sale of investment
securities are those of specific securities sold. Interest income is
recognized on the accrual basis. Discounts on securities purchased are
amortized according to the effective yield method over their respective
lives. Discount or premium on mortgage backed securities is recognized upon
receipt of principal payments on the underlying mortgage pools. Dividend
income is recorded on the ex-dividend date.
7. DELAYED DELIVERY COMMITMENTS: The Fund may purchase or sell securities on a
when-issued or forward commitment basis. Payment and delivery may take place
a month or more after the date of the transaction. The price of the
underlying securities and the date when the securities will be delivered and
paid for are fixed at the time the transaction is negotiated.
8. DIVIDENDS AND DISTRIBUTIONS: The Fund pays dividends of net investment
income monthly and makes distributions at least annually of any net capital
gains in excess of applicable capital losses, including capital loss
carryforward. Dividends and distributions are recorded on the ex-dividend
date.
Income distributions and capital gain distributions are determined in
accordance with U.S. Federal Income Tax regulations which may differ from
generally accepted accounting principles. These differences are principally
due to the timing of the recognition of gains or losses on securities,
defaulted bond interest and from permanent differences presented in Note A-2.
B. Effective June 13, 1995, BEA Associates (the "Adviser") provides investment
advisory services to the Fund under the terms of an Advisory Agreement. Under
the Advisory Agreement, the Adviser is paid a fee, computed weekly and payable
quarterly at an annual rate of .50% of average weekly net assets. Prior to June
13, 1995, CS First Boston Investment Management Corporation provided investment
advisory services to the Fund under substantially the same terms, conditions and
fees as stated above.
C. Effective September 1, 1995, The Chase Manhattan Bank, N.A. ("Chase), through
its affiliate Chase Global Funds Services Company ("CGFSC" or the
"Administrator"), formerly Mutual Funds Service Company ("MFSC"), provides
administrative services to the Fund under the terms of an Administration
Agreement. Under the Agreement, the Administrator is paid a fee, computed weekly
and payable monthly, at an annual rate of .15% of the Fund's first $100 million
of average weekly net assets, .10% of the Fund's next $300 million of average
weekly net assets and .05% of the Fund's average weekly net assets in excess of
$400 million. Prior to September 1, 1995, MFSC provided administrative services
to the Fund under substantially the same terms, conditions and fees as stated
above.
Effective September 1, 1995, Chase provides custodial services to the Fund.
Under the Custody Agreement, Chase is paid a fee, computed weekly and payable
monthly, at an annual rate of .03% of the Fund's first $50 million of average
weekly net assets, .02% of the Fund's next $50 million of average weekly net
assets and .01% of the Fund's average weekly net assets in excess of $100
million. Prior to September 1, 1995, United States Trust Company of New York
("U.S. Trust") provided custodial services to the Fund under substantially the
same terms, conditions and fees as stated above.
Effective September 1, 1995, CGFSC, provides transfer agent services to the
Fund. Under the Transfer Agent Agreement, CGFSC is paid a fee based on the
number of accounts in the Fund per year. In addition, the Fund is charged
certain out-of-pocket expenses by CGFSC. Prior to September 1, 1995, U.S. Trust
provided transfer agent services to the Fund under substantially the same terms,
conditions and fees as stated above.
D. During the year ended December 31, 1995, the Fund made purchases of
$42,670,368 and sales of $44,643,281 of investment securities other than U.S.
Government securities and short term investments. During the year ended December
31, 1995, purchases and sales of U.S. Government securities were $4,004,676 and
$8,547,347, respectively. At December 31, 1995, the cost of investments for
Federal income tax purposes was $86,679,980. Accordingly, net unrealized
depreciation for Federal income tax purposes aggregated $1,723,805, of which
$6,082,592 related to depreciated securities and $4,358,787 related to
appreciated securities.
14
<PAGE>
At December 31, 1995, the Fund had a capital loss carryforward of $1,744,722
available to offset future capital gains of which $242,365, $546,663, $743,988
and $211,706 will expire on December 31, 1998, 2000, 2002 and 2003,
respectively.
E. At December 31, 1995 under the terms of the forward foreign currency exchange
contracts, the Fund is obligated to deliver currency in exchange for U.S.
dollars as indicated in the following table:
SALES
<TABLE>
<CAPTION>
NET
CURRENCY TO IN EXCHANGE SETTLEMENT UNREALIZED
DELIVER FOR DATE VALUE APPRECIATION
- ----------- ------------ ----------- ---------- -------------
<S> <C> <C> <C> <C>
L1,850,000 $2,915,045 6/18/96 $2,858,909 $ 56,136
</TABLE>
F. At December 31, 1995, 70.2% of the Fund's net assets comprised high-yield
fixed income securities. The financial condition of the issuers of the
securities and general eco-
nomic conditions may affect the issuers' ability to make payments of income and
principal, as well as the market value of the securities. Such investments may
also be less liquid and more volatile than investments in higher rated fixed
income securities.
At December 31, 1995, 15.3% of the Fund's net assets comprised foreign currency
denominated fixed income securities. Changes in currency exchange rates will
affect the value and net investment income from such securities.
G. The Fund's Board of Directors has approved a share repurchase program
authorizing the Fund from time to time to make open-market purchases on the New
York Stock Exchange of up to 10 percent of the Fund's shares outstanding as of
December 11, 1990. There were no repurchases of shares during the year ended
December 31, 1995.
H. Summary of quarterly results of operations (Unaudited):
<TABLE>
<CAPTION>
AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS
THREE MONTHS ENDED
----------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31,
MARCH 31, 1995 JUNE 30, 1995 1995 1995
--------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment Income............. $2,178 $ 0.26 $2,430 $ 0.29 $2,225 $ 0.26 $2,119 $ 0.25
Net Investment Income......... 1,946 0.23 2,224 0.26 1,975 0.24 1,887 0.22
Net Realized Loss and Change
in Unrealized
Appreciation/Depreciation on
Investments and Foreign
Currency..................... 2,020 0.24 1,437 0.17 877 0.09 848 0.11
Net Increase in Net Assets
Resulting from Operations.... 3,966 0.47 3,661 0.43 2,852 0.33 2,735 0.33
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
MARCH 31, 1994 JUNE 30, 1994 1994 1994
--------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment Income............. $2,264 $ 0.27 $2,196 $ 0.26 $2,224 $ 0.27 $2,138 $ 0.25
Net Investment Income......... 2,053 0.24 1,974 0.24 2,022 0.24 1,952 0.23
Net Realized Loss and Change
in Unrealized
Appreciation/Depreciation on
Investments and Foreign
Currency..................... (3,027) (0.36) (3,969) (0.48) (2,037) (0.24) (2,187) (0.25)
Net Decrease in Net Assets
Resulting from Operations.... (974) (0.12) (1,995) (0.24) (15) 0.00 (235) (0.02)
</TABLE>
15
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
- ------
To the Shareholders and Board of Directors of
BEA Strategic Income Fund, Inc.
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of BEA Strategic Income Fund, Inc.
(the "Fund") at December 31, 1995, the results of its operations for the year
then ended, the changes in its net assets for each of the two years in the
period then ended and the financial highlights for each of the five years in the
period then ended, in conformity with generally accepted accounting principles.
These financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
December 31, 1995 by correspondence with the custodian and brokers, provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York
February 13, 1996
16
<PAGE>
DESCRIPTION OF DIVIDEND REINVESTMENT
AND CASH PURCHASE PLAN
- -----------------
Pursuant to the BEA Strategic Income Fund, Inc.'s (the "Fund") Dividend
Reinvestment and Cash Purchase Plan (the "Plan"), each shareholder will be
deemed to have elected, unless the Fund's transfer agent as the Plan Agent (the
"Plan Agent"), is otherwise instructed by the shareholder in writing, to have
all dividends and distributions, net of any applicable U.S. withholding tax,
automatically reinvested in additional shares of the Fund. Shareholders who do
not participate in the Plan will receive all dividends and distributions in
cash, net of any applicable U.S. withholding tax, paid in dollars by check
mailed directly to the shareholder by the Plan Agent, as dividend-paying agent.
Shareholders who do not wish to have dividends and distributions automatically
reinvested should notify the Plan Agent for the Fund, at the address set forth
below. Dividends and distributions with respect to shares registered in the name
of a broker-dealer or other nominee (i.e., in "street name") will be reinvested
under the Plan unless such service is not provided by the broker or nominee or
the shareholder elects to receive dividends and distributions in cash. A
shareholder whose shares are held by a broker or nominee that does not provide a
dividend reinvestment program may be required to have his shares registered in
his own name to participate in the Plan. Investors who own shares of the Fund's
common stock registered in street name should contact the broker or nominee for
details concerning participation in the Plan.
Certain distributions of cash attributable to (a) some of the dividends and
interest amounts paid to the Fund and (b) certain capital gains earned by the
Fund that are derived from securities of certain foreign issuers are subject to
taxes payable by the Fund at the time amounts are remitted. Such taxes, if any,
will be borne by the Fund and allocated to all shareholders in proportion to
their interests in the Fund.
The Plan Agent serves as agent for the shareholders in administering the
Plan. If the Board of Directors of the Fund declares an income dividend or a
capital gains distribution payable either in the Fund's common stock or in cash,
as shareholders may have elected, nonparticipants in the Plan will receive cash
and participants in the Plan will receive the equivalent in shares of the Fund
valued at the lower of market price or net asset value as determined
at the time of purchase (generally on the payable date of the dividend) as set
forth below. Whenever market price is equal to or exceeds net asset value at the
time shares are valued for the purpose of determining the number of shares
equivalent to the cash dividend or distribution, participants will be issued
shares of the Fund at a price equal to net asset value but not less than 95% of
the then current market price of the Fund shares. The Fund will not issue shares
under the Plan below net asset value. If net asset value determined as at the
time of purchase exceeds the market price of Fund shares at such time, or if the
Fund should declare a dividend or other distribution payable only in cash (i.e.,
if the Board of Directors should preclude reinvestment at net asset value), the
Agent will, as agent for the participants, endeavor to buy Fund shares in the
open market, on the New York Stock Exchange or elsewhere, on behalf of all
participants, and will allocate to you your pro rata portion based on the
average price paid (including brokerage commissions) for all shares purchased.
Shares acquired on behalf of participants in the open market will be purchased
at the prevailing market price. Fractions of a share allocated to you will be
computed to four decimal places. If, before the Agent has completed its
purchases, the market price exceeds the net asset value of a Fund share, the
average per share purchase price paid by the Agent may exceed the net asset
value of the Fund's shares, resulting in the acquisition of fewer shares than if
the dividend or distribution had been paid in shares issued by the Fund.
For all purposes of the Plan: (a) the market price of the Fund's common
stock on a dividend payment date shall be the last sale price on the New York
Stock Exchange on that date, or, if there is no such sale, then the mean between
the closing bid and asked quotations for such stock, and (b) net asset value per
share of the Fund's common stock on a particular date shall be as determined by
or on behalf of the Fund.
Participants in the Plan have the option of making additional cash payments
to the Plan Agent, monthly, in any amount from $100 to $1,000, for investment in
the Fund's common stock. Shareholders should be aware that cash contributions
will be used to purchase shares of the Fund in the open market regardless of
whether such shares are selling above, at or below the market price that
reflects a premium to the Fund's net asset value.
Cash contributions should be in the form of a check or money order and made
payable in U.S. dollars and directed to The Chase Manhattan Bank N.A., Dividend
Reinvestment Department -- Retail, 770 Broadway, New York, NY 10003-9598.
Deliveries to any other address do not constitute valid delivery.
A detachable form for use in making voluntary cash payments will be attached
to each Dividend Reinvestment Plan statement you receive. The same amount of
money need not be sent each month and there is no obligation to make an optional
cash payment each month.
Payments received by the Agent will be used to purchase stock under the
Plan. Prior to such purchase of stock by the Agent, no interest will be paid on
such funds sent to the Agent. Therefore, voluntary cash payments should be sent
to reach the Agent shortly (but at least five business days) before the dividend
payment date. Voluntary cash payments received after the five business day
deadline will be invested by the Agent on the next succeeding dividend payment
date. Dividend payment dates are expected to be the 15th (or next business day)
of each month.
17
<PAGE>
You may obtain a refund of any voluntary payment if a request for such a
refund is received in writing by the Agent not less than 48 hours before the
next succeeding dividend payment.
There is no charge to participants for reinvesting dividends or capital
gains distributions. The Agent's fees for the handling of reinvestment of
dividends and distributions will be paid by the Fund. There will be no brokerage
charges with respect to shares issued directly by the Fund as a result of
dividends or capital gains distributions payable either in shares or in cash.
However, each participant will pay a pro rata share of brokerage commissions
incurred with respect to the Agent's open market purchases in connection with
the reinvestment of dividends, capital gains distributions, or voluntary cash
payments.
Brokerage charges for purchasing small amounts of stock for individual
accounts through the Plan are expected to be less than the usual brokerage
charges for such transactions because the Agent will be purchasing stock for all
participants in blocks and pro rating the lower commissions thus attainable.
The receipt of dividends and distributions in stock under the Plan will not
relieve participants of any income tax (including withholding tax) that may be
payable on such dividends and distributions.
While the Fund presently intends to continue the Plan indefinitely,
experience under the Plan may indicate that changes are desirable. Accordingly,
the Fund reserves the right to amend or terminate the Plan as applied to any
voluntary cash payments made and any dividend or distribution paid subsequent to
notice of the change sent to all shareholders of the Fund at least 30 days
before the record date for such dividend or distribution. The Plan also may be
amended or terminated by the Agent by at least 30 days' written notice to all
shareholders of the Fund.
Any notices, questions or other correspondence regarding the Plan should be
addressed to The Chase Manhattan Bank, N.A., Customer Service Department, 770
Broadway, New York, NY 10003-9598. Be sure to include a reference to BEA
Strategic Income Fund, Inc. or you may call (800) 428-8890.
18
