<PAGE>
BEA Strategic Income Fund, Inc.
153 East 53rd Street
New York, NY 10022
---------------------------------------------
OFFICERS AND DIRECTORS
<TABLE>
<S> <C>
Daniel H. Sigg RICHARD J. LINDQUIST
CHAIRMAN AND CHIEF VICE PRESIDENT
EXECUTIVE OFFICER Michael A. Pignataro
Robert J. Moore SECRETARY
PRESIDENT AND CHIEF Wendy S. Setnicka
INVESTMENT OFFICER ASSISTANT VICE
Prof. Enrique R. Arzac PRESIDENT
DIRECTOR AND ASSISTANT
Lawrence J. Fox SECRETARY
DIRECTOR Paul P. Stamler
James S. Pasman, Jr. TREASURER
DIRECTOR John M. Corcoran
ASSISTANT TREASURER
Joseph R. Federico
ASSISTANT TREASURER
</TABLE>
--------------------------------------------------------
INVESTMENT ADVISER
BEA Associates
153 East 53rd Street
New York, New York 10022
--------------------------------------------------------
ADMINISTRATOR
The Chase Manhattan Bank
73 Tremont Street
Boston, Massachusetts 02108
--------------------------------------------------------
CUSTODIAN
The Chase Manhattan Bank
770 Broadway
New York, New York 10003
--------------------------------------------------------
SHAREHOLDER SERVICING AGENT
The Chase Manhattan Bank
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]
SEMI-ANNUAL REPORT
June 30, 1996
<PAGE>
BEA STRATEGIC INCOME FUND, INC.
- ----------
Dear Shareholders: August 14, 1996
We are pleased to report on the activities of the BEA Strategic Income Fund,
Inc. ("the Fund") for the six months ended June 30, 1996.
At June 30, 1996, the Fund's net asset value (NAV) was $10.11, compared to
an NAV of $10.01 at December 31, 1995. As a result, the Fund's total return
(based on NAV and assuming reinvestment of dividends of $0.40 per share) for the
period was 5.14%. At June 30, 1996, $55.9 million was invested in high-yield
debt securities, $15.5 million was invested in domestic, investment-grade debt
securities, $11.7 was invested in international, investment-grade debt
securities, and the balance of the Fund's investments, $3.4 million, was
invested in equity securities. The investment-grade component consisted of
short-term mortgages, asset-backed securities, global government bonds and
corporate bonds of intermediate maturity. Of the debt securities, the largest
concentration (42.26%) was in B-rated issues.
MARKET COMMENTARY
Overall, the high-yield sector was the top performer among the major U.S.
fixed-income markets during the first half of 1996. As measured by the Salomon
Brothers High Yield Market Index, high yield returned 2.91%. This is
significantly better than the -1.81% return achieved by government bonds, the
- -2.12% by corporate bonds and the 0.30% earned by mortgages. [All returns cited
from the respective Salomon Brothers index.] High yield also outperformed bonds
globally, which lost 1.16% (as represented by the J.P. Morgan Global Government
Bond Index).
The high yield new-issue market was extremely active and more than doubled
its 1995 pace. As of June 30, 1996, $40.9 billion of new issues had entered the
market, versus $20.0 billion for the same period last year. In addition, the
average market-weighted new-issue offer yield was 11.00% at the end of the
period, as compared with 11.43% at the same point in 1995 and 10.93% for 1995 as
a whole.
Investment in high-yield mutual funds substantially increased during the
six-month period ended June 30, 1996. Net cash inflow was $6.4 billion, a 23.1%
jump over 1995. The percentage of funds held in cash was 5.71%, the lowest such
figure since July 1994, suggesting general optimism among portfolio managers.
HIGH-YIELD SECURITIES
The Fund's most noteworthy strategic activity in its high-yield holdings
occurred during the first quarter. At that time, we reduced our positions in the
steel and paper sectors, based on our belief that their appeal as cyclical plays
had declined. We used the proceeds to overweight several other sectors versus
their weightings in the Salomon high yield index. The new overweightings
included broadcasting, cable, telecommunications, health care and gaming. Our
reasoning behind the shift was twofold. First, these sectors tend to grow
regardless of the current state of the economy. Second, most have recently been
experiencing substantial merger and acquisition activity (especially gaming,
broadcasting and telecommunications). Such activity benefits debtholders in the
form of price appreciation and upgraded creditworthiness.
Our shifts in sector allocation helped the Fund to perform well during the
period. As a result, we do not anticipate any meaningful allocation change in
the near term.
MORTGAGE-BACKED SECURITIES
Mortgage-backed securities (MBS), in which the Fund maintains a position,
are regaining popularity among investors. Certain MBS categories represent good
value in the current environment. In this regard, we particularly like
commercial mortgage-backed securities (CMBS). Essentially, these are structured
mortgages most commonly backed by commercial real estate. Because of their very
strong collateralization and relatively high income levels, CMBS offer an
unusual combination of credit strength and attractive yield. Most investors tend
to avoid them, moreover, because they are somewhat difficult to understand,
indicating the kind of information gap that can help more knowledgeable
investors to earn excess returns. We have trimmed our corporate holdings a bit
and reallocated the proceeds to CMBS and asset-backed securities.
INTERNATIONAL HOLDINGS
In contrast with our optimism during the first half of the year, our general
view on the world's debt markets has become more uncertain. Only four major
economies are growing (Canada, the U.S., Japan and the U.K.) and most of the
rest are fairly sluggish. In particular, the U.S.
2
<PAGE>
economy is functioning at full capacity-utilization levels and near-full
employment, meaning that above-trend growth would likely prompt the Federal
Reserve to raise interest rates. Accordingly, we have altered our international
exposure so as to take a more defensive investment stance. Our emphasis has
shifted to capturing yield rather than pursuing opportunities for capital
appreciation. We also further diversified our holdings by shifting assets from
core European nations to higher-yielding European markets (E.G., Sweden, Spain)
and adding government bonds from Canada and Japan.
OUTLOOK
Our outlook for the high-yield debt market remains positive. We are
maintaining our strategic focus on the generation of a strong income stream as
well as pragmatic investment in companies that, over the longer term, we believe
offer improving operating performance and deleveraging potential. We continue to
find good opportunities among the increasingly large universe of high yield
issues and issuers. As always, we are carefully monitoring market conditions so
as to preserve the Fund's capital.
On the new-issue front, we expect the third quarter to slow down from the
frenetic pace of the first half. Secondary trading should remain brisk as
investors reposition portfolios to make room for new issues.
We appreciate your interest in the Fund and would be pleased to respond to
your questions or comments. Any questions regarding net asset value,
performance, dividends, portfolio management or allocations should be directed
to BEA Associates at (800) 293-1232. All other inquiries regarding account
information or requests for a prospectus or other reports should be directed to
the Fund's Shareholder Servicing Agent at (800) 428-8890.
Sincerely yours,
[SIG]
Robert J. Moore
PRESIDENT AND CHIEF INVESTMENT OFFICER
[SIG]
Daniel H. Sigg
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
3
<PAGE>
PORTFOLIO OF INVESTMENTS (UNAUDITED)
- ---------
JUNE 30, 1996
<TABLE>
<CAPTION>
Face
Moody's Amount
Ratings (000) Value
<C> <S> <C> <C> <C>
- --------------------------------------------------------------------------------
- -----------------
DOMESTIC SECURITIES (87.5%)
- --------------------------------------------------------------------------------
- -----------------
CORPORATE OBLIGATIONS (62.5%)
- ---------------------------------------------------------------------------------
- -----------------
COMMUNICATIONS (18.7%)
A+ Network, Inc.
Sr. Sub. Notes
11.875%, 11/1/05 Caa $ 250 $ 255,625
(8) American Communications
Services, Inc.
Sr. Discount Notes
0.00%, 11/1/05 N/R 1,000 555,000
(8) American Telecasting, Inc.
Sr. Discount Notes
0.00%, 6/15/04 Caa 325 230,750
(8) Arch Communications Group, Inc.
Sr. Discount Notes
0.00%, 3/15/08 B3 700 362,250
(8) Australis Media Ltd.
Yankee Gtd. Sub.
Discount Notes
0.00%, 5/15/03 Caa 225 156,375
(3)(8) Brooks Fiber Properties, Inc.
Sr. Discount Notes
0.00%, 3/1/06 N/R 450 239,625
Chancellor Broadcasting Co.
Gtd. Sr. Sub. Notes
12.50%, 10/1/04 B3 375 412,500
(3) Charter Communications Southeast
L.P.
Sr. Notes
11.25%, 3/15/06 B3 250 248,750
Citicasters, Inc.,
Series B, Sr. Sub. Notes
9.75%, 2/15/04 B2 500 500,000
(8)(10) Comcast UK Cable Partners Ltd.
Yankee Sr. Debentures
0.00%, 11/15/07 B2 500 290,000
(8) Dial Call Communications
Sr. Discount Notes
0.00%, 4/15/04 Caa 500 322,500
(8) Diamond Cable
Communications plc
Yankee Sr. Discount Notes
0.00%, 12/15/05 B3 1,000 590,000
(8) EchoStar Communications Corp.
Gtd. Sr. Discount Notes
0.00%, 6/1/04 B2 500 376,250
(4) Falcon Holdings Group L.P.
Sr. Sub. Notes
11.00%, 9/15/03 N/R 396 380,225
Geotek Communications, Inc.
Sr. Sub. Convertible Notes
12.00%, 2/15/01 N/R 350 490,000
(8) GST Telecommunications, Inc.
Conv. Sr. Discount Notes
0.00%, 12/15/05 N/R 100 100,000
(3)(8) GST USA, Inc.
Notes
0.00%, 12/15/05 N/R 800 448,000
<CAPTION>
Face
Moody's Amount
Ratings (000) Value
<C> <S> <C> <C> <C>
- ----------------------------------------------------------------------------------
- -----------------
(8) Helicon Group L.P.
Sr. Secured Notes
9.00%, 11/1/03 B1 $ 650 $ 641,875
(8) Imax Corp.,
Series B, Yankee Sr. Notes
7.00%, 3/1/01 B1 250 246,875
(8) In-Flight Phone Corp.,
Series B, Sr. Discount Notes
0.00%, 5/15/02 Caa 500 180,000
(8) IntelCom Group, Inc.
Sr. Discount Notes
0.00%, 9/15/05 N/R 350 209,563
Intermedia Communications of
Florida, Inc.,
Series B, Sr. Notes
13.50%, 6/1/05 B3 300 347,250
(8) International CableTel, Inc.,
Series A, Sr. Deferred Coupon
Notes
0.00%, 2/1/06 B3 500 281,250
(3) Lenfest Communications, Inc.
Sr. Sub. Note
10.50%, 6/15/06 B2 500 508,280
(8) MFS Communications Co., Inc.
Discount Notes
0.00%, 1/15/04 B1 350 262,500
Metrocall, Inc.
Sr. Sub. Notes
10.375%, 10/1/07 B2 250 232,500
Mobile Telecommunications
Technologies Corp.
Sr. Sub. Notes
13.50%, 12/15/02 B2 250 265,625
NWCG Holding Corp.,
Series B, Sr. Discount Notes
Zero Coupon, 6/15/99 Caa 500 368,750
(8) Nextel Communications, Inc.
Sr. Notes
0.00%, 8/15/04 B3 700 411,250
PTI Holdings, Inc.
Sub. Notes
Zero Coupon, 12/17/02 N/R 507 344,702
(8) Pagemart Nationwide, Inc.
Sr. Discount Notes
0.00%, 2/1/05 N/R 750 491,250
Paging Network, Inc.
Sr. Sub. Notes
10.125%, 8/1/07 B2 500 492,500
(3) Park Broadcasting Inc.,
Sr. Notes
11.75%, 5/15/04 B2 250 250,783
Pegasus Media & Communications,
Inc.,
Series B, Notes
12.50%, 7/1/05 B3 500 530,000
(3) Petersburg Long Distance Inc.,
Sub. Notes
9.00%, 6/1/06 N/R 80 96,000
(2) Scott Cable Communications, Inc.
Sub. Debentures
12.25%, 4/15/01 B3 500 300,000
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
Face
Moody's Amount
Ratings (000) Value
<C> <S> <C> <C> <C>
- ----------------------------------------------------------------------------------
- -----------------
(2)(6) Simmons Cable
Sr. Sub. Notes
15.747%, 4/30/96 N/R $ 500 $ 335,000
Sinclair Broadcast Group
Sr. Sub. Notes
10.00%, 9/30/05 B2 300 288,000
Spanish Broadcasting Systems
Sr. Notes
7.50%, 6/15/02 B3 500 496,250
Teleport Communications Group,
Inc. Sr. Notes
9.875%, 7/1/06
(8) Sr. Discount Notes B1 250 253,203
0.00%, 7/1/07 B1 550 326,735
United International Holdings
Discount Notes
Zero Coupon, 11/15/99 B3 1,000 650,000
Univision Network Holding L.P.
Sub. Notes
Zero Coupon, 12/17/02 N/R 573 389,690
(8)(10) Videotron Holdings plc
Yankee Discount Notes
0.00%, 8/15/05 B3 1,000 670,000
Young Broadcasting, Inc.
Series B Gtd. Sr. Sub. Notes
9.00%, 1/15/06 N/R 200 179,500
-----------
GROUP TOTAL 16,007,181
-----------
- ---------------------------------------------------------------------------------
- -----------------
CONSUMER PRODUCTS (6.0%)
(10) Fort Howard Corp.
Sub. Notes
10.00%, 3/15/03 B2 500 497,500
(10) Jordan Industries, Inc.
Sr. Notes
10.375%, 8/1/03 B3 500 475,000
Mail-Well Corp.
Sr. Sub. Notes
10.50%, 2/15/04 B2 500 478,750
Marvel III Holdings, Inc.,
Series B, Sr. Secured
Debentures
9.125%, 2/15/98 Caa 700 661,500
Regency Health Services, Inc.
Gtd Sr. Sub. Notes
9.875%, 10/15/02 B2 300 288,000
Renaissance Cosmetics, Inc.,
Series B, Sr. Notes
13.75%, 8/15/01 N/R 500 500,000
Revlon Consumer Products, Inc.,
Series B, Sr. Sub. Notes
10.50%, 2/15/03 B3 450 452,250
Revlon Worldwide Corp.
Sr. Secured Discount Notes
Zero Coupon, 3/15/98 B3 750 623,437
(8) Specialty Foods Acquisition
Corp.,
Series B, Sr. Secured Discount
Debentures
0.00%, 8/15/05 Ca 1,500 637,500
(4) Town & Country Corp.
Sr. Sub. Notes
13.00%, 5/31/98 Caa 616 492,854
-----------
GROUP TOTAL 5,106,791
-----------
- ----------------------------------------------------------------------------------
- -----------------
<CAPTION>
Face
Moody's Amount
Ratings (000) Value
<C> <S> <C> <C> <C>
- ----------------------------------------------------------------------------------
- -----------------
FINANCE (0.8%)
American Banknote Corp.,
Series B, Sr. Notes
11.625%, 8/1/02 B2 $ 250 $ 207,500
GPA Holland B.V.
Medium Term Notes
8.625%, 1/15/99 N/R 500 496,875
-----------
GROUP TOTAL 704,375
-----------
- ---------------------------------------------------------------------------------
- -----------------
INDUSTRIAL GOODS AND MATERIALS (9.1%)
Alpine Group, Inc.
Gtd. Sr. Notes
12.25%, 7/15/03 B3 250 257,050
(3) American Skiing Corp.,
Sr. Sub. Notes
12.00%, 7/15/06 B3 200 195,500
Armco, Inc.
Sr. Notes
11.375%, 10/15/99 B2 500 510,000
Bayou Steel Corp.
First Mortgage Notes
10.25%, 3/1/01 B2 300 276,000
Collins & Aikman Products,
Sr. Sub. Notes
11.50%, 4/15/06 B3 200 202,500
Container Corp. of America
Gtd. Sr. Notes
9.75%, 4/1/03 B1 250 245,625
(3) Four M Corp.,
Series A Sr. Secured Notes,
12.00%, 6/1/06 B2 350 357,875
G.I. Holdings, Inc.
Sr. Notes
10.00%, 2/15/06 Ba3 433 426,505
GNF Corp.,
Series B, First Mortgage Notes
10.625%, 4/1/03 B1 500 543,750
Geneva Steel Co.
Sr. Notes
9.50%, 1/15/04 B2 250 195,000
Genmar Holdings,
Series A, Sr. Sub. Notes
13.50%, 7/15/01 Caa 500 437,500
Harris Chemical N.A.
Sr. Secured Debentures
10.25%, 7/15/01 B2 500 501,250
Malette, Inc.
Yankee Sr. Secured Debentures
12.25%, 7/15/04 Ba3 250 262,500
NL Industries Inc.:
Sr. Notes
(8) 0.00%, 10/15/05 B2 400 309,000
Sr. Secured Debentures
11.75%, 10/15/03 B1 250 255,000
Parisian, Inc.,
Sr. Sub. Notes
9.875%, 7/15/03 Caa 250 236,250
Presley Companies
Sr. Notes
12.50%, 7/1/01 B3 250 240,000
(10) Repap Wisconsin, Inc.
2nd Priority Sr. Secured Notes
9.875%, 5/1/06 Caa 250 223,750
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
Face
Moody's Amount
Ratings (000) Value
<C> <S> <C> <C> <C>
- ----------------------------------------------------------------------------------
- -----------------
Republic Engineered Steel, Inc.
First Mortgage Bonds
9.875%, 12/15/01 B3 $ 350 $ 329,396
(3) SRI Receivables Purchase Co.,
Inc.
Trust Certificate-Backed Notes
12.50%, 12/15/00 N/R 500 505,000
Stone-Consolidated Corp.
Yankee Sr. Secured Debentures
10.25%, 12/15/00 Ba1 250 257,813
UCC Investor's Holdings, Inc.
Sr. Sub. Notes
11.00%, 5/1/03 B3 500 522,500
WCI Steel, Inc.,
Series B, Sr. Notes
10.50%, 3/1/02 B1 200 203,000
(3)(5)(6) Weirton Steel Corp.,
Sr. Notes
11.375%, 7/1/04
(acquired 6/27/96, cost
$294,262) N/R 300 294,262
-----------
GROUP TOTAL 7,787,026
-----------
- ---------------------------------------------------------------------------------
- -----------------
MANUFACTURING (9.8%)
Algoma Steel, Inc.
Yankee First Mortgage Notes
12.375%, 7/15/05 B1 500 485,000
Atlantis Group, Inc.
Sr. Notes
11.00%, 2/15/03 B2 250 238,750
(8) Crown Packaging Holdings,
Series B, Sr. Sub. Notes
0.00%, 11/1/03 Caa 1,300 494,000
Domtar, Inc.
Yankee Debentures
11.25%, 9/15/17 Ba1 500 530,000
Gaylord Container Corp.:
Sr. Notes
11.50%, 5/15/01 B3 250 255,625
Sr. Sub. Debentures
12.75%, 5/15/05 Caa 500 526,875
(8) Ivex Holdings Corp.
Series B, Sr. Debentures
0.00%, 3/15/05 Caa 1,250 753,125
MVE Inc.
Sr. Secured Debentures
12.50%, 2/15/02 B3 500 520,000
(8) PriCellular Wireless Corp.
Sr. Discount Notes
0.00%, 10/1/03 B3 450 355,500
Rexene Corp.
Sr. Notes
11.75%, 12/1/04 B1 400 414,000
Sheffield Steel Corp.
First Mortgage Notes
12.00%, 11/1/01 Caa 500 440,000
Silgan Holdings, Inc.
Sr. Debentures
13.25%, 12/15/02 B3 459 464,737
Specialty Equipment Co., Inc.
Sr. Sub. Notes
11.375%, 12/1/03 B3 700 722,750
Stone Container Corp.
First Mortgage Notes
10.75%, 10/1/02 B1 250 252,500
<CAPTION>
Face
Moody's Amount
Ratings (000) Value
<C> <S> <C> <C> <C>
- ----------------------------------------------------------------------------------
- -----------------
Synthetic Industries, Inc.
Sr. Sub. Notes
12.75%, 12/1/02 B3 $ 500 $ 528,750
(3) Terex Corp.
Gtd. Sr. Notes
13.75%, 5/15/02 Caa 500 517,500
Tracor, Inc.,
Series A, Gtd. Sr. Sub. Notes
10.875%, 8/15/01 B2 250 263,750
U.S. Leather, Inc.
Sr. Notes
10.25%, 7/31/03 B3 700 595,000
-----------
GROUP TOTAL 8,357,862
-----------
- ---------------------------------------------------------------------------------
- -----------------
OIL, GAS & ELECTRIC (1.6%)
Falcon Drilling Co., Inc.
Series B, Sr. Notes
9.75%, 1/15/01 B2 375 382,500
Gulf Canada Resources Ltd.
Yankee Sr. Sub. Debentures
9.25%, 1/15/04 Ba3 450 438,187
Kelley Oil & Gas Corp.
Sr. Notes
13.50%, 6/15/99 B2 200 212,000
Maxus Energy Corp.,
Notes
9.375%, 11/1/03 B1 350 344,000
-----------
GROUP TOTAL 1,376,687
-----------
- ---------------------------------------------------------------------------------
- -----------------
RETAIL TRADE (6.5%)
Big V Supermarkets, Inc.
Sr. Sub. Notes
11.00%, 2/15/04 B3 500 466,875
(10) Brylane L.P.
Series B Gtd.
Sr. Sub. Notes
10.00%, 9/1/03 B2 500 485,000
County Seat Stores, Inc.
Sr. Sub. Notes
12.00%, 10/1/02 Caa 500 403,750
Dairy Mart Conveniences Stores,
Inc.
Sr. Sub. Notes
10.25%, 3/15/04 B3 626 583,745
Duane Reade Corp.
Sr. Notes
12.00%, 9/15/02 B3 500 477,500
Farm Fresh, Inc.
Sr. Notes
12.25%, 10/1/00 B2 650 559,000
Great American Cookie Co.,
Series B, Sr. Sec. Debentures
10.875%, 1/15/01 B3 500 440,625
(3) Hills Stores Co.
Sr. Notes
12.50%, 7/1/03 B1 300 294,750
Pathmark Stores, Inc.:
(8) Jr. Sub. Notes
0.00%, 11/1/03 B3 850 514,250
Sr. Sub. Notes
9.625%, 5/1/03 B2 500 465,000
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
<TABLE>
<CAPTION>
Face
Moody's Amount
Ratings (000) Value
<C> <S> <C> <C> <C>
- ----------------------------------------------------------------------------------
- -----------------
Ralph's Grocery Co.
Sr. Notes
10.45%, 6/15/04 B1 $ 300 $ 294,000
Waban, Inc.
Sr. Sub. Notes
11.00%, 5/15/04 Ba3 550 580,283
-----------
GROUP TOTAL 5,564,778
-----------
- ---------------------------------------------------------------------------------
- -----------------
SERVICES (8.6%)
American Restaurant Group, Inc.
Series A, Sr. Notes
12.00%, 9/15/98 Caa 500 444,450
Bally's Casino Holdings, Inc.
Sr. Discount Notes
Zero Coupon, 6/15/98 B2 600 519,000
Bally's Park Place Funding, Inc.
First Mortgage Notes
9.25%, 3/15/04 Ba3 250 265,000
Boomtown, Inc.
First Mortgage Notes
11.50%, 11/1/03 B1 500 485,000
Casino America, Inc.
First Mortgage Bonds
11.50%, 11/15/01 B1 500 530,000
Comcast Corp.
Sr. Sub. Notes
9.125%, 10/15/06 B1 250 236,563
Community Health Systems, Inc.
Sr. Sub. Debentures
10.25%, 11/30/03 B2 250 262,500
(2) Elsinore Corp.
First Mortgage Notes
12.50%, 10/1/00 N/R 100 52,000
G.B. Property Funding Corp.
First Mortgage Notes
10.875%, 1/15/04 B2 500 450,000
(4) General Medical Corp.,
Series A, Sub. Debentures
12.125%, 8/15/05 Caa 563 591,150
Griffin Gaming & Entertainment,
Inc.
Mortgage Notes
11.00%, 9/15/03 N/R 500 520,000
(2)(4) Hemmeter Enterprises, Inc.
Sr. Notes
12.00%, 12/15/00 N/R 297 118,877
(3) HMC Acquisition Properties, Inc.
Sr. Notes
9.00%, 12/15/07 Ba3 450 411,750
Horseshoe Gaming L.L.C.
Sr. Notes
12.75%, 9/30/00 B1 375 403,125
(3) Mohegan Tribal Gaming Authority
Series A Sr. Secured Notes
13.50%, 11/15/02 N/R 350 439,250
Motels of America, Inc.,
Series B, Sr. Sub. Notes
12.00%, 4/15/04 B3 250 239,688
Stratosphere Corp.
First Mortgage Notes
14.25%, 5/15/02 B2 250 280,000
<CAPTION>
Face
Moody's Amount
Ratings (000) Value
<C> <S> <C> <C> <C>
- ----------------------------------------------------------------------------------
- -----------------
Trump Atlantic City,
First Mortgage Notes
11.25%, 5/1/06 B1 $ 600 $ 601,500
Trump Castle Funding, Inc.
Mortgage Bonds
11.75%, 11/15/03 Caa 500 510,000
-----------
GROUP TOTAL 7,359,853
-----------
- ---------------------------------------------------------------------------------
- -----------------
TRANSPORTATION (1.4%)
CHC Helicopter Corp.
Yankee Sr. Sub. Notes
11.50%, 7/15/02 B3 250 237,500
(3)(8) Consorcio G Grupo Dina S.A./
MCII Holdings (USA), Inc.
Sr. Secured Notes
0.00%, 11/15/02 N/R 250 190,625
Polysindo International Finance
Co. B.V.,
Guaranteed Yankee Notes
11.375%, 6/15/06 Ba3 250 254,375
USAir, Inc.
Gtd. Sr. Notes
10.00%, 7/1/03 B3 500 471,250
-----------
GROUP TOTAL 1,153,750
-----------
- --------------------------------------------------------------------------------
- -----------------
TOTAL CORPORATE OBLIGATIONS
(Cost $54,544,761) 53,418,303
-----------
- --------------------------------------------------------------------------------
- -----------------
GOVERNMENT & AGENCY SECURITIES (11.3%)
- ---------------------------------------------------------------------------------
- -----------------
FEDERAL HOME LOAN BANK (3.5%)
Discount Note
Zero Coupon, 7/1/96 Aaa 2,950 2,949,095
-----------
- ---------------------------------------------------------------------------------
- -----------------
FEDERAL HOME LOAN MORTGAGE CORPORATION (2.4%)
30 yr. TBA
8.00%, 12/31/26 Aaa 2,000 2,016,860
-----------
- ---------------------------------------------------------------------------------
- -----------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION (0.4%)
30 yr. TBA
7.00%, 12/31/26 Aaa 400 374,124
-----------
- ---------------------------------------------------------------------------------
- -----------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (0.0%)
Graduated Payment
12.75%, 11/15/13 Aaa 28 33,115
-----------
- ---------------------------------------------------------------------------------
- -----------------
U.S. DEPT. OF VETERANS AFFAIRS (0.4%)
Vendee Mortgage Trust
Series 1995-2B, Class D
7.50%, 10/15/17 N/R 350 357,875
-----------
- ---------------------------------------------------------------------------------
- -----------------
U.S. TREASURY BOND (0.8)%
8.75%, 8/15/20 Aaa 550 657,938
-----------
- ----------------------------------------------------------------------------------
- -----------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
<TABLE>
<CAPTION>
Face
Moody's Amount
Ratings (000) Value
<C> <S> <C> <C> <C>
- ----------------------------------------------------------------------------------
- -----------------
U.S. TREASURY NOTES (3.8%)
(10) 5.375%, 5/31/98 Aaa $ 655 $ 646,302
(10) 7.75%, 11/30/99 Aaa 2,500 2,603,125
-----------
GROUP TOTAL 3,249,427
-----------
- --------------------------------------------------------------------------------
- -----------------
TOTAL GOVERNMENT & AGENCY SECURITIES
(Cost $9,660,242) 9,638,434
-----------
- --------------------------------------------------------------------------------
- -----------------
COLLATERALIZED SECURITIES (2.2%)
- ---------------------------------------------------------------------------------
- -----------------
COLLATERALIZED MORTGAGE OBLIGATIONS (2.2%)
Drexel, Burnham & Lambert Trust
REMIC-PAC,
Series S, Class 2
9.00%, 8/1/18 Aaa 847 863,515
Kidder Peabody Acceptance Corp.
Series 1993-C-1, Class A3
6.80%, 9/1/06 N/R 400 379,360
Series 1993-M3, Class A
6.50%, 11/25/25 Aaa 349 342,897
Nationscredit Grantor Trust,
Retail Installment Sale
Contracts,
Series 1996-1,
5.85%, 9/15/11 Aaa 247 238,243
-----------
- --------------------------------------------------------------------------------
- -----------------
TOTAL COLLATERALIZED SECURITIES
(Cost $1,865,919) 1,824,015
-----------
- --------------------------------------------------------------------------------
- -----------------
ASSET BACKED OBLIGATIONS (4.7%)
- --------------------------------------------------------------------------------
- -----------------
Green Tree Financial Corp.
Manufactured Housing
Installment Sale Contracts
Series 1993-4, Class B1
6.30%, 7/15/25 Aaa 1,650 1,619,063
7.20%, 1/15/19 Baa3 1,043 1,012,033
(9) Merrill Lynch Home Equity
Acceptance Trust
Series 1994-A, Class A-2
6.25%, 7/17/22 A3 1,365 1,372,216
- --------------------------------------------------------------------------------
- -----------------
TOTAL ASSET BACKED OBLIGATIONS
(Cost $4,042,995) 4,003,312
-----------
- ----------------------------------------------------------------------------------
- -----------------
<CAPTION>
Shares
<C> <S> <C> <C> <C>
- --------------------------------------------------------------------------------
- -----------------
COMMON STOCKS (2.0%)
- ---------------------------------------------------------------------------------
- -----------------
COMMUNICATIONS (0.1%)
(1) Pagemart, Inc. 3,500 35,875
Pegasus Media & Communications,
Inc. 50 30,000
-----------
GROUP TOTAL 65,875
-----------
- ----------------------------------------------------------------------------------
- -----------------
<CAPTION>
Shares Value
<C> <S> <C> <C> <C>
- ----------------------------------------------------------------------------------
- -----------------
CONSUMER PRODUCTS (0.6%)
(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) 60,000 285,000
Mail-Well, Inc. 3,551 30,184
(1) Specialty Foods, Corp. 22,500 11,250
(5)(6) TLC Beatrice International
Holdings
(acquired 11/26/91, cost
$307,500) 7,500 157,500
-----------
GROUP TOTAL 489,634
-----------
- ---------------------------------------------------------------------------------
- -----------------
FINANCE (0.0%)
(1)(5)(6)(7) Westfed Holdings Inc. Class B
(acquired 9/20/88, cost $100) 4,223 0
-----------
- ---------------------------------------------------------------------------------
- -----------------
MANUFACTURING (0.2%)
(1) Alpine Group, Inc. 3,773 17,922
(1)(5)(6)(7) CICI Acquisition Corp.
(acquired 10/18/89, cost
$1,076,700) 2,944 200,192
-----------
GROUP TOTAL 218,114
-----------
- ---------------------------------------------------------------------------------
- -----------------
RETAIL TRADE (0.0%)
(1)(5)(6) Jewel Recovery L.P.
(acquired 7/30/93, cost $0) 33,040 0
-----------
- ---------------------------------------------------------------------------------
- -----------------
SERVICES (1.1%)
(1) Gillett Holdings, Inc. 22,500 630,000
(1) Lady Luck Gaming Corp 10,000 293,500
(1)(3) Motels of America, Inc. 250 18,750
-----------
GROUP TOTAL 942,250
-----------
- --------------------------------------------------------------------------------
- -----------------
TOTAL COMMON STOCKS
(Cost $2,394,383) 1,715,873
-----------
- --------------------------------------------------------------------------------
- -----------------
PREFERRED STOCKS (1.6%)
- ---------------------------------------------------------------------------------
- -----------------
COMMUNICATIONS (1.2%)
BCP/Essex Holdings, Inc.
15% Exchangeable, Series B 17,379 460,544
(3) K-III Communications Corp.
10% Exchangeable, Series C 3,500 318,500
(1) SD Warren Co.
14% Exchangeable 8,000 257,840
-----------
GROUP TOTAL 1,036,884
-----------
- ---------------------------------------------------------------------------------
- -----------------
FINANCE (0.0%)
(1)(5)(6)(7) Westfed Holdings, Inc., Class A
(acquired 9/20/88-6/18/93,
cost $1,203,500) 14,246 0
-----------
- ---------------------------------------------------------------------------------
- -----------------
MANUFACTURING (0.3%)
GPA Group plc 7% Cum. CV 6,500 237,250
-----------
- ----------------------------------------------------------------------------------
- -----------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
<TABLE>
<CAPTION>
Shares Value
<C> <S> <C> <C> <C>
- ----------------------------------------------------------------------------------
- -----------------
OIL, GAS & ELECTRIC (0.1%)
(1)(7) Consolidated Hydro, Inc.,
13.50%, Series H (Convertible) 1,500 $ 150,000
-----------
- --------------------------------------------------------------------------------
- -----------------
TOTAL PREFERRED STOCKS
(Cost $3,095,160) 1,424,134
-----------
- --------------------------------------------------------------------------------
- -----------------
RIGHTS (0.0%)
- ----------------------------------------------------------------------------------
- -----------------
(1) Terex Corp,
expiring 5/15/02 (Cost $0) 2,000 4,000
-----------
- --------------------------------------------------------------------------------
- -----------------
WARRANTS (0.3%)
- ----------------------------------------------------------------------------------
- -----------------
(1) America Communications Services,
Inc., expiring 11/1/05 1,000 0
(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 11/1/98 500 250
(1) CHC Helicopter Corp.,
expiring 12/15/00 2,000 1,000
(1) Casino America, Inc.,
expiring 11/15/96 1,632 0
(1) Casino Magic Corp.,
expiring 10/14/96 3,000 150
(1)(7) Consolidated Hydro, Inc.,
expiring 12/31/03 2,700 0
(1) County Seat Stores, Inc.,
expiring 10/15/98 500 25
(1)(6) Crown Packaging Holdings,
expiring 11/1/03 1,000 5,000
(1) Dairy Mart Convenience Stores,
Inc., expiring 5/13/98 4,172 12,516
(1)(3) Elsinore Corp.,
expiring 10/8/98 5,329 0
(1)(3) Great American Cookie,
expiring 1/30/00 90 900
(1) Hemmeter Enterprises, Inc.,
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 16,170
(1) Intermedia Communications of
Florida, Inc., expiring 6/1/00 300 12,000
(1) MVE Inc.,
expiring 2/15/02 500 15,000
(1) Nextel Communications, Inc.,
expiring 4/25/99 500 5
(1) Presidential Riverboat Casinos,
expiring 9/23/96 3,000 30
(1)(3) Purity Supreme,
expiring 8/1/97 1,733 0
(1)(3) Renaissance Cosmetics Inc.,
expiring 8/15/01 1,000 22,500
<CAPTION>
Shares Value
<C> <S> <C> <C> <C>
- ----------------------------------------------------------------------------------
- -----------------
(1) SD Warren Co.,
expiring 12/15/06 8,000 $ 36,000
(1) Sheffield Steel Corp.,
expiring 11/1/01 2,500 7,500
(1) Spanish Broadcasting Systems,
expiring 6/29/99 500 85,000
(1) United International Holdings,
expiring 11/15/99 600 16,200
(1)(3) Wright Medical Technology,
expiring 6/30/03 206 26,765
- --------------------------------------------------------------------------------
- -----------------
TOTAL WARRANTS
(Cost $177,319) 258,761
-----------
- ----------------------------------------------------------------------------------
- -----------------
</TABLE>
<TABLE>
<CAPTION>
Face
Moody's Amount
Ratings (000)
<C> <S> <C> <C> <C>
- --------------------------------------------------------------------------------
- -----------------
UNITS (2.9%)
- ---------------------------------------------------------------------------------
- -
- -----------------
Cellular Communications,
International, Inc.
Notes,
Zero Coupon, 8/15/00 B3 $ 1,000 610,000
(3)(5)(6)(8) DIVA Systems Corp.,
Notes
0.00%, 5/15/06
(acquired 5/30/96, cost
$485,851) N/R 900 486,000
Health O Meter, Inc.
Gtd. Sr. Sub. Notes
13.00%, 8/15/02 B3 500 530,000
(3)(8) Hyperion Telecommunications, Inc.
Sr. Discount Notes
0.00%, 4/15/03 N/R 750 412,500
(3)(8) Petersburg Long Distance
Inc.,
Sub. Notes
0.00%, 6/1/04 N/R 560 434,000
- --------------------------------------------------------------------------------
- -----------------
TOTAL UNITS
(Cost $2,386,462) 2,472,500
-----------
- --------------------------------------------------------------------------------
- -----------------
TOTAL DOMESTIC SECURITIES
(Cost $78,167,241) 74,759,332
-----------
</TABLE>
<TABLE>
<C> <S> <C> <C> <C>
- --------------------------------------------------------------------------------
- -----------------
FOREIGN INCOME SECURITIES (13.7%)
- --------------------------------------------------------------------------------
- -----------------
GOVERNMENT OBLIGATIONS (13.7%)
CANADA
Canadian Government Bond
8.75%, 12/1/05 N/R CAD 825 651,208
DENMARK
Kingdom of Denmark Bonds
8.00%, 3/15/06 N/R DK 5,200 926,060
</TABLE>
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
<TABLE>
<CAPTION>
Face
Moody's Amount
Ratings (000)
<C> <S> <C> <C> <C>
- ----------------------------------------------------------------------------------
- -----------------
FRANCE
Government of France
Debentures
7.50%, 4/25/05 Aaa FF 7,000 $ 1,462,676
GERMANY
Deutscheland Bundesbank
Debentures
6.75%, 7/15/04 Aaa DM 6,000 4,053,346
ITALY
Italian Treasury Bond
8.50%, 1/1/04 A1 ITL 1,000,000 635,246
SUPRANATIONAL
International Bank for
Reconstruction &
Development Global Bonds
5.25%, 3/20/02 Aaa JPY 90,000 944,736
UNITED KINGDOM
United Kingdom Treasury
6.00%, 8/10/99 A L 2,000 3,027,364
TOTAL GOVERNMENT OBLIGATIONS
(Cost $11,054,702) 11,700,636
-----------
TOTAL FOREIGN INCOME SECURITIES
(Cost $11,054,702) 11,700,636
-----------
TOTAL INVESTMENTS (101.2%)
(Cost $89,221,943) 86,459,968
-----------
- ----------------------------------------------------------------------------------
- -----------------
LIABILITIES IN EXCESS OF OTHER
ASSETS (-1.2%) (1,016,565)
-----------
NET ASSETS (100%)
Applicable to 8,454,140 issued and outstanding $.001
par value shares (authorized 100,000,000 shares) $85,443,403
-----------
-----------
- --------------------------------------------------------------------
- -------------
- ----------------------------------------------------------------------------------
- -----------------
L--British Pound.
CAD--Canadian Dollar.
DK--Danish Krone.
DM--Deutsche Mark.
FF--French Franc.
ITL--Italian Lira.
JPY--Japanese Yen
N/R--Not Rated.
PAC--Planned Amortization Class.
REMIC--Real Estate Mortgage Investment Conduit.
TBA--To Be Announced. Security is subject to delayed delivery.
(1) Non-income producing security.
(2) Defaulted security.
(3) 144A Security. Certain conditions for public sale may exist.
(4) Payment in kind bond. Market value includes accrued interest.
(5) Restricted as to private and public resale. Total cost of restricted
securities at June 30, 1996 aggregated $3,494,113. Total market value of
restricted securities owned at June 30, 1996 was $1,428,654 or 1.7% 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 June 30,
1996.
(10) 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 June 30,
1996
(Unaudited)
<S> <C>
- ----------------------------------------------------------------------------------------------
ASSETS:
Investments at Value
(Cost $89,221,943) (Note A-1)............................................. $86,459,968
Receivables:
Investments Sold.......................................................... 2,567,521
Interest (Note A-6)....................................................... 1,590,654
Dividend (Note A-6)....................................................... 16,293
Other Assets................................................................ 53,204
- ----------------------------------------------------------------------------------------------
Total Assets............................................................ 90,687,640
- ----------------------------------------------------------------------------------------------
LIABILITIES:
Payables:
Investments Purchased..................................................... 4,943,267
Unrealized Loss on Forward Foreign Currency Exchange Contracts (Note
A-5)..................................................................... 104,392
Investment Advisory Fees (Note B)......................................... 103,537
Shareholders' Reports..................................................... 29,581
Professional Fees......................................................... 23,439
Shareholder Servicing Fees................................................ 16,053
Administrative Fees (Note C).............................................. 10,755
Custodian Fees............................................................ 13,213
- ----------------------------------------------------------------------------------------------
Total Liabilities....................................................... 5,244,237
- ----------------------------------------------------------------------------------------------
NET ASSETS...................................................................... $85,443,403
------------
------------
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............................ (1,055,487)
Accumulated Net Realized Loss............................................... (115,747)
(2,876,454)
Unrealized Depreciation on Investments and Foreign Currency Translations....
------------
NET ASSETS APPLICABLE TO 8,454,140 ISSUED AND OUTSTANDING SHARES (AUTHORIZED
100,000,000 SHARES)........................................................... $85,443,403
------------
------------
NET ASSET VALUE PER SHARE....................................................... $ 10.11
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS Six Months
Ended
June 30,
1996
(Unaudited)
<S> <C>
- --------------------------------------------------------------------------
INVESTMENT INCOME:
Interest (Note A-6) (Net of foreign taxes withheld of
$2,370)................................................ $ 4,239,529
Dividends (Note A-6).................................... 57,486
- --------------------------------------------------------------------------
Total Income.......................................... 4,297,015
- --------------------------------------------------------------------------
EXPENSES:
Investment Advisory Fees (Note B)....................... 209,682
Administrative Fees (Note C)............................ 65,956
Shareholders' Reports................................... 47,358
Shareholder Servicing Fees.............................. 33,345
Professional Fees....................................... 30,173
Directors' Fees and Expenses............................ 19,134
Custodian Fees.......................................... 15,939
Other................................................... 37,321
- --------------------------------------------------------------------------
Total Expenses........................................ 458,908
- --------------------------------------------------------------------------
Net Investment Income............................... 3,838,107
- --------------------------------------------------------------------------
NET REALIZED GAIN:
Investments............................................. 754,646
Foreign Currency........................................ 874,329
- --------------------------------------------------------------------------
Total Net Realized Gain............................. 1,628,975
- --------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION:
Investments............................................. (1,038,170)
Foreign Currency Translations........................... (179,841)
- --------------------------------------------------------------------------
Total Change in Unrealized
Appreciation/Depreciation.......................... (1,218,011)
- --------------------------------------------------------------------------
Net Realized Gain and Change in Unrealized
Appreciation/Depreciation................................. 410,964
- --------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations........ $ 4,249,071
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
11
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
<S> <C> <C>
Six Months Ended Year Ended
June 30, 1996 December 31,
(Unaudited) 1995
- -----------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net Investment Income....................................................... $ 3,838,107 $ 8,032,455
Net Realized Gain (Loss) on Investments and Foreign Currency................ 1,628,975 (2,727,386)
Change in Unrealized Appreciation/Depreciation on Investments and Foreign
Currency................................................................... (1,218,011) 7,908,855
- -----------------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS............................ 4,249,071 13,213,924
- -----------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
Net Investment Income....................................................... (3,423,930) (6,422,578)
Return of Capital........................................................... -- (425,283)
- -----------------------------------------------------------------------------------------------------------------------
Total Distributions....................................................... (3,423,930) (6,847,861)
- -----------------------------------------------------------------------------------------------------------------------
Total Increase in Net Assets............................................ 825,141 6,366,063
- -----------------------------------------------------------------------------------------------------------------------
NET ASSETS:
Beginning of Period......................................................... 84,618,262 78,252,199
- -----------------------------------------------------------------------------------------------------------------------
End of Period (Including distributions in excess of net investment income of
$(1,055,487) and $(1,469,664), respectively)............................... $85,443,403 $84,618,262
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Six Months
FINANCIAL HIGHLIGHTS Ended Year Ended December 31,
PER SHARE OPERATING June 30, 1996 ----------------------------------------------------------------------------------
PERFORMANCE: (Unaudited) 1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF
PERIOD............. $ 10.01 $ 9.26 $ 10.45 $ 9.80 $ 9.62 $ 8.70
- ---------------------------------------------------------------------------------------------------------------------------
Investment
Activities:
Net Investment
Income......... 0.45 0.95 0.95 1.04 1.22 1.16
Net Realized and
Unrealized Gain
(Loss) on
Investments.... 0.05 0.61 (1.33) 0.66 0.01 0.96
- ---------------------------------------------------------------------------------------------------------------------------
Total from
Investment
Activities... 0.50 1.56 (0.38) 1.70 1.23 2.12
- ---------------------------------------------------------------------------------------------------------------------------
Distributions:
Net Investment
Income......... (0.40) (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... (0.40) (0.81) (0.81) (1.05) (1.05) (1.20)
- ---------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END
OF PERIOD.......... $ 10.11 $ 10.01 $ 9.26 $ 10.45 $ 9.80 $ 9.62
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
PER SHARE MARKET
VALUE, END OF
PERIOD............. $ 8.88 $ 8.88 $ 8.25 $ 9.50 $ 9.50 $ 10.38
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT
RETURN:
Net Asset Value
(1)............ 5.14%# 17.57% (3.80)% 18.29% 13.28% 25.32%
Market Value.... 4.69%# 18.16% (4.72)% 10.94% 3.50% 53.35%
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
RATIOS AND
SUPPLEMENTAL DATA:
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Net Assets, End of
Period
(Thousands)........ $85,443 $84,618 $78,252 $88,319 $82,450 $80,606
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of Expenses to
Average Net
Assets............. 1.09%* 1.12% 0.99% 1.06% 1.01% 1.00%
Ratio of Net
Investment Income
to Average Net
Assets............. 9.15%* 9.80% 9.66% 10.28% 12.34% 12.13%
Portfolio Turnover
Rate............... 39.8%# 54.5% 83.1% 128.5% 107.7% 48.0%
- ---------------------------------------------------------------------------------------------------------------------------
* Annualized
# Not Annualized
(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 (UNAUDITED)
- ------------
BEA Strategic Income Fund, Inc. (the "Fund"), 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 $350,192 (or 0.41% of net assets) at June 30, 1996. In determining
fair value, consideration is given to cost, operating and other financial
data.
The Fund may invest up to 10% of its total assets in securities which are not
readily marketable, including those which are restricted as to disposition
under securities law ("restricted securities"). These securities are valued
pursuant to the valuation procedures noted above.
2. FEDERAL INCOME TAXES: It is the Fund's intention to continue to qualify as a
regulated investment company and distribute all of its taxable income to
shareholders. Accordingly, no provision for Federal income taxes is required
in the financial statements.
Paid in capital, distributions in excess of net investment income and
accumulated net realized loss have been adjusted for prior period permanent
book-tax differences.
3. REPURCHASE AGREEMENTS: In connection with transactions in repurchase
agreements, a bank as custodian for the Fund takes possession of the
underlying securities, the value of which exceeds the principal amount of
the repurchase transaction, including accrued interest. To the extent that
any repurchase transaction exceeds one business day, the value of the
collateral is marked-to-market on a daily basis to determine the adequacy of
the collateral. In the event of default on the obligation to repurchase, the
Fund has the right to liquidate the collateral and apply the proceeds in
satisfaction of the obligation. In the event of default or bankruptcy by the
other party to the agreement, realization and/or retention of the collateral
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 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.
13
<PAGE>
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.
B. BEA Associates (the "Adviser") provides investment advisory services to the
Fund under the terms of an Advisory Agreement. Under the Advisory Agreement, the
Adviser is paid a fee, computed weekly and payable quarterly at an annual rate
of .50% of average weekly net assets.
C. The Chase Manhattan Bank ("Chase"), through its affiliate Chase Global Funds
Services Company ("CGFSC" or the "Administrator"), provides administrative
services to the Fund under the terms of an Administration Agreement. Under the
Agreement, the Administrator is paid a fee, computed weekly and payable monthly,
at an annual rate of .15% of the Fund's first $100 million of average weekly net
assets, .10% of the Fund's next $300 million of average weekly net assets and
.05% of the Fund's average weekly net assets in excess of $400 million.
Chase provides custodial services to the Fund. Under the Custody Agreement,
Chase is paid a fee, computed weekly and payable monthly, at an annual rate of
.03% of the Fund's first $50 million of average weekly net assets, .02% of the
Fund's next $50 million of average weekly net assets and .01% of the Fund's
average weekly net assets in excess of $100 million.
CGFSC provides transfer agent services to the Fund. Under the Transfer Agent
Agreement, CGFSC is paid a fee based on the number of accounts in the Fund per
year. In addition, the Fund is charged certain out-of-pocket expenses by CGFSC.
D. During the six months ended June 30, 1996, the Fund made purchases of
$25,364,192 and sales of $30,259,384 of investment securities other than U.S.
Government securities and short term investments. During the six months ended
June 30, 1996, purchases and sales of U.S. Government securities were
$23,313,320 and $18,980,889, respectively. At June 30, 1996, the cost of
investments for Federal income tax purposes was $89,221,943. Accordingly, net
unrealized depreciation for Federal income tax purposes aggregated $2,761,975,
of which $5,906,534 related to depreciated securities and $3,144,559 related to
appreciated securities.
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 June 30, 1996 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:
<TABLE>
<CAPTION>
NET
UNREALIZED
CURRENCY TO IN EXCHANGE SETTLEMENT APPRECIATION/
DELIVER FOR DATE VALUE (DEPRECIATION)
- ------------------ ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
CAD 916,000 $ 673,034 9/17/96 $ 672,604 $ 430
DKK 5,200,000 880,819 9/17/96 891,640 (10,821)
DEM 6,200,000 4,061,047 9/17/96 4,100,475 (39,428)
FRF 6,780,000 1,308,880 9/17/96 1,324,697 (15,817)
GBP 1,850,000 2,837,900 9/17/96 2,871,690 (33,790)
ITL 980,900,000 627,482 9/17/96 636,556 (9,074)
JPY 105,200,000 977,781 9/17/96 973,673 4,108
------------- ------------- ------------
$ 11,366,943 $ 11,471,335 $ (104,392)
------------- ------------- ------------
------------- ------------- ------------
</TABLE>
F. At June 30, 1996, 65.41% of the Fund's net assets comprised high-yield fixed
income securities. The financial condition of the issuers of the securities and
general economic
14
<PAGE>
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 June 30, 1996, 13.8% 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 six months
ended June 30, 1996.
H. Summary of quarterly results of operations:
<TABLE>
<CAPTION>
AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS
THREE MONTHS ENDED
----------------------------------------------------------------------
MARCH 31, 1996 JUNE 30, 1996
--------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment Income............. $2,085 $ 0.24 $2,212 $ 0.26
Net Investment Income......... 1,872 0.22 1,966 0.23
Net Realized Gain (Loss) and
Change in Unrealized
Appreciation/Depreciation on
Investments and Foreign
Currency..................... 774 0.09 (363) (0.04)
Net Increase in Net Assets
Resulting from Operations.... 2,646 0.31 1,603 0.19
</TABLE>
<TABLE>
<CAPTION>
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>
I. Supplemental Proxy Information
The Annual Meeting of the Stockholders of the BEA Strategic Income Fund, Inc.
was held on Thursday May 16, 1996 at the offices of Willkie, Farr & Gallagher,
One Citicorp Center, 153 East 53rd Street, New York City. The following is a
summary of each proposal presented and the total number of shares voted:
<TABLE>
<CAPTION>
VOTES IN VOTES VOTES
PROPOSAL FAVOR OF AGAINST ABSTAINED
- ------------------------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
1. To elect the following four Directors:
Messrs. Daniel H. Sigg, Enrique R. Arzac,
Lawrence J. Fox and James S. Pasman Jr. 7,344,268 71,781 --
2. To ratify the selection of Price Waterhouse
LLP as independent public accountants of Fund
until the next annual meeting. 7,319,292 31,602 65,155
</TABLE>
15
<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, 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.
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.
16
<PAGE>
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, 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.
17
