<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
</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]
THIRD QUARTER REPORT
September 30, 1996
<PAGE>
BEA STRATEGIC INCOME FUND, INC.
- ----------
Dear Shareholders: November 8, 1996
We are pleased to report on the activities of the BEA Strategic Income Fund,
Inc. ("the Fund") for the quarter ended September 30, 1996.
At September 30, 1996, the Fund's net asset value (NAV) was $10.29, compared
to an NAV of $10.11 at June 30, 1996. As a result, the Fund's total return
(based on NAV and assuming reinvestment of dividends of $0.2025 per share) for
the period was 4.07%. At September 30, 1996, $56.6 million was invested in
high-yield debt securities; $15.7 million was invested in domestic,
investment-grade debt securities; $12.1 million was invested in international,
investment-grade securities; and the balance of the Fund's investments, $3.6
million, was invested in equity securities. The investment-grade component
consisted of short and intermediate-term mortgages, asset-backed securities,
global government bonds and corporate bonds of intermediate maturity. Of the
debt securities, the largest concentration (41.41%) was in B-rated issues.
THE MARKET
Through September, high yield remained the top performer among the major
U.S. fixed income categories in 1996. As measured by the Salomon Brothers High
Yield Market Index, high yield rose 7.11%, much higher than government bonds
(-0.16%), corporate bonds (-0.14%) and mortgages (2.41%). High yield also
outperformed bonds globally, which gained 1.21%. [All returns cited from the
corresponding Salomon Brothers index.]
Individuals have been pouring cash into high-yield mutual funds at a record
pace in 1996. September witnessed the highest monthly net inflows on record
($2.3 billion), eclipsing the previous high in November 1992 ($1.6 billion).
Year to date through September, high yield fund net inflows totaled $11.3
billion (versus $7.9 billion for the same period in 1995), thus already
exceeding the previous annual record of $9.6 billion set in 1986.
As reflected by the level of new issuance, institutions are also finding
high yield very attractive. New issuance for 1996 thus far totaled $54.8 billion
at the end of September, nearly double last year's $29.9 billion for the same
period. The average market-weighted new-issue offer yield was 11.11% at
month-end, versus 10.93% for 1995 as a whole.
HIGH-YIELD SECURITIES
Currently, the high-yield market is being propelled forward by an auspicious
combination of technical and fundamental factors. For example, interest rates
are both stable and relatively low, each of which is beneficial to high-yield
performance. A stable economy suggests that issuer defaults should remain below
historical averages, while low rates help to attract income-oriented investors
looking for more yield than is available from investment-grade instruments.
Our strategy continues to be focused on opportunistic investment in
companies that we believe offer operating performance improvement and
deleveraging potential over the longer term. We also favor companies whose core
operations should perform relatively well regardless of the state of the
economy, as well as those which may be desirable candidates for future mergers
and acquisitions activity. We assign overweighted allocations to industries that
we believe have a good operating outlook and could benefit from consolidation
trends.
This approach is particularly reflected by several of our sector
concentrations:
TELECOMMUNICATIONS. This industry should benefit from the landmark
telecommunications legislation enacted in early 1996. The wireless
communications segment is poised for tremendous growth over the near term as the
Information Highway takes shape. Therefore, we believe that this segment, which
is in the early phase of its growth cycle, will be able to grow even through an
economic downturn.
Going forward, we expect the broad telecom industry to continue to
consolidate, a trend from which high-yield issuers should benefit. Accordingly,
telecom is among our largest industry exposures. Its 11.1% weighting in the
Portfolio (as of September 30) is about 1.7 times its 6.6% concurrent weighting
in the Salomon Brothers High Yield Market Index.
GAMING. We are attracted to this sector for much the same reasons that we
like telecom. It is growing and consolidating and is relatively less affected by
the macroeconomic environment. Although we believe that Atlantic City may become
overbuilt over the next few years, the sector's long-term prospects remain
bright.
2
<PAGE>
CABLE AND MEDIA. As with telecom, we expect cable/ media's recent
consolidation trend to continue. Cable TV companies need to become larger, with
more contiguous systems, in order both to offer local phone service in the
future and to compete against the regional Bell operating companies.
MORTGAGE AND ASSET-BACKED SECURITIES
Three factors most benefited mortgage-backed securities ("MBS") during the
third quarter: relatively stable interest rates, modest new supply and the
strength (i.e., lower yields) of the investment-grade corporate bond market.
Rate stability is good for MBS because it generally lowers volatility in the
government and corporate sectors, thus allowing for greater MBS liquidity. In
this climate, intermediate-term instruments such as collateralized mortgage
obligations ("CMOs") have done well. We are maintaining the Fund's existing CMO
positions because their yields to effective maturity are about 20 to 40 basis
points higher than those of comparable investment-grade corporates.
The Fund also owns asset-backed securities ("ABS"), which are instruments
whose credit quality and income stream are backed by various types of
consumer-related receivables (most notably from credit cards and auto
financings). Like MBS, ABS yields are typically higher than those of comparable
investment-grade corporates. ABS have performed well during the past year,
particularly since many pension funds and other institutional investors have
dropped their historical restrictions against ABS investment. As a result, many
institutions have begun to buy ABS in place of corporates within their
investment-grade allocations.
INTERNATIONAL HOLDINGS
With regard to our international holdings, our near-term investment stance
is marginally defensive. Accordingly, we are considering several measures to be
gradually implemented over the next few months. These include a shift in asset
allocation to overweight holdings in underperforming markets like the U.S.,
Japan, U.K. and Canada; the under-weighting of core European markets; and the
maintenance of existing positions in high-yielding European markets such as
Spain and Sweden.
Our positive view on global bonds for 1997 is based on two strong factors.
We believe that 1) interest rates have further room for downward movement and 2)
the powerful trend of economic globalization will remain intact and be
beneficial for the debt of most nations.
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.
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)
- ---------
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Face
Moody's Amount
Ratings (000) Value
<C> <S> <C> <C> <C>
- --------------------------------------------------------------------
- -------------
DOMESTIC SECURITIES (87.2%)
- ---------------------------------------------------------------------
- -----------------
CORPORATE OBLIGATIONS (61.5%)
- ----------------------------------------------------------------------------------
- -----------------
AEROSPACE/DEFENSE (0.9%)
GPA Holland
B.V. Medium Term Notes
8.625%, 1/15/99 N/R $ 500 $ 498,750
Tracor, Inc.,
Series A, Gtd. Sr. Sub. Notes
10.875%, 8/15/01 B2 250 267,500
------------
GROUP TOTAL 766,250
------------
- ----------------------------------------------------------------------------------
- -----------------
BROADCASTING (4.9%)
(8) Australis Media Ltd.
Yankee Gtd. Sr. Sub. Discount Notes
0.00%, 5/15/03 Caa 225 130,500
Chancellor Broadcasting Co.
Gtd. Sr. Sub. Notes
12.50%, 10/1/04 B3 375 421,406
(8) EchoStar Communications Corp.
Gtd. Sr. Discount Notes
0.00%, 6/1/04 B2 500 392,500
NWCG Holdings Corp.,
Series B, Sr. Discount Notes
Zero Coupon, 6/15/99 Caa 500 401,875
(3) Park Broadcasting Inc.,
Sr. Notes
11.75%, 5/15/04 B2 250 285,625
Pegasus Media & Communications, Inc.
Series B, Notes
12.50%, 7/1/05 B3 500 527,500
Sinclair Broadcast Group
Sr. Sub. Notes
10.00%, 9/30/05 B2 300 303,750
(8) Spanish Broadcasting Systems
Sr. Notes
7.50%, 6/15/02 B3 500 520,000
United International Holdings
Sr. Secured Debentures
Zero Coupon, 11/15/99 B3 1,000 700,000
Univision Network Holding L.P.
Sub. Notes
Zero Coupon, 12/17/02 N/R 573 389,691
Young Broadcasting, Inc.,
Series B, Gtd. Sr. Sub. Notes
9.00%, 1/15/06 B2 200 188,500
------------
GROUP TOTAL 4,261,347
------------
- ----------------------------------------------------------------------------------
- -----------------
CABLE (3.8%)
(8) American Telecasting, Inc.
Sr. Discount Notes
0.00%, 6/15/04 Caa 325 242,125
Charter Communications Southeast L.P.,
Series B, Sr. Notes
11.25%, 3/15/06 B3 250 257,500
<CAPTION>
Face
Moody's Amount
Ratings (000) Value
<C> <S> <C> <C> <C>
- --------------------------------------------------------------------
- -------------
Comcast Corp.
Sr. Sub. Notes
9.125%, 10/15/06 B1 $ 250 $ 248,750
(8) Comcast UK Cable Partners Ltd.
Yankee Sr. Debentures
0.00%, 11/15/07 B2 500 316,875
(4) Falcon Holding Group L.P.
Sr. Sub. Notes
11.00%, 9/15/03 N/R 418 386,512
(8) Helicon Group L.P.
Sr. Secured Notes
9.00%, 11/1/03 B1 650 658,125
(3) Lenfest Communications, Inc.
Sr. Sub. Notes
10.50%, 6/15/06 B2 500 516,250
(2) Scott Cable Communications, Inc.
Sub. Debentures
12.25%, 4/15/01 B3 500 300,000
(2)(6)(8) Simmons Cable Sr. Sub. Notes
15.747%, 4/30/96 N/R 500 385,000
------------
GROUP TOTAL 3,311,137
------------
- ----------------------------------------------------------------------------------
- -----------------
CHEMICALS (2.4%)
(8) Harris Chemical N.A.
Sr. Secured Debentures
10.25%, 7/15/01 B2 500 510,000
NL Industries Inc.:
(8) Sr. Secured Discount Debentures
0.00%, 10/15/05 B2 400 337,000
Sr. Secured Debentures
11.75%, 10/15/03 B1 250 262,500
Rexene Corp. Sr. Notes
11.75%, 12/1/04 B1 400 436,000
UCC Investor's Holdings, Inc.
Sr. Sub. Notes
11.00%, 5/1/03 B3 500 523,750
------------
GROUP TOTAL 2,069,250
------------
- ----------------------------------------------------------------------------------
- -----------------
CONSTRUCTION & BUILDING MATERIALS (0.3%)
Presley Companies
Sr. Notes
12.50%, 7/1/01 B3 250 243,125
------------
- ----------------------------------------------------------------------------------
- -----------------
CONSUMER PRODUCTS & SERVICES (4.5%)
(10) Jordan Industries, Inc.
Sr. Notes
10.375%, 8/1/03 B3 500 482,500
Marvel III Holdings, Inc.,
Series B, Sr. Secured Debentures
9.125%, 2/15/98 Caa 700 656,250
Renaissance Cosmetics, Inc.,
Series B, Sr. Notes
13.75%, 8/15/01 N/R 500 535,000
Revlon Consumer Products, Inc.
Series B, Sr. Sub. Notes
10.50%, 2/15/03 B3 450 466,875
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
Face
Moody's Amount
Ratings (000) Value
- --------------------------------------------------------------------
<C> <S> <C> <C> <C>
- -------------
Revlon Worldwide Corp.,
Series B, Sr. Secured Discount Notes
Zero Coupon, 3/15/98 B3 $ 750 $ 658,125
(8) Specialty Foods Acquisition Corp.,
Series B, Sr. Secured Discount
Debentures
0.00%, 8/15/05 Ca 1,500 645,000
(4) Town & Country Corp.
Sr. Sub. Notes
13.00%, 5/31/98 Caa 616 505,175
------------
GROUP TOTAL 3,948,925
------------
- ----------------------------------------------------------------------------------
- -----------------
ELECTRONICS (0.3%)
Advanced Micro Devices, Inc.
Sr. Secured Notes
11.00%, 8/1/03 Ba1 250 258,125
------------
- ----------------------------------------------------------------------------------
- -----------------
ENERGY (1.6%)
Falcon Drilling Co., Inc.
Series B, Sr. Notes
9.75%, 1/15/01 Ba3 375 379,688
Gulf Canada Resources Ltd.
Yankee Sr. Sub. Debentures
9.25%, 1/15/04 Ba3 450 461,812
Kelley Oil & Gas Corp.
Sr. Notes
13.50%, 6/15/99 B2 200 226,000
Maxus Energy Corp.:
Series B, Notes
9.375%, 11/1/03 B1 250 246,875
Notes
9.375%, 11/1/03 B1 100 100,000
------------
GROUP TOTAL 1,414,375
------------
- ----------------------------------------------------------------------------------
- -----------------
ENTERTAINMENT (2.1%)
(3) American Skiing Company,
Sr. Sub. Notes
12.00%, 7/15/06 B3 200 199,000
GNF Corp., Series B,
First Mortgage Notes
10.625%, 4/1/03 B1 500 547,500
Genmar Holdings, Inc.
Series A, Sr. Sub. Notes
13.50%, 7/15/01 Caa 500 477,500
(8) Imax Corp.
Series B, Yankee Sr. Notes
7.00%, 3/1/01 B1 250 247,188
PTI Holdings, Inc.
Sub. Notes
Zero Coupon, 12/17/02 N/R 507 344,702
------------
GROUP TOTAL 1,815,890
------------
- ----------------------------------------------------------------------------------
- -----------------
FINANCIAL SERVICES (0.5%)
American Banknote Corp.
Series B, Sr. Notes
11.625%, 8/1/02 B2 250 231,875
<CAPTION>
Face
Moody's Amount
Ratings (000) Value
<C> <S> <C> <C> <C>
- --------------------------------------------------------------------
- -------------
(3)(8) Consorcio G Grupo Dina S.A./ MCII
Holdings (USA), Inc.
Sr. Secured Notes
0.00%, 11/15/02 N/R $ 250 $ 202,500
------------
GROUP TOTAL 434,375
------------
- ----------------------------------------------------------------------------------
- -----------------
HEALTH CARE (1.0%)
(4) General Medical Corp.,
Series A, Sub. Debentures
12.125%, 8/15/05 Caa 597 598,493
Regency Health Services, Inc.
Gtd Sr. Sub. Notes
9.875%, 10/15/02 B2 300 301,500
------------
GROUP TOTAL 899,993
------------
- ----------------------------------------------------------------------------------
- -----------------
INDUSTRIAL GOODS & MATERIALS (4.3%)
Alpine Group, Inc.
Series B, Gtd. Sr. Secured Notes
12.25%, 7/15/03 B3 250 256,875
Atlantis Group, Inc.
Sr. Notes
11.00%, 2/15/03 B2 250 250,000
(3) Delco Remy International, Inc.
Gtd. Sr. Sub. Notes
10.625%, 8/1/06 B2 250 257,500
G.I. Holdings, Inc.,
Series B, Sr. Notes
10.00%, 2/15/06 Ba3 433 433,000
Haynes International, Inc.
Sr. Notes
11.625%, 9/1/04 B3 250 257,500
MVE Inc.
Sr. Secured Debentures
12.50%, 2/15/02 B3 500 530,000
(3) SRI Receivables Purchase Co., Inc.
Trust Certificate-Backed Notes
12.50%, 12/15/00 N/R 500 505,000
Specialty Equipment Companies, Inc.
Sr. Sub. Notes
11.375%, 12/1/03 B3 700 750,750
(3) Terex Corp.
Gtd. Sr. Notes
13.75%, 5/15/02 Caa 500 526,250
------------
GROUP TOTAL 3,766,875
------------
- ----------------------------------------------------------------------------------
- -----------------
METALS & MINING (3.3%)
Algoma Steel, Inc.
Yankee First Mortgage Notes
12.375%, 7/15/05 B1 500 522,500
Armco, Inc.
Sr. Notes
11.375%, 10/15/99 B2 500 522,500
Bayou Steel Corp.
First Mortgage Notes
10.25%, 3/1/01 B2 300 291,000
Republic Engineered Steel, Inc.
First Mortgage Bonds
9.875%, 12/15/01 B3 350 334,250
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
Face
Moody's Amount
Ratings (000) Value
- --------------------------------------------------------------------
<C> <S> <C> <C> <C>
- -------------
Sheffield Steel Corp.
First Mortgage Notes
12.00%, 11/1/01 Caa $ 500 $ 462,500
(8) Silgan Holdings, Inc.
Sr. Discount Debentures
13.25%, 12/15/02 B3 165 167,475
WCI Steel, Inc.
Series B, Sr. Notes
10.50%, 3/1/02 B1 200 220,000
Weirton Steel Corp.,
Sr. Notes
11.375%, 7/1/04 N/R 300 301,500
------------
GROUP TOTAL 2,821,725
------------
- ----------------------------------------------------------------------------------
- -----------------
PACKAGING/CONTAINERS (3.5%)
Container Corp. of America
Gtd. Sr. Notes
9.75%, 4/1/03 B1 250 253,750
(8) Crown Packaging Holdings Ltd.
Series B, Sr. Sub. Discount Notes
0.00%, 11/1/03 Caa 1,300 552,500
(3) Four M Corp.,
Series A, Sr. Secured Notes,
12.00%, 6/1/06 B2 350 371,000
Gaylord Container Corp.
Sr. Notes
11.50%, 5/15/01 B3 250 265,000
Sr. Sub. Debentures
12.75%, 5/15/05 Caa 500 548,750
(8) Ivex Holdings Corp.
Series B, Sr. Debentures
0.00%, 3/15/05 Caa 1,250 790,625
(3) Stone Container Finance Co.,
Series C, Gtd Sr. Notes
11.50%, 8/15/06 B1 250 257,500
------------
GROUP TOTAL 3,039,125
------------
- ----------------------------------------------------------------------------------
- -----------------
PAPER & FOREST PRODUCTS (2.1%)
Fort Howard Corp.
Sub. Notes
10.00%, 3/15/03 B2 500 515,000
Mail-Well Corp.
Sr. Sub. Notes
10.50%, 2/15/04 B2 500 490,000
Malette, Inc.
Yankee Sr. Secured Debentures
12.25%, 7/15/04 Ba3 250 267,500
(10) Repap Wisconsin, Inc.
Sr. Secured Debentures
9.875%, 5/1/06 Caa 250 245,000
Stone-Consolidated Corp.
Yankee Sr. Secured Debentures
10.25%, 12/15/00 Ba1 250 264,375
------------
GROUP TOTAL 1,781,875
------------
- --------------------------------------------------------------------
- -------------
<CAPTION>
Face
Moody's Amount
Ratings (000) Value
<C> <S> <C> <C> <C>
- --------------------------------------------------------------------
- -------------
RESTAURANTS, HOTELS & GAMING (7.0%)
American Restaurant Group, Inc.
Series 92, Sr. Notes
13.00%, 9/15/98 N/R $ 500 $ 455,000
(3) Argosy Gaming Company
1st Mortgage Notes
13.25%, 6/1/04 B1 225 223,875
Bally's Casino Holdings, Inc.
Sr. Notes
Zero Coupon, 6/15/98 B2 600 532,500
Bally's Park Place Funding, Inc.
First Mortgage Notes
9.25%, 3/15/04 Ba3 250 268,750
Boomtown, Inc.
First Mortgage Notes
11.50%, 11/1/03 B1 500 510,000
Casino America, Inc.
Gtd. Sr. Notes
12.50%, 8/1/03 B1 250 261,562
(3)(5)(6) Casino Magic of Louisiana, Corp.
First Mortgage Notes
13.00%, 8/15/03
(acquired 8/16/96, cost $250,000) B3 250 253,750
(4) Colorado Gaming & Entertaiment, Co.
Sr. Notes
12.00%, 6/1/03 N/R 88 82,280
(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 B3 500 435,000
Grand Casinos Inc.,
First Mortgage Bonds
10.125%, 12/1/03 Ba3 250 245,938
Griffin Gaming & Entertainment, Inc.
Mortgage Notes
11.00%, 9/15/03 N/R 500 527,500
HMC Acquisition Properties,
Series B, Gtd. Sr. Notes
9.00%, 12/15/07 Ba3 450 429,750
Horseshoe Gaming L.L.C.
Series B, Sr. Notes
12.75%, 9/30/00 B1 375 401,250
Mohegan Tribal Gaming Authority,
Series B, Sr. Secured Notes
13.50%, 11/15/02 N/R 350 441,000
Trump Atlantic City,
First Mortgage Notes
11.25%, 5/1/06 B1 500 492,500
Trump's Castle Funding, Inc.
Mortgage Bonds
11.75%, 11/15/03 Caa 500 510,000
------------
GROUP TOTAL 6,122,655
------------
- --------------------------------------------------------------------
- -------------
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
Face
Moody's Amount
Ratings (000) Value
- --------------------------------------------------------------------
<C> <S> <C> <C> <C>
- -------------
RETAIL (5.9%)
Big V Supermarkets, Inc.
Sr. Sub. Notes
11.00%, 2/15/04 B3 $ 500 $ 480,000
Brylane L.P. Gtd.
Sr. Sub. Notes
10.00%, 9/1/03 B2 500 511,250
County Seat Stores, Inc.
Sr. Sub. Notes
12.00%, 10/1/02 Ca 500 165,000
Dairy Mart Conveniences Stores, Inc.
Sr. Sub. Notes
10.25%, 3/15/04 B3 626 604,090
Duane Reade Corp.
Sr. Notes
12.00%, 9/15/02 B3 250 242,500
Farm Fresh, Inc.
Series A , Sr. Notes
12.25%, 10/1/00 B3 150 112,500
Sr. Notes
12.25%, 10/1/00 B3 500 385,000
Great American Cookie Co.,
Series B, Sr. Sec. Debentures
10.875%, 1/15/01 B3 500 420,000
Hills Stores Co.
Gtd. Sr. Notes
12.50%, 7/1/03 B1 300 269,250
Pathmark Stores, Inc.
(8) Jr. Sub. Notes
0.00%, 11/1/03 B3 850 563,125
Sr. Sub. Notes
9.625%, 5/1/03 B2 500 487,500
Ralph's Grocery Co.
Sr. Notes
10.45%, 6/15/04 B1 300 304,125
Waban, Inc.
Sr. Sub. Notes
11.00%, 5/15/04 Ba3 550 569,250
------------
GROUP TOTAL 5,113,590
------------
- ----------------------------------------------------------------------------------
- -----------------
TELECOMMUNICATIONS (11.1%)
A+ Network, Inc.
Sr. Sub. Notes
11.875%, 11/1/05 Caa 250 241,875
(8) American Communications Services, Inc.
Sr. Discount Notes
0.00%, 11/1/05 N/R 1,000 575,000
(8) Arch Communications Group, Inc.
Sr. Discount Notes
0.00%, 3/15/08 B3 400 224,000
(8) Brooks Fiber Properties, Inc.
Sr. Discount Notes
0.00%, 3/1/06 N/R 450 276,750
(8) Dial Call Communications
Sr. Discount Notes
0.00%, 4/15/04 B3 500 338,750
(8) Diamond Cable Communications plc
Yankee Sr. Discount Notes
0.00%, 12/15/05 B3 1,000 645,000
<CAPTION>
Face
Moody's Amount
Ratings (000) Value
<C> <S> <C> <C> <C>
- --------------------------------------------------------------------
- -------------
(3)(8) GST Telecommunications, Inc.
Conv. Sr. Discount Notes
0.00%, 12/15/05 N/R $ 100 $ 83,000
(8) GST USA, Inc.
Guaranteed Notes
0.00%, 12/15/05 N/R 800 432,000
Geotek Communications, Inc.
Convertible Sr. Sub. Notes
12.00%, 12/15/01 Caa 350 406,000
(8) Hyperion Telecommunications, Inc.,
Series B, Sr. Discount Notes
0.00%, 4/15/03 B 750 465,000
(8) IntelCom Group (U.S.A.), Inc.
Sr. Discount Notes
0.00%, 9/15/05 N/R 350 234,500
(8) In-Flight Phone Corp.
Series B, Sr. Discount Notes
0.00%, 5/15/02 Caa 500 165,000
(3) InterMedia Capital Partners
Sr. Notes
11.25%, 8/1/06 B2 250 257,500
Intermedia Communications, Inc.
Series B, Sr. Notes
13.50%, 6/1/05 B3 300 343,500
(8) International CableTel, Inc.,
Series B, Sr. Deferred Coupon Notes
0.00%, 2/1/06 B3 500 300,000
(8) MFS Communications Co., Inc.
Discount Notes
0.00%, 1/15/04 B1 350 294,000
Metrocall, Inc.
Sr. Sub. Notes
10.375%, 10/1/07 B3 250 207,500
Mobile Telecommunications Technologies
Corp.
Sr. Sub. Notes
13.50%, 12/15/02 B3 250 260,000
(8) Nextel Communications, Inc.
Sr. Notes
0.00%, 8/15/04 B3 700 451,500
(3) Orbcomm Global L.P./Orbcomm Global
Capital Corp.
Sr. Notes
14.00%, 8/15/04 B3 250 256,250
(8) Pagemart Nationwide, Inc.
Sr. Discount Notes
0.00%, 2/1/05 N/R 750 502,500
Paging Network, Inc.
Sr. Sub. Notes
10.125%, 8/1/07 B2 500 507,500
(3) Petersburg Long Distance Telephone, Inc.
Conv. Sub. Notes
9.00%, 6/1/06 N/R 80 96,000
(8) PriCellular Wireless Corp.
Discount Notes
0.00%, 10/1/03 B3 450 362,250
(10) Sprint Spectrum L.P./Sprint Spectrum
Finance Corp.
Sr. Notes
11.00%, 8/15/06 B2 450 463,500
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Face
Moody's Amount
Ratings (000) Value
- --------------------------------------------------------------------
<C> <S> <C> <C> <C>
- -------------
Teleport Communications Group, Inc.
Sr. Notes
9.875%, 7/1/06 B1 $ 250 $ 256,250
(8) Sr. Discount Notes
0.00%, 7/1/07 B1 550 352,000
(8) Videotron Holdings plc
Yankee Discount Notes
0.00%, 8/15/05 B3 1,000 662,500
------------
GROUP TOTAL 9,659,625
------------
- ----------------------------------------------------------------------------------
- -----------------
TEXTILES/APPAREL (1.2%)
Collins & Aikman Products Co.
Sr. Sub Notes
11.50%, 4/15/06 B3 250 263,125
Parisian, Inc.,
Sr. Sub Notes
9.875%, 7/15/03 Caa 250 245,625
Synthetic Industries, Inc.
Sr. Sub. Notes
12.75%, 12/1/02 B3 500 540,000
------------
GROUP TOTAL 1,048,750
------------
- ----------------------------------------------------------------------------------
- -----------------
TRANSPORTATION (0.8%)
CHC Helicopter Corp.
Yankee Sr. Sub. Notes
11.50%, 7/15/03 B3 250 248,125
USAir, Inc.
Gtd. Sr. Notes
10.00%, 7/1/03 B3 500 475,000
------------
GROUP TOTAL 723,125
------------
- ---------------------------------------------------------------------
- -----------------
TOTAL CORPORATE OBLIGATIONS
(Cost $54,010,172) 53,500,137
------------
- ---------------------------------------------------------------------
- -----------------
GOVERNMENT & AGENCY SECURITIES (7.9%)
- ----------------------------------------------------------------------------------
- -----------------
FEDERAL HOME LOAN MORTGAGE CORPORATION (2.3%)
30 yr TBA
8.00% Aaa 2,000 2,020,000
------------
- ----------------------------------------------------------------------------------
- -----------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION (0.4%)
30 yr TBA
7.00% Aaa 400 375,624
------------
- ----------------------------------------------------------------------------------
- -----------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (0.0%)
Graduated Payment
12.75%, 11/15/13 Aaa 28 33,103
------------
- ----------------------------------------------------------------------------------
- -----------------
U.S. DEPT. OF VETERANS AFFAIRS (0.4%)
Vendee Mortgage Trust
Series 1995-2B, Class 2D
7.50%, 10/15/17 N/R 350 345,950
------------
- ----------------------------------------------------------------------------------
- -----------------
UNITED STATES TREASURY BOND (0.8%)
(10) 8.75%, 8/15/20 Aaa 550 655,446
------------
- --------------------------------------------------------------------
- -------------
<CAPTION>
Face
Moody's Amount
Ratings (000) Value
<C> <S> <C> <C> <C>
- --------------------------------------------------------------------
- -------------
U.S. TREASURY NOTES (4.0%)
(10) 5.375%, 5/31/98 Aaa $ 655 $ 648,037
7.50%, 2/15/05 Aaa 200 210,468
(10) 7.75%, 11/30/99 Aaa 2,500 2,600,000
------------
GROUP TOTAL 3,458,505
------------
- ---------------------------------------------------------------------
- -----------------
TOTAL GOVERNMENT & AGENCY SECURITIES
(Cost $6,894,689) 6,888,628
------------
- ---------------------------------------------------------------------
- -----------------
COLLATERALIZED SECURITIES (1.9%)
- ----------------------------------------------------------------------------------
- -----------------
COLLATERALIZED MORTGAGE OBLIGATIONS (1.9%)
Drexel, Burnham & Lambert Trust
REMIC-PAC,
Series S, Class 2
9.00%, 8/1/18 Aaa 782 792,607
Kidder Peabody Acceptance Corp.
Series 1993-C1, Class A3
6.80%, 9/1/06 Aaa 400 388,000
Series 1993-M3, Class A
6.50%, 11/25/25 Aaa 267 264,414
Nationscredit Grantor Trust,
Retail Installment
Sale Contracts
Series 1996-1,
Class A
5.85%, 9/15/11 Aaa 230 224,192
------------
- ---------------------------------------------------------------------
- -----------------
TOTAL COLLATERALIZED SECURITIES
(Cost $1,700,613) 1,669,213
------------
- ---------------------------------------------------------------------
- -----------------
ASSET BACKED OBLIGATIONS (4.6%)
</TABLE>
- -----------------------------------------------------
- ----------
<TABLE>
<C> <S> <C> <C> <C>
Green Tree Financial Corp.
Manufactured Housing Installment Sale
Contracts: Series 1995-4, Class A3
6.30%, 7/15/25 Aaa 1,650 1,629,887
Series 1993-4, Class B1
7.20%, 1/15/19 Baa3 1,043 1,015,621
(9) Merrill Lynch Home Equity Acceptance
Trust
Series 1994-A, Class A-2
6.1875%, 7/17/22 A3 1,349 1,348,904
------------
- ---------------------------------------------------------------------
- -----------------
TOTAL ASSET BACKED OBLIGATIONS
(Cost S4,026,511) 3,994,412
------------
- ---------------------------------------------------------------------
- -----------------
UNITS (3.8%)
- ----------------------------------------------------------------------------------
- -----------------
Cellular Communications, International,
Inc. Notes,
Zero Coupon, 8/15/00 B3 1,000 655,000
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Face
Moody's Amount
Ratings (000) Value
- --------------------------------------------------------------------
<C> <S> <C> <C> <C>
- -------------
(3)(8) Crown Packaging Enterprises Ltd.
Sr. Secured Discount Notes 0.00%,
8/1/06 N/R $ 775 $ 301,917
(3)(5)(6)(8) DIVA Systems Corp.,
Sub. Discount 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
0.00%, 8/15/02 B3 500 542,500
(3)(8) InterAct Systems Inc.
Sr. Discount Notes
0.00%, 8/1/03 N/R 400 272,000
(3)(5)(6)(8) Petersburg Long Distance Inc.,
Sr. Discount Notes
0.00%, 6/1/04
(acquired 5/24/96, cost $411,968) N/R 560 456,400
(3)(8) Real Time Data Inc.
Sub. Discount Notes
0.00%, 8/15/06 N/R 500 270,000
Renaissance Cosmetics, Inc.,
Series B, 14% Sr. Redeemable N/R 200 200,000
(8) Wireless One, Inc.
Sr. Discount Notes
0.00%, 8/1/06 B3 250 136,250
------------
- ---------------------------------------------------------------------
- -----------------
TOTAL UNITS
(Cost $3,189,583) 3,320,067
------------
- --------------------------------------------------------------------
- -------------
<CAPTION>
Shares
<C> <S> <C> <C> <C>
- ---------------------------------------------------------------------
- -----------------
COMMON STOCKS (1.7%)
- ----------------------------------------------------------------------------------
- -----------------
BROADCASTING (0.0%)
(3) Pegasus Media & Communications, Inc.
Class B 50 17,500
------------
- --------------------------------------------------------------------
- -------------
CONSUMER PRODUCTS & SERVICES (0.4%)
(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
(1) Specialty Foods Corp. 22,500 11,250
------------
GROUP TOTAL 301,950
------------
- ----------------------------------------------------------------------------------
- -----------------
ENTERTAINMENT (0.9%)
(1) Gillett Holdings, Inc. 22,500 787,500
------------
- ----------------------------------------------------------------------------------
- -----------------
FINANCIAL SERVICES (0.0%)
(1)(5)(6)(7) Westfed Holdings Inc. Class B
(acquired 9/20/88, cost $100) 4,223 0
------------
- ----------------------------------------------------------------------------------
- -----------------
INDUSTRIAL GOODS & MATERIALS (0.3%)
(1) Alpine Group, Inc. 3,773 26,173
(1)(5)(6)(7) CIC I Acquisition Corp.
(acquired 10/18/89, cost $1,076,700) 2,944 200,192
------------
GROUP TOTAL 226,365
------------
<CAPTION>
Shares Value
<C> <S> <C> <C> <C>
- --------------------------------------------------------------------
- -------------
PAPER & FOREST PRODUCTS (0.0%)
Mail-Well, Inc. 3,551 $ 30,183
------------
- --------------------------------------------------------------------
- -------------
RESTAURANTS, HOTELS & GAMING (0.1%)
(1) Casino America Inc. 4,982 33,629
(1) Colorado Gaming & Entertainment, Co. 8,822 26,466
(1)(3) Motels of America, Inc. 250 19,000
------------
GROUP TOTAL 79,095
------------
- ----------------------------------------------------------------------------------
- -----------------
RETAIL (0.0%)
(1)(5)(6) Jewel Recovery L.P.
(acquired 7/30/93, cost $0) 33,040 0
------------
- ----------------------------------------------------------------------------------
- -----------------
TELECOMMUNICATIONS (0.0%)
(1) Pagemart Nationwide, Inc. 3,500 35,875
------------
- ---------------------------------------------------------------------
- -----------------
TOTAL COMMON STOCKS
(Cost $1,924,822) 1,478,468
------------
- ---------------------------------------------------------------------
- -----------------
PREFERRED STOCKS (1.8%)
- ----------------------------------------------------------------------------------
- -----------------
AEROSPACE/DEFENSE (0.3%)
GPA Group plc
7% Cumulative Conv. 650,000 253,500
------------
ENERGY (0.2%)
(1)(7) Consolidated Hydro, Inc.,
13.50%, Series H Conv. 1,500 150,000
------------
- ----------------------------------------------------------------------------------
- -----------------
RESTAURANTS, HOTELS & GAMING (0.3%)
Lady Luck Gaming Corp.,
Series A 10,000 305,000
------------
- ----------------------------------------------------------------------------------
- -----------------
FINANCIAL SERVICES (0.0%)
(1)(5)(6)(7) WestFed Holdings,
Class A
(acquired 9/20/88-6/18/93, cost
$1,203,500) 14,246 14,246
------------
- ----------------------------------------------------------------------------------
- -----------------
PAPER & FOREST PRODUCTS (0.6%)
(1) SD Warren Co.
14% Exchangeable 13,000 455,000
------------
- ----------------------------------------------------------------------------------
- -----------------
PUBLISHING & INFORMATION SERVICES (0.4%)
K-III Communications Corp.
10% Exchangeable, Series C 3,500 315,000
------------
- ---------------------------------------------------------------------
- -----------------
TOTAL PREFERRED STOCKS
(Cost $3,132,845) 1,492,746
------------
- ----------------------------------------------------------------------------------
- -----------------
RIGHTS (0.0%)
(1) Terex Corp.,
expiring 5/15/02 (cost $0) 2,000 4,000
------------
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
Shares Value
- --------------------------------------------------------------------
<C> <S> <C> <C> <C>
- -------------
WARRANTS (0.4%)
(1) America Communications Services, Inc.,
expiring 11/1/05 1,000 $ 75,000
(1) American Telecasting, Inc.,
expiring 6/23/99 350 1,400
(1) Australis Media Ltd.,
expiring 5/15/00 225 0
(1)(3) Boomtown, Inc.,
expiring 11/1/98 500 125
(1) CHC Helicopter Corp.,
expiring 12/15/00 2,000 1,000
(1) Casino America, Inc.,
expiring 5/03/01 882 882
(1) Casino America, Inc.,
expiring 11/15/96 1,632 0
(1) Casino Magic of Louisiana 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 2,000
(1) Dairy Mart Conveniences 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) Hyperion Telecommunications, Inc.,
expiring 4/15/01 750 0
(1)(3) In-Flight Phone Corp.,
expiring 8/31/02 500 0
(1)(3) IntelCom Group, Inc.,
expiring 9/15/05 1,155 17,325
(1) Intermedia Communications, Inc.,
expiring 6/1/00 300 12,000
(1) Nextel Communications, Inc.,
expiring 4/25/99 500 5
(1)(3) Purity Supreme, Inc.
expiring 8/1/97 1,733 0
(1)(3) Renaissance Cosmetics Inc.,
expiring 8/15/01 1,000 50,000
(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 6/29/99 500 105,000
(1) United International Holdings,
expiring 11/15/99 600 12,000
(1)(3) Wright Medical Technology,
expiring 6/30/03 206 26,765
- ----------------------------------------------------------------------------------
- -----------------
TOTAL WARRANTS
(Cost $177,319) 360,593
------------
- --------------------------------------------------------------------
- -------------
</TABLE>
<TABLE>
<CAPTION>
Face
Moody's Amount
Ratings (000) Value
<C> <S> <C> <C> <C>
SHORT-TERM INVESTMENTS (3.6%)
- ----------------------------------------------------------------------------------
- -----------------
FEDERAL HOME LOAN MORTGAGE DISCOUNT NOTE (3.6%)
Zero Coupon, 10/1/96
(Cost $3,165,000) N/R $3,165 $ 3,165,000
------------
- ---------------------------------------------------------------------
- -----------------
TOTAL DOMESTIC SECURITIES
(Cost $78,221,554) 75,873,264
------------
FOREIGN INCOME SECURITIES (13.9%)
- ---------------------------------------------------------------------
- -----------------
GOVERNMENT OBLIGATIONS (13.9%)
</TABLE>
- -----------------------------------------------------
- ----------
<TABLE>
<C> <S> <C> <C> <C>
CANADA
Canadian Government
Debentures
8.75%, 12/1/05 Aa1 CAD 825 675,258
DENMARK
Kingdom of Denmark Bonds
8.00%, 3/15/06 N/R DKK 5,200 950,047
FRANCE
Government of France Debentures
7.50%, 4/25/05 Aaa FRF 7,000 1,494,074
GERMANY
Deutscheland Bundesbank Debentures
6.75%, 7/15/04 Aaa DEM 6,000 4,139,064
SPAIN
Kingdom of Spain
10.10%, 2/28/01 N/R ESP 47,000 404,731
SUPRANATIONAL
International Bank for Reconstruction &
Development Japanese Yen Global Bonds
5.25%, 3/20/02 Aaa JPY 90,000 923,553
SWEDEN
Kingdom of Sweden Debentures Series 1028
11.00%, 1/21/99 Aa1 SEK 2,500 413,812
UNITED KINGDOM
United Kingdom Treasury
6.00%, 8/10/99 Aaa GBP 2,000 3,113,761
------------
- --------------------------------------------------------------------
- -------------
TOTAL FOREIGN INCOME SECURITIES
(Cost $11,265,923) 12,114,300
------------
- ---------------------------------------------------------------------
- -----------------
TOTAL INVESTMENTS (101.1%)
(Cost $89,487,477) 87,987,564
------------
- --------------------------------------------------------------------
- -------------
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Value
- --------------------------------------------------------------------
<C> <S> <C> <C> <C>
- -------------
LIABILITIES IN EXCESS OF OTHER
ASSETS (-1.1%)
$ (961,428)
------------
- ----------------------------------------------------------------------------------
- -----------------
NET ASSETS (100%)
Applicable to 8,454,140 issued and outstanding $.001 par value
shares (authorized 100,000,000 shares) $ 87,026,136
------------
------------
- ---------------------------------------------------------------------
- -----------------
NET ASSET VALUE PER SHARE
$ 10.29
------------
------------
- ---------------------------------------------------------------------
- -----------------
MARKET PRICE PER SHARE
$ 9.125
------------
------------
- --------------------------------------------------------------------
- -------------
N/R--Not Rated.
PAC--Planned Amortization Class.
REMIC--Real Estate Mortgage Investment Conduit.
STRIPS--Seperate Trading of Registered Interest and Principal Securities.
TBA--To Be Announced. Security is subject to delayed delivery.
(1) Non-income producing security.
(2) Defaulted security.
(3) 144A Security. Certain conditions for public sale may exist.
(4) Payment in kind bond. Market value includes accrued interest.
(5) Restricted as to private and public resale. Total cost of restricted securities at
September 30, 1996 aggregated $3,554,319. Total market value of restricted securities
owned at September 30, 1996 was $1,701,288 or 2.0% 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 September 30, 1996.
(10) All or a portion of this security was pledged as collateral for delayed delivery
securities.
</TABLE>
11
