<PAGE>
BEA Strategic Income Fund, Inc.
153 East 53rd Street
New York, NY 10022
---------------------------------------------
OFFICERS AND DIRECTORS
<TABLE>
<S> <C>
William W. Priest, Jr. Suzanne E. Moran
CHAIRMAN OF THE BOARD INVESTMENT OFFICER
Prof. Enrique R. Arzac Michael A. Pignataro
DIRECTOR SECRETARY
Lawrence J. Fox Wendy S. Setnicka
DIRECTOR ASSISTANT VICE
James S. Pasman, Jr. PRESIDENT
DIRECTOR AND ASSISTANT
Richard J. Lindquist SECRETARY
PRESIDENT AND CHIEF INVESTMENT Paul P. Stamler
OFFICER TREASURER
John M. Corcoran
ASSISTANT TREASURER
</TABLE>
--------------------------------------------------------
INVESTMENT ADVISER
BEA Associates
153 East 53rd Street
New York, New York 10022
--------------------------------------------------------
ADMINISTRATOR
Chase Global Funds Services Company
73 Tremont Street
Boston, Massachusetts 02108
--------------------------------------------------------
CUSTODIAN
The Chase Manhattan Bank
3 Chase MetroTech Center
Brooklyn, New York 11245
--------------------------------------------------------
SHAREHOLDER SERVICING AGENT
The Chase Manhattan Bank
4 New York Plaza
New York, New York 10004
Phone 1-800-428-8890
--------------------------------------------------------
LEGAL COUNSEL
Willkie Farr & Gallagher
153 East 53rd Street
New York, New York 10022
--------------------------------------------------------
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
--------------------------------------------------------
INCREASE YOUR FUND HOLDINGS THROUGH DIVIDEND
REINVESTMENT AND DIRECT CASH PURCHASES
The Fund offers the opportunity for all shareholders to participate in the
Fund's Dividend Reinvestment and Cash Purchase Plan (the "Plan"). Under the
Plan, participating shareholders receive, in lieu of cash dividends, common
stock of the Fund. In addition, participants in the Plan have the option of
making voluntary cash payments of $100 to $1,000 (per investment period), plus
any dividends received in cash, to the Plan Agent to purchase Fund shares in the
open market. A brochure further describing the Plan and additional information
concerning terms and conditions, and any applicable charges relating to the
Plan, can be obtained from the Plan's agent at (800) 428-8890.
[LOGO]
BEA Strategic Income Fund, Inc.
[LOGO]
ANNUAL REPORT
December 31, 1996
<PAGE>
BEA STRATEGIC INCOME FUND, INC.
- ----------
Dear Shareholders: February 10, 1997
We are pleased to report on the activities of the BEA Strategic Income Fund,
Inc. ("the Fund") for the year ended December 31, 1996.
At December 31, 1996, the Fund's net asset value (NAV) was $10.37, 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 $0.81 per share) for the
period was 13.27%. At December 31, 1996, $53.6 million was invested in
high-yield debt securities; $19.1 million was invested in domestic, investment-
grade debt securities; $12.5 million was invested in international
investment-grade securities; and the balance of the Fund's investments, $4.0
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 (39.40%) was in B-rated issues.
THE MARKET
High yield was the top performer among major U.S. fixed income categories in
1996. As measured by the Salomon Brothers High Yield Market Index, high yield
returned 11.28% versus 2.76% for government bonds, 3.32% for investment-grade
corporate bonds and 5.37% for mortgages. [All returns cited from the
corresponding Salomon Brothers index.]
Investment in high yield mutual funds by individuals reached an all-time
high in 1996. According to AMG Data Services, net fund inflows totaled $15.9
billion, nearly 50% higher than the previous annual record of $10.7 billion set
in 1995.
As reflected by the level of new issuance, institutions also found high
yield very attractive. Aggregate new issuance for 1996 was $73.2 billion, a 55%
jump over last year's $47.2 billion. The average market-weighted new-issue offer
yield was 10.40% at year-end, versus 10.93% for 1995 as a whole.
HIGH YIELD SECURITIES
The high yield market is being driven by good fundamentals and strong
technicals. On the technical side is demand, which was strong throughout 1996
and remains so. This is a result both of the search by investors for more yield
than is available from investment-grade instruments and the increasing
acceptance of high yield as a mainstream asset class. Fundamentally, the U.S.
macroeconomic environment, which is a benign mixture of moderate growth, little
threat of inflation and relatively stable interest rates, continues to be
positive for high yield issuers. Under such conditions, demand ought to stay
strong and issuer defaults should be below historical averages.
In managing the Fund, our general investment approach is to assign high
portfolio allocations to industries that we believe have a good operating
outlook and could benefit from consolidation trends. More specifically, we favor
companies that we believe offer long-term operating performance improvement and
deleveraging potential; those whose core operations should perform relatively
well regardless of the state of the economy; and those that may be desirable
candidates for future mergers and acquisitions activity.
Over the last few months, we have revised our views on several of our
industry concentrations.
The Fund's largest position remains in telecommunications, primarily based
on good growth prospects and the potential for further consolidation. In
particular, merger and acquisition activity among providers of traditional
telephony has been brisk over the last few months, with significant deals
announced between British Telecom and MCI Communications as well as WorldCom and
MFS Communications. The securities of many telecom companies tend to benefit in
this type of environment.
As our focus on telephony sharpens, we are reducing positions in other
segments of the telecommunications sector, notably wireless communications and
paging.
Debt issues of the gaming industry also occupy a significant position in the
portfolio. Although our investment thesis regarding gaming is very much intact
(I.E., it is growing and consolidating and is relatively less affected by the
macroeconomic environment), we are taking a more cautious view on the industry's
presence in Atlantic City. For the time being, then, we consider it most
appropriate to maintain existing positions without replacing bonds that have
been redeemed.
MORTGAGE AND ASSET-BACKED SECURITIES
We continue to find both mortgage and asset-backed securities (known as
"MBS" and "ABS", respectively) attractive. Within the general investment-grade
category, they possess good value relative to government and corporate bonds.
MBS's fundamentals and supply/demand dynamics are quite positive. In recent
months we have observed enormous buying by Fannie Mae and Freddie Mac (in 1996,
they consumed roughly half of all new MBS issues). There has also been strong
demand from investment managers who, because of their frequent trading activity,
help to keep the market liquid.
2
<PAGE>
ABS retain a place in the portfolio because they offer a desirable
combination of high quality, low prepayment risk and compelling value. Prices
have tightened over the last few months in response to rising demand.
INTERNATIONAL HOLDINGS
Overall, we consider 1996 to have been a year of global credit compression,
which means a substantial narrowing of yield spreads between bond classes (E.G.,
U.S. Treasuries and emerging market bonds). Compression was primarily due to
intense fiscal belt-tightening in anticipation of the European Monetary Union,
moderate economic growth in the U.S. and stable-to-falling interest rates in
most developed nations.
Our worldwide outlook for debt in 1997 is one of caution. The coordinated
global economic growth that we expect could have differing implications for
bonds of the developed and emerging worlds. On the negative side, growth might
ignite inflation fears among developed economies, which could necessitate
interest-rate tightening. Emerging nations, by contrast, could benefit in the
form of improving fiscal conditions and higher creditworthiness.
OUTLOOK
In the near term, we expect conditions in the high yield market to remain
fairly stable, since the macroeconomic climate continues to be favorable and is
showing few substantive signs of overheating. Default risk ought to stay low and
overall corporate performance should stay positive. The surge in demand that
occurred in 1996 still appears to be in place, and should persist if there are
no major shocks in the financial markets.
We note here that institutional interest in high yield is rising as time
progresses, prompted by the rapid growth of retirement plan assets. It is
becoming more attractive as institutions seek new ways to diversify their
portfolios' overall risk. In addition, many institutions have already added
emerging markets debt (whose credit quality is similar to that of high yield) to
their asset mixes and, therefore, are becoming more comfortable with the concept
of below-investment-grade fixed income.
Along those lines, on February 10, 1997 the Board of Directors approved
certain amendments to the Fund's non-fundamental investment policies that will
permit it to invest in emerging markets debt securities. Pursuant to the new
investment policies adopted by the Board, up to 35% of the Fund's total assets
may now be invested in debt securities of issuers, both government or private,
located in emerging markets. There is no requirement that such emerging markets
securities be rated investment grade or that they be comparable to investment
grade securities.
We would like to take this opportunity to report on some important
organizational developments. Daniel H. Sigg has resigned from the Fund as
Chairman of the Board, President and Chief Executive Officer. We are grateful
for his contributions. We are pleased to announce that Richard J. Lindquist, the
Fund's Chief Investment Officer, has been elected to the office of President of
the Fund. The Fund's new Chairman of the Board is William W. Priest, Jr., Chief
Executive Officer of BEA Associates.
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]
Richard J. Lindquist
PRESIDENT AND CHIEF INVESTMENT OFFICER*
[SIG]
William W. Priest, Jr.
CHAIRMAN OF THE BOARD*
*Richard J. Lindquist, who is a member of the Executive Committee and is a
Managing Director of BEA Associates, is primarily responsible for management of
the Fund's assets. He has served in such capacity since November 21, 1996. Prior
to November 21, 1996, he served as Vice President to the Fund, a position he
assumed on August 15, 1989. Mr. Lindquist joined BEA Associates on May 1, 1995
as a result of BEA's acquisition of CS First Boston Investment Management
Corporation ("CSFBIM"). Prior to joining BEA Associates, Mr. Lindquist served
various offices at CSFBIM beginning in July, 1989. Mr. Lindquist is also
President and Chief Investment Officer of BEA Income Fund, Inc.
William W. Priest, Jr., who is Chairman of the Executive Committee and holds
the offices of Executive Director and Chief Executive Officer of BEA Associates,
joined BEA Associates in 1972. Mr. Priest is Director and President of The
Indonesia Fund, Inc. and Director and Chairman of the Board of BEA Income Fund,
Inc., The Brazilian Equity Fund, Inc., The Chile Fund, Inc., The Emerging
Markets Infrastructure Fund, Inc., The Emerging Markets Telecommunications Fund,
Inc., The First Israel Fund, Inc., The Latin America Equity Fund, Inc., The
Latin America Investment Fund, Inc. and The Portugal Fund, Inc., all of which
are managed by BEA Associates.
3
<PAGE>
PORTFOLIO OF INVESTMENTS
- ---------
DECEMBER 31, 1996
<TABLE>
<CAPTION>
Moody's Face
Ratings Amount Value
(Unaudited) (000) (Note A-1)
<C> <S> <C> <C> <C>
- --------------------------------------------------------------------------------
- -----------------
DOMESTIC INCOME SECURITIES (87.6%)
- --------------------------------------------------------------------------------
- -----------------
CORPORATE OBLIGATIONS (61.2%)
- ---------------------------------------------------------------------------------
- -----------------
AEROSPACE/DEFENSE (0.9%)
(3) GPA Holland B.V.
Series C, Medium Term Notes
8.625%, 1/15/99 N/R $ 500 $ 501,250
Tracor, Inc.
Series A, Gtd. Sr. Sub.
Notes
10.875%, 8/15/01 B2 250 263,750
-----------
GROUP TOTAL 765,000
-----------
- ----------------------------------------------------------------------------------
- -----------------
BROADCASTING (5.0%)
(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 375 425,625
(8) EchoStar Communications Corp.
Gtd. Sr. Discount Notes
0.00%, 6/1/04 B2 500 413,750
NWCG Holding Corp.
Series B, Sr. Discount Notes
0.00%, 6/15/99 Caa 500 412,500
Park Broadcasting Inc.
Series B, Sr. Notes
11.75%, 5/15/04 B2 250 293,750
Pegasus Media &
Communications, Inc.
Series B, Notes
12.50%, 7/1/05 B3 500 541,250
Sinclair Broadcast Group
Sr. Sub. Notes
10.00%, 9/30/05 B2 300 304,500
(8) Spanish Broadcasting Systems
Sr. Notes
7.50%, 6/15/02 B3 500 527,500
United International Holdings
Sr. Discount Notes
0.00%, 11/15/99 B3 1,000 710,000
Univision Network Holding
L.P.
Sub. Notes
0.00%, 12/17/02 N/R 573 389,691
Young Broadcasting, Inc.
Series B, Gtd. Sr. Sub.
Notes
9.00%, 1/15/06 B2 200 195,000
-----------
GROUP TOTAL 4,344,066
-----------
- ----------------------------------------------------------------------------------
- -----------------
BUSINESS SERVICES (0.3%)
(3)(8) Real Time Data Inc.
Units
0.00%, 8/15/06 N/R 500 270,000
-----------
- ----------------------------------------------------------------------------------
- -----------------
CABLE (4.6%)
(8) American Telecasting, Inc.
Sr. Discount Notes
0.00%, 6/15/04 Caa 325 133,250
<CAPTION>
Moody's Face
Ratings Amount Value
(Unaudited) (000) (Note A-1)
<C> <S> <C> <C> <C>
- ----------------------------------------------------------------------------------
- -----------------
(3)(8) Australis Holdings Pty Ltd.
Yankee Units
0.00%, 11/1/02 B2 $ 250 $ 147,500
Charter Communications
Southeast L.P.
Series B, Sr. Notes
11.25%, 3/15/06 B3 250 261,250
Comcast Corp.
Sr. Sub. Notes
9.125%, 10/15/06 B1 250 256,250
(8) Comcast UK Cable Partners
Ltd.
Yankee Sr. Debentures
0.00%, 11/15/07 B2 500 347,500
(3)(8) DIVA Systems Corp.
Units
0.00%, 5/15/06 N/R 900 482,625
(4) Falcon Holding Group L.P.
Sr. Sub. Notes
11.00%, 9/15/03 N/R 418 373,977
(8) Helicon Group L.P.
Series B, Sr. Secured Notes
11.00%, 11/1/03 B1 650 666,250
(8) International CableTel, Inc.
Series B, Sr. Deferred
Coupon Notes
0.00%, 2/1/06 B3 500 340,000
Lenfest Communications, Inc.
Sr. Sub. Notes
10.50%, 6/15/06 B2 500 526,250
(2) Scott Cable Communications,
Inc.
Sub. Debentures
12.25%, 4/15/01 B3 500 350,000
(8) Telewest Communications plc
Yankee Sr. Discount
Debentures
0.00%, 10/1/07 B1 250 174,375
-----------
GROUP TOTAL 4,059,227
-----------
- ----------------------------------------------------------------------------------
- -----------------
CHEMICALS (2.9%)
(8) Harris Chemical N.A.
Sr. Secured Debentures
10.25%, 7/15/01 B2 500 519,375
(3) ISP Holdings Inc.
Sr. Notes
9.75%, 2/15/02 Ba3 433 443,825
NL Industries Inc.:
(8) Sr. Secured Discount
Debentures
0.00%, 10/15/05 B2 400 344,000
Sr. Secured Debentures
11.75%, 10/15/03 B1 250 265,000
Rexene Corp.
Sr. Notes
11.75%, 12/1/04 B1 400 449,000
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
Moody's Face
Ratings Amount Value
(Unaudited) (000) (Note A-1)
<C> <S> <C> <C> <C>
- ----------------------------------------------------------------------------------
- -----------------
UCC Investor's Holdings, Inc.
Sr. Sub. Notes
11.00%, 5/1/03 B3 $ 500 $ 530,000
-----------
GROUP TOTAL 2,551,200
-----------
- ----------------------------------------------------------------------------------
- -----------------
CONSTRUCTION & BUILDING MATERIALS (0.3%)
Presley Companies
Sr. Notes
12.50%, 7/1/01 B3 250 241,250
-----------
- ----------------------------------------------------------------------------------
- -----------------
CONSUMER PRODUCTS & SERVICES (2.6%)
(3)(8) Coinstar Inc.
Units
0.00%, 10/1/06 N/R 600 423,750
Jordan Industries, Inc.
Sr. Notes
10.375%, 8/1/03 B3 500 492,500
(2) Marvel III Holdings, Inc.
Series B, Sr. Secured
Debentures
9.125%, 2/15/98 C 700 129,500
Renaissance Cosmetics, Inc.
Series B, Sr. Notes
13.75%, 8/15/01 N/R 500 582,500
Revlon Consumer Products,
Inc.
Series B, Sr. Sub. Notes
10.50%, 2/15/03 B3 250 262,500
(4) Town & Country Corp.
Sr. Sub. Notes
13.00%, 5/31/98 Caa 616 412,765
-----------
GROUP TOTAL 2,303,515
-----------
- ----------------------------------------------------------------------------------
- -----------------
ELECTRONICS (0.9%)
Advanced Micro Devices, Inc.
Sr. Secured Notes
11.00%, 8/1/03 Ba1 250 270,625
Unisys Corp.
Sr. Notes
11.75%, 10/15/04 B1 500 533,750
-----------
GROUP TOTAL 804,375
-----------
- ----------------------------------------------------------------------------------
- -----------------
ENERGY (1.4%)
Falcon Drilling Co., Inc.
Series B, Sr. Notes
9.75%, 1/15/01 Ba3 375 393,750
Gulf Canada Resources Ltd.
Yankee Sr. Sub. Debentures
9.25%, 1/15/04 Ba3 450 474,750
Maxus Energy Corp.:
Notes
9.375%, 11/1/03 B1 100 101,500
Series B Notes
9.375%, 11/1/03 B1 250 252,500
-----------
GROUP TOTAL 1,222,500
-----------
- ----------------------------------------------------------------------------------
- -----------------
<CAPTION>
Moody's Face
Ratings Amount Value
(Unaudited) (000) (Note A-1)
<C> <S> <C> <C> <C>
- ----------------------------------------------------------------------------------
- -----------------
ENTERTAINMENT (1.8%)
(3) American Skiing Company,
Sr. Sub. Notes
12.00%, 7/15/06 B3 $ 200 $ 211,500
Genmar Holdings, Inc.
Series A, Sr. Sub. Notes
13.50%, 7/15/01 Caa 500 487,500
(8) Imax Corp.
Yankee Sr. Notes
0.00%, 3/1/01 B1 250 247,813
PTI Holdings, Inc.
Sub. Notes
0.00%, 12/17/02 N/R 507 344,702
(3) Stuart Entertainment Inc.
Sr. Sub. Notes
12.50%, 11/15/04 B3 250 249,375
-----------
GROUP TOTAL 1,540,890
-----------
- ----------------------------------------------------------------------------------
- -----------------
FINANCIAL SERVICES (1.5%)
American Banknote Corp.
Series B, Sr. Notes
11.625%, 8/1/02 B2 250 241,250
Chevy Chase Bank F.S.B.
Sub. Debentures
9.25%, 12/1/08 B1 250 253,125
Consorcio G Grupo Dina S.A./
MCII Holdings (U.S.A.), Inc.
Sr. Secured Notes
0.00%, 11/15/02 N/R 250 206,563
(3) Veritas Holdings GmbH
Sr. Notes
9.625%, 12/15/03 N/R 500 505,000
(2) Westfed Holdings
Sr. Debentures
15.50%, 9/15/99 N/R 250 137,500
-----------
GROUP TOTAL 1,343,438
-----------
- ----------------------------------------------------------------------------------
- -----------------
HEALTH CARE (1.7%)
(4) General Medical Corp.
Series A, Sub. Debentures
12.125%, 8/15/05 Caa 597 605,209
Health O Meter, Inc.
Units
13.00%, 8/15/02 B3 500 540,000
Regency Health Services, Inc.
Gtd Sr. Sub. Notes
9.875%, 10/15/02 B2 300 304,500
-----------
GROUP TOTAL 1,449,709
-----------
- ----------------------------------------------------------------------------------
- -----------------
INDUSTRIAL GOODS & MATERIALS (4.2%)
Alpine Group, Inc.
Series B, Gtd. Sr.
Secured Notes
12.25%, 7/15/03 B3 125 135,000
Atlantis Group, Inc.
Sr. Notes
11.00%, 2/15/03 B2 250 253,750
(3) CSK Auto Inc.
Sr. Sub. Notes
11.00%, 11/1/06 B3 400 414,000
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
Moody's Face
Ratings Amount Value
(Unaudited) (000) (Note A-1)
<C> <S> <C> <C> <C>
- ----------------------------------------------------------------------------------
- -----------------
(3) Delco Remy International,
Inc.
Gtd. Sr. Sub. Notes
10.625%, 8/1/06 B2 $ 250 $ 264,062
Haynes International, Inc.
Sr. Notes
11.625%, 9/1/04 B3 250 263,750
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 500 510,000
Specialty Equipment
Companies, Inc.
Sr. Sub. Notes
11.375%, 12/1/03 B3 700 764,750
Terex Corp.
Series B, Sr. Secured Notes
13.25%, 5/15/02 Caa 500 538,750
-----------
GROUP TOTAL 3,674,062
-----------
- ----------------------------------------------------------------------------------
- -----------------
METALS & MINING (2.9%)
Algoma Steel, Inc.
Yankee First Mortgage Notes
12.375%, 7/15/05 B1 500 540,000
Armco, Inc.
Sr. Notes
11.375%, 10/15/99 B2 250 258,750
Bayou Steel Corp.
First Mortgage Notes
10.25%, 3/1/01 B2 300 286,500
Republic Engineered Steel,
Inc.
First Mortgage Bonds
9.875%, 12/15/01 B3 350 325,500
Sheffield Steel Corp.
First Mortgage Notes
12.00%, 11/1/01 Caa 500 475,000
(8) Silgan Holdings, Inc.
Sr. Discount Debentures
13.25%, 12/15/02 B3 137 137,856
(3) WCI Steel Inc.
Sr. Notes
10.00%, 12/1/04 B2 250 253,125
Weirton Steel Corp.
Sr. Notes
11.375%, 7/1/04 B2 300 304,500
-----------
GROUP TOTAL 2,581,231
-----------
- ----------------------------------------------------------------------------------
- -----------------
PACKAGING/CONTAINERS (3.7%)
Container Corp. of America
Gtd. Sr. Notes
9.75%, 4/1/03 B1 250 262,500
(3)(8) Crown Packaging
Enterprises Ltd. Units
0.00%, 8/1/06 Ca 775 205,375
<CAPTION>
Moody's Face
Ratings Amount Value
(Unaudited) (000) (Note A-1)
<C> <S> <C> <C> <C>
- ----------------------------------------------------------------------------------
- -----------------
(3)(8) Crown Packaging
Holdings Ltd.
Series B, Sr. Sub.
Discount Notes
0.00%, 11/1/03 Ca $ 1,300 $ 364,000
Four M Corp.
Series B, Sr. Secured Notes
12.00%, 6/1/06 B2 350 364,000
Gaylord Container Corp.
Sr. Sub. Discount Debentures
12.75%, 5/15/05 Caa 500 552,500
(8) Ivex Holdings Corp.
Series B, Sr. Discount
Debentures
0.00%, 3/15/05 Caa 1,250 971,875
(3) Spinnaker Industries Inc.
Sr. Secured Notes
10.75%, 10/15/06 B3 250 258,750
(3) Stone Container Finance Co.
Yankee Gtd. Sr. Notes
11.50%, 8/15/06 B1 250 253,125
-----------
GROUP TOTAL 3,232,125
-----------
- ----------------------------------------------------------------------------------
- -----------------
PAPER & FOREST PRODUCTS (2.1%)
Fort Howard Corp.
Sub. Notes
10.00%, 3/15/03 B2 500 520,625
Mail-Well Corp.
Sr. Sub. Notes
10.50%, 2/15/04 B2 500 495,000
Malette, Inc.
Yankee Sr. Secured
Debentures
12.25%, 7/15/04 Ba3 250 268,750
(6) Repap Wisconsin, Inc.
Sr. Secured Debentures
9.875%, 5/1/06 Caa 250 254,375
Stone-Consolidated Corp.
Yankee Sr. Secured
Debentures
10.25%, 12/15/00 Ba1 250 266,250
-----------
GROUP TOTAL 1,805,000
-----------
- ----------------------------------------------------------------------------------
- -----------------
PUBLISHING & INFORMATION SERVICES (0.3%)
(3)(8) InterAct Systems Inc.
Units
0.00%, 8/1/03 N/R 400 272,000
-----------
- ----------------------------------------------------------------------------------
- -----------------
RESTAURANTS, HOTELS & GAMING (4.9%)
Argosy Gaming Co.
Gtd. First Mortgage Notes
13.25%, 6/1/04 B2 225 212,063
Boomtown, Inc.
First Mortgage Notes
11.50%, 11/1/03 B1 500 527,500
Casino America, Inc.
Gtd. Sr. Notes
12.50%, 8/1/03 B1 250 237,500
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
<TABLE>
<CAPTION>
Moody's Face
Ratings Amount Value
(Unaudited) (000) (Note A-1)
<C> <S> <C> <C> <C>
- ----------------------------------------------------------------------------------
- -----------------
(3) Casino Magic of
Louisiana, Corp.
First Mortgage Notes
13.00%, 8/15/03 B3 $ 250 $ 243,750
(4) Colorado Gaming &
Entertainment, Co.
Gtd. Sr. Notes
12.00%, 6/1/03 N/R 88 82,060
(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 450 378,000
HMC Acquisition Properties
Series B, Gtd. Sr. Notes
9.00%, 12/15/07 Ba3 450 455,625
Horseshoe Gaming L.L.C.
Series B, Sr. Notes
12.75%, 9/30/00 B1 375 402,656
Mohegan Tribal Gaming
Authority
Series B, Sr. Secured Notes
13.50%, 11/15/02 N/R 200 260,000
Resorts International Hotel
Casino, Inc.
Mortgage Notes
11.00%, 9/15/03 N/R 500 537,500
Trump Atlantic City
Secured First Mortgage Notes
11.25%, 5/1/06 B1 250 247,500
Trump's Castle Funding, Inc.
Mortgage Bonds
11.75%, 11/15/03 Caa 500 440,000
(3) Waterford Gaming L.L.C./
Waterford Gaming Finance
Corp.
Sr. Notes
12.75%, 11/15/03 N/R 200 209,000
-----------
GROUP TOTAL 4,285,154
-----------
- ----------------------------------------------------------------------------------
- -----------------
RETAIL (5.4%)
Big V Supermarkets, Inc.
Sr. Sub. Notes
11.00%, 2/15/04 B3 500 462,500
Brylane L.P.
Gtd. Sr. Sub. Notes
10.00%, 9/1/03 B2 500 515,000
(2) County Seat Stores, Inc.
Sr. Sub. Notes
12.00%, 10/1/02 Ca 500 150,000
Dairy Mart Convenience
Stores, Inc.
Sr. Sub. Notes
10.25%, 3/15/04 B3 626 607,220
Duane Reade Corp.
Sr. Notes
12.00%, 9/15/02 B3 250 253,750
Farm Fresh, Inc.:
Series A, Sr. Notes
12.25%, 10/1/00 B3 150 114,000
<CAPTION>
Moody's Face
Ratings Amount Value
(Unaudited) (000) (Note A-1)
<C> <S> <C> <C> <C>
- ----------------------------------------------------------------------------------
- -----------------
Sr. Notes
12.25%, 10/1/00 B3 $ 500 $ 405,000
Great American Cookie Co.
Series B, Sr. Secured
Debentures
10.875%, 1/15/01 B3 500 440,000
Hills Stores Co.
Gtd. Sr. Notes
12.50%, 7/1/03 B1 200 177,500
Pathmark Stores, Inc.:
(8) Jr. Sub. Notes
0.00%, 11/1/03 Caa 850 546,125
Sr. Sub. Notes
9.625%, 5/1/03 B3 500 478,750
Waban, Inc.
Sr. Sub. Notes
11.00%, 5/15/04 Ba3 550 610,500
-----------
GROUP TOTAL 4,760,345
-----------
- ----------------------------------------------------------------------------------
- -----------------
TELECOMMUNICATIONS (11.7%)
(8) American Communications
Services, Inc.
Sr. Discount Notes
0.00%, 11/1/05 N/R 1,000 600,000
(8) Arch Communications Group,
Inc.
Sr. Discount Notes
0.00%, 3/15/08 B3 400 228,000
Brooks Fiber Properties, Inc.
Sr. Discount Notes:
(3)(8) 0.00%, 11/1/06 N/R 300 201,000
(8) 0.00%, 3/1/06 N/R 450 288,000
Cellular Communications
International, Inc.
Units
0.00%, 8/15/00 B3 1,000 710,000
(8) Dial Call Communications
Sr. Discount Notes
0.00%, 4/15/04 B3 500 360,000
(8) Diamond Cable Communications
plc
Yankee Discount Notes
0.00%, 12/15/05 B3 1,000 720,000
(3)(8) GST Telecommunications, Inc.
Conv. Sr. Sub. Discount
Notes
0.00%, 12/15/05 N/R 100 78,000
(8) GST USA, Inc.
Gtd. Sr. Discount Notes
0.00%, 12/15/05 N/R 800 480,000
Geotek Communications, Inc.
Conv Sr. Sub. Notes
12.00%, 12/15/01 Caa 350 350,000
(8) Hyperion Telecommunications,
Inc.
Series B, Sr. Discount Notes
0.00%, 4/15/03 N/R 750 421,875
(8) ICG Holdings, Inc.
Sr. Discount Notes
0.00%, 9/15/05 N/R 350 246,750
</TABLE>
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
<TABLE>
<CAPTION>
Moody's Face
Ratings Amount Value
(Unaudited) (000) (Note A-1)
<C> <S> <C> <C> <C>
- ----------------------------------------------------------------------------------
- -----------------
(8) In-Flight Phone Corp.
Series B, Sr. Discount Notes
0.00%, 5/15/02 Caa $ 250 $ 41,250
(3) InterMedia Capital Partners
IV, L.P./InterMedia Partners
IV Capital Corp.
Sr. Notes
11.25%, 8/1/06 B2 250 257,187
Intermedia
Communications, Inc.
Series B, Sr. Notes
13.50%, 6/1/05 B3 300 343,500
(8) MFS Communications Co., Inc.
Discount Notes
0.00%, 1/15/04 B1 350 303,625
Mobile Telecommunications
Technologies Corp.
Sr. Sub. Notes
13.50%, 12/15/02 B3 200 200,000
(8) Nextel Communications, Inc.
Sr. Notes
0.00%, 8/15/04 B3 500 341,250
(3) Orbcomm Global L.P./ Orbcomm
Global
Capital Corp.
Gtd. Sr. Notes
14.00%, 8/15/04 B3 250 254,375
(8) Pagemart Nationwide, Inc.
Sr. Discount Notes
0.00%, 2/1/05 N/R 750 521,250
Paging Network, Inc.
Sr. Sub. Notes
10.125%, 8/1/07 B2 100 102,000
Petersburg Long Distance,
Inc.:
(3) Conv. Sub. Notes
9.00%, 6/1/06 N/R 80 84,300
(3)(8) Units
0.00%, 6/1/04 N/R 560 459,200
(8) PriCellular Wireless Corp.
Discount Notes
0.00%, 10/1/03 B3 450 384,750
Sprint Spectrum L.P./Sprint
Spectrum Finance Corp.
Sr. Notes
11.00%, 8/15/06 B2 450 488,250
Teleport Communications
Group, Inc.:
Sr. Notes
9.875%, 7/1/06 B1 250 266,875
(8) Sr. Discount Notes
0.00%, 7/1/07 B1 550 376,750
(8) Videotron Holdings plc
Yankee Discount Notes
0.00%, 8/15/05 B3 1,000 805,000
Western Wireless Corp.
Sr. Sub. Notes
10.50%, 2/1/07 B3 250 259,375
<CAPTION>
Moody's Face
Ratings Amount Value
(Unaudited) (000) (Note A-1)
<C> <S> <C> <C> <C>
- ----------------------------------------------------------------------------------
- -----------------
(8) Wireless One, Inc.
Units
0.00%, 8/1/06 B3 $ 250 $ 113,750
-----------
GROUP TOTAL 10,286,312
-----------
- ----------------------------------------------------------------------------------
- -----------------
TEXTILES/APPAREL (1.2%)
Collins & Aikman Products
Sr. Sub. Notes
11.50%, 4/15/06 B3 250 272,500
Parisian, Inc.,
Sr. Sub Notes
9.875%, 7/15/03 B1 250 252,500
Synthetic Industries, Inc.
Sr. Sub. Notes
12.75%, 12/1/02 B3 500 551,250
-----------
GROUP TOTAL 1,076,250
-----------
- ----------------------------------------------------------------------------------
- -----------------
TRANSPORTATION (0.9%)
CHC Helicopter Corp.
Yankee Sr. Sub. Notes
11.50%, 7/15/02 B3 250 256,562
USAir, Inc.
Gtd. Sr. Notes
10.00%, 7/1/03 B3 500 506,250
-----------
GROUP TOTAL 762,812
-----------
- --------------------------------------------------------------------------------
- -----------------
TOTAL CORPORATE OBLIGATIONS
(Cost $53,905,090) 53,630,461
-----------
- --------------------------------------------------------------------------------
- -----------------
GOVERNMENT & AGENCY SECURITIES (11.0%)
- ---------------------------------------------------------------------------------
- -----------------
FEDERAL HOME LOAN MORTGAGE CORPORATION (5.5%)
Pool# G10614
6.50%, 12/1/11 Aaa 2,828 2,776,728
30-Year TBA
8.00%, 12/31/26 Aaa 2,000 2,038,740
-----------
GROUP TOTAL 4,815,468
-----------
- ----------------------------------------------------------------------------------
- -----------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION (1.2%)
30-Year TBA
7.50%, 12/31/27 Aaa 510 509,679
Various Pools:
7.00%, 11/1/25-12/1/25 Aaa 539 526,735
-----------
GROUP TOTAL 1,036,414
-----------
- ----------------------------------------------------------------------------------
- -----------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (0.0%)
Graduated Payment
12.75%, 11/15/13 Aaa 28 33,067
-----------
- ----------------------------------------------------------------------------------
- -----------------
UNITED STATES DEPARTMENT OF VETERANS AFFAIRS (0.4%)
Vendee Mortgage Trust
REMIC, Series 1995-2B, Class
D
7.50%, 10/15/17 N/R 350 354,483
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
<TABLE>
<CAPTION>
Moody's Face
Ratings Amount Value
(Unaudited) (000) (Note A-1)
<C> <S> <C> <C> <C>
- ----------------------------------------------------------------------------------
- -----------------
- ----------------------------------------------------------------------------------
- -----------------
UNITED STATES TREASURY NOTES (3.9%)
(6) 7.50%, 2/15/05 Aaa $ 200 $ 213,906
(6) 7.75%, 11/30/99 Aaa 2,035 2,126,249
(6) 6.625%, 6/30/01 Aaa 1,000 1,016,090
-----------
GROUP TOTAL 3,356,245
-----------
- --------------------------------------------------------------------------------
- -----------------
TOTAL GOVERNMENT & AGENCY SECURITIES
(Cost $9,645,639) 9,595,677
-----------
- --------------------------------------------------------------------------------
- -----------------
COLLATERALIZED MORTGAGE OBLIGATIONS (1.4%)
- ----------------------------------------------------------------------------------
- -----------------
Asset Securitization Corp.:
Series 1995-MD4 Class A1
7.10%, 8/13/29 N/R 192 191,790
Series 1996-MD6 Class A6
7.11%, 11/13/26 Baa2 230 232,659
Drexel, Burnham & Lambert
Trust REMIC-PAC,
Series S, Class 2
9.00%, 8/1/18 Aaa 723 729,128
Kidder Peabody
Acceptance Corp.
Series 1993-M3, Class A
6.50%, 11/25/25 Aaa 101 101,112
-----------
- --------------------------------------------------------------------------------
- -----------------
TOTAL COLLATERALIZED MORTGAGE SECURITIES
(Cost $1,275,738) 1,254,689
-----------
- --------------------------------------------------------------------------------
- -----------------
ASSET BACKED OBLIGATIONS (5.0%)
- ----------------------------------------------------------------------------------
- -----------------
Green Tree Financial Corp.
Manufactured Housing
Installment Sale Contracts:
Series 1995-6, Class A3
6.65%, 9/15/26 Aaa 410 412,563
Series 1995-4, Class A3
6.30%, 7/15/25 Aaa 1,650 1,648,961
Series 1993-4, Class B1
7.20%, 1/15/19 Baa3 1,043 1,027,021
(9) Merrill Lynch Home Equity
Acceptance Trust
Series 1994-A, Class A-2
6.125%, 7/17/22 A3 1,049 1,049,384
Nationscredit Grantor Trust,
Retail Installment Sales
Contracts
Series 1996-1, Class A
5.85%, 9/15/11 Aaa 216 212,631
-----------
- --------------------------------------------------------------------------------
- -----------------
TOTAL ASSET BACKED OBLIGATIONS
(Cost $4,353,915) 4,350,560
-----------
- ----------------------------------------------------------------------------------
- -----------------
<CAPTION>
Shares
<C> <S> <C> <C> <C>
- --------------------------------------------------------------------------------
- -----------------
COMMON STOCKS (2.1%)
- ---------------------------------------------------------------------------------
- -----------------
BROADCASTING (0.0%)
(1)(3) Pegasus Media &
Communications, Inc.
Class B 1,128 16,250
-----------
- ----------------------------------------------------------------------------------
- -----------------
<CAPTION>
Value
Shares (Note A-1)
<C> <S> <C> <C> <C>
- ----------------------------------------------------------------------------------
- -----------------
CONSUMER PRODUCTS & SERVICES (0.0%)
(1)(5) Applause Enterprises, Inc.
(acquired 11/8/91, cost
$72,200) 1,900 $ 5,700
- ----------------------------------------------------------------------------------
- -----------------
ENTERTAINMENT (1.0%)
(1) Gillett Holdings, Inc. 22,500 855,000
-----------
- ----------------------------------------------------------------------------------
- -----------------
FINANCIAL SERVICES (00.0%)
(1)(5)(7) WestFed Holdings Inc.
Class B (acquired 9/20/88,
cost $127) 4,223 0
-----------
- ----------------------------------------------------------------------------------
- -----------------
FOOD & BEVERAGES (0.7%)
(1)(5) Dr. Pepper Bottling Holdings,
Inc. Class A
(acquired 10/21/88, cost
$54,000) 60,000 600,000
(1) Specialty Foods
Acquisition Corp. 22,500 450
-----------
GROUP TOTAL 600,450
-----------
- ----------------------------------------------------------------------------------
- -----------------
INDUSTRIAL GOODS & MATERIALS (0.2%)
(1)(5)(7) CIC I Acquisition Corp.
(acquired 10/18/89, cost
$1,076,725) 2,944 200,192
-----------
- ----------------------------------------------------------------------------------
- -----------------
PAPER & FOREST PRODUCTS (0.1%)
(1)(3) Mail-Well, Inc. 3,551 56,816
-----------
- ----------------------------------------------------------------------------------
- -----------------
RESTAURANTS, HOTELS & GAMING (0.1%)
(1) Casino America Inc. 4,982 14,946
(1) Colorado Gaming &
Entertainment, Co. 8,822 26,466
(1)(3) Motels of America, Inc. 250 17,500
-----------
GROUP TOTAL 58,912
-----------
- ----------------------------------------------------------------------------------
- -----------------
RETAIL (0.0%)
(1)(5) Jewel Recovery L.P.
(acquired 7/30/93, cost $0) 33,040 0
-----------
- ----------------------------------------------------------------------------------
- -----------------
TELECOMMUNICATIONS (0.0%)
(1)(3) Pagemart Nationwide, Inc. 3,500 25,375
-----------
- --------------------------------------------------------------------------------
- -----------------
TOTAL COMMON STOCKS
(Cost $1,903,947) 1,818,695
-----------
- --------------------------------------------------------------------------------
- -----------------
PREFERRED STOCKS (2.0%)
- ---------------------------------------------------------------------------------
- -----------------
AEROSPACE/DEFENSE (0.3%)
(1) GPA Group plc
7% Second Preference Cum.
Conv. 650,000 284,700
-----------
- ----------------------------------------------------------------------------------
- -----------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
<TABLE>
<CAPTION>
Value
Shares (Note A-1)
<C> <S> <C> <C> <C>
- ----------------------------------------------------------------------------------
- -----------------
CONSUMER PRODUCTS & SERVICES (0.2%)
Renaissance Cosmetics, Inc.:
(3) 14% Sr. Redeemable,
Series B 7 $ 7,280
(3) Units 200 208,000
-----------
GROUP TOTAL 215,280
-----------
- ----------------------------------------------------------------------------------
- -----------------
ENERGY (0.2%)
(1)(7) Consolidated Hydro, Inc.
13.50% Series H, Conv. 1,500 150,000
-----------
- ----------------------------------------------------------------------------------
- -----------------
FINANCIAL SERVICES (0.0%)
(1)(5)(7) WestFed Holdings,
Class A (acquired
9/20/88-6/18/93, cost
$1,203,500) 14,246 14,246
-----------
- ----------------------------------------------------------------------------------
- -----------------
PAPER & FOREST PRODUCTS (0.5%)
(1) SD Warren Co.
14% Exchangeable 13,000 474,500
-----------
- ----------------------------------------------------------------------------------
- -----------------
PUBLISHING & INFORMATION SERVICES (0.4%)
K-III Communications Corp.
10% Exchangeable Series D 3,500 315,000
-----------
- ----------------------------------------------------------------------------------
- -----------------
RESTAURANTS, HOTELS & GAMING (0.4%)
(1) Lady Luck Gaming Corp.
Series A 10,000 320,000
-----------
- --------------------------------------------------------------------------------
- -----------------
TOTAL PREFERRED STOCKS
(Cost $3,332,845) 1,773,726
-----------
- --------------------------------------------------------------------------------
- -----------------
RIGHTS (0.0%)
- ----------------------------------------------------------------------------------
- -----------------
(1)(3) Terex Corp., expiring 5/15/02
(cost $0) 2,000 4,000
-----------
- --------------------------------------------------------------------------------
- -----------------
WARRANTS (0.4%)
- ----------------------------------------------------------------------------------
- -----------------
(1)(3) American Communications
Services, Inc.
expiring 11/1/05 1,000 90,000
(1) American Telecasting, Inc.
expiring 6/23/99 350 175
(1) Australis Media Ltd.
expiring 5/15/00 225 0
(1)(3) Boomtown, Inc.
expiring 11/1/98 500 30
(1) CHC Helicopter Corp.
expiring 12/15/00 2,000 1,000
(1) Casino America, Inc.
expiring 5/3/01 882 882
(1)(3)(7) Consolidated Hydro, Inc.
expiring 12/31/03 2,700 0
<CAPTION>
Value
Shares (Note A-1)
<C> <S> <C> <C> <C>
- ----------------------------------------------------------------------------------
- -----------------
(1) County Seat Stores, Inc.
expiring 10/15/98 500 5
(1)(3)(6) Crown Packaging
Holdings, Ltd.
expiring 11/1/03 1,000 $ 125
(1) Dairy Mart Conveniences
Stores, Inc.
expiring 5/13/98 4,172 10,430
(1)(3) Elsinore Corp.
expiring 10/8/98 5,329 0
(1)(3) Great American Cookie Co.
expiring 1/30/00 90 900
(1)(3) Hemmeter Enterprises, Inc.
expiring 12/15/99 3,000 0
(1)(3) Hyperion Telecommunications.
Inc.
expiring 4/15/01 750 15,000
(1)(3) In-Flight Phone Corp.
expiring 8/31/02 500 0
(1)(3) IntelCom Group, Inc.
expiring 9/01/05 1,155 16,170
(1)(3) Intermedia Communications,
Inc.
expiring 6/1/00 300 10,500
(1) Nextel Communications, Inc.
expiring 4/25/99 500 5
(1)(3) Purity Supreme
expiring 8/1/97 1,733 0
(1)(3) Renaissance Cosmetics Inc.
expiring 8/31/06 1,000 50,000
(1)(3) SD Warren Co.
expiring 12/15/06 8,000 41,200
(1) Sheffield Steel Corp.
expiring 11/1/01 2,500 7,500
(1) Spanish Broadcasting Systems
expiring 6/29/99 500 100,000
(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 $166,819) 382,687
-----------
- ----------------------------------------------------------------------------------
- -----------------
</TABLE>
<TABLE>
<CAPTION>
Moody's Face
Ratings Amount
(Unaudited) (000)
<C> <S> <C> <C> <C>
- --------------------------------------------------------------------------------
- -----------------
SHORT-TERM INVESTMENTS (4.5%)
- ---------------------------------------------------------------------------------
- -----------------
FEDERAL HOME LOAN BANK DISCOUNT NOTE (4.5%)
0.00%, 1/2/97 (Cost
$3,934,344) N/R $3,935 3,934,344
-----------
- --------------------------------------------------------------------------------
- -----------------
TOTAL DOMESTIC INCOME SECURITIES
(Cost $78,518,337) 76,744,839
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
10
<PAGE>
<TABLE>
<CAPTION>
Moody's Face
Ratings Amount Value
(Unaudited) (000) (Note A-1)
<C> <S> <C> <C> <C>
- ----------------------------------------------------------------------------------
- -----------------
- --------------------------------------------------------------------------------
- -----------------
FOREIGN INCOME SECURITIES (14.2%)
- --------------------------------------------------------------------------------
- -----------------
GOVERNMENT OBLIGATIONS (14.2%)
- ---------------------------------------------------------------------------------
- -
- -----------------
CANADA
Government of Canada
Debentures
8.75%, 12/1/05 Aa1 CAD 825 $ 700,822
DENMARK
Kingdom of Denmark
Bonds
8.00%, 3/15/06 N/R DEK 5,200 971,220
FRANCE
Government of France
Debentures
7.50%, 4/25/05 Aaa FRF 7,000 1,517,454
GERMANY
Deutscheland Bundesbank
Debentures
6.75%, 7/15/04 Aaa DEM 6,000 4,185,257
SPAIN
Kingdom of Spain
Debentures
10.10%, 2/28/01 N/R ESP 47,000 417,082
SUPRANATIONAL
International Bank for
Reconstruction &
Development
Japanese Yen Global Bonds
5.25%, 3/20/02 Aaa JPY 90,000 909,155
SWEDEN
Kingdom of Sweden
Debentures
11.00%, 1/21/99 Aa1 SEK 2,500 412,486
UNITED KINGDOM
United Kingdom Treasury
Bonds
6.00%, 8/10/99 Aaa GBP 2,000 3,354,541
-----------
- --------------------------------------------------------------------------------
- -----------------
TOTAL FOREIGN INCOME SECURITIES
(Cost $11,279,748) 12,468,017
-----------
- --------------------------------------------------------------------------------
- -----------------
TOTAL INVESTMENTS (101.8%)
(Cost $89,798,085) 89,212,856
-----------
- --------------------------------------------------------------------------------
- -----------------
LIABILITIES IN EXCESS OF OTHER
ASSETS (-1.8%)
(1,556,588)
-----------
- --------------------------------------------------------------------------------
- -----------------
NET ASSETS (100%)
Applicable to 8,454,140 issued and outstanding $.001
par value shares (authorized 100,000,000 shares) $87,656,268
-----------
-----------
- --------------------------------------------------------------------
- -------------
- ----------------------------------------------------------------------------------
- -----------------
GBP--British Pound.
CAD--Canadian Dollar.
DEK--Danish Krone.
FRF--French Franc.
DEM--Deutsche Mark.
ESP--Spanish Peseta.
JPY--Japanese Yen.
SEK--Swedish Krona.
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 December 31, 1996 aggregated $2,406,552. Total market value
of restricted securities owned at December 31, 1996 was $820,138 or 0.9%
of net assets.
(6) All or a portion of this security was pledged as collateral for delayed
delivery securities.
(7) Securities for which market quotations are not readily available are
valued at fair value as determined in good faith by the Board of
Directors.
(8) Step Bond -- Coupon rate is low or zero for an initial period and then
increases to a higher coupon rate thereafter. Maturity date disclosed is
the ultimate maturity.
(9) Floating Rate -- The interest rate changes on these instruments based upon
a designated base rate. The rates shown are those in effect at December
31, 1996.
</TABLE>
The accompanying notes are an integral part of the financial statements.
11
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES December 31,
1996
<S> <C>
- ----------------------------------------------------------------------------------------------
ASSETS:
Investments at Value
(Cost $89,798,085) (Note A-1)............................................. $89,212,856
Cash........................................................................ 980,023
Receivables:
Interest (Note A-6)....................................................... 1,640,793
Investments Sold.......................................................... 698,074
Other Assets................................................................ 5,789
- ----------------------------------------------------------------------------------------------
Total Assets............................................................ 92,537,535
- ----------------------------------------------------------------------------------------------
LIABILITIES:
Payables:
Investments Purchased..................................................... 4,554,304
Investment Advisory Fees (Note B)......................................... 109,710
Unrealized Loss on Forward Foreign Currency Exchange Contracts (Note A and
E)....................................................................... 86,269
Professional Fees......................................................... 49,077
Shareholders' Reports..................................................... 44,856
Shareholder Servicing Fees................................................ 16,996
Administrative Fees (Note C).............................................. 11,565
Custodian Fees............................................................ 8,053
Directors' Fees........................................................... 200
Other Liabilities........................................................... 237
- ----------------------------------------------------------------------------------------------
Total Liabilities....................................................... 4,881,267
- ----------------------------------------------------------------------------------------------
NET ASSETS...................................................................... $87,656,268
------------
------------
NET ASSETS CONSIST OF:
Capital Shares at $.001 Par Value........................................... $ 8,454
Capital Paid in Excess of Par Value......................................... 89,457,023
Undistributed Net Investment Income......................................... 242,020
Accumulated Net Realized Loss............................................... (1,382,093)
(669,136)
Unrealized Depreciation on Investments and Foreign Currency Translations....
------------
NET ASSETS APPLICABLE TO 8,454,140 ISSUED AND OUTSTANDING SHARES (AUTHORIZED
100,000,000 SHARES)........................................................... $87,656,268
------------
------------
NET ASSET VALUE PER SHARE....................................................... $ 10.37
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS Year Ended
December 31,
1996
<S> <C>
- --------------------------------------------------------------------------
INVESTMENT INCOME:
Interest (Note A-6) (Net of foreign taxes withheld of
$14,016)............................................... $8,592,437
Dividends (Note A-6).................................... 74,985
- --------------------------------------------------------------------------
Total Income.......................................... 8,667,422
- --------------------------------------------------------------------------
EXPENSES:
Investment Advisory Fees (Note B)....................... 429,140
Administrative Fees (Note C)............................ 134,333
Shareholders' Reports................................... 103,927
Shareholder Servicing Fees.............................. 73,551
Professional Fees....................................... 70,591
Directors' Fees and Expenses............................ 39,497
Custodian Fees.......................................... 30,342
Other................................................... 75,477
- --------------------------------------------------------------------------
Total Expenses........................................ 956,858
- --------------------------------------------------------------------------
Expense offset (Note A-6)............................... (3,298)
- --------------------------------------------------------------------------
Net Expenses........................................ 953,560
- --------------------------------------------------------------------------
Net Investment Income............................... 7,713,862
- --------------------------------------------------------------------------
NET REALIZED GAIN:
Investments............................................. 708,075
Foreign Currency........................................ 474,621
- --------------------------------------------------------------------------
Total Net Realized Gain............................. 1,182,696
- --------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION:
Investments............................................. 1,138,576
Foreign Currency Translations........................... (149,269)
- --------------------------------------------------------------------------
Total Change in Unrealized
Appreciation/Depreciation.......................... 989,307
- --------------------------------------------------------------------------
Net Realized Gain and Change in Unrealized
Appreciation/Depreciation................................. 2,172,003
- --------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations........ $9,885,865
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
12
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
<S> <C> <C>
Year Ended
Year Ended December 31,
December 31, 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net Investment Income....................................................... $ 7,713,862 $ 8,032,455
Net Realized Gain (Loss) on Investments and Foreign Currency................ 1,182,696 (2,727,386)
Change in Unrealized Appreciation/Depreciation on Investments and Foreign
Currency................................................................... 989,307 7,908,855
- -----------------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS............................ 9,885,865 13,213,924
- -----------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
Net Investment Income....................................................... (6,847,859) (6,422,578)
Return of Capital........................................................... -- (425,283)
- -----------------------------------------------------------------------------------------------------------------------
Total Distributions....................................................... (6,847,859) (6,847,861)
- -----------------------------------------------------------------------------------------------------------------------
Total Increase in Net Assets............................................ 3,038,006 6,366,063
- -----------------------------------------------------------------------------------------------------------------------
NET ASSETS:
Beginning of Year........................................................... 84,618,262 78,252,199
- -----------------------------------------------------------------------------------------------------------------------
End of Year (Including undistributed net investment income and distributions
in excess of net investment income of $242,020 and $(1,469,664),
respectively).............................................................. $87,656,268 $84,618,262
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
FINANCIAL HIGHLIGHTS ----------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE: 1996 1995Section 1994 1993 1992
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
YEAR.............................. $ 10.01 $ 9.26 $ 10.45 $ 9.80 $ 9.62
- -----------------------------------------------------------------------------------------------------------------------
Investment Activities:
Net Investment Income.......... 0.91 0.95 0.95 1.04 1.22
Net Realized and Unrealized
Gain (Loss) on Investments.... 0.26 0.61 (1.33) 0.66 0.01
- -----------------------------------------------------------------------------------------------------------------------
Total from Investment
Activities.................. 1.17 1.56 (0.38) 1.70 1.23
- -----------------------------------------------------------------------------------------------------------------------
Distributions:
Net Investment Income.......... (0.81) (0.76) (0.62) (1.04) (1.05)
In Excess of Net Investment
Income........................ -- -- -- (0.01) --
Return of Capital.............. -- (0.05) (0.19) -- --
- -----------------------------------------------------------------------------------------------------------------------
Total Distributions.......... (0.81) (0.81) (0.81) (1.05) (1.05)
- -----------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR....... $ 10.37 $ 10.01 $ 9.26 $ 10.45 $ 9.80
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
PER SHARE MARKET VALUE, END OF
YEAR.............................. $ 9.00 $ 8.88 $ 8.25 $ 9.50 $ 9.50
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:
Net Asset Value (1)............ 13.27% 17.57% (3.80)% 18.29% 13.28%
Market Value................... 11.03% 18.16% (4.72)% 10.94% 3.50%
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA:
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year
(Thousands)....................... $87,656 $84,618 $78,252 $88,319 $82,450
- -----------------------------------------------------------------------------------------------------------------------
Ratio of Expenses to Average Net
Assets Including Expense
Offsets........................... 1.11% 1.12% 0.99% 1.06% 1.01%
Ratio of Expenses to Average Net
Assets............................ 1.11% -- -- -- --
Ratio of Net Investment Income to
Average Net Assets................ 8.99% 9.80% 9.66% 10.28% 12.34%
Portfolio Turnover Rate............ 65.1% 54.5% 83.1% 128.5% 107.7%
- -----------------------------------------------------------------------------------------------------------------------
Section BEA Associates replaced CS First Boston Investment Management as the Fund's investment adviser effective June
13, 1995.
(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.
13
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- ------------
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
$364,438 (or 0.42% of net assets) at December 31, 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.
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, investment income and expenses 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 gains/losses on foreign currency transactions represent net
foreign exchange gains/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.
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
14
<PAGE>
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.
Custodian fees for the Fund have been increased to include expense offsets
for custodian balance credits.
7. DELAYED DELIVERY COMMITMENTS: The Fund may purchase or sell securities on a
when-issued or forward commitment basis. Payment and delivery may take place
a month or more after the date of the transaction. The price of the
underlying securities and the date when the securities will be delivered and
paid for are fixed at the time the transaction is negotiated.
8. DIVIDENDS AND DISTRIBUTIONS: The Fund pays dividends of net investment income
monthly and makes distributions at least annually of any net capital gains in
excess of applicable capital losses, including capital loss carryforward.
Dividends and distributions are recorded on the ex-dividend date.
Income distributions and capital gain distributions are determined in
accordance with U.S. Federal Income Tax regulations which may differ from
generally accepted accounting principles. These differences are principally
due to the timing of the recognition of defaulted bond interest and to
differing book and tax treatment for foreign currency transactions.
Permanent book and tax differences relating to shareholder distributions may
result in reclassifications to undistributed net investment income (loss),
undistributed realized gain (loss) and paid in capital.
B. BEA Associates (the "Adviser") provides investment advisory services to the
Fund under the terms of an Advisory Agreement. Under the Advisory Agreement, the
Adviser is paid a fee, computed weekly and payable quarterly at an annual rate
of .50% of average weekly net assets.
C. The Chase Manhattan Bank ("Chase"), through its affiliate Chase Global Funds
Services Company ("CGFSC" or the "Administrator"), provides administrative
services to the Fund under the terms of an Administration Agreement. Under the
Agreement, the Administrator is paid a fee, computed weekly and payable monthly,
at an annual rate of .15% of the Fund's first $100 million of average weekly net
assets, .10% of the Fund's next $300 million of average weekly net assets and
.05% of the Fund's average weekly net assets in excess of $400 million.
Chase provides custodial services to the Fund. Under the Custody Agreement,
Chase is paid a fee, computed weekly and payable monthly, at an annual rate of
.03% of the Fund's first $50 million of average weekly net assets, .02% of the
Fund's next $50 million of average weekly net assets and .01% of the Fund's
average weekly net assets in excess of $100 million.
CGFSC provides transfer agent services to the Fund. Under the Transfer Agent
Agreement, CGFSC is paid a fee based on the number of accounts in the Fund per
year. In addition, the Fund is charged certain out-of-pocket expenses by CGFSC.
D. During the year ended December 31, 1996, the Fund made purchases of
$26,018,236 and sales of $35,175,897 of investment securities other than U.S.
Government securities and short term investments. During the year ended December
31, 1996, purchases and sales of U.S. Government securities were $28,938,432 and
$22,231,025, respectively. At December 31, 1996, the cost of investments for
Federal income tax purposes was $89,798,085. Accordingly, net unrealized
depreciation for Federal income tax purposes aggregated $585,229, of which
$6,098,511 related to depreciated securities and $5,513,282 related to
appreciated securities.
At December 31, 1996, the Fund had a capital loss carryforward of $1,046,571
available to offset future capital gains of which $90,877, $743,988 and $211,706
will expire on December 31, 2000, 2002 and 2003, respectively. Net capital
losses incurred after October 31 and within the taxable year are deemed to arise
on the first business day of the Fund's net taxable year. For the period from
November 1, 1996 to December 31, 1996 the Fund incurred and elected to defer
until January 1, 1997 for U.S. Federal income tax purposes net losses of
approximately $335,522.
15
<PAGE>
E. At December 31, 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 $ 677,014 03/17/97 $ 672,180 $ 4,834
DEK 5,200,000 884,956 03/17/97 886,551 (1,595)
DEM 6,200,000 4,044,357 03/17/97 4,050,381 (6,024)
FRF 6,780,000 1,303,846 03/17/97 1,313,523 (9,677)
GBP 1,850,000 3,061,750 03/17/97 3,162,339 (100,589)
ESP 52,500,000 403,846 03/17/97 403,936 (90)
JPY 105,200,000 944,345 03/17/97 918,628 25,717
SEK 2,800,000 413,589 03/17/97 412,434 1,155
------------- ----------- --------------
$ 11,733,703 $11,819,972 $ (86,269)
------------- ----------- --------------
------------- ----------- --------------
</TABLE>
F. At December 31, 1996, 61.18% of the Fund's net assets comprised high-yield
fixed income securities. The financial condition of the issuers of the
securities and general economic conditions may affect the issuers' ability to
make payments of income and principal, as well as the market value of the
securities. Such investments may also be less liquid and more volatile than
investments in higher rated fixed income securities.
At December 31, 1996, 14.22% of the Fund's net assets comprised foreign currency
denominated fixed income securities. Changes in currency exchange rates will
affect the value and net investment income from such securities.
G. The Fund's Board of Directors has approved a share repurchase program
authorizing the Fund from time to time to make open-market purchases on the New
York Stock Exchange of up to 10 percent of the Fund's shares outstanding as of
December 11, 1990. There were no repurchases of shares during the year ended
December 31, 1996.
16
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
- ------
To the Shareholders and Board of Directors of
BEA Strategic Income Fund, Inc.
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of BEA Strategic Income Fund, Inc.
("The Fund") at December 31, 1996, the results of its operations for the year
then ended, the changes in its net assets for each of the two years in the
period then ended and the financial highlights for each of the five years in the
period then ended, in conformity with generally accepted accounting principles.
These financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of the securities at
December 31, 1996 by correspondence with the custodian and brokers and the
application of alternative auditing procedures where confirmations from brokers
were not received, provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York
February 3, 1997
17
<PAGE>
SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):
<TABLE>
<CAPTION>
AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS
THREE MONTHS ENDED
----------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31,
MARCH 31, 1996 JUNE 30, 1996 1996 1996
--------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment Income............. $2,085 $ 0.24 $2,212 $ 0.26 $2,370 $ 0.28 $2,000 $ 0.24
Net Investment Income......... 1,872 0.22 1,966 0.23 2,134 0.25 1,742 0.21
Net Realized Gain (Loss) and
Change in Unrealized
Appreciation/Depreciation on
Investments and Foreign
Currency..................... 774 0.09 (363) (0.04) 1,161 0.14 600 0.07
Net Increase in Net Assets
Resulting from Operations.... 2,646 0.31 1,603 0.19 3,295 0.39 2,342 0.28
</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>
SUPPLEMENTAL PROXY INFORMATION (UNAUDITED)
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>
FEDERAL INCOME TAX INFORMATION (UNAUDITED)
For the year ended December 31, 1996, the percentage of dividends paid that
qualify for the 70% dividend received reduction for corporate shareholders is
0.92%.
18
<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"), shareholders may elect to have
all dividends and distributions, net of any applicable U.S. withholding tax,
automatically reinvested in additional shares of the Fund by The Chase Manhattan
Bank, as the plan agent (the "Plan Agent"). Shareholders who do not make this
election will receive all dividends and distributions in cash, net of any
applicable U.S. withholding tax, paid in dollars by check mailed directly to the
shareholder by the Plan Agent, as dividend-paying agent. Shareholders who wish
to have dividends and distributions automatically reinvested should notify the
Plan Agent for the Fund, at Dividend Reinvestment Department -- Retail, 4 New
York Plaza, New York, NY 10004. A shareholder whose shares are held by a broker
or nominee that does not provide a dividend reinvestment program may be required
to have his shares registered in his own name to participate in the Plan.
Investors who own shares of the Fund's common stock registered in street name
should contact the broker or nominee for details concerning participation in the
Plan.
Certain distributions of cash attributable to (a) some of the dividends and
interest amounts paid to the Fund and (b) certain capital gains earned by the
Fund that are derived from securities of certain foreign issuers are subject to
taxes payable by the Fund at the time amounts are remitted. Such taxes, if any,
will be borne by the Fund and allocated to all shareholders in proportion to
their interests in the Fund.
The Plan Agent serves as agent for the shareholders in administering the
Plan. If the Board of Directors of the Fund declares an income dividend or a
capital gains distribution payable either in the Fund's common stock or in cash,
as shareholders may have elected, nonparticipants in the Plan will receive cash
and participants in the Plan will receive the equivalent in shares of the Fund
valued at the lower of market price or net asset value as determined at the time
of purchase (generally on the payable date of the dividend) as set forth below.
Whenever market price is equal to or exceeds net asset value at the time shares
are valued for the purpose of determining the number of shares equivalent to the
cash dividend or distribution, participants will be issued shares of the Fund at
a price equal to net asset value but not less than 95% of the then current
market price of the Fund shares. The Fund will not issue shares under the Plan
below net asset value. If net asset value determined as at the time of purchase
exceeds the market price of Fund shares at such time, or if the Fund should
declare a dividend or other distribution payable only in cash (i.e., if the
Board of Directors should preclude reinvestment at net asset value), the Agent
will, as agent for the participants, endeavor to buy Fund shares in the open
market, on the New York Stock Exchange or elsewhere, on behalf of all
participants, and will allocate to you your pro rata portion based on the
average price paid (including brokerage commissions) for all shares purchased.
Shares acquired on behalf of participants in the open market will be purchased
at the prevailing market price. Fractions of a share allocated to you will be
computed to four decimal places. If, before the Agent has completed its
purchases, the market price exceeds the net asset value of a Fund share, the
average per share purchase price paid by the Agent may exceed the net asset
value of the Fund's shares, resulting in the acquisition of fewer shares than if
the dividend or distribution had been paid in shares issued by the Fund.
For all purposes of the Plan: (a) the market price of the Fund's common
stock on a dividend payment date shall be the last sale price on the New York
Stock Exchange on that date, or, if there is no such sale, then the mean between
the closing bid and asked quotations for such stock, and (b) net asset value per
share of the Fund's 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, 4 New York Plaza, New York, NY 10004.
Deliveries to any other address do not constitute valid delivery.
A detachable form for use in making voluntary cash payments will be attached
to each Dividend Reinvestment Plan statement you receive. The same amount of
money need not be sent each month and there is no obligation to make an optional
cash payment each month.
Payments received by the Agent will be used to purchase stock under the
Plan. Prior to such purchase of stock by the Agent, no interest will be paid on
such funds sent to the Agent. Therefore, voluntary cash payments should be sent
to reach the Agent shortly (but at least five business days) before the dividend
payment date. Voluntary cash payments received after the five business day
deadline will be invested by the Agent on the next succeeding dividend payment
date. Dividend payment dates are expected to be the 15th (or next business day)
of each month.
You may obtain a refund of any voluntary payment if a request for such a
refund is received in writing by the Agent not less than 48 hours before the
next succeeding dividend payment.
There is no charge to participants for reinvesting dividends or capital
gains distributions. The Agent's fees for the handling of reinvestment of
dividends and distributions will be paid by the Fund. There will be no brokerage
charges with respect to shares issued directly by the Fund as a result of
dividends or capital gains distributions payable either in shares or in cash.
However, each participant will pay a pro
19
<PAGE>
rata share of brokerage commissions incurred with respect to the Agent's open
market purchases in connection with the reinvestment of dividends, capital gains
distributions, or voluntary cash payments.
Brokerage charges for purchasing small amounts of stock for individual
accounts through the Plan are expected to be less than the usual brokerage
charges for such transactions because the Agent will be purchasing stock for all
participants in blocks and pro rating the lower commissions thus attainable.
The receipt of dividends and distributions in stock under the Plan will not
relieve participants of any income tax (including withholding tax) that may be
payable on such dividends and distributions.
While the Fund presently intends to continue the Plan indefinitely,
experience under the Plan may indicate that changes are desirable. Accordingly,
the Fund reserves the right to amend or terminate the Plan as applied to any
voluntary cash payments made and any dividend or distribution paid subsequent to
notice of the change sent to all shareholders of the Fund at least 30 days
before the record date for such dividend or distribution. The Plan also may be
amended or terminated by the Agent by at least 30 days' written notice to all
shareholders of the Fund.
Any notices, questions or other correspondence regarding the Plan should be
addressed to The Chase Manhattan Bank, Customer Service Department, 4 New York
Plaza, New York, NY 10004. Be sure to include a reference to BEA Strategic
Income Fund, Inc. or you may call (800) 428-8890.
20
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<PAGE>
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