Putnam
Strategic
Income
Fund*
ANNUAL REPORT
March 31, 1998
*Formerly Diversified Income Trust II
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* "With Putnam Strategic Income Fund, we pursue attractive income
opportunities in U.S. government, international, and corporate bonds,
including the high-yield arena where Putnam has a research advantage,
while keeping volatility in check with a continuously diversified
portfolio."
-- Jennifer Leichter, manager
Putnam Strategic Income Fund
* "Whatever the reason, bond funds deserve the renewed attention
they're getting. They're far better investments than they used to be."
-- Morningstar Investor, February 1998
CONTENTS
4 Report from Putnam Management
9 Fund performance summary
13 Portfolio holdings
34 Financial statements
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
We are pleased to bring you this annual report for Putnam Strategic Income
Fund's fiscal year ended March 31, 1998. It is the first report bearing the
fund's new name and reflecting its slightly revised investment strategy. Both
changes were effective February 28, 1998. The fund, formerly named Putnam
Diversified Income Trust II, is now pursuing a slightly more aggressive
strategy, aimed at providing higher current income.
The revised strategy will allow your fund's management team to allocate a
larger portion of the portfolio to high-yield bonds. These bonds carry their
higher yields because of their lower credit ratings and thus as a class
represent more risk than higher-rated securities. Those in which your fund
invests will be painstakingly selected by Putnam's High-Yield Bond Group, one
of the largest and most experienced in the mutual fund industry. Risk should
be reduced further through diversification across different sectors of the
fixed-income market.
We are confident that the fund will continue to help you meet your investment
program's objectives and that you will be pleased with the results in the
years ahead.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
May 20, 1998
Report from the Fund Managers
Jennifer E. Leichter
Michael Martino
D. William Kohli
Gail S. Attridge
Despite the instability in Asia that has endured since October, widespread
strength in bond markets around the world powered Putnam Strategic Income Fund
to a solid return over the 12 months ended March 31, 1998. Because the fund
invests in a variety of fixed-income securities, it had exposure to several of
the leading bond sectors, including government bonds and high-yielding
corporate issues. Bonds from the emerging markets that struggled in the wake
of Asia's financial turmoil made up only a small portion of the portfolio. You
will find complete performance information, including returns for all share
classes, beginning on page 9.
* ASIAN CRISIS TEMPORARILY AFFLICTS GENERALLY ROBUST GLOBAL MARKETS
Most of the economic factors that affect the performance of bonds were largely
favorable in the fund's 1998 fiscal year. Above all, inflation remained
subdued despite robust economic growth and low unemployment in the United
States, where the fund invests the majority of its assets. In Europe, economic
expansion accelerated modestly, though in many nations unemployment remained
high. Despite political wrangling in France, Germany, and Italy, European
governments also remained on course for phasing in a single currency on
January 1, 1999.
German short-term interest rates held steady for most of 1997, while the
decision of Great Britain's new Labour government to grant greater
independence to the nation's central bank boosted international confidence in
U.K. gilts (British sovereign debt, the equivalent of U.S. Treasuries). This
combination of factors supported the fund's holdings in European sovereign
bonds.
The one major problem that struck international credit markets in 1997 -- the
Asian crisis -- temporarily upset certain bond sectors but eventually had a
beneficial effect by further diminishing inflationary expectations. Following
currency devaluations in the emerging markets of Southeast Asia and in South
Korea, corporations headquartered in those countries faced large repayment
burdens on bonds they had issued in foreign currencies. Although widespread
defaults did not occur, the consequent cutback in corporate investment slowed
economic activity in those markets. Meanwhile, falling prices of Asian exports
reduced growth and inflation expectations in the United States and Europe.
As mentioned in previous reports, during the course of 1997 we had decided to
build up the fund's position in emerging-markets bonds to approximately 8% -
10% of the fund's assets. At the time, these bonds offered some of the most
attractive income opportunities outside the domestic high-yield sector.
Although we had almost no investments in Asian emerging markets, the fund's
holdings in Brazilian, Mexican, and Argentinean bonds came under pressure, as
some analysts anticipated that the crisis would spread to Latin America.
Accordingly, we reduced the fund's position in some of these holdings but are
pleased to report that the remainder has rebounded in early 1998, as Latin
America proved its ability to weather the storm.
[GRAPHIC OMITTED: horizontal bar chart TOP FIVE COUNTRY ALLOCATIONS]
TOP FIVE COUNTRY ALLOCATIONS*
(international sector)
United Kingdom 6.1%
Australia 2.5%
Mexico 2.4%
Germany 2.2%
South Africa 1.9%
Footnote reads:
*Based on net assets as of 3/31/98. Holdings will vary over time.
* HIGH-YIELD SECTOR ENJOYS GROWING STRENGTH
High-yielding corporate bonds performed exceptionally well during the fiscal
period. As the fund's 1997 fiscal year closed, high-yield issues, like many
other bonds, were reeling from the Federal Reserve Board's March 1997 decision
to raise short-term interest rates. It seemed that the Fed was intent on
slowing growth in the United States, which could have been damaging to the
many small companies that rely on a robust business environment for cash flow
to service their high-yielding debt.
Throughout fiscal 1998, however, economic growth remained strong and the
equity markets stayed buoyant. The high-yield market rallied, faltering only
briefly in late 1997, when the market feared that the industrial slowdown in
Asia might harm the financial strength of U.S. companies. This worry was
largely unfounded, however, because aside from certain technology companies
with business in Asia, most of the companies that issue high-yield bonds have
a domestic focus and remained in secure condition.
We continued to favor the telecommunications sectors -- broadcasting, cable,
radio, and long-distance telephone companies -- that are benefiting from new
technologies and industry deregulation. In particular, competitive local
exchange carriers (CLECs) and specialized mobile radio operators have been
given room to grow by the regulatory conditions introduced by the
Telecommunications Act of 1996. Also the cable television sector, in which the
fund has owned a number of different issues during the fiscal year, has
performed quite well. Several cable companies, such as Jones Intercable and
Century Communications, had struggled in 1996 but recovered in the course of
1997. Recent technological advances have added new luster to the growth
prospects of such cable companies, enabling them to offer many new television
and personal computing services for household customers. While these holdings,
along with others discussed in this report, were viewed favorably at the end
of the fiscal period, all are subject to review and adjustment in accordance
with the fund's investment strategy and may vary in the future.
[GRAPHIC OMITTED: TOP THREE HOLDINGS PER SECTOR]
TOP THREE HOLDINGS PER SECTOR
HIGH-YIELD BONDS
ICN Pharmaceuticals Inc. 9.25%, 2005
Transamerican Energy senior disc. notes stepped-coupon series B, 0%, 2002
NEXTEL Communications senior disc. notes stepped-coupon, 0%, 2007
FOREIGN BONDS
United Kingdom Treasury bonds, 8%, 2007
Australia (Government of) bonds, 8.75%, 2008
South Africa (Republic of) bonds, series 153, 13%, 2010
U.S. GOVERNMENT AND AGENCY OBLIGATIONS
Government National Mortgage Association, 7.5%, 2022-2027
Government National Mortgage Association, 7%, 2025-2028
U.S. Treasury notes, 6.625%, 2001
Footnote reads:
These holdings represent 20.8% of the fund's net assets as of 3/31/98.
Portfolio holdings will vary over time.
* MORTGAGE EMPHASIS PROVES WORTHWHILE
In the portion of the fund devoted to U.S. government and agency bonds, we
consistently overweighted mortgage-backed securities throughout the fiscal
year. We decided on this stance because of the expectation of a further rise
in short-term interest rates in 1997 following the Fed's March decision. In
such periods of uncertainty, mortgage-backed bonds tend to perform well.
Although just below Treasuries in terms of credit quality, mortgages tend to
be less influenced by interest-rate changes than Treasuries and generally pay
a more attractive level of income.
Mortgages have performed well throughout the period. In the fiscal year's
second half, however, as money streaming out of Asia sought refuge in
Treasuries, the quick drop in long-term interest rates left mortgages behind.
Many homeowners decided to refinance their houses, resulting in a wave of
prepayments that diminished the appeal of these securities. Although they
underperformed during this rally, mortgages have been a good choice again in
the first three months of 1998, as U.S. interest rates have fluctuated within
a fairly narrow range.
* GLOBAL CONDITIONS STILL FAVORABLE; HIGH-YIELD SECTOR REMAINS FOCUS
We anticipate somewhat slower economic growth in 1998 as a result of the
slowdown in Asia, a climate that is positive for bonds. Although it is
possible that inflation could nonetheless result from wage increases of the
past few years, we do not expect a dramatic change in interest rates. The fund
continues to favor high-yield corporates and agency mortgages while remaining
broadly diversified.
The views expressed here are exclusively those of Putnam Management. They are
not meant as investment advice. Although the described holdings were viewed
favorably as of 3/31/98, there is no guarantee the fund will continue to hold
these securities in the future. While the U.S. government backing of
individual securities does not insure your principal, which will fluctuate, it
does guarantee the fund's government-backed holdings will make timely payments
of interest and principal. Mortgage-backed securities in the portfolio may be
subject to prepayment risk. International investing involves certain risks,
such as currency fluctuations, economic instability and political
developments, not present with domestic investments. The lower credit ratings
of high-yield bonds reflect a greater possibility that adverse changes in the
economy or poor performance by the issuers of these bonds may affect the
issuer's ability to pay principal and interest.
Performance summary
This section provides information about your fund's performance, which
should always be considered in light of its investment strategy Putnam
Strategic Income Fund is designed for investors seeking high current
income consistent with capital preservation through U.S. government,
high-yield, and international fixed-income securities.
TOTAL RETURN FOR PERIODS ENDED 3/31/98
Class A Class B Class M
(inception date) (2/26/96) (2/26/96) (2/26/96)
NAV POP NAV CDSC NAV POP
- ------------------------------------------------------------------------------
1 year 13.05% 7.62% 12.20% 7.20% 12.76% 9.10%
- ------------------------------------------------------------------------------
Life of fund 20.20 14.54 18.31 15.31 19.58 15.63
Annual average 9.20 6.71 8.38 7.05 8.93 7.20
- ------------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 3/31/98
Salomon Bros.
Lehman Bros. Non-U.S. First Boston Consumer
Aggregate World Gov't. High Yield Price
Bond Index Bond Index Index Index
- ------------------------------------------------------------------------------
1 year 11.99% 2.03% 14.33% 1.38%
- ------------------------------------------------------------------------------
Life of fund 16.67 2.03 27.31 4.71
Annual average 7.68 0.97 12.29 2.23
- ------------------------------------------------------------------------------
Class A and class M share performance is shown at public offering price
and reflects the current maximum sales charge of 4.75% for class A shares
and 3.25% for class M shares. Class B share performance reflects the
applicable contingent deferred sales charge which is 5% in the first year,
declines to 1% in the sixth year, and is eliminated thereafter. All
returns assume reinvestment of distributions at NAV and represent past
performance; they do not guarantee future results. Investment return and
principal value will fluctuate so that an investor's shares when redeemed
may be worth more or less than their original cost.
[GRAPHIC OMITTED: worm chart GROWTH OF A $10,000 INVESTMENT]
GROWTH OF A $10,000 INVESTMENT
Cumulative total return of a $10,000 investment since 2/26/96
Plot points read:
Lehman Bros. Fund's
Aggregate class A shares Consumer
Bond Index at POP Price Index
2/26/96 9529 10000 10000
6/30/96 9551 9987 10116
9/30/96 9926 10171 10187
12/31/96 10231 10476 10239
3/31/97 10132 10418 10330
6/30/97 10557 10801 10350
9/30/97 11064 11160 10407
12/31/97 11131 11489 10415
3/31/98 11454 11667 10471
Footnote reads:
Past performance is no assurance of future results. At the end of the
same time period, a $10,000 investment in the fund's class B shares
would have been valued at $11,831 ($11,531 with a redemption at the
end of the period); a $10,000 investment in the fund's class M shares
would have been valued at $11,958 ($11,563 at public offering price).
See first page of performance section for performance calculation
method.
PRICE AND DISTRIBUTION INFORMATION
12 months ended 3/31/98
Class A Class B Class M
- ------------------------------------------------------------------------------
Distributions (number) 12 12 12
- ------------------------------------------------------------------------------
Income $.601984 $.537341 $.580405
- ------------------------------------------------------------------------------
Capital gains
- ------------------------------------------------------------------------------
Long-term .025 .025 .025
- ------------------------------------------------------------------------------
Short-term .067 .067 .067
- ------------------------------------------------------------------------------
Total $.693984 $.629341 $.672405
- ------------------------------------------------------------------------------
Share value: NAV POP NAV NAV POP
- ------------------------------------------------------------------------------
3/31/97 $8.34 $8.76 $8.34 $8.34 $8.62
- ------------------------------------------------------------------------------
3/31/98 8.70 9.13 8.70 8.70 8.99
- ------------------------------------------------------------------------------
Current return (end of period)
- ------------------------------------------------------------------------------
Current dividend rate 6.86% 6.54% 6.11% 6.61% 6.40%
- ------------------------------------------------------------------------------
Current 30-day SEC yield2 7.01 6.67 6.17 6.87 6.65
- ------------------------------------------------------------------------------
1 Income portion of most recent distribution, annualized and divided by
NAV or POP at end of period.
2 Based on investment income, calculated using SEC guidelines.
TERMS AND DEFINITIONS
Total return shows how the value of the fund's shares changed over time,
assuming you held the shares through the entire period and reinvested all
distributions in the fund.
Class A shares are generally subject to an initial sales charge.
Class B shares may be subject to a sales charge upon redemption.
Class M shares have a lower initial sales charge and a higher 12b-1 fee
than class A shares and no sales charge on redemption.
Net asset value (NAV) is the value of all your fund's assets, minus any
liabilities, divided by the number of outstanding shares, not including
any initial or contingent deferred sales charge.
Public offering price (POP) is the price of a mutual fund share plus the
maximum sales charge levied at the time of purchase. POP performance
figures shown here assume the maximum 4.75% sales charge for class A
shares and 3.25% for class M shares.
Contingent deferred sales charge (CDSC) is a charge applied at the time of
the redemption of class B shares and assumes redemption at the end of the
period. Your fund's CDSC declines from a 5% maximum during the first year
to 1% during the sixth year. After the sixth year, the CDSC no longer
applies.
COMPARATIVE BENCHMARKS
Lehman Brothers Aggregate Bond Index* is composed of securities from
Lehman Brothers Government/Corporate Bond Index, Mortgage-Backed
Securities Index, and the Asset-Backed Securities Index. Total return
comprises price appreciation/depreciation and income as a percentage of
the original investment. Indexes are rebalanced monthly by market
capitalization.
Salomon Brothers Non-U.S. World Government Bond Index* is a market
capitalization-weighted benchmark that tracks the performance of the
government bond markets tracked by the Salomon Brothers World Government
Bond Index, excluding the United States.
First Boston High Yield Index* is an unmanaged index of lower-rated,
higher-yielding U.S. corporate bonds. It includes over 180 issues with an
average maturity range of 7 to 10 years.
Consumer Price Index (CPI) is a commonly used measure of inflation; it
does not represent an investment return.
*Securities indexes assume reinvestment of all distributions and interest
payments and do not take in account brokerage fees or taxes. Securities in
the fund do not match those in the indexes and performance of the fund
will differ. It is not possible to invest directly in an index.
Report of independent accountants
For the fiscal year ended March 31, 1998
To the Trustees and Shareholders of
Putnam Strategic Income Fund
We have audited the accompanying statement of assets and liabilities of Putnam
Strategic Income Fund (formerly known as Putnam Diversified Income Trust II),
including the portfolio of investments owned, as of March 31, 1998, and the
related statement of operations for the year then ended, the statements of
changes in net assets for each of the two years in the period then ended, and
the financial highlights for each of the periods indicated therein. These
financial statements and financial highlights are the responsibility of the
fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned as of March 31, 1998, by correspondence with the custodian and brokers.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Putnam Strategic Income Fund as of March 31, 1998, 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 periods indicated therein, in conformity with generally accepted
accounting principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
May 18, 1998
Portfolio of investments owned
March 31, 1998
<TABLE>
<CAPTION>
CORPORATE BONDS AND NOTES (49.0%) *
PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C>
Advertising (0.2%)
- ------------------------------------------------------------------------------------------------------------
$ 200,000 Lamar Advertising Co. company guaranty
8 5/8s, 2007 $ 207,000
80,000 Lamar Advertising Co. sr. sub. notes 9 5/8s, 2006 86,800
40,000 Outdoor Comunications Inc. sr. sub. notes
9 1/4s, 2007 41,600
--------------
335,400
Aerospace and Defense (0.5%)
- ------------------------------------------------------------------------------------------------------------
60,000 Argo-Tech Corp. company guaranty 8 5/8s, 2007 61,350
140,000 Aviation Sales Co. 144A sr. sub. notes 8 1/8s, 2008 137,900
90,000 BE Aerospace, Inc. 144A sr. sub. notes 8s, 2008 89,775
70,000 K&F Industries, Inc. sr. sub. notes Ser. B, 9 1/4s, 2007 72,450
90,000 Moog, Inc. sr. sub. notes Ser. B, 10s, 2006 97,650
260,000 Raytheon Co notes 6.45s, 2002 262,187
75,000 United Defense Industries Inc. company guaranty
8 3/4s, 2007 76,688
--------------
798,000
Agriculture (0.4%)
- ------------------------------------------------------------------------------------------------------------
250,000 AGCO Corp. sr. sub. notes 8 1/2s, 2006 258,750
263,597 Premium Standard Farms, Inc. sr. secd. notes
11s, 2003 [2 DBL. DAGGERS] 284,685
--------------
543,435
Airlines (0.1%)
- ------------------------------------------------------------------------------------------------------------
90,000 Trans World Airlines, Inc. sr. notes 11 1/2s, 2004 95,175
110,000 Trans World Airlines, Inc. 144A notes 11 3/8s, 2006 110,825
--------------
206,000
Apparel (0.5%)
- ------------------------------------------------------------------------------------------------------------
325,000 Guess Jeans, Inc. sr. sub. notes 9 1/2s, 2003 331,500
130,000 Sassco Fashions Ltd. sr. notes 12 3/4s, 2004 137,150
65,000 William Carter Co. 144A sr. sub. notes 12s, 2008 70,525
135,000 William Carter Co. sr. sub. notes Ser. A, 10 3/8s, 2006 144,450
--------------
683,625
Automotive Parts (0.8%)
- ------------------------------------------------------------------------------------------------------------
299,000 Aftermarket Technology Corp. sr. sub. notes 12s, 2004 331,890
200,000 Cambridge Industries Inc. company guaranty Ser. B,
10 1/4s, 2007 208,000
60,000 Hayes Wheels International, Inc. company guaranty
Ser. B, 9 1/8s, 2007 63,300
90,000 Lear Corp. sub. notes 9 1/2s, 2006 99,900
460,000 Navistar International Corp. 144A sr. sub.notes 8s, 2008 458,275
--------------
1,161,365
Banks (2.0%)
- ------------------------------------------------------------------------------------------------------------
400,000 Advanta Corp. company guaranty Ser. B, 8.99s, 2026 331,000
40,000 Advanta National Bank sr. notes 7.02s, 2001 39,200
65,000 Albank Capital Trust 144A company guaranty Ser. AI,
9.27s, 2027 70,772
120,000 Banponce Financial Corp. med. term note 7 1/8s, 2002 122,881
170,000 Chevy Chase Savings Bank Inc. sub. deb. 9 1/4s, 2005 175,950
80,000 Delta Financial Corp. sr. notes 9 1/2s, 2004 79,200
45,000 Dime Capital Trust I bank guaranty Ser. A, 9.33s, 2027 50,751
110,000 Espiirto Santo Centrais 144A sr. notes 10s, 2007
(Canada) 107,525
250,000 First Nationwide Holdings sr. sub. notes 10 5/8s, 2003 280,625
60,000 First Union Corp. sub. notes 7s, 2006 62,350
250,000 Firstar Bank Milwaukee sr. bank notes 6 1/4s, 2002 251,188
45,000 Greenpoint Capital Trust I company guaranty 9.1s, 2027 49,238
500,000 Korea Development Bank bonds 7 3/8s, 2004 (Korea) 450,825
95,000 Merita Bank Ltd. sub. notes 6 1/2s, 2006 (Finland) 94,337
40,000 Ocwen Capital Trust I company guaranty 10 7/8s, 2027 44,400
55,000 Ocwen Federal Bank FSB sub. deb. 12s, 2005 61,325
35,000 Ocwen Financial Corp. notes 11 7/8s, 2003 39,725
60,000 Provident Capital Trust company guaranty 8.6s, 2026 63,500
40,000 Riggs Capital Trust 144A bonds 8 5/8s, 2026 42,449
60,000 Sovereign Capital Trust company guaranty 9s, 2027 65,208
105,000 Sparbanken Sverige AB (Swedbank) 144A sub. 7 1/2s,
2006 (Sweden) 108,266
310,000 Sumitomo Bank Treasury Co. 144A bonds Ser. A,
FRB 9.4s, 2049 (Japan) 320,463
50,000 Webster Capital Trust I 144A bonds 9.36s, 2027 55,111
--------------
2,966,289
Basic Industrial Products (0.5%)
- ------------------------------------------------------------------------------------------------------------
110,000 Johnstown America Industries, Inc. company guaranty
Ser. C, 11 3/4s, 2005 122,925
90,000 Motors and Gears Inc. sr. notes Ser. D, 10 3/4s, 2006 97,200
530,000 Morris Material Handling Inc. 144A sr. notes
9 1/2s, 2008 532,650
30,000 Roller Bearing Co. company guaranty Ser. B,
9 5/8s, 2007 30,825
--------------
783,600
Broadcasting (2.2%)
- ------------------------------------------------------------------------------------------------------------
130,000 Allbritton Communications Co. 144A sr. sub. notes
8 7/8s, 2008 131,300
60,000 Azteca Holdings S.A. sr. notes 11s, 2002 62,550
400,000 Benedek Communications Corp. sr. disc. notes stepped-coupon
zero % (13 1/4s, 5/15/01), 2006 ++ 320,000
215,000 Capstar Broadcasting sr. disc. notes stepped-coupon
zero % (12 3/4s, 2/1/02), 2009 ++ 162,325
95,000 Capstar Broadcasting sr. sub. notes 9 1/4s, 2007 99,750
55,000 Central European Media Enterprises Ltd. sr. notes
9 3/8s, 2004 56,100
250,000 Chancellor Media Corp. company guaranty Ser. B,
10 1/2s, 2007 280,000
90,000 Citadel Broadcasting Inc. sr. sub. notes 10 1/4s, 2007 99,675
310,000 Fox/Liberty Networks LLC sr. notes 8 7/8s, 2007 321,625
250,000 Granite Broadcasting Corp. sr. sub. notes 9 3/8s, 2005 258,750
40,000 Jacor Communications, Inc. company guaranty
9 3/4s, 2006 43,800
250,000 Jacor Communications, Inc. sr. sub. notes 10 1/8s, 2006 273,750
35,000 Pegasus Communications Corp. sr. notes Ser. B,
9 5/8s, 2005 36,663
50,000 Pegasus Media & Communications notes Ser. B,
12 1/2s, 2005 57,250
200,000 Petracom Holdings, Inc. notes stepped-coupon zero %
(17 1/2s, 8/1/00), 2003 ++ 201,000
125,000 Radio One Inc. company guaranty stepped-coupon
Ser. B, 7s, (12s, 5/15/00), 2004 ++ 127,500
110,000 SFX Entertainment Inc. 144A sr. sub. notes 9 1/8s, 2008 108,350
250,000 Sinclair Broadcast Group, Inc. company guaranty
9s, 2007 260,625
250,000 Turner Broadcasting Systems, Inc. sr. notes 8 3/8s, 2013 281,453
100,000 TV Azteca S.A. de C.V. sr. notes 10 1/2s,
2007 (Mexico) 106,500
--------------
3,288,966
Building and Construction (0.4%)
- ------------------------------------------------------------------------------------------------------------
125,000 American Architectural Products Corp. 144A sr. notes
11 3/4s, 2007 130,625
100,000 Beazer Homes USA, Inc. 144A sr. notes 8 7/8s, 2008 100,125
130,000 Brand Scaffold Services 144A sr. notes 10 1/4s, 2008 133,900
35,000 Cia Latino Americana 144A company guaranty
11 5/8s, 2004 (Argentina) 36,313
200,000 GS Superhighway Holdings sr. notes 10 1/4s, 2007 170,000
70,000 GS Superhighway Holdings sr. notes 9 7/8s, 2004 61,600
--------------
632,563
Building Products (0.6%)
- ------------------------------------------------------------------------------------------------------------
145,000 Cemex S.A. 144A bonds 12 3/4s, 2006 (Mexico) 175,450
160,000 Consumers International 144A sr. notes 10 1/4s, 2005 176,000
90,000 Presley Cos. sr. notes 12 1/2s, 2001 86,850
300,000 Southdown, Inc. sr. sub. notes Ser. B, 10s, 2006 328,125
100,000 Waxman Industries Inc. sr. notes stepped-coupon
Ser. B, zero % (12 3/4s, 6/1/99), 2004 ++ 91,250
--------------
857,675
Buses (0.3%)
- ------------------------------------------------------------------------------------------------------------
415,000 Consorcio/MCII Holdings sec. notes stepped-coupon
zero % (12s, 11/15/98), 2002 ++ 383,875
Business Equipment (0.1%)
- ------------------------------------------------------------------------------------------------------------
145,000 Axiohm Transactions Solutions Inc. company guaranty
9 3/4s, 2007 147,538
Business Services (0.1%)
- ------------------------------------------------------------------------------------------------------------
60,000 ATC Group Services Inc. 144A sr. sub. notes 12s, 2008 60,300
10,000 Corporate Express, Inc. sr. sub. notes Ser. B, 9 1/8s, 2004 10,250
40,000 Outsourcing Solutions, Inc. sr. sub. notes Ser. B, 11s, 2006 42,800
--------------
113,350
Cable Television (4.0%)
- ------------------------------------------------------------------------------------------------------------
120,000 Acme Television sr. disc. notes stepped-coupon zero %
(10 7/8s, 9/30/00), 2004 ++ 98,700
100,000 Australis Hldngs PTY Ltd. notes stepped-coupon zero %
(15s, 11/01/00), 2002 (In Default) + 40,000
250,000 Century Communications Corp. sr. notes 8 7/8s, 2007 261,875
200,000 Charter Communications International, Inc. notes stepped-
coupon Ser. B, zero % (14s, 3/15/01), 2007 ++ 160,500
200,000 Comcast UK Cable, Ltd. deb. stepped-coupon zero %
(11.2s, 11/15/00), 2007 (Bermuda) ++ 166,000
90,000 Diamond Cable Communication Co. sr. disc. notes stepped-
coupon zero % (13 1/2s, 9/30/99), 2004 (United Kingdom) ++ 83,025
300,000 Diamond Cable Communication Co. sr. disc. notes stepped-
coupon zero % (11 3/4s, 12/15/00), 2005
(United Kingdom) ++ 238,500
210,000 Diamond Cable Communication Co. sr. disc. notes stepped-
coupon zero % (10 3/4s, 2/15/02), 2007 (United Kingdom) ++ 148,050
527,500 Falcon Holdings Group, Inc. sr. sub. notes 11s, 2003 [2 DBL. DAGGERS] 566,403
300,000 Falcon Holdings Group, Inc. 144A deb. stepped-coupon zero %
(9.285s, 4/15/03), 2010 ++ 192,000
300,000 Fox Kids Worldwide Inc. 144A sr. discount notes stepped-
coupon zero % (10 1/4s, 11/1/02), 2007 ++ 191,250
710,000 Fox Kids Worldwide Inc. 144A sr. notes 9 1/4s, 2007 713,550
200,000 FrontierVision Holdings LP sr. disc. notes stepped-coupon
zero % (11 7/8s, 9/15/01), 2007 ++ 155,000
110,000 Globo Communicacoes 144A sr. notes 10 5/8s, 2008 (Brazil) 111,788
85,000 Globo Communicacoes 144A company guaranty
10 1/2s, 2006 (Brazil) 86,488
50,000 Heartland Wireless Communications, Inc. sr. notes Ser. D,
13s, 2003 9,000
200,000 Heartland Wireless Communications, Inc. 144A sr. notes
13s, 2003 36,000
500,000 International Cabletel, Inc. sr. notes stepped-coupon
Ser. B, zero % (11 1/2s, 2/01/01), 2006 ++ 407,500
400,000 Jones Intercable, Inc. sr. sub. deb. 10 1/2s, 2008 440,000
240,000 Lenfest Communications, Inc. 144A sr. sub. notes 8 1/4s, 2008 243,000
10,000 Marcus Cable Co. (L.P.) sr. disc. notes stepped-coupon zero %
(14 1/4s, 6/15/00), 2005 ++ 9,075
380,000 NTL Inc. 144A sr.notes stepped-coupon zero %
(9 3/4s, 4/01/03), 2008 (United Kingdom) ++ 247,000
200,000 NTL Inc. sr. notes Ser. B, 10s, 2007 (United Kingdom) 217,000
250,000 RBS Participacoes S.A. 144A company guaranty 11s, 2007
(Brazil) 253,750
270,000 RCN Corp. 144A sr. disc. notes stepped-coupon zero %
(9.8s, 2/15/03), 2008 ++ 169,425
320,000 RCN Corp. sr. disc. notes stepped-coupon zero %
(11 1/8s, 10/15/02), 2007 ++ 213,600
190,000 Time Warner Entertainment sr. notes 8 3/8s, 2033 217,943
40,000 Time Warner Entertainment sr. notes 8 7/8s, 2012 47,060
5,000 Time Warner, Inc. deb. 9.15s, 2023 6,125
245,000 UIH Australia/Pacific sr. disc. notes stepped-coupon Ser. D,
zero % (14s, 5/15/01), 2006 (Australia) ++ 169,050
150,000 UIH Australia/Pacific, Inc. sr. disc. notes stepped-coupon Ser. B,
zero % (14s, 5/15/01), 2006 (Australia) ++ 103,500
290,000 United International Holdings 144A sr. disc. notes stepped-
coupon zero % (10 3/4s, 2/15/03), 2008 ++ 181,250
80,000 Wireless One, Inc. sr. notes 13s, 2003 22,400
--------------
6,205,807
Cellular Communications (2.0%)
- ------------------------------------------------------------------------------------------------------------
100,000 Dobson Communications Corp. sr. notes 11 3/4s, 2007 110,000
160,000 McCaw International Ltd sr. discount notes stepped coupon
zero % (13s, 4/15/02), 2007 ++ 106,400
450,000 Millicom International Cellular S.A. sr. disc. notes stepped-
coupon zero % (13 1/2s, 6/1/01), 2006
(Luxembourg) ++ 351,000
710,000 NEXTEL Communicaitons, Inc. 144A sr. disc. notes stepped-
coupon zero % (12 1/8s, 4/15/03), 2008 ++ 426,887
1,645,000 NEXTEL Communications sr. disc. notes stepped-coupon
zero % (10.65s, 9/15/02), 2007 ++ 1,102,150
450,000 NEXTEL Communications, Inc. 144A sr. disc. notes stepped-
coupon zero % (9.95s, 2/15/03), 2008 ++ 287,438
50,000 Omnipoint Corp. sr. notes 11 5/8s, 2006 55,000
275,000 Omnipoint Corp. sr. notes Ser. A, 11 5/8s, 2006 302,500
200,000 Pricellular Wireless Corp. sr. notes 10 3/4s, 2004 225,000
--------------
2,966,375
Chemicals (1.2%)
- ------------------------------------------------------------------------------------------------------------
200,000 Acetex Corp. sr. notes 9 3/4s, 2003 (Canada) 207,000
45,000 Foamex, L.P. company guaranty 9 7/8s, 2007 47,700
150,000 Huntsman Corp. 144A sr. sub. notes 9 1/2s, 2007 155,625
150,000 Huntsman Corp. 144A sr. sub. notes FRN 9.187s, 2007 150,375
115,000 Huntsman Packaging Corp. 144A sr. sub. notes 9 1/8s, 2007 117,875
70,000 Koppers Industries, Inc. 144A company guaranty
9 7/8s, 2007 73,325
70,000 Pharmaceutical Fine Chemicals 144A sr. sub. notes 9 3/4s, 2007
(Switzerland) 72,625
200,000 Pioneer Americas Acquisition 144A sr. notes 9 1/4s, 2007 203,000
110,000 Polymer Group, Inc. company guaranty Ser. B, 9s, 2007 113,575
90,000 Polymer Group, Inc. 144A sr. sub. notes 8 3/4s, 2008 91,575
165,000 Polytama International company guaranty notes 11 1/4s, 2007 102,300
30,000 Sociedad Quimica Y Minera de Chile S.A. 144A bonds 7.7s,
2006 (Chile) 30,254
115,000 Sovereign Specialty Chemical 144A sr. sub. notes 9 1/2s, 2007 121,325
150,000 Sterling Chemicals Holdings sr. disc. notes stepped-coupon
zero % (13 1/2s, 8/15/01), 2008 ++ 89,250
95,000 Trikem S.A. 144A bonds 10 5/8s, 2007 (Brazil) 90,250
200,000 Union Carbide Global Enterprises sr. sub. notes Ser. B,
12s, 2005 223,500
--------------
1,889,554
Computer Services (0.8%)
- ------------------------------------------------------------------------------------------------------------
200,000 Unisys Corp. sr. notes 11 3/4s, 2004 231,500
700,000 Unisys Corp. deb. 9 3/4s, 2016 724,500
180,000 Viasystems Inc. 144A sr. sub. notes 9 3/4s, 2007 188,100
110,000 Viasystems Inc. sr. sub notes 9 3/4s, 2007 114,950
--------------
1,259,050
Consumer Durable Goods (0.1%)
- ------------------------------------------------------------------------------------------------------------
20,000 Hedstrom Holdings, Inc. 144A sr. disc. notes stepped-coupon
zero % (12s, 6/1/02), 2009 ++ 12,400
115,000 Icon Fitness Corp. 144A sr. disc. notes stepped-coupon Ser. B,
zero % (14s, 11/15/01), 2006 ++ 57,500
70,000 Sealy Mattress Co. 144A sr. sub. notes 9 7/8s, 2007 74,200
--------------
144,100
Consumer Non Durables (0.3%)
- ------------------------------------------------------------------------------------------------------------
35,000 Amscan Holdings, Inc. sr. sub. notes 9 7/8s, 2007 36,531
380,000 CLN Holdings, Inc. company guaranty zero %, 2001 307,800
45,000 CLN Holdings, Inc. sr. disc. notes zero %, 2001 35,325
20,000 Packaged Ice, Inc. 144A sr. notes 9 3/4s, 2005 20,300
--------------
399,956
Consumer Products (0.2%)
- ------------------------------------------------------------------------------------------------------------
250,000 IHF Holdings, Inc. sr. disc. notes Ser. B, stepped-coupon
zero % (15s 11/15/99), 2004 ++ 207,500
110,000 Interact Systems, Inc. 144A sr. disc. notes stepped-coupon
zero % (14s, 8/1/99), 2003 ++ 41,800
--------------
249,300
Cosmetics (0.5%)
- ------------------------------------------------------------------------------------------------------------
200,000 Carson, Inc. company guaranty Ser. B, 10 3/8s, 2007 206,000
80,000 Chattem, Inc. 144A sr. sub. notes 8 7/8s, 2008 81,000
40,000 French Fragrances, Inc. sr. notes Ser. B, 10 3/8s, 2007 42,600
550,000 Revlon Worldwide Corp. sr. disc. notes Ser. B, zero %, 2001 420,750
--------------
750,350
Electronics (0.4%)
- ------------------------------------------------------------------------------------------------------------
45,000 Celestica International Ltd. 144A sr. sub. notes 10 1/2s, 2006
(Canada) 49,050
150,000 Details Inc. sr. discount notes stepped-coupon Ser. B, zero %
(12 1/2s, 11/15/02), 2007 ++ 96,000
90,000 DII Group, Inc. (The) sr. sub. notes 8 1/2s, 2007 90,900
50,000 HCC Industries, Inc. company guaranty 10 3/4s, 2007 52,250
100,000 Flextronics Internationsl Ltd. 144A sr. sub. notes 8 3/4s, 2007 100,750
30,000 Wavetek Corp. company guaranty 10 1/8s, 2007 31,650
220,000 Zilog Inc. 144A sr. notes 9 1/2s, 2005 213,950
--------------
634,550
Electric Utilities (1.0%)
- ------------------------------------------------------------------------------------------------------------
115,000 AES Corp. sr. sub. notes 8 3/8s, 2007 117,300
250,000 Calpine Corp. sr. notes 10 1/2s, 2006 272,500
100,000 Calpine Corp. sr. notes 9 1/4s, 2004 103,000
25,000 Commonwealth Edison Co. 1st mtge. 7s, 2005 25,832
85,000 Connecticut Light & Power Co. 1st mtge. Ser. A, 7 7/8s, 2001 86,664
75,000 El Paso Electric Co. 1st mtge. Ser. B, 7 3/4s, 2001 76,412
60,000 Enersis S.A. notes 6.6s, 2026 (Chile) 58,710
35,000 Illinova Corp. sr. notes 7 1/8s, 2004 35,848
45,000 Jersey Central Power & Light Co. 1st mtge. med. term
note 6.85s, 2006 46,209
165,000 Midland Funding Corp. deb. Ser. A, 11 3/4s, 2005 197,894
10,000 Niagara Mohawk Power Corp. med. term notes 9.99s, 2004 10,199
499,699 Northeast Utilities System notes Ser. A, 8.58s, 2006 499,679
--------------
1,530,247
Energy-Related (0.3%)
- ------------------------------------------------------------------------------------------------------------
110,000 Arizona Public Service Co. sr. notes 6 3/4s, 2006 112,028
350,000 Panda Global Energy Co. company guaranty 12 1/2s, 2004 332,500
--------------
444,528
Environmental Control (0.2%)
- ------------------------------------------------------------------------------------------------------------
80,000 Allied Waste Industries, Inc. company guaranty 10 1/4s, 2006 88,800
180,000 Allied Waste Industries, Inc. sr. disc. notes stepped-coupon
zero % (11.3s, 6/1/07), 2007 ++ 132,300
90,000 WMX Technologies Inc. notes 7.1s, 2026 93,082
--------------
314,182
Financial Services (1.4%)
- ------------------------------------------------------------------------------------------------------------
150,000 Aames Financial Corp. sr. notes 9 1/8s, 2003 151,500
40,000 Allstate Financing II company guaranty 7.83s, 2045 40,951
240,000 American General Institute 144A company guaranty
8 1/8s, 2046 264,972
200,000 Colonial Capital I 144A company guaranty 8.92s, 2027 214,594
135,000 Contifinancial Corp. sr. notes 8 3/8s, 2003 137,700
70,000 Dine S.A. de C.V. 144A company guaranty
8 3/4s, 2007 (Mexico) 68,338
110,000 Dollar Financial Group Inc. sr. notes Ser. A, 10 7/8s, 2006 120,450
35,000 First Financial Caribbean Corp. sr. notes 7.84s, 2006 36,489
80,000 Imperial Credit Capital Trust I 144A company guaranty
10 1/4s, 2002 80,000
400,000 Imperial Credit Industries, Inc. sr. notes 9 7/8s, 2007 398,000
60,000 Intertek Finance PLC 144A sr. sub. notes 10 1/4s, 2006 64,200
135,000 Lehman Brothers Holdings, Inc. med. term notes 6.4s, 1999 135,617
55,000 Lehman Brothers Holdings, Inc. notes 6 1/2s, 2002 54,920
55,000 Nationwide Credit Inc. 144A sr. notes 10 1/4s, 2008 56,650
25,000 Primark Corp. sr. notes 8 3/4s, 2000 25,906
260,000 Resource America Inc. 144A sr. notes 12s, 2004 274,950
60,000 Southern Investments Service Co. sr. notes 6.8s, 2006
(United Kingdom) 61,186
50,000 Travelers Capital Trust II bonds 7 3/4s, 2036 51,422
100,000 Webster Financial Corp. sr. notes 8 3/4s, 2000 104,696
--------------
2,342,541
Food and Beverages (0.4%)
- ------------------------------------------------------------------------------------------------------------
95,000 Canandaigua Wine Co. sr. sub. notes Ser. C, 8 3/4s, 2003 96,900
200,000 Doane Products Co. sr. notes 10 5/8s, 2006 219,000
40,000 Eagle Family Foods 144A sr. sub. notes 8 3/4s, 2008 40,000
160,000 Purina Mills, Inc. 144A sr. sub. notes 9s, 2010 165,200
60,000 Southern Foods Group 144A sr. sub. notes 9 7/8s, 2007 63,900
20,000 Windy Hill Pet Food Co. sr. sub. notes 9 3/4s, 2007 21,300
--------------
606,300
Food Chains (1.5%)
- ------------------------------------------------------------------------------------------------------------
135,000 Ameriserve Food Co. company guaranty 8 7/8s, 2006 139,050
645,000 Fleming Companies, Inc. company guaranty Ser. B,
10 5/8s, 2007 691,763
130,000 Fleming Companies, Inc. company guaranty Ser. B,
10 1/2s, 2004 139,425
575,000 Jitney-Jungle Stores company guaranty 12s, 2006 655,500
120,000 Jitney-Jungle Stores company guaranty 10 3/8s, 2007 124,800
300,000 Nebco Evans Holding Co. sr. disc. notes stepped-coupon
zero % (12 3/8s, 7/15/02), 2007 ++ 207,000
150,000 Smithfield Foods, Inc. 144A sr. sub. notes 7 5/8s, 2008 149,250
150,000 Southland Corp. deb. Ser. A, 4 1/2s, 2004 124,875
--------------
2,231,663
Gaming (2.0%)
- ------------------------------------------------------------------------------------------------------------
230,000 Argosy Gaming Co. company guaranty
13 1/4s, 2004 254,725
200,000 Autotote Corp. company guaranty Ser. B, 10 7/8s, 2004 215,000
75,000 Casino America, Inc. sr. notes 12 1/2s, 2003 83,250
260,000 Coast Hotels & Casinos, Inc. 1st mtge. company guaranty
Ser. B, 13s, 2002 302,250
370,300 Colorado Gaming & Entertainment Co. sr. notes 12s, 2003 401,776
280,000 Fitzgeralds Gaming Corp. 144A company guaranty
12 1/4s, 2004 282,800
100,000 Grand Casinos, Inc. 1st mtge. 10 1/8s, 2003 108,000
70,000 Isle of Capri Black Hawk LLC 1st mtge. Ser. B, 13s, 2004 71,050
550,000 Lady Luck Gaming Corp. 1st mtge. 11 7/8s, 2001 565,125
51,000 Louisiana Casino Cruises Corp. 1st mtge. 11 1/2s, 1998 51,510
40,000 Penn National Gaming, Inc. 144A sr. notes 10 5/8s, 2004 42,400
250,000 PRT Funding Corp. sr. notes 11 5/8s, 2004 187,500
50,000 Showboat Marina Casino 1st mtge. Ser. B, 13 1/2s, 2003 59,000
250,000 Trump A.C. company guaranty 11 1/4s, 2006 256,875
125,000 Trump Holdings & Funding Corp. sr. notes 15 1/2s, 2005 143,438
--------------
3,024,699
Health Care (1.4%)
- ------------------------------------------------------------------------------------------------------------
140,000 Genesis Eldercare 144A sr. sub. notes 9s, 2007 143,500
30,000 Genesis Health Ventures, Inc. sr. sub. notes 9 1/4s, 2006 31,350
230,000 Integrated Health Services, Inc. sr. sub. notes
Ser. A, 9 1/4s, 2008 242,363
230,000 Magellan Health Services, Inc. 144A sr. sub. notes 9s, 2008 231,725
80,000 Manor Care, Inc. sr. notes 7 1/2s, 2006 78,960
110,000 MedPartners, Inc. sr. notes 7 3/8s, 2006 98,557
315,000 Paracelsus Healthcare sr. sub. notes 10s, 2006 326,025
80,000 Paragon Corp. Holdings 144A sr. notes 9 5/8s, 2008 79,400
360,000 Paragon Health Networks, Inc. sr. sub. notes Ser. B, 9 1/2s, 2007 369,000
100,000 Quorum Health Group, Inc. sr. sub. notes 8 3/4s, 2005 105,500
170,000 Sun Healthcare Group Inc. 144A sr. sub. notes 9 1/2s, 2007 178,500
70,000 Tenet Healthcare Corp. sr. notes 8s, 2005 71,750
100,000 Tenet Healthcare Corp. sr. sub. notes 10 1/8s, 2005 109,500
--------------
2,066,130
Insurance (1.1%)
- ------------------------------------------------------------------------------------------------------------
95,000 Aegon NV sub. notes 8s, 2006 (Netherlands) 104,292
145,000 Hartford Life, Inc. notes 7.1s, 2007 150,365
100,000 Phoenix Home Life Mutual Insurance Co. 144A notes
6.95s, 2006 102,191
935,000 Provident Companies, Inc. bonds 7.405s, 2038 927,894
125,000 Reliance Group Holdings, Inc. sr. notes 9s, 2000 130,753
300,000 Reliance Group Holdings, Inc. sr. sub. deb. 9 3/4s, 2003 313,305
--------------
1,728,800
Lodging (0.5%)
- ------------------------------------------------------------------------------------------------------------
60,000 Bluegreen Corp. 144A sr. notes 10 1/2s, 2008 59,700
180,000 HMH Properties, Inc. company guaranty Ser. B, 8 7/8s, 2007 (R) 189,450
300,000 Host Marriott Travel Plaza sr. notes Ser. B, 9 1/2s, 2005 318,750
120,000 Prime Hospitality Corp. sub. notes 9 3/4s, 2007 129,600
--------------
697,500
Medical Supplies and Devices (0.4%)
- ------------------------------------------------------------------------------------------------------------
110,000 ALARIS Medical Systems, Inc. company guaranty 9 3/4s, 2006 117,700
100,000 Conmed Corp. 144A sr. sub. notes 9s, 2008 101,500
190,000 Fresenius Medical Care AG 144A company guaranty
7 7/8s, 2008 (Germany) 190,000
130,000 Imagyn Medical Technologies company guaranty 12 1/2s, 2004 78,000
160,000 Wright Medical Technology, Inc. 144A notes Ser. C,
11 3/4s, 2000 156,800
--------------
644,000
Metals and Mining (0.1%)
- ------------------------------------------------------------------------------------------------------------
50,000 Acindar Industria Argentina de Aceros S.A. bonds
11 1/4s, 2004 (Argentina) 52,750
80,000 Continental Global Group sr. notes Ser. B, 11s, 2007 85,600
--------------
138,350
Motion Picture Distribution (0.2%)
- ------------------------------------------------------------------------------------------------------------
130,000 AMC Entertainment, Inc. sr. sub. notes 9 1/2s, 2009 137,150
95,000 Cinemark USA, Inc. sr. sub. notes 9 5/8s, 2008 100,225
60,000 Panavision Inc. 144A sr. disc. notes stepped-coupon zero %
(9 5/8s, 2/1/02), 2006 ++ 42,675
--------------
280,050
Oil and Gas (3.4%)
- ------------------------------------------------------------------------------------------------------------
55,000 Abraxas Petroleum Corp. 144A sr. notes Ser. B, 11 1/2s, 2004 56,650
350,000 Benton Oil & Gas Co. sr. notes 11 5/8s, 2003 381,500
20,000 Benton Oil & Gas Co. sr. notes 9 3/8s, 2007 20,200
90,000 Coho Energy, Inc. sr. sub. notes 8 7/8s, 2007 84,600
110,000 Dailey International Inc. 144A sr. notes 9 1/2s, 2008 110,000
65,000 DI Industries Inc. sr. notes 8 7/8s, 2007 66,463
50,000 Gulf Canada Resources, Ltd. sr. notes 8.35s, 2006 (Canada) 54,152
715,000 K N Energy, Inc. sr. notes 6.45s, 2003 715,572
500,000 Kelley Oil & Gas Corp. sr. sub. notes Ser. B, 10 3/8s, 2006 521,250
110,000 Market Hub Partners 144A sr. notes 8 1/4s, 2008 112,200
100,000 Michael Petroleum Corp. 144A sr. notes 11 1/2s, 2005 98,875
150,000 Ocean Energy, Inc. company guaranty Ser. B, 8 7/8s, 2007 159,750
55,000 Panaco, Inc. company guaranty Ser. B, 10 5/8s, 2004 55,550
55,000 Petro Geo-Services AS ADR notes 7 1/2s, 2007 (Norway) 58,255
120,000 Pogo Producing Co. sr. sub. notes Ser. B, 8 3/4s, 2007 124,200
65,000 Pride Petroleum Services, Inc. sr. notes 9 3/8s, 2007 69,225
90,000 RAM Energy Inc. sr. notes 11 1/2s, 2008 88,425
100,000 Saga Petroleum ASA deb. 7 1/4s, 2027 (Norway) 99,627
45,000 Snyder Oil Corp. sr. sub. notes 8 3/4s, 2007 46,350
85,000 Southwest Royalties, Inc. company guaranty 10 1/2s, 2004 76,500
120,000 Tokai Corp. 144A bonds FRB 9.98s, 2008 121,650
1,810,000 Transamerican Energy sr. disc. notes stepped-coupon
Ser. B, zero % (13s, 6/15/99), 2002 ++ 1,520,400
480,000 Transamerican Energy sr. notes Ser. B, 11 1/2s, 2002 475,200
180,000 TransTexas Gas Corp. sr. sub. notes Ser. D, 13 3/4s, 2001 201,600
45,000 Wiser Oil Co. company guaranty 9 1/2s, 2007 43,425
--------------
5,361,619
Packaging and Containers (0.5%)
- ------------------------------------------------------------------------------------------------------------
60,000 AEP Industries, Inc. 144A sr. sub. notes 9 7/8s, 2007 62,925
100,000 Innova S De R.L. 144A sr. notes 12 7/8s, 2007 (Mexico) 107,000
80,000 Radnor Holdings Corp. company guaranty 10s, 2003 83,800
35,000 Radnor Holdings Inc. sr. notes 10s, 2003 36,663
250,000 Stone Container Corp. sr. notes 11 7/8s, 2016 271,250
160,000 Stone Container Corp. 144A company guaranty 11 1/2s, 2006 169,600
--------------
731,238
Paging (0.4%)
- ------------------------------------------------------------------------------------------------------------
280,000 Metrocall, Inc. sr. sub. notes 10 3/8s, 2007 291,900
150,000 Mobile Telecommunications Tech. sr. notes 13 1/2s, 2002 176,625
60,000 Paging Network Do Brasil sr. notes 13 1/2s, 2005 (Brazil) 60,750
--------------
529,275
Paper and Forest Products (1.6%)
- ------------------------------------------------------------------------------------------------------------
140,000 APP Finance II Mauritius Ltd. bonds stepped-coupon
zero % (12s, 12/29/49) 2049 (Indonesia) ++ 114,800
250,000 Buckeye Cellulose Corp. sr. sub. notes 9 1/4s, 2008 266,250
280,000 Florida Coast Paper LLC 1st mtge. Ser. B, 12 3/4s, 2003 299,600
180,000 Impac Group Inc. 144A sr. sub. notes 10 1/8s, 2008 183,150
300,000 Indah Kiat Financial Mauritius Ltd. company guaranty 10s, 2007
(Indonesia) 248,250
50,000 Maxxam Group Holdings, Inc. sr. notes Ser. B, 12s, 2003 54,813
180,000 Pindo Deli Finance Mauritius Ltd. 144A company guaranty
10 3/4s, 2007 (India) 145,800
200,000 PT Pabrik Kertas Tjiwi Kimia company guaranty 10s, 2004
(Indonesia) 165,000
460,000 Repap New Brunswick sr. notes 10 5/8s, 2005 (Canada) 466,900
440,000 Riverwood International Corp. sr. sub. notes 10 7/8s, 2008 443,300
50,000 Riverwood International Corp. company guaranty 10 5/8s, 2007 52,875
--------------
2,440,738
Pharmaceuticals and Biotechnology (1.8%)
- ------------------------------------------------------------------------------------------------------------
2,495,000 ICN Pharmaceuticals, Inc. 144A sr. notes 9 1/4s, 2005 2,641,581
120,000 PharMerica, Inc. 144A sr. sub. notes 8 3/8s, 2008 120,300
--------------
2,761,881
Publishing (0.7%)
- ------------------------------------------------------------------------------------------------------------
280,000 Affinity Group Holdings sr. notes 11s, 2007 303,100
285,000 American Media Operation, Inc. sr. sub. notes 11 5/8s, 2004 309,225
50,000 Hollinger International Publishing, Inc. company guaranty
9 1/4s, 2007 53,000
50,000 Hollinger International Publishing, Inc. company guaranty
8 5/8s, 2005 52,500
70,000 Perry-Judd 144A sr. sub. notes 10 5/8s, 2007 74,900
120,000 News America Holdings, Inc. deb. 7 3/4s, 2045 124,961
35,000 News America Holdings, Inc. deb. 7.7s, 2025 36,642
45,000 Von Hoffman Press Inc. 144A sr. sub. notes 10 3/8s, 2007 48,375
--------------
1,002,703
Railroads (0.1%)
- ------------------------------------------------------------------------------------------------------------
170,000 TFM S.A. de C.V. company guaranty stepped-coupon zero %
(11 3/4s, 6/15/02), 2009 ++ 114,538
Recreation (0.2%)
- ------------------------------------------------------------------------------------------------------------
275,000 Six Flags Corp. sr. notes 8 7/8s, 2006 280,500
Restaurants (0.1%)
- ------------------------------------------------------------------------------------------------------------
100,000 FRD Acquisition Co. sr. notes Ser. B, 12 1/2s, 2004 109,250
Retail (1.2%)
- ------------------------------------------------------------------------------------------------------------
60,000 Color Spot Nurseries sr. sub. notes 10 1/2s, 2007 59,100
200,000 Federated Department Stores sr. notes 8 1/2s, 2003 218,276
25,000 Federated Department Stores, Inc. sr. notes 8 1/8s, 2002 26,594
177,000 Guitar Center Management Co. 144A sr. notes 11s, 2006 196,470
225,000 Johns Manville International Group sr. notes 10 7/8s, 2004 249,187
250,000 K mart Corp. med. term notes 7.86s, 2002 252,700
200,000 K mart Corp. deb. 7 3/4s, 2012 201,000
250,000 Mothers Work, Inc. sr. notes 12 5/8s, 2005 271,250
60,000 NBTY Inc. 144A sr. sub. notes 8 5/8s, 2007 61,200
50,000 Rite Aid Corp. notes 6.7s, 2001 50,766
166,000 United Stationer Supply, Inc. sr. sub. notes 12 3/4s, 2005 191,730
--------------
1,778,273
Satellite Services (1.1%)
- ------------------------------------------------------------------------------------------------------------
665,000 Echostar Satellite Broadcast Corp. sr. disc. notes stepped-
coupon zero % (13 1/8s, 3/15/00), 2004 ++ 606,813
150,000 Echostar DBS Corp. company guaranty 12 1/2s, 2002 169,500
200,000 Globalstar L.P. Capital sr. notes 11 3/8s, 2004 209,500
155,000 Iridium LLC/Capital Corp. company guaranty Ser. B, 14s, 2005 179,800
100,000 Iridium LLC/Capital Corp. company guaranty Ser. A, 13s, 2005 112,000
30,000 Iridium LLC/Capital Corp. 144A sr. notes 11 1/4s, 2005 31,800
300,000 Orbcomm Global Capital Corp. sr. notes Ser. B, 14s, 2004 350,250
--------------
1,659,663
Semiconductors (0.6%)
- ------------------------------------------------------------------------------------------------------------
44,827 Cirent Semiconductor sr. sub. notes 10.22s, 2002 46,732
50,059 Cirent Semiconductor 144A sr. sub. notes 10.14s, 2004 52,315
675,645 Fairchild Semiconductor Corp. 144A sr. sub. notes 11.74s, 2008 755,230
--------------
854,277
Shipping (0.1%)
- ------------------------------------------------------------------------------------------------------------
30,000 Chemical Leaman Corp. sr. notes 10 3/8s, 2005 31,950
80,000 MC Shipping, Inc. 144A sr. notes 11 1/4s, 2008 80,400
--------------
112,350
Steel (0.3%)
- ------------------------------------------------------------------------------------------------------------
185,000 Ameristeel Corp. 144A sr. notes 8 3/4s, 2008 188,238
210,000 Hylsa S.A. de C.V. 144A bonds 9 1/4s, 2007 (Mexico) 210,525
110,000 WHX Corp. 144A sr. notes 10 1/2s, 2005 112,200
--------------
510,963
Telecommunications (5.1%)
- ------------------------------------------------------------------------------------------------------------
90,000 American Communication Services, Inc. sr. notes 13 3/4s, 2007 106,650
500,000 American Communication Services, Inc. sr. disc. notes stepped-
coupon zero % (12 3/4s, 4/1/01), 2006 ++ 402,500
350,000 Barak ITC 144A sr. disc. notes stepped-coupon zero %
(12 1/2s, 11/15/02), 2007 (Israel) ++ 204,750
90,000 Colt Telecom Group PLC sr. disc. notes stepped-coupon zero %
(12s, 12/15/01), 2006 (United Kingdom) ++ 72,000
45,000 Consorcio Ecuatoiano notes 14s, 2002 (Ecuador) 47,250
85,000 Esat Holdings Ltd. 144A sr. notes stepped-coupon zero %
(12 1/2s, 2/01/02), 2007 (Ireland) ++ 63,750
200,000 Esprit Teleom Group PLC sr. notes 11 1/2s, 2007
(United Kingdom) 219,000
200,000 Focal Communications Corp. 144A sr. disc. notes stepped-
coupon zero % (12 1/8s, 2/15/03), 2008 ++ 117,000
110,000 Fonorola, Inc. sr. notes 12 1/2s, 2002 (Canada) 123,200
882,000 GST Telecommunications,Inc. company guaranty stepped-
coupon zero % (13 7/8s, 12/15/00), 2005 ++ 732,060
100,000 Hyperion Telecommunications, Inc. sr. disc. notes stepped-
coupon Ser. B, zero % (13s, 4/15/01), 2003 ++ 76,750
175,000 Hyperion Telecommunications, Inc. sr. notes Ser. B, 12 1/4s, 2004 196,875
250,000 ICG Holdings, Inc. sr. disc. notes stepped-coupon zero %
(13 1/2s, 9/15/00), 2005 ++ 213,125
300,000 ICG Services Inc. 144A sr. disc. notes stepped-coupon zero %
(10s, 2/15/03), 2008 ++ 195,000
125,000 Intermedia Communications, Inc. sr. disc. notes stepped-coupon
Ser. B, zero % (11 1/4s, 7/15/02), 2007 ++ 93,750
160,000 Intermedia Communications, Inc. sr. notes Ser. B, 8 7/8s, 2007 171,200
100,000 Intermedia Communications, Inc. sr. notes Ser. B, 8 1/2s, 2008 104,750
290,000 Knology Holdings Inc. sr. disc. notes stepped-coupon zero %
(11 7/8s, 10/15/02), 2007 ++ 174,000
65,000 L-3 Communications Corp. sr. sub. notes Ser. B, 10 3/8s, 2007 71,988
130,000 McLeod USA, Inc. 144A sr. notes 8 3/8s, 2008 134,550
70,000 MetroNet Communications Corp. sr. disc. notes stepped-coupon
zero % (10 3/4s, 11/1/02), 2007 (Canada) ++ 46,550
90,000 Microcell Telecommunications sr. disc. notes stepped-coupon
Ser. B, zero % (14s, 12/1/01), 2006 (Canada) ++ 66,825
250,000 Netia Holdings B.V. 144A company guaranty 10 1/4s, 2007
(Poland) 256,875
30,000 Netia Holdings B.V. 144A company guaranty stepped-coupon
zero % (11 1/4s, 11/1/02), 2007 (Poland) ++ 20,475
480,000 NEXTLINK Communications, Inc. 144A sr. disc. notes stepped-
coupon zero % (9.45s, 4/15/03), 2008 ++ 303,600
815,000 Sprint Spectrum L.P. sr. notes 11s, 2006 941,325
400,000 Teligent, Inc. sr. notes 11 1/2s, 2007 420,000
380,000 Teligent, Inc. 144A sr. disc. notes stepped-coupon zero %
(11 1/2s, 3/1/03), 2008 ++ 219,450
60,000 Transtel S.A. 144A pass through certificates
12 1/2s, 2007 (Colombia) 57,450
1,000,000 USN Communications, Inc. sr. disc. notes stepped-coupon
Ser. B, zero % (14 5/8s, 8/15/00), 2004 ++ 832,500
100,000 WinStar Communications. Inc. 144A sr. sub. notes 11s, 2008 102,500
550,000 WinStar Communications. Inc. 144A sr. sub. notes
stepped-coupon zero % (15s, 3/1/02), 2007 734,250
300,000 WinStar Equipment Corp. company guaranty 12 1/2s, 2004 343,500
--------------
7,865,448
Telephone Services (1.5%)
- ------------------------------------------------------------------------------------------------------------
300,000 BTI Telecom Corp. sr. notes 10 1/2s, 2007 314,250
15,000 Cia de Telecomunicaciones de Chile S.A. notes 7 5/8s, 2006
(Chile) 15,191
320,000 Econophone Inc. 144A sr. disc. notes stepped-coupon zero %
(11s, 2/15/03), 2008 ++ 188,800
90,000 Facilicom International 144A sr. notes 10 1/2s, 2008 94,050
200,000 Flag Limited 144A sr. notes 8 1/4s, 2008 (Bermuda) 205,000
90,000 IDT Corp. 144A sr. notes 8 3/4s, 2006 89,550
260,000 Intelcom Group (USA), Inc. company guaranty
stepped-coupon zero % (12 1/2s, 5/1/01), 2006 )++ 208,000
700,000 Ionica Group PLC sr. disc. notes stepped-coupon zero %
(15s, 5/1/02), 2007 (United Kingdom) ++ 297,500
75,000 ITC Deltacom, Inc. sr. notes 11s, 2007 85,125
175,000 Qwest Communications International Inc. sr. disc. notes
stepped-coupon zero % (9.47s, 10/15/02), 2007 ++ 128,625
180,000 RSL Communications, Ltd. company guaranty 12 1/4s, 2006 205,200
130,000 RSL Communications, Ltd. 144A sr. disc. notes stepped-coupon
zero % (10 1/8s, 3/1/03), 2008 ++ 81,738
90,000 RSL Communications, Ltd. 144A sr. notes 9 1/8s, 2008 90,900
95,000 US West Capital Funding, Inc. company guaranty 6.95s, 2037 99,039
100,000 Viatel, Inc. sr. disc. notes stepped-coupon zero %
(15s, 1/15/00), 2005 ++ 94,000
--------------
2,196,968
Textiles (0.6%)
- ------------------------------------------------------------------------------------------------------------
275,000 Clark-Schwebel sr. notes 10 1/2s, 2006 305,250
30,000 GFSI, Inc. sr. sub. notes Ser. B, 9 5/8s, 2007 31,500
40,000 Glenoit Corp. 144A sr. sub. notes 11s, 2007 43,300
150,000 Polysindo International Finance company guaranty 11 3/8s, 2006
(Indonesia) 102,000
105,000 Tultex Corp. sr. notes 10 5/8s, 2005 109,856
200,000 Tultex Corp. company guaranty 9 5/8s, 2007 202,000
70,000 Worldtex, Inc. 144A sr. notes 9 5/8s, 2007 71,050
--------------
864,956
Tobacco (0.3%)
- ------------------------------------------------------------------------------------------------------------
25,000 Philip Morris Cos., Inc. deb. 7 3/4s, 2027 26,714
230,000 Philip Morris Cos., Inc. notes 7 1/2s, 2004 241,097
80,000 Philip Morris Cos., Inc. notes 7 1/2s, 2002 82,940
75,000 Sampoerna International Finance Co. 144A company guaranty
8 3/8s, 2006 (Indonesia) 54,000
--------------
404,751
Transportation (0.3%)
- ------------------------------------------------------------------------------------------------------------
150,000 Eletson Holdings, Inc. 1st pfd. mtge. notes 9 1/4s, 2003 (Greece) 154,988
90,000 Hermes Europe Railtel sr. notes 11 1/2s, 2007 101,925
170,000 Kitty Hawk, Inc. company guaranty 9.95s, 2004 178,500
--------------
435,413
Wireless Communications (0.4%)
- ------------------------------------------------------------------------------------------------------------
615,000 CellNet Data Systems, Inc. sr. disc. notes stepped-coupon
zero % (14s, 10/1/02), 2007 ++ 352,088
90,000 Comcast Cellular Holdings sr. notes Ser. B, 9 1/2s, 2007 94,500
250,000 International Wireless Communications, Inc. sr. disc. notes
zero %, 2001 80,000
70,000 Telesystem International Wireless Inc. sr. disc. notes stepped-
coupon Ser. C, zero % (10 1/2s, 11/1/02), 2007 ++ $ 44,450
--------------
571,038
--------------
Total Corporate Bonds and Notes (cost $71,344,174) $ 74,035,555
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (18.8%) *
PRINCIPAL AMOUNT VALUE
U.S. Government Agency Mortgage Obligations (9.8%)
- ------------------------------------------------------------------------------------------------------------
$ 10,000 Federal Home Loan Mortgage Association
7s, TBA, December 15, 2012 $ 10,172
252,717 Federal Home Loan Mortgage Association
Adjustable Rate Mortgage 7.143s, July 1, 2027 256,508
131,433 Federal National Mortgage Association
Adjustable Rate Morgage 7.837s, May 1, 2025 137,020
Government National Mortgage Association
155,000 7 1/2s, TBA, April 15, 2028 158,923
110,000 7s, TBA, April 15, 2028 111,100
106,000 5 1/2s, TBA, April 15, 2028 106,563
Government National Mortgage Association
Adjustable Rate Mortgages
688,355 7s, July 20, 2024 706,610
Government National Mortgage Association
Pass-through Certificates
1,917,298 8s, with due dates from February 15, 2027 to
November 15, 2027 1,985,002
5,469,215 7 1/2s, with due dates from October 15, 2022 to
November 15, 2027 5,625,210
4,767,042 7s, with due dates from October 15, 2025 to
February 15, 2028 4,815,002
944,460 6 1/2s, January 15, 2028 934,714
--------------
14,846,824
U.S. Treasury Obligations (9.0%)
- ------------------------------------------------------------------------------------------------------------
U.S. Treasury Bonds
3,188,000 6 5/8s, February 15, 2027 # 3,458,980
1,135,000 6 1/2s, November 15, 2026 # 1,211,261
25,000 6 1/8s, November 15, 2027 25,637
U.S. Treasury Notes
45,000 7 7/8s, November 15, 2004 50,274
980,000 7s, July 15, 2006 1,059,164
1,015,000 6 7/8s, May 15, 2006 1,088,273
3,615,000 6 5/8s, June 30, 2001 3,717,232
40,000 6 1/2s, May 31, 2001 40,969
135,000 6 1/8s, August 15, 2007 138,839
2,510,000 5 3/4s, November 30, 2002 2,517,455
9,000 5 5/8s, December 31, 2002 8,985
65,000 5 5/8s, December 31, 1999 65,030
205,000 5 1/2s, February 28, 2003 203,782
--------------
13,585,881
--------------
Total U.S. Government and Agency Obligations
(cost $28,139,859) $ 28,432,705
FOREIGN GOVERNMENT BONDS AND NOTES (11.0%) *
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
AUD 4,305,000 Australia (Government of) bonds 8 3/4s, 2008 $ 3,497,896
DKK 31,000 Denmark (Government of) 6s, 2026 4,355
DEM 4,605,000 Germany (Federal Republic of)
Unity Fund bonds 8s, 2002 2,799,142
USD 595,000 Russia (Government of) deb. principal loans FRB
6.719s, 2020 +++ 378,569
ZAR 14,453,000 South Africa (Republic of) bonds Ser. 153, 13s, 2010 2,837,193
GBP 3,115,000 United Kingdom Treasury bills bonds 8s, 2007 5,720,459
GBP 640,000 United Kingdom Treasury bonds 8s, 2021 1,366,745
--------------
Total Foreign Government Bonds and Notes
(cost $16,649,002) $ 16,604,359
BRADY BONDS (5.4%) *
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
$ 2,460,000 Argentina (Republic of) Ser. L-GP, stepped-
coupon 5 3/4s, (6s, 3/31/99), 2023 ++ $ 1,885,098
1,610,047 Brazil (Government of) stepped-coupon
4 1/2s (5s, 4/30/98), 2014 ++ 1,354,533
FRF 870,000 Ivory Coast -- FLIRB collateralized FRB 2s, 2018 ## 52,012
FRF 870,000 Ivory Coast -- Past due interest bonds 1.9s, 2018 ## 59,040
1,455,000 Peru (Government of) 144A Ser. Past due
interest bonds, 4s, 2017 998,567
880,000 Philippines (Government of) Ser. B, FRB 6 1/2s, 2017 774,400
420,000 Poland (Government of) bonds ser.
stepped-coupon 4s (5s, 10/1/98), 2014 ++ 376,446
3,230,000 United Mexican States sec. Ser. B, 6 1/4s, 2019 2,741,624
--------------
Total Brady Bonds (cost $8,249,563) $ 8,241,720
PREFERRED STOCKS (4.5%) *
NUMBER OF SHARES VALUE
- ------------------------------------------------------------------------------------------------------------
600 Adelphia Communications Corp. Ser. B, $13.00 cum. pfd. $ 71,400
41 American Communications Services $12.75 pfd. [2 DBL. DAGGERS] 47,663
2,343 AmeriKing, Inc. $3.25 pfd. [2 DBL. DAGGERS] 63,261
26 Anvil Holdings Ser. B, $3.25 pfd. [2 DBL. DAGGERS] 650
14,000 California Federal Bancorp Inc. Ser. A, $2.281 pfd. 381,500
692 Capstar Broadcasting Inc. 144A $12.00 pfd. 81,310
11,880 CGA Group Ltd. 144A Ser. A, $13.75 pfd. [2 DBL. DAGGERS] 320,760
2,575 Chevy Chase Capital Corp. Ser. A, $5.188 pfd. 131,325
1,225 Citadel Broadcasting Inc. 144A $13.25 cum. pfd. [2 DBL. DAGGERS] 150,063
3,744 CSC Holdings Inc. Ser. M, $11.125 cum. [2 DBL. DAGGERS] 428,688
1,750 Diva Systems Corp. Ser. C, $6.00 pfd. 22,750
9,000 Diva Systems Corp. Ser. D, $6.00 pfd. 117,000
170 Dobson Communications 144A $12.25 pfd. [2 DBL. DAGGERS] 186,150
2 Echostar Communications Corp. 144A 12.125% pfd. [2 DBL. DAGGERS] 2,230
3,116 El Paso Electric Co. $11.40 pfd [2 DBL. DAGGERS] 346,266
360,000 Fresenius Medical Care AG Ser. D, $9.00 pfd. (Germany) 376,200
200 Hyperion Telecommunications Ser. B, $12.875 pfd. [2 DBL. DAGGERS] 229,000
285 ICG Holdings, Inc. $14.25 pfd. (Canada) 344,850
410 Intermedia Communication Ser. B, 13.50% pfd. [2 DBL. DAGGERS] 502,250
211 IXC Communications, Inc. $12.50 pfd. [2 DBL. DAGGERS] 257,420
1,200 Nebco Evans Holding Co. 144A $11.25 pfd. [2 DBL. DAGGERS] 124,800
1,063 NEXTEL Communications, Inc. Ser. D, $13.00 cum. pfd. [2 DBL. DAGGERS] 1,233,080
2,688 Nextlink Communications, Inc. 144A $7.00 pfd. 169,344
84 NTL Inc. 144A Ser. B, $13.00 pfd. [2 DBL. DAGGERS] 101,010
5,000 Public Service Co. of New Hampshire $2.65 1st mtge. pfd. 130,000
1,754 SFX Broadcasting, Inc. Ser. E, $12.625 pfd. [2 DBL. DAGGERS] 207,849
373 Spanish Broadcasting Systems 14.25% cum. pfd. 391,650
1,100 Von Hoffman Corp. 144A $13.50 pfd. 37,125
165 Webster Financial $7.375 pfd. 163,448
200 WinStar Communications. Inc. 144A $14.25 cum. pfd. [2 DBL. DAGGERS] 244,000
--------------
Total Preferred Stocks (cost $6,258,160) $ 6,863,042
COLLATERALIZED MORTGAGE OBLIGATIONS (3.1%) *
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
$ 260,000 Commercial Mortgage Acceptance Corp.
Ser. 97-ML1, Class D, 7.11s, 2030 $ 260,975
420,000 Countrywide Mortgage Backed Securities, Inc.
Ser. 93-C, Class A8, 6 1/2s, 2024 405,724
First Union-Lehman Brothers Commercial Mortgage
255,000 Ser. 97-C2, Class A3, 6.65s, 2007 259,144
475,000 Ser. 97-C2, Class D, 7.12s, 2012 475,445
5,700,542 Ser. 97-C2, Class IO, 1.09s, 2027 513,049
Freddie Mac
200,000 Ser. 2040, Class PE 7.5s, 2028 214,938
185,000 Ser. 1602, Class PJ, 6.5s, 2023 186,677
155,000 Ser. 1832, Class G, 6.5s, 2011 153,886
485,000 Ser. 25, Class B, 6.5s, 2008 486,667
111,000 Merrill Lynch Mortgage Investors, Inc. Ser. 98-C2,
Class D, 7.1158s, 2030 111,191
PNC Mortgage Securities Corp.
795,447 Ser. 97-4, Class 2PP3, 7 1/4s, 2027 805,788
500,772 Ser. 97-6, Class A2, 6.6s, 2027 502,181
160,000 Prudential Home Mortgage Securities Ser. 93-57,
Class A4, 5.9s, 2023 158,608
118,712 Rural Housing Trust Ser. 87-1, Class D, 6.33s, 2026 118,770
--------------
Total Collateralized Mortgage Obligations (cost $4,841,530) $ 4,653,043
UNITS (1.9%) *
NUMBER OF UNITS VALUE
- ------------------------------------------------------------------------------------------------------------
275 Allegiance Telecom Inc. units sr. disc. stepped-coupon
notes zero % (11 3/4s, 2/15/03), 2008 ++ $ 159,500
350 Australis Media, Ltd. units stepped-coupon zero %
(15 3/4s, 5/15/03), 2003 (Australia) (In Default) ++ + 70,000
4 Celcaribe S.A. 144A units stepped-coupon zero %,
(13 1/2s, 3/15/98), 2004 (Colombia) ++ 80,400
720 Club Regina, Inc. 144A units 13s, 2004 774,000
40 Concentric Network Corp. units 12 3/4s, 2007 47,000
120 Conecel Holdings 144A units 14s, 2000 130,200
413 Diva Systems Corp. 144A units stepped-coupon zero %
(12 5/8s,3/1/03), 2008 ++ 227,150
380 DTI Holdings Inc. units stepped-coupon zero %
(12 1/2s, 3/1/03), 2008 ++ 221,350
280 KMC Telecom Holdings, Inc. units stepped-coupon zero %
(12 1/2s, 2/15/03), 2008 ++ 166,600
140 Orbital Imaging Corp. units 11 5/8s, 2005 152,950
55 Real Time Data 144A units stepped-coupon zero %
(13 1/2s, 8/15/01), 2006 ++ 28,050
20 Stone Container Corp. units sr. sub. 12 1/4s, 2002 20,550
175 Transamerican Refining units 16s, 2003 185,500
155 Wireless One, Inc. units stepped-coupon zero %
(13 1/2s, 8/1/01), 2006 ++ 18,600
225 XCL Ltd units sr. sec. notes 13 1/2s, 2004 292,500
2,000 XCL Ltd. units cum. pfd. zero %, 2006 260,000
--------------
Total Units (cost $2,747,555) $ 2,834,350
CONVERTIBLE BONDS AND NOTES (1.6%) *
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
$ 902,000 APP Global Finance Ltd. cv. bond zero %, 2012
(United Kingdom) $ 235,647
300,000 APP Global Finance (V) Ltd. 144A cv. sec. 2s, 2000
(United Kingdom) 309,750
485,000 Argosy Gaming cv. sub. notes 12s, 2001 461,963
150,000 Corporate Express, Inc. cv. notes 4 1/2s, 2000 133,875
250,000 Exide Corp. 144A cv. sr. sub. notes 2.9s, 2005 167,500
4,000 GST Telecommunications, Inc. cv. sr. disc. notes stepped-coupon
zero % (13 7/8s, 12/15/00), 2005 ++ 6,280
160,000 Integrated Device Technology, Inc. cv. sub. notes 5 1/2s, 2002 143,600
140,000 National Semiconductor Corp. 144A cv. deb. 6 1/2s, 2002 134,925
500,000 NovaCare, Inc. cv. sub. deb. 5 1/2s, 2000 480,000
103,000 Pricellular Wireless Corp. 144A cv. sub. notes stepped-coupon
zero % (10 3/4s, 8/15/00) ++ 113,815
150,000 WinStar Communications. Inc. 144A cv. sr. disc. notes stepped-
coupon zero % (14s, 10/15/00), 2005 ++ 209,625
--------------
Total Convertible Bonds and Notes (cost $2,104,938) $ 2,396,980
ASSET-BACKED SECURITIES (0.8%) *
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
$ 50,000 Capital Equipment Receivables Trust Ser. 96-1, Class A4,
6.28s, 2000 $ 50,242
70,000 Contimortgage Home Equity Loan Trust Ser. 97-1, Class M2,
7.67s, 2025 70,459
347,446 GMAC Commercial Mortgage Securities Inc. Ser. 97-C2,
Class A1, 6.45s, 2004 350,269
555,000 Green Tree Financial Corp. Ser. 98-2, Class A5, 6.24s, 2016 553,526
202,193 Green Tree Recreational Equipment & Cons Ser. 97-B, Class A1,
6.55s, 2028 203,710
--------------
Total Asset-Backed Securities (cost $1,227,602) $ 1,228,206
WARRANTS (0.3) * EXPIRATION
NUMBER OF WARRANTS DATE VALUE
- ------------------------------------------------------------------------------------------------------------
615 Cellnet Data Systems, Inc. 9/15/07 $ 12,300
11,800 CGA Group Ltd. 144A 4/15/01 118
90 Colt Telecommunications Group PLC 12/31/06 12,150
35 Diva Systems Corp. 5/15/06 9,188
85 Esat Holdings, Inc. (Ireland) 1/1/04 2,975
1,024 Fitzgeralds Gaming Co. 12/19/98 10
120 Globalstar Telecom 144A 2/15/04 16,200
400 Hyperion Telecommunications 144A 4/15/01 28,000
110 Interact Systems Inc. 8/1/03 28
25 Intermedia Communications 6/1/00 4,025
30 International Wireless Communications Holdings 144A 8/15/01 690
1,100 Iridium World Com 144A 7/15/05 269,500
290 Knology Holdings Inc. 144A 10/15/07 145
160 McCaw International Ltd. 4/15/07 48
160 Orion Network Systems 1/15/07 1,600
180 RSL Communications Ltd. 11/15/06 17,460
100 Spanish Broadcasting Systems 144A 6/30/99 20,500
45 Sterling Chemicals Holdings 8/15/08 1,170
395 UIH Australia/Pacific, Inc. 144A 5/15/06 4,740
130 Urohealth Systems Inc. 4/10/04 1
--------------
Total Warrants (cost $233,376) $ 400,848
COMMON STOCKS (0.2%) *
NUMBER OF SHARES VALUE
- ------------------------------------------------------------------------------------------------------------
4,950 American Mobile Satellite Corp. + $ 70,538
50 AmeriKing, Inc. + 2,500
4,100 Chattem, Inc. + 103,525
1,213 Hedstrom Holdings, Inc. 144A 1,668
3,059 NEXTEL Communications, Inc. Class A + 103,241
60 Paging Do Brazil Holdings Co., LLC Class B + 1
900 Terex Corp. Rights + 18,000
--------------
Total Common Stocks (cost $235,871) $ 299,473
CONVERTIBLE PREFERRED STOCKS (--%) *(cost $5,467)
NUMBER OF SHARES VALUE
- ------------------------------------------------------------------------------------------------------------
29 XCL Ltd $8.075 cv. pfd. $ 3,770
SHORT-TERM INVESTMENTS (3.8%) *
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
TRL 120,200,000,000 Turkey Treasury Bills zero %, July 29, 1998 $ 358,567
TRL 109,790,000,000 Turkey Treasury Bills zero %, June 17, 1998 381,055
TRL 95,790,000,000 Turkey Treasury Bills zero %, June 4, 1998 333,286
$ 4,680,000 Interest in $223,360,000 joint repurchase agreement
dated March 31, 1998 with S.B.C Warburg, Inc.
due April 1, 1998 with respect to various
U.S. Treasury obligations -- maturity value
of $4,680,770 for an effective yield of 5.92% 4,680,770
--------------
Total Short-Term Investments (cost $5,742,330) $ 5,753,678
- ------------------------------------------------------------------------------------------------------------
Total Investments (cost $147,779,427) *** $ 151,747,729
- ------------------------------------------------------------------------------------------------------------
* Percentages indicated are based on net assets of $151,166,323.
*** The aggregate identified cost on a tax basis is $147,993,481, resulting in gross unrealized
appreciation and depreciation of $6,931,367 and $3,177,119, respectively, or net unrealized
appreciation of $3,754,248.
+ Non-income-producing security.
++ The interest rate and date shown parenthetically represent the new interest rate to be
paid and the date the fund will begin receiving interest at this rate.
[2 DBL. DAGGERS] Income may be received in cash or additional securities at the discretion of the issuer.
+++ A portion of the income will be received in additional securities.
# A portion of these securities were pledged and segregated with the custodian to cover
margin requirements for futures contracts at March 31, 1998.
## When-issued securities (Note 1).
(R) Real Estate Investment Trust.
144A after the name of a security represents those exempt from registration under
Rule 144A of the Securities Act of 1933. These securities may be resold in transactions
exempt from registration, normally to qualified institutional buyers.
ADR, after the name of a foreign holding stands for American Depository Receipts, representing
ownership of foreign securities on deposit with a domestic custodian bank.
FLIRB represents Front Loaded Interest Reduction Bond.
TBA after the name of a security represents to be announced securities (Note 1).
The rate shown on Floating Rate Bonds (FRB) and Floating Rate Notes (FRN) are the current
interest rates shown at March 31, 1998, which are subject to change based on the terms of
the security.
Diversification by Country
Distribution of investments by country of issue at March 31, 1998:
(as percentage of Market Value)
Argentina 1.3%
Australia 2.5
Brazil 1.3
Germany 2.2
Mexico 2.4
South Africa 1.9
United Kingdom 6.1
United States 76.4
Other 5.9
-----
Total 100.0%
<CAPTION>
- -------------------------------------------------------------------------------------------
Forward Currency Contracts to Buy at March 31, 1998
(aggregate face value $23,836,599)
Unrealized
Market Aggregate Face Delivery Appreciation/
Value Value Date (Depreciation)
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Danish Krone $ 491,277 $ 506,081 6/17/98 $ (14,804)
Deutschemarks 8,117,364 8,286,496 6/17/98 (169,132)
French Franc 104,174 106,154 6/17/98 (1,980)
Italian Lira 3,074,974 3,128,795 6/17/98 (53,821)
Japanese Yen 7,336,032 7,662,373 6/17/98 (326,341)
Mexican Peso 170,966 162,963 5/12/98 8,003
Mexican Peso 212,227 203,702 5/11/98 8,525
New Zealand Dollar 156,158 159,371 6/17/98 (3,213)
Philippines Peso 286,740 290,089 4/27/98 (3,349)
South Korean Won 650,233 588,882 3/11/99 61,351
Spanish Peseta 823,252 839,656 6/17/98 (16,404)
Swedish Krona 1,279,020 1,276,311 6/17/98 2,709
Swiss Franc 600,029 625,726 6/17/98 (25,697)
- -------------------------------------------------------------------------------------------
$ (534,153)
- -------------------------------------------------------------------------------------------
<CAPTION>
Forward Currency Contracts to Sell at March 31, 1998
(aggregate face value $27,844,821)
Aggregate Unrealized
Market Face Delivery Appreciation/
Value Value Date (Depreciation)
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Australian Dollars $ 3,512,435 $ 3,533,032 6/17/98 $ 20,597
British Pounds 6,855,965 6,741,166 6/17/98 (114,799)
Deutschemarks 10,511,075 10,701,782 6/17/98 190,707
French Franc 116,131 117,404 6/17/98 1,273
Italian Lira 1,634,514 1,663,023 6/17/98 28,509
Japanese Yen 3,221,688 3,338,746 6/17/98 117,058
New Zealand Dollar 184,476 192,650 6/17/98 8,174
South African Rand 917,445 926,553 6/17/98 9,108
Swiss Franc 603,842 630,465 6/17/98 26,623
- -------------------------------------------------------------------------------------------
$ 287,250
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
<CAPTION>
Futures Contracts Outstanding at March 31, 1998
Unrealized
Total Aggregate Face Expiration Appreciation/
Value Value Date (Depreciation)
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Euro DM (Long) $ 2,722,185 $ 2,724,040 Mar-99 $ (1,855)
Municipal Bond Index (Long) 1,347,500 1,353,375 Jun-98 (5,875)
U.S. Treasury Bond (Long) 8,177,000 8,166,947 Jun-98 10,053
Euro Lira (Short) 2,762,593 2,762,772 Mar-99 179
U.S. Treasury Note (Short) 1,322,750 1,337,875 Jun-98 15,125
U.S. Treasury Bond (Short) 7,866,250 7,873,050 Jun-98 6,800
- -------------------------------------------------------------------------------------------
$ 24,427
- -------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
March 31, 1998
<S> <C>
Assets
- ---------------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $147,779,427) (Note 1) $151,747,729
- ---------------------------------------------------------------------------------------------------
Cash 206,559
- ---------------------------------------------------------------------------------------------------
Foreign currency (cost $21,264) 22,085
- ---------------------------------------------------------------------------------------------------
Dividends, interest, and other receivables 2,231,530
- ---------------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 1,137,164
- ---------------------------------------------------------------------------------------------------
Receivable for securities sold 2,729,958
- ---------------------------------------------------------------------------------------------------
Receivable for open forward currency contracts 482,920
- ---------------------------------------------------------------------------------------------------
Receivable for closed forward currency contracts 146,157
- ---------------------------------------------------------------------------------------------------
Receivable for variation margin 6,044
- ---------------------------------------------------------------------------------------------------
Unamortized organization expenses (Note 1) 34,325
- ---------------------------------------------------------------------------------------------------
Total assets 158,744,471
Liabilities
- ---------------------------------------------------------------------------------------------------
Distributions payable to shareholders 242,082
- ---------------------------------------------------------------------------------------------------
Payable for securities purchased 5,354,707
- ---------------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 143,331
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 202,718
- ---------------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 24,642
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 5,072
- ---------------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 1,687
- ---------------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 101,493
- ---------------------------------------------------------------------------------------------------
Payable for open forward currency contracts 729,823
- ---------------------------------------------------------------------------------------------------
Payable for closed forward currency contracts 756,931
- ---------------------------------------------------------------------------------------------------
Other accrued expenses 15,662
- ---------------------------------------------------------------------------------------------------
Total liabilities 7,578,148
- --------------------------------------------------------------------------------------------------
Net assets $151,166,323
Represented by
- ---------------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $147,372,798
- ---------------------------------------------------------------------------------------------------
Distributions in excess of net investment income (Note 1) (1,544,547)
- ---------------------------------------------------------------------------------------------------
Accumulated net realized gains on investments and
foreign currency transactions (Note 1) 1,611,194
- ---------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments and assets and
liabilities in foreign currencies 3,726,878
- ---------------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $151,166,323
Computation of net asset value and offering price
- ---------------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($57,015,531 divided by 6,551,551 shares) $8.70
- ---------------------------------------------------------------------------------------------------
Offering price per class A share (100/95.25 of $8.70)* $9.13
- ---------------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($85,379,416 divided by 9,809,641 shares)** $8.70
- ---------------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($8,771,376 divided by 1,007,762 shares) $8.70
- ---------------------------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $8.70)* $8.99
- ---------------------------------------------------------------------------------------------------
* On single retail sales of less than $50,000. On sales of $50,000 or more and on group sales
the offering price is reduced.
** Redemption price per share is equal to net asset value less any applicable contingent deferred
sales charge.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Year ended March 31, 1998
<S> <C>
Investment income:
- --------------------------------------------------------------------------------------------------
Interest $10,735,975
- --------------------------------------------------------------------------------------------------
Dividends 512,806
- --------------------------------------------------------------------------------------------------
Total investment income 11,248,781
Expenses:
- --------------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 877,245
- --------------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 376,889
- --------------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 13,499
- --------------------------------------------------------------------------------------------------
Administrative services (Note 2) 7,534
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 118,182
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 685,897
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 39,181
- --------------------------------------------------------------------------------------------------
Amortization of organization expenses (Note 1) 11,329
- --------------------------------------------------------------------------------------------------
Reports to shareholders 25,135
- --------------------------------------------------------------------------------------------------
Registration fees 15,812
- --------------------------------------------------------------------------------------------------
Auditing 53,615
- --------------------------------------------------------------------------------------------------
Legal 19,364
- --------------------------------------------------------------------------------------------------
Postage 12,184
- --------------------------------------------------------------------------------------------------
Other 8,710
- --------------------------------------------------------------------------------------------------
Fees Waived by Manager (Note 2) (156,781)
- --------------------------------------------------------------------------------------------------
Total expenses 2,107,795
- --------------------------------------------------------------------------------------------------
Expense reduction (Note 2) (130,391)
- --------------------------------------------------------------------------------------------------
Net expenses 1,977,404
- --------------------------------------------------------------------------------------------------
Net investment income 9,271,377
- --------------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 1,233,096
- --------------------------------------------------------------------------------------------------
Net realized loss on foreign currency transactions (Note 1) (1,750,092)
- --------------------------------------------------------------------------------------------------
Net realized gain on futures contracts (Notes 1 and 3) 296,986
- --------------------------------------------------------------------------------------------------
Net realized gain on written options (Notes 1 and 3) 58,557
- --------------------------------------------------------------------------------------------------
Net unrealized depreciation of assets and liabilities in
foreign currencies during the year (175,351)
- --------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments and futures during the year 5,635,451
- --------------------------------------------------------------------------------------------------
Net gain on investments 5,298,647
- --------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $14,570,024
- --------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Year ended March 31
--------------------------------
1998 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase in net assets
- ----------------------------------------------------------------------------------------------------------------------
Operations:
- ----------------------------------------------------------------------------------------------------------------------
Net investment income $9,271,377 $4,407,634
- ----------------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments (161,453) 622,841
- ----------------------------------------------------------------------------------------------------------------------
Net unrealized appreciation
(depreciation) of investments 5,460,100 (1,707,317)
- ----------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 14,570,024 3,323,158
- ----------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ----------------------------------------------------------------------------------------------------------------------
From net investment income
- ----------------------------------------------------------------------------------------------------------------------
Class A (3,306,248) (1,689,156)
- ----------------------------------------------------------------------------------------------------------------------
Class B (4,296,155) (2,371,438)
- ----------------------------------------------------------------------------------------------------------------------
Class M (524,449) (253,993)
- ----------------------------------------------------------------------------------------------------------------------
In excess of net investment income
- ----------------------------------------------------------------------------------------------------------------------
Class A (32,083) --
- ----------------------------------------------------------------------------------------------------------------------
Class B (41,689) --
- ----------------------------------------------------------------------------------------------------------------------
Class M (5,089) --
- ----------------------------------------------------------------------------------------------------------------------
From net realized gain on investments
- ----------------------------------------------------------------------------------------------------------------------
Class A (199,916) (65,289)
- ----------------------------------------------------------------------------------------------------------------------
Class B (293,062) (97,835)
- ----------------------------------------------------------------------------------------------------------------------
Class M (33,891) (9,432)
- ----------------------------------------------------------------------------------------------------------------------
In excess of net realized gain on investments
- ----------------------------------------------------------------------------------------------------------------------
Class A (332,120) --
- ----------------------------------------------------------------------------------------------------------------------
Class B (486,866) --
- ----------------------------------------------------------------------------------------------------------------------
Class M (56,304) --
- ----------------------------------------------------------------------------------------------------------------------
Increase from capital share transactions (Note 4) 44,172,882 93,866,742
- ----------------------------------------------------------------------------------------------------------------------
Total increase in net assets 49,135,034 92,702,757
Net assets
- ----------------------------------------------------------------------------------------------------------------------
Beginning of year 102,031,289 9,328,532
- ----------------------------------------------------------------------------------------------------------------------
End of year (including distributions in excess and
undistributed net investment income
of $1,544,547 and $38,301, respectively) $151,166,323 $102,031,289
- ----------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS A
- --------------------------------------------------------------------------------------------------------------------
For the period
Per-share Year ended Feb. 26, 1996+
operating performance March 31 to March 31
- --------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value,
beginning of period $8.34 $8.38 $8.50
- --------------------------------------------------------------------------------------------------------------------
Investment operations
- --------------------------------------------------------------------------------------------------------------------
Net investment income (d) .65 .63 .04(c)
- --------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .40 (.02) (.13)
- --------------------------------------------------------------------------------------------------------------------
Total from
investment operations 1.05 .61 (.09)
- --------------------------------------------------------------------------------------------------------------------
Less distributions:
- --------------------------------------------------------------------------------------------------------------------
From net
investment income (.59) (.63) (.03)
- --------------------------------------------------------------------------------------------------------------------
In excess of
net investment income (.01)
- --------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments (.03) (.02) --
- --------------------------------------------------------------------------------------------------------------------
In excess of net
realized gain on investment (.06)
- --------------------------------------------------------------------------------------------------------------------
Total distributions (.69) (.65) (.03)
- --------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $8.70 $8.34 $8.38
- --------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- --------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 13.05 7.36 (1.41)*
- --------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $57,016 $39,178 $3,799
- --------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b)(d) 1.26 1.25 .13*
- --------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%)(d) 7.82 7.74 .50*
- --------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 211.24 169.27 18.98*
- --------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) Includes amounts paid through expense offset arrangements (Note 2).
(c) Per share net investment income has been determined on the basis of the
weighted average number of shares outsanding during the period.
(d) Reflects an expense limitaton in effect during the period (Note 2). As a result of such limitation,
expenses of the fund reflect a reduction of approximately $0.01, $0.01, and $0.02 per share class for
the period ended September 30, 1997, the year ended March 31, 1997, and the period
February 26, 1996 (commencement of operations) to March 31, 1996, respectively.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS B
- -----------------------------------------------------------------------------------------------------------------------
For the period
Per-share Year ended Feb. 26, 1996+
operating performance March 31 to March 31
- -----------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value,
beginning of period $8.34 $8.38 $8.50
- -----------------------------------------------------------------------------------------------------------------------
Investment operations
- -----------------------------------------------------------------------------------------------------------------------
Net investment income (d) .59 .57 .03(c)
- -----------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .40 (.03) (.12)
- -----------------------------------------------------------------------------------------------------------------------
Total from
investment operations .99 .54 (.09)
- -----------------------------------------------------------------------------------------------------------------------
Less distributions:
- -----------------------------------------------------------------------------------------------------------------------
From net
investment income (.53) (.56) (.03)
- -----------------------------------------------------------------------------------------------------------------------
In excess of
net investment income (.01) -- --
- -----------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments (.03) (.02) --
- -----------------------------------------------------------------------------------------------------------------------
In excess of net
realized gain on investment (.06) -- --
- -----------------------------------------------------------------------------------------------------------------------
Total distributions (.63) (.58) (.03)
- -----------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $8.70 $8.34 $8.38
- -----------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- -----------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 12.20 6.56 (1.41)*
- -----------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $85,379 $57,052 $5,048
- -----------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b)(d) 2.01 2.00 .20*
- -----------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%)(d) 7.07 6.99 .44*
- -----------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 211.24 169.27 18.98*
- -----------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) Includes amounts paid through expense offset arrangements (Note 2).
(c) Per share net investment income has been determined on the basis of the
weighted average number of shares outsanding during the period.
(d) Reflects an expense limitaton in effect during the period (Note 2). As a result of such limitation,
expenses of the fund reflect a reduction of approximately $0.01, $0.01, and $0.02 per share class for
the period ended September 30, 1997, the year ended March 31, 1997, and the period
February 26, 1996 (commencement of operations) to March 31, 1996, respectively.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS M
- ------------------------------------------------------------------------------------------------------------------
For the period
Per-share Year ended Feb. 26, 1996+
operating performance March 31 to March 31
- ------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value,
beginning of period $8.34 $8.38 $8.50
- ------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------
Net investment income (d) .64 .61 .04(c)
- ------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .39 (.03) (.13)
- ------------------------------------------------------------------------------------------------------------------
Total from
investment operations 1.03 .58 (.09)
- ------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------
From net
investment income (.57) (.60) (.03)
- ------------------------------------------------------------------------------------------------------------------
In excess of
net investment income (.01) -- --
- ------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments (.03) (.02) --
- ------------------------------------------------------------------------------------------------------------------
In excess of net
realized gain on investment (.06) -- --
- ------------------------------------------------------------------------------------------------------------------
Total distributions (.67) (.62) (.03)
- ------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $8.70 $8.34 $8.38
- ------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 12.76 7.09 (1.41)*
- ------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $8,771 $5,802 $482
- ------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b)(d) 1.51 1.50 .14*
- ------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%)(d) 7.57 7.48 .50*
- ------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 211.24 169.27 18.98*
- ------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) Includes amounts paid through expense offset arrangements (Note 2).
(c) Per share net investment income has been determined on the basis of the
weighted average number of shares outsanding during the period.
(d) Reflects an expense limitaton in effect during the period (Note 2). As a result of such limitation,
expenses of the fund reflect a reduction of approximately $0.01, $0.01, and $0.02 per share class for
the period ended September 30, 1997, the year ended March 31, 1997, and the period
February 26, 1996 (commencement of operations) to March 31, 1996, respectively.
</TABLE>
Notes to financial statements
March 31, 1998
Note 1
Significant accounting policies
Putnam Strategic Income Fund (formerly known as Putnam Diversified Income
Trust II) (the "fund") is registered under the Investment Company Act of 1940,
as amended, as a diversified, open-end management company. The fund seeks high
current income consistent with the preservation of capital by investing its
assets in debt securities of domestic or foreign issuers, including government
and corporate obligations. The fund may also invest in preferred stocks,
common stocks, and other equity securities, as well as in cash or money market
instruments.
The fund offers class A, class B, and class M shares. Class A shares are sold
with a maximum front-end sales charge of 4.75%. Class B shares, which convert
to class A shares after approximately eight years, do not pay a front-end
sales charge, but pay a higher ongoing distribution fee than class A shares,
and are subject to a contingent deferred sales charge, if those shares are
redeemed within six years of purchase. Class M shares are sold with a maximum
front-end sales charge of 3.25% and pay an ongoing distribution fee that is
lower than class B shares and higher than class A shares.
Expenses of the fund are borne pro-rata by the holders of each class of
shares, except that each class bears expenses unique to that class (including
the distribution fees applicable to such class). Each class votes as a class
only with respect to its own distribution plan or other matters on which a
class vote is required by law or determined by the Trustees. Shares of each
class would receive their pro-rata share of the net assets of the fund, if the
fund were liquidated. In addition, the Trustees declare separate dividends on
each class of shares.
The following is a summary of significant accounting policies consistently
followed by the fund in the preparation of its financial statements. The
preparation of financial statements is in conformity with generally accepted
accounting principles and requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities. Actual
results could differ from those estimates.
A) Security valuation Investments for which market quotations are readily
available are stated at market value, which is determined using the last
reported sale price, or, if no sales are reported -- as in the case of some
securities traded over-the-counter -- the last reported bid price. Securities
quoted in foreign currencies are translated into U.S. dollars at the current
exchange rate. Short-term investments having remaining maturities of 60 days
or less are stated at amortized cost, which approximates market value, and
other investments, including restricted securities, are stated at fair value
following procedures approved by the Trustees. Market quotations are not
considered to be readily available for long-term corporate bonds and notes;
such investments are stated at fair value on the basis of valuations furnished
by a pricing service, approved by the Trustees, which determines valuations
for normal, institutional-size trading units of such securities using methods
based on market transactions for comparable securities and various
relationships between securities that are generally recognized by
institutional traders.
B) Joint trading account Pursuant to an exemptive order issued by the
Securities and Exchange Commission, the fund may transfer uninvested cash
balances into a joint trading account along with the cash of other registered
investment companies and certain other accounts managed by Putnam Investment
Management, Inc. ("Putnam Management"), the fund's Manager, a wholly-owned
subsidiary of Putnam Investments, Inc.. These balances may be invested in one
or more repurchase agreements and/or short-term money market instruments.
C) Repurchase agreements The fund, or any joint trading account, through its
custodian, receives delivery of the underlying securities, the market value of
which at the time of purchase is required to be in an amount at least equal to
the resale price, including accrued interest. Putnam Management is responsible
for determining that the value of these underlying securities is at all times
at least equal to the resale price, including accrued interest.
D) Security transactions and related investment income Security transactions
are accounted for on the trade date (date the order to buy or sell is
executed). Interest income is recorded on the accrual basis. Dividend income
is recorded on the ex-dividend date except that certain dividends from foreign
securities are recorded as soon as the fund is informed of the ex-dividend
date. Discounts on zero coupon bonds, original issue discounts, stepped-coupon
bonds, and payment in kind bonds are accreted according to the
yield-to-maturity basis. Any premium resulting from the purchase of
stepped-coupon securities is amortized on a yield-to-maturity basis.
Securities purchased or sold on a when-issued or forward commitment or delayed
delivery basis may be settled a month or more after the trade date; interest
income is accrued based on the terms of the security. Losses may arise due to
changes in the market value of the underlying securities or if the
counterparty does not perform under the contract.
E) Foreign currency translation The accounting records of the fund are
maintained in U.S. dollars. The market value of foreign securities, currency
holdings, other assets and liabilities are recorded in the books and records
of the fund after translation to U.S. dollars based on the exchange rates on
that day. The cost of each security is determined using historical exchange
rates. Income and withholding taxes are translated at prevailing exchange
rates when accrued or incurred. The fund does not isolate that portion of
realized or unrealized gains or losses resulting from changes in the foreign
exchange rate on investments from fluctuations arising from changes in the
market prices of the securities. Such gains and losses are included with the
net realized and unrealized gain or loss on investments. Net realized gains
and losses on foreign currency transactions represent net exchange gains or
losses on closed forward currency contracts, disposition of foreign currencies
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 unrealized appreciation and
depreciation of assets and liabilities in foreign currencies arise from
changes in the value of open forward currency contracts and assets and
liabilities other than investments at the period end, resulting from changes
in the exchange rate.
F) Forward currency contracts The fund may engage in forward currency
contracts, which are agreements between two parties to buy and sell currencies
at a set price on a future date, to protect against a decline in value
relative to the U.S. dollar of the currencies in which its portfolio
securities are denominated or quoted (or an increase in the value of a
currency in which securities a fund intends to buy are denominated, when a
fund holds cash reserves and short-term investments). The U.S. dollar value of
forward currency contracts is determined using current forward currency
exchange rates supplied by a quotation service. The market value of the
contract will fluctuate with changes in currency exchange rates. The contract
is "marked to market" daily and the change in market value is recorded as an
unrealized gain or loss. When the contract is closed, the fund records a
realized gain or loss 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.
The fund could be exposed to risk if the value of the currency changes
unfavorably, if the counterparties to the contracts are unable to meet the
terms of their contracts or if the fund is unable to enter into a closing
position.
G) Futures and options contracts The fund may use futures and options
contracts to hedge against changes in the values of securities the fund owns
or expects to purchase. The fund may also write options on securities it owns
or in which it may invest to increase its current returns.
The potential risk to the fund is that the change in value of futures and
options contracts may not correspond to the change in value of the hedged
instruments. In addition, losses may arise from changes in the value of the
underlying instruments, if there is an illiquid secondary market for the
contracts, or if the counterparty to the contract is unable to perform. When
the contract is closed, the fund records a realized gain or loss 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. Realized gains and losses on purchased
options are included in realized gains and losses on investment securities.
Futures contracts are valued at the quoted daily settlement prices established
by the exchange on which they trade. Exchange traded options are valued at the
last sale price, or if no sales are reported, the last bid price for purchased
options and the last ask price for written options. Options traded
over-the-counter are valued using prices supplied by dealers.
H) TBA purchase commitments The fund may enter into "TBA" (to be announced)
purchase commitments to purchase securities for a fixed unit price at a future
date beyond customary settlement time. Although the unit price has been
established, the principal value has not been finalized. However, the amount
of the commitments will not fluctuate more than 1.0% from the principal
amount. The fund holds, and maintains until settlement date, cash or
high-grade debt obligations in an amount sufficient to meet the purchase
price, or the fund may enter into offsetting contracts for the forward sale of
other securities it owns. Income on the securities will not be earned until
settlement date. TBA purchase commitments may be considered securities in
themselves, and involve a risk of loss if the value of the security to be
purchased declines prior to the settlement date, which risk is in addition to
the risk of decline in the value of the fund's other assets. Unsettled TBA
purchase commitments are valued at the current market value of the underlying
securities, according to the procedures described under "Security valuation"
above.
Although the fund will generally enter into TBA purchase commitments with the
intention of acquiring securities for their portfolio or for delivery pursuant
to options contracts it has entered into, the fund may dispose of a commitment
prior to settlement if Putnam Management deems it appropriate to do so.
I) Line of credit The fund has entered into a committed line of credit with
certain banks. This line of credit agreement includes restrictions that the
fund maintain an asset coverage ratio of at least 300% and borrowings must not
exceed prospectus limitations For the year ended March 31, 1998, the fund had
no borrowings against the line of credit.
J) Federal taxes It is the policy of the fund to distribute all of its taxable
income within the prescribed time and otherwise comply with the provisions of
the Internal Revenue Code applicable to regulated investment companies. It is
also the intention of the fund to distribute an amount sufficient to avoid
imposition of any excise tax under Section 4982 of the Internal Revenue Code
of 1986, as amended. Therefore, no provision has been made for federal taxes
on income, capital gains or unrealized appreciation on securities held nor for
excise tax on income and capital gains.
K) Distributions to shareholders The fund declares a distribution each day
based upon the projected net investment income, for a specified period,
calculated as if earned prorata throughout the period on a daily basis. Such
distributions are recorded daily and paid monthly. Capital gain distributions,
if any, are recorded on the ex-dividend date and paid at least annually. The
amount and character of income and gains to be distributed are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles.
These differences include temporary and permanent differences of losses on
wash sale transactions, post-October loss deferrals, foreign currency gains
and losses and market discount. Reclassifications are made to the fund's
capital accounts to reflect income and gains available for distribution (or
available capital loss carryovers) under income tax regulations. For the year
ended March 31, 1998, the fund reclassified $2,648,512 to increase
distributions in excess of net investment income and $9,602 to decrease
paid-in-capital, with an increase to accumulated net realized gains on
investments of $2,658,114. The calculation of net investment income per share
in the financial highlights table excludes these adjustments.
L) Unamortized organization expenses Expenses incurred by the fund in
connection with its organization, its registration with the Securities and
Exchange Commission and with various states and the initial public offering of
its shares were $46,575. These expenses are being amortized on projected net
asset levels over a five-year period.
Note 2
Management fee, administrative services and other transactions
Compensation of Putnam Management, for management and investment advisory
services is paid quarterly based on the average net assets of the fund. Such
fee is based on the following annual rates: 0.70% of the first $500 million of
average net assets, 0.60% of the next $500 million, 0.55% of the next $500
million, 0.50% of the next $5 billion, 0.475% of the next $5 billion, 0.455%
of the next $5 billion, 0.44% of the next $5 billion, and 0.43% thereafter.
Putnam Management has agreed to limit its compensation (and, to the extent
necessary, bear other expenses) through March 31, 1998 to the extent that
expenses of the fund (exclusive of brokerage commissions, interest, taxes,
deferred organizational and extraordinary expense, credits from Putnam
Fiduciary Trust Company (PFTC), a subsidiary of Putnam Investments, Inc. and
payments under the Trust's distribution plan) would exceed an annual rate of
1.00% of the fund's average net assets.
The fund reimburses Putnam Management an allocated amount for the compensation
and related expenses of certain officers of the fund and their staff who
provide administrative services to the fund. The aggregate amount of all such
reimbursements is determined annually by the Trustees.
Custodial functions for the fund's assets are provided by PFTC. Investor
servicing agent functions are provided by Putnam Investor Services, a division
of PFTC.
For the year ended March 31, 1998 fund expenses were reduced by $130,391 under
expense offset arrangements with PFTC. Investor servicing and custodian fees
reported in the Statement of operations exclude these credits. The fund could
have invested a portion of the assets utilized in connection with the expense
offset arrangements in an income producing asset if it had not entered into
such arrangements.
Each Trustee of the fund receives an annual Trustee fee, of which $570 has
been allocated to the fund, and an additional fee for each Trustee's meeting
attended. Trustees who are not interested persons of Putnam Management and who
serve on committees of the Trustees receive additional fees for attendance at
certain committee meetings.
The fund has adopted a Trustee Fee Deferral Plan (the "Deferral Plan") which
allows the Trustees to defer the receipt of all or a portion of Trustees Fees
payable on or after July 1, 1995. The deferred fees remain in the fund and are
invested in certain Putnam funds until distribution in accordance with the
Deferral Plan.
The fund has adopted an unfunded noncontributory defined benefit pension plan
(the "Pension Plan") covering all Trustees of the fund who have served as
Trustee for at least five years. Benefits under the Pension Plan are equal to
50% of the Trustee's average total retainer and meeting fees for the three
years preceding retirement. Pension expense for the fund is included in
Compensation of Trustees in the Statement of operations. Accrued pension
liability is included in Payable for compensation of Trustees in the Statement
of assets and liabilities.
The fund has adopted distribution plans (the "Plans") with respect to its
class A, class B, and class M shares pursuant to Rule 12b-1 under the
Investment Company Act of 1940. The purpose of the Plans is to compensate
Putnam Mutual Funds Corp., a wholly-owned subsidiary of Putnam Investments
Inc., for services provided and expenses incurred by it in distributing shares
of the fund. The Plans provide for payments by the fund to Putnam Mutual Funds
Corp. at an annual rate up to .035%, 1.00%, and 1.00% of the average net
assets attributable to class A, class B, and class M shares, respectively. The
Trustees currently limit payment by the fund to an annual rate of 0.25%,
1.00%, and 0.50% of the average net assets attributable to class A, class B,
and class M shares respectively.
For the year ended March 31, 1998, Putnam Mutual Funds Corp., acting as
underwriter received net commissions of $63,465 and $491 from the sale of
class A and class M shares, respectively and $120,866 in contingent deferred
sales charges from redemptions of class B shares. A deferred sales charge of
up to 1% is assessed on certain redemptions of class A shares. For the year
ended March 31, 1998, Putnam Mutual Funds Corp., acting as underwriter
received $746 on class A redemptions.
Note 3
Purchase and sales of securities
During the year ended March 31, 1998, purchases and sales of investment
securities other than U.S. government obligations and short-term investments
aggregated $236,779,791 and $195,603,012, respectively. Purchases and sales of
U.S. government obligations aggregated $63,860,767 and $59,586,989,
respectively. In determining the net gain or loss on securities sold, the cost
of securities has been determined on the identified cost basis.
Written option transactions during the year are summarized as follows:
Contract Premiums
Amounts Received
- ------------------------------------------------------------
Written options
outstanding at
beginning of year $-- $--
- ------------------------------------------------------------
Options opened 2,183,600 33,518
- ------------------------------------------------------------
Options expired -- --
- ------------------------------------------------------------
Options closed (2,183,600) (33,518)
- ------------------------------------------------------------
Written options
outstanding at
end of year $-- $--
- ------------------------------------------------------------
Note 4
Capital shares
At March 31, 1998 there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
Year ended
March 31, 1998
- ------------------------------------------------------------
Class A Shares Amount
- ------------------------------------------------------------
Shares sold 3,238,873 $27,807,851
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 332,350 2,863,744
- ------------------------------------------------------------
3,571,223 30,671,595
Shares
repurchased (1,715,526) (14,718,694)
- ------------------------------------------------------------
Net increase 1,855,697 $15,952,901
- ------------------------------------------------------------
Year ended
March 31, 1997
- ------------------------------------------------------------
Class A Shares Amount
- ------------------------------------------------------------
Shares sold 5,212,882 $44,031,671
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 150,568 1,278,981
- ------------------------------------------------------------
5,363,450 45,310,652
Shares
repurchased (1,120,900) (9,487,014)
- ------------------------------------------------------------
Net increase 4,242,550 $35,823,638
- ------------------------------------------------------------
Year ended
March 31, 1998
- ------------------------------------------------------------
Class B Shares Amount
- ------------------------------------------------------------
Shares sold 5,105,604 $43,975,120
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 410,214 3,534,024
- ------------------------------------------------------------
5,515,818 47,509,144
Shares
repurchased (2,549,062) (21,937,542)
- ------------------------------------------------------------
Net increase 2,966,756 $25,571,602
- ------------------------------------------------------------
Year ended
March 31, 1997
- ------------------------------------------------------------
Class B Shares Amount
- ------------------------------------------------------------
Shares sold 7,538,742 $63,653,797
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 210,529 1,788,543
- ------------------------------------------------------------
7,749,271 65,442,340
Shares
repurchased (1,508,622) (12,784,744)
- ------------------------------------------------------------
Net increase 6,240,649 $52,657,596
- ------------------------------------------------------------
Year ended
March 31, 1998
- ------------------------------------------------------------
Class M Shares Amount
- ------------------------------------------------------------
Shares sold 576,527 $4,919,785
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 51,603 444,562
- ------------------------------------------------------------
628,130 5,364,347
Shares
repurchased (316,042) (2,715,968)
- ------------------------------------------------------------
Net increase 312,088 $2,648,379
- ------------------------------------------------------------
Year ended
March 31, 1997
- ------------------------------------------------------------
Class M Shares Amount
- ------------------------------------------------------------
Shares sold 776,371 $6,554,558
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 23,144 196,556
- ------------------------------------------------------------
799,515 6,751,114
Shares
repurchased (161,416) (1,365,606)
- ------------------------------------------------------------
Net increase 638,099 $5,385,508
- ------------------------------------------------------------
Federal tax information
(Unaudited)
Pursuant to Section 852 of the Internal Revenue Code, as amended, the
Fund hereby designates $854,314 as capital gain, which includes $444,577
as 20% capital gain for its taxable year ended March 31, 1998.
The fund has designated 5.3% of the distributions from net investment
income as qualifying for the dividends received deductions for
corporations.
The Form 1099 you receive in January 1999 will show the tax status of
all distributions paid to your account in calendar 1998.
Fund information
INVESTMENT MANAGER
Putnam Investment
Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
John A. Hill
Ronald J. Jackson
Paul L. Joskow
Elizabeth T. Kennan
Lawrence J. Lasser
John H. Mullin III
Robert E. Patterson
Donald S. Perkins
George Putnam, III
A.J.C. Smith
W. Thomas Stephens
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
John D. Hughes
Senior Vice President and Treasurer
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
William J. Curtin
Vice President
Jennifer E. Leichter
Vice President and Fund Manager
Michael Martino
Vice President and Fund Manager
D. William Kohli
Vice President and Fund Manager
Gail S. Attridge
Vice President and Fund Manager
William N. Shiebler
Vice President
John R. Verani
Vice President
Beverly Marcus
Clerk and Assistant Treasurer
This report is for the information of shareholders of Putnam Strategic Income
Fund. It may also be used as sales literature when preceded or accompanied by
the current prospectus, which gives details of sales charges, investment
objectives, and operating policies of the fund, and the most recent copy of
Putnam's Quarterly Performance Summary. For more information or to request a
prospectus, call toll free: 1-800-225-1581. You can also learn more at Putnam
Investments' website: http://www.putnaminv.com.
Shares of mutual funds are not deposits or obligations of, or guaranteed or
endorsed by, any financial institution; are not insured by the Federal Deposit
Insurance Corporation (FDIC), the Federal Reserve Board, or any other agency;
and involve risk, including the possible loss of the principal amount
invested.
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
- --------------------
Bulk Rate
U.S. Postage
PAID
Putnam
Investments
- --------------------
AN029-42024 896/2BQ/2BR 5/98
