Putnam
Strategic
Income
Fund
SEMIANNUAL REPORT ON PERFORMANCE AND OUTLOOK
9-30-99
[LOGO: BOSTON * LONDON * TOKYO]
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
The past several months have provided little joy for investors in global
fixed-income securities. Concerns over rising interest rates and renewed
inflation cast a pall over virtually all the world's bond markets. Even
the U.S. Treasury and core European government bonds that were doing so
well a year ago as other fixed-income markets were faltering are feeling
the heat now. About the only bright spots have been bonds of emerging
markets, which as a group recovered smartly from the financial crisis that
nearly did them in during the summer and fall of 1998.
The results of this general market malaise are reflected in the
performance of Putnam Strategic Income Fund during the semiannual period
that ended on September 30, 1999. In the following report, your fund's
management team reviews performance and concludes that while more
near-term volatility lies ahead, long-term prospects remain positive.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
November 17, 1999
Report from the Fund Managers
Jennifer E. Leichter
David L. Waldman
D. William Kohli
Jeffrey A. Kaufman
The first half of Putnam Strategic Income Fund's fiscal year was a
challenging period for all sectors of the fixed-income market. During the
six months ended September 30, 1999, the Federal Reserve Board increased
short-term interest rates twice. A quarter-point increase in June -- the
first in two years -- was followed by another quarter-point increase in
August. This rising-rate environment, coupled with general investor
uncertainty as the year 2000 approached, dampened bond performance. The
high-yield sector, which had been enjoying a sharp recovery since the
start of the calendar year, also weakened as investors again began to shy
away from any element of risk. Despite dampened performance for the
period, your fund benefited from its ability to spread assets across a
range of bond investments, including the stronger media and
telecommunications sectors of the high-yield market. In addition,
emerging-markets securities provided a boost in the fund's international
sector.
Total return for 6 months ended 9/30/99
Class A Class B Class C Class M
NAV POP NAV CDSC NAV CDSC NAV POP
- ------------------------------------------------------------------------
-1.03% -5.72% -1.40% -6.13% -1.41% -2.35% -1.16% -4.41%
- ------------------------------------------------------------------------
Past performance is no indication of future results. Performance
information for longer periods begins on page 6.
* U.S. TREASURIES HURT BY RISING INTEREST RATES
During the period, U.S. Treasury securities were the most seriously
affected by the Federal Reserve Board's interest-rate increases. The yield
on the benchmark 30-year Treasury bond -- which moves in the opposite
direction of its price -- jumped to a 2-year high during the period. As a
result, your fund's position in Treasury securities detracted from returns
during the semiannual period.
[GRAPHIC OMITTED: horizontal bar chart SECTOR WEIGHTINGS]
SECTOR WEIGHTINGS*
High-yield
bonds 48.8%
U.S. government
and agency
obligations
and CMOs 21.6%
Foreign
bonds 19.7%
Footnote reads:
*Based on net assets as of 9/30/99. Holdings will vary over time.
In the final month of the period, a small rally brought Treasury yields
down from their August highs. Statements accompanying the August rate
increase indicated that this could be the last activity of 1999, as the
Fed declared that this increase "markedly diminishes the risk of rising
inflation going forward." Also toward the end of the period, equity
markets had weakened and investor concerns over Y2K issues appeared to be
increasing. While this atmosphere hurt the bond market somewhat, it may
result in U.S. Treasuries gaining appeal as a safe-haven asset in the
months ahead.
Also within the fund's U.S. government sector, mortgage-backed securities
delivered weaker performance. Within this sector of the portfolio,
however, we remain optimistic about the fund's investments in more
seasoned issues as well as in commercial mortgage-backed securities, which
offer structured prepayment protection.
* EMERGING-MARKETS BONDS BECOME MORE ATTRACTIVE
While all sectors of the U.S. bond market suffered during the semiannual
period, emerging-markets bonds have performed extremely well, recovering
some of the ground they lost in 1998. The fund has exposure to bonds in
Brazil, whose prices are at historically inexpensive levels, as well as
Mexican issues, which offer attractive yields. We also initiated positions
in Bulgaria, one of eastern Europe's more solidly growing economies. We
believe Bulgarian bonds offer good value and strong appreciation
potential.
The fund's minimal exposure to Japanese bonds limited performance, since
Japan was one of the top-performing bond markets during the period due to
currency appreciation. Robust domestic demand and a soaring yen attracted
capital from domestic and foreign investors alike. The core bond markets
of Europe were fairly represented in the portfolio. However, they too came
under pressure during the period because of stronger-than-expected
economic data, which led to expectations of central bank monetary
tightening. The United Kingdom, the weakest performer among major markets,
was hurt by an unexpected interest-rate increase by the Bank of England
and by indications of similar actions to come.
* HIGH-YIELD SECTOR RETREATS; STRENGTH REMAINS IN MEDIA AND TELECOM HOLDINGS
Amid fears of rising interest rates and increasing equity market weakness
high-yield bonds experienced a setback during the period.
Telecommunications and media continued to be the top-performing
industries and a key focus for your fund. Within these industries,
deregulation has created a favorable environment, allowing for substantial
cost cutting and opportunities for growth. Selected energy holdings also
performed well during the period, including R&B Falcon Corp., which
operates the world's largest fleet of marine-based drilling rigs serving
the international oil and gas industry. The company specializes in
offshore ultra-deep-water drilling operations. While this holding and
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 well vary in the future.
"If you're dollar-cost averaging into a bond fund, don't give up now. It's
worth noting that a roaring bull market followed the last losing year
for bonds -- 1994."
- -- CNBC.com, October 15, 1999
Many of the issuers represented in your fund's portfolio, such as Covad
Communications Group and Charter Communications Holdings, either have
issued or will soon issue stock, prompting credit improvements and
therefore higher prices for their bonds. Covad Communications, which uses
high-speed digital technology to provide communications services to
consumers and Internet service providers, successfully completed an
initial public offering during the period. Covad recently launched a
nationwide remote access program, integrating for the first time the
company's digital subscriber line service with the networks of AT&T and
Qwest Communications International. With the program, Covad is targeting
its new TeleSpeed Remote service to small and midsize businesses that want
to connect remote offices in other cities. The new service is dramatically
faster than long-distance dial-up service.
Don't believe everything you hear about
high-yield issuers
Many investors believe that all companies rated below investment grade level
are "fallen angels." This term refers to corporations that were once rated
Baa/BBB (the lowest tier of the investment-grade sector) or higher but have
since experienced hard times. However, according to Martin Fridson, author
of It Was a Very Good Year: Extraordinary Moments in Stock Market History,
the vast majority of American companies do not qualify for investment-grade
ratings. For one reason, size is a rating consideration and many young but
highly profitable companies cannot hope to achieve Baa/BBB status until their
sales have grown for several more years. So the average high-yield issuer is
less likely to have experienced a setback -- and more likely to have a bright
future ahead -- than popular sentiment would indicate.
Stricter Medicare reimbursement formulas negatively affected the
performance of several long-term nursing care bonds such as Sun Healthcare
and Mariner Post-Acute Network. Fund holding United Artists Theatre, along
with other movie exhibition companies, reported disappointing earnings
during the period. The onslaught of new multiplexes has resulted in
overcapacity in the marketplace, hurting the performance of movie
exhibition companies.
* CAUTIOUS OPTIMISM FOR FISCAL YEAR'S SECOND HALF
With the second half of the fund's fiscal year comes the year 2000, along
with the potential for jittery investors and market volatility. The
perceived problems that 2000 may cause -- however temporarily -- could
adversely affect the liquidity of fixed-income securities. However, we
expect the Fed to maintain its pre-emptive attitude on interest rates and
to keep a tight rein on inflation to slow economic growth. With
nervousness and uncertainty may come heightened interest in the bond
market as investors shun the riskier equity markets. In the high-yield
sector, we believe that further weakness could result in attractive
valuation opportunities moving into 2000. As always, we will continue to
take full advantage of the fund's ability to diversify across the
fixed-income universe, focusing on what we believe are the most promising
areas of the market.
[GRAPHIC OMITTED: TOP THREE HOLDINGS PER SECTOR]
TOP THREE HOLDINGS PER SECTOR
HIGH-YIELD BONDS
Millicom International Cellular S.A.
senior discount notes stepped-coupon, 13 1/2s, 6/1/01, 2006
Charter Communications Holdings LLC
144A senior notes, 8 5/8s, 2009
Global Crossing Holdings, Ltd.
Company guaranty, 9 5/8s, 2008
FOREIGN BONDS
Australia (Government of)
bonds, 8 3/4s, 2008
United Mexican States SEC.
Series B, 6 1/4s, 2019
Brazil (Government of)
FRB, 8s, 2014
U.S. GOVERNMENT AND
AGENCY OBLIGATIONS
Government National Mortgage Association
pass-through certificates, 8s, 2025-2029
U.S. Treasury notes,
5 1/2s, 2001
U.S. Treasury notes,
5 1/4s, 2004
Footnote reads:
These holdings represent 16.0% of the fund's net assets as of 9/30/99.
Portfolio holdings will vary over time.
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 9/30/99, there is no guarantee the fund will
continue to hold these securities in the future. The lower credit ratings
of high-yield corporate bonds reflect a greater possibility that adverse
changes in the economy or their issuers may affect their ability to pay
principal and interest on these bonds. Investments in non-U.S. securities
may be subject to certain risks such as currency fluctuations, economic
instability, and political developments. Although the U.S. government
guarantees the timely payment of principal and interest on some of the
underlying securities, the value of fund shares is not guaranteed and will
fluctuate.
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.
<TABLE>
<CAPTION>
TOTAL RETURN FOR PERIODS ENDED 9/30/99
Class A Class B Class C Class M
(inception dates) (2/26/96) (2/26/96) (2/1/99) (2/26/96)
NAV POP NAV CDSC NAV CDSC NAV POP
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
6 months -1.03% -5.72% -1.40% -6.13% -1.41% -2.35% -1.16% -4.41%
- -----------------------------------------------------------------------------------------
1 year 0.35 -4.39 -0.40 -4.98 -0.18 -1.10 0.10 -3.10
- -----------------------------------------------------------------------------------------
Life of fund 13.80 8.45 10.90 8.35 11.07 11.07 12.79 9.07
Annual average 3.67 2.28 2.92 2.26 2.97 2.97 3.41 2.45
- -----------------------------------------------------------------------------------------
</TABLE>
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 9/30/99
Salomon Bros.
Lehman Bros. Non-U.S. First Boston Consumer
Aggregate World Govt. High Yield price
Bond Index Bond Index Index index
- ------------------------------------------------------------------------
6 months -0.21% 1.35% -0.46% 1.76%
- ------------------------------------------------------------------------
1 year -0.37 1.53 3.95 2.75
- ------------------------------------------------------------------------
Life of fund 23.99 15.44 25.77 8.39
Annual average 6.18 4.09 6.61 2.27
- ------------------------------------------------------------------------
Past performance is no assurance of future results. More recent returns
may be more or less than those shown. Returns for class A and class M
shares reflect the current maximum initial sales charges of 4.75% and
3.25% respectively. Class B share returns for the 6-month,1-year, and
life-of-fund periods reflect the applicable contingent deferred sales
charge (CDSC), which is 5% in the first year, declines to 1% in the sixth
year, and is eliminated thereafter. For class C shares, returns for
periods prior to their inception are derived from the historical
performance of class A shares, adjusted to reflect both the CDSC currently
applicable to class C shares, which is 1% for the first year and is
eliminated thereafter, and the higher operating expenses applicable to
class C shares. All returns assume reinvestment of distributions at NAV.
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.
<TABLE>
<CAPTION>
PRICE AND DISTRIBUTION INFORMATION 6 MONTHS ENDED 9/30/99
Class A Class B Class C Class M
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Distributions (number) 6 6 6 6
- --------------------------------------------------------------------------------------
Income $0.343413 $0.315293 $0.314888 $0.334043
- --------------------------------------------------------------------------------------
Capital gains -- -- -- --
- --------------------------------------------------------------------------------------
Total $0.343413 $0.315293 $0.314888 $0.334043
- --------------------------------------------------------------------------------------
Share value: NAV POP NAV NAV NAV POP
- --------------------------------------------------------------------------------------
3/31/99 $7.64 $8.02 $7.65 $7.66 $7.64 $7.90
- --------------------------------------------------------------------------------------
9/30/99 7.22 7.58 7.23 7.24 7.22 7.46
- --------------------------------------------------------------------------------------
Current return (end of period)
- --------------------------------------------------------------------------------------
Current dividend rate1 9.14% 8.71% 8.38% 8.36% 8.89% 8.60%
- --------------------------------------------------------------------------------------
Current 30-day SEC yield2 8.97 8.54 8.20 8.20 8.70 8.42
- --------------------------------------------------------------------------------------
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.
</TABLE>
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 C shares are not subject to an initial sales charge and are subject
to a contingent deferred sales charge only if the shares are redeemed
during the first year.
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 4.75% maximum 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 or class C shares and assumes redemption at the
end of the period. Your fund's class B 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. The CDSC for class C shares is 1% for one year
after purchase.
Comparative benchmarks
Lehman Brothers Aggregate Bond Index* is an unmanaged list consisting of
securities from Lehman Brothers Government/Corporate Bond Index,
Mortgage-Backed Securities Index, and the Asset-Backed Securities Index.
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 list of lower-rated,
higher-yielding U.S. corporate bonds.
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.
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A guide to the financial statements
These sections of the report constitute the fund's financial
statements.
The fund's portfolio lists all the fund's investments and their values as
of the last day of the reporting period. Holdings are organized by asset
type and industry sector, country, or state to show areas of concentration
and diversification.
Statement of assets and liabilities shows how the fund's net assets and
share price are determined. All investment and non-investment assets are
added together. Any unpaid expenses and other liabilities are subtracted
from this total. The result is divided by the number of shares to
determine the net asset value per share, which is calculated separately
for each class of shares. (For funds with preferred shares, the amount
subtracted from total assets includes the net assets allocated to
remarketed preferred shares.)
Statement of operations shows the fund's net investment gain or loss for
the reporting period. This is determined by adding up all the fund's
earnings -- from dividends and interest income -- and subtracting its
operating expenses. This statement also lists any net gain or loss the
fund realized on the sales of its holdings and -- for holdings that remain
in the portfolio -- any change in unrealized gains or losses over the
period.
Statement of changes in net assets shows how the fund's net assets were
affected by distributions to shareholders and by changes in the number of
the fund's shares. It lists distributions and their sources (net
investment income or realized capital gains) over the current reporting
period and the most recent fiscal year-end. The distributions listed here
may not match the sources listed in the Statement of operations because
the distributions are determined on a tax basis and may be paid in a
different period from the one in which they were earned.
Financial highlights provide an overview of the fund's investment results,
per-share distributions, expense ratios, net investment income ratios and
portfolio turnover in one summary table, reflecting the five most recent
reporting periods. In a semiannual report, the highlight table also
includes the current reporting period. For open-ended funds, a separate
table is provided for each share class.
<TABLE>
<CAPTION>
The fund's portfolio
September 30, 1999 (Unaudited)
CORPORATE BONDS AND NOTES (48.7%) (a)
PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C>
Advertising (0.8%)
- --------------------------------------------------------------------------------------------------------------------------
$ 300,000 Adams Outdoor Advertising sr. notes 10 3/4s, 2006 $ 306,000
80,000 Lamar Media Corp. company guaranty 9 5/8s, 2006 81,400
540,000 Lamar Media Corp. sr. sub. notes 9 1/4s, 2007 534,600
420,000 Lamar Media Corp. company guaranty 8 5/8s, 2007 413,700
350,000 Outdoor Systems, Inc. company guaranty 8 7/8s, 2007 360,500
--------------
1,696,200
Aerospace and Defense (1.5%)
- --------------------------------------------------------------------------------------------------------------------------
485,000 Argo-Tech Corp. company guaranty 8 5/8s, 2007 414,675
130,000 Argo-Tech Corp. company guaranty Ser. D, 8 5/8s, 2007 111,150
190,000 Aviation Sales Co. company guaranty 8 1/8s, 2008 167,200
500,000 BE Aerospace, Inc. sr. sub. notes Ser. B, 9 7/8s, 2006 497,500
80,000 BE Aerospace, Inc. sr. sub. notes 9 1/2s, 2008 78,200
90,000 BE Aerospace, Inc. sr. sub. notes Ser. B, 8s, 2008 81,225
500,000 Burke Industries, Inc. company guaranty 10s, 2007 350,000
400,000 Decrane Aircraft Holdings company guaranty Ser. B,
12s, 2008 400,000
70,000 K&F Industries, Inc. sr. sub. notes Ser. B, 9 1/4s, 2007 67,200
65,000 L-3 Communications Corp. sr. sub. notes Ser. B,
10 3/8s, 2007 67,194
870,000 L-3 Communications Corp. sr. notes 9 1/8s, 2008 787,350
110,000 L-3 Communications Corp. sr. sub. notes 8 1/2s, 2008 104,775
160,000 L-3 Communications Corp. company guaranty Ser. B,
8s, 2008 147,600
--------------
3,274,069
Agriculture (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
293,389 Premium Standard Farms, Inc. sr. sec. notes 11s, 2003 (PIK) 268,451
Airlines (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
120,000 Calair LLC 144A company guaranty 8 1/8s, 2008 110,850
140,000 Canadian Airlines Corp. sr. notes 12 1/4s, 2006 (Canada) 82,600
200,000 Canadian Airlines Corp. secd. notes 10s, 2005 (Canada) 160,000
90,000 Trans World Airlines, Inc. sr. notes 11 1/2s, 2004 74,700
280,000 Trans World Airlines, Inc. sr. notes 11 3/8s, 2006 179,200
--------------
607,350
Apparel (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
400,000 Fruit of the Loom company guaranty 8 7/8s, 2006 144,000
295,000 Guess Jeans, Inc. sr. sub. notes 9 1/2s, 2003 297,950
65,000 William Carter Holdings Co. sr. sub. notes Ser. A, 12s, 2008 65,000
135,000 William Carter Holdings Co. sr. sub. notes Ser. A, 10 3/8s, 2006 129,600
--------------
636,550
Automotive Parts (1.1%)
- --------------------------------------------------------------------------------------------------------------------------
299,000 Aftermarket Technology Corp. sr. sub. notes 12s, 2004 303,485
270,000 Dura Operating Corp. company guaranty Ser. B, 9s, 2009 250,425
200,000 Exide Corp. sr. notes 10s, 2005 199,000
190,000 Federal Mogul Corp. notes 7 3/8s, 2006 176,031
60,000 Hayes Wheels International, Inc. company guaranty Ser. B,
9 1/8s, 2007 59,325
400,000 Hayes Wheels International, Inc. 144A sr. sub. notes
9 1/8s, 2007 374,000
315,000 Lear Corp. sub. notes 9 1/2s, 2006 321,300
90,000 Motors and Gears, Inc. sr. notes Ser. D, 10 3/4s, 2006 86,400
160,000 Navistar International Corp. sr. notes Ser. B, 8s, 2008 154,000
500,000 Oxford Automotive, Inc. company guaranty Ser. D,
10 1/8s, 2007 435,000
130,000 Transportation Manufacturing Operations Inc. 144A
company guaranty 11 1/4s, 2009 129,350
--------------
2,488,316
Banks (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
150,000 Chevy Chase Savings Bank Inc. sub. deb. 9 1/4s, 2008 150,750
540,000 Chevy Chase Savings Bank Inc. sub. deb. 9 1/4s, 2005 542,700
280,000 Delta Financial Corp. sr. notes 9 1/2s, 2004 224,000
45,000 Dime Capital Trust I bank guaranty Ser. A, 9.33s, 2027 44,769
45,000 Greenpoint Capital Trust I company guaranty 9.1s, 2027 42,907
40,000 Ocwen Capital Trust I company guaranty 10 7/8s, 2027 26,000
55,000 Ocwen Federal Bank FSB sub. deb. 12s, 2005 51,700
40,000 Ocwen Financial Corp. notes 11 7/8s, 2003 37,600
60,000 Provident Capital Trust company guaranty 8.6s, 2026 56,853
690,000 Realkredit Danmark mortgage 7s, 2029 (Denmark) 95,985
40,000 Riggs Capital Trust 144A bonds 8 5/8s, 2026 37,072
200,000 Webster Capital Trust I 144A bonds 9.36s, 2027 192,270
--------------
1,502,606
Basic Industrial Products (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
350,000 Blount Inc. 144A sr. sub. notes 13s, 2009 360,500
400,000 Newcor, Inc. company guaranty Ser. B, 9 7/8s, 2008 288,000
80,000 Paragon Corp. Holdings, Inc. company guaranty Ser. B,
9 5/8s, 2008 27,200
30,000 Roller Bearing Co. company guaranty Ser. B, 9 5/8s, 2007 26,700
--------------
702,400
Broadcasting (4.1%)
- --------------------------------------------------------------------------------------------------------------------------
500,000 Allbritton Communications Co. sr. sub. deb. Ser. B,
9 3/4s, 2007 497,500
460,000 Allbritton Communications Co. sr. sub. notes Ser. B,
8 7/8s, 2008 439,300
300,000 AMFM, Inc. company guaranty 8s, 2008 291,000
2,861 Australis Media, Ltd. sr. disc. notes stepped-coupon 1 3/4s,
(15 3/4s, 5/15/00), 2003 (In default) (Australia) (STP) (PIK) (NON) 0
450,000 Benedek Communications Corp. sr. disc. notes stepped-
coupon zero % (13 1/4s, 5/15/01), 2006 (STP) 391,500
215,000 Capstar Broadcasting sr. disc. notes stepped-coupon zero %
(12 3/4s, 2/1/02), 2009 (STP) 180,600
685,000 Capstar Broadcasting sr. sub. notes 9 1/4s, 2007 690,138
460,000 CD Radio Inc. sr. disc. notes stepped-coupon 15s,
(15s, 12/1/02), 2007 (STP) 219,650
55,000 Central European Media Enterprises Ltd. sr. notes 9 3/8s,
2004 (Bermuda) 22,000
90,000 Citadel Broadcasting, Inc. sr. sub. notes 10 1/4s, 2007 92,475
390,000 Citadel Broadcasting, Inc. company guaranty 9 1/4s, 2008 382,200
200,000 Comcast UK Cable, Ltd. deb. stepped-coupon zero %
(11.2s, 11/15/00), 2007 (Bermuda) (STP) 181,000
730,000 Echostar DBS Corp. sr. notes 9 3/8s, 2009 719,050
340,000 Fox Family Worldwide, Inc. sr. notes 9 1/4s, 2007 312,800
260,000 Fox/Liberty Networks LLC sr. notes 8 7/8s, 2007 263,900
110,000 Globo Communicacoes 144A sr. notes 10 5/8s,
2008 (Brazil) 80,575
85,000 Globo Communicacoes 144A company guaranty
10 1/2s, 2006 (Brazil) 62,900
250,000 Granite Broadcasting Corp. sr. sub. notes 9 3/8s, 2005 250,000
120,000 Granite Broadcasting Corp. sr. sub. notes 8 7/8s, 2008 115,800
250,000 Heritage Media Services Corp. sr. sub. notes 8 3/4s, 2006 257,500
120,000 Jacor Communications, Inc. company guaranty Ser. B,
8 3/4s, 2007 126,000
300,000 Lenfest Communications, Inc. sr. sub. notes 10 1/2s, 2006 339,000
240,000 Lenfest Communications, Inc. sr. sub. notes 8 1/4s, 2008 242,400
210,000 Paxson Communications Corp. 144A sr. sub. notes
11 5/8s, 2002 217,350
560,000 Pegasus Communications Corp. sr. notes Ser. B,
9 3/4s, 2006 537,600
600,000 Pegasus Media & Communications notes Ser. B,
12 1/2s, 2005 648,000
424,000 PHI Holdings, Inc. sr. sub. notes zero %, 2001 356,075
125,000 Radio One Inc. company guaranty stepped-coupon
Ser. B, 7s, (12s, 5/15/00), 2004 (STP) 129,375
650,000 Sinclair Broadcast Group, Inc. company guaranty 9s, 2007 614,250
300,000 Spanish Broadcasting Systems sr. notes Ser. B, 11s, 2004 333,000
60,000 TV Azteca Holdings S.A. de C.V. sr. notes 11s,
2002 (Mexico) 46,200
190,000 TV Azteca Holdings S.A. de C.V. sr. notes 10 1/2s,
2007 (Mexico) 147,250
--------------
9,186,388
Building and Construction (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
125,000 American Architectural Products Corp. company guaranty
11 3/4s, 2007 56,250
35,000 Cia Latino Americana 144A company guaranty 11 5/8s,
2004 (Argentina) 22,050
660,000 D.R. Horton, Inc. company guaranty 8s, 2009 605,550
70,000 Jackson Products, Inc. company guaranty Ser. B, 9 1/2s, 2005 64,750
140,000 NCI Building Systems Inc. sr. sub. notes Ser. B, 9 1/4s, 2009 135,800
180,000 Toll Corp. company guaranty 8 1/8s, 2009 170,550
--------------
1,054,950
Building Products (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
80,000 Atrium Companies Inc. company guaranty Ser. B,
10 1/2s, 2009 76,400
180,000 Building Materials Corp. company guaranty 8s, 2008 164,700
--------------
241,100
Business Equipment and Services (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
170,000 Cex Holdings, Inc. company guaranty Ser. B, 9 5/8s, 2008 170,850
250,000 Iron Mountain, Inc. med. term notes company guaranty
10 1/8s, 2006 258,750
600,000 Iron Mountain, Inc. company guaranty 8 3/4s, 2009 564,000
40,000 Outsourcing Solutions, Inc. sr. sub. notes Ser. B, 11s, 2006 38,800
470,000 U.S. Office Products Co. company guaranty 9 3/4s, 2008 239,700
166,000 United Stationer Supply, Inc. sr. sub. notes 12 3/4s, 2005 179,280
--------------
1,451,380
Cable Television (3.1%)
- --------------------------------------------------------------------------------------------------------------------------
340,000 Acme Television sr. disc. notes stepped-coupon zero %
(10 7/8s, 9/30/00), 2004 (STP) 299,200
20,000 Adelphia Communications Corp. sr. notes Ser. B,
9 7/8s, 2007 20,200
240,000 Adelphia Communications Corp. sr. notes Ser. B,
8 3/8s, 2008 226,200
260,000 Adelphia Communications Corp. sr. notes 7 7/8s, 2009 233,675
380,000 Century Communications Corp. sr. notes 8 7/8s, 2007 364,800
500,000 Charter Communications Holdings LLC 144A sr. disc.
notes stepped-coupon zero % (9.92s, 4/1/04), 2011 (STP) 295,000
1,270,000 Charter Communications Holdings LLC 144A sr. notes
8 5/8s, 2009 1,181,100
60,000 CSC Holdings, Inc. deb. Ser. B, 8 1/8s, 2009 60,531
70,000 CSC Holdings, Inc. deb. 7 7/8s, 2018 67,039
230,000 CSC Holdings, Inc. sr. notes 7 7/8s, 2007 227,693
170,000 CSC Holdings, Inc. sr. notes 7 1/4s, 2008 161,616
410,000 Diamond Cable Communication Co. sr. disc. notes
stepped-coupon zero % (10 3/4s, 2/15/02), 2007
(United Kingdom) (STP) 322,875
170,000 Diamond Cable Communication Co. sr. disc. notes
stepped-coupon zero % (11 3/4s, 12/15/00), 2005
(United Kingdom) (STP) 152,575
170,000 Grupo Televisa S.A. de C.V. 144A sr. notes 11 7/8s,
2006 (Mexico) 175,950
340,000 Insight Midwest 144A sr. notes 9 3/4s, 2009 342,975
830,000 International Cabletel, Inc. sr. notes stepped-coupon
Ser. B, zero % (11 1/2s, 2/01/01), 2006 (STP) 722,100
40,000 Jones Intercable, Inc. sr. notes 9 5/8s, 2002 42,500
400,000 Jones Intercable, Inc. sr. sub. deb. 10 1/2s, 2008 423,000
190,000 NTL Communications Corp. sr. notes Ser. B, 11 1/2s, 2008 203,300
200,000 NTL Inc. sr. notes Ser. B, 10s, 2007 (United Kingdom) 204,000
210,000 NTL Inc. sr. notes, stepped-coupon Ser. B, zero %
(9 3/4s, 4/1/03), 2008 (United Kingdom) (STP) 138,600
70,000 RCN Corp. sr. disc. notes stepped-coupon zero %,
(11 1/8s, 10/15/02), 2007 (STP) 45,150
60,000 Rogers Cablesystems Ltd. sr. notes Ser. B, 10s, 2005 (Canada) 64,350
150,000 Supercanal Holdings S.A. 144A sr. notes 11 1/2s,
2005 (In default) (Argentina) (NON) 70,500
50,000 TeleWest Communications PLC 11 1/4s, 2008
(United Kingdom) 55,625
250,000 TeleWest Communications PLC 144A sr. disc. notes
stepped-coupon zero %, (9 1/4, 4/15/04), 2009
(United Kingdom) (STP) 153,125
710,000 United Pan-Europe N.V. 144A sr. disc. notes stepped-
coupon zero % (12 1/2s, 8/1/04), 2009 (Netherlands) (STP) 397,600
340,000 United Pan-Europe N.V. 144A sr. notes 10 7/8s,
2009 (Netherlands) 342,550
--------------
6,993,829
Cellular Communications (2.3%)
- --------------------------------------------------------------------------------------------------------------------------
430,000 Celcaribe S.A. sr. notes stepped-coupon zero %
(13 1/2s, 12/3/99), 2004 (Colombia) (STP) 316,050
405,000 Cellco Finance Corp. NV 144A sr. sub. notes 15s,
2005 (Netherlands) 426,263
120,000 Conecel Holdings 144A notes Ser. A, 16 1/2s,
2000 (In default) (NON) 12,000
400,000 Dobson Communications Corp. sr. notes 11 3/4s, 2007 422,000
260,000 McCaw International Ltd sr. disc. notes stepped coupon
zero % (13s, 4/15/02), 2007 (STP) 156,000
1,875,000 Millicom International Cellular S.A. sr. disc. notes
stepped-coupon zero % (13 1/2s, 6/1/01), 2006
(Luxembourg) (STP) 1,340,625
710,000 NEXTEL Communications, Inc. sr. disc. notes
stepped-coupon zero % (12 1/8s, 4/15/03), 2008 (STP) 356,775
380,000 NEXTEL Communications, Inc. sr. notes 12s, 2008 421,800
485,000 NEXTEL Communications, Inc. sr. disc. notes
stepped-coupon zero % (10.65s, 9/15/02), 2007 (STP) 357,688
100,000 NEXTEL Communications, Inc. sr. disc. notes
stepped-coupon zero % (9 3/4s, 10/31/02), 2007 (STP) 70,750
280,000 Price Communications Wireless, Inc. 144A sr. notes
9 1/8s, 2006 285,600
828,000 Rogers Cantel, Inc. sr. sub. notes 8.8s, 2007 (Canada) 844,560
--------------
5,010,111
Chemicals (1.5%)
- --------------------------------------------------------------------------------------------------------------------------
120,000 Geo Specialty Chemicals, Inc. sr. sub. notes 10 1/8s, 2008 111,000
310,000 Huntsman Corp. 144A sr. sub. notes 9 1/2s, 2007 289,850
150,000 Huntsman Corp. 144A sr. sub. notes FRN 9.031s, 2007 133,500
540,000 Huntsman ICI Chemicals, Inc. 144A sr. sub. notes
10 1/8s, 2009 526,500
450,000 Lyondell Petrochemical Co. sec. notes Ser. B, 9 7/8s, 2007 445,500
840,000 Lyondell Petrochemical Co. notes Ser. A, 9 5/8s, 2007 835,800
250,000 PCI Chemicals & Pharmaceuticals company guaranty
9 1/4s, 2007 (India) 187,500
446,000 Pioneer Americas Acquisition 144A sr. notes 9 1/4s, 2007 343,420
149,874 Polytama International notes 11 1/4s, 2007 (Indonesia) 26,977
250,000 Royster-Clark Inc. 144A 1st mtge 10 1/4s, 2009 227,500
150,000 Sterling Chemicals Holdings sr. disc. notes stepped-
coupon zero % (13 1/2s, 8/15/01), 2008 (STP) 30,000
170,000 Sterling Chemicals Inc. 144A sec. notes 12 3/8s, 2006 159,800
200,000 Trikem S.A. 144A bonds 10 5/8s, 2007 (Brazil) 112,000
--------------
3,429,347
Computer Services and Software (0.8%)
- --------------------------------------------------------------------------------------------------------------------------
40,000 Concentric Network Corp. sr. notes 12 3/4s, 2007 40,400
230,000 PSINet, Inc. sr. notes 11 1/2s, 2008 232,300
160,000 PSINet, Inc. 144A sr. notes 11s, 2009 156,800
370,000 PSINet, Inc. sr. notes Ser. B, 10s, 2005 353,813
200,000 Unisys Corp. sr. notes 11 3/4s, 2004 222,500
435,000 Unisys Corp. sr. notes 7 7/8s, 2008 420,863
120,000 Verio Inc. sr. notes 11 1/4s, 2008 122,400
110,000 Verio Inc. sr. notes 10 3/8s, 2005 109,175
--------------
1,658,251
Conglomerates (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
300,000 Axia, Inc. company guaranty 10 3/4s, 2008 277,500
250,000 Cathay International Ltd. 144A sr. notes 13s,
2008 (China) 120,000
270,000 GS Superhighway Holdings sr. notes 9 7/8s,
2004 (China) 135,000
--------------
532,500
Consumer Durable Goods (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
160,000 Albecca Inc. company guaranty 10 3/4s, 2008 122,800
20,000 Hedstrom Holdings, Inc. 144A sr. disc. notes
stepped-coupon zero % (12s, 6/1/02), 2009 (STP) 7,400
70,000 Iron Age Corp. company guaranty 9 7/8s, 2008 53,900
500,000 Samsonite Corp. sr. sub. notes 10 3/4s, 2008 430,000
70,000 Sealy Mattress Co. sr. sub. notes Ser. B, 9 7/8s, 2007 67,900
--------------
682,000
Consumer Services (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
350,000 Coinmach Corp. sr. notes Ser. D, 11 3/4s, 2005 370,125
90,000 Protection One, Inc. sr. disc. notes 13 5/8s, 2005 81,900
--------------
452,025
Cosmetics (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
60,000 French Fragrances, Inc. company guaranty Ser. D,
10 3/8s, 2007 54,000
40,000 French Fragrances, Inc. sr. notes Ser. B, 10 3/8s, 2007 39,650
110,000 Revlon Consumer Products sr. notes 9s, 2006 99,550
350,000 Revlon Consumer Products sr. sub. notes 8 5/8s, 2008 285,250
150,000 Revlon Consumer Products sr. notes 8 1/8s, 2006 133,875
--------------
612,325
Electric Utilities (1.6%)
- --------------------------------------------------------------------------------------------------------------------------
100,000 Applied Power Inc. sr. sub. notes 8 3/4s, 2009 93,500
575,000 Calpine Corp. sr. notes 10 1/2s, 2006 603,750
100,000 Calpine Corp. sr. notes 9 1/4s, 2004 101,000
100,000 Calpine Corp. sr. notes 8 3/4s, 2007 100,416
750,000 Midland Funding II Corp. deb. Ser. B, 13 1/4s, 2006 905,025
665,000 Midland Funding II Corp. deb. Ser. A, 11 3/4s, 2005 735,018
68,049 Niagara Mohawk Power Corp. sr. notes Ser. F, 7 5/8s, 2005 68,472
433,282 Northeast Utilities System notes Ser. A, 8.58s, 2006 439,192
350,000 Panda Global Energy Co. company guaranty 12 1/2s,
2004 (China) 199,500
380,000 York Power Funding 144A notes 12s,
2007 (Cayman Islands) 380,000
--------------
3,625,873
Electronics (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
30,000 Celestica International Ltd. 144A sr. sub. notes 10 1/2s,
2006 (Canada) 31,500
90,000 DII Group, Inc. (The) sr. sub. notes 8 1/2s, 2007 85,050
100,000 Flextronics International Ltd. sr. sub. notes Ser. B,
8 3/4s, 2007 98,500
50,000 HCC Industries, Inc. company guaranty 10 3/4s, 2007 33,000
90,000 Moog, Inc. sr. sub. notes Ser. B, 10s, 2006 91,800
300,000 Telecommunications Techniques, Inc. company guaranty
9 3/4s, 2008 285,000
100,000 Viasystems, Inc. sr. sub notes 9 3/4s, 2007 86,250
430,000 Viasystems, Inc. sr. notes Ser. B, 9 3/4s, 2007 370,875
30,000 Wavetek Corp. company guaranty 10 1/8s, 2007 25,200
--------------
1,107,175
Entertainment (0.8%)
- --------------------------------------------------------------------------------------------------------------------------
50,000 News America Holdings, Inc. deb. 7 3/4s, 2045 44,730
750,000 Premier Parks, Inc.144A sr. disc. notes stepped-coupon
zero %, (10s, 4/1/03), 2008 (STP) 472,500
500,000 Premier Parks, Inc. sr. notes 9 1/4s, 2006 470,000
410,000 SFX Entertainment, Inc. 144A company guaranty Ser. B,
9 1/8s, 2008 387,450
170,000 SFX Entertainment Inc. company guaranty 9 1/8s, 2008 156,400
275,000 Six Flags Corp. sr. notes 8 7/8s, 2006 258,500
5,000 Time Warner, Inc. deb. 9.15s, 2023 5,701
--------------
1,795,281
Environmental Control (0.6%)
- --------------------------------------------------------------------------------------------------------------------------
970,000 Allied Waste Industries, Inc. 144A sr. sub. notes
10s, 2009 904,525
550,000 Allied Waste Industries, Inc. company guaranty Ser. B,
7 7/8s, 2009 484,688
--------------
1,389,213
Financial Services (1.2%)
- --------------------------------------------------------------------------------------------------------------------------
310,000 Aames Financial Corp. sr. notes 9 1/8s, 2003 207,700
400,000 Advanta Corp. company guaranty Ser. B, 8.99s, 2026 267,500
260,000 Advanta Corp. med-term notes Ser. D, 6.98s, 2002 235,862
298,000 AMRESCO, Inc. sr. sub. notes Ser. 97-A, 10s, 2004 183,270
100,000 AMRESCO, Inc. sr. sub. notes Ser. 98-A, 9 7/8s, 2005 63,000
200,000 Colonial Capital II 144A company guaranty 8.92s, 2027 183,705
185,000 Contifinancial Corp. sr. notes 8 3/8s, 2003 63,825
320,000 Contifinancial Corp. sr. notes 8 1/8s, 2008 108,800
310,000 Contifinancial Corp. sr. notes 7 1/2s, 2002 74,400
80,000 Imperial Credit Capital Trust I 144A company guaranty
10 1/4s, 2002 64,000
400,000 Imperial Credit Industries, Inc. sr. notes 9 7/8s, 2007 319,500
200,000 Local Financial Corp. sr. notes 11s, 2004 208,000
525,000 Nationwide Credit Inc. sr. notes Ser. A, 10 1/4s, 2008 320,250
400,000 Resource America Inc. 144A sr. notes 12s, 2004 340,000
--------------
2,639,812
Food and Beverages (1.5%)
- --------------------------------------------------------------------------------------------------------------------------
400,000 Ameriserve Food Distribution Inc. 144A sec. notes
12s, 2006 391,000
110,000 Aurora Foods, Inc. sr. sub. notes Ser. B, 9 7/8s, 2007 110,825
600,000 Aurora Foods, Inc. 144A ser. sub. notes Ser. D, 9 7/8s, 2007 604,500
1,020,000 Doane Pet Care Co. sr. sub. notes 9 3/4s, 2007 999,600
540,000 Eagle Family Foods company guaranty Ser. B, 8 3/4s, 2008 432,000
240,000 RAB Enterprises, Inc. company guaranty 10 1/2s, 2005 151,200
380,000 Triarc Consumer Products, Inc. 144A sr. sub. notes
10 3/4s, 2009 367,650
200,000 Vlassic Foods Intl. Inc. 144A sr. sub. notes 10 1/4s, 2009 180,000
--------------
3,236,775
Gaming (2.3%)
- --------------------------------------------------------------------------------------------------------------------------
250,000 Argosy Gaming Co. company guaranty 10 3/4s, 2009 256,250
200,000 Autotote Corp. company guaranty Ser. B, 10 7/8s, 2004 203,500
420,000 Boyd Gaming Corp. sr. sub. notes 9 1/2s, 2007 407,400
110,000 Circus Circus Enterprises, Inc. sr. notes 6.45s, 2006 97,378
370,300 Colorado Gaming & Entertainment Co. sr. notes
12s, 2003 (PIK) 351,785
280,000 Fitzgeralds Gaming Corp. company guaranty Ser. B,
12 1/4s, 2004 (In default) (NON) 150,500
100,000 Harrahs Entertainment, Inc. company guaranty 7 1/2s, 2009 94,034
420,000 Hollywood Casino Corp. company guaranty 11 1/4s, 2007 423,150
150,000 Hollywood Park, Inc. company guaranty Ser. B, 9 1/4s, 2007 144,000
290,000 Horseshoe Gaming Holdings company guaranty
8 5/8s, 2009 274,050
510,000 International Game Technology sr. notes 7 7/8s, 2004 487,050
70,000 Isle of Capri Black Hawk LLC 144A 1st mortgage Ser. B,
13s, 2004 75,950
50,000 Lady Luck Gaming Corp. 1st mtge. 11 7/8s, 2001 50,625
750,000 Mohegan Tribal Gaming, Auth. sr. sub. notes 8 3/4s, 2009 735,000
230,000 Mohegan Tribal Gaming, Auth. sr. notes 8 1/8s, 2006 223,100
180,000 Park Place Entertainment sr. sub. notes 7 7/8s, 2005 169,650
250,000 PRT Funding Corp. sr. notes 11 5/8s, 2004 (In default) (NON) 111,875
120,000 Sun International Hotels Ltd. company guaranty 9s, 2007 111,600
180,000 Sun International Hotels Ltd. sr. sub. notes 8 5/8s, 2007 162,900
250,000 Trump A.C. 1st mtge. 11 1/4s, 2006 212,500
310,000 Trump Castle Funding 144A sub. notes 10 1/4s, 2003 313,900
125,000 Trump Holdings & Funding Corp. sr. notes 15 1/2s, 2005 123,750
--------------
5,179,947
Health Care (1.0%)
- --------------------------------------------------------------------------------------------------------------------------
70,000 Columbia/HCA Healthcare Corp. deb. 8.36s, 2024 61,950
70,000 Columbia/HCA Healthcare Corp. med. term notes notes
7.69s, 2025 55,650
50,000 Columbia/HCA Healthcare Corp. notes 7 1/4s, 2008 43,758
330,000 Columbia/HCA Healthcare Corp. med. term notes
6.63s, 2045 314,381
250,000 Extendicare Health Services, Inc. company guaranty
9.35s, 2007 150,000
150,000 Hudson Respiratory Care, Inc. sr. sub. notes 9 1/8s, 2008 117,000
250,000 Integrated Health Services, Inc. sr. sub. notes Ser. A,
9 1/4s, 2008 42,500
480,000 Mariner Post-Acute Network, Inc. sr. sub. notes Ser. B,
9 1/2s, 2007 28,800
80,000 Mariner Post-Acute Network, Inc. sr. sub. notes stepped-
coupon Ser. B, zero % (10 1/2s, 11/1/02), 2007 (STP) 4,000
130,000 MedPartners, Inc. sr. sub. notes 6 7/8s, 2000 124,150
630,000 Multicare Cos., Inc. sr. sub. notes 9s, 2007 239,400
315,000 Paracelsus Healthcare sr. sub. notes 10s, 2006 214,200
100,000 Quorum Health Group, Inc. sr. sub. notes 8 3/4s, 2005 89,000
1,125,000 Sun Healthcare Group, Inc. sr. sub. notes Ser. B, 9 1/2s,
2007 (In default) (NON) 112,500
30,000 Sun Healthcare Group, Inc. 144A sr. sub. notes 9 3/8s,
2008 (In default) (NON) 3,000
150,000 Tenet Healthcare Corp. sr. sub. notes 8 5/8s, 2007 142,500
210,000 Tenet Healthcare Corp. sr. notes Ser. B, 8 1/8s, 2008 192,150
90,000 Tenet Healthcare Corp. sr. notes 8s, 2005 85,500
130,000 Tenet Healthcare Corp. sr. notes Ser. B, 7 5/8s, 2008 118,300
160,000 Triad Hospitals Holdings 144A sr. sub. notes 11s, 2009 159,200
--------------
2,297,939
Lodging (0.8%)
- --------------------------------------------------------------------------------------------------------------------------
250,000 Epic Resorts LLC company guaranty Ser. B, 13s, 2005 217,500
10,000 HMH Properties, Inc. sr. notes Ser. C, 8.45s, 2008 9,250
40,000 HMH Properties, Inc. company guaranty Ser. B,
7 7/8s, 2008 35,700
40,000 Host Marriott L.P. sr. notes Ser. E, 8 3/8s, 2006 37,600
300,000 Host Marriott Travel Plaza sr. notes Ser. B, 9 1/2s, 2005 307,500
730,000 ITT Corp. notes 6 3/4s, 2005 657,146
120,000 Prime Hospitality Corp. sub. notes 9 3/4s, 2007 115,200
440,000 Starwood Hotels & Resorts notes 6 3/4s, 2003 415,466
--------------
1,795,362
Media (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
250,000 RBS Participacoes S.A. 144A company guaranty 11s,
2007 (Brazil) 180,000
Medical Supplies and Devices (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
110,000 ALARIS Medical Systems, Inc. company guaranty
9 3/4s, 2006 102,025
500,000 Dade International, Inc. sr. sub. notes Ser. B, 11 1/8s, 2006 518,750
250,000 Leiner Health Products sr. sub. notes 9 5/8s, 2007 195,000
190,000 Mediq, Inc. company guaranty 11s, 2008 123,500
145,000 Mediq, Inc. deb. stepped-coupon zero % (13s, 6/1/03),
2009 (STP) 36,250
--------------
975,525
Metals and Mining (0.6%)
- --------------------------------------------------------------------------------------------------------------------------
490,000 Better Minerals & Aggregates Co. 144A sr. sub. notes
13s, 2009 491,837
80,000 Continental Global Group sr. notes Ser. B, 11s, 2007 47,200
290,000 Lodestar Holdings, Inc. company guaranty 11 1/2s, 2005 217,500
150,000 Neenah Foundry Co. company guaranty Ser. F,
11 1/8s, 2007 138,000
150,000 Neenah Foundry Co. sr. sub. notes Ser. B, 11 1/8s, 2007 138,000
200,000 UCAR Global Enterprises sr. sub. notes Ser. B, 12s, 2005 210,500
--------------
1,243,037
Motion Picture Distribution (0.6%)
- --------------------------------------------------------------------------------------------------------------------------
630,000 AMC Entertainment, Inc. sr. sub. notes 9 1/2s, 2009 526,050
330,000 Cinemark USA, Inc. sr. sub. notes Ser. D, 9 5/8s,
2008 (Mexico) 283,800
310,000 Cinemark USA, Inc. sr. sub. notes 8 1/2s, 2008 (Mexico) 241,800
433,000 Diva Systems Corp. sr. disc. notes, stepped-coupon Ser. B,
zero % (12 5/8s, 3/1/03), 2008 (STP) 129,900
240,000 Silver Cinemas, Inc. sr. sub. notes 10 1/2s, 2005 105,600
630,000 United Artists Theatre sr. sub. notes 9 3/4s, 2008 126,000
--------------
1,413,150
Oil and Gas (1.3%)
- --------------------------------------------------------------------------------------------------------------------------
200,000 Belco Oil & Gas Corp. company guaranty Ser. B,
10 1/2s, 2006 205,500
170,000 Benton Oil & Gas Co. sr. notes 11 5/8s, 2003 123,250
20,000 Benton Oil & Gas Co. sr. notes 9 3/8s, 2007 12,200
50,000 Gulf Canada Resources Ltd. sr. sub. notes 9 5/8s,
2005 (Canada) 51,500
150,000 Gulf Canada Resources, Ltd. sr. notes 8 3/8s, 2005 (Canada) 147,359
170,000 Gulf Canada Resources, Ltd. sr. notes 8.35s, 2006 (Canada) 169,645
90,000 Leviathan Gas Corp. company guaranty Ser. B, 10 3/8s, 2009 92,250
240,000 Ocean Energy, Inc. company guaranty Ser. B, 8 7/8s, 2007 238,800
220,000 Ocean Energy, Inc. company guaranty Ser. B, 8 3/8s, 2008 212,300
300,000 Petro Geo-Services ADR notes 7 1/2s, 2007 (Norway) 296,274
120,000 Pogo Producing Co. sr. sub. notes Ser. B, 8 3/4s, 2007 114,600
90,000 RAM Energy Inc. sr. notes 11 1/2s, 2008 44,550
550,000 RBF Finance Co. company guaranty 11s, 2006 567,875
300,000 Seven Seas Petroleum sr. notes Ser. B, 12 1/2s, 2005 120,000
45,000 Snyder Oil Corp. sr. sub. notes 8 3/4s, 2007 44,325
350,000 Vintage Petroleum sr. sub. notes 9 3/4s, 2009 356,125
--------------
2,796,553
Packaging and Containers (1.0%)
- --------------------------------------------------------------------------------------------------------------------------
500,000 AEP Industries, Inc. sr. sub. notes 9 7/8s, 2007 467,500
410,000 Consumers International 144A sr. notes 10 1/4s, 2005 389,500
190,000 Innova S De R.L. sr. notes 12 7/8s, 2007 (Mexico) 152,000
350,000 Packaging Corp. 144A sr. sub. notes 9 5/8s, 2009 353,500
278,599 Packaging Corp bank term loan Ser. C, FRN 6s, 2008 276,016
35,000 Radnor Holdings Inc. sr. notes 10s, 2003 35,700
635,000 Riverwood International Corp. company guaranty
10 7/8s, 2008 598,488
50,000 Riverwood International Corp. company guaranty
10 5/8s, 2007 49,625
--------------
2,322,329
Paper and Forest Products (1.0%)
- --------------------------------------------------------------------------------------------------------------------------
140,000 APP Finance II Mauritius Ltd. bonds stepped-coupon 12s,
(16s, 2/15/04), 2049 (Indonesia) (STP) 81,200
250,000 Buckeye Cellulose Corp. sr. sub. notes 9 1/4s, 2008 250,000
115,000 Huntsman Packaging Corp. company guaranty 9 1/8s, 2007 107,525
180,000 Impac Group Inc. company guaranty Ser. B, 10 1/8s, 2008 160,200
235,000 Indah Kiat Financial Mauritius Ltd. company guaranty 10s,
2007 (Indonesia) 131,600
290,000 Pacifica Papers, Inc. sr. notes 10s, 2009 (Canada) 294,350
180,000 Pindo Deli Finance Mauritius Ltd. company guaranty
10 3/4s, 2007 (Indonesia) 100,800
270,000 PT Pabrik Kertas Tjiwi Kimia company guaranty 10s,
2004 (Indonesia) 153,900
430,000 Repap New Brunswick sr. notes 10 5/8s, 2005 (Canada) 375,175
540,000 Republic Group, Inc. sr. sub. notes 9 1/2s, 2008 499,500
--------------
2,154,250
Pharmaceuticals (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
295,000 ICN Pharmaceuticals, Inc. 144A sr. notes 9 1/4s, 2005 292,788
370,000 ICN Pharmaceuticals, Inc. 144A sr. notes 8 3/4s, 2008 337,625
--------------
630,413
Photography (--%)
- --------------------------------------------------------------------------------------------------------------------------
50,000 PX Escrow Corp. sr. disc. notes stepped-coupon zero %
(9 5/8s, 2/1/02), 2006 (STP) 25,000
Publishing (0.6%)
- --------------------------------------------------------------------------------------------------------------------------
380,000 Affinity Group Holdings sr. notes 11s, 2007 351,500
140,000 American Media Operation, Inc. sr. sub. notes
10 1/4s, 2009 135,450
520,000 Garden State Newspapers sr. sub. notes 8 5/8s, 2011 468,000
250,000 Hollinger International Publishing, Inc. company guaranty
9 1/4s, 2007 247,500
70,000 Perry-Judd company guaranty 10 5/8s, 2007 63,700
35,722 Von Hoffman Press, Inc. 144A sr. sub. notes 13 1/2s, 2009 32,507
45,000 Von Hoffman Press, Inc. 144A sr. sub. notes 10 3/8s, 2007 44,100
--------------
1,342,757
Railroads (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
80,000 MRS Logistica, S.A. bonds Ser. B, 10 5/8s, 2005 (Brazil) 55,200
170,000 TFM S.A. de C.V. company guaranty stepped-coupon
zero %, (11 3/4s, 6/15/02), 2009 (Mexico) (STP) 95,200
--------------
150,400
Restaurants (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
100,000 FRD Acquisition Co. sr. notes Ser. B, 12 1/2s, 2004 87,000
420,000 Sbarro Inc. 144A sr. notes 11s, 2009 414,750
--------------
501,750
Retail (1.0%)
- --------------------------------------------------------------------------------------------------------------------------
230,000 Home Interiors & Gifts, Inc. company guaranty
10 1/8s, 2008 201,250
110,000 Interact Systems, Inc. 144A sr. disc. notes 14s, 2003 17,600
250,000 K mart Corp. med. term notes 7.86s, 2002 248,228
200,000 K mart Corp. deb. 7 3/4s, 2012 182,000
105,000 Kasper A.S.L. Ltd. sr. notes 12 3/4s, 2004 95,025
250,000 Mothers Work, Inc. sr. notes 12 5/8s, 2005 250,000
500,000 NBTY Inc. 144A sr. sub. notes 8 5/8s, 2007 418,750
515,000 North Atlantic Trading Co. company guaranty Ser. B,
11s, 2004 486,675
210,000 Zale Corp. sr. notes Ser. B, 8 1/2s, 2007 207,900
--------------
2,107,428
Satellite Services (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
460,000 Golden Sky Systems company guaranty Ser. B,
12 3/8s, 2006 489,900
Semiconductors (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
750,000 Amkor Technologies, Inc. 144A sr. notes 9 1/4s, 2006 738,750
250,000 Amkor Technologies, Inc. 144A sr. sub. notes 10 1/2s, 2009 240,625
200,000 Fairchild Semiconductor Corp. sr. sub. notes 10 1/8s, 2007 196,000
520,000 Zilog, Inc. company guaranty Ser. B, 9 1/2s, 2005 474,500
--------------
1,649,875
Specialty Consumer Products (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
160,000 Decora Industries, Inc. sr. sec. notes Ser. B, 11s, 2005 142,400
Steel (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
400,000 AK Steel Corp. company guaranty 7 7/8s, 2009 368,000
185,000 Ameristeel Corp. company guaranty Ser. B, 8 3/4s, 2008 181,300
290,000 California Steel Industries 144A sr. notes 8 1/2s, 2009 275,500
305,000 National Steel Corp. 1st mtge. Ser. D, 9 7/8s, 2009 302,713
250,000 WCI Steel, Inc. sr. notes Ser. B, 10s, 2004 245,000
250,000 Weirton Steel Co. sr. notes 11 3/8s, 2004 248,125
--------------
1,620,638
Supermarkets (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
150,000 Southland Corp. deb. Ser. A, 4 1/2s, 2004 123,375
Telecommunications (7.6%)
- --------------------------------------------------------------------------------------------------------------------------
450,000 Alaska Communications Systems 144A sr. sub. notes
9 3/8s, 2009 421,875
80,000 Allegiance Telecom, Inc. sr. notes 12 7/8s, 2008 86,800
165,000 Allegiance Telecom, Inc. sr. disc. notes stepped-coupon
Ser. B, zero % (11 3/4s, 2/15/03), 2008 (STP) 107,250
350,000 Barak I.T.C. sr. disc. notes stepped-coupon Ser. B, zero %
(12 1/2s, 11/15/02), 2007 (Israel) (STP) 194,250
130,000 Bestel S.A.de C.V. sr. disc. notes stepped-coupon zero %
(12 3/4s, 5/15/03), 2005 (Mexico) (STP) 81,900
120,000 Birch Telecommunications, Inc. sr. notes 14s, 2008 117,600
120,000 CapRock Communications Corp. sr. notes Ser. B, 12s, 2008 117,600
170,000 CapRock Communications Corp. sr. notes 11 1/2s, 2009 164,900
270,000 Carrier1 International S.A. 144A sr. notes 13 1/4s,
2009 (Switzerland) 270,000
200,000 Colt Telecommunications Group PLC sr. disc. notes
stepped-coupon zero %, (12s, 12/15/01), 2006
(United Kingdom) (STP) 163,500
1,130,000 Covad Communications Group, Inc. sr. disc. notes
stepped-coupon Ser. B, zero % (13 1/2s, 03/15/03),
2008 (STP) 576,300
1,475,000 DTI Holdings Inc. sr. disc. notes, stepped-coupon Ser. B,
zero % (12 1/2s, 03/01/03), 2008 (STP) 516,250
500,000 Econophone, Inc. company guaranty 13 1/2s, 2007 525,000
310,000 Econophone, Inc. 144A notes stepped-coupon zero %
(11s, 2/15/03), 2008 (STP) 173,600
200,000 Esprit Teleom Group PLC sr. notes 11 1/2s, 2007
(United Kingdom) 203,000
60,000 Exodus Communications, Inc. 144A sr. notes 11 1/4s, 2008 60,600
1,020,000 Firstworld Communication Corp. sr. disc. notes
stepped-coupon zero % (13, 4/15/03), 2008 (STP) 520,200
625,000 Focal Communications Corp. sr. disc. notes, stepped-
coupon Ser. B, zero % (12 1/8s, 02/15/03), 2008 (STP) 351,563
990,000 Global Crossing Holdings, Ltd. company guaranty
9 5/8s, 2008 1,017,213
1,162,000 GST Telecommunications, Inc. company guaranty
stepped-coupon zero % (13 7/8s, 12/15/00), 2005 (STP) 883,120
630,000 GST Telecommunications, Inc. 144A sr. disc. notes
stepped-coupon zero % (10 1/2s, 5/1/03), 2008 (STP) 296,100
50,000 Hermes Europe Railtel 144A sr. notes 11 1/2s,
2007 (Netherlands) 51,250
100,000 Hyperion Telecommunications, Inc. sr. disc. notes
stepped-coupon Ser. B, zero % (13s, 4/15/01), 2003 (STP) 84,000
475,000 Hyperion Telecommunications, Inc. sr. notes Ser. B,
12 1/4s, 2004 498,750
370,000 Hyperion Telecommunications, Inc. sr. sub. notes 12s, 2007 371,850
300,000 ICG Communications, Inc. sr. disc. notes stepped-
coupon zero % (10s, 02/15/03), 2008 (STP) 172,500
220,000 ICG Holdings, Inc. sr. disc. notes stepped-coupon zero %
(13 1/2s, 9/15/00), 2005 (Canada) (STP) 191,400
530,000 ICG Services, Inc. sr. disc. notes stepped-coupon zero %
(9 7/8s, 5/1/03), 2008 (STP) 294,150
480,000 Intelcom Group (USA), Inc. company guaranty
stepped-coupon zero % (12 1/2s, 5/1/01), 2006 (STP) 379,200
210,000 Intermedia Communications, Inc. sr. disc. notes stepped-
coupon Ser. B, zero % (11 1/4s, 7/15/02), 2007 (STP) 140,700
130,000 Intermedia Communications, Inc. sr. notes Ser. B,
8 7/8s, 2007 115,050
270,000 Intermedia Communications, Inc. sr. notes Ser. B, 8.6s, 2008 232,200
270,000 Intermedia Communications, Inc. sr. notes Ser. B,
8 1/2s, 2008 230,850
330,000 IPC Information Systems Inc. sr. disc. notes zero %
(10 7/8s,), 2008 (STP) 244,200
650,000 KMC Telecom Holdings, Inc. sr. disc. notes stepped-
coupon zero % (12 1/2s, 2/15/03), 2008 (STP) 325,000
390,000 KMC Telecomunications 144A sr. notes 13 1/2s, 2009 378,300
380,000 Knology Holdings, Inc. sr. disc. notes stepped-coupon
zero %, (11 7/8s, 10/15/02), 2007 (STP) 221,350
230,000 Logix Communications Enterprises sr. notes 12 1/4s, 2008 193,200
500,000 McLeodUSA, Inc. sr. disc. notes stepped-coupon zero %,
(10 1/2s, 3/1/02), 2007 (STP) 392,500
410,000 Metromedia Fiber Network, Inc. sr. notes Ser. B, 10s, 2008 395,650
30,000 Netia Holdings B.V. 144A company guaranty stepped-
coupon zero % (11 1/4s, 11/1/01), 2007 (Poland) (STP) 18,900
250,000 Netia Holdings B.V. company guaranty 10 1/4s,
2007 (Netherlands) 220,000
375,000 NorthEast Optic Network, Inc. sr. notes 12 3/4s, 2008 378,750
480,000 Pathnet, Inc. sr. notes 12 1/4s, 2008 260,400
525,000 Qwest Communications International, Inc. sr. disc. notes
stepped-coupon zero % (9.47s, 10/15/02), 2007 (STP) 416,183
290,000 Rhythms Netconnections, Inc. sr. disc. notes stepped-
coupon Ser. B, zero % (13 1/2s, 5/15/03), 2008 (STP) 142,100
130,000 Telehub Communications Corp. company guaranty
stepped-coupon zero % (13 7/8s, 7/31/02), 2005 (STP) 32,500
660,000 Time Warner Telecom Inc. sr. notes 9 3/4s, 2008 664,950
970,000 Versatel Telecom B.V. sr. notes 13 1/4s, 2008 (Netherlands) 960,300
650,000 Williams Communications Group Inc. sr. notes
10 7/8s, 2009 648,375
550,000 WinStar Communications, Inc. sr. sub. notes
stepped-coupon zero % (15s, 3/1/02), 2007 (STP) 632,500
100,000 WinStar Communications. Inc. sr. sub. notes 11s, 2008 87,000
240,000 WinStar Communications, Inc. sr. sub. notes 10s, 2008 199,200
330,000 Worldwide Fiber, Inc. 144A sr. notes 12s, 2009 322,575
--------------
16,744,454
Telephone Services (1.5%)
- --------------------------------------------------------------------------------------------------------------------------
570,000 BTI Telecom Corp. sr. notes 10 1/2s, 2007 478,800
780,000 Call-Net Enterprises Inc. sr. disc. notes stepped-coupon
zero % (10.8s, 5/15/04), 2009 (Canada) (STP) 413,400
180,000 Call-Net Enterprises, Inc. sr. disc. notes stepped-coupon
zero % (9.27s, 8/15/02), 2007 (Canada) (STP) 106,200
430,000 Call-Net Enterprises, Inc. sr. disc. notes stepped-coupon
zero % (8.94s, 8/15/03), 2008 (Canada) (STP) 221,450
190,000 Call-Net Enterprises, Inc. sr. notes 8s, 2008 (Canada) 152,000
90,000 Facilicom International sr. notes Ser. B, 10 1/2s, 2008 76,500
160,000 Flag Ltd. 144A sr. notes 8 1/4s, 2008 (Bermuda) 139,600
75,000 ITC Deltacom, Inc. sr. notes 11s, 2007 78,750
60,000 Long Distance International, Inc. sr. notes 12 1/4s, 2008 30,000
70,000 OnePoint Communications Corp. company guaranty
Ser. B, 14 1/2s, 2008 45,500
120,000 Primus Telecommunications Group, Inc. sr. notes Ser. B,
9 7/8s, 2008 105,600
526,000 RSL Communications, Ltd. company guaranty 12 1/4s, 2006 523,370
150,000 RSL Communications, Ltd. company guaranty 10 1/2s, 2008 136,500
40,000 RSL Communications, Ltd. company guaranty 9 1/8s, 2008 33,400
60,000 Transtel pass-through certificates 12 1/2s, 2007 29,400
200,000 US Xchange LLC sr. notes 15s, 2008 195,000
290,000 Viatel, Inc. sr. disc. notes stepped-coupon zero %
(12 1/2s, 4/15/03), 2008 (STP) 162,400
500,000 Viatel, Inc. sr. notes 11 1/4s, 2008 470,000
--------------
3,397,870
Textiles (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
260,000 Galey & Lord, Inc. company guaranty 9 1/8s, 2008 59,800
100,000 Polymer Group, Inc. company guaranty Ser. B, 9s, 2007 94,750
--------------
154,550
Transportation (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
150,000 Eletson Holdings, Inc. 1st pfd. mtge. notes 9 1/4s,
2003 (Greece) 135,000
345,000 Johnstown America Industries, Inc. company guaranty
Ser. C, 11 3/4s, 2005 351,900
100,000 Johnstown America Industries, Inc. sr. sub. notes
11 3/4s, 2005 102,000
120,000 Kitty Hawk, Inc. company guaranty 9.95s, 2004 115,200
--------------
704,100
Wireless Communications (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
1,025,000 CellNet Data Systems, Inc. sr. disc. notes stepped-coupon
zero % (14s, 10/1/02), 2007 (STP) 369,000
120,000 Clearnet Communications, Inc. sr. disc. notes stepped-
coupon zero % (14 3/4s, 12/15/00), 2005 (STP) 112,800
390,000 Microcell Telecommunications sr. disc. notes stepped-
coupon Ser. B, zero % (14s, 12/1/01), 2006 (Canada) (STP) 325,650
170,000 Omnipoint Corp. 144A sr. notes 11 1/2s, 2009 175,100
60,000 Orbital Imaging Corp. sr. notes Ser. D, 11 5/8s, 2005 40,800
140,000 Orbital Imaging Corp. sr. notes Ser. B, 11 5/8s, 2005 106,400
60,000 Paging Network Do Brasil sr. notes 13 1/2s, 2005 (Brazil) 18,000
230,000 Sprint Spectrum L.P. sr. disc. notes stepped-coupon zero %
(12 1/2s, 8/15/01), 2006 (STP) 213,003
140,000 Startec Global Communications Corp. sr. notes 12s, 2008 116,200
260,000 Telecorp PCS Inc. 144A sr. disc. notes stepped-coupon
zero %, (11 5/8s, 4/15/04), 2009 (STP) 150,150
--------------
1,627,103
--------------
Total Corporate Bonds and Notes (cost $121,165,805) $ 108,044,382
FOREIGN GOVERNMENT BONDS AND NOTES (13.7%) (a)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$ 3,355,000 Argentina (Republic of) unsub. 11 3/4s, 2009 $ 3,237,575
8,965,000 Australia (Government of) bonds 8 3/4s, 2008 6,806,920
775,000 Brazil (Government of) bonds 11 5/8s, 2004 727,570
3,620,000 Canada (Government of) bonds Ser. WL43,
5 3/4s, 2029 2,453,978
1,290,000 Canada (Government of) bonds Ser. WB60,
7 1/4s, 2007 960,331
390,000 Colombia (Republic of) unsub. 9 3/4s, 2009 334,425
265,000 Colombia (Republic of) unsub. 8 5/8s, 2008 213,325
3,110,000 Germany (Federal Republic of) bonds Ser. 132,
4 1/8s, 2004 3,281,622
830,000 Russia (Federation of) unsub. 10s, 2007 348,600
2,550,000 Russia (Government of) deb. principal loans
FRB 6.719s, 2020 (In default) (NON) 232,688
425,000 Russia (Government of) 144A bonds 12 3/4s, 2028 200,281
20,300,000 Sweden (Government of) bonds Ser. 1041,
6 3/4s, 2014 2,665,097
SEK 2,800,000 Sweden (Government of) bonds Ser. 1035, 6s, 2005 352,284
GBP 950,000 United Kingdom Treasury bonds 10s, 2003 1,761,367
GBP 645,000 United Kingdom Treasury bonds Ser. 85,
9 3/4s, 2002 1,157,291
GBP 1,750,000 United Kingdom Treasury bonds 8s, 2000 2,952,692
1,960,000 United Mexican States bonds Ser. XW,
10 3/8s, 2009 1,983,520
780,000 United Mexican States sr. notes Ser. EMTN,
9 3/4s, 2005 786,630
--------------
Total Foreign Government Bonds and Notes
(cost $31,040,709) $ 30,456,196
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (11.6%) (a)
PRINCIPAL AMOUNT VALUE
U.S. Government Agency Mortgage Obligations (5.1%)
- --------------------------------------------------------------------------------------------------------------------------
Federal National Mortgage Association Pass-Through
Certificates
$ 338,018 7s, May 1, 2011 $ 337,700
43,755 6 1/2s, July 1, 2013 42,935
Government National Mortgage Association Pass-Through
Certificates
5,594,813 8s, with due dates from September 15, 2025
to June 15, 2029 5,717,171
1,487,408 7 1/2s, with due dates from October 15, 2022
to November 15, 2023 1,497,166
2,945,018 7s, with due dates from December 15, 2022
to May 15, 2028 2,896,146
997,036 6 1/2s, with due dates from January 15, 2028
to March 15, 2029 953,097
--------------
11,444,215
U.S. Treasury Obligations (6.5%)
- --------------------------------------------------------------------------------------------------------------------------
365,000 U.S. Treasury Bonds 5 1/4s, August 15, 2003 (SEG) 357,758
U.S. Treasury Notes
2,524,000 6s, August 15, 2009 2,544,495
59,000 6s, August 15, 2004 59,572
1,755,000 5 1/2s, May 15, 2009 1,698,243
5,530,000 5 1/2s, July 31, 2001 5,516,175
4,043,000 5 1/4s, May 15, 2004 (SEG) 3,951,386
785,000 U.S. Treasury Strip zero %, February 15, 2019 222,500
--------------
14,350,129
--------------
Total U.S. Government and Agency Obligations
(cost $26,061,109) $ 25,794,344
COLLATERALIZED MORTGAGE OBLIGATIONS (10.1%) (a)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
GBP 750,000 Blackstone Hotel Acquisition Co. sr. mtge. loan,
FRN, 3.3449s, 2003 $ 1,229,945
Commercial Mortgage Acceptance Corp.
$ 485,000 Ser. 97-ML1, Class D, 7.054s, 2010 456,658
310,000 Ser. 98-C2, Class D, 6.944s, 2009 283,795
480,000 Countrywide Home Loan Ser. 98-3, Class A5, 6.75s, 2028 454,425
420,000 Countrywide Mortgage Backed Securities, Inc. Ser. 93-C,
Class A8, 6.5s, 2024 392,444
Criimi Mae Commercial Mortgage Trust
1,365,000 Ser. 98-C1, Class A2, 7s, 2011 1,173,900
590,000 Ser. 98-C1, Class B, 7s, 2011 442,039
4,136,758 Deutsche Mortgage & Asset Receiving Corp. Ser. 98-C1,
Class X, Interest Only (IO), 1.249s, 2023 226,875
253,137 Fannie Mae Ser. 99-7, Class CZ, 6.5s, 2029 236,169
Fannie Mae Strip
1,682,000 Ser. 96-5, Class SW, IO, 12.124s, 2018 611,828
2,143,915 Ser. 281, Class 2, IO, 9s, 2026 550,718
1,017,412 Ser. 241, Class 2, IO, 8.5s, 2023 282,332
540,878 Ser. 217, Class 2, IO, 8s, 2023 152,798
193,360 Ser. 176, Class 2, IO, 8s, 2022 54,624
2,959,286 Ser. 215, Class 2, IO, 7s, 2023 832,299
165,398 Ser. 98-30, Class TH, IO, 6.5s, 2012 30,805
2,426,760 Ser. 97-23, Class SH, IO, 4.73s, 2023 489,144
814,350 Ser. 291, Class 1, Principal Only (PO), zero %, 2027 607,200
First Union-Lehman Brothers Commercial Mortgage Co.
2,358,413 Ser. 97-C2, IO, 1.533s, 2027 177,065
7,316,228 Ser. 98-C2, IO, 0.804s, 2028 274,644
Freddie Mac
1,091,000 Ser. 2182, Class SA, 8.336s, 2025 977,427
200,000 Ser. 2040, Class PE, 7.5s, 2028 202,394
115,000 Ser. 1439, Class I, 7.5s, 2022 114,659
Freddie Mac Strip
1,337 Ser. 1208, Class G, IO, 1007.5s, 2022 33,432
217,543 Ser. 144, Class A, IO, 8s, 2022 60,368
136,298 Ser. 137, Class B, IO, 8s, 2022 37,823
223,322 Ser. 165, Class B, IO, 8s, 2024 61,972
461,971 Ser. 147, IO, 8s, 2023 129,207
989,095 Ser. 172, Class A, IO, 6.5s, 2024 281,892
521,802 Ser. 2103, Class PI, IO, 6.5s, 2012 92,985
195,000 Ser. 2100, Class GI, IO, 6.5s, 2012 36,319
324,043 Ser. 2050, Class PI, IO, 6.5s, 2011 58,632
377,000 Ser. 2039, Class PI, IO, 6.5s, 2012 62,441
1,653,569 Ser. 1954, Class MG, IO, 6s, 2027 500,721
443,426 Ser. 1208, Class F, PO, zero %, 2022 352,940
4,405,133 Ser. 177, PO, zero %, 2026 3,053,307
1,191,726 Ser. 191, PO, zero %, 2028 887,836
285,000 GE Capital Mortgage Services, Inc. Ser. 98-11,
Class 2A4, 6.75s, 2028 270,394
570,000 General Growth Properties-Ala Moana Ser. 99-C1,
Class E, 7.63s, 2004 570,000
250,000 General Growth Properties-Ivanhoe Ser. 99-C1,
Class F, 7.88s, 2004 250,000
295,000 General Growth Properties-Ivanhoe Ser. 99-C1,
Class G, 8.63s, 2004 295,000
900,000 GMAC Commercial Mortgage Securities, Inc. Ser. 98-C2,
Class D, 6.5s, 2010 801,316
185,000 Government National Mortgage Association Ser. 97-8,
Class PE, 7.5s, 2027 186,388
675,000 GS Mortgage Securities Corp. II Ser. 98-GLII, Class D,
7.190s, 2031 617,625
Merrill Lynch Mortgage Investors, Inc.
210,000 Ser. 1995-C3, Class D, 7.770s, 2025 207,408
111,000 Ser. 98-C2, Class D,7.110s, 2030 103,005
4,538,290 Ser. 98-C2, IO, 1.577s, 2030 330,444
4,406,313 Ser. 96-C2, IO, 1.563s, 2028 308,786
Morgan Stanley Capital I
290,000 Ser. 98-XL1, Class E, 6.989s, 2030 271,784
5,681,554 Ser. 98-HF1, Class X, IO, 1.199s, 2018 317,368
Mortgage Capital Funding, Inc.
2,972,605 Ser. 97-MC2, Class X, IO, 1.581s, 2012 209,012
6,573,856 Ser. 98-MC1, Class X, IO, 0.859s, 2009 253,248
231,245 PNC Mortgage Securities Corp. Ser. 97-6,
Class A2, 6.6s, 2027 231,823
71,353 Prudential Home Mortgage Securities Ser. 93-57,
Class A4, 5.9s, 2023 70,911
83,295 Rural Housing Trust Ser. 87-1, Class D, 6.33s, 2026 82,009
Structured Asset Security Corp.
455,750 Ser. 98-RF2, 8.58s, 2028 474,407
3,072,480 Ser. 98-RF3, IO, 6.1s, 2028 609,119
--------------
Total Collateralized Mortgage Obligations
(cost $23,109,431) $ 22,364,109
BRADY BONDS (6.0%) (a)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$ 7,374,877 Brazil (Government of) disc. bonds FRB 8s, 2014 (POR) $ 4,692,634
940,000 Brazil (Government of) disc. bonds Ser. ZL, FRB 5.875s, 2024 594,550
3,075,000 Bulgaria (Government of) FRB Ser. A, 6 1/2s, 2024 2,114,063
7,175,000 United Mexican States SEC. Ser.W- B, 6 1/4s, 2019 5,273,625
1,080,000 Venezuela (Government of) deb. Ser. W-A, 6 3/4s, 2020 711,504
--------------
Total Brady Bonds (cost $14,402,028) $ 13,386,376
PREFERRED STOCKS (3.2%) (a)
NUMBER OF SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------------
600 Adelphia Communications Corp. Ser. B, $13.00 cum. pfd. $ 67,200
2,834 AmeriKing, Inc. $3.25 cum. pfd. (PIK) 45,344
400 Benedek Communications 11.50% pfd. (PIK) 304,000
20,000 Brand Scaffold Services, Inc. $3.625 cum. pfd. 560,000
822 Capstar Broadcasting, Inc. 144A $12.00 pfd. (PIK) 95,352
1,052 Capstar Communications, Inc. Ser. E, $12.625 cum. pfd. (PIK) 122,032
11,880 CGA Group Ltd. 144A Ser. A, $13.75 pfd. (PIK) 320,760
2,575 Chevy Chase Capital Corp. Ser. A, $5.188 pfd. 139,050
965 Citadel Broadcasting Inc. $13.25 cum. pfd. (PIK) 109,528
104 Concentric Network Corp. Ser. B, 13.50% pfd. (PIK) 95,680
4,412 CSC Holdings, Inc. Ser. M, $11.125 cum. pfd. (PIK) 474,290
3,500 Diva Systems Corp. Ser. C, $6.00 pfd. 14,000
18,000 Diva Systems Corp. Ser. D, $6.00 pfd. 72,000
319 Dobson Communications 13.00% pfd. (PIK) 307,835
200 Dobson Communications 12.25% pfd. (PIK) 173,000
110 First Republic 144A 10.50% pfd. 110,000
360 Fresenius Medical Capital Trust I company guaranty Ser. D,
$9.00 pfd. (Germany) 353,700
190 Fresenius Medical Capital Trust II company guaranty,
$7.875, pfd. (Germany) 175,275
4,430 Global Crossing Holdings $10.50 pfd. (PIK) 465,150
425 Granite Broadcasting 12.75% cum. pfd. (PIK) 408,000
352 ICG Holdings, Inc. 14.25% pfd. (PIK) 330,880
497 Intermedia Communication Ser. B, 13.50% pfd. (PIK) 447,300
250 IXC Communications, Inc. 12.50% cum. pfd. (PIK) 262,500
204 NEXTEL Communications, Inc. Ser. D, 13.00% cum. pfd. (PIK) 215,220
3,623 Nextlink Communications, Inc. $7.00 cum. pfd. (PIK) 179,339
30 Paxson Communications Corp. 13.25% cum. pfd. (PIK) 324,000
2,500 Public Service Co. of New Hampshire $2.65 cum. pfd. 62,500
238 R& B Falcon Corp. 13.875% cum. pfd. (PIK) 226,100
374 Spanish Broadcasting Systems 14.25% cum. pfd. 392,700
165 Webster Financial 7.375% cum. pfd. 159,699
200 WinStar Communications, Inc. 14.25% cum. pfd. 168,000
--------------
Total Preferred Stocks (cost $7,285,977) $ 7,180,434
ASSET-BACKED SECURITIES (1.0%) (a)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$ 19,440 Capita Equipment Receivables Trust Ser. 96-1, Class A4,
6.28s, 2000 $ 19,440
70,000 Contimortgage Home Equity Loan Trust Ser. 97-1,
Class M2, 7.67s, 2028 67,309
525,133 First Plus Ser. 98-A, Class A, 8 1/2s, 2023 446,363
1,754,848 Provident Bank Home Equity Loan Trust Ser. 99-1,
Class A2, 5.533s, 2019 1,754,848
--------------
Total Asset-Backed Securities (cost $2,364,374) $ 2,287,960
CONVERTIBLE BONDS AND NOTES (0.3%) (a)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$ 150,000 Corporate Express, Inc. cv. notes 4 1/2s, 2000 $ 147,000
570,000 Cybernet Internet Service 144A cv. sr. disc. notes
stepped-coupon zero %, (13s, 8/15/04), 2009 (STP) 314,925
4,000 GST Telecommunications, Inc. cv. sr. disc. notes stepped-
coupon zero %, (13 7/8s, 12/15/00), 2005 (STP) 4,800
150,000 HEALTHSOUTH Corp. cv. sub. deb. 3 1/4s, 2003 116,063
160,000 Integrated Device Technology, Inc. cv. sub. notes
5 1/2s, 2002 151,000
--------------
Total Convertible Bonds and Notes (cost $694,821) $ 733,788
UNITS (0.3%) (a)
NUMBER OF UNITS VALUE
- --------------------------------------------------------------------------------------------------------------------------
350 Australis Media, Ltd. units stepped-coupon zero %,
(15 3/4s, 5/15/00), 2003 (In default) (Australia) (STP) (NON) $ 35
225 Cybernet 144A units 14s, 2009 221,625
220 Pegasus Shipping 144A units company guaranty stepped-
coupon zero % (14 1/2s. 6/20/03), 2008 (Bermuda) (STP) 22,000
260 Stone Container Corp. units sr. sub.notes stepped-coupon
zero %, (12 1/4s, 11/15/99), 2002 (STP) 261,300
225 XCL Ltd. units sr. sec. notes 13 1/2s, 2004 (In default) (NON) 78,750
2,000 XCL Ltd. 144A units 9.50% cv. cum. Pfd. (PIK) 6,000
--------------
Total Units (cost $1,395,113) $ 589,710
CONVERTIBLE PREFERRED STOCKS (0.3%) (a)
NUMBER OF SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------------
870 Chesapeake Energy Corp. $3.50 cv. cum. pfd. $ 26,753
10,970 Global Telesystems, Inc. 144A $3.625 cv. cum. pfd. 445,656
10 Paxson Communications Corp. 144A 9.75% cv. pfd. (PIK) 112,000
330 XCL Ltd 144A Ser. A, 9.50% cv. cum. pfd. (PIK) 990
--------------
Total Convertible Preferred Stocks (cost $723,043) $ 585,399
COMMON STOCKS (0.2%) (a)
NUMBER OF SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------------
50 AmeriKing, Inc. (NON) $ 500
2,000 AMFM, Inc. (NON) 121,750
24,136 Celcaribe (NON) 9,051
69,918 Celcaribe S.A. 144A (NON) 87,398
1,024 Fitzgerald Gaming Corp. (NON) 256
1,213 Hedstrom Holdings, Inc. 144A (NON) 1,213
73 Mothers Work, Inc. (NON) 575
60 Paging Do Brazil Holdings Co., LLC 144A Class B, (Brazil) (NON) 1
42 Spanish Broadcasting System, Inc. 27,300
2,015 Viatel, Inc. (NON) 59,568
3,225 WinStar Communications. Inc. (NON) 125,977
--------------
Total Common Stocks (cost $259,962) $ 433,589
WARRANTS (0.1%) (a) (NON) EXPIRATION
NUMBER OF WARRANTS DATE VALUE
- --------------------------------------------------------------------------------------------------------------------------
130 Bestel S.A. (Mexico) 5/15/05 $ 3,900
120 Birch Telecommunications, Inc. 144A (PIK) 6/15/08 6,600
270 Carrier International 144A 2/15/09 5,400
615 Cellnet Data Systems, Inc. 10/1/07 15,375
11,800 CGA Group Ltd. 144A 2/11/07 118
720 Club Regina, Inc. 144A 12/1/04 720
90 Colt Telecommunications Group PLC
(United Kingdom) 12/31/06 34,200
1,620 Consorcio Ecuatoriano 144A (Ecuador) 10/1/00 162
400 Decrane Holdings 9/30/08 4
1,299 Diva Systems Corp. 3/1/08 10,392
35 Diva Systems Corp. 5/15/06 6,300
6,480 DTI Holdings Inc. 3/1/08 65
250 Epic Resorts 6/15/05 3
85 Esat Holdings, Inc. (Ireland) 2/1/07 5,950
520 Firstworld Communication 4/15/08 36,400
120 Globalstar Telecommunications 2/15/04 8,640
400 Hyperion Telecommunications 144A 4/15/01 50,000
110 Interact Systems, Inc. 8/1/03 1
25 Intermedia Communications 6/1/00 2,256
30 International Wireless Communications
Holdings 144A 8/15/01 1
500 Iridium World Com 144A 7/15/05 5
280 KMC Telecom Holdings, Inc. 4/15/08 840
290 Knology Holdings, Inc. 144A 10/15/07 724
60 Long Distance International, Inc. 144A 4/13/08 120
160 McCaw International Ltd. 4/15/07 680
145 Mediq Inc. 144A 6/1/09 1
70 OnePoint Communications Corp. 6/1/08 70
140 Orbital Imaging Corp. 144A 3/1/05 2,800
160 Orion Network Systems 1/15/07 1,840
480 Pathnet, Inc. 144A 4/15/08 4,800
320 Paxson Communications Corp. 144A 6/30/03 1,280
230 R& B Falcon Corp. 144A 5/1/09 57,500
140 Startec Global Communications Corp. 5/15/08 140
45 Sterling Chemicals Holdings 8/15/08 540
130 Telehub Communications Corp. 7/31/05 1,300
395 UIH Australia/Pacific, Inc. 144A 5/15/06 11,850
205 Versatel Telecom B.V. 144A (Netherlands) 5/15/08 32,800
--------------
Total Warrants (cost $305,278) $ 303,777
PURCHASED OPTIONS OUTSTANDING (--%) (a) (cost $21,032)
EXPIRATION DATE/
CONTRACT AMOUNT STRIKE PRICE VALUE
- --------------------------------------------------------------------------------------------------------------------------
$ 2,900,000 U.S. Treasury Bonds Ten Year
Futures Contract (put) Dec 99/107 USD $ 4,531
SHORT-TERM INVESTMENTS (4.3%) (a) (cost $9,592,000)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$ 9,592,000 Interest in $750,000,000 joint repurchase agreement
dated September 30, 1999 with Goldman Sachs
& Company due October 1, 1999 with respect to
various U.S. Treasury obligations -- maturity value
of $9,593,409 for an effective yield of 5.29% $ 9,592,000
- --------------------------------------------------------------------------------------------------------------------------
Total Investments (cost $238,420,682) (b) $ 221,756,595
- --------------------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $221,624,167.
(b) The aggregate identified cost on a tax basis is $238,484,968, resulting in gross unrealized appreciation and
depreciation of $1,786,219 and $18,514,592, respectively, or net unrealized depreciation of $16,728,373.
(NON) Non-income-producing security.
(STP) 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.
(POR) A portion of the income will be received in additional securities.
(PIK) Income may be received in cash or additional securities at the discretion of the issuer.
(SEG) A portion of these securities were pledged and segregated with the custodian to cover margin requirements for
futures contracts at September 30, 1999.
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 Depositary Receipts representing ownership of foreign
securities on deposit with a domestic custodian bank.
The rates shown on Floating Rate Bonds (FRB) and Floating Rate Notes (FRN) are the current interest rates shown at
September 30, 1999, which are subject to change based on the terms of the security.
DIVERSIFICATION BY COUNTRY
Distribution of investments by country of issue at September 30, 1999: (as percentage of Market Value)
Argentina 1.5% Mexico 4.2%
Australia 3.1 Netherlands 1.1
Brazil 2.9 Sweden 1.4
Bulgaria 1.0 United Kingdom 3.3
Canada 3.3 United States 73.6
Germany 1.7 Other 1.9
Luxembourg 1.0 ----
Total 100.0%
- -------------------------------------------------------------------------------
Forward Currency Contracts to Buy at September 30, 1999 (Unaudited)
(aggregate face value $12,709,659)
Aggregate Face Delivery Unrealized
Market Value Value Date Appreciation
- -------------------------------------------------------------------------------
Danish Krone $ 746,016 $ 742,147 2/3/00 $ 3,869
Euro Dollars 7,226,478 7,180,812 2/3/00 45,666
Japanese Yen 4,887,631 4,786,700 2/3/00 100,931
- -------------------------------------------------------------------------------
$ 150,466
- -------------------------------------------------------------------------------
Forward Currency Contracts to Sell at September 30, 1999 (Unaudited)
(aggregate face value $17,916,526)
Market Aggregate Face Delivery Unrealized
Value Value Date Depreciation
- -------------------------------------------------------------------------------
Australian Dollars $ 5,218,327 $5,191,279 2/3/00 $ (27,048)
British Pounds 3,003,825 2,977,098 2/3/00 (26,727)
Canadian Dollars 3,560,658 3,495,232 2/3/00 (65,426)
Euro Dollars 2,855,693 2,831,048 2/3/00 (24,645)
Japanese Yen 3,498,566 3,421,869 2/3/00 (76,697)
- -------------------------------------------------------------------------------
$(220,543)
- -------------------------------------------------------------------------------
Futures Contracts Outstanding at September 30, 1999 (Unaudited)
Unrealized
Aggregate Face Expiration Appreciation/
Total Value Value Date (Depreciation)
- -------------------------------------------------------------------------------
Bank Accept (Short) $ 5,013,773 $4,900,983 Dec-99 $(112,790)
Euro (Long) 2,355,000 2,351,815 Mar-00 3,185
Euro (Long) 2,586,100 2,581,497 Jun-00 4,603
Euro Euribor (Short) 2,557,193 2,490,884 Dec-00 (66,309)
Euro Euribor (Short) 258,403 254,366 Dec-99 (4,037)
Euro Euribor (Short) 7,718,436 7,513,026 Jun-00 (205,410)
Euro Euribor (Short) 254,892 252,694 Jun-01 (2,198)
Euro Euribor (Short) 258,002 251,033 Mar-00 (6,969)
Euro Euribor (Short) 255,386 252,027 Mar-01 (3,359)
Euro Euribor (Short) 256,614 253,115 Sep-00 (3,499)
Euro-schatz (Long) 1,106,234 1,096,897 Dec-99 9,337
Euroyen (Long) 4,927,988 5,034,830 Jun-00 (106,842)
Euroyen (Long) 3,287,795 3,321,743 Mar-00 (33,948)
Euroyen (Short) 8,202,201 8,343,018 Sep-00 140,817
Libor (Long) 7,499,117 7,357,679 Jun-00 141,438
Libor (Long) 2,295,075 2,247,275 Dec-00 47,800
U.S. Treasury Bond
20Yr (Long) 11,621,625 11,693,866 Dec-99 (72,241)
- -------------------------------------------------------------------------------
$(270,422)
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
September 30, 1999 (Unaudited)
<S> <C>
Assets
- -----------------------------------------------------------------------------------------------
Investments in securities, at value (identified cost $238,420,682) (Note 1) $221,756,595
- -----------------------------------------------------------------------------------------------
Cash 912,548
- -----------------------------------------------------------------------------------------------
Foreign currency (cost $108,431) 108,859
- -----------------------------------------------------------------------------------------------
Dividends, interest, and other receivables 4,343,682
- -----------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 1,063,574
- -----------------------------------------------------------------------------------------------
Receivable for securities sold 1,124,544
- -----------------------------------------------------------------------------------------------
Receivable for variation margin 67,811
- -----------------------------------------------------------------------------------------------
Receivable for open forward currency contracts 151,098
- -----------------------------------------------------------------------------------------------
Unamortized organizational expenses (Note 1) 14,889
- -----------------------------------------------------------------------------------------------
Total assets 229,543,600
Liabilities
- -----------------------------------------------------------------------------------------------
Distributions payable to shareholders 316,054
- -----------------------------------------------------------------------------------------------
Payable for securities purchased 6,276,638
- -----------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 410,900
- -----------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 389,801
- -----------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 47,484
- -----------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 9,775
- -----------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 1,698
- -----------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 169,991
- -----------------------------------------------------------------------------------------------
Payable for open forward currency contracts 221,175
- -----------------------------------------------------------------------------------------------
Payable for closed forward currency contracts 8,622
- -----------------------------------------------------------------------------------------------
Other accrued expenses 67,295
- -----------------------------------------------------------------------------------------------
Total liabilities 7,919,433
- -----------------------------------------------------------------------------------------------
Net assets $221,624,167
Represented by
- -----------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $252,135,804
- -----------------------------------------------------------------------------------------------
Distributions in excess of net investment income (Note 1) (1,582,251)
- -----------------------------------------------------------------------------------------------
Accumulated net realized loss on investment (Note 1) (12,142,340)
- -----------------------------------------------------------------------------------------------
Net unrealized depreciation of investments and
assets and liabilities in foreign currencies (16,787,046)
- -----------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $221,624,167
Computation of net asset value and offering price
- -----------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($80,888,292 divided by 11,197,831 shares) $7.22
- -----------------------------------------------------------------------------------------------
Offering price per class A share (100/95.25 of $7.22)* $7.58
- -----------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($126,311,955 divided by 17,465,501 shares)** $7.23
- -----------------------------------------------------------------------------------------------
Net asset value and offering price per class C share
($5,596,566 divided by 772,727 shares)** $7.24
- -----------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($8,827,354 divided by 1,222,321 shares) $7.22
- -----------------------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $7.22)* $7.46
- -----------------------------------------------------------------------------------------------
* 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
Six months ended September 30, 1999 (Unaudited)
<S> <C>
Investment income:
- -----------------------------------------------------------------------------------------------
Interest income (net of foreign tax of $9,307) $ 10,063,751
- -----------------------------------------------------------------------------------------------
Dividends 326,131
- -----------------------------------------------------------------------------------------------
Total investment income 10,389,882
Expenses:
- -----------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 768,551
- -----------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 204,281
- -----------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 7,521
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 101,227
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 633,915
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class C (Note 2) 21,001
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 22,685
- -----------------------------------------------------------------------------------------------
Administrative services (Note 2) 3,514
- -----------------------------------------------------------------------------------------------
Reports to shareholders 10,621
- -----------------------------------------------------------------------------------------------
Amortization of organizational expenses (Note 1) 5,255
- -----------------------------------------------------------------------------------------------
Registration fees 4,575
- -----------------------------------------------------------------------------------------------
Auditing 29,222
- -----------------------------------------------------------------------------------------------
Legal 10,788
- -----------------------------------------------------------------------------------------------
Postage 9,626
- -----------------------------------------------------------------------------------------------
Other 9,014
- -----------------------------------------------------------------------------------------------
Total expenses 1,841,796
- -----------------------------------------------------------------------------------------------
Expense reduction (Note 2) (13,969)
- -----------------------------------------------------------------------------------------------
Net expenses 1,827,827
- -----------------------------------------------------------------------------------------------
Net investment income 8,562,055
- -----------------------------------------------------------------------------------------------
Net realized loss on investments (Notes 1 and 3) (3,623,673)
- -----------------------------------------------------------------------------------------------
Net realized gain on foreign currency transactions (Note 1) 428,492
- -----------------------------------------------------------------------------------------------
Net realized loss on futures contracts (Notes 1 and 3) (1,792,899)
- -----------------------------------------------------------------------------------------------
Net unrealized appreciation of assets and liabilities in
foreign currencies during the period 92,176
- -----------------------------------------------------------------------------------------------
Net unrealized depreciation of investments and futures during the period (6,519,611)
- -----------------------------------------------------------------------------------------------
Net loss on investments (11,415,515)
- -----------------------------------------------------------------------------------------------
Net decrease in net assets resulting from operations $ (2,853,460)
- -----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Six months ended Year ended
September 30 March 31
1999* 1999
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase in net assets
- ---------------------------------------------------------------------------------------------------------------
Operations:
- ---------------------------------------------------------------------------------------------------------------
Net investment income $ 8,562,055 $ 12,850,688
- ---------------------------------------------------------------------------------------------------------------
Net realized loss on investments and foreign
currency transactions (4,988,080) (7,088,106)
- ---------------------------------------------------------------------------------------------------------------
Net unrealized depreciation of investments and
assets and liabilities in foreign currencies (6,427,435) (14,086,489)
- ---------------------------------------------------------------------------------------------------------------
Net decrease in net assets resulting
from operations (2,853,460) (8,323,907)
- ---------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ---------------------------------------------------------------------------------------------------------------
From net investment income
Class A (3,736,170) (5,128,659)
- ---------------------------------------------------------------------------------------------------------------
Class B (5,359,918) (7,008,305)
- ---------------------------------------------------------------------------------------------------------------
Class C (174,481) (6,333)
- ---------------------------------------------------------------------------------------------------------------
Class M (406,977) (646,669)
- ---------------------------------------------------------------------------------------------------------------
From net realized gain on investments
Class A -- (172,254)
- ---------------------------------------------------------------------------------------------------------------
Class B -- (272,107)
- ---------------------------------------------------------------------------------------------------------------
Class C -- (4,122)
- ---------------------------------------------------------------------------------------------------------------
Class M -- (19,980)
- ---------------------------------------------------------------------------------------------------------------
From return of capital
Class A -- (685,978)
- ---------------------------------------------------------------------------------------------------------------
Class B -- (937,771)
- ---------------------------------------------------------------------------------------------------------------
Class C -- (888)
- ---------------------------------------------------------------------------------------------------------------
Class M -- (86,477)
- ---------------------------------------------------------------------------------------------------------------
Increase from capital share transactions (Note 4) 20,278,443 86,003,857
- ---------------------------------------------------------------------------------------------------------------
Total increase in net assets 7,747,437 62,710,407
Net assets
- ---------------------------------------------------------------------------------------------------------------
Beginning of period 213,876,730 151,166,323
- ---------------------------------------------------------------------------------------------------------------
End of period (including distributions in excess of net
investment income of $1,582,251 and $466,760, respectively) $221,624,167 $213,876,730
- ---------------------------------------------------------------------------------------------------------------
*Unaudited
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
- ------------------------------------------------------------------------------------------------------------------------------------
Six months
ended For the period
Per-share Sept. 30 Feb. 26, 1996+
operating performance (Unaudited) Year ended March 31 to March 31
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1999 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $7.64 $8.70 $8.34 $8.38 $8.50
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .31 .60(c) .65(d) .63(d) .04(c)(d)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.39) (.97) .40 (.02) (.13)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations (.08) (.37) 1.05 .61 (.09)
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.34) (.59) (.59) (.63) (.03)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of
net investment income -- -- (.01) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- (.02) (.03) (.02) --
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of
net realized gain on investments -- -- (.06) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
From return of capital -- (.08) -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.34) (.69) (.69) (.65) (.03)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $7.22 $7.64 $8.70 $8.34 $8.38
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) (1.03)* (4.33) 13.05 7.36 (1.41)*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $80,888 $78,484 $57,016 $39,178 $3,799
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .61* 1.31 1.26(d) 1.25(d) .13*(d)
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 4.11* 7.43 7.82(d) 7.74(d) .50*(d)
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 66.46* 204.50 211.24 169.27 18.98*
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total 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 year ended March 31, 1998, 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
- ------------------------------------------------------------------------------------------------------------------------------------
Six months
ended For the period
Per-share Sept. 30 Feb. 26, 1996+
operating performance (Unaudited) Year ended March 31 to March 31
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1999 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $7.65 $8.70 $8.34 $8.38 $8.50
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .28 .53(c) .59(d) .57(d) .03(c)(d)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.38) (.95) .40 (.03) (.12)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations (.10) (.42) .99 .54 (.09)
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.32) (.54) (.53) (.56) (.03)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of
net investment income -- -- (.01) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- (.02) (.03) (.02) --
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of
net realized gain on investments -- -- (.06) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
From return of capital -- (.07) -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.32) (.63) (.63) (.58) (.03)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $7.23 $7.65 $8.70 $8.34 $8.38
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) (1.40)* (4.93) 12.20 6.56 (1.41)*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $126,312 $124,434 $85,379 $57,052 $5,048
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .98* 2.06 2.01(d) 2.00(d) .20*(d)
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 3.74* 6.67 7.07(d) 6.99(d) .44*(d)
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 66.46* 204.50 211.24 169.27 18.98*
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total 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 year ended March 31, 1998, 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 C
- ------------------------------------------------------------------------------------------------------------------------------------
Six months
ended For the period
Per-share Sept. 30 Feb. 1, 1999+
operating performance (Unaudited) to March 31
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1999
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net asset value,
beginning of period $7.66 $7.77
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment loss (c) .29 .04
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.40) (.05)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations (.11) (.01)
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.31) (.07)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of
net investment income -- --
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- (.02)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of
net realized gain on investments -- --
- ------------------------------------------------------------------------------------------------------------------------------------
From return of capital -- (.01)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.31) (.10)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $7.24 $7.66
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) (1.41)* (.12)*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $5,597 $1,957
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .98* .33*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 3.79* .73*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 66.46* 204.50
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total 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 year ended March 31, 1998, 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
- ------------------------------------------------------------------------------------------------------------------------------------
Six months
ended For the period
Per-share September 3 Feb. 26, 1996+
operating performance (Unaudited) Year ended March 31 to March 31
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1999 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $7.64 $8.70 $8.34 $8.38 $8.50
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .30 .58(c) .64(d) .61(d) .04(c)(d)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.39) (.97) .39 (.03) (.13)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations (.09) (.39) 1.03 .58 (.09)
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.33) (.57) (.57) (.60) (.03)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of
net investment income -- -- (.01) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- (.02) (.03) (.02) --
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of
net realized gain on investments -- -- (.06) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Return of capital -- (.08) -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.33) (.67) (.67) (.62) (.03)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $7.22 $7.64 $8.70 $8.34 $8.38
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) (1.16)* (4.57) 12.76 7.09 (1.41)*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $8,827 $9,001 $8,771 $5,802 $482
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .73* 1.56 1.51(d) 1.50(d) .14*(d)
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 3.99* 7.21 7.57(d) 7.48(d) .50*(d)
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 66.46* 204.50 211.24 169.27 18.98*
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total 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 year ended March 31, 1998, 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
September 30, 1999 (Unaudited)
Note 1
Significant accounting policies
Putnam Strategic Income Fund (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
preservation of capital by investing its assets in debt investments of
U.S. and 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, class C and class M shares. The fund
began offering class C shares on February 1, 1999. 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 C shares are
subject to the same fees and expenses as class B shares, except that class
C shares have a one-year 1.00% contingent deferred sales charge and do not
convert to class A shares. Class M shares are sold with a maximum
front-end sales charge of 3.25% and pay an ongoing distribution fee that
is higher than class A shares but lower than class B and class C 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
of the financial statements and the reported amounts of increases and
decreases in net assets from operations during the reporting period.
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. Collateral
for certain tri-party repurchase agreements is held at the counterparty's
custodian in a segregated account for the benefit of the fund and the
counterparty. 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). Gains or losses on securities sold are determined on
the identified cost basis.
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 discount
bonds, 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 bonds is amortized on a yield-to-maturity
basis.
E) Foreign currency translation The accounting records of the fund are
maintained in U.S. dollars. The market value of foreign securities,
currency holdings, and 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 realized 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 six months
ended September 30, 1999, 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.
At March 31, 1999, the fund had a capital loss carryover of approximately
$3,976,000 available to offset future net capital gain, if any, which will
expire on March 31, 2007.
K) Distributions to shareholders Income dividends are recorded daily by
the fund and are distributed 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. 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.
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.
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 Putnam Fiduciary
Trust Company (PFTC), a subsidiary of Putnam Investments, Inc. Investor
servicing agent functions are provided by Putnam Investor Services, a
division of PFTC.
For the six months ended September 30, 1999, fund expenses were reduced by
$13,969 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 $663 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
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, class C 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 0.35%, 1.00%,
1.00% and 1.00% of the average net assets attributable to class A, class
B, class C and class M shares, respectively. The Trustees have approved
payment by the fund at an annual rate of 0.25%, 1.00%, 1.00% and 0.50% of
the average net assets attributable to class A, class B, class C and class
M shares, respectively.
For the six months ended September 30, 1999, Putnam Mutual Funds Corp.,
acting as underwriter, received net commissions of $46,324 and $1,497 from
the sale of class A and class M shares, respectively, and $169,960 and
$2,735 in contingent deferred sales charges from redemptions of class B
and class C shares. A deferred sales charge of up to 1% is assessed on
certain redemptions of class A shares. For the six months ended September
30, 1999, Putnam Mutual Funds Corp., acting as underwriter received $434
on class A redemptions.
Note 3
Purchases and sales of securities
During the six months ended September 30, 1999, cost of purchases and
proceeds from sales of investment securities other than U.S. government
obligations and short-term investments aggregated $73,946,133 and
$39,842,261, respectively. Purchases and sales of U.S. government
obligations aggregated $80,623,048 and $99,002,609 respectively.
Note 4
Capital shares
At September 30, 1999, there was an unlimited number of shares of
beneficial interest authorized. Transactions in capital shares were as
follows:
Six months ended September 30, 1999
- -----------------------------------------------------------------------------
Class A Shares Amount
- -----------------------------------------------------------------------------
Shares sold 2,542,331 $19,058,636
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 332,392 2,465,359
- -----------------------------------------------------------------------------
2,874,723 21,523,995
Shares
repurchased (1,943,254) (14,492,004)
- -----------------------------------------------------------------------------
Net increase 931,469 $ 7,031,991
- -----------------------------------------------------------------------------
Year ended March 31, 1999
- -----------------------------------------------------------------------------
Class A Shares Amount
- -----------------------------------------------------------------------------
Shares sold 7,713,394 $61,974,962
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 529,306 4,214,619
- -----------------------------------------------------------------------------
8,242,700 66,189,581
Shares
repurchased (4,527,889) (35,815,929)
- -----------------------------------------------------------------------------
Net increase 3,714,811 $30,373,652
- -----------------------------------------------------------------------------
Six months ended September 30, 1999
- -----------------------------------------------------------------------------
Class B Shares Amount
- -----------------------------------------------------------------------------
Shares sold 3,471,498 $25,972,814
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 447,986 3,327,639
- -----------------------------------------------------------------------------
3,919,484 29,300,453
Shares
repurchased (2,722,283) (20,291,114)
- -----------------------------------------------------------------------------
Net increase 1,197,201 $ 9,009,339
- -----------------------------------------------------------------------------
Year ended March 31, 1999
- -----------------------------------------------------------------------------
Class B Shares Amount
- -----------------------------------------------------------------------------
Shares sold 10,357,970 $83,776,294
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 683,889 5,099,725
- -----------------------------------------------------------------------------
11,041,859 88,876,019
Shares
repurchased (4,583,200) (36,621,223)
- -----------------------------------------------------------------------------
Net increase 6,458,659 $52,254,796
- -----------------------------------------------------------------------------
Six months ended September 30, 1999
- -----------------------------------------------------------------------------
Class C Shares Amount
- -----------------------------------------------------------------------------
Shares sold 565,850 $ 4,255,458
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 18,653 137,849
- -----------------------------------------------------------------------------
584,503 4,393,307
Shares
repurchased (67,446) (499,720)
- -----------------------------------------------------------------------------
Net increase 517,057 $ 3,893,587
- -----------------------------------------------------------------------------
For the period February 1, 1999
(commencement of operations)
to March 31, 1999
- -----------------------------------------------------------------------------
Class C Shares Amount
- -----------------------------------------------------------------------------
Shares sold 254,964 $ 1,952,429
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 1,162 8,902
- -----------------------------------------------------------------------------
256,126 1,961,331
Shares
repurchased (456) (3,483)
- -----------------------------------------------------------------------------
Net increase 255,670 $ 1,957,848
- -----------------------------------------------------------------------------
Six months ended September 30, 1999
- -----------------------------------------------------------------------------
Class M Shares Amount
- -----------------------------------------------------------------------------
Shares sold 272,038 $2,046,693
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 39,511 293,038
- -----------------------------------------------------------------------------
311,549 2,339,731
Shares
repurchased (267,283) (1,996,205)
- -----------------------------------------------------------------------------
Net increase 44,266 $ 343,526
- -----------------------------------------------------------------------------
Year ended March 31, 1999
- -----------------------------------------------------------------------------
Class M Shares Amount
- -----------------------------------------------------------------------------
Shares sold 713,461 $5,813,600
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 69,417 553,147
- -----------------------------------------------------------------------------
782,878 6,366,747
Shares
repurchased (612,585) (4,949,186)
- -----------------------------------------------------------------------------
Net increase 170,293 $1,417,561
- -----------------------------------------------------------------------------
The Putnam family of funds
The following is a complete list of Putnam's open-end mutual funds. Please
call your financial advisor or Putnam at 1-800-225-1581 to obtain a prospectus
for any Putnam fund. It contains more complete information, including charges
and expenses. Please read it carefully before you invest or send money.
GROWTH FUNDS
Asia Pacific Growth Fund
Capital Appreciation Fund [DBL. DAGGER]
Capital Opportunities Fund
Europe Growth Fund
Global Equity Fund
Global Growth Fund
Global Natural Resources Fund
Growth Opportunities Fund
Health Sciences Trust
International Growth Fund
International New Opportunities Fund
Investors Fund
New Opportunities Fund [DBL. DAGGER]
OTC & Emerging Growth Fund
Research Fund
Tax Smart Equity Fund
Vista Fund
Voyager Fund
Voyager Fund II
GROWTH AND INCOME FUNDS
Balanced Retirement Fund
Convertible Income-Growth Trust
Equity Income Fund
The George Putnam Fund of Boston
Global Growth and Income Fund
The Putnam Fund for Growth and Income
Growth and Income Fund II
International Growth and Income Fund
New Value Fund
Small Cap Value Fund
Utilities Growth and Income Fund
INCOME FUNDS
American Government Income Fund
Diversified Income Trust
Global Governmental Income Trust
High Yield Advantage Fund [DBL. DAGGER]
High Yield Trust [DBL. DAGGER]
High Yield Trust II
Income Fund
Intermediate U.S. Government
Income Fund
Money Market Fund **
Preferred Income Fund
Strategic Income Fund *
U.S. Government Income Trust
TAX-FREE INCOME FUNDS
Municipal Income Fund
Tax Exempt Income Fund
Tax Exempt Money Market Fund**
Tax-Free High Yield Fund
Tax-Free Insured Fund
State tax-free income funds [SECTION MARK]
Arizona, California, Florida, Massachusetts, Michigan, Minnesota, New Jersey,
New York, Ohio and Pennsylvania
State tax-free money market funds [SECTION MARK] **
California, New York
ASSET ALLOCATION FUNDS
Putnam Asset Allocation Funds--three investment portfolios that spread your
money across a variety of stocks, bonds, and money market investments.
The three portfolios:
Asset Allocation: Balanced Portfolio
Asset Allocation: Conservative Portfolio
Asset Allocation: Growth Portfolio
* Formerly Putnam Diversified Income Trust II
[DBL. DAGGER] Closed to new investors. Some exceptions may apply. Contact
Putnam for details.
[SECTION MARK] Not available in all states.
** An investment in a money market fund is not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other government agency.
Although the funds seek to preserve your investment at $1.00 per share, it
is possible to lose money by investing in the fund.
Check your account balances and current performance at www.putnaminv.com.
Fund information
WEB SITE
www.putnaminv.com
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
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
John A. Hill, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
Ronald J. Jackson
Paul L. Joskow
Elizabeth T. Kennan
Lawrence J. Lasser
John H. Mullin III
Robert E. Patterson
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
Ian C. Ferguson
Vice President
Brett C. Browchuk
Vice President
Stephen Oristaglio
Vice President
Edward H. D'Alelio
Vice President
Jennifer E. Leichter
Vice President and Fund Manager
David L. Waldman
Vice President and Fund Manager
D. William Kohli
Vice President and Fund Manager
Jeffrey A. Kaufman
Vice President and Fund Manager
Richard A. Monaghan
Vice President
John R. Verani
Vice President
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' Web site: 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
- ---------------------
For account balances, economic forecasts, and the latest on Putnam funds, visit
www.putnaminv.com
SA029-56147 896/2BQ/2BR 11/99
