Putnam
Strategic
Income
Fund
ANNUAL REPORT ON PERFORMANCE AND OUTLOOK
3-31-99
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* "If interest rates remain relatively stable, funds that invest in bonds
with at least some risk attached to them are the most attractive sector to
be in . . ."
-- The Wall Street Journal, April 5, 1999
* "Calendar 1998 was a period of unprecedented volatility for fixed-income
markets worldwide. And while ongoing volatility remains a concern, there
appears to be considerable opportunity along with current value in many
fixed-income sectors."
-- Jennifer E. Leichter, manager
Putnam Strategic Income Fund
CONTENTS
4 Report from Putnam Management
9 Fund performance summary
14 Portfolio holdings
36 Financial statements
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
The world's securities markets experienced a dramatic change that was
generally for the better during Putnam Strategic Income Fund's fiscal
1999. As moods brightened, global investors began to venture tentatively
back to more aggressive securities than the U.S. Treasury bonds to which
they had fled in the wake of last year's sharp market swings.
The result put a damper on Treasuries, but it did raise prospects for a
host of other fixed-income securities from high-grade corporates to
lower-rated high-yield bonds. International bonds, especially those in
core European markets, also began to show stronger results. Even
emerging-markets issues attracted some renewed attention.
In the following report, your fund's management team reviews fiscal 1999
performance in this improved environment and takes a look at prospects for
the fiscal year that just began.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
May 19, 1999
Report from the Fund Managers
Jennifer E. Leichter
D. William Kohli
Jeffrey A. Kaufman
David L. Waldman
In the extraordinary market volatility that characterized 1998, U.S.
Treasuries were virtually the only fixed-income investment to emerge
unscathed. While Putnam Strategic Income Fund's Treasury position helped
minimize losses, the fund's emphasis on higher-yielding sectors during the
heaviest volatility resulted in disappointing performance during the
fiscal year just ended. Although the environment for these sectors has
since become more favorable, the fund's class A shares returned -4.33% at
net asset value and -8.84% at public offering price for the 12-month
period ended March 31, 1999. For more detailed performance, including
returns for other share classes, please turn to pages 9 and 10.
* U.S. TREASURIES RALLY, THEN DECLINE
U.S. Treasury bonds enjoyed a spectacular rally for much of 1998, as
interest rates were ratcheted lower and less creditworthy markets boiled
over with political, economic, and financial upheaval. Also helping the
sector were investor concerns over a slowing U.S. economy. During the
summer and early fall, consumer spending, manufacturing output, and a host
of other indicators pointed toward slowing economic growth and a potential
credit crunch. The Federal Reserve Board intervened in the fall with a
series of rate cuts that helped restore liquidity to financial markets and
calm investors' fears. Demand for U.S. Treasury bonds soared, pushing the
yields on these securities, which move in the opposite direction of price,
to record lows.
As 1999 began, strong U.S. and European economic fundamentals and modest
improvement in Asia helped renew investor interest in sectors of the bond
market that offer higher yields than U.S. Treasuries. Money that had
poured into Treasuries during late 1998 exited the sector in early 1999 as
investors began to feel more comfortable taking on greater amounts of
market and credit risk.
While Treasuries generally benefited from declining rates in 1998, the
results for mortgage-backed securities were relatively mixed as the result
of an increase in prepayment risk. Declining interest rates prompted many
homeowners to pay off their mortgages ahead of schedule, reducing the
appreciation potential for certain groups of mortgage-backed securities.
To combat the risk of prepayment, we adopted a defensive investment
strategy in this area, emphasizing commercial mortgage-backed securities,
which are not subject to prepayment, and bonds with relatively short
maturities, since homeowners are less likely to refinance mortgages that
are almost paid off. At 22.2% of the portfolio on March 31, the fund's
mortgage-related holdings remain a vital part of its overall investment
strategy. Given the steady rise in real estate values and a return to more
stable interest rates, we believe these securities will continue to add
value in the coming months.
* HIGH-YIELD BONDS REBOUND IN SECOND HALF
When investors fled higher-risk investments in reaction to last summer's
foreign market turmoil, high-yield bonds were among the first to go.
High-yield bonds declined nearly 5% during the six months ended September
30, 1998, for example, as measured by the First Boston High Yield Index.
The negative performance reflected investor concern over heavy losses in
foreign economies and the impact of those losses on corporate profits here
in the United States.
[GRAPHIC OMITTED: horizontal bar chart SECTOR WEIGHTINGS]
SECTOR WEIGHTINGS*
High-yield bonds 44.9%
Foreign bonds 14.7%
U.S. government and
agency obligations
and CMOs 31.0%
Footnote reads:
*Based on net assets as of 3/31/99. Holdings will vary over time.
Throughout this tumultuous period, we made few changes to the high-yield
portion of the portfolio. In particular, we continued to favor bonds in
the telecommunications, media, and finance sectors. These are some of the
fastest growing areas of the U.S. economy with long-term growth potential
that we believe can withstand short-term swings in investor sentiment.
Our commitment to the fund's high-yield holdings was bolstered during the
period by steady merger and acquisition activity. As trade barriers fall
around the world and competition intensifies, many corporations are
recognizing that only the most resourceful, adaptable, and truly global
will survive in worldwide competition. The implications for high-yield
issuers are often positive, since acquiring companies tend to be large
corporations with investment-grade credit. Examples of companies in the
portfolio that benefited from merger activity during the period include
MetroNet Communications, Diamond Cable, and Stone Container.
By the beginning of 1999, investors had begun to recognize that the
high-yield bonds beaten down over the summer offered tremendous value. In
some cases, yields were more than three percentage points above those
offered by comparable Treasuries. With the return of some stability to
global financial markets, investors were again willing to take on risk in
exchange for higher returns, and the resulting increase in demand pushed
high-yield bond prices into positive territory. For the first three months
of the year, as Treasury bonds suffered losses, high-yield issues gained
2.44% as measured by the First Boston High Yield Index.
* INTERNATIONAL FOCUS ON CORE EUROPE
In the international portion of the portfolio, our focus on the core
markets of Europe -- including Germany, France, Denmark, and the
Netherlands -- proved beneficial during the period. These markets enjoyed
healthy rallies during the year against a background of slowing economic
growth, high unemployment, and low inflation. Prior to the introduction of
the euro at the start of 1999, a weakening U.S. dollar enhanced European
returns for U.S. investors. However, the euro got off to a weak start,
partly due to the weakness of Europe's economies relative to the United
States. As a result, the fund's gains in this sector for the full 12-month
period were diminished.
[GRAPHIC OMITTED: TOP THREE HOLDINGS PER SECTOR]
TOP THREE HOLDINGS PER SECTOR
HIGH-YIELD BONDS
NEXTEL Communications, Inc. sr. 10.65s, 2002
Global Crossing Holdings, Ltd. 95/8, 2008
L-3 Communications Corp. sr. 91/8, 2008
FOREIGN BONDS
United Kingdom Treasury 8s, 2000
United Mexican States SEC. Ser. B, 61/4s, 2019
Bulgaria (Government of) Ser. A, FRB, 6.688s, 2024
U.S. GOVERNMENT AND AGENCY OBLIGATIONS
Federal National Mortgage Association 61/2s, 2028-29
U.S. Treasury notes, 43/4s, 2008
U.S. Treasury bonds, 51/2s, 2028
Footnote reads:
These holdings represent 19.6% of the fund's net assets as of 3/31/99.
Portfolio holdings will vary over time.
The fund's emerging-markets holdings dampened performance during the
summer and fall of 1998. However, as the turmoil has subsided in recent
months, some emerging markets have rebounded. We have opportunistically
increased the fund's exposure to select emerging markets, including
Bulgaria and Mexico, where issuing governments have clear access to
capital, and yields are significantly higher than comparable U.S.
government securities.
Exposure to Japan remains limited, given the uncertainty surrounding
economic issues and investor sentiment there. Plus, with Japanese
short-term rates barely above zero, there is little room for an
improvement in bond prices.
* MORE CONSERVATIVE APPROACH FAVORED FOR 1999
With the global financial markets on more solid footing, investors may
feel more comfortable increasing exposure to areas of the bond market
widely overlooked in 1998. In the high-yield segment of the portfolio, we
expect to add in the coming months to the fund's holdings in economically
sensitive industries, including energy and basic materials. Should
commodity prices improve after a prolonged downward trend, these issues
would likely benefit.
In the government sector, we intend to invest opportunistically in U.S.
Treasury bonds and maintain our bias toward mortgage-backed issues. Within
the mortgage market, we expect to emphasize commercial mortgage-backed
securities, higher-coupon residential mortgage securities, and bonds with
relatively short maturities.
In the international sector, we believe our focus on core Europe will
provide attractive returns as these countries contend with slowing
economic growth. (After the close of the period, both the European Central
Bank and the Bank of England announced rate cuts.) Although the recent
changes to the portfolio are not dramatic, we believe they will position
the fund to take advantage of investment opportunities for the balance of
the year.
The views expressed here are exclusively those of Putnam Management. They
are not meant as investment advice. Although the described holdings were
viewed favorably as of 3/31/99, 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.
TOTAL RETURN FOR PERIODS ENDED 3/31/99
Class A Class B Class C Class M
(inception date) (2/26/96) (2/26/96) (2/1/99) (2/26/96)
NAV POP NAV CDSC NAV CDSC NAV POP
- -------------------------------------------------------------------------------
1 year -4.33% -8.84% -4.93% -9.32% -4.82% -5.69% -4.57% -7.65%
- -------------------------------------------------------------------------------
3 years 16.11 10.56 13.66 10.93 13.73 13.73 15.24 11.51
Annual average 5.10 3.40 4.36 3.52 4.38 4.38 4.84 3.70
- -------------------------------------------------------------------------------
Life of fund 14.99 9.58 12.48 9.78 12.66 12.66 14.11 10.35
Annual average 4.62 3.00 3.88 3.07 3.93 3.93 4.36 3.24
- -------------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 3/31/99
Salomon Bros.
Lehman Bros. Non-U.S. First Boston Consumer
Aggregate World Govt. High Yield price
Bond Index Bond Index Index index
- -----------------------------------------------------------------------
1 year 6.49% 11.63% -0.75% 1.73%
- -----------------------------------------------------------------------
3 years 25.11 13.62 26.70 5.97
Annual average 7.76 4.35 8.21 1.95
- -----------------------------------------------------------------------
Life of fund 24.24 13.90 26.36 6.52
Annual average 7.30 4.31 7.88 2.07
- -----------------------------------------------------------------------
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 1-, 3-, 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.
[GRAPHIC OMITTED: worm chart GROWTH OF A $10,000 INVESTMENT]
GROWTH OF A $10,000 INVESTMENT
Cumulative total return of
a $10,000 investment since
2/26/96
Fund's class A Lehman Brothers Consumer price
Date shares at POP Aggregate Bond Index index
2/26/96 9,529 10,000 10,000
3/31/96 9,437 9,930 10,052
6/30/96 9,551 9,987 10,116
9/30/96 9,925 10,172 10,187
12/31/96 10,231 10,477 10,239
3/31/97 10,132 10,418 10,329
6/30/97 10,556 10,801 10,349
9/30/97 11,063 11,160 10,407
12/31/97 11,130 11,488 10,413
3/31/98 11,453 11,667 10,471
6/30/98 11,449 11,939 10,523
9/30/98 10,806 12,444 10,549
12/31/98 10,892 12,486 10,600
3/31/99 $10,958 $12,424 $10,652
Footnote reads:
Past performance is no assurance of future results. At the end of the same
time period, a $10,000 investment in the fund's class B shares would have
been valued at $11,248 ($10,978 with a redemption at the end of the
period); a $10,000 investment in the fund's class M shares would have been
valued at $11,411 ($11,035 at public offering price). A $10,000 investment
in the fund's class C shares would have been valued at $11,266.
PRICE AND DISTRIBUTION INFORMATION
12 months ended 3/31/99
Class A Class B Class C Class M
- ------------------------------------------------------------------------------
Distributions (number) 12 12 2 12
- ------------------------------------------------------------------------------
Income $0.591867 $0.538508 $0.073222 $0.574050
- ------------------------------------------------------------------------------
Long-term capital gains 0.016800 0.016800 0.016800 0.016800
- ------------------------------------------------------------------------------
Return of capital1 0.079100 0.071900 0.010500 0.076700
- ------------------------------------------------------------------------------
Total $0.687767 $0.627208 $0.100522 $0.667550
- ------------------------------------------------------------------------------
Share value: NAV POP NAV NAV NAV POP
- ------------------------------------------------------------------------------
3/31/98 $8.70 $9.13 $8.70 -- $8.70 $8.99
- ------------------------------------------------------------------------------
2/1/992 -- -- -- $7.77 -- --
- ------------------------------------------------------------------------------
3/31/99 7.64 8.02 7.65 7.66 7.64 7.90
- ------------------------------------------------------------------------------
Current return (end of period)
- ------------------------------------------------------------------------------
Current dividend rate3 8.37% 7.98% 7.66% 7.58% 8.14% 7.87%
- ------------------------------------------------------------------------------
Current 30-day
SEC yield4 8.36 7.95 7.49 8.25 8.08 7.81
- ------------------------------------------------------------------------------
1 See page 50.
2 Inception date of class C shares.
3 Income portion of most recent distribution, annualized and divided by
NAV or POP at end of period.
4 Based on investment income, calculated using SEC guidelines.
TERMS AND DEFINITIONS
Total return shows how the value of the fund's shares changed over time,
assuming you held the shares through the entire period and reinvested all
distributions in the fund.
Class A shares are generally subject to an initial sales charge.
Class B shares may be subject to a sales charge upon redemption.
Class C shares are not subject to an initial sales charge but are subject
to a contingent deferred sales charge if 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% or class M shares.
Contingent deferred sales charge (CDSC) is a charge applied at the time of
the redemption of class B shares and assumes redemption at the end of the
period. Your fund's CDSC declines from a 5% maximum during the first year
to 1% during the sixth year. After the sixth year, the CDSC no longer
applies. The CDSC for class C shares is 1% for one year after purchase.
COMPARATIVE BENCHMARKS
Lehman Brothers Aggregate Bond Index* is composed of securities for Lehman
Brothers Government/Corporate Bond Index, Mortgage-Backed Securities
Index, and the Asset-Backed Securities Index. Total return comprises price
appreciation/ depreciation and income as a percentage of the original
investment. Indexes are rebalanced monthly by market capitalization.
Salomon Brothers Non-U.S. World Government Bond Index* is a market
capitalization-weighted benchmark that tracks the performance of the
government bond markets tracked by the Salomon Brothers World Government
Bond Index, excluding the United States.
First Boston High Yield Index* is an unmanaged index of lower-rated,
higher-yielding U.S. corporate bonds. It includes over 180 issues with an
average maturity range of 7 to 10 years.
Consumer price index (CPI) is a commonly used measure of inflation; it
does not represent an investment return.
*Securities indexes assume reinvestment of all distributions and interest
payments and do not take in account brokerage fees or taxes. Securities in
the fund do not match those in the indexes and performance of the fund
will differ. It is not possible to invest directly in an index.
Report of independent accountants
For the fiscal year ended March 31, 1999
To the Trustees and Shareholders of
Putnam Strategic Income Fund
In our opinion, the accompanying statement of assets and liabilities,
including the portfolio of investments owned, and the related statements
of operations and of changes in net assets and the financial highlights
present fairly, in all material respects, the financial position of Putnam
Strategic Income Fund (the "fund") at March 31, 1999, and the results of
its operations, the changes in its net assets and the financial highlights
for the periods indicated, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility
of the fund's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of
these financial statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included
confirmation of investments owned at March 31, 1999 by correspondence with
the custodian, provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
May 14, 1999
<TABLE>
<CAPTION>
Portfolio of investments owned
March 31, 1999
CORPORATE BONDS AND NOTES (44.9%) (a)
PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C>
Advertising (0.8%)
- --------------------------------------------------------------------------------------------------------------------------
$ 300,000 Adams Outdoor Advertising sr. notes 10 3/4s, 2006 $ 327,000
80,000 Lamar Advertising Co. sr. sub. notes 9 5/8s, 2006 86,400
420,000 Lamar Advertising Co. company guaranty 8 5/8s, 2007 442,050
540,000 Outdoor Communications Inc. sr. sub. notes 9 1/4s, 2007 581,850
350,000 Outdoor Systems, Inc. company guaranty 8 7/8s, 2007 374,063
--------------
1,811,363
Aerospace and Defense (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
485,000 Argo-Tech Corp. company guaranty 8 5/8s, 2007 460,750
130,000 Argo-Tech Corp. 144A sr. sub. notes 8 5/8s, 2007 123,500
190,000 Aviation Sales Co. company guaranty 8 1/8s, 2008 190,475
500,000 BE Aerospace, Inc. sr. sub. notes Ser. B, 9 7/8s, 2006 527,500
80,000 BE Aerospace, Inc. sr. sub. notes 9 1/2s, 2008 85,400
90,000 BE Aerospace, Inc. sr. sub. notes Ser. B, 8s, 2008 89,550
70,000 K&F Industries, Inc. sr. sub. notes Ser. B, 9 1/4s, 2007 71,663
--------------
1,548,838
Agriculture (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
285,000 IMC Global, Inc. notes 7.4s, 2002 291,264
278,094 Premium Standard Farms, Inc. sr. sec. notes 11s, 2003 (PIK) 266,970
--------------
558,234
Airlines (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
120,000 Calair LLC company guaranty 8 1/8s, 2008 114,000
140,000 Canadian Airlines Corp. sr. notes 12 1/4s, 2006 (Canada) 61,600
200,000 Canadian Airlines Corp. secd. notes 10s, 2005 (Canada) 150,000
460,000 Continental Airlines, Inc. sr. notes 9 1/2s, 2001 476,100
90,000 Trans World Airlines, Inc. sr. notes 11 1/2s, 2004 68,850
280,000 Trans World Airlines, Inc. sr. notes 11 3/8s, 2006 154,000
--------------
1,024,550
Apparel (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
210,000 Fruit of the Loom 144A company guaranty 8 7/8s, 2006 210,525
295,000 Guess Jeans, Inc. sr. sub. notes 9 1/2s, 2003 295,000
105,000 Sassco Fashions Ltd. sr. notes 12 3/4s, 2004 103,425
65,000 William Carter Holdings Co. sr. sub. notes Ser. A, 12s, 2008 69,875
135,000 William Carter Holdings Co. sr. sub. notes Ser. A, 10 3/8s, 2006 145,800
--------------
824,625
Automotive Parts (1.0%)
- --------------------------------------------------------------------------------------------------------------------------
299,000 Aftermarket Technology Corp. sr. sub. notes 12s, 2004 307,223
200,000 Cambridge Industries, Inc. company guaranty Ser. B,
10 1/4s, 2007 165,000
145,000 Chrysler Corp. deb. Ser. B, 7.45s, 2097 154,482
200,000 Exide Corp. sr. notes 10s, 2005 198,000
190,000 Federal Mogul Corp. 144A notes 7 3/8s, 2006 186,208
315,000 Lear Corp. sub. notes 9 1/2s, 2006 345,319
60,000 Hayes Wheels International, Inc. company guaranty Ser. B,
9 1/8s, 2007 62,550
400,000 Hayes Wheels International, Inc. 144A sr. sub. notes
9 1/8s, 2007 417,000
90,000 Motors and Gears, Inc. sr. notes Ser. D, 10 3/4s, 2006 92,925
160,000 Navistar International Corp. sr. notes Ser. B, 8s, 2008 165,600
--------------
2,094,307
Banks (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
120,000 Banponce Financial Corp. med. term note 7 1/8s, 2002 121,586
150,000 Chevy Chase Savings Bank Inc. sub. deb. 9 1/4s, 2008 150,000
170,000 Chevy Chase Savings Bank Inc. sub. deb. 9 1/4s, 2005 170,000
80,000 Delta Financial Corp. sr. notes 9 1/2s, 2004 60,000
45,000 Dime Capital Trust I bank guaranty Ser. A, 9.33s, 2027 47,823
35,000 Firstar Bank Milwaukee sr. bank notes 6 1/4s, 2002 35,405
395,000 Fuji JGB Inv. LLC 144A FLIRB bonds Ser. A, 9.87s, 2049 (Japan) 353,525
45,000 Greenpoint Capital Trust I company guaranty 9.1s, 2027 46,980
95,000 Merita Bank Ltd. sub. notes 6 1/2s, 2006 (Finland) 94,852
40,000 Ocwen Capital Trust I company guaranty 10 7/8s, 2027 32,400
55,000 Ocwen Federal Bank FSB sub. deb. 12s, 2005 53,488
35,000 Ocwen Financial Corp. notes 11 7/8s, 2003 31,325
60,000 Provident Capital Trust company guaranty 8.6s, 2026 60,125
40,000 Riggs Capital Trust 144A bonds 8 5/8s, 2026 39,161
60,000 Sovereign Capital Trust company guaranty 9s, 2027 59,909
50,000 Webster Capital Trust I 144A bonds 9.36s, 2027 50,735
--------------
1,407,314
Basic Industrial Products (--%)
- --------------------------------------------------------------------------------------------------------------------------
80,000 Paragon Corp. Holdings, Inc. company guaranty Ser. B,
9 5/8s, 2008 62,400
30,000 Roller Bearing Co. company guaranty Ser. B, 9 5/8s, 2007 28,500
--------------
90,900
Broadcasting (3.7%)
- --------------------------------------------------------------------------------------------------------------------------
500,000 Allbritton Communications sr. sub. deb. Ser. B, 9 3/4s, 2007 530,625
460,000 Allbritton Communications Co. sr. sub. notes Ser. B,
8 7/8s, 2008 468,050
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) 29
400,000 Benedek Communications Corp. sr. disc. notes
stepped-coupon zero % (13 1/4s, 5/15/01), 2006 (STP) 304,000
215,000 Capstar Broadcasting sr. disc. notes stepped-coupon zero %
(12 3/4s, 2/1/02), 2009 (STP) 181,675
685,000 Capstar Broadcasting sr. sub. notes 9 1/4s, 2007 719,250
55,000 Central European Media Enterprises Ltd. sr. notes 9 3/8s,
2004 (Bermuda) 52,250
800,000 Chancellor Media Corp. 144A sr. notes 8s, 2008 833,000
90,000 Citadel Broadcasting, Inc. sr. sub. notes 10 1/4s, 2007 99,000
390,000 Citadel Broadcasting, Inc. company guaranty 9 1/4s, 2008 417,300
200,000 Comcast UK Cable, Ltd. deb. stepped-coupon zero %
(11.2s, 11/15/00), 2007 (Bermuda) (STP) 174,750
730,000 Echostar DBS Corp. 144A sr. notes 9 3/8s, 2009 755,550
340,000 Fox Family Worldwide, Inc. sr. notes 9 1/4s, 2007 322,150
260,000 Fox/Liberty Networks LLC sr. notes 8 7/8s, 2007 269,100
250,000 Granite Broadcasting Corp. sr. sub. notes 9 3/8s, 2005 245,313
120,000 Granite Broadcasting Corp. sr. sub. notes 8 7/8s, 2008 120,600
360,000 Jacor Communications, Inc. company guaranty Ser. B,
8 3/4s, 2007 384,300
300,000 Lenfest Communications, Inc. sr. sub. notes 10 1/2s, 2006 352,500
240,000 Lenfest Communications, Inc. sr. sub. notes 8 1/4s, 2008 247,200
60,000 Pegasus Communications Corp. 144A sr. notes 9 3/4s, 2006 62,400
50,000 Pegasus Media & Communications notes Ser. B, 12 1/2s, 2005 55,000
212,000 PHI Holdings, Inc. sr. sub. notes 16s, 2001 174,773
125,000 Radio One Inc. company guaranty stepped-coupon Ser. B, 7s,
(12s, 5/15/00), 2004 (STP) 128,750
650,000 Sinclair Broadcast Group, Inc. company guaranty 9s, 2007 666,250
300,000 Spanish Broadcasting Systems sr. notes Ser. B, 11s, 2004 327,000
60,000 TV Azteca Holdings S.A. de C.V. sr. notes 11s, 2002 (Mexico) 51,000
100,000 TV Azteca Holdings S.A. de C.V. sr. notes 10 1/2s, 2007
(Mexico) 82,500
--------------
8,024,315
Building and Construction (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
125,000 American Architectural Products Corp. company guaranty
11 3/4s, 2007 106,250
660,000 D.R. Horton, Inc. company guaranty 8s, 2009 645,150
270,000 GS Superhighway Holdings sr. notes 9 7/8s, 2004 (China) 137,700
35,000 Cia Latino Americana 144A company guaranty 11 5/8s, 2004
(Argentina) 19,600
70,000 Jackson Products, Inc. company guaranty Ser. B, 9 1/2s, 2005 70,175
180,000 Toll Corp. company guaranty 8 1/8s, 2009 179,100
--------------
1,157,975
Building Products (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
180,000 Building Materials Corp. 144A sr. notes 8s, 2008 177,300
140,000 Morris Material Handling, Inc. company guaranty 9 1/2s, 2008 74,200
300,000 Southdown, Inc. sr. sub. notes Ser. B, 10s, 2006 333,000
--------------
584,500
Buses (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
540,000 MCII Holdings sec. notes 12s (15s, 11/18/99) 2002 (STP) 475,200
Business Equipment and Services (0.6%)
- --------------------------------------------------------------------------------------------------------------------------
170,000 Cex Holdings, Inc. company guaranty Ser. B, 9 5/8s, 2008 159,800
600,000 Iron Mountain, Inc. company guaranty 8 3/4s, 2009 615,000
40,000 Outsourcing Solutions, Inc. sr. sub. notes Ser. B, 11s, 2006 39,400
270,000 U.S. Office Products Co. company guaranty 9 3/4s, 2008 178,200
166,000 United Stationer Supply, Inc. sr. sub. notes 12 3/4s, 2005 183,845
40,000 United Stationer Supply, Inc. sr. sub. notes 8 3/8s, 2008 39,900
--------------
1,216,145
Cable Television (2.2%)
- --------------------------------------------------------------------------------------------------------------------------
300,000 Acme Television sr. disc. notes stepped-coupon zero %
(10 7/8s, 9/30/00), 2004 (STP) 253,500
240,000 Adelphia Communications Corp. 144A sr. notes 8 3/8s, 2008 244,800
380,000 Century Communications Corp. sr. notes 8 7/8s, 2007 399,000
500,000 Charter Communications Holdings LLC 144A sr. disc. notes
stepped-coupon zero % (9.92s, 4/1/04), 2011 (STP) 321,875
750,000 Charter Communications Holdings LLC 144A sr. notes
8 5/8s, 2009 765,938
60,000 CSC Holdings, Inc. deb. Ser. B, 8 1/8s, 2009 64,475
70,000 CSC Holdings, Inc. deb. 7 7/8s, 2018 71,747
230,000 CSC Holdings, Inc. sr. notes 7 7/8s, 2007 242,227
170,000 CSC Holdings, Inc. sr. notes 7 1/4s, 2008 172,326
410,000 Diamond Cable Communication Co. sr. disc. notes
stepped-coupon zero % (10 3/4s, 2/15/02), 2007
(United Kingdom) (STP) 319,800
170,000 Diamond Cable Communication Co. sr. disc. notes
stepped-coupon zero % (11 3/4s, 12/15/00), 2005
(United Kingdom) (STP) 150,238
300,000 Grupo Televisa S.A. de C.V. 144A sr. notes 11 7/8s, 2006
(Mexico) 310,500
40,000 Jones Intercable, Inc. sr. notes 9 5/8s, 2002 42,100
400,000 Jones Intercable, Inc. sr. sub. deb. 10 1/2s, 2008 428,500
190,000 NTL Inc. 144A sr. notes 11 1/2s, 2008 (United Kingdom) 214,225
200,000 NTL Inc. sr. notes Ser. B, 10s, 2007 (United Kingdom) 212,000
210,000 NTL Inc. sr. notes, stepped-coupon Ser. B, zero %
(9 3/4s, 4/1/03), 2008 (United Kingdom) (STP) 142,800
60,000 Rogers Cablesystems Ltd. sr. notes Ser. B, 10s, 2005 (Canada) 67,650
150,000 Supercanal Holdings S.A. 144A sr. notes 11 1/2s, 2005
(Argentina) 60,000
60,000 TeleWest Communications PLC 144A sr. notes 11 1/4s,
2008 (United Kingdom) 69,750
200,000 United International Holdings sr. disc. notes stepped-coupon
Ser. B, zero % (10 3/4s, 2/15/03), 2008 (STP) 136,000
--------------
4,689,451
Cellular Communications (1.9%)
- --------------------------------------------------------------------------------------------------------------------------
430,000 Celcaribe S.A. sr. notes stepped-coupon zero %
(13 1/2s, 3/15/04), 2004 (Colombia) (STP) 365,500
595,000 CellNet Data Systems, Inc. sr. disc. notes stepped-coupon
zero % (14s, 10/1/02), 2007 (STP) 196,350
120,000 Conecel Holdings 144A notes Ser. A, 14s, 2000 24,000
100,000 Dobson Communications Corp. sr. notes 11 3/4s, 2007 107,125
160,000 McCaw International Ltd sr. disc. notes stepped coupon zero %
(13s, 4/15/02), 2007 (STP) 94,400
450,000 Millicom International Cellular S.A. sr. disc. notes
stepped-coupon zero % (13 1/2s, 6/1/01), 2006
(Luxembourg) (STP) 334,688
710,000 NEXTEL Communications, Inc. sr. disc. notes stepped-coupon
zero % (12 1/8s, 4/15/03), 2008 (STP) 340,800
380,000 NEXTEL Communications, Inc. 144A sr. notes 12s, 2008 440,800
2,505,000 NEXTEL Communications, Inc. sr. disc. notes stepped-coupon
zero % (10.65s, 9/15/02), 2007 (STP) 1,828,650
280,000 Price Communications Wireless, Inc. 144A sr. notes 9 1/8s, 2006 291,200
--------------
4,023,513
Chemicals (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
40,000 Acetex Corp. sr. notes 9 3/4s, 2003 (Canada) 37,600
120,000 Geo Specialty Chemicals, Inc. 144A sr. sub. notes 10 1/8s, 2008 119,400
60,000 Huntsman Corp. 144A sr. sub. notes 9 1/2s, 2007 59,700
150,000 Huntsman Corp. 144A sr. sub. FRN 9.03s, 2007 138,000
446,000 Pioneer Americas Acquisition 144A sr. notes 9 1/4s, 2007 374,640
142,759 Polytama International notes 11 1/4s, 2007 (Indonesia) 9,993
230,000 Scotts Co 144A sr. sub. notes 8 5/8s, 2009 237,475
150,000 Sterling Chemicals Holdings sr. disc. notes stepped-coupon
zero % (13 1/2s, 8/15/01), 2008 (STP) 63,750
200,000 Trikem S.A. 144A bonds 10 5/8s, 2007 (Brazil) 70,000
--------------
1,110,558
Computer Services and Software (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
40,000 Concentric Network Corp. sr. notes 12 3/4s, 2007 46,200
330,000 IPC Information Systems sr. disc. notes stepped-coupon zero %
(10 7/8s, 11/1/01), 2008 (STP) 215,325
230,000 PSINet, Inc. sr. notes 11 1/2s, 2008 258,750
120,000 PSINet, Inc. sr. notes Ser. B, 10s, 2005 126,600
200,000 Unisys Corp. sr. notes 11 3/4s, 2004 226,500
435,000 Unisys Corp. sr. notes 7 7/8s, 2008 456,750
120,000 Verio Inc. 144A sr. notes 11 1/4s, 2008 135,000
--------------
1,465,125
Conglomerates (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
200,000 Axia, Inc. company guaranty 10 3/4s, 2008 199,000
250,000 Cathay International Ltd. 144A sr. notes 13s, 2008 (China) 57,500
70,000 Dine S.A. de C.V. company guaranty 8 3/4s, 2007 (Mexico) 58,100
--------------
314,600
Consumer Durable Goods (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
160,000 Albecca Inc. company guaranty 10 3/4s, 2008 136,000
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 51,100
500,000 Samsonite Corp. sr. sub. notes 10 3/4s, 2008 340,000
70,000 Sealy Mattress Co. sr. sub. notes Ser. B, 9 7/8s, 2007 69,475
--------------
603,975
Consumer Services (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
350,000 Coinmach Corp. sr. notes Ser. D, 11 3/4s, 2005 385,000
90,000 Protection One, Inc. sr. disc. notes stepped-coupon zero %
(13 5/8s, 6/30/00), 2005 (STP) 102,600
--------------
487,600
Cosmetics (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
60,000 French Fragrances, Inc. company guaranty Ser. D, 10 3/8s, 2007 61,200
40,000 French Fragrances, Inc. sr. notes Ser. B, 10 3/8s, 2007 39,700
110,000 Revlon Consumer Products sr. notes 9s, 2006 110,000
250,000 Revlon Consumer Products sr. sub. notes 8 5/8s, 2008 232,500
--------------
443,400
Electric Utilities (1.2%)
- --------------------------------------------------------------------------------------------------------------------------
100,000 Applied Power Inc. sr. sub. notes 8 3/4s, 2009 101,500
110,000 Arizona Public Service Co. sr. notes 6 3/4s, 2006 113,749
250,000 Calpine Corp. sr. notes 10 1/2s, 2006 275,000
100,000 Calpine Corp. sr. notes 9 1/4s, 2004 103,500
100,000 Calpine Corp. sr. notes 8 3/4s, 2007 102,070
25,000 Commonwealth Edison Co. 1st mtge. 7s, 2005 25,980
45,000 Jersey Central Power & Light Co. 1st mtge. med. term note
6.85s, 2006 46,083
665,000 Midland Funding Corp. deb. Ser. A, 11 3/4s, 2005 753,778
90,000 Niagara Mohawk Power Corp. sr. notes Ser. F, 7 5/8s, 2005 92,767
433,282 Northeast Utilities System notes Ser. A, 8.58s, 2006 451,606
350,000 Panda Global Energy Co. company guaranty 12 1/2s, 2004
(China) 175,000
380,000 York Power Funding 144A notes 12s, 2007 (Cayman Islands) 381,900
--------------
2,622,933
Electronics (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
30,000 Celestica International Ltd. 144A sr. sub. notes 10 1/2s, 2006
(Canada) 33,075
150,000 Details, Inc. sr. discount notes stepped-coupon Ser. B, zero %
(12 1/2s, 11/15/02), 2007 (STP) 75,000
90,000 DII Group, Inc. (The) sr. sub. notes 8 1/2s, 2007 90,450
100,000 Flextronics International Ltd. sr. sub. notes Ser. B, 8 3/4s, 2007 102,500
50,000 HCC Industries, Inc. company guaranty 10 3/4s, 2007 48,000
410,000 Metromedia Fiber Network, Inc. 144A sr. notes 10s, 2008 438,700
90,000 Moog, Inc. sr. sub. notes Ser. B, 10s, 2006 93,713
40,000 Samsung Electronics 144A company guaranty 9 3/4s, 2003 40,800
40,000 Viasystems Inc. sr. sub notes 9 3/4s, 2007 37,650
180,000 Viasystems, Inc. sr. notes Ser. B, 9 3/4s, 2007 168,300
30,000 Wavetek Corp. company guaranty 10 1/8s, 2007 27,900
--------------
1,156,088
Entertainment (0.9%)
- --------------------------------------------------------------------------------------------------------------------------
730,000 ITT Corp. notes 6 3/4s, 2005 661,993
50,000 News America Holdings, Inc. deb. 7 3/4s, 2045 51,445
410,000 SFX Entertainment, Inc. 144A company guaranty Ser. B,
9 1/8s, 2008 414,613
170,000 SFX Entertainment Inc. 144A sr. sub. notes 9 1/8s, 2008 171,700
150,000 Silver Cinemas Inc. sr. sub. notes 10 1/2s, 2005 79,500
275,000 Six Flags Corp. sr. notes 8 7/8s, 2006 280,500
40,000 Time Warner Entertainment Inc. notes 8 7/8s, 2012 47,884
5,000 Time Warner, Inc. deb. 9.15s, 2023 6,218
380,000 United Artists Theatre 144A sr. sub. notes 9 3/4s, 2008 311,600
--------------
2,025,453
Environmental Control (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
550,000 Allied Waste Industries, Inc. company guaranty Ser. B,
7 7/8s, 2009 533,500
90,000 WMX Technologies Inc. notes 7.1s, 2026 93,830
--------------
627,330
Financial Services (1.7%)
- --------------------------------------------------------------------------------------------------------------------------
310,000 Aames Financial Corp. sr. notes 9 1/8s, 2003 210,800
400,000 Advanta Corp. company guaranty Ser. B, 8.99s, 2026 246,000
260,000 Advanta Corp. med-term notes Ser. D, 6.92s, 2002 225,870
405,000 Cellco Finance Corp. NV 144A sr. sub. notes 15s, 2005
(Netherlands) 391,838
200,000 Colonial Capital I 144A company guaranty 8.92s, 2027 189,299
135,000 Contifinancial Corp. sr. notes 8 3/8s, 2003 94,500
70,000 Contifinancial Corp. sr. notes 8 1/8s, 2008 51,800
310,000 Contifinancial Corp. sr. notes 7 1/2s, 2002 235,600
80,000 Imperial Credit Capital Trust I 144A company guaranty
10 1/4s, 2002 62,400
400,000 Imperial Credit Industries, Inc. sr. notes 9 7/8s, 2007 344,000
55,000 Lehman Brothers Holdings, Inc. notes 6 1/2s, 2002 54,985
200,000 Local Financial Corp. sr. notes 11s, 2004 206,000
525,000 Nationwide Credit Inc. sr. notes Ser. A, 10 1/4s, 2008 228,375
550,000 RBF Finance 144A company guaranty 11s, 2006 577,500
400,000 Resource America Inc. 144A sr. notes 12s, 2004 356,000
100,000 Webster Financial Corp. sr. notes 8 3/4s, 2000 102,059
--------------
3,577,026
Food and Beverages (0.9%)
- --------------------------------------------------------------------------------------------------------------------------
135,000 Ameriserve Food Co. company guaranty 8 7/8s, 2006 113,569
110,000 Aurora Foods, Inc. sr. sub. notes Ser. B, 9 7/8s, 2007 118,800
300,000 Aurora Foods, Inc. 144A sr. sub. notes Ser. D, 9 7/8s, 2007 324,000
320,000 Doane Products Co. 144A sr. sub. notes 9 3/4s, 2007 337,200
540,000 Eagle Family Foods company guaranty Ser. B, 8 3/4s, 2008 508,275
300,000 Nebco Evans Holding Co. sr. disc. notes stepped-coupon
zero % (12 3/8s, 7/15/02), 2007 (STP) 114,000
240,000 RAB Enterprises, Inc. company guaranty 10 1/2s, 2005 120,000
210,000 Triarc Consumer Products, Inc. 144A sr. sub. notes
10 1/4s, 2009 209,475
--------------
1,845,319
Gaming (1.8%)
- --------------------------------------------------------------------------------------------------------------------------
290,000 Argosy Gaming Co. company guaranty 13 1/4s, 2004 327,700
200,000 Autotote Corp. company guaranty Ser. B, 10 7/8s, 2004 210,000
420,000 Boyd Gaming Corp. sr. sub. notes 9 1/2s, 2007 430,500
75,000 Casino America, Inc. sr. notes 12 1/2s, 2003 85,594
110,000 Circus Circus Enterprises, Inc. sr. notes 6.45s, 2006 100,459
370,300 Colorado Gaming & Entertainment Co. sr. notes 12s, 2003 381,409
280,000 Fitzgeralds Gaming Corp. company guaranty Ser. B,
12 1/4s, 2004 147,000
100,000 Harrahs Entertainment, Inc. company guaranty 7 1/2s, 2009 99,726
180,000 Hollywood Park Inc. 144A sr. sub. notes 9 1/4s, 2007 184,500
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. 144A sr. sub. notes 8 3/4s, 2009 781,875
230,000 Mohegan Tribal Gaming, Auth. 144A sr. notes 8 1/8s, 2006 235,175
180,000 Park Place Entertainment sr. sub. notes 7 7/8s, 2005 176,850
250,000 PRT Funding Corp. sr. notes 11 5/8s, 2004 (In default) (NON) 112,188
310,000 Trump Castle Funding 144A sub. notes 10 1/4s, 2003 313,100
125,000 Trump Holdings & Funding Corp. sr. notes 15 1/2s, 2005 125,156
--------------
3,837,807
Health Care (1.8%)
- --------------------------------------------------------------------------------------------------------------------------
70,000 Columbia/HCA Healthcare Corp. deb. 8.36s, 2024 64,096
70,000 Columbia/HCA Healthcare Corp. notes 7.69s, 2025 56,525
110,000 Columbia/HCA Healthcare Corp. notes 7 1/4s, 2008 100,441
330,000 Columbia/HCA Healthcare Corp. med term notes notes
6.63s, 2045 311,748
500,000 Conmed Corp. company guaranty 9s, 2008 502,500
250,000 Extendicare Health Services, Inc. company guaranty 9.35s, 2007 200,000
130,000 Global Health Sciences company guaranty 11s, 2008 81,900
150,000 Hudson Respiratory Care, Inc. sr. sub. notes 9 1/8s, 2008 121,500
210,000 Integrated Health Services, Inc. sr. sub. notes Ser. A, 9 1/2s, 2007 136,500
460,000 Integrated Health Services, Inc. sr. sub. notes Ser. A, 9 1/4s, 2008 294,400
230,000 Magellan Health Services, Inc. sr. sub. notes 9s, 2008 196,650
480,000 Mariner Post-Acute Network, Inc. sr. sub. notes Ser. B,
9 1/2s, 2007 148,800
80,000 Mariner Post-Acute Network, Inc. sr. sub. notes stepped-coupon
Ser. B, zero % (10 1/2s, 11/1/02), 2007 (STP) 15,200
270,000 MedPartners, Inc. sr. notes 7 3/8s, 2006 210,600
130,000 MedPartners, Inc. sr. sub. notes 6 7/8s, 2000 114,563
440,000 Multicare Cos., Inc. sr. sub. notes 9s, 2007 294,800
315,000 Paracelsus Healthcare sr. sub. notes 10s, 2006 223,650
100,000 Quorum Health Group, Inc. sr. sub. notes 8 3/4s, 2005 98,500
350,000 Sun Healthcare Group, Inc. sr. sub. notes Ser. B, 9 1/2s, 2007 105,438
150,000 Tenet Healthcare Corp. sr. sub. notes 8 5/8s, 2007 150,750
210,000 Tenet Healthcare Corp. 144A sr. sub. notes 8 1/8s, 2008 202,650
90,000 Tenet Healthcare Corp. sr. notes 8s, 2005 88,875
130,000 Tenet Healthcare Corp.144A sr. notes 7 5/8s, 2008 125,450
--------------
3,845,536
Insurance (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
240,000 American General Corp. sr. notes 6 5/8s, 2029 233,400
50,000 Hartford Life, Inc. deb. 7.65s, 2027 54,272
145,000 Hartford Life, Inc. notes 7.1s, 2007 151,468
100,000 Phoenix Home Life Mutual Insurance Co. 144A notes
6.95s, 2006 99,588
125,000 Reliance Group Holdings, Inc. sr. notes 9s, 2000 128,666
--------------
667,394
Lodging (0.9%)
- --------------------------------------------------------------------------------------------------------------------------
120,000 Epic Resorts LLC company guaranty Ser. B, 13s, 2005 112,800
540,000 HMH Properties, Inc. company guaranty Ser. B, 7 7/8s, 2008 518,400
300,000 Host Marriott Travel Plaza sr. notes Ser. B, 9 1/2s, 2005 314,625
40,000 Host Marriott L.P. 144A sr. notes 8 3/8s, 2006 40,250
120,000 Prime Hospitality Corp. sub. notes 9 3/4s, 2007 124,050
440,000 Starwood Hotels & Resorts notes 6 3/4s, 2003 410,168
300,000 Sun International Hotels Ltd. company guaranty 9s, 2007 314,250
--------------
1,834,543
Machinery (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
400,000 Newcor, Inc. company guaranty Ser. B, 9 7/8s, 2008 354,000
Media (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
650,000 Paramount Communications, Inc. deb. 7 1/2s, 2023 644,566
250,000 RBS Participacoes S.A. 144A company guaranty 11s, 2007
(Brazil) 132,500
--------------
777,066
Medical Supplies and Devices (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
110,000 ALARIS Medical Systems, Inc. company guaranty 9 3/4s, 2006 111,375
250,000 Leiner Health Products sr. sub. notes 9 5/8s, 2007 253,750
230,000 Mediq, Inc. company guaranty 11s, 2008 200,100
145,000 Mediq, Inc. deb. stepped-coupon zero %, (13s, 6/1/03) 2009 (STP) 58,000
--------------
623,225
Metals and Mining (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
185,000 Ameristeel Corp. company guaranty Ser. B, 8 3/4s, 2008 184,306
80,000 Continental Global Group sr. notes Ser. B, 11s, 2007 70,400
120,000 Lodestar Holdings, Inc. company guaranty 11 1/2s, 2005 96,000
150,000 Neenah Foundry Co. sr. sub. notes Ser. B, 11 1/8s, 2007 158,250
150,000 Neenah Foundry Co. 144A sr. sub. notes 11 1/8s, 2007 158,250
250,000 Weirton Steel Co. sr. notes 11 3/8s, 2004 240,000
110,000 WHX Corp. sr. notes 10 1/2s, 2005 106,150
--------------
1,013,356
Motion Picture Distribution (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
380,000 AMC Entertainment, Inc. sr. sub. notes 9 1/2s, 2009 362,900
433,000 Diva Systems Corp. sr. disc. notes, stepped-coupon Ser. B,
zero % (12 5/8s, 3/1/03), 2008 (STP) 127,735
35,000 Cinemark USA, Inc. sr. sub. notes 9 5/8s, 2008 (Mexico) 36,138
250,000 Cinemark USA, Inc. sr. sub. notes Ser. D, 9 5/8s, 2008 (Mexico) 258,750
--------------
785,523
Oil and Gas (1.8%)
- --------------------------------------------------------------------------------------------------------------------------
175,000 Abraxas Petroleum Corp. 144A company guaranty Ser. D,
11 1/2s, 2004 105,000
200,000 Belco Oil & Gas Corp. company guaranty Ser. B, 10 1/2s, 2006 203,250
170,000 Benton Oil & Gas Co. sr. notes 11 5/8s, 2003 119,000
20,000 Benton Oil & Gas Co. sr. notes 9 3/8s, 2007 12,000
240,000 Chesapeake Energy Corp. company guaranty Ser. B,
9 5/8s, 2005 199,200
750,000 CMS Energy Corp. pass through certificates 7s, 2005 731,565
120,000 Eagle Geophysical, Inc. company guaranty Ser. B, 10 3/4s, 2008 72,000
30,000 Gothic Energy Corp. sr. disc. notes, stepped-coupon Ser. B,
zero % (14 1/8s, 5/1/03), 2006 (STP) 9,300
110,000 Gothic Production Corp. company guaranty Ser. B,
11 1/8s, 2005 83,600
170,000 Gulf Canada Resources Ltd. sr. sub. notes 9 5/8s, 2005 (Canada) 173,825
150,000 Gulf Canada Resources, Ltd. sr. notes 8 3/8s, 2005 (Canada) 149,250
50,000 Gulf Canada Resources, Ltd. sr. notes 8.35s, 2006 (Canada) 49,391
85,000 K N Energy, Inc. sr. notes 6.45s, 2003 86,170
100,000 Michael Petroleum Corp. sr. notes Ser. B, 11 1/2s, 2005 73,000
240,000 Ocean Energy, Inc. company guaranty Ser. B, 8 7/8s, 2007 238,200
220,000 Ocean Energy, Inc. company guaranty Ser. B, 8 3/8s, 2008 209,000
355,000 Petro Geo-Services notes ADR 7 1/2s, 2007 (Norway) 366,193
120,000 Pogo Producing Co. sr. sub. notes Ser. B, 8 3/4s, 2007 111,600
90,000 RAM Energy Inc. sr. notes 11 1/2s, 2008 57,600
300,000 Seven Seas Petroleum sr. notes Ser. B, 12 1/2s, 2005 180,000
45,000 Snyder Oil Corp. sr. sub. notes 8 3/4s, 2007 44,775
100,000 Statoil 144A notes 6 1/2s, 2028 (Norway) 93,875
20,000 Transamerican Energy sr. disc. notes stepped-coupon Ser. B,
zero % (13s, 6/15/99), 2002 (STP) 5,025
480,000 Transamerican Energy sr. notes Ser. B, 11 1/2s, 2002 120,000
175,000 Transamerican Refining Corp. sr. sub. notes Ser. B, 16s, 2003 17,500
180,000 TransTexas Gas Corp. sr. sub. notes Ser. D, 13 3/4s, 2001 54,000
350,000 Vintage Petroleum 144A sr. sub. notes 9 3/4s, 2009 357,000
--------------
3,921,319
Packaging and Containers (0.6%)
- --------------------------------------------------------------------------------------------------------------------------
500,000 AEP Industries, Inc. sr. sub. notes 9 7/8s, 2007 512,500
300,000 Packaging Corp. 144A sr. sub. notes 9 5/8s, 2009 307,890
35,000 Radnor Holdings Inc. sr. notes 10s, 2003 36,050
440,000 Riverwood International Corp. company guaranty 10 7/8s, 2008 424,600
50,000 Riverwood International Corp. company guaranty 10 5/8s, 2007 52,500
--------------
1,333,540
Paper and Forest Products (1.0%)
- --------------------------------------------------------------------------------------------------------------------------
140,000 APP Finance II Mauritius Ltd. bonds stepped-coupon zero %,
(12s, 2/15/04), 2049 (Indonesia) (STP) 58,800
250,000 Buckeye Cellulose Corp. sr. sub. notes 9 1/4s, 2008 261,875
410,000 Consumers International 144A sr. notes 10 1/4s, 2005 430,500
115,000 Huntsman Packaging Corp. company guaranty 9 1/8s, 2007 115,000
180,000 Impac Group Inc. company guaranty Ser. B, 10 1/8s, 2008 178,200
300,000 Indah Kiat Financial Mauritius Ltd. company guaranty 10s, 2007
(Indonesia) 165,000
300,000 Pacifica Papers, Inc. 144A sr. notes 10s, 2009 (Canada) 306,750
180,000 Pindo Deli Finance Mauritius Ltd. company guaranty 10 3/4s,
2007 (Indonesia) 94,500
270,000 PT Pabrik Kertas Tjiwi Kimia company guaranty 10s, 2004
(Indonesia) 143,100
290,000 Republic Group Inc. sr. sub. notes 9 1/2s, 2008 292,900
--------------
2,046,625
Pharmaceuticals (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
295,000 ICN Pharmaceuticals, Inc. 144A sr. notes 9 1/4s, 2005 304,588
Photography (--%)
- --------------------------------------------------------------------------------------------------------------------------
50,000 PX Escrow Corp. sr. disc. notes stepped-coupon zero %
(9 5/8s, 2/1/02), 2006 (STP) 29,000
Publishing (0.8%)
- --------------------------------------------------------------------------------------------------------------------------
380,000 Affinity Group Holdings sr. notes 11s, 2007 380,000
285,000 American Media Operation, Inc. sr. sub. notes 11 5/8s, 2004 307,800
520,000 Garden State Newspapers 144A sr. sub. notes 8 5/8s, 2011 523,900
250,000 Hollinger International Publishing, Inc. company guaranty
9 1/4s, 2007 260,625
70,000 Perry-Judd company guaranty 10 5/8s, 2007 72,450
45,000 Von Hoffman Press Inc. 144A sr. sub. notes 10 3/8s, 2007 46,238
33,475 Von Hoffman Press, Inc. 144A sr. sub. notes 13 1/2s, 2009 34,814
--------------
1,625,827
Railroads (--%)
- --------------------------------------------------------------------------------------------------------------------------
170,000 TFM S.A. de C.V. company guaranty stepped-coupon zero %
(11 3/4s, 6/15/02), 2009 (Mexico) (STP) 96,900
Restaurants (--%)
- --------------------------------------------------------------------------------------------------------------------------
100,000 FRD Acquisition Co. sr. notes Ser. B, 12 1/2s, 2004 101,000
Retail (0.9%)
- --------------------------------------------------------------------------------------------------------------------------
230,000 Home Interiors & Gifts, Inc. company guaranty 10 1/8s, 2008 232,300
200,000 K mart Corp. deb. 7 3/4s, 2012 206,250
250,000 K mart Corp. med. term notes 7.86s, 2002 250,408
250,000 Mothers Work, Inc. sr. notes 12 5/8s, 2005 260,000
500,000 NBTY Inc. 144A sr. sub. notes 8 5/8s, 2007 467,500
515,000 North Atlantic Trading Co. company guaranty Ser. B, 11s, 2004 520,150
--------------
1,936,608
Satellite Services (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
210,000 Golden Sky Systems 144A sr. sub. notes 12 3/8s, 2006 233,100
Semiconductors (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
39,327 Cirent Semiconductor sr. sub. notes 10.22s, 2002 40,458
42,913 Cirent Semiconductor 144A sr. sub. notes 10.14s, 2004 44,147
695,344 Fairchild Semiconductor Corp. 144A sr. sub. notes 11.74s,
2008 (PIK) 674,484
170,000 Zilog, Inc. company guaranty Ser. B, 9 1/2s, 2005 141,100
--------------
900,189
Shipping (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
110,000 Johnstown America Industries, Inc. company guaranty Ser. C,
11 3/4s, 2005 119,350
80,000 MC Shipping, Inc. sr. notes Ser. B, 11 1/4s, 2008 50,800
--------------
170,150
Specialty Consumer Products (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
160,000 Decora Industries, Inc. sr. sec. notes Ser. B, 11s, 2005 154,400
Steel (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
200,000 AK Steel Corp. 144A sr. notes 7 7/8s, 2009 199,500
290,000 California Steel Industries 144A sr. notes 8 1/2s, 2009 292,900
170,000 National Steel Corp. 144A 1st mtge. 9 7/8s, 2009 174,675
135,000 National Steel Corp. 144A 1st mtge. Ser. B, 9 7/8s, 2009 138,713
200,000 UCAR Global Enterprises sr. sub. notes Ser. B, 12s, 2005 211,250
--------------
1,017,038
Supermarkets (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
150,000 Southland Corp. deb. Ser. A, 4 1/2s, 2004 125,813
Telecommunications (7.9%)
- --------------------------------------------------------------------------------------------------------------------------
140,000 AT & T Capital Corp. company guaranty Ser. F, 6.6s, 5/15/05 142,299
350,000 Barak I.T.C. sr. disc. notes stepped-coupon Ser. B, zero %
(12 1/2s, 11/15/02), 2007 (Israel) (STP) 196,000
130,000 Bestel S.A.de C.V. sr. disc. notes stepped-coupon zero %
(12 3/4s, 5/15/03), 2005 (Mexico) (STP) 80,600
120,000 Birch Telecommunications, Inc. sr. notes 14s, 2008 109,800
120,000 CapRock Communications Corp. sr. notes Ser. B, 12s, 2008 122,100
90,000 Colt Telecommunications Group PLC sr. disc. notes
stepped-coupon zero %, (12s, 12/15/01), 2006
(United Kingdom) (STP) 76,388
500,000 Covad Communications Group, Inc. sr. disc. notes
stepped-coupon Ser. B, zero % (13 1/2s, 03/15/03), 2008 (STP) 277,500
330,000 Covad Communications Group, Inc. 144A sr. notes
12 1/2s, 2009 331,650
1,625,000 DTI Holdings Inc. sr. disc. notes, stepped-coupon Ser. B,
zero % (12 1/2s, 03/01/03), 2008 (STP) 446,875
500,000 Econophone, Inc. company guaranty 13 1/2s, 2007 532,500
380,000 Econophone, Inc. 144A notes stepped-coupon
zero % (11s, 2/15/03), 2008 (STP) 209,000
200,000 Esprit Teleom Group PLC sr. notes 11 1/2s, 2007
(United Kingdom) 214,586
520,000 Firstworld Communication Corp. sr. disc. notes
stepped-coupon zero % (13, 4/15/03), 2008 (STP) 192,400
300,000 Focal Communications Corp. sr. disc. notes,
stepped-coupon zero % (12 1/8s, 02/15/03), 2008 (STP) 168,000
990,000 Global Crossing Holdings, Ltd. company guaranty 9 5/8s, 2008 1,102,613
902,000 GST Telecommunications, Inc. company guaranty
stepped-coupon zero % (13 7/8s, 12/15/00), 2005 (STP) 712,580
630,000 GST Telecommunications, Inc. 144A sr. disc. notes
stepped-coupon zero % (10 1/2s, 5/1/03), 2008 (STP) 327,600
50,000 Hermes Europe Railtel 144A sr. notes 11 1/2s, 2007
(Netherlands) 54,750
100,000 Hyperion Telecommunications, Inc. sr. disc. notes
stepped-coupon Ser. B, zero % (13s, 4/15/01), 2003 (STP) 82,500
175,000 Hyperion Telecommunications, Inc. sr. notes Ser. B, 12 1/4s, 2004 190,313
310,000 Hyperion Telecommunications, Inc. 144A sr. sub. notes 12s, 2007 323,175
300,000 ICG Communications, Inc. sr. disc. notes stepped-coupon
zero % (10s, 02/15/03), 2008 (STP) 183,375
220,000 ICG Holdings, Inc. sr. disc. notes stepped-coupon zero %
(13 1/2s, 9/15/00), 2005 (Canada) (STP) 194,700
700,000 ICG Services, Inc. sr. disc. notes stepped-coupon zero %
(9 7/8s, 5/1/03), 2008 (STP) 418,250
260,000 Intelcom Group (USA), Inc. company guaranty stepped-coupon
zero % (12 1/2s, 5/1/01), 2006 (STP) 212,550
110,000 Interact Systems, Inc. 144A stepped-coupon zero %
(14s, 8/1/99), 2003 (STP) 14,300
255,000 Intermedia Communications, Inc. sr. disc. notes stepped-coupon
Ser. B, zero % (11 1/4s, 7/15/02), 2007 (STP) 193,800
130,000 Intermedia Communications, Inc. sr. notes Ser. B, 8 7/8s, 2007 132,275
310,000 Intermedia Communications, Inc. sr. notes Ser. B, 8.6s, 2008 310,000
420,000 Intermedia Communications, Inc. sr. notes Ser. B, 8 1/2s, 2008 417,900
830,000 International Cabletel, Inc. sr. notes stepped-coupon Ser. B,
zero % (11 1/2s, 2/01/01), 2006 (STP) 722,100
190,000 IXC Communications, Inc. sr. sub. notes 9s, 2008 197,600
570,000 KMC Telecom Holdings, Inc. sr. disc. notes stepped-coupon
zero % (12 1/2s, 2/15/03), 2008 (STP) 313,500
380,000 Knology Holdings, Inc. sr. disc. notes stepped-coupon zero %
(11 7/8s, 10/15/02), 2007 (STP) 205,200
65,000 L-3 Communications Corp. sr. sub. notes Ser. B, 10 3/8s, 2007 71,663
870,000 L-3 Communications Corp. sr. notes 9 1/8s, 2008 872,175
110,000 L-3 Communications Corp. sr. sub. notes 8 1/2s, 2008 114,675
160,000 L-3 Communications Corp. company guaranty Ser. B, 8s, 2008 162,000
230,000 Logix Communications Enterprises sr. notes 12 1/4s, 2008 207,000
70,000 MetroNet Communications Corp. sr. disc. notes
stepped-coupon zero % (10 3/4s, 11/1/02), 2007
(Canada) (STP) 56,350
390,000 MetroNet Communications Corp. 144A sr. notes 10 5/8s,
2008 (Canada) 454,350
510,000 MetroNet Communications Corp. sr. disc. stepped-coupon
notes zero % (9.95s, 6/15/03), 2008 (Canada) (STP) 393,975
390,000 Microcell Telecommunications sr. disc. notes stepped-coupon
Ser. B, zero % (14s, 12/1/01), 2006 (Canada) (STP) 317,850
30,000 Netia Holdings B.V. 144A company guaranty
stepped-coupon zero % (11 1/4s, 11/1/01),
2007 (Poland) (STP) 19,350
250,000 Netia Holdings B.V. 144A company guaranty 10 1/4s, 2007
(Poland) 231,250
375,000 NorthEast Optic Network, Inc. sr. notes 12 3/4s, 2008 390,000
480,000 Pathnet, Inc. sr. notes 12 1/4s, 2008 259,200
675,000 Qwest Communications International, Inc. sr. disc. notes
stepped-coupon zero % (9.47s, 10/15/02), 2007 (STP) 534,938
290,000 Rhythms Netconnections, Inc. sr. disc. notes stepped-coupon
Ser. B, zero % (13 1/2s, 5/15/03), 2008 (STP) 159,500
828,000 Rogers Cantel, Inc. sr. sub. notes 8.8s, 2007 (Canada) 865,260
140,000 Startec Global Communications Corp. sr. notes 12s, 2008 126,700
300,000 Telecommunications Techniques, Inc. company guaranty
9 3/4s, 2008 303,000
100,000 Telehub Communications Corp. company guaranty
stepped-coupon zero % (13 7/8s, 7/31/02), 2005 (STP) 60,000
280,000 Teligent, Inc. sr. notes 11 1/2s, 2007 266,000
260,000 Teligent, Inc. sr. disc. notes stepped-coupon Ser. B, zero %
(11 1/2s, 3/1/03), 2008 (STP) 136,500
660,000 Time Warner Telecom Inc. sr. notes 9 3/4s, 2008 706,200
550,000 WinStar Communications, Inc. sr. sub. notes stepped-coupon
zero % (15s, 3/1/02), 2007 (STP) 467,500
100,000 WinStar Communications. Inc. sr. sub. notes 11s, 2008 58,000
70,000 Versatel Telecom B.V. sr. notes 13 1/4s, 2008 (Netherlands) 73,675
135,000 Versatel Telecom B.V. sr. notes 13 1/4s, 2008 (Netherlands) 142,088
--------------
16,857,978
Telephone Services (2.2%)
- --------------------------------------------------------------------------------------------------------------------------
80,000 Allegiance Telecom, Inc. sr. notes 12 7/8s, 2008 88,600
385,000 Allegiance Telecom, Inc. sr. disc. notes stepped-coupon
Ser. B, zero % (11 3/4s, 2/15/03), 2008 (STP) 239,663
470,000 BTI Telecom Corp. sr. notes 10 1/2s, 2007 427,700
470,000 Call-Net Enterprises, Inc. sr. disc. notes stepped-coupon zero %
(8.94s, 8/15/03), 2008 (Canada) (STP) 310,200
190,000 Call-Net Enterprises, Inc. sr. notes 8s, 2008 (Canada) 188,100
310,000 E. Spire Communications, Inc. sr. disc. notes stepped-coupon
zero % (12 3/4s, 4/1/01), 2006 (STP) 206,150
90,000 Facilicom International sr. notes Ser. B, 10 1/2s, 2008 69,525
110,000 Globo Communicacoes 144A sr. notes 10 5/8s, 2008 (Brazil) 70,400
85,000 Globo Communicacoes 144A company guaranty 10 1/2s, 2006
(Brazil) 55,250
75,000 ITC Deltacom, Inc. sr. notes 11s, 2007 82,594
100,000 Long Distance International, Inc. sr. notes 12 1/4s, 2008 70,000
420,000 McLeodUSA, Inc. 144A sr. notes 8 1/8s, 2009 418,950
500,000 McLeodUSA, Inc. sr. disc. notes stepped-coupon zero %
(10 1/2s, 3/1/02), 2007 (STP) 401,250
70,000 OnePoint Communications, Corp. 144A sr. notes 14 1/2s, 2008 36,400
120,000 Primus Telecommunications Group, Inc. sr. notes Ser. B,
9 7/8s, 2008 115,800
70,000 RCN Corp. sr. disc. notes stepped-coupon zero %
(11 1/8s, 10/15/02), 2007 (STP) 47,250
526,000 RSL Communications, Ltd. company guaranty 12 1/4s, 2006 574,655
150,000 RSL Communications, Ltd. 144A 10 1/2s, 2008 159,000
40,000 RSL Communications, Ltd. company guaranty, stepped-coupon
zero % (10 1/8s, 3/1/03), 2008 (STP) 26,400
90,000 RSL Communications, Ltd. company guaranty 9 1/8s, 2008 89,550
230,000 Sprint Spectrum L.P. sr. disc. notes stepped-coupon zero %
(12 1/2s, 8/15/01), 2006 (STP) 204,700
70,000 Sprint Spectrum L.P. sr. notes 11s, 2006 81,999
60,000 Transtel S.A. 144A pass-through certificates 12 1/2s, 2007
(Colombia) 25,200
100,000 US Xchange LLC sr. notes 15s, 2008 108,000
500,000 Viatel, Inc. sr. notes 11 1/4s, 2008 512,500
--------------
4,609,836
Textiles (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
260,000 Galey & Lord Inc. company guaranty 9 1/8s, 2008 202,800
100,000 Polymer Group, Inc. company guaranty Ser. B, 9s, 2007 102,250
90,000 Polymer Group, Inc. company guaranty Ser. B, 8 3/4s, 2008 91,125
--------------
396,175
Tobacco (--%)
- --------------------------------------------------------------------------------------------------------------------------
80,000 Philip Morris Cos., Inc. notes 7 1/2s, 2002 82,973
Transportation (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
150,000 Eletson Holdings, Inc. 1st pfd. mtge. notes 9 1/4s, 2003 (Greece) 144,000
120,000 Kitty Hawk, Inc. company guaranty 9.95s, 2004 120,900
--------------
264,900
Wireless Communications (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
120,000 Clearnet Communications, Inc. sr. disc. notes stepped-coupon
zero % (14 3/4s, 12/15/00), 2005 (STP) 109,950
140,000 Orbital Imaging Corp. sr. notes Ser. B, 11 5/8s, 2005 140,000
60,000 Paging Network Do Brasil sr. notes 13 1/2s, 2005 (Brazil) 25,200
70,000 Telesystem International Wireless Inc. sr. disc. notes
stepped-coupon Ser. C, zero %, (10 1/2s, 11/1/02), 2007
(Canada) (STP) 33,775
--------------
308,925
--------------
Total Corporate Bonds and Notes (cost $103,127,591) $ 96,065,971
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (21.6%) (a)
PRINCIPAL AMOUNT VALUE
U.S. Government Agency Obligations (12.8%)
- --------------------------------------------------------------------------------------------------------------------------
Federal National Mortgage Association
Pass-through Certificates
$ 391,446 7s, Dwarf, May 1, 2011 $ 399,885
14,443,041 6 1/2s, with due dates from January 1, 2028
to February 15, 2029 14,375,303
46,610 6 1/2s, Dwarf, July 1, 2013 47,032
1,514,433 6s, Dwarf, July 1, 2013 1,503,074
Government National Mortgage Association
Pass-through Certificates
1,736,750 8s, with due dates from September 15, 2026
to November 15, 2027 1,809,468
2,178,703 7 1/2s, with due dates from October 15, 2022
to October 15, 2027 2,247,230
3,559,867 7s, with due dates from December 15, 2022
to May 15, 2028 3,617,831
3,314,598 6 1/2s, with due dates from January 15, 2028
to March 15, 2029 3,300,080
--------------
27,299,903
U.S. Treasury Obligations (8.8%)
- --------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Bonds
1,475,000 6 1/8s, November 15, 2027 (SEG) 1,530,770
3,840,000 5 1/2s, August 15, 2028 3,674,995
3,120,000 5 1/4s, February 15, 2029 2,949,367
1,565,000 5 1/4s, November 15, 2028 1,459,613
U.S. Treasury Notes
90,000 5 1/2s, March 31, 2003 90,942
755,000 5s, February 28, 2001 755,121
5,762,000 4 3/4s, November 15, 2008 5,550,419
2,000,000 4 3/4s, February 15, 2004 1,969,380
2,915,000 U.S. Treasury Interest Strip zero %,
November 15, 2019 841,765
--------------
18,822,372
--------------
Total U.S. Government and Agency Obligations
(cost $46,985,042) $ 46,122,275
COLLATERALIZED MORTGAGE OBLIGATIONS (9.4%) (a)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
GBP 750,000 Blackstone Hotel Acquistion Co. sr. mtge.
loan FRN 3.3449s, 2003 $ 1,204,093
Commercial Mortgage Acceptance Corp.
$ 405,000 Ser. 97-ML1, Class D, 7.055s, 2030 396,773
630,000 Ser. 98-C2, Class D, 6.944s, 2009 601,453
480,000 Countrywide Home Loans Ser. 98-3, Class A5, 6.75s, 2028 475,800
420,000 Countrywide Mortgage Backed Securities, Inc. Ser. 93-C,
Class A8, 6 1/2s, 2024 410,878
Criimi Mae Commercial Mortgage Trust
1,365,000 Ser. 98-C1, Class A2, 7s, 2011 1,245,563
590,000 Ser. 98-C1, Class B, 7s, 2011 476,425
6,070,051 Deutsche Mortgage & Asset Receiving Corp. Ser. 98-C1,
Class X, Interest Only (IO), 1.232s, 2031 361,595
1,451,777 Fannie Mae Ser. 99-7, Class CZ, 6.5s, 2029 1,349,812
Fannie Mae Strip
5,820,000 Ser. 97-57, Class PT, IO, 8s, 2024 722,044
2,751,862 Ser. 281, Class 2, IO, 9s, 2026 613,149
1,568,811 Ser. 299, Class 2, IO, 6.5s, 2028 417,206
Freddie Mac
200,000 Ser. 2040, Class PE, 7.5s, 2028 211,618
115,000 Ser. 1439, Class I, 7.5s, 2022 119,672
Freddie Mac Strip
1,669 Ser. 1208, Class G, IO, 7.5s, 2022 37,129
3,068,319 Ser. 80, IO, 7.5s, 2027 686,536
1,187,271 Ser. 188, IO, 7.5s, 2027 243,019
4,278,385 Ser. 2019, IO, 7s, 2027 1,070,933
1,897,819 Ser. 200, IO, 6.5s, 2029 556,891
403,497 Ser. 199, IO, 6.5s, 2028 112,349
553,616 Ser. 1208, Class F, Principle Only, zero %, 2022 461,578
First Union-Lehman Brothers Commercial Mortgage Co.
475,000 Ser. 97-C2, Class D, 7.12s, 2012 450,897
580,000 Ser. 98-C2, Class D, 6.778s, 2013 533,305
5,642,253 Ser. 97-C2, IO, 1.534s, 2027 446,972
13,628,374 Ser. 98-C2, IO, 0.805s, 2028 540,876
285,000 GE Capital Mortgage Services, Inc. Ser. 98-11, Class 2A4,
6 3/4s, 2028 284,364
GMAC Commercial Mortgage Securities Inc.
1,795,000 Ser. 98-C2, Class D, 6 1/2s, 2031 1,673,908
9,410,218 Ser. 98-C2, Class X, IO, 0.821s, 2031 392,950
185,000 Government National Mortgage Association Ser. 97-8,
Class PE, 7.5s, 2027 189,972
255,000 GS Mortgage Securities Corp. II Ser. 98-GLII, Class D,
7.190s, 2031 245,517
Merrill Lynch Mortgage Investors, Inc.
210,000 Ser. 1995-C3, Class D, 7.779s, 2025 212,855
111,000 Ser. 98-C2, Class D, 7.114s, 2030 107,254
5,551,649 Ser. 98-C2, IO, 1.609s, 2030 427,199
Morgan Stanley Capital I
150,000 Ser. 98-WF1, Class D, 7.12s, 2008 146,988
145,000 Ser. 98-XL1, Class E, 6.989s, 2030 141,375
5,752,725 Ser. 1998-HF1, Class X, IO, 1.204s, 2018 328,984
Mortgage Capital Funding, Inc.
100,000 Ser. 98-MC1, Class A2, 6.663s, 2008 102,063
2,366,988 Ser. 97-MC2, Class X, IO, 1.583s, 2012 176,693
6,609,890 Ser. 98-MC1, Class X, IO, 0.860s, 2009 270,592
297,992 PNC Mortgage Securities Corp. Ser. 97-6, Class A2, 6.6s, 2027 299,855
96,950 Prudential Home Mortgage Securities Ser. 93-57,
Class A4, 5.9s, 2023 97,172
93,688 Rural Housing Trust Ser. 87-1, Class D, 6.33s, 2026 93,535
512,001 Structured Asset Security Corp. 98-RF2, 8.58s, 2028 545,521
3,072,480 Structured Asset Security Corp. 98-RF3, IO 6.1s, 2028 627,938
--------------
Total Collateralized Mortgage Obligations
(cost $20,473,995) $ 20,111,301
FOREIGN GOVERNMENT BONDS AND NOTES (9.1%) (a)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
CAD 1,290,000 Canada (Government of) bonds Ser. WB60,
7 1/4s, 2007 $ 978,895
USD 2,265,000 Colombia (Republic of) bonds 8 5/8s, 2008 2,010,188
EUR 432,040 France (Government of) deb. 6s, 2025 532,252
EUR 1,210,750 France (Government of) bonds 5 1/2s, 2007 1,442,124
EUR 398,808 Germany (Federal Republic of) bonds Ser. 97,
6 1/2s, 2027 524,322
EUR 265,975 Italy (Government of) bonds 7 1/4s, 2026 371,843
USD 1,450,000 Korea (Republic of) unsub. 8 7/8s, 2008 1,547,875
EUR 556,929 Netherlands (Government of) bonds Ser. 2,
8 1/4s, 2002 689,402
EUR 1,138,988 Netherlands (Government of) bonds 7 1/4s, 2004 1,447,255
EUR 442,435 Netherlands (Government of) bonds 5 1/2s, 2028 511,051
EUR 334,343 Spain (Government of) bonds 6s, 2029 405,604
SEK 3,200,000 Sweden (Government of) bonds Ser. 1035, 6 3/4s, 2014 469,303
SEK 2,800,000 Sweden (Government of) bonds Ser. 1041, 6s, 2005 377,126
RUB 5,160,000 U.S. Dollar GKO Pass Through Structured Note
(Issued by Deutsche Bank. The principal USD
is linked to the bid price for the Russian Treasury
Bill at maturity, and the change in the spot rate
of the Russian Ruble from issue date), zero %, 1999
(in default) (NON) 6,223
GBP 3,695,000 United Kingdom Treasury bonds 8s, 2000 6,264,126
GBP 645,000 United Kingdom Treasury bonds Ser. 85, 9 3/4s, 2002 1,200,008
USD 1,080,000 Venezuela (Government of) deb. Ser. W-A,
6 3/4s, 2020 745,200
--------------
Total Foreign Government Bonds and Notes
(cost $21,064,920) $ 19,522,797
BRADY BONDS (5.6%) (a)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$ 4,820,000 Brazil (Government of) disc. bonds FRB 5.875s, 2024 $ 3,006,716
4,920,000 Bulgaria (Government of) Ser. A, FRB 5.875s, 2024 3,296,400
FRF 870,000 Ivory Coast -- FLIRB collateralized FRB 2s, 2018 34,932
FRF 848,250 Ivory Coast -- PDI bonds FRB 1.9s, 2018 40,314
$ 780,000 United Mexican States 9 3/4s, 2005 780,780
6,255,000 United Mexican States SEC. Ser. B, 6 1/4s, 2019 4,910,175
--------------
Total Brady Bonds (cost $11,951,313) $ 12,069,317
PREFERRED STOCKS (2.8%) (a)
NUMBER OF SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------------
600 Adelphia Communications Corp. Ser. B, $13.00 cum. pfd. $ 69,300
2,659 AmeriKing, Inc. $3.25 pfd. (PIK) 69,134
776 Capstar Broadcasting Inc. 144A $12.00 pfd. (PIK) 93,896
990 Capstar Communications, Inc. Ser. E, $12.625 cum. pfd. (PIK) 121,770
11,880 CGA Group Ltd. 144A Ser. A, $13.75 pfd. (PIK) 332,640
2,575 Chevy Chase Capital Corp. Ser. A, $5.188 pfd. (PIK) 140,338
1,392 Citadel Broadcasting Inc. 144A $13.25 cum. pfd. (PIK) 164,604
98 Concentric Network Corp. Ser. B, 13.50% pfd. (PIK) 105,840
4,177 CSC Holdings, Inc. Ser. M, $11.125 cum. pfd. (PIK) 488,709
3,500 Diva Systems Corp. Ser. C, $6.00 pfd. 21,000
18,000 Diva Systems Corp. Ser. D, $6.00 pfd. 108,000
189 Dobson Communications Corp. 144A 12.25% pfd. (PIK) 168,210
360,000 Fresenius Medical Capital Trust I company guaranty Ser. D,
$9.00 pfd. (Germany) 374,400
190,000 Fresenius Medical Capital Trust II company guaranty,
$7.875 pfd. (Germany) 186,913
4,830 Global Crossing Holdings 144A $10.50 pfd. 556,658
400 Granite Broadcasting 144A 12.75% pfd. (PIK) 408,000
327 ICG Holdings, Inc. 14.25% pfd. (Canada) 348,255
481 Intermedia Communication Ser. B, 13.50% pfd. (PIK) 514,670
236 IXC Communications, Inc. 12.50% pfd. (PIK) 259,600
1,336 Nebco Evans Holding Co. 144A $11.25 pfd. (PIK) 46,760
192 NEXTEL Communications, Inc. Ser. D, 13.00% cum. pfd. (PIK) 215,040
3,083 Nextlink Communications, Inc. 144A $7.00 cum. pfd. (PIK) 164,941
29 Paxson Communications Corp. 13.25% cum. pfd. (PIK) 242,150
3,750 Public Service Co. of New Hampshire $2.65 1st mtge. pfd. 97,500
350 Spanish Broadcasting Systems 14.25% cum. pfd. (PIK) 374,500
24,578 TCR Holding Corp. Class. E, zero % pfd. 1,548
260 Viatel, Inc. Ser. A, $10.00 cv. pfd. (PIK) 37,700
165 Webster Financial 7.375% pfd. 157,369
200 WinStar Communications, Inc. 144A 14.25% cum. pfd. (PIK) 160,000
--------------
Total Preferred Stocks (cost $5,976,759) $ 6,029,445
ASSET-BACKED SECURITIES (1.3%) (a)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$ 50,000 Capita Equipment Receivables Trust Ser. 96-1, Class A4,
6.28s, 2000 $ 50,141
70,000 Contimortgage Home Equity Loan Trust Ser. 97-1, Class M2,
7.67s, 2028 69,059
546,747 First Plus Ser. 98-A Class A, 8 1/2s, 2023 541,792
135,837 Green Tree Recreational Equipment & Cons. Ser. 97-B, Class A1,
6.55s, 2028 137,403
2,065,000 Provident Bank Home Equity Loan Trust 5.08s, 2029 2,065,000
--------------
Total Asset-Backed Securities (cost $2,863,121) $ 2,863,395
CONVERTIBLE BONDS AND NOTES (0.5%) (a)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$ 485,000 Argosy Gaming cv. sub. notes 12s, 2001 $ 489,244
150,000 Corporate Express, Inc. cv. notes 4 1/2s, 2000 135,188
4,000 GST Telecommunications, Inc. cv. sr. disc. notes stepped-coupon
zero % (13 7/8s, 12/15/00), 2005 (STP) 4,360
150,000 HEALTHSOUTH Corp. cv. sub. deb. 3 1/4s, 2003 122,063
160,000 Integrated Device Technology, Inc. cv. sub. notes 5 1/2s, 2002 113,400
150,000 WinStar Communications. Inc. 144A cv. sr. disc. notes 14s, 2005 240,000
--------------
Total Convertible Bonds and Notes (cost $949,451) $ 1,104,255
UNITS (0.5%) (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) $ 3,500
400 Decrane Aircraft 144A units 12s, 2008 404,000
270 Carrier1 International S.A. units 13 1/4s, 2009 282,801
220 Pegasus Shipping 144A units company guaranty
stepped-coupon zero % (14 1/2s. 6/20/03), 2008
(Bermuda) (STP) 88,000
225 XCL Ltd. units sr. sec. notes 13 1/2s, 2004 184,500
2,000 XCL Ltd. 144A units cum. cv. pfd. , 9.5s, 2006 (PIK) 88,000
--------------
Total Units (cost $1,541,399) $ 1,050,801
WARRANTS (0.1%) (a) (NON) EXPIRATION
NUMBER OF WARRANTS DATE VALUE
- --------------------------------------------------------------------------------------------------------------------------
315 Allegiance Telecom, Inc. 2/3/08 $ 10,080
130 Bestel S.A. de C.V. (Mexico) 5/15/05 130
120 Birch Telecommunications, Inc. 144A 6/15/08 600
615 Cellnet Data Systems, Inc. 9/15/07 12,300
11,800 CGA Group Ltd. 144A 1/1/04 236
720 Club Regina, Inc. 144A 4/15/06 720
90 Colt Telecommunications Group PLC 12/31/06 47,250
40 Concentric Network Corp. 12/15/07 12,000
1,620 Consorcio Ecuatoriano 144A (Ecuador) 10/1/00 405
1,299 Diva Systems Corp. 3/1/08 16,887
35 Diva Systems Corp. 5/15/06 8,470
7,230 DTI Holdings Inc. 3/1/08 72
120 Epic Resorts 6/15/05 1
85 Esat Holdings, Inc. (Ireland) 2/1/07 6,163
520 Firstworld Communication 4/15/08 5,200
120 Globalstar Telecommunications 2/15/04 5,400
400 Hyperion Telecommunications 144A 4/15/01 20,580
110 Interact Systems, Inc. 8/1/03 1
25 Intermedia Communications 6/1/00 2,256
1,100 Iridium World Com 144A 7/15/05 22,000
280 KMC Telecom Holdings, Inc. 4/15/08 700
290 Knology Holdings, Inc. 144A 10/15/07 435
100 Long Distance International, Inc. 144A 4/13/08 250
160 McCaw International Ltd. 4/15/07 640
145 Mediq, Inc. 144A 6/1/09 1
70 OnePoint Communications Corp. 6/1/08 70
140 Orbital Imaging Corp. 144A 3/1/05 5,600
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 3
1,400 Rhythms Netcon 144A 5/15/08 56,000
100 Spanish Broadcasting Systems 144A 6/30/99 20,500
140 STARTEC Global Communications Corp. 5/15/08 140
45 Sterling Chemicals Holdings 8/15/08 900
100 Telehub Communications Corp. 7/31/05 100
395 UIH Australia/Pacific, Inc. 144A 5/15/06 395
205 Versatel 144A (Netherlands) 5/15/08 14,350
--------------
Total Warrants (cost $402,578) $ 277,475
CONVERTIBLE PREFERRED STOCKS (0.1%) (a)
NUMBER OF SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------------
1,000 Chancellor Media Corp. $3.00 cv. cum. pfd. $ 95,625
870 Chesapeake Energy Corp. $3.50 cv. cum. pfd. 11,094
10 Paxson Communications Corp. 144A $9.75 cv. pfd. (PIK) 96,000
225 XCL Ltd 144A Ser. A, $9.50 cv. cum. pfd. (PIK) 9,900
--------------
Total Convertible Preferred Stocks (cost $275,542) $ 212,619
COMMON STOCKS (0.1%) (a)
NUMBER OF SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------------
50 AmeriKing, Inc. (NON) $ 2,000
69,918 Celcaribe S.A. 144A (NON) 174,795
1,024 Fitzgerald Gaming Corp. (NON) 512
1,213 Hedstrom Holdings, Inc. 144A (NON) 1,213
73 Mothers Work, Inc. (NON) 767
60 Paging Do Brazil Holdings Co., LLC 144A Class B, (Brazil) (NON) 1
715 RSL Communications, Ltd. Class A (NON) 25,695
--------------
Total Common Stocks (cost $12,425) $ 204,983
- --------------------------------------------------------------------------------------------------------------------------
Total Investments (cost $215,624,136) (b) $ 205,634,634
- --------------------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $213,876,730.
(b) The aggregate identified cost on a tax basis is $215,688,422, resulting in gross unrealized appreciation and
depreciation of $4,886,393 and $14,940,181, respectively, or net unrealized depreciation of $10,053,788.
(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.
(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 March 31, 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 Depository Receipts representing ownership of
foreign securities on deposit with a domestic custodian bank.
FLIRB represents Front Loaded Interest Reduction Bond.
The rates shown on Floating Rate Bonds (FRB) and Floating Rate Notes (FRN) are the current interest rates
shown at March 31, 1999, which are subject to change based on the terms of the security.
Distribution of investments by country of issue at March 31, 1999 (as percentage of Market Value):
Brazil 1.6%
Bulgaria 1.6
Canada 2.5
Colombia 1.3
France 1.0
Mexico 3.2
Netherlands 1.6
United Kingdom 4.3
United States 78.8
Other 4.1
------
Total 100.0%
- -------------------------------------------------------------------------------
Forward Currency Contracts to Buy at March 31, 1999
(aggregate face value $15,612,796)
Unrealized
Aggregate Face Delivery Appreciation/
Market Value Value Date (Depreciation)
- -------------------------------------------------------------------------------
Australian Dollars $1,009,793 $1,009,364 6/16/99 $ 429
Danish Krone 1,014,128 1,030,442 6/16/99 (16,314)
Euro Dollars 7,033,552 7,147,681 6/16/99 (114,129)
Japanese Yen 4,321,505 4,178,441 6/16/99 143,064
Swedish Krona 2,210,862 2,246,868 6/16/99 (36,006)
- -------------------------------------------------------------------------------
$ (22,956)
- -------------------------------------------------------------------------------
Forward Currency Contracts to Sell at March 31, 1999
(aggregate face value $26,231,866)
Unrealized
Market Aggregate Face Delivery Appreciation/
Value Value Date (Depreciation)
- -------------------------------------------------------------------------------
British Pounds $ 8,802,872 $ 8,803,726 6/16/99 $ 854
Canadian Dollar 1,003,741 993,682 6/16/99 (10,059)
Euro Dollars 13,120,015 13,331,780 6/16/99 211,765
Japanese Yen 3,211,748 3,102,678 6/16/99 (109,070)
- -------------------------------------------------------------------------------
$ 93,490
- -------------------------------------------------------------------------------
Futures Contracts Outstanding at March 31, 1999
Aggregate Face Expiration Unrealized
Total Value Value Date Depreciation
- -------------------------------------------------------------------------------
U.S. Treasury Note
10yr (Long) $ 688,125 $ 698,852 June-99 $ (10,727)
U.S. Treasury Bond
20yr (Long) 20,375,063 20,789,732 June-99 (414,669)
- -------------------------------------------------------------------------------
$(425,396)
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
March 31, 1999
<S> <C>
Assets
- -----------------------------------------------------------------------------------------------
Investments in securities, at value (identified cost $215,624,136) (Note 1) $205,634,634
- -----------------------------------------------------------------------------------------------
Cash 629,290
- -----------------------------------------------------------------------------------------------
Dividends, interest, and other receivables 3,817,326
- -----------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 1,353,139
- -----------------------------------------------------------------------------------------------
Receivable for securities sold 7,617,558
- -----------------------------------------------------------------------------------------------
Receivable for open forward currency contracts 361,043
- -----------------------------------------------------------------------------------------------
Receivable for closed forward currency contracts 5,660
- -----------------------------------------------------------------------------------------------
Unamortized organization expenses (Note 1) 20,144
- -----------------------------------------------------------------------------------------------
Total assets 219,438,794
Liabilities
- -----------------------------------------------------------------------------------------------
Payable for variation margin 91,469
- -----------------------------------------------------------------------------------------------
Distributions payable to shareholders 316,054
- -----------------------------------------------------------------------------------------------
Payable for securities purchased 3,841,161
- -----------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 358,790
- -----------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 363,708
- -----------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 49,658
- -----------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 8,073
- -----------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 1,617
- -----------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 164,510
- -----------------------------------------------------------------------------------------------
Payable for open forward currency contracts 290,509
- -----------------------------------------------------------------------------------------------
Payable for closed forward currency contracts 29,318
- -----------------------------------------------------------------------------------------------
Other accrued expenses 47,197
- -----------------------------------------------------------------------------------------------
Total liabilities 5,562,064
- -----------------------------------------------------------------------------------------------
Net assets $213,876,730
Represented by
- -----------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $231,857,361
- -----------------------------------------------------------------------------------------------
Distributions in excess of net investment income (Note 1) (466,760)
- -----------------------------------------------------------------------------------------------
Distributions in excess of net realized gain on investments
and foreign currency transactions (Note 1) (7,154,260)
- -----------------------------------------------------------------------------------------------
Net unrealized depreciation of investments and assets and
liabilities in foreign currencies (10,359,611)
- -----------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to capital shares outstanding $213,876,730
Computation of net asset value and offering price
- -----------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($78,483,787 divided by 10,266,362 shares) $7.64
- -----------------------------------------------------------------------------------------------
Offering price per class A share (100/95.25 of $7.64)* $8.02
- -----------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($124,434,303 divided by 16,268,300 shares)** $7.65
- -----------------------------------------------------------------------------------------------
Net asset value and offering price per class C share
($1,957,419 divided by 255,670 shares)** $7.66
- -----------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($9,001,221 divided by 1,178,055 shares) $7.64
- -----------------------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $7.64)* $7.90
- -----------------------------------------------------------------------------------------------
* On single retail sales of less than $50,000. On sales of $50,000 or more and on group
sales the offering price is reduced.
** Redemption price per share is equal to net asset value less any applicable contingent
deferred sales charge.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Year ended March 31, 1999
<S> <C>
Investment income:
- -----------------------------------------------------------------------------------------------
Interest income (net of foreign tax of $12,373) $ 15,368,044
- -----------------------------------------------------------------------------------------------
Dividends 706,903
- -----------------------------------------------------------------------------------------------
Total investment income 16,074,947
Expenses:
- -----------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 1,292,627
- -----------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 396,745
- -----------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 14,169
- -----------------------------------------------------------------------------------------------
Administrative services (Note 2) 6,587
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 175,624
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 1,066,874
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class C (Note 2) 1,594
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 45,627
- -----------------------------------------------------------------------------------------------
Amortization of organization expenses (Note 1) 14,181
- -----------------------------------------------------------------------------------------------
Reports to shareholders 43,168
- -----------------------------------------------------------------------------------------------
Registration fees 25,462
- -----------------------------------------------------------------------------------------------
Auditing 75,748
- -----------------------------------------------------------------------------------------------
Legal 16,569
- -----------------------------------------------------------------------------------------------
Postage 16,315
- -----------------------------------------------------------------------------------------------
Other 53,275
- -----------------------------------------------------------------------------------------------
Total expenses 3,244,565
- -----------------------------------------------------------------------------------------------
Expense reduction (Note 2) (20,306)
- -----------------------------------------------------------------------------------------------
Net expenses 3,224,259
- -----------------------------------------------------------------------------------------------
Net investment income 12,850,688
- -----------------------------------------------------------------------------------------------
Net realized loss on investments (Notes 1 and 3) (6,899,898)
- -----------------------------------------------------------------------------------------------
Net realized loss on foreign currency transactions (Note 1) (608,942)
- -----------------------------------------------------------------------------------------------
Net realized gain on futures contracts (Notes 1 and 3) 420,734
- -----------------------------------------------------------------------------------------------
Net unrealized appreciation of assets and liabilities in
foreign currencies during the year 321,139
- -----------------------------------------------------------------------------------------------
Net unrealized depreciation of investments and futures during the year (14,407,628)
- -----------------------------------------------------------------------------------------------
Net loss on investments (21,174,595)
- -----------------------------------------------------------------------------------------------
Net decrease in net assets resulting from operations $ (8,323,907)
- -----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Year ended March 31
-------------------------------
1999 1998
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
Increase in net assets
- ---------------------------------------------------------------------------------------------------------------
Operations:
- ---------------------------------------------------------------------------------------------------------------
Net investment income $ 12,850,688 $ 9,271,377
- ---------------------------------------------------------------------------------------------------------------
Net realized loss on investments and
foreign currency transactions (7,088,106) (161,453)
- ---------------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of investments
and asset and liabilities in foreign currencies (14,086,489) 5,460,100
- ---------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations (8,323,907) 14,570,024
- ---------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ---------------------------------------------------------------------------------------------------------------
From net investment income
Class A (5,128,659) (3,306,248)
- ---------------------------------------------------------------------------------------------------------------
Class B (7,008,305) (4,296,155)
- ---------------------------------------------------------------------------------------------------------------
Class C (6,333) --
- ---------------------------------------------------------------------------------------------------------------
Class M (646,669) (524,449)
- ---------------------------------------------------------------------------------------------------------------
In excess of net investment income
Class A -- (32,083)
- ---------------------------------------------------------------------------------------------------------------
Class B -- (41,689)
- ---------------------------------------------------------------------------------------------------------------
Class M -- (5,089)
- ---------------------------------------------------------------------------------------------------------------
From net realized gain on investments
Class A (172,254) (199,916)
- ---------------------------------------------------------------------------------------------------------------
Class B (272,107) (293,062)
- ---------------------------------------------------------------------------------------------------------------
Class C (4,122) --
- ---------------------------------------------------------------------------------------------------------------
Class M (19,980) (33,891)
- ---------------------------------------------------------------------------------------------------------------
In excess of net realized gain on investments
Class A -- (332,120)
- ---------------------------------------------------------------------------------------------------------------
Class B -- (486,866)
- ---------------------------------------------------------------------------------------------------------------
Class M -- (56,304)
- ---------------------------------------------------------------------------------------------------------------
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) 86,003,857 44,172,882
- ---------------------------------------------------------------------------------------------------------------
Total increase in net assets 62,710,407 49,135,034
Net assets
- ---------------------------------------------------------------------------------------------------------------
Beginning of year 151,166,323 102,031,289
- ---------------------------------------------------------------------------------------------------------------
End of year (including distributions in excess of net investment
income of $466,760 and $1,544,547, respectively) $213,876,730 $151,166,323
- ---------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS A
- ------------------------------------------------------------------------------------------------------------------------------------
For the period
Per-share Feb. 26, 1996+
operating performance Year ended March 31 to March 31
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value,
beginning of period $8.70 $8.34 $8.38 $8.50
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .60(c) .65(d) .63(d) .04(c)(d)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.97) .40 (.02) (.13)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations (.37) 1.05 .61 (.09)
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.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 (.69) (.69) (.65) (.03)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $7.64 $8.70 $8.34 $8.38
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) (4.33) 13.05 7.36 (1.41)*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $78,484 $57,016 $39,178 $3,799
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.31 1.26(d) 1.25(d) .13*(d)
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 7.43 7.82(d) 7.74(d) .50*(d)
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 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
- ------------------------------------------------------------------------------------------------------------------------------------
For the period
Per-share Feb. 26, 1996+
operating performance Year ended March 31 to March 31
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value,
beginning of period $8.70 $8.34 $8.38 $8.50
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .53(c) .59(d) .57(d) .03(c)(d)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.95) .40 (.03) (.12)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations (.42) .99 .54 (.09)
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.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 (.63) (.63) (.58) (.03)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $7.65 $8.70 $8.34 $8.38
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) (4.93) 12.20 6.56 (1.41)*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $124,434 $85,379 $57,052 $5,048
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 2.06 2.01(d) 2.00(d) .20*(d)
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 6.67 7.07(d) 6.99(d) .44*(d)
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 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
- ------------------------------------------------------------------------------------------------------------------------------------
For the period
Per-share Feb. 1, 1999+
operating performance to March 31
- ------------------------------------------------------------------------------------------------------------------------------------
1999
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Net asset value,
beginning of period $7.77
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment loss (c) .04
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.05)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations (.01)
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.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 (.10)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $7.66
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) (.12)*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $1,957
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .33*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) .73*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 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
- ------------------------------------------------------------------------------------------------------------------------------------
For the period
Per-share Feb. 26, 1996+
operating performance Year ended March 31 to March 31
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value,
beginning of period $8.70 $8.34 $8.38 $8.50
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .58(c) .64(d) .61(d) .04(c)(d)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.97) .39 (.03) (.13)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations (.39) 1.03 .58 (.09)
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.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 (.67) (.67) (.62) (.03)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $7.64 $8.70 $8.34 $8.38
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) (4.57) 12.76 7.09 (1.41)*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $9,001 $8,771 $5,802 $482
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.56 1.51(d) 1.50(d) .14*(d)
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 7.20 7.57(d) 7.48(d) .50*(d)
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 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
March 31, 1999
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 the
preservation of capital by investing its assets in debt securities of
domestic or foreign issuers, including government and corporate
obligations. The fund may also invest in preferred stocks, common stocks,
and other equity securities, as well as in cash or money market
instruments.
The fund offers class A, class B, 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 lower than class B shares and higher than class A shares.
Expenses of the fund are borne pro-rata by the holders of each class of
shares, except that each class bears expenses unique to that class
(including the distribution fees applicable to such class). Each class
votes as a class only with respect to its own distribution plan or other
matters on which a class vote is required by law or determined by the
Trustees. Shares of each class would receive their pro-rata share of the
net assets of the fund, if the fund were liquidated. In addition, the
Trustees declare separate dividends on each class of shares.
The following is a summary of significant accounting policies consistently
followed by the fund in the preparation of its financial statements. The
preparation of financial statements is in conformity with generally
accepted accounting principles and requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities. Actual results could differ from those estimates.
A) Security valuation Investments for which market quotations are readily
available are stated at market value, which is determined using the last
reported sale price, or, if no sales are reported -- as in the case of
some securities traded over-the-counter -- the last reported bid price.
Securities quoted in foreign currencies are translated into U.S. dollars
at the current exchange rate. Short-term investments having remaining
maturities of 60 days or less are stated at amortized cost, which
approximates market value, and other investments, including restricted
securities, are stated at fair value following procedures approved by the
Trustees. Market quotations are not considered to be readily available for
long-term corporate bonds and notes; such investments are stated at fair
value on the basis of valuations furnished by a pricing service, approved
by the Trustees, which determines valuations for normal,
institutional-size trading units of such securities using methods based on
market transactions for comparable securities and various relationships
between securities that are generally recognized by institutional traders.
B) Joint trading account Pursuant to an exemptive order issued by the
Securities and Exchange Commission, the fund may transfer uninvested cash
balances into a joint trading account along with the cash of other
registered investment companies and certain other accounts managed by
Putnam Investment Management, Inc. ("Putnam Management"), the fund's
Manager, a wholly-owned subsidiary of Putnam Investments, Inc. These
balances may be invested in one or more repurchase agreements and/or
short-term money market instruments.
C) Repurchase agreements The fund, or any joint trading account, through
its custodian, receives delivery of the underlying securities, the market
value of which at the time of purchase is required to be in an amount at
least equal to the resale price, including accrued interest. 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). 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 securities 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 year ended
March 31, 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 The fund declares a distribution each day
based upon the projected net investment income, for a specified period,
calculated as if earned pro-rata throughout the period on a daily basis.
Such distributions are recorded daily and paid monthly. Capital gain
distributions, if any, are recorded on the ex-dividend date and paid at
least annually. The amount and character of income and gains to be
distributed are determined in accordance with income tax regulations which
may differ from generally accepted accounting principles.
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. These differences include
temporary and permanent differences of losses on wash sale transactions,
foreign currency gains and losses, post-October loss deferrals,
organization costs, defaulted bond interest, unrealized gains and losses
on certain future contracts, paydown gains and losses on mortgage-backed
securities, market discount, and interest in payment-in-kind securities.
Reclassifications are made to the fund's capital accounts to reflect
income and gains available for distribution (or available capital loss
carryovers) under income tax regulations. For the year ended March 31,
1999, the fund reclassified $1,017,065 to decrease undistributed net
investment income and $191,820 to increase paid-in-capital, with an
increase to accumulated net realized gains and losses of $1,208,885. The
calculation of net investment income per share in the financial highlights
table excludes these adjustments.
L) Unamortized organization expenses Expenses incurred by the fund in
connection with its organization, its registration with the Securities and
Exchange Commission and with various states and the initial public
offering of its shares were $46,575. These expenses are being amortized on
projected net asset levels over a five-year period.
Note 2
Management fee, administrative
services and other transactions
Compensation of Putnam Management, for management and investment advisory
services is paid quarterly based on the average net assets of the fund.
Such fee is based on the following annual rates: 0.70% of the first $500
million of average net assets, 0.60% of the next $500 million, 0.55% of
the next $500 million, 0.50% of the next $5 billion, 0.475% of the next $5
billion, 0.455% of the next $5 billion, 0.44% of the next $5 billion, and
0.43% thereafter.
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 year ended March 31, 1999, fund expenses were reduced by $20,306
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 $610 has
been allocated to the fund, and an additional fee for each Trustee's
meeting attended. Trustees who are not interested persons of Putnam
Management and who serve on committees of the Trustees receive additional
fees for attendance at certain committee meetings.
The fund has adopted a Trustee Fee Deferral Plan (the "Deferral Plan")
which allows the Trustees to defer the receipt of all or a portion of
Trustees Fees payable on or after July 1, 1995. The deferred fees remain
in the fund and are invested in certain Putnam funds until distribution in
accordance with the Deferral Plan.
The fund has adopted an unfunded noncontributory defined benefit pension
plan (the "Pension Plan") covering all Trustees of the fund who have
served as Trustee for at least five years. Benefits under the Pension Plan
are equal to 50% of the Trustee's average total retainer and meeting fees
for the three years preceding retirement. Pension expense for the fund is
included in Compensation of Trustees in the Statement of operations.
Accrued pension liability is included in Payable for compensation of
Trustees in the Statement of assets and liabilities.
The fund has adopted distribution plans (the "Plans") with respect to its
class A, class B, 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 year ended March 31, 1999, Putnam Mutual Funds Corp., acting as
underwriter received net commissions of $129,371 and $8,471 from the sale
of class A and class M shares, respectively and $280,523 and $13 in
contingent deferred sales charges from redemptions of class B and class C
shares, respectively. A deferred sales charge of up to 1% is assessed on
certain redemptions of class A shares. For the year ended March 31, 1999,
Putnam Mutual Funds Corp., acting as underwriter received $3,006 on class
A redemptions.
Note 3
Purchase and sales of securities
During the year ended March 31, 1999, purchases and sales of investment
securities other than U.S. government obligations and short-term
investments aggregated $254,667,007 and $181,790,285, respectively.
Purchases and sales of U.S. government obligations aggregated $174,682,010
and $169,828,903, respectively. In determining the net gain or loss on
securities sold, the cost of securities has been determined on the
identified cost basis.
Note 4
Capital shares
At March 31, 1999, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
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
- -----------------------------------------------------------------------------
Year ended
March 31, 1998
- -----------------------------------------------------------------------------
Class A Shares Amount
- -----------------------------------------------------------------------------
Shares sold 3,238,873 $27,807,851
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 332,350 2,863,744
- -----------------------------------------------------------------------------
3,571,223 30,671,595
Shares
repurchased (1,715,526) (14,718,694)
- -----------------------------------------------------------------------------
Net increase 1,855,697 $15,952,901
- -----------------------------------------------------------------------------
Year ended
March 31, 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
- -----------------------------------------------------------------------------
Year ended
March 31, 1998
- -----------------------------------------------------------------------------
Class B Shares Amount
- -----------------------------------------------------------------------------
Shares sold 5,105,604 $43,975,120
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 410,214 3,534,024
- -----------------------------------------------------------------------------
5,515,818 47,509,144
Shares
repurchased (2,549,062) (21,937,542)
- -----------------------------------------------------------------------------
Net increase 2,966,756 $25,571,602
- -----------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------
Year ended
March 31, 1998
- -----------------------------------------------------------------------------
Class M Shares Amount
- -----------------------------------------------------------------------------
Shares sold 576,527 $4,919,785
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 51,603 444,562
- -----------------------------------------------------------------------------
628,130 5,364,347
Shares
repurchased (316,042) (2,715,968)
- -----------------------------------------------------------------------------
Net increase 312,088 $2,648,379
- -----------------------------------------------------------------------------
Federal tax information
(Unaudited)
The fund has designated 5.56% of the distributions from net investment
income as qualifying for the dividends received deduction for
corporations.
For the year ended March 31, 1999, a portion of the funds distribution
represents a return of capital and is therefore not taxable to
shareholders.
The Form 1099 you receive in January 2000 will show the tax status of all
distributions paid to your account in calendar 1999.
Fund information
INVESTMENT MANAGER
Putnam Investment
Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
INDEPENDENT
ACCOUNTANTS
PricewaterhouseCoopers LLP
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
Donald S. Perkins
George Putnam, III
A.J.C. Smith
W. Thomas Stephens
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
John D. Hughes
Senior Vice President and Treasurer
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Ian C. Ferguson
Vice President
Brett C. Browchuk
Vice President
Stephen Oristaglio
Vice President
Jennifer E. Leichter
Vice President and Fund Manager
D. William Kohli
Vice President and Fund Manager
Jeffrey A. Kaufman
Vice President and Fund Manager
David L. Waldman
Vice President and Fund Manager
Richard A. Monaghan
Vice President
John R. Verani
Vice President
Beverly Marcus
Clerk and Assistant Treasurer
This report is for the information of shareholders of Putnam Strategic
Income Fund. It may also be used as sales literature when preceded or
accompanied by the current prospectus, which gives details of sales
charges, investment objectives, and operating policies of the fund, and
the most recent copy of Putnam's Quarterly Performance Summary. For more
information or to request a prospectus, call toll free: 1-800-225-1581.
You can also learn more at Putnam Investments' Web site:
http://www.putnaminv.com.
Shares of mutual funds are not deposits or obligations of, or guaranteed
or endorsed by, any financial institution; are not insured by the Federal
Deposit Insurance Corporation (FDIC), the Federal Reserve Board, or any
other agency; and involve risk, including the possible loss of the
principal amount invested.
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
www.putnaminv.com
- ---------------------
BULK RATE
U.S. POSTAGE PAID
PUTNAM
INVESTMENTS
- ---------------------
AN029-51850 896/2BQ/2BR 5/99
