Putnam
Strategic
Income
Fund
SEMIANNUAL REPORT ON PERFORMANCE AND OUTLOOK
9-30-00
[SCALE LOGO OMITTED]
FROM THE TRUSTEES
[GRAPHIC OMITTED: PHOTO OF JOHN A. HILL AND GEORGE PUTNAM III]
Dear Shareholder:
It is a pleasure to greet you in our new roles as Chairman of the
Trustees and President of the Funds. As you know, both of us have been
members of the Board of Trustees for a number of years -- years during
which the global securities markets, the mutual fund industry, and
Putnam itself have experienced tremendous growth and change.
As we look to the future, we are certain that the changes will be
breathtaking in their scope. What will not change is the Trustees'
dedication to serving the best interests of our shareholders.
We welcome the challenges that lie ahead and are confident that Putnam
and your Board will continue to face those challenges successfully as
they have for more than 60 years. We look forward to helping you meet
your financial objectives for many years to come.
Respectfully yours,
/S/ JOHN A. HILL /S/ GEORGE PUTNAM, III
John A. Hill George Putnam, III
Chairman of the Trustees President of the Funds
November 15, 2000
REPORT FROM FUND MANAGEMENT
James M. Prusko and
the Core Fixed
Income Team
The semiannual period that ended September 30, 2000, for Putnam
Strategic Income Fund was characterized by continued volatility in the
fixed-income sectors in which the fund invests. However, the general
tone in the global bond markets was more positive than it has been in
the past several years. Enormous volatility plagued the U.S. equity
markets, spilling over into global equities, and the significant equity
declines resulted in a renewed interest in the more stable bond asset
class.
Total return for 6 months ended 9/30/00
Class A Class B Class C Class M
NAV POP NAV CDSC NAV CDSC NAV POP
-----------------------------------------------------------------------
0.15% -4.67% -0.23% -5.01% -0.23% -1.18% 0.03% -3.24%
-----------------------------------------------------------------------
Past performance is no indication of future results. Performance
information for longer periods and an explanation of performance
calculation methods begin on page 6.
* HIGH YIELD IN DOLDRUMS BUT MAY BE NEAR BOTTOM
The fund benefited from strong performance in several sectors, most
notably U.S. Treasuries, mortgage-backed securities (MBSs), and emerging
markets. The exception was high yield, which has continued to perform
poorly. Since the fund is designed to be diversified and invest a
significant percentage of assets in high-yield bonds, its high-yield
holdings have hurt overall performance.
Several factors have contributed to a difficult market environment for
high-yield bonds in the past 12 months. The Federal Reserve Board's
interest-rate increases, sustained difficulty with defaults, and an
overall exodus of investor assets from the high-yield market have all
created a strong headwind for the fund's high-yield bond holdings. The
Fed's series of six rate increases from June 1999 through May 2000 made
short-term investments more attractive than they had been in several
years, drawing investors from the high-yield market. Furthermore, the
U.S. Treasury's buyback of long-term Treasury securities helped spark
fervent demand for a shrinking supply of longer-term Treasury debt,
leading to sharp declines in long-term yields. The combination of rising
short-term interest rates and declining long-term rates created an
inverted yield curve, in which yields offered by short-term investments
actually became higher than the yields of long-term bonds. The end
result was that significant attention was drawn away from high-yield
debt.
[GRAPHIC OMITTED: horizontal bar chart SECTOR WEIGHTINGS]
SECTOR WEIGHTINGS*
High-yield
bonds 40.0%
Foreign
bonds 19.6%
U.S. government
and agency
obligations
and CMOs 24.4%
Footnote reads:
*Based on net assets as of 9/30/00. Holdings will vary over time.
Increasing default rates over the past two years also reduced demand for
high-yield bonds, a situation that had its inception in 1998, when a
series of international crises dried up liquidity in the market while
investors became more risk averse. The risk aversion sentiment has not
changed, and credit for many issuers remains tight. Rising interest
rates also have made it more expensive for companies to borrow money.
Furthermore, exceptionally strong issuance in 1996, 1997, and early 1998
nearly doubled the size of the high-yield market. That type of increased
activity is usually followed by an increase in defaults.
* M&A ACTIVITY BRIGHT SPOT FOR HIGH-YIELD BONDS
One of the most positive developments in the high-yield market over the
past six months was the large number of mergers and acquisitions.
Consolidation activity can help support the security prices of the
companies that are involved. The resulting new, larger companies may
achieve greater economies of scale. Furthermore, the high-yield bonds of
acquired companies often benefit from credit upgrades if they have been
acquired by companies with higher credit ratings.
One fund holding that benefited from this trend over the past year was
21st Century Telecommunications, which was purchased by RCN Corporation.
More recently, Verizon Communications agreed to acquire a majority stake
in two fund holdings. One was North Point, which provides digital
subscriber lines (DSL), network connections that can carry voice and
data at the same time. The other, One Point, provides cable and other
communications services to large apartment buildings. Acquisition
announcements involving two other holdings, paper company Repap New
Brunswick and energy service provider R&B Falcon, also occurred recently
to the fund's benefit.
"Glimmers of hope have begun to show up for bond funds . . . With the
stock market bouncing around on its way to nowhere, this year bond funds
are actually beating many stock funds, while also offering a much
smoother ride . . . Bond funds have bounced on the perception that the
U.S. economy has slowed and that the Federal Reserve is done raising
interest rates for the rest of the year."
-- The Wall Street Journal, October 9, 2000
On the downside, the fund's European long-distance carrier holdings
underperformed dramatically as a result of price wars. Among these were
Viatel and RSL as well as ICG Holdings, Inc., a telecommunications
company that underperformed due to earnings disappointments. However,
all three securities remain in the fund because we still have faith in
their long-term prospects. While these holdings and others discussed in
this report were viewed favorably at the end of the fiscal period, all
holdings are subject to review and adjustment in accordance with the
fund's investment strategy and may well vary in the future.
* STRENGTH IN U.S. GOVERNMENT AND EMERGING-MARKETS SECTORS
In contrast to the difficulties experienced in the high-yield sector,
the fund's U.S. government and emerging-markets holdings performed well.
U.S. Treasuries of all maturities benefited from the federal
government's buyback program and the prospects of an ongoing federal
budget surplus. Despite the fact that the buybacks were targeted at
longer maturity bonds, for the period shorter-maturity Treasury bonds
outperformed as reports of slower economic growth and higher oil prices
ended fears of continued Fed tightening. Overall, during the six-month
period, two- and five-year Treasury yields declined 0.5%.
[GRAPHIC OMITTED: TOP THREE HOLDINGS PER SECTOR]
TOP THREE HOLDINGS PER SECTOR
HIGH-YIELD BONDS
Blackstone Hotel Acquisition Co.
senior mortgage loan, floating rate note,
3.449%, 2003 (United Kingdom)
McLeodUSA, Inc.
bank term loan series B, floating
rate note 9.62%, 2007
Young Broadcasting
bank term loan series B, floating
rate note 10.0%, 2005
FOREIGN BONDS
Germany (Federal Republic of) bonds
series 132, 4.125%, 2004
Denmark (Kingdom of) bonds
6.0%, 2009
Canada (Government of) bonds
series WE00, 5.5%, 2002
U. S. GOVERNMENT AGENCY
U.S. Treasury Bonds
6.5%, November 15, 2026
Federal National Mortgage Association
7.5%, TBA, October 1, 2015
U.S. Treasury Bonds
6.125%, November 15, 2027
Footnote reads:
These holdings represent 13.8% of the fund's net assets as of 9/30/00.
Portfolio holdings will vary over time.
The fund's MBS holdings benefited from solid overall performance within
this sector. MBSs have attractive yields with little credit risk and
therefore provide a desirable alternative for fixed-income investors.
MBSs outperformed many fixed-income sectors that have credit risk and
are more exposed to an economic downturn. Additionally the yield spread
for MBSs (the difference between MBS yields and those of comparable
maturity Treasury securities) remains wide, providing room for solid
performance going forward.
The fund's emerging-markets sector experienced strong performance during
the fiscal period. Spreads declined significantly -- more than a full
percentage point -- resulting in impressive price appreciation. New
issuance declined, which reduced supply and helped boost prices. Finally
the economies of some emerging markets countries, in particular, Mexico
and South Korea, improved significantly, helping to bring their bond
ratings up as Moody's raised the ratings of bonds from both countries
during the period. The fund also held Mexican and Russian sovereign
bonds, which had strong performance.
On the downside, the fund was hurt by currency exposure in the euro and
the Australian dollar. We believe these currencies are undervalued and
expect to hold them through the end of the year. However, we will
continue to monitor currency developments and make adjustments if
necessary.
* LOOKING FOR IMPROVEMENT IN HIGH YIELD, CONTINUED BUOYANCY FROM OTHER SECTORS
With regard to the outlook for this fund, we are particularly concerned
about the high-yield sector because it represents a significant
weighting in the portfolio and performance in this sector has lagged.
Nevertheless, we are encouraged by several indications that may help the
sector improve. First, defaults are expected to peak sometime next year,
and historically high-yield bonds perform very well during the year
before defaults peak. Second, yields are at extremely attractive levels
(currently around 13%), which indicates significant value among
carefully chosen bonds. As always, we will remain vigilant in our credit
analysis, especially since conditions in some sectors like
telecommunications and technology remain uncertain.
As emerging markets are fully priced, we do not anticipate adding to
this sector. But we expect these bonds to continue to provide solid
performance through the end of this year. Treasury bonds and MBSs
continue to be attractive, and we expect solid performance from these
sectors. Overall, with continued volatility in the equity markets and a
slowing U.S. economy, we believe bonds should become increasingly
attractive for conservative investors.
The views expressed here are exclusively those of Putnam Management.
They are not meant as investment advice. Although the described holdings
were viewed favorably as of 9/30/00, 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.
A NOTE ABOUT DUPLICATE MAILINGS
In response to investors' requests, the SEC has modified mailing regulations
for semiannual and annual reports and prospectuses. Putnam is now able to
send a single copy of these materials to customers who share the same address.
This change will automatically apply to all shareholders except those who
notify us. If you would prefer to receive your own copy, please call Putnam at
1-800-225-1581.
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 9/30/00
Class A Class B Class C Class M
(inception dates) (2/26/96) (2/26/96) (2/1/99) (2/26/96)
NAV POP NAV CDSC NAV CDSC NAV POP
------------------------------------------------------------------------------
6 months 0.15% -4.67% -0.23% -5.01% -0.23% -1.18% 0.03% -3.24%
------------------------------------------------------------------------------
1 year 3.28 -1.62 2.51 -2.21 2.50 1.56 3.03 -0.29
------------------------------------------------------------------------------
Life of fund 17.54 12.01 13.68 12.07 13.85 13.85 16.21 12.37
Annual average 3.58 2.50 2.83 2.51 2.87 2.87 3.33 2.57
------------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 9/30/00
Salomon Bros.
Lehman Bros. Non-U.S. First Boston Consumer
Aggregate World Govt. High Yield price
Bond Index Bond Index Index index
-----------------------------------------------------------------------------
6 months 4.81% -5.28% 1.14% 1.34%
-----------------------------------------------------------------------------
1 year 6.99 -7.86 1.92 3.46
-----------------------------------------------------------------------------
Life of fund 32.65 6.37 28.19 11.93
Annual average 6.36 1.35 5.56 2.49
-----------------------------------------------------------------------------
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-, 5- and 10-year,
if available, 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. Performance data reflect an expense
limitation previously in effect, without which returns would have been
lower.
PRICE AND DISTRIBUTION INFORMATION 6 MONTHS ENDED 9/30/00
Class A Class B Class C Class M
------------------------------------------------------------------------------
Distributions (number) 6 6 6 6
------------------------------------------------------------------------------
Income $0.31939 $0.29316 $0.29309 $0.31068
------------------------------------------------------------------------------
Capital gains -- -- -- --
------------------------------------------------------------------------------
Total $0.31939 $0.29316 $0.29309 $0.31068
------------------------------------------------------------------------------
Share value: NAV POP NAV NAV NAV POP
------------------------------------------------------------------------------
3/31/00 $7.12 $7.48 $7.13 $7.14 $7.12 $7.36
------------------------------------------------------------------------------
9/30/00 6.81 7.15 6.82 6.83 6.81 7.04
------------------------------------------------------------------------------
Current return (end of period)
------------------------------------------------------------------------------
Current
dividend
rate1 9.08% 8.65% 8.28% 8.27% 8.82% 8.53%
------------------------------------------------------------------------------
Current
30-day SEC
yield2 9.15 8.71 8.38 8.39 8.89 8.60
------------------------------------------------------------------------------
1 Income portion of most recent distribution, annualized and divided by
NAV or POP at end of period.
2 Based only 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 and are
subject to a contingent deferred sales charge only if the shares are
redeemed during the first year.
Class M shares have a lower initial sales charge and a higher 12b-1 fee
than class A shares and no sales charge on redemption.
Net asset value (NAV) is the value of all your fund's assets, minus any
liabilities, divided by the number of outstanding shares, not including
any initial or contingent deferred sales charge.
Public offering price (POP) is the price of a mutual fund share plus the
maximum sales charge levied at the time of purchase. POP performance
figures shown here assume the 4.75% maximum sales charge for class A
shares and 3.25% for class M shares.
Contingent deferred sales charge (CDSC) is a charge applied at the time
of the redemption of class B or C shares and assumes redemption at the
end of the period. Your fund's class B CDSC declines from a 5% maximum
during the first year to 1% during the sixth year. After the sixth year,
the CDSC no longer applies. The CDSC for class C shares is 1% for one
year after purchase.
COMPARATIVE BENCHMARKS
Lehman Brothers Aggregate Bond Index* is composed of securities from the
Lehman Brothers Government/Corporate Bond Index, Mortgage-Backed
Securities Index, and the Asset-Backed Securities Index. Total return
comprises prices 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 list of lower-rated,
higher-yielding U.S. corporate bonds.
Consumer price index (CPI) is a commonly used measure of inflation; it
does not represent an investment return.
*Securities indexes assume reinvestment of all distributions and interest
payments and do not take into 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.
A GUIDE TO THE FINANCIAL STATEMENTS
These sections of the report constitute the fund's financial statements.
The fund's portfolio lists all the fund's investments and their values
as of the last day of the reporting period. Holdings are organized by
asset type and industry sector, country, or state to show areas of
concentration and diversification.
Statement of assets and liabilities shows how the fund's net assets and
share price are determined. All investment and noninvestment assets are
added together. Any unpaid expenses and other liabilities are
subtracted from this total. The result is divided by the number of
shares to determine the net asset value per share, which is calculated
separately for each class of shares. (For funds with preferred shares,
the amount subtracted from total assets includes the net assets
allocated to remarketed preferred shares.)
Statement of operations shows the fund's net investment gain or loss
for the reporting period. This is determined by adding up all the fund's
earnings -- from dividends and interest income -- and subtracting its
operating expenses. This statement also lists any net gain or loss the
fund realized on the sales of its holdings and -- for holdings that
remain in the portfolio -- any change in unrealized gains or losses over
the period.
Statement of changes in net assets shows how the fund's net assets were
affected by distributions to shareholders and by changes in the number
of the fund's shares. It lists distributions and their sources (net
investment income or realized capital gains) over the current reporting
period and the most recent fiscal year-end. The distributions listed
here may not match the sources listed in the Statement of operations
because the distributions are determined on a tax basis and may be paid
in a different period from the one in which they were earned.
Financial highlights provide an overview of the fund's investment
results, per-share distributions, expense ratios, net investment income
ratios and portfolio turnover in one summary table, reflecting the five
most recent reporting periods. In a semiannual report, the highlight
table also includes the current reporting period. For open-end funds, a
separate table is provided for each share class.
<TABLE>
<CAPTION>
THE FUND'S PORTFOLIO
September 30, 2000 (Unaudited)
CORPORATE BONDS AND NOTES (40.0%) (a)
PRINCIPAL AMOUNT VALUE
<S> <C> <C>
Advertising and Marketing Services (0.4%)
-------------------------------------------------------------------------------------------------------------------
$ 40,000 Adams Outdoor Advertising sr. notes 10 3/4s, 2006 $ 41,200
158,850 Interact Operating Co. notes 14s, 2003 7,943
220,000 Lamar Media Corp. company guaranty 8 5/8s, 2007 216,700
170,000 SFX Entertainment, Inc. company guaranty 9 1/8s, 2008 177,650
250,000 SFX Entertainment, Inc. 144A company guaranty Ser. B,
9 1/8s, 2008 261,250
-------------
704,743
Aerospace and Defense (0.5%)
-------------------------------------------------------------------------------------------------------------------
315,000 Argo-Tech Corp. company guaranty 8 5/8s, 2007 259,875
190,000 BE Aerospace, Inc. sr. sub. notes 9 1/2s, 2008 185,725
100,000 Decrane Aircraft Holdings company guaranty Ser. B, 12s, 2008 92,500
105,000 L-3 Communications Corp. sr. sub. notes Ser. B, 10 3/8s, 2007 107,363
110,000 L-3 Communications Corp. sr. sub. notes 8 1/2s, 2008 102,575
160,000 L-3 Communications Corp. company guaranty Ser. B, 8s, 2008 144,800
90,000 Moog, Inc. sr. sub. notes Ser. B, 10s, 2006 89,325
10,000 Sequa Corp. med. term notes 10s, 2001 10,071
50,000 Sequa Corp. sr. notes 9s, 2009 49,000
-------------
1,041,234
Agriculture (0.1%)
-------------------------------------------------------------------------------------------------------------------
293,389 Premium Standard Farms, Inc. sr. sec. notes 11s, 2003 (PIK) 266,984
Airlines (0.5%)
-------------------------------------------------------------------------------------------------------------------
480,000 Airbus Industries 144A 12.266s, 2020 509,498
250,000 Calair LLC 144A company guaranty 8 1/8s, 2008 235,000
70,000 Northwest Airlines, Inc. company guaranty 8.52s, 2004 67,609
120,000 Northwest Airlines, Inc. company guaranty 7 5/8s, 2005 112,222
70,000 US Air, Inc. pass-through certificates Ser. 93A3, 10 3/8s, 2013 63,875
-------------
988,204
Automotive (0.9%)
-------------------------------------------------------------------------------------------------------------------
239,000 Aftermarket Technology Corp. sr. sub. notes 12s, 2004 239,000
50,000 Collins & Aikman Products, Inc. company guaranty
11 1/2s, 2006 48,500
270,000 Dura Operating Corp. company guaranty Ser. B, 9s, 2009 232,200
110,000 Exide Corp. sr. notes 10s, 2005 84,700
530,000 Federal Mogul Corp. notes 7 3/4s, 2006 206,700
30,000 Federal Mogul Corp. notes 7 1/2s, 2009 11,400
70,000 Federal Mogul Corp. notes 7 3/8s, 2006 27,300
120,000 Hayes Wheels International, Inc. company guaranty Ser. B,
9 1/8s, 2007 106,800
110,000 Hayes Wheels International, Inc. 144A sr. sub. notes 9 1/8s, 2007 96,250
265,000 Lear Corp. sub. notes 9 1/2s, 2006 267,414
30,000 Lear Corp. company guaranty 8.11s, 2009 28,520
235,000 Oxford Automotive, Inc. company guaranty Ser. D, 10 1/8s, 2007 211,500
250,000 Tenneco, Inc. company guaranty Ser. B, 11 5/8s, 2009 (Malaysia) 160,000
-------------
1,720,284
Banking (1.0%)
-------------------------------------------------------------------------------------------------------------------
40,000 Bank United Corp. sub. notes 8 7/8s, 2007 39,574
100,000 Bangko Sentral NG Pilipinas bonds 8.6s, 2027 (Philippines) 68,100
150,000 Colonial Capital II 144A company guaranty 8.92s, 2027 138,051
320,000 GS Escrow Corp. sr. notes 7 1/8s, 2005 295,462
830,000 Hanvit Bank 144A sub. notes 11 3/4s, 2010 (Korea) 823,775
160,000 Local Financial Corp. sr. notes 11s, 2004 160,000
40,000 Riggs Capital Trust 144A bonds 8 5/8s, 2026 31,975
340,000 Sovereign Bancorp, Inc. sr. notes 10 1/2s, 2006 345,100
160,000 Superior Financial 144A sr. notes 8.65s, 2003 155,123
-------------
2,057,160
Beverage (0.2%)
-------------------------------------------------------------------------------------------------------------------
330,000 Triarc Consumer Products, Inc. company guaranty 10 1/4s, 2009 369,188
Broadcasting (3.6%)
-------------------------------------------------------------------------------------------------------------------
230,000 Acme Television sr. disc. notes 10 7/8s, 2004 218,500
230,000 Allbritton Communications Co. sr. sub. notes Ser. B, 8 7/8s, 2008 215,050
105,200 AMFM Operating, Inc. deb. 12 5/8s, 2006 (PIK) 120,454
2,861 Australis Media, Ltd. sr. disc. notes 15 3/4s, 2003
(In default) (Australia) (PIK)(NON) 1
290,000 Benedek Communications Corp. sr. disc. notes stepped-coupon
zero % (13 1/4s, 5/15/01), 2006 (STP) 250,125
315,000 Capstar Broadcasting sr. disc. notes stepped-coupon zero %
(12 3/4s, 2/1/02), 2009 (STP) 301,612
82,200 Capstar Broadcasting sub. deb. 12s, 2009 (PIK) 94,530
485,000 Capstar Broadcasting sr. sub. notes 9 1/4s, 2007 494,700
55,000 Central European Media Enterprises, Ltd. sr. notes 9 3/8s,
2004 (In default) (Bermuda) (NON) 12,100
40,000 Citadel Broadcasting, Inc. sr. sub. notes 10 1/4s, 2007 41,600
503,000 Diva Systems Corp. sr. disc. notes, stepped-coupon Ser. B,
zero % (12 5/8s, 3/1/03), 2008 (STP) 221,320
800,000 Echostar Broadband Corp. 144A sr. notes 10 3/8s, 2007 800,000
100,000 Fox Family Worldwide, Inc. sr. disc. notes stepped-coupon
zero % (10 1/4s, 11/1/02), 2007 (STP) 72,750
120,000 Fox Family Worldwide, Inc. sr. notes 9 1/4s, 2007 114,900
210,000 Golden Sky Systems company guaranty Ser. B, 12 3/8s, 2006 229,950
250,000 Granite Broadcasting Corp. sr. sub. notes 9 3/8s, 2005 202,500
230,000 Knology Holdings, Inc. sr. disc. notes stepped-coupon zero %
(11 7/8s, 10/15/02), 2007 (STP) 120,750
270,000 Lin Holdings Corp. sr. disc. notes stepped-coupon zero %
(10s, 3/1/03), 2008 (STP) 194,400
160,000 Onepoint Communications, Inc. company guaranty Ser. B,
14 1/2s, 2008 160,800
210,000 Paxson Communications Corp. 144A sr. sub. notes
11 5/8s, 2002 215,250
10,000 Pegasus Communications Corp. sr. notes 12 1/2s, 2007 10,600
590,000 Pegasus Communications Corp. sr. notes Ser. B, 9 3/4s, 2006 575,250
30,000 Pegasus Communications Corp. 144A sr. notes Ser. B,
9 5/8s, 2005 29,250
130,000 Pegasus Media & Communications notes Ser. B, 12 1/2s, 2005 135,200
424,000 PHI Holdings, Inc. sr. sub. notes zero %, 2001 398,899
125,000 Radio One, Inc. company guaranty Ser. B, 12s, 2004 132,500
120,000 RCN Corp. sr. notes 10 1/8s, 2010 85,800
120,000 Spanish Broadcasting System, Inc. sr. sub notes 9 5/8s, 2009 119,700
390,000 TV Azteca SA de CV sr. notes 10 1/2s, 2007 (Mexico) 360,263
150,000 XM Satellite Radio, Inc. 144A sr. notes 14s, 2010 111,000
1,000,000 Young Broadcasting bank term loan, Ser. B, FRN 10s, 2005 1,000,000
-------------
7,039,754
Building Materials (0.4%)
-------------------------------------------------------------------------------------------------------------------
125,000 American Architectural Products Corp. company guaranty
11 3/4s, 2007 (In default) (NON) 22,500
180,000 American Standard, Inc. company guaranty 7 5/8s, 2010 169,650
20,000 American Standard, Inc. company guaranty 7 1/8s, 2003 19,450
80,000 Atrium Companies, Inc. company guaranty Ser. B, 10 1/2s, 2009 72,000
180,000 Building Materials Corp. company guaranty 8s, 2008 113,400
220,000 Dayton Superior Corp. company guaranty 13s, 2009 221,100
140,000 NCI Building Systems, Inc. sr. sub. notes Ser. B, 9 1/4s, 2009 131,950
-------------
750,050
Cable Television (1.3%)
-------------------------------------------------------------------------------------------------------------------
30,000 Adelphia Communications Corp. sr. notes Ser. B, 8 3/8s, 2008 26,175
20,000 Adelphia Communications Corp. sr. notes 7 7/8s, 2009 16,650
20,000 Charter Communications Holdings LLC sr. disc. notes,
stepped-coupon zero % (11 3/4s, 1/15/05), 2010 (STP) 11,700
160,000 Charter Communications Holdings LLC bank term loan
Ser. B, FRN 9.24s, 2008 160,000
620,000 Charter Communications Holdings LLC sr. notes 8 5/8s, 2009 554,900
40,000 Classic Cable, Inc. company guaranty 10 1/2s, 2010 34,000
600,000 NTL Communications Corp. 144A sr. notes 11 7/8s, 2010 588,000
370,000 NTL Communications Corp. sr. notes Ser. B, 11 1/2s, 2008 359,825
150,000 Supercanal Holdings S.A. 144A sr. notes 11 1/2s, 2005
(In default) (Argentina) (NON) 63,000
380,000 TeleWest Communications PLC deb. stepped-coupon zero %,
(11s, 10/1/00), 2007 (United Kingdom) (STP) 362,900
70,000 TeleWest Communications PLC 144A 9 7/8s, 2010
(United Kingdom) 64,400
20,000 TeleWest Communications PLC sr. disc. notes stepped-coupon
zero %, (9 1/4, 4/15/04) 2009 (United Kingdom) (STP) 10,600
210,000 United Pan-Europe NV 144A sr. disc. notes stepped-coupon
zero %, (12.5s, 8/1/04), 2009 (Netherlands) (STP) 100,800
140,000 Williams Communications Group, Inc. 144A sr. notes
11.7s, 2008 135,800
-------------
2,488,750
Chemicals (1.7%)
-------------------------------------------------------------------------------------------------------------------
400,000 Arco Chemical Co. deb. 9.8s, 2020 392,000
120,000 Geo Specialty Chemicals, Inc. sr. sub. notes 10 1/8s, 2008 105,600
290,000 Huntsman Corp. 144A sr. sub. notes 9 1/2s, 2007 249,400
520,000 Huntsman ICI Chemicals, Inc. company guaranty 10 1/8s, 2009 512,200
60,000 ISP Holdings, Inc. sr. notes Ser. B, 9 3/4s, 2002 58,650
40,000 ISP Holdings, Inc. sr. notes Ser. B, 9s, 2003 36,000
500,000 Lyondell Petrochemical Co. sec. notes Ser. B, 9 7/8s, 2007 490,000
80,000 Lyondell Petrochemical Co. notes Ser. A, 9 5/8s, 2007 78,400
250,000 PCI Chemicals & Pharmaceuticals company guaranty 9 1/4s,
2007 (Canada) 123,750
446,000 Pioneer Americas Acquisition 144A sr. notes 9 1/4s, 2007 285,440
100,000 Polymer Group, Inc. company guaranty Ser. B, 9s, 2007 80,000
70,000 Polymer Group, Inc. company guaranty Ser. B, 8 3/4s, 2008 55,300
159,617 Polytama International notes 11 1/4s, 2007
(In default) (Indonesia) (NON) 12,977
250,000 Royster-Clark, Inc. 1st mtge. 10 1/4s, 2009 187,500
170,000 Sterling Chemicals Holdings sr. disc. notes stepped-coupon
zero % (13 1/2s, 8/15/01), 2008 (STP) 68,000
170,000 Sterling Chemicals, Inc. company guaranty Ser. B, 12 3/8s, 2006 173,400
230,000 Sterling Chemicals, Inc. sr. sub. notes 11 3/4s, 2006 161,000
10,000 Sterling Chemicals, Inc. sr. sub. notes Ser. A, 11 1/4s, 2007 6,800
50,000 Texas Petrochemical Corp. sr. sub. notes Ser. B, 11 1/8s, 2006 42,500
245,000 Trikem S.A. 144A bonds 10 5/8s, 2007 (Brazil) 192,325
-------------
3,311,242
Coal (--%)
-------------------------------------------------------------------------------------------------------------------
290,000 Lodestar Holdings, Inc. company guaranty 11 1/2s, 2005 40,600
Commercial and Consumer Services (0.3%)
-------------------------------------------------------------------------------------------------------------------
280,000 Coinmach Corp. sr. notes Ser. D, 11 3/4s, 2005 280,000
170,000 GS Superhighway Holdings sr. notes 10 1/4s, 2007 (China) 120,694
200,000 GS Superhighway Holdings sr. notes 9 7/8s, 2004 (China) 146,000
-------------
546,694
Computers (0.1%)
-------------------------------------------------------------------------------------------------------------------
130,000 Unisys Corp. sr. notes 11 3/4s, 2004 137,475
65,000 Unisys Corp. sr. notes 7 7/8s, 2008 60,125
-------------
197,600
Construction (0.4%)
-------------------------------------------------------------------------------------------------------------------
320,000 Better Minerals & Aggregates Co. company guaranty 13s, 2009 297,600
540,000 Republic Group, Inc. sr. sub. notes 9 1/2s, 2008 534,600
-------------
832,200
Consumer (0.2%)
-------------------------------------------------------------------------------------------------------------------
230,000 Home Interiors & Gifts, Inc. company guaranty 10 1/8s, 2008 68,713
500,000 Samsonite Corp. sr. sub. notes 10 3/4s, 2008 395,000
-------------
463,713
Consumer Finance (0.1%)
-------------------------------------------------------------------------------------------------------------------
155,000 Contifinancial Corp. sr. notes 8 3/8s, 2003 (In default) (NON) 21,700
320,000 Contifinancial Corp. sr. notes 8 1/8s, 2008 (In default) (NON) 44,800
310,000 Contifinancial Corp. sr. notes 7 1/2s, 2002 (In default) (NON) 43,400
40,000 Finova Capital Corp. sr. notes 7 5/8s, 2009 27,800
140,000 Outsourcing Solutions, Inc. sr. sub. notes Ser. B, 11s, 2006 119,000
-------------
256,700
Consumer Goods (0.3%)
-------------------------------------------------------------------------------------------------------------------
60,000 French Fragrances, Inc. company guaranty Ser. D, 10 3/8s, 2007 58,500
40,000 French Fragrances, Inc. sr. notes Ser. B, 10 3/8s, 2007 39,800
210,000 Leiner Health Products sr. sub. notes 9 5/8s, 2007 90,300
330,000 NBTY, Inc. 144A sr. sub. notes 8 5/8s, 2007 282,150
90,000 Revlon Consumer Products sr. notes 9s, 2006 64,800
60,000 Revlon Consumer Products sr. notes 8 1/8s, 2006 42,600
-------------
578,150
Consumer Staples (--%)
-------------------------------------------------------------------------------------------------------------------
140,000 Doskcil Manufacturing Co 144A sr. sub. notes 10 1/8s, 2007 47,600
Containers (0.6%)
-------------------------------------------------------------------------------------------------------------------
300,000 AEP Industries, Inc. sr. sub. notes 9 7/8s, 2007 253,500
410,000 Consumers International 144A sr. notes 10 1/4s, 2005 164,000
100,000 Huntsman Packaging Corp. 144A company guaranty 13s, 2010 87,500
430,000 Owens-Illinois, Inc. sr. notes 7.15s, 2005 393,076
320,000 Tekni-Plex, Inc. 144A sr. sub. notes 12 3/4s, 2010 315,200
-------------
1,213,276
Distribution (0.1%)
-------------------------------------------------------------------------------------------------------------------
240,000 RAB Enterprises, Inc. company guaranty 10 1/2s, 2005 192,000
Electric Utilities (0.6%)
-------------------------------------------------------------------------------------------------------------------
235,000 AES China Generating Co. sr. notes 10 1/8s, 2006 (China) 164,500
50,000 CMS Energy Corp. sr. notes 7 1/2s, 2009 44,642
530,000 CMS Energy Corp. sr. notes Ser. B, 6 3/4s, 2004 495,550
236,282 Northeast Utilities System notes Ser. A, 8.58s, 2006 240,358
56,000 Northeast Utilities System notes Ser. B, 8.38s, 2005 56,152
350,000 Panda Global Energy Co. company guaranty 12 1/2s,
2004 (China) 157,500
-------------
1,158,702
Energy (0.7%)
-------------------------------------------------------------------------------------------------------------------
410,000 AES Corp. sr. notes 9 3/8s, 2010 416,150
150,000 Leviathan Gas Corp. company guaranty Ser. B, 10 3/8s, 2009 158,250
150,000 Parker Drilling Corp. company guaranty Ser. D, 9 3/4s, 2006 151,125
550,000 RBF Finance Co. company guaranty 11 3/8s, 2009 635,250
-------------
1,360,775
Entertainment (0.7%)
-------------------------------------------------------------------------------------------------------------------
40,000 AMC Entertainment, Inc. sr. sub. notes 9 1/2s, 2011 18,400
260,000 AMC Entertainment, Inc. sr. sub. notes 9 1/2s, 2009 119,600
220,000 Autotote Corp. 144A company guaranty 12 1/2s, 2010 223,300
310,000 Cinemark USA, Inc. sr. sub. notes 8 1/2s, 2008 (Mexico) 148,800
500,000 Premier Parks, Inc. sr. notes 9 1/4s, 2006 465,625
550,000 Regal Cinemas, Inc. sr. sub. notes 9 1/2s, 2008 66,000
190,000 Regal Cinemas, Inc. sr. sub. notes 8 7/8s, 2010 20,900
240,000 Silver Cinemas, Inc. sr. sub. notes 10 1/2s, 2005 (In default) (NON) 19,200
275,000 Six Flags Corp. sr. notes 8 7/8s, 2006 266,750
630,000 United Artists Theatre sr. sub. notes 9 3/4s, 2008 (In default) (NON) 11,025
-------------
1,359,600
Financial (1.8%)
-------------------------------------------------------------------------------------------------------------------
230,000 Aames Financial Corp. sr. notes 9 1/8s, 2003 117,875
425,000 Advanta Corp. company guaranty Ser. B, 8.99s, 2026 265,094
260,000 Advanta Corp. med-term notes Ser. D, 6.92s, 2002 232,801
308,000 AMRESCO, Inc. sr. sub. notes Ser. 97-A, 10s, 2004 138,600
110,000 AMRESCO, Inc. sr. sub. notes Ser. 98-A, 9 7/8s, 2005 49,500
60,000 CSBI Capital Trust I 144A company guaranty 11 3/4s, 2027 60,000
70,000 Conseco Finance Trust III, Inc. bonds 8.796s, 2027 30,100
170,000 Conseco Financial Corp. sr. sub. notes 10 1/4s, 2002 127,500
320,000 Delta Financial Corp. sr. notes 9 1/2s, 2004 144,000
275,000 Imperial Credit Industries, Inc. sr. notes 9 7/8s, 2007 151,250
1,000,000 Liberty Mutual Insurance 144A notes 7.697s, 2097 735,560
85,000 Nationwide Credit, Inc. sr. notes Ser. A, 10 1/4s, 2008 53,550
110,000 Ocwen Capital Trust I company guaranty 10 7/8s, 2027 56,100
175,000 Ocwen Federal Bank sub. deb. 12s, 2005 161,000
150,000 Ocwen Financial Corp. notes 11 7/8s, 2003 135,375
220,000 Resource America, Inc. 144A sr. notes 12s, 2004 200,200
1,010,000 Sun Life Canada Capital Trust 144A company guaranty
8.526s, 2049 896,789
-------------
3,555,294
Food (0.4%)
-------------------------------------------------------------------------------------------------------------------
40,000 Archibald Candy Corp. company guaranty 10 1/4s, 2004 23,200
50,000 Aurora Foods, Inc. sr. sub. notes Ser. B, 9 7/8s, 2007 39,250
160,000 Aurora Foods, Inc. 144A ser. sub. notes Ser. D, 9 7/8s, 2007 125,600
350,000 Doane Pet Care Corp. sr. sub. notes 9 3/4s, 2007 302,750
90,000 Eagle Family Foods company guaranty Ser. B, 8 3/4s, 2008 47,700
50,000 Premier International Foods PLC sr. notes 12s, 2009
(United Kingdom) 41,500
250,000 Vlasic Foods Intl., Inc. sr. sub notes Ser. B, 10 1/4s, 2009 137,500
-------------
717,500
Gaming & Lottery (1.6%)
-------------------------------------------------------------------------------------------------------------------
70,000 Ameristar Casinos, Inc. company guaranty Ser. B, 10 1/2s, 2004 70,175
280,000 Fitzgeralds Gaming Corp. company guaranty Ser. B, 12 1/4s,
2004 (In default) (NON) 151,200
100,000 Harrahs Entertainment, Inc. company guaranty 7 1/2s, 2009 94,228
330,000 Hollywood Casino Corp. company guaranty 11 1/4s, 2007 345,675
150,000 Hollywood Park, Inc. company guaranty Ser. B, 9 1/4s, 2007 153,000
20,000 International Game Technology 144A sr. notes 8 3/8s, 2009 19,600
70,000 Isle of Capri Black Hawk LLC 144A 1st mortgage Ser. B,
13s, 2004 76,300
260,000 Isle of Capri Black Hawk LLC company guaranty 8 3/4s, 2009 241,800
200,000 MGM Grand, Inc. company guaranty 9 3/4s, 2007 206,500
190,000 Mohegan Tribal Gaming, Auth. sr. sub. notes 8 3/4s, 2009 188,575
80,000 Mohegan Tribal Gaming, Auth. sr. notes 8 1/8s, 2006 78,000
160,000 Park Place Entertainment Corp. sr. sub. notes 8 7/8s, 2008 158,400
800,000 Trump A.C. 1st mtge. 11 1/4s, 2006 554,000
100,000 Trump Castle Funding, Inc. 144A sr. sub. notes 11 3/4s, 2003 83,500
520,000 Trump Castle Funding, Inc. 144A sub. notes 10 1/4s, 2003 520,000
170,000 Venetian Casino, Inc. company guaranty 12 1/4s, 2004 175,100
-------------
3,116,053
Health Care (0.9%)
-------------------------------------------------------------------------------------------------------------------
110,000 ALARIS Medical Systems, Inc. company guaranty 9 3/4s, 2006 80,300
80,000 Bio-Rad Labs Corp. sr. sub. notes 11 5/8s, 2007 84,000
70,000 Columbia/HCA Healthcare Corp. deb. 8.36s, 2024 65,450
70,000 Columbia/HCA Healthcare Corp. med term notes notes
7.69s, 2025 58,625
330,000 Columbia/HCA Healthcare Corp. med term notes 6.63s, 2045 316,704
270,000 HCA - The Healthcare Co. notes 8 3/4s, 2010 273,621
150,000 Hudson Respiratory Care, Inc. sr. sub. notes 9 1/8s, 2008 105,000
40,000 Kinetic Concepts, Inc. company guaranty Ser. B, 9 5/8s, 2007 30,800
180,000 Magellan Health sr. sub. notes 9s, 2008 118,800
145,000 Mediq, Inc. deb. stepped-coupon zero % (13s, 6/1/03), 2009 (STP) 15
220,000 Mediq, Inc. company guaranty 11s, 2008 (In default) (NON) 6,600
240,000 Paracelsus Healthcare sr. sub. notes 10s, 2006 (In default) (NON) 96,000
210,000 Tenet Healthcare Corp. sr. notes Ser. B, 8 1/8s, 2008 200,288
130,000 Tenet Healthcare Corp. sr. notes Ser. B, 7 5/8s, 2008 122,525
150,000 Triad Hospitals Holdings company guaranty Ser. B, 11s, 2009 153,750
-------------
1,712,478
Homebuilding (0.5%)
-------------------------------------------------------------------------------------------------------------------
80,000 D.R. Horton, Inc. company guaranty 8s, 2009 74,700
80,000 Del Webb Corp. sr. sub. deb. 10 1/4s, 2010 77,200
20,000 Del Webb Corp. sr. sub. deb. 9 3/8s, 2009 18,400
160,000 K. Hovnanian Enterprises, Inc. 144A company guaranty
10 1/2s, 2007 156,600
130,000 Lennar Corp. sr. notes 7 5/8s, 2009 119,600
140,000 Ryland Group, Inc. sr. notes 9 3/4s, 2010 141,750
140,000 Standard Pacific Corp. sr. notes 9 1/2s, 2010 140,350
180,000 Toll Corp. company guaranty 8 1/8s, 2009 170,550
-------------
899,150
Household Furniture & Appliances (0.1%)
-------------------------------------------------------------------------------------------------------------------
180,000 Albecca, Inc. company guaranty 10 3/4s, 2008 162,450
70,000 Sealy Mattress Co. sr. sub. notes Ser. B, 9 7/8s, 2007 67,725
-------------
230,175
Lodging/Tourism (1.0%)
-------------------------------------------------------------------------------------------------------------------
159,818 Blackstone Hotel Acquisition Co. jr. mtge. loan FRN 10 1/4s,
2003 (United Kingdom) 224,400
731,854 Blackstone Hotel Acquisition Co. sr. mtge. loan FRN 3.449s,
2003 (United Kingdom) 1,081,680
180,000 Epic Resorts LLC company guaranty Ser. B, 13s, 2005 54,000
240,000 HMH Properties, Inc. company guaranty Ser. B, 7 7/8s, 2008 221,400
340,000 ITT Corp. notes 6 3/4s, 2005 317,366
-------------
1,898,846
Manufacturing (0.6%)
-------------------------------------------------------------------------------------------------------------------
340,000 Blount, Inc. company guaranty 13s, 2009 349,350
80,000 Continental Global Group sr. notes Ser. B, 11s, 2007 26,400
290,000 Flextronics International, Ltd. 144A sr. sub. notes 9 7/8s, 2010 300,150
230,000 Flowserve Corp. 144A company guaranty 12 1/4s, 2010 235,750
270,000 Motors and Gears, Inc. sr. notes Ser. D, 10 3/4s, 2006 264,600
90,000 Roller Bearing Co. company guaranty Ser. B, 9 5/8s, 2007 82,800
-------------
1,259,050
Medical Services (0.1%)
-------------------------------------------------------------------------------------------------------------------
250,000 Extendicare Health Services, Inc. company guaranty 9.35s, 2007 145,000
250,000 Integrated Health Services, Inc. sr. sub. notes Ser. A, 9 1/4s, 2008
(In default) (NON) 2,500
80,000 Mariner Post-Acute Network, Inc. sr. sub. notes stepped-coupon
Ser. B, zero % (10 1/2s, 11/1/02), 2007 (In default) (STP) (NON) 600
480,000 Mariner Post-Acute Network, Inc. sr. sub. notes Ser. B, 9 1/2s,
2007 (In default) (NON) 3,600
630,000 Multicare Cos., Inc. sr. sub. notes 9s, 2007 (In default) (NON) 34,650
40,000 Service Corp. International debs. 7 7/8s, 2013 21,400
40,000 Service Corp. International notes 6s, 2005 22,700
1,125,000 Sun Healthcare Group, Inc. sr. sub. notes Ser. B, 9 1/2s, 2007
(In default) (NON) 22,500
30,000 Sun Healthcare Group, Inc. 144A sr. sub. notes 9 3/8s, 2008
(In default) (NON) 638
-------------
253,588
Medical Technology (--%)
-------------------------------------------------------------------------------------------------------------------
90,000 Hanger Orthopedic Group, Inc. sr. sub. notes 11 1/4s, 2009 80,550
Metals (0.5%)
-------------------------------------------------------------------------------------------------------------------
70,000 AK Steel Corp. company guaranty 7 7/8s, 2009 62,650
235,000 Kaiser Aluminum & Chemical Corp. sr. sub. notes 12 3/4s, 2003 209,150
20,000 Kaiser Aluminum & Chemical Corp. sr. notes Ser. B, 10 7/8s, 2006 19,700
30,000 Kaiser Aluminum & Chemical Corp. sr. notes 9 7/8s, 2002 29,400
340,000 LTV Corp. company guaranty 11 3/4s, 2009 176,800
285,000 National Steel Corp. 1st mtge. Ser. D, 9 7/8s, 2009 171,000
70,000 Oregon Steel Mills 1st mortgage 11s, 2003 56,000
250,000 WCI Steel, Inc. sr. notes Ser. B, 10s, 2004 225,000
20,000 Weirton Steel Corp. 144A sr. notes 10 3/4s, 2005 16,100
310,000 Wheeling-Pittsburgh Steel Corp. sr. notes 9 1/4s, 2007 108,500
-------------
1,074,300
Oil & Gas (1.1%)
-------------------------------------------------------------------------------------------------------------------
350,000 Belco Oil & Gas Corp. company guaranty Ser. B, 10 1/2s, 2006 350,875
100,000 Belco Oil & Gas Corp. sr. sub. notes Ser. B, 8 7/8s, 2007 94,500
110,000 Giant Industries Corp. company guaranty 9s, 2007 101,475
30,000 Gulf Canada Resources, Ltd. sr. sub. notes 9 5/8s,
2005 (Canada) 30,788
220,000 HS Resources, Inc. company guaranty 9 1/4s, 2006 221,650
150,000 Nuevo Energy Co. sr. sub. notes Ser. B, 9 1/2s, 2008 150,375
70,000 Nuevo Energy Co. 144A sr. sub. notes 9 3/8s, 2010 69,650
430,000 Ocean Energy, Inc. company guaranty Ser. B, 8 3/8s, 2008 427,850
80,000 Pioneer Natural Resources Co. company guaranty 9 5/8s, 2010 84,800
20,000 Port Arthur Finance Corp. company guaranty 12 1/2s, 2009 20,000
110,000 Seven Seas Petroleum sr. notes Ser. B, 12 1/2s, 2005 26,400
145,000 Snyder Oil Corp. sr. sub. notes 8 3/4s, 2007 148,384
70,000 Stone Energy Corp. company guaranty 8 3/4s, 2007 66,850
180,000 Triton Energy, Ltd. 144A sr. notes 8 7/8s, 2007 (Cayman Islands) 180,000
290,000 Vintage Petroleum sr. sub. notes 9 3/4s, 2009 303,050
-------------
2,276,647
Paper & Forest Products (1.7%)
-------------------------------------------------------------------------------------------------------------------
330,000 APP China Group, Ltd. 144A sr. disc. notes 14s,
2010 (Bermuda) 161,700
395,000 APP Finance II Mauritius, Ltd. bonds stepped-coupon 12s,
(16s, 2/15/04), 2049 (Indonesia) (STP) 142,200
200,000 Doman Industries, Ltd. company guaranty 12s, 2004 (Canada) 203,000
300,000 Doman Industries, Ltd. 144A sr. notes 8 3/4s, 2004 (Canada) 216,000
70,000 Four M Corp. sr. notes Ser. B, 12s, 2006 66,675
130,000 Gaylord Container Corp. sr. sub. notes 9 7/8s, 2008 58,500
10,000 Gaylord Container Corp. sr. notes Ser. B, 9 3/4s, 2007 6,800
110,000 Gaylord Container Corp. sr. notes Ser. B, 9 3/8s, 2007 73,700
500,000 Indah Kiat Financial Mauritius, Ltd. company guaranty 10s,
2007 (Indonesia) 245,000
320,000 Pacifica Papers, Inc. sr. notes 10s, 2009 (Canada) 321,600
110,000 Packaging Corp. company guaranty 9 5/8s, 2009 111,100
520,000 Pindo Deli Finance Mauritius, Ltd. company guaranty 10 3/4s,
2007 (Indonesia) 254,800
235,000 PT Pabrik Kertas Tjiwi Kimia company guaranty 10s,
2004 (Indonesia) 126,900
450,000 Repap New Brunswick sr. notes 10 5/8s, 2005 (Canada) 463,500
765,000 Riverwood International Corp. company guaranty 10 7/8s, 2008 711,450
180,000 Tembec Industries, Inc. company guaranty 8 5/8s,
2009 (Canada) 175,500
-------------
3,338,425
Pharmaceuticals (0.2%)
-------------------------------------------------------------------------------------------------------------------
185,000 ICN Pharmaceuticals, Inc. 144A sr. notes 9 1/4s, 2005 183,613
210,000 ICN Pharmaceuticals, Inc. 144A sr. notes 8 3/4s, 2008 207,900
20,000 ICN Pharmaceuticals, Inc. 144A sr. notes 8 3/4s, 2008 19,800
-------------
411,313
Power Producers (0.9%)
-------------------------------------------------------------------------------------------------------------------
85,000 Calpine Corp. sr. notes 10 1/2s, 2006 87,550
40,000 Calpine Corp. sr. notes 9 1/4s, 2004 39,995
120,000 Calpine Corp. sr. notes 8 3/4s, 2007 120,659
70,000 Calpine Corp. sr. notes 7 7/8s, 2008 67,136
10,000 Calpine Corp. sr. notes 7 3/4s, 2009 9,513
700,000 Midland Funding II Corp. deb. Ser. B, 13 1/4s, 2006 787,605
270,000 Midland Funding II Corp. deb. Ser. A, 11 3/4s, 2005 291,938
376,000 York Power Funding 144A notes 12s, 2007 (Cayman Islands) 379,760
-------------
1,784,156
Publishing (0.5%)
-------------------------------------------------------------------------------------------------------------------
410,000 Affinity Group Holdings sr. notes 11s, 2007 340,300
156,489 Big Flower Holdings bank term loan FRN 9.625s, 2010 156,098
520,000 Garden State Newspapers, Inc. sr. sub. notes 8 5/8s, 2011 478,400
-------------
974,798
Railroads (0.2%)
-------------------------------------------------------------------------------------------------------------------
180,000 Kansas City Southern Railway 144A sr. notes 9 1/2s, 2008 182,700
335,000 TFM SA de CV company guaranty stepped-coupon zero %
(11 3/4s, 6/15/02), 2009 (Mexico) (STP) 253,763
-------------
436,463
Restaurants (0.4%)
-------------------------------------------------------------------------------------------------------------------
130,000 Felcor Lodging 144A sr. notes 9 1/2s, 2008 130,325
140,000 FRD Acquisition Co. sr. notes Ser. B, 12 1/2s, 2004 65,100
420,000 Sbarro, Inc. company guaranty 11s, 2009 432,600
170,000 Tricon Global Restaurants, Inc. sr. notes 7.65s, 2008 158,749
-------------
786,774
Retail (0.8%)
-------------------------------------------------------------------------------------------------------------------
310,000 Amazon.com, Inc. sr. disc. notes stepped-coupon zero %
(10s, 5/1/03), 2008 (STP) 164,300
90,000 Iron Age Corp. company guaranty 9 7/8s, 2008 63,000
10,000 Iron Age Holdings Corp. sr. disc. notes stepped-coupon
zero % (12 1/8s, 5/1/03), 2009 (STP) 1,500
300,000 Grupo Elektra SA 144A notes 12s, 2008 (Mexico) 290,250
250,000 K mart Corp. notes 8 3/8s, 2004 214,828
200,000 K mart Corp. deb. 7 3/4s, 2012 171,934
190,000 Mothers Work, Inc. sr. notes 12 5/8s, 2005 174,800
620,000 Saks, Inc. company guaranty 8 1/4s, 2008 372,000
150,000 Southland Corp. deb. Ser. A, 4 1/2s, 2004 123,750
-------------
1,576,362
Semiconductor (--%)
-------------------------------------------------------------------------------------------------------------------
80,000 Chippac Intl., Ltd. company guaranty Ser. B, 12 3/4s, 2009 84,800
Shipping (0.2%)
-------------------------------------------------------------------------------------------------------------------
150,000 Eletson Holdings, Inc. 1st pfd. mtge. notes 9 1/4s, 2003 (Greece) 141,750
70,000 Kitty Hawk, Inc. company guaranty 9.95s, 2004 (In default) (NON) 39,900
160,000 Navistar International Corp. sr. notes Ser. B, 8s, 2008 147,200
-------------
328,850
Software (--%)
-------------------------------------------------------------------------------------------------------------------
130,000 Telehub Communications Corp. company guaranty
stepped-coupon zero % (13 7/8s, 7/31/02), 2005 (STP) 23,400
Specialty Printing (0.1%)
-------------------------------------------------------------------------------------------------------------------
70,000 Perry-Judd company guaranty 10 5/8s, 2007 62,300
40,706 Von Hoffman Press, Inc. 144A sr. sub. notes 13 1/2s, 2009 36,635
45,000 Von Hoffman Press, Inc. 144A sr. sub. notes 10 3/8s, 2007 41,400
-------------
140,335
Technology (0.6%)
-------------------------------------------------------------------------------------------------------------------
130,000 Fairchild Semiconductor Corp. company guaranty 10 3/8s, 2007 131,300
200,000 Fairchild Semiconductor Corp. sr. sub. notes 10 1/8s, 2007 200,000
180,000 Flextronics International, Ltd. sr. sub. notes Ser. B, 8 3/4s, 2007 176,400
300,000 Telecommunications Techniques, Inc. company guaranty
9 3/4s, 2008 282,000
90,000 U.S. Can Corp. 144A sr. sub. notes 12 3/8s, 2010 90,900
430,000 Viasystems, Inc. sr. notes Ser. B, 9 3/4s, 2007 391,300
-------------
1,271,900
Technology Services (0.7%)
-------------------------------------------------------------------------------------------------------------------
200,000 Equinix, Inc. sr. notes 13s, 2007 160,000
340,000 Exodus Communications, Inc. 144A sr. notes 11 5/8s, 2010 341,700
150,000 Exodus Communications, Inc. sr. notes 10 3/4s, 2009 145,125
90,000 Globix Corp. sr. notes 12 1/2s, 2010 64,800
560,000 Iron Mountain, Inc. company guaranty 8 3/4s, 2009 543,200
40,000 PSINet, Inc. sr. notes 11 1/2s, 2008 26,600
150,000 PSINet, Inc. sr. notes 11s, 2009 97,500
90,000 Rhythms Netconnections sr. notes Ser. B, 14s, 2010 59,400
-------------
1,438,325
Telecommunications (5.5%)
-------------------------------------------------------------------------------------------------------------------
170,000 360Networks, Inc. sr. notes 13s, 2008 158,100
640,000 American Cellular bank term loan Ser. C, FRN 9.95s, 2008 640,000
560,000 American Cellular bank term loan Ser. B, FRN 9.70s, 2008 560,000
230,000 American Mobile Satellite Corp. company guaranty
12 1/4s, 2008 171,350
130,000 Arch Communications Group sr. disc. notes stepped-coupon
zero % (10 7/8s, 3/15/01), 2008 (STP) 65,975
230,000 Barak I.T.C. sr. disc. notes stepped-coupon Ser. B, zero %
(12 1/2s, 11/15/02), 2007 (Israel) (STP) 124,200
130,000 Bestel SA de CV sr. disc. notes stepped-coupon zero %
(12 3/4s, 5/15/03), 2005 (Mexico) (STP) 85,150
160,000 Call-Net Enterprises, Inc. sr. notes 8s, 2008 (Canada) 64,000
250,000 Carrier1 Intl. SA sr. notes Ser. B, 13 1/4s, 2009 (Luxembourg) 220,000
555,000 Celcaribe S.A. sr. notes stepped-coupon zero %
(13 1/2s, 3/15/04), 2004 (Colombia) (STP) 421,800
1,025,000 CellNet Data Systems, Inc. sr. disc. notes stepped-coupon
zero % (14s, 10/1/02), 2007 (In default) (STP) (NON) 71,750
1,000,000 Clearnet Racers notes Ser. 00-17A, 9.709s, 2007 995,000
180,000 Crown Castle Intl., Corp. sr. notes 10 3/4s, 2011 181,800
80,000 Dobson Communications Corp. sr. notes 10 7/8s, 2010 78,000
120,000 Dobson/Sygnet Communications, Inc. sr. notes 12 1/4s, 2008 120,600
500,000 Econophone, Inc. company guaranty 13 1/2s, 2007 310,000
200,000 Esprit Teleom Group PLC sr. notes 11 1/2s, 2007
(United Kingdom) 93,500
30,000 Exodus Communications, Inc. sr. notes 11 1/4s, 2008 29,550
220,000 Flag, Ltd. 144A sr. notes 8 1/4s, 2008 (Bermuda) 193,600
300,000 Global Crossing Holdings, Ltd. company guaranty 9 1/2s,
2009 (Bermuda) 298,500
260,000 Global Crossing Holdings, Ltd. company guaranty 9 1/8s,
2006 (Bermuda) 256,750
170,000 Grupo Iusacell SA de CV sr. notes 14 1/4s, 2006 (Mexico) 180,625
225,000 Innova S. de R.L. sr. notes 12 7/8s, 2007 (Mexico) 213,750
230,000 Intra Corp. bonds 13s, 2010 119,600
110,000 Level 3 Communications, Inc. sr. notes 11s, 2008 106,700
340,000 Level 3 Communications, Inc. sr. notes 9 1/8s, 2008 293,250
300,000 Maxcom Telecomunicaciones SA de CV 144A sr. notes
13 3/4s, 2007 (Mexico) 169,500
50,000 Metrocall, Inc. sr. sub. notes 11s, 2008 33,500
40,000 Metrocall, Inc. sr. sub. notes 10 3/8s, 2007 24,800
50,000 Metrocall, Inc. sr. sub. notes 9 3/4s, 2007 33,125
150,000 Metromedia Fiber Network, Inc. sr. notes 10s, 2009 140,250
410,000 Metromedia Fiber Network, Inc. sr. notes Ser. B, 10s, 2008 383,350
520,000 Millicom International Cellular S.A. sr. disc. notes stepped-coupon
zero % (13 1/2s, 6/1/01), 2006 (Luxembourg) (STP) 447,200
120,000 Nextel Communications, Inc. sr. disc. notes stepped-coupon
zero % (12 1/8s, 4/15/03), 2008 (STP) 77,700
380,000 Nextel Communications, Inc. sr. notes 12s, 2008 406,600
572,000 Nextel Communications, Inc. sr. notes 9 3/8s, 2009 560,560
300,000 Nextel International, Inc. 144A sr. notes 12 3/4s, 2010 297,000
130,000 Nextel Partners, Inc. sr. notes 11s, 2010 130,650
180,000 Nextel Partners, Inc. 144A sr. notes 11s, 2010 180,000
165,000 NorthEast Optic Network, Inc. sr. notes 12 3/4s, 2008 141,900
120,000 NorthPoint Communications Group, Inc. sr. notes 12 7/8s, 2010 120,000
140,000 Orbital Imaging Corp. sr. notes Ser. B, 11 5/8s, 2005 51,800
60,000 Orbital Imaging Corp. sr. notes Ser. D, 11 5/8s, 2005 22,200
270,000 Pagemart Wireless, Inc. sr. disc. notes stepped-coupon zero %
(11 1/4s, 2/1/03), 2008 (STP) 108,000
60,000 Paging Network Do Brasil sr. notes 13 1/2s, 2005
(In default) (Brazil) (NON) 3,900
100,000 Paging Network, Inc. sr. sub. notes 10s, 2008 (In default) (NON) 36,000
50,000 Paging Network, Inc. sr. sub. notes 8 7/8s, 2006 (In default) (NON) 18,000
400,000 Pinnacle Holdings, Inc. sr. disc. notes stepped-coupon zero %
(10s, 3/15/03), 2008 (STP) 288,000
40,000 Price Communications Wireless, Inc. 144A sr. notes 9 1/8s, 2006 40,000
120,000 Primus Telecommunications Group, Inc. sr. notes Ser. B,
9 7/8s, 2008 67,200
306,000 RSL Communications PLC company guaranty 12 1/4s,
2006 (United Kingdom) 91,800
150,000 RSL Communications PLC 144A company guaranty 10 1/2s,
2008 (United Kingdom) 38,250
40,000 RSL Communications PLC company guaranty 9 1/8s, 2008
(United Kingdom) 10,000
55,000 Satelites Mexicanos S.A. de C.V. 144A sr. notes 10 1/8s,
2004 (Mexico) 34,375
90,000 Spectrasite Holdings, Inc. sr. disc. notes stepped-coupon Ser. B,
zero % (12 7/8s, 3/15/05), 2010 (STP) 45,900
90,000 Spectrasite Holdings, Inc. sr. disc. notes stepped-coupon zero %
(11 1/4s, 4/15/04), 2009 (STP) 49,050
220,000 Startec Global Communications Corp. sr. notes 12s, 2008 176,000
290,000 Viatel, Inc. sr. disc. notes stepped-coupon zero %
(12 1/2s, 4/15/03), 2008 (STP) 104,400
340,000 Viatel, Inc. sr. notes 11 1/4s, 2008 173,400
100,000 Williams Communications Group, Inc. sr. notes 10 7/8s, 2009 91,250
220,000 World Access, Inc. sr. notes Ser. B, 13 1/4s, 2008 171,600
-------------
10,820,810
Telephone (3.0%)
-------------------------------------------------------------------------------------------------------------------
120,000 Airgate PCS, Inc. sr. sub. notes stepped-coupon zero %
(13 1/2s, 10/1/04), 2009 (STP) 72,000
350,000 Alamosa PCS Holdings, Inc. company guaranty stepped-coupon
zero % (12 7/8s, 2/15/05), 2010 (STP) 185,500
140,000 Alaska Communications Systems Corp. company guaranty
9 3/8s, 2009 128,800
20,000 Allegiance Telecom, Inc. sr. notes 12 7/8s, 2008 19,800
10,000 Allegiance Telecom, Inc. sr. disc. notes stepped-coupon Ser. B,
zero % (11 3/4s, 2/15/03), 2008 (STP) 6,700
120,000 Birch Telecommunications, Inc. sr. notes 14s, 2008 72,000
290,000 BTI Telecom Corp. sr. notes 10 1/2s, 2007 168,200
510,000 Covad Communications Group, Inc. sr. disc. notes
stepped-coupon Ser. B, zero % (13 1/2s, 3/15/03), 2008 (STP) 234,600
62,000 Covad Communications Group, Inc. sr. notes Ser. B, 12s, 2010 45,880
440,000 Firstworld Communication Corp. sr. disc. notes stepped-coupon
zero % (13, 4/15/03), 2008 (STP) 105,600
260,000 Focal Communications Corp. sr. disc. notes, stepped-coupon
Ser. B, zero % (12 1/8s, 2/15/03), 2008 (STP) 130,000
20,000 Focal Communications Corp. sr. notes 11 7/8s, 2010 15,400
530,000 ICG Holdings, Inc. company guaranty stepped-coupon zero %
(12 1/2s, 5/1/01), 2006 (STP) 106,000
210,000 ICG Services, Inc. sr. disc. notes stepped-coupon zero %
(10s, 2/15/03), 2008 (STP) 28,350
330,000 ICG Services, Inc. sr. disc. notes stepped-coupon zero %
(9 7/8s, 5/1/03), 2008 (STP) 43,725
130,000 Intermedia Communications, Inc. sr. disc. notes stepped-coupon
Ser. B, zero %, (121/4s, 3/1/04), 2009 (STP) 91,650
650,000 KMC Telecommunications Holdings, Inc. sr. disc. notes
stepped-coupon zero % (12 1/2s, 2/15/03), 2008 (STP) 260,000
340,000 Madison River Capital Corp. sr. notes 13 1/4s, 2010 272,000
1,080,000 McLeodUSA, Inc. bank term loan Ser. B, FRN 9.62s, 2007 1,079,873
160,000 McLeodUSA, Inc. sr. notes 8 1/8s, 2009 139,200
130,000 MGC Communications, Inc. sr. notes 13s, 2010 78,000
240,000 Microcell Telecommunications sr. disc. notes stepped-coupon
Ser. B, zero % (14s, 12/1/01), 2006 (Canada) (STP) 229,800
30,000 Netia Holdings B.V. 144A company guaranty stepped-coupon
zero % (11 1/4s, 11/1/01), 2007 (Poland) (STP) 20,100
250,000 Netia Holdings B.V. 144A company guaranty 10 1/4s,
2007 (Poland) 192,500
210,000 NEXTLINK Communications, Inc. sr. notes 10 1/2s, 2009 191,100
420,000 Telecorp PCS, Inc. 144A sr. sub. notes 10 5/8s, 2010 422,100
130,000 Time Warner Telecom, Inc. sr. notes 9 3/4s, 2008 120,575
110,000 Transtel S.A. pass-through certificates 12 1/2s, 2007 37,400
40,000 Triton PCS Inc. company guaranty 11s, 2008 30,400
400,000 UbiquiTel Operating Co. company guaranty stepped-coupon
zero % (14s, 4/15/05), 2010 (STP) 190,000
430,000 US Unwired, Inc. company guaranty, stepped-coupon Ser. B,
zero % (13 3/8s, 11/1/04), 2009 (STP) 227,900
190,000 Versatel Telecom NV sr. notes 13 1/4s, 2008 (Netherlands) 171,000
60,000 Versatel Telecom NV sr. notes 13 1/4s, 2008 (Netherlands) 54,000
400,000 Voicestream Wire, Inc. sr. notes 10 3/8s, 2009 430,000
802,000 WinStar Communications, Inc. 144A sr. disc. notes
stepped-coupon zero % (14 3/4s 4/15/05), 2010 (STP) 248,620
44,000 WinStar Communications, Inc. 144A sr. notes 12 3/4s, 2010 31,680
-------------
5,880,453
Textiles (0.6%)
-------------------------------------------------------------------------------------------------------------------
80,000 Galey & Lord, Inc. company guaranty 9 1/8s, 2008 50,800
295,000 Guess Jeans, Inc. sr. sub. notes 9 1/2s, 2003 293,156
105,000 Kasper A.S.L., Ltd. sr. notes 12 3/4s, 2004 59,850
250,000 Levi Strauss & Co. notes 6.8s, 2003 210,000
120,000 Westpoint Stevens, Inc. sr. notes 7 7/8s, 2008 99,600
360,000 Westpoint Stevens, Inc. sr. notes 7 7/8s, 2005 311,400
65,000 William Carter Holdings Co. sr. sub. notes Ser. A, 12s, 2008 59,800
135,000 William Carter Holdings Co. sr. sub. notes Ser. A, 10 3/8s, 2006 130,275
-------------
1,214,881
Tobacco (0.2%)
-------------------------------------------------------------------------------------------------------------------
485,000 North Atlantic Trading Co. company guaranty Ser. B, 11s, 2004 412,250
Transportation Services (0.5%)
-------------------------------------------------------------------------------------------------------------------
1,000,000 North American Van Lines, Inc. 144A sr. sub. Notes
13 3/8s, 2009 922,500
Trucks & Parts (0.1%)
-------------------------------------------------------------------------------------------------------------------
220,000 Transportation Manufacturing Operations, Inc. company
guaranty 11 1/4s, 2009 165,000
Utilities (0.1%)
-------------------------------------------------------------------------------------------------------------------
420,000 Cathay International, Ltd. 144A sr. notes 13s, 2008 (China) 218,400
Waste Management (0.4%)
-------------------------------------------------------------------------------------------------------------------
100,000 Allied Waste Industries, Inc. company guaranty Ser. B, 10s, 2009 86,750
810,000 Browning-Ferris Industries, Inc. deb. 7.4s, 2035 585,225
90,000 Waste Management, Inc. company guaranty 6 1/2s, 2004 84,492
-------------
756,467
Water Utilities (--%)
-------------------------------------------------------------------------------------------------------------------
90,000 Azurix Corp. 144A notes 10 3/8s, 2007 81,900
-------------
Total Corporate Bonds and Notes (cost $94,219,703) $ 79,127,396
<CAPTION>
FOREIGN GOVERNMENT BONDS AND NOTES (16.8%) (a)
PRINCIPAL AMOUNT VALUE
<S> <C> <C>
-------------------------------------------------------------------------------------------------------------------
USD 772,000 Argentina (Republic of) bonds 11 3/4s, 2015 $ 704,450
USD 800,000 Argentina (Republic of) unsub. 11 3/4s, 2009 753,040
USD 720,000 Argentina (Republic of) notes Ser. XW, 11s, 2005 696,600
USD 412,000 Brazil (Federal Republic of) notes 14 1/2s, 2009 453,200
USD 1,520,000 Brazil (Federal Republic of) 12 3/4s, 2020 1,453,576
USD 825,000 Brazil (Federal Republic of) bonds 12 1/4s, 2030 746,625
CAD 1,290,000 Canada (Government of) bonds Ser. WB60,
7 1/4s, 2007 925,067
CAD 1,815,000 Canada (Government of) bonds Ser. WL43,
5 3/4s, 2029 1,223,595
CAD 3,740,000 Canada (Government of) bonds Ser. WE00,
5 1/2s, 2002 2,474,601
USD 310,000 Colombia (Republic of) 11 3/4s, 2020 260,400
DKK 8,275,000 Denmark (Kingdom of) 7s, 2024 1,125,890
DKK 24,230,000 Denmark (Kingdom of) bonds 6s, 2009 2,939,237
EUR 970,000 Germany (Federal Republic of) bonds Ser. 98,
5 5/8s, 2028 855,734
EUR 3,575,000 Germany (Federal Republic of) bonds Ser. 132,
4 1/8s, 2004 3,046,634
GRD 895,600,000 Hellenic Greece (Republic of) bonds 6 1/2s, 2014 2,400,701
USD 456,056 Morocco (Government of) bonds Ser. A, 6.844s, 2009 410,450
NZD 4,975,000 New Zealand (Government of) bonds Ser. 709,
7s, 2009 2,049,643
USD 860,000 Philippines (Republic of) 10 5/8s, 2025 727,818
USD 550,000 Philippines (Republic of) 9 7/8s, 2019 451,000
USD 725,000 Russia (Federation of) unsub. 10s, 2007 556,438
USD 500,000 Russia (Federation of) 144A bonds 12 3/4s, 2028 432,500
USD 792,306 Russia (Federation of) 144A unsub. 8 1/4s, 2010 527,913
USD 4,207,500 Russia (Federation of) 144A unsub. stepped-coupon
2 1/4s, (5s, 4/1/01), 2030 (STP) 1,630,406
GBP 950,000 United Kingdom Treasury bonds 10s, 2003 1,560,657
GBP 645,000 United Kingdom Treasury bonds Ser. 85, 9 3/4s, 2002 1,018,135
USD 835,000 United Mexican States bonds 11 3/8s, 2016 968,600
USD 2,235,000 United Mexican States bonds Ser. XW, 10 3/8s, 2009 2,424,975
USD 635,000 Venezuela (Republic of) bonds 9 1/4s, 2027 429,451
-------------
Total Foreign Government Bonds and Notes
(cost $34,578,541) $ 33,247,336
<CAPTION>
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (12.6%) (a)
PRINCIPAL AMOUNT VALUE
<S> <C> <C>
U.S. Government Agency Mortgage Obligations (6.1%)
-------------------------------------------------------------------------------------------------------------------
$ 5,855,000 Federal National Mortgage Association 7 1/2s, TBA,
October 1, 2015 $ 5,897,156
Federal National Mortgage Association
Pass-Through Certificates
103,127 8s, with due dates from April 1, 2027 to November 1, 2029 104,512
530,000 6s, May 15, 2008 506,314
Government National Mortgage Association
Pass-Through Certificates
3,368,437 8s, with due dates from December 15, 2022
to November 15, 2027 3,430,215
509,561 7 1/2s, with due dates from October 15, 2022
to May 15, 2023 512,444
1,637,385 7s, with due dates from December 15, 2022
to November 15, 2027 1,617,111
-------------
12,067,752
U.S. Treasury Obligations (6.5%)
-------------------------------------------------------------------------------------------------------------------
U.S. Treasury Bonds
5,585,000 6 1/2s, November 15, 2026 5,900,885
3,875,000 6 1/8s, November 15, 2027 3,910,728
U.S. Treasury Notes
205,000 6 3/4s, May 15, 2005 212,368
445,000 6 1/2s, February 15, 2010 463,703
60,000 6 3/8s, January 31, 2002 60,131
1,350,000 6 1/8s, December 31, 2001 (SEG) 1,348,529
145,000 5 3/4s, August 15, 2010 144,411
1,895,000 U. S. Treasury Interest Strip zero %, February 15, 2023 495,751
1,920,000 U. S. Treasury Principal Strip zero %, November 15, 2024 453,869
-------------
12,990,375
-------------
Total U.S. Government and Agency Obligations
(cost $25,146,191) $ 25,058,127
<CAPTION>
COLLATERALIZED MORTGAGE OBLIGATIONS (11.6%) (a)
PRINCIPAL AMOUNT VALUE
<S> <C> <C>
-------------------------------------------------------------------------------------------------------------------
$ 1,100,000 AMRESCO Commercial Mortgage Funding I Ser. 97-C1,
Class F, 7.64s, 2029 $ 1,049,641
250,000 Chase Commercial Mortgage Securities Corp. Ser. 00-1,
Class E, 8.42s, 2010 254,786
485,000 Commercial Mortgage Acceptance Corp. Ser. 97-ML1,
Class D, 7.0532s, 2030 460,371
17,747,875 Commercial Mortgage Asset Trust Ser. 99-C1, Class X,
Interest Only (IO), 1.17s, 2020 1,114,076
480,000 Countrywide Home Loan Ser. 98-3, Class A5, 6 3/4s, 2028 452,550
420,000 Countrywide Mortgage Backed Securities, Inc. Ser. 93-C,
Class A8, 6 1/2s, 2024 389,054
Criimi Mae Commercial Mortgage Trust
2,849,000 Ser. 98-C1, Class A2, 7s, 2011 2,591,700
372,000 Ser. 98-C1, Class B, 7s, 2011 310,097
13,301,987 Deutsche Mortgage & Asset Receiving Corp. Ser. 98-C1,
Class X, IO, 1.241s, 2031 670,295
Fannie Mae
1,682,000 Ser. 96-5, Class SW, IO, 12.516s, 2018 559,265
850,660 Ser. 281, Class 2, IO, 9s, 2026 235,394
832,557 Ser. 241, Class 2, IO, 8.5s, 2023 219,066
165,574 Ser. 176, Class 2, IO, 8s, 2022 44,162
308,662 Ser. 203, Class 2, IO, 8s, 2023 87,583
459,352 Ser. 217, Class 2, IO, 8s, 2023 122,518
309,742 Ser. 251, Class 2, IO, 8s, 2023 87,889
268,869 Ser. 218, Class 2, IO, 7 1/2s, 2023 76,544
1,161,087 Ser. 231, Class 2, IO, 7 1/2s, 2023 335,445
567,309 Ser. 252, Class 2, IO, 7 1/2s, 2023 164,874
1,154,916 Ser. 254, Class 2, IO, 7 1/2s, 2024 336,369
2,666,493 Ser. 215, Class 2, IO, 7s, 2023 741,618
2,700,000 Ser. 97-23, Class SJ, IO, 5.94s, 2023 557,297
2,403,701 Ser. 97-23, Class SH, IO, 4.87s, 2023 546,091
756,864 Ser. 00-31, Class SC, IO, 3.51s, 2022 80,180
211,279 Ser. 92-124, Class SA, IO, 3.144s, 2022 19,431
2,765,839 Ser. 97-91, Class SL, IO, 2.763s, 2023 279,609
3,802,356 Ser. 98-66, Class SB, IO, 1.528s, 2028 200,812
550,000 First Union National Bank Commercial Mortgage Ser. 00-C1,
Class E, 8.499s, 2010 561,000
Freddie Mac
133,433 Ser. 2209, Class S, 10.658s, 2024 131,432
348,655 Ser. 1208, Class F, Principal Only (PO), 9s, 2022 263,997
555,000 Ser. 2032, Class SK, IO, 8.927s, 2024 262,411
522,155 Ser. 2219, Class SA, 7.725s, 2030 458,010
235,609 Ser. 2122, Class ZA, 6 1/4s, 2028 189,665
655,000 Ser. 2183, Class SG, 3.96s, 2014 536,281
267,160 Ser. 180, Class PO, zero %, 2026 192,063
285,000 GE Capital Mortgage Services, Inc. Ser. 98-11, Class 2A4,
6 3/4s, 2028 270,813
570,000 General Growth Properties-ALA MOANA Ser. 99-C1, Class E,
FRB, 8.87s, 2009 570,156
General Growth Properties-Homart
120,000 Ser. 99-C1, Class G, FRB, 9.12s, 2003 120,206
140,000 Ser. 99-C1, Class F, FRB, 8.87s, 2003 140,241
General Growth Properties-Ivanhoe
250,000 Ser. 99-C1, Class F, FRB, 9.87s, 2004 250,049
150,000 Ser. 99-C1, Class G, FRB, 9.87s, 2004 150,029
695,000 GMAC Commercial Mortgage Securities Inc. Ser. 98-C2,
Class D, 6 1/2s, 2010 636,884
Government National Mortgage Association
823,466 Ser. 99-30, Class SG, 9.638s, 2025 799,791
291,744 Ser. 00-17, Class SB, 9.138s, 2026 301,085
492,371 Ser. 99-38, Class SL, 8.9s, 2026 468,060
440,571 Ser. 00-11, Class SA, 8.381s, 2021 416,546
550,000 LB Commercial Conduit Mortgage Trust Ser. 99-C1, Class D,
7.02s, 2009 520,582
Merrill Lynch Mortgage Investors, Inc.
210,000 Ser. 95-C3, Class D, 7.782s, 2025 208,819
315,000 Ser. 96-C2, Class E, 6.96s, 2028 279,563
320,000 Ser. 98-C2, Class F, 6 1/4s, 2030 208,150
5,496,042 Ser. 96-C2, Class IO, 3.061s, 2028 357,243
4,436,173 Ser. 98-C2, Class IO, 1.568s, 2030 302,907
1,919,912 Mortgage Capital Funding, Inc. Ser. 97-MC2, Class X, IO,
1.579s, 2012 126,744
180,372 PNC Mortgage Securities Corp. Ser. 97-6, Class A2, 6.6s, 2027 179,801
35,035 Prudential Home Mortgage Securities Ser. 93-57, Class A4,
5.9s, 2023 34,508
400,000 Residential Mortgage Securities Ser. 8, Class M, FRB,
7.202s, 2038 583,514
67,311 Rural Housing Trust Ser. 87-1, Class D, 6.33s, 2026 65,717
700,000 Starwood Asset Receivables Trust Ser. 00-1, Class E,
9.372s, 2005 703,063
Structured Asset Security Corp.
2,213,374 Ser. 98-RF4, 3.152s, IO, 2028 412,518
380,934 Ser. 98-RF2, 8.58s, 2028 389,922
-------------
Total Collateralized Mortgage Obligations
(cost $22,946,556) $ 23,078,487
<CAPTION>
PREFERRED STOCKS (2.9%) (a)
NUMBER OF SHARES VALUE
<S> <C> <C>
-------------------------------------------------------------------------------------------------------------------
3,220 AmeriKing, Inc. 3.25 cum. pfd. (PIK) $ 12,880
94 Benedek Communications Corp. 11.50 pfd. (PIK) 50,760
9,980 Brand Scaffold Services, Inc. 3.625 cum. pfd. 299,400
6,880 CGA Group, Ltd. 144A Ser. A, 13.75 pfd. (PIK) 185,760
12,575 Chevy Chase Corporation Ser. A, 5.188 pfd. 641,325
1,200 Chevy Chase Savings Bank, Inc. 3.25 pfd. 30,600
1,078 Citadel Broadcasting Co. Ser. B, 13.25 cum. pfd. (PIK) 123,412
5,028 CSC Holdings, Inc. Ser. M, 11.13 cum. pfd. (PIK) 539,253
1,000 Decrane Aircraft Holdings 16.00 pfd. (PIK) 100,000
18,000 Diva Systems Corp. Ser. D, 6.00 pfd. 148,500
3,500 Diva Systems Corp. Ser. C, 6.00 pfd. 28,875
291 Dobson Communications Corp. 13.00% pfd. (PIK) 274,995
225 Dobson Communications Corp. 144A 12.25% pfd. (PIK) 211,199
110 First Republic Capital Corp. Ser. 144A, 10.50 pfd. 92,950
240 Fresenius Medical Capital Trust I Ser. D, 9.00% company
guaranty, pfd. (Germany) 238,200
110 Fresenius Medical Capital Trust II 7.875% company guaranty,
pfd. (Germany) 103,400
16,000 Golden State Bancorp Ser. A, 2.281 pfd. 372,000
303 Granite Broadcasting 12.75 cum. pfd. (PIK) 196,950
172 ICG Holdings, Inc. 14.00% pfd. (PIK) 3,440
79 ICG Holdings, Inc. 14.25% pfd. (PIK) 1,580
350 Intermedia Communications Ser. B, 13.50% pfd. (PIK) 332,500
230 Nextel Communications, Inc. 13.00% cum. pfd. (PIK) 246,100
4,155 NEXTLINK Communications, Inc. 7.00 cum. pfd. (PIK) 186,975
114 NEXTLINK Communications, Inc. Ser. B, 13.50% pfd. (PIK) 87,780
1 Paxson Communications Corp. 12.50% pfd. (PIK) 1,040
47 Paxson Communications Corp. 144A 13.25% cum. pfd. (PIK) 460,600
30 Pegasus Communications Corp. Ser. A, 12.75% cum. pfd. 31,200
1,244 Public Service Co. of New Hampshire 2.65 1st mtge. pfd. 31,411
172 R&B Falcon Corp. 13.875% cum. pfd. (PIK) 220,275
286 Rural Cellular Corp. 12.25% pfd. (PIK) 243,100
165 Webster Capital Corp. Ser. A, 7.375% cum. pfd. 161,700
-------------
Total Preferred Stocks (cost $6,068,991) $ 5,658,160
BRADY BONDS (2.8%) (a)
PRINCIPAL AMOUNT VALUE
<S> <C> <C>
-------------------------------------------------------------------------------------------------------------------
$ 2,524,390 Brazil (Federal Republic of) bonds FRB 8s, 2014 (POR) $ 1,931,158
380,000 Bulgaria (Government of) Ser. A, FRB Ser. A, 7.063s, 2024 290,700
165,000 Bulgaria (Government of) deb. Ser. PDI, FRB, 7.063s, 2011 125,400
985,000 Bulgaria (Government of) Ser. A, FLIRB, 2 3/4s, 2012 714,125
1,900,000 United Mexican States sec. Ser. W-B, 6 1/4s, 2019 1,693,470
892,850 Venezuela (Republic of) deb. Ser. DL, FRB, 7s, 2007 764,547
-------------
Total Brady Bonds (cost $5,251,385) $ 5,519,400
<CAPTION>
ASSET-BACKED SECURITIES (1.2%) (a)
PRINCIPAL AMOUNT VALUE
<S> <C> <C>
-------------------------------------------------------------------------------------------------------------------
$ 1,300,000 Conseco Finance Securitization Ser. 00-4, Class A6, 8.31s, 2032 $ 1,326,806
49,619 Contimortgage Home Equity Loan Trust Ser. 97-1, Class M2,
7.67s, 2028 24,546
500,428 First Plus Ser. 98-A, Class A, 8 1/2s, 2023 372,662
716,787 Provident Bank Home Equity Loan Trust 6.801s, 2019 716,787
-------------
Total Asset-Backed Securities (cost $2,562,038) $ 2,440,801
<CAPTION>
UNITS (0.7%) (a)
NUMBER OF UNITS VALUE
<S> <C> <C>
-------------------------------------------------------------------------------------------------------------------
350 Australis Media, Ltd. units 15 3/4s, 2003
(In default) (NON) (Australia) $ 1
370 CFW Communications Co. 144A units 13s, 2010 344,099
100 Colo.com units 13 7/8s, 2010 102,000
270 Horizon PCS., Inc. units stepped-coupon zero %
(14s, 10/1/05), 2010 (STP) 137,700
230 Ipcs, Inc. 144A units stepped-coupon zero % (14s, 7/15/05), 2010 (STP) 119,600
240 Jostens, Inc. units 12 3/4s, 2010 247,200
220 Pegasus Shipping 144A units stepped-coupon zero %
(14 1/2s, 12/20/03), 2008 (STP) 9,900
130 Railamerica Transportation Corp. units sr. sub. notes
12 7/8s, 2010 122,200
260 Stone Container Corp. units 12 1/4s, 2002 262,600
225 XCL, Ltd. units sr. sec. notes 13 1/2s, 2004 (In default) 40,500
2 XCL, Ltd. 144A units cum. pfd. zero % (PIK) 1,000
-------------
Total Units (cost $2,299,816) $ 1,386,800
<CAPTION>
PURCHASED OPTIONS OUTSTANDING (0.5%) (a) EXPIRATION DATE/
CONTRACT AMOUNT STRIKE PRICE VALUE
<S> <C> <C> <C>
-------------------------------------------------------------------------------------------------------------------
$ 400,000,000 Japanese Government Bond
10 year (call) Dec 00/133.26 JPY $ 1,015,644
1,971,067 Japanese Government Bond
future contracts (JP Morgan) (call) Oct 00/110.6 USD 1,100
1,989,150 Japanese Government Bond
future contracts (Merril Lynch) (call) Oct 00/110.6 USD 1,193
1,000,000 North American Van Lines (put) Oct 00/93 USD 7,950
-------------
Total Purchased Options Outstanding
(cost $1,086,168) $ 1,025,887
<CAPTION>
CONVERTIBLE BONDS AND NOTES (0.3%) (a)
PRINCIPAL AMOUNT VALUE
<S> <C> <C>
-------------------------------------------------------------------------------------------------------------------
$ 570,000 Cybernet Internet Services Intl., Inc. 144A cv. sr. disc. notes
stepped-coupon zero %, (13s, 8/15/04), 2009 (STP) $ 245,100
370,000 Exide Corp. 144A cv. sr. sub. notes 2.9s, 2005 172,050
150,000 HEALTHSOUTH Corp. cv. sub. deb. 3 1/4s, 2003 124,875
120,000 Parker Drilling Corp. cv. sub. notes 5 1/2s, 2004 101,700
-------------
Total Convertible Bonds and Notes (cost $751,135) $ 643,725
<CAPTION>
CONVERTIBLE PREFERRED STOCKS (0.3%) (a)
NUMBER OF SHARES VALUE
<S> <C> <C>
-------------------------------------------------------------------------------------------------------------------
500 Global Crossing, Ltd. 7.00% cv. cum.pfd. $ 99,250
700 Global Crossing, Ltd. 6.75% cv. cum. pfd. 175,218
10,970 Global Telesystems Group, Inc. 144A 3.625 cv. cum. pfd. 113,814
110 Interact Systems, Inc. 14.00% cv. cum. pfd. 1
1,400 LTV Corp. (The) 144A 4.125 cv. cum. pfd. 32,200
10 Paxson Communications Corp. 144A 9.75% cv. pfd. (PIK) 97,000
2,700 PSINet, Inc. 144A 3.50 cv. cum. pfd. 46,238
40 World Access, Inc. 144A Ser. D, zero %, cv. pfd. 34,800
330 XCL, Ltd 144A Ser. A, 9.50% cv. cum. pfd. 165
-------------
Total Convertible Preferred Stocks (cost $1,168,998) $ 598,686
<CAPTION>
WARRANTS (0.1%) (a) (NON) EXPIRATION
NUMBER OF WARRANTS DATE VALUE
<S> <C> <C> <C>
-------------------------------------------------------------------------------------------------------------------
330 Asia Pulp & Paper Co., Ltd. 144A 3/15/05 $ 1
130 Bestel SA de CV (Mexico) 5/15/05 15,600
120 Birch Telecommunications, Inc. 144A (PIK) 6/15/08 12,000
251 Carrier1 Intl. SA (Luxembourg) 2/19/09 62,750
615 CellNet Data Systems, Inc. 10/1/07 1
11,800 CGA Group, Ltd. 144A 2/11/07 118
220 Dayton Superior Corp. 6/15/09 4,400
410 Decrane Aircraft Holdings 9/30/08 4
35 Diva Systems Corp. 5/15/06 19,950
1,059 Diva Systems Corp. 3/1/08 17,474
250 Epic Resorts 6/15/05 3
230 Firstworld Communication Corp. 4/15/08 4,600
120 Globalstar Telecommunications 2/15/04 120
100 Huntsman Packaging Corp. 144A 6/1/10 1,000
110 Interact Systems, Inc. 8/1/03 1
110 Interact Systems, Inc. 144A 12/15/09 1
30 International Wireless Communications
Holdings 144A 8/15/01 1
3,791 Intra Corp. Class A 2/1/10 1
1,303 Intra Corp. Class B 2/2/10 1
500 Iridium World Com 144A 7/15/05 1
280 KMC Telecommunications Holdings, Inc. 4/15/08 840
290 Knology Holdings 10/22/07 1,740
300 Maxcom Telecomunicaciones SA de CV
144A (Mexico) 4/1/07 3
160 McCaw International, Ltd. 4/15/07 3,200
145 Mediq, Inc. 144A 6/1/09 1
230 Motient Corp. 144A 4/1/08 8,740
70 Onepoint Communications, Inc. 6/1/08 5,600
140 Orbital Imaging Corp. 144A 3/1/05 700
160 Orion Network Systems 1/15/07 840
320 Paxson Communications Corp. 144A 6/30/03 1,760
720 Raintree Resort 144A 12/1/04 7
140 Startec Global Communications Corp. 5/15/08 140
45 Sterling Chemicals Holdings 8/15/08 180
130 Telehub Communications Corp. 7/31/05 60
400 Ubiquitel, Inc. 144A 4/15/10 16,000
395 UIH Australia/Pacific, Inc. 144A 5/15/06 11,850
150 XM Satellite Radio Holdings, Inc. 144A 3/15/10 28,500
-------------
Total Warrants (cost $272,592) $ 218,188
<CAPTION>
COMMON STOCKS (0.1%) (a) (NON)
NUMBER OF SHARES VALUE
<S> <C> <C>
-------------------------------------------------------------------------------------------------------------------
8,230 360Networks, Inc. 144A (Canada) $ 139,910
50 AmeriKing, Inc. 500
3,718 Aurora Foods, Inc. 12,548
49,785 Celcaribe S.A. (Colombia) 6,223
1,024 Fitzgeralds Gaming Corp. 10
73 Mothers Work, Inc. 703
60 Paging Do Brazil Holdings Co., LLC 144A Class B (Brazil) 1
283 RSL Communications, Ltd. Class A 566
2,100 Spanish Broadcasting System, Inc. 24,938
-------------
Total Common Stocks (cost $133,944) $ 185,399
<CAPTION>
SHORT-TERM INVESTMENTS (12.9%) (a)
PRINCIPAL AMOUNT VALUE
<S> <C> <C>
-------------------------------------------------------------------------------------------------------------------
$ 9,477,000 Interest in $9,477,000 repurchase agreement dated
September 29, 2000 with S.B.C. Warburg, Inc. due
October 2, 2000 with respect to various U.S. Treasury
obligations -- maturity value of $9,482,173 for an effective
yield of 6.55% $ 9,477,000
8,000,000 Interest in $789,642,000 joint repurchase agreement dated
September 29, 2000 with Morgan (J.P.) & Co., Inc. due
October 2, 2000 with respect to various U.S. Treasury
obligations -- maturity value of $8,004,433 for an effective
yield of 6.65% 8,000,000
8,000,000 Interest in $156,720,000 joint repurchase agreement dated
September 29, 2000 with Morgan Stanley Dean Witter & Co.,
Inc., Inc. due October 2, 2000 with respect to various U.S.
Treasury obligations -- maturity value of $8,004,420 for an
effective yield of 6.63% 8,000,000
-------------
Total Short-Term Investments (cost $25,477,000) $ 25,477,000
-------------------------------------------------------------------------------------------------------------------
Total Investments (cost $221,963,058) (b) $ 203,665,392
-------------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $198,025,891.
(b) The aggregate identified cost on a tax basis is $223,145,582,
resulting in gross unrealized appreciation and depreciation of
$2,841,377 and $22,321,567, respectively, or net unrealized depreciation
of $19,480,190.
(NON) Non-income-producing security.
(STP) The interest rate and date shown parenthetically represent the new
interest rate to be paid and the date the fund will begin receiving
interest at this rate.
(POR) A portion of the income will be received in additional securities.
(PIK) Income may be received in cash or additional securities at the
discretion of the issuer.
(SEG) A portion of this security was pledged and segregated with the
custodian to cover margin requirements for futures contracts at
September 30, 2000.
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.
TBA after the name of a security represents to be announced
securities (Note 1).
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 September 30, 2000,
which are subject to change based on the terms of the security.
DIVERSIFICATION BY COUNTRY
Distribution of investments by country of issue at September 30, 2000:
(as percentage of Market Value)
Argentina 1.1% Mexico 3.3%
Brazil 2.3 New Zealand 1.0
Canada 3.2 Russia 1.5
Denmark 2.0 United Kingdom 2.2
Germany 2.1 United States 74.9
Greece 1.2 Other 5.2
-------
Total 100.0%
------------------------------------------------------------------------------
Forward Currency Contracts to Buy at September 30, 2000 (Unaudited)
(aggregate face value $29,328,135)
Unrealized
Market Aggregate Face Delivery Appreciation/
Value Value Date (Depreciation)
------------------------------------------------------------------------------
Australian Dollars $ 5,683,808 $ 5,944,162 12/20/00 $(260,354)
Canadian Dollars 2,435,574 2,475,255 12/20/00 (39,681)
Euro Dollars 13,111,959 13,185,358 12/20/00 (73,399)
Japanese Yen 2,040,992 2,047,793 10/16/00 (6,801)
Japanese Yen 3,868,933 3,969,621 12/20/00 (100,688)
Swedish Kronas 1,189,529 1,201,728 12/20/00 (12,199)
Swiss Francs 504,694 504,218 12/20/00 476
------------------------------------------------------------------------------
$(492,646)
------------------------------------------------------------------------------
Forward Currency Contracts to Sell at September 30, 2000 (Unaudited)
(aggregate face value $33,912,986)
Unrealized
Market Aggregate Face Delivery Appreciation/
Value Value Date (Depreciation)
------------------------------------------------------------------------------
Australian Dollars $ 966,406 $ 968,569 12/20/00 $ 2,163
British Pounds 3,461,087 3,427,433 12/20/00 (33,654)
Canadian Dollars 7,446,564 7,577,855 12/20/00 131,291
Danish Krone 3,933,619 3,987,810 12/20/00 54,191
Euro Dollars 10,592,182 10,639,211 12/20/00 47,029
Japanese Yen 4,988,801 5,125,970 12/20/00 137,169
New Zealand
Dollars 2,113,316 2,186,138 12/20/00 72,822
------------------------------------------------------------------------------
$411,011
------------------------------------------------------------------------------
Futures Contracts Outstanding at September 30, 2000 (Unaudited)
Unrealized
Aggregate Face Expiration Appreciation/
Total Value Value Date (Depreciation)
------------------------------------------------------------------------------
Euro-bund (Short) $3,154,840 $3,155,075 Dec-00 $ 235
Euro 3 month
(Short) 2,770,336 2,769,494 Sep-01 (842)
Gilt (Short) 823,342 823,103 Dec-00 (239)
Libor Future 90
day (Long) 1,028,299 1,027,407 Jun-02 892
Libor Future 90
day (Long) 342,876 342,737 Mar-02 139
Libor Future 90
day (Short) 343,279 343,234 Mar-01 (45)
Libor Future 90
day (Short) 1,029,617 1,029,154 Jun-01 (463)
U.S. Treasury Bond
(Long) 1,182,000 1,193,895 Dec-00 (11,895)
U.S. Treasury Bond
(Short) 7,781,500 7,936,486 Dec-00 154,986
U.S. Treasury Note
10yr (Long) 3,904,875 3,901,389 Dec-00 3,486
------------------------------------------------------------------------------
$146,254
------------------------------------------------------------------------------
Swap Contracts outstanding at September 30, 2000 (Unaudited)
Notional Termination Unrealized
Amount Date Depreciation
------------------------------------------------------------------------------
Agreement with
Morgan Stanley
Dean Witter &
Co., Inc. dated
February 28, 2000
to receive (pay)
quarterly the
notional amount
multiplied by
6.815% and pay
the notional
amount multiplied
by three months
LIBOR adjusted by
a specified
spread. $2,000,000 Oct-10 $(58,768)
------------------------------------------------------------------------------
$(58,768)
------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
September 30, 2000 (Unaudited)
<S> <C>
Assets
-------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $221,963,058) (Note 1) $203,665,392
-------------------------------------------------------------------------------------------
Foreign currency (cost $182,023) 174,800
-------------------------------------------------------------------------------------------
Dividends and interest receivable 3,852,492
-------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 401,266
-------------------------------------------------------------------------------------------
Receivable for securities sold 3,161,158
-------------------------------------------------------------------------------------------
Receivable for open forward currency contracts 445,141
-------------------------------------------------------------------------------------------
Receivable for closed forward currency contracts 40,947
-------------------------------------------------------------------------------------------
Unamortized organizational expenses (Note 1) 4,941
-------------------------------------------------------------------------------------------
Total assets 211,746,137
Liabilities
-------------------------------------------------------------------------------------------
Payable to subcustodian (Note 2) 110,351
-------------------------------------------------------------------------------------------
Payable for variation margin 20,052
-------------------------------------------------------------------------------------------
Distributions payable to shareholders 454,064
-------------------------------------------------------------------------------------------
Payable for securities purchased 11,411,863
-------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 331,148
-------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 353,886
-------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 125,977
-------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 13,173
-------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 1,550
-------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 146,382
-------------------------------------------------------------------------------------------
Payable for open swap contracts (Note 1) 58,768
-------------------------------------------------------------------------------------------
Payable for open forward currency contracts 526,776
-------------------------------------------------------------------------------------------
Payable for closed forward currency contracts 132,546
-------------------------------------------------------------------------------------------
Other accrued expenses 33,710
-------------------------------------------------------------------------------------------
Total liabilities 13,720,246
-------------------------------------------------------------------------------------------
Net assets $198,025,891
Represented by
-------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $239,674,110
-------------------------------------------------------------------------------------------
Distributions in excess of net investment income (Note 1) (3,022,573)
-------------------------------------------------------------------------------------------
Accumulated net realized loss on investments and
foreign currency transactions (Note 1) (20,247,499)
-------------------------------------------------------------------------------------------
Net unrealized depreciation of investments and
assets and liabilities in foreign currencies (18,378,147)
-------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $198,025,891
Computation of net asset value and offering price
-------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($73,854,336 divided by 10,843,192 shares) $6.81
-------------------------------------------------------------------------------------------
Offering price per class A share (100/95.25 of $6.81)* $7.15
-------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($111,063,396 divided by 16,287,129 shares)** $6.82
-------------------------------------------------------------------------------------------
Net asset value and offering price per class C share
($6,102,261 divided by 893,137 shares)** $6.83
-------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($7,005,898 divided by 1,028,873 shares) $6.81
-------------------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $6.81)* $7.04
-------------------------------------------------------------------------------------------
* On single retail sales of less than $50,000. On sales of $50,000
or more and on group sales, the offering price is reduced.
** Redemption price per share is equal to net asset value less any
applicable contingent deferred sales charge.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
Six months ended September 30, 2000 (Unaudited)
<S> <C>
Investment income:
-------------------------------------------------------------------------------------------
Interest $ 9,753,151
-------------------------------------------------------------------------------------------
Dividend 330,752
-------------------------------------------------------------------------------------------
Total investment income 10,083,903
Expenses:
-------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 705,206
-------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 276,502
-------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 7,034
-------------------------------------------------------------------------------------------
Administrative services (Note 2) 3,100
-------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 92,971
-------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 567,590
-------------------------------------------------------------------------------------------
Distribution fees -- Class C (Note 2) 29,089
-------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 18,125
-------------------------------------------------------------------------------------------
Amortization of organizational expenses (Note 1) 7,548
-------------------------------------------------------------------------------------------
Other 62,769
-------------------------------------------------------------------------------------------
Total expenses 1,769,934
-------------------------------------------------------------------------------------------
Expense reduction (Note 2) (39,597)
-------------------------------------------------------------------------------------------
Net expenses 1,730,337
-------------------------------------------------------------------------------------------
Net investment income 8,353,566
-------------------------------------------------------------------------------------------
Net realized loss on investments (Notes 1 and 3) (2,230,555)
-------------------------------------------------------------------------------------------
Net realized loss on foreign currency transactions (Note 1) (1,028,290)
-------------------------------------------------------------------------------------------
Net realized loss on futures contracts (Note 1) (89,436)
-------------------------------------------------------------------------------------------
Net unrealized appreciation of assets and liabilities in
foreign currencies during the period 678,361
-------------------------------------------------------------------------------------------
Net unrealized depreciation of investments, swap contracts
and futures contracts during the period (5,886,300)
-------------------------------------------------------------------------------------------
Net loss on investments (8,556,220)
-------------------------------------------------------------------------------------------
Net decrease in net assets resulting from operations $ (202,654)
-------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
Six months ended Year ended
September 30 March 31
2000* 2000
--------------------------------------------------------------------------------------------------
<S> <C> <C>
Decrease in net assets
--------------------------------------------------------------------------------------------------
Operations:
--------------------------------------------------------------------------------------------------
Net investment income $ 8,353,566 $ 17,337,543
--------------------------------------------------------------------------------------------------
Net realized loss on investments and
foreign currency transactions (3,348,281) (11,123,551)
--------------------------------------------------------------------------------------------------
Net unrealized depreciation of investments and
asset and liabilities in foreign currencies (5,207,939) (2,810,597)
--------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations (202,654) 3,403,395
--------------------------------------------------------------------------------------------------
Distributions to shareholders:
--------------------------------------------------------------------------------------------------
From net investment income
Class A (3,407,131) (6,691,231)
--------------------------------------------------------------------------------------------------
Class B (4,763,624) (9,569,013)
--------------------------------------------------------------------------------------------------
Class C (242,953) (371,754)
--------------------------------------------------------------------------------------------------
Class M (323,140) (705,545)
--------------------------------------------------------------------------------------------------
In excess of net investment income
Class A -- (357,587)
--------------------------------------------------------------------------------------------------
Class B -- (511,379)
--------------------------------------------------------------------------------------------------
Class C -- (19,866)
--------------------------------------------------------------------------------------------------
Class M -- (37,705)
--------------------------------------------------------------------------------------------------
From return of capital
Class A -- (248,848)
--------------------------------------------------------------------------------------------------
Class B -- (355,873)
--------------------------------------------------------------------------------------------------
Class C -- (13,826)
--------------------------------------------------------------------------------------------------
Class M -- (26,239)
--------------------------------------------------------------------------------------------------
Increase from capital share transactions (Note 4) 412,714 8,181,420
--------------------------------------------------------------------------------------------------
Total decrease in net assets (8,526,788) (7,324,051)
Net assets
--------------------------------------------------------------------------------------------------
Beginning of period 206,552,679 213,876,730
--------------------------------------------------------------------------------------------------
End of period (including distributions in excess of
net investment income of $3,022,573 and
$2,639,291, respectively) $198,025,891 $206,552,679
--------------------------------------------------------------------------------------------------
* Unaudited
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
CLASS A
------------------------------------------------------------------------------------------------------------------
Six months
ended For the period
Per-share Sept. 30 Feb. 26, 1996+
operating performance (Unaudited) Year ended March 31 to March 31
------------------------------------------------------------------------------------------------------------------
2000 2000 1999 1998 1997 1996
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $7.12 $7.64 $8.70 $8.34 $8.38 $8.50
------------------------------------------------------------------------------------------------------------------
Investment operations
------------------------------------------------------------------------------------------------------------------
Net investment income .31 .61 .60(c) .65(d) .63(d) .04(c)(d)
------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.30) (.47) (.97) .40 (.02) (.13)
------------------------------------------------------------------------------------------------------------------
Total from
investment operations .01 .14 (.37) 1.05 .61 (.09)
------------------------------------------------------------------------------------------------------------------
Less distributions:
------------------------------------------------------------------------------------------------------------------
From net
investment income (.32) (.61) (.59) (.59) (.63) (.03)
------------------------------------------------------------------------------------------------------------------
In excess of
net investment income -- (.03) -- (.01) -- --
------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- -- (.02) (.03) (.02) --
------------------------------------------------------------------------------------------------------------------
In excess of
net realized gain on investments -- -- -- (.06) -- --
------------------------------------------------------------------------------------------------------------------
From return of capital -- (.02) (.08) -- -- --
------------------------------------------------------------------------------------------------------------------
Total distributions (.32) (.66) (.69) (.69) (.65) (.03)
------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $6.81 $7.12 $7.64 $8.70 $8.34 $8.38
------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) .15* 2.07 (4.33) 13.05 7.36 (1.41)*
------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $73,854 $76,608 $78,484 $57,016 $39,178 $3,799
------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .65* 1.22 1.31 1.26(d) 1.25(d) .13*(d)
------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 4.38* 8.37 7.43 7.82(d) 7.74(d) .50*(d)
------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 78.93* 187.27 204.50 211.24 169.27 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 outstanding during the period.
(d) Reflects an expense limitation in effect during the period. As a
result of such limitation, expenses of the fund reflect a reduction of
approximately $0.01, $0.01 and $0.02 per share class for the year ended
March 31, 1998, the year ended March 31, 1997 and the period February
26, 1996(commencement of operations) to March 31, 1996, respectively.
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
CLASS B
------------------------------------------------------------------------------------------------------------------
Six months
ended For the period
Per-share Sept. 30 Feb. 26, 1996+
operating performance (Unaudited) Year ended March 31 to March 31
------------------------------------------------------------------------------------------------------------------
2000 2000 1999 1998 1997 1996
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $7.13 $7.65 $8.70 $8.34 $8.38 $8.50
------------------------------------------------------------------------------------------------------------------
Investment operations
------------------------------------------------------------------------------------------------------------------
Net investment income .28 .56 .53(c) .59(d) .57(d) .03(c)(d)
------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.30) (.47) (.95) .40 (.03) (.12)
------------------------------------------------------------------------------------------------------------------
Total from
investment operations (.02) .09 (.42) .99 .54 (.09)
------------------------------------------------------------------------------------------------------------------
Less distributions:
------------------------------------------------------------------------------------------------------------------
From net
investment income (.29) (.56) (.54) (.53) (.56) (.03)
------------------------------------------------------------------------------------------------------------------
In excess of
net investment income -- (.03) -- (.01) -- --
------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- -- (.02) (.03) (.02) --
------------------------------------------------------------------------------------------------------------------
In excess of
net realized gain on investments -- -- -- (.06) -- --
------------------------------------------------------------------------------------------------------------------
From return of capital -- (.02) (.07) -- -- --
------------------------------------------------------------------------------------------------------------------
Total distributions (.29) (.61) (.63) (.63) (.58) (.03)
------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $6.82 $7.13 $7.65 $8.70 $8.34 $8.38
------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) (.23)* 1.30 (4.93) 12.20 6.56 (1.41)*
------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $111,063 $117,090 $124,434 $85,379 $57,052 $5,048
------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.03* 1.97 2.06 2.01(d) 2.00(d) .20*(d)
------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 4.01* 7.62 6.67 7.07(d) 6.99(d) .44*(d)
------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 78.93* 187.27 204.50 211.24 169.27 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 outstanding during the period.
(d) Reflects an expense limitation in effect during the period. 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>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
CLASS C
---------------------------------------------------------------------------
Six months
ended For the period
Per-share Sept. 30 Year ended Feb. 1, 1999+
operating performance (Unaudited) March 31 to March 31
---------------------------------------------------------------------------
2000 2000 1999
---------------------------------------------------------------------------
Net asset value,
beginning of period $7.14 $7.66 $7.77
---------------------------------------------------------------------------
Investment operations
---------------------------------------------------------------------------
Net investment income .28 .56 .04(c)
---------------------------------------------------------------------------
Net realized and unrealized
loss on investments (.30) (.47) (.05)
---------------------------------------------------------------------------
Total from
investment operations (.02) .09 (.01)
---------------------------------------------------------------------------
Less distributions:
---------------------------------------------------------------------------
From net
investment income (.29) (.56) (.07)
---------------------------------------------------------------------------
In excess of
net investment income -- (.03) --
---------------------------------------------------------------------------
From net realized gain
on investments -- -- (.02)
---------------------------------------------------------------------------
In excess of
net realized gain on investments -- -- --
---------------------------------------------------------------------------
From return of capital -- (.02) (.01)
---------------------------------------------------------------------------
Total distributions (.29) (.61) (.10)
---------------------------------------------------------------------------
Net asset value,
end of period $6.83 $7.14 $7.66
---------------------------------------------------------------------------
Ratios and supplemental data
---------------------------------------------------------------------------
Total return at
net asset value (%)(a) (.23)* 1.29 (.12)*
---------------------------------------------------------------------------
Net assets, end of period
(in thousands) $6,102 $5,448 $1,957
---------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.03* 1.97 .33*
---------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 4.00* 7.68 .73*
---------------------------------------------------------------------------
Portfolio turnover (%) 78.93* 187.27 204.50
---------------------------------------------------------------------------
+ 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 outstanding during the period.
(d) Reflects an expense limitation in effect during the period. 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>
<CAPTION>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
CLASS M
------------------------------------------------------------------------------------------------------------------
Six months
ended For the period
Per-share Sept. 30 Feb. 26, 1996+
operating performance (Unaudited) Year ended March 31 to March 31
------------------------------------------------------------------------------------------------------------------
2000 2000 1999 1998 1997 1996
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $7.12 $7.64 $8.70 $8.34 $8.38 $8.50
------------------------------------------------------------------------------------------------------------------
Investment operations
------------------------------------------------------------------------------------------------------------------
Net investment income .30 .59 .58(c) .64(d) .61(d) .04(c)(d)
------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.30) (.47) (.97) .39 (.03) (.13)
------------------------------------------------------------------------------------------------------------------
Total from
investment operations -- .12 (.39) 1.03 .58 (.09)
------------------------------------------------------------------------------------------------------------------
Less distributions:
------------------------------------------------------------------------------------------------------------------
From net
investment income (.31) (.59) (.57) (.57) (.60) (.03)
------------------------------------------------------------------------------------------------------------------
In excess of
net investment income -- (.03) -- (.01) -- --
------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- -- (.02) (.03) (.02) --
------------------------------------------------------------------------------------------------------------------
In excess of
net realized gain on investments -- -- -- (.06) -- --
------------------------------------------------------------------------------------------------------------------
Return of capital -- (.02) (.08) -- -- --
------------------------------------------------------------------------------------------------------------------
Total distributions (.31) (.64) (.67) (.67) (.62) (.03)
------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $6.81 $7.12 $7.64 $8.70 $8.34 $8.38
------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) .03* 1.82 (4.57) 12.76 7.09 (1.41)*
------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $7,006 $7,407 $9,001 $8,771 $5,802 $482
------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .78* 1.47 1.56 1.51(d) 1.50(d) .14*(d)
------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 4.26* 8.11 7.21 7.57(d) 7.48(d) .50*(d)
------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 78.93* 187.27 204.50 211.24 169.27 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 outstanding during the period.
(d) Reflects an expense limitation in effect during the period. As a
result of such limitation, expenses of the fund reflect a reduction of
approximately $0.01, $0.01 and $0.02 per share class for the year ended
March 31, 1998, the year ended March 31, 1997 and the period February
26, 1996(commencement of operations) to March 31, 1996, respectively.
</TABLE>
NOTES TO FINANCIAL STATEMENTS
September 30, 2000 (Unaudited)
Note 1
Significant accounting policies
Putnam Strategic Income Fund (the "fund") is registered under the
Investment Company Act of 1940, as amended, as a diversified, open-end
management company. The fund seeks high current income consistent with
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. Class A
shares are sold with a maximum front-end sales charge of 4.75%. Class B
shares, which convert to class A shares after approximately eight years,
do not pay a front-end sales charge but pay a higher ongoing
distribution fee than class A shares, and are subject to a contingent
deferred sales charge, if those shares are redeemed within six years of
purchase. Class C shares are subject to the same fees and expenses as
class B shares, except that class C shares have a one-year 1.00%
contingent deferred sales charge and do not convert to class A shares.
Class M shares are sold with a maximum front-end sales charge of 3.25%
and pay an ongoing distribution fee that is higher than class A shares
but lower than class B and class C shares.
Expenses of the fund are borne pro-rata by the holders of each class of
shares, except that each class bears expenses unique to that class
(including the distribution fees applicable to such class). Each class
votes as a class only with respect to its own distribution plan or other
matters on which a class vote is required by law or determined by the
Trustees. Shares of each class would receive their pro-rata share of the
net assets of the fund, if that fund were liquidated. In addition, the
Trustees declare separate dividends on each class of shares.
The following is a summary of significant accounting policies
consistently followed by the fund in the preparation of its financial
statements. The preparation of financial statements is in conformity
with generally accepted accounting principles and requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities of the financial statements and the reported
amounts of increases and decreases in net assets from operations during
the reporting period. Actual results could differ from those estimates.
A) Security valuation Investments for which market quotations are
readily available are stated at market value, which is determined using
the last reported sales price on its principal exchange, 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. 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 certain debt obligations; such
investments are stated at fair value on the basis of valuations furnished
by a pricing service or dealers, approved by the Trustees, which determine
valuations for normal institutional-size trading units of such securities
using methods based on market transactions for comparable securities and
variable 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
Putnam Investment Management, Inc. ("Putnam Management"), the fund's
manager, a wholly-owned subsidiary of Putnam Investments, Inc. These
balances may be invested in one or more repurchase agreements and/or
short-term money market instruments.
C) Repurchase agreements The fund, or any joint trading account, through
its custodian, receives delivery of the underlying securities, the
market value of which at the time of purchase is required to be in an
amount at least equal to the resale price, including accrued interest.
Collateral for certain tri-party repurchase agreements is held at the
counterparty's custodian in a segregated account for the benefit of the
fund and the counterparty. Putnam Management is responsible for
determining that the value of these underlying securities is at all
times at least equal to the resale price, including accrued interest.
D) Security transactions and related investment income Security
transactions are accounted for on the trade date (date the order to buy
or sell is executed). Gains or losses on securities sold are determined
on the identified cost basis.
Interest income is recorded on the accrual basis. Dividend income is
recorded on the ex-dividend date except that certain dividends from
foreign securities are recorded as soon as the fund is informed of the
ex-dividend date. Non-cash dividends, if any, are recorded at the fair
market value of the securities received. Discounts on zero coupon bonds,
original issue discount bonds, stepped-coupon bonds and payment in kind
bonds are accreted according to the yield-to-maturity basis. Any premium
resulting from the purchase of stepped-coupon bonds is amortized on a
yield-to-maturity basis.
E) Foreign currency translation The accounting records of the fund are
maintained in U.S. dollars. The market value of foreign securities,
currency holdings, and other assets and liabilities are recorded in the
books and records of the fund after translation to U.S. dollars based on
the exchange rates on that day. The cost of each security is determined
using historical exchange rates. Income and withholding taxes are
translated at prevailing exchange rates when accrued or incurred. The
fund does not isolate that portion of realized or unrealized gains or
losses resulting from changes in the foreign exchange rate on investments
from fluctuations arising from changes in the market prices of the
securities. Such gains and losses are included with the net realized and
unrealized gain or loss on investments. Net realized gains and losses on
foreign currency transactions represent net realized exchange gains or
losses on closed forward currency contracts, disposition of foreign
currencies and the difference between the amount of investment income and
foreign withholding taxes recorded on the fund's books and the U.S. dollar
equivalent amounts actually received or paid. Net unrealized appreciation
and depreciation of assets and liabilities in foreign currencies arise
from changes in the value of open forward currency contracts and assets
and liabilities other than investments at the period end, resulting from
changes in the exchange rate. Investments in foreign securities involve
certain risks, including those related to economic instability, unfavorable
political developments, and currency fluctuations, not present with domestic
investments.
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) Equity swap contracts The fund may engage in swap agreements,
which are agreements to exchange the return generated by one instrument
for the return generated by another instrument. To manage its exposure
to equity markets the fund may enter into equity swap agreements, which
involve a commitment by one party to pay interest in exchange for a
market-linked return based on a notional amount. To the extent that the
total return of the security or index underlying the transaction exceeds
or falls short of the offsetting interest rate obligation, the fund will
receive a payment from or make a payment to the counterparty, respectively.
Equity swaps are marked to market daily based upon quotations from market
makers and the change, if any, is recorded as unrealized gain or loss.
Payments received or made at the end of the measurement period are recorded
as realized gains or losses. The fund could be exposed to credit or market
risk due to unfavorable changes in the fluctuation of interest rates or in
the price of the underlying security or index, the possibility that there
is no liquid market for these agreements or that the counterparty may
default on its obligation to perform.
I) Interest rate swap contracts The fund may engage in interest rate
swap agreements, which are agreements between two parties to exchange
cash flows based on a notional amount. The fund may enter into interest
rate swap agreements, to change the fund's exposure to interest rates.
Interest rate swaps are marked to market daily based upon quotations
from market makers and the change, if any, is recorded as unrealized
gain or loss. Net payments are included as part of interest income.
Payments received or made at the end of the measurement period are
recorded as realized gains or losses. The fund could be exposed to
credit or market risk due to unfavorable changes in the fluctuation of
interest rates or that the counterparty may default on its obligation to
perform.
J) 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 0.01% 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.
K) TBA sale commitments The fund may enter into TBA sale commitments to
hedge its portfolio positions or to sell mortgage-backed securities it
owns under delayed delivery arrangements. Proceeds of TBA sale
commitments are not received until the contractual settlement date.
During the time a TBA sale commitment is outstanding, equivalent
deliverable securities, or an offsetting TBA purchase commitment
deliverable on or before the sale commitment date, are held as "cover"
for the transaction.
Unsettled TBA sale commitments are valued at the current market value of
the underlying securities, generally according to the procedures
described under "Security valuation" above. The contract is
marked-to-market daily and the change in market value is recorded by the
fund as an unrealized gain or loss. If the TBA sale commitment is closed
through the acquisition of an offsetting purchase commitment, the fund
realizes a gain or loss. If the fund delivers securities under the
commitment, the fund realizes a gain or a loss from the sale of the
securities based upon the unit price established at the date the
commitment was entered into.
L) Line of credit The fund has entered into a committed line of credit
with certain banks. This line of credit agreement includes restrictions
that the fund maintain an asset coverage ratio of at least 300% and
borrowings must not exceed prospectus limitations. For the six months
ended September 30, 2000, the fund had no borrowings against the line of
credit.
M) 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, 2000, the fund had a capital loss carryover of
approximately $12,209,000 available to offset future capital gains, if
any. The amount of the carryover and the expiration dates are:
Loss Carryover Expiration
-------------- ------------------
$3,976,000 March 31, 2007
8,233,000 March 31, 2008
N) 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.
O) 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
fist $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.
Under the subcustodian contract between the subcustodian bank
and PFTC, the subcustodian bank has a lien on the securities of the
fund to the extent permitted by the fund's investment restrictions
to cover any advances made by the subcustodian bank for the settlement
of securities purchased by the fund. At September 30, 2000, the payable
to the subcustodian bank represents the amount due for cash advance for
the settlement of a security purchased.
For the six months ended September 30, 2000, fund expenses were reduced
by $39,597 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 $649
has been allocated to the fund, and an additional fee for each Trustees
meeting attended. Trustees receive additional fees for attendance at
certain committee meetings.
The fund has adopted a Trustee Fee Deferral Plan (the "Deferral Plan")
which allows the Trustees to defer the receipt of all or a portion of
Trustees Fees payable on or after July 1, 1995. The deferred fees remain
invested in certain Putnam funds until distribution in accordance with
the Deferral Plan.
The fund has adopted an unfunded noncontributory defined benefit pension
plan (the "Pension Plan") covering all Trustees of the fund who have
served as a 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 Retail Management, Inc., 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 Retail Management, Inc. at an annual rate up to
0.35%, 1.00%, 1.00% and 1.00% of the average net assets attributable to
class A, class B, class C and class M shares, respectively. The Trustees
have approved payment by the fund at an annual rate of 0.25%, 1.00%,
1.00% and 0.50% of the average net assets attributable to class A, class
B, class C and class M shares, respectively.
For the six months ended September 30, 2000, Putnam Retail Management,
Inc., acting as underwriter received net commissions of $20,761 and $402
from the sale of class A and class M shares, respectively, and received
$138,527 and $1,741 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 six months ended September 30, 2000, Putnam Retail
Management, Inc., acting as underwriter received $21 on class A
redemptions.
Note 3
Purchases and sales of securities
During the six months ended September 30, 2000, cost of purchases and
proceeds from sales of investment securities other than U.S. government
obligations and short-term investments aggregated $94,574,000 and
$107,910,465, respectively. Purchases and sales of U.S. government
obligations aggregated $49,598,003 and $46,077,193, respectively.
Note 4
Capital shares
At September 30, 2000, there was an unlimited number of shares of
beneficial interest authorized. Transactions in capital shares were as
follows:
Six months ended September 30, 2000
---------------------------------------------------------------------------
Class A Shares Amount
---------------------------------------------------------------------------
Shares sold 1,359,008 $ 9,431,808
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 341,762 2,365,851
---------------------------------------------------------------------------
1,700,770 11,797,659
Shares
repurchased (1,616,447) (11,241,922)
---------------------------------------------------------------------------
Net increase 84,323 $ 555,737
---------------------------------------------------------------------------
Year ended March 31, 2000
---------------------------------------------------------------------------
Class A Shares Amount
---------------------------------------------------------------------------
Shares sold 4,284,630 $31,634,730
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 661,599 4,832,913
---------------------------------------------------------------------------
4,946,229 36,467,643
Shares
repurchased (4,453,722) (32,602,658)
---------------------------------------------------------------------------
Net increase 492,507 $ 3,864,985
---------------------------------------------------------------------------
Six months ended September 30, 2000
---------------------------------------------------------------------------
Class B Shares Amount
---------------------------------------------------------------------------
Shares sold 1,664,531 $11,565,491
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 400,507 2,776,742
---------------------------------------------------------------------------
2,065,038 14,342,233
Shares
repurchased (2,202,085) (15,313,072)
---------------------------------------------------------------------------
Net decrease (137,047) $ (970,839)
---------------------------------------------------------------------------
Year ended March 31, 2000
---------------------------------------------------------------------------
Class B Shares Amount
---------------------------------------------------------------------------
Shares sold 5,792,496 $42,743,561
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 864,448 6,325,671
---------------------------------------------------------------------------
6,656,944 49,069,232
Shares
repurchased (6,501,068) (47,600,532)
---------------------------------------------------------------------------
Net increase 155,876 $ 1,468,700
---------------------------------------------------------------------------
Six months ended September 30, 2000
---------------------------------------------------------------------------
Class C Shares Amount
---------------------------------------------------------------------------
Shares sold 177,437 $1,237,922
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 25,866 179,559
---------------------------------------------------------------------------
203,303 1,417,481
Shares
repurchased (73,097) (508,043)
---------------------------------------------------------------------------
Net increase 130,206 $ 909,438
---------------------------------------------------------------------------
Year ended March 31, 2000
---------------------------------------------------------------------------
Class C Shares Amount
---------------------------------------------------------------------------
Shares sold 758,131 $5,649,471
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 43,660 318,267
---------------------------------------------------------------------------
801,791 5,967,738
Shares
repurchased (294,530) (2,148,560)
---------------------------------------------------------------------------
Net increase 507,261 $3,819,178
---------------------------------------------------------------------------
Six months ended September 30, 2000
---------------------------------------------------------------------------
Class M Shares Amount
---------------------------------------------------------------------------
Shares sold 94,762 $657,511
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 30,796 213,465
---------------------------------------------------------------------------
125,558 870,976
Shares
repurchased (136,934) (952,598)
---------------------------------------------------------------------------
Net decrease (11,376) $(81,622)
---------------------------------------------------------------------------
Year ended March 31, 2000
---------------------------------------------------------------------------
Class M Shares Amount
---------------------------------------------------------------------------
Shares sold 374,400 $2,785,979
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 75,447 551,361
---------------------------------------------------------------------------
449,847 3,337,340
Shares
repurchased (587,653) (4,308,783)
---------------------------------------------------------------------------
Net decrease (137,806) $ (971,443)
---------------------------------------------------------------------------
Note 5
Change in independent accountants
(unaudited)
Based on the recommendation of the Audit Committee of the fund, the
Board of Trustees has determined not to retain PricewaterhouseCoopers
LLP as this fund's independent accountants and voted to appoint KPMG LLP
for the fund's fiscal year ended March 31, 2001. During the two previous
fiscal years, PricewaterhouseCoopers LLP audit reports contained no
adverse opinion or disclaimer of opinion; nor were its reports qualified
or modified as to uncertainty, audit scope, or accounting principle.
Further, in connection with its audits for the two previous fiscal years
and through July 24, 2000, there were no disagreements between the fund
and PricewaterhouseCoopers LLP on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or
procedure, which if not resolved to the satisfaction of
PricewaterhouseCoopers LLP would have caused it to make reference to the
disagreements in its report on the financial statements for such years.
THE PUTNAM FAMILY OF FUNDS
The following is a complete list of Putnam's open-end mutual funds.
Please call your financial advisor or Putnam at 1-800-225-1581 to obtain
a prospectus for any Putnam fund. It contains more complete information,
including charges and expenses. Please read it carefully before you
invest or send money.
GROWTH FUNDS
Asia Pacific Growth Fund
Capital Appreciation Fund
Capital Opportunities Fund
Europe Growth Fund
Global Equity Fund
Global Growth Fund
Global Natural Resources Fund
Growth Opportunities Fund
Health Sciences Trust
International Growth Fund
International New Opportunities Fund
Investors Fund
New Century Growth Fund
New Opportunities Fund
OTC & Emerging Growth Fund
Research Fund
Tax Smart Equity Fund
Technology Fund
Vista Fund
Voyager Fund
Voyager Fund II
GROWTH AND INCOME FUNDS
Balanced Fund
Balanced Retirement Fund
Classic Equity Fund *
Convertible Income-Growth Trust
Equity Income Fund
The George Putnam Fund of Boston
Global Growth and Income Fund
The Putnam Fund for Growth and Income
International Growth and Income Fund
New Value Fund
Small Cap Value Fund
Utilities Growth and Income Fund
INCOME FUNDS
American Government Income Fund
Diversified Income Trust
Global Governmental Income Trust
High Yield Advantage Fund [DBL. DAGGER]
High Yield Trust [DBL. DAGGER]
High Yield Trust II
Income Fund
Intermediate U.S. Government Income Fund
Money Market Fund **
Preferred Income Fund
Strategic Income Fund
U.S. Government Income Trust
TAX-FREE INCOME FUNDS
Municipal Income Fund
Tax Exempt Income Fund
Tax Exempt Money Market Fund **
Tax-Free High Yield Fund
Tax-Free Insured Fund
State tax-free income funds [SECTION MARK]
Arizona, California, Florida, Massachusetts, Michigan, Minnesota, New
Jersey, New York, Ohio and Pennsylvania
State tax-free money market funds [SECTION MARK] **
California, New York
ASSET ALLOCATION FUNDS
Putnam Asset Allocation Funds--three investment portfolios that spread
your money across a variety of stocks, bonds, and money market
investments.
The three portfolios:
Asset Allocation: Balanced Portfolio
Asset Allocation: Conservative Portfolio
Asset Allocation: Growth Portfolio
* Formerly Putnam Growth and Income Fund II
[DBL. DAGGER] Closed to new investors. Some exceptions may apply.
Contact Putnam for details.
[SECTION MARK] Not available in all states.
** An investment in a money market fund is not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other government agency.
Although the funds seek to preserve your investment at $1.00 per share, it
is possible to lose money by investing in the fund.
Check your account balances and current performance at
www.putnaminvestments.com.
FUND INFORMATION
WEB SITE
www.putnaminvestments.com
INVESTMENT MANAGER
Putnam Investment Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Retail Management, Inc.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
TRUSTEES
John A. Hill, Chairman
Jameson Adkins Baxter
Hans H. Estin
Ronald J. Jackson
Paul L. Joskow
Elizabeth T. Kennan
Lawrence J. Lasser
John H. Mullin III
Robert E. Patterson
George Putnam, III
A.J.C. Smith
W. Thomas Stephens
W. Nicholas Thorndike
OFFICERS
George Putnam, III
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
John D. Hughes
Senior Vice President and Treasurer
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Ian C. Ferguson
Vice President
Brett C. Browchuk
Vice President
Stephen Oristaglio
Vice President
Edward H. D'Alelio
Vice President
James M. Prusko
Vice President and Fund Manager
Richard A. Monaghan
Vice President
Richard G. Leibovitch
Vice President
John R. Verani
Vice President
This report is for the information of shareholders of Putnam Strategic
Income Fund. It may also be used as sales literature when preceded or
accompanied by the current prospectus, which gives details of sales
charges, investment objectives, and operating policies of the fund, and
the most recent copy of Putnam's Quarterly Performance Summary and
Putnam's Quarterly Ranking Summary. For more information or to request a
prospectus, call toll free: 1-800-225-1581.
You can also learn more at Putnam Investments' Web site:
www.putnaminvestments.com.
Not FDIC Insured, May Lose Value, No Bank Guarantee
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
---------------------
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U.S. POSTAGE PAID
PUTNAM
INVESTMENTS
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For account balances, economic forecasts, and the latest on Putnam funds, visit
www.putnaminvestments.com
SA029-65465 896/2BQ/2BR 11/00
