Putnam
Strategic
Income
Fund
ANNUAL REPORT ON PERFORMANCE AND OUTLOOK
3-31-00
[SCALE LOGO OMITTED]
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[COPYRIGHT] Karsh, Ottawa
Dear Shareholder:
The markets continued to provide their share of challenges and
opportunities as your fund closed its books on fiscal year 2000. In the
following report, the fund's managers discuss performance for the period
and prospects for the months ahead.
This is the last letter to you and the other shareholders of Putnam
Strategic Income Fund that I will be signing. After more than 30 years
as Chairman of the Trustees and President of the Putnam Funds, the time
has come for me to step aside. In June, John Hill will become Chairman.
John is currently an independent Trustee and has served on the board for
the past 14 years. In addition, my son, George Putnam, III, will take on
the role of President. I am confident that the leadership of the funds
will be in exceptionally strong hands.
I will become Chairman Emeritus, remain a Putnam shareholder, and stay
in close touch with the funds. It has been my privilege to serve you.
Respectfully yours,
/S/ GEORGE PUTNAM
George Putnam
Chairman of the Trustees
May 17, 2000
Report from the Fund Managers
James Prusko and
the Core Fixed
Income Team
With few exceptions during the year ended March 31, 2000, the world's
bond markets provided disappointing results. In the United States,
inflation fears were omnipresent, prompting the Federal Reserve Board to
raise interest rates on five separate occasions. Y2K-related fears
hindered the performance of corporate issues in the months leading up to
the new century, and a rising U.S. dollar hurt U.S. investor's
fixed-income holdings overseas.
There were a few bright spots, however, including bonds from
emerging-markets countries and in recent months long-term U.S.
Treasuries. Putnam Strategic Income Fund benefited during the year from
its ability to invest in many different types of bonds, shifting assets
from poor-performing sectors to those whose fortunes were elevated in an
often unpredictable market investment environment. The fund's return for
class A shares at net asset value, although slight, exceeds the return
of all three of its unmanaged benchmarks. For more performance
information, please see the tables that begin on page 6.
Total return for 12 months ended 3/31/00
Class A Class B Class C Class M
NAV POP NAV CDSC NAV CDSC NAV POP
- ------------------------------------------------------------------------
2.07% -2.77% 1.30% -3.36% 1.29% 0.35% 1.82% -1.54%
- ------------------------------------------------------------------------
Past performance is not indicative of future results. Performance
information for longer periods and explanation of performance
calculation methods begin on page 6.
* U.S. TREASURIES REBOUND IN 2000; MORTGAGES ADD VALUE
For most of the period covered by this report, U.S. Treasury bonds
performed relatively poorly, hurt by the Fed's restrictive monetary
policy and a growing fear of inflation. The U.S. economy continued its
expansion into a record tenth consecutive year, growing at a torrid 7.3%
annualized rate in the fourth quarter of 1999. For several years, a
concurrent surge in worker productivity kept inflation at bay. But the
economy now appears to be showing the strain of its rapid advancement.
In March, the consumer price index -- outside of energy and food -- rose
at the fastest pace in more than five years as costs increased for
clothing, medical care, and travel.
[GRAPHIC OMITTED: bar chart SECTOR WEIGHTINGS]
SECTOR WEIGHTINGS*
High-yield bonds 47.2%
Foreign bonds 23.1%
U.S. government and agency obligations and CMO's 18.1%
Footnote reads:
*Based on net assets as of 3/31/00. Holdings will vary over time.
Two factors intervened in recent months to offset the negative rate
environment and boost the performance of Treasury bonds. First,
increased volatility in the stock market prompted investors to seek the
safety of AAA-rated Treasuries. Second, the Treasury Department
announced plans to pay off roughly $17 billion in public debt and
suggested bigger debt repayments would follow. The anticipated reduction
in the supply of Treasury bonds promises to tip the supply/demand
balance in favor of investors who own existing issues, and the sector
rallied sharply as a result.
Compared with Treasury bonds, the fund's mortgage-backed securities
provided more stable performance during the year. Mortgage-backed
securities are somewhat insulated from a rising interest-rate
environment because they offer premium yields to compensate for the risk
of prepayment. When rates are declining, homeowners often refinance
their mortgages, returning principal to mortgage investors who must
reinvest at lower prevailing rates. However, when rates rise, as they
have all year, the incidence of prepayment drops dramatically, and
mortgage-related bonds tend to be relatively stable as long as investors
are earning a premium yield. For the year ended March 31, 2000, the
Lehman Brothers GNMA Index returned 2.24%.
* EMERGING MARKETS RALLY; DEVELOPED MARKETS HURT BY RISING U.S. DOLLAR
As the period progressed, we gradually increased the fund's allocation
to emerging-markets debt to approximately 16% of net assets from roughly
5% at the start of the year. In our estimation, the valuations and
yields in this sector are very attractive. For the period,
emerging-markets bonds have been the best- performing fixed-income asset
class in the world due in large part to the recoveries underway in many
world economies and a willingness on the part of investors to
participate in these markets after the so-called Asian Flu of 1998. At
the end of March, the fund had emerging-markets representation in
Mexico, Brazil, Argentina, and Russia.
"Given the likelihood of further near-term volatility, a diversified
approach to the fixed-income market should help even out the swings in
any one sector."
- -- James Prusko, manager, Putnam Strategic Income Fund
Outside the emerging markets, we added to the fund's high-yielding
corporate bonds, particularly in Europe. At the moment, Europe is going
through a corporate renaissance similar to the restructuring that took
place in the United States in the early 1990s. Industries are becoming
less regulated and corporations are increasingly focused on delivering
shareholder value. Corporations that previously went to banks for
financing are now gaining flexibility and saving money by going directly
to the debt markets. Telecommunications is a particularly active sector.
Recently deregulated, the industry is dominated by aggressive companies
striving to carve out market share in this growing business, often
through mergers and acquisitions.
Unfortunately, a rising U.S. dollar hindered the performance of our
foreign holdings outside the emerging markets. In particular, an
overweight position in euros hurt the fund as that fledgling currency
continued to decline relative to the dollar. We remain committed to our
euro position, however, because we believe the currency is significantly
undervalued. With European economic recoveries gaining momentum, it
stands to reason that the region's currency should also eventually
strengthen.
* U.S. HIGH-YIELD SECTOR STRUGGLES
The U.S. high-yield market lagged other sectors of the world bond market
for much of the year. Rising interest rates, equity market weakness,
rising default rates in some areas, and Y2K-related fears prompted many
investors to seek less-risky fixed-income investments. The Fed's
tightening was especially troublesome for many of the companies that had
recently issued debt, including newer businesses that are not as
financially prepared to weather tough times.
TOP THREE HOLDINGS PER SECTOR
HIGH-YIELD BONDS
Nextel Communications, Inc.
sr. notes 9 3/8s, 2009
Midland Funding ll Corp.
deb. Ser. A, 11 3/4s, 2005
Doman Industries Ltd.
sr. notes 8 3/4s, 2004
FOREIGN BONDS
Brazil (Federal Republic of)
notes 14 1/2s, 2009
United Mexican States
bonds Ser. XW, 10 3/8s, 2009
Denmark (Kingdom of)
bonds 6s, 2009
U.S. GOVERNMENT AND AGENCY OBLIGATIONS
U.S. Treasury Bonds
6 1/8s, August 15, 2029
GNMA
pass-through certificates 8s, 12/15/22-11/15/27
GNMA
pass-through certificates 7s, 12/15/22-11/15/27
These holdings represent 13.5% of the fund's net assets as of 3/31/00.
Portfolio holdings will vary over time.
Despite the pall that has fallen over the market, we continue to believe
that the high-yield sector is laden with income and price appreciation
opportunities. The solid fundamentals of the U.S. economy, America's
corporate earnings strength, and sustained overseas demand for U.S.
products continue to create a favorable backdrop for many high-yield
debt issuers, particularly in the telecommunications and
broadcasting/media industries where deregulation and consolidation also
have helped drive performance potential. Nevertheless, we consolidated
our high-yield position somewhat in light of the market's weakness,
eliminating weaker positions and deploying the proceeds in other areas
such as the emerging markets.
* FLEXIBILITY REMAINS A VIRTUE
Heading into the second quarter of calendar year 2000, we think the Fed
is likely to raise rates at least once more to prevent an outbreak of
inflation. As such, we expect to bolster our position in mortgage-backed
securities, which tend to be less affected by rising rates. We also
expect to maintain our weighting in the emerging markets, which continue
to benefit from economic growth in the United States and Europe.
At some point this year, however, the Fed's monetary tightening is
likely to weigh heavily on the U.S. economy. Slower growth will
eventually lead to lower rates and hopefully better returns across the
entire fixed-income market. As always, we will continue to take full
advantage of the fund's ability to diversify across the fixed-income
universe, focusing on what we believe are the most promising
opportunities for income and price appreciation.
The views expressed here are exclusively those of Putnam Management.
They are not meant as investment advice. Although the described holdings
were viewed favorably as of 3/31/00, 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.
PERFORMANCE SUMMARY
This section provides information about your fund's performance, which
should always be considered in light of its investment strategy. Putnam
Strategic Income Fund is designed for investors seeking high current
income consistent with capital preservation through U.S. government,
high-yield, and international fixed income securities.
<TABLE>
<CAPTION>
TOTAL RETURN FOR PERIODS ENDED 3/31/00
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
<C> <S> <S> <S> <S> <S> <S> <S> <S>
- ----------------------------------------------------------------------------------------
1 year 2.07% 2.77% 1.30% -3.36% 1.29% 0.35% 1.82% -1.54%
- ----------------------------------------------------------------------------------------
Life of fund 17.37 11.84 13.94 12.26 14.11 14.11 16.18 12.35
Annual average 3.99 2.77 3.24 2.87 3.28 3.28 3.73 2.89
- ----------------------------------------------------------------------------------------
</TABLE>
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 3/31/00
Salomon Bros.
Lehman Bros. Non-U.S. First Boston Consumer
Aggregate World Govt. High Yield price
Bond Index Bond Index Index index
- -------------------------------------------------------------------------
1 year 1.87% -1.40% 0.30% 3.69%
- -------------------------------------------------------------------------
Life of fund 26.57 12.30 26.74 10.38
Annual average 5.94 2.88 5.97 2.45
- -------------------------------------------------------------------------
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
(where 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.
[GRAPHIC OMITTED worm chart GROWTH OF A $10,000 INVESTMENT]
GROWTH OF A $10,000 INVESTMENT
Cumulative total return of a $10,000 investment since 2/26/96
Fund's Lehman Brothers Consumer
class A shares Aggregate price
at POP Bond Index index
2/26/96 9,525 10,000 10,000
3/31/96 9,437 9,930 10,039
3/31/97 10,132 10,418 10,316
3/31/98 11,454 11,667 10,458
3/31/99 10,958 12,424 10,645
3/31/00 $11,184 $12,657 $11,038
Footnote reads:
Past performance is no assurance of future results. At the end of the
same time period, a $10,000 investment in the fund's class B shares
would have been valued at $11,394 ($11,226 with a contingent deferred
sales charge); a $10,000 investment in the fund's class C shares would
have been valued at $11,411 and no contingent deferred sales charge
would apply; a $10,000 investment in the fund's class M shares would
have been valued at $11,618 ($11,235 at public offering price).
<TABLE>
<CAPTION>
PRICE AND DISTRIBUTION INFORMATION 12 MONTHS ENDED 3/31/00
Class A Class B Class C Class M
<S> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------
Distributions (number) 12 12 12 12
- -------------------------------------------------------------------------------------------------
Income $0.643761 $0.590174 $0.589715 $0.625991
- -------------------------------------------------------------------------------------------------
Return of capital 3 0.022800 0.020900 0.020800 0.022100
- -------------------------------------------------------------------------------------------------
Total $0.666561 $0.611074 $0.610515 $0.648091
- -------------------------------------------------------------------------------------------------
Share value: NAV POP NAV NAV NAV POP
- -------------------------------------------------------------------------------------------------
3/31/99 $7.64 $8.02 $7.65 $7.66 $7.64 $7.90
- -------------------------------------------------------------------------------------------------
3/31/00 7.12 7.48 7.13 7.14 7.12 7.36
- -------------------------------------------------------------------------------------------------
Current return (end of period)
- -------------------------------------------------------------------------------------------------
Current dividend rate 1 8.90% 8.48% 8.13% 8.12% 8.65% 8.37%
- -------------------------------------------------------------------------------------------------
Current 30-day SEC yield 2 9.08 8.63 8.31 8.31 8.82 8.52
- -------------------------------------------------------------------------------------------------
1 Income portion of most recent distribution, annualized and divided by NAV or POP at end of period.
2 Based on investment income, calculated using SEC guidelines.
3 See page 48.
</TABLE>
Terms and definitions
Total return shows how the value of the fund's shares changed over time,
assuming you held the shares through the entire period and reinvested
all distributions in the fund.
Class A shares are generally subject to an initial sales charge.
Class B shares may be subject to a sales charge upon redemption.
Class C shares are not subject to an initial sales charge and are
subject to a contingent deferred sales charge only if the shares are
redeemed during the first year.
Class M shares have a lower initial sales charge and a higher 12b-1 fee
than class A shares and no sales charge on redemption.
Net asset value (NAV) is the value of all your fund's assets, minus any
liabilities, divided by the number of outstanding shares, not including
any initial or contingent deferred sales charge.
Public offering price (POP) is the price of a mutual fund share plus the
maximum sales charge levied at the time of purchase. POP performance
figures shown here assume the 4.75% maximum sales charge for class A
shares and 3.25% for class M shares.
Contingent deferred sales charge (CDSC) is a charge applied at the time
of the redemption of class B or C shares and assumes redemption at the
end of the period. Your fund's class B CDSC declines from a 5% maximum
during the first year to 1% during the sixth year. After the sixth year,
the CDSC no longer applies. The CDSC for class C shares is 1% for one
year after purchase.
Comparative benchmarks
Lehman Brothers Aggregate Bond Index* is an unmanaged list consisting of
securities from Lehman Brothers Government/ Corporate Bond Index,
Mortgage-Backed Securities Index, and the Asset-Backed Securities Index.
Salomon Brothers Non-U.S. World Government Bond Index* is a market
capitalization-weighted benchmark that tracks the performance of the
government bond markets tracked by the Salomon Brothers World Government
Bond Index, excluding the United States.
First Boston High Yield Index* is an unmanaged list of lower-rated,
higher-yielding U.S. corporate bonds.
Consumer price index (CPI) is a commonly used measure of inflation; it
does not represent an investment return.
*Securities indexes assume reinvestment of all distributions and interest
payments and do not take in account brokerage fees or taxes. Securities
in the fund do not match those in the indexes and performance of the
fund will differ. It is not possible to invest directly in an index.
A guide to the financial statements
These sections of the report, preceded by the Report of independent
accountants, 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.
Report of independent accountants
For the fiscal year ended March 31, 2000
To the Trustees and Shareholders of
Putnam Strategic Income Fund
In our opinion, the accompanying statement of assets and liabilities,
including the fund's portfolio, and the related statements of operations
and of changes in net assets and the financial highlights present
fairly, in all material respects, the financial position of Putnam
Strategic Income Fund (the "fund") at March 31, 2000, and the results of
its operations, the changes in its net assets and the financial
highlights for the periods indicated, in conformity with accounting
principles generally accepted in the United States. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the fund's management; our
responsibility is to express an opinion on these financial statements
based on our audits. We conducted our audits of these financial
statements in accordance with auditing standards generally accepted in
the United States, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included
confirmation of investments owned at March 31, 2000 by correspondence
with the custodian, provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
May 10, 2000
The fund's portfolio
March 31, 2000
<TABLE>
<CAPTION>
CORPORATE BONDS AND NOTES (47.2%) (a)
PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C> <C>
Advertising (0.1%)
- ----------------------------------------------------------------------------------------------------------------------------
$ 160,000 Ackerly Group, Inc. sr. sub. notes Ser. B, 9s, 2009 $ 150,400
300,000 Adams Outdoor Advertising sr. notes 10 3/4s, 2006 305,250
220,000 Lamar Media Corp. company guaranty 8 5/8s, 2007 210,100
----------------
665,750
Aerospace and Defense (0.5%)
- ----------------------------------------------------------------------------------------------------------------------------
485,000 Argo-Tech Corp. company guaranty 8 5/8s, 2007 368,600
130,000 Argo-Tech Corp. company guaranty Ser. D, 8 5/8s, 2007 111,150
190,000 Aviation Sales Co. company guaranty 8 1/8s, 2008 76,000
370,000 BE Aerospace, Inc. sr. sub. notes 9 1/2s, 2008 318,200
120,000 Burke Industries, Inc. company guaranty 10s, 2007 55,200
90,000 Decrane Aircraft Holdings company guaranty
Ser. B, 12s, 2008 79,200
----------------
1,008,350
Agriculture (0.1%)
- ----------------------------------------------------------------------------------------------------------------------------
293,389 Premium Standard Farms, Inc. sr. sec. notes 11s, 2003 (PIK) 266,984
Airlines (0.6%)
- ----------------------------------------------------------------------------------------------------------------------------
880,000 Airbus Industries 144A 12.266s, 2020 930,204
120,000 Calair LLC company guaranty 8 1/8s, 2008 103,650
230,000 Canadian Airlines Corp. secd. notes 10s, 2005
(In default) (Canada) (NON) 193,200
----------------
1,227,054
Apparel (0.2%)
- ----------------------------------------------------------------------------------------------------------------------------
295,000 Guess Jeans, Inc. sr. sub. notes 9 1/2s, 2003 297,213
65,000 William Carter Holdings Co. sr. sub. notes Ser. A, 12s, 2008 59,475
135,000 William Carter Holdings Co. sr. sub. notes Ser. A,
10 3/8s, 2006 113,400
----------------
470,088
Automotive Parts (1.1%)
- ----------------------------------------------------------------------------------------------------------------------------
299,000 Aftermarket Technology Corp. sr. sub. notes 12s, 2004 297,505
270,000 Dura Operating Corp. company guaranty Ser. B, 9s, 2009 240,300
540,000 Federal Mogul Corp. notes 7 3/4s, 2006 444,658
130,000 Federal Mogul Corp. 144A notes 7 3/8s, 2006 106,240
60,000 Hayes Wheels International, Inc. company guaranty
Ser. B, 9 1/8s, 2007 57,750
315,000 Lear Corp. sub. notes 9 1/2s, 2006 312,638
160,000 Navistar International Corp. sr. notes Ser. B, 8s, 2008 147,200
525,000 Oxford Automotive, Inc. company guaranty
Ser. D, 10 1/8s, 2007 494,813
130,000 Transportation Manufacturing Operations, Inc.
company guaranty 11 1/4s, 2009 123,500
----------------
2,224,604
Banks (0.8%)
- ----------------------------------------------------------------------------------------------------------------------------
330,000 Bangko Sentral NG Pilipinas bonds 8.6s, 2027 (Philippines) 262,350
100,000 Chevy Chase Savings Bank, Inc. sub. deb. 9 1/4s, 2008 89,000
190,000 Chevy Chase Savings Bank, Inc. sub. deb. 9 1/4s, 2005 180,500
280,000 Delta Financial Corp. sr. notes 9 1/2s, 2004 170,800
325,000 Hanvit Bank 144A sub. notes 11 3/4s, 2010 (Korea) 325,000
40,000 Riggs Capital Trust 144A bonds 8 5/8s, 2026 33,390
340,000 Sovereign Bancorp, Inc. sr. notes 10 1/2s, 2006 334,900
200,000 Webster Capital Trust I 144A bonds 9.36s, 2027 195,186
----------------
1,591,126
Basic Industrial Products (0.1%)
- ----------------------------------------------------------------------------------------------------------------------------
170,000 Azurix Corp. 144A notes 10 3/8s, 2007 170,000
80,000 Paragon Corp. Holdings, Inc. company guaranty
Ser. B, 9 5/8s, 2008 26,400
90,000 Roller Bearing Co. company guaranty Ser. B, 9 5/8s, 2007 82,350
----------------
278,750
Broadcasting (2.8%)
- ----------------------------------------------------------------------------------------------------------------------------
460,000 Allbritton Communications Co. sr. sub. notes
Ser. B, 8 7/8s, 2008 414,000
105,200 AMFM, Inc. deb. 12 5/8s, 2006 (PIK) 118,876
2,861 Australis Media, Ltd. sr. disc. notes stepped-coupon
zero % (15 3/4s 5/15/00), 2003 (In default)
(Australia) (NON) (STP) (PIK) 0
450,000 Benedek Communications Corp. sr. disc. notes
stepped-coupon zero % (13 1/4s, 5/15/01), 2006 (STP) 405,000
215,000 Capstar Broadcasting sr. disc. notes stepped-coupon
zero % (12 3/4s, 2/1/02), 2009 (STP) 189,200
82,200 Capstar Broadcasting sub. deb. 12s, 2009 (PIK) 92,681
685,000 Capstar Broadcasting sr. sub. notes 9 1/4s, 2007 685,000
55,000 Central European Media Enterprises Ltd. sr. notes
9 3/8s, 2004 (Bermuda) 22,413
520,000 Chancellor Media Corp. company guaranty 8s, 2008 514,739
90,000 Citadel Broadcasting, Inc. sr. sub. notes 10 1/4s, 2007 89,775
390,000 Citadel Broadcasting, Inc. company guaranty 9 1/4s, 2008 363,675
80,000 Fox Family Worldwide, Inc. sr. disc. notes stepped-coupon
zero % (10 1/4s, 11/1/02), 2007 (STP) 48,800
250,000 Fox Family Worldwide, Inc. sr. notes 9 1/4s, 2007 217,500
180,000 Fox/Liberty Networks LLC sr. notes 8 7/8s, 2007 180,000
250,000 Granite Broadcasting Corp. sr. sub. notes 9 3/8s, 2005 233,750
240,000 Lenfest Communications, Inc. sr. sub. notes 8 1/4s, 2008 245,005
210,000 Paxson Communications Corp. 144A sr. sub. notes
11 5/8s, 2002 216,300
560,000 Pegasus Communications Corp. 144A sr. notes Ser. B,
9 3/4s, 2006 537,600
130,000 Pegasus Media & Communications notes Ser. B,
12 1/2s, 2005 139,100
424,000 PHI Holdings, Inc. sr. sub. notes 16s, 2001 368,117
125,000 Radio One, Inc. company guaranty stepped-coupon Ser. B,
7s, (12s, 5/15/00), 2004 (STP) 130,000
100,000 Spanish Broadcasting Systems sr. sub notes 9 5/8s, 2009 95,000
60,000 TV Azteca Holdings S.A. de C.V. sr. notes 11s, 2002 (Mexico) 58,050
390,000 TV Azteca Holdings S.A. de C.V. sr. notes 10 1/2s,
2007 (Mexico) 370,500
----------------
5,735,081
Building and Construction (0.5%)
- ----------------------------------------------------------------------------------------------------------------------------
125,000 American Architectural Products Corp. company
guaranty 11 3/4s, 2007 31,250
80,000 Atrium Companies, Inc. company guaranty Ser. B,
10 1/2s, 2009 75,600
200,000 D.R. Horton, Inc. company guaranty 8s, 2009 164,000
170,000 GS Superhighway Holdings sr. notes 10 1/4s, 2007 (China) 119,841
270,000 GS Superhighway Holdings sr. notes 9 7/8s, 2004 (China) 191,700
70,000 Jackson Products, Inc. company guaranty Ser. B, 9 1/2s, 2005 64,050
140,000 NCI Building Systems, Inc. sr. sub. notes Ser. B, 9 1/4s, 2009 133,350
180,000 Toll Corp. company guaranty 8 1/8s, 2009 157,950
----------------
937,741
Building Products (0.1%)
- ----------------------------------------------------------------------------------------------------------------------------
180,000 Building Materials Corp. company guaranty 8s, 2008 155,700
Business Equipment and Services (0.3%)
- ----------------------------------------------------------------------------------------------------------------------------
600,000 Iron Mountain, Inc. company guaranty 8 3/4s, 2009 534,000
40,000 Outsourcing Solutions, Inc. sr. sub. notes Ser. B, 11s, 2006 35,200
303,000 U.S. Office Products Co. company guaranty 9 3/4s, 2008 99,990
----------------
669,190
Cable Television (2.2%)
- ----------------------------------------------------------------------------------------------------------------------------
370,000 21st Century Telecom Group, Inc. sr. disc. notes
stepped-coupon zero % (12 1/4s, 2/15/03), 2008 (STP) 259,000
490,000 Acme Television sr. disc. notes stepped-coupon zero %
(10 7/8s, 9/30/00), 2004 (STP) 448,350
210,000 Adelphia Communications Corp. sr. notes Ser. B,
8 3/8s, 2008 186,900
360,000 Adelphia Communications Corp. sr. notes 7 7/8s, 2009 306,000
950,000 Charter Communications Holdings LLC 144A sr. notes
8 5/8s, 2009 836,000
160,000 Charter Communications Holdings bank term loans
8.518s, 2008 159,600
210,000 Classic Cable, Inc. 144A sr. sub. notes 10 1/2s, 2010 207,375
70,000 CSC Holdings, Inc. deb. 7 7/8s, 2018 67,368
230,000 CSC Holdings, Inc. sr. notes 7 7/8s, 2007 227,976
170,000 CSC Holdings, Inc. sr. notes 7 1/4s, 2008 162,090
340,000 Insight Midwest 144A sr. notes 9 3/4s, 2009 338,300
270,000 Lin Holdings Corp. sr. disc. notes stepped-coupon
zero % (10s, 3/1/2003), 2008 (STP) 166,725
200,000 NTL, Inc. sr. notes Ser. B, 10s, 2007 (United Kingdom) 195,000
210,000 NTL, Inc. sr. notes, stepped-coupon Ser. B, zero %
(9 3/4s, 4/1/03), 2008 (United Kingdom) (STP) 133,350
60,000 Rogers Cablesystems Ltd. sr. notes Ser. B, 10s,
2005 (Canada) 62,400
150,000 Supercanal Holdings S.A. 144A sr. notes 11 1/2s, 2005
(In default) (Argentina) (NON) 67,500
200,000 TeleWest Communications PLC 144A 9 7/8s, 2010
(United Kingdom) 198,000
160,000 TeleWest Communications PLC 144A sr. disc. notes
stepped-coupon zero %, 2009 (9 1/4, 4/15/04)
(United Kingdom) (STP) 90,400
90,000 United Pan-Europe N.V. sr. notes, Ser. B, 10 7/8s, 2009
(Netherlands) 82,800
130,000 United Pan-Europe N.V. 144A stepped-coupon zero %
(13 3/4s, 2/1/05), 2010 (Netherlands) (STP) 63,700
880,000 United Pan-Europe N.V. 144A sr. notes, Ser. B, stepped-coupon
zero % (12.5s, 8/1/04), 2009 (Netherlands) (STP) 440,000
----------------
4,698,834
Cellular Communications (2.2%)
- ----------------------------------------------------------------------------------------------------------------------------
120,000 Airgate PCS, Inc. sr. sub. notes stepped-coupon zero %
(13 1/2s, 10/1/04), 2009 (STP) 66,600
555,000 Celcaribe S.A. sr. notes 13.5s, 2004 (Colombia) 471,750
1,025,000 CellNet Data Systems, Inc. sr. disc. notes stepped-coupon
zero % (14s, 10/1/02), 2007 (STP) 123,000
260,000 McCaw International Ltd sr. disc. notes stepped coupon
zero % (13s, 4/15/02), 2007 (STP) 187,200
950,000 Millicom International Cellular S.A. sr. disc. notes stepped-
coupon zero % (13 1/2s, 6/1/01), 2006 (Luxembourg) (STP) 807,500
710,000 Nextel Communications, Inc. sr. disc. notes stepped-
coupon zero % (12 1/8s, 4/15/03), 2008 (STP) 440,200
380,000 Nextel Communications, Inc. sr. notes 12s, 2008 412,300
1,712,000 Nextel Communications, Inc. sr. notes 9 3/8s, 2009 1,575,040
810,000 US Unwired Inc. sr. disc. notes stepped-coupon zero %
(13 3/8s, 11/1/04), 2009 (STP) 433,350
----------------
4,516,940
Chemicals (1.7%)
- ----------------------------------------------------------------------------------------------------------------------------
120,000 Geo Specialty Chemicals, Inc. 144A sr. sub. notes
10 1/8s, 2008 97,200
230,000 Georgia Gulf Corp. 144A sr. sub. notes 10 3/8s, 2007 231,725
290,000 Huntsman Corp. 144A sr. sub. notes 9 1/2s, 2007 265,350
710,000 Huntsman ICI Chemicals, Inc. company guaranty
10 1/8s, 2009 679,825
80,000 Lyondell Petrochemical Co. sr. sub. notes 10 7/8s, 2009 75,000
450,000 Lyondell Petrochemical Co. sec. notes Ser. B, 9 7/8s, 2007 428,625
420,000 Lyondell Petrochemical Co. notes Ser. A, 9 5/8s, 2007 400,050
250,000 PCI Chemicals & Pharmaceuticals company guaranty
9 1/4s, 2007 (Canada) 204,375
446,000 Pioneer Americas Acquisition 144A sr. notes 9 1/4s, 2007 371,295
149,874 Polytama International notes 11 1/4s, 2007 (Indonesia) 22,481
250,000 Royster-Clark, Inc. 1st mtge. 10 1/4s, 2009 212,500
150,000 Sterling Chemicals Holdings sr. disc. notes stepped-coupon
zero % (13 1/2s, 8/15/01), 2008 (STP) 49,125
130,000 Sterling Chemicals, Inc. company guaranty Ser. B,
12 3/8s, 2006 133,250
40,000 Sterling Chemicals, Inc. sr. sub. notes 11 3/4s, 2006 34,000
30,000 Sterling Chemicals, Inc. sr. sub. notes Ser. A, 11 1/4s, 2007 24,300
245,000 Trikem S.A. 144A bonds 10 5/8s, 2007 (Brazil) 188,650
----------------
3,417,751
Computer Services and Software (0.8%)
- ----------------------------------------------------------------------------------------------------------------------------
40,000 Concentric Network Corp. sr. notes 12 3/4s, 2007 43,100
225,000 Cybernet Internet Services Intl., Inc. 144A sr. notes 14s, 2009 175,500
280,000 Exodus Communications, Inc. sr. notes 10 3/4s, 2009 275,800
58,850 Interact Operating Co. notes 14s, 2003 17,655
80,000 PSINet, Inc. sr. notes 11 1/2s, 2008 79,600
250,000 PSINet, Inc. sr. notes 11s, 2009 242,500
200,000 Unisys Corp. sr. notes 11 3/4s, 2004 215,500
435,000 Unisys Corp. sr. notes 7 7/8s, 2008 408,900
120,000 Verio, Inc. sr. notes 11 1/4s, 2008 118,800
----------------
1,577,355
Conglomerates (0.2%)
- ----------------------------------------------------------------------------------------------------------------------------
300,000 Axia, Inc. company guaranty 10 3/4s, 2008 231,000
250,000 Cathay International Ltd. 144A sr. notes 13s, 2008 (China) 125,000
----------------
356,000
Consumer Durable Goods (0.6%)
- ----------------------------------------------------------------------------------------------------------------------------
800,000 Albecca, Inc. company guaranty 10 3/4s, 2008 632,000
70,000 Iron Age Corp. company guaranty 9 7/8s, 2008 49,700
500,000 Samsonite Corp. sr. sub. notes 10 3/4s, 2008 422,500
70,000 Sealy Mattress Co. sr. sub. notes Ser. B, 9 7/8s, 2007 68,250
----------------
1,172,450
Consumer Services (0.2%)
- ----------------------------------------------------------------------------------------------------------------------------
400,000 Coinmach Corp. sr. notes Ser. D, 11 3/4s, 2005 380,000
Cosmetics (0.2%)
- ----------------------------------------------------------------------------------------------------------------------------
60,000 French Fragrances, Inc. company guaranty Ser. D,
10 3/8s, 2007 56,700
40,000 French Fragrances, Inc. sr. notes Ser. B, 10 3/8s, 2007 38,200
110,000 Revlon Consumer Products sr. notes 9s, 2006 78,100
350,000 Revlon Consumer Products sr. sub. notes 8 5/8s, 2008 152,250
150,000 Revlon Consumer Products sr. notes 8 1/8s, 2006 105,000
----------------
430,250
Electric Utilities (2.4%)
- ----------------------------------------------------------------------------------------------------------------------------
235,000 AES China Generating Co. sr. notes 10 1/8s, 2006 (China) 157,450
100,000 Applied Power, Inc. sr. sub. notes 8 3/4s, 2009 102,500
575,000 Calpine Corp. sr. notes 10 1/2s, 2006 606,625
100,000 Calpine Corp. sr. notes 9 1/4s, 2004 100,000
100,000 Calpine Corp. sr. notes 8 3/4s, 2007 99,568
530,000 CMS Energy Corp. sr. notes Ser. B, 6 3/4s, 2004 487,600
150,000 Metromedia Fiber Network, Inc. sr. notes 10s, 2009 141,750
410,000 Metromedia Fiber Network, Inc. sr. notes Ser. B, 10s, 2008 387,450
750,000 Midland Funding II Corp. deb. Ser. B, 13 1/4s, 2006 883,890
1,125,000 Midland Funding II Corp. deb. Ser. A, 11 3/4s, 2005 1,219,883
236,284 Northeast Utilities System notes Ser. A, 8.58s, 2006 237,217
56,000 Northeast Utilities System notes Ser. B, 8.38s, 2005 55,794
350,000 Panda Global Energy Co. company guaranty 12 1/2s,
2004 (China) 122,500
380,000 York Power Funding 144A notes 12s, 2007 (Cayman Islands) 372,400
----------------
4,974,627
Electronics (0.4%)
- ----------------------------------------------------------------------------------------------------------------------------
30,000 Celestica International Ltd. 144A sr. sub. notes 10 1/2s,
2006 (Canada) 30,900
90,000 DII Group, Inc. (The) sr. sub. notes 8 1/2s, 2007 89,550
100,000 Flextronics International Ltd. sr. sub. notes Ser. B, 8 3/4s, 2007 94,000
50,000 HCC Industries, Inc. company guaranty 10 3/4s, 2007 28,500
90,000 Moog, Inc. sr. sub. notes Ser. B, 10s, 2006 90,675
90,000 Motors and Gears, Inc. sr. notes Ser. D, 10 3/4s, 2006 86,400
430,000 Viasystems, Inc. sr. notes Ser. B, 9 3/4s, 2007 365,500
20,000 Viasystems, Inc. sr. sub notes 9 3/4s, 2007 17,000
----------------
802,525
Entertainment (0.8%)
- ----------------------------------------------------------------------------------------------------------------------------
340,000 ITT Corp. notes 6 3/4s, 2005 304,521
50,000 News America Holdings, Inc. deb. 7 3/4s, 2045 45,264
500,000 Premier Parks, Inc. sr. notes 9 1/4s, 2006 465,000
85,000 Regal Cinemas, Inc. sr. sub. notes 9 1/2s, 2008 37,825
170,000 SFX Entertainment, Inc. company guaranty 9 1/8s, 2008 168,300
410,000 SFX Entertainment, Inc. 144A company guaranty Ser. B,
9 1/8s, 2008 410,000
240,000 Silver Cinemas, Inc. sr. sub. notes 10 1/2s, 2005 38,400
275,000 Six Flags Corp. sr. notes 8 7/8s, 2006 259,188
630,000 United Artists Theatre sr. sub. notes, Ser. B, 9 3/4s, 2008 25,200
----------------
1,753,698
Environmental Control (0.8%)
- ----------------------------------------------------------------------------------------------------------------------------
690,000 Allied Waste Industries, Inc. company guaranty Ser. B,
10s, 2009 517,500
1,110,000 Browning-Ferris Industries, Inc. deb. 7.4s, 2035 754,800
90,000 Waste Management, Inc. company guaranty 6 1/2s, 2004 80,334
410,000 WMX Technologies, Inc. notes 7.7s, 2002 391,107
----------------
1,743,741
Financial Services (2.5%)
- ----------------------------------------------------------------------------------------------------------------------------
310,000 Aames Financial Corp. sr. notes 9 1/8s, 2003 185,225
425,000 Advanta Corp. company guaranty Ser. B, 8.99s, 2026 263,500
260,000 Advanta Corp. med-term notes Ser. D, 6.92s, 2002 241,023
308,000 AMRESCO, Inc. sr. sub. notes Ser. 97-A, 10s, 2004 231,000
110,000 AMRESCO, Inc. sr. sub. notes Ser. 98-A, 9 7/8s, 2005 82,500
150,000 Cellco Finance Corp. NV sr. sub. notes 15s, 2005
(Netherlands) 163,500
200,000 Colonial Capital II 144A company guaranty 8.92s, 2027 185,735
210,000 Conseco Finance Trust III, Inc. bonds 8.796s, 2027 175,201
185,000 Contifinancial Corp. sr. notes 8 3/8s, 2003 16,650
320,000 Contifinancial Corp. sr. notes 8 1/8s, 2008 28,800
310,000 Contifinancial Corp. sr. notes 7 1/2s, 2002 27,900
478,000 Fannie Mae notes, 6 5/8s, 2009 459,702
320,000 GS Escrow Corp. sr. notes 7 1/8s, 2005 290,506
80,000 Imperial Credit Capital Trust I 144A company
guaranty 10 1/4s, 2002 61,600
400,000 Imperial Credit Industries, Inc. sr. notes 9 7/8s, 2007 293,000
200,000 Local Financial Corp. sr. notes 11s, 2004 200,000
525,000 Nationwide Credit, Inc. sr. notes Ser. A, 10 1/4s, 2008 372,750
110,000 Ocwen Capital Trust I company guaranty 10 7/8s, 2027 63,800
175,000 Ocwen Federal Bank sub. deb. 12s, 2005 164,500
150,000 Ocwen Financial Corp. notes 11 7/8s, 2003 137,625
630,000 RBF Finance Co. company guaranty 11s, 2006 650,475
400,000 Residential Mortgages Corp. 144A mortgage backed
FRN Ser. M, 7.503s, 2038 637,000
400,000 Resource America, Inc. 144A sr. notes 12s, 2004 312,000
----------------
5,243,992
Food and Beverages (0.9%)
- ----------------------------------------------------------------------------------------------------------------------------
110,000 Aurora Foods, Inc. sr. sub. notes Ser. B, 9 7/8s, 2007 44,000
600,000 Aurora Foods, Inc. 144A sr. sub. notes Ser. D, 9 7/8s, 2007 240,000
470,000 Doane Products Co. 144A sr. sub. notes 9 3/4s, 2007
sr. sub. notes 9 3/4s, 2007 432,400
540,000 Eagle Family Foods company guaranty Ser. B, 8 3/4s, 2008 405,000
240,000 RAB Enterprises, Inc. company guaranty 10 1/2s, 2005 158,400
450,000 Triarc Consumer Products, Inc. company guaranty
10 1/4s, 2009 434,250
290,000 Vlasic Foods Intl., Inc. sr. sub. notes Ser. B, 10 1/4s, 2009 185,600
----------------
1,899,650
Gaming (2.1%)
- ----------------------------------------------------------------------------------------------------------------------------
250,000 Argosy Gaming Co. company guaranty 10 3/4s, 2009 255,000
200,000 Autotote Corp. company guaranty Ser. B, 10 7/8s, 2004 197,500
360,000 Boyd Gaming Corp. sr. sub. notes 9 1/2s, 2007 331,200
280,000 Fitzgeralds Gaming Corp. company guaranty Ser. B, 12 1/4s,
2004 (In default) (NON) 156,800
30,000 Hard Rock Hotel, Inc. sr. sub. notes Ser. B, 9 1/4s, 2005 25,200
100,000 Harrahs Entertainment, Inc. company guaranty 7 1/2s, 2009 95,793
600,000 Hollywood Casino Corp. company guaranty 11 1/4s, 2007 609,000
150,000 Hollywood Park, Inc. company guaranty Ser. B, 9 1/4s, 2007 147,750
200,000 Horseshoe Gaming Holdings company guaranty 8 5/8s, 2009 182,000
510,000 International Game Technology 144A sr. notes 7 7/8s, 2004 474,300
70,000 Isle of Capri Black Hawk LLC 144A 1st mtge.
Ser. B, 13s, 2004 76,300
110,000 Mohegan Tribal Gaming, Auth. sr. sub. notes 8 3/4s, 2009 103,125
230,000 Mohegan Tribal Gaming, Auth. sr. notes 8 1/8s, 2006 213,325
180,000 Park Place Entertainment sr. notes 8 1/2s, 2006 176,623
470,000 Trump A.C. 1st mtge. 11 1/4s, 2006 314,900
720,000 Trump Castle Funding 144A sub. notes 10 1/4s, 2003 727,200
125,000 Trump Holdings & Funding Corp. sr. notes 15 1/2s, 2005 68,750
170,000 Venetian Casino, Inc. company guaranty 12 1/4s, 2004 158,100
----------------
4,312,866
Health Care (1.0%)
- ----------------------------------------------------------------------------------------------------------------------------
80,000 Bio-Rad Labs Corp. 144A sr. sub. notes 11 5/8s, 2007 80,500
70,000 Columbia/HCA Healthcare Corp. deb. 8.36s, 2024 63,175
70,000 Columbia/HCA Healthcare Corp. med-term notes
7.69s, 2025 56,088
180,000 Columbia/HCA Healthcare Corp. notes 7s, 2007 158,400
330,000 Columbia/HCA Healthcare Corp. med-term notes
6.63s, 2045 311,982
250,000 Extendicare Health Services, Inc. company guaranty
9.35s, 2007 135,000
150,000 Hudson Respiratory Care, Inc. sr. sub. notes 9 1/8s, 2008 116,813
250,000 Integrated Health Services, Inc. sr. sub. notes Ser. A,
9 1/4s, 2008 (In default) (NON) 5,000
480,000 Mariner Post-Acute Network, Inc. sr. sub. notes Ser. B,
9 1/2s, 2007 (In default) (NON) 2,400
80,000 Mariner Post-Acute Network, Inc. sr. sub. notes
stepped-coupon Ser. B, zero % (10 1/2s, 11/1/02),
2007 (In default) (NON) (STP) 400
130,000 MedPartners, Inc. sr. sub. notes 6 7/8s, 2000 124,800
630,000 Multicare Cos., Inc. sr. sub. notes 9s, 2007 25,200
170,000 Paracelsus Healthcare sr. sub. notes 10s, 2006 76,500
100,000 Quorum Health Group, Inc. sr. sub. notes 8 3/4s, 2005 92,000
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) 600
210,000 Tenet Healthcare Corp. sr. notes Ser. B, 8 1/8s, 2008 191,100
90,000 Tenet Healthcare Corp. sr. notes 8s, 2005 84,825
130,000 Tenet Healthcare Corp. sr. notes Ser. B, 7 5/8s, 2008 117,650
310,000 Triad Hospitals Holdings company guaranty Ser. B,
11s, 2009 308,450
----------------
1,973,383
Lodging (0.4%)
- ----------------------------------------------------------------------------------------------------------------------------
150,000 Epic Resorts LLC company guaranty Ser. B, 13s, 2005 105,000
40,000 HMH Properties, Inc. company guaranty Ser. B,
7 7/8s, 2008 33,400
10,000 HMH Properties, Inc. sr. notes Ser. C, 8.45s, 2008 8,650
300,000 Host Marriott Travel Plaza sr. notes Ser. B, 9 1/2s, 2005 297,000
120,000 Prime Hospitality Corp. sub. notes 9 3/4s, 2007 114,300
50,000 Starwood Hotels & Resorts notes 6 3/4s, 2003 46,642
120,000 Sun International Hotels Ltd. company guaranty 9s, 2007 108,000
110,000 Sun International Hotels Ltd. sr. sub. notes 8 5/8s, 2007 96,800
----------------
809,792
Machinery (0.1%)
- ----------------------------------------------------------------------------------------------------------------------------
400,000 Newcor, Inc. company guaranty Ser. B, 9 7/8s, 2008 140,000
Manufacturing (0.2%)
- ----------------------------------------------------------------------------------------------------------------------------
350,000 Blount, Inc. company guaranty 13s, 2009 362,250
Medical Supplies and Devices (0.4%)
- ----------------------------------------------------------------------------------------------------------------------------
110,000 ALARIS Medical Systems, Inc. company guaranty
9 3/4s, 2006 91,575
500,000 Dade International, Inc. sr. sub. notes Ser. B, 11 1/8s, 2006 482,500
210,000 Leiner Health Products sr. sub. notes 9 5/8s, 2007 156,975
220,000 Mediq, Inc. company guaranty 11s, 2008 22,000
145,000 Mediq, Inc. deb. stepped-coupon zero % (13s, 6/1/03),
2009 (STP) 7,250
----------------
760,300
Metals and Mining (0.5%)
- ----------------------------------------------------------------------------------------------------------------------------
490,000 Better Minerals & Aggregates Co. 144A sr. sub.
notes 13s, 2009 486,325
80,000 Continental Global Group sr. notes Ser. B, 11s, 2007 20,000
205,000 Kaiser Aluminum & Chemical Corp. sr. sub. notes
12 3/4s, 2003 189,625
290,000 Lodestar Holdings, Inc. company guaranty 11 1/2s, 2005 55,100
150,000 Neenah Corp. company guaranty Ser. F, 11 1/8s, 2007 129,000
150,000 Neenah Corp. sr. sub. notes Ser. B, 11 1/8s, 2007 129,000
----------------
1,009,050
Motion Picture Distribution (0.4%)
- ----------------------------------------------------------------------------------------------------------------------------
140,000 AMC Entertainment, Inc. sr. sub. notes 9 1/2s, 2011 71,400
310,000 AMC Entertainment, Inc. sr. sub. notes 9 1/2s, 2009 158,100
310,000 Cinemark USA, Inc. sr. sub. notes 8 1/2s, 2008 207,700
613,000 Diva Systems Corp. sr. disc. notes, stepped-coupon Ser. B,
zero % (12 5/8s, 3/1/03), 2008 (STP) 294,240
----------------
731,440
Oil and Gas (1.0%)
- ----------------------------------------------------------------------------------------------------------------------------
350,000 Belco Oil & Gas Corp. company guaranty Ser. B,
10 1/2s, 2006 357,875
20,000 Benton Oil & Gas Co. sr. notes 9 3/8s, 2007 11,900
110,000 Giant Industries Corp. company guaranty 9s, 2007 97,900
50,000 Gulf Canada Resources, Ltd. sr. sub. notes 9 5/8s,
2005 (Canada) 50,125
60,000 Gulf Canada Resources, Ltd. sr. sub. deb. 9 1/4s,
2004 (Canada) 60,610
20,000 Gulf Canada Resources, Ltd. sr. notes 8.35s, 2006 (Canada) 19,450
80,000 HS Resources, Inc. company guaranty 9 1/4s, 2006 76,800
90,000 Leviathan Gas Corp. company guaranty Ser. B, 10 3/8s, 2009 91,800
120,000 Ocean Energy, Inc. company guaranty Ser. B, 8 7/8s, 2007 114,900
460,000 Ocean Energy, Inc. company guaranty Ser. B, 8 3/8s, 2008 430,100
120,000 Pogo Producing Co. sr. sub. notes Ser. B, 8 3/4s, 2007 111,000
90,000 RAM Energy, Inc. sr. notes 11 1/2s, 2008 45,225
300,000 Seven Seas Petroleum sr. notes Ser. B, 12 1/2s, 2005 84,000
115,000 Snyder Oil Corp. sr. sub. notes 8 3/4s, 2007 113,563
70,000 Stone Energy Corp. company guaranty 8 3/4s, 2007 65,100
350,000 Vintage Petroleum 144A sr. sub. notes 9 3/4s, 2009 352,625
----------------
2,082,973
Packaging and Containers (1.2%)
- ----------------------------------------------------------------------------------------------------------------------------
410,000 AEP Industries, Inc. sr. sub. notes 9 7/8s, 2007 315,700
410,000 Consumers International 144A sr. notes 10 1/4s, 2005 266,500
130,000 Gaylord Container Corp. sr. sub. notes 9 7/8s, 2008 109,200
20,000 Gaylord Container Corp. sr. notes Ser. B, 9 3/4s, 2007 18,500
170,000 Gaylord Container Corp. sr. notes Ser. B, 9 3/8s, 2007 155,550
115,000 Huntsman Packaging Corp. company guaranty 9 1/8s, 2007 107,525
350,000 Packaging Corp. company guaranty 9 5/8s, 2009 344,750
191,257 Packaging Corp. bank term loan 8.5s, 2008 181,520
35,000 Radnor Holdings, Inc. sr. notes 10s, 2003 29,750
765,000 Riverwood International Corp. company guaranty
10 7/8s, 2008 734,400
260,000 Stone Container Corp. sr. sub. deb. stepped-coupon
zero % (12 1/4s, 5/12/00), 2002 (STP) 261,950
----------------
2,525,345
Paper and Forest Products (1.9%)
- ----------------------------------------------------------------------------------------------------------------------------
395,000 APP Finance II Mauritius Ltd. bonds stepped-coupon
zero % (12s, 2/15/04), 2049 (Indonesia) (STP) 233,050
250,000 Buckeye Cellulose Corp. sr. sub. notes 9 1/4s, 2008 246,250
1,175,000 Doman Industries Ltd. sr. notes 8 3/4s, 2004 998,750
180,000 Impac Group, Inc. company guaranty Ser. B, 10 1/8s, 2008 147,600
500,000 Indah Kiat Financial Mauritius Ltd. company guaranty 10s,
2007 (Indonesia) 350,000
320,000 Pacifica Papers, Inc. sr. notes 10s, 2009 (Canada) 312,800
520,000 Pindo Deli Finance Mauritius Ltd. company guaranty
10 3/4s, 2007 (Indonesia) 358,800
335,000 PT Pabrik Kertas Tjiwi Kimia company guaranty 10s,
2004 (Indonesia) 242,875
640,000 Repap New Brunswick sr. notes 10 5/8s, 2005 (Canada) 582,400
540,000 Republic Group, Inc. sr. sub. notes 9 1/2s, 2008 480,600
----------------
3,953,125
Pharmaceuticals (0.2%)
- ----------------------------------------------------------------------------------------------------------------------------
225,000 ICN Pharmaceuticals, Inc. 144A sr. notes 9 1/4s, 2005 213,750
280,000 ICN Pharmaceuticals, Inc. 144A sr. notes 8 3/4s, 2008 259,000
----------------
472,750
Publishing (0.7%)
- ----------------------------------------------------------------------------------------------------------------------------
380,000 Affinity Group Holdings sr. notes 11s, 2007 330,600
140,000 American Media Operation, Inc. sr. sub. notes 10 1/4s, 2009 138,600
160,000 Big Flower Hldgs. bank term loan 9.125s, 2010 160,000
520,000 Garden State Newspapers sr. sub. notes 8 5/8s, 2011 442,000
250,000 Hollinger International Publishing, Inc. company guaranty
9 1/4s, 2007 233,750
70,000 Perry-Judd company guaranty 10 5/8s, 2007 57,750
38,133 Von Hoffman Press, Inc. 144A sr. sub. notes 13 1/2s, 2009 34,701
45,000 Von Hoffman Press, Inc. 144A sr. sub. notes 10 3/8s, 2007 42,075
----------------
1,439,476
Railroads (0.1%)
- ----------------------------------------------------------------------------------------------------------------------------
335,000 TFM S.A. de C.V. company guaranty stepped-coupon
zero % (11 3/4s, 6/15/02), 2009 (Mexico) (STP) 237,850
Restaurants (0.2%)
- ----------------------------------------------------------------------------------------------------------------------------
140,000 FRD Acquisition Co. sr. notes Ser. B, 12 1/2s, 2004 77,000
420,000 Sbarro, Inc. 144A sr. notes 11s, 2009 415,800
----------------
492,800
Retail (1.2%)
- ----------------------------------------------------------------------------------------------------------------------------
310,000 Amazon.com, Inc. sr. disc. notes stepped-coupon zero %
(10s, 05/01/03), 2008 (STP) 185,225
230,000 Home Interiors & Gifts, Inc. company guaranty
10 1/8s, 2008 184,000
250,000 K mart Corp. notes 8 3/8s, 2004 245,703
250,000 K mart Corp. med. term notes 7.86s, 2002 246,715
200,000 K mart Corp. deb. 7 3/4s, 2012 189,718
105,000 Kasper A.S.L. Ltd. sr. notes 12 3/4s, 2004 57,750
250,000 Mothers Work, Inc. sr. notes 12 5/8s, 2005 236,250
500,000 NBTY, Inc. 144A sr. sub. notes 8 5/8s, 2007 427,500
515,000 North Atlantic Trading Co. company guaranty Ser. B,
11s, 2004 463,500
210,000 Zale Corp. sr. notes Ser. B, 8 1/2s, 2007 200,025
----------------
2,436,386
Satellite Services (0.3%)
- ----------------------------------------------------------------------------------------------------------------------------
210,000 Golden Sky Systems company guaranty Ser. B,
12 3/8s, 2006 231,000
350,000 Innova S De R.L. sr. notes 12 7/8s, 2007 (Mexico) 329,000
50,000 Loral Space & Communication, Ltd. sr. notes 9 1/2s, 2006 33,750
----------------
593,750
Semiconductors (0.8%)
- ----------------------------------------------------------------------------------------------------------------------------
250,000 Amkor Technologies, Inc. sr. sub. notes 10 1/2s, 2009 246,250
750,000 Amkor Technologies, Inc. sr. notes 9 1/4s, 2006 729,375
80,000 Chippic Intl. Ltd. 144A company guaranty 12 3/4s, 2009 84,200
120,000 Fairchild Semiconductor Corp. company guaranty
10 3/8s, 2007 117,900
200,000 Fairchild Semiconductor Corp. sr. sub. notes 10 1/8s, 2007 194,000
210,000 Zilog, Inc. company guaranty Ser. B, 9 1/2s, 2005 186,900
----------------
1,558,625
Shipping (--%)
- ----------------------------------------------------------------------------------------------------------------------------
220,000 Pegasus Shipping 144A company guaranty stepped-
coupon zero % (14 1/2s. 6/20/03), 2008 (Bermuda) (STP) 16,500
Specialty Consumer Products (--%)
- ----------------------------------------------------------------------------------------------------------------------------
160,000 Decora Industries, Inc. sr. sec. notes Ser. B, 11s, 2005 84,800
Steel (1.2%)
- ----------------------------------------------------------------------------------------------------------------------------
400,000 AK Steel Corp. company guaranty 7 7/8s, 2009 362,000
180,000 California Steel Industries sr. notes Ser. B, 8 1/2s, 2009 165,600
1,010,000 LTV Corp. sr. notes 11 3/4s, 2009 979,700
415,000 National Steel Corp. 1st mtge. Ser. D, 9 7/8s, 2009 404,625
250,000 WCI Steel, Inc. sr. notes Ser. B, 10s, 2004 246,250
310,000 Wheeling-Pittsburgh Steel Corp. sr. notes 9 1/4s, 2007 277,450
----------------
2,435,625
Supermarkets (0.1%)
- ----------------------------------------------------------------------------------------------------------------------------
150,000 Southland Corp. deb. Ser. A, 4 1/2s, 2004 123,000
Telecommunications (6.8%)
- ----------------------------------------------------------------------------------------------------------------------------
140,000 Alaska Communications Systems Corp. company guaranty
9 3/8s, 2009 126,000
350,000 Barak I.T.C. sr. disc. notes stepped-coupon Ser. B, zero %
(12 1/2s, 11/15/02), 2007 (Israel) (STP) 199,500
130,000 Bestel S.A. de C.V. sr. disc. notes stepped-coupon zero %
(12 3/4s, 5/15/03), 2005 (Mexico) (STP) 98,800
120,000 Birch Telecommunications, Inc. sr. notes 14s, 2008 120,000
150,000 CapRock Communications Corp. sr. notes 11 1/2s, 2009 145,500
270,000 Carrier1 Intl. S.A. sr. notes Ser. B, 13 1/4s, 2009
(Luxembourg) 274,050
200,000 Colt Telecommunications Group PLC sr. disc. notes
stepped-coupon zero % (12s, 12/15/01), 2006
(United Kingdom) (STP) 174,500
680,000 Covad Communications Group, Inc. sr. disc. notes
stepped-coupon Ser. B, zero % (13 1/2s, 03/15/03),
2008 (STP) 394,400
32,000 Covad Communications Group, Inc. 144A sr. notes
12s, 2010 28,160
730,000 Echostar DBS Corp. sr. notes 9 3/8s, 2009 704,450
500,000 Econophone, Inc. company guaranty 13 1/2s, 2007 510,000
200,000 Esprit Teleom Group PLC sr. notes 11 1/2s, 2007
(United Kingdom) 185,000
590,000 Firstworld Communication Corp. sr. disc. notes
stepped-coupon zero % (13, 4/15/03), 2008 (STP) 286,150
630,000 Focal Communications Corp. sr. disc. notes stepped-
coupon Ser. B, zero % (12 1/8s, 02/15/03), 2008 (STP) 409,500
200,000 Focal Communications Corp. 144A sr. notes 11 7/8s, 2010 199,000
320,000 Global Crossing Holdings, Ltd. company guaranty
9 5/8s, 2008 (Bermuda) 308,800
420,000 Global Crossing Holdings Ltd. 144A sr. notes 9 1/2s, 2009
(Bermuda) 403,200
150,000 Global Crossing Holdings Ltd. 144A sr. notes 9 1/8s, 2006
(Bermuda) 143,250
150,000 GST Equipment Funding sr. notes 13 1/4s, 2007 106,500
122,000 GST Telecommunications, Inc. sr. disc. notes stepped-
coupon zero % (10 1/2s, 5/1/03), 2008 (STP) 55,510
50,000 Hermes Europe Railtel 144A sr. notes 11 1/2s,
2007 (Netherlands) 48,000
115,000 Hyperion Telecommunications Corp., Inc. sr. notes Ser. B,
12 1/4s, 2004 118,450
210,000 ICG Communications, Inc. sr. disc. notes stepped-coupon
zero % (10s, 02/15/03), 2008 (STP) 115,500
70,000 ICG Holdings, Inc. sr. disc. notes stepped-coupon zero %
(13 1/2s, 9/15/00), 2005 (STP) 65,450
530,000 ICG Services, Inc. sr. disc. notes stepped-coupon zero %
(9 7/8s, 5/1/03), 2008 (STP) 286,200
480,000 Intelcom Group (USA), Inc. company guaranty stepped-
coupon zero % (12 1/2s, 5/1/01), 2006 (STP) 391,200
230,000 Intra Corp. bonds 13s, 2010 123,050
570,000 IPC Information Systems, Inc. sr. disc. notes zero %
(10 7/8s, 05/01/00), 2008 (STP) 495,900
650,000 KMC Telecom Holdings, Inc. sr. disc. notes stepped-
coupon zero % (12 1/2s, 2/15/03), 2008 (STP) 341,250
390,000 KMC Telecomunications Inc. sr. notes 13 1/2s, 2009 374,400
380,000 Knology Holdings, Inc. sr. disc. notes stepped-coupon
zero% (11 7/8s, 10/15/02), 2007 (STP) 243,200
65,000 L-3 Communications Corp. sr. sub. notes Ser. B, 10 3/8s, 2007 64,513
870,000 L-3 Communications Corp. sr. notes 9 1/8s, 2008 748,200
110,000 L-3 Communications Corp. sr. sub. notes 8 1/2s, 2008 98,175
160,000 L-3 Communications Corp. company guaranty Ser. B,
8s, 2008 138,000
410,000 Logix Communications Enterprises sr. notes 12 1/4s, 2008 192,700
440,000 Madison River Capital 144A sr. notes 13 1/4s, 2010 418,000
120,000 MGC Communications, Inc. 144A sr. notes 13s, 2010 117,300
30,000 Netia Holdings B.V. 144A company guaranty stepped-
coupon zero % (11 1/4s, 11/1/01), 2007 (Poland) (STP) 21,150
250,000 Netia Holdings B.V. 144A company guaranty 10 1/4s,
2007 (Poland) 211,250
220,000 Nextel Partners, Inc. 144A sr. notes 11s, 2010 213,400
50,000 Nextlink Communications, Inc. 144A sr. disc. notes
stepped-coupon zero % (12 1/8s, 12/1/04), 2009 (STP) 27,000
430,000 Nextlink Communications, Inc. 144A sr. notes 10 1/2s, 2009 410,650
345,000 NorthEast Optic Network, Inc. sr. notes 12 3/4s, 2008 345,000
530,000 NorthPoint Communications Group, Inc. 144A
notes 12 7/8s, 2010 471,700
400,000 NTL Communications Corp. sr. notes Ser. B, 11 1/2s, 2008 406,000
70,000 Onepoint Communications, Inc. company guaranty Ser. B,
14 1/2s, 2008 45,500
320,000 Pathnet, Inc. sr. notes 12 1/4s, 2008 211,200
295,000 Qwest Communications International, Inc. sr. disc. notes
stepped-coupon zero % (9.47s, 10/15/02), 2007 (STP) 248,107
140,000 Rhythms Netconnections, Inc. 144A sr. notes 14s, 2010 121,800
80,000 Spectrasite Holdings, Inc. sr. disc. notes stepped-coupon
zero % (11 1/4s, 4/15/04), 2009 (STP) 43,600
140,000 Startec Global Communications Corp. sr. notes 12s, 2008 116,900
300,000 Telecommunications Techniques, Inc. company guaranty
9 3/4s, 2008 273,750
130,000 Telehub Communications Corp. company guaranty
stepped-coupon zero % (13 7/8s, 7/31/02), 2005 (STP) 6,500
250,000 Time Warner Telecom, Inc. sr. notes 9 3/4s, 2008 245,000
310,000 Versatel Telecom B.V. sr. notes 13 1/4s, 2008 (Netherlands) 317,750
550,000 WinStar Communications, Inc. sr. sub. notes stepped-
coupon zero % (15s, 3/1/02), 2007 (STP) 874,500
100,000 WinStar Communications, Inc. sr. sub. notes 11s, 2008 123,250
----------------
13,985,765
Telephone Services (1.6%)
- ----------------------------------------------------------------------------------------------------------------------------
630,000 Alamosa PCS Holdings, Inc. company guaranty stepped-
coupon zero % (12 7/8s, 2/15/05), 2010 (STP) 308,700
380,000 BTI Telecom Corp. sr. notes 10 1/2s, 2007 335,350
60,000 Call-Net Enterprises, Inc. sr. notes 9 3/8s, 2009 (Canada) 45,600
160,000 Call-Net Enterprises, Inc. sr. disc. notes stepped-coupon
zero % (9.27s, 8/15/02), 2007 (Canada) (STP) 85,200
430,000 Call-Net Enterprises, Inc. sr. disc. notes stepped-coupon
zero % (8.94s, 8/15/03), 2008 (Canada) (STP) 206,400
160,000 Call-Net Enterprises, Inc. sr. notes 8s, 2008 (Canada) 118,000
350,000 Flag Ltd. 144A sr. notes 8 1/4s, 2008 (Bermuda) 302,750
120,000 Primus Telecommunications Group, Inc. sr. notes Ser. B,
9 7/8s, 2008 106,800
70,000 RCN Corp. sr. disc. notes stepped-coupon zero %
(11 1/8s, 10/15/02), 2007 (STP) 44,800
40,000 RSL Communications, Ltd. 144A 12 7/8s, 2010 38,000
306,000 RSL Communications, Ltd. company guaranty
12 1/4s, 2006 302,940
150,000 RSL Communications, Ltd. 144A 10 1/2s, 2008 128,250
260,000 RSL Communications, Ltd. company guaranty 9 1/8s, 2008 208,000
110,000 Transtel S.A. pass-through certificates 12 1/2s,
2007 (Colombia) 70,400
140,000 US Xchange LLC sr. notes 15s, 2008 84,000
290,000 Viatel, Inc. sr. disc. notes stepped-coupon zero %
(12 1/2s, 4/15/03), 2008 (STP) 162,400
212,000 Viatel, Inc. sr. notes 11 1/2s, 2009 197,160
500,000 Viatel, Inc. sr. notes 11 1/4s, 2008 445,000
90,000 World Access, Inc. sr. notes Ser. B, 13 1/4s, 2008 78,300
----------------
3,268,050
Textiles (0.1%)
- ----------------------------------------------------------------------------------------------------------------------------
260,000 Galey & Lord, Inc. company guaranty 9 1/8s, 2008 93,600
100,000 Polymer Group, Inc. company guaranty Ser. B, 9s, 2007 88,000
----------------
181,600
Transportation (0.2%)
- ----------------------------------------------------------------------------------------------------------------------------
150,000 Eletson Holdings, Inc. 1st pfd. mtge. notes 9 1/4s,
2003 (Greece) 135,000
120,000 Kitty Hawk, Inc. company guaranty 9.95s, 2004 110,400
210,000 Transportacion Maritima Mexicana S.A. de C.V. sr. notes
10s, 2006 (Mexico) 176,400
----------------
421,800
Wireless Communications (1.4%)
- ----------------------------------------------------------------------------------------------------------------------------
640,000 American Cellular Corp. bank term loan 9.26s, 2008 636,800
560,000 American Cellular Corp. bank term loan 9.609s, 2008 557,200
130,000 Arch Communications Group sr. disc. notes stepped-
coupon zero % (10 7/8s, 3/15/01), 2008 (STP) 104,000
120,000 Clearnet Communications, Inc. sr. disc. notes stepped-
coupon zero % (14 3/4s, 12/15/00), 2005 (STP) 119,700
170,000 Nuevo Grupo Iusacell S.A. 144A sr. notes 14 1/4s,
2006 (Mexico) 182,113
140,000 Orbital Imaging Corp. sr. notes Ser. B, 11 5/8s, 2005 95,200
60,000 Orbital Imaging Corp. sr. notes Ser. D, 11 5/8s, 2005 40,800
270,000 Pagemart Wireless, Inc. sr. disc. notes stepped-coupon
zero % (11 1/4s, 2/1/03), 2008 (STP) 148,500
60,000 Paging Network Do Brasil sr. notes 13 1/2s, 2005 (Brazil) 7,800
340,000 Telecorp PCS, Inc. company guaranty stepped-coupon
zero % (11 5/8s, 4/15/04), 2009 (STP) 209,100
820,000 Voicestream Wire Corp. 144A sr. notes 10 3/8s, 2009 815,900
----------------
2,917,113
----------------
Total Corporate Bonds and Notes (cost $111,153,415) $ 97,524,645
FOREIGN GOVERNMENT BONDS AND NOTES (19.1%) (a)
PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------
USD 2,283,000 Argentina (Republic of) unsub. 11 3/4s, 2009 $ 2,254,463
AUD 3,895,000 Australia (Government of) bonds Ser. 909,
7 1/2s, 2009 2,549,174
USD 4,607,000 Brazil (Federal Republic of) notes 14 1/2s, 2009 5,016,102
USD 260,000 Brazil (Federal Republic of) bonds 12 3/4s, 2020 258,700
CAD 1,290,000 Canada (Government of) bonds Ser. WB60,
7 1/4s, 2007 952,100
CAD 3,620,000 Canada (Government of) bonds Ser. WL43,
5 3/4s, 2029 2,533,900
USD 515,000 Colombia (Republic of) bonds 11 3/4s, 2020 500,220
DKK 8,275,000 Denmark (Kingdom of) bonds 7s, 2024 1,235,322
DKK 24,230,000 Denmark (Kingdom of) bonds 6s, 2009 3,207,772
EUR 2,140,000 Germany (Federal Republic of) bonds Ser. 132,
4 1/8s, 2004 1,989,542
EUR 1,710,000 Germany (Federal Republic of) bonds Ser. 98,
5 5/8s, 2028 1,624,885
USD 420,000 Philippines (Republic of) notes 10 5/8s, 2025 400,050
USD 1,540,000 Russia (Federation of) 144A bonds 12 3/4s, 2028 1,305,150
USD 1,940,000 Russia (Federation of) unsub. 10s, 2007 1,435,600
USD 7,465,000 Russia (Federation of) deb. 6.91s, 2020 (In default) (NON) 2,164,850
USD 360,000 Turkey (Republic of) sr. unsub. 12 3/8s, 2009 385,200
USD 4,625,000 United Mexican States bonds Ser. XW,
10 3/8s, 2009 4,941,813
USD 835,000 United Mexican States bonds 11 3/8s, 2016 987,388
GBP 1,750,000 United Kingdom Treasury bonds 8s, 2000 2,817,531
GBP 645,000 United Kingdom Treasury bonds Ser. 85,
9 3/4s, 2002 1,102,145
GBP 950,000 United Kingdom Treasury bonds 10s, 2003 1,684,586
USD 255,000 Venezuela (Republic of) bonds 9 1/4s, 2027 168,300
----------------
Total Foreign Government Bonds and Notes
(cost $38,039,100) $ 39,514,793
COLLATERALIZED MORTGAGE OBLIGATIONS (9.7%) (a)
PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------
$ 1,100,000 AMRESCO Commercial Mortgage Funding I Ser. 97-C1,
Class F, 7.64s, 2029 $ 1,029,703
738,015 Blackstone Hotel Acquisition Co. sr. mtge. loan FRN
3.449s, 2003 1,170,881
Commercial Mortgage Acceptance Corp.
485,000 Ser. 97-ML1, Class D, 6.977s, 2030 448,322
1,010,000 Ser. 98-C2, Class A2, 6.03s, 2008 920,402
Commercial Mortgage Asset Trust
125,000 Ser. 99-C1, Class A3, 6.64s, 2010 116,992
17,823,950 Ser. 99-C1, Class X, Interest Only (IO), 0.99s, 2020 1,122,352
480,000 Countrywide Home Loan Ser. 98-3, Class A5, 6 3/4s, 2028 446,325
420,000 Countrywide Mortgage Backed Securities, Inc. Ser. 93-C,
Class A8, 6 1/2s, 2024 384,825
Criimi Mae Commercial Mortgage Trust
1,344,000 Ser. 98-C1, Class A2, 7s, 2011 1,171,800
372,000 Ser. 98-C1, Class B, 7s, 2011 298,646
100,000 CS First Boston Mortgage Securities Corp. Ser. 99-C1,
Class A2, 7.29s, 2009 98,094
13,394,741 Deutsche Mortgage & Asset Receiving Corp. Ser. 98-C1,
Class X, IO, 0.86s, 2031 705,317
Fannie Mae
1,682,000 Ser. 96-5, Class SW, IO, 12.88s, 2018 611,828
940,766 Ser. 281, IO, Class 2, 9s, 2026 259,593
923,231 Ser. 241, IO, Class 2, 8 1/2s, 2023 258,360
178,263 Ser. 176, IO, Class 2, 8s, 2022 52,309
498,067 Ser. 217, IO, Class 2, 8s, 2023 146,151
180,525 Ser. 218, IO, Class 2, 7.5s, 2023 54,496
465,073 Ser. 252, IO, Class 2, 7.5s, 2023 142,574
2,812,763 Ser. 215, IO, Class 2, 7s, 2023 834,599
212,099 Ser. 302, IO, Class 2, 6s, 2029 68,004
2,700,000 Ser. 97-23, Class SJ, IO, 5.32s, 2023 604,125
2,403,701 Ser. 97-23, Class SH, IO, 4.02s, 2023 567,874
Freddie Mac
555,000 Ser. 2032, IO Class SK, 9.55s, 2024 260,850
655,000 Ser. 2183, Class SG, 6.44s, 2014 495,344
269,898 Ser. 2122, Class ZA, 6 1/4s, 2028 211,955
383,023 Ser. 1208, Class F, Principal Only (PO), zero %, 2022 295,646
284,480 Ser. 180, PO, zero %, 2026 193,979
285,000 GE Capital Mortgage Services, Inc. Ser. 98-11, Class 2A4,
6 3/4s, 2028 264,159
570,000 GGP ALA MOANA Ser. 99-C1, Class E, FRB 7.613s, 2004 571,425
GGP-Homart
120,000 Ser. 99-C1, Class G, 8.089s, 2003 120,300
140,000 Ser. 99-C1, Class F, 7.858s, 2003 140,350
GGP-Ivanhoe
150,000 Ser. 99-C1, Class G, FRB 8.63s, 2004 150,375
250,000 Ser. 99-C1, Class F, FRB 7.88s, 2004 250,625
Government National Mortgage Association
548,224 Ser. 99-38, Class SL, 15.13s, 2026 492,031
314,279 Ser. 00-17, Class SB, 13.2s, 2026 304,359
1,795,514 Ser. 99-25, Class QA, 12.6s, 2026 1,498,132
168,935 Ser. 99-34, Class S, 8.112s, 2025 134,937
Merrill Lynch Mortgage Investors, Inc.
210,000 Ser. 95-C3, Class D, 7.782s, 2025 205,373
315,000 Ser. 96-C2, Class E, 6.96s, 2028 273,263
5,746,840 Ser. 96-C2, IO, 1.607s, 2028 383,422
4,493,599 Ser. 98-C2, IO, 1.076s, 2030 313,850
Morgan Stanley Capital I
290,000 Ser. 98-XL1, Class A3, 6.48s, 2030 271,150
3,734,992 Ser. 98-HF1, Class X, IO, 0.668s, 2018 199,589
Mortgage Capital Funding, Inc.
1,931,090 Ser. 97-MC2, Class X, IO, 0.817s, 2012 128,236
860,735 Ser. 98-MC1, Class X, IO, 0.493s, 2009 31,672
203,493 PNC Mortgage Securities Corp. Ser. 97-6, Class A2,
6.6s, 2027 200,949
50,942 Prudential Home Mortgage Securities Ser. 93-57,
Class A4, 5.9s, 2023 49,923
75,019 Rural Housing Trust Ser. 87-1, Class D, 6.33s, 2026 72,393
413,176 Structured Asset Security Corp. Ser. 98-RF2, 8.58s, 2028 420,342
2,466,662 Structured Asset Security Corp. Ser. 98-RF3, IO 6.1s, 2028 489,016
----------------
Total Collateralized Mortgage Obligations
(cost $20,021,415) $ 19,937,217
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (8.4%) (a)
PRINCIPAL AMOUNT VALUE
U.S. Government Agency Mortgage Obligations (4.3%)
- ----------------------------------------------------------------------------------------------------------------------------
$ 365,000 Federal National Mortgage Association 7 1/2s, TBA,
April 1, 2030 $ 358,784
Federal National Mortgage Association
Pass-through Certificates
1,156,409 8s, with due dates from April 1, 2027 to
November 1, 2029 1,159,658
307,299 7s, May 1, 2011 301,823
365,000 Government National Mortgage Association 8s, TBA,
April 1, 2030 369,165
Government National Mortgage Association
Pass-Through Certificates
3,613,744 8s, with due dates from December 15, 2022 to
November 15, 2027 3,654,400
1,365,905 7 1/2s, with due dates from October 15, 2022 to
November 15, 2023 1,359,499
1,706,549 7s, with due dates from December 15, 2022 to
November 15, 2027 1,659,651
----------------
8,862,980
U.S. Treasury Obligations (4.1%)
- ----------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Bonds
265,000 6 1/4s, May 15, 2030 280,155
5,440,000 6 1/8s, August 15, 2029 5,544,557
665,000 6 1/8s, November 15, 2027 671,544
U.S. Treasury Notes
60,000 6 3/8s, January 31, 2002 59,831
1,350,000 6 1/8s, December 31, 2001 (SEG) 1,341,144
436,000 6s, August 15, 2009 430,480
200,000 5 7/8s, November 15, 2004 196,374
----------------
8,524,085
----------------
Total U.S. Government and Agency Obligations
(cost $17,167,853) $ 17,387,065
BRADY BONDS (4.0%) (a)
PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------
$ 805,000 Argentina (Republic of) govt. guaranty 6s, 2023 $ 563,500
5,065,151 Brazil (Federal Republic of) bonds FRB 8s, 2014 (POR) 3,792,785
1,725,000 Bulgaria (Government of) Ser. A, FRB 7.063s, 2024 1,386,555
685,000 Peru (Republic of) bonds Ser. PDI, FRB, 4 1/2s, 2017 456,416
2,830,000 Venezuela (Republic of) Ser. W-A, 6 3/4s, 2020 2,016,375
----------------
Total Brady Bonds (cost $7,795,698) $ 8,215,631
PREFERRED STOCKS (3.6%) (a)
NUMBER OF SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------------------
600 Adelphia Communications Corp. Ser. B, $13.00 cum. pfd. $ 64,200
3,021 AmeriKing, Inc. $3.25 pfd. (PIK) 33,231
94 Benedek Communications $11.50 pfd. (PIK) 75,670
20,000 Brand Scaffold Services, Inc. 144A $3.625 pfd. 550,000
16,000 California Federal Bancorp, Inc. Ser. A, $2.281 pfd. 372,000
11,880 CGA Group Ltd. 144A Ser. A, $13.75 pfd. (PIK) 320,760
12,575 Chevy Chase Capital Corp. Ser. A, $5.188 pfd. (PIK) 666,475
1,200 Chevy Chase Savings Bank $3.25 pfd. 29,400
1,029 Citadel Broadcasting, Inc. 144A $13.25 cum. pfd. (PIK) 114,991
111 Concentric Network Corp. Ser. B, 13.50% pfd. (PIK) 113,012
4,760 CSC Holdings, Inc. Ser. M, $11.125 cum. pfd. (PIK) 515,270
3,500 Diva Systems Corp. Ser. C, $6.00 pfd. 17,500
18,000 Diva Systems Corp. Ser. D, $6.00 pfd. 90,000
339 Dobson Communications Corp. 13.00% pfd. 359,340
212 Dobson Communications Corp. 144A 12.25% pfd. (PIK) 205,640
110 First Republic 144A 10.50% pfd. 106,150
290 Fresenius Medical Capital Trust I company guaranty,
Ser. D, $9.00 pfd. (Germany) 274,775
320 Fresenius Medical Capital Trust II company guaranty,
$7.875 pfd. (Germany) 288,000
1,730 Global Crossing Holdings 144A $10.50 pfd. (Bermuda) 169,540
452 Granite Broadcasting 144A 12.75% pfd.(PIK) 397,760
279 ICG Holdings, Inc. 14.25% pfd. 253,890
444 Intermedia Communication Ser. B, 13.50% pfd.(PIK) 424,020
216 Nextel Communications, Inc. Ser. D, 13.00% cum. pfd. (PIK) 228,960
3,880 Nextlink Communications, Inc. 144A $7.00 cum. pfd. (PIK) 194,000
43 Paxson Communications Corp. 13.25% cum. pfd. (PIK) 440,750
2,500 Public Service Co. of New Hampshire $2.65 1st mtge. pfd. 62,500
254 R&B Falcon Corp. 13.875% pfd. 281,940
270 Rural Cellular Corp. 12.25% pfd. (PIK) 269,460
165 Webster Financial 7.375% pfd. 156,750
200 WinStar Communications, Inc. 144A 14.25% cum. pfd. (PIK) 270,000
----------------
Total Preferred Stocks (cost $7,251,172) $ 7,345,984
UNITS (0.6%) (a)
NUMBER OF UNITS VALUE
- ----------------------------------------------------------------------------------------------------------------------------
330 App China Group Ltd. 144A units 14s, 2010 $ 278,850
350 Australis Media, Ltd. units stepped-coupon zero %
(15 3/4s, 5/15/00), 2003 (In default) (Australia) (NON) (STP) 35
90 Colo.com 144A units 13 7/8s, 2010 90,000
200 Equinix, Inc. 144A units 13s, 2007 210,000
240 Leap Wireless 144A units 12 1/2s, 2010 240,000
240 Maxcom Telecom 144A units 13 3/4s, 2007 242,400
225 XCL Ltd. units sr. sec. notes 13 1/2s, 2004 (In default) (NON) 22,500
2 XCL Ltd. 144A units cum. cv. pfd. 9.5s, 2006(PIK) 2,000
160 XM Satellite Radio Inc, 144A units 14s, 2010 151,200
----------------
Total Units (cost $2,022,942) $ 1,236,985
ASSET-BACKED SECURITIES (0.8%) (a)
PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------
$ 55 Capita Equipment Receivables Trust Ser. 96-1, Class A4,
6.28s, 2000 $ 55
60,474 Contimortgage Home Equity Loan Trust Ser. 97-1,
Class M2, 7.67s, 2028 30,237
520,844 First Plus Ser. 98-A, Class A, 8 1/2s, 2023 390,633
1,232,023 Provident Bank Home Equity Loan Trust 6.029s, 2029 1,231,253
----------------
Total Asset-Backed Securities (cost $1,808,400) $ 1,652,178
CONVERTIBLE PREFERRED STOCKS (0.4%) (a)
NUMBER OF SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------------------
870 Chesapeake Energy Corp. $3.50 cum. cv. pfd. $ 32,408
10,970 Global Telesystems, Inc. 144A $3.625 cv. pfd. 414,118
110 Interact Electronic $14.00 cv. pfd 110
1,400 LTV Corp. (The) 144A $4.13 cv. pfd. 74,988
10 Paxson Communications Corp. 144A $9.75 cv. pfd. (PIK) 92,000
1,600 RSL Communications Ltd. 144A cv. pfd. (Bermuda) 97,200
40 World Access, Inc. Ser. D, 4.50% cv. pfd. 41,200
330 XCL Ltd 144A Ser. A, $9.50 cv. cum. pfd. 330
----------------
Total Convertible Preferred Stocks (cost $939,228) $ 752,354
CONVERTIBLE BONDS AND NOTES (0.4%) (a)
PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------
$ 570,000 Cybernet Internet Service 144A cv. sr. disc. notes
stepped-coupon zero % (13s, 8/15/04), 2009 (STP) $ 287,850
380,000 Exide Corp. 144A cv. sr. sub. notes 2.9s, 2005 218,500
4,000 GST Telecommunications, Inc. 144A cv. sr. disc. notes
stepped-coupon zero % (13 7/8s, 12/15/00), 2005 (STP) 3,120
150,000 HEALTHSOUTH Corp. cv. sub. deb. 3 1/4s, 2003 117,188
195,000 Mahindra & Mahindra Ltd. cv. bonds 12s, 2008 (Mexico) 189,150
----------------
Total Convertible Bonds and Notes (cost $839,843) $ 815,808
WARRANTS (0.3%) (a) (NON) EXPIRATION
NUMBER OF WARRANTS DATE VALUE
- ----------------------------------------------------------------------------------------------------------------------------
130 Bestel S.A. de C.V. (Mexico) 5/15/05 $ 14,300
120 Birch Telecommunications, Inc. 144A 6/15/08 6,600
615 Cellnet Data Systems, Inc. 10/1/07 1
11,800 CGA Group Ltd. 144A 2/11/07 118
720 Club Regina, Inc. 144A 12/1/04 7
225 Cybernet Internet 144A 7/1/09 22,500
400 Decrane Holdings 9/30/08 4
1,389 Diva Systems Corp. 3/1/08 33,336
35 Diva Systems Corp. 5/15/06 14,000
250 Epic Resorts 6/15/05 3
85 Esat Holdings, Inc. (Ireland) 2/1/07 19,125
230 Firstworld Communication 4/15/08 40,250
120 Globalstar Telecommunications 2/15/04 600
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 2/1/10 1
500 Iridium World Com 144A 7/15/05 1
280 KMC Telecom Holdings, Inc. 4/15/08 980
290 Knology Holdings 10/22/07 943
160 McCaw International Ltd. 4/15/07 720
145 Mediq ,Inc. 144A 6/1/09 1
251 Network Plus Corp. 2/19/09 165,655
70 Onepoint Communications, Inc. 6/1/08 1,400
140 Orbital Imaging Corp. 144A 3/1/05 2,800
160 Orion Network Systems 1/15/07 2,000
480 Pathnet, Inc. 144A 4/15/08 4,800
320 Paxson Communications Corp. 144A 6/30/03 960
230 R&B Falcon Corp. 144A 5/1/09 80,500
140 Startec Global Communications Corp. 5/15/08 2,548
45 Sterling Chemicals Holdings 8/15/08 810
130 Telehub Communications Corp. 7/31/05 65
395 UIH Australia/Pacific, Inc. 144A 5/15/06 11,850
205 Versatel Telecom B.V. 144A (Netherlands) 5/15/08 123,000
----------------
Total Warrants (cost $348,677) $ 549,882
COMMON STOCKS (0.1%) (a)
NUMBER OF SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------------------
50 AmeriKing, Inc. (NON) $ 500
2,000 AMFM, Inc. (NON) 124,250
49,785 Celcaribe S.A. (NON) 12,446
1,024 Fitzgerald Gaming Corp. (NON) 256
73 Mothers Work, Inc. (NON) 876
60 Paging Do Brazil Holdings Co., LLC 144A Class B, (Brazil) (NON) 1
2,100 Spanish Broadcasting Systems (NON) 37,800
1,003 Viatel, Inc. (NON) 50,338
----------------
Total Common Stocks (cost $175,382) $ 226,467
PURCHASED OPTIONS OUTSTANDING (--%) (a) EXPIRATION DATE/
CONTRACT AMOUNT STRIKE PRICE VALUE
- ----------------------------------------------------------------------------------------------------------------------------
$ 6,500,000 U.S. Treasury Bonds Twenty Year Futures
Contract (put) May 00/88 USD $ 1,016
3,600,000 U.S. Treasury Bonds Twenty Year Futures
Contract (put) May 00/90 USD 1,688
2,200,000 U.S. Treasury Bonds Twenty Year Futures
Contract (put) May 00/92 USD 2,406
----------------
Total Purchased Options Outstanding
(cost $94,161) $ 5,110
SHORT-TERM INVESTMENTS (2.6%) (a)
PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------
$ 365,000 Salomon Smith Barney for an effective yield of 5.99%,
April 19, 2000 $ 363,907
555,000 Windmill Funding Corp. for an effective yield of 5.86%,
April 7, 2000 554,458
4,515,000 Interest in $754,202,000 joint repurchase agreement
March 31, 2000 with Morgan (J.P.) & Co., Inc. due
April 3, 2000 with respect to various U.S. Treasury
obligations -- maturity value of $4,517,291 for an
effective yield of 6.09% 4,515,000
----------------
Total Short-Term Investments (cost $5,435,975) $ 5,433,365
- ----------------------------------------------------------------------------------------------------------------------------
Total Investments (cost $213,093,261) (b) $ 200,597,484
- ----------------------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $206,552,679.
(b) The aggregate identified cost on a tax basis is $214,275,785, resulting in gross unrealized appreciation and
depreciation of $5,152,530 and $18,830,831, respectively, or net unrealized depreciation of $13,678,301.
(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 March 31, 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).
The rates shown on Floating Rate Bonds (FRB) and Floating Rate Notes (FRN) are the current interest rates
at March 31, 2000, which are subject to change based on the terms of the security.
DIVERSIFICATION BY COUNTRY
Distribution of investments by country of issue at March 31, 2000:
(as percentage of Market Value)
Argentina 1.2%
Australia 1.3
Brazil 2.7
Canada 2.6
Germany 2.1
Mexico 3.8
Netherlands 2.5
Russia 2.4
United Kingdom 3.3
United States 74.0
Other 4.1
--------
Total 100.0%
</TABLE>
- ------------------------------------------------------------------------------
Forward Currency Contracts to Buy at March 31, 2000
(aggregate face value $29,229,755)
Unrealized
Aggregate Face Delivery Appreciation/
Market Value Value Date (Depreciation)
- ------------------------------------------------------------------------------
Australian Dollar $ 5,981,212 $ 6,092,137 6/21/00 $(110,925)
Euro 17,145,388 18,066,588 6/21/00 (921,200)
Japanese Yen 4,063,432 3,974,967 6/21/00 88,465
Swedish Krona 554,572 549,218 6/21/00 5,354
Swiss Franc 524,594 546,845 6/21/00 (22,251)
- ------------------------------------------------------------------------------
$(960,557)
- ------------------------------------------------------------------------------
Forward Currency Contracts to Sell at March 31, 2000
(aggregate face value $24,407,620)
Unrealized
Aggregate Face Delivery Appreciation/
Market Value Value Date (Depreciation)
- ------------------------------------------------------------------------------
British Pounds $9,578,161 $9,746,924 6/21/00 $168,763
Canadian Dollar 796,286 795,593 6/21/00 (693)
Danish Krone 4,279,857 4,315,265 6/21/00 35,408
Euro 2,542,532 2,678,478 6/21/00 135,946
Japanese Yen 7,080,989 6,871,360 6/21/00 (209,629)
- ------------------------------------------------------------------------------
$129,795
- ------------------------------------------------------------------------------
Futures Contracts Outstanding at March 31, 2000
Unrealized
Aggregate Face Expiration Appreciation/
Total Value Value Date (Depreciation)
- ------------------------------------------------------------------------------
Euro-bund 10yr.
(Short) $ 7,046,661 $ 6,901,442 Jun-00 $(145,219)
Euro 3month (Long) 15,122,250 15,140,726 Sep-00 (18,476)
Euro 3month (Short) 15,064,563 15,068,584 Sep-01 4,021
Gilt (Short) 903,823 889,744 Jun-00 (14,079)
U.S. Treasury Note
10yr (Long) 8,140,484 7,928,013 Jun-00 212,471
U.S. Treasury Note
5yr (Short) 2,561,000 2,522,922 Jun-00 (38,078)
U.S. Treasury Bond
20 yr (Long) 3,907,500 3,715,220 Jun-00 192,280
U.S. Treasury Bond
20 yr (Short) 683,812 665,186 Jun-00 (18,626)
- ------------------------------------------------------------------------------
$174,294
- ------------------------------------------------------------------------------
TBA Sale Commitments at March 31, 2000
(Proceeds receivable $366,768)
Settlement Market
Agency Principal Amount Date Value
- ------------------------------------------------------------------------------
GNMA, 8s, April 2030 $365,000 4/19/00 $369,165
- ------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
<TABLE>
<CAPTION>
Statement of assets and liabilities
March 31, 2000
Assets
- ----------------------------------------------------------------------------------------------
<S> <C>
Investments in securities, at value (identified cost $213,093,261) (Note 1) $200,597,484
- ----------------------------------------------------------------------------------------------
Cash 385,179
- ----------------------------------------------------------------------------------------------
Foreign currency (cost $179,071) 184,242
- ----------------------------------------------------------------------------------------------
Dividends, interest, and other receivables 4,436,140
- ----------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 603,593
- ----------------------------------------------------------------------------------------------
Receivable for securities sold 5,576,656
- ----------------------------------------------------------------------------------------------
Receivable for open forward currency contracts 467,692
- ----------------------------------------------------------------------------------------------
Receivable for closed forward currency contracts 415,809
- ----------------------------------------------------------------------------------------------
Unamortized organizational expenses (Note 1) 12,489
- ----------------------------------------------------------------------------------------------
Total assets 212,679,284
Liabilities
- ----------------------------------------------------------------------------------------------
Payable for variation margin 5,516
- ----------------------------------------------------------------------------------------------
Distributions payable to shareholders 571,306
- ----------------------------------------------------------------------------------------------
Payable for securities purchased 2,557,890
- ----------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 454,507
- ----------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 371,360
- ----------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 51,024
- ----------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 11,224
- ----------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 1,593
- ----------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 164,230
- ----------------------------------------------------------------------------------------------
Payable for open forward currency contracts 1,298,454
- ----------------------------------------------------------------------------------------------
Payable for closed forward currency contracts 242,168
- ----------------------------------------------------------------------------------------------
TBA sales commitments, at value (proceeds receivable $366,768) 369,165
- ----------------------------------------------------------------------------------------------
Other accrued expenses 28,168
- ----------------------------------------------------------------------------------------------
Total liabilities 6,126,605
- ----------------------------------------------------------------------------------------------
Net assets $206,552,679
Represented by
- ----------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $239,261,396
- ----------------------------------------------------------------------------------------------
Distributions in excess of net investment income (Note 1) (2,639,291)
- ----------------------------------------------------------------------------------------------
Accumulated net realized loss on investments and
foreign currency transactions (Note 1) (16,899,218)
- ----------------------------------------------------------------------------------------------
Net unrealized depreciation of investments and assets and
liabilities in foreign currencies (13,170,208)
- ----------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $206,552,679
Computation of net asset value and offering price
- ----------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($76,608,049 divided by 10,758,869 shares) $7.12
- ----------------------------------------------------------------------------------------------
Offering price per class A share (100/95.25 of $7.12)* $7.48
- ----------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($117,090,217 divided by 16,424,176 shares)** $7.13
- ----------------------------------------------------------------------------------------------
Net asset value and offering price per class C share
($5,447,751 divided by 762,931shares)** $7.14
- ----------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($7,406,662 divided by 1,040,249 shares) $7.12
- ----------------------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $7.12)* $7.36
- ----------------------------------------------------------------------------------------------
* On single retail sales of less than $50,000. On sales of $50,000 or more and on group sales,
the offering price is reduced.
** Redemption price per share is equal to net asset value less any applicable contingent
deferred sales charge.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Year ended March 31, 2000
Investment income:
- ----------------------------------------------------------------------------------------------
<S> <C>
Interest income (net of foreign tax of $1,338) $ 20,302,619
- ----------------------------------------------------------------------------------------------
Dividends 673,807
- ----------------------------------------------------------------------------------------------
Total investment income 20,976,426
Expenses:
- ----------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 1,529,424
- ----------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 407,186
- ----------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 14,901
- ----------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 200,860
- ----------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 1,255,515
- ----------------------------------------------------------------------------------------------
Distribution fees -- Class C (Note 2) 49,400
- ----------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 43,539
- ----------------------------------------------------------------------------------------------
Administrative services (Note 2) 6,753
- ----------------------------------------------------------------------------------------------
Reports to shareholders 25,182
- ----------------------------------------------------------------------------------------------
Amortization of organizational expenses 7,655
- ----------------------------------------------------------------------------------------------
Registration fees 1,098
- ----------------------------------------------------------------------------------------------
Auditing 57,465
- ----------------------------------------------------------------------------------------------
Legal 23,823
- ----------------------------------------------------------------------------------------------
Postage 20,137
- ----------------------------------------------------------------------------------------------
Other 28,873
- ----------------------------------------------------------------------------------------------
Total expenses 3,671,811
- ----------------------------------------------------------------------------------------------
Expense reduction (Note 2) (32,928)
- ----------------------------------------------------------------------------------------------
Net expenses 3,638,883
- ----------------------------------------------------------------------------------------------
Net investment income 17,337,543
- ----------------------------------------------------------------------------------------------
Net realized loss on investments (Notes 1 and 3) (8,590,876)
- ----------------------------------------------------------------------------------------------
Net realized loss on foreign currency transactions (Note 1) (660,953)
- ----------------------------------------------------------------------------------------------
Net realized loss on swap contracts (Note 1) (5,439)
- ----------------------------------------------------------------------------------------------
Net realized loss on futures contracts (Note 1) (1,866,283)
- ----------------------------------------------------------------------------------------------
Net unrealized depreciation of assets and liabilities in
foreign currencies during the year (901,615)
- ----------------------------------------------------------------------------------------------
Net unrealized depreciation of investments, futures
contracts and TBA sale commitments during the year (1,908,982)
- ----------------------------------------------------------------------------------------------
Net loss on investments (13,934,148)
- ----------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $ 3,403,395
- ----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Year ended March 31
-----------------------------------
2000 1999
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets
- -------------------------------------------------------------------------------------------------------
Operations:
- -------------------------------------------------------------------------------------------------------
Net investment income $ 17,337,543 $ 12,850,688
- -------------------------------------------------------------------------------------------------------
Net realized loss on investments and foreign
currency transactions (11,123,551) (7,088,106)
- -------------------------------------------------------------------------------------------------------
Net unrealized depreciation of investments and
asset and liabilities in foreign currencies (2,810,597) (14,086,489)
- -------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations 3,403,395 (8,323,907)
- -------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- -------------------------------------------------------------------------------------------------------
From net investment income
Class A (6,691,231) (5,128,659)
- -------------------------------------------------------------------------------------------------------
Class B (9,569,013) (7,008,305)
- -------------------------------------------------------------------------------------------------------
Class C (371,754) (6,333)
- -------------------------------------------------------------------------------------------------------
Class M (705,545) (646,669)
- -------------------------------------------------------------------------------------------------------
In excess of net investment income
Class A (357,587) --
- -------------------------------------------------------------------------------------------------------
Class B (511,379) --
- -------------------------------------------------------------------------------------------------------
Class C (19,866) --
- -------------------------------------------------------------------------------------------------------
Class M (37,705) --
- -------------------------------------------------------------------------------------------------------
From net realized gain on investments
Class A -- (172,254)
- -------------------------------------------------------------------------------------------------------
Class B -- (272,107)
- -------------------------------------------------------------------------------------------------------
Class C -- (4,122)
- -------------------------------------------------------------------------------------------------------
Class M -- (19,980)
- -------------------------------------------------------------------------------------------------------
From return of capital
Class A (248,848) (685,978)
- -------------------------------------------------------------------------------------------------------
Class B (355,873) (937,771)
- -------------------------------------------------------------------------------------------------------
Class C (13,826) (888)
- -------------------------------------------------------------------------------------------------------
Class M (26,239) (86,477)
- -------------------------------------------------------------------------------------------------------
Increase from capital share transactions (Note 4) 8,181,420 86,003,857
- -------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets (7,324,051) 62,710,407
Net assets
- -------------------------------------------------------------------------------------------------------
Beginning of year 213,876,730 151,166,323
- -------------------------------------------------------------------------------------------------------
End of year (including distributions in excess of
net investment income of $2,639,291 and
$466,760, respectively) $206,552,679 $213,876,730
- -------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS A
- -----------------------------------------------------------------------------------------------------------------
For the period
Per-share Feb. 26, 1996+
operating performance Year ended March 31 to March 31
- -----------------------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $7.64 $8.70 $8.34 $8.38 $8.50
- -----------------------------------------------------------------------------------------------------------------
Investment operations
- -----------------------------------------------------------------------------------------------------------------
Net investment income .61 .60(c) .65(d) .63(d) .04(c)(d)
- -----------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.47) (.97) .40 (.02) (.13)
- -----------------------------------------------------------------------------------------------------------------
Total from
investment operations .14 (.37) 1.05 .61 (.09)
- -----------------------------------------------------------------------------------------------------------------
Less distributions:
- -----------------------------------------------------------------------------------------------------------------
From net
investment income (.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 (.66) (.69) (.69) (.65) (.03)
- -----------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $7.12 $7.64 $8.70 $8.34 $8.38
- -----------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- -----------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 2.07 (4.33) 13.05 7.36 (1.41)*
- -----------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $76,608 $78,484 $57,016 $39,178 $3,799
- -----------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.22 1.31 1.26(d) 1.25(d) .13*(d)
- -----------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 8.37 7.43 7.82(d) 7.74(d) .50*(d)
- -----------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 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
- -----------------------------------------------------------------------------------------------------------------
For the period
Per-share Feb. 26, 1996+
operating performance Year ended March 31 to March 31
- -----------------------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $7.65 $8.70 $8.34 $8.38 $8.50
- -----------------------------------------------------------------------------------------------------------------
Investment operations
- -----------------------------------------------------------------------------------------------------------------
Net investment income .56 .53(c) .59(d) .57(d) .03(c)(d)
- -----------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.47) (.95) .40 (.03) (.12)
- -----------------------------------------------------------------------------------------------------------------
Total from
investment operations .09 (.42) .99 .54 (.09)
- -----------------------------------------------------------------------------------------------------------------
Less distributions:
- -----------------------------------------------------------------------------------------------------------------
From net
investment income (.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 (.61) (.63) (.63) (.58) (.03)
- -----------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $7.13 $7.65 $8.70 $8.34 $8.38
- -----------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- -----------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 1.30 (4.93) 12.20 6.56 (1.41)*
- -----------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $117,090 $124,434 $85,379 $57,052 $5,048
- -----------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.97 2.06 2.01(d) 2.00(d) .20*(d)
- -----------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 7.62 6.67 7.07(d) 6.99(d) .44*(d)
- -----------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 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 C
- -----------------------------------------------------------------------------------------------------------------
For the period
Per-share Year ended Feb. 1, 1999+
operating performance March 31 to March 31
- -----------------------------------------------------------------------------------------------------------------
2000 1999
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net asset value,
beginning of period $7.66 $7.77
- -----------------------------------------------------------------------------------------------------------------
Investment operations
- -----------------------------------------------------------------------------------------------------------------
Net investment income .56 .03(c)
- -----------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.47) (.05)
- -----------------------------------------------------------------------------------------------------------------
Total from
investment operations .09 (.01)
- -----------------------------------------------------------------------------------------------------------------
Less distributions:
- -----------------------------------------------------------------------------------------------------------------
From net
investment income (.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 (.61) (.10)
- -----------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $7.14 $7.66
- -----------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- -----------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 1.29 (.12)*
- -----------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $5,448 $1,957
- -----------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.97 .33*
- -----------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 7.68 .73*
- -----------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 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>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS M
- -----------------------------------------------------------------------------------------------------------------
For the period
Per-share Feb. 26, 1996+
operating performance Year ended March 31 to March 31
- -----------------------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $7.64 $8.70 $8.34 $8.38 $8.50
- -----------------------------------------------------------------------------------------------------------------
Investment operations
- -----------------------------------------------------------------------------------------------------------------
Net investment income .59 .58(c) .64(d) .61(d) .04(c)(d)
- -----------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.47) (.97) .39 (.03) (.13)
- -----------------------------------------------------------------------------------------------------------------
Total from
investment operations .12 (.39) 1.03 .58 (.09)
- -----------------------------------------------------------------------------------------------------------------
Less distributions:
- -----------------------------------------------------------------------------------------------------------------
From net
investment income (.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 (.64) (.67) (.67) (.62) (.03)
- -----------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $7.12 $7.64 $8.70 $8.34 $8.38
- -----------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- -----------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 1.82 (4.57) 12.76 7.09 (1.41)*
- -----------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $7,407 $9,001 $8,771 $5,802 $482
- -----------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.47 1.56 1.51(d) 1.50(d) .14*(d)
- -----------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 8.11 7.21 7.57(d) 7.48(d) .50*(d)
- -----------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 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
March 31, 2000
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 lower than class B shares
and higher than class A shares.
Expenses of the fund are borne pro-rata by the holders of each class of
shares, except that each class bears expenses unique to that class
(including the distribution fees applicable to such class). Each class
votes as a class only with respect to its own distribution plan or other
matters on which a class vote is required by law or determined by the
Trustees. Shares of each class would receive their pro-rata share of the
net assets of the fund, if the fund were liquidated. In addition, the
Trustees declare separate dividends on each class of shares.
The following is a summary of significant accounting policies
consistently followed by the fund in the preparation of its financial
statements. The preparation of financial statements is in conformity
with generally accepted accounting principles and requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities 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 by
Putnam Investment Management, Inc. ("Putnam Management"), the fund's
manager, a wholly-owned subsidiary of Putnam Investments, Inc. These
balances may be invested in one or more repurchase agreements and/or
short-term money market instruments.
C) Repurchase agreements The fund, or any joint trading account, through
its custodian, receives delivery of the underlying securities, the
market value of which at the time of purchase is required to be in an
amount at least equal to the resale price, including accrued interest.
Collateral for certain tri-party repurchase agreements is held at the
counterparty's custodian in a segregated account for the benefit of the
fund and the counterparty. Putnam Management is responsible for
determining that the value of these underlying securities is at all
times at least equal to the resale price, including accrued interest.
D) Security transactions and related investment income Security
transactions are accounted for on the trade date (date the order to buy
or sell is executed). Gains or losses on securities sold are determined
on the identified cost basis.
Interest income is recorded on the accrual basis. Dividend income is
recorded on the ex-dividend date except that certain dividends from
foreign securities are recorded as soon as the fund is informed of the
ex-dividend date. Discounts on zero coupon bonds, original issue
discount bonds, stepped-coupon bonds and payment in kind bonds are
accreted according to the yield-to-maturity basis. Any premium resulting
from the purchase of stepped-coupon securities is amortized on a
yield-to-maturity basis.
E) Foreign currency translation The accounting records of the fund are
maintained in U.S. dollars. The market value of foreign securities,
currency holdings, and other assets and liabilities are recorded in the
books and records of the fund after translation to U.S. dollars based on
the exchange rates on that day. The cost of each security is determined
using historical exchange rates. Income and withholding taxes are
translated at prevailing exchange rates when accrued or incurred. The
fund does not isolate that portion of realized or unrealized gains or
losses resulting from changes in the foreign exchange rate on
investments from fluctuations arising from changes in the market prices
of the securities. Such gains and losses are included with the net
realized and unrealized gain or loss on investments. Net realized gains
and losses on foreign currency transactions represent net realized
exchange gains or losses on closed forward currency contracts,
disposition of foreign currencies and the difference between the amount
of investment income and foreign withholding taxes recorded on the
fund's books and the U.S. dollar equivalent amounts actually received or
paid. Net unrealized appreciation and depreciation of assets and
liabilities in foreign currencies arise from changes in the value of
open forward currency contracts and assets and liabilities other than
investments at the period end, resulting from changes in the exchange
rate. 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) 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. The fund may enter into equity
swap agreements, to manage its exposure to equity markets, 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) 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.
J) 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.
K) Line of credit The fund has entered into a committed line of credit
with certain banks. This line of credit agreement includes restrictions
that the fund maintain an asset coverage ratio of at least 300% and
borrowings must not exceed prospectus limitations. For the year ended
ended March 31, 2000, the fund had no borrowings against the line of
credit.
L) 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 net capital gain,
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
M) Distributions to shareholders Distributions to shareholders from net
investment income are recorded by the fund on the ex-dividend date.
Capital gain distributions, if any, are recorded on the ex-dividend date
and paid at least annually. The amount and character of income and gains
to be distributed are determined in accordance with income tax
regulations which may differ from generally accepted accounting
principles. These differences include temporary and permanent
differences of losses on wash sale transactions, foreign currency gains
and losses, post-October loss deferrals, organization costs, dividends
payable, defaulted bond interest, unrealized gains and losses on certain
futures contracts, paydown gains and losses on mortgage backed
securities, market discount and interest on payment-in-kind securities.
Reclassifications are made to the fund's capital accounts to reflect
income and gains available for distribution (or available capital loss
carryovers) under income tax regulations. For the year ended March 31,
2000, the fund reclassified $1,245,994 to increase distributions in
excess of net investment income and $132,599 to decrease
paid-in-capital, with a decrease to accumulated net realized losses of
$1,378,593. The calculation of net investment income per share in the
financial highlights table excludes these adjustments.
N) 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
based on projected net asset levels over a five-year period.
Note 2
Management fee, administrative services and other transactions
Compensation of Putnam Management, for management and investment
advisory services is paid quarterly based on the average net assets of
the fund. Such fee is based on the following annual rates: 0.70% of the
first $500 million of average net assets, 0.60% of the next $500
million, 0.55% of the next $500 million, 0.50% of the next $5 billion,
0.475% of the next $5 billion, 0.455% of the next $5 billion, 0.44% of
the next $5 billion, and 0.43% thereafter.
The fund reimburses Putnam Management an allocated amount for the
compensation and related expenses of certain officers of the fund and
their staff who provide administrative services to the fund. The
aggregate amount of all such reimbursements is determined annually by
the Trustees.
Custodial functions for the fund's assets are provided by Putnam
Fiduciary Trust Company (PFTC), a subsidiary of Putnam Investments, Inc.
Investor servicing agent functions are provided by Putnam Investor
Services, a division of PFTC.
For the year ended March 31, 2000, fund expenses were reduced by $32,928
under expense offset arrangements with PFTC and brokerage service
arrangements. 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 $684
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 Mutual Funds Corp., a wholly-owned subsidiary of
Putnam Investments Inc., for services provided and expenses incurred by
it in distributing shares of the fund. The Plans provide for payments by
the fund to Putnam Mutual Funds Corp. at an annual rate up to 0.35%,
1.00%, 1.00% and 1.00% of the average net assets attributable to class
A, class B, class C and class M shares, respectively. The Trustees have
approved payment by the fund at an annual rate of 0.25%, 1.00%, 1.00%
and 0.50% of the average net assets attributable to class A, class B,
class C and class M shares, respectively.
For the year ended March 31, 2000, Putnam Mutual Funds Corp., acting as
underwriter received net commissions of $68,949 and $1,743 from the sale
of class A and class M shares, respectively, and received $396,869 and
$4,098 in contingent deferred sales charges from redemptions of class B
and class C shares, respectively. A deferred sales charge of up to 1% is
assessed on certain redemptions of class A shares. For the year ended
March 31, 2000, Putnam Mutual Funds Corp., acting as underwriter
received $3,324 on class A redemptions.
Note 3
Purchases and sales of securities
During the year ended March 31, 2000, purchases and sales of investment
securities other than U.S. government obligations and short-term
investments aggregated $224,060,454 and $216,337,552, respectively.
Purchases and sales of U.S. government obligations aggregated
$166,188,482 and $175,576,025, respectively.
Note 4
Capital shares
At March 31, 2000, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
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
- ---------------------------------------------------------------------------
Year ended March 31, 1999
- ---------------------------------------------------------------------------
Class A Shares Amount
- ---------------------------------------------------------------------------
Shares sold 7,713,394 $61,974,962
- ---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 529,306 4,214,619
- ---------------------------------------------------------------------------
8,242,700 66,189,581
Shares
repurchased (4,527,889) (35,815,929)
- ---------------------------------------------------------------------------
Net increase 3,714,811 $30,373,652
- ---------------------------------------------------------------------------
Year ended March 31, 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
- ---------------------------------------------------------------------------
Year ended March 31, 1999
- ---------------------------------------------------------------------------
Class B Shares Amount
- ---------------------------------------------------------------------------
Shares sold 10,357,970 $83,776,294
- ---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 683,889 5,099,725
- ---------------------------------------------------------------------------
11,041,859 88,876,019
Shares
repurchased (4,583,200) (36,621,223)
- ---------------------------------------------------------------------------
Net increase 6,458,659 $52,254,796
- ---------------------------------------------------------------------------
Year ended March 31, 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
- ---------------------------------------------------------------------------
For the period February 1, 1999
(commencement of operations) to
March 31, 1999
- ---------------------------------------------------------------------------
Class C Shares Amount
- ---------------------------------------------------------------------------
Shares sold 254,964 $1,952,429
- ---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 1,162 8,902
- ---------------------------------------------------------------------------
256,126 1,961,331
Shares
repurchased (456) (3,483)
- ---------------------------------------------------------------------------
Net increase 255,670 $1,957,848
- ---------------------------------------------------------------------------
Year ended March 31, 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)
- ---------------------------------------------------------------------------
Year ended March 31, 1999
- ---------------------------------------------------------------------------
Class M Shares Amount
- ---------------------------------------------------------------------------
Shares sold 713,461 $5,813,600
- ---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 69,417 553,147
- ---------------------------------------------------------------------------
782,878 6,366,747
Shares
repurchased (612,585) (4,949,186)
- ---------------------------------------------------------------------------
Net increase 170,293 $1,417,561
- ---------------------------------------------------------------------------
Federal tax information
(Unaudited)
The fund has designated 3.74% of the distributions from net investment
income as qualifying for the dividends received deduction for
corporations.
For the year ended March 31, 2000, a portion of the funds distribution
represents a return of capital and is therefore not taxable to
shareholders.
The Form 1099 you receive in January 2001 will show the tax status of
all distributions paid to your account in calendar 2000.
Fund information
WEB SITE
www.putnaminv.com
INVESTMENT MANAGER
Putnam Investment
Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
John A. Hill, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
Ronald J. Jackson
Paul L. Joskow
Elizabeth T. Kennan
Lawrence J. Lasser
John H. Mullin III
Robert E. Patterson
George Putnam, III
A.J.C. Smith
W. Thomas Stephens
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
John D. Hughes
Senior Vice President and Treasurer
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Ian C. Ferguson
Vice President
Brett C. Browchuk
Vice President
Stephen Oristaglio
Vice President
Edward H. D'Alelio
Vice President
James 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. For more
information or to request a prospectus, call toll free: 1-800-225-1581.
You can also learn more at Putnam Investments' Web site: www.putnaminv.com.
Shares of mutual funds are not deposits or obligations of, or guaranteed
or endorsed by, any financial institution; are not insured by the
Federal Deposit Insurance Corporation (FDIC), the Federal Reserve Board,
or any other agency; and involve risk, including the possible loss of
the principal amount invested.
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
- ---------------------
BULK RATE
U.S. POSTAGE PAID
PUTNAM
INVESTMENTS
- ---------------------
For account balances, economic forecasts, and the latest on Putnam funds, visit
www.putnaminv.com
AN029-60356 896/2BQ/2BR 5/00
