<PAGE>
Putnam
Managed
Income Trust
ANNUAL REPORT
October 31, 1994
[ARTWORK APPEARS HERE]
BOSTON * LONDON * TOKYO
<PAGE>
PERFORMANCE HIGHLIGHTS
. The fund's performance at net asset value for the 12 months ended October 31,
1994, outpaced that of the Lehman Brothers Corporate/Government Bond Index.
. The fund's class A share performance for the same one-year period ended
October 31, 1994, surpassed the average return shown by 21 income funds
tracked by Lipper Analytical Services.*
. Performance should always be considered in light of a fund's investment
strategy. Putnam Managed Income Trust is designed for investors seeking high
current return from a diversified portfolio of equity and debt securities.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
FISCAL 1994 RESULTS AT A GLANCE
- ----------------------------------------------------------------------------------
CLASS A CLASS B
TOTAL RETURN NAV POP NAV CDSC
<S> <C> <C> <C> <C>
(change in value during
period plus reinvested
distributions)
12 months ended 10/31/94 -0.61% -6.37% -- --
Life of class B (2/1/94) -- -- -2.75% -7.41%
<CAPTION>
SHARE VALUE NAV POP NAV
<S> <C> <C> <C> <C>
10/31/93 $9.28 $9.85 --
2/1/94 -- -- $9.31
10/31/94 8.68 9.21 8.67
<CAPTION>
CAPITAL GAINS
LONG- SHORT-
DISTRIBUTIONS NO. INCOME TERM TERM TOTAL
<S> <C> <C> <C> <C> <C>
Class A 4 $0.428 $.052 $.060 $0.540
Class B 3 0.271 .052 .060 0.383
<CAPTION>
CURRENT RETURN NAV POP NAV
(end of period)
<S> <C> <C> <C> <C>
Current dividend rate/1/ 5.99% 5.65% 5.49%
Current 30-day SEC yield/2/ 4.88 4.60 4.12
</TABLE>
Performance data represent past results and will differ for each share class.
For performance over longer periods, see pages 8 and 9. POP assumes 5.75%
maximum sales charge. CDSC assumes 5% maximum contingent deferred sales
charge. /1/Income portion of most recent distribution, annualized and divided
by NAV or POP at end of period. /2/Based only on net investment income,
calculated using SEC guidelines.
* Lipper Analytical Services is an independent research organization; rankings
vary over time and do not reflect the effects of sales charges. The fund's
class A shares ranked 11 out of 21 income funds and 7 out of 15 income funds
tracked by Lipper for 1-year and 5-year performance, respectively. Past
performance is not indicative of future results.
2
<PAGE>
FROM THE CHAIRMAN
[PHOTO OF GEORGE PUTNAM APPEARS HERE]
(C) Karsh, Ottawa
DEAR SHAREHOLDER:
PUTNAM MANAGED INCOME TRUST'S FISCAL YEAR THAT ENDED ON OCTOBER 31, 1994
REPRESENTED AN UNSETTLED PERIOD FOR BOTH STOCK AND BOND INVESTORS.
NEVERTHELESS, THE FUND DEMONSTRATED ONCE AGAIN THAT DIVERSIFICATION ACROSS
BOTH MARKETS CAN TAKE SOME OF THE UNCERTAINTY OUT OF INVESTING.
EARLY IN THE PERIOD, FUND MANAGERS EDWARD BOUSA AND KENNETH TAUBES SAW SIGNS
THAT INTEREST RATES WOULD SOON START RISING FROM THEIR LOWEST POINT IN
DECADES. THEY BEGAN TAKING DEFENSIVE ACTION; HAD THEY NOT DONE SO, THE TOLL
ON THE FUND'S RESULTS WOULD LIKELY HAVE BEEN GREATER IN THE WAKE OF THE
FEDERAL RESERVE BOARD'S SWIFT AND VIGOROUS MOVES TO SLOW THE PACE OF GROWTH.
AS WE HAVE RECENTLY SEEN, THE FED IS ADAMANTLY STICKING TO ITS POLICY OF
KEEPING INFLATION IN CHECK. THE RESULT IS LIKELY TO BE FURTHER UNCERTAINTY IN
BOTH THE STOCK AND BOND MARKETS. THIS, IN TURN, COULD TRANSLATE INTO
CONTINUED PRICE VOLATILITY OVER THE NEXT FEW MONTHS.
EDWARD AND KEN HAVE POSITIONED THE PORTFOLIO WITH THIS PROSPECT IN MIND. IN
THE REPORT THAT FOLLOWS, THEY DISCUSS THE FUND'S FISCAL '94 PERFORMANCE AND
OUTLOOK FOR FISCAL '95.
RESPECTFULLY YOURS,
/s/ GEORGE PUTNAM
GEORGE PUTNAM
CHAIRMAN OF THE TRUSTEES
DECEMBER 14, 1994
3
<PAGE>
REPORT FROM THE FUND MANAGERS
EDWARD P. BOUSA
KENNETH J. TAUBES
Putnam Managed Income Trust's fiscal year, the 12 months ended October 31,
1994, was a time of trial for financial markets worldwide. During the period,
interest rates rose from their lowest levels in recent history to a four-year
high, affecting virtually every sector of the securities markets. As a
result, your fund's total return for the period, though stronger than that of
many of its peers, was slightly negative: -0.61% for class A shares at net
asset value. For class B shares, introduced on February 1, 1994, performance
was -2.75%, also at net asset value.
Despite a negative total return, the fund outperformed the Lehman Brothers
Corporate/Government Bond Index, which had a return of -3.66% for the same
period. The fund's class A share return was also better than the -0.99%
average return of the 21 income funds tracked by Lipper Analytical Services.
Measured against our own internal list of 10 similar funds, the fund's
performance puts it in first place. In this list, unlike the Lipper list, all
funds hold both equities and bonds as your fund does, so we consider it a
more accurate indicator of our true competitive universe and a better test of
fund performance.
. STRATEGY PROVED MORE EFFECTIVE THAN CONVENTIONAL INCOME FUNDS
Your fund's investment strategy, which allows us to invest in stocks as well
as bonds, enabled us to increase the stock portion of the portfolio from 40%
to 45% shortly before interest rates began to rise. We had anticipated the
Federal Reserve Board's actions and had planned the shift into stocks as a
defensive move. Our stock holdings gave the fund a cushion against the worst
of the market volatility, since bonds bore the brunt of the downturn. At the
end of the period, we moved the stock portion of the portfolio back from 45%
to 42%, given the change in valuation in the bond market.
4
<PAGE>
. STOCKS PROVIDED POSITIVE RETURNS
During the year, our most optimistic expectations for some of the fund's
largest stock holdings were more than fulfilled which helped to offset
negative bond returns. We originally bought many holdings in the basic
materials sector at bargain prices when they were out of favor. This year,
the market bid up these stocks in recognition of their ability to command
higher prices and to supply growing demand on an international scale. We sold
the fund's holdings in DuPont at profits of about 45%.
In addition to our basic value criteria in stock selection, we also take a
special interest in U.S. companies that, through new efficiencies, lower-cost
production, and other factors, are actively building market share overseas.
The fund's holdings in Xerox, for example, gained about 50% this year, in
large part because the market recognized the importance of the company's
international business in digital copiers.
. TIMELY SHIFT CUSHIONED BOND DECLINE
The fund's bonds did not escape the broad-scale decline which began in
February when the Federal Reserve Board first increased interest rates.
However, we had moved decisively beforehand to increase the fund's holdings
of shorter-term bonds, which are traditionally less sensitive to interest
rate shifts than longer-term issues. The strategy, while adding stability,
slightly reduced income levels and contributed to May's dividend adjustment.
Later in the year, we moved the fund's government securities holdings into
other attractive sectors of the market, mainly Government National Mortgage
Association (GNMA) securities and other mortgage securities.
<TABLE>
<CAPTION>
---------------------------------------------------------------------
TOP INDUSTRY SECTORS* 10/31/93 10/31/94
---------------------------------------------------------------------
<S> <C> <C>
Utilities 7.6% 8.4%
Insurance and finance 6.8 7.8
Oil and gas 5.2 6.2
Consumer non-durables -- 3.0
Health care 3.1 2.4
Chemicals 3.2 2.1
</TABLE>
* Equity securities, based on net assets.
5
<PAGE>
Fortunately, the year's market volatility had less impact on the fund's high-
yield corporate bonds. These holdings responded favorably to evidence of
economic strength and corporate health shown by steadily improving
profitability. For the year as a whole, holdings in the high-yield sector
turned in the best performance of all our bond positions. Securities of
cyclical companies -- those producing products such as paper for packing and
chemicals used in basic industry -- showed attractive gains and helped
support the fund's net asset value.
. OUTLOOK: SLIGHT SHIFTS TO MEET THE EVER-CHANGING ECONOMIC LANDSCAPE
Our basic value approach to income investing now calls for a watchful eye on
the maturing U.S. recovery and on the rebound taking place overseas.
Anticipating investor response to market events is also an important factor.
Recently we began to reduce the portfolio's equity holdings in favor of
bonds, a more "normal" allocation for an income fund. Currently, lower bond
prices, reflecting ongoing volatility in the market, have made bonds'
effective yields more attractive. In light of the fund's current return
objective, we will choose bonds over stocks when both look equally
attractive. As long-term benchmark Treasury bond rates push beyond 8%, bonds
offer higher income potential and greater relative stability than stocks.
Within the bond sector, we anticipate that U.S. Treasuries and government-
backed mortgage securities will take the lead over high-yield corporate
bonds. This is because we expect investors to shift to higher-quality
securities in response to the maturing recovery. Until we are convinced
interest rates have stabilized and growth is more moderate, we will favor
government securities with an overall portfolio maturity that is still
defensive.
. BROAD DIVERSIFICATION TO CONTINUE IN BASIC VALUE STOCKS
As 1994 comes to a close, we see potential in the insurance industry because
companies may need to raise rates to cover bond losses. Nondurable consumer
stocks show promise, too, as consumers tend to restrict spending to lower-
cost items (such as food and beverages) and shop at discount retailers. As
for
6
<PAGE>
-------------------------------------------------------------------------
TOP 10 STOCK HOLDINGS (10/31/94)
-------------------------------------------------------------------------
MORGAN (J.P.) & CO., INC.
BANK HOLDING COMPANY
-------------------------------------------------------------------------
CINERGY CORPORATION
UTILITY
-------------------------------------------------------------------------
EXXON CORPORATION
DRILLING, PRODUCTION, REFINING, AND MARKETING OF OIL AND GAS
-------------------------------------------------------------------------
NYNEX CORP.
TELECOMMUNICATIONS
-------------------------------------------------------------------------
AMERICAN HOME PRODUCTS CORP.
PHARMACEUTICALS
-------------------------------------------------------------------------
PHILIP MORRIS COMPANIES
DOMESTIC FOOD PROCESSING, ALCOHOL, AND TOBACCO
-------------------------------------------------------------------------
MOBIL CORPORATION
CRUDE OIL, NATURAL GAS, AND CHEMICAL INDUSTRIES
-------------------------------------------------------------------------
AMERICAN TELEPHONE & TELEGRAPH CO.
TELECOMMUNICATIONS
-------------------------------------------------------------------------
BANKERS TRUST NEW YORK CORP.
INSURANCE AND FINANCE
-------------------------------------------------------------------------
TEXAS UTILITIES ELECTRIC CO.
ELECTRIC UTILITY
-------------------------------------------------------------------------
These holdings represent 9.1% of the fund's assets. Portfolio holdings are
subject to change.
utilities, after an earlier runup, telephone stocks have re-entered the value
category. With a drop in the price of many cyclicals, we will take another
look at this category with a special interest in companies that have the
potential to outperform the U.S. market by doing well internationally.
Whatever events fiscal 1995 may hold, we will continue to use a broadly
diversified portfolio of bonds and stocks to build a competitive level of
income over the long term.
The views expressed about the companies mentioned in this report are
exclusively those of Putnam Management, and are not meant as investment
advice. Although the described holdings were viewed favorably as of October
31, 1994, there is no guarantee the fund will continue to hold these
securities in the future.
7
<PAGE>
PERFORMANCE SUMMARY
This section provides, at a glance, information about your fund's
performance. 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 back into the fund. We show total return in two
ways: on a cumulative long-term basis and on average how the fund might have
grown each year over varying periods. For comparative purposes, we show how
the fund performed relative to appropriate indexes and benchmarks.
TOTAL RETURN FOR PERIODS ENDED 10/31/94
<TABLE>
<CAPTION>
Lehman Bros.
Class A Class B S&P Govt./Corp.
NAV POP NAV CDSC 500 Index Bond Index
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1 year -0.61% -6.37% -- -- 3.87% -3.66%
------------------------------------------------------------------------------------------------
5 years 53.55 44.71 -- -- 61.96 47.31
Annual average 8.96 7.67 -- -- 10.12 8.05
------------------------------------------------------------------------------------------------
Life of class A 134.67 121.24 -- -- 258.49 146.55
Annual average 9.36 8.69 -- -- 14.34 9.93
------------------------------------------------------------------------------------------------
Life of class B -- -- -2.75 -7.41 0.23 -5.39
------------------------------------------------------------------------------------------------
</TABLE>
TOTAL RETURN FOR PERIODS ENDED 9/30/94
(MOST RECENT CALENDAR QUARTER)
<TABLE>
<CAPTION>
Lehman Bros.
Class A* Class B* S&P Govt./Corp.
NAV POP NAV CDSC 500 Index Bond Index
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1 year 0.36% -5.40% -- -- 3.72% -3.15%
------------------------------------------------------------------------------------------------
5 years 49.08 40.46 -- -- 54.66 51.20
Annual average 8.31 7.03 -- -- 9.11 8.62
------------------------------------------------------------------------------------------------
Life of class A 134.67 121.24 -- -- 251.16 146.82
Annual average 9.45 8.77 -- -- 14.22 10.03
------------------------------------------------------------------------------------------------
Life of class B -- -- -2.75 -7.41 -1.82 -5.28
------------------------------------------------------------------------------------------------
</TABLE>
*Fund performance data do not take into account any adjustment for taxes
payable on reinvested distributions. The fund began offering what are now
known as class A shares on April 19, 1985. Effective February 1, 1994, the
fund began offering class B shares. Performance data represent past results,
assume reinvestment of all distributions and will differ for each share
class. Investment returns and principal value will fluctuate so an
investor's shares, when sold, may be worth more or less than their original
cost.
8
<PAGE>
[GROWTH OF A $10,000 INVESTMENT CHART APPEARS HERE]
Past performance is no assurance of future results. A $10,000 investment in
the fund's class B shares at inception on 2/1/94 would have been valued at
$9,725 on 10/31/94 ($9,259 with a redemption at the end of the period).
TERMS AND DEFINITIONS
CLASS A SHARES are generally subject to an initial sales charge.
CLASS B SHARES may be subject to a sales charge upon redemption.
NET ASSET VALUE (NAV) is the value of all your fund's assets, minus any
liabilities, divided by the number of outstanding shares, not including any
initial or contingent deferred sales charge.
PUBLIC OFFERING PRICE (POP) is the price of a mutual fund share plus the
maximum sales charge levied at the time of purchase. POP performance figures
shown here assume the maximum 5.75% sales charge.
CONTINGENT DEFERRED SALES CHARGE (CDSC) is a charge applied at the time of
the redemption of class B shares and assumes redemption at the end of the
period. Your fund's CDSC declines from a 5% maximum during the first year to
1% during the sixth year. After the sixth year, the CDSC no longer applies.
COMPARATIVE BENCHMARKS
STANDARD & POOR'S 500 INDEX is an unmanaged list of large-capitalization
common stocks and is frequently used as a general gauge of stock market
performance.
LEHMAN BROTHERS GOVERNMENT/CORPORATE BOND INDEX is an unmanaged list of
publicly issued U.S. Treasury obligations, debt obligations of U.S.
government agencies (excluding mortgage-backed securities), fixed-rate,
nonconvertible investment-grade corporate debt securities and U.S. dollar-
denominated SEC-registered nonconvertible debt issued by foreign governmental
entities or international agencies.
Both indexes assume reinvestment of all distributions and do not take into
account brokerage commissions or other costs. The fund's portfolio contains
securities that do not match those in the indexes.
9
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
For the Year ended October 31, 1994
To the Trustees and Shareholders of
Putnam Managed Income Trust
In our opinion, the accompanying statement of assets and liabilities,
including the portfolio of investments owned, and the related statements of
operations and of changes in net assets and the financial highlights present
fairly, in all material respects, the financial position of Putnam Managed
Income Trust (the "fund") at October 31, 1994, and the results of its
operations, the changes in its net assets, and the financial highlights for
the periods indicated, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the fund's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards, which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating
the overall financial statement presentation. We believe that our audits,
which included confirmation of investments owned at October 31, 1994 by
correspondence with the custodian and brokers and the application of
alternative auditing procedures where confirmations from brokers were not
received, provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
December 14, 1994
10
<PAGE>
PORTFOLIO OF INVESTMENTS OWNED
October 31, 1994
<TABLE>
<CAPTION>
COMMON STOCKS (39.4%)(a)
NUMBER OF SHARES VALUE
UTILITIES (8.4%)
- ---------------------------------------------------------------------------------------------------
<C> <S> <C>
71,500 American Telephone & Telegraph Co. $ 3,932,500
30,000 Bell Atlantic Corp. 1,571,250
27,000 BellSouth Corp. 1,437,750
210,024 Cinergy Corp. 4,856,805
36,000 Consolidated Natural Gas Co. 1,305,000
31,000 Entergy Corp. 724,625
66,000 GTE Corp. 2,029,500
24,000 Hawaiian Electric Industries, Inc. 780,000
28,000 Houston Industries Inc. 976,500
18,000 NIPSCO Industries, Inc. 501,750
111,000 NYNEX Corp. 4,356,750
35,300 Northeast Utilities 816,313
30,000 Pacific Enterprises 645,000
22,000 Pacific Gas & Electric Co. 495,000
85,000 Public Service Co. of Colorado 2,316,250
46,000 Shandong Huaneng Power (b) 494,500
40,600 Sprint Corp. 1,324,575
20,000 Telefonica de Espana ADR (b) 810,000
100,000 Texas Utilities Electric Co. 3,262,500
76,000 US WEST, Inc. 2,859,500
18,000 Union Electric Co. 645,750
40,000 United Illuminating Co. 1,220,000
24,000 Westcoast Energy, Inc. 393,000
35,000 Wicor Inc. 1,001,875
-------------
38,756,693
<CAPTION>
INSURANCE AND FINANCE (7.6%)
- ---------------------------------------------------------------------------------------------------
<C> <S> <C>
43,000 Aetna Life & Casualty Co. 1,983,375
75,000 American Express Co. 2,306,250
23,000 American General Corp. 632,500
7,000 BankAmerica Corp. 304,500
51,566 Bankers Trust New York Corp. 3,442,031
45,000 Bear Stearns Companies, Inc. 731,250
72,000 Beneficial Corp. 2,817,000
17,000 CIGNA Corp. 1,119,875
69,000 Comerica Inc. 1,906,125
66,000 CoreStates Financial Corp. 1,707,750
56,500 Household International, Inc. 1,984,563
10,000 ITT Corp. 882,500
64,000 Lincoln National Corp. 2,320,000
13,000 Mellon Bank Corp. 723,125
85,000 Morgan (J.P.) & Co., Inc. 5,259,375
50,000 National City Corp. 1,356,250
25,000 NationsBank Corp. 1,237,500
28,000 PNC Bank Corp. 658,000
16,000 Republic New York Corp. 732,000
30,000 Synovus Financial Corp. 573,750
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
COMMON STOCKS
NUMBER OF SHARES VALUE
INSURANCE AND FINANCE (continued)
- ---------------------------------------------------------------------------------------------------
<C> <S> <C>
24,000 Torchmark Corp. $ 885,000
49,000 Wilmington Trust Co. 1,225,000
-------------
34,787,719
<CAPTION>
OIL AND GAS (4.5%)
- ---------------------------------------------------------------------------------------------------
<C> <S> <C>
40,000 Amoco Corp. 2,535,000
54,000 Chevron Corp. 2,430,000
71,000 Exxon Corp. 4,464,125
37,000 Imperial Oil Ltd. 1,327,375
35,100 McDermott International, Inc. 899,430
46,400 Mobil Corp. 3,990,400
28,000 Panhandle Eastern Corp. 658,000
10,600 Pennzoil Co. 545,900
20,000 Phillips Petroleum Co. 737,500
17,000 Royal Dutch Petroleum Co. ADR (b) 1,980,500
27,000 Total Corp. ADS (b) 891,000
-------------
20,459,230
<CAPTION>
CONSUMER NON DURABLES (2.9%)
- ---------------------------------------------------------------------------------------------------
<C> <S> <C>
90,000 American Brands, Inc. 3,127,500
41,000 Avon Products, Inc. 2,593,250
57,000 Kimberly-Clark Corp. 2,935,500
66,000 Philip Morris Cos., Inc. 4,042,500
3,400 Springs Industries, Inc. Class A 137,275
19,200 Universal Corp. 432,000
-------------
13,268,025
<CAPTION>
HEALTH CARE (2.4%)
- ---------------------------------------------------------------------------------------------------
<C> <S> <C>
66,000 American Home Products Corp. 4,191,000
32,800 Baxter International Inc. 852,800
15,000 Bristol-Myers Squibb Co. 875,625
27,900 Lilly (Eli) & Co. 1,729,800
18,000 Merck & Co., Inc. 643,500
35,000 Warner-Lambert Co. 2,668,750
-------------
10,961,475
<CAPTION>
CHEMICALS (2.1%)
- ---------------------------------------------------------------------------------------------------
<C> <S> <C>
39,000 Dexter Corp. 804,375
24,000 Dow Chemical Co. 1,764,000
9,000 Eastman Chemical Co. 486,000
62,000 Grace (W.R.) & Co. 2,456,750
24,000 Olin Corp. 1,317,000
26,000 Union Carbide Corp. 861,250
76,000 Witco Corp. 2,128,000
-------------
9,817,375
<CAPTION>
BUSINESS EQUIPMENT AND SERVICES (2.1%)
- ---------------------------------------------------------------------------------------------------
<C> <S> <C>
14,000 Block (H & R), Inc. 621,250
28,000 Deluxe Corp. 791,000
53,000 Dun & Bradstreet Corp. 3,107,125
38,000 IBM Corp. 2,831,000
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
COMMON STOCKS
NUMBER OF SHARES VALUE
BUSINESS EQUIPMENT AND SERVICES (continued)
- ---------------------------------------------------------------------------------------------------
<C> <S> <C>
200,000 Unisys Corp. $ 2,125,000
300 Xerox Corp. 30,750
-------------
9,506,125
<CAPTION>
CONGLOMERATES (1.2%)
- ---------------------------------------------------------------------------------------------------
<C> <S> <C>
6,000 Minnesota Mining & Manufacturing Co. 332,250
38,000 Ogden Corp. 817,000
34,700 TRW, Inc. 2,472,375
43,000 Tenneco Inc. 1,902,750
-------------
5,524,375
<CAPTION>
FOOD AND BEVERAGES (1.2%)
- ---------------------------------------------------------------------------------------------------
<C> <S> <C>
28,000 Anheuser-Busch Cos., Inc. 1,421,000
75,000 Flowers Industries, Inc. 1,368,750
44,000 Heinz (H.J.) Co. 1,633,500
37,000 Sara Lee Corp. 911,125
-------------
5,334,375
<CAPTION>
REAL ESTATE (1.0%)
- ---------------------------------------------------------------------------------------------------
<C> <S> <C>
45,000 Bradley Real Estate, Inc. 691,875
37,000 Debartolo Realty Corp. 494,875
44,500 Equity Residential Properties Trust 1,329,438
23,000 Evans Withycombe Residential 454,250
40,000 Health Care REIT Inc. 870,000
40,000 LTC Properties Inc. 515,000
15,800 Macerich Co. 316,000
50,000 Mid-America Realty Investments 437,500
-------------
5,108,938
<CAPTION>
TRANSPORTATION (1.0%)
- ---------------------------------------------------------------------------------------------------
<C> <S> <C>
38,000 Illinois Central Corp. 1,220,750
24,000 Norfolk Southern Corp. 1,512,000
37,000 Union Pacific Corp. 1,808,375
-------------
4,541,125
<CAPTION>
AEROSPACE AND DEFENSE (0.8%)
- ---------------------------------------------------------------------------------------------------
<C> <S> <C>
82,000 GenCorp Inc. 984,000
68,600 Rockwell International Corp. 2,392,425
8,000 United Technologies Corp. 504,000
-------------
3,880,425
<CAPTION>
PHOTOGRAPHY (0.6%)
- ---------------------------------------------------------------------------------------------------
<C> <S> <C>
62,000 Eastman Kodak Co. 2,983,750
<CAPTION>
ELECTRONICS AND ELECTRICAL EQUIPMENT (0.6%)
- ---------------------------------------------------------------------------------------------------
<C> <S> <C>
8,000 Eaton Corp. 419,000
27,600 Emerson Electric Co. 1,676,700
17,000 Honeywell, Inc. 548,250
-------------
2,643,950
<CAPTION>
FOREST PRODUCTS (0.6%)
- ---------------------------------------------------------------------------------------------------
<C> <S> <C>
52,000 Potlatch Corp. 1,989,000
18,000 Westvaco Corp. 630,000
-------------
2,619,000
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
COMMON STOCKS
NUMBER OF SHARES VALUE
RETAIL (0.5%)
- ---------------------------------------------------------------------------------------------------
<C> <S> <C>
57,000 K Mart Corp. $ 933,375
27,000 Sears, Roebuck & Co. 1,336,500
-------------
2,269,875
CONSUMER SERVICES (0.4%)
- ---------------------------------------------------------------------------------------------------
27,000 Knight-Ridder, Inc. 1,390,500
6,000 McGraw-Hill, Inc. 448,500
-------------
1,839,000
AUTOMOTIVE (0.4%)
- ---------------------------------------------------------------------------------------------------
15,000 Dana Corp. 384,375
33,000 General Motors Corp. 1,303,500
-------------
1,687,875
TELECOMMUNICATIONS (0.3%)
- ---------------------------------------------------------------------------------------------------
59,000 Comsat Corp. 1,268,500
BUILDING AND CONSTRUCTION (0.3%)
- ---------------------------------------------------------------------------------------------------
30,000 Armstrong World Industries, Inc. 1,245,000
METALS AND MINING (0.3%)
- ---------------------------------------------------------------------------------------------------
21,000 Reynolds Metal Co. 1,162,875
ENVIRONMENTAL CONTROL (0.2%)
- ---------------------------------------------------------------------------------------------------
33,000 Chemical Waste Mgmt., Inc. 313,500
15,000 WMX Technologies, Inc. 440,625
-------------
754,125
BASIC INDUSTRIAL PRODUCTS (0.1%)
- ---------------------------------------------------------------------------------------------------
15,000 Ball Corp. 423,750
CONSUMER DURABLE GOODS (--%)
- ---------------------------------------------------------------------------------------------------
1,900 Whirlpool Corp. 98,800
COMPUTER SOFTWARE (--%)
- ---------------------------------------------------------------------------------------------------
3,414 Computervision Corp. (c) 8,962
-------------
Total Common Stocks
(cost $187,774,607) $180,951,342
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (26.9%)(a)
PRINCIPAL AMOUNT VALUE
<C> <S> <C>
Government National Mortgage Association
$ 4,570,000 8 1/2s, TBA, November 14, 2024(d) $ 4,512,161
6,650,000 8s, TBA, November 14, 2024(d) 6,377,766
3,012,456 8s, Midgets, with various due dates to
January 15, 2007 3,003,042
14,776,478 7 1/2s, with various due dates to June 15, 2024 13,719,036
2,395,000 7s, TBA, November 14, 2024(d) 2,146,519
18,661,232 6 1/2s, with various due dates to
February 15, 2024 16,112,808
22,540,000 U.S. Treasury Bonds 7 1/2s, November 15, 2024 21,342,563
2,215,000 U.S. Treasury Notes 7 3/4s, February 15, 2001 2,232,997
8,385,000 U.S. Treasury Notes 5s, January 31, 1999 7,664,414
26,875,000 U.S. Treasury Notes 4 5/8s, February 29, 1996 26,261,914
5,295,000 U.S. Treasury Notes 4 1/4s, November 30, 1995 5,185,791
15,685,000 U.S. Treasury Notes 4s, January 31, 1996 15,243,859
-------------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS
(cost $127,373,861) $ 123,802,870
<CAPTION>
CORPORATE BONDS AND NOTES (26.1%)(a)
PRINCIPAL AMOUNT VALUE
INSURANCE AND FINANCE (6.6%)
- ---------------------------------------------------------------------------------------------------
<C> <S> <C>
$ 500,000 AIM Management Group sr. secd. notes 9s, 2003 $ 452,500
500,000 American Annuity Group, Inc. sr. sub. notes
11 1/8s, 2003 500,000
1,160,000 BAT Capital Corp. med. term notes 6.19s, 2000 1,056,325
2,000,000 Bank of Scotland sub. notes 8.85s, 2006(e) 1,998,750
500,000 Bankers Life Holding Corp. sr. sub. notes
Ser. B 13s, 2002 568,750
270,000 Chevy Chase Savings Bank Inc. sub. deb.
9 1/4s, 2005 237,600
3,000,000 Chrysler Financial Corp. sr. note, 9 1/2s, 1999 3,168,750
500,000 Comdata Network, Inc. sr. notes 12 1/2s, 1999 536,250
250,000 Delaware Management sr. notes Ser. B,
10 1/4s, 2004(e) 241,250
3,150,000 Den Danske Bank sub. notes 6.55s, 2003(e) 2,728,688
1,040,000 Ford Capital BV deb. 9s, 1998 1,077,050
2,000,000 Goldman, Sachs & Co. deb., 8s, 2013(e) 1,792,500
4,500,000 Great Western Financial Corp. notes 6 1/8s, 1998 4,252,500
600,000 Keystone Group, Inc. sr. secd. notes 9 3/4s, 2003 570,000
2,100,000 Midlantic Banks, deb. 9 7/8s, 1999 2,214,188
500,000 PRT Funding Corp. sr. notes 11 5/8s, 2004 330,000
500,000 PSF Finance L.P. sr. notes 12 1/4s, 2004(e) 514,063
250,000 Phoenix Re Corp. sr. notes 9 3/4s, 08/15/2003 248,750
750,000 Reliance Group Holdings sr. sub. deb. 9 3/4s, 2003 667,500
2,500,000 Riggs National Corp. sub. deb. 8 1/2s, 2006 2,300,000
3,200,000 Star Bank N.A. sub. notes 6 3/8s, 2004 2,786,000
2,440,000 Suntrust Banks sub. notes 6 1/8s, 2004 2,078,575
-------------
30,319,989
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
CORPORATE BONDS AND NOTES
PRINCIPAL AMOUNT VALUE
UTILITIES (5.6%)
- ---------------------------------------------------------------------------------------------------
<C> <S> <C>
$ 2,500,000 Arkla, Inc. notes 8 7/8s, 1999 $ 2,462,500
200,000 BVPS II Funding Corp. secd. lease oblig. bonds 9s, 2017 149,750
5,000,000 Gulf States Utilities Co. 1st mtge. bonds 8.7s, 2024 4,728,125
1,335,000 Long Island Lighting mtge. 5 1/4s, 1996 1,300,791
16,704 Midland Cogeneration Venture L.P. sr. deb.
10.33s, 2002(e) 16,119
5,000,000 Old Dominion Electric Co. Ser. 93-A,
1st mtge. Sinking Fund, 7.78s, 2023 4,421,875
4,196,000 System Energy Resources Inc. 1st mtge. 14s, 1994 4,203,868
4,700,000 Texas Utilities Electric Co. secd. fac. bonds 7.46s, 2015 4,100,750
4,350,000 Toledo Edison Co. med. term notes 7.82s, 2003 3,746,438
-------------
25,130,216
CONSUMER SERVICES (3.8%)
- ---------------------------------------------------------------------------------------------------
50,000 Act III Broadcasting Inc. sr. sub. notes 9 5/8s, 2003 46,750
250,000 Arizona Charlies Corp. sub. deb. Ser. B, 12s, 2000 207,188
380,000 Cablevision Systems Corp. sr. sub. reset deb.
10 3/4s, 2004 381,900
500,000 Casino America Inc. 1st mtge. deb. 11 1/2s, 2001 425,000
500,000 Century Communications Corp. sr. disc. notes
zero %, 2003 202,500
400,000 Comcast Cellular Corp. sr. participating
notes Ser. A, zero %, 2000 262,000
650,000 Enquirer/Star Inc. sr. sub. notes zero %, 1997 523,250
500,000 General Media sr. secd. notes 10 5/8s, 2000 467,500
500,000 Grand Casino Resorts Inc. notes 12 1/2s, 2000 470,000
550,000 John Q. Hammons Hotels 1st mtge. notes 8 7/8s, 2004 489,500
300,000 La Quinta Motor Inns Inc. deb. 9 1/4s, 2003 280,500
300,000 Louisiana Casino Cruises Corp. sr. sub. deb. 11 1/2s, 1998 210,000
550,000 Marvel Parent Holdings, Inc. sr. secd. disc. notes zero %, 1998 341,000
4,000,000 News American Hldgs. Inc. sr. notes 8 1/2s, 2005 3,845,000
5,000,000 Tele-Communications, Inc. sr. deb. 9.8s, 2012 5,062,500
5,200,000 Time Warner Inc. global notes 9 1/8s, 2013 4,732,000
-------------
17,946,588
OIL AND GAS (3.3%)
- ---------------------------------------------------------------------------------------------------
4,000,000 Coastal Corp. sub. notes 11 1/8s, 1998 4,070,000
2,760,000 LASMO PLC ADS notes 7 1/8s, 2003 (b) 2,454,675
4,400,000 Occidental Petroleum Corp. sr. notes 11 3/4s, 2011 4,815,250
500,000 Oryx Energy Co. deb. 9 3/4s, 1998 493,438
250,000 Tosco Corp. 1st mtge. Ser. B, 9 5/8s, 2002 257,500
450,000 TransTexas Gas Corp. sr. secd. notes 10 1/2s, 2000 433,125
2,615,000 USX Corp. deb. 9.8s, 2001 2,713,063
-------------
15,237,051
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
CORPORATE BONDS AND NOTES
PRINCIPAL AMOUNT VALUE
CONGLOMERATES (1.3%)
- ---------------------------------------------------------------------------------------------------
<C> <S> <C>
$ 250,000 ADT Ltd. sr. sub. notes 9 1/4s, 2003 $ 233,750
500,000 MacAndrews & Forbes Holdings Inc. sub. deb. notes
13s, 1999 490,000
4,700,000 Pennsylvania Central Corp. sub. notes 10 7/8s, 2011 5,123,000
-------------
5,846,750
AUTOMOTIVE (1.0%)
- ---------------------------------------------------------------------------------------------------
3,775,000 Chrysler Corp. deb. 10.95s, 2017 4,228,000
150,000 Hayes Wheels notes 9 1/4s, 2002 151,125
365,000 Key Plastics Corp. sr. notes 14s, 1999 406,519
-------------
4,785,644
RETAIL (0.9%)
- ---------------------------------------------------------------------------------------------------
500,000 Caldor Corp. sr. sub. deb. 15s, 2000 547,500
250,000 Penn Traffic Co. sr. sub. notes 9 5/8s, 2005 222,500
200,000 Revco D.S., Inc. sr. notes 9 1/4s, 2000 200,500
3,000,000 Sears Roebuck med. term notes 5.91s, 1999 2,769,375
250,000 Service Merchandise Co., Inc. sr. sub. deb. 8 3/8s, 2001 220,000
-------------
3,959,875
FOREST PRODUCTS (0.5%)
- ---------------------------------------------------------------------------------------------------
250,000 Container Corp. of America sr. notes Ser. A, 11 1/4s, 2004 258,125
1,000,000 Gaylord Container Corp. sr. sub. disc. deb. stepped-coupon
zero % (12 3/4s, 5/15/96), 2005 (f) 895,000
250,000 Riverwood International Corp. sr. notes 10 3/4s, 2000 256,250
250,000 Riverwood International Corp. sr. sub. notes 10 3/8s, 2004 250,625
750,000 Stone Container sr. sub. notes 9 7/8s, 2001 703,125
-------------
2,363,125
CHEMICALS (0.5%)
- ---------------------------------------------------------------------------------------------------
490,000 G-I Holdings Inc. sr. notes zero %, 1998 301,350
1,000,000 Harris Chemical sr. secd. disc. notes stepped-coupon
zero % (10 1/4s, 1/15/96), 2001 (f) 805,000
750,000 OSI Specialty Inc. sr. sub. notes 9 1/4s, 2003 686,250
500,000 UCC Investors Holding, Inc. sr. notes 10 1/2s, 2002 500,000
-------------
2,292,600
MOTION PICTURE DISTRIBUTION (0.4%)
- ---------------------------------------------------------------------------------------------------
750,000 AMC Entertainment, Inc. sr. sub. deb. 12 5/8s, 2002 817,500
500,000 Plitt Theatres, Inc. sr. sub. notes 10 7/8s, 2004 490,000
500,000 United Artists notes 11 1/2s, 2002 535,000
-------------
1,842,500
HEALTH CARE (0.3%)
- ---------------------------------------------------------------------------------------------------
250,000 Healthsouth Rehabilitation sr. sub. notes 9 1/2s, 2001 241,250
300,000 Kendall Co. (The) deb. 8 1/4s, 2003 303,375
250,000 McGaw, Inc. sr. notes 10 3/8s, 1999 257,500
500,000 Mediplex Group, Inc. sr. sub. notes 11 3/4s, 2002 560,000
250,000 Paracelsus Healthcare Corp. sr. sub. notes 9 7/8s, 2003 238,125
-------------
1,600,250
FOOD AND BEVERAGES (0.3%)
- ---------------------------------------------------------------------------------------------------
500,000 Fresh Del Monte Produce Corp. sr. notes, Ser. B, 10s, 2003 432,500
500,000 Safeway, Inc. sr. sub. notes 8.57s, 2003 486,250
500,000 Stater Brothers sr. notes 11s, 2001 (e) 472,500
-------------
1,391,250
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
CORPORATE BONDS AND NOTES
PRINCIPAL AMOUNT VALUE
METALS AND MINING (0.3%)
- ---------------------------------------------------------------------------------------------------
<C> <S> <C>
$ 250,000 Inland Steel Co. 1st mtge. 12s, 1998 $ 271,250
200,000 Inland Steel Industries, Inc. notes 12 3/4s, 2002 220,000
250,000 Kaiser Aluminum & Chemical Co. sr. notes 9 7/8s, 2002 228,750
500,000 WCI Steel Inc. sr. secd. notes 10 1/2s, 2002 490,000
-------------
1,210,000
BASIC INDUSTRIAL PRODUCTS (0.3%)
- ---------------------------------------------------------------------------------------------------
230,000 Anchor Glass Container Corp. sr. sub. deb. 9 7/8s, 2008 209,300
250,000 Ivex Packaging Corp. sr. sub. notes 12 1/2s, 2002 258,750
500,000 Lear Seating sub. notes 8 1/4s, 2002 440,000
270,000 Sequa Corp. sr. notes 8 3/4s, 2001 245,025
-------------
1,153,075
TRANSPORTATION (0.2%)
- ---------------------------------------------------------------------------------------------------
455,000 Blue Bird Body Co. sub. deb. Ser. B, 11 3/4s, 2002 459,550
650,000 Viking Star Shipping sr. secd. notes 9 5/8s, 2003 611,000
-------------
1,070,550
COMMUNICATIONS (0.2%)
- ---------------------------------------------------------------------------------------------------
250,000 Centennial Cellular Corp. sr. notes 8 7/8s, 2001 227,500
1,000,000 Panamsat L.P. sr. sub. notes stepped-coupon
zero % (11 3/8s, 8/1/98), 2003 (f) 675,000
-------------
902,500
REAL ESTATE (0.2%)
- ---------------------------------------------------------------------------------------------------
710,000 Kearny State Real Estate L.P. secd. notes 9.56s, 2003 712,663
BUILDING AND CONSTRUCTION (0.1%)
- ---------------------------------------------------------------------------------------------------
500,000 American Standard, Inc. sr. sub. deb. stepped-coupon
zero % (10 1/2s, 6/1/98), 2005 (f) 335,000
250,000 Scotsman Group Inc. sr. notes 9 1/2s, 2000 235,000
-------------
570,000
ELECTRONICS AND ELECTRICAL EQUIPMENT (0.1%)
- ---------------------------------------------------------------------------------------------------
500,000 Amphenol Corp. sr. notes 10.95s, 2001(e) 550,000
BUSINESS SERVICES (0.1%)
- ---------------------------------------------------------------------------------------------------
500,000 Corporate Express, Inc. sr. notes 9 5/8s, 2004(c) 455,000
CONSUMER NON DURABLES (0.1%)
- ---------------------------------------------------------------------------------------------------
460,000 Playtex Family Products Corp. sr. sub. notes 9s, 2003 397,900
ENTERTAINMENT (--%)
- ---------------------------------------------------------------------------------------------------
250,000 Viacom International sub. deb. 8s, 2006 216,875
-------------
Total Corporate Bonds and Notes
(cost $131,557,253) $119,954,401
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCKS (2.1%)(a)
NUMBER OF SHARES VALUE
TRANSPORTATION (0.5%)
- ---------------------------------------------------------------------------------------------------
<C> <S> <C>
28,000 AMR Corp. Ser. A, $3.00, cv. pfd. $ 1,162,000
25,000 Delta Air Lines, Inc. Ser. C, $6.25, cv. pfd. 1,196,875
-------------
2,358,875
METALS AND MINING (0.5%)
- ---------------------------------------------------------------------------------------------------
56,000 Freeport-McMoRan Copper Co., Inc. stepped-coupon
$1.25, (7s, 8/1/96), cv. pfd.(f) 1,288,000
20,000 Pittston Corp. $6.25, cv. pfd. 860,000
-------------
2,148,000
AUTOMOTIVE (0.4%)
- ---------------------------------------------------------------------------------------------------
20,000 Ford Motor Co. Ser. A, $4.20, cv. pfd. 1,935,000
OIL AND GAS (0.3%)
- ---------------------------------------------------------------------------------------------------
19,600 Ashland Oil Corp. $3.125, cv. pfd. 1,239,700
INSURANCE AND FINANCE (0.2%)
- ---------------------------------------------------------------------------------------------------
17,000 Republic New York Corp. $3.375, cv. pfd. 905,250
ELECTRONICS AND ELECTRICAL EQUIPMENT (0.1%)
- ---------------------------------------------------------------------------------------------------
42,700 Westinghouse Electric Ser. C, $1.30, cv. pfd.(c) 624,488
CONSUMER NON DURABLES (0.1%)
- ---------------------------------------------------------------------------------------------------
9,000 Fieldcrest Cannon, Inc. $3.00, cv. pfd.(c) 470,250
-------------
Total Convertible Preferred Stocks
(cost $10,054,225) $ 9,681,563
<CAPTION>
YANKEE BONDS AND NOTES (1.5%)(a)
PRINCIPAL AMOUNT VALUE
<C> <S> <C>
$ 4,700,000 Australia New Zealand Bank sub. notes 6 1/4s, 2004 $ 4,015,563
1,800,000 Hollinger, Inc. cv. notes Liquid Yield
Option Notes (LYON), zero %, 2013 531,000
500,000 Methanex Corp. sr. notes 8 7/8s, 2001 483,750
1,850,000 Noranda, Inc. deb. 8 1/8s, 2004 1,781,781
-------------
Total Yankee Bonds and Notes
(cost $5,443,085) $ 6,812,094
<CAPTION>
CONVERTIBLE BONDS AND NOTES (1.2%)(a)
PRINCIPAL AMOUNT VALUE
<C> <S> <C>
INSURANCE AND FINANCE (0.4%)
- ---------------------------------------------------------------------------------------------------
$ 1,600,000 Old Republic International Corp. cv. sub. deb.
5 3/4s, 2002 $ 1,592,000
500,000 Trenwick Group, Inc. cv. deb. 6s, 1999 482,500
-------------
2,074,500
METALS AND MINING (0.2%)
- ---------------------------------------------------------------------------------------------------
3,100,000 Freeport-McMoRan, Inc. cv. sub. deb. zero %, 2006 1,077,250
CELLULAR BROADCASTING (0.2%)
- ---------------------------------------------------------------------------------------------------
2,300,000 Comcast Corp. cv. deb. 1 1/8s, 2007 954,500
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
CONVERTIBLE BONDS AND NOTES
PRINCIPAL AMOUNT VALUE
REAL ESTATE (0.2%)
- ---------------------------------------------------------------------------------------------------
<C> <S> <C>
$ 900,000 Liberty Property Trust cv. sub. deb. 8s, 2001 $ 853,875
BUSINESS EQUIPMENT AND SERVICES (0.2%)
- ---------------------------------------------------------------------------------------------------
600,000 EMC Corp. cv. deb. 4 1/4s, 2001 712,500
-------------
Total Convertible Bonds and Notes
(cost $5,921,570) $ 5,672,625
<CAPTION>
COLLATERALIZED MORTGAGE OBLIGATIONS (0.7%)(a)
PRINCIPAL AMOUNT VALUE
<C> <S> <C>
$ 212,499 Housing Securities Inc. 6.66s, 2009 161,566
171,386 Housing Securities Inc. 6 1/2s, 2009 128,218
706,869 Prudential Home Loan Corp. 8s, 2022 539,429
2,211,006 Prudential Home Mortgage Securities 7 1/2s, 2024(e) 1,768,805
850,000 Prudential Home Mortgage Securities 6.33s 2009(e) 636,438
-------------
Total Collateralized Mortgage Obligations
(cost $3,355,557) $ 3,234,456
<CAPTION>
ASSET-BACKED SECURITIES(0.5%)(a) (cost $2,534,713)
PRINCIPAL AMOUNT VALUE
<C> <S> <C>
$ 2,465,000 Chase Credit Card Master Trust 91-1 8 3/4s, 1999 $ 2,518,922
<CAPTION>
UNITS (0.3%) (a)
NUMBER OF UNITS VALUE
<C> <S> <C>
750,000 County Seat Stores units 12s, 2001 $ 746,250
250 Echostar Communication Corp. units stepped-coupon
zero % (12 7/8s, 12/1/99), 2004 (f) 120,000
475,000 ICF Kaiser International Inc. sr. sub. units 12s, 2003 418,000
250 Total Renal Care units stepped-coupon zero %
(12s, 8/15/99), 2004(f) 183,750
-------------
Total Units (cost $1,541,410) $ 1,468,000
<CAPTION>
PREFERRED STOCKS (0.1%)(a) (cost $350,000)
NUMBER OF SHARES VALUE
<C> <S> <C>
3,500 First Nationwide Bank FSB $11.50 pfd. $ 358,750
<CAPTION>
EUROBONDS (0.1%)(a) (cost $248,478)
PRINCIPAL AMOUNT VALUE
<C> <S> <C>
$ 250,000 Ispat Mexicana sr. notes 10 3/8s, 2001(c) $ 233,125
<CAPTION>
WARRANTS (--%)(a)(e)(g) EXPIRATION
NUMBERS OF WARRANTS DATE VALUE
<C> <S> <C> <C>
500 General Media Corp. 12/31/00 $ 5,000
900 Louisiana Casino Cruises, Inc. 12/01/98 13,500
-------------
Total Warrants (cost $11,323) $ 18,500
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
SHORT-TERM INVESTMENTS (1.3%)(a) (cost $5,965,787)
PRINCIPAL AMOUNT VALUE
<C> <S> <C>
$ 5,965,000 Interest in $497,257,000 joint
repurchase agreement dated October
31, 1994 with J.P. Morgan due November 1, 1994
with respect to various U.S. Treasury
obligations -- maturity value of
$5,965,787 for an effective yield of 4.75% $ 5,965,787
-------------
Total Investments (cost $482,131,869)(h) $ 460,672,435
=============
</TABLE>
NOTES
- --------------------------------------------------------------------------------
(a) Percentages indicated are based on total net assets of $459,495,721,
which correspond to a net asset value per Class A share and Class B share of
$8.68 and $8.67, respectively.
(b) Securities whose values are determined or significantly influenced by
trading on exchanges not in the United States or Canada. ADR or ADS after
the name of a foreign holding stands for American Depository Receipt or
American Depository Shares respectively, representing securities on deposit
with a domestic custodian bank.
(c) Restricted, excluding 144A securities, as to public resale. At the date
of acquisition, this security was valued at cost. There were no outstanding
unrestricted securities of the same class as that held. Total market value
of restricted securities owned at October 31, 1994 was $1,791,825 or less
than .4% of net assets.
(d) TBA's are mortgage backed securities traded under delayed delivery
commitments settling after October 31, 1994. Although the unit price for the
trades has been established, the principal amount of the commitments will
not fluctuate more than 2.0% from the principal amount. Income on the
securities will not be earned until settlement date. The cost of TBA
purchases at October 31, 1994 was $13,050,317.
21
<PAGE>
NOTES (continued)
- --------------------------------------------------------------------------------
TBA SALE COMMITMENTS Outstanding at October 31, 1994
(proceeds receivable $16,106,776)
<TABLE>
<CAPTION>
Principal Delivery Coupon Market
Agency Amount Month Rate Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
GNMA $18,661,000 Nov./94 6.5s $16,106,776
- --------------------------------------------------------------------------------
</TABLE>
(e) Securities 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. At October 31,
1994, these securities amounted to $10,737,613 or 2.3% of net assets.
(f) 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.
(g) Non-income-producing security.
(h) The aggregate identified cost for federal income tax purposes is
$482,463,062 resulting in gross unrealized appreciation and depreciation of
$10,383,802 and $32,174,429, respectively, or net unrealized depreciation of
$21,790,627.
The accompanying notes are an integral part of these financial statements.
22
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
October 31, 1994
<TABLE>
<CAPTION>
ASSETS
- -----------------------------------------------------------------------------------------------------
<S> <C>
Investments in securities, at value
(identified cost $482,131,869) (Note 1) $460,672,435
- -----------------------------------------------------------------------------------------------------
Cash 187
- -----------------------------------------------------------------------------------------------------
Dividends, interest and other receivables 5,731,293
- -----------------------------------------------------------------------------------------------------
Receivable for shares of the Fund sold 211,614
- -----------------------------------------------------------------------------------------------------
Receivable for securities sold 41,211,860
- -----------------------------------------------------------------------------------------------------
Total assets 507,827,389
LIABILITIES
- -----------------------------------------------------------------------------------------------------
Payable for securities purchased 30,403,739
- -----------------------------------------------------------------------------------------------------
Payable for shares of the Fund repurchased 738,038
- -----------------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 766,298
- -----------------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 3,454
- -----------------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 136
- -----------------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 106,486
- -----------------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 100,128
- -----------------------------------------------------------------------------------------------------
Other accrued expenses 106,613
- -----------------------------------------------------------------------------------------------------
TBA sale commitments at value
(proceeds receivable $16,106,776) Note 1 16,106,776
- -----------------------------------------------------------------------------------------------------
Total liabilities 48,331,668
- -----------------------------------------------------------------------------------------------------
Net assets $459,495,721
- -----------------------------------------------------------------------------------------------------
Represented by
Paid-in capital (Note 4) $481,294,781
- -----------------------------------------------------------------------------------------------------
Accumulated net realized loss on investment transactions (339,626)
- -----------------------------------------------------------------------------------------------------
Net unrealized depreciation of investments, and TBA sale commitments (21,459,434)
- -----------------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $459,495,721
- -----------------------------------------------------------------------------------------------------
Computation of net asset value and offering price
Net asset value and redemption price of Class A shares
($455,299,448 divided by 52,429,311 shares) $8.68
- -----------------------------------------------------------------------------------------------------
Offering price per share (100/94.25 of $8.68)* $9.21
- -----------------------------------------------------------------------------------------------------
Net asset value and offering price of Class B shares
($4,196,273 divided by 483,994 shares)** $8.67
- -----------------------------------------------------------------------------------------------------
</TABLE>
* 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.
23
<PAGE>
STATEMENT OF OPERATIONS
Year ended October 31, 1994
<TABLE>
<CAPTION>
INVESTMENT INCOME:
- -----------------------------------------------------------------------------------------------------
<S> <C>
Interest $ 20,092,017
- -----------------------------------------------------------------------------------------------------
Dividends (net of foreign tax of $60,833) 9,693,111
- -----------------------------------------------------------------------------------------------------
Total investment income 29,785,128
- -----------------------------------------------------------------------------------------------------
EXPENSES:
- -----------------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 3,214,949
- -----------------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 599,183
- -----------------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 20,786
- -----------------------------------------------------------------------------------------------------
Reports to shareholders 68,046
- -----------------------------------------------------------------------------------------------------
Auditing 35,431
- -----------------------------------------------------------------------------------------------------
Legal 21,040
- -----------------------------------------------------------------------------------------------------
Postage 111,792
- -----------------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 1,235,883
- -----------------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 17,536
- -----------------------------------------------------------------------------------------------------
Registration fees 10,400
- -----------------------------------------------------------------------------------------------------
Administrative services (Note 2) 12,381
- -----------------------------------------------------------------------------------------------------
Other 40,895
- -----------------------------------------------------------------------------------------------------
Total expenses 5,388,322
- -----------------------------------------------------------------------------------------------------
Net investment income 24,396,806
- -----------------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 5,850,454
- -----------------------------------------------------------------------------------------------------
Net unrealized depreciation of investments and TBA sale commitments
during the year (34,072,630)
- -----------------------------------------------------------------------------------------------------
Net loss on investments (28,222,176)
- -----------------------------------------------------------------------------------------------------
Net decrease in net assets resulting from operations $ (3,825,370)
- -----------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
24
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year ended October 31
------------------------------------
1994 1993
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
- ------------------------------------------------------------------------------------------------------------------
Operations:
- ------------------------------------------------------------------------------------------------------------------
Net investment income $ 24,396,806 $ 30,101,856
- ------------------------------------------------------------------------------------------------------------------
Net realized gain on investments 5,850,454 14,464,868
- ------------------------------------------------------------------------------------------------------------------
Net realized loss on options -- (3,131,875)
- ------------------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of investments,
options and TBA sale commitments (34,072,630) 57,208,336
- ------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS (3,825,370) 98,643,185
- ------------------------------------------------------------------------------------------------------------------
Undistributed net investment income included
in price of shares sold and repurchased, net -- (225,742)
DISTRIBUTIONS TO SHAREHOLDERS:
- ------------------------------------------------------------------------------------------------------------------
From net investment income
- ------------------------------------------------------------------------------------------------------------------
Class A (24,376,662) (29,766,067)
- ------------------------------------------------------------------------------------------------------------------
Class B (41,307) --
- ------------------------------------------------------------------------------------------------------------------
In excess of net investment income
- ------------------------------------------------------------------------------------------------------------------
Class A -- (193,287)
- ------------------------------------------------------------------------------------------------------------------
From net realized gain on investments
- ------------------------------------------------------------------------------------------------------------------
Class A (5,806,154) (15,555,868)
- ------------------------------------------------------------------------------------------------------------------
Class B (44,300) --
- ------------------------------------------------------------------------------------------------------------------
In excess of net realized gain on investments
- ------------------------------------------------------------------------------------------------------------------
Class A (176,371) --
- ------------------------------------------------------------------------------------------------------------------
Class B (1,346) --
- ------------------------------------------------------------------------------------------------------------------
Decrease from capital share transactions (Note 4) (57,623,727) (134,692,175)
- ------------------------------------------------------------------------------------------------------------------
TOTAL DECREASE IN NET ASSETS (91,895,237) (81,789,954)
NET ASSETS
- ------------------------------------------------------------------------------------------------------------------
Beginning of year 551,390,958 633,180,912
- ------------------------------------------------------------------------------------------------------------------
END OF YEAR (including distributions
in excess of net investment
income of $0 and
$193,287, respectively) $459,495,721 $551,390,958
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
25
<PAGE>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
<TABLE>
February 1, 1994
(commencement of
operations) to
October 31 Year ended October 31
- ------------------------------------------------------------------------------------------------------------------------------------
1994 1994 1993 1992* 1991 1990
- ------------------------------------------------------------------------------------------------------------------------------------
Class B
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year $9.31 $9.28 $8.50 $8.56 $7.47 $9.34
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
Net investment income .34 .43 .45 .16 .21 .31
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
Gain (loss) on investments (.60) (.49) .99 .74 1.87 (1.03)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from investment operations (.26) (.06) 1.44 .90 2.08 (.72)
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions from:**
Net investment income (.27) (.43) (.45) (.16) (.19) (.31)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized gain on investments
and options (.11) (.11) (.21) (.80) (.75) --
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net realized gain on investments -- -- -- -- -- (.01)
- ------------------------------------------------------------------------------------------------------------------------------------
Tax returns of capital -- -- -- -- (.05) (.83)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.38) (.54) (.66) (.96) (.99) (1.15)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $8.67 $8.68 $9.28 $8.50 $8.56 $7.47
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return at
Net asset value (%) (a) (2.75)(b) (0.61) 17.68 11.15 29.29 (8.64)
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $4,196 $455,299 $551,391 $633,181 $699,858 $724,871
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average
Net assets (%) 1.34(b) 1.08 1.02 1.11 1.09 1.03
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 3.20(b) 4.92 5.06 1.87 2.56 3.65
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 125.69 125.69 224.28 118.43 135.18 152.06
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
For the period
April 19, 1985
(commencement of
operations)
Three months to
Year ended October 31 ended October 31 Year ended July 31 July 31
- ------------------------------------------------------------------------------------------------------------------------------------
1989 1988 1987 1987 1986 1985
- ------------------------------------------------------------------------------------------------------------------------------------
Class A
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year $9.15 $9.05 $11.76 $11.40 $11.95 $11.71
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
Net investment income .39 .23 .05 .20 .27 .12
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
Gain (loss) on investments 1.00 1.37 (2.34) 1.90 1.03 .12
- ------------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 1.39 1.60 (2.29) 2.10 1.30 .24
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions from:**
Net investment income (.39) (.27) (.02) (.37) (.40) --
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized gain on investments
and options (.31) (.08) (.40) (1.37) (1.45) --
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net realized gain on investments (.01) -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Tax returns of capital (.49) (1.15) -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (1.20) (1.50) (.42) (1.74) (1.85) --
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $9.34 $9.15 $9.05 $11.76 $11.40 $11.95
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return at
Net asset value (%) (a) 16.30 19.81 (20.20)(b) 20.39 11.87 2.08(b)
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $1,138,983 $1,391,983 $1,497,312 $1,868,298 $1,026,462 $171,869
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average
Net assets (%) .82 .81 .19(b) .78 .82 .29(b)
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 4.20 2.57 .45(b) 1.78 2.24 .77(b)
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 117.59 31.21 49.66 214.89 197.96 23.41
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* During fiscal 1992, the fund expanded its investment flexibility to include
corporate bonds, foreign securities, warrants and restricted securities.
Accordingly, results of operations prior to fiscal 1992, as presented above,
may not reflect those that would have been achieved under the fund's current
investment policies. (Note 1)
** Distributions for periods ended through October 31, 1993 have
been restated to conform to Statement of Position 93-2 (Note 5).
(a) Total investment return assumes dividend reinvestment and does not
reflect the effect of sales charges.
(b) Not annualized.
27
<PAGE>
NOTES TO FINANCIAL STATEMENTS
October 31, 1994
NOTE 1
SIGNIFICANT ACCOUNTING POLICIES
The fund is registered under the Investment Company Act of 1940, as amended,
as a diversified, open-end management investment company. The fund seeks high
current return by investing in a diversified portfolio of equity and debt
securities.
The fund offers both class A and class B shares. The fund commenced its
public offering of class B shares on February 1, 1994. Class A shares are
sold with a maximum front-end sales charge of 5.75%. Class B shares do not
pay a front-end sales charge, but pay a higher ongoing distribution fee than
class A shares, and may be subject to a contingent deferred sales charge, if
those shares are redeemed within six years of purchase. Expenses of the fund
are borne pro-rata by the holders of both classes 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
policies are in conformity with generally accepted accounting principles.
A SECURITY VALUATION Investments for which market quotations are readily
available are stated at market value, which is determined using the last
reported sale price, or, if no sales are reported -- as in the case of some
securities traded over-the-counter -- the last reported bid price, except that
certain U.S. government obligations are stated at the mean between the last
reported bid and asked prices. Securities quoted in foreign currencies are
translated into U.S. dollars at the current exchange rate. Short-term
investments having remaining maturities of 60 days or less are stated at
amortized cost, which approximates market value, and other investments are
stated at fair market value following procedures approved by the Trustees.
Market quotations are not considered to be readily available for long-term
corporate bonds and notes; such investments are stated at fair value on the
basis of valuations furnished by a pricing service, approved by the Trustees,
which determines valuations for normal, institutional-size trading units of such
securities using methods based on market transactions for comparable securities
and various relationships between securities which are generally recognized by
institutional traders.
B TBA PURCHASE COMMITMENTS The fund may enter into "TBA" (to be announced)
purchase commitments to purchase securities for a fixed price at a future date
beyond customary settlement time. 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
28
<PAGE>
the underlying securities, generally 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
its portfolio or for delivery pursuant to options contracts it has entered
into, the fund may dispose of a commitment prior to settlement if the fund
Manager deems it appropriate to do so.
C 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" to 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 on the
commitment without regard to any unrealized gain or loss on the underlying
security. If the fund delivers securities under the commitment, the fund
realizes a gain or a loss from the sale of securities based upon the unit
price established at the date the commitment was entered into.
D 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 managed by Putnam Investment Management, Inc. (Putnam Management),
the fund's Manager, a wholly-owned subsidiary of Putnam Investments, Inc., and
certain other accounts. These balances may be invested in one or more repurchase
agreements and/or short-term money market instruments.
E 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. The fund's Manager 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.
F SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are
accounted for on the trade date (date the order to buy or sell is executed).
Interest income is recorded on the accrual basis and 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.
Discount on zero-coupon bonds, original issue discount bonds and step-up
bonds is accreted according to the effective yield method. Certain securities
held by the fund pay interest in the form of additional securities; interest
on such securities is recorded on the accrual basis at the lower of the
coupon rate or market value of the securities to be received, and is
allocated to the cost of the securities received on the payment date.
G OPTION ACCOUNTING PRINCIPLES When the fund writes a call or put option, an
amount equal to the premium received by the fund is included in the fund's
"Statement of assets and liabilities" as an asset and an equivalent liability.
The amount of the liability is subsequently "marked-to-market" to reflect the
current market value of the option written. The current market value of a
written
29
<PAGE>
option is the last sale price or, in the absence of a sale, the last offering
price. If an option expires on its stipulated expiration date, or if the fund
enters into a closing purchase transaction, the fund realizes a gain (or loss
if the cost of a closing purchase transaction exceeds the premium received
when the option was written) without regard to any unrealized gain or loss on
the underlying security, and the liability related to such option is
extinguished. If a written call option is exercised, the fund realizes a gain
or loss from the sale of the underlying security and the proceeds of the sale
are increased by the premium originally received. If a written put option is
exercised, the amount of the premium originally received reduces the cost of
the security which the fund purchases upon exercise of the option.
The fund writes covered call options; that is, options for which it holds the
underlying security or its equivalent. Accordingly, the risk in writing a
call option is that the fund relinquishes the opportunity to profit if the
market price of the underlying security increases and the option is
exercised. In writing a put option, the fund assumes the risk of incurring a
loss if the market price of the underlying security decreases and the option
is exercised.
The premium paid by the fund for the purchase of a call or put option is
included in the fund's "Statement of assets and liabilities" as an investment
and subsequently "marked-to-market" to reflect the current market value of the
option. If an option the fund has purchased expires on the stipulated expiration
date, the fund realizes a loss in the amount of the cost of the option. If the
fund enters into a closing sale transaction, the fund realizes a gain or loss,
depending on whether proceeds from the closing sale transaction are greater or
less than the cost of the option. If the fund exercises a call option, the cost
of the securities acquired by exercising the call is increased by the premium
paid to buy the call. If the fund exercises a put option, it realizes a gain or
loss from the sale of the underlying security and the proceeds from such sale
are decreased by the premium originally paid.
Stock index options are similar to options on individual securities in that
the purchaser of an index option acquires the right to buy, and the writer
undertakes the obligations to sell, an index at a stated exercise price
during the term of the option. Instead of giving the right to take or make
actual delivery of securities, the holder of a stock index option has the
right to receive a cash "exercise settlement amount." This amount is equal
to the amount by which the fixed exercise price of the option exceeds (in the
case of a put) or is less than (in the case of a call) the closing value of
the underlying index on the date of the exercise, multiplied by a fixed
"Indices multiplier." The fund writes options on stock indices only to the
extent that it holds in its portfolio underlying securities, which, in the
judgment of Putnam Management correlate closely with the stock index.
H FEDERAL TAXES It is the policy of the fund to distribute all of its 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.
Therefore, no provision has been made for federal taxes on income, capital gains
or unrealized appreciation of securities held and excise tax on income and
capital gains.
I DISTRIBUTIONS TO SHAREHOLDERS Distributions to shareholders are recorded by
the fund on the ex-dividend date. Distributions are declared from projected net
investment income and net realized short-term capital gains that the fund is
likely to earn over the longer term.
The amount and character of income and gains determined in accordance with
30
<PAGE>
income tax regulations may differ from generally accepted accounting principles.
These differences include treatment of wash sales, market discount and return of
capital dividends received by the fund. Reclassifications are made to the fund's
capital accounts as necessary so that they reflect income and gains available
for distribution (or available capital loss carryovers) under income tax
regulations. For the year ended October 31, 1994, the fund reclassified $58,293
to decrease undistributed net investment income, $41,825 to decrease accumulated
net realized loss on investments and $16,468 to increase paid-in capital.
J EQUALIZATION Prior to November 1, 1993, the fund used the accounting practice
known as equalization to keep continuing shareholder's per share interest in
undistributed net investment income unaffected by sales or repurchases of fund
shares. This was accomplished by allocating a per share portion of the proceeds
from sales and the cost of repurchases of shares to undistributed net investment
income.
As of November 1, 1993, the fund discontinued using equalization. This change
has no effect on the fund's total net assets, net asset value per share, or its
net increase (decrease) in net assets from operations and did not have a
material effect on the per share amounts shown in the financial highlights. In
management's opinion, discontinuing the use of equalization will result in less
distortion of undistributed net investment income as compared to income
available for distribution for federal income tax purposes.
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 for the
quarter. Such fee is based on the following annual rates: 0.65% of the first
$500 million of average net assets, 0.55% of the next $500 million, 0.50% of the
next $500 million and 0.45% of any amount over $1.5 billion. This fee is
subject, under current law, to reduction in any year to the extent that expenses
(exclusive of distribution fees, brokerage, interest and taxes) of the fund
exceed 2.5% of the first $30 million of average net assets, 2.0% of the next $70
million and 1.5% of any amount over $100 million, and by the amount of certain
brokerage commissions and fees (less expenses) received by affiliates of the
Manager on the fund's portfolio transactions.
The fund also reimburses the Manager 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. For the year ended October 31, 1994, the
fund paid $12,381 for these services.
Trustees of the fund receive an annual Trustee's fee of $1,050 and an
additional fee for each Trustees' meeting attended. Trustees who are not
interested persons of the Manager and who serve on committees of the Trustees
receive additional fees for attendance at certain committee meetings.
Custodial functions for the fund's assets are being provided to the fund 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. Fees paid for these investor servicing and
custodial functions for the year ended October 31, 1994, amounted to
$599,183. Investor servicing and custodian fees reported in the Statement of
operations for the year ended October 31, 1994 have been reduced by credits
allowed by PFTC.
The fund has adopted a distribution plan with respect to its class A shares
(the "Class A Plan") pursuant to Rule 12b-1 under the Investment Company Act
of 1940. The purpose of the Class A Plan
31
<PAGE>
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 class A shares. The Trustees have approved payment by the
fund to Putnam Mutual Funds Corp. at an annual rate of .25% of the fund's
average net assets attributable to class A shares. For the year ended
October 31, 1994, the fund paid $1,235,883 in distribution fees for class A
shares.
During the year ended October 31, 1994, Putnam Mutual Funds Corp., acting as
the underwriter, received net commissions of $39,647 from the sale of class A
shares of the fund.
A deferred sales charge of up to 1.00% is assessed on certain redemptions of
class A shares purchased as part of an investment of $1 million or more. For
the year ended October 31, 1994, Putnam Mutual Funds Corp., acting as the
underwriter, received $50 on class A redemptions.
The fund has adopted a distribution plan with respect to its class B shares
(the "Class B Plan") pursuant to Rule 12b-1 under the Investment Company Act
of 1940. The purpose of the Class B Plan is to compensate Putnam Mutual
Funds Corp. for services provided and expenses incurred by it in distributing
class B shares. The Class B Plan provides for payments by the fund to Putnam
Mutual Funds Corp. at an annual rate of 1.00% of the fund's average net
assets attributable to class B shares. For the year ended October 31, 1994,
the fund paid Putnam Mutual Funds Corp. distribution fees of $17,536 for
class B shares.
Putnam Mutual Funds Corp. also receives the proceeds on the contingent
deferred sales charges on its class B share redemptions within six years of
purchase. The charge is based on declining rates, which begin at 5.00% of
the net asset value of the redeemed shares. Putnam Mutual Funds Corp.
received contingent deferred sales charges of $1,015 from redemptions during
the year ended October 31, 1994.
NOTE 3
PURCHASES AND SALES OF SECURITIES
During the year ended October 31, 1994, purchases and sales of investment
securities other than U.S. government obligations and short-term investments
aggregated $267,864,909 and $372,061,725, respectively. Purchases and sales
of U.S. government obligations aggregated $330,632,610 and $310,220,481
respectively. In determining the net gain or loss on securities sold, the
cost of securities has been determined on the identified cost basis.
NOTE 4
CAPITAL SHARES
At October 31, 1994, there was an unlimited number of shares of beneficial
interest authorized divided into two classes, designated class A and class B
capital stock. Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
Year ended
October 31, 1994
- ---------------------------------------------------
Class A Shares Amount
- ---------------------------------------------------
<S> <C> <C>
Shares sold 1,996,341 $17,703,585
- ---------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 1,913,722 16,905,211
- ---------------------------------------------------
3,910,063 34,608,796
- ---------------------------------------------------
Shares
repurchased (10,870,674) (96,488,990)
- ---------------------------------------------------
Net decrease (6,960,611) $(61,880,194)
- ---------------------------------------------------
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
Year ended
October 31, 1993
- ---------------------------------------------------
Class A Shares Amount
- ---------------------------------------------------
<S> <C> <C>
Shares sold 2,314,999 $20,453,900
- ---------------------------------------------------
Shares issued
in connection with
reinvestment of
distributions 2,676,939 23,302,220
- ---------------------------------------------------
4,991,938 43,756,120
- ---------------------------------------------------
Shares
repurchased (20,087,445) (178,674,037)
- ---------------------------------------------------
Portion represented
by undistributed net
investment income -- 225,742
- ---------------------------------------------------
Net decrease (15,095,507) $(134,692,175)
- ---------------------------------------------------
</TABLE>
<TABLE>
February 1, 1994
(commencement
of operations) to
October 31, 1994
- ---------------------------------------------------
Class B Shares Amount
- ---------------------------------------------------
<S> <C> <C>
Shares sold 528,835 $4,648,625
- ---------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 5,566 48,364
- ---------------------------------------------------
534,401 4,696,989
- ---------------------------------------------------
Shares
repurchased (50,407) (440,522)
- ---------------------------------------------------
Net increase 483,994 $4,256,467
- ---------------------------------------------------
</TABLE>
NOTE 5
RECLASSIFICATION OF CAPITAL ACCOUNTS
Effective November 1, 1993, the fund adopted the provisions of Statement of
Position 93-2 "Determination, Disclosure and Financial Statement Presentation
of Income, Capital Gain and Return of Capital Distributions by Investment
Companies (SOP)." The purpose of this SOP is to report the accumulated net
investment income and accumulated net realized gain (loss) accounts in such a
manner as to approximate amounts available for future distributions (or to
offset future realized capital gains) and to achieve uniformity in the
presentation of distributions by investment companies.
As a result of the SOP, the fund has reclassified $59,833,036 to decrease
accumulated net realized loss, $272,743 to decrease distributions in excess
of net investment income, with a decrease of $60,105,779 to additional
paid-in capital. These adjustments represent the cumulative amounts
necessary to report these balances on a tax basis through October 31, 1993.
These reclassifications, which have no impact on the total net asset value of
the fund, are primarily attributable to income from payment in kind
securities, expired capital loss carryovers and return of capital dividends
received by the fund, which are treated differently in the computation of
distributable income and capital gains under federal income tax rules and
regulations versus generally accepted accounting principles.
33
<PAGE>
FEDERAL TAX INFORMATION
For fiscal year ended October 31, 1994, the fund's distributions of $.54 and
.383 per share for class A and class B shares, respectively from net investment
income gain, constitute "dividend income" for federal income tax purposes. The
fund has designated 33.8% of the investment income as qualifying for the
dividends-received deductions for corporations.
In addition, the long-term capital gains of $.05 and .05 per share for class A
and class B shares, respectively are taxable as "capital gains" for federal
income tax purposes.
The Form 1099 you will receive in January 1995 will show the tax status of all
distributions paid to your account in calendar 1994.
As required by law, your fund reports to the Internal Revenue Service on a
calendar basis the amount of distributions paid to each shareholder.
34
<PAGE>
FUND INFORMATION
INVESTMENT
MANAGER
Putnam Investment
Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
John A. Hill
Elizabeth T. Kennan
Lawrence J. Lasser
Robert E. Patterson
Donald S. Perkins
George Putnam, III
A.J.C. Smith
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Peter Carman
Vice President
Brett C. Browchuk
Vice President
Thomas V. Reilly
Vice President
Edward P. Bousa
Vice President and Fund Manager
Kenneth J. Taubes
Vice President and Fund Manager
William N. Shiebler
Vice President
John R. Verani
Vice President
Paul M. O'Neil
Vice President
John D. Hughes
Vice President and Treasurer
Beverly Marcus
Clerk and Assistant Treasurer
This report is for the information of shareholders of Putnam Managed Income
Trust. 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.
35
<PAGE>
PUTNAM INVESTMENTS
THE PUTNAM FUNDS
One Post Office Square
Boston, Massachusetts 02109
Bulk Rate
U.S. Postage
PAID
Putnam
Investments
A14/B10-15432
