Putnam
Balanced
Retirement
Fund
ANNUAL REPORT
October 31, 1997
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* "Putnam Balanced Retirement Fund could nicely serve investors who
want something more tame than the average domestic-hybrid fund."
-- Morningstar Mutual Funds, August 1, 1997
CONTENTS
4 Report from Putnam Management
9 Fund performance summary
14 Portfolio holdings
41 Financial statements
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
Whatever else you might think about the stock market's late-October retreat,
it provided the opportunity for Putnam Balanced Retirement Fund to demonstrate
its ability to weather volatility as our most conservative equity-oriented
fund. A timely shift of some stocks into fixed-income securities and an
emphasis on what proved to be the most vibrant sectors of the bond market
contributed to the fund's positive total return for the period. At the same
time, shareholders who took their distributions in cash enjoyed a steady
stream of current income.
These results reflect the broad base of experience and expertise represented
on your fund's management team. I am pleased to report the recent addition of
Robert M. Paine to that team. Bob has been a member of the high-yield bond
group since 1989. He has eight years of investment experience. In the
following report, your fund's managers discuss final 1997 results in detail
and provide their views of what lies ahead for the fiscal year just begun.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
December 17, 1997
Report from the Fund Managers
Edward P. Bousa, lead manager
Charles G. Pohl
Kenneth J. Taubes
Robert M. Paine
The close of your fund's fiscal year came just days after a historic selloff
in the U.S. stock market -- an event that served as a solid reminder of the
importance of your fund's strategy. The 554-point drop in the Dow Jones
Industrial Average on October 27, 1997, was considered by many analysts to be
a much-needed correction for a market that was overvalued. At the same time,
it left the index 13% below its August high and demonstrated for many
investors the volatility inherent in equity investing.
Despite this rather dramatic ending to its fiscal year, Putnam Balanced
Retirement Fund delivered solid returns and maintained its balanced strategy,
which seeks downside protection from market volatility through a combination
of bond and stock investments. For the 12 months ended October 31, 1997, your
fund's class A shares provided a total return of 18.87% at net asset value and
12.04% at public offering price. For complete performance information, please
refer to the summary that begins on page 9.
Just prior to the October correction, we had shifted a portion of the fund's
equity assets into fixed-income investments. This move proved beneficial, as
did our emphasis on mortgage-backed securities and investment-grade corporate
bonds. On the equity side, solid stock selection throughout the year boosted
returns, while buying opportunities created by the late-October correction
have left us optimistic about the coming fiscal year.
* SOLID VALUE INVESTING AND NEW BUYING OPPORTUNITIES HIGHLIGHT FISCAL YEAR
Again in fiscal 1997, your fund benefited from its strategy of seeking
companies in flux -- those experiencing short-term setbacks that have caused
their stock prices to become undervalued. The stocks of these companies are
considered bargains because they represent fundamentally strong companies that
are making positive changes to improve their earnings potential. We call it
the search for "cheapness and change" -- and several stocks in your fund's
portfolio have demonstrated how well this strategy can work.
Bristol-Myers Squibb, for example, is a classic turnaround story. Originally a
consumer products company best known for its Clairol line of hair-care
products, the company has developed into a pharmaceutical powerhouse. Since
its merger with Squibb Corporation in 1989, it has become a world leader in
most of its core businesses. This company's strongest growth potential is
based in its innovative pharmaceutical products, such as the
cholesterol-lowering drug Pravachol, which has proved especially successful
for patients with coronary disease. In addition, recent studies indicate that
Pravachol may be effective as a preventive medication for people who do not
yet have heart disease. Another innovative Bristol-Myers Squibb product is
Taxol, a drug being developed for the treatment of breast cancer and
AIDS-related Karposi's sarcoma.
Ford Motor Company has shown great improvement over the past year as a result
of its strong sales of new products like the Expedition and Navigator sport
utility vehicles. In addition, Ford has made strategic cost-cutting moves and
has refocused on its core automotive business by spinning off Associates First
Capital Corporation, a consumer and commercial finance organization that was
purchased by Ford in 1989.
[GRAPHIC OMITTED: horizontal bar chart TOP INDUSTRY SECTORS]
TOP INDUSTRY SECTORS*
Insurance and Finance 17.9%
Utilities 10.1%
Oil and Gas 6.3%
Transportation 3.8%
Chemicals 3.4%
Footnote reads:
*Based on net assets as of 10/31/97. Holdings will vary over time.
AT&T, another key portfolio holding, is on the rebound after being under
tremendous pressure through most of 1997. Much of AT&T's problems stemmed from
the shuffling of its management and a recent three-month wait for the company
to hire a new CEO. Since the announcement that a new CEO had been chosen -- a
hands-on manager with a strong record for turning companies around -- the
stock has risen significantly. While these holdings, along with others
discussed in this report, were viewed favorably at the end of the fiscal
period, all portfolio holdings are subject to review and adjustment in
accordance with the fund's investment strategy and may vary in the future.
* SOME DISAPPOINTMENTS; NEW ADDITIONS TO PORTFOLIO
Despite a generally solid year, there were some stocks that did not meet our
expectations, such as Weyerhaeuser, a forest products company whose lumber and
log sales to Japan have been weak because of the distressed Asian economies.
Eastman Kodak has also been under tremendous pressure from Fuji, a major film
competitor. While Kodak stock has generally been disappointing, we remain
cautiously optimistic about the company, which recently announced a
significant cost-cutting initiative. Other poor performers were Rockwell
International, a semiconductor company experiencing pricing pressures, and
Sears, which has had problems with its credit-card business.
In the latter part of the fiscal year, we made some additions to the
portfolio, including Browning-Ferris Industries, Inc., a waste management
company. We felt the stock of this company, which has streamlined itself and
is selling some under-perfoming business units, was attractively valued.
Boeing Company is another new holding whose stock appears to be undervalued.
The jet aircraft manufacturer has suffered from production delays and high
expenses for late deliveries. However, Boeing is a leader in military aircraft
and space systems production with a large share of the commercial jet market,
and we felt its inexpensive stock represented a buying opportunity.
[GRAPHIC OMITTED: TOP FIVE EQUITY HOLDINGS]
TOP FIVE EQUITY HOLDINGS
SBC Communications, Inc.
Utilities
Exxon Corp.
Oil and gas
Mobil Corp.
Oil and gas
Banc One Corp.
Insurance and finance
E.I. du Pont de Nemours & Co., Ltd.
Chemicals
[GRAPHIC OMITTED: TOP FIVE FIXED-INCOME HOLDINGS]
TOP FIVE FIXED-INCOME HOLDINGS
Government National Mortgage Association 7-1/2s,
various due dates
Government National Mortgage Association 8-1/2s,
various due dates
Germany (Federal Repoublic of) bonds 6-1/2s,
2027
Government National Mortgage Association 7s,
TBA 11/15/27
Federal National Mortgage Association 7s,
various due dates
Footnote reads:
These holdings represent 13.4% of the fund's net assets as of 10/31/97.
Portfolio holdings will vary over time.
* MORTGAGES AND CORPORATE BONDS DRIVE FIXED-INCOME PERFORMANCE
Throughout the fiscal year, mortgage-backed securities were a major
contributor to fixed-income performance. These securities provided higher
yields than those of other sectors of the U.S. investment-grade market and
were subject to stable prepayment risk because of the relatively steady
interest-rate environment. Prepayment risk, which reduces the appreciation
potential of these securities, is greater during periods of rapidly declining
rates, when homeowners pay off mortgages ahead of schedule to refinance.
Toward the end of the period, as declining rates became more of a concern, we
reduced the fund's weighting in mortgage-backed securities.
The fund's high-yield corporate bond holdings were also important contributors
to performance. Typically the performance of these bonds reflects that of
stocks, and this year both markets benefited from low inflation, strong
corporate earnings, and moderate economic growth. Like stocks, corporate bonds
proved disappointing toward the end of the period as investors reacted to
turmoil in markets at home and abroad. For the bulk of the year, however,
corporate bonds in the broadcasting, cable, and telecommunications sectors
provided stellar returns.
The October U.S. market drop was in large part a reaction to a dramatic plunge
in Hong Kong's stock market, a scenario that brought down markets around the
world. While performance of your fund's international bond holdings was hurt
by this turn of events, there were some positives, including investments in
the United Kingdom, Canada, and Australia.
* WELL-BALANCED CONSERVATIVE PORTFOLIO FOR FISCAL '98
While fiscal 1997 ended amid some market turmoil, we remain optimistic about
the coming year. The fund's equity and fixed-income sectors are well balanced,
and we're carefully watching economic developments to take advantage of the
best opportunities. Meanwhile, we've visited a significant number of the
companies represented in your fund's portfolio and we're encouraged about
their valuations and earnings potential over the next several years.
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 10/31/97, there is no guarantee the fund will continue to hold
these securities in the future.
Performance summary
This section provides information about your fund's performance, which
should always be considered in light of its investment strategy. Putnam
Balanced Retirement Fund is designed for investors seeking high current
return and relative stability of principal from a diversified portfolio of
equity and debt securities.
TOTAL RETURN FOR PERIODS ENDED 10/31/97
Class A Class B Class M
(inception date) (4/19/85) (2/1/94) (3/17/95)
NAV POP NAV CDSC NAV POP
- ------------------------------------------------------------------------------
1 year 18.87% 12.04% 18.11% 13.11% 18.41% 14.22%
- ------------------------------------------------------------------------------
5 years 91.27 80.25 84.43 82.43 86.86 80.37
Annual average 13.85 12.51 13.02 12.78 13.32 12.52
- ------------------------------------------------------------------------------
10 years 249.89 229.84 222.79 222.79 231.21 219.72
Annual average 13.34 12.68 12.43 12.43 12.72 12.33
- ------------------------------------------------------------------------------
Life of fund 283.78 261.83 245.03 245.03 256.46 244.07
Annual average 11.33 10.81 10.39 10.39 10.68 10.36
- ------------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 10/31/97
Standard Lehman Bros.
& Poor's Govt./Corp. Consumer
500 Index Bond Index Price Index
- ------------------------------------------------------------------------------
1 year 32.10% 8.81% 2.08%
- ------------------------------------------------------------------------------
5 years 147.06 44.36 13.96
Annual average 19.83 7.62 2.65
- ------------------------------------------------------------------------------
10 years 387.00 140.89 40.16
Annual average 17.15 9.19 3.43
- ------------------------------------------------------------------------------
Life of fund 643.95 225.00 51.17
Annual average 17.41 9.88 3.36
- ------------------------------------------------------------------------------
Performance data represent past results, do not reflect future
performance, and will differ with each share class. Returns for class A
and class M shares reflect the current maximum initial sales charges of
5.75% and 3.50%, 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. Returns
shown for class B and class M shares for periods prior to their inception
are derived from the historical performance of class A shares, adjusted to
reflect both the initial sales charge or CDSC, if any, currently
applicable to each class and, in the case of class B and class M shares,
the higher operating expenses applicable to such shares. All returns
assume reinvestment of distributions at NAV and represent past
performance; they do not guarantee future results. 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]
Cumulative total return of a $10,000 investment since 10/31/87
Fund's class A shares at POP $32,984
S&P 500 Index $48,700
Lehman Bros. Govt/Corp. Bond Index $24,089
Consumer Price Index $14,016
Lehman Bros.
Fund's class A S&P 500 Govt/Corp. Consumer
shares at POP Index Bond Index Price Index
-------------- ------- ------------ -----------
10/31/87 9425 10000 10000 10000
10/31/88 11295 11490 11062 10425
10/31/89 13135 14520 12405 10893
10/31/90 12001 13432 13087 11578
10/31/91 15515 17932 14099 11916
10/31/92 17245 19713 16687 12298
10/31/93 20293 22632 18962 12636
10/31/94 20169 23506 18082 12966
10/31/95 24066 29714 21004 13330
10/31/96 27750 36869 22136 13729
10/31/97 32984 48700 24089 14016
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 $32,279 and no contingent deferred sales charges would apply; a
$10,000 investment in the fund's class M shares would have been valued at
$33,121 at net asset value ($31,972 at public offering price). See first page
of performance section for performance calculation method.
PRICE AND DISTRIBUTION INFORMATION
12 months ended 10/31/97
Class A Class B Class M
- ------------------------------------------------------------------------------
Distributions (number) 4 4 4
- ------------------------------------------------------------------------------
Income $0.400 $0.328 $0.351
- ------------------------------------------------------------------------------
Capital gains
- ------------------------------------------------------------------------------
Long term 0.413 0.413 0.413
- ------------------------------------------------------------------------------
Short term 0.259 0.259 0.259
- ------------------------------------------------------------------------------
Total $1.072 $1.000 $1.023
- ------------------------------------------------------------------------------
Share value: NAV POP NAV NAV POP
- ------------------------------------------------------------------------------
10/31/96 $10.67 $11.32 $10.60 $10.63 $11.02
- ------------------------------------------------------------------------------
10/31/97 11.48 12.18 11.40 11.44 11.85
- ------------------------------------------------------------------------------
Current return (end of period)
- ------------------------------------------------------------------------------
Current dividend rate1 3.83% 3.61% 3.16% 3.39% 3.27%
- ------------------------------------------------------------------------------
Current 30-day SEC yield2 3.52 3.32 2.77 3.03 2.92
- ------------------------------------------------------------------------------
1Income portion of most recent distribution, annualized and divided by NAV
or POP at end of period.
2Based on net investment income, calculated using SEC guidelines.
TOTAL RETURN FOR PERIODS ENDED 9/30/97
(most recent calendar quarter)
Class A Class B Class M
(inception date) (4/19/85) (2/1/94) (3/17/95)
NAV POP NAV CDSC NAV POP
- ------------------------------------------------------------------------------
1 year 23.79% 16.65% 22.92% 17.92% 23.21% 18.88%
- ------------------------------------------------------------------------------
5 years 96.43 85.04 89.42 87.42 91.91 85.20
Annual average 14.46 13.10 13.63 13.39 13.93 13.12
- ------------------------------------------------------------------------------
10 years 183.08 166.73 160.91 160.91 167.75 158.45
Annual average 10.97 10.31 10.06 10.06 10.35 9.96
- ------------------------------------------------------------------------------
Life of fund 291.80 269.40 252.29 252.29 263.94 251.29
Annual average 11.59 11.07 10.64 10.64 10.93 10.62
- ------------------------------------------------------------------------------
Performance data represent past results, do not reflect future
performance, and will differ for each share class. Investment returns and
principal value will fluctuate so that an investor's shares, when sold,
may be worth more or less than their original cost. See first page of
performance section for performance calculation method.
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 M shares have a lower initial sales charge and a higher 12b-1 fee
than class A shares and no 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 for class A
shares and 3.50% for class M shares.
Contingent deferred sales charge (CDSC) is a charge applied at the time of
the redemption of class B shares and assumes redemption at the end of the
period. Your fund's CDSC declines from a 5% maximum during the first year
to 1% during the sixth year. After the sixth year, the CDSC no longer
applies.
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.
Consumer Price Index (CPI ) is a commonly used measure of inflation; it
does not represent an investment return.
*Securities indexes assume reinvestment of all distributions and interest
payments and do not take in account brokerage fees or taxes. Securities in
the fund do not match those in the indexes and performance of the fund
will differ. It is not possible to invest directly in an index.
Report of independent accountants
To the Trustees and Shareholders of
Putnam Balanced Retirement Fund
In our opinion, the accompanying statement of assets and liabilities,
including the portfolio of investments owned, and the related statements of
operations and of changes in net assets and the financial highlights present
fairly, in all material respects, the financial position of Putnam Balanced
Retirement Fund (the "fund") at October 31, 1997, 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, 1997 by correspondence with
the custodian and the application of alternative auditing procedures where
investments purchased were not yet received by the custodian, provide a
reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
December 12, 1997
Portfolio of investments owned
October 31, 1997
<TABLE>
<CAPTION>
COMMON STOCKS (50.1%) *
NUMBER OF SHARES VALUE
Aerospace and Defense (1.1%)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
87,000 Boeing Co. $ 4,165,125
25,000 Lockheed Martin Corp. 2,376,563
10,700 Northrop Grumman Corp. 1,168,975
--------------
7,710,663
Agriculture (--%)
- ------------------------------------------------------------------------------------------------------------
11,013 PSF Holdings LLC Class A 330,390
Automotive (1.7%)
- ------------------------------------------------------------------------------------------------------------
1,800 Bayerische Motoren Werke (BMW) AG (Germany) 1,301,217
24,500 Chrysler Corp. 863,625
78,700 Ford Motor Co. 3,438,206
25,700 General Motors Corp. 1,649,619
28,200 Lear Corp. + 1,355,363
59,000 Michelin Corp. Class B, (France) 3,016,935
--------------
11,624,965
Basic Industrial Products (0.4%)
- ------------------------------------------------------------------------------------------------------------
52,000 Deere (John) & Co. 2,736,500
Business Equipment and Services (0.8%)
- ------------------------------------------------------------------------------------------------------------
24,000 Pitney Bowes, Inc. 1,903,500
42,000 Xerox Corp. 3,331,125
--------------
5,234,625
Cable Television (0.4%)
- ------------------------------------------------------------------------------------------------------------
107,000 Comcast Corp. Class A 2,942,500
Chemicals (3.0%)
- ------------------------------------------------------------------------------------------------------------
60,000 Bayer AG ADR (Germany) 2,109,048
44,000 Dow Chemical Co. 3,993,000
98,000 du Pont (E.I.) de Nemours & Co., Ltd. 5,573,750
44,000 Eastman Chemical Co. 2,623,500
44,000 Minnesota Mining & Manufacturing Co. 4,026,000
34,000 PPG Industries, Inc. 1,925,250
--------------
20,250,548
Computer Equipment (0.2%)
- ------------------------------------------------------------------------------------------------------------
42,000 Seagate Technology, Inc. + 1,139,250
Computer Services and Software (1.6%)
- ------------------------------------------------------------------------------------------------------------
32,000 Computer Associates International, Inc. 2,386,000
43,000 IBM Corp. 4,216,688
36,000 Intel Corp. 2,772,000
49,000 NCR Corp. + 1,485,313
--------------
10,860,001
Conglomerates (0.6%)
- ------------------------------------------------------------------------------------------------------------
68,900 TRW, Inc. 3,944,525
Consumer Non-Durables (2.5%)
- ------------------------------------------------------------------------------------------------------------
29,000 Colgate-Palmolive Co. 1,877,750
73,000 Fortune Brands, Inc. 2,413,563
104,000 Gallaher Group PLC (United Kingdom) + 1,995,500
90,100 Kimberly-Clark Corp. 4,679,569
140,000 Philip Morris Cos., Inc. 5,547,500
--------------
16,513,882
Consumer Related (0.5%)
- ------------------------------------------------------------------------------------------------------------
75,000 Lowe's Cos., Inc. 3,121,875
Consumer Services (--%)
- ------------------------------------------------------------------------------------------------------------
25 AmeriKing, Inc. 1,250
Electronics and Electrical Equipment (2.2%)
- ------------------------------------------------------------------------------------------------------------
54,000 Cooper Industries, Inc. 2,814,750
78,000 Emerson Electric Co. 4,090,125
55,700 Hewlett-Packard Co. 3,435,994
43,000 Rockwell International Corp. 2,107,000
116,000 Siebe ORD (United Kingdom) 2,224,602
--------------
14,672,471
Environmental Control (0.4%)
- ------------------------------------------------------------------------------------------------------------
79,400 Browning-Ferris Industries, Inc. 2,580,500
Food and Beverages (2.6%)
- ------------------------------------------------------------------------------------------------------------
75,700 Anheuser-Busch Cos., Inc. 3,023,269
32,000 Dole Food Co. 1,418,000
54,000 General Mills, Inc. 3,564,000
64,000 PepsiCo, Inc. 2,356,000
49,500 Sara Lee Corp. 2,530,688
39,000 The Quaker Oats Co. 1,867,125
116,000 Whitman Corp. 3,045,000
--------------
17,804,082
Health Care (1.1%)
- ------------------------------------------------------------------------------------------------------------
110,000 Baxter International, Inc. 5,087,500
54,000 United Healthcare Corp. 2,500,875
--------------
7,588,375
Hospital Management and Medical Services (0.2%)
- ------------------------------------------------------------------------------------------------------------
48,000 Tenet Healthcare Corp. + 1,467,000
Insurance and Finance (9.7%)
- ------------------------------------------------------------------------------------------------------------
24,000 Aetna Inc. 1,705,500
54,000 Ahmanson (H.F.) & Co. 3,186,000
82,000 American General Corp. 4,182,000
60,000 AON Corp. 3,236,250
107,000 Banc One Corp. 5,577,375
24,761 Bankers Trust New York Corp. [UPSIDE DOWN DELTA] 2,921,798
17,000 Beneficial Corp. 1,303,688
12,000 Chase Manhattan Corp. 1,384,500
7,900 CIGNA Corp. 1,226,475
6,000 CoreStates Financial Corp. 436,500
24,000 Federal National Mortgage Association 1,162,500
49,800 First Chicago NBD Corp. 3,622,950
18,000 First of America Bank Corp. 1,003,500
74,200 First Union Corp. 3,640,438
18,000 Firstar Corp. 650,250
65,000 Fleet Financial Group, Inc. 4,180,313
23,000 KeyCorp 1,407,313
36,000 Mercantile Bancorporation, Inc. 1,748,250
31,200 Morgan (J.P.) & Co., Inc. 3,424,200
73,000 NationsBank Corp. 4,370,875
84,000 Norwest Corp. 2,693,250
94,000 PNC Bank Corp. 4,465,000
12,000 Star Banc Corp. 588,750
67,500 Synovus Financial Corp. 1,468,125
103,000 USF&G Corp. 2,085,750
39,300 Wachovia Corp. 2,959,781
10,300 Washington Mutual, Inc. 704,906
--------------
65,336,237
Metals and Mining (0.7%)
- ------------------------------------------------------------------------------------------------------------
38,700 Aluminum Co. of America 2,825,100
11,900 Carpenter Technology Corp. 575,663
71,100 Freeport-McMoRan Copper & Gold Co., Inc. Class A 1,639,744
--------------
5,040,507
Oil and Gas (5.2%)
- ------------------------------------------------------------------------------------------------------------
47,000 Amoco Corp. 4,309,313
23,000 Atlantic Richfield Co. 1,893,188
34,000 British Petroleum PLC ADR (United Kingdom) 2,983,500
69,600 Elf Aquitane ADR (France) 4,297,800
30,900 Ente Nazionale Idrocarburi S.P.A. (ENI) ADR (Italy) 1,741,988
96,000 Exxon Corp. 5,898,000
30,000 Kerr-McGee Corp. 2,026,875
78,000 Mobil Corp. 5,679,375
63,600 Occidental Petroleum Corp. 1,772,850
75,000 Total Corp. ADR (France) 4,162,500
--------------
34,765,389
Paper and Forest Products (1.5%)
- ------------------------------------------------------------------------------------------------------------
31,000 Chesapeake Corp. 982,313
36,000 International Paper Co. 1,620,000
45,000 Temple Inland, Inc. 2,581,875
101,000 Weyerhaeuser Co. 4,822,750
--------------
10,006,938
Pharmaceuticals (2.9%)
- ------------------------------------------------------------------------------------------------------------
53,200 American Home Products Corp. 3,943,450
62,000 Bristol-Myers Squibb Co. 5,440,500
61,400 Glaxo Wellcome PLC ADR (United Kingdom) + 2,628,688
32,000 Merck & Co., Inc. 2,856,000
145,160 Pharmacia & Upjohn, Inc. 4,608,830
--------------
19,477,468
Photography (0.5%)
- ------------------------------------------------------------------------------------------------------------
38,000 Eastman Kodak Co. 2,275,250
21,000 Polaroid Corp. 943,688
--------------
3,218,938
Publishing (0.2%)
- ------------------------------------------------------------------------------------------------------------
44,000 McGraw-Hill Companies, Inc. 2,876,500
Real Estate (0.6%)
- ------------------------------------------------------------------------------------------------------------
24,200 Beacon Properties Corp. (R) 1,019,425
48,000 Duke Realty Investments, Inc. (R) 1,080,000
33,000 Equity Residential Properties Trust (R) 1,666,500
--------------
3,765,925
Retail (0.6%)
- ------------------------------------------------------------------------------------------------------------
94,000 K mart Corp. + 1,239,625
81,600 Toys R Us 2,779,500
--------------
4,019,125
Telecommunications (--%)
- ------------------------------------------------------------------------------------------------------------
1,005 NEXTEL Communications, Inc. 144A
(acquired 9/12/97, cost $16,244)[DBL. DAGGERS] 25,062
Transportation (2.6%)
- ------------------------------------------------------------------------------------------------------------
30,000 Burlington Northern Santa Fe Corp. 2,850,000
58,000 CSX Corp. 3,171,875
49,000 Delta Air Lines, Inc. 4,936,750
108,200 Ryder System, Inc. 3,787,000
48,000 Union Pacific Corp. 2,940,000
--------------
17,685,625
Utilities (6.3%)
- ------------------------------------------------------------------------------------------------------------
64,000 American Telephone & Telegraph Co. 3,132,000
58,000 Ameritech Corp. 3,770,000
27,000 Baltimore Gas & Electric Co. 740,813
53,312 Bell Atlantic Corp. 4,258,296
83,000 BellSouth Corp. 3,926,938
95,000 CiNergy Corp. 3,135,000
63,000 Dominion Resources, Inc. 2,342,813
79,108 Duke Power Co. 3,816,961
36,000 OGE Energy Corp. 1,743,750
74,100 Pacific Enterprises 2,422,144
50,000 Potomac Electric Power Co. 1,121,875
103,303 SBC Communications, Inc. 6,572,643
11,800 Southern Co. 270,663
100,000 Sprint Corp. 5,200,000
--------------
42,453,896
--------------
Total Common Stocks (cost $279,346,686) $ 339,195,012
CORPORATE BONDS AND NOTES (20.7%) *
PRINCIPAL AMOUNT VALUE
Advertising (0.1%)
- ------------------------------------------------------------------------------------------------------------
$ 175,000 Adams Outdoor Advertising sr. notes 10 3/4s, 2006 $ 190,750
190,000 Lamar Advertising Co. sr. sub. notes 9 5/8s, 2006 200,925
60,000 Lamar Advertising Co. 144A sr. sub. notes 8 5/8s, 2007 60,525
10,000 Outdoor Comunications Inc. sr. sub. notes 9 1/4s, 2007 9,900
190,000 Outdoor Systems, Inc. company guaranty 8 7/8s, 2007 195,700
10,000 Outdoor Systems, Inc. sr. sub. notes 9 3/8s, 2006 10,350
55,000 Universal Outdoor, Inc. sr. sub. notes 9 3/4s, 2006 61,050
75,000 Universal Outdoor, Inc. sr. sub. notes Ser. B, 9 3/4s, 2006 83,250
--------------
812,450
Aerospace and Defense (0.4%)
- ------------------------------------------------------------------------------------------------------------
100,000 BE Aerospace sr. notes 9 3/4s, 2003 104,500
25,000 Howmet Corp. sr. sub. notes 10s, 2003 26,750
20,000 K & F Industries, Inc.144A sr. sub. notes 9 1/4s, 2007 20,150
10,000 L-3 Communications Corp. 144A sr. sub. notes 10 3/8s, 2007 10,750
2,515,000 Raytheon Co notes 6.45s, 2002 2,532,857
25,000 Sequa Corp. bonds 8 3/4s, 2001 25,250
25,000 Sequa Corp. sr. notes 9 5/8s, 1999 25,500
20,000 Tracor, Inc. sr. sub. notes 8 1/2s, 2007 20,200
25,000 Wyman-Gordon Co. sr. notes 10 3/4s, 2003 26,500
--------------
2,792,457
Agriculture (0.2%)
- ------------------------------------------------------------------------------------------------------------
25,000 AGCO Corp. sr. sub. notes 8 1/2s, 2006 25,875
915,000 Potash Corp. of Saskatchewan notes 7 1/8s, 2007 (Cananda) 943,237
127,869 Premium Standard Farms, Inc. sr. secd. notes 11s, 2003 [2 DBL. DAGGERS] 140,656
--------------
1,109,768
Apparel (--%)
- ------------------------------------------------------------------------------------------------------------
60,000 Sassco Fashions Ltd. sr. notes 12 3/4s, 2004 63,600
Automotive (0.2%)
- ------------------------------------------------------------------------------------------------------------
47,000 Aftermarket Technology Corp. sr. sub. notes 12s, 2004 52,170
5,000 Cambridge Industries Inc. 144A sr. sub. notes 10 1/4s, 2007 5,200
680,000 Chrysler Corp. deb. Ser. B, 7.45s, 2097 699,006
5,000 Hawk Corp. sr. notes 10 1/4s, 2003 5,200
200,000 Hayes Wheels International, Inc. company guaranty Ser. B,
9 1/8s, 2007 205,000
200,000 Lear Corp. sub. notes 9 1/2s, 2006 218,000
10,000 Safety Components International, Inc. sr. sub. notes Ser. B,
10 1/8s, 2007 10,350
--------------
1,194,926
Banks (0.1%)
- ------------------------------------------------------------------------------------------------------------
740,000 Abbey National First Capital PLC sub. notes 7.35s, 2049
(United Kingdom) 770,969
Basic Industrial Products (--%)
- ------------------------------------------------------------------------------------------------------------
45,000 Clark-Schwebel sr. notes 10 1/2s, 2006 48,600
5,000 Inter-City Products sr. notes 9 3/4s, 2000 5,125
10,000 Owens-Illinois, Inc. sr. notes 8.1s, 2007 10,610
5,000 Roller Bearing Co. 144A sr. sub. notes 9 5/8s, 2007 5,038
--------------
69,373
Broadcasting (0.3%)
- ------------------------------------------------------------------------------------------------------------
35,000 Acme Television/Finance 144A sr. disc. notes stepped-coupon
zero % (10 7/8s, 9/30/00), 2004 ++ 25,813
45,000 Affinity Group Holdings sr. notes 11s, 2007 47,700
100,000 Allbritton Communications sr. sub. deb. Ser. B, 9 3/4s, 2007 100,750
25,000 Allbritton Communications Co. sr. sub. deb. 11 1/2s, 2004 26,250
75,000 American Radio Systems Corp. company guaranty 9s, 2006 79,688
45,000 Argyle Television Corp. sr. sub. notes 9 3/4s, 2005 49,275
75,000 Benedek Broadcasting sr. notes 11 7/8s, 2005 83,625
150,000 Benedek Communications Corp. sr. disc. notes stepped-coupon
zero % (13 1/4s, 5/15/01), 2006 ++ 105,000
45,000 Capstar Broadcasting sr. disc. notes stepped-coupon zero %
(12 3/4s, 2/1/02), 2009 ++ 31,050
125,000 Capstar Broadcasting sr. sub. notes 9 1/4s, 2007 125,625
20,000 Central European Media Enterprises Ltd. sr. notes 9 3/8s,
2004 (Bermuda) 19,800
100,000 Chancellor Media Corp. sr. sub. notes 9 3/8s, 2004 103,500
10,000 Citadel Broadcasting Co. 144A sr. sub. notes 10 1/4s, 2007 10,650
40,000 Commodore Media, Inc. sr. sub. notes stepped-coupon
7 1/2s, (13 1/4s, 5/1/98), 2003 ++ 44,200
150,000 Dial Call Communications, Inc. sr. disc. notes stepped-coupon
zero % (12 1/4s, 4/15/99), 2004 ++ 139,875
100,000 Fox/Liberty Networks LLC 144A sr. notes 8 7/8s, 2007 100,000
75,000 Granite Broadcasting Corp. sr. sub. notes 10 3/8s, 2005 75,750
10,000 Gray Communications Systems, Inc. sr. sub. notes 10 5/8s, 2006 10,800
15,000 Heritage Media Services Corp. sr. sub. notes 8 3/4s, 2006 15,975
145,000 International Cabletel, Inc. sr. notes stepped-coupon Ser. B,
zero % (11 1/2s, 2/01/01), 2006 ++ 105,850
75,000 Jacor Communications, Co. 144A company guaranty
8 3/4s, 2007 75,375
20,000 Jacor Communications, Inc. company guaranty 9 3/4s, 2006 20,900
45,000 JCAC, Inc. sr. sub. notes 10 1/8s, 2006 47,925
25,000 Pegasus Media & Communications notes Ser. B, 12 1/2s, 2005 28,500
5,000 Radio One Inc. 144A sr. sub. notes stepped-coupon 7s,
(12s, 5/15/00), 2004 ++ 4,800
75,000 Sinclair Broadcast Group, Inc. 144A sr. sub. notes 9s, 2007 75,000
40,000 Sinclair Broadcasting Group sr. sub. notes 10s, 2005 40,800
25,000 Spanish Broadcasting sr. notes Ser. B, 11s, 2004 27,500
120,000 Sullivan Broadcasting sr. sub. notes 10 1/4s, 2005 126,000
15,000 TV Azteca S.A. de C.V. sr. notes 10 1/2s, 2007 (Mexico) 15,075
125,000 UIH Australia/Pacific, Inc. 144A sr. disc. notes stepped-coupon
zero % (14s, 5/15/01), 2006 (Australia) ++ 86,875
--------------
1,849,926
Building and Construction (0.1%)
- ------------------------------------------------------------------------------------------------------------
35,000 Atrium Companies, Inc. 144A sr. sub. notes 10 1/2s, 2006 36,750
10,000 Building Materials Corp. sr. notes Ser. B, 8 5/8s, 2006 10,300
20,000 Continental Homes Holding Corp. sr. notes 10s, 2006 21,650
750,000 Guangdong Enterprises 144A sr. notes 8 7/8s, 2007 (China) 738,990
75,000 M.D.C. Holdings, Inc. notes Ser. B, 11 1/8s, 2003 83,250
75,000 Southdown, Inc. sr. sub. notes Ser. B, 10s, 2006 82,875
27,000 Terex Corp. sr. notes Ser. B, 13 1/4s, 2002 30,105
--------------
1,003,920
Business Equipment and Services (0.1%)
- ------------------------------------------------------------------------------------------------------------
10,000 Axiohm Transactions Solutions 144A sr. sub. notes 9 3/4s, 2007 10,150
10,000 Coleman Holdings, Inc. 144A sr. disc. notes zero %, 2001 5,900
40,000 Corporate Express, Inc. sr. sub. notes Ser. B, 9 1/8s, 2004 41,200
90,000 Iron Mountain, Inc. med. term notes company guaranty
10 1/8s, 2006 97,650
20,000 Outsourcing Solutions, Inc. sr. sub. notes Ser. B, 11s, 2006 22,100
233,000 Pierce Leahy Corp. sr. sub. notes 11 1/8s, 2006 263,290
10,000 Williams Scotsman, Inc. 144A sr. notes 9 7/8s, 2007 10,350
--------------
450,640
Cable Television (0.5%)
- ------------------------------------------------------------------------------------------------------------
177,375 Adelphia Communications Corp. sr. notes 9 1/2s, 2004 [2 DBL. DAGGERS] 177,375
15,000 Bell Cablemedia PLC sr. disc. stepped-coupon notes zero %
(11.95s, 7/15/99), 2004 (United Kingdom) ++ 13,950
75,000 Cablevision Systems Corp. sr. sub. deb. 10 1/2s, 2016 81,750
5,000 Cablevision Systems Corp. sr. sub. deb. 9 7/8s, 2023 5,225
75,000 Century Communications Corp. sr. notes 8 7/8s, 2007 75,375
75,000 Comcast Corp. sr. sub. notes 9 1/2s, 2008 80,250
1,465,000 Continental Cablevision, Inc. sr. deb. 9 1/2s, 2013 1,680,604
5,000 Diamond Cable Communication Co. sr. disc. notes
stepped-coupon zero % (13 1/4s, 9/30/99), 2004
(United Kingdom) ++ 4,200
210,000 Diamond Cable Communication Co. sr. disc. notes
stepped-coupon zero % (11 3/4s, 12/15/00), 2005
(United Kingdom) ++ 154,350
155,000 Diamond Cable Communication Co. sr. disc. notes
stepped-coupon zero % (10 3/4s, 2/15/02), 2007
(United Kingdom) ++ 99,200
79,125 Falcon Holdings Group, Inc. sr. sub. notes 11s, 2003 [2 DBL. DAGGERS] 83,081
175,000 Jones Intercable, Inc. sr. sub. deb. 10 1/2s, 2008 189,000
45,000 Marcus Cable Co. (L.P.) sr. deb. 11 7/8s, 2005 48,825
110,000 Marcus Cable Co. (L.P.) sr. sub. disc. notes stepped-coupon
zero % (13 1/2s, 8/1/99), 2004 ++ 99,550
5,000 Rogers Cablesystems Ltd. deb. 10 1/8s, 2012 (Canada) 5,250
175,000 Rogers Cablesystems Ltd. sr. notes Ser. B, 10s, 2005 (Canada) 187,250
100,000 TCI Satellite Entertainment 144A sr. sub. notes 10 7/8s, 2007 104,000
--------------
3,089,235
Chemicals (0.4%)
- ------------------------------------------------------------------------------------------------------------
45,000 Great Lakes Carbon Corp. sr. notes 10s, 2006 47,700
75,000 Huntsman Corp. 144A sr. sub. notes 9 1/2s, 2007 77,813
50,000 Huntsman Corp. 144A sr. sub. notes FRN 9.094s 2007 51,750
900,000 Lyondell Petrochemical Co. notes 9 1/8s, 2002 995,364
25,000 NL Industries, Inc. sr. notes stepped-coupon zero %
(13s, 10/15/98), 2005 ++ 24,625
25,000 Polytama International notes 11 1/4s, 2007 23,125
960,000 Sociedad Quimica Y Minera de Chile S.A. 144A bonds 7.7s,
2006 (Chile) 1,003,200
20,000 Sovereign Specialty Chemical 144A sr. sub. notes 9 1/2s, 2007 20,550
30,000 Sterling Chemicals Holdings sr. disc. notes stepped-coupon
zero % (13 1/2s, 8/15/01), 2008 ++ 21,750
85,000 Sterling Chemicals, Inc. sr. sub. notes Ser. A, 11 1/4s, 2007 94,350
15,000 Trikem S.A. 144A bonds 10 5/8s, 2007 (Brazil) 13,950
15,000 Union Carbide Global Enterprises sr. sub. notes Ser. B, 12s, 2005 16,800
--------------
2,390,977
Computer Services and Software (--%)
- ------------------------------------------------------------------------------------------------------------
10,000 DecisionOne Corp. sr. sub. notes 9 3/4s, 2007 10,225
Conglomerates (0.1%)
- ------------------------------------------------------------------------------------------------------------
15,000 Aramark Corp. sub. notes 8 1/2s, 2003 15,300
5,000 Cia Latino Americana 144A company guaranty 11 5/8s,
2004 (Argentina) 5,050
20,000 Congoleum Corp. sr. notes 9s, 2001 20,550
100,000 Dart & Kraft Finance N.V. company guaranty Ser. WW,
7 3/4s, 1998 (Luxembourg) 367,250
40,000 MacAndrews & Forbes Holdings, Inc. sub. deb. notes 13s, 1999 40,150
--------------
448,300
Consumer Durable Goods (--%)
- ------------------------------------------------------------------------------------------------------------
20,000 Remington Products Co. sr. sub. notes Ser. B, 11s, 2006 14,800
50,000 Selmer Co., Inc. sr. sub. notes 11s, 2005 55,000
--------------
69,800
Consumer Non-Durables (0.2%)
- ------------------------------------------------------------------------------------------------------------
5,000 Foamex (L.P.) 144A sr. sub. notes 9 7/8s, 2007 5,150
50,000 Guess Jeans, Inc. sr. sub. notes 9 1/2s, 2003 51,000
10,000 Hedstrom Corp. 144A sr. sub. notes 10s, 2007 10,100
295,000 Philip Morris Cos., Inc. deb. 7 3/4s, 2027 309,809
600,000 Philip Morris Cos., Inc. notes 7 1/8s, 2004 611,586
430,000 RJR Nabisco, Inc. notes 8 3/4s, 2005 460,182
--------------
1,447,827
Consumer Related (--%)
- ------------------------------------------------------------------------------------------------------------
5,000 French Fragrances, Inc. sr. notes Ser. B, 10 3/8s, 2007 5,250
Consumer Services (--%)
- ------------------------------------------------------------------------------------------------------------
40,000 Coinmach Corp. sr. notes Ser. B, 11 3/4s, 2005 43,800
60,000 Coinmach Corp. 144A sr. notes 11 3/4s, 2005 65,700
45,000 FRD Acquisition Co. sr. notes Ser. B, 12 1/2s, 2004 47,250
30,000 Host Marriott Travel Plaza sr. notes Ser. B, 9 1/2s, 2005 31,425
100,000 John Q Hammons Hotels, Inc. 1st mtge. 8 7/8s, 2004 100,000
--------------
288,175
Electronics and Electrical Equipment (--%)
- ------------------------------------------------------------------------------------------------------------
20,000 Argo-Tech Corp. 144A sr. sub. notes 8 5/8s, 2007 19,900
25,000 Celestica International Ltd. sr. sub. notes 10 1/2s, 2006 (India) 26,813
30,000 DII Group, Inc. 144A sr. sub. notes 8 1/2s, 2007 29,700
25,000 Dobson Communications Corp. 11 3/4s, 2007 25,625
25,000 Fairchild Semiconductor Corp. 144A sr. sub. notes 11.74s, 2008 25,563
30,000 Flextronics Internationsl Ltd. 144A sr. sub. notes 8 3/4s, 2007 29,775
10,000 HCC Industries, Inc. 144A sr. sub. notes 10 3/4s, 2007 10,525
50,000 International Semi-Tech. Corp. sr. secd. disc. notes
stepped-coupon zero % (11 1/2s, 8/15/00), 2003
(Canada) ++ 23,000
40,000 Motors and Gears, Inc. sr. notes Ser. B, 10 3/4s, 2006 42,400
20,000 Viasystems Inc. 144A sr. sub. notes 9 3/4s, 2007 20,650
5,000 Wavetek Corp. 144A sr. sub. notes 10 1/8s, 2007 5,150
--------------
259,101
Energy-Related (0.4%)
- ------------------------------------------------------------------------------------------------------------
95,000 AES Corp. sr. sub. notes 8 3/8s, 2007 92,388
1,840,000 CalEnergy, Inc. sr. notes 7.63s, 2007 1,846,624
40,000 Panda Global Energy Co. company guaranty 12 1/2s, 2004 37,200
725,000 Quezon Power Ltd. sr. notes 8.86s, 2017 (Philippines) 697,813
--------------
2,674,025
Entertainment (0.8%)
- ------------------------------------------------------------------------------------------------------------
190,000 AMC Entertainment, Inc. sr. sub. notes 9 1/2s, 2009 194,750
75,000 Aztar Corp. sr. sub. notes 11s, 2002 77,250
190,000 Cinemark USA, Inc. 9 5/8s, 2008 195,700
855,000 News America Holdings, Inc. deb. 7 3/4s, 2045 867,569
30,000 Premier Parks, Inc. sr. notes Ser. A, 12s, 2003 33,113
185,000 Six Flags Corp. sr. sub. notes Ser. A, stepped-coupon
zero % (12 1/4s, 6/15/98), 2005 ++ 195,638
615,000 Time Warner Entertainment Inc. notes 8 7/8s, 2012 715,331
1,725,000 Time Warner Entertainment sr. notes 8 3/8s, 2033 1,897,862
685,000 Time Warner Entertainment Inc. deb. 7 1/4s, 2008 704,180
380,000 Viacom International, Inc. sub. deb. 8s, 2006 372,400
--------------
5,253,793
Environmental Control (--%)
- ------------------------------------------------------------------------------------------------------------
30,000 Allied Waste Industries, Inc. 144A sr. disc. notes
stepped-coupon zero % (11.3s, 6/1/02), 2007 ++ 20,250
Food and Beverages (0.1%)
- ------------------------------------------------------------------------------------------------------------
40,000 Ameriserve Food Co. 144A sr. notes 8 7/8s, 2006 40,000
10,000 Aurora Foods, Inc. sr. sub. notes Ser. B, 9 7/8s, 2007 10,350
45,000 Canandaigua Wine Inc. sr. sub. notes Ser. C, 8 3/4s, 2003 45,000
100,000 Chiquita Brands sr. notes 9 5/8s, 2004 105,875
10,000 Del Monte Corp. sr. sub. notes Ser. B, 12 1/4s, 2007 10,900
20,000 Fleming Companies, Inc. 144A sr. sub. notes 10 1/2s, 2004 20,850
75,000 Jitney-Jungle Stores company guaranty 12s, 2006 84,000
80,000 Mafco, Inc. sr. sub. notes 11 7/8s, 2002 84,800
75,000 Ralphs Grocery Co. sr. notes 10.45s, 2004 82,688
20,000 Ralphs Grocery Co. company guaranty 10.45s, 2004 22,000
25,000 Signature Brands Inc. sr. sub. notes 13s, 2002 28,500
20,000 Southern Foods Group 144A sr. sub. notes 9 7/8s, 2007 20,500
115,000 Southland Corp. deb. Ser. A, 4 1/2s, 2004 94,013
35,000 Stater Brothers sr. notes 11s, 2001 38,500
100,000 Stater Brothers 144A sr. sub. notes 9s, 2004 101,000
5,000 Windy Hill Pet Food Co. sr. sub. notes 9 3/4s, 2007 5,075
--------------
794,051
Gaming (0.1%)
- ------------------------------------------------------------------------------------------------------------
25,000 Boyd Gaming Corp. 144A sr. sub. notes 9 1/2s, 2007 25,375
15,000 Casino America, Inc. sr. notes 12 1/2s, 2003 16,050
50,000 Coast Hotels & Casinos company guaranty Ser. B, 13s, 2002 55,750
35,000 Empress River Casino sr. notes 10 3/4s, 2002 37,275
75,000 Harveys Casino Resorts sr. sub. notes 10 5/8s, 2006 81,750
20,000 Isle of Capri Black Hawk LLC 144A 1st mortgage 13s, 2004 20,200
120,000 Lady Luck Gaming Corp. 1st mtge. 11 7/8s, 2001 121,200
59,000 Louisiana Casino Cruises Corp. 1st mtge. 11 1/2s, 1998 59,590
110,000 Mohegan Tribal Gaming sr. secd. notes Ser. B, 13 1/2s, 2002 141,900
75,000 Showboat Marina Casino 1st mtge. Ser. B, 13 1/2s, 2003 85,688
75,000 Sun International Hotels Ltd. company guaranty 9s, 2007 76,875
140,000 Trump A.C. 1st mtge. 11 1/4s, 2006 137,900
--------------
859,553
Health Care (0.3%)
- ------------------------------------------------------------------------------------------------------------
30,000 Genesis Eldercare 144A sr. sub. notes 9s, 2007 29,100
90,000 Genesis Health Ventures, Inc. sr. sub. notes 9 1/4s, 2006 91,350
35,000 Graphic Controls Corp. sr. sub. notes Ser. A, 12s, 2005 39,025
65,000 Integrated Health Services, Inc. 144A sr. sub. notes 9 1/2s, 2007 65,650
70,000 Integrated Health Services, Inc. 144A sr. sub. notes 9 1/4s, 2008 70,000
35,000 Magellan Health Services, Inc. sr. sub. deb. Ser. A, 11 1/4s, 2004 38,850
90,000 Merit Behavioral Care sr. sub. notes 11 1/2s, 2005 106,200
30,000 Paracelsus Healthcare sr. sub. notes 10s, 2006 30,900
80,000 Paragon Health Networks 144A sr. sub. notes 9 1/2s, 2007 79,500
55,000 Paragon Health Networks 144A sr. sub. notes stepped-coupon
zero % (10 1/2s, 11/1/02), 2007 ++ 32,656
75,000 Quorum Health Group, Inc. sr. sub. notes 8 3/4s, 2005 78,000
100,000 Sun Healthcare Group Inc. 144A sr. sub. notes 9 1/2s, 2007 101,500
150,000 Tenet Healthcare Corp. sr. sub. notes 8 5/8s, 2007 153,750
1,020,000 Tenet Healthcare Corp. sr. notes 8s, 2005 1,030,200
--------------
1,946,681
Insurance and Finance (7.2%)
- ------------------------------------------------------------------------------------------------------------
10,000 Aames Financial Corp. sr. notes 9 1/8s, 2003 9,200
1,080,000 Advanta Corp. med. term notes Ser. B, 7s, 2001 1,055,333
1,890,000 Advanta National Bank sr. notes 7.02s, 2001 1,899,677
825,000 AFC Capital Trust company guaranty Ser. B, 8.207s, 2027 910,998
485,000 Allstate Financing II company guaranty 7.83s, 2045 501,180
75,000 Chevy Chase Savings Bank sub. deb. 9 1/4s, 2008 75,750
35,000 Chevy Chase Savings Bank Inc. sub. deb. 9 1/4s, 2005 35,350
15,000 Colonial Capital II company guaranty 8.92s, 2027 15,797
1,165,000 Conseco Inc. sr. notes 10 1/2s, 2004 1,407,192
10,000 Delta Financial Corp. sr. notes 9 1/2s, 2004 9,900
20,000 Dine S.A. de C.V. 144A company guaranty 8 3/4s,
2007 (Luxembourg) 18,600
3,150,000 Den Danske Bank 144A sub. notes 6.55s, 2003 (Denmark) 3,175,232
10,000 Dime Capital Trust I bank guaranty Ser. A, 9.33s, 2027 11,299
20,000 Dollar Financial Group Inc. sr. notes Ser. A, 10 7/8s, 2006 21,400
1,895,000 Executive Risk Capital Trust company guaranty Ser. B,
8.675s, 2027 2,010,121
540,000 First Financial Caribbean Corp. sr. notes 7.84s, 2006 568,636
110,000 First Nationwide Holdings sr. sub. notes 10 5/8s, 2003 119,350
1,070,000 Firstar Capital Trust I company guaranty Ser. B, 8.32s, 2026 1,158,853
900,000 Greenpoint Bank sr. notes 6.7s, 2002 903,537
410,000 Greenpoint Capital Trust I company guaranty 9.1s, 2027 431,730
15,000 Imperial Credit Capital Trust I 144A company guaranty
10 1/4s, 2002 14,925
30,000 Intertek Finance PLC 144A sr. sub. notes 10 1/4s, 2006
(United Kingdom) 31,500
1,675,000 Lehman Bros Holdings, Inc. med. term notes 6.4s, 1999 1,687,094
1,015,000 Markel Capital Trust I 144A company guaranty 8.71s, 2046 1,058,138
1,670,000 Money Store, Inc. notes 8.05s, 2002 1,743,547
20,000 Netia Holdings B.V. 144A company guaranty 10 1/4s,
2007 (Poland) 19,654
10,000 Netia Holdings B.V. 144A company guaranty stepped-coupon
zero % (11 1/4s, 11/1/02), 2007 (Poland)++ 6,313
25,000 North Fork Capital Trust I company guaranty 8.7s, 2026 26,735
15,000 Ocwen Capital Trust I company guaranty 10 7/8s, 2027 15,900
5,000 Ocwen Federal Bank FSB sub. deb. 12s, 2005 5,500
5,000 Ocwen Financial Corp. notes 11 7/8s, 2003 5,550
470,000 Orange Cogen Funding 144A company guaranty 8.175s, 2022 502,853
1,265,000 Peoples Bank- Bridgeport sub. notes 7.2s, 2006 1,304,683
325,000 Peoples Heritage Capital Trust company guaranty Ser. B,
9.06s, 2027 356,688
1,335,000 Phoenix Home Life Mutual Insurance Co. 144A notes
6.95s, 2006 1,362,141
10,000 Pioneer Americas Acquisition company guaranty Ser. B,
9 1/4s, 2007 9,900
35,000 PRT Funding Corp. sr. notes 11 5/8s, 2004 27,650
2,504,809 Railcar Leasing L.L.C. 144A sr. notes Ser. A1, 6 3/4s, 2006 2,576,823
5,000 Reliance Group Holdings, Inc. sr. sub. deb. 9 3/4s, 2003 5,345
15,000 Riggs Capital Trust 144A bonds 8 5/8s, 2026 15,828
2,500,000 Riggs National Corp. sub. deb. 8 1/2s, 2006 2,600,000
1,425,000 Salomon, Inc. sr. notes 7.3s, 2002 1,476,044
1,100,000 Salton Sea Funding Corp. company guaranty Ser. E, 8.3s, 2011 1,196,866
1,600,000 Sampoerna International Finance Co. 144A company guaranty
8 3/8s, 2006 (Indonesia) 1,466,800
2,000,000 Scotland International Finance B.V. 144A sub. notes 8.85s,
2006 (Netherlands) 2,311,860
1,710,000 Sears Roebuck and Co. med. Term notes Ser. VI, 8.99s, 2012 2,078,334
1,735,000 Societe Generale 144A notes 7.85s, 2049 (France) 1,806,656
885,000 Southern Investments Service Co. sr. notes 6.8s, 2006
(United Kingdom) 889,027
20,000 Sovereign Capital Trust 144A company guaranty 9s, 2027 21,275
1,095,000 Sparbanken Sverige AB (Swedbank) 144A sub. 7 1/2s, 2006
(Sweden) 1,143,837
985,000 St. Paul Bancorp sr. notes 7 1/8s, 2004 1,006,837
635,000 State Development Bank of China notes 7 3/8s, 2007 (China) 624,243
585,000 State Street Institution 144A company guaranty 7.94s, 2026 614,063
1,955,000 TigCapital Trust I 144A bonds 8.597s, 2027 2,082,916
1,235,000 Trenwick Capital Trust I company guaranty 8.82s, 2037 1,310,644
955,000 Webster Capital Trust I 144A bonds 9.36s, 2027 1,063,125
1,500,000 Webster Financial Corp. sr. notes 8 3/4s, 2000 1,579,740
--------------
48,388,169
Medical Supplies and Devices (--%)
- ------------------------------------------------------------------------------------------------------------
55,000 ALARIS Medical Systems, Inc. company guaranty 9 3/4s, 2006 58,025
25,000 Dade International, Inc. sr. sub. notes Ser. B, 11 1/8s, 2006 28,063
65,000 Imagyn Medical Technologies 12 1/2s, 2004 63,050
110,000 Wright Medical Technology, Inc. 144A 11 3/4s, 2000 112,750
--------------
261,888
Metals and Mining (0.4%)
- ------------------------------------------------------------------------------------------------------------
30,000 Anker Coal Group, Inc. 144A sr. notes 9 3/4s, 2007 30,450
10,000 Altos Hornos De Mexico bonds Ser. B, 11 7/8s, 2004 (Mexico) 10,350
25,000 Continental Global Group sr. notes Ser. B, 11s, 2007 26,500
405,000 Freeport-McMoRan Copper & Gold Co., Inc. sr. notes
7 1/2s, 2006 406,737
60,000 Hylsa S.A. de C.V. 144A bonds 9 1/4s, 2007 (Mexico) 58,500
25,000 Maxxam Group Holdings, Inc. sr. notes Ser. B, 12s, 2003 26,688
750,000 Noranda, Inc. notes 7s, 2005 (Canada) 759,795
1,035,000 PT Alatief Freeport sr. notes 9 3/4s, 2001 (Netherlands) 1,135,861
--------------
2,454,881
Oil and Gas (0.7%)
- ------------------------------------------------------------------------------------------------------------
30,000 Abraxas Petroleum Corp. sr. notes Ser. B, 11 1/2s, 2004 32,850
25,000 Benton Oil & Gas Co. sr. notes 11 5/8s, 2003 27,250
20,000 Chesapeake Energy Corp. sr. notes 10 1/2s, 2002 21,200
30,000 Coho Energy, Inc. sr. sub. notes 8 7/8s, 2007 29,925
5,000 Costilla Energy, Inc. sr. notes 10 1/4s, 2006 5,313
10,000 Dailey Petroleum Services Corp. 144A company guaranty
9 3/4s, 2007 10,400
10,000 DI Industries Inc. sr. notes 8 7/8s, 2007 10,250
680,000 El Paso Natural Gas Co. deb. 7 1/2s, 2026 726,369
75,000 Flores & Rucks, Inc. sr. sub. notes 9 3/4s, 2006 79,688
75,000 Gulf Canada Resources Ltd. sr. sub. notes 9 5/8s, 2005 (Canada) 81,375
970,000 Gulf Canada Resources, Ltd. sr. notes 8.35s, 2006 (Canada) 1,055,738
5,000 Maxus Energy Corp. global notes 9 7/8s, 2002 5,370
20,000 Maxus Energy Corp. notes 9 1/2s, 2003 21,500
25,000 Ocean Energy, Inc. company guaranty Ser. B, 8 7/8s, 2007 25,625
20,000 Panaco, Inc. 144a sr. notes 10 5/8s, 2004 20,000
30,000 Parker Drilling Corp. sr. notes Ser. B, 9 3/4s, 2006 31,650
20,000 Perez Companc S.A. 144A bonds 9s, 2004 (Argentina) 20,300
640,000 Petro Geo-Services AS ADR notes 7 1/2s, 2007 (Norway) 673,811
10,000 Pride Petroleum Services, Inc. sr. notes 9 3/8s, 2007 10,650
960,000 Saga Petroleum ASA deb. 7 1/4s, 2027 (Norway) 962,294
5,000 Snyder Oil Corp. sr. sub. notes 8 3/4s, 2007 5,050
5,000 Texas Petrochemical Corp. sr. sub. notes 11 1/8s, 2006 5,500
320,000 Transamerican Energy 144A sr. disc. notes stepped-coupon
zero % (13s 6/15/1999), 2002 ++ 267,200
225,000 Transamerican Energy 144A sr. notes 11 1/2s, 2002 230,625
81,000 TransTexas Gas Corp. sr. sub. notes Ser. D, 13 3/4s, 2001 91,935
30,000 Trico Marine Services, Inc. company guaranty Ser. B, 8 1/2s, 2005 30,900
5,000 Wiser Oil Co. company guaranty 9 1/2s, 2007 4,950
--------------
4,487,718
Packaging and Containers (--%)
- ------------------------------------------------------------------------------------------------------------
30,000 Huntsman Packaging Corp. 144A sr. sub. notes 9 1/8s, 2007 30,600
30,000 Innova S De R.L. sr. notes 12 7/8s, 2007 (Mexico) 30,825
25,000 Radnor Holdings Corp. 144A sr. notes Ser. B, 10s, 2003 25,875
20,000 Radnor Holdings Inc. sr. notes 10s, 2003 20,700
25,000 Vicap SA. 144A company guaranty 10 1/4s, 2002 25,375
--------------
133,375
Paper and Forest Products (0.1%)
- ------------------------------------------------------------------------------------------------------------
25,000 Florida Coast Paper LLC 1st mtge. Ser. B, 12 3/4s, 2003 27,188
80,000 Indah Kiat Financial Mauritius 144A 10s, 2007 (Indonesia) 72,800
466,000 Pindo Deli Finance Mauritius Ltd. 144A company guaranty
10 3/4s, 2007 (India) 419,400
30,000 PT Pabrik Kertas Tjiwi Kimia 144A company guaranty 10s,
2004 (Indonesia) 27,150
10,000 Repap New Brunswick sr. notes FRN 9.063s, 2000 (Canada) 9,800
95,000 Riverwood International Corp. company guaranty 10 1/4s, 2006 97,138
--------------
653,476
Pharmaceuticals (--%)
- ------------------------------------------------------------------------------------------------------------
40,000 ICN Pharmaceuticals, Inc. 144A sr. notes 9 1/4s, 2005 42,100
Publishing (0.3%)
- ------------------------------------------------------------------------------------------------------------
35,000 American Media, Inc. sr. sub. notes 11 5/8s, 2004 38,413
30,000 Garden State Newspapers 144A sr. sub. notes 8 3/4s, 2009 29,925
90,000 Hollinger International Publishing, Inc. company guaranty
9 1/4s, 2007 92,250
15,000 Hollinger International Publishing, Inc. company guaranty
8 5/8s, 2005 15,263
2,085,000 News America Holdings, Inc. deb. 7.7s, 2025 2,086,418
10,000 Von Hoffman Press Inc. 144A sr. sub. notes 10 3/8s, 2007 10,650
--------------
2,272,919
Real Estate (1.0%)
- ------------------------------------------------------------------------------------------------------------
745,000 Chelsea GCA Realty, Inc. notes 7 1/4s, 2007 (R) 757,672
1,235,000 First Industrial Realty Trust, Inc. notes 7.6s, 2007 1,311,125
630,000 Health Care Property Investors, Inc. sr. notes 6 1/2s, 2006 (R) 617,047
185,000 HMH Properties, Inc. company guaranty Ser. B, 8 7/8s, 2007 189,163
835,000 National Health Investors, Inc. bonds 7.3s, 2007 (R) 859,165
1,780,000 OMEGA Healthcare Investors, Inc. notes 6.95s, 2007 1,797,141
5,000 Prime Hospitality Corp. 1st mtge. 9 1/4s, 2006 5,225
35,000 Prime Hospitality Corp. sub. notes 9 3/4s, 2007 37,100
1,015,000 Sun Communities, Inc. sr. notes 7 5/8s, 2003 (R) 1,065,151
40,000 Tanger Properities Ltd. Partnership Gtd. notes 8 3/4s, 2001 (R) 41,596
--------------
6,680,385
Retail (0.2%)
- ------------------------------------------------------------------------------------------------------------
975,000 Federated Department Stores sr. notes 8 1/2s, 2003 1,065,890
35,000 Johns Manville Corp. sr. notes 10 7/8s, 2004 39,200
40,000 Mothers Work, Inc. sr. notes 12 5/8s, 2005 42,800
10,000 Specialty Retailers, Inc. company guaranty Ser. B, 8 1/2s, 2005 10,175
20,000 William Carter Holdings Co. 144A sr. sub. notes 12s, 2008 21,400
40,000 Zale Corp. 144A sr. notes 8 1/2s, 2007 39,100
--------------
1,218,565
Satellite Services (--%)
- ------------------------------------------------------------------------------------------------------------
25,000 Echostar DBS Corp. 144A company guaranty 12 1/2s, 2002 26,250
40,000 Esat Holdings Ltd. sr. notes stepped-coupon zero %
(12 1/2s, 2/01/02), 2007 (Ireland) ++ 27,600
40,000 Globalstar L.P. Capital sr. notes 11 3/8s, 2004 39,800
20,000 Pratama Datakom Asia BV 144A company guaranty 12 3/4s,
2005 (Indonesia) 17,000
--------------
110,650
Specialty Consumer Products (--%)
- ------------------------------------------------------------------------------------------------------------
45,000 Coty Inc. Gtd. sr. sub. notes 10 1/4s, 2005 48,150
10,000 GFSI, Inc. sr. sub. notes Ser. B, 9 5/8s, 2007 10,150
45,000 Herff Jones, Inc. sr. sub. notes 11s, 2005 48,600
--------------
106,900
Technology (--%)
- ------------------------------------------------------------------------------------------------------------
25,000 Computervision Corp. sr. sub. notes 11 3/8s, 1999 13,250
Telecommunications (1.6%)
- ------------------------------------------------------------------------------------------------------------
20,000 Antenna TV S.A. 144A sr. notes 9s, 2007 (Greece) 19,500
15,000 America Communication Services, Inc. 144A sr. notes
13 3/4s, 2007 17,250
50,000 Arch Communications Group sr. disc. notes stepped-coupon
zero % (10 7/8s, 3/15/01), 2008 ++ 33,000
25,000 Call-Net Enterprises sr. disc. notes stepped-coupon zero %
(13 1/4s, 12/1/99), 2004 ++ 22,500
100,000 Cencall Communications Corp. sr. disc. notes stepped-coupon
zero % (10 1/8s, 1/15/99), 2004 ++ 87,500
105,000 Centennial Cellular Corp. sr. notes 10 1/8s, 2005 109,725
45,000 Centennial Cellular Corp. sr. notes 8 7/8s, 2001 44,663
30,000 Comcast Cellular 144A sr. notes 9 1/2s, 2007 31,050
10,000 Consorcio Ecuatoriano 144A notes 14s, 2002 (Ecuador) 10,000
150,000 Dial Call Communications, Inc. sr. disc. notes stepped-coupon
Ser. B, zero % (10 1/4s, 12/15/98), 2005 ++ 130,500
20,000 Fonorola, Inc. sr. notes 12 1/2s, 2002 (Canada) 22,600
90,000 Fox Kids Worldwide Inc. 144A sr. discount notes
stepped-coupon zero % (10 1/4s, 11/1/02), 2007 ++ 51,300
120,000 Fox Kids Worldwide Inc. 144A sr. notes 9 1/4s, 2007 115,200
100,000 FrontierVision Holdings LP 144A sr. discount notes
stepped coupon zero % (11 7/8s, 9/15/01), 2007 ++ 68,000
25,000 FrontierVision Operating Partners L.P. sr. sub. notes 11s, 2006 27,000
70,000 Intercel, Inc. sr. disc. notes stepped-coupon zero %
(12s, 5/1/01), 2006 ++ 49,700
35,000 Intermedia Communications, Inc. sr. disc. notes stepped-coupon
zero % (12 1/2s, 5/15/01), 2006 ++ 26,425
200,000 Intermedia Communications, Inc. sr. disc. notes stepped-coupon
Ser. B, zero % (11 1/4s, 7/15/02), 2007 ++ 131,500
15,000 Intermedia Communications, Inc. 144A sr. notes 8 7/8s, 2007 14,663
55,000 Iridium LLC/Capital Corp. company guaranty Ser. B, 14s, 2005 57,750
110,000 Iridium LLC/Capital Corp. 144A sr. notes 11 1/4s, 2005 102,300
5,005,000 LCI International, Inc. sr. notes 7 1/4s, 2007 5,114,409
45,000 McCaw International Ltd sr. discount notes stepped coupon
zero % (13s, 4/15/02), 2007 ++ 26,100
50,000 McLeodUSA, Inc. sr. disc. notes stepped-coupon zero %
(10 1/2s, 3/1/02), 2007 ++ 34,500
100,000 Metrocall, Inc. 144A sr. sub. notes 9 3/4s, 2007 99,000
20,000 Metronet Communications 144A sr. disc. notes
stepped-coupon zero % (10 3/4s, 11/1/02), 2007 ++ 11,800
265,000 Millicom International Cellular S.A. sr. disc. notes
stepped-coupon zero % (13 1/2s, 6/1/01), 2006
(Luxembourg) ++ 198,750
30,000 Mobile Telecommunications Tech. sr. notes 13 1/2s, 2002 33,975
75,000 NEXTEL Communications, Inc. sr. disc. notes stepped-coupon
zero % (11 1/2s, 9/1/98), 2003 ++ 72,938
170,000 NEXTEL Communications, Inc. 144A sr. disc. notes
stepped-coupon zero % (10.65s, 9/15/02), 2007 ++ 98,600
285,000 NEXTEL Communications, Inc. sr. disc. notes stepped-coupon
zero % (9 3/4s, 2/15/99), 2004 ++ 239,400
50,000 Nextlink Communications sr. notes 9 5/8s, 2007 50,125
150,000 NTL Inc. sr. notes Ser. B, 10s, 2007 (United Kingdom) 153,000
140,000 Omnipoint Corp. sr. notes 11 5/8s, 2006 146,300
50,000 Orbcomm Global Capital Corp. sr. notes Ser. B, 14s, 2004 52,375
75,000 Paging Network, Inc. sr. sub. notes 10s, 2008 75,000
10,000 Pegasus Communications Corp. 144A sr. notes 9 5/8s, 2005 10,025
10,000 Powertel, Inc. sr. notes 11 1/8s, 2007 10,600
110,000 Pricellular Wireless Corp. sr. notes 10 3/4s, 2004 118,800
20,000 Pronet, Inc. sr. sub. notes 11 7/8s, 2005 21,300
85,000 Qwest Communications International, Inc. 144A sr. disc. notes
stepped-coupon zero % (9.47s, 10/15/02), 2007 ++ 54,400
100,000 RCN Corp. 144A sr. disc. notes stepped-coupon zero %
(11 1/8s, 10/15/02), 2007 ++ 58,000
10,000 RCN Corp. 144A sr. notes 10s, 2007 9,875
85,000 Teleport Communications Group Inc. sr. disc. notes
stepped-coupon zero % (11 1/8s, 7/1/01), 2007 ++ 66,513
175,000 Teleport Communications Group, Inc. sr.notes 9 7/8s, 2006 189,875
20,000 Telesystem International Wireless Inc. 144A sr. disc. notes
stepped-coupon zero % (10 1/2s, 11/1/02), 2007 (Canada) ++ 10,600
15,000 Transtel S.A. 144A pass through Certificates 12 1/2s,
2007 (Colombia) 14,100
125,000 Winstar Equipment Corp. company guaranty 12 1/2s, 2004 130,000
15,000 Wireless One, Inc. sr. notes 13s, 2003 7,913
2,555,000 WorldCom, Inc. notes 7 3/4s, 2007 2,679,582
--------------
10,959,981
Textiles (--%)
- ------------------------------------------------------------------------------------------------------------
10,000 Glenoit Corp. 144A sr. sub. notes 11s, 2007 10,600
15,000 Polymer Group, Inc. company guaranty Ser. B, 9s, 2007 14,850
40,000 Polysindo International Finance company guaranty 11 3/8s,
2006 (Indonesia) 41,100
40,000 Tultex Corp. sr. notes 10 5/8s, 2005 43,100
--------------
109,650
Transportation (1.0%)
- ------------------------------------------------------------------------------------------------------------
10,000 Atlantic Express, Transportation Corp.144A company guaranty
10 3/4s, 2004 10,500
20,000 Blue Bird Body Co. sr. sub. notes Ser. B, 10 3/4s, 2006 21,000
1,690,000 Burlington Northern Santa Fe notes 6 3/8s, 2005 1,679,100
5,000 Chemical Leaman Corp. 144A sr. notes 10 3/8s, 2005 5,150
30,000 Consorcio/MCII Holdings sec. notes stepped-coupon zero %
(12s, 11/15/98), 2002 ++ 27,225
520,000 Continental Airlines pass thru cert. Ser. 97CI, 7.42s, 2007 538,736
1,130,000 CSX Corp. deb. 7.95s, 2027 1,245,723
35,000 Eletson Holdings, Inc. 1st pfd. mtge. notes 9 1/4s, 2003 (Greece) 35,350
30,000 Hermes Europe Railtel 144a sr. notes 11 1/2s,
2007 (Netherlands) 32,400
45,000 International Shipholding Corp. sr. notes 9s, 2003 46,238
30,000 Johnstown America Industries, Inc. 144A sr. sub. notes
11 3/4s, 2005 32,700
1,330,000 Norfolk Southern Corp. bonds 7.8s, 2027 1,444,460
1,755,000 Norfolk Southern Corp. bonds 7.05s, 2037 1,825,130
5,000 TFM S.A. de C.V. 144A company guaranty 10 1/4s,
2007 (Mexico) 5,175
25,000 TFM S.A. de C.V. 144A company guaranty stepped-coupon
zero % (11 3/4s, 6/15/02), 2009 (Mexico) ++ 16,500
34,000 Viking Star Shipping sr. secd. notes 9 5/8s, 2003 34,340
--------------
6,999,727
Utilities (3.8%)
- ------------------------------------------------------------------------------------------------------------
25,000 AES China Generating Co. sr. notes 10 1/8s, 2006 (China) 26,063
1,005,000 Arizona Public Service Co. sr. notes 6 3/4s, 2006 1,026,658
50,000 BTI Telecom Corp. 144A sr. notes 10 1/2s, 2007 50,000
1,135,000 California Energy Corp. disc. notes 10 1/4s, 2005 1,243,461
80,000 Chesapeake Energy Corp. sr. notes 9 1/8s, 2006 82,200
1,125,000 Citizens Utilities Co. bonds 7.68s, 2034 1,270,733
495,000 CMS Energy Corp. sr. notes 8 1/8s, 2002 509,895
1,065,000 Connecticut Light & Power Co. 1st mtge. Ser. A, 7 7/8s, 2001 1,089,452
305,000 Edison Mission Energy 144A company guaranty 7.33s, 2008 317,142
1,369,000 EIP Funding-Public Service Co. of New Mexico deb.
10 1/4s, 2012 1,595,665
1,910,000 El Paso Electric Co. 1st mtge. Ser. B, 7 3/4s, 2001 1,971,540
25,000 El Paso Electric Co. 1st mtge. Ser. D, 8.9s, 2006 27,234
2,525,000 Enersis S.A. ADR notes 7.4s, 2016 (Chile) 2,491,973
775,000 Enersis S.A. ADR notes 6.6s, 2026 (Chile) 772,884
20,000 Espirito Santo Centrais 144A sr. notes 10s, 2007 (Brazil) 19,200
29,000 First PV Funding deb. 10.15s, 2016 31,165
790,000 Illinova Corp. sr. notes 7 1/8s, 2004 802,601
1,005,000 Israel Electric Corp., Ltd. 144A sr. notes 7 1/4s, 2006 (Israel) 1,043,037
35,000 Midland Funding Corp. I deb. Ser. C-94, 10.33s, 2002 41,981
622,017 Midland Funding Corp. II deb. Ser. A, 11 3/4s, 2005 682,645
80,000 Niagara Mohawk Power Corp. med. term notes 9.95s, 2000 80,522
296,872 Northeast Utilities System notes Ser. A, 8.58s, 2006 294,848
788,133 Northeast Utilities System notes Ser. B, 8.38s, 2005 791,246
1,685,000 Texas New-Mexico Power Utilities 1st mtge. 9 1/4s, 2000 1,794,289
4,700,000 Texas Utilities Co. secd. lease fac. bonds 7.46s, 2015 4,934,107
1,360,000 Texas Utilities Electric Capital Trust V company guaranty
8.175s, 2037 1,450,209
1,135,000 US West Capital Funding, Inc. company guaranty 6.95s, 2037 1,151,685
--------------
25,592,435
--------------
Total Corporate Bonds and Notes
(cost $136,314,553) $ 140,161,341
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (16.2%) *
PRINCIPAL AMOUNT VALUE
U.S. Government Agency Mortgage Obligations (11.3%)
- ------------------------------------------------------------------------------------------------------------
$ 6,624,629 Federal Home Loan Mortgage Corp. 5 1/2s, with
due dates from March 1, 2011 to April 1, 2011 $ 6,388,341
Federal National Mortgage Association
Pass-Through Certificates
10,399,792 7s, with due dates from February 1, 2026 to June 15, 2027 10,432,252
2,695,000 5.94s, med. term notes December 12, 2005 2,650,775
n 10,525,000 Government National Mortgage Association 7s, TBA,
November 15, 2027 10,583,997
Government National Mortgage Association
Adjustable Rate Mortgages
1,471,232 7 3/8s, with due dates from April 20, 2023 to May 20, 2024 1,512,362
5,879,854 7 1/8s, with due dates from July 20, 2023 to
September 20, 2024 6,073,609
2,770,000 6s, TBA, November 16, 2027 2,794,238
6,100,000 5 1/2s, TBA, November 16, 2027 6,087,617
Government National Mortgage Association
Pass-Through Certificates
14,023,343 8 1/2s, with due dates from July 15, 2026 to
October 15, 2027 14,702,505
14,837,431 7 1/2s, with due dates from June 15, 2026 to
October 15, 2027 15,171,440
--------------
76,397,136
U.S. Treasury Obligations (4.9%)
- ------------------------------------------------------------------------------------------------------------
U.S. Treasury Bonds
55,000 11 7/8s, November 15, 2003 71,655
35,000 8 7/8s, August 15, 2017 45,571
3,120,000 6 5/8s, February 15, 2027 3,308,167
880,000 6 3/8s, August 15, 2027 906,946
U.S. Treasury Notes
3,205,000 7s, July 15, 2006 3,438,869
2,230,000 6 5/8s, May 15, 2007 2,348,123
3,945,000 6 1/4s, June 30, 2002 4,020,192
6,203,000 6 1/8s, August 15, 2007 6,337,729
5,514,000 6s, July 31, 2002 # 5,566,548
3,305,000 5 7/8s, September 30, 2002 3,322,054
4,000,000 5 3/4s, October 31, 2002 4,005,640
--------------
33,371,494
--------------
Total U.S. Government and Agency Obligations
(cost $107,371,495) $ 109,768,630
FOREIGN GOVERNMENT BONDS AND NOTES (5.1%) *
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
USD 4,901,000 Bank of Foreign Economic Affairs of Russia
(Vnesheconombank) principal loan FRN,
Libor plus 13/16s, 2020 +##+++ $ 2,891,590
DEM 18,425,000 Germany (Federal Republic of) bonds Ser. 97,
6 1/2s,2027 11,119,087
ITL 250,000,000 Italy (Government of) cv. notes 5s, 2001 267,500
NZD 3,815,000 New Zealand (Government of) bonds 10s, 2002 2,655,876
NZD 7,465,000 New Zealand (Government of) bonds 8s, 2004 4,958,027
USD 2,012,000 Peru (Government of) Ser. US, 4s, 2017 1,126,720
USD 2,750,000 Quebec (Province of) deb. Ser. NM, 7 1/8s, 2024 2,746,700
- ------------------------------------------------------------------------------------------------------------
ZAR 36,942,000 South Africa (Republic of) bonds Ser. 153, 13s, 2010 6,972,985
GBP 912,000 United Kingdom Treasury bonds 8s, 2021 1,809,151
--------------
Total Foreign Government Bonds and Notes
(cost $34,916,113) $ 34,547,636
CONVERTIBLE BONDS AND NOTES (3.4%) *
PRINCIPAL AMOUNT VALUE
Aerospace and Defense (0.1%)
- ------------------------------------------------------------------------------------------------------------
$ 350,000 SPACEHAB, Inc. 144A cv. sub. notes 8s, 2007 $ 350,000
Automotive (0.2%)
- ------------------------------------------------------------------------------------------------------------
55,000 Exide Corp. 144A cv. sr. sub. notes 2.9s, 2005 34,513
200,000 Magna International cv. sub. deb. 5s, 2002 255,000
JPY 60,000,000 Toyota Motor Corp. cv. deb. 1.2s, 1998 (Japan) 865,169
--------------
1,154,682
Broadcasting (--%)
- ------------------------------------------------------------------------------------------------------------
250,000 International Cabletel Inc. 144A cv. deb. 7 1/4s, 2005 275,938
Business Equipment and Services (0.1%)
- ------------------------------------------------------------------------------------------------------------
300,000 National Data Corp. cv. sub. notes 5s, 2003 295,125
150,000 U.S. Office Products Co. cv. sub. notes 5 1/2s, 2003 142,500
200,000 U.S. Office Products Co. 144A cv. sub. notes 5 1/2s, 2003 195,500
--------------
633,125
Cable Television (--%)
- ------------------------------------------------------------------------------------------------------------
250,000 Comcast Corp. cv. notes 1 1/8s, 2007 160,938
Computer Services and Software (0.1%)
- ------------------------------------------------------------------------------------------------------------
330,000 Intevac, Inc. 144A cv. sub. notes 6 1/2s, 2004 292,050
260,000 System Software Associates, Inc. cv. sub. notes 7s, 2002 253,500
--------------
545,550
Computers (0.2%)
- ------------------------------------------------------------------------------------------------------------
500,000 Safeguard Scientifics, Inc. 144A cv. sub. notes 6s, 2006 545,000
650,000 Softkey International, Inc. 144A cv. sr. notes 5 1/2s, 2000 594,750
150,000 Synoptics Communications Inc. 144A cv. sub. deb. 5 1/4s, 2003 145,313
--------------
1,285,063
Conglomerates (0.1%)
- ------------------------------------------------------------------------------------------------------------
225,000 Hexcel Corp. cv. sub. notes 7s, 2003 402,750
150,000 Thermo Electron Corp. 144A cv. subordinated 4 1/4s, 2003 168,750
--------------
571,500
Consumer Non-Durables (--%)
- ------------------------------------------------------------------------------------------------------------
350,000 Standard Commercial Corp. cv. sub. deb. 7 1/4s, 2007 316,750
Consumer Services (0.3%)
- ------------------------------------------------------------------------------------------------------------
275,000 Aker Maritime cv. 5 1/4s, 2002 313,500
500,000 Boston Chicken, Inc. cv. notes LYON
(Liquid Yield Option Notes) zero %, 2015 103,750
320,000 Boston Chicken, Inc. cv. sub. deb. 7 3/4s, 2004 267,600
350,000 Fine Host Corp. 144A cv. sub. notes 5s, 2004 325,500
150,000 Loews Corp. cv. sub. notes 3 1/8s, 2007 169,500
550,000 Pharmaceutical Marketing Services Inc. 144A cv. deb.
6 1/4s, 2003 473,000
184,000 Protection One, Inc. cv. sr. sub. notes 6 3/4s, 2003 213,210
--------------
1,866,060
Electronics and Electrical Equipment (0.5%)
- ------------------------------------------------------------------------------------------------------------
130,000 Dovatron International cv. sub. notes 6s, 2002 188,500
330,000 Integrated Device Technology, Inc. cv. sub. notes 5 1/2s, 2002 280,500
150,000 Integrated Process Equipment Corp. 144A cv. sub. notes
6 1/4s, 2004 132,750
350,000 Lam Research Corp. 144A cv. sub. notes 5s, 2002 304,063
200,000 Lernout & Hauspie Speech Products N.V.
144A cv. sub. notes 8s, 2001 (Belgium) 496,000
680,000 Motorola, Inc. cv. sub. deb. LYON zero %, 2013 538,900
10,000 National Semiconductor Corp. 144A cv. deb. 6 1/2s, 2002 10,863
15,000 Photronics, Inc. cv. sub. notes 6s, 2004 15,881
184,000 SCI Systems, Inc. cv. sub. notes 5s, 2006 339,940
150,000 Solectron Corp. 144A cv. sub. notes 6s, 2006 196,688
340,000 Thermo Instrument Systems, Inc. 144A cv. deb. 4 1/2s, 2003 355,300
282,000 Thermo Optek Corp. 144A cv. bonds 5s, 2000 321,480
30,000 VLSI Technology, Inc. cv. sub. notes 8 1/4s, 2005 30,525
250,000 Xilinx, Inc. 144A cv. sub. notes 5 1/4s, 2002 248,125
--------------
3,459,515
Environmental Control (0.1%)
- ------------------------------------------------------------------------------------------------------------
255,000 Thermo Terratech, Inc. 144A cv. sub. deb. 4 5/8s, 2003 231,731
200,000 USA Waste Services, Inc. cv. sub. notes 4s, 2002 210,500
250,000 WMX Technologies, Inc. cv. sub. notes 2s, 2005 207,500
--------------
649,731
Food and Beverages (--%)
- ------------------------------------------------------------------------------------------------------------
260,000 Grand Metropolitan PLC cv. unsub. 6 1/2s, 2000 336,700
Health Care (0.4%)
- ------------------------------------------------------------------------------------------------------------
700,000 Alza Corp. cv. sub. LYON zero %, 2014 297,500
200,000 Integrated Health Services cv. sr. sub. deb 5 3/4s, 2001 215,500
300,000 NovaCare, Inc. cv. sub. deb. 5 1/2s, 2000 286,125
175,000 PhyMatrix, Inc. cv. sub. deb. 6 3/4s, 2003 154,000
300,000 Renal Treatment Centers, Inc. cv. sub. notes 5 5/8s, 2006 338,250
200,000 Renal Treatment Centers, Inc. 144A cv. sub. notes 5 5/8s, 2006 225,500
250,000 Rotech Medical Corp. 144A cv. sub. deb. 5 1/4s, 2003 248,438
110,000 Tenet Health Care Corp. cv. sub. notes 6s, 2005 109,313
200,000 U.S. Diagnostic Laboratories, Inc. 144A cv. sub. deb. 9s, 2003 196,000
200,000 Uromed Corp. 144A cv. sub. notes 6s, 2003 143,250
--------------
2,213,876
Insurance and Finance (0.2%)
- ------------------------------------------------------------------------------------------------------------
420,000 Mitsubishi Bank Ltd. International Finance cv. trust gtd. notes 3s,
2002 (Japan) 405,300
425,000 Mutual Risk Management 144A cv. sub. deb. zero %, 2015 244,906
700,000 USF&G Corp. cv. sub. notes zero %, 2009 463,750
--------------
1,113,956
Metals and Mining (--%)
- ------------------------------------------------------------------------------------------------------------
200,000 Quanex Corp. cv. sub. deb. 6.88s, 2007 206,250
Oil and Gas (0.4%)
- ------------------------------------------------------------------------------------------------------------
325,000 Apache Corp. 144A cv. sub. deb. 6s, 2002 443,625
500,000 Lomak Petroleum, Inc. 144A cv. sub. deb. 6s, 2007 587,500
350,000 Offshore Logistics, Inc. cv. sub. notes 6s, 2003 395,500
300,000 Parker Drilling Co. cv. sub. notes 5 1/2s, 2004 357,000
100,000 Pennzoil Co. cv. deb. 4 3/4s, 2003 140,000
125,000 Pennzoil Co. cv. sub. deb. 6 1/2s, 2003 244,844
100,000 Pride Petroleum Services, Inc. cv. sub. deb. 6 1/4s, 2006 283,125
350,000 Swift Energy Co. cv. sub. notes 6 1/4s, 2006 385,000
--------------
2,836,594
Paper and Forest Products (0.1%)
- ------------------------------------------------------------------------------------------------------------
25,000 APP Global Finance (V) Ltd. 144A cv. sec. 2s, 2000
(United Kingdom) 23,500
300,000 Stone Container Corp. cv. sr. sub. notes 8 7/8s, 2000 375,750
--------------
399,250
Pharmaceuticals (0.1%)
- ------------------------------------------------------------------------------------------------------------
100,000 Nabi, Inc. 144A cv. sub. notes 6 1/2s, 2003 79,000
300,000 Roche Holdings, Inc. 144A cv. unsub. LYON zero %, 2010
(Switzerland) 150,750
275,000 Sandoz Capital BVI Ltd. 144A cv. company guaranty 2s, 2002
(Switzerland) 409,063
--------------
638,813
Publishing (--%)
- ------------------------------------------------------------------------------------------------------------
750,000 Hollinger, Inc. cv. LYON zero %, 2013 287,813
Real Estate (--%)
- ------------------------------------------------------------------------------------------------------------
150,000 Malan Realty Investors cv. sub. notes 9 1/2s, 2004 (R) 156,938
Retail (0.2%)
- ------------------------------------------------------------------------------------------------------------
30,000 Einstein/Noah Bagel Corp. 144A cv. sub. deb. 7 1/4s, 2004 24,263
220,000 Federated Department Stores, Inc. cv. notes 5s, 2003 299,200
180,000 Michaels Stores, Inc. cv. sub. notes 6 3/4s, 2003 182,700
700,000 Office Depot, Inc. cv. LYON zero %, 2007 454,125
195,000 Pier 1 Imports, Inc. cv. sub. notes 5 3/4s, 2003 316,388
--------------
1,276,676
Satellite Services (--%)
- ------------------------------------------------------------------------------------------------------------
200,000 Gilat Satellite Networks Ltd. cv. sub. notes 6 1/2s, 2004 (Israel) 197,500
Telecommunications (0.2%)
- ------------------------------------------------------------------------------------------------------------
325,000 3Com Corp. 144A cv. sub. notes 10 1/4s, 2001 417,625
250,000 MIDCOM Communications, Inc. 144A cv. sub. deb. 8 1/4s, 2003 186,563
800,000 Rogers Communications cv. deb. 2s, 2005 473,000
250,000 SmarTalk Teleservices, Inc. 144A cv. sub. notes 5 3/4s, 2004 261,563
--------------
1,338,751
Transportation (0.1%)
- ------------------------------------------------------------------------------------------------------------
200,000 British Airport Authority 144A cv. bonds 5 3/4s, 2006
(United Kingdom) 360,104
250,000 Continental Airlines, Inc. cv. sub. deb. 6 3/4s, 2006 387,813
--------------
747,917
--------------
Total Convertible Bonds and Notes (cost $21,384,527) $ 23,019,886
CONVERTIBLE PREFERRED STOCKS (2.4%) *
NUMBER OF SHARES VALUE
Basic Industrial Products (0.1%)
- ------------------------------------------------------------------------------------------------------------
2,400 Case Corp. $4.50 cv. pfd. $ 343,920
Broadcasting (0.2%)
- ------------------------------------------------------------------------------------------------------------
3,500 Chancellor Broadcasting Corp. 144A $3.50 cv. pfd. 288,313
3,650 Evergreen Media Corp. 144A $3.00 cv. pfd. 225,844
1,500 Granite Broadcasting $1.938 cv. pfd. 74,438
8,500 Sinclair Broadcast Group, Inc. $3.00 cv. pfd. 418,625
--------------
1,007,220
Computer Services and Software (0.1%)
- ------------------------------------------------------------------------------------------------------------
7,800 Vanstar Financial Trust Corp. 144A $3.375 cv. cum. pfd. 306,150
8,460 Wang Laboratories, Inc. Ser. B, $3.25 cv. pfd. 445,208
--------------
751,358
Consumer Non Durables (--%)
- ------------------------------------------------------------------------------------------------------------
10,600 DIMON, Inc. 8.50% cv. pfd. 265,000
Consumer Services (--%)
- ------------------------------------------------------------------------------------------------------------
5,500 Metromedia International Group, Inc. $3.625 cv. cum. pfd. 281,875
Environmental Control (--%)
- ------------------------------------------------------------------------------------------------------------
8,500 Browning-Ferris Industries, Inc. $7.25 cv. pfd. 272,000
Food and Beverages (0.1%)
- ------------------------------------------------------------------------------------------------------------
5,650 Chiquita Brands International, Inc. Ser. B, $3.75 cv. cum. pfd. 360,541
Hospital Management and Medical Services (0.1%)
- ------------------------------------------------------------------------------------------------------------
13,500 MedPartners, Inc. 6.50% cv. pfd. 330,750
Insurance and Finance (0.8%)
- ------------------------------------------------------------------------------------------------------------
3,100 Aetna Inc. $6.25 cv. pfd. 224,425
4,850 Ahmanson (H.F.) & Co. $3.00 cv. cum. pfd. 586,850
5,700 American Bankers Insurance Group, Inc. Ser. B, $3.125 cv. pfd. 450,300
6,550 American General Delaware Corp. $3.00 cv. cum. pfd. 435,575
5,000 Banc One Corp. Ser. C, $3.50 cv. cum. pfd. 502,188
6,300 CalEnergy Capital Trust $3.125 cv. cum. pfd. 403,988
1,700 CalEnergy Capital Trust 144A $3.125 cv. cum. pfd. 109,013
4,500 Devon Financing Trust $3.25 cv. pfd. 366,750
7,123 Finova Finance Trust $2.75 cv. cum. pfd. 434,503
4,700 Matewan Bancshares, Inc. Ser. A, $3.75 cv. cum. pfd. 126,313
5,300 Penncorp Financial Group, Inc. 144A $3.50 cv. cum. pfd. 288,850
7,300 Sovereign Bancorp Inc. $3.125 cv. cum. pfd. 777,450
4,750 St. Paul Capital LLC $3.00 cv. cum. pfd. 332,500
5,000 Timet Capital Trust I 144A $3.312 cv. pfd. 260,000
5,500 Union Planters Corp. Ser. E, $2.00 cv. cum. pfd. 403,563
--------------
5,702,268
Metals and Mining (0.3%)
- ------------------------------------------------------------------------------------------------------------
74,900 Freeport-McMoRan Copper Co., Inc. $1.75 cv. pfd. 1,891,225
1,575 Titanium Metals Corp. $3.313 cv. pfd. 81,900
--------------
1,973,125
Oil and Gas (0.1%)
- ------------------------------------------------------------------------------------------------------------
5,986 Neuvo Energy Ser. A, $2.875 cv. pfd. 299,300
3,000 Occidental Petroleum Corp. 144A $3.875 cv. pfd. 186,375
7,750 Tosco Financing Trust 144A $2.875 cv. pfd. 448,531
--------------
934,206
Paper and Forest Products (0.1%)
- ------------------------------------------------------------------------------------------------------------
9,300 International Paper Co. $2.625 cv. pfd. 471,975
REITs (Real Estate Investment Trust) (0.1%)
- ------------------------------------------------------------------------------------------------------------
15,900 Equity Residential Property Ser. E, $1.75 cv. pfd. 453,150
8,300 Insignia Financial Group, Inc. 144A $3.25 cv. pfd. 418,113
--------------
871,263
Retail (0.2%)
- ------------------------------------------------------------------------------------------------------------
8,000 Ann Taylor Finance Trust $4.25 cv. cum. pfd. 385,000
14,300 K mart Financing I $3.875 cv. cum. pfd. 814,206
--------------
1,199,206
Telecommunications (0.1%)
- ------------------------------------------------------------------------------------------------------------
6,150 AirTouch Communications, Inc. Ser. C, $2.125 cv. cum. pfd. 369,000
7,000 Intermedia Communications, Inc. Ser. D, $1.75 cv. pfd. 227,500
5,000 Tele-Communications (TCI Group) Ser. A, $2.125 cv. pfd. 277,500
--------------
874,000
Transportation (0.1%)
- ------------------------------------------------------------------------------------------------------------
5,100 Hvide Capital Trust 144A $3.25 cv. pfd. 341,700
--------------
Total Convertible Preferred Stocks (cost $14,252,993) $ 15,980,407
COLLATERALIZED MORTGAGE OBLIGATIONS (2.0%) *
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
$ 775,031 Chase Mortgage Finance Corp. Ser. 93-3, Class B13, 7.461s
October 30, 2024 $ 632,377
Housing Securities Inc.
567,966 Ser. 91-B, Class B6, 9s August 25, 2006 568,676
467,133 Ser. 93-F, Class F9M2, 7s, September 25, 2023 455,454
180,715 Ser. 93-J, Class J4, 6.66s January 25, 2009 169,872
82,143 Ser. 93-J, Class J5, 6.66s January 25, 2009 68,384
145,659 Ser. 94-1, Class AB1, 6 1/2s March 25, 2009 135,599
Prudential Home Mortgage Securities
669,644 Ser. 94-A, Class 4B, 7 1/2s, June 25, 2007 623,606
729,129 Ser. 94-D, Class B4, 6.312s, August 28, 2009 645,849
Prudential Home Mortgage Securities 144A
706,869 Ser. 92-25, Class B3, 8s, August 25, 2022 (In default) + 685,663
2,087,933 Ser. 93-D, Class 2B, 7.108s June 28, 2023 2,090,869
1,025,080 Ser. 93-E, Class 5B, 7.393s July 28, 2023 799,882
188,163 Ser. 94-31, Class B3, 8s November 25, 2009 188,398
2,151,805 Ser. 94-A, Class 4B, 6.802s April 28, 2024 2,091,286
523,257 Ser. 94-D, Class 3B, 6.311s, August 28, 2009 494,887
2,245,095 Ser. 95-C, Class B1, 7.815s October 28, 2001 2,247,901
1,665,906 Securitized Asset Sales, Inc. Ser. 93-J, Class 2B, 6.807s
December 30, 2023 1,618,532
--------------
Total Collateralized Mortgage Obligations
(cost $12,040,338) $ 13,517,235
MUNICIPAL BONDS AND NOTES (0.2%) *(cost $1,205,000)
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
$ 1,205,000 NJ Econ. Dev. Auth. MBIA Rev. Bonds, Ser. A,
7.425s, 2/15/29 Aaa $ 1,287,217
BRADY BONDS (0.2%) *
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
$ 14,280 Argentina (Republic of) deb. FRB 6.688s, 2005 $ 12,174
14,230 Brazil (Government of) 6.688s, Ser. EI-L, 2006 11,153
1,441,000 Philippines (Central Bank of) bonds 5 3/4s, 2017 1,192,428
--------------
Total Brady Bonds (cost $1,280,864) $ 1,215,755
PREFERRED STOCKS (0.1%) *
NUMBER OF SHARES VALUE
- ------------------------------------------------------------------------------------------------------------
1,000 AmeriKing, Inc. $3.25 pfd. [2 DBL. DAGGERS] $ 27,000
6 Anvil Holdings 144A Ser. B, $3.25 pfd. [2 DBL. DAGGERS] 150
975 Cablevision Systems Corp. Ser. M, $11.125 dep. shs. cum. pfd. [2 DBL. DAGGERS] 107,006
100 Capstar Broadcasting $12.00 pfd. [2 DBL. DAGGERS] 10,950
430 Chancellor Media Corp. $12.00 pfd. [2 DBL. DAGGERS] 49,880
315 Chevy Chase Capital Corp. Ser. A, $5.19 pfd. 16,065
25 Echostar Communications Corp. 144A 12.125% pfd. [2 DBL. DAGGERS] 25,625
2,156 El Paso Electric Co. $11.40 pfd [2 DBL. DAGGERS] 232,848
55 Fresenius Medical Care AG Ser. D, $9.00 pfd. (Germany) 57,200
1,100 Nextlink Communications, Inc. 144A $7.00 cum. pfd. 64,900
1,045 SFX Broadcasting, Inc. Ser. E, $12.625 cum. pfd. [2 DBL. DAGGERS] 120,698
200 Time Warner Inc. Ser. M, $10.25 pfd. 230,000
--------------
Total Preferred Stocks (cost $904,364) $ 942,322
UNITS (--%)*
NUMBER OF UNITS VALUE
- ------------------------------------------------------------------------------------------------------------
225 Cellnet Data Systems, Inc. 144A units stepped-coupon zero %
(14s, 10/01/02), 2007 ++ $ 114,293
40 Colt Telecommunications Group PLC units stepped-coupon
zero % (12s, 12/15/01), 2006 (United Kingdom) ++ 30,000
95 Fitzgerald Gaming Co. units 13s, 2002 90,725
5 Hedstrom Holdings, Inc. units stepped-coupon zero %
(12s, 6/01/02), 2009 ++ 3,125
85 Knology Holdings Inc. units stepped-coupon zero %
(11 7/8s, 10/15/02), 2007 ++ 46,750
10 Stone Container Corp. units sr. sub. 12 1/4s, 2002 10,375
--------------
Total Units (cost $286,130) $ 295,268
WARRANTS (--%)*+ EXPIRATION
NUMBER OF WARRANTS DATE VALUE
- ------------------------------------------------------------------------------------------------------------
40 Esat Holdings 144A (Ireland) 2/1/07 $ 800
40 Globalstar Telecom 144A 2/15/04 4,000
150 Intermedia Communications 6/1/00 10,500
900 Louisiana Casino Cruises, Inc. 144A 12/1/98 45,000
45 McCaw International Ltd. 4/15/07 14
1,100 Nextlink Communications, Inc. 144A 2/1/09 11
65 Urohealth Systems Inc. 4/10/04 325
--------------
Total Warrants (cost $12,413) $ 60,650
SHORT-TERM INVESTMENTS (2.0%) *
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
TRL 191,850,000,000 Turkey Treasury bill zero%, September 16, 1998 $ 515,706
$12,945,000 Interest in $269,350,000 joint repurchase agreement
dated October 31, 1997 with S.B.C. Warburg Inc.
due November 3, 1997 with respect to various
U.S. Treasury obligations -- maturity value of
$12,951,095 for an effective yield of 5.65% 12,947,032
--------------
Total Short-Term Investments (cost $13,511,045) $ 13,462,738
- ------------------------------------------------------------------------------------------------------------
Total Investments (cost $622,826,521) *** 693,454,097
- ------------------------------------------------------------------------------------------------------------
* Percentages indicated are based on net assets of
$676,769,975.
*** The aggregate identified cost on a tax basis is
$623,346,386, resulting in gross unrealized appreciation
and depreciation of $80,939,848 and $10,832,137,
respectively, or net unrealized appreciation of
$70,107,711.
+ Non-income-producing security.
++ 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.
+++ A portion of the income will be received in additional
securities.
[DBL. DAGGER] Restricted, excluding 144A securities, as to public
resale. The total market value of restricted securities
held at October 31, 1997 was $25,062, or less than 0.1%
of net assets.
[2 DBL. DAGGERS] Income may be received in cash or additional securities
at the discretion of the issuer.
# A portion of this security was pledged and segregated
with the custodian to cover margin requirements for
futures contracts as of October 31, 1997.
## When-issued securities (Note 1).
[UPSIDE DOWN DELTA] This entity provided subcustodian services to the fund.
(R) Real Estate Investment Trust.
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).
MBIA represents Municipal Bond Investors Assurance Corporation.
ADR after the name of a foreign holding stands for American Depository Receipts,
representing ownership of foreign securities on deposit with a domestic
custodian bank.
The rates shown on Floating Rate Bonds (FRB) and Floating Rate Notes (FRN) are
the current interest rates at October 31, 1997, which are subject to change
based on the terms of the security.
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
Forward Currency Contracts to Buy at October 31, 1997
(aggregate face value $49,666,438)
<S> <C> <C> <C> <C>
Unrealized
Market Aggregate Face Delivery Appreciation/
Value Value Date (Depreciation)
- ----------------------------------------------------------------------------------------
Australian Dollars $ 1,054,841 $1,129,136 12/17/97 $ (74,295)
Canadian Dollar 5,201,909 5,363,317 12/17/97 (161,408)
Danish Krone 68,460 66,828 12/17/97 1,632
Deutschemarks 12,757,852 12,180,276 12/17/97 577,576
Indonesian Rupiah 1,054,760 1,018,674 6/23/98 36,086
Indonesian Rupiah 1,904,008 1,996,137 2/23/98 (92,129)
Italian Lira 7,028,464 6,784,756 12/17/97 243,708
Japanese Yen 11,420,070 11,426,054 12/17/97 (5,984)
Philippines Peso 704,948 728,823 3/25/98 (23,875)
Polish Zloty 1,071,967 1,131,739 6/5/98 (59,772)
Swedish Krona 5,260,670 5,188,818 12/17/97 71,852
Swiss Franc 1,559,215 1,501,655 12/17/97 57,560
Venezuelan Bolivar 272,316 271,682 6/19/98 634
Venezuelan Bolivar 901,609 878,543 6/5/98 23,066
- ----------------------------------------------------------------------------------------
$ 594,651
- ----------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------
Forward Currency Contracts to Sell at October 31, 1997
(aggregate face value $48,021,220)
<S> <C> <C> <C> <C>
Unrealized
Market Aggregate Face Delivery Appreciation/
Value Value Date (Depreciation)
- ----------------------------------------------------------------------------------------
Australian Dollars $ 774,327 $ 824,390 12/17/97 $ 50,063
British Pounds 1,229,004 1,163,742 12/17/97 (65,262)
British Pounds 247,702 234,393 6/5/98 (13,309)
Deutschemarks 17,301,347 16,625,943 12/17/97 (675,404)
Deutschemarks 896,823 846,995 6/5/98 (49,828)
Italian Lira 7,153,045 6,889,589 12/17/97 (263,456)
Japanese Yen 511,840 606,351 1/28/98 94,511
Japanese Yen 5,521,343 5,503,247 12/17/97 (18,096)
New Zealand Dollar 7,675,048 7,840,159 12/17/97 165,111
South African Rand 6,018,706 6,091,503 12/17/97 72,797
Swiss Franc 1,445,068 1,394,908 12/17/97 (50,160)
- ----------------------------------------------------------------------------------------
$(753,033)
- ----------------------------------------------------------------------------------------
Futures Contracts Outstanding at October 31, 1997
Unrealized
Aggregate Face Expiration Appreciation/
Total Value Value Date (Depreciation)
- ----------------------------------------------------------------------------------------
U.S. Treasury Note
10 yr (long) $ 5,140,500 $ 5,068,115 Dec 97 $ 72,385
U.S. Treasury Note
20 yr (long) 26,181,594 25,752,814 Dec 97 428,780
U.S. Treasury Note
5 yr (short) 32,521,875 31,967,250 Dec 97 (554,625)
Japanese Government
Bond 10 yr (long) 7,608,823 7,400,078 Dec 97 208,745
- ----------------------------------------------------------------------------------------
$ 155,285
- ----------------------------------------------------------------------------------------
TBA Sale Commitments at October 31, 1997
(proceeds receivable $13,548,671)
Settlement Market
Description Principal Amount Date Value
- ----------------------------------------------------------------------------------------
FNMA, 7s November 2027 $10,394,000 11/19/97 $10,426,429
GNMA, 8.5s November 2027 2,985,000 11/19/97 3,129,564
- ----------------------------------------------------------------------------------------
$13,555,993
- ----------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
October 31, 1997
<S> <C>
Assets
- ---------------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $622,826,521) (Note 1) $693,454,097
- ---------------------------------------------------------------------------------------------------
Cash 204,656
- ---------------------------------------------------------------------------------------------------
Foreign currency 138,234
- ---------------------------------------------------------------------------------------------------
Dividends and interest receivable 5,678,589
- ---------------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 1,777,728
- ---------------------------------------------------------------------------------------------------
Receivable for securities sold 36,410,964
- ---------------------------------------------------------------------------------------------------
Receivable for variation margin 233,377
- ---------------------------------------------------------------------------------------------------
Receivable for open forward currency contracts 1,497,568
- ---------------------------------------------------------------------------------------------------
Receivable for closed forward currency contracts 591,063
- ---------------------------------------------------------------------------------------------------
Total assets 739,986,276
Liabilities
- ---------------------------------------------------------------------------------------------------
Payable for securities purchased 44,597,698
- ---------------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 575,434
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 1,063,963
- ---------------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 194,371
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 12,679
- ---------------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 915
- ---------------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 201,623
- ---------------------------------------------------------------------------------------------------
Payable for open forward currency contracts 1,655,950
- ---------------------------------------------------------------------------------------------------
Payable for closed forward currency contracts 1,235,207
- ---------------------------------------------------------------------------------------------------
TBA sales commitments at value (proceeds receivable $13,548,671) 13,555,993
- ---------------------------------------------------------------------------------------------------
Other accrued expenses 122,468
- ---------------------------------------------------------------------------------------------------
Total liabilities 63,216,301
- ---------------------------------------------------------------------------------------------------
Net assets $676,769,975
Represented by
- ---------------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $551,702,644
- ---------------------------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 135,224
- ---------------------------------------------------------------------------------------------------
Accumulated net realized gain on investment and foreign
currency transactions (Note 1) 54,306,813
- ---------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments and assets
and liabilities in foreign currencies 70,625,294
- ---------------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $676,769,975
Computation of net asset value and offering price
- ---------------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($585,623,751 divided by 50,992,225 shares) $11.48
- ---------------------------------------------------------------------------------------------------
Offering price per class A share (100/94.25 of $11.48)* $12.18
- ---------------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($82,759,271 divided by 7,258,497 shares)** $11.40
- ---------------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($8,386,953 divided by 733,352 shares) $11.44
- ---------------------------------------------------------------------------------------------------
Offering price per class M share (100/96.50 of $11.44)* $11.85
- ---------------------------------------------------------------------------------------------------
* 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 October 31, 1997
<S> <C>
Investment income:
- --------------------------------------------------------------------------------------------------
Interest $ 20,646,259
- --------------------------------------------------------------------------------------------------
Dividends (net of foreign tax of $18,565) 9,069,533
- --------------------------------------------------------------------------------------------------
Total investment income 29,715,792
- --------------------------------------------------------------------------------------------------
Expenses:
- --------------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 3,880,624
- --------------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 1,522,739
- --------------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 22,955
- --------------------------------------------------------------------------------------------------
Administrative services (Note 2) 11,205
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 1,357,602
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 583,680
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 42,723
- --------------------------------------------------------------------------------------------------
Reports to shareholders 23,558
- --------------------------------------------------------------------------------------------------
Registration fees 41,217
- --------------------------------------------------------------------------------------------------
Auditing 45,626
- --------------------------------------------------------------------------------------------------
Legal 6,220
- --------------------------------------------------------------------------------------------------
Total expenses 7,538,149
- --------------------------------------------------------------------------------------------------
Expense reduction (Note 2) (311,681)
- --------------------------------------------------------------------------------------------------
Net expenses 7,226,468
- --------------------------------------------------------------------------------------------------
Net investment income 22,489,324
- --------------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 57,313,708
- --------------------------------------------------------------------------------------------------
Net realized loss on futures contracts (Note 1) (239,252)
- --------------------------------------------------------------------------------------------------
Net realized gain on written options (Notes 1 and 3) 51,340
- --------------------------------------------------------------------------------------------------
Net realized loss on foreign currency transactions (795,437)
- --------------------------------------------------------------------------------------------------
Net unrealized depreciation of assets and liabilities in
foreign currencies during the year (180,578)
- --------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments, futures and
TBA sale commitments during the year 24,997,060
- --------------------------------------------------------------------------------------------------
Net gain on investments 81,146,841
- --------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $103,636,165
- --------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Year ended October 31,
--------------------------------
1997 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase in net assets
- ----------------------------------------------------------------------------------------------------------------------
Operations:
- ----------------------------------------------------------------------------------------------------------------------
Net investment income $22,489,324 $21,551,905
- ----------------------------------------------------------------------------------------------------------------------
Net realized gain on investments and
foreign currency transactions 56,330,359 31,284,046
- ----------------------------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments and
assets and liabilities in foreign currencies 24,816,482 19,128,396
- ----------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 103,636,165 71,964,347
- ----------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ----------------------------------------------------------------------------------------------------------------------
From net investment income
Class A (19,923,868) (20,586,838)
- ----------------------------------------------------------------------------------------------------------------------
Class B (1,699,007) (777,109)
- ----------------------------------------------------------------------------------------------------------------------
Class M (173,862) (67,607)
- ----------------------------------------------------------------------------------------------------------------------
From net realized gain on investments
Class A (31,157,500) (8,805,295)
- ----------------------------------------------------------------------------------------------------------------------
Class B (2,267,224) (235,373)
- ----------------------------------------------------------------------------------------------------------------------
Class M (234,795) (19,705)
- ----------------------------------------------------------------------------------------------------------------------
Increase from capital share transactions (Note 4) 93,039,915 14,757,987
- ----------------------------------------------------------------------------------------------------------------------
Total increase in net assets 141,219,824 56,230,407
Net assets
- ----------------------------------------------------------------------------------------------------------------------
Beginning of year 535,550,151 479,319,744
- ----------------------------------------------------------------------------------------------------------------------
End of year including undistributed net investment
income of $135,224 and $212,078, respectively) $676,769,975 $535,550,151
- ----------------------------------------------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------------------------------------------------------------
Per-share
operating performance Year ended October 31
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $10.67 $9.84 $8.68 $9.28 $8.50
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .42 .44 .45 .43 .45
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments 1.46 1.01 1.17 (.49) .99
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations 1.88 1.45 1.62 (.06) 1.44
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.40) (.43) (.46) (.43) (.45)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments (.67) (.19) -- (.11) (.21)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (1.07) (.62) (.46) (.54) (.66)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $11.48 $10.67 $9.84 $8.68 $9.28
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 18.87 15.31 19.32 (.61) 17.68
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $585,624 $496,882 $468,725 $455,299 $551,391
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.15 1.20 1.15 1.08 1.02
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 3.73 4.28 4.93 4.92 5.06
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 152.66 142.36 131.00 125.69 224.28
- ------------------------------------------------------------------------------------------------------------------------------------
Average commisssion
rate paid(c) $.0512 $.0511
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total investment return assumes dividend reinvestment and does not
reflect the effect of sales charges.
(b) The ratio of expenses to average net assets for the year ended
October 31, 1995 and thereafter, includes amounts paid through
expense offset and brokerage service arrangements. Prior period
ratios exclude these amounts (Note 2).
(c) Average commission rate paid on security trades is required for
fiscal periods beginning on or after September 1, 1995.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS B
- ------------------------------------------------------------------------------------------------------------------------------------
For the period
Per-share Feb. 1, 1994+
operating performance Year ended October 31 to Oct. 31
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value,
beginning of period $10.60 $9.80 $8.67 $9.31
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .35 .36 .38 .34
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments 1.45 1.00 1.15 (.60)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations 1.80 1.36 1.53 (.26)
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.33) (.37) (.40) (.27)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments (.67) (.19) -- (.11)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (1.00) (.56) (.40) (.38)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $11.40 $10.60 $9.80 $8.67
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 18.11 14.36 18.25 (2.75)*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $82,759 $35,118 $10,073 $4,196
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.90 1.97 1.91 1.34*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.98 3.51 4.09 3.20*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 152.66 142.36 131.00 125.69
- ------------------------------------------------------------------------------------------------------------------------------------
Average commisssion
rate paid(c) $.0512 $.0511
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total investment return assumes dividend reinvestment and does not
reflect the effect of sales charges.
(b) The ratio of expenses to average net assets for the year ended
October 31, 1995 and thereafter, includes amounts paid through
expense offset and brokerage service arrangements. Prior period
ratios exclude these amounts (Note 2).
(c) Average commission rate paid on security trades is required for
fiscal periods beginning on or after September 1, 1995.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS M
- ------------------------------------------------------------------------------------------------------------------------------------
For the period
Per-share Mar. 17, 1995+
operating performance Year ended October 31 to Oct. 31
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value,
beginning of period $10.63 $9.82 $8.88
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .36 .42 .25
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments 1.47 .98 .90
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations 1.83 1.40 1.15
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.35) (.40) (.21)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments (.67) (.19) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (1.02) (.59) (.21)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $11.44 $10.63 $9.82
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 18.41 14.76 13.13*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $8,387 $3,551 $522
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.65 1.72 1.09*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 3.23 3.74 2.76*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 152.66 142.36 131.00
- ------------------------------------------------------------------------------------------------------------------------------------
Average commisssion
rate paid (c) $.0512 $.0511
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total investment return assumes dividend reinvestment and does not
reflect the effect of sales charges.
(b) The ratio of expenses to average net assets for the year ended
October 31, 1995 and thereafter, includes amounts paid through
expense offset and brokerage service arrangements. Prior period
ratios exclude these amounts (Note 2).
(c) Average commission rate paid on security trades is required for
fiscal periods beginning on or after September 1, 1995.
</TABLE>
Notes to financial statements
October 31, 1997
Note 1
Significant accounting policies
Putnam Balanced Retirement Fund (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, with a secondary
objective of stability of principle.
The fund offers class A, class B and class M shares. Class A shares are sold
with a maximum front-end sales charge of 5.75%. 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 M shares are sold with a maximum
front-end sales charge of 3.50% and pay an ongoing distribution fee that is
lower than class B shares and higher than class A shares.
Expenses of the fund are borne pro-rata by the holders of each class of
shares, except that each class bears expenses unique to that class (including
the distribution fees applicable to such class). Each class votes as a class
only with respect to its own distribution plan or other matters on which a
class vote is required by law or determined by the Trustees. Shares of each
class would receive their pro-rata share of the net assets of the fund, if the
fund were liquidated. In addition, the Trustees declare separate dividends on
each class of shares.
The following is a summary of significant accounting policies consistently
followed by the fund in the preparation of its financial statements. The
preparation of financial statements is in conformity with generally accepted
accounting principles and requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities. Actual
results could differ from those estimates.
A) Security valuation Investments for which market quotations are readily
available are stated at market value, which is determined using the last
reported sale price, or, if no sales are reported -- as in the case of some
securities traded over-the-counter -- the last reported bid price. Securities
quoted in foreign currencies are translated into U.S. dollars at the current
exchange rate. Short-term investments having remaining maturities of 60 days
or less are stated at amortized cost, which approximates market value, and
other investments, including restricted securities, are stated at fair value
following procedures approved by the Trustees. Market quotations are not
considered to be readily available for certain debt obligations, 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) 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. Putnam Management is responsible
for determining that the value of these underlying securities is at all times
at least equal to the resale price, including accrued interest.
D) Security transactions and related investment income Security transactions
are accounted for on the trade date (date the order to buy or sell is
executed).
Interest income is recorded on the accrual basis. Dividend income is recorded
on the ex-dividend date except that certain dividends from foreign securities
are recorded as soon as the fund is informed of the ex-dividend date.
Discounts on zero coupon bonds, original issue discount bonds, stepped-coupon
bonds and payment in kind bonds are accreted according to the
yield-to-maturity method.
Securities purchased or sold on a when-issued or delayed delivery basis may be
settled a month or more after the trade date; interest income is accrued based
on the terms of the security. Losses may arise due to changes in the market
value of the underlying securities or if the counterparty does not perform
under the contract.
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
exchange gains or losses on closed forward currency contracts, disposition of
foreign currencies and the difference between the amount of investment income
and foreign withholding taxes recorded on the fund's books and the U.S. dollar
equivalent amounts actually received or paid. Net unrealized appreciation and
depreciation of assets and liabilities in foreign currencies arise from
changes in the value of open forward currency contracts and assets and
liabilities other than investments at the period end, resulting from changes
in the exchange rate.
F) Forward currency contracts The fund may engage in forward currency
contracts, which are agreements between two parties to buy and sell currencies
at a set price on a future date, to protect against a decline in value
relative to the U.S. dollar of the currencies in which its portfolio
securities are denominated or quoted (or an increase in the value of a
currency in which securities a fund intends to buy are denominated, when a
fund holds cash reserves and short-term investments). The U.S. dollar value of
forward currency contracts is determined using current forward currency
exchange rates supplied by a quotation service. The market value of the
contract will fluctuate with changes in currency exchange rates. The contract
is "marked to market" daily and the change in market value is recorded as an
unrealized gain or loss. When the contract is closed, the fund records a
realized gain or loss equal to the difference between the value of the
contract at the time it was opened and the value at the time it was closed.
The fund could be exposed to risk if the value of the currency changes
unfavorably, if the counterparties to the contracts are unable to meet the
terms of their contracts or if the fund is unable to enter into a closing
position.
G) Futures and options contracts The fund may use futures and options
contracts to hedge against changes in the values of securities the fund owns
or expects to purchase. The fund may also write options on securities it owns
or in which it may invest to increase its current returns.
The potential risk to the fund is that the change in value of futures and
options contracts may not correspond to the change in value of the hedged
instruments. In addition, losses may arise from changes in the value of the
underlying instruments, if there is an illiquid secondary market for the
contracts, or if the counterparty to the contract is unable to perform. When
the contract is closed, the fund records a realized gain or loss equal to the
difference between the value of the contract at the time it was opened and the
value at the time it was closed. Realized gains and losses on purchased
options are included in realized gains and losses on investment securities.
Futures contracts are valued at the quoted daily settlement prices established
by the exchange on which they trade. Exchange traded options are valued at the
last sale price, or if no sales are reported, the last bid price for purchased
options and the last ask price for written options. Options traded
over-the-counter are valued using prices supplied by dealers.
H) TBA purchase commitments The fund may enter into "TBA" (to be announced)
purchase commitments to purchase securities for a fixed unit price at a future
date beyond customary settlement time. Although the unit price has been
established, the principal value has not been finalized. However, the amount
of the commitments will not fluctuate more than 1.0% from the principal
amount. The fund holds, and maintains until settlement date, cash or
high-grade debt obligations in an amount sufficient to meet the purchase
price, or the fund may enter into offsetting contracts for the forward sale of
other securities it owns. Income on the securities will not be earned until
settlement date. TBA purchase commitments may be considered securities in
themselves, and involve a risk of loss if the value of the security to be
purchased declines prior to the settlement date, which risk is in addition to
the risk of decline in the value of the fund's other assets. Unsettled TBA
purchase commitments are valued at the current market value of the underlying
securities, according to the procedures described under "Security valuation"
above.
Although the fund will generally enter into TBA purchase commitments with the
intention of acquiring securities for their portfolio or for delivery pursuant
to options contracts it has entered into, the fund may dispose of a commitment
prior to settlement if Putnam Management deems it appropriate to do so.
I) 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 valuations" 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 securities based upon the unit price established at the date the
commitment was entered into.
J) 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 October 31, 1997, the fund
had no borrowings against the line of credit.
K) 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.
L) 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 wash sales, market discount, realized and
unrealized gains and losses on forward foreign currency contracts and currency
gains and losses on foreign bonds. 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 October 31, 1997, the fund reclassified $769,441 to decrease
undistributed net investment income and $24,725 to increase paid-in-capital,
with an increase to accumulated net realized gain on investment and foreign
currency transactions of $744,716. The calculation of net investment income
per share in the financial highlights table excludes these adjustments.
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: 0.650% of the first $500 million
of average net assets, 0.550% of the next $500 million, 0.500% of the next
$500 million, 0.450% of the next $5 billion, 0.425% of the next $5 billion,
0.405% of the next $5 billion, 0.390% of the next $5 billion and 0.380%
thereafter. Prior to February 20, 1997, any amount over $1.5 billion was based
on a rate of 0.450%.
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 October 31, 1997, fund expenses were reduced by $311,681
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.
Trustees of the funds receive an annual Trustees fee of which $899 has been
allocated to the fund and an additional fee for each Trustee's meeting
attended. Trustees who are not interested persons of Putnam Management and who
serve on committees of the Trustees receive additional fees for attendance at
certain committee meetings.
The fund has adopted a Trustee Fee Deferral Plan (the "Deferral Plan") which
allows the Trustees to defer the receipt of all or a portion of Trustees Fees
payable on or after July 1, 1995. The deferred fees remain in the fund and are
invested in certain Putnam funds until distribution in accordance with the
Deferral Plan.
The fund has adopted an unfunded noncontributory defined benefit pension plan
(the "Pension Plan") covering all Trustees of the fund who have served as
Trustee for at least five years. Benefits under the Pension Plan are equal to
50% of the Trustee's average total retainer and meeting fees for the three
years preceding retirement. Pension expense for the fund is included in
Compensation of Trustees in the Statement of operations. Accrued pension
liability is included in Payable for compensation of Trustees in the Statement
of assets and liabilities.
The fund has adopted distribution plans (the "Plans") with respect to its
class A, class B 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% and 1.00% of the average net assets
attributable to class A, class B and class M shares, respectively. The
Trustees currently limit payment by the fund to an annual rate of 0.25%, 1.00%
and 0.75% of the average net assets attributable to class A, class B and class
M shares, respectively.
For the year ended October 31, 1997, Putnam Mutual Funds Corp., acting as
underwriter received net commissions of $181,505 and $8,508 from the sale of
class A and class M shares, respectively and $74,732 in contingent deferred
sales charges from redemptions of class B shares. A deferred sales charge of
up to 1% is assessed on certain redemptions of class A shares. For the year
ended October 31, 1997, Putnam Mutual Funds Corp., acting as underwriter
received $117 on class A redemptions.
Note 3
Purchase and sales of securities
During the year ended October 31, 1997, purchases and sales of investment
securities other than U.S. government obligations and short-term investments
aggregated $552,714,795 and $474,628,238, respectively. Purchases and sales of
U.S. government obligations aggregated $431,209,033 and $434,248,409,
respectively. In determining the net gain or loss on securities sold, the cost
of securities has been determined on the identified cost basis.
Written option transactions during the year are summarized as follows:
Contract Premiums
Amount Received
- ------------------------------------------------------------
Written options
outstanding at
beginning of year $ -- $ --
- ------------------------------------------------------------
Options opened 5,134,000 78,807
Options closed (5,134,000) (78,807)
- ------------------------------------------------------------
Written option
outstanding at
end of year $ -- $ --
- ------------------------------------------------------------
Note 4
Capital shares
At October 31, 1997, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
Year ended
October 31, 1997
- ------------------------------------------------------------
Class A Shares Amount
- ------------------------------------------------------------
Shares sold 9,967,018 $108,022,258
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 3,382,364 35,489,762
- ------------------------------------------------------------
13,349,382 143.512,020
Shares
repurchased (8,922,742) (97,565,460)
- ------------------------------------------------------------
Net increase 4,426,640 $ 45,946,560
- ------------------------------------------------------------
Year ended
October 31, 1996
- ------------------------------------------------------------
Class A Shares Amount
- ------------------------------------------------------------
Shares sold 5,867,101 $ 59,837,952
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 1,221,161 12,087,099
- ------------------------------------------------------------
7,088,262 71,925,051
Shares
repurchased (8,157,622) (83,150,218)
- ------------------------------------------------------------
Net decrease (1,069,360) $(11,225,167)
- ------------------------------------------------------------
Year ended
October 31, 1997
- ------------------------------------------------------------
Class B Shares Amount
- ------------------------------------------------------------
Shares sold 6,602,648 $71,376,745
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 313,305 3,282,332
- ------------------------------------------------------------
6,915,953 74,659,077
Shares
repurchased (2,969,623) (31,940,101)
- ------------------------------------------------------------
Net increase 3,946,330 $42,718,976
- ------------------------------------------------------------
Year ended
October 31, 1996
- ------------------------------------------------------------
Class B Shares Amount
- ------------------------------------------------------------
Shares sold 6,516,135 $66,142,610
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 36,408 359,575
- ------------------------------------------------------------
6,552,543 66,502,185
Shares
repurchased (4,268,278) (43,359,319)
- ------------------------------------------------------------
Net increase 2,284,265 $23,142,866
- ------------------------------------------------------------
Year ended
October 31, 1997
- ------------------------------------------------------------
Class M Shares Amount
- ------------------------------------------------------------
Shares sold 480,548 $5,284,277
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 33,306 349,022
- ------------------------------------------------------------
513,854 5,633,299
Shares
repurchased (114,446) (1,258,920)
- ------------------------------------------------------------
Net increase 399,408 $4,374,379
- ------------------------------------------------------------
Year ended
October 31, 1996
- ------------------------------------------------------------
Class M Shares Amount
- ------------------------------------------------------------
Shares sold 367,560 $3,738,317
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 2,485 24,710
- ------------------------------------------------------------
370,045 3,763,027
Shares
repurchased (89,255) (922,739)
- ------------------------------------------------------------
Net increase 280,790 $2,840,288
- ------------------------------------------------------------
Federal tax information
(Unaudited)
Pursuant to Section 852 of the Internal Revenue Code, as amended, the
Fund hereby designates $56,800,110 as capital gain for its taxable
year ended October 31, 1997.
The fund has designated 21.5% of the distributions from net investment
income as qualifying for the dividends received deduction for
corporations.
The Form 1099 you receive in January 1998 will show the tax status of
all distributions paid to your account in calendar 1997.
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
Ronald J. Jackson
Elizabeth T. Kennan
Lawrence J. Lasser
Robert E. Patterson
Donald S. Perkins
George Putnam, III
A.J.C. Smith
W. Thomas Stephens
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
John D. Hughes
Senior Vice President and Treasurer
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Ian C. Ferguson
Vice President
Thomas V. Reilly
Vice President
Edward P. Bousa
Vice President and Fund Manager
Charles G. Pohl
Vice President and Fund Manager
Kenneth J. Taubes
Vice President and Fund Manager
Robert M. Paine
Vice President and Fund Manager
William N. Shiebler
Vice President
John R. Verani
Vice President
Paul M. O'Neil
Vice President
Beverly Marcus
Clerk and Assistant Treasurer
This report is for the information of shareholders of Putnam Balanced
Retirement 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' website: http://www.putnaminv.com.
Shares of mutual funds are not deposits or obligations of, or guaranteed or
endorsed by, any financial institution; are not insured by the Federal Deposit
Insurance Corporation (FDIC), the Federal Reserve Board, or any other agency;
and involve risk, including the possible loss of the principal amount
invested.
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
- --------------------
Bulk Rate
U.S. Postage
PAID
Putnam
Investments
- --------------------
AN018-36862-034/243/908 12/97
