Putnam
Balanced
Retirement
Fund
ANNUAL REPORT ON PERFORMANCE AND OUTLOOK
10-31-98
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* "Putnam's competitive advantage lies in spending a great deal of time
visiting companies, undertaking fundamental research to find those
organizations that are pursuing meaningful changes in their operations."
-- Edward P. Bousa, manager
Putnam Balanced Retirement Fund
CONTENTS
4 Report from Putnam Management
9 Fund performance summary
15 Portfolio holdings
48 Financial statements
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
Putnam Balanced Retirement Fund's portfolio of equities and fixed-income
securities is designed to provide relatively steady performance when
markets develop turbulence. The strategy was put to the test during the
fiscal year that ended on October 31, 1998. I am pleased to report that
your fund's diversification and relatively conservative strategy served it
well during what turned out to be one of the most volatile periods in
recent memory.
Even with a portfolio such as your fund's, these results did not occur
automatically. The breadth of experience and depth of expertise
represented by the fund's managers and the analysts who support them span
the full range of asset classes. The fund also benefited from astute asset
allocation shifts, market sector moves, and strong stock selection.
In the following report, the management team discusses the fund's
performance in fiscal 1998's challenging environment and offers commentary
on prospects for the new fiscal year.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
December 16, 1998
Report from the Fund Managers
Edward P. Bousa, lead manager
Jeffrey J. Kobylarz
Charles G. Pohl
James M. Prusko
David L. Waldman
After several years of steady gains, both the stock and bond markets were
rocked by a series of unusual events during the summer and fall of 1998.
While Putnam Balanced Retirement Fund enjoyed the benefit of a positive
investment environment during most of its fiscal year, it also suffered
from the downturns sparked by Russia's default and currency devaluation in
August and the collapse of hedge fund Long-Term Capital Management in
September. The fund's balanced strategy helped soften the effects of these
events somewhat, while interest-rate cuts by the Federal Reserve Board
helped buoy investor sentiment, encouraging rebounds in both markets late
in the period.
Considering this challenging environment, your fund posted what we
consider respectable returns for its fiscal year ended October 31, 1998;
total return for class A shares was 7.86% (1.66% at public offering
price). For more performance information, including results for other
share classes and over longer periods, please turn to pages 9 through 11.
* ASSET ALLOCATION, SECTOR MOVES HELP INSULATE FUND FROM SHARP MARKET
DECLINES
Through much of the first part of the fiscal year, investors tried to
discern what effects, if any, Asian financial problems might have on
global economic growth. However, as long as returns remained positive, the
markets shrugged off any uncertainty. That complacency quickly dissipated
when Russia announced it would default on most of its short-term debt in
mid August, and its currency, the ruble, devalued sharply.
Both the stock and bond markets witnessed sharp declines as investors ran
from any but the safest investments in a flight to quality. U.S. Treasury
securities enjoyed unusually strong gains as did large, steady-growth
blue-chip stocks. In September, the collapse of hedge fund Long-Term
Capital Management sparked a similar flight to quality amid fears that the
fixed-income markets were facing a credit crunch, with lenders unwilling
to lend even to the most creditworthy borrowers. The Fed stepped in and
steadied the situation by lowering key short-term interest rates at its
meeting in September. Then, in an unusual move, it did so again between
meetings in October and for a third time in November, shortly after the
close of your fund's fiscal year. The Fed's actions helped calm the
markets, prompting a rebound beginning in late October.
The fund benefited from an increase in its bond holdings undertaken in
May. At that time, the stock market appeared to be reaching peak
valuations, while bonds had lagged. Building up the bond position helped
the fund's performance through the summer, since bonds tended to perform
better than stocks over the period.
In addition, the fund's equity portfolio benefited from an increase in
consumer staple stocks such as Sara Lee, Heinz, and Anheuser Busch as well
as electric utility holdings such as Texas Utilities and Duke Energy.
These investments held up well during the market declines because they are
high-quality companies that enjoy steady, recurring revenues -- an
important quality in an uncertain investment environment. While these
holdings, as well as others discussed in this report, were viewed
favorably during the period, all holdings are subject to review in
accordance with the fund's investment strategy and may vary in the future.
[GRAPHIC OMITTED: horizontal bar chart TOP INDUSTRY SECTORS]
TOP INDUSTRY SECTORS*
Insurance and
finance 17.2%
Utilities 9.1%
Oil and gas 6.7%
Transportation 3.5%
Food and
beverages 3.1%
Footnote reads:
*Based on net assets as of 10/31/98. Holdings will vary over time.
* FUND BENEFITS FROM CONSISTENT, VALUE-ORIENTED APPROACH
The fund also continued to benefit from strong stock picking among
companies and sectors that appeared to be poised for consolidation. During
the past six months, the fund's holdings in Rubbermaid and Amoco were
strong performers because these two firms were acquired by other companies
with the fund benefiting from the transactions. On the negative side, the
fund's airline stocks such as Delta and UAL (the holding company for
United Airlines) suffered despite posting solid earnings growth. Investors
apparently feared that any slowdown caused by Asian economic difficulties
might lead to a recession that would markedly hurt airlines' prospects.
Following the fund's value strategy, we found many opportunities to buy
attractive stocks during the market's weakness. In general, we sold
consumer nondurable stocks in order to invest in other areas, notably
finance and retail. We also sold some energy stocks that had performed
well, since their fundamentals looked less appealing going forward. Among
the holdings we added to the portfolio was a bond of Federated Department
Stores, a well-managed company that appeared poised to bounce back from
some weakness in September and October. Also appealing was the stock of
Computer Associates, a software company.
* FIXED INCOME: SHIFT TO HIGHER QUALITY
Starting with the onslaught of the Asian financial crisis in the fall of
1997, all other sectors of the bond market underperformed U.S. Treasury
securities. In the spring, it appeared that the robust U.S. economy would
remain strong for some time, leading most market participants to
anticipate an increase in short-term interest rates by an inflation-averse
Fed, a move that many believed would slow economic growth.
When positioning the bond portfolio, we aim to provide income first and
foremost; capital appreciation is secondary. As a result, we sought to add
yield by increasing the allocated assets to non-Treasury sectors because
they offered significant yield advantages. We considered these advantages
appropriate compensation for the additional risk.
[GRAPHIC OMITTED: TOP FIVE EQUITY HOLDINGS]
TOP FIVE EQUITY HOLDINGS
BankAmerica Corp.
Insurance and finance
Philip Morris
Consumer nondurables
GTE Corp.
Utilities
Bristol-Meyers Squibb Co.
Pharmaceuticals
Exxon Corp.
Oil and gas
[GRAPHIC OMITTED: TOP FIVE FIXED-INCOME HOLDINGS]
TOP FIVE FIXED-INCOME HOLDINGS
U. S. Treasury notes
5 1/2s, 5/31/03
U. S. Treasury bonds
5 1/2s, 8/15/28
Government National Mortgage Association
pass-through certificates, 7s, various due dates 2023-2028
U. S. Treasury bonds
5 1/4s, 8/15/03
U. S. Treasury notes
5 1/2s, 3/31/03
Footnote reads:
The top 5 equity holdings and the top 5 fixed income holdings represent
14.7% of the fund's net assets. Holdings will vary over time.
Among the areas in which we invested was emerging-markets debt. When
Russia defaulted on its debt, an unprecedented flight to quality resulted
as investors quickly pulled assets out of all emerging markets. While we
acted to liquidate the fund's emerging-markets debt, we were not able to
prevent a loss to the fund.
August proved to be one of the worst months in the history of the
non-Treasury sectors of the bond market. Treasury securities outperformed
investment-grade corporate securities by 3%, high-yield debt by 7%, and
emerging-markets debt by 27%. Since the bond portfolio was focused on the
income advantages offered by non-Treasuries, the fund did not perform as
well as it would have if it had held more Treasuries.
Investors worldwide sought these securities as a safe haven from the
market's dislocations, since they offered liquidity; they would be easy to
sell when other markets improved. The flight to quality resumed in
October, amid fears of recession, the credit crunch, and other fallout
from the collapse of Long-Term Capital.
More recently, the Fed's interest-rate cuts have sparked some improvement
in the fixed-income markets, but we are faced with a new investment
landscape. There appears to be less liquidity in non-Treasury sectors
because investors have become much more discriminating about whether a
security compensates them adequately for the investment risk. Accordingly
we currently expect the fund's fixed-income portfolio to focus on
investing in higher-quality instruments going forward, including a recent
increase in the Treasury allocation.
High-yield securities will continue to be an important part of the fund's
strategy, however, especially since we believe Putnam's extensive credit
research capability gives us a distinct advantage. Nevertheless, the
allocation to high-yield holdings probably will be lower going forward.
While the outlook for that sector is positive and buying opportunities are
intriguing, it appears that risk levels in this sector have increased. In
addition, we expect the fund's investment in emerging-markets debt will be
extremely limited if there is any at all.
* OUTLOOK: RATE CUTS REDUCE CHANCE OF RECESSION
With the help of the Fed's recent rate cuts, it now appears to us that the
U.S. economy will not go into recession as some had feared. Within that
context, the fund's equity management will continue to pursue its
value-oriented strategy, seeking to take advantage of low valuations.
Putnam's competitive advantage lies in spending a great deal of time
visiting companies, undertaking fundamental research to find those
organizations that are pursuing meaningful changes in their operations.
The value strategy pays dividends when we can find stocks that combine a
low valuation with some sort of impetus or momentum to turn things around.
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 10/31/98, 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 10/31/98
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 7.86% 1.66% 7.08% 2.29% 7.30% 3.59%
- ------------------------------------------------------------------------------
5 years 75.32 65.16 69.13 67.13 71.25 65.24
Annual average 11.88 10.56 11.08 10.82 11.36 10.57
- ------------------------------------------------------------------------------
10 years 215.00 196.83 191.26 191.26 198.88 188.55
Annual average 12.16 11.49 11.28 11.28 11.57 11.18
- ------------------------------------------------------------------------------
Life of fund 313.94 290.27 269.45 269.45 282.47 269.18
Annual average 11.07 10.59 10.14 10.14 10.42 10.13
- ------------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 10/31/98
Standard Lehman Bros.
& Poor's Govt./Corp. Consumer
500 Index Bond Index Price Index
- ------------------------------------------------------------------------------
1 year 21.99% 10.28% 1.36%
- ------------------------------------------------------------------------------
5 years 162.66 40.09 12.42
Annual average 21.31 6.98 2.37
- ------------------------------------------------------------------------------
10 years 418.25 140.13 36.27
Annual average 17.89 9.16 3.14
- ------------------------------------------------------------------------------
Life of fund 808.80 258.39 53.23
Annual average 17.76 9.91 3.21
- ------------------------------------------------------------------------------
Past performance is no assurance of future results. 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. 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.
This performance information does not reflect any market volatility that
may have occurred since the date of the information. As a result, more
recent returns may be more or less than those shown.
[GRAPHIC OMITTED: worm chart GROWTH OF A $10,000 INVESTMENT]
GROWTH OF A $10,000 INVESTMENT
Cumulative total return of
a $10,000 investment since
10/31/88
Fund's class A S&P 500 Lehman Govt./Corp
Date/year shares at POP Index Bond Index
10/31/88 9,425 10,000 10,000
10/31/89 10,961 12,640 1,0449
10/31/90 10,014 11,695 1,1106
10/31/91 12,947 15,612 1,1431
10/31/92 14,391 17,167 1,1796
10/31/93 16,935 19,732 12,121
10/31/94 16,832 20,496 12,437
10/31/95 20,086 25,915 12,787
10/31/96 23,161 32,160 13,169
10/31/97 27,531 42,487 13,443
10/31/98 $29,683 $51,825 $24,013
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 $29,126 and no contingent deferred sales charges would
apply; a $10,000 investment in the fund's class M shares would have been
valued at $29,888 ($28,855 at public offering price). See first page of
performance section for performance calculation method.
PRICE AND DISTRIBUTION INFORMATION
for 12 months ended 10/31/98
Class A Class B Class M
- ----------------------------------------------------------------------
Distributions (number) 4 4 4
- ----------------------------------------------------------------------
Income $0.356 $0.279 $0.304
- ----------------------------------------------------------------------
Capital gains
- ----------------------------------------------------------------------
Long-term 0.610 0.610 0.610
- ----------------------------------------------------------------------
Short-term 0.355 0.355 0.355
- ----------------------------------------------------------------------
Total $1.321 $1.244 $1.269
- ----------------------------------------------------------------------
Share value: NAV POP NAV NAV POP
- ----------------------------------------------------------------------
10/31/97 $11.48 $12.18 $11.40 $11.44 $11.85
- ----------------------------------------------------------------------
10/31/98 11.01 11.68 10.92 10.96 11.36
- ----------------------------------------------------------------------
Current return (end of period)
- ----------------------------------------------------------------------
Current dividend rate1 4.00% 3.77% 3.30% 3.54% 3.42%
- ----------------------------------------------------------------------
Current 30-day SEC yield2 3.74 3.52 2.97 3.21 3.10
- ----------------------------------------------------------------------
1 Income portion of most recent distribution, annualized and divided by NAV
or POP at end of period.
2 Based on investment income, calculated using SEC guidelines.
TOTAL RETURN FOR PERIODS ENDED 9/30/98
(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 2.77% -3.18% 2.09% -2.48% 2.22% -1.33%
- ------------------------------------------------------------------------------
5 years 72.21 62.31 66.07 64.07 68.18 62.23
Annual average 11.48 10.17 10.68 10.41 10.96 10.16
- ------------------------------------------------------------------------------
10 years 211.86 193.87 188.33 188.33 195.68 185.30
Annual average 12.05 11.38 11.17 11.17 11.45 11.05
- ------------------------------------------------------------------------------
Life of fund 302.66 279.63 259.64 259.64 272.00 259.08
Annual average 10.91 10.43 9.98 9.98 10.26 9.97
- ------------------------------------------------------------------------------
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 on redemption.
Net asset value (NAV) is the value of all your fund's assets, minus any
liabilities, divided by the number of outstanding shares, not including
any initial or contingent deferred sales charge.
Public offering price (POP) is the price of a mutual fund share plus the
maximum sales charge levied at the time of purchase. POP performance
figures shown here assume the 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's & 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.
PUTNAM GROWTH FUNDS
Asia Pacific Growth Fund
Capital Appreciation Fund [DBL. DAGGER]
Capital Opportunities Fund
Diversified Equity Trust
Europe Growth Fund
Global Growth Fund
Global Natural Resources Fund
Growth Opportunities Fund
Health Sciences Trust
International Growth Fund
International New Opportunities Fund
Investors Fund
New Opportunities Fund [DBL. DAGGER]
OTC & Emerging Growth Fund
Research Fund
Vista Fund
Voyager Fund
Voyager Fund II
PUTNAM GROWTH
AND INCOME FUNDS
Balanced Retirement Fund
Convertible Income-Growth Trust
Equity Income Fund
The George Putnam Fund of Boston
Global Growth and Income Fund
The Putnam Fund for Growth and Income
Growth and Income Fund II
International Growth and Income Fund
New Value Fund
Utilities Growth and Income Fund
PUTNAM INCOME FUNDS
American Government Income Fund
Diversified Income Trust
Global Governmental Income Trust
High Quality Bond Fund +
High Yield Advantage Fund [DBL. DAGGER]
High Yield Total Return Fund
High Yield Trust [DBL. DAGGER]
High Yield Trust II
Income Fund
Intermediate U.S. Government
Income Fund
Money Market Fund **
Preferred Income Fund
Strategic Income Fund *
U.S. Government Income Trust
PUTNAM TAX-FREE
INCOME FUNDS
Municipal Income Fund
Tax Exempt Income Fund
Tax Exempt Money Market Fund**
Tax-Free High Yield Fund
Tax-Free Insured Fund
State tax-free income funds [SECTION MARK]
Arizona, California, Florida, Massachusetts, Michigan, Minnesota,
New Jersey, New York, Ohio and Pennsylvania
State tax-free money market funds [SECTION MARK]
California, New York
LIFESTAGE SM FUNDS
Putnam Asset Allocation Funds-three investment portfolios that spread
your money across a variety of stocks, bonds, and money market
investments.
The three portfolios:
Asset Allocation: Balanced Portfolio
Asset Allocation: Conservative Portfolio
Asset Allocation: Growth Portfolio
*Formerly Putnam Diversified Income Trust II
+Formerly Putnam Federal Income Trust
[DBL. DAGGER] Closed to new investors. Some exceptions may apply.
Contact Putnam for details.
[SECTION MARK] Not available in all states.
**An investment in a money market fund is neither insured nor guaranteed
by the U.S. government. These funds are managed to maintain a price of
$1.00 per share, although there is no assurance that this price will
be maintained in the future.
Please call your financial advisor or Putnam at 1-800-225-1581 to obtain
a prospectus for any Putnam fund. It contains more complete information,
including charges and expenses. Please read it carefully before you
invest or send money.
Report of independent accountants
For the fiscal year ended October 31, 1998
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, 1998, 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, 1998 by
correspondence with the custodian, provide a reasonable basis for the
opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
December 15, 1998
<TABLE>
<CAPTION>
Portfolio of investments owned
October 31, 1998
COMMON STOCKS (48.5%) (a)
NUMBER OF SHARES VALUE
<S> <C> <C>
Aerospace and Defense (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
63,200 Raytheon Co. Class B $ 3,669,550
Agriculture (--%)
- --------------------------------------------------------------------------------------------------------------------------
11,013 PSF Holdings LLC Class A (acquired various
dates from 5/20/94 to 8/25/94, cost $387,226) (NON) (RES) 192,948
Automotive (1.2%)
- --------------------------------------------------------------------------------------------------------------------------
103,200 Ford Motor Co. 5,598,600
59,000 General Motors Corp. 3,720,688
--------------
9,319,288
Basic Industrial Products (0.8%)
- --------------------------------------------------------------------------------------------------------------------------
91,000 Deere (John) & Co. 3,219,125
100,000 Owens-Illinois, Inc. (NON) 3,056,250
--------------
6,275,375
Building and Construction (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
50,000 Masco Corp. 1,409,375
Business Equipment and Services (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
40,000 Xerox Corp. 3,875,000
Cable Television (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
81,500 Comcast Corp. Class A 4,024,063
Chemicals (2.0%)
- --------------------------------------------------------------------------------------------------------------------------
26,600 Dow Chemical Co. 2,490,425
93,000 du Pont (E.I.) de Nemours & Co., Ltd. 5,347,500
54,000 Eastman Chemical Co. 3,172,500
62,600 Minnesota Mining & Manufacturing Co. 5,008,000
--------------
16,018,425
Computer Equipment (1.0%)
- --------------------------------------------------------------------------------------------------------------------------
142,200 Compaq Computer Corp. 4,497,075
64,300 Sun Microsystems, Inc. (NON) 3,745,475
--------------
8,242,550
Computer Services and Software (1.2%)
- --------------------------------------------------------------------------------------------------------------------------
80,300 Computer Associates International, Inc. 3,161,813
46,000 IBM Corp. 6,828,125
--------------
9,989,938
Consumer Durable Goods (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
92,100 Hasbro, Inc. 3,229,256
Consumer Non Durables (1.9%)
- --------------------------------------------------------------------------------------------------------------------------
33,500 Colgate-Palmolive Co. 2,960,563
303 Hedstrom Holdings, Inc. 144A 303
73,000 Kimberly-Clark Corp. 3,522,250
168,700 Philip Morris Cos., Inc. 8,624,788
--------------
15,107,904
Consumer Services (--%)
- --------------------------------------------------------------------------------------------------------------------------
25 AmeriKing, Inc. (NON) 1,000
Electronics and Electrical Equipment (1.9%)
- --------------------------------------------------------------------------------------------------------------------------
36,700 Eaton Corp. 2,484,131
58,700 Emerson Electric Co. 3,874,200
68,000 Motorola, Inc. 3,536,000
238 Sensormatic Electronics Corp. (NON) 1,339
83,750 Texas Instruments, Inc. 5,354,766
--------------
15,250,436
Food and Beverages (3.0%)
- --------------------------------------------------------------------------------------------------------------------------
72,700 Anheuser Busch Cos., Inc. 4,321,106
126,000 ConAgra, Inc. 3,835,125
49,300 Heinz (H.J.) Co. 2,865,563
51,300 Nabisco Holdings Corp. Class A 1,936,575
89,500 PepsiCo, Inc. 3,020,625
70,000 Sara Lee Corp. 4,178,125
58,600 Wendy's International, Inc. 1,230,600
125,800 Whitman Corp. 2,696,838
--------------
24,084,557
Health Care (2.0%)
- --------------------------------------------------------------------------------------------------------------------------
92,000 Baxter International, Inc. 5,514,250
147,800 Columbia/HCA Healthcare Corp. 3,103,800
134,800 HEALTHSOUTH Corp. (NON) 1,634,450
43,700 Merck & Co., Inc. 5,910,425
--------------
16,162,925
Insurance and Finance (11.0%)
- --------------------------------------------------------------------------------------------------------------------------
79,800 Allstate Corp. 3,436,388
80,700 American General Corp. 5,527,950
122,738 Banc One Corp. 5,998,820
176,143 BankAmerica Corp. 10,117,214
73,200 BankBoston Corp. 2,694,675
493 Bankers Trust New York Corp. (CUS) 30,967
71,800 Charter One Financial, Inc. 1,970,012
58,000 CIGNA Corp. 4,230,375
162,500 Citigroup, Inc. 7,647,656
67,100 Federal National Mortgage Association 4,751,519
58,400 First Union Corp. 3,387,200
73,200 Hartford Financial Services Group 3,888,750
90,500 Household International, Inc. 3,308,906
100,400 KeyCorp 3,043,375
32,300 Mercantile Bancorpation, Inc. 1,475,706
39,000 Morgan (J.P.) & Co., Inc. 3,675,750
76,800 Morgan Stanley, Dean Witter, Discover and Co. 4,972,800
135,000 Norwest Corp. 5,020,313
79,200 PNC Bank Corp. 3,960,000
76,500 Reliastar Financial Corp. 3,351,656
74,250 Synovus Financial Corp. 1,721,672
92,200 Washington Mutual, Inc. 3,451,738
2,000 Wells Fargo & Co. 740,000
--------------
88,403,442
Oil and Gas (5.2%)
- --------------------------------------------------------------------------------------------------------------------------
64,000 Amoco Corp. 3,592,000
42,300 Atlantic Richfield Co. 2,913,413
62,836 British Petroleum PLC ADR (United Kingdom) 5,557,059
42,000 Chevron, Inc. 3,423,000
39,400 Conoco, Inc. (NON) 980,075
48,000 Elf Aquitane ADR (France) 2,784,000
65,000 Enron Corp. 3,428,750
108,000 Exxon Corp. 7,695,000
68,000 Kerr-McGee Corp. 2,711,500
82,000 Mobil Corp. 6,206,375
47,900 Total Corp. ADR (France) 2,802,150
--------------
42,093,322
Paper and Forest Products (0.8%)
- --------------------------------------------------------------------------------------------------------------------------
41,200 Temple Inland, Inc. 2,000,775
99,000 Weyerhaeuser Co. 4,634,438
--------------
6,635,213
Pharmaceuticals (2.5%)
- --------------------------------------------------------------------------------------------------------------------------
116,000 American Home Products Corp. 5,655,000
70,000 Bristol-Myers Squibb Co. 7,739,375
134,160 Pharmacia & Upjohn, Inc. 7,102,095
--------------
20,496,470
Photography (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
44,000 Eastman Kodak Co. 3,410,000
Publishing (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
38,000 McGraw-Hill, Inc. 3,417,625
Real Estate (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
69,000 Equity Residential Properties Trust (R) 2,898,000
99,000 Starwood Hotels & Resorts (R) 2,802,938
--------------
5,700,938
Retail (1.4%)
- --------------------------------------------------------------------------------------------------------------------------
54,200 Albertson's, Inc. 3,011,488
12 Mothers Work, Inc. (NON) 101
64,200 May Department Stores Co. 3,916,200
100,300 Sears, Roebuck & Co. 4,507,231
--------------
11,435,020
Telecommunications (--%)
- --------------------------------------------------------------------------------------------------------------------------
170 Intermedia Communications, Inc. (NON) 3,145
Transportation (1.9%)
- --------------------------------------------------------------------------------------------------------------------------
144,900 Burlington Northern Santa Fe Corp. 4,473,788
28,400 Delta Air Lines, Inc. 2,997,975
41,000 FDX Corp. (NON) 2,155,063
4,100 Norfolk Southern Corp. 130,930
111,300 Ryder System, Inc. 2,740,763
45,000 UAL Corp. (NON) 2,922,188
--------------
15,420,707
Utilities (7.1%)
- --------------------------------------------------------------------------------------------------------------------------
99,400 American Telephone & Telegraph Co. 6,187,650
139,200 Ameritech Corp. 7,508,100
63,600 Bell Atlantic Corp. 3,378,750
72,200 Duke Energy Corp. 4,670,438
14,400 Edison International 378,793
104,200 Entergy Corp. 2,995,750
137,000 GTE Corp. 8,040,188
109,400 OGE Energy Corp. 2,905,938
87,000 P P & L Resources, Inc. 2,359,875
101,100 Potomac Electric Power Co. 2,647,556
108,000 SBC Communications, Inc. 5,001,750
118,000 Sempra Energy (NON) 3,068,000
50,300 Sprint Corp. 3,860,525
32,000 Texas Utilities Co. 1,400,000
82,900 Western Resources, Inc. 2,901,500
--------------
57,304,813
--------------
Total Common Stocks (cost $340,305,318) $ 391,173,285
CORPORATE BONDS AND NOTES (18.1%) (a)
PRINCIPAL AMOUNT VALUE
Advertising (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
$ 300,000 Adams Outdoor Advertising sr. notes 10 3/4s, 2006 $ 316,500
190,000 Lamar Advertising Co. sr. sub. notes 9 5/8s, 2006 201,400
10,000 Lamar Advertising Co. company guaranty 8 5/8s, 2007 10,250
210,000 Outdoor Communications Inc. sr. sub. notes
9 1/4s, 2007 214,725
10,000 Outdoor Systems, Inc. sr. sub. notes 9 3/8s, 2006 10,400
--------------
753,275
Aerospace and Defense (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
20,000 Argo-Tech Corp. company guaranty 8 5/8s, 2007 18,600
100,000 Aviation Sales Co. company guaranty 8 1/8s, 2008 92,000
100,000 BE Aerospace, Inc. sr. sub. notes Ser. B, 9 7/8s, 2006 102,000
40,000 BE Aerospace, Inc. 144A sr. sub. notes 9 1/2s, 2008 40,900
30,000 BE Aerospace Inc. sr. sub. notes Ser. B, 8s, 2008 28,050
100,000 Burke Industries, Inc. company guaranty 10s, 2007 95,500
20,000 K&F Industries, Inc. sr. sub. notes Ser. B, 9 1/4s, 2007 19,000
1,330,000 Raytheon Co notes 6.45s, 2002 1,371,589
105,000 Sequa Corp. bonds 8 3/4s, 2001 106,050
--------------
1,873,689
Agriculture (--%)
- --------------------------------------------------------------------------------------------------------------------------
127,869 Premium Standard Farms, Inc. sr. secd. notes
11s, 2003 (acquired various dates 9/17/96 to
6/25/97, cost $124,913) (RES) (PIK) 134,902
40,000 Purina Mills, Inc. 144A sr. sub. notes 9s, 2010 40,000
--------------
174,902
Apparel (--%)
- --------------------------------------------------------------------------------------------------------------------------
60,000 Sassco Fashions Ltd. sr. notes 12 3/4s, 2004 57,000
Automotive (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
250,000 Accuride Corp. sr. sub. notes Ser. B, 9 1/4s, 2008 232,500
47,000 Aftermarket Technology Corp. sr. sub. notes 12s, 2004 47,940
5,000 Cambridge Industries, Inc. company guaranty
Ser. B, 10 1/4s, 2007 4,400
1,085,000 Chrysler Corp. deb. Ser. B, 7.45s, 2097 1,159,963
885,000 Ford Motor Co. bonds 6 5/8s, 2028 877,522
200,000 Hayes Wheels International, Inc. company guaranty
Ser. B, 9 1/8s, 2007 201,000
210,000 Lear Corp. sub. notes 9 1/2s, 2006 226,800
10,000 Safety Components International, Inc. sr. sub. notes
Ser. B, 10 1/8s, 2007 9,200
80,000 Talon Automotive Group sr. sub. notes
Ser. B, 9 5/8s, 2008 70,400
125,000 Walbro Corp. sr. notes Ser. B, 9 7/8s, 2005 116,250
--------------
2,945,975
Basic Industrial Products (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
190,000 American Standard Companies, Inc. sr. notes
7 3/8s, 2008 187,150
110,000 Axia, Inc. 144A sr.sub. notes 10 3/4s, 2008 103,400
250,000 Newcor, Inc. company guaranty Ser. B, 9 7/8s, 2008 212,500
160,000 Owens-Illinois, Inc. sr. notes 8.1s, 2007 166,360
5,000 Roller Bearing Co. company guaranty
Ser. B, 9 5/8s, 2007 4,650
--------------
674,060
Broadcasting (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
245,000 Affinity Group Holdings sr. notes 11s, 2007 235,813
100,000 Allbritton Communications Co. sr. sub. deb.
Ser. B, 9 3/4s, 2007 101,000
70,000 Allbritton Communications Co. sr. sub. notes
Ser. B, 8 7/8s, 2008 65,800
75,000 American Radio Systems Corp. company guaranty
9s, 2006 80,250
75,000 Benedek Broadcasting sr. notes 11 7/8s, 2005 78,750
180,000 Benedek Communications Corp. sr. disc. notes stepped-
coupon zero % (13 1/4s, 5/15/01), 2006 (STP) 119,700
45,000 Capstar Broadcasting sr. disc. notes stepped-coupon
zero % (12 3/4s, 2/1/02), 2009 (STP) 32,850
205,000 Capstar Broadcasting sr. sub. notes 9 1/4s, 2007 203,975
20,000 Central European Media Enterprises Ltd. sr. notes
9 3/8s, 2004 (Bermuda) 16,000
60,000 Chancellor Media Corp. sr. sub notes Ser. B,
8 1/8s, 2007 57,300
10,000 Citadel Broadcasting Co. sr. sub. notes 10 1/4s, 2007 10,575
90,000 Fox Family Worldwide, Inc. sr. disc. notes stepped-coupon
zero % (10 1/4s, 11/1/02), 2007 (STP) 53,100
120,000 Fox Family Worldwide, Inc. sr. notes 9 1/4s, 2007 112,800
220,000 Fox/Liberty Networks LLC sr. notes 8 7/8s, 2007 213,400
75,000 Granite Broadcasting Corp. sr. sub. notes 10 3/8s, 2005 71,250
250,000 Granite Broadcasting Corp. sr. sub. notes 8 7/8s, 2008 215,000
10,000 Gray Communications Systems, Inc. sr. sub. notes
10 5/8s, 2006 10,150
15,000 Heritage Media Services Corp. sr. sub. notes
8 3/4s, 2006 15,675
250,000 Jacor Communications, Inc. company guaranty
Ser. B, 8 3/4s, 2007 260,000
140,000 Lenfest Communications, Inc. sr. sub. notes
10 1/2s, 2006 158,200
25,000 Pegasus Media & Communications notes
Ser. B, 12 1/2s, 2005 27,250
5,000 Radio One Inc. company guaranty stepped-coupon
Ser. B, zero %, (12s, 5/15/00), 2004 (STP) 4,500
40,000 Sinclair Broadcast Group, Inc. sr. sub. notes 10s, 2005 40,200
225,000 Sinclair Broadcast Group, Inc. company guaranty
9s, 2007 216,563
30,000 Sinclair Broadcast Group, Inc. sr. sub. notes
8 3/4s, 2007 28,500
25,000 Spanish Broadcasting sr. notes Ser. B, 11s, 2004 25,250
15,000 TV Azteca S.A. de C.V. sr. notes
10 1/2s, 2007 (Mexico) 10,500
--------------
2,464,351
Building and Construction (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
90,000 Albecca Inc. 144A sr. sub. notes 10 3/4s, 2008 85,500
20,000 American Architectural Products Corp. company guaranty
11 3/4s, 2007 17,000
35,000 Atrium Companies Inc. 144A sr. sub. notes
10 1/2s, 2006 35,350
10,000 Building Materials Corp. sr. notes Ser. B, 8 5/8s, 2006 9,950
20,000 D.R. Horton Inc. company guaranty 10s, 2006 20,200
70,000 GS Superhighway Holdings sr. notes 9 7/8s, 2004 30,100
750,000 Guangdong Enterprises 144A sr. notes
8 7/8s, 2007 (China) 262,973
20,000 Jackson Products, Inc. company guaranty
Ser. B, 9 1/2s, 2005 19,100
75,000 M.D.C. Holdings, Inc. notes Ser. B, 11 1/8s, 2003 75,750
40,000 Morris Material Handling, Inc. company guaranty
9 1/2s, 2008 27,200
40,000 Republic Group Inc. 144A sr. sub. notes 9 1/2s, 2008 37,300
75,000 Southdown, Inc. sr. sub. notes Ser. B, 10s, 2006 79,500
--------------
699,923
Business Equipment and Services (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
40,000 Cex Holdings, Inc. 144A sr. sub. notes 9 5/8s, 2008 37,200
90,000 Iron Mountain, Inc. med. term notes
company guaranty 10 1/8s, 2006 94,950
20,000 Outsourcing Solutions, Inc. sr. sub. notes
Ser. B, 11s, 2006 18,400
233,000 Pierce Leahy Corp. sr. sub. notes 11 1/8s, 2006 249,310
210,000 U.S. Office Products Co. 144A sr. sub notes
9 3/4s, 2008 168,000
--------------
567,860
Cable Television (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
95,000 Acme Television sr. disc. notes stepped-coupon zero %
(10 7/8s, 9/30/00), 2004 (STP) 72,200
177,375 Adelphia Communications Corp. sr. notes
9 1/2s, 2004 (PIK) 182,696
80,000 Century Communications Corp. sr. notes
8 3/4s, 2007 82,800
75,000 Century Communications Corp. sr. notes
8 7/8s, 2007 78,000
325,000 Comcast Corp. sr. sub. notes 9 1/2s, 2008 341,751
75,000 CSC Holdings, Inc. sr. sub. deb. 10 1/2s, 2016 84,000
5,000 CSC Holdings, Inc. sr. sub. deb. 9 7/8s, 2023 5,350
250,000 CSC Holdings, Inc. sr. notes 7 7/8s, 2007 251,963
305,000 Diamond Cable Communication Co. sr. disc. notes
stepped-coupon zero % (10 3/4s, 2/15/02), 2007
(United Kingdom) (STP) 195,200
210,000 Diamond Cable Communication Co. sr. disc. notes
stepped-coupon zero % (11 3/4s, 12/15/00), 2005
(United Kingdom) (STP) 155,400
30,000 Globo Communicacoes 144A sr. notes
10 5/8s, 2008 (Brazil) 15,750
175,000 Jones Intercable, Inc. sr. sub. deb. 10 1/2s, 2008 190,750
55,000 Jones Intercable, Inc. sr. notes 9 5/8s, 2002 58,575
70,000 Lenfest Communications, Inc. sr. sub. notes
8 1/4s, 2008 70,000
110,000 Marcus Cable Co. (L.P.) sr. sub. disc. notes stepped-
coupon zero % (13 1/2s, 8/1/99), 2004 (STP) 107,250
45,000 Marcus Cable Co. (L.P.) sr. deb. 11 7/8s, 2005 47,250
175,000 Rogers Cablesystems Ltd. sr. notes Ser. B, 10s, 2005 189,875
--------------
2,128,810
Chemicals (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
835,000 Arco Chemical Co. deb. 9.8s, 2020 801,157
900,000 Equistar Chemicals LP notes 9 1/8s, 2002 948,339
60,000 Geo Specialty Chemicals, Inc. 144A sr. sub. notes
10 1/8s, 2008 54,000
50,000 Huntsman Corp. 144A sr. sub. notes FRN
9.031s, 2007 46,500
10,000 Pioneer Americas Acquisition 144A sr. notes
9 1/4s, 2007 7,500
25,000 Polytama International notes 11 1/4s, 2007 (Indonesia) 3,250
30,000 Sterling Chemicals Holdings sr. disc. notes stepped-coupon
zero % (13 1/2s, 8/15/01), 2008 (STP) 8,400
85,000 Trikem S.A. 144A bonds 10 5/8s, 2007 (Brazil) 39,950
15,000 Union Carbide Global Enterprises sr. sub. notes
Ser. B, 12s, 2005 15,150
--------------
1,924,246
Computer Services and Software (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
1,225,000 Dell Computer Corp. deb. 7.1s, 2028 1,200,500
90,000 IPC Information Systems sr. disc. notes stepped-coupon
zero % (10 7/8s, 11/1/01), 2008 (STP) 60,300
50,000 PSINet, Inc. 144A sr. notes 11 1/2s, 2008 51,500
50,000 PSINet, Inc. sr. notes Ser. B, 10s, 2005 48,500
30,000 Unisys Corp. sr. notes 7 7/8s, 2008 30,300
--------------
1,391,100
Conglomerates (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
465,000 Canadian Pacific Ltd. deb. 9.45s, 2021 (Canada) 593,810
5,000 Cia Latino Americana 144A company guaranty
11 1/8s, 2004 (Argentina) 2,900
--------------
596,710
Consumer Durable Goods (--%)
- --------------------------------------------------------------------------------------------------------------------------
5,000 Hedstrom Holdings, Inc. 144A sr. disc. notes stepped-
coupon zero % (12s, 6/1/02), 2009 (STP) 2,750
20,000 Sealy Mattress Co. sr. sub. notes Ser. B, 9 7/8s, 2007 18,000
50,000 Selmer Co., Inc. sr. sub. notes 11s, 2005 51,000
--------------
71,750
Consumer Non Durables (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
10,000 Amscan Holdings, Inc. sr. sub. notes 9 7/8s, 2007 8,100
20,000 Chattem, Inc. company guaranty Ser. B, 8 7/8s, 2008 19,150
130,000 Guess Jeans, Inc. sr. sub. notes 9 1/2s, 2003 125,125
40,000 Packaged Ice, Inc. company guaranty
Ser. B, 9 3/4s, 2005 37,200
295,000 Philip Morris Companies, Inc. notes 7 1/2s, 2004 315,671
600,000 Philip Morris Companies, Inc. notes 7 1/8s, 2004 633,372
295,000 Philip Morris Companies, Inc. notes 6.8s, 2003 310,004
390,000 Westpoint Stevens, Inc. sr. notes 7 7/8s, 2008 390,975
--------------
1,839,597
Consumer Products (--%)
- --------------------------------------------------------------------------------------------------------------------------
80,000 Iron Age Corp. company guaranty 9 7/8s, 2008 68,400
Consumer Services (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
100,000 Coinmach Corp. sr. notes 11 3/4s, 2005 103,000
70,000 Epic Resorts LLP 144A sr. notes 13s, 2005 66,500
45,000 FRD Acquisition Co. sr. notes Ser. B, 12 1/2s, 2004 43,650
210,000 HMH Properties, Inc. company guaranty
Ser. B, 7 7/8s, 2008 203,700
30,000 Host Marriott Travel Plaza sr. notes Ser. B, 9 1/2s, 2005 30,600
100,000 John Q Hammons Hotels, Inc. 1st mtge. 8 7/8s, 2004 84,000
40,000 Protection One, Inc. sr. disc. notes stepped-coupon
zero %, (13 5/8s, 6/30/00), 2005 (STP) 44,800
30,000 Raintree Resorts International, Inc. sr. notes
Ser. B, 13s, 2004 18,000
1,855,000 TCI Communications, Inc. sr. notes 8.65s, 2004 2,124,569
--------------
2,718,819
Cosmetics (--%)
- --------------------------------------------------------------------------------------------------------------------------
5,000 French Fragrances, Inc. sr. notes Ser. B, 10 3/8s, 2007 5,025
20,000 French Fragrances, Inc. company guaranty Ser. D,
10 3/8s, 2007 19,600
75,000 Revlon Consumer Products sr. notes 8 1/8s, 2006 72,375
--------------
97,000
Electronics and Electrical Equipment (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
15,000 Celestica International Ltd. 144A sr. sub. notes
10 1/2s, 2006 (Canada) 16,088
20,000 Details, Inc. sr. sub. notes Ser. B, 10s, 2005 18,600
30,000 DII Group, Inc. (The) sr. sub. notes 8 1/2s, 2007 27,600
275,000 Dobson Communications Corp. sr. notes
11 3/4s, 2007 265,375
59,431 Fairchild Semiconductor Corp. 144A sr. sub. notes
11.74s, 2008 52,597
20,000 Fairchild Semiconductor Corp. sr. sub. notes
10 1/8s, 2007 18,000
90,000 Flextronics International Ltd. sr. sub. notes
Ser. B, 8 3/4s, 2007 88,200
10,000 HCC Industries, Inc. company guaranty 10 3/4s, 2007 9,400
70,000 Motors and Gears, Inc. sr. notes Ser. D, 10 3/4s, 2006 68,600
20,000 Samsung Electronics 144A company guaranty
9 3/4s, 2003 16,800
100,000 Viasystems Inc. sr. sub notes 9 3/4s, 2007 86,000
235,000 Wavetek Corp. company guaranty 10 1/8s, 2007 218,550
110,000 Zilog, Inc. company guaranty Ser. B, 9 1/2s, 2005 80,300
--------------
966,110
Energy-Related (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
60,000 Calpine Corp. sr. notes 7 7/8s, 2008 58,200
40,000 Panda Global Energy Co. company guaranty
12 1/2s, 2004 (China) 24,000
725,000 Quezon Power Ltd. sr. notes 8.86s, 2017 (Philippines) 446,368
30,000 RAM Energy Inc. sr. notes 11 1/2s, 2008 21,000
100,000 York Power Funding 144A company guaranty
12s, 2007 (Cayman Islands) 99,000
--------------
648,568
Entertainment (1.3%)
- --------------------------------------------------------------------------------------------------------------------------
40,000 AMC Entertainment, Inc. sr. sub. notes 9 1/2s, 2009 38,400
75,000 Aztar Corp. sr. sub. notes 11s, 2002 74,250
190,000 Cinemark USA, Inc. sr. sub. notes Ser. D, 9 5/8s, 2008 193,800
1,380,000 News America Holdings, Inc. deb. 7 3/4s, 2045 1,352,317
30,000 Premier Parks, Inc. sr. notes Ser. A, 12s, 2003 32,100
75,000 Premier Parks, Inc. sr. notes 9 1/4s, 2006 75,750
100,000 SFX Entertainment, Inc. 144A company guaranty
Ser. B, 9 1/8s, 2008 92,000
40,000 Silver Cinemas Inc. sr. sub. notes 10 1/2s, 2005 34,000
185,000 Six Flags Corp. sr. sub. notes stepped-coupon zero %
(12 1/4s, 6/15/98), 2005 (STP) 197,950
615,000 Time Warner Entertainment Co. (L.P.) notes
8 7/8s, 2012 747,004
2,385,000 Time Warner Entertainment Co. (L.P.) sr. notes
8 3/8s, 2033 2,788,518
70,000 Trump A.C. 1st mtge. 11 1/4s, 2006 60,900
90,000 Trump Castle Funding 144A sub. notes 10 1/4s, 2003 90,900
190,000 United Artists Theatre 144A 9 3/4s, 2008 172,900
3,905,000 Viacom, Inc. sr. notes 7 3/4s, 2005 4,208,926
600,000 Viacom, Inc. deb. 7 1/2s, 2023 575,946
--------------
10,735,661
Environmental Control (--%)
- --------------------------------------------------------------------------------------------------------------------------
30,000 Allied Waste Industries, Inc. sr. disc. notes stepped-
coupon zero % (11.3s, 6/1/02), 2007 (STP) 22,350
20,000 ATC Group Services Inc. company guaranty
12s, 2008 6,000
--------------
28,350
Food and Beverages (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
120,000 Ameriserve Food Co. company guaranty 8 7/8s, 2006 104,400
10,000 Aurora Foods, Inc. sr. sub. notes Ser. B, 9 7/8s, 2007 10,700
50,000 Aurora Foods, Inc. 144A ser. sub. notes
Ser. D, 9 7/8s, 2007 53,500
45,000 Canandaigua Wine Co. sr. sub. notes Ser. C,
8 3/4s, 2003 44,888
10,000 Eagle Family Foods company guaranty Ser. B,
8 3/4s, 2008 8,800
20,000 Fleming Companies, Inc. company guaranty Ser. B,
10 1/2s, 2004 18,000
70,000 RAB Enterprises, Inc. 144A sr. notes 10 1/2s, 2005 64,050
25,000 Signature Brands Ltd. sr. sub. notes 13s, 2002 (Canada) 28,000
100,000 Stater Brothers Holdings 144A sr. sub. notes
9s, 2004 90,000
--------------
422,338
Gaming (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
250,000 Argosy Gaming Co. company guaranty 13 1/4s, 2004 266,250
25,000 Boyd Gaming Corp. sr. sub. notes 9 1/2s, 2007 23,750
15,000 Casino America, Inc. sr. notes 12 1/2s, 2003 16,125
50,000 Coast Hotels & Casinos, Inc. 1st mtge.
company guaranty Ser. B, 13s, 2002 55,500
35,000 Empress River Casino sr. notes 10 3/4s, 2002 37,713
80,000 Fitzgeralds Gaming Corp. company guaranty
Ser. B, 12 1/4s, 2004 47,200
20,000 Isle of Capri Black Hawk LLC 144A 1st mtge.
Ser. B, 13s, 2004 20,000
59,000 Louisiana Casino Cruises Corp. 1st mtge.
11 1/2s, 1998 59,000
110,000 Mohegan Tribal Gaming sr. notes Ser. B,
13 1/2s, 2002 135,850
75,000 Showboat Marina Casino 1st mtge. Ser. B,
13 1/2s, 2003 83,250
--------------
744,638
Health Care (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
140,000 Columbia/HCA Healthcare Corp.
med. term notes 9s, 2014 134,400
70,000 Extendicare Health Services, Inc.
company guaranty 9.35s, 2007 61,250
90,000 Genesis Health Ventures, Inc. sr. sub. notes
9 1/4s, 2006 81,000
115,000 Global Health Sciences company guaranty
11s, 2008 96,600
35,000 Graphic Controls Corp. sr. sub. notes
Ser. A, 12s, 2005 40,600
40,000 Hudson Respiratory Care, Inc. sr. sub. notes
9 1/8s, 2008 31,200
105,000 Integrated Health Services, Inc. sr. sub. notes
Ser. A, 9 1/2s, 2007 97,125
150,000 Integrated Health Services, Inc. sr. sub. notes
Ser. A, 9 1/4s, 2008 137,250
365,000 Manor Care, Inc. sr. notes 7 1/2s, 2006 362,726
50,000 Mariner Post-Acute Network, Inc. sr. sub. notes stepped-
coupon Ser. B, zero % (10 1/2s, 11/1/02), 2007 24,000
240,000 Mariner Post-Acute Network, Inc. sr. sub. notes
Ser. B, 9 1/2s, 2007 201,600
180,000 MedPartners, Inc. sr. notes 7 3/8s, 2006 141,232
260,000 Multicare Cos., Inc. sr. sub. notes 9s, 2007 228,800
20,000 Paragon Corp. Holdings, Inc. company guaranty
Ser. B, 9 5/8s, 2008 14,600
75,000 Quorum Health Group, Inc. sr. sub. notes 8 3/4s, 2005 71,250
160,000 Sun Healthcare Group, Inc. sr. sub. notes
Ser. B, 9 1/2s, 2007 116,800
40,000 Sun Healthcare Group, Inc. 144A sr. sub. notes
9 3/8s, 2008 28,800
150,000 Tenet Healthcare Corp. sr. sub. notes 8 5/8s, 2007 155,625
--------------
2,024,858
Insurance and Finance (5.5%)
- --------------------------------------------------------------------------------------------------------------------------
10,000 Aames Financial Corp. sr. notes 9 1/8s, 2003 4,800
1,080,000 Advanta Corp. med. term notes Ser. B, 7s, 2001 1,002,769
1,495,000 AFC Capital Trust company guaranty
Ser. B, 8.207s, 2027 1,661,633
485,000 Allstate Financing II company guaranty 7.83s, 2045 494,846
605,000 American General Institute 144A company guaranty
8 1/8s, 2046 669,336
75,000 Chevy Chase Savings Bank Inc. sub. deb. 9 1/4s, 2008 72,000
35,000 Chevy Chase Savings Bank Inc. sub. deb. 9 1/4s, 2005 33,600
15,000 Colonial Capital II 144A company guaranty
8.92s, 2027 14,456
10,000 Delta Financial Corp. sr. notes 9 1/2s, 2004 5,000
10,000 Dime Capital Trust I bank guaranty Ser. A, 9.33s, 2027 10,319
20,000 Dollar Financial Group Inc. sr. notes
Ser. A, 10 7/8s, 2006 18,800
255,000 DTI Holdings Inc. sr. disc. notes, stepped-coupon
Ser. B, zero % (12 1/2s, 03/01/03), 2008 (STP) 81,600
1,895,000 Executive Risk Capital Trust company guaranty
Ser. B, 8.675s, 2027 1,877,377
515,000 Finova Capital Corp. notes 6 1/4s, 2002 513,785
1,150,000 First Citizens Bank Capital Trust I company guaranty
8.05s, 2028 1,115,500
540,000 First Financial Caribbean Corp. sr. notes 7.84s, 2006 572,351
470,000 Firstar Bank Milwaukee sr. bank notes 6 1/4s, 2002 484,034
1,070,000 Firstar Capital Trust I company guaranty
Ser. B, 8.32s, 2026 1,177,054
402,000 Ford Motor Credit Corp. sr. notes 6s, 2003 409,823
190,000 Ford Motor Credit Corp. notes 5 1/8s, 2001 188,784
770,000 Fuji JGB Inv. LLC 144A FLIRB Ser. A 9.87s, 2049 439,431
900,000 Greenpoint Bank sr. notes 6.7s, 2002 901,620
5,000 Greenpoint Capital Trust I company guaranty
9.1s, 2027 5,313
520,000 Hartford Life, Inc. deb. 7.65s, 2027 544,102
15,000 Imperial Credit Capital Trust I 144A company guaranty
10 1/4s, 2002 9,000
1,675,000 Lehman Brothers Holdings, Inc. med. term notes
6.4s, 1999 1,664,665
1,740,000 Lehman Brothers Holdings, Inc. notes 6 1/4s, 2003 1,682,945
1,015,000 Markel Capital Trust I company guaranty
Ser. B, 8.71s, 2046 1,008,646
785,000 Money Store, Inc. notes 8.05s, 2002 844,629
250,000 Nationwide Credit Inc. 144A sr. notes 10 1/4s, 2008 227,500
25,000 North Fork Capital Trust I company guaranty
8.7s, 2026 27,647
720,000 Norwest Corp. med. term sr. notes Ser. J, 6 3/4s, 2027 733,752
15,000 Ocwen Capital Trust I company guaranty
10 7/8s, 2027 11,100
5,000 Ocwen Federal Bank FSB sub. deb. 12s, 2005 3,750
5,000 Ocwen Financial Corp. notes 11 7/8s, 2003 3,800
470,000 Orange Cogen Funding 144A company guaranty
8.175s, 2022 484,711
580,000 Orion Capital Trust II company guaranty 7.701s, 2028 531,941
1,630,000 Paine Webber Group, Inc. sr. notes 6.55s, 2008 1,578,622
1,605,000 Paine Webber Group, Inc. sr. med. term notes
6.52s, 2005 1,574,906
1,935,000 Peoples Bank-Bridgeport sub. notes 7.2s, 2006 1,831,845
325,000 Peoples Heritage Capital Trust company guaranty
Ser. B, 9.06s, 2027 334,753
1,335,000 Phoenix Home Life Mutual Insurance Co.
144A notes 6.95s, 2006 1,414,179
2,010,000 Provident Companies, Inc. bonds 7.405s, 2038 2,040,150
35,000 PRT Funding Corp. sr. notes 11 5/8s, 2004 22,575
15,000 Riggs Capital Trust 144A bonds 8 5/8s, 2026 15,577
2,500,000 Riggs National Corp. sub. deb. 8 1/2s, 2006 2,608,650
1,425,000 Salomon, Inc. sr. notes 7.3s, 2002 1,483,539
1,100,000 Salton Sea Funding Corp. company guaranty
Ser. E, 8.3s, 2011 1,232,396
1,300,000 Sampoerna International Finance Co. 144A
company guaranty 8 3/8s, 2006 (Indonesia) 650,000
2,000,000 Scotland International Finance 144A sub. notes
8.85s, 2006 (Netherlands) 2,315,680
20,000 Sovereign Capital Trust company guaranty 9s, 2027 19,110
1,095,000 Sparbanken Sverige AB (Swedbank) 144A sub.
7 1/2s, 2049 (Sweden) 1,006,163
985,000 St. Paul Bancorp sr. notes 7 1/8s, 2004 1,058,373
585,000 State Street Institution 144A company guaranty
7.94s, 2026 662,589
1,955,000 Tig Capital Trust I 144A bonds 8.597s, 2027 2,150,265
1,235,000 Trenwick Capital Trust I company guaranty
8.82s, 2037 1,359,686
175,000 Webster Capital Trust I 144A bonds 9.36s, 2027 183,040
1,500,000 Webster Financial Corp. sr. notes 8 3/4s, 2000 1,555,920
--------------
44,630,437
Medical Supplies and Devices (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
55,000 ALARIS Medical Systems, Inc. company guaranty
9 3/4s, 2006 52,525
105,000 Conmed Corp. company guaranty 9s, 2008 100,800
25,000 Dade International, Inc. sr. sub. notes Ser. B,
11 1/8s, 2006 26,750
5,000 Imagyn Medical Technologies company guaranty
12 1/2s, 2004 750
70,000 Leiner Health Products sr. sub. notes 9 5/8s, 2007 71,488
110,000 Mediq, Inc. 144A sr. sub. notes 11s, 2008 97,900
110,000 Wright Medical Technology, Inc. 144A notes
Ser. C, 11 3/4s, 2000 82,500
--------------
432,713
Metals and Mining (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
150,000 AK Steel Corp. sr. notes 9 1/8s, 2006 154,500
50,000 Ameristeel Corp. company guaranty Ser. B,
8 7/8s, 2008 44,000
30,000 Anker Coal Group, Inc. sr. notes Ser. B, 9 3/4s, 2007 10,500
135,000 Continental Global Group sr. notes Ser. B, 11s, 2007 110,700
405,000 Freeport-McMoRan Copper & Gold Co., Inc.
sr. notes 7 1/2s, 2006 225,670
140,000 Lodestar Holding, Inc. 144A sr. notes 11 1/2s, 2005 109,200
1,035,000 PT Alatief Freeport sr. notes 9 3/4s, 2001
(Netherlands) 517,500
30,000 WHX Corp. sr.notes 10 1/2s, 2005 27,000
--------------
1,199,070
Motion Picture Distribution (--%)
- --------------------------------------------------------------------------------------------------------------------------
20,000 Panavision Inc. 144A sr. disc. notes stepped-coupon
zero % (9 5/8s, 2/1/02), 2006 (STP) 10,800
Oil and Gas (1.2%)
- --------------------------------------------------------------------------------------------------------------------------
110,000 Abraxas Petroleum Corp. 144A company guaranty
11 1/2s, 2004 84,700
150,000 American Eco Corp. company guaranty
Ser. B, 9 5/8s, 2008 97,500
25,000 Benton Oil & Gas Co. sr. notes 11 5/8s, 2003 20,000
10,000 Benton Oil & Gas Co. sr. notes 9 3/8s, 2007 7,000
140,000 Chesapeake Energy Corp. company guaranty
Ser. B, 9 5/8s, 2005 119,000
20,000 CIA Naviera Perez Companc S.A. 144A bonds
9s, 2004 (Argentina) 19,600
1,675,000 Coastal Corp. bonds 6.95s, 2028 1,606,560
30,000 Coho Energy, Inc. sr. sub. notes 8 7/8s, 2007 27,900
85,000 Costilla Energy, Inc. sr. notes 10 1/4s, 2006 69,700
30,000 Dailey Petroleum Services Corp. company guaranty
9 1/2s, 2008 12,450
65,000 Eagle Geophysical, Inc. 144A sr. notes 10 3/4s, 2008 55,900
1,110,000 Enron Corp. notes 6.95s, 2028 1,073,892
560,000 Enron Corp. notes 6.4s, 2006 565,835
660,000 Express Pipeline Ltd. 144A sub. notes Ser. B,
7.39s, 2019 (Canada) 635,210
260,000 Gothic Production Corp. company guaranty
Ser. B, 11 1/8s, 2005 169,000
970,000 Gulf Canada Resources, Ltd. sr. notes
8.35s, 2006 (Canada) 1,000,303
1,120,000 KN Capital Trust III company guaranty 7.63s, 2028 1,068,200
600,000 KN Energy, Inc. sr. notes 6.45s, 2003 616,224
200,000 Michael Petroleum Corp. sr. notes Ser. B, 11 1/2s, 2005 168,000
45,000 Northern Offshore 144A company guaranty
10s, 2005 31,500
10,000 Ocean Energy, Inc. company guaranty
Ser. B, 8 3/8s, 2008 9,600
100,000 Panaco, Inc. company guaranty Ser. B, 10 5/8s, 2004 80,000
640,000 Petro Geo-Services AS ADR notes
7 1/2s, 2007 (Norway) 671,981
200,000 Petsec Energy, Inc. sr. sub. notes Ser. B, 9 1/2s, 2007 160,000
960,000 Saga Petroleum ASA deb. 7 1/4s, 2027 (Norway) 843,542
250,000 Southwest Royalties, Inc. company guaranty
10 1/2s, 2004 117,500
1,050,000 Transamerican Energy sr. disc. notes stepped-coupon
Ser. B, zero % (13s, 6/15/99), 2002 (STP) 336,000
195,000 Transamerican Energy sr. notes Ser. B, 11 1/2s, 2002 72,150
81,000 TransTexas Gas Corp. sr. sub. notes Ser. D,
13 3/4s, 2001 64,800
--------------
9,804,047
Packaging and Containers (--%)
- --------------------------------------------------------------------------------------------------------------------------
15,000 AEP Industries, Inc. sr. sub. notes 9 7/8s, 2007 14,025
20,000 Radnor Holdings Inc. sr. notes 10s, 2003 19,400
--------------
33,425
Paper and Forest Products (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
15,000 Florida Coast Paper LLC 1st mtge. Ser. B,
12 3/4s, 2003 9,750
30,000 Huntsman Packaging Corp. company guaranty
9 1/8s, 2007 28,200
80,000 Indah Kiat Financial Mauritius Ltd. company guaranty
10s, 2007 (Indonesia) 41,600
55,000 Pindo Deli Finance Mauritius Ltd. company guaranty
10 3/4s, 2007 (Indonesia) 24,750
30,000 PT Pabrik Kertas Tjiwi Kimia company guaranty
10s, 2004 (Indonesia) 14,400
250,000 Repap New Brunswick sr. notes 9s, 2004 233,750
200,000 Riverwood International Corp. company guaranty
10 5/8s, 2007 187,000
70,000 Riverwood International Corp. company guaranty
10 1/4s, 2006 64,750
--------------
604,200
Pharmaceuticals (--%)
- --------------------------------------------------------------------------------------------------------------------------
150,000 ICN Pharmaceuticals, Inc. 144A sr. notes 9 1/4s, 2005 148,875
30,000 PharMerica, Inc. company guaranty 8 3/8s, 2008 26,100
--------------
174,975
Publishing (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
35,000 American Media Operation, Inc. sr. sub. notes
11 5/8s, 2004 35,700
30,000 Garden State Newspapers, Inc. sr. sub. notes
Ser. B, 8 3/4s, 2009 29,700
700,000 News America Holdings, Inc. deb. 7.7s, 2025 695,100
20,000 Perry-Judd company guaranty 10 5/8s, 2007 19,000
10,000 Von Hoffman Press Inc. 144A sr. sub. notes
10 3/8s, 2007 9,950
--------------
789,450
Real Estate (1.0%)
- --------------------------------------------------------------------------------------------------------------------------
1,005,000 Avalon Properties, Inc. notes 6 7/8s, 2007 (R) 976,860
920,000 Avalon Properties, Inc. notes 6 5/8s, 2005 (R) 901,885
20,000 Bluegreen Corp. company guaranty Ser. B,
10 1/2s, 2008 17,600
1,590,000 Equity Residential Properties notes 6.63s, 2005 (R) 1,548,024
1,235,000 First Industrial (L.P.) notes 7.6s, 2007 1,205,014
2,035,000 First Industrial (L.P.) med. term notes 7s, 2006 1,933,108
1,780,000 OMEGA Healthcare Investors, Inc. notes 6.95s, 2007 1,595,610
40,000 Tanger Properties Ltd. Partnership Gtd. notes
8 3/4s, 2001 (R) 39,708
--------------
8,217,809
Retail (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
975,000 Federated Department Stores, Inc. sr. notes
8 1/2s, 2003 1,073,183
40,000 Home Interiors & Gifts, Inc. 144A sr. sub. notes
10 1/8s, 2008 37,200
60,000 K mart Corp. med. term notes 7.55s, 2004 60,707
40,000 Mothers Work, Inc. sr. notes 12 5/8s, 2005 42,200
560,000 Neiman-Marcus Group, Inc. deb. 7 1/8s, 2028 489,586
115,000 Southland Corp. deb. Ser. A, 4 1/2s, 2004 90,850
20,000 William Carter Holdings Co. sr. sub. notes
Ser. A, 12s, 2008 20,600
--------------
1,814,326
Satellite Services (--%)
- --------------------------------------------------------------------------------------------------------------------------
40,000 Esat Holdings Ltd. 144A sr. notes stepped-coupon
zero % (12 1/2s, 2/01/02), 2007 (Ireland) (STP) 23,600
100,000 Golden Sky Systems 144A sr. sub. notes 12 3/8s, 2006 99,000
30,000 Satelites Mexicanos S.A. de C.V. 144A sr. notes
10 1/8s, 2004 (Mexico) 19,500
80,000 TCI Satellite Entertainment, Inc. sr. disc. notes stepped-
coupon zero % (12 1/4s, 2/102), 2007 (STP) 24,000
90,000 TCI Satellite Entertainment, Inc. sr. sub. notes
10 7/8s, 2007 49,500
--------------
215,600
Specialty Consumer Products (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
50,000 Decora Industries, Inc. sec. Ser. B, 11s, 2005 41,000
30,000 Eye Care Centers of America 144A
sr. sub. notes 9 1/8s, 2008 25,200
40,000 Specialty Retailers, Inc. company guaranty
Ser. B, 8 1/2s, 2005 36,800
1,820,000 Tyco International Ltd. company guaranty
6 3/8s, 2005 1,866,974
1,530,000 Tyco International Ltd. company guaranty 6 1/4s, 2003 1,560,447
--------------
3,530,421
Telecommunications (1.4%)
- --------------------------------------------------------------------------------------------------------------------------
1,345,000 AirTouch Communications, Inc. notes 6.65s, 2008 1,407,623
240,000 Allegiance Telecom, Inc. sr. disc. notes stepped-coupon
Ser. B, zero % (11 3/4s, 2/15/03), 2008 (STP) 102,600
50,000 Allegiance Telecom, Inc. sr. notes 12 7/8s, 2008 46,250
230,000 BTI Telecom Corp. sr. notes 10 1/2s, 2007 170,200
25,000 Call-Net Enterprises sr. disc. notes stepped-coupon
zero % (13 1/4s, 12/1/99), 2004 (STP) 23,750
30,000 Call-Net Enterprises, Inc. sr. disc. notes stepped-coupon
zero % (8.94s, 8/15/03), 2008 (Canada) (STP) 16,650
70,000 Caprock Communications Corp. 144A sr. notes
12s, 2008 59,500
215,000 CellNet Data Systems, Inc. sr. disc. notes stepped-coupon
zero % (14s, 10/1/02), 2007 (STP) 64,500
105,000 Centennial Cellular Corp. sr. notes 10 1/8s, 2005 120,750
45,000 Centennial Cellular Corp. sr. notes 8 7/8s, 2001 47,250
50,000 Charter Communications International, Inc. disc. notes
stepped-coupon Ser. B, zero % (14s, 3/15/01), 2007 (STP) 43,000
40,000 Colt Telecommunications Group PLC sr. disc. notes
stepped-coupon zero %, (12s, 12/15/01), 2006
(United Kingdom) (STP) 31,200
DEM 2,000,000 Colt Telecommunications Group PLC sr. notes
8 7/8s, 2007 (United Kingdom) 1,269,342
DEM 780,000 Colt Telecommunications Group PLC bonds
7 5/8s, 2008 (United Kingdom) 462,041
$ 30,000 Comcast Cellular Holdings sr. notes Ser. B, 9 1/2s, 2007 30,675
10,000 Consorcio Ecuatoiano notes 14s, 2002 (Ecuador) 3,000
30,000 CTI Holdings S.A. sr. notes stepped-coupon zero %
(11 1/2s,4/15/03), 2008 (Argentina) (STP) 11,100
150,000 Dial Call Communications, Inc. sr. disc. notes stepped-
coupon Ser. B, zero %, (10 1/4s, 12/15/98), 2005 (STP) 142,500
90,000 Dobson Wireline Co. 144A sr. notes 12 1/4s, 2008 82,800
170,000 Econophone, Inc. 144A notes stepped-coupon zero %
(11s, 2/15/03), 2008 (STP) 92,650
15,000 E. Spire Communications, Inc. sr. notes 13 3/4s, 2007 15,975
20,000 Esprit Telecom Group PLC sr. notes 11 1/2s, 2007
(United Kingdom) 17,600
30,000 Facilicom International sr. notes Ser. B., 10 1/2s, 2008 23,400
360,000 Flag Ltd. 144A sr. notes 8 1/4s, 2008 (Bermuda) 329,400
410,000 Global Crossing Holdings 144A sr. notes 9 5/8s, 2008 399,750
395,000 Hyperion Telecommunications Corp., Inc. sr. disc. notes
stepped-coupon Ser. B, zero %
(13s, 4/15/01), 2003 (STP) 272,550
780,000 ICG Services, Inc. sr. disc. notes stepped-coupon zero %
(9 7/8s, 5/1/03), 2008 343,200
30,000 IDT Corp. sr. notes 8 3/4s, 2006 25,500
200,000 Intermedia Communications, Inc. sr. disc. notes stepped-
coupon Ser. B, zero % (11 1/4s, 7/15/02), 2007 (STP) 133,500
15,000 Intermedia Communications, Inc. sr. notes
Ser. B, 8 7/8s, 2007 14,400
90,000 Intermedia Communications, Inc. sr. notes
Ser. B, 8.6s, 2008 85,950
85,000 Intermedia Communications, Inc. sr. notes
Ser. B, 8 1/2s, 2008 80,750
665,000 International Cabletel, Inc. sr. notes stepped-coupon
Ser. B, zero % (11 1/2s, 2/01/01), 2006 (STP) 498,750
50,000 IXC Communications, Inc. sr. sub. notes 9s, 2008 49,250
80,000 KMC Telecom Holdings, Inc. sr. disc. notes stepped-coupon
zero % (12 1/2s, 2/15/03), 2008 (STP) 36,800
145,000 Knology Holdings, Inc. sr. disc. notes stepped-coupon
zero %, (11 7/8s, 10/15/02), 2007 (STP) 69,600
10,000 L-3 Communications Corp. sr. sub. notes
Ser. B, 10 3/8s, 2007 10,750
40,000 L-3 Communications Corp. sr. sub. notes 8 1/2s, 2008 40,000
1,775,000 LCI International, Inc. sr. notes 7 1/4s, 2007 1,751,943
45,000 McCaw International Ltd sr. disc. notes stepped-coupon
zero % (13s, 4/15/02), 2007 (STP) 18,900
20,000 MetroNet Communications Corp. sr. disc. notes
stepped-coupon zero % (10 3/4s, 11/1/02), 2007
(Canada) (STP) 11,600
160,000 MetroNet Communications Corp. sr. disc. notes zero %
(9.95s, 6/15/03), 2008 (Canada) (STP) 86,400
265,000 Millicom International Cellular S.A. sr. disc. notes
stepped-coupon zero % (13 1/2s, 6/1/01), 2006
(Luxembourg) (STP) 151,050
54,000 MJD Communications, Inc. 144A FRN 10s, 2008 51,300
10,000 MJD Communications, Inc. 144A sr. sub. notes
9 1/2s, 2008 9,600
30,000 Mobile Telecommunications Tech. sr. notes
13 1/2s, 2002 32,250
10,000 Netia Holdings B.V. 144A company guaranty
stepped-coupon zero % (11 1/4s, 11/1/01),
2007 (Poland) (STP) 4,700
20,000 Netia Holdings B.V. 144A company guaranty
10 1/4s, 2007 (Poland) 15,400
180,000 NEXTEL Communications, Inc. 144A sr. notes
12s, 2008 189,000
170,000 NEXTEL Communications, Inc. sr. disc. notes stepped-
coupon zero % (10.65s, 9/15/02), 2007 (STP) 99,450
130,000 NEXTEL Communications, Inc. sr. disc. notes stepped-
coupon zero % (9.95s, 2/15/03), 2008 (STP) 69,550
285,000 NEXTEL Communications, Inc. sr. disc. notes stepped-
coupon zero % (9 3/4s, 2/15/99), 2004 (STP) 265,763
110,000 NorthEast Optic Network, Inc. sr. notes 12 3/4s, 2008 96,250
30,000 NTL Inc. 144A sr. notes stepped-coupon zero %,
(12 3/8s, 10/1/03), 2008 (STP) 28,800
90,000 NTL Inc. 144A sr. notes 11 1/2s, 2008 92,700
75,000 NTL Inc. sr. notes Ser. B, 10s, 2007 (United Kingdom) 72,000
30,000 NTL Inc. 144A sr. notes stepped-coupon zero %
(9 3/4s, 4/01/03), 2008 (STP) 16,575
60,000 Pathnet, Inc. sr. notes 12 1/4s, 2008 42,600
60,000 Price Communications Wireless, Inc. 144A sr. notes
9 1/8s, 2006 59,400
200,000 Primus Telecommunications Group sr. notes
11 3/4s, 2004 184,000
30,000 Primus Telecommunications Group, Inc. sr. notes
Ser. B, 9 7/8s, 2008 24,900
195,000 Qwest Communications International, Inc. sr. disc. notes
stepped-coupon zero % (9.47s, 10/15/02), 2007 (STP) 144,300
200,000 Qwest Communications International, Inc. sr. disc. notes
stepped-coupon zero % (8.29s, 2/1/03), 2008 (STP) 146,500
100,000 RCN Corp. sr. disc. notes stepped-coupon zero %,
(11 1/8s, 10/15/02), 2007 (STP) 52,000
70,000 RCN Corp. sr. disc. notes, stepped-coupon Ser. B, zero %
(9.8s, 2/15/03), 2008 (STP) 33,600
40,000 RSL Communications, Ltd. company guaranty, stepped-
coupon zero % (10 1/8s, 3/1/03), 2008 (STP) 20,000
30,000 RSL Communications, Ltd. company guaranty
9 1/8s, 2008 25,500
260,000 TCI Communications sr. notes 7 1/8s, 2028 273,374
30,000 Telecom Tech, Inc. 144A sr. sub. notes 9 3/4s, 2008 25,500
20,000 Telesystem International Wireless Inc. sr. disc. notes
stepped-coupon Ser. C, 10 1/2s,
(10 1/2s, 11/1/02), 2007 (STP) 5,400
30,000 Telewest 144A sr. notes 11 1/4s, 2008 31,500
370,000 Time Warner Telecom Inc. sr. notes 9 3/4s, 2008 370,000
15,000 Transtel S.A. 144A pass through certificates
12 1/2s, 2007 (Colombia) 5,250
85,000 United International Holdings sr. disc. notes stepped-
coupon Ser. B, zero % (10 3/4s, 2/15/03), 2008 (STP) 38,250
60,000 US Xchange LLC 144A sr. notes 15s, 2008 59,700
40,000 Versatel Teleco 144A sr. notes 13 1/4s, 2008 37,000
125,000 WinStar Equipment Corp. company guaranty
12 1/2s, 2004 115,625
--------------
11,432,136
Textiles (--%)
- --------------------------------------------------------------------------------------------------------------------------
60,000 Day International Group, Inc. company guaranty
9 1/2s, 2008 55,200
150,000 Galey & Lord Inc. company guaranty 9 1/8s, 2008 132,750
10,000 Glenoit Corp. company guaranty 11s, 2007 9,400
15,000 Polymer Group, Inc. company guaranty Ser. B, 9s, 2007 14,100
40,000 Polymer Group, Inc. company guaranty
Ser. B, 8 3/4s, 2008 37,200
--------------
248,650
Transportation (1.5%)
- --------------------------------------------------------------------------------------------------------------------------
1,340,000 Burlington Northern Santa Fe bonds 6 7/8s, 2027 1,308,014
1,270,000 Burlington Northern Santa Fe notes 6 3/8s, 2005 1,315,618
30,000 Calair LLC company guaranty 8 1/8s, 2008 27,038
60,000 Canadian Airlines Corp. sr. sec. notes
10s, 2005 (Canada) 46,800
70,000 Cathay International Ltd. 144A sr. notes
13s, 2008 (China) 21,000
100,000 Continental Airlines, Inc. sr. notes 9 1/2s, 2001 104,500
1,815,000 Continental Airlines, Inc. pass-through certificates
Ser. 981C, 6.541s, 2008 1,773,201
1,130,000 CSX Corp. deb. 7.95s, 2027 1,243,927
35,000 Eletson Holdings, Inc. 1st pfd. mtge. notes
9 1/4s, 2003 (Greece) 34,738
30,000 Hermes Europe Railtel 144A sr. notes
11 1/2s, 2007 (Netherlands) 31,500
45,000 International Shipholding Corp. sr. notes 9s, 2003 46,125
260,000 International Shipholding Corp. sr. notes 7 3/4s, 2007 241,800
30,000 Johnstown America Industries, Inc. company guaranty
Ser. C, 11 3/4s, 2005 31,088
50,000 Kitty Hawk, Inc. company guaranty 9.95s, 2004 47,500
20,000 MC Shipping, Inc. sr. notes Ser. B, 11 1/4s, 2008 13,000
30,000 MCII Holdings sec. notes stepped-coupon zero %
(12s, 11/15/98), 2002 (STP) 18,000
1,755,000 Norfolk Southern Corp. bonds 7.05s, 2037 1,885,572
25,000 TFM S.A. de C.V. company guaranty stepped-coupon
zero %, (11 3/4s, 6/15/02), 2009 (Mexico) (STP) 13,250
3,300,000 Wisconsin Central Transportation Corp. notes
6 5/8s, 2008 3,247,629
--------------
11,450,300
Utilities (1.9%)
- --------------------------------------------------------------------------------------------------------------------------
25,000 AES China Generating Co. sr. notes
10 1/8s, 2006 (China) 13,000
1,005,000 Arizona Public Service Co. sr. notes 6 3/4s, 2006 1,052,496
1,260,000 AT&T Capital Corp. med. term notes 6.6s, 2005 1,238,189
30,000 Chesapeake Energy Corp. sr. notes 9 1/8s, 2006 24,600
150,000 Cleveland Electric Illuminating Co. 144A bonds
6.86s, 2008 147,750
395,000 Connecticut Light & Power Co. 1st mtge. Ser. A,
7 7/8s, 2001 410,046
305,000 Edison Mission Energy 144A company guaranty
7.33s, 2008 326,487
1,324,000 EIP Funding-Public Service Co. of New Mexico
deb. 10 1/4s, 2012 1,602,901
25,000 El Paso Electric Co. 1st mtge. Ser. D, 8.9s, 2006 27,887
1,910,000 El Paso Electric Co. 1st mtge. Ser. B, 7 3/4s, 2001 2,004,908
790,000 Illinova Corp. sr. notes 7 1/8s, 2004 826,530
1,005,000 Israel Electric Corp., Ltd. 144A sr. notes
7 1/4s, 2006 (Israel) 1,001,533
250,000 Long Island Lighting Co. deb. 9s, 2022 297,248
35,000 Midland Funding Corp. deb. Ser. A, 11 3/4s, 2005 43,005
502,737 Midland Funding Corp. I deb. Ser. C-94, 10.33s, 2002 531,051
80,000 Niagara Mohawk Power Corp. med. term notes
9.95s, 2000 84,833
150,000 Niagara Mohawk Power Corp. sr. notes
Ser. G, 7 3/4s, 2008 157,262
50,000 Niagara Mohawk Power Corp. sr. notes
Ser. F, 7 5/8s, 2005 51,317
51,613 Northeast Utilities System notes Ser. A, 8.58s, 2006 55,942
685,333 Northeast Utilities System notes Ser. B, 8.38s, 2005 715,741
1,685,000 Texas New-Mexico Power Utilities 1st mtge.
9 1/4s, 2000 1,798,973
1,300,000 Texas Utilities Co. secd. lease fac. bonds 7.46s, 2015 1,392,443
1,360,000 Texas Utilities Electric Capital Trust V company guaranty
8.175s, 2037 1,467,086
--------------
15,271,228
--------------
Total Corporate Bonds and Notes
(cost $150,804,561) $ 146,477,577
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (17.4%) (a)
PRINCIPAL AMOUNT VALUE
U.S. Government Agency Mortgage Obligations (6.6%)
- --------------------------------------------------------------------------------------------------------------------------
Federal Home Loan Mortgage Corp.
$ 1,718,012 7s, with due dates from July 1, 2025 to
October 1, 2028 $ 1,751,822
4,230,000 6 1/2s, TBA, November 15, 2028 4,263,036
5,855,584 5 1/2s, with due dates from March 1, 2011 to
April 1, 2011 5,789,708
Federal National Mortgage Association
2,695,000 5.94s, December 12, 2005 2,839,425
Federal National Mortgage Association
Pass- Through Certificates
2,371,051 7s, Dwarf, November 1, 2008 2,419,942
88,194 6 1/2s, with due dates from July 1, 2028 to
August 1, 2028 88,883
1,138,677 6 1/2s, Dwarf, with due dates from
September 1, 2010 to April 1, 2013 1,155,393
6,969,606 6s, Dwarf, with due dates from July 1, 2013 to
September 1, 2013 6,997,903
Government National Mortgage Association
Pass- Through Certificates
7,905,114 8s, with due dates from June 15, 2025 to
February 15, 2028 8,196,574
1,051,574 7 3/8s, with due dates from June 20, 2022 to
May 20, 2024 1,065,175
$16,322,432 7s, with due dates from July 20, 2023 to
May 15, 2028 16,672,139
2,156,927 6 1/2s, with due dates from March 15, 2026 to
June 15, 2028 2,180,502
--------------
53,420,502
U.S. Treasury Obligations (10.8%)
- --------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Bonds
3,895,000 6 1/8s, November 15, 2027 4,383,082
17,151,000 5 1/2s, August 15, 2028 18,048,683
9,525,000 5 1/4s, August 15, 2003 9,938,766
U.S. Treasury Notes
4,640,000 6 1/8s, August 15, 2007 5,122,838
3,370,000 5 7/8s, September 30, 2002 3,544,802
4,011,000 5 5/8s, May 15, 2008 4,323,738
20,820,000 5 1/2s, May 31, 2003 21,802,496
9,309,000 5 1/2s, March 31, 2003 9,736,655
2,210,000 5 1/2s, February 28, 2003 2,306,688
4,015,000 5 1/2s, January 31, 2003 4,188,769
3,400,000 5 1/2s, May 31, 2000 3,458,956
--------------
86,855,473
--------------
Total U.S. Government and Agency Obligations
(cost $136,397,083) $ 140,275,975
COLLATERALIZED MORTGAGE OBLIGATIONS (3.8%) (a)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$ 524,497 Amresco Commercial Mortgage Funding I Ser. 97-C1,
Class A1, 6.73s, 2029 $ 536,933
Chase Mortgage Finance Corp.
665,173 Ser. 93-3, Class B13, 7.461s, 2024 585,976
690,000 Ser. 98-S2, Class A14, 6 3/4s, 2028 695,175
Commercial Mortgage Acceptance Corp.
845,000 Ser. 97-ML1, Class D, 7.11s, 2030 845,000
1,655,000 Ser. 97-ML1, Class A3, 6.57s, 2007 1,701,030
605,000 Ser. 97-ML1, Class A2, 6.53s, 2007 624,095
2,550,000 Ser. 98-C2, Class A2, 6.03s, 2008 2,531,273
Fannie Mae Strip
1,790,860 Ser. 290 Class 2 Interest Only (IO), 6.5s, 2024 346,979
1,305,162 Ser. 294 Class 1, zero %, 2028 1,107,756
First Union-Lehman Brothers Commercial Mortgage Co.
885,000 Ser. 97-C2, Class D, 7.12s, 2012 853,092
2,090,000 Ser. 98-C2, Class D, 6.778s, 2013 1,950,721
620,000 Ser. 97-C2, Class A3, 6.65s, 2008 640,707
28,955,000 Ser. 98-C2, Class IO, 0.816s, 2028 1,214,753
Freddie Mac Strip
1,890,555 Ser. 194 IO, 6.5s, 2028 412,377
1,206,097 Ser. 199 IO, 6.5s, 2028 263,080
GMAC Commercial Mortgage Securities Inc.
1,190,000 Ser. 98-C1, Class E, 7.153s, 2011 1,178,287
1,288,635 Ser. 98-C2, Class A2, 6.42s, 2008 1,308,820
GS Mortgage Securities Corp. II
540,000 Ser. 98-GLII, Class D, 7.191s, 2031 506,250
985,000 Ser. 98-GLII, Class A2, 6.562s, 2031 1,002,545
Housing Securities Inc.
343,593 Ser. 91-B, Class B6, 9s, 2006 343,164
454,622 Ser. 93-F, Class F9M2, 7s, 2023 426,919
167,953 Ser. 93-J, Class J4, 6.66s, 2009 167,428
76,971 Ser. 93-J, Class J5, 6.66s, 2009 68,625
138,337 Ser. 94-1, Class AB1, 6 1/2s, 2009 136,996
388,000 Merrill Lynch Mortgage Investors, Inc. Ser. 98-C2,
Class D, 7.116s, 2030 384,726
Morgan Stanley Capital I
545,000 Ser. 96-WF1, Class A2, 7.218s, 2006 578,041
305,000 Ser. 98-XL1, Class E, 6.989s, 2030 307,573
Prudential Home Mortgage Securities
630,618 Ser. 92-25, Class B3, 8s, 2022 (In default) (NON) 589,825
551,532 Ser. 94-A, Class 4B, 7 1/2s, 2007 514,045
2,129,294 Ser. 94-A, Class 4B, 6.803s, 2024 2,012,183
Prudential Home Mortgage Securities 144A
177,271 Ser. 94-31, Class B3, 8s, 2009 170,347
968,162 Ser. 95-C, Class B1, 7.681s, 2001 969,070
992,293 Ser. 93-E, Class 5B, 7.394s, 2023 844,069
1,892,589 Ser. 93-D, Class 2B, 7.108s, 2023 1,940,494
489,792 Ser. 94-D, Class 3B, 6.312s, 2009 489,180
682,496 Ser. 94-D, Class B4, 6.312s, 2009 666,393
1,659,004 Securitized Asset Sales, Inc. Ser. 93-J,
Class 2B, 6.808s, 2023 1,591,607
--------------
Total Collateralized Mortgage Obligations
(cost $30,103,880) $ 30,505,534
CONVERTIBLE BONDS AND NOTES (2.7%) (a)
PRINCIPAL AMOUNT VALUE
Advertising (--%)
- --------------------------------------------------------------------------------------------------------------------------
$ 150,000 Omnicom Group Inc. cv. sub. deb. 2 1/4s, 2013 $ 180,000
Aerospace and Defense (--%)
- --------------------------------------------------------------------------------------------------------------------------
184,000 SPACEHAB, Inc. 144A cv. sub. notes 8s, 2007 148,120
Automotive (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
55,000 Exide Corp. 144A cv. sr. sub. notes 2.9s, 2005 24,956
200,000 Magna International cv. sub. deb. 5s, 2002 229,500
325,000 Tower Automotive, Inc. cv. sub. notes
5s, 2004 331,500
--------------
585,956
Biotechnology (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
176,000 Centocor, Inc. cv. sub. deb. 4 3/4s, 2005 186,340
313,000 Centocor, Inc. 144A cv. sub. notes 4 3/4s, 2005 331,389
--------------
517,729
Broadcasting (--%)
- --------------------------------------------------------------------------------------------------------------------------
110,000 Jacor Communications, Inc. cv. sr. notes zero %, 2011 82,088
180,000 Scandinavian Broadcasting System S.A. 144A
cv. sub. notes 7s, 2004 (Luxembourg) 174,600
--------------
256,688
Business Equipment and Services (--%)
- --------------------------------------------------------------------------------------------------------------------------
151,000 National Data Corp. cv. sub. notes 5s, 2003 140,996
110,000 Personnel Group of America, Inc. cv. sub. notes
5 3/4s, 2004 110,000
--------------
250,996
Computer Services and Software (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
13,000 EMC Corp. cv. sub. notes 3 1/4s, 2002 37,489
330,000 Intevac, Inc. 144A cv. sub. notes 6 1/2s, 2004 241,725
460,000 Network Associates, Inc. 144A cv. sub. deb.
zero %, 2018 192,050
460,000 System Software Associates, Inc. cv. sub. notes
7s, 2002 293,250
107,000 Vantive Corp. (The) cv. sub. notes 4 3/4s, 2002 72,760
2,590,000 Western Digital Corp. 144A cv. sub. deb.
zero %, 2018 553,613
130,000 Xilinx, Inc. cv. sub. notes 5 1/4s, 2002 131,300
--------------
1,522,187
Computers (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
415,000 Safeguard Scientifics, Inc. 144A cv. sub. notes 6s, 2006 399,956
350,000 Softkey International, Inc. 144A cv. sr. notes
5 1/2s, 2000 333,813
150,000 Synoptics Communications Inc. 144A cv. sub. deb.
5 1/4s, 2003 152,250
--------------
886,019
Conglomerates (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
100,000 Dart & Kraft Finance N.V. cv. company guaranty
Ser. WW, 7 3/4s, 1998 320,500
156,000 Hexcel Corp. cv. sub. notes 7s, 2003 143,325
150,000 Thermo Electron Corp. 144A cv. subordinated
4 1/4s, 2003 134,438
--------------
598,263
Consumer Durable Goods (--%)
- --------------------------------------------------------------------------------------------------------------------------
1,120,000 Sunbeam Corp. 144A cv. sr. sub. notes zero %, 2018 126,000
Consumer Non Durables (--%)
- --------------------------------------------------------------------------------------------------------------------------
230,000 Standard Commercial Corp. cv. sub. deb.
7 1/4s, 2007 (NON) 164,738
Consumer Services (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
500,000 Boston Chicken, Inc. cv. notes LYON
(Liquid Yield Option Notes) zero %, 2015
(In default) 7,500
320,000 Boston Chicken, Inc. cv. sub. deb.
7 3/4s, 2004 (In default) 16,000
132,000 CKE Restaurants, Inc. cv. sub. notes 4 1/4s, 2004 108,900
280,000 CKE Restaurants, Inc. 144A cv. sub. notes 4 1/4s, 2004 242,200
350,000 Fine Host Corp. 144A cv. sub. notes 5s, 2004 245,000
150,000 Loews Corp. cv. sub. notes 3 1/8s, 2007 124,500
550,000 Pharmaceutical Marketing Services Inc. 144A cv.
deb. 6 1/4s, 2003 486,750
--------------
1,230,850
Electronics and Electrical Equipment (0.6%)
- --------------------------------------------------------------------------------------------------------------------------
359,000 Advanced Micro Devices, Inc. cv. sub. notes 6s, 2005 297,073
251,000 Credence Systems Corp. cv. sub. notes 5 1/4s, 2002 183,230
487,000 Dovatron International cv. sub. notes 6s, 2002 457,780
530,000 Integrated Device Technology, Inc. cv. sub. notes
5 1/2s, 2002 334,563
150,000 Integrated Process Equipment Corp. 144A cv.
sub. notes 6 1/4s, 2004 90,750
579,000 Kent Electronics Corp. cv. sub. notes 4 1/2s, 2004 461,753
350,000 Lam Research Corp. sub. notes 5s, 2002 273,875
100,000 Lernout & Hauspie Speech Products N.V. 144A cv.
sub. notes 8s, 2001 (Belgium) 376,000
477,000 Micron Technology, Inc. cv. sub. notes 7s, 2004 463,286
429,000 Motorola, Inc. cv. sub. deb. LYON zero %, 2013 309,953
490,000 Park Electrochemical Corp. cv. sub. notes 5 1/2s, 2006 396,900
15,000 Photronics, Inc. cv. sub. notes 6s, 2004 15,338
303,000 SCI Systems, Inc. cv. sub. notes 5s, 2006 499,571
125,000 Solectron Corp. 144A cv. sub. notes 6s, 2006 215,625
340,000 Thermo Instrument Systems, Inc. 144A cv. deb.
4 1/2s, 2003 293,675
250,000 Thermo Instrument Systems, Inc. cv. company guaranty
Ser. RG, 4s, 2005 202,813
282,000 Thermo Optek Corp. 144A cv. bonds 5s, 2000 267,548
--------------
5,139,733
Health Care (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
692,000 Alza Corp. cv. sub. LYON zero %, 2014 434,230
1,685,000 HEALTHSOUTH Corp. cv. sub. deb. 3 1/4s, 2003 1,377,488
160,000 HEALTHSOUTH Corp. 144A cv. sub. notes
3 1/4s, 2003 130,800
200,000 Integrated Health Services, Inc. cv. sr. sub. deb
5 3/4s, 2001 172,250
175,000 PhyMatrix, Inc. cv. sub. deb. 6 3/4s, 2003 72,844
300,000 Renal Treatment Centers, Inc. cv. sub. notes
5 5/8s, 2006 332,625
130,000 Renal Treatment Centers, Inc. 144A cv. sub. notes
5 5/8s, 2006 144,138
110,000 Tenet Health Care Corp. cv. sub. notes 6s, 2005 95,700
200,000 U.S. Diagnostic Laboratories, Inc. 144A cv. sub. deb.
9s, 2003 127,750
--------------
2,887,825
Information Systems (--%)
- --------------------------------------------------------------------------------------------------------------------------
163,000 Quantum Corp. cv. sub. 7s, 2004 145,885
Infrastructure (--%)
- --------------------------------------------------------------------------------------------------------------------------
255,000 Thermo Terratech, Inc. 144A cv. sub. deb. 4 5/8s, 2003 231,094
Insurance and Finance (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
387,000 Berkshire Hathaway, Inc. cv. sr. notes 1s, 2001 491,490
20,000 Dine S.A. de C.V. 144A company guaranty
8 3/4s, 2007 (Mexico) 15,400
1,125,000 Mutual Risk Management 144A cv. sub. deb.
zero %, 2015 815,625
--------------
1,322,515
Metals and Mining (--%)
- --------------------------------------------------------------------------------------------------------------------------
200,000 Inco Ltd. deb. 5 3/4s, 2004 (Canada) 176,000
200,000 Quanex Corp. cv. sub. deb. 6.88s, 2007 177,000
--------------
353,000
Oil and Gas (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
270,000 Lomak Petroleum, Inc. 144A cv. sub. deb. 6s, 2007 173,138
350,000 Offshore Logistics, Inc. cv. sub. notes 6s, 2003 318,500
150,000 Parker Drilling Co. cv. sub. notes 5 1/2s, 2004 109,875
306,000 Pennzoil Co. cv. deb. 4.95s, 2008 296,438
200,000 Pride International, Inc. cv. sub. deb. 6 1/4s, 2006 206,750
350,000 Swift Energy Co. cv. sub. notes 6 1/4s, 2006 280,000
--------------
1,384,701
Paper and Forest Products (--%)
- --------------------------------------------------------------------------------------------------------------------------
150,000 APP Global Finance Ltd. 144A cv. company guaranty
3 1/2s, 2003 (United Kingdom) 83,813
Pharmaceuticals (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
300,000 Roche Holdings, Inc. 144A cv. unsub. LYON
zero %, 2010 (Switzerland) 187,313
5,000 Sandoz Capital BVI Ltd. 144A cv. company guaranty
2s, 2002 (Switzerland) 8,545
300,000 Sepracor, Inc. 144A cv. sub. deb. 6 1/4s, 2005 460,500
--------------
656,358
Publishing (--%)
- --------------------------------------------------------------------------------------------------------------------------
200,000 World Color Press, Inc. cv. sub. notes 6s, 2007 200,000
Real Estate (--%)
- --------------------------------------------------------------------------------------------------------------------------
150,000 Malan Realty Investors cv. sub. notes 9 1/2s, 2004 (R) 144,563
Retail (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
280,000 Home Depot, Inc. cv. sub. notes 3 1/4s, 2001 525,350
180,000 Michaels Stores, Inc. cv. sub. notes 6 3/4s, 2003 152,550
527,000 Office Depot, Inc. cv. LYON zero %, 2007 399,203
88,000 Pier 1 Imports, Inc. cv. sub. notes 5 3/4s, 2003 109,340
55,000 Rite Aid Corp. cv. sub. notes 5 1/4s, 2002 69,438
--------------
1,255,881
Satellite Services (--%)
- --------------------------------------------------------------------------------------------------------------------------
200,000 Gilat Satellite Networks Ltd. cv. sub. notes
6 1/2s, 2004 (Israel) 245,250
Telecommunications (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
478,000 Inacom Corp. cv. sub. deb. 4 1/2s, 2004 409,885
250,000 MIDCOM Communications, Inc. 144A cv. sub. deb.
8 1/4s, 2003 (In default) (NON) 55,000
--------------
464,885
Transportation (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
GBP 200,000 British Airport Authority 144A cv. bonds 5 3/4s, 2006
(United Kingdom) 423,522
250,000 Continental Airlines, Inc. cv. sub. deb. 6 3/4s, 2006 341,875
5,000 TFM S.A. de C.V. company guaranty
10 1/4s, 2007 (Mexico) 4,650
--------------
770,047
--------------
Total Convertible Bonds and Notes
(cost $24,033,029) $ 21,753,096
CONVERTIBLE PREFERRED STOCKS (2.1%) (a)
NUMBER OF SHARES VALUE
Aerospace and Defense (--%)
- --------------------------------------------------------------------------------------------------------------------------
3,983 Coltec Capital Trust $2.625 cv. pfd. $ 141,397
Automotive (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
4,800 Frederal-Mogul Corp. 144A $3.50 cv. cum. pfd. 290,400
5,182 Tower Automotive Capital Trust 144A $3.375 cv. pfd. 228,656
--------------
519,056
Basic Industrial Products (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
3,965 Case Corp. $4.50 cv. cum. pfd. 233,439
6,642 Owens-Illinois, Inc. $2.375 cv.pfd. 266,510
--------------
499,949
Broadcasting (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
600 Chancellor Media Corp. $3.00 cv. cum. pfd. 45,450
2,000 Chancellor Media Corp. $3.50 cv. pfd. 207,750
4,100 Sinclair Broadcast Group, Inc. $3.00 cv. pfd. 162,975
--------------
416,175
Communications (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
3,650 Evergreen Media Corp. 144A $3.00 cv. pfd. 276,488
6,725 Mediaone Group, Inc. Ser. D, $2.25 cv. pfd. 583,814
--------------
860,302
Computer Services and Software (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
7,505 Unisys Corp. Ser. A, $3.75 cv. pfd. 380,410
7,800 Vanstar Financial Trust Corp. 144A $3.375 cv. cum. pfd. 205,725
10,301 Wang Laboratories, Inc. Ser. B, $3.25 cv. pfd. 468,696
--------------
1,054,831
Conglomerates (--%)
- --------------------------------------------------------------------------------------------------------------------------
16,000 Cooper Industries, Inc. $0.81 cv. pfd. 210,000
Consumer Non Durables (--%)
- --------------------------------------------------------------------------------------------------------------------------
4,900 DIMON, Inc. $8.50 cv. pfd. 66,150
Consumer Services (--%)
- --------------------------------------------------------------------------------------------------------------------------
5,500 Metromedia International Group, Inc. $3.625
cv. cum. pfd. 162,250
Electronics and Electrical Equipment (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
7,500 Lernout & Hauspie Speech Products N.V. 144A
$2.375 cv. pfd 261,563
6,300 Pioneer Standard Electronics, Inc. 144A
$3.375 cv. pfd. 242,550
8,670 Sensormatic Electronics Corp. 144A $1.625 cv. pfd. 94,286
--------------
598,399
Food and Beverages (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
5,500 Dole Food Co., Inc. cv. pfd. (7.00%) 167,750
1,792 Ralston Purina Co. $4.336 cv. pfd. 88,816
6,989 Wendy's Financing Ser. A, $2.50 cv. pfd. 342,461
--------------
599,027
Health Care (--%)
- --------------------------------------------------------------------------------------------------------------------------
15,823 MedPartners, Inc. $6.50 cv. pfd. 110,761
Insurance and Finance (0.6%)
- --------------------------------------------------------------------------------------------------------------------------
4,316 American Bankers Insurance Group, Inc. Ser. B,
$3.125 cv. pfd. 396,533
7,742 American General Delaware Corp. $3.00 cv. cum. pfd. 669,683
6,250 American Heritage Life Investment Corp.
$4.25 cv. pfd. 371,875
6,300 CalEnergy Capital Trust $3.125 cv. cum. pfd. 319,725
4,000 CNF Trust I Ser. A, $2.50 cv. cum. pfd. 202,000
4,500 Devon Financing Trust $3.25 cv. pfd. 266,063
7,123 Finova Finance Trust $2.75 cv. cum. pfd. 470,118
5,000 Firstplus Financial Mandatory Common
Exchange Trust (The) $3.625 cv. pfd. 40,625
4,957 Fleetwood Capital Trust $3.00 cv. cum. pfd. 218,108
14,400 Lincoln National Corp. $0.463 cv. cum. pfd. 255,600
4,700 Matewan Bancshares, Inc. Ser. A, $3.75 cv. cum. pfd. 133,950
4,700 Newell Financial Trust 144A $2.625 cv. cum. pfd. 252,038
3,570 Penncorp Financial Group, Inc. 144A $3.50
cv. cum. pfd. 28,560
28,475 Philadelphia Consolidated Holding Corp.
$0.534 cv. pfd. 252,716
6,300 Protective Life Corp. $3.25 cv. cum. pfd. 392,175
3,450 St. Paul Capital LLC $3.00 cv. cum. pfd. 213,469
4,400 Suiza Capital Trust 144A cv. pfd. 144,100
5,000 Timet Capital Trust I 144A $3.312 cv. pfd. 122,500
5,035 Union Planters Corp. Ser. E, $2.00 cv. cum. pfd. 276,925
--------------
5,026,763
Medical Supplies and Devices (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
2,508 Mckesson Corp. $2.50 cv. pfd. 266,475
8,292 Owens & Minor, Inc. 144A $5.375 cv. pfd. 381,432
--------------
647,907
Metals and Mining (--%)
- --------------------------------------------------------------------------------------------------------------------------
15,900 Freeport-McMoRan Copper Co., Inc. $1.75 cv. pfd. 236,513
1,575 Titanium Metals Corp. $3.313 cv. pfd. 38,588
--------------
275,101
Oil and Gas (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
235 Chesapeake Energy Corp. 144A $3.50 cv. cum. pfd. 4,700
5,986 Neuvo Energy Ser. A, $2.875 cv. pfd. 212,503
7,750 Tosco Financing Trust 144A $2.875 cv. pfd. 381,688
10,620 Unocal Capital Trust $3.125 cv. cum. pfd. 544,275
--------------
1,143,166
Packaging and Containers (--%)
- --------------------------------------------------------------------------------------------------------------------------
2,989 Sealed Air Corp. Ser. A, $2.00 cv.pfd. 119,186
Paper and Forest Products (--%)
- --------------------------------------------------------------------------------------------------------------------------
8,530 International Paper Co. $2.625 cv. pfd. 403,043
Real Estate (--%)
- --------------------------------------------------------------------------------------------------------------------------
15,900 Equity Residential Property Ser. E, $1.75 cv. pfd. (R) 373,650
Retail (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
2,521 Ann Taylor Finance Trust $4.25 cv. cum. pfd. 196,953
3,468 Dollar General Strypes Trust $3.352 cv. pfd. 115,528
23,300 K mart Financing I $3.875 cum. cv. pfd. 1,291,694
--------------
1,604,175
Telecommunications (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
4,150 AirTouch Communications, Inc. Ser. C, $2.125
cv. cum. pfd. 332,259
800,000 Rogers Communications cv. deb. 2s, 2005 504,000
5,000 Tele-Communications (TCI Group) Ser. A,
$2.125 cv. pfd. 437,500
--------------
1,273,759
Transportation (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
1,700 Hvide Capital Trust 144A $3.25 cv. pfd. 40,800
7,814 Union Pacific Capital Trust 144A $3.125 cum. cv. pfd. 357,491
3,311 Union Pacific Capital Trust 144A $3.125 cum. cv. pfd. 154,789
--------------
553,080
Utilities (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
9,585 El Paso Energy Capital Trust $2.375 cv. pfd. 464,873
1,794 Houston Industries, Inc. $3.22 cv. pfd 145,426
400 Texas Utilities Co. $0.205 cv. pfd. 18,400
--------------
628,699
--------------
Total Convertible Preferred Stocks
(cost $18,774,343) $ 17,286,826
FOREIGN GOVERNMENT BONDS AND NOTES (1.2%) (a)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
DEM 6,510,000 Germany (Federal Republic of) bonds
Ser. 98, 5 5/8s, 2028 $ 4,192,701
DEM 1,990,000 Germany (Federal Republic of) Unity Fund
bonds 8s, 2002 1,360,427
USD 3,555,000 Ontario (Province of) sr. unsub. 5 1/2s, 2008 3,562,821
USD 775,000 Quebec (Province of) deb. Ser. NN,
7 1/8s, 2024 812,905
--------------
Total Foreign Government Bonds and Notes
(cost $9,298,756) $ 9,928,854
ASSET-BACKED SECURITIES (0.4%) (a)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$ 1,591,108 Green Tree Recreational Equipment & Cons Ser. 97-B,
Class A1, 6.55s, 2028 $ 1,638,654
1,115,950 Green Tree Recreational Equipment & Cons. Ser. 98-A,
Class A1C, 6.18s, 2019 1,140,404
7,525,000 Lehman Manufactured Housing Ser. 98-1, Class 1
Interest Only, 0.82s, 2028 339,213
--------------
Total Asset-Backed Securities (cost $3,098,245) $ 3,118,271
PREFERRED STOCKS (0.1%) (a)
NUMBER OF SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------------
1,245 AmeriKing, Inc. $3.25 pfd. (PIK) $ 29,880
6 Anvil Holdings Ser. B, $3.25 pfd. (PIK) 120
112 Capstar Broadcasting Inc. 144A $12.00 pfd. (PIK) 12,544
315 Chevy Chase Capital Corp. Ser. A, $5.188 pfd. 15,593
51 Concentric Network Corp. Ser. B, 13.50% pfd. (PIK) 37,995
1,086 CSC Holdings, Inc. Ser. M, $11.125 cum. (PIK) 118,917
15 Echostar Communications, Inc. 12.125% pfd. (PIK) 14,250
66 El Paso Electric Co. $11.40 pfd (PIK) 7,046
170 Fresenius Medical Capital Trust II company guaranty
7 7/8%, pfd. (Germany) 158,950
55 Fresenius Medical Care Capital Trust I company guaranty
9.00% pfd. (Germany) 55,000
1,349 Nextlink Communications, Inc. 144A $7.00 pfd. (PIK) 62,729
15 Paxson Communications Corp. 13.25% cum. pfd. (PIK) 138,000
590 SFX Broadcasting, Inc. Ser. E, $12.625 pfd. (PIK) 69,620
--------------
Total Preferred Stocks (cost $732,630) $ 720,644
UNITS (--%) (a)
NUMBER OF UNITS VALUE
- --------------------------------------------------------------------------------------------------------------------------
40 Bestel S.A. de CV units, stepped-coupon zero %
(12 3/4s,5/15/03), 2005 (Mexico) (STP) $ 22,400
60 Birch Telecom, Inc. 144A units 14s, 2008 51,000
120 Diva Systems Corp. 144A units stepped-coupon zero %
(12 5/8s, 3/1/03), 2008 (STP) 38,400
90 Long Distance International, Inc. 144A units
12 1/4s, 2008 72,900
80 Mediq Inc. Units 144A units, 13s, 2009 37,600
20 Onepoint Communications, Inc. units 14 1/2s, 2008 9,000
160 Rhythms Netcon 144A units stepped-coupon zero %
(13 1/2s, 5/15/03), 2008 (STP) 57,600
80 Startec Global Communications Corp. units 12s, 2008 58,800
60 Telehub Communications Corp. units stepped-coupon
zero %, (13 7/8s,7/31/02), 2005 (STP) 30,600
50 Transam Refinance, Inc. 144A units 16s, 2003 17,500
--------------
Total Units (cost $528,473) $ 395,800
WARRANTS (--%) (a) (NON) EXPIRATION
NUMBER OF WARRANTS DATE VALUE
- --------------------------------------------------------------------------------------------------------------------------
100 Allegiance Telecom, Inc. 2/3/08 $ 1,600
225 Cellnet Data Systems, Inc. 10/1/07 9,000
30 Club Regina, Inc. 144A 4/15/06 30
40 Colt Telecommunications Group PLC 12/31/06 12,000
1,275 DTI Holdings Inc. 3/1/08 64
70 Epic Resorts 6/15/05 1
40 Esat Holdings, Inc. (Ireland) 2/1//07 1,400
748 Fitzgeralds Gaming Co. 12/19/98 7
40 Globalstar Telecom 144A 2/15/04 1,200
150 Intermedia Communications, Inc. 6/1/00 8,235
80 KMC Telecom Holdings, Inc. 4/15/08 1,280
85 Knology Holdings, Inc. 144A 10/15/07 128
900 Louisiana Casino Cruises, Inc. 144A 12/1/98 47,700
45 McCaw International Ltd. 4/15/07 180
60 Pathnet, Inc. 144A 4/15/08 600
125 UIH Australia/Pacific, Inc. 144A 5/15/06 625
40 Versatel Telecom 144A 5/15/08 400
--------------
Total Warrants (cost $21,927) $ 84,450
SHORT-TERM INVESTMENTS (7.2%) (a)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$10,000,000 Bank Of Nova Scotia effective yield of 5.08%,
November 18, 1998 (Canada) $ 9,976,011
17,705,000 Delaware Funding Corp. effective yield of 5.15%,
December 31, 1998 17,553,927
30,710,000 Interest in $750,000,000 joint tri-party repurchase
agreement dated October 30, 1998 with
Golman Sachs due November 2, 1998 with
respect to various U.S. Treasury obligations --
maturity value of $30,723,768 for an
effective yield of 5.38% 30,719,179
--------------
Total Short-Term Investments (cost $58,249,117) $ 58,249,117
- --------------------------------------------------------------------------------------------------------------------------
Total Investments (cost $772,347,362) (b) $ 819,969,429
- --------------------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $806,630,697.
(b) The aggregate identified cost on a tax basis is $772,966,082, resulting in gross unrealized appreciation and
depreciation of $85,072,509 and $38,069,162, respectively, or net unrealized appreciation of $47,003,347.
(NON) Non-income-producing security.
(STP) The interest rate and date shown parenthetically represent the new interest rate to be paid and the date the
fund will begin receiving interest at this rate.
(RES) Restricted, excluding 144A securities, as to public resale. The total market value of restricted securities
held at October 31, 1998 was $327,850 or less than 0.1% of net assets.
(PIK) Income may be received in cash or additional securities at the discretion of the issuer.
(CUS) This entity provides 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.
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.
TBA after the name of a security represents to be announced securities. (Note 1)
FLIRB represents Front Loaded Interest Reduction Bond.
The rates shown on Floating Rate Notes (FRN) are the current interest rates shown at October 31, 1998, which
are subject to change based on the terms of the security.
- -------------------------------------------------------------------------------
Forward Currency Contracts to Buy at October 31, 1998
Aggregate Face Delivery Unrealized
Market Value Value Date Appreciation
- -------------------------------------------------------------------------------
Deutschemarks $17,418,971 $16,696,204 12-16-98 $722,767
- -------------------------------------------------------------------------------
Forward Currency Contracts to Sell at October 31, 1998
Aggregate Face Delivery Unrealized
Market Value Value Date Depreciation
- -------------------------------------------------------------------------------
Deutschemarks $24,480,278 $23,438,649 12-16-98 $(1,041,629)
- -------------------------------------------------------------------------------
Futures Contracts Outstanding at October 31, 1998
Aggregate Face Expiration Unrealized
Market Value Value Date Appreciation
- -------------------------------------------------------------------------------
U.S. Treasury Bond
20 yr (Long) $4,769,531 $4,642,181 Dec-98 $127,350
- -------------------------------------------------------------------------------
TBA Sales Commitments at October 31, 1998
(Proceeds receivable $4,214,358)
Principal Settlement Market
Amount Date Value
- -------------------------------------------------------------------------------
FNMA 6s, November 2013 $4,230,000 11/17/98 $4,247,174
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
October 31, 1998
<S> <C>
Assets
- -----------------------------------------------------------------------------------------------
Investments in securities, at value (identified cost $772,347,362) (Note 1) $819,969,429
- -----------------------------------------------------------------------------------------------
Dividends, interest, and other receivables 6,346,678
- -----------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 1,908,713
- -----------------------------------------------------------------------------------------------
Receivable for securities sold 11,435,641
- -----------------------------------------------------------------------------------------------
Receivable for variation margin 16,820
- -----------------------------------------------------------------------------------------------
Receivable for open forward currency contracts 722,767
- -----------------------------------------------------------------------------------------------
Receivable for closed forward currency contracts 15,900
- -----------------------------------------------------------------------------------------------
Total assets 840,415,948
Liabilities
- -----------------------------------------------------------------------------------------------
Payable to subcustodian (Note 2) 2,082,396
- -----------------------------------------------------------------------------------------------
Payable for securities purchased 23,874,056
- -----------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 745,516
- -----------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 1,209,761
- -----------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 122,726
- -----------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 13,948
- -----------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 872
- -----------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 262,859
- -----------------------------------------------------------------------------------------------
Payable for open forward currency contracts 1,041,629
- -----------------------------------------------------------------------------------------------
TBA sales commitments, at value (proceeds receivable $4,214,358) 4,247,174
- -----------------------------------------------------------------------------------------------
Other accrued expenses 184,314
- -----------------------------------------------------------------------------------------------
Total liabilities 33,785,251
- -----------------------------------------------------------------------------------------------
Net assets $806,630,697
Represented by
- -----------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $710,449,939
- -----------------------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 182,380
- -----------------------------------------------------------------------------------------------
Accumulated net realized gain on investments and
foreign currency transactions (Note 1) 48,391,381
- -----------------------------------------------------------------------------------------------
Net unrealized appreciation of investments and
assets and liabilities in foreign currencies 47,606,997
- -----------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $806,630,697
Computation of net asset value and offering price
- -----------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($644,902,384 divided by 58,559,551 shares) $11.01
- -----------------------------------------------------------------------------------------------
Offering price per class A share (100/94.25 of $11.01)* $11.68
- -----------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($149,711,534 divided by 13,709,392 shares)** $10.92
- -----------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($12,016,779 divided by 1,096,779 shares) $10.96
- -----------------------------------------------------------------------------------------------
Offering price per class M share (100/96.50 of $10.96)* $11.36
- -----------------------------------------------------------------------------------------------
* On single retail sales of less than $50,000. On sales of $50,000 or more and on group
sales the offering price is reduced.
** Redemption price per share is equal to net asset value less any applicable contingent
deferred sales charge.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Year ended October 31, 1998
<S> <C>
Investment income:
- -----------------------------------------------------------------------------------------------
Interest (net of foreign tax of $2,197) $25,727,786
- -----------------------------------------------------------------------------------------------
Dividends (net of foreign tax of $10,694) 9,359,963
- -----------------------------------------------------------------------------------------------
Total investment income 35,087,749
Expenses:
- -----------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 4,688,079
- -----------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 1,607,724
- -----------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 20,187
- -----------------------------------------------------------------------------------------------
Administrative services (Note 2) 10,437
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 1,582,941
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 1,186,920
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 77,335
- -----------------------------------------------------------------------------------------------
Reports to shareholders 82,578
- -----------------------------------------------------------------------------------------------
Registration fees 18,725
- -----------------------------------------------------------------------------------------------
Auditing 68,706
- -----------------------------------------------------------------------------------------------
Legal 8,961
- -----------------------------------------------------------------------------------------------
Postage 155,486
- -----------------------------------------------------------------------------------------------
Other 70,283
- -----------------------------------------------------------------------------------------------
Total expenses 9,578,362
- -----------------------------------------------------------------------------------------------
Expense reduction (Note 2) (347,106)
- -----------------------------------------------------------------------------------------------
Net expenses 9,231,256
- -----------------------------------------------------------------------------------------------
Net investment income 25,856,493
- -----------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 50,683,637
- -----------------------------------------------------------------------------------------------
Net realized loss on foreign currency transactions (Note 1) (2,352,355)
- -----------------------------------------------------------------------------------------------
Net realized gain on futures contracts (Note 1) 705,094
- -----------------------------------------------------------------------------------------------
Net realized gain on written options (Notes 1 and 3) 23,810
- -----------------------------------------------------------------------------------------------
Net unrealized appreciation of assets and liabilities in
foreign currencies during the year 40,641
- -----------------------------------------------------------------------------------------------
Net unrealized depreciation of investments, futures, and
TBA sale commitments during the year (23,058,938)
- -----------------------------------------------------------------------------------------------
Net gain on investments 26,041,889
- -----------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $51,898,382
- -----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Year ended October 31
-------------------------------
1998 1997
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
Increase in net assets
- ---------------------------------------------------------------------------------------------------------------
Operations:
- ---------------------------------------------------------------------------------------------------------------
Net investment income $ 25,856,493 $ 22,489,324
- ---------------------------------------------------------------------------------------------------------------
Net realized gain on investments and
foreign currency transactions 49,060,186 56,330,359
- ---------------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of
investments and assets and liabilities in foreign currencies (23,018,297) 24,816,482
- ---------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 51,898,382 103,636,165
- ---------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ---------------------------------------------------------------------------------------------------------------
From net investment income
Class A (20,208,084) (19,923,868)
- ---------------------------------------------------------------------------------------------------------------
Class B (3,074,445) (1,699,007)
- ---------------------------------------------------------------------------------------------------------------
Class M (283,338) (173,862)
- ---------------------------------------------------------------------------------------------------------------
From net realized gain on investments
Class A (49,312,780) (31,157,500)
- ---------------------------------------------------------------------------------------------------------------
Class B (7,189,378) (2,267,224)
- ---------------------------------------------------------------------------------------------------------------
Class M (717,582) (234,795)
- ---------------------------------------------------------------------------------------------------------------
Increase from capital share transactions (Note 4) 158,747,947 93,039,915
- ---------------------------------------------------------------------------------------------------------------
Total increase in net assets 129,860,722 141,219,824
Net assets
- ---------------------------------------------------------------------------------------------------------------
Beginning of year 676,769,975 535,550,151
- ---------------------------------------------------------------------------------------------------------------
End of year (including undistributed net investment
income of $182,380 and $135,224, respectively) $806,630,697 $676,769,975
- ---------------------------------------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $11.48 $10.67 $9.84 $8.68 $9.28
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .40(c) .42 .44 .45 .43
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .46 1.46 1.01 1.17 (.49)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .86 1.88 1.45 1.62 (.06)
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.36) (.40) (.43) (.46) (.43)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments (.97) (.67) (.19) -- (.11)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (1.33) (1.07) (.62) (.46) (.54)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $11.01 $11.48 $10.67 $9.84 $8.68
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 7.86 18.87 15.31 19.32 (.61)
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $644,902 $585,624 $496,882 $468,725 $455,299
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.13 1.15 1.20 1.15 1.08
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 3.51 3.73 4.28 4.93 4.92
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 124.34 152.66 142.36 131.00 125.69
- ------------------------------------------------------------------------------------------------------------------------------------
+ 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) Per share net investment income has been determined on the basis of the weighted average
number of shares outstanding during the period.
</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
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $11.40 $10.60 $9.80 $8.67 $9.31
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .31(c) .35 .36 .38 .34
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .46 1.45 1.00 1.15 (.60)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .77 1.80 1.36 1.53 (.26)
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.28) (.33) (.37) (.40) (.27)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments (.97) (.67) (.19) -- (.11)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (1.25) (1.00) (.56) (.40) (.38)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $10.92 $11.40 $10.60 $9.80 $8.67
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 7.08 18.11 14.36 18.25 (2.75)*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $149,712 $82,759 $35,118 $10,073 $4,196
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.88 1.90 1.97 1.91 1.34*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.76 2.98 3.51 4.09 3.20*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 124.34 152.66 142.36 131.00 125.69
- ------------------------------------------------------------------------------------------------------------------------------------
+ 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) Per share net investment income has been determined on the basis of the weighted average
number of shares outstanding during the period.
</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
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value,
beginning of period $11.44 $10.63 $9.82 $8.88
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .34(c) .36 .42 .25
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .45 1.47 .98 .90
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .79 1.83 1.40 1.15
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.30) (.35) (.40) (.21)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments (.97) (.67) (.19) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (1.27) (1.02) (.59) (.21)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $10.96 $11.44 $10.63 $9.82
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 7.30 18.41 14.76 13.13*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $12,017 $8,387 $3,551 $522
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.63 1.65 1.72 1.09*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 3.01 3.23 3.74 2.76*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 124.34 152.66 142.36 131.00
- ------------------------------------------------------------------------------------------------------------------------------------
+ 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) Per share net investment income has been determined on the basis of the weighted average
number of shares outstanding during the period.
</TABLE>
Notes to financial statements
October 31, 1998
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
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, and other investments 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. Collateral
for certain tri-party repurchase agreements is held at the counterparty's
custodian in a segregated account for the benefit of the fund and the
counterparty. Putnam Management is responsible for determining that the
value of these underlying securities is at all times at least equal to the
resale price, including accrued interest.
D) Security transactions and related investment income Security
transactions are accounted for on the trade date (date the order to buy or
sell is executed). Interest income is recorded on the accrual basis.
Dividend income is recorded on the ex-dividend date except that certain
dividends from foreign securities are recorded as soon as the fund is
informed of the ex-dividend date. Discounts on zero coupon bonds, original
issue discount bonds, stepped-coupon bonds and payment in kind bonds are
accreted according to the yield-to-maturity basis. Any premium resulting
from the purchase of stepped-coupon securities is amortized on a
yield-to-maturity basis.
E) Foreign currency translation The accounting records of the fund are
maintained in U.S. dollars. The market value of foreign securities,
currency holdings, and other assets and liabilities are recorded in the
books and records of the fund after translation to U.S. dollars based on
the exchange rates on that day. The cost of each security is determined
using historical exchange rates. Income and withholding taxes are
translated at prevailing exchange rates when accrued or incurred. The fund
does not isolate that portion of realized or unrealized gains or losses
resulting from changes in the foreign exchange rate on investments from
fluctuations arising from changes in the market prices of the securities.
Such gains and losses are included with the net realized and unrealized
gain or loss on investments. Net realized gains and losses on foreign
currency transactions represent net realized exchange gains or losses on
closed forward currency contracts, disposition of foreign currencies and
the difference between the amount of investment income and foreign
withholding taxes recorded on the fund's books and the U.S. dollar
equivalent amounts actually received or paid. Net unrealized appreciation
and depreciation of assets and liabilities in foreign currencies arise
from changes in the value of open forward currency contracts and assets
and liabilities other than investments at the period end, resulting from
changes in the exchange rate.
F) Forward currency contracts The fund may engage in forward currency
contracts, which are agreements between two parties to buy and sell
currencies at a set price on a future date, to protect against a decline
in value relative to the U.S. dollar of the currencies in which its
portfolio securities are denominated or quoted (or an increase in the
value of a currency in which securities a fund intends to buy are
denominated, when a fund holds cash reserves and short-term investments).
The U.S. dollar value of forward currency contracts is determined using
current forward currency exchange rates supplied by a quotation service.
The market value of the contract will fluctuate with changes in currency
exchange rates. The contract is "marked to market" daily and the change in
market value is recorded as an unrealized gain or loss. When the contract
is closed, the fund records a realized gain or loss equal to the
difference between the value of the contract at the time it was opened and
the value at the time it was closed. The fund could be exposed to risk if
the value of the currency changes unfavorably, if the counterparties to
the contracts are unable to meet the terms of their contracts or if the
fund is unable to enter into a closing position.
G) Futures and options contracts The fund may use futures and options
contracts to hedge against changes in the values of securities the fund
owns or expects to purchase. The fund may also write options on securities
it owns or in which it may invest to increase its current returns.
The potential risk to the fund is that the change in value of futures and
options contracts may not correspond to the change in value of the hedged
instruments. In addition, losses may arise from changes in the value of
the underlying instruments, if there is an illiquid secondary market for
the contracts, or if the counterparty to the contract is unable to
perform. When the contract is closed, the fund records a realized gain or
loss equal to the difference between the value of the contract at the time
it was opened and the value at the time it was closed. Realized gains and
losses on purchased options are included in realized gains and losses on
investment securities.
Futures contracts are valued at the quoted daily settlement prices
established by the exchange on which they trade. Exchange traded options
are valued at the last sale price, or if no sales are reported, the last
bid price for purchased options and the last ask price for written
options. Options traded over-the-counter are valued using prices supplied
by dealers.
H) TBA purchase commitments The fund may enter into "TBA" (to be
announced) purchase commitments to purchase securities for a fixed unit
price at a future date beyond customary settlement time. Although the unit
price has been established, the principal value has not been finalized.
However, the amount of the commitments will not fluctuate more than 1.0%
from the principal amount. The fund holds, and maintains until settlement
date, cash or high-grade debt obligations in an amount sufficient to meet
the purchase price, or the fund may enter into offsetting contracts for
the forward sale of other securities it owns. Income on the securities
will not be earned until settlement date. TBA purchase commitments may be
considered securities in themselves, and involve a risk of loss if the
value of the security to be purchased declines prior to the settlement
date, which risk is in addition to the risk of decline in the value of the
fund's other assets. Unsettled TBA purchase commitments are valued at the
current market value of the underlying securities, according to the
procedures described under "Security valuation" above.
Although the fund will generally enter into TBA purchase commitments with
the intention of acquiring securities for their portfolio or for delivery
pursuant to options contracts it has entered into, the fund may dispose of
a commitment prior to settlement if Putnam Management deems it appropriate
to do so.
I) TBA sale commitments The fund may enter into TBA sale commitments to
hedge its portfolio positions or to sell mortgage-backed securities it
owns under delayed delivery arrangements. Proceeds of TBA sale commitments
are not received until the contractual settlement date. During the time a
TBA sale commitment is outstanding, equivalent deliverable securities, or
an offsetting TBA purchase commitment deliverable on or before the sale
commitment date, are held as "cover" for the transaction.
Unsettled TBA sale commitments are valued at the current market value of
the underlying securities, generally according to the procedures described
under "Security valuation" above. The contract is "marked-to-market" daily
and the change in market value is recorded by the fund as an unrealized
gain or loss. If the TBA sale commitment is closed through the acquisition
of an offsetting purchase commitment, the fund realizes a gain or loss. If
the fund delivers securities under the commitment, the fund realizes a
gain or a loss from the sale of the securities based upon the unit price
established at the date the commitment was entered into.
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, 1998, 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 losses on wash
sale transactions, foreign currency gains and losses, post-October loss
deferrals, organization costs, nontaxable dividends, dividends payable,
defaulted bond interest, unrealized gains and losses on certain futures
contracts, market discount, interest on payment-in-kind securities,
realized gains and losses on passive foreign investment companies, and
unrealized gains and losses on passive foreign investment companies.
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,
1998, the fund reclassified $2,243,470 to increase distributions in excess
of net investment income and $652 to decrease paid-in-capital, with an
increase to accumulated net realized gains on investments of $2,244,122.
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: 0.65% of the first $500
million of average net assets, 0.55% of the next $500 million, 0.50% of
the next $500 million, 0.45% of the next $5 billion, 0.425% of the next $5
billion, 0.405% of the next $5 billion, 0.39% of the next $5 billion and
0.38% thereafter.
The fund reimburses Putnam Management an allocated amount for the
compensation and related expenses of certain officers of the fund and
their staff who provide administrative services to the fund. The aggregate
amount of all such reimbursements is determined annually by the Trustees.
Custodial functions for the fund's assets are provided by Putnam Fiduciary
Trust Company (PFTC), a subsidiary of Putnam Investments, Inc. Investor
servicing agent functions are provided by Putnam Investor Services, a
division of PFTC.
For the year ended October 31, 1998, fund expenses were reduced by
$347,106 under expense offset arrangements with PFTC and brokerage service
arrangements. Investor servicing and custodian fees reported in the
Statement of operations exclude these credits. The fund could have
invested a portion of the assets utilized in connection with the expense
offset arrangements in an income producing asset if it had not entered
into such arrangements.
Each Trustee of the fund receives an annual Trustee fee, of which $850 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, class M shares,
respectively. The Trustees have approved payment by the fund at 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, 1998 Putnam Mutual Funds Corp., acting as
underwriter received net commissions of $290,751 and $11,924 from the sale
of class A and class M shares, respectively and received $173,589 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, 1998, Putnam Mutual Funds
Corp., acting as underwriter received $2,810 on class A redemptions.
Note 3
Purchases and sales of securities
During the year ended October 31, 1998, purchases and sales of investment
securities other than U.S. government obligations and short-term
investments aggregated $644,321,282 and $618,679,155, respectively.
Purchases and sales of U.S. government obligations aggregated $314,867,375
and $291,662,120, 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
Amounts Received
- -----------------------------------------------------------------------------
Written options
outstanding at
beginning of year -- $ --
- -----------------------------------------------------------------------------
Options opened 75,000 23,810
- -----------------------------------------------------------------------------
Options expired (75,000) (23,810)
- -----------------------------------------------------------------------------
Options closed -- --
- -----------------------------------------------------------------------------
Written options
outstanding at
end of year -- $ --
- -----------------------------------------------------------------------------
Note 4
Capital shares
At October 31, 1998, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
Year ended
October 31, 1998
- -----------------------------------------------------------------------------
Class A Shares Amount
- -----------------------------------------------------------------------------
Shares sold 11,014,274 $122,760,010
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 4,783,073 52,005,749
- -----------------------------------------------------------------------------
15,797,347 174,765,759
Shares
repurchased (8,230,021) (91,550,973)
- -----------------------------------------------------------------------------
Net increase 7,567,326 $ 83,214,786
- -----------------------------------------------------------------------------
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, 1998
- -----------------------------------------------------------------------------
Class B Shares Amount
- -----------------------------------------------------------------------------
Shares sold 9,671,097 $106,622,401
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 806,588 8,717,305
- -----------------------------------------------------------------------------
10,477,685 115,339,706
Shares
repurchased (4,026,790) (43,819,735)
- -----------------------------------------------------------------------------
Net increase 6,450,895 $ 71,519,971
- -----------------------------------------------------------------------------
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, 1998
- -----------------------------------------------------------------------------
Class M Shares Amount
- -----------------------------------------------------------------------------
Shares sold 525,863 $5,826,012
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 87,480 947,225
- -----------------------------------------------------------------------------
613,343 6,773,237
Shares
repurchased (249,916) (2,760,047)
- -----------------------------------------------------------------------------
Net increase 363,427 $4,013,190
- -----------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------
Federal tax information
(Unaudited)
Pursuant to Section 852 of the Internal Revenue Code, as amended, the Fund
hereby designates $46,203,590 as capital gain, for its taxable year ended
October 31, 1998.
The fund has designated 31.80% of the distributions from net investment
income as qualifying for the dividends received deduction for
corporations.
The Form 1099 you receive in January 1999 will show the tax status of all
distributions paid to your account in calendar 1998.
WELCOME TO
www.putnaminv.com
Now you can use your PC to get up-to-date information about your funds,
learn more about investing and retirement planning, and access market
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VISIT PUTNAM'S SITE ON THE WORLD WIDE WEB FOR:
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You can also read Putnam economist Dr. Robert Goodman's commentary
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The site can be accessed through any of the major online services
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New features will be added to the site regularly.
So be sure to bookmark us at
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Fund information
INVESTMENT MANAGER
Putnam Investment
Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
INDEPENDENT
ACCOUNTANTS
PricewaterhouseCoopers LLP
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
John A. Hill, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
Ronald J. Jackson
Paul L. Joskow
Elizabeth T. Kennan
Lawrence J. Lasser
John H. Mullin III
Robert E. Patterson
Donald S. Perkins
George Putnam, III
A.J.C. Smith
W. Thomas Stephens
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
John D. Hughes
Senior Vice President and Treasurer
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Ian C. Ferguson
Vice President
Brett C. Browchuk
Vice President
Stephen Oristaglio
Vice President
Thomas V. Reilly
Vice President
Edward H. D'Alelio
Vice President
Anthony I. Kreisel
Vice President
Edward P. Bousa
Vice President and Fund Manager
Jeffrey J. Kobylarz
Vice President and Fund Manager
Charles G. Pohl
Vice President and Fund Manager
James M. Prusko
Vice President and Fund Manager
David L. Waldman
Vice President and Fund Manager
John R. Verani
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
www.putnaminv.com
- ---------------------
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PUTNAM
INVESTMENTS
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AN018-47868 034/243/908 12/98
