The George
Putnam Fund
of Boston
ANNUAL REPORT
July 31, 1998
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* "Reflecting its ability to achieve solid returns over long time periods,
The George Putnam Fund of Boston class A shares ranked 27 out of 134
balanced funds tracked by Lipper Analytical Services for 5-year returns as
of July 31, 1998, placing the fund in the top 20% of this category.*
* "This venerable offering has shown new life under [co-manager Edward]
Bousa's watch. It is now a more than respectable choice for moderate
investors."
-- Morningstar Mutual Funds, May 27, 1998
CONTENTS
4 Report from Putnam Management
9 Fund performance summary
14 Portfolio holdings
44 Financial statements
* Past performance is not indicative of future results. Lipper rankings
are based on total return performance, vary over time, and do not reflect
the effects of sales charges. For periods ended 7/31/98, the fund's class
A shares placed 197 out of 379 funds for 1-year and 15 out of 51 funds for
10-year performance. Performance of other share classes will vary.
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
The ability of The George Putnam Fund of Boston to invest in both stocks
and bonds proved advantageous during the fiscal year ended July 31, 1998.
By investing selectively in the stocks of large undervalued companies
undertaking positive changes, your fund's managers were able to minimize
the effects of the stock market disruptions triggered by events in Asia
last year. By directing the fund's bond sector largely into Treasuries and
mortgage-backed securities, they were able to capitalize on the bond
market's rise as equity investors sought the safety of bonds.
I am pleased to note two additions to your fund's management team, David
L. Waldman and James M. Prusko. Both are members of Putnam's Core
Fixed-Income group. David joined Putnam in 1997, coming from Lazard Freres
Asset Management and Goldman Sachs Asset Management. He has 10 years of
investment experience. Jim has been at Putnam since 1992 and has 7 years
of investment experience.
On the following pages, your fund's management team discusses its
strategies during fiscal 1998 and prospects for the year ahead in this
still unsettled environment.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
September 16, 1998
Report from the Fund Managers
Edward P. Bousa
James M. Prusko
David L. Waldman
Jeffrey J. Kobylarz
The George Putnam Fund of Boston demonstrated the resilience of its
balanced strategy during the fiscal year that ended July 31, 1998. Over
the past 12 months, the stock market experienced a fair amount of
turbulence as Asia's financial crisis caused episodes of volatility and
began to slow the growth of U.S. corporate earnings. Nonetheless, many of
the large, established companies in your fund's portfolio continued to
post gains, while the fixed-income portion benefited from strong demand
for bonds. The fund's class A shares posted a gain of 9.53% at net asset
value for the year (3.22% at public offering price). For complete
performance information, including the returns of all share classes,
please turn to the performance tables on page 9.
* CHANGING ECONOMIC PERCEPTIONS AFFECT VALUE STOCKS
The performance of equities in the portfolio during the past year varied
significantly. Companies highly sensitive to economic growth rates faced
tougher circumstances because Asia's recession caused a steep decline in
demand for capital goods and commodities such as oil and paper. Stocks of
companies in more consumer-oriented businesses had better fortunes. The
fund owned both types of stocks because, as we have explained in previous
reports, we invest in a variety of industries, seeking large, undervalued
companies undertaking positive changes to improve financial performance.
During the past year, the fund owned several oil, chemical, and basic
materials companies that were attractively priced in comparison with the
overall stock market. The oil company holdings, in particular, have been
undertaking positive changes to improve their earnings. Exxon, one of the
portfolio's largest holdings, has been gaining competitiveness for a
number of years, but the falling price of oil since late 1997 prompted
investors focused on short-term conditions to sell the stock, driving its
price down and dampening the fund's performance. Although this holding, as
well as others discussed in this report, was viewed favorably at the end
of the fiscal period, all are subject to review and adjustment in
accordance with the fund's investment strategy and may vary in the future.
Fortunately we found undervalued stocks in several other sectors less
exposed to Asian economies. We adjusted the portfolio by adding to
positions in utilities and consumer nondurables, such as American Home
Products, a pharmaceutical company, while trimming our stakes in
industrial and capital goods companies. Utility stocks have also offered a
degree of protection from market volatility because most of the utility
business is well insulated from concerns about Asia. Meanwhile, the
portfolio's overweighted position in the financials sector benefited from
falling interest rates and from secular trends in the industry -- corporate
restructurings and investments in information technology. During the
period, many financial companies sought to leverage even more gains from
their new efficiencies by merging. Several fund holdings, such as First
Chicago NBD, have been parties to mergers recently.
[GRAPHIC OMITTED: horizontal bar chart of COMPARATIVE PORTFOLIO
COMPOSITION]
COMPARATIVE PORTFOLIO COMPOSITION*
7/31/98 7/31/97
Common stocks 62.0% 64.6%
U.S. government and
agency securities 13.2% 13.0%
Corporate bonds
and notes 17.8% 12.9%
Foreign government
bonds and notes 1.2% 3.9%
Brady bonds+ 0.6% 1.3%
Collateralized
mortgage obligations 2.8% 0.9%
Convertible and
preferred securities 0.4% 0.2%
Cash and
other 2.4% 0.5%
Footnote reads:
*Based on percentage of net assets. The balances of the portfolio on
dates listed were invested in cash and short-term securities.
Portfolio allocation will vary over time.
+Brady bonds are U.S.-dollar denominated bonds of foreign governments
whose principal is collateralized by U.S. Treasury obligations.
* COMPANIES ENHANCE COMPETITIVENESS WITH NEW STRATEGIES
Our face-to-face consultations with corporate officers and key
decision-makers in the companies we research give us important insights on
industry conditions and improve the timeliness of our buy-and-sell
decisions. Recently we decided to add to existing positions in Burlington
Northern Santa Fe Railroad and AT&T because both have demonstrated
improving competitiveness. The railroad industry has undergone
consolidation in recent years, resulting in two large entities with
nationwide services. Burlington has emerged as the more efficient.
Although they do not compete head-to-head in most routes, Burlington has
picked up a lot of additional customers because of its rival's massive
traffic jams in its Texas freight yards. Burlington also reported a
significant increase in second-quarter earnings. With regard to AT&T, we
are encouraged by its recent acquisitions strategy. It agreed to acquire
Tele-Communications, Inc. during the period, giving AT&T access to TCI's
millions of cable television subscribers and allowing it to distribute its
voice, data, and entertainment products to a far wider audience.
We have also made adjustments to the fund's health-care positions. Several
large pharmaceutical companies, for example, have performed especially
well this year, including Bristol-Myers and Merck, as consumer spending on
drugs and other medical supplies has remained strong and successful new
products have been introduced. We decided to take some profits in those
positions. We also sold the fund's position in United Healthcare at a
favorable price following the stock's resilient performance in much of
1998, when other HMOs came under pressure. The HMO industry's fundamental
outlook has deteriorated lately because the federal government has begun
to propose new regulatory measures that could increase business costs.
[GRAPHIC OMITTED: TOP 10 HOLDINGS]
TOP 10 EQUITY HOLDINGS*
Citicorp
Insurance and finance
Exxon Corp.
Oil and gas
Philip Morris Cos., Inc.
Consumer non durables
NationsBank Corp.
Insurance and finance
Ameritech Corp.
Utilities
American Home Products Corp.
Pharmaceuticals
Bristol-Myers Squibb Co.
Pharmaceuticals
IBM Corp.
Computer services and software
Baxter International, Inc.
Medical supplies and devices
Pharmacia & Upjohn, Inc.
Pharmaceuticals
Footnote reads:
*These holdings represent 10.9% of the fund's net assets as of 7/31/98.
Portfolio holdings will vary over time.
* SMOOTH SAILING FOR BONDS
Bonds have been clear beneficiaries of the uncertainty in Asia and of the
somewhat slower economic growth in the United States as well as of the
recent federal budget surplus. Treasuries have led the way, with the yield
on the 30-year bond falling to historic lows. Other bond sectors,
especially mortgage-backed securities and corporate bonds, have performed
well, though they lagged a bit behind Treasuries. Mortgages, for example,
suffered from prepayments because many homeowners have refinanced their
houses at lower interest rates. As a result, mortgage-backed security
investors miss out on long-term interest payments at higher rates.
We kept the bond portion of the portfolio well diversified at all times,
making only small changes in the allocations to Treasuries, mortgages, and
corporate and foreign government bonds. In the second half of the fund's
fiscal year, we added a small number of corporate bonds, both
investment-grade and high-yield issues, while trimming some of the fund's
Treasury holdings. With Treasury yields quite low and relatively steady,
we saw greater upside potential for corporate bonds, which are flourishing
thanks to continuing economic growth in both the United States and Europe.
Although economic uncertainty cast some doubts on corporates during the
winter, our analysis suggested they were undervalued, and so we opted to
enable the fund to benefit from their yield advantages without, we
believe, adding much credit risk. Because of our concerns about
volatility, we adjusted the high-yield portion of the fund by adding
somewhat higher quality credits. We have added many Ba-rated electric and
broadcasting issues that, in our opinions, represent some of the safest
offerings in the high-yield universe.
* ECONOMY SHOULD REMAIN SOLID, SUPPORT SECURITIES
As the fund enters its 62nd year of operation, the stock market continues
to experience volatility stemming from the effects of overseas financial
conditions on U.S. companies. While your fund's current performance
reflects this uncertain environment, our analysis anticipates continued
profitability and steady growth in the domestic economy, although at a
somewhat slower pace than that of recent years.
We also expect low inflation and relatively stable interest rates,
providing a favorable environment for both bonds and stocks. Also, based
on the lessons of history, we anticipate that the lead of growth stocks
will eventually give way to outperformance of value equities.
Our fundamental research and ongoing conversations with corporate
executives continue to turn up what we consider attractive long-term
investments in undervalued companies undertaking positive change, and we
will continue to take advantage of these opportunities as we seek to
achieve an attractive blend of capital growth and income.
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 7/31/98, 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. The
George Putnam Fund of Boston is designed for investors seeking capital
appreciation and current income.
TOTAL RETURN FOR PERIODS ENDED 7/31/98
Class A Class B Class M
(inception date) (11/5/37) (4/27/92) (12/1/94)
NAV POP NAV CDSC NAV POP
- ------------------------------------------------------------------------------
1 year 9.53% 3.22% 8.72% 3.76% 8.98% 5.19%
- ------------------------------------------------------------------------------
5 years 101.35 89.76 94.01 92.01 96.26 89.34
Annual average 15.02 13.67 14.17 13.94 14.44 13.62
- ------------------------------------------------------------------------------
10 years 258.41 237.89 231.12 231.12 238.94 227.16
Annual average 13.62 12.95 12.72 12.72 12.98 12.58
- ------------------------------------------------------------------------------
Annual average
(life of fund) 9.99 9.88 8.92 8.92 9.20 9.14
- ------------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 7/31/98
Standard & Lehman Bros. Lehman Bros.
Poor's Govt./Corp. Aggregate Consumer
500 Index Bond Index Bond Index Price Index
- ------------------------------------------------------------------------------
1 year 19.29% 8.06% 7.87% 1.68%
- ------------------------------------------------------------------------------
5 years 180.54 38.67 38.97 13.02
Annual average 22.92 6.76 6.80 2.48
- ------------------------------------------------------------------------------
10 years 445.10 140.45 139.95 37.72
Annual average 18.48 9.17 9.15 3.25
- ------------------------------------------------------------------------------
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-,
10-year, 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 net asset value. 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.
<TABLE>
<CAPTION>
[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
7/31/88
Lehman Brothers
Lehman Brothers Fund's class A Government/Corporate S&P 500
Date Aggregate Bond Index shares at POP Bond Index Index
<S> <C> <C> <C> <C>
7/31/88 10,000 9,425 10,000 10,000
7/31/89 11,520 11,535 11,533 13,193
7/31/90 12,334 12,210 12,252 14,051
7/31/91 13,654 13,588 13,505 15,843
7/31/92 15,672 15,447 15,617 17,870
7/31/93 17,266 16,781 17,340 19,430
7/31/94 17,282 17,362 17,317 20,432
7/31/95 19,029 20,440 19,071 25,767
7/31/96 20,083 23,455 20,084 30,037
7/31/97 22,244 30,848 22,251 45,698
7/31/98 $23,995 $33,789 $24,045 $54,510
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 $33,112 and no contingent deferred sales charges would
apply; a $10,000 investment in the fund's class M shares would have been
valued at $33,894 ($32,716 at public offering price).
</TABLE>
PRICE AND DISTRIBUTION INFORMATION
12 months ended 7/31/98
Class A Class B Class M
- ------------------------------------------------------------------------------
Distributions (number) 4 4 4
- ------------------------------------------------------------------------------
Income $0.600 $0.469 $0.514
- ------------------------------------------------------------------------------
Capital gains
- ------------------------------------------------------------------------------
Long-term 0.782 0.782 0.782
- ------------------------------------------------------------------------------
Short-term 0.430 0.430 0.430
- ------------------------------------------------------------------------------
Total $1.812 $1.681 $1.726
- ------------------------------------------------------------------------------
Share value: NAV POP NAV NAV POP
- ------------------------------------------------------------------------------
7/31/97 $18.95 $20.11 $18.82 $18.82 $19.50
- ------------------------------------------------------------------------------
7/31/98 18.82 19.97 18.67 18.67 19.35
- ------------------------------------------------------------------------------
Current return
(end of period)
- ------------------------------------------------------------------------------
Current dividend rate1 3.19% 3.00% 2.51% 2.72% 2.63%
- ------------------------------------------------------------------------------
Current 30-day SEC yield2 3.11 2.93 2.32 2.58 2.49
- ------------------------------------------------------------------------------
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 6/30/98
(most recent calendar quarter)
Class A Class B Class M
(inception date) (11/5/37) (4/27/92) (12/1/94)
NAV POP NAV CDSC NAV POP
- ------------------------------------------------------------------------------
1 year 16.71% 10.00% 15.82% 10.82% 16.17% 12.11%
- ------------------------------------------------------------------------------
5 years 104.89 93.07 97.41 95.41 99.69 92.64
Annual average 15.43 14.06 14.57 14.34 14.83 14.01
- ------------------------------------------------------------------------------
10 years 262.51 241.58 234.92 234.92 242.81 230.70
Annual average 13.74 13.07 12.85 12.85 13.11 12.71
- ------------------------------------------------------------------------------
Annual average
(life of fund) 10.03 9.93 8.97 8.97 9.24 9.18
- ------------------------------------------------------------------------------
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 5.75% maximum sales charge for class A
shares and 3.50% for class M shares.
Contingent deferred sales charge (CDSC) is a charge applied at the time of
the redemption of class B shares and assumes redemption at the end of the
period. Your fund's CDSC declines from a 5% maximum during the first year
to 1% during the sixth year. After the sixth year, the CDSC no longer
applies.
COMPARATIVE BENCHMARKS
Standard & Poor's 500 Index* is an unmanaged list of common stocks that is
frequently used as a general measure of stock market performance.
Lehman Brothers Government/Corporate Bond Index* is an index of publicly
issued U.S. Treasury obligations, debt obligations of U.S. government
agencies (excluding mortgage-backed securities), fixed-rate,
non-convertible, investment-grade corporate debt securities and U.S.
dollar-denominated, SEC-registered non-convertible debt issued by foreign
governmental entities or international agencies used as a general measure
of the performance of fixed-income securities.
The Lehman Brothers Aggregate Bond Index*+ is composed of securities from
Lehman Brothers Government/Corporate Bond Index, Mortgage-Backed
Securities Index, and the Asset-Backed Securities Index. Total return
comprises price appreciation/depreciation and income as a percentage of
the original investment. Indexes are rebalanced monthly by market
capitalization.
Consumer Price Index (CPI) is a commonly used measure of inflation; it
does not represent an investment return.
* Securities index returns 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 index and performance of
the fund will differ. It is not possible to invest directly in an index.
+ Putnam Management has recently undertaken a review of benchmarks for
various funds. This index replaces the Lehman Brothers
Government/Corporate Bond Index as a performance benchmark for this fund
because, in Putnam Management's opinion, the securities tracked by this
index more accurately reflect the types of securities generally held by
the fund.
Report of independent accountants
For the fiscal year ended July 31, 1998
To the Trustees and Shareholders of
The George Putnam Fund of Boston
In our opinion, the accompanying statement of assets and liabilities,
including the portfolio of investments owned (except for bond ratings),
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 The George Putnam Fund of Boston (the "fund") at
July 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 July 31,
1998 by correspondence with the custodian, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
September 16, 1998
<TABLE>
<CAPTION>
Portfolio of investments owned
July 31, 1998
COMMON STOCKS (62.0%) (a)
NUMBER OF SHARES VALUE
<S> <C> <C>
Aerospace and Defense (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
273,800 Lockheed Martin Corp. $ 27,294,438
Agriculture (--%)
- --------------------------------------------------------------------------------------------------------------------------
22,025 PSF Holdings LLC Class A (NON) 385,878
Automotive (2.3%)
- --------------------------------------------------------------------------------------------------------------------------
566,600 Dana Corp. 28,191,314
776,800 Ford Motor Co. 44,229,050
375,000 General Motors Corp. 27,117,188
408,300 Goodyear Tire & Rubber Co. (The) 24,880,781
--------------
124,418,333
Basic Industrial Products (1.9%)
- --------------------------------------------------------------------------------------------------------------------------
486,400 Cooper Industries, Inc. 25,505,600
612,200 Deere (John) & Co. 24,602,788
416,800 Minnesota Mining & Manufacturing Co. 31,207,900
485,700 Owens-Illinois, Inc. (NON) 21,431,513
--------------
102,747,801
Broadcasting (0.6%)
- --------------------------------------------------------------------------------------------------------------------------
696,900 Comcast Corp. Class A 31,643,616
Business Equipment and Services (1.7%)
- --------------------------------------------------------------------------------------------------------------------------
506,800 Hewlett-Packard Co. 28,127,400
559,400 Pitney Bowes, Inc. 28,249,700
340,000 Xerox Corp. 35,891,250
--------------
92,268,350
Chemicals (1.4%)
- --------------------------------------------------------------------------------------------------------------------------
852,000 du Pont (E.I.) de Nemours & Co., Ltd. 52,824,000
447,300 Eastman Chemical Co. 25,384,275
--------------
78,208,275
Computer Services and Software (1.9%)
- --------------------------------------------------------------------------------------------------------------------------
600,000 Compaq Computer Corp. 19,725,000
775,000 Electronic Data Systems Corp. 27,270,313
411,000 IBM Corp. 54,457,500
--------------
101,452,813
Conglomerates (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
389,800 Temple Inland, Inc. 20,293,963
Consumer Durable Goods (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
747,900 Hasbro, Inc. 27,064,631
44 Mothers Work, Inc. (NON) 330
--------------
27,064,961
Consumer Non Durables (2.2%)
- --------------------------------------------------------------------------------------------------------------------------
310,100 Colgate-Palmolive Co. 28,664,869
1,213 Hedstrom Holdings, Inc. 144A 1,516
640,200 Kimberly-Clark Corp. 28,768,988
1,425,700 Philip Morris Cos., Inc. 62,463,481
--------------
119,898,854
Consumer Services (--%)
- --------------------------------------------------------------------------------------------------------------------------
100 AmeriKing, Inc. (NON) 5,200
Electronics and Electrical Equipment (2.0%)
- --------------------------------------------------------------------------------------------------------------------------
423,300 Eaton Corp. 27,620,325
608,400 Emerson Electric Co. 36,161,775
715,600 Texas Instruments, Inc. 42,444,025
--------------
106,226,125
Food and Beverages (3.6%)
- --------------------------------------------------------------------------------------------------------------------------
628,000 Anheuser-Busch Cos., Inc. 32,459,750
1,000,000 ConAgra, Inc. 25,875,000
416,000 General Mills, Inc. 25,766,000
591,700 Heinz (H.J.) Co. 32,617,463
423,600 Nabisco Holdings Corp. Class A 15,090,750
524,800 Sara Lee Corp. 26,305,600
686,100 Wendy's International, Inc. 15,308,606
1,167,100 Whitman Corp. 24,727,931
--------------
198,151,100
Health Care (1.2%)
- --------------------------------------------------------------------------------------------------------------------------
904,600 Columbia/HCA Healthcare Corp. 25,781,100
911,900 HEALTHSOUTH Corp. (NON) 22,911,488
255,800 WeLLPoint Health Networks, Inc. (NON) 15,683,738
--------------
64,376,326
Insurance and Finance (14.5%)
- --------------------------------------------------------------------------------------------------------------------------
774,000 Allstate Corp. 32,846,625
659,600 American General Corp. 45,058,925
386,000 BankAmerica Corp. 34,643,500
609,600 BankBoston Corp. 29,489,400
202,208 Bankers Trust New York Corp. (CUS) 22,659,934
520,000 Charter One Financial, Inc. 16,932,500
433,400 CIGNA Corp. 28,631,488
414,500 Citicorp 70,465,000
570,600 Federal National Mortgage Association 35,377,200
592,800 First Chicago NBD Corp. 49,684,050
664,000 First Union Corp. 40,006,000
400,200 Fleet Financial Group, Inc. 34,392,188
630,200 Hartford Financial Services Group 32,809,788
356,300 Household International, Inc. 17,725,925
782,800 KeyCorp 26,615,200
220,000 Mercantile Bancorpation, Inc. 11,962,500
304,600 Morgan (J.P.) & Co., Inc. 38,379,600
359,000 Morgan Stanley, Dean Witter, Discover and Co. 31,255,438
747,800 NationsBank Corp. 59,637,050
1,129,000 Norwest Corp. 40,573,438
597,900 PNC Bank Corp. 32,249,231
381,200 Reliastar Financial Corp. 18,917,050
611,250 Synovus Financial Corp. 13,523,906
642,800 Washington Mutual, Inc. 25,671,825
--------------
789,507,761
Medical Supplies and Devices (1.0%)
- --------------------------------------------------------------------------------------------------------------------------
907,700 Baxter International, Inc. 54,235,075
Oil and Gas (6.2%)
- --------------------------------------------------------------------------------------------------------------------------
934,100 Amoco Corp. 38,998,675
557,150 British Petroleum PLC ADR (United Kingdom) 44,711,288
488,400 Elf Aquitane ADR (France) 31,684,950
525,000 Enron Corp. 27,792,188
935,400 Exxon Corp. 65,594,925
325,700 Halliburton Co. 11,826,981
449,000 Kerr-McGee Corp. 23,039,313
719,100 Mobil Corp. 50,157,225
585,100 Sonat, Inc. 17,114,175
491,500 Total Corp. ADR (France) 28,107,656
--------------
339,027,376
Paper and Forest Products (0.8%)
- --------------------------------------------------------------------------------------------------------------------------
224,000 Chesapeake Corp. 8,736,000
869,000 Weyerhaeuser Co. 36,498,000
--------------
45,234,000
Pharmaceuticals (4.1%)
- --------------------------------------------------------------------------------------------------------------------------
1,122,000 American Home Products Corp. 57,783,000
483,600 Bristol-Myers Squibb Co. 55,100,175
437,000 Merck & Co., Inc. 53,887,563
1,141,970 Pharmacia & Upjohn, Inc. 54,100,829
--------------
220,871,567
Photography (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
200,000 Eastman Kodak Co. 16,825,000
Publishing (0.6%)
- --------------------------------------------------------------------------------------------------------------------------
418,000 McGraw-Hill, Inc. 34,249,875
REIT's (Real Estate Investment Trust) (0.8%)
- --------------------------------------------------------------------------------------------------------------------------
107,800 Duke Realty Investments, Inc. 2,310,963
387,600 Equity Residential Properties Trust 16,279,200
571,000 Starwood Lodging Trust 23,446,688
--------------
42,036,851
Retail (1.7%)
- --------------------------------------------------------------------------------------------------------------------------
549,500 May Department Stores Co. 35,271,031
660,500 Sears, Roebuck & Co. 33,520,375
1,107,813 Toys "R" Us (NON) 25,202,746
--------------
93,994,152
Telecommunications (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
519,100 BCE Inc. (Canada) 20,926,219
142,000 Cincinnati Bell, Inc. 4,561,750
3,175 NEXTEL Communications, Inc. Class A (NON) 85,030
196,870 U S West, Inc. 10,507,936
--------------
36,080,935
Transportation (3.1%)
- --------------------------------------------------------------------------------------------------------------------------
414,100 Burlington Northern Santa Fe Corp. 42,626,419
264,800 Delta Air Lines, Inc. 32,438,000
581,600 FDX Corp. (NON) 35,295,850
945,100 Ryder System, Inc. 27,407,900
425,000 UAL Corp. (NON) 33,096,875
--------------
170,865,044
Utilities (8.0%)
- --------------------------------------------------------------------------------------------------------------------------
834,400 American Telephone & Telegraph Co. 50,585,500
1,180,500 Ameritech Corp. 58,065,844
489,000 BellSouth Corp. 33,404,813
640,000 Duke Energy Corp. 36,560,000
528,300 Entergy Corp. 14,462,213
805,300 GTE Corp. 43,788,188
816,000 OGE Energy Corp. 21,267,000
600,000 P P & L Resources, Inc. 13,912,500
640,600 Potomac Electric Power Co. 15,454,475
873,402 SBC Communications, Inc. 35,700,307
990,000 Sempra Energy (NON) 24,935,625
315,700 Southern Co. 8,050,350
435,000 Sprint Corp. 30,450,000
781,000 Texas Utilities Co. 31,288,813
425,800 Western Resources, Inc. 16,606,200
--------------
434,531,828
--------------
Total Common Stocks (cost $2,905,235,629) $3,371,895,497
CORPORATE BONDS AND NOTES (17.8%) (a)
PRINCIPAL AMOUNT VALUE
Advertising (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
$ 400,000 Adams Outdoor Advertising sr. notes 10 3/4s, 2006 $ 440,000
1,370,000 Lamar Advertising Co. sr. sub. notes 9 5/8s, 2006 1,486,450
40,000 Lamar Advertising Co. company guaranty 8 5/8s, 2007 41,700
355,000 Outdoor Communications Inc. sr. sub. notes 9 1/4s, 2007 369,200
45,000 Outdoor Systems, Inc. sr. sub. notes 9 3/8s, 2006 48,319
850,000 Outdoor Systems, Inc. company guaranty 8 7/8s, 2007 896,750
--------------
3,282,419
Aerospace and Defense (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
100,000 Argo-Tech Corp. company guaranty 8 5/8s, 2007 101,750
530,000 Aviation Sales Co. 144A sr. sub. notes 8 1/8s, 2008 527,350
570,000 BE Aerospace sr. sub. notes Ser. B, 9 7/8s, 2006 611,325
180,000 BE Aerospace sr. sub. notes Ser. B, 8s, 2008 181,800
500,000 Burke Industries, Inc. company guaranty 10s, 2007 517,500
115,000 K&F Industries, Inc. sr. sub. notes Ser. B, 9 1/4s, 2007 116,150
14,405,000 Raytheon Co notes 6.45s, 2002 14,519,664
105,000 Sequa Corp. bonds 8 3/4s, 2001 106,706
115,000 Sequa Corp. sr. notes 9 5/8s, 1999 118,163
115,000 United Defense Industries Inc.
company guaranty 8 3/4s, 2007 116,725
--------------
16,917,133
Agriculture (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
300,000 AGCO Corp. sr. sub. notes 8 1/2s, 2006 306,000
4,120,000 Potash Corp. of Saskatchewan notes
7 1/8s, 2007 (Canada) 4,268,320
255,739 Premium Standard Farms, Inc. sr. secd. notes
11%, 2003 (PIK) 275,560
310,000 Purina Mills, Inc. 144A sr. sub. notes 9s, 2010 318,525
--------------
5,168,405
Apparel (--%)
- --------------------------------------------------------------------------------------------------------------------------
320,000 Sassco Fashions Ltd. sr. notes 12 3/4s, 2004 345,600
600,000 Tultex Corp. company guaranty 9 5/8s, 2007 570,000
--------------
915,600
Automotive (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
111,000 Aftermarket Technology Corp. sr. sub. notes 12s, 2004 121,684
40,000 Cambridge Industries Inc. company guaranty
Ser. B, 10 1/4s, 2007 40,400
2,630,000 Chrysler Corp. deb. Ser. B, 7.45s, 2097 2,842,767
52,000 Hawk Corp. sr. notes 10 1/4s, 2003 56,290
840,000 Hayes Wheels International, Inc. company guaranty
Ser. B, 9 1/8s, 2007 886,200
800,000 Lear Corp. sub. notes 9 1/2s, 2006 884,000
1,260,000 Navistar International Corp. sr. notes Ser. B, 7s, 2003 1,266,300
550,000 Talon Automotive Group 144A sr. sub. notes
9 5/8s, 2008 547,250
500,000 Walbro Corp. sr. notes Ser. B, 9 7/8s, 2005 495,000
--------------
7,139,891
Banks (1.4%)
- --------------------------------------------------------------------------------------------------------------------------
7,225,000 Advanta Corp. med. term notes Ser. B, 7s, 2001 6,786,804
145,000 Chevy Chase Savings Bank, Inc. sub. deb. 9 1/4s, 2005 146,813
5,330,000 Den Danske Bank 144A sub. notes
6.55s, 2003 (Denmark) 5,433,349
40,000 Dime Capital Trust bank guaranty Ser. A, 9.33s, 2027 46,346
120,000 Espirto Santo Centrais sr. notes 10s, 2007 (Canada) 105,000
595,000 First Nationwide Holdings sr. sub. notes 10 5/8s, 2003 679,788
4,015,000 Firstar Capital Trust I company guaranty
Ser. B, 8.32s, 2026 4,423,526
4,480,000 Fuji JGB Inv. LLC 144A FRB 9.87s, 2049 3,922,285
4,130,000 Greenpoint Bank sr. notes 6.7s, 2002 4,182,864
8,895,000 Merita Bank Ltd. sub. notes 6 1/2s, 2006 (Finland) 8,868,315
140,000 North Fork Capital Trust I company guaranty
8.7s, 2026 156,352
5,000 Ocwen Federal Bank FSB sub. deb. 12s, 2005 5,438
9,830,000 Peoples Bank Bridgeport sub. notes 7.2s, 2006 10,043,803
1,685,000 Peoples Heritage Capital Trust company guaranty
Ser. B, 9.06s, 2027 1,879,870
90,000 Riggs Capital Trust 144A bonds 8 5/8s, 2006 97,805
3,750,000 Riggs National Corp. sub. deb. 8 1/2s, 2006 3,926,288
4,855,000 Sparbanken Sverige AB (Swedbank) 144A sub.
7 1/2s, 2006 (Sweden) 5,038,034
3,915,000 St. Paul Bancorp sr. notes 7 1/8s, 2004 4,003,440
2,000,000 State Development Bank deb. 12 1/2s, 1999 (China) 2,137,500
2,195,000 State Street Institution 144A company guaranty
7.94s, 2026 2,356,091
4,450,000 Webster Capital Trust I 144A bonds 9.36s, 2027 4,847,830
5,090,000 Webster Financial Corp. sr. notes 8 3/4s, 2000 5,304,798
--------------
74,392,339
Basic Industrial Products (--%)
- --------------------------------------------------------------------------------------------------------------------------
600,000 Axia, Inc. 144A sr. sub. notes 10 3/4s, 2008 601,500
175,000 Clark-Schwebel sr. notes 10 1/2s, 2006 201,688
120,000 Koppers Industries, Inc. 144A sr. sub. notes
9 7/8s, 2007 122,700
250,000 Newcor, Inc. company guaranty Ser. B, 9 7/8s, 2008 252,500
60,000 Owens-Illinois, Inc. sr. notes 8.1s, 2007 63,137
30,000 Roller Bearing Co. company guaranty Ser. B,
9 5/8s, 2007 30,300
--------------
1,271,825
Broadcasting (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
50,000 Affinity Group Holdings sr. sub. notes 11 1/2s, 2003 52,750
585,000 Affinity Group Holdings sr. notes 11s, 2007 625,219
800,000 American Radio Systems Corp. company guaranty
9s, 2006 860,000
400,000 Benedek Broadcasting sr. notes 11 7/8s, 2005 446,000
985,000 Benedek Communications Corp. sr. disc. notes
stepped-coupon zero % (13 1/4s, 5/15/01), 2006 (STP) 795,388
1,690,000 Capstar Broadcasting sr. sub. notes 9 1/4s, 2007 1,791,400
190,000 Capstar Broadcasting sr. disc. notes stepped-coupon
zero % (12 3/4s, 2/1/02), 2009 (STP) 149,150
580,000 Central European Media Enterprises Ltd. sr. notes
9 3/8s, 2004 568,400
185,000 Chancellor Media Corp. sr. sub. notes 9 3/8s, 2004 194,250
990,000 Chancellor Media Corp. sr. sub. notes Ser. B,
8 1/8s, 2007 1,004,850
80,000 Citadel Broadcasting Inc. sr. sub. notes 10 1/4s, 2007 88,600
500,000 Echostar Satellite Broadcast Corp. sr. disc. notes
stepped-coupon zero % (13 1/8s, 3/15/00), 2004 (STP) 462,500
930,000 Fox Family Worldwide, Inc. sr. notes 9 1/4s, 2007 918,375
490,000 Fox Family Worldwide, Inc. sr. disc. notes
stepped-coupon zero % (10 1/4s, 11/1/02), 2007 (STP) 323,400
480,000 Fox/Liberty Networks LLC sr. notes 8 7/8s, 2007 493,200
650,000 Fox/Liberty Networks LLC sr. disc. notes
stepped-coupon zero % (9 3/4s, 8/15/02), 2007 (STP) 464,750
625,000 Granite Broadcasting Corp. sr. sub. notes
10 3/8s, 2005 662,500
640,000 Granite Broadcasting Corp. 144A sr. sub. notes
8 7/8s, 2008 652,800
45,000 Gray Communications Systems, Inc. sr. sub. notes
10 5/8s, 2006 49,275
115,000 Heritage Media Services Corp. sr. sub. notes
8 3/4s, 2006 122,763
100,000 Jacor Communications, Inc. company guaranty
9 3/4s, 2006 109,000
1,125,000 Jacor Communications, Inc. company guaranty
Ser. B, 8 3/4s, 2007 1,181,250
50,000 Pegasus Communications Corp. sr. notes Ser. B,
9 5/8s, 2005 51,500
250,000 Pegasus Media & Communications notes Ser. B,
12 1/2s, 2005 282,500
35,000 Radio One Inc. company guaranty stepped-coupon
Ser. B, 7s, (12s, 5/15/00), 2004 (STP) 35,700
200,000 Sinclair Broadcasting Group, Inc. sr. sub. notes 10s, 2005 216,500
700,000 Sinclair Broadcasting Group, Inc. company guaranty
9s, 2007 728,000
150,000 Sinclair Broadcasting Group, Inc. sr. sub. notes
8 3/4s, 2007 157,875
700,000 Spanish Broadcasting Systems sr. notes
12 1/2s, 2002 798,000
100,000 Spanish Broadcasting Systems sr. notes
Ser. B, 11s, 2004 108,500
85,000 TV Azteca SA de CV sr. notes 10 1/2s, 2007 (Mexico) 85,850
--------------
14,480,245
Building and Construction (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
115,000 American Architectural Products Corp.
company guaranty 11 3/4s, 2007 116,150
175,000 Atrium Companies, Inc. 144A sub. notes 10 1/2s, 2006 183,750
200,000 Beazer Homes USA company guaranty 8 7/8s, 2008 197,000
180,000 Brand Scaffold Services 144A sr. notes 10 1/4s, 2008 183,600
60,000 Building Materials Corp. sr. notes Ser. B, 8 5/8s, 2006 61,650
115,000 Congoleum Corp. sr. notes 9s, 2001 117,300
95,000 D.R. Horton Inc. company guaranty 10s, 2006 102,600
520,000 GS Superhighway Holdings sr. notes 9 7/8s, 2004 410,800
3,300,000 Guangdong Enterprises 144A sr. notes
8 7/8s, 2007 (China) 2,431,407
130,000 Jackson Products, Inc. 144A company guaranty
9 1/2s, 2005 129,675
200,000 M.D.C. Holdings, Inc. notes Ser. B, 11 1/8s, 2003 216,500
1,000,000 Nortek, Inc. sr. sub. notes 9 7/8s, 2004 1,032,500
500,000 NVR, Inc. sr. notes 8s, 2005 500,000
200,000 Republic Group Inc. 144A sr. sub. notes 9 1/2s, 2008 201,250
--------------
5,884,182
Business Equipment and Services (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
70,000 Axiohm Transactions Solutions Inc. company guaranty
9 3/4s, 2007 69,038
280,000 Cex Holdings, Inc. 144A sr. sub. notes 9 5/8s, 2008 287,000
610,000 Iron Mountain, Inc. med. term notes company guaranty
10 1/8s, 2006 664,900
280,000 Morris Material Handling Inc. 144A sr. notes
9 1/2s, 2008 254,800
100,000 Outsourcing Solutions, Inc. sr. sub. notes
Ser. B, 11s, 2006 108,000
649,000 Pierce Leahy Corp. sr. sub. notes 11 1/8s, 2006 729,314
500,000 Production Resource Group sr. sub. notes
11 1/2s, 2008 496,250
1,020,000 U.S. Office Products Co. 144A sr.sub notes
9 3/4s, 2008 1,020,000
800,000 Unicco Service Co. company guaranty Ser. B,
9 7/8s, 2007 808,000
920,000 United Stationer 144A sr. sub. notes 8 3/8s, 2008 929,200
895,000 Williams Scoutman, Inc. 144A sr. notes 9 7/8s, 2007 924,088
--------------
6,290,590
Cable Television (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
485,000 Acme Television sr. disc. notes stepped-coupon zero %
(10 7/8s, 9/30/00), 2004 (STP) 409,825
100,000 Adelphia Communications Corp. sr. notes
Ser. B, 10 1/4s, 2000 104,750
250,000 Adelphia Communications Corp. sr. notes
Ser. B, 9 7/8s, 2007 275,625
261,875 Adelphia Communications Corp. sr. notes
9 1/2s, 2004 (PIK) 280,206
355,000 Century Communications Corp. sr. notes 9 1/2s, 2005 389,613
850,000 Century Communications Corp. sr. notes
8 7/8s, 2007 915,875
605,000 Comcast Corp. sr. sub. notes 9 1/2s, 2008 643,666
250,000 Comcast Corp. sr. sub. notes 9 3/8s, 2005 266,595
240,000 Comcast Corp. sr. sub. notes 9 1/8s, 2006 255,600
4,825,000 Continental Cablevision, Inc. sr. deb 9 1/2s, 2013 5,697,939
10,000 CSC Holdings, Inc. sr. sub. deb. 9 7/8s, 2023 11,050
100,000 CSC Holdings, Inc. sr. sub. notes 9 1/4s, 2005 106,750
10,000 Diamond Cable Communication Co. sr. disc. notes
stepped-coupon zero % (13 1/4s, 9/30/99), 2004
(United Kingdom) (STP) 9,650
625,000 Diamond Cable Communication Co. sr. disc. notes
stepped-coupon zero % (11 3/4s, 12/15/00), 2005
(United Kingdom) (STP) 528,125
1,670,000 Diamond Cable Communication Co. sr. disc. notes
stepped-coupon zero % (10 3/4s, 2/15/02), 2007
(United Kingdom) (STP) 1,294,250
210,000 Globo Communicacoes 144A sr. notes
10 5/8s, 2008 (Brazil) 192,150
1,010,000 International Cabletel, Inc. sr. notes stepped-coupon
Ser. B, zero % (11 1/2s, 2/01/01), 2006 (STP) 838,300
390,000 Jones Intercable, Inc. sr. sub. deb. 10 1/2s, 2008 428,025
650,000 Jones Intercable, Inc. sr. notes 7 5/8s, 2008 656,500
1,250,000 Lenfest Communications, Inc. sr. sub. notes
10 1/2s, 2006 1,462,500
310,000 Lenfest Communications, Inc. 144A sr. sub. notes
8 1/4s, 2008 322,400
500,000 Marcus Cable Co. (L.P.) sr. deb 11 7/8s, 2005 536,250
765,000 Marcus Cable Co. (L.P.) notes stepped-coupon
zero % (13 1/2s, 8/1/99), 2004 (STP) 745,875
100,000 Rogers Cablesystems Ltd. notes 11s, 2015 116,000
225,000 Rogers Cablesystems Ltd. sr. notes Ser. B, 10s, 2005 250,313
--------------
16,737,832
Cellular Communications (--%)
- --------------------------------------------------------------------------------------------------------------------------
80,000 Pronet, Inc. sr. sub. notes 11 7/8s, 2005 86,800
Chemicals (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
360,000 Geo Specialty Chemicals 144A sr. sub. notes
10 1/8s, 2008 368,100
275,000 Huntsman Corp. 144A sr. sub. notes FRN 9.031s, 2007 277,750
1,640,000 Lyondell Petrochemical Co. notes 9 1/8s, 2002 1,737,941
150,000 NL Industries, Inc. sr. notes stepped-coupon zero %
(13s, 10/15/98), 2005 (STP) 156,000
500,000 PCI Chemicals & Pharmaceuticals company guaranty
9 1/4s, 2007 (Canada) 470,000
125,000 Sovereign Specialty Chemical 144A company guaranty
Ser. A, 9 1/2s, 2007 128,750
135,000 Sterling Chemicals Holdings sr. disc. notes
stepped-coupon zero % (13 1/2s, 8/15/01), 2008 (STP) 81,000
100,000 Trikem S.A. 144A bonds 10 5/8s, 2007 (Brazil) 81,500
125,000 Union Carbide Global Enterprises sr. sub. notes
Ser. B, 12s, 2005 134,375
--------------
3,435,416
Computer Services and Software (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
13,380,000 Dell Computer Corp. deb. 7.1s, 2028 13,431,914
670,000 IPC Information Systems sr. disc. notes stepped-coupon
zero % (10 7/8s, 11/1/01), 2008 (STP) 489,100
370,000 PSINet, Inc. sr. notes Ser. B, 10s, 2005 388,500
150,000 Unisys Corp. sr. notes 7 7/8s, 2008 155,250
--------------
14,464,764
Conglomerates (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
2,545,000 Canadian Pacific Ltd. deb. 9.45s, 2021 (Canada) 3,280,836
30,000 Cia Latino Americana 144A company guaranty
11 5/8s, 2004 (Argentina) 29,850
--------------
3,310,686
Consumer Durable Goods (--%)
- --------------------------------------------------------------------------------------------------------------------------
20,000 Hedstrom Holdings, Inc. 144A sr. disc. notes
stepped-coupon zero % (12s, 6/1/02), 2009 (STP) 12,400
570,000 Iron Age Corp. 144A sr. sub. notes 9 7/8s, 2008 552,900
110,000 Sealy Mattress Co. sr. sub. notes Ser. B, 9 7/8s, 2007 114,400
165,000 Selmer Co., Inc. sr. sub. notes 11s, 2005 179,025
--------------
858,725
Consumer Non Durables (--%)
- --------------------------------------------------------------------------------------------------------------------------
60,000 Amscan Holdings, Inc. sr. sub. notes 9 7/8s, 2007 60,900
205,000 Carson, Inc. company guaranty Ser. B, 10 3/8s, 2007 205,000
160,000 Chattem, Inc. company guaranty Ser. B, 8 7/8s, 2008 161,600
220,000 Coty, Inc. Gtd. sr. sub. notes 10 1/4s, 2005 235,675
845,000 Guess Jeans, Inc. sr. sub. notes 9 1/2s, 2003 853,450
290,000 Revlon Consumer Products sr. sub. notes 8 5/8s, 2008 297,250
--------------
1,813,875
Consumer Products (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
35,000 French Fragrances, Inc. sr. notes Ser. B, 10 3/8s, 2007 37,188
170,000 French Fragrances, Inc. 144A sr. notes 10 3/8s, 2007 179,350
1,405,000 Philip Morris Cos., Inc. notes 7 1/2s, 2004 1,469,785
5,460,000 Philip Morris Cos., Inc. notes 7 1/4s, 2003 5,635,484
2,925,000 Philip Morris Cos., Inc. notes 7 1/8s, 2004 3,011,346
2,800,000 Philip Morris Cos., Inc. notes 6.8s, 2003 2,839,732
1,190,000 Revlon Worldwide Corp. sr. disc. notes Ser. B,
zero %, 2001 943,075
5,025,000 Sampoerna International Finance Co. 144A
company guaranty 8 3/8s, 2006 (Indonesia) 2,613,000
--------------
16,728,960
Consumer Services (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
450,000 Boyd Gaming Corp. sr. sub. notes 9 1/2s, 2007 470,250
685,000 Club Regina, Inc. 144A sr. notes 13s, 2004 678,150
548,750 Coinmach Corp. sr. notes Ser. D, 11 3/4s, 2005 609,113
490,000 Fitzgerald Gaming Corp. company guaranty Ser. B,
12 1/4s, 2004 441,000
120,000 FRD Acquisition Co. sr. notes Ser. B, 12 1/2s, 2004 132,000
1,140,000 HMH Properties, Inc. company guaranty Ser. B,
7 7/8s, 2008 1,135,725
140,000 Host Marriott Travel Plaza sr. notes Ser. B, 9 1/2s, 2005 149,450
100,000 Isle of Capri Black Hawk LLC 1st mortgage
Ser. B, 13s, 2004 105,500
535,000 Premier Parks, Inc. sr. notes 9 1/4s, 2006 561,750
9,730,000 TCI Communications, Inc. sr. notes 8.65s, 2004 10,829,587
--------------
15,112,525
Electronics and Electrical Equipment (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
70,000 Celestica International Ltd. 144A sr. sub. notes
10 1/2s, 2006 (Canada) 77,175
116,476 Cirent Semiconductor sr. sub. notes 10.22s, 2002 120,990
123,587 Cirent Semiconductor 144A sr. sub. notes 10.14s, 2004 128,685
125,000 Details, Inc. sr. sub. notes Ser. B, 10s, 2005 123,750
650,000 DII Group, Inc. (The) sr. sub. notes 8 1/2s, 2007 632,125
120,000 Dobson Communications Corp. sr. notes 11 3/4s, 2007 129,900
1,110,000 Fairchild Semiconductor Corp. 144A sr. sub. notes
11.74s, 2008 (PIK) 1,270,950
1,270,000 Fairchild Semiconductor Corp. sr. sub. notes
10 1/8s, 2007 1,244,600
490,000 Flextronics International Ltd. sr. sub. notes Ser. B,
8 3/4s, 2007 494,900
45,000 HCC Industries, Inc. company guaranty 10 3/4s, 2007 47,475
340,000 Motors and Gears Inc. sr. notes Ser. B, 10 3/4s, 2006 365,500
160,000 Samsung Electronics 144A company guaranty
9 3/4s, 2003 148,800
500,000 Unisys Corp. deb. 9 3/4s, 2016 517,500
50,000 Viasystems, Inc. notes 9 3/4s, 2007 49,250
480,000 Viasystems, Inc. 144A sr. notes 9 3/4s, 2007 463,200
1,225,000 Wavetek Corp. company guaranty 10 1/8s, 2007 1,237,250
610,000 Zilog Inc. 144A sr. notes 9 1/2s, 2005 475,800
--------------
7,527,850
Energy-Related (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
435,000 AES Corp. sr. sub. notes 8 3/8s, 2007 444,788
8,990,000 Calenergy, Inc. sr. notes 7.63s, 2007 9,035,220
6,230,000 Enron Corp. notes 6.95s, 2028 6,120,103
1,120,000 Gothic Production Corp. company guaranty
Ser. B, 11 1/8s, 2005 1,086,400
6,295,000 KN Capital Trust III company guaranty 7.63s, 2028 6,397,294
80,000 Newpark Resources, Inc. company guaranty
Ser. B, 8 5/8s, 2007 80,800
340,000 Niagara Mohawk Power Corp. sr. notes
Ser. G, 7 3/4s, 2008 351,339
270,000 Niagara Mohawk Power Corp. sr. notes
Ser. F, 7 5/8s, 2005 274,830
175,000 Panda Global Energy Co. company guaranty
12 1/2s, 2004 157,500
3,350,000 Quezon Power Ltd. sr. notes 8.86s, 2017 (Philippines) 3,052,085
1,170,000 RAM Energy Inc. sr. notes 11 1/2s, 2008 1,181,700
--------------
28,182,059
Entertainment (1.2%)
- --------------------------------------------------------------------------------------------------------------------------
310,000 AMC Entertainment, Inc. sr. sub. notes 9 1/2s, 2009 314,650
640,000 Argosy Gaming Co. company guaranty 13 1/4s, 2004 723,200
450,000 Aztar Corp. sr. sub. notes 11s, 2002 461,250
75,000 Casino America, Inc. sr. notes 12 1/2s, 2003 84,750
725,000 Cinemark USA, Inc. notes 9 5/8s, 2008 754,000
280,000 Cinemark USA, Inc. sr. sub. notes Ser. B, 9 5/8s, 2008 289,800
350,000 Coast Hotels & Casinos, Inc. 1st mtge. company
guaranty Ser. B, 13s, 2002 404,250
220,000 Empress River Casino sr. notes 10 3/4s, 2002 231,825
150,000 Hollywood Casino Corp. sr. notes 12 3/4s, 2003 166,875
435,000 Lady Luck Gaming 1st mtge. 11 7/8s, 2001 450,225
510,000 Mohegan Tribal Gaming sr. secd. notes Ser. B,
13 1/2s, 2002 647,700
11,065,000 News America Holdings, Inc. deb. 7 3/4s, 2045 11,614,267
500,000 Paramount Communications Inc. deb. 7 1/2s, 2023 496,385
80,000 Penn National Gaming, Inc. 144A sr. notes
10 5/8s, 2004 84,800
125,000 Players International, Inc. sr. notes 10 7/8s, 2005 135,313
210,000 Premier Parks, Inc. sr. notes Ser. A, 12s, 2003 232,050
390,000 PRT Funding Corp. sr. notes 11 5/8s, 2004 (In default) (NON) 279,825
530,000 SFX Entertainment, Inc. 144A company guaranty
Ser. B, 9 1/8s, 2008 522,050
575,000 Showboat Marina Casino 1st mtge. Ser. B,
13 1/2s, 2003 668,438
290,000 Silver Cinemas Intl.144A sr. sub. notes 10 1/2s, 2005 294,350
840,000 Six Flags Corp. sr. sub. notes 12 1/4s, 2005 956,550
650,000 Sun International Hotels Ltd. company guaranty
9s, 2007 682,500
2,670,000 Time Warner Entertainment, Inc. notes 8 7/8s, 2012 3,158,049
15,510,000 Time Warner Entertainment, Inc. sr. notes
8 3/8s, 2033 18,120,178
640,000 Time Warner Entertainment, Inc. notes 7 3/4s, 2005 685,811
350,000 Trump A.C. 1st mtge. 11 1/4s, 2006 343,875
600,000 Trump Castle Funding 144A sub. notes 10 1/4s, 2003 606,000
1,000,000 United Artists Theatre 144A sr. sub. notes
9 3/4s, 2008 1,010,000
1,750,000 Viacom International, Inc. sub. deb. 8s, 2006 1,811,250
17,980,000 Viacom International, Inc. sr. notes 7 3/4s, 2005 19,077,679
--------------
65,307,895
Environmental Control (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
160,000 Allied Waste Industries, Inc. sr. disc. notes
stepped-coupon zero % (11.3s, 6/1/02), 2007 (STP) 118,400
120,000 ATC Group Services Inc. company guaranty
12s, 2008 111,600
2,120,000 Waste Management, Inc. notes 6 5/8s, 2002 2,141,666
4,300,000 WMX Technologies, Inc. notes 4.1s, 2002 4,489,716
--------------
6,861,382
Food and Beverages (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
65,000 Ameriserve Food Co. company guaranty
10 1/8s, 2007 66,950
645,000 Ameriserve Food Co. company guaranty
8 7/8s, 2006 646,613
50,000 Aurora Foods, Inc. sr. sub. notes Ser. B, 9 7/8s, 2007 53,500
370,000 Aurora Foods, Inc. 144A ser. sub. notes Ser. D,
9 7/8s, 2007 395,900
895,000 Canandaigua Wine Co. sr. sub. notes Ser. C,
8 3/4s, 2003 919,613
75,000 Eagle Family Foods company guaranty Ser. B,
8 3/4s, 2008 72,750
135,000 Fleming Companies, Inc. company guaranty
Ser. B, 10 1/2s, 2004 140,063
1,000,000 Packaged Ice, Inc. 144A sr. notes 9 3/4s, 2005 1,030,000
490,000 RAB Enterprises, Inc. 144A sr. notes 10 1/2s, 2005 492,450
150,000 Signature Brands Ltd. sr. sub. notes 13s, 2002 (Canada) 167,625
930,000 Smithfield Foods, Inc. sr. sub. notes 7 5/8s, 2008 934,650
100,000 Southern Foods Group sr. sub. notes 9 7/8s, 2007 104,750
670,000 Stater Brothers Holdings sr. sub. notes 9s, 2004 690,938
20,000 Windy Hill Pet Food Co. sr. sub. notes 9 3/4s, 2007 21,000
--------------
5,736,802
Health Care (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
700,000 Columbia/HCA Healthcare Corp. notes 7.15s, 2004 690,158
400,000 Columbia/HCA Healthcare Corp. deb. 7.05s, 2027 354,324
100,000 Columbia/HCA Healthcare Corp. notes 7s, 2007 95,534
185,000 Conmed Corp. company guaranty 9s, 2008 185,000
380,000 Extendicare Health Services Inc. company guaranty
9.35s, 2007 381,900
265,000 Fresenius Medical Capital Trust I company guaranty
9s, 2006(Germany) 278,250
375,000 Fresenius Medical Capital Trust II company guaranty
7 7/8s, 2008 367,500
280,000 Genesis Health Ventures, Inc. sr. sub. notes 9 1/4s, 2006 280,000
610,000 Global Health Sciences 144A sr. notes 11s, 2008 608,475
300,000 Hudson Respiratory Care, Inc. 144A sr. sub. notes
9 1/8s, 2008 276,000
200,000 Integrated Health Services, Inc. sr. sub. notes
Ser. A, 9 1/2s, 2007 205,000
830,000 Integrated Health Services, Inc. sr. sub. notes
Ser. A, 9 1/4s, 2008 842,450
1,870,000 Manor Care, Inc. sr. notes 7 1/2s, 2006 1,880,678
1,500,000 MedPartners, Inc. sr. notes 7 3/8s, 2006 1,350,570
925,000 Multicare Cos., Inc. sr. sub. notes 9s, 2007 901,875
175,000 Paracelsus Healthcare sr. sub. notes 10s, 2006 177,625
160,000 Paragon Corp. Holdings 144A sr. notes 9 5/8s, 2008 140,800
2,000,000 Paragon Health Networks, Inc. sr. sub. notes
Ser. B, 9 1/2s, 2007 2,030,000
450,000 Quorum Health Group, Inc. sr. sub. notes 8 3/4s, 2005 465,750
480,000 Sun Healthcare Group, Inc. 144A sr. sub. notes
9 1/2s, 2007 489,600
575,000 Sun Healthcare Group, Inc. 144A sr. sub. notes
9 3/8s, 2008 580,750
700,000 Tenet Healthcare Corp. sr. sub. notes 8 5/8s, 2007 724,500
3,825,000 Tenet Healthcare Corp. sr. notes 8s, 2005 3,920,625
--------------
17,227,364
Insurance and Finance (3.8%)
- --------------------------------------------------------------------------------------------------------------------------
105,000 Aames Financial Corp. sr. notes 9 1/8s, 2003 105,525
10,625,000 AFC Capital Trust I company guaranty Ser. B,
8.207s, 2027 11,952,594
1,990,000 Allstate Financing II company guaranty 7.83s, 2045 2,055,829
1,500,000 AMBAC Indemnity Corp. deb. 9 3/8s, 2011 1,881,885
12,745,000 American General Institute 144A company guaranty
8 1/8s, 2046 14,378,527
8,950,000 Amvescap Corp. PLC 144A sr. notes 6.6s, 2005
(United Kingdom) 9,023,122
340,000 Colonial Capital I 144A company guaranty 8.92s, 2027 373,575
80,000 Delta Financial Corp. sr. notes 9 1/2s, 2004 75,200
110,000 Dine S.A. de C.V. 144A company guaranty
8 3/4s, 2007 (Mexico) 101,475
90,000 Dollar Financial Group Inc. sr. notes Ser. A,
10 7/8s, 2006 97,650
7,890,000 Executive Risk Capital Trust company guaranty
Ser. B, 8.675s, 2027 8,464,076
6,045,000 First Citizens Bank Capital Trust I 144A
company guaranty 8.05s, 2008 6,214,713
1,880,000 First Financial Caribbean Corp. sr. notes 7.84s, 2006 1,976,726
5,145,000 Firstar Bank Milwaukee sr. notes 6 1/4s, 2002 5,176,076
19,395,000 Ford Motor Credit Corp. sr. notes 6s, 2003 19,315,093
1,920,000 Greenpoint Capital Trust I company guaranty
9.1s, 2027 2,162,554
2,625,000 Hartford Life, Inc. deb. 7.65s, 2027 2,845,080
175,000 Imperial Credit Capital Trust I 144A
company guaranty 10 1/4s, 2002 176,750
100,000 Imperial Credit Industries, Inc. sr. notes 9 7/8s, 2007 99,500
205,000 Investors Capital Trust I company guaranty
Ser. B, 9.77s, 2027 233,572
6,225,000 Lehman Bros Holdings, Inc. med. term notes 6.4s, 1999 6,260,420
11,410,000 Lehman Bros Holdings, Inc. notes 6 1/4s, 2003 11,406,349
3,970,000 Markel Capital Trust I company guaranty
Ser. B, 8.71s, 2046 4,200,101
210,000 Market Hub Partners 144A sr. notes 8 1/4s, 2008 214,200
5,100,000 Merrill Lynch & Co., Inc. med. term notes 6.13s, 2003 5,121,063
4,205,000 Money Store, Inc. notes 8.05s, 2002 4,467,014
620,000 Nationwide Credit Inc. 144A sr. notes 10 1/4s, 2008 621,550
80,000 Netia Holdings B.V. company guaranty Ser. B,
10 1/4s, 2007 (Netherlands) 75,600
50,000 Netia Holdings B.V. company guaranty
stepped-coupon Ser. B zero % (11.25s, 11/1/01),
2007 (Netherlands) (STP) 32,250
2,310,000 North Fork Bancorporation, Inc.
company guaranty 8s, 2027 2,412,148
70,000 Ocwen Capital Trust I company guaranty 10 7/8s, 2027 75,775
2,000,000 Orion Capital Corp. sr. notes 9 1/8s, 2002 2,179,940
3,885,000 Orion Capital Trust II company guaranty 7.701s, 2028 4,048,364
7,170,000 Paine Webber Group, Inc. sr. notes 6.55s, 2008 7,098,587
8,985,000 Paine Webber Group, Inc. sr. med. term notes
6.52s, 2005 9,007,463
5,825,000 Phoenix Home Life Mutual Insurance Co.
144A notes 6.95s, 2006 5,971,674
290,000 Pindo Deli Finance Mauritius Ltd. company guaranty
10 3/4s, 2007 (Indonesia) 194,300
35,000 Pioneer Americas Acquisition 144A sr. notes
9 1/4s, 2007 33,250
150,000 Polytama International notes 11 1/4s, 2007 52,500
10,770,000 Provident Companies, Inc. bonds 7.405s, 2038 10,813,080
185,000 Reliance Group Holdings, Inc. sr. notes 9s, 2000 192,977
6,350,000 Salomon, Inc. sr. notes 7.3s, 2002 6,570,536
14,225,000 Salomon, Inc. sr. notes 6 3/4s, 2003 14,523,867
3,195,000 Southern Investments Service Co. sr. notes 6.8s,
2006 (United Kingdom) 3,251,232
75,000 Sovereign Capital Trust company guaranty 9s, 2027 82,445
8,015,000 TIG Capital Trust I 144A bonds 8.597s, 2027 8,768,250
5,345,000 Trenwick Capital Trust I company guaranty 8.82s, 2037 5,851,065
9,745,000 Trenwick Group, Inc. 144A sr. notes 6.7s, 2003 9,754,745
--------------
209,990,267
Lodging (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
1,110,000 Epic Resorts LLP 144A sr. notes 13s, 2005 1,121,100
167,000 John Q Hammons Hotels, Inc. 1st mtge. 8 7/8s, 2004 168,253
1,415,000 Prime Hospitality Corp. sub. notes 9 3/4s, 2007 1,506,975
--------------
2,796,328
Medical Supplies and Devices (--%)
- --------------------------------------------------------------------------------------------------------------------------
265,000 ALARIS Medical Systems, Inc. company guaranty
9 3/4s, 2006 272,288
150,000 Dade International, Inc. sr. sub. notes Ser. B,
11 1/8s, 2006 168,750
175,000 Graphic Controls Corp. sr. sub. notes Ser. A, 12s, 2005 194,250
55,000 Imagyn Medical Technologies, Inc. company guaranty
12 1/2s, 2004 15,400
480,000 Kinetic Concepts, Inc. company guaranty Ser. B,
9 5/8s, 2007 492,000
360,000 Leiner Health Products sr. sub. notes 9 5/8s, 2007 381,600
610,000 Mediq, Inc. 144A sr. sub. notes 11s, 2008 613,050
430,000 Wright Medical Technology, Inc. 144A notes
Ser. C, 11 3/4s, 2000 425,700
--------------
2,563,038
Metals and Mining (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
630,000 AK Steel Corp. sr. notes 9 1/8s, 2006 658,350
360,000 Ameristeel Corp. 144A sr. notes 8 3/4s, 2008 356,400
150,000 Anker Coal Group, Inc. sr. notes Ser. B, 9 3/4s, 2007 135,000
105,000 Armco, Inc. sr. notes 9s, 2007 102,900
650,000 Continental Global Group sr. notes Ser. B, 11s, 2007 676,000
1,915,000 Freeport-McMoRan Copper & Gold Co., Inc.
sr. notes 7 1/2s, 2006 1,512,333
250,000 Hylsa S.A. de C.V. 144A bonds 9 1/4s, (Mexico) 234,375
20,000 Maxxam Group Holdings, Inc. sr. notes
Ser. B, 12s, 2003 22,350
760,000 Lodestar Holding, Inc. 144A sr. notes 11 1/2s, 2005 737,200
3,870,000 PT Alatief Freeport sr. notes 9 3/4s, 2001 (Netherlands) 3,714,426
250,000 Weirton Steel Co. sr. notes 11 3/8s, 2004 262,500
220,000 WHX Corp. sr. notes 10 1/2s, 2005 222,200
--------------
8,634,034
Oil and Gas (1.2%)
- --------------------------------------------------------------------------------------------------------------------------
365,000 Abraxas Petroleum Corp. 144A 11 1/2s, 2004 372,300
830,000 American Eco. Corp. 144A company guaranty
9 5/8s, 2008 800,950
100,000 Benton Oil & Gas Co. sr. notes 11 5/8s, 2003 104,250
70,000 Benton Oil & Gas Co. sr. notes 9 3/8s, 2007 68,075
740,000 Chesapeake Energy Corp. 144A sr. notes 9 5/8s, 2005 714,100
95,000 CIA Naviera Perez Companc S.A. 144A bonds
9s, 2004 (Argentina) 96,425
1,000,000 Cliffs Drilling Co. company guaranty Ser. B,
10 1/4s, 2003 1,035,000
9,185,000 Coastal Corp. bonds 6.95s, 2028 8,972,459
140,000 Coho Energy, Inc. sr. sub. notes 8 7/8s, 2007 130,200
590,000 Costilla Energy, Inc. sr. notes 10 1/4s, 2006 598,850
220,000 Dailey Petroleum Services Corp. company guaranty
9 1/2s, 2008 206,800
370,000 Eagle Geophysical, Inc. 144A sr. notes 10 3/4s, 2008 370,000
3,150,000 Enron Corp. notes 6.4s, 2006 3,129,336
3,365,000 Express Pipeline Ltd. 144A sub. notes Ser. B,
7.39s, 2019 (Canada) 3,375,802
125,000 Flores & Rucks, Inc. sr. sub. notes 9 3/4s, 2006 133,125
100,000 Gulf Canada Resources Ltd. sr. sub. notes
9 5/8s, 2005 (Canada) 108,000
3,205,000 Gulf Canada Resources Ltd. sr. notes
8.35s, 2006 (Canada) 3,425,792
835,000 K N Energy, Inc. sr. notes 6.45s, 2003 836,386
11,195,000 Louis Dreyfus Natural Gas notes 6 7/8s, 2007 11,098,387
1,210,000 Michael Petroleum Corp. 144A sr. notes 11 1/2s, 2005 1,185,800
320,000 Northern Offshore 144A company guaranty
10s, 2005 296,800
200,000 Pacalta Resources Ltd. sr. notes Ser. B,
10 3/4s, 2004 (Canada) 201,000
750,000 Panaco, Inc. company guaranty Ser. B, 10 5/8s, 2004 742,500
2,720,000 Petro Geo-Services AS ADR notes
7 1/2s, 2007 (Norway) 2,882,656
3,000,000 Petro-Canada deb. 9 1/4s, 2021 (Canada) 3,807,510
800,000 Petsec Energy, Inc. sr. sub. notes Ser. B, 9 1/2s, 2007 804,000
7,920,000 Pioneer Natural Resources Co. bonds 7.2s, 2028 7,232,148
15,000 Pogo Producing Co. sr. sub. notes Ser. B, 8 3/4s, 2007 15,000
55,000 Pride Petroleum Services, Inc. sr. notes 9 3/8s, 2007 56,650
4,620,000 Saga Petroleum ASA deb. 7 1/4s, 2027 (Norway) 4,553,564
975,000 Seagull Energy sr. sub notes 8 5/8s, 2005 996,938
40,000 Snyder Oil Corp. sr. sub. notes 8 3/4s, 2007 40,400
720,000 Southwest Royalties, Inc. company guaranty
10 1/2s, 2004 576,000
160,000 Tokai Corp. 144A FRB 9.98s, 2049 (Japan) 148,800
440,000 Transamerican Energy sr. notes Ser. B, 11 1/2s, 2002 391,600
6,830,000 Transamerican Energy sr. disc. notes stepped-coupon
Ser. B, zero % (13s, 6/15/00), 2002 (STP) 5,327,400
425,000 TransTexas Gas Corp. sr. sub. notes Ser. D,
13 3/4s, 2001 465,375
185,000 Trico Marine Services, Inc. company guaranty
Ser. B, 8 1/2s, 2005 180,375
--------------
65,480,753
Packaging and Containers (--%)
- --------------------------------------------------------------------------------------------------------------------------
100,000 AEP Industries, Inc. 144A 9 7/8s, 2007 103,750
90,000 Radnor Holdings Inc. sr. notes 10s, 2003 94,500
155,000 Riverwood International Corp. company guaranty
10 7/8s, 2008 158,100
1,700,000 Riverwood International Corp. company guaranty
10 5/8s, 2007 1,776,500
450,000 Riverwood International Corp. company guaranty
10 1/4s, 2006 460,125
--------------
2,592,975
Paper and Forest Products (--%)
- --------------------------------------------------------------------------------------------------------------------------
135,000 APP Finance II Mauritius Ltd. bonds 12s,
(16s, 2/15/04), 2049 (Indonesia) (STP) 86,400
75,000 Florida Coast Paper LLC 1st mtge. Ser. B,
12 3/4s, 2003 81,750
170,000 Huntsman Packaging Corp. company guaranty
9 1/8s, 2007 175,100
510,000 Indah Kiat Financial Mauritius Ltd. company guaranty
10s, 2007 (Indonesia) 344,250
500,000 PT Pabrik Kertas Tjiwi Kimia company guaranty
10s, 2004 (Indonesia) 335,000
145,000 Repap New Brunswick sr. notes
10 5/8s, 2005 (Canada) 142,100
1,240,000 Repap New Brunswick 144A sr. notes
9s, 2004 (Canada) 1,240,000
--------------
2,404,600
Pharmaceuticals (--%)
- --------------------------------------------------------------------------------------------------------------------------
200,000 ICN Pharmaceuticals, Inc. 144A sr. notes
9 1/4s, 2005 211,500
240,000 PharMerica, Inc. 144A sr. sub. notes 8 3/8s, 2008 238,800
--------------
450,300
Photography (--%)
- --------------------------------------------------------------------------------------------------------------------------
130,000 Panavision Inc. 144A sr. disc. notes stepped-coupon
zero % (9 5/8s, 2/1/02), 2006 (STP) 94,900
Publishing (--%)
- --------------------------------------------------------------------------------------------------------------------------
170,000 American Media Operation, Inc. sr. sub. notes
11 5/8s, 2004 184,450
180,000 Garden State Newspapers, Inc. sr. sub. notes
Ser. B, 8 3/4s, 2009 184,500
100,000 Hollinger International Publishing, Inc. sr. sub. notes
9 1/4s, 2006 105,500
120,000 Perry-Judd company guaranty 10 5/8s, 2007 126,000
100,000 Tri State Outdoor Media, Inc. 144A sr. sub. notes
11s, 2008 103,750
40,000 Von Hoffman Press Inc. 144A sr. sub. notes
10 3/8s, 2007 42,000
--------------
746,200
Real Estate (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
1,090,000 Bluegreen Corp. 144A sr. notes 10 1/2s, 2008 1,068,200
3,650,000 Chelsea GCA Realty, Inc. notes 7 1/4s, 2007 3,625,144
9,950,000 First Industrial LP med. term notes 7s, 2006 10,010,496
--------------
14,703,840
REIT's (Real Estate Investment Trust) (0.9%)
- --------------------------------------------------------------------------------------------------------------------------
4,920,000 Avalon Properties, Inc. notes 6 7/8s, 2007 4,867,553
4,670,000 Avalon Properties, Inc. notes 6 5/8s, 2005 4,608,029
8,540,000 Equity Residential Properties notes 6.63s, 2015 8,515,917
5,500,000 First Industrial Realty Trust, Inc. notes 7.6s, 2007 5,665,385
1,685,000 Health Care Property Investors, Inc. sr. notes
6 1/2s, 2006 1,638,140
10,015,000 National Health Investors, Inc. bonds 7.3s, 2007 10,211,194
9,095,000 OMEGA Healthcare Investors, Inc. notes 6.95s, 2007 9,034,700
3,050,000 Sun Communities, Inc. sr. notes 7 5/8s, 2003 3,143,300
120,000 Tanger Properties (L.P.) gtd. notes 8 3/4s, 2001 124,337
--------------
47,808,555
Retail (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
230,000 Eye Care Centers of America 144A sr. sub. notes
9 1/8s, 2008 230,000
13,685,000 Federated Department Stores, Inc. sr. notes
8 1/2s, 2003 14,861,910
190,000 Home Interiors & Gifts, Inc. 144A sr. sub. notes
10 1/8s, 2008 198,075
350,000 Jitney-Jungle Stores company guaranty 12s, 2006 399,875
1,300,000 K mart Corp. deb. 7.95s, 2023 1,322,750
310,000 K mart Corp. med. term notes 7.55s, 2004 307,780
150,000 Mothers Work, Inc. sr. notes 12 5/8s, 2005 163,875
1,000,000 NBTY Inc. 144A sr. sub. notes 8 5/8s, 2007 1,015,000
1,790,000 Service Merchandise Co., Inc. sr. sub. deb. 9s, 2004 1,288,800
695,000 Southland Corp. deb. Ser. A, 4 1/2s, 2004 560,344
60,000 Specialty Retailers, Inc. company guaranty
Ser. B, 8 1/2s, 2005 61,800
85,000 William Carter Co. 144A sr. sub. notes 12s, 2008 90,950
230,000 William Carter Co. sr. sub. notes Ser. A, 10 3/8s, 2006 244,950
200,000 Zale Corp. sr. notes Ser. B, 8 1/2s, 2007 207,000
--------------
20,953,109
Satellite Services (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
205,000 Esat Holdings Ltd. 144A sr. notes stepped-coupon
zero % (12 1/2s, 2/01/02), 2007 (Ireland) (STP) 150,675
560,000 Golden Sky Systems 144A sr. sub. notes 12 3/8s, 2006 574,000
4,300,000 ICG Services, Inc. 144A sr. discount notes
stepped-coupon zero %, (9 7/8s, 5/1/03), 2008 (STP) 2,623,000
210,000 Satellites Mexicanos S.A. de C.V. 144A sr. notes
10 1/8s, 2004 (Mexico) 201,600
390,000 TCI Satellite Entertainment, Inc. sr. sub. notes
10 7/8s, 2007 385,125
590,000 TCI Satellite Entertainment, Inc. sr. disc. notes
stepped-coupon zero % (12 1/4s, 2/1/02), 2007 (STP) 386,450
--------------
4,320,850
Shipping (--%)
- --------------------------------------------------------------------------------------------------------------------------
1,380,000 International Shipholding Corp. sr. notes 7 3/4s, 2007 1,359,300
Specialty Consumer Products (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
330,000 Decora Industries, Inc. 144A sr. sec. notes 11s, 2005 323,400
35,000 GFSI, Inc. sr. sub. notes Ser. B, 9 5/8s, 2007 36,225
10,090,000 Tyco International Ltd. company guaranty
6 3/8s, 2005 10,087,881
8,385,000 Tyco International Ltd. company guaranty
6 1/4s, 2003 8,357,497
--------------
18,805,003
Telecommunications (1.7%)
- --------------------------------------------------------------------------------------------------------------------------
3,290,000 AirTouch Communications, Inc. notes 7s, 2003 3,397,287
9,000,000 AirTouch Communications, Inc. notes 6.65s, 2008 9,036,720
920,000 Allbritton Communications Co. sr. sub. notes
Ser. B, 8 7/8s, 2008 975,200
170,000 Allegiance Telecom, Inc. sr. notes 12 7/8s, 2008 172,125
1,340,000 Allegiance Telecom, Inc. sr. disc. notes stepped-coupon
Ser. B, zero % (11 3/4s, 2/15/03), 2008 (STP) 710,200
6,715,000 AT&T Capital Corp. med. term notes 6.6s, 2005 6,744,277
2,000,000 Barak I.T.C. sr. disc. notes stepped-coupon Ser. B,
zero % (12 1/2s, 11/15/02), 2007 (STP) 1,200,000
750,000 BTI Telecom Corp. sr. notes 10 1/2s, 2007 746,250
190,000 Call-Net Enterprises, Inc. sr. disc. notes stepped-coupon
zero % (8.94s, 8/15/03), 2008 (Canada) (STP) 123,500
370,000 Caprock Communications Corp. 144A sr. notes
12s, 2008 375,550
400,000 Celcaribe S.A. sr. notes 13 1/2s,2004 (Columbia) 424,000
1,155,000 CellNet Data Systems, Inc. sr. disc. notes
stepped-coupon zero % (14s, 10/1/02), 2007 (STP) 652,575
250,000 Cencall Communications Corp. sr. disc. notes
stepped-coupon zero % (10 1/8s, 1/15/99), 2004 (STP) 253,125
440,000 Centennial Cellular Corp. sr. notes 8 7/8s, 2001 469,700
260,000 Charter Communications International, Inc.
disc. notes stepped-coupon Ser. B, zero %
(14s, 3/15/01), 2007 (STP) 226,200
9,610,000 Colt Telecommunications Group PLC sr. notes
8 7/8s, (United Kingdom) 5,999,494
5,625,000 Colt Telecommunications Group PLC bonds
7 5/8s, 2008 (United Kingdom) 3,195,304
210,000 Colt Telecommunications Group PLC sr. disc. notes
stepped-coupon zero % (12s, 12/15/01), 2006
(United Kingdom) (STP) 171,150
150,000 Comcast Cellular Holdings sr. notes Ser. B, 9 1/2s, 2007 157,875
40,000 Consorcio Ecuatoriano notes 14s, 2002 (Ecuador) 38,800
1,500,000 CSC Holdings, Inc. deb. 7 5/8s, 2018 1,492,470
190,000 CTI Holdings S.A. 144A sr. notes stepped-coupon
zero % (11 1/2s, 4/15/03), 2008 (STP) 106,875
740,000 Dobson Wireline Co. 144A sr. notes 12 1/4s, 2008 747,400
90,000 E. Spire Communications, Inc. sr. notes 13 3/4s, 2007 105,075
785,000 E. Spire Communications, Inc. sr. disc. notes
stepped-coupon zero % (12 3/4s, 4/1/01), 2006 (STP) 629,963
1,000,000 Econophone, Inc. 144A notes stepped-coupon zero %
(11s, 2/15/03), 2008 (STP) 595,000
140,000 Esprit Telecom Group PLC sr. notes 11 1/2s, 2007
(United Kingdom) 148,400
180,000 Facilicom International sr. notes Ser. B., 10 1/2s, 2008 181,800
360,000 Flag Ltd. 144A sr. notes 8 1/4s, 2008 (Bermuda) 365,400
105,000 Fonorola, Inc. sr. notes 12 1/2s, 2002 (Canada) 118,519
2,140,000 Global Crossing Holdings 144A sr. notes 9 5/8s, 2008 2,268,400
750,000 GST Telecommunications, Inc. company guaranty
stepped-coupon zero % (13 7/8s, 15/15/00), 2005 (STP) 622,500
1,310,000 GST Telecommunications, Inc. 144A sr. disc. notes
stepped-coupon zero % (10 1/2s, 5/1/03), 2008 (STP) 812,200
1,200,000 Hyperion Telecommunications, Inc.
sr. disc. notes stepped-coupon Ser. B, zero %
(13s, 4/15/01), 2003 (STP) 924,000
180,000 IDT Corp. sr. notes 8 3/4s, 2006 172,800
300,000 Intercel, Inc. sr. disc. notes stepped-coupon zero %
(12s, 5/1/01), 2006 (STP) 234,750
120,000 Intercel, Inc. sr. disc. notes stepped-coupon zero %
(12s, 2/1/01), 2006 (STP) 96,600
1,060,000 Intermedia Communications, Inc. 144A
sr. notes 8.6s, 2008 1,086,500
440,000 Intermedia Communications, Inc. sr. notes
Ser. B, 8 1/2s, 2008 446,050
1,525,000 Intermedia Communications, Inc.
sr. disc. notes stepped-coupon Ser. B, zero %
(11 1/4s, 7/15/02), 2007 (STP) 1,151,375
370,000 Iridium LLC/Capital Corp. company guaranty
Ser. B, 14s, 2005 395,900
370,000 IXC Communications, Inc. 144A sr. sub. notes 9s, 2008 380,175
560,000 KMC Telecom Holdings, Inc. 144A sr. disc. notes
stepped-coupon zero % (12 1/2s, 2/15/03), 2008 (STP) 341,600
470,000 Knology Holdings Inc. sr. disc. notes stepped-coupon
zero % (11 7/8s, 10/15/02), 2007 (STP) 276,125
60,000 L-3 Communications Corp. sr. sub. notes Ser. B,
10 3/8s, 2007 66,600
310,000 L-3 Communications Corp. sr. sub. notes 8 1/2s, 2008 316,975
14,265,000 LCI International, Inc. sr. notes 7 1/4s, 2007 14,637,031
120,000 Level 3 Communication, Inc. sr. notes 9 1/8s, 2008 118,200
180,000 McCaw International Ltd sr. discount notes
stepped-coupon zero % (13s, 4/15/02), 2007 (STP) 119,700
140,000 Metrocall, Inc. sr. sub. notes 9 3/4s, 2007 144,200
115,000 MetroNet Communications Corp. sr. disc. notes
stepped-coupon zero % (10 3/4s, 11/1/02), 2007
(Canada) (STP) 77,913
830,000 MetroNet Communications Corp. 144A
sr. disc. notes stepped-coupon zero %
(9.95s, 6/15/03), 2008 (STP) 527,050
1,150,000 Millicom International Cellular S.A. sr. disc. notes
stepped-coupon zero % (13 1/2s, 6/1/01), 2006
(Luxembourg) (STP) 915,688
120,000 MJD Communications Inc. 144A sr. sub. notes
9 1/2s, 2008 124,200
130,000 MJD Communications Inc. 144A FRN 10s, 2008 131,300
205,000 Mobile Telecommunications Tech. sr. notes
13 1/2s, 2002 237,800
860,000 NEXTEL Communications, Inc. sr. disc. notes
stepped-coupon zero % (10.65s, 9/15/02), 2007 (STP) 591,250
2,890,000 NEXTEL Communications, Inc. sr. disc. notes
stepped-coupon zero % (9.95s, 2/15/03), 2008 (STP) 1,900,175
700,000 NEXTEL Communications, Inc. sr. disc. notes
stepped-coupon zero % (9 3/4s, 10/31/02), 2007 (STP) 469,000
1,100,000 NEXTEL Communications, Inc. sr. disc. notes
stepped-coupon zero % (9 3/4s, 2/15/99), 2004 (STP) 1,102,750
620,000 NorthEast Optic Network, Inc. sr. notes 12 3/4s, 2008 626,200
2,060,000 NTL Inc. 144A sr. notes stepped-coupon zero %
(9 3/4s, 4/01/03), 2008 (STP) 1,382,775
315,000 Omnipoint Corp. sr. notes 11 5/8s, 2006 337,050
250,000 Paging Network, Inc. sr. sub. notes 10s, 2008 263,125
570,000 Price Communications Wireless Inc. 144A
sr. notes 9 1/8s, 2006 575,700
1,000,000 Primus Telecom Group sr. notes 11 3/4s, 2004 1,070,000
250,000 Primus Telecom Group 144A sr. notes 9 7/8s, 2008 250,000
700,000 Qwest Communications International, Inc.
sr. disc. notes stepped-coupon zero %
(9.47s, 10/15/02), 2007 (STP) 540,750
250,000 Qwest Communications International, Inc.
sr. disc. notes stepped-coupon zero %
(8.29s, 2/1/03), 2008 (STP) 186,250
510,000 RCN Corp. sr. disc. notes stepped-coupon zero %
(11 1/8s, 10/15/02), 2007 (STP) 330,225
690,000 RCN Corp. sr. disc. notes stepped-coupon Ser. B,
zero % (9.8s, 2/15/03), 2008 (STP) 426,075
180,000 RSL Communications Ltd. company guaranty
9 1/8s, 2008 178,425
260,000 RSL Communications Ltd. company guaranty,
stepped-coupon zero % (10 1/8s, 3/1/03), 2008 (STP) 165,100
220,000 Sprint Spectrum L.P. sr. notes 11s, 2006 254,100
300,000 Supercanal Holdings S.A. 144A sr. notes
11 1/2s, 2005 (Argentina) 288,000
190,000 Telecom Tech, Inc. 144A sr. sub. notes 9 3/4s, 2008 194,750
110,000 Telesystem International Wireless Inc.
sr. disc. notes stepped-coupon Ser. C, zero %
(10 1/2s, 11/1/02), 2007 (STP) 66,000
1,060,000 Time Warner Telecom Inc. sr. notes 9 3/4s, 2008 1,083,850
100,000 Transtel S.A. 144A pass-through certificates
12 1/2s, 2007 (Colombia) 90,000
580,000 United International Holdings sr. disc. notes
stepped-coupon Ser. B, zero %
(10 3/4s, 2/15/03), 2008 (STP) 366,850
300,000 US Xchange LLC 144A sr. notes 15s, 2008 318,750
1,500,000 WinStar Equipment Corp. company guaranty
12 1/2s, 2004 1,691,250
9,340,000 WorldCom, Inc. notes 7 3/4s, 2007 10,038,072
--------------
90,972,338
Telephone Utilities (--%)
- --------------------------------------------------------------------------------------------------------------------------
100,000 Iridium LLC company guaranty Ser. A, 13s, 2005 102,000
Textiles (--%)
- --------------------------------------------------------------------------------------------------------------------------
380,000 Day International Group, Inc. company guaranty
9 1/2s, 2008 382,850
810,000 Galey & Lord Inc. company guaranty 9 1/8s, 2008 781,650
50,000 Glenoit Corp. company guaranty 11s, 2007 52,750
105,000 Polymer Group, Inc. company guaranty Ser. B, 9s, 2007 107,625
280,000 Polymer Group, Inc. 144A sr. sub.notes 8 3/4s, 2008 284,200
1,210,000 Polysindo International Finance company guaranty
13s, 2001 (Indonesia) (In default) (NON) 387,200
200,000 Polysindo International Finance company guaranty
11 3/8s, 2006 (Indonesia) (In default) (NON) 64,000
150,000 Tultex Corp. sr. notes 10 5/8s, 2005 153,000
470,000 Westpoint Stevens, Inc. 144A sr. notes 7 7/8s, 2008 479,400
--------------
2,692,675
Transportation (1.1%)
- --------------------------------------------------------------------------------------------------------------------------
7,185,000 Burlington Northern Santa Fe bonds 6 7/8s, 2027 7,235,295
1,905,000 Burlington Northern Santa Fe notes 6 3/8s, 2005 1,913,058
220,000 Calair LLC 144A company guaranty 8 1/8s, 2008 217,250
390,000 Canadian Airlines Corp. sec. 10s, 2005 (Canada) 386,100
1,570,000 Cathay International Ltd. 144A sr. notes 13s, 2008 1,389,450
25,000 Chemical Leaman Corp. sr. notes 10 3/8s, 2005 28,750
55,000 Coach USA, Inc. 144A company guaranty 9 3/8s, 2007 57,475
190,000 Consorcio/MCII Holdings sec. notes
stepped-coupon zero % (12s, 11/15/98), 2002 (STP) 182,163
590,000 Continental Airlines, Inc. sr. notes 9 1/2s, 2001 628,350
2,066,128 Continental Airlines, Inc. pass-through certificates
Ser. 97CI, 7.42s, 2007 2,117,223
6,800,000 Continental Airlines, Inc. pass-through certificates
Ser. 981C, 6.541s, 2009 6,791,908
17,235,000 CSX Corp. deb. 7.95s, 2027 19,243,395
430,000 Eletson Holdings, Inc. 1st pfd. mtge. notes
9 1/4s, 2003 (Greece) 444,513
140,000 Hermes Europe Railtel sr. notes 11 1/2s (Netherlands) 159,600
150,000 International Shipholding Corp. sr. notes 9s, 2003 154,500
165,000 Johnstown America Industries, Inc. company guaranty
Ser. C, 11 3/4s, 2005 182,325
290,000 Kitty Hawk, Inc. company guaranty 9.95s, 2004 305,950
155,000 MC Shipping, Inc. 144A sr. notes 11 1/4s, 2008 153,450
4,665,000 Norfolk Southern Corp. bonds 7.8s, 2027 5,262,680
8,430,000 Norfolk Southern Corp. bonds 7.05s, 2037 8,929,225
600,000 Pegasus Shipping company guaranty Ser. A,
11 7/8s, 2004 603,750
2,000,000 Southwest Airlines Co. deb. 7 7/8s, 2007 2,223,700
30,000 TFM SA DE CV company guaranty
10 1/4s, 2007 (Mexico) 30,375
160,000 TFM SA DE CV company guaranty stepped-coupon
zero % (11 3/4s, 6/15/02), 2009 (Mexico) (STP) 106,800
1,000,000 Trans World Airlines, Inc. sr. notes 11 1/2s, 2004 1,051,250
575,000 US Air Inc. pass thru certificates Ser. 93-A2,
9 5/8s, 2003 621,000
125,000 Viking Star Shipping sr. secd. notes 9 5/8s, 2003 129,688
--------------
60,549,223
Utilities (1.4%)
- --------------------------------------------------------------------------------------------------------------------------
170,000 AES China Generating Co. sr. notes
10 1/8s, 2006 (China) 158,950
3,840,000 Arizona Public Service Co. sr. notes 6 3/4s, 2006 3,900,058
4,035,000 California Energy Corp. disc. notes 10 1/4s, 2005 4,292,998
175,000 California Energy Corp. sr. notes 9 7/8s, 2003 186,688
1,300,000 Calpine Corp. sr. notes 8 3/4s, 2007 1,321,359
5,520,000 CMS Energy Corp. pass-through certificates 7s, 2005 5,358,098
2,200,000 CMS Energy Corp. sr. notes 8 1/8s, 2002 2,261,006
4,140,000 Connecticut Light & Power Co. 1st mtge.
Ser. A, 7 7/8s, 2001 4,262,627
3,090,000 Connecticut Light & Power Co. 1st mtge.
Ser. C, 7 3/4s, 2002 3,185,327
1,160,000 Edison Mission Energy 144A company guaranty
7.33s, 2008 1,225,436
4,691,000 EIP Funding-Public Service Co. of New Mexico
deb. 10 1/4s, 2012 5,514,693
110,000 El Paso Electric Co. 1st mtge. Ser. D, 8.9s, 2006 122,694
6,040,000 El Paso Electric Co. 1st mtge. Ser. B, 7 3/4s, 2001 6,180,853
166,000 First PV Funding Corp. deb. Ser. 86A, 10.3s, 2014 176,031
36,000 First PV Funding Corp. deb. 10.15s, 2016 38,153
3,265,000 Illinova Corp. sr. notes 7 1/8s, 2004 3,315,934
3,745,000 Israel Electric Corp., Ltd. 144A sr. notes
7 1/4s, 2006 (Israel) 3,744,363
135,000 Long Island Lighting Co. deb. 9s, 2022 152,856
255,000 Midland Funding Corp. deb. Ser. A, 11 3/4s, 2005 305,694
1,358,157 Midland Funding Corp. I deb. Ser. C-94, 10.33s, 2002 1,465,018
300,000 Niagara Mohawk Power Corp. med. term notes
9.95s, 2000 304,476
1,133,807 Northeast Utilities System notes Ser. A, 8.58s, 2006 1,172,890
3,065,128 Northeast Utilities System notes Ser. B, 8.38s, 2005 3,105,497
1,970,000 Orange Cogen Funding 144A company guaranty
8.175s, 2022 2,164,833
3,450,000 Salton Sea Funding Corp. company guaranty
Ser. E, 8.3s, 2011 3,809,283
3,925,000 Texas New-Mexico Power Utilities 1st mtge.
9 1/4s, 2000 4,132,554
6,455,000 Texas Utilities Co. secd. lease fac. bonds 7.46s, 2015 6,758,514
5,095,000 Texas Utilities Electric Capital Trust V
company guaranty 8.175s, 2037 5,281,885
--------------
73,898,768
--------------
Total Corporate Bonds and Notes
(cost $958,403,689) $ 971,054,620
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (13.2%) (a)
PRINCIPAL AMOUNT VALUE
U.S. Government Agency Mortgage Obligations (0.9%)
- --------------------------------------------------------------------------------------------------------------------------
Federal National Mortgage Association
$43,285,000 6 1/2s, TBA, August 15, 2028 $ 43,054,724
6,790,000 5.94s, December 12, 2005 6,838,820
--------------
49,893,544
U.S. Government Agency Mortgage Pass-Through Certificates (5.9%)
- --------------------------------------------------------------------------------------------------------------------------
1,999,139 Federal Home Loan Mortgage Association 8 3/4s,
with due dates from May 1, 2009 to June 1, 2009 2,107,833
Federal Home Loan Mortgage Corp.
6,742,007 7s July 1, 2012 6,884,534
24,657,122 5 1/2s, with due dates from March 1, 2011 to
July 1, 2011 23,904,596
Federal National Mortgage Association
179,778 11s, with due dates from October 1, 2015 to
March 1, 2016 204,498
138,202 8 3/4s, July 1, 2009 144,507
5,875,798 7s, with due dates from September 1, 2027 to
July 15, 2028 5,958,416
4,953,353 6 1/2s, with due dates from March 15, 2028 to
July 1, 2028 4,927,001
1,831,845 5 1/2s, Dwarf, with due dates from March 1, 2013 to
March 15, 2013 1,774,601
Government National Mortgage Association
1,043 15s, September 15, 2011 1,270
43,554,773 8s, with due dates from June 15, 2024 to
November 15, 2027 45,195,643
32,113 7 1/2s, September 15, 2005 33,327
123,999,870 7s, with due dates from July 20, 2024 to
June 15, 2028 125,936,844
57,527,821 6 1/2s, with due dates from February 15, 2026 to
July 15, 2028 57,347,783
Government National Mortgage Association
Adjustable Rate Mortgages
13,919,683 7 3/8s, with due dates from June 20, 2022 to
May 20, 2024 14,235,743
28,007,035 7s, with due dates from July 20, 2023 to
June 15, 2028 28,723,843
3,241,357 5 1/2s, with due dates from August 20, 2027 to
April 15, 2028 3,262,371
--------------
320,642,810
U.S. Treasury Obligations (6.4%)
- --------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Bonds
24,380,000 11 5/8s, November 15, 2004 (SEG) 32,074,816
4,500,000 10 3/4s, August 15, 2005 5,828,220
20,330,000 6 1/8s, November 15, 2027 21,489,420
U.S. Treasury Notes
1,220,000 11 7/8s, November 15, 2003 (SEG) 1,565,797
5,765,000 5 3/4s, November 15, 2000 5,793,825
7,750,000 5 5/8s, May 15, 2008 7,822,618
78,375,000 5 5/8s, December 31, 2002 78,570,938
5,985,000 5 5/8s, May 15, 2001 6,008,401
145,970,000 5 1/2s, May 31, 2003 145,695,576
36,420,000 5 1/2s, March 31, 2003 36,340,240
2,105,000 5 1/2s, February 28, 2003 2,099,401
3,075,000 5 1/2s, May 31, 2000 3,074,047
--------------
346,363,299
--------------
Total U.S. Government and Agency Obligations
(cost $715,235,743) $ 716,899,653
COLLATERALIZED MORTGAGE OBLIGATIONS (2.8%) (a)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$10,081,757 Amresco Commercial Mortgage Funding I
Ser. 97-C1, Class A1, 6.73s, 2029 $ 10,221,957
Chase Mortgage Finance Corp.
1,676,065 Ser. 93-3, Class B13, 7.461s, 2028 1,394,276
2,161,486 Ser. 94-G, Class B13, 7s, 2025 2,172,631
3,790,000 Ser. 98-S2, Class A14 6 3/4s, 2028 3,794,738
Commercial Mortgage Acceptance Corp.
4,350,000 Ser. 97-ML1, Class D, 7.11s, 2030 4,403,695
11,325,000 Ser. 97-ML1, Class A2, 6.57s, 2007 11,533,805
4,010,000 Ser. 97-ML1, Class A2, 6.53s, 2007 4,078,295
Commercial Mortgage Trust Co.
17,085,000 Ser. 98-C1, Class A2, 7s, 2011 16,812,708
6,750,000 Ser. 98-C1, Class B, 7s, 2011 6,347,109
First Union-Lehman Brothers
Commercial Mortgage Co.
4,390,000 Ser. 97-C2, Class D, 7.12s, 2012 4,402,347
6,665,000 Ser. 98-C2, Class D, 6.778s, 2013 6,477,547
6,740,000 Ser. 97-C2, Class A3, 6.65s, 2007 6,874,800
65,193,570 Ser. 97-C2, Class Interest Only (IO), 1.092s, 2027 5,849,595
1,248,647 GE Capital Mortgage Services, Inc. 144A
Ser. 94-12, Class B3, 6s, 2009 1,123,783
GMAC Commercial Mortgage Securities Inc.
6,510,000 Ser. 98-C1, Class E, 7.153s, 2030 6,643,252
19,869 Ser. 97-C2, Class A1, 6.45s, 2004 20,075
9,194,352 Ser. 98-C1, Class A1, 6.44s, 2030 9,283,423
GS Mortgage Securities Corp. II
5,380,000 Ser. 98-GLII, Class A2, 6.562s, 2031 5,462,381
2,940,000 Ser. 98-GLII, Class D, 7.191s, 2031 2,957,456
Housing Securities Inc.
941,244 Ser. 91-B, Class B6, 9s, 2006 940,655
1,341,331 Ser. 93-F, Class F9M2, 7s, 2023 1,324,984
248,509 Ser. 93-J, Class J4, 6.66s, 2009 236,472
135,230 Ser. 93-J, Class J5, 6.66s, 2009 115,030
220,003 Ser. 94-1, Class AB1, 6 1/2s, 2009 207,421
2,687,000 Merrill Lynch Mortgage Investors, Inc. Ser. 98-C2,
Class D, 6.96s, 2030 2,700,015
Morgan Stanley Capital I
3,000,000 Ser. 96-WF1, Class A2, 7.218s, 2006 3,117,656
1,670,000 Ser. 98-XL1, Class E, 7.15s, 2030 1,714,098
308,916 Prudential Home Mortgage Securities sub. bonds
Ser. 94-31, Class B3, 8s, 2009 308,771
Prudential Home Mortgage Securities
2,965,885 Ser. 92-25, Class B3, 8s, 2022 (In default) (NON) 2,915,372
1,156,046 Ser. 94-A, Class 4B, 7 1/2s, 2023 1,074,039
3,450,298 Ser. 94-A, Class 4B, 6.802s, 2024 3,412,021
Prudential Home Mortgage Securities 144A
3,136,463 Ser. 95-C, Class B1, 7.815s, 2001 3,124,212
1,161,192 Ser. 95-D, Class 5B, 7.54s, 2024 881,780
2,029,513 Ser. 93-E, Class 5B, 7.393s, 2023 1,676,568
3,620,990 Ser. 93-D, Class 2B, 7.108s, 2023 3,657,199
1,114,577 Ser. 94-D, Class B4, 6.312s, 2009 1,062,853
3,725,000 Residential Funding Mortgage Corp. Ser. 98-S13,
Class A21 6 3/4s, 2008 3,708,703
Ryland Mortgage Securities Corp.
1,894,750 Ser. 94-7C, Class B1, 7.358s, 2025 1,934,421
1,338,310 Ser. 94-7C, Class B2, 7.358s, 2025 1,339,775
4,238,226 Securitized Asset Sales, Inc. Ser. 93-J, Class 2B, 6.807s 4,189,221
372,000 Travelers Mortgage Securities Corp. coll. oblig.
Ser. 1, Class Z2, 12s, 2014 426,173
--------------
Total Collateralized Mortgage Obligations
(cost $144,597,647) $ 149,921,312
FOREIGN GOVERNMENT BONDS AND NOTES (1.2%) (a)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
DEM 10,495,000 Germany (Federal Republic of) Unity Fund
bonds 8s, 2002 $ 6,608,072
DEM 34,305,000 Germany (Federal Republic of) bonds
Ser. 98, 5 5/8s, 2028 20,307,094
USD 5,050,000 Korea (Republic of) unsub. 8 7/8s, 2008 4,757,100
USD 7,400,000 Russia (Government of) 144A bonds
12 3/4s, 2028 6,086,500
USD 10,850,000 Quebec (Province of) deb. Ser. NM,
7 1/8s, 2024 11,486,787
USD 3,260,000 Russia (Government of) deb. principal loans
FRB 6.625s, 2020 (POR) 1,407,913
ZAR 48,063,000 South Africa (Republic of) bonds
Ser. 153, 13s, 2010 6,778,297
USD 12,785,000 United Mexican States sec. Ser. B,
6 1/4s, 2019 10,564,246
--------------
Total Foreign Government Bonds and Notes
(cost $70,815,759) $ 67,996,009
ASSET-BACKED SECURITIES (0.6%) (a)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$ 5,621,904 First Plus Ser. 98-ACl 8 1/2s, 2023 $ 5,577,983
9,633,146 Green Tree Recreational Equipment & Cons.
Ser. 97-B, Class A1, 6.55s, 2028 9,714,427
6,857,978 Green Tree Recreational Equipment & Cons.
Ser. 98-A, Class A1C, 6.18s, 2019 6,866,551
39,290,000 Lehman Manufactured Housing Ser. 98-1, Class IO,
0.819s, 2028 1,878,553
7,140,000 Sassco Fashions Ser. RF2 8.58s, 2028 7,636,453
--------------
Total Asset-Backed Securities (cost $31,804,246) $ 31,673,967
BRADY BONDS (0.6%) (a)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$15,161,000 Argentina (Republic of) Ser. L-GP, stepped-coupon
5 3/4s, (6s, 3/31/99), 2023 (STP) $ 11,446,555
6,195,521 Brazil (Government of) stepped-coupon 5s,
(8s, 4/30/00), 2014 (STP) (POR) 4,724,085
11,553,000 Peru (Government of) 144A Ser. PDI, 4s, 2017 7,278,390
7,398,000 Philippines (Government of) Ser. B, 6 1/2s, 2017 6,510,240
76,314 Russian (Government of) deb. 6.625s, 2015 38,825
--------------
Total Brady Bonds (cost $31,030,817) $ 29,998,095
UNITS (0.1%) (a)
NUMBER OF UNITS VALUE
- --------------------------------------------------------------------------------------------------------------------------
260 Bestel SA de CV units, stepped-coupon zero %
(12 3/4s, 5/15/03), 2005 (STP) $ 181,350
340 Birch Telecom Inc., 144A units 14s, 2008 340,000
810 Diva Systems Corp. 144A units stepped-coupon
zero % (12 5/8s, 3/1/03), 2008 (STP) 413,100
1,775 DTI Holdings Inc. units stepped-coupon zero %
(12 1/2s, 3/1/03), 2008 (STP) 931,875
330 ICO Global Communications Ltd. units 15s, 2005 330,300
630 Long Distance International Inc. 144A units
12 1/4s, 2008 642,600
430 Mediq 144A units, stepped-coupon zero %
(13s, 6/1/03), 2009 (STP) 230,050
150 Onepoint Communications, Inc. units 14 1/2s, 2008 140,250
450 Pathnet, Inc. 144A units 12 1/4s, 2008 474,750
920 Rhythms Netconn 144A units stepped-coupon
zero % (13 1/2s, 5/15/03), 2008 (STP) 418,600
390 Startec Global Communications Corp. units 12s, 2008 382,200
70 Stone Container Corp. units sr. sub. 12 1/4s, 2002 72,100
300 Telehub Communications Corp. units
stepped-coupon zero % (13 7/8s,7/31/02), 2005 (STP) 204,000
310 Transamerican Refining units 16s, 2003 316,975
270 Versatel Teleco units 13 1/4s, 2008 284,850
540 York Power Funding Ltd. unit 12s, 2007 540,000
--------------
Total Units (cost $6,007,684) $ 5,903,000
PREFERRED STOCKS (0.2%) (a)
NUMBER OF SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------------
4,840 AmeriKing, Inc. $3.25 pfd. (PIK) $ 130,680
35 Anvil Holdings Ser. B, $3.25 pfd. (PIK) 805
27,755 California Federal Bancorp Inc. Ser. A, $2.281 pfd. 763,263
676 Capstar Broadcasting Inc. 144A $12.00 pfd. 78,416
16,637 CGA Group Ltd. 144A Ser. A, $13.75 pfd. (PIK) 465,836
6,155 Chevy Chase Capital Corp. Ser. A, $5.188 pfd. 336,986
260 Concentric Network Corp. 144A 13.50% pfd. (PIK) 269,750
2,892 CSC Holdings, Inc. Ser. M, 11.125 cum. (PIK) 338,364
98 Echostar Communications, Inc. 12.125 pfd. 109,270
148 El Paso Electric Co. 11.40 pfd (PIK) 16,132
6,972 Nextlink Communications, Inc. 144A 7.00 pfd. 407,851
81 Paxson Communications Corp. 144A 13.25% pfd. (PIK) 805,950
12,371 Public Service Co. of New Hampshire 2.651
1st mtge. pfd. 327,832
830 SFX Broadcasting, Inc. Ser. E, 12.625 pfd. (PIK) 97,525
6,775 Webster Financial 7.375 pfd. 6,882,316
--------------
Total Preferred Stocks (cost $10,581,822) $ 11,030,976
CONVERTIBLE BONDS AND NOTES (0.1%) (a)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$ 1,140,000 APP Global Finance Ltd. 144A cv. sec. 2s, 2000
(United Kingdom) $ 940,500
500,000 Corporate Express, Inc. cv. notes 4 1/2s, 2000 461,250
2,160,000 Exide Corp. 144A cv. sr. sub. notes 2.9s, 2005 1,393,200
100,000 Integrated Device Technology, Inc. cv. sub. notes
5 1/2s, 2002 80,625
580,000 Jacor Communications, Inc. cv. sr. notes zero %, 2011 480,675
1,000,000 LAM Research Corp. 144A cv. sub. notes 5s, 2002 810,000
45,000 National Semiconductor Corp. 144A cv. deb.
6 1/2s, 2002 41,063
8,810,000 Western Digital Corp. 144A cv. sub. deb. zero %, 2018 2,136,425
--------------
Total Convertible Bonds and Notes (cost $7,556,249) $ 6,343,738
<CAPTION>
MUNICIPAL BONDS AND NOTES (0.1%) (a) (cost $5,410,000)
PRINCIPAL AMOUNT RATING VALUE
- --------------------------------------------------------------------------------------------------------------------------
$ 5,410,000 NJ Econ. Dev. Auth. Rev. Bonds, Ser. A,
Municipal Bond Investors Assurance
Corporation, 7.425s, 2/15/29 Aaa $ 6,054,331
CONVERTIBLE PREFERRED STOCKS (0.1%) (a)
NUMBER OF SHARES VALUE
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
3,000 Chancellor Media Corp. $3.00 cv. cum. pfd. $ 313,500
1,675 Chesapeake Energy Corp. 144A 3.50 cv. cum. pfd. 57,789
77,000 K mart Financing I 3.875 cv. cum. pfd. 4,774,000
--------------
Total Convertible Preferred Stocks (cost $4,452,893) $ 5,145,289
WARRANTS (--%)(a)(NON) EXPIRATION
NUMBER OF WARRANTS DATE VALUE
- --------------------------------------------------------------------------------------------------------------------------
660 Allegiance Telecom, Inc. 2/3/08 $ 11,880
1,155 Cellnet Data Systems, Inc. 9/15/07 64,680
16,000 CGA Group Ltd. 144A 1/1/04 320
685 Club Regina, Inc. 144A 12/1/04 20,550
210 Colt Telecommunications Group PLC 12/31/06 73,500
1,110 Epic Resorts 6/15/05 11
205 Esat Holdings, Inc. (Ireland) 9/9/99 7,226
1,732 Fitzgerald Gaming Co. 12/19/98 17
200 Globalstar Telecom 144A 2/15/04 20,000
250 Intermedia Communications, Inc. 6/1/00 38,750
560 KMC Telecom Holdings, Inc. 4/15/08 11,200
470 Knology Holdings, Inc. 144A 10/15/07 705
180 McCaw International Ltd. 4/5/07 720
960 Powertel, Inc. 2/1/06 9,120
625 UIH Australia/Pacific, Inc. 144A 5/15/06 9,375
--------------
Total Warrants (cost $139,903) $ 268,054
SHORT-TERM INVESTMENTS (1.6%) (a)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$25,000,000 Asset Securitization Corp. effective yield of 5.52%,
August 31, 1998 $ 24,885,000
64,000,000 Interest in $750,000,000 joint tri-party repurchase
agreement dated July 31, 1998 with Goldman Sachs
due August 3, 1998 with respect to various U.S. Treasury
obligations -- maturity value of $64,030,187 for an
effective yield of 5.66% 64,010,062
--------------
Total Short-Term Investments (cost $88,895,062) $ 88,895,062
- --------------------------------------------------------------------------------------------------------------------------
Total Investments (cost $4,980,167,143) (b) $5,463,079,603
- --------------------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $5,441,655,519.
(b) The aggregate identified cost on a tax basis is $4,982,694,223, resulting in gross unrealized appreciation and
depreciation of $642,069,884 and $161,684,504, respectively, or net unrealized appreciation of $480,385,380.
(NON) Non-income-producing security.
(STP) The interest rate and date shown parenthetically represent the new interest rate to be paid and the date the
fund will begin receiving interest at this rate.
(POR) Portion of income will be received in additional securities.
(PIK) Income may be received in cash or additional securities at the discretion of the issuer.
(SEG) A portion of this security was pledged and segregated with the custodian to cover margin requirements for
futures contracts at July 31, 1998.
(CUS) This entity provides subcustodian services to the fund.
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).
The rates shown on Floating Rate Bonds (FRB) and Floating Rate Notes (FRN) are the current interest rates
shown at July 31, 1998, which are subject to change based on the terms of the security.
<CAPTION>
- -------------------------------------------------------------------------------
Forward Currency Contracts to Buy at July 31, 1998
(aggregate face value $65,661,008)
Aggregate Face Delivery Unrealized
Market Value Value Date Depreciation
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Australian Dollars $ 343,607 $ 352,901 9/16/98 $ (9,294)
British Pounds 518,376 518,705 9/16/98 (329)
Deutschemarks 64,502,893 64,789,402 9/16/98 (286,509)
- -------------------------------------------------------------------------------
$(296,132)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Forward Currency Contracts to Sell at July 31, 1998
(aggregate face value $108,921,359)
Market Aggregate Face Delivery Unrealized
Value Value Date Appreciation
- -------------------------------------------------------------------------------
Deutschemarks $100,577,647 $101,120,181 9/16/98 $ 542,534
South African Rand 7,110,833 7,801,178 9/16/98 690,345
- -------------------------------------------------------------------------------
$1,232,879
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Futures Contracts Outstanding at July 31, 1998
Aggregate Face Expiration Unrealized
Total Value Value Date Appreciation
- -------------------------------------------------------------------------------
US Treasury 20 year
Bonds (long) $33,100,313 $32,712,039 Sep-98 $388,274
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
TBA Sales Commitments at July 31, 1998
(premium received $43,011,857)
Principal Settlement Market
Description Amount Date Value
- -------------------------------------------------------------------------------
GNMA, 6 1/2s, August, 2028 $43,145,000 Aug-98 $43,009,956
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
July 31, 1998
<S> <C>
Assets
- -----------------------------------------------------------------------------------------------
Investments in securities, at value (identified cost $4,980,167,143) (Note 1) $5,463,079,603
- -----------------------------------------------------------------------------------------------
Dividends and interest receivable 32,622,321
- -----------------------------------------------------------------------------------------------
Cash 332,571
- -----------------------------------------------------------------------------------------------
Foreign currency (cost $31,651) 32,394
- -----------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 12,709,594
- -----------------------------------------------------------------------------------------------
Receivable for securities sold 89,226,983
- -----------------------------------------------------------------------------------------------
Receivable for variation margin 8,438
- -----------------------------------------------------------------------------------------------
Receivable for open forward currency contracts 1,310,690
- -----------------------------------------------------------------------------------------------
Receivable for closed forward currency contracts 175,999
- -----------------------------------------------------------------------------------------------
Total assets 5,599,498,593
Liabilities
- -----------------------------------------------------------------------------------------------
Payable for securities purchased 99,046,366
- -----------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 4,580,661
- -----------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 6,611,511
- -----------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 790,327
- -----------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 72,485
- -----------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 2,834
- -----------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 2,042,266
- -----------------------------------------------------------------------------------------------
Payable for open forward currency contracts 373,943
- -----------------------------------------------------------------------------------------------
Payable for closed forward currency contracts 314,819
- -----------------------------------------------------------------------------------------------
TBA sale commitments at value (proceeds received $43,011,857) 43,009,956
- -----------------------------------------------------------------------------------------------
Other accrued expenses 997,906
- -----------------------------------------------------------------------------------------------
Total liabilities 157,843,074
- -----------------------------------------------------------------------------------------------
Net assets $5,441,655,519
Represented by
- -----------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $4,581,900,369
- -----------------------------------------------------------------------------------------------
Distributions in excess of net investment income (Note 1) (11,819,799)
- -----------------------------------------------------------------------------------------------
Accumulated net realized gain on investments and
foreign currency transactions (Note 1) 387,335,567
- -----------------------------------------------------------------------------------------------
Net unrealized appreciation of investments and
assets and liabilities in foreign currencies 484,239,382
- -----------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to capital shares outstanding $5,441,655,519
Computation of net asset value and offering price
- -----------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($3,387,619,998 divided by 180,048,584 shares) $18.82
- -----------------------------------------------------------------------------------------------
Offering price per class A share (100/94.25 of $18.82)* $19.97
- -----------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($1,305,897,316 divided by 69,962,275 shares)** $18.67
- -----------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($276,961,960 divided by 14,838,406 shares) $18.67
- -----------------------------------------------------------------------------------------------
Offering price per class M share (100/96.50 of $18.67)* $19.35
- -----------------------------------------------------------------------------------------------
Net asset value, offering price and redemption price per class Y share
($471,176,245 divided by 25,000,359 shares) $18.85
- -----------------------------------------------------------------------------------------------
* On single retail sales of less than $50,000. On sales of $50,000 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 July 31, 1998
<S> <C>
Investment income:
- -----------------------------------------------------------------------------------------------
Interest $ 126,755,620
- -----------------------------------------------------------------------------------------------
Dividends (net of foreign tax of $338,714) 68,706,582
- -----------------------------------------------------------------------------------------------
Total investment income 195,462,202
Expenses:
- -----------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 23,461,272
- -----------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 11,138,618
- -----------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 78,831
- -----------------------------------------------------------------------------------------------
Administrative services (Note 2) 34,088
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 7,572,318
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 10,970,841
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 1,802,024
- -----------------------------------------------------------------------------------------------
Reports to shareholders 245,532
- -----------------------------------------------------------------------------------------------
Registration fees 415,315
- -----------------------------------------------------------------------------------------------
Auditing 73,033
- -----------------------------------------------------------------------------------------------
Legal 34,936
- -----------------------------------------------------------------------------------------------
Postage 461,085
- -----------------------------------------------------------------------------------------------
Other 114,370
- -----------------------------------------------------------------------------------------------
Total expenses 56,402,263
- -----------------------------------------------------------------------------------------------
Expense reduction (Note 2) (1,816,710)
- -----------------------------------------------------------------------------------------------
Net expenses 54,585,553
- -----------------------------------------------------------------------------------------------
Net investment income 140,876,649
- -----------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 469,756,376
- -----------------------------------------------------------------------------------------------
Net realized gain on futures contracts (Note 1) 980,884
- -----------------------------------------------------------------------------------------------
Net realized gain on written options (Notes 1 and 3) 113,337
- -----------------------------------------------------------------------------------------------
Net realized loss on foreign currency transactions (Note 1) (16,365,863)
- -----------------------------------------------------------------------------------------------
Net unrealized depreciation of assets and liabilities in
foreign currencies during the year (1,650,070)
- -----------------------------------------------------------------------------------------------
Net unrealized depreciation of investments, futures contracts,
and TBA sale commitments during the year (172,713,772)
- -----------------------------------------------------------------------------------------------
Net gain on investments 280,120,892
- -----------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $420,997,541
- -----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Year ended July 31
-------------------------------
1998 1997
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
Increase in net assets
- ---------------------------------------------------------------------------------------------------------------
Operations:
- ---------------------------------------------------------------------------------------------------------------
Net investment income $ 140,876,649 $ 100,718,238
- ---------------------------------------------------------------------------------------------------------------
Net realized gain on investments and
foreign currency transactions 454,484,734 229,478,035
- ---------------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of
investments and assets and liabilities in foreign currencies (174,363,842) 505,535,233
- ---------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 420,997,541 835,731,506
- ---------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ---------------------------------------------------------------------------------------------------------------
From net investment income
Class A (93,857,434) (73,837,380)
- ---------------------------------------------------------------------------------------------------------------
Class B (26,582,497) (19,404,724)
- ---------------------------------------------------------------------------------------------------------------
Class M (6,420,081) (3,535,939)
- ---------------------------------------------------------------------------------------------------------------
Class Y (14,256,392) (11,248,863)
- ---------------------------------------------------------------------------------------------------------------
From net realized gain on investments
Class A (173,044,314) (92,386,949)
- ---------------------------------------------------------------------------------------------------------------
Class B (63,051,883) (29,105,446)
- ---------------------------------------------------------------------------------------------------------------
Class M (14,653,375) (4,503,492)
- ---------------------------------------------------------------------------------------------------------------
Class Y (25,075,114) (13,502,169)
- ---------------------------------------------------------------------------------------------------------------
Increase from capital share transactions (Note 4) 1,397,644,938 1,244,159,864
- ---------------------------------------------------------------------------------------------------------------
Total increase in net assets 1,401,701,389 1,832,366,408
Net assets
- ---------------------------------------------------------------------------------------------------------------
Beginning of year 4,039,954,130 2,207,587,722
- ---------------------------------------------------------------------------------------------------------------
End of year (including distributions in excess of
net investment income and undistributed net
investment income of $11,819,799 and
$4,134,739, respectively) $5,441,655,519 $4,039,954,130
- ---------------------------------------------------------------------------------------------------------------
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 July 31
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $18.95 $15.82 $14.90 $13.52 $14.24
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .60 .60(c) .63 .63 .59
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments 1.08 4.11 1.50 1.63 (.11)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations 1.68 4.71 2.13 2.26 .48
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.60) (.67) (.58) (.56) (.58)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments (1.21) (.91) (.63) (.32) (.62)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (1.81) (1.58) (1.21) (.88) (1.20)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $18.82 $18.95 $15.82 $14.90 $13.52
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 9.53 31.52 14.75 17.73 3.46
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $3,387,620 $2,607,562 $1,515,260 $1,036,674 $913,171
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.00 1.06 .95 .91 .95
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 3.11 3.51 4.07 4.58 4.15
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 126.19 134.80 119.44 102.57 100.69
- ------------------------------------------------------------------------------------------------------------------------------------
+ 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 period ended July 31, 1996 and thereafter includes
amounts paid through brokerage service and expense offset 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
- ------------------------------------------------------------------------------------------------------------------------------------
Per-share
operating performance Year ended July 31
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $18.82 $15.74 $14.83 $13.46 $14.19
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .46 .46(c) .51 .52 .50
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments 1.07 4.08 1.50 1.63 (.12)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations 1.53 4.54 2.01 2.15 .38
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.47) (.55) (.47) (.46) (.49)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments (1.21) (.91) (.63) (.32) (.62)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (1.68) (1.46) (1.10) (.78) (1.11)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $18.67 $18.82 $15.74 $14.83 $13.46
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 8.72 30.46 13.97 16.87 2.70
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $1,305,897 $888,666 $435,278 $224,166 $151,327
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.75 1.81 1.71 1.66 1.71
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.37 2.74 3.31 3.81 3.39
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 126.19 134.80 119.44 102.57 100.69
- ------------------------------------------------------------------------------------------------------------------------------------
+ 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 period ended July 31, 1996 and thereafter includes
amounts paid through brokerage service and expense offset 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 Dec. 1, 1994+
operating performance Year ended July 31 to July 31
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value,
beginning of period $18.82 $15.74 $14.84 $12.77
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .51 .53(c) .55 .31
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments 1.06 4.06 1.50 2.03
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations 1.57 4.59 2.05 2.34
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.51) (.60) (.52) (.27)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments (1.21) (.91) (.63) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (1.72) (1.51) (1.15) (.27)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $18.67 $18.82 $15.74 $14.84
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 8.98 30.83 14.26 18.52*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $276,962 $187,475 $49,541 $8,164
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.50 1.56 1.50 .93*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.62 3.05 3.50 2.53*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 126.19 134.80 119.44 102.57
- ------------------------------------------------------------------------------------------------------------------------------------
+ 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 period ended July 31, 1996 and thereafter includes
amounts paid through brokerage service and expense offset 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 Y
- ------------------------------------------------------------------------------------------------------------------------------------
For the period
Per-share April 1, 1994+
operating performance Year ended July 31 to July 31
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $18.98 $15.85 $14.92 $13.54 $13.21
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .64 .64(c) .68 .66 .17
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments 1.09 4.11 1.50 1.63 .31
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations 1.73 4.75 2.18 2.29 .48
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.65) (.71) (.62) (.59) (.15)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments (1.21) (.91) (.63) (.32) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (1.86) (1.62) (1.25) (.91) (.15)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $18.85 $18.98 $15.85 $14.92 $13.54
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 9.79 31.78 15.09 18.00 3.65*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $471,176 $356,251 $207,508 $153,597 $71,566
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .75 .81 .70 .66 .25*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 3.37 3.74 4.33 4.78 1.34*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 126.19 134.80 119.44 102.57 100.69
- ------------------------------------------------------------------------------------------------------------------------------------
+ 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 period ended July 31, 1996 and thereafter includes
amounts paid through brokerage service and expense offset 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
July 31, 1998
Note 1
Significant accounting policies
The George Putnam Fund of Boston (the "fund") is registered under the
Investment Company Act of 1940, as amended, as a diversified, open-end
management investment company. The fund seeks to provide a balanced
investment composed of a well-diversified portfolio of stocks and bonds
which will produce both capital growth and current income.
The fund offers class A, class B, class M and class Y 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 higher than class A shares but lower than
class B shares. Class Y shares, which are sold at net asset value, are
generally subject to the same expenses as class A shares, class B, and
class M shares, but do not bear a distribution fee. Class Y shares are
sold to defined contribution plans that invest at least $250 million in a
combination of Putnam Funds and other accounts managed by affiliates of
Putnam Investment Management, Inc. ("Putnam Management"), the fund's
manager, a wholly owned subsidiary of Putnam Investments, Inc.
Expenses of the fund are borne pro-rata by the holders of each class of
shares, except that each class bears expenses unique to that class
(including the distribution fees applicable to such class). Each class
votes as a class only with respect to its own distribution plan or other
matters on which a class vote is required by law or determined by the
Trustees. Shares of each class would receive their pro-rata share of the
net assets of the fund, if that fund were liquidated. In addition, the
Trustees declare separate dividends on each class of shares.
The following is a summary of significant accounting policies consistently
followed by the fund in the preparation of its financial statements. The
preparation of financial statements is in conformity with generally
accepted accounting principles and requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities. Actual results could differ from those estimates.
A) Security valuation Investments for which market quotations are readily
available are stated at market value, which is determined using the last
reported sale price, or, if no sales are reported -- as in the case of
some securities traded over-the-counter -- the last reported bid price.
Securities quoted in foreign currencies are translated into U.S. dollars
at the current exchange rate. Short-term investments having remaining
maturities of 60 days or less are stated at amortized cost, which
approximates market value, and other investments are stated at fair value
following procedures approved by the Trustees. Market quotations are not
considered to be readily available for certain long-term corporate bonds
and notes; such investments are stated at fair value on the basis of
valuations furnished by a pricing service, approved by the Trustees, which
determines valuations for normal, institutional size trading units of such
securities using methods based on market transactions for comparable
securities and various relationships between securities which are
generally recognized by institutional traders.
B) 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 Management. 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. Securities purchased or
sold on a forward commitment or delayed delivery basis may be settled a
month or more after the trade date; interest income is accrued based on
the terms of the security. Losses may arise due to changes in the market
value of the underlying securities or if the counterparty does not perform
under the contract.
E) Foreign currency translation The accounting records of the fund are
maintained in U.S. dollars. The market value of foreign securities,
currency holdings, other assets and liabilities are recorded in the books
and records of the fund after translation to U.S. dollars based on the
exchange rates on that day. The cost of each security is determined using
historical exchange rates. Income and withholding taxes are translated at
prevailing exchange rates when accrued or incurred. The fund does not
isolate that portion of realized or unrealized gains or losses resulting
from changes in the foreign exchange rate on investments from fluctuations
arising from changes in the market prices of the securities. Such gains
and losses are included with the net realized and unrealized gain or loss
on investments. Net realized gains and losses on foreign currency
transactions represent net exchange gains or losses on closed forward
currency contracts, disposition of foreign currencies and the difference
between the amount of investment income and foreign withholding taxes
recorded on the fund's books and the U.S. dollar equivalent amounts
actually received or paid. Net unrealized appreciation and depreciation of
assets and liabilities in foreign currencies arise from changes in the
value of open forward currency contracts and assets and liabilities other
than investments at the period end, resulting from changes in the exchange
rate.
F) Forward currency contracts The fund may engage in forward currency
contracts, which are agreements between two parties to buy and sell
currencies at a set price on a future date, to protect against a decline
in value relative to the U.S. dollar of the currencies in which its
portfolio securities are denominated or quoted (or an increase in the
value of a currency in which securities a fund intends to buy are
denominated, when a fund holds cash reserves and short-term investments).
The U.S. dollar value of forward currency contracts is determined using
current forward currency exchange rates supplied by a quotation service.
The market value of the contract will fluctuate with changes in currency
exchange rates. The contract is "marked to market" daily and the change in
market value is recorded as an unrealized gain or loss. When the contract
is closed, the fund records a realized gain or loss equal to the
difference between the value of the contract at the time it was opened and
the value at the time it was closed. The fund could be exposed to risk if
the value of the currency changes unfavorably, if the counterparties to
the contracts are unable to meet the terms of their contracts or if the
fund is unable to enter into a closing position.
G) Futures and options contracts The fund may use futures and options
contracts to hedge against changes in the values of securities the fund
owns or expects to purchase. The fund may also write options on securities
it owns or in which it may invest to increase its current returns.
The potential risk to the fund is that the change in value of futures and
options contracts may not correspond to the change in value of the hedged
instruments. In addition, losses may arise from changes in the value of
the underlying instruments, if there is an illiquid secondary market for
the contracts, or if the counterparty to the contract is unable to
perform. When the contract is closed, the fund records a realized gain or
loss equal to the difference between the value of the contract at the time
it was opened and the value at the time it was closed. Realized gains and
losses on purchased options are included in realized gains and losses on
investment securities.
Futures contracts are valued at the quoted daily settlement prices
established by the exchange on which they trade. Exchange traded options
are valued at the last sale price, or if no sales are reported, the last
bid price for purchased options and the last ask price for written
options. Options traded over-the-counter are valued using prices supplied
by dealers.
H) TBA purchase commitments The fund may enter into "TBA" (to be
announced) purchase commitments to purchase securities for a fixed unit
price at a future date beyond customary settlement time. Although the unit
price has been established, the principal value has not been finalized.
However, the amount of the commitments will not fluctuate more than 1.0%
from the principal amount. The fund holds, and maintains until settlement
date, cash or high-grade debt obligations in an amount sufficient to meet
the purchase price, or the fund may enter into offsetting contracts for
the forward sale of other securities it owns. Income on the securities
will not be earned until settlement date. TBA purchase commitments may be
considered securities in themselves, and involve a risk of loss if the
value of the security to be purchased declines prior to the settlement
date, which risk is in addition to the risk of decline in the value of the
fund's other assets. Unsettled TBA purchase commitments are valued at the
current market value of the underlying securities, according to the
procedures described under "Security valuation" above.
Although the fund will generally enter into TBA purchase commitments with
the intention of acquiring securities for their portfolio or for delivery
pursuant to options contracts it has entered into, the fund may dispose of
a commitment prior to settlement if Putnam Management deems it appropriate
to do so.
I) TBA sale commitments The fund may enter into TBA sale commitments to
hedge its portfolio positions or to sell mortgage-backed securities it
owns under delayed delivery arrangements. Proceeds of TBA sale commitments
are not received until the contractual settlement date. During the time a
TBA sale commitment is outstanding, equivalent deliverable securities, or
an offsetting TBA purchase commitment deliverable on or before the sale
commitment date, are held as "cover" for the transaction.
Unsettled TBA sale commitments are valued at the current market value of
the underlying securities, generally according to the procedures described
under "Security 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 July
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 treatment of gains and losses on forward foreign
currency contracts, losses on wash sale transactions, post-October losses
deferrals, nontaxable dividends, defaulted bond interest, paydown gains
and losses on mortgage-backed securities, market discount and interest on
payment-in-kind securities. Reclassifications are made to the fund's
capital accounts to reflect income and gains available for distribution
(or available capital loss carryovers) under income tax regulations. For
the year ended July 31, 1998, the fund reclassified $15,714,783 to
decrease undistributed net investment income and $399,736 to decrease
paid-in-capital, with an increase to accumulated net realized gains of
$16,114,519. 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 and 0.425% of the next
$5 billion, 0.405% of the next $5 billion, 0.39% of the next $5 billion,
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 July 31, 1998, fund expenses were reduced by $1,816,710
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 $3,250
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%, 1.00% of the
average net assets attributable to class A, class B, and class M shares,
respectively. The Trustees have approved payment by the fund to an annual
rate of 0.25%, 1.00%, and 0.75% of the average net assets attributable to
class A, class B, and class M shares respectively.
For the year ended July 31, 1998, Putnam Mutual Funds Corp., acting as
underwriter received net commissions of $2,093,763 and $76,814 from the
sale of class A and class M shares, respectively and received $1,277,848
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 July 31, 1998, Putnam Mutual Funds
Corp., acting as underwriter received $26,282 on class A redemptions.
Note 3
Purchases and sales of securities
During the year ended July 31, 1998, purchases and sales of investment
securities other than U.S. government obligations and short-term
investments aggregated $4,678,997,359 and $3,758,890,690, respectively.
Purchases and sales of U.S. government obligations aggregated
$2,305,592,599 and $2,070,525,868, 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 35,700,000 113,337
- -----------------------------------------------------------------------------
Options closed (35,700,000) (113,337)
- -----------------------------------------------------------------------------
Written options
outstanding at
end of year $ -- $ --
- -----------------------------------------------------------------------------
Note 4
Capital shares
At July 31, 1998, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
Year ended
July 31, 1998
- -----------------------------------------------------------------------------
Class A Shares Amount
- -----------------------------------------------------------------------------
Shares sold 68,382,912 $1,271,076,297
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 13,629,619 245,136,594
- -----------------------------------------------------------------------------
82,012,531 1,516,212,891
Shares
repurchased (39,574,947) (742,732,518)
- -----------------------------------------------------------------------------
Net increase 42,437,584 $ 773,480,373
- -----------------------------------------------------------------------------
Year ended
July 31, 1997
- -----------------------------------------------------------------------------
Class A Shares Amount
- -----------------------------------------------------------------------------
Shares sold 57,561,340 $ 980,905,251
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 9,015,602 148,378,857
- -----------------------------------------------------------------------------
66,576,942 1,129,284,108
Shares
repurchased (24,717,591) (422,352,583)
- -----------------------------------------------------------------------------
Net increase 41,859,351 $ 706,931,525
- -----------------------------------------------------------------------------
Year ended
July 31, 1998
- -----------------------------------------------------------------------------
Class B Shares Amount
- -----------------------------------------------------------------------------
Shares sold 27,640,494 $ 514,329,289
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 4,702,492 83,884,848
- -----------------------------------------------------------------------------
32,342,986 598,214,137
Shares
repurchased (9,601,746) (178,587,762)
- -----------------------------------------------------------------------------
Net increase 22,741,240 $ 419,626,375
- -----------------------------------------------------------------------------
Year ended
July 31, 1997
- -----------------------------------------------------------------------------
Class B Shares Amount
- -----------------------------------------------------------------------------
Shares sold 21,764,323 $368,267,529
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 2,767,490 45,275,666
- -----------------------------------------------------------------------------
24,531,813 413,543,195
Shares
repurchased (4,971,519) (84,322,499)
- -----------------------------------------------------------------------------
Net increase 19,560,294 $329,220,696
- -----------------------------------------------------------------------------
Year ended
July 31, 1998
- -----------------------------------------------------------------------------
Class M Shares Amount
- -----------------------------------------------------------------------------
Shares sold 7,042,764 $130,939,053
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 1,109,311 19,785,710
- -----------------------------------------------------------------------------
8,152,075 150,724,763
Shares
repurchased (3,276,702) (60,912,495)
- -----------------------------------------------------------------------------
Net increase 4,875,373 $ 89,812,268
- -----------------------------------------------------------------------------
Year ended
July 31, 1997
- -----------------------------------------------------------------------------
Class M Shares Amount
- -----------------------------------------------------------------------------
Shares sold 7,413,996 $125,678,090
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 457,088 7,498,922
- -----------------------------------------------------------------------------
7,871,084 133,177,012
Shares
repurchased (1,055,770) (18,153,890)
- -----------------------------------------------------------------------------
Net increase 6,815,314 $115,023,122
- -----------------------------------------------------------------------------
Year ended
July 31, 1998
- -----------------------------------------------------------------------------
Class Y Shares Amount
- -----------------------------------------------------------------------------
Shares sold 9,280,297 $173,998,943
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 2,181,250 39,331,506
- -----------------------------------------------------------------------------
11,461,547 213,330,449
Shares
repurchased (5,233,650) (98,604,527)
- -----------------------------------------------------------------------------
Net increase 6,227,897 $114,725,922
- -----------------------------------------------------------------------------
Year ended
July 31, 1997
- -----------------------------------------------------------------------------
Class Y Shares Amount
- -----------------------------------------------------------------------------
Shares sold 8,877,256 $150,219,737
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 1,501,670 24,753,440
- -----------------------------------------------------------------------------
10,378,926 174,973,177
Shares
repurchased (4,702,056) (81,988,656)
- -----------------------------------------------------------------------------
Net increase 5,676,870 $ 92,984,521
- -----------------------------------------------------------------------------
Federal tax information
(Unaudited)
Pursuant to Section 852 of the Internal Revenue Code, as amended, the Fund
hereby designates $407,533,403 as capital gain, which includes
$228,305,991 as 20% capital gain, for its taxable year ended July 31,
1998.
The fund has designated 20.96% 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.
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
Jameson Adkins Baxter
Hans H. Estin
John A. Hill
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
Thomas V. Reilly
Vice President
Anthony I. Kreisel
Vice President
Edward P. Bousa
Vice President and Fund Manager
James M. Prusko
Vice President and Fund Manager
David L. Waldman
Vice President and Fund Manager
Jeffrey J. Kobylarz
Vice President and Fund Manager
William N. Shiebler
Vice President
John R. Verani
Vice President
Beverly Marcus
Clerk and Assistant Treasurer
This report is for the information of shareholders of The George Putnam
Fund of Boston. It may also be used as sales literature when preceded or
accompanied by the current prospectus, which gives details of sales
charges, investment objectives, and operating policies of the fund, and
the most recent copy of Putnam's Quarterly Performance Summary. For more
information or to request a prospectus, call toll free: 1-800-225-1581.
You can also learn more at Putnam Investments' website:
http://www.putnaminv.com.
Shares of mutual funds are not deposits or obligations of, or guaranteed
or endorsed by, any financial institution; are not insured by the Federal
Deposit Insurance Corporation (FDIC), the Federal Reserve Board, or any
other agency; and involve risk, including the possible loss of the
principal amount invested.
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
- ---------------
Bulk Rate
U.S. Postage
PAID
Putnam
Investments
- ---------------
AN021 45518-001/880/242/505 9/98
PUTNAM INVESTMENTS [SCALE LOGO OMITTED]
- ---------------------------------------------------------------------------
The George Putnam
Supplement to Report dated
The following information has been prepared to provide class Y shareholders
with a performance overview specific to their holdings. Class Y shares are
offered exclusively to defined contribution plans investing $250 million or
more in one or more of Putnam's funds or private accounts. Performance of
class Y shares, which incur neither a front-end load, distribution fee, nor
contingent deferred sales charge, will differ from performance of class A,
B, and M shares, which are discussed more extensively in the report.
RESULTS AT A GLANCE
- ---------------------------------------------------------------------------
Total return
for periods ended NAV
9.79%
Five years 103.69
Annual average 15.29
10 years 262.58
Annual average 13.75
Life of fund (since class A inception), annual average 10.01
Share value: NAV
7/31/97 $18.98
7/31/98 $18.85
- ---------------------------------------------------------------------------
Distributions: No. Income Capital gains Total
4 0.646 1.212 1.858
- ---------------------------------------------------------------------------
Please note that past performance does not indicate future results.
Investment return and principal value will fluctuate so your shares, when
redeemed, may be worth more or less than their original cost. See full
report for information on comparative benchmarks. If you have questions,
please consult your fund prospectus or call Putnam toll free at
1-800-752-9894.
