Putnam
Income
Fund
ANNUAL REPORT
October 31, 1996
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* According to Lipper Analytical Services, Putnam Income Fund's class A
share total return ranked 9 out of 111 corporate debt A-rated funds for
the one-year period ended October 31, 1996, placing the fund in the top
9% in this category.*
* "With increasing signs of moderate economic growth, the markets
apparently have become convinced that the Federal Reserve will continue
to hold policy steady, at least through November and possibly into next
year."
-- Barron's, October 7, 1996
CONTENTS
4 Report from Putnam Management
9 Fund performance summary
15 Portfolio holdings
28 Financial statements
*Lipper Analytical Services, an independent research organization, ranks
funds according to total return performance. Their rankings vary over
time and do not reflect the effects of sales charges. For periods ended
10/31/96, class A shares ranked 5 out of 49 and 5 out of 26 funds for 5-
and 10-year performance, respectively; class B shares ranked 30 out of
111 and 25 out of 73 funds for 1- and 3-year performance, respectively;
class M shares ranked 13 out of 111 funds for 1-year performance. Class
B and class M shares were not ranked over longer periods. Past
performance is not indicative of future results.
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
(copyright) Karsh, Ottawa
Dear Shareholder:
Duration is a concept that few people outside the investment industry
fully understand, and most are satisfied when we describe it simply as a
measure of a fixed-income portfolio's tendency toward price volatility.
The longer the duration, expressed in years, the more sensitive a
portfolio is to a given change in interest rates. The shorter the
duration, the more stable a portfolio is likely to be.
During the somewhat unsettled bond markets of the fiscal year ended
October 31, 1996, Putnam Income Fund's management team spent
considerable time managing the fund's duration, playing it out and
reeling it in as events warranted.
In the following report, your fund's managers discuss their management
of duration and the other factors that contributed to your fund's
positive performance in fiscal 1996. Then they offer some insights into
prospects for 1997.
Respectfully yours,
/S/George Putnam
George Putnam
Chairman of the Trustees
December 18, 1996
Report from the Fund Managers
Kenneth J. Taubes, lead manager
Rosemary H. Thomsen
D. William Kohli
After enduring the uncertainty that pervaded bond markets throughout the
early part of its fiscal year, Putnam Income Fund rebounded impressively
in the second half, resulting in solid competitive performance for the
12 months ended October 31, 1996. Through much of the period, the U.S.
economy continued to expand at a steady pace, fueling continued growth
in corporate earnings but contributing to investors' fears of inflation.
In turn, inflation fears dealt a blow to the U.S. bond market,
particularly restraining the performance of Treasury securities for a
portion of the year. Nevertheless, your fund was able to weather this
brief storm by focusing on high-yield and international securities when
market conditions warranted such a strategy. Complete performance
information for the fund appears on pages 9 through 11.
* DURATION MANAGEMENT RETURNS TO THE FOREFRONT
After a brief hiatus during the bond market's decline early in calendar
1996, duration management reclaimed its place as a vital contributor to
the fund's performance in the second half of the fiscal year. Duration
is a measure of the price sensitivity of a portfolio of bonds to changes
in interest rates. Like maturity, with which it is often confused,
duration is measured in years.
Through the first few months of the period, we kept the portfolio's
duration relatively long, seeking to enhance the fund's value as long-
term interest rates continued to drop. Because bond prices rise as
interest rates fall, a longer duration gives the fund the potential to
derive greater benefit when long-term rates are in decline. However,
greater rewards always entail greater risks; in this case, such a
strategy can expose the fund to the negative effects of an interest-rate
increase.
When the bond market rally began to dissipate early this year, we
believed the prospects for a sustained decline in bond prices seemed
remote and initially maintained the portfolio's long duration. However,
when the intensity of the market's decline became evident in late
February, we shortened duration to protect the fund's value as interest
rates climbed. Subsequently, when the bond market regained its footing
and rates again headed downward late in the spring, we again extended
the portfolio's duration. For the fiscal year as a whole, our duration
management strategy was an essential contributor to the fund's
performance.
* HIGH-YIELD BONDS MAINTAIN THEIR VIGOR
The sustained growth in the U.S. economy was the primary cause of the
bond market's struggles this year. After enjoying calendar 1995's robust
economic growth, many investors expected the rate of growth to slow
considerably in 1996. As they came to realize that this slowdown might
not arrive on its own, they grew increasingly concerned that the Federal
Reserve Board would raise interest rates in order to induce it. In fact,
the Fed did not raise rates, instead allowing the rate of economic
growth to run its course while keeping an eye on inflation. Ultimately,
the bond market rebounded.
While steady economic growth can be detrimental to general bond market
performance, it typically signifies a favorable environment for high-
yield bonds. This was certainly the case during fiscal 1996 as the pace
of the economy propelled the domestic high-yield market throughout the
year. As the economy thrived, so did corporate profitability. This, in
turn, helped to improve the creditworthiness of high-yield bond issuers.
Demand for high-yield bonds continued to grow, making them the
strongest-performing asset class over the past 12 months. We added to
your fund's investments in high-yield bonds when appropriate while
ensuring that the average credit quality of bonds in the portfolio
remained at the fund's investment-grade standard.
[GRAPHIC HORIZONTAL BAR CHART OMITTED: BOND MARKET PERFORMANCE BY SECTOR*]
BOND MARKET PERFORMANCE BY SECTOR*
Comparison of total returns, 10/31/95-10/31/96
First Boston High Yield 10.5%
Lehman Mortgage Backed 6.9%
Lehman Corporate Bond 6.2%
Lehman Aggregate Bond 5.9%
Salomon World Government Bond 5.4%
Lehman Long-Term Treasury Bond 3.5%
Footnote reads:
*These indexes reflect the general performance of market sectors in
which the fund invests. The fund's performance will differ. Past
performance is not indicative of future results. The indexes may include
bonds different from those in the fund. It is not possible to invest in
an index.
* INTERNATIONAL BOND MARKETS OFFER REWARDING OPPORTUNITIES
As with the high-yield sector, the fund's investments in international
bonds contributed substantially to its performance during the period. In
the first six months of the fiscal period, we focused on European
government bonds. Specifically, we emphasized higher-yielding markets
such as Germany, Italy, and France. Since that time, these and most
other European countries have focused their efforts on reining in fiscal
budgets in order to gain acceptance in the European Monetary Union
(EMU), which intends to create a single currency to be used among member
nations. As a result of these efforts, several nations have driven down
both inflation and bond yields. At the same time, as the U.S. bond
market struggled, investors who sold Treasuries took advantage of
investment opportunities in these flourishing European bond markets.
Germany, in particular, enjoyed a rally that pushed its once-steep
yields below those of U.S. Treasuries by the end of the period.
During the second half of the period, slow economic growth and improved
fiscal management roused bond markets in Canada and Australia. In these
countries, yields at the outset of the period were considerably higher
than those in the United States. However, as their markets rallied over
the course of the year, interest rates in these countries fell
precipitously, substantially narrowing the yield spreads relative to
U.S. Treasuries and attracting investors.
As the U.S. dollar remained strong relative to major foreign currencies
during the period, we hedged a portion of our international bonds back
to the dollar in an effort to protect the fund's value from losses due
to currency fluctuations.
[GRAPHIC HORIZONTAL BAR CHART OMITTED: CHANGES IN PORTFOLIO COMPOSITION*]
CHANGES IN PORTFOLIO COMPOSITION*
10/31/95 10/31/96
U.S. government and agency obligations 55.4% 48.2%
Corporate bonds 29.3% 33.5%
Foreign government bonds and notes 8.2% 7.8%
Collateralized mortgage obligations 5.1% 4.3%
Short-term investments 2.1% 1.2%
Other 0.1% 3.3%
Footnote reads:
*Based on net assets as of indicated dates. Holdings will vary over
time.
* POSITIVE OUTLOOK FOR U.S. BOND MARKETS
As we head into 1997, economic indicators suggest that the U.S.
economy's rate of growth is moderate and that inflation and interest
rates are likely to remain at low levels. For investors, this may
suggest an environment that's conducive to a healthy domestic bond
market. To prepare your fund for this economic scenario, we are
maintaining a portfolio duration that's somewhat longer than the
industry average. We have invested a portion of the fund's assets in
U.S. Treasury securities in the 7- to 10-year maturity range, as we
consider these securities likely to benefit from such a slow-growth
environment.
In the event that economic growth subsides, it is probable that
corporate earnings, which remained sturdy throughout fiscal 1996, may
decline moderately. While we believe that the high-yield bond market is
resilient enough to remain profitable even as earnings begin to decline,
we do not expect high-yield bonds to continue outperforming all other
bond categories as dramatically as they did over the past year.
Among international bond markets, we plan to continue to invest in
countries whose inflation rates are subsiding. We will also look to take
advantage of European markets as progress toward the EMU creates
opportunities.
The views expressed here are exclusively those of Putnam Management.
They are not meant as investment advice. Although the described holdings
were viewed favorably as of 10/31/96, there is no guarantee the fund
will continue to hold these securities in the future.
Performance summary
Performance should always be considered in light of a fund's investment
strategy. Putnam Income Fund is designed for investors seeking high
current income consistent with prudent risk, mainly through fixed-income
securities.
This section provides, at a glance, information about your fund's
performance. Total return shows how the value of the fund's shares
changed over time, assuming you held the shares through the entire
period and reinvested all distributions in the fund.
TOTAL RETURN FOR PERIODS ENDED 10/31/96
Class A Class B Class M
(inception date) (11/1/54) (3/1/93) (12/14/94)
NAV POP NAV CDSC NAV POP
- ------------------------------------------------------------------------
1 year 6.08% 1.07% 5.32% 0.36% 5.92% 2.43%
- -----------------------------------------------------------------------
5 years 51.17 43.97 -- -- -- --
Annual average 8.62 7.56 -- -- -- --
- ------------------------------------------------------------------------
10 years 133.53 122.36 -- -- -- --
Annual average 8.85 8.32 -- -- -- --
- -----------------------------------------------------------------------
Life of class -- -- 23.85 20.94 22.27 18.27
Annual average -- -- 6.00 5.32 11.29 9.34
- ------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS
ENDED 10/31/96
Lehman Bros.
Aggregate Consumer
Bond Index Price Index
- ----------------------------------------------------------------------
1 year 5.85 % 2.99%
- ------------------------------------------------------------------------
5 years 44.89 15.21
Annual average 7.69 2.87
- ------------------------------------------------------------------------
10 years 127.74 43.52
Annual average 8.58 3.68
- ----------------------------------------------------------------------
Life of class B 25.19 10.62
Annual average 6.31 2.79
- ----------------------------------------------------------------------
Life of class M 22.68 5.74
Annual average 11.24 3.02
- ------------------------------------------------------------------------
Performance data represent past results, do not reflect future
performance, and will differ for each share class. They do not take into
account any adjustment for taxes payable on reinvested distributions or,
for class A shares, distribution fees prior to implementation of the
class A distribution plan in 1990. Investment returns and net asset
value will fluctuate so that an investor's shares, when sold, may be
worth more or less than their original cost. POP assumes 4.75% maximum
sales charge for class A shares and 3.25% for class M shares. CDSC for
class B shares assumes the applicable sales charge, with the maximum
being 5%.
[GRAPHIC OMITTED: GROWTH OF A $10,000 INVESTMENT]
Cumulative total return of a $10,000 investment since 10/31/86
Starting value (Insert ending Total)
$9,525 Fund's class A shares at POP $22,236
$10,000 Lehman Aggregate Bond Index $22,774
$10,000 Consumer Price Index $14,352
(plot points for 10-year total return mountain chart)
Lehman Agg.
Date/year Fund at POP Bond Index CPI
- --------- ----------- ---------- ------
10/31/86 9,525 10,000 10,000
10/31/87 9,587 10,236 10,453
10/31/88 11,031 11,409 10,898
10/31/89 12,210 12,766 11,387
10/31/90 12,461 13,572 12,103
10/31/91 14,709 15,719 12,457
10/31/92 16,453 17,264 12,856
10/31/93 18,817 19,314 13,209
10/31/94 18,035 18,605 13,554
10/31/95 20,961 21,516 13,935
10/31/96 22,236 22,774 14,352
Footnote reads:
Past performance is no assurance of future results. A $10,000 investment
in the fund's class B shares at inception on 3/1/93 would have been
valued at $12,385 on 10/31/96 ($12,094 with a redemption at the end of
the period). A $10,000 investment in the fund's class M shares at
inception on 12/14/94 would have been valued at $12,227 at net asset
value on 10/31/96 ($11,827 at public offering price).
TOTAL RETURN FOR PERIODS ENDED 9/30/96
(most recent calendar quarter)
Class A Class B Class M
(inception date) (11/1/54) (3/1/93) (12/14/94)
NAV POP NAV CDSC NAV POP
- ------------------------------------------------------------------------
1 year 5.34% 0.33% 4.44% (0.48)% 5.03% 1.68%
- -----------------------------------------------------------------------
5 years 50.04 42.84 -- -- -- --
Annual average 8.45 7.39 -- -- -- --
- -----------------------------------------------------------------------
10 years 131.02 119.93 -- -- -- --
Annual average 8.73 8.20 -- -- -- --
- -----------------------------------------------------------------------
Life of class -- -- 21.15 18.28 19.55 15.64
Annual average -- -- 5.49 4.79 10.43 8.41
- ------------------------------------------------------------------------
Performance data represent past results, do not reflect future
performance, and will differ for each share class. Investment returns
and net asset value will fluctuate so that an investor's shares, when
sold, may be worth more or less than their original cost.
PRICE AND DISTRIBUTION INFORMATION
12 months ended 10/31/96
Class A Class B Class M
- -----------------------------------------------------------------------
Distributions (number) 12 12 12
- ----------------------------------------------------------------------
Income $0.460 $0.409 $0.448
- ----------------------------------------------------------------------
Total $0.460 $0.409 $0.448
- -----------------------------------------------------------------------
Share value: NAV POP NAV NAV POP
- -----------------------------------------------------------------------
10/31/95 $7.07 $7.42 $7.04 $7.04 $7.28
- -----------------------------------------------------------------------
10/31/96 7.02 7.37 6.99 6.99 7.22
- -----------------------------------------------------------------------
Current return (end of period)
- ----------------------------------------------------------------------
Current dividend rate1 6.32% 6.02% 5.67% 6.18% 5.98%
- -----------------------------------------------------------------------
Current 30-day SEC yield2 6.27 5.97 5.52 5.99 5.80
- -----------------------------------------------------------------------
1Income portion of most recent distribution, annualized and divided by
NAV or POP at end of period.
2Based on investment income, calculated using SEC guidelines.
TERMS AND DEFINITIONS
Class A shares are generally subject to an initial sales charge.
Class B shares may be subject to a sales charge upon redemption.
Class M shares have a lower initial sales charge and a higher 12b-1 fee
than class A shares and no sales charge on redemption.
Net asset value (NAV) is the value of all your fund's assets, minus any
liabilities, divided by the number of outstanding shares, not including
any initial or contingent deferred sales charge.
Public offering price (POP) is the price of a mutual fund share plus the
maximum sales charge levied at the time of purchase. POP performance
figures shown here assume the maximum 4.75% sales charge for class A
shares and 3.25% for class M shares.
Contingent deferred sales charge (CDSC) is a charge applied at the time
of the redemption of class B 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
Lehman Brothers Aggregate Bond Index* is an unmanaged list of
investment-grade bonds.
First Boston High Yield Index* is a market-weighted index including
publicly traded bonds rated below BBB by Standard & Poor's and Moody's.
Lehman Brothers Corporate Bond Index* is an unmanaged list of publicly
issued, fixed-rate, non-convertible, investment-grade domestic corporate
debt securities frequently used as a general measure of the performance
of fixed-income securities.
Lehman Brothers Long-Term Treasury Bond Index* is composed of all bonds
covered by the Lehman Brothers Treasury Bond Index with maturities of 10
years or greater.
Lehman Brothers Mortgage-Backed Securities Index* is an unmanaged list
of GNMA bonds.
Salomon Brothers World Government Bond Index* is a market-capitalization
weighted benchmark that tracks the performance of government-bond
markets in 14 countries.
Consumer Price Index (CPI) is a commonly used measure of inflation; it
does not represent an investment return.
*Securities indexes assume reinvestment of all distributions and
interest payments and do not take into account brokerage commissions or
other costs. Securities in the fund do not match those in the indexes
and performance in the fund will differ. It is not possible to invest
directly in an index.
PUTNAM GROWTH FUNDS
Asia Pacific Growth Fund
Capital Appreciation Fund
Diversified Equity Trust
Europe Growth Fund
Global Growth Fund
Global Natural Resources Fund *
Health Sciences Trust
International Growth Fund +
International New Opportunities Fund
Investors Fund
New Opportunities Fund
OTC & Emerging Growth Fund [DBL. DAGGER]
Vista Fund
Voyager Fund
Voyager Fund II
PUTNAM GROWTH
AND INCOME FUNDS
Balanced Retirement Fund
Convertible Income-Growth Trust
Equity Income Fund
The George Putnam Fund of Boston
The Putnam Fund for Growth and Income
Growth and Income Fund II
International Growth and Income Fund
New Value Fund
Utilities Growth and Income Fund
PUTNAM INCOME FUNDS
American Government Income Fund
Diversified Income Trust
Diversified Income Trust II
Federal Income Trust
Global Governmental Income Trust
High Yield Advantage Fund
High Yield Trust
Income Fund
Intermediate U.S. Government
Income Fund
Preferred Income Fund
U.S. Government Income Trust
PUTNAM TAX-FREE
INCOME FUNDS
Municipal Income Fund
Tax Exempt Income Fund
Tax-Free High Yield Fund
Tax-Free Insured Fund
State tax-free income funds [SECTION MARK]
Arizona, California, Florida, Massachusetts, Michigan, Minnesota, New
Jersey, New York, Ohio and Pennsylvania
LIFESTAGESM FUNDS
Putnam Asset Allocation Funds--three investment portfolios that spread
your money across a variety of stocks, bonds, and money market
investments.
The three portfolios:
Asset Allocation: Balanced Portfolio
Asset Allocation: Conservative Portfolio
Asset Allocation: Growth Portfolio
MOST CONSERVATIVE
INVESTMENTS **
Putnam money market funds: ++
California Tax Exempt Money Market Fund
Money Market Fund
New York Tax Exempt Money Market Fund
Tax Exempt Money Market Fund
CDs and savings accounts [2 DBL. DAGGERS]
* Formerly Natural Resources Fund
+ Formerly Overseas Growth Fund
[DBL. DAGGER] Formerly OTC Emerging Growth Fund
[SECTION MARK] Not available in all states.
** Relative to above.
++ An investment in a money market fund is neither insured nor
guaranteed by the U.S. government. These funds are managed
to maintain a price of $1.00 per share, although there is no
assurance that this price will be maintained in the future.
[2 DBL. DAGGGERS] Not offered by Putnam Investments. Certificates of deposit
offer a fixed rate of return and may be insured up to certain
limits by federal/state agencies. Savings accounts may also
be insured up to certain limits. Please call your financial
advisor or Putnam at 1-800-225-1581 to obtain a prospectus
for any Putnam fund. It contains more complete information,
including charges and expenses. Please read it carefully
before you invest or send money.
Report of independent accountants
For the fiscal year ended October 31, 1996
To the Trustees and Shareholders of Putnam Income Fund
We have audited the accompanying statement of assets and liabilities of
Putnam Income Fund, including the portfolio of investments owned, as of
October 31, 1996, and the related statement of operations for the year
then ended, the statements of changes in net assets for each of the two
years in the period then ended, and the financial highlights for each of
the periods indicated therein. These financial statements and financial
highlights are the responsibility of the fund's management. Our
responsibility is to express an opinion on these financial statements
and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included
confirmation of securities owned as of October 31, 1996, by
correspondence with the custodian and brokers. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the
financial position of Putnam Income Fund as of October 31, 1996, the
results of its operations for the year then ended, the changes in its
net assets for each of the two years in the period then ended and the
financial highlights for each of the periods indicated therein, in
conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
December 16, 1996
<TABLE>
<CAPTION>
Portfolio of investments owned
October 31, 1996
<S> <C> <C> <C>
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (48.2%)*
PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------
Federal National Mortgage Association pass-through certificates
$449,558 11s, with various due dates from August 1, 2013 to October 1, 2015 $ 508,281
3,242,541 8s, December 1, 2008 3,404,863
47,417,183 7s, with various due dates from July 1, 2023 to May 1, 2026 46,512,986
24,077,882 6s, Dwarfs, with various due dates from January 1, 2009 to October 1, 2010 23,197,359
14,100,000 Federal National Mortgage Association 5.94s, December 12, 2005 13,452,246
Government National Mortgage Association pass-through certificates
447,192 11s, Graduated Payment Mortgages (GPM) with various due dates from
December 15, 2009 to October 15, 2013 500,238
429,969 9s, with various due dates from October 15, 2004 to May 15, 2009 460,873
52,330 7 1/2s, January 15, 2024 52,494
82,918,371 7s, with various due dates from May 15, 2024 to June 15, 2026 81,311,479
20,811,052 6 1/2s, with various due dates from November 15, 2025 to May 15, 2026 19,893,928
11,231,151 6 1/2s, Midgets, with various due dates from
December 15, 2008 to November 15, 2009 11,083,699
11,795,907 6s, Midgets, with various due dates from July 15, 2008 to June 15, 2009 11,460,448
U.S. Treasury Bonds
38,900,000 11 7/8s, November 15, 2003# 51,171,783
27,835,000 11 5/8s, November 15, 2004 37,029,179
68,270,000 10 3/4s, August 15, 2005 88,185,724
62,380,000 8 1/8s, August 15, 2019 72,272,844
21,887,000 7 1/2s, November 15, 2024 24,007,194
22,829,000 7 1/8s, February 15, 2023 23,874,112
U.S. Treasury Notes
48,235,000 9 1/4s, August 15, 1998 51,076,524
44,140,000 7 1/2s, May 15, 2002 46,960,987
7,365,000 7 1/4s, August 15, 2004 7,794,232
7,675,000 6 1/2s, August 15, 2005 7,755,357
9,210,000 6 1/2s, May 31, 2001 9,361,136
64,715,000 6 3/8s, August 15, 2002 65,453,398
41,130,000 6 1/4s, April 30, 2001 41,406,394
--------------
Total U.S. Government and Agency Obligations (cost $740,079,391) 738,187,758
CORPORATE BONDS AND NOTES (33.5%)*
PRINCIPAL AMOUNT VALUE
Advertising (--%)
- ----------------------------------------------------------------------------------------------------------------------
$50,000 Adams Outdoor Advertising sr. notes 10 3/4s, 2006 52,000
60,000 Outdoor Systems, Inc. sr. sub. notes 9 3/8s, 2006 59,700
375,000 Universal Outdoor, Inc. sr. sub. notes 9 3/4s, 2006 371,250
--------------
482,950
Aerospace and Defense (0.8%)
- ----------------------------------------------------------------------------------------------------------------------
950,000 Alliant Techsystems, Inc. sr. sub. notes 11 3/4s, 2003 1,035,500
650,000 BE Aerospace sr. notes 9 3/4s, 2003 672,750
1,000,000 Howmet Corp. 144A sr. sub. notes 10s, 2003 1,075,000
9,200,000 Northrop Gruman Corp. 144A notes 7s, 2006 9,115,544
500,000 Sequa Corp. sr. notes 9 5/8s, 1999 497,500
750,000 Wyman-Gordon Co. sr. notes 10 3/4s, 2003 802,500
--------------
13,198,794
Agriculture (0.1%)
- ----------------------------------------------------------------------------------------------------------------------
400,000 Agco Corp. sr. sub. notes 8 1/2s, 2006 404,000
485,097 Premium Standard Farms, Inc. sr. sec. notes 11s, 2003(2 double daggers) 492,374
--------------
896,374
Automotive (0.5%)
- ----------------------------------------------------------------------------------------------------------------------
500,000 Aftermarket Technology Corp. Ser. D, sr. sub. notes 12s, 2004 550,000
250,000 Aftermarket Technology Corp. sr. sub. notes 12s, 2004 275,000
245,000 CSK Auto, Inc. 144A sr. sub. notes 11s, 2006 248,675
6,245,000 Daimler-Benz med. term notes 7 3/8s, 2006 6,421,484
350,000 Key Plastics Corp. sr. notes 14s, 1999 360,500
525,000 Lear Corp. sub. notes 9 1/2s, 2006 559,125
105,000 Speedy Muffler King, Inc. company guaranty 10 7/8s, 2006 107,625
--------------
8,522,409
Banks (5.0%)
- ----------------------------------------------------------------------------------------------------------------------
4,500,000 ABN AMRO Bank N.V. sub. notes 7.55s, 2006 (Netherlands) 4,698,360
11,105,000 Advanta National Bank sr. notes 7.02s, 2001 11,153,562
6,320,000 Bangkok Bank Public Co. 144A sub. notes 8 1/4s, 2016 (Thailand) 6,432,559
215,000 Berkeley Federal Bank & Trust sub. deb. 12s, 2005 234,350
450,000 Centerbank sub. notes 8 3/8s, 2002 481,500
750,000 Chevy Chase Savings Bank Inc. sub. deb. 9 1/4s, 2005 785,625
10,500,000 Citicorp sub. notes 7 1/8s, 2005 10,642,800
8,325,000 Den Danske Bank sub. notes 6.55s, 2003 (Denmark) 8,154,421
2,340,000 First National Bank of Omaha sub. notes 7.32s, 2010 2,290,790
45,000 First Nationwide Holdings 144A sr. sub. notes 10 5/8s, 2003 47,250
750,000 First Nationwide Holdings sr. sub. notes 9 1/8s, 2003 735,000
8,500,000 Riggs National Corp. sub. deb. 8 1/2s, 2006 8,786,875
6,500,000 Scotland International Finance 144A sub. notes 8.85s, 2006 (Netherlands) 7,321,665
5,000,000 Society Bank & Trust notes 12 1/2s, 1999 5,768,750
8,445,000 Webster Financial Corp. sr. notes 8 3/4s, 2000 8,789,809
--------------
76,323,316
Basic Industrial Products (0.1%)
- ----------------------------------------------------------------------------------------------------------------------
125,000 Astor Corp. 144A sr. sub. notes 10 1/2s, 2006 125,000
1,000,000 Inter-City Products sr. notes 9 3/4s, 2000 995,000
75,000 Mettler Toledo, Inc. company guaranty 9 3/4s, 2006 76,500
425,000 Owens Illinois, Inc. sr. sub. notes 9 3/4s, 2004 440,938
--------------
1,637,438
Broadcasting (0.5%)
- ----------------------------------------------------------------------------------------------------------------------
675,000 Allbritton Communications Corp. 144A sr. sub. notes Ser. B, 9 3/4s, 2007 634,500
800,000 Argyle Television Corp. sr. sub. notes 9 3/4s, 2005 800,000
500,000 Benedek Broadcasting sr. notes 11 7/8s, 2005 542,500
1,150,000 Chancellor Broadcasting Co. sr. sub. notes 9 3/8s, 2004 1,115,500
800,000 Commodore Media, Inc. sr. sub. notes stepped-coupon 7 1/2s,
(13 1/4s, 5/1/98), 2003++ 832,000
65,000 Gray Communications Systems, Inc. sr. sub. notes 10 5/8s, 2006 65,650
1,105,000 Jacor Communications, Inc. sr. sub. notes 10 1/8s, 2006 1,127,100
460,000 Park Broadcasting, Inc. sr. notes Ser. B, 11 3/4s, 2004 531,300
350,000 Paxson Communications Corp. 144A sr. sub. notes 11 5/8s, 2002 357,000
1,000,000 Sullivan Broadcasting sr. sub. notes 10 1/4s, 2005 1,002,500
--------------
7,008,050
Building and Construction (0.3%)
- ----------------------------------------------------------------------------------------------------------------------
1,105,000 American Standard, Inc. deb. 9 1/4s, 2016 1,135,388
420,000 Cemex S.A. 144A bonds 12 3/4s, 2006 (Mexico) 452,025
750,000 Schuller International Corp. sr. notes 10 7/8s, 2004 825,000
975,000 Scotsman Group, Inc. sr. secd. notes 9 1/2s, 2000 979,875
745,000 Triangle Pacific Corp. sr. notes 10 1/2s, 2003 782,250
--------------
4,174,538
Business Equipment and Services (0.2%)
- ----------------------------------------------------------------------------------------------------------------------
750,000 Corporate Express, Inc. sr. sub. notes Ser. B, 9 1/8s, 2004 750,000
90,000 Iron Mountain, Inc. sr. sub. notes 10 1/8s, 2006 92,250
500,000 Lamar Advertising Co. sr. secd. notes 11s, 2003 560,000
135,000 Outsourcing Solutions, Inc. 144A sr. sub. notes 11s, 2006 138,038
200,000 Pierce Leahy Corp. sr. sub. notes 144A 11 1/8s, 2006 214,000
650,000 United Stationer Supply, Inc. sr. sub. notes 12 3/4s, 2005 711,750
--------------
2,466,038
Cable Television (1.0%)
- ----------------------------------------------------------------------------------------------------------------------
200,000 Cablevision Systems Corp. sr. sub. deb. 9 7/8s, 2023 180,000
750,000 Cablevision Systems Corp. sr. sub. reset deb. 10 3/4s, 2004 761,250
8,400,000 Continental Cablevision, Inc. sr. deb. 9 1/2s, 2013 9,450,000
1,000,000 Diamond Cable Communication Co. sr. disc. notes stepped-coupon zero %
(11 3/4s, 12/15/00), 2005++ 657,500
1,000,000 Jones Intercable, Inc. sr. notes 9 5/8s, 2002 1,025,000
1,000,000 Lenfest Communications, Inc. sr. notes 8 3/8s, 2005 912,500
1,000,000 Marcus Cable Co. (L.P.) sr. sub. disc. notes stepped-coupon zero %
(13 1/2s, 8/1/99), 2004++ 767,500
200,000 Rogers Cablesystem Ltd. deb. 10 1/8s, 2012 (Canada) 198,000
475,000 Rogers Cablesystem Ltd. notes 9 5/8s, 2002 (Canada) 484,500
1,285,000 Telewest Communications PLC deb. stepped-coupon zero %
(11s, 10/1/00), 2007 (United Kingdom)++ 819,188
770,000 Videotron Holdings. sr. disc. notes stepped-coupon zero %
(11s, 8/15/05), 2005 (United Kingdom)++ 558,250
--------------
15,813,688
Chemicals (0.6%)
- ----------------------------------------------------------------------------------------------------------------------
1,050,000 Arcadian Partner sr. notes 10 3/4s, 2005 1,155,000
110,000 Freedom Chemicals, Inc. 144A sr. sub. notes 10 5/8s, 2006 111,238
725,000 Great Lakes Carbon Corp. sr. notes 10s, 2006 761,250
750,000 IMC Fertilizer Group, Inc. deb. 9.45s, 2011 855,000
3,335,000 Lyondell Petrochemical Co. notes 9 1/8s, 2002 3,650,758
2,635,000 Sociedad Quimica Y Minera de Chile S.A. 144A bonds 7.7s, 2006 (Chile) 2,697,581
110,000 Texas Petrochemical 144A sr. sub. notes 11 1/8s, 2006 116,875
500,000 Union Carbide Global Enterprises sr. sub. notes Ser. B, 12s, 2005 570,000
--------------
9,917,702
Computer Services and Software (-%)
- ----------------------------------------------------------------------------------------------------------------------
375,000 Unisys Corp. sr. notes 11 3/4s, 2004 380,625
Conglomerates (0.2%)
- ----------------------------------------------------------------------------------------------------------------------
500,000 ADT Ltd. sr. sub. notes 9 1/4s, 2003 526,250
1,100,000 Congoleum Corp. sr. notes 9s, 2001 1,089,000
750,000 MacAndrews & Forbes Holdings, Inc. sub. deb. notes 13s, 1999 750,000
--------------
2,365,250
Consumer Durable Goods (--%)
- ----------------------------------------------------------------------------------------------------------------------
110,000 Rayovac Corp. 144A sr. sub. notes 10 1/4s, 2006 110,550
335,000 Selmer Co., Inc. sr. sub. notes 11s, 2005 355,100
--------------
465,650
Consumer Non Durables (0.1%)
- ----------------------------------------------------------------------------------------------------------------------
105,000 E&S Holdings Corp. 144A sr. sub. notes 10 3/8s, 2006 107,756
800,000 Guess Jeans, Inc. sr. sub. notes 9 1/2s, 2003 816,000
--------------
923,756
Consumer Services (0.2%)
- ----------------------------------------------------------------------------------------------------------------------
500,000 Act III Theatres, Inc. sr. sub. notes 11 7/8s, 2003 550,000
850,000 Coinmach Corp. sr. notes Ser. B, 11 3/4s, 2005 913,750
750,000 John Q Hammons Hotels, Inc. 1st mtge. 8 7/8s, 2004 731,250
750,000 Metrocall, Inc. sr. sub. notes 10 3/8s, 2007 630,000
200,000 Specialty Retailers, Inc. sr. sub. notes 11s, 2003 205,000
--------------
3,030,000
Electronics and Electrical Equipment (0.2%)
- ----------------------------------------------------------------------------------------------------------------------
1,500,000 Amphenol Corp. sr. notes 10.45s, 2001 1,618,800
180,298 Cirent Semiconductor, Inc. sr. sub. notes 10.22s, 2002 180,298
1,005,000 International Semi-Tech. Corp. sr. secd. disc. notes stepped-coupon
zero % (11 1/2s, 8/15/00), 2003 (Canada)++ 613,050
--------------
2,412,148
Entertainment (1.4%)
- ----------------------------------------------------------------------------------------------------------------------
440,000 Cinemark USA, Inc. 144A sr. sub. notes 9 5/8s, 2008 433,400
1,600,000 Marvel Parent Holdings, Inc. sr. secd. disc. notes zero %, 1998 592,000
1,500,000 Premier Parks, Inc. sr. notes Ser. A, 12s, 2003 1,623,750
1,750,000 Six Flags Corp. sr. sub. notes stepped-coupon zero %
(12 1/4s, 6/15/98), 2005++ 1,575,000
11,560,000 Time Warner Entertainment Co. deb. 7 1/4s, 2008 11,266,838
3,450,000 Time Warner, Inc. notes 8 7/8s, 2012 3,754,808
750,000 Trump A.C. 1st. mtge. 11 1/4s, 2006 708,750
1,000,000 Trump Holdings & Funding Corp. sr. notes 15 1/2s, 2005 1,160,000
600,000 Viacom International, Inc. sub. deb. 8s, 2006 561,000
--------------
21,675,546
Food Chains (0.4%)
- ----------------------------------------------------------------------------------------------------------------------
6,130,000 Kroger Co. sr. notes 8.15s, 2006 6,372,442
Food and Beverages (0.1%)
- ----------------------------------------------------------------------------------------------------------------------
525,000 Canandaigua Wine sr. sub. notes 8 3/4s, 2003 496,125
330,000 Canandaigua Wine Co. 144A sr. sub. notes 8 3/4s, 2003 316,800
1,000,000 Stater Brothers sr. notes 11s, 2001 1,057,500
--------------
1,870,425
Health Care (0.7%)
- ----------------------------------------------------------------------------------------------------------------------
4,660,000 Columbia Healthcare Corp. deb. 8.36s, 2024 5,200,374
115,000 Genesis Health Ventures, Inc. 144A sr. sub. notes 9 1/4s, 2006 114,713
1,150,000 Integrated Health Services sr. sub. notes 10 3/4s, 2004 1,213,250
2,060,000 Ivac Corp. sr. notes 9 1/4s, 2002 2,085,750
1,275,000 Merit Behavioral Care sr. sub. notes 11 1/2s, 2005 1,335,563
370,000 Paracelsus Healthcare sr. sub. notes 10s, 2006 344,100
350,000 Tenet Healthcare Corp. sr. notes 8 5/8s, 2003 370,125
--------------
10,663,875
Insurance and Finance (3.9%)
- ----------------------------------------------------------------------------------------------------------------------
4,205,000 Abbey National PLC sub. notes 7.35s, 2049 (United Kingdom) 4,271,691
175,000 Aames Financial Corp. sr. notes 9 1/8s, 2003 176,750
750,000 AIM Management Group sr. secd. notes 9s, 2003 783,750
3,500,000 AMBAC Indemnity Corp. deb. 9 3/8s, 2011 4,225,375
1,150,000 American Life Holding Co. sr. sub. notes 11 1/4s, 2004 1,308,125
5,260,000 Conseco, Inc. sr. notes 10 1/2s, 2004 6,217,688
1,085,000 Contifinancial Corp. sr. notes 8 3/8s, 2003 1,090,425
1,090,000 Discover Credit Corp. med. term notes 9.07s, 2012 1,274,395
3,170,000 First Financial Caribbean Corp. sr. notes 7.84s, 2006 3,197,008
10,810,000 Ford Motor Credit Corp. notes 8.2s, 2002 11,558,160
200,000 Intertek Finance PLC 144A sr. sub notes 10 1/4s, 2006 203,000
750,000 Keystone Group, Inc. sr. secd. notes 9 3/4s, 2003 806,250
895,000 MCII Holding (USA), Inc. 144A bonds zero % (15s, 12/1/99), 2002++ 724,950
130,000 Ocwen Financial Corp. notes 11 7/8s, 2003 137,800
155,000 Olympic Financial Ltd. sr. notes 13s, 2000 172,050
5,000,000 Orion Capital Corp. sr. notes 9 1/8s, 2002 5,524,000
475,000 Reliance Group Holdings, Inc. sr. sub. deb. 9 3/4s, 2003 486,875
750,000 Reliance Group Holdings, Inc. sr. notes 9s, 2000 765,000
6,255,000 Salton Sea Funding Corp. company guaranty Ser. E, 8.3s, 2011 6,514,520
9,055,000 Sampoerna International Finance Co. 144A company guaranty
8 3/8s, 2006 (Indonesia) 9,239,360
900,000 Van Kampen Merritt sr. notes 9 3/4s, 2003 963,000
--------------
59,640,172
Medical Supplies and Devices (0.1%)
- ----------------------------------------------------------------------------------------------------------------------
900,000 Graphic Controls Corp. sr. sub. notes Ser. A, 12s, 2005 972,000
400,000 Wright Medical Technology, Inc. sr. secd. notes Ser. B, 10 3/4s, 2000 404,000
--------------
1,376,000
Metals and Mining (1.0%)
- ----------------------------------------------------------------------------------------------------------------------
1,000,000 Ispat Mexicana, SA 144A deb. 10 3/8s, 2001 (Mexico) 1,005,000
6,770,000 Noranda, Inc. notes 7s, 2005 (Canada) 6,663,643
6,100,000 PT Alatief Freeport sr. notes 9 3/4s, 2001 (Netherlands) 6,655,771
200,000 Renco Metals, Inc. sr. notes 11 1/2s, 2003 208,000
250,000 Royal Oak Mines, Inc. 144A sr. sub. notes 11s, 2006 (Canada) 257,500
--------------
14,789,914
Oil and Gas (3.5%)
- ----------------------------------------------------------------------------------------------------------------------
500,000 Benton Oil & Gas Corp. 144A sr. notes 11 5/8s, 2003 550,000
160,000 Chesapeake Energy Corp. sr. notes 10 1/2s, 2002 171,000
70,000 Costilla Energy, Inc. sr. notes 10 1/4s, 2006 70,175
125,000 Flores & Rucks Corp. sr. sub. notes 9 3/4s, 2006 128,281
195,000 Forcenergy, Inc. sr. sub. notes 9 1/2s, 2006 198,413
5,565,000 Gulf Canada Resources Ltd. sr. notes 8.35s, 2006 (Canada) 5,745,863
170,000 Kelley Oil & Gas Corp. 144A sr. sub. notes 10 3/8s, 2006 169,575
250,000 Maxus Energy Corp. notes 9 7/8s, 2002 255,000
1,002,000 Maxus Energy Corp. notes 9 1/2s, 2003 996,990
250,000 Maxus Energy Corp. notes 9 3/8s, 2003 252,500
6,600,000 ONEOK, Inc. deb. 9.7s, 2019 7,278,810
9,832,000 Parker & Parsley Petro Co. sr. notes 8 7/8s, 2005 10,935,839
12,500,000 Petro-Canada deb. 9 1/4s, 2021 (Canada) 14,968,750
1,745,000 Petroliam Nasional Berhad 144A notes 7 5/8s, 2026 (Malaysia) 1,765,556
8,245,000 Petroliam Nasional Berhad 144A notes 7 1/8s, 2005 (Malaysia) 8,340,395
500,000 Transcontinental Gas Pipe Line Corp. deb. 9s, 1996 500,335
750,000 Transtexas Gas Corp. sr. secd. notes 11 1/2s, 2002 795,000
750,000 Triton Energy sr. sub. disc. notes stepped-coupon zero %
(9 3/4s, 12/15/96), 2000++ 765,000
--------------
53,887,482
Packaging and Containers (0.1%)
- ----------------------------------------------------------------------------------------------------------------------
1,250,000 Ivex Packaging Corp. sr. sub. notes 12 1/2s, 2002 1,343,750
80,000 Printpack, Inc. 144A sr. notes 10 5/8s, 2006 82,600
155,000 Printpack, Inc. 144A sr. notes 9 7/8s, 2004 159,263
125,000 US Can Corp. 144A sr. sub. notes 10 1/8s, 2006 128,750
--------------
1,714,363
Paper and Forest Products (0.4%)
- ----------------------------------------------------------------------------------------------------------------------
1,500,000 Doman Industries Ltd. sr. notes 8 3/4s, 2004 (Canada) 1,410,000
455,000 Domtar, Inc. deb. 9 1/2s, 2016 (Canada) 482,300
225,000 Rainy River Forest Products sr. notes 10 3/4s, 2001 (Canada) 243,563
1,425,000 Repap New Brunswick sr. notes 10 5/8s, 2005 (Canada) 1,439,250
100,000 Repap New Brunswick FRN 8.875s, 2000 (Canada) 98,750
750,000 Stone Consolidated Corp. sr. notes 10 1/4s, 2000 793,125
1,000,000 Stone Container Corp. 144A sr. notes 11 7/8s, 2016 1,055,000
--------------
5,521,988
Publishing (0.8%)
- ----------------------------------------------------------------------------------------------------------------------
1,500,000 American Media Operation, Inc. sr. sub. notes 11 5/8s, 2004 1,601,250
11,600,000 News America Hldgs, Inc. deb. 7.7s, 2025 11,090,412
--------------
12,691,662
REITs (Real Estate Investment Trust) (1.3%)
- ----------------------------------------------------------------------------------------------------------------------
3,290,000 Health Care Property Investors, Inc. sr. notes 6 1/2s, 2006 3,132,080
8,525,000 Meditrust med. term notes 7.3s, 2006 8,328,840
1,250,000 Prime Hospitality Corp. 1st mtge. 9 1/4s, 2006 1,242,188
5,705,000 Sun Communities, Inc. sr. notes 7 5/8s, 2003 5,805,009
1,000,000 Tanger Properities Ltd. Partnership Gtd. notes 8 3/4s, 2001 1,006,140
--------------
19,514,257
Recreation (0.6%)
- ----------------------------------------------------------------------------------------------------------------------
130,000 Alliance Gaming Corp. sr. notes 12 7/8s, 2003 133,900
645,000 Argosy Gaming Co. 1st mtge. 13 1/4s, 2004 619,200
500,000 Arizona Charlies Corp. 1st mtge. Ser. B, 12s, 2000+ 350,000
750,000 Bally Park Place Funding 1st mtge. 9 1/4s, 2004 819,375
655,000 Casino America, Inc. sr. notes 12 1/2s, 2003 671,375
230,000 Casino Magic Corp. 144A 1st mtge. 13s, 2003 233,450
500,000 Coast Hotels & Casino company guaranty Ser. B, 13s, 2002 537,500
750,000 Empress River Casino sr. notes 10 3/4s, 2002 802,500
1,000,000 Grand Casinos, Inc. 1st mtge. 10 1/8s, 2003 982,500
550,000 Hollywood Casino Corp. sr. notes 12 3/4s, 2003 522,500
1,000,000 Lady Luck Gaming 1st mtge. 11 7/8s, 2001 980,000
750,000 Mohegan Tribal, Gaming Auth. sr. secd. notes Ser. B, 13 1/2s, 2002 956,250
1,000,000 Players International, Inc. sr. notes 10 7/8s, 2005 990,000
--------------
8,598,550
Retail (1.8%)
- ----------------------------------------------------------------------------------------------------------------------
720,000 Brylane (L.P.) sr. sub. notes 10s, 2003 741,600
5,585,000 Federated Department Stores, Inc. sr. notes 8 1/2s, 2003 5,817,671
750,000 Finlay Enterprises, Inc. sr. notes 10 5/8s, 2003 759,375
485,000 Loehmanns Holdings, Inc. sr. notes 11 7/8s, 2003 514,100
5,000,000 May Department Stores Co. notes 9 1/2s, 2021 5,914,750
1,200,000 Mothers Work, Inc. sr. notes 12 5/8s, 2005 1,269,000
450,000 Phar-Mor, Inc. sr. notes 11.72s, 2002 466,875
8,000,000 Sears, Roebuck & Co. med. term notes 9.1s, 2012 9,434,640
1,500,000 Southland Corp. 1st priority sr. sub. deb. 5s, 2003 1,200,000
500,000 Southland Corp. deb. Ser. A, 4 1/2s, 2004 366,250
750,000 Waban, Inc. sr. sub. notes 11s, 2004 798,750
--------------
27,283,011
Specialty Consumer Products (0.1%)
- ----------------------------------------------------------------------------------------------------------------------
750,000 Coty, Inc. Gtd. sr. sub. notes 10 1/4s, 2005 795,000
175,000 Genesco, Inc. sr. notes 10 3/8s, 2003 174,563
500,000 Herff Jones, Inc. sr. sub. notes 11s, 2005 532,500
--------------
1,502,063
Telecommunications (1.7%)
- ----------------------------------------------------------------------------------------------------------------------
9,225,000 360 Communications Co. sr. notes 7 1/2s, 2006 9,140,591
1,500,000 Arch Communications Group sr. disc. notes stepped-coupon
zero % (10 7/8s, 3/15/01), 2008++ 825,000
1,750,000 Call-Net Enterprises sr. disc. notes stepped-coupon zero %
(13 1/4s, 12/1/99), 2004++ 1,373,750
2,310,000 Dial Call Communication, Inc. sr. disc. notes stepped-coupon
Ser. B, zero % (10 1/4s, 12/15/98), 2005++ 1,443,750
500,000 Fonorola, Inc. sr. notes 12 1/2s, 2002 (Canada) 543,750
150,000 Frontiervision Operating Partners L.P. sr. sub. notes 11s, 2006 148,500
1,360,000 Intercel, Inc. sr. disc. notes stepped-coupon zero % (12s, 5/1/01), 2006++ 768,400
1,500,000 Intermedia Communications of Florida, Inc. sr. disc. notes stepped-coupon
zero % (12 1/2s, 5/15/01), 2006++ 915,000
400,000 Intermedia Communications of Florida Inc. sr. notes Ser. B, 13 1/2s, 2005 453,000
3,060,000 International Cabletel, Inc. sr. notes stepped-coupon Ser. B, zero %
(11 1/2s, 2/01/01), 2006++ 1,836,000
4,100,000 MFS Communications sr. disc. notes stepped-coupon zero %
(8 7/8s, 1/1/01), 2006++ 2,900,750
835,000 MFS Communications sr. disc. notes stepped-coupon zero %
(9 3/8s, 1/15/99), 2004++ 709,750
500,000 Milicom International Cellular 144A sr. disc. notes stepped-coupon zero %
(13 1/2s, 6/01/00), 2006 (Luxembourg)++ 283,750
1,000,000 Mobile Telecommunications Tech. sr. notes 13 1/2s, 2002 1,015,000
1,800,000 NEXTEL Communications, Inc. sr. disc. notes stepped-coupon zero %
(9 3/4s, 2/15/99), 2004++ 1,143,000
710,000 Omnipoint Corp. 144A sr. notes 11 5/8s, 2006 717,100
330,000 Orbcomm Global Capital Corp. 144A sr. notes 14s, 2004 333,300
450,000 Paging Network, Inc. 144A sr. sub. notes 10s, 2008 445,500
800,000 Pricellular Wireless Corp. 144A sr. notes 10 3/4s, 2004 806,000
1,285,000 Teleport Communications Group Inc. sr. disc. notes stepped-coupon zero %
(11 1/8s, 7/1/01), 2007++ 822,400
350,000 Wireless One, Inc. sr. notes 13s, 2003 355,250
--------------
26,979,541
Textiles (0.1%)
- ----------------------------------------------------------------------------------------------------------------------
410,000 Polysindo International Finance company guaranty 11 3/8s, 2006 (Indonesia) 434,600
450,000 Tultex Corp. sr. notes 10 5/8s, 2005 473,400
--------------
908,000
Tobacco (0.1%)
- ----------------------------------------------------------------------------------------------------------------------
2,420,000 RJR Nabisco, Inc. notes 8 3/4s, 2005 2,395,243
Transportation (1.1%)
- ----------------------------------------------------------------------------------------------------------------------
200,000 Blue Bird Body Co. sub. deb. Ser. B, 11 3/4s, 2002 207,000
8,705,000 Burlington Northern Santa Fe notes 6 3/8s, 2005 8,334,080
975,000 Eletson Holdings, Inc. 1st pfd. mtge. notes 9 1/4s, 2003 (Greece) 955,500
400,000 Greenwich Air Services, Inc. sr. notes 10 1/2s, 2006 418,000
645,000 International Shipholding Corp. sr. notes 9s, 2003 643,388
5,465,000 Southwest Airlines Co. deb. 7 7/8s, 2007 5,669,774
500,000 Viking Star Shipping sr. secd. notes 9 5/8s, 2003 516,250
--------------
16,743,992
Utilities (4.5%)
- ----------------------------------------------------------------------------------------------------------------------
6,565,000 California Energy Corp. disc. notes stepped-coupon zero %
(10 1/4s, 1/15/97), 2005++ 6,729,125
5,541,000 Citizens Utilities Co. bonds 7.68s, 2034 6,175,832
2,040,000 Connecticut Light & Power 1st mtge. 7 7/8s, 2001 2,079,413
6,835,000 Connecticut Yankee mtge. Ser. A, 12s, 2000 7,021,390
7,865,000 EIP Funding-Public Service Co. of New Mexico deb. 10 1/4s, 2012 8,722,285
750,000 El Paso Electric Co. 1st mtge. Ser. D, 8.9s, 2006 775,223
10,850,000 El Paso Electric Co. 1st mtge. Ser. B, 7 3/4s, 2001 10,897,523
599,000 First PV Funding deb. 10.15s, 2016 637,935
90,000 Hidroelectric Pierda Aguila 144A bonds 10 5/8s, 2001 (Argentina) 90,113
4,893,085 Midland Cogeneration Ventures deb. 10.33s, 2002 5,174,438
475,000 Midland Funding Corp. deb. Ser. A, 11 3/4s, 2005 521,374
900,000 Niagara Mohawk Power Corp. med. term notes 9.95s, 2000 819,000
100,000 Texas New Mexico Power deb. 12 1/2s, 1999 109,480
8,120,000 Texas New Mexico Power Utilities 1st mtge. 9 1/4s, 2000 8,495,875
10,800,000 Texas Utilities Co. secd. lease fac. bonds 7.46s, 2015 10,858,212
--------------
69,107,218
--------------
Total Corporate Bonds and Notes (cost $501,209,152) 513,254,470
<CAPTION>
FOREIGN GOVERNMENT BONDS AND NOTES (7.8%)*
PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
AUD 9,990,000 Australia (Government of) bonds 10s, 2006 9,269,886
AUD 13,300,000 Australia (Government of) bonds Ser. 803, 9 1/2s, 2003 11,783,432
CAD 26,530,000 Canada (Government of) deb. Ser. A-76, 9s, 2025 24,423,218
FRF 91,330,000 France (Government of) OAT deb. 7 1/4s, 2006 19,507,188
USD 13,055,000 Quebec (Province of) deb. Ser. NN, 7 1/8s, 2024 12,460,345
USD 8,600,000 Quebec (Province of) deb. 13s, 2013 9,990,018
USD 23,595,000 Russia (Government of) principal loan 8s, 2020+## 12,593,831
GBP 11,625,000 United Kingdom Treasury notes 7s, 2001 18,730,894
--------------
Total Foreign Government Bonds and Notes (cost $116,502,438) 118,758,812
COLLATERALIZED MORTGAGE OBLIGATIONS (4.3%)*
PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------
$3,926,182 Chase Mortgage Finance Corp. Ser. 93-3, Class B13, 7.457s 2,457,544
Housing Securities Inc.
3,416,641 Ser. 91-B, Class B6, 9s, 2006 3,423,047
2,605,516 Ser. 93-F, Class F9M2, 7s, 2023 2,409,289
642,091 Ser. 93-J, Class J4, 6.66s, 2009 555,609
305,757 Ser. 93-J, Class J5, 6.66s, 2009 219,763
508,342 Ser. 94-1, Class AB1, 6 1/2s, 2009 433,679
2,324,265 Prudential Home Loan Corp. Ser. 92-25, Class B3, 8s, 2022 + 2,022,110
Prudential Home Mortgage Securities
2,511,684 Ser. 92-13, Class B3, 7 1/2s, 2007 2,270,719
3,222,855 Ser. 93-36, Class M, 7 1/4s, 2023 3,098,976
3,346,825 Ser. 93-31, Class B2, 6s, 2000 2,699,423
Prudential Home Mortgage Securities 144A
681,767 Ser. 94-31, Class B3, 8s, 2009 621,793
436,706 Ser. 94-31, Class B4, 8s, 2009 355,847
6,978,455 Ser. 93-B, Class 5B, 7.836s, 2023 4,693,011
10,033,475 Ser. 95-C, Class 1B1, 7.681s, 2001 10,049,152
3,970,212 Ser. 93-E, Class 5B, 7.394s, 2023 2,423,070
7,858,307 Ser. 93-D, Class 2B, 7.108s, 2023 7,308,226
7,581,987 Ser. 94-A, Class 4B, 6.8s, 2024 6,854,591
2,135,888 Ser. 94-D, Class 3B, 6.311s, 2009 2,005,065
2,542,161 Ser. 94-D, Class 4B, 6.31s, 2009 2,123,499
8,664,708 Securitized Asset Sales, Inc. Ser. 93-J, Class 2B, 6.807s, 2023 7,957,993
1,398,084 Travelers Mortgage Securities Corp. coll. oblig.
Ser. 1, Class Z2, 12s, 2014 1,612,603
--------------
Total Collateralized Mortgage Obligations (cost $62,414,566) 65,595,009
BRADY BONDS (2.7%)*
PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------
$19,208,000 Argentina (Republic of) FRB 6.625s, 2005 15,750,560
16,360,000 Gov't. of Mexico disc. notes Ser. C, 6.352s, 2019 (Mexico) 13,445,875
11,115,000 Poland (Government of) 144A FRN 6 1/2s, 2024 10,614,825
2,740,000 United Mexican States FRB Ser. D, 6.4531s, 2019 2,251,938
--------------
Total Brady Bonds (cost $43,065,008) 42,063,198
PREFERRED STOCKS (0.4%)*
NUMBER OF SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------------
11,034 Cablevision Systems Ser. M, $11.125 dep. shs. pfd. 1,009,611
11,500 California Federal Bank Ser. B, $10.625 exch. pfd. 1,239,125
7,500 El Paso Electric Co. $11.40 pfd.(2 double daggers) 810,000
10,736 K-III Communications $11.625 pfd. 1,062,864
1,519 Time Warner, Inc. 144A Ser. K, $10.25 pfd. 1,617,735
--------------
Total Preferred Stocks (cost $5,797,401) 5,739,335
UNITS (0.1%)*
NUMBER OF UNITS VALUE
- ----------------------------------------------------------------------------------------------------------------------
40 Celcaribe S.A. 144A units stepped-coupon zero % (13 1/2s, 3/15/98), 2004++ 436,000
500 Fitzgerald Gaming Co. units 13s, 2002 380,000
755 Wireless One Inc. units stepped-coupon zero % (13 1/2s, 8/1/01), 2006++ 398,263
--------------
Total Units (cost $1,196,997) 1,214,263
CONVERTIBLE BONDS AND NOTES (0.1%)*
PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------
$1,300,000 Exide Corp. 144A cv. sr. sub. notes 2.9s, 2005 789,750
205,000 Integrated Device Technology, Inc. cv. sub. notes 5 1/2s, 2002 165,794
130,000 National Semiconductor Corp. cv. deb. 6 1/2s, 2002 122,038
--------------
Total Convertible Bonds and Notes (cost $1,130,375) 1,077,582
COMMON STOCKS (cost $1,527,030)(--%)*
NUMBER OF SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------------
44,051 PSF Holdings LLC Class A 748,867
CONVERTIBLE PREFERRED STOCKS (--%)*
NUMBER OF SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------------
5,000 Granite Broadcasting $1.938 cv. pfd. 300,000
505 Paxson Communications Corp. $12.5 pfd.(2 double daggers) 482,275
--------------
Total Convertible Preferred Stocks (cost $805,625) 782,275
<CAPTION>
PURCHASED OPTIONS OUTSTANDING
(cost $83,200)(--%)*
NUMBER OF EXPIRATION/
CONTRACTS STRIKE PRICE VALUE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CAD 26,000,000 U.S. Dollars in exchange for Canadian Dollars November 96/CAD 1.34 166,400
WARRANTS (cost $4,000)(--%)* EXPIRATION
NUMBER OF WARRANTS DATE VALUE
- ----------------------------------------------------------------------------------------------------------------------
400 Intermedia Communications 144A 6/1/01 20,000
<CAPTION>
SHORT-TERM INVESTMENTS (1.2%)*
PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
$15,000,000 Interest in $500,000,000 joint repurchase agreement dated
October 31, 1996 with Lehman Brothers Inc. due November 1, 1996
with respect to various U.S. Treasury obligations -- maturity value
of $15,002,304 for an effective yield of 5.53% 15,002,304
3,000,000 Interest in $356,650,000 joint repurchase agreement dated October 31, 1996
with Morgan (J.P.) & Co., Inc. due November 1, 1996 with respect to various
U.S. Treasury obligations -- maturity value of $3,000,459 for an effective
yield of 5.51% 3,000,459
--------------
Total Short-Term Investments (cost $18,002,763) 18,002,763
- ----------------------------------------------------------------------------------------------------------------------
Total Investments (cost $1,491,817,946)*** 1,506,377,607
- ----------------------------------------------------------------------------------------------------------------------
* Percentages indicated are based on net assets of $1,530,945,077.
*** The aggregate identified cost on a tax basis is
$1,492,232,708, resulting in gross unrealized appreciation and
depreciation of $34,956,745 and $21,578,721, respectively,
or net unrealized appreciation of $13,378,024.
+ Non-income producing security.
++ The interest rate and date shown parenthetically represent
the new interest rate to be paid and the date the fund will
begin receiving interest at this rate.
(2 double daggers) Income may be received in cash or additional securities at
the discretion of the issuer.
## When-issued securities (See Note 1).
# A portion of this security was pledged and segregated
with the custodian to cover margin requirements for
futures contracts at October 31, 1996.
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.
The rate shown on Floating Rate Bonds, (FRB) and
Floating Rate Notes(FRN) are the current interest rates
shown at October 31, 1996, which are subject to
change based on the terms of the security.
<CAPTION>
Forward Currency Contracts to Buy at October 31, 1996
(aggregate face value $28,141,460)
Aggregate Face Delivery Unrealized
Market Value Value Date Appreciation
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Australian Dollars $4,290,251 $4,285,951 12/18/96 $4,300
Canadian Dollars 24,062,603 23,855,509 12/18/96 207,094
- ------------------------------------------------------------------------------------------------------
$211,394
- ------------------------------------------------------------------------------------------------------
Forward Currency Contracts to Sell at October 31, 1996
(aggregate face value $46,888,907)
Market Aggregate Face Delivery Unrealized
Value Value Date Depreciation
- ---------------------------------------------------------------------------------------------------------
British Pounds $19,518,075 $19,123,149 12/18/96 $(394,926)
Canadian Dollars 7,948,203 7,744,526 12/18/96 (203,677)
French Francs 20,147,933 20,021,232 12/18/96 (126,701)
- ---------------------------------------------------------------------------------------------------------
$(725,304)
- ---------------------------------------------------------------------------------------------------------
Futures Contracts Outstanding at October 31, 1996
Aggregate Face Delivery Unrealized
Total Value Value Date Appreciation
- ---------------------------------------------------------------------------------------------------------
U.S. Treasury Bond
Futures (Long) $82,942,000 $80,622,896 Dec 96 $2,319,104
- ---------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
October 31, 1996
<S> <C>
Assets
- -----------------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $1,491,817,946) (Note 1) $1,505,610,732
- -----------------------------------------------------------------------------------------------------
Cash 647,572
- -----------------------------------------------------------------------------------------------------
Dividends, interest and other receivables 26,456,620
- -----------------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 3,546,247
- -----------------------------------------------------------------------------------------------------
Receivable for securities sold 69,128,629
- -----------------------------------------------------------------------------------------------------
Receivable for variation margin 297,638
- -----------------------------------------------------------------------------------------------------
Receivable for open forward currency contracts 211,394
- -----------------------------------------------------------------------------------------------------
Receivable for closed forward currency contracts 2,265,802
- -----------------------------------------------------------------------------------------------------
Total assets 1,608,164,634
Liabilities
- -----------------------------------------------------------------------------------------------------
Payable for securities purchased 69,056,414
- -----------------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 2,097,888
- -----------------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 2,117,893
- -----------------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 693,068
- -----------------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 6,999
- -----------------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 7,592
- -----------------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 509,751
- -----------------------------------------------------------------------------------------------------
Payable for open forward currency contracts 725,304
- -----------------------------------------------------------------------------------------------------
Payable for closed forward currency contracts 1,435,446
- -----------------------------------------------------------------------------------------------------
Other accrued expenses 569,202
- -----------------------------------------------------------------------------------------------------
Total liabilities 77,219,557
- -----------------------------------------------------------------------------------------------------
Net assets $1,530,945,077
Represented by
- -----------------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $1,507,250,090
- -----------------------------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 3,228,618
- -----------------------------------------------------------------------------------------------------
Accumulated net realized gain on investments
and foreign currency transactions (Note 1) 4,854,345
- -----------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments
and assets and liabilities in foreign currencies 15,612,024
- -----------------------------------------------------------------------------------------------------
Total - Representing net assets applicable to capital shares outstanding $1,530,945,077
- -----------------------------------------------------------------------------------------------------
Computation of net asset value and offering price
- -----------------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($1,037,717,787 divided by 147,842,439 shares) $7.02
- -----------------------------------------------------------------------------------------------------
Offering price per class A share (100/95.25 of $7.02)* $7.37
- -----------------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($340,774,699 divided by 48,761,940 shares)** $6.99
- -----------------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($18,936,919 divided by 2,709,868 shares) $6.99
- -----------------------------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $6.99)* $7.22
- -----------------------------------------------------------------------------------------------------
Net asset value, offering price and redemption price per class Y
share ($133,515,672 divided by 19,010,264 shares) $7.02
- -----------------------------------------------------------------------------------------------------
* On single retail sales of less than $50,000. On sales of $50,000
or more and on group sales the offering price is reduced.
** Redemption price per share is equal to net asset value less any
applicable contingent deferred sales charge.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Year ended October 31, 1996
<S> <C>
Investment income:
- -----------------------------------------------------------------------------------------------------
Interest income (net of foreign tax of $148,317) $108,212,397
- -----------------------------------------------------------------------------------------------------
Dividends 486,617
- -----------------------------------------------------------------------------------------------------
Total investment income 108,699,014
- -----------------------------------------------------------------------------------------------------
Expenses:
- -----------------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 8,111,205
- -----------------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 4,072,240
- -----------------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 39,948
- -----------------------------------------------------------------------------------------------------
Administrative services (Note 2) 23,188
- -----------------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 2,449,737
- -----------------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 3,020,633
- -----------------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 67,651
- -----------------------------------------------------------------------------------------------------
Reports to shareholders 73,906
- -----------------------------------------------------------------------------------------------------
Registration fees 142,740
- -----------------------------------------------------------------------------------------------------
Auditing 56,683
- -----------------------------------------------------------------------------------------------------
Legal 35,289
- -----------------------------------------------------------------------------------------------------
Postage 456,291
- -----------------------------------------------------------------------------------------------------
Other 61,225
- -----------------------------------------------------------------------------------------------------
Total expenses 18,610,736
- -----------------------------------------------------------------------------------------------------
Expense reduction (Note 2) (481,748)
- -----------------------------------------------------------------------------------------------------
Net expenses 18,128,988
- -----------------------------------------------------------------------------------------------------
Net investment income 90,570,026
- -----------------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 10,049,088
- -----------------------------------------------------------------------------------------------------
Net realized gain on futures contracts (Notes 1 and 3) 1,328,159
- -----------------------------------------------------------------------------------------------------
Net realized gain on written options (Notes 1 and 3) 105,592
- -----------------------------------------------------------------------------------------------------
Net realized gain on foreign currency transactions (Note 1) 4,697,474
- -----------------------------------------------------------------------------------------------------
Net unrealized appreciation of assets and liabilities
in foreign currencies during the year 734,523
- -----------------------------------------------------------------------------------------------------
Net unrealized depreciation of investments, futures
and written options during the year (24,468,203)
- -----------------------------------------------------------------------------------------------------
Net loss on investments (7,553,367)
- -----------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $83,016,659
- -----------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Year ended October 31
---------------------------------
1996 1995
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------------
Increase in net assets
- --------------------------------------------------------------------------------------------------------------
Operations:
- --------------------------------------------------------------------------------------------------------------
Net investment income $90,570,026 $75,201,308
- --------------------------------------------------------------------------------------------------------------
Net realized gain on investments and foreign currency transactions 16,180,313 4,684,416
- --------------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of investments
and assets and liabilities in foreign currencies (23,733,680) 87,210,466
- --------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 83,016,659 167,096,190
- --------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- --------------------------------------------------------------------------------------------------------------
Net investment income
Class A (64,589,263) (59,477,655)
- --------------------------------------------------------------------------------------------------------------
Class B (17,694,764) (13,155,239)
- --------------------------------------------------------------------------------------------------------------
Class M (870,674) (154,150)
- --------------------------------------------------------------------------------------------------------------
Class Y (8,614,367) (4,389,552)
- --------------------------------------------------------------------------------------------------------------
Increase from capital share transactions (Note 4) 234,847,259 256,127,530
- --------------------------------------------------------------------------------------------------------------
Total increase in net assets 226,094,850 346,047,124
- --------------------------------------------------------------------------------------------------------------
Net assets
- --------------------------------------------------------------------------------------------------------------
Beginning of year 1,304,850,227 958,803,103
- --------------------------------------------------------------------------------------------------------------
End of year (including undistributed net investment income
of $3,228,618 and $480,823, respectively) $1,530,945,077 $1,304,850,227
- --------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
June 16, 1994
(commencement
Year ended of operations) to
October 31 October 31
- -----------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------
Class Y
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $7.07 $6.52 $6.72
- -----------------------------------------------------------------------------------------------------------------------
Investment operations
- -----------------------------------------------------------------------------------------------------------------------
Net investment income .47 .47 .19
- -----------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (.04) .57 (.21)
- -----------------------------------------------------------------------------------------------------------------------
Total from investment operations .43 1.04 (.02)
- -----------------------------------------------------------------------------------------------------------------------
Less distributions:
- -----------------------------------------------------------------------------------------------------------------------
From net investment income (.48) (.49) (.16)
- -----------------------------------------------------------------------------------------------------------------------
In excess of net investment income -- -- --
- -----------------------------------------------------------------------------------------------------------------------
From net realized gain on investments -- -- (.02)
- -----------------------------------------------------------------------------------------------------------------------
From return of capital -- -- --
- -----------------------------------------------------------------------------------------------------------------------
Total distributions (.48) (.49) (.18)
- -----------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $7.02 $7.07 $6.52
- -----------------------------------------------------------------------------------------------------------------------
Total investment return at net asset value (%)(a) 6.31 16.65 (0.35)*
- -----------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $133,516 $107,414 $7,517
- -----------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%)(b) .92 .86 .24*
- -----------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets (%) 6.76 7.14 2.91*
- -----------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 213.46 169.29 128.82
- -----------------------------------------------------------------------------------------------------------------------
See page 33 for notes to Financial Highlights.
<CAPTION>
Financial highlights (continued)
(For a share outstanding throughout the period)
December 14, 1994
(commencement
Year ended of operations) to
October 31 October 31 Year ended October 31
- ---------------------------------------------------------------------------------------------------------------------------
1996 1995 1996
- ---------------------------------------------------------------------------------------------------------------------------
Class M
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $7.04 $6.50 $7.04
- ---------------------------------------------------------------------------------------------------------------------------
Investment operations
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income .44 .43 .40
- ---------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (.04) .54 (.04)
- ---------------------------------------------------------------------------------------------------------------------------
Total from investment operations .40 .97 .36
- ---------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ---------------------------------------------------------------------------------------------------------------------------
From net investment income (.45) (.43) (.41)
- ---------------------------------------------------------------------------------------------------------------------------
In excess of net investment income -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
From net realized gain on investments -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
From return of capital -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Total distributions (.45) (.43) (.41)
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $6.99 $7.04 $6.99
- ---------------------------------------------------------------------------------------------------------------------------
Total investment return at net asset value (%)(a) 5.92 15.43* 5.32
- ---------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $18,937 $7,673 $340,775
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%)(b) 1.42 1.19* 1.92
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets (%) 6.28 5.17* 5.76
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 213.46 169.29 213.46
- ---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Financial highlights (continued)
(For a share outstanding throughout the period)
March 1, 1993
(commencement
of operations) to
October 31
- ---------------------------------------------------------------------------------------------------------------------------
1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------
Class B
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $6.50 $7.34 $7.19
- ---------------------------------------------------------------------------------------------------------------------------
Investment operations
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income .42 .48 .28(c)
- ---------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments .55 (.83) .22
- ---------------------------------------------------------------------------------------------------------------------------
Total from investment operations .97 (.35) .50
- ---------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ---------------------------------------------------------------------------------------------------------------------------
From net investment income (.43) (.38) (.35)
- ---------------------------------------------------------------------------------------------------------------------------
In excess of net investment income -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
From net realized gain on investments -- (.04) --
- ---------------------------------------------------------------------------------------------------------------------------
From return of capital -- (.07) --
- ---------------------------------------------------------------------------------------------------------------------------
Total distributions (.43) (.49) (.35)
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $7.04 $6.50 $7.34
- ---------------------------------------------------------------------------------------------------------------------------
Total investment return at net asset value (%)(a) 15.46 (4.98) 7.18*
- ---------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $260,769 $169,501 $92,832
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%)(b) 1.80 1.59 1.03*
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets (%) 6.14 6.40 4.37*
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 169.29 128.82 129.95
- ---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Financial highlights (continued)
(For a share outstanding throughout the period)
Year ended October 31
- ----------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------
Class A
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $7.07 $6.53 $7.36
- ----------------------------------------------------------------------------------------------------------------------------
Investment operations
- ----------------------------------------------------------------------------------------------------------------------------
Net investment income .45 .47 .54
- ----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (.04) .55 (.84)
- ----------------------------------------------------------------------------------------------------------------------------
Total from investment operations .41 1.02 (.30)
- ----------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ----------------------------------------------------------------------------------------------------------------------------
From net investment income (.46) (.48) (.41)
- ----------------------------------------------------------------------------------------------------------------------------
In excess of net investment income -- -- --
- ----------------------------------------------------------------------------------------------------------------------------
From net realized gain on investments -- -- (.04)
- ----------------------------------------------------------------------------------------------------------------------------
From return of capital -- -- (.08)
- ----------------------------------------------------------------------------------------------------------------------------
Total distributions (.46) (.48) (.53)
- ----------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $7.02 $7.07 $6.53
- ----------------------------------------------------------------------------------------------------------------------------
Total investment return at net asset value (%)(a) 6.08 16.23 (4.16)
- ----------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $1,037,718 $928,995 $781,784
- ----------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%)(b) 1.17 1.05 .83
- ----------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets (%) 6.50 6.91 7.10
- ----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 213.46 169.29 128.82
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Financial highlights (continued)
(For a share outstanding throughout the period)
Year ended October 31
- ----------------------------------------------------------------------------------------------------
1993 1992
- ----------------------------------------------------------------------------------------------------
Class A
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
- ----------------------------------------------------------------------------------------------------
Net asset value, beginning of period $6.97 $6.80
- ----------------------------------------------------------------------------------------------------
Investment operations
- ----------------------------------------------------------------------------------------------------
Net investment income .56 .60
- ----------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments .40 .18
- ----------------------------------------------------------------------------------------------------
Total from investment operations .96 .78
- ----------------------------------------------------------------------------------------------------
Less distributions:
- ----------------------------------------------------------------------------------------------------
From net investment income (.56) (.61)
- ----------------------------------------------------------------------------------------------------
In excess of net investment income (.01) --
- ----------------------------------------------------------------------------------------------------
From net realized gain on investments -- --
- ----------------------------------------------------------------------------------------------------
From return of capital -- --
- ----------------------------------------------------------------------------------------------------
Total distributions (.57) (.61)
- ----------------------------------------------------------------------------------------------------
Net asset value, end of period $7.36 $6.97
- ----------------------------------------------------------------------------------------------------
Total investment return at net asset value (%)(a) 14.36 11.86
- ----------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $814,289 $633,135
- ----------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%)(b) .77 .97
- ----------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets (%) 7.71 8.62
- ----------------------------------------------------------------------------------------------------
Portfolio turnover (%) 129.95 146.66
- ----------------------------------------------------------------------------------------------------
* Not annualized.
(a) Total investment return assumes dividend reinvestment
and does not reflect the effect of sales charge.
(b) The ratio of expenses to average net assets for the year ended October 31,
1995 and thereafter, includes amounts paid through 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
October 31, 1996
Note 1
Significant accounting policies
The fund is registered under the Investment Company Act of 1940, as
amended, as a diversified, open-end management investment company.
Putnam Income Fund seeks high current income consistent with what Putnam
Management believes to be prudent risk. The fund primarily invests in a
portfolio of debt securities, both government and corporate obligations,
preferred stocks and dividend-paying common stocks.
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 4.75%. Class B
shares, which convert to class A shares after approximately eight years,
do not pay a front-end sales charge but pay a higher ongoing
distribution fee than class A shares, and may be 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 3.25% 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,
class B and class M shares, but do not bear a distribution fee. Class Y
shares are sold to defined contribution plans that initially invest at
least $250 million in a combination of Putnam Funds.
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 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 market 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 Investment Management, Inc. ("Putnam Management"), the fund's
Manager, a wholly-owned subsidiary of Putnam Investments, Inc. These
balances may be invested in one or more repurchase agreements and/or
short-term money market instruments.
C) Repurchase agreements The fund, or any joint trading account, through
its custodian, receives delivery of the underlying securities, the
market value of which at the time of purchase is required to be in an
amount at least equal to the resale price, including accrued interest.
Putnam Management is responsible for determining that the value of these
underlying securities is at all times at least equal to the resale
price, including accrued interest.
D) Security transactions and related investment income Security
transactions are accounted for on the trade date (date the order to buy
or sell is executed).
Interest income is recorded on the accrual basis. Discounts on zero
coupon bonds, original issue, stepped-coupon bonds and payment in kind
bonds are accreted according to the effective yield method.
Securities purchased or sold on a when-issued or delayed delivery basis
may be settled a month or more after the trade date; interest income is
accrued based on the terms of the security. Losses may arise due to
changes in the market value of the underlying securities or if the
counterparty does not perform under the contract.
E) Foreign currency translation The accounting records of the fund are
maintained in U.S. dollars. The market value of foreign securities,
currency holdings, 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 fluctuations 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
gains and losses on foreign currency transactions 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 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.
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) 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. 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.
I) 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 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 market discount, paydown gains
and losses on mortgage backed securities, realized and unrealized gains
and losses on forward foreign currency contracts, currency gains and
losses on foreign bonds, realized and unrealized gains and losses on
certain futures contracts and bond premium. Reclassifications are made
to the fund's capital accounts to reflect income and gains available for
distribution (or available capital loss carryovers) under income tax
regulations. For the year ended October 31, 1996, the fund reclassified
$3,946,837 to increase undistributed net investment income and
$2,394,858 to decrease paid-in-capital, with a decrease to accumulated
net realized gain on investments of $1,551,979. The calculation of net
investment income per share in the financial highlights table excludes
these adjustments.
Note 2
Management fees, 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, 0.55% of the next $500 million, 0.50% of the next
$500 million, and 0.45% of the next $5 billion, 0.425% of the next $5
billion, 0.405% of the next $5 billion, 0.39% of the next $5 billion,
and 0.38% of any amount thereafter subject, under current law, to
reduction in any year by the amount of certain brokerage commissions and
fees (less expenses) received by affiliates of Putnam Management on the
fund's portfolio transactions.
The fund reimburses Putnam Management 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 wholly-owned subsidiary of Putnam
Investments, Inc.
Investor servicing agent functions are provided by Putnam Investor
Services, a division of PFTC.
For the year ended October 31, 1996, fund expenses were reduced by
$481,748 under expense offset arrangements with PFTC. Investor servicing
and custodian fees reported in the Statement of operations exclude these
credits. The fund could have invested a portion of the assets utilized
in connection with the expense offset arrangements in an income
producing asset if it had not entered into such arrangements.
Trustees of the fund receive an annual Trustees fee of $2,260 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 adopted a Trustee Fee Deferral Plan (the "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 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 compensation for
the three years preceding retirement. Pension expense for the fund is
included in Compensation of Trustees in the Statement of operations.
Accrued pension liability is included in Payable for compensation of
Trustees in the Statement of assets and liabilities.
The fund has adopted distribution plans (the "Plans") with respect to
its class A, class B and class M shares pursuant to Rule 12b-1 under the
Investment Company Act of 1940. The purpose of the Plans is to
compensate Putnam Mutual Funds Corp., a wholly-owned subsidiary of
Putnam Investments, Inc., for services provided and expenses incurred by
it in distributing shares of the fund. The Plans provide for payments by
the fund to Putnam Mutual Funds Corp. at an annual rate up to 0.35%,
1.00% and 1.00% of the average net assets attributable to class A, class
B and class M shares, respectively. The Trustees have approved payment
by the fund at an annual rate of 0.25%, 1.00% and 0.50% of the average
net assets attributable to class A, class B and class M shares,
respectively.
For the year ended October 31, 1996, Putnam Mutual Funds Corp., acting
as underwriter received net commissions of $406,388 and $13,212 from the
sale of class A and class M shares, respectively and received $633,545
in contingent deferred sales charges from redemptions of class B shares.
A deferred sales charge of up to 1% is assessed on certain redemptions
of class A shares. For the year ended October 31, 1996, Putnam Mutual
Funds Corp., acting as underwriter received $8,423 on class A
redemptions.
Note 3
Purchase and sales of securities
During the year ended October 31, 1996, purchases and sales of
investment securities other than U.S. government obligations and short-
term investments aggregated $1,248,498,660 and $1,061,351,210,
respectively. Purchases and sales of U.S. government obligations
aggregated $1,935,876,135 and $1,901,123,664, 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 $ 9,440,000 $40,592
- ----------------------------------------------------
Options opened 20,000,000 65,000
- ----------------------------------------------------
Options expired (9,440,000) (40,592)
- ----------------------------------------------------
Options closed (20,000,000) (65,000)
- ----------------------------------------------------
Written options
outstanding at
end of year $ -- $ --
- ----------------------------------------------------
Note 4
Capital shares
At October 31, 1996, there was an unlimited number of shares of
beneficial interest authorized. Transactions in capital shares were as
follows:
Year ended
October 31, 1996
- ----------------------------------------------------
Class A Shares Amount
- ----------------------------------------------------
Shares sold 51,499,246 $ 358,192,745
- ----------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 6,891,807 47,867,344
- ----------------------------------------------------
58,391,053 406,060,089
Shares
repurchased (41,990,050) (291,589,053)
- ----------------------------------------------------
Net increase 16,401,003 $ 114,471,036
- ----------------------------------------------------
Year ended
October 31, 1995
- ----------------------------------------------------
Class A Shares Amount
- ----------------------------------------------------
Shares sold 39,283,827 $ 266,565,707
- ----------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 5,503,114 37,189,815
- ----------------------------------------------------
44,786,941 303,755,522
Shares
repurchased (33,147,718) (224,093,082)
- ----------------------------------------------------
Net increase 11,639,223 $ 79,662,440
- ----------------------------------------------------
Year ended
October 31, 1996
- ----------------------------------------------------
Class B Shares Amount
- ----------------------------------------------------
Shares sold 26,294,130 $182,625,950
- ----------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 1,699,732 11,736,562
- ----------------------------------------------------
27,993,862 194,362,512
Shares
repurchased (16,265,239) (112,753,976)
- ----------------------------------------------------
Net increase 11,728,623 $81,608,536
- ----------------------------------------------------
Year ended
October 31, 1995
- ----------------------------------------------------
Class B Shares Amount
- ----------------------------------------------------
Shares sold 16,956,756 $114,910,859
- ----------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 1,224,911 8,266,102
- ----------------------------------------------------
18,181,667 123,176,961
Shares
repurchased (7,208,649) (48,605,023)
- ----------------------------------------------------
Net increase 10,973,018 $74,571,938
- ----------------------------------------------------
Year ended
October 31, 1996
- ----------------------------------------------------
Class M Shares Amount
- ----------------------------------------------------
Shares sold 2,331,089 $16,185,461
- ----------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 104,715 721,051
- ----------------------------------------------------
2,435,804 16,906,512
Shares
repurchased (816,055) (5,631,015)
- ----------------------------------------------------
Net increase 1,619,749 $11,275,497
- ----------------------------------------------------
December 14, 1995
(commencement
of operations)
to October 31, 1995
- ----------------------------------------------------
Class M Shares Amount
- ----------------------------------------------------
Shares sold 1,145,112 $7,921,807
- ----------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 18,171 125,903
- ----------------------------------------------------
1,163,283 8,047,710
Shares
repurchased (73,164) (509,587)
- ----------------------------------------------------
Net increase 1,090,119 $7,538,123
- ----------------------------------------------------
Year ended
October 31, 1996
- ----------------------------------------------------
Class Y Shares Amount
- ----------------------------------------------------
Shares sold 9,748,399 $68,812,178
- ----------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 1,242,297 8,614,367
- ----------------------------------------------------
10,990,696 77,426,545
Shares
repurchased (7,183,980) (49,934,355)
- ----------------------------------------------------
Net increase 3,806,716 $27,492,190
- ----------------------------------------------------
Year ended
October 31, 1995
- ----------------------------------------------------
Class Y Shares Amount
- ----------------------------------------------------
Shares sold 16,554,420 $111,509,264
- ----------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 637,485 4,389,491
- ----------------------------------------------------
17,191,905 115,898,755
Shares
repurchased (3,140,797) (21,543,726)
- ----------------------------------------------------
Net increase 14,051,108 $94,355,029
- ----------------------------------------------------
Federal tax information
(Unaudited)
The Fund has designated 0.51% of the distributions from net investment
income as qualifying for the dividends received deduction for
corporations.
The Form 1099 you receive in January 1997 will show the tax status of
all distributions paid to your account in calendar 1996.
Results of July 31, 1996 shareholder meeting
(Unaudited)
A meeting of shareholders of the fund was held on July 31, 1996. At the
meeting, each of the nominees for Trustees was elected, as follows:
Votes
Votes for withheld
Jameson Adkins Baxter 115,346,645 3,620,785
Hans H. Estin 115,322,407 3,645,023
John A. Hill 115,348,297 3,619,133
R.J. Jackson 115,354,860 3,612,570
Elizabeth T. Kennan 115,258,047 3,709,383
Lawrence J. Lasser 115,327,924 3,639,506
Robert E. Patterson 115,364,913 3,602,517
Donald S. Perkins 115,286,162 3,681,268
William F. Pounds 115,338,883 3,628,547
George Putnam 115,342,581 3,624,849
George Putnam, III 115,332,941 3,634,489
Eli Shapiro 115,179,503 3,787,927
A.J.C. Smith 115,343,122 3,624,308
W. Nicholas Thorndike 115,313,249 3,654,181
A proposal to ratify the selection of Coopers & Lybrand L.L.P. as
auditors for the fund was approved as follows: 114,320,282 votes for,
and 855,535 votes against, with 3,791,613 abstentions.
A proposal to amend the fund's fundamental investment restriction with
respect to diversification of investments was approved as follows:
103,841,655 votes for, and 6,225,628 votes against, with 8,900,147
abstentions and broker non-votes.
A proposal to amend the fund's fundamental investment restriction with
respect to investments in the securities of a single issuer was approved
as follows: 101,609,637 votes for, and 8,046,538 votes against, with
9,311,255 abstentions and broker non-votes.
A proposal to amend the fund's fundamental investment restriction with
respect to making loans through purchases of debt obligations,
repurchase agreements and securities loans was approved as follows:
99,429,840 votes for, and 9,808,172 votes against, with 9,729,418
abstentions and broker non-votes.
A proposal to amend the fund's fundamental investment restriction with
respect to investments in real estate was approved as follows:
99,087,879 votes for, and 9,535,490 votes against, with 10,344,061
abstentions and broker non-votes.
A proposal to amend the fund's fundamental investment restriction with
respect to concentration of its assets was approved as follows:
103,047,903 votes for, and 6,556,169 votes against, with 9,363,358
abstentions and broker non-votes.
A proposal to amend the fund's fundamental investment restriction with
respect to investments in commodities or commodity contracts was
approved as follows: 97,007,354 votes for, and 12,507,416 votes against,
with 9,452,660 abstentions and broker non-votes.
A proposal to amend the fund's fundamental investment restriction with
respect to underwriting was approved as follows: 101,706,601 votes for,
and 7,282,285 votes against, with 9,978,544 abstentions and broker non-
votes.
A proposal to eliminate the fund's fundamental investment restriction
with respect to investments in issuers that have been in operation for
less than three years was approved as follows: 98,605,585 votes for, and
11,050,804 votes against, with 9,311,041 abstentions and broker non-
votes.
A proposal to eliminate the fund's fundamental investment restriction
with respect to investments in securities of issuers in which management
of the fund or Putnam Investment Management, Inc. owns securities was
approved as follows: 100,974,692 votes for, and 8,455,628 votes against,
with 9,537,110 abstentions and broker non-votes.
A proposal to eliminate the fund's fundamental investment restriction
with respect to margin transactions was approved as follows: 97,278,145
votes for, and 11,865,939 votes against, with 9,823,346 abstentions and
broker non-votes.
A proposal to eliminate the fund's fundamental investment restriction
with respect to short sales was approved as follows: 97,949,540 votes
for, and 11,175,462 votes against, with 9,842,428 abstentions and broker
non-votes.
A proposal to eliminate the fund's fundamental investment restriction
which limits the fund's ability to pledge assets was approved as
follows: 97,508,097 votes for, and 11,734,786 votes against, with
9,724,547 abstentions and broker non-votes.
A proposal to eliminate the fund's fundamental investment restrictions
with respect to investments in illiquid securities was approved as
follows: 97,418,587 votes for, and 11,618,088 votes against, with
9,930,755 abstentions and broker non-votes.
All tabulations are rounded to nearest whole number.
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
Coopers & Lybrand L.L.P.
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
John A. Hill
Ronald J. Jackson
Elizabeth T. Kennan
Lawrence J. Lasser
Robert E. Patterson
Donald S. Perkins
George Putnam, III
Eli Shapiro
A.J.C. Smith
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
Gary N. Coburn
Vice President
William J. Curtin
Vice President
Alan J. Bankart
Vice President
Kenneth J. Taubes
Vice President and Fund Manager
Rosemary H. Thomsen
Vice President and Fund Manager
D. William Kohli
Vice President and Fund Manager
William N. Shiebler
Vice President
John R. Verani
Vice President
Paul M. O'Neil
Vice President
Beverly Marcus
Clerk and Assistant Treasurer
This report is for the information of shareholders of Putnam Income
Fund. It may also be used as sales literature when preceded or
accompanied by the current prospectus, which gives details of sales
charges, investment objectives, and operating policies of the fund, and
the most recent copy of Putnam's Quarterly Performance Summary. For more
information, or to request a prospectus, call toll free: 1-800-225-1581.
You can also learn more at Putnam Investments' 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
principal amount invested.
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
- ---------------------
Bulk Rate
U.S. Postage
PAID
Putnam
Investments
- ---------------------
29202-004/312/510 12/96
PUTNAM INVESTMENTS [LOGO]
- --------------------------------------------------------------------------
Putnam Income Fund
Supplement to Annual Report dated October 31, 1996
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 annual report.
ANNUAL RESULTS AT A GLANCE
- --------------------------------------------------------------------------
Total return: NAV
One year ended 10/31/96 6.31%
Life of class (since 6/16/94) 23.57
Annual average 9.30
- --------------------------------------------------------------------------
Share value: NAV
10/31/96 $7.02
10/31/95 7.07
- --------------------------------------------------------------------------
Distributions: No. Income Capital gains Total
12 $0.475 $0.00 $0.475
- --------------------------------------------------------------------------
Current return
(end of period) Total
Current dividend rate1 6.50%
Current 30-day SEC yield2 6.53
1Income portion of most recent distribution, annualized and divided by NAV at
end of period.
2Based only on investment income, calculated using SEC guidelines.
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.
