Putnam
Income
Fund
ANNUAL REPORT
October 31, 1997
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* For the 5 years ended October 31, 1997, Putnam Income Fund's class A
shares ranked 11 out of 54 corporate debt A-rated funds tracked by
Lipper Analytical Services, placing the fund in the top 20% of its
category.*
* "Rather than loading up on A-rated credits, [the fund manager of
Putnam Income Fund] has normally offset high-yield bonds with
government issues. This combination generates a higher yield to
maturity than simply buying A-rated credits. That, coupled with
[high-yield] bonds' stellar performance in recent years, is largely
responsible for the fund's strong track record."
-- Morningtar Mutual Funds, April 25, 1997
CONTENTS
4 Report from Putnam Management
9 Fund performance summary
14 Portfolio holdings
33 Financial statements
* Lipper rankings are based on total return performance, vary over time,
and do not reflect the effects of sales charges. The fund's class A
shares ranked 30 out of 131 and 8 out of 34 for 1- and 10-year
performance, respectively, through 10/31/97. Class B shares ranked 81
out of 131 and 48 out of 101 for 1- and 3-year performance,
respectively. Class M shares were ranked 42 out of 131 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:
Putnam Income Fund took advantage of a favorable bond market environment to
deliver solid results for the fiscal year that ended on October 31, 1997. A
carefully selected portfolio emphasizing corporate and mortgage-backed
domestic securities and supplemented by fixed-income securities from other
world markets allowed the fund to perform well during the period.
During the year, Robert M. Paine and D. William Kohli were appointed to your
fund's management team. Bob joined Putnam's High-Yield Bond Group in 1989 and
has 8 years of investment experience. Bill has been with Putnam since 1994. In
addition to his duties with the fund, he serves as managing director and chief
investment officer of Putnam's Global Fixed-Income Group. He has 11 years of
investment experience.
In the following report, the management team provides an in-depth account of
your fund's performance during fiscal 1997 and provides insights into
prospects for the new fiscal year.
Respectfully yours,
/S/George Putnam
George Putnam
Chairman of the Trustees
December 17, 1997
Report from the Fund Managers
Kenneth J. Taubes, lead manager
Robert M. Paine
D. William Kohli
During Putnam Income Fund's 1997 fiscal year, world bond markets provided
plenty of challenges and opportunities for fixed-income investors. Your fund's
flexible investment strategy enabled it to complete the 12-month period ended
October 31, 1997, with solid results. For the period, your fund's class A
share return at net asset value was 8.88%, while the Lehman Brothers Aggregate
Bond Index produced an 8.89% return. At public offering price, your fund's
class A shares returned 3.72%. For more performance information, including the
results of other share classes, please see pages 9 through 11.
* U.S. MARKET PROVIDES FAVORABLE ENVIRONMENT FOR BONDS
During the first half of the fiscal year, your fund benefited from continuing
steady growth, falling interest rates, ample liquidity, and low inflation in
the world's major economies -- all of which contributed to a generally
favorable environment for fixed-income investments. An underlying current of
nervousness prevailed throughout the period, however, as both the Federal
Reserve Board and investors kept a close watch on inflation, fearful that the
still robust U.S. economy might reignite it at any moment. The Fed's
quarter-point increase in short-term interest rates in March, billed as a
preemptive strike, seemed to do the trick without extinguishing the economy's
long-standing growth cycle.
Economic activity in the first half of your fund's fiscal year was vigorous
and widespread. Consumer spending rose, unemployment fell, sales of new homes
set records, and manufacturing capacity became increasingly strained. The
market's reaction to the Fed's March increase in interest rates was swift;
bonds most sensitive to changing interest rates suffered the greatest price
declines. Returns among fixed-income investments in general were lackluster
over the first half of the fiscal year. Having become more cautious on the
bond market's prospects, we had gradually reduced the portfolio's sensitivity
to changes in interest rates by shortening its duration. (An important tool
for investment professionals, duration measures a portfolio's sensitivity to
changes in interest rates and is expressed in years. The longer the duration,
the greater the change in portfolio value with each change in interest rates.)
The second half brought a calmer mood to the market. Economic activity tapered
off in a manner that convinced the Fed to leave interest rates unchanged.
Despite continued strength in the employment picture, retail sales declined
and manufacturers slowed production. This new landscape proved a welcome
change for fixed-income investors; bond prices rose throughout the spring and
summer while yields fell. With the significant rally based on subdued
prospects for inflation, we are cautiously optimistic that interest rates will
remain low for the near term.
* HEAVY EMPHASIS ON MORTGAGE-BACKED SECURITIES
In its search for income, your fund invests in a variety of bonds, including
U.S. and foreign government bonds, mortgage-backed investments, and bonds
issued by corporations. The amount of assets in each sector of the market is
adjusted depending on the outlook for the economy and interest rates. This
flexibility proved invaluable during fiscal 1997 as sectors rotated in and out
of favor with investors. Relying on Putnam's extensive fixed-income research
and analysis capabilities, we surveyed interest rates, maturities, and credit
ratings throughout the year.
[GRAPHIC BAR CHART HORIZONTAL OMITTED: BOND MARKET PERFORMANCE BY SECTOR]
BOND MARKET PERFORMANCE BY SECTOR*
Comparison of total return, 10/31/96-10/31/97
First Boston High Yield Index 14.75%
Lehman Brothers Mortgage-
Backed Securities Index 9.12%
Lehman Brothers Corporate
Bond Index 9.26%
Salomon Brothers World
Government Bond Index 10.33%
J.P. Morgan Emerging Market
Bond Index 14.00%
Lehman Brothers Long-Term
Treasury Bond Index 12.61%
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.
During the first half, we concluded that mortgage-backed securities provided a
distinct advantage over U.S. Treasuries of comparable maturity and therefore
weighted the portfolio heavily toward them. Mortgage-backed securities
generally offer higher yields than Treasuries in order to compensate investors
for the risk to investors that their principal may be returned in full at some
point prior to the security's stated maturity date. Such prepayment may cause
an investor's actual rate of return to differ from the expected rate of
return.
Prepayment risk was not an issue for a large part of the year, however, since
economic growth was generally strong and interest rates appeared to us to be
relatively stable. Only during the summer did Treasuries gain the upper hand.
Their sensitivity to changing interest rates translated into relatively
greater price appreciation as the market rallied and rates moved lower.
Mortgages were hurt during this period as the prospect of lower rates
rekindled concern over the potential of increased homeowner prepayments. By
the end of the fund's fiscal period, we had lowered the fund's mortgage-backed
securities allocation to 27.7% of the total portfolio.
* CORPORATE BONDS PERFORM WELL
Most corporate bonds, including the ones held by your fund, performed well
during the period. Spreads between investment-grade corporate bonds and
Treasuries tightened slowly and modestly as economic activity remained firm
and inflation remained low. Generally speaking, market environments that are
favorable for stocks are also favorable for investment-grade corporate bonds.
However, as the period ended, fears of unsustainable U.S. economic growth and
turmoil overseas created uncertainty in the market. As events in Southeast
Asia heated up toward the fiscal year's close, investment-grade corporate
bonds experienced a setback on the grounds that weaker currencies in Asia
would reduce U.S. exports and cut into profits of U.S. companies.
[GRAPHIC VERTICAL BAR CHART OMITTED: CHANGES IN PORTFOLIO COMPOSITION]
CHANGES IN PORTFOLIO COMPOSITION*
10/31/96 10/31/97
U.S.
government
and agency
obligations 48.2% 47.3%
Corporate
bonds 33.5% 40.0%
Foreign
government
bonds and notes 7.8% 10.2%
Collateralized
mortgage
obligations 4.3% 2.6%
Short-term
investments 1.2% 5.6%
Other 3.3% 1.3%
Footnote reads:
* Based on total net assets as of indicated dates. Holdings will vary over
time.
High-yield bonds also performed well throughout most of the period, reflecting
an environment of low inflation, strong earnings, and solid economic numbers.
For most of the fiscal year, the fund benefited from its exposure to the
high-yield bond market. As the period ended, however, high-yield bonds
exhibited some weakness stemming from the October market turmoil. Despite
their volatility, high-yield bonds represented the best-performing segment of
the fixed-income market during the period.
* FOREIGN BONDS ADD FLAVOR TO PERFORMANCE
Many overseas bond markets also performed well during the period as
inflationary expectations diminished. The peripheral markets of Spain, Italy,
and Sweden, buoyed by improving fiscal deficits and a benign inflation
outlook, continued to outperform the core European markets of Germany and
France. Strong performance also came from the United Kingdom. The Bank of
England's independence and tighter monetary policy, as well as the possibility
that the United Kingdom may enter the European Economic and Monetary Union
(EMU) after all, provided the catalyst U.K. bonds needed to rally.
Japan's economy showed signs of improvement early in the fiscal year, but it
faltered again when already beleaguered Japanese consumers were hit with a tax
increase in April. Implementation of the higher consumption tax coincided with
the announcement of major deregulation measures related to land reform and to
Japan's troubled banking sector. These changes were part of the Japanese
government's plan to reduce the country's bulging budget deficit by cutting
fiscal spending and raising taxes.
* MARKET UNCERTAINTIES DICTATE CAUTION
The U.S. economy still appears to be robust and there is some question whether
potential weaknesses in Asian and Latin American export markets will create
enough of a slowing in the U.S. economy to hold inflation in check. We intend
to keep an attentive eye on the corporate sector because we believe corporate
bonds should continue to perform well over the near term, supported by such
positive factors as sustained economic growth, contained inflation, and solid
earnings growth. We also remain cautiously optimistic on the mortgage sector
and certain international bond markets, including Germany, the United Kingdom,
and France.
The views expressed here are exclusively those of Putnam Management. They are
not meant as investment advice. Although the described holdings were viewed
favorably as of 10/31/97, there is no guarantee the fund will continue to hold
these securities in the future.
Performance summary
This section provides information about your fund's performance, which
should always be considered in light of its investment strategy. Putnam
Income Fund is designed for investors seeking high current income
consistent with prudent risk, mainly through fixed-income securities.
TOTAL RETURN FOR PERIODS ENDED 10/31/97
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 8.88% 3.72% 8.15% 3.15% 8.74% 5.28%
- ------------------------------------------------------------------------------
5 years 47.15 40.11 41.70 39.70 45.13 40.33
Annual average 8.03 6.98 7.22 6.92 7.73 7.01
- ------------------------------------------------------------------------------
10 years 152.53 140.56 132.19 132.19 144.15 136.20
Annual average 9.71 9.17 8.79 8.79 9.34 8.98
- ------------------------------------------------------------------------------
Annual average
(life of fund) 8.69 8.57 7.64 7.64 8.19 8.11
- ------------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 10/31/97
Lehman Bros.
Aggregate Consumer
Bond Index* Price Index
- ------------------------------------------------------------------------------
1 year 8.89% 2.08%
- ------------------------------------------------------------------------------
5 years 43.64 13.96
Annual average 7.51 2.65
- ------------------------------------------------------------------------------
10 years 142.28 40.16
Annual average 9.25 3.43
- ------------------------------------------------------------------------------
Annual average (life of fund) -- 4.27
- ------------------------------------------------------------------------------
Returns for class A and class M shares reflect the current maximum initial
sales charges of 4.75% and 3.25%, respectively. Class B share returns for
the 1-, 5-, and 10-year (where available) and life-of-fund periods reflect
the applicable contingent deferred sales charge (CDSC), which is 5% in the
first year, declines to 1% in the sixth year, and is eliminated
thereafter. Returns shown for class B and class M shares for periods prior
to their inception are derived from the historical performance of class A
shares, adjusted to reflect both the initial sales charge or CDSC, if any,
currently applicable to each class and, in the case of class B and class M
shares, the higher operating expenses applicable to such shares. All
returns assume reinvestment of distributions at NAV and represent past
performance; they do not guarantee future results. Investment return and
principal value will fluctuate so that an investor's shares when redeemed
may be worth more or less than their original cost.
* The Lehman Brothers Aggregate Bond Index was introduced on 12/31/75.
[GRAPHIC WORM CHART OMITTED: GROWTH OF A $10,000 INVESTMENT]
GROWTH OF A $10,000 INVESTMENT
Cumulative total return of
a $10,000 investment since
10/31/87
Fund's class A Lehman Bros.
Date shares at POP Aggregate Bond Index Consumer Price Index
10/87 9,526 10,000 10,000
10/88 10,960 11,146 10,425
10/89 12,132 12,472 10,893
10/90 12,381 13,259 11,578
10/91 14,615 15,356 11,916
10/92 16,348 16,866 12,298
10/93 18,696 18,868 12,636
10/94 17,919 18,176 12,966
10/95 20,827 21,020 13,330
10/96 22,093 22,249 13,729
10/97 24,056 24,228 14,016
Past performance is no assurance of future results. At the end of the same
time period, a $10,000 investment in the fund's class B shares would have been
valued at $23,219 and no contingent deferred sales charges would apply; a
$10,000 investment in the fund's class M shares would have been valued at
$24,415 ($23,620 at public offering price). See first page of performance
section for performance calculation method.
PRICE AND DISTRIBUTION INFORMATION
12 months ended 10/31/97
Class A Class B Class M
- ------------------------------------------------------------------------------
Distributions (number) 12 12 12
- ------------------------------------------------------------------------------
Income $0.444 $0.394 $0.432
- ------------------------------------------------------------------------------
Capital gains
- ------------------------------------------------------------------------------
Long-term $0.035 $0.035 $0.035
- ------------------------------------------------------------------------------
Total $0.479 $0.429 $0.467
- ------------------------------------------------------------------------------
Share value: NAV POP NAV NAV POP
- ------------------------------------------------------------------------------
10/31/96 $7.02 $7.37 $6.99 $6.99 $7.22
- ------------------------------------------------------------------------------
10/31/97 7.14 7.50 7.11 7.11 7.35
- ------------------------------------------------------------------------------
Current return (end of period)
- ------------------------------------------------------------------------------
Current dividend rate1 6.22% 5.92% 5.40% 6.08% 5.88%
- ------------------------------------------------------------------------------
Current 30-day SEC yield2 6.10 5.81 5.33 5.80 5.61
- ------------------------------------------------------------------------------
1 Income portion of most recent distribution, annualized and divided by
NAV or POP at end of period.
2 Based on investment income, calculated using SEC guidelines.
TOTAL RETURN FOR PERIODS ENDED 9/30/97
(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 10.79% 5.59% 10.07% 5.07% 10.66% 7.07%
- ------------------------------------------------------------------------------
5 years 44.30 37.37 38.93 36.94 42.37 37.76
Annual average 7.61 6.56 6.80 6.49 7.32 6.62
- ------------------------------------------------------------------------------
10 years 155.35 143.18 134.62 134.62 146.52 138.46
Annual average 9.83 9.29 8.90 8.90 9.44 9.08
- ------------------------------------------------------------------------------
Annual average
(life of fund) 8.70 8.57 7.65 7.65 8.19 8.11
- ------------------------------------------------------------------------------
Performance data represent past results, do not reflect future
performance, and will differ for each share class. Investment returns and
principal value will fluctuate so that an investor's shares, when sold,
may be worth more or less than their original cost. See first page of
performance section for performance calculation method.
TERMS AND DEFINITIONS
Total return shows how the value of the fund's shares changed over time,
assuming you held the shares through the entire period and reinvested all
distributions in the fund.
Class A shares are generally subject to an initial sales charge.
Class B shares may be subject to a sales charge upon redemption.
Class M shares have a lower initial sales charge and a higher 12b-1 fee
than class A shares and no sales charge on redemption.
Net asset value (NAV) is the value of all your fund's assets, minus any
liabilities, divided by the number of outstanding shares, not including
any initial or contingent deferred sales charge.
Public offering price (POP) is the price of a mutual fund share plus the
maximum sales charge levied at the time of purchase. POP performance
figures shown here assume the maximum 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 a 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 a 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 a 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.
J.P. Morgan Emerging Market Bond Index* is a total-return index that
tracks the traded market for U.S. dollar-denominated Brady and other
similar sovereign restructured bonds.
Consumer Price Index (CPI) is a commonly used measure of inflation; it
does not represent an investment return.
* Securities indexes assume reinvestment of all distributions and interest
payments and do not take in account brokerage fees or taxes. Securities in
the fund do not match those in the indexes and performance of the fund
will differ. It is not possible to invest directly in an index.
Report of independent accountants
For the fiscal year ended October 31, 1997
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,
1997, and the related statement of operations for the year then ended and 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, 1997, 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, 1997, the results of its operations for
the year then ended and 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 11, 1997
Portfolio of investments owned
October 31, 1997
<TABLE>
<CAPTION>
U.S. GOVERNMENT AND AGENCY OBLIGATION (47.3%) *
PRINCIPAL AMOUNT VALUE
U.S. Government Agency Mortgage Obligations (25.1%)
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------
41,462,268 Federal Home Loan Mortgage Corp. 5 1/2s, with due dates
from December 1, 2010 to August 1, 2011 $ 40,011,102
Federal National Mortgage Association
12,119,993 6 1/2s, TBA, November 16, 2027 11,915,408
14,100,000 5.94s, med. term notes December 12, 2005 13,868,619
2,662,408 Federal National Mortgage Association Graduated Payment
Mortgages 8s, December 1, 2008 2,809,693
Federal National Mortgage Association Pass-Through Certificates
370,614 11s, with due dates from August 1, 2013 to October 1, 2015 422,732
61,944,981 7s, with due dates from December 1, 2025 to June 15, 2027 62,068,658
15,186,782 6 1/2s, with due dates from January 1, 2025 to
September 15, 2027 14,930,445
Government National Mortgage Association
20,030,000 7s, TBA, November 16, 2027 20,073,860
63,985,000 7s, TBA, November 15, 2027 64,344,596
Government National Mortgage Association
Adjustable Rate Mortgages
6,386,198 7 3/8s, April 20, 2023 6,614,704
24,144,537 7 1/8s, with due dates from July 20, 2023 to August 20, 2023 24,922,800
15,483,802 7s, September 20, 2024 16,011,219
8,069,272 6s, May 20, 2024 8,245,788
19,835,000 6s, TBA, November 16, 2027 20,008,556
41,068,000 5 1/2s, TBA, November 16, 2027 40,984,632
424,293 Government National Mortgage Association Graduated
Payment Mortgages 11s, with due dates from
December 15, 2009 to October 15, 2013 457,851
Government National Mortgage Association
Pass-Through Certificates
292,396 9s, with due dates from October 15, 2004 to May 15, 2009 314,690
95,324,644 8 1/2s, with due dates from February 15, 2026 to
October 15, 2027 99,941,269
110,649,341 7 1/2s, with due dates from January 15, 2024 to
October 15, 2027 113,139,219
--------------
561,085,841
U.S. Treasury Obligations (22.2%)
- ------------------------------------------------------------------------------------------------------------
U.S. Treasury Bonds
38,832,000 10 3/4s, August 15, 2005 # 50,421,022
6,955,000 7 1/2s, November 15, 2024 8,114,538
1,390,000 6 3/8s, August 15, 2027 1,432,534
U.S. Treasury Notes
148,790,000 7s, July 15, 2006 159,647,206
40,765,000 6 1/4s, June 30, 2002 41,541,981
166,448,000 6s, July 31, 2002 168,034,249
U.S. Treasury Notes
22,320,000 5 7/8s, September 30, 2002 22,435,171
9,000,000 5 7/8s, August 31, 1999 9,035,190
7,015,000 5 7/8s, July 31, 1999 7,040,184
30,570,000 5 3/4s, October 31, 2002 30,613,104
--------------
498,315,179
--------------
Total U.S. Government and Agency Obligation
(cost $1,048,198,993) 1,059,401,020
CORPORATE BONDS AND NOTES (40.0%) *
PRINCIPAL AMOUNT VALUE
Advertising (0.3%)
- ------------------------------------------------------------------------------------------------------------
$ 175,000 Adams Outdoor Advertising sr. notes 10 3/4s, 2006 $ 190,750
2,010,000 Lamar Advertising Co. sr. sub. notes 9 5/8s, 2006 2,125,575
420,000 Lamar Advertising Co. 144A sr. sub. notes 8 5/8s, 2007 423,675
70,000 Outdoor Comunications Inc. sr. sub. notes 9 1/4s, 2007 69,300
1,175,000 Outdoor Systems, Inc. company guaranty 8 7/8s, 2007 1,210,250
60,000 Outdoor Systems, Inc. sr. sub. notes 9 3/8s, 2006 62,100
1,725,000 Universal Outdoor, Inc. sr. sub. notes 9 3/4s, 2006 1,914,750
1,100,000 Universal Outdoor, Inc. sr. sub. notes Ser. B, 9 3/4s, 2006 1,221,000
--------------
7,217,400
Aerospace and Defense (0.8%)
- ------------------------------------------------------------------------------------------------------------
170,000 BE Aerospace sr. notes 9 3/4s, 2003 177,650
160,000 Howmet Corp. sr. sub. notes 10s, 2003 171,200
155,000 K & F Industries, Inc.144A sr. sub. notes 9 1/4s, 2007 156,163
75,000 L-3 Communications Corp. 144A sr. sub. notes 10 3/8s, 2007 80,625
16,515,000 Raytheon Co notes 6.45s, 2002 16,632,257
125,000 Sequa Corp. bonds 8 3/4s, 2001 126,250
145,000 Sequa Corp. sr. notes 9 5/8s, 1999 147,900
140,000 Tracor, Inc. sr. sub. notes 8 1/2s, 2007 141,400
140,000 Wyman-Gordon Co. sr. notes 10 3/4s, 2003 148,400
165,000 United Defense Industries Inc. 144A units sr. sub. notes
8 3/4s, 2007 165,000
--------------
17,946,845
Agriculture (0.3%)
- ------------------------------------------------------------------------------------------------------------
275,000 AGCO Corp. sr. sub. notes 8 1/2s, 2006 284,625
5,850,000 Potash Corp. of Saskatchewan notes 7 1/8s, 2007 (Canada) 6,030,531
511,480 Premium Standard Farms, Inc. sr. secd. notes 11s, 2003 [2 DBL. DAGGERS] 562,628
--------------
6,877,784
Apparel (--%)
- ------------------------------------------------------------------------------------------------------------
400,000 Sassco Fashions Ltd. sr. notes 12 3/4s, 2004 424,000
Automotive (0.3%)
- ------------------------------------------------------------------------------------------------------------
232,000 Aftermarket Technology Corp. sr. sub. notes 12s, 2004 257,520
165,000 Aftermarket Technology Corp. sr. sub. notes Ser. D, 12s, 2004 183,150
40,000 Cambridge Industries Inc. 144A sr. sub. notes 10 1/4s, 2007 41,600
4,360,000 Chrysler Corp. deb. Ser. B, 7.45s, 2097 4,481,862
5,000 Hawk Corp. sr. notes 10 1/4s, 2003 5,200
1,185,000 Hayes Wheels International, Inc. company guaranty Ser. B,
9 1/8s, 2007 1,214,625
1,100,000 Lear Corp. sub. notes 9 1/2s, 2006 1,199,000
--------------
7,382,957
Banks (5.3%)
- ------------------------------------------------------------------------------------------------------------
4,205,000 Abbey National PLC sub. notes 7.35s, 2049 (United Kingdom) 4,380,979
11,105,000 Advanta National Bank sr. notes 7.02s, 2001 11,161,858
900,000 Chevy Chase Savings Bank sub. deb. 9 1/4s, 2008 909,000
180,000 Chevy Chase Savings Bank Inc. sub. deb. 9 1/4s, 2005 181,800
8,325,000 Den Danske Bank sub. notes 6.55s, 2003 (Denmark) 8,391,683
50,000 Dime Capital Trust I sub. notes 9.33s, 2027 56,495
895,000 First Nationwide Holdings 144A sr. sub. notes 10 5/8s, 2003 971,075
5,705,000 Greenpoint Bank sr. notes 6.7s, 2002 5,727,421
2,630,000 Greenpoint Capital Trust I company guaranty 9.1s, 2027 2,769,390
1,520,000 Merita Bank Ltd. sub. notes 6 1/2s, 2006 (Finland) 1,507,749
5,000 Ocwen Federal Bank FSB sub. deb. 12s, 2005 5,500
90,000 Ocwen Capital Trust I company guaranty 10 7/8s, 2027 95,400
9,865,000 Peoples Bank- Bridgeport sub. notes 7.2s, 2006 10,174,465
2,065,000 Peoples Heritage Capital Trust company guaranty Ser. B,
9.06s, 2027 2,266,338
95,000 Provident Capital Trust company guaranty 8.6s, 2026 99,156
115,000 Riggs Capital Trust 144A bonds 8 5/8s, 2026 121,347
8,500,000 Riggs National Corp. sub. deb. 8 1/2s, 2006 8,840,000
6,500,000 Scotland International Finance B.V. 144A sub.
notes 8.85s, 2006 (Netherlands) 7,513,545
11,215,000 Societe Generale 144A notes 7.85s, 2049 (France) 11,678,180
5,000,000 Society Bank & Trust notes 12 1/2s, 1999 5,522,500
6,935,000 Sparbanken Sverige AB (Swedbank) 144A sub. 7 1/2s,
2006 (Sweden) 7,244,301
6,065,000 St. Paul Bancorp sr. notes 7 1/8s, 2004 6,199,461
4,050,000 State Development Bank of China notes 7 3/8s, 2007 (China) 3,981,393
3,745,000 State Street Institution 144A company guaranty 7.94s, 2026 3,931,052
6,095,000 Webster Capital Trust I 144A bonds 9.36s, 2027 6,785,076
8,445,000 Webster Financial Corp. sr. notes 8 3/4s, 2000 8,893,936
--------------
119,409,100
Basic Industrial Products (--%)
- ------------------------------------------------------------------------------------------------------------
290,000 Clark-Schwebel sr. notes 10 1/2s, 2006 313,200
75,000 Owens-Illinois, Inc. sr. notes 8.1s, 2007 79,577
30,000 Roller Bearing Co. 144A sr. sub. notes 9 5/8s, 2007 30,225
--------------
423,002
Broadcasting (0.7%)
- ------------------------------------------------------------------------------------------------------------
250,000 Acme Television/Finance 144A sr. disc. notes stepped-coupon
zero % (10 7/8s, 9/30/00), 2004 ++ 184,375
100,000 Adelphia Communications Corp. sr. notes Ser. B, 10 1/4s, 2000 101,000
855,000 Affinity Group Holdings sr. notes 11s, 2007 906,300
1,100,000 American Radio Systems Corp. company guaranty 9s, 2006 1,168,750
305,000 Argyle Television Corp. sr. sub. notes 9 3/4s, 2005 333,975
185,000 Bell Cablemedia PLC sr. disc. notes stepped-coupon
zero % (11.95s, 7/15/99), 2004 (United Kingdom) ++ 172,050
550,000 Benedek Broadcasting sr. notes 11 7/8s, 2005 613,250
925,000 Benedek Communications Corp. sr. disc. notes stepped-coupon
zero % (13 1/4s, 5/15/01), 2006 ++ 647,500
260,000 Capstar Broadcasting sr. disc. notes stepped-coupon zero %
(12 3/4s, 2/1/02), 2009 ++ 179,400
900,000 Capstar Broadcasting sr. sub. notes 9 1/4s, 2007 904,500
110,000 Central European Media Enterprises Ltd. sr. notes 9 3/8s, 2004 108,900
230,000 Chancellor Media Corp. sr. sub. notes 9 3/8s, 2004 238,050
90,000 Citadel Broadcasting Co. 144A sr. sub. notes 10 1/4s, 2007 95,850
840,000 Comcast Corp. sr. sub. notes 9 1/2s, 2008 898,800
340,000 Commodore Media, Inc. sr. sub. notes stepped-coupon 7 1/2s,
(13 1/4s, 5/1/98), 2003 ++ 375,700
630,000 Fox/Liberty Networks LLC 144A sr. notes 8 7/8s, 2007 630,000
875,000 Granite Broadcasting Corp. sr. sub. notes 10 3/8s, 2005 883,750
65,000 Gray Communications Systems, Inc. sr. sub. notes 10 5/8s, 2006 70,200
160,000 Heartland Wireless Communications, Inc. sr. notes Ser. B,
14s, 2004 + 68,800
120,000 Heritage Media Services Corp. sr. sub. notes 8 3/4s, 2006 127,800
1,350,000 Jacor Communications, Inc. 144A company guaranty
8 3/4s, 2007 1,356,750
125,000 Jacor Communications, Inc. company guaranty 9 3/4s, 2006 130,625
275,000 JCAC, Inc. sr. sub. notes 10 1/8s, 2006 292,875
220,000 Paxson Communications Corp. 144A sr. sub. notes 11 5/8s, 2002 237,600
250,000 Pegasus Media & Communications notes Ser. B, 12 1/2s, 2005 285,000
40,000 Radio One Inc. 144A sr. sub. notes stepped-coupon 7s,
(12s, 5/1/00), 2004 ++ 38,400
1,075,000 Sinclair Broadcast Group, Inc. 144A sr. sub. notes 9s, 2007 1,075,000
275,000 Sinclair Broadcasting Group sr. sub. notes 10s, 2005 280,500
155,000 Spanish Broadcasting sr. notes Ser. B, 11s, 2004 170,500
1,000,000 Spanish Broadcasting Systems sr. notes 12.5s, 2002 1,155,000
1,160,000 Sullivan Broadcasting sr. sub. notes 10 1/4s, 2005 1,218,000
870,000 TCI Satellite Entertainment 144A sr. sub. notes 10 7/8s, 2007 904,800
100,000 TV Azteca S.A. de C.V. sr. notes 10 1/2s, 2007 (Mexico) 100,500
835,000 UIH Australia/Pacific, Inc. 144A sr. disc. notes stepped-coupon
zero % (14s, 5/15/01), 2006 (Australia) ++ 580,325
--------------
16,534,825
Building and Construction (0.3%)
- ------------------------------------------------------------------------------------------------------------
260,000 Atrium Companies, Inc. 144A sr. sub. notes 10 1/2s, 2006 273,000
80,000 Building Materials Corp. sr. notes Ser. B, 8 5/8s, 2006 82,400
115,000 Continental Homes Holding Corp. sr. notes 10s, 2006 124,488
4,740,000 Guangdong Enterprises 144A sr. notes 8 7/8s, 2007 (China) 4,670,417
500,000 GS Superhighway Holdings 144A sr. notes 10 1/4s, 2007 486,250
75,000 M.D.C. Holdings, Inc. notes Ser. B, 11 1/8s, 2003 83,250
223,000 Terex Corp. sr. notes Ser. B, 13 1/4s, 2002 248,645
550,000 Southdown, Inc. sr. sub. notes Ser. B, 10s, 2006 607,750
--------------
6,576,200
Business Equipment and Services (0.1%)
- ------------------------------------------------------------------------------------------------------------
95,000 Axiohm Transactions Solutions 144A sr. sub. notes 9 3/4s, 2007 96,425
50,000 Coleman Escrow Corp. 144A 2nd Priority sr. disc. notes
zero %, 2001 29,500
305,000 Corporate Express, Inc. sr. sub. notes Ser. B, 9 1/8s, 2004 314,150
840,000 Iron Mountain, Inc. med. term notes company guaranty
10 1/8s, 2006 911,400
250,000 Iron Mountain, Inc. 144A sr. sub. notes 8 3/4s 2009 252,500
135,000 Outsourcing Solutions, Inc. sr. sub. notes Ser. B, 11s, 2006 149,175
$679,000 Pierce Leahy Corp. sr. sub. notes 11 1/8s, 2006 767,270
160,000 United Stationer Supply, Inc. sr. sub. notes 12 3/4s, 2005 182,400
60,000 Williams Scotsman, Inc. 144A sr. notes 9 7/8s, 2007 62,100
--------------
2,764,920
Cable Television (0.6%)
- ------------------------------------------------------------------------------------------------------------
1,100,000 Cablevision Systems Corp. sr. sub. deb. 10 1/2s, 2016 1,199,000
5,000 Cablevision Systems Corp. sr. sub. deb. 9 7/8s, 2023 5,225
95,000 Century Communications Corp. sr. notes 9 1/2s, 2005 98,325
1,200,000 Century Communications Corp. sr. notes 8 7/8s, 2007 1,206,000
8,400,000 Continental Cablevision, Inc. sr. deb. 9 1/2s, 2013 9,636,228
880,000 Diamond Cable Communication Co. sr. disc. notes
stepped-coupon zero % (11 1/4s, 12/15/00), 2005
(United Kingdom) ++ 646,800
15,000 Diamond Cable Communication Co. sr. disc. notes
stepped-coupon zero % (13 1/2s, 9/30/99), 2004
(United Kingdom) ++ 12,600
245,000 Jones Intercable, Inc. sr. sub. deb. 10 1/2s, 2008 264,600
1,105,000 Marcus Cable Co. (L.P.) sr. sub. disc. notes stepped-coupon
zero % (13 1/2s, 8/1/99), 2004 ++ 1,000,025
75,000 Rogers Cablesystems Ltd. notes 11s, 2015 (Canada) 83,250
5,000 Rogers Cablesystems Ltd. deb. 10 1/8s, 2012 (Canada) 5,250
--------------
14,157,303
Chemicals (0.7%)
- ------------------------------------------------------------------------------------------------------------
275,000 Great Lakes Carbon Corp. sr. notes 10s, 2006 291,500
45,000 Harris Chemical Corp. sr. sub. notes 10 3/4s, 2003 47,363
600,000 Huntsman Corp. 144A sr. sub. notes 9 1/2s, 2007 622,500
305,000 Huntsman Corp. 144A sr. sub. notes FRN 9.187s, 2007 315,675
3,335,000 Lyondell Petrochemical Co. notes 9 1/8s, 2002 3,688,377
250,000 NL Industries, Inc. sr. notes stepped-coupon zero %
(13s, 10/15/98), 2005 ++ 246,250
45,000 Pioneer Americas Acquisition company guaranty Ser. B,
9 1/4s, 2007 44,550
165,000 Polytama International notes 11 1/4s, 2007 (Netherlands) 152,625
9,850,000 Sociedad Quimica Y Minera de Chile S.A. 144A bonds 7.7s,
2006 (Chile) 10,293,250
115,000 Sovereign Specialty Chemical 144A sr. sub. notes 9 1/2s, 2007 118,163
170,000 Sterling Chemicals Holdings sr. disc. notes stepped-coupon
zero % (13 1/2s, 8/15/01), 2008 ++ 123,250
570,000 Sterling Chemicals, Inc. sr. sub. notes Ser. A, 11 1/4s, 2007 632,700
95,000 Trikem S.A. 144A bonds 10 5/8s, 2007 (Brazil) 88,350
100,000 Union Carbide Global Enterprises sr. sub. notes Ser. B, 12s, 2005 112,000
--------------
16,776,553
Computer Services and Software (--%)
- ------------------------------------------------------------------------------------------------------------
230,000 Computervision Corp. sr. sub. notes 11 3/8s, 1999 121,900
55,000 DecisionOne Corp. sr. sub. notes 9 3/4s, 2007 56,238
--------------
178,138
Conglomerates (--%)
- ------------------------------------------------------------------------------------------------------------
100,000 Aramark Corp. sub. notes 8 1/2s, 2003 102,000
40,000 Cia Latino Americana 144A company guaranty 11 5/8s,
2004 (Argentina) 40,400
140,000 Congoleum Corp. sr. notes 9s, 2001 143,850
289,000 MacAndrews & Forbes Holdings, Inc. sub. deb. notes 13s, 1999 290,084
--------------
576,334
Consumer Durable Goods (0.1%)
- ------------------------------------------------------------------------------------------------------------
320,000 Carson Inc. 144A sr. notes 10 3/8s 2007 320,000
45,000 French Fragrances, Inc. sr. notes Ser. B, 10 3/8s, 2007 47,250
45,000 Hedstrom Corp. 144A sr. sub. notes 10s, 2007 45,450
165,000 Remington Products Co. sr. sub. notes Ser. B, 11s, 2006 122,100
210,000 Revlon Worldwide Corp. sr. disc. notes Ser. B, zero %, 2001 143,850
200,000 Selmer Co., Inc. sr. sub. notes 11s, 2005 220,000
--------------
898,650
Consumer Non Durables (0.8%)
- ------------------------------------------------------------------------------------------------------------
50,000 Foamex (L.P.) 144A sr. sub. notes 9 7/8s, 2007 51,500
390,000 Guess Jeans, Inc. sr. sub. notes 9 1/2s, 2003 397,800
4,530,000 Philip Morris Cos., Inc. notes 7 1/8s, 2004 4,617,474
1,895,000 Philip Morris Cos., Inc. deb. 7 3/4s, 2027 1,990,129
2,420,000 RJR Nabisco, Inc. notes 8 3/4s, 2005 2,589,860
9,055,000 Sampoerna International Finance Co. 144A company guaranty
8 3/8s, 2006 (Indonesia) 8,301,171
--------------
17,947,934
Consumer Services (0.1%)
- ------------------------------------------------------------------------------------------------------------
255,000 Coinmach Corp. sr. notes Ser. B, 11 3/4s, 2005 279,225
600,000 Coinmach Corp. 144A sr. notes 11 3/4s, 2005 657,000
738,500 Falcon Holdings Group, Inc. sr. sub. notes 11s, 2003 [2 DBL. DAGGERS] 775,425
80,000 FRD Acquisition Co. sr. notes Ser. B, 12 1/2s, 2004 84,000
165,000 Host Marriott Travel Plaza sr. notes Ser. B, 9 1/2s, 2005 172,838
595,000 John Q Hammons Hotels, Inc. 1st mtge. 8 7/8s, 2004 595,000
110,000 Viasystems Inc. 144A sr. sub. notes 9 3/4s, 2007 113,575
--------------
2,677,063
Electronics and Electrical Equipment (0.2%)
- ------------------------------------------------------------------------------------------------------------
130,000 Argo-Tech Corp. 144A sr. sub. notes 8 5/8s, 2007 129,350
150,000 Celestica International Ltd. 144A sr. sub. notes 10 1/2s,
2006 (India) 160,875
170,586 Cirent Semiconductor sr. sub. notes 10.22s, 2002 174,211
181,037 Cirent Semiconductor 144A sr. sub. notes 10.14s, 2004 185,337
1,190,000 DII Group, Inc. 144A sr. sub. notes 8 1/2s, 2007 1,178,100
210,000 Dobson Communications Corp. 11 3/4s, 2007 215,250
760,000 Fairchild Semiconductor Corp. sr. sub. notes 10 1/8s, 2007 803,700
170,000 Fairchild Semiconductor Corp. 144A sr. sub. notes 11.74s, 2008 173,825
220,000 Flextronics International Ltd. 144A sr. sub. notes 8 3/4s, 2007 218,350
60,000 HCC Industries, Inc. 144A sr. sub. notes 10 3/4s, 2007 63,150
330,000 International Semi-Tech. Corp. sr. secd. disc. notes
stepped-coupon zero % (11 1/2s, 8/15/00), 2003
(Canada) ++ 151,800
255,000 Motors and Gears, Inc. sr. notes Ser. B, 10 3/4s, 2006 270,300
30,000 Wavetek Corp. 144A sr. sub. notes 10 1/8s, 2007 30,900
--------------
3,755,148
Energy-Related (0.2%)
- ------------------------------------------------------------------------------------------------------------
250,000 Panda Global Energy Co. company guaranty 12 1/2s, 2004 232,500
4,715,000 Quezon Power Ltd. sr. notes 8.86s, 2017 (Philippines) 4,538,188
--------------
4,770,688
Entertainment (1.2%)
- ------------------------------------------------------------------------------------------------------------
55,000 Affinity Group Holdings sr. sub. notes 11 1/2s, 2003 58,850
1,410,000 AMC Entertainment, Inc. sr. sub. notes 9 1/2s, 2009 1,445,250
700,000 Aztar Corp. sr. sub. notes 11s, 2002 721,000
75,000 Cinemark USA, Inc. sr. sub. notes Ser. B, 9 5/8s, 2008 76,500
1,650,000 Cinemark USA, Inc. sr. sub. notes Ser. D, 9 5/8s, 2008 1,699,500
180,000 Premier Parks, Inc. sr. notes Ser. A, 12s, 2003 198,675
1,205,000 Six Flags Corp. sr. sub. notes stepped-coupon zero %
(12 1/4s, 6/15/98), 2005 ++ 1,274,288
3,450,000 Time Warner Entertainment Inc. notes 8 7/8s, 2012 4,012,833
11,990,000 Time Warner Entertainment sr. notes 8 3/8s, 2033 13,191,518
1,925,000 Time Warner Entertainment Inc. deb. 7 1/4s, 2008 1,978,900
685,000 Trump A.C. 1st mtge. 11 1/4s, 2006 674,725
2,515,000 Viacom International, Inc. sub. deb. 8s, 2006 2,464,700
--------------
27,796,739
Environmental Control (--%)
- ------------------------------------------------------------------------------------------------------------
35,000 Allied Waste Industries, Inc. company guaranty 10 1/4s, 2006 37,800
200,000 Allied Waste Industries, Inc. 144A sr. disc. notes stepped-coupon
zero % (11.3s, 6/1/02), 2007 ++ 135,000
--------------
172,800
Food and Beverages (0.2%)
- ------------------------------------------------------------------------------------------------------------
65,000 Ameriserve Food Co. 144A sr. sub. notes 10 1/8s, 2007 67,925
295,000 Ameriserve Food Co. 144A sr. notes 8 7/8s, 2006 295,000
70,000 Aurora Foods, Inc. sr. sub. notes Ser. B, 9 7/8s, 2007 72,450
90,000 Canandaigua Wine Co. sr. sub. notes Ser. C, 8 3/4s, 2003 90,000
235,000 Chiquita Brands cv. sr. notes 9 5/8s, 2004 245,575
60,000 Del Monte Corp. sr. sub. notes Ser. B, 12 1/4s, 2007 65,400
130,000 Fleming Companies, Inc. 144A sr. sub. notes 10 1/2s, 2004 135,525
300,000 Jitney-Jungle Stores company guaranty 12s, 2006 336,000
110,000 Ralphs Grocery Co. company guaranty 10.45s, 2004 121,000
550,000 Ralphs Grocery Co. sr. notes 10.45s, 2004 606,375
445,000 Mafco, Inc. sr. sub. notes 11 7/8s, 2002 471,700
130,000 Signature Brands Ltd. sr. sub. notes 13s, 2002 (Canada) 148,200
750,000 Southland Corp. deb. Ser. A, 4 1/2s, 2004 613,125
130,000 Southern Foods Group 144A sr. sub. notes 9 7/8s, 2007 133,250
205,000 Stater Brothers sr. notes 11s, 2001 225,500
930,000 Stater Brothers 144A sr. sub. notes 9s, 2004 939,300
25,000 Windy Hill Pet Food Co. sr. sub. notes 9 3/4s, 2007 25,375
--------------
4,591,700
Health Care (0.5%)
- ------------------------------------------------------------------------------------------------------------
200,000 Genesis Eldercare 144A sr. sub. notes 9s, 2007 194,000
290,000 Genesis Health Ventures, Inc. sr. sub. notes 9 1/4s, 2006 294,350
325,000 Integrated Health Services, Inc. 144A sr. sub. notes 9 1/2s, 2007 328,250
450,000 Integrated Health Services, Inc. 144A sr. sub. notes 9 1/4s, 2008 450,000
205,000 Magellan Health Services, Inc. sr. sub. deb. Ser. A, 11 1/4s, 2004 227,550
210,000 Merit Behavioral Care sr. sub. notes 11 1/2s, 2005 247,800
250,000 Paracelsus Healthcare sr. sub. notes 10s, 2006 257,500
440,000 Paragon Health Network 144A sr. sub. notes stepped-coupon
zero % (10 1/2s, 11/1/02) 2007 ++ 261,250
920,000 Paragon Health Network 144A sr. sub. notes 9 1/2s 2007 914,250
625,000 Quorum Health Group, Inc. sr. sub. notes 8 3/4s, 2005 650,000
595,000 Sun Healthcare Group Inc. 144A sr. sub. notes 9 1/2s, 2007 603,925
6,465,000 Tenet Healthcare Corp. sr. notes 8s, 2005 6,529,650
1,295,000 Tenet Healthcare Corp. sr. sub. notes 8 5/8s, 2007 1,327,375
--------------
12,285,900
Insurance and Finance (7.2%)
- ------------------------------------------------------------------------------------------------------------
125,000 Aames Financial Corp. sr. notes 9 1/8s, 2003 115,000
7,745,000 Advanta Corp. med. term notes Ser. B, 7s, 2001 7,568,104
5,265,000 AFC Capital Trust company guaranty Ser. B, 8.207s, 2027 5,813,824
3,245,000 Allstate Financing II company guaranty 7.83s, 2045 3,353,253
3,500,000 AMBAC Indemnity Corp. deb. 9 3/8s, 2011 4,391,520
115,000 Colonial Capital II company guaranty 8.92s, 2027 121,109
6,420,000 Conseco Inc. sr. notes 10 1/2s, 2004 7,754,654
20,000 Contifinancial Corp. sr. notes 8 3/8s, 2003 20,700
110,000 Delta Financial Corp. sr. notes 9 1/2s, 2004 108,900
150,000 Dine S.A. de C.V. company guaranty 8 3/4s,
2007 (Mexico) 139,500
120,000 Dollar Financial Group Inc. sr. notes Ser. A, 10 7/8s, 2006 128,400
12,055,000 Executive Risk Capital Trust company guaranty Ser. B,
8.675s, 2027 12,787,341
3,595,000 First Financial Caribbean Corp. sr. notes 7.84s, 2006 3,785,643
6,840,000 Firstar Capital Trust I company guaranty Ser. B, 8.32s, 2026 7,407,994
85,000 Imperial Credit Capital Trust I 144A company guaranty
10 1/4s, 2002 84,575
200,000 Intertek Finance PLC 144A sr. sub. notes 10 1/4s, 2006
(United Kingdom) 210,000
245,000 Investors Capital Trust I company guaranty Ser. B, 9.77s, 2027 261,538
9,705,000 Lehman Bros Holdings, Inc. med. term notes 6.4s, 1999 9,775,070
6,460,000 Markel Capital Trust I 144A company guaranty 8.71s, 2046 6,734,550
12,955,000 Money Store, Inc. notes 8.05s, 2002 13,525,538
120,000 Netia Holdings B.V. 144A company guaranty 10 1/4s, 2007 (Poland) 115,200
70,000 Netia Holdings B.V. 144A company guaranty stepped-coupon
zero % (11 1/4s, 11/1/02), 2007 (Poland) ++ 40,250
175,000 North Fork Capital Trust I company guaranty 8.7s, 2026 187,143
2,950,000 Orange Cogen Funding 144A company guaranty 8.175s, 2022 3,156,205
5,000,000 Orion Capital Corp. sr. notes 9 1/8s, 2002 5,509,000
7,600,000 Phoenix Home Life Mutual Insurance Co. 144A notes 6.95s, 2006 7,754,508
15,459,623 Railcar Leasing L.L.C. 144A sr. notes Ser. A1, 6 3/4s, 2006 15,904,088
205,000 Reliance Group Holdings, Inc. sr. notes 9s, 2000 215,394
10,000 Reliance Group Holdings, Inc. sr. sub. deb. 9 3/4s, 2003 10,690
9,140,000 Salomon, Inc. sr. notes 7.3s, 2002 9,467,395
6,255,000 Salton Sea Funding Corp. company guaranty Ser. E, 8.3s, 2011 6,805,815
1,090,000 Sears, Roebuck and Co. med. term notes Ser. VI, 8.99s, 2012 1,324,786
5,055,000 Southern Investments Service Co. sr. notes 6.8s, 2006
(United Kingdom) 5,078,000
115,000 Sovereign Capital Trust 144A company guaranty 9s, 2027 122,331
12,490,000 TigCapital Trust I 144A bonds 8.597s, 2027 13,307,221
7,845,000 Trenwick Capital Trust I company guaranty 8.82s, 2037 8,325,506
--------------
161,410,745
Medical Supplies and Devices (0.1%)
- ------------------------------------------------------------------------------------------------------------
350,000 ALARIS Medical Inc. company guaranty 9 3/4s, 2006 369,250
175,000 Dade International, Inc. sr. sub. notes Ser. B, 11 1/8s, 2006 196,438
210,000 Graphic Controls Corp. sr. sub. notes Ser. A, 12s, 2005 234,150
425,000 Imagyn Medical Technologies 12 1/2s, 2004 412,250
165,000 Kinetic Concepts, Inc. 144A sr. sub. notes 9 5/8s, 2007 165,413
670,000 Wright Medical Technology, Inc. 144A 11 3/4s, 2000 686,750
--------------
2,064,251
Metals and Mining (0.8%)
- ------------------------------------------------------------------------------------------------------------
200,000 Anker Coal Group, Inc. 144A sr. notes 9 3/4s, 2007 203,000
135,000 Armco, Inc. 144A sr. notes 9s, 2007 134,663
855,000 AK Steel Corp. sr. notes 9 1/8s, 2006 889,200
50,000 Altos Hornos De Mexico bonds Ser. B, 11 7/8s, 2004 (Mexico) 51,750
100,000 Bucyrus International, Inc. 144A sr. notes 9 3/4s, 2007 100,500
155,000 Continental Global Group sr. notes Ser. B, 11s, 2007 164,300
2,585,000 Freeport-McMoRan Copper & Gold Co., Inc. sr. notes 7 1/2s, 2006 2,596,090
430,000 Hylsa S.A. de C.V. 144A bonds 9 1/4s, 2007 (Mexico) 419,250
170,000 Murrin Holdings 144A sr. notes 9 3/8s, 2007 (Australia) 172,975
6,770,000 Noranda, Inc. notes 7s, 2005 (Canada) 6,858,416
6,100,000 PT Alatief Freeport sr. notes 9 3/4s, 2001 (Netherlands) 6,694,445
--------------
18,284,589
Oil and Gas (2.4%)
- ------------------------------------------------------------------------------------------------------------
195,000 Abraxas Petroleum Corp. 144A sr. notes Ser. B, 11 1/2s, 2004 213,525
200,000 Benton Oil & Gas Co. sr. notes 11 5/8s, 2003 218,000
750,000 Benton Oil & Gas Co. 144A sr. notes 9 3/8s, 2007 748,125
140,000 Chesapeake Energy Corp. sr. notes 10 1/2s, 2002 148,400
135,000 Chesapeake Energy Corp. sr. notes 9 1/8s, 2006 138,713
120,000 CIA Naviera Perez Companc S.A. 144A bonds 9s,
2004 (Argentina) 121,800
190,000 Coho Energy, Inc. sr. sub. notes 8 7/8s, 2007 189,525
5,000 Costilla Energy, Inc. sr. notes 10 1/4s, 2006 5,313
80,000 Dailey Petroleum Services Corp. 144A company guaranty
9 3/4s, 2007 83,200
65,000 DI Industries Inc. sr. notes 8 7/8s, 2007 66,625
3,860,000 El Paso Natural Gas Co. deb. 7 1/2s, 2026 4,123,213
900,000 Flores & Rucks, Inc. sr. sub. notes 9 3/4s, 2006 956,250
1,300,000 Gulf Canada Resources Ltd. sr. sub. notes 9 5/8s, 2005 (Canada) 1,410,500
5,565,000 Gulf Canada Resources, Ltd. sr. notes 8.35s, 2006 (Canada) 6,056,890
50,000 Maxus Energy Corp. med. term notes 10.83s, 2004 61,128
260,000 Maxus Energy Corp. notes 9 7/8s, 2002 279,258
177,000 Maxus Energy Corp. notes 9 1/2s, 2003 190,275
150,000 Ocean Energy, Inc. company guaranty Ser. B, 8 7/8s, 2007 153,750
6,600,000 ONEOK Inc. deb. 9.7s, 2019 7,270,428
900,000 Panaco, Inc. 144a sr. notes 10 5/8s, 2004 900,000
210,000 Parker Drilling Corp. sr. notes Ser. B, 9 3/4s, 2006 221,550
4,055,000 Petro Geo-Services AS ADR notes 7 1/2s, 2007 (Norway) 4,269,226
12,500,000 Petro-Canada deb. 9 1/4s, 2021 (Canada) 15,607,000
20,000 Pogo Producing Co. sr. sub. notes Ser. B, 8 3/4s, 2007 20,400
70,000 Pride Petroleum Services, Inc. sr. notes 9 3/8s, 2007 74,550
6,135,000 Saga Petroleum ASA deb. 7 1/4s, 2027 (Norway) 6,149,663
1,000,000 Seagull Energy sr. sub notes 8 5/8s, 2005 1,045,000
60,000 Snyder Oil Corp. sr. sub. notes 8 3/4s, 2007 60,600
125,000 Southwest Royalties, Inc. 144a company guaranty 10 1/2s, 2004 123,750
5,000 Texas Petrochemical Corp. sr. sub. notes 11 1/8s, 2006 5,500
1,350,000 Transamerican Energy 144A sr. disc. notes stepped-coupon
zero % (13s 6/15/1999), 2002 ++ 1,127,250
495,000 Transamerican Energy 144A sr. notes 11 1/2s, 2002 507,375
541,000 TransTexas Gas Corp. sr. sub. notes Ser. D, 13 3/4s, 2001 614,035
175,000 Trico Marine Services, Inc. company guaranty Ser. B, 8 1/2s, 2005 180,250
45,000 Wiser Oil Co. company guaranty 9 1/2s, 2007 44,550
--------------
53,385,617
Packaging and Containers (--%)
- ------------------------------------------------------------------------------------------------------------
225,000 Huntsman Packaging Corp. 144A sr. sub. notes 9 1/8s, 2007 229,500
200,000 Innova S De R.L. sr. notes 12 7/8s, 2007 (Mexico) 205,500
175,000 Radnor Holdings Corp. 144A sr. notes Ser. B, 10s, 2003 181,125
115,000 Radnor Holdings Inc. sr. notes 10s, 2003 119,025
165,000 Vicap SA. 144A company guaranty 10 1/4s, 2002 167,475
--------------
902,625
Paper and Forest Products (0.3%)
- ------------------------------------------------------------------------------------------------------------
115,000 APP International Finance Co. notes 11 3/4s,
2005 (Netherlands) 115,575
855,000 Domtar, Inc. deb. 9 1/2s, 2016 (Canada) 940,739
360,000 Florida Coast Paper LLC 1st mtge. Ser. B, 12 3/4s, 2003 391,500
550,000 Indah Kiat Financial Mauritius 144A 10s, 2007 (Indonesia) 500,500
145,000 Maxxam Group Holdings, Inc. sr. notes Ser. B, 12s, 2003 154,788
3,050,000 Pindo Deli Finance Mauritius Ltd. 144A company guaranty
10 3/4s, 2007 (India) 2,745,000
415,000 PT Pabrik Kertas Tjiwi Kimia 144A company guaranty 10s,
2004 (Indonesia) 375,575
90,000 Repap New Brunswick FRN 9.063s, 2000 (Canada) 88,200
110,000 Repap New Brunswick sr. notes 10 5/8s, 2005 (Canada) 108,350
40,000 Riverwood International Corp. company guranty 10 7/8s, 2008 39,200
600,000 Riverwood International Corp. company guaranty 10 1/4s, 2006 613,500
--------------
6,072,927
Pharmaceuticals (--%)
- ------------------------------------------------------------------------------------------------------------
265,000 ICN Pharmaceuticals, Inc. 144a sr. notes 9 1/4s, 2005 278,913
Publishing (0.9%)
- ------------------------------------------------------------------------------------------------------------
210,000 American Media Operation, Inc. sr. sub. notes 11 5/8s, 2004 230,475
240,000 Garden State Newspapers 144A sr. sub. notes 8 3/4s, 2009 239,400
630,000 Hollinger International Publishing, Inc. company guaranty
9 1/4s, 2007 645,750
130,000 Hollinger International Publishing, Inc. company guaranty
8 5/8s, 2005 132,275
7,265,000 News America Holdings, Inc. deb. 7 3/4s, 2045 7,371,796
11,600,000 News America Holdings, Inc. deb. 7.7s, 2025 11,607,888
50,000 Von Hoffman Press Inc. 144A sr. sub. notes 10 3/8s, 2007 53,250
--------------
20,280,834
REITs (Real Estate Investment Trust) (2.4%)
- ------------------------------------------------------------------------------------------------------------
5,315,000 Chelsea GCA Realty, Inc. notes 7 1/4s, 2007 5,405,408
7,920,000 First Industrial Realty Trust, Inc. notes 7.6s, 2007 8,408,189
3,290,000 Health Care Property Investors, Inc. sr. notes 6 1/2s, 2006 3,222,358
1,300,000 HMH Properties, Inc. company guaranty Ser. B, 8 7/8s, 2007 1,329,250
13,915,000 National Health Investors, Inc. bonds 7.3s, 2007 14,317,700
13,575,000 OMEGA Healthcare Investors, Inc. notes 6.95s, 2007 13,705,727
230,000 Prime Hospitality Corp. sub. notes 9 3/4s, 2007 243,800
10,000 Prime Hospitality Corp. 1st mtge. 9 1/4s, 2006 10,450
5,705,000 Sun Communities, Inc. sr. notes 7 5/8s, 2003 5,986,884
400,000 Tanger Properities Ltd. Partnership company guaranty
8 3/4s, 2001 415,956
--------------
53,045,722
Recreation (0.3%)
- ------------------------------------------------------------------------------------------------------------
120,000 Argosy Gaming Co. 1st mtge. 13 1/4s, 2004 122,400
600,000 Boyd Gaming Corp. 144A sr. sub. notes 9 1/2s, 2007 609,000
85,000 Casino America, Inc. sr. notes 12 1/2s, 2003 90,950
475,000 Coast Hotels & Casinos, Inc. company guaranty Ser. B, 13s, 2002 529,625
220,000 Empress River Casino sr. notes 10 3/4s, 2002 234,300
550,000 Harveys Casino Resorts sr. sub. notes 10 5/8s, 2006 599,500
350,000 Hollywood Casino Corp. sr. notes 12 3/4s, 2003 379,750
140,000 Isle of Capri Black Hawk LLC 144A 1st mortgage 13s, 2004 141,400
740,000 Lady Luck Gaming Corp. 1st mtge. 11 7/8s, 2001 747,400
795,000 Mohegan Tribal Gaming Auth. sr. secd. notes Ser. B, 13 1/2s, 2002 1,025,550
150,000 Players International Inc. sr. notes 10 7/8s, 2005 161,250
450,000 Showboat Marina Casino 1st mtge. Ser. B, 13 1/2s, 2003 514,125
1,050,000 Sun International Hotels Ltd. company guaranty 9s, 2007 1,076,250
--------------
6,231,500
Retail (1.3%)
- ------------------------------------------------------------------------------------------------------------
5,585,000 Federated Department Stores sr. notes 8 1/2s, 2003 6,105,634
250,000 Johns Manville International Group sr. notes 10 7/8s, 2004 280,000
5,000,000 May Department Stores Co. notes 9 1/2s, 2021 6,146,300
250,000 Mothers Work, Inc. sr. notes 12 5/8s, 2005 267,500
5,500,000 Proffitt's, Inc. company guaranty Ser. B, 8 1/8s, 2004 5,637,500
8,000,000 Sears, Roebuck & Co. med. term notes 9.1s, 2012 9,803,120
65,000 Specialty Retailers, Inc. company guaranty Ser. B, 8 1/2s, 2005 66,138
10,000 William Carter Co. sr. sub. notes Ser. A, 10 3/8s, 2006 10,400
125,000 William Carter Holdings Co. 144A sr. sub. notes 12s, 2008 133,750
270,000 Zale Corp. 144A sr. notes 8 1/2s, 2007 263,925
--------------
28,714,267
Satellite Services (--%)
- ------------------------------------------------------------------------------------------------------------
150,000 Echostar DBS Corp. 144A company guaranty 12 1/2s, 2002 157,500
260,000 Esat Holdings Ltd. 144A sr. notes stepped-coupon zero %
(12 1/2s, 2/01/02), 2007 (Ireland) ++ 179,400
250,000 Globalstar L.P. Capital 144A sr. notes 11 3/8s, 2004 248,750
--------------
585,650
Specialty Consumer Products (--%)
- ------------------------------------------------------------------------------------------------------------
270,000 Coty Inc. Gtd. sr. sub. notes 10 1/4s, 2005 288,900
65,000 GFSI, Inc. sr. sub. notes Ser. B, 9 5/8s, 2007 65,975
265,000 Herff Jones, Inc. sr. sub. notes 11s, 2005 286,200
--------------
641,075
Telecommunications (2.1%)
- ------------------------------------------------------------------------------------------------------------
1,000,000 Adelphia Communications Corp. sr. notes Ser. B, 9 7/8s, 2007 1,005,000
85,000 America Communication Services, Inc. 144A sr. notes
13 3/4s, 2007 97,750
160,000 Antenna TV S.A. 144A sr. notes 9s, 2007 (Greece) 156,000
250,000 Arch Communications Group sr. disc. notes stepped-coupon
zero % (10 7/8s, 3/15/01), 2008 ++ 165,000
295,000 Call-Net Enterprises sr. disc. notes stepped-coupon zero %
(13 1/4s, 12/1/99), 2004 ++ 265,500
100,000 Celcaribe S.A. sr. notes stepped-coupon zero %
(13 1/2s, 3/15/98), 2004 ++ 102,500
305,000 Centennial Cellular Corp. sr. notes 8 7/8s, 2001 302,713
195,000 Comcast Cellular 144A sr. notes 9 1/2s, 2007 201,825
50,000 Consorcio Ecuatoriano 144A notes 14s, 2002 (Ecuador) 50,000
560,000 Dial Call Communications, Inc. sr. disc. notes stepped-coupon
Ser. B, zero % (10 1/4s, 12/15/98), 2005 ++ 487,200
2,015,000 Diamond Cable Communication Co. sr. disc. notes
stepped-coupon zero % (10 3/4s, 2/15/02), 2007
(United Kingdom) ++ 1,289,600
130,000 Fonorola, Inc. sr. notes 12 1/2s, 2002 (Canada) 146,900
670,000 Fox Kids Worldwide Inc. 144A sr. discount notes
stepped-coupon zero % (10 1/4s, 11/1/02), 2007 ++ 381,900
1,370,000 Fox Kids Worldwide Inc. 144A sr. notes 9 1/4s, 2007 1,315,200
600,000 FrontierVision Holdings LP 144A sr. discount notes
stepped coupon zero % (11 7/8s, 9/15/01), 2007 ++ 408,000
150,000 FrontierVision Operating Partners L.P. sr. sub. notes 11s, 2006 162,000
410,000 Intercel, Inc. sr. disc. notes stepped-coupon zero %
(12s, 5/1/01), 2006 ++ 291,100
225,000 Intermedia Communications, Inc. sr. disc. notes stepped-coupon
zero % (12 1/2s, 5/15/01), 2006 ++ 169,875
1,950,000 Intermedia Communications, Inc. sr. disc. notes stepped-coupon
Ser. B, zero % (11 1/4s, 7/15/02), 2007 ++ 1,282,125
825,000 International Cabletel, Inc. sr. notes stepped-coupon Ser. B,
zero % (11 1/2s, 2/01/01), 2006 ++ 602,250
360,000 Iridium LLC/Capital Corp. company guaranty Ser. B, 14s, 2005 378,000
830,000 Iridium LLC/Capital Corp. 144A sr. notes 11 1/4s, 2005 771,900
11,260,000 LCI International, Inc. sr. notes 7 1/4s, 2007 11,506,144
315,000 McCaw International Ltd sr. discount notes stepped coupon
zero % (13s, 4/15/02), 2007 ++ 182,700
340,000 McLeodUSA, Inc. sr. disc. notes stepped-coupon zero %
(10 1/2s, 3/1/02), 2007 ++ 234,600
600,000 Metrocall, Inc. 144A sr. sub. notes 9 3/4s, 2007 594,000
160,000 Metronet Communications 144A sr. disc. notes zero %
(10.75s, 11/1/02), 2007 ++ 94,400
1,610,000 Millicom International Cellular S.A. sr. disc. notes
stepped-coupon zero % (13 1/2s, 6/1/01), 2006
(Luxembourg) ++ 1,207,500
150,000 Mobile Telecommunications Tech. sr. notes 13 1/2s, 2002 169,875
1,120,000 NEXTEL Communications, Inc. 144A sr. disc. notes
stepped-coupon zero % (10.65s, 9/15/02), 2007 ++ 649,600
1,350,000 NEXTEL Communications, Inc. sr. disc. notes stepped-coupon
zero % (9 3/4s, 2/15/99), 2004 ++ 1,134,000
500,000 NEXTEL Communications, Inc. sr. disc. notes stepped-coupon
zero % (11 1/2s, 9/1/98), 2003 ++ 486,250
1,750,000 NEXTEL Communications, Inc. 144A sr. disc. notes
stepped-coupon zero % (9 3/4s, 10/31/02), 2007 ++ 1,032,500
385,000 Nextlink Communications sr. notes 9 5/8s, 2007 385,963
15,000 NTL Inc. sr. notes Ser. B, 10s, 2007 (United Kingdom) 15,300
740,000 Omnipoint Corp. sr. notes 11 5/8s, 2006 773,300
330,000 Orbcomm Global Capital Corp. sr. notes Ser. B, 14s, 2004 345,675
350,000 Paging Network, Inc. sr. sub. notes 10s, 2008 350,000
70,000 Pegasus Communications Corp. 144A sr. notes 9 5/8s, 2005 70,175
90,000 Powertel, Inc. sr. notes 11 1/8s, 2007 95,400
125,000 Pratama Datakom Asia BV 144A company guaranty
12 3/4s, 2005 (Indonesia) 106,250
680,000 Pricellular Wireless Corp. sr. notes 10 3/4s, 2004 734,400
615,000 Qwest Communications International, Inc. 144A sr. disc. notes
stepped-coupon zero % (9.47s, 10/15/02), 2007 ++ 393,600
690,000 RCN Corp. 144A sr. disc. notes stepped-coupon zero %
(11 1/8s, 10/15/02) 2007 ++ 400,200
100,000 RCN Corp. 144A sr. notes 10s, 2007 98,750
120,000 Sprint Spectrum L.P. sr. notes 11s, 2006 133,200
1,615,000 Teleport Communications Group Inc. sr. disc. notes
stepped-coupon zero % (11 1/8s, 7/1/01), 2007 ++ 1,263,738
1,100,000 Teleport Communications Group, Inc. sr. notes 9 7/8s, 2006 1,193,500
155,000 Telesystem International Wireless Inc. 144A sr. disc. notes
stepped-coupon zero % (10 1/2s, 11/1/02), 2007 (Canada) ++ 82,150
130,000 Transtel S.A. 144A pass through Certificates 12 1/2s,
2007 (Colombia) 122,200
600,000 Winstar Equipment Corp. company guaranty 12 1/2s, 2004 624,000
85,000 Wireless One, Inc. sr. notes 13s, 2003 44,838
12,840,000 WorldCom, Inc. notes 7 3/4s, 2007 13,466,078
--------------
48,022,624
Textiles (--%)
- ------------------------------------------------------------------------------------------------------------
75,000 Glenoit Corp. 144A sr. sub. notes 11s, 2007 79,500
110,000 Polymer Group, Inc. company guaranty Ser. B, 9s, 2007 108,900
310,000 Polysindo International Finance company guaranty 11 3/8s,
2006 (Indonesia) 318,525
250,000 Tultex Corp. sr. notes 10 5/8s, 2005 269,375
--------------
776,300
Transportation (2.3%)
- ------------------------------------------------------------------------------------------------------------
65,000 Atlantic Express, Transportation Corp.144A company guaranty
10 3/4s, 2004 68,250
100,000 Blue Bird Body Co. sr. sub. notes Ser. B, 10 3/4s, 2006 105,000
8,705,000 Burlington Northern Santa Fe notes 6 3/8s, 2005 8,648,853
30,000 Chemical Leaman Corp. 144A sr. notes 10 3/8s, 2005 30,900
60,000 Coach USA, Inc. company guaranty 9 3/8s, 2007 59,100
165,000 Consorcio/MCII Holdings sec. notes stepped-coupon zero %
(12s, 11/15/98), 2002 ++ 149,738
3,245,000 Continental Airlines pass thru cert. Ser. 97CI, 7.42s, 2007 3,361,917
7,165,000 CSX Corp. deb. 7.95s, 2027 7,898,768
600,000 Eletson Holdings, Inc. 1st pfd. mtge. notes 9 1/4s, 2003 (Greece) 606,000
180,000 Hermes Europe Railtel 144a sr. notes 11 1/2s, 2007 (Netherlands) 194,400
240,000 International Shipholding Corp. sr. notes 9s, 2003 246,600
215,000 Johnstown America Industries, Inc. 144A sr. sub. notes
11 3/4s, 2005 234,350
10,090,000 Norfolk Southern Corp. bonds 7.8s, 2027 10,958,345
12,655,000 Norfolk Southern Corp. bonds 7.05s, 2037 13,160,694
5,465,000 Southwest Airlines Co. deb. 7 7/8s, 2007 6,009,587
35,000 TFM S.A. de C.V. 144A company guaranty 10 1/4s,
2007 (Mexico) 36,225
175,000 TFM S.A. de C.V. 144A company guaranty stepped-coupon
zero % (11 3/4s, 6/15/02), 2009 (Mexico) ++ 115,500
238,000 Viking Star Shipping sr. secd. notes 9 5/8s, 2003 240,380
--------------
52,124,607
Utilities (6.7%)
- ------------------------------------------------------------------------------------------------------------
200,000 AES China Generating Co. sr. notes 10 1/8s, 2006 (China) 208,500
600,000 AES Corp. sr. sub. notes 8 3/8s, 2007 583,500
7,275,000 Arizona Public Service Co. sr. notes 6 3/4s, 2006 7,431,776
340,000 BTI Telecom Corp. 144A sr. notes 10 1/2s, 2007 340,000
13,555,000 CalEnergy, Inc. sr. notes 7.63s, 2007 13,603,798
6,565,000 California Energy Corp. disc. notes 10 1/4s, 2005 7,192,351
5,541,000 Citizens Utilities Co. bonds 7.68s, 2034 6,258,781
3,115,000 CMS Energy Corp. sr. notes 8 1/8s, 2002 3,208,730
6,980,000 Connecticut Light & Power Co. 1st mtge. Ser. A, 7 7/8s, 2001 7,140,261
1,970,000 Edison Mission Energy 144A company guaranty 7.33s, 2008 2,048,426
7,713,000 EIP Funding-Public Service Co. of New Mexico deb.
10 1/4s, 2012 8,990,041
10,850,000 El Paso Electric Co. 1st mtge. Ser. B, 7 3/4s, 2001 11,199,587
140,000 El Paso Electric Co. 1st mtge. Ser. D, 8.9s, 2006 152,512
15,640,000 Enersis S.A. ADR notes 7.4s, 2016 (Chile) 15,435,429
4,680,000 Enersis S.A. ADR notes 6.6s, 2026 (Chile) 4,667,224
110,000 Espirito Santo Centrais 144A sr. notes 10s, 2007 (Brazil) 105,600
259,000 First PV Funding deb. 10.15s, 2016 278,332
5,065,000 Illinova Corp. sr. notes 7 1/8s, 2004 5,145,787
6,440,000 Israel Electric Corp., Ltd. 144A sr. notes 7 1/4s, 2006 (Israel) 6,683,754
65,000 Long Island Lighting Co. deb. 9s, 2022 74,441
3,465,718 Midland Cogeneration Ventures deb. 10.33s, 2002 3,803,522
300,000 Midland Funding Corp. deb. Ser. A, 11 3/4s, 2005 359,841
500,000 Niagara Mohawk Power Corp. med. term notes 9.95s, 2000 503,265
1,888,377 Northeast Utilities System notes Ser. A, 8.58s, 2006 1,875,499
6,467,434 Northeast Utilities System notes Ser. B, 8.38s, 2005 6,492,981
8,120,000 Texas New Mexico Power Utilities 1st mtge. 9 1/4s, 2000 8,646,663
10,800,000 Texas Utilities Co. secd. lease fac. bonds 7.46s, 2015 11,337,948
8,625,000 Texas Utilities Electric Capital Trust V company guaranty
8.175s, 2037 9,197,096
7,205,000 US West Capital Funding, Inc. company guaranty 6.95s, 2037 7,310,914
--------------
150,276,559
--------------
Total Corporate Bonds and Notes (cost $864,071,936) $ 895,240,788
FOREIGN GOVERNMENT BONDS AND NOTES (10.2%) *
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
USD 13,680,000 Bank of Foreign Economic Affairs of Russia
(Vnesheconombank) non performing loan
1999 + ## $ 11,628,000
USD 12,502,000 Bank of Foreign Economic Affairs of Russia
(Vnesheconombank) principal loan FRN, Libor plus
13/16s, 2020 +##+++ 7,376,180
DEM 126,250,000 Germany (Federal Republic of ) Bonds Ser. 97,
6 1/2s 2027 76,189,130
NZD 22,950,000 New Zealand (Government of) bonds 10s, 2002 15,977,025
NZD 48,250,000 New Zealand (Government of) bonds 8s, 2004 32,046,188
USD 14,320,000 Peru (Government of) 144A Ser. US, 4s, 2017 8,019,200
USD 8,600,000 Quebec (Province of) deb. 13s, 2013 9,506,612
USD 17,490,000 Quebec (Province of) deb. Ser. NN, 7 1/8s, 2024 17,469,012
ZAR 228,477,000 South Africa (Republic of) bonds Ser. 153, 13s, 2010 43,126,160
GBP 3,734,000 United Kingdom Treasury bonds 8s, 2021 7,407,203
--------------
Total Foreign Government Bonds and Notes
(cost $232,678,801) $ 228,744,710
COLLATERALIZED MORTGAGE OBLIGATIONS (2.6%) *
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
$ 3,842,667 Chase Mortgage Finance Corp. Ser. 93-3, Class B13,
7.461s, 2024 $ 3,135,376
Housing Securities Inc.
2,656,192 Ser. 91-B, Class B6, 9s, 2006 2,659,512
2,566,870 Ser. 93-F, Class F9M2, 7s, 2023 2,502,699
603,755 Ser. 93-J, Class J4, 6.66s, 2009 567,529
287,502 Ser. 93-J, Class J5, 6.66s, 2009 239,346
478,596 Ser. 94-1, Class AB1, 6 1/2s, 2009 445,543
Prudential Home Mortgage Securities
3,346,825 Ser. 93-31, Class B2, 6s, 2000 2,771,171
2,328,534 Ser. 94-A, Class 4B, 7 1/2s, 2024 2,168,448
2,399,266 Ser. 94-D, Class B4, 6.312s, 2009 2,125,225
Prudential Home Mortgage Securities 144A
2,324,265 Ser. 92-25, Class B3, 8s, 2022 (in default) + 2,254,537
7,736,623 Ser. 93-D, Class 2B, 7.108s, 2023 7,747,502
3,970,212 Ser. 93-E, Class 5B, 7.393s, 2023 3,098,006
647,631 Ser. 94-31, Class B3, 8s, 2009 648,440
414,834 Ser. 94-31, Class B4, 8s, 2009 366,739
7,526,473 Ser. 94-A, Class 4B, 6.802s, 2024 7,314,791
2,015,829 Ser. 94-D, Class 3B, 6.311s, 2009 1,906,533
8,347,149 Ser. 95-C, Class B1, 7.815s, 2001 8,357,583
8,626,667 Securitized Asset Sales, Inc. Ser. 93-J, Class 2B, 6.807s, 2003 8,381,347
1,105,834 Travelers Mortgage Securities Corp. coll. oblig. Ser. 1, Class Z2,
12s, 2014 1,266,181
--------------
Total Collateralized Mortgage Obligations
(cost $51,985,133) $ 57,956,508
BRADY BONDS (0.4%) *
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
$ 20 Argentina (Republic of) deb. FRB 6.688, 2005 $ 17
10,775,000 Philippines (Government of) Ser. B FRB 6 1/4s, 2017 8,916,313
--------------
Total Brady Bonds (cost $9,409,701) $ 8,916,330
MUNICIPAL BONDS AND NOTES (0.4%) *(cost $7,665,000)
PRINCIPAL AMOUNT RATING** VALUE
- ------------------------------------------------------------------------------------------------------------
$ 7,665,000 NJ Econ. Dev. Auth. MBIA Rev. Bonds,
Ser. A, 7.425s, 2/15/29 Aaa $ 8,187,983
PREFERRED STOCKS (0.3%) *
NUMBER OF SHARES VALUE
- ------------------------------------------------------------------------------------------------------------
6,580 AmeriKing, Inc. $3.25 pfd. [2 DBL. DAGGERS] $ 177,660
52 Anvil Holdings 144A Ser. B, $3.25 pfd. [2 DBL. DAGGERS] 1,300
2,628 Cablevision Systems Corp. Ser. M, $11.125 dep. shs. cum. pfd. [2 DBL. DAGGERS] 288,423
3,000 California Federal Bank Ser. B, $10.625 cum. pfd. 325,125
650 Capstar Broadcasting $12.00 pfd [2 DBL. DAGGERS] 71,175
2,874 Chancellor Media Corp. $12.00 pfd. [2 DBL. DAGGERS] 333,384
2,855 Chevy Chase Capital Corp. Ser. A, $5.19 pfd. 145,605
190 Echostar Communications Corp. $12.125 pfd [2 DBL. DAGGERS] 194,750
9,839 El Paso Electric Co. $11.40 pfd [2 DBL. DAGGERS] 1,062,612
350 Fresenius Medical Care AG units Ser. D, $9.00 pfd. (Germany) 364,000
7,918 Nextlink Communications, Inc. 144A $7.00 cum. pfd. 467,162
32 NTL Inc. 144A $13.00 pfd. [2 DBL. DAGGERS] 35,200
531 Paxson Communications Corp. $12.50 pfd. [2 DBL. DAGGERS] 570,825
1,855 SFX Broadcasting, Inc. Ser. E, $12.625 cum. pfd. [2 DBL. DAGGERS] 214,253
1,282 Time Warner Inc. Ser. M, $10.25 pfd. 1,474,300
--------------
Total Preferred Stocks (cost $5,497,529) $ 5,725,774
UNITS (0.1%) *
NUMBER OF UNITS VALUE
- ------------------------------------------------------------------------------------------------------------
40 Celcaribe S.A. 144A units stepped-coupon zero %
(13 1/2s, 3/15/98), 2004 ++ $ 800,000
1,550 Cellnet Data Systems, Inc. 144A units stepped-coupon zero %
(14s, 10/01/02), 2007 ++ 787,354
270 Colt Telecommunications Group PLC units stepped-coupon
zero % (12s, 12/15/01), 2006 (United Kingdom) ++ 202,500
450 Fitzgerald Gaming Co. units 13s, 2002 429,750
20 Hedstrom Holdings, Inc. units stepped-coupon zero %
(12s, 6/01/02), 2009 ++ 12,500
645 Knology Holdings Inc. units stepped-coupon zero %
(11 7/8s, 10/15/02), 2007 ++ 354,750
95 Stone Container Corp. units sr. sub. 12 1/4s, 2002 98,563
--------------
Total Units (cost $2,163,320) $ 2,685,417
COMMON STOCKS (0.1%) *
NUMBER OF SHARES VALUE
- ------------------------------------------------------------------------------------------------------------
150 AmeriKing, Inc. $ 7,500
4,662 NEXTEL Communications, Inc. 144A
(acquired 9/12/97 cost $75,250) [DBL. DAGGERS] 116,259
44,051 PSF Holdings LLC Class A 1,321,530
--------------
Total Common Stocks (cost $1,609,449) $ 1,445,289
CONVERTIBLE BONDS AND NOTES (--%)
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
145,000 APP Global Finance (V) Ltd. 144A cv. sec. 2s, 2000
(United Kingdom) $ 136,300
250,000 Exide Corp. 144A cv. sr. sub. notes 2.9s, 2005 156,875
105,000 Integrated Device Technology, Inc. cv. sub. notes 5 1/2s, 2002 89,250
75,000 National Semiconductor Corp. cv. deb. 6 1/2s, 2002 81,469
--------------
Total Convertible Bonds and Notes (cost $462,575) $ 463,894
CONVERTIBLE PREFERRED STOCKS (--%) *(cost $300,625)
NUMBER OF SHARES VALUE
- ------------------------------------------------------------------------------------------------------------
5,000 Granite Broadcasting $1.938 cv. pfd. $ 248,125
WARRANTS EXPIRATION
NUMBER OF WARRANTS DATE VALUE
- ------------------------------------------------------------------------------------------------------------
260 Esat Holdings (Ireland) 2/1/07 $ 5,200
250 Globalstar Telecom 144A 2/15/04 25,000
400 Intermedia Communications 144A 6/1/00 28,000
315 McCaw International Ltd. 144A 4/15/07 95
7,390 Nextlink Communications, Inc. 144A 2/1/09 74
425 UROHEALTH Systems Inc. 144A 4/10/04 2,125
--------------
Total Warrants (cost $28,697) $ 60,494
SHORT-TERM INVESTMENTS (5.6%) *
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
$ 25,000,000 Morgan (J.P. ) & Co. Inc. effective yield of 5 1/2%,
December 17, 1997 $ 24,824,306
TRL 1,239,260,000,000 Turkey Treasury bills zero %, 1998 3,331,214
96,209,000 Interest in $269,350,000 joint repurchase
agreement dated October 31, 1997 with
Broker SBC Warburg due November 3, 1997
with respect to various U.S. Treasury
obligations -- maturity value of
$96,254,298 for an effective yield of 5.65% 96,224,099
--------------
Total Short-Term Investments (cost $124,379,619) $ 124,379,619
- ------------------------------------------------------------------------------------------------------------
Total Investments (cost $2,348,451,378) *** $2,393,455,951
- ------------------------------------------------------------------------------------------------------------
* Percentages indicated are based on net assets of $2,239,503,499
** The Moody's or Standard & Poor's ratings indicated are believedto be the most recent ratings available at
October 31, 1997 for the securities listed. Ratings are generally ascribed to securities at the time of
issuance. While the agencies may from time to time revise such ratings, they undertake no obligation to do
so, and the ratings do not necessarily represent what the agencies would ascribe to these securities at
October 31, 1997. Ratings are not covered by the report of independent accountants.
*** The aggregate identified cost on a tax basis is $2,349,777,870, resulting in gross unrealized appreciation
and depreciation of $62,783,749 and $19,105,668, respectively, or net unrealized appreciation of
$43,678,081.
+ Non-income-producing security.
++ The interest or dividend rate and date shown parenthetically represent the new interest or dividend rate to
be paid and the date the fund will begin receiving interest or dividend income at this rate.
[2 DBL. DAGGERS] Income may be received in cash or additional securities at the discretion of the issuer.
+++ A portion of the income will be received in additional securities.
[DBL. DAGGER] Restricted, excluding 144A Securities, as to public resale. The market value of restricted
security held at October 31, 1997 was $75,250 or less than 0.1% of net assets.
# A portion of these securities were pledged and segregated with the custodian to cover margin
requirements for futures contracts at October 31, 1997.
## When-issued securities (Note 1).
144A after the name of a security represents those exempt from registration under Rule 144A of
the Securities Act of 1933. These securities may be resold in transactions exempt from registration,
normally to qualified institutional buyers.
ADR after the name of a foreign holding stands for American Depository Receipts, representing ownership
of foreign securities on deposit with a domestic custodian bank.
TBA after the name of a security represents to be announced securities (Note 1).
MBIA represents Municipal Bond Investors Assurance Corporation.
The rate shown on Floating Rate Bonds (FRB) and Floating Rate Notes (FRN) are the current interest rates
shown at October 31, 1997, which are subject to change based on the terms of the security.
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
Forward Currency Contracts to Buy at October 31,1997
(aggregate face value $329,950,384)
Unrealized
Aggregate Face Delivery Appreciation/
Market Value Value Date (Depreciation)
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Australian Dollars $ 6,769,545 $ 7,246,345 12/17/97 $ (476,800)
Canadian Dollar 35,904,305 37,013,674 12/17/97 (1,109,369)
Danish Krone 435,832 425,445 12/17/97 10,387
Deutschemarks 81,640,803 77,939,621 12/17/97 3,701,182
Indonesian Rupiah 18,808,147 19,102,848 2/23/98 (294,701)
Italian Lira 45,612,349 44,030,220 12/17/97 1,582,129
Japanese Yen 79,202,254 79,151,082 12/17/97 51,172
Philippines Peso 4,483,780 4,635,637 3/25/98 (151,857)
Polish Zloty 6,843,105 7,224,666 6/5/98 (381,561)
Swedish Krona 36,021,703 35,529,710 12/17/97 491,993
Swiss Franc 10,731,400 10,335,241 12/17/97 396,159
Venezuelan Bolivar 7,466,657 7,315,895 6/5/98 150,762
- -----------------------------------------------------------------------------------------
$ 3,969,496
- -----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
Forward Currency Contracts to Sell at October 31,1997
(aggregate face value $249,954,861)
Unrealized
Aggregate Face Delivery Appreciation/
Market Value Value Date (Depreciation)
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Australian Dollars $ 5,681,622 $ 6,048,960 12/17/97 $ 367,338
British Pounds 4,993,267 4,727,128 12/17/97 (266,139)
Deutschemarks 107,873,471 103,711,065 12/17/97 (4,162,406)
Deutschemarks 5,722,300 5,404,368 6/5/98 (317,932)
Italian Lira 45,730,456 44,046,148 12/17/97 (1,684,308)
Japanese Yen 34,701,088 34,587,207 12/17/97 (113,881)
New Zealand Dollar 48,410,080 49,449,358 12/17/97 1,039,278
South African Rand 37,248,236 37,698,749 12/17/97 450,513
Swiss Franc 9,615,660 9,281,878 12/17/97 (333,782)
- -----------------------------------------------------------------------------------------
$(5,021,319)
- -----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
Futures Contracts Outstanding at October 31,1997
Unrealized
Aggregate Face Expiration Appreciation/
Total Value Value Date (Depreciation)
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
US Treasury Notes
10 Yr (long) $ 59,339,250 $ 58,090,529 Dec-97 $1,248,721
US Treasury Bonds
20 Yr (long) 209,097,344 205,474,412 Dec-97 3,622,932
US Treasury Notes
5 Yr (short) 199,033,875 195,763,219 Dec-97 (3,270,656)
Japanese Government
Bonds 10Yr (long) 47,826,885 46,514,450 Dec-97 1,312,435
- ------------------------------------------------------------------------------------------
$2,913,432
- ------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
TBA Sale Commitments at October 31, 1997
(Proceeds receivable $85,426,980)
Settlement Market
Agency Principal Amount Date Value
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FNMA, 7s
November 2027 $42,524,000 11/19/97 $42,656,675
FNMA, 7s
November 2027 19,420,000 11/13/97 19,480,590
GNMA, 7s
November 2027 22,260,000 11/16/97 23,338,052
- ------------------------------------------------------------------------------------------
$85,475,317
- ------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
October 31, 1997
<S> <C>
Assets
- ---------------------------------------------------------------------------------------------------
Investments in securities, at value (identified cost $2,348,451,378) (Note 1) $ 2,393,455,951
- ---------------------------------------------------------------------------------------------------
Cash 3,064,995
- ---------------------------------------------------------------------------------------------------
Foreign currency 894,715
- ---------------------------------------------------------------------------------------------------
Dividends and interest receivable 33,728,833
- ---------------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 17,427,700
- ---------------------------------------------------------------------------------------------------
Receivable for securities sold 228,156,000
- ---------------------------------------------------------------------------------------------------
Receivable for variation margin 1,866,399
- ---------------------------------------------------------------------------------------------------
Receivable for open forward currency contracts 9,164,018
- ---------------------------------------------------------------------------------------------------
Receivable for closed forward currency contracts 3,708,247
- ---------------------------------------------------------------------------------------------------
Total assets 2,691,466,858
Liabilities
- ---------------------------------------------------------------------------------------------------
Distributions payable to shareholders 300,179
- ---------------------------------------------------------------------------------------------------
Payable for securities purchased 339,824,412
- ---------------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 3,027,542
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 2,642,945
- ---------------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 741,353
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 27,272
- ---------------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 1,690
- ---------------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 724,656
- ---------------------------------------------------------------------------------------------------
Payable for open forward currency contracts 10,215,841
- ---------------------------------------------------------------------------------------------------
Payable for closed forward currency contracts 8,628,219
- ---------------------------------------------------------------------------------------------------
TBA sales commitments, at value (proceeds receivable $85,426,980) 85,475,317
- ---------------------------------------------------------------------------------------------------
Other accrued expenses 353,933
- ---------------------------------------------------------------------------------------------------
Total liabilities 451,963,359
- ---------------------------------------------------------------------------------------------------
Net assets $ 2,239,503,499
Represented by
- ---------------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $ 2,182,327,860
- ---------------------------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 35,030
- ---------------------------------------------------------------------------------------------------
Accumulated net realized gain on investments and
foreign currency transactions (Note 1) 10,295,621
- ---------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments and
assets and liabilities in foreign currencies 46,844,988
- ---------------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to capital shares outstanding $2,239,503,499
Computation of net asset value and offering price
- ---------------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($1,296,600,344, divided by 181,479,851 shares) $7.14
- ---------------------------------------------------------------------------------------------------
Offering price per class A share (100/95.25 of $7.14)* $7.50
- ---------------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($403,704,347 divided by 56,787,726 shares)** $7.11
- ---------------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($368,296,581 divided by 51,801,067 shares) $7.11
- ---------------------------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $7.11)* $7.35
- ---------------------------------------------------------------------------------------------------
Net asset value, offering price and redemption price per class Y share
($170,902,227 divided by 23,891,056 shares) $7.15
- ---------------------------------------------------------------------------------------------------
* 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 to net asset value less any applicable contingent deferred sales charge.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Year ended October 31, 1997
<S> <C>
Investment income:
- --------------------------------------------------------------------------------------------------
Interest $ 128,452,772
- --------------------------------------------------------------------------------------------------
Dividends 500,507
- --------------------------------------------------------------------------------------------------
Total investment income 128,953,279
Expenses:
- --------------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 9,469,339
- --------------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 5,449,140
- --------------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 51,989
- --------------------------------------------------------------------------------------------------
Administrative services (Note 2) 20,406
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 2,879,758
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 3,681,894
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 258,462
- --------------------------------------------------------------------------------------------------
Reports to shareholders 82,179
- --------------------------------------------------------------------------------------------------
Registration fees 281,084
- --------------------------------------------------------------------------------------------------
Auditing 66,411
- --------------------------------------------------------------------------------------------------
Legal 23,165
- --------------------------------------------------------------------------------------------------
Postage 202,164
- --------------------------------------------------------------------------------------------------
Other 81,832
- --------------------------------------------------------------------------------------------------
Total expenses 22,547,823
- --------------------------------------------------------------------------------------------------
Expense reduction (Note 2) (478,593)
- --------------------------------------------------------------------------------------------------
Net expenses 22,069,230
- --------------------------------------------------------------------------------------------------
Net investment income 106,884,049
- --------------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 16,155,331
- --------------------------------------------------------------------------------------------------
Net realized loss on futures contracts (Note 1) (1,371,289)
- --------------------------------------------------------------------------------------------------
Net realized gain on written options (Notes 1 and 3) 327,580
- --------------------------------------------------------------------------------------------------
Net realized loss on foreign currency transactions (6,527,117)
- --------------------------------------------------------------------------------------------------
Net unrealized depreciation of assets and liabilities in
foreign currencies during the year (524,815)
- --------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments, futures,
and TBA sale commitments, during the year 31,757,779
- --------------------------------------------------------------------------------------------------
Net gain on investments 39,817,469
- --------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $ 146,701,518
- --------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Year ended October 31
-------------------------
1997 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase in net assets
- ----------------------------------------------------------------------------------------------------------------------
Operations:
- ----------------------------------------------------------------------------------------------------------------------
Net investment income $ 106,884,049 $ 90,570,026
- ----------------------------------------------------------------------------------------------------------------------
Net realized gain on investments and
foreign currency transactions 8,584,505 16,180,313
- ----------------------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation)
of investments 31,232,964 (23,733,680)
- ----------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 146,701,518 83,016,659
- ----------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ----------------------------------------------------------------------------------------------------------------------
From net investment income
Class A (72,785,926) (64,589,263)
- ----------------------------------------------------------------------------------------------------------------------
Class B (20,709,360) (17,694,764)
- ----------------------------------------------------------------------------------------------------------------------
Class M (3,091,964) (870,674)
- ----------------------------------------------------------------------------------------------------------------------
Class Y (8,962,004) (8,614,367)
- ----------------------------------------------------------------------------------------------------------------------
From net realized gain on investments
Class A (5,178,160) --
- ----------------------------------------------------------------------------------------------------------------------
Class B (1,738,693) --
- ----------------------------------------------------------------------------------------------------------------------
Class M (103,201) --
- ----------------------------------------------------------------------------------------------------------------------
Class Y (668,296) --
- ----------------------------------------------------------------------------------------------------------------------
Increase from capital share transactions (Note 4) 675,094,508 234,847,259
- ----------------------------------------------------------------------------------------------------------------------
Total increase in net assets 708,558,422 226,094,850
Net assets
- ----------------------------------------------------------------------------------------------------------------------
Beginning of year 1,530,945,077 1,304,850,227
- ----------------------------------------------------------------------------------------------------------------------
End of year (including undistributed
net investment income of $35,030
and $3,228,618, respectively) $2,239,503,499 $1,530,945,077
- ----------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS A
- ------------------------------------------------------------------------------------------------------------------------------------
Per-share
operating performance Year ended October 31
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $7.02 $7.07 $6.53 $7.36 $6.97
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .45 .45 .47 .54 .56
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .15 (.04) .55 (.84) .40
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .60 .41 1.02 (.30) .96
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.44) (.46) (.48) (.41) (.56)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income -- -- -- -- (.01)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments (.04) -- -- (.04) --
- ------------------------------------------------------------------------------------------------------------------------------------
From return of capital -- -- -- (.08) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.48) (.46) (.48) (.53) (.57)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $7.14 $7.02 $7.07 $6.53 $7.36
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 8.88 6.08 16.23 (4.16) 14.36
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $1,296,600 $1,037,718 $928,995 $781,784 $814,289
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.17 1.17 1.05 .83 .77
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 6.39 6.50 6.91 7.10 7.71
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 265.71 213.46 169.29 128.82 129.95
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* 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>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS B
- ------------------------------------------------------------------------------------------------------------------------------------
For the period
Per-share March 1, 1993+
operating performance Year ended October 31 to October 31
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $6.99 $7.04 $6.50 $7.34 $7.19
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .39 .40 .42 .48 .28 (c)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .16 (.04) .55 (.83) .22
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .55 .36 .97 (.35) .50
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.39) (.41) (.43) (.38) (.35)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments (.04) -- -- (.04) --
- ------------------------------------------------------------------------------------------------------------------------------------
From return of capital -- -- -- (.07) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.43) (.41) (.43) (.49) (.35)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $7.11 $6.99 $7.04 $6.50 $7.34
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 8.15 5.32 15.46 (4.98) 7.18*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $403,704 $340,775 $260,769 $169,501 $92,832
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.92 1.92 1.80 1.59 1.03*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 5.64 5.76 6.14 6.40 4.37*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 265.71 213.46 169.29 128.82 129.95
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* 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>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS M
- ------------------------------------------------------------------------------------------------------------------------------------
For the period
Per-share Dec. 14, 1994+
operating performance Year ended October 31 to October 31
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value,
beginning of period $6.99 $7.04 $6.50
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .43 .44 .43
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .16 (.04) .54
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .59 .40 .97
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.43) (.45) (.43)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments (.04) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
From return of capital -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.47) (.45) (.43)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $7.11 $6.99 $7.04
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 8.74 5.92 15.43*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $368,297 $18,937 $7,673
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.42 1.42 1.19*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 5.76 6.28 5.17*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 265.71 213.46 169.29
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* 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>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS Y
- ------------------------------------------------------------------------------------------------------------------------------------
For the period
Per-share June 16, 1994+
operating performance Year ended October 31 to October 31
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value,
beginning of period $7.02 $7.07 $6.52 $6.72
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .47 .47 .47 .19
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .16 (.04) .57 (.21)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .63 .43 1.04 (.02)
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.46) (.48) (.49) (.16)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments (.04) -- -- (.02)
- ------------------------------------------------------------------------------------------------------------------------------------
From return of capital -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.50) (.48) (.49) (.18)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $7.15 $7.02 $7.07 $6.52
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) -- 6.31 16.65 (0.35)*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $170,902 $133,516 $107,414 $7,517
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .92 .92 .86 .24*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 6.64 6.76 7.14 2.91*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 265.71 213.46 169.29 128.82
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* 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, 1997
Note 1
Significant accounting policies
Putnam Income Fund (the "fund") is registered under the Investment Company Act
of 1940, as amended, as a diversified, open-end management investment company.
The fund seeks high current income consistent with what Putnam Investment
Management, Inc. ("Putnam Management"), the fund's manager, a wholly-owned
subsidiary of Putnam Investments, Inc. believes to be prudent risk. The fund
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 shares, class B, and class M shares, but do not bear a
distribution fee. Class Y shares are sold to defined contribution plans that
invest at least $250 million in a combination of Putnam Funds and other
accounts managed by affiliates of Putnam Management.
Expenses of the fund are borne pro-rata by the holders of each class of
shares, except that each class bears expenses unique to that class (including
the distribution fees applicable to such class). Each class votes as a class
only with respect to its own distribution plan or other matters on which a
class vote is required by law or determined by the Trustees. Shares of each
class would receive their pro-rata share of the net assets of the fund, if
that fund were liquidated. In addition, the Trustees declare separate
dividends on each class of shares.
The following is a summary of significant accounting policies consistently
followed by the fund in the preparation of its financial statements. The
preparation of financial statements is in conformity with generally accepted
accounting principles and requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities. Actual
results could differ from those estimates.
A) Security valuation Investments for which market quotations are readily
available are stated at market value, which is determined using the last
reported sale price, or, if no sales are reported -- as in the case of some
securities traded over-the-counter -- the last reported bid price. Securities
quoted in foreign currencies are translated into U.S. dollars at the current
exchange rate. Short-term investments having remaining maturities of 60 days
or less are stated at amortized cost, which approximates market value, and
other investments are stated at fair 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 Management.
These balances may be invested in one or more repurchase agreements and/or
short-term money market instruments.
C) Repurchase agreements The fund, or any joint trading account, through its
custodian, receives delivery of the underlying securities, the market value of
which at the time of purchase is required to be in an amount at least equal to
the resale price, including accrued interest. Putnam Management is responsible
for determining that the value of these underlying securities is at all times
at least equal to the resale price, including accrued interest.
D) Security transactions and related investment income Security transactions
are accounted for on the trade date (date the order to buy or sell is
executed). Interest income is recorded on the accrual basis. Dividend income
is recorded on the ex-dividend date except that certain dividends from foreign
securities are recorded as soon as the fund is informed of the ex-dividend
date. Discounts on zero coupon bonds, original issue discount bonds,
stepped-coupon bonds and payment in kind bonds are accreted according to the
yield-to-maturity method. Any premium resulting from the purchase of
stepped-coupon securities is amortized on a yield-to-maturity basis.
Securities purchased or sold on a (when-issued or forward commitment or
delayed delivery) basis may be settled a month or more after the trade date;
interest income is accrued based on the terms of the security. Losses may
arise due to changes in the market value of the underlying securities or if
the counterparty does not perform under the contract.
E) Foreign currency translation The accounting records of the fund are
maintained in U.S. dollars. The market value of foreign securities, currency
holdings, other assets and liabilities are recorded in the books and records
of the fund after translation to U.S. dollars based on the exchange rates on
that day. The cost of each security is determined using historical exchange
rates. Income and withholding taxes are translated at prevailing exchange
rates when accrued or incurred. The fund does not isolate that portion of
realized or unrealized gains or losses resulting from changes in the foreign
exchange rate on investments from fluctuations arising from changes in the
market prices of the securities. Such gains and losses are included with the
net realized and unrealized gain or loss on investments. Net realized gains
and losses on foreign currency transactions represent net exchange gains or
losses on closed forward currency contracts, disposition of foreign currencies
and the difference between the amount of investment income and foreign
withholding taxes recorded on the fund's books and the U.S. dollar equivalent
amounts actually received or paid. Net unrealized appreciation and
depreciation of assets and liabilities in foreign currencies arise from
changes in the value of open forward currency contracts and assets and
liabilities other than investments at the period end, resulting from changes
in the exchange rate.
F) Forward currency contracts The fund may engage in forward currency
contracts, which are agreements between two parties to buy and sell
currencies at a set price on a future date, to protect against a decline
in value relative to the U.S. dollar of the currencies in which its
portfolio securities are denominated or quoted (or an increase in the
value of a currency in which securities a fund intends to buy are
denominated, when a fund holds cash reserves and short-term investments).
The U.S. dollar value of forward currency contracts is determined using
current forward currency exchange rates supplied by a quotation service.
The market value of the contract will fluctuate with changes in currency
exchange rates. The contract is "marked to market" daily and the change
in market value is recorded as an unrealized gain or loss. When the contract
is closed, the fund records a realized gain or loss equal to the difference
between the value of the contract at the time it was opened and the value
at the time it was closed. The fund could be exposed to risk if the value
of the currency changes unfavorably, if the counterparties to the contracts
are unable to meet the terms of their contracts or if the fund is unable to
enter into a closing position.
G) Futures and options contracts The fund may use futures and options
contracts to hedge against changes in the values of securities the fund owns
or expects to purchase. The fund may also write options on securities it owns
or in which it may invest to increase its current returns.
The potential risk to the fund is that the change in value of futures and
options contracts may not correspond to the change in value of the hedged
instruments. In addition, losses may arise from changes in the value of the
underlying instruments, if there is an illiquid secondary market for the
contracts, or if the counterparty to the contract is unable to perform. When
the contract is closed, the fund records a realized gain or loss equal to the
difference between the value of the contract at the time it was opened and the
value at the time it was closed. Realized gains and losses on purchased
options are included in realized gains and losses on investment securities.
Futures contracts are valued at the quoted daily settlement prices established
by the exchange on which they trade. Exchange traded options are valued at the
last sale price, or if no sales are reported, the last bid price for purchased
options and the last ask price for written options. Options traded
over-the-counter are valued using prices supplied by dealers.
H) Line of credit The fund has entered into a committed line of credit with
certain banks. This line of credit agreement includes restrictions that the
fund maintain an asset coverage ratio at least 300% and borrowings must not
exceed prospectus limitations. For the year ended October 31, 1997, the fund
had no borrowings against the line of credit.
I) TBA purchase commitments The fund may enter into "TBA" (to be announced)
purchase commitments to purchase securities for a fixed unit price at a future
date beyond customary settlement time. Although the unit price has been
established, the principal value has not been finalized. However, the amount
of the commitments will not fluctuate more than 1.0% from the principal
amount. The fund holds, and maintains until settlement date, cash or
high-grade debt obligations in an amount sufficient to meet the purchase
price, or the fund may enter into offsetting contracts for the forward sale of
other securities it owns. Income on the securities will not be earned until
settlement date. TBA purchase commitments may be considered securities in
themselves, and involve a risk of loss if the value of the security to be
purchased declines prior to the settlement date, which risk is in addition to
the risk of decline in the value of the fund's other assets. Unsettled TBA
purchase commitments are valued at the current market value of the underlying
securities, according to the procedures described under "Security valuation"
above.
Although the fund will generally enter into TBA purchase commitments with the
intention of acquiring securities for their portfolio or for delivery pursuant
to options contracts it has entered into, the fund may dispose of a commitment
prior to settlement if Putnam Management deems it appropriate to do so.
J) TBA sale commitments The fund may enter into TBA sale commitments to hedge
its portfolio positions or to sell mortgage-backed securities it owns under
delayed delivery arrangements. Proceeds of TBA sale commitments are not
received until the contractual settlement date. During the time a TBA sale
commitment is outstanding, equivalent deliverable securities, or an offsetting
TBA purchase commitment deliverable on or before the sale commitment date, are
held as "cover" for the transaction.
Unsettled TBA sale commitments are valued at the current market value of the
underlying securities, generally according to the procedures described under
"Security valuation" above. The contract is "marked-to-market" daily and the
change in market value is recorded by the fund as an unrealized gain or loss.
If the TBA sale commitment is closed through the acquisition of an offsetting
purchase commitment, the fund realizes a gain or loss. If the fund delivers
securities under the commitment, the fund realizes a gain or a loss from the
sale of the securities based upon the unit price established at the date the
commitment was entered into.
K) Federal taxes It is the policy of the fund to distribute all of its taxable
income within the prescribed time and otherwise comply with the provisions of
the Internal Revenue Code applicable to regulated investment companies. It is
also the intention of the fund to distribute an amount sufficient to avoid
imposition of any excise tax under Section 4982 of the Internal Revenue Code
of 1986, as amended. Therefore, no provision has been made for federal taxes
on income, capital gains or unrealized appreciation on securities held nor for
excise tax on income and capital gains.
L) Distributions to shareholders Distributions to shareholders from net
investment income are recorded by the fund on the ex-dividend date. Capital
gain distributions, if any, are recorded on the ex-dividend date and paid at
least annually. The amount and character of income and gains to be distributed
are determined in accordance with income tax regulations which may differ from
generally accepted accounting principles. These differences include temporary
and permanent differences of market discount, paydown gains and losses on
mortgage-backed securities, realized and unrealized gains and losses on
forward foreign currency contracts and currency gains and losses on foreign
bonds. Reclassifications are made to the fund's capital accounts to reflect
income and gains available for distribution (or available capital loss
carryovers) under income tax regulations. For the year ended October 31, 1997,
the fund reclassified $4,528,383 to decrease undistributed net investment
income and $16,738 to decrease paid-in-capital, with an increase to
accumulated net realized gain on investments of $4,545,121. 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 of
average net assets, 0.55% of the next $500 million, 0.50% of the next $500
million, 0.45% of the next $5 billion, 0.425% of the next $5 billion, 0.405%
of the next $5 billion, 0.39% of the next $5 billion, and 0.38% thereafter.
The fund reimburses Putnam Management an allocated amount for the compensation
and related expenses of certain officers of the fund and their staff who
provide administrative services to the fund. The aggregate amount of all such
reimbursements is determined annually by the Trustees.
Custodial functions for the fund's assets are provided by Putnam Fiduciary
Trust Company (PFTC), a subsidiary of Putnam Investments, Inc. Investor
servicing agent functions are provided by Putnam Investor Services, a division
of PFTC.
For the year ended October 31, 1997, fund expenses were reduced by $478,593
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 funds receive an annual Trustees fee of which $1,380 has been
allocated to the fund and an additional fee for each Trustee's meeting
attended. Trustees who are not interested persons of Putnam Management and who
serve on committees of the Trustees receive additional fees for attendance at
certain committee meetings.
The fund has adopted a Trustee Fee Deferral Plan (the "Deferral Plan") which
allows the Trustees to defer the receipt of all or a portion of Trustees Fees
payable on or after July 1, 1995. The deferred fees remain in the fund and are
invested in certain Putnam funds until distribution in accordance with the
Deferral Plan.
The fund has adopted an unfunded noncontributory defined benefit pension plan
(the "Pension Plan") covering all Trustees of the fund who have served as
Trustee for at least five years. Benefits under the Pension Plan are equal to
50% of the Trustee's average total retainer and meeting fees for the three
years preceding retirement. Pension expense for the fund is included in
Compensation of trustees in the Statement of operations. Accrued pension
liability is included in Payable for compensation of Trustees in the Statement
of assets and liabilities.
The fund has adopted distribution plans (the "Plans") with respect to its
class A, class B and class M shares pursuant to Rule 12b-1 under the
Investment Company Act of 1940. The purpose of the Plans is to compensate
Putnam Mutual Funds Corp., a wholly-owned subsidiary of Putnam Investments
Inc., for services provided and expenses incurred by it in distributing shares
of the fund. The Plans provide for payments by the fund to Putnam Mutual Funds
Corp. at an annual rate up to 0.35%, 1.00% and 1.00% of the average net assets
attributable to class A, class B and class M shares, respectively. The
Trustees currently limit payment by the fund to an annual rate of 0.25%, 1.00%
and 0.50% of the average net assets attributable to class A, class B and class
M shares respectively.
For the year ended October 31, 1997, Putnam Mutual Funds Corp., acting as
underwriter received net commissions of $332,989 and $963,584 from the sale of
class A and class M shares, respectively and $744,912 in contingent deferred
sales charges from redemptions of class B shares. A deferred sales charge of
up to 1% is assessed on certain redemptions of class A shares. For the year
ended October 31, 1997, Putnam Mutual Funds Corp., acting as underwriter
received $35,488 on class A redemptions.
Note 3
Purchase and sales of securities
During the year ended October 31, 1997, purchases and sales of investment
securities other than U.S. government obligations and short-term investments
aggregated $1,948,233,916 and $1,604,073,256, respectively. Purchases and
sales of U.S. government obligations aggregated $3,171,199,953 and
$2,864,721,388, respectively. In determining the net gain or loss on
securities sold, the cost of securities has been determined on the identified
cost basis.
Written option transactions during the year are summarized as follows:
Contract Premiums
Amounts Received
- ------------------------------------------------------------
Written options
outstanding at
beginning of year $-- $--
Options opened 32,758,000 502,835
Options closed (32,758,000) (502,835)
- ------------------------------------------------------------
Written options
outstanding at
end of year $-- $--
- ------------------------------------------------------------
Note 4
Capital shares
At October 31, 1997, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
Year ended
October 31, 1997
- ------------------------------------------------------------
Class A Shares Amount
- ------------------------------------------------------------
Shares sold 77,412,276 $ 543,976,678
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 8,301,268 58,159,711
- ------------------------------------------------------------
85,713,544 602,136,389
Shares
repurchased (52,076,132) (365,715,762)
- ------------------------------------------------------------
Net increase 33,637,412 $ 236,420,627
- ------------------------------------------------------------
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, 1997
- ------------------------------------------------------------
Class B Shares Amount
- ------------------------------------------------------------
Shares sold 20,253,849 $ 141,668,032
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 2,260,966 15,771,501
- ------------------------------------------------------------
22,514,815 157,439,533
- ------------------------------------------------------------
Shares
repurchased (14,489,029) (101,264,493)
- ------------------------------------------------------------
Net increase 8,025,786 $ 56,175,040
- ------------------------------------------------------------
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, 1997
- ------------------------------------------------------------
Class M Shares Amount
- ------------------------------------------------------------
Shares sold 50,210,110 $ 355,774,387
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 192,477 1,342,428
- ------------------------------------------------------------
50,402,587 357,116,815
Shares
repurchased (1,311,388) (9,197,153)
- ------------------------------------------------------------
Net increase 49,091,199 $ 347,919,662
- ------------------------------------------------------------
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
- ------------------------------------------------------------
Year ended
October 31, 1997
- ------------------------------------------------------------
Class Y Shares Amount
- ------------------------------------------------------------
Shares sold 13,478,379 $ 94,976,470
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 1,374,239 9,630,300
- ------------------------------------------------------------
14,852,618 104,606,770
Shares
repurchased (9,971,826) (70,027,591)
- ------------------------------------------------------------
Net increase 4,880,792 $ 34,579,179
- ------------------------------------------------------------
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
- ------------------------------------------------------------
Federal tax information
(Unaudited)
Pursuant to Section 852 of the Internal Revenue Code, as amended, the
Fund hereby designates $7,559,495 as long-term capital gain, for its
taxable year ended October 31, 1997.
The fund has designated .40% of the distributions from net investment
income as qualifying for the dividends received deduction for corporations.
The Form 1099 you receive in January 1998 will show the tax status of all
distributions paid to your account in calendar 1997.
Fund information
INVESTMENT MANAGER
Putnam Investment
Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
INDEPENDENT ACCOUNTANTS
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
A.J.C. Smith
W. Thomas Stephens
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
John D. Hughes
Senior Vice President and Treasurer
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Gary N. Coburn
Vice President
William J. Curtin
Vice President
Kenneth J. Taubes
Vice President and Fund Manager
Robert M. Paine
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 the principal amount
invested.
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
- --------------------
Bulk Rate
U.S. Postage
PAID
Putnam
Investments
- --------------------
38088-004/312/510/514 12/97
PUTNAM INVESTMENTS [SCALE LOGO OMITTED]
- -----------------------------------------------------------------------------
Putnam Income Fund
Supplement to Annual Report dated October 31, 1997
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 and
B shares, which are discussed more extensively in the annual report.
FISCAL 1997 ANNUAL RESULTS AT A GLANCE
- -----------------------------------------------------------------------------
10/31/96 to 10/31/97
Annual fiscal period 9.23%
Five years 48.36
Annual average 8.21
Ten years 154.60
Annual average 9.80
Life of class (since 11/1/54 )
Annual average 8.71
- -----------------------------------------------------------------------------
Share value NAV
10/31/96 $7.02
10/31/97 $7.15
- -----------------------------------------------------------------------------
Distributions No. Income Capital gains Total
Short Long
10/31/96 to 10/31/97 12 $0.457 $0.000 $0.035 $0.492
- -----------------------------------------------------------------------------
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
Annual 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.
