Putnam
Income
Fund
ANNUAL REPORT ON PERFORMANCE AND OUTLOOK
10-31-98
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* "If the current conditions of low inflation, falling interest rates, and
subdued economic growth persist, there remains, in Putnam's opinion, no
reason for bonds to lose their appeal."
-- Krishna Memani, manager
Putnam Income Fund
* "The fundamentals underpinning the U.S. bond market are as strong as at
any time in recent memory."
-- The Wall Street Journal, July 6, 1998
CONTENTS
4 Report from Putnam Management
9 Fund performance summary
15 Portfolio holdings
39 Financial statements
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
Putnam Income Fund's managers faced their share of challenges during the
fund's just-concluded fiscal year. The 12 months ended October 31, 1998,
represented a period in which the U.S. fixed-income market ranged from
rally to retreat as risk-averse investors first flocked to the safety the
market represented and then just as suddenly fled in the aftermath of the
Russian bond default and the collapse of a large hedge fund. Their report,
which follows, provides the details.
During the period, two new members of Putnam's Core Fixed-Income Group
were named to the fund's management team. Krishna K. Memani, who also
heads the group's High-Grade Corporate Bond team, is the fund's new lead
manager. He came to Putnam earlier this year from Morgan Stanley and
PricewaterhouseCoopers and has 14 years of investment experience. Kevin M.
Cronin is chief investment officer of the group's Mortgage- and
Asset-Backed team. Before joining Putnam in 1997, he was with MFS
Investment Management and Liberty Mutual Insurance Co. He has 10 years of
investment experience.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
December 16, 1998
Report from the Fund Managers
Krishna K. Memani, lead manager
Kevin M. Cronin
During the 12 months ended October 31, 1998, Putnam Income Fund wrestled
with unprecedented levels of volatility in the fixed-income markets.
During the fiscal year, concerns that economic upheavals abroad would come
to the United States sparked a summer rally in the U.S. Treasury market.
These worries, which had been building for most of the period, were
exacerbated late in the fiscal year by Russia's foreign debt moratorium,
its effect on highly leveraged hedge funds, and the resulting selloff of
non-Treasury bonds. Within this challenging environment, your fund's class
A share total return at net asset value was 2.78%. At public offering
price, class A shares returned -2.16%. For more performance information,
including the results of other share classes, please see pages 9 through
11.
* RISK-AVERSE INVESTORS FLEE TO TREASURIES
During the period, the bond market experienced both historic highs and
lows. The Treasury market benefited from a hot summer rally that brought
long-term rates to their lowest levels since the late 1960s. However, the
bond market tumbled in October, experiencing its worst three-day
performance since 1965 -- a startling turnaround for the market.
The summer rally came amid marked weakness in every kind of investment
that carries risk: from stocks to high-yield and emerging-markets bonds.
Investors scrambled to buy the investment they perceived as both safe and
liquid: U.S. Treasury securities. This flight to quality caused heavy
selling in many of the sectors in which your fund invests, including
mortgage-backed securities and investment-grade and high-yield corporate
bonds. A large part of the summer's Treasury rally, however, was
attributable to short sellers -- investors and dealers who borrowed and
sold Treasury securities, hoping to profit from a fall in their value.
Toward the end of your fund's fiscal year, following weeks of handwringing
amid the Treasury rally, many investors rushed to buy Treasuries at any
price in an effort to cut portfolio losses. Just as the summer's Treasury
rally was largely the result of unwinding or closing out of long-held bets
on Treasury securities, so too was October's dramatic selloff. Many
investors had borrowed yen to buy Treasuries in recent years -- a maneuver
termed the yen-carry trade -- betting that the yen would fall in price
while dollar-denominated Treasuries would rise. That strategy worked
wonders until October, when the yen rose substantially against the dollar.
This development, along with the need to raise cash (given losses
elsewhere in their portfolios), spurred many investors to dump Treasuries,
causing prices of these securities to plunge.
Your fund's strategy of overweighting mortgage-backed and corporate
securities versus Treasuries enabled the fund to deliver an attractive
level of income but detracted from total return performance. These sectors
underperformed Treasuries on a duration-adjusted basis following massive
liquidations of each by hedge funds. Putnam believes the recent volatility
in the bond markets obscures robust fundamentals. The economy is slowing,
inflation is low, and the supply of bonds is shrinking, conditions that
should help keep bond prices high.
[GRAPHIC OMITTED: horizontal bar chart BOND MARKET PERFORMANCE BY SECTOR]
BOND MARKET PERFORMANCE BY SECTOR*
Comparison of total returns, 10/31/97-10/31/98
First Boston
High Yield Index -2.49%
Lehman Brothers
Mortgage-Backed Securities Index 8.74%
Lehman Brothers
Corporate Bond Index 8.00%
Salomon Brothers World
Government Bond Index 12.55%
J.P. Morgan Emerging
Markets Bond Index -10.11%
Lehman Brothers
Long-Term Treasury Bond Index 16.30%
*Past performance is not indicative of future results. These indexes
reflect the general performance of market sectors in which the fund
invests. The fund's performance will differ. The indexes may include bonds
different from those in the fund. It is not possible to invest directly in
an index.
* MORTGAGE SECTOR FOCUS: REDUCING PREPAYMENT RISK
Mortgage-backed securities performed well during the first half of the
year, and your fund benefited from its exposure to this sector. We began
the fiscal year with an increased focus on GNMA mortgage-backed securities
and commercial mortgage-backed security (CMBS) issues. CMBS issues
represent mortgages of office buildings, hotels, multifamily housing, and
industrial real estate. Unlike residential mortgages, CMBS issues have the
advantage of a measure of prepayment protection. For example, under the
terms of some loans, commercial mortgage owners are not allowed to prepay
for the first five years.
When interest rates started dropping rapidly, mortgages began to lag
comparable Treasuries because of fears of increased prepayments. In this
scenario, mortgage holders seek to pay off their loans before maturity in
order to refinance at lower rates. Investors in mortgage-backed securities
are then left to reinvest the principal at current rates that are lower
than the yield on the prepaid mortgages. On September 29, in a
long-anticipated move, the Federal Reserve Board lowered the federal funds
rate from 5.50% to 5.25% and then lowered it again to 5.00% two weeks
later in order to sustain U.S. economic growth. (Shortly after the end of
the fiscal year, the rate was lowered again to 4.75%.) Anticipating the
increase in prepayments, we reduced the fund's position in GNMA
mortgage-backed securities during the period.
* CORPORATES CAUGHT IN CREDIT CRUNCH
During the period, the U.S. corporate bond market experienced its worst
downturn since the early 1980s. With U.S. companies relying heavily on
bonds rather than bank loans to raise capital, investors worried that the
credit contraction would begin to affect the economy through defaults and
possible bankruptcies. Many U.S. companies were hampered because they
could not draw on credit lines with commercial banks to fill the gap
vacated by jittery bond investors. Banks tend to mark down the value of
loans much more slowly than the market downgrades bonds. This means
borrowers with access to bank credit have an additional cushion against
the worst effects of a credit contraction.
[GRAPHIC OMITTED: horizontal bar chart CHANGES IN PORTFOLIO COMPOSITION]
CHANGES IN PORTFOLIO COMPOSITION*
10/31/97 10/31/98
U.S. government
and agency obligations 47.3% 31.1%
Corporate bonds 40.0% 42.3%
Foreign government
bonds and notes 10.2% 1.3%
Collateralized
mortgage obligations 2.6% 10.7%
Short-term
investments 5.6% 15.0%
Other 1.3% 4.5%
Footnote reads:
*Based on total net assets as of indicated date. Holdings will vary over
time.
Your fund's emphasis on corporate bonds detracted from performance, as
investors penalized the lower-rated issues within the investment-grade
sector regardless of industry. Our emphasis on non-money-center bank
financial issues as well as our de-emphasis of dollar-denominated bonds
issued in the U.S. by foreign banks -- which were among the stronger and
weaker performing sectors, respectively, within the investment-grade
corporate market -- could not overcome the negative impact of the fund's
BBB/Baa rating bias, the lowest tier of the investment grade bonds.
High-yield corporate bonds also suffered during the latter half of the
fiscal year. In the past, high-yield securities have often rallied when
Treasuries dipped. Because they occupy a curious middle ground, high-yield
bonds take their cues from both the bond and stock markets. On average,
their risk levels and rates of return have been higher than
investment-grade bonds and lower than stocks.
Until recently, high-yield bonds enjoyed a powerful rally that had run
throughout much of the 1990s. In the booming economy, fears of defaults
diminished and investors bid up prices. However, the recent flight to
quality that swept the globe during the period brought the worst period
since 1990's recession-bound third quarter. Worried by Russia's financial
collapse and subsequent margin calls on certain highly leveraged
portfolios, many investors suddenly became extremely risk averse. Spreads
against Treasuries widened in August, the peak of the period's rush to
safety.
* FUND IS POSITIONED TO TAKE ADVANTAGE OF ANTICIPATED RECOVERY
If the current conditions of low inflation, falling interest rates, and
subdued economic growth persist, in Putnam's opinion, there remains no
reason for bonds to lose their appeal. We believe the market's current
pricing of corporate holdings does not accurately reflect the strong
underlying credit fundamentals of these bonds. Unprecedented levels of
volatility in the fixed-income markets have also pushed mortgage-backed
security spreads to recent wide levels.
As the credit markets stabilize, we believe investors will begin to focus
on the positive underlying credit fundamentals and determine that the
attractive yields now associated with corporates, high-yield bonds, and
mortgage-backed securities offer good value. Given our outlook, we believe
the fund's current allocations to these sectors will enable us to take
advantage of any recovery in these markets.
The views expressed here are exclusively those of Putnam Management. They
are not meant as investment advice. Although the described holdings were
viewed favorably as of 10/31/98, there is no guarantee the fund will
continue to hold these securities in the future.
Performance summary
This section provides information about your fund's performance, which
should always be considered in light of its investment strategy. Putnam
Income Fund is designed for investors seeking high current income
consistent with prudent risk, mainly through fixed-income securities.
TOTAL RETURN FOR PERIODS ENDED 10/31/98
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 2.78% -2.16% 1.92% -2.88% 2.58% -0.77%
- ------------------------------------------------------------------------------
5 years 32.25 25.92 27.37 25.51 30.42 26.14
Annual average 5.75 4.72 4.96 4.65 5.46 4.75
- ------------------------------------------------------------------------------
10 years 125.58 114.96 107.59 107.59 118.63 111.45
Annual average 8.48 7.95 7.58 7.58 8.14 7.78
- ------------------------------------------------------------------------------
Annual average
(life of fund) 8.55 8.43 7.51 7.51 8.06 7.98
- ------------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 10/31/98
Lehman Brothers
Aggregate Consumer
Bond Index* Price Index
- ------------------------------------------------------------------------------
1 year 9.34% 1.36%
- ------------------------------------------------------------------------------
5 years 40.39 12.42
Annual average 7.02 2.37
- ------------------------------------------------------------------------------
10 years 137.66 36.27
Annual average 9.04 3.14
- ------------------------------------------------------------------------------
Annual average (life of fund) -- 4.20
- ------------------------------------------------------------------------------
Past performance is no assurance of future results. 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. Investment return and
principal value will fluctuate so that an investor's shares when redeemed
may be worth more or less than their original cost.
This performance information does not reflect any market volatility that
may have occurred since the date of the information. As a result, more
recent returns may be more or less than those shown.
*The Lehman Brothers Aggregate Bond Index was introduced on 12/31/75.
[GRAPHIC OMITTED: worm chart GROWTH OF A $10,000 INVESTMENT]
GROWTH OF A $10,000 INVESTMENT
Cumulative total return of
a $10,000 investment since
10/31/88
Lehman Bros.
Fund's class A Aggregate Bond Consumer Price
Date shares at POP Index Index
10/31/88 9,525 10,000 10,000
10/31/89 10,543 11,190 10,449
10/31/90 10,759 11,896 11,106
10/31/91 12,701 13,777 11,431
10/31/92 14,208 15,131 11,796
10/31/93 16,248 16,927 12,121
10/31/94 15,572 16,306 12,437
10/31/95 18,099 18,858 12,787
10/31/96 19,200 19,961 13,169
10/31/97 20,907 21,736 13,443
10/31/98 $21,496 $23,766 $13,627
Footnote reads:
Past performance is no assurance of future results. At the end of the same
time period, a $10,000 investment in the fund's class B shares would have
been valued at $20,759 and no contingent deferred sales charges would
apply; a $10,000 investment in the fund's class M shares would have been
valued at $21,863 ($21,145 at public offering price). See first page of
performance section for performance calculation method.
PRICE AND DISTRIBUTION INFORMATION
12 months ended 10/31/98
Class A Class B Class M
- ---------------------------------------------------------------------------
Distributions (number) 12 12 12
- ---------------------------------------------------------------------------
Income $0.4046 $0.3577 $0.3906
- ---------------------------------------------------------------------------
Capital gains
- ---------------------------------------------------------------------------
Long-term -- -- --
- ---------------------------------------------------------------------------
Short-term 0.0371 0.0371 0.0371
- ---------------------------------------------------------------------------
Return of capital1 0.0263 0.0232 0.0254
- ---------------------------------------------------------------------------
Total $0.4680 $0.4180 $0.4531
- ---------------------------------------------------------------------------
Share value: NAV POP NAV NAV POP
- ---------------------------------------------------------------------------
10/31/97 $7.14 $7.50 $7.11 $7.11 $7.35
- ---------------------------------------------------------------------------
10/31/98 6.87 7.21 6.83 6.84 7.07
- ---------------------------------------------------------------------------
Current return (end of period)
- ---------------------------------------------------------------------------
Current dividend rate2 5.89% 5.61% 5.27% 5.75% 5.57%
- ---------------------------------------------------------------------------
Current 30-day SEC yield3 6.17 5.87 5.41 5.89 5.69
- ---------------------------------------------------------------------------
1 See page 53.
2 Income portion of most recent distribution, annualized and divided by NAV
or POP at end of period.
3 Based on investment income, calculated using SEC guidelines.
TOTAL RETURN FOR PERIODS ENDED 9/30/98
(most recent calendar quarter)
Class A Class B Class M
(inception date) (11/1/54) (3/1/93) (12/14/94)
NAV POP NAV CDSC NAV POP
- ------------------------------------------------------------------------------
1 year 5.01% -0.04% 4.28% -0.64% 4.81% 1.39%
- ------------------------------------------------------------------------------
5 years 35.24 28.77 30.46 28.56 33.40 29.04
Annual average 6.22 5.19 5.46 5.15 5.93 5.23
- ------------------------------------------------------------------------------
10 years 133.87 122.75 115.64 115.64 126.66 119.43
Annual average 8.87 8.34 7.99 7.99 8.53 8.18
- ------------------------------------------------------------------------------
Life of fund
Annual average 8.61 8.49 7.57 7.57 8.11 8.03
- ------------------------------------------------------------------------------
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 4.75% maximum sales charge for class A
shares and 3.25% for class M shares.
Contingent deferred sales charge (CDSC) is a charge applied at the time of
the redemption of class B shares and assumes redemption at the end of the
period. Your fund's CDSC declines from a 5% maximum during the first year
to 1% during the sixth year. After the sixth year, the CDSC no longer
applies.
COMPARATIVE BENCHMARKS
Lehman Brothers Aggregate Bond Index* is an unmanaged list of
investment-grade bonds.
First Boston High Yield Index* is a market-weighted index, including
publicly traded bonds rated below BBB by Standard & Poor's and Moody's.
Lehman Brothers Corporate Bond Index* is an unmanaged list of publicly
issued, fixed-rate non-convertible investment-grade domestic corporate
debt securities frequently used as a general measure of the performance of
fixed-income securities.
Lehman Brothers Long-Term Treasury Bond Index* is composed of all bonds
covered by the Lehman Brothers Treasury Bond Index with maturities of 10
years or greater.
Lehman Brothers Mortgage-Backed Securities Index* is an unmanaged list of
GNMA bonds.
Salomon Brothers World Government Bond Index* is a market-capitalization
weighted benchmark that tracks the performance of government-bond markets
in 14 countries.
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.
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Report of independent accountants
For the fiscal year ended October 31, 1998
To the Trustees and Shareholders of
Putnam Income Fund
In our opinion, the accompanying statement of assets and liabilities,
including the portfolio of investments owned, and the related statements
of operations and of changes in net assets and the financial highlights
present fairly, in all material respects, the financial position of Putnam
Income Fund (the "fund") at October 31, 1998, and the results of its
operations, the changes in its net assets and the financial highlights for
the periods indicated, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the
fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included
confirmation of investments owned at October 31, 1998 by correspondence
with the custodian, provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
December 14, 1998
<TABLE>
<CAPTION>
Portfolio of investments owned
October 31, 1998
CORPORATE BONDS AND NOTES (42.3%) (a)
PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C>
Advertising (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
$ 1,250,000 Adams Outdoor Advertising sr. notes 10 3/4s, 2006 $ 1,318,750
2,010,000 Lamar Advertising Co. sr. sub. notes 9 5/8s, 2006 2,130,600
100,000 Lamar Advertising Co. company guaranty 8 5/8s, 2007 102,500
470,000 Outdoor Communications, Inc. sr. sub. notes 9 1/4s, 2007 480,575
60,000 Outdoor Systems, Inc. sr. sub. notes 9 3/8s, 2006 62,400
--------------
4,094,825
Aerospace and Defense (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
3,520,000 Argo-Tech Corp. company guaranty 8 5/8s, 2007 3,273,600
1,080,000 Aviation Sales Co. company guaranty 8 1/8s, 2008 993,600
2,200,000 BE Aerospace sr. sub. notes Ser. B, 9 7/8s, 2006 2,244,000
390,000 BE Aerospace 144A sr. sub. notes 9 1/2s, 2008 398,775
270,000 BE Aerospace sr. sub. notes Ser. B, 8s, 2008 252,450
1,400,000 Burke Industries, Inc. company guaranty 10s, 2007 1,337,000
155,000 K&F Industries, Inc. sr. sub. notes Ser. B, 9 1/4s, 2007 147,250
1,058,000 Sequa Corp. bonds 8 3/4s, 2001 1,068,580
660,000 Sequa Corp. sr. notes 9 5/8s, 1999 669,900
165,000 United Defense Industries Inc.
company guaranty 8 3/4s, 2007 165,825
--------------
10,550,980
Agriculture (--%)
- --------------------------------------------------------------------------------------------------------------------------
511,480 Premium Standard Farms, Inc. sr. sec. notes
11s, 2003 (acquired 9/17/96, cost $499,650) (PIK) (RES) 539,612
480,000 Purina Mills, Inc. 144A sr. sub. notes 9s, 2010 480,000
--------------
1,019,612
Apparel (--%)
- --------------------------------------------------------------------------------------------------------------------------
400,000 Sassco Fashions Ltd. sr. notes 12 3/4s, 2004 380,000
Automotive (0.9%)
- --------------------------------------------------------------------------------------------------------------------------
2,000,000 Accuride Corp. sr. sub. notes Ser. B, 9 1/4s, 2008 1,860,000
392,000 Aftermarket Technology Corp. sr. sub. notes 12s, 2004 399,840
165,000 Aftermarket Technology Corp. sr. sub. notes
Ser. D, 12s, 2004 168,300
40,000 Cambridge Industries, Inc. company guaranty
Ser. B, 10 1/4s, 2007 35,200
8,085,000 Chrysler Corp. deb. Ser. B, 7.45s, 2097 8,643,593
8,130,000 Ford Motor Co. bonds 6 5/8s, 2028 8,061,302
4,560,000 Hayes Wheels International, Inc. company guaranty
Ser. B, 9 1/8s, 2007 4,582,800
2,340,000 Lear Corp. sub. notes 9 1/2s, 2006 2,527,200
1,925,000 Navistar International Corp. sr. notes Ser. B, 8s, 2008 1,881,688
890,000 Talon Automotive Group sr. sub. notes
Ser. B, 9 5/8s, 2008 783,200
1,050,000 Walbro Corp. sr. notes Ser. B, 9 7/8s, 2005 976,500
--------------
29,919,623
Banks (2.9%)
- --------------------------------------------------------------------------------------------------------------------------
785,000 Chevy Chase Savings Bank Inc. sub. deb. 9 1/4s, 2008 753,600
180,000 Chevy Chase Savings Bank Inc. sub. deb. 9 1/4s, 2005 172,800
50,000 Dime Capital Trust I bank guaranty Ser. A, 9.33s, 2027 51,595
12,397,000 First Citizens Bank Capital Trust I company guaranty
8.05s, 2028 12,025,090
5,705,000 Greenpoint Bank sr. notes 6.7s, 2002 5,715,269
45,000 Greenpoint Capital Trust I company guaranty
9.1s, 2027 47,815
1,520,000 Merita Bank Ltd. sub. notes 6 1/2s, 2006 (Finland) 1,532,373
90,000 Ocwen Capital Trust I company guaranty
10 7/8s, 2027 66,600
5,000 Ocwen Federal Bank FSB sub. deb. 12s, 2005 3,750
19,955,000 Peoples Bank-Bridgeport sub. notes 7.2s, 2006 18,891,199
2,065,000 Peoples Heritage Capital Trust company guaranty
Ser. B, 9.06s, 2027 2,126,971
95,000 Provident Capital Trust company guaranty 8.6s, 2026 104,474
5,470,000 Riggs Capital Trust company guaranty Ser. A, 8 5/8s, 2026 5,442,650
115,000 Riggs Capital Trust 144A bonds 8 5/8s, 2026 119,425
8,500,000 Riggs National Corp. sub. deb. 8 1/2s, 2006 8,869,410
6,500,000 Scotland International Finance 144A sub. notes
8.85s, 2006 (Netherlands) 7,525,960
5,000,000 Society Bank & Trust notes 12 1/2s, 1999 5,412,500
6,935,000 Sparbanken Sverige AB (Swedbank) 144A sub. notes
7 1/2s, 2049 (Sweden) 6,372,363
7,305,000 St. Paul Bancorp sr. notes 7 1/8s, 2004 7,849,149
3,745,000 State Street Institution 144A company guaranty
7.94s, 2026 4,241,699
1,875,000 Webster Capital Trust I 144A bonds 9.36s, 2027 1,961,138
8,445,000 Webster Financial Corp. sr. notes 8 3/4s, 2000 8,759,830
--------------
98,045,660
Basic Industrial Products (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
1,980,000 American Standard Companies, Inc. sr. notes
7 3/8s, 2008 1,950,300
1,090,000 Axia, Inc. 144A sr. sub. notes 10 3/4s, 2008 1,024,600
450,000 Ball Corp. 144A sr. sub. notes 8 1/4s, 2008 464,625
4,657,500 Ball Corp. 144A sr. notes 7 3/4s, 2006 4,820,513
1,750,000 Owens-Illinois, Inc. sr. notes 8.1s, 2007 1,819,563
30,000 Roller Bearing Co. company guaranty Ser. B,
9 5/8s, 2007 27,900
--------------
10,107,501
Broadcasting (2.2%)
- --------------------------------------------------------------------------------------------------------------------------
100,000 Adelphia Communications Corp. sr. notes Ser. B,
10 1/4s, 2000 101,500
1,000,000 Adelphia Communications Corp. sr. notes
Ser. B, 9 7/8s, 2007 1,065,000
55,000 Affinity Group Holdings sr. sub. notes 11 1/2s, 2003 55,550
2,855,000 Affinity Group Holdings sr. notes 11s, 2007 2,747,938
1,100,000 American Radio Systems Corp. company guaranty 9s, 2006 1,177,000
550,000 Benedek Broadcasting sr. notes 11 7/8s, 2005 577,500
1,575,000 Benedek Communications Corp. sr. disc. notes
stepped-coupon zero % (13 1/4s, 5/15/01), 2006 (STP) 1,047,375
260,000 Capstar Broadcasting sr. disc. notes stepped-coupon
zero % (12 3/4s, 2/1/02), 2009 (STP) 189,800
3,820,000 Capstar Broadcasting sr. sub. notes 9 1/4s, 2007 3,800,900
1,110,000 Central European Media Enterprises Ltd. sr. notes
9 3/8s, 2004 (Bermuda) 888,000
615,000 Chancellor Media Corp. sr. sub notes Ser. B, 8 1/8s, 2007 587,325
90,000 Citadel Broadcasting Co. sr. sub. notes 10 1/4s, 2007 95,175
4,090,000 Comcast Corp. sr. sub. notes 9 1/2s, 2008 4,300,799
1,490,000 Echostar Satellite Broadcast Corp. sr. disc. notes
stepped-coupon zero % (13 1/8s, 3/15/00), 2004 (STP) 1,311,200
670,000 Fox Family Worldwide, Inc. sr. disc. notes stepped-coupon
zero % (10 1/4s, 11/1/02), 2007 (STP) 395,300
1,870,000 Fox Family Worldwide, Inc. sr. notes 9 1/4s, 2007 1,757,800
1,350,000 Fox/Liberty Networks LLC sr. disc. notes stepped-coupon
zero % (9 3/4s, 8/15/02), 2007 (STP) 877,500
1,580,000 Fox/Liberty Networks LLC sr. notes 8 7/8s, 2007 1,532,600
875,000 Granite Broadcasting Corp. sr. sub. notes 10 3/8s, 2005 831,250
2,270,000 Granite Broadcasting Corp. sr. sub. notes 8 7/8s, 2008 1,952,200
65,000 Gray Communications Systems, Inc. sr. sub. notes
10 5/8s, 2006 65,975
120,000 Heritage Media Services Corp. sr. sub. notes
8 3/4s, 2006 125,400
1,900,000 Jacor Communications, Inc. company guaranty
Ser. B, 8 3/4s, 2007 1,976,000
1,575,000 Lenfest Communications, Inc. sr. sub. notes
10 1/2s, 2006 1,779,750
1,105,000 Marcus Cable Co. L.P. sr. sub. disc. notes stepped-coupon
zero % (13 1/2s, 8/1/99), 2004 (STP) 1,077,375
250,000 Pegasus Media & Communications notes Ser. B,
12 1/2s, 2005 272,500
305,000 Radio One Inc. company guaranty stepped-coupon
Ser. B, zero %, (12s, 5/15/00), 2004 (STP) 274,500
75,000 Rogers Cablesystems Ltd. notes 11s, 2015 (Canada) 85,125
2,075,000 Sinclair Broadcast Group, Inc. company guaranty 9s, 2007 1,997,188
310,000 Sinclair Broadcast Group, Inc. sr. sub. notes 8 3/4s, 20072 94,500
275,000 Sinclair Broadcast Group, Inc. sr. sub. notes 10s, 2005 276,375
155,000 Spanish Broadcasting Systems sr. notes Ser. B, 11s, 2004 156,550
1,000,000 Spanish Broadcasting Systems sr. notes 12 1/2s, 2002 1,080,000
100,000 TV Azteca S.A. de C.V. sr. notes 10 1/2s, 2007 (Mexico) 70,000
35,621,000 Viacom, Inc. sr. notes 7 3/4s, 2005 38,393,382
--------------
73,216,332
Building and Construction (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
880,000 Albecca Inc. 144A sr. sub. notes 10 3/4s, 2008 836,000
175,000 American Architectural Products Corp.
company guaranty 11 3/4s, 2007 148,750
1,890,000 Atrium Companies Inc. 144A sr. sub. notes
10 1/2s, 2006 1,908,900
80,000 Building Materials Corp. sr. notes Ser. B, 8 5/8s, 2006 79,600
115,000 D.R. Horton Inc. company guaranty 10s, 2006 116,150
830,000 GS Superhighway Holdings sr. notes 9 7/8s, 2004 356,900
4,740,000 Guangdong Enterprises 144A sr. notes
8 7/8s, 2007 (China) 1,661,986
220,000 Jackson Products, Inc. company guaranty
Ser. B, 9 1/2s, 2005 210,100
75,000 M.D.C. Holdings, Inc. notes Ser. B, 11 1/8s, 2003 75,750
440,000 Morris Material Handling, Inc. company guaranty
9 1/2s, 2008 299,200
370,000 Republic Group, Inc. 144A sr. sub. notes 9 1/2s, 2008 345,025
550,000 Southdown, Inc. sr. sub. notes Ser. B, 10s, 2006 583,000
--------------
6,621,361
Business Equipment and Services (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
450,000 Cex Holdings, Inc. 144A sr. sub. notes 9 5/8s, 2008 418,500
250,000 Iron Mountain, Inc. company guaranty 8 3/4s, 2009 248,750
840,000 Iron Mountain, Inc. med. term notes company guaranty
10 1/8s, 2006 886,200
135,000 Outsourcing Solutions, Inc. sr. sub. notes Ser. B, 11s, 2006 124,200
679,000 Pierce Leahy Corp. sr. sub. notes 11 1/8s, 2006 726,530
1,500,000 Production Resource Group sr. sub. notes 11 1/2s, 2008 1,395,000
2,110,000 U.S. Office Products Co. 144A sr. sub notes 9 3/4s, 2008 1,688,000
160,000 United Stationer Supply, Inc. sr. sub. notes 12 3/4s, 2005 177,600
--------------
5,664,780
Cable Television (0.9%)
- --------------------------------------------------------------------------------------------------------------------------
3,040,000 Acme Television sr. disc. notes stepped-coupon zero %
(10 7/8s, 9/30/00), 2004 (STP) 2,310,400
850,000 Century Communications Corp. sr. notes 8 3/4s, 2007 879,750
2,250,000 CSC Holdings, Inc. sr. notes 7 7/8s, 2007 2,267,663
1,100,000 CSC Holdings, Inc. sr. sub. deb. 10 1/2s, 2016 1,232,000
5,000 CSC Holdings, Inc. sr. sub. deb. 9 7/8s, 2023 5,350
320,000 Globo Communicacoes 144A sr. notes
10 5/8s, 2008 (Brazil) 168,000
1,350,000 Jones Intercable, Inc. sr. notes 7 5/8s, 2008 1,363,500
750,000 Lenfest Communications, Inc. sr. sub. notes 8 1/4s, 2008 750,000
480,000 Supercanal Holdings S.A. 144A sr. notes
11 1/2s, 2005 (Argentina) 216,000
17,715,000 TCI Communications, Inc. sr. notes 8.65s, 2004 20,289,344
--------------
29,482,007
Chemicals (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
7,802,000 Arco Chemical Co. deb. 9.8s, 2020 7,485,785
3,335,000 Equistar Chemicals LP notes 9 1/8s, 2002 3,514,123
640,000 Geo Specialty Chemicals, Inc. 144A sr. sub. notes
10 1/8s, 2008 576,000
305,000 Huntsman Corp. 144A sr. sub. notes FRN 9.031s, 2007 283,650
2,000,000 PCI Chemicals & Pharmaceuticals company guaranty
9 1/4s, 2007 (India) 1,540,000
45,000 Pioneer Americas Acquisition 144A sr. notes 9 1/4s, 2007 33,750
165,000 Polytama International notes 11 1/4s, 2007 21,450
170,000 Sterling Chemicals Holdings sr. disc. notes
stepped-coupon zero % (13 1/2s, 8/15/01), 2008 (STP) 47,600
915,000 Trikem S.A. 144A bonds 10 5/8s, 2007 (Brazil) 430,050
100,000 Union Carbide Global Enterprises sr. sub. notes
Ser. B, 12s, 2005 101,000
--------------
14,033,408
Computer Services and Software (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
14,690,000 Dell Computer Corp. deb. 7.1s, 2028 14,396,200
1,080,000 IPC Information Systems sr. disc. notes stepped-coupon
zero % (10 7/8s, 11/1/01), 2008 (STP) 723,600
1,400,000 Paramount Communications, Inc. deb. 7 1/2s, 2023 1,343,874
490,000 PSINet, Inc. 144A sr. notes 11 1/2s, 2008 504,700
580,000 PSINet, Inc. sr. notes Ser. B, 10s, 2005 562,600
310,000 Unisys Corp. sr. notes 7 7/8s, 2008 313,100
--------------
17,844,074
Conglomerates (1.1%)
- --------------------------------------------------------------------------------------------------------------------------
5,155,000 Canadian Pacific Ltd. deb. 9.45s, 2021 (Canada) 6,582,987
40,000 Cia Latino Americana 144A company guaranty
11 5/8s, 2004 (Argentina) 23,200
13,575,000 Tyco International Ltd. company guaranty 6 3/8s, 2005 13,925,371
16,970,000 Tyco International Ltd. company guaranty 6 1/4s, 2003 17,307,703
--------------
37,839,261
Consumer Durable Goods (--%)
- --------------------------------------------------------------------------------------------------------------------------
290,000 French Fragrances, Inc. company guaranty
Ser. D, 10 3/8s, 2007 284,200
45,000 French Fragrances, Inc. sr. notes Ser. B, 10 3/8s, 2007 45,225
20,000 Hedstrom Holdings, Inc. 144A sr. disc. notes
stepped-coupon zero % (12s, 6/1/02), 2009 (STP) 11,000
920,000 Iron Age Corp. company guaranty 9 7/8s, 2008 786,600
100,000 Packaged Ice, Inc. company guaranty Ser. B,
9 3/4s, 2005 93,000
160,000 Sealy Mattress Co. sr. sub. notes Ser. B, 9 7/8s, 2007 144,000
200,000 Selmer Co., Inc. sr. sub. notes 11s, 2005 204,000
--------------
1,568,025
Consumer Non Durables (1.0%)
- --------------------------------------------------------------------------------------------------------------------------
90,000 Amscan Holdings, Inc. sr. sub. notes 9 7/8s, 2007 72,900
250,000 Chattem, Inc. company guaranty Ser. B, 8 7/8s, 2008 239,375
1,920,000 Guess Jeans, Inc. sr. sub. notes 9 1/2s, 2003 1,848,000
2,255,000 Philip Morris Cos., Inc. notes 7 1/2s, 2004 2,413,008
11,028,000 Philip Morris Cos., Inc. notes 7 1/4s, 2003 11,649,979
4,530,000 Philip Morris Cos., Inc. notes 7 1/8s, 2004 4,781,959
6,220,000 Philip Morris Cos., Inc. notes 6.8s, 2003 6,536,349
840,000 Revlon Consumer Products sr. notes 8 1/8s, 2006 810,600
1,200,000 Samsonite Corp. sr. sub. notes 10 3/4s, 2008 840,000
4,170,000 Westpoint Stevens, Inc. sr. notes 7 7/8s, 2008 4,180,425
--------------
33,372,595
Consumer Services (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
2,435,000 Century Communications Corp. sr. notes 9 1/2s, 2005 2,617,625
1,200,000 Century Communications Corp. sr. notes 8 7/8s, 2007 1,248,000
1,650,000 Cinemark USA, Inc. sr. sub. notes Ser. D,
9 5/8s, 2008 (Mexico) 1,683,000
1,355,000 Coinmach Corp. sr. notes 11 3/4s, 2005 1,395,650
2,000,000 Consumers International 144A sr. notes 10 1/4s, 2005 2,040,000
80,000 FRD Acquisition Co. sr. notes Ser. B, 12 1/2s, 2004 77,600
2,080,000 HMH Properties, Inc. company guaranty
Ser. B, 7 7/8s, 2008 2,017,600
660,000 Host Marriott Travel Plaza sr. notes Ser. B, 9 1/2s, 2005 673,200
245,000 Jones Intercable, Inc. sr. sub. deb. 10 1/2s, 2008 267,050
561,000 Jones Intercable, Inc. sr. notes 9 5/8s, 2002 597,465
1,850,000 Premier Parks, Inc. sr. notes 9 1/4s, 2006 1,868,500
460,000 Protection One, Inc. sr. disc. notes 13 5/8s, 2005 515,200
70,000 Viasystems Inc. sr. sub notes 9 3/4s, 2007 60,200
780,000 Viasystems, Inc. 144A sr. notes 9 3/4s, 2007 682,500
--------------
15,743,590
Electronics and Electrical Equipment (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
95,000 Celestica International Ltd. 144A sr. sub. notes
10 1/2s, 2006 (India) 101,888
156,739 Cirent Semiconductor sr. sub. notes 10.22s, 2002 153,801
163,586 Cirent Semiconductor 144A sr. sub. notes 10.14s, 2004 160,519
190,000 Details, Inc. sr. sub. notes Ser. B, 10s, 2005 176,700
1,190,000 DII Group, Inc. (The) sr. sub. notes 8 1/2s, 2007 1,094,800
2,210,000 Dobson Communications Corp. sr. notes 11 3/4s, 2007 2,132,650
1,010,000 Fairchild Semiconductor Corp. sr. sub. notes 10 1/8s, 2007 909,000
1,509,549 Fairchild Semiconductor Corp. 144A
sr. sub. notes 11.74s, 2008 1,335,951
1,030,000 Flextronics International Ltd. sr. sub. notes
Ser. B, 8 3/4s, 2007 1,009,400
60,000 HCC Industries, Inc. company guaranty 10 3/4s, 2007 56,400
475,000 Motors and Gears, Inc. sr. notes Ser. D, 10 3/4s, 2006 465,500
180,000 Samsung Electronics 144A company guaranty
9 3/4s, 2003 151,200
2,540,000 Wavetek Corp. company guaranty 10 1/8s, 2007 2,362,200
1,170,000 Zilog, Inc. company guaranty Ser. B, 9 1/2s, 2005 854,100
--------------
10,964,109
Energy-Related (0.9%)
- --------------------------------------------------------------------------------------------------------------------------
3,000,000 CalEnergy, Inc. sr. notes 7.63s, 2007 3,064,140
1,500,000 Calpine Corp. sr. notes 7 7/8s, 2008 1,455,000
10,492,000 Enron Corp. notes 6.95s, 2028 10,150,695
660,000 Gothic Production Corp. company guaranty
Ser. B, 11 1/8s, 2005 429,000
10,630,000 KN Capital Trust III company guaranty 7.63s, 2028 10,138,363
250,000 Panda Global Energy Co. company guaranty
12 1/2s, 2004 150,000
4,715,000 Quezon Power Ltd. sr. notes 8.86s, 2017 (Philippines) 2,902,931
450,000 RAM Energy Inc. sr. notes 11 1/2s, 2008 315,000
980,000 York Power Funding 144A company guaranty
12s, 2007 (Cayman Islands) 970,200
--------------
29,575,329
Entertainment (1.3%)
- --------------------------------------------------------------------------------------------------------------------------
490,000 AMC Entertainment, Inc. sr. sub. notes 9 1/2s, 2009 470,400
1,400,000 Argosy Gaming Co. company guaranty 13 1/4s, 2004 1,491,000
700,000 Aztar Corp. sr. sub. notes 11s, 2002 693,000
85,000 Casino America, Inc. sr. notes 12 1/2s, 2003 91,375
475,000 Coast Hotels & Casinos, Inc. 1st mtge. company guaranty
Ser. B, 13s, 2002 527,250
200,000 Coast Hotels & Casinos, Inc. company guaranty
Ser. B, 10 7/8s, 2001 206,000
25,595,000 News America Holdings, Inc. deb. 7 3/4s, 2045 25,081,564
180,000 Premier Parks, Inc. sr. notes Ser. A, 12s, 2003 192,600
1,110,000 SFX Entertainment, Inc. 144A company guaranty
Ser. B, 9 1/8s, 2008 1,021,200
470,000 Silver Cinemas Inc. sr. sub. notes 10 1/2s, 2005 399,500
1,205,000 Six Flags Corp. sr. sub. notes 12 1/4s, 2005 1,289,350
3,450,000 Time Warner Entertainment Inc. notes 8 7/8s, 2012 4,190,508
685,000 Trump A.C. 1st mtge. 11 1/4s, 2006 595,950
970,000 Trump Castle Funding 144A sub. notes 10 1/4s, 2003 979,700
2,100,000 United Artists Theatre 144A 9 3/4s, 2008 1,911,000
2,000,000 Viacom International, Inc. sub. deb. 8s, 2006 2,060,000
--------------
41,200,397
Environmental Control (1.0%)
- --------------------------------------------------------------------------------------------------------------------------
35,000 Allied Waste Industries, Inc. company guaranty
10 1/4s, 2006 37,975
200,000 Allied Waste Industries, Inc. sr. disc. notes stepped-coupon
zero % (11.3s, 6/1/02), 2007 (STP) 149,000
185,000 ATC Group Services, Inc. company guaranty 12s, 2008 55,500
10,805,000 U.S. Filter Corp. 144A bonds 6 1/2s, 2003 10,845,519
10,360,000 U.S. Filter Corp. 144A bonds 6 3/8s, 2001 10,347,050
4,250,000 Waste Management, Inc. notes 6 5/8s, 2002 4,370,658
8,610,000 WMX Technologies, Inc. notes 7.7s, 2002 9,124,103
--------------
34,929,805
Food and Beverages (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
65,000 Ameriserve Food Co. company guaranty 10 1/8s, 2007 53,300
1,335,000 Ameriserve Food Co. company guaranty 8 7/8s, 2006 1,161,450
70,000 Aurora Foods, Inc. sr. sub. notes Ser. B, 9 7/8s, 2007 74,900
600,000 Aurora Foods, Inc. 144A ser. sub. notes Ser. D, 9 7/8s, 2007 642,000
1,590,000 Canandaigua Wine Co. sr. sub. notes Ser. C, 8 3/4s, 2003 1,586,025
115,000 Eagle Family Foods company guaranty Ser. B, 8 3/4s, 2008 101,200
130,000 Fleming Companies, Inc. company guaranty
Ser. B, 10 1/2s, 2004 117,000
780,000 RAB Enterprises, Inc. 144A sr. notes 10 1/2s, 2005 713,700
130,000 Signature Brands Ltd. sr. sub. notes 13s, 2002 (Canada) 145,600
930,000 Stater Brothers 144A sr. sub. notes 9s, 2004 837,000
--------------
5,432,175
Health Care (1.0%)
- --------------------------------------------------------------------------------------------------------------------------
1,430,000 Columbia/HCA Healthcare Corp.
med. term notes 9s, 2014 1,372,800
3,280,000 Columbia/HCA Healthcare Corp.
med. term notes 8.7s, 2010 3,411,758
1,220,000 Columbia/HCA Healthcare Corp. notes 7 1/4s, 2008 1,133,026
290,000 Conmed Corp. company guaranty 9s, 2008 278,400
750,000 Extendicare Health Services, Inc. company guaranty
9.35s, 2007 656,250
1,700,000 Fresenius Medical Capital Trust II company guaranty
7 7/8s, 2008 (Germany) 1,589,500
290,000 Genesis Health Ventures, Inc. sr. sub. notes 9 1/4s, 2006 261,000
1,380,000 Global Health Sciences company guaranty 11s, 2008 1,159,200
480,000 Hudson Respiratory Care, Inc. sr. sub. notes 9 1/8s, 2008 374,400
1,105,000 Integrated Health Services, Inc. sr. sub. notes
Ser. A, 9 1/2s, 2007 1,022,125
1,850,000 Integrated Health Services, Inc. sr. sub. notes
Ser. A, 9 1/4s, 2008 1,692,750
6,675,000 Manor Care, Inc. sr. notes 7 1/2s, 2006 6,633,415
4,175,000 Mariner Post-Acute Network, Inc. sr. sub. notes
Ser. B, 9 1/2s, 2007 3,507,000
550,000 Mariner Post-Acute Network, Inc. sr. sub. notes
stepped-coupon Ser. B, zero %
(10 1/2s, 11/1/02), 2007 (STP) 264,000
2,200,000 MedPartners, Inc. sr. notes 7 3/8s, 2006 1,726,164
50,000 MedPartners, Inc. sr. sub.notes 6 7/8s, 2000 41,477
2,910,000 Multicare Cos., Inc. sr. sub. notes 9s, 2007 2,560,800
250,000 Paracelsus Healthcare sr. sub. notes 10s, 2006 222,500
250,000 Paragon Corp. Holdings, Inc. company guaranty
Ser. B, 9 5/8s, 2008 182,500
380,000 PharMerica, Inc. company guaranty 8 3/8s, 2008 330,600
625,000 Quorum Health Group, Inc. sr. sub. notes 8 3/4s, 2005 593,750
1,145,000 Sun Healthcare Group, Inc. sr. sub. notes
Ser. B, 9 1/2s, 2007 835,850
965,000 Sun Healthcare Group, Inc. 144A sr. sub. notes
9 3/8s, 2008 694,800
2,000,000 Tenet Healthcare Corp. sr. notes 8s, 2005 2,055,000
2,170,000 Tenet Healthcare Corp. sr. sub. notes 8 5/8s, 2007 2,251,375
--------------
34,850,440
Insurance and Finance (8.8%)
- --------------------------------------------------------------------------------------------------------------------------
125,000 Aames Financial Corp. sr. notes 9 1/8s, 2003 60,000
7,745,000 Advanta Corp. med. term notes Ser. B, 7s, 2001 7,191,155
18,995,000 AFC Capital Trust company guaranty Ser. B, 8.207s, 2027 21,112,183
3,245,000 Allstate Financing II company guaranty 7.83s, 2045 3,310,874
3,500,000 AMBAC Indemnity Corp. deb. 9 3/8s, 2011 4,486,720
25,090,000 American General Institute 144A company guaranty
8 1/8s, 2046 27,758,071
500,000 Colonial Capital II 144A company guaranty 8.92s, 2027 481,875
475,000 Contifinancial Corp. sr. notes 8 3/8s, 2003 285,000
110,000 Delta Financial Corp. sr. notes 9 1/2s, 2004 55,000
150,000 Dine S.A. de C.V. 144A company guaranty
8 3/4s, 2007 (Mexico) 115,500
120,000 Dollar Financial Group Inc. sr. notes Ser. A, 10 7/8s, 2006 112,800
3,055,000 DTI Holdings Inc. sr. disc. notes, stepped-coupon
Ser. B, zero % (12 1/2s, 3/01/03), 2008 (STP) 977,600
15,995,000 Executive Risk Capital Trust company guaranty
Ser. B, 8.675s, 2027 15,846,247
11,390,000 Finova Capital Corp. notes 6 1/4s, 2002 11,363,120
3,595,000 First Financial Caribbean Corp. sr. notes 7.84s, 2006 3,810,376
3,945,000 Firstar Bank Milwaukee sr. bank notes 6 1/4s, 2002 4,062,798
6,840,000 Firstar Capital Trust I company guaranty Ser. B,
8.32s, 2026 7,524,342
3,100,000 Fleet Financial Group, Inc. sub. deb. 6 7/8s, 2028 3,123,746
5,239,000 Ford Motor Credit Corp. sr. notes 6s, 2003 5,340,951
1,760,000 Ford Motor Credit Corp. notes 5 1/8s, 2001 1,748,736
6,000,000 GS Escrow Corp. 144A sr. notes 7 1/8s, 2005 5,859,240
5,050,000 Hartford Life, Inc. deb. 7.65s, 2027 5,284,068
585,000 Imperial Credit Capital Trust I 144A company guaranty
10 1/4s, 2002 351,000
245,000 Investors Capital Trust I company guaranty
Ser. B, 9.77s, 2027 267,663
9,705,000 Lehman Bros Holdings, Inc. med. term notes 6.4s, 1999 9,645,120
21,165,000 Lehman Bros Holdings, Inc. notes 6 1/4s, 2003 20,471,000
8,050,000 Markel Capital Trust I company guaranty
Ser. B, 8.71s, 2046 7,999,607
170,000 Nationwide Credit, Inc. 144A sr. notes 10 1/4s, 2008 154,700
175,000 North Fork Capital Trust I company guaranty 8.7s, 2026 193,529
2,950,000 Orange Cogen Funding 144A company guaranty
8.175s, 2022 3,042,335
5,000,000 Orion Capital Corp. sr. notes 9 1/8s, 2002 5,411,250
6,172,000 Orion Capital Trust II company guaranty 7.701s, 2028 5,660,588
17,855,000 Paine Webber Group, Inc. sr. med. term notes 6.52s, 2005 17,520,219
18,815,000 Paine Webber Group, Inc. sr. notes 6.55s, 2008 18,221,951
7,600,000 Phoenix Home Life Mutual Insurance Co.
144A notes 6.95s, 2006 8,050,756
17,325,000 Provident Companies, Inc. bonds 7.405s, 2038 17,584,875
205,000 Reliance Group Holdings, Inc. sr. notes 9s, 2000 211,390
9,140,000 Salomon, Inc. sr. notes 7.3s, 2002 9,515,471
2,010,000 Salomon, Inc. sr. notes 6 3/4s, 2003 2,079,003
6,255,000 Salton Sea Funding Corp. company guaranty
Ser. E, 8.3s, 2011 7,007,852
8,555,000 Sampoerna International Finance Co. 144A
company guaranty 8 3/8s, 2006 (Indonesia) 4,277,500
115,000 Sovereign Capital Trust company guaranty 9s, 2027 109,884
12,490,000 Tig Capital Trust I 144A bonds 8.597s, 2027 13,737,501
11,075,000 Trenwick Capital Trust I company guaranty 8.82s, 2037 12,193,132
--------------
293,616,728
Lodging (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
680,000 Epic Resorts LLP 144A sr. notes 13s, 2005 646,000
595,000 John Q Hammons Hotels, Inc. 1st mtge. 8 7/8s, 2004 499,800
1,285,000 Raintree Resorts International, Inc. sr. notes Ser. B, 13s, 2004 771,000
--------------
1,916,800
Medical Supplies and Devices (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
350,000 ALARIS Medical, Inc. company guaranty 9 3/4s, 2006 334,250
175,000 Dade International, Inc. sr. sub. notes Ser. B, 11 1/8s, 2006 187,250
210,000 Graphic Controls Corp. sr. sub. notes Ser. A, 12s, 2005 243,600
95,000 Imagyn Medical Technologies company guaranty
12 1/2s, 2004 14,250
905,000 Kinetic Concepts, Inc. company guaranty Ser. B,
9 5/8s, 2007 823,550
760,000 Leiner Health Products sr. sub. notes 9 5/8s, 2007 776,150
1,290,000 Mediq, Inc. 144A sr. sub. notes 11s, 2008 1,148,100
920,000 Mediq, Inc. 144A deb. zero %, 2009 414,000
670,000 Wright Medical Technology, Inc. 144A notes
Ser. C, 11 3/4s, 2000 502,500
--------------
4,443,650
Metals and Mining (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
1,665,000 AK Steel Corp. sr. notes 9 1/8s, 2006 1,714,950
575,000 Ameristeel Corp. company guaranty Ser. B, 8 7/8s, 2008 506,000
200,000 Anker Coal Group, Inc. sr. notes Ser. B, 9 3/4s, 2007 70,000
135,000 Armco, Inc. sr. notes 9s, 2007 135,000
1,310,000 Continental Global Group sr. notes Ser. B, 11s, 2007 1,074,200
2,585,000 Freeport-McMoRan Copper & Gold Co., Inc.
sr. notes 7 1/2s, 2006 1,440,388
1,590,000 Lodestar Holding, Inc. 144A sr. notes 11 1/2s, 2005 1,240,200
6,100,000 PT Alatief Freeport sr. notes 9 3/4s, 2001 (Netherlands) 3,050,000
360,000 WHX Corp. sr. notes 10 1/2s, 2005 324,000
--------------
9,554,738
Oil and Gas (3.5%)
- --------------------------------------------------------------------------------------------------------------------------
1,045,000 Abraxas Petroleum Corp. 144A 11 1/2s, 2004 804,650
1,500,000 American Eco Corp. company guaranty
Ser. B, 9 5/8s, 2008 975,000
200,000 Benton Oil & Gas Co. sr. notes 11 5/8s, 2003 160,000
120,000 Benton Oil & Gas Co. sr. notes 9 3/8s, 2007 84,000
1,550,000 Chesapeake Energy Corp. company guaranty
Ser. B, 9 5/8s, 2005 1,317,500
120,000 CIA Naviera Perez Companc S.A. 144A bonds
9s, 2004 (Argentina) 117,600
1,000,000 Clark Refining & Marketing Inc. sr. sub. notes 8 7/8s, 2007 855,000
18,605,000 Coastal Corp. bonds 6.95s, 2028 17,844,800
190,000 Coho Energy, Inc. sr. sub. notes 8 7/8s, 2007 176,700
915,000 Costilla Energy, Inc. sr. notes 10 1/4s, 2006 750,300
330,000 Dailey Petroleum Services Corp. company guaranty
9 1/2s, 2008 136,950
680,000 Eagle Geophysical, Inc. 144A sr. notes 10 3/4s, 2008 584,800
5,342,000 Enron Corp. notes 6.4s, 2006 5,397,664
6,802,000 Express Pipeline Ltd. 144A sub. notes Ser. B,
7.39s, 2019 (Canada) 6,546,517
290,000 Flores & Rucks, Inc. sr. sub. notes 9 3/4s, 2006 297,250
6,400,000 K N Energy, Inc. sr. notes 6.45s, 2003 6,573,056
22,335,000 Louis Dreyfus Natural Gas notes 6 7/8s, 2007 21,278,108
2,530,000 Michael Petroleum Corp. sr. notes Ser. B, 11 1/2s, 2005 2,125,200
510,000 Northern Offshore 144A company guaranty 10s, 2005 357,000
400,000 Pacalta Resources Ltd. sr. notes Ser. B,
10 3/4s, 2004 (Canada) 344,000
1,100,000 Panaco, Inc. company guaranty Ser. B, 10 5/8s, 2004 880,000
4,055,000 Petro Geo-Services AS ADR notes 7 1/2s, 2007 (Norway) 4,257,628
12,500,000 Petro-Canada deb. 9 1/4s, 2021 (Canada) 15,163,375
1,665,000 Petsec Energy, Inc. sr. sub. notes Ser. B, 9 1/2s, 2007 1,332,000
20,000 Pogo Producing Co. sr. sub. notes Ser. B, 8 3/4s, 2007 19,100
6,135,000 Saga Petroleum ASA deb. 7 1/4s, 2027 (Norway) 5,390,763
1,000,000 Seagull Energy sr. sub notes 8 5/8s, 2005 987,500
60,000 Snyder Oil Corp. sr. sub. notes 8 3/4s, 2007 57,600
1,825,000 Southwest Royalties, Inc. company guaranty
10 1/2s, 2004 857,750
12,465,000 Transamerican Energy sr. disc. notes stepped-coupon
Ser. B, zero % (13s, 6/15/99), 2002 (STP) 3,988,800
1,685,000 Transamerican Energy sr. notes Ser. B, 11 1/2s, 2002 623,450
541,000 TransTexas Gas Corp. sr. sub. notes Ser. D, 13 3/4s, 2001 432,800
13,075,000 Union Pacific Resources Group Inc. notes 6 3/4s, 2008 12,932,875
5,000,000 Union Pacific Resources Group Inc. notes 6 1/2s, 2005 4,974,600
--------------
118,624,336
Packaging and Containers (--%)
- --------------------------------------------------------------------------------------------------------------------------
670,000 AEP Industries, Inc. sr. sub. notes 9 7/8s, 2007 626,450
225,000 Huntsman Packaging Corp. company guaranty
9 1/8s, 2007 211,500
115,000 Radnor Holdings Inc. sr. notes 10s, 2003 111,550
--------------
949,500
Paper and Forest Products (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
115,000 APP Finance II Mauritius Ltd. bonds stepped-coupon
12s, (16s, 2/15/04), 2049 (Indonesia) (STP) 55,200
170,000 Florida Coast Paper LLC 1st mtge. Ser. B, 12 3/4s, 2003 110,500
550,000 Indah Kiat Financial Mauritius Ltd. company guaranty
10s, 2007 (Indonesia) 286,000
390,000 Pindo Deli Finance Mauritius Ltd. company guaranty
10 3/4s, 2007 (India) 175,500
415,000 PT Pabrik Kertas Tjiwi Kimia company guaranty
10s, 2004 (Indonesia) 199,200
110,000 Repap New Brunswick sr. notes 10 5/8s, 2005 (Canada) 71,500
480,000 Repap New Brunswick notes, 9s, 2004 (Canada) 448,800
40,000 Riverwood International Corp. company guaranty
10 7/8s, 2008 30,800
2,600,000 Riverwood International Corp. company guaranty
10 5/8s, 2007 2,431,000
630,000 Riverwood International Corp. company guaranty
10 1/4s, 2006 582,750
--------------
4,391,250
Pharmaceuticals (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
1,625,000 ICN Pharmaceuticals, Inc. 144A sr. notes 9 1/4s, 2005 1,612,813
Photography (--%)
- --------------------------------------------------------------------------------------------------------------------------
190,000 Panavision Inc. 144A sr. disc. notes stepped-coupon
zero % (9 5/8s, 2/1/02), 2006 (STP) 102,600
Publishing (--%)
- --------------------------------------------------------------------------------------------------------------------------
210,000 American Media Operation, Inc. sr. sub. notes
11 5/8s, 2004 214,200
990,000 Garden State Newspapers, Inc. sr. sub. notes
Ser. B, 8 3/4s, 2009 980,100
180,000 Perry-Judd company guaranty 10 5/8s, 2007 171,000
50,000 Von Hoffman Press Inc. 144A sr. sub. notes
10 3/8s, 2007 49,750
--------------
1,415,050
Real Estate (2.2%)
- --------------------------------------------------------------------------------------------------------------------------
2,110,000 Avalon Properties, Inc. notes 7 3/8s, 2002 (R) 2,107,721
8,730,000 Avalon Properties, Inc. notes 6 7/8s, 2007 (R) 8,485,560
9,085,000 Avalon Properties, Inc. notes 6 5/8s, 2005 (R) 8,906,116
170,000 Bluegreen Corp. company guaranty Ser. B, 10 1/2s, 2008 149,600
16,770,000 Equity Residential Properties notes 6.63s, 2005 (R) 16,327,272
17,365,000 First Industrial LP med. term notes 7s, 2006 16,495,534
7,920,000 First Industrial Realty Trust, Inc. notes 7.6s, 2007 (R) 7,727,702
13,575,000 OMEGA Healthcare Investors, Inc. notes 6.95s, 2007 (R) 12,168,766
400,000 Tanger Properties Ltd. Partnership company guaranty
8 3/4s, 2001(R) 397,080
--------------
72,765,351
Recreation (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
600,000 Boyd Gaming Corp. sr. sub. notes 9 1/2s, 2007 570,000
220,000 Empress River Casino sr. notes 10 3/4s, 2002 237,050
760,000 Fitzgeralds Gaming Corp. company guaranty
Ser. B, 12 1/4s, 2004 448,400
350,000 Hollywood Casino Corp. sr. notes 12 3/4s, 2003 350,000
140,000 Isle of Capri Black Hawk LLC 144A 1st mortgage
Ser. B, 13s, 2004 140,000
795,000 Mohegan Tribal Gaming Auth. sr. notes Ser. B,
13 1/2s, 2002 981,825
150,000 Players International Inc. sr. notes 10 7/8s, 2005 158,250
450,000 Showboat Marina Casino 1st mtge. Ser. B, 13 1/2s, 2003 499,500
--------------
3,385,025
Retail (0.8%)
- --------------------------------------------------------------------------------------------------------------------------
370,000 Eye Care Centers of America 144A sr. sub. notes
9 1/8s, 2008 310,800
5,585,000 Federated Department Stores, Inc. sr. notes
8 1/2s, 2003 6,147,410
3,000,000 Fred Meyer, Inc. company guaranty 7.45s, 2008 3,129,900
450,000 Home Interiors & Gifts, Inc. 144A sr. sub. notes
10 1/8s, 2008 418,500
1,320,000 K mart Corp. deb. 7.95s, 2023 1,293,600
660,000 K mart Corp. med. term notes 7.55s, 2004 667,781
680,000 K mart Corp. notes 8 1/8s, 2006 707,200
5,000,000 May Department Stores Co. notes 9 1/2s, 2021 6,355,300
250,000 Mothers Work, Inc. sr. notes 12 5/8s, 2005 263,750
2,000,000 NBTY Inc. 144A sr. sub. notes 8 5/8s, 2007 1,940,000
4,505,000 Neiman-Marcus Group, Inc. deb. 7 1/8s, 2028 3,938,541
1,000,000 Southland Corp. deb. Ser. A, 4 1/2s, 2004 790,000
370,000 Specialty Retailers, Inc. company guaranty
Ser. B, 8 1/2s, 2005 340,400
410,000 William Carter Co. sr. sub. notes Ser. A, 10 3/8s, 2006 422,300
125,000 William Carter Holdings Co. sr. sub. notes Ser. A, 12s, 2008 128,750
--------------
26,854,232
Satellite Services (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
260,000 Esat Holdings Ltd. 144A sr. notes stepped-coupon zero %
(12 1/2s, 2/01/02), 2007 (Ireland) (STP) 153,400
1,030,000 Golden Sky Systems 144A sr. sub. notes 12 3/8s, 2006 1,019,700
340,000 Satelites Mexicanos S.A. de C.V. 144A sr. notes
10 1/8s, 2004 (Mexico) 221,000
800,000 TCI Satellite Entertainment, Inc. sr. disc. notes
stepped-coupon zero % (12 1/4s, 2/1/02), 2007 (STP) 240,000
1,109,000 TCI Satellite Entertainment, Inc. sr. sub. notes
10 7/8s, 2007 609,950
--------------
2,244,050
Specialty Consumer Products (--%)
- --------------------------------------------------------------------------------------------------------------------------
530,000 Decora Industries, Inc. sec. Ser. B, 11s, 2005 434,600
Telecommunications (4.4%)
- --------------------------------------------------------------------------------------------------------------------------
12,095,000 AirTouch Communications, Inc. notes 6.65s, 2008 12,658,143
2,090,000 Allbritton Communications Co. sr. sub. notes
Ser. B, 8 7/8s, 2008 1,964,600
510,000 Allegiance Telecom, Inc. sr. notes 12 7/8s, 2008 471,750
2,610,000 Allegiance Telecom, Inc. sr. disc. notes stepped-coupon
Ser. B, zero % (11 3/4s, 2/15/03), 2008 (STP) 1,115,775
13,845,000 AT&T Capital Corp. med. term notes 6.6s, 2005 13,605,343
3,000,000 Barak I.T.C. sr. disc. notes stepped-coupon Ser. B,
zero % (12 1/2s, 11/15/02), 2007 (Israel) (STP) 1,350,000
2,360,000 BTI Telecom Corp. sr. notes 10 1/2s, 2007 1,746,400
295,000 Call-Net Enterprises sr. disc. notes stepped-coupon
zero % (13 1/4s, 12/1/99), 2004 (STP) 280,250
410,000 Call-Net Enterprises, Inc. sr. disc. notes stepped-coupon
zero % (8.94s, 8/15/03), 2008 (Canada) (STP) 227,550
670,000 Caprock Communications Corp. 144A sr. notes 12s, 2008 569,500
100,000 Celcaribe S.A. sr. notes 13 1/2s, 2004 (Colombia) 101,000
1,550,000 CellNet Data Systems, Inc. sr. disc. notes
stepped-coupon zero % (14s, 10/1/02), 2007 (STP) 465,000
305,000 Centennial Cellular Corp. sr. notes 8 7/8s, 2001 320,250
480,000 Charter Communications International, Inc. disc. notes
stepped-coupon Ser. B, zero % (14s, 3/15/01), 2007 (STP) 412,800
2,000,000 Charter Communications International, Inc. sr. notes
Ser. B, 11 1/4s, 2006 2,160,000
DEM 15,980,000 Colt Telecommunications Group PLC sr. notes
8 7/8s, 2007 (United Kingdom) 10,142,045
DEM 10,755,000 Colt Telecommunications Group PLC bonds
7 5/8s, 2008 (United Kingdom) 6,370,829
270,000 Colt Telecommunications Group PLC sr. disc. notes
stepped-coupon zero %, (12s, 12/15/01), 2006
(United Kingdom) (STP) 210,600
6,065,000 Comcast Cellular Holdings sr. notes Ser. B, 9 1/2s, 2007 6,201,463
50,000 Consorcio Ecuatoriano notes 14s, 2002 (Ecuador) 15,000
310,000 CTI Holdings S.A. sr. notes stepped-coupon zero %
(11 1/2s, 4/15/03), 2008 (Argentina) (STP) 114,700
560,000 Dial Call Communications, Inc. sr. disc. notes
stepped-coupon Ser. B, zero %,
(10 1/4s, 12/15/98), 2005 (STP) 532,000
880,000 Diamond Cable Communication Co. sr. disc. notes
stepped-coupon zero % (11 3/4s, 12/15/00), 2005
(United Kingdom) (STP) 651,200
5,640,000 Diamond Cable Communication Co. sr. disc. notes
stepped-coupon zero % (10 3/4s, 2/15/02), 2007
(United Kingdom) (STP) 3,609,600
970,000 Dobson Wireline Co. 144A sr. notes 12 1/4s, 2008 892,400
1,275,000 E. Spire Communications, Inc. sr. disc. notes
stepped-coupon zero % (12 3/4s, 4/1/01), 2006 (STP) 924,375
85,000 E. Spire Communications, Inc. sr. notes 13 3/4s, 2007 90,525
2,060,000 Econophone, Inc. 144A notes stepped-coupon
zero % (11s, 2/15/03), 2008 (STP) 1,122,700
210,000 Esprit Telecom Group PLC sr. notes 11 1/2s, 2007
(United Kingdom) 184,800
270,000 Facilicom International sr. notes Ser. B., 10 1/2s, 2008 210,600
4,055,000 Flag Ltd. 144A sr. notes 8 1/4s, 2008 (Bermuda) 3,710,325
4,460,000 Global Crossing Holdings 144A sr. notes 9 5/8s, 2008 4,348,500
1,100,000 GST Telecommunications, Inc. company guaranty
stepped-coupon zero % (13 7/8s, 15/15/00), 2005 (STP) 715,000
2,250,000 GST Telecommunications, Inc. 144A sr. disc. notes
stepped-coupon zero % (10 1/2s, 5/1/03), 2008 (STP) 956,250
3,650,000 Hyperion Telecommunications Corp., Inc. sr. disc. notes
stepped-coupon Ser. B, zero % (13s, 4/15/01), 2003 (STP) 2,518,500
4,160,000 ICG Services, Inc. sr. disc. notes stepped-coupon
zero % (9 7/8s, 5/1/03), 2008 (STP) 1,830,400
270,000 IDT Corp. sr. notes 8 3/4s, 2006 229,500
1,950,000 Intermedia Communications, Inc. sr. disc. notes
stepped-coupon Ser. B, zero %
(11 1/4s, 7/15/02), 2007 (STP) 1,301,625
1,460,000 Intermedia Communications, Inc. sr. notes
Ser. B, 8.6s, 2008 1,394,300
1,000,000 Intermedia Communications, Inc. sr. notes
Ser. B, 8 1/2s, 2008 950,000
5,475,000 International Cabletel, Inc. sr. notes stepped-coupon
Ser. B, zero % (11 1/2s, 2/01/01), 2006 (STP) 4,106,250
600,000 IXC Communications, Inc. sr. sub. notes 9s, 2008 591,000
840,000 KMC Telecom Holdings, Inc. sr. disc. notes stepped-coupon
zero % (12 1/2s, 2/15/03), 2008 (STP) 386,400
1,335,000 Knology Holdings, Inc. sr. disc. notes stepped-coupon
zero %, (11 7/8s, 10/15/02), 2007 (STP) 640,800
75,000 L-3 Communications Corp. sr. sub. notes Ser. B,
10 3/8s, 2007 80,625
510,000 L-3 Communications Corp. sr. sub. notes 8 1/2s, 2008 510,000
23,845,000 LCI International, Inc. sr. notes 7 1/4s, 2007 23,535,253
315,000 McCaw International Ltd sr. disc. notes
stepped-coupon zero % (13s, 4/15/02), 2007 (STP) 132,300
1,720,000 MetroNet Communications Corp. sr. disc. notes
stepped-coupon zero % (9.95s, 6/15/03), 2008
(Canada) (STP) 928,800
1,160,000 MetroNet Communications Corp. sr. disc. notes
stepped-coupon zero % (10 3/4s, 11/1/02), 2007
(Canada) (STP) 672,800
1,610,000 Millicom International Cellular S.A. sr. disc. notes
stepped-coupon zero % (13 1/2s, 6/1/01), 2006
(Luxembourg) (STP) 917,700
210,000 MJD Communications, Inc. notes Ser. B, FRN, 10s, 2008 199,500
190,000 MJD Communications, Inc. sr. sub. notes Ser. B,
9 1/2s, 2008 182,400
150,000 Mobile Telecommunications Tech. sr. notes 13 1/2s, 2002 161,250
120,000 Netia Holdings B.V. 144A company guaranty
10 1/4s, 2007 (Poland) 92,400
70,000 Netia Holdings B.V. 144A company guaranty
stepped-coupon zero % (11 1/4s, 11/1/01), 2007
(Poland) (STP) 32,900
1,940,000 NEXTEL Communications, Inc. 144A sr. notes 12s, 2008 2,037,000
1,120,000 NEXTEL Communications, Inc. sr. disc. notes
stepped-coupon zero % (10.65s, 9/15/02), 2007 (STP) 655,200
1,360,000 NEXTEL Communications, Inc. sr. disc. notes
stepped-coupon zero % (9.95s, 2/15/03), 2008 (STP) 727,600
1,750,000 NEXTEL Communications, Inc. sr. disc. notes
stepped-coupon zero % (9 3/4s, 10/31/02), 2007 (STP) 971,250
1,350,000 NEXTEL Communications, Inc. sr. disc. notes
stepped-coupon zero % (9 3/4s, 2/15/99), 2004 (STP) 1,258,875
1,130,000 NorthEast Optic Network, Inc. sr. notes 12 3/4s, 2008 988,750
990,000 NTL Inc. 144A sr. notes 11 1/2s, 2008 1,019,700
15,000 NTL Inc. sr. notes Ser. B, 10s, 2007 14,400
290,000 NTL Inc. 144A sr. notes stepped-coupon zero %,
(12 3/8s, 10/1/03), 2008 (STP) 371,884
2,980,000 NTL Inc. 144A sr. notes stepped-coupon zero %
(9 3/4s, 4/01/03), 2008 (STP) 1,646,450
720,000 Pathnet, Inc. sr. notes 12 1/4s, 2008 511,200
650,000 Price Communications Wireless, Inc. 144A sr. notes
9 1/8s, 2006 643,500
1,000,000 Primus Telecommunications Group sr. notes 11 3/4s, 2004 920,000
400,000 Primus Telecommunications Group, Inc. sr. notes
Ser. B, 9 7/8s, 2008 332,000
2,295,000 Qwest Communications International, Inc. sr. disc. notes
stepped-coupon zero % (9.47s, 10/15/02), 2007 (STP) 1,698,300
750,000 Qwest Communications International, Inc. sr. disc. notes
stepped-coupon zero % (8.29s, 2/1/03), 2008 (STP) 549,375
690,000 RCN Corp. sr. disc. notes stepped-coupon zero %,
(11 1/8s, 10/15/02), 2007 (STP) 358,800
930,000 RCN Corp. sr. disc. notes, stepped-coupon Ser. B, zero %
(9.8s, 2/15/03), 2008 (STP) 446,400
275,000 RSL Communications, Ltd. company guaranty
9 1/8s, 2008 233,750
410,000 RSL Communications, Ltd. company guaranty,
stepped-coupon zero % (10 1/8s, 3/1/03), 2008 (STP) 205,000
410,000 Sprint Spectrum L.P. sr. notes 11s, 2006 463,300
1,310,000 Telecom Tech, Inc. 144A sr. sub. notes 9 3/4s, 2008 1,113,500
155,000 Telesystem International Wireless Inc. sr. disc. notes
stepped-coupon Ser. C, zero %,
(10 1/2s, 11/1/02), 2007 (STP) 41,850
330,000 Telewest 144A sr. notes 11 1/4s, 2008 346,500
1,920,000 Time Warner Telecom Inc. sr. notes 9 3/4s, 2008 1,920,000
130,000 Transtel S.A. 144A pass-through certificates
12 1/2s, 2007 (Colombia) 45,500
890,000 United International Holdings sr. disc. notes stepped-coupon
Ser. B, zero % (10 3/4s, 2/15/03), 2008 (STP) 400,500
550,000 US Xchange LLC 144A sr. notes 15s, 2008 547,250
440,000 Versatel Teleco 144A sr. notes 13 1/4s, 2008 407,000
1,375,000 WinStar Communications, Inc. sr. sub. notes
stepped-coupon zero % (15s, 3/1/02), 2007 (STP) 1,237,500
600,000 WinStar Equipment Corp. company guaranty
12 1/2s, 2004 555,000
3,845,000 WorldCom, Inc. notes 7 3/4s, 2007 4,296,019
--------------
146,809,329
Textiles (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
590,000 Day International Group, Inc. company guaranty
9 1/2s, 2008 542,800
1,510,000 Galey & Lord Inc. company guaranty 9 1/8s, 2008 1,336,350
75,000 Glenoit Corp. company guaranty 11s, 2007 70,500
110,000 Polymer Group, Inc. company guaranty Ser. B, 9s, 2007 103,400
490,000 Polymer Group, Inc. company guaranty
Ser. B, 8 3/4s, 2008 455,700
--------------
2,508,750
Transportation (2.7%)
- --------------------------------------------------------------------------------------------------------------------------
15,715,000 Burlington Northern Santa Fe bonds 6 7/8s, 2027 15,339,883
4,720,000 Burlington Northern Santa Fe notes 6 3/8s, 2005 4,889,542
360,000 Calair LLC company guaranty 8 1/8s, 2008 324,450
630,000 Canadian Airlines Corp. sr. sec. notes
10s, 2005 (Canada) 491,400
2,520,000 Cathay International Ltd. 144A sr. notes
13s, 2008 (China) 756,000
60,000 Coach USA, Inc. 144A company guaranty 9 3/8s, 2007 58,800
2,263,467 Continental Airlines, Inc. pass-through certificates
Ser. 97CI, 7.42s, 2007 2,300,678
2,300,000 Continental Airlines, Inc. pass-through certificates
Ser. 974C, 6.8s, 2009 2,293,100
13,587,000 Continental Airlines, Inc. pass-through certificates
Ser. 981C, 6.541s, 2008 13,274,091
4,640,000 Continental Airlines, Inc. sr. notes 9 1/2s, 2001 4,848,800
18,435,000 CSX Corp. deb. 7.95s, 2027 20,293,617
600,000 Eletson Holdings, Inc. 1st pfd. mtge. notes
9 1/4s, 2003 (Greece) 595,500
180,000 Hermes Europe Railtel 144A sr. notes
11 1/2s, 2007 (Netherlands) 189,000
240,000 International Shipholding Corp. sr. notes 9s, 2003 246,000
2,830,000 International Shipholding Corp. sr. notes 7 3/4s, 2007 2,631,900
215,000 Johnstown America Industries, Inc. company guaranty
Ser. C, 11 3/4s, 2005 222,794
680,000 Kitty Hawk, Inc. company guaranty 9.95s, 2004 646,000
240,000 MC Shipping, Inc. sr. notes Ser. B, 11 1/4s, 2008 156,000
165,000 MCII Holdings sec. notes stepped-coupon zero %
(12s, 11/15/98), 2002 (STP) 99,000
12,655,000 Norfolk Southern Corp. bonds 7.05s, 2037 13,596,532
1,500,000 Pegasus Shipping 144A 11 7/8s, 2004 1,425,000
35,000 TFM S.A. de C.V. company guaranty
10 1/4s, 2007 (Mexico) 32,550
175,000 TFM S.A. de C.V. company guaranty stepped-coupon
zero %, (11 3/4s, 6/15/02), 2009 (Mexico) (STP) 92,750
250,000 Trans World Airlines, Inc. sr. notes 12s, 2002 230,000
5,540,000 Wisconsin Central Transportation Corp. notes
6 5/8s, 2008 5,452,080
--------------
90,485,467
Utilities (2.7%)
- --------------------------------------------------------------------------------------------------------------------------
200,000 AES China Generating Co. sr. notes 10 1/8s, 2006 (China) 104,000
7,275,000 Arizona Public Service Co. sr. notes 6 3/4s, 2006 7,618,817
750,000 California Energy Corp. sr. notes 9 7/8s, 2003 826,028
325,000 Calpine Corp. sr. notes 10 1/2s, 2006 347,750
2,200,000 Calpine Corp. sr. notes 8 3/4s, 2007 2,280,740
135,000 Chesapeake Energy Corp. sr. notes 9 1/8s, 2006 110,700
1,530,000 Cleveland Electric Illuminating Co. 144A bonds
6.86s, 2008 1,507,050
2,605,000 Connecticut Light & Power Co. 1st mtge. Ser. A,
7 7/8s, 2001 2,704,224
1,970,000 Edison Mission Energy 144A company guaranty
7.33s, 2008 2,108,787
7,543,000 EIP Funding-Public Service Co. of New Mexico deb.
10 1/4s, 2012 9,131,933
140,000 El Paso Electric Co. 1st mtge. Ser. D, 8.9s, 2006 156,169
7,965,000 Illinova Corp. sr. notes 7 1/8s, 2004 8,333,302
6,440,000 Israel Electric Corp., Ltd. 144A sr. notes
7 1/4s, 2006 (Israel) 6,417,782
2,565,000 Long Island Lighting Co. deb. 9s, 2022 3,049,759
550,000 Midland Funding Corp. deb. Ser. A, 11 3/4s, 2005 675,796
3,142,404 Midland Funding Corp. I deb. Ser. C-94, 10.33s, 2002 3,319,384
500,000 Niagara Mohawk Power Corp. med. term notes
9.95s, 2000 530,205
550,000 Niagara Mohawk Power Corp. sr. notes
Ser. F, 7 5/8s, 2005 564,482
1,580,000 Niagara Mohawk Power Corp. sr. notes
Ser. G, 7 3/4s, 2008 1,656,488
357,624 Northeast Utilities System notes Ser. A, 8.58s, 2006 387,618
5,623,856 Northeast Utilities System notes Ser. B, 8.38s, 2005 5,873,386
8,120,000 Texas New-Mexico Power Utilities 1st mtge.
9 1/4s, 2000 8,669,237
11,800,000 Texas Utilities Co. secd. lease fac. bonds 7.46s, 2015 12,639,098
11,450,000 Texas Utilities Electric Capital Trust V
company guaranty 8.175s, 2037 12,351,573
--------------
91,364,308
--------------
Total Corporate Bonds and Notes
(cost $1,469,809,923) $1,419,934,466
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (31.1%) (a)
PRINCIPAL AMOUNT VALUE
U.S. Government Agency Mortgage Obligations (15.8%)
- --------------------------------------------------------------------------------------------------------------------------
Federal Home Loan Mortgage Corp.
Pass-through certificates
$ 5,824,377 7s, July 1, 2012 $ 5,946,281
36,219,790 5 1/2s, with due dates from December 1, 2010 to
August 1, 2011 35,816,469
Federal National Mortgage Association
15,049,737 7s, Dwarf, with due dates from May 1, 2007 to
September 1, 2013 15,360,059
32,711,825 6 1/2s, with due dates from February 1, 2028 to
August 1, 2028 32,967,306
2,780,306 6 1/2s, Dwarf, with due dates from
September 1, 2010 to August 1, 2013 2,821,122
38,950,000 6 1/2s, TBA, November 15, 2028 39,254,200
63,781,275 6s, Dwarf, with due dates from February 1, 2012 to
October 1, 2013 64,040,231
14,100,000 5.94s, December 12, 2005 14,855,619
Federal National Mortgage Association
Pass-through certificates
274,722 11s, with due dates from August 1, 2013 to
October 1, 2015 307,087
2,121,103 8s, December 1, 2008 2,238,421
7,076,769 7s, Dwarf, with due dates from November 1, 2010 to
January 1, 2013 7,222,692
12,248,049 6 1/2s, with due dates from April 1, 2024 to
August 1, 2028 12,343,760
3,266,697 6 1/2s, Dwarf, with due dates from June 1, 2011 to
August 1, 2013 3,314,651
2,598,078 5 1/2s, Dwarf, with due dates from May 1, 2011 to
February 1, 2013 2,567,214
Government National Mortgage Association
22,593,000 9 1/2s, TBA, November 15, 2028 24,428,681
3,725,366 8s, with due dates from April 15, 2024 to
October 15, 2026 3,863,782
7,847,006 7s, with due dates from December 15, 2027 to
May 15, 2028 8,033,372
Government National Mortgage Association
20,410,740 6 1/2s, with due dates from April 15, 2028 to
July 15, 2028 20,633,828
Government National Mortgage Association
Pass-through certificates
284,981 11s, with due dates from December 15, 2009 to
October 15, 2013 309,297
188,411 9s, with due dates from October 15, 2004 to
May 15, 2009 202,424
20,014,216 8s, with due dates from September 15, 2024 to
March 15, 2028 20,755,770
147,646,057 7s, with due dates from July 15, 2025 to May 15, 2028 151,152,735
15,791,545 6 1/2s, with due dates from February 15, 2026 to
April 15, 2028 15,964,150
Government National Mortgage Association
Adjustable rate mortgages
18,730,691 7s, with due dates from July 20, 2023 to
September 20, 2024 18,917,997
27,088,227 6 7/8s, with due dates from June 20, 2022 to
May 20, 2024 27,393,757
--------------
530,710,905
U.S. Treasury Obligations (15.3%)
- --------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Bonds
14,192,000 10 3/4s, August 15, 2005 (SEG) 19,196,951
50,482,000 6 1/8s, November 15, 2027 56,807,899
208,661,000 5 1/2s, August 15, 2028 219,582,317
159,005,000 5 1/4s, August 15, 2003 165,912,177
U.S. Treasury Notes
6,640,000 5 3/4s, August 15, 2003 7,037,338
41,559,000 5 5/8s, May 15, 2008 44,799,355
--------------
513,336,037
--------------
Total U.S. Government and Agency Obligations
(cost $1,034,293,943) $1,044,046,942
COLLATERALIZED MORTGAGE OBLIGATIONS (10.7%)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
GBP 13,350,000 Blackstone Hotel Acquisition Co. sr. mtge. loan,
FRN 3.3449s, 2003 $ 22,264,095
Chase Mortgage Finance Corp.
$ 7,670,000 Ser 98-S2, Class A14, 6 3/4s, 2028 7,727,525
3,406,035 Ser. 93-3, Class B13, 7.461s, 2024 3,000,504
Commercial Mortgage Acceptance Corp.
23,000,000 Ser. 98-C2, Class A2, 6.03s, 2008 22,831,094
7,000,000 Ser. 97-ML1, Class A2, 6.53s, 2007 7,220,938
28,790,000 Ser. 97-ML1, Class A3, 6.57s, 2007 29,590,722
7,935,000 Ser. 97-ML1, Class D, 7.11s, 2030 7,935,000
Criimi Mae Commercial Mortgage Trust
34,500,000 Ser. 98-C1, Class A2, 7s, 2011 33,621,328
13,675,000 Ser. 98-C1, Class B, 7s, 2011 12,717,750
Fannie Mae
4,878,169 Ser. 98-50, Class ZN, 6 1/2s, 2028 4,818,716
1,801,715 Ser. 97-80, Class C, zero %, 2027 1,753,294
4,708,683 Ser. 98-4, Class A, zero %, 2027 4,567,422
Fanniemae Strip
19,083,434 Ser. 290, Class 2, Interest Only (IO),
6 1/2s, 2024 3,697,415
15,888,092 Ser. 294, Class 1, zero %, 2028 13,485,018
Freddiemac Strip
21,167,565 Ser. 194, Class IO, 6 1/2s, 2028 4,617,175
5,786,482 Ser. 199, Class IO, 6 1/2s, 2028 1,262,176
First Union-Lehman Brothers Commercial Mortgage Co.
8,340,000 Ser. 97-C2, Class D, 7.12s, 2012 8,039,304
13,505,000 Ser. 98-C2, Class D, 6.778s, 2013 12,605,018
4,620,000 Ser. 97-C2, Class A3, 6.65s, 2008 4,774,301
131,676,093 Ser. 97-C2, IO, 1.092s, 2027 11,115,314
GMAC Commercial Mortgage Securities Inc.
12,972,000 Ser. 98-C1, Class E, 7.153s, 2011 12,844,307
18,016,424 Ser. 98-C1, Class A1, 6.44s, 2030 18,493,578
11,828,665 Ser. 98-C2, Class A2, 6.42s, 2008 12,013,950
GS Mortgage Securities Corp. II
3,175,000 Ser. 98-C1, Class C, 6.91s, 2030 3,093,641
10,885,000 Ser. 98-GLII, Class A2, 6.562s, 2031 11,078,889
5,945,000 Ser. 98-GLII, Class D, 7.191s, 2031 5,573,438
Housing Securities Inc.
1,729,951 Ser. 91-B, Class B6, 9s, 2006 1,727,789
2,498,128 Ser. 93-F, Class F9M2, 7s, 2023 2,345,898
565,737 Ser. 93-J, Class J4, 6.66s, 2009 563,969
269,399 Ser. 93-J, Class J5, 6.66s, 2009 240,186
451,754 Ser. 94-1, Class AB1, 6 1/2s, 2009 447,377
11,136,000 Merrill Lynch Mortgage Investors, Inc.
Ser. 98-C2, Class D, 7.116s, 2030 11,042,040
5,935,000 Morgan Stanley Capital I Ser. 96-WF1,
Class A2, 7.218s, 2006 6,294,809
Prudential Home Mortgage Securities
2,096,072 Ser. 92-25, Class B3, 8s, 2022 (In default) (NON) 1,960,483
1,952,058 Ser. 94-A, Class 4B, 7 1/2s, 2007 1,819,379
7,452,462 Ser. 94-A, Class 4B, 6.803s, 2024 7,042,577
Prudential Home Mortgage Securities 144A
613,475 Ser. 94-31, Class B3, 8s, 2009 589,511
397,092 Ser. 94-31, Class B4, 8s, 2009 347,455
3,845,089 Ser. 95-C, Class B1, 7.681s, 2001 3,848,693
3,843,228 Ser. 93-E, Class 5B, 7.394s, 2023 3,269,146
7,086,159 Ser. 93-D, Class 2B, 7.108s, 2023 7,265,528
1,898,444 Ser. 94-D, Class 3B, 6.312s, 2009 1,896,071
2,259,552 Ser. 94-D, Class B4, 6.312s, 2009 2,206,241
3,336,090 Ser. 93-31, Class B2, 6s, 2000 2,902,398
7,580,000 Residential Funding Mortgage Sec. I
Ser. 98-S13, Class A21, 6 3/4s, 2028 7,703,175
8,585,118 Securitized Asset Sales, Inc. Ser. 93-J, Class 2B,
6.808s, 2023 8,236,348
4,940,000 Sears Mortgage Sec. Ser. 93-7, Class T7, 7s, 2007 5,035,713
847,362 Travelers Mortgage Securities Corp. coll. oblig.
Ser. 1, Class Z2, 12s, 2014 974,467
--------------
Total Collateralized Mortgage Obligations
(cost $353,401,570) $ 358,501,165
ASSET-BACKED SECURITIES (3.5%) (a)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$10,160,335 First Plus Ser. 98-A, Class A, 8 1/2s, 2023 $ 10,347,666
56,600,000 First USA, Ser. MT-98, Class 5, 5.735s, 2006 56,246,250
16,339,672 Green Tree Recreational Equipment & Cons. Ser. 97-B,
Class A1, 6.55s, 2028 16,827,947
11,686,123 Green Tree Recreational Equipment & Cons. Ser. 98-A,
Class A1C, 6.18s, 2019 11,942,213
65,355,000 Lehman Manufactured Housing Ser. 98-1, Class IO,
0.82s, 2028 2,946,081
11,916,193 Sasco Ser. 98-RF2, Class A, 8.58s, 2028 12,895,556
6,682,965 Sasco 144A 8.712s, 2027 7,284,432
--------------
Total Asset-Backed Securities (cost $118,132,170) $ 118,490,145
FOREIGN GOVERNMENT BONDS AND NOTES (1.3%) (a)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
DEM 52,355,000 Germany (Federal Republic of) bonds
Ser. 98, 5 5/8s, 2028 $ 33,718,721
DEM 16,020,000 Germany (Federal Republic of)
Unity Fund bonds 8s, 2002 10,951,777
--------------
Total Foreign Government Bonds and Notes
(cost $39,612,364) $ 44,670,498
PREFERRED STOCKS (0.7%) (a)
NUMBER OF SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------------
7,496 AmeriKing, Inc. $3.25 pfd. (PIK) $ 179,904
733 Capstar Broadcasting Inc. 144A $12.00 pfd. (PIK) 82,096
24,956 CGA Group Ltd. 144A Ser. A, $13.75 pfd. (PIK) 698,768
2,855 Chevy Chase Capital Corp. Ser. A, $5.19 pfd. 141,323
556 Concentric Network Corp. Ser. B, $13.50 pfd. (PIK) 414,220
2,857 CSC Holdings, Inc. Ser. M, $11.125 cum. Pfd. (PIK) 312,842
167 Echostar Communications, Inc. $12.125 pfd. (PIK) 158,650
850 Fresenius Medical Care AG Ser. D, 9.00%, (Germany) 850,000
8,960 Fuji JGB Inv. LLC 144A FLIRB Ser. A 9.87%, pfd. (Japan) 5,113,382
9,084 Nextlink Communications, Inc. 144A $7.00 cum. pfd. (PIK) 422,406
167 Paxson Communications Corp. $13.25 cum. pfd. (PIK) 1,536,400
1,048 SFX Broadcasting, Inc. Ser. E, $12.625 pfd. (PIK) 123,664
12,580 Webster Financial $7.375 pfd. 13,884,600
--------------
Total Preferred Stocks (cost $25,706,967) $ 23,918,255
UNITS (0.1%) (a)
NUMBER OF UNITS VALUE
- --------------------------------------------------------------------------------------------------------------------------
410 Bestel S.A. de CV units, stepped-coupon zero %
(12 3/4s, 5/15/03), 2005 (Mexico) (STP) $ 229,600
690 Birch Telecom, Inc. 144A units 14s, 2008 586,500
40 Celcaribe S.A. 144A units 13 1/2s, 2004 (Colombia) 800,000
1,245 Diva Systems Corp. 144A units stepped-coupon zero %
(12 5/8s, 3/1/03), 2008 (STP) 398,832
240 Onepoint Communications, Inc. units 14 1/2s, 2008 108,000
1,780 Rhythms Netcon 144A units stepped-coupon zero %
(13 1/2s, 5/15/03), 2008 (STP) 640,800
820 Startec Global Communications Corp. units 12s, 2008 602,700
550 Telehub Communications Corp. units stepped-coupon
zero %, (13 7/8s,7/31/02), 2005 (STP) 280,500
480 Transam Refinance, Inc. 144A units 16s, 2003 168,000
--------------
Total Units (cost $4,946,803) $ 3,814,932
CONVERTIBLE BONDS AND NOTES (0.2%) (a)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$ 1,000,000 Corporate Express, Inc. cv. notes 4 1/2s, 2000 $ 882,500
2,750,000 Exide Corp. 144A cv. sr. sub. notes 2.9s, 2005 1,247,813
1,400,000 HEALTHSOUTH Corp. cv. sub. deb. 3 1/4s, 2003 1,144,500
105,000 Integrated Device Technology, Inc. cv. sub. notes
5 1/2s, 2002 66,281
1,070,000 Jacor Communications, Inc. cv. sr. notes zero %, 2011 798,488
1,500,000 Lam Research Corp. 144A cv. sub. notes 5s, 2002 1,173,750
--------------
Total Convertible Bonds and Notes (cost $6,082,741) $ 5,313,332
COMMON STOCKS (--%) (a)
NUMBER OF SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------------
150 AmeriKing, Inc. $ 6,000
242 Concord Communications, Inc. (NON) 4,978
1,213 Hedstrom Holdings, Inc. 144A 1,213
73 Mothers Work, Inc. 611
44,051 PSF Holdings LLC Class A (acquired 3/16/96,
cost $1,527,031) (RES) (NON) 771,305
--------------
Total Common Stocks (cost $1,539,920) $ 784,107
CONVERTIBLE PREFERRED STOCKS (--%) (a)
NUMBER OF SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------------
5,500 Chancellor Media Corp. $3.00 cv. cum. pfd. $ 416,625
2,695 Chesapeake Energy Corp. 144A $3.50 cv. cum. pfd. 53,900
--------------
Total Convertible Preferred Stocks (cost $727,257) $ 470,525
WARRANTS (--%) (a) (NON) EXPIRATION
NUMBER OF WARRANTS DATE VALUE
- --------------------------------------------------------------------------------------------------------------------------
1,060 Allegiance Telecom, Inc. 2/3/08 $ 16,960
1,550 Cellnet Data Systems, Inc. 9/15/07 62,000
24,000 CGA Group Ltd. 144A 1/1/04 480
1,285 Club Regina, Inc. 144A 4/15/06 1,285
270 Colt Telecommunications Group PLC 12/31/06 81,000
15,275 DTI Holdings Inc. 3/1/08 764
10 E. Spire Communications, Inc. 11/1/05 160
680 Epic Resorts 6/15/05 7
260 Esat Holdings, Inc. (Ireland) 2/1/07 9,100
3,544 Fitzgeralds Gaming Co. 12/19/98 35
250 Globalstar Telecom 144A 2/15/04 7,500
400 Intermedia Communications 6/1/00 21,960
840 KMC Telecom Holdings, Inc. 4/15/08 13,440
645 Knology Holdings, Inc. 144A 10/15/07 968
1,010 Long Distance International, Inc. 144A 4/13/08 818,100
315 McCaw International Ltd. 4/15/07 1,260
720 Pathnet, Inc. 144A 4/15/08 7,200
835 UIH Australia/Pacific, Inc. 144A 5/15/06 4,175
440 Versatel Teleco 144A 5/15/08 4,400
--------------
Total Warrants (cost $309,228) $ 1,050,794
SHORT-TERM INVESTMENTS (15.0%) (a)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$25,000,000 American General Finance Corp., effective yield of
5.07%, December 11, 1998 $ 24,855,645
25,000,000 Asset Securitization Cooperative Corp.,
effective yield of 5.35%, November 16, 1998 24,940,556
50,000,000 Associates Corp. of North America, effective yield of
5.73%, November 2, 1998 49,984,083
25,000,000 Bayerische Vereinsbank AG, effective yield of 5.72%,
November 2, 1998 24,992,055
25,000,000 Ciesco L.P., effective yield of 5.1%, November 25, 1998 24,911,458
25,000,000 CXC Incorp., effective yield of 5.15%,
December 14, 1998 24,842,639
16,700,000 Federal Home Loan Mortgage Corp., effective yield of
5.35%, November 13, 1998 16,671,365
45,000,000 Federal Home Loan Mortgage Corp., effective yield of
5.14%, November 9, 1998 44,942,691
25,000,000 Federal Home Loan Mortgage Corp., effective yield of
5.06%, December 17, 1998 24,834,847
50,000,000 Ford Motor Credit Corp., effective yield of 5.27%,
November 16, 1998 49,886,639
50,000,000 General Motors Acceptance Corp., effective yield of
5.72%, November 2, 1998 49,984,111
25,151,000 Metlife Funding Inc., effective yield of 5.11%,
November 19, 1998 25,083,169
30,117,000 Metlife Funding Inc., effective yield of 5.1%,
November 12, 1998 30,065,801
17,000,000 Preferred Receivables Funding Corp., effective yield of
5.17%, December 4, 1998 16,916,993
50,000,000 Toronto Dominion Holdings USA, Inc., effective yield of
5.09%, November 30, 1998 49,815,796
19,673,000 Interest in $750,000,000 joint tri-party repurchase
agreement dated October 30, 1998 with Goldman
Sachs & Co. due November 2, 1998 with respect to
various U.S. Treasury obligations -- maturity value of
$19,681,820 for an effective yield of 5.38% 19,678,880
--------------
Total Short-Term Investments (cost $502,406,728) $ 502,406,728
- --------------------------------------------------------------------------------------------------------------------------
Total Investments (cost $3,556,969,614) (b) $3,523,401,889
- --------------------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $3,356,310,962.
(b) The aggregate identified cost on a tax basis is $3,558,487,239, resulting in gross unrealized appreciation and
depreciation of $59,643,408 and $94,728,758, respectively, or net unrealized depreciation of $35,085,350.
(NON) Non-income-producing security.
(STP) 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.
(RES) Restricted, excluding 144A securities, as to public resale. The total market value of restricted securities
held at October 31, 1998 was $1,310,917 or less than 0.1% of net assets.
(PIK) Income may be received in cash or additional securities at the discretion of the issuer.
(SEG) A portion of this security was pledged and segregated with the custodian to cover margin requirements for
futures contracts at October 31, 1998.
(R) Real Estate Investment Trust.
144A after the name of a security represents those exempt from registration under Rule 144A of the Securities
Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified
institutional buyers.
ADR after the name of a foreign holding stands for American Depository Receipts, representing ownership of
foreign securities on deposit with a domestic custodian bank.
TBA after the name of a security represents to be announced securities (Note 1).
FLIRB represents Front Loaded Interest Reduction Bond.
The rates shown on Floating Rate Notes (FRN) are the current interest rates shown at October 31, 1998, which
are subject to change based on the terms of the security.
- -------------------------------------------------------------------------------
Forward Currency Contracts to Buy at October 31, 1998
Aggregate Face Delivery Unrealized
Market Value Value Date Appreciation
- -------------------------------------------------------------------------------
Deutschemarks $119,111,822 $114,167,037 12/16/98 $4,944,785
- -------------------------------------------------------------------------------
Forward Currency Contracts to Sell at October 31, 1998
(Aggregate face value $191,332,262)
Unrealized
Market Aggregate Face Delivery Appreciation/
Value Value Date (Depreciation)
- -------------------------------------------------------------------------------
British Pounds $21,145,717 $ 21,189,711 12/16/98 $ 43,994
Deutschemarks 177,745,590 170,142,551 12/16/98 (7,603,039)
- -------------------------------------------------------------------------------
$(7,559,045)
- -------------------------------------------------------------------------------
Futures Contracts Outstanding at October 31, 1998
Aggregate Face Expiration Unrealized
Total Value Value Date Appreciation
- -------------------------------------------------------------------------------
US Treasury Bonds
20 Yr (long) $64,066,406 $61,839,652 Dec-98 $2,226,754
- -------------------------------------------------------------------------------
TBA Sales Commitments at October 31, 1998
(Proceeds receivable $38,502,269)
Settlement Market
Agency Principal Amount Date Value
- -------------------------------------------------------------------------------
FNMA, 6s, November 2013 $38,645,000 11/17/98 $38,801,899
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
October 31, 1998
<S> <C>
Assets
- -----------------------------------------------------------------------------------------------
Investments in securities, at value (identified cost $3,556,969,614) (Note 1) $3,523,401,889
- -----------------------------------------------------------------------------------------------
Cash 1,976,759
- -----------------------------------------------------------------------------------------------
Dividends and interest receivable 47,120,332
- -----------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 14,534,579
- -----------------------------------------------------------------------------------------------
Receivable for securities sold 78,148,653
- -----------------------------------------------------------------------------------------------
Receivable for open forward currency contracts 4,988,779
- -----------------------------------------------------------------------------------------------
Receivable for closed forward currency contracts 501,440
- -----------------------------------------------------------------------------------------------
Total assets 3,670,672,431
Liabilities
- -----------------------------------------------------------------------------------------------
Payable for securities purchased 256,405,029
- -----------------------------------------------------------------------------------------------
Payable for variation margin 232,969
- -----------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 4,916,972
- -----------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 4,139,747
- -----------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 520,380
- -----------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 27,714
- -----------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 2,586
- -----------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 1,206,986
- -----------------------------------------------------------------------------------------------
Payable for open forward currency contracts 7,603,039
- -----------------------------------------------------------------------------------------------
TBA sales commitments, at value (proceeds receivable $38,502,269) 38,801,899
- -----------------------------------------------------------------------------------------------
Other accrued expenses 504,148
- -----------------------------------------------------------------------------------------------
Total liabilities 314,361,469
- -----------------------------------------------------------------------------------------------
Net assets $3,356,310,962
Represented by
- -----------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $3,411,911,414
- -----------------------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 2,851,787
- -----------------------------------------------------------------------------------------------
Accumulated net realized loss on investments and
foreign currency transactions (Note 1) (24,140,056)
- -----------------------------------------------------------------------------------------------
Net unrealized depreciation of investments and
assets and liabilities in foreign currencies (34,312,183)
- -----------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to capital shares outstanding $3,356,310,962
Computation of net asset value and offering price
- -----------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($1,426,583,163 divided by 207,587,546 shares) $6.87
- -----------------------------------------------------------------------------------------------
Offering price per class A share (100/95.25 of $6.87)* $7.21
- -----------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($494,702,785 divided by 72,389,042 shares)** $6.83
- -----------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($1,188,620,327 divided by 173,879,305 shares) $6.84
- -----------------------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $6.84)* $7.07
- -----------------------------------------------------------------------------------------------
Net asset value, offering price and redemption price per class Y share
($246,404,687 divided by 35,809,954 shares) $6.88
- -----------------------------------------------------------------------------------------------
* On single retail sales of less than $50,000. On sales of $50,000 or more and on group
sales the offering price is reduced.
** Redemption price per share is equal to net asset value less any applicable contingent
deferred sales charge.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Year ended October 31, 1998
<S> <C>
Investment income:
- -----------------------------------------------------------------------------------------------
Interest (net of foreign tax of $77,985) $ 246,672,809
- -----------------------------------------------------------------------------------------------
Dividends 363,899
- -----------------------------------------------------------------------------------------------
Total investment income 247,036,708
Expenses:
- -----------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 16,143,721
- -----------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 7,634,568
- -----------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 34,949
- -----------------------------------------------------------------------------------------------
Administrative services (Note 2) 31,867
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 3,477,025
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 4,479,069
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 5,706,912
- -----------------------------------------------------------------------------------------------
Reports to shareholders 130,436
- -----------------------------------------------------------------------------------------------
Registration fees 251,638
- -----------------------------------------------------------------------------------------------
Auditing 98,518
- -----------------------------------------------------------------------------------------------
Legal 21,809
- -----------------------------------------------------------------------------------------------
Postage 298,007
- -----------------------------------------------------------------------------------------------
Other 156,906
- -----------------------------------------------------------------------------------------------
Total expenses 38,465,425
- -----------------------------------------------------------------------------------------------
Expense reduction (Note 2) (1,209,306)
- -----------------------------------------------------------------------------------------------
Net expenses 37,256,119
- -----------------------------------------------------------------------------------------------
Net investment income 209,780,589
- -----------------------------------------------------------------------------------------------
Net realized loss on investments (Notes 1 and 3) (38,974,053)
- -----------------------------------------------------------------------------------------------
Net realized gain on futures contracts (Note 1) 10,553,761
- -----------------------------------------------------------------------------------------------
Net realized gain on written options (Notes 1 and 3) 180,005
- -----------------------------------------------------------------------------------------------
Net realized loss on foreign currency transactions (Note 1) (19,989,004)
- -----------------------------------------------------------------------------------------------
Net unrealized depreciation of assets and
liabilities in foreign currencies during the year (1,646,902)
- -----------------------------------------------------------------------------------------------
Net unrealized depreciation of investments, futures and
TBA sale commitments during the year (79,510,269)
- -----------------------------------------------------------------------------------------------
Net loss on investments (129,386,462)
- -----------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $ 80,394,127
- -----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Year ended October 31
-------------------------------
1998 1997
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
Increase in net assets
- ---------------------------------------------------------------------------------------------------------------
Operations:
- ---------------------------------------------------------------------------------------------------------------
Net investment income $ 209,780,589 $ 106,884,049
- ---------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments and
foreign currency transactions (48,229,291) 8,584,505
- ---------------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of investments
and assets and liabilities in foreign currencies (81,157,171) 31,232,964
- ---------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 80,394,127 146,701,518
- ---------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ---------------------------------------------------------------------------------------------------------------
From net investment income
Class A (79,385,042) (72,785,926)
- ---------------------------------------------------------------------------------------------------------------
Class B (22,749,198) (20,709,360)
- ---------------------------------------------------------------------------------------------------------------
Class M (64,035,315) (3,091,964)
- ---------------------------------------------------------------------------------------------------------------
Class Y (13,178,073) (8,962,004)
- ---------------------------------------------------------------------------------------------------------------
From net realized gain on investments
Class A (6,772,757) (5,178,160)
- ---------------------------------------------------------------------------------------------------------------
Class B (2,151,676) (1,738,693)
- ---------------------------------------------------------------------------------------------------------------
Class M (3,964,090) (103,201)
- ---------------------------------------------------------------------------------------------------------------
Class Y (896,482) (668,296)
- ---------------------------------------------------------------------------------------------------------------
From return of capital
Class A (5,156,795) --
- ---------------------------------------------------------------------------------------------------------------
Class B (1,477,771) --
- ---------------------------------------------------------------------------------------------------------------
Class M (4,159,687) --
- ---------------------------------------------------------------------------------------------------------------
Class Y (856,038) --
- ---------------------------------------------------------------------------------------------------------------
Increase from capital share transactions (Note 4) 1,241,196,260 675,094,508
- ---------------------------------------------------------------------------------------------------------------
Total increase in net assets 1,116,807,463 708,558,422
Net assets
- ---------------------------------------------------------------------------------------------------------------
Beginning of year 2,239,503,499 1,530,945,077
- ---------------------------------------------------------------------------------------------------------------
End of year (including undistributed net investment
income of $2,851,787 and $35,030, respectively) $3,356,310,962 $2,239,503,499
- ---------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS A
- ------------------------------------------------------------------------------------------------------------------------------------
Per-share
operating performance Year ended October 31
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $7.14 $7.02 $7.07 $6.53 $7.36
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .48(c) .45 .45 .47 .54
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.28) .15 (.04) .55 (.84)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .20 .60 .41 1.02 (.30)
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.40) (.44) (.46) (.48) (.41)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments (.04) (.04) -- -- (.04)
- ------------------------------------------------------------------------------------------------------------------------------------
From return of capital (.03) -- -- -- (.08)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.47) (.48) (.46) (.48) (.53)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $6.87 $7.14 $7.02 $7.07 $6.53
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 2.78 8.88 6.08 16.23 (4.16)
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $1,426,583 $1,296,600 $1,037,718 $928,995 $781,784
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.02 1.17 1.17 1.05 .83
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 6.69 6.39 6.50 6.91 7.10
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 257.12 265.71 213.46 169.29 128.82
- ------------------------------------------------------------------------------------------------------------------------------------
+ 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>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS B
- ------------------------------------------------------------------------------------------------------------------------------------
Per-share
operating performance Year ended October 31
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $7.11 $6.99 $7.04 $6.50 $7.34
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .42(c) .39 .40 .42 .48
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.28) .16 (.04) .55 (.83)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .14 .55 .36 .97 (.35)
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.36) (.39) (.41) (.43) (.38)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments (.04) (.04) -- -- (.04)
- ------------------------------------------------------------------------------------------------------------------------------------
From return of capital (.02) -- -- -- (.07)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.42) (.43) (.41) (.43) (.49)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $6.83 $7.11 $6.99 $7.04 $6.50
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 1.92 8.15 5.32 15.46 (4.98)
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $494,703 $403,704 $340,775 $260,769 $169,501
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.77 1.92 1.92 1.80 1.59
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 5.92 5.64 5.76 6.14 6.40
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 257.12 265.71 213.46 169.29 128.82
- ------------------------------------------------------------------------------------------------------------------------------------
+ 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>
<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
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value,
beginning of period $7.11 $6.99 $7.04 $6.50
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .47(c) .43 .44 .43
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.28) .16 (.04) .54
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .19 .59 .40 .97
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.39) (.43) (.45) (.43)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments (.04) (.04) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
From return of capital (.03) -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.46) (.47) (.45) (.43)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $6.84 $7.11 $6.99 $7.04
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 2.58 8.74 5.92 15.43*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $1,186,620 $368,297 $18,937 $7,673
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.27 1.42 1.42 1.19*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 6.53 5.76 6.28 5.17*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 257.12 265.71 213.46 169.29
- ------------------------------------------------------------------------------------------------------------------------------------
+ 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
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $7.15 $7.02 $7.07 $6.52 $6.72
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .50(c) .47 .47 .47 .19
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.28) .16 (.04) .57 (.21)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .22 .63 .43 1.04 (.02)
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.42) (.46) (.48) (.49) (.16)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments (.04) (.04) -- -- (.02)
- ------------------------------------------------------------------------------------------------------------------------------------
From return of capital (.03) -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.49) (.50) (.48) (.49) (.18)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $6.88 $7.15 $7.02 $7.07 $6.52
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 3.02 9.23 6.31 16.65 (0.35)*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $246,405 $170,902 $133,516 $107,414 $7,517
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .77 .92 .92 .86 .24*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 6.92 6.64 6.76 7.14 2.91*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 257.12 265.71 213.46 169.29 128.82
- ------------------------------------------------------------------------------------------------------------------------------------
+ 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, 1998
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 primarily invests in a portfolio of debt securities, both
government and corporate obligations, and may invest in 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 are subject to a contingent deferred sales
charge, if those shares are redeemed within six years of purchase. Class M
shares are sold with a maximum front end sales charge of 3.25% and pay an
ongoing distribution fee that is higher than class A shares but lower than
class B shares. Class Y shares, which are sold at net asset value, are
generally subject to the same expenses as class A, class B, and class M
shares, but do not bear a distribution fee. Class Y shares are sold to
defined contribution plans that 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. Collateral
for certain tri-party repurchase agreements is held at the counterparty's
custodian in a segregated account for the benefit of the fund and the
counterparty. Putnam Management is responsible for determining that the
value of these underlying securities is at all times at least equal to the
resale price, including accrued interest.
D) Security transactions and related investment income Security
transactions are accounted for on the trade date (date the order to buy or
sell is executed). Interest income is recorded on the accrual basis.
Dividend income is recorded on the ex-dividend date except that certain
dividends from foreign securities are recorded as soon as the fund is
informed of the ex-dividend date. Discounts on zero coupon bonds, original
issue discount bonds, stepped-coupon bonds and payment in kind bonds are
accreted according to the yield-to-maturity basis. Any premium resulting
from the purchase of stepped-coupon securities is amortized on a
yield-to-maturity basis.
E) Foreign currency translation The accounting records of the fund are
maintained in U.S. dollars. The market value of foreign securities,
currency holdings, and other assets and liabilities are recorded in the
books and records of the fund after translation to U.S. dollars based on
the exchange rates on that day. The cost of each security is determined
using historical exchange rates. Income and withholding taxes are
translated at prevailing exchange rates when accrued or incurred. The fund
does not isolate that portion of realized or unrealized gains or losses
resulting from changes in the foreign exchange rate on investments from
fluctuations arising from changes in the market prices of the securities.
Such gains and losses are included with the net realized and unrealized
gain or loss on investments. Net realized gains and losses on foreign
currency transactions represent net realized exchange gains or losses on
closed forward currency contracts, disposition of foreign currencies and
the difference between the amount of investment income and foreign
withholding taxes recorded on the fund's books and the U.S. dollar
equivalent amounts actually received or paid. Net unrealized appreciation
and depreciation of assets and liabilities in foreign currencies arise
from changes in the value of open forward currency contracts and assets
and liabilities other than investments at the period end, resulting from
changes in the exchange rate.
F) Forward currency contracts The fund may engage in forward currency
contracts, which are agreements between two parties to buy and sell
currencies at a set price on a future date, to protect against a decline
in value relative to the U.S. dollar of the currencies in which its
portfolio securities are denominated or quoted (or an increase in the
value of a currency in which securities a fund intends to buy are
denominated, when a fund holds cash reserves and short-term investments).
The U.S. dollar value of forward currency contracts is determined using
current forward currency exchange rates supplied by a quotation service.
The market value of the contract will fluctuate with changes in currency
exchange rates. The contract is "marked to market" daily and the change in
market value is recorded as an unrealized gain or loss. When the contract
is closed, the fund records a realized gain or loss equal to the
difference between the value of the contract at the time it was opened and
the value at the time it was closed. The fund could be exposed to risk if
the value of the currency changes unfavorably, if the counterparties to
the contracts are unable to meet the terms of their contracts or if the
fund is unable to enter into a closing position.
G) Futures and options contracts The fund may use futures and options
contracts to hedge against changes in the values of securities the fund
owns or expects to purchase. The fund may also write options on securities
it owns or in which it may invest to increase its current returns.
The potential risk to the fund is that the change in value of futures and
options contracts may not correspond to the change in value of the hedged
instruments. In addition, losses may arise from changes in the value of
the underlying instruments, if there is an illiquid secondary market for
the contracts, or if the counterparty to the contract is unable to
perform. When the contract is closed, the fund records a realized gain or
loss equal to the difference between the value of the contract at the time
it was opened and the value at the time it was closed. Realized gains and
losses on purchased options are included in realized gains and losses on
investment securities.
Futures contracts are valued at the quoted daily settlement prices
established by the exchange on which they trade. Exchange traded options
are valued at the last sale price, or if no sales are reported, the last
bid price for purchased options and the last ask price for written
options. Options traded over-the-counter are valued using prices supplied
by dealers.
H) TBA purchase commitments The fund may enter into "TBA" (to be
announced) purchase commitments to purchase securities for a fixed unit
price at a future date beyond customary settlement time. Although the unit
price has been established, the principal value has not been finalized.
However, the amount of the commitments will not fluctuate more than 1.0%
from the principal amount. The fund holds, and maintains until settlement
date, cash or high-grade debt obligations in an amount sufficient to meet
the purchase price, or the fund may enter into offsetting contracts for
the forward sale of other securities it owns. income on the securities
will not be earned until settlement date. TBA purchase commitments may be
considered securities in themselves, and involve a risk of loss if the
value of the security to be purchased declines prior to the settlement
date, which risk is in addition to the risk of decline in the value of the
fund's other assets. Unsettled TBA purchase commitments are valued at the
current market value of the underlying securities, according to the
procedures described under "Security valuation" above.
Although the fund will generally enter into TBA purchase commitments with
the intention of acquiring securities for their portfolio or for delivery
pursuant to options contracts it has entered into, the fund may dispose of
a commitment prior to settlement if Putnam Manage- ment deems it
appropriate to do so.
I) TBA sale commitments The fund may enter into TBA sale commitments to
hedge its portfolio positions or to sell mortgage-backed securities it
owns under delayed delivery arrangements. Proceeds of TBA sale commitments
are not received until the contractual settlement date. During the time a
TBA sale commitment is outstanding, equivalent deliverable securities, or
an offsetting TBA purchase commitment deliverable on or before the sale
commitment date, are held as "cover" for the transaction.
Unsettled TBA sale commitments are valued at the current market value of
the underlying securities, generally according to the procedures described
under "Security valuation" above. The contract is "marked-to-market" daily
and the change in market value is recorded by the fund as an unrealized
gain or loss. If the TBA sale commitment is closed through the acquisition
of an offsetting purchase commitment, the fund realizes a gain or loss. If
the fund delivers securities under the commitment, the fund realizes a
gain or a loss from the sale of the securities based upon the unit price
established at the date the commitment was entered into.
J) Line of credit The fund has entered into a committed line of credit
with certain banks. This line of credit agreement includes restrictions
that the fund maintain an asset coverage ratio of at least 300% and
borrowings must not exceed prospectus limitations. For the year ended
October 31, 1998, the fund had no borrowings against the line of credit.
K) Federal taxes It is the policy of the fund to distribute all of its
taxable income within the prescribed time and otherwise comply with the
provisions of the Internal Revenue Code applicable to regulated investment
companies. It is also the intention of the fund to distribute an amount
sufficient to avoid imposition of any excise tax under Section 4982 of the
Internal Revenue Code of 1986, as amended. Therefore, no provision has
been made for federal taxes on income, capital gains or unrealized
appreciation on securities held nor for excise tax on income and capital
gains. At October 31, 1998, the fund had a capital loss carryover of
approximately $21,203,000 available to offset future net capital gain, if
any, which will expire on October 31, 2006.
L) Distributions to shareholders Distributions to shareholders from net
investment income are recorded by the fund on the ex-dividend date.
Capital gain distributions, if any, are recorded on the ex-dividend date
and paid at least annually. The amount and character of income and gains
to be distributed are determined in accordance with income tax regulations
which may differ from generally accepted accounting principles. These
differences include temporary and permanent differences of losses on wash
sale transactions, foreign currency gains and losses, defaulted bond
interest, unrealized gains and losses on mortgage-backed securities,
market discount and interest on payment-in-kind securities.
Reclassifications are made to the fund's capital accounts to reflect
income and gains available for distribution (or available capital loss
carryovers) under income tax regulations. For the year ended October 31,
1998, the fund reclassified $27,616,204 to decrease undistributed net
investment income and $37,585 to increase paid-in-capital, with a decrease
to accumulated net realized loss of $27,578,619. The calculation of net
investment income per share in the financial highlights table excludes
these adjustments.
Note 2
Management fee, administrative
services and other transactions
Compensation of Putnam Management, for management and investment advisory
services is paid quarterly based on the average net assets of the fund.
Such fee is based on the following annual rates: 0.65% of the first $500
million, 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% of any amount
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 PFTC. Investor
servicing agent functions are provided by Putnam Investor Services, a
division of PFTC.
For the year ended October 31, 1998, fund expenses were reduced by
$1,209,306 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.
Each Trustee of the fund receives an annual Trustee fee, of which $1,870
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 have approved 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, 1998, Putnam Mutual Funds Corp., acting as
underwriter received net commissions of $393,453 and $4,512,426 from the
sale of class A and class M shares, respectively and $809,081 in
contingent deferred sales charges from redemptions of class B shares. A
deferred sales charge of up to 1% is assessed on certain redemptions of
class A shares. For the year ended October 31, 1998, Putnam Mutual Funds
Corp., acting as underwriter received $14,222 on class A redemptions.
Note 3
Purchases and sales of securities
During the year ended October 31, 1998, purchases and sales of investment
securities other than U.S. government obligations and short-term
investments aggregated $3,732,886,061 and $2,936,639,607, respectively.
Purchases and sales of U.S. government obligations aggregated
$4,760,644,504 and $4,663,528,921, 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 56,700,000 180,005
- -----------------------------------------------------------------------------
Options closed (56,700,000) (180,005)
- -----------------------------------------------------------------------------
Written options
outstanding at
end of year $ -- $ --
- -----------------------------------------------------------------------------
Note 4
Capital shares
At October 31, 1998, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
Year ended
October 31, 1998
- -----------------------------------------------------------------------------
Class A Shares Amount
- -----------------------------------------------------------------------------
Shares sold 117,513,808 $833,959,048
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 10,148,559 71,782,053
- -----------------------------------------------------------------------------
127,662,367 905,741,101
Shares
repurchased (101,554,672) (720,337,135)
- -----------------------------------------------------------------------------
Net increase 26,107,695 $185,403,966
- -----------------------------------------------------------------------------
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, 1998
- -----------------------------------------------------------------------------
Class B Shares Amount
- -----------------------------------------------------------------------------
Shares sold 30,433,688 $214,171,299
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 2,689,774 18,923,375
- -----------------------------------------------------------------------------
33,123,462 233,094,674
Shares
repurchased (17,522,146) (123,354,854)
- -----------------------------------------------------------------------------
Net increase 15,601,316 $109,739,820
- -----------------------------------------------------------------------------
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, 1998
- -----------------------------------------------------------------------------
Class M Shares Amount
- -----------------------------------------------------------------------------
Shares sold 233,079,491 $1,647,065,092
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 297,510 2,092,733
- -----------------------------------------------------------------------------
233,377,001 1,649,157,825
Shares
repurchased (111,298,763) (787,992,957)
- -----------------------------------------------------------------------------
Net increase 122,078,238 $ 861,164,868
- -----------------------------------------------------------------------------
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, 1998
- -----------------------------------------------------------------------------
Class Y Shares Amount
- -----------------------------------------------------------------------------
Shares sold 26,281,110 $186,532,273
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 2,109,915 14,930,593
- -----------------------------------------------------------------------------
28,391,025 201,462,866
Shares
repurchased (16,472,127) (116,575,260)
- -----------------------------------------------------------------------------
Net increase 11,918,898 $ 84,887,606
- -----------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------
Federal tax information
(Unaudited)
For the year ended October 31, 1998, a portion of the Fund's distribution
represents a return of capital and is therefore not taxable to
shareholders.
The fund has designated 0.31% of the distributions from net investment
income as qualifying for the dividends received deduction for
corporations.
The Form 1099 you receive in January 1999 will show the tax status of all
distributions paid to your account in calendar 1998.
PUTNAM GROWTH FUNDS
Asia Pacific Growth Fund
Capital Appreciation Fund [DBL. DAGGER]
Capital Opportunities Fund
Diversified Equity Trust
Europe Growth Fund
Global Growth Fund
Global Natural Resources Fund
Growth Opportunities Fund
Health Sciences Trust
International Growth Fund
International New Opportunities Fund
Investors Fund
New Opportunities Fund [DBL. DAGGER]
OTC & Emerging Growth Fund
Research Fund
Vista Fund
Voyager Fund
Voyager Fund II
PUTNAM GROWTH
AND INCOME FUNDS
Balanced Retirement Fund
Convertible Income-Growth Trust
Equity Income Fund
The George Putnam Fund of Boston
Global Growth and Income Fund
The Putnam Fund for Growth and Income
Growth and Income Fund II
International Growth and Income Fund
New Value Fund
Utilities Growth and Income Fund
PUTNAM INCOME FUNDS
American Government Income Fund
Diversified Income Trust
Global Governmental Income Trust
High Quality Bond Fund +
High Yield Advantage Fund [DBL. DAGGER]
High Yield Total Return Fund
High Yield Trust [DBL. DAGGER]
High Yield Trust II
Income Fund
Intermediate U.S. Government
Income Fund
Money Market Fund **
Preferred Income Fund
Strategic Income Fund *
U.S. Government Income Trust
PUTNAM TAX-FREE
INCOME FUNDS
Municipal Income Fund
Tax Exempt Income Fund
Tax Exempt Money Market Fund**
Tax-Free High Yield Fund
Tax-Free Insured Fund
State tax-free income funds [SECTION MARK]
Arizona, California, Florida, Massachusetts, Michigan, Minnesota,
New Jersey, New York, Ohio and Pennsylvania
State tax-free money market funds [SECTION MARK]
California, New York
LIFESTAGE SM FUNDS
Putnam Asset Allocation Funds-three investment portfolios that spread
your money across a variety of stocks, bonds, and money market
investments.
The three portfolios:
Asset Allocation: Balanced Portfolio
Asset Allocation: Conservative Portfolio
Asset Allocation: Growth Portfolio
*Formerly Putnam Diversified Income Trust II
+Formerly Putnam Federal Income Trust
[DBL. DAGGER] Closed to new investors. Some exceptions may apply.
Contact Putnam for details.
[SECTION MARK] Not available in all states.
**An investment in a money market fund is neither insured nor guaranteed
by the U.S. government. These funds are managed to maintain a price of
$1.00 per share, although there is no assurance that this price will
be maintained in the future.
Please call your financial advisor or Putnam at 1-800-225-1581 to obtain
a prospectus for any Putnam fund. It contains more complete information,
including charges and expenses. Please read it carefully before you
invest or send money.
Fund information
INVESTMENT MANAGER
Putnam Investment
Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
INDEPENDENT
ACCOUNTANTS
PricewaterhouseCoopers LLP
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
John A. Hill, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
Ronald J. Jackson
Paul L. Joskow
Elizabeth T. Kennan
Lawrence J. Lasser
John H. Mullin III
Robert E. Patterson
Donald S. Perkins
George Putnam, III
A.J.C. Smith
W. Thomas Stephens
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
John D. Hughes
Senior Vice President and Treasurer
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Ian C. Ferguson
Vice President
Brett C. Browchuk
Vice President
Stephen Oristaglio
Vice President
Krishna K. Memani
Vice President and Fund Manager
Kevin M. Cronin
Vice President and Fund Manager
John R. Verani
Vice President
Beverly Marcus
Clerk and Assistant Treasurer
This report is for the information of shareholders of Putnam 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
www.putnaminv.com
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BULK RATE
U.S. POSTAGE PAID
PUTNAM
INVESTMENTS
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AN035 -- 47852 004/312/510/514 12/98
PUTNAM INVESTMENTS [SCALE LOGO OMITTED]
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Putnam Income Fund
Supplement to Annual Report dated October 31, 1998
The following information has been prepared to provide class Y shareholders
with a performance overview specific to their holdings. Class Y shares are
offered exclusively to defined contribution plans investing $250 million or
more in one or more of Putnam's funds or private accounts. Performance of
class Y shares, which incur neither a front-end load, distribution fee, nor
contingent deferred sales charge, will differ from performance of class A,
B, and M shares, which are discussed more extensively in the semiannual
report.
SEMIANNUAL RESULTS AT A GLANCE
- ----------------------------------------------------------------------------
Total return: NAV
One year ended 10/31/98 3.02
Annual average (since class A inception, 11/1/54) 8.58
- ----------------------------------------------------------------------------
Share value: NAV
10/31/97 $7.15
10/31/98 6.88
- ----------------------------------------------------------------------------
Distributions: No. Income Return of capital Capital gains Total
12 $0.4206 $0.0273 $0.0371 0.4850
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Current return (end of period) Total
Current dividend rate1 6.63%
Current 30-day SEC yield2 6.41
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1 Income portion of most recent distribution, annualized and divided by NAV
at end of period.
2 Based only on investment income, calculated using SEC guidelines.
Class Y shares are offered without an initial sales charge or CDSC. The
class Y share returns shown for periods before their inception (6/16/94) are
derived from the historical performance of class A shares for such periods,
but have not been adjusted to reflect differences in expenses, which are
lower for class Y shares than for class A shares. All returns assume
reinvestment of distributions at NAV and represent past performance; they do
not guarantee future results. Investment return will fluctuate and may
involve the loss of principal. Performance of other share classes will vary.
See full report for information on comparative benchmarks. If you have
questions, please consult your fund prospectus or call Putnam toll free at
1-800-752-9894.
