Putnam
Income
Fund
SEMIANNUAL REPORT ON PERFORMANCE AND OUTLOOK
4-30-99
[LOGO: BOSTON * LONDON * TOKYO]
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
As you may already know, over the past several months Putnam has been
conducting an in-depth review of its entire fixed-income product line. The
objective has been to seek ways to differentiate the funds more clearly.
Among the alterations that are being implemented is a slight change in the
investment strategy of Putnam Income Fund.
In recent years, foreign securities constituted a portion of the fund's
portfolio, generally not exceeding 20%. The Trustees have approved a
change that allows the fund to invest only in domestic fixed-income
securities. The change, which took effect in February, 1999, is reflected
in the portfolio that starts on page 12 of this report.
Shareholders should now find it easier to allocate their personal
investment programs between domestic and international holdings. Those
wishing to maintain a non-U.S. position in their programs may consult
their financial advisor about appropriate Putnam funds to accomplish this
objective.
We appreciate your choice of Putnam Income Fund to help you meet your
financial and investment goals and look forward to many more years of
association.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
June 16, 1999
Report from the Fund Managers
Krishna K. Memani
Kevin M. Cronin
Many fixed-income investors started 1999 with high hopes. Inflation was
low, interest rates seemed unlikely to rise, and memories of worldwide
tumult were still fresh enough to keep demand strong for fixed-income
investments. There were widespread expectations that the U.S. economy
would join the rest of the world slowing in 1999, further reducing the
possibility of an uptick in inflation and helping bond prices rise.
However, during the first few months of 1999, U.S. Treasury securities
fell back to earth with a thud, leaving investors unpleasantly surprised.
This challenging environment for fixed-income securities was reflected in
Putnam Income Fund's performance for the first half of the fund's fiscal
year.
Total return for 6 months ended 4/30/99
Class A Class B Class M
NAV POP NAV CDSC NAV POP
- -------------------------------------------------------
1.55% -3.24% 1.32% -3.61% 1.47% -1.83%
- -------------------------------------------------------
Past performance is no indication of future results. Performance
information for longer periods begins on page 6.
* U.S. TREASURIES SUFFER SETBACK
After starting the year on a positive note, the climate in the
fixed-income world shifted significantly in February, resulting in
disappointing performance for bond funds of all kinds. During your fund's
semiannual period, U.S. Treasuries fell from favor, as investors shifted
away from flight-to-quality positions established in the summer and fall
of 1998 and by a steady drumbeat of reports indicated higher-than-expected
economic growth. These persistent signals of economic vigor raised
concerns about possible future interest-rate increases by the Federal
Reserve Board -- just months following three successive eases.
Your fund employed a modestly long duration (a measure of interest-rate
sensitivity) early in the fiscal year. Essentially the longer a fund's
duration, the more likely its net asset value will be positively affected
by a reduction in rates. The tradeoff for this opportunity is that a long
duration makes the fund more vulnerable to a decline in net asset value if
rates should increase.
[GRAPHIC OMITTED: horizontal bar chart BOND MARKET PERFORMANCE BY SECTOR]
BOND MARKET PERFORMANCE BY SECTOR*
Comparison of total returns, 10/31/98-4/30/99
First Boston
High Yield Bond Index 8.91%
Lehman Brothers
Mortgage-Backed Securities Index 2.39%
Lehman Brothers
Corporate Bond Index 1.75%
Salomon Brothers
World Government Bond Index -3.35%
J.P. Morgan Emerging
Markets Bond Index 15.87%
Lehman Brothers
Long-Term Treasury Bond Index -3.62%
Footnote reads:
*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.
Your fund's long duration early in the period reflected our expectations
that market volatility, created by the delicate economic situation in
Brazil, would drive U.S. interest rates lower. Instead, emerging markets
stabilized and signs of continued U.S. economic growth pushed domestic
interest rates up. In an environment of rising yields and falling prices,
the portfolio's longer duration position earlier in the fiscal year
detracted from returns. We shortened your fund's duration during the
period and will continue to monitor the Fed's actions.
* U.S. SPREAD SECTORS OUTPERFORM
The fund's strategy is designed to add value by seeking incremental excess
returns from multiple sources, among them sector rotation, security
selection, duration management, and yield curve positioning. In addition,
we employ prudent risk control. The process emphasizes those sources of
return believed to be most reliable in today's markets, namely, sector
rotation and security selection.
Indeed, sector rotation played a key role in our portfolio positioning
over the semiannual period as we shifted assets into U.S. spread sectors
- -- those sectors offering yields higher than U.S. Treasuries are offering.
They include high-yield bonds and mortgage-backed securities. In an
environment of rising interest rates and falling bond prices, these spread
sectors significantly outperformed Treasuries of comparable duration, with
high-yield corporate bonds leading the pack. Investors were drawn to
attractive yields, as the investment climate grew increasingly amenable to
risk. The fund's modestly overweight positions in the U.S. spread sectors
(mortgage-backed securities, high-yield and investment-grade corporates,
and asset-backed securities) contributed to performance as the
flight-to-quality tide continued to ebb on the strength of positive U.S.
economic fundamentals.
More on mortgage-backed securities
Mortgage-backed securities are debt obligations backed by a pool of mortgages.
Ginnie Maes (Government National Mortgage Association securities) are the
most popular type. Investors have an undivided interest in the pool. Rather
than owning any particular mortgage, they have a proportionate interest in the
cash flow generated by the entire pool. Mortgage-backed securities generally
offer yields higher than Treasuries offer in order to compensate investors for
the risk that their principal may be returned in full at some point prior to
the security's stated maturity date if the underlying mortgages are prepaid.
These prepayments can cause an investor's actual rate of return to differ from
the expected rate of return.
"With the exception of the move away from emerging markets, no significant
changes have been made to the fund's strategy. Indeed, [Fund Manager Krishna]
Memani stresses that he and [Co-manager Kevin] Cronin will continue to rely
on the same research team and basic investment process."
-- Morningstar Mutual Funds,
January 11, 1999
Within your fund's corporate holdings, our emphasis in the finance and
telecommunications sectors -- and the favorable climate for mergers and
acquisitions that has characterized them for some time -- contributed to
relative returns. Careful security selection within the telecommunications
sector further boosted returns. Attractive telecommunications holdings
featured in your fund's portfolio during the period included Global
Crossing Holdings, Ltd.; Call-Net Enterprises, Inc.; and MetroNet
Communications Corp. While these holdings were viewed favorably at the end
of the reporting period, all portfolio holdings are subject to review and
adjustment in accordance with the fund's investment strategy and may vary
in the future.
[GRAPHIC OMITTED: horizontal bar chart CHANGES IN PORTFOLIO COMPOSITION]
CHANGES IN PORTFOLIO COMPOSITION*
10/31/98 4/30/99
Corporate bonds 42.3% 48.0%
U.S. government
and agency obligations 31.1% 36.3%
Collateralized
mortgage obligations 10.7% 7.7%
Short-term
investments 15.0% 4.7%
Other 5.8% 2.4%
Footnote reads:
*Based on total net assets as of indicated date. Holdings will vary over
time.
Within the mortgage-backed sector, our emphasis on securities with lower
prepayment sensitivity, primarily lower-coupon, 15-year-maturity
mortgage-backed securities, and on sectors with structural prepayment
protection such as commercial mortgage-backed security (CMBS) issues
benefited performance. 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.
* STRONG U.S. ECONOMY CALLS FOR SLIGHTLY DEFENSIVE STANCE
Although the U.S. economy is likely to slow from its torrid late 1998
growth rate, Putnam's analysis indicates that the United States is still
on track for above-trend economic growth overall in 1999. If global
capital markets remain stable, we believe that U.S. interest rates are
likely to move higher, reflecting the strong underlying U.S. economy.
Given this expectation, our duration and yield curve strategy is currently
neutral to slightly defensive.
Believing that much of the reversal of the flight to quality has run its
course, we have modestly reduced the fund's exposure to mortgage-backed,
asset-backed, and corporate securities, although the portfolio remains
slightly overweight in these areas. Within the spread sectors, we continue
to emphasize those issues that we believe offer the highest potential for
excess return.
The strength of the equity market, high consumer confidence, a strong
housing market, and a substantial pickup in leading indicators all give us
reason to be optimistic on the corporate profitability and credit fronts.
Our overall strategy within the corporate sector remains essentially the
same, except that the robust economy is encouraging us to reduce the
modestly underweight position in the cyclical sector, including energy and
basic materials, at the expense of an overweight position in the insurance
sector. On balance, the portfolio will still be underweight in cyclicals
and overweight in insurance but only to a lesser degree. We continue to
emphasize the telecommunications industry, based on a favorable earnings
outlook, and we are underweighting many commodities, such as steel, for
which more positive performance is dependent on global price increases.
In the mortgage-backed portion of the portfolio, we believe that favorable
security selection opportunities exist primarily in the higher coupon and
seasoned pass-through sectors. Favorable economic activity continues to
support real estate fundamentals. Therefore, we plan to maintain our
emphasis on the commercial mortgage-backed securities sector.
We will continue to monitor the strength of the U.S. economy and its
impact on the Treasury and credit sectors. We remain confident that
careful sector rotation, security selection, and prudent risk control can
help produce solid performance for your fund in the second half of its
fiscal year.
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 4/30/99, 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 4/30/99
Class A Class B Class M
(inception dates) (11/1/54) (3/1/93) (12/14/94)
NAV POP NAV CDSC NAV POP
- --------------------------------------------------------------------------
6 months 1.55% -3.24% 1.32% -3.61% 1.47% -1.83%
- --------------------------------------------------------------------------
1 year 1.12 -3.75 0.54 -4.21 1.06 -2.26
- --------------------------------------------------------------------------
5 years 40.07 33.39 35.07 33.09 38.35 33.83
Annual average 6.97 5.93 6.20 5.88 6.71 6.00
- --------------------------------------------------------------------------
10 years 123.46 112.99 106.39 106.39 117.08 110.05
Annual average 8.37 7.85 7.51 7.51 8.06 7.70
- --------------------------------------------------------------------------
Annual average
(life of fund) 8.49 8.37 7.45 7.45 8.00 7.92
- --------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 4/30/99
Lehman Brothers Aggregate Consumer
Bond Index* price index
- -------------------------------------------------------------------------
6 months 0.69% 1.47%
- -------------------------------------------------------------------------
1 year 6.27 2.28
- -------------------------------------------------------------------------
5 years 47.16 12.75
Annual average 8.03 2.43
- -------------------------------------------------------------------------
10 years 134.33 35.01
Annual average 8.89 3.05
- -------------------------------------------------------------------------
Annual average
(life of fund) -- 4.19
- -------------------------------------------------------------------------
Past performance is no assurance of future results. More recent returns
may be more or less than those shown. 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.
* Lehman Brothers Aggregate Bond Index was introduced on 12/31/75.
PRICE AND DISTRIBUTION INFORMATION 6 months ended 4/30/99
Class A Class B Class M
- ----------------------------------------------------------------------------
Distributions (number)
- ----------------------------------------------------------------------------
Income $0.216 $0.190 $0.210
- ----------------------------------------------------------------------------
Capital gains -- -- --
- ----------------------------------------------------------------------------
Total $0.216 $0.190 $0.210
- ----------------------------------------------------------------------------
Share value: NAV POP NAV NAV POP
- ----------------------------------------------------------------------------
10/31/98 $6.87 $7.21 $6.83 $6.84 $7.07
- ----------------------------------------------------------------------------
4/30/99 6.76 7.10 6.73 6.73 6.96
- ----------------------------------------------------------------------------
Current return (end of period)
- ----------------------------------------------------------------------------
Current dividend rate1 6.21% 5.92% 5.35% 6.06% 5.87%
- ----------------------------------------------------------------------------
Current 30-day SEC yield2 6.25 5.95 5.48 5.99 5.79
- ----------------------------------------------------------------------------
1Income portion of most recent distribution, annualized and divided by NAV
or POP at end of period.
2Based on investment income, calculated using SEC guidelines.
TOTAL RETURN FOR PERIODS ENDED 3/31/99 (most recent calendar quarter)
Class A Class B Class M
(inception dates) (11/1/54) (3/1/93) (12/14/94)
NAV POP NAV CDSC NAV POP
- --------------------------------------------------------------------------
6 months -0.45% -5.18% -0.96% -5.77% -0.69% -3.85%
- --------------------------------------------------------------------------
1 year 1.42 -3.34 0.55 -4.20 1.06 -2.26
- --------------------------------------------------------------------------
5 years 38.20 31.71 33.08 31.13 36.32 31.93
Annual average 6.68 5.66 5.88 5.57 6.39 5.70
- --------------------------------------------------------------------------
10 years 125.87 115.21 108.20 108.20 118.80 111.68
Annual average 8.49 7.97 7.61 7.61 8.14 7.79
- --------------------------------------------------------------------------
Annual average
(life of fund) 8.50 8.38 7.46 7.46 8.00 7.92
- --------------------------------------------------------------------------
Past performance is no assurance of future results. More recent returns
may be more or less than those shown. They do not take into account any
adjustment for taxes payable on reinvested distributions. 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 summary for method of calculation.
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 funds' class B 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 composed of securities from
Lehman Brothers Government/Corporate Bond Index, Mortgage-Backed
Securities Index, and the Asset-Backed Securities Index. Total return
comprises price appreciation/depreciation and income as a percentage of
the original investment. Indexes are rebalanced monthly by market
capitalization.
First Boston High Yield Index* is a market-weighted index including
publicly traded bonds having a rating below BBB by Standard & Poor's and
Baa by Moody's.
Lehman Brothers Corporate Bond Index* is an index 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 U.S. Treasury Index with maturities of 10
or more years.
Lehman Brothers Mortgage-Backed Securities Index* includes 15- and 30-year
fixed rate securities backed by mortgage pools of the Government National
Mortgage Association, Federal Home Loan Mortgage Corporation, and Federal
National Mortgage Association.
Salomon Brothers World Government Bond Index* is an index that tracks the
performance of the 14 government bond markets of Australia, Austria,
Belgium, Canada, Denmark, France, Germany, Italy, Japan, Netherlands,
Spain, Sweden, United Kingdom and the United States. Country eligibility
is determined by market capitalization and investability criteria.
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.
Welcome to www.putnaminv.com
Now you can use your PC to get up-to-date information about your funds,
learn more about investing and retirement planning, and access market news
and economic outlooks from Putnam.
VISIT PUTNAM'S SITE ON THE WORLD WIDE WEB FOR:
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New features will be added to the site regularly. So be sure to bookmark us
at
http://www.putnaminv.com
A guide to the financial statements
These sections of the report constitute the fund's financial
statements.
The fund's portfolio lists all the fund's investments and their values as of
the last day of the reporting period. Holdings are organized by asset type and
industry sector, country, or state to show areas of concentration and
diversification.
Statement of assets and liabilities shows how the fund's net assets and share
price is determined. All investment and non-investment assets are added
together. Any unpaid expenses and other liabilities are subtracted from this
total. The result is divided by the number of shares to determine the net
asset value per share, which is calculated separately for each class of
shares. (For funds with preferred shares, the amount subtracted from total
assets includes the net assets allocated to remarketed preferred shares.)
Statement of operations shows the fund's net investment gain or loss for the
reporting period. This is determined by adding up all the fund's earnings --
from dividends and interest income -- and subtracting its operating expenses.
This statement also lists any net gain or loss the fund realized on the sales
of its holdings and -- for holdings that remain in the portfolio -- any change
in unrealized gains or losses over the period.
Statement of changes in net assets shows how the fund's net assets were
affected by distributions to shareholders and by changes in the number of the
fund's shares. It lists distributions and their sources (net investment income
or realized capital gains) over the current reporting period and the most
recent fiscal year-end. The distributions listed here may not match the amounts
listed in the Statement of Operations because the distributions are determined
on a tax basis and may be paid in a different period from the one in which
they were earned.
Financial highlights provide an overview of the fund's investment results,
per-share distributions, expense ratios, net investment income ratios and
portfolio turnover in one summary table, reflecting the five most recent
reporting periods. In a semiannual report, the highlight table also includes
the current reporting period. For open-ended funds, a separate table is
provided for each share class.
<TABLE>
<CAPTION>
The fund's portfolio
April 30, 1999 (Unaudited)
CORPORATE BONDS AND NOTES (48.0%) (a)
PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C>
Advertising (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
$ 675,000 Adams Outdoor Advertising sr. notes 10 3/4s, 2006 $ 737,438
1,010,000 Lamar Advertising Co. sr. sub. notes 9 5/8s, 2006 1,080,700
100,000 Lamar Advertising Co. company guaranty 8 5/8s, 2007 104,750
470,000 Outdoor Communications Inc. sr. sub. notes 9 1/4s, 2007 499,375
60,000 Outdoor Systems, Inc. sr. sub. notes 9 3/8s, 2006 64,350
--------------
2,486,613
Aerospace and Defense (0.9%)
- --------------------------------------------------------------------------------------------------------------------------
2,520,000 Argo-Tech Corp. company guaranty 8 5/8s, 2007 2,450,700
1,080,000 Aviation Sales Co. company guaranty 8 1/8s, 2008 1,082,700
1,200,000 BE Aerospace, Inc. sr. sub. notes Ser. B, 9 7/8s, 2006 1,266,000
390,000 BE Aerospace, Inc. sr. sub. notes 9 1/2s, 2008 415,350
270,000 BE Aerospace, Inc. sr. sub. notes Ser. B, 8s, 2008 267,975
18,390,000 Boeing Co. deb. 6 5/8s, 2038 17,585,621
1,400,000 Burke Industries, Inc. company guaranty 10s, 2007 1,120,000
155,000 K&F Industries, Inc. sr. sub. notes Ser. B, 9 1/4s, 2007 160,038
9,385,000 Raytheon Co. deb. 7s, 2028 9,411,278
1,058,000 Sequa Corp. bonds 8 3/4s, 2001 1,073,870
660,000 Sequa Corp. sr. notes 9 5/8s, 1999 670,725
--------------
35,504,257
Agriculture (--%)
- --------------------------------------------------------------------------------------------------------------------------
539,611 Premium Standard Farms, Inc. sr. secd. notes 11s, 2003 (PIK) 512,631
Apparel (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
1,790,000 Fruit of the Loom 144A company guaranty 8 7/8s, 2006 1,754,200
1,770,000 Guess Jeans, Inc. sr. sub. notes 9 1/2s, 2003 1,774,425
--------------
3,528,625
Automotive (1.6%)
- --------------------------------------------------------------------------------------------------------------------------
392,000 Aftermarket Technology Corp. sr. sub. notes 12s, 2004 412,580
165,000 Aftermarket Technology Corp. sr. sub. notes Ser. D, 12s, 2004 173,663
10,855,000 Chrysler Corp. deb. Ser. B, 7.45s, 2097 11,497,073
9,580,000 Dana Corp. notes 7s, 2029 9,220,750
11,985,000 Delphi Automotive Systems Corp. deb. 7 1/8s, 2029 11,759,682
640,000 Dura Operating Corp. 144A sr. sub. notes 9s, 2009 648,800
2,590,000 Federal Mogul Corp. 144A notes 7 3/8s, 2006 2,544,675
6,000,000 Ford Motor Co. deb. 7.4s, 2046 6,222,420
14,360,000 Ford Motor Co. bonds 6 5/8s, 2028 13,784,308
1,560,000 Hayes Wheels International, Inc. company guaranty
Ser. B, 9 1/8s, 2007 1,630,200
1,340,000 Lear Corp. sub. notes 9 1/2s, 2006 1,467,300
475,000 Motors and Gears, Inc. sr. notes Ser. D, 10 3/4s, 2006 490,438
890,000 Talon Automotive Group sr. sub. notes Ser. B, 9 5/8s, 2008 778,750
939,000 Walbro Corp. sr. notes Ser. B, 9 7/8s, 2005 953,085
--------------
61,583,724
Banks (4.1%)
- --------------------------------------------------------------------------------------------------------------------------
23,510,000 BankAmerica Corp. sr. notes 5 7/8s, 2009 22,563,252
16,680,000 Bank United med. term notes Ser. A, 8s, 2009 16,668,658
785,000 Chevy Chase Savings Bank Inc. sub. deb. 9 1/4s, 2008 792,850
180,000 Chevy Chase Savings Bank Inc. sub. deb. 9 1/4s, 2005 181,800
12,285,000 Colonial Bank sub. notes 8s, 2009 11,996,425
12,397,000 First Citizens Bank Capital Trust I
company guaranty 8.05s, 2028 12,025,090
3,945,000 Firstar Bank Milwaukee sr. bank notes 6 1/4s, 2002 3,981,610
6,840,000 Firstar Capital Trust I company guaranty Ser. B, 8.32s, 2026 7,096,842
8,710,000 Fuji JGB Inv. LLC 144A FLIRB 9.87s, 2049 (Japan) 8,143,850
45,000 Greenpoint Capital Trust I company guaranty 9.1s, 2027 46,734
4,000,000 GS Escrow Corp. sr. notes 7 1/8s, 2005 3,922,200
11,195,000 Imperial Bank sub. notes 8 1/2s, 2009 11,181,006
1,520,000 Merita Bank Ltd. sub. notes 6 1/2s, 2006 (Finland) 1,517,902
95,000 Provident Capital Trust company guaranty 8.6s, 2026 94,660
17,325,000 Provident Companies, Inc. bonds 7.405s, 2038 17,267,654
13,595,000 Providian National Bank sr. notes 6 3/4s, 2002 13,640,135
5,470,000 Riggs Capital Trust company guaranty Ser. A, 8 5/8s, 2026 5,661,450
115,000 Riggs Capital Trust 144A bonds 8 5/8s, 2026 111,986
8,500,000 Riggs National Corp. sub. deb. 8 1/2s, 2006 8,849,010
14,465,000 Sovereign Bancorp, Inc. sr. notes 6 5/8s, 2001 14,477,585
115,000 Sovereign Capital Trust company guaranty 9s, 2027 114,290
--------------
160,334,989
Basic Industrial Products (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
1,980,000 American Standard Companies, Inc. sr. notes 7 3/8s, 2008 1,960,200
450,000 Ball Corp. company guaranty 8 1/4s, 2008 469,125
2,657,000 Ball Corp. company guaranty 7 3/4s, 2006 2,743,353
250,000 Paragon Corp. Holdings, Inc. company guaranty
Ser. B, 9 5/8s, 2008 150,000
30,000 Roller Bearing Co. company guaranty Ser. B, 9 5/8s, 2007 28,800
--------------
5,351,478
Broadcasting (2.3%)
- --------------------------------------------------------------------------------------------------------------------------
100,000 Adelphia Communications Corp. sr. notes
Ser. B, 10 1/4s, 2000 103,500
1,000,000 Adelphia Communications Corp. sr. notes
Ser. B, 9 7/8s, 2007 1,095,000
950,000 Adelphia Communications Corp. 144A sr. notes
8 3/8s, 2008 969,000
1,590,000 Allbritton Communications Co. sr. sub. notes Ser. B,
8 7/8s, 2008 1,629,750
550,000 Benedek Broadcasting sr. notes 11 7/8s, 2005 596,750
260,000 Capstar Broadcasting sr. disc. notes stepped-coupon
zero % (12 3/4s, 2/1/02), 2009 (STP) 219,050
1,320,000 Capstar Broadcasting sr. sub. notes 9 1/4s, 2007 1,412,400
3,480,000 Chancellor Media Corp. 144A sr. notes 8s, 2008 3,584,400
90,000 Citadel Broadcasting Co. sr. sub. notes 10 1/4s, 2007 99,450
2,090,000 Comcast Corp. sr. sub. notes 9 1/2s, 2008 2,203,487
875,000 Granite Broadcasting Corp. sr. sub. notes 10 3/8s, 2005 912,188
1,270,000 Granite Broadcasting Corp. sr. sub. notes 8 7/8s, 2008 1,266,825
65,000 Gray Communications Systems, Inc. sr. sub. notes
10 5/8s, 2006 69,550
120,000 Heritage Media Services Corp. sr. sub. notes 8 3/4s, 2006 126,300
860,000 Jacor Communications, Inc. company guaranty
Ser. B, 8 3/4s, 2007 915,900
1,575,000 Lenfest Communications, Inc. sr. sub. notes 10 1/2s, 2006 1,846,688
750,000 Lenfest Communications, Inc. sr. sub. notes 8 1/4s, 2008 780,000
1,400,000 Paramount Communications, Inc. deb. 7 1/2s, 2023 1,379,434
290,000 Pegasus Communications Corp. 144A sr. notes 9 3/4s, 2006 301,600
250,000 Pegasus Media & Communications notes Ser. B, 12 1/2s, 2005 275,000
75,000 Rogers Cablesystems Ltd. notes 11s, 2015 (Canada) 88,125
2,035,000 Sinclair Broadcast Group, Inc. company guaranty 9s, 2007 2,065,525
260,000 Sinclair Broadcast Group, Inc. sr. sub. notes 8 3/4s, 2007 261,300
275,000 Sinclair Broadcast Group, Inc. sr. sub. notes 10s, 2005 281,875
1,000,000 Spanish Broadcasting Systems sr. notes 12 1/2s, 2002 1,125,000
155,000 Spanish Broadcasting Systems sr. notes Ser. B, 11s, 2004 168,950
26,575,000 TCI Communications Inc deb. 8 3/4s, 2015 31,875,915
30,215,000 Viacom, Inc. sr. notes 7 3/4s, 2005 32,006,728
--------------
87,659,690
Building and Construction (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
80,000 Building Materials Corp. sr. notes Ser. B, 8 5/8s, 2006 82,000
530,000 Building Materials Corp. 144A sr. notes 8s, 2008 523,375
115,000 D.R. Horton Inc. company guaranty 10s, 2006 121,900
1,210,000 D.R. Horton, Inc. company guaranty 8s, 2009 1,197,900
220,000 Jackson Products, Inc. company guaranty Ser. B,
9 1/2s, 2005 220,550
440,000 Morris Material Handling, Inc. company guaranty
9 1/2s, 2008 239,800
460,000 NCI Building Systems 144A sr. sub. notes 9 1/4s, 2009 460,000
550,000 Southdown, Inc. sr. sub. notes Ser. B, 10s, 2006 613,250
--------------
3,458,775
Business Equipment and Services (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
450,000 Cex Holdings, Inc. company guaranty Ser. B, 9 5/8s, 2008 424,125
15,430,433 Federal Express Corp. pass-thru certificates Ser. 1998-1A,
6.72s, 2022 15,319,180
175,000 Iron Mountain, Inc. company guaranty 8 3/4s, 2009 178,938
590,000 Iron Mountain, Inc. med. term notes company guaranty
10 1/8s, 2006 638,675
619,000 Pierce Leahy Corp. sr. sub. notes 11 1/8s, 2006 688,638
1,500,000 Production Resource Group sr. sub. notes 11 1/2s, 2008 1,522,500
2,110,000 U.S. Office Products Co. company guaranty 9 3/4s, 2008 1,413,700
160,000 United Stationer Supply, Inc. sr. sub. notes 12 3/4s, 2005 177,400
--------------
20,363,156
Cable Television (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
935,000 Century Communications Corp. sr. notes 9 1/2s, 2005 1,007,463
270,000 Century Communications Corp. sr. notes 8 7/8s, 2007 282,150
600,000 Century Communications Corp. sr. notes 8 3/4s, 2007 624,000
440,000 Charter Communications Holdings LLC 144A sr. disc.
notes stepped-coupon zero % (9.92s, 4/1/04), 2011 (STP) 290,400
3,395,000 Charter Communications Holdings LLC 144A sr. notes
8 5/8s, 2009 3,479,875
1,100,000 CSC Holdings, Inc. sr. sub. deb. 10 1/2s, 2016 1,325,500
5,000 CSC Holdings, Inc. sr. sub. deb. 9 7/8s, 2023 5,625
340,000 CSC Holdings, Inc. deb. 7 7/8s, 2018 347,694
2,250,000 CSC Holdings, Inc. sr. notes 7 7/8s, 2007 2,367,720
230,000 Diamond Cable Communication Co. sr. disc. notes
stepped-coupon zero % (11 3/4s, 12/15/00), 2005
(United Kingdom) (STP) 207,575
5,640,000 Diamond Cable Communication Co. sr. disc. notes
stepped-coupon zero % (10 3/4s, 2/15/02), 2007
(United Kingdom) (STP) 4,497,900
245,000 Jones Intercable, Inc. sr. sub. deb. 10 1/2s, 2008 262,456
561,000 Jones Intercable, Inc. sr. notes 9 5/8s, 2002 607,283
1,200,000 Jones Intercable, Inc. sr. notes 7 5/8s, 2008 1,269,000
990,000 NTL Inc. 144A sr. notes 11 1/2s, 2008 (United Kingdom) 1,113,750
15,000 NTL Inc. sr. notes Ser. B, 10s, 2007 (United Kingdom) 16,050
980,000 NTL Inc. sr. notes stepped-coupon Ser. B, zero %
(9 3/4s, 4/1/03), 2008 (United Kingdom) (STP) 690,900
150,000 TeleWest Communications PLC 144A sr. notes 11 1/4s,
2008 (United Kingdom) 172,875
830,000 TeleWest Communications PLC 144A sr. disc. notes
stepped-coupon zero % (9 1/4s, 4/15/04) 2009 (STP)
(United Kingdom) 562,325
--------------
19,130,541
Chemicals (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
3,335,000 Equistar Chemicals LP notes 9 1/8s, 2002 3,429,614
930,000 ISP Holdings, Inc. sr. notes Ser. B, 9 3/4s, 2002 953,250
11,175,000 Nova Chemicals Corp. deb. 7s, 2026 (Canada) 11,250,990
1,925,000 PCI Chemicals & Pharmaceuticals company guaranty
9 1/4s, 2007 (India) 1,607,375
470,000 Royster-Clark Inc. 144A 1st mtge. 10 1/4s, 2009 477,050
600,000 Scotts Co. 144A sr. sub. notes 8 5/8s, 2009 621,000
--------------
18,339,279
Computer Services and Software (0.6%)
- --------------------------------------------------------------------------------------------------------------------------
7,305,000 Dell Computer Corp. deb. 7.1s, 2028 7,238,817
12,075,000 IBM Corp. deb. 7 1/8s, 2096 12,406,580
1,080,000 IPC Information Systems sr. disc. notes stepped-coupon
zero % (10 7/8s, 11/1/01), 2008 (STP) 815,400
1,220,000 PSINet, Inc. sr. notes 11 1/2s, 2008 1,357,250
580,000 PSINet, Inc. sr. notes Ser. B, 10s, 2005 607,550
310,000 Unisys Corp. sr. notes 7 7/8s, 2008 324,725
570,000 Verio Inc. 144A sr. notes 11 1/4s, 2008 641,250
150,000 Verio Inc. sr. notes 10 3/8s, 2005 159,750
--------------
23,551,322
Conglomerates (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
1,090,000 Axia, Inc. company guaranty 10 3/4s, 2008 1,103,625
5,800,000 Canadian Pacific Ltd. deb. 9.45s, 2021 (Canada) 7,127,388
--------------
8,231,013
Consumer Durable Goods (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
880,000 Albecca Inc. company guaranty 10 3/4s, 2008 748,000
290,000 French Fragrances, Inc. company guaranty Ser. D,
10 3/8s, 2007 295,800
45,000 French Fragrances, Inc. sr. notes Ser. B, 10 3/8s, 2007 45,675
20,000 Hedstrom Holdings, Inc. 144A sr. disc. notes stepped-coupon
zero % (12s, 6/1/02), 2009 (STP) 7,800
920,000 Iron Age Corp. company guaranty 9 7/8s, 2008 671,600
160,000 Sealy Mattress Co. 144A sr. sub. notes Ser. B, 9 7/8s, 2007 161,600
130,000 Signature Brands Ltd. sr. sub. notes 13s, 2002 (Canada) 143,650
--------------
2,074,125
Consumer Non Durables (1.2%)
- --------------------------------------------------------------------------------------------------------------------------
16,700,000 Imperial Tobacco Global company guaranty 7 1/8s, 2009 16,574,249
1,955,000 Philip Morris Cos., Inc. notes 7 1/2s, 2004 2,052,496
11,028,000 Philip Morris Cos., Inc. notes 7 1/4s, 2003 11,399,313
4,530,000 Philip Morris Cos., Inc. notes 7 1/8s, 2004 4,684,428
6,220,000 Philip Morris Cos., Inc. notes 6.8s, 2003 6,346,204
610,000 Revlon Consumer Products sr. notes 9s, 2006 622,200
840,000 Revlon Consumer Products sr. notes 8 1/8s, 2006 831,600
1,380,000 Samsonite Corp. sr. sub. notes 10 3/4s, 2008 1,028,100
2,670,000 Westpoint Stevens, Inc. sr. notes 7 7/8s, 2008 2,730,075
--------------
46,268,665
Consumer Services (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
600,000 Boyd Gaming Corp. sr. sub. notes 9 1/2s, 2007 619,500
355,000 Coinmach Corp. sr. notes 11 3/4s, 2005 390,500
2,000,000 Consumers International 144A sr. notes 10 1/4s, 2005 2,110,000
80,000 FRD Acquisition Co. sr. notes Ser. B, 12 1/2s, 2004 82,000
3,320,000 Hertz Corp. notes 6 1/4s, 2009 3,233,813
460,000 Protection One, Inc. sr. disc. notes 13 5/8s, 2005 525,550
780,000 Viasystems, Inc. sr. notes Ser. B, 9 3/4s, 2007 725,400
70,000 Viasystems, Inc. sr. sub notes 9 3/4s, 2007 67,725
--------------
7,754,488
Electronics and Electrical Equipment (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
95,000 Celestica International Ltd. 144A sr. sub. notes 10 1/2s,
2006 (Canada) 105,450
137,509 Cirent Semiconductor sr. sub. notes 10.22s, 2002 140,947
150,046 Cirent Semiconductor 144A sr. sub. notes 10.14s, 2004 153,797
190,000 DII Group, Inc. (The) sr. sub. notes 8 1/2s, 2007 192,375
1,597,432 Fairchild Semiconductor Corp. 144A sr. sub. notes
11.74s, 2008 1,501,586
1,010,000 Fairchild Semiconductor Corp. sr. sub. notes 10 1/8s, 2007 1,020,100
1,030,000 Flextronics International Ltd. sr. sub. notes Ser. B, 8 3/4s, 2007 1,066,050
60,000 HCC Industries, Inc. company guaranty 10 3/4s, 2007 57,900
1,330,000 Metromedia Fiber Network, Inc. 144A sr. notes 10s, 2008 1,429,750
2,540,000 Wavetek Corp. company guaranty 10 1/8s, 2007 2,387,600
--------------
8,055,555
Energy-Related (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
940,000 Applied Power Inc. sr. sub. notes 8 3/4s, 2009 963,500
580,000 CMS Energy Corp. sr. notes 6 3/4s, 2004 569,206
10,630,000 KN Capital Trust III company guaranty 7.63s, 2028 10,328,108
--------------
11,860,814
Entertainment (1.5%)
- --------------------------------------------------------------------------------------------------------------------------
490,000 AMC Entertainment, Inc. sr. sub. notes 9 1/2s, 2009 482,650
1,400,000 Argosy Gaming Co. company guaranty 13 1/4s, 2004 1,585,500
437,000 Aztar Corp. sr. sub. notes 11s, 2002 446,833
2,670,000 Cinemark USA, Inc. sr. sub. notes Ser. D, 9 5/8s, 2008 (Mexico) 2,776,800
380,000 Cinemark USA, Inc. sr. sub. notes 8 1/2s, 2008 (Mexico) 380,000
1,245,000 Diva Systems Corp. sr. disc. notes, stepped-coupon Ser. B,
zero % (12 5/8s, 3/1/03), 2008 (STP) 435,750
1,380,000 ITT Corp. notes 6 3/4s, 2005 1,295,682
26,235,000 News America Holdings, Inc. deb. 7 3/4s, 2045 27,047,760
505,000 News America Holdings, Inc. deb. 7.7s, 2025 526,760
180,000 Premier Parks, Inc. sr. notes Ser. A, 12s, 2003 193,050
860,000 Premier Parks, Inc. sr. notes 9 1/4s, 2006 898,700
1,110,000 SFX Entertainment, Inc. 144A company guaranty
Ser. B, 9 1/8s, 2008 1,148,850
800,000 SFX Broadcasting, Inc. 144A sr. sub. notes 9 1/8s, 2008 822,000
470,000 Silver Cinemas, Inc. sr. sub. notes 10 1/2s, 2005 225,600
1,205,000 Six Flags Corp. sr. sub. notes 12 1/4s, 2005 1,337,550
3,450,000 Time Warner Entertainment Inc. notes 8 7/8s, 2012 4,136,205
1,010,000 Time Warner Entertainment sr. notes 8 3/8s, 2033 1,184,498
685,000 Trump A.C. 1st mtge. 11 1/4s, 2006 601,088
100,000 United Artists Theatre sr. sub. notes Ser. B, 9 3/4s, 2008 85,000
13,870,000 Walt Disney Co. med. term notes 5.62s, 2008 13,244,602
--------------
58,854,878
Environmental Control (1.0%)
- --------------------------------------------------------------------------------------------------------------------------
2,390,000 Allied Waste Industries, Inc. company guaranty
Ser. B, 7 7/8s, 2009 2,336,225
10,805,000 U.S. Filter Corp. bonds 6 1/2s, 2003 10,818,506
10,610,000 U.S. Filter Corp. bonds 6 3/8s, 2001 10,641,512
4,250,000 Waste Management, Inc. notes 6 5/8s, 2002 4,327,010
8,610,000 WMX Technologies, Inc. notes 7.7s, 2002 9,057,031
--------------
37,180,284
Food and Beverages (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
65,000 Ameriserve Food Co. company guaranty 10 1/8s, 2007 53,300
240,000 Ameriserve Food Co. company guaranty 8 7/8s, 2006 222,600
70,000 Aurora Foods, Inc. sr. sub. notes Ser. B, 9 7/8s, 2007 75,863
100,000 Aurora Foods, Inc. 144A ser. sub. notes Ser. D, 9 7/8s, 2007 108,375
690,000 Triarc Consumer Products, Inc. 144A sr. sub. notes
10 1/4s, 2009 695,175
11,875,000 Tricon Global Restaurants, Inc. sr. notes 7.45s, 2005 12,128,413
--------------
13,283,726
Gaming (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
330,000 Circus Circus Enterprises, Inc. sr. notes 6.45s, 2006 307,920
320,000 Harrahs Entertainment, Inc. company guaranty 7 1/2s, 2009 321,280
350,000 Hollywood Casino Corp. sr. notes 12 3/4s, 2003 381,500
1,020,000 Hollywood Park Inc. sr. sub. notes Ser. B, 9 1/2s, 2007 1,053,150
470,000 Hollywood Park, Inc. 144A sr. sub. notes 9 1/4s, 2007 485,275
140,000 Isle of Capri Black Hawk LLC 144A 1st mtge.
Ser. B, 13s, 2004 155,400
11,830,000 Mashantucket Pequot Tribe 144A bonds Ser. A,
FSA, 6.57s, 2013 11,529,518
3,190,000 Mohegan Tribal Gaming, Auth. 144A sr. sub. notes
8 3/4s, 2009 3,301,650
760,000 Mohegan Tribal Gaming, Auth. 144A sr. notes 8 1/8s, 2006 775,200
570,000 Park Place Entertainment sr. sub. notes 7 7/8s, 2005 558,600
150,000 Players International Inc. sr. notes 10 7/8s, 2005 160,875
--------------
19,030,368
Health Care (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
1,430,000 Columbia/HCA Healthcare Corp. med. term notes 9s, 2014 1,420,562
3,280,000 Columbia/HCA Healthcare Corp. med. term notes
8.7s, 2010 3,168,677
260,000 Columbia/HCA Healthcare Corp. deb. 8.36s, 2024 246,433
1,220,000 Columbia/HCA Healthcare Corp. notes 7 1/4s, 2008 1,107,040
290,000 Conmed Corp. company guaranty 9s, 2008 294,350
750,000 Extendicare Health Services, Inc. company guaranty
9.35s, 2007 570,000
480,000 Hudson Respiratory Care, Inc. sr. sub. notes 9 1/8s, 2008 390,000
1,105,000 Integrated Health Services, Inc. sr. sub. notes Ser. A,
9 1/2s, 2007 795,600
1,850,000 Integrated Health Services, Inc. sr. sub. notes Ser. A,
9 1/4s, 2008 1,258,000
550,000 Mariner Post-Acute Network, Inc. sr. sub. notes stepped-
coupon Ser. B, zero % (10 1/2s, 11/1/02), 2007 (STP) 203,500
1,275,000 Mariner Post-Acute Network, Inc. sr. sub. notes Ser. B,
9 1/2s, 2007 663,000
1,060,000 MedPartners, Inc. sr. notes 7 3/8s, 2006 890,400
650,000 MedPartners, Inc. sr. sub. notes 6 7/8s, 2000 598,000
2,200,000 Multicare Cos., Inc. sr. sub. notes 9s, 2007 1,716,000
250,000 Paracelsus Healthcare sr. sub. notes 10s, 2006 185,000
625,000 Quorum Health Group, Inc. sr. sub. notes 8 3/4s, 2005 625,000
465,000 Sun Healthcare Group, Inc. sr. sub. notes Ser. B, 9 1/2s, 2007 116,250
965,000 Sun Healthcare Group, Inc. 144A sr. sub. notes 9 3/8s, 2008 212,300
170,000 Tenet Healthcare Corp. sr. sub. notes 8 5/8s, 2007 171,700
1,925,000 Tenet Healthcare Corp. sr. notes 8s, 2005 1,929,813
530,000 Triad Hospitals Holdings 144A sr. sub. notes 11s, 2009 530,000
--------------
17,091,625
Insurance and Finance (15.7%)
- --------------------------------------------------------------------------------------------------------------------------
380,000 Advanta Corp. med. term notes Ser. B, 7s, 2001 345,606
1,240,000 Advanta Corp. med. term notes Ser. D, 6.92s, 2002 1,079,953
18,995,000 AFC Capital Trust company guaranty Ser. B, 8.207s, 2027 20,449,257
12,570,000 AFLAC, Inc. 144A sr. notes 6 1/2s, 2009 12,407,219
3,100,000 Ahold Finance, Inc. USA company guaranty 6 7/8s, 2029 3,140,300
3,500,000 AMBAC Indemnity Corp. deb. 9 3/8s, 2011 4,302,550
24,690,000 American General Institute 144A company guaranty
8 1/8s, 2046 27,253,316
5,575,000 Associates First Capital Corp. sub. deb. 8.15s, 2009 6,227,164
12,070,000 Bombardier Capital Inc. 144A notes 6s, 2002 11,995,166
14,500,000 Capital One Financial Corp. notes 7 1/4s, 2006 14,522,330
8,115,000 Capital One Financial Corp. notes 7 1/4s, 2003 8,104,775
8,095,000 Citicorp sub. notes 6 3/8s, 2008 8,050,801
500,000 Colonial Capital II 144A company guaranty 8.92s, 2027 476,795
11,305,000 Conseco Inc. med-term notes 6 1/2s, 2002 10,833,921
110,000 Contifinancial Corp. sr. notes 8 3/8s, 2003 77,275
230,000 Contifinancial Corp. sr. notes 8 1/8s, 2008 174,800
1,480,000 Contifinancial Corp. sr. notes 7 1/2s, 2002 1,169,200
9,465,000 Countrywide Home Loan Corp. company guaranty
6.935s, 2007 9,671,053
6,850,000 Countrywide Home Loan Corp. company guaranty
med term notes 6 1/4s, 2009 6,651,830
110,000 Delta Financial Corp. sr. notes 9 1/2s, 2004 89,650
13,540,000 Dime Bancorp, Inc. sr. notes 6 3/8s, 2001 13,436,961
7,300,000 Dime Capital Trust I bank guaranty Ser. A, 9.33s, 2027 7,830,710
17,035,000 Executive Risk Capital Trust company guaranty Ser. B,
8.675s, 2027 18,127,625
10,820,000 Finova Capital Corp. notes 6 1/4s, 2002 10,866,959
14,375,000 Finova Capital Corp. med-term notes 6.11s, 2003 14,361,488
4,270,000 First Financial Caribbean Corp. sr. notes 7.84s, 2006 4,298,694
5,325,000 Florida Windstorm Underwriting Association 144A
notes MBIA, 7 1/8s, 2019 5,447,475
5,239,000 Ford Motor Credit Corp. sr. notes 6s, 2003 5,248,745
11,205,000 Ford Motor Credit Corp. sr. notes 5.8s, 2009 10,690,018
1,760,000 Ford Motor Credit Corp. notes 5 1/8s, 2001 1,734,656
22,120,000 General Motors Acceptance Corp. sr. unsub. 5.85s, 2009 21,149,817
5,050,000 Hartford Life, Inc. deb. 7.65s, 2027 5,464,454
7,590,000 Household Finance Corp. notes 6 1/2s, 2008 7,550,456
8,975,000 Household Finance Corp. sr. unsub. 5 7/8s, 2009 8,517,096
245,000 Investors Capital Trust I company guaranty Ser. B, 9.77s, 2027 235,200
10,810,000 Lehman Bros Holdings, Inc. notes 6 5/8s, 2004 10,839,728
9,705,000 Lehman Bros Holdings, Inc. med. term notes 6.4s, 1999 9,750,905
21,165,000 Lehman Bros Holdings, Inc. notes 6 1/4s, 2003 21,009,861
9,070,000 Markel Capital Trust I company guaranty Ser. B, 8.71s, 2046 8,657,315
170,000 Nationwide Credit Inc. sr. notes Ser. A, 10 1/4s, 2008 91,800
9,555,000 Newcourt Credit Group, Inc. 144A company guaranty
7 1/8s, 2003 9,901,847
9,380,000 Newcourt Credit Group, Inc. 144A notes 6 7/8s, 2005 9,603,338
175,000 North Fork Capital Trust I company guaranty 8.7s, 2026 183,134
2,950,000 Orange Cogen Funding 144A company guaranty
8.175s, 2022 3,100,745
5,000,000 Orion Capital Corp. sr. notes 9 1/8s, 2002 5,379,700
19,385,000 Paine Webber Group, Inc. sr. notes 6.55s, 2008 18,896,304
17,855,000 Paine Webber Group, Inc. sr. med. term notes 6.52s, 2005 17,631,813
21,310,000 Peoples Bank-Bridgeport sub. notes 7.2s, 2006 20,582,903
2,065,000 Peoples Heritage Capital Trust company guaranty
Ser. B, 9.06s, 2027 2,018,971
7,600,000 Phoenix Home Life Mutual Insurance Co. 144A notes
6.95s, 2006 7,553,792
45,000 Pioneer Americas Acquisition 144A sr. notes 9 1/4s, 2007 38,250
8,000,000 Presidential Life Corp. sr. notes 7 7/8s, 2009 8,000,000
10,910,000 Prudential Insurance Co. 144A 6 7/8s, 2003 11,014,954
800,000 RBF Finance 144A company guaranty 11 3/8s, 2009 844,000
1,870,000 RBF Finance 144A company guaranty 11s, 2006 1,954,150
9,140,000 Salomon, Inc. sr. notes 7.3s, 2002 9,488,417
1,610,000 Salomon, Inc. sr. notes 6 3/4s, 2003 1,645,919
7,480,000 Salton Sea Funding Corp. company guaranty
Ser. E, 8.3s, 2011 7,892,148
6,500,000 Scotland International Finance 144A sub. notes 8.85s,
2006 (Netherlands) 7,267,455
15,610,000 Sears Roebuck Acceptance Corp. notes 6 1/2s, 2028 14,296,575
5,000,000 Society Bank & Trust notes 12 1/2s, 1999 5,006,250
6,160,000 Sprint Capital Corp. company guaranty 6.9s, 2019 6,068,339
12,815,000 Sprint Capital Corp. company guaranty 6 1/8s, 2008 12,410,559
9,400,000 Sprint Capital Corp. company guaranty 5.7s, 2003 9,234,748
8,400,000 St. Paul Bancorp sr. notes 7 1/8s, 2004 8,348,256
3,745,000 State Street Institution 144A company guaranty 7.94s, 2026 3,898,994
18,421,000 Sun Life Canada Capital Trust 144A 8.526s, 2049 19,183,077
12,490,000 Tig Capital Trust I 144A bonds 8.597s, 2027 11,080,878
7,220,000 Transamerica Capital III bonds 7 5/8s, 2037 7,445,769
10,575,000 Trenwick Capital Trust I company guaranty 8.82s, 2037 9,910,467
1,875,000 Webster Capital Trust I 144A bonds 9.36s, 2027 1,889,344
8,445,000 Webster Financial Corp. sr. notes 8 3/4s, 2000 8,606,891
1,555,000 Wilmington Trust Corp. sub. notes 6 5/8s, 2008 1,536,231
11,783,000 Zurich Capital Trust I 144A company guaranty 8.376s, 2037 12,485,974
--------------
606,733,116
Lodging (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
680,000 Epic Resorts LLC company guaranty Ser. B, 13s, 2005 632,400
2,080,000 HMH Properties, Inc. company guaranty Ser. B, 7 7/8s, 2008 2,007,200
660,000 Host Marriott Travel Plaza sr. notes Ser. B, 9 1/2s, 2005 691,350
530,000 Starwood Hotels & Resorts notes 6 3/4s, 2003 493,727
--------------
3,824,677
Medical Supplies and Devices (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
350,000 ALARIS Medical Systems, Inc. company guaranty 9 3/4s, 2006 354,375
175,000 Dade International, Inc. sr. sub. notes Ser. B, 11 1/8s, 2006 195,125
905,000 Kinetic Concepts, Inc. company guaranty Ser. B, 9 5/8s, 2007 877,850
920,000 Mediq, Inc. deb. stepped-coupon zero % (13s, 6/1/03) 2009 (STP) 368,000
--------------
1,795,350
Metals and Mining (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
575,000 Ameristeel Corp. company guaranty Ser. B, 8 3/4s, 2008 586,500
200,000 Anker Coal Group, Inc. sr. notes Ser. B, 9 3/4s, 2007
(In default) (NON) 100,000
135,000 Armco, Inc. sr. notes 9s, 2007 140,738
810,000 Continental Global Group sr. notes Ser. B, 11s, 2007 745,200
1,590,000 Lodestar Holdings, Inc. company guaranty 11 1/2s, 2005 1,240,200
285,000 WHX Corp. sr. notes 10 1/2s, 2005 285,000
--------------
3,097,638
Oil and Gas (3.7%)
- --------------------------------------------------------------------------------------------------------------------------
1,000,000 Clark Refining & Marketing Inc. sr. sub. notes 8 7/8s, 2007 865,000
19,665,000 Coastal Corp. bonds 6.95s, 2028 19,079,376
9,550,000 Conoco, Inc. sr. notes 6.95s, 2029 9,334,743
680,000 Eagle Geophysical, Inc. company guaranty Ser. B, 10 3/4s, 2008 408,000
5,297,000 Enron Corp. notes 6.4s, 2006 5,277,931
6,796,558 Express Pipeline Ltd. 144A sub. notes Ser. B, 7.39s,
2019 (Canada) 6,127,165
290,000 Flores & Rucks, Inc. sr. sub. notes 9 3/4s, 2006 299,425
720,000 Gulf Canada Resources, Ltd. sr. notes 8 3/8s, 2005 (Canada) 732,600
4,760,000 K N Energy, Inc. sr. notes 6.45s, 2003 4,808,552
22,335,000 Louis Dreyfus Natural Gas notes 6 7/8s, 2007 20,352,769
13,525,000 Norsk Hydro ASA notes 6.36s, 2009 (Norway) 13,222,987
620,000 Ocean Energy, Inc. company guaranty Ser. B, 8 7/8s, 2007 632,400
970,000 Ocean Energy, Inc. company guaranty Ser. B, 8 3/8s, 2008 950,600
12,500,000 Petro-Canada deb. 9 1/4s, 2021 (Canada) 14,965,250
1,150,000 Petro Geo-Services notes 7 1/2s, 2007 (Norway) 1,193,263
14,815,000 Petro Geo-Services sr. notes 7 1/8s, 2028 (Norway) 14,027,286
20,000 Pogo Producing Co. sr. sub. notes Ser. B, 8 3/4s, 2007 18,600
1,000,000 Seagull Energy sr. sub notes 8 5/8s, 2005 985,000
60,000 Snyder Oil Corp. sr. sub. notes 8 3/4s, 2007 60,300
10,500,000 Statoil 144A notes 6 1/2s, 2028 (Norway) 9,863,280
541,000 TransTexas Gas Corp. sr. sub. notes Ser. D, 13 3/4s, 2001
(In default) (NON) 27,050
19,015,000 Union Oil Company of California company guaranty
7 1/2s, 2029 19,639,072
--------------
142,870,649
Packaging and Containers (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
670,000 AEP Industries, Inc. sr. sub. notes 9 7/8s, 2007 696,800
1,750,000 Owens-Illinois, Inc. sr. notes 8.1s, 2007 1,818,443
2,010,000 Packaging Corp. 144A sr. sub. notes 9 5/8s, 2009 2,070,300
115,000 Radnor Holdings Inc. sr. notes 10s, 2003 121,325
40,000 Riverwood International Corp. company guaranty
10 7/8s, 2008 39,600
2,600,000 Riverwood International Corp. company guaranty
10 5/8s, 2007 2,756,000
630,000 Riverwood International Corp. company guaranty
10 1/4s, 2006 655,200
--------------
8,157,668
Paper and Forest Products (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
90,000 Boise Cascade Co. med. term notes Ser. A, 7.43s, 2005 86,237
1,750,000 Pacifica Papers, Inc. 144A sr. notes 10s, 2009 (Canada) 1,820,000
370,000 Republic Group, Inc. sr. sub. notes 9 1/2s, 2008 379,250
1,770,000 Tembec Industries, Inc. company guaranty 8 5/8s,
2009 (Canada) 1,831,950
--------------
4,117,437
Pharmaceuticals and Biotechnology (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
1,625,000 ICN Pharmaceuticals, Inc. 144A sr. notes 9 1/4s, 2005 1,677,813
6,035,000 Monsanto Co. 144A deb. 6.6s, 2028 5,750,933
--------------
7,428,746
Photography (--%)
- --------------------------------------------------------------------------------------------------------------------------
190,000 PX Escrow Corp. sr. disc. notes stepped-coupon zero %
(9 5/8s, 2/1/02), 2006 (STP) 115,900
Publishing (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
1,855,000 Affinity Group Holdings sr. notes 11s, 2007 1,855,000
210,000 American Media Operation, Inc. sr. sub. notes
11 5/8s, 2004 226,800
470,000 American Media Operation, Inc. 144A sr. sub. notes
10 1/4s, 2009 507,600
1,510,000 Garden State Newspapers, Inc. sr. sub. notes Ser. B,
8 3/4s, 2009 1,521,325
1,270,000 Garden State Newspapers 144A sr. sub. notes
8 5/8s, 2011 1,289,050
180,000 Perry-Judd company guaranty 10 5/8s, 2007 178,650
50,000 Von Hoffman Press, Inc. 144A sr. sub. notes 10 3/8s, 2007 52,000
--------------
5,630,425
Real Estate (2.1%)
- --------------------------------------------------------------------------------------------------------------------------
2,110,000 Avalon Properties, Inc. notes 7 3/8s, 2002 (R) 2,167,350
8,730,000 Avalon Properties, Inc. notes 6 7/8s, 2007 (R) 8,614,677
9,085,000 Avalon Properties, Inc. notes 6 5/8s, 2005 (R) 8,968,530
16,295,000 EOP Operating L.P. notes 6.8s, 2009 15,943,517
3,955,000 EOP Operating L.P. sr. notes 6 3/4s, 2008 3,864,826
6,045,000 EOP Operating L.P. notes 6 3/8s, 2002 6,034,965
20,825,000 Equity Residential Properties notes 6.63s, 2005 20,504,087
3,305,000 OMEGA Healthcare Investors, Inc. notes 6.95s, 2007 (R) 2,856,677
8,460,000 OMEGA Healthcare Investors, Inc. notes 6.95s, 2002 (R) 8,243,509
3,500,000 Tanger Properties Ltd. partnership gtd. notes 8 3/4s, 2001 (R) 3,497,165
--------------
80,695,303
Retail (0.6%)
- --------------------------------------------------------------------------------------------------------------------------
2,470,000 Federated Department Stores, Inc. sr. notes 8 1/2s, 2003 2,681,877
3,265,000 Federated Department Stores, Inc. 144A notes 6.3s, 2009 3,194,215
3,000,000 Fred Meyer, Inc. company guaranty 7.45s, 2008 3,144,900
450,000 Home Interiors & Gifts, Inc. company guaranty 10 1/8s, 2008 456,750
680,000 K mart Corp. notes 8 1/8s, 2006 728,450
1,320,000 K mart Corp. deb. 7.95s, 2023 1,359,600
660,000 K mart Corp. med. term notes 7.55s, 2004 642,860
320,000 Kasper A.S.L. Ltd. sr. notes 12 3/4s, 2004 308,800
5,000,000 May Department Stores Co. notes 9 1/2s, 2021 6,273,100
250,000 Mothers Work, Inc. sr. notes 12 5/8s, 2005 263,125
2,000,000 NBTY Inc. 144A sr. sub. notes 8 5/8s, 2007 1,820,000
1,000,000 Southland Corp. deb. Ser. A, 4 1/2s, 2004 852,500
125,000 William Carter Holdings Co. sr. sub. notes Ser. A, 12s, 2008 133,438
410,000 William Carter Holdings Co. sr. sub. notes Ser. A, 10 3/8s, 2006 439,725
--------------
22,299,340
Satellite Services (--%)
- --------------------------------------------------------------------------------------------------------------------------
30,000 Golden Sky Systems company guaranty Ser. B, 12 3/8s, 2006 33,750
Specialty Consumer Products (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
11,810,000 Tyco International Ltd. company guaranty 6 3/8s, 2005 11,915,463
16,970,000 Tyco International Ltd. company guaranty 6 1/4s, 2003 17,086,923
--------------
29,002,386
Steel (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
1,665,000 AK Steel Corp. sr. notes 9 1/8s, 2006 1,764,900
1,330,000 California Steel Industries 144A sr. notes 8 1/2s, 2009 1,359,925
3,250,000 National Steel Corp. 144A 1st mtge. 9 7/8s, 2009 3,420,625
100,000 UCAR Global Enterprises sr. sub. notes Ser. B, 12s, 2005 105,625
--------------
6,651,075
Telecommunications (2.2%)
- --------------------------------------------------------------------------------------------------------------------------
4,915,000 AirTouch Communications, Inc. notes 6.65s, 2008 4,999,636
14,215,000 AT&T Capital Corp. med. term notes 6.6s, 2005 14,423,250
1,360,000 BTI Telecom Corp. sr. notes 10 1/2s, 2007 1,268,200
295,000 Call-Net Enterprises, Inc. sr. disc. notes stepped-coupon
zero % (13 1/4s, 12/1/99), 2004 (Canada) (STP) 303,113
160,000 Call-Net Enterprises, Inc. sr. disc. notes stepped-coupon
zero % (9.27s, 8/15/02), 2007 (Canada) (STP) 112,800
1,540,000 Call-Net Enterprises, Inc. sr. disc. notes stepped-coupon
zero % (8.94s, 8/15/03), 2008 (Canada) (STP) 1,001,000
640,000 Call-Net Enterprises, Inc. sr. notes 8s, 2008 (Canada) 617,600
670,000 CapRock Communications Corp. sr. notes Ser. B, 12s, 2008 708,525
270,000 Colt Telecommunications Group PLC sr. disc. notes
stepped-coupon zero % (12s, 12/15/01), 2006
(United Kingdom) (STP) 230,850
2,020,000 Covad Communications Group Inc. 144A sr. notes
12 1/2s, 2009 2,050,300
560,000 Dial Call Communications, Inc. sr. disc. notes
Ser. B, 10 1/4s, 2005 581,000
3,055,000 DTI Holdings Inc. sr. disc. notes, stepped-coupon Ser. B,
zero % (12 1/2s, 03/01/03), 2008 (STP) 1,191,450
735,000 E. Spire Communications, Inc. sr. disc. notes stepped-coupon
zero % (12 3/4s, 4/1/01), 2006 (STP) 492,450
2,060,000 Econophone, Inc. 144A notes stepped-coupon zero %
(11s, 2/15/03), 2008 (STP) 1,158,750
210,000 Esprit Telecom Group PLC sr. notes 11 1/2s, 2007
(United Kingdom) 226,275
270,000 Facilicom International sr. notes Ser. B, 10 1/2s, 2008 210,600
1,215,000 Flag Ltd. 144A sr. notes 8 1/4s, 2008 (Bermuda) 1,205,888
1,280,000 Focal Communications Corp. sr. disc. notes, stepped-coupon
Ser. B, zero % (12 1/8s, 02/15/03), 2008 (STP) 755,200
4,460,000 Global Crossing Holdings, Ltd. company guaranty 9 5/8s, 2008 4,961,750
1,100,000 GST Telecommunications, Inc. company guaranty stepped-
coupon zero % (13 7/8s, 12/15/00), 2005 (STP) 913,000
2,250,000 GST Telecommunications, Inc. 144A sr. disc. notes stepped-
coupon zero % (10 1/2s, 5/1/03), 2008 (STP) 1,395,000
3,650,000 Hyperion Telecommunications Corp., Inc. sr. disc. notes
stepped-coupon Ser. B, zero % (13s, 4/15/01), 2003 (STP) 3,056,875
1,020,000 Hyperion Telecommunications Corp., Inc. sr. notes
Ser. B, 12 1/4s, 2004 1,106,700
4,160,000 ICG Services, Inc. sr. disc. notes stepped-coupon zero %
(9 7/8s, 5/1/03), 2008 (STP) 2,579,200
3,010,000 Intermedia Communications, Inc. sr. disc. notes stepped-
coupon Ser. B, zero % (11 1/4s, 7/15/02), 2007 (STP) 2,272,550
1,460,000 Intermedia Communications, Inc. sr. notes Ser. B, 8.6s, 2008 1,452,700
1,000,000 Intermedia Communications, Inc. sr. notes Ser. B, 8 1/2s, 2008 990,000
5,475,000 International Cabletel, Inc. sr. notes stepped-coupon Ser. B,
zero % (11 1/2s, 2/01/01), 2006 (STP) 4,776,938
600,000 IXC Communications, Inc. sr. sub. notes 9s, 2008 603,000
840,000 KMC Telecom Holdings, Inc. sr. disc. notes stepped-coupon
zero % (12 1/2s, 2/15/03), 2008 (STP) 474,600
1,335,000 Knology Holdings, Inc. sr. disc. notes stepped-coupon zero %
(11 7/8s, 10/15/02), 2007 (STP) 827,700
75,000 L-3 Communications Corp. sr. sub. notes Ser. B, 10 3/8s, 2007 82,688
510,000 L-3 Communications Corp. sr. sub. notes 8 1/2s, 2008 533,588
970,000 Logix Communications Enterprises sr. notes 12 1/4s, 2008 950,600
310,000 Long Distance International, Inc. sr. notes 12 1/4s, 2008 217,000
315,000 McCaw International Ltd sr. disc. notes stepped-coupon
zero % (13s, 4/15/02), 2007 (STP) 211,050
1,780,000 McLeodUSA, Inc. 144A sr. notes 8 1/8s, 2009 1,762,200
1,160,000 MetroNet Communications Corp. sr. disc. notes
stepped-coupon zero % (10 3/4s, 11/1/02), 2007
(Canada) (STP) 948,300
1,120,000 MetroNet Communications Corp. sr. disc. stepped-coupon
notes zero % (9.95s, 6/15/03), 2008 (Canada) (STP) 868,000
1,770,000 MetroNet Communications Corp. 144A sr. notes 10 5/8s,
2008 (Canada) 2,075,325
960,000 Microcell Telecommunications sr. disc. notes stepped-coupon
Ser. B, zero % (14s, 12/1/01), 2006 (Canada) (STP) 806,400
440,000 NEXTEL Communications, Inc. 144A sr. notes 12s, 2008 517,000
910,000 NEXTEL Communications, Inc. sr. disc. notes stepped-coupon
zero % (10.65s, 9/15/02), 2007 (STP) 709,800
1,320,000 NEXTEL Communications, Inc. sr. disc. notes stepped-coupon
zero % (9.95s, 2/15/03), 2008 (STP) 990,000
1,050,000 NEXTEL Communications, Inc. sr. disc. notes stepped-coupon
zero % (9 3/4s, 10/31/02), 2007 (STP) 808,500
1,350,000 NEXTEL Communications, Inc. sr. disc. notes 9 3/4s, 2004 1,404,000
1,170,000 NorthEast Optic Network, Inc. sr. notes 12 3/4s, 2008 1,234,350
720,000 Pathnet, Inc. sr. notes 12 1/4s, 2008 403,200
1,900,000 Price Communications Wireless, Inc. 144A sr. notes
9 1/8s, 2006 1,999,750
1,000,000 Primus Telecommunications Group, Inc. sr. notes
11 3/4s, 2004 1,050,000
400,000 Primus Telecommunications Group, Inc. sr. notes Ser. B,
9 7/8s, 2008 394,000
2,295,000 Qwest Communications International, Inc. sr. disc. notes
stepped-coupon zero % (9.47s, 10/15/02), 2007 (STP) 1,871,068
750,000 Qwest Communications International, Inc. sr. disc. notes
stepped-coupon zero % (8.29s, 2/1/03), 2008 (STP) 579,465
250,000 RCN Corp. sr. disc. notes stepped-coupon zero %
(11 1/8s, 10/15/02), 2007 (STP) 173,125
275,000 RSL Communications, Ltd. company guaranty 9 1/8s, 2008 268,125
410,000 Sprint Spectrum L.P. sr. notes 11s, 2006 470,381
820,000 Startec Global Communications Corp. sr. notes 12s, 2008 742,100
1,310,000 Telecommunications Techniques, Inc. company guaranty
9 3/4s, 2008 1,323,100
390,000 Telehub Communications Corp. company guaranty
stepped-coupon zero % (13 7/8s, 7/31/02), 2005 (STP) 269,100
1,920,000 Time Warner Telecom Inc. sr. notes 9 3/4s, 2008 2,073,600
890,000 United International Holdings sr. disc. notes stepped-coupon
Ser. B, zero % (10 3/4s, 2/15/03), 2008 (STP) 609,650
440,000 Versatel Telecom B.V. sr. notes 13 1/4s, 2008 (Netherlands) 475,200
875,000 WinStar Communications, Inc. sr. sub. notes stepped-coupon
zero % (15s, 3/1/02), 2007 (STP) 918,750
--------------
84,686,315
Telephone Services (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
240,000 OnePoint Communications Corp. 144A sr. notes 14 1/2s, 2008 122,400
5,060,000 U S West, Inc. notes 5 5/8s, 2008 4,817,980
--------------
4,940,380
Textiles (--%)
- --------------------------------------------------------------------------------------------------------------------------
515,000 Day International Group, Inc. company guaranty
9 1/2s, 2008 494,400
935,000 Galey & Lord, Inc. company guaranty 9 1/8s, 2008 719,950
110,000 Polymer Group, Inc. company guaranty Ser. B, 9s, 2007 112,200
490,000 Polymer Group, Inc. company guaranty Ser. B, 8 3/4s, 2008 494,900
--------------
1,821,450
Transportation (2.5%)
- --------------------------------------------------------------------------------------------------------------------------
14,560,000 Atlas Air, Inc. pass through certificates Ser. 991A, 7.2s, 2019 14,610,960
4,720,000 Burlington Northern Santa Fe notes 6 3/8s, 2005 4,752,993
360,000 Calair LLC company guaranty 8 1/8s, 2008 342,792
630,000 Canadian Airlines Corp. sr. sec. notes 10s, 2005 (Canada) 456,750
2,640,000 Continental Airlines, Inc. sr. notes 9 1/2s, 2001 2,758,800
3,061,381 Continental Airlines, Inc. pass-through certificates
Ser. 97CI, 7.42s, 2007 3,081,770
2,055,586 Continental Airlines, Inc. pass-through certificates
Ser. 974C, 6.8s, 2009 2,017,927
12,511,558 Continental Airlines, Inc. pass-through certificates
Ser. 981C, 6.541s, 2008 12,499,297
18,435,000 CSX Corp. deb. 7.95s, 2027 20,057,280
600,000 Eletson Holdings, Inc. 1st pfd. mtge. notes 9 1/4s,
2003 (Greece) 573,000
180,000 Hermes Europe Railtel 144A sr. notes 11 1/2s,
2007 (Netherlands) 197,100
240,000 International Shipholding Corp. sr. notes 9s, 2003 243,300
2,830,000 International Shipholding Corp. sr. notes 7 3/4s, 2007 2,716,800
315,000 Johnstown America Industries, Inc. company guaranty
Ser. C, 11 3/4s, 2005 341,775
540,000 Kitty Hawk, Inc. company guaranty 9.95s, 2004 546,750
240,000 MC Shipping, Inc. sr. notes Ser. B, 11 1/4s, 2008 160,800
165,000 MCII Holdings sec. notes, stepped-coupon zero %
(15s,11/15/99), 2002 (STP) 148,500
9,715,000 Northwest Airlines Corp. pass thru certificate
Ser. 1999-1A, 6.81s, 2020 9,599,003
1,500,000 Pegasus Shipping 144A 11 7/8s, 2004 1,050,000
250,000 Trans World Airlines, Inc. sr. notes 12s, 2002 237,500
16,020,000 United Air Lines Corp. deb. 9 3/4s, 2021 19,140,536
--------------
95,533,633
Utilities (2.0%)
- --------------------------------------------------------------------------------------------------------------------------
7,275,000 Arizona Public Service Co. sr. notes 6 3/4s, 2006 7,498,052
325,000 Calpine Corp. sr. notes 10 1/2s, 2006 357,500
700,000 Calpine Corp. sr. notes 8 3/4s, 2007 711,998
1,500,000 Calpine Corp. sr. notes 7 7/8s, 2008 1,515,000
1,530,000 Cleveland Electric Illuminating Co. 1st mtge 6.86s, 2008 1,538,262
2,605,000 Connecticut Light & Power Co. 1st mtge. Ser. A, 7 7/8s, 2001 2,683,567
2,625,000 Edison Mission Energy 144A company guaranty 7.33s, 2008 2,684,876
140,000 El Paso Electric Co. 1st mtge. Ser. D, 8.9s, 2006 156,139
7,870,000 GTE Corp. deb. 6.46s, 2008 7,960,584
550,000 Midland Funding Corp. II deb. Ser. A, 11 3/4s, 2005 622,798
1,942,587 Midland Funding Corp. I deb. Ser. C-94, 10.33s, 2002 2,058,521
500,000 Niagara Mohawk Power Corp. med. term notes 9.95s, 2000 517,520
460,000 Niagara Mohawk Power Corp. sr. notes Ser. G, 7 3/4s, 2008 490,171
920,000 Niagara Mohawk Power Corp. sr. notes Ser. F, 7 5/8s, 2005 948,069
339,927 Northeast Utilities System notes Ser. A, 8.58s, 2006 343,952
3,062,950 Northeast Utilities System notes Ser. B, 8.38s, 2005 3,087,668
7,452,000 Public Service Co. of New Mexico deb. 10 1/4s, 2012 8,580,084
720,000 Public Service Co. of New Mexico sr. notes
Ser. B, 7 1/2s, 2018 724,990
820,000 Public Service Co. of New Mexico sr. notes
Ser. A, 7.1s, 2005 821,763
8,120,000 Texas New-Mexico Power Utilities 1st mtge. 9 1/4s, 2000 8,471,596
11,800,000 Texas Utilities Co. secd. lease fac. bonds 7.46s, 2015 12,492,896
12,500,000 Texas Utilities Electric Capital Trust V company guaranty
8.175s, 2037 12,783,375
1,180,000 York Power Funding 144A notes 12s, 2007 (Cayman Islands) 1,185,900
--------------
78,235,281
Wireless Communications (--%)
- --------------------------------------------------------------------------------------------------------------------------
850,000 Telecorp PCS Inc. 144A sr. disc. notes stepped-coupon
zero % (11 5/8s, 4/15/04), 2009 (STP) 478,125
--------------
Total Corporate Bonds and Notes (cost $1,881,245,856) $1,859,639,265
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (36.3%) (a)
PRINCIPAL AMOUNT VALUE
U.S. Government Agency Mortgage Obligations (21.4%)
- --------------------------------------------------------------------------------------------------------------------------
Federal Home Loan Mortgage Corp.
$ 4,777,390 7s, July 1, 2012 $ 4,881,871
33,236,237 5 1/2s, with due dates from December 1, 2010
to August 1, 2011 32,306,789
35,000,000 5s, January 15, 2004 34,048,350
Federal National Mortgage Association Pass-Through
Certificates
230,892 11s, with due dates from August 1, 2013
to October 1, 2015 257,299
30,016,925 8s, with due dates from December 1, 2008
to March 1, 2029 31,244,535
18,373,168 7s, Dwarf, with due dates from May 1, 2007
to September 1, 2013 18,769,292
108,599,309 6 1/2s, with due dates from May 1, 2024
to March 25, 2029 107,685,658
4,176,077 6 1/2s, Dwarf, with due dates from September 1, 2010
to August 1, 2013 4,209,986
211,000 6s, April 1, 2029 204,472
83,362,231 6s, Dwarf, with due dates from February 1, 2012
to December 1, 2013 82,580,290
14,710,000 5 1/8s, December 12, 2005 14,379,025
7,610,000 Government National Mortgage Association 6 1/2s,
TBA, May 15, 2029 7,560,002
Government National Mortgage Association Pass-Through
Certificates
230,374 11s, with due dates from January 15, 2010
to October 15, 2013 248,481
19,193,175 9 1/2s, November 15, 2028 20,938,554
15,891,823 9s, with due dates from October 15, 2004
to December 15, 2021 17,135,355
158,076,460 8s, with due dates from November 15, 2016
to February 1, 2029 164,713,212
109,337,692 7s, with due dates from December 15, 2022
to February 15, 2029 111,160,306
178,898,837 6 1/2s, with due dates from June 15, 2023
to March 15, 2029 177,870,462
--------------
830,193,939
U.S. Treasury Obligations (14.9%)
- --------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Bonds
7,102,000 10 3/4s, August 15, 2005 (SEG) 9,096,100
64,410,000 5 1/2s, August 15, 2028 61,380,798
46,365,000 5 1/4s, February 15, 2029 43,525,144
50,050,000 5 1/4s, November 15, 2028 46,311,766
37,905,000 5 1/4s, August 15, 2003 37,887,185
U.S. Treasury Notes
14,530,000 5 7/8s, February 15, 2004 14,913,737
15,420,000 5 5/8s, May 15, 2008 15,651,300
8,435,000 5s, February 28, 2001 8,423,107
45,650,000 4 7/8s, March 31, 2001 45,478,813
47,975,000 4 3/4s, November 15, 2008 45,823,321
115,945,000 4 3/4s, February 15, 2004 113,662,041
52,935,000 4 5/8s, December 31, 2000 52,554,397
60,125,000 4 1/4s, November 15, 2003 57,748,259
87,160,000 U.S. Treasury Interest Strip, zero %, August 15, 2020 24,130,246
--------------
576,586,214
--------------
Total U.S. Government and Agency Obligations
(cost $1,420,005,437) $1,406,780,153
COLLATERALIZED MORTGAGE OBLIGATIONS (7.7%) (a)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
GBP 13,350,000 Blackstone Hotel Acquisition Co. sr. mtge. loan FRN
3.3449s, 2003 $ 21,399,599
Commercial Mortgage Acceptance Corp.
$ 22,525,000 Ser. 97-ML1, Class A3, 6.57s, 2007 22,764,328
2,380,000 Ser. 97-ML1, Class D, 7.11s, 2030 2,347,647
13,310,000 Ser. 98-C2, Class A2, 6.03s, 2008 13,062,517
8,905,000 Countrywide Home Loans Ser. 1998-A12, Class A14,
8s, 2028 9,330,770
Criimi Mae Commercial Mortgage Trust
34,500,000 Ser. 98-C1, Class A2, 7s, 2011 31,502,813
13,675,000 Ser. 98-C1, Class B, 7s, 2011 11,128,031
23,576,333 Ser. 279, Class 2, 9s, 2026 5,319,410
25,102,208 Ser. 281, Class 2, Interest Only (IO), 9s, 2026 5,663,686
35,621,652 Ser. 299, Class 2, IO, 6 1/2s, 2028 10,129,907
5,477,337 Ser. 176, Principle Only (PO), 7s, 2026 4,238,945
18,950,356 Ser. 177, PO, 7s, 2026 14,665,799
17,962,819 Ser. 188, IO, 7 1/2s, 2027 3,870,426
10,172,018 Ser. 192, IO, 6 1/2s, 2028 2,836,012
7,047,202 Ser. 199, IO, 6 1/2s, 2028 2,052,498
First Union-Lehman Brothers Commercial Mortgage Co.
2,505,000 Ser. 97-C2, Class A3, 6.65s, 2008 2,538,857
2,800,000 Ser. 97-C2, Class D, 7.12s, 2012 2,679,250
81,552,566 Ser. 97-C2, IO, 1.092s, 2027 6,399,965
7,870,000 GE Capital Mortgage Services, Inc. Ser. 1998-11,
Class 2a4, 6 3/4s, 2028 7,826,164
GMAC Commercial Mortgage Securities Inc.
16,710,000 6.135s, 2033 16,381,022
12,972,000 Ser. 98-C1, Class E, 7.153s, 2011 12,640,606
20,428,665 Ser. 98-C2, Class A2, 6.42s, 2008 20,423,079
5,945,000 GS Mortgage Securities Corp. II Ser. 98-GLII, Class D,
7.191s, 2031 5,686,764
4,809,819 Headlands Mortgage Securities, Inc. Ser. 1998-1, Class X2,
IO, 6 1/2s, 2028 805,645
Housing Securities Inc.
1,538,728 Ser. 91-B, Class B6, 9s, 2006 1,535,843
2,316,041 Ser. 93-F, Class F9M2, 7s, 2023 2,298,670
1,769 Ser. 93-J, Class J5, 6.66s, 2009 1,507
427,892 Ser. 94-1, Class AB1, 6 1/2s, 2009 381,358
Merrill Lynch Mortgage Investors, Inc.
5,989,000 Ser. 98-C2, Class D, 7.116s, 2030 5,818,688
23,615,595 Ser. 98-C2, IO, 1.587s, 2030 1,799,508
76,747,052 Ser. 96-C2, IO, 1.559s, 2028 5,735,043
5,935,000 Morgan Stanley Capital I Ser. 96-WF1, Class A2,
7.218s, 2006 6,148,289
42,502,832 Mortgage Capital Funding, Inc. Ser. 1997-MC2,
Class X, 1.368s, 2012 3,152,847
1,884,704 Prudential Home Mortgage Securities Ser. 92-25,
Class B3, 8s, 2022 1,905,907
Prudential Home Mortgage Securities 144A
3,293,191 Ser. 93-31, Class B2, 6s, 2000 3,194,395
589,751 Ser. 94-31, Class B3, 8s, 2009 588,645
375,805 Ser. 94-31, Class B4, 8s, 2009 370,462
7,580,000 Residential Funding Mortgage Sec. I Ser. 98-S13,
Class A21, 6 3/4s, 2028 7,440,452
4,930,344 Sears Mortgage Securities Ser.1993-7, Class T7, 7s, 2007 4,991,036
5,610,131 Structured Asset Security Corp. 144A
Ser. 98-F818, 8.712s, 2027 5,987,938
10,340,793 Structured Asset Security Corp. Ser. 98-Rf2, A 8.58s, 2028 10,991,940
--------------
Total Collateralized Mortgage Obligations
(cost $303,142,568) $ 298,036,268
ASSET-BACKED SECURITIES (0.9%) (a)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$ 9,672,995 First Plus Ser. 98-A, Class A, 8 1/2s, 2023 $ 9,589,868
13,359,698 Green Tree Recreational Equipment & Cons. Ser. 97-B,
Class A1, 6.55s, 2028 13,482,335
9,562,481 Green Tree Recreational Equipment & Cons. Ser. 98-A,
Class A1C, 6.18s, 2019 9,583,772
65,355,000 Lehman Manufactured Housing Ser. 98-1, Class 1 IO,
0.82s, 2028 2,484,001
--------------
Total Asset-Backed Securities (cost $35,944,984) $ 35,139,976
PREFERRED STOCKS (0.8%) (a)
NUMBER OF SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------------
7,986 AmeriKing, Inc. $3.25 pfd. (PIK) $ 203,643
776 Capstar Broadcasting, Inc. 144A $12.00 pfd. (PIK) 95,448
1,114 Capstar Communications, Inc. Ser. E, $12.625 cum. pfd. (PIK) 138,136
10,880 Centaur Funding Corp 144A 9.08% pfd. (Cayman Islands) 11,859,418
24,956 CGA Group Ltd. 144A Ser. A, $13.75 pfd. (PIK) 673,812
2,855 Chevy Chase Capital Corp. Ser. A, $5.188 pfd. 153,456
3,096 CSC Holdings, Inc. Ser. M, $11.125 cum. pfd. (PIK) 363,780
850 Fresenius Medical Capital Trust I Ser. D, 9.00% company
guaranty, pfd. (Germany) 886,125
1,700 Fresenius Medical Capital Trust II 7.875% company
guaranty, pfd. (Germany) 1,683,000
9,730 Nextlink Communications, Inc. 144A $7.00 cum. pfd. (PIK) 535,150
176 Paxson Communications Corp. 13.25% cum. pfd. (PIK) 1,487,200
151,862 TCR Holding Corp. Class E, zero % pfd. 9,567
12,580 Webster Financial 7.375% pfd. 12,186,875
--------------
Total Preferred Stocks (cost $29,652,273) $ 30,275,610
FOREIGN GOVERNMENT BONDS AND NOTES (0.6%) (a)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$ 2,405,000 Ontario (Province of) sr. unsub. 5 1/2s, 2008 (Canada) $ 2,311,325
22,670,000 Quebec (Province of) sr. unsub. 5 3/4s, 2009 (Canada) 21,888,339
--------------
Total Foreign Government Bonds and Notes
(cost $24,952,691) $ 24,199,664
CONVERTIBLE BONDS AND NOTES (0.1%) (a)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$ 1,000,000 Corporate Express, Inc. cv. notes 4 1/2s, 2000 $ 892,500
255,000 Exide Corp. 144A cv. sr. sub. notes 2.9s, 2005 144,713
780,000 HEALTHSOUTH Corp. cv. sub. deb. 3 1/4s, 2003 653,250
105,000 Integrated Device Technology, Inc. cv. sub. notes 5 1/2s, 2002 75,731
1,500,000 LAM Research Corp. 144A cv. sub. notes 5s, 2002 1,286,250
1,000,000 Micron Technology, Inc cv. 6 1/2s, 2005 795,000
--------------
Total Convertible Bonds and Notes (cost $3,785,136) $ 3,847,444
WARRANTS (--%) (a) (NON) EXPIRATION
NUMBER OF WARRANTS DATE VALUE
- --------------------------------------------------------------------------------------------------------------------------
24,000 CGA Group Ltd. 144A 2/11/07 $ 240
1,285 Club Regina, Inc. 144A 12/1/04 1,285
270 Colt Telecommunications Group PLC 12/31/06 128,250
3,735 Diva Systems Corp. 3/1/08 48,555
15,275 DTI Holdings Inc. 3/1/08 153
10 E. Spire Communications, Inc. 11/1/05 150
680 Epic Resorts 6/15/05 7
260 Esat Holdings, Inc. (Ireland) 2/1/07 19,240
400 Intermedia Communications 6/1/00 42,800
840 KMC Telecom Holdings, Inc. 4/15/08 2,520
645 Knology Holdings, Inc. 144A 10/15/07 1,290
310 Long Distance International, Inc. 144A 4/13/08 620
315 McCaw International Ltd. 4/15/07 1,339
920 Mediq Inc. 144A 6/1/09 9
240 Onepoint Communications, Inc. 6/1/08 240
720 Pathnet, Inc. 144A 4/15/08 7,200
7,120 Rhythms Netcon 144A 5/15/08 1,598,796
820 STARTEC Global Communications Corp. 5/15/08 820
390 Telehub Communications Corp. 7/31/05 19,500
835 UIH Australia/Pacific, Inc. 144A 5/15/06 835
440 Versatel Telecom B.V. 144A (Netherlands) 5/15/08 30,800
--------------
Total Warrants (cost $380,864) $ 1,904,649
CONVERTIBLE PREFERRED STOCKS (--%)
NUMBER OF SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------------
5,000 Adelphia Communications Corp. Ser. D, 5.50% cv. pfd. $ 1,017,500
5,500 Chancellor Media Corp. $3.00 cv. cum. pfd. 606,375
2,695 Chesapeake Energy Corp. $3.50 cum. cv. pfd. 61,312
--------------
Total Convertible Preferred Stocks (cost $1,727,257) $ 1,685,187
COMMON STOCKS (--%)
NUMBER OF SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------------
150 AmeriKing, Inc. (NON) $ 5,850
3,544 Fitzgerald Gaming Corp. (NON) 886
1,213 Hedstrom Holdings, Inc. 144A (NON) 1,213
73 Mothers Work, Inc. (NON) 789
44,051 PSF Holdings LLC Class A (NON) 550,637
--------------
Total Common Stocks (cost $1,537,463) $ 559,375
SHORT-TERM INVESTMENTS (4.7%) (a)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$ 25,000,000 Associates First Capital, effective yield of 4.94%, May 3, 1999 $ 24,989,708
50,000,000 Delaware Funding Corp., effective yield of 4.85%,
May 20, 1999 49,865,278
30,000,000 Federal Home Loan Mortgage Corp., effective yield
of 4.78%, May 14, 1999 29,948,217
25,000,000 Merrill Lynch & Co. Inc., effective yield 4.79%, July 14, 1999 24,740,542
25,000,000 USAA Capital Corp., effective yield 4.81%, May 7, 1999 24,979,958
28,322,000 Interest in $600,000,000 joint repurchase agreement
dated April 30, 1999 with Salomon, Smith Barney Inc.
due May 3, 1999 with respect to various U.S. Treasury
obligations -- maturity value of $28,333,494 for an
effective yield of 4.87% 28,322,000
--------------
Total Short-Term Investments (cost $182,859,008) $ 182,845,703
- --------------------------------------------------------------------------------------------------------------------------
Total Investments (cost $3,885,233,537) (b) $3,844,913,294
- --------------------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $3,876,155,934.
(b) The aggregate identified cost on a tax basis is $3,886,751,162, resulting in gross unrealized appreciation and
depreciation of $37,277,622 and $79,115,490, respectively, or net unrealized depreciation of $41,837,868.
(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.
(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 April 30, 1999.
(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.
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 April 30, 1999, which are subject
to change based on the terms of the security.
- -------------------------------------------------------------------------------
Forward Currency Contracts to Buy at April 30, 1999 (Unaudited)
Market Aggregate Face Delivery Unrealized
Value Value Date Depreciation
- -------------------------------------------------------------------------------
Euro $106,677,582 $110,058,474 6/16/99 $(3,380,892)
- -------------------------------------------------------------------------------
Forward Currency Contracts to Sell at April 30, 1999 (Unaudited)
(aggregate face value $126,538,101)
Market Aggregate Face Delivery Unrealized
Value Value Date Appreciation
- -------------------------------------------------------------------------------
Euro $102,704,081 $106,154,857 6/16/99 $3,450,776
British Pounds 20,360,569 20,383,244 6/16/99 22,675
- -------------------------------------------------------------------------------
$3,473,451
- -------------------------------------------------------------------------------
Futures Contracts Outstanding at April 30, 1999 (Unaudited)
Aggregate Face Expiration Unrealized
Total Value Value Date Depreciation
- -------------------------------------------------------------------------------
US Treasury Bonds
20 Yr (long) $18,869,438 $19,046,954 Jun-99 $(177,516)
- -------------------------------------------------------------------------------
TBA Sale Commitments at April 30, 1999 (Unaudited)
(Proceeds receivable $11,810,265)
Principal Settlement Market
Agency Amount Date Value
- -------------------------------------------------------------------------------
FNMA 6s, May 2029 $ 211,000 5/17/99 $ 204,472
GNMA 7s, May 2029 11,374,000 5/24/99 11,540,970
- -------------------------------------------------------------------------------
$11,745,442
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
April 30, 1999 (Unaudited)
<S> <C>
Assets
- -----------------------------------------------------------------------------------------------
Investments in securities, at value (identified cost $3,885,233,537) (Note 1) $3,844,913,294
- -----------------------------------------------------------------------------------------------
Cash 1,473,159
- -----------------------------------------------------------------------------------------------
Dividends, interest and other receivables 53,324,055
- -----------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 10,108,191
- -----------------------------------------------------------------------------------------------
Receivable for securities sold 58,638,954
- -----------------------------------------------------------------------------------------------
Receivable for open forward currency contracts 3,473,451
- -----------------------------------------------------------------------------------------------
Total assets 3,971,931,104
Liabilities
- -----------------------------------------------------------------------------------------------
Payable for securities purchased 55,725,331
- -----------------------------------------------------------------------------------------------
Payable for variation margin 318,906
- -----------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 17,618,270
- -----------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 4,627,556
- -----------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 657,405
- -----------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 5,835
- -----------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 4,942
- -----------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 1,426,931
- -----------------------------------------------------------------------------------------------
Payable for open forward currency contracts 3,380,892
- -----------------------------------------------------------------------------------------------
TBA sales commitments, at value (proceeds receivable $11,810,265) 11,745,442
- -----------------------------------------------------------------------------------------------
Other accrued expenses 263,660
- -----------------------------------------------------------------------------------------------
Total liabilities 95,775,170
- -----------------------------------------------------------------------------------------------
Net assets $3,876,155,934
Represented by
- -----------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $3,992,624,730
- -----------------------------------------------------------------------------------------------
Distributions in excess of net investment income (Note 1) (7,385,220)
- -----------------------------------------------------------------------------------------------
Accumulated net realized loss on investments and
foreign currency transactions (Note 1) (68,740,115)
- -----------------------------------------------------------------------------------------------
Net unrealized depreciation of investments and
assets and liabilities in foreign currencies (40,343,461)
- -----------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to capital shares outstanding $3,876,155,934
Computation of net asset value and offering price
- -----------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($1,361,532,004 divided by 201,392,297 shares) $6.76
- -----------------------------------------------------------------------------------------------
Offering price per class A share (100/95.25 of $6.76)* $7.10
- -----------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($505,391,036 divided by 75,132,018 shares)** $6.73
- -----------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($1,756,464,217 divided by 261,125,972 shares) $6.73
- -----------------------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $6.73)* $6.96
- -----------------------------------------------------------------------------------------------
Net asset value, offering price and redemption price per class Y share
($252,768,677 divided by 37,317,561 shares) $6.77
- -----------------------------------------------------------------------------------------------
* 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
Six months ended April 30, 1999 (Unaudited)
<S> <C>
Investment income:
- -----------------------------------------------------------------------------------------------
Interest $122,598,317
- -----------------------------------------------------------------------------------------------
Dividends 878,888
- -----------------------------------------------------------------------------------------------
Total investment income 123,477,205
Expenses:
- -----------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 9,050,084
- -----------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 3,895,578
- -----------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 1,982
- -----------------------------------------------------------------------------------------------
Administrative services (Note 2) 9,769
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 1,756,271
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 2,507,608
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 3,714,582
- -----------------------------------------------------------------------------------------------
Reports to shareholders 46,376
- -----------------------------------------------------------------------------------------------
Registration fees 201,545
- -----------------------------------------------------------------------------------------------
Auditing 1,199
- -----------------------------------------------------------------------------------------------
Legal 22,790
- -----------------------------------------------------------------------------------------------
Postage 144,893
- -----------------------------------------------------------------------------------------------
Other 98,446
- -----------------------------------------------------------------------------------------------
Total expenses 21,451,123
- -----------------------------------------------------------------------------------------------
Expense reduction (Note 2) (511,034)
- -----------------------------------------------------------------------------------------------
Net expenses 20,940,089
- -----------------------------------------------------------------------------------------------
Net investment income 102,537,116
- -----------------------------------------------------------------------------------------------
Net realized loss on investments (Notes 1 and 3) (44,267,673)
- -----------------------------------------------------------------------------------------------
Net realized gain on futures contracts (Note 1) 1,091,408
- -----------------------------------------------------------------------------------------------
Net realized loss on foreign currency transactions (Note 1) (1,423,794)
- -----------------------------------------------------------------------------------------------
Net unrealized appreciation of assets and liabilities in
foreign currencies during the period 2,761,057
- -----------------------------------------------------------------------------------------------
Net unrealized depreciation of investments, futures and
TBA sale commitments, during the period (8,792,335)
- -----------------------------------------------------------------------------------------------
Net loss on investments (50,631,337)
- -----------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $ 51,905,779
- -----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Six months ended Year ended
April 30 October 31
1999* 1998
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase in net assets
- ---------------------------------------------------------------------------------------------------------------
Operations:
- ---------------------------------------------------------------------------------------------------------------
Net investment income $102,537,116 $209,780,589
- ---------------------------------------------------------------------------------------------------------------
Net realized loss on investments and
foreign currency transactions (44,600,059) (48,229,291)
- ---------------------------------------------------------------------------------------------------------------
Net unrealized depreciation of investments
and assets and liabilities in foreign currencies (6,031,278) (81,157,171)
- ---------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 51,905,779 80,394,127
- ---------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ---------------------------------------------------------------------------------------------------------------
From net investment income
Class A (44,629,595) (79,385,042)
- ---------------------------------------------------------------------------------------------------------------
Class B (14,083,703) (22,749,198)
- ---------------------------------------------------------------------------------------------------------------
Class M (45,866,093) (64,035,315)
- ---------------------------------------------------------------------------------------------------------------
Class Y (8,194,732) (13,178,073)
- ---------------------------------------------------------------------------------------------------------------
From net realized gain on investments
Class A -- (6,772,757)
- ---------------------------------------------------------------------------------------------------------------
Class B -- (2,151,676)
- ---------------------------------------------------------------------------------------------------------------
Class M -- (3,964,090)
- ---------------------------------------------------------------------------------------------------------------
Class Y -- (896,482)
- ---------------------------------------------------------------------------------------------------------------
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) 580,713,316 1,241,196,260
- ---------------------------------------------------------------------------------------------------------------
Total increase in net assets 519,844,972 1,116,807,463
Net assets
- ---------------------------------------------------------------------------------------------------------------
Beginning of period 3,356,310,962 2,239,503,499
- ---------------------------------------------------------------------------------------------------------------
End of period (including distributions in excess
of net investment income and undistributed
net investment income of $7,385,220 and
$2,851,787, respectively) $3,876,155,934 $3,356,310,962
- ---------------------------------------------------------------------------------------------------------------
* Unaudited
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
- ------------------------------------------------------------------------------------------------------------------------------------
Six months
ended
Per-share April 30
operating performance (Unaudited) Year ended October 31
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $6.87 $7.14 $7.02 $7.07 $6.53 $7.36
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .20(c) .48(c) .45 .45 .47 .54
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.09) (.28) .15 (.04) .55 (.84)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .11 .20 .60 .41 1.02 (.30)
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.22) (.40) (.44) (.46) (.48) (.41)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- (.04) (.04) -- -- (.04)
- ------------------------------------------------------------------------------------------------------------------------------------
From return of capital -- (.03) -- -- -- (.08)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.22) (.47) (.48) (.46) (.48) (.53)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $6.76 $6.87 $7.14 $7.02 $7.07 $6.53
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 1.55* 2.78 8.88 6.08 16.23 (4.16)
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $1,361,532 $1,426,583 $1,296,600 $1,037,718 $928,995 $781,784
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .49* 1.02 1.17 1.17 1.05 .83
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.90* 6.69 6.39 6.50 6.91 7.10
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 116.60* 257.12 265.71 213.46 169.29 128.82
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total 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
- ------------------------------------------------------------------------------------------------------------------------------------
Six months
ended
Per-share April 30
operating performance (Unaudited) Year ended October 31
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $6.83 $7.11 $6.99 $7.04 $6.50 $7.34
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .17(c) .42(c) .39 .40 .42 .48
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.08) (.28) .16 (.04) .55 (.83)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .09 .14 .55 .36 .97 (.35)
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.19) (.36) (.39) (.41) (.43) (.38)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- (.04) (.04) -- -- (.04)
- ------------------------------------------------------------------------------------------------------------------------------------
From return of capital -- (.02) -- -- -- (.07)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.19) (.42) (.43) (.41) (.43) (.49)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $6.73 $6.83 $7.11 $6.99 $7.04 $6.50
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 1.32* 1.92 8.15 5.32 15.46 (4.98)
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $505,391 $494,703 $403,704 $340,775 $260,769 $169,501
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .87* 1.77 1.92 1.92 1.80 1.59
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.52* 5.92 5.64 5.76 6.14 6.40
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 116.60* 257.12 265.71 213.46 169.29 128.82
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total 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
- ------------------------------------------------------------------------------------------------------------------------------------
Six months
ended For the period
Per-share April 30 Dec. 14, 1994+
operating performance (Unaudited) Year ended October 31 to October 31
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $6.84 $7.11 $6.99 $7.04 $6.50
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .19(c) .47(c) .43 .44 .43
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.09) (.28) .16 (.04) .54
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .10 .19 .59 .40 .97
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.21) (.39) (.43) (.45) (.43)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- (.04) (.04) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
From return of capital -- (.03) -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.21) (.46) (.47) (.45) (.43)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $6.73 $6.84 $7.11 $6.99 $7.04
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 1.47* 2.58 8.74 5.92 15.43*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $1,756,464 $1,186,620 $368,297 $18,937 $7,673
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .62* 1.27 1.42 1.42 1.19*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.74* 6.53 5.76 6.28 5.17*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 116.60* 257.12 265.71 213.46 169.29
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total 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
- ------------------------------------------------------------------------------------------------------------------------------------
Six months
ended For the period
Per-share April 30 June 16, 1994+
operating performance (Unaudited) Year ended October 31 to October 31
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $6.88 $7.15 $7.02 $7.07 $6.52 $6.72
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .21(c) .50(c) .47 .47 .47 .19
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.10) (.28) .16 (.04) .57 (.21)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .11 .22 .63 .43 1.04 (.02)
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.22) (.42) (.46) (.48) (.49) (.16)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- (.04) (.04) -- -- (.02)
- ------------------------------------------------------------------------------------------------------------------------------------
From return of capital -- (.03) -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.22) (.49) (.50) (.48) (.49) (.18)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $6.77 $6.88 $7.15 $7.02 $7.07 $6.52
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 1.67* 3.02 9.23 6.31 16.65 (0.35)*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $252,769 $246,405 $170,902 $133,516 $107,414 $7,517
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .37* .77 .92 .92 .86 .24*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 3.02* 6.92 6.64 6.76 7.14 2.91*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 116.60* 257.12 265.71 213.46 169.29 128.82
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total 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
April 30, 1999 (Unaudited)
Note 1
Significant accounting policies
Putnam Income Fund (the "fund") is registered under the Investment Company
Act of 1940, as amended, as a diversified, open-end management investment
company. The fund seeks high current income consistent with what Putnam
Investment Management, Inc. ("Putnam Management"), the fund's manager, a
wholly-owned subsidiary of Putnam Investments, Inc. believes to be prudent
risk. The fund invests in a portfolio of debt securities, both government
and corporate obligations.
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 lower than class B shares and higher than
class A 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 $150 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 Management deems it appropriate
to do so.
I) TBA sale commitments The fund may enter into TBA sale commitments to
hedge its portfolio positions or to sell mortgage-backed securities it
owns under delayed delivery arrangements. Proceeds of TBA sale commitments
are not received until the contractual settlement date. During the time a
TBA sale commitment is outstanding, equivalent deliverable securities, or
an offsetting TBA purchase commitment deliverable on or before the sale
commitment date, are held as "cover" for the transaction.
Unsettled TBA sale commitments are valued at the current market value of
the underlying securities, generally according to the procedures described
under "Security valuation" above. The contract is "marked-to-market" daily
and the change in market value is recorded by the fund as an unrealized
gain or loss. If the TBA sale commitment is closed through the acquisition
of an offsetting purchase commitment, the fund realizes a gain or loss. If
the fund delivers securities under the commitment, the fund realizes a
gain or a loss from the sale of the securities based upon the unit price
established at the date the commitment was entered into.
J) Line of credit The fund has entered into a committed line of credit
with certain banks. This line of credit agreement includes restrictions
that the fund maintain an asset coverage ratio of at least 300% and
borrowings must not exceed prospectus limitations. For the six months
ended April 30, 1999, 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.
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.
Note 2
Management fees, administrative
services, and other transactions
Compensation of Putnam Management, for management and investment advisory
services is paid quarterly based on the average net assets of the fund.
Such fee is based on the following annual rates: 0.65% of the first $500
million, 0.55% of the next $500 million, 0.50% of the next $500 million,
0.45% of the next $5 billion, 0.425% of the next $5 billion, 0.405% of the
next $5 billion, 0.39% of the next $5 billion, and 0.38% thereafter.
The fund reimburses Putnam Management an allocated amount for the
compensation and related expenses of certain officers of the fund and
their staff who provide administrative services to the fund. The aggregate
amount of all such reimbursements is determined annually by the Trustees.
Custodial functions for the fund's assets are provided by Putnam Fiduciary
Trust Company (PFTC), a subsidiary of Putnam Investments, Inc. Investor
servicing agent functions are provided by Putnam Investor Services, a
division of PFTC.
For the six months ended April 30, 1999, fund expenses were reduced by
$511,034 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 $1,880
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 six months ended April 30, 1999, Putnam Mutual Funds Corp., acting
as underwriter received net commissions of $187,961 and $1,739,143 from
the sale of class A and class M shares, respectively and $489,771 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 six months ended April 30, 1999, Putnam Mutual
Funds Corp., acting as underwriter received $49,967 on class A
redemptions.
Note 3
Purchase and sales of securities
During the six months ended April 30, 1999, purchases and sales of
investment securities other than U.S. government obligations and
short-term investments aggregated $2,923,586,571 and $2,286,409,310,
respectively. Purchases and sales of U.S. government obligations
aggregated $1,724,642,237 and $1,637,384,825, respectively. In determining
the net gain or loss on securities sold, the cost of securities has been
determined on the identified cost basis.
Note 4
Capital shares
At April 30, 1999, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
Six months ended April 30, 1999
- -----------------------------------------------------------------------------
Class A Shares Amount
- -----------------------------------------------------------------------------
Shares sold 58,822,842 $ 403,557,026
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 5,181,017 35,426,185
- -----------------------------------------------------------------------------
64,003,859 438,983,211
Shares
repurchased (70,199,108) (481,366,492)
- -----------------------------------------------------------------------------
Net decrease (6,195,249) $ (42,383,281)
- -----------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------
Six months ended April 30, 1999
- -----------------------------------------------------------------------------
Class B Shares Amount
- -----------------------------------------------------------------------------
Shares sold 13,502,717 $ 91,998,030
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 1,505,535 10,238,160
- -----------------------------------------------------------------------------
15,008,252 102,236,190
Shares
repurchased (12,265,276) (83,481,238)
- -----------------------------------------------------------------------------
Net increase 2,742,976 $ 18,754,952
- -----------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------
Six months ended April 30, 1999
- -----------------------------------------------------------------------------
Class M Shares Amount
- -----------------------------------------------------------------------------
Shares sold 95,641,815 $650,973,331
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 162,978 1,108,064
- -----------------------------------------------------------------------------
95,804,793 652,081,395
Shares
repurchased (8,558,126) (58,169,333)
- -----------------------------------------------------------------------------
Net increase 87,246,667 $593,912,062
- -----------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------
Six months ended April 30, 1999
- -----------------------------------------------------------------------------
Class Y Shares Amount
- -----------------------------------------------------------------------------
Shares sold 12,577,820 $ 86,434,718
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 1,196,857 8,194,732
- -----------------------------------------------------------------------------
13,774,677 94,629,450
Shares
repurchased (12,267,070) (84,199,867)
- -----------------------------------------------------------------------------
Net increase 1,507,607 $ 10,429,583
- -----------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------
The Putnam family of funds
The following is a complete list of Putnam's open-end mutual funds. 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.
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
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
INCOME FUNDS
American Government Income Fund
Diversified Income Trust
Global Governmental Income Trust
High Quality Bond Fund + [DBL. DAGGER]
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
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
ASSET ALLOCATION 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 not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other government agency.
Although the funds seek to preserve your investment at $1.00 per share, it
is possible to lose money by investing in the fund.
Check your account balances and current performance at www.putnaminv.com.
Fund information
WEB SITE
www.putnaminv.com
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
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
Edward H. D'Alelio
Vice President
Krishna K. Memani
Vice President and Fund Manager
Kevin M. Cronin
Vice President and Fund Manager
Richard A. Monaghan
Vice President
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' Web site:
www.putnaminv.com.
Shares of mutual funds are not deposits or obligations of, or guaranteed
or endorsed by, any financial institution; are not insured by the Federal
Deposit Insurance Corporation (FDIC), the Federal Reserve Board, or any
other agency; and involve risk, including the possible loss of the
principal amount invested.
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
- ---------------------
BULK RATE
U.S. POSTAGE PAID
PUTNAM
INVESTMENTS
- ---------------------
For account balances, economic forecasts, and the latest on Putnam funds, visit
www.putnaminv.com
SA035-52508 004/312/510/514 6/99
PUTNAM INVESTMENTS [SCALE LOGO OMITTED]
- ----------------------------------------------------------------------------
Putnam Income Fund
Supplement to Semiannual Report dated April 30, 1999
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
Six months ended 4/30/99 1.67%
One year ended 4/30/99 1.35
Annual average (since class A inception, 11/1/54) 8.52
- ----------------------------------------------------------------------------
Share value: NAV
10/31/98 $6.88
4/30/99 6.77
- ----------------------------------------------------------------------------
Distributions: No. Income Capital gains Total
6 $0.224 6 $0.224
- ----------------------------------------------------------------------------
Current return (end of period) Total
Current dividend rate1 6.56%
Current 30-day SEC yield2 6.50
1Income portion of most recent distribution, annualized and divided by NAV at
end of period.
2Based 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.
