Putnam
Income
Fund
ANNUAL REPORT ON PERFORMANCE AND OUTLOOK
10-31-99
[LOGO: BOSTON * LONDON * TOKYO]
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
The bond market has not been its usual safe haven for investors in recent
months. Rising interest rates knocked the wind out of fixed-income
securities just as they had begun to catch the hint of a favorable breeze.
The situation was exacerbated as investors regained their confidence in
common stocks and abandoned the safety of bonds.
However, an unfavorable environment often translates into opportunity for
investors. In fact, as they explain in the accompanying report, Putnam
Income Fund's managers are already focusing on the opportunities that they
believe should lie in the wake of the bond market's decline and are
positioning the portfolio accordingly.
Fixed-income investors themselves should take comfort in the quote from
The Wall Street Journal that appears on page 3 of this report. It reminds
us that stocks will not always be as exuberant as they are now and that
balancing exposure to stocks with bonds provides diversification and
protection against stock market declines. Point well taken.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
December 15, 1999
Report from the Fund Managers
Krishna K. Memani
Kevin M. Cronin
Fixed-income investors witnessed a sharp turnaround in U.S. bond markets
during Putnam Income Fund's fiscal year that ended on October 31, 1999. At
the end of calendar 1998 and the beginning of calendar 1999, a positive
backdrop heartened bond investors. Inflation was virtually nonexistent,
interest rates remained in a steady holding pattern at low levels, and
uncertainty reigned regarding the direction of both global and domestic
economic growth.
Unfortunately, the specter of renewed inflation as a consequence of a
global economic rebound and a healthy U.S. economy spooked bond investors
as 1999 unfolded and led to sharp price declines in the fixed-income
markets. These economic factors also prodded the Federal Reserve Board to
take back the three short-term interest rate cuts it implemented in late
1998. With interest rates on the rise, the fund weathered the storm as
best as possible, but experienced many of the same tribulations as the
market itself.
Total return for 12 months ended 10/31/99
Class A Class B Class C Class M
NAV POP NAV CDSC NAV CDSC NAV POP
- -------------------------------------------------------------------------
-0.09% -4.80% -0.69% -5.38% -0.92% -1.85% -0.26% -3.51%
- -------------------------------------------------------------------------
Past performance is no indication of future results. Performance
information for longer periods and explanation of performance calculation
methods begin on page 6.
* RISING INTEREST RATES TRIP UP U.S. TREASURIES
U.S. Treasury securities enjoyed a banner year in 1998 at the expense of
other bond-market sectors, benefiting from the flight to quality elicited
by crises in emerging markets. However, once we entered 1999 and signs
appeared that the worst was behind us, investor interest in non-Treasury
sectors was rekindled. Treasury securities, in particular, suffered from a
steady upward march in interest rates that commenced in the second quarter
of 1999. An unexpected jump in the consumer price index in April, the
largest one-month increase in nine years, followed by the Fed's May
announcement of its shift to a bias toward raising interest rates combined
to send market rates scurrying upward.
[GRAPHIC OMITTED: horizontal bar chart BOND MARKET PERFORMANCE BY SECTOR]
BOND MARKET PERFORMANCE BY SECTOR*
Comparison of total returns, 10/31/98 - 10/31/99
First Boston
High Yield Bond Index 5.54%
Lehman Brothers Mortgage-
Backed Securities Index 3.00%
Lehman Brothers
Corporate Bond Index 0.61%
Lehman Brothers Long-term
Treasury Bond Index -6.20%
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.
The Fed followed through with its threat, increasing short-term rates in
June and August, and again in November, just after the close of the fiscal
year. For its part, your fund made only small adjustments to its duration
in an attempt to take advantage of the substantial volatility in the
marketplace. Duration is a measure of the fund's sensitivity to changes in
interest rates; the longer a fund's duration, the more likely its net
asset value will be affected by changes in interest rates.
In the summer, we kept the duration slightly short in comparison to
similar funds because we believed the market was not pricing in the Fed
rate increases we thought were imminent. By early fall, market rates
reflected a more sustained aggressive Fed policy than we expected, so we
extended the duration slightly in response. Overall, however, our duration
posture during the year was neutral, a beneficial stance given the
volatility in the markets.
* U.S. SPREAD SECTORS POST VARIED RESULTS
Spread sectors (those offering higher yields than U.S. Treasuries,
including high-yield and investment-grade corporates, mortgage-backed
securities, and asset-backed securities) fell in and out of favor
throughout the fiscal year. Until the year's second quarter, corporate
bonds enjoyed a rally, rebounding from sharp losses associated with the
flight to quality in 1998.
The case for owning bonds
"While there's no denying that rising interest rates have helped put the debt
markets in the doldrums this year, the fact remains that bonds are a viable
investment for millions of investors. One of the most obvious reasons to buy
bonds is to diversify your portfolio . . . [Y]ear in and year out, stocks
won't always offer the souped-up returns that they've generated in the 1990s.
That's where bonds come in. They balance out your exposure to stocks and can
limit any downside that can occur in a bear market."
- -- The Wall Street Journal, 11/19/99
"There are many factors leading us to a positive outlook for the fund. First,
while we think the economy is moderating, we do not believe it will slow in a
substantial way. We also believe that profitability growth for corporations is
likely to be substantial."
- -- Krishna Memani, manager Putnam Income Fund
From April through September, however, corporates reeled from a flood of
new supply that came to market for two main reasons. First, corporations
were seeking to refinance their debt before interest rates went up.
Second, companies wanted to secure financing well in advance of 2000, to
avoid any problems associated with the Y2K computer bug.
During the same period, mortgage-backed securities fell out of favor
because of rising interest rates. When rates rise, the average life of
mortgages lengthens and their sensitivity to changes in interest rates
increases. Fortunately, we had substantially cut back on the fund's
mortgage position before this situation developed.
In September and October, the spread sectors rebounded. The corporate
market improved in large part because new supply was much slower than
anticipated. While your fund was caught in the initial corporate
downdraft, we found numerous opportunities to buy high-grade corporate
securities at attractive valuations. As the spread sectors recovered, our
increased allocation to them paid off. That included additional purchases
in mortgages that were made in September, just in time to take advantage
of a rally in September and October.
[GRAPHIC OMITTED: horizontal bar chart CHANGES IN PORTFOLIO COMPOSITION]
CHANGES IN PORTFOLIO COMPOSITION*
10/31/98 10/31/99
Corporate bonds
and notes 42.3% 50.6%
U.S. government
and agency obligations 31.1% 33.0%
Collateralized
mortgage obligations 10.7% 11.1%
Short-term
investments 15.0% 5.5%
Foreign government
bonds and notes 1.3% 0.7%
Other 4.5% 2.1%
Footnote reads:
*Based on total net assets as of indicated date. Holdings will vary over
time.
The main focus of our corporate purchases has been bonds of cyclical
companies, those that tend to be sensitive to the ups and downs of the
economy. New names include Amerada Hess, an integrated oil and gas
company; and, shortly after the close of the period, Georgia Pacific,
which we believe will take advantage of higher paper prices. 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.
In the mortgage-backed sector, we continued to favor and profit from
commercial mortgage-backed securities (CMBS). These investments, which
include mortgages of office buildings, hotels, multifamily housing, and
industrial real estate, offer the advantage of prepayment protection. Some
loans, for example, cannot be prepaid during the first five years. Beyond
that, we underweighted mortgages with coupons at or near current market
rates.
* POSITIVE OUTLOOK REMAINS FOR FISCAL 2000
There are many factors leading us to a positive outlook for the fund.
First, while we believe the economy is moderating, we do not think it will
slow in a substantial way. We also believe that profitability growth for
corporations is likely to be substantial, an ideal environment for the
spread sectors. Those sectors remain quite attractively valued now and
could well appreciate in future.
The perceived risks of 1997 and 1998, sparked more by a lack of growth
overseas than any fundamental problems in the U.S. economy, should fade as
overseas economies continue to grow relatively fast. The corporate market
also has historically outperformed other sectors in the first quarter of
each year. Therefore, we believe the corporate market will provide
particularly fertile ground for your fund in the near future.
The views expressed here are exclusively those of Putnam Management. They
are not meant as investment advice. Although the described holdings were
viewed favorably as of 10/31/99, 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.
<TABLE>
<CAPTION>
TOTAL RETURN FOR PERIODS ENDED 10/31/99
Class A Class B Class C Class M
(inception dates) (11/1/54) (3/1/93) (7/26/99) (12/14/94)
NAV POP NAV CDSC NAV CDSC NAV POP
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 year -0.09% -4.80% -0.69% -5.38% -0.92% -1.85% -0.26% -3.51%
- ----------------------------------------------------------------------------------------------
5 years 37.85 31.23 33.13 31.15 32.77 32.77 36.24 31.80
Annual average 6.63 5.59 5.89 5.57 5.83 5.83 6.38 5.68
- ----------------------------------------------------------------------------------------------
10 years 103.61 94.06 88.36 88.36 88.83 88.83 97.89 91.37
Annual average 7.37 6.85 6.54 6.54 6.56 6.56 7.06 6.71
- ----------------------------------------------------------------------------------------------
Annual average
(life of fund) 8.35 8.23 7.32 7.32 7.54 7.54 7.86 7.79
- ----------------------------------------------------------------------------------------------
</TABLE>
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 10/31/99
Lehman Brothers Aggregate Consumer
Bond Index* price index
- -----------------------------------------------------------------------------
1 year 0.53% 2.69%
- -----------------------------------------------------------------------------
5 years 46.52 12.51
Annual average 7.94 2.39
- -----------------------------------------------------------------------------
10 years 113.52 33.92
Annual average 7.88 2.96
- -----------------------------------------------------------------------------
Annual average
(life of fund) -- 4.17
- -----------------------------------------------------------------------------
*Index inception, 12/31/75.
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. For class C shares,
returns for periods prior to their inception are derived from the
historical performance of class A shares, adjusted to reflect both the
CDSC currently applicable to class C shares, which is 1% for the first
year and is eliminated thereafter, and the higher operating expenses
applicable to class C 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.
[GRAPHIC OMITTED: worm chart GROWTH OF A $10,000 INVESTMENT]
GROWTH OF A $10,000 INVESTMENT
Cumulative total return of a $10,000 investment since 10/31/89
Lehman Bros.
Fund's class A Aggregate Bond Consumer price
Date shares at POP Index index
10/31/89 9,525 10,000 10,000
10/31/90 9,726 10,631 10,629
10/31/91 11,481 12,312 10,939
10/31/92 12,843 13,523 11,290
10/31/93 14,687 15,128 11,600
10/31/94 14,077 14,573 11,903
10/31/95 16,361 16,853 12,237
10/31/96 17,356 17,839 12,604
10/31/97 18,898 19,425 12,866
10/31/98 19,423 21,239 13,041
10/31/99 $19,406 $21,352 $13,392
Footnote reads:
Past performance is no assurance of future results. At the end of the same
time period, a $10,000 investment in the fund's class B and class C shares
would have been valued at $18,836 and $18,883, respectively and no
contingent deferred sales charges would apply; a $10,000 investment in the
fund's class M shares would have been valued at $19,789 ($19,137 at public
offering price).
<TABLE>
<CAPTION>
PRICE AND DISTRIBUTION INFORMATION 12 MONTHS ENDED 10/31/99
Class A Class B Class C Class M
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Distributions (number) 12 12 3 12
- ------------------------------------------------------------------------------------------
Income $0.413 $0.365 $0.098 $0.402
- ------------------------------------------------------------------------------------------
Return of capital* 0.013 0.011 0.003 0.012
- ------------------------------------------------------------------------------------------
Total $0.426 $0.376 $0.101 $0.414
- ------------------------------------------------------------------------------------------
Share value: NAV POP NAV NAV NAV POP
- ------------------------------------------------------------------------------------------
10/31/98 $6.87 $7.21 $6.83 -- $6.84 $7.07
- ------------------------------------------------------------------------------------------
7/26/99+ -- -- -- $6.54 -- --
- ------------------------------------------------------------------------------------------
10/31/99 6.44 6.76 6.41 6.43 6.41 6.63
- ------------------------------------------------------------------------------------------
Current return (end of period)
- ------------------------------------------------------------------------------------------
Current dividend rate1 6.52% 6.21% 5.80% 6.35% 6.37% 6.15%
- ------------------------------------------------------------------------------------------
Current 30-day SEC yield2 6.77 6.44 6.01 6.07 6.51 6.29
- ------------------------------------------------------------------------------------------
* See page 44.
+ Inception date of class C shares.
1 Income portion of most recent distribution, annualized and divided by NAV or POP at end
of period.
2 Based on investment income, calculated using SEC guidelines.
</TABLE>
<TABLE>
<CAPTION>
TOTAL RETURN FOR PERIODS ENDED 9/30/99 (most recent calendar quarter)
Class A Class B Class C Class M
(inception dates) (11/1/54) (3/1/93) (7/26/99) (12/14/94)
NAV POP NAV CDSC NAV CDSC NAV POP
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 year -1.78% -6.44% -2.51% -7.12% -2.42% -3.34% -1.96% -5.08%
- ----------------------------------------------------------------------------------------------
5 years 37.59 31.02 32.67 30.71 32.57 32.57 36.00 31.60
Annual average 6.59 5.55 5.82 5.50 5.80 5.80 6.34 5.65
- ----------------------------------------------------------------------------------------------
10 years 106.90 97.11 91.29 91.29 92.08 92.08 101.10 94.68
Annual average 7.54 7.02 6.70 6.70 6.74 6.74 7.24 6.89
- ----------------------------------------------------------------------------------------------
Annual average
(life of fund) 8.37 8.25 7.33 7.33 7.56 7.56 7.88 7.80
- ----------------------------------------------------------------------------------------------
</TABLE>
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 section for performance calculation method.
Terms and definitions
Total return shows how the value of the fund's shares changed over time,
assuming you held the shares through the entire period and reinvested all
distributions in the fund.
Class A shares are generally subject to an initial sales charge.
Class B shares may be subject to a sales charge upon redemption.
Class C shares are not subject to an initial sales charge and are subject
to a contingent deferred sales charge only if the shares are redeemed
during the first year.
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 or class C shares and assumes redemption at the
end of the period. Your fund's 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. The CDSC for class C shares is 1% for one year
after purchase.
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.
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.
A guide to the financial statements
These sections of the report, preceded by the Report of independent
accountants, 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 are determined. All investment and noninvestment 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 sources 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-end funds, a separate
table is provided for each share class.
Report of independent accountants
For the fiscal year ended October 31, 1999
The Board of Trustees and Shareholders
Putnam Income Fund
We have audited the accompanying statement of assets and liabilities of
Putnam Income Fund, including the fund's portfolio, as of October 31,
1999, and the related statement of operations, statement of changes in net
assets and financial highlights for the year or period then ended. These
financial statements and financial highlights are the responsibility of
the Fund's management. Our responsibility is to express an opinion on
these financial statements and financial highlights based on our audit.
The statement of changes in net assets for the year ended October 31,
1998, and the financial highlights for each of the years or period, in the
four-year period ended October 31, 1998, were audited by other auditors,
whose report dated December 14, 1998, expressed an unqualified opinion on
that financial statement and those financial highlights.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform our audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included
confirmation of securities owned as of October 31, 1999 by correspondence
with the custodian and brokers. An audit also includes assessing the
accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position
of Putnam Income Fund as of October 31, 1999, the results of its
operations, changes in its net assets and financial highlights for the
year or period then ended, in conformity with generally accepted
accounting principles.
KPMG LLP
Boston, Massachusetts
December 7, 1999
<TABLE>
<CAPTION>
The fund's portfolio
October 31, 1999
CORPORATE BONDS AND NOTES (50.6%) (a)
PRINCIPAL AMOUNT VALUE
<S> <C> <C>
Advertising (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
$ 1,010,000 Lamar Media Corp. company guaranty 9 5/8s, 2006 $ 1,027,675
470,000 Lamar Media Corp. sr. sub. notes 9 1/4s, 2007 462,950
60,000 Outdoor Systems, Inc. sr. sub. notes 9 3/8s, 2006 62,700
--------------
1,553,325
Aerospace and Defense (1.2%)
- --------------------------------------------------------------------------------------------------------------------------
2,520,000 Argo-Tech Corp. company guaranty 8 5/8s, 2007 2,129,400
1,200,000 BE Aerospace, Inc. sr. sub. notes Ser. B, 9 7/8s, 2006 1,170,000
18,410,000 Boeing Co. deb. 6 5/8s, 2038 16,067,696
13,800,000 Litton Industries Inc. 144A notes 8s, 2009 14,026,320
1,400,000 Raytheon Co. notes 6 3/4s, 2007 1,333,696
9,830,000 Raytheon Co. deb. 6.4s, 2018 8,413,792
--------------
43,140,904
Agriculture (--%)
- --------------------------------------------------------------------------------------------------------------------------
569,290 Premium Standard Farms, Inc. sr. sec. notes 11s, 2003 (PIK) 523,747
Airlines (1.8%)
- --------------------------------------------------------------------------------------------------------------------------
20,785,000 Airbus Industries 144A bonds, Ser. A, 8.027s, 2020 20,785,000
3,054,378 Continental Airlines, Inc. pass-through certificates
Ser. 97CI, 7.42s, 2007 3,015,771
2,035,409 Continental Airlines, Inc. pass-through certificates
Ser. 974C, 6.8s, 2009 1,956,638
12,503,050 Continental Airlines, Inc. pass-through certificates
Ser. 981C, 6.541s, 2008 12,011,805
9,706,792 Northwest Airlines Corp. pass-thru certificate
Ser. 1999-1A, 6.81s, 2020 8,649,722
15,440,000 United Air Lines Corp. deb. 9 3/4s, 2021 17,412,614
--------------
63,831,550
Apparel (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
1,130,000 Fruit of the Loom company guaranty 8 7/8s, 2006 282,500
1,770,000 Guess Jeans, Inc. sr. sub. notes 9 1/2s, 2003 1,787,700
--------------
2,070,200
Automotive (1.3%)
- --------------------------------------------------------------------------------------------------------------------------
120,000 Aftermarket Technology Corp. sr. sub. notes 12s, 2004 120,600
11,615,000 Chrysler Corp. deb. Ser. B, 7.45s, 2097 11,076,761
11,985,000 Delphi Automotive Systems Corp. deb. 7 1/8s, 2029 10,785,541
2,590,000 Federal Mogul Corp. notes 7 3/8s, 2006 2,376,092
6,000,000 Ford Motor Co. deb. 7.4s, 2046 5,707,140
14,360,000 Ford Motor Co. bonds 6 5/8s, 2028 12,774,225
1,600,000 Ford Motor Credit Corp. notes 6.55s, 2002 1,590,688
1,340,000 Lear Corp. sub. notes 9 1/2s, 2006 1,373,500
890,000 Talon Automotive Group sr. sub. notes Ser. B, 9 5/8s, 2008 712,000
--------------
46,516,547
Banks (3.9%)
- --------------------------------------------------------------------------------------------------------------------------
13,820,000 BankAmerica Corp. sr. notes 5 7/8s, 2009 12,552,291
16,680,000 Bank United med. term notes Ser. A, 8s, 2009 15,718,732
12,700,000 Bayer Hypo-Vereinsbank144A bonds 8.741s, 2031 12,270,232
12,285,000 Colonial Bank sub. notes 8s, 2009 11,504,903
12,020,000 Dresdner Funding Trust I 144A notes 8.151s, 2031 11,231,849
3,945,000 Firstar Bank Milwaukee sr. bank notes 6 1/4s, 2002 3,882,590
6,260,000 Firstar Capital Trust I company guaranty Ser. B, 8.32s, 2026 6,229,263
10,615,000 Imperial Bank sub. notes 8 1/2s, 2009 10,081,596
1,860,000 Merita Bank Ltd. sub. notes 6 1/2s, 2006 (Finland) 1,769,232
21,915,000 Provident Companies, Inc. bonds 7.405s, 2038 18,526,941
13,015,000 Providian National Bank sr. notes 6 3/4s, 2002 12,745,329
5,470,000 Riggs Capital Trust company guaranty Ser. A, 8 5/8s, 2026 5,278,550
14,465,000 Sovereign Bancorp, Inc. sr. notes 6 5/8s, 2001 14,178,738
--------------
135,970,246
Basic Industrial Products (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
2,305,000 American Standard Companies, Inc. sr. notes 7 3/8s, 2008 2,028,400
450,000 Ball Corp. company guaranty 8 1/4s, 2008 438,750
2,157,000 Ball Corp. company guaranty 7 3/4s, 2006 2,103,075
13,905,000 Merey Sweeney L.P. 144A sr. notes 8.85s, 2019 13,870,238
--------------
18,440,463
Broadcasting (1.2%)
- --------------------------------------------------------------------------------------------------------------------------
590,000 Allbritton Communications Co. sr. sub. notes
Ser. B, 8 7/8s, 2008 561,975
1,320,000 Capstar Broadcasting sr. sub. notes 9 1/4s, 2007 1,369,500
2,800,000 Chancellor Media Corp. sr. sub. notes 9 3/8s, 2004 2,856,000
875,000 Granite Broadcasting Corp. sr. sub. notes 10 3/8s, 2005 894,688
1,130,000 Granite Broadcasting Corp. sr. sub. notes 8 7/8s, 2008 1,087,625
1,575,000 Lenfest Communications, Inc. sr. sub. notes 10 1/2s, 2006 1,779,750
750,000 Lenfest Communications, Inc. sr. sub. notes 8 1/4s, 2008 750,000
75,000 Rogers Cablesystems Ltd. notes 11s, 2015 (Canada) 84,375
2,035,000 Sinclair Broadcast Group, Inc. company guaranty 9s, 2007 1,912,900
1,000,000 Spanish Broadcasting Systems sr. notes 12 1/2s, 2002 1,140,000
26,575,000 TCI Communications, Inc. deb. 8 3/4s, 2015 29,688,527
360,000 TCI Communications, Inc. sr. notes 8.65s, 2004 387,479
--------------
42,512,819
Building and Construction (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
530,000 Building Materials Corp. company guaranty 8s, 2008 480,975
4,010,000 D.R. Horton, Inc. company guaranty 8s, 2009 3,498,725
600,000 NCI Building Systems Inc. sr. sub. notes Ser. B, 9 1/4s, 2009 553,500
--------------
4,533,200
Business Equipment and Services (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
15,396,451 Federal Express Corp. pass-through certificates, Ser. 1998-1A,
6.72s, 2022 14,417,391
590,000 Iron Mountain, Inc. med. term notes company guaranty
10 1/8s, 2006 601,800
175,000 Iron Mountain, Inc. company guaranty 8 3/4s, 2009 164,500
619,000 Pierce Leahy Corp. sr. sub. notes 11 1/8s, 2006 654,593
1,500,000 Production Resource Group sr. sub. notes 11 1/2s, 2008 1,350,000
--------------
17,188,284
Cable Television (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
950,000 Adelphia Communications Corp. sr. notes Ser. B, 8 3/8s, 2008 897,750
1,000,000 Adelphia Communications Corp. sr. notes Ser. B, 7 3/4s, 2009 900,000
935,000 Century Communications Corp. sr. notes 9 1/2s, 2005 932,663
600,000 Century Communications Corp. sr. notes 8 3/4s, 2007 573,000
440,000 Charter Communications Holdings LLC sr. disc. notes
stepped-coupon zero % (9.92s, 4/1/04), 2011 (STP) 259,600
1,100,000 CSC Holdings, Inc. sr. sub. deb. 10 1/2s, 2016 1,199,000
340,000 CSC Holdings, Inc. deb. 7 7/8s, 2018 322,249
2,250,000 CSC Holdings, Inc. sr. notes 7 7/8s, 2007 2,215,350
230,000 Diamond Cable Communication Co. sr. disc. notes
stepped-coupon zero % (11 3/4s, 12/15/00), 2005
(United Kingdom) (STP) 208,725
4,795,000 Diamond Cable Communication Co. sr. disc. notes
stepped-coupon zero % (10 3/4s, 2/15/02), 2007
(United Kingdom) (STP) 3,764,075
245,000 Jones Intercable, Inc. sr. sub. deb. 10 1/2s, 2008 258,475
561,000 Jones Intercable, Inc. sr. notes 9 5/8s, 2002 594,660
1,200,000 Jones Intercable, Inc. sr. notes 7 5/8s, 2008 1,197,000
1,280,000 NTL Communications Corp. sr. notes Ser. B, 11 1/2s, 2008 1,376,000
980,000 NTL Inc. sr. notes, Ser. B, stepped-coupon zero %
(9 3/4s, 4/1/03), 2008 (United Kingdom) (STP) 656,600
1,080,000 TeleWest Communications PLC 144A sr. disc. notes
stepped-coupon zero % (9 1/4, 4/15/04), 2009
(United Kingdom) (STP) 656,100
--------------
16,011,247
Chemicals (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
1,420,000 Equistar Chemicals LP notes 9 1/8s, 2002 1,431,687
930,000 ISP Holdings, Inc. sr. notes Ser. B, 9 3/4s, 2002 934,650
2,370,000 Lyondell Petrochemical Co. notes Ser. A, 9 5/8s, 2007 2,375,925
11,175,000 Nova Chemicals Corp. deb. 7s, 2026 (Canada) 10,859,977
9,290,000 Rohm & Haas Co. 144A deb. 7.85s, 2029 9,506,364
--------------
25,108,603
Computer Services and Software (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
23,870,000 IBM Corp. deb. 7 1/8s, 2096 22,782,483
570,000 Verio Inc. sr. notes 11 1/4s, 2008 587,100
--------------
23,369,583
Conglomerates (0.6%)
- --------------------------------------------------------------------------------------------------------------------------
5,670,000 Canadian Pacific Ltd. deb. 9.45s, 2021 (Canada) 6,503,603
13,135,000 TRW, Inc. 144A notes 7 3/4s, 2029 12,493,749
--------------
18,997,352
Consumer Durables (--%)
- --------------------------------------------------------------------------------------------------------------------------
880,000 Albecca Inc. company guaranty 10 3/4s, 2008 673,200
Consumer Non Durables (1.2%)
- --------------------------------------------------------------------------------------------------------------------------
16,700,000 Imperial Tobacco company guaranty 7 1/8s, 2009 15,261,295
1,955,000 Philip Morris Cos., Inc. notes 7 1/2s, 2004 1,944,404
11,028,000 Philip Morris Cos., Inc. notes 7 1/4s, 2003 11,055,791
4,530,000 Philip Morris Cos., Inc. notes 7 1/8s, 2004 4,432,379
6,220,000 Philip Morris Cos., Inc. notes 6.8s, 2003 6,085,648
610,000 Revlon Consumer Products sr. notes 9s, 2006 481,900
840,000 Revlon Consumer Products sr. notes 8 1/8s, 2006 655,200
--------------
39,916,617
Consumer Services (0.6%)
- --------------------------------------------------------------------------------------------------------------------------
344,000 Coinmach Corp. sr. notes Ser. D, 11 3/4s, 2005 356,040
1,070,000 Hertz Corp. sr. notes 7s, 2028 961,951
14,260,000 Hertz Corp. sr. notes 6 1/2s, 2006 13,648,674
6,080,000 Hertz Corp. notes 6 1/4s, 2009 5,566,848
471,000 Protection One, Inc. sr. disc. notes 13 5/8s, 2005 103,620
--------------
20,637,133
Electronics and Electrical Equipment (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
190,000 DII Group, Inc. (The) sr. sub. notes 8 1/2s, 2007 180,500
1,030,000 Flextronics International Ltd. sr. sub. notes Ser. B, 8 3/4s, 2007 1,019,700
2,540,000 Wavetek Corp. company guaranty 10 1/8s, 2007 2,082,800
--------------
3,283,000
Energy-related (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
4,280,000 CMS Energy Corp. sr. notes Ser. B, 6 3/4s, 2004 4,061,806
15,270,000 KN Capital Trust III company guaranty 7.63s, 2028 13,245,198
1,180,000 York Power Funding 144A company guaranty 12s, 2007
(Cayman Islands) 1,203,600
--------------
18,510,604
Entertainment (1.5%)
- --------------------------------------------------------------------------------------------------------------------------
27,235,000 News America Holdings, Inc. deb. 7 3/4s, 2045 24,835,052
505,000 News America Holdings, Inc. deb. 7.7s, 2025 474,629
1,110,000 SFX Entertainment, Inc. 144A company guaranty
Ser. B, 9 1/8s, 2008 1,018,425
800,000 SFX Entertainment, Inc. company guaranty 9 1/8s, 2008 736,000
3,450,000 Time Warner Entertainment, Inc. notes 8 7/8s, 2012 3,814,561
14,010,000 Time Warner Entertainment, Inc. sr. notes 8 3/8s, 2033 15,001,768
100,000 United Artists Theatre sr. sub. notes 9 3/4s, 2008 20,125
7,845,000 Walt Disney Co. med. term notes 5.62s, 2008 7,036,573
--------------
52,937,133
Environmental Control (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
5,690,000 Allied Waste Industries, Inc. company guaranty
Ser. B, 7 7/8s, 2009 4,843,613
8,610,000 Waste Management, Inc. notes 7.7s, 2002 8,038,727
4,250,000 Waste Management, Inc. notes 6 5/8s, 2002 3,882,418
--------------
16,764,758
Food and Beverages (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
14,195,000 Pepsi Bottling Group Inc. sr. notes Ser. B, 7s, 2029 13,141,731
5,275,000 Tricon Global Restaurants, Inc. sr. notes 7.45s, 2005 5,010,881
--------------
18,152,612
Gaming (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
330,000 Circus Circus Enterprises, Inc. sr. notes 6.45s, 2006 291,275
2,800,000 Harrahs Entertainment, Inc. company guaranty 7 7/8s, 2005 2,667,000
320,000 Harrahs Entertainment, Inc. company guaranty 7 1/2s, 2009 299,373
1,020,000 Hollywood Park, Inc. sr. sub. notes Ser. B, 9 1/2s, 2007 986,850
470,000 Hollywood Park, Inc. company guaranty Ser. B, 9 1/4s, 2007 451,200
1,590,000 International Game Technology sr. notes 7 7/8s, 2004 1,526,400
2,890,000 Mohegan Tribal Gaming, Auth. sr. sub. notes 8 3/4s, 2009 2,810,525
990,000 Mohegan Tribal Gaming, Auth. sr. notes 8 1/8s, 2006 955,350
3,910,000 Park Place Entertainment sr. sub. notes 7 7/8s, 2005 3,685,175
--------------
13,673,148
Health Care (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
1,430,000 Columbia/HCA Healthcare Corp. med. term notes 9s, 2014 1,358,500
3,280,000 Columbia/HCA Healthcare Corp. med. term notes 8.7s, 2010 3,106,750
70,000 Columbia/HCA Healthcare Corp. notes 7 1/4s, 2008 60,850
480,000 Hudson Respiratory Care, Inc. sr. sub. notes 9 1/8s, 2008 375,600
585,000 Integrated Health Services, Inc. sr. sub. notes
Ser. A, 9 1/2s, 2007 46,800
600,000 Integrated Health Services, Inc. sr. sub. notes
Ser. A, 9 1/4s, 2008 48,000
550,000 Mariner Post-Acute Network, Inc. sr. sub. notes
stepped-coupon Ser. B, zero %
(10 1/2s, 11/1/02), 2007 (In default) (NON) (STP) 11,000
1,275,000 Mariner Post-Acute Network, Inc. sr. sub. notes
Ser. B, 9 1/2s, 2007 (In default) (NON) 38,250
650,000 MedPartners, Inc. sr. sub. notes 6 7/8s, 2000 627,250
120,000 Multicare Cos., Inc. sr. sub. notes 9s, 2007 36,000
625,000 Quorum Health Group, Inc. sr. sub. notes 8 3/4s, 2005 571,875
170,000 Tenet Healthcare Corp. sr. sub. notes 8 5/8s, 2007 158,525
2,800,000 Tenet Healthcare Corp. sr. notes Ser. B, 8 1/8s, 2008 2,520,000
1,925,000 Tenet Healthcare Corp. sr. notes 8s, 2005 1,799,875
--------------
10,759,275
Insurance and Finance (17.1%)
- --------------------------------------------------------------------------------------------------------------------------
380,000 Advanta Corp. med. term notes Ser. B, 7s, 2001 354,874
1,660,000 Advanta Corp. med-term notes Ser. D, 6.92s, 2002 1,509,006
19,995,000 AFC Capital Trust company guaranty Ser. B, 8.207s, 2027 19,142,413
11,990,000 AFLAC Inc. sr. notes 6 1/2s, 2009 11,293,261
3,500,000 AMBAC Indemnity Corp. deb. 9 3/8s, 2011 3,985,730
24,690,000 American General Institute 144A company guaranty
8 1/8s, 2046 24,627,534
5,135,000 Associates Corp. deb. 6.95s, 2018 4,876,145
5,575,000 Associates First Capital Corp. sub. deb. 8.15s, 2009 5,957,389
12,300,000 Capital One Financial Corp. notes 7 1/4s, 2006 11,685,000
8,115,000 Capital One Financial Corp. notes 7 1/4s, 2003 7,913,829
17,650,000 Citicorp sub. notes 6 3/8s, 2008 16,621,358
500,000 Colonial Capital II 144A company guaranty 8.92s, 2027 455,871
15,810,000 Conseco Financing Trust II company guaranty 8.7s, 2026 13,756,281
9,515,000 Conseco, Inc. notes 8 1/2s, 2002 9,543,450
11,305,000 Conseco, Inc. med-term notes 6 1/2s, 2002 10,767,673
3,000,000 Contifinancial Corp. sr. notes 8 3/8s, 2003 600,000
370,000 Contifinancial Corp. sr. notes 8 1/8s, 2008 74,000
1,480,000 Contifinancial Corp. sr. notes 7 1/2s, 2002 251,600
205,000 Countrywide Home Loan Corp. company guaranty
Ser. E, 7.26s, 2004 206,296
9,465,000 Countrywide Home Loan Corp. company guaranty
6.935s, 2007 9,248,062
15,960,000 Countrywide Home Loan Corp. company guaranty
med. term notes 6 1/4s, 2009 14,677,295
13,540,000 Dime Bancorp, Inc. sr. notes 6 3/8s, 2001 13,559,904
6,200,000 Dime Capital Trust I bank guaranty Ser. A, 9.33s, 2027 6,118,594
17,035,000 Executive Risk Capital Trust company guaranty
Ser. B, 8.675s, 2027 16,903,660
10,820,000 Finova Capital Corp. notes 6 1/4s, 2002 10,586,721
14,375,000 Finova Capital Corp. med-term notes 6.11s, 2003 13,964,163
12,397,000 First Citizens Bank Capital Trust I company guaranty
8.05s, 2028 11,033,330
4,270,000 First Financial Caribbean Corp. sr. notes 7.84s, 2006 4,135,282
14,240,000 Ford Motor Credit Corp. notes 7 3/8s, 2009 14,314,048
8,445,000 Ford Motor Credit Corp. sr. notes 5.8s, 2009 7,623,048
22,120,000 General Motors Acceptance Corp. sr. unsub. 5.85s, 2009 20,081,421
13,755,000 Goldman Sachs Group, Inc. (The) notes Ser. B, 7.35s, 2009 13,720,613
5,050,000 Hartford Life, Inc. deb. 7.65s, 2027 4,938,244
355,000 Heller Financial Inc. notes 6s, 2004 340,356
15,180,000 Household Finance Corp. notes 6 1/2s, 2008 14,319,446
1,795,000 Household Finance Corp. sr. unsub. 5 7/8s, 2009 1,624,134
9,830,000 Lehman Bros Holdings, Inc. notes 6 5/8s, 2004 9,593,294
21,165,000 Lehman Bros Holdings, Inc. notes 6 1/4s, 2003 20,569,205
10,120,000 Liberty Mutual Insurance 144A notes 7.697s, 2097 8,512,438
8,490,000 Markel Capital Trust I company guaranty Ser. B, 8.71s, 2046 7,403,025
9,555,000 Newcourt Credit Group Inc. company guaranty
Ser. A, 7 1/8s, 2003 9,537,228
9,380,000 Newcourt Credit Group Inc. 144A notes 6 7/8s, 2005 9,266,783
2,950,000 Orange Cogen Funding 144A company guaranty 8.175s, 2022 2,851,765
320,000 Paine Webber Group, Inc. sr. notes 6.55s, 2008 300,589
17,855,000 Paine Webber Group, Inc. sr. med. term notes 6.52s, 2005 16,917,613
21,310,000 Peoples Bank-Bridgeport sub. notes 7.2s, 2006 19,805,088
1,565,000 Peoples Heritage Capital Trust company guaranty
Ser. B, 9.06s, 2027 1,495,170
8,000,000 Presidential Life Corp. sr. notes 7 7/8s, 2009 7,600,000
13,975,000 Principal Financial Group 144A notes 7.95s, 2004 (Australia) 14,114,750
10,910,000 Prudential Insurance Co. 144A 6 7/8s, 2003 10,861,341
800,000 RBF Finance Co. company guaranty 11 3/8s, 2009 844,000
3,870,000 RBF Finance Co. company guaranty 11s, 2006 4,102,200
9,140,000 Salomon, Inc. sr. notes 7.3s, 2002 9,252,788
1,610,000 Salomon, Inc. sr. notes 6 3/4s, 2003 1,596,476
6,258,936 Salton Sea Funding Corp. company guaranty Ser. E, 8.3s, 2011 6,271,141
6,500,000 Scotland International Finance 144A sub. notes 8.85s, 2006
(Netherlands) 6,970,795
13,810,000 Sears Roebuck Acceptance Corp. notes 6 1/2s, 2028 11,265,646
6,160,000 Sprint Capital Corp. company guaranty 6.9s, 2019 5,743,646
12,815,000 Sprint Capital Corp. company guaranty 6 1/8s, 2008 11,850,031
9,400,000 Sprint Capital Corp. company guaranty 5.7s, 2003 9,001,722
8,510,000 St. Paul Bancorp sr. notes 7 1/8s, 2004 8,242,190
3,745,000 State Street Institution 144A company guaranty 7.94s, 2026 3,656,768
18,981,000 Sun Life Canada Capital Trust 144A 8.526s, 2049 17,762,040
12,490,000 Tig Capital Trust I 144A bonds 8.597s, 2027 11,562,118
7,220,000 Transamerica Capital III bonds 7 5/8s, 2037 6,723,625
10,575,000 Trenwick Capital Trust I company guaranty 8.82s, 2037 8,563,529
1,595,000 Webster Capital Trust I 144A bonds 9.36s, 2027 1,569,911
1,555,000 Wilmington Trust Corp. sub. notes 6 5/8s, 2008 1,440,459
11,783,000 Zurich Capital Trust I 144A company guaranty 8.376s, 2037 11,335,717
--------------
597,393,122
Lodging (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
4,980,000 HMH Properties, Inc. company guaranty Ser. B, 7 7/8s, 2008 4,320,150
1,250,000 ITT Corp. notes 6 3/4s, 2005 1,123,925
530,000 Starwood Hotels & Resorts notes 6 3/4s, 2003 498,576
--------------
5,942,651
Medical Supplies and Devices (--%)
- --------------------------------------------------------------------------------------------------------------------------
350,000 ALARIS Medical Systems, Inc. company guaranty 9 3/4s, 2006 280,000
905,000 Kinetic Concepts, Inc. company guaranty Ser. B, 9 5/8s, 2007 651,600
--------------
931,600
Metals and Mining (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
160,000 Anker Coal Group, Inc. 144A sec. notes 14 1/4s, 2007 (PIK) 80,000
810,000 Continental Global Group sr. notes Ser. B, 11s, 2007 421,200
1,590,000 Lodestar Holdings, Inc. company guaranty 11 1/2s, 2005 954,000
--------------
1,455,200
Oil and Gas (3.3%)
- --------------------------------------------------------------------------------------------------------------------------
12,855,000 Amerada Hess Corp. bonds 7 7/8s, 2029 12,600,471
20,595,000 Coastal Corp. bonds 6.95s, 2028 18,388,864
720,000 Gulf Canada Resources, Ltd. sr. notes 8 3/8s, 2005 (Canada) 704,282
3,390,000 Leviathan Gas Corp. company guaranty Ser. B, 10 3/8s, 2009 3,474,750
22,335,000 Louis Dreyfus Natural Gas notes 6 7/8s, 2007 19,512,526
705,000 Norsk Hydro AS deb. 7.15s, 2025 (Norway) 650,504
13,205,000 Norsk Hydro ASA notes 6.36s, 2009 (Norway) 12,276,556
1,270,000 Ocean Energy, Inc. company guaranty Ser. B, 8 3/8s, 2008 1,222,375
11,920,000 Petro-Canada deb. 9 1/4s, 2021 (Canada) 13,356,837
1,150,000 Petro Geo-Services ADR notes 7 1/2s, 2007 (Norway) 1,141,916
14,815,000 Petro Geo-Services sr. notes 7 1/8s, 2028 (Norway) 13,263,573
1,760,000 Seagull Energy sr. sub notes 8 5/8s, 2005 1,724,800
19,015,000 Union Oil Company of California company guaranty
7 1/2s, 2029 18,091,822
--------------
116,409,276
Packaging and Containers (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
2,000,000 Consumers International 144A sr. notes 10 1/4s, 2005 1,880,000
1,750,000 Owens-Illinois, Inc. sr. notes 8.1s, 2007 1,690,710
--------------
3,570,710
Paper and Forest Products (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
9,360,000 Abitibi-Consolidated Inc. deb. 8 1/2s, 2029 9,219,600
90,000 Boise Cascade Co. med. term notes Ser. A, 7.43s, 2005 86,774
940,000 Pacifica Papers, Inc. sr. notes 10s, 2009 (Canada) 956,450
3,670,000 Tembec Industries, Inc. company guaranty 8 5/8s, 2009
(Canada) 3,578,250
--------------
13,841,074
Pharmaceuticals and Biotechnology (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
1,625,000 ICN Pharmaceuticals, Inc. 144A sr. notes 9 1/4s, 2005 1,551,875
2,800,000 ICN Pharmaceuticals, Inc. 144A sr. notes 8 3/4s, 2008 2,555,000
6,035,000 Monsanto Co. 144A deb. 6.6s, 2028 5,368,857
--------------
9,475,732
Photography (--%)
- --------------------------------------------------------------------------------------------------------------------------
190,000 PX Escrow Corp. sr. disc. notes stepped-coupon zero %
(9 5/8s, 2/1/02), 2006 (STP) 85,500
Pipelines (1.1%)
- --------------------------------------------------------------------------------------------------------------------------
8,055,000 Alliance Pipeline L.P. 144A sr. notes 7.77s, 2015 (Canada) 7,752,938
6,793,838 Express Pipeline Ltd. 144A sub. notes Ser. B, 7.39s, 2019
(Canada) 5,851,668
8,725,000 Maritime & NE Pipelines 144A sr. sec. notes 7.7s, 2019 8,519,090
7,935,000 Osprey Trust 144A sec. notes 8.31s, 2003 7,989,553
8,655,000 Sonat, Inc. notes 7 5/8s, 2011 8,655,433
--------------
38,768,682
Publishing (--%)
- --------------------------------------------------------------------------------------------------------------------------
1,510,000 Garden State Newspapers, Inc. sr. sub. notes Ser. B, 8 3/4s, 2009 1,389,200
Real Estate (1.6%)
- --------------------------------------------------------------------------------------------------------------------------
2,110,000 Avalon Properties, Inc. notes 7 3/8s, 2002 (R) 2,112,047
8,730,000 Avalon Properties, Inc. notes 6 7/8s, 2007 (R) 8,161,764
8,390,000 Avalon Properties, Inc. notes 6 5/8s, 2005 (R) 7,988,874
16,295,000 EOP Operating L.P. notes 6.8s, 2009 15,075,971
3,955,000 EOP Operating L.P. sr. notes 6 3/4s, 2008 3,672,653
6,045,000 EOP Operating L.P. notes 6 3/8s, 2002 5,939,152
3,305,000 OMEGA Healthcare Investors, Inc. notes 6.95s, 2007 (R) 2,712,149
8,460,000 OMEGA Healthcare Investors, Inc. notes 6.95s, 2002 (R) 7,854,772
3,500,000 Tanger Properties Ltd. partnership gtd. notes 8 3/4s, 2001 (R) 3,476,445
--------------
56,993,827
Retail (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
2,340,000 Federated Department Stores, Inc. sr. notes 8 1/2s, 2003 2,433,834
3,265,000 Federated Department Stores, Inc. notes 6.3s, 2009 3,009,808
680,000 K mart Corp. notes 8 1/8s, 2006 673,200
1,320,000 K mart Corp. deb. 7.95s, 2023 1,188,000
660,000 K mart Corp. med. term notes 7.55s, 2004 628,234
320,000 Kasper A.S.L. Ltd. sr. notes 12 3/4s, 2004 276,800
5,000,000 May Department Stores Co. notes 9 1/2s, 2021 5,821,250
2,760,000 Southland Corp. sr. sub. deb. 5s, 2003 2,380,500
1,000,000 Southland Corp. deb. Ser. A, 4 1/2s, 2004 820,000
--------------
17,231,626
Semiconductors (--%)
- --------------------------------------------------------------------------------------------------------------------------
1,120,000 Amkor Technologies, Inc. 144A sr. notes 9 1/4s, 2006 1,083,600
Specialty Consumer Products (0.8%)
- --------------------------------------------------------------------------------------------------------------------------
11,810,000 Tyco International Ltd. company guaranty 6 3/8s, 2005 11,276,306
16,970,000 Tyco International Ltd. company guaranty 6 1/4s, 2003 16,347,880
--------------
27,624,186
Steel (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
1,165,000 AK Steel Corp. sr. notes 9 1/8s, 2006 1,153,350
2,800,000 AK Steel Corp. company guaranty 7 7/8s, 2009 2,548,000
575,000 Ameristeel Corp. company guaranty Ser. B, 8 3/4s, 2008 564,938
810,000 California Steel Industries 144A sr. notes 8 1/2s, 2009 769,500
2,760,000 National Steel Corp. 1st mtge. Ser. D, 9 7/8s, 2009 2,732,400
--------------
7,768,188
Telecommunications (1.4%)
- --------------------------------------------------------------------------------------------------------------------------
14,215,000 AT&T Capital Corp. med. term notes 6.6s, 2005 13,701,260
1,360,000 BTI Telecom Corp. sr. notes 10 1/2s, 2007 1,156,000
800,000 Call-Net Enterprises Inc. sr. disc. notes stepped-coupon
zero % (10.8s, 5/15/04), 2009 (Canada) (STP) 464,000
1,220,000 Call-Net Enterprises, Inc. sr. disc. notes stepped-coupon
zero % (8.94s, 8/15/03), 2008 (Canada) (STP) 707,600
2,770,000 Call-Net Enterprises Inc. sr. notes 8s, 2008 (Canada) 2,354,500
1,770,000 Covad Communications Group Inc. sr. notes 12 1/2s, 2009 1,734,600
560,000 Dial Call Communications, Inc. sr. disc. notes
Ser. B, 10 1/4s, 2005 571,200
1,860,000 Econophone, Inc. 144A notes stepped-coupon zero %
(11s, 2/15/03), 2008 (STP) 1,023,000
200,000 Exodus Communications, Inc. 144A sr. notes 11 1/4s, 2008 202,000
1,215,000 Flag Ltd. 144A sr. notes 8 1/4s, 2008 (Bermuda) 1,075,267
4,860,000 Global Crossing Holdings, Ltd. company guaranty 9 5/8s, 2008 4,932,900
1,100,000 GST Telecommunications, Inc. company guaranty
stepped-coupon zero % (13 7/8s, 12/15/00), 2005 (STP) 836,000
1,020,000 Hyperion Telecommunications Corp., Inc. sr. notes Ser. B,
12 1/4s, 2004 1,081,200
4,160,000 ICG Services, Inc. sr. disc. notes stepped-coupon zero %
(9 7/8s, 5/1/03), 2008 (STP) 2,059,200
1,855,000 Intermedia Communications, Inc. sr. disc. notes stepped-coupon
Ser. B, zero % (11 1/4s, 7/15/02), 2007 (STP) 1,279,950
4,225,000 International Cabletel, Inc. sr. notes stepped-coupon Ser. B,
zero % (11 1/2s, 2/01/01), 2006 (STP) 3,686,313
970,000 Logix Communications Enterprises sr. notes 12 1/4s, 2008 814,800
180,000 Long Distance International, Inc. sr. notes 12 1/4s, 2008 90,000
2,330,000 Metromedia Fiber Network, Inc. sr. notes Ser. B, 10s, 2008 2,283,400
1,270,000 Microcell Telecommunications sr. disc. notes stepped-coupon
Ser. B, zero % (14s, 12/1/01), 2006 (Canada) (STP) 1,044,575
440,000 NEXTEL Communications, Inc. sr. notes 12s, 2008 489,500
350,000 NEXTEL Communications, Inc. sr. disc. notes stepped-coupon
zero % (10.65s, 9/15/02), 2007 (STP) 262,500
1,320,000 NEXTEL Communications, Inc. sr. disc. notes stepped-coupon
zero % (9.95s, 2/15/03), 2008 (STP) 937,200
1,050,000 NEXTEL Communications, Inc. sr. disc. notes stepped-coupon
zero % (9 3/4s, 10/31/02), 2007 (STP) 756,000
1,350,000 NEXTEL Communications, Inc. sr. disc. notes 9 3/4s, 2004 1,375,313
1,665,000 Qwest Communications International, Inc. sr. disc. notes
stepped-coupon zero % (9.47s, 10/15/02), 2007 (STP) 1,321,194
1,310,000 Telecommunications Techniques, Inc. company guaranty
9 3/4s, 2008 1,244,500
390,000 Telehub Communications Corp. company guaranty
stepped-coupon zero % (13 7/8s, 7/31/02), 2005 (STP) 39,000
1,940,000 Williams Communications Group Inc. sr. notes 10 7/8s, 2009 1,998,200
--------------
49,521,172
Telephone Services (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
5,060,000 U S West, Inc. notes 5 5/8s, 2008 4,513,621
Textiles (--%)
- --------------------------------------------------------------------------------------------------------------------------
515,000 Day International Group, Inc. company guaranty 9 1/2s, 2008 422,300
935,000 Galey & Lord, Inc. company guaranty 9 1/8s, 2008 158,950
--------------
581,250
Transportation (1.2%)
- --------------------------------------------------------------------------------------------------------------------------
14,560,000 Atlas Air, Inc. pass-through certificates Ser. 991A, 7.2s, 2019 13,472,368
4,720,000 Burlington Northern Santa Fe notes 6 3/8s, 2005 4,532,663
360,000 Calair LLC 144A company guaranty 8 1/8s, 2008 332,550
18,435,000 CSX Corp. deb. 7.95s, 2027 18,613,635
600,000 Eletson Holdings, Inc. 1st pfd. mtge. notes 9 1/4s, 2003
(Greece) 540,000
2,830,000 International Shipholding Corp. sr. notes 7 3/4s, 2007 2,575,300
540,000 Johnstown America Industries, Inc. sr. sub. notes 11 3/4s, 2005 549,450
1,500,000 Pegasus Shipping 144A company guaranty 11 7/8s, 2004 465,000
--------------
41,080,966
Utilities (3.3%)
- --------------------------------------------------------------------------------------------------------------------------
14,455,000 AES Eastern Energy 144A pass through certificates 9s, 2017 13,960,928
7,275,000 Arizona Public Service Co. sr. notes 6 3/4s, 2006 7,060,315
700,000 Calpine Corp. sr. notes 8 3/4s, 2007 695,394
1,660,000 Calpine Corp. sr. notes 7 7/8s, 2008 1,560,400
2,800,000 Calpine Corp. sr. notes 7 3/4s, 2009 2,628,360
1,530,000 Cleveland Electric Illuminating Co. 1st mtge 6.86s, 2008 1,432,600
2,625,000 Edison Mission Energy 144A company guaranty 7.33s, 2008 2,541,473
7,357,000 EIP Funding -- Public Service Co. of New Mexico deb.
10 1/4s, 2012 8,037,964
4,740,000 El Paso Energy Corp. sr. notes 6 3/4s, 2009 4,522,434
7,870,000 GTE Corp. deb. 6.46s, 2008 7,544,025
550,000 Midland Funding Corp. II deb. Ser. A, 11 3/4s, 2005 604,874
1,746,998 Midland Funding Corp. I deb. Ser. C-94, 10.33s, 2002 1,813,314
9,235,000 Midwest Energy, Inc. 144A notes 8.7s, 2009 9,311,189
5,144,000 Niagara Mohawk Power Corp. sr. notes Ser. G, 7 3/4s, 2008 5,202,024
695,610 Niagara Mohawk Power Corp. sr. notes Ser. F, 7 5/8s, 2005 701,905
220,414 Northeast Utilities System notes Ser. A, 8.58s, 2006 222,336
2,973,745 Northeast Utilities System notes Ser. B, 8.38s, 2005 2,944,602
720,000 Public Service Co. of New Mexico sr. notes Ser. B, 7 1/2s, 2018 684,994
820,000 Public Service Co. of New Mexico sr. notes Ser. A, 7.1s, 2005 810,455
10,130,000 Southern Energy 144A sr. notes 7.9s, 2009 9,781,224
8,120,000 Texas New-Mexico Power Utilities 1st mtge. 9 1/4s, 2000 8,297,584
11,800,000 Texas Utilities Co. secd. lease fac. bonds 7.46s, 2015 11,786,194
14,856,000 Texas Utilities Electric Capital Trust V company guaranty
8.175s, 2037 14,606,568
--------------
116,751,156
Wireless Communications (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
100,000 Clearnet Communications, Inc. sr. disc. notes
stepped-coupon zero % (14 3/4s, 12/15/00), 2005 (STP) 95,000
3,770,000 Price Communications Wireless, Inc. 144A sr. notes
9 1/8s, 2006 3,817,125
--------------
3,912,125
--------------
Total Corporate Bonds and Notes (cost $1,882,760,593) $1,771,400,014
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (33.0%) (a)
PRINCIPAL AMOUNT VALUE
U.S. Government Agency Mortgage Obligations (15.1%)
- --------------------------------------------------------------------------------------------------------------------------
Federal Home Loan Mortgage Corporation
$ 4,189,526 7s, July 1, 2012 $ 4,188,186
30,531,421 5 1/2s, with due dates from December 1, 2010 to
August 1, 2011 28,765,961
35,000,000 5s, January 15, 2004 33,135,200
1,592,195 Federal National Mortgage Association Graduated Payment
Mortgages 8s, December 1, 2008 1,647,078
58,000,000 Federal National Mortgage Association 6 1/2s, TBA,
November 25, 2029 55,580,240
Federal National Mortgage Association
Pass-Through Certificates
204,737 11s, with due dates from August 1, 2013 to
October 1, 2015 226,042
35,293,520 8s, with due dates from June 1, 2024 to
October 1, 2029 35,955,277
13,396,424 7s, with due dates from November 1, 2010 to
August 1, 2014 13,375,392
3,576,913 6 1/2s, with due dates from May 1, 2024 to
August 1, 2028 3,427,112
3,905,704 6 1/2s, with due dates from September 1, 2010 to
August 1, 2013 3,830,013
42,711,892 6s, with due dates from February 1, 2012 to
December 1, 2013 41,083,281
2,098,212 5 1/2s, August 15, 2014 1,974,271
14,710,000 5 1/8s, February 13, 2004 13,983,620
Government National Mortgage Association
Pass-Through Certificates
179,387 11s, with due dates from January 15, 2010 to July 15, 2013 197,391
15,874,958 9 1/2s, November 15, 2028 17,045,737
1,501,387 9s, December 15, 2021 1,585,825
158,000 9s, with due dates from October 15, 2004 to May 15, 2009 166,886
135,169,890 8s, with due dates from May 15, 2023 to February 1, 2029 138,084,768
74,733 8s, November 15, 2016 76,857
89,328,388 7s, with due dates from January 15, 2023 to May 15, 2028 87,812,683
49,362,664 6 1/2s, with due dates from June 15, 2023 to
November 15, 2028 47,256,627
--------------
529,398,447
U.S. Treasury Obligations (17.9%)
- --------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Bonds
7,102,000 10 3/4s, August 15, 2005 (SEG) 8,654,426
2,000 6 1/8s, November 15, 2027 1,933
1,036,000 5 1/2s, August 15, 2028 921,387
U.S. Treasury Notes
5,580,000 6 1/8s, August 15, 2029 5,555,560
15,160,000 6s, August 15, 2009 15,138,624
88,940,000 6s, August 15, 2004 89,148,120
9,980,000 5 7/8s, February 15, 2004 9,951,956
25,530,000 5 7/8s, October 31, 2001 25,569,827
251,515,000 5 1/4s, May 15, 2004 244,402,156
52,295,000 5 1/4s, August 15, 2003 51,052,994
100,175,000 4 3/4s, February 15, 2004 95,651,097
U.S. Treasury Notes
41,995,000 4 5/8s, December 31, 2000 41,502,819
35,405,000 4 1/4s, November 15, 2003 33,264,060
12,770,000 U.S. Treasury Interest Strip zero %, February 15, 2019 3,622,594
--------------
624,437,553
--------------
Total U.S. Government and Agency Obligations
(cost $1,172,405,303) $1,153,836,000
COLLATERALIZED MORTGAGE OBLIGATIONS (11.1%) (a)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
GBP 13,350,000 Blackstone Hotel Acquisition Co. sr. mtge. loan
FRN 3.3449s, 2003 $ 21,863,767
$ 22,525,000 Commercial Mortgage Acceptance Corp. Ser. 97-ML1,
Class A3, 6.57s, 2007 21,648,637
6,994,010 Countrywide Home Loan Ser. 98-3, Class A5, 6.75s, 2028 6,575,462
9,610,000 Countrywide Mortgage Backed Securities, Inc. Ser. 93-C,
Class A8, 6.5s, 2024 8,887,712
Criimi Mae Commercial Mortgage Trust
33,035,000 Ser. 98-C1, Class A2, 7s, 2011 28,255,248
13,675,000 Ser. 98-C1, Class B, 7s, 2011 10,162,234
DLJ Commercial Mortgage Corp.
5,680,000 Ser. 99-CG3, Class A1B, 7.34s, 2009 5,704,850
4,700,000 Ser. 99-CG3, Class A1A, 7.12s, 2008 4,716,156
374,803 Fannie Mae Ser. 99-7, Class CZ, 6.5s, 2029 328,421
Fannie Mae Strip
20,108,917 Ser. 281, Class 2, Interest Only (IO), 9s, 2026 5,363,425
18,208,998 Ser. 279, Class 2, IO, 9s, 2026 4,856,681
9,811,034 Ser. 217, Class 2, IO, 8s, 2023 2,901,920
3,548,182 Ser. 176, Class 2, IO, 8s, 2022 1,049,486
53,952,055 Ser. 215, Class 2, IO, 7s, 2023 15,494,356
7,705,784 Ser. 203, Principal Only (PO), zero %, 2029 4,808,891
44,581,762 First Union-Lehman Brothers Commercial Mortgage Co.
Ser. 97-C2, IO, 1.384s, 2027 3,312,286
Freddie Mac
6,163,438 Ser. 2182, Class SA, 7.91s, 2025 5,389,156
6,860,000 Ser. T-20, Class A6, 7.49s, 2029 6,860,000
12,071,000 Ser. 2183, Class SG, 6.39s, 2014 9,656,800
8,740,350 Ser. 2182, Class EC, PO, zero %, 2025 6,643,213
7,870,000 GE Capital Mortgage Services, Inc. Ser. 98-11,
Class 2A4, 6.75s, 2028 7,466,663
9,611,000 General Growth Properties-Ivanhoe Ser. 99-C1,
Class F, 7.92s, 2004 9,611,000
5,962,000 GMAC Commercial Mortgage Securities Inc. Ser. 98-C1,
Class E, 7.155s, 2011 5,495,520
GS Mortgage Securities Corp. II
5,945,000 Ser. 98-GLII, Class D, 7.97s, 2031 5,357,931
6,005,000 Ser. 98-GLII, Class A2, 6.562s, April 13, 2031 5,674,725
3,900,923 Headlands Mortgage Securities, Inc. Ser. 98-1,
Class X2, IO, 6.5s, 2028 791,156
Housing Securities Inc.
1,067,948 Ser. 91-B, Class B6, 9s, 2006 1,063,943
2,222,600 Ser. 93-F, Class F9M2, 7s, 2023 2,116,332
401,116 Ser. 94-1, Class AB1, 6 1/2s, March 25, 2009 348,095
LB Commercial Conduit Mortgage Trust
8,465,000 Ser. 99-C2, Class A2, 7.325s, 2009 8,494,098
4,845,000 Ser. 99-C2. Class A1, 7.105s, 2008 4,862,627
25,563,000 Ser. 99-C1, Class A2, 6.78s, 2009 24,793,114
4,829,085 Ser. 99-C1, Class A1, 6.41s, 2007 4,712,320
Merrill Lynch Mortgage Investors, Inc.
5,989,000 Ser. 98-C2, Class D, 6.954s, 2030 5,511,752
7,221,163 Ser. 98-C2, Class A1, 6.22s, 2030 7,042,891
13,771,083 Ser. 96-C2, IO, 1.557s, 2028 970,969
7,749,530 Ser. 98-C2, IO, 1.447s, 2030 559,419
Morgan Stanley Capital I
5,935,000 Ser. 96-WF1, Class A2, 7.231s, 2006 5,978,585
18,975,000 Ser. 99-CAM1, Class A3, 6.92s, 2008 18,702,234
6,160,000 Ser. 98-XL1, Class A3, 6.48s, 2030 5,870,288
42,269,730 Mortgage Capital Funding, Inc. Ser. 97-MC2, Class X,
IO, 1.366s, 2012 2,939,067
1,624,443 Prudential Home Mortgage Securities Ser. 92-25,
Class B3, 8s, 2022 (In default) (NON) 1,575,710
Prudential Home Mortgage Securities 144A
568,733 Ser. 94-31, Class B3, 8s, 2009 559,402
364,297 Ser. 94-31, Class B4, 8s, 2009 333,787
3,289,535 Ser. 93-31, Class B2, 6s, 2000 3,244,304
8,905,000 Residential Asset Securitization Trust Ser. 98-A12,
Class A14, 8s, 2028 9,097,014
7,580,000 Residential Funding Mortgage Sec. I Ser. 98-S13,
Class A21, 6.75s, 2028 7,160,750
4,442,006 Sears Mortgage Securities Ser. 93-7, Class T7, 7s, 2007 4,453,511
Structured Asset Security Corp.
4,973,392 144A 8.712s, 2027 5,172,328
9,209,121 Ser. 98-RF2, 8.58s, 2028 9,550,146
36,737,923 Ser. 98-RF3, IO, 6.1s, 2028 7,283,293
37,371,376 TIAA Retail Commercial Mortgage Trust, Ser. 99-1,
Class A, 7.17s, 2008 37,172,840
--------------
Total Collateralized Mortgage Obligations
(cost $396,982,190) $ 388,444,515
PREFERRED STOCKS (0.9%) (a)
NUMBER OF SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------------
8,245 AmeriKing, Inc. $3.25 cum. pfd. (PIK) $ 140,165
822 Capstar Broadcasting, Inc. $12.00 pfd. (PIK) 96,174
1,184 Capstar Communications, Inc. Ser. E, $12.625 cum. pfd. (PIK) 138,528
10,880 Centaur Funding Corp 144A 9.08% cum. pfd. (Cayman Islands) 11,193,562
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. 154,170
3,271 CSC Holdings, Inc. Ser. M, $11.125 cum. pfd. (PIK) 349,997
850 Fresenius Medical Capital Trust I company guaranty
Ser. D, 9.00%, pfd. (Germany) 824,500
2,910 Fresenius Medical Capital Trust II company guaranty
7.875%, pfd. (Germany) 2,589,900
187 Paxson Communications Corp. 13.25% cum. pfd. (PIK) 2,028,950
12,580 Webster Financial Ser. A, 7.375% cum. pfd. 12,177,440
--------------
Total Preferred Stocks (cost $30,410,879) $ 30,367,198
ASSET-BACKED SECURITIES (0.8%) (a)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$ 9,389,546 First Plus Ser. 98-A, Class A, 8 1/2s, 2023 $ 7,981,114
1,900,000 Green Tree Financial Corp. Ser. 97-1, Class B2, 7.76s, 2028 1,400,656
10,609,086 Green Tree Recreational Equipment & Cons. Ser. 97-B,
Class A1, 6.55s, 2028 10,537,807
7,637,938 Green Tree Recreational Equipment & Cons. Ser. 98-A,
Class A1C, 6.18s, 2019 7,520,385
65,355,000 Lehman Manufactured Housing Ser. 98-1,
Class 1 IO, 0.82s, 2028 2,302,743
--------------
Total Asset-Backed Securities (cost $32,355,463) $ 29,742,705
FOREIGN GOVERNMENT BONDS AND NOTES (0.7%) (a)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
USD 2,405,000 Ontario (Province of) sr. unsub. 5 1/2s, 2008 (Canada) $ 2,180,638
USD 22,670,000 Quebec (Province of) sr. unsub. 5 3/4s, 2009 (Canada) 20,643,529
Total Foreign Government Bonds and Notes
(cost $24,955,456) $ 22,824,167
MUNICIPAL BONDS AND NOTES (0.3%) (a) (cost $11,820,587)
PRINCIPAL AMOUNT RATING (RAT) VALUE
- --------------------------------------------------------------------------------------------------------------------------
$11,830,000 CT, Mashantucket Pequot Tribe 144A Rev. Bonds,
Ser. A, FSA, 6.57s, 9/1/13 Aaa $ 10,573,654
CONVERTIBLE BONDS AND NOTES (0.1%) (a)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$ 1,000,000 Corporate Express, Inc. cv. notes 4 1/2s, 2000 $ 988,750
780,000 HEALTHSOUTH Corp. cv. sub. deb. 3 1/4s, 2003 586,950
1,500,000 LAM Research Corp. 144A cv. sub. notes 5s, 2002 1,736,250
1,000,000 Micron Technology, Inc cv. Notes 6 1/2s, 2005 780,000
--------------
Total Convertible Bonds and Notes (cost $3,539,588) $ 4,091,950
COMMON STOCKS (--%) (a)
NUMBER OF SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------------
150 AmeriKing, Inc. (NON) $ 1,500
11,000 AMFM, Inc. (NON) 770,000
3,544 Fitzgerald Gaming Corp. (NON) 886
1,213 Hedstrom Holdings, Inc. 144A (NON) 1,213
1,752 Intermedia Communications, Inc. (NON) 45,552
73 Mothers Work, Inc. (NON) 767
44,051 PSF Holdings LLC Class A (NON) 550,638
--------------
Total Common Stocks (cost $2,143,539) $ 1,370,556
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
(United Kingdom) 12/31/06 135,000
10 E. Spire Communications, Inc. 11/1/05 300
260 Esat Holdings, Inc. (Ireland) 2/1/07 19,760
180 Long Distance International, Inc. 144A 4/13/08 360
315 McCaw International Ltd. 4/15/07 1,339
390 Telehub Communications Corp. 7/31/05 1,950
835 UIH Australia/Pacific, Inc. 144A 5/15/06 25,050
440 Versatel Telecom B.V. 144A (Netherlands) 5/15/08 63,800
--------------
Total Warrants (cost $171,245) $ 249,084
CONVERTIBLE PREFERRED STOCKS (--%) (a) (cost $134,750)
NUMBER OF SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------------
2,695 Chesapeake Energy Corp. $3.50 cum. cv. pfd. $ 88,935
SHORT-TERM INVESTMENTS (5.5%) (a)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$ 62,000,000 Citi Group, Inc. effective yield of 5.31%, November 1, 1999 $ 62,000,000
57,000,000 Federal Home Loan Mortgage Corp., effective yield of 5.32%,
November 1, 1999 57,000,000
75,000,000 Wal-Mart Stores, effective yield of 5.34%, November 1, 1999 75,000,000
--------------
Total Short-Term Investments (cost $194,000,000) $ 194,000,000
- --------------------------------------------------------------------------------------------------------------------------
Total Investments (cost $3,751,679,593) (b) $3,606,988,778
- --------------------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $3,499,690,694.
(RAT) The Moody's or Standard & Poor's ratings indicated are believed to be the most recent ratings available at
October 31, 1999 for the securities listed. Ratings are generally ascribed to securities at the time of issuance.
While the agencies may from time to time revise such ratings, they undertake no obligation to do so, and the ratings
do not necessarily represent what the agencies would ascribe to these securities at October 31, 1999. Securities
rated by Putnam are indicated by "/P" and are not publicly rated. Ratings are not covered by the Report of
independent accountants.
(b) The aggregate identified cost on a tax basis is $3,755,213,653, resulting in gross unrealized appreciation and
depreciation of $10,725,673 and $158,950,548, respectively, or net unrealized depreciation of $148,224,875.
(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 October 31, 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.
ADR after the name of a foreign holding stands for American Depositary Receipts representing ownership of foreign
securities on deposit with a domestic custodian bank.
TBA after the name of a security represents to be announced securities (Note 1).
FSA represents Financial Security Assurance Corporation.
The rates shown on Floating Rate Notes (FRN) are the current interest rates shown at October 31, 1999, which are
subject to change based on the terms of the security.
- -------------------------------------------------------------------------------
Forward Currency Contracts to Sell at October 31, 1999
Market Aggregate Face Delivery Unrealized
Value Value Date Depreciation
- -------------------------------------------------------------------------------
British Pounds $20,824,408 $20,387,169 2/3/00 $(437,239)
- -------------------------------------------------------------------------------
Futures Contracts Outstanding at October 31, 1999
Aggregate Face Expiration Unrealized
Total Value Value Date Depreciation
- -------------------------------------------------------------------------------
U.S. Treasury Bonds
20yr (Long) $17,266,250 $17,416,551 Dec-99 $(150,301)
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
October 31, 1999
<S> <C>
Assets
- -----------------------------------------------------------------------------------------------
Investments in securities, at value (identified cost $3,751,679,593) (Note 1) $3,606,988,778
- -----------------------------------------------------------------------------------------------
Foreign currency (cost $659) 654
- -----------------------------------------------------------------------------------------------
Dividends, interest and other receivables 56,180,781
- -----------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 5,068,864
- -----------------------------------------------------------------------------------------------
Receivable for securities sold 132,152,898
- -----------------------------------------------------------------------------------------------
Receivable for variation margin 199,500
- -----------------------------------------------------------------------------------------------
Total assets 3,800,591,475
Liabilities
- -----------------------------------------------------------------------------------------------
Payable to subcustodian (Note 2) 25,341,278
- -----------------------------------------------------------------------------------------------
Payable for securities purchased 259,441,849
- -----------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 9,147,115
- -----------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 4,482,028
- -----------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 397,105
- -----------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 76,483
- -----------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 2,640
- -----------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 1,326,888
- -----------------------------------------------------------------------------------------------
Payable for open forward currency contracts 437,239
- -----------------------------------------------------------------------------------------------
Other accrued expenses 248,156
- -----------------------------------------------------------------------------------------------
Total liabilities 300,900,781
- -----------------------------------------------------------------------------------------------
Net assets $3,499,690,694
Represented by
- -----------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $3,789,974,494
- -----------------------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 85,462
- -----------------------------------------------------------------------------------------------
Accumulated net realized loss on investments and
foreign currency transactions (Note 1) (145,098,029)
- -----------------------------------------------------------------------------------------------
Net unrealized depreciation of investments and
assets and liabilities in foreign currencies (145,271,233)
- -----------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $3,499,690,694
Computation of net asset value and offering price
- -----------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($1,160,120,962 divided by 180,075,908 shares) $6.44
- -----------------------------------------------------------------------------------------------
Offering price per class A share (100/95.25 of $6.44)* $6.76
- -----------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($458,766,330 divided by 71,582,302 shares)** $6.41
- -----------------------------------------------------------------------------------------------
Net asset value and offering price per class C share
($1,869,439 divided by 290,550 shares)** $6.43
- -----------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($1,623,060,909 divided by 253,302,748 shares) $6.41
- -----------------------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $6.41)* $6.63
- -----------------------------------------------------------------------------------------------
Net asset value, offering price and redemption price per class Y share
($255,873,054 divided by 39,618,742 shares) $6.46
- -----------------------------------------------------------------------------------------------
* On single retail sales of less than $50,000. On sales of $50,000 or more and on group
sales, the offering price is reduced.
** Redemption price per share is equal to net asset value less any applicable contingent
deferred sales charge.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Year ended October 31, 1999
<S> <C>
Investment income:
- -----------------------------------------------------------------------------------------------
Interest (net foreign tax of $106,639) $ 249,503,408
- -----------------------------------------------------------------------------------------------
Dividends 2,098,029
- -----------------------------------------------------------------------------------------------
Total investment income 251,601,437
Expenses:
- -----------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 18,218,286
- -----------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 6,775,909
- -----------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 51,888
- -----------------------------------------------------------------------------------------------
Administrative services (Note 2) 31,081
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 3,334,116
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 4,924,841
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class C (Note 2) 1,626
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 7,940,292
- -----------------------------------------------------------------------------------------------
Reports to shareholders 90,105
- -----------------------------------------------------------------------------------------------
Registration fees 133,942
- -----------------------------------------------------------------------------------------------
Auditing 12,455
- -----------------------------------------------------------------------------------------------
Legal 41,035
- -----------------------------------------------------------------------------------------------
Postage 311,597
- -----------------------------------------------------------------------------------------------
Other 194,199
- -----------------------------------------------------------------------------------------------
Total expenses 42,061,372
- -----------------------------------------------------------------------------------------------
Expense reduction (Note 2) (984,676)
- -----------------------------------------------------------------------------------------------
Net expenses 41,076,696
- -----------------------------------------------------------------------------------------------
Net investment income 210,524,741
- -----------------------------------------------------------------------------------------------
Net realized loss on investments (Notes 1 and 3) (112,186,288)
- -----------------------------------------------------------------------------------------------
Net realized gain on futures contracts (Note 1) 179,169
- -----------------------------------------------------------------------------------------------
Net realized loss on foreign currency transactions (Note 1) (1,378,766)
- -----------------------------------------------------------------------------------------------
Net unrealized appreciation of assets and
liabilities in foreign currencies during the year 2,241,465
- -----------------------------------------------------------------------------------------------
Net unrealized depreciation of investments, futures
and TBA sale commitments during the year (113,200,515)
- -----------------------------------------------------------------------------------------------
Net loss on investments (224,344,935)
- -----------------------------------------------------------------------------------------------
Net decrease in net assets resulting from operations $ (13,820,194)
- -----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Year ended October 31
-------------------------------
1999 1998
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase in net assets
- ---------------------------------------------------------------------------------------------------------------
Operations:
- ---------------------------------------------------------------------------------------------------------------
Net investment income $210,524,741 $209,780,589
- ---------------------------------------------------------------------------------------------------------------
Net realized loss on investments and
foreign currency transactions (113,385,885) (48,229,291)
- ---------------------------------------------------------------------------------------------------------------
Net unrealized depreciation of investments
and assets and liabilities in foreign currencies (110,959,050) (81,157,171)
- ---------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations (13,820,194) 80,394,127
- ---------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ---------------------------------------------------------------------------------------------------------------
From net investment income
Class A (78,558,769) (79,385,042)
- ---------------------------------------------------------------------------------------------------------------
Class B (25,718,093) (22,749,198)
- ---------------------------------------------------------------------------------------------------------------
Class C (9,492) --
- ---------------------------------------------------------------------------------------------------------------
Class M (91,242,779) (64,035,315)
- ---------------------------------------------------------------------------------------------------------------
Class Y (14,995,609) (13,178,073)
- ---------------------------------------------------------------------------------------------------------------
In excess of net investment income
Class A (3,839,887) --
- ---------------------------------------------------------------------------------------------------------------
Class B (1,257,079) --
- ---------------------------------------------------------------------------------------------------------------
Class C (464) --
- ---------------------------------------------------------------------------------------------------------------
Class M (4,459,871) --
- ---------------------------------------------------------------------------------------------------------------
Class Y (732,973) --
- ---------------------------------------------------------------------------------------------------------------
From net realized gain on investments
Class A -- (6,772,757)
- ---------------------------------------------------------------------------------------------------------------
Class B -- (2,151,676)
- ---------------------------------------------------------------------------------------------------------------
Class C -- --
- ---------------------------------------------------------------------------------------------------------------
Class M -- (3,964,090)
- ---------------------------------------------------------------------------------------------------------------
Class Y -- (896,482)
- ---------------------------------------------------------------------------------------------------------------
From return of capital
Class A (2,501,477) (5,156,795)
- ---------------------------------------------------------------------------------------------------------------
Class B (818,918) (1,477,771)
- ---------------------------------------------------------------------------------------------------------------
Class C (302) --
- ---------------------------------------------------------------------------------------------------------------
Class M (2,905,362) (4,159,687)
- ---------------------------------------------------------------------------------------------------------------
Class Y (477,492) (856,038)
- ---------------------------------------------------------------------------------------------------------------
Increase from capital share transactions (Note 4) 384,718,493 1,241,196,260
- ---------------------------------------------------------------------------------------------------------------
Total increase in net assets 143,379,732 1,116,807,463
Net assets
- ---------------------------------------------------------------------------------------------------------------
Beginning of year 3,356,310,962 2,239,503,499
- ---------------------------------------------------------------------------------------------------------------
End of year (including undistributed net investment
income of $85,462 and $2,851,787, respectively) $3,499,690,694 $3,356,310,962
- ---------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS A
- ------------------------------------------------------------------------------------------------------------------------------------
Per-share
operating performance Year ended October 31
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $6.87 $7.14 $7.02 $7.07 $6.53
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .40(c) .48(c) .45 .45 .47
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.40) (.28) .15 (.04) .55
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations -- .20 .60 .41 1.02
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.40) (.40) (.44) (.46) (.48)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income (.02) -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- (.04) (.04) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
From return of capital (.01) (.03) -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.43) (.47) (.48) (.46) (.48)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $6.44 $6.87 $7.14 $7.02 $7.07
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) (.09) 2.78 8.88 6.08 16.23
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $1,160,121 $1,426,583 $1,296,600 $1,037,718 $928,995
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .96 1.02 1.17 1.17 1.05
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 5.95 6.69 6.39 6.50 6.91
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 209.02 257.12 265.71 213.46 169.29
- ------------------------------------------------------------------------------------------------------------------------------------
+ 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 includes amounts paid through expense offset arrangements. (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.
(d) Per share distributions were less than $.01 per share.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS B
- ------------------------------------------------------------------------------------------------------------------------------------
Per-share
operating performance Year ended October 31
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $6.83 $7.11 $6.99 $7.04 $6.50
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .35(c) .42(c) .39 .40 .42
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.39) (.28) .16 (.04) .55
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations (.04) .14 .55 .36 .97
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.35) (.36) (.39) (.41) (.43)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income (.02) -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- (.04) (.04) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
From return of capital (.01) (.02) -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.38) (.42) (.43) (.41) (.43)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $6.41 $6.83 $7.11 $6.99 $7.04
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) (.69) 1.92 8.15 5.32 15.46
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $458,766 $494,703 $403,704 $340,775 $260,769
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.71 1.77 1.92 1.92 1.80
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 5.20 5.92 5.64 5.76 6.14
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 209.02 257.12 265.71 213.46 169.29
- ------------------------------------------------------------------------------------------------------------------------------------
+ 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 includes amounts paid through expense offset arrangements. (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.
(d) Per share distributions were less than $.01 per share.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS C
- ------------------------------------------------------------------------------------------------------------------------------------
For the period
Per-share July 26, 1999+
operating performance to October 31
- ------------------------------------------------------------------------------------------------------------------------------------
1999
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Net asset value,
beginning of period $6.54
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income (c) .10
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.11)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations (.01)
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.10)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income --(d)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments --
- ------------------------------------------------------------------------------------------------------------------------------------
From return of capital --(d)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.10)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $6.43
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) (.13)*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $1,869
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .46*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 1.36*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 209.02
- ------------------------------------------------------------------------------------------------------------------------------------
+ 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 includes amounts paid through expense offset arrangements. (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.
(d) Per share distributions were less than $.01 per share.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS M
- ------------------------------------------------------------------------------------------------------------------------------------
For the period
Per-share Dec. 14, 1994+
operating performance Year ended October 31 to October 31
- ------------------------------------------------------------------------------------------------------------------------------------
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 .38(c) .47(c) .43 .44 .43
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.40) (.28) .16 (.04) .54
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations (.02) .19 .59 .40 .97
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.38) (.39) (.43) (.45) (.43)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income (.02) -- -- -- --(d)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- (.04) (.04) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
From return of capital (.01) (.03) -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.41) (.46) (.47) (.45) (.43)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $6.41 $6.84 $7.11 $6.99 $7.04
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) (.26) 2.58 8.74 5.92 15.43*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $1,623,061 $1,188,620 $368,297 $18,937 $7,673
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.21 1.27 1.42 1.42 1.19*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 5.68 6.53 5.76 6.28 5.17*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 209.02 257.12 265.71 213.46 169.29
- ------------------------------------------------------------------------------------------------------------------------------------
+ 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 includes amounts paid through expense offset arrangements. (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.
(d) Per share distributions were less than $.01 per share.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS Y
- ------------------------------------------------------------------------------------------------------------------------------------
Per-share
operating performance Year ended October 31
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $6.88 $7.15 $7.02 $7.07 $6.52
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .41(c) .50(c) .47 .47 .47
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.39) (.28) .16 (.04) .57
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .02 .22 .63 .43 1.04
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.41) (.42) (.46) (.48) (.49)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income (.02) -- -- -- --(d)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- (.04) (.04) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
From return of capital (.01) (.03) -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.44) (.49) (.50) (.48) (.49)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $6.46 $6.88 $7.15 $7.02 $7.07
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) .27 3.02 9.23 6.31 16.65
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $255,873 $246,405 $170,902 $133,516 $107,414
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .71 .77 .92 .92 .86
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 6.19 6.92 6.64 6.76 7.14
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 209.02 257.12 265.71 213.46 169.29
- ------------------------------------------------------------------------------------------------------------------------------------
+ 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 includes amounts paid through expense offset arrangements. (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.
(d) Per share distributions were less than $.01 per share.
</TABLE>
Notes to financial statements
October 31, 1999
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, and may invest in preferred stocks
and dividend-paying common stocks.
The fund offers class A, class B, class C, class M and class Y shares. The
fund began offering Class C shares on July 26, 1999. 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 C shares are
subject to the same fees and expenses as class B shares, except that class
C shares have a one-year 1.00% contingent deferred sales charge and do not
convert to class A shares. Class M shares are sold with a maximum front
end sales charge of 3.25% and pay an ongoing distribution fee that is
higher than class A shares but lower than class B and class C shares.
Class Y shares, which are sold at net asset value, are generally subject
to the same expenses as class A, class B, class C 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
of the financial statements and the reported amounts of increases and
decreases in net assets from operations during the reporting period.
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 sales price on its principle exchange, 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. Other investments,
including restricted securities, are stated at fair value following
procedures approved by the Trustees. Market quotations are not considered
to be readily available for certain debt obligations; such investments are
stated at fair value on the basis of valuations furnished by a pricing
service, approved by the Trustees, or dealers which determine valuations
for normal institutional-size trading units of such securities using
methods based on market transactions for comparable securities and
variable relationships between securities that 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). Gains or losses on securities sold are determined on
the identified cost basis.
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 bonds 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. Investments in foreign securities involve
certain risks, including those related to economic instability,
unfavorable political developments, and currency fluctuations, not present
with domestic investments.
F) Forward currency contracts The fund may engage in forward currency
contracts, which are agreements between two parties to buy and sell
currencies at a set price on a future date, to protect against a decline
in value relative to the U.S. dollar of the currencies in which its
portfolio securities are denominated or quoted (or an increase in the
value of a currency in which securities a fund intends to buy are
denominated, when a fund holds cash reserves and short-term investments).
The U.S. dollar value of forward currency contracts is determined using
current forward currency exchange rates supplied by a quotation service.
The market value of the contract will fluctuate with changes in currency
exchange rates. The contract is "marked to market" daily and the change in
market value is recorded as an unrealized gain or loss. When the contract
is closed, the fund records a realized gain or loss equal to the
difference between the value of the contract at the time it was opened and
the value at the time it was closed. The fund could be exposed to risk if
the value of the currency changes unfavorably, if the counterparties to
the contracts are unable to meet the terms of their contracts or if the
fund is unable to enter into a closing position.
G) Futures and options contracts The fund may use futures and options
contracts to hedge against changes in the values of securities the fund
owns or expects to purchase. The fund may also write options on securities
it owns or in which it may invest to increase its current returns.
The potential risk to the fund is that the change in value of futures and
options contracts may not correspond to the change in value of the hedged
instruments. In addition, losses may arise from changes in the value of
the underlying instruments, if there is an illiquid secondary market for
the contracts, or if the counterparty to the contract is unable to
perform. When the contract is closed, the fund records a realized gain or
loss equal to the difference between the value of the contract at the time
it was opened and the value at the time it was closed. Realized gains and
losses on purchased options are included in realized gains and losses on
investment securities.
Futures contracts are valued at the quoted daily settlement prices
established by the exchange on which they trade. Exchange traded options
are valued at the last sale price, or if no sales are reported, the last
bid price for purchased options and the last ask price for written
options. Options traded over-the-counter are valued using prices supplied
by dealers.
H) TBA purchase commitments The fund may enter into "TBA" (to be
announced) purchase commitments to purchase securities for a fixed unit
price at a future date beyond customary settlement time. Although the unit
price has been established, the principal value has not been finalized.
However, the amount of the commitments will not fluctuate more than 1.0%
from the principal amount. The fund holds, and maintains until settlement
date, cash or high-grade debt obligations in an amount sufficient to meet
the purchase price, or the fund may enter into offsetting contracts for
the forward sale of other securities it owns. Income on the securities
will not be earned until settlement date. TBA purchase commitments may be
considered securities in themselves, and involve a risk of loss if the
value of the security to be purchased declines prior to the settlement
date, which risk is in addition to the risk of decline in the value of the
fund's other assets. Unsettled TBA purchase commitments are valued at the
current market value of the underlying securities, according to the
procedures described under "Security valuation" above.
Although the fund will generally enter into TBA purchase commitments with
the intention of acquiring securities for their portfolio or for delivery
pursuant to options contracts it has entered into, the fund may dispose of
a commitment prior to settlement if Putnam Management deems it appropriate
to do so.
I) TBA sale commitments The fund may enter into TBA sale commitments to
hedge its portfolio positions or to sell mortgage-backed securities it
owns under delayed delivery arrangements. Proceeds of TBA sale commitments
are not received until the contractual settlement date. During the time a
TBA sale commitment is outstanding, equivalent deliverable securities, or
an offsetting TBA purchase commitment deliverable on or before the sale
commitment date, are held as "cover" for the transaction.
Unsettled TBA sale commitments are valued at the current market value of
the underlying securities, generally according to the procedures described
under "Security valuation" above. The contract is "marked-to-market" daily
and the change in market value is recorded by the fund as an unrealized
gain or loss. If the TBA sale commitment is closed through the acquisition
of an offsetting purchase commitment, the fund realizes a gain or loss. If
the fund delivers securities under the commitment, the fund realizes a
gain or a loss from the sale of the securities based upon the unit price
established at the date the commitment was entered into.
J) Line of credit The fund has entered into a committed line of credit
with certain banks. This line of credit agreement includes restrictions
that the fund maintain an asset coverage ratio of at least 300% and
borrowings must not exceed prospectus limitations. For the year ended
October 31, 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, 1999, the fund had a capital loss carryover of
approximately $141,714,000 available to offset future capital gains, if
any. The amount of the carryover and the expiration dates are:
Loss Carryover Expiration
- -------------- ----------------
$ 21,203,000 October 31, 2006
120,511,000 October 31, 2007
L) Distributions to shareholders Distributions to shareholders from net
investment income are recorded by the fund on the ex-dividend date.
Capital gain distributions, if any, are recorded on the ex-dividend date
and paid at least annually. The amount and character of income and gains
to be distributed are determined in accordance with income tax
regulations, which may differ from generally accepted accounting
principles. These differences include temporary and permanent differences
of losses on wash sale transactions, foreign currency gains and losses,
defaulted bond interest, unrealized gains and losses on certain futures
contracts, paydown gains and losses on mortgage-backed securities, market
discount, interest on payment-in-kind securities, foreign market discount
and book/tax amortization differences. Reclassifications are made to the
fund's capital accounts to reflect income and gains available for
distribution (or available capital loss carryovers) under income tax
regulations. For the year ended October 31, 1999, the fund reclassified
$7,523,950 to increase undistributed net investment income and $48,138 to
increase paid-in-capital, with an increase to accumulated net realized
losses of $7,572,088. The calculation of net investment income per share
in the financial highlights table excludes these adjustments.
Note 2
Management fees, administrative
services, and other transactions
Compensation of Putnam Management, for management and investment advisory
services is paid quarterly based on the average net assets of the fund.
Such fee is based on the following annual rates: 0.65% of the first $500
million, 0.55% of the next $500 million, 0.50% of the next $500 million,
0.45% of the next $5 billion, 0.425% of the next $5 billion, 0.405% of the
next $5 billion, 0.39% of the next $5 billion, and 0.38% of any amount
thereafter.
The fund reimburses Putnam Management an allocated amount for the
compensation and related expenses of certain officers of the fund and
their staff who provide administrative services to the fund. The aggregate
amount of all such reimbursements is determined annually by the Trustees.
Custodial functions for the fund's assets are provided by 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.
Under the subcustodian contract between the subcustodian bank and PFTC,
the subcustodian bank has a lien on the securities of the fund to the
extent permitted by the fund's investment restrictions to cover any
advances made by the subcustodian bank for the settlement of securities
purchased by the fund. At October 31, 1999, the payable to the
subcustodian bank represents the amount due for a cash advance for the
settlement of a security purchased.
For the year ended October 31, 1999, fund expenses were reduced by
$984,676 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 $2,774
has been allocated to the fund, and an additional fee for each Trustee's
meeting attended. 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
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 a 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, class C and class M shares pursuant to Rule 12b-1 under
the Investment Company Act of 1940. The purpose of the Plans is to
compensate Putnam Mutual Funds Corp., a wholly owned subsidiary of Putnam
Investments Inc., for services provided and expenses incurred by it in
distributing shares of the fund. The Plans provide for payments by the
fund to Putnam Mutual Funds Corp. at an annual rate up to 0.35%, 1.00%,
1.00% and 1.00% of the average net assets attributable to class A, class
B, class C and class M shares, respectively. The Trustees have approved
payment by the fund at an annual rate of 0.25%, 1.00%, 1.00% and 0.50% of
the average net assets attributable to class A, class B, class C and class
M shares, respectively.
For the year ended October 31, 1999, Putnam Mutual Funds Corp., acting as
underwriter received net commissions of $329,655 and $1,967,295 from the
sale of class A and class M shares, respectively and received $1,104,203
and no monies in contingent deferred sales charges from redemptions of
class B and class C shares, respectively. A deferred sales charge of up to
1% is assessed on certain redemptions of class A shares. For the year
ended October 31, 1999, Putnam Mutual Funds Corp., acting as underwriter
received $62,410 on class A redemptions.
Note 3
Purchases and sales of securities
During the year ended October 31, 1999, cost of purchases and proceeds
from sales of investment securities other than U.S. government obligations
and short-term investments aggregated $4,585,392,294 and $4,100,570,026,
respectively. Purchases and sales of U.S. government obligations
aggregated $3,188,406,946 and $3,025,567,742, respectively.
Note 4
Capital shares
At October 31, 1999, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
Year ended October 31, 1999
- -----------------------------------------------------------------------------
Class A Shares Amount
- -----------------------------------------------------------------------------
Shares sold 85,980,837 $ 581,237,616
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 10,082,232 67,300,640
- -----------------------------------------------------------------------------
96,063,069 648,538,256
Shares
repurchased (123,574,707) (830,101,980)
- -----------------------------------------------------------------------------
Net decrease (27,511,638) $(181,563,724)
- -----------------------------------------------------------------------------
Year ended October 31, 1998
- -----------------------------------------------------------------------------
Class A Shares Amount
- -----------------------------------------------------------------------------
Shares sold 117,513,808 $833,959,048
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 10,148,559 71,782,053
- -----------------------------------------------------------------------------
127,662,367 905,741,101
Shares
repurchased (101,554,672) (720,337,135)
- -----------------------------------------------------------------------------
Net increase 26,107,695 $185,403,966
- -----------------------------------------------------------------------------
Year ended October 31, 1999
- -----------------------------------------------------------------------------
Class B Shares Amount
- -----------------------------------------------------------------------------
Shares sold 22,318,917 $149,461,315
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 3,059,313 20,291,028
- -----------------------------------------------------------------------------
25,378,230 169,752,343
Shares
repurchased (26,184,970) (173,951,299)
- -----------------------------------------------------------------------------
Net decrease (806,740) $ (4,198,956)
- -----------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------
For the period July 26, 1999
(commencement of operations)
to October 31, 1999
- -----------------------------------------------------------------------------
Class C Amount
- -----------------------------------------------------------------------------
Shares sold 295,519 $ 1,899,822
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 1,464 9,367
- -----------------------------------------------------------------------------
296,983 1,909,189
Shares
repurchased (6,433) (41,469)
- -----------------------------------------------------------------------------
Net increase 290,550 $ 1,867,720
- -----------------------------------------------------------------------------
Year ended October 31, 1999
- -----------------------------------------------------------------------------
Class M Shares Amount
- -----------------------------------------------------------------------------
Shares sold 109,475,894 $ 740,922,579
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 342,020 2,265,651
- -----------------------------------------------------------------------------
109,817,914 743,188,230
Shares
repurchased (30,394,471) (199,897,904)
- -----------------------------------------------------------------------------
Net increase 79,423,443 $ 543,290,326
- -----------------------------------------------------------------------------
Year ended October 31, 1998
- -----------------------------------------------------------------------------
Class M Shares Amount
- -----------------------------------------------------------------------------
Shares sold 233,079,491 $1,647,065,092
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 297,510 2,092,733
- -----------------------------------------------------------------------------
233,377,001 1,649,157,825
Shares
repurchased (111,298,763) (787,992,957)
- -----------------------------------------------------------------------------
Net increase 122,078,238 $ 861,164,868
- -----------------------------------------------------------------------------
Year ended October 31, 1999
- -----------------------------------------------------------------------------
Class Y Shares Amount
- -----------------------------------------------------------------------------
Shares sold 26,162,845 $ 175,327,648
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 2,424,462 16,206,074
- -----------------------------------------------------------------------------
28,587,307 191,533,722
Shares
repurchased (24,778,519) (166,210,595)
- -----------------------------------------------------------------------------
Net increase 3,808,788 $ 25,323,127
- -----------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------
Note 5
Change in Independent Accountants
(Unaudited)
Based on the recommendation of the Audit Committee of the fund, the Board
of Trustees has determined not to retain PricewaterhouseCoopers LLP as
this fund's independent accountants and voted to appoint KPMG LLP for the
fund's fiscal year ended October 31, 1999. During the two previous fiscal
years, PricewaterhouseCoopers LLP audit reports contained no adverse
opinion or disclaimer of opinion; nor were its reports qualified or
modified as to uncertainty, audit scope, or accounting principle. Further,
in connection with its audits for the two previous fiscal years and
through July 14, 1999, there were no disagreements between the fund and
PricewaterhouseCoopers LLP on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure,
which if not resolved to the satisfaction of PricewaterhouseCoopers LLP,
would have caused it to make reference to the disagreements in its report
on the financial statements for such years.
Federal tax information
(Unaudited)
For the year ended October 31, 1999, a portion of the Fund's distribution
represents a return of capital and is therefore not taxable to
shareholders.
The fund has designated 1.0% of the distributions from net investment
income, as qualifying for the dividends received deduction for
corporations.
The Form 1099 you receive in January 2000 will show the tax status of all
distributions paid to your account in calendar 1999.
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
INDEPENDENT ACCOUNTANTS
KPMG LLP
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
John A. Hill, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
Ronald J. Jackson
Paul L. Joskow
Elizabeth T. Kennan
Lawrence J. Lasser
John H. Mullin III
Robert E. Patterson
George Putnam, III
A.J.C. Smith
W. Thomas Stephens
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
John D. Hughes
Senior Vice President and Treasurer
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Ian C. Ferguson
Vice President
Brett C. Browchuk
Vice President
Stephen Oristaglio
Vice President
Krishna K. Memani
Vice President and Fund Manager
Kevin M. Cronin
Vice President and Fund Manager
Richard A. Monaghan
Vice President
John R. Verani
Vice President
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
AN035 56827 004/312/510/514 12/99
PUTNAM INVESTMENTS SCALE LOGO OMITTED
- -----------------------------------------------------------------------------
Putnam Income Fund
Supplement to Annual Report dated 10/31/99
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 $150 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,
class B, class C, and class M shares, which are discussed more extensively in
the annual report.
ANNUAL RESULTS AT A GLANCE
- -----------------------------------------------------------------------------
Total return
for periods ended 10/31/99 NAV
1 year 0.27%
5 years 39.94
Annual average 6.95
10 years 106.52
Annual average 7.52
Life of fund (since class A inception, 11/1/54)
Annual average 8.39
Share value: NAV
10/31/98 $6.88
10/31/99 $6.46
- -----------------------------------------------------------------------------
Return of
Distributions: No. Income Capital gains capital Total
12 $0.427 -- $0.013 $0.440
- -----------------------------------------------------------------------------
Please note that past performance does not indicate future results. Returns
shown for class Y shares for periods prior to their inception are derived
from the historical performance of class A shares, adjusted to reflect the
initial sales charge currently applicable to class A shares. These returns
have not been adjusted to reflect differences in operating expenses which,
for class Y shares, are lower than the operating expenses applicable to class
A shares. All returns assume reinvestment of distributions at net asset
value. Investment return and principal value will fluctuate so your shares,
when redeemed, may be worth more or less than their original cost. See full
report for information on comparative benchmarks. If you have questions,
please consult your fund prospectus or call Putnam toll free at 1-800-752-9894.
