Putnam
Master
Income
Trust
ANNUAL REPORT
October 31, 1996
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* Morningstar, Inc., an independent rating agency, awarded the fund 4
out of a possible 5 stars for overall performance (based on the 3- and
5-year return) as of October 31, 1996. This places the fund among the
top 22.5% of the 128 fixed-income funds rated.
* "Putnam Master Income Trust doesn't get the heart racing, but it
delights the soul. . . . PMT stands out for its prudence . . . . By
avoiding big losses . . . PMT has generated a solid long-term record."
-- Morningstar Mutual Funds, September 6, 1996
CONTENTS
4 Report from Putnam Management
9 Fund performance summary
13 Portfolio holdings
27 Financial statements
*Morningstar ratings reflect risk-adjusted performance through 10/31/96
and are subject to change every month. Morningstar ratings are
calculated from a fund's 3-, and 5-year returns (with fee adjustments)
in excess of 90-day Treasury bill returns and a risk factor that
reflects performance below 90-day Treasury bill returns. For the 3- and
5-year performance, the fund received 4 stars. There were 128 and 83
funds rated, respectively. 22.5% of the funds in an investment category
receive 4 stars. Performance for other share classes will vary. Past
performance is not indicative of future results.
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
(copyright) Karsh, Ottawa
Dear Shareholder:
A portfolio invested in U.S. high-yield, U.S. government, and
international fixed-income securities once again provided shareholders
of Putnam Master Income Trust with positive results during the fiscal
year ended October 31, 1996. Vibrant performance by high-yield and
international bonds offset the more restrained results posted by U.S.
government securities during the period, demonstrating the value of
diversification across a wide spectrum of the world's bond markets.
The U.S. high-yield bond market was the beneficiary of continued
economic strength, and the growth-oriented companies represented in the
fund's high-yield sector were among the best performing. The
international bond sector's focus on core European and emerging markets
also proved advantageous. Even within the less vibrant U.S. government
sector, a shift in emphasis to mortgage-backed securities away from
Treasuries was worthwhile.
Finally, it gives me pleasure to announce that Jin W. Ho of Putnam's
High-Yield Bond Group was named to your fund's management team in
September. Jin has been with Putnam since 1983.
Respectfully yours,
/S/George Putnam
George Putnam
Chairman of the Trustees
December 18, 1996
Report from the Fund Managers
Neil Powers, lead manager
Jin W. Ho
D. William Kohli
Mark J. Siegel
Putnam Master Income Trust wrapped up another fiscal year on October 31,
1996, with more solid evidence that its multisector strategy is an
effective one. In a year marked by fluctuating bond markets at home and
abroad, your fund's ability to invest in three distinct sectors of the
fixed-income market proved especially valuable.
Throughout most of the fiscal year, the U.S. economy grew at a faster-
than-expected pace, triggering investor fears about inflation and
weakening the performance of U.S. government securities. At the same
time, international bonds generally delivered positive returns and the
high-yield sector of the fixed-income market showed continued strength.
In light of this environment, our strategy for fiscal 1996 was to focus
on high-yield and international bonds while de-emphasizing U.S.
government securities. Complete performance information appears on pages
9 and 10.
* HIGH-YIELD HOLDINGS LEAD THE CHARGE
In the fund's high-yield sector, we continued to reduce holdings in core
cyclical industries -- a strategy we began in the middle of calendar
1995, when the U.S. economy began to show signs of slackening growth.
Cyclical companies, such as chemical, paper, and automotive, are so
called because their performance typically shadows the behavior of the
economy, waxing and waning along with the pace of economic growth. Also,
throughout the fiscal year, we added to the fund's holdings in growth-
oriented industries, such as telecommunications -- the industry with the
largest representation in this sector -- and other media such as
television and radio.
In February 1996, Congress passed legislation to deregulate the
telecommunications and broadcasting industries. The new law loosens
restrictions on radio stations, cable television service, and long-
distance telephone service. It will ultimately allow a single company to
offer services in more than one of these areas; for example, a telephone
company may provide cable television service. The legislation will also
allow ownership of more than one service in a particular region; one
company may own several radio stations in one city, for example.
Among the fund's holdings, local exchange carriers like Teleport and
Brooks Fiber Properties were among the portfolio's strongest performers.
These companies issue high-yield securities to help finance the
construction of the fiber-optic network required to attract corporate
customers and compete with larger telephone service providers. While
these securities and others discussed in this report were viewed
favorably during the period, all portfolio holdings are subject to
review and adjustment in accordance with the fund's investment strategy
and may vary in the future.
* PERIPHERAL EUROPEAN AND EMERGING MARKETS MAKE STRONG SHOWING
As with the high-yield sector, the fund's investments in international
bonds contributed substantially to performance. While international bond
markets generally delivered positive returns, we believe our emphasis on
country selection and currency management allowed the fund to derive
superior returns from international holdings.
[GRAPHIC WORM CHART OMITTED: MARKET SECTOR PERFORMANCE]
MARKET SECTOR PERFORMANCE
International U.S.
government government High-yield
Date/Year securities securities securities
- ---------- ------------- ---------- ----------
Oct. 1995 0% 0% 0%
Nov. 1995 0.87% 1.56% 0.47%
Dec. 1995 1.75% 3.00% 1.75%
Jan. 1996 -0.51% 3.64% 3.68%
Feb. 1996 -0.22% 1.52% 4.23%
Mar. 1996 0.03% 0.66% 3.95%
Apr. 1996 -0.18% 0.02% 4.51%
May 1996 -0.13% -0.15% 5.36%
Jun. 1996 0.43% 1.14% 5.59%
Jul. 1996 3.20% 1.39% 6.54%
Aug. 1996 3.89% 1.17% 7.70%
Sep. 1996 3.69% 2.85% 9.55%
Oct. 1996 5.45% 5.12% 10.47%
Footnote reads:
Chart shows cumulative monthly performance of the three major sectors in
which your fund invested from 10/31/95 to 10/31/96. Indexes are
unmanaged and their holdings and performance will differ from those of
the fund. Past performance is not indicative of future results. Sources:
International government securities, Salomon Brothers Non-U.S. World
Government Bond Index; high-yield corporate bonds, First Boston High
Yield Index; U.S. government securities, Lehman Brothers Government Bond
Index.
We focused primarily on European government bonds in this sector. Early
in the fiscal year, we emphasized bonds in higher-yielding markets, such
as those of Italy and Spain, rather than core markets. Since that time,
these and most other European countries have focused their efforts on
reining in fiscal budgets in order to gain acceptance into the European
Monetary Union (EMU), which intends to create a single currency to be
used among member nations. As a result of these efforts, Italy, Spain,
and Sweden have driven down both inflation and bond yields. As yields
declined, the fund's holdings in these markets benefited from price
appreciation.
A similar trend took place among markets in Canada and Australia. Here,
yields at the outset of the fiscal period were considerably higher than
those in the United States. Interest rates have fallen quite a bit since
then, narrowing the yield spreads relative to U.S. Treasuries.
We increased the fund's holdings in securities in emerging markets such
as Russia, which enjoyed robust gains through much of the period. Toward
the end of the fiscal year, however, we made a slight reduction to the
fund's emerging markets allocation.
Our currency strategy involved hedging international bonds back to the
U.S. dollar in an effort to protect the fund's value from losses due to
currency fluctuations. This helped protect the portfolio's value, as
several European currencies declined in value against the dollar. We
underweighted the yen and deutschemark and capitalized on other currency
movements as European nations struggled with the stringent budgetary and
growth criteria required to qualify for EMU inclusion.
[GRAPHIC OMITTED: TOP THREE HOLDINGS PER SECTOR*]
TOP THREE HOLDINGS PER SECTOR*
HIGH-YIELD BONDS
Midland Funding Corp. 13.25%, 2006
Trump Holdings & Funding Corp. 15.5%, 2005
ICG Holdings Inc. zero %(2000, 13.5%) 2005 (STP)
FOREIGN BONDS
Italy (Government of) 9.5%, 2001
United Kingdom Treasury notes 7.75%, 2006
France Treasury bill 4.5%, 1998
U.S. GOVERNMENT OBLIGATIONS
GNMA 7.5%, 2025-2026
FNMA 8%, 2026
FNMA 7.5%, 2026
Footnote reads:
*Based on net assets as of 10/31/96. Holdings will vary over time.
* MORTGAGE-BACKED SECURITIES PLAYED KEY ROLE IN U.S. GOVERNMENT SECTOR
Just before the fiscal year's midpoint, the U.S. bond market rally came
to an abrupt halt, experiencing the sharpest one-day price decline in
its history. Recognizing the considerable impact this would have on the
mortgage-backed securities market, we made some strategic shifts in the
U.S. government sector of the portfolio. The rise in interest rates
drove down the prices of mortgage-backed securities and reduced
prepayment risk (because higher interest rates made mortgage refinancing
less attractive to mortgage holders). At that time, we quickly swapped a
considerable portion of the fund's U.S. Treasury holdings for mortgage-
backed securities before the majority of the market adjusted to these
changes.
The remainder of the fiscal year brought a bit more stability to the
U.S. bond market, and yields on Treasuries remained within a fairly
narrow range. As a result, mortgage-backed securities offered greater
price appreciation and higher income than Treasuries. Toward the end of
the period, as interest rates declined, we began to reduce the fund's
allocation to mortgage-backed securities in order to better manage the
portfolio's exposure to prepayment risk.
* CONTINUED MODERATE GROWTH EXPECTED
As the new fiscal year begins, our outlook reflects what we have seen
during much of this year: moderate economic growth, low inflation, and
interest rates that move within a relatively limited range. We
anticipate that the sectors and securities that have served the fund
well in recent months may continue to do so into the beginning of
calendar 1997.
We plan to maintain the fund's considerable weighting in high-yield
securities to take advantage of the atmosphere of robust corporate
earnings which may allow the fund to grow in value while interest rates
remain stable. Among international bond markets, we expect to continue
to invest in countries whose inflation rates are declining. We will also
look to take advantage of European markets as progress toward the EMU
creates opportunities. If, as some economists predict, the rate of U.S.
economic growth begins to slow in the coming months, interest rates will
likely decline once again. For this reason, we expect to maintain a
longer-than-average portfolio duration to enable the fund to participate
in any corresponding price appreciation among government bonds.
Footnote reads:
The views expressed here are exclusively those of Putnam Management.
They are not meant as investment advice. Although the described holdings
were viewed favorably as of 10/31/96, there is no guarantee the fund
will continue to hold these securities in the future.
Performance summary
Performance should always be considered in light of a fund's investment
strategy. Putnam Master Income Trust is designed for investors seeking
high current income, consistent with preservation of capital, through a
portfolio diversified among U.S. government, high-yield, and
international fixed-income securities.
This section provides, at a glance, information about your fund's
performance. Total return shows how the value of the fund's shares
changed over time, assuming you held the shares through the entire
period and reinvested all distributions in the fund.
TOTAL RETURN FOR PERIODS ENDED 10/31/96
Salomon Bros. First
Lehman Bros. Non-U.S. Boston
Market Government World Govt. High-Yield
NAV price Bond Index Bond Index Index
- ------------------------------------------------------------------------
1 year 12.22% 12.08% 5.12% 5.45% 10.47%
- ------------------------------------------------------------------------
5 years 69.76 60.11 44.62 72.73 77.75
Annual average 11.16 9.87 7.65 11.55 12.19
- ------------------------------------------------------------------------
Life of Fund
(12/28/87) 155.49 113.06 112.23 109.80 168.83
Annual average 11.18 8.92 8.89 8.75 11.84
- -----------------------------------------------------------------------
Footnote reads:
Performance data represent past results and do not reflect future
performance. They do not take into account any adjustment for taxes
payable on reinvested distributions. Investment returns, net asset value
and market price will fluctuate so that an investor's shares, when sold,
may be worth more or less than their original cost.
TOTAL RETURN FOR PERIODS ENDED 9/30/96
(most recent calendar quarter)
Market
NAV price
- -----------------------------------------------------------------------
1 year 11.89% 8.74%
- -----------------------------------------------------------------------
5 years 70.63 58.05
Annual average 11.28 9.59
- ------------------------------------------------------------------------
Life of Fund
(12/28/87) 151.58 105.29
Annual average 11.11 8.56
- ------------------------------------------------------------------------
PRICE AND DISTRIBUTION INFORMATION
12 months ended 10/31/96
- -----------------------------------------------------------------------
Distributions (number) 12
- -----------------------------------------------------------------------
Income $0.69
- -----------------------------------------------------------------------
Total $0.69
- ------------------------------------------------------------------------
Share value: NAV Market price
- -----------------------------------------------------------------------
10/31/95 $9.04 $8.125
- ------------------------------------------------------------------------
10/31/96 9.33 8.375
- -----------------------------------------------------------------------
Current return NAV Market price
- -----------------------------------------------------------------------
Current dividend rate1 7.40% 8.24%
- ------------------------------------------------------------------------
Footnote reads:
1Income portion of most recent distribution, annualized and divided by
NAV or market price at end of period.
TERMS AND DEFINITIONS
Net asset value (NAV) is the value of all your fund's assets,
minus any liabilities, divided by the number of outstanding common
shares.
Market price is the current trading price of one share of the fund.
Market prices are set by transactions between buyers and sellers on the
New York Stock Exchange.
COMPARATIVE BENCHMARKS
First Boston High Yield Index* is an unmanaged list of lower-rated
higher-yielding U.S. corporate bonds.
Salomon Brothers Non-U.S. World Government Bond Index* is an unmanaged
list of bonds issued by 10 countries.
Lehman Bros. Government Bond Index* is an unmanaged list of publicly
issued U.S. Treasury obligations.
*Securities indexes assume reinvestment of all distributions and
interest payments and do not take in account brokerage fees or taxes.
Securities in the fund do not match those in the indexes and performance
of the fund will differ. It is not possible to invest directly in an
index.
Report of independent accountants
For the fiscal year ended October 31, 1996
To the Trustees and Shareholders of
Putnam Master Income Trust
We have audited the accompanying statement of assets and liabilities of
Putnam Master Income Trust, including the portfolio of investments
owned, as of October 31, 1996, and the related statement of operations
for the year then ended, the statements of changes in net assets for
each of the two years in the period then ended, and the financial
highlights for each of the periods indicated therein. These financial
statements and financial highlights are the responsibility of the fund's
management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included
confirmation of securities owned as of October 31, 1996, by
correspondence with the custodian and brokers. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the
financial position of Putnam Master Income Trust as of October 31, 1996,
the results of its operations for the year then ended, the changes in
its net assets for each of the two years in the period then ended and
the financial highlights for each of the periods indicated therein, in
conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
December 16, 1996
<TABLE>
<CAPTION>
Portfolio of investments owned
October 31, 1996
<S> <C> <C> <C>
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (34.2%) *
PRINCIPAL AMOUNT VALUE
U.S. Government Agency Mortgage Pass-Through Certificates (22.7%)
- -----------------------------------------------------------------------------------------------------------------------------
Federal National Mortgage Association
$26,675,613 8s, with various due dates from June 1, 2026 to October 1, 2026 $ 27,209,130
23,651,855 7 1/2s, with various due dates from January 1, 2026 to July 1, 2026 23,696,088
15,280,487 7s, with various due dates from July 1, 2025 to February 1, 2026 14,989,099
Government National Mortgage Association
499,588 8s, September 15, 2025 501,148
28,442,348 7 1/2s, with various due dates from June 15, 2025 to March 15, 2026 28,531,109
27,030 7s, Midget, February 15, 2009 27,294
17,687,145 7s, with various due dates from November 15, 2025 to June 15, 2026 17,344,378
------------
112,298,246
U.S. Treasury Obligations (11.5%)
- -----------------------------------------------------------------------------------------------------------------------------
8,690,000 U.S. Treasury Bonds 7 7/8s, February 15, 2021 9,841,425
U.S. Treasury Notes
1,425,000 9 1/8s, May 15, 1999 1,533,214
18,355,000 7s, July 15, 2006 19,163,721
10,800,000 6 1/2s, October 15, 2006 10,906,272
7,958,000 5 3/4s, August 15, 2003 7,750,376
12,775,000 U.S. Treasury Interest Strips zero %, May 15, 2004 7,968,790
------------
57,163,798
------------
Total U.S. Government and Agency Obligations (cost $159,377,173) $ 169,462,044
CORPORATE BONDS AND NOTES (33.4%)
PRINCIPAL AMOUNT VALUE
Advertising (0.5%)
- -----------------------------------------------------------------------------------------------------------------------------
$75,000 Adams Outdoor Advertising sr. notes 10 3/4s, 2006 $ 78,000
1,500,000 Lamar Advertising Co. sr. secd. notes 11s, 2003 1,680,000
85,000 Outdoor Systems, Inc. sr. sub. notes 9 3/8s, 2006 84,575
660,000 Universal Outdoor, Inc. sr. sub. notes 9 3/4s, 2006 653,400
------------
2,495,975
Aerospace and Defense (0.5%)
- -----------------------------------------------------------------------------------------------------------------------------
275,000 Howmet Corp. sr. sub. notes 10s, 2003 295,625
185,000 Moog Inc. sr. sub. notes Ser. B, 10s, 2006 191,475
1,750,000 Sequa Corp. bonds 8 3/4s, 2001 1,732,500
185,000 UNC, Inc. sr. sub. notes 11s, 2006 193,788
------------
2,413,388
Agriculture (0.5%)
- -----------------------------------------------------------------------------------------------------------------------------
1,994,000 PMI Holdings Corp. sub. disc. deb. stepped-coupon Ser. B, zero %
(11 1/2s, 9/1/00), 2005 ++ 1,286,130
1,105,471 Premium Standard Farms, Inc. sr. sec. notes 11s, 2003(2 double daggers) 1,122,054
------------
2,408,184
Airlines (0.3%)
- -----------------------------------------------------------------------------------------------------------------------------
1,070,000 Greenwich Air Services, Inc. sr. notes 10 1/2s, 2006 1,118,150
Apparel (0.2%)
- -----------------------------------------------------------------------------------------------------------------------------
850,000 Guess Jeans, Inc. sr. sub. notes 9 1/2s, 2003 867,000
Automotive (0.1%)
- -----------------------------------------------------------------------------------------------------------------------------
340,000 CSK Auto, Inc. 144A sr. sub. notes 11s, 2006 345,100
Automotive Parts (0.6%)
- -----------------------------------------------------------------------------------------------------------------------------
510,000 Aftermarket Technology Corp. sr. sub. notes 12s, 2004 561,000
1,350,000 Key Plastics Corp. sr. notes 14s, 1999 1,390,500
725,000 Lear Corp. sub. notes 9 1/2s, 2006 772,125
395,000 Speedy Muffler King, Inc. company guaranty 10 7/8s, 2006 404,875
------------
3,128,500
Banks (0.1%)
- -----------------------------------------------------------------------------------------------------------------------------
290,000 Berkeley Federal Bank & Trust sub. deb. 12s, 2005 316,100
Basic Industrial Products (0.1%)
- -----------------------------------------------------------------------------------------------------------------------------
170,000 Astor Corp. 144A sr. sub. notes 10 1/2s, 2006 170,000
350,000 Mettler Toledo, Inc. company guaranty 9 3/4s, 2006 357,000
------------
527,000
Broadcasting (2.3%)
- -----------------------------------------------------------------------------------------------------------------------------
750,000 Allbritton Communications sr. sub. deb. Ser. B, 9 3/4s, 2007 705,000
750,000 Argyle Television Corp. sr. sub. notes 9 3/4s, 2005 750,000
500,000 Comcast UK Cable, Ltd. deb. stepped-coupon zero % (11.2s, 11/15/00),
2007 (Bermuda) ++ 322,500
750,000 Grupo Televisa S.A. sr. disc. notes stepped-coupon zero % (13 1/4s,
5/15/01), 2008 (Mexico) ++ 465,000
150,000 Jacor Communications, Inc. sr. sub. notes 10 1/8s, 2006 153,000
910,000 Lenfest Communications, Inc. sr. sub. notes 10 1/2s, 2006 914,550
250,000 New City Broadcasting Corp. sr. sub. notes 11 3/8s, 2003 275,000
455,000 Park Broadcasting, Inc. sr. notes Ser. B, 11 3/4s, 2004 525,525
480,000 Paxson Communications Corp. 144A sr. sub. notes 11 5/8s, 2002 489,600
1,327,000 Petracom Holdings, Inc. notes stepped-coupon zero % (17 1/2s, 8/1/98), 2003 ++ 1,141,220
1,275,000 SFX Broadcasting, Inc. sr. sub. notes Ser. B, 10 3/4s, 2006 1,306,875
1,822,000 Telemedia Broadcasting Corp. 144A deb. stepped-coupon 3.8s, (16s, 6/15/99),
2004 ++ 1,653,465
2,600,000 Telewest Communications PLC deb. stepped-coupon zero % (11s, 10/1/00),
2007 (United Kingdom) ++ 1,657,500
1,100,000 Videotron Holdings. sr. disc. notes stepped-coupon zero % (11s, 8/15/2000),
2005 (United Kingdom) ++ 797,500
------------
11,156,735
Building Materials (0.1%)
- -----------------------------------------------------------------------------------------------------------------------------
600,000 Cemex S.A. 144A bonds 12 3/4s, 2006 (Mexico) 645,750
Building Products (0.1%)
- -----------------------------------------------------------------------------------------------------------------------------
500,000 Triangle Pacific Corp. sr. notes 10 1/2s, 2003 525,000
175,000 Waxman Industries Inc. sr. notes stepped-coupon Ser. B, zero %
(12 3/4s, 6/1/99), 2004 ++ 125,563
------------
650,563
Building and Construction (1.0%)
- -----------------------------------------------------------------------------------------------------------------------------
1,250,000 Inter-City Products sr. notes 9 3/4s, 2000 1,243,750
250,000 Presley Cos. sr. notes 12 1/2s, 2001 243,125
1,500,000 Scotsman Group, Inc. sr. secd. notes 9 1/2s, 2000 1,507,500
2,000,000 Terex Corp. (New) 144A sr. notes 13 3/4s, 2002 2,112,500
------------
5,106,875
Business Services (0.5%)
- -----------------------------------------------------------------------------------------------------------------------------
1,000,000 Corporate Express, Inc. sr. sub. notes Ser. B, 9 1/8s, 2004 1,000,000
120,000 Iron Mountain, Inc. sr. sub. notes 10 1/8s, 2006 123,000
110,000 Muzak, Inc. sr. notes 10s, 2003 110,000
190,000 Outsourcing Solutions, Inc. 144A sr. sub. notes 11s. 2006 194,275
270,000 Pierce Leahy Corp. 144A sr. sub. notes 11 1/8s, 2006 288,900
------------
1,716,175
Cable Television (2.2%)
- -----------------------------------------------------------------------------------------------------------------------------
1,000,000 Adelphia Communications Corp. notes Ser. B, 9 7/8s, 2005 870,000
1,865,000 American Telecasting, Inc. sr. disc. notes stepped-coupon zero % (14 1/2s,
8/15/00), 2005 ++ 1,156,300
1,200,000 Benedek Communications 144A sr. disc. notes stepped-coupon zero % (13 1/4s,
5/15/01), 2006 ++ 660,000
500,000 Century Communications Corp. sr. notes 9 1/2s, 2005 481,250
930,000 Charter Communications International disc. notes stepped-coupon Ser. B,
zero % (14s, 3/15/01), 2007 ++ 525,450
475,000 Charter Communications International sr. notes 11 1/4s, 2006 482,125
1,000,000 Diamond Cable Communication Co. sr. disc. notes stepped-coupon zero %
(11 3/4s, 12/15/00), 2005 (United Kingdom)++ 657,500
800,000 Diamond Cable Communication Co. sr. disc. notes stepped-coupon zero % (13 1/2s,
9/30/99), 2004 (United Kingdom) ++ 620,000
2,607,389 Falcon Holdings Group, Inc. sr. sub. notes 11s, 2003 (2 double daggers) 2,372,724
265,000 Heartland Wireless Communication, Inc.144A sr. notes 13s, 2003 283,550
1,500,000 Marcus Cable Co. sr. disc. notes stepped-coupon zero % (14 1/4s,
6/15/00), 2005 ++ 997,500
1,000,000 Marcus Cable Co. sr. sub. disc. notes stepped-coupon zero % (13 1/2s,
8/1/99), 2004 ++ 767,500
2,285,000 UIH Australia sr. disc. notes stepped-coupon Ser. B, zero % (14s,
5/15/01), 2006 ++ 1,199,625
------------
11,073,524
Cellular Communications (1.9%)
- -----------------------------------------------------------------------------------------------------------------------------
2,000,000 Cencall Communications Corp. sr. disc. notes stepped-coupon zero % (10 1/8s,
1/15/99), 2004 ++ 1,280,000
1,985,000 Dial Call Communication, Inc. sr. disc. notes stepped-coupon Ser. B,
zero % (10 1/4s, 12/15/98), 2005 ++ 1,240,625
1,110,000 Intercel, Inc. sr. disc. notes stepped-coupon zero % (12s, 5/1/01), 2006 ++ 627,150
2,635,000 Milicom International Cellular 144A sr. disc. notes stepped-coupon
zero % (13 1/2s, 6/1/00), 2006 (Luxembourg) ++ 1,495,363
3,350,000 NEXTEL Communications, Inc. sr. disc. notes stepped-coupon
zero % (11 1/2s, 9/1/98), 2003 ++ 2,428,750
2,545,000 Pricellular Wireless sr. disc. notes stepped-coupon Ser. B,
zero % (14s, 11/15/97), 2001 ++ 2,405,025
------------
9,476,913
Chemicals (0.2%)
- -----------------------------------------------------------------------------------------------------------------------------
155,000 Freedom Chemicals, Inc. 144A sr. sub. notes 10 5/8s, 2006 156,744
650,000 IMC Fertilizer Group, Inc. deb. 9.45s, 2011 741,000
275,000 Sterling Chemicals Holdings sr. disc. notes stepped-coupon zero % (13 1/2s,
8/15/01), 2008 ++ 161,123
150,000 Texas Petrochemical 144A sr. sub. notes 11 1/8s, 2006 159,375
------------
1,218,242
Computer Services (0.2%)
- -----------------------------------------------------------------------------------------------------------------------------
1,010,000 Unisys Corp. sr. notes 11 3/4s, 2004 1,025,150
Conglomerates (0.4%)
- -----------------------------------------------------------------------------------------------------------------------------
175,000 ADT Ltd. sr. sub. notes 9 1/4s, 2003 184,188
875,000 Axia, Inc. sr. sub. notes Ser. B, 11s, 2001 892,500
1,000,000 MacAndrews & Forbes Holdings, Inc. sub. deb. 13s, 1999 1,000,000
------------
2,076,688
Consumer Durable Goods (0.2%)
- -----------------------------------------------------------------------------------------------------------------------------
150,000 Rayovac Corp. 144A sr. sub. notes 10 1/4s, 2006 150,750
895,000 Remington Products Co. LLC 144A sr. sub. notes 11s, 2006 901,713
------------
1,052,463
Consumer Non Durables (--%)
- -----------------------------------------------------------------------------------------------------------------------------
145,000 E&S Holdings Corp. 144A sr. sub. notes 10 3/8s, 2006 148,806
Consumer Services (0.3%)
- -----------------------------------------------------------------------------------------------------------------------------
1,360,000 Coinmach Corp. sr. notes Ser. B, 11 3/4s, 2005 1,462,000
Containers (0.8%)
- -----------------------------------------------------------------------------------------------------------------------------
2,500,000 Ivex Packaging Corp. sr. sub. notes 12 1/2s, 2002 2,687,500
105,000 Printpack, Inc. 144A sr. notes 10 5/8s, 2006 108,413
215,000 Printpack, Inc. 144A sr. notes 9 7/8s, 2004 220,913
1,150,000 Riverwood International company guaranty 10 7/8s, 2008 1,052,250
------------
4,069,076
Electric Utilities (1.5%)
- -----------------------------------------------------------------------------------------------------------------------------
1,125,000 El Paso Electric Co. 1st mtge. Ser. E, 9.4s, 2011 1,164,375
125,000 Hidroelectric Pierda Aguila 144A bonds 10 5/8s, 2001 (Argentina) 125,156
1,250,000 Long Island Lighting Co. deb. 9s, 2022 1,248,850
365,000 Long Island Lighting Co. refunding mtge. notes 9 5/8s, 2024 369,563
4,000,000 Midland Funding Corp. deb. Ser. B, 13 1/4s, 2006 4,641,480
------------
7,549,424
Electronics (0.8%)
- -----------------------------------------------------------------------------------------------------------------------------
2,650,000 Amphenol Corp. sr. sub. notes 12 3/4s, 2002 2,928,250
251,815 Cirent Semiconductor 144A sr. sub. notes 10.22s, 2002 251,815
1,500,000 International Semi-Tech. Corp. sr. secd. disc. notes stepped-coupon
zero % (11 1/2s, 8/15/00), 2003 (Canada) ++ 915,000
------------
4,095,065
Entertainment (1.3%)
- -----------------------------------------------------------------------------------------------------------------------------
2,000,000 Six Flags Corp. sr. sub. notes stepped-coupon
zero % (12 1/4s, 6/15/98), 2005 ++ 1,800,000
495,000 Time Warner, Inc. notes 8.18s, 2007 509,380
495,000 Time Warner, Inc. notes 8.11s, 2006 503,766
3,050,000 Trump Holdings & Funding Corp. sr. notes 15 1/2s, 2005 3,538,000
------------
6,351,146
Finance (0.6%)
- -----------------------------------------------------------------------------------------------------------------------------
1,250,000 MCII Holding (USA), Inc. 144A bonds zero % (12.0s,11/15/98), 2002 ++ 1,012,500
1,925,000 Ocwen Financial Corp. notes 11 7/8s, 2003 2,040,500
------------
3,053,000
Financial Services (0.4%)
- -----------------------------------------------------------------------------------------------------------------------------
235,000 Aames Financial Corp. sr. notes 9 1/8s, 2003 237,350
395,000 Contifinancial Corp. sr. notes 8 3/8s, 2003 396,975
285,000 Intertek Finance PLC 144A sr. sub. notes 10 1/4s, 2006 289,275
320,000 Keystone Group, Inc. sr. secd. notes 9 3/4s, 2003 344,000
705,000 Olympic Financial Ltd. sr. notes 13s, 2000 782,550
------------
2,050,150
Food (0.4%)
- -----------------------------------------------------------------------------------------------------------------------------
985,000 Del Monte Corp. sub. notes 12 1/4s, 2002 (2 double daggers) 985,000
830,000 Mafco, Inc. sr. sub. notes 11 7/8s, 2002 879,800
------------
1,864,800
Food Chains (0.2%)
- -----------------------------------------------------------------------------------------------------------------------------
780,000 Stater Brothers sr. notes 11s, 2001 824,850
Food and Beverages (0.1%)
- -----------------------------------------------------------------------------------------------------------------------------
460,000 Canandaigua Wine Co. 144A sr. sub. notes 8 3/4s, 2003 441,600
Gaming (1.7%)
- -----------------------------------------------------------------------------------------------------------------------------
185,000 Alliance Gaming Corp. sr. notes 12 7/8s, 2003 190,550
1,000,000 Argosy Gaming Co. 1st mtge. 13 1/4s, 2004 960,000
840,000 Casino America, Inc. sr. notes 12 1/2s, 2003 861,000
315,000 Casino Magic Corp. 144A 1st mtge. 13s, 2003 319,725
925,000 Coast Hotels & Casino company guaranty Ser. B, 13s, 2002 994,375
625,000 Colorado Gaming & Entertainment Co. sr. notes 12s, 2003 (2 double daggers) 612,500
215,000 Harveys Casino Resorts sr. sub. notes 10 5/8s, 2006 224,675
1,425,000 Lady Luck Gaming 1st mtge. 11 7/8s, 2001 1,396,500
1,450,000 Mohegan Tribal Gaming 144A sr. secd. notes Ser. B, 13 1/2s, 2002 1,848,750
850,000 Players International Inc. sr. notes 10 7/8s, 2005 841,500
------------
8,249,575
Health Care (0.9%)
- -----------------------------------------------------------------------------------------------------------------------------
1,790,000 Columbia/HCA Healthcare med. term notes 7.58s, 2025 1,831,188
1,885,000 Ivac Corp. sr. notes 9 1/4s, 2002 1,908,563
675,000 Merit Behavioral Care sr. sub. notes 11 1/2s, 2005 707,063
------------
4,446,814
Hospital Management (--%)
- -----------------------------------------------------------------------------------------------------------------------------
155,000 Genesis Health Ventures, Inc. 144A sr. sub. notes 9 1/4s, 2006 154,613
Insurance (0.2%)
- -----------------------------------------------------------------------------------------------------------------------------
750,000 American Life Holding Co. sr. sub. notes 11 1/4s, 2004 853,125
Lodging (0.4%)
- -----------------------------------------------------------------------------------------------------------------------------
300,000 Host Marriott Corp. sr. notes Ser. B, 9 1/2s, 2005 303,000
1,850,000 John Q Hammons Hotels, Inc. 1st mtge. 8 7/8s, 2004 1,803,750
------------
2,106,750
Media (--%)
- -----------------------------------------------------------------------------------------------------------------------------
85,000 Gray Communications System, Inc. sr. sub. notes 10 5/8s, 2006 85,850
Medical Management (0.1%)
- -----------------------------------------------------------------------------------------------------------------------------
660,000 Paracelsus Healthcare sr. sub. notes 10s, 2006 613,800
Medical Supplies and Devices (0.2%)
- -----------------------------------------------------------------------------------------------------------------------------
515,000 Dade International, Inc. 144A sr. sub. notes 11 1/8s, 2006 551,050
500,000 Wright Medical Technology, Inc. sr. secd. notes Ser. B, 10 3/4s, 2000 505,000
------------
1,056,050
Metals and Mining (0.4%)
- -----------------------------------------------------------------------------------------------------------------------------
1,025,000 Great Lakes Carbon Corp. sr. notes 10s, 2006 1,076,250
275,000 Renco Metals, Inc. sr. notes 11 1/2s, 2003 286,000
650,000 Royal Oak Mines, Inc. 144A sr. sub. notes 11s, 2006 (Canada) 669,500
------------
2,031,750
Motion Picture Distribution (0.7%)
- -----------------------------------------------------------------------------------------------------------------------------
2,000,000 Act III Theatres, Inc. sr. sub. notes 11 7/8s, 2003 2,200,000
734,400 Cinemark Mexico USA notes Ser. B, 13s, 2003 (Mexico) 697,680
49,600 Cinemark Mexico USA notes Ser. D, 13s, 2003 (Mexico) 47,120
605,000 Cinemark USA, Inc. 144A sr. sub. notes 9 5/8s, 2008 595,925
------------
3,540,725
Networking (0.2%)
- -----------------------------------------------------------------------------------------------------------------------------
1,785,000 CellNet Data Systems, Inc. 144A sr. disc. notes stepped-coupon
zero % (13s, 6/15/00), 2005 ++ 1,178,100
Office Equipment (0.2%)
- -----------------------------------------------------------------------------------------------------------------------------
1,000,000 United Stationer Supply, Inc. sr. sub. notes 12 3/4s, 2005 1,095,000
Oil and Gas (1.0%)
- -----------------------------------------------------------------------------------------------------------------------------
750,000 Benton Oil & Gas Corp. sr. notes 11 5/8s, 2003 825,000
200,000 Cliffs Drilling Co. company guaranty Ser. B, 10 1/4s, 2003 207,500
645,000 Costilla Energy, Inc. sr. notes 10 1/4s, 2006 646,613
170,000 Flores & Rucks Corp. sr. sub. notes 9 3/4s, 2006 174,463
275,000 Forcenergy, Inc. sr. sub. notes 9 1/2s, 2006 279,813
300,000 Maxus Energy Corp. notes 9 3/8s, 2003 303,000
500,000 Transamerican Refinancing Corp. 1st mtge. 16 1/2s, 2002 487,500
1,950,000 Transtexas Gas Corp. sr. secd. notes 11 1/2s, 2002 2,067,000
------------
4,990,889
Packaging and Containers (--%)
- -----------------------------------------------------------------------------------------------------------------------------
170,000 US Can Corp. 144A sr. sub. notes 10 1/8s, 2006 175,100
Paging (0.6%)
- -----------------------------------------------------------------------------------------------------------------------------
1,250,000 Arch Communications Group sr. disc. notes stepped-coupon
zero % (10 7/8s, 3/15/01), 2008 ++ 687,500
1,000,000 Mobilemedia Corp. sr. sub. notes 9 3/8s, 2007+ (In default) 550,000
1,250,000 Pagemart Nationwide, Inc. sr. disc. notes stepped-coupon
zero % (15s, 2/1/00), 2005 ++ 850,000
1,150,000 Pagemart, Inc. sr. disc. notes stepped-coupon
zero % (12 1/4s, 11/1/98), 2003 ++ 894,125
------------
2,981,625
Paper and Forest Products (1.4%)
- -----------------------------------------------------------------------------------------------------------------------------
1,000,000 APP International Finance Co. notes 11 3/4s, 2005 (Netherlands) 1,035,000
640,000 Domtar, Inc. deb. 9 1/2s, 2016 (Canada) 678,400
1,035,000 Florida Coast Paper LLC 144A 1st. mtge. 12 3/4s, 2003 1,115,213
1,500,000 Gaylord Container Corp. sr. sub. deb. 12 3/4s, 2005 1,646,250
1,425,000 Repap New Brunswick sr. notes 10 5/8s, 2005 (Canada) 1,439,250
600,000 Stone Container Corp. 1st mtge. 10 3/4s, 2002 630,000
500,000 Stone Container Corp. 144A sr. notes 11 7/8s, 2016 527,500
------------
7,071,613
Publishing (0.6%)
- -----------------------------------------------------------------------------------------------------------------------------
1,800,000 American Media Operation, Inc. sr. sub. notes 11 5/8s, 2004 1,921,500
2,500,000 Marvel Parent Holdings, Inc. sr. secd. disc. notes zero %, 1998 925,000
------------
2,846,500
Recreation (0.8%)
- -----------------------------------------------------------------------------------------------------------------------------
880,000 Arizona Charlies Corp. 1st mtge. Ser. B, 12s, 2000 616,000
320,000 Capitol Queen Corp. 1st mtge. notes Ser. B, 12s, 2000 + 240,000
750,000 Grand Casinos, Inc. 1st mtge. 10 1/8s, 2003 736,875
1,179,000 Louisiana Casino Cruises Corp. 1st mtge. 11 1/2s, 1998 1,078,785
500,000 Trump A.C. 1st. mtge. 11 1/4s, 2006 472,500
864,000 Trump Castle Funding notes 11 1/2s, 2000 872,640
------------
4,016,800
Restaurants (0.1%)
- -----------------------------------------------------------------------------------------------------------------------------
700,000 FRD Acquisition Co. sr. notes Ser. B, 12 1/2s, 2004 710,500
Retail (0.8%)
- -----------------------------------------------------------------------------------------------------------------------------
1,280,000 Brylane (L.P.) sr. sub. notes 10s, 2003 1,318,400
1,000,000 Finlay Enterprises, Inc. sr. disc. deb. stepped-coupon
zero % (12s, 5/1/98), 2005 ++ 830,000
470,000 Finlay Enterprises, Inc. sr. notes 10 5/8s, 2003 475,875
480,000 Loehmanns, Inc. sr. notes 11 7/8s, 2003 508,800
625,000 Mothers Work, Inc. sr. notes 12 5/8s, 2005 660,938
------------
3,794,013
School Buses (0.1%)
- -----------------------------------------------------------------------------------------------------------------------------
320,000 Blue Bird Body Co. sub. deb. Ser. B, 11 3/4s, 2002 331,200
Steel (0.3%)
- -----------------------------------------------------------------------------------------------------------------------------
1,500,000 Ispat Mexicana, S.A. 144A deb. 10 3/8s, 2001 (Mexico) 1,507,500
Supermarkets (0.1%)
- -----------------------------------------------------------------------------------------------------------------------------
150,000 Ralphs Grocery Co. sr. notes 10.45s, 2004 151,500
150,000 Ralphs Grocery Co. sr. sub. notes 11s, 2005 150,000
------------
301,500
Telecommunications (3.0%)
- -----------------------------------------------------------------------------------------------------------------------------
1,445,000 American Communication Services, Inc. sr. disc. notes stepped-coupon
zero % (12 3/4s, 4/1/01), 2006 ++ 751,400
500,000 Brooks Fiber Properties sr. disc. notes stepped-coupon
zero % (10 7/8s, 3/1/01), 2006 ++ 292,500
1,155,000 Frontiervision Operating Partners L.P. sr. sub. notes 11s, 2006 1,143,450
1,322,000 GST Telecommunications, Inc. company guaranty stepped-coupon
zero % (13 7/8s, 15/15/00), 2005 ++ 717,185
940,000 Hyperion Telecommunication sr. disc. notes stepped-coupon
Ser. B, zero % (13s, 4/15/01), 2003 ++ 578,100
500,000 ICG Holding Inc. company guaranty stepped-coupon
zero % (12 1/2s, 5/1/01), 2006 ++ 302,500
4,130,000 ICG Holding Inc. sr. disc. notes stepped-coupon
zero % (13 1/2s, 9/15/00), 2005 ++ 2,725,800
1,000,000 Intermedia Communications of Florida, Inc. sr. disc. notes stepped-coupon
zero % (12 1/2s, 5/15/01), 2006 ++ 610,000
1,325,000 Intermedia Communications of Florida, Inc. sr. notes Ser. B, 13 1/2s, 2005 1,500,563
660,000 International Cabletel, Inc. sr. notes stepped-coupon Ser. B,
zero % (11 1/2s, 2/1/01), 2006 ++ 396,000
500,000 Metrocall, Inc. sr. sub. notes 10 3/8s, 2007 420,000
1,000,000 MFS Communications sr. disc. notes stepped-coupon
zero % (8 7/8s, 1/1/01), 2006 ++ 707,500
1,050,000 Nextlink Communications sr. notes 12 1/2s, 2006 1,071,000
585,000 Omnipoint Corp. 144A sr. notes 11 5/8s, 2006 590,850
1,800,000 Rogers Cantel, Inc. deb. 9 3/8s, 2008 (Canada) 1,809,000
1,930,000 Teleport Communications Group Inc. sr. disc. notes stepped-coupon
zero % (11 1/8s, 7/1/01), 2007 ++ 1,235,200
------------
14,851,048
Telephone Services (0.8%)
- -----------------------------------------------------------------------------------------------------------------------------
2,300,000 Call-Net Enterprises sr. disc. notes stepped-coupon
zero % (13 1/4s, 12/1/99), 2004 ++ 1,805,500
545,000 Fonorola, Inc. sr. notes 12 1/2s, 2002 (Canada) 592,688
1,655,000 MFS Communications sr. disc. notes stepped-coupon
zero % (9 3/8s, 1/15/99), 2004 ++ 1,406,750
------------
3,804,938
Textiles (0.2%)
- -----------------------------------------------------------------------------------------------------------------------------
145,000 Polysindo International Eka Perka company guaranty 13s, 2001 (Indonesia) 160,225
570,000 Polysindo International Finance company guaranty 11 3/8s, 2006 (Indonesia) 604,200
310,000 Reeves Industries Inc. sub. deb. 13 3/4s, 2001 263,500
------------
1,027,925
Wireless Communications (0.2%)
- -----------------------------------------------------------------------------------------------------------------------------
610,000 Paging Network, Inc. 144A sr. sub. notes 10s, 2008 603,900
310,000 Pricellular Wireless Corp. 144A sr. notes 10 3/4s, 2004 312,325
150,000 Western Wireless Corp. 144A sr. sub. notes 10 1/2s, 2007 150,375
------------
1,066,600
------------
Total Corporate Bonds and Notes (cost $171,128,471) $ 165,618,295
<CAPTION>
FOREIGN GOVERNMENT BONDS AND NOTES (22.1%) *
PRINCIPAL AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
AUD 4,310,000 Australia (Government of) bonds Ser. 400, 7s, 2000 $ 3,429,694
AUD 4,985,000 Australia (Government of) bonds Ser. 803, 9 1/2s, 2003 4,416,572
CAD 2,540,000 Canada (Government of) deb. Ser. A-76, 9s, 2025 2,338,295
CAD 9,362,000 Canada (Government of) deb. 8 3/4s, 2005 8,142,968
CAD 4,745,000 Canada (Government of) bonds 7s, 2006 3,693,628
DKK 38,690,000 Denmark (Government of) bonds 8s, 2003 7,246,163
DKK 26,205,000 Denmark (Government of) bonds 7s, 2004 4,606,751
FRF 9,900,000 France (Government of) OAT deb. 6s, 2025 1,729,114
FRF 28,200,000 France Treasury bill 7s, 2000 5,965,459
FRF 42,980,000 France Treasury bill 4 1/2s, 1998 8,488,137
DEM 3,820,000 Germany (Federal Republic of) bonds Ser. 96, 6 1/4s, 2006 2,559,249
DEM 8,940,000 Germany (Federal Republic of) bonds 7 3/8s, 2005 6,434,091
DEM 4,790,000 Germany (Federal Republic of) bonds Ser. 118, 5 1/4s, 2001 3,216,999
ITL 16,435,000,000 Italy (Government of) bonds 9 1/2s, 2001 11,633,292
USD 270,000 Morocco (Government of) bonds 6.437s, 2009 213,638
USD 4,056,000 Russia (Government of) principal loans 8s, 2020 ##(2 double dgers) 2,164,890
USD 960,000 Russia (Government of) interest notes 8s, 2015 ##(2 double ggers) 633,000
ESP 273,000,000 Spain (Government of) deb. 10.1s, 2001 2,379,121
SEK 31,200,000 Sweden (Government of) bonds 10 1/4s, 2000 5,353,678
DEM 3,000,000 Treuhandanstalt (Germany Republic of) 7 1/8s, 2003 2,143,281
GBP 1,270,000 United Kingdom Conversion stock 9s, 2000 2,186,372
GBP 4,820,000 United Kingdom Treasury bonds 8 1/2s, 2007 8,297,884
GBP 790,000 United Kingdom Treasury bonds 6 3/4s, 2004 1,225,507
GBP 6,740,000 United Kingdom Treasury notes 7 3/4s, 2006 11,031,126
------------
Total Foreign Government Bonds and Notes (cost $106,367,411) $ 109,528,909
BRADY BONDS (2.5%) *
PRINCIPAL AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------
$4,939,000 Argentina (Republic of) FRB Ser. L-D, 6.4375s, 2023 $ 3,549,906
886,900 Argentina (Republic of) FRN 6.625s, 2005 727,258
3,703,000 Brazil (Republic of) notes 6.50s, 2024 2,717,076
1,643,109 Brazil (Republic of) bond 6.88s, 2014 1,125,530
972,000 Ecuador (Government of) FRN 6.50s, 2025 639,090
1,675,000 United Mexican States deb. Ser. B, 6 1/4s, 2019 1,170,406
1,112,000 United Mexican States bonds 11 1/2s, 2026 1,103,660
1,750,000 Venezuela (Government of) FRN Ser. DL, 6.625s, 2007 1,432,813
------------
Total Brady Bonds (cost $12,130,164) $ 12,465,739
PREFERRED STOCKS (1.6%) *
NUMBER OF SHARES VALUE
- -----------------------------------------------------------------------------------------------------------------------------
3,127 Alliance Gaming Corp. Ser. B, $15.00 pfd. $ 290,811
11,249 Cablevision Systems Ser. M, $11.125 dep. shs. pfd. 1,029,284
25,300 California Federal Bank Ser. B, $10.625 exch. pfd. 2,726,075
13,965 Diva Systems Corp. Ser. C, $6.00 pfd. 122,194
8,206 K-III Communications $3.85 pfd. 812,394
685 Paxson Communications Corp. $12.50 pfd. 654,175
29,400 SDW Hldgs Corp. 144A $3.50 pfd. 852,600
1,545 Time Warner, Inc. 144A Ser. K, $10.25 pfd. 1,645,425
------------
Total Preferred Stocks (cost $7,912,741) $ 8,132,958
COMMON STOCKS (1.1%) *
NUMBER OF SHARES VALUE
- -----------------------------------------------------------------------------------------------------------------------------
570 Applause Enterprises, Inc. (acquired 10/4/90, cost $64,125) +(double dagger) $ 1,710
2,625 Axia Holding Corp. 144A + 131,250
29,974 Computervision Corp. + 269,766
21,960 Conseco Inc. 1,174,860
25,000 Exide Corp. 650,000
48,625 Gaylord Container Corp. + 364,688
57,441 Grand Union Co. (acquired 7/15/92, cost $3,250,000)(double dagger)+ 387,727
4,148 IFINT Diversified Holdings 144A + 203,771
671 PMI Holdings Corp. + 147,620
480 Premium Holdings L.P. 144A + 11,995
100,386 PSF Holdings LLC Class A 1,706,562
20,000 Southdown, Inc. 547,500
2,055 Southland Corp. + 5,780
15,000 Specialty Foods Corp. + 7,500
4,000 Terex Corp. Rights (expiration date, 5/15/2002) + 8,000
------------
Total Common Stocks (cost $9,148,054) $ 5,618,729
ASSET-BACKED SECURITIES (1.0%) *
PRINCIPAL AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------
$1,611,000 Chemical Master Credit Card Trust Ser. 95-2, Class A, 6.23s, 2003 $ 1,605,958
3,315,000 Sears Credit Account Master Trust Ser. 95-5, Class A, 6.05s, 2004 3,217,605
------------
Total Asset-Backed Securities (cost $4,963,274) $ 4,823,563
UNITS (0.9%) *
NUMBER OF UNITS VALUE
- -----------------------------------------------------------------------------------------------------------------------------
150 Celcaribe S.A. 144A units stepped-coupon zero % (13 1/2s, 3/15/98), 2004 ++ $ 1,635,000
690 Diva Systems Corp. 144A units stepped-coupon zero % (13s, 5/15/01), 2006 ++ 393,300
850 Fitzgerald Gaming Co. units 13s, 2002 646,000
760 Interact Systems, Inc. 144A units stepped-coupon zero % (14s, 8/1/99), 2003 ++ 516,800
450 International Wireless Communications 144A units zero %, 2001 245,250
600 RSL Communications, Ltd. 144A units 12 1/4s, 2006 601,500
1,030 Wireless One Inc. units stepped-coupon zero % (13 1/2s, 8/1/01), 2006 ++ 543,325
------------
Total Units (cost $4,313,851) $ 4,581,175
CONVERTIBLE BONDS AND NOTES (0.7%) *
PRINCIPAL AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------
$550,000 Exide Corp. 144A cv. sr. sub. notes 2.9s, 2005 $ 334,125
234,000 GST Telecommunications, Inc. cv. sr. disc. notes stepped-coupon
zero % (13 7/8s, 15/15/00), 2005 217,620
280,000 Integrated Device Technology, Inc. cv. sub. notes 5 1/2s, 2002 226,450
185,000 National Semiconductor Corp. 144A cv. deb. 6 1/2s, 2002 173,669
1,486,000 Pricellular Wireless Corp. 144A cv. sub. notes stepped-coupon
zero % (10 3/4s, 8/15/00) 2004 ++ 1,411,700
675,000 Protection One Alarm cv. sr. sub. notes 6 3/4s, 2003 645,453
280,000 VLSI Technology, Inc. cv. sub. notes 8 1/4s, 2005 264,600
------------
Total Convertible Bonds and Notes (cost $2,686,278) $ 3,273,617
CONVERTIBLE PREFERRED STOCKS (0.6%) *
NUMBER OF SHARES VALUE
- -----------------------------------------------------------------------------------------------------------------------------
28,404 Cablevision Systems Corp. Ser. H, $11.75 cv. pfd. $ 2,726,784
5,450 Granite Broadcasting $1.938 cv. pfd. 327,000
------------
Total Convertible Preferred Stocks (cost $3,009,753) $ 3,053,784
PURCHASED OPTIONS OUTSTANDING (0.3%) *(cost $793,612)
<CAPTION>
EXPIRATION DATE/
NUMBER OF CONTRACTS STRIKE PRICE VALUE
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
JPY 1,986,000,000 Japanese Government bonds Futures Contracts (Call) Nov 96/117.5 $1,390,444
WARRANTS (0.2%) *+ EXPIRATION
NUMBER OF WARRANTS DATE VALUE
- -----------------------------------------------------------------------------------------------------------------------------
40,000 Becker Gaming Corp. 144A 11/15/00 $ 10,000
3,165 Casino America, Inc. 11/15/96 317
7,140 Cellnet Data Systems 6/15/00 214,200
2,100 County Seat Holdings, Inc. 10/15/98 21
1,399 Grand Union Co. Ser. 1 (acquired 10/6/93, cost $560)(double dagger) 6/16/00 420
2,799 Grand Union Co. Ser. 2 (acquired 10/6/93, cost $280)(double dagger) 6/16/00 112
940 Hyperion Telecommunications 144A 4/15/01 42,300
75,000 Insight Communications Co. 144A 3/31/98 187,500
8,514 Intelcom Group 144A 10/15/05 131,967
1,325 Intermedia Communications 144A 6/1/00 66,250
4,101 Louisiana Casino Cruises, Inc. 144A 12/1/98 58,439
5,290 Pagemart, Inc. 144A 12/31/03 43,643
2,000 Petracom Holdings, Inc. 144A 8/1/05 14,250
4,238 President Riverboat Casinos, Inc. 9/30/99 2,967
2,940 SDW Hldgs Corp. Ser. B 144A 12/15/06 38,220
275 Sterling Chemicals Holdings 8/15/08 8,250
31 Telemedia Broadcasting Corp. 144A 4/1/04 23,295
9,660 UCC Investor Holding, Inc. (acquired 3/16/94, cost $125,580)(double dagger) 10/31/99 125,580
36 Wright Medical Technology, Inc. 144A 6/30/03 4,625
------------
Total Warrants (cost $858,258) $ 972,356
SHORT-TERM INVESTMENTS (2.0%) *(cost $10,001,531)
PRINCIPAL AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------
$10,000,000 Interest in $356,650,000 joint repurchase agreement dated October 31,
1996 with Morgan (J.P.) & Co., Inc. due November 1, 1996 with respect to
various U.S. Treasury obligations -- maturity value of $10,001,531 for an
effective yield of 5.51% $ 10,001,531
- -----------------------------------------------------------------------------------------------------------------------------
Total Investments (cost $492,690,571)*** $ 498,923,144
- -----------------------------------------------------------------------------------------------------------------------------
* Percentages indicated are based on net assets of $495,724,285.
*** The aggregate identified cost on a tax basis is
$494,115,856, resulting in gross unrealized appreciation and
depreciation of $13,543,185 and $8,735,897, respectively,
or net unrealized appreciation of $4,807,288.
+ Non-income-producing security.
++ The interest rate and date shown parenthetically represent
the new interest rate to be paid and the date the fund will
begin receiving interest at this rate.
(double dagger) Restricted, excluding 144A securities, as to public resale.
The total market value of restricted securities held at
October 31, 1996 $515,549 or 0.1% of net assets.
(2 double daggers) Income may be received in cash or additional securities at
the discretion of the issuer.
## When-issued securities (Note 1).
144A after the name of a security represents those exempt
from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions exempt
from registration, normally to qualified institutional
buyers.
The rate shown on FRB and FRN are the current interest rates
shown at October 31, 1996, which are subject to
change based on the terms of the security.
<CAPTION>
- -------------------------------------------------------------------------------------------------
Forward Currency Contracts to Sell at October 31, 1996
(aggregate face value $70,225,802)
Unrealized
Market Aggregate Face Delivery Appreciation/
Value Value Date (Depreciation)
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
British Pounds $4,414,743 $4,431,997 12/18/96 $17,254
Canadian Dollars 8,645,113 8,566,736 12/18/96 (78,377)
Danish Krone 8,750,654 8,850,707 12/18/96 100,053
Deutschemarks 5,782,342 5,863,519 12/18/96 81,177
French Francs 8,973,311 9,142,447 12/18/96 169,136
Italian Lira 4,657,980 4,651,643 12/18/96 (6,337)
Japanese Yen 7,783,022 8,097,501 12/18/96 314,479
Swedish Krona 1,958,859 1,952,420 12/18/96 (6,439)
Swiss Francs 18,543,642 18,668,832 12/18/96 125,190
- -------------------------------------------------------------------------------------------------
$716,136
- -------------------------------------------------------------------------------------------------
Forward Currency Contracts to Buy at October 31, 1996
(aggregate face value $83,693,416)
Unrealized
Market Aggregate Face Delivery Appreciation/
Value Value Date (Depreciation)
- -------------------------------------------------------------------------------------------------
Australian Dollars $611,138 $608,015 12/18/96 $3,123
Deutschemarks 37,107,279 37,324,604 12/18/96 (217,325)
Ecuadorian Sucre 68,837 68,974 12/18/96 (137)
French Francs 7,768,408 7,886,166 12/18/96 (117,758)
Italian Lira 2,517,762 2,510,920 12/18/96 6,842
Japanese Yen 30,394,831 32,026,577 12/18/96 (1,631,746)
Spanish Peseta 3,178,500 3,146,376 12/18/96 32,124
Swedish Krona 122,425 121,784 12/18/96 641
- -------------------------------------------------------------------------------------------------
$(1,924,236)
- -------------------------------------------------------------------------------------------------
TBA Sale Commitments at October 31, 1996
(proceeds receivable $15,902,973)
Agency Principal Amount Delivery Month Coupon Rate Value
- -------------------------------------------------------------------------------------------------
FNMA $3,107,000 Nov 8.0% $3,169,141
FNMA 7,958,000 Nov 7.5% 7,972,881
GNMA 4,754,000 Nov 7.5% 4,768,832
- -------------------------------------------------------------------------------------------------
$15,910,854
- -------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
October 31, 1996
<S> <C>
Assets
- -----------------------------------------------------------------------------------------------------------
Investments in securities, at value (identified cost $492,690,571)(Note 1) $498,923,144
- -----------------------------------------------------------------------------------------------------------
Cash 4,609,081
- -----------------------------------------------------------------------------------------------------------
Dividends and interest receivable 8,397,293
- -----------------------------------------------------------------------------------------------------------
Receivable for securities sold 38,630,528
- -----------------------------------------------------------------------------------------------------------
Receivable for open forward currency contracts 960,157
- -----------------------------------------------------------------------------------------------------------
Receivable for closed forward currency contracts 2,659,831
- -----------------------------------------------------------------------------------------------------------
Total assets 554,180,034
Liabilities
- -----------------------------------------------------------------------------------------------------------
Distributions payable to shareholders 3,054,670
- -----------------------------------------------------------------------------------------------------------
Payable for securities purchased 34,538,269
- -----------------------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 937,327
- -----------------------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 76,268
- -----------------------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 122
- -----------------------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 2,846
- -----------------------------------------------------------------------------------------------------------
Payable for open forward currency contracts 2,168,263
- -----------------------------------------------------------------------------------------------------------
Payable for closed forward currency contracts 1,667,432
- -----------------------------------------------------------------------------------------------------------
TBA sale commitments, at value (proceeds receivable $15,902,973) 15,910,854
- -----------------------------------------------------------------------------------------------------------
Other accrued expenses 99,698
- -----------------------------------------------------------------------------------------------------------
Total liabilities 58,455,749
- -----------------------------------------------------------------------------------------------------------
Net Assets $495,724,285
Represented by
- -----------------------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $485,523,998
- -----------------------------------------------------------------------------------------------------------
Distributions in excess of net investment income (Note 1) (1,034,382)
- -----------------------------------------------------------------------------------------------------------
Accumulated net realized gain on investmentsand foreign currency transactions (Note 1) 6,206,763
- -----------------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments and assets and liabilities in foreign currencies 5,027,906
- -----------------------------------------------------------------------------------------------------------
Total - Representing net assets applicable to capital shares outstanding $495,724,285
Computation of net asset value
- -----------------------------------------------------------------------------------------------------------
Net asset value per share ($495,724,285 divided by 53,147,249 shares) $9.33
- -----------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Year ended October 31, 1996
<S> <C>
Investment income:
- -----------------------------------------------------------------------------------------------------------------
Interest (net of foreign tax of $143,675) $39,567,003
- -----------------------------------------------------------------------------------------------------------------
Dividends 1,090,794
- -----------------------------------------------------------------------------------------------------------------
Total investment income 40,657,797
- -----------------------------------------------------------------------------------------------------------------
Expenses:
- -----------------------------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 3,647,975
- -----------------------------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 609,072
- -----------------------------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 16,794
- -----------------------------------------------------------------------------------------------------------------
Administrative services (Note 2) 8,672
- -----------------------------------------------------------------------------------------------------------------
Reports to shareholders 77,877
- -----------------------------------------------------------------------------------------------------------------
Registration fees 450
- -----------------------------------------------------------------------------------------------------------------
Auditing 66,494
- -----------------------------------------------------------------------------------------------------------------
Legal 23,527
- -----------------------------------------------------------------------------------------------------------------
Postage 97,441
- -----------------------------------------------------------------------------------------------------------------
Exchange listing fees 48,410
- -----------------------------------------------------------------------------------------------------------------
Other 1,972
- -----------------------------------------------------------------------------------------------------------------
Total expenses 4,598,684
- -----------------------------------------------------------------------------------------------------------------
Expense reduction (Note 2) (79,886)
- -----------------------------------------------------------------------------------------------------------------
Net expenses 4,518,798
- -----------------------------------------------------------------------------------------------------------------
Net investment income 36,138,999
- -----------------------------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 18,096,840
- -----------------------------------------------------------------------------------------------------------------
Net realized gain on written options (Notes 1 and 3) 127,030
- -----------------------------------------------------------------------------------------------------------------
Net realized loss foreign currency transactions (25,759)
- -----------------------------------------------------------------------------------------------------------------
Net unrealized appreciation of assets and liabilities in foreign currencies during the year 112,608
- -----------------------------------------------------------------------------------------------------------------
Net unrealized depreciation of investments, written options, and TBA sale commitments during the year (2,578,483)
- -----------------------------------------------------------------------------------------------------------------
Net gain on investments 15,732,236
- -----------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $51,871,235
- -----------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Year ended October 31
---------------------------------
1996 1995
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase in net assets
- -------------------------------------------------------------------------------------------------------------
Operations:
- -------------------------------------------------------------------------------------------------------------
Net investment income $36,138,999 $37,218,565
- -------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments 18,198,111 (1,497,838)
- -------------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of investments (2,465,875) 22,757,028
- -------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 51,871,235 58,477,755
- -------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- -------------------------------------------------------------------------------------------------------------
From net investment income (36,742,441) (34,122,774)
- -------------------------------------------------------------------------------------------------------------
Return of capital -- (2,693,488)
- -------------------------------------------------------------------------------------------------------------
Decrease from capital share transactions (Note 4) (1,318,283) (507,361)
- -------------------------------------------------------------------------------------------------------------
Total increase in net assets 13,810,511 21,154,132
- -------------------------------------------------------------------------------------------------------------
Net Assets
- -------------------------------------------------------------------------------------------------------------
Beginning of year 481,913,774 460,759,642
- -------------------------------------------------------------------------------------------------------------
End of year (including distribuitons in excess of net investment
income of $1,034,382 and $2,654,955, respectively) $495,724,285 $481,913,774
- -------------------------------------------------------------------------------------------------------------
Number of fund shares
- -------------------------------------------------------------------------------------------------------------
Shares outstanding at beginning of year 53,311,249 53,375,649
- -------------------------------------------------------------------------------------------------------------
Shares liquidated (Note 4) (164,000) (64,400)
- -------------------------------------------------------------------------------------------------------------
Shares outstanding at end of year 53,147,249 53,311,249
- -------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
----------------------------------------------------
Year ended October 31
----------------------------------------------------
1996 1995 1994
----------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of year $9.04 $8.63 $9.62
- ---------------------------------------------------------------------------------------------------------------------------
Investment operations
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income .68 .68 .74
- ---------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments .30 .42 (.88)
- ---------------------------------------------------------------------------------------------------------------------------
Total from investment operations .98 1.10 (.14)
- ---------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ---------------------------------------------------------------------------------------------------------------------------
From net investment income (.69) (.64) (.52)
- ---------------------------------------------------------------------------------------------------------------------------
In excess of net investment income -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
From net realized gain on investments -- -- (.08)
- ---------------------------------------------------------------------------------------------------------------------------
Return of capital -- (.05) (.25)
- ---------------------------------------------------------------------------------------------------------------------------
Total distributions (.69) (.69) (.85)
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $9.33 $9.04 $8.63
- ---------------------------------------------------------------------------------------------------------------------------
Market value, end of year $8.375 $8.125 $7.88
- ---------------------------------------------------------------------------------------------------------------------------
Total investment return at market value (%)(a) 12.08 14.16 (1.92)
- ---------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in thousands) $495,724 $481,914 $460,760
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%)(b) .95 1.02 .95
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets (%) 7.43 7.98 7.33
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 280.38 290.44 201.95
- ---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Financial highlights (continued)
(For a share outstanding throughout the period)
----------------------------------------------------
1993 1992
----------------------------------------------------
<S> <C> <C>
Net asset value, beginning of year $9.15 $8.80
- -------------------------------------------------------------------------------------------------------------------------
Investment operations
- -------------------------------------------------------------------------------------------------------------------------
Net investment income .73 .77
- -------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments .61 .51
- -------------------------------------------------------------------------------------------------------------------------
Total from investment operations 1.34 1.28
- -------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- -------------------------------------------------------------------------------------------------------------------------
From net investment income (.73) (.77)
- -------------------------------------------------------------------------------------------------------------------------
In excess of net investment income (.14) --
- -------------------------------------------------------------------------------------------------------------------------
From net realized gain on investments -- (.10)
- -------------------------------------------------------------------------------------------------------------------------
Return of capital -- (.06)
- -------------------------------------------------------------------------------------------------------------------------
Total distributions (.87) (.93)
- -------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $9.62 $9.15
- -------------------------------------------------------------------------------------------------------------------------
Market value, end of year $8.88 $8.63
- -------------------------------------------------------------------------------------------------------------------------
Total investment return at market value (%)(a) 13.27 14.34
- -------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in thousands) $513,316 $488,266
- -------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%)(b) .92 .95
- -------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets (%) 7.76 8.59
- -------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 132.24 221.30
- -------------------------------------------------------------------------------------------------------------------------
(a) Total investment return assumes dividend reinvestment and does not
reflect the effect of sales charges.
(b) The ratio of expenses to average net assets for the periods ended October 31,
1995 and thereafter includes amounts paid through expense offset
arrangements. Prior period ratios exclude these amounts. (Note 2).
</TABLE>
Notes to financial statements
October 31, 1996
Note 1
Significant accounting policies
The fund is registered under the Investment Company Act of 1940, as
amended, as a diversified, closed-end management investment company. The
investment objective of the fund is to seek high current income
consistent with the preservation of capital. The fund intends to
diversify its investments among the following three sectors of the
fixed-income securities market: a U.S. government sector, consisting of
debt obligations of the U.S. government, its agencies and
instrumentalities and related options, futures and repurchase
agreements; a high-yield sector, consisting of high yielding, lower-
rated U.S. corporate fixed income securities; and an international
sector, consisting of obligations of foreign governments, their agencies
and instrumentalities and other fixed-income securities denominated in
foreign currencies.
The following is a summary of significant accounting policies
consistently followed by the fund in the preparation of its financial
statements. The preparation of financial statements is in conformity
with generally accepted accounting principles and requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities. Actual results could differ from those
estimates.
A) Security valuation Investments for which market quotations are
readily available are stated at market value, which is determined using
the last reported sale price, or, if no sales are reported -- as in the
case of some securities traded over-the-counter -- the last reported bid
price. Securities quoted in foreign currencies are translated into U.S.
dollars at the current exchange rate. Short-term investments having
remaining maturities of 60 days or less are stated at amortized cost,
which approximates market value, and other investments, including
restricted securities, are stated at fair value following procedures
approved by the Trustees. Market quotations are not considered to be
readily available for long-term corporate bonds and notes; such
investments are stated at fair value on the basis of valuations
furnished by a pricing service, approved by the Trustees, which
determines valuations for normal, institutional-size trading units of
such securities using methods based on market transactions for
comparable securities and various relationships between securities which
are generally recognized by institutional traders.
B) Joint trading account Pursuant to an exemptive order issued by the
Securities and Exchange Commission, the fund may transfer uninvested
cash balances into a joint trading account along with the cash of other
registered investment companies and certain other accounts managed by
Putnam Investment Management, Inc. ("Putnam Management"), the fund's
Manager, a wholly-owned subsidiary of Putnam Investments, Inc.. These
balances may be invested in one or more repurchase agreements and/or
short-term money market instruments.
C) Repurchase agreements The fund, or any joint trading account, through
its custodian, receives delivery of the underlying securities, the
market value of which at the time of purchase is required to be in an
amount at least equal to the resale price, including accrued interest.
Putnam Management is responsible for determining that the value of these
underlying securities is at all times at least equal to the resale
price, including accrued interest.
D) Security transactions and related investment income Security
transactions are accounted for on the trade date (date the order to buy
or sell is executed).
Interest income is recorded on the accrual basis. 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,
stepped-coupon bonds and payment in kind bonds are accreted according to
the effective yield method.
Securities purchased or sold on a when-issued or delayed delivery basis
may be settled a month or more after the trade date; interest income is
accrued based on the terms of the security. Losses may arise due to
changes in the market value of the underlying securities or if the
counterparty does not perform under the contract.
E) Foreign currency translation The accounting records of the fund are
maintained in U.S. dollars. The market value of foreign securities,
currency holdings, other assets and liabilities are recorded in the
books and records of the fund after translation to U.S. dollars based on
the exchange rates on that day. The cost of each security is determined
using historical exchange rates. Income and withholding taxes are
translated at prevailing exchange rates when accrued or incurred. The
fund does not isolate that portion of realized or unrealized gains or
losses resulting from changes in the foreign exchange rate on
investments from fluctuations arising from changes in the market prices
of the securities. Such fluctuations are included with the net realized
and unrealized gain or loss on investments. Net realized gains and
losses on foreign currency transactions represent net exchange gains or
losses on closed forward currency contracts, disposition of foreign
currencies and the difference between the amount of investment income
and foreign withholding taxes recorded on the fund's books and the U.S.
dollar equivalent amounts actually received or paid. Net unrealized
gains and losses on foreign currency transactions arise from changes in
the value of open forward currency contracts and assets and liabilities
other than investments at the period end, resulting from changes in the
exchange rate.
F) Forward currency contracts The fund may engage in forward currency
contracts, which are agreements between two parties to buy and sell
currencies at a set price on a future date, to protect against a decline
in value relative to the U.S. dollar of the currencies in which its
portfolio securities are denominated or quoted (or an increase in the
value of a currency in which securities a fund intends to buy are
denominated, when a fund holds cash reserves and short-term
investments). The U.S. dollar value of forward currency contracts is
determined using forward currency exchange rates supplied by a quotation
service. The market value of the contract will fluctuate with changes in
currency exchange rates. The contract is "marked to market" daily and
the change in market value is recorded as an unrealized gain or loss.
When the contract is closed, the fund records a realized gain or loss
equal to the difference between the value of the contract at the time it
was opened and the value at the time it was closed. The fund could be
exposed to risk if the value of the currency changes unfavorably, if the
counterparties to the contracts are unable to meet the terms of their
contracts or if the fund is unable to enter into a closing position.
G) Futures and options contracts The fund may use futures and options
contracts to hedge against changes in the values of securities the fund
owns or expects to purchase. The fund may also write options on
securities it owns or in which it may invest to increase its current
returns.
The potential risk to the fund is that the change in value of futures
and options contracts may not correspond to the change in value of the
hedged instruments. In addition, losses may arise from changes in the
value of the underlying instruments, if there is an illiquid secondary
market for the contracts, or if the counterparty to the contract is
unable to perform.
Futures contracts are valued at the quoted daily settlement prices
established by the exchange on which they trade. Exchange traded options
are valued at the last sale price, or if no sales are reported, the last
bid price for purchased options and the last ask price for written
options. Options traded over-the-counter are valued using prices
supplied by dealers.
H) 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 a 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 on the underlying security. 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.
I) Federal taxes It is the policy of the fund to distribute all of its
taxable income within the prescribed time and otherwise comply with the
provisions of the Internal Revenue Code applicable to regulated
investment companies. It is also the intention of the fund to distribute
an amount sufficient to avoid imposition of any excise tax under Section
4982 of the Internal Revenue Code of 1986. Therefore, no provision has
been made for federal taxes on income, capital gains or unrealized
appreciation on securities held nor for excise tax on income and capital
gains.
J) Distributions to shareholders Distributions to shareholders are
recorded by the fund on the ex-dividend date. At certain times, the fund
may pay distributions at a level rate even though , as a result of
market conditions or investment decisions, the fund may not achieve
projected investment results for a given period. 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 losses on wash sale transactions, realized and
unrealized gains and losses on forward foreign currency contracts,
currency gains and losses on foreign bonds, and market discount.
Reclassifications are made to the fund's capital accounts to reflect
income and gains available for distribution (or available capital loss
carryovers) under income tax regulations. For the year ended October 31,
1996, the fund reclassified $2,224,015 to decrease distributions in
excess of net investment income and $137,697 to increase paid-in-
capital, with a decrease to accumulated net realized gain on investments
of $2,361,712. The calculation of net investment income per share in the
financial highlights table excludes these adjustments.
Note 2
Management fee, administrative services and other transactions
Compensation of Putnam Management, for management and investment
advisory services is paid quarterly based on the average net assets of
the fund. Such fee is based on the following annual rates: 0.75% of the
first $500 million of average weekly net assets, 0.65% of the next $500
million, 0.60% of the next $500 million, and 0.55% of any amount over
$1.5 billion subject, under current law, to reduction in any year by the
amount of certain brokerage commissions and fees (less expenses)
received by affiliates of Putnam Management on the fund's portfolio
transactions.
The fund reimburses Putnam Management for the compensation and related
expenses of certain officers of the fund and their staff who provide
administrative services to the fund. The aggregate amount of all such
reimbursements is determined annually by the Trustees.
Trustees of the fund receive an annual Trustees fee of $950 and an
additional fee for each Trustee's meeting attended. Trustees who are not
interested persons of Putnam Management and who serve on committees of
the Trustees receive additional fees for attendance at certain committee
meetings.
The fund adopted a Trustee Fee Deferral Plan (the "Plan") which allows
the Trustees to defer the receipt of all or a portion of Trustees Fees
payable on or after July 1, 1995. The deferred fees remain in the fund
and are invested in the fund or in other Putnam funds until distribution
in accordance with the Plan.
The fund has adopted an unfunded noncontributory defined benefit pension
plan (the "Pension Plan") covering all Trustees of the Fund who have
served as Trustee for at least five years. Benefits under the Pension
Plan are equal to 50% of the Trustee's average total 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.
Custodial functions for the fund's assets are provided by Putnam
Fiduciary Trust Company (PFTC), a wholly-owned subsidiary of Putnam
Investments, Inc. Investor servicing agent functions are provided by
Putnam Investor Services, a division of PFTC.
For the year ended October 31, 1996, fund expenses were reduced by
$79,886 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 these assets utilized
in connection with the expense offset arrangements in an income
producing asset if it had not entered into such arrangements.
Note 3
Purchase and sales of securities
During the year ended October 31, 1996, purchases and sales of
investment securities other than U.S. government obligations and short-
term investments aggregated $596,762,555 and $599,851,943, respectively.
Purchases and sales of U.S. government obligations aggregated
$712,018,913 and $722,210,602, respectively. In determining the net gain
or loss on securities sold, the cost of securities has been determined
on the identified cost basis.
Written option transactions during the year are summarized as follows:
Contract Premiums
Amounts Received
- ----------------------------------------------------
Written options
outstanding at
beginning of year $11,100,000 $ 47,730
- ----------------------------------------------------
Options opened 24,400,000 79,300
- ----------------------------------------------------
Options expired (35,500,000) (127,030)
- ----------------------------------------------------
Written options
outstanding at
end of year $ -- $ --
- ----------------------------------------------------
Note 4
Share repurchase program
In November, 1994, the Trustees authorized the fund to repurchase up to
2,650,000 of its shares in the open market. Repurchases will only be
made when the fund's shares are trading at less than net asset value and
at such times and amounts as is believed to be in the best interests of
the fund's shareholders. Any repurchases of shares will have the effect
of increasing the net asset value per share of remaining shares
outstanding.
For the year ended October 31, 1996, the fund repurchased 164,000 shares
for $1,318,283, which reflects a discount from net asset value of
$176,109 or 11.83%.
Federal tax information
(Unaudited)
The Form 1099 you receive in January 1997 will show the tax status of
all distributions paid to your account in calendar 1996.
The Fund has designated 2.90% of the distributions from net investment
income as qualifying for the dividends received deduction for
corporations.
Results of October 3, 1996 shareholder meeting
A meeting of shareholders of the fund was held on October 3, 1996. At
the meeting, each of the nominees for Trustees was elected, as follows:
Votes
Votes for withheld
Jameson Adkins Baxter 46,459,451 831,370
Hans H. Estin 46,479,181 811,640
John A. Hill 46,524,773 766,048
R.J. Jackson 46,479,107 811,714
Elizabeth T. Kennan 46,465,236 825,585
Lawrence J. Lasser 46,458,178 832,643
Robert E. Patterson 46,493,221 797,600
Donald S. Perkins 46,467,926 822,895
William F. Pounds 46,445,396 845,425
George Putnam 46,466,828 823,993
George Putnam, III 46,479,581 811,240
Eli Shapiro 46,325,167 965,654
A.J.C. Smith 46,473,853 816,968
W. Nicholas Thorndike 46,435,352 855,469
A proposal to ratify the selection of Coopers & Lybrand L.L.P. as
auditors for the fund was approved as follows: 46,390,625 votes for, and
417,254 votes against, with 482,942 abstentions and broker non-votes.
A proposal to approve or disapprove the conversion of the Fund from
closed-end to open-end status and to authorize certain related
amendments to the Agreement and Declaration of Trust was disapproved as
follows: 6,021,349 votes for, 20,370,943 votes against, with 20,898,529
abstentions and broker non-votes.
Fund information
INVESTMENT MANAGER
Putnam Investment
Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
John A. Hill
Ronald J. Jackson
Elizabeth T. Kennan
Lawrence J. Lasser
Robert E. Patterson
Donald S. Perkins
George Putnam, III
Eli Shapiro
A.J.C. Smith
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
John D. Hughes
Senior Vice President and Treasurer
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Gary N. Coburn
Vice President
Neil H. Powers
Vice President and Fund Manager
Jin W. Ho
Vice President and Fund Manager
D. William Kohli
Vice President and Fund Manager
Mark J. Siegel
Vice President and Fund Manager
William N. Shiebler
Vice President
John R. Verani
Vice President
Paul M. O'Neil
Vice President
Beverly Marcus
Clerk and Assistant Treasurer
Call 1-800-225-1581 weekdays from 9 a.m. to 5 p.m. Eastern Time for up-
to-date information about the fund's NAV.
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
- ---------------------
Bulk Rate
U.S. Postage
PAID
Putnam
Investments
- ---------------------
29208-072 12/96
