Putnam
Master Income
Trust
ANNUAL REPORT ON PERFORMANCE AND OUTLOOK
10-31-98
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* "We believe Putnam Master Income Trust's strategy of investing in three
different fixed-income sectors is a sound one for all market environments.
While periods of volatility are always disconcerting, we are confident
that the fund's global flexibility and Putnam's intensive credit research
will enable the management team to meet any challenge head on."
-- Jennifer E. Leichter, fund manager
* "Unlike equities, [high-yield] bonds have not yet rallied from depressed
levels. . . . [A]n appealing aspect to buying junk bonds at current levels
is that the reward potential is great and that the chance of disaster is
far less than it is in the stocks that are back to their all-time highs. .
. . Because of the high costs associated with buying individual junk
issues, high-yield mutual funds are the way to go for most investors in
this market."
-- The New York Times, November 8, 1998
CONTENTS
4 Report from Putnam Management
8 Fund performance summary
11 Portfolio holdings
31 Financial statements
41 Results of October 1, 1998 shareholder meeting
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
By playing to the strengths and de-emphasizing the vulnerabilities of
Putnam Master Income Trust's multisector portfolio, the fund's managers
were able to moderate the effects of generally negative fixed-income
markets during the 12 months ended October 31, 1998. The fund's fiscal
1998 results, while disappointing, show neither the sharp declines nor the
solid gains of many single-sector portfolios in the prevailing
environment.
I am pleased to announce the appointment of David L. Waldman to your
fund's management team. Before joining Putnam in 1997, David held
positions with Lazard Freres Asset Management and Goldman Sachs Asset
Management. He has 10 years of investment experience.
In the following report, your fund's management team discusses the
performance and strategies for the fiscal year and then provides its
perspectives on the outlook for the months ahead.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
December 16, 1998
Report from the Fund Managers
Jennifer E. Leichter
D. William Kohli
David L. Waldman
Throughout the 12 months ended October 31, 1998, resurgent financial and
political instability in many of the world's developing countries had a
dramatic effect on securities markets around the globe. As Asia's woes
intensified and Russia's currency crisis hit the boiling point, each of
Putnam Master Income Trust's three investment sectors -- U.S. taxable
investment grade, foreign, and high yield -- was affected in some manner.
In August and September, the high-yield sector felt the most pressure as
investors around the world became more jittery and fled to the relative
safety of government securities. The U.S. stock market recorded its worst
quarter in eight years as dramatic selloffs occurred in overseas markets
and investors feared worsening global economic conditions.
Although the markets revived a bit during the last month of the period,
the fund closed fiscal 1998 with disappointing results, posting a total
return of -2.71% at net asset value and 4.15% at market price. However, we
view the recent downturns as an opportunity to take advantage of
attractive prices in many bond sectors and we are optimistic about the
fund's positioning and its ability to play to the strongest bond sectors
and de-emphasize those that may be underperforming. For complete
performance information, please refer to the summary that begins on page
8.
* SUCCESSFUL STRATEGY DAMPENED BY GLOBAL FLIGHT TO QUALITY
Our strategy throughout the year was to hold firm in our emphasis on the
so-called spread sectors -- those areas of the fixed-income market in
which the most attractive yield resides, such as high-yield bonds,
high-grade corporate issues, mortgage-backed securities, and some
emerging-markets debt. The reasoning behind this approach involves a
time-tested belief that by focusing on the spread sectors in combination
with some exposure to U.S. government securities, your fund's portfolio
would offer the potential to outperform the broad fixed-income market over
the long term.
While this approach has generally benefited the fund, a dramatic
about-face occurred toward the end of the period. The fund's U.S. Treasury
securities and mortgage-backed issues became the portfolio's dominant
performers as a result of the global flight to quality, while the
high-yield and investment-grade corporate positions experienced a severe
setback. Our focus on the core bond markets of Europe stood the fund in
good stead and helped provide some much-needed ballast in the wake of
capsizing emerging-markets debt.
* HIGH-YIELD BONDS FEEL STING OF TROUBLED EQUITY MARKET
Seven years of price gains in the high-yield market were effectively
eradicated this past summer for reasons that had more to do with global
investor sentiment than with the business and economic fundamentals in the
United States. Signs of recession overseas, an unexpectedly weak U.S.
employment report, lower-than-expected corporate earnings forecasts,
Russia's financial collapse, and broad-based selling of high-yield debt by
highly leveraged, distressed hedge funds to meet margin calls created a
sky-is-falling atmosphere. In response, investors came stampeding out of
just about any fixed-income security that involved credit risk.
As disturbing as the market rout has been, we are holding firm in the
fund's high-yield positioning for sound, fundamental reasons. The forces
that pushed Treasury bonds, stocks, and high-yield bonds higher for most
of the period, such as solid economic growth, healthy corporate
profitability, subdued inflation, and low interest rates, remain in place
and continue to provide ideal conditions for high-yield investing. Indeed,
the high-yield bond sector was the top-performing global fixed-income
sector through June. Bonds in the telecommunications, broadcasting, cable,
and finance industries remain our primary focus. The ongoing
consolidation, deregulation, and dynamic long-term growth potential of
these industries bode well for companies that are focused and driven.
[GRAPHIC OMITTED: horizontal bar chart TOP FIVE COUNTRY ALLOCATIONS
(INTERNATIONAL SECTOR)]
TOP FIVE COUNTRY ALLOCATIONS
(INTERNATIONAL SECTOR)*
Sweden 3.9%
Mexico 2.2%
Italy 1.9%
Brazil 1.1%
United Kingdom 1.1%
Footnote reads:
*Based on net assets as of 10/31/98. Holdings will vary over time.
* RECORD-BREAKING SURGE FOR U.S. TREASURIES
After Asia's troubles first garnered the attention of investors worldwide
last October, the U.S. Treasury market experienced a most impressive and
historic rally. Investors flocked to the high credit quality of U.S.
Treasury bonds throughout most of the fiscal period. The fund's
investments in the Treasury market significantly helped performance,
buoying its share price as other sectors came under considerable pressure.
The Treasury rally continued through October, when it came to an abrupt
halt. During the final month of your fund's fiscal period, the bond market
experienced its worst three-day performance since 1965 -- a startling
turnaround.
Higher-yielding mortgage-backed securities, however, were our main focus
in the U.S. government sector. While at times this emphasis prohibited the
fund from participating fully in the Treasury market rally, our focus on
securities with lower prepayment sensitivity, such as adjustable-rate,
lower-coupon, and 15-year maturity mortgage-backed securities, did benefit
the fund.
* EUROPE BOOSTS INTERNATIONAL SECTOR
Bonds of developed European countries benefited from the global flight to
quality, posting solid returns in local currency terms over the period.
The forthcoming unification of monetary policy and interest rates across
11 European countries -- and everything else that Europe's Economic and
Monetary Union (EMU) promises -- convinced us to stay the course with our
core European holdings.
[GRAPHIC OMITTED: TOP THREE HOLDINGS PER SECTOR]
TOP THREE HOLDINGS PER SECTOR*
HIGH-YIELD BONDS
Midland Funding Corp., series A, 11 3/4s, 2005
Global Crossing Holdings, 144A senior notes, 9 5/8s, 2008
Dial Call Communications, Inc., senior discount notes, series B,
10 1/4s, 2005
FOREIGN BONDS
Sweden (Government of), 6 3/4s, 2014
Italy (Government of), 10 1/2s, 2005
Sweden (Government of), debentures, 6s, 2005
TAXABLE INVESTMENT-GRADE BONDS
Government National Mortgage Association pass-through certificates
7%, 2025-2028
Government National Mortgage Association pass-through certificates
7.5%, 2022-2027
Federal National Mortgage Association 6%, 2013
Footnote reads:
*Based on net assets as of 10/31/98. Holdings will vary over time.
The fund's exposure to emerging markets, although limited, hindered
returns as the crisis in Asia worsened and Russia's financial system
collapsed. We continue to avoid Japanese government bonds, anticipating
that the sad state of economic affairs in that country may well continue
for some time.
* SEEKING OPPORTUNITIES AMONG CHALLENGES
As the fiscal year came to a close, U.S. markets had begun to recover from
the late-summer global flight to quality. The investment climate began
warming again to risk taking and the Federal Reserve Board's decision to
lower short-term interest rates twice toward the end of the fiscal year
and again in mid November, after the close of the period, gave a boost to
higher-yielding fixed-income sectors. In our opinion, fundamental forces
at work all over the globe -- EMU, positive budget developments in the
United States and many other developed nations, low inflation,
stable-to-declining interest rates, and economic recovery and/or continued
growth -- are providing a favorable backdrop for fixed-income investing
worldwide.
The views expressed here are exclusively those of Putnam Management. They
are not meant as investment advice. Although the described holdings were
viewed favorably as of 10/31/98, there is no guarantee the fund will
continue to hold these securities in the future. The lower credit ratings
of high-yield corporate bonds reflect a greater possibility that adverse
changes in the economy or their issuers may affect their ability to pay
principal and interest on the bonds. Investments in non-U.S. securities
may be subject to certain risks such as currency fluctuations, economic
instability, and political developments. Although the U.S. government
guarantees the timely payment of principal and interest on some of the
underlying securities, the value of the fund shares is not guaranteed and
will fluctuate.
Performance summary
This section provides information about your fund's performance, which
should always be considered in light of its 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. investment-grade, high-yield, and international fixed-income
securities.
TOTAL RETURN FOR PERIODS ENDED 10/31/98
Salomon Bros. First
Lehman Bros. Non-U.S. Boston
Market Government World Govt. High-Yield
NAV price Bond Index Bond Index Index
- ---------------------------------------------------------------------------
1 year -2.71% 4.15% 11.28% 12.80% -2.49%
- ---------------------------------------------------------------------------
5 years 35.61 44.46 40.10 48.61 44.79
Annual average 6.28 7.63 6.98 8.25 7.68
- ---------------------------------------------------------------------------
10 years 144.40 140.18 137.83 133.96 166.93
Annual average 9.35 9.16 9.05 8.87 10.32
- ---------------------------------------------------------------------------
Life of fund 172.70 148.97 156.62 135.90 200.80
(12/28/87)
Annual average 9.70 8.78 9.09 8.24 10.70
- ---------------------------------------------------------------------------
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.
This performance information does not reflect any market volatility that
may have occurred since the date of the information. As a result, more
recent returns may be more or less than those shown.
PRICE AND DISTRIBUTION INFORMATION
12 months ended 10/31/98
- ------------------------------------------------------------------------------
Distributions (number) 12
- ------------------------------------------------------------------------------
Income $0.6483
- ------------------------------------------------------------------------------
Return of capital1 0.0946
- ------------------------------------------------------------------------------
Total $0.7429
- ------------------------------------------------------------------------------
Share value NAV Market price
- ------------------------------------------------------------------------------
10/31/97 $9.26 $8.500
- ------------------------------------------------------------------------------
10/31/98 8.27 8.125
- ------------------------------------------------------------------------------
Current return NAV Market price
- ------------------------------------------------------------------------------
Current dividend rate2 9.14% 9.30%
- ------------------------------------------------------------------------------
1 See page 40.
2 Income portion of most recent distribution, annualized and divided by
NAV or POP at end of period.
TOTAL RETURN FOR PERIODS ENDED 9/30/98
(most recent calendar quarter)
Market
NAV price
- ---------------------------------------------------------------
1 year -0.79% 1.12%
- ---------------------------------------------------------------
5 years 40.80 44.36
Annual average 7.08 7.62
- ---------------------------------------------------------------
10 years 155.85 140.67
Annual average 9.85 9.18
- ---------------------------------------------------------------
Life of fund (12/28/87) 179.15 147.09
Annual average 10.01 8.77
- ---------------------------------------------------------------
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 and principal
value will fluctuate so that an investor's shares, when sold, may be worth
more or less than their original cost.
TERMS AND DEFINITIONS
Total return shows how the value of the fund's shares changed over time,
assuming you held the shares through the entire period and reinvested all
distributions in the fund.
Net asset value (NAV) is the value of all your fund's assets, minus any
liabilities, divided by the number of outstanding 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, 1998
To the Trustees and Shareholders of
Putnam Master Income Trust
In our opinion, the accompanying statement of assets and liabilities,
including the portfolio of investments owned, and the related statements
of operations and of changes in net assets and the financial highlights
present fairly, in all material respects, the financial position of Putnam
Master Income Trust (the "fund") at October 31, 1998, and the results of
its operations, the changes in its net assets and the financial highlights
for the periods indicated, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility
of the fund's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of
these financial statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included
confirmation of investments owned at October 31, 1998 by correspondence
with the custodian, provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
December 11, 1998
<TABLE>
<CAPTION>
Portfolio of investments owned
October 31, 1998
CORPORATE BONDS AND NOTES (35.6%) (a)
PRINCIPAL AMOUNT VALUE
<S> <C> <C>
Advertising (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
$1,000,000 Adams Outdoor Advertising sr. notes 10 3/4s, 2006 $ 1,055,000
840,000 Lamar Advertising Co. company guaranty 8 5/8s, 2007 861,000
1,000,000 Outdoor Communications Inc. sr. sub. notes 9 1/4s, 2007 1,022,500
--------------
2,938,500
Aerospace and Defense (0.6%)
- --------------------------------------------------------------------------------------------------------------------------
190,000 Argo-Tech Corp. company guaranty 8 5/8s, 2007 176,700
520,000 Aviation Sales Co. company guaranty 8 1/8s, 2008 478,400
240,000 BE Aerospace, Inc. sr. sub. notes Ser. B, 8s, 2008 224,400
750,000 BE Aerospace, Inc. sr. sub. notes Ser. B, 9 7/8s, 2006 765,000
160,000 BE Aerospace, Inc. 144A sr. sub. notes 9 1/2s, 2008 163,600
200,000 Derlan Industries Ltd. sr. notes 10s, 2007 (Canada) 162,000
210,000 K&F Industries, Inc. sr. sub. notes Ser. B, 9 1/4s, 2007 199,500
315,000 United Defense Industries Inc. company guaranty 8 3/4s, 2007 316,575
--------------
2,486,175
Agriculture (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
1,165,596 Premium Standard Farms, Inc. sr. sec. notes 11s, 2003 (PIK) 1,229,704
440,000 Purina Mills, Inc. 144A sr. sub. notes 9s, 2010 440,000
--------------
1,669,704
Airlines (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
310,000 Calair LLC company guaranty 8 1/8s, 2008 279,388
340,000 Canadian Airlines Corp. sr. notes 12 1/4s, 2006 (Canada) 255,000
530,000 Canadian Airlines Corp. sr. sec. notes 10s, 2005 (Canada) 413,400
670,000 Cathay International Ltd. 144A sr. notes 13s, 2008 (China) 201,000
355,000 Trans World Airlines, Inc. sr. notes 11 1/2s, 2004 298,200
650,000 Trans World Airlines, Inc. sr. notes 11 3/8s, 2006 494,000
--------------
1,940,988
Apparel (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
610,000 Guess Jeans, Inc. sr. sub. notes 9 1/2s, 2003 587,125
575,000 Sassco Fashions Ltd. sr. notes 12 3/4s, 2004 546,250
250,000 William Carter Holdings Co. sr. sub. notes Ser. A, 12s, 2008 257,500
--------------
1,390,875
Automotive (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
580,000 Accuride Corp. sr. sub. notes Ser. B, 9 1/4s, 2008 539,400
88,000 Hawk Corp. sr. notes 10 1/4s, 2003 91,520
250,000 Lear Corp. sub. notes 9 1/2s, 2006 270,000
900,000 Navistar International Corp. sr. notes Ser. B, 8s, 2008 879,750
--------------
1,780,670
Automotive Parts (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
180,000 Aftermarket Technology Corp. sr. sub. notes 12s, 2004 183,600
383,000 Aftermarket Technology Corp. sr. sub. notes Ser. D, 12s, 2004 390,660
650,000 Cambridge Industries, Inc. company guaranty Ser. B,
10 1/4s, 2007 572,000
200,000 Hayes Wheels International, Inc. company guaranty Ser. B, 9
1/8s, 2007 201,000
290,000 Safety Components International, Inc. sr. sub. notes Ser. B, 10
1/8s, 2007 266,800
--------------
1,614,060
Banks (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
250,000 Delta Financial Corp. sr. notes 9 1/2s, 2004 125,000
145,000 Dime Capital Trust I bank guaranty Ser. A, 9.33s, 2027 149,624
1,350,000 Fuji JGB Inv. LLC 144A FLIRB 9.87s, 2049 770,432
350,000 Greenpoint Capital Trust I company guaranty 9.1s, 2027 371,896
250,000 North Fork Capital Trust I company guaranty 8.7s, 2026 276,470
135,000 Onbank & Trust Co. company guaranty 9 1/4s, 2027 154,744
290,000 Peoples Heritage Capital Trust company guaranty Ser. B,
9.06s, 2027 298,703
285,000 Provident Capital Trust company guaranty 8.6s, 2026 313,423
165,000 Riggs Capital Trust 144A bonds 8 5/8s, 2026 171,349
230,000 Sovereign Capital Trust company guaranty 9s, 2027 219,767
220,000 Webster Capital Trust I 144A bonds 9.36s, 2027 230,107
--------------
3,081,515
Basic Equipment Services (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
900,000 Cex Holdings, Inc. 144A sr. sub. notes 9 5/8s, 2008 837,000
Basic Industrial Products (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
510,000 Axia, Inc. 144A sr. sub. notes 10 3/4s, 2008 479,400
150,000 Koppers Industries, Inc. 144A company guaranty 9 7/8s, 2007 138,750
250,000 Owens-Illinois, Inc. sr. notes 8.1s, 2007 259,938
205,000 Roller Bearing Co. company guaranty Ser. B, 9 5/8s, 2007 190,650
100,000 W. R. Carpenter North America, Inc. company guaranty
10 5/8s, 2007 97,000
--------------
1,165,738
Broadcasting (2.1%)
- --------------------------------------------------------------------------------------------------------------------------
555,000 Affinity Group Holdings sr. notes 11s, 2007 534,188
820,000 Benedek Communications Corp. sr. disc. notes stepped-coupon
zero % (13 1/4s, 5/15/01), 2006 (STP) 545,300
765,000 Capstar Broadcasting sr. disc. notes stepped-coupon zero %
(12 3/4s, 2/1/02), 2009 (STP) 558,450
340,000 Capstar Broadcasting sr. sub. notes 9 1/4s, 2007 338,300
310,000 CBS Corp. notes 6 7/8s, 2003 316,550
170,000 Central European Media Enterprises Ltd. sr. notes 9 3/8s,
2004 (Bermuda) 136,000
220,000 Chancellor Media Corp. sr. sub notes Ser. B, 8 1/8s, 2007 210,100
327,990 Citadel Broadcasting Co. sr. sub. notes 10 1/4s, 2007 346,849
400,000 Echostar Satellite Broadcast Corp. sr. disc. notes stepped-coupon
zero % (13 1/8s, 3/15/00), 2004 (STP) 352,000
670,000 Fox Family Worldwide, Inc. sr. disc. notes stepped-coupon
zero % (10 1/4s, 11/1/02), 2007 (STP) 395,300
980,000 Fox Family Worldwide, Inc. sr. notes 9 1/4s, 2007 921,200
480,000 Fox/Liberty Networks LLC sr. notes 8 7/8s, 2007 465,600
890,000 Granite Broadcasting Corp. sr. sub. notes 8 7/8s, 2008 765,400
1,290,000 Grupo Televisa S.A. sr. disc. notes stepped-coupon zero %
(13 1/4s, 5/15/01), 2008 (Mexico) (STP) 954,600
1,424,000 PHI Holdings, Inc. zero %, 2001 1,092,493
405,000 Radio One Inc. company guaranty stepped-coupon Ser. B, 7s,
(12s, 5/15/00), 2004 (STP) 364,500
140,000 Sinclair Broadcast Group, Inc. sr. sub. notes 8 3/4s, 2007 133,000
505,000 Spanish Broadcasting sr. notes Ser. B, 11s, 2004 510,050
175,000 TV Azteca Holdings S.A. de C.V. sr. notes 11s, 2002 (Mexico) 124,250
140,000 TV Azteca S.A. de C.V. sr. notes 10 1/2s, 2007 (Mexico) 98,000
--------------
9,162,130
Building and Construction (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
195,000 American Architectural Products Corp. company guaranty
11 3/4s, 2007 165,750
910,000 Atrium Companies Inc. 144A sr. sub. notes 10 1/2s, 2006 919,100
740,000 GS Superhighway Holdings sr. notes 9 7/8s, 2004 318,200
180,000 Jackson Products, Inc. company guaranty Ser. B, 9 1/2s, 2005 171,900
270,000 Presley Cos. sr. notes 12 1/2s, 2001 222,750
590,000 Republic Group Inc. 144A sr. sub. notes 9 1/2s, 2008 550,175
--------------
2,347,875
Building Products (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
410,000 Albecca Inc. 144A sr. sub. notes 10 3/4s, 2008 389,500
380,000 Morris Material Handling, Inc. company guaranty 9 1/2s, 2008 258,400
175,000 Waxman Industries Inc. sr. notes stepped-coupon Ser. B, zero %
(12 3/4s, 6/1/99), 2004 (STP) 160,125
--------------
808,025
Buses (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
1,250,000 MCII Holdings sec. notes stepped-coupon zero %
(12s, 11/15/98), 2002 (STP) 750,000
Business Services (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
550,000 Iron Mountain, Inc. company guaranty 8 3/4s, 2009 547,250
100,000 Iron Mountain, Inc. med. term notes company guaranty
10 1/8s, 2006 105,500
190,000 Outsourcing Solutions, Inc. sr. sub. notes Ser. B, 11s, 2006 174,800
--------------
827,550
Cable Television (1.2%)
- --------------------------------------------------------------------------------------------------------------------------
455,000 Acme Television sr. disc. notes stepped-coupon zero %
(10 7/8s, 9/30/00), 2004 (STP) 345,800
835,000 Adelphia Communications Corp. sr. notes Ser. B, 9 7/8s, 2007 889,275
360,000 CSC Holdings, Inc. sr. notes 7 1/4s, 2008 347,803
870,000 Diamond Cable Communication Co. sr. disc. notes
stepped-coupon zero % (10 3/4s, 2/15/02), 2007
(United Kingdom) (STP) 556,800
1,500,000 Diamond Cable Communication Co. sr. disc. notes
stepped-coupon zero % (11 3/4s, 12/15/00), 2005
(United Kingdom) (STP) 1,110,000
625,000 Grupo Televisa S.A. 144A sr. notes 11 7/8s, 2006 (Mexico) 596,875
450,000 Lenfest Communications, Inc. sr. sub. notes 8 1/4s, 2008 450,000
500,000 Marcus Cable Co. (L.P.) sr. disc. notes stepped-coupon zero %
(14 1/4s, 6/15/00), 2005 (STP) 455,000
370,000 Supercanal Holdings S.A. 144A sr. notes 11 1/2s, 2005
(Argentina) 166,500
520,000 United International Holdings sr. disc. notes stepped-coupon
Ser. B, zero % (10 3/4s, 2/15/03), 2008 (STP) 234,000
--------------
5,152,053
Cellular Communications (1.1%)
- --------------------------------------------------------------------------------------------------------------------------
1,658,000 CellNet Data Systems, Inc. sr. disc. notes stepped-coupon
zero % (14s, 10/1/02), 2007 (STP) 497,400
610,000 Cencall Communications Corp. sr. disc. notes stepped-coupon
zero % (10 1/8s, 1/15/99), 2004 (STP) 574,925
1,985,000 Dial Call Communications, Inc. sr. disc. notes stepped-coupon
Ser. B, 10 1/4s, (10 1/4s, 12/15/98), 2005 (STP) 1,885,750
1,265,000 McCaw International Ltd sr. disc. notes stepped coupon zero %
(13s, 4/15/02), 2007 (STP) 531,300
2,045,000 Millicom International Cellular S.A. sr. disc. notes stepped-coupon
zero % (13 1/2s, 6/1/01), 2006 (Luxembourg) (STP) 1,165,650
230,000 Price Communications Wireless, Inc. 144A sr. notes
9 1/8s, 2006 227,700
--------------
4,882,725
Chemicals (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
300,000 Geo Specialty Chemicals, Inc. 144A sr. sub. notes 10 1/8s, 2008 270,000
500,000 Huntsman Corp. 144A sr. sub. notes FRN 9.188s, 2007 465,000
145,000 Pioneer Americas Acquisition 144A sr. notes 9 1/4s, 2007 108,750
555,000 Polytama International notes 11 1/4s, 2007 (Indonesia) 72,150
340,000 Sterling Chemicals Holdings sr. disc. notes stepped-coupon
zero % (13 1/2s, 8/15/01), 2008 (STP) 95,200
435,000 Trikem S.A. 144A bonds 10 5/8s, 2007 (Brazil) 204,450
--------------
1,215,550
Computer Services and Software (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
125,000 Concentric Network Corp. sr. notes 12 3/4s, 2007 113,125
200,000 PSINet, Inc. 144A sr. notes 11 1/2s, 2008 206,000
250,000 PSINet, Inc. sr. notes Ser. B, 10s, 2005 242,500
280,000 Unisys Corp. sr. notes 7 7/8s, 2008 282,800
--------------
844,425
Computers (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
850,000 IPC Information Systems sr. disc. notes stepped-coupon zero %
(10 7/8s, 11/1/01), 2008 (STP) 569,500
Consumer Durable Goods (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
70,000 Hedstrom Holdings, Inc. 144A sr. disc. notes stepped-coupon
zero % (12s, 6/1/02), 2009 (STP) 38,500
220,000 Packaged Ice, Inc. company guaranty Ser. B, 9 3/4s, 2005 204,600
175,000 Sealy Mattress Co. sr. sub. notes Ser. B, 9 7/8s, 2007 157,500
--------------
400,600
Consumer Non Durables (--%)
- --------------------------------------------------------------------------------------------------------------------------
100,000 Amscan Holdings, Inc. sr. sub. notes 9 7/8s, 2007 81,000
Consumer Services (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
860,000 Coinmach Corp. sr. notes 11 3/4s, 2005 885,800
190,000 Protection One, Inc. sr. disc. notes stepped-coupon 13 5/8s,
(13 5/8s, 6/30/00), 2005 (STP) 212,800
--------------
1,098,600
Containers (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
175,000 AEP Industries, Inc. sr. sub. notes 9 7/8s, 2007 163,625
145,000 Radnor Holdings Inc. sr. notes 10s, 2003 140,650
--------------
304,275
Cosmetics (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
220,000 Chattem, Inc. company guaranty Ser. B, 8 7/8s, 2008 210,650
140,000 French Fragrances, Inc. company guaranty Ser. D, 10 3/8s, 2007 137,200
135,000 French Fragrances, Inc. sr. notes Ser. B, 10 3/8s, 2007 135,675
560,000 Revlon Consumer Products sr. sub. notes 8 5/8s, 2008 504,000
--------------
987,525
Electric Utilities (1.2%)
- --------------------------------------------------------------------------------------------------------------------------
1,200,000 AES China Generating Co. sr. notes 10 1/8s, 2006 (China) 624,000
650,000 Long Island Lighting Co. deb. 9s, 2022 772,844
1,600,000 Midland Funding Corp. deb. Ser. A, 11 3/4s, 2005 1,965,952
750,000 Midland Funding Corp. deb. Ser. B, 13 1/4s, 2006 957,645
409,841 Midland Funding Corp. I deb. Ser. C-94, 10.33s, 2002 432,923
240,000 Niagara Mohawk Power Corp. sr. notes Ser. E, 7 3/8s, 2003 245,568
480,663 Northeast Utilities System notes Ser. A, 8.58s, 2006 520,976
--------------
5,519,908
Electronics & Electrical Equipment (1.0%)
- --------------------------------------------------------------------------------------------------------------------------
295,000 Celestica International Ltd. 144A sr. sub. notes 10 1/2s,
2006 (Canada) 316,388
218,912 Cirent Semiconductor sr. sub. notes 10.22s, 2002 214,807
232,274 Cirent Semiconductor 144A sr. sub. notes 10.14s, 2004 227,919
200,000 Details, Inc. sr. sub. notes Ser. B, 10s, 2005 186,000
915,000 Dobson Communications Corp. 11 3/4s, 2007 882,975
280,000 DII Group, Inc. (The) sr. sub. notes 8 1/2s, 2007 257,600
685,000 Flextronics International Ltd. sr. sub. notes Ser. B, 8 3/4s, 2007 671,300
180,000 HCC Industries, Inc. company guaranty 10 3/4s, 2007 169,200
185,000 Moog, Inc. sr. sub. notes Ser. B, 10s, 2006 185,000
535,000 Motors and Gears, Inc. sr. notes Ser. D, 10 3/4s, 2006 524,300
90,000 Samsung Electronics 144A company guaranty 9 3/4s, 2003 75,600
75,000 Viasystems Inc. sr. sub notes 9 3/4s, 2007 64,500
600,000 Viasystems, Inc. 144A sr. notes 9 3/4s, 2007 525,000
400,000 Wavetek Corp. company guaranty 10 1/8s, 2007 372,000
--------------
4,672,589
Energy-Related (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
470,000 Calpine Corp. sr. notes 7 7/8s, 2008 455,900
300,000 Gothic Production Corp. company guaranty Ser. B, 11 1/8s, 2005 195,000
250,000 Niagara Mohawk Power Corp. sr. notes Ser. F, 7 5/8s, 2005 256,583
980,000 Niagara Mohawk Power Corp. sr. notes Ser. G, 7 3/4s, 2008 1,027,442
850,000 Panda Global Energy Co. company guaranty 12 1/2s,
2004 (China) 510,000
250,000 RAM Energy Inc. sr. notes 11 1/2s, 2008 175,000
450,000 York Power Funding 144A company guaranty 12s, 2007
(Cayman Islands) 445,500
--------------
3,065,425
Entertainment (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
440,000 AMC Entertainment, Inc. sr. sub. notes 9 1/2s, 2009 422,400
495,000 SFX Entertainment, Inc. 144A company guaranty Ser. B,
9 1/8s, 2008 455,400
400,000 Silver Cinemas Inc. sr. sub. notes 10 1/2s, 2005 340,000
830,000 Trump Castle Funding 144A sub. notes 10 1/4s, 2003 838,300
360,000 Trump Holdings & Funding Corp. sr. notes 15 1/2s, 2005 363,600
--------------
2,419,700
Environmental Control (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
370,000 Allied Waste Industries, Inc. company guaranty 10 1/4s, 2006 401,450
920,000 Allied Waste Industries, Inc. sr. disc. notes stepped-coupon
zero % (11.3s, 6/1/02), 2007 (STP) 685,400
170,000 ATC Group Services Inc. company guaranty 12s, 2008 51,000
--------------
1,137,850
Financial Services (1.0%)
- --------------------------------------------------------------------------------------------------------------------------
750,000 Aames Financial Corp. sr. notes 9 1/8s, 2003 360,000
500,000 Advanta Corp. med. term notes Ser. B, 7s, 2001 464,245
165,000 Colonial Capital II 144A company guaranty 8.92s, 2027 159,019
200,000 Dine S.A. de C.V. 144A company guaranty 8 3/4s, 2007
(Mexico) 154,000
1,920,000 DTI Holdings Inc. sr. disc. notes, stepped-coupon Ser. B, zero %
(12 1/2s, 03/01/03), 2008 (STP) 614,400
470,000 Imperial Credit Capital Trust I 144A company guaranty
10 1/4s, 2002 282,000
480,000 Imperial Credit Industries, Inc. sr. notes 9 7/8s, 2007 273,600
345,000 Investors Capital Trust I company guaranty Ser. B, 9.77s, 2027 376,913
600,000 Nationwide Credit Inc. 144A sr. notes 10 1/4s, 2008 546,000
140,000 Ocwen Capital Trust I company guaranty 10 7/8s, 2027 103,600
290,000 Ocwen Federal Bank FSB sub. deb. 12s, 2005 217,500
1,050,000 Pindo Deli Finance Mauritius Ltd. company guaranty 10 3/4s,
2007 (Indonesia) 472,500
395,000 Resource America Inc. 144A sr. notes 12s, 2004 323,900
--------------
4,347,677
Food & Beverages (0.6%)
- --------------------------------------------------------------------------------------------------------------------------
340,000 Ameriserve Food Co. company guaranty 10 1/8s, 2007 278,800
590,000 Ameriserve Food Co. company guaranty 8 7/8s, 2006 513,300
550,000 Aurora Foods, Inc. 144A ser. sub. notes Ser. D, 9 7/8s, 2007 588,500
230,000 Canandaigua Wine Co. sr. sub. notes Ser. C, 8 3/4s, 2003 229,425
365,000 Fleming Companies, Inc. company guaranty Ser. B, 10 1/2s, 2004 328,500
620,000 RAB Enterprises, Inc. 144A sr. notes 10 1/2s, 2005 567,300
75,000 Windy Hill Pet Food Co. sr. sub. notes 9 3/4s, 2007 75,750
--------------
2,581,575
Food Chains (--%)
- --------------------------------------------------------------------------------------------------------------------------
25,000 Nebco Evans Holding Co. sr. disc. notes stepped-coupon
zero % (12 3/8s, 7/15/02), 2007 (STP) 11,000
Gaming (1.3%)
- --------------------------------------------------------------------------------------------------------------------------
655,000 Argosy Gaming Co. company guaranty 13 1/4s, 2004 697,575
500,000 Autotote Corp. company guaranty Ser. B, 10 7/8s, 2004 485,000
840,000 Coast Hotels & Casinos, Inc. 1st mtge. company guaranty
Ser. B, 13s, 2002 932,400
720,000 Fitzgeralds Gaming Corp. company guaranty Ser. B,
12 1/4s, 2004 424,800
215,000 Isle of Capri Black Hawk LLC 144A 1st mortgage Ser. B,
13s, 2004 215,000
904,000 Louisiana Casino Cruises Corp. 1st mtge. 11 1/2s, 1998 904,000
700,000 Mohegan Tribal Gaming Auth. sr. notes Ser. B, 13 1/2s, 2002 864,500
500,000 PRT Funding Corp. sr. notes 11 5/8s, 2004 (NON) (In default) 322,500
600,000 Sun International Hotels Ltd. company guaranty 9s, 2007 621,000
250,000 Trump A.C. 1st mtge. 11 1/4s, 2006 217,500
--------------
5,684,275
Health Care (1.8%)
- --------------------------------------------------------------------------------------------------------------------------
270,000 Conmed Corp. company guaranty 9s, 2008 259,200
275,000 Extendicare Health Services, Inc. company guaranty 9.35s, 2007 240,625
560,000 Fresenius Medical Capital Trust II company guaranty 7 7/8s,
2008 (Germany) 523,600
510,000 Global Health Sciences company guaranty 11s, 2008 428,400
410,000 Hudson Respiratory Care, Inc. sr. sub. notes 9 1/8s, 2008 319,800
500,000 Integrated Health Services, Inc. sr. sub. notes Ser. A, 9 1/2s, 2007 462,500
480,000 Integrated Health Services, Inc. sr. sub. notes Ser. A, 9 1/4s, 2008 439,200
610,000 Magellan Health Services, Inc. 144A sr. sub. notes 9s, 2008 518,500
1,260,000 Mariner Post-Acute Network, Inc. sr. sub. notes Ser. B,
9 1/2s, 2007 1,058,400
210,000 Mariner Post-Acute Network, Inc. sr. sub. notes stepped-coupon
Ser. B, zero % (10 1/2s, 11/1/02), 2007 100,800
800,000 MedPartners, Inc. sr. notes 7 3/8s, 2006 627,696
20,000 MedPartners, Inc. sr. sub.notes 6 7/8s, 2000 16,591
1,080,000 Multicare Cos., Inc. sr. sub. notes 9s, 2007 950,400
810,000 Paracelsus Healthcare sr. sub. notes 10s, 2006 720,900
220,000 Paragon Corp. Holdings, Inc. company guaranty Ser. B,
9 5/8s, 2008 160,600
150,000 Sun Healthcare Group, Inc. 144A sr. sub. notes 9 3/8s, 2008 108,000
750,000 Sun Healthcare Group, Inc. sr. sub. notes Ser. B, 9 1/2s, 2007 547,500
340,000 Tenet Healthcare Corp. 144A sr. sub. notes 8 1/8s, 2008 345,100
250,000 Tenet Healthcare Corp.144A sr. notes 7 5/8s, 2008 252,500
--------------
8,080,312
Infrastructure (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
370,000 Cia Latino Americana 144A company guaranty 11 1/8s,
2004 (Argentina) 214,600
Lodging (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
310,000 Epic Resorts LLP 144A sr. notes 13s, 2005 294,500
1,135,000 HMH Properties, Inc. company guaranty Ser. B, 7 7/8s, 2008 1,100,950
325,000 Raintree Resorts International, Inc. sr. notes Ser. B, 13s, 2004 195,000
--------------
1,590,450
Media (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
1,590,000 Viacom International, Inc. sub. deb. 8s, 2006 1,637,700
Medical Supplies and Devices (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
455,000 ALARIS Medical Systems, Inc. company guaranty 9 3/4s, 2006 434,525
415,000 Dade International, Inc. sr. sub. notes Ser. B, 11 1/8s, 2006 444,050
220,000 Imagyn Medical Technologies company guaranty 12 1/2s, 2004 33,000
210,000 Kinetic Concepts, Inc. company guaranty Ser. B, 9 5/8s, 2007 191,100
340,000 Leiner Health Products sr. sub. notes 9 5/8s, 2007 347,225
510,000 Mediq, Inc. 144A sr. sub. notes 11s, 2008 453,900
500,000 Wright Medical Technology, Inc. 144A notes Ser. C,
11 3/4s, 2000 375,000
--------------
2,278,800
Metals and Mining (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
135,000 Acindar Industria Argentina de Aceros S.A. bonds 11 1/4s,
2004 (Argentina) 87,750
350,000 Anker Coal Group, Inc. sr. notes Ser. B, 9 3/4s, 2007 122,500
305,000 Continental Global Group sr. notes Ser. B, 11s, 2007 250,100
710,000 Lodestar Holding, Inc. 144A sr. notes 11 1/2s, 2005 553,800
310,000 WHX Corp. sr. notes 10 1/2s, 2005 279,000
--------------
1,293,150
Motion Picture Distribution (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
635,000 Cinemark USA, Inc. sr. sub. notes 9 5/8s, 2008 644,525
140,000 Panavision Inc. 144A sr. disc. notes stepped-coupon zero %
(9 5/8s, 2/1/02), 2006 (STP) 75,600
--------------
720,125
Office Equipment (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
480,000 U.S. Office Products Co. 144A sr. sub notes 9 3/4s, 2008 384,000
666,000 United Stationer Supply, Inc. sr. sub. notes 12 3/4s, 2005 739,260
--------------
1,123,260
Oil and Gas (1.4%)
- --------------------------------------------------------------------------------------------------------------------------
1,000,000 Abraxas Petroleum Corp. 144A 11 1/2s, 2004 770,000
60,000 American Eco Corp. company guaranty Ser. B, 9 5/8s, 2008 39,000
50,000 Benton Oil & Gas Co. sr. notes 9 3/8s, 2007 35,000
730,000 Chesapeake Energy Corp. company guaranty Ser. B, 9 5/8s, 2005 620,500
140,000 Coho Energy, Inc. sr. sub. notes 8 7/8s, 2007 130,200
355,000 Costilla Energy, Inc. sr. notes 10 1/4s, 2006 291,100
290,000 Dailey Petroleum Services Corp. company guaranty 9 1/2s, 2008 120,350
310,000 Eagle Geophysical, Inc. 144A sr. notes 10 3/4s, 2008 266,600
70,000 Gothic Energy Corp. sr. disc. notes, stepped-coupon Ser. B,
zero % (14 1/8s, 5/1/03), 2006 (STP) 28,000
280,000 Michael Petroleum Corp. sr. notes Ser. B, 11 1/2s, 2005 235,200
345,000 Northern Offshore 144A company guaranty 10s, 2005 241,500
60,000 Ocean Energy, Inc. company guaranty Ser. B, 8 3/8s, 2008 57,450
520,000 Panaco, Inc. company guaranty Ser. B, 10 5/8s, 2004 416,000
240,000 Seven Seas Petroleum sr. notes Ser. B, 12 1/2s, 2005 199,200
240,000 Southwest Royalties, Inc. company guaranty 10 1/2s, 2004 112,800
4,225,000 Transamerican Energy sr. disc. notes stepped-coupon Ser. B,
zero % (13s, 6/15/99), 2002 (STP) 1,352,000
1,370,000 Transamerican Energy sr. notes Ser. B, 11 1/2s, 2002 506,900
774,000 TransTexas Gas Corp. sr. sub. notes Ser. D, 13 3/4s, 2001 619,200
--------------
6,041,000
Paging (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
200,000 Mobile Telecommunications Tech. sr. notes 13 1/2s, 2002 215,000
125,000 Paging Network Do Brasil sr. notes 13 1/2s, 2005 (Brazil) 47,500
--------------
262,500
Paper and Forest Products (0.9%)
- --------------------------------------------------------------------------------------------------------------------------
40,000 APP International Finance Co. notes 11 3/4s, 2005 (Netherlands) 28,400
65,000 Florida Coast Paper LLC 1st mtge. Ser. B, 12 3/4s, 2003 42,250
330,000 Huntsman Packaging Corp. company guaranty 9 1/8s, 2007 310,200
480,000 Impac Group Inc. company guaranty Ser. B, 10 1/8s, 2008 460,800
1,220,000 Indah Kiat Financial Mauritius Ltd. company guaranty 10s,
2007 (Indonesia) 634,400
1,075,000 PT Pabrik Kertas Tjiwi Kimia company guaranty 10s,
2004 (Indonesia) 516,000
655,000 Repap New Brunswick sr. notes 10 5/8s, 2005 (Canada) 425,750
225,000 Repap New Brunswick sr. notes 9s, 2004 (Canada) 210,375
1,070,000 Riverwood International Corp. company guaranty 10 7/8s, 2008 823,900
615,000 Riverwood International Corp. company guaranty 10 1/4s, 2006 568,875
--------------
4,020,950
Pharmaceuticals (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
600,000 ICN Pharmaceuticals, Inc. 144A sr. notes 9 1/4s, 2005 595,500
Publishing (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
300,000 American Media Operation, Inc. sr. sub. notes 11 5/8s, 2004 306,000
500,000 Garden State Newspapers, Inc. sr. sub. notes Ser. B, 8 3/4s, 2009 495,000
400,000 Perry-Judd company guaranty 10 5/8s, 2007 380,000
150,000 Von Hoffman Press Inc. 144A sr. sub. notes 10 3/8s, 2007 149,250
--------------
1,330,250
Railroads (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
510,000 TFM S.A. de C.V. company guaranty 10 1/4s, 2007 (Mexico) 474,300
565,000 TFM S.A. de C.V. company guaranty stepped-coupon 11 3/4s,
(11 3/4s, 6/15/02), 2009 (Mexico) (STP) 299,450
--------------
773,750
Real Estate (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
70,000 Bluegreen Corp. company guaranty Ser. B, 10 1/2s, 2008 61,600
350,000 Prime Hospitality Corp. sub. notes 9 3/4s, 2007 331,625
--------------
393,225
Recreation (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
825,000 Premier Parks, Inc. sr. notes 9 1/4s, 2006 833,250
Restaurants (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
700,000 FRD Acquisition Co. sr. notes Ser. B, 12 1/2s, 2004 679,000
Retail (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
825,000 Amazon.com Inc. sr. disc. notes stepped-coupon zero %
(10s, 05/01/03), 2008 (STP) 453,750
350,000 Fred Meyer, Inc. company guaranty 7.45s, 2008 365,155
180,000 Home Interiors & Gifts, Inc. 144A sr. sub. notes 10 1/8s, 2008 167,400
400,000 K mart Corp. pass-thru certificates Ser. 95K4, 9.35s, 2020 404,968
625,000 Mothers Work, Inc. sr. notes 12 5/8s, 2005 659,375
170,000 NBTY Inc. 144A sr. sub. notes 8 5/8s, 2007 164,900
680,000 North Atlantic Trading Co. company guaranty Ser. B, 11s, 2004 612,000
--------------
2,827,548
Satellite Services (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
370,000 Esat Holdings Ltd. 144A sr. notes stepped-coupon zero %
(12 1/2s, 2/01/02), 2007 (Ireland) (STP) 218,300
470,000 Golden Sky Systems 144A sr. sub. notes 12 3/8s, 2006 465,300
200,000 Iridium LLC/Capital Corp. company guaranty Ser. B, 14s, 2005 163,000
270,000 Satelites Mexicanos S.A. de C.V. 144A sr. notes 10 1/8s,
2004 (Mexico) 175,500
285,000 TCI Satellite Entertainment, Inc. sr. disc. notes stepped-coupon
zero % (12 1/4s, 2/102), 2007 (STP) 85,500
461,000 TCI Satellite Entertainment, Inc. sr. sub. notes 10 7/8s, 2007 253,550
--------------
1,361,150
Semiconductors (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
800,000 Fairchild Semiconductor Corp. sr. sub. notes 10 1/8s, 2007 720,000
386,302 Fairchild Semiconductor Corp. 144A sr. sub. notes 11.74s, 2008 341,877
660,000 Zilog, Inc. company guaranty Ser. B, 9 1/2s, 2005 481,800
--------------
1,543,677
Shipping (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
140,000 International Shipholding Corp. sr. notes 7 3/4s, 2007 130,200
450,000 Johnstown America Industries, Inc. company guaranty Ser. C,
11 3/4s, 2005 466,313
220,000 MC Shipping, Inc. sr. notes Ser. B, 11 1/4s, 2008 143,000
560,000 Pegasus Shipping 144A company guaranty zero %, 2008 (STP) 260,400
--------------
999,913
Specialty Consumer Products (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
420,000 Decora Industries, Inc. sec. Ser. B, 11s, 2005 344,400
310,000 Eye Care Centers of America 144A sr. sub. notes 9 1/8s, 2008 260,400
--------------
604,800
Telecommunications (5.0%)
- --------------------------------------------------------------------------------------------------------------------------
40,000 21st Century Telecom Group, Inc. sr. disc. notes stepped-coupon
zero % (12 1/4s, 2/15/03), 2008 (STP) 18,100
190,000 Allegiance Telecom, Inc. sr. notes 12 7/8s, 2008 175,750
1,270,000 Allegiance Telecom, Inc. sr. disc. notes stepped-coupon Ser. B,
zero % (11 3/4s, 2/15/03), 2008 (STP) 542,925
440,000 Barak I.T.C. sr. disc. notes stepped-coupon Ser. B, zero %
(12 1/2s, 11/15/02), 2007 (Israel) (STP) 198,000
310,000 Caprock Communications Corp. 144A sr. notes 12s, 2008 263,500
220,000 Charter Communications International, Inc. disc. notes
stepped-coupon Ser. B, zero % (14s, 3/15/01), 2007 (STP) 189,200
475,000 Charter Communications International, Inc. sr. notes Ser. B,
11 1/4s, 2006 513,000
375,000 Conecel Holdings 144A notes Ser. A, 14s, 2000 112,500
155,000 Consorcio Ecuatoriano notes 14s, 2002 (Ecuador) 46,500
425,000 Covad Communications Group sr. disc. notes Ser. B, zero %
(13 1/2s, 03/15/03), 2008 (STP) 140,250
900,000 Econophone Inc. company guaranty 13 1/2s, 2007 976,500
720,000 Econophone, Inc. 144A notes stepped-coupon zero %
(11s, 2/15/03), 2008 (STP) 392,400
230,000 Esprit Teleom Group PLC sr. notes 11 1/2s, 2007
(United Kingdom) 202,400
1,370,000 FirstWorld Communications 144A sr. disc. notes
stepped-coupon zero % (13s, 4/15/03), 2008 (STP) 397,300
890,000 Focal Communications Corp. sr. disc. notes, stepped-coupon
Ser. B, zero % (12 1/8s, 02/15/03), 2008 (STP) 436,100
1,980,000 Global Crossing Holdings 144A sr. notes 9 5/8s, 2008 1,930,500
620,000 GST Equipment Funding sr. notes 13 1/4s, 2007 613,800
747,000 GST Telecommunications, Inc. company guaranty
stepped-coupon zero % (13 7/8s, 12/15/00), 2005 (STP) 485,550
1,190,000 GST Telecommunications, Inc. 144A sr. disc. notes
stepped-coupon zero % (10 1/2s, 5/1/03), 2008 (STP) 505,750
290,000 Hermes Europe Railtel 144A sr. notes 11 1/2s,
2007 (Netherlands) 304,500
265,000 Hyperion Telecommunications Corp., Inc. sr. disc. notes
stepped-coupon Ser. B, zero % (13s, 4/15/01), 2003 (STP) 182,850
550,000 Hyperion Telecommunications Corp., Inc. sr. notes Ser. B,
12 1/4s, 2004 539,000
770,000 ICG Communications, Inc. sr. disc. notes stepped-coupon
zero % (10s, 02/15/03), 2008 (STP) 354,200
575,000 ICG Holdings, Inc. sr. disc. notes stepped-coupon zero %
(13 1/2s, 9/15/00), 2005 (STP) 431,250
930,000 Intermedia Communications, Inc. sr. disc. notes stepped-coupon
Ser. B, zero % (11 1/4s, 7/15/02), 2007 (STP) 620,775
1,120,000 Intermedia Communications, Inc. sr. notes Ser. B, 8.6s, 2008 1,069,600
1,070,000 International Cabletel, Inc. sr. notes stepped-coupon Ser. B,
zero % (11 1/2s, 2/01/01), 2006 (STP) 802,500
510,000 IXC Communications, Inc. sr. sub. notes 9s, 2008 502,350
1,635,000 KMC Telecom Holdings, Inc. sr. disc. notes stepped-coupon
zero % (12 1/2s, 2/15/03), 2008 (STP) 752,100
1,015,000 Knology Holdings, Inc. sr. disc. notes stepped-coupon zero %,
(11 7/8s, 10/15/02), 2007 (STP) 487,200
425,000 L-3 Communications Corp. sr. sub. notes Ser. B, 10 3/8s, 2007 456,875
210,000 MetroNet Communications Corp. sr. disc. notes stepped-coupon
zero % (10 3/4s, 11/1/02), 2007 (Canada) (STP) 121,800
770,000 MetroNet Communications Corp. sr. disc. notes zero %
(9.95s, 6/15/03), 2008 (Canada) (STP) 415,800
850,000 Microcell Telecommunications sr. disc. notes stepped-coupon
Ser. B, zero % (14s, 12/1/01), 2006 (Canada) (STP) 527,000
150,000 Netia Holdings B.V. 144A company guaranty 10 1/4s,
2007 (Poland) 115,500
90,000 Netia Holdings B.V. 144A company guaranty stepped-coupon
zero % (11 1/4s, 11/1/01), 2007 (Poland) (STP) 42,300
900,000 NEXTEL Communications, Inc. sr. disc. notes stepped-coupon
zero % (10.65s, 9/15/02), 2007 (STP) 526,500
610,000 NEXTEL Communications, Inc. sr. disc. notes stepped-coupon
zero % (9.95s, 2/15/03), 2008 (STP) 326,350
790,000 NEXTEL Communications, Inc. 144A sr. notes 12s, 2008 829,500
520,000 NorthEast Optic Network, Inc. sr. notes 12 3/4s, 2008 455,000
620,000 Pathnet, Inc. sr. notes 12 1/4s, 2008 440,200
380,000 Qwest Communications International, Inc. sr. disc. notes
stepped-coupon zero % (8.29s, 2/1/03), 2008 (STP) 278,350
505,000 Qwest Communications International, Inc. sr. disc. notes
stepped-coupon zero % (9.47s, 10/15/02), 2007 (STP) 373,700
700,000 Telecom Tech, Inc. 144A sr. sub. notes 9 3/4s, 2008 595,000
130,000 Telewest 144A sr. notes 11.25s, 11/01/08 (United Kingdom) 136,500
890,000 Time Warner Telecom Inc. sr. notes 9 3/4s, 2008 890,000
340,000 Versatel Teleco 144A sr. notes 13 1/4s, 2008 314,500
545,000 WinStar Communications, Inc. sr. sub. notes stepped-coupon
zero % (15s, 3/1/02), 2007 (STP) 490,500
310,000 WinStar Equipment Corp. company guaranty 12 1/2s, 2004 286,750
--------------
21,808,475
Telephone Services (2.6%)
- --------------------------------------------------------------------------------------------------------------------------
1,080,000 BTI Telecom Corp. sr. notes 10 1/2s, 2007 799,200
150,000 Call-Net Enterprises, Inc. sr. disc. notes stepped-coupon zero %
(8.94s, 8/15/03), 2008 (Canada) (STP) 83,250
1,235,000 Colt Telecommunications Group PLC sr. disc. notes
stepped-coupon 12s, (12s, 12/15/01), 2006
(United Kingdom) (STP) 963,300
695,000 E. Spire Communications, Inc. sr. disc. notes stepped-coupon
zero % (12 3/4s, 4/1/01), 2006 (STP) 503,875
280,000 E. Spire Communications, Inc. sr. notes 13 3/4s, 2007 298,200
250,000 Facilicom International sr. notes Ser. B., 10 1/2s, 2008 195,000
500,000 Flag Ltd. 144A sr. notes 8 1/4s, 2008 (Bermuda) 457,500
420,000 Globo Communicacoes 144A company guaranty 10 1/2s,
2006 (Brazil) 222,600
150,000 Globo Communicacoes 144A sr. notes 10 5/8s, 2008 (Brazil) 78,750
1,630,000 ICG Services, Inc. sr. disc. notes stepped-coupon zero %
(9 7/8s, 5/1/03), 2008 717,200
240,000 IDT Corp. sr. notes 8 3/4s, 2006 204,000
550,000 Intermedia Communications, Inc. sr. notes Ser. B, 8 1/2s, 2008 522,500
800,000 Ionica Group PLC sr. disc. notes stepped-coupon zero %
(15s, 5/1/02), 2007 (United Kingdom) (STP) 4,000
380,000 ITC Deltacom, Inc. sr. notes 11s, 2007 407,550
480,000 Long Distance International, Inc. 144A sr. notes 12 1/4s, 2008 388,800
264,000 MJD Communications, Inc. notes Ser. B, FRN, 10s, 2008 250,800
100,000 MJD Communications, Inc. sr. sub. notes Ser. B, 9 1/2s, 2008 96,000
680,000 NTL Inc. sr. notes Ser. B, 10s, 2007 (United Kingdom) 652,800
400,000 NTL Inc. 144A sr. notes 11 1/2s, 2008 412,000
140,000 NTL Inc. 144A sr. notes stepped-coupon 12 3/8s,
(12 3/8s, 10/1/03), 2008 (STP) 76,552
760,000 Primus Telecommunications Group, Inc. sr. notes Ser. B,
9 7/8s, 2008 630,800
750,000 RCN Corp. sr. disc. notes stepped-coupon zero %,
(11 1/8s, 10/15/02), 2007 (STP) 390,000
440,000 RCN Corp. sr. discount notes, stepped-coupon Ser. B, zero %
(9.8s, 2/15/03), 2008 (STP) 211,200
765,000 RSL Communications, Ltd. company guaranty 12 1/4s, 2006 787,950
260,000 RSL Communications, Ltd. company guaranty 9 1/8s, 2008 221,000
380,000 RSL Communications, Ltd. company guaranty, stepped-coupon
zero % (10 1/8s, 3/1/03), 2008 (STP) 190,000
190,000 Sprint Spectrum L.P. sr. notes 11s, 2006 214,700
500,000 Sprint Spectrum L.P. sr. disc. notes stepped-coupon zero %
(12 1/2s, 8/15/01), 2006 (STP) 438,750
175,000 Transtel S.A. 144A pass-through certificates 12 1/2s,
2007 (Colombia) 61,250
260,000 US Xchange LLC 144A sr. notes 15s, 2008 258,700
890,000 Viatel, Inc. sr. notes 11 1/4s, 2008 809,900
--------------
11,548,127
Textiles (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
700,000 Galey & Lord Inc. company guaranty 9 1/8s, 2008 619,500
290,000 Polymer Group, Inc. company guaranty Ser. B, 9s, 2007 272,600
190,000 Polymer Group, Inc. company guaranty Ser. B, 8 3/4s, 2008 176,700
--------------
1,068,800
Transportation (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
200,000 Coach USA, Inc. 144A company guaranty 9 3/8s, 2007 196,000
520,000 Kitty Hawk, Inc. company guaranty 9.95s, 2004 494,000
--------------
690,000
Wireless Communications (0.8%)
- --------------------------------------------------------------------------------------------------------------------------
850,000 Allbritton Communications Co. sr. sub. notes Ser. B, 8 7/8s, 2008 799,000
510,000 American Mobile Satellite Corp. company guaranty 12 1/4s, 2008 239,700
1,030,000 Comcast Cellular Holdings sr. notes Ser. B, 9 1/2s, 2007 1,053,175
265,000 CTI Holdings S.A. sr. notes stepped-coupon zero %
(11 1/2s,4/15/03), 2008 (Argentina) (STP) 98,050
420,000 Dobson Wireline Co. 144A sr. notes 12 1/4s, 2008 386,400
390,000 Orbital Imaging Corp. sr. notes Ser. B, 11 5/8s, 2005 335,400
195,000 Sygnet Wireless, Inc. sr. notes 11 1/2s, 2006 210,600
200,000 Telesystem International Wireless Inc. sr. disc. notes
stepped-coupon Ser. C, zero %, (10 1/2s, 11/1/02), 2007 (STP) 54,000
880,000 Teligent, Inc. sr. disc. notes stepped-coupon Ser. B, zero %
(11 1/2s, 3/1/03), 2008 (STP) 367,400
580,000 Teligent, Inc. sr. notes 11 1/2s, 2007 481,400
--------------
4,025,125
--------------
Total Corporate Bonds and Notes (cost $182,024,788) $ 156,122,494
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (28.8%) (a)
PRINCIPAL AMOUNT VALUE
U.S. Government Agency Mortgage Obligations (18.6%)
- --------------------------------------------------------------------------------------------------------------------------
Federal Home Loan Mortgage Corporation
$3,030,000 7 1/2s, May 1, 2027 $ 3,103,841
1,060,500 7s, with due dates from June 1, 2023 to November 1, 2025 1,081,371
Freddie Mac
435,000 Ser. 1439, Class I, 7 1/2s, 2022 472,757
610,284 Ser.1717, Class L, 6 1/2s, 2024 634,695
770,000 Ser.2040, Class PE, 7 1/2s,2028 836,413
1,286,437 Ser.194, IO, 6 1/2s, 2028 (Interest Only) 280,604
92,716 Ser.195, IO, 7 1/2s, 2028 13,502
94,288 Ser.195, PO, April 1, 2028 (Principal Only) 82,885
254,438 Ser.199, IO, 6 1/2s, 2028 55,499
2,252,152 6 1/2s, December 25, 2023 2,186,347
Federal National Mortgage Association
990,000 7s, Dwarf, May 1, 2011 1,010,414
212,286 6 1/2s, Dwarf, July 1, 2013 215,402
5,880,000 6 1/2s, TBA, November 15, 2028 5,925,923
9,690,878 6s, Dwarf, with due dates from February 1, 2013 to
October 1, 2013 9,730,223
Fannie Mae Strip
1,065,158 Ser. 273, PO, Class 1, zero %, 2026 911,376
1,048,151 Ser. 273, IO, Class 2, 7s, 2026 173,928
3,896,676 Ser. 290, IO, Class 2, 6 1/2s, 2024 754,981
609,253 Ser. 294, PO, Class 1, zero %, 2028 517,104
Federal National Mortgage Association Pass-Through Certificates
316,800 7s, Dwarf, May 1, 2011 323,332
3,372,195 6 1/2s, with due dates from June 1, 2026 to August 1, 2028 3,405,459
636,014 6 1/2s, Dwarf, August 1, 2013 645,351
700,000 Government National Mortgage Association Ser. 97-8
Class PE, 7-1/2s, 2027 728,438
Government National Mortgage Association
968,910 8s, with due dates from November 15, 2026 to
December 15, 2027 1,004,633
447,481 7s, with due dates from April 15, 2028 to July 15, 2028 458,108
Government National Mortgage Association
Pass-Through Certificates
6,874,664 8s, with due dates from February 15, 2024 to
March 15, 2028 7,129,510
13,994,712 7 1/2s, with due dates from September 15, 2022 to
February 15, 2027 14,411,653
18,767 7 1/2s, Midget, February 15, 2024 19,330
21,322,115 7s, with due dates from August 15, 2025 to May 15, 2028 21,829,395
3,440,744 6 1/2s, with due dates from December 15, 2027 to
February 15, 2028 3,478,350
176,739 5 1/2s, April 20, 2028 176,739
--------------
81,597,563
U.S. Treasury Obligations (10.2%)
- --------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Bonds
2,985,000 6 1/2s, November 15, 2026 (SEG) 3,474,271
13,380,000 6 1/8s, November 15, 2027 15,056,648
5,382,000 5 1/2s, August 15, 2028 5,663,694
15,230,000 5 1/4s, August 15, 2003 15,891,591
U.S. Treasury Notes
4,480,000 5 5/8s, May 15, 2008 4,829,306
120,000 5 1/2s, May 31, 2003 125,663
--------------
45,041,173
--------------
Total U.S. Government and Agency Obligations
(cost $125,685,971) $126,638,736
COLLATERALIZED MORTGAGE OBLIGATIONS (7.8%) (a)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$ 1,015,000 Chase Mortgage Finance Corp. 6 3/4s, 2028 $ 1,022,613
Commercial Mortgage Acceptance Corp.
1,395,000 Ser. 97-ML1, Class D, 7.11s, 2030 1,395,000
16,555,000 Ser. 97-ML1, IO, 0.962s, 2017 902,765
1,525,000 Ser. 98-C2, Class D, 6.757s, 2009 1,494,499
1,625,000 Countrywide Mortgage Backed Securities, Inc. Ser. 93-C,
Class A8, 6 1/2s, 2024 1,632,617
Criimi Mae Commercial Mortgage Trust
4,665,000 Ser. 98-C1, Class A2, 7s, 2011 4,546,188
1,860,000 Ser. 98-C1, Class B, 7s, 2011 1,729,800
19,536,068 Deutsche Mortgage & Asset Receiving Corp. Ser. 98-C1,
Class X, 1.254s, 2031 1,223,294
9,895,000 First Union-Lehman Brothers Commercial Mortgage
Ser. 97-C2, IO, 1.092s, 2027 835,277
First Union-Lehman Brothers Commercial Mortgage
1,415,000 Ser. 97-C2, Class A2, 6.6s, 2007 1,464,580
1,615,000 Ser. 97-C2, Class D, 7.12s, 2012 1,556,772
First Union-Lehman Brothers Commercial Mortgage Co.
1,100,000 Ser. 97-C2, Class A3, 6.65s, 2008 1,136,738
1,790,000 Ser. 98-C2, Class D, 6.778s, 2013 1,670,713
GMAC Commercial Mortgage Securities Inc.
1,710,000 Ser. 98-C2, Class D, 6 1/2s, 2031 1,616,818
23,770,000 Ser. 98-C2, Class X, IO, 0.823s, 2031 1,064,079
GS Mortgage Securities Corp. II
1,470,000 Ser. 98-GLII, Class A2, 6.562s, 2031 1,496,184
800,000 Ser. 98-GLII, Class D, 7.191s, 2031 750,000
Merrill Lynch Mortgage Investors, Inc.
640,000 7.782s, 2025 665,300
248,000 Ser. 98-C2, Class D, 7.116s, 2030 245,908
Morgan Stanley Capital I
455,000 Ser. 98-WF1, Class D, 7.12s, 2008 458,270
445,000 Ser. 98-XL1, Class E, 6.989s, 2030 448,755
Mortgage Capital Funding, Inc.
585,000 Ser. 98-MC1, Class A2, 6.663s, 2008 601,270
21,225,200 Ser. 98-MC1, Class X, IO, 0.722s, 2009 888,805
1,442,436 PNC Mortgage Securities Corp. Ser. 97-6, Class A2, 6.6s, 2027 1,444,690
575,694 Prudential Home Mortgage Securities Ser. 93-57, Class A4,
5.9s, 2023 577,493
2,363,036 Residential Asset Securitization Trust, Ser 98, Class A8,
6 3/4s, 2028 2,380,759
879,923 Rural Housing Trust Ser. 87-1, Class D, 6.33s, 2026 894,144
--------------
Total Collateralized Mortgage Obligations
(cost $34,536,114) $ 34,143,331
FOREIGN GOVERNMENT BONDS AND NOTES (6.7%) (a)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
ITL 9,975,000,000 Italy (Government of) 10 1/2s, 2005 $ 8,314,735
FRF 3,420,000 Ivory Coast -- PDI bonds FRB 1.9s, 2018 147,972
FRF 3,420,000 Ivory Coast -- FLIRB collateralized FRB 2s, 2018 123,310
USD 6,605,000 Peru (Government of) 144A Ser. PDI, 4s, 2017 3,731,825
SEK 58,400,000 Sweden (Government of) 6 3/4s, 2014 8,950,166
SEK 57,800,000 Sweden (Government of) deb. 6s, 2005 8,050,423
RUB 16,500,000 U.S. Dollar GKO Pass Through Structured Note
(Issued by Deutsche Bank The principal USD is
linked to the bid price for the Russian Treasury Bill
at maturity, and the change in the spot rate of the
Russian Ruble from issue date), zero %, 1998
(In Default) 148,665
--------------
Total Foreign Government Bonds and Notes
(cost $32,585,598) $ 29,467,096
BRADY BONDS (4.0%) (a)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$ 7,485,000 Brazil (Republic of) annual reset bonds 6.688s, 2024 $ 4,425,881
6,390,000 Bulgaria (Government of) Ser. A, FLIRB, 2 1/2s, 2012 3,514,500
2,155,000 Panama (Republic of) bonds 3 3/4s, 2014 1,562,375
8,545,000 United Mexican States Ser. B, 6 1/4s, 2019 6,377,134
680,000 Venezuela (Government of) 13 5/8s, 2018 489,600
1,745,000 Venezuela (Government of) 6 3/4s, 2020 1,162,694
--------------
Total Brady Bonds (cost $19,214,126) $ 17,532,184
PREFERRED STOCKS (3.3%) (a)
NUMBER OF SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------------
9,996 AmeriKing, Inc. $3.25 pfd. (PIK) $ 239,904
9 Anvil Holdings Ser. B, $3.25 pfd. (PIK) 180
15,000 California Federal Bancorp Inc. Ser. A, $2.281 pfd. 386,250
4,739 Capstar Broadcasting Inc. 144A $12.00 pfd. (PIK) 530,768
11,925 Chevy Chase Capital Corp. Ser. A, $5.188 pfd. 590,288
4,708 Citadel Broadcasting Inc. 144A $13.25 cum. pfd. (PIK) 532,004
240 Concentric Network Corp. Ser. B, 13.50% pfd. (PIK) 178,800
8,700 CSC Holdings, Inc. Ser. M, $11.125 cum. (PIK) 952,650
13,965 Diva Systems Corp. Ser. C, $6.00 pfd. 125,685
156 E. Spire Communications, Inc. 12.75% pfd. (PIK) 106,080
144 Echostar Communications, Inc. 12.125% pfd. 136,800
100 Fresenius Medical Care AG. 9% pfd. (Germany) 100,000
877 Granite Broadcasting 144A 12.75% pfd. (PIK) 727,910
135 Hyperion Telecommunications Ser. B, 12.875% pfd. (PIK) 87,750
849 ICG Holdings, Inc. $14.25 pfd. (Canada) 891,450
377 ICG Holdings, Inc., 144A $14.00 pfd. (Canada) (PIK) 388,310
908 Intermedia Communication Ser. B, 13.50% pfd. (PIK) 935,240
563 IXC Communications, Inc. $12.50 pfd. (PIK) 555,963
9,189 Lady Luck Gaming Corp. $11.25 pfd. 385,938
5,196 Nebco Evans Holding Co. 144A 11.25% pfd. (PIK) 259,800
1,987 NEXTEL Communications, Inc. Ser. D, 13.00% cum. pfd. (PIK) 1,987,000
232 NEXTEL Communications, Inc. Ser. E, $11.125 pfd. (PIK) 204,160
17,906 Nextlink Communications, Inc. 144A $7.00 cum. pfd. 832,629
75 Paxson Communications Corp. 13.25% cum. pfd. (PIK) 690,000
3,255 SFX Broadcasting, Inc. Ser. E, $12.625 pfd. (PIK) 384,090
5,000 Sinclair Capital $11.625 cum. pfd. 515,000
1,183 Spanish Broadcasting Systems 14.25% cum. pfd. 1,165,255
386 Viatel, Inc. Ser. A, $10.00 cv. pfd. (PIK) 23,160
3,540 Von Hoffman Corp. 144A $13.50 pfd. 109,740
580 WinStar Communications, Inc. 144A 14.25% pfd. (PIK) 493,000
--------------
Total Preferred Stocks (cost $15,259,372) $ 14,515,804
UNITS (1.5%) (a)
NUMBER OF UNITS VALUE
- --------------------------------------------------------------------------------------------------------------------------
330 Bestel S.A.de CV units, stepped-coupon zero %
(12 3/4s,5/15/03), 2005 (Mexico) (STP) $ 184,800
310 Birch Telecom, Inc. 144A units 14s, 2008 263,500
150 Celcaribe S.A. 144A units 13 1/2s, 2004 (Colombia) 3,000,000
1,202 Diva Systems Corp. 144A units stepped-coupon zero %
(12 5/8s, 3/1/03), 2008 (STP) 384,640
760 Interact Systems, Inc. 144A units stepped-coupon zero %
(14s, 8/1/99), 2003 (STP) 38,000
380 Mediq Inc. units 144A 13s, 2009 178,600
185 Onepoint Communications, Inc. units 14 1/2s, 2008 83,250
910 Rhythms Netcon 144A units stepped-coupon zero %
(13 1/2s, 5/15/03), 2008 (STP) 327,600
650 Startec Global Communications Corp. units 12s, 2008 477,750
260 Telehub Communications Corp. units stepped-coupon
zero %, (13 7/8s,7/31/02), 2005 (STP) 132,600
500 Transamerican Refining, Inc. 144A units 16s, 2003 175,000
585 United Artists Theatre 144A 9 3/4s, 2008 532,350
90 United Stationer Supply, Inc. 144A 8 3/8s, 2008 90,225
380 XCL Ltd. units sr. sec. notes 13 1/2s, 2004 394,250
4,732 XCL Ltd. 144A units cum. pfd. 9 1/2s, 2006 (PIK) 402,220
--------------
Total Units (cost $7,093,747) $ 6,664,785
ASSET-BACKED SECURITIES (0.9%) (a)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$1,611,000 Chemical Master Credit Card Trust Ser. 95-2, Class A,
6.23s, 2003 $ 1,640,691
505,000 Contimortgage Home Equity Loan Trust Ser. 97-1,
Class M2, 7.67s, 2028 518,413
1,456,745 First Plus 1998-a Class A 8 1/2s, 2023 1,483,604
433,942 Green Tree Recreational Equipment & Cons
Ser. 97-B, Class A1, 6.55s, 2028 446,909
--------------
Total Asset-Backed Securities (cost $4,048,707) $ 4,089,617
CONVERTIBLE BONDS AND NOTES (0.5%) (a)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$1,110,000 APP Global Finance Ltd. 144A cv. company guaranty
3 1/2s, 2003 (United Kingdom) $ 620,213
500,000 Corporate Express, Inc. cv. notes 4 1/2s, 2000 441,250
234,000 GST Telecommunications, Inc. cv. sr. disc. notes stepped-coupon
zero %, (13 7/8s, 12/15/00), 2005 (STP) 304,200
320,000 HEALTHSOUTH Corp. cv. sub. deb. 3 1/4s, 2003 261,600
280,000 Integrated Device Technology, Inc. cv. sub. notes 5 1/2s, 2002 176,750
530,000 Jacor Communications, Inc. cv. sr. notes zero %, 2011 395,513
--------------
Total Convertible Bonds and Notes (cost $2,866,361) $ 2,199,526
COMMON STOCKS (0.5%) (a)
NUMBER OF SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------------
200 AmeriKing, Inc. (NON) $ 8,000
2,625 Axia Holding Inc. 144A (PIK) 36,750
14,280 CellNet Data Systems, Inc. (NON) 91,035
4,246 Hedstrom Holdings, Inc. 144A 4,246
4,148 IFINT Diversified Holdings 144A (NON) 31,110
182 Mothers Work, Inc. (NON) 1,524
125 Paging Do Brazil Holdings Co., LLC
144A Class B, (Brazil) 1
480 Premium Holdings L.P. 144A (NON) 1,919
100,386 PSF Holdings LLC Class A (acquired various
dates from 2/8/93 to 3/16/98, cost $3,443,871) (RES) 1,758,763
3,180 RSL Communications, Ltd. Class A (NON) 71,550
15,000 Specialty Foods Acquisition Corp. (NON) 750
--------------
Total Common Stocks (cost $3,855,125) $ 2,005,648
WARRANTS (0.4%) (a) (NON) EXPIRATION
NUMBER OF WARRANTS DATE VALUE
- --------------------------------------------------------------------------------------------------------------------------
860 Allegiance Telecom, Inc. 2/3/08 $ 13,760
510 American Mobile Satellite Corp. 4/1/08 1,408
40,000 Becker Gaming Corp. 144A 11/15/00 4
2,498 Cellnet Data Systems, Inc. 10/1/07 99,920
325 Club Regina, Inc. 144A 4/15/06 325
1,235 Colt Telecommunications Group PLC 12/31/06 370,500
125 Concentric Network Corp. 12/15/07 12,778
5,062 Consorcio Ecuatoriano 144A (Ecuador) 10/1/00 1,266
425 Covad Communications Group 144A 3/15/08 4,250
690 Diva Systems Corp. 5/15/06 189,750
9,600 DTI Holdings Inc. 3/1/08 480
10 E. Spire Communications, Inc. 11/1/05 160
1,050 Econophone, Inc. 144A 10/15/07 57,750
310 Epic Resorts 6/15/05 3
370 Esat Holdings, Inc. (Ireland) 2/1/07 12,950
1,370 Firstworld Communication 12/1/06 13,700
380 Globalstar Telecom 144A 2/15/04 11,400
940 Hyperion Telecommunications 144A 4/15/01 50,286
8,514 Intelcom Group 144A 10/15/05 229,878
760 Interact Systems, Inc. 8/1/03 8
1,325 Intermedia Communications, Inc. 6/1/00 72,743
450 International Wireless Communications
Holdings 144A 8/15/01 5
875 KMC Telecom Holdings, Inc. 4/15/08 14,000
875 Knology Holdings, Inc. 144A 10/15/07 1,313
4,101 Louisiana Casino Cruises, Inc. 144A 12/1/98 217,353
1,530 McCaw International Ltd. 4/15/07 6,120
140 MGC Communications, Inc. 144A 10/1/04 6,122
390 Orbital Imaging Corp. 144A 3/1/05 15,600
525 Orion Network Systems 1/15/07 6,038
5,290 Pagemart, Inc. 144A 12/31/03 42,320
620 Pathnet, Inc. 144A 4/15/08 6,200
640 Paxson Communications Corp. 144A 6/30/03 6
4,238 President Riverboat Casinos, Inc. 4/15/08 424
390 Spanish Broadcasting Systems 144A 6/30/99 79,950
275 Sterling Chemicals Holdings 8/15/08 4,950
2,285 UIH Australia/Pacific, Inc. 144A 5/15/06 11,425
340 Versatel Teleco 144A 5/15/08 3,400
36 Wright Medical Technology, Inc. 144A 6/30/03 356
--------------
Total Warrants (cost $869,141) $ 1,558,901
CONVERTIBLE PREFERRED STOCKS (0.1%) (a)
NUMBER OF SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------------
2,600 Chancellor Media Corp. $3.00 cv. cum. pfd. $ 196,950
2,290 Chesapeake Energy Corp. 144A $3.50 cv. cum. pfd. 45,800
20 Paxson Communications Corp. 144A 9.75% cv. pfd. (PIK) 200,000
432 XCL Ltd $8.075 cv. pfd. 36,720
--------------
Total Convertible Preferred Stocks (cost $632,061) $ 479,470
SHORT-TERM INVESTMENTS (6.2%) (a)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$ 2,000,000 Falcon Asset Securitization Corp.
effective yield of 5.15s, 12/9/98 $ 1,984,550
25,150,000 Interest in $274,098,000 joint repurchase agreement dated
October 30, 1998 with Credit Suisse First Boston due
November 2, 1998 with respect to various U.S. Treasury
obligations -- maturity value of $25,161,255 for an effective
yield of 5.37% 25,157,504
--------------
Total Short-Term Investments (cost $27,142,054) $ 27,142,054
- --------------------------------------------------------------------------------------------------------------------------
Total Investments (cost $455,813,165) (b) $ 422,559,646
- --------------------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $438,972,156.
(b) The aggregate identified cost on a tax basis is $456,007,746, resulting in gross unrealized appreciation and
depreciation of $8,454,491 and $41,902,591, respectively, or net unrealized depreciation of $33,448,100.
(NON) Non-income-producing security.
(STP) The interest rate and date shown parenthetically represent the new interest or dividend rate to be paid and
the date the fund will begin receiving interest or dividend income at this rate.
(PIK) Income may be received in cash or additional securities at the discretion of the issuer.
(SEG) A portion of these securities were pledged and segregated with the custodian to cover margin requirements for
futures contracts at October 31, 1998.
TBA after the name of a security represents to be announced 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.
FLIRB represents Front Loaded Interest Reduction Bond.
The rates shown on Floating Rate Bonds (FRB) and Floating Rate Notes (FRN) are the current interest rates
shown at October 31, 1998 which are subject to change based on the terms of the security.
- -------------------------------------------------------------------------------
Forward Currency Contracts to Buy at October 31, 1998
(aggregate face value $66,281,920)
Unrealized
Aggregate Face Delivery Appreciation/
Market Value Value Date (Depreciation)
- -------------------------------------------------------------------------------
Australian Dollars $ 371,204 $ 346,538 12/16/98 $ 24,666
British Pounds 1,625,045 1,626,383 12/16/98 (1,338)
Danish Krone 2,814,721 2,659,943 12/16/98 154,778
Deutschemarks 38,768,074 37,739,836 12/16/98 1,028,238
French Franc 1,104,123 1,106,145 12/16/98 (2,022)
Japanese Yen 21,156,541 18,402,577 12/16/98 2,753,964
Spanish Peseta 4,635,260 4,400,498 12/16/98 234,762
- -------------------------------------------------------------------------------
$4,193,048
- -------------------------------------------------------------------------------
Forward Currency Contracts to Sell at October 31, 1998
(aggregate face value $66,530,516)
Unrealized
Market Aggregate Face Delivery Appreciation/
Value Value Date (Depreciation)
- -------------------------------------------------------------------------------
Deutschemarks $38,281,229 $36,655,289 12/16/98 $(1,625,940)
Dutch Guilder 18,325 17,606 12/16/98 (719)
French Franc 508,201 482,413 12/16/98 (25,788)
Italian Lira 453,249 452,304 12/16/98 (945)
Japanese Yen 20,595,017 17,882,665 12/16/98 (2,712,352)
Swedish Krona 10,946,583 11,040,239 12/16/98 93,656
- -------------------------------------------------------------------------------
$(4,272,088)
- -------------------------------------------------------------------------------
Futures Contracts Outstanding at October 31, 1998
Aggregate Face Expiration Unrealized
Total Value Value Date Appreciation
- -------------------------------------------------------------------------------
U.S. Treasury Bond
20 yr. (Long) $18,562,500 $18,044,273 Dec-98 $518,227
- -------------------------------------------------------------------------------
TBA Sales Commitments at October 31, 1998
(proceeds receivable $5,858,256)
Settlement Market
Agency Principal Amount Date Value
- -------------------------------------------------------------------------------
FNMA, 6s, November 15, 2013 $5,880,000 11/17/98 $5,903,873
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
October 31, 1998
<S> <C>
Assets
- -----------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $455,813,165) (Note 1) $422,559,646
- -----------------------------------------------------------------------------------------------
Cash 60,597
- -----------------------------------------------------------------------------------------------
Foreign currency (cost $172,045) 132,246
- -----------------------------------------------------------------------------------------------
Dividends, interest and other receivables 8,338,466
- -----------------------------------------------------------------------------------------------
Receivable for securities sold 43,481,175
- -----------------------------------------------------------------------------------------------
Receivable for open forwards 4,290,064
- -----------------------------------------------------------------------------------------------
Total assets 478,862,194
Liabilities
- -----------------------------------------------------------------------------------------------
Distributions payable to shareholders 3,237,290
- -----------------------------------------------------------------------------------------------
Payable for variation margin 130,500
- -----------------------------------------------------------------------------------------------
Payable for securities purchased 24,761,241
- -----------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 865,173
- -----------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 77,728
- -----------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 14,004
- -----------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 583
- -----------------------------------------------------------------------------------------------
Payable for open forward currency contracts 4,369,104
- -----------------------------------------------------------------------------------------------
Payable for closed forward currency contracts 355,858
- -----------------------------------------------------------------------------------------------
TBA sales commitment, at value (proceeds receivable $5,858,256) 5,903,873
- -----------------------------------------------------------------------------------------------
Other accrued expenses 174,684
- -----------------------------------------------------------------------------------------------
Total liabilities 39,890,038
- -----------------------------------------------------------------------------------------------
Net assets $438,972,156
Represented by
- -----------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $478,647,593
- -----------------------------------------------------------------------------------------------
Distributions in excess of net investment income (Note 1) (2,101,458)
- -----------------------------------------------------------------------------------------------
Accumulated net realized loss on investments
and foreIgn currency transactions (Note 1) (4,668,579)
- -----------------------------------------------------------------------------------------------
Net unrealized depreciation of investments and
assets and liabilities in foreign currencies (32,905,400)
- -----------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $438,972,156
Computation of net asset value
- -----------------------------------------------------------------------------------------------
Net asset value per share ($438,972,156 divided by
53,095,749 shares) $8.27
- -----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Year ended October 31, 1998
<S> <C>
Investment income:
- -----------------------------------------------------------------------------------------------
Interest income $ 40,607,333
- -----------------------------------------------------------------------------------------------
Dividends 1,695,914
- -----------------------------------------------------------------------------------------------
Total investment income 42,303,247
Expenses:
- -----------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 3,608,031
- -----------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 733,334
- -----------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 18,562
- -----------------------------------------------------------------------------------------------
Administrative services (Note 2) 7,002
- -----------------------------------------------------------------------------------------------
Reports to shareholders 68,453
- -----------------------------------------------------------------------------------------------
Auditing 84,782
- -----------------------------------------------------------------------------------------------
Legal 28,613
- -----------------------------------------------------------------------------------------------
Postage 91,642
- -----------------------------------------------------------------------------------------------
Exchange listing fees 48,410
- -----------------------------------------------------------------------------------------------
Other 120,727
- -----------------------------------------------------------------------------------------------
Total expenses 4,809,556
- -----------------------------------------------------------------------------------------------
Expense reduction (Note 2) (97,884)
- -----------------------------------------------------------------------------------------------
Net expenses 4,711,672
- -----------------------------------------------------------------------------------------------
Net investment income 37,591,575
- -----------------------------------------------------------------------------------------------
Net realized loss on investments (Notes 1 and 3) (1,962,604)
- -----------------------------------------------------------------------------------------------
Net realized gain on futures contracts (Note 1) 2,972,002
- -----------------------------------------------------------------------------------------------
Net realized gain on written options (Notes 1 and 3) 100,776
- -----------------------------------------------------------------------------------------------
Net realized loss on foreign currency transactions (Note 1) (8,767,055)
- -----------------------------------------------------------------------------------------------
Net unrealized appreciation of assets and liabilities in
foreign currencies during the year 1,065,635
- -----------------------------------------------------------------------------------------------
Net unrealized depreciation of investments, futures,
and TBA sale commitments during the year (44,177,432)
- -----------------------------------------------------------------------------------------------
Net loss on investments (50,768,678)
- -----------------------------------------------------------------------------------------------
Net decrease in net assets resulting from operations $(13,177,103)
- -----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Year ended October 31
-------------------------------
1998 1997
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Decrease in net assets
- ---------------------------------------------------------------------------------------------------------------
Operations:
- ---------------------------------------------------------------------------------------------------------------
Net investment income $ 37,591,575 $ 35,121,838
- ---------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments
and foreign currency transactions (7,656,881) 1,453,960
- ---------------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of
investments and assets and liabilities in foreign currencies (43,111,797) 5,178,491
- ---------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations (13,177,103) 41,754,289
- ---------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ---------------------------------------------------------------------------------------------------------------
From net investment income (34,469,475) (27,336,768)
- ---------------------------------------------------------------------------------------------------------------
From net realized gain on investments -- (8,980,918)
- ---------------------------------------------------------------------------------------------------------------
In excess of realized gains -- (8,653,969)
- ---------------------------------------------------------------------------------------------------------------
Return of capital (5,032,778) (437,427)
- ---------------------------------------------------------------------------------------------------------------
Decrease from capital share transactions (Note 4) -- (417,980)
- ---------------------------------------------------------------------------------------------------------------
Total decrease in net assets (52,679,356) (4,072,773)
Net assets
- ---------------------------------------------------------------------------------------------------------------
Beginning of year 491,651,512 495,724,285
- ---------------------------------------------------------------------------------------------------------------
End of year (including distributions in excess of
net investment income of $2,101,458 and
$1,159,237, respectively) $438,972,156 $491,651,512
- ---------------------------------------------------------------------------------------------------------------
Number of fund shares
- ---------------------------------------------------------------------------------------------------------------
Shares outstanding at beginning of year 53,095,749 53,147,249
- ---------------------------------------------------------------------------------------------------------------
Shares liquidated (Note 4) -- (51,500)
- ---------------------------------------------------------------------------------------------------------------
Shares outstanding at end of year 53,095,749 53,095,749
- ---------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
- ------------------------------------------------------------------------------------------------------------------------------------
Per-share
operating performance Year ended October 31
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of year $9.26 $9.33 $9.04 $8.63 $9.62
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .71 .66 .68 .68 .74
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.96) .13 .30 .42 (.88)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations (.25) .79 .98 1.10 (.14)
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.65) (.52) (.69) (.64) (.52)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- (.17) -- -- (.08)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net realized
gain on investments -- (.16) -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Return of capital (.09) (.01) -- (.05) (.25)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.74) (.86) (.69) (.69) (.85)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $8.27 $9.26 $9.33 $9.04 $8.63
- ------------------------------------------------------------------------------------------------------------------------------------
Market value,
end of period $8.125 $8.500 $8.375 $8.125 $7.88
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at market value (%)(a) 4.15 11.34 12.08 14.16 (1.92)
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $438,972 $491,652 $495,724 $481,914 $460,760
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.00 .96 .95 1.02 .95
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 7.81 7.18 7.43 7.98 7.33
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 202.83 246.84 280.38 290.44 201.95
- ------------------------------------------------------------------------------------------------------------------------------------
* Not annualized.
(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, 1998
Note 1
Significant accounting policies
Putnam Master Income Trust (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. investment-grade sector,
consisting of debt obligations of the U.S. government and investment-grade
U.S. corporate bonds; 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 Management. These balances may be invested in one or more
repurchase agreements and/or short-term money market instruments.
C) Repurchase agreements The fund, or any joint trading account, through
its custodian, receives delivery of the underlying securities, the market
value of which at the time of purchase is required to be in an amount at
least equal to the resale price, including accrued interest. Collateral
for certain tri-party repurchase agreements is held at the counterparty's
custodian in a segregated account for the benefit of the fund and the
counterparty. Putnam Management is responsible for determining that the
value of these underlying securities is at all times at least equal to the
resale price, including accrued interest.
D) Security transactions and related investment income Security
transactions are accounted for on the trade date (date the order to buy or
sell is executed). Interest income is recorded on the accrual basis.
Dividend income is recorded on the ex-dividend date except that certain
dividends from foreign securities are recorded as soon as the fund is
informed of the ex-dividend date. Discounts on zero coupon bonds, original
issue discount bonds, stepped-coupon bonds and payment in kind bonds are
accreted according to the yield-to-maturity method. Any premium resulting
from the purchase of securities is amortized on a yield-to-maturity basis.
Securities purchased or sold on a when-issued basis may be settled a month
or more after the trade date; interest income is accrued based on the
terms of the security. Losses may arise due to changes in the market value
of the underlying securities or if the counterparty does not perform under
the contract.
E) Foreign currency translation The accounting records of the fund are
maintained in U.S. dollars. The market value of foreign securities,
currency holdings, other assets and liabilities are recorded in the books
and records of the fund after translation to U.S. dollars based on the
exchange rates on that day. The cost of each security is determined using
historical exchange rates. Income and withholding taxes are translated at
prevailing exchange rates when accrued or incurred. The fund does not
isolate that portion of realized or unrealized gains or losses resulting
from changes in the foreign exchange rate on investments from fluctuations
arising from changes in the market prices of the securities. Such gains
and losses are included with the net realized and unrealized gain or loss
on investments. Net realized gains and losses on foreign currency
transactions represent net exchange gains or losses on closed forward
currency contracts, disposition of foreign currencies and the difference
between the amount of investment income and foreign withholding taxes
recorded on the fund's books and the U.S. dollar equivalent amounts
actually received or paid. Net unrealized appreciation and depreciation of
assets and liabilities in foreign currencies arise from changes in the
value of open forward currency contracts and assets and liabilities other
than investments at the period end, resulting from changes in the exchange
rate.
F) Forward currency contracts The fund may engage in forward currency
contracts, which are agreements between two parties to buy and sell
currencies at a set price on a future date, to protect against a decline
in value relative to the U.S. dollar of the currencies in which its
portfolio securities are denominated or quoted (or an increase in the
value of a currency in which securities a fund intends to buy are
denominated, when a fund holds cash reserves and short-term investments).
The U.S. dollar value of forward currency contracts is determined using
current forward currency exchange rates supplied by a quotation service.
The market value of the contract will fluctuate with changes in currency
exchange rates. The contract is "marked to market" daily and the change in
market value is recorded as an unrealized gain or loss. When the contract
is closed, the fund records a realized gain or loss equal to the
difference between the value of the contract at the time it was opened and
the value at the time it was closed. The fund could be exposed to risk if
the value of the currency changes unfavorably, if the counterparties to
the contracts are unable to meet the terms of their contracts or if the
fund is unable to enter into a closing position.
G) Futures and options contracts The fund may use futures and options
contracts to hedge against changes in the values of securities the fund
owns or expects to purchase. The fund may also write options on securities
it owns or in which it may invest to increase its current returns.
The potential risk to the fund is that the change in value of futures and
options contracts may not correspond to the change in value of the hedged
instruments. In addition, losses may arise from changes in the value of
the underlying instruments, if there is an illiquid secondary market for
the contracts, or if the counterparty to the contract is unable to
perform. When the contract is closed, the fund records a realized gain or
loss equal to the difference between the value of the contract at the time
it was opened and the value at the time it was closed. Realized gains and
losses on purchased options are included in realized gains and losses on
investment securities.
Futures contracts are valued at the quoted daily settlement prices
established by the exchange on which they trade. Exchange traded options
are valued at the last sale price, or if no sales are reported, the last
bid price for purchased options and the last ask price for written
options. Options traded over-the-counter are valued using prices supplied
by dealers.
H) TBA purchase commitments The fund may enter into "TBA" (to be
announced) purchase commitments to purchase securities for a fixed unit
price at a future date beyond customary settlement time. Although the unit
price has been established, the principal value has not been finalized.
However, the amount of the commitments will not fluctuate more than 1.0%
from the principal amount. The fund holds, and maintains until settlement
date, cash or high-grade debt obligations in an amount sufficient to meet
the purchase price, or the fund may enter into offsetting contracts for
the forward sale of other securities it owns. Income on the securities
will not be earned until settlement date. TBA purchase commitments may be
considered securities in themselves, and involve a risk of loss if the
value of the security to be purchased declines prior to the settlement
date, which risk is in addition to the risk of decline in the value of the
fund's other assets. Unsettled TBA purchase commitments are valued at the
current market value of the underlying securities, according to the
procedures described under "Security valuation" above.
Although the fund will generally enter into TBA purchase commitments with
the intention of acquiring securities for their portfolio or for delivery
pursuant to options contracts it has entered into, the fund may dispose of
a commitment prior to settlement if Putnam Management deems it appropriate
to do so.
I) TBA sale commitments The fund may enter into TBA sale commitments to
hedge its portfolio positions or to sell mortgage-backed securities it
owns under delayed delivery arrangements. Proceeds of TBA sale commitments
are not received until the contractual settlement date. During the time a
TBA sale commitment is outstanding, equivalent deliverable securities, or
an offsetting TBA purchase commitment deliverable on or before the sale
commitment date, are held as "cover" for the transaction.
Unsettled TBA sale commitments are valued at the current market value of
the underlying securities, generally according to the procedures described
under "Security valuation" above. The contract is "marked-to-market" daily
and the change in market value is recorded by the fund as an unrealized
gain or loss. If the TBA sale commitment is closed through the acquisition
of an offsetting purchase commitment, the fund realizes a gain or loss. If
the fund delivers securities under the commitment, the fund realizes a
gain or a loss from the sale of the securities based upon the unit price
established at the date the commitment was entered into.
J) Federal taxes It is the policy of the fund to distribute all of its
taxable income within the prescribed time and otherwise comply with the
provisions of the Internal Revenue Code applicable to regulated investment
companies. It is also the intention of the fund to distribute an amount
sufficient to avoid imposition of any excise tax under Section 4982 of the
Internal Revenue Code of 1986, as amended. Therefore, no provision has
been made for federal taxes on income, capital gains or unrealized
appreciation on securities held nor for excise tax on income and capital
gains.
At October 31, 1998, the fund had a capital loss carryover of
approximately $3,956,000 available to offset future net capital gains, if
any, which will expire on October 31, 2006.
K) 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 temporary and permanent differences
of losses on wash sale transactions, foreign currency gains and losses,
dividends payable, defaulted bond interest, unrealized gains and losses on
certain futures contracts, paydown gains and losses on mortgage-backed
securities, market discount, and interest on payment-in-kind securities.
Reclassifications are made to the fund's capital accounts to reflect
income and gains available for distribution (or available capital loss
carryovers) under income tax regulations. For the year ended October 31,
1998, the fund reclassified $4,064,321 to increase distributions in excess
of net investment income and $899,056 to decrease paid-in-capital, with a
decrease to accumulated net realized losses of $4,963,377. 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% thereafter.
The fund reimburses Putnam Management an allocated amount for the
compensation and related expenses of certain officers of the fund and
their staff who provide administrative services to the fund. The aggregate
amount of all such reimbursements is determined annually by the Trustees.
Custodial functions for the fund's assets are provided by Putnam Fiduciary
Trust Company (PFTC), a subsidiary of Putnam Investments, Inc. Investor
servicing agent functions are provided by Putnam Investor Services, a
division of PFTC.
For the year ended October 31, 1998, fund expenses were reduced by $97,884
under expense offset arrangements with PFTC. Investor servicing and
custodian fees reported in the Statement of operations exclude these
credits. The fund could have invested a portion of the assets utilized in
connection with the expense offset arrangements in an income producing
asset if it had not entered into such arrangements.
Trustees of the funds receive an annual Trustees fee of which $730 has
been allocated to the fund and an additional fee for each Trustee's
meeting attended. Trustees who are not interested persons of Putnam
Management and who serve on committees of the Trustees receive additional
fees for attendance at certain committee meetings.
The fund has adopted a Trustee Fee Deferral Plan (the "Deferral Plan")
which allows the Trustees to defer the receipt of all or a portion of
Trustees Fees payable on or after July 1, 1995. The deferred fees remain
in the fund and are invested in certain Putnam funds until distribution in
accordance with the Deferral Plan.
The fund has adopted an unfunded noncontributory defined benefit pension
plan (the "Pension Plan") covering all Trustees of the fund who have
served as Trustee for at least five years. Benefits under the Pension Plan
are equal to 50% of the Trustee's average total retainer and meeting fees
for the three years preceding retirement. Pension expense for the fund is
included in Compensation of trustees in the Statement of operations.
Accrued pension liability is included in Payable for compensation of
Trustees in the Statement of assets and liabilities.
Note 3
Purchase and sales of securities
During the year ended October 31, 1998, purchases and sales of investment
securities other than U.S. government obligations and short-term
investments aggregated $652,515,371 and $622,663,927, respectively.
Purchases and sales of U.S. government obligations aggregated $282,910,470
and $338,406,947, 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 $ 4,295,000 $ 53,473
- -----------------------------------------------------------------------------
Options written 14,900,000 47,303
- -----------------------------------------------------------------------------
Options expired (19,195,000) (100,776)
- -----------------------------------------------------------------------------
Options closed -- --
- -----------------------------------------------------------------------------
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 interest 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, 1998, the fund repurchased no shares.
For the year ended October 31, 1997, the fund repurchased 51,500 shares
for $417,980, which reflects a discount from net asset value of $55,821,
or 11.78%.
As of October 31, 1998, 279,900 shares have been repurchased since the
inception of the program.
Federal tax information
(Unaudited)
For the year ended October 31, 1998, a portion of the Fund's distribution
represents a return of capital and is therefore not taxable to
shareholders.
The fund has designated 4.92% of the distributions from net investment
income as qualifying for the dividends received deduction for corporations.
The Form 1099 you receive in January 1999 will show the tax status of
all distributions paid to your account in calendar 1998.
Results of October 1, 1998 shareholder meeting
(Unaudited)
An annual meeting of shareholders of the fund was held on October 1, 1998.
At the meeting, each of the nominees for Trustees was elected, as follows:
Votes
Votes for withheld
Jameson Adkins Baxter 33,254,286 1,186,410
Hans H. Estin 33,244,947 1,195,749
John A. Hill 33,303,335 1,137,361
Ronald J. Jackson 33,264,616 1,176,080
Paul L. Joskow 33,241,990 1,198,706
Elizabeth T. Kennan 33,218,881 1,221,815
Lawrence J. Lasser 33,250,129 1,190,567
John H. Mullin III 33,264,787 1,175,909
Robert E. Patterson 33,270,024 1,170,672
Donald S. Perkins 33,205,813 1,234,883
William F. Pounds 33,246,665 1,194,031
George Putnam 33,257,923 1,182,773
George Putnam, III 33,268,918 1,171,778
A.J.C. Smith 33,252,600 1,188,096
W. Thomas Stephens 33,253,539 1,187,157
W. Nicholas Thorndike 33,229,094 1,211,602
A proposal to ratify the selection of PricewaterhouseCoopers LLP as the
independent auditors of your fund was approved as follows: 33,203,090
votes for, and 377,342 votes against, with 860,264 abstentions and broker
non-votes.
A proposal to approve an amendment to the fund's fundamental investment
restriction with respect to diversification was approved as follows:
27,076,327 votes for, and 1,978,380 votes against, with 5,385,989
abstentions and broker non-votes.
A proposal to approve an amendment to the fund's fundamental investment
restriction with respect to investments in the voting securities of a
single issuer was approved as follows: 26,581,977 votes for, and 2,267,852
votes against, with 5,590,867 abstentions and broker non-votes.
A proposal to approve an amendment to the fund's fundamental investment
restriction with respect to making loans was approved as follows:
25,554,041 votes for, and 3,261,159 votes against, with 5,625,496
abstentions and broker non-votes.
A proposal to approve an amendment to the fund's fundamental investment
restriction with respect to investments in commodities was approved as
follows: 25,791,959 votes for, and 3,092,885 votes against, with 5,555,852
abstentions and broker non-votes.
A proposal to approve an amendment to the fund's fundamental investment
restriction with respect to investments in real estate was approved as
follows: 26,503,440 votes for, and 2,465,751 votes against, with 5,471,505
abstentions and broker non-votes.
A proposal to eliminate an amendment to the fund's fundamental investment
restriction with respect to investments in securities of issuers in which
management of the fund or Putnam Investment Management, Inc. owns was
approved as follows: 25,930,158 votes for, and 2,974,716 votes against,
with 5,535,822 abstentions and broker non-votes.
A proposal to eliminate an amendment to the fund's fundamental investment
restriction with respect to margin transactions was approved as follows:
25,338,804 votes for, and 3,565,912 votes against, with 5,535,980
abstentions and broker non-votes.
A proposal to eliminate an amendment to the fund's fundamental investment
restriction with respect to short sales was approved as follows:
25,420,297 votes for, and 3,492,946 votes against, with 5,527,453
abstentions and broker non-votes.
A proposal to eliminate an amendment to the fund's fundamental investment
restriction with respect to pledging assets was approved as follows:
25,327,226 votes for, and 3,507,277 votes against, with 5,606,193
abstentions and broker non-votes.
A proposal to eliminate an amendment to the fund's fundamental investment
restriction with respect to investments in restricted securities was
approved as follows: 25,624,793 votes for, and 3,259,178 votes against,
with 5,556,725 abstentions and broker non-votes.
A proposal to eliminate an amendment to the fund's fundamental investment
restriction with respect to investments in oil, gas and mineral interests
was approved as follows: 26,343,510 votes for, and 2,641,412 votes
against, with 5,455,774 abstentions and broker non-votes.
A proposal to eliminate an amendment to the fund's fundamental investment
restriction with respect to investing to gain control of a company's
management was approved as follows: 26,203,856 votes for, and 2,705,144
votes against, with 5,531,696 abstentions and broker non-votes.
All tabulations are rounded to nearest whole number.
Fund information
INVESTMENT MANAGER
Putnam Investment
Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
INDEPENDENT
ACCOUNTANTS
PricewaterhouseCoopers LLP
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
John A. Hill, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
Ronald J. Jackson
Paul L. Joskow
Elizabeth T. Kennan
Lawrence J. Lasser
John H. Mullin III
Robert E. Patterson
Donald S. Perkins
George Putnam, III
A.J.C. Smith
W. Thomas Stephens
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
John D. Hughes
Senior Vice President and Treasurer
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Ian C. Ferguson
Vice President
Brett C. Browchuk
Vice President
Stephen Oristaglio
Vice President
Edward H. D'Alelio
Vice President
Jennifer E. Leichter
Vice President and Fund Manager
D. William Kohli
Vice President and Fund Manager
David L. Waldman
Vice President and Fund Manager
John R. Verani
Vice President
Beverly Marcus
Clerk and Assistant Treasurer
Call 1-800-225-1581 weekdays from 9 a.m. to 5 p.m. Eastern Time, or visit
our website (www.putnaminv.com) any time for up-to-date information about
the fund's NAV.
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
www.putnaminv.com
- ---------------------
BULK RATE
U.S. POSTAGE PAID
PUTNAM
INVESTMENTS
- ---------------------
47867 072 12/98
