Putnam
Master
Income
Trust
SEMIANNUAL REPORT
April 30, 1998
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* "We expect that economic weakness and uncertainty in Asia may
continue to affect foreign bond markets, while the demand for domestic
high-yield bonds is likely to remain strong in the months ahead. Our
management team will continue to closely monitor all the fixed-income
sectors in which your fund invests, seeking to position the portfolio
defensively while taking advantage of attractive income opportunities."
-- Jennifer E. Leichter, lead manager
Putnam Master Income Trust
CONTENTS
4 Report from Putnam Management
8 Fund performance summary
10 Portfolio holdings
33 Financial statements
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
Access to a wide variety of fixed-income assets was one of Putnam Master
Income Trust's particularly useful attributes in the challenging global market
environment that prevailed during the first half of the fund's fiscal year. As
you might imagine, events in Asia dominated the thinking of your fund's
management team throughout the period.
The U.S. bond market actually thrived in the wake of the Asian currency and
debt crisis as investors worldwide shifted assets to the safe haven
represented by U.S. Treasury securities. Once again, the U.S. high-yield bonds
in your fund's portfolio continued to show the strongest performance. European
bonds also delivered solid results. Your fund's underweight position in
Japanese bonds helped ameliorate the effects of the Asian difficulties.
In the following report, your fund's managers provide commentary on each of
the portfolio's market sectors and discuss the strategies they employed in
each sector during the period. Then they offer their insights into the
prospects for the fiscal year's second half.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
June 17, 1998
Report from the Fund Managers
Jennifer E. Leichter, lead manager
Robert M. Paine
D. William Kohli
Gail S. Attridge
Putnam Master Income Trust began its fiscal year at a rather sobering time for
world financial markets. Several Asian economies were experiencing economic
meltdowns, which had sparked the largest single-day point decline in the
history of the Dow Jones Industrial Average, just as your fund was embarking
on its new fiscal year. This event, combined with continued economic weakness
and uncertainty in Asia, put the world's financial markets, as well as
investors' nerves, on edge.
While this backdrop has created a tumultuous environment for many markets, two
of the three key sectors in which your fund invests -- U.S. taxable
investment-grade securities and high-yield bonds -- actually fared quite well
during the semiannual period, the six months ended April 30, 1998. The third
sector, international bonds, obviously faced tougher times. But strategic
portfolio shifts allowed us to soften the blow of Asia's currency and debt
crisis. For complete performance information, please refer to the summary that
begins on page 8.
* U.S. GOVERNMENT BONDS BENEFIT FROM ASIAN CRISIS
Throughout the period, the Asian crisis actually boosted performance in the
domestic bond market. Nervous international investors flocked to the high
credit quality and attractive yields offered by U.S. bonds, bidding up prices
of Treasuries dramatically. While this flight to quality was good news for
your fund, our focus on mortgage-backed securities, which also performed well
early in the period, meant we didn't take full advantage of the Treasury
rally. Toward the end of the period, the momentum of Treasuries slowed, while
the performance of mortgage-backed securities began to lag as well.
Our decision to focus on mortgage-backed securities was based on the
interest-rate climate during the period. When interest rates are falling,
mortgage-backed securities present a higher prepayment risk -- that is, the
chance that homeowners will refinance or pay off their mortgage loans early,
which dampens the value of these securities. To compensate investors for this
prepayment risk, mortgage-backed securities carry a higher yield than most
other U.S. government issues. The fund's emphasis on mortgage-backed
securities was designed to take advantage of those higher yield opportunities.
* EMERGING MARKETS PLUNGE, THEN REBOUND
The Asian currency and debt crisis took its toll on many international
markets, hitting the emerging markets especially hard. In October, as
investors deserted these bonds in favor of more established markets, emerging
markets plunged, although they had posted handsome gains for most of calendar
1997. After that rather brief swoon, however, these bonds staged a remarkable
recovery. In a situation similar to the Treasury rally, this rebound helped
your fund, but because we had positioned this portion of the portfolio
defensively, the fund did not take full advantage of the comeback in
emerging-markets securities.
In Europe, bond markets turned in robust returns due to sluggish economic
growth in Germany and expectations that the European Economic and Monetary
Union (EMU) would begin as scheduled in January 1999. EMU will unify the
monetary policy and interest rates of 11 European countries. Europe's
peripheral markets, such as Spain, Italy, and Sweden, posted the best
performance, but your fund's underweight position in these areas dragged
performance somewhat. The fund benefited from a significant position in the
United Kingdom, where the bond market was buoyed by slowing economic growth
and low inflation. Our decision to underweight Japanese government bonds meant
the fund had only minimal exposure to these bonds, which were hurt by the
country's troubled political and economic climate and increasing concerns
about the long-term health of its economy.
[GRAPHIC OMITTED: HORIZONTAL BAR CHART OF TOP 5 COUNTRY ALLOCATIONS]
TOP 5 COUNTRY ALLOCATIONS
(international sector)*
United Kingdom 6.5%
Germany 4.7%
Mexico 2.2%
Argentina 1.5%
Russia 1.5%
Footnote reads:
* Based on net assets as of 4/30/98. Holdings will vary over time.
* HIGH-YIELD SECTOR POWERS PORTFOLIO ONCE AGAIN
The high-yield bond market was the strongest-performing sector of the domestic
bond market in the first calendar quarter of 1998, propelled by the same
forces that pushed Treasury bonds and stocks higher. These forces included
solid economic growth and low inflation, which kept the Federal Reserve Board
from increasing interest rates.
Leading the way among high-yield issues were those of companies in the
telecommunications, cable TV, and broadcasting industries, following a pattern
that has prevailed for well over a year. New issuance in the high-yield market
has continued at a record-breaking pace, driven by favorable interest rates,
expanding businesses, and strong investor demand. Another factor boosting the
high-yield bond market has been the tremendous amount of merger and
acquisition activity. Larger, more creditworthy companies that have completed
cost-cutting programs are buying smaller high-yield bond issuers in an effort
to further grow their businesses or add niche products. This consolidation
trend was evident in many sectors, including consumer products,
telecommunications, and cable TV. The cable TV industry as a whole was boosted
by increasing interest in the delivery of Internet technology through
conventional cable systems.
* OUTLOOK: CURRENT TRENDS SHOULD CONTINUE
In general, we believe that the domestic economy, driven by consumer demand,
is poised for continued strong growth with relatively low inflation. As a
result, we expect that demand for high-yield bonds will remain strong in the
months ahead as investor confidence remains high. We are more cautious about
international bond markets and the outlook for global economic growth.
Valuations in most foreign markets appear stretched, particularly after the
global flight to quality that has driven bond yields lower worldwide. We will
continue to monitor the Asian turbulence closely, realizing that its impact
may be greater than previously forecast. Your fund's ability to invest across
multiple fixed-income sectors should enable us to position the portfolio
defensively while taking advantage of attractive income opportunities.
[GRAPHIC OMITTED: TOP THREE HOLDINGS PER SECTOR]
TOP THREE HOLDINGS PER SECTOR *
HIGH-YIELD BONDS
Transamerican Energy Series B, zero % (1999, 13s) 2002
Winstar Communications, Inc. 144A 10s, 2008
Dial Call Communications, Inc. Series B, zero % (1998, 10 1/4s) 2005
FOREIGN BONDS
United Kingdom Treasury Bonds 8s, 2007
Germany (Federal Republic of) Unity Fund Bonds 8s, 2002
Germany (Federal Republic of) Bonds Series 98, 5 5/8s, 2028
TAXABLE INVESTMENT GRADE BONDS
Government National Mortgage Association 7 1/2s, 2022-2028
Government National Mortgage Association 7s, 2025-2028
US Treasury Obligation 6 5/8s, 2001
* Based on net assets as of 4/30/98. Holdings will vary over time.
The views expressed here are exclusively those of Putnam Management. They are
not meant as investment advice. Although the described holdings were viewed
favorably as of 4/30/98, there is no guarantee the fund will continue to hold
these securities in the future.
Performance summary
Performance should always be considered in light of a fund's investment
strategy. Putnam Master Income Trust is designed for investors seeking
high current income, consistent with preservation of capital, through a
portfolio diversified among U.S. government, high-yield, and international
fixed-income securities.
TOTAL RETURN FOR PERIODS ENDED 4/30/98
Salomon Bros. First
Lehman Bros. Non-U.S. Boston
Market Government World Govt. High-Yield
NAV price Bond Index Bond Index Index
- ----------------------------------------------------------------------------
6 months 4.55% 4.21% 3.56% -1.02% 5.47%
- ----------------------------------------------------------------------------
1 year 12.68 13.69 11.05 6.44 14.17
- ----------------------------------------------------------------------------
5 years 56.52 46.75 37.97 36.69 68.82
Annual average 9.37 7.97 6.65 6.45 11.04
- ----------------------------------------------------------------------------
10 years 179.58 148.19 132.43 105.39 205.67
Annual average 10.83 9.52 8.80 7.46 11.82
- ----------------------------------------------------------------------------
Life of fund 193.07 149.12 138.81 107.01 225.34
(12/28/87)
Annual average 10.96 9.23 8.79 7.30 12.10
- ----------------------------------------------------------------------------
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.
PRICE AND DISTRIBUTION INFORMATION
6 months ended 4/30/98
- ------------------------------------------------------------------------------
Distributions (number) 6
- ------------------------------------------------------------------------------
Income $0.366
- ------------------------------------------------------------------------------
Capital gains --
- ------------------------------------------------------------------------------
Total $0.366
- ------------------------------------------------------------------------------
Share value NAV Market price
- ------------------------------------------------------------------------------
10/31/97 $9.26 $8.500
- ------------------------------------------------------------------------------
4/30/98 9.29 8.500
- ------------------------------------------------------------------------------
Current return NAV Market price
- ------------------------------------------------------------------------------
Current dividend rate1 7.88% 8.61%
- ------------------------------------------------------------------------------
1Income portion of most recent distribution, annualized and divided by NAV
or market price at end of period.
TOTAL RETURN FOR PERIODS ENDED 3/31/98
(most recent calendar quarter)
Market
NAV price
- ------------------------------------------------------------------------------
6 months 3.44% 0.49%
- ------------------------------------------------------------------------------
1 year 12.42 11.13
- ------------------------------------------------------------------------------
5 years 56.91 47.73
Annual average 9.43 8.12
- ------------------------------------------------------------------------------
10 years 177.68 147.03
Annual average 10.75 9.46
- ------------------------------------------------------------------------------
Life of fund (12/28/87) 191.03 145.56
Annual average 10.97 9.15
- ------------------------------------------------------------------------------
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.
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 common shares.
Market price is the current trading price of one share of the fund. Market
prices are set by transactions between buyers and sellers on the New York
Stock Exchange.
COMPARATIVE BENCHMARKS
First Boston High Yield Index* is an unmanaged list of lower-rated
higher-yielding U.S. corporate bonds.
Salomon Brothers Non-U.S. World Government Bond Index* is an unmanaged
list of bonds issued by 10 countries.
Lehman Bros. Government Bond Index* is an unmanaged list of publicly
issued U.S. Treasury obligations.
* Securities indexes assume reinvestment of all distributions and interest
payments and do not take in account brokerage fees or taxes. Securities in
the fund do not match those in the indexes and performance of the fund
will differ. It is not possible to invest directly in an index.
Portfolio of investments owned
April 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
CORPORATE BONDS AND NOTES (35.3%) (a)
PRINCIPAL AMOUNT VALUE
Advertising (0.3%)
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------
$ 75,000 Adams Outdoor Advertising sr. notes 10 3/4s, 2006 $ 82,125
450,000 Lamar Advertising Co. company guaranty 8 5/8s, 2007 455,625
1,000,000 Outdoor Communications, Inc. sr. sub. notes
9 1/4s, 2007 1,052,500
--------------
1,590,250
Aerospace and Defense (0.6%)
- -------------------------------------------------------------------------------------------------------------
190,000 Argo-Tech Corp. company guaranty 8 5/8s, 2007 192,375
370,000 Aviation Sales Co. 144A sr. sub. notes 8 1/8s, 2008 362,600
750,000 BE Aerospace, Inc. sr. sub. notes Ser. B, 9 7/8s, 2006 795,000
240,000 BE Aerospace, Inc. 144A sr. sub. notes 8s, 2008 237,000
200,000 Derlan Industries Ltd. sr. notes 10s, 2007 (Canada) 209,250
210,000 K&F Industries, Inc. sr. sub. notes Ser. B, 9 1/4s, 2007 218,400
185,000 Moog, Inc. sr. sub. notes Ser. B, 10s, 2006 197,950
275,000 Tracor, Inc. sr. sub. notes 8 1/2s, 2007 297,000
225,000 United Defense Industries Inc. company
guaranty 8 3/4s, 2007 228,375
--------------
2,737,950
Agriculture (0.3%)
- -------------------------------------------------------------------------------------------------------------
1,165,596 Premium Standard Farms, Inc. sr. secd. notes
11s, 2003 (PIK) 1,258,843
440,000 Purina Mills, Inc. 144A sr. sub. notes 9s, 2010 452,100
--------------
1,710,943
Airlines (0.5%)
- -------------------------------------------------------------------------------------------------------------
310,000 Calair LLC 144A company guaranty 8 1/8s, 2008 307,675
530,000 Canadian Airlines Corp. sr. sec. notes 10s, 2005 (Canada) 535,300
670,000 Cathay International Ltd. 144A sr. notes 13s, 2008 671,675
355,000 Trans World Airlines, Inc. sr. notes 11 1/2s, 2004 371,863
320,000 Trans World Airlines, Inc. 144A notes 11 3/8s, 2006 320,000
--------------
2,206,513
Apparel (0.3%)
- -------------------------------------------------------------------------------------------------------------
130,000 GFSI, Inc. sr. sub. notes Ser. B, 9 5/8s, 2007 135,850
450,000 Guess Jeans, Inc. sr. sub. notes 9 1/2s, 2003 454,500
575,000 Sassco Fashions Ltd. sr. notes 12 3/4s, 2004 616,688
250,000 William Carter Holdings Co. 144A sr. sub.
notes 12s, 2008 270,000
--------------
1,477,038
Automotive (0.1%)
- -------------------------------------------------------------------------------------------------------------
135,000 Hawk Corp. sr. notes 10 1/4s, 2003 145,125
500,000 Navistar International Corp. sr. notes Ser. B, 8s, 2008 498,125
--------------
643,250
Automotive Parts (0.3%)
- -------------------------------------------------------------------------------------------------------------
383,000 Aftermarket Technology Corp. sr. sub. notes
Ser. D, 12s, 2004 424,651
200,000 Hayes Wheels International, Inc. company guaranty
Ser. B, 9 1/8s, 2007 210,000
500,000 Lear Corp. sub. notes 9 1/2s, 2006 552,500
290,000 Safety Components International, Inc. sr. sub. notes
Ser. B, 10 1/8s, 2007 303,775
--------------
1,490,926
Banks (1.1%)
- -------------------------------------------------------------------------------------------------------------
215,000 Albank Capital Trust 144A company guaranty
Ser. B, 9.27s, 2027 241,983
250,000 Delta Financial Corp. sr. notes 9 1/2s, 2004 250,000
145,000 Dime Capital Trust I bank guaranty Ser. A, 9.33s, 2027 165,083
750,000 First Nationwide Holdings sr. sub. notes 9 1/8s, 2003 791,250
350,000 Greenpoint Capital Trust I company guaranty
9.1s, 2027 388,182
75,000 Korea Development Bank bonds 7 3/8s, 2004 (Korea) 68,438
400,000 Korea Development Bank bonds 7 1/8s, 2001 (Korea) 379,564
250,000 North Fork Capital Trust I company guaranty
8.7s, 2026 272,035
135,000 Onbank & Trust Co. company guaranty 9 1/4s, 2027 154,335
290,000 Peoples Heritage Capital Trust company guaranty
Ser. B, 9.06s, 2027 315,401
145,000 Pioneer Americas Acquisition 144A sr. notes
9 1/4s, 2007 147,175
285,000 Provident Capital Trust company guaranty 8.6s, 2026 301,291
165,000 Riggs Capital Trust 144A bonds 8 5/8s, 2026 174,733
230,000 Sovereign Capital Trust company guaranty 9s, 2027 249,614
1,100,000 Sumitoma Bank Treasury Co. 144A bonds Ser. A,
FRB, 9.4s, 2049 (Japan) 1,126,664
220,000 Webster Capital Trust I 144A bonds 9.36s, 2027 241,696
--------------
5,267,444
Basic Industrial Products (0.1%)
- -------------------------------------------------------------------------------------------------------------
240,000 American Standard Companies, Inc. sr. notes
7 3/8s, 2008 232,800
200,000 Koppers Industries, Inc. 144A 9 7/8s, 2007 206,500
250,000 W. R. Carpenter North America, Inc. company
guaranty 10 5/8s, 2007 266,250
--------------
705,550
Broadcasting (1.8%)
- -------------------------------------------------------------------------------------------------------------
555,000 Affinity Group Holdings sr. notes 11s, 2007 602,175
160,000 Benedek Communications Corp. sr. disc. notes stepped-
coupon zero % (13 1/4s, 5/15/01), 2006 (STP) 126,400
765,000 Capstar Broadcasting sr. disc. notes stepped-coupon
zero % (12 3/4s, 2/1/02), 2009 (STP) 569,925
315,000 Capstar Broadcasting sr. sub. notes 9 1/4s, 2007 327,600
170,000 Central European Media Enterprises Ltd. sr. notes
9 3/8s, 2004 168,300
500,000 Chancellor Media Corp. 144A sr. sub. notes
8 1/8s, 2007 500,000
327,990 Citadel Broadcasting, Inc. sr. sub. notes 10 1/4s, 2007 359,969
1,300,000 Comcast UK Cable, Ltd. deb. stepped-coupon zero %
(11.2s, 11/15/00), 2007 (Bermuda) (STP) 1,072,500
400,000 Echostar Satellite Broadcast Corp. sr. disc. notes stepped-
coupon zero % (13 1/8s, 3/15/00), 2004 (STP) 364,000
500,000 Echostar DBS Corp. company guaranty 12 1/2s, 2002 562,500
480,000 Fox/Liberty Networks LLC sr. notes 8 7/8s, 2007 489,600
1,290,000 Grupo Televisa S.A. sr. disc. notes stepped-coupon
zero % (13 1/4s, 5/15/01), 2008 (Mexico) (STP) 1,044,900
1,327,000 Petracom Holdings, Inc. notes stepped-coupon zero %
(17 1/2s, 8/1/98), 2003 (STP) 1,328,062
405,000 Radio One, Inc. company guaranty stepped-coupon
Ser. B, 7s, (12s, 5/15/00), 2004 (STP) 413,100
295,000 SFX Entertainment, Inc. 144A sr. sub. notes
9 1/8s, 2008 286,150
505,000 Spanish Broadcasting sr. notes Ser. B, 11s, 2004 552,975
175,000 TV Azteca Holdings S.A. de C.V. sr. notes
11s, 2002 (Mexico) 181,125
140,000 TV Azteca S.A de C.V. sr. notes
10 1/2s, 2007 (Mexico) 147,700
--------------
9,096,981
Building Products (0.2%)
- -------------------------------------------------------------------------------------------------------------
500,000 Nortek, Inc. sr. sub. notes 9 7/8s, 2004 512,500
205,000 Roller Bearing Co. company guaranty Ser. B,
9 5/8s, 2007 209,613
175,000 Waxman Industries, Inc. sr. notes stepped-coupon
Ser. B, zero % (12 3/4s, 6/1/99), 2004 (STP) 159,250
--------------
881,363
Building and Construction (0.6%)
- -------------------------------------------------------------------------------------------------------------
195,000 American Architectural Products Corp. 144A
sr. notes 11 3/4s, 2007 206,213
910,000 Atrium Companies, Inc. 144A sr. sub. notes
10 1/2s, 2006 957,775
280,000 Beazer Homes USA, Inc. 144A sr. notes 8 7/8s, 2008 276,500
240,000 Brand Scaffold Services 144A sr. notes 10 1/4s, 2008 244,800
740,000 GS Superhighway Holdings sr. notes 9 7/8s 636,400
180,000 Jackson Products, Inc. 144A company guaranty
9 1/2s, 2005 181,800
270,000 Presley Cos. sr. notes 12 1/2s, 2001 256,500
--------------
2,759,988
Buses (0.4%)
- -------------------------------------------------------------------------------------------------------------
765,000 Blue Bird Body Co. sr. sub. notes Ser. B, 10 3/4s, 2006 843,413
1,250,000 Consorcio/MCII Holdings sec. notes stepped-coupon
zero % (12s, 11/15/98), 2002 (STP) 1,143,750
--------------
1,987,163
Business Equipment and Services (0.5%)
- -------------------------------------------------------------------------------------------------------------
170,000 ATC Group Services, Inc. 144A sr. sub. notes 12s, 2008 165,750
600,000 Corporate Express, Inc. sr. sub. notes Ser. B,
9 1/8s, 2004 615,000
550,000 Iron Mountain, Inc. company guaranty 8 3/4s, 2009 558,250
100,000 Iron Mountain, Inc. med. term notes company guaranty
10 1/8s, 2006 108,000
380,000 Morris Material Handling, Inc. 144A sr. notes
9 1/2s, 2008 378,100
190,000 Outsourcing Solutions, Inc. sr. sub. notes Ser. B,
11s, 2006 201,163
410,000 United Stationer 144A sr. sub. notes 8 3/8s, 2008 412,050
185,000 Williams Scotsman, Inc. 144A sr. notes 9 7/8s, 2007 192,400
--------------
2,630,713
Cable Television (2.2%)
- -------------------------------------------------------------------------------------------------------------
355,000 Acme Television sr. disc. notes stepped-coupon zero %
(10 7/8s, 9/30/00), 2004 (STP) 291,100
835,000 Adelphia Communications Corp. sr. notes Ser. B,
9 7/8s, 2007 897,625
475,000 Charter Communications International sr. notes
11 1/4s, 2006 523,688
420,000 Diamond Cable Communication Co. sr. disc. notes
stepped-coupon zero % (10 3/4s, 2/15/02), 2007
(United Kingdom) (STP) 297,150
1,500,000 Diamond Cable Communication Co. sr. disc. notes
stepped-coupon zero % (11 3/4s, 12/15/00), 2005
(United Kingdom) (STP) 1,192,500
800,000 Diamond Cable Communication Co. sr. disc. notes
stepped-coupon zero % (13 1/2s, 9/30/99), 2004
(United Kingdom) (STP) 744,000
637,267 Falcon Holdings Group, Inc. sr. sub. notes 11s, 2003 (PIK) 681,876
890,000 Fox Kids Worldwide, Inc. 144A sr. discount notes stepped-
coupon zero % (10 1/4s, 11/1/02), 2007 (STP) 569,600
900,000 Fox Kids Worldwide, Inc. 144A sr. notes 9 1/4s, 2007 887,625
150,000 Globo Communicacoes 144A sr. notes 10 5/8s, 2008 151,500
625,000 Grupo Televisa S.A. 144A sr. notes 11 7/8s,
2006 (Mexico) 717,188
440,000 Heartland Wireless Communications, Inc. sr. notes
Ser. B, 14s, 2004 (In default) (NON) 128,700
265,000 Heartland Wireless Communications, Inc. sr. notes
Ser. D, 13s, 2003 (In default) (NON) 76,850
670,000 Lenfest Communications, Inc. 144A sr. sub. notes
8 1/4s, 2008 676,700
500,000 Marcus Cable Co. (L.P.) sr. disc. notes stepped-
coupon zero % (14 1/4s, 6/15/00), 2005 (STP) 458,750
660,000 RCN Corp. 144A sr. disc. notes stepped-coupon
zero % (9.8s, 2/15/03), 2008 (STP) 412,500
800,000 United International Holdings sr. disc. notes stepped-
coupon Ser. B, zero % (10 3/4s, 2/15/03), 2008 (STP) 506,000
2,285,000 UIH Australia/Pacific, Inc. sr. disc. notes stepped-coupon
Ser. B, zero % (14s, 5/15/01), 2006 (Australia) (STP) 1,576,650
--------------
10,790,002
Cellular Communications (2.2%)
- -------------------------------------------------------------------------------------------------------------
2,118,000 CellNet Data Systems, Inc. sr. disc. notes stepped-coupon
zero % (14s, 10/1/02), 2007 (STP) 1,212,555
610,000 Cencall Communications Corp. sr. disc. notes stepped-
coupon zero % (10 1/8s, 1/15/99), 2004 (STP) 595,513
375,000 Conecel Holdings 144A notes Ser. A, 14s, 2000 369,375
1,985,000 Dial Call Communications, Inc. sr. disc. notes stepped-
coupon Ser. B, zero % (10 1/4s, 12/15/98), 2005 (STP) 1,945,300
760,000 Interact Systems, Inc. 144A stepped-coupon zero %
(14s, 8/1/99), 2003 (STP) 288,800
1,410,000 Intercel, Inc. sr. disc. notes stepped-coupon zero %
(12s, 5/1/01), 2006 (STP) 1,075,125
1,530,000 McCaw International Ltd sr. discount notes stepped-
coupon zero % (13s, 4/15/02), 2007 (STP) 1,055,700
2,185,000 Millicom International Cellular S.A. sr. disc. notes
stepped-coupon zero % (13 1/2s, 6/1/01),
2006 (Luxembourg) (STP) 1,715,225
1,820,000 NEXTEL Communications, Inc. sr. disc. notes stepped-
coupon zero % (10.65s, 9/15/02), 2007 (STP) 1,219,400
1,210,000 NEXTEL Communications, Inc. 144A sr. disc. notes
stepped-coupon zero % (9.95s, 2/15/03), 2008 (STP) 777,425
500,000 Omnipoint Corp, 144A sr. notes FRN 8.875s, 2006 500,000
195,000 Sygnet Wireless, Inc. sr. notes 11 1/2s, 2006 212,550
--------------
10,966,968
Chemicals (0.5%)
- -------------------------------------------------------------------------------------------------------------
500,000 Huntsman Corp. 144A sr. sub. notes FRN 9.094s, 2007 501,250
425,000 NL Industries, Inc. sr. notes stepped-coupon zero %
(13s, 10/15/98), 2005 (STP) 431,375
205,000 Pharmaceutical Fine Chemicals 144A sr. sub. notes
9 3/4s, 2007 (Switzerland) 211,150
240,000 Radnor Holdings Corp. company guaranty 10s, 2003 250,200
370,000 Sovereign Specialty Chemical 144A sr. sub. notes
9 1/2s, 2007 386,650
340,000 Sterling Chemicals Holdings sr. disc. notes stepped-
coupon zero % (13 1/2s, 8/15/01), 2008 (STP) 195,500
305,000 Trikem S.A. 144A bonds 10 5/8s, 2007 (Brazil) 286,700
--------------
2,262,825
Computers (0.1%)
- -------------------------------------------------------------------------------------------------------------
850,000 IPC Information Systems sr. disc. notes stepped-coupon
zero % (10 7/8s, 11/1/01), 2008 (STP) 620,500
Conglomerates (0.1%)
- -------------------------------------------------------------------------------------------------------------
224,000 Axia, Inc. sr. sub. notes Ser. B, 11s, 2001 228,480
400,000 MacAndrews & Forbes Holdings, Inc. sub. deb.
notes 13s, 1999 398,000
--------------
626,480
Consumer Products (--%)
- -------------------------------------------------------------------------------------------------------------
70,000 Hedstrom Holdings, Inc. 144A sr. disc. notes zero %
(12.0s, 6/1/02), 2009 (STP) 43,750
175,000 Sealy Mattress Co. 144A sr. sub. notes 9 7/8s, 2007 185,063
--------------
228,813
Consumer Non Durables (0.1%)
- -------------------------------------------------------------------------------------------------------------
100,000 Amscan Holdings, Inc. sr. sub. notes 9 7/8s, 2007 105,000
365,000 Viasystems, Inc. sr. sub notes 9 3/4s, 2007 382,338
--------------
487,338
Consumer Services (0.2%)
- -------------------------------------------------------------------------------------------------------------
860,000 Coinmach Corp. sr. notes 11 3/4s, 2005 963,200
Containers (0.2%)
- -------------------------------------------------------------------------------------------------------------
105,000 Printpack, Inc. sr. sub. notes Ser. B, 10 5/8s, 2006 113,400
145,000 Radnor Holdings, Inc. sr. notes 10s, 2003 151,888
700,000 Riverwood International company guaranty
10 7/8s, 2008 707,000
--------------
972,288
Cosmetics (0.3%)
- -------------------------------------------------------------------------------------------------------------
220,000 Chattem, Inc. 144A sr. sub. notes 8 7/8s, 2008 220,000
135,000 French Fragrances, Inc. sr. notes Ser. B, 10 3/8s, 2007 142,425
140,000 French Fragrances, Inc. 144A sr. notes 10 3/8s, 2007 149,100
560,000 Revlon Consumer Products 144A sr. sub. notes
8 5/8s, 2008 568,400
640,000 Revlon Worldwide Corp. sr. disc. notes Ser. B,
zero %, 2001 491,200
--------------
1,571,125
Electric Utilities (1.1%)
- -------------------------------------------------------------------------------------------------------------
1,200,000 AES China Generating Co. sr. notes 10 1/8s,
2006 (China) 1,128,000
850,000 Calpine Corp. sr. notes 10 1/2s, 2006 939,250
355,000 Espirto Santo Centrais 144A sr. notes 10s,
2007 (Brazil) 339,025
650,000 Long Island Lighting Co. deb. 9s, 2022 739,518
459,718 Midland Cogeneration Ventures LP deb. 10.33s, 2002 495,902
1,000,000 Midland Funding II Corp. deb. Ser. B, 13 1/4s, 2006 1,281,060
480,662 Northeast Utilities System notes Ser. A, 8.58s, 2006 489,343
--------------
5,412,098
Electronics and Electrical Equipment (1.1%)
- -------------------------------------------------------------------------------------------------------------
460,000 Celestica International Ltd. 144A sr. sub. notes
10 1/2s, 2006 (India) 507,150
218,911 Cirent Semiconductor sr. sub. notes 10.22s, 2002 227,668
250,256 Cirent Semiconductor 144A sr. sub. notes
10.14s, 2004 259,015
200,000 Details, Inc. sr. sub. notes Ser. B, 10s, 2005 206,500
280,000 DII Group, Inc. (The) sr. sub. notes 8 1/2s, 2007 281,400
915,000 Dobson Communications Corp. 11 3/4s, 2007 997,350
500,000 Flag Limited 144A sr. notes 8 1/4s, 2008 (Bermuda) 508,750
300,000 Flextronics International Ltd. sr. sub. notes Ser. B,
8 3/4s, 2007 303,750
180,000 HCC Industries, Inc. company guaranty 10 3/4s, 2007 188,550
535,000 Motors and Gears, Inc. sr. notes Ser. D, 10 3/4s, 2006 580,475
200,000 Samsung Electronics 144A company guaranty
9 3/4s, 2003 201,000
250,000 Teherma-Wave, Inc. sr. notes Ser. B, 10 5/8s, 2004 252,500
400,000 Wavetek Corp. company guaranty 10 1/8s, 2007 412,000
630,000 Zilog, Inc. 144A sr. notes 9 1/2s, 2005 541,800
--------------
5,467,908
Energy-Related (0.3%)
- -------------------------------------------------------------------------------------------------------------
150,000 Gothic Production 144A sr. notes 11 1/8s, 2005 150,750
975,000 Panda Global Energy Co. company guaranty
12 1/2s, 2004 936,000
250,000 RAM Energy, Inc. sr. notes 11 1/2s, 2008 249,375
--------------
1,336,125
Entertainment (0.7%)
- -------------------------------------------------------------------------------------------------------------
440,000 AMC Entertainment, Inc. sr. sub. notes 9 1/2s, 2009 457,600
400,000 Silver Cinemas International 144A sr. sub. notes
10 1/2s, 2005 407,000
830,000 Trump Castle Funding 144A sub. notes 10 1/4s, 2003 838,300
600,000 Trump Holdings & Funding Corp. sr. notes
15 1/2s, 2005 675,000
345,000 United Artists Theatre 144A sr. sub. notes
9 3/4s, 2008 346,725
650,000 Viacom International, Inc. sub. deb. 8s, 2006 658,938
--------------
3,383,563
Environmental Control (0.2%)
- -------------------------------------------------------------------------------------------------------------
370,000 Allied Waste Industries, Inc. company guaranty
10 1/4s, 2006 407,000
920,000 Allied Waste Industries, Inc. sr. disc. notes stepped-
coupon zero % (11.3s, 6/1/02), 2007 (STP) 671,600
--------------
1,078,600
Financial Services (0.9%)
- -------------------------------------------------------------------------------------------------------------
750,000 Aames Financial Corp. sr. notes 9 1/8s, 2003 750,000
500,000 Advanta Corp. med. term notes Ser. B, 7s, 2001 466,020
165,000 Colonial Capital II 144A company guaranty
8.92s, 2027 176,808
200,000 Dine S.A. de C.V. 144A company guaranty
8 3/4s, 2007 (Mexico) 195,000
480,000 Imperial Credit Industries, Inc. sr. notes 9 7/8s, 2007 472,800
310,000 Market Hub Partners 144A sr. notes 8 1/4s, 2008 316,200
150,000 Nationwide Credit, Inc. 144A sr. notes 10 1/4s, 2008 153,000
150,000 Netia Holdings B.V. 144A company guaranty
10 1/4s, 2007 (Poland) 153,375
90,000 Netia Holdings B.V. 144A company guaranty stepped-
coupon zero % (11 1/4s, 11/1/02), 2008
(Poland) (STP) 63,450
140,000 Ocwen Capital Trust I company guaranty
10 7/8s, 2027 154,000
290,000 Ocwen Federal Bank FSB sub. deb. 12s, 2005 321,900
1,050,000 Pindo Deli Finance Mauritius Ltd. company
guaranty 10 3/4s, 2007 850,500
395,000 Resource America, Inc. 144A sr. notes 12s, 2004 419,688
--------------
4,492,741
Food Chains (0.1%)
- -------------------------------------------------------------------------------------------------------------
365,000 Fleming Companies, Inc. company guaranty
Ser. B, 10 1/2s, 2004 379,600
Food and Beverages (0.4%)
- -------------------------------------------------------------------------------------------------------------
550,000 Aurora Foods, Inc. 144A ser. sub. notes Ser. D,
9 7/8s, 2007 592,625
230,000 Canandaigua Wine Co. sr. sub. notes Ser. C,
8 3/4s, 2003 234,025
360,000 Packaged Ice, Inc. 144A sr. notes 9 3/4s, 2005 366,300
620,000 RAB Enterprises, Inc. 144A sr. notes 10 1/2s, 2005 623,100
75,000 Windy Hill Pet Food Co. sr. sub. notes 9 3/4s, 2007 78,750
--------------
1,894,800
Gaming (1.0%)
- -------------------------------------------------------------------------------------------------------------
575,000 Argosy Gaming Co. company guaranty 13 1/4s, 2004 646,875
500,000 Autotote Corp. company guaranty Ser. B,
10 7/8s, 2004 540,000
840,000 Coast Hotels & Casinos, Inc. 1st mtge. company
guaranty Ser. B, 13s, 2002 974,400
790,000 Fitzgeralds Gaming Corp. 144A company guaranty
12 1/4s, 2004 801,850
215,000 Isle of Capri Black Hawk LLC 144A 1st mortgage
Ser. B, 13s, 2004 219,300
400,000 Lady Luck Gaming Corp. 1st mtge. 11 7/8s, 2001 414,000
600,000 Mohegan Tribal Gaming Auth. sr. notes Ser. B,
13 1/2s, 2002 765,000
130,000 Penn National Gaming, Inc. 144A sr. notes
10 5/8s, 2004 136,825
600,000 Sun International Hotels Ltd. company guaranty
9s, 2007 628,500
--------------
5,126,750
Health Care (1.1%)
- -------------------------------------------------------------------------------------------------------------
1,000,000 Columbia/HCA Healthcare Corp. notes 7 1/4s, 2008 963,510
275,000 Extendicare, Inc. 144A sr. sub. notes 9.35s,
2007 (Canada) 279,125
370,000 Global Health Sciences 144A sr. notes 11s, 2008 362,600
410,000 Hudson Respiratory Care, Inc. 144A sr. sub.
notes 9 1/8s, 2008 414,100
410,000 Integrated Health Services, Inc. sr. sub. notes Ser. A,
9 1/4s, 2008 424,350
610,000 Magellan Health Services, Inc. 144A sr. sub. notes
9s, 2008 606,950
310,000 MedPartners, Inc. sr. notes 7 3/8s, 2006 277,645
810,000 Paracelsus Healthcare sr. sub. notes 10s, 2006 838,350
220,000 Paragon Corp. Holdings, Inc. 144A sr. notes
9 5/8s, 2008 213,950
900,000 Paragon Corp. Holdings, Inc. 144A sr. sub. notes
Ser. B, 9 1/2s, 2007 913,500
--------------
5,294,080
Health Care Services (0.2%)
- -------------------------------------------------------------------------------------------------------------
560,000 Fresenius Medical Care AG 144A company guaranty
7 7/8s, 2008 (Germany) 554,400
440,000 Multicare Cos., Inc. sr. sub. notes 9s, 2007 445,500
--------------
999,900
Infrastructure (0.1%)
- -------------------------------------------------------------------------------------------------------------
370,000 Cia Latino Americana 144A company guaranty
11 1/8s, 2004 (Argentina) 380,175
Insurance and Finance (0.6%)
- -------------------------------------------------------------------------------------------------------------
470,000 Imperial Credit Capital Trust I 144A company guaranty
10 1/4s, 2002 470,000
1,220,000 Indah Kiat Financial Mauritius Ltd. company guaranty
10s, 2007 (Indonesia) 994,300
345,000 Investors Capital Trust I company guaranty Ser. B,
9.77s, 2027 372,357
555,000 Polytama International notes 11 1/4s, 2007 349,650
550,000 Vicap S.A. 144A company guaranty 11 3/8s,
2007 (Mexico) 599,500
--------------
2,785,807
Medical Supplies and Devices (0.4%)
- -------------------------------------------------------------------------------------------------------------
455,000 ALARIS Medical Systems, Inc. company guaranty
9 3/4s, 2006 484,575
270,000 Conmed Corp. 144A sr. sub. notes 9s, 2008 270,675
515,000 Dade International, Inc. sr. sub. notes Ser. B,
11 1/8s, 2006 576,800
220,000 Imagyn Medical Technologies company guaranty
12 1/2s, 2004 123,200
210,000 Kinetic Concepts, Inc. company guaranty Ser. B,
9 5/8s, 2007 212,625
500,000 Wright Medical Technology, Inc. 144A notes
Ser. C, 11 3/4s, 2000 495,000
--------------
2,162,875
Metals and Mining (0.5%)
- -------------------------------------------------------------------------------------------------------------
135,000 Acindar Industria Argentina de Aceros S.A. bonds
11 1/4s, 2004 (Argentina) 141,075
350,000 Anker Coal Group, Inc. sr. notes Ser. B, 9 3/4s, 2007 339,500
210,000 Armco, Inc. sr. notes 9s, 2007 217,350
305,000 Continental Global Group sr. notes Ser. B, 11s, 2007 324,063
625,000 Great Lakes Carbon Corp. sr. notes 10s, 2006 706,250
465,000 Maxxam Group Holdings, Inc. sr. notes Ser. B,
12s, 2003 509,756
--------------
2,237,994
Motion Picture Distribution (0.1%)
- -------------------------------------------------------------------------------------------------------------
645,000 Cinemark USA, Inc. sr. sub. notes 9 5/8s, 2008 672,413
Natural Gas (0.1%)
- -------------------------------------------------------------------------------------------------------------
180,000 Panaco, Inc. company guaranty Ser. B, 10 5/8s, 2004 182,700
320,000 Tokai Corp. 144A FRB Ser. A, 9.98s, 2008 316,000
--------------
498,700
Networking (0.1%)
- -------------------------------------------------------------------------------------------------------------
125,000 Concentric Network Corp. 144A sr. notes
12 3/4s, 2007 135,000
510,000 IXC Communications, Inc. 144A sr. sub. notes 9s, 2008 510,000
--------------
645,000
Nursing Homes (0.1%)
- -------------------------------------------------------------------------------------------------------------
540,000 Sun Healthcare Group, Inc. 144A sr. sub. notes
9 1/2s, 2007 553,500
Office Equipment (0.2%)
- -------------------------------------------------------------------------------------------------------------
666,000 United Stationer Supply, Inc. sr. sub. notes
12 3/4s, 2005 764,235
Oil and Gas (2.0%)
- -------------------------------------------------------------------------------------------------------------
1,000,000 Abraxas Petroleum Corp. 144A sr. notes
Ser. B, 11 1/2s, 2004 1,035,000
50,000 Benton Oil & Gas Co. sr. notes 9 3/8s, 2007 50,000
620,000 Chesapeake Energy Corp. 144A sr. notes 9 5/8s, 2005 623,100
270,000 Coho Energy, Inc. sr. sub. notes 8 7/8s, 2007 252,450
585,000 Costilla Energy, Inc. sr. notes 10 1/4s, 2006 596,700
290,000 Dailey International, Inc. 144A sr. notes 9 1/2s, 2008 292,900
215,000 DI Industries, Inc. sr. notes 8 7/8s, 2007 217,150
280,000 Michael Petroleum Corp. 144A sr. notes 11 1/2s, 2005 275,800
125,000 Newpark Resources, Inc. company guaranty
Ser. B, 8 5/8s, 2007 126,250
220,000 Pride Petroleum Services, Inc. sr. notes 9 3/8s, 2007 238,700
240,000 Southwest Royalties, Inc. company guaranty
10 1/2s, 2004 218,400
4,225,000 Transamerican Energy sr. disc. notes stepped-coupon
Ser. B, zero % (13s, 6/15/99), 2002 (STP) 3,591,250
1,370,000 Transamerican Energy sr. notes Ser. B, 11 1/2s, 2002 1,359,725
774,000 TransTexas Gas Corp. sr. sub. notes Ser. D,
13 3/4s, 2001 866,880
150,000 Wiser Oil Co. company guaranty 9 1/2s, 2007 144,000
--------------
9,888,305
Packaging and Containers (0.1%)
- -------------------------------------------------------------------------------------------------------------
175,000 AEP Industries, Inc. 144A sr. sub. notes 9 7/8s, 2007 182,000
395,000 Innova S De R.L. sr. notes 12 7/8s, 2007 (Mexico) 425,119
--------------
607,119
Paging (0.1%)
- -------------------------------------------------------------------------------------------------------------
200,000 Mobile Telecommunications Tech. sr. notes
13 1/2s, 2002 234,500
160,000 Pagemart Nationwide, Inc. sr. disc. notes stepped-
coupon zero % (15s, 2/1/00), 2005 (STP) 143,200
--------------
377,700
Paper and Forest Products (0.8%)
- -------------------------------------------------------------------------------------------------------------
245,000 Florida Coast Paper LLC 1st mtge. Ser. B,
12 3/4s, 2003 267,050
330,000 Huntsman Packaging Corp. company guaranty
9 1/8s, 2007 337,838
480,000 Impac Group, Inc. 144A sr. sub. notes 10 1/8s, 2008 489,600
1,075,000 PT Pabrik Kertas Tjiwi Kimia company guaranty
10s, 2004 870,750
1,180,000 Repap New Brunswick sr. notes 10 5/8s,
2005 (Canada) 1,233,100
615,000 Riverwood International Corp. company guaranty
10 1/4s, 2006 636,525
250,000 Stone Container Corp. sr. notes 11 7/8s, 2016 275,000
--------------
4,109,863
Pharmaceuticals (0.1%)
- -------------------------------------------------------------------------------------------------------------
600,000 ICN Pharmaceuticals, Inc. 144A sr. notes 9 1/4s, 2005 647,250
Photography (--%)
- -------------------------------------------------------------------------------------------------------------
170,000 Panavision, Inc. 144A sr. disc. notes stepped-coupon
zero % (9 5/8s, 2/1/02), 2006 (STP) 121,550
Publishing (0.4%)
- -------------------------------------------------------------------------------------------------------------
1,000,000 American Media Operation, Inc. sr. sub. notes
11 5/8s, 2004 1,086,250
500,000 Garden State Newspapers, Inc. sr. sub. notes
Ser. B, 8 3/4s, 2009 512,500
400,000 Perry-Judd 144A sr. sub. notes 10 5/8s, 2007 421,000
150,000 Von Hoffman Press, Inc. 144A sr. sub. notes
10 3/8s, 2007 160,500
--------------
2,180,250
Railroads (0.3%)
- -------------------------------------------------------------------------------------------------------------
290,000 Hermes Europe Railtel 144A sr. notes 11 1/2s,
2007 (Netherlands) 327,700
510,000 TFM S.A. de C.V. company guaranty 10 1/4s, 2007 (Mexico) 520,200
565,000 TFM S.A. de C.V. company guaranty stepped-coupon
zero % (11 3/4s, 6/15/02), 2009 (Mexico) (STP) 380,669
--------------
1,228,569
Real Estate (0.1%)
- -------------------------------------------------------------------------------------------------------------
150,000 Bluegreen Corp. 144A sr. notes 10 1/2s, 2008 150,563
510,000 Prime Hospitality Corp. sub. notes 9 3/4s, 2007 549,525
--------------
700,088
Recreation (0.5%)
- -------------------------------------------------------------------------------------------------------------
904,000 Louisiana Casino Cruises Corp. 1st mtge.
11 1/2s, 1998 913,040
750,000 Premier Parks, Inc. sr. notes 9 1/4s, 2006 761,250
500,000 PRT Funding Corp. sr. notes 11 5/8s, 2004
(In default) (NON) 371,250
250,000 Trump A.C. 1st mtge. 11 1/4s, 2006 250,625
--------------
2,296,165
Restaurants (0.2%)
- -------------------------------------------------------------------------------------------------------------
700,000 FRD Acquisition Co. sr. notes Ser. B, 12 1/2s, 2004 764,750
Retail (0.3%)
- -------------------------------------------------------------------------------------------------------------
180,000 Color Spot Nurseries sr. sub. notes 10 1/2s, 2007 175,950
400,000 K mart Corp. pass-thru certificates Ser. 95K4,
9.35s, 2020 443,000
625,000 Mothers Work, Inc. sr. notes 12 5/8s, 2005 678,125
170,000 NBTY, Inc. 144A sr. sub. notes 8 5/8s, 2007 172,125
--------------
1,469,200
Satellite Services (0.6%)
- -------------------------------------------------------------------------------------------------------------
370,000 Esat Holdings Ltd. 144A sr. notes stepped-coupon
zero % (12 1/2s, 2/01/02), 2007 (Ireland) (STP) 277,500
770,000 ICG Services, Inc. 144A sr. disc. notes stepped-coupon
zero % (10s, 2/15/03), 2008 (STP) 481,250
1,110,000 ICG Services, Inc. 144A sr. discount notes stepped-coupon
zero %, (9 7/8s, 5/1/03), 2008 (STP) 686,813
535,000 Iridium LLC/Capital Corp. company guaranty
Ser. B, 14s, 2005 601,875
400,000 Iridium LLC company guaranty Ser. A, 13s, 2005 436,000
310,000 Satellites Mexicanos S.A. de C.V. 144A sr. notes
10 1/8s, 2004 (Mexico) 315,425
150,000 TCI Satellite Entertainment sr. sub. notes 10 7/8s, 2007 159,000
--------------
2,957,863
Semiconductors (0.4%)
- -------------------------------------------------------------------------------------------------------------
800,000 Fairchild Semiconductor Corp. sr. sub. notes
10 1/8s, 2007 832,000
325,000 Fairchild Semiconductor Corp. 144A sr. sub. notes
11.74s, 2008 372,125
600,000 Viasystems Inc. 144A sr. sub. notes 9 3/4s, 2007 627,000
--------------
1,831,125
Shipping (0.2%)
- -------------------------------------------------------------------------------------------------------------
140,000 International Shipholding Corp. sr. notes 7 3/4s, 2007 138,600
450,000 Johnstown America Industries, Inc. company
guaranty Ser. C, 11 3/4s, 2005 501,750
220,000 MC Shipping, Inc. 144A sr. notes 11 1/4s, 2008 220,000
--------------
860,350
Specialty Consumer Products (0.1%)
- -------------------------------------------------------------------------------------------------------------
420,000 Decora Industries, Inc. 144A sr. sec. notes 11s, 2005 408,975
310,000 Eye Care Centers of America 144A sr. sub. notes
9 1/8s, 2008 310,000
--------------
718,975
Steel (0.3%)
- -------------------------------------------------------------------------------------------------------------
420,000 Hylsa S.A. de C.V. 144A bonds 9 1/4s, 2007 (Mexico) 415,800
550,000 Ispat Mexicana, S.A. 144A bonds 10 3/8s,
2001 (Mexico) 561,000
310,000 WHX Corp. 144A sr. notes 10 1/2s, 2005 314,650
--------------
1,291,450
Supermarkets (0.2%)
- -------------------------------------------------------------------------------------------------------------
340,000 Ameriserve Food Co. company guaranty
10 1/8s, 2007 363,800
400,000 Ameriserve Food Co. company guaranty 8 7/8s, 2006 407,000
25,000 Nebco Evans Holding Co. sr. disc. notes stepped-
coupon zero % (12 3/8s, 7/15/02), 2007 (STP) 17,250
--------------
788,050
Telecommunications (3.0%)
- -------------------------------------------------------------------------------------------------------------
245,000 Antenna TV S.A. sr. notes 9s, 2007 (Greece) 245,000
440,000 Barak I.T.C. sr. disc. notes stepped-coupon Ser. B, zero %
(12 1/2s, 11/15/02), 2007 (STP) 261,800
155,000 Consorcio Ecuatoriano notes 14s, 2002 (Ecuador) 150,350
900,000 Econophone, Inc. company guaranty 13 1/2s, 2007 1,035,000
230,000 Econophone, Inc. 144A notes stepped-coupon zero %
(11s,2/15/03), 2008 (STP) 133,400
230,000 Esprit Teleom Group PLC sr. notes 11 1/2s, 2007
(United Kingdom) 251,850
260,000 Focal Communications Corp. 144A sr. disc. notes stepped-
coupon zero % (12 1/8s, 2/15/03), 2008 (STP) 153,400
400,000 GST Equipment Funding sr. notes 13 1/4s, 2007 466,000
1,190,000 GST Telecommunications, Inc. 144A sr. disc. notes
stepped-coupon zero % (10 1/2s, 5/1/03), 2008 (STP) 719,950
747,000 GST Telecommunications, Inc. company guaranty stepped-
coupon zero % (13 7/8s, 15/15/00), 2005 (STP) 603,203
265,000 Hyperion Telecommunications, Inc. sr. disc. notes stepped-
coupon Ser. B, zero % (13s, 4/15/01), 2003 (STP) 198,088
570,000 Hyperion Telecommunications, Inc. sr. notes Ser. B,
12 1/4s, 2004 632,700
945,000 ICG Holdings, Inc. sr. disc. notes stepped-coupon zero %
(13 1/2s, 9/15/00), 2005 (STP) 807,975
1,200,000 Intermedia Communications, Inc. sr. disc. notes stepped-
coupon Ser. B, zero % (11 1/4s, 7/15/02), 2007 (STP) 882,000
875,000 Knology Holdings Inc. sr. disc. notes stepped-coupon
zero % (11 7/8s, 10/15/02), 2007 (STP) 507,500
425,000 L-3 Communications Corp. sr. sub. notes Ser. B,
10 3/8s, 2007 469,625
500,000 Metrocall, Inc. sr. sub. notes 10 3/8s, 2007 517,500
320,000 Metrocall, Inc. sr. sub. notes 9 3/4s, 2007 328,000
210,000 MetroNet Communications Corp. sr. disc. notes
stepped-coupon zero % (10 3/4s, 11/1/02), 2007
(Canada) (STP) 144,900
260,000 Microcell Telecommunications sr. disc. notes stepped-
coupon Ser. B, zero % (14s, 12/1/01), 2006
(Canada) (STP) 195,000
480,000 Psinet, Inc. 144A sr. notes 10s, 2005 493,200
505,000 Qwest Communications International, Inc. sr. disc.
notes stepped-coupon zero % (9.47s, 10/15/02),
2007 (STP) 362,338
380,000 RSL Communications, Ltd. 144A sr. disc. notes stepped-
coupon zero % (10 1/8s, 3/1/03), 2008 (STP) 237,500
260,000 RSL Communications, Ltd. 144A sr. notes 9 1/8s, 2008 260,000
850,000 Teligent, Inc. sr. notes 11 1/2s, 2007 884,000
545,000 Winstar Communications, Inc. sr. sub. notes 15s, 2007 708,500
2,640,000 Winstar Communications, Inc. 144A sr. sub. notes
10s, 2008 2,547,600
310,000 Winstar Equipment Corp. company guaranty
12 1/2s, 2004 347,200
--------------
14,543,579
Telephone Services (2.1%)
- -------------------------------------------------------------------------------------------------------------
740,000 BTI Telecom Corp. sr. notes 10 1/2s, 2007 769,600
1,235,000 Colt Telecom Group PLC sr. disc. notes stepped-coupon
zero % (12s, 12/15/01), 2006 (United Kingdom) (STP) 981,825
695,000 E. Spire Communications, Inc. sr. disc. notes stepped-
coupon zero % (12 3/4s, 4/1/01), 2006 (STP) 554,263
280,000 E. Spire Communications, Inc. sr. notes 13 3/4s, 2007 330,400
250,000 Facilicom International 144A sr. notes 10 1/2s, 2008 257,500
545,000 Fonorola, Inc. sr. notes 12 1/2s, 2002 (Canada) 610,400
420,000 Globo Communicacoes 144A company guaranty
10 1/2s, 2006 (Brazil) 426,300
260,000 IDT Corp. 144A sr. notes 8 3/4s, 2006 258,700
200,000 Intermedia Communications, Inc. sr. notes Ser. B,
8 1/2s, 2008 203,000
800,000 Ionica Group PLC sr. disc. notes stepped-coupon
zero % (15s, 5/1/02), 2007 (United Kingdom) (STP) 352,000
380,000 ITC Deltacom, Inc. sr. notes 11s, 2007 431,300
350,000 Level 3 Communication, Inc. 144A sr. notes
9 1/8s, 2008 346,500
360,000 McLeod USA, Inc. 144A sr. notes 8 3/8s, 2008 365,400
140,000 MGC Communications, Inc. sr. notes Ser. B, 13s, 2004 144,200
150,000 MJD Communications, Inc. 144A sr. sub. notes
9 1/2s, 2008 150,000
160,000 MJD Communications, Inc. 144A FRN, 2008 160,000
400,000 NEXTLINK Communications, Inc. 144A sr. disc. notes
stepped-coupon zero % (9.45s, 4/15/03), 2008 (STP) 250,000
1,620,000 NTL Inc. sr. notes Ser. B, 10s, 2007 (United Kingdom) 1,733,400
950,000 RCN Corp. sr. disc. notes stepped-coupon zero %
(11 1/8s, 10/15/02), 2007 (STP) 629,375
765,000 RSL Communications, Ltd. company guaranty
12 1/4s, 2006 872,100
350,000 Sprint Spectrum L.P. sr. notes 11s, 2006 399,875
175,000 Transtel S.A. 144A pass through Certificates
12 1/2s, 2007 (Colombia) 171,500
--------------
10,397,638
Textiles (0.3%)
- -------------------------------------------------------------------------------------------------------------
360,000 Polymer Group, Inc. company guaranty Ser. B, 9s, 2007 370,800
190,000 Polymer Group, Inc. 144A sr. sub. notes 8 3/4s, 2008 193,325
485,000 Polysindo International Eka company guaranty
13s, 2001 (Indonesia) 324,950
800,000 Polysindo International Finance company guaranty
11 3/8s, 2006 (Indonesia) 480,000
--------------
1,369,075
Tobacco (--%)
- -------------------------------------------------------------------------------------------------------------
215,000 North Atlantic Trading Ser. B company guaranty
11s, 2004 218,201
Transportation (0.2%)
- -------------------------------------------------------------------------------------------------------------
200,000 Coach USA, Inc. 144A company guaranty 9 3/8s, 2007 208,000
520,000 Kitty Hawk, Inc. company guaranty 9.95s, 2004 546,000
--------------
754,000
Wireless Communications (0.7%)
- -------------------------------------------------------------------------------------------------------------
350,000 Allbritton Communications Co. sr. sub. notes Ser. B,
8 7/8s, 2008 349,125
590,000 Comcast Cellular Holdings sr. notes Ser. B, 9 1/2s, 2007 613,600
265,000 CTI Holdings S.A. 144A sr. notes stepped-coupon
zero % (11 1/2s, 4/15/03), 2008 (STP) 156,350
450,000 International Wireless Communications, Inc. sr. disc.
notes zero %, 2001 175,500
565,000 Omnipoint Corp. sr. notes 11 5/8s, 2006 614,438
125,000 Paging Network Do Brasil sr. notes 13 1/2s,
2005 (Brazil) 125,000
170,000 Paging Network, Inc. sr. sub. notes 10s, 2008 176,800
230,000 Powertel, Inc. sr. notes 11 1/8s, 2007 248,400
200,000 Telesystem International Wireless, Inc. sr. disc. notes
stepped-coupon Ser. C, zero % (10 1/2s, 11/1/02),
2007 (STP) 127,000
1,270,000 Teligent, Inc. 144A sr. disc. notes stepped-coupon zero %
(11 1/2s, 3/1/03), 2008 (STP) 723,900
150,000 Western Wireless Corp. sr. sub. notes 10 1/2s, 2007 164,250
--------------
3,474,363
--------------
Total Corporate Bonds and Notes
(cost $171,081,306) $ 173,837,953
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (28.5%) (a)
PRINCIPAL AMOUNT VALUE
U.S. Government Agency Mortgage Obligations (18.4%)
- -------------------------------------------------------------------------------------------------------------
$ 31,165 Federal National Mortgage Association 6 1/2s,
June 1, 2026 $ 30,843
Federal National Mortgage Association
Adjustable Rate Mortgage
193,212 7.835s, May 1, 2025 201,182
308,899 7.143s, July 1, 2027 313,146
Government National Mortgage Association
5,480,000 8s, TBA, May 25, 2028 5,685,500
45,000 7 1/2s, TBA, February 16, 2028 46,223
700,000 Ser. 97-8, Class PE, 7 1/2s, May 16, 2027 736,814
5,620,000 7s, TBA, May 15, 2028 5,686,709
150 6s, TBA, January 16, 2028 151
Government National Mortgage Association
Pass-Through-Certificates
6,717,926 8s, with due dates from August 15, 2024 to
March 15, 2028 6,985,974
35,795,761 7 1/2s, with due dates from September 15, 2022 to
February 15, 2028 36,826,343
20,729 7 1/2s, Midget, February 15, 2009 21,376
17,859,560 7s, with due dates from August 15, 2025 to April 15, 2028 18,072,503
10,878,695 6 1/2s, with due dates from November 15, 2027 to
February 15, 2028 10,780,038
Government National Mortgage Association
Adjustable Rate Mortgage
2,532,048 7s, July 20, 2024 2,596,585
2,729,800 5 1/2s, April 15, 2028 2,738,331
--------------
90,721,718
U.S. Treasury Obligations (10.1%)
- -------------------------------------------------------------------------------------------------------------
U.S. Treasury Bonds
55,000 8 1/8s, August 15, 2019 (SEG) 68,613
8,850,000 6 1/2s, November 15, 2026 (SEG) 9,418,347
1,445,000 6 3/8s, August 15, 2027 1,520,415
U.S. Treasury Notes
3,075,000 7s, July 15, 2006 3,318,110
7,035,000 6 7/8s, May 15, 2006 7,531,812
16,325,000 6 5/8s, June 30, 2001 16,776,550
2,887,000 6 1/2s, October 15, 2006 (SEG) 3,025,027
4,135,000 5 3/4s, November 30, 2002 4,145,338
150,000 5 5/8s, December 31, 2002 149,696
430,000 5 1/2s, February 15, 2008 424,221
1,475,000 5 1/2s, March 31, 2003 1,465,324
230,000 5 1/2s, February 28, 2003 228,383
1,475,000 5 1/2s, March 31, 2000 1,472,463
--------------
49,544,299
--------------
Total U.S. Government and Agency Obligations
(cost $138, 499,680) $ 140,266,017
FOREIGN GOVERNMENT BONDS AND NOTES (12.1%) (a)
PRINCIPAL AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------
DKK 113,000 Denmark (Government of) bonds 6s, 2026 $ 16,194
DEM 20,685,000 Germany (Federal Republic of) Unity Fund
bonds 8s, 2002 12,856,842
DEM 17,255,000 Germany (Federal Republic of) bonds Ser. 98,
5 5/8s, 2028 9,730,263
USD 1,080,000 Korea (Republic of) unsub. 8 7/8s, 2008 1,062,202
USD 7,760,000 Russia (Government of) deb. principal loans
FRB 6.719s, 2020 (POR) 4,908,200
ZAR 26,464,000 South Africa (Republic of) bonds Ser. 153,
13s, 2010 5,229,978
GBP 10,095,000 United Kingdom Treasury bonds 8s, 2007 18,617,361
GBP 3,405,000 United Kingdom Treasury bonds 8s, 2021 7,295,785
--------------
Total Foreign Government Bonds and Notes
(cost $58,206,693) $ 59,716,825
COLLATERALIZED MORTGAGE OBLIGATIONS (8.1%) (a)
PRINCIPAL AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------
Commercial Mortgage Acceptance Corp. Ser. 97-ML1
$ 980,000 Class D, 6.980s, 2010 $ 982,756
16,497,823 Interest Only, 0.902s, 2017 958,517
1,625,000 Countrywide Mortgage Backed Securities, Inc.
Ser. 93-C, Class A8, 6 1/2s, 2024 1,556,831
19,640,000 Deutsche Mortgage & Asset Receiving Corp.
Ser. 98-C1, Class X, 1.255s, 2023 1,380,938
First Union-Lehman Brothers Commercial Mortgage
Ser. 97-C2
1,615,000 Class D, 7.12s, 2012 1,611,720
1,415,000 Class A2, 6.6s, 2007 1,434,014
2,290,000 Class A3, 6.65s, 2007 2,324,708
9,861,340 Interest Only, 1.388s, 2027 892,143
Fannie Mae Strip
1,611,563 Ser. 284, Class 2, 7 1/2s, 2027 364,868
2,192,135 Ser. 93-251, Class Z 6 1/2s, 2023 2,023,615
150,238 Ser. 294, Class 1 zero %, 2028 110,378
2,210,587 Ser. 273, Class 1 zero %, 2026 1,659,322
Freddie Mac
3,780,000 Interest Only Strip Ser. 195, 7 1/2s, 2028 864,675
770,000 Ser. 2040, Class PE, 7 1/2s, 2028 815,538
435,000 Ser. 1439, Class 1, 7 1/2s 2002 459,573
4,984,233 Interest Only Strip Ser. 192, 6 1/2s, 2028 1,548,227
610,284 Ser. 1717, Class L, 6 1/2s, 2024 608,186
3,780,000 Principal Only Strip Ser. 195, zero %, 2028 3,021,638
1,789,020 Principal Only Strip Ser. 191, zero %, 2028 1,482,092
1,949,166 Principal Only Strip Ser. 193, zero %, 2024 1,452,129
1,806,721 GMAC Commercial Mortgage Securities Inc.
Ser. 97-C2, Class A1, 6.451s, 2004 1,824,788
Mortgage Capital Funding, Inc. Ser. 98-MC1, Class A2
2,670,000 6.663s, 2008 2,721,731
21,315,000 0.722s, 2009 985,819
Merrill Lynch Mortgage Investors, Inc. Ser. 98-C2
21,963,000 Class IO, 1.456s, 2030 1,984,794
248,000 Class D, 6.959s, 2030 248,000
PNC Mortgage Securities Corp.
2,200,072 Ser. 97-6, Class A2, 6.6s, 2027 2,205,572
2,833,780 Ser. 97-4, Class 2PP3, 7.25s, 2027 2,882,486
610,000 Prudential Home Mortgage Securities Ser. 93-57,
Class A4, 5.9s, 2023 603,809
1,011,880 Rural Housing Trust Ser. 87-1, Class D, 6.33s, 2026 1,009,766
--------------
Total Collateralized Mortgage Obligations
(cost $40,018,470) $ 40,018,633
BRADY BONDS (5.9%) (a)
PRINCIPAL AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------
$8,965,000 Argentina (Republic of) Ser. L-GP, stepped-coupon
5 3/4s, (6s, 3/31/99), 2023 (STP) $ 6,813,400
2,989,861 Brazil (Government of) stepped-coupon 5s
(8s, 4/15/00) 2014 (STP) 2,474,110
3,420,000 Ivory Coast - FLIRB collateralized FRB 2s, 2018 190,426
3,420,000 Ivory Coast - PDI bonds FRB 1.9s, 2018 224,533
5,390,000 Peru (Government of) 144A Ser. PDI, 4s, 2017 3,665,200
3,238,000 Philippines (Government of) FRB Ser. B, 6 1/2s, 2017 2,857,535
6,897,000 Poland (Government of) bonds Ser. PDI, stepped-
coupon 4s,(5s, 10/1/98), 2014 (STP) 6,276,270
7,575,000 United Mexican States Sec. Ser. B, 6 1/4s, 2019 6,381,938
--------------
Total Brady Bonds (cost $29,059,059) $ 28,883,412
PREFERRED STOCKS (3.0%) (a)
Number of Shares VALUE
- -------------------------------------------------------------------------------------------------------------
9,378 AmeriKing, Inc. $3.25 pfd. (PIK) $ 253,206
108 Anvil Holdings Ser. B, $3.25 pfd. (PIK) 2,754
15,000 California Federal Bancorp, Inc. Ser. A, $2.281 pfd. 405,000
4,471 Capstar Broadcasting, Inc. 144A $12.00 pfd. 525,343
2,000 Chancellor Media Corp. $12.00 pfd. (PIK) 244,000
11,925 Chevy Chase Capital Corp. Ser. A, $5.188 pfd. 643,950
4,416 Citadel Broadcasting, Inc. 144A $13.25 cum. pfd. (PIK) 543,168
8,236 CSC Holdings, Inc. Ser. M, $11.125 cum. (PIK) 949,199
13,965 Diva Systems Corp. Ser. C, $6.00 pfd. 181,545
148 E. Spire Communications, Inc. pfd. 12.75% (PIK) 172,420
136 Echostar Communications, Inc. 12.125% pfd. 151,980
100,000 Fresenius Medical Care AG pfd. Ser. D, $9.00 pfd. (Germany) 104,000
825 Granite Broadcasting 144A $12.75 pfd. (PIK) 932,250
127 Hyperion Telecommunications, Inc. Ser. B,
$12.875 pfd. (PIK) 144,780
739 ICG Holdings, Inc. $14.25 pfd. (Canada) 897,885
320 ICG Holdings, Inc. $14.00 pfd. (PIK) 395,200
851 Intermedia Communication Ser. B, $13.50 pfd. 1,042,475
516 IXC Communications, Inc. 12.50% pfd. (PIK) 598,560
3,200 Nebco Evans Holding Co. 144A $11.25 pfd. (PIK) 332,800
1,814 NEXTEL Communications, Inc. Ser. D, $13.00
cum. pfd. (PIK) 2,063,425
220 NEXTEL Communications, Inc. 144A Ser. E,
$11.125 pfd. (PIK) 237,875
16,007 Nextlink Communications, Inc. 144A $7.00 pfd. 968,424
5,760 SFX Broadcasting, Inc. Ser. E, $12.625 pfd. (PIK) 673,920
5,000 Sinclair Capital $11.625 cum. pfd. 555,000
1,109 Spanish Broadcasting Systems 14.25% cum. pfd .(PIK) 1,164,450
3,540 Von Hoffman Corp. 144A $13.50 pfd. 116,820
580 Winstar Communications. Inc. 144A $14.25
cum. pfd. (PIK) 693,100
--------------
Total Preferred Stocks (cost $13,429,170) $ 14,993,529
UNITS (2.4%) (a)
NUMBER OF UNITS VALUE
- -------------------------------------------------------------------------------------------------------------
760 Allegiance Telecom, Inc. units sr. disc. notes zero %
(11 3/4s, 2/15/03), 2008 (STP) $ 425,600
100 American Mobile Satellite Corp. 144A units
12 1/4s, 2008 102,000
190 Bell Tech Ltd. 144A units 13s, 2005 193,325
150 Celcaribe S.A. 144A units stepped-coupon
13 1/2s, 2004 (Columbia) 3,172,500
325 Club Regina, Inc. 144A units 13s, 2004 348,563
1,141 Diva Systems Corp. 144A units zero % (12 5/8s, 3/1/03),
2008 (STP) 621,845
1,400 DTI Holdings, Inc. units stepped-coupon zero %
(12 1/2s, 3/1/03), 2008 (STP) 805,000
950 Firstworld Communication 144A units zero %
(13.0s, 4/15/03), 2008 (STP) 482,125
875 KMC Telecom Holdings, Inc. units stepped-coupon
zero % (12 1/2s, 2/15/03), 2008 (STP) 520,625
870 Long Distance International, Inc. 144A units
12 1/4s, 2008 887,400
390 Orbital Imaging Corp. units 11 5/8s, 2005 423,150
620 Pathnet, Inc. 144A units 12 1/4s, 2008 637,825
820 Rhythms Netcon 144A units zero % (13 1/2s, 5/15/03),
2008 (STP) 426,400
295 Stone Container Corp. units sr. sub. notes 12 1/4s, 2002 303,850
500 Transam Refinance, Inc. 144A units 16s, 2003 533,750
780 Viatel, Inc. 144A units 11 1/4s, 2008 826,800
730 Wireless One, Inc. units stepped-coupon zero %
(13 1/2s, 8/1/01), 2006 (STP) 87,600
380 XCL Ltd units sr. sec. notes 13 1/2s, 2004 475,000
4,732 XCL Ltd. 144A units cv. cum. pfd. 9 1/2s, 2006 591,500
--------------
Total Units (cost $9,637,083) $ 11,864,858
ASSET-BACKED SECURITIES (1.2%) (a)
PRINCIPAL AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------
$1,611,000 Chemical Master Credit Card Trust Ser. 95-2, Class A,
6.23s, 2003 $ 1,621,069
505,000 Contimortgage Home Equity Loan Trust Ser. 97-1,
Class M2, 7.67s, 2025 509,419
1,280,000 First Plus 1998-a Cl A,8 1/2s, 2023 1,273,600
1,870,000 Green Tree Financial Corp. Ser. 98-2, Class A5,
6.24s, 2016 1,866,786
679,368 Green Tree Recreational Equipment & Cons Ser. 97-B,
Class A1, 6.55s, 2028 682,976
--------------
Total Asset-Backed Securities (cost $5,989,244) $ 5,953,850
COMMON STOCKS (0.9%) (a)
Number of Shares VALUE
- -------------------------------------------------------------------------------------------------------------
13,320 American Mobile Satellite Corp. (NON) 143,190
200 AmeriKing, Inc. (NON) 10,000
2,625 Axia Holding, Inc. 144A (NON) 210,000
14,280 CellNet Data Systems, Inc. (NON) 197,243
11,050 Chattem, Inc. (NON) 306,638
4,245 Hedstrom Holdings, Inc. 144A 5,306
4,148 IFINT Diversified Holdings 144A (NON) 29,036
5,979 NEXTEL Communications, Inc. Class A (NON) 171,523
125 Paging Do Brazil Holdings Co., LLC Class B (Brazil) 1
671 PMI Holdings Corp. 144A (NON) 335,500
480 Premium Holdings L.P. (NON) 1,919
100,386 PSF Holdings LLC Class A (NON) 3,011,580
15,000 Specialty Foods Acquisition Corp. (NON) 2,250
--------------
Total Common Stocks (cost $4,318,661) $ 4,424,186
CONVERTIBLE BONDS AND NOTES (0.9%) (a)
PRINCIPAL AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------
$ 510,000 APP Global Finance (V) Ltd. 144A cv. sec. 2s, 2000
(United Kingdom) $ 532,950
1,110,000 APP Global Finance Ltd. 144A cv. company guaranty
3 1/2s, 2003 1,111,388
500,000 Corporate Express, Inc. cv. notes 4 1/2s, 2000 451,875
234,000 GST Telecommunications, Inc. cv. sr. disc. notes stepped-
coupon zero % (13 7/8s, 12/15/00), 2005 (STP) 367,380
280,000 Integrated Device Technology, Inc. cv. sub. notes
5 1/2s, 2002 243,600
185,000 National Semiconductor Corp. 144A cv. deb.
6 1/2s, 2002 178,063
1,486,000 Pricellular Wireless Corp. 144A cv. sub. notes stepped-
coupon zero % (10 3/4s, 8/15/00) (STP) 1,642,030
--------------
Total Convertible Bonds and Notes
(cost $3,485,856) $ 4,527,286
WARRANTS (0.3%) (a) (NON) EXPIRATION
NUMBER OF WARRANTS DATE VALUE
- -------------------------------------------------------------------------------------------------------------
40,000 Becker Gaming Corp. 144A 11/15/00 $ 400
2,498 Cellnet Data Systems, Inc. 9/15/07 137,390
1,235 Colt Telecommunications Group PLC 12/31/06 166,725
125 Concentric Network Corp. 12/15/07 1,688
5,062 Consorcio Ecuatoriano 144A (Equador) 10/1/00 5,062
2,100 County Seat Holdings, Inc. 10/15/98 42
690 Diva Systems Corp. 5/15/06 181,125
10 E. Spire Communications, Inc. 11/1/05 1,700
1,050 Econophone Inc. 144A 7/15/07 63,000
370 Esat Holdings, Inc. (Ireland) 2/1/07 12,950
380 Globalstar Telecom 144A 2/15/04 55,100
2,799 Grand Union Co. 6/15/00 28
1,399 Grand Union Co. 6/15/00 14
940 Hyperion Telecommunications 144A 4/15/01 65,800
8,514 Intelcom Group 144A 10/15/05 280,962
760 Interact Systems Inc. 8/1/03 190
1,325 Intermedia Communications 6/1/00 178,875
450 International Wireless Communications
Holdings 144A 8/15/01 450
875 Knology Holdings Inc. 144A 10/15/07 438
4,101 Louisiana Casino Cruises, Inc. 144A 12/1/98 217,353
1,530 McCaw International Ltd. 4/15/07 459
140 MGC Communications, Inc. 144A 10/1/04 7,000
525 Orion Network Systems 1/15/07 6,300
5,290 Pagemart, Inc. 144A 12/31/03 39,675
2,000 Petracom Holdings, Inc. 9/30/99 16,000
4,238 President Riverboat Casinos, Inc. 9/30/99 2,119
800 RSL Communications Ltd. 11/15/06 80,949
390 Spanish Broadcasting Systems 144A 6/30/99 79,950
275 Sterling Chemicals Holdings 8/15/08 7,150
2,285 UIH Australia/Pacific, Inc. 144A 5/15/06 34,275
150 Urohealth Systems Inc. 4/10/04 2
36 Wright Medical Technology, Inc. 144A 6/30/03 3,558
--------------
Total Warrants (cost $803,593) $ 1,646,729
CONVERTIBLE PREFERRED STOCKS (--%) (a) (cost $114,500)
NUMBER OF SHARES VALUE
- -------------------------------------------------------------------------------------------------------------
2,290 Chesapeake Energy Corp. 144A $3.50 cv. cum. pfd. $ 113,641
SHORT-TERM INVESTMENTS (1.1%) (a)
PRINCIPAL AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------
$ 16,500,000 U.S. Dollar GKO Pass Through Structured
note (issued by Deutsche Bank. The
principal at redemption 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 to
maturity date) zero %, October 28, 1998 $ 2,372,700
TRL 352,810,000,000 Turkey Treasury bills zero %, June 17, 1998 1,274,957
TRL 366,980,000,000 Turkey Treasury bills zero %, June 4, 1998 1,350,707
$ 644,000 Interest in $500,000,000 joint repurchase
agreement dated April 30, 1998 with
Lehman Brothers due May 1, 1998 with
respect to various U.S. Treasury obligations --
maturity value of $644,099 for an effective
yield of 5.51% 644,099
--------------
Total Short-Term Investments (cost $5,480,742) $ 5,642,463
- -------------------------------------------------------------------------------------------------------------
Total Investments (cost $480,124,057) (b) $ 491,889,382
- -------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $492,998,489.
(b) The aggregate identified cost on a tax basis is $481,233,623, resulting in gross unrealized appreciation
and depreciation of $14,790,632 and $4,134,873, respectively, or net unrealized appreciation of
$10,655,759.
(NON) Non-income-producing security.
(STP) The interest rate and date shown parenthetically represent the new interest rate to be paid and the date
the fund will begin receiving interest at this rate.
(POR) A portion of the income will be received in additional securities.
(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 April 30, 1998.
144A after the name of a security represents those exempt from registration under Rule 144A of the Securities
Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified
institutional buyers.
TBA after the name of a security represents to be announced securities (Note 1).
The rates shown on Floating Rate Bonds (FRB) and Floating Rate Notes (FRN) are the current interest rates shown
at April 30, 1998, which are subject to change based on the terms of the security.
FLIRB represents Front Loaded Interest Reduciton Bond.
Diversification by Country
Distribution of investments by country of issue at April 30, 1998
(as percentage of Market Value):
Argentina 1.5%
Germany 4.7
Mexico 2.4
Poland 1.3
Russia 1.5
South Africa 1.1
United Kingdom 6.5
United States 74.3
Other 6.7
-----
100%
=====
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
Forward Currency Contracts to Buy at April 30, 1998 (Unaudited)
(aggregate face value $102,832,149)
Unrealized
Aggregate Face Delivery Appreciation/
Market Value Value Date (Depreciation)
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Australian Dollars $ 386,262 $ 390,246 6/17/98 $ (3,984)
Danish Krone 2,589,013 2,596,685 6/17/98 (7,672)
Deutschemarks 29,739,870 29,537,920 6/17/98 201,950
French Franc 665,676 660,611 6/17/98 5,065
Italian Lira 15,449,656 15,296,560 6/17/98 153,096
Japanese Yen 30,899,361 32,366,266 6/17/98 (1,466,905)
Mexican Peso 758,023 710,407 5/12/98 47,616
Mexican Peso 940,931 888,007 5/11/98 52,924
New Zealand Dollar 1,046,947 1,061,653 6/17/98 (14,706)
South Korean Won 2,185,852 1,986,067 5/11/98 199,785
Spanish Peseta 4,276,144 4,244,478 6/17/98 31,666
Swedish Krona 6,592,133 6,366,970 6/17/98 225,163
Swiss Franc 6,516,503 6,726,279 6/17/98 (209,776)
- ------------------------------------------------------------------------------------------------
$ (785,778)
- ------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Forward Currency Contracts to Sell at April 30, 1998 (Unaudited)
(aggregate face value $108,432,001)
Unrealized
Aggregate Face Delivery Appreciation/
Market Value Value Date (Depreciation)
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
British Pounds $25,262,118 $24,786,185 6/17/98 $(475,933)
Deutschemarks 50,658,117 50,233,683 6/17/98 (424,434)
French Franc 468,755 461,518 6/17/98 (7,237)
Italian Lira 8,081,814 8,002,723 6/17/98 (79,091)
Japanese Yen 16,249,046 16,988,762 6/17/98 739,716
New Zealand Dollar 1,176,768 1,221,048 6/17/98 44,280
Swiss Franc 6,522,231 6,738,082 6/17/98 215,851
- ------------------------------------------------------------------------------------------------
$ 13,152
- ------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Futures Contracts Outstanding at April 30, 1998 (Unaudited)
Unrealized
Aggregate Face Expiration Appreciation/
Total Value Value Date (Depreciation)
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Euro Dm (long) $ 9,467,161 $ 9,478,375 March-99 $(11,214)
Muni Bond (long) 4,721,438 4,781,469 June-98 (60,031)
U.S Treasury Bonds
20yr (long) 24,284,188 24,303,711 June-98 (19,523)
Euro Lira (short) 9,594,575 9,600,263 March-99 5,688
U.S Treasury Bonds
20yr (short) 4,688,531 4,722,047 June-98 33,516
U.S Treasury Notes
10yr (short) 18,531,563 18,556,101 June-98 24,538
- ------------------------------------------------------------------------------------------------
$(27,026)
- ------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
TBA Sales Commitments at April 30, 1998 (Unaudited)
(proceeds receivable $11,360,103)
Settlement Market
Agency Principal Amount Date Value
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
GNMA, 7.5s, May 15, 2028 $11,067,000 5/20/98 $11,367,801
- ------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
April 30, 1998 (Unaudited)
<S> <C>
Assets
- ---------------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $480,124,057) (Note 1) $491,889,382
- ---------------------------------------------------------------------------------------------------
Cash 4,067,323
- ---------------------------------------------------------------------------------------------------
Foreign currency (cost $116,312) 118,039
- ---------------------------------------------------------------------------------------------------
Dividends, interest and other receivables 7,946,468
- ---------------------------------------------------------------------------------------------------
Receivable for securities sold 29,648,951
- ---------------------------------------------------------------------------------------------------
Receivable for variation margin 907,519
- ---------------------------------------------------------------------------------------------------
Receivable for open forwards 1,917,112
- ---------------------------------------------------------------------------------------------------
Receivable for closed forwards 469,954
- ---------------------------------------------------------------------------------------------------
Total assets 536,964,748
Liabilities
- ---------------------------------------------------------------------------------------------------
Distributions payable to shareholders 3,119,929
- ---------------------------------------------------------------------------------------------------
Payable for securities purchased 22,463,506
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 900,354
- ---------------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 74,324
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 13,305
- ---------------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 588
- ---------------------------------------------------------------------------------------------------
Payable for open forward currency contracts 2,689,738
- ---------------------------------------------------------------------------------------------------
Payable for closed forward currency contracts 3,223,360
- ---------------------------------------------------------------------------------------------------
TBA sales commitment, at value (proceeds receivables $11,360,103) 11,367,801
- ---------------------------------------------------------------------------------------------------
Other accrued expenses 113,354
- ---------------------------------------------------------------------------------------------------
Total liabilities 43,966,259
- ---------------------------------------------------------------------------------------------------
Net assets $492,998,489
Represented by
- ---------------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $484,579,427
- ---------------------------------------------------------------------------------------------------
Distributions in excess of net investment income (Note 1) (236,319)
- ---------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments and
foreign currency transactions (Note 1) (2,318,387)
- ---------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments and assets and
liabilities in foreign currencies 10,973,768
- ---------------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $492,998,489
Computation of net asset value
- ---------------------------------------------------------------------------------------------------
Net asset value per share ($492,998,489 divided by 53,095,749 shares) $9.29
- ---------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Six months ended April 30, 1998 (Unaudited)
<S> <C>
Investment income:
- --------------------------------------------------------------------------------------------------
Interest income: $21,803,272
- --------------------------------------------------------------------------------------------------
Dividends 837,636
- --------------------------------------------------------------------------------------------------
Total investment income 22,640,908
Expenses:
- --------------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 1,794,288
- --------------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 371,678
- --------------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 11,082
- --------------------------------------------------------------------------------------------------
Administrative services (Note 2) 3,512
- --------------------------------------------------------------------------------------------------
Reports to shareholders 24,386
- --------------------------------------------------------------------------------------------------
Auditing 37,582
- --------------------------------------------------------------------------------------------------
Legal 9,034
- --------------------------------------------------------------------------------------------------
Postage 30,707
- --------------------------------------------------------------------------------------------------
Exchange listing fees 56,478
- --------------------------------------------------------------------------------------------------
Other 9,768
- --------------------------------------------------------------------------------------------------
Total expenses 2,348,515
- --------------------------------------------------------------------------------------------------
Expense reduction (Note 2) (63,005)
- --------------------------------------------------------------------------------------------------
Net expenses 2,285,510
- --------------------------------------------------------------------------------------------------
Net investment income 20,355,398
- --------------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 3,898,831
- --------------------------------------------------------------------------------------------------
Net realized gain on futures contracts (Note 1) 1,399,918
- --------------------------------------------------------------------------------------------------
Net realized gain on written options (Notes 1 and 3) 100,776
- --------------------------------------------------------------------------------------------------
Net realized loss on foreign currency transactions (Note 1) (5,742,837)
- --------------------------------------------------------------------------------------------------
Net unrealized appreciation of assets and liabilities in
foreign currencies during the period 433,293
- --------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments, futures,
written options, and TBA sale commitments during the period 334,078
- --------------------------------------------------------------------------------------------------
Net gain on investments 424,059
- --------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $20,779,457
- --------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Six months ended Year ended
April 30 October 31
1998* 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets
- ----------------------------------------------------------------------------------------------------------------------
Operations:
- ----------------------------------------------------------------------------------------------------------------------
Net investment income $20,355,398 $35,121,838
- ----------------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments and
foreign currency transactions (343,312) 1,453,960
- ----------------------------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments and
assets and liabilities in foreign currencies 767,371 5,178,491
- ----------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 20,779,457 41,754,289
- ----------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ----------------------------------------------------------------------------------------------------------------------
From net investment income (19,432,480) (27,336,768)
- ----------------------------------------------------------------------------------------------------------------------
From net realized gain on investments -- (8,980,918)
- ----------------------------------------------------------------------------------------------------------------------
In excess of realized gains -- (8,653,969)
- ----------------------------------------------------------------------------------------------------------------------
Return of capital -- (437,427)
- ----------------------------------------------------------------------------------------------------------------------
Decrease from capital share transactions (Note 4) -- (417,980)
- ----------------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets 1,346,977 (4,072,773)
Net assets
- ----------------------------------------------------------------------------------------------------------------------
Beginning of period 491,651,512 495,724,285
- ----------------------------------------------------------------------------------------------------------------------
End of period (including distributions in excess of net
investment income of $236,319 and $1,159,237, respectively) $492,998,489 $491,651,512
- ----------------------------------------------------------------------------------------------------------------------
Number of fund shares
- ----------------------------------------------------------------------------------------------------------------------
Shares outstanding at beginning of period 53,095,749 53,147,249
- ----------------------------------------------------------------------------------------------------------------------
Shares liquidated (Note 4) -- (51,500)
- ----------------------------------------------------------------------------------------------------------------------
Shares outstanding at end of period 53,095,749 53,095,749
- ----------------------------------------------------------------------------------------------------------------------
* Unaudited
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
- ------------------------------------------------------------------------------------------------------------------------------------
Six months
ended
Per-share April 30
operating performance (Unaudited) Year ended October 31
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of year $9.26 $9.33 $9.04 $8.63 $9.62 $9.15
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .38 .66 .68 .68 .74 .73
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .02 .13 .30 .42 (.88) .61
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .40 .79 .98 1.10 (.14) 1.34
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.37) (.52) (.69) (.64) (.52) (.73)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income -- -- -- -- -- (.14)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- (.17) -- -- (.08) --
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net realized
gain on investments -- (.16) -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Return of capital -- (.01) -- (.05) (.25) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.37) (.86) (.69) (.69) (.85) (.87)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.29 $9.26 $9.33 $9.04 $8.63 $9.62
- ------------------------------------------------------------------------------------------------------------------------------------
Market value,
end of period $8.500 $8.500 $8.375 $8.125 $7.88 $8.88
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at market value (%)(a) 4.21* 11.34 12.08 14.16 (1.92) 13.27
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $492,998 $491,652 $495,724 $481,914 $460,760 $513,316
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .48* .96 .95 1.02 .95 .92
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 4.13* 7.18 7.43 7.98 7.33 7.76
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 115.26* 246.84 280.38 290.44 201.95 132.24
- ------------------------------------------------------------------------------------------------------------------------------------
* 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
April 30, 1998 (Unaudited)
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. taxable investment grade sector,
consisting of debt obligations of the U.S. government, its agencies and
instrumentalities and related options, futures and repurchase agreements; a
high-yield sector, consisting of high yielding, lower-rated U.S. corporate
fixed income securities; and an international sector, consisting of
obligations of foreign governments, their agencies and instrumentalities and
other fixed-income securities denominated in foreign currencies.
The following is a summary of significant accounting policies consistently
followed by the fund in the preparation of its financial statements. The
preparation of financial statements is in conformity with generally accepted
accounting principles and requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities. Actual
results could differ from those estimates.
A) Security valuation Investments for which market quotations are readily
available are stated at market value, which is determined using the last
reported sale price, or, if no sales are reported -- as in the case of some
securities traded over-the-counter -- the last reported bid price. Securities
quoted in foreign currencies are translated into U.S. dollars at the current
exchange rate. Short-term investments having remaining maturities of 60 days
or less are stated at amortized cost, which approximates market value, and
other investments, including restricted securities, are stated at fair value
following procedures approved by the Trustees. Market quotations are not
considered to be readily available for long-term corporate bonds and notes;
such investments are stated at fair value on the basis of valuations furnished
by a pricing service, approved by the Trustees, which determines valuations
for normal, institutional-size trading units of such securities using methods
based on market transactions for comparable securities and various
relationships between securities which are generally recognized by
institutional traders.
B) Joint trading account Pursuant to an exemptive order issued by the
Securities and Exchange Commission, the fund may transfer uninvested cash
balances into a joint trading account along with the cash of other registered
investment companies and certain other accounts managed by Putnam Investment
Management, Inc. ("Putnam Management"), the fund's Manager, a wholly-owned
subsidiary of Putnam Investments, Inc.. These balances may be invested in one
or more repurchase agreements and/or short-term money market instruments.
C) Repurchase agreements The fund, or any joint trading account, through its
custodian, receives delivery of the underlying securities, the market value of
which at the time of purchase is required to be in an amount at least equal to
the resale price, including accrued interest. Putnam Management is responsible
for determining that the value of these underlying securities is at all times
at least equal to the resale price, including accrued interest.
D) Security transactions and related investment income Security transactions
are accounted for on the trade date (date the order to buy or sell is
executed). Interest income is recorded on the accrual basis. Dividend income
is recorded on the ex-dividend date except that certain dividends from foreign
securities are recorded as soon as the fund is informed of the ex-dividend
date. Discounts on zero coupon bonds, original issue 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
stepped-coupon securities in excess of maturity value is amortized on a
yield-to-maturity basis.
E) Foreign currency translation The accounting records of the fund are
maintained in U.S. dollars. The market value of foreign securities, currency
holdings, 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.
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. Reclassifications are
made to the fund's capital accounts to reflect income and gains available for
distribution (or available capital loss carryovers) under income tax
regulations.
Note 2
Management 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 six months ended April 30, 1998, fund expenses were reduced by $63,005
under expense offset arrangements with PFTC. Investor servicing and custodian
fees reported in the Statement of operations exclude these credits. The fund
could have invested a portion of the assets utilized in connection with the
expense offset arrangements in an income producing asset if it had not entered
into such arrangements.
Each Trustee of the fund receives an annual Trustee fee, of which $720 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
Purchases and sales of securities
During the six months ended April 30, 1998, purchases and sales of investment
securities other than U.S. government obligations and short-term investments
aggregated $342,006,514 and $307,440,289, respectively. Purchases and sales of
U.S. government obligations aggregated $220,798,154 and $245,941,387,
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 opened 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 six months ended April 30, 1998, the fund repurchased no shares.
As of April 30, 1998, 279,900 shares had been repurchased since the inception
of the program.
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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
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
John A. Hill
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
William J. Curtin
Vice President
Edward H. D'Alelio
Vice President
Jennifer E. Leichter
Vice President and Fund Manager
Robert M. Paine
Vice President and Fund Manager
D. William Kohli
Vice President and Fund Manager
Gail S. Attridge
Vice President and Fund Manager
William N. Shiebler
Vice President
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
- --------------------
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Putnam
Investments
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42879 - 072 6/98
