Putnam
Master Income
Trust
SEMIANNUAL REPORT ON PERFORMANCE AND OUTLOOK
4-30-00
[SCALE LOGO OMITTED]
FROM THE CHAIRMAN
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[COPYRIGHT] Karsh, Ottawa
Dear Shareholder:
I am pleased to announce the appointment of David L. Waldman and the
Core Fixed-Income team as managers of your fund. Before joining Putnam
in 1997, David was with Lazard Freres Asset Management and Goldman Sachs
Asset Management. He has 12 years of investment experience. I would also
like to call your attention to recent changes in the fund's investment
policy, which are described on page 43.
The first half of the fund's fiscal year, the six months ended April 30,
2000, was a period marked by substantial volatility in the financial
markets. Nevertheless, your fund's portfolio management team maximized
the fund's multisector flexibility to meet the challenges of the day. By
period's end, your fund had produced a slight gain at net asset value.
Total return for 6 months ended 4/30/00
NAV Market price
---------------------------------
2.87% -2.50%
---------------------------------
Past performance is no indication of future results. Performance
information for longer periods and explanation of performance
calculation methods begin on page 7.
* INFLATION AND RISING RATES KEEP BOND PRICES ON ROPES
The sustained strength of economic growth worldwide was a major
influence on bond market performance. As inflation concerns grew, many
central banks around the globe tightened monetary policy causing
interest rates to rise. The U.S. stock market's extreme run-up within
the first four months of the period put further pressure on bonds as
investors turned almost their full attention to the soaring price
appreciation of technology stocks. Although the U.S. stock market's
rally came to an abrupt halt in mid March, the performance of the broad
fixed-income market remained rather disappointing.
"Given the increased volatility of capital markets, we expect fixed-income
to provide stability going forward."
-- David Waldman, portfolio manager
During the fund's semiannual period, the U.S. Federal Reserve Board
raised short-term interest rates three times, bringing the federal funds
rate to a high not seen since 1995 and the discount rate to its highest
point in 8 1/2 years. Overseas, interest rates moved upward as well.
Despite the efforts of central banks worldwide, the pace of economic
activity did not appear to have been deterred as of the time this report
was written -- particularly in the United States.
With each report of leading economic indicators showing no signs of a
slowdown in growth, fixed-income investors worry that the Fed may not
have acted aggressively enough to keep inflation at bay. Investors'
fears combined with more recent hawkish comments by the Fed suggesting
further rate increases served to keep U.S. bond prices at relatively
depressed levels through April's end.
* U.S. TREASURY BUYBACK PROGRAM PUTS ADDED PRESSURE ON MARKET
In early January, U.S. Treasury Secretary Lawrence Summers announced
that the Treasury would use the current budget surplus to pay down
federal debt with plans to repurchase $30 billion in securities, the
bulk of which would occur in longer-term issues. This announcement
spurred investor demand for Treasury securities, particularly 30-year
bonds. As a result, the yield curve, a plotting of yields across the
maturity spectrum, inverted for the first time in more than a decade
with 3-month T-bills providing higher yields than the bellwether 30-year
bond. U.S. investment-grade corporate bonds, high-yield debt, government
agency bonds and mortgage-backed issues experienced another episode of
pressure as spreads, the difference in yields between bonds of different
credit qualities, widened and demand weakened.
[GRAPHIC OMITTED: horizontal bar chart SECTOR ALLOCATION]
SECTOR ALLOCATION*
High-yield 43.1%
U.S. investment-grade 31.9%
International 25.6%
Footnote reads:
*Based on net assets as of 4/30/00. Holdings will vary over time.
Within the U.S. investment-grade sector, your fund's managers focused on
10-year Treasury notes, increasing their emphasis on longer-term issues
as the period progressed. This strategy contributed to performance as
prices rose at the longer end of the curve. The portfolio's overall
interest rate exposure remained defensive. Management also continued
to emphasize mortgage-backed securities which benefit from diminished
prepayment risk and from improving real estate fundamentals.
* HIGH-YIELD STRATEGY BOTH OPPORTUNISTIC AND SLIGHTLY DEFENSIVE
The majority of your fund's assets are invested in U.S. high-yield
corporate bonds, those issues rated below investment grade. Within the
sector, management has emphasized holdings that can capitalize on the
new era of technological innovation and the current stage of the global
economic cycle while at the same time positioning the fund for
potentially slower growth in the latter part of the year.
Throughout the period, telecommunication, broadcasting, and media
holdings dominated high-yield allocation. Your fund's managers have
either maintained or acquired positions in several bond issues that have
performed relatively well in this difficult market. Examples include
Covad Communications, Diva Systems and Nextel. As the period progressed,
commodity chemical companies, home builders and industrials were added
to the portfolio to take advantage of attractive valuations. While these
holdings, as well as others discussed in this report, were viewed
favorably at the end of the period, all holdings are subject to review
and adjustment in accordance with the fund's investment strategy and may
well vary in the future.
[GRAPHIC OMITTED: TOP THREE HOLDINGS PER SECTOR]
TOP THREE HOLDINGS PER SECTOR
HIGH YIELD SECTOR
Midland Funding II Corp.
debentures, series A, 11.75%, 2005
Host Marriott Travel Plaza
senior notes, series B, 9.5%, 2005
Affinity Group Holdings
senior notes, 11.0%, 2007
FOREIGN GOVERNMENT
Germany (Federal Republic of)
series 132, 4.125%, 2004
Denmark (Kingdom of)
6.00%, 2009
Canada (Government of)
series WL43, 5.75%, 2029
U.S. GOVERNMENT
U.S. Treasury Notes
6.00%, 8/15/09
U.S. Treasury Bonds
6.125%, 8/15/29
Government National Mortgage Assn.
7.00%, 5/15/23 through 12/15/28
Footnote reads:
These holdings represented 17.7% of the fund's net assets as of 4/30/00.
Portfolio holdings will vary over time.
* INTERNATIONAL STRATEGY
Despite a somewhat sluggish April, emerging-markets bonds were the best
performing fixed-income asset class throughout the period. Your fund
held positions in markets that offered attractive risk-adjusted value
such as Mexico and Bulgaria, two nations that are experiencing stable to
improving fundamentals. As the period progressed, the portfolio's
weighting in Mexico was pared back to realize profits. Management
redeployed assets into Russian debt, a market that gained 41% in the
first three months of calendar 2000 alone. Within the fund's developed
country holdings, longer-term bonds from Denmark and Canada were
acquired in order to take advantage of the possibility of continued
yield curve flattening. Japanese government bonds were largely avoided.
* OUTLOOK: NO DRAMATIC PRICE MOVEMENTS EXPECTED
The fund enters the second half of fiscal 2000 with a market that
already seems to have priced in further Fed rate increases. While
volatility across capital markets may well continue, management expects
fixed-income securities to provide stability. In such an environment,
individual bond selection and sector allocation become the key drivers
of performance. Your fund's managers have taken full advantage of the
portfolio's multisector flexibility to position it for the challenges
that may lie ahead.
* UPCOMING TRANSITION
This is my last letter to you and other Putnam Master Income Trust
shareholders. After more than 30 years as Chairman of the Trustees and
President of the Putnam Funds, the time has come for me to step aside.
As of July 1, 2000, John Hill will become Chairman. John is currently an
independent Trustee and has served on the Board for the past 14 years.
In addition, my son, George Putnam, III, will take on the role of
President. I am confident that the leadership of the funds will be in
exceptionally strong hands. I will become Chairman Emeritus, remain a
shareholder, and stay in close touch with the funds.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
June 21, 2000
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 4/30/00, there is no guarantee the fund will
continue to hold these securities in the future. The lower credit
ratings of high-yield bonds reflect a greater possibility that adverse
changes in the economy or poor performance by the issuers of these bonds
may affect the fund's ability to pay principal and interest.
International investing involves certain risks, such as currency
fluctuations, economic instability, and political developments. While
the U.S. government backing of individual securities does not insure
your principal, which will fluctuate, it does guarantee that the fund's
government-backed holdings will make timely payments of interest and
principal. Mortgage-backed securities in the portfolio may be subject to
prepayment risk.
PERFORMANCE SUMMARY
This section provides information about your fund's performance, which
should always be considered in light of its investment strategy. Putnam
Master Income Trust is designed for investors seeking high current
income, consistent with preservation of capital, through a portfolio
diversified among U.S. government, high-yield, and international
fixed-income securities.
TOTAL RETURN FOR PERIODS ENDED 4/30/00
Salomon Bros. First
Lehman Bros. Non-U.S. Boston
Market Government World Govt. High-Yield
NAV price Bond Index Bond Index Index
--------------------------------------------------------------------------
6 months 2.87% -2.50% 2.25% -6.86% 1.11%
--------------------------------------------------------------------------
1 year -0.08 -10.37 1.98 -5.57 -2.01
--------------------------------------------------------------------------
5 years 36.34 29.08 39.06 7.72 42.19
Annual average 6.40 5.24 6.81 1.50 7.29
--------------------------------------------------------------------------
10 years 149.86 130.18 116.60 129.37 187.57
Annual average 9.59 8.69 8.03 8.65 11.14
--------------------------------------------------------------------------
Life of fund
(since 12/28/87) 187.48 117.25 159.25 113.20 221.00
Annual average 8.93 6.49 8.03 6.33 9.92
--------------------------------------------------------------------------
Past performance is no assurance of future results. More recent returns
may be more or less than those shown. They do not take into account any
adjustment for taxes payable on reinvested distributions. Investment
returns, 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 4/30/00
--------------------------------------------------
Distributions (number) 6
--------------------------------------------------
Income $0.336
--------------------------------------------------
Total $0.336
--------------------------------------------------
Share value: NAV Market price
--------------------------------------------------
10/31/99 $7.72 $6.625
--------------------------------------------------
4/30/00 7.53 6.125
--------------------------------------------------
Current return (end of period)
--------------------------------------------------
Current dividend rate1 8.76% 10.78%
--------------------------------------------------
1Income portion of most recent distribution, annualized and divided by
NAV or market price at end of period.
TOTAL RETURN FOR PERIODS ENDED 3/31/00 (most recent calendar quarter)
Market
NAV price
------------------------------------------------------
6 months 3.79% -6.19%
------------------------------------------------------
1 year 2.49 -11.40
------------------------------------------------------
5 years 40.43 25.50
Annual average 7.03 4.65
------------------------------------------------------
10 years 150.91 124.32
Annual average 9.64 8.41
------------------------------------------------------
Life of fund (since 12/28/87) 189.88 113.14
Annual average 9.07 6.37
------------------------------------------------------
Past performance is no assurance of future results. More recent returns
may be more or less than those shown. They do not take into account any
adjustment for taxes payable on reinvested distributions. Investment
returns, 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 shares, not including
any initial or contingent deferred sales charge.
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 a market-weighted index including
publicly traded bonds having a rating below BBB by Standard & Poor's and
Baa by Moody's.
Salomon Brothers Non-U.S. World Government Bond Index* is an unmanaged
list of bonds issued by 10 countries.
The Lehman Brothers Government Bond Index* is composed of all publicly
issued, non-convertible, domestic debt of the U.S. government or any
agency thereof, quasi-federal corporations, or corporate debt guaranteed
by the U.S. government. Flower bonds and pass-through issues are
excluded. Total return comprises price appreciation/depreciation and
income as a percentage of the original investment. Indexes are
rebalanced monthly by market capitalization.
*Securities indexes assume reinvestment of all distributions and interest
payments and do not take in account brokerage fees or taxes. Securities
in the fund do not match those in the indexes and performance of the fund
will differ. It is not possible to invest directly in an index.
A GUIDE TO THE FINANCIAL STATEMENTS
These sections of the report constitute the fund's financial statements.
The fund's portfolio lists all the fund's investments and their values
as of the last day of the reporting period. Holdings are organized by
asset type and industry sector, country, or state to show areas of
concentration and diversification.
Statement of assets and liabilities shows how the fund's net assets and
share price are determined. All investment and noninvestment assets are
added together. Any unpaid expenses and other liabilities are
subtracted from this total. The result is divided by the number of
shares to determine the net asset value per share, which is calculated
separately for each class of shares. (For funds with preferred shares,
the amount subtracted from total assets includes the net assets
allocated to remarketed preferred shares.)
Statement of operations shows the fund's net investment gain or loss
for the reporting period. This is determined by adding up all the fund's
earnings -- from dividends and interest income -- and subtracting its
operating expenses. This statement also lists any net gain or loss the
fund realized on the sales of its holdings and -- for holdings that
remain in the portfolio -- any change in unrealized gains or losses over
the period.
Statement of changes in net assets shows how the fund's net assets were
affected by distributions to shareholders and by changes in the number
of the fund's shares. It lists distributions and their sources (net
investment income or realized capital gains) over the current reporting
period and the most recent fiscal year-end. The distributions listed
here may not match the sources listed in the Statement of operations
because the distributions are determined on a tax basis and may be paid
in a different period from the one in which they were earned.
Financial highlights provide an overview of the fund's investment
results, per-share distributions, expense ratios, net investment income
ratios and portfolio turnover in one summary table, reflecting the five
most recent reporting periods. In a semiannual report, the highlight
table also includes the current reporting period. For open-end funds, a
separate table is provided for each share class.
<TABLE>
<CAPTION>
THE FUND'S PORTFOLIO
April 30, 2000 (Unaudited)
CORPORATE BONDS AND NOTES (45.9%) (a)
PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C>
Advertising and Marketing Services (0.7%)
-------------------------------------------------------------------------------------------------------------------
$ 140,000 Ackerly Group, Inc. sr. sub. notes Ser. B, 9s, 2009 $ 131,600
1,000,000 Adams Outdoor Advertising sr. notes 10 3/4s, 2006 1,020,000
406,600 Interact Operating Co. notes 14s, 2003 121,980
1,000,000 Lamar Media Corp. sr. sub. notes 9 1/4s, 2007 987,500
460,000 Lamar Media Corp. company guaranty 8 5/8s, 2007 437,000
----------------
2,698,080
Aerospace and Defense (0.7%)
-------------------------------------------------------------------------------------------------------------------
800,000 Argo-Tech Corp. company guaranty 8 5/8s, 2007 600,000
80,000 Argo-Tech Corp. company guaranty Ser. D, 8 5/8s, 2007 60,800
690,000 BE Aerospace, Inc. sr. sub. notes 9 1/2s, 2008 600,300
210,000 Decrane Aircraft Holdings company guaranty Ser. B, 12s, 2008 185,850
425,000 L-3 Communications Corp. sr. sub. notes Ser. B, 10 3/8s, 2007 425,000
570,000 L-3 Communications Corp. sr. notes 9 1/8s, 2008 494,475
220,000 L-3 Communications Corp. company guaranty Ser. B, 8s, 2008 191,400
185,000 Moog, Inc. sr. sub. notes Ser. B, 10s, 2006 180,375
----------------
2,738,200
Agriculture (0.3%)
-------------------------------------------------------------------------------------------------------------------
1,297,335 Premium Standard Farms, Inc. sr. sec. notes 11s, 2003 (PIK) 1,180,575
Airlines (0.7%)
-------------------------------------------------------------------------------------------------------------------
540,000 Airbus Industries 144A 12.266s, 2020 562,874
310,000 Calair LLC 144A company guaranty 8 1/8s, 2008 268,538
480,000 Canadian Airlines Corp. secd. notes 10s,
2005 (In default) (Canada) (NON) 412,800
1,500,000 US Air, Inc. pass-thru certificates Ser. 93-A2, 9 5/8s, 2003 1,400,145
----------------
2,644,357
Automotive (1.0%)
-------------------------------------------------------------------------------------------------------------------
180,000 Aftermarket Technology Corp. sr. sub. notes 12s, 2004 180,900
383,000 Aftermarket Technology Corp. sr. sub. notes Ser. D, 12s, 2004 384,915
500,000 Dura Operating Corp. company guaranty Ser. B, 9s, 2009 451,250
1,060,000 Federal Mogul Corp. notes 7 3/4s, 2006 866,942
290,000 Federal Mogul Corp. notes 7 3/8s, 2006 235,553
420,000 Hayes Lemmerz International, Inc. company guaranty Ser. B,
8 1/4s, 2008 357,000
200,000 Hayes Wheels International, Inc. company guaranty Ser. B,
9 1/8s, 2007 178,000
250,000 Lear Corp. sub. notes 9 1/2s, 2006 240,958
1,120,000 Navistar International Corp. sr. notes Ser. B, 8s, 2008 1,052,800
80,000 Oxford Automotive, Inc. company guaranty Ser. D, 10 1/8s, 2007 75,200
290,000 Safety Components International, Inc. sr. sub. notes Ser. B,
10 1/8s, 2007 (In default) (NON) 43,500
100,000 Tenneco, Inc. company guaranty Ser. B, 11 5/8s, 2009 100,000
----------------
4,167,018
Banking (0.9%)
-------------------------------------------------------------------------------------------------------------------
190,000 Chevy Chase Savings Bank, Inc. sub. deb. 9 1/4s, 2008 168,625
380,000 Chevy Chase Savings Bank, Inc. sub. deb. 9 1/4s, 2005 360,050
165,000 Colonial Capital II 144A company guaranty 8.92s, 2027 150,344
45,000 Dime Capital Trust I bank guaranty Ser. A, 9.33s, 2027 40,829
550,000 GS Escrow Corp. sr. notes 7 1/8s, 2005 490,430
865,000 Hanvit Bank 144A sub. notes 11 3/4s, 2010 (Korea) 850,944
70,000 North Fork Capital Trust I company guaranty 8.7s, 2026 65,192
40,000 Peoples Heritage Capital Trust company guaranty Ser. B,
9.06s, 2027 38,708
285,000 Provident Capital Trust company guaranty 8.6s, 2026 271,354
165,000 Riggs Capital Trust 144A bonds 8 5/8s, 2026 136,090
420,000 Sovereign Bancorp, Inc. sr. notes 10 1/2s, 2006 414,750
230,000 Sovereign Capital Trust company guaranty 9s, 2027 154,963
440,000 Webster Capital Trust I 144A bonds 9.36s, 2027 424,098
----------------
3,566,377
Beverage (0.2%)
-------------------------------------------------------------------------------------------------------------------
810,000 Triarc Consumer Products, Inc. company guaranty 10 1/4s, 2009 749,250
Broadcasting (3.5%)
-------------------------------------------------------------------------------------------------------------------
885,000 Acme Television sr. disc. notes stepped-coupon zero %
(10 7/8s, 9/30/00), 2004 (STP) 809,775
920,000 Allbritton Communications Co. sr. sub. notes Ser. B, 8 7/8s, 2008 821,100
367,800 AMFM Operating, Inc. deb. 12 5/8s, 2006 (PIK) 419,752
820,000 Benedek Communications Corp. sr. disc. notes stepped-coupon
zero % (13 1/4s, 5/15/01), 2006 (STP) 740,050
1,020,000 Capstar Broadcasting sr. disc. notes stepped-coupon zero %
(12 3/4s, 2/1/02), 2009 (STP) 915,450
532,400 Capstar Broadcasting sub. deb. 12s, 2009 601,612
340,000 Capstar Broadcasting sr. sub. notes 9 1/4s, 2007 340,850
170,000 Central European Media Enterprises Ltd. sr. notes 9 3/8s,
2004 (Bermuda) 64,600
960,000 Chancellor Media Corp. company guaranty 8s, 2008 952,800
327,990 Citadel Broadcasting, Inc. sr. sub. notes 10 1/4s, 2007 327,990
270,000 Citadel Broadcasting, Inc. company guaranty 9 1/4s, 2008 253,800
902,000 Diva Systems Corp. sr. disc. notes, stepped-coupon Ser. B,
zero % (12 5/8s, 3/1/03), 2008 (STP) 441,980
1,390,000 Echostar DBS Corp. sr. notes 9 3/8s, 2009 1,343,088
150,000 Fox Family Worldwide, Inc. sr. disc. notes stepped-coupon
zero % (10 1/4s, 11/1/02), 2007 (STP) 91,125
440,000 Fox Family Worldwide, Inc. sr. notes 9 1/4s, 2007 382,800
350,000 Gloden Sky DBS, Inc. sr. disc. notes, stepped-coupon Ser. B,
zero % (13 1/2s, 3/1/04), 2007 (STP) 235,375
360,000 Golden Sky Systems company guaranty Ser. B, 12 3/8s, 2006 396,000
230,000 Granite Broadcasting Corp. sr. sub. notes 8 7/8s, 2008 198,375
770,000 Knology Holdings, Inc. sr. disc. notes stepped-coupon zero %
(11 7/8s, 10/15/02), 2007 (STP) 477,400
480,000 LIN Holdings Corp. sr. disc. notes stepped-coupon zero %
(10s, 3/1/03), 2008 (STP) 283,200
120,000 LIN Television Corp. company guaranty 8 3/8s, 2008 102,000
185,000 Onepoint Communications, Inc. company guaranty Ser. B,
14 1/2s, 2008 120,250
170,000 Paxson Communications Corp. 144A sr. sub. notes
11 5/8s, 2002 175,100
120,000 Pegasus Communications Corp. sr. notes Ser. B, 9 3/4s, 2006 117,600
120,000 Pegasus Media & Communications notes Ser. B, 12 1/2s, 2005 124,800
1,424,000 PHI Holdings, Inc. sr. sub. notes zero %, 2001 1,238,880
405,000 Radio One, Inc. company guaranty stepped-coupon Ser. B, 7s,
(12s, 5/15/00), 2004 (STP) 429,300
580,000 RCN Corp. sr. notes 10 1/8s, 2010 516,200
180,000 Spanish Broadcasting Systems sr. sub notes 9 5/8s, 2009 175,950
175,000 TV Azteca Holdings S.A. de C.V. sr. notes 11s, 2002 (Mexico) 167,125
665,000 TV Azteca S.A. de C.V. sr. notes 10 1/2s, 2007 (Mexico) 605,150
----------------
13,869,477
Building Materials (0.2%)
-------------------------------------------------------------------------------------------------------------------
195,000 American Architectural Products Corp. company guaranty
11 3/4s, 2007 48,750
150,000 Atrium Companies, Inc. company guaranty Ser. B, 10 1/2s, 2009 140,250
360,000 Building Materials Corp. company guaranty 8s, 2008 304,200
270,000 NCI Building Systems, Inc. sr. sub. notes Ser. B, 9 1/4s, 2009 247,050
----------------
740,250
Cable Television (2.3%)
-------------------------------------------------------------------------------------------------------------------
250,000 Adelphia Communications Corp. sr. notes Ser. B, 9 7/8s, 2007 241,875
460,000 Adelphia Communications Corp. sr. notes Ser. B, 8 3/8s, 2008 409,400
160,000 Century Communications Corp. sr. notes 8 7/8s, 2007 146,400
1,000,000 Century Communications Corp. bank term loan FRN
9.29s, 2009 1,001,250
290,000 Charter Communications bank term loan FRN 8.79s, 2008 288,550
1,750,000 Charter Communications Holdings LLC sr. notes 8 5/8s, 2009 1,526,875
380,000 Classic Cable, Inc. 144A sr. sub. notes 10 1/2s, 2010 372,400
50,000 CSC Holdings, Inc. sr. sub. deb. 9 7/8s, 2013 50,750
140,000 CSC Holdings, Inc. deb. 7 7/8s, 2018 126,049
250,000 CSC Holdings, Inc. sr. notes 7 7/8s, 2007 237,685
360,000 CSC Holdings, Inc. sr. notes 7 1/4s, 2008 328,356
990,000 Diamond Cable Communication Co. sr. disc. notes
stepped-coupon zero % (10 3/4s, 2/15/02),
2007 (United Kingdom) (STP) 772,200
400,000 NTL Communications Corp. sr. notes Ser. B, 11 1/2s, 2008 405,000
410,000 Rogers Cablesystems Ltd. company guaranty 10s,
2007 (Canada) 428,450
370,000 Supercanal Holdings S.A. 144A sr. notes 11 1/2s,
2005 (In default) (Argentina) (NON) 159,100
250,000 TeleWest Communications Plc, structured notes (issued by
DLJ International Capital) 10 7/8s, 2005 (United Kingdom) 252,100
760,000 TeleWest Communications Plc 144A 9 7/8s,
2010 (United Kingdom) 744,800
300,000 TeleWest Communications Plc sr. disc. notes stepped-coupon
zero % (9 1/4, 4/15/04), 2009 (United Kingdom) (STP) 177,000
950,000 United Pan-Europe N.V. 144A bonds stepped-coupon zero %
(13.75s, 8/1/05) 2010 (Netherlands) (STP) 460,750
1,580,000 United Pan-Europe N.V. 144A bonds stepped-coupon zero %
(12.5s, 8/1/04) 2009 (Netherlands) (STP) 782,100
390,000 United Pan-Europe N.V. 144A bonds 10 7/8s,
2009 (Netherlands) 356,850
----------------
9,267,940
Chemicals (1.8%)
-------------------------------------------------------------------------------------------------------------------
300,000 Geo Specialty Chemicals, Inc. sr. sub. notes 10 1/8s, 2008 258,000
410,000 Georgia Gulf Corp. 144A sr. sub. notes 10 3/8s, 2007 420,250
40,000 Huntsman Corp. 144A sr. sub. notes 9 1/2s, 2007 36,600
500,000 Huntsman Corp. 144A sr. sub. notes FRN 9.38s, 2007 452,500
1,240,000 Huntsman ICI Chemicals, Inc. company guaranty 10 1/8s, 2009 1,233,800
270,000 Koppers Industries, Inc. 144A company guaranty 9 7/8s, 2007 249,075
210,000 Lyondell Petrochemical Co. sr. sub. notes 10 7/8s, 2009 206,325
830,000 Lyondell Petrochemical Co. sec. notes Ser. B, 9 7/8s, 2007 815,475
860,000 Lyondell Petrochemical Co. notes Ser. A, 9 5/8s, 2007 844,950
795,000 Pioneer Americas Acquisition 144A sr. notes 9 1/4s, 2007 636,000
290,000 Polymer Group, Inc. company guaranty Ser. B, 9s, 2007 263,900
190,000 Polymer Group, Inc. company guaranty Ser. B, 8 3/4s, 2008 170,050
504,126 Polytama International notes 11 1/4s, 2007 (Indonesia) 66,444
480,000 Royster-Clark, Inc. 1st mtge. 10 1/4s, 2009 391,200
340,000 Sterling Chemicals, Inc. sr. disc. notes stepped-coupon zero %
(13 1/2s, 8/15/01), 2008 (STP) 158,100
220,000 Sterling Chemicals, Inc. company guaranty Ser. B, 12 3/8s, 2006 224,950
50,000 Sterling Chemicals, Inc. sr. sub. notes 11 3/4s, 2006 44,500
373,000 Sterling Chemicals, Inc. sr. sub. notes Ser. A, 11 1/4s, 2007 320,780
465,000 Trikem S.A. 144A bonds 10 5/8s, 2007 (Brazil) 344,100
----------------
7,136,999
Coal (--%)
-------------------------------------------------------------------------------------------------------------------
710,000 Lodestar Holdings, Inc. company guaranty 11 1/2s, 2005 142,000
Commercial and Consumer Services (0.3%)
-------------------------------------------------------------------------------------------------------------------
720,000 Coinmach Corp. sr. notes Ser. D, 11 3/4s, 2005 669,600
100,000 GS Superhighway Holdings sr. notes 10 1/4s, 2007 (China) 70,011
740,000 GS Superhighway Holdings sr. notes 9 7/8s, 2004 (China) 518,000
----------------
1,257,611
Computers (0.1%)
-------------------------------------------------------------------------------------------------------------------
300,000 Unisys Corp. sr. notes 11 3/4s, 2004 324,000
280,000 Unisys Corp. sr. notes 7 7/8s, 2008 268,100
----------------
592,100
Construction (0.3%)
-------------------------------------------------------------------------------------------------------------------
920,000 Better Minerals & Aggregates Co. 144A sr. sub. notes 13s, 2009 910,800
590,000 Republic Group, Inc. sr. sub. notes 9 1/2s, 2008 483,800
----------------
1,394,600
Consumer (0.2%)
-------------------------------------------------------------------------------------------------------------------
590,000 Home Interiors & Gifts, Inc. company guaranty 10 1/8s, 2008 466,100
530,000 Samsonite Corp. sr. sub. notes 10 3/4s, 2008 447,850
----------------
913,950
Consumer Finance (0.3%)
-------------------------------------------------------------------------------------------------------------------
70,000 Contifinancial Corp. sr. notes 8 3/8s, 2003 7,000
610,000 Contifinancial Corp. sr. notes 8 1/8s, 2008 61,000
840,000 Contifinancial Corp. sr. notes 7 1/2s, 2002 84,000
790,000 Madison River Capital 144A sr. notes 13 1/4s, 2010 734,700
190,000 Outsourcing Solutions, Inc. sr. sub. notes Ser. B, 11s, 2006 167,200
----------------
1,053,900
Consumer Goods (0.5%)
-------------------------------------------------------------------------------------------------------------------
420,000 Decora Industries, Inc. sr. sec. notes Ser. B, 11s, 2005 176,400
135,000 French Fragrances, Inc. sr. notes Ser. B, 10 3/8s, 2007 128,925
530,000 French Fragrances, Inc. company guaranty Ser. D, 10 3/8s, 2007 508,800
310,000 Leiner Health Products sr. sub. notes 9 5/8s, 2007 231,725
300,000 NBTY, Inc. 144A sr. sub. notes 8 5/8s, 2007 261,000
250,000 Revlon Consumer Products sr. notes 9s, 2006 180,000
660,000 Revlon Consumer Products sr. sub. notes 8 5/8s, 2008 320,100
180,000 Revlon Consumer Products sr. notes 8 1/8s, 2006 128,700
----------------
1,935,650
Consumer Services (0.4%)
-------------------------------------------------------------------------------------------------------------------
550,000 Iron Mountain, Inc. company guaranty 8 3/4s, 2009 488,125
930,000 Iron Mountain, Inc. sr. sub. notes 8 1/4s, 2011 792,825
150,000 Pierce Leahy Corp. sr. sub. notes 11 1/8s, 2006 154,125
----------------
1,435,075
Containers (0.7%)
-------------------------------------------------------------------------------------------------------------------
735,000 AEP Industries, Inc. sr. sub. notes 9 7/8s, 2007 606,375
630,000 Huntsman Packaging Corp. company guaranty 9 1/8s, 2007 648,900
480,000 Impac Group, Inc. company guaranty Ser. B, 10 1/8s, 2008 494,400
460,000 Owens-Illinois, Inc. sr. notes 7.35s, 2008 411,847
740,000 Owens-Illinois, Inc. sr. notes 7.15s, 2005 675,746
145,000 Radnor Holdings, Inc. sr. notes 10s, 2003 123,250
----------------
2,960,518
Distribution (0.1%)
-------------------------------------------------------------------------------------------------------------------
620,000 RAB Enterprises, Inc. company guaranty 10 1/2s, 2005 409,200
Electric Utilities (0.5%)
-------------------------------------------------------------------------------------------------------------------
440,000 AES China Generating Co. sr. notes 10 1/8s, 2006 (China) 281,600
120,000 CMS Energy Corp. sr. notes 7 1/2s, 2009 103,950
1,040,000 CMS Energy Corp. sr. notes Ser. B, 6 3/4s, 2004 982,800
341,800 Northeast Utilities System notes Ser. A, 8.58s, 2006 341,079
104,533 Northeast Utilities System notes Ser. B, 8.38s, 2005 103,664
840,963 Panda Global Energy Co. company guaranty
12 1/2s, 2004 (China) 294,337
----------------
2,107,430
Energy (0.4%)
-------------------------------------------------------------------------------------------------------------------
250,000 Leviathan Gas Corp. company guaranty Ser. B, 10 3/8s, 2009 253,750
290,000 Parker Drilling Corp. company guaranty Ser. D, 9 3/4s, 2006 273,325
1,140,000 RBF Finance Co. company guaranty 11s, 2006 1,208,400
----------------
1,735,475
Entertainment (0.6%)
-------------------------------------------------------------------------------------------------------------------
230,000 AMC Entertainment, Inc. sr. sub. notes 9 1/2s, 2011 126,500
480,000 AMC Entertainment, Inc. sr. sub. notes 9 1/2s, 2009 264,000
345,000 Cinemark USA, Inc. sr. sub. notes 8 1/2s, 2008 (Mexico) 217,350
825,000 Premier Parks, Inc. sr. notes 9 1/4s, 2006 771,375
530,000 SFX Entertainment, Inc. company guaranty 9 1/8s, 2008 532,650
495,000 SFX Entertainment, Inc. 144A company guaranty Ser. B,
9 1/8s, 2008 495,000
440,000 Silver Cinemas, Inc. sr. sub. notes 10 1/2s, 2005 (In default) (NON 70,400
373,000 United Artists Theatre 144A sr. sub. notes 10.415s,
2007 (In default) (NON) 7,460
641,000 United Artists Theatre sr. sub. notes 9 3/4s, 2008 (In default) (NON) 12,820
----------------
2,497,555
Financial (1.2%)
-------------------------------------------------------------------------------------------------------------------
650,000 Aames Financial Corp. sr. notes 9 1/8s, 2003 386,750
50,000 Advanta Corp. company guaranty Ser. B, 8.99s, 2026 31,000
500,000 Advanta Corp. med. term notes Ser. B, 7s, 2001 471,970
460,000 Advanta Corp. med-term notes Ser. D, 6.92s, 2002 428,485
350,000 AMRESCO, Inc. sr. sub. notes Ser. 97-A, 10s, 2004 234,500
260,000 AMRESCO, Inc. sr. sub. notes Ser. 98-A, 9 7/8s, 2005 174,200
420,000 Conseco Finance Trust III, Inc. bonds 8.796s, 2027 147,000
600,000 Delta Financial Corp. sr. notes 9 1/2s, 2004 318,000
470,000 Imperial Credit Capital Trust I 144A company guaranty
10 1/4s, 2002 380,700
460,000 Imperial Credit Industries, Inc. sr. notes 9 7/8s, 2007 335,800
345,000 Investors Capital Trust I company guaranty Ser. B, 9.77s, 2027 317,400
600,000 Nationwide Credit, Inc. sr. notes Ser. A, 10 1/4s, 2008 444,000
200,000 Ocwen Capital Trust I company guaranty 10 7/8s, 2027 116,000
320,000 Ocwen Federal Bank FSB sub. deb. 12s, 2005 300,800
260,000 Ocwen Financial Corp. notes 11 7/8s, 2003 237,900
435,000 Resource America, Inc. 144A sr. notes 12s, 2004 352,350
----------------
4,676,855
Food (0.2%)
-------------------------------------------------------------------------------------------------------------------
400,000 Aurora Foods, Inc. sr. sub. notes Ser. B, 9 7/8s, 2007 224,000
550,000 Aurora Foods, Inc. 144A ser. sub. notes Ser. D, 9 7/8s, 2007 308,000
525,000 Vlasic Foods Intl., Inc. sr. sub notes Ser. B, 10 1/4s, 2009 330,750
----------------
862,750
Gaming & Lottery (2.1%)
-------------------------------------------------------------------------------------------------------------------
140,000 Ameristar Casinos, Inc. company guaranty Ser. B, 10 1/2s, 2004 136,500
80,000 Argosy Gaming Co. company guaranty 10 3/4s, 2009 83,200
500,000 Autotote Corp. company guaranty Ser. B, 10 7/8s, 2004 492,500
650,000 Boyd Gaming Corp. sr. sub. notes 9 1/2s, 2007 614,250
720,000 Fitzgeralds Gaming Corp. company guaranty Ser. B,
12 1/4s, 2004 (In default) (NON) 403,200
60,000 Hard Rock Hotel, Inc. sr. sub. notes Ser. B, 9 1/4s, 2005 52,200
180,000 Harrahs Entertainment, Inc. company guaranty 7 1/2s, 2009 166,653
1,080,000 Hollywood Casino Corp. company guaranty 11 1/4s, 2007 1,093,500
270,000 Hollywood Park, Inc. company guaranty Ser. B, 9 1/4s, 2007 270,000
360,000 Horseshoe Gaming Holdings company guaranty 8 5/8s, 2009 336,600
930,000 International Game Technology sr. notes 7 7/8s, 2004 878,850
215,000 Isle of Capri Black Hawk LLC 144A 1st mortgage Ser. B,
13s, 2004 234,350
250,000 Isle of Capri Casinos, Inc. company guaranty 8 3/4s, 2009 226,250
410,000 Mohegan Tribal Gaming, Auth. sr. sub. notes 8 3/4s, 2009 389,500
180,000 Park Place Entertainment 144A sr. sub. notes 9 3/8s, 2007 178,200
230,000 Park Place Entertainment sr. notes 8 1/2s, 2006 223,362
210,000 Sun International Hotels Ltd. company guaranty 9s, 2007 189,525
210,000 Sun International Hotels Ltd. sr. sub. notes 8 5/8s, 2007 185,325
850,000 Trump A.C. 1st mtge. 11 1/4s, 2006 622,625
1,250,000 Trump Castle Funding 144A sub. notes 10 1/4s, 2003 1,262,500
360,000 Trump Holdings & Funding Corp. sr. notes 15 1/2s, 2005 199,800
340,000 Venetian Casino company guaranty 12 1/4s, 2004 333,200
----------------
8,572,090
Health Care (1.6%)
-------------------------------------------------------------------------------------------------------------------
455,000 ALARIS Medical Systems, Inc. company guaranty 9 3/4s, 2006 364,000
170,000 Bio-Rad Labs Corp. 144A sr. sub. notes 11 5/8s, 2007 174,250
640,000 Columbia/HCA Healthcare Corp. deb. 8.36s, 2024 577,600
150,000 Columbia/HCA Healthcare Corp. med term notes notes
7.69s, 2025 122,250
600,000 Columbia/HCA Healthcare Corp. med term notes 6.63s, 2045 566,100
270,000 Conmed Corp. company guaranty 9s, 2008 245,700
465,000 Dade International, Inc. sr. sub. notes Ser. B, 11 1/8s, 2006 437,100
410,000 Hudson Respiratory Care, Inc. sr. sub. notes 9 1/8s, 2008 319,288
210,000 Kinetic Concepts, Inc. company guaranty Ser. B, 9 5/8s, 2007 152,250
590,000 Lifepoint Hospital Holdings company guaranty Ser. B,
10 3/4s, 2009 607,700
865,466 Magellan Health bank term loan FRN 8.63s, 2005 830,847
380,000 Mediq, Inc. deb. stepped-coupon zero % (13s, 6/1/03), 2009 (STP) 19,000
440,000 Mediq, Inc. company guaranty 11s, 2008 44,000
370,000 Paracelsus Healthcare sr. sub. notes 10s, 2006 (In default) (NON) 111,000
150,000 Tenet Healthcare Corp. sr. notes 8 5/8s, 2003 146,625
720,000 Tenet Healthcare Corp. sr. notes Ser. B, 8 1/8s, 2008 669,600
150,000 Tenet Healthcare Corp. sr. notes 8s, 2005 143,250
250,000 Tenet Healthcare Corp. sr. notes Ser. B, 7 5/8s, 2008 228,750
770,000 Triad Hospitals Holdings company guaranty Ser. B, 11s, 2009 796,950
----------------
6,556,260
Homebuilding (0.5%)
-------------------------------------------------------------------------------------------------------------------
700,000 D.R. Horton, Inc. company guaranty 8s, 2009 596,750
70,000 Del Webb Corp. sr. sub. deb. 9 3/8s, 2009 55,563
700,000 Lennar Corp. 144A sr. notes 9.95s, 2010 666,750
110,000 M.D.C. Holdings, Inc. sr. notes 8 3/8s, 2008 95,425
350,000 Toll Corp. company guaranty 8 1/8s, 2009 308,000
170,000 Webb Corp. sr. sub. deb. 10 1/4s, 2010 141,100
----------------
1,863,588
Household Furniture & Appliances (0.3%)
-------------------------------------------------------------------------------------------------------------------
750,000 Albecca, Inc. company guaranty 10 3/4s, 2008 594,375
650,000 Sealy Mattress Co. company guaranty stepped-coupon Ser. B,
zero % (10 7/8s, 12/15/02), 2007 (STP) 458,250
175,000 Sealy Mattress Co. sr. sub. notes Ser. B, 9 7/8s, 2007 170,625
----------------
1,223,250
Lodging/Tourism (0.6%)
-------------------------------------------------------------------------------------------------------------------
320,000 Epic Resorts LLC company guaranty Ser. B, 13s, 2005 208,000
1,135,000 HMH Properties, Inc. company guaranty Ser. B, 7 7/8s, 2008 981,775
670,000 ITT Corp. notes 6 3/4s, 2005 595,704
350,000 Prime Hospitality Corp. sub. notes 9 3/4s, 2007 333,375
100,000 Starwood Hotels & Resorts notes 6 3/4s, 2003 92,895
----------------
2,211,749
Manufacturing (1.0%)
-------------------------------------------------------------------------------------------------------------------
565,000 Applied Power, Inc. sr. sub. notes 8 3/4s, 2009 581,950
600,000 Axia, Inc. company guaranty 10 3/4s, 2008 456,000
680,000 Blount, Inc. company guaranty 13s, 2009 671,500
99,749 Blount, Inc. bank term loan FRN 9.82s, 2006 100,123
270,000 Burke Industries, Inc. company guaranty 10s, 2007 110,700
295,000 Celestica International Ltd. 144A sr. sub. notes
10 1/2s, 2006 (Canada) 306,800
305,000 Continental Global Group sr. notes Ser. B, 11s, 2007 88,450
685,000 Flextronics International Ltd. sr. sub. notes Ser. B, 8 3/4s, 2007 650,750
95,000 HCC Industries, Inc. company guaranty 10 3/4s, 2007 52,250
180,000 Jackson Products, Inc. company guaranty Ser. B, 9 1/2s, 2005 162,000
535,000 Motors and Gears, Inc. sr. notes Ser. D, 10 3/4s, 2006 508,250
220,000 Paragon Corp. Holdings, Inc. company guaranty Ser. B,
9 5/8s, 2008 77,000
205,000 Roller Bearing Co. company guaranty Ser. B, 9 5/8s, 2007 186,550
----------------
3,952,323
Medical Services (--%)
-------------------------------------------------------------------------------------------------------------------
490,000 Integrated Health Services, Inc. sr. sub. notes Ser. A,
9 1/2s, 2007 (In default) (NON) 9,800
250,000 Integrated Health Services, Inc. sr. sub. notes Ser. A,
9 1/4s, 2008 (In default) (NON) 5,000
210,000 Mariner Post-Acute Network, Inc. sr. sub. notes stepped-coupon
Ser. B, zero % (10 1/2s, 11/1/02), 2007 (In default) (STP) (NON) 1,050
1,000,000 Mariner Post-Acute Network, Inc. sr. sub. notes Ser. B,
9 1/2s, 2007 (In default) (NON) 5,000
1,080,000 Multicare Cos., Inc. sr. sub. notes 9s, 2007 54,000
520,000 Sun Healthcare Group, Inc. sr. sub. notes Ser. B,
9 1/2s, 2007 (In default) (NON) 10,400
430,000 Sun Healthcare Group, Inc. 144A sr. sub. notes
9 3/8s, 2008 (In default) (NON) 8,600
----------------
93,850
Medical Technology (--%)
-------------------------------------------------------------------------------------------------------------------
100,000 Hanger Orthopedic Group, Inc. sr. sub. notes 11 1/4s, 2009 79,000
Metal Fabricators (0.1%)
-------------------------------------------------------------------------------------------------------------------
300,000 Neenah Corp. company guaranty Ser. F, 11 1/8s, 2007 234,000
Metals (1.3%)
-------------------------------------------------------------------------------------------------------------------
780,000 AK Steel Corp. company guaranty 7 7/8s, 2009 709,800
280,000 Anker Coal Group, Inc. company guaranty Ser. B,
14 1/4s, 2007 (PIK) 126,000
460,000 California Steel Industries sr. notes Ser. B, 8 1/2s, 2009 434,700
425,000 Kaiser Aluminum & Chemical Corp. sr. sub. notes 12 3/4s, 2003 401,625
880,000 LTV Corp. sr. notes 11 3/4s, 2009 877,800
835,000 National Steel Corp. 1st mtge. Ser. D, 9 7/8s, 2009 835,000
1,000,000 Ucar Global bank term loan FRN 8.63s, 2008 1,000,000
290,000 WCI Steel, Inc. sr. notes Ser. B, 10s, 2004 284,200
380,000 Wheeling-Pittsburgh Steel Corp. sr. notes 9 1/4s, 2007 341,050
270,000 WHX Corp. sr. notes 10 1/2s, 2005 245,700
----------------
5,255,875
Office Equipment & Supplies (--%)
-------------------------------------------------------------------------------------------------------------------
461,000 U.S. Office Products Co. company guaranty 9 3/4s, 2008 115,250
Oil & Gas (1.0%)
-------------------------------------------------------------------------------------------------------------------
700,000 Belco Oil & Gas Corp. company guaranty Ser. B, 10 1/2s, 2006 714,000
50,000 Benton Oil & Gas Co. sr. notes 9 3/8s, 2007 29,750
230,000 Giant Industries Corp. company guaranty 9s, 2007 205,275
120,000 Gulf Canada Resources Ltd. sr. sub. notes 9 5/8s, 2005 (Canada) 121,800
110,000 Gulf Canada Resources, Ltd. sr. sub. deb. 9 1/4s, 2004 (Canada) 109,645
10,000 Gulf Canada Resources, Ltd. sr. notes 8.35s, 2006 (Canada) 9,725
440,000 HS Resources, Inc. company guaranty 9 1/4s, 2006 426,800
570,000 Ocean Energy, Inc. company guaranty Ser. B, 8 7/8s, 2007 561,450
570,000 Ocean Energy, Inc. company guaranty Ser. B, 8 3/8s, 2008 545,775
250,000 Pioneer Natural Resources Co. company guaranty 9 5/8s, 2010 252,813
250,000 RAM Energy, Inc. sr. notes 11 1/2s, 2008 125,625
240,000 Seven Seas Petroleum sr. notes Ser. B, 12 1/2s, 2005 48,000
215,000 Snyder Oil Corp. sr. sub. notes 8 3/4s, 2007 212,850
120,000 Stone Energy Corp. company guaranty 8 3/4s, 2007 111,900
700,000 Vintage Petroleum sr. sub. notes 9 3/4s, 2009 707,000
----------------
4,182,408
Paper & Forest Products (1.8%)
-------------------------------------------------------------------------------------------------------------------
490,000 APP Finance II Mauritius Ltd. bonds stepped-coupon 12s,
(16s, 2/15/04), 2049 (Indonesia) (STP) 273,175
100,000 APP Global Finance III sec. notes 10.345s,
2002 (Cayman Islands) 78,800
820,000 Doman Industries 144A sr. notes 8 3/4s, 2004 (Canada) 721,600
240,000 Gaylord Container Corp. sr. sub. notes 9 7/8s, 2008 187,200
325,000 Gaylord Container Corp. sr. notes Ser. B, 9 3/8s, 2007 290,875
640,000 Indah Kiat Financial Mauritius Ltd. company guaranty 10s,
2007 (Indonesia) 417,600
630,000 Pacifica Papers, Inc. sr. notes 10s, 2009 (Canada) 615,825
640,000 Packaging Corp. company guaranty 9 5/8s, 2009 643,200
348,182 Packaging Corp. bank term loan FRN 9.44s, 2008 328,659
1,085,000 Pindo Deli Finance Mauritius Ltd. company guaranty
10 3/4s, 2007 (Indonesia) 721,525
770,000 PT Pabrik Kertas Tjiwi Kimia company guaranty
10s, 2004 (Indonesia) 515,900
1,298,000 Repap New Brunswick sr. notes 10 5/8s, 2005 (Canada) 1,220,120
910,000 Riverwood International Corp. company guaranty 10 7/8s, 2008 864,500
450,000 Riverwood International Corp. company guaranty 10 1/4s, 2006 438,750
----------------
7,317,729
Pharmaceuticals (0.3%)
-------------------------------------------------------------------------------------------------------------------
430,000 ICN Pharmaceuticals, Inc. 144A sr. notes 9 1/4s, 2005 409,575
520,000 ICN Pharmaceuticals, Inc. 144A sr. notes 8 3/4s, 2008 481,000
280,000 MedPartners, Inc. sr. sub. notes 6 7/8s, 2000 274,400
----------------
1,164,975
Power Producers (1.3%)
-------------------------------------------------------------------------------------------------------------------
840,000 Calpine Corp. sr. notes 8 3/4s, 2007 827,963
350,000 Calpine Corp. sr. notes 7 7/8s, 2008 330,750
306,880 Midland Funding I Corp. deb. Ser. C-94, 10.33s, 2002 313,757
750,000 Midland Funding II Corp. deb. Ser. B, 13 1/4s, 2006 875,295
2,670,000 Midland Funding II Corp. deb. Ser. A, 11 3/4s, 2005 2,870,971
----------------
5,218,736
Publishing (0.8%)
-------------------------------------------------------------------------------------------------------------------
2,475,000 Affinity Group Holdings sr. notes 11s, 2007 2,079,000
287,753 Big Flower Hldgs. bank term loan FRN 9.13s, 3/1/10 287,753
500,000 Garden State Newspapers, Inc. sr. sub. notes Ser. B, 8 3/4s, 2009 441,250
490,000 Garden State Newspapers, Inc. sr. sub. notes 8 5/8s, 2011 426,300
----------------
3,234,303
Railroads (0.1%)
-------------------------------------------------------------------------------------------------------------------
565,000 TFM S.A. de C.V. company guaranty stepped-coupon zero %
(11 3/4s, 6/15/02), 2009 (Mexico) (STP) 372,900
Restaurants (0.9%)
-------------------------------------------------------------------------------------------------------------------
300,000 FRD Acquisition Co. sr. notes Ser. B, 12 1/2s, 2004 163,500
2,840,000 Host Marriott Travel Plaza sr. notes Ser. B, 9 1/2s, 2005 2,804,500
500,000 Sbarro, Inc. company guaranty 11s, 2009 501,250
----------------
3,469,250
Retail (0.7%)
-------------------------------------------------------------------------------------------------------------------
560,000 Amazon.com, Inc. sr. disc. notes stepped-coupon zero %
(10s,05/01/03), 2008 (STP) 333,200
130,000 Iron Age Corp. company guaranty 9 7/8s, 2008 91,000
400,000 K mart Corp. pass-thru certificates Ser. 95K4, 9.35s, 2020 408,120
900,000 K mart Corp. notes 8 3/8s, 2004 861,066
625,000 Mothers Work, Inc. sr. notes 12 5/8s, 2005 581,250
220,000 Saks, Inc. company guaranty 8 1/4s, 2008 198,550
375,000 Grupo Elektra 144A sr. notes 12s, 2008 (Mexico) 346,875
----------------
2,820,061
Semiconductor (0.1%)
-------------------------------------------------------------------------------------------------------------------
80,000 Amkor Technology, Inc. sr. notes 9 1/4s, 2006 78,400
140,000 Chippic Intl. Ltd. 144A company guaranty 12 3/4s, 2009 147,700
----------------
226,100
Shipping (0.2%)
-------------------------------------------------------------------------------------------------------------------
100,000 International Shipholding Corp. sr. notes 9s, 2003 98,750
140,000 International Shipholding Corp. sr. notes 7 3/4s, 2007 120,400
230,000 Kitty Hawk, Inc. company guaranty 9.95s, 2004 59,800
375,000 Transportacion Maritima Mexicana S.A. de C.V. notes
9 1/4s, 2003 322,500
----------------
601,450
Software (--%)
-------------------------------------------------------------------------------------------------------------------
480,000 Telehub Communications Corp. company guaranty
stepped-coupon zero % (13 7/8s, 7/31/02), 2005 (STP) 24,000
Specialty Printing (0.2%)
-------------------------------------------------------------------------------------------------------------------
400,000 Perry-Judd company guaranty 10 5/8s, 2007 332,000
122,719 Von Hoffman Press, Inc. 144A sr. sub. notes 13 1/2s, 2009 110,447
250,000 Von Hoffman Press, Inc. 144A sr. sub. notes 10 3/8s, 2007 225,000
----------------
667,447
Technology (0.8%)
-------------------------------------------------------------------------------------------------------------------
720,000 Fairchild Semiconductor Corp. sr. sub. notes 10 1/8s, 2007 714,600
1,000,000 Micron Technology, Inc. notes 6 1/2s, 2005 820,000
700,000 Telecommunications Techniques, Inc. company guaranty
9 3/4s, 2008 647,500
210,000 Viasystems, Inc. sr. sub notes 9 3/4s, 2007 178,500
690,000 Viasystems, Inc. sr. notes Ser. B, 9 3/4s, 2007 586,500
350,000 Zilog, Inc. company guaranty Ser. B, 9 1/2s, 2005 313,250
----------------
3,260,350
Technology Services (0.8%)
-------------------------------------------------------------------------------------------------------------------
125,000 Concentric Network Corp. sr. notes 12 3/4s, 2007 134,063
285,000 Covad Communications Group, Inc. sr. disc. notes
stepped-coupon Ser. B, zero % (13 1/2s, 03/15/03), 2008 (STP) 175,275
660,000 Covad Communications Group, Inc. sr. notes 12 1/2s, 2009 627,000
130,000 Covad Communications Group 144A sr. notes 12s, 2010 122,525
280,000 Cybernet Internet Services Intl., Inc. 144A sr. notes 14s, 2009 215,600
280,000 DII Group, Inc. (The) sr. sub. notes 8 1/2s, 2007 282,800
600,000 Exodus Communications, Inc. sr. notes 10 3/4s, 2009 595,500
335,000 Globix Corp. 144A sr. notes 12 1/2s, 2010 298,150
300,000 PSINet, Inc. sr. notes 11s, 2009 264,000
280,000 Rhythms Netconnections, Inc. 144A sr. notes 14s, 2010 246,400
220,000 Verio, Inc. sr. notes 11 1/4s, 2008 219,450
----------------
3,180,763
Telecommunications (6.2%)
-------------------------------------------------------------------------------------------------------------------
980,000 360Networks, Inc. 144A sr. notes 13s, 2008 (Canada) 962,850
260,000 Alaska Communications Systems Corp. company guaranty
9 3/8s, 2009 237,900
560,000 American Cellular bank term loan FRN 9.01s, 2008 558,600
640,000 American Cellular 144A bank term loan FRN 9.26s, 2008 638,400
230,000 Arch Communications Group sr. disc. notes stepped-coupon
zero % (10 7/8s, 3/15/01), 2008 (STP) 138,000
440,000 Barak I.T.C. sr. disc. notes stepped-coupon Ser. B, zero %
(12 1/2s, 11/15/02), 2007 (Israel) (STP) 246,400
330,000 Bestel S.A. de C.V. sr. disc. notes stepped-coupon zero %
(12 3/4s, 5/15/03), 2005 (Mexico) (STP) 244,200
110,000 Call-Net Enterprises, Inc. sr. notes 9 3/8s, 2009 77,000
970,000 Call-Net Enterprises, Inc. sr. disc. notes stepped-coupon zero %
(8.94s, 8/15/03), 2008 (Canada) (STP) 446,200
270,000 Call-Net Enterprises, Inc. sr. notes 8s, 2008 (Canada) 172,800
500,000 Carrier1 Intl. S.A. sr. notes Ser. B, 13 1/4s, 2009 (Luxembourg) 500,000
960,000 Celcaribe S.A. sr. notes 13 1/2s, 2004 (Colombia) 782,400
275,000 Cellco Finance Corp. NV sr. sub. notes 15s, 2005 (Netherlands) 289,438
1,658,000 CellNet Data Systems, Inc. sr. disc. notes stepped-coupon
zero % (14s, 10/1/02), 2007 (STP) 132,640
180,000 Clearnet Communications, Inc. sr. disc. notes stepped-coupon
zero % (14 3/4s, 12/15/00), 2005 (STP) 180,900
900,000 Econophone, Inc. company guaranty 13 1/2s, 2007 900,000
230,000 Esprit Teleom Group Plc sr. notes 11 1/2s,
2007 (United Kingdom) 212,750
615,000 Flag Ltd. 144A sr. notes 8 1/4s, 2008 (Bermuda) 547,350
1,060,000 Global Crossing Holdings Ltd. 144A sr. notes 9 1/2s, 2009 1,033,500
270,000 Global Crossing Holdings Ltd. 144A sr. notes 9 1/8s, 2006 262,575
530,000 Innova S De R.L. sr. notes 12 7/8s, 2007 (Mexico) 480,975
450,000 Intra Corp. bonds 13s, 2010 239,810
670,000 IPC Information Systems, Inc. sr. disc. notes stepped-coupon
zero % (10 7/8s, 11/01/01), 2008 (STP) 599,650
270,000 Level 3 Communication, Inc. 144A sr. notes 11 1/4s, 2010 257,175
140,000 Level 3 Communication, Inc. 144A sr. notes 11s, 2008 134,400
100,000 Loral Space & Communication, Ltd. sr. notes 9 1/2s, 2006 65,000
745,000 McCaw International Ltd sr. disc. notes stepped-coupon
zero % (13s, 4/15/02), 2007 (STP) 528,950
230,000 Metromedia Fiber Network, Inc. sr. notes 10s, 2009 220,800
760,000 Metromedia Fiber Network, Inc. sr. notes Ser. B, 10s, 2008 727,700
1,760,000 Millicom International Cellular S.A. sr. disc. notes
stepped-coupon zero % (13 1/2s, 6/1/01),
2006 (Luxembourg) (STP) 1,487,200
320,000 Neuvo Grupo Iusacell S.A. 144A sr. notes 14 1/4s,
2006 (Mexico) 334,400
790,000 Nextel Communications, Inc. sr. notes 12s, 2008 849,250
730,000 Nextel Communications, Inc. sr. notes 9 3/8s, 2009 691,675
400,000 Nextel Partners, Inc. 144A sr. notes 11s, 2010 389,000
490,000 NorthEast Optic Network, Inc. sr. notes 12 3/4s, 2008 460,600
970,000 NorthPoint Communications Group, Inc. 144A notes
12 7/8s, 2010 863,300
390,000 Orbital Imaging Corp. sr. notes Ser. B, 11 5/8s, 2005 175,500
500,000 Pagemart Wireless, Inc. sr. disc. notes stepped-coupon zero %
(11 1/4s, 2/1/03), 2008 (STP) 270,000
125,000 Paging Network Do Brasil sr. notes 13 1/2s, 2005 (Brazil) 16,250
665,000 Pathnet, Inc. sr. notes 12 1/4s, 2008 432,250
420,000 Price Communications Wireless, Inc. 144A sr. notes 9 1/8s, 2006 414,750
530,000 Primus Telecommunications Group, Inc. sr. notes Ser. B,
9 7/8s, 2008 454,475
300,000 RSL Communications, Ltd. 144A company guaranty
12 7/8s, 2010 278,250
405,000 RSL Communications, Ltd. company guaranty 12 1/4s, 2006 401,963
300,000 RSL Communications, Ltd. 144A company guaranty
10 1/2s, 2008 258,000
430,000 RSL Communications, Ltd. company guaranty 9 1/8s, 2008 344,000
270,000 Satelites Mexicanos S.A. de C.V. 144A sr. notes
10 1/8s, 2004 (Mexico) 202,500
110,000 Spectrasite Holdings, Inc. 144A sr. disc. notes stepped-coupon
zero % (12 7/8s, 3/15/05), 2010 (STP) 57,475
140,000 Spectrasite Holdings, Inc. sr. disc. notes stepped-coupon zero %
(11 1/4s, 4/15/04), 2009 (STP) 76,650
50,000 Spectrasite Holdings, Inc. 144A sr. notes 10 3/4s, 2010 49,250
650,000 Startec Global Communications Corp. sr. notes 12s, 2008 542,750
580,000 Viatel, Inc. sr. disc. notes stepped-coupon zero %
(12 1/2s, 4/15/03), 2008 (STP) 313,200
397,000 Viatel, Inc. sr. notes 11 1/2s, 2009 349,360
1,040,000 Viatel, Inc. sr. notes 11 1/4s, 2008 894,400
1,500,000 Western Wireless bank term loan FRN 8.94s, 2008 1,500,000
520,000 Williams Communications Group, Inc. sr. notes 10 7/8s, 2009 523,900
250,000 World Access, Inc. sr. notes Ser. B, 13 1/4s, 2008 223,750
----------------
24,672,461
Telephone (3.2%)
-------------------------------------------------------------------------------------------------------------------
240,000 Airgate PCS, Inc. sr. sub. notes stepped-coupon zero %
(13 1/2s, 10/1/04), 2009 (STP) 140,400
1,150,000 Alamosa PCS Holdings, Inc. company guaranty stepped-coupon
zero % (12 7/8s, 2/15/05), 2010 (STP) 592,250
310,000 Birch Telecommunications, Inc. sr. notes 14s, 2008 310,000
760,000 BTI Telecom Corp. sr. notes 10 1/2s, 2007 598,500
1,160,000 Firstworld Communication Corp. sr. disc. notes stepped-coupon
zero % (13, 4/15/03), 2008 (STP) 533,600
1,075,000 Focal Communications Corp. sr. disc. notes, stepped-coupon
Ser. B, zero % (12 1/8s, 02/15/03), 2008 (STP) 693,375
230,000 Focal Communications Corp. 144A sr. notes 11 7/8s, 2010 232,300
170,000 GST Equipment Funding sr. notes 13 1/4s, 2007 85,000
215,000 Hyperion Telecommunications Corp., Inc. sr. notes Ser. B,
12 1/4s, 2004 224,138
770,000 ICG Communications, Inc. sr. disc. notes stepped-coupon
zero % (10s, 02/15/03), 2008 (STP) 396,550
575,000 ICG Holdings, Inc. sr. disc. notes stepped-coupon zero %
(13 1/2s, 9/15/00), 2005 (Canada) (STP) 546,250
380,000 ICG Services, Inc. sr. disc. notes stepped-coupon zero %
(9 7/8s, 5/1/03), 2008 (STP) 191,900
380,000 KMC Telecommunications, Inc. sr. notes 13 1/2s, 2009 349,600
1,695,000 KMC Telecommunications, Inc. sr. disc. notes stepped-coupon
zero % (12 1/2s, 2/15/03), 2008 (STP) 872,925
820,000 Logix Communications Enterprises sr. notes 12 1/4s, 2008 344,400
1,130,000 McLeodUSA, Inc. sr. notes 9 1/2s, 2008 1,096,100
240,000 MGC Communications, Inc. 144A sr. notes 13s, 2010 227,400
850,000 Microcell Telecommunications sr. disc. notes stepped-coupon
Ser. B, zero % (14s, 12/1/01), 2006 (Canada) (STP) 765,000
290,000 Netia Holdings B.V. 144A company guaranty stepped-coupon
zero % (11 1/4s, 11/1/01), 2007 (Poland) (STP) 204,450
150,000 Netia Holdings B.V. 144A company guaranty
10 1/4s, 2007 (Poland) 126,375
120,000 Nextlink Communications 144A sr. disc. notes stepped-coupon
zero % (12 1/8s, 12/1/04), 2009 (STP) 66,000
230,000 Nextlink Communications, Inc. 144A sr. notes 10 1/2s, 2009 223,100
620,000 Telecorp PCS, Inc. company guaranty stepped-coupon zero %
(11 5/8s, 4/15/04), 2009 (STP) 406,100
250,000 Time Warner Telecom, Inc. sr. notes 9 3/4s, 2008 246,875
175,000 Transtel S.A. pass through certificates 12 1/2s, 2007 110,250
250,000 US Xchange LLC sr. notes 15s, 2008 162,500
665,000 US Unwired, Inc. sr. disc. notes stepped-coupon zero %
(13 3/8s, 11/1/04), 2009 (STP) 375,725
120,000 Versatel Telecom B.V. sr. notes 13 1/4s, 2008 (Netherlands) 121,800
340,000 Versatel Telecom B.V. sr. notes 13 1/4s, 2008 (Netherlands) 345,100
1,120,000 Voicestream Wire Corp. 144A sr. notes 10 3/8s, 2009 1,142,400
536,000 WinStar Communications, Inc. 144A sr. disc. notes
stepped-coupon zero % (14 3/4s, 4/15/05), 2010 (STP) 243,880
991,000 WinStar Communications, Inc. 144A sr. notes 12 3/4s, 2010 946,405
----------------
12,920,648
Textiles (0.4%)
-------------------------------------------------------------------------------------------------------------------
540,000 Galey & Lord, Inc. company guaranty 9 1/8s, 2008 232,200
610,000 Guess Jeans, Inc. sr. sub. notes 9 1/2s, 2003 613,050
460,000 Kasper A.S.L. Ltd. sr. notes 12 3/4s, 2004 230,000
390,000 Westpoint Stevens, Inc. sr. notes 7 7/8s, 2005 319,800
250,000 William Carter Holdings Co. sr. sub. notes Ser. A, 12s, 2008 225,000
----------------
1,620,050
Tobacco (0.2%)
-------------------------------------------------------------------------------------------------------------------
680,000 North Atlantic Trading Co. company guaranty Ser. B, 11s, 2004 598,400
Transportation (0.2%)
-------------------------------------------------------------------------------------------------------------------
1,000,000 Transportation Tech bank term loan FRN 9.74s, 2007 992,500
Trucks & Parts (0.1%)
-------------------------------------------------------------------------------------------------------------------
260,000 Transportation Manufacturing Operations, Inc. company
guaranty 11 1/4s, 2009 248,300
Utilities (0.3%)
-------------------------------------------------------------------------------------------------------------------
810,000 Cathay International Ltd. 144A sr. notes 13s, 2008 (China) 364,500
660,000 York Power Funding 144A notes 12s, 2007 (Cayman Islands) 646,800
----------------
1,011,300
Waste Management (0.6%)
-------------------------------------------------------------------------------------------------------------------
1,680,000 Allied Waste Industries, Inc. company guaranty Ser. B, 10s, 2009 1,155,000
710,000 Browning-Ferris Industries, Inc. deb. 7.4s, 2035 440,200
170,000 Waste Management, Inc. company guaranty 6 1/2s, 2004 149,515
710,000 WMX Technologies, Inc. notes 7.7s, 2002 673,208
----------------
2,417,923
Water Utilities (0.1%)
-------------------------------------------------------------------------------------------------------------------
330,000 Azurix Corp. 144A notes 10 3/8s, 2007 331,650
----------------
Total Corporate Bonds and Notes
(cost $209,473,793) $ 183,444,131
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (16.7%) (a)
PRINCIPAL AMOUNT VALUE
U.S. Government Agency Mortgage Obligations (5.1%)
-------------------------------------------------------------------------------------------------------------------
$ 1,769,163 Federal Home Loan Mortgage Association 7 1/2s, May 1, 2027 $ 1,732,665
Federal National Mortgage Association
Pass-Through Certificates
869,515 8s, with due dates from July 1, 2024 to May 1, 2029 868,149
834,945 7 1/2s, with due dates from December 1, 2029
to May 1, 2030 816,980
1,327,291 7s, with due dates from May 1, 2011 to February 1, 2030 1,286,996
574,000 6 5/8s, September 15, 2009 547,544
2,717,527 6s, with due dates from May 15, 2008 to May 25, 2029 2,463,968
Government National Mortgage Association
Pass-Through Certificates
5,748,589 8s, with due dates from March 15, 2017 to
December 15, 2027 5,760,598
6,385,475 7s, with due dates from May 15, 2023 to
December 15, 2028 6,153,635
694,321 6 1/2s, December 15, 2027 650,273
----------------
20,280,808
U.S. Treasury Obligations (11.6%)
-------------------------------------------------------------------------------------------------------------------
U.S. Treasury Bonds
4,115,000 6 1/2s, November 15, 2026 (SEG) 4,264,827
16,010,000 6 1/8s, August 15, 2029 16,047,463
3,970,000 6 1/8s, November 15, 2027 (SEG) 3,927,799
U.S. Treasury Notes
390,000 6 1/2s, February 15, 2010 397,738
1,840,000 6 3/8s, January 31, 2002 1,829,365
1,300,000 6 1/8s, December 31, 2001 1,288,014
16,629,000 6s, August 15, 2009 16,244,371
2,059,000 5 7/8s, November 15, 2004 2,004,622
1,485,000 U.S. Treasury Strip zero %, February 15, 2019 467,597
----------------
46,471,796
----------------
Total U.S. Government and Agency Obligations
(cost $66,264,531) $ 66,752,604
FOREIGN GOVERNMENT BONDS AND NOTES (15.9%) (a)
PRINCIPAL AMOUNT VALUE
-------------------------------------------------------------------------------------------------------------------
USD 2,581,000 Argentina (Republic of) unsub. 11 3/4s, 2009 $ 2,535,833
USD 2,653,000 Brazil (Federal Republic of) notes 14 1/2s, 2009 2,795,731
USD 990,000 Brazil (Federal Republic of) bonds 12 3/4s, 2020 949,212
CAD 4,495,000 Canada (Government of) bonds 5 1/2s, 2009 2,893,958
CAD 530,000 Canada (Government of) bonds Ser. WB60,
7 1/4s, 2007 377,876
CAD 7,990,000 Canada (Government of) bonds Ser. WL43,
5 3/4s, 2029 5,359,943
USD 800,000 Colombia (Republic of) bonds 11 3/4s, 2020 679,040
DKK 11,970,000 Denmark (Kingdom of) bonds 7s, 2024 1,678,082
DKK 45,900,000 Denmark (Kingdom of) bonds 6s, 2009 5,729,305
EUR 15,250,000 Germany (Federal Republic of) bonds Ser. 132,
4 1/8s, 2004 13,424,584
USD 480,000 Korea (Republic of) unsub. 8 7/8s, 2008 494,976
USD 565,000 Morocco (Government of) bonds Ser. A, 6.844s, 2009 504,263
NZD 5,985,000 New Zealand (Government of) bonds Ser. 709,
7s, 2009 2,892,902
USD 655,000 Philippines (Republic of) notes 10 5/8s, 2025 606,727
USD 645,000 Philippines (Republic of) bonds 9 7/8s, 2019 570,051
USD 2,255,000 Russia (Federation of) unsub. 10s, 2007 1,606,688
USD 1,410,000 Russia (Federation of) 144A bonds 12 3/4s, 2028 1,142,100
USD 10,575,000 Russia (Government of) deb. FRB 6.906s,
2020 (In default) (NON) 2,894,906
USD 565,000 Turkey (Republic of) sr. unsub. 12 3/8s, 2009 608,788
GBP 2,555,000 United Kingdom Treasury bonds 8s, 2000 4,006,996
GBP 2,460,000 United Kingdom Treasury bonds Ser. 85, 9 3/4s, 2002 4,108,082
GBP 820,000 United Kingdom Treasury bonds 10s, 2003 1,421,539
USD 1,310,000 United Mexican States bonds 11 3/8s, 2016 1,480,300
USD 4,300,000 United Mexican States bonds Ser. XW, IO,
10 3/8s, 2009 4,530,050
USD 740,000 Venezuela (Republic of) bonds 9 1/4s, 2027 472,712
----------------
Total Foreign Government Bonds and Notes
(cost $65,146,765) $ 63,764,644
COLLATERALIZED MORTGAGE OBLIGATIONS (8.9%) (a)
PRINCIPAL AMOUNT VALUE
-------------------------------------------------------------------------------------------------------------------
Commercial Mortgage Acceptance Corp.
$ 905,000 Ser. 97-ML1, Class D, 6.977s, 2030 $ 821,712
16,114,658 Ser. 97-ML1, Interest Only (IO), 0.897s, 2017 725,160
28,822,925 Commercial Mortgage Asset Trust Ser. 99-C1, Class X, IO,
1.16s, 2020 1,793,552
1,060,000 Countrywide Home Loan Ser. 98-3, Class A5, 6 3/4s, 2028 964,269
1,625,000 Countrywide Mortgage Backed Securities, Inc. Ser. 93-C,
Class A8, 6 1/2s, 2024 1,474,103
Criimi Mae Commercial Mortgage Trust
5,222,000 Ser. 98-C1, Class A2, 7s, 2011 4,459,914
1,398,000 Ser. 98-C1, Class B, 7s, 2011 1,077,552
27,980,654 Deutsche Mortgage & Asset Receiving Corp. Ser. 98-C1,
Class X, IO, 1.11s, 2031 1,438,381
Federal National Mortgage Association
659,000 Ser. 92-207, Class S, IO, 9.03s, 2022 130,153
2,273,482 Ser. 281, Class 2, IO, 9s, 2026 635,509
532,997 Ser. 251, Class 2, IO, 8s, 2023 161,647
994,060 Ser. 217, Class 2, IO, 8s, 2023 294,490
471,400 Ser. 203, Class 2, IO, 8s, 2023 142,966
355,883 Ser. 176, Class 2, IO, 8s, 2022 105,430
2,222,329 Ser. 266, Class 2, IO, 7 1/2s, 2024 671,560
2,112,882 Ser. 252, Class 2, IO, 7 1/2s, 2023 654,993
2,772,784 Ser. 221, Class 2, 7 1/2s, 2023 843,966
5,328,298 Ser. 218, Class 2, IO, 7 1/2s, 2023 1,618,470
1,157,911 Ser. 250, Class 2, IO, 7s, 2023 356,781
2,482,145 Ser. 93-251, Class Z, 6 1/2s, 2023 2,155,588
84,396 Ser. 302, Class 2, IO, 6s, 2029 27,191
2,027,223 Ser. 304, Class 2, IO, 6s, 2028 586,628
1,957,736 Ser. 97-91, Class SL, IO, 3.61s, 2023 157,231
1,025,392 Ser. 97-92, Class SM,IO, 2.94s, 2022 81,070
2,699,710 Ser. 98-66, Class SB, IO, 2.01s, 2028 111,785
610,284 Freddie Mac Ser. 1717, Class L, 6 1/2s, 2024 584,967
Freddie Mac Strip
408,353 Ser. 147, IO, 8s, 2023 123,527
675,025 Ser. 180, Principal Only (PO), zero %, 2026 454,903
1,366,061 Ser. 202, Class PO, zero %, 2029 824,119
620,000 GE Capital Mortgage Services, Inc. Ser. 98-11, Class 2A4,
6 3/4s, 2028 569,110
1,085,000 GGP ALA MOANA Ser. 99-C1, Class E, 7.65s, 2009 1,087,713
GGP-Homart
220,000 Ser. 99-C1, Class G, 8.089s, 2003 220,550
255,000 Ser. 99-C1, Class F, 7.839s, 2003 255,638
GGP-Ivanhoe
471,000 Ser. 99-C1, Class F, 7.88s, 2004 472,178
280,000 Ser. 99-C1, Class G, 7.88s, 2004 280,700
Government National Mortgage Association
590,757 Ser. 99-30, Class SG, 15.39s, 2025 525,497
871,374 Ser. 99-38, Class SL, 14.78s, 2026 765,720
1,606,981 Ser. 00-17, Class SB, 13.2s, 2026 1,512,972
124,506 Ser. 99-34, Class S, 8.112s, 2025 97,426
573,836 Ser. 99-40, Class US, 6s, 2027 411,010
4,047,439 Ser. 98-2, Class SA, IO, 2.37s, 2028 230,198
Merrill Lynch Mortgage Investors, Inc.
640,000 Ser. 95-C3, Class D, 7.782s, 2025 618,000
585,000 Ser. 96-C2, Class E, 6.96s, 2028 495,879
9,484,692 Ser. 96-C2, Class IO, 1.61s, 2028 619,469
970,671 Ser. 98-C2, Class IO, 1.57s, 2030 66,885
8,459,374 Morgan Stanley Capital I Ser. 98-HF1, Class X, IO, 1.02s, 2018 436,186
Mortgage Capital Funding, Inc.
4,053,641 Ser. 97-MC2, Class X, IO, 1.58s, 2012 266,020
16,709,968 Ser. 98-MC1, Class X, IO, 0.86s, 2009 609,000
754,756 PNC Mortgage Securities Corp. Ser. 97-6, Class A2, 6.6s, 2027 744,024
183,095 Prudential Home Mortgage Securities Ser. 93-57, Class A4,
5.9s, 2023 179,277
700,000 Residential Mortgage Securities Ser. 8, Class M, 7.202s, 2038 1,069,018
628,131 Rural Housing Trust Ser. 87-1, Class D, 6.33s, 2026 603,357
----------------
Total Collateralized Mortgage Obligations
(cost $37,512,736) $ 35,613,444
PREFERRED STOCKS (3.2%) (a)
NUMBER OF SHARES VALUE
-------------------------------------------------------------------------------------------------------------------
4 Adelphia Business Solutions, Inc. Ser. B, $12.875 pfd. $ 3,800
12,100 AmeriKing, Inc. $3.25 pfd. (PIK) 133,100
207 Benedek Communications $11.50 pfd. (PIK) 162,495
29,000 California Federal Bancorp, Inc. Ser. A, $2.281 pfd. 674,250
11,925 Chevy Chase Capital Corp. Ser. A, $5.188 pfd. (PIK) 632,025
2,100 Chevy Chase Savings Bank $3.25 pfd. 53,025
3,709 Citadel Broadcasting, Inc. 144A $13.25 cum. pfd. (PIK) 395,009
300 Concentric Network Corp. Ser. B, $13.50 pfd. (PIK) 305,437
9,375 CSC Holdings, Inc. Ser. M, $11.125 cum. pfd. (PIK) 1,005,469
27,930 Diva Systems Corp. Ser. C, $6.00 pfd. 139,650
1,022 Dobson Communications $13.00 pfd. 1,062,880
4 E. Spire Communications, Inc. $12.75 pfd. (PIK) 1,200
210 First Republic 144A 10.50% pfd. 197,400
850 Fresenius Medical Capital Trust I company guaranty Ser. D,
9.00%, pfd. (Germany) 816,000
3,330 Global Crossing Holdings 144A $10.50 pfd. 328,005
991 Granite Broadcasting 144A $12.75 pfd. (PIK) 842,350
650 ICG Holdings, Inc. $14.25 pfd. (Canada) 559,000
657 ICG Holdings, Inc., 144A $14.00 pfd. (Canada) (PIK) 551,880
884 Intermedia Communication Ser. B, $13.50 pfd. (PIK) 844,220
481 Nextel Communications, Inc. Ser. D, $13.00 cum. pfd. (PIK) 505,050
178 Nextel Communications, Inc. Ser. E, $11.125 pfd. (PIK) 170,880
13,868 Nextlink Communications, Inc. 144A $7.00 cum. pfd. (PIK) 693,400
86 Paxson Communications Corp. $13.25 cum. pfd. (PIK) 877,200
421 R&B Falcon Corp. 13.875% pfd. 450,470
480 Rural Cellular Corp. $12.25 pfd. (PIK) 477,600
580 WinStar Communications, Inc. 144A $14.25 cum. pfd. (PIK) 783,000
----------------
Total Preferred Stocks (cost $12,763,869) $ 12,664,795
BRADY BONDS (2.0%) (a)
PRINCIPAL AMOUNT VALUE
-------------------------------------------------------------------------------------------------------------------
$ 1,340,000 Argentina (Republic of) govt. guaranty 6s, 2023 $ 936,392
5,116,509 Brazil (Republic of) bonds 8s, 2014 3,664,955
190,000 Bulgaria (Government of) deb. Ser. PDI, FRB 7.063s, 2011 143,450
645,000 Bulgaria (Government of) Ser. A, FRB 7.063s, 2024 493,425
1,555,000 Bulgaria (Government of) Ser. A, FLIRB 2 1/4s, 2012 1,080,725
952,375 Venezuela (Republic of) deb. Ser. DL, FRB, 7s, 2007 745,233
1,055,000 Venezuela (Republic of) Ser. W-A, 6 3/4s, 2020 734,597
----------------
Total Brady Bonds (cost $7,635,927) $ 7,798,777
UNITS (0.7%) (a)
NUMBER OF UNITS VALUE
-------------------------------------------------------------------------------------------------------------------
635 APP China Group 144A units 14s, 2010 $ 504,825
200 Colo.com 144A units 13 7/8s, 2010 204,000
360 Equinix, Inc. 144A units 13s, 2007 374,400
430 Leap Wireless 144A units 12 1/2s, 2010 414,950
465 Maxcom Telecom 144A units 13 3/4s, 2007 (Mexico) 455,700
560 Pegasus Shipping 144A units company guaranty
stepped-coupon zero % (14 1/2s, 6/20/03),
2008 (Bermuda) (STP) 28,000
790 Ubiquitel 144A units stepped-coupon zero %
(14s, 4/1/05) 2010 (STP) 466,100
380 XCL Ltd. units sr. sec. notes 13 1/2s, 2004 (In default) (NON) 38,000
4,732 XCL Ltd. 144A units cum. pfd. zero % (PIK) 2,366
320 XM Satellite Radio, Inc. 144A units 14s, 2010 284,800
----------------
Total Units (cost $3,880,767) $ 2,773,141
ASSET-BACKED SECURITIES (0.7%) (a)
PRINCIPAL AMOUNT VALUE
-------------------------------------------------------------------------------------------------------------------
$ 376,588 Contimortgage Home Equity Loan Trust Ser. 97-1, Class M2,
7.67s, 2028 $ 184,410
1,337,518 First Plus Ser. 98-A, Class A, 8 1/2s, 2023 989,346
1,477,035 Provident Bank Home Equity Loan Trust 6.029s, 2029 1,476,112
----------------
Total Asset-Backed Securities (cost $3,185,326) $ 2,649,868
CONVERTIBLE BONDS AND NOTES (0.3%) (a)
PRINCIPAL AMOUNT VALUE
-------------------------------------------------------------------------------------------------------------------
$ 1,210,000 Cybernet Internet Service 144A cv. sr. disc. notes
stepped-coupon zero % (13s, 8/15/04), 2009 (STP) $ 592,900
740,000 Exide Corp. 144A cv. sr. sub. notes 2.9s, 2005 425,500
320,000 HEALTHSOUTH Corp. cv. sub. deb. 3 1/4s, 2003 251,200
90,000 Parker Drilling Co. cv. sub. notes 5 1/2s, 2004 65,363
----------------
Total Convertible Bonds and Notes (cost $1,433,840) $ 1,334,963
COMMON STOCKS (0.5%) (a)
NUMBER OF SHARES VALUE
-------------------------------------------------------------------------------------------------------------------
200 AmeriKing, Inc. (NON) $ 2,000
5,200 AMFM, Inc. (NON) 345,150
2,625 Axia Holding, Inc. 144A (PIK) 34,125
111,114 Celcaribe S.A. (Colombia) (NON) 13,893
28,056 GST Telecommunications, Inc. (Canada) 94,689
4,148 IFINT Diversified Holdings 144A 8,296
755 MGC Communications, Inc. (NON) 36,995
182 Mothers Work, Inc. 2,184
125 Paging Do Brazil Holdings Co., LLC 144A Class B, (Brazil) 1
480 Premium Holdings (L.P.) 144A (NON) 4,798
100,418 PSF Holdings LLC Class A 1,003,901
8,300 Spanish Broadcasting Systems (NON) 125,330
15,000 Specialty Foods Acquisition Corp. (NON) 150
2,005 Viatel, Inc. (NON) 76,691
700 VoiceStream Wireless Corp. (NON) 69,300
----------------
Total Common Stocks (cost $4,334,141) $ 1,817,503
CONVERTIBLE PREFERRED STOCKS (0.4%) (a)
NUMBER OF SHARES VALUE
-------------------------------------------------------------------------------------------------------------------
2,290 Chesapeake Energy Corp. $3.50 cum. cv. pfd. $ 113,928
1,200 Global Crossing Ltd. $3.375 cv. pfd. 301,650
900 Global Crossing Ltd. $3.50 cv. pfd. 181,350
16,450 Global Telesystems, Inc. 144A $3.625 cv. pfd. 479,106
760 Interact Electronic $7.00 cv. pfd. 760
2,600 LTV Corp. (The) 144A $4.13 cv. pfd. 139,100
20 Paxson Communications Corp. 144A $9.75 cv. pfd. (PIK) 180,000
2,990 RSL Communications Ltd. 144A $3.75 cv. pfd. (Bermuda) 117,358
1,300 Verio, Inc. 144A $3.375 cv. pfd. 60,775
67 World Access, Inc. zero % cv. pfd. 68,005
932 XCL Ltd. 144A Ser. A, $9.50 cv. cum. pfd. 466
----------------
Total Convertible Preferred Stocks (cost $2,136,357) $ 1,642,498
WARRANTS (0.4%) (a) (NON) EXPIRATION
NUMBER OF WARRANTS DATE VALUE
-------------------------------------------------------------------------------------------------------------------
7 Anker Coal Group, Inc. 144A 10/28/09 $ 1
330 Bestel S.A. (Mexico) 5/15/05 36,300
310 Birch Telecommunications, Inc. 144A (PIK) 6/15/08 17,050
2,498 Cellnet Data Systems, Inc. 10/1/07 1
325 Club Regina, Inc. 144A 12/1/04 3
280 Cybernet Internet 144A 7/1/09 28,000
1,050 Destia Communications 144A 7/15/07 110,250
690 Diva Systems Corp. 5/15/06 276,000
2,086 Diva Systems Corp. 3/1/08 29,199
10 E. Spire Communications, Inc. 11/1/05 230
430 Epic Resorts 6/15/05 4
450 Firstworld Communication 4/15/08 60,750
380 Globalstar Telecommunications 2/15/04 1,900
8,514 ICG Communications 10/15/05 206,465
760 Interact Systems, Inc. 8/1/03 8
760 Interact Systems, Inc. 144A 12/15/09 8
450 International Wireless
Communications Holdings 144A 8/15/01 1
7,412 Intra Corp. Class A 2/1/10 1
2,547 Intra Corp. Class B 2/1/10 1
875 KMC Telecom Holdings, Inc. 4/15/08 2,625
875 Knology Holdings 10/22/07 6,563
1,530 McCaw International Ltd. 4/15/07 6,120
380 Mediq, Inc. 144A 6/1/09 4
409 Network Plus Corp. 2/19/09 204,500
185 Onepoint Communications, Inc. 6/1/08 3,700
390 Orbital Imaging Corp. 144A 3/1/05 7,800
525 Orion Network Systems 1/15/07 6,300
5,290 Pagemart, Inc. 144A 12/31/03 63,480
620 Pathnet, Inc. 144A 4/15/08 6,200
640 Paxson Communications Corp. 144A 6/30/03 1,920
380 R&B Falcon Corp. 144A 5/1/09 133,000
650 Startec Global Communications Corp. 5/15/08 11,700
275 Sterling Chemicals Holdings 8/15/08 4,950
480 Telehub Communications Corp. 7/31/05 240
2,285 UIH Australia/Pacific, Inc. 144A 5/15/06 68,550
410 Versatel Telecom 5/15/08 200,900
36 Wright Medical Technology, Inc. 144A 6/30/03 1
----------------
Total Warrants (cost $711,681) $ 1,494,725
PURCHASED OPTIONS OUTSTANDING (--%) (a) (cost $12,050)
EXPIRATION
DATE/STRIKE
PRINCIPAL AMOUNT PRICE VALUE
-------------------------------------------------------------------------------------------------------------------
$ 4,287,000 90 Day Euro Bond Future Contracts (Call) May 2000/
94 USD $ 2,338
SHORT-TERM INVESTMENTS (5.1%) (a)
PRINCIPAL AMOUNT VALUE
-------------------------------------------------------------------------------------------------------------------
$10,280,000 Interest in $434,310,000 joint repurchase agreement dated
April 28, 2000 with Salomon, Smith Barney, Inc. due
May 1, 2000 with respect to various U.S. Treasury
obligations -- maturity value of $10,284,892 for an
effective yield of 5.71% $ 10,280,000
10,000,000 Interest in $662,705,000 joint repurchase agreement dated
April 28, 2000 with S.B.C. Warburg, Inc. due May 1, 2000
with respect to various U.S. Treasury obligations -- maturity
value of $10,004,758 for an effective yield of 5.71% 10,000,000
----------------
Total Short-Term Investments (cost $20,280,000) $ 20,280,000
-------------------------------------------------------------------------------------------------------------------
Total Investments (cost $434,771,783) (b) $ 402,033,431
-------------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $399,798,319.
(b) The aggregate identified cost on a tax basis is $435,592,684,
resulting in gross unrealized appreciation and depreciation of
$12,931,389 and $46,490,642, respectively, or net unrealized
depreciation of $33,559,253.
(NON) Non-income-producing security.
(STP) The interest or dividend rate and date shown parenthetically
represent the new interest or dividend rate to be paid and the date the
fund will begin receiving interest or dividend income at this rate.
(PIK) Income may be received in cash or additional securities at the
discretion of the issuer.
(SEG) A portion of these securities were pledged and segregated with the
custodian to cover margin requirements for futures contracts at April
30, 2000.
144A after the name of a security represents those exempt from
registration under Rule 144A of the Securities Act of 1933. These
securities may be resold in transactions exempt from registration,
normally to qualified institutional buyers.
FLIRB represents Front Loaded Interest Reduction Bond.
The rates shown on Floating Rate Bonds (FRB) and Floating Rate
Notes (FRN) are the current interest rates shown at April 30, 2000,
which are subject to change based on the terms of the security.
-----------------------------------------------------------------------------
Forward Currency Contracts to Buy at April 30, 2000 (Unaudited)
(aggregate face value $61,276,152)
Aggregate Face Delivery Unrealized
Market Value Value Date Depreciation
-----------------------------------------------------------------------------
Australian Dollars $15,748,121 $16,536,105 6/21/00 $ (787,984)
Euro Dollars 19,037,294 21,092,045 6/21/00 (2,054,751)
Japanese Yen 20,908,622 21,660,087 6/21/00 (751,465)
Swedish Krona 952,029 974,350 6/21/00 (22,321)
Swiss Franc 936,843 1,013,565 6/21/00 (76,722)
-----------------------------------------------------------------------------
$(3,693,243)
-----------------------------------------------------------------------------
Forward Currency Contracts to Sell at April 30, 2000 (Unaudited)
(aggregate face value $49,628,805)
Market Aggregate Face Delivery Unrealized
Value Value Date Appreciation
-----------------------------------------------------------------------------
British Pounds $10,574,022 $11,005,288 6/21/00 $ 431,266
Canadian Dollars 3,751,548 3,765,849 6/21/00 14,301
Danish Krone 7,151,831 7,597,854 6/21/00 446,023
Euro Dollars 3,690,740 4,092,443 6/21/00 401,703
Japanese Yen 19,345,164 20,096,715 6/21/00 751,551
New Zealand Dollar 2,981,715 3,070,656 6/21/00 88,941
-----------------------------------------------------------------------------
$2,133,785
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
Futures Contracts Outstanding at April 30, 2000 (Unaudited)
Unrealized
Aggregate Face Expiration Appreciation/
Total Value Value Date (Depreciation)
-----------------------------------------------------------------------------
Euro Bund (Short) $12,794,692 $12,576,366 Jun-00 $(218,326)
Euro Dollar (Short) 3,241,350 3,250,286 Sep-01 8,936
Euro Dollar (Long) 3,251,325 3,262,252 Sep-00 (10,927)
Gilt (Short) 1,411,699 1,387,387 Jun-00 (24,312)
Us Treasury Note
10yr (Long) 15,221,641 14,995,773 Jun-00 225,868
Us Treasury Note
5yr (Short) 23,809,062 24,023,202 Jun-00 214,140
Us Treasury Bond
(Long) 7,725,000 7,449,721 Jun-00 275,279
-----------------------------------------------------------------------------
$ 470,658
-----------------------------------------------------------------------------
TBA Sale Commitments at April 30, 2000
(Proceeds receivable $442,989)
Principal Settlement Market
Amount Date Value
-----------------------------------------------------------------------------
FNMA, 7s, May 2030 $459,205 5/15/00 $439,331
-----------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
April 30, 2000 (Unaudited)
<S> <C>
Assets
-------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $434,771,783) (Note 1) $402,033,431
-------------------------------------------------------------------------------------------
Cash 957,150
-------------------------------------------------------------------------------------------
Foreign currency (cost $422,953) 411,515
-------------------------------------------------------------------------------------------
Dividends, interest and other receivables 8,055,394
-------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 9,733
-------------------------------------------------------------------------------------------
Receivable for securities sold 5,938,288
-------------------------------------------------------------------------------------------
Receivable for variation margin 11,831
-------------------------------------------------------------------------------------------
Receivable for open forward currency contracts 2,133,785
-------------------------------------------------------------------------------------------
Receivable for closed forward currency contracts 543,228
-------------------------------------------------------------------------------------------
Total assets 420,094,355
Liabilities
-------------------------------------------------------------------------------------------
Distributions payable to shareholders 2,920,091
-------------------------------------------------------------------------------------------
Payable for securities purchased 11,254,577
-------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 771,023
-------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 89,143
-------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 17,851
-------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 537
-------------------------------------------------------------------------------------------
Payable for open forward currency contracts 3,693,243
-------------------------------------------------------------------------------------------
Payable for closed forward currency contracts 1,055,977
-------------------------------------------------------------------------------------------
TBA sales commitments, at value (proceeds receivable $442,989) 439,331
-------------------------------------------------------------------------------------------
Other accrued expenses 54,263
-------------------------------------------------------------------------------------------
Total liabilities 20,296,036
-------------------------------------------------------------------------------------------
Net assets $399,798,319
Represented by
-------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $475,111,545
-------------------------------------------------------------------------------------------
Distributions in excess of net investment income (Note 1) (3,851,716)
-------------------------------------------------------------------------------------------
Accumulated net realized loss on investments and
foreign currency transactions (Note 1) (37,506,001)
-------------------------------------------------------------------------------------------
Net unrealized depreciation of investments and
assets and liabilities in foreign currencies (33,955,509)
-------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $399,798,319
Computation of net asset value
-------------------------------------------------------------------------------------------
Net asset value per share ($399,798,319 divided by 53,095,749 shares) $7.53
-------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
Six months ended April 30, 2000 (Unaudited)
<S> <C>
Investment income:
-------------------------------------------------------------------------------------------
Interest income $18,348,347
-------------------------------------------------------------------------------------------
Dividends 796,611
-------------------------------------------------------------------------------------------
Total investment income 19,144,958
Expenses:
-------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 1,537,455
-------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 268,037
-------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 8,379
-------------------------------------------------------------------------------------------
Administrative services (Note 2) 3,173
-------------------------------------------------------------------------------------------
Reports to shareholders 24,460
-------------------------------------------------------------------------------------------
Auditing 15,869
-------------------------------------------------------------------------------------------
Legal 10,923
-------------------------------------------------------------------------------------------
Postage 9,745
-------------------------------------------------------------------------------------------
Exchange listing fees 56,478
-------------------------------------------------------------------------------------------
Other 7,158
-------------------------------------------------------------------------------------------
Total expenses 1,941,677
-------------------------------------------------------------------------------------------
Expense reduction (Note 2) (28,951)
-------------------------------------------------------------------------------------------
Net expenses 1,912,726
-------------------------------------------------------------------------------------------
Net investment income 17,232,232
-------------------------------------------------------------------------------------------
Net realized loss on investments (Notes 1 and 3) (7,526,219)
-------------------------------------------------------------------------------------------
Net realized loss on futures contracts (Note 1) (96,905)
-------------------------------------------------------------------------------------------
Net realized loss on foreign currency transactions (Note 1) (1,632,259)
-------------------------------------------------------------------------------------------
Net unrealized depreciation of assets and liabilities in
foreign currencies during the period (1,611,587)
-------------------------------------------------------------------------------------------
Net unrealized appreciation of investments, futures contracts
and TBA sale commitments during the period 1,260,474
-------------------------------------------------------------------------------------------
Net loss on investments (9,606,496)
-------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $ 7,625,736
-------------------------------------------------------------------------------------------
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
2000* 1999
--------------------------------------------------------------------------------------------------
<S> <C> <C>
Decrease in net assets
--------------------------------------------------------------------------------------------------
Operations:
--------------------------------------------------------------------------------------------------
Net investment income $ 17,232,232 $ 34,234,373
--------------------------------------------------------------------------------------------------
Net realized loss on investments and
foreign currency transactions (9,255,383) (24,745,739)
--------------------------------------------------------------------------------------------------
Net unrealized depreciation of investments and
assets and liabilities in foreign currencies (351,113) (698,996)
--------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 7,625,736 8,789,638
--------------------------------------------------------------------------------------------------
Distributions to shareholders:
--------------------------------------------------------------------------------------------------
From net investment income (17,839,475) (34,234,373)
--------------------------------------------------------------------------------------------------
In excess of net investment income -- (355,987)
--------------------------------------------------------------------------------------------------
Return of capital -- (3,159,376)
--------------------------------------------------------------------------------------------------
Total decrease in net assets (10,213,739) (28,960,098)
Net assets
--------------------------------------------------------------------------------------------------
Beginning of period 410,012,058 438,972,156
--------------------------------------------------------------------------------------------------
End of period (including distributions in excess of
net investment income of $3,851,716 and
$3,244,473, respectively) $399,798,319 $410,012,058
--------------------------------------------------------------------------------------------------
Number of fund shares
--------------------------------------------------------------------------------------------------
Shares outstanding at beginning and 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
-------------------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996 1995
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $7.72 $8.27 $9.26 $9.33 $9.04 $8.63
-------------------------------------------------------------------------------------------------------------
Investment operations
-------------------------------------------------------------------------------------------------------------
Net investment income .33 .64 .71 .66 .68 .68
-------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.18) (.48) (.96) .13 .30 .42
-------------------------------------------------------------------------------------------------------------
Total from
investment operations .15 .16 (.25) .79 .98 1.10
-------------------------------------------------------------------------------------------------------------
Less distributions:
-------------------------------------------------------------------------------------------------------------
From net
investment income (.34) (.64) (.65) (.52) (.69) (.64)
-------------------------------------------------------------------------------------------------------------
In excess of net
investment income -- (.01) -- -- -- --
-------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- -- -- (.17) -- --
-------------------------------------------------------------------------------------------------------------
In excess of net realized
gain on investments -- -- -- (.16) -- --
-------------------------------------------------------------------------------------------------------------
Return of capital -- (.06) (.09) (.01) -- (.05)
-------------------------------------------------------------------------------------------------------------
Total distributions (.34) (.71) (.74) (.86) (.69) (.69)
-------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $7.53 $7.72 $8.27 $9.26 $9.33 $9.04
-------------------------------------------------------------------------------------------------------------
Market value,
end of period $6.125 $6.625 $8.125 $8.500 $8.375 $8.125
-------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
-------------------------------------------------------------------------------------------------------------
Total return at
market value (%)(a) (2.50)* (10.50) 4.15 11.34 12.08 14.16
-------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $399,798 $410,012 $438,972 $491,652 $495,724 $481,914
-------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .47* .94 1.00 .96 .95 1.02
-------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 4.20* 7.93 7.81 7.18 7.43 7.98
-------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 83.72* 124.21 202.83 246.84 280.38 290.44
-------------------------------------------------------------------------------------------------------------
* Not annualized
(a) Total return assumes dividend reinvestment and does not reflect
the effect of sales charges.
(b) Includes amounts paid through expense offset arrangements. (Note 2)
</TABLE>
NOTES TO FINANCIAL STATEMENTS
April 30, 2000 (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. investment grade
sector, consisting of debt obligations of the U.S. government and
investment-grade U. S. corporate bonds; a high-yield sector, consisting
of high yielding, lower-rated U.S. corporate fixed income securities;
and an international sector, consisting of obligations of foreign
governments, their agencies and instrumentalities and other fixed-income
securities denominated in foreign currencies.
The following is a summary of significant accounting policies
consistently followed by the fund in the preparation of its financial
statements. The preparation of financial statements is in conformity
with generally accepted accounting principles and requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities of the financial statements and the reported
amounts of increases and decreases in net assets from operations during
the reporting period. Actual results could differ from those estimates.
A) Security valuation Investments for which market quotations are
readily available are stated at market value, which is determined using
the last reported sales price on its principal exchange, or if no sales
are reported -- as in the case of some securities traded
over-the-counter -- the last reported bid price. Securities quoted in
foreign currencies are translated into U.S. dollars at the current
exchange rate. Short-term investments having remaining maturities of 60
days or less are stated at amortized cost, which approximates market
value, 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 certain debt obligations; such investments are stated at fair value
on the basis of valuations furnished by a pricing service or dealers,
approved by the Trustees, which determine valuations for normal
institutional-size trading units of such securities using methods based
on market transactions for comparable securities and variable
relationships between securities that are generally recognized by
institutional traders.
B) Joint trading account Pursuant to an exemptive order issued by the
Securities and Exchange Commission, the fund may transfer uninvested
cash balances into a joint trading account along with the cash of other
registered investment companies and certain other accounts managed by
Putnam 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.
Collateral for certain tri-party repurchase agreements is held at the
counterparty's custodian in a segregated account for the benefit of the
fund and the counterparty. Putnam Management is responsible for
determining that the value of these underlying securities is at all
times at least equal to the resale price, including accrued interest.
D) Security transactions and related investment income Security
transactions are accounted for on the trade date (date the order to buy
or sell is executed). Gains or losses on securities sold are determined on
the identified cost basis. Interest income is recorded on the accrual
basis. Dividend income is recorded on the ex-dividend date except that
certain dividends from foreign securities are recorded as soon as the
fund is informed of the ex-dividend date. Discounts on zero coupon
bonds, original issue discount bonds, stepped-coupon bonds and payment
in kind bonds are accreted according to the yield-to-maturity basis. Any
premium resulting from the purchase of securities is amortized on a
yield-to-maturity basis.
E) Foreign currency translation The accounting records of the fund are
maintained in U.S. dollars. The market value of foreign securities,
currency holdings, and other assets and liabilities are recorded in the
books and records of the fund after translation to U.S. dollars based on
the exchange rates on that day. The cost of each security is determined
using historical exchange rates. Income and withholding taxes are
translated at prevailing exchange rates when accrued or incurred. The
fund does not isolate that portion of realized or unrealized gains or
losses resulting from changes in the foreign exchange rate on
investments from fluctuations arising from changes in the market prices
of the securities. Such gains and losses are included with the net
realized and unrealized gain or loss on investments. Net realized gains
and losses on foreign currency transactions represent net realized
exchange gains or losses on closed forward currency contracts,
disposition of foreign currencies and the difference between the amount
of investment income and foreign withholding taxes recorded on the
fund's books and the U.S. dollar equivalent amounts actually received or
paid. Net unrealized appreciation and depreciation of assets and
liabilities in foreign currencies arise from changes in the value of
open forward currency contracts and assets and liabilities other than
investments at the period end, resulting from changes in the exchange
rate. Investments in foreign securities involve certain risks, including
those related to economic instability, unfavorable political developments,
and currency fluctuations, not present with domestic investments.
F) Forward currency contracts The fund may engage in forward currency
contracts, which are agreements between two parties to buy and sell
currencies at a set price on a future date, to protect against a decline
in value relative to the U.S. dollar of the currencies in which its
portfolio securities are denominated or quoted (or an increase in the
value of a currency in which securities a fund intends to buy are
denominated, when a fund holds cash reserves and short-term investments).
The U.S. dollar value of forward currency contracts is determined using
current forward currency exchange rates supplied by a quotation service.
The market value of the contract will fluctuate with changes in currency
exchange rates. The contract is "marked to market" daily and the change in
market value is recorded as an unrealized gain or loss. When the contract is
closed, the fund records a realized gain or loss equal to the difference
between the value of the contract at the time it was opened and the
value at the time it was closed. The fund could be exposed to risk if
the value of the currency changes unfavorably, if the counterparties to
the contracts are unable to meet the terms of their contracts or if the
fund is unable to enter into a closing position.
G) Futures and options contracts The fund may use futures and options
contracts to hedge against changes in the values of securities the fund
owns or expects to purchase. The fund may also write options on securities
it owns or in which it may invest to increase its current returns.
The potential risk to the fund is that the change in value of futures
and options contracts may not correspond to the change in value of the
hedged instruments. In addition, losses may arise from changes in the
value of the underlying instruments, if there is an illiquid secondary
market for the contracts, or if the counterparty to the contract is
unable to perform. When the contract is closed, the fund records a
realized gain or loss equal to the difference between the value of the
contract at the time it was opened and the value at the time it was
closed. Realized gains and losses on purchased options are included in
realized gains and losses on investment securities.
Futures contracts are valued at the quoted daily settlement prices
established by the exchange on which they trade. Exchange traded options
are valued at the last sale price, or if no sales are reported, the last
bid price for purchased options and the last ask price for written
options. Options traded over-the-counter are valued using prices
supplied by dealers.
H) TBA 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.
I) Federal taxes It is the policy of the fund to distribute all of its
taxable income within the prescribed time and otherwise comply with the
provisions of the Internal Revenue Code applicable to regulated
investment companies. It is also the intention of the fund to distribute
an amount sufficient to avoid imposition of any excise tax under Section
4982 of the Internal Revenue Code of 1986, as amended. Therefore, no
provision has been made for federal taxes on income, capital gains or
unrealized appreciation on securities held nor for excise tax on income
and capital gains.
At October 31, 1999, the fund had a capital loss carryover of
approximately $27,370,000 available to offset future capital gains, if
any. The amount of the carryover and the expiration dates are:
Loss Carryover Expiration
-------------- ------------------
$3,956,000 October 31, 2006
23,414,000 October 31, 2007
J) Distributions to shareholders Distributions to shareholders are
recorded by the fund on the ex-dividend date. At certain times, the fund
may pay distributions at a level rate even though, as a result of market
conditions or investment decisions, the fund may not achieve projected
investment results for a given period. Capital gains distributions, if
any, are recorded on the ex-dividend date and paid at least annually.
The amount and character of income and gains to be distributed are
determined in accordance with income tax regulations which may differ
from generally accepted accounting principles. Reclassifications are
made to the fund's capital accounts to reflect income and gains
available for distribution (or available capital loss carryovers) under
income tax regulations.
Note 2
Management 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, 2000, fund expenses were reduced by
$28,951 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 $707
has been allocated to the fund, and an additional fee for each Trustees
meeting attended. Trustees receive additional fees for attendance at
certain committee meetings.
The fund has adopted a Trustee Fee Deferral Plan (the "Deferral Plan")
which allows the Trustees to defer the receipt of all or a portion of
Trustees Fees payable on or after July 1, 1995. The deferred fees remain
invested in certain Putnam funds until distribution in accordance with
the Deferral Plan.
The fund has adopted an unfunded noncontributory defined benefit pension
plan (the "Pension Plan") covering all Trustees of the fund who have
served as a Trustee for at least five years. Benefits under the Pension
Plan are equal to 50% of the Trustee's average total retainer and
meeting fees for the three years preceding retirement. Pension expense
for the fund is included in Compensation of Trustees in the Statement of
operations. Accrued pension liability is included in Payable for
compensation of Trustees in the Statement of assets and liabilities.
Note 3
Purchase and sales of securities
During the six months ended April 30, 2000, cost of purchases and
proceeds from sales of investment securities other than U.S. government
obligations and short-term investments aggregated $192,117,582 and
$200,121,414, respectively. Purchases and sales of U.S. government
obligations aggregated $134,878,973 and $139,104,939, respectively.
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, 2000, the fund repurchased no shares.
As of April 30, 2000, 279,900 shares have been repurchased since the
inception of the program.
TRUSTEES APPROVE INVESTMENT POLICY CHANGES FOR PUTNAM MASTER INCOME TRUST
At their February 4, 2000, meeting, the Trustees of the Putnam Funds approved
changes in the investment policies of Putnam Master Income Trust and four
other funds that also invest in the U.S. government/investment-grade,
high-yield, and international fixed-income sectors of the securities markets.
The changes, proposed by Putnam Management, were made to standardize the ways
the three investment sectors are defined and to provide greater clarity and
consistency among the funds as to minimum and maximum investments in each
sector, and to establish consistent limits on lower-rated securities that may
be purchased by both the high-yield and international sectors.
The changes will provide portfolio managers somewhat greater flexibility,
enhancing their ability to compete in the multi-sector universe, which has
evolved over recent years. However, Putnam Management does not expect that
the proposed changes will significantly change the way the funds are managed.
Sector definitions clarified and standardized. To eliminate ambiguity and
inconsistency across funds, the following sector definitions were adopted for
each of the five funds:
* The U.S. investment-grade sector includes any security issued by an entity
domiciled or with its principal operations in the United States and at
least investment-grade in quality.
* The high-yield sector includes any security issued by an entity domiciled or
with its principal operations in the United States and is below
investment-grade in quality.
* The international sector includes any security issued by an entity domiciled
or with its principal operations outside the United States.
The revised investment policies also delete an expectation that the
international sector will primarily be invested in securities of industrialized
Western Europe (including the Scandinavian countries), Canada, Japan,
Australia, and New Zealand. This change will increase the funds' flexibility to
invest in nonindustrialized countries, including emerging markets.
Uniform limit established on lower-rated securities. The new uniform policy for
all five funds limits securities below investment grade quality to 70% of fund
assets, provided that no more than 5% of assets be invested in securities below
CCC in quality. Putnam Master Income Trust and two other Putnam closed-end
funds had limited securities below investment grade in quality to 65% of fund
assets. The increased limit will enhance the competitiveness of the fund.
The change also eliminates a policy of the fund that prohibits it from
investing more than 20% of assets in foreign securities rated below investment
grade. This restriction could potentially restrict the fund's ability to take
advantage of attractive foreign fixed-income markets, including high-yield
corporate securities and emerging markets. Moreover, the fund will be subject
to an overall 70% restriction on lower-rated securities.
Consistent minimum and maximum investment limits adopted. The required 20%
minimum investment in U.S. government securities was lowered to 15%.
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The site can be accessed through any of the major online services
(America Online, CompuServe, Prodigy) that offer web access. Of course,
you can also access it via Netscape or Microsoft Internet Explorer,
using an independent Internet service provider.
New features will be added to the site regularly. So be sure to bookmark us at
http://www.putnaminv.com
FUND INFORMATION
WEB SITE
www.putnaminv.com
INVESTMENT MANAGER
Putnam Investment Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
John A. Hill, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
Ronald J. Jackson
Paul L. Joskow
Elizabeth T. Kennan
Lawrence J. Lasser
John H. Mullin III
Robert E. Patterson
George Putnam, III
A.J.C. Smith
W. Thomas Stephens
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
John D. Hughes
Senior Vice President and Treasurer
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Ian C. Ferguson
Vice President
Brett C. Browchuk
Vice President
Stephen Oristaglio
Vice President
Edward H. D'Alelio
Vice President
David L. Waldman
Vice President and Fund Manager
Richard A. Monaghan
Vice President
John R. Verani
Vice President
Call 1-800-225-1581 weekdays from 9 a.m. to 5 p.m. Eastern Time, or
visit our Web site (www.putnaminv.com) any time for up-to-date
information about the fund's NAV.
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PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
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BULK RATE
U.S. POSTAGE PAID
PUTNAM
INVESTMENTS
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For account balances, economic forecasts, and the latest on Putnam funds, visit
www.putnaminv.com
61445 072 6/00
