Putnam
Premier
Income
Trust
ANNUAL REPORT
July 31, 1996
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* "Since 1990, Putnam Premier Income Trust has placed in or above the
middle third of the multisector-bond objective. Such consistency has
given PPT some of the better risk scores in its peer group, and a
trailing five-year return that bests 74% of its rivals. Its low-key
virtues make PPT an ideal core holding."
-- Morningstar Mutual Funds, June 3, 1996
* Morningstar, Inc. once again awarded Putnam Premier Income Trust four
out of a possible five stars for overall risk-adjusted performance as
of July 31, 1996 (based on the average annual risk-adjusted returns
for the 3-, 5-, and 10-year periods). The four-star rating for the
period ended July 31, 1996, puts the fund among 22.5% of the funds
rated in the fixed-income category.*
CONTENTS
4 Report from Putnam Management
9 Fund performance summary
12 Portfolio holdings
24 Financial statements
*Ratings by Morningstar, an independent rating agency, are subject to
change every month and are calculated from a fund's 3-, 5-, and 10-year
average annual returns in excess of 90-day Treasury bill returns, with
appropriate sales charge adjustments and a risk factor that reflects
performance compared to 90-day Treasury bill monthly returns. 10% of
the funds in an investment category receive 5 stars; 22.5% receive 4
stars. For the 3- and 5-year periods ended 7/31/96, there were 90 and
63 funds, respectively, in the fixed-income category. The fund's
shares received 4 stars for each of these periods. Past performance is
not indicative of future results.
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
(copyright) Karsh, Ottawa
Dear Shareholder:
We say it again and again, but it remains consistently valid: Putnam
Premier Income Trust's strategy of investing in a combination of U.S.
government, high-yield, and international bonds helps smooth out the
fund's overall results, year in and year out, regardless of how any or
all of the three markets may be performing at a particular moment.
During the fiscal year that ended on July 31, 1996, high-yield bonds,
thriving on the U.S. economy's continued strength, and international
bonds, enjoying a resurgence in fixed-income markets abroad, helped
offset the volatility encountered in the rest of the U.S. fixed-income
market as investors grew concerned over the possibility of a pickup in
inflation.
Of course, it is only fair to add that the skill and talent required to
manage the investments within each of these "sleeves" also play an
important part in the fund's continuing success. The following report by
your fund's management team reviews fiscal 1996 and prospects for the
fiscal year just begun.
Respectfully yours,
/S/George Putnam
George Putnam
Chairman of the Trustees
September 18, 1996
Report from the Fund Managers
Rosemary H. Thomsen, lead manager
Neil J. Powers
D. William Kohli
Mark J. Siegel
Thanks in large part to its flexible, diversified trisector investment
strategy, Putnam Premier Income Trust wrapped up fiscal 1996 with strong
returns: 9.76% at net asset value and 7.94% at market value. These
returns outpaced the Lehman Brothers Government Bond Index's 5.16%
return for the same period -- the 12 months ended July 31, 1996.
Beginning with February's report of a low unemployment level, signs of
significant economic strength emerged and dealt a blow to the U.S. bond
market that would continue to be felt over the next few months.
Investors became concerned about increasing inflation and, as a result,
the bond market weakened. While your fund could not avoid some of the
negative effects of these developments, its trisector strategy proved
extremely beneficial.
In the second half of the fiscal year, the U.S. government sleeve gave
back some of the gains it had realized in the first half. However,
because high-yield bonds are influenced by the pace of the economy,
their performance was less affected by this spring's higher interest
rates than other fixed-income investments, which are more sensitive to
rate changes. This explains why the portfolio's high-yield bond portion,
or "sleeve," continued to post the strongest returns for the fund both
on a relative and an absolute basis. Meanwhile, the international
segment, bolstered by our investments in emerging markets, registered
significantly better performance for the period on an absolute basis and
relative to its benchmark index.
* HIGH-YIELD HOLDINGS WERE THE STAR PERFORMERS
Changing market dynamics, while adversely affecting U.S. Treasury
securities, remained hospitable to the performance of your fund's high-
yield corporate bond holdings, the most heavily weighted area of the
portfolio. Treasury securities generally respond negatively to signs of
economic strength because investors fear the possibility of increasing
inflation, which erodes the value of fixed-income investments. Issuers
of high-yield securities, however, are generally in a position to
benefit from a stronger economy and stand to reap both increased
revenues and higher cash flows as a result. Consequently, throughout
fiscal 1996, we continued to find value in the high-yield sector, in
which credit quality remained high and virtually no defaults
materialized. During the year, our emphasis on companies in the
telecommunications, cable television, broadcasting, retail, insurance,
and gaming industries benefited the fund substantially.
Retailing was also an area in which we increased exposure, purchasing
the attractively priced bonds of companies with niche businesses. One
long-standing holding, discount clothing retailer Loehmann's, Inc.,
appreciated dramatically over the period as the company's management
announced an initial public offering (IPO) of its stock. In addition,
Terra Nova Insurance Holdings in the insurance sector has made a strong
contribution to fund performance this year with its successful IPO and
rating upgrade. While these securities, along with others discussed in
this report, were viewed favorably on July 31, 1996, all portfolio
holdings are subject to review and adjustment in accordance with the
fund's investment strategy and may well vary in the future.
[GRAPHIC HORIZONTAL BAR CHART OMITTED:
TOP 10 ALLOCATIONS TO FOREIGN MARKETS*]
Germany 8.7%
United Kingdom 5.6%
Canada 4.9%
Australia 2.1%
France 2.0%
Denmark 2.0%
Mexico 1.4%
Brazil 0.8%
Argentina 0.6%
New Zealand 0.5%
Footnote reads:
*Based on net assets as of 7/31/96. Allocations will vary over time.
* PORTFOLIO REFOCUSED ON MORTGAGE-BACKED SECURITIES
In the portfolio's U.S. government sleeve, we shifted our primary
strategy from managing duration to maximizing yield. Duration is a
measure of a portfolio's sensitivity to interest-rate changes, and a
longer duration can be beneficial during a period of declining rates.
Throughout fiscal 1995, the portfolio's relatively long duration boosted
performance, as economic growth slowed and inflation remained relatively
stable. However, in the rising-interest-rate environment of the first
six months of calendar 1996, we took steps to shorten duration. We sold
a significant portion of the fund's intermediate- and long-term U.S.
Treasury notes and bonds in favor of mortgage-backed securities.
At the fiscal year's midpoint, mortgage-backed securities made up a
relatively small portion of the portfolio. We had reduced the position
because the increasing risk of prepayment activity had diminished their
value. Historically a declining-interest-rate environment sparks
increased prepayment, as lower rates prompt homeowners to refinance
their mortgages. Prepayment can have a negative impact on the fund
because the prepaid principal must be reinvested at lower rates.
As calendar 1996 progressed, however, we saw prices of mortgage-backed
securities decline significantly -- so much so that we believed the
market had mispriced prepayment assumptions and prices had fallen below
fair value. Taking advantage of what we saw as an opportunity, by April
we had more than doubled the fund's weighting of current-coupon
mortgage-backed securities. This strategic shift proved rewarding and
enhanced the fund's income stream over the last quarter of the fiscal
year.
* INTERNATIONAL SECTOR PROVIDED NEEDED DIVERSIFICATION
Your fund's international sleeve made an outstanding contribution to the
portfolio's positive return. Our country selections, including those in
emerging markets, and currency strategy drove performance.
At the start of the fund's third quarter, we shifted a small portion of
the U.S. government sector holdings into the international sector. This
move was based on our expectation of stronger performance from
international bond markets, many of which would get a boost in price
from economic slowdowns. For most of the year, overweight positions in
Europe, especially in securities of high-yielding countries, namely
Italy and Spain, were strong contributors to performance. Underweighting
securities in Japan proved successful until the fiscal year's third
quarter.
[GRAPHIC OMITTED: TOP SECTOR HOLDINGS (7/31/96)]
Top Three Holdings: High-Yield
Amphenol Corp. sr. sub. notes 12 3/4s, 2002
Midland Funding Corp. 11 deb. Series B, 13 1/4s, 2006
Apparel Retailers, Inc. deb. stepped coupon Series B, 0%, 12 3/4s, 2005
Top Three Holdings: U.S. Government
Government National Mortgage Association 7 1/2s,
with various due dates from 12/15/2023 to 4/15/2026
Federal National Mortgage Association 7 1/2s,
with various due dates from 1/1/2026 to 7/1/2026
Federal National Mortgage Association 8s, TBA 8/16/2026
Top Three Holdings: International
Canada (Government of) deb. 7 1/2s, 2001
Germany (Federal Republic of) bonds, 5 3/4s, 2000
Germany (Federal Republic of) bonds Series 108, 5 3/4s, 1998
Footnote reads:
These holdings represent 23.2% of the fund's net assets as of 7/31/96.
Portfolio holdings will vary over time.
In addition, allocations to emerging markets greatly added to
performance as investors became willing to accept the less certain
markets for their attractive yields. Toward the end of the fiscal year,
we began to reduce positions in Europe and to add to positions in Anglo
markets, such as Canada, Australia, and the United Kingdom. We also
began investing in Japanese bonds for the first time in nine months.
Throughout May and June, holdings in the higher-yielding European
markets, although reduced, continued to provide strong performance.
However, in July, the German Bundesbank failed to ease interest rates,
causing doubts to arise over whether the European Monetary Union and a
single currency would occur. Our decision to scale back investments in
higher-yielding markets proved positive, as these markets consequently
underperformed against core European bonds for the first time in six
months.
Our currency hedging strategies also proved beneficial. A hedge is
considered a sort of insurance policy designed to protect the fund from
adverse currency movements. When foreign currencies weaken or decline
compared with the U.S. dollar, the value of the fund's foreign holdings
can be diminished. By hedging these foreign currency holdings into U.S.
dollars, we are using the expected strength of the dollar to seek
protection of their value.
Hedging can prove detrimental, of course, if the dollar should weaken
against these other currencies. Throughout most of the period, our
hedges proved effective as several European currencies declined in value
against the dollar. In May, however, our hedging strategy reduced
performance and we began to cut back on the hedges as the dollar's
momentum slowed.
* POSITIVE ENVIRONMENT LIKELY TO CONTINUE DESPITE RECENT UNCERTAINTY
Your fund enters fiscal 1997 with a somewhat conservatively positioned
portfolio. We currently anticipate no major shifts in asset allocation
and look for market and economic conditions to remain favorable. Low
inflation and moderate economic growth are expected to provide a
positive environment for attractive fixed-income performance in each of
the fund's three sectors.
Our long-term outlook remains optimistic: we believe U.S. interest rates
will continue to be stable and global inflation will remain under
control despite some recent market concerns about an overheating
economy. We realize, however, that the market may be vulnerable to
periods of volatility, especially during this presidential election
year. Accordingly we will watch market conditions at home and abroad,
monitor our country selections carefully, and make adjustments to the
portfolio, seeking to capitalize on the fund's effective trisector
strategy.
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 7/31/96, there is no guarantee the fund will
continue to hold these securities in the future. The lower credit
ratings of high-yield corporate bonds reflect a greater possibility that
adverse changes in the economy or their issuers may affect their ability
to pay principal and interest on the bonds. Investments in non-U.S.
securities may be subject to certain risks such as currency
fluctuations, economic instability, and political developments. Although
the U.S. government guarantees the timely payment of principal and
interest on some of the underlying securities, the value of the fund
shares is not guaranteed and will fluctuate.
Performance summary
Performance should always be considered in light of a fund's investment
strategy. Putnam Premier Income Trust is designed for investors seeking
a high level of current income consistent with preservation of capital.
This section provides, at a glance, information about your fund's
performance. Total return shows how the value of the fund's shares
changed over time, assuming you held the shares through the entire
period and reinvested all distributions in the fund.
TOTAL RETURN FOR PERIODS ENDED 7/31/96
Salomon Bros. First
Lehman Bros. Non-U.S. Boston Consumer
Market Government World Govt. High Yield Price
NAV value Bond Index Bond Index Index Index
- -----------------------------------------------------------------------
1 year 9.76% 7.94% 5.16% 0.49% 9.27% 2.95%
- -----------------------------------------------------------------------
5 years 71.57 51.22 47.01 83.96 84.42 15.27
Annual
average 11.40 8.62 8.01 12.96 13.02 2.88
- -----------------------------------------------------------------------
Life of
fund
(since
2/29/88) 124.45 80.47 96.15 111.63 143.64 35.34
Annual
average 10.08 7.26 8.33 9.31 11.16 3.66
- -----------------------------------------------------------------------
TOTAL RETURN FOR PERIODS ENDED 6/30/96
(most recent calendar quarter)
NAV Market value
- -----------------------------------------------------------------------
1 year 10.16% 10.68%
- -----------------------------------------------------------------------
5 years 73.19 59.36
Annual average 11.61 9.77
- -----------------------------------------------------------------------
Life of fund
(since 2/29/88) 122.58 85.26
Annual average 10.07 7.67
- -----------------------------------------------------------------------
Performance data represent past results, do not reflect future
performance. They do not take into account any adjustment for taxes
payable on reinvested distributions. Investment returns, market value,
and net asset value will fluctuate so that an investor's shares, when
sold, may be worth more or less than their original cost. Past
performance is not indicative of future results.
PRICE AND DISTRIBUTION INFORMATION
12 months ended 7/31/96
Distributions
- -----------------------------------------------------------------------
Number 12
- -----------------------------------------------------------------------
Income $0.660
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Capital gains
- -----------------------------------------------------------------------
Long-term --
- -----------------------------------------------------------------------
Short-term --
- -----------------------------------------------------------------------
Total $0.660
- -----------------------------------------------------------------------
Share value: NAV Market value
- -----------------------------------------------------------------------
7/31/95 $8.46 $7.4375
- -----------------------------------------------------------------------
7/31/96 8.53 7.3750
- -----------------------------------------------------------------------
Current return: NAV Market value
- -----------------------------------------------------------------------
End of period
- -----------------------------------------------------------------------
Current dividend rate1 7.74% 8.95%
- -----------------------------------------------------------------------
1 Income portion of most recent distribution, annualized and divided
by NAV or market value at end of period.
TERMS AND DEFINITIONS
Net asset value (NAV) is the value of all your fund's assets, minus any
liabilities, divided by the number of outstanding shares.
Market value is the current trading price of one share of the fund.
Market values are set by transactions between buyers and sellers on the
New York Stock Exchange.
COMPARATIVE BENCHMARKS
Consumer Price Index (CPI ) is a commonly used measure of inflation; it
does not represent an investment return.
First Boston High Yield Index* is an unmanaged list of lower-rated
higher-yielding U.S. corporate bonds.
Lehman Bros. Government Bond Index* is an unmanaged list of U.S.
government and mortgage-backed securities.
Salomon Brothers Non-U.S. World Government Bond Index* is an unmanaged
list of bonds issued by 10 countries.
*Securities indexes assume reinvestment of all distributions and
interest payments and do not take into account brokerage fees or taxes.
Securities in the fund do not match those in the indexes and
performance of the fund will differ. It is not possible to invest
directly in an index.
Report of Independent Accountants
To the Trustees and Shareholders of
Putnam Premier Income Trust
In our opinion, the accompanying statement of assets and liabilities,
including the portfolio of investments owned, and the related statements
of operations and of changes in net assets and the financial highlights
present fairly, in all material respects, the financial position of
Putnam Premier Income Trust (the "fund") at July 31, 1996, and the
results of its operations, the changes in its net assets, and the
financial highlights for the periods indicated, in conformity with
generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements")
are the responsibility of the fund's management; our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits of these financial statements in accordance with
generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of investments owned at July 31,
1996 by correspondence with the custodian and brokers and the
application of alternative auditing procedures where confirmations from
brokers were not received, provide a reasonable basis for the opinion
expressed above.
Price Waterhouse LLP
Boston, Massachusetts
September 17, 1996
<TABLE>
<CAPTION>
Portfolio of investments owned
July 31, 1996
CORPORATE BONDS AND NOTES (32.0%) *
PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C>
Advertising (1.0%)
- ---------------------------------------------------------------------------------------------------------------------------------
$1,115,000 Lamar Advertising Co. sr. secd. notes 11s, 2003 $ 1,159,600
2,100,000 Outdoor Systems, Inc. sr. notes 10 3/4s, 2003 2,310,000
5,000,000 Universal Outdoor, Inc. sub. deb. 11s, 2003 5,300,000
3,915,000 Universal Outdoor, Inc. sr. notes stepped-coupon zero % (14s, 7/1/99), 2004 ++ 3,053,700
--------------
11,823,300
Aerospace and Defense (0.6%)
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1,420,000 Greenwich Air Services, Inc. sr. notes 10 1/2s, 2006 1,427,100
1,000,000 Howmet Corp. 144A sr. sub. notes 10s, 2003 1,052,500
473,000 K&F Industries Inc. sub. deb. 13 3/4s, 2001 487,190
3,300,000 Sequa Corp. bonds 8 3/4s, 2001 3,217,500
490,000 UNC, Inc. 144A sr. sub. notes 11s, 2006 497,350
--------------
6,681,640
Agriculture (0.8%)
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4,931,000 PMI Holdings Corp. sub. disc. deb. stepped-coupon Ser. B, zero % (11 1/2s,
9/1/00), 2005 ++ 2,773,688
125,000 PSF Finance (L.P.) sr. exch. notes 12 1/4s, 2004 (acquired 8/25/94,
cost $127,734)(In default)+(double dagger) 75,000
6,123,698 PSF Finance (L.P.) sr. notes 12s, 2000 (acquired various dates from 2/8/93
to 9/15/93, cost $6,123,698)(In default)+(double dagger) 3,674,219
4,155,000 PSF Finance (L.P.) sr. disc. notes stepped-coupon zero % (12s, 9/15/96),
2003 (acquired 9/29/93, cost $2,999,862)(In default)+ ++ (double dagger) 2,493,000
--------------
9,015,907
Apparel (0.4%)
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4,275,000 Guess Jeans, Inc. sr. sub. notes 9 1/2s, 2003 4,275,000
Automotive Parts (0.7%)
- ---------------------------------------------------------------------------------------------------------------------------------
1,265,000 Aftermarket Technology Corp. sr. sub. notes 12s, 2004 1,356,713
450,000 Delco Remy International, Inc. 144A sr. sub. notes 10 5/8s, 2006 451,125
1,805,000 Lear Corp. sub. notes 9 1/2s, 2006 1,825,306
4,900,000 Key Plastics Corp. sr. notes 14s, 1999 5,071,500
--------------
8,704,644
Banks (0.2%)
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2,350,000 Chevy Chase Savings Bank Inc. sub. deb. 9 1/4s, 2005 2,214,875
775,000 First Federal Financial Corp. notes 11 3/4s, 2004 767,250
--------------
2,982,125
Broadcasting (1.8%)
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2,000,000 Allbritton Communications sr. sub. deb. Ser. B, 9 3/4s, 2007 1,860,000
3,225,000 Argyle Television Corp. sr. sub. notes 9 3/4s, 2005 3,096,000
380,000 Jacor Communications, Inc. sr. sub. notes 10 1/8s, 2006 381,900
1,135,000 Park Broadcasting, Inc. 144A sr. notes 11 3/4s, 2004 1,305,250
4,495,000 Paxson Communications Corp. 144A sr. sub. notes 11 5/8s, 2002 4,674,800
3,816,000 Petracom Holdings, Inc. notes stepped-coupon zero % (17 1/2s, 8/1/98), 2003 ++ 2,757,060
3,370,000 SFX Broadcasting, Inc. 144A sr. sub. notes 10 3/4s, 2006 3,386,850
4,331,000 Telemedia Broadcasting Corp. 144A deb. stepped-coupon 6.4s,
(16s, 6/15/99), 2004 ++ 3,914,141
--------------
21,376,001
Building and Construction (1.0%)
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1,500,000 Cemex S.A. 144A bonds 12 3/4s, 2006 (Mexico) 1,511,250
2,275,000 Inter-City Products sr. notes 9 3/4s, 2000 2,166,938
3,500,000 Presley Cos. sr. notes 12 1/2s, 2001 3,325,000
5,000,000 Scotsman Group, Inc. sr. secd. notes 9 1/2s, 2000 4,987,500
440,000 Waxman Industries Inc. sr. notes stepped-coupon Ser. B, zero % (12 3/4s,
6/1/99), 2004 ++ 294,800
--------------
12,285,488
Buses (0.2%)
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800,000 Blue Bird Body Co. sub. deb. Ser. B, 11 3/4s, 2002 824,000
3,105,000 MCII Holding (USA), Inc. bonds 144A zero % (12s, 11/15/98), 2002 ++ 2,406,375
--------------
3,230,375
Business Services (0.5%)
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5,770,000 Corporate Express, Inc. sr. sub. notes Ser. B, 9 1/8s, 2004 5,712,300
670,000 Pierce Leahy Corp. 144A sr. sub. notes 11 1/8s, 2006 688,425
--------------
6,400,725
Cable Television (3.3%)
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3,200,000 Adelphia Communications Corp. sr. notes 12 1/2s, 2002 3,288,000
750,000 Adelphia Communications Corp. sr. deb. 11 7/8s, 2004 746,250
4,000,000 Adelphia Communications Corp. notes Ser. B, 9 7/8s, 2005 3,640,000
4,675,000 American Telecasting, Inc. sr. disc. notes stepped-coupon zero % (14 1/2s,
8/15/00), 2005 ++ 2,781,625
1,350,000 Cablevision Systems Corp. sr. sub. deb. 9 7/8s, 2023 1,220,063
4,000,000 Century Communications Corp. sr. notes 9 1/2s, 2005 3,910,000
2,480,000 Charter Communications Holdings 144A sr. disc. notes stepped-coupon zero %
(14s, 3/15/01), 2007 ++ 1,357,800
1,250,000 Charter Communications International, Inc. 144A sr. notes 11 1/4s, 2006 1,225,000
2,275,000 Diamond Cable Communication Co. sr. disc. notes stepped-coupon zero % (13
1/4s, 9/30/99), 2004 (United Kingdom) ++ 1,638,000
750,000 Diamond Cable Communication Co. sr. disc. notes stepped-coupon zero %
(11 3/4s, 12/15/00), 2005 (United Kingdom)++ 446,250
6,453,767 Falcon Holdings Group, Inc. sr. sub. notes 11s, 2003 (2 double daggers) 6,163,347
685,000 Heartland Wireless Communication Inc.144A sr. notes 13s, 2003 741,513
4,685,000 Lenfest Communications, Inc. sr. notes 8 3/8s, 2005 4,263,350
2,700,000 Marcus Cable Co. (L.P.) sr. sub. disc. notes stepped-coupon zero %
(13 1/2s, 8/1/99), 2004 ++ 1,944,000
2,285,000 Telewest Communications PLC deb. stepped-coupon zero % (11s, 10/1/00),
2007 (United Kingdom) ++ 1,336,725
6,700,000 UIH Australia/Pacific 144A sr. disc. notes zero % (14s, 5/15/01), 2006 ++ 3,484,000
2,745,000 Videotron Holdings. sr. disc. notes stepped-coupon zero % (11s, 8/15/00),
2005 (United Kingdom) ++ 1,791,113
--------------
39,977,036
Cellular Communications (1.6%)
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3,800,000 Cellular, Inc. sr. sub. disc. notes stepped-coupon zero % (11 3/4s,
9/1/98), 2003 ++ 3,116,000
2,150,000 Cencall Communications Corp. sr. disc. notes stepped-coupon zero %
(10 1/8s, 1/15/99), 2004 ++ 1,257,750
3,500,000 Dial Call Communication, Inc. sr. disc. notes stepped-coupon Ser. B,
zero % (10 1/4s, 12/15/98), 2005 ++ 1,995,000
2,860,000 Intercel, Inc. sr. disc. notes stepped-coupon zero % (12s, 5/1/01), 2006 ++ 1,551,550
2,815,000 Milicom International Cellular 144A sr. disc. notes stepped-coupon zero %
(13 1/2s, 6/1/00), 2006 (Luxembourg) ++ 1,393,425
7,500,000 NEXTEL Communications, Inc. sr. disc. notes stepped-coupon zero % (11 1/2s,
9/1/98), 2003 ++ 4,875,000
5,980,000 Pricellular Wireless sr. disc. notes stepped-coupon Ser. B, zero %
(14s, 11/15/97), 2001 ++ 5,352,100
--------------
19,540,825
Chemicals (0.1%)
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1,500,000 IMC Fertilizer Group, Inc. deb. 9.45s, 2011 1,552,500
375,000 Texas Petrochemical 144A sr. sub. notes 11 1/8s, 2006 385,313
--------------
1,937,813
Conglomerates (0.1%)
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900,000 ADT Ltd. sr. sub. notes 9 1/4s, 2003 940,500
275,000 MacAndrews & Forbes Holdings, Inc. sub. deb. notes 13s, 1999 275,000
--------------
1,215,500
Consumer Durable Goods (0.2%)
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2,335,000 Remington Products Co. LLC 144A sr. sub. notes 11s, 2006 2,335,000
Consumer Services (0.4%)
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4,791,000 Coinmach Corp. sr. notes Ser. B, 11 3/4s, 2005 5,006,595
Containers (0.5%)
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6,000,000 Ivex Packaging Corp. sr. sub. notes 12 1/2s, 2002 6,300,000
Electric Utilities (0.6%)
- ---------------------------------------------------------------------------------------------------------------------------------
6,550,000 Midland Funding Corp. II deb. Ser. B, 13 1/4s, 2006 7,221,375
Electronics (1.0%)
- ---------------------------------------------------------------------------------------------------------------------------------
7,536,000 Amphenol Corp. sr. sub. notes 12 3/4s, 2002 8,251,920
5,175,000 International Semi-Tech. Corp. sr. secd. disc. notes stepped-coupon zero %
(11 1/2s, 8/15/00), 2003 (Canada) ++ 2,923,875
460,000 Moog, Inc. 144A sr. sub. notes 10s, 2006 459,425
--------------
11,635,220
Entertainment (0.8%)
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2,300,000 Premier Parks, Inc. sr. notes Ser. A, 12s, 2003 2,426,500
5,000,000 Six Flags Corp. sr. sub. notes stepped-coupon zero % (12 1/4s, 6/15/98), 2005 ++ 4,250,000
1,200,000 Time Warner, Inc. notes 8.18s, 2007 1,187,940
1,200,000 Time Warner, Inc. notes 8.11s, 2006 1,186,200
--------------
9,050,640
Financial Services (0.2%)
- ---------------------------------------------------------------------------------------------------------------------------------
2,000,000 Keystone Group, Inc. sr. secd. notes 9 3/4s, 2003 1,980,000
Food (0.8%)
- ---------------------------------------------------------------------------------------------------------------------------------
4,754,000 Del Monte Corp. sub. notes 12 1/4s, 2002 (2 double daggers) 4,611,380
5,095,000 Mafco, Inc. sr. sub. notes 11 7/8s, 2002 5,375,225
--------------
9,986,605
Food Chains (0.1%)
- ---------------------------------------------------------------------------------------------------------------------------------
1,700,000 Stater Brothers sr. notes 11s, 2001 1,768,000
Gaming (3.0%)
- ---------------------------------------------------------------------------------------------------------------------------------
460,000 Alliance Gaming Corp. sr. notes 12 7/8s, 2003 450,800
1,045,000 Argosy Gaming Co. 144A 1st. mtge. 13 1/4s, 2004 1,018,875
2,090,000 Arizona Charlies Corp. 1st mtge. Ser. B, 12s, 2000 1,363,072
760,000 Capitol Queen Corp. 1st mtge. notes Ser. B, 12s, 2000 + 532,000
4,620,000 Casino America, Inc. 1st mtge. 11 1/2s, 2001 4,989,600
1,320,000 Coast Hotels & Casinos, Inc. 1st mtge. 13s, 2002 1,425,600
410,000 Eldorado Resorts LLC 144A sr. sub. notes 10 1/2s, 2006 411,025
4,250,000 Grand Casinos, Inc. 1st mtge. 10 1/8s, 2003 4,143,750
535,000 Harveys Casino Resorts sr. sub. notes 10 5/8s, 2006 543,025
3,625,000 Lady Luck Gaming 1st mtge. 11 7/8s, 2001 3,606,875
3,164,000 Louisiana Casino Cruises Corp. 1st mtge. 11 1/2s, 1998 2,641,940
1,625,000 Mohegan Tribal Gaming 144A sr. secd. notes 13 1/2s, 2002 2,031,250
1,000,000 Players International Inc. sr. notes 10 7/8s, 2005 1,005,000
4,250,000 Trump A.C. 1st. mtge. 11 1/4s, 2006 4,143,750
2,106,000 Trump Castle Funding Corp. sr. sub. notes 11 1/2s, 2000 2,106,000
4,800,000 Trump Holdings & Funding Corp. sr. notes 15 1/2s, 2005 5,616,000
--------------
36,028,562
Health Care (1.6%)
- ---------------------------------------------------------------------------------------------------------------------------------
4,480,000 Columbia/HCA Healthcare med. term notes 7.58s, 2025 4,360,160
4,315,000 Ivac Corp. sr. notes 9 1/4s, 2002 4,271,850
1,490,000 Merit Behavioral Care sr. sub. notes 11 1/2s, 2005 1,557,050
6,000,000 Paracelsus Healthcare Corp. sr. sub. notes 9 7/8s, 2003 6,240,000
2,252,000 Total Renal Care Holdings, Inc. sr. disc. notes stepped-coupon zero %
(12s, 8/15/97), 2004 ++ 2,240,740
--------------
18,669,800
Insurance (0.6%)
- ---------------------------------------------------------------------------------------------------------------------------------
1,000,000 American Annuity Group, Inc. sr. notes 9 1/2s, 2001 1,045,000
2,000,000 American Life Holding Co. sr. sub. notes 11 1/4s, 2004 2,090,000
800,000 Reliance Group Holdings, Inc. sr. notes 9s, 2000 798,000
3,150,000 Reliance Group Holdings, Inc. sr. sub. deb. 9 3/4s, 2003 3,118,500
--------------
7,051,500
Lodging (0.5%)
- ---------------------------------------------------------------------------------------------------------------------------------
940,000 Host Marriott Corp. sr. notes Ser. B, 9 1/2s, 2005 902,400
4,500,000 John Q Hammons Hotels, Inc. 1st mtge. 8 7/8s, 2004 4,173,750
490,000 Wyndham Hotel Corp. sr. sub. notes 10 1/2s, 2006 491,838
--------------
5,567,988
Medical Supplies and Devices (0.2%)
- ---------------------------------------------------------------------------------------------------------------------------------
1,285,000 Dade International, Inc. 144A sr. sub. notes 11 1/8s, 2006 1,346,038
1,000,000 Wright Medical Technology, Inc. sr. secd. notes Ser. B, 10 3/4s, 2000 985,000
--------------
2,331,038
Metals and Mining (0.3%)
- ---------------------------------------------------------------------------------------------------------------------------------
2,675,000 Great Lakes Carbon Corp. sr. notes 10s, 2006 2,755,250
690,000 Renco Metals, Inc. sr. notes 11 1/2s, 2003 703,800
--------------
3,459,050
Motion Picture Distribution (1.0%)
- ---------------------------------------------------------------------------------------------------------------------------------
4,750,000 Act III Theatres, Inc. sr. sub. notes 11 7/8s, 2003 5,165,625
1,670,000 Cinemark Mexico notes 12s, 2003 (Mexico) 1,553,100
4,500,000 Cinemark USA sr. notes 12s, 2002 4,933,125
--------------
11,651,850
Office Equipment (0.2%)
- ---------------------------------------------------------------------------------------------------------------------------------
2,500,000 United Stationer Supply, Inc. sr. sub. notes 12 3/4s, 2005 2,687,500
Oil and Gas (0.6%)
- ---------------------------------------------------------------------------------------------------------------------------------
2,135,000 Chesapeake Energy Corp. sr. notes 12s, 2001 2,311,138
490,000 Cliffs Drilling Co. 144A sr. notes 10 1/4s, 2003 488,775
800,000 Maxus Energy Corp. notes 9 3/8s, 2003 772,000
4,150,000 TransTexas Gas Corp. sr. secd. notes 11 1/2s, 2002 4,129,250
--------------
7,701,163
Paging (0.3%)
- ---------------------------------------------------------------------------------------------------------------------------------
3,000,000 Pagemart Nationwide, Inc. sr. disc. notes stepped-coupon zero %
(15s, 2/1/00), 2005 ++ 2,032,500
2,800,000 Pagemart, Inc. sr. disc. notes stepped-coupon zero % (12 1/4s, 11/1/98),
2003 ++ 2,107,000
--------------
4,139,500
Paper and Forest Products (0.6%)
- ---------------------------------------------------------------------------------------------------------------------------------
1,975,000 APP International Finance Co. notes 11 3/4s, 2005 (Netherlands) 2,054,000
1,100,000 Domtar Inc. deb. 9 1/2s, 2016 (Canada) 1,105,500
1,205,000 Florida Coast Paper LLC 144A 1st. mtge. 12 3/4s, 2003 1,256,213
2,950,000 Gaylord Container Corp. sr. sub. disc. deb. 12 3/4s, 2005 3,134,375
--------------
7,550,088
Publishing (0.8%)
- ---------------------------------------------------------------------------------------------------------------------------------
4,250,000 American Media Operation, Inc. sr. sub. notes 11 5/8s, 2004 4,313,750
500,000 Marvel Holdings, Inc. sr. notes Ser. B, zero %, 1998 397,500
5,955,000 Marvel Parent Holdings, Inc. sr. secd. disc. notes zero %, 1998 4,704,450
--------------
9,415,700
Real Estate (0.2%)
- ---------------------------------------------------------------------------------------------------------------------------------
1,900,000 Chelsea Piers 1st mtge. Ser. B, 12 1/2s, 2004 1,776,500
90,000 Chelsea Piers 144A 1st mtge. stepped-coupon Ser. B, 11s, (11s,
6/15/99), 2009 ++ 84,150
--------------
1,860,650
Retail (1.6%)
- ---------------------------------------------------------------------------------------------------------------------------------
8,007,000 Apparel Retailers, Inc. deb. stepped-coupon Ser. B, zero % (12 3/4s,
8/15/98), 2005 ++ 6,325,530
4,630,000 Brylane L.P. sr. sub. notes 10s, 2003 4,491,100
4,000,000 Finlay Enterprises, Inc. sr. disc. deb. stepped-coupon zero % (12s,
5/1/98), 2005 ++ 3,190,000
1,200,000 Finlay Enterprises, Inc. sr. notes 10 5/8s, 2003 1,185,000
545,000 Guitar Center Management 144A sr. notes 11s, 2006 550,450
1,195,000 Loehmanns, Inc. sr. notes 11 7/8s, 2003 1,233,838
1,600,000 Mothers Work, Inc. sr. notes 12 5/8s, 2005 1,700,000
--------------
18,675,918
Steel (0.3%)
- ---------------------------------------------------------------------------------------------------------------------------------
3,750,000 Ispat Mexicana, S.A. 144A deb. 10 3/8s, 2001 (Mexico) 3,637,500
Telecommunication (3.1%)
- ---------------------------------------------------------------------------------------------------------------------------------
1,860,000 American Communication Services, Inc. sr. disc. notes stepped-coupon zero %
(12 3/4s, 4/1/01), 2006 ++ 934,650
3,110,000 Brooks Fiber Properties 144A sr. disc. notes stepped-coupon zero %
(10 7/8s, 3/1/01), 2006 ++ 1,617,200
4,550,000 Call-Net Enterprises sr. disc. notes stepped-coupon zero % (13 1/4s,
12/1/99), 2004 ++ 3,332,875
1,695,000 Fonorola, Inc. sr. notes 12 1/2s, 2002 (Canada) 1,830,600
5,176,000 GST Telecommunications, Inc. company guaranty stepped-coupon zero %
(13 7/8s, 15/15/00), 2005 ++ 2,963,260
7,720,000 Intelcom Group, Inc. sr. disc. notes stepped-coupon zero % (13 1/2s,
9/15/00), 2005 ++ 4,612,700
3,025,000 Intermedia Communications of Florida sr. notes Ser. B, 13 1/2s, 2005 3,380,438
6,125,000 International Cabletel, Inc. sr. notes stepped-coupon Ser. B, zero %
(11 1/2s, 2/1/01), 2006 ++ 3,521,875
5,175,000 MFS Communications sr. disc. notes stepped-coupon zero % (9 3/8s,
1/15/99), 2004 ++ 3,881,250
5,500,000 MFS Communications sr. disc. notes stepped-coupon zero % (8 7/8s,
1/1/01), 2006 ++ 3,231,250
1,425,000 Nextlink Communications, Inc. 144A sr. notes 12 1/2s, 2006 1,382,250
4,650,000 Rogers Cantel, Inc. deb. 9 3/8s, 2008 (Canada) 4,510,500
3,520,000 Teleport Communications Group Inc. sr. disc. notes stepped-coupon
zero % (11 1/8s, 7/1/01), 2007 ++ 1,936,000
--------------
37,134,848
Textiles (0.2%)
- ---------------------------------------------------------------------------------------------------------------------------------
1,425,000 Polysindo International Finance company guaranty 11 3/8s, 2006 (Indonesia) 1,460,625
804,000 Reeves Industries Inc. sub. deb. 13 3/4s, 2001 719,580
--------------
2,180,205
--------------
Total Corporate Bonds and Notes (cost $391,270,141) $ 384,472,674
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (31.4%) *
PRINCIPAL AMOUNT VALUE
U.S. Government Agency Mortgage Pass-Through Certificates (23.1%)
- ---------------------------------------------------------------------------------------------------------------------------------
Federal National Mortgage Association
$19,681,497 8s, with various due dates from May 1, 2026 to June 1, 2026 19,786,007
47,890,000 8s, TBA, August 16, 2026 48,144,296
59,114,887 7 1/2s, with various due dates from January 1, 2026 to July 1, 2026 58,154,268
38,829,535 7s, with various due dates from July 1, 2025 to April 1, 2026 37,251,892
75,583 6 1/2s, with various due dates from June 1, 2023 to February 1, 2024 70,481
Government National Mortgage Association
429,988 8 1/2s, November 15, 2024 422,463
71,851,354 7 1/2s, with various due dates from December 15, 2023 to April 15, 2026 70,597,859
44,462,773 7s, with various due dates from July 1, 2025 to July 15, 2026 42,517,527
322,917 6 1/2s, October 15, 2025 317,266
--------------
277,262,059
U.S. Treasury Obligations (8.3%)
- ---------------------------------------------------------------------------------------------------------------------------------
21,785,000 U.S. Treasury Bonds 7 7/8s, February 15, 2021 23,721,904
U.S. Treasury Notes
18,915,000 9 1/8s, May 15, 1999 20,215,406
8,135,000 8 7/8s, November 15, 1998 8,574,778
10,770,000 8 1/2s, February 15, 2000 11,446,464
3,890,000 7s, July 15, 2006 3,945,899
11,135,000 6 7/8s, May 15, 2006 11,197,579
10,975,000 6 1/4s, February 15, 2003 10,734,867
9,860,000 6 1/4s, April 30, 2001 9,733,693
--------------
99,570,590
Total U.S. Government and Agency Obligations (cost $380,300,297) $ 376,832,649
<CAPTION>
FOREIGN GOVERNMENT BONDS AND NOTES (24.8%) *
PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
AUD 15,425,000 Australia (Government of) bonds Ser. 1002, 10s, 2002 $ 13,043,435
AUD 9,735,000 Australia (Government of) bonds Ser. 904, 9s, 2004 7,848,019
AUD 5,388,000 Australia (Government of) bonds Ser. 400, 7s, 2000 4,076,960
CAD 23,185,000 Canada (Government of) deb. 8 3/4s, 2005 18,232,454
CAD 40,985,000 Canada (Government of) deb. 7 1/2s, 2001 30,553,811
DKK 96,295,000 Denmark (Government of) bonds 8s, 2003 17,997,008
DKK 35,725,000 Denmark (Government of) bonds 7s, 2004 6,243,411
FRF 70,105,000 France Treasury Bill 7s, 2000 14,905,650
FRF 46,680,000 France Treasury Bill 4 1/2s, 1998 9,324,780
DEM 20,935,000 Germany (Federal Republic of) bonds Ser. 91, 8 3/8s, 2001 15,996,064
DEM 22,010,000 Germany (Federal Republic of) bonds 7 3/8s, 2005 15,964,990
DEM 6,000,000 Germany (Federal Republic of) bonds 6 7/8s, 2005 4,217,572
DEM 37,365,000 Germany (Federal Republic of) bonds 5 3/4s, 2000 25,972,953
DEM 32,645,000 Germany (Federal Republic of) bonds Ser. 108, 5 3/4s, 1998 22,913,831
DEM 28,390,000 Germany (Federal Republic of) bonds Ser. 118, 5 1/4s, 2001 19,261,680
USD 1,412,000 Morocco (Government of) Ser. A FRB 6.437s, 2009 1,027,230
USD 7,990,000 Russia (Government of) non performing loan + 4,394,500
ZAR 9,147,000 South Africa (Republic of) bonds Ser. 153, 13s, 2010 1,689,097
GBP 12,035,000 United Kingdom Treasury bonds 8 1/2s, 2007 19,428,006
GBP 6,720,000 United Kingdom Treasury bonds 7 1/4s, 1998 10,609,583
GBP 9,200,000 United Kingdom Treasury bonds 6 3/4s, 2004 13,407,440
GBP 11,965,000 United Kingdom Treasury notes 7s, 2001 18,314,956
USD 2,330,000 United Mexican States bonds 11 1/2s, 2026 2,120,300
--------------
Total Foreign Government Bonds and Notes (cost $290,839,876) $ 297,543,730
<CAPTION>
BRADY BONDS (2.6%) *
PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
$8,272,000 Argentina (Republic of) FRN Ser. L-GL 6.438s, 2023 $ 5,531,900
2,403,000 Argentina (Republic of) bonds stepped-coupon Ser. L-GP 5s, (5 1/4s,
3/31/97), 2023 ++ 1,273,590
1,108,800 Argentina (Republic of) FRN 6.313s, 2005 837,144
3,733,000 Brazil (Republic of) annual reset bonds 4 1/4s, 2024 2,608,434
4,501,826 Brazil (Republic of) FRB 8s, 2014 (diamond) 2,774,250
4,900,000 Brazil (Republic of) FRN Ser. EI-L, 6 1/2s, 2006 3,999,625
2,478,000 Ecuador (Government of) FRN 6.063s, 2025 1,421,753
2,709,000 Poland (Government of) FRN 6.438s, 2024 2,553,233
3,173,000 United Mexican States deb. Ser. A, 6 1/4s, 2019 2,038,653
7,263,000 United Mexican States deb. Ser. B, 6 1/4s, 2019 4,666,478
4,500,000 Venezuela (Government of) FRN Ser. DL 6.625s, 2007 3,273,750
--------------
Total Brady Bonds (cost $30,043,831) $30,978,810
PREFERRED STOCKS (1.9%) *
NUMBER OF SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
27,207 Cablevision Systems Corp. 144A Ser. L, $11.125, pfd. (2 double daggers) $ 2,533,652
63,750 California Federal Bank Ser. B, $10.625, exch. pfd. 6,677,813
6,875 Chevy Chase Savings Bank $13.00, pfd. 207,969
34,730 Diva Systems Corp. Ser. C., $6.00, pfd. 299,546
49,000 First Nationwide Bank $11.50, pfd. 5,390,000
20,581 K-III Communications $3.85, pfd. (2 double daggers) 1,986,067
74,450 SDW Hldgs Corp. 144A $3.50, pfd. 2,159,050
3,741 Time Warner, Inc. 144A Ser. K, $1.025 pfd. 3,712,943
--------------
Total Preferred Stocks (cost $22,313,848) $ 22,967,040
UNITS (1.3%) *
NUMBER OF UNITS VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
385 Celcaribe S.A. 144A units stepped-coupon zero % (13 1/2s, 3/15/98), 2004 ++ $ 4,081,000
5,360 Cellnet Data Systems Inc. units stepped-coupon zero % (13s, 6/15/00), 2005 ++ 3,765,400
700 Cobblestone Holdings, Inc. 144A units zero %, 2004 262,500
1,715 Diva Systems Corp. 144A units stepped-coupon zero % (13s, 5/15/01), 2006 ++ 930,388
2,000 Fitzgerald Gaming Co. units 13s, 2002 1,560,000
2,815 Hyperion Communications 144A units stepped-coupon zero % (13s, 4/15/01), 2003 ++ 1,491,950
468 ICF Kaiser International, Inc. units 13s, 2003 453,960
1,900 Interact Systems 144A units stepped-coupon zero % (14s, 8/1/99), 2003 ++ 1,254,000
13,760 PSF Finance 144A exch. pfd. units 12 1/2s, 2000 (acquired various dates
from 2/8/93 to 9/15/93, cost $1,376,000)+(double dagger) 619,200
675 Terex Corp. 144A units 13 3/4s, 2002 712,125
--------------
Total Units (cost $14,190,015) $ 15,130,523
ASSET-BACKED SECURITIES (1.0%) *
PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
$4,135,000 Chemical Master Credit Card Trust Ser. 95-2, Class A, 6.23s, 2003 $ 4,043,244
8,240,000 Sears Credit Account Master Trust Ser. 95-5, Class A, 6.05s, 2004 7,794,463
--------------
Total Asset-Backed Securities (cost $12,471,343) $ 11,837,707
CONVERTIBLE PREFERRED STOCKS (0.8%) *
NUMBER OF SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
48,632 Cablevision Systems Corp. Ser. H, $11.75, cv. pfd. $ 4,668,672
66,330 Conseco, Inc. Ser. D, $3.25, cv. pfd. 4,153,916
18,000 Granite Broadcasting $1.938, cv. pfd. 1,167,750
--------------
Total Convertible Preferred Stocks (cost $8,985,546) $ 9,990,338
COMMON STOCKS (0.6%) *
NUMBER OF SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
86,149 Computervision Corp. + $ 635,349
60,000 Exide Corp. 1,612,500
136,975 Grand Union Co. (acquired 6/20/95, cost $7,750,000)(double dagger)+ 838,972
10,934 IFINT Diversified Holdings 144A + 537,133
114,260 Loehmanns' Holdings, Inc. (acquired 9/27/93, cost $280,117)(double dagger)+ 2,095,243
1,658 PMI Holdings Corp. 144A + 331,600
1,186 Premium Holdings L.P. 144A + 29,643
46 Southland Corp. + 157
36,750 Specialty Foods Corp. + 18,375
28,813 Total Renal Care Holdings, Inc. + 772,549
20,790 Total Renal Care Holdings, Inc. (acquired various dates from 8/4/94 to 1/25/95,
cost $33,330)(double dagger)+ 743,243
--------------
Total Common Stocks (cost $11,047,714) $7,614,764
<CAPTION>
WARRANTS (0.3%) *+ EXPIRATION
NUMBER OF WARRANTS DATE VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
95,000 Becker Gaming Corp. 144A 11/15/00 $ 19,000
8,223 Casino America, Inc. 144A 11/15/96 822
16,560 Casino Magic Finance Corp. 144A 10/14/96 828
32,700 Cinemark Mexico USA, Inc. 144A 8/1/03 302,966
5,375 County Seat Holdings, Inc. 144A 10/15/98 53,750
120,047 Gaylord Container Corp. 144A 11/1/02 795,311
700 Grand Union Co. (acquired 6/20/95, cost $280)(double dagger) 6/16/00 224
1,399 Grand Union Co. (acquired 6/20/95, cost $140)(double dagger) 6/16/00 56
187,200 Insight Communications Co. 144A 3/30/98 514,800
20,856 Intelcom Group 9/15/05 239,844
3,025 Intermedia Communications 144A 6/1/00 121,000
10,452 Louisiana Casino Cruises, Inc. 144A 12/1/98 156,780
12,880 Pagemart, Inc. 144A 12/31/03 111,090
5,600 Petracom Hldgs., Inc. 144A 8/1/05 39,900
46,534 President Riverboat Casinos, Inc. 144A 9/30/99 41,881
31,620 President Riverboat Casinos, Inc. 144A 9/23/96 1,581
7,445 SDW Hldgs Corp.144A 4/1/04 96,785
60,000 Southdown, Inc. 144A 10/31/96 300,000
77 Telemedia Broadcasting Corp. 144A 4/1/04 57,870
24,000 UCC Investor Holding, Inc. 144A 10/30/99 336,000
455 Wright Medical Technology, Inc. 144A 6/30/03 59,134
--------------
Total Warrants (cost $2,747,850) $3,249,622
<CAPTION>
CONVERTIBLE BONDS AND NOTES (0.3%) *
PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
$647,000 GST Telecommunications, Inc. cv. sr. disc. notes stepped-coupon zero %
(13 7/8s, 15/15/00), 2005 ++ $ 647,000
3,483,000 Pricellular Wireless Corp. 144A cv. sub. notes stepped-coupon zero %
(10 3/4s, 8/15/00), 2004 ++ 2,995,380
--------------
Total Convertible Bonds and Notes (cost $2,411,346) $ 3,642,380
<CAPTION>
PURCHASED OPTIONS OUTSTANDING (0.1%)(cost $953,046)* EXPIRATION DATE/
NUMBER OF CONTRACTS STRIKE PRICE VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
<S><C> <C> <C> <C>
JPY 6,633,000,000 Japanese Government 10 Yr Bonds August 96/ $1,181,134
JPY 117.25
<CAPTION>
SHORT-TERM INVESTMENTS (6.1%) *
PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$4,805,000 Federal Home Loan Bank effective yield of 5.20%, August 8, 1996 $ 4,800,142
15,715,000 Federal Home Loan Bank effective yield of 5.20%, August 7, 1996 15,701,380
20,000,000 Federal Home Loan Mortgage Corp. effective yield of 5.27%, September 23, 1996 19,844,828
NZD 6,289,240 New Zealand T Bill zero %, September 18, 1996 6,263,868
MXP 843,543 Mexican T Bill zero %, June 5, 1997 850,996
MXP 383,652 Mexican T Bill zero %, January 9, 1997 442,644
$1,754,376 U.S. Dollar Certificate of Deposit, zero %, April 16, 1997 (Issued by J.P.
Morgan Securities, Inc. The principal at redemption is linked to the bid
price for the Polish Treasury Bill, at maturity, and the change in the spot
rate of the Polish Zloty from issue date to maturity date.) 1,498,713
23,193,000 Interest in $500,000,000 joint repurchase agreement dated July 31, 1996
with Lehman Brothers, Inc., due August 1, 1996 with respect to various U.S.
Treasury obligations--maturity value $23,196,640 for an effective yield of 5.65% 23,196,640
--------------
Total Short-Term Investments (cost $72,391,528) $72,599,211
- ---------------------------------------------------------------------------------------------------------------------------------
Total Investments (cost $1,239,966,381) $1,238,040,582
- ---------------------------------------------------------------------------------------------------------------------------------
* Percentages indicated are based on net assets of $1,199,854,271.
*** The aggregate identified cost on a tax basis is $1,242,564,041, resulting in gross unrealized appreciation and
depreciation of $37,449,977 and $41,973,436, respectively, or net unrealized depreciation of $4,523,459.
+ Non-income-producing security.
++ The interest rate and date shown parenthetically represent the new interest rate to be paid and the date the fund
will begin receiving interest at this rate.
(double dagger) Restricted, excluding 144A securities, as to public resale. The total market value of restricted securities held at
July 31, 1996 was $10,539,157 or less than 0.1% of net assets.
++++ Income may be received in cash or additional securities at the discretion of the issuer.
(diamond) A portion of the income will be received in additional securities.
144A after the name of a security represents those exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may be resold in transactions exempt from registration, normally to qualified
institutional buyers.
The rate shown FRB and FRN are the current interest rates shown at July 31, 1996, which are subject to
change based on the terms of the security.
TBA after the name of a security represents to be announced securities.
<CAPTION>
- --------------------------------------------------------------------------------------------
Forward Currency Contracts to Buy at July 31, 1996
(Aggregate Face Value $254,129,284)
Aggregate Face Delivery Unrealized
Market Value Value Date Appreciation
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Danish Krone $ 1,942,146 $ 1,857,573 9/18/96 $ 84,573
Deutschemarks 75,380,358 73,308,356 9/18/96 2,072,002
French Francs 15,496,401 14,807,635 9/18/96 688,766
Italian Lira 42,214,960 42,105,674 9/18/96 109,286
Japanese Yen 85,762,740 84,471,931 9/18/96 1,290,809
Spanish Peseta 14,625,788 14,203,188 9/18/96 422,600
Swedish Krona 618,003 608,229 9/18/96 9,774
Swiss Francs 22,940,677 22,766,698 9/18/96 173,979
- --------------------------------------------------------------------------------------------
$ 4,851,789
- --------------------------------------------------------------------------------------------
Forward Currency Contracts to Sell at July 31, 1996
(Aggregate Face Value $231,779,904)
Unrealized
Market Aggregate Face Delivery Appreciation/
Value Value Date (Depreciation)
- --------------------------------------------------------------------------------------------
Australian Dollars $19,195,161 $ 19,591,792 9/18/96 $ 396,631
British Pounds 31,581,287 30,948,707 9/18/96 (632,580)
Canadian Dollars 34,122,787 34,165,800 9/18/96 43,013
Danish Krone 16,210,977 15,631,398 9/18/96 (579,579)
Deutschemarks 753,924 744,434 4/16/97 (9,490)
Deutschemarks 66,468,984 64,589,583 9/18/96 (1,879,401)
Italian Lira 30,883,919 30,562,887 9/18/96 (321,032)
Japanese Yen 10,445,865 10,265,017 9/18/96 (180,848)
Swedish Krona 6,397,357 6,378,040 9/18/96 (19,317)
Swiss Francs 19,179,108 18,902,246 9/18/96 (276,862)
- --------------------------------------------------------------------------------------------
$ (3,459,465)
- --------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
July 31, 1996
<S> <C>
Assets
- -----------------------------------------------------------------------------------------------------------------
Investments in securities, at value (identified cost $1,239,966,381) (Note 1) $1,238,040,582
- -----------------------------------------------------------------------------------------------------------------
Cash 2,403,948
- -----------------------------------------------------------------------------------------------------------------
Dividends, interest and other receivables 20,545,172
- -----------------------------------------------------------------------------------------------------------------
Receivable for securities sold 19,762,966
- -----------------------------------------------------------------------------------------------------------------
Receivable for open forward currency contracts 5,526,135
- -----------------------------------------------------------------------------------------------------------------
Receivable for closed forward currency contracts 2,567,858
- -----------------------------------------------------------------------------------------------------------------
Total assets 1,288,846,661
Liabilities
- -----------------------------------------------------------------------------------------------------------------
Distributions payable to shareholders 7,735,695
- -----------------------------------------------------------------------------------------------------------------
Payable for securities purchased 68,891,601
- -----------------------------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 2,060,135
- -----------------------------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 374,849
- -----------------------------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 3,522
- -----------------------------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 1,874
- -----------------------------------------------------------------------------------------------------------------
Payable for open forward currency contracts 4,133,811
- -----------------------------------------------------------------------------------------------------------------
Payable for closed forward currency contracts 5,559,726
- -----------------------------------------------------------------------------------------------------------------
Other accrued expenses 231,177
- -----------------------------------------------------------------------------------------------------------------
Total liabilities 88,992,390
- -----------------------------------------------------------------------------------------------------------------
Net assets $1,199,854,271
Represented by
- -----------------------------------------------------------------------------------------------------------------
Paid-in-capital (Notes 1 and 4) 1,227,255,458
- -----------------------------------------------------------------------------------------------------------------
Distributions in excess of net investment income (Note 1) (9,585,083)
- -----------------------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments and foreign currency transactions (Note 1) (17,364,808)
- -----------------------------------------------------------------------------------------------------------------
Net unrealized depreciation of investments and assets and liabilities in foreign currencies (451,296)
- -----------------------------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to capital shares outstanding $1,199,854,271
- -----------------------------------------------------------------------------------------------------------------
Computation of net asset value and offering price
- -----------------------------------------------------------------------------------------------------------------
Net asset value per share ($1,199,854,271 divided by 140,679,960 shares) $8.53
- -----------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Year ended July 31, 1996
<S> <C>
Investment Income:
- -----------------------------------------------------------------------------------------------------------
Interest (net of foreign tax of $341,025) $97,314,717
- -----------------------------------------------------------------------------------------------------------
Dividends 2,165,701
- -----------------------------------------------------------------------------------------------------------
Total investment income 99,480,418
Expenses:
- -----------------------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 8,223,346
- -----------------------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 1,254,533
- -----------------------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 41,244
- -----------------------------------------------------------------------------------------------------------
Administrative services (Note 2) 23,469
- -----------------------------------------------------------------------------------------------------------
Auditing 92,960
- -----------------------------------------------------------------------------------------------------------
Legal 42,980
- -----------------------------------------------------------------------------------------------------------
Exchange listing fees 118,429
- -----------------------------------------------------------------------------------------------------------
Other 374,625
- -----------------------------------------------------------------------------------------------------------
Total expenses 10,171,586
- -----------------------------------------------------------------------------------------------------------
Expense reduction (Note 2) (128,974)
- -----------------------------------------------------------------------------------------------------------
Net expenses 10,042,612
- -----------------------------------------------------------------------------------------------------------
Net investment income 89,437,806
- -----------------------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 45,924,404
- -----------------------------------------------------------------------------------------------------------
Net realized gain on written options (Notes 1 and 3) 316,308
- -----------------------------------------------------------------------------------------------------------
Net realized loss on forward currency contracts and foreign currency translation (Note 1) (11,309,071)
- -----------------------------------------------------------------------------------------------------------
Net unrealized appreciation on forward currency contracts and foreign currency translation
during the year 5,234,636
- -----------------------------------------------------------------------------------------------------------
Net unrealized depreciation of investments during the year (27,182,419)
- -----------------------------------------------------------------------------------------------------------
Net gain on investments 12,983,858
- -----------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $102,421,664
- -----------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Year ended July 31
-----------------------------------
1996 1995
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Increase in net assets
- ------------------------------------------------------------------------------------------------------------------------------
Operations:
- ------------------------------------------------------------------------------------------------------------------------------
Net investment income $89,437,806 $95,235,357
- ------------------------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments and foreign currency transactions 34,931,641 (34,225,964)
- ------------------------------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of investments and assets and
liabilities in foreign currencies (21,947,783) 57,992,724
- ------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 102,421,664 119,002,117
- ------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders
- ------------------------------------------------------------------------------------------------------------------------------
From net investment income (91,016,918) (80,928,763)
- ------------------------------------------------------------------------------------------------------------------------------
In excess of net investment income (1,695,936) --
- ------------------------------------------------------------------------------------------------------------------------------
From return of capital -- (14,067,170)
- ------------------------------------------------------------------------------------------------------------------------------
Shares repurchased (Note 4) (229,350) (357,250)
- ------------------------------------------------------------------------------------------------------------------------------
Total increase in net assets 9,479,460 23,648,934
- ------------------------------------------------------------------------------------------------------------------------------
Net Assets
- ------------------------------------------------------------------------------------------------------------------------------
Beginning of year 1,190,374,811 1,166,725,877
- ------------------------------------------------------------------------------------------------------------------------------
End of year (including distributions in excess of net investment income of
$9,585,083 and $7,889,148, respectively) $1,199,854,271 $1,190,374,811
- ------------------------------------------------------------------------------------------------------------------------------
Number of fund shares
- ------------------------------------------------------------------------------------------------------------------------------
Shares outstanding at beginning of year 140,709,960 140,759,960
- ------------------------------------------------------------------------------------------------------------------------------
Shares repurchased (30,000) (50,000)
- ------------------------------------------------------------------------------------------------------------------------------
Shares outstanding at end of year 140,679,960 140,709,960
- ------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
Year ended July 31
---------------------------------------------------
1996 1995 1994
---------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of year $8.46 $8.29 $8.87
- ---------------------------------------------------------------------------------------------------------------------------
Investment operations
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income .64 .68 .64
- ---------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments .09 .17 (.50)
- ---------------------------------------------------------------------------------------------------------------------------
Total from investment operations .73 .85 .14
- ---------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ---------------------------------------------------------------------------------------------------------------------------
From net investment income (.65) (.58) (.70)
- ---------------------------------------------------------------------------------------------------------------------------
In excess of net investment income (.01) -- (.02)
- ---------------------------------------------------------------------------------------------------------------------------
From tax return of capital -- (.10) --
- ---------------------------------------------------------------------------------------------------------------------------
Total distributions (.66) (.68) (.72)
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $8.53 $8.46 $8.29
- ---------------------------------------------------------------------------------------------------------------------------
Total investment return at market value (%)(a) 7.94 6.86 .95
- ---------------------------------------------------------------------------------------------------------------------------
Market value, end of year $7.38 $7.44 $7.63
- ---------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in thousands) $1,199,854 $1,190,375 $1,166,726
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%)(b) .85 .82 .86
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets (%) 7.43 8.29 7.30
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 332.00 196.83 242.29
- ---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Financial highlights (continued)
(For a share outstanding throughout the period)
----------------------------
1993 1992
----------------------------
<S> <C> <C>
Net asset value, beginning of year $8.51 $7.90
- ------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------
Net investment income .71 .75
- ------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments .42 .73
- ------------------------------------------------------------------------------------------------------
Total from investment operations 1.13 1.48
- ------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------
From net investment income (.71) (.75)
- ------------------------------------------------------------------------------------------------------
In excess of net investment income (.06) (.12)
- ------------------------------------------------------------------------------------------------------
From tax return of capital -- --
- ------------------------------------------------------------------------------------------------------
Total distributions (.77) (.87)
- ------------------------------------------------------------------------------------------------------
Net asset value, end of year $8.87 $8.51
- ------------------------------------------------------------------------------------------------------
Total investment return at market value (%)(a) 1.92 27.42
- ------------------------------------------------------------------------------------------------------
Market value, end of year $8.25 $8.88
- ------------------------------------------------------------------------------------------------------
Net assets, end of year (in thousands) $1,249,193 $1,194,958
- ------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%)(b) .84 .88
- ------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets (%) 8.14 9.05
- ------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 250.65 203.27
- ------------------------------------------------------------------------------------------------------
(a) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) The ratio of expenses to average net assets for the period ended July 31, 1996 includes amounts paid
through expense offset arrangements. Prior period ratios exclude these amounts. (Note 2)
</TABLE>
Note 1
Significant accounting policies
The fund is registered under the Investment Company Act of 1940, as
amended, as a non-diversified, closed-end management investment company.
The fund's investment objective is to seek high current income
consistent with the preservation of capital by allocating its
investments among the U.S. government sector, high yield sector and
international sector of the fixed income securities market.
The following is a summary of significant accounting policies
consistently followed by the fund in the preparation of its financial
statements. The preparation of financial statements is in conformity
with generally accepted accounting principles and requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities. Actual results could differ from those
estimates.
A) Security valuation Investments for which market quotations are
readily available are stated at market value, which is determined using
the last reported sale price, or, if no sales are reported -- as in the
case of some securities traded over-the-counter -- the last reported bid
price. Securities quoted in foreign currencies are translated into U.S.
dollars at the current exchange rate. Short-term investments having
remaining maturities of 60 days or less are stated at amortized cost,
which approximates market value, and other investments, including
restricted securities, are stated at fair value following procedures
approved by the Trustees. Market quotations are not considered to be
readily available for debt obligations; such investments are stated at
fair value on the basis of valuations furnished by a pricing service,
approved by the Trustees or dealers, which determines valuations for
normal, institutional-size trading units of such securities using
methods based on market transactions for comparable securities and
various relationships between securities which are generally recognized
by institutional traders.
B) Joint trading account Pursuant to an exemptive order issued by the
Securities and Exchange Commission, the fund may transfer uninvested
cash balances into a joint trading account along with the cash of other
registered investment companies managed by Putnam Investment Management,
Inc. ("Putnam Management"), the fund's Manager, a wholly-owned
subsidiary of Putnam Investments, Inc. and certain other accounts. These
balances may be invested in one or more repurchase agreements and/or
short-term money market instruments.
C) Repurchase agreements The fund, or any joint trading account, through
its custodian, receives delivery of the underlying securities, the
market value of which at the time of purchase is required to be in an
amount at least equal to the resale price, including accrued interest.
Putnam Management is responsible for determining that the value of these
underlying securities is at all times at least equal to the resale
price, including accrued interest.
D) Security transactions and related investment income Security
transactions are accounted for on the trade date (date the order to buy
or sell is executed). Interest income is recorded on the accrual basis.
Dividend income is recorded on the ex-dividend date except that certain
dividends from foreign securities are recorded as soon as the fund is
informed of the ex-dividend date. Discounts on zero coupon bonds,
original issue, stepped-coupon bonds and payment in kind bonds are
accreted according to the effective yield method.
E) Forward currency contracts The fund may engage in forward currency
contracts, which are agreements between two parties to buy and sell
currencies at a set price on a future date, to protect against a decline
in value relative to the U.S. dollar of the currencies in which its
portfolio securities are denominated or quoted (or an increase in the
value of a currency in which securities a fund intends to buy are
denominated, when a fund holds cash reserves and short-term
investments). The U.S. dollar value of forward currency contracts is
determined using forward currency exchange rates supplied by a quotation
service. The market value of the contract will fluctuate with changes in
currency exchange rates. The contract is "marked to market" daily and
the change in market value is recorded as an unrealized gain or loss.
When the contract is closed, the fund records a realized gain or loss
equal to the difference between the value of the contract at the time it
was opened and the value at the time it was closed. The fund could be
exposed to risk if the value of the currency changes unfavorably, if the
counterparties to the contracts are unable to meet the terms of their
contracts or if the fund is unable to enter into a closing position.
F) Foreign currency translation The accounting records of the fund are
maintained in U.S. dollars. The market value of foreign securities,
currency holdings, other assets and liabilities are recorded in the
books and records of the fund after translation to U.S. dollars based on
the exchange rates on that day. The cost of each security is determined
using historical exchange rates. Income and withholding taxes are
translated at prevailing exchange rates when accrued or incurred. The
fund does not isolate that portion of realized or unrealized gains or
losses resulting from changes in the foreign exchange rate on
investments from fluctuations arising from changes in the market prices
of the securities. Such fluctuations are included with the net realized
and unrealized gain or loss on investments. Net realized gains and
losses on foreign currency transactions represent net exchange gains or
losses on closed forward currency contracts, disposition of foreign
currencies and the difference between the amount of investment income
and foreign withholding taxes recorded on the fund's books and the U.S.
dollar equivalent amounts actually received or paid. Net unrealized
gains and losses on foreign currency transactions arise from changes in
the value of open forward currency contracts and assets and liabilities
other than investments at the period end, resulting from changes in the
exchange rate.
G) Futures and options contracts The fund may use futures and options
contracts to hedge against changes in the values of securities the fund
owns or expects to purchase. The fund may also write options on
securities it owns or in which it may invest to increase its current
returns.
The potential risk to the fund is that the change in value of futures
and options contracts may not correspond to the change in value of the
hedged instruments. In addition, losses may arise from changes in the
value of the underlying instruments, if there is an illiquid secondary
market for the contracts, or if the counterparty to the contract is
unable to perform.
Futures contracts are valued at the quoted daily settlement prices
established by the exchange on which they trade. Exchange traded options
are valued at the last sale price, or if no sales are reported, the last
bid price for purchased options and the last ask price for written
options. Options traded over-the-counter are valued using prices
supplied by dealers.
H) TBA purchase commitments The fund may enter into "TBA" (to be
announced) purchase commitments to purchase securities for a fixed unit
price at a future date beyond customary settlement time. Although the
unit price has been established, the principal value has not been
finalized. However, the amount of the commitments will not fluctuate
more than 1.0% from the principal amount. The fund holds, and maintains
until settlement date, cash or high-grade debt obligations in an amount
sufficient to meet the purchase price, or the fund may enter into
offsetting contracts for the forward sale of other securities it owns.
Income on the securities will not be earned until settlement date. TBA
purchase commitments may be considered securities in themselves, and
involve a risk of loss if the value of the security to be purchased
declines prior to the settlement date, which risk is in addition to the
risk of decline in the value of the fund's other assets. Unsettled TBA
purchase commitments are valued at the current market value of the
underlying securities, generally according to the procedures described
under Security valuation above.
Although the fund will generally enter into TBA purchase commitments
with the intention of acquiring securities for their portfolio or for
delivery pursuant to options contracts it has entered into, the fund may
dispose of a commitment prior to settlement if Putnam Management deems
it appropriate to do so.
I) Federal taxes It is the policy of the fund to distribute all of its
taxable income within the prescribed time and otherwise comply with the
provisions of the Internal Revenue Code applicable to regulated
investment companies. It is also the intention of the fund to distribute
an amount sufficient to avoid imposition of any excise tax under Section
4982 of the Internal Revenue Code of 1986. Therefore, no provision has
been made for federal taxes on income, capital gains or unrealized
appreciation on securities held and for excise tax on income and capital
gains.
At July 31, 1996, the fund had a capital loss carryover of approximately
$14,767,000 available to offset future capital gains, if any, which will
expire on July 31, 2003.
J) Distributions to shareholders Distributions to shareholders are
recorded by the fund on the ex-dividend date. At certain times, the fund
may pay distributions at a level rate even though, as a result of market
conditions or investment decisions, the fund may not achieve projected
investment results for a given period. The amount and character of
income and gains to be distributed are determined in accordance with
income tax regulations which may differ from generally accepted
accounting principles. These differences include treatment of market
discount, realized and unrealized gains and losses on forward foreign
currency contracts, losses on wash sale transactions, and post-October
loss deferrals.
Reclassifications are made to the fund's capital accounts to reflect
income and gains available for distribution (or available capital loss
carryovers) under income tax regulations. For the year ended July 31,
1996, the fund reclassified $1,579,113 to decrease distributions in
excess of net investment income and $11,609,039 to decrease paid-in-
capital, with a decrease to accumulated net realized loss on investments
of $10,029,926. The calculation of net investment income per share in
the financial highlights table excludes these adjustments.
Note 2
Management fee, administrative services and other transactions
Compensation of Putnam Management, for management and investment
advisory services is paid quarterly based on the average weekly net
assets of the fund. Such fee is based on the following annual rates:
0.75% of the first $500 million of average weekly net assets, 0.65% of
the next $500 million, 0.60% of the next $500 million and 0.55% of any
amount over $1.5 billion subject, under current law, to reduction in any
year by the amount of certain brokerage commissions and fees (less
expenses) received by affiliates of Putnam Management on the fund's
portfolio transactions.
The fund reimburses Putnam Management for the compensation and related
expenses of certain officers of the fund and their staff who provide
administrative services to the fund. The aggregate amount of all such
reimbursements is determined annually by the Trustees.
Custodial functions for the fund's assets are provided by Putnam
Fiduciary Trust Company (PFTC), a wholly-owned subsidiary of Putnam
Investments, Inc. Investor servicing agent functions are provided by
Putnam Investor Services, a division of PFTC.
For the year ended July 31, 1996, fund expenses were reduced by $128,974
under expense offset arrangements with PFTC. Investor servicing and
custodian fees reported in the Statement of operations exclude these
credits. The fund could have invested a portion of the assets utilized
in connection with the expense offset arrangements in an income
producing asset if it had not entered into such arrangements.
Trustees of the fund receive an annual Trustees fee of $2,210 and an
additional fee for each Trustee's meeting attended. Trustees who are not
interested persons of Putnam Management and who serve on committees of
the Trustees receive additional fees for attendance at certain committee
meetings.
The fund adopted a Trustee Fee Deferral Plan (the "Plan") which allows
the Trustees to defer the receipt of all or a portion of Trustees Fees
payable on or after July 1, 1995. The deferred fees remain in the fund
and are invested in the fund or in other Putnam funds until distribution
in accordance with the Plan.
Note 3
Purchase and sales of securities
During the year ended July 31, 1996, purchases and sales of investment
securities other than U.S. government obligations and short-term
investments aggregated $1,254,476,836 and $1,239,565,151, respectively.
Purchases and sales of U.S. government obligations aggregated
$2,588,904,497 and $2,590,073,371, respectively. In determining the net
gain or loss on securities sold, the cost of securities has been
determined on the identified cost basis.
Written option transactions during the year are summarized as follows:
Contract Premiums
Amounts Received
- ----------------------------------------------------
Contracts
outstanding at
beginning of year $ -- $ --
Options opened 88,260,000 316,308
Options expired (88,260,000) (316,308)
Options closed -- --
- ----------------------------------------------------
Written options
outstanding at
end of year $ -- $ --
- ----------------------------------------------------
Note 4
Share Repurchase Program
The Trustees have authorized the fund to repurchase up to 7,000,000 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 are believed to be in the best interests of the fund's
shareholders. Any repurchases of shares will have the effect of
increasing the net asset value per share of remaining shares
outstanding.
For the year ended July 31, 1996 the fund repurchased 30,000 shares for
$229,350 which reflects a discount from net asset value of $26,800 or
10.46%.
Federal tax information
(Unaudited)
The Form 1099 you receive in January 1997 will show the tax status of
all distributions paid to your account in calendar 1996.
<TABLE>
<CAPTION>
Selected quarterly data
(Unaudited)
Net realized and Net increase (decrease)
Investment Net investment unrealized gain in net assets
income income (loss) on investments from operations
- ----------------------------------------------------------------------------------------------------------
Quarter Per Per Per Per
Ended Total Share Total Share Total Share Total Share
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
10/31/94 $26,313,460 $.19 $23,947,987 $.17 $(19,690,617) $(.14) $4,257,370 $.03
- ----------------------------------------------------------------------------------------------------------
1/31/95 27,023,424 .19 24,775,669 .18 (31,843,818) (.23) (7,068,149) (.05)
- ----------------------------------------------------------------------------------------------------------
4/30/95 24,980,495 .18 22,825,142 .16 41,610,760 .30 64,435,902 .46
- ----------------------------------------------------------------------------------------------------------
7/31/95 26,391,491 .18 23,686,559 .17 33,690,435 .24 57,376,994 .41
- ----------------------------------------------------------------------------------------------------------
10/31/95 25,389,718 .18 23,038,560 .16 9,464,195 .07 32,502,755 .23
- ----------------------------------------------------------------------------------------------------------
1/31/96 24,912,049 .18 22,299,922 .16 35,108,083 .25 57,408,005 .41
- ----------------------------------------------------------------------------------------------------------
4/30/96 24,046,784 .17 21,536,732 .15 (28,300,592) (.20) (6,763,860) (.05)
- ----------------------------------------------------------------------------------------------------------
7/31/96 25,131,867 .18 22,562,592 .17 (3,287,828) (.03) 19,274,764 .14
- ----------------------------------------------------------------------------------------------------------
</TABLE>
Dividend policy
It is the fund's dividend policy to pay monthly distributions from net
investment income and any net realized short-term gains (including gains
from options and futures transactions). Long-term capital gains are
distributed at least annually. In an effort to maintain a more stable
level of distributions, the fund's monthly distribution rate will be
based on Putnam Management's projections of the net investment income
and net realized short-term capital gains that the fund is likely to
earn over the long term. Such distributions at times may exceed the
current earnings of the fund, resulting in a return of capital to
shareholders.
Results of July 11, 1996 shareholder meeting
(Unaudited)
An annual meeting of shareholders of the fund was held on
July 11, 1996. At the meeting, each of the nominees for Trustee was
elected, as follows:
Votes for Votes withheld
- ------------------------------------------------------------------------
Jameson Adkins Baxter 123,795,630 3,088,626
Hans H. Estin 123,833,036 3,051,220
John A. Hill 123,879,609 3,004,647
Elizabeth T. Kennan 123,780,347 3,103,909
Lawrence J. Lasser 123,848,968 3,035,288
Robert E. Patterson 123,908,747 2,975,509
Donald S. Perkins 123,769,876 3,114,380
William F. Pounds 123,792,966 3,091,290
George Putnam 123,837,979 3,046,277
George Putnam, III 123,777,282 3,106,974
E. Shapiro 123,564,800 3,319,456
A.J.C. Smith 123,873,802 3,010,454
W. Nicholas Thorndike 123,790,582 3,093,674
A proposal to ratify the selection of Price Waterhouse LLP as
independent auditors of the fund was approved as follows: 124,159,343
votes for, and 1,257,559 votes against, with 1,467,354 abstentions and
non-broker votes.
A proposal to convert the fund from closed-end to open-end status and
authorize certain related amendments to the Agreement and Declaration of
Trust was not approved as follows: 14,055,775 votes for and 53,537,086
votes against, with 59,291,395 abstentions and non-broker votes.
Fund information
INVESTMENT MANAGER
Putnam Investment
Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
John A. Hill
Ronald J. Jackson
Elizabeth T. Kennan
Lawrence J. Lasser
Robert E. Patterson
Donald S. Perkins
George Putnam, III
Eli Shapiro
A.J.C. Smith
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
John D. Hughes
Senior Vice President and Treasurer
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Gary N. Coburn
Vice President
Rosemary H. Thomsen
Vice President and Fund Manager
Neil J. Powers
Vice President and Fund Manager
D. William Kohli
Vice President and Fund Manager
Mark J. Seigel
Vice President and Fund Manager
William N. Shieber
Vice President
John R. Verani
Vice President
Paul M. O'Neil
Vice President
Beverly Marcus
Clerk and Assistant Treasurer
Call 1-800-225-1581 weekdays from
9 a.m. to 5 p.m. Eastern Time for up-to-date
information about the fund's NAV.
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
- ----------------
Bulk Rate
U.S. Postage
PAID
Putnam
Investments
- ----------------
27084-073 9/96