Putnam
Premier
Income
Trust
SEMIANNUAL REPORT
January 31, 1997
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* Morningstar Inc., an independent rating agency, awarded the fund 4 out of a
possible 5 stars for overall performance (based on 3- and 5-year returns) as
of February 28, 1997. This places the fund in the top 22.5% of the 139
closed-end fixed-income funds rated.*
* "Putnam Premier Income Trust has struck an admirable balance between
self-control and versatility."
-- Morningstar Mutual Funds, September 6, 1996
CONTENTS
4 Report from Putnam Management
10 Fund performance summary
13 Portfolio holdings
29 Financial statements
*Morningstar ratings are subject to change every month and are calculated from
a fund's 3- and 5-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. Of the
funds in an investment category, 10% receive 5 stars and 22.5% receive 4
stars. For the 3- and 5-year periods ended 2/28/97, there were 139 and 88
funds, respectively, in the closed-end fixed-income investment category. The
fund received 4 stars for both periods. Past performance is not indicative of
future results.
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
(copyright) Karsh, Ottawa
Dear Shareholder:
During the first half of fiscal 1997, the management team of Putnam Premier
Income Trust once again guided a portfolio of U.S. and foreign government
securities and domestic high-yield bonds to a total return that was
significantly higher than the returns posted by all three benchmark indexes.
Average annual returns based on net asset value for 1 year, 5 years, and the
life of the fund are similarly well above the benchmarks. You can see these
numbers in the total return tables on page 10.
Such consistency of performance is no accident -- and it is definitely the
result of a team effort. Each of the managers named at the top of the report
that starts on the next page is a specialist in one of the fund's portfolio
sectors, or sleeves, as we call them. These managers are backed by Putnam's
extensive credit research capability.
During the period, Neil Powers assumed the reins of lead manager and Jin Ho
was added to the team. Neil, manager of the fund's U.S. government sector, has
been with Putnam since 1986. Jin joined Putnam in 1983 as a fixed-income
analyst. As a member of the High Yield Bond Group, he manages that sector of
your fund's portfolio. He has 14 years of investment experience.
Respectfully yours,
/S/George Putnam
George Putnam
Chairman of the Trustees
March 19, 1997
Report from the Fund Managers
Neil J. Powers, lead manager
D. William Kohli
Mark J. Siegel
Jin W. Ho
On the home front and abroad, sovereign and corporate debt enjoyed a generally
favorable environment for the six months ended January 31, 1997. Over the
period, Putnam Premier Income Trust was able to benefit from several positive
trends, including global disinflation, reassuring economic growth, and
interest-rate stability. At the close of the period, your fund had gained
7.70% at net asset value and 13.11% at market price. Full performance details
can be found on pages 10 and 11.
For the most part, our bond selections and sector allocations in each of the
fund's three sectors, or sleeves -- U.S. government, foreign government, and
U.S. high yield -- focused more on maximizing yield potential than
aggressively managing duration. While each of the fund's sleeves produced
attractive results, the high-yield and emerging market positions provided the
most robust gains. Active management of the fund's U.S. dollar exposure also
supported returns.
* MORTGAGE-BACKED SECURITIES DOMINATE U.S. GOVERNMENT HOLDINGS
Since early 1996, we have favored mortgage-backed securities for both their
income advantages and their price appreciation possibilities. Our main focus
has been discount-coupon mortgages -- those with coupons lower than the
current market rate -- which tend to be less sensitive to prepayment risk.
With the exception of a brief period of volatility in late October and early
November, the mortgage market has been a strong performer for the fund, with
January witnessing exceptional gains. The fund's asset-backed instruments also
performed well.
In our opinion, yields on Treasury securities are currently too low and
valuations too high to justify a large position now. Consequently we have kept
exposure relatively low -- with 30-year bonds and 10-year notes making up most
of those Treasury securities in the portfolio at period's end. The longer
duration of these investments allowed the fund to participate fully in the
market's rally over the period. Going forward, we may search for opportunities
in some nontraditional sectors of the U.S. government market, possibly home
equity loans.
* HIGH-YIELD BONDS RIDE HIGHER ON STRONG DEMAND AND IMPROVING CREDIT
Highly favorable supply/demand characteristics, strong corporate
profitability, moderate economic growth, and record-breaking stock market
activity fueled the returns of high-yield bonds throughout the period.
High-yield mutual fund inflows topped $16 billion in 1996, with insurance
companies and pension funds committing additional funds to these securities.
This accelerated demand for high-yield bonds in the secondary market supported
the absorption of a recording-breaking number of new issues. Merger and
acquisition activity was also robust, with many high-yield issuers purchased
by stronger companies, resulting in credit quality upgrades.
In this environment, we sought to maximize yield and appreciation potential by
investing a significant portion of the fund's assets in the high-yield market.
We targeted bonds we believed offered the best relative value, particularly in
growth-oriented industries. Telecommunications and broadcasting holdings, the
sleeve's largest industry weightings, produced outstanding results, benefiting
from the deregulation legislation passed in February of last year. Competitive
access providers (CAPs), such as Teleport Communications Group and Brooks
Fiber Properties, were among the top performers. These companies issue
high-yield debt to finance the construction of fiber-optic networks that will
enable them to compete against local telephone companies for commercial
customers. Bonds issued by MFS Communications and Intermedia Communications
also delivered solid gains, as did those issued by Intelcom. While these
securities and others discussed in this report were viewed favorably during
the period, all holdings are subject to review and adjustment in accordance
with the fund's investment strategy and may vary in the future.
[GRAPHIC OMITTED: horizontal bar chart TOP 10 ALLOCATIONS BY COUNTRY*]
TOP 10 ALLOCATIONS BY COUNTRY*
Germany 7.2%
France 6.1%
United Kingdom 3.5%
Mexico 2.5%
Brazil 1.9%
Australia 1.7%
Argentina 1.4%
Spain 1.3%
Canada 1.2%
Italy 1.0%
Footnote reads:
*Based on net assets as of 1/31/97. Reflects international sleeve holdings
only. Allocations will vary over time.
A noteworthy trend in telecommunications is also developing in the United
Kingdom, where corporations are permitted to market telephone and cable
television services jointly. Videotron Holdings, whose bonds we hold in the
portfolio, was sold to a partnership made up of Bell Canada and Cable and
Wireless PLC. This acquisition helped to focus investor interest on the
telephone/cable television duopolies in the United Kingdom and boosted
security values across the industry sector.
The fund also benefited from its exposure to gaming, aerospace, and utility
companies. Issues from the gaming sector hold consistent appeal because of
their high yields. Renewed growth in the aerospace industry, in which demand
for airplanes from both domestic and foreign customers is increasing, has
created a number of attractive investments in companies supplying the
industry. At the same time, ongoing consolidation among utility companies
continues to create price appreciation opportunities.
* EUROPE AND EMERGING MARKETS ARE MAJOR FOCUS FOR FOREIGN HOLDINGS
We targeted Europe as the primary investment locale for your fund's
international sleeve. This enabled us to participate in the rallies sparked by
stable-to-easing monetary policies and continued optimism about the prospects
for European Monetary Union (EMU). By investing in bonds that stood to benefit
from the move toward monetary union, or "convergence," the international
component contributed significantly to your fund's overall performance.
TOP SECTOR HOLDINGS*
Top three high-yield holdings
Sears Credit 6.05%, 2004
Midland Funding Corp. 13.25%, 2006
Cencall Communications Corp. zero%, 2004
Top three U.S. government holdings
U.S. Treasury notes 6.5%, 2006
GNMA 7%, 2025-2026
GNMA 7.5%, 2025
Top three international holdings
Germany (Federal Republic of ) bonds 6.25%, 2006
Germany (Federal Republic of ) bonds 5.25%, 2001
France Treasury bill 7%, 2000
Footnote reads:
*These holdings represent 19.9% of the fund's assets as of 1/31/97.
Portfolio holdings will vary over time.
At the outset of fiscal 1997, we emphasized the higher-yielding peripheral
markets of Europe, such as Italy, Spain, and Sweden, which offered much higher
yields than the markets of core Europe. As the outlook for EMU improved on the
heels of the German-French summit in September, investors began recognizing
that these countries were earnestly attempting to get their fiscal houses in
shape to qualify for inclusion. Bond prices appreciated and yields declined.
By mid-autumn, we decided to sell the fund's Spanish, Italian, and Swedish
bonds, whose prices had risen to our target levels. We reinvested the
resulting gains in the dollar-bloc, or Anglo, bond markets of Canada,
Australia, and the United Kingdom. In hindsight, this move may have been a bit
premature, since the peripheral markets have continued to appreciate. However,
the fund's Anglo holdings had proved their potential by producing strong
returns. We have also increased the fund's weighting in core European markets,
specifically France and Germany, which have also rallied and stand to benefit
further from improving economic conditions.
Prospects for Japan's bond market remained murky and we opted to keep the
portfolio's exposure to Japanese government bonds at a minimum. Our avoidance
of the Japanese market has contributed positively to performance.
Emerging market investments also have played a vital role in performance. A
number of positive factors contributed to favorable conditions for emerging
market debt: a supportive U.S. Treasury market with low volatility, increased
liquidity in the global bond market system, and positive macroeconomic
scenarios in Latin America and Eastern Europe. To capitalize on the strength
of these markets, we increased exposure to its allowable maximum, profiting
substantially from investments in Mexico, Argentina, and Russia through
period's end. We re-established exposure to South Africa because bond prices
have approached bargain levels and our on-site research has revealed improving
political and economic conditions.
Last but certainly not least, active currency management proved highly
rewarding. We protected the fund's value from losses resulting from currency
fluctuations and a strong U.S. dollar by hedging foreign bonds back to the
U.S. dollar. We also boosted the portfolio's yield potential, especially in
December and January, by investing in dollar/yen and dollar/mark currency
contracts.
* MODERATE GROWTH, BENIGN INFLATION, AND STABLE INTEREST RATES APPEAR ON THE
HORIZON
As the fund enters the second half of fiscal 1997, the broad outlook for
fixed-income investing remains positive. We anticipate steady economic growth
worldwide and stable inflation. The trend toward fiscal responsibility
accompanied by easy monetary policies -- low interest rates -- should likely
continue in all country blocs.
As risk premiums around the world have declined dramatically from the high
levels of 1995 to today's low levels, investors must search harder for bonds
offering attractive yields relative to their valuations. Your fund's trisector
investment strategy gives us the flexibility to uncover such opportunities
around the globe. Against this backdrop, we are maintaining the portfolio's
strategic commitment to select emerging markets. For the time being, we are
also keeping the fund's domestic high-yield sector fully invested, since it
also stands to benefit from a historic seasonal boost this winter. Improving
economies should bode well for the fund's core European holdings, while
conditions in the United States give us reason to remain optimistic about the
solid performance potential of mortgage-backed securities.
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 1/31/97, 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 interest and
principal 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 1/31/97
Market
NAV price
- ------------------------------------------------------------------------------
6 months 7.70% 13.11%
- ------------------------------------------------------------------------------
1 year 9.31 10.54
- ------------------------------------------------------------------------------
5 years 65.08 59.32
Annual average 10.54 9.76
- ------------------------------------------------------------------------------
Life of fund
(since 2/29/88) 141.73 104.13
Annual average 10.39 8.32
- ------------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 1/31/97
Salomon Bros.
Lehman Bros. Non-U.S. First Boston Consumer
Government World Govt. High Yield Price
Bond Index Bond Index Index Index
- ------------------------------------------------------------------------------
6 months 4.51% -1.55% 4.94% 1.34%
- ------------------------------------------------------------------------------
1 year 2.26 2.11 3.26 3.04
- ------------------------------------------------------------------------------
5 years 41.80 55.62 42.87 15.21
Annual average 7.23 9.24 7.39 2.87
- ------------------------------------------------------------------------------
Life of fund
(since 2/29/88) 104.99 108.34 110.13 37.16
Annual average 8.38 8.57 8.68 3.60
- ------------------------------------------------------------------------------
Performance data represent past results and do not reflect future performance.
They do not take into account any adjustment for taxes payable on reinvested
distributions. Investment returns, net asset value and market price will
fluctuate so that an investor's shares, when sold, may be worth more or less
than their original cost.
PRICE AND DISTRIBUTION INFORMATION
6 months ended 1/31/97
- ------------------------------------------------------------------------------
Distributions (number) 6
- ------------------------------------------------------------------------------
Income $0.33
- ------------------------------------------------------------------------------
Capital gains --
- ------------------------------------------------------------------------------
Total $0.33
- ------------------------------------------------------------------------------
Share value: NAV Market price
- ------------------------------------------------------------------------------
7/31/96 $8.53 $7.375
- ------------------------------------------------------------------------------
1/31/97 8.81 8.00
- ------------------------------------------------------------------------------
Current return
- ------------------------------------------------------------------------------
End of period
- ------------------------------------------------------------------------------
Current dividend rate1 7.49% 8.25%
- ------------------------------------------------------------------------------
1 Income portion of most recent distribution, annualized and divided by NAV or
POP at end of period.
TOTAL RETURN FOR PERIODS ENDED 12/31/96
(most recent calendar quarter)
Market
NAV price
- ------------------------------------------------------------------------------
6 months 8.11% 4.31%
- ------------------------------------------------------------------------------
1 year 10.32 8.81
- ------------------------------------------------------------------------------
5 years 64.65 54.66
Annual average 10.49 9.11
- ------------------------------------------------------------------------------
Life of fund
(since 2/29/88) 140.63 93.24
Annual average 10.44 7.74
- ------------------------------------------------------------------------------
Performance data represent past results, do not reflect future performance,
and will differ for each share class. 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
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
Lehman Brothers 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.
First Boston High Yield Index* is an unmanaged list of lower-rated
higher-yielding U.S. corporate bonds.
Consumer Price Index (CPI) is a commonly used measure of inflation; it does
not represent an investment return.
*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.
<TABLE>
<CAPTION>
Portfolio of investments owned
January 31, 1997 (Unaudited)
CORPORATE BONDS AND NOTES (37.0%) *
PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C>
Advertising (0.2%)
- ---------------------------------------------------------------------------------------------------------
$ 175,000 Adams Outdoor Advertising, (L.P.) sr. notes 10 3/4s, 2006 $ 187,250
1,720,000 Universal Outdoor, Inc. sr. sub. notes 9 3/4s, 2006 1,763,000
--------------
1,950,250
Aerospace and Defense (0.5%)
- ---------------------------------------------------------------------------------------------------------
2,500,000 BE Aerospace sr. sub. notes Ser. B, 9 7/8s, 2006 2,612,500
335,000 Hawk Corp. 144A sr. notes 10 1/4s, 2003 340,863
1,000,000 Howmet Corp. sr. sub. notes 10s, 2003 1,090,000
1,300,000 Sequa Corp. bonds 8 3/4s, 2001 1,300,000
490,000 UNC, Inc. sr. sub. notes 11s, 2006 524,300
--------------
5,867,663
Agriculture (0.5%)
- ---------------------------------------------------------------------------------------------------------
4,931,000 PMI Holdings Corp. sub. disc. deb. stepped-coupon Ser. B,
zero % (11 1/2s, 9/1/00), 2005 ++ 3,377,735
2,755,772 Premium Standard Farms, Inc. sr. secd. notes 11s, 2003 2,914,230
--------------
6,291,965
Airlines (0.2%)
- ---------------------------------------------------------------------------------------------------------
2,220,000 Greenwich Air Services, Inc. sr. notes 10 1/2s, 2006 2,375,400
Apparel (0.3%)
- ---------------------------------------------------------------------------------------------------------
2,275,000 Guess Jeans, Inc. sr. sub. notes 9 1/2s, 2003 2,331,875
1,475,000 William Carter Co. 144A sr. sub. notes 10 3/8s, 2006 1,534,000
--------------
3,865,875
Automotive Parts (1.0%)
- ---------------------------------------------------------------------------------------------------------
949,000 Aftermarket Technology Corp. sr. sub. notes 12s, 2004 1,060,508
2,500,000 APS Holding, Inc. company guaranty 11 7/8s, 2006 2,650,000
855,000 CSK Auto, Inc. 144A sr. sub. notes 11s, 2006 897,750
1,150,000 Harvard Industries Inc. sr. notes 11 1/8s, 2005 874,000
3,400,000 Key Plastics Corp. sr. notes 14s, 1999 3,621,000
1,805,000 Lear Corp. sub. notes 9 1/2s, 2006 1,895,250
760,000 Speedy Muffler King, Inc. company guaranty 10 7/8s, 2006 (Canada) 794,200
--------------
11,792,708
Banks (0.5%)
- ---------------------------------------------------------------------------------------------------------
2,500,000 First Nationwide Holdings 144A sr. sub. notes 10 5/8s, 2003 2,712,500
635,000 North Fork Bancorp, Inc. 144A bonds 8.7s, 2026 635,000
345,000 Onbank Capital Trust I 144A company guaranty 9 1/4s, 2027 346,725
735,000 Peoples Heritage Capital Trust I 144A company guaranty 9.06s, 2027 738,675
715,000 Provident Capital Trust 144A jr. sub. notes 8.6s, 2026 725,725
410,000 Riggs Capital Trust 144A bonds 8 5/8s, 2026 410,000
555,000 Webster Capital Trust I 144A bonds 9.36s, 2027 558,979
--------------
6,127,604
Basic Industrial Products (--%)
- ---------------------------------------------------------------------------------------------------------
425,000 Astor Corp. 144A sr. sub. notes 10 1/2s, 2006 434,563
Broadcasting (2.4%)
- ---------------------------------------------------------------------------------------------------------
1,225,000 Argyle Television Corp. sr. sub. notes 9 3/4s, 2005 1,249,500
1,775,000 Comcast UK Cable, (L.P.) deb. stepped-coupon zero %
(11.2s, 11/15/00), 2007 (Bermuda) ++ 1,251,375
1,500,000 Commodore Media, Inc. sr. sub. notes stepped-coupon
7 1/2s, (13 1/4s, 5/1/98), 2003 ++ 1,582,500
215,000 Gray Communications Systems, Inc. sr. sub. notes 10 5/8s, 2006 228,975
5,440,000 Grupo Televisa S.A. sr. disc. notes stepped-coupon zero %
(13 1/4s, 5/15/01), 2008 (Mexico) ++ 3,685,600
455,000 Jacor Communications Co. company guaranty 9 3/4s, 2006 468,650
2,340,000 Lenfest Communications, Inc. sr. sub. notes 10 1/2s, 2006 2,480,400
790,000 Paxson Communications Corp. 144A sr. sub. notes 11 5/8s, 2002 829,500
3,816,000 Petracom Holdings, Inc. notes stepped-coupon zero %
(17 1/2s, 8/1/98), 2003 ++ 3,281,760
2,600,000 SFX Broadcasting, Inc. sr. sub. notes Ser. B, 10 3/4s, 2006 2,756,000
1,000,000 Sinclair Broadcasting Group sr. sub. notes 10s, 2005 1,025,000
4,527,000 Telemedia Broadcasting Corp. 144A deb. stepped-coupon
3.8s, (16s, 6/15/99), 2004 ++ 4,119,570
5,935,000 Telewest Communications PLC deb. stepped-coupon
zero % (11s, 10/1/00), 2007 (United Kingdom) ++ 4,065,475
3,105,000 Videotron Holdings. sr. disc. notes 11s, 2005 (United Kingdom) 2,452,950
--------------
29,477,255
Building and Construction (1.6%)
- ---------------------------------------------------------------------------------------------------------
1,965,000 Atrium Companies Inc. 144A sr. sub. notes 10 1/2s, 2006 2,019,038
290,000 Building Materials Corp. 144A sr. notes 8 5/8s, 2006 290,000
1,950,000 Cemex S.A. 144A bonds 12 3/4s, 2006 (Mexico) 2,230,313
1,020,000 Clark Material Handling Co. 144A sr. notes 10 3/4s, 2006 1,063,350
400,000 Continental Homes Holding Corp. sr. notes 10s, 2006 413,000
2,565,000 Inter-City Products sr. notes 9 3/4s, 2000 2,590,650
500,000 Nortek, Inc. sr. sub. notes 9 7/8s, 2004 507,500
2,365,000 Presley Cos. sr. notes 12 1/2s, 2001 2,223,100
2,500,000 Scotsman Group, Inc. sr. secd. notes 9 1/2s, 2000 2,575,000
3,975,000 Terex Corp. sr. notes Ser. B, 13 1/4s, 2002 4,392,375
440,000 Waxman Industries Inc. sr. notes stepped-coupon Ser. B,
zero % (12 3/4s, 6/1/99), 2004 ++ 356,400
415,000 Webb (Del E.) Corp. sr. sub. notes 9 3/4s, 2008 419,669
--------------
19,080,395
Buses (0.4%)
- ---------------------------------------------------------------------------------------------------------
235,000 Atlantic Express Transportation Corp. company guaranty
Ser. AI, 10 3/4s, 2004 241,463
1,585,000 Blue Bird Body Co. sr. sub. notes Ser. B, 10 3/4s, 2006 1,664,250
3,105,000 Consorcio/MCII Holdings secd. notes stepped-coupon
zero % (12s, 11/15/98), 2002 ++ 2,639,250
--------------
4,544,963
Business Services (0.5%)
- ---------------------------------------------------------------------------------------------------------
4,770,000 Corporate Express, Inc. sr. sub. notes Ser. B, 9 1/8s, 2004 4,865,400
705,000 Intertek Finance PLC 144A sr. sub. notes 10 1/4s, 2006 (United Kingdom) 740,250
210,000 Loomis Fargo & Co. 144A sr. sub. notes 10s, 2004 214,200
670,000 Pierce Leahy Corp. sr. sub. notes 11 1/8s, 2006 735,325
--------------
6,555,175
Cable Television (2.7%)
- ---------------------------------------------------------------------------------------------------------
4,000,000 Adelphia Communications Corp. notes Ser. B, 9 7/8s, 2005 3,760,000
750,000 Adelphia Communications Corp. sr. deb. 11 7/8s, 2004 753,750
4,675,000 American Telecasting, Inc. sr. disc. notes stepped-coupon
zero % (14 1/2s, 8/15/00), 2005 ++ 1,402,500
1,350,000 Cablevision Systems Corp. sr. sub. deb. 9 7/8s, 2023 1,309,500
4,000,000 Century Communications Corp. sr. notes 9 1/2s, 2005 4,090,000
2,750,000 Diamond Cable Communication Co. sr. disc. notes
stepped-coupon zero % (11 3/4s, 12/15/00), 2005 (United Kingdom) ++ 1,938,750
2,275,000 Diamond Cable Communication Co. sr. disc. notes
stepped-coupon zero % (13 1/2s, 9/30/99), 2004 (United Kingdom) ++ 1,842,750
4,658,724 Falcon Holdings Group, Inc. sr. sub. notes 11s, 2003 [2 DBL. DAGGERS] 4,332,613
1,975,000 Grupo Televisa S.A. 144A sr. notes 11 7/8s, 2006 (Mexico) 2,192,250
685,000 Heartland Wireless Communications, Inc. sr. notes Ser. D, 13s, 2003 679,863
2,000,000 Heartland Wireless Communications, Inc. 144A sr. notes 14s, 2004 2,100,000
1,000,000 Marcus Cable Co. (L.P.) sr. deb. 11 7/8s, 2005 1,070,000
2,000,000 Marcus Cable Co. (L.P.) sr. disc. notes stepped-coupon zero %
(14 1/4s, 6/15/00), 2005 ++ 1,460,000
2,700,000 Marcus Cable Co. (L.P.) sr. sub. disc. notes stepped-coupon
zero % (13 1/2s, 8/1/99), 2004 ++ 2,227,500
615,000 Tevecap S.A. 144A sr. notes 12 5/8s, 2004 (Brazil) 646,519
425,000 TV Filme, Inc. 144A sr. notes 12 7/8s, 2004 (Brazil) 429,781
5,820,000 UIH Australia/Pacific, Inc. sr. disc. notes stepped-coupon
Ser. B, zero % (14s, 5/15/01), 2006 (Australia) ++ 2,982,750
--------------
33,218,526
Cellular Communications (2.4%)
- ---------------------------------------------------------------------------------------------------------
4,550,000 Call-Net Enterprises sr. disc. notes stepped-coupon zero %
(13 1/4s, 12/1/99), 2004 ++ 3,776,500
695,000 CCPR Services, Inc. 144A company guaranty 10s, 2007 695,869
9,475,000 Cencall Communications Corp. sr. disc. notes
stepped-coupon zero % (10 1/8s, 1/15/99), 2004 ++ 6,798,313
3,500,000 Dial Call Communication, Inc. sr. disc. notes stepped-coupon
Ser. B, zero % (10 1/4s, 12/15/98), 2005 ++ 2,502,500
3,860,000 Intercel, Inc. sr. disc. notes stepped-coupon zero %
(12s, 5/1/01), 2006 ++ 2,451,100
6,730,000 Millicom International Cellular S.A. sr. disc. notes
stepped-coupon zero % (13 1/2s, 6/1/01), 2006 (Luxembourg) ++ 4,391,325
3,225,000 NEXTEL Communications, Inc. sr. disc. notes stepped-coupon
zero % (11 1/2s, 9/1/98), 2003 ++ 2,596,125
5,980,000 Pricellular Wireless Corp. sr. disc. notes stepped-coupon Ser. B,
zero % (14s, 11/15/97), 2001 ++ 5,980,000
930,000 Pricellular Wireless Corp. sr. notes 10 3/4s, 2004 974,175
--------------
30,165,907
Chemicals (0.7%)
- ---------------------------------------------------------------------------------------------------------
1,505,000 Freedom Chemicals, Inc. 144A sr. sub. notes 10 5/8s, 2006 1,591,538
2,675,000 Great Lakes Carbon Corp. sr. notes 10s, 2006 2,835,500
2,000,000 Harris Chemical Corp. sr. sub. notes 10 3/4s, 2003 2,085,000
1,000,000 NL Industries, Inc. sr. notes stepped-coupon zero %
(13s, 10/15/98), 2005 ++ 865,000
1,805,000 Sterling Chemicals Holdings sr. disc. notes stepped-coupon
zero % (13 1/2s, 8/15/01), 2008 ++ 1,092,025
--------------
8,469,063
Computer Services (0.3%)
- ---------------------------------------------------------------------------------------------------------
1,900,000 Interact Systems, Inc. 144A stepped-coupon zero %
(14s, 8/1/99), 2003 ++ 945,250
2,965,000 Unisys Corp. sr. notes 11 3/4s, 2004 3,194,788
--------------
4,140,038
Conglomerates (0.1%)
- ---------------------------------------------------------------------------------------------------------
900,000 ADT Ltd. sr. sub. notes 9 1/4s, 2003 949,500
275,000 MacAndrews & Forbes Holdings, Inc. sub. deb. notes 13s, 1999 275,000
--------------
1,224,500
Consumer Durable Goods (0.2%)
- ---------------------------------------------------------------------------------------------------------
1,280,000 Icon Fitness Corp. 144A sr. disc. notes stepped-coupon
zero % (14s, 11/15/01), 2006 ++ 691,200
2,335,000 Remington Products Co. sr. sub. notes Ser. B, 11s, 2006 2,083,988
--------------
2,775,188
Consumer Non Durables (--%)
- ---------------------------------------------------------------------------------------------------------
365,000 E&S Holdings Corp. 144A sr. sub. notes 10 3/8s, 2006 381,881
Consumer Services (0.4%)
- ---------------------------------------------------------------------------------------------------------
4,791,000 Coinmach Corp. sr. notes Ser. B, 11 3/4s, 2005 5,216,201
Electric Utilities (1.8%)
- ---------------------------------------------------------------------------------------------------------
2,005,000 AES China Generating Co. sr. notes 10 1/8s, 2006 (China) 2,085,200
1,125,000 Cleveland Electric Illuminating Co. 1st mtge. Ser. B, 9 1/2s, 2005 1,211,985
4,225,000 El Paso Electric Co. 1st mtge. Ser. E, 9.4s, 2011 4,520,750
955,000 Empresa Distribuidora Norte 144A notes 9 3/4s, 2001 (Argentina) 988,425
310,000 Hidro Pierda Aguila 144A bonds 10 5/8s, 2001 (Argentina) 323,950
2,750,000 Long Island Lighting Co. deb. 9s, 2022 2,936,175
300,000 Long Island Lighting Co. deb. 8.9s, 2019 307,983
1,095,000 Long Island Lighting Co. refunding mtge. notes 9 5/8s, 2024 1,138,800
6,550,000 Midland Funding Corp. deb. Ser. B, 13 1/4s, 2006 7,786,051
1,375,361 Northeast Utilities System notes Ser. A, 8.58s, 2006 1,305,218
--------------
22,604,537
Electronics (0.5%)
- ---------------------------------------------------------------------------------------------------------
1,280,000 Celestica International Ltd. 144A sr. sub. notes 10 1/2s,
2006 (India) 1,376,000
627,064 Cirent Semiconductor sr. sub. notes 10.22s, 2002 627,064
629,637 Cirent Semiconductor 144A sr. sub. notes 10.14s, 2004 629,638
2,925,000 International Semi-Tech. Corp. sr. secd. disc. notes
stepped-coupon zero % (11 1/2s, 8/15/00), 2003 (Canada) ++ 1,725,750
460,000 Moog, Inc. sr. sub. notes Ser. B, 10s, 2006 483,000
1,420,000 Motors and Gears Inc. 144A sr. notes Ser. A, 10 3/4s, 2006 1,462,600
--------------
6,304,052
Entertainment (0.9%)
- ---------------------------------------------------------------------------------------------------------
2,300,000 Premier Parks, Inc. sr. notes Ser. A, 12s, 2003 2,581,750
3,500,000 Six Flags Corp. sr. sub. notes stepped-coupon zero %
(12 1/4s, 6/15/98), 2005 ++ 3,351,250
1,200,000 Time Warner, Inc. notes 8.18s, 2007 1,233,708
1,200,000 Time Warner, Inc. notes 8.11s, 2006 1,233,264
2,300,000 Trump Holdings & Funding Corp. sr. notes 15 1/2s, 2005 2,633,500
--------------
11,033,472
Environmental Control (0.1%)
- ---------------------------------------------------------------------------------------------------------
925,000 Allied Waste Industries, Inc. 144A sr. sub. notes 10 1/4s, 2006 985,125
Food and Beverages (0.8%)
- ---------------------------------------------------------------------------------------------------------
575,000 Canandaigua Wine Co. 144A sr. sub. notes 8 3/4s, 2003 572,125
1,982,000 Del Monte Corp. notes 12 1/4s, 2002 [2 DBL. DAGGERS] 2,021,640
5,095,000 Mafco, Inc. sr. sub. notes 11 7/8s, 2002 5,477,125
1,700,000 Stater Brothers sr. notes 11s, 2001 1,836,000
--------------
9,906,890
Health Care Services (1.2%)
- ---------------------------------------------------------------------------------------------------------
4,480,000 Columbia/HCA Healthcare med. term notes 7.58s, 2025 4,491,110
380,000 Genesis Health Ventures, Inc. 144A sr. sub. notes 9 1/4s, 2006 389,500
2,610,000 IMED Corp. sr. sub. notes 9 3/4s, 2006 2,662,200
1,490,000 Merit Behavioral Care sr. sub. notes 11 1/2s, 2005 1,616,650
2,710,000 Paracelsus Healthcare sr. sub. notes 10s, 2006 2,628,700
1,700,000 Tenet Healthcare Corp. sr. notes 8s, 2005 1,700,000
1,700,000 Tenet Healthcare Corp. sr. sub. notes 8 5/8s, 2007 1,723,375
--------------
15,211,535
Insurance and Finance (1.1%)
- ---------------------------------------------------------------------------------------------------------
585,000 Aames Financial Corp. sr. notes 9 1/8s, 2003 596,700
420,000 Colonial Capital Trust I 144A company guaranty 8.92s, 2027 426,103
975,000 Contifinancial Corp. sr. notes 8 3/8s, 2003 994,500
1,625,000 Dollar Financial Group Inc. 144A sr. notes 10 7/8s, 2006 1,690,000
775,000 First Federal Financial Corp. notes 11 3/4s, 2004 790,500
455,000 Imperial Credit Industries, Inc. 144A sr. notes 9 7/8s, 2007 464,100
865,000 Investors Capital Trust, Inc. PLC 144A deb. 9.77s, 2027 (United Kingdom) 865,000
725,000 Ocwen Federal Bank FSB sub. deb. 12s, 2005 797,500
1,190,000 Ocwen Financial Corp. notes 11 7/8s, 2003 1,300,075
1,265,000 Olympic Financial Ltd. sr. notes 13s, 2000 1,429,450
1,230,000 Outsourcing Solutions Inc. 144A sr. sub. notes 11s, 2006 1,303,800
2,150,000 Reliance Group Holdings, Inc. sr. sub. deb. 9 3/4s, 2003 2,257,500
--------------
12,915,228
Lodging (0.2%)
- ---------------------------------------------------------------------------------------------------------
940,000 Host Marriott Travel Plazas sr. notes Ser. B, 9 1/2s, 2005 977,600
2,000,000 John Q Hammons Hotels, Inc. 1st mtge. 8 7/8s, 2004 1,980,000
--------------
2,957,600
Medical Supplies and Devices (0.2%)
- ---------------------------------------------------------------------------------------------------------
1,285,000 Dade International, Inc. sr. sub. notes Ser. B, 11 1/8s, 2006 1,387,800
1,000,000 Wright Medical Technology, Inc. sr. secd. notes Ser. B, 10 3/4s, 2000 1,010,000
--------------
2,397,800
Metals and Mining (0.2%)
- ---------------------------------------------------------------------------------------------------------
535,000 Maxxam Group Holdings Inc. 144A sr. notes 12s, 2003 547,038
690,000 Renco Metals, Inc. sr. notes 11 1/2s, 2003 724,500
1,435,000 Royal Oak Mines Inc. company guaranty Ser. B, 11s, 2006 (Canada) 1,420,650
--------------
2,692,188
Motion Picture Distribution (0.4%)
- ---------------------------------------------------------------------------------------------------------
1,250,000 Act III Theatres, Inc. sr. sub. notes 11 7/8s, 2003 1,362,500
1,817,000 Cinemark Mexico USA notes Ser. B, 13s, 2003 (Mexico) [2 DBL. DAGGERS] 1,726,150
122,800 Cinemark Mexico USA notes Ser. D, 13s, 2003 (Mexico) [2 DBL. DAGGERS] 116,660
1,505,000 Cinemark USA sr. sub. notes notes 9 5/8s, 2008 1,531,338
--------------
4,736,648
Office Equipment (0.2%)
- ---------------------------------------------------------------------------------------------------------
2,500,000 United Stationer Supply, Inc. sr. sub. notes 12 3/4s, 2005 2,775,000
Oil and Gas (1.5%)
- ---------------------------------------------------------------------------------------------------------
3,305,000 Abraxas Petrolem Corp. 144A sr. notes 11 1/2s, 2004 3,569,400
425,000 CIA Naviera Perez Companc S.A. 144A bonds 9s, 2004 (Argentina) 425,000
490,000 Cliffs Drilling Co. company guaranty Ser. B, 10 1/4s, 2003 526,750
3,195,000 Costilla Energy, Inc. sr. notes 10 1/4s, 2006 3,386,700
425,000 Flores & Rucks, Inc. sr. sub. notes 9 3/4s, 2006 451,563
1,095,000 Kelley Oil & Gas Corp. 144A sr. sub. notes 10 3/8s, 2006 1,160,700
800,000 Maxus Energy Corp. notes 9 3/8s, 2003 834,000
900,000 Texas Petrochemical Corp. sr. sub. notes 11 1/8s, 2006 967,500
500,000 Transamerican Refining Corp. 1st mtge. 16 1/2s, 2002 525,000
3,145,000 TransTexas Gas Corp. sr. disc. notes stepped-coupon
13 1/4s, (13 1/4s, 12/16/01), 2003 ++ 1,981,350
4,450,000 Transtexas Gas Corp. sr. secd. notes 11 1/2s, 2002 4,883,875
160,000 Vintage Petroleum, Inc. sr. sub. notes 8 5/8s, 2009 158,652
--------------
18,870,490
Packaging and Containers (1.0%)
- ---------------------------------------------------------------------------------------------------------
1,700,000 Amtrol, Inc. 144A sr. sub. notes 10 5/8s, 2006 1,759,500
6,000,000 Ivex Packaging Corp. sr. sub. notes 12 1/2s, 2002 6,495,000
530,000 Printpack, Inc. 144A sr. notes 9 7/8s, 2004 553,850
265,000 Printpack, Inc. 144A sr. sub. notes 10 5/8s, 2006 278,250
420,000 Radnor Holdings Corp. 144A sr. notes 10s, 2003 427,350
3,050,000 Riverwood International company guaranty 10 7/8s, 2008 2,638,250
425,000 US Can Corp. 144A sr. sub. notes 10 1/8s, 2006 446,250
--------------
12,598,450
Paging (0.6%)
- ---------------------------------------------------------------------------------------------------------
750,000 Arch Communications Group sr. disc. notes stepped-coupon
zero % (10 7/8s, 3/15/01), 2008 ++ 410,625
3,000,000 Pagemart Nationwide, Inc. sr. disc. notes stepped-coupon
zero % (15s, 2/1/00), 2005 ++ 2,100,000
2,800,000 Pagemart Nationwide, Inc. sr. disc. notes stepped-coupon
zero % (12 1/4s, 11/1/98), 2003 ++ 2,208,500
2,125,000 Paging Network, Inc. sr. sub. notes 10s, 2008 2,135,625
--------------
6,854,750
Paper and Forest Products (1.6%)
- ---------------------------------------------------------------------------------------------------------
2,975,000 APP International Finance Co. notes 11 3/4s, 2005 (Netherlands) 3,231,594
1,100,000 Domtar, Inc. deb. 9 1/2s, 2016 (Canada) 1,179,750
3,655,000 Florida Coast Paper LLC 1st mtge. Ser. B, 12 3/4s, 2003 3,910,850
2,950,000 Gaylord Container Corp. sr. sub. disc. deb. 12 3/4s, 2005 3,252,375
3,525,000 Repap New Brunswick sr. notes 10 5/8s, 2005 (Canada) 3,480,938
1,900,000 Riverwood International company guaranty 10 1/4s, 2006 1,814,500
1,000,000 Stone Container Corp. 1st mtge. 10 3/4s, 2002 1,030,000
1,500,000 Stone Container Corp. sr. notes 11 7/8s, 2016 1,605,000
--------------
19,505,007
Publishing (0.4%)
- ---------------------------------------------------------------------------------------------------------
4,250,000 American Media Operation, Inc. sr. sub. notes 11 5/8s, 2004 4,547,500
Recreation (2.8%)
- ---------------------------------------------------------------------------------------------------------
460,000 Alliance Gaming Corp. sr. notes 12 7/8s, 2003 492,200
800,000 Argosy Gaming Co. 1st mtge. 13 1/4s, 2004 668,000
2,090,000 Arizona Charlies Corp. 1st mtge. Ser. B, 12s, 2000 1,463,000
760,000 Capitol Queen Corp. 1st mtge. notes Ser. B, 12s, 2000 + 570,000
2,325,000 Casino America, Inc. sr. notes 12 1/2s, 2003 2,290,125
780,000 Casino Magic of Louisiana Corp. 144A 1st mtge. 13s, 2003 780,000
3,175,000 Coast Hotels & Casinos, Inc. company guaranty Ser. B, 13s, 2002 3,532,188
2,563,100 Colorado Gaming & Entertainment Co. sr. notes 12s, 2003 2,460,576
1,750,000 Grand Casinos, Inc. 1st mtge. 10 1/8s, 2003 1,793,750
1,285,000 Harveys Casino Resorts sr. sub. notes 10 5/8s, 2006 1,391,013
2,500,000 Hollywood Casino Corp. sr. notes 12 3/4s, 2003 2,437,500
4,125,000 Lady Luck Gaming 1st mtge. 11 7/8s, 2001 4,083,750
4,129,000 Louisiana Casino Cruises Corp. 1st mtge. 11 1/2s, 1998 4,170,290
2,875,000 Mohegan Tribal, Gaming Auth. sr. secd. notes, Ser. B, 13 1/2s, 11/15/02 3,809,375
1,400,000 PRT Funding Corp. sr. notes 11 5/8s, 2004 952,000
1,500,000 Trump A.C. 1st mtge. 11 1/4s, 2006 1,447,500
2,106,000 Trump Castle notes 11 1/2s, 2000 2,127,060
--------------
34,468,327
Restaurants (0.2%)
- ---------------------------------------------------------------------------------------------------------
335,000 AmeriKing. Inc. sr. notes 10 3/4s, 2006 348,400
1,800,000 FRD Acquisition Co. sr. notes Ser. B, 12 1/2s, 2004 1,876,500
--------------
2,224,900
Retail (0.8%)
- ---------------------------------------------------------------------------------------------------------
3,700,000 Brylane (L.P.) sr. sub. notes 10s, 2003 3,829,500
3,000,000 Finlay Enterprises, Inc. sr. disc. deb. stepped-coupon zero %
(12s, 5/1/98), 2005 ++ 2,700,000
1,195,000 Loehmanns, Inc. sr. notes 11 7/8s, 2003 1,290,600
1,600,000 Mothers Work, Inc. sr. notes 12 5/8s, 2005 1,696,000
--------------
9,516,100
Shipping (0.1%)
- ---------------------------------------------------------------------------------------------------------
1,420,000 Newport News Shipbuilding 144A sr. sub. notes 9 1/4s, 2006 1,476,800
Specialty Consumer Products (0.1%)
- ---------------------------------------------------------------------------------------------------------
1,455,000 Sassco Fashions Ltd. 144A notes 12 3/4s, 2003 1,433,175
Steel (0.4%)
- ---------------------------------------------------------------------------------------------------------
820,000 AK Steel Corp. 144A sr. notes 9 1/8s, 2006 838,450
3,750,000 Ispat Mexicana, S.A. 144A deb. 10 3/8s, 2001 (Mexico) 3,853,120
--------------
4,691,570
Supermarkets (0.1%)
- ---------------------------------------------------------------------------------------------------------
450,000 Ralphs Grocery Co. sr. sub. notes 11s, 2005 468,000
505,000 Supermercad 144A bonds 10 7/8s, 2004 (Brazil) 511,313
--------------
979,313
Telecommunications (3.6%)
- ---------------------------------------------------------------------------------------------------------
3,960,000 American Communication Services, Inc. sr. disc. notes
stepped-coupon zero % (12 3/4s, 4/1/01), 2006 ++ 2,296,800
6,010,000 Brooks Fiber Properties, Inc. sr. disc. notes stepped-coupon
zero % (10 7/8s, 3/1/01), 2006 ++ 4,026,700
5,360,000 CellNet Data Systems, Inc. 144A sr. disc. notes
stepped-coupon zero % (13s, 6/15/00), 2005 ++ 3,685,000
2,480,000 Charter Communications International, Inc. disc. notes
stepped-coupon Ser. B, zero % (14s, 3/15/01), 2007 ++ 1,550,000
1,250,000 Charter Communications International, Inc. sr. notes Ser. B,
11 1/4s, 2006 1,325,000
1,695,000 Fonorola, Inc. sr. notes 12 1/2s, 2002 (Canada) 1,856,025
3,355,000 Frontiervision Operating Partners L.P. sr. sub. notes 11s, 2006 3,455,650
3,126,000 GST Telecommunications,Inc. company guaranty
stepped-coupon zero % (13 7/8s, 12/15/00), 2005 ++ 1,938,120
2,815,000 Hyperion Telecommunication Corp. sr. disc. notes
stepped-coupon Ser. B, zero % (13s, 4/15/01), 2003 ++ 1,653,800
9,220,000 ICG Holdings, Inc. sr. disc. notes stepped-coupon zero %
(13 1/2s, 9/15/00), 2005 ++ 6,546,200
1,000,000 Intelcom Group (USA), Inc. company guaranty
stepped-coupon zero % (12 1/2s, 5/1/01), 2006 ++ 655,000
1,700,000 Intermedia Communications, Inc. sr. disc. notes
stepped-coupon zero % (12 1/2s, 5/15/01), 2006 ++ 1,147,500
3,025,000 Intermedia Communications, Inc. sr. notes Ser. B, 13 1/2s, 2005 3,440,938
1,725,000 International Cabletel, Inc. sr. notes stepped-coupon
Ser. B, zero % (11 1/2s, 2/01/01), 2006 ++ 1,155,750
1,400,000 Metrocall, Inc. sr. sub. notes 10 3/8s, 2007 1,190,000
600,000 MFS Communications sr. disc. notes stepped-coupon
zero % (8 7/8s, 1/1/01), 2006 ++ 441,000
4,650,000 Rogers Cantel, Inc. deb. 9 3/8s, 2008 (Canada) 4,836,000
4,920,000 Teleport Communications Group Inc. sr. disc. notes
stepped-coupon zero % (11 1/8s, 7/1/01), 2007 ++ 3,370,200
355,000 TV Azteca, S.A. 144A sr. notes 10 1/2s, 2007 (Mexico) 355,000
--------------
44,924,683
Telephone Services (0.7%)
- ---------------------------------------------------------------------------------------------------------
1,495,000 Globo Communicacoes 144A company guaranty 10 1/2s, 2006 (Brazil) 1,524,900
5,175,000 MFS Communications sr. disc. notes stepped-coupon
zero % (9 3/8s, 1/15/99), 2004 ++ 4,515,188
2,925,000 Nextlink Communications, Inc. sr. notes 12 1/2s, 2006 3,166,313
--------------
9,206,401
Textiles (0.3%)
- ---------------------------------------------------------------------------------------------------------
305,000 Collins & Aikman Corp. 144A sr. sub. notes 10s, 2007 309,575
2,425,000 Polysindo International Finance company guaranty 11 3/8s,
2006 (Indonesia) 2,546,250
804,000 Reeves Industries Inc. sub. deb. 13 3/4s, 2001 683,400
--------------
3,539,225
Wireless Communications (0.3%)
- ---------------------------------------------------------------------------------------------------------
460,000 Echostar Communications Corp. stepped-coupon zero %
(12 7/8s, 6/1/99), 2004 ++ 380,650
1,140,000 International Wireless Communications, Inc. sr. disc. notes
zero %, 2001 638,400
1,455,000 Omnipoint Corp. sr. notes 11 5/8s, 2006 1,505,925
600,000 Omnipoint Corp. 144A sr. notes Ser. A, 11 5/8s, 2006 627,000
450,000 Western Wireless Corp. sr. sub. notes 10 1/2s, 2007 467,438
--------------
3,619,413
--------------
Total Corporate Bonds and Notes (cost $445,097,618) $ 456,931,299
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (26.1%) *
PRINCIPAL AMOUNT VALUE
U.S. Government Agency Mortgage Pass-Through Certificates (18.1%)
- ---------------------------------------------------------------------------------------------------------
Federal National Mortgage Association
$ 19,241,962 8s, with due dates from May 1, 2026 to September 1, 2026 $ 19,626,807
26,101,582 7 1/2s, with due dates from May 1, 2026 to January 1, 2027 26,117,788
3,453,000 7 1/2s, TBA, February 16, 2027 3,455,141
37,915,561 7s, with dur dates from July 1, 2026 to April 1, 2026 37,109,864
73,853 6 1/2s, with due dates from June 1, 2023 to February 1, 2024 70,506
Government National Mortgage Association
17,535,529 8s, with due dates from January 15, 2026 to January 15, 2027 17,930,098
16,640,000 8s, TBA, February 16, 2027 17,024,800
41,163,648 7 1/2s, with due dates from December 15, 2023 to December 15, 2025 41,259,971
18,193,000 7 1/2s, TBA, February 16, 2027 18,232,661
43,812,040 7s, with due dates from July 1, 2025 to July 15, 2026 42,894,652
--------------
223,722,288
U.S. Treasury Obligations (8.0%)
- ---------------------------------------------------------------------------------------------------------
U.S. Treasury Bonds
2,940,000 8 1/8s, August 15, 2019 $ 3,352,070
29,615,000 7 7/8s, February 15, 2021 32,992,887
U.S. Treasury Notes
3,525,000 9 1/8s, May 15, 1999 3,756,875
1,160,000 7s, July 15, 2006 1,198,605
56,979,000 6 1/2s, October 15, 2006 56,925,440
--------------
98,225,877
--------------
Total U.S. Government and Agency Obligations (cost $320,652,913) $ 321,948,165
FOREIGN GOVERNMENT BONDS AND NOTES (21.1%) *
PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------
AUD 8,070,000 Australia (Government of) bonds 7 1/2s, 2005 $ 6,194,011
AUD 13,530,000 Australia (Government of) bonds 10s, 2002 11,663,512
USD 15,736,000 Bank of Foreign Economic Affairs of Russia (Vnesheconombank)
principal loan 144A 8s, 2020+##+++ 9,087,540
DEM 16,000,000 DBR Unity Fund bonds 8s, 2002 (Germany) 11,180,382
DKK 41,055,000 Denmark (Government of) bonds 8s, 2006 7,234,650
FRF 12,370,000 France (Government of) deb. 6s, 2025 2,084,568
FRF 141,460,000 France (Government of) notes 5 1/2s, 2001 26,610,780
FRF 137,019,000 France Treasury bill 7s, 2000 27,124,143
FRF 107,240,000 France Treasury bill 4 1/2s, 1998 19,698,921
DEM 22,010,000 Germany (Federal Republic of) bonds 7 3/8s, 2005 15,010,785
DEM 54,175,000 Germany (Federal Republic of) bonds 6 1/4s, 2006 34,336,500
DEM 43,935,000 Germany (Federal Republic of) bonds Ser. 118, 5 1/4s, 2001 27,779,313
ITL 18,020,000,000 Italy (Government of) bonds 9 1/2s, 2001 12,315,132
ZAR 10,285,000 South Africa (Republic of) bonds Ser. 153, 13s, 2010 1,951,409
ESP 1,938,300,000 Spain (Government of) deb. 10.1s, 2001 16,135,049
GBP 11,765,000 United Kingdom Treasury bonds 7 1/2s, 2006 18,955,856
GBP 6,255,000 United Kingdom Treasury notes 7 3/4s, 2006 10,237,750
MXP 2,430,000 United Mexican States bonds 11 1/2s, 2026 2,645,663
--------------
Total Foreign Government Bonds and Notes (cost $270,040,554) $ 260,245,964
BRADY BONDS (4.7%) *
PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------
$14,900,000 Argentina (Republic of) FRB Ser. L-GL 6 3/8s, 2023 $ 12,106,250
4,085,620 Argentina (Republic of) deb. 6.625s, 2005 3,666,844
12,927,560 Brazil (Republic of) FRB 4s, 2014 +++ 10,051,178
6,720,000 Brazil (Republic of) FRB Ser. L, 6.563s, 2012 5,401,200
3,589,000 Ecuador (Government of) FRN 6 1/2s, 2025 2,557,163
17,939,000 United Mexican States deb. Ser. B, 6 3/8s, 2019 13,543,945
11,750,000 Venezuela (Government of) deb. Ser. DL, 6 1/2s, 2007 10,619,063
--------------
Total Brady Bonds (cost $52,714,724) $ 57,945,643
UNITS (1.2%) *
NUMBER OF UNITS VALUE
- ---------------------------------------------------------------------------------------------------------
525 AmeriKing, Inc. pfd. units zero %, 2008 $ 582,750
385 Celcaribe S.A. 144A units stepped-coupon zero %
(13 1/2s, 3/15/98), 2004 ++ (Brazil) 4,774,000
2,855 Colt Telecommunications Group PLC units stepped-coupon
zero % (12s, 12/15/01), 2006 (United Kingdom) ++ 1,777,238
1,715 Diva Systems Corp. 144A units stepped-coupon zero %
(13s, 5/15/01), 2006 ++ 1,001,131
940 Esat Holdings Ltd. 144A units stepped-coupon zero %
(12 1/2s, 2/1/02), 2007 ++ (Ireland) 531,100
2,000 Fitzgerald Gaming Co. units 13s, 2002 1,600,000
26,715 Nextlink Communications 144A pfd. units stepped-coupon
zero % (14s, 2/1/02), 2009 [2 DBL. DAGGERS]++ 1,339,089
2,000 RSL Communications, Ltd. 144A units 12 1/4s, 2006 2,080,000
2,565 Wireless One Inc. units zero % (13.5s, 8/1/01), 2006 ++ 1,244,025
--------------
Total Units (cost $13,307,864) $ 14,929,333
PREFERRED STOCKS (1.9%) *
NUMBER OF SHARES VALUE
- ---------------------------------------------------------------------------------------------------------
7,569 Alliance Gaming Corp. Ser. B, $15.00 pfd. [2 DBL. DAGGERS] $ 726,624
3,050 American Radio Systems Corp. 144A $11.375 pfd. 303,475
28,740 Cablevision Systems Ser. M, $11.125 dep. shs. pfd. [2 DBL. DAGGERS] 2,622,525
108,000 California Federal Bancorp Inc. Ser. A, $2.281 pfd. 2,673,000
8,750 California Federal Bank Ser. B, $10.625 exch. pfd. [2 DBL. DAGGERS] 964,688
10,350 Chancellor Radio Broadcasting 144A $12.00 pfd. 1,038,881
29,725 Chevy Chase Capital Corp. Ser. A, $5.188 pfd. 1,567,994
6,875 Chevy Chase Savings Bank $13.00 pfd. 220,859
34,730 Diva Systems Corp. Ser. C, $6.00 pfd. 303,888
1,250 Fresenius Medical Care $9.00 trust pfd. 1,275,000
21,794 K-III Communications, Ser. B $11.625 pfd. 2,157,606
11,250 K-III Communications Ser. D $10.00 pfd. 1,125,000
74,450 SDW Holdings Corp. 144A $3.50 pfd 2,185,405
20,750 SFX Broadcasting, Inc. Ser. E, $12.625 pfd. [2 DBL. DAGGERS] 2,075,000
3,934 Time Warner Inc. Ser. M, $10.25 pfd. [2 DBL. DAGGERS] 4,297,895
--------------
Total Preferred Stocks (cost $22,952,252) $ 23,537,840
COMMON STOCKS (1.3%) *
NUMBER OF SHARES VALUE
- ---------------------------------------------------------------------------------------------------------
86,149 Computervision Corp. + $ 646,118
52,282 Conseco Inc. 3,842,727
60,000 Exide Corp. 1,350,000
120,047 Gaylord Container Corp. + 780,306
136,975 Grand Union Co. (acquired 6/20/95, cost $280) [DBL. DAGGER]+ 505,095
10,934 IFINT Diversified Holdings 144A + 174,944
1,658 PMI Holdings Corp. 144A + 414,500
1,186 Premium Holdings L.P. 144A + 5,929
250,248 PSF Holdings LLC Class A 6,256,200
60,000 Southdown, Inc. 1,830,000
46 Southland Corp. + 127
36,750 Specialty Foods Corp. + 9,188
11,900 Terex Corp. Rights expiration date 5/15/02 + 35,700
--------------
Total Common Stocks (cost $22,298,369) $ 15,850,834
ASSET-BACKED SECURITIES (1.1%) *
PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------
$4,135,000 Chemical Master Credit Card Trust Ser. 95-2, Class A, 6.23s, 2003 $ 4,115,607
1,275,000 Contimortgage Home Equity Loan Trust Ser. 97-1, Class M2, 7.67s, 2025 1,276,594
8,240,000 Sears Credit Account Master Trust Ser. 95-5, Class A, 6.05s, 2004 8,003,100
--------------
Total Asset-Backed Securities (cost $13,746,144) $ 13,395,301
CONVERTIBLE BONDS AND NOTES (0.6%) *
PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------
$2,000,000 Exide Corp. 144A cv. sr. sub. notes 2.9s, 2005 $ 1,227,500
647,000 GST Telecommunications, Inc. cv. sr. disc. notes
stepped-coupon zero % (13 7/8s, 12/15/00), 2005 ++ 540,245
700,000 Integrated Device Technology, Inc. cv. sub. notes 5 1/2s, 2002 582,750
450,000 National Semiconductor Corp. cv. deb. 6 1/2s, 2002 452,813
3,483,000 Pricellular Wireless Corp. 144A cv. sub. notes
stepped-coupon zero % (10 3/4s, 8/15/00), 2004 ++ 2,960,550
1,525,000 Protection One, Inc. cv. sr. sub. notes 6 3/4s, 2003 1,355,344
--------------
Total Convertible Bonds and Notes (cost $6,147,601) $ 7,119,202
CONVERTIBLE PREFERRED STOCKS (0.3%) *
NUMBER OF SHARES VALUE
- ---------------------------------------------------------------------------------------------------------
25,796 Cablevision Systems Corp. Ser. H, $11.75 cv. pfd. [2 DBL. DAGGERS] $ 2,457,069
18,000 Granite Broadcasting $1.938 cv. pfd. 987,750
--------------
Total Convertible Preferred Stocks (cost $3,520,861) $ 3,444,819
COLLATERALIZED MORTGAGE OBLIGATIONS (0.2%) * (cost $2,983,199)
PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------
$3,022,874 Rural Housing Trust Ser. 87-1, Class D, 6.33s, 2026 $ 2,975,642
WARRANTS (0.2%) * +
NUMBER OF WARRANTS EXPIRATION DATE VALUE
- ---------------------------------------------------------------------------------------------------------
95,000 Becker Gaming Corp. 144A 11/15/00 $ 23,750
21,440 Cellnet Data Systems 6/15/05 552,080
5,375 County Seat Holdings, Inc. 10/15/98 108
700 Grand Union Co. Ser.1 6/15/00 182
1,399 Grand Union Co. Ser. 2 6/15/00 56
2,815 Hyperion Telecommunications 144A 4/15/01 56,300
187,200 Insight Communications Co. 144A 3/1/98 468,000
20,856 Intelcom Group 9/15/05 291,984
1,900 Interact Systems, Inc. 8/1/03 4,275
3,025 Intermedia Communications 144A 6/1/00 105,875
1,140 International Wireless Communications Holdings 8/15/01 11
10,452 Louisiana Casino Cruises, Inc. 144A 12/1/98 177,684
12,880 Pagemart, Inc. 144A 12/31/03 103,040
5,600 Petracom Holdings, Inc. 8/1/05 39,900
46,534 President Riverboat Casinos, Inc. 9/30/99 23,267
7,445 SDW Holdings Corp. 144A Ser. B 4/1/04 96,785
680 Sterling Chemicals Holdings 8/15/08 23,800
77 Telemedia Broadcasting 4/1/04 57,870
24,000 UCC Investor Holding, Inc. 10/31/99 348,000
455 Wright Medical Technology, Inc. 144A 6/30/03 59,134
--------------
Total Warrants (cost $2,588,331) $ 2,432,101
PURCHASED OPTIONS OUTSTANDING (0.1%) * EXPIRATION DATE/
NUMBER OF CONTRACTS STRIKE PRICE VALUE
- ---------------------------------------------------------------------------------------------------------
DEM 45,100,000 German Government Bond Futures Contracts (Put) Feb. 97/DEM $ 243,540
DEM 44,104,000 German Government Bond Futures Contracts (Call) Feb. 97/DEM 1,384,866
JPY 44,200,000,000 Japanese Government Bond Futures Contracts (Put) Feb. 97/JPY 47,736
- ---------------------------------------------------------------------------------------------------------
Total Purchased Options Outstanding (cost $1,138,746) $ 1,676,142
SHORT-TERM INVESTMENTS (5.1%) *
PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------
$25,000,000 Federal National Mortgage Association effective yield of
5.28%, February 13, 1997 $ 24,956,000
38,366,000 Interest in $718,546,000 joint repurchase agreement dated
January 31, 1997 with Morgan (J.P.) & Co., Inc. due
February 3, 1997 with respect to various U.S. Treasury
obligations -- maturity value of $38,383,744 for an
effective yield of 5.55% 38,371,915
--------------
Total Short-Term Investments (cost $63,332,411) $ 63,327,915
- ---------------------------------------------------------------------------------------------------------
Total Investments (cost $1,240,521,587) *** $1,245,760,200
- ---------------------------------------------------------------------------------------------------------
* Percentages indicated are based on net assets of $1,234,913,410.
*** The aggregate identified cost on a tax basis is $1,243,119,247, resulting in gross unrealized
appreciation and depreciation of $47,297,423 and $44,656,470, respectively, or net unrealized
appreciation of $2,640,953.
+ 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.
+++ A portion of the income will be received in additional securities.
[DBL. DAGGER] Restricted, excluding 144A securities, as to public resale. The total market value of restricted
securities held at January 31, 1997 was $504,857 or less than 0.1% of net assets.
[2 DBL. DAGGERS] Income may be received in cash or additional securities at the discretion of the issuer.
## When-issued securities (Note 1).
144A after the name of a security represents those exempt from registration under Rule 144A of the
Securities Act of 1933. These securities may be resold in transactions exempt from registration,
normally to qualified institutional buyers.
TBA after the name of a security represents to be announced securities (Note 1).
The rate shown on Floating Rate Bonds (FRBs) and Floating Rate Notes (FRNs) are the current interest
rates shown at January 31, 1997, which are subject to change based on the terms of the security.
</TABLE>
<TABLE>
<CAPTION>
Forward Currency Contracts to Buy at January 31, 1997
(Aggregate Face Value $250,833,328)
Unrealized
Aggregate Face Delivery Appreciation/
Market Value Value Date (Depreciation)
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
British Pounds $ 1,340,298 $ 1,398,939 Mar 97 $ (58,641)
Canadian Dollars 35,606,394 35,555,653 Mar 97 50,741
Danish Krone 1,089,752 1,134,117 Mar 97 (44,365)
Deutschemarks 88,581,354 91,954,978 Mar 97 (3,373,624)
Italian Lira 11,886,891 12,482,705 Mar 97 (595,814)
Japanese Yen 75,599,266 79,032,730 Mar 97 (3,433,464)
Swedish Krona 9,581,717 9,542,688 Mar 97 39,029
Swiss Francs 19,615,185 19,731,518 Mar 97 (116,333)
- ----------------------------------------------------------------------------------------
(7,532,471)
- ----------------------------------------------------------------------------------------
<CAPTION>
Forward Currency Contracts to Sell at January 31, 1997
(Aggregate Face Value $206,244,845)
Market Aggregate Face Delivery Unrealized
Value Value Date Appreciation
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Australian Dollars $11,595,576 $12,443,841 3/19/97 $ 848,265
British Pounds 549,845 556,450 3/19/97 6,605
Canadian Dollars 2,555,704 2,569,611 3/19/97 13,907
Deutschemarks 87,094,002 90,521,184 3/19/97 3,427,182
French Francs 39,655,308 41,222,799 3/19/97 1,567,491
Japanese Yen 33,760,690 34,933,848 3/19/97 1,173,158
Spanish Peseta 2,715,070 2,860,254 3/19/97 145,184
Swiss Francs 19,583,048 21,136,858 3/19/97 1,553,810
- ----------------------------------------------------------------------------------------
$8,735,602
- ----------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
January 31, 1997 (Unaudited)
<S> <C>
Assets
- ---------------------------------------------------------------------------------------------------
Investments in securities, at value (identified cost $1,240,521,587) (Note 1) $1,245,760,200
- ---------------------------------------------------------------------------------------------------
Cash 533
- ---------------------------------------------------------------------------------------------------
Dividends and interest receivable 21,430,031
- ---------------------------------------------------------------------------------------------------
Receivable for securities sold 93,661,271
- ---------------------------------------------------------------------------------------------------
Receivable for open forward currency contracts 9,020,100
- ---------------------------------------------------------------------------------------------------
Receivable for closed forward currency contracts 7,329,649
- ---------------------------------------------------------------------------------------------------
Total assets 1,377,201,784
Liabilities
- ---------------------------------------------------------------------------------------------------
Distributions payable to shareholders 7,719,129
- ---------------------------------------------------------------------------------------------------
Payable for securities purchased 122,027,891
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 2,102,991
- ---------------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 199,465
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 23,785
- ---------------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 7,173
- ---------------------------------------------------------------------------------------------------
Payable for open forward currency contracts 7,816,969
- ---------------------------------------------------------------------------------------------------
Payable for closed forward currency contracts 2,240,407
- ---------------------------------------------------------------------------------------------------
Other accrued expenses 150,564
- ---------------------------------------------------------------------------------------------------
Total liabilities 142,288,374
- ---------------------------------------------------------------------------------------------------
Net assets $1,234,913,410
Represented by
- ---------------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $1,223,899,088
- ---------------------------------------------------------------------------------------------------
Distributions in excess net investment income (Note 1) (8,865,023)
- ---------------------------------------------------------------------------------------------------
Accumulated net realized gain on investments and foreign
currency transactions (Note 1) 13,964,009
- ---------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments and assets and
liabilities in foreign currencies 5,915,336
- ---------------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to capital shares outstanding $1,234,913,410
Computation of net asset value:
- ---------------------------------------------------------------------------------------------------
Net asset value per share ($1,234,913,410 divided by 140,248,960 shares) $8.81
- ---------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Six months ended January 31, 1997 (Unaudited)
<S> <C>
Investment income:
- --------------------------------------------------------------------------------------------------
Interest income (net of foreign tax of $122,227) $51,107,295
- --------------------------------------------------------------------------------------------------
Dividends 1,012,370
- --------------------------------------------------------------------------------------------------
Total investment income 52,119,665
Expenses:
- --------------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 4,235,348
- --------------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 563,150
- --------------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 40,309
- --------------------------------------------------------------------------------------------------
Administrative services (Note 2) 10,679
- --------------------------------------------------------------------------------------------------
Reports to shareholders 26,254
- --------------------------------------------------------------------------------------------------
Registration fees 125
- --------------------------------------------------------------------------------------------------
Auditing 28,225
- --------------------------------------------------------------------------------------------------
Legal 24,363
- --------------------------------------------------------------------------------------------------
Postage 50,155
- --------------------------------------------------------------------------------------------------
Exchange listing fees 59,255
- --------------------------------------------------------------------------------------------------
Other 31,558
- --------------------------------------------------------------------------------------------------
Total expenses 5,069,421
- --------------------------------------------------------------------------------------------------
Expense reduction (Note 2) (63,722)
- --------------------------------------------------------------------------------------------------
Net expenses 5,005,699
- --------------------------------------------------------------------------------------------------
Net investment income 47,113,966
- --------------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 30,459,867
- --------------------------------------------------------------------------------------------------
Net realized gain on foreign currency transactions 868,950
- --------------------------------------------------------------------------------------------------
Net unrealized depreciation of assets and liabilities in
foreign currencies during the period (797,780)
- --------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments during the period 7,164,412
- --------------------------------------------------------------------------------------------------
Net gain on investments 37,695,449
- --------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $84,809,415
- --------------------------------------------------------------------------------------------------
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
January 31 July 31
1997* 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase in net assets
- ----------------------------------------------------------------------------------------------------------------------
Operations:
- ----------------------------------------------------------------------------------------------------------------------
Net investment income $ 47,113,966 $ 89,437,806
- ----------------------------------------------------------------------------------------------------------------------
Net realized gain on investments and foreign currency transactions 31,328,817 34,931,641
- ----------------------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of investments
and assets and liabilities in foreign currencies 6,366,632 (21,947,783)
- ----------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 84,809,415 102,421,664
- ----------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ----------------------------------------------------------------------------------------------------------------------
From net investment income (46,393,906) (91,016,918)
- ----------------------------------------------------------------------------------------------------------------------
In excess of net investment income -- (1,695,936)
- ----------------------------------------------------------------------------------------------------------------------
Shares repurchased (Note 4) (3,356,370) (229,350)
- ----------------------------------------------------------------------------------------------------------------------
Total increase in net assets 35,059,139 9,479,460
- ----------------------------------------------------------------------------------------------------------------------
Net assets
- ----------------------------------------------------------------------------------------------------------------------
Beginning of period 1,199,854,271 1,190,374,811
- ----------------------------------------------------------------------------------------------------------------------
End of period (including distributions in excess of net investment income
of $8,865,023 and $9,585,083, respectively) $1,234,913,410 $1,199,854,271
- ----------------------------------------------------------------------------------------------------------------------
Number of fund shares
- ----------------------------------------------------------------------------------------------------------------------
Shares outstanding at beginning of period 140,679,960 140,709,960
- ----------------------------------------------------------------------------------------------------------------------
Shares repurchased (431,000) (30,000)
- ----------------------------------------------------------------------------------------------------------------------
Shares outstanding at end of period 140,248,960 140,679,960
- ----------------------------------------------------------------------------------------------------------------------
* 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
January 31
(Unaudited) Year Ended July 31
- ---------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period $8.53 $8.46 $8.29
- ---------------------------------------------------------------------------------------------------------------------------
Investment operations
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income .33 .64 .68
- ---------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments .28 .09 .17
- ---------------------------------------------------------------------------------------------------------------------------
Total from investment operations .61 .73 .85
- ---------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ---------------------------------------------------------------------------------------------------------------------------
From net investment income (.33) (.65) (.58)
- ---------------------------------------------------------------------------------------------------------------------------
In excess of net investment income -- (.01) --
- ---------------------------------------------------------------------------------------------------------------------------
From return of capital -- -- (.10)
- ---------------------------------------------------------------------------------------------------------------------------
Total distributions (.33) (.66) (.68)
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $8.81 $8.53 $8.46
- ---------------------------------------------------------------------------------------------------------------------------
Total investment return at market value (%) (a) 13.11* 7.94 6.86
- ---------------------------------------------------------------------------------------------------------------------------
Market value, end of period $8.00 $7.38 $7.44
- ---------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $1,234,913 $1,199,854 $1,190,375
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%)(b) .41* .85 .82
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets (%) 3.84* 7.43 8.29
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 120.42* 332.00 196.83
- ---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Financial highlights (continued)
(For a share outstanding throughout the period)
Year ended July 31
- ---------------------------------------------------------------------------------------------------------------------------
1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period $8.87 $8.51 $7.90
- ---------------------------------------------------------------------------------------------------------------------------
Investment operations
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income .64 .71 .75
- ---------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (.50) .42 .73
- ---------------------------------------------------------------------------------------------------------------------------
Total from investment operations .14 1.13 1.48
- ---------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ---------------------------------------------------------------------------------------------------------------------------
From net investment income (.70) (.71) (.75)
- ---------------------------------------------------------------------------------------------------------------------------
In excess of net investment income (.02) (.06) (.12)
- ---------------------------------------------------------------------------------------------------------------------------
From return of capital -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Total distributions (.72) (.77) (.87)
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $8.29 $8.87 $8.51
- ---------------------------------------------------------------------------------------------------------------------------
Total investment return at market value (%) (a) .95 1.92 27.42
- ---------------------------------------------------------------------------------------------------------------------------
Market value, end of period $7.63 $8.25 $8.88
- ---------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $1,166,726 $1,249,193 $1,194,958
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%)(b) .86 .84 .88
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets (%) 7.30 8.14 9.05
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 242.29 250.65 203.27
- ---------------------------------------------------------------------------------------------------------------------------
* Not annualized.
(a) Total investment return assumes dividend reinvestment and
does not reflect the effect of sales charges.
(b) The ratio of expenses to average net assets for the period ended July 31, 1996 includes amounts
paid through expense offset arrangements. Prior period ratios exclude these amounts. (Note 2)
</TABLE>
Notes to financial statements
January 31, 1997 (Unaudited)
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 long-term corporate bonds and notes;
such investments are stated at fair value on the basis of valuations furnished
by a pricing service, approved by the Trustees, which determines valuations
for normal, institutional-size trading units of such securities using methods
based on market transactions for comparable securities and various
relationships between securities which are generally recognized by
institutional traders.
B) Joint trading account Pursuant to an exemptive order issued by the
Securities and Exchange Commission, the fund may transfer uninvested cash
balances into a joint trading account along with the cash of other registered
investment companies and certain other accounts managed by Putnam Management.
These balances may be invested in one or more repurchase agreements and/or
short-term money market instruments.
C) Repurchase agreements The fund, or any joint trading account, through its
custodian, receives delivery of the underlying securities, the market value of
which at the time of purchase is required to be in an amount at least equal to
the resale price, including accrued interest. 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.
Securities purchased or sold on a when-issued or delayed delivery basis may be
settled a month or more after the trade date; interest income is accrued based
on the terms of the security. Losses may arise due to changes in the market
value of the underlying securities or if the counterparty does not perform
under the contract.
E) Foreign currency translation The accounting records of the fund are
maintained in U.S. dollars. The market value of foreign securities, currency
holdings, other assets and liabilities are recorded in the books and records
of the fund after translation to U.S. dollars based on the exchange rates on
that day. The cost of each security is determined using historical exchange
rates. Income and withholding taxes are translated at prevailing exchange
rates when accrued or incurred. The fund does not isolate that portion of
realized or unrealized gains or losses resulting from changes in the foreign
exchange rate on investments from fluctuations arising from changes in the
market prices of the securities. Such fluctuations are included with the net
realized and unrealized gain or loss on investments. Net realized gains and
losses on foreign currency transactions represent net exchange gains or losses
on closed forward currency contracts, disposition of foreign currencies and
the difference between the amount of investment income and foreign withholding
taxes recorded on the fund's books and the U.S. dollar equivalent amounts
actually received or paid. Net unrealized gains and losses on foreign currency
transactions arise from changes in the value of open forward currency
contracts and assets and liabilities other than investments at the period end,
resulting from changes in the exchange rate.
F) Forward currency contracts The fund may engage in forward currency
contracts, which are agreements between two parties to buy and sell currencies
at a set price on a future date, to protect against a decline in value
relative to the U.S. dollar of the currencies in which its portfolio
securities are denominated or quoted (or an increase in the value of a
currency in which securities a fund intends to buy are denominated, when a
fund holds cash reserves and short-term investments). The U.S. dollar value of
forward currency contracts is determined using forward currency exchange rates
supplied by a quotation service. The market value of the contract will
fluctuate with changes in currency exchange rates. The contract is "marked to
market" daily and the change in market value is recorded as an unrealized gain
or loss. When the contract is closed, the fund records a realized gain or loss
equal to the difference between the value of the contract at the time it was
opened and the value at the time it was closed. The fund could be exposed to
risk if the value of the currency changes unfavorably, if the counterparties
to the contracts are unable to meet the terms of their contracts or if the
fund is unable to enter into a closing position.
G) Futures and options contracts The fund may use futures and options
contracts to hedge against changes in the values of securities the fund owns
or expects to purchase. The fund may also write options on securities it owns
or in which it may invest to increase its current returns.
The potential risk to the fund is that the change in value of futures and
options contracts may not correspond to the change in value of the hedged
instruments. In addition, losses may arise from changes in the value of the
underlying instruments, if there is an illiquid secondary market for the
contracts, or if the counterparty to the contract is unable to perform.
Futures contracts are valued at the quoted daily settlement prices established
by the exchange on which they trade. Exchange traded options are valued at the
last sale price, or if no sales are reported, the last bid price for purchased
options and the last ask price for written options. Options traded
over-the-counter are valued using prices supplied by dealers.
H) 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, 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. 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 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.
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 six months ended January 31, 1997, fund expenses were reduced by
$63,722 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 $1,360 and an
additional fee for each Trustee's meeting attended. Trustees who are not
interested persons of Putnam Management and who serve on committees of the
Trustees receive additional fees for attendance at certain committee meetings.
The fund adopted a Trustee Fee Deferral Plan (the "Plan") which allows the
Trustees to defer the receipt of all or a portion of Trustees Fees payable on
or after July 1, 1995. The deferred fees remain in the fund and are invested
in the fund or in other Putnam funds until distribution in accordance with the
Plan.
The fund has adopted an unfunded noncontributory defined benefit pension plan
(the "Pension Plan") covering all Trustees of the fund who have served as
Trustee for at least five years. Benefits under the Pension Plan are equal to
50% of the Trustee's average total retainer and meeting fees for the three
years preceding retirement. Pension expense for the fund is included in
Compensation of Trustees in the Statement of operations. Accrued pension
liability is included in Payable for compensation of Trustees in the Statement
of assets and liabilities.
Note 3
Purchase and sales of securities
During the six months ended January 31, 1997, purchases and sales of
investment securities other than U.S. government obligations and short-term
investments aggregated $855,216,899 and $817,841,409, respectively. Purchases
and sales of U.S. government obligations aggregated $569,681,117 and
$631,324,287, respectively. In determining the net gain or loss on securities
sold, the cost of securities has been determined on the identified cost basis.
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 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 period ended January
31, 1997, the fund repurchased 431,000 shares for $3,356,370, which reflects a
discount from net asset value of 10.67%.
Fund information
INVESTMENT MANAGER
Putnam Investment
Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
John A. Hill
Ronald J. Jackson
Elizabeth T. Kennan
Lawrence J. Lasser
Robert E. Patterson
Donald S. Perkins
George Putnam, III
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
William J. Curtin
Vice President
Neil J. Powers
Vice President and Fund Manager
D. William Kohli
Vice President and Fund Manager
Mark J. Siegel
Vice President and Fund Manager
Jin W. Ho
Vice President and Fund Manager
William N. Shiebler
Vice President
John R. Verani
Vice President
Paul M. O'Neil
Vice President
Beverly Marcus
Clerk and Assistant Treasurer
Call 1-800-225-1581 weekdays from 9 a.m. to 5 p.m. Eastern Time for up-to-date
information about the fund's NAV.
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
- --------------------
Bulk Rate
U.S. Postage
PAID
Putnam
Investments
- --------------------
31266-073 3/97
