Putnam
Premier
Income
Trust
SEMIANNUAL REPORT
January 31, 1998
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* Morningstar, an independent rating agency, gave Putnam Premier Income
Trust 4 out of 5 stars for overall performance for the period ended
January 31, 1998 (based on the fund's average annual returns for the
3- and 5-year periods). Only 22.5% of the 143 fixed-income funds rated
received 4 stars.*
* "The team of specialized investment professionals that manage Putnam
Premier Income Trust will continue to monitor closely the impact of
the Asian contagion on the world bond markets. Your fund's ability to
search out opportunities across multiple fixed-income sectors should
serve shareholders well in the months ahead as it has in the past."
-- Kenneth J. Taubes, lead manager
CONTENTS
4 Report from Putnam Management
9 Fund performance summary
12 Portfolio holdings
32 Financial statements
* Morningstar ratings reflect risk-adjusted performance through 1/31/98 and
are subject to change every month. Morningstar ratings are calculated from
a fund's 3-, 5-, and 10-year returns (with fee adjustments) in excess of
90-day Treasury bill returns and a risk factor that reflects performance
below 90-day Treasury bill returns. The fund received 3 and 4 stars for
the 3- and 5-year performance, respectively. There were 143 and 106 funds
rated, respectively. 22.5% of the funds in an investment category receive
4 stars and 35% receive 3 stars. Past performance is not indicative of
future results.
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
The advantages of a multisector investment strategy such as the one pursued by
Putnam Premier Income Trust have rarely been demonstrated so clearly as they
were during the first half of the fund's fiscal 1998. By shifting the
portfolio's allocations among its U.S., international, and high-yield
fixed-income investments, your fund's managers were able to navigate an
environment that went from benign to uncertain to tumultuous, culminating in
the Asian currency crisis that sent shock waves throughout the world's
securities markets.
In the following report, your fund's managers provide a detailed look at the
challenging environment that prevailed throughout the first half of the fiscal
year and discuss their generally optimistic view of prospects for the second
half.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
March 18, 1998
Report from the Fund Managers
Kenneth J. Taubes
Robert M. Paine
D. William Kohli
Gail S. Attridge
Asia's financial crisis provided both headlines and headaches for investors
around the world during Putnam Premier Income Trust's semiannual period,
affecting virtually every sector of the financial markets. By monitoring
market conditions carefully and shifting allocations between sectors, we took
advantage of your fund's inherent flexibility to help cushion the effects of
the crisis. Your fund's positive performance during this difficult period is a
tribute to the benefits of its multisector strategy. For the six months ended
January 31, 1998, the fund provided a total return of 4.13% at net asset value
and 5.77% at market price. Detailed performance information can be found on
pages 9 and 10.
* ASIAN FLU SPREADS ACROSS OTHERWISE HEALTHY GLOBAL FIXED-INCOME MARKETS
For most of calendar 1997, the world's bond markets enjoyed an overall
environment of steady, moderate economic growth and low inflation. These
trends benefited key markets like those in the United States, Germany, Japan,
and the United Kingdom. However, the Asian financial crisis in October shook
equity and fixed-income markets around the world.
Although equity markets were profoundly affected, the crisis actually helped
bond markets by making it more likely that worldwide inflation would remain
low. In addition, nervous investors flocked to the high credit quality and
attractive yields of U.S. bonds, resulting in substantial gains for your
fund's position. Other Anglo countries, however, did not fare as well: Canada,
Australia, and New Zealand were among the period's relative laggards.
In Europe, expectations that a broad European Economic and Monetary Union
(EMU) would begin as scheduled in January 1999 firmed over the period.
Higher-yielding peripheral markets such as those in Spain and Italy
outperformed German, French, and some other core markets. Peripheral markets
were boosted by indications that short-term interest rates in countries
expected to be first-round participants in EMU were more likely to converge
downward rather than upward. The U.K. market turned in solid gains as
inflation remained subdued and domestic economic growth appeared to slow,
quelling fears that the Bank of England would continue to raise interest
rates.
We reduced the fund's position in Japan during the period as that country's
financial sector deteriorated. Exposure to the Anglo markets of Canada and
Australia was also trimmed. In Europe, we increased exposure to the principal
markets of Germany and France while reducing the fund's position in the
smaller peripheral market of Denmark. The secondary markets have been the
undisputed leaders in performance for most of this decade. At this point, we
believe they have discounted convergence and hold more potential for
corrections than rallies.
* EMERGING MARKETS HIT HARDEST BY CRISIS
Emerging-markets bonds experienced a challenging environment during the
period, plunging in October but recouping some of their losses in December and
January. Thus although the sector posted handsome gains for calendar 1997, it
had losses for the semiannual period. In contrast, local-currency Asian issues
continued to sink after October's sharp selloff and recorded substantial
losses for both the period and 1997 as a whole.
[GRAPHIC OMITTED: double horizontal bar chart SECTOR ALLOCATION]
SECTOR ALLOCATION *
7/31/97 1/31/98
U.S. investment-grade 22.0% 34.4%
High yield 41.1% 40.6%
Foreign (ex-emerging) 28.9% 19.4%
Emerging markets 15.8% 9.3%
Footnote reads:
*Based on net assets. Holdings will vary over time.
Asian financial sector turmoil intensified and spread to other regions during
the latter half of the period. Speculative attacks on the Thai baht last
summer were repeated with several other currencies. When the Hong Kong dollar
came under pressure in late October, the island's stock market fell sharply,
followed closely in domino fashion by the U.S. and other equity markets.
The International Monetary Fund raced to assemble rescue packages for the
financially distressed countries, supporting Thailand in August and more
recently providing aid to Indonesia and South Korea. The latter negotiated the
largest-ever emergency IMF package in December, when it experienced a sharp
four-notch downgrade by rating agencies to noninvestment-grade status.
Though returns on your fund's emerging-markets holdings were in line with
relevant indexes, this position detracted from performance as the Asian
financial crisis deepened. Accordingly we have reduced exposure in this area
from 15.8% at the beginning of the fund's fiscal year to 9.3% at the end of
the semiannual period.
* MORTGAGE EMPHASIS MIXED BLESSING FOR U.S. BOND SECTOR
During the period, your fund held a diversified range of mortgage-backed
securities and emphasized securities with lower prepayment risk.
While the mortgage-backed securities sector continued its strong performance
during the period, it has underperformed Treasuries in recent months.
Investors' flight to quality following the Asian crisis created a dramatic
rally in the Treasury market and while the fund benefited to some extent, that
extent certainly could have been greater had we not underweighted Treasuries
relative to mortgages. We slightly reduced the fund's mortgage holdings at the
beginning of the fiscal year to take advantage of the Treasury rally; however,
we subsequently recommitted assets to the fund's mortgage allocation to take
advantage of the higher yield opportunities offered by these securities.
[GRAPHIC OMITTED: TOP SECTOR HOLDINGS]
TOP SECTOR HOLDINGS*
Top three high-yield holdings
Transamerican Energy zero %, 2002
Celcaribe S.A. 144A stepped-coupon zero %, 2004
Millicom International Cellular zero %, 2006
Top three U.S. government holdings
GNMA 7.5%, 2022-2027
U.S. Treasury obligation 6.5%, 2026
FNMA 6.5%, 2023-2027
Top three international holdings
United Kingdom Treasury bonds 7.25%, 2007
France Treasury bill notes 4.75%, 2002
Government of France 5.5%, 2007
Footnote reads:
These holdings represent 25.6% of the fund's net assets as of
1/31/98. Portfolio holdings will vary over time.
We remain optimistic on the mortgage sector for 1998, given the significant
outperformance of 1997 and current price levels. We plan to add
opportunistically to the fund's position when the performance potential of
this sector becomes more significant.
* TELECOMMUNICATIONS POWER HIGH-YIELD SECTOR
High-yield bonds turned in a stunning performance in 1997, handily outpacing
Treasuries for much of the year. This performance was achieved against a
favorable backdrop of healthy economic growth, low inflation, and vibrant
equity markets. Merger and acquisition activity as well as positive
developments in key high-yield industries, such as telecommunications and
cable television, also helped propel returns.
The latter half of the period was not as strong as the first half for
high-yield issues, as the turmoil in Asia caused a partial reversal of earlier
gains. Treasuries, on the other hand, surged in response to the deflationary
implications of the Asian currency crisis and ended up outperforming
high-yield bonds for the period overall.
Top-performing industries represented within the high-yield sector included
telecommunications, cable television, and broadcasting. The telecommunications
sector, now the largest in the high-yield universe, demonstrated a number of
positive factors. First, favorable regulatory developments improved the market
positions of competitive local exchange carriers (CLECs) and specialized
mobile radio operators. Second, the network buildouts and commercial launches
of these new technologies proceeded smoothly throughout the period. Third,
merger and acquisition activity in the sector continued at a healthy pace.
* SLOWER BUT STILL POSITIVE GLOBAL GROWTH SEEN FOR 1998
The financial and economic turbulence in Asia has caused Putnam to reduce its
forecasts for global economic growth in 1998. The greatest risk to this
outlook for slowing but still positive global growth is that the impact of
Asian weakness may be greater than now forecast. Looking at it from another
angle, however, concern about this impact may actually boost bond markets by
helping rates stay low and perhaps allowing further rate declines worldwide.
Looking ahead, we will continue to monitor closely the impact of the Asian
contagion on the world bond markets. Your fund's ability to search out
opportunities across multiple fixed-income sectors should serve shareholders
well in the months ahead as it has in the past.
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 1/31/98, there is no guarantee the fund will continue to hold
these securities in the future. The lower credit ratings of high-yield bonds
reflect a greater possibility that adverse changes in the economy or poor
performance by the issuers of these bonds may affect the issuer's ability to
pay principal and interest. International investing involves certain risks,
such as currency fluctuations, economic instability, and political
developments, not present with domestic investments. While U.S. government
backing of individual securities does not insure principal, which will
fluctuate, it does guarantee that the fund's government-backed holdings will
make timely payments of interest and principal. This fund includes investments
in mortgage-backed securities, which are subject to prepayment risk.
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.
TOTAL RETURNS FOR PERIODS ENDED 1/31/98
Market
NAV price
- ------------------------------------------------------------------------
6 months 4.13% 5.77%
- ------------------------------------------------------------------------
1 year 9.45 18.05
- ------------------------------------------------------------------------
5 years 58.64 62.54
Annual average 9.67 10.20
- ------------------------------------------------------------------------
Life of fund
(since 2/29/88) 164.56 140.99
Annual average 10.30 9.27
- ------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 1/31/98
Salomon Bros.
Lehman Bros. Non-U.S. First Boston Consumer
Government World Govt. High Yield Price
Bond Index Bond Index Index Index
- ------------------------------------------------------------------------
6 months 5.39% 2.16% 5.96% 0.69%
- ------------------------------------------------------------------------
1 year 11.10 0.47 13.71 1.57
- ------------------------------------------------------------------------
5 years 41.63 44.37 73.25 13.32
Annual average 7.21 7.62 11.62 2.53
- ------------------------------------------------------------------------
Life of fund
(since 2/29/88) 127.75 109.32 199.61 39.31
Annual average 8.65 7.73 11.69 3.40
- ------------------------------------------------------------------------
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 1/31/98
- ------------------------------------------------------------------------
Distributions
- ------------------------------------------------------------------------
Number 6
- ------------------------------------------------------------------------
Income $0.360
- ------------------------------------------------------------------------
Capital gains --
- ------------------------------------------------------------------------
Total $0.360
- ------------------------------------------------------------------------
Share value NAV Market price
- ------------------------------------------------------------------------
7/31/97 $8.88 $8.5620
- ------------------------------------------------------------------------
1/31/98 8.87 8.6875
- ------------------------------------------------------------------------
Current return
- ------------------------------------------------------------------------
End of period
- ------------------------------------------------------------------------
Current dividend rate1 8.12% 8.29%
- ------------------------------------------------------------------------
1Income portion of most recent distribution, annualized and divided by
NAV or market price at end of period.
TOTAL RETURN FOR PERIODS ENDED 12/31/97
(most recent calendar quarter)
Market
NAV price
- ------------------------------------------------------------------------
6 months 5.32% 7.39%
- ------------------------------------------------------------------------
1 year 8.83 22.07
- ------------------------------------------------------------------------
5 years 60.07 65.32
Annual average 9.87 10.58
- ------------------------------------------------------------------------
Life of fund
(since 2/29/88) 161.87 135.90
Annual average 10.28 9.11
- ------------------------------------------------------------------------
Performance data represent past results and do not reflect future
performance. They do not take into account any adjustment for taxes
payable on reinvested distributions. Investment returns, net asset value
and market price will fluctuate so that an investor's shares, when sold,
may be worth more or less than their original cost.
TERMS AND DEFINITIONS
Total return shows how the value of the fund's shares changed over time,
assuming you held the shares through the entire period and reinvested all
distributions in the fund.
Net asset value (NAV) is the value of all your fund's assets, minus any
liabilities, divided by the number of outstanding common shares.
Market price is the current trading price of one share of the fund. Market
prices are set by transactions between buyers and sellers on the New York
Stock Exchange.
COMPARATIVE BENCHMARKS
First Boston High Yield Index* is an unmanaged list of lower-rated
higher-yielding U.S. corporate bonds.
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.
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.
Portfolio of investments owned
January 31, 1998 (Unaudited)
<TABLE>
<CAPTION>
CORPORATE BONDS AND NOTES (32.7%) *
PRINCIPAL AMOUNT VALUE
Advertising (0.4%)
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------
$ 175,000 Adams Outdoor Advertising (L.P) sr. notes 10 3/4s, 2006 $ 195,125
1,520,000 Lamar Advertising Co. company guaranty 8 5/8s, 2007 1,580,800
2,500,000 Outdoor Comunications Inc. sr. sub. notes 9 1/4s, 2007 2,618,750
860,000 Universal Outdoor, Inc. sr. sub. notes 9 3/4s, 2006 965,350
--------------
5,360,025
Aerospace and Defense (0.5%)
- ------------------------------------------------------------------------------------------------------------
470,000 Argo-Tech Corp. company guaranty 8 5/8s, 2007 481,750
1,500,000 BE Aerospace sr. sub. notes Ser. B, 9 7/8s, 2006 1,612,500
500,000 Derlan Industries Ltd. sr. notes 10s, 2007 (Canada) 523,750
335,000 Hawk Corp. sr. notes 10 1/4s, 2003 364,313
530,000 K & F Industries, Inc.144A sr. sub. notes 9 1/4s, 2007 559,813
1,300,000 Sequa Corp. bonds 8 3/4s, 2001 1,332,500
690,000 Tracor, Inc. sr. sub. notes 8 1/2s, 2007 717,600
570,000 United Defense Industries Inc. 144A sr. sub. notes
8 3/4s, 2007 581,400
--------------
6,173,626
Agriculture (0.3%)
- ------------------------------------------------------------------------------------------------------------
2,905,652 Premium Standard Farms, Inc. sr. secd. notes 11s, 2003 [2 DBL. DAGGERS] 3,138,105
Airlines (0.1%)
- ------------------------------------------------------------------------------------------------------------
915,000 Trans World Airlines 144A sr. notes 11 1/2s, 2004 947,025
Apparel (0.3%)
- ------------------------------------------------------------------------------------------------------------
325,000 GFSI, Inc. sr. sub. notes Ser. B, 9 5/8s, 2007 339,625
2,275,000 Guess Jeans, Inc. sr. sub. notes 9 1/2s, 2003 2,360,313
1,455,000 Sassco Fashions Ltd. sr. notes 12 3/4s, 2004 1,542,300
--------------
4,242,238
Automotive (0.5%)
- ------------------------------------------------------------------------------------------------------------
949,000 Aftermarket Technology Corp. sr. sub. notes Ser. D, 12s, 2004 1,053,390
415,000 Delco Remy International, Inc. 144A sr. notes 8 5/8s, 2007 430,563
1,500,000 Hayes Wheels International, Inc. 144A sr. sub. notes 9 1/8s, 2007 1,571,250
500,000 Hayes Wheels International, Inc. 144A sr. sub. notes 9 1/8s, 2007 524,375
1,355,000 Lear Corp. sub. notes 9 1/2s, 2006 1,512,519
730,000 Safety Components International, Inc. sr. sub. notes Ser. B,
10 1/8s, 2007 766,500
--------------
5,858,597
Banks (0.9%)
- ------------------------------------------------------------------------------------------------------------
545,000 Albank Capital Trust 144A company guaranty
Ser. AI, 9.27s, 2027 601,249
635,000 Delta Financial Corp. sr. notes 9 1/2s, 2004 609,600
370,000 Dime Capital Trust I bank guaranty Ser. A, 9.33s, 2027 422,777
575,000 First Federal Financial Corp. notes 11 3/4s, 2004 621,000
2,500,000 First Nationwide Holdings sr. sub. notes 10 5/8s, 2003 2,800,000
900,000 Greenpoint Capital Trust I company guaranty 9.1s, 2027 1,016,469
635,000 North Fork Capital Trust I company guaranty 8.7s, 2026 701,878
350,000 Ocwen Capital Trust I company guaranty 10 7/8s, 2027 385,000
725,000 Ocwen Federal Bank FSB sub. deb. 12s, 2005 804,750
345,000 Onbank & Trust Co. company guaranty 9 1/4s, 2027 401,063
735,000 Peoples Heritage Capital Trust company guaranty
Ser. B, 9.06s, 2027 820,304
715,000 Provident Capital Trust company guaranty 8.6s, 2026 762,662
410,000 Riggs Capital Trust 144A bonds 8 5/8s, 2026 440,971
585,000 Sovereign Capital Trust company guaranty 9s, 2027 641,049
555,000 Webster Capital Trust I 144A bonds 9.36s, 2027 636,130
--------------
11,664,902
Basic Industrial Products (0.1%)
- ------------------------------------------------------------------------------------------------------------
595,000 American Standard Companies Inc. sr. notes 7 3/8s, 2008 593,513
500,000 Koppers Industries, Inc. 144A sr. sub. notes 9 7/8s, 2007 526,875
510,000 Roller Bearing Co. company guaranty Ser. B, 9 5/8s, 2007 525,300
--------------
1,645,688
Broadcasting (2.4%)
- ------------------------------------------------------------------------------------------------------------
890,000 Acme Television/Finance 144A sr. disc. notes stepped-
coupon zero % (10 7/8s, 9/30/00), 2004 ++ 694,200
1,395,000 Affinity Group Holdings sr. notes 11s, 2007 1,506,600
870,000 Allbritton Communications Co. 144A sr. sub. notes
8 7/8s, 2008 870,000
615,000 Antenna TV S.A. 144A sr. notes 9s, 2007 (Greece) 627,300
333,000 Argyle Television Corp. sr. sub. notes 9 3/4s, 2005 374,625
410,000 Benedek Communications Corp. sr. disc. notes stepped-
coupon zero % (13 1/4s, 5/15/01), 2006 ++ 323,900
1,920,000 Capstar Broadcasting sr. disc. notes stepped-coupon zero %
(12 3/4s, 2/1/02), 2009 ++ 1,401,600
800,000 Capstar Broadcasting sr. sub. notes 9 1/4s, 2007 822,000
420,000 Central European Media Enterprises Ltd. sr. notes 9 3/8s, 2004 428,400
2,500,000 Chancellor Media Corp. 144A sr. sub. notes 8 1/8s, 2007 2,518,750
715,000 Citadel Broadcasting Co. sr. sub. notes 10 1/4s, 2007 786,500
94,390 Citadel Broadcasting Co. 144A sr. notes 10 1/4s, 2007 103,829
3,415,000 Comcast UK Cable, Ltd. deb. stepped-coupon zero %
(11.2s, 11/15/00), 2007 (Bermuda) ++ 2,800,300
1,500,000 Commodore Media, Inc. sr. sub. notes stepped-coupon
7 1/2s, (13 1/4s, 5/1/98), 2003 ++ 1,680,000
600,000 Echostar Satellite Broadcast Corp. sr. disc. notes
stepped-coupon zero % (13 1/8s, 3/15/00), 2004 ++ 528,000
1,210,000 Fox/Liberty Networks LLC sr. notes 8 7/8s, 2007 1,240,250
10,000 Jacor Communications, Inc. company guaranty 9 3/4s, 2006 10,800
2,250,000 Jacor Communications, Inc. company guaranty
Ser. B, 8 3/4s, 2007 2,328,750
1,670,000 Lenfest Communciations, Inc. 144A sr. sub. notes 8 1/4s, 2008 1,665,424
3,816,000 Petracom Holdings, Inc. notes stepped-coupon zero %
(17 1/2s, 8/1/98), 2003 ++ 3,663,360
1,010,000 Radio One Inc. company guaranty stepped-coupon Ser. B, 7s,
(12s, 5/15/00), 2004 ++ 1,020,100
1,000,000 Sinclair Broadcasting Group sr. sub. notes 10s, 2005 1,070,000
1,225,000 Spanish Broadcasting sr. notes Ser. B, 11s, 2004 1,350,563
1,005,000 TV Azteca S.A. de C.V. sr. notes 10 1/2s, 2007 (Mexico) 1,059,019
500,000 TV Azteca S.A. de C.V. sr. notes Ser. A, 10 1/8s, 2004 (Mexico) 517,250
--------------
29,391,520
Building and Construction (0.7%)
- ------------------------------------------------------------------------------------------------------------
490,000 American Architectural Products Corp. 144A sr. notes
11 3/4s, 2007 506,538
1,190,000 Atrium Companies Inc. sub. notes 10 1/2s, 2006 1,255,450
1,400,000 GS Superhighway Holdings 144A sr. notes 10 1/4s, 2007 1,274,000
500,000 Nortek, Inc. sr. sub. notes 9 7/8s, 2004 516,250
655,000 Presley Cos. sr. notes 12 1/2s, 2001 630,438
3,738,000 Terex Corp. sr. notes Ser. B, 13 1/4s, 2002 4,261,320
440,000 Waxman Industries Inc. sr. notes stepped-coupon
Ser. B, zero % (12 3/4s, 6/1/99), 2004 ++ 388,300
--------------
8,832,296
Buses (0.3%)
- ------------------------------------------------------------------------------------------------------------
235,000 Atlantic Express, Transportation Corp.144A company
guaranty 10 3/4s, 2004 251,450
1,085,000 Blue Bird Body Co. sr. sub. notes Ser. B, 10 3/4s, 2006 1,190,788
3,105,000 Consorcio/MCII Holdings sec. notes stepped-coupon zero %
(12s, 11/15/98), 2002 ++ 2,841,075
--------------
4,283,313
Business Services (0.5%)
- ------------------------------------------------------------------------------------------------------------
430,000 ATC Group Services Inc. 144A sr. sub. notes 12s, 2008 440,750
335,000 Axiohm Transactions Solutions 144A sr. sub. notes 9 3/4s, 2007 340,025
2,270,000 Corporate Express, Inc. sr. sub. notes Ser. B, 9 1/8s, 2004 2,326,750
1,010,000 Iron Mountain, Inc. company guaranty 8 3/4s, 2009 1,035,250
1,230,000 Outsourcing Solutions, Inc. sr. sub. notes Ser. B, 11s, 2006 1,353,000
465,000 Williams Scotsman, Inc. 144A sr. notes 9 7/8s, 2007 484,181
--------------
5,979,956
Cable Television (1.7%)
- ------------------------------------------------------------------------------------------------------------
750,000 Adelphia Communications Corp. sr. deb. 11 7/8s, 2004 813,750
1,275,000 American Telecasting, Inc. sr. disc. notes stepped-coupon
zero % (14 1/2s, 8/15/00), 2005 ++ 306,000
1,120,000 Century Communications Corp. 144A sr. disc. notes
zero %, 2008 476,000
2,275,000 Diamond Cable Communication Co. sr. disc. notes
stepped-coupon zero % (13 1/4s, 9/30/99), 2004
(United Kingdom) ++ 2,053,188
2,750,000 Diamond Cable Communication Co. sr. disc. notes
stepped-coupon zero % (11 3/4s, 12/15/00), 2005
(United Kingdom) ++ 2,158,750
435,000 Diamond Cable Communication Co. sr. disc. notes
stepped-coupon zero % (10 3/4s, 2/15/02), 2007
(United Kingdom) ++ 299,063
1,281,775 Falcon Holdings Group, Inc. sr. sub. notes 11s, 2003 [2 DBL. DAGGERS] 1,429,179
2,230,000 Fox Kids Worldwide Inc. 144A sr. discount notes
stepped-coupon zero % (10 1/4s, 11/1/02), 2007 ++ 1,371,450
2,875,000 Fox Kids Worldwide Inc. 144A sr. notes 9 1/4s, 2007 2,860,625
3,440,000 Grupo Televisa S.A. sr. disc. notes stepped-coupon zero %
(13 1/4s, 5/15/01), 2008 (Mexico) ++ 2,648,800
1,975,000 Grupo Televisa S.A. 144A sr. notes 11 7/8s, 2006 (Mexico) 2,246,563
800,000 Heartland Wireless Communications, Inc. sr. notes
Ser. B, 14s, 2004 302,000
685,000 Heartland Wireless Communications, Inc. sr. notes
Ser. D, 13s, 2003 212,350
240,000 Pegasus Communications Corp. 144A sr. notes 9 5/8s, 2005 250,800
5,820,000 UIH Australia/Pacific, Inc. sr. disc. notes stepped-coupon
Ser. B, zero % (14s, 5/15/01), 2006 (Australia) ++ 4,204,950
--------------
21,633,468
Cellular Communications (1.7%)
- ------------------------------------------------------------------------------------------------------------
1,790,000 Cencall Communications Corp. sr. disc. notes stepped-
coupon zero % (10 1/8s, 1/15/99), 2004 ++ 1,727,350
1,480,000 Comcast Cellular Holdings sr. notes Ser. B, 9 1/2s, 2007 1,559,550
3,500,000 Dial Call Communications, Inc. sr. disc. notes stepped-coupon
Ser. B, zero % (10 1/4s, 12/15/98), 2005 ++ 3,412,500
1,900,000 Interact Systems, Inc. 144A stepped-coupon zero %
(14s, 8/1/99), 2003 ++ 722,000
3,120,000 Intercel, Inc. sr. disc. notes stepped-coupon zero %
(12s, 5/1/01), 2006 ++ 2,371,200
3,590,000 McCaw International Ltd sr. discount notes stepped-
coupon zero % (13s, 4/15/02), 2007 ++ 2,279,650
6,665,000 Millicom International Cellular S.A. sr. disc. notes
stepped-coupon zero % (13 1/2s, 6/1/01), 2006
(Luxembourg) ++ 5,082,063
2,030,000 NEXTEL Communications sr. disc. notes stepped-coupon
zero % (9 3/4s, 10/31/02), 2007 ++ 1,319,500
4,685,000 NEXTEL Communications sr. disc. notes stepped-coupon
zero % (10.65s, 9/15/02), 2007 ++ 3,080,388
--------------
21,554,201
Chemicals (0.7%)
- ------------------------------------------------------------------------------------------------------------
1,675,000 Great Lakes Carbon Corp. sr. notes 10s, 2006 1,825,750
1,150,000 Huntsman Corp. 144A sr. sub. notes FRN 9.187s, 2007 1,173,000
900,000 NL Industries, Inc. sr. notes stepped-coupon zero %
(13s, 10/15/98), 2005 ++ 895,500
510,000 Pharmaceutical Fine Chemicals 144A sr. sub. notes
9 3/4s, 2007 (Switzerland) 526,575
360,000 Pioneer Americas Acquisition 144A sr. notes 9 1/4s, 2007 364,500
1,410,000 Polytama International notes 11 1/4s, 2007 705,000
925,000 Sovereign Specialty Chemical 144A sr. sub. notes 9 1/2s, 2007 973,563
1,275,000 Sterling Chemicals Holdings sr. disc. notes stepped-coupon
zero % (13 1/2s, 8/15/01), 2008 ++ 796,875
580,000 Sterling Chemicals, Inc. sr. sub. notes Ser. A, 11 1/4s, 2007 597,400
760,000 Trikem S.A. 144A bonds 10 5/8s, 2007 (Brazil) 668,800
--------------
8,526,963
Conglomerates (0.1%)
- ------------------------------------------------------------------------------------------------------------
555,000 Cia Latino Americana 144A company guaranty 11 1/8s,
2004 (Argentina) 560,550
515,000 Dine S.A. de C.V. 144A company guaranty 8 3/4s, 2007
(Mexico) 495,688
110,000 MacAndrews & Forbes Holdings, Inc. sub. deb. notes 13s, 1999 110,413
--------------
1,166,651
Consumer Durable Goods (0.1%)
- ------------------------------------------------------------------------------------------------------------
455,000 Remington Products Co. LLC sr. sub. notes Ser. B, 11s, 2006 393,575
450,000 Sealy Mattress Co. 144A sr. sub. notes 9 7/8s, 2007 473,625
--------------
867,200
Consumer Non Durables (0.1%)
- ------------------------------------------------------------------------------------------------------------
250,000 Amscan Holdings, Inc. 144A sr. sub. notes 9 7/8s, 2007 261,250
365,000 Hedstrom Corp. 144A 10s, 2007 375,038
180,000 Hedstrom Holdings, Inc. units stepped-coupon zero %
(12s, 6/01/02), 2009 ++ 111,600
120,000 Packaged Ice, Inc. 144A sr. notes 9 3/4s, 2005 122,400
910,000 Viasystems Inc. sr. sub notes 9 3/4s, 2007 941,850
--------------
1,812,138
Consumer Services (0.3%)
- ------------------------------------------------------------------------------------------------------------
3,791,000 Coinmach Corp. sr. notes Ser. B, 11 3/4s, 2005 4,245,920
Cosmetics (0.1%)
- ------------------------------------------------------------------------------------------------------------
345,000 French Fragrances, Inc. sr. notes Ser. B, 10 3/8s, 2007 363,975
1,520,000 Revlon Worldwide Corp. sr. disc. notes Ser. B, zero %, 2001 1,117,200
--------------
1,481,175
Electric Utilities (1.1%)
- ------------------------------------------------------------------------------------------------------------
4,305,000 AES China Generating Co. sr. notes 10 1/8s, 2006 (China) 4,175,850
2,000,000 Calpine Corp. sr. notes 10 1/2s, 2006 2,180,000
919,435 Midland Cogeneration Ventures LP deb. 10.33s, 2002 1,000,382
3,550,000 Midland Funding II Corp. deb. Ser. B, 13 1/4s, 2006 4,610,811
1,288,313 Northeast Utilities System notes Ser. A, 8.58s, 2006 1,298,684
--------------
13,265,727
Electronics and Electrical Equipment (0.9%)
- ------------------------------------------------------------------------------------------------------------
1,030,000 Celestica International Ltd. 144A sr. sub. notes 10 1/2s,
2006 (Canada) 1,096,950
500,000 Details, Inc. 144A sr. sub. notes 10s, 2005 530,000
700,000 DII Group, Inc. (The) sr. sub. notes 8 1/2s, 2007 710,500
2,305,000 Dobson Communications Corp. 11 3/4s, 2007 2,512,450
1,240,000 Flag Limited 144A sr. notes 8 1/4s, 2008 (Bermuda) 1,274,100
750,000 Flextronics International Ltd. 144A sr. sub. notes 8 3/4s, 2007 759,375
445,000 HCC Industries, Inc. company guaranty 10 3/4s, 2007 461,688
460,000 Moog, Inc. sr. sub. notes Ser. B, 10s, 2006 501,400
1,420,000 Motors and Gears, Inc. sr. notes Ser. B, 10 3/4s, 2006 1,540,700
300,000 Prestolite Electric, Inc. 144A sr. notes 9 5/8s, 2008 306,750
620,000 Therma-Wave Inc. sr. notes Ser. B, 10 5/8s, 2004 644,800
455,000 Wavetek Corp. company guaranty 10 1/8s, 2007 477,750
--------------
10,816,463
Energy-Related (0.2%)
- ------------------------------------------------------------------------------------------------------------
2,575,000 Panda Global Energy Co. company guaranty 12 1/2s, 2004 2,317,500
Environmental Control (0.2%)
- ------------------------------------------------------------------------------------------------------------
925,000 Allied Waste Industries, Inc. company guaranty 10 1/4s, 2006 1,033,688
2,300,000 Allied Waste Industries, Inc. sr. disc. notes stepped-coupon
zero % (11.3s, 6/1/02), 2007 ++ 1,679,000
--------------
2,712,688
Food and Beverages (0.5%)
- ------------------------------------------------------------------------------------------------------------
1,220,000 Ameriserve Food Co. company guaranty 10 1/8s, 2007 1,317,600
1,000,000 Ameriserve Food Co. company guaranty 8 7/8s, 2006 1,032,500
575,000 Canandaigua Wine Co. sr. sub. notes Ser. C, 8 3/4s, 2003 592,250
1,000,000 Chiquita Brands sr. notes 9 5/8s, 2005 1,052,100
270,000 Eagle Family Foods 144A sr. sub. notes 8 3/4s, 2008 272,025
850,000 Jitney-Jungle Stores company guaranty 10 3/8s, 2007 894,625
65,000 Nebco Evans Holding Co. sr. disc. notes stepped-coupon
zero % (12 3/8s, 7/15/02), 2007 ++ 44,200
1,070,000 Shoppers Food Warehouse Corp. company guaranty
9 3/4s, 2004 1,096,750
185,000 Windy Hill Pet Food Co. sr. sub. notes 9 3/4s, 2007 196,563
--------------
6,498,613
Health Care Services (0.9%)
- ------------------------------------------------------------------------------------------------------------
1,110,000 Genesis Eldercare 144A sr. sub. notes 9s, 2007 1,132,200
825,000 Fisher Scientific International, Inc. 144A sr. sub. notes 9s, 2008 846,656
1,770,000 Integrated Health Services, Inc. 144A sr. sub. notes 9 1/4s, 2008 1,858,500
770,000 MedPartners, Inc. sr. notes 7 3/8s, 2006 727,650
1,490,000 Merit Behavioral Care sr. sub. notes 11 1/2s, 2005 1,780,550
1,960,000 Paracelsus Healthcare sr. sub. notes 10s, 2006 2,018,800
2,670,000 Paragon Health Networks, Inc. 144A sr. sub. notes 9 1/2s, 2007 2,790,150
--------------
11,154,506
Insurance and Finance (0.9%)
- ------------------------------------------------------------------------------------------------------------
1,805,000 Aames Financial Corp. sr. notes 9 1/8s, 2003 1,714,750
420,000 Colonial Capital II Ser. A company guaranty 8.92s, 2027 457,275
865,000 Investors Capital Trust I company guaranty Ser. B, 9.77s, 2027 957,988
1,175,000 Imperial Credit Capital Trust I 144A company guaranty
10 1/4s, 2002 1,163,250
955,000 Imperial Credit Industries, Inc. sr. notes 9 7/8s, 2007 916,800
705,000 Intertek Finance PLC 144A sr. sub. notes 10 1/4s, 2006
(United Kingdom) 743,775
380,000 Nationwide Credit Inc. 144A sr. notes 10 1/4s, 2008 388,550
2,150,000 Reliance Group Holdings, Inc. sr. sub. deb. 9 3/4s, 2003 2,311,186
1,000,000 Resource America Inc. 144A bonds 12s, 2004 1,027,500
1,555,000 Vicap SA. 144A company guaranty 11 3/8s, 2007 (Mexico) 1,663,850
--------------
11,344,924
Lodging (0.2%)
- ------------------------------------------------------------------------------------------------------------
1,160,000 Prime Hospitality Corp. sub. notes 9 3/4s, 2007 1,264,400
1,250,000 Sun International Hotels Ltd. company guaranty 9s, 2007 1,325,000
--------------
2,589,400
Medical Supplies and Devices (0.4%)
- ------------------------------------------------------------------------------------------------------------
1,305,000 ALARIS Medical Inc. company guaranty 9 3/4s, 2006 1,383,300
1,285,000 Dade International, Inc. sr. sub. notes Ser. B, 11 1/8s, 2006 1,432,775
550,000 Imagyn Medical Technologies, Inc. company guaranty
12 1/2s, 2004 330,000
525,000 Kinetic Concepts, Inc. 144A sr. sub. notes 9 5/8s, 2007 546,000
1,000,000 Wright Medical Technology, Inc. 144A notes Ser. C,
11 3/4s, 2000 1,000,000
--------------
4,692,075
Metals and Mining (0.4%)
- ------------------------------------------------------------------------------------------------------------
340,000 Acindar Industria Argentina de Aceros S.A. bonds
11 1/4s, 2004 (Argentina) 336,600
850,000 Anker Coal Group, Inc. 144A sr. notes 9 3/4s, 2007 875,500
515,000 Armco, Inc. sr. notes 9s, 2007 515,000
775,000 Continental Global Group sr. notes Ser. B, 11s, 2007 829,250
785,000 Maxxam Group Holdings, Inc. sr. notes Ser. B, 12s, 2003 851,725
1,500,000 Murrin Holdings 144A sr. notes 9 3/8s, 2007 (Australia) 1,440,000
--------------
4,848,075
Motion Picture Distribution (0.2%)
- ------------------------------------------------------------------------------------------------------------
1,295,000 AMC Entertainment, Inc. sr. sub. notes 9 1/2s, 2009 1,359,750
1,505,000 Cinemark USA, Inc. sr. sub. notes 9 5/8s, 2008 1,599,063
--------------
2,958,813
Nursing Homes (0.2%)
- ------------------------------------------------------------------------------------------------------------
500,000 Genesis Health Ventures, Inc. sr. sub. notes 9 1/4s, 2006 523,750
1,355,000 Sun Healthcare Group Inc. 144A sr. sub. notes 9 1/2s, 2007 1,422,750
--------------
1,946,500
Office Equipment (0.1%)
- ------------------------------------------------------------------------------------------------------------
639,000 United Stationer Supply, Inc. sr. sub. notes 12 3/4s, 2005 726,863
Oil and Gas (2.0%)
- ------------------------------------------------------------------------------------------------------------
2,305,000 Abraxas Petroleum Corp. 144A sr. notes Ser. B, 11 1/2s, 2004 2,477,875
500,000 Benton Oil & Gas Co. sr. notes 11 5/8s, 2003 552,500
160,000 Benton Oil & Gas Co. 144A sr. notes 9 3/8s, 2007 165,200
490,000 Cliffs Drilling Co. company guaranty Ser. B, 10 1/4s, 2003 531,650
680,000 Coho Energy, Inc. sr. sub. notes 8 7/8s, 2007 676,600
1,695,000 Costilla Energy, Inc. sr. notes 10 1/4s, 2006 1,762,800
300,000 Dailey Petroleum Services Corp. 144A company guaranty
9 3/4s, 2007 315,000
545,000 DI Industries Inc. sr. notes 8 7/8s, 2007 570,888
310,000 Newpark Resources, Inc. 144A sr. sub. notes 8 5/8s, 2007 319,300
450,000 Panaco, Inc. company guaranty Ser. B, 10 5/8s, 2004 454,500
720,000 Parker Drilling Corp. sr. notes Ser. B, 9 3/4s, 2006 775,800
550,000 Pride Petroleum Services, Inc. sr. notes 9 3/8s, 2007 596,750
430,000 Southwest Royalties, Inc. 144A company guaranty 10 1/2s, 2004 412,800
290,000 Texas Petrochemical Corp. sr. sub. notes 11 1/8s, 2006 317,550
10,100,000 Transamerican Energy sr. disc. notes stepped-coupon
Ser. B, zero % (13s, 6/15/99), 2002 ++ 8,383,000
3,430,000 Transamerican Energy sr. notes Ser. B, 11 1/2s, 2002 3,494,313
1,927,000 TransTexas Gas Corp. sr. sub. notes Ser. D, 13 3/4s, 2001 2,158,240
370,000 Wiser Oil Co. company guaranty 9 1/2s, 2007 367,225
--------------
24,331,991
Packaging and Containers (0.3%)
- ------------------------------------------------------------------------------------------------------------
440,000 AEP Industries, Inc. 144A sr. sub. notes 9 7/8s, 2007 465,300
820,000 Huntsman Packaging Corp. 144A sr. sub. notes 9 1/8s, 2007 846,650
1,000,000 Innova S De R.L. sr. notes 12 7/8s, 2007 (Mexico) 1,070,000
320,000 Norampac Inc. 144A sr. notes 9 1/2s, 2008 (Canada) 326,400
265,000 Printpack, Inc. sr. sub. notes Ser. B, 10 5/8s, 2006 283,550
600,000 Radnor Holdings Corp. 144A sr. notes Ser. B, 10s, 2003 633,000
420,000 Radnor Holdings Inc. sr. notes 10s, 2003 441,000
--------------
4,065,900
Paging (0.3%)
- ------------------------------------------------------------------------------------------------------------
660,000 Metrocall, Inc. 144A sr. sub. notes 9 3/4s, 2007 656,700
1,535,000 Mobile Telecommunications Tech. sr. notes 13 1/2s, 2002 1,784,438
250,000 Paging Network Do Brasil sr. notes 13 1/2s, 2005 (Brazil) 238,750
250,000 Paging Network, Inc. sr. sub. notes 10 1/8s, 2007 260,000
1,225,000 Paging Network, Inc. sr. sub. notes 10s, 2008 1,274,000
--------------
4,213,888
Paper and Forest Products (1.2%)
- ------------------------------------------------------------------------------------------------------------
250,000 APP Finance II Mauritius Ltd. bonds stepped-coupon 12s
(16s, 2/15/07), 2049 (Indonesia) ++ 182,500
2,355,000 Florida Coast Paper LLC 1st mtge. Ser. B, 12 3/4s, 2003 2,508,075
2,810,000 Indah Kiat Financial Mauritius Ltd. company guaranty
10s, 2007 (Indonesia) 2,163,700
2,625,000 Pindo Deli Finance Mauritius Ltd. 144A company guaranty
10 3/4s, 2007 (India) 2,021,250
4,685,000 PT Pabrik Kertas Tjiwi Kimia 144A company guaranty
10s, 2004 (Indonesia) 3,607,450
2,365,000 Repap New Brunswick sr. notes 10 5/8s, 2005 (Canada) 2,282,225
1,540,000 Riverwood International Corp. company guaranty 10 1/4s, 2006 1,590,050
650,000 Stone Container Corp. sr. notes 11 7/8s, 2016 703,625
340,000 Tjiwi Kimia Financie Mauritius company guaranty 10s,
2004 (Indonesia) 261,800
--------------
15,320,675
Pharmaceuticals (0.1%)
- ------------------------------------------------------------------------------------------------------------
1,035,000 ICN Pharmaceuticals, Inc. 144A sr. notes 9 1/4s, 2005 1,093,219
Publishing (0.6%)
- ------------------------------------------------------------------------------------------------------------
3,250,000 American Media Operation, Inc. sr. sub. notes 11 5/8s, 2004 3,542,500
1,250,000 Garden State Newspapers 144A sr. sub. notes 8 3/4s, 2009 1,287,500
500,000 Hollinger International Publishing, Inc. company guaranty
8 5/8s, 2005 525,000
1,000,000 Perry-Judd 144A sr. sub. notes 10 5/8s, 2007 1,050,000
370,000 Von Hoffman Press Inc. 144A sr. sub. notes 10 3/8s, 2007 401,450
--------------
6,806,450
Railroads (0.3%)
- ------------------------------------------------------------------------------------------------------------
820,000 Hermes Europe Railtel 144A sr. notes 11 1/2s, 2007
(Netherlands) 918,400
1,280,000 TFM S.A. de C.V. 144A company guaranty 10 1/4s,
2007 (Mexico) 1,331,200
1,415,000 TFM S.A. de C.V. 144A company guaranty stepped-coupon
zero % (11 3/4s, 6/15/02), 2009 (Mexico) ++ 933,900
--------------
3,183,500
Recreation (1.7%)
- ------------------------------------------------------------------------------------------------------------
380,000 Argosy Gaming Co. 1st mtge. 13 1/4s, 2004 413,250
1,500,000 Autotote Corp. company guaranty Ser. B, 10 7/8s, 2004 1,597,500
370,000 CLN Holdings, Inc. sr. disc. notes zero %, 2001 218,300
1,975,000 Coast Hotels & Casinos, Inc. company guaranty Ser. B, 13s, 2002 2,271,250
1,960,000 Fitzgeralds Gaming Corp. 144A company guaranty 12 1/4s, 2004 2,018,800
540,000 Isle of Capri Black Hawk LLC 1st mortgage Ser. B, 13s, 2004 548,100
2,825,000 Lady Luck Gaming 1st mtge. 11 7/8s, 2001 2,909,750
2,379,000 Louisiana Casino Cruises Corp. 1st mtge. 11 1/2s, 1998 2,402,790
2,400,000 Mohegan Tribal, Gaming Auth. sr. secd. notes Ser. B, 13 1/2s, 2002 3,084,000
320,000 Penn National Gaming, Inc. 144A sr. notes 10 5/8s, 2004 335,200
1,400,000 PRT Funding Corp. sr. notes 11 5/8s, 2004 980,000
500,000 Trump A.C. 1st mtge. 11 1/4s, 2006 520,000
2,106,000 Trump Castle notes 11 1/2s, 2000 2,127,060
1,800,000 Trump Holdings & Funding Corp. sr. notes 15 1/2s, 2005 2,088,000
--------------
21,514,000
Restaurants (0.2%)
- ------------------------------------------------------------------------------------------------------------
1,800,000 FRD Acquisition Co. sr. notes Ser. B, 12 1/2s, 2004 1,957,500
Retail (0.3%)
- ------------------------------------------------------------------------------------------------------------
450,000 Color Spot Nurseries sr. sub. notes 10 1/2s, 2007 468,000
1,000,000 K mart Corp. pass-thru certificates Ser. 95K4, 9.35s, 2020 1,040,000
1,600,000 Mothers Work, Inc. sr. notes 12 5/8s, 2005 1,712,000
420,000 NBTY Inc. 144A sr. sub. notes 8 5/8s, 2007 430,500
635,000 William Carter Co. 144A sr. sub. notes 12s, 2008 681,038
--------------
4,331,538
Satellite Services (0.6%)
- ------------------------------------------------------------------------------------------------------------
1,275,000 Echostar DBS Corp. company guaranty 12 1/2s, 2002 1,418,438
940,000 Esat Holdings Ltd. sr. notes stepped-coupon zero %
(12 1/2s, 2/01/02), 2007 (Ireland) ++ 693,250
2,265,000 Globalstar L.P. Capital 11 3/8s, 2004 2,310,300
1,340,000 Iridium LLC/Capital Corp. company guaranty Ser. B, 14s, 2005 1,504,150
200,000 Iridium LLC/Capital Corp. 144A sr. notes 11 1/4s, 2005 204,500
790,000 Satelites Mexicanos S.A. de C.V. 144A sr. notes 10 1/8s,
2004 (Mexico) 811,725
820,000 TCI Satellite Entertainment 144A sr. sub. notes 10 7/8s, 2007 858,950
--------------
7,801,313
Semiconductors (0.3%)
- ------------------------------------------------------------------------------------------------------------
545,129 Cirent Semiconductor sr. sub. notes 10.22s, 2002 557,395
623,182 Cirent Semiconductor 144A sr. sub. notes 10.14s, 2004 638,762
825,000 Fairchild Semiconductor Corp. 144A sr. sub. notes 11.74s, 2008 915,750
1,900,000 Fairchild Semiconductor Corp. sr. sub. notes 10 1/8s, 2007 2,018,750
--------------
4,130,657
Shipping (0.1%)
- ------------------------------------------------------------------------------------------------------------
260,000 Chemical Leaman Corp. sr. notes 10 3/8s, 2005 275,600
360,000 International Shipholding Corp. 144A sr. notes 7 3/4s, 2007 358,200
850,000 Johnstown America Industries, Inc. company guaranty
Ser. C, 11 3/4s, 2005 947,750
--------------
1,581,550
Steel (0.3%)
- ------------------------------------------------------------------------------------------------------------
400,000 Altos Hornos De Mexico bonds Ser. B, 11 7/8s, 2004 (Mexico) 414,000
1,560,000 Hylsa S.A. de C.V. 144A bonds 9 1/4s, 2007 (Mexico) 1,540,500
1,500,000 Ispat Mexicana, S.A. 144A bonds 10 3/8s, 2001 (Mexico) 1,526,250
--------------
3,480,750
Supermarkets (0.2%)
- ------------------------------------------------------------------------------------------------------------
695,000 Fleming Companies, Inc. 144A sr. sub. notes 10 1/2s, 2004 736,700
950,000 Stater Brothers sr. notes 11s, 2001 1,049,750
120,000 Stater Brothers Holdings 144A sr. sub. notes 9s, 2004 124,200
--------------
1,910,650
Telecommunications (3.5%)
- ------------------------------------------------------------------------------------------------------------
710,000 American Communication Services, Inc. 144A sr. notes
13 3/4s, 2007 855,550
2,300,000 American Communication Services, Inc. sr. disc. notes
stepped-coupon zero % (12 3/4s, 4/1/01), 2006 ++ 1,817,000
1,100,000 Barak ITC 144A sr. disc. notes stepped-coupon zero %
(12 1/2s, 11/15/02), 2007 (Israel) ++ 638,000
7,502,000 Cellnet Data Systems, Inc. sr. disc. notes stepped-coupon
Ser. AI, zero % (14s, 10/1/02), 2007 ++ 3,751,000
1,280,000 Charter Communications International, Inc. disc. notes
stepped-coupon Ser. B, zero % (14s, 3/15/01), 2007 ++ 1,030,400
1,250,000 Charter Communications International, Inc. sr. notes
Ser. B, 11 1/4s, 2006 1,393,750
385,000 Consorcio Ecuatoiano notes 14s, 2002 (Ecuador) 392,700
2,270,000 Econophone Inc. company guaranty 13 1/2s, 2007 2,497,000
580,000 Esprit Teleom Group PLC sr. notes 11 1/2s, 2007
(United Kingdom) 616,250
620,000 Facilicom International 144A sr. notes 10 1/2s, 2008 639,375
1,695,000 Fonorola, Inc. sr. notes 12 1/2s, 2002 (Canada) 1,898,400
410,000 FrontierVision Holdings LP sr. disc. notes stepped-coupon
zero % (11 7/8s, 9/15/01), 2007 ++ 313,650
1,580,000 FrontierVision Operating Partners L.P. sr. sub. notes 11s, 2006 1,765,650
1,150,000 GST Equipment Funding sr. notes 13 1/4s, 2007 1,362,750
2,026,000 GST Telecommunications,Inc. company guaranty stepped-
coupon zero % (13 7/8s, 12/15/00), 2005 ++ 1,681,580
1,535,000 Hyperion Telecommunication Corp. sr. disc. notes stepped-
coupon Ser. B, zero % (13s, 4/15/01), 2003 ++ 1,174,275
2,800,000 Hyperion Telecommunications , Inc. sr. notes Ser. B, 12 1/4s, 2004 3,192,000
4,020,000 ICG Holdings, Inc. sr. disc. notes stepped-coupon zero %
(13 1/2s, 9/15/00), 2005 ++ 3,376,800
2,750,000 Intermedia Communications, Inc. sr. disc. notes stepped-coupon
Ser. B, zero % (11 1/4s, 7/15/02), 2007 ++ 2,014,375
500,000 Intermedia Communications, Inc. 144A sr. notes 8 1/2s, 2008 518,750
1,565,000 L-3 Communications Corp. sr. sub. notes Ser. B, 10 3/8s, 2007 1,733,238
1,400,000 Metrocall, Inc. sr. sub. notes 10 3/8s, 2007 1,431,500
525,000 Metronet Communications 144A sr. disc. notes zero %
(10.75s, 5/1/98), 2007 ++ 338,625
650,000 Microcell Telecommunications sr. disc. notes stepped-coupon
Ser. B, zero % (14s, 12/1/01), 2006 (Canada) ++ 464,750
380,000 Netia Holdings B.V. 144A company guaranty 10 1/4s, 2007
(Poland) 380,950
220,000 Netia Holdings B.V. 144A company guaranty stepped-coupon
zero % (11 1/4s, 11/1/02), 2007 (Poland) ++ 145,200
750,000 Pratama Datakom Asia BV 144A company guaranty 12 3/4s,
2005 (Indonesia) 337,500
1,270,000 Qwest Communications International, Inc. 144A sr. disc. ntoes
stepped-coupon zero % (9.47s, 10/15/02), 2007 ++ 896,938
2,475,000 Teligent, Inc. sr. notes 11 1/2s, 2007 2,598,750
2,000,000 United Intl Hldgs Inc. stepped-coupon zero % (10 3/4s,
2/15/03), 2008 ++ 1,193,000
1,390,000 WinStar Communications. Inc. 144A sr. sub. notes 15s, 2007 1,848,700
785,000 WinStar Equipment Corp. company guaranty 12 1/2s, 2004 912,563
--------------
43,210,969
Telephone Services (1.7%)
- ------------------------------------------------------------------------------------------------------------
1,980,000 BTI Telecom Corp. 144A sr. notes 10 1/2s, 2007 2,103,750
1,045,000 Globo Communicacoes 144A company guaranty
10 1/2s, 2006 (Brazil) 992,750
4,500,000 Ionica Group PLC sr. disc. notes stepped-coupon zero %
(15s, 5/1/02), 2007 (United Kingdom) ++ 1,890,000
1,420,000 ITC Deltacom, Inc. sr. notes 11s, 2007 1,601,050
1,700,000 McLeodUSA, Inc. sr. disc. notes stepped-coupon zero %
(10 1/2s, 3/1/02), 2007 ++ 1,283,500
350,000 MGC Communications, Inc. 144A sr. notes 13s, 2004 348,250
1,300,000 Nextlink Communications sr. notes 12 1/2s, 2006 1,508,000
3,000,000 NTL Inc. sr. notes Ser. B, 10s, 2007 (United Kingdom) 3,217,500
2,360,000 RCN Corp. sr. disc. notes stepped-coupon zero % (11 1/8s,
10/15/02), 2007 ++ 1,587,100
325,000 RCN Corp. sr. notes 10s, 2007 347,750
1,670,000 RCN Corp. 144A sr. disc. notes stepped-coupon zero %
(9.8s, 2/15/03) ++ 1,032,594
2,550,000 RSL Communications, Ltd. company guaranty 12 1/4s, 2006 2,881,500
1,000,000 Sprint Spectrum L.P. sr. notes 11s, 2006 1,147,500
440,000 Transtel S.A. 144A pass through Certificates 12 1/2s, 2007
(Colombia) 415,800
785,000 Viatel, Inc. sr. disc. notes stepped-coupon zero % (15s, 1/15/00),
2005 ++ 677,063
--------------
21,034,107
Textiles (0.2%)
- ------------------------------------------------------------------------------------------------------------
900,000 Polymer Group, Inc. company guaranty Ser. B, 9s, 2007 931,500
850,000 Polysindo Inernational Eka company guaranty 13s, 2001
(Indonesia) 544,000
2,000,000 Polysindo International Finance company guaranty
11 3/8s, 2006 (Indonesia) 1,140,000
--------------
2,615,500
Transportation (0.3%)
- ------------------------------------------------------------------------------------------------------------
500,000 Coach USA, Inc. 144A company guaranty 9 3/8s, 2007 520,000
1,600,000 Eletson Holdings, Inc. 1st pfd. mtge. notes 9 1/4s, 2003 (Greece) 1,660,000
1,290,000 Kitty Hawk, Inc. 144A sr. notes 9.95s, 2004 1,348,050
--------------
3,528,050
Utilities (0.1%)
- ------------------------------------------------------------------------------------------------------------
890,000 Espirito Santo Centrais 144A sr. notes 10s, 2007 (Brazil) 854,400
Wireless Communications (0.4%)
- ------------------------------------------------------------------------------------------------------------
740,000 Advanced Radio Telecom Corp. sr. notes 14s, 2007 743,700
480,000 FWT, Inc. 144A sr. sub. notes 9 7/8s, 2007 470,400
1,140,000 International Wireless Communications, Inc. sr. disc. notes
zero %, 2001 364,800
1,405,000 Omnipoint Corp. sr. notes 11 5/8s, 2006 1,538,475
820,000 Powertel, Inc. sr. notes 11 1/8s, 2007 906,100
490,000 Sygnet Wireless, Inc. sr. notes 11 1/2s, 2006 541,450
505,000 Telesystem International Wireless Inc. 144A sr. disc. notes
stepped-coupon zero % (10 1/2s, 11/1/02), 2007
(Canada) ++ 304,263
450,000 Western Wireless Corp. sr. sub. notes 10 1/2s, 2007 487,125
--------------
5,356,313
--------------
Total Corporate Bonds and Notes (cost $397,772,937) $ 407,000,074
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (30.5%) *
PRINCIPAL AMOUNT VALUE
U.S. Government Agency Mortgage Pass-Through Certificates (20.0%)
- ------------------------------------------------------------------------------------------------------------
Federal Home Loan Mortgage Corp.
$28,380,859 8 1/2s, with due dates from January 1, 2025 to
August 1, 2027 $ 29,578,001
30,428,366 7s, with due dates from June 1, 2011 to February 15, 2027 30,991,795
Federal National Mortgage Association
10,870,206 7s, with due dates from October 1, 2011 to January 1, 2013 11,084,135
34,424,137 6 1/2s, with due dates from June 1, 2023 to
September 1, 2027 34,262,723
Government National Mortgage Association
93,191,649 7 1/2s, with due dates from August 15, 2022 to
November 15, 2027 95,951,461
11,950,000 7s, TBA, February 16, 2028 12,129,250
12,272,056 7s, with due dates from September 15, 2025 to
November 15, 2026 12,458,618
3,019,443 6s, July 20, 2024 3,098,704
9,010,000 5 1/2s, TBA, March 15, 2028 9,057,843
10,405,000 5 1/2s, TBA, February 16, 2028 10,459,914
--------------
249,072,444
U.S. Treasury Obligations (10.5%)
- ------------------------------------------------------------------------------------------------------------
U.S. Treasury Bonds
32,005,000 6 1/2s, November 15, 2026 # 34,775,353
1,055,000 6 3/8s, August 15, 2027 1,132,479
U.S. Treasury Notes
16,575,000 7s, July 15, 2006 18,152,277
17,839,000 6 1/2s, October 15, 2006 # 18,962,322
4,580,000 6s, July 31, 2002 # 4,684,470
28,250,000 5 3/4s, November 30, 2002 28,642,958
635,000 5 5/8s, December 31, 2002 640,950
17,150,000 5 5/8s, December 31, 1999 17,238,494
5,380,000 5 5/8s, November 30, 1999 5,405,232
--------------
129,634,535
--------------
Total U.S. Government and Agency Obligations
(cost $368,623,707) $ 378,706,979
FOREIGN GOVERNMENT BONDS AND NOTES (20.9%) *
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
ARP 5,560,000 Argentina (Republic of) 11.75s, 2007 $ 5,450,980
ARP 6,150,000 Argentina (Republic of) 3.47s, 2007 5,575,668
ARP 3,915,000 Argentina (Republic of) 3.238s, 2007 3,789,278
DEM 17,100,000 DBR Unity Fund bonds 8s, 2002 (Germany) 10,553,709
DKK 286,000 Denmark (Government of) 6s, 2026 39,723
DKK 6,136,000 Denmark (Government of) 6s, 2003 3,575,672
FRF 228,760,000 France Treasury Bill notes 4 3/4s, 2002 37,741,108
FRF 13,274,000 France (Government of) 6 3/4s, 2003 2,392,394
FRF 188,200,000 France (Government of) 5 1/2s, 2007 31,678,748
DEM 22,525,000 Germany (Federal Republic of) bonds Ser. 97,
6 1/2s, 2027 13,754,127
DEM 16,590,000 Germany (Federal Republic of) bonds Ser. 97, 6s, 2007 9,676,669
FRF 8,650,000 Ivory Coast - FLIRB collaterized FRB 2s, 2049 ## 453,240
FRF 8,650,000 Ivory Coast - PDI bonds FRB 1.9s, 2049 ## 522,019
KRW 1,500,000 Korea Developmental Bank 7 1/8s, 2001 1,392,585
NZD 13,815,000 New Zealand (Government of) bonds 8s, 2004 8,531,930
USD 3,295,000 Peru (Government of) 144A Ser. US, 4s, 2017 2,158,225
USD 5,315,000 Philippines (Central Bank of) bonds 5 3/4s, 2017 4,570,900
USD 2,070,000 Poland (Government of) deb. 3 1/4s, 2014 1,806,075
USD 5,431,000 Russia (Government of) FRN, Ser. US., 6.719s, 2015 3,520,804
USD 12,771,000 Russia (Government of) deb. principal loans
FRB 6.719s, 2020 7,119,833
ZAR 9,640,000 South Africa (Republic of) bonds Ser. 153, 13s, 2010 1,892,228
GBP 11,815,000 United Kingdom Treasury bonds 8s, 2021 24,008,473
GBP 35,645,000 United Kingdom Treasury bonds 7 1/4s, 2007 63,330,596
USD 14,120,000 United Mexican States bonds 11 3/8s, 2016 16,696,900
--------------
Total Foreign Government Bonds and Notes
(cost $256,636,313) $ 260,231,884
COLLATERALIZED MORTGAGE OBLIGATIONS (4.4%) *
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
$ 2,475,000 Commercial Mortgage Acceptance Corp.
Ser. 97-ML1, Class D, 7.11s, 2030 $ 2,477,707
4,100,000 Countrywide Mortgage Corp. 6 1/2s, 2024 3,987,168
Freddie Mac
1,539,212 Ser. 1717, Class L, 6.5s, 2024 1,551,718
1,790,000 Ser. 1602, Class PJ, 6.5s, 2023 1,823,003
1,485,000 Ser. 1832, Class G, 6.5s, 2011 1,494,281
8,840,000 Ser. 25, Class B, 6.5s, 2008 8,972,600
Fannie Mae Strips Ser. 294
9,710,000 Class 1, Principal only, zero %, 2028 7,200,572
9,710,000 Class 2, Interest only, 7s, 2028 2,645,975
First Union-Lehman Brothers Commercial Mortgage
4,060,000 Ser. 97-C2, Class D, 7.12s, 2012 4,133,588
5,775,000 Ser. 97-C2, Class A3, 6.65s, 2008 5,932,008
3,070,000 Ser. 97-C2, Class A2, 6.6s, 2007 3,147,709
4,590,000 GMAC Commercial Mortgage Securities Inc. Ser. 97-C2,
Class A1, 6.45s, 2029 4,686,103
2,320,000 Government National Mortgage Association Ser. 97-1,
7.5s, 2027 2,413,525
1,585,430 Housing Securities Inc. Ser. 94-1, Class A9, 6 1/2s, 2009 1,591,550
2,543,608 Rural Housing Trust Ser. 87-1, Class D, 6.33s, 2026 2,566,323
--------------
Total Collateralized Mortgage Obligations
(cost $53,916,013) $ 54,623,830
BRADY BONDS (3.8%) * [DIAMOND]
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
$ 18,556,800 Argentina (Republic of) deb. FRB 4.188s, 2005 $ 16,608,336
22,267,030 Brazil (Republic of) C Bond 4s, 2014 +++ 17,479,619
13,804,000 Brazil (Republic of) FRN 8 3/4s, 2001 13,113,800
--------------
Total Brady Bonds (cost $48,832,208) 47,201,755
PREFERRED STOCKS (3.2%) *
NUMBER OF SHARES VALUE
- ------------------------------------------------------------------------------------------------------------
376 American Communications Services 12.75% pfd. [2 DBL. DAGGERS] $ 424,880
23,848 AmeriKing, Inc. $3.25 pfd. [2 DBL. DAGGERS] 643,896
278 Anvil Holdings Ser. B, $3.25 pfd. 6,672
25,871 Cablevision Systems Corp. Ser. M, $11.125 dep. shs. pfd. [2 DBL. DAGGERS] 2,981,633
108,000 California Federal Bancorp Inc. Ser. A, $2.281 pfd. 2,875,500
11,179 Capstar Broadcasting $12.00 pfd. 1,268,817
29,725 Chevy Chase Capital Corp. Ser. A, $5.19 pfd. 1,515,975
6,875 Chevy Chase Savings Bank $3.25 pfd. 210,547
11,097 Citadel Broadcasting Inc. 144A $13.25 pfd. 1,320,543
34,730 Diva Systems Corp. Ser. C, $6.00 pfd. 397,311
670 Echostar Communications, Inc. 12.125% pfd. 733,650
250 Fresenius Medical Care AG Ser. D, $9.00 pfd., (Germany) 267,500
1,629 Granite Broadcasting 144A 12.75% pfd. [2 DBL. DAGGERS] 1,905,930
329 Hyperion Telecommunications Ser. B, 12.875% pfd. [2 DBL. DAGGERS] 366,835
3,554 ICG Holdings, Inc. 14.25% pfd. (Canada) 4,300,340
2,784 Intermedia Communication Ser. B, 13.50% pfd. 3,438,240
1,287 IXC Communications, Inc. 12.50% pfd. [2 DBL. DAGGERS] 1,518,660
4,265 NEXTEL Communications, Inc. Ser. D, 13.00% cum. pfd. [2 DBL. DAGGERS] 4,947,400
37,618 Nextlink Communications, Inc. 144A $7.00 pfd. 2,331,413
2,203 NTL Inc. 144A Ser. B, 13.00% pfd. [2 DBL. DAGGERS] 2,654,615
15,149 SFX Broadcasting, Inc. Ser. E, $12.625 pfd. [2 DBL. DAGGERS] 1,772,433
5,000 Sinclair Capital $11.625 cum. pfd. 555,000
1,589 Spanish Broadcasting Systems 14.25% pfd. 1,692,285
8,560 Von Hoffman Corp. 144A $13.50 pfd. 267,500
1,450 WinStar Communications. Inc. 144A 14.25% cum. pfd. [2 DBL. DAGGERS] 1,696,500
--------------
Total Preferred Stocks (cost $35,736,151) $ 40,094,075
UNITS (1.8%) *
NUMBER OF UNITS VALUE
- ------------------------------------------------------------------------------------------------------------
1,900 Allegiance Telephone, Inc 144A units stepped-coupon zero %
(11 3/4s, 2/15/03), 2008 ++ $ 1,073,500
385 Celcaribe S.A. 144A units stepped-coupon zero %
(13 1/2s, 3/15/98), 2004 ++ 7,738,500
810 Club Regina, Inc. 144A units 13s, 2004 834,300
2,905 Colt Telecommunications Group PLC units stepped-coupon
zero % (12s, 12/15/01), 2006 (United Kingdom) ++ 2,324,000
320 Concentric Network Corp. units 12 3/4s, 2007 350,400
955 Conecel Holdings 144A units 14s, 2000 988,425
1,715 Diva Systems Corp. 144A units stepped-coupon zero %
(13s, 5/15/01), 2006 ++ 1,766,450
1,920 KMC Telecomunications 144A units stepped-coupon zero %
(12 1/2s, 2/15/03), 2008 ++ 1,094,400
2,185 Knology Holdings Inc. units stepped-coupon zero %
(11 7/8s, 10/15/02), 2007 ++ 1,223,600
740 Stone Container Corp. units sr. sub. 12 1/4s, 2002 758,500
1,240 Transam Refinance, Inc. 144A units 16s, 2003 1,289,600
1,665 Wireless One, Inc. units stepped-coupon zero %
(13 1/2s, 8/1/01), 2006 ++ 416,250
960 XCL Ltd. units sr. sec. notes 13 1/2s, 2004 1,248,000
7,615 XCL Ltd. units cum. pfd. 9.50% 1,028,025
--------------
Total Units (cost $15,660,512) $ 22,133,950
COMMON STOCKS (0.8%) *
NUMBER OF SHARES VALUE
- ------------------------------------------------------------------------------------------------------------
525 AmeriKing, Inc. + $ 26,250
42,880 CellNet Data Systems, Inc. + 412,720
22,984 Crompton & Knowles Corp. 657,917
136,975 Grand Union Co. (acquired 6/20/95, cost $7,750,000)[DBL. DAGGER]+ 179,780
10,918 Hedstrom Holdings, Inc. 144A 15,012
10,934 IFINT Diversified Holdings 144A + 109,340
20,101 NEXTEL Communications, Inc. Class A + 549,009
1,658 PMI Holdings Corp. 144A + 530,560
1,186 Premium Holdings L.P. 144A + 4,743
250,248 PSF Holdings LLC Class A + 7,507,440
36,750 Specialty Foods Corp. 144A + 9,188
11,900 Terex Corp. Rights expiration date 5/15/02 + 238,000
--------------
Total Common Stocks (cost $17,729,904) $ 10,239,959
CONVERTIBLE BONDS AND NOTES (0.6%) *
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
$ 1,585,000 APP Global Finance (V) Ltd. 144A cv. sec. 2s, 2000
(United Kingdom) $ 1,323,475
1,200,000 Corporate Express, Inc. cv. notes 4 1/2s, 2000 1,068,000
647,000 GST Telecommunications, Inc. cv. sr. disc. notes stepped-
coupon zero % (13 7/8s, 12/15/00), 2005 ++ 886,390
700,000 Integrated Device Technology, Inc. cv. sub. notes 5 1/2s, 2002 595,000
450,000 National Semiconductor Corp. 144A cv. deb. 6 1/2s, 2002 455,063
3,483,000 Pricellular Wireless Corp. 144A cv. sub. notes stepped-
coupon zero % (10 3/4s, 8/15/00), 2004 ++ 3,413,340
--------------
Total Convertible Bonds and Notes (cost $6,088,483) $ 7,741,268
ASSET-BACKED SECURITIES (0.4%) *
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
$ 4,135,000 Chemical Master Credit Card Trust Ser. 95-2, Class A,
6.23s, 2003 $ 4,187,969
1,275,000 Contimortgage Home Equity Loan Trust Ser. 97-1, Class M2,
7.67s, 2025 1,303,280
--------------
Total Asset-Backed Securities (cost $5,526,744) $ 5,491,249
WARRANTS (0.2%) * + EXPIRATION
NUMBER OF WARRANTS DATE VALUE
- ------------------------------------------------------------------------------------------------------------
95,000 Becker Gaming Corp. 144A 11/15/00 $ 950
7,502 Cellnet Data Systems, Inc. 9/15/07 825
5,375 County Seat Holdings, Inc. 10/15/98 108
2,520 Econophone Inc. 144A 7/15/07 10,080
940 Esat Holdings, Inc. (Ireland) 2/1/07 32,900
1,015 Globalstar Telecom 144A 2/15/04 126,875
700 Grand Union Co. Ser. 1 (acquired 6/20/95,
cost $280) [DBL. DAGGER] 6/16/00 7
1,399 Grand Union Co. Ser. Z (acquired 6/20/95,
cost $140) [DBL. DAGGER] 6/16/00 14
2,815 Hyperion Telecommunications 144A 4/15/01 168,900
187,200 Insight Communications Co. 144A 3/1/98 468,000
20,856 Intelcom Group 10/15/05 375,408
1,900 Interact Systems Inc. 8/1/03 475
3,025 Intermedia Communications 6/1/00 316,113
1,140 International Wireless Communications
Holdings 144A 8/15/01 31,920
10,452 Louisiana Casino Cruises, Inc. 144A + 12/1/98 522,600
3,590 McCaw International Ltd. 4/15/07 1,077
350 MGC communications, Inc. 144A 10/1/04 12,250
1,310 Orion Network Systems 1/15/07 13,100
12,880 Pagemart, Inc. 144A 12/31/03 96,600
5,600 Petracom Holdings, Inc. 144A 9/30/99 39,900
46,534 President Riverboat Casinos, Inc. 9/30/99 23,267
2,000 RSL Communications Ltd. 11/15/06 120,000
990 Spanish Broadcasting Systems 144A 6/30/99 198,000
680 Sterling Chemicals Holdings 8/15/08 20,400
5,820 UIH Australia/Pacific, Inc. 144A 5/15/06 69,840
300 Urohealth Systems Inc. 4/10/04 3
455 Wright Medical Technology, Inc. 144A 6/30/03 45,488
--------------
Total Warrants (cost $2,143,020) $ 2,695,100
CONVERTIBLE PREFERRED STOCKS (0.1%) * (cost $1,082,250)
NUMBER OF SHARES VALUE
- ------------------------------------------------------------------------------------------------------------
18,000 Granite Broadcasting $ 1.938 cv. pfd. $ 992,250
PURCHASED OPTIONS OUTSTANDING (--%)* EXPIRATION DATE/
NUMBER OF CONTRACTS STRIKE PRICE VALUE
- ------------------------------------------------------------------------------------------------------------
ITL 56,000 Italian Government Bond futures Feb. 98/
contract (put) 113.0 ITL $ 621
ITL 16,000 Italian Government Bond futures Feb. 98/
contract (put) 117.5 ITL 9,752
--------------
Total Purchased Options Outstanding
(cost $132,373) $ 10,373
SHORT-TERM INVESTMENTS (4.3%) *
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
$25,000,000 Freddie Mac for an effective yield of 5.38%,
March 10, 1998 $ 24,820,666
TRL 122,302,000,000 Turkey Treasury bill zero%, July 29, 1998 3,598,251
TRL 92,555,000,000 Turkey Treasury bill zero%, June 4, 1998 3,128,460
TRL 59,640,000,000 Turkey Treasury bill zero%, March 18, 1998 2,400,854
$18,904,000 Interest in $594,026,000 joint repurchase agreement
dated January 30, 1998 with Morgan Stanley due
February 2, 1998 with respect to various U.S.
Treasury obligations -- maturity value of
$18,912,775 for an effective yield of 5.57% 18,909,850
--------------
Total Short-Term Investments (cost $52,926,361) $ 52,858,081
- ------------------------------------------------------------------------------------------------------------
Total Investments (cost $1,262,806,976) *** $1,290,020,827
- ------------------------------------------------------------------------------------------------------------
* Percentages indicated are based on net assets of $1,243,895,083.
*** The aggregate identified cost on a tax basis is $1,265,803,395,
resulting in gross unrealized appreciation and depreciation of
$54,059,642 and $29,842,210, respectively, or net unrealized
appreciation of $24,217,432.
+ 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, 1998 was $179,801 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.
# A portion of this security was pledged and segregated with the
custodian to cover margin requirements for futures contracts at January 31, 1998.
[DIAMOND] Brady Bonds are foreign bonds collateralized by the U.S.
Government. The rates are floating and are the current rates at January
31, 1998.
144A after the name of a security represents those exempt from
registration under Rule 144A of the Securities Act of 1933. These
securities may be resold in transactions exempt from registration,
normally to qualified institutional buyers.
TBA after the name of a security represents to be announced securities (Note 1).
The rates shown on a floating rate note (FRN) are current interest
rates shown at January 31, 1998 which are subject to change based on
terms of the security.
Diversification by Country
Distribution of investments by country of issue at January 31, 1998:
(as percentage of market value)
Argentina 1.2%
Brazil 1.0
Canada 1.0
France 5.6
Germany 2.7
Mexico 2.5
Russia 1.0
United Kingdom 7.9
United States 71.0
Others 6.1
-----
Total 100.0%
=====
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
Forward Currency Contracts to Buy at January 31, 1998
(aggregate face value $278,597,100)
Unrealized
Aggregate Face Delivery Appreciation/
Market Value Value Date (Depreciation)
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Australian Dollars $ 4,325,073 $ 4,246,619 3/18/98 $ 78,454
Canadian Dollar 10,372,986 10,637,671 3/18/98 (264,685)
Danish Krone 6,500,234 6,721,174 3/18/98 (220,940)
Deutschemarks 68,005,806 70,162,411 3/18/98 (2,156,605)
Indonesian Rupiah 3,480,781 10,732,803 6/23/98 (7,252,022)
Indonesian Rupiah 1,262,258 3,524,498 2/23/98 (2,262,240)
Italian Lira 37,612,911 38,763,615 3/18/98 (1,150,704)
Japanese Yen 82,051,804 81,255,856 3/18/98 795,948
Mexican Peso 1,846,487 1,787,011 5/12/98 59,476
Mexican Peso 2,463,336 2,405,042 5/11/98 58,294
Philippines Peso 2,650,810 3,411,052 3/25/98 (760,242)
Spanish Peseta 10,643,820 10,984,856 3/18/98 (341,036)
Swedish Krona 15,792,034 16,531,796 3/18/98 (739,762)
Swiss Franc 15,673,634 16,277,723 3/18/98 (604,089)
Venezuelan Bolivar 1,089,493 1,154,973 6/5/98 (65,480)
- ----------------------------------------------------------------------------------------
$(14,825,633)
- ----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Forward Currency Contracts to Sell at January 31, 1998
(aggregate face value $360,467,276)
Unrealized
Aggregate Face Delivery Appreciation/
Market Value Value Date (Depreciation)
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
British Pounds $ 87,450,586 $ 88,605,119 3/18/98 $1,154,533
Deutschemarks 101,545,072 104,694,551 3/18/98 3,149,479
French Franc 72,674,369 75,226,153 3/18/98 2,551,784
Italian Lira 19,383,519 19,976,192 3/18/98 592,673
Japanese Yen 43,330,628 42,591,893 3/18/98 (738,735)
New Zealand Dollar 12,731,313 13,177,467 3/18/98 446,154
Swiss Franc 15,568,390 16,195,901 3/18/98 627,511
- ----------------------------------------------------------------------------------------
$7,783,399
- ----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Unrealized
Aggregate Face Expiration Appreciation/
Market Value Value Date (Depreciation)
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Municipal Bond Index
(Long) $43,136,438 $42,678,860 Mar-98 $ 457,578
U.S. Treasury Bond
20 yr (Long) 57,349,906 55,767,031 Mar-98 1,582,875
U.S. Treasury Bond
(Short) 42,431,594 41,730,438 Mar-98 (701,156)
U.S. Treasury Note
10 yr (Long) 42,189,656 41,342,107 Mar-98 847,549
- ----------------------------------------------------------------------------------------
$2,186,846
- ----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Written Options Outstanding January 31, 1998
(premium received $106,974)
Expiration Date/ Market
Contract Amount Strike Price Value
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
DEM 14,000 German Government Bond
futures contracts (put) Feb. 98 / 106.50 DEM $8,801
DEM 50,000 German Government Bond
futures contracts (put) Feb. 98 / 102.00 DEM 683
- ----------------------------------------------------------------------------------------
$9,484
- ----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
TBA Sale Commitments at January 31, 1998
(proceeds receivable $36,840,790)
Settlement Market
Agency Principal Amount Date Value
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
FHLMC, 8.5s, February 2039 $28,379,000 2/12/98 $29,576,026
GNMA II, 5.5s, February 2039 7,160,000 2/24/98 7,198,020
- ----------------------------------------------------------------------------------------
$36,774,046
- ----------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
January 31, 1998 (Unaudited)
<S> <C>
Assets
- ---------------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $1,262,806,976) (Note 1) $1,290,020,827
- ---------------------------------------------------------------------------------------------------
Cash 957,091
- ---------------------------------------------------------------------------------------------------
Foreign currency (cost $388,116) 398,353
- ---------------------------------------------------------------------------------------------------
Dividends, interest and other receivables 17,612,634
- ---------------------------------------------------------------------------------------------------
Receivable for securities sold 75,868,153
- ---------------------------------------------------------------------------------------------------
Receivable for variation margin 1,099,772
- ---------------------------------------------------------------------------------------------------
Receivable for open forward currency contracts 9,699,705
- ---------------------------------------------------------------------------------------------------
Receivable for closed forward currency contracts 503,440
- ---------------------------------------------------------------------------------------------------
Total assets 1,396,159,975
Liabilities
- ---------------------------------------------------------------------------------------------------
Distributions payable to shareholders 8,419,942
- ---------------------------------------------------------------------------------------------------
Payable for securities purchased 86,026,895
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 2,026,702
- ---------------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 238,556
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 25,750
- ---------------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 1,562
- ---------------------------------------------------------------------------------------------------
Payable for open forward currency contracts 16,741,939
- ---------------------------------------------------------------------------------------------------
Payable for closed forward currency contracts 1,823,256
- ---------------------------------------------------------------------------------------------------
Written options, at value (premium received $106,974) (Note 1) 9,484
- ---------------------------------------------------------------------------------------------------
TBA sales commitments, at value (proceeds receivable $36,840,790) 36,774,046
- ---------------------------------------------------------------------------------------------------
Other accrued expenses 176,760
- ---------------------------------------------------------------------------------------------------
Total liabilities 152,264,892
- ---------------------------------------------------------------------------------------------------
Net assets $1,243,895,083
Represented by
- ---------------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) 1,229,563,197
- ---------------------------------------------------------------------------------------------------
Distributions in excess of net investment income (Note 1) (21,239,345)
- ---------------------------------------------------------------------------------------------------
Accumulated net realized gain on investments and foreign
currency transactions (Note 1) 13,089,699
- ---------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments and assets and
liabilities in foreign currencies 22,481,532
- ---------------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $1,243,895,083
Computation of net asset value
- ---------------------------------------------------------------------------------------------------
Net asset value per share ($1,243,895,083 divided by
140,248,960 shares) $8.87
- ---------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Six months ended January 31, 1998 (Unaudited)
<S> <C>
Investment income:
- --------------------------------------------------------------------------------------------------
Interest income $52,320,976
- --------------------------------------------------------------------------------------------------
Dividends 2,387,781
- --------------------------------------------------------------------------------------------------
Total investment income 54,708,757
Expenses:
Compensation of Manager (Note 2) 4,207,487
- --------------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 831,659
- --------------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 17,156
- --------------------------------------------------------------------------------------------------
Administrative services (Note 2) 9,475
- --------------------------------------------------------------------------------------------------
Reports to shareholders 73,532
- --------------------------------------------------------------------------------------------------
Auditing 41,212
- --------------------------------------------------------------------------------------------------
Legal 25,642
- --------------------------------------------------------------------------------------------------
Postage 133,485
- --------------------------------------------------------------------------------------------------
Exchange listing fees 59,051
- --------------------------------------------------------------------------------------------------
Other 28,842
- --------------------------------------------------------------------------------------------------
Total expenses 5,427,541
- --------------------------------------------------------------------------------------------------
Expense reduction (Note 2) (122,039)
- --------------------------------------------------------------------------------------------------
Net expenses 5,305,502
- --------------------------------------------------------------------------------------------------
Net investment income 49,403,255
- --------------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 10,574,625
- --------------------------------------------------------------------------------------------------
Net realized gain on futures contracts (Note 1) 2,097,270
- --------------------------------------------------------------------------------------------------
Net realized gain on written options (Notes 1 and 3) 465,345
- --------------------------------------------------------------------------------------------------
Net realized loss on foreign currency transactions (Note 1) (12,014,255)
- --------------------------------------------------------------------------------------------------
Net unrealized depreciation of assets and liabilities in
foreign currencies during the period (2,065,442)
- --------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments, futures, written
options, and TBA sale commitments during the period 478,863
- --------------------------------------------------------------------------------------------------
Net loss on investments (463,594)
- --------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $48,939,661
- --------------------------------------------------------------------------------------------------
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
1998* 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets
- ----------------------------------------------------------------------------------------------------------------------
Operations:
- ----------------------------------------------------------------------------------------------------------------------
Net investment income $ 49,403,255 $ 90,919,087
- ----------------------------------------------------------------------------------------------------------------------
Net realized gain on investments and foreign
currency transactions 1,122,985 28,287,061
- ----------------------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of investments
and assets and liabilties in foreign currencies (1,586,579) 24,519,407
- ----------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 48,939,661 143,725,555
- ----------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ----------------------------------------------------------------------------------------------------------------------
From net investment income (50,488,878) (90,919,087)
- ----------------------------------------------------------------------------------------------------------------------
In excess of net investment income -- (3,860,069)
- ----------------------------------------------------------------------------------------------------------------------
Shares repurchased (Note 4) -- (3,356,370)
- ----------------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets (1,549,217) 45,590,029
Net assets
- ----------------------------------------------------------------------------------------------------------------------
Beginning of period 1,245,444,300 1,199,854,271
- ----------------------------------------------------------------------------------------------------------------------
End of period (including distributions in excess of
net investment income of $21,239,345 and
$20,153,722, respectively $1,243,895,083 $1,245,444,300
Number of fund shares
- ----------------------------------------------------------------------------------------------------------------------
Shares outstanding at beginning of period 140,248,960 140,679,960
- ----------------------------------------------------------------------------------------------------------------------
Shares repurchased -- (431,000)
- ----------------------------------------------------------------------------------------------------------------------
Shares outstanding at end of period 140,248,960 140,248,960
- ----------------------------------------------------------------------------------------------------------------------
* 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
Per-share January 31
operating performance (Unaudited) Year Ended July 31
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $8.88 $8.53 $8.46 $8.29 $8.87 $8.51
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .35 .65 .64 .68 .64 .71
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments -- .38 .09 .17 (.50) .42
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .35 1.03 .73 .85 .14 1.13
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.36) (.65) (.65) (.58) (.70) (.71)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income -- (.03) (.01) -- (.02) (.06)
- ------------------------------------------------------------------------------------------------------------------------------------
From return of capital -- -- -- (.10) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.36) (.68) (.66) (.68) (.72) (.77)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $8.87 $8.88 $8.53 $8.46 $8.29 $8.87
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at market value (%)(a) 5.77* 26.24 7.94 6.86 .95 1.92
- ------------------------------------------------------------------------------------------------------------------------------------
Market value,
end of period $8.69 $8.56 $7.38 $7.44 $7.63 $8.25
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $1,243,895 $1,245,444 $1,199,854 $1,190,375 $1,166,726 $1,249,193
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .44* .83 .85 .82 .86 .84
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 3.98* 7.42 7.43 8.29 7.30 8.14
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 107.16* 262.01 332.00 196.83 242.29 250.65
- ------------------------------------------------------------------------------------------------------------------------------------
* Not annualized.
(a) Total investment return assumes dividend reinvestment.
(b) The ratio of expenses to average net assets for the period ended July 31, 1996 and thereafter includes
amounts paid through expense offset arrangements. Prior period ratios exclude
these amounts. (Note 2)
</TABLE>
Notes to financial statements
January 31, 1998 (Unaudited)
Note 1
Significant accounting policies
Putnam Premier Income Trust (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 certain debt obligations; such
investments are stated at fair value on the basis of valuations furnished by a
pricing service, approved by the Trustees or dealers, which determines
valuations for normal, institutional-size trading units of such securities
using methods based on market transactions for comparable securities and
various relationships between securities which are generally recognized by
institutional traders.
B) Joint trading account Pursuant to an exemptive order issued by the
Securities and Exchange Commission, the fund may transfer uninvested cash
balances into a joint trading account along with the cash of other registered
investment companies and certain other accounts managed by Putnam Investment
Management, Inc. ("Putnam Management") the fund's manager, a wholly-owned
subsidiary of Putnam Investments, Inc. These balances may be invested in one
or more repurchase agreements and/or short-term money market instruments.
C) Repurchase agreements The fund, or any joint trading account, through its
custodian, receives delivery of the underlying securities, the market value of
which at the time of purchase is required to be in an amount at least equal to
the resale price, including accrued interest. Putnam Management is responsible
for determining that the value of these underlying securities is at all times
at least equal to the resale price, including accrued interest.
D) Security transactions and related investment income Security transactions
are accounted for on the trade date (date the order to buy or sell is
executed). Interest income is recorded on the accrual basis. Dividend income
is recorded on the ex-dividend date except that certain dividends from foreign
securities are recorded as soon as the fund is informed of the ex-dividend
date. Discounts on zero coupon bonds, original issue discount bonds,
stepped-coupon bonds and payment in kind bonds are accreted according to the
yield-to-maturity basis. Any premium resulting from the purchase of
stepped-coupon securities is amortized on a yield-to-maturity basis.
Securities purchased or sold on a when-issued or forward commitment 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 gains and losses are included with the
net realized and unrealized gain or loss on investments. Net realized gains
and losses on foreign currency transactions represent net exchange gains or
losses on closed forward currency contracts, disposition of foreign currencies
and the difference between the amount of investment income and foreign
withholding taxes recorded on the fund's books and the U.S. dollar equivalent
amounts actually received or paid. Net unrealized appreciation and
depreciation of assets and liabilities in foreign currencies arise from
changes in the value of open forward currency contracts and assets and
liabilities other than investments at the period end, resulting from changes
in the exchange rate.
F) Forward currency contracts The fund may engage in forward currency
contracts, which are agreements between two parties to buy and sell currencies
at a set price on a future date, to protect against a decline in value
relative to the U.S. dollar of the currencies in which its portfolio
securities are denominated or quoted (or an increase in the value of a
currency in which securities a fund intends to buy are denominated, when a
fund holds cash reserves and short-term investments). The U.S. dollar value of
forward currency contracts is determined using current forward currency
exchange rates supplied by a quotation service. The market value of the
contract will fluctuate with changes in currency exchange rates. The contract
is "marked to market" daily and the change in market value is recorded as an
unrealized gain or loss. When the contract is closed, the fund records a
realized gain or loss equal to the difference between the value of the
contract at the time it was opened and the value at the time it was closed.
The fund could be exposed to risk if the value of the currency changes
unfavorably, if the counterparties to the contracts are unable to meet the
terms of their contracts or if the fund is unable to enter into a closing
position.
G) Futures and options contracts The fund may use futures and options
contracts to hedge against changes in the values of securities the fund owns
or expects to purchase. The fund may also write options on securities it owns
or in which it may invest to increase its current returns.
The potential risk to the fund is that the change in value of futures and
options contracts may not correspond to the change in value of the hedged
instruments. In addition, losses may arise from changes in the value of the
underlying instruments, if there is an illiquid secondary market for the
contracts, or if the counterparty to the contract is unable to perform. When
the contract is closed, the fund records a realized gain or loss equal to the
difference between the value of the contract at the time it was opened and the
value at the time it was closed. Realized gains and losses on purchased
options are included in realized gains and losses on investment securities.
Futures contracts are valued at the quoted daily settlement prices established
by the exchange on which they trade. Exchange traded options are valued at the
last sale price, or if no sales are reported, the last bid price for purchased
options and the last ask price for written options. Options traded
over-the-counter are valued using prices supplied by dealers.
H) TBA purchase commitments The fund may enter into "TBA" (to be announced)
purchase commitments to purchase securities for a fixed unit price at a future
date beyond customary settlement time. Although the unit price has been
established, the principal value has not been finalized. However, the amount
of the commitments will not fluctuate more than 1.0% from the principal
amount. The fund holds, and maintains until settlement date, cash or
high-grade debt obligations in an amount sufficient to meet the purchase
price, or the fund may enter into offsetting contracts for the forward sale of
other securities it owns. Income on the securities will not be earned until
settlement date. TBA purchase commitments may be considered securities in
themselves, and involve a risk of loss if the value of the security to be
purchased declines prior to the settlement date, which risk is in addition to
the risk of decline in the value of the fund's other assets. Unsettled TBA
purchase commitments are valued at the current market value of the underlying
securities, according to the procedures described under "Security valuation"
above.
Although the fund will generally enter into TBA purchase commitments with the
intention of acquiring securities for their portfolio or for delivery pursuant
to options contracts it has entered into, the fund may dispose of a commitment
prior to settlement if Putnam Management deems it appropriate to do so.
I) TBA sale commitments The fund may enter into TBA sale commitments to hedge
its portfolio positions or to sell mortgage-backed securities it owns under
delayed delivery arrangements. Proceeds of TBA sale commitments are not
received until the contractual settlement date. During the time a TBA sale
commitment is outstanding, equivalent deliverable securities, or an offsetting
TBA purchase commitment deliverable on or before the sale commitment date, are
held as "cover" for the transaction.
Unsettled TBA sale commitments are valued at the current market value of the
underlying securities, generally according to the procedures described under
"Security valuation" above. The contract is "marked-to-market" daily and the
change in market value is recorded by the fund as an unrealized gain or loss.
If the TBA sale commitment is closed through the acquisition of an offsetting
purchase commitment, the fund realizes a gain or loss. If the fund delivers
securities under the commitment, the fund realizes a gain or a loss from the
sale of the securities based upon the unit price established at the date the
commitment was entered into.
J) Federal taxes It is the policy of the fund to distribute all of its taxable
income within the prescribed time and otherwise comply with the provisions of
the Internal Revenue Code applicable to regulated investment companies. It is
also the intention of the fund to distribute an amount sufficient to avoid
imposition of any excise tax under Section 4982 of the Internal Revenue Code
of 1986, as amended. Therefore, no provision has been made for federal taxes
on income, capital gains or unrealized appreciation on securities held nor for
excise tax on income and capital gains.
K) Distributions to shareholders Distributions to shareholders are recorded by
the fund on the ex-dividend date. At certain times, the fund may pay
distributions at a level rate even though, as a result of market conditions or
investment decisions, the fund may not achieve projected investment results
for a given period. The amount and character of income and gains to be
distributed are determined in accordance with income tax regulations which may
differ from generally accepted accounting principles. Reclassifications are
made to the fund's capital accounts to reflect income and gains available for
distribution (or available capital loss carryovers) under income tax
regulations.
Note 2
Management fee, administrative
services and other transactions
Compensation of Putnam Management, for management and investment advisory
services is paid quarterly based on the average 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% thereafter.
The fund reimburses Putnam Management an allocated amount for the compensation
and related expenses of certain officers of the fund and their staff who
provide administrative services to the fund. The aggregate amount of all such
reimbursements is determined annually by the Trustees.
Custodial functions for the fund's assets are provided by Putnam Fiduciary
Trust Company (PFTC), a 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, 1998, fund expenses were reduced by
$122,039 under expense offset arrangements with PFTC. Investor servicing and
custodian fees reported in the Statement of operations exclude these credits.
The fund could have invested a portion of the assets utilized in connection
with the expense offset arrangements in an income producing asset if it had
not entered into such arrangements.
Each Trustee of the fund receives an annual Trustee fee, of which $1,070 has
been allocated to the fund, and an additional fee for each Trustee's meeting
attended. Trustees who are not interested persons of Putnam Management and who
serve on committees of the Trustees receive additional fees for attendance at
certain committee meetings.
The fund has adopted a Trustee Fee Deferral Plan (the "Deferral Plan") which
allows the Trustees to defer the receipt of all or a portion of Trustees Fees
payable on or after July 1, 1995. The deferred fees remain in the fund and are
invested in certain Putnam funds until distribution in accordance with the
Deferral Plan.
The fund has adopted an unfunded noncontributory defined benefit pension plan
(the "Pension Plan") covering all Trustees of the fund who have served as
Trustee for at least five years. Benefits under the Pension Plan are equal to
50% of the Trustee's average total retainer and meeting fees for the three
years preceding retirement. Pension expense for the fund is included in
Compensation of trustees in the Statement of operations. Accrued pension
liability is included in Payable for compensation of Trustees in the Statement
of assets and liabilities.
Note 3
Purchase and sales of securities
During the six months ended January 31, 1998, purchases and sales of
investment securities other than U.S. government obligations and short-term
investments aggregated $837,544,762 and $856,353,111, respectively. Purchases
and sales of U.S. government obligations aggregated $463,606,834 and
$480,185,290, respectively. In determining the net gain or loss on securities
sold, the cost of securities has been determined on the identified cost basis.
Written option transactions during the year are summarized as follows:
Contract Premiums
Amounts Received
- ------------------------------------------------------------
Written options
outstanding at
beginning of year -- $ --
- ------------------------------------------------------------
Options written 74,970,000 465,346
Options expired 74,906,000 358,372
- ------------------------------------------------------------
Written options
outstanding at
end of year 64,000 $106,974
- ------------------------------------------------------------
Note 4
Share Repurchase Program
The Trustees 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 times and amounts as is believed
to be in the best interest of the fund's shareholders. Any repurchases of
shares will have the effect of increasing the net asset value per share of
remaining shares outstanding. For the six months ended January 31, 1998, the
fund did not repurchase any shares. As of January 31, 1998 511,000 shares have
been repurchased since the inception of the program.
Fund information
INVESTMENT MANAGER
Putnam Investment
Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
John A. Hill
Ronald J. Jackson
Paul L. Joskow
Elizabeth T. Kennan
Lawrence J. Lasser
John H. Mullin III
Robert E. Patterson
Donald S. Perkins
George Putnam, III
A.J.C. Smith
W. Thomas Stephens
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
John D. Hughes
Senior Vice President and Treasurer
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
William J. Curtin
Vice President
Gary N. Coburn
Vice President
Kenneth J. Taubes
Vice President and Fund Manager
Robert M. Paine
Vice President and Fund Manager
D. William Kohli
Vice President and Fund Manager
Gail S. Attridge
Vice President and Fund Manager
William N. Shiebler
Vice President
John R. Verani
Vice President
Beverly Marcus
Clerk and Assistant Treasurer
Call 1-800-225-1581 weekdays from 9 a.m. to 5 p.m. Eastern Time 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
- --------------------
40525-073 3/98
