-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OpcgSkoQ0wJRTI7OJygfusy+eU1NNW19d6Y6m/+Feh0aWtZoPscaMZOOAcj1ta0s ABOm6+lfrA2TajRsdf5BJA== 0000928816-96-000288.txt : 19961001 0000928816-96-000288.hdr.sgml : 19961001 ACCESSION NUMBER: 0000928816-96-000288 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19960731 FILED AS OF DATE: 19960930 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PUTNAM PREMIER INCOME TRUST CENTRAL INDEX KEY: 0000827773 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 042995046 STATE OF INCORPORATION: MA FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: N-30D SEC ACT: 1940 Act SEC FILE NUMBER: 811-05452 FILM NUMBER: 96637138 BUSINESS ADDRESS: STREET 1: ONE POST OFFICE SQ CITY: BOSTON STATE: MA ZIP: 02109 BUSINESS PHONE: 6172921000 N-30D 1 PUTNAM PREMIER INCOME TRUST Putnam Premier Income Trust ANNUAL REPORT July 31, 1996 [LOGO: BOSTON * LONDON * TOKYO] Fund highlights * "Since 1990, Putnam Premier Income Trust has placed in or above the middle third of the multisector-bond objective. Such consistency has given PPT some of the better risk scores in its peer group, and a trailing five-year return that bests 74% of its rivals. Its low-key virtues make PPT an ideal core holding." -- Morningstar Mutual Funds, June 3, 1996 * Morningstar, Inc. once again awarded Putnam Premier Income Trust four out of a possible five stars for overall risk-adjusted performance as of July 31, 1996 (based on the average annual risk-adjusted returns for the 3-, 5-, and 10-year periods). The four-star rating for the period ended July 31, 1996, puts the fund among 22.5% of the funds rated in the fixed-income category.* CONTENTS 4 Report from Putnam Management 9 Fund performance summary 12 Portfolio holdings 24 Financial statements *Ratings by Morningstar, an independent rating agency, are subject to change every month and are calculated from a fund's 3-, 5-, and 10-year average annual returns in excess of 90-day Treasury bill returns, with appropriate sales charge adjustments and a risk factor that reflects performance compared to 90-day Treasury bill monthly returns. 10% of the funds in an investment category receive 5 stars; 22.5% receive 4 stars. For the 3- and 5-year periods ended 7/31/96, there were 90 and 63 funds, respectively, in the fixed-income category. The fund's shares received 4 stars for each of these periods. Past performance is not indicative of future results. From the Chairman [GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM] (copyright) Karsh, Ottawa Dear Shareholder: We say it again and again, but it remains consistently valid: Putnam Premier Income Trust's strategy of investing in a combination of U.S. government, high-yield, and international bonds helps smooth out the fund's overall results, year in and year out, regardless of how any or all of the three markets may be performing at a particular moment. During the fiscal year that ended on July 31, 1996, high-yield bonds, thriving on the U.S. economy's continued strength, and international bonds, enjoying a resurgence in fixed-income markets abroad, helped offset the volatility encountered in the rest of the U.S. fixed-income market as investors grew concerned over the possibility of a pickup in inflation. Of course, it is only fair to add that the skill and talent required to manage the investments within each of these "sleeves" also play an important part in the fund's continuing success. The following report by your fund's management team reviews fiscal 1996 and prospects for the fiscal year just begun. Respectfully yours, /S/George Putnam George Putnam Chairman of the Trustees September 18, 1996 Report from the Fund Managers Rosemary H. Thomsen, lead manager Neil J. Powers D. William Kohli Mark J. Siegel Thanks in large part to its flexible, diversified trisector investment strategy, Putnam Premier Income Trust wrapped up fiscal 1996 with strong returns: 9.76% at net asset value and 7.94% at market value. These returns outpaced the Lehman Brothers Government Bond Index's 5.16% return for the same period -- the 12 months ended July 31, 1996. Beginning with February's report of a low unemployment level, signs of significant economic strength emerged and dealt a blow to the U.S. bond market that would continue to be felt over the next few months. Investors became concerned about increasing inflation and, as a result, the bond market weakened. While your fund could not avoid some of the negative effects of these developments, its trisector strategy proved extremely beneficial. In the second half of the fiscal year, the U.S. government sleeve gave back some of the gains it had realized in the first half. However, because high-yield bonds are influenced by the pace of the economy, their performance was less affected by this spring's higher interest rates than other fixed-income investments, which are more sensitive to rate changes. This explains why the portfolio's high-yield bond portion, or "sleeve," continued to post the strongest returns for the fund both on a relative and an absolute basis. Meanwhile, the international segment, bolstered by our investments in emerging markets, registered significantly better performance for the period on an absolute basis and relative to its benchmark index. * HIGH-YIELD HOLDINGS WERE THE STAR PERFORMERS Changing market dynamics, while adversely affecting U.S. Treasury securities, remained hospitable to the performance of your fund's high- yield corporate bond holdings, the most heavily weighted area of the portfolio. Treasury securities generally respond negatively to signs of economic strength because investors fear the possibility of increasing inflation, which erodes the value of fixed-income investments. Issuers of high-yield securities, however, are generally in a position to benefit from a stronger economy and stand to reap both increased revenues and higher cash flows as a result. Consequently, throughout fiscal 1996, we continued to find value in the high-yield sector, in which credit quality remained high and virtually no defaults materialized. During the year, our emphasis on companies in the telecommunications, cable television, broadcasting, retail, insurance, and gaming industries benefited the fund substantially. Retailing was also an area in which we increased exposure, purchasing the attractively priced bonds of companies with niche businesses. One long-standing holding, discount clothing retailer Loehmann's, Inc., appreciated dramatically over the period as the company's management announced an initial public offering (IPO) of its stock. In addition, Terra Nova Insurance Holdings in the insurance sector has made a strong contribution to fund performance this year with its successful IPO and rating upgrade. While these securities, along with others discussed in this report, were viewed favorably on July 31, 1996, all portfolio holdings are subject to review and adjustment in accordance with the fund's investment strategy and may well vary in the future. [GRAPHIC HORIZONTAL BAR CHART OMITTED: TOP 10 ALLOCATIONS TO FOREIGN MARKETS*] Germany 8.7% United Kingdom 5.6% Canada 4.9% Australia 2.1% France 2.0% Denmark 2.0% Mexico 1.4% Brazil 0.8% Argentina 0.6% New Zealand 0.5% Footnote reads: *Based on net assets as of 7/31/96. Allocations will vary over time. * PORTFOLIO REFOCUSED ON MORTGAGE-BACKED SECURITIES In the portfolio's U.S. government sleeve, we shifted our primary strategy from managing duration to maximizing yield. Duration is a measure of a portfolio's sensitivity to interest-rate changes, and a longer duration can be beneficial during a period of declining rates. Throughout fiscal 1995, the portfolio's relatively long duration boosted performance, as economic growth slowed and inflation remained relatively stable. However, in the rising-interest-rate environment of the first six months of calendar 1996, we took steps to shorten duration. We sold a significant portion of the fund's intermediate- and long-term U.S. Treasury notes and bonds in favor of mortgage-backed securities. At the fiscal year's midpoint, mortgage-backed securities made up a relatively small portion of the portfolio. We had reduced the position because the increasing risk of prepayment activity had diminished their value. Historically a declining-interest-rate environment sparks increased prepayment, as lower rates prompt homeowners to refinance their mortgages. Prepayment can have a negative impact on the fund because the prepaid principal must be reinvested at lower rates. As calendar 1996 progressed, however, we saw prices of mortgage-backed securities decline significantly -- so much so that we believed the market had mispriced prepayment assumptions and prices had fallen below fair value. Taking advantage of what we saw as an opportunity, by April we had more than doubled the fund's weighting of current-coupon mortgage-backed securities. This strategic shift proved rewarding and enhanced the fund's income stream over the last quarter of the fiscal year. * INTERNATIONAL SECTOR PROVIDED NEEDED DIVERSIFICATION Your fund's international sleeve made an outstanding contribution to the portfolio's positive return. Our country selections, including those in emerging markets, and currency strategy drove performance. At the start of the fund's third quarter, we shifted a small portion of the U.S. government sector holdings into the international sector. This move was based on our expectation of stronger performance from international bond markets, many of which would get a boost in price from economic slowdowns. For most of the year, overweight positions in Europe, especially in securities of high-yielding countries, namely Italy and Spain, were strong contributors to performance. Underweighting securities in Japan proved successful until the fiscal year's third quarter. [GRAPHIC OMITTED: TOP SECTOR HOLDINGS (7/31/96)] Top Three Holdings: High-Yield Amphenol Corp. sr. sub. notes 12 3/4s, 2002 Midland Funding Corp. 11 deb. Series B, 13 1/4s, 2006 Apparel Retailers, Inc. deb. stepped coupon Series B, 0%, 12 3/4s, 2005 Top Three Holdings: U.S. Government Government National Mortgage Association 7 1/2s, with various due dates from 12/15/2023 to 4/15/2026 Federal National Mortgage Association 7 1/2s, with various due dates from 1/1/2026 to 7/1/2026 Federal National Mortgage Association 8s, TBA 8/16/2026 Top Three Holdings: International Canada (Government of) deb. 7 1/2s, 2001 Germany (Federal Republic of) bonds, 5 3/4s, 2000 Germany (Federal Republic of) bonds Series 108, 5 3/4s, 1998 Footnote reads: These holdings represent 23.2% of the fund's net assets as of 7/31/96. Portfolio holdings will vary over time. In addition, allocations to emerging markets greatly added to performance as investors became willing to accept the less certain markets for their attractive yields. Toward the end of the fiscal year, we began to reduce positions in Europe and to add to positions in Anglo markets, such as Canada, Australia, and the United Kingdom. We also began investing in Japanese bonds for the first time in nine months. Throughout May and June, holdings in the higher-yielding European markets, although reduced, continued to provide strong performance. However, in July, the German Bundesbank failed to ease interest rates, causing doubts to arise over whether the European Monetary Union and a single currency would occur. Our decision to scale back investments in higher-yielding markets proved positive, as these markets consequently underperformed against core European bonds for the first time in six months. Our currency hedging strategies also proved beneficial. A hedge is considered a sort of insurance policy designed to protect the fund from adverse currency movements. When foreign currencies weaken or decline compared with the U.S. dollar, the value of the fund's foreign holdings can be diminished. By hedging these foreign currency holdings into U.S. dollars, we are using the expected strength of the dollar to seek protection of their value. Hedging can prove detrimental, of course, if the dollar should weaken against these other currencies. Throughout most of the period, our hedges proved effective as several European currencies declined in value against the dollar. In May, however, our hedging strategy reduced performance and we began to cut back on the hedges as the dollar's momentum slowed. * POSITIVE ENVIRONMENT LIKELY TO CONTINUE DESPITE RECENT UNCERTAINTY Your fund enters fiscal 1997 with a somewhat conservatively positioned portfolio. We currently anticipate no major shifts in asset allocation and look for market and economic conditions to remain favorable. Low inflation and moderate economic growth are expected to provide a positive environment for attractive fixed-income performance in each of the fund's three sectors. Our long-term outlook remains optimistic: we believe U.S. interest rates will continue to be stable and global inflation will remain under control despite some recent market concerns about an overheating economy. We realize, however, that the market may be vulnerable to periods of volatility, especially during this presidential election year. Accordingly we will watch market conditions at home and abroad, monitor our country selections carefully, and make adjustments to the portfolio, seeking to capitalize on the fund's effective trisector strategy. The views expressed here are exclusively those of Putnam Management. They are not meant as investment advice. Although the described holdings were viewed favorably as of 7/31/96, there is no guarantee the fund will continue to hold these securities in the future. The lower credit ratings of high-yield corporate bonds reflect a greater possibility that adverse changes in the economy or their issuers may affect their ability to pay principal and interest on the bonds. Investments in non-U.S. securities may be subject to certain risks such as currency fluctuations, economic instability, and political developments. Although the U.S. government guarantees the timely payment of principal and interest on some of the underlying securities, the value of the fund shares is not guaranteed and will fluctuate. Performance summary Performance should always be considered in light of a fund's investment strategy. Putnam Premier Income Trust is designed for investors seeking a high level of current income consistent with preservation of capital. This section provides, at a glance, information about your fund's performance. Total return shows how the value of the fund's shares changed over time, assuming you held the shares through the entire period and reinvested all distributions in the fund. TOTAL RETURN FOR PERIODS ENDED 7/31/96 Salomon Bros. First Lehman Bros. Non-U.S. Boston Consumer Market Government World Govt. High Yield Price NAV value Bond Index Bond Index Index Index - ----------------------------------------------------------------------- 1 year 9.76% 7.94% 5.16% 0.49% 9.27% 2.95% - ----------------------------------------------------------------------- 5 years 71.57 51.22 47.01 83.96 84.42 15.27 Annual average 11.40 8.62 8.01 12.96 13.02 2.88 - ----------------------------------------------------------------------- Life of fund (since 2/29/88) 124.45 80.47 96.15 111.63 143.64 35.34 Annual average 10.08 7.26 8.33 9.31 11.16 3.66 - ----------------------------------------------------------------------- TOTAL RETURN FOR PERIODS ENDED 6/30/96 (most recent calendar quarter) NAV Market value - ----------------------------------------------------------------------- 1 year 10.16% 10.68% - ----------------------------------------------------------------------- 5 years 73.19 59.36 Annual average 11.61 9.77 - ----------------------------------------------------------------------- Life of fund (since 2/29/88) 122.58 85.26 Annual average 10.07 7.67 - ----------------------------------------------------------------------- Performance data represent past results, do not reflect future performance. They do not take into account any adjustment for taxes payable on reinvested distributions. Investment returns, market value, and net asset value will fluctuate so that an investor's shares, when sold, may be worth more or less than their original cost. Past performance is not indicative of future results. PRICE AND DISTRIBUTION INFORMATION 12 months ended 7/31/96 Distributions - ----------------------------------------------------------------------- Number 12 - ----------------------------------------------------------------------- Income $0.660 - ----------------------------------------------------------------------- Capital gains - ----------------------------------------------------------------------- Long-term -- - ----------------------------------------------------------------------- Short-term -- - ----------------------------------------------------------------------- Total $0.660 - ----------------------------------------------------------------------- Share value: NAV Market value - ----------------------------------------------------------------------- 7/31/95 $8.46 $7.4375 - ----------------------------------------------------------------------- 7/31/96 8.53 7.3750 - ----------------------------------------------------------------------- Current return: NAV Market value - ----------------------------------------------------------------------- End of period - ----------------------------------------------------------------------- Current dividend rate1 7.74% 8.95% - ----------------------------------------------------------------------- 1 Income portion of most recent distribution, annualized and divided by NAV or market value at end of period. TERMS AND DEFINITIONS Net asset value (NAV) is the value of all your fund's assets, minus any liabilities, divided by the number of outstanding shares. Market value is the current trading price of one share of the fund. Market values are set by transactions between buyers and sellers on the New York Stock Exchange. COMPARATIVE BENCHMARKS Consumer Price Index (CPI ) is a commonly used measure of inflation; it does not represent an investment return. First Boston High Yield Index* is an unmanaged list of lower-rated higher-yielding U.S. corporate bonds. Lehman Bros. Government Bond Index* is an unmanaged list of U.S. government and mortgage-backed securities. Salomon Brothers Non-U.S. World Government Bond Index* is an unmanaged list of bonds issued by 10 countries. *Securities indexes assume reinvestment of all distributions and interest payments and do not take into account brokerage fees or taxes. Securities in the fund do not match those in the indexes and performance of the fund will differ. It is not possible to invest directly in an index. Report of Independent Accountants To the Trustees and Shareholders of Putnam Premier Income Trust In our opinion, the accompanying statement of assets and liabilities, including the portfolio of investments owned, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Putnam Premier Income Trust (the "fund") at July 31, 1996, and the results of its operations, the changes in its net assets, and the financial highlights for the periods indicated, in conformity with generally accepted accounting principles. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of investments owned at July 31, 1996 by correspondence with the custodian and brokers and the application of alternative auditing procedures where confirmations from brokers were not received, provide a reasonable basis for the opinion expressed above. Price Waterhouse LLP Boston, Massachusetts September 17, 1996
Portfolio of investments owned July 31, 1996 CORPORATE BONDS AND NOTES (32.0%) * PRINCIPAL AMOUNT VALUE Advertising (1.0%) - --------------------------------------------------------------------------------------------------------------------------------- $1,115,000 Lamar Advertising Co. sr. secd. notes 11s, 2003 $ 1,159,600 2,100,000 Outdoor Systems, Inc. sr. notes 10 3/4s, 2003 2,310,000 5,000,000 Universal Outdoor, Inc. sub. deb. 11s, 2003 5,300,000 3,915,000 Universal Outdoor, Inc. sr. notes stepped-coupon zero % (14s, 7/1/99), 2004 ++ 3,053,700 -------------- 11,823,300 Aerospace and Defense (0.6%) - --------------------------------------------------------------------------------------------------------------------------------- 1,420,000 Greenwich Air Services, Inc. sr. notes 10 1/2s, 2006 1,427,100 1,000,000 Howmet Corp. 144A sr. sub. notes 10s, 2003 1,052,500 473,000 K&F Industries Inc. sub. deb. 13 3/4s, 2001 487,190 3,300,000 Sequa Corp. bonds 8 3/4s, 2001 3,217,500 490,000 UNC, Inc. 144A sr. sub. notes 11s, 2006 497,350 -------------- 6,681,640 Agriculture (0.8%) - --------------------------------------------------------------------------------------------------------------------------------- 4,931,000 PMI Holdings Corp. sub. disc. deb. stepped-coupon Ser. B, zero % (11 1/2s, 9/1/00), 2005 ++ 2,773,688 125,000 PSF Finance (L.P.) sr. exch. notes 12 1/4s, 2004 (acquired 8/25/94, cost $127,734)(In default)+(double dagger) 75,000 6,123,698 PSF Finance (L.P.) sr. notes 12s, 2000 (acquired various dates from 2/8/93 to 9/15/93, cost $6,123,698)(In default)+(double dagger) 3,674,219 4,155,000 PSF Finance (L.P.) sr. disc. notes stepped-coupon zero % (12s, 9/15/96), 2003 (acquired 9/29/93, cost $2,999,862)(In default)+ ++ (double dagger) 2,493,000 -------------- 9,015,907 Apparel (0.4%) - --------------------------------------------------------------------------------------------------------------------------------- 4,275,000 Guess Jeans, Inc. sr. sub. notes 9 1/2s, 2003 4,275,000 Automotive Parts (0.7%) - --------------------------------------------------------------------------------------------------------------------------------- 1,265,000 Aftermarket Technology Corp. sr. sub. notes 12s, 2004 1,356,713 450,000 Delco Remy International, Inc. 144A sr. sub. notes 10 5/8s, 2006 451,125 1,805,000 Lear Corp. sub. notes 9 1/2s, 2006 1,825,306 4,900,000 Key Plastics Corp. sr. notes 14s, 1999 5,071,500 -------------- 8,704,644 Banks (0.2%) - --------------------------------------------------------------------------------------------------------------------------------- 2,350,000 Chevy Chase Savings Bank Inc. sub. deb. 9 1/4s, 2005 2,214,875 775,000 First Federal Financial Corp. notes 11 3/4s, 2004 767,250 -------------- 2,982,125 Broadcasting (1.8%) - --------------------------------------------------------------------------------------------------------------------------------- 2,000,000 Allbritton Communications sr. sub. deb. Ser. B, 9 3/4s, 2007 1,860,000 3,225,000 Argyle Television Corp. sr. sub. notes 9 3/4s, 2005 3,096,000 380,000 Jacor Communications, Inc. sr. sub. notes 10 1/8s, 2006 381,900 1,135,000 Park Broadcasting, Inc. 144A sr. notes 11 3/4s, 2004 1,305,250 4,495,000 Paxson Communications Corp. 144A sr. sub. notes 11 5/8s, 2002 4,674,800 3,816,000 Petracom Holdings, Inc. notes stepped-coupon zero % (17 1/2s, 8/1/98), 2003 ++ 2,757,060 3,370,000 SFX Broadcasting, Inc. 144A sr. sub. notes 10 3/4s, 2006 3,386,850 4,331,000 Telemedia Broadcasting Corp. 144A deb. stepped-coupon 6.4s, (16s, 6/15/99), 2004 ++ 3,914,141 -------------- 21,376,001 Building and Construction (1.0%) - --------------------------------------------------------------------------------------------------------------------------------- 1,500,000 Cemex S.A. 144A bonds 12 3/4s, 2006 (Mexico) 1,511,250 2,275,000 Inter-City Products sr. notes 9 3/4s, 2000 2,166,938 3,500,000 Presley Cos. sr. notes 12 1/2s, 2001 3,325,000 5,000,000 Scotsman Group, Inc. sr. secd. notes 9 1/2s, 2000 4,987,500 440,000 Waxman Industries Inc. sr. notes stepped-coupon Ser. B, zero % (12 3/4s, 6/1/99), 2004 ++ 294,800 -------------- 12,285,488 Buses (0.2%) - --------------------------------------------------------------------------------------------------------------------------------- 800,000 Blue Bird Body Co. sub. deb. Ser. B, 11 3/4s, 2002 824,000 3,105,000 MCII Holding (USA), Inc. bonds 144A zero % (12s, 11/15/98), 2002 ++ 2,406,375 -------------- 3,230,375 Business Services (0.5%) - --------------------------------------------------------------------------------------------------------------------------------- 5,770,000 Corporate Express, Inc. sr. sub. notes Ser. B, 9 1/8s, 2004 5,712,300 670,000 Pierce Leahy Corp. 144A sr. sub. notes 11 1/8s, 2006 688,425 -------------- 6,400,725 Cable Television (3.3%) - --------------------------------------------------------------------------------------------------------------------------------- 3,200,000 Adelphia Communications Corp. sr. notes 12 1/2s, 2002 3,288,000 750,000 Adelphia Communications Corp. sr. deb. 11 7/8s, 2004 746,250 4,000,000 Adelphia Communications Corp. notes Ser. B, 9 7/8s, 2005 3,640,000 4,675,000 American Telecasting, Inc. sr. disc. notes stepped-coupon zero % (14 1/2s, 8/15/00), 2005 ++ 2,781,625 1,350,000 Cablevision Systems Corp. sr. sub. deb. 9 7/8s, 2023 1,220,063 4,000,000 Century Communications Corp. sr. notes 9 1/2s, 2005 3,910,000 2,480,000 Charter Communications Holdings 144A sr. disc. notes stepped-coupon zero % (14s, 3/15/01), 2007 ++ 1,357,800 1,250,000 Charter Communications International, Inc. 144A sr. notes 11 1/4s, 2006 1,225,000 2,275,000 Diamond Cable Communication Co. sr. disc. notes stepped-coupon zero % (13 1/4s, 9/30/99), 2004 (United Kingdom) ++ 1,638,000 750,000 Diamond Cable Communication Co. sr. disc. notes stepped-coupon zero % (11 3/4s, 12/15/00), 2005 (United Kingdom)++ 446,250 6,453,767 Falcon Holdings Group, Inc. sr. sub. notes 11s, 2003 (2 double daggers) 6,163,347 685,000 Heartland Wireless Communication Inc.144A sr. notes 13s, 2003 741,513 4,685,000 Lenfest Communications, Inc. sr. notes 8 3/8s, 2005 4,263,350 2,700,000 Marcus Cable Co. (L.P.) sr. sub. disc. notes stepped-coupon zero % (13 1/2s, 8/1/99), 2004 ++ 1,944,000 2,285,000 Telewest Communications PLC deb. stepped-coupon zero % (11s, 10/1/00), 2007 (United Kingdom) ++ 1,336,725 6,700,000 UIH Australia/Pacific 144A sr. disc. notes zero % (14s, 5/15/01), 2006 ++ 3,484,000 2,745,000 Videotron Holdings. sr. disc. notes stepped-coupon zero % (11s, 8/15/00), 2005 (United Kingdom) ++ 1,791,113 -------------- 39,977,036 Cellular Communications (1.6%) - --------------------------------------------------------------------------------------------------------------------------------- 3,800,000 Cellular, Inc. sr. sub. disc. notes stepped-coupon zero % (11 3/4s, 9/1/98), 2003 ++ 3,116,000 2,150,000 Cencall Communications Corp. sr. disc. notes stepped-coupon zero % (10 1/8s, 1/15/99), 2004 ++ 1,257,750 3,500,000 Dial Call Communication, Inc. sr. disc. notes stepped-coupon Ser. B, zero % (10 1/4s, 12/15/98), 2005 ++ 1,995,000 2,860,000 Intercel, Inc. sr. disc. notes stepped-coupon zero % (12s, 5/1/01), 2006 ++ 1,551,550 2,815,000 Milicom International Cellular 144A sr. disc. notes stepped-coupon zero % (13 1/2s, 6/1/00), 2006 (Luxembourg) ++ 1,393,425 7,500,000 NEXTEL Communications, Inc. sr. disc. notes stepped-coupon zero % (11 1/2s, 9/1/98), 2003 ++ 4,875,000 5,980,000 Pricellular Wireless sr. disc. notes stepped-coupon Ser. B, zero % (14s, 11/15/97), 2001 ++ 5,352,100 -------------- 19,540,825 Chemicals (0.1%) - --------------------------------------------------------------------------------------------------------------------------------- 1,500,000 IMC Fertilizer Group, Inc. deb. 9.45s, 2011 1,552,500 375,000 Texas Petrochemical 144A sr. sub. notes 11 1/8s, 2006 385,313 -------------- 1,937,813 Conglomerates (0.1%) - --------------------------------------------------------------------------------------------------------------------------------- 900,000 ADT Ltd. sr. sub. notes 9 1/4s, 2003 940,500 275,000 MacAndrews & Forbes Holdings, Inc. sub. deb. notes 13s, 1999 275,000 -------------- 1,215,500 Consumer Durable Goods (0.2%) - --------------------------------------------------------------------------------------------------------------------------------- 2,335,000 Remington Products Co. LLC 144A sr. sub. notes 11s, 2006 2,335,000 Consumer Services (0.4%) - --------------------------------------------------------------------------------------------------------------------------------- 4,791,000 Coinmach Corp. sr. notes Ser. B, 11 3/4s, 2005 5,006,595 Containers (0.5%) - --------------------------------------------------------------------------------------------------------------------------------- 6,000,000 Ivex Packaging Corp. sr. sub. notes 12 1/2s, 2002 6,300,000 Electric Utilities (0.6%) - --------------------------------------------------------------------------------------------------------------------------------- 6,550,000 Midland Funding Corp. II deb. Ser. B, 13 1/4s, 2006 7,221,375 Electronics (1.0%) - --------------------------------------------------------------------------------------------------------------------------------- 7,536,000 Amphenol Corp. sr. sub. notes 12 3/4s, 2002 8,251,920 5,175,000 International Semi-Tech. Corp. sr. secd. disc. notes stepped-coupon zero % (11 1/2s, 8/15/00), 2003 (Canada) ++ 2,923,875 460,000 Moog, Inc. 144A sr. sub. notes 10s, 2006 459,425 -------------- 11,635,220 Entertainment (0.8%) - --------------------------------------------------------------------------------------------------------------------------------- 2,300,000 Premier Parks, Inc. sr. notes Ser. A, 12s, 2003 2,426,500 5,000,000 Six Flags Corp. sr. sub. notes stepped-coupon zero % (12 1/4s, 6/15/98), 2005 ++ 4,250,000 1,200,000 Time Warner, Inc. notes 8.18s, 2007 1,187,940 1,200,000 Time Warner, Inc. notes 8.11s, 2006 1,186,200 -------------- 9,050,640 Financial Services (0.2%) - --------------------------------------------------------------------------------------------------------------------------------- 2,000,000 Keystone Group, Inc. sr. secd. notes 9 3/4s, 2003 1,980,000 Food (0.8%) - --------------------------------------------------------------------------------------------------------------------------------- 4,754,000 Del Monte Corp. sub. notes 12 1/4s, 2002 (2 double daggers) 4,611,380 5,095,000 Mafco, Inc. sr. sub. notes 11 7/8s, 2002 5,375,225 -------------- 9,986,605 Food Chains (0.1%) - --------------------------------------------------------------------------------------------------------------------------------- 1,700,000 Stater Brothers sr. notes 11s, 2001 1,768,000 Gaming (3.0%) - --------------------------------------------------------------------------------------------------------------------------------- 460,000 Alliance Gaming Corp. sr. notes 12 7/8s, 2003 450,800 1,045,000 Argosy Gaming Co. 144A 1st. mtge. 13 1/4s, 2004 1,018,875 2,090,000 Arizona Charlies Corp. 1st mtge. Ser. B, 12s, 2000 1,363,072 760,000 Capitol Queen Corp. 1st mtge. notes Ser. B, 12s, 2000 + 532,000 4,620,000 Casino America, Inc. 1st mtge. 11 1/2s, 2001 4,989,600 1,320,000 Coast Hotels & Casinos, Inc. 1st mtge. 13s, 2002 1,425,600 410,000 Eldorado Resorts LLC 144A sr. sub. notes 10 1/2s, 2006 411,025 4,250,000 Grand Casinos, Inc. 1st mtge. 10 1/8s, 2003 4,143,750 535,000 Harveys Casino Resorts sr. sub. notes 10 5/8s, 2006 543,025 3,625,000 Lady Luck Gaming 1st mtge. 11 7/8s, 2001 3,606,875 3,164,000 Louisiana Casino Cruises Corp. 1st mtge. 11 1/2s, 1998 2,641,940 1,625,000 Mohegan Tribal Gaming 144A sr. secd. notes 13 1/2s, 2002 2,031,250 1,000,000 Players International Inc. sr. notes 10 7/8s, 2005 1,005,000 4,250,000 Trump A.C. 1st. mtge. 11 1/4s, 2006 4,143,750 2,106,000 Trump Castle Funding Corp. sr. sub. notes 11 1/2s, 2000 2,106,000 4,800,000 Trump Holdings & Funding Corp. sr. notes 15 1/2s, 2005 5,616,000 -------------- 36,028,562 Health Care (1.6%) - --------------------------------------------------------------------------------------------------------------------------------- 4,480,000 Columbia/HCA Healthcare med. term notes 7.58s, 2025 4,360,160 4,315,000 Ivac Corp. sr. notes 9 1/4s, 2002 4,271,850 1,490,000 Merit Behavioral Care sr. sub. notes 11 1/2s, 2005 1,557,050 6,000,000 Paracelsus Healthcare Corp. sr. sub. notes 9 7/8s, 2003 6,240,000 2,252,000 Total Renal Care Holdings, Inc. sr. disc. notes stepped-coupon zero % (12s, 8/15/97), 2004 ++ 2,240,740 -------------- 18,669,800 Insurance (0.6%) - --------------------------------------------------------------------------------------------------------------------------------- 1,000,000 American Annuity Group, Inc. sr. notes 9 1/2s, 2001 1,045,000 2,000,000 American Life Holding Co. sr. sub. notes 11 1/4s, 2004 2,090,000 800,000 Reliance Group Holdings, Inc. sr. notes 9s, 2000 798,000 3,150,000 Reliance Group Holdings, Inc. sr. sub. deb. 9 3/4s, 2003 3,118,500 -------------- 7,051,500 Lodging (0.5%) - --------------------------------------------------------------------------------------------------------------------------------- 940,000 Host Marriott Corp. sr. notes Ser. B, 9 1/2s, 2005 902,400 4,500,000 John Q Hammons Hotels, Inc. 1st mtge. 8 7/8s, 2004 4,173,750 490,000 Wyndham Hotel Corp. sr. sub. notes 10 1/2s, 2006 491,838 -------------- 5,567,988 Medical Supplies and Devices (0.2%) - --------------------------------------------------------------------------------------------------------------------------------- 1,285,000 Dade International, Inc. 144A sr. sub. notes 11 1/8s, 2006 1,346,038 1,000,000 Wright Medical Technology, Inc. sr. secd. notes Ser. B, 10 3/4s, 2000 985,000 -------------- 2,331,038 Metals and Mining (0.3%) - --------------------------------------------------------------------------------------------------------------------------------- 2,675,000 Great Lakes Carbon Corp. sr. notes 10s, 2006 2,755,250 690,000 Renco Metals, Inc. sr. notes 11 1/2s, 2003 703,800 -------------- 3,459,050 Motion Picture Distribution (1.0%) - --------------------------------------------------------------------------------------------------------------------------------- 4,750,000 Act III Theatres, Inc. sr. sub. notes 11 7/8s, 2003 5,165,625 1,670,000 Cinemark Mexico notes 12s, 2003 (Mexico) 1,553,100 4,500,000 Cinemark USA sr. notes 12s, 2002 4,933,125 -------------- 11,651,850 Office Equipment (0.2%) - --------------------------------------------------------------------------------------------------------------------------------- 2,500,000 United Stationer Supply, Inc. sr. sub. notes 12 3/4s, 2005 2,687,500 Oil and Gas (0.6%) - --------------------------------------------------------------------------------------------------------------------------------- 2,135,000 Chesapeake Energy Corp. sr. notes 12s, 2001 2,311,138 490,000 Cliffs Drilling Co. 144A sr. notes 10 1/4s, 2003 488,775 800,000 Maxus Energy Corp. notes 9 3/8s, 2003 772,000 4,150,000 TransTexas Gas Corp. sr. secd. notes 11 1/2s, 2002 4,129,250 -------------- 7,701,163 Paging (0.3%) - --------------------------------------------------------------------------------------------------------------------------------- 3,000,000 Pagemart Nationwide, Inc. sr. disc. notes stepped-coupon zero % (15s, 2/1/00), 2005 ++ 2,032,500 2,800,000 Pagemart, Inc. sr. disc. notes stepped-coupon zero % (12 1/4s, 11/1/98), 2003 ++ 2,107,000 -------------- 4,139,500 Paper and Forest Products (0.6%) - --------------------------------------------------------------------------------------------------------------------------------- 1,975,000 APP International Finance Co. notes 11 3/4s, 2005 (Netherlands) 2,054,000 1,100,000 Domtar Inc. deb. 9 1/2s, 2016 (Canada) 1,105,500 1,205,000 Florida Coast Paper LLC 144A 1st. mtge. 12 3/4s, 2003 1,256,213 2,950,000 Gaylord Container Corp. sr. sub. disc. deb. 12 3/4s, 2005 3,134,375 -------------- 7,550,088 Publishing (0.8%) - --------------------------------------------------------------------------------------------------------------------------------- 4,250,000 American Media Operation, Inc. sr. sub. notes 11 5/8s, 2004 4,313,750 500,000 Marvel Holdings, Inc. sr. notes Ser. B, zero %, 1998 397,500 5,955,000 Marvel Parent Holdings, Inc. sr. secd. disc. notes zero %, 1998 4,704,450 -------------- 9,415,700 Real Estate (0.2%) - --------------------------------------------------------------------------------------------------------------------------------- 1,900,000 Chelsea Piers 1st mtge. Ser. B, 12 1/2s, 2004 1,776,500 90,000 Chelsea Piers 144A 1st mtge. stepped-coupon Ser. B, 11s, (11s, 6/15/99), 2009 ++ 84,150 -------------- 1,860,650 Retail (1.6%) - --------------------------------------------------------------------------------------------------------------------------------- 8,007,000 Apparel Retailers, Inc. deb. stepped-coupon Ser. B, zero % (12 3/4s, 8/15/98), 2005 ++ 6,325,530 4,630,000 Brylane L.P. sr. sub. notes 10s, 2003 4,491,100 4,000,000 Finlay Enterprises, Inc. sr. disc. deb. stepped-coupon zero % (12s, 5/1/98), 2005 ++ 3,190,000 1,200,000 Finlay Enterprises, Inc. sr. notes 10 5/8s, 2003 1,185,000 545,000 Guitar Center Management 144A sr. notes 11s, 2006 550,450 1,195,000 Loehmanns, Inc. sr. notes 11 7/8s, 2003 1,233,838 1,600,000 Mothers Work, Inc. sr. notes 12 5/8s, 2005 1,700,000 -------------- 18,675,918 Steel (0.3%) - --------------------------------------------------------------------------------------------------------------------------------- 3,750,000 Ispat Mexicana, S.A. 144A deb. 10 3/8s, 2001 (Mexico) 3,637,500 Telecommunication (3.1%) - --------------------------------------------------------------------------------------------------------------------------------- 1,860,000 American Communication Services, Inc. sr. disc. notes stepped-coupon zero % (12 3/4s, 4/1/01), 2006 ++ 934,650 3,110,000 Brooks Fiber Properties 144A sr. disc. notes stepped-coupon zero % (10 7/8s, 3/1/01), 2006 ++ 1,617,200 4,550,000 Call-Net Enterprises sr. disc. notes stepped-coupon zero % (13 1/4s, 12/1/99), 2004 ++ 3,332,875 1,695,000 Fonorola, Inc. sr. notes 12 1/2s, 2002 (Canada) 1,830,600 5,176,000 GST Telecommunications, Inc. company guaranty stepped-coupon zero % (13 7/8s, 15/15/00), 2005 ++ 2,963,260 7,720,000 Intelcom Group, Inc. sr. disc. notes stepped-coupon zero % (13 1/2s, 9/15/00), 2005 ++ 4,612,700 3,025,000 Intermedia Communications of Florida sr. notes Ser. B, 13 1/2s, 2005 3,380,438 6,125,000 International Cabletel, Inc. sr. notes stepped-coupon Ser. B, zero % (11 1/2s, 2/1/01), 2006 ++ 3,521,875 5,175,000 MFS Communications sr. disc. notes stepped-coupon zero % (9 3/8s, 1/15/99), 2004 ++ 3,881,250 5,500,000 MFS Communications sr. disc. notes stepped-coupon zero % (8 7/8s, 1/1/01), 2006 ++ 3,231,250 1,425,000 Nextlink Communications, Inc. 144A sr. notes 12 1/2s, 2006 1,382,250 4,650,000 Rogers Cantel, Inc. deb. 9 3/8s, 2008 (Canada) 4,510,500 3,520,000 Teleport Communications Group Inc. sr. disc. notes stepped-coupon zero % (11 1/8s, 7/1/01), 2007 ++ 1,936,000 -------------- 37,134,848 Textiles (0.2%) - --------------------------------------------------------------------------------------------------------------------------------- 1,425,000 Polysindo International Finance company guaranty 11 3/8s, 2006 (Indonesia) 1,460,625 804,000 Reeves Industries Inc. sub. deb. 13 3/4s, 2001 719,580 -------------- 2,180,205 -------------- Total Corporate Bonds and Notes (cost $391,270,141) $ 384,472,674 U.S. GOVERNMENT AND AGENCY OBLIGATIONS (31.4%) * PRINCIPAL AMOUNT VALUE U.S. Government Agency Mortgage Pass-Through Certificates (23.1%) - --------------------------------------------------------------------------------------------------------------------------------- Federal National Mortgage Association $19,681,497 8s, with various due dates from May 1, 2026 to June 1, 2026 19,786,007 47,890,000 8s, TBA, August 16, 2026 48,144,296 59,114,887 7 1/2s, with various due dates from January 1, 2026 to July 1, 2026 58,154,268 38,829,535 7s, with various due dates from July 1, 2025 to April 1, 2026 37,251,892 75,583 6 1/2s, with various due dates from June 1, 2023 to February 1, 2024 70,481 Government National Mortgage Association 429,988 8 1/2s, November 15, 2024 422,463 71,851,354 7 1/2s, with various due dates from December 15, 2023 to April 15, 2026 70,597,859 44,462,773 7s, with various due dates from July 1, 2025 to July 15, 2026 42,517,527 322,917 6 1/2s, October 15, 2025 317,266 -------------- 277,262,059 U.S. Treasury Obligations (8.3%) - --------------------------------------------------------------------------------------------------------------------------------- 21,785,000 U.S. Treasury Bonds 7 7/8s, February 15, 2021 23,721,904 U.S. Treasury Notes 18,915,000 9 1/8s, May 15, 1999 20,215,406 8,135,000 8 7/8s, November 15, 1998 8,574,778 10,770,000 8 1/2s, February 15, 2000 11,446,464 3,890,000 7s, July 15, 2006 3,945,899 11,135,000 6 7/8s, May 15, 2006 11,197,579 10,975,000 6 1/4s, February 15, 2003 10,734,867 9,860,000 6 1/4s, April 30, 2001 9,733,693 -------------- 99,570,590 Total U.S. Government and Agency Obligations (cost $380,300,297) $ 376,832,649 FOREIGN GOVERNMENT BONDS AND NOTES (24.8%) * PRINCIPAL AMOUNT VALUE - --------------------------------------------------------------------------------------------------------------------------------- AUD 15,425,000 Australia (Government of) bonds Ser. 1002, 10s, 2002 $ 13,043,435 AUD 9,735,000 Australia (Government of) bonds Ser. 904, 9s, 2004 7,848,019 AUD 5,388,000 Australia (Government of) bonds Ser. 400, 7s, 2000 4,076,960 CAD 23,185,000 Canada (Government of) deb. 8 3/4s, 2005 18,232,454 CAD 40,985,000 Canada (Government of) deb. 7 1/2s, 2001 30,553,811 DKK 96,295,000 Denmark (Government of) bonds 8s, 2003 17,997,008 DKK 35,725,000 Denmark (Government of) bonds 7s, 2004 6,243,411 FRF 70,105,000 France Treasury Bill 7s, 2000 14,905,650 FRF 46,680,000 France Treasury Bill 4 1/2s, 1998 9,324,780 DEM 20,935,000 Germany (Federal Republic of) bonds Ser. 91, 8 3/8s, 2001 15,996,064 DEM 22,010,000 Germany (Federal Republic of) bonds 7 3/8s, 2005 15,964,990 DEM 6,000,000 Germany (Federal Republic of) bonds 6 7/8s, 2005 4,217,572 DEM 37,365,000 Germany (Federal Republic of) bonds 5 3/4s, 2000 25,972,953 DEM 32,645,000 Germany (Federal Republic of) bonds Ser. 108, 5 3/4s, 1998 22,913,831 DEM 28,390,000 Germany (Federal Republic of) bonds Ser. 118, 5 1/4s, 2001 19,261,680 USD 1,412,000 Morocco (Government of) Ser. A FRB 6.437s, 2009 1,027,230 USD 7,990,000 Russia (Government of) non performing loan + 4,394,500 ZAR 9,147,000 South Africa (Republic of) bonds Ser. 153, 13s, 2010 1,689,097 GBP 12,035,000 United Kingdom Treasury bonds 8 1/2s, 2007 19,428,006 GBP 6,720,000 United Kingdom Treasury bonds 7 1/4s, 1998 10,609,583 GBP 9,200,000 United Kingdom Treasury bonds 6 3/4s, 2004 13,407,440 GBP 11,965,000 United Kingdom Treasury notes 7s, 2001 18,314,956 USD 2,330,000 United Mexican States bonds 11 1/2s, 2026 2,120,300 -------------- Total Foreign Government Bonds and Notes (cost $290,839,876) $ 297,543,730 BRADY BONDS (2.6%) * PRINCIPAL AMOUNT VALUE - --------------------------------------------------------------------------------------------------------------------------------- $8,272,000 Argentina (Republic of) FRN Ser. L-GL 6.438s, 2023 $ 5,531,900 2,403,000 Argentina (Republic of) bonds stepped-coupon Ser. L-GP 5s, (5 1/4s, 3/31/97), 2023 ++ 1,273,590 1,108,800 Argentina (Republic of) FRN 6.313s, 2005 837,144 3,733,000 Brazil (Republic of) annual reset bonds 4 1/4s, 2024 2,608,434 4,501,826 Brazil (Republic of) FRB 8s, 2014 (diamond) 2,774,250 4,900,000 Brazil (Republic of) FRN Ser. EI-L, 6 1/2s, 2006 3,999,625 2,478,000 Ecuador (Government of) FRN 6.063s, 2025 1,421,753 2,709,000 Poland (Government of) FRN 6.438s, 2024 2,553,233 3,173,000 United Mexican States deb. Ser. A, 6 1/4s, 2019 2,038,653 7,263,000 United Mexican States deb. Ser. B, 6 1/4s, 2019 4,666,478 4,500,000 Venezuela (Government of) FRN Ser. DL 6.625s, 2007 3,273,750 -------------- Total Brady Bonds (cost $30,043,831) $30,978,810 PREFERRED STOCKS (1.9%) * NUMBER OF SHARES VALUE - --------------------------------------------------------------------------------------------------------------------------------- 27,207 Cablevision Systems Corp. 144A Ser. L, $11.125, pfd. (2 double daggers) $ 2,533,652 63,750 California Federal Bank Ser. B, $10.625, exch. pfd. 6,677,813 6,875 Chevy Chase Savings Bank $13.00, pfd. 207,969 34,730 Diva Systems Corp. Ser. C., $6.00, pfd. 299,546 49,000 First Nationwide Bank $11.50, pfd. 5,390,000 20,581 K-III Communications $3.85, pfd. (2 double daggers) 1,986,067 74,450 SDW Hldgs Corp. 144A $3.50, pfd. 2,159,050 3,741 Time Warner, Inc. 144A Ser. K, $1.025 pfd. 3,712,943 -------------- Total Preferred Stocks (cost $22,313,848) $ 22,967,040 UNITS (1.3%) * NUMBER OF UNITS VALUE - --------------------------------------------------------------------------------------------------------------------------------- 385 Celcaribe S.A. 144A units stepped-coupon zero % (13 1/2s, 3/15/98), 2004 ++ $ 4,081,000 5,360 Cellnet Data Systems Inc. units stepped-coupon zero % (13s, 6/15/00), 2005 ++ 3,765,400 700 Cobblestone Holdings, Inc. 144A units zero %, 2004 262,500 1,715 Diva Systems Corp. 144A units stepped-coupon zero % (13s, 5/15/01), 2006 ++ 930,388 2,000 Fitzgerald Gaming Co. units 13s, 2002 1,560,000 2,815 Hyperion Communications 144A units stepped-coupon zero % (13s, 4/15/01), 2003 ++ 1,491,950 468 ICF Kaiser International, Inc. units 13s, 2003 453,960 1,900 Interact Systems 144A units stepped-coupon zero % (14s, 8/1/99), 2003 ++ 1,254,000 13,760 PSF Finance 144A exch. pfd. units 12 1/2s, 2000 (acquired various dates from 2/8/93 to 9/15/93, cost $1,376,000)+(double dagger) 619,200 675 Terex Corp. 144A units 13 3/4s, 2002 712,125 -------------- Total Units (cost $14,190,015) $ 15,130,523 ASSET-BACKED SECURITIES (1.0%) * PRINCIPAL AMOUNT VALUE - --------------------------------------------------------------------------------------------------------------------------------- $4,135,000 Chemical Master Credit Card Trust Ser. 95-2, Class A, 6.23s, 2003 $ 4,043,244 8,240,000 Sears Credit Account Master Trust Ser. 95-5, Class A, 6.05s, 2004 7,794,463 -------------- Total Asset-Backed Securities (cost $12,471,343) $ 11,837,707 CONVERTIBLE PREFERRED STOCKS (0.8%) * NUMBER OF SHARES VALUE - --------------------------------------------------------------------------------------------------------------------------------- 48,632 Cablevision Systems Corp. Ser. H, $11.75, cv. pfd. $ 4,668,672 66,330 Conseco, Inc. Ser. D, $3.25, cv. pfd. 4,153,916 18,000 Granite Broadcasting $1.938, cv. pfd. 1,167,750 -------------- Total Convertible Preferred Stocks (cost $8,985,546) $ 9,990,338 COMMON STOCKS (0.6%) * NUMBER OF SHARES VALUE - --------------------------------------------------------------------------------------------------------------------------------- 86,149 Computervision Corp. + $ 635,349 60,000 Exide Corp. 1,612,500 136,975 Grand Union Co. (acquired 6/20/95, cost $7,750,000)(double dagger)+ 838,972 10,934 IFINT Diversified Holdings 144A + 537,133 114,260 Loehmanns' Holdings, Inc. (acquired 9/27/93, cost $280,117)(double dagger)+ 2,095,243 1,658 PMI Holdings Corp. 144A + 331,600 1,186 Premium Holdings L.P. 144A + 29,643 46 Southland Corp. + 157 36,750 Specialty Foods Corp. + 18,375 28,813 Total Renal Care Holdings, Inc. + 772,549 20,790 Total Renal Care Holdings, Inc. (acquired various dates from 8/4/94 to 1/25/95, cost $33,330)(double dagger)+ 743,243 -------------- Total Common Stocks (cost $11,047,714) $7,614,764 WARRANTS (0.3%) *+ EXPIRATION NUMBER OF WARRANTS DATE VALUE - --------------------------------------------------------------------------------------------------------------------------------- 95,000 Becker Gaming Corp. 144A 11/15/00 $ 19,000 8,223 Casino America, Inc. 144A 11/15/96 822 16,560 Casino Magic Finance Corp. 144A 10/14/96 828 32,700 Cinemark Mexico USA, Inc. 144A 8/1/03 302,966 5,375 County Seat Holdings, Inc. 144A 10/15/98 53,750 120,047 Gaylord Container Corp. 144A 11/1/02 795,311 700 Grand Union Co. (acquired 6/20/95, cost $280)(double dagger) 6/16/00 224 1,399 Grand Union Co. (acquired 6/20/95, cost $140)(double dagger) 6/16/00 56 187,200 Insight Communications Co. 144A 3/30/98 514,800 20,856 Intelcom Group 9/15/05 239,844 3,025 Intermedia Communications 144A 6/1/00 121,000 10,452 Louisiana Casino Cruises, Inc. 144A 12/1/98 156,780 12,880 Pagemart, Inc. 144A 12/31/03 111,090 5,600 Petracom Hldgs., Inc. 144A 8/1/05 39,900 46,534 President Riverboat Casinos, Inc. 144A 9/30/99 41,881 31,620 President Riverboat Casinos, Inc. 144A 9/23/96 1,581 7,445 SDW Hldgs Corp.144A 4/1/04 96,785 60,000 Southdown, Inc. 144A 10/31/96 300,000 77 Telemedia Broadcasting Corp. 144A 4/1/04 57,870 24,000 UCC Investor Holding, Inc. 144A 10/30/99 336,000 455 Wright Medical Technology, Inc. 144A 6/30/03 59,134 -------------- Total Warrants (cost $2,747,850) $3,249,622 CONVERTIBLE BONDS AND NOTES (0.3%) * PRINCIPAL AMOUNT VALUE - --------------------------------------------------------------------------------------------------------------------------------- $647,000 GST Telecommunications, Inc. cv. sr. disc. notes stepped-coupon zero % (13 7/8s, 15/15/00), 2005 ++ $ 647,000 3,483,000 Pricellular Wireless Corp. 144A cv. sub. notes stepped-coupon zero % (10 3/4s, 8/15/00), 2004 ++ 2,995,380 -------------- Total Convertible Bonds and Notes (cost $2,411,346) $ 3,642,380 PURCHASED OPTIONS OUTSTANDING (0.1%)(cost $953,046)* EXPIRATION DATE/ NUMBER OF CONTRACTS STRIKE PRICE VALUE - --------------------------------------------------------------------------------------------------------------------------------- JPY 6,633,000,000 Japanese Government 10 Yr Bonds August 96/ $1,181,134 JPY 117.25 SHORT-TERM INVESTMENTS (6.1%) * PRINCIPAL AMOUNT VALUE - --------------------------------------------------------------------------------------------------------------------------------- $4,805,000 Federal Home Loan Bank effective yield of 5.20%, August 8, 1996 $ 4,800,142 15,715,000 Federal Home Loan Bank effective yield of 5.20%, August 7, 1996 15,701,380 20,000,000 Federal Home Loan Mortgage Corp. effective yield of 5.27%, September 23, 1996 19,844,828 NZD 6,289,240 New Zealand T Bill zero %, September 18, 1996 6,263,868 MXP 843,543 Mexican T Bill zero %, June 5, 1997 850,996 MXP 383,652 Mexican T Bill zero %, January 9, 1997 442,644 $1,754,376 U.S. Dollar Certificate of Deposit, zero %, April 16, 1997 (Issued by J.P. Morgan Securities, Inc. The principal at redemption is linked to the bid price for the Polish Treasury Bill, at maturity, and the change in the spot rate of the Polish Zloty from issue date to maturity date.) 1,498,713 23,193,000 Interest in $500,000,000 joint repurchase agreement dated July 31, 1996 with Lehman Brothers, Inc., due August 1, 1996 with respect to various U.S. Treasury obligations--maturity value $23,196,640 for an effective yield of 5.65% 23,196,640 -------------- Total Short-Term Investments (cost $72,391,528) $72,599,211 - --------------------------------------------------------------------------------------------------------------------------------- Total Investments (cost $1,239,966,381) $1,238,040,582 - --------------------------------------------------------------------------------------------------------------------------------- * Percentages indicated are based on net assets of $1,199,854,271. *** The aggregate identified cost on a tax basis is $1,242,564,041, resulting in gross unrealized appreciation and depreciation of $37,449,977 and $41,973,436, respectively, or net unrealized depreciation of $4,523,459. + Non-income-producing security. ++ The interest rate and date shown parenthetically represent the new interest rate to be paid and the date the fund will begin receiving interest at this rate. (double dagger) Restricted, excluding 144A securities, as to public resale. The total market value of restricted securities held at July 31, 1996 was $10,539,157 or less than 0.1% of net assets. ++++ Income may be received in cash or additional securities at the discretion of the issuer. (diamond) A portion of the income will be received in additional securities. 144A after the name of a security represents those exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. The rate shown FRB and FRN are the current interest rates shown at July 31, 1996, which are subject to change based on the terms of the security. TBA after the name of a security represents to be announced securities. - -------------------------------------------------------------------------------------------- Forward Currency Contracts to Buy at July 31, 1996 (Aggregate Face Value $254,129,284) Aggregate Face Delivery Unrealized Market Value Value Date Appreciation - -------------------------------------------------------------------------------------------- Danish Krone $ 1,942,146 $ 1,857,573 9/18/96 $ 84,573 Deutschemarks 75,380,358 73,308,356 9/18/96 2,072,002 French Francs 15,496,401 14,807,635 9/18/96 688,766 Italian Lira 42,214,960 42,105,674 9/18/96 109,286 Japanese Yen 85,762,740 84,471,931 9/18/96 1,290,809 Spanish Peseta 14,625,788 14,203,188 9/18/96 422,600 Swedish Krona 618,003 608,229 9/18/96 9,774 Swiss Francs 22,940,677 22,766,698 9/18/96 173,979 - -------------------------------------------------------------------------------------------- $ 4,851,789 - -------------------------------------------------------------------------------------------- Forward Currency Contracts to Sell at July 31, 1996 (Aggregate Face Value $231,779,904) Unrealized Market Aggregate Face Delivery Appreciation/ Value Value Date (Depreciation) - -------------------------------------------------------------------------------------------- Australian Dollars $19,195,161 $ 19,591,792 9/18/96 $ 396,631 British Pounds 31,581,287 30,948,707 9/18/96 (632,580) Canadian Dollars 34,122,787 34,165,800 9/18/96 43,013 Danish Krone 16,210,977 15,631,398 9/18/96 (579,579) Deutschemarks 753,924 744,434 4/16/97 (9,490) Deutschemarks 66,468,984 64,589,583 9/18/96 (1,879,401) Italian Lira 30,883,919 30,562,887 9/18/96 (321,032) Japanese Yen 10,445,865 10,265,017 9/18/96 (180,848) Swedish Krona 6,397,357 6,378,040 9/18/96 (19,317) Swiss Francs 19,179,108 18,902,246 9/18/96 (276,862) - -------------------------------------------------------------------------------------------- $ (3,459,465) - -------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements.
Statement of assets and liabilities July 31, 1996 Assets - ----------------------------------------------------------------------------------------------------------------- Investments in securities, at value (identified cost $1,239,966,381) (Note 1) $1,238,040,582 - ----------------------------------------------------------------------------------------------------------------- Cash 2,403,948 - ----------------------------------------------------------------------------------------------------------------- Dividends, interest and other receivables 20,545,172 - ----------------------------------------------------------------------------------------------------------------- Receivable for securities sold 19,762,966 - ----------------------------------------------------------------------------------------------------------------- Receivable for open forward currency contracts 5,526,135 - ----------------------------------------------------------------------------------------------------------------- Receivable for closed forward currency contracts 2,567,858 - ----------------------------------------------------------------------------------------------------------------- Total assets 1,288,846,661 Liabilities - ----------------------------------------------------------------------------------------------------------------- Distributions payable to shareholders 7,735,695 - ----------------------------------------------------------------------------------------------------------------- Payable for securities purchased 68,891,601 - ----------------------------------------------------------------------------------------------------------------- Payable for compensation of Manager (Note 2) 2,060,135 - ----------------------------------------------------------------------------------------------------------------- Payable for investor servicing and custodian fees (Note 2) 374,849 - ----------------------------------------------------------------------------------------------------------------- Payable for compensation of Trustees (Note 2) 3,522 - ----------------------------------------------------------------------------------------------------------------- Payable for administrative services (Note 2) 1,874 - ----------------------------------------------------------------------------------------------------------------- Payable for open forward currency contracts 4,133,811 - ----------------------------------------------------------------------------------------------------------------- Payable for closed forward currency contracts 5,559,726 - ----------------------------------------------------------------------------------------------------------------- Other accrued expenses 231,177 - ----------------------------------------------------------------------------------------------------------------- Total liabilities 88,992,390 - ----------------------------------------------------------------------------------------------------------------- Net assets $1,199,854,271 Represented by - ----------------------------------------------------------------------------------------------------------------- Paid-in-capital (Notes 1 and 4) 1,227,255,458 - ----------------------------------------------------------------------------------------------------------------- Distributions in excess of net investment income (Note 1) (9,585,083) - ----------------------------------------------------------------------------------------------------------------- Accumulated net realized loss on investments and foreign currency transactions (Note 1) (17,364,808) - ----------------------------------------------------------------------------------------------------------------- Net unrealized depreciation of investments and assets and liabilities in foreign currencies (451,296) - ----------------------------------------------------------------------------------------------------------------- Total -- Representing net assets applicable to capital shares outstanding $1,199,854,271 - ----------------------------------------------------------------------------------------------------------------- Computation of net asset value and offering price - ----------------------------------------------------------------------------------------------------------------- Net asset value per share ($1,199,854,271 divided by 140,679,960 shares) $8.53 - ----------------------------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements
Statement of operations Year ended July 31, 1996 Investment Income: - ----------------------------------------------------------------------------------------------------------- Interest (net of foreign tax of $341,025) $97,314,717 - ----------------------------------------------------------------------------------------------------------- Dividends 2,165,701 - ----------------------------------------------------------------------------------------------------------- Total investment income 99,480,418 Expenses: - ----------------------------------------------------------------------------------------------------------- Compensation of Manager (Note 2) 8,223,346 - ----------------------------------------------------------------------------------------------------------- Investor servicing and custodian fees (Note 2) 1,254,533 - ----------------------------------------------------------------------------------------------------------- Compensation of Trustees (Note 2) 41,244 - ----------------------------------------------------------------------------------------------------------- Administrative services (Note 2) 23,469 - ----------------------------------------------------------------------------------------------------------- Auditing 92,960 - ----------------------------------------------------------------------------------------------------------- Legal 42,980 - ----------------------------------------------------------------------------------------------------------- Exchange listing fees 118,429 - ----------------------------------------------------------------------------------------------------------- Other 374,625 - ----------------------------------------------------------------------------------------------------------- Total expenses 10,171,586 - ----------------------------------------------------------------------------------------------------------- Expense reduction (Note 2) (128,974) - ----------------------------------------------------------------------------------------------------------- Net expenses 10,042,612 - ----------------------------------------------------------------------------------------------------------- Net investment income 89,437,806 - ----------------------------------------------------------------------------------------------------------- Net realized gain on investments (Notes 1 and 3) 45,924,404 - ----------------------------------------------------------------------------------------------------------- Net realized gain on written options (Notes 1 and 3) 316,308 - ----------------------------------------------------------------------------------------------------------- Net realized loss on forward currency contracts and foreign currency translation (Note 1) (11,309,071) - ----------------------------------------------------------------------------------------------------------- Net unrealized appreciation on forward currency contracts and foreign currency translation during the year 5,234,636 - ----------------------------------------------------------------------------------------------------------- Net unrealized depreciation of investments during the year (27,182,419) - ----------------------------------------------------------------------------------------------------------- Net gain on investments 12,983,858 - ----------------------------------------------------------------------------------------------------------- Net increase in net assets resulting from operations $102,421,664 - ----------------------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements
Statement of changes in net assets Year ended July 31 ----------------------------------- 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------ Increase in net assets - ------------------------------------------------------------------------------------------------------------------------------ Operations: - ------------------------------------------------------------------------------------------------------------------------------ Net investment income $89,437,806 $95,235,357 - ------------------------------------------------------------------------------------------------------------------------------ Net realized gain (loss) on investments and foreign currency transactions 34,931,641 (34,225,964) - ------------------------------------------------------------------------------------------------------------------------------ Net unrealized appreciation (depreciation) of investments and assets and liabilities in foreign currencies (21,947,783) 57,992,724 - ------------------------------------------------------------------------------------------------------------------------------ Net increase in net assets resulting from operations 102,421,664 119,002,117 - ------------------------------------------------------------------------------------------------------------------------------ Distributions to shareholders - ------------------------------------------------------------------------------------------------------------------------------ From net investment income (91,016,918) (80,928,763) - ------------------------------------------------------------------------------------------------------------------------------ In excess of net investment income (1,695,936) -- - ------------------------------------------------------------------------------------------------------------------------------ From return of capital -- (14,067,170) - ------------------------------------------------------------------------------------------------------------------------------ Shares repurchased (Note 4) (229,350) (357,250) - ------------------------------------------------------------------------------------------------------------------------------ Total increase in net assets 9,479,460 23,648,934 - ------------------------------------------------------------------------------------------------------------------------------ Net Assets - ------------------------------------------------------------------------------------------------------------------------------ Beginning of year 1,190,374,811 1,166,725,877 - ------------------------------------------------------------------------------------------------------------------------------ End of year (including distributions in excess of net investment income of $9,585,083 and $7,889,148, respectively) $1,199,854,271 $1,190,374,811 - ------------------------------------------------------------------------------------------------------------------------------ Number of fund shares - ------------------------------------------------------------------------------------------------------------------------------ Shares outstanding at beginning of year 140,709,960 140,759,960 - ------------------------------------------------------------------------------------------------------------------------------ Shares repurchased (30,000) (50,000) - ------------------------------------------------------------------------------------------------------------------------------ Shares outstanding at end of year 140,679,960 140,709,960 - ------------------------------------------------------------------------------------------------------------------------------ The accompanying notes are an integral part of these financial statements
Financial highlights (For a share outstanding throughout the period) Year ended July 31 --------------------------------------------------- 1996 1995 1994 --------------------------------------------------- Net asset value, beginning of year $8.46 $8.29 $8.87 - --------------------------------------------------------------------------------------------------------------------------- Investment operations - --------------------------------------------------------------------------------------------------------------------------- Net investment income .64 .68 .64 - --------------------------------------------------------------------------------------------------------------------------- Net realized and unrealized gain (loss) on investments .09 .17 (.50) - --------------------------------------------------------------------------------------------------------------------------- Total from investment operations .73 .85 .14 - --------------------------------------------------------------------------------------------------------------------------- Less distributions: - --------------------------------------------------------------------------------------------------------------------------- From net investment income (.65) (.58) (.70) - --------------------------------------------------------------------------------------------------------------------------- In excess of net investment income (.01) -- (.02) - --------------------------------------------------------------------------------------------------------------------------- From tax return of capital -- (.10) -- - --------------------------------------------------------------------------------------------------------------------------- Total distributions (.66) (.68) (.72) - --------------------------------------------------------------------------------------------------------------------------- Net asset value, end of year $8.53 $8.46 $8.29 - --------------------------------------------------------------------------------------------------------------------------- Total investment return at market value (%)(a) 7.94 6.86 .95 - --------------------------------------------------------------------------------------------------------------------------- Market value, end of year $7.38 $7.44 $7.63 - --------------------------------------------------------------------------------------------------------------------------- Net assets, end of year (in thousands) $1,199,854 $1,190,375 $1,166,726 - --------------------------------------------------------------------------------------------------------------------------- Ratio of expenses to average net assets (%)(b) .85 .82 .86 - --------------------------------------------------------------------------------------------------------------------------- Ratio of net investment income to average net assets (%) 7.43 8.29 7.30 - --------------------------------------------------------------------------------------------------------------------------- Portfolio turnover (%) 332.00 196.83 242.29 - --------------------------------------------------------------------------------------------------------------------------- Financial highlights (continued) (For a share outstanding throughout the period) ---------------------------- 1993 1992 ---------------------------- Net asset value, beginning of year $8.51 $7.90 - ------------------------------------------------------------------------------------------------------ Investment operations - ------------------------------------------------------------------------------------------------------ Net investment income .71 .75 - ------------------------------------------------------------------------------------------------------ Net realized and unrealized gain (loss) on investments .42 .73 - ------------------------------------------------------------------------------------------------------ Total from investment operations 1.13 1.48 - ------------------------------------------------------------------------------------------------------ Less distributions: - ------------------------------------------------------------------------------------------------------ From net investment income (.71) (.75) - ------------------------------------------------------------------------------------------------------ In excess of net investment income (.06) (.12) - ------------------------------------------------------------------------------------------------------ From tax return of capital -- -- - ------------------------------------------------------------------------------------------------------ Total distributions (.77) (.87) - ------------------------------------------------------------------------------------------------------ Net asset value, end of year $8.87 $8.51 - ------------------------------------------------------------------------------------------------------ Total investment return at market value (%)(a) 1.92 27.42 - ------------------------------------------------------------------------------------------------------ Market value, end of year $8.25 $8.88 - ------------------------------------------------------------------------------------------------------ Net assets, end of year (in thousands) $1,249,193 $1,194,958 - ------------------------------------------------------------------------------------------------------ Ratio of expenses to average net assets (%)(b) .84 .88 - ------------------------------------------------------------------------------------------------------ Ratio of net investment income to average net assets (%) 8.14 9.05 - ------------------------------------------------------------------------------------------------------ Portfolio turnover (%) 250.65 203.27 - ------------------------------------------------------------------------------------------------------ (a) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges. (b) The ratio of expenses to average net assets for the period ended July 31, 1996 includes amounts paid through expense offset arrangements. Prior period ratios exclude these amounts. (Note 2)
Note 1 Significant accounting policies The fund is registered under the Investment Company Act of 1940, as amended, as a non-diversified, closed-end management investment company. The fund's investment objective is to seek high current income consistent with the preservation of capital by allocating its investments among the U.S. government sector, high yield sector and international sector of the fixed income securities market. The following is a summary of significant accounting policies consistently followed by the fund in the preparation of its financial statements. The preparation of financial statements is in conformity with generally accepted accounting principles and requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities. Actual results could differ from those estimates. A) Security valuation Investments for which market quotations are readily available are stated at market value, which is determined using the last reported sale price, or, if no sales are reported -- as in the case of some securities traded over-the-counter -- the last reported bid price. Securities quoted in foreign currencies are translated into U.S. dollars at the current exchange rate. Short-term investments having remaining maturities of 60 days or less are stated at amortized cost, which approximates market value, and other investments, including restricted securities, are stated at fair value following procedures approved by the Trustees. Market quotations are not considered to be readily available for debt obligations; such investments are stated at fair value on the basis of valuations furnished by a pricing service, approved by the Trustees or dealers, which determines valuations for normal, institutional-size trading units of such securities using methods based on market transactions for comparable securities and various relationships between securities which are generally recognized by institutional traders. B) Joint trading account Pursuant to an exemptive order issued by the Securities and Exchange Commission, the fund may transfer uninvested cash balances into a joint trading account along with the cash of other registered investment companies managed by Putnam Investment Management, Inc. ("Putnam Management"), the fund's Manager, a wholly-owned subsidiary of Putnam Investments, Inc. and certain other accounts. These balances may be invested in one or more repurchase agreements and/or short-term money market instruments. C) Repurchase agreements The fund, or any joint trading account, through its custodian, receives delivery of the underlying securities, the market value of which at the time of purchase is required to be in an amount at least equal to the resale price, including accrued interest. Putnam Management is responsible for determining that the value of these underlying securities is at all times at least equal to the resale price, including accrued interest. D) Security transactions and related investment income Security transactions are accounted for on the trade date (date the order to buy or sell is executed). Interest income is recorded on the accrual basis. Dividend income is recorded on the ex-dividend date except that certain dividends from foreign securities are recorded as soon as the fund is informed of the ex-dividend date. Discounts on zero coupon bonds, original issue, stepped-coupon bonds and payment in kind bonds are accreted according to the effective yield method. E) Forward currency contracts The fund may engage in forward currency contracts, which are agreements between two parties to buy and sell currencies at a set price on a future date, to protect against a decline in value relative to the U.S. dollar of the currencies in which its portfolio securities are denominated or quoted (or an increase in the value of a currency in which securities a fund intends to buy are denominated, when a fund holds cash reserves and short-term investments). The U.S. dollar value of forward currency contracts is determined using forward currency exchange rates supplied by a quotation service. The market value of the contract will fluctuate with changes in currency exchange rates. The contract is "marked to market" daily and the change in market value is recorded as an unrealized gain or loss. When the contract is closed, the fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. The fund could be exposed to risk if the value of the currency changes unfavorably, if the counterparties to the contracts are unable to meet the terms of their contracts or if the fund is unable to enter into a closing position. F) Foreign currency translation The accounting records of the fund are maintained in U.S. dollars. The market value of foreign securities, currency holdings, other assets and liabilities are recorded in the books and records of the fund after translation to U.S. dollars based on the exchange rates on that day. The cost of each security is determined using historical exchange rates. Income and withholding taxes are translated at prevailing exchange rates when accrued or incurred. The fund does not isolate that portion of realized or unrealized gains or losses resulting from changes in the foreign exchange rate on investments from fluctuations arising from changes in the market prices of the securities. Such fluctuations are included with the net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent net exchange gains or losses on closed forward currency contracts, disposition of foreign currencies and the difference between the amount of investment income and foreign withholding taxes recorded on the fund's books and the U.S. dollar equivalent amounts actually received or paid. Net unrealized gains and losses on foreign currency transactions arise from changes in the value of open forward currency contracts and assets and liabilities other than investments at the period end, resulting from changes in the exchange rate. G) Futures and options contracts The fund may use futures and options contracts to hedge against changes in the values of securities the fund owns or expects to purchase. The fund may also write options on securities it owns or in which it may invest to increase its current returns. The potential risk to the fund is that the change in value of futures and options contracts may not correspond to the change in value of the hedged instruments. In addition, losses may arise from changes in the value of the underlying instruments, if there is an illiquid secondary market for the contracts, or if the counterparty to the contract is unable to perform. Futures contracts are valued at the quoted daily settlement prices established by the exchange on which they trade. Exchange traded options are valued at the last sale price, or if no sales are reported, the last bid price for purchased options and the last ask price for written options. Options traded over-the-counter are valued using prices supplied by dealers. H) TBA purchase commitments The fund may enter into "TBA" (to be announced) purchase commitments to purchase securities for a fixed unit price at a future date beyond customary settlement time. Although the unit price has been established, the principal value has not been finalized. However, the amount of the commitments will not fluctuate more than 1.0% from the principal amount. The fund holds, and maintains until settlement date, cash or high-grade debt obligations in an amount sufficient to meet the purchase price, or the fund may enter into offsetting contracts for the forward sale of other securities it owns. Income on the securities will not be earned until settlement date. TBA purchase commitments may be considered securities in themselves, and involve a risk of loss if the value of the security to be purchased declines prior to the settlement date, which risk is in addition to the risk of decline in the value of the fund's other assets. Unsettled TBA purchase commitments are valued at the current market value of the underlying securities, generally according to the procedures described under Security valuation above. Although the fund will generally enter into TBA purchase commitments with the intention of acquiring securities for their portfolio or for delivery pursuant to options contracts it has entered into, the fund may dispose of a commitment prior to settlement if Putnam Management deems it appropriate to do so. I) Federal taxes It is the policy of the fund to distribute all of its taxable income within the prescribed time and otherwise comply with the provisions of the Internal Revenue Code applicable to regulated investment companies. It is also the intention of the fund to distribute an amount sufficient to avoid imposition of any excise tax under Section 4982 of the Internal Revenue Code of 1986. Therefore, no provision has been made for federal taxes on income, capital gains or unrealized appreciation on securities held and for excise tax on income and capital gains. At July 31, 1996, the fund had a capital loss carryover of approximately $14,767,000 available to offset future capital gains, if any, which will expire on July 31, 2003. J) Distributions to shareholders Distributions to shareholders are recorded by the fund on the ex-dividend date. At certain times, the fund may pay distributions at a level rate even though, as a result of market conditions or investment decisions, the fund may not achieve projected investment results for a given period. The amount and character of income and gains to be distributed are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. These differences include treatment of market discount, realized and unrealized gains and losses on forward foreign currency contracts, losses on wash sale transactions, and post-October loss deferrals. Reclassifications are made to the fund's capital accounts to reflect income and gains available for distribution (or available capital loss carryovers) under income tax regulations. For the year ended July 31, 1996, the fund reclassified $1,579,113 to decrease distributions in excess of net investment income and $11,609,039 to decrease paid-in- capital, with a decrease to accumulated net realized loss on investments of $10,029,926. The calculation of net investment income per share in the financial highlights table excludes these adjustments. Note 2 Management fee, administrative services and other transactions Compensation of Putnam Management, for management and investment advisory services is paid quarterly based on the average weekly net assets of the fund. Such fee is based on the following annual rates: 0.75% of the first $500 million of average weekly net assets, 0.65% of the next $500 million, 0.60% of the next $500 million and 0.55% of any amount over $1.5 billion subject, under current law, to reduction in any year by the amount of certain brokerage commissions and fees (less expenses) received by affiliates of Putnam Management on the fund's portfolio transactions. The fund reimburses Putnam Management for the compensation and related expenses of certain officers of the fund and their staff who provide administrative services to the fund. The aggregate amount of all such reimbursements is determined annually by the Trustees. Custodial functions for the fund's assets are provided by Putnam Fiduciary Trust Company (PFTC), a wholly-owned subsidiary of Putnam Investments, Inc. Investor servicing agent functions are provided by Putnam Investor Services, a division of PFTC. For the year ended July 31, 1996, fund expenses were reduced by $128,974 under expense offset arrangements with PFTC. Investor servicing and custodian fees reported in the Statement of operations exclude these credits. The fund could have invested a portion of the assets utilized in connection with the expense offset arrangements in an income producing asset if it had not entered into such arrangements. Trustees of the fund receive an annual Trustees fee of $2,210 and an additional fee for each Trustee's meeting attended. Trustees who are not interested persons of Putnam Management and who serve on committees of the Trustees receive additional fees for attendance at certain committee meetings. The fund adopted a Trustee Fee Deferral Plan (the "Plan") which allows the Trustees to defer the receipt of all or a portion of Trustees Fees payable on or after July 1, 1995. The deferred fees remain in the fund and are invested in the fund or in other Putnam funds until distribution in accordance with the Plan. Note 3 Purchase and sales of securities During the year ended July 31, 1996, purchases and sales of investment securities other than U.S. government obligations and short-term investments aggregated $1,254,476,836 and $1,239,565,151, respectively. Purchases and sales of U.S. government obligations aggregated $2,588,904,497 and $2,590,073,371, respectively. In determining the net gain or loss on securities sold, the cost of securities has been determined on the identified cost basis. Written option transactions during the year are summarized as follows: Contract Premiums Amounts Received - ---------------------------------------------------- Contracts outstanding at beginning of year $ -- $ -- Options opened 88,260,000 316,308 Options expired (88,260,000) (316,308) Options closed -- -- - ---------------------------------------------------- Written options outstanding at end of year $ -- $ -- - ---------------------------------------------------- Note 4 Share Repurchase Program The Trustees have authorized the fund to repurchase up to 7,000,000 of its shares in the open market. Repurchases will only be made when the fund's shares are trading at less than net asset value and at such times and amounts as are believed to be in the best interests of the fund's shareholders. Any repurchases of shares will have the effect of increasing the net asset value per share of remaining shares outstanding. For the year ended July 31, 1996 the fund repurchased 30,000 shares for $229,350 which reflects a discount from net asset value of $26,800 or 10.46%. Federal tax information (Unaudited) The Form 1099 you receive in January 1997 will show the tax status of all distributions paid to your account in calendar 1996.
Selected quarterly data (Unaudited) Net realized and Net increase (decrease) Investment Net investment unrealized gain in net assets income income (loss) on investments from operations - ---------------------------------------------------------------------------------------------------------- Quarter Per Per Per Per Ended Total Share Total Share Total Share Total Share - ---------------------------------------------------------------------------------------------------------- 10/31/94 $26,313,460 $.19 $23,947,987 $.17 $(19,690,617) $(.14) $4,257,370 $.03 - ---------------------------------------------------------------------------------------------------------- 1/31/95 27,023,424 .19 24,775,669 .18 (31,843,818) (.23) (7,068,149) (.05) - ---------------------------------------------------------------------------------------------------------- 4/30/95 24,980,495 .18 22,825,142 .16 41,610,760 .30 64,435,902 .46 - ---------------------------------------------------------------------------------------------------------- 7/31/95 26,391,491 .18 23,686,559 .17 33,690,435 .24 57,376,994 .41 - ---------------------------------------------------------------------------------------------------------- 10/31/95 25,389,718 .18 23,038,560 .16 9,464,195 .07 32,502,755 .23 - ---------------------------------------------------------------------------------------------------------- 1/31/96 24,912,049 .18 22,299,922 .16 35,108,083 .25 57,408,005 .41 - ---------------------------------------------------------------------------------------------------------- 4/30/96 24,046,784 .17 21,536,732 .15 (28,300,592) (.20) (6,763,860) (.05) - ---------------------------------------------------------------------------------------------------------- 7/31/96 25,131,867 .18 22,562,592 .17 (3,287,828) (.03) 19,274,764 .14 - ----------------------------------------------------------------------------------------------------------
Dividend policy It is the fund's dividend policy to pay monthly distributions from net investment income and any net realized short-term gains (including gains from options and futures transactions). Long-term capital gains are distributed at least annually. In an effort to maintain a more stable level of distributions, the fund's monthly distribution rate will be based on Putnam Management's projections of the net investment income and net realized short-term capital gains that the fund is likely to earn over the long term. Such distributions at times may exceed the current earnings of the fund, resulting in a return of capital to shareholders. Results of July 11, 1996 shareholder meeting (Unaudited) An annual meeting of shareholders of the fund was held on July 11, 1996. At the meeting, each of the nominees for Trustee was elected, as follows: Votes for Votes withheld - ------------------------------------------------------------------------ Jameson Adkins Baxter 123,795,630 3,088,626 Hans H. Estin 123,833,036 3,051,220 John A. Hill 123,879,609 3,004,647 Elizabeth T. Kennan 123,780,347 3,103,909 Lawrence J. Lasser 123,848,968 3,035,288 Robert E. Patterson 123,908,747 2,975,509 Donald S. Perkins 123,769,876 3,114,380 William F. Pounds 123,792,966 3,091,290 George Putnam 123,837,979 3,046,277 George Putnam, III 123,777,282 3,106,974 E. Shapiro 123,564,800 3,319,456 A.J.C. Smith 123,873,802 3,010,454 W. Nicholas Thorndike 123,790,582 3,093,674 A proposal to ratify the selection of Price Waterhouse LLP as independent auditors of the fund was approved as follows: 124,159,343 votes for, and 1,257,559 votes against, with 1,467,354 abstentions and non-broker votes. A proposal to convert the fund from closed-end to open-end status and authorize certain related amendments to the Agreement and Declaration of Trust was not approved as follows: 14,055,775 votes for and 53,537,086 votes against, with 59,291,395 abstentions and non-broker votes. Fund information INVESTMENT MANAGER Putnam Investment Management, Inc. One Post Office Square Boston, MA 02109 MARKETING SERVICES Putnam Mutual Funds Corp. One Post Office Square Boston, MA 02109 CUSTODIAN Putnam Fiduciary Trust Company LEGAL COUNSEL Ropes & Gray INDEPENDENT ACCOUNTANTS Price Waterhouse LLP TRUSTEES George Putnam, Chairman William F. Pounds, Vice Chairman Jameson Adkins Baxter Hans H. Estin John A. Hill Ronald J. Jackson Elizabeth T. Kennan Lawrence J. Lasser Robert E. Patterson Donald S. Perkins George Putnam, III Eli Shapiro A.J.C. Smith W. Nicholas Thorndike OFFICERS George Putnam President Charles E. Porter Executive Vice President Patricia C. Flaherty Senior Vice President John D. Hughes Senior Vice President and Treasurer Lawrence J. Lasser Vice President Gordon H. Silver Vice President Gary N. Coburn Vice President Rosemary H. Thomsen Vice President and Fund Manager Neil J. Powers Vice President and Fund Manager D. William Kohli Vice President and Fund Manager Mark J. Seigel Vice President and Fund Manager William N. Shieber Vice President John R. Verani Vice President Paul M. O'Neil Vice President Beverly Marcus Clerk and Assistant Treasurer Call 1-800-225-1581 weekdays from 9 a.m. to 5 p.m. Eastern Time for up-to-date information about the fund's NAV. PUTNAM INVESTMENTS The Putnam Funds One Post Office Square Boston, Massachusetts 02109 - ---------------- Bulk Rate U.S. Postage PAID Putnam Investments - ---------------- 27084-073 9/96 -----END PRIVACY-ENHANCED MESSAGE-----