-----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, Iqe0vpcJl7lEtGE4XbH0V/+oz3nAzBIs7RggQdy77TWwtN932PHpJjJUVAv9d8Nn CwZI3E6KHezbO5f9434ISA== 0000928816-98-000256.txt : 19980923 0000928816-98-000256.hdr.sgml : 19980923 ACCESSION NUMBER: 0000928816-98-000256 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19980731 FILED AS OF DATE: 19980922 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: SEC FILE NUMBER: 811-05452 FILM NUMBER: 98712658 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, 1998 [LOGO: BOSTON * LONDON * TOKYO] Fund highlights * Morningstar, an independent rating agency, gave Putnam Premier Income Trust 4 out of 5 stars for overall performance for the period ended July 31, 1998 (based on the fund's average annual returns for the 3-, 5-, and 10-year periods). Only 22.5% of the 136 fixed-income funds rated received 4 stars.* *"We expect continued moderate economic growth in the United States with little inflation, though growth may be dampened by the continuing crisis in Asia. The unrest in Asia will likely keep the Federal Reserve Board on the sidelines and keep U.S. interest rates relatively stable over the near term. With this outlook, we believe that the fund's domestic holdings should continue to add value to the portfolio." -- Jennifer E. Leichter, lead manager CONTENTS 4 Report from Putnam Management 9 Fund performance summary 13 Portfolio holdings 36 Financial statements 46 Results of July 9, 1998 shareholder meeting * Past performance is not indicative of future results. Morningstar ratings reflect risk-adjusted performance through 7/31/98 and are subject to change every month. Morningstar ratings are calculated from a fund's 3-, 5-, and 10-year returns (with fee adjustments) in excess of 90-day Treasury bill returns and a risk factor that reflects performance below 90-day Treasury returns. The fund received 2,3 and 4 stars for the 3-, 5-, and 10-year performance, respectively. There were 136, 116, and 53 funds rated over these periods, respectively. 22.5% of the funds in an investment category receive 4 stars, 35% receive 3 stars and 22.5% receive 2 stars. From the Chairman [GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM] [copyright] Karsh, Ottawa Dear Shareholder: Putnam Premier Income Trust's broad diversification across three major sectors of the world's fixed-income markets allowed the fund's management team ample latitude for maneuvering through the market dislocations that followed the Asian crisis. Because some market sectors prospered while others declined in that unsettled environment, the challenge became one of portfolio sector weightings as much as the selection of individual securities. When the fiscal year ended on July 31, 1998, the generally optimistic outlook projected by your fund's managers at the fiscal year's midpoint was borne out, as the fund's competitive performance for the period indicates. Performance over longer periods is even more favorable when judged against the fund's benchmark indexes. Full performance details are provided in the management report and performance tables that follow. Respectfully yours, /S/GEORGE PUTNAM George Putnam Chairman of the Trustees September 16, 1998 Report from the Fund Managers Jennifer E. Leichter, lead manager Robert M. Paine D. William Kohli Gail S. Attridge Like a fleet of three ships, each sailing a different route to the same destination, Putnam Premier Income Trust seeks a high level of current income by taking advantage of a multisector strategy. Your fund's focus on U.S. investment-grade bonds, high-yield securities, and foreign fixed-income opportunities was particularly valuable in the uncertain environment that existed for much of your fund's fiscal year. While Asia's financial downturn continued to pose difficulties for that region and its trading partners, many of the world's financial markets prospered. Relatively stable interest rates, low inflation, and positive changes in business operations provided a solid backdrop for moderate economic growth and favorable market performance in many countries. By emphasizing higher-yielding U.S. corporate holdings, bonds from the world's emerging and developed economies, and U.S. mortgage-backed securities, your fund was able to deliver solid performance for fiscal 1998. For the 12 months ended July 31, 1998, your fund provided a total return of 6.77% at net asset value and 8.06% at market price. Detailed performance information can be found on pages 9 and 10. * U.S. INVESTMENT-GRADE SECURITIES PROVIDE SAFE PORT WHILE BOOSTING PERFORMANCE Asian problems continued to fuel U.S. fixed-income performance as nervous international investors flocked to the high credit quality and attractive yields offered by U.S. bonds. During the period, the U.S. bond market also benefited from low inflation, lower issuance of new Treasury bonds brought on by the balanced federal budget, and emerging signs of a slowing economy. All these factors helped to make Treasuries attractive during the period. Usually when Treasuries are strong, mortgage-backed securities suffer because of prepayment concerns. As interest rates fall, many homeowners refinance their mortgages, returning principal to mortgage investors. In addition to disrupting an investor's income stream, this prepayment of principal forces the investor to reinvest at lower prevailing rates. In January, mortgage refinancings reached an all-time high, as measured by the Mortgage Bankers Refinancing Index. Investors did not abandon mortgage-backed securities as expected, however. Many, seeking the relatively higher yields offered by these securities, simply reinvested their prepaid principal despite the lower rates, keeping demand for mortgages strong. We took several steps to limit the fund's exposure to prepayment risk during the period. First, we concentrated primarily on commercial mortgage-backed security (CMBS) issues. CMBS issues represent mortgages of office buildings, hotels, multifamily housing, and industrial real estate. Unlike residential mortgages, CMBS issues have the advantage of prepayment protection. For example, under the terms of some loans, commercial mortgage owners are not allowed to prepay for the first five years. We also sought to avoid prepayments by investing in GNMAs. These carry less prepayment risk than FHLMC and FNMA bonds because the average GNMA mortgage is smaller. In addition, we concentrated mortgage holdings in lower-coupon bonds, since the owners of these mortgages had relatively little to gain by refinancing. Finally, we focused on seasoned issues, those for which homeowners have passed over previous opportunities to refinance and thus are not likely to trade in their mortgages now. [GRAPHIC OMITTED: horizontal bar chart of SECTOR ALLOCATION] SECTOR ALLOCATION* 7/31/97 7/31/98 U.S. investment grade 22.0% 38.1% High yield 41.1% 46.2% Foreign (ex-emerging) 28.9% 10.3% Emerging markets 15.8% 8.1% Footnote reads: *Based on net assets. Holdings will vary over time. * HIGH-YIELD BONDS SAIL BEFORE WIND The performance of high-yield bonds tends to reflect the strength of the stock market to a greater extent than the performance of other types of bonds. However, during your fund's fiscal year, high-yield bonds were also buoyed by a healthy bond market. Furthermore, merger and acquisition activity, which often leads to companies being acquired by financially stronger corporations, as well as positive developments in key high-yield industries helped produce substantial gains on several investments. The high-yield market's performance during your fund's fiscal year was especially noteworthy given the record amount of new high-yield bonds issued during the period. The fact that the market was able to absorb the new issues and still post robust gains speaks to the strong demand that exists for high-yield bonds both in the United States and abroad. Among the top performing industries in the high-yield universe during your fund's fiscal year were telecommunications, which performed well based on very positive operating results and high equity valuations, cable television, broadcasting, and finance. The telecommunications sector experienced a number of positive factors during the period. First, favorable regulatory developments improved the market position of competitive local exchange carriers (CLECs) and specialized mobile radio operators. Second, the commercial launches of these new technologies proceeded smoothly throughout the year. And finally, merger and acquisition activity in the high-yield sector continued at a healthy pace. In the cable television sector, the industry benefited from Microsoft's billion-dollar investment in Comcast Corp. Prior to this event, investors had perceived cable as a mature industry that would gradually lose share to satellite television. The Microsoft investment changed this perception and raised awareness of the industry's new role as the ideal Internet delivery vehicle. [GRAPHIC OMITTED: TOP SECTOR HOLDINGS] TOP SECTOR HOLDINGS* Top three high-yield holdings Transamerican Energy zero %, 2002 Global Crossing Holdings 144A 9.625%, 2008 Intermedia Communications, Inc. 144A 8.6%, 2008 Top three U.S. investment-grade holdings Government National Mortgage Association 7%, 2024-2028 Government National Mortgage Association 6.5%, 2027-2028 U.S. Treasury obligations 6.5%, 2026 Top three international holdings Germany (Federal Republic of) bonds, 5.625%, 2028 United Kingdom Treasury bonds 8%, 2021 United Kingdom Treasury bonds 8%, 2000 *These holdings represent 19.0% of the fund's net assets as of 7/31/98. Portfolio holdings will vary over time. * EMERGING MARKETS EXPERIENCE CHOPPY SEAS Performance in foreign fixed-income markets varied widely during the period, despite a favorable backdrop of soft global inflation. The European peripheral markets of Spain, Italy, and Sweden posted strong returns during the period, while Japan and other Asian markets trailed. Core European markets performed well too as a result of sluggish German economic growth and expectations that European Economic Monetary Union would begin operating as scheduled in January 1999. Emerging-markets bonds experienced a challenging environment during the period, getting hit the hardest by Asia's financial crisis early in the fiscal year. Later in the period, Russian bonds were pummeled by the country's budgetary woes, while Venezuela fell on a two-notch downgrade by Moody's Investor Services, a bond rating agency. Though returns on your fund's emerging-markets holdings were in line with relative indexes, exposure to emerging markets was a slight drag on performance due to financial troubles in areas including Asia and Russia. Accordingly we have reduced exposure in this area from 15.8% at the beginning of the fund's fiscal year to 8.1% at the end of the period. * SHIFTING CURRENTS EMPHASIZE VALUE OF MULTISECTOR STRATEGY Putnam Management expects continued moderate economic growth in the United States with little inflation, though growth may be dampened by the continuing crisis in Asia. The unrest in Asia will likely keep the Fed on the sidelines and keep U.S. interest rates relatively stable -- or perhaps drifting slightly lower -- over the near term. With this outlook, we believe that the fund's domestic holdings should continue to add value to the portfolio. Although the lowest long-term bond yields in modern history have brought valuations from cheap to fair value, as long as Japan languishes, we believe U.S. fixed-income investments should continue to perform well. In the high-yield market, the underlying fundamentals and credit quality remain strong and default rates remain low. Merger activity and strong mutual fund cash flows are supporting the market. We will continue to emphasize improving credits in the telecommunications, broadcasting, finance, and health-care industries while avoiding issues with exposure to Asian economies. Overseas, valuations in many markets are stretched. With economic activity poised to accelerate in Europe and perhaps in Japan, we believe foreign bond performance could very well lag the U.S. market in the months ahead. This outlook highlights the value of your fund's ability to search out opportunities across multiple fixed-income sectors. 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 7/31/98, there is no guarantee the fund will continue to hold these securities in the future. The lower credit ratings of high-yield bonds reflect a greater possibility that adverse changes in the economy or poor performance by the issuers of these bonds may affect the issuer's ability to pay principal and interest. International investing involves certain risks, such as currency fluctuations, economic instability, and political developments, not present with domestic investments. While U.S. government backing of individual securities does not insure principal, which will fluctuate, it does guarantee that the fund's government-backed holdings will make timely payments of interest and principal. This fund includes investments in mortgage-backed securities, which are subject to prepayment risk. Performance summary This section provides information about your fund's performance, which should always be considered in light of its investment strategy. Putnam Premier Income Trust is designed for investors seeking a high level of current income consistent with preservation of capital. TOTAL RETURN FOR PERIODS ENDED 7/31/98 Market NAV price - ------------------------------------------------------------------------------ 1 year 6.77% 8.06% - ------------------------------------------------------------------------------ 5 years 51.40 58.86 Annual average 8.65 9.70 - ------------------------------------------------------------------------------ 10 years 170.61 145.57 Annual average 10.47 9.40 - ------------------------------------------------------------------------------ Life of fund 171.28 146.21 (since 2/29/88) Annual average 10.05 9.03 - ------------------------------------------------------------------------------ COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 7/31/98 Salomon Bros. Lehman Bros. Non-U.S. First Boston Consumer Government World Govt. High Yield Price Bond Index Bond Index Index Index - ------------------------------------------------------------------------------ 1 year 8.35% 3.71% 9.44% 1.68% - ------------------------------------------------------------------------------ 5 years 37.43 36.15 63.71 13.02 Annual average 6.57 6.37 10.36 2.48 - ------------------------------------------------------------------------------ 10 years 135.99 120.39 198.06 37.72 Annual average 8.97 8.22 11.54 3.25 - ------------------------------------------------------------------------------ Life of fund 134.14 112.50 209.45 40.69 (since 2/29/88) Annual average 8.51 7.50 11.45 3.33 - ------------------------------------------------------------------------------ Performance data represent past results and do not reflect future performance. They do not take into account any adjustment for taxes payable on reinvested distributions. Investment returns, net asset value and market price will fluctuate so that an investor's shares when sold may be worth more or less than their original cost. 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. PRICE AND DISTRIBUTION INFORMATION 12 months ended 7/31/98 - ------------------------------------------------------------------------------ Distributions - ------------------------------------------------------------------------------ Number 12 - ------------------------------------------------------------------------------ Income $0.6598 - ------------------------------------------------------------------------------ Capital gains $0.0692 - ------------------------------------------------------------------------------ Total $0.7290 - ------------------------------------------------------------------------------ Share value NAV Market price - ------------------------------------------------------------------------------ 7/31/97 $8.88 $8.562 - ------------------------------------------------------------------------------ 7/31/98 8.71 8.500 - ------------------------------------------------------------------------------ Current return - ------------------------------------------------------------------------------ Current dividend rate1 8.68% 8.890% - ------------------------------------------------------------------------------ 1Income portion of most recent distribution, annualized and divided by NAV or Market Value at end of period. TOTAL RETURN FOR PERIODS ENDED 6/30/98 (most recent calendar quarter) Market NAV price - ------------------------------------------------------------------------------ 1 year 8.69% 11.27% - ------------------------------------------------------------------------------ 5 years 51.94 58.87 Annual average 8.73 9.70 - ------------------------------------------------------------------------------ 10 years 167.89 143.16 Annual average 10.36 9.29 - ------------------------------------------------------------------------------ Life of fund 170.24 144.43 (since 2/29/88) Annual average 10.10 9.04 - ------------------------------------------------------------------------------ Performance data represent past results, and do not reflect future performance. Investment returns and principal value will fluctuate so that an investor's shares, when sold, may be worth more or less than their original cost. TERMS AND DEFINITIONS Total return shows how the value of the fund's shares changed over time, assuming you held the shares through the entire period and reinvested all distributions in the fund. Net asset value (NAV) is the value of all your fund's assets, minus any liabilities, divided by the number of outstanding shares. Market price is the current trading price of one share of the fund. Market prices are set by transactions between buyers and sellers on the New York Stock Exchange. COMPARATIVE BENCHMARKS First Boston High Yield Index* is an unmanaged list of lower-rated higher-yield U.S. corporate bonds. Lehman Brothers Government Bond Index* is an unmanaged list of U.S. government and mortgage-backed securities. Salomon Brothers Non-U.S. World Government Bond Index* is an unmanaged list of bonds issued by 10 countries. Consumer Price Index (CPI) is a commonly used measure of inflation; it does not represent an investment return. *Securities indexes assume reinvestment of all distributions and interest payments and do not take in account brokerage fees or taxes. Securities in the fund do not match those in the indexes and performance of the fund will differ. It is not possible to invest directly in an index. Report of independent accountants For the fiscal year ended July 31, 1998 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, 1998, 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, 1998, by correspondence with the custodian, provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Boston, Massachusetts September 17, 1998
Portfolio of investments owned July 31, 1998 CORPORATE BONDS AND NOTES (37.9%) (a) PRINCIPAL AMOUNT VALUE Advertising (0.6%) - -------------------------------------------------------------------------------------------------------------------------- $ 2,500,000 Adams Outdoor Advertising sr. notes 10 3/4s, 2006 $ 2,750,000 2,100,000 Lamar Advertising Co. company guaranty 8 5/8s, 2007 2,189,250 2,500,000 Outdoor Communications Inc. sr. sub. notes 9 1/4s, 2007 2,600,000 -------------- 7,539,250 Aerospace and Defense (0.6%) - -------------------------------------------------------------------------------------------------------------------------- 470,000 Argo-Tech Corp. company guaranty 8 5/8s, 2007 478,225 1,280,000 Aviation Sales Co. company guaranty 8 1/8s, 2008 1,273,600 1,500,000 BE Aerospace sr. sub. notes Ser. B, 9 7/8s, 2006 1,608,750 600,000 BE Aerospace sr. sub. notes Ser. B, 8s, 2008 606,000 500,000 Derlan Industries Ltd. sr. notes 10s, 2007 (Canada) 525,000 217,000 Hawk Corp. sr. notes 10 1/4s, 2003 234,903 530,000 K&F Industries, Inc. sr. sub. notes Ser. B, 9 1/4s, 2007 535,300 990,000 Orbital Imaging Corp. 144A sr. notes 11 5/8s, 2005 1,004,850 800,000 United Defense Industries Inc. company guaranty 8 3/4s, 2007 812,000 -------------- 7,078,628 Agriculture (0.4%) - -------------------------------------------------------------------------------------------------------------------------- 2,905,653 Premium Standard Farms, Inc. sr. secd. notes 11s, 2003 (PIK) 3,130,841 1,110,000 Purina Mills, Inc. 144A sr. sub. notes 9s, 2010 1,140,525 -------------- 4,271,366 Airlines (0.5%) - -------------------------------------------------------------------------------------------------------------------------- 780,000 Calair LLC 144A company guaranty 8 1/8s, 2008 770,250 1,340,000 Canadian Airlines Corp. secd. notes 10s, 2005 (Canada) 1,326,600 855,000 Canadian Airlines Corp. sr. notes 12 1/4s, 2006 (Canada) 844,338 1,705,000 Cathay International Ltd. 144A sr. notes 13s, 2008 1,508,925 915,000 Trans World Airlines, Inc. sr. notes 11 1/2s, 2004 961,894 820,000 Trans World Airlines, Inc. 144A notes 11 3/8s, 2006 820,000 -------------- 6,232,007 Apparel (0.3%) - -------------------------------------------------------------------------------------------------------------------------- 325,000 GFSI, Inc. sr. sub. notes Ser. B, 9 5/8s, 2007 336,375 2,275,000 Guess Jeans, Inc. sr. sub. notes 9 1/2s, 2003 2,297,750 1,455,000 Sassco Fashions Ltd. sr. notes 12 3/4s, 2004 1,571,400 -------------- 4,205,525 Automotive (0.6%) - -------------------------------------------------------------------------------------------------------------------------- 1,440,000 Accuride Corp. 144A sr. sub. notes 9 1/4s, 2008 1,454,400 949,000 Aftermarket Technology Corp. sr. sub. notes Ser. D, 12s, 2004 1,040,341 500,000 Cambridge Industries Inc. company guaranty Ser. B, 10 1/4s, 2007 505,000 1,355,000 Lear Corp. sub. notes 9 1/2s, 2006 1,497,275 2,140,000 Navistar International Corp. sr. notes Ser. B, 8s, 2008 2,156,050 730,000 Safety Components International, Inc. sr. sub. notes Ser. B, 10 1/8s, 2007 759,200 -------------- 7,412,266 Banks (1.4%) - -------------------------------------------------------------------------------------------------------------------------- 545,000 Albank Capital Trust 144A company guaranty Ser. AI, 9.27s, 2027 620,853 635,000 Delta Financial Corp. sr. notes 9 1/2s, 2004 596,900 370,000 Dime Capital Trust I bank guaranty Ser. A, 9.33s, 2027 428,701 890,000 Espirito Santo Centrais sr. notes 10s, 2007 (Brazil) 778,750 575,000 First Federal Financial Corp. notes 11 3/4s, 2004 620,281 2,500,000 First Nationwide Holdings sr. sub. notes 10 5/8s, 2003 2,856,250 3,120,000 Fuji JGB Inv. LLC 144A FLIRB bonds 9.87s, 2049 2,731,591 900,000 Greenpoint Capital Trust I company guaranty 9.1s, 2027 1,013,697 1,500,000 Korea Developmental Bank bonds 7 1/8s, 2001 (Korea) 1,343,700 635,000 North Fork Capital Trust I company guaranty 8.7s, 2026 709,168 350,000 Ocwen Capital Trust I company guaranty 10 7/8s, 2027 378,875 725,000 Ocwen Federal Bank FSB sub. deb. 12s, 2005 788,438 345,000 Onbank & Trust Co. company guaranty 9 1/4s, 2027 409,817 735,000 Peoples Heritage Capital Trust company guaranty Ser. B, 9.06s, 2027 820,003 715,000 Provident Capital Trust company guaranty 8.6s, 2026 766,158 410,000 Riggs Capital Trust 144A bonds 8 5/8s, 2026 445,555 585,000 Sovereign Capital Trust company guaranty 9s, 2027 643,067 555,000 Webster Capital Trust I 144A bonds 9.36s, 2027 604,617 -------------- 16,556,421 Basic Industrial Products (0.2%) - -------------------------------------------------------------------------------------------------------------------------- 1,260,000 Axia, Inc. 144A sr. sub. notes 10 3/4s, 2008 1,263,150 500,000 Koppers Industries, Inc. 144A sr. sub. notes 9 7/8s, 2007 511,250 510,000 Roller Bearing Co. company guaranty Ser. B, 9 5/8s, 2007 515,100 625,000 W. R. Carpenter North America, Inc. company guaranty 10 5/8s, 2007 662,500 -------------- 2,952,000 Broadcasting (2.4%) - -------------------------------------------------------------------------------------------------------------------------- 1,395,000 Affinity Group Holdings sr. notes 11s, 2007 1,490,906 2,050,000 Benedek Communications Corp. sr. disc. notes stepped-coupon zero % (13 1/4s, 5/15/01), 2006 (STP) 1,655,375 1,920,000 Capstar Broadcasting sr. disc. notes stepped-coupon zero % (12 3/4s, 2/1/02), 2009 (STP) 1,507,200 800,000 Capstar Broadcasting sr. sub. notes 9 1/4s, 2007 848,000 420,000 Central European Media Enterprises Ltd. sr. notes 9 3/8s, 2004 411,600 2,500,000 Chancellor Media Corp. sr. sub notes Ser. B, 8 1/8s, 2007 2,537,500 809,390 Citadel Broadcasting Inc. sr. sub. notes 10 1/4s, 2007 896,399 3,065,000 Comcast UK Cable, Ltd. deb. stepped-coupon zero % (11.2s, 11/15/00), 2007 (Bermuda) (STP) 2,605,250 600,000 Echostar Satellite Broadcast Corp. sr. disc. notes stepped-coupon zero % (13 1/8s, 3/15/00), 2004 (STP) 555,000 2,230,000 Fox Family Worldwide, Inc. sr. disc. notes stepped-coupon zero % (10 1/4s, 11/1/02), 2007 (STP) 1,471,800 2,500,000 Fox Family Worldwide, Inc. sr. notes 9 1/4s, 2007 2,468,750 1,210,000 Fox/Liberty Networks LLC sr. notes 8 7/8s, 2007 1,243,275 1,990,000 Granite Broadcasting Corp. 144A sr. sub. notes 8 7/8s, 2008 2,029,800 10,000 Jacor Communications, Inc. company guaranty 9 3/4s, 2006 10,900 2,250,000 Jacor Communications, Inc. company guaranty Ser. B, 8 3/4s, 2007 2,362,500 4,096,000 PHI Holdings, Inc. sr. notes 16s, 2001 3,062,170 1,010,000 Radio One Inc. company guaranty stepped-coupon Ser. B, 7s, (12s, 5/15/00), 2004 (STP) 1,030,200 320,000 Sinclair Broadcast Group, Inc. sr. sub. notes 8 3/4s, 2007 336,800 1,225,000 Spanish Broadcasting System, Inc. sr. notes Ser. B, 11s, 2004 1,329,125 1,005,000 TV Azteca S.A. de C.V. sr. notes 10 1/2s, 2007 (Mexico) 1,015,050 500,000 TV Azteca S.A. de C.V. sr. notes Ser. A, 10 1/8s, 2004 (Mexico) 503,750 -------------- 29,371,350 Building and Construction (0.6%) - -------------------------------------------------------------------------------------------------------------------------- 490,000 American Architectural Products Corp. company guaranty 11 3/4s, 2007 494,900 1,190,000 Atrium Companies, Inc. sub. notes 10 1/2s, 2006 1,249,500 710,000 Beazer Homes USA company guaranty 8 7/8s, 2008 699,350 570,000 Brand Scaffold Services 144A sr. notes 10 1/4s, 2008 581,400 1,165,000 GS Superhighway Holdings sr. notes 10 1/4s, 2007 920,350 665,000 GS Superhighway Holdings sr. notes 9 7/8s, 2004 525,350 460,000 Jackson Products, Inc. 144A company guaranty 9 1/2s, 2005 458,850 500,000 Nortek, Inc. sr. sub. notes 9 7/8s, 2004 516,250 655,000 Presley Cos. sr. notes 12 1/2s, 2001 614,063 430,000 Republic Group Inc. 144A sr. sub. notes 9 1/2s, 2008 432,688 440,000 Waxman Industries Inc. sr. notes stepped-coupon Ser. B, zero % (12 3/4s, 6/1/99), 2004 (STP) 413,600 -------------- 6,906,301 Buses (0.1%) - -------------------------------------------------------------------------------------------------------------------------- 1,130,000 MCII Holdings sec. notes stepped-coupon zero % (12s, 11/15/98), 2002 (STP) 1,083,388 Business Services (0.5%) - -------------------------------------------------------------------------------------------------------------------------- 2,235,000 Cex Holdings, Inc. 144A sr. sub. notes 9 5/8s, 2008 2,290,875 300,000 Iron Mountain, Inc. med. term notes company guaranty 10 1/8s, 2006 327,000 1,275,000 Iron Mountain, Inc. company guaranty 8 3/4s, 2009 1,313,250 950,000 Morris Material Handling Inc. 144A sr. notes 9 1/2s, 2008 864,500 1,230,000 Outsourcing Solutions, Inc. sr. sub. notes Ser. B, 11s, 2006 1,328,400 465,000 Williams Scotsman, Inc. 144A sr. notes 9 7/8s, 2007 480,113 -------------- 6,604,138 Cable Television (1.3%) - -------------------------------------------------------------------------------------------------------------------------- 1,110,000 Acme Television sr. disc. notes stepped-coupon zero % (10 7/8s, 9/30/00), 2004 (STP) 937,950 2,275,000 Diamond Cable Communication Co. sr. disc. notes stepped-coupon zero % (13 1/2s, 9/30/99), 2004 (United Kingdom) (STP) 2,195,375 2,325,000 Diamond Cable Communication Co. sr. disc. notes stepped-coupon zero % (11 3/4s, 12/15/00), 2005 (United Kingdom) (STP) 1,964,625 1,795,000 Diamond Cable Communication Co. sr. disc. notes stepped-coupon zero % (10 3/4s, 2/15/02), 2007 (United Kingdom) (STP) 1,391,125 3,440,000 Grupo Televisa S.A. sr. disc. notes stepped-coupon zero % (13 1/4s, 5/15/01), 2008 (Mexico) 2,855,200 1,975,000 Grupo Televisa S.A. 144A sr. notes 11 7/8s, 2006 (Mexico) 2,192,250 1,050,000 Lenfest Communications, Inc. 144A sr. sub. notes 8 1/4s, 2008 1,092,000 2,360,000 RCN Corp. sr. discount notes stepped-coupon zero % (11 1/8s, 10/15/02) 2007 (STP) 1,528,100 1,670,000 RCN Corp. sr. discount notes, stepped-coupon Ser. B, zero % (9.8s, 2/15/03), 2008 (STP) 1,031,225 930,000 Supercanal Holdings S.A. 144A sr. notes 11 1/2s, 2005 (Argentina) 892,800 -------------- 16,080,650 Cellular Communications (1.7%) - -------------------------------------------------------------------------------------------------------------------------- 110,000 American Cell Corp 144A sr. notes 10 1/2s, 2008 111,650 4,132,000 CellNet Data Systems, Inc. sr. disc. notes stepped-coupon zero % (14s, 10/1/02), 2007 (STP) 2,334,580 1,790,000 Cencall Communications Corp. sr. disc. notes stepped-coupon zero % (10 1/8s, 1/15/99), 2004 (STP) 1,812,375 1,480,000 Comcast Cellular Holdings sr. notes Ser. B, 9 1/2s, 2007 1,557,700 3,500,000 Dial Call Communications, Inc. sr. disc. notes stepped-coupon Ser. B, zero % (10 1/4s, 12/15/98), 2005 (STP) 3,561,250 1,900,000 Interact Systems, Inc. 144A stepped-coupon zero % (14s, 8/1/99), 2003 (STP) 665,000 3,120,000 Intercel, Inc. sr. disc. notes stepped-coupon zero % (12s, 5/1/01), 2006 (STP) 2,441,400 3,160,000 McCaw International Ltd sr. discount notes stepped-coupon zero % (13s, 4/15/02), 2007 (STP) 2,101,400 5,075,000 Millicom International Cellular S.A. sr. disc. notes stepped-coupon zero % (13 1/2s, 6/1/01), 2006 (Luxembourg) (STP) 4,040,969 1,300,000 Price Communications Wireless Inc. 144A sr. notes 9 1/8s, 2006 1,313,000 -------------- 19,939,324 Chemicals (0.4%) - -------------------------------------------------------------------------------------------------------------------------- 740,000 Geo Specialty Chemicals 144A sr. sub. notes 10 1/8s, 2008 756,650 1,150,000 Huntsman Corp. 144A sr. sub. notes FRN 9.188s, 2007 1,161,500 900,000 NL Industries, Inc. sr. notes stepped-coupon zero % (13s, 10/15/98), 2005 (STP) 936,000 360,000 Pioneer Americas Acquisition 144A sr. notes 9 1/4s, 2007 342,000 1,410,000 Polytama International notes 11 1/4s, 2007 493,500 925,000 Sterling Chemicals Holdings sr. disc. notes stepped-coupon zero % (13 1/2s, 8/15/01), 2008 (STP) 555,000 760,000 Trikem S.A. 144A bonds 10 5/8s, 2007 (Brazil) 619,400 -------------- 4,864,050 Computer Services and Software (0.3%) - -------------------------------------------------------------------------------------------------------------------------- 320,000 Concentric Network Corp. sr. notes 12 3/4s, 2007 352,000 2,150,000 IPC Information Systems sr. disc. notes stepped-coupon zero % (10 7/8s, 11/1/01), 2008 (STP) 1,569,500 1,150,000 PSINet, Inc. sr. notes Ser. B, 10s, 2005 1,207,500 320,000 Unisys Corp. sr. notes 7 7/8s, 2008 331,200 -------------- 3,460,200 Conglomerates (0.1%) - -------------------------------------------------------------------------------------------------------------------------- 555,000 Cia Latino Americana 144A company guaranty 11 5/8s, 2004 (Argentina) 552,225 515,000 Dine S.A. de C.V. 144A company guaranty 8 3/4s, 2007 (Mexico) 475,088 -------------- 1,027,313 Consumer Durable Goods (--%) - -------------------------------------------------------------------------------------------------------------------------- 450,000 Sealy Mattress Co. sr. sub. notes Ser. B, 9 7/8s, 2007 468,000 Consumer Non Durables (0.2%) - -------------------------------------------------------------------------------------------------------------------------- 250,000 Amscan Holdings, Inc. sr. sub. notes 9 7/8s, 2007 253,750 1,690,000 North Atlantic Trading Co. co. guaranty Ser. B, 11s, 2004 1,706,900 180,000 Hedstrom Holdings, Inc. sr. sub. notes stepped-coupon zero % (12s, 6/01/02), 2009 (STP) 111,600 890,000 Packaged Ice, Inc. 144A sr. notes 9 3/4s, 2005 916,700 -------------- 2,988,950 Consumer Services (0.2%) - -------------------------------------------------------------------------------------------------------------------------- 1,755,000 Coinmach Corp. sr. notes Ser. D, 11 3/4s, 2005 1,948,050 Cosmetics (0.3%) - -------------------------------------------------------------------------------------------------------------------------- 570,000 Chattem, Inc. company guaranty Ser. B, 8 7/8s, 2008 575,700 345,000 French Fragrances, Inc. sr. notes Ser. B, 10 3/8s, 2007 366,563 320,000 French Fragrances, Inc. 144A sr. notes 10 3/8s, 2007 337,600 1,410,000 Revlon Consumer Products sr. sub. notes 8 5/8s, 2008 1,445,250 990,000 Revlon Worldwide Corp. sr. disc. notes Ser. B, zero %, 2001 784,575 -------------- 3,509,688 Electric Utilities (1.2%) - -------------------------------------------------------------------------------------------------------------------------- 4,305,000 AES China Generating Co. sr. notes 10 1/8s, 2006 (China) 4,025,175 1,700,000 Long Island Lighting Co. deb. 9s, 2022 1,924,859 4,000,000 Midland Funding Corp. I deb. Ser. A, 11 3/4s, 2005 4,795,200 819,679 Midland Funding Corp. I deb. Ser. C-94, 10.33s, 2002 884,171 1,750,000 Midland Funding Corp. II deb. Ser. B, 13 1/4s, 2006 2,253,405 1,288,313 Northeast Utilities System notes Ser. A, 8.58s, 2006 1,332,722 -------------- 15,215,532 Electronics and Electrical Equipment (1.0%) - -------------------------------------------------------------------------------------------------------------------------- 670,000 Celestica International Ltd. 144A sr. sub. notes 10 1/2s, 2006 (Canada) 738,675 500,000 Details, Inc. sr. sub. notes Ser. B, 10s, 2005 495,000 700,000 DII Group, Inc. (The) sr. sub. notes 8 1/2s, 2007 680,750 2,305,000 Dobson Communications Corp. notes 11 3/4s, 2007 2,495,163 1,720,000 Flextronics International Ltd. sr. sub. notes Ser. B, 8 3/4s, 2007 1,737,200 445,000 HCC Industries, Inc. company guaranty 10 3/4s, 2007 469,475 460,000 Moog, Inc. sr. sub. notes Ser. B, 10s, 2006 493,350 1,420,000 Motors and Gears Inc. sr. notes Ser. B, 10 3/4s, 2006 1,526,500 520,000 Samsung Electronics 144A company guaranty 9 3/4s, 2003 483,600 1,500,000 Viasystems, Inc. 144A sr. notes 9 3/4s, 2007 1,447,500 190,000 Viasystems Inc. sr. sub notes 9 3/4s, 2007 187,150 455,000 Wavetek Corp. company guaranty 10 1/8s, 2007 459,550 1,660,000 Zilog Inc. 144A sr. notes 9 1/2s, 2005 1,294,800 -------------- 12,508,713 Energy-Related (0.4%) - -------------------------------------------------------------------------------------------------------------------------- 780,000 Niagara Mohawk Power Corp. sr. notes Ser. G, 7 3/4s, 2008 806,013 620,000 Niagara Mohawk Power Corp. sr. notes Ser. F, 7 5/8s, 2005 631,092 2,100,000 Panda Global Energy Co. company guaranty 12 1/2s, 2004 1,890,000 630,000 RAM Energy Inc. sr. notes 11 1/2s, 2008 636,300 520,000 Tokai Corp. 144A bonds FRB 9.98s, 2049 483,600 -------------- 4,447,005 Entertainment (0.5%) - -------------------------------------------------------------------------------------------------------------------------- 1,240,000 SFX Entertainment, Inc. 144A company guaranty Ser. B, 9 1/8s, 2008 1,221,400 1,010,000 Silver Cinemas Intl. 144A sr. sub. notes 10 1/2s, 2005 1,025,150 2,090,000 Trump Castle Funding 144A sub. notes 10 1/4s, 2003 2,110,900 1,470,000 United Artists Theatre 144A sr. sub. notes 9 3/4s, 2008 1,484,700 -------------- 5,842,150 Environmental Control (0.3%) - -------------------------------------------------------------------------------------------------------------------------- 925,000 Allied Waste Industries, Inc. company guaranty 10 1/4s, 2006 1,022,125 2,300,000 Allied Waste Industries, Inc. sr. disc. notes stepped-coupon zero % (11.3s, 6/1/02), 2007 (STP) 1,702,000 430,000 ATC Group Services Inc. company guaranty 12s, 2008 399,900 -------------- 3,124,025 Food and Beverages (0.5%) - -------------------------------------------------------------------------------------------------------------------------- 1,220,000 Ameriserve Food Co. company guaranty 10 1/8s, 2007 1,256,600 1,470,000 Ameriserve Food Co. company guaranty 8 7/8s, 2006 1,473,675 730,000 Aurora Foods, Inc. sr. sub. notes Ser. B, 9 7/8s, 2007 781,100 575,000 Canandaigua Wine Co. sr. sub. notes Ser. C, 8 3/4s, 2003 590,813 695,000 Fleming Companies, Inc. company guaranty Ser. B, 10 1/2s, 2004 721,063 65,000 Nebco Evans Holding Co. sr. disc. notes stepped-coupon zero % (12 3/8s, 7/15/02), 2007 (STP) 42,250 1,570,000 RAB Enterprises, Inc. 144A sr. notes 10 1/2s, 2005 1,577,850 185,000 Windy Hill Pet Food Co. sr. sub. notes 9 3/4s, 2007 194,250 -------------- 6,637,601 Health Care Services (1.5%) - -------------------------------------------------------------------------------------------------------------------------- 680,000 Conmed Corp. company guaranty 9s, 2008 680,000 1,175,000 Extendicare Health Services Inc. company guaranty 9.35s, 2007 1,180,875 1,420,000 Fresenius Medical Capital Trust II company guaranty 7 7/8s, 2008 1,391,600 1,280,000 Global Health Sciences 144A sr. notes 11s, 2008 1,276,800 1,040,000 Hudson Respiratory Care, Inc. 144A sr. sub. notes 9 1/8s, 2008 956,800 1,080,000 Integrated Health Services, Inc. sr. sub. notes Ser. A, 9 1/2s, 2007 1,107,000 1,030,000 Integrated Health Services, Inc. sr. sub. notes Ser. A, 9 1/4s, 2008 1,045,450 1,530,000 Magellan Health Services, Inc. 144A sr. sub. notes 9s, 2008 1,499,400 770,000 MedPartners, Inc. sr. notes 7 3/8s, 2006 693,293 1,560,000 Multicare Cos., Inc. sr. sub. notes 9s, 2007 1,521,000 1,960,000 Paracelsus Healthcare sr. sub. notes 10s, 2006 1,989,400 560,000 Paragon Corp. Holdings 144A sr. notes 9 5/8s, 2008 492,800 3,130,000 Paragon Health Networks, Inc. sr. sub. notes Ser. B, 9 1/2s, 2007 3,176,950 1,499,375 Patriot American Hospital Term Loan B 8 1/8s, 2003 1,499,375 -------------- 18,510,743 Insurance and Finance (0.9%) - -------------------------------------------------------------------------------------------------------------------------- 1,805,000 Aames Financial Corp. sr. notes 9 1/8s, 2003 1,814,025 420,000 Colonial Capital II company guaranty Ser. A, 8.92s, 2027 461,475 865,000 Investors Capital Trust I company guaranty Ser. B, 9.77s, 2027 985,559 1,175,000 Imperial Credit Capital Trust I 144A company guaranty 10 1/4s, 2002 1,186,750 955,000 Imperial Credit Industries, Inc. sr. notes 9 7/8s, 2007 950,225 780,000 Market Hub Partners 144A sr. notes 8 1/4s, 2008 795,600 380,000 Nationwide Credit Inc. 144A sr. notes 10 1/4s, 2008 380,950 2,625,000 Pindo Deli Finance Mauritius Ltd. company guaranty 10 3/4s, 2007 (Indonesia) 1,758,750 1,150,000 Primestar Bank Loan 8 5/8s, 2004 1,138,500 1,000,000 Resource America Inc. 144A sr. notes 12s, 2004 1,065,000 -------------- 10,536,834 Lodging (0.3%) - -------------------------------------------------------------------------------------------------------------------------- 810,000 Club Regina, Inc. 144A sr. notes 13s, 2004 801,900 780,000 Epic Resorts LLP 144A sr. notes 13s, 2005 787,800 950,000 Prime Hospitality Corp. sub. notes 9 3/4s, 2007 1,011,750 1,250,000 Sun International Hotels Ltd. company guaranty 9s, 2007 1,312,500 -------------- 3,913,950 Medical Supplies and Devices (0.5%) - -------------------------------------------------------------------------------------------------------------------------- 1,305,000 ALARIS Medical Systems, Inc. company guaranty 9 3/4s, 2006 1,340,888 1,285,000 Dade International, Inc. sr. sub. notes Ser. B, 11 1/8s, 2006 1,445,625 550,000 Imagyn Medical Technologies, Inc. company guaranty 12 1/2s, 2004 154,000 525,000 Kinetic Concepts, Inc. company guaranty Ser. B, 9 5/8s, 2007 538,125 840,000 Leiner Health Products sr. sub. notes 9 5/8s, 2007 890,400 1,280,000 Mediq, Inc. 144A sr. sub. notes 11s, 2008 1,286,400 1,000,000 Wright Medical Technology, Inc. 144A notes Ser. C, 11 3/4s, 2000 990,000 -------------- 6,645,438 Metals and Mining (0.4%) - -------------------------------------------------------------------------------------------------------------------------- 340,000 Acindar Industria Argentina de Aceros S.A. bonds 11 1/4s, 2004 (Argentina) 341,275 850,000 Anker Coal Group, Inc. sr. notes Ser. B, 9 3/4s, 2007 765,000 775,000 Continental Global Group sr. notes Ser. B, 11s, 2007 806,000 1,760,000 Lodestar Holding, Inc. 144A sr. notes 11 1/2s, 2005 1,707,200 785,000 Maxxam Group Holdings, Inc. sr. notes Ser. B, 12s, 2003 877,238 770,000 WHX Corp. sr. notes 10 1/2s, 2005 777,700 -------------- 5,274,413 Motion Picture Distribution (0.2%) - -------------------------------------------------------------------------------------------------------------------------- 1,085,000 AMC Entertainment, Inc. sr. sub. notes 9 1/2s, 2009 1,101,275 1,595,000 Cinemark USA, Inc. sr. sub. notes Ser. B, 9 5/8s, 2008 1,650,825 -------------- 2,752,100 Nursing Homes (0.2%) - -------------------------------------------------------------------------------------------------------------------------- 250,000 Genesis Health Ventures, Inc. sr. sub. notes 9 1/4s, 2006 250,000 2,085,000 Sun Healthcare Group Inc. 144A sr. sub. notes 9 1/2s, 2007 2,126,700 370,000 Sun Healthcare Group Inc. 144A sr. sub. notes 9 3/8s, 2008 373,700 -------------- 2,750,400 Office Equipment (0.2%) - -------------------------------------------------------------------------------------------------------------------------- 1,200,000 U.S. Office Products Co. 144A sr. sub notes 9 3/4s, 2008 1,200,000 639,000 United Stationer Supply, Inc. sr. sub. notes 12 3/4s, 2005 728,460 1,040,000 United Stationer 144A sr. sub. notes 8 3/8s, 2008 1,050,400 -------------- 2,978,860 Oil and Gas (2.2%) - -------------------------------------------------------------------------------------------------------------------------- 2,305,000 Abraxas Petroleum Corp. 144A 11 1/2s, 2004 2,351,100 160,000 American Eco. Corp. 144A company guaranty 9 5/8s, 2008 154,400 500,000 Benton Oil & Gas Co. sr. notes 11 5/8s, 2003 521,250 140,000 Benton Oil & Gas Co. sr. notes 9 3/8s, 2007 136,150 1,620,000 Chesapeake Energy Corp. 144A sr. notes 5/8s, 2005 1,563,300 680,000 Coho Energy, Inc. sr. sub. notes 8 7/8s, 2007 632,400 1,355,000 Costilla Energy, Inc. sr. notes 10 1/4s, 2006 1,375,325 730,000 Dailey Petroleum Services Corp. company guaranty 9 1/2s, 2008 686,200 790,000 Eagle Geophysical, Inc. 144A sr. notes 10 3/4s, 2008 790,000 160,000 Gothic Energy Corp. sr. disc. notes, stepped-coupon Ser. B, zero % (14 1/8s, 5/1/02), 2006 (STP) 91,200 710,000 Michael Petroleum Corp. 144A sr. notes 11 1/2s, 2005 695,800 310,000 Newpark Resources, Inc. company guaranty Ser. B, 8 5/8s, 2007 313,100 875,000 Northern Offshore 144A company guaranty 10s, 2007 811,563 1,160,000 Panaco, Inc. company guaranty Ser. B, 10 5/8s, 2004 1,148,400 550,000 Pride Petroleum Services, Inc. sr. notes 9 3/8s, 2007 566,500 610,000 Seven Seas Petroleum 144A sub. notes 12 1/2s, 2005 616,100 590,000 Southwest Royalties, Inc. company guaranty 10 1/2s, 2004 472,000 10,600,000 Transamerican Energy sr. disc. notes stepped-coupon Ser. B, zero % (13s, 6/15/99), 2002 (STP) 8,268,000 3,430,000 Transamerican Energy sr. notes Ser. B, 11 1/2s, 2002 3,052,700 1,927,000 TransTexas Gas Corp. sr. sub. notes Ser. D, 13 3/4s, 2001 2,110,065 -------------- 26,355,553 Packaging and Containers (0.5%) - -------------------------------------------------------------------------------------------------------------------------- 440,000 AEP Industries, Inc. 144A sr. notes 9 7/8s, 2007 456,500 1,230,000 Impac Group Inc. 144A sr. sub. notes 10 1/8s, 2008 1,236,150 265,000 Printpack, Inc. sr. sub. notes Ser. B, 10 5/8s, 2006 282,888 420,000 Radnor Holdings Inc. sr. notes 10s, 2003 441,000 1,540,000 Riverwood International Corp. company guaranty 10 1/4s, 2006 1,574,650 2,550,000 Riverwood International Corp. company guaranty 10 7/8s, 2008 2,601,000 -------------- 6,592,188 Paging (0.1%) - -------------------------------------------------------------------------------------------------------------------------- 500,000 Mobile Telecommunications Tech. sr. notes 13 1/2s, 2002 580,000 1,000,000 Pagemart Nationwide, Inc. sr. disc. notes stepped-coupon zero % (15s, 2/1/00), 2005 (STP) 915,000 250,000 Paging Network Do Brazil sr. notes 13 1/2s, 2005 (Brazil) 207,188 -------------- 1,702,188 Paper and Forest Products (0.7%) - -------------------------------------------------------------------------------------------------------------------------- 250,000 APP Finance II Mauritius Ltd. bonds sr. disc. notes stepped-coupon 12s, (16s, 2/15/04), 2049 (Indonesia) (STP) 160,000 90,000 APP International Finance Co. notes 11 3/4s, 2005 (Netherlands) 72,900 175,000 Florida Coast Paper LLC 1st mtge. Ser. B, 12 3/4s, 2003 190,750 820,000 Huntsman Packaging Corp. company guaranty 9 1/8s, 2007 844,600 2,810,000 Indah Kiat Financial Mauritius Ltd. company guaranty 10s, 2007 (Indonesia) 1,896,750 2,765,000 PT Pabrik Kertas Tjiwi Kimia company guaranty 10s, 2004 (Indonesia) 1,852,550 1,645,000 Repap New Brunswick sr. notes 10 5/8s, 2005 (Canada) 1,612,100 530,000 Repap New Brunswick 144A sr. notes 9s, 2004 (Canada) 530,000 650,000 Stone Container Corp. sr. notes 12.58s, 2016 734,500 -------------- 7,894,150 Pharmaceuticals and Biotechnology (0.2%) - -------------------------------------------------------------------------------------------------------------------------- 1,450,000 ICN Pharmaceuticals, Inc. 144A sr. notes 9 1/4s, 2005 1,533,375 420,000 PharMerica, Inc. 144A sr. sub. notes 8 3/8s, 2008 417,900 -------------- 1,951,275 Photography (--%) - -------------------------------------------------------------------------------------------------------------------------- 360,000 Panavision Inc. 144A sr. disc. notes stepped-coupon zero % (9 5/8s, 2/1/02), 2006 (STP) 262,800 Publishing (0.4%) - -------------------------------------------------------------------------------------------------------------------------- 900,000 American Media Operation, Inc. sr. sub. notes 11 5/8s, 2004 976,500 1,250,000 Garden State Newspapers, Inc. sr. sub. notes Ser. B, 8 3/4s, 2009 1,281,250 760,000 Gothic Production Corp. company guaranty Ser. B, 11 1/8s, 2005 737,200 1,000,000 Perry-Judd company guaranty 10 5/8s, 2007 1,050,000 300,000 Tri State Outdoor Media, Inc. 144A sr. sub. notes 11s, 2008 311,250 370,000 Von Hoffman Press Inc. 144A sr. sub. notes 10 3/8s, 2007 388,500 -------------- 4,744,700 Railroads (0.2%) - -------------------------------------------------------------------------------------------------------------------------- 1,280,000 TFM S.A. de C.V. company guaranty 10 1/4s, 2007 (Mexico) 1,296,000 1,415,000 TFM S.A. de C.V. company guaranty stepped-coupon zero %, (11 3/4s, 6/15/02), 2009 (Mexico) (STP) 944,513 -------------- 2,240,513 Real Estate (0.2%) - -------------------------------------------------------------------------------------------------------------------------- 190,000 Bluegreen Corp. 144A sr. notes 10 1/2s, 2008 186,200 2,380,000 HMH Properties, Inc. company guaranty Ser. B, 7 7/8s, 2008 (Canada) (R) 2,371,075 -------------- 2,557,275 Recreation (1.4%) - -------------------------------------------------------------------------------------------------------------------------- 1,400,000 Argosy Gaming Co. 1st mtge. 13 1/4s, 2004 1,582,000 1,500,000 Autotote Corp. company guaranty Ser. B, 10 7/8s, 2004 1,612,500 1,975,000 Coast Hotels & Casinos, Inc. company guaranty Ser. B, 13s, 2002 2,281,125 1,780,000 Fitzgeralds Gaming Corp. company guaranty Ser. B, 12 1/4s, 2004 1,602,000 540,000 Isle of Capri Black Hawk LLC 1st mortgage Ser. B, 13s, 2004 569,700 2,379,000 Louisiana Casino Cruises Corp. 1st mtge. 11 1/2s, 1998 2,402,790 1,675,000 Mohegan Tribal, Gaming Auth. sr. secd. notes Ser. B, 13 1/2s, 2002 2,127,250 320,000 Penn National Gaming, Inc. 144A sr. notes 10 5/8s, 2004 339,200 2,300,000 Premier Parks, Inc. sr. notes 9 1/4s, 2006 2,415,000 1,400,000 PRT Funding Corp. sr. notes 11 5/8s, 2004 (In default) (NON) 1,004,500 500,000 Trump A.C. 1st mtge. 11 1/4s, 2006 491,250 875,000 Trump Holdings & Funding Corp. sr. notes 15 1/2s, 2005 980,000 -------------- 17,407,315 Restaurants (0.2%) - -------------------------------------------------------------------------------------------------------------------------- 1,800,000 FRD Acquisition Co. sr. notes Ser. B, 12 1/2s, 2004 1,980,000 Retail (0.5%) - -------------------------------------------------------------------------------------------------------------------------- 2,090,000 Amazon Inc. 144A sr. disc. notes stepped-coupon zero % (10s, 5/1/03), 2008 (STP) 1,316,700 450,000 Color Spot Nurseries sr. sub. notes 10 1/2s, 2007 333,000 445,000 Home Interiors & Gifts, Inc. 144A sr. sub. notes 10 1/8s, 2008 463,913 1,000,000 K mart Corp. pass-thru certificates Ser. 95K4, 9.35s, 2020 1,080,080 1,600,000 Mothers Work, Inc. sr. notes 12 5/8s, 2005 1,748,000 420,000 NBTY Inc. 144A sr. sub. notes 8 5/8s, 2007 426,300 180,000 Service Merchandise Co., Inc. sr. sub. deb. 9s, 2004 129,600 635,000 William Carter Co. 144A sr. sub. notes 12s, 2008 679,450 -------------- 6,177,043 Satellite Services (0.7%) - -------------------------------------------------------------------------------------------------------------------------- 850,000 Amsc Acquisition Co. Inc. 144A sr. notes 12 1/4s, 2008 756,500 940,000 Esat Holdings Ltd. 144A sr. notes stepped-coupon zero % (12 1/2s, 2/01/02), 2007 (Ireland) (STP) 690,900 1,180,000 Golden Sky Systems 144A sr. sub. notes 12 3/8s, 2006 1,209,500 1,420,000 ICG Services Inc. 144A sr. disc. notes stepped-coupon zero % (10s, 2/15/03), 2008 (STP) 880,400 4,160,000 ICG Services, Inc. 144A sr. discount notes stepped-coupon zero %, (9 7/8s, 5/1/03), 2008 (STP) 2,537,600 640,000 Satelites Mexicanos S.A. de C.V. 144A sr. notes 10 1/8s, 2004 (Mexico) 614,400 1,185,000 TCI Satellite Entertainment, Inc. sr. disc. notes stepped-coupon zero % (12 1/4s, 2/15/02), 2007 (STP) 776,175 880,000 TCI Satellite Entertainment, Inc. sr. sub. notes 10 7/8s, 2007 869,000 -------------- 8,334,475 Semiconductors (0.3%) - -------------------------------------------------------------------------------------------------------------------------- 545,129 Cirent Semiconductor sr. sub. notes 10.22s, 2002 566,253 578,404 Cirent Semiconductor 144A sr. sub. notes 10.14s, 2004 602,263 825,000 Fairchild Semiconductor Corp. 144A sr. sub. notes 11.74s, 2008 (PIK) 944,625 1,900,000 Fairchild Semiconductor Corp. sr. sub. notes 10 1/8s, 2007 1,862,000 -------------- 3,975,141 Shipping (0.2%) - -------------------------------------------------------------------------------------------------------------------------- 360,000 International Shipholding Corp. sr. notes 7 3/4s, 2007 354,600 1,100,000 Johnstown America Industries, Inc. company guaranty Ser. C, 11 3/4s, 2005 1,215,500 570,000 MC Shipping, Inc. 144A sr. notes 11 1/4s, 2008 564,300 1,420,000 Pegasus Shipping 144A company guaranty 11 7/8s, 2008 710,000 -------------- 2,844,400 Specialty Consumer Products (0.2%) - -------------------------------------------------------------------------------------------------------------------------- 1,060,000 Decora Industries, Inc. 144A sr. sec. notes 11s, 2005 1,038,800 790,000 Eye Care Centers of America 144A sr. sub. notes 9 1/8s, 2008 790,000 925,000 Sovereign Specialty Chemical 144A company guaranty Ser. A, 9 1/2s, 2007 952,750 -------------- 2,781,550 Steel (0.2%) - -------------------------------------------------------------------------------------------------------------------------- 480,000 Hylsa S.A. de C.V. 144A bonds 9 1/4s, 2007 (Mexico) 450,000 1,500,000 Ispat Mexicana, S.A. 144A bonds 10 3/8s, 2001 (Mexico) 1,515,000 -------------- 1,965,000 Telecommunications (6.1%) - -------------------------------------------------------------------------------------------------------------------------- 3,150,000 Allegiance Telecom, Inc. sr. disc. notes stepped-coupon Ser. B, zero % (11 3/4s, 2/15/03), 2008 (STP) 1,669,500 150,000 Allegiance Telecom, Inc. sr. notes 12 7/8s, 2008 151,875 1,100,000 Barak I.T.C. sr. disc. notes stepped-coupon Ser. B, zero % (12 1/2s, 11/15/02), 2007 (Israel) (STP) 660,000 1,980,000 BTI Telecommunication Corp. sr. notes 10 1/2s, 2007 1,970,100 780,000 Caprock Communications Corp. 144A sr. notes 12s, 2008 791,700 1,280,000 Charter Communications International, Inc. disc. notes stepped-coupon Ser. B, zero % (14s, 3/15/01), 2007 (STP) 1,113,600 1,250,000 Charter Communications International, Inc. sr. notes Ser. B, 11 1/4s, 2006 1,415,625 2,905,000 Colt Telecommunications sr. discount notes stepped coupon zero % (12s, 12/15/01), 2006 (STP) (United Kingdom) 2,367,575 955,000 Conecel Holdings 144A notes Ser. A, 14s, 2000 926,350 385,000 Consorcio Ecuatoiano notes 14s, 2002 (Ecuador) 373,450 2,270,000 Econophone Inc. company guaranty 13 1/2s, 2007 2,587,800 1,790,000 Econophone, Inc. 144A notes stepped-coupon zero % (11s, 2/15/03), 2008 (STP) 1,065,050 710,000 E. Spire Communications, Inc. sr. notes 13 3/4s, 2007 828,925 1,760,000 E. Spire Communications, Inc. sr. discount notes stepped-coupon zero % (12 3/4s, 4/1/01) 2006 (STP) 1,412,400 580,000 Espirit Telecom Group PLC sr. notes 11 1/2s, 2007 (United Kingdom) 614,800 2,210,000 Focal Communications Corp. 144A sr. disc. notes stepped-coupon zero % (12 1/8s, 2/15/03), 2008 (STP) 1,317,713 1,695,000 Fonorola, Inc. sr. notes 12 1/2s, 2002 (Canada) 1,913,231 4,930,000 Global Crossing Holdings 144A sr. notes 9 5/8s, 2008 5,225,800 1,150,000 GST Equipment Funding sr. notes 13 1/4s, 2007 1,334,000 2,026,000 GST Telecommunications, Inc. company guaranty stepped-coupon zero % (13 7/8s, 12/15/00), 2005 (STP) 1,681,580 2,330,000 GST Telecommunications, Inc. 144A sr. disc. notes stepped-coupon zero % (10 1/2s, 5/1/03), 2008 (STP) 1,444,600 655,000 Hyperion Telecommunications, Inc. sr. disc. notes stepped-coupon Ser. B, zero % (13s, 4/15/01), 2003 (STP) 504,350 1,430,000 Hyperion Telecommunications, Inc. sr. notes Ser. B, 12 1/4s, 2004 1,558,700 1,430,000 ICG Holdings, Inc. sr. disc. notes stepped-coupon zero % (13 1/2s, 9/15/00), 2005 (STP) 1,226,225 2,750,000 Intermedia Communications, Inc. sr. disc. notes stepped-coupon Ser. B, zero % (11 1/4s, 7/15/02), 2007 (STP) 2,076,250 5,040,000 Intermedia Communications, Inc. 144A sr. notes 8.6s, 2008 5,166,000 922,000 ITC Deltacom, Inc. sr. notes 11s, 2007 1,053,385 1,280,000 IXC Communications, Inc. 144A sr. sub. notes 9s, 2008 1,315,200 2,185,000 Knology Holdings Inc. sr. disc. notes stepped-coupon zero %, (11 7/8s, 10/15/02), 2007 (STP) 1,283,688 1,565,000 L-3 Communications Corp. sr. sub. notes Ser. B, 10 3/8s, 2007 1,737,150 525,000 MetroNet Communications Corp. sr. disc. notes stepped-coupon zero % (10 3/4s, 11/1/02), 2007 (STP) (Canada) 355,688 1,910,000 MetroNet Communications Corp. 144A sr. disc. notes stepped-coupon zero % (9.95s, 6/15/03), 2008 (Canada) (STP) 1,212,850 350,000 MGC Communications, Inc. sr. notes Ser. B, 13s, 2004 343,000 750,000 MJD Communications 144A sr. sub. notes 9 1/2s, 2008 776,250 659,000 MJD Communications 144A 8s, 2008 665,590 730,000 Microcell Telecommunications sr. disc. notes stepped-coupon Ser. B, zero % (14s, 12/1/01), 2006 (Canada) (STP) 565,750 220,000 Netia Holdings B.V. 144A company guaranty stepped-coupon zero % (11 1/4s, 11/1/01), 2007 (Poland) (STP) 141,900 380,000 Netia Holdings B.V. 144A 10 1/4s, 2007 (Poland) 359,100 350,000 NEXTEL Communications, Inc. 144A sr. disc. notes stepped-coupon zero % (12 1/8s, 4/15/03), 2008 (STP) 220,500 4,345,000 NEXTEL Communications, Inc. sr. disc. notes stepped-coupon zero % (10.65s, 9/15/02), 2007 (STP) 2,987,188 2,030,000 NEXTEL Communications, Inc. sr. disc. notes stepped-coupon zero % (9 3/4s, 10/31/02), 2007 (STP) 1,360,100 5,250,000 NEXTEL Communications, Inc. sr. disc. notes stepped-coupon zero % (9.95s, 2/15/03), 2008 (STP) 3,451,875 1,300,000 NorthEast Optic Network, Inc. sr. notes 12 3/4s, 2008 1,300,000 1,900,000 Primus Telecom Group 144A sr. notes 9 7/8s, 2008 1,900,000 1,270,000 Qwest Communications International Inc. sr. disc. notes stepped-coupon zero % (9.47s, 10/15/02), 2007 (STP) 981,075 940,000 Qwest Communications International, Inc. sr. disc. notes stepped-coupon zero % (8.29s, 2/1/03), 2008 (STP) 700,300 1,765,000 Telecom Tech, Inc. 144A sr. sub. notes 9 3/4s, 2008 1,809,125 2,210,000 Time Warner Telecom Inc. sr. notes 9 3/4s, 2008 2,259,725 440,000 Transtel pass thru certificates 144A 12 1/2s, 2007 396,000 100,000 21st Century Telecom Group, Inc. sr. disc. notes stepped-coupon zero % (12 1/4s, 2/15/03), 2008 (STP) 55,000 1,870,000 United International Holdings sr. disc. notes stepped-coupon Ser. B, zero % (10 3/4s, 2/15/03), 2008 (STP) 1,182,775 1,390,000 WinStar Communications. Inc. 144A sr. sub. notes 15s, 2007 1,765,300 785,000 Winstar Equipment Corp. company guaranty 12 1/2s, 2004 885,088 1,810,000 Viacom International, Inc. sub. deb. 8s, 2006 1,873,350 -------------- 74,334,151 Telephone Services (1.1%) - -------------------------------------------------------------------------------------------------------------------------- 390,000 Call-Net Enterprises, Inc. sr. disc. notes stepped-coupon zero % (8.94s, 8/15/03), 2008 (Canada) (STP) 253,500 620,000 Facilicom International sr. notes Ser. B., 10 1/2s, 2008 626,200 1,240,000 Flag Ltd. 144A sr. notes 8 1/4s, 2008 (Bermuda) 1,258,600 370,000 Globo Communicacoes 144A sr. notes 10 5/8s, 2008 (Brazil) 338,550 1,045,000 Globo Communicacoes 144A company guaranty 10 1/2s, 2006 (Brazil) 964,013 655,000 IDT Corp. sr. notes 8 3/4s, 2006 628,800 4,350,000 Ionica PLC sr. discount notes stepped-coupon zero % (15s, 5/1/02) 2007 (STP) (United Kingdom) 826,500 2,175,000 KMC Telecom Holdings, Inc. 144A sr. disc. notes stepped-coupon zero % (12 1/2s, 2/15/03), 2008 (STP) 1,326,750 280,000 Level 3 Communication, Inc. sr. notes 9 1/8s, 2008 275,800 650,000 NTL Inc. sr. notes Ser. B, 10s, 2005 703,625 2,390,000 NTL Inc. 144A sr. notes stepped-coupon zero % (9 3/4s, 4/01/03), 2008 (STP) 1,604,288 1,785,000 RSL Communications, Ltd. company guaranty 12 1/4s, 2006 2,003,663 980,000 RSL Communications, Ltd. company guaranty stepped-coupon zero % (10 1/8s, 3/1/03), 2008 (STP) 622,300 650,000 RSL Communications, Ltd. company guaranty 9 1/8s, 2008 644,313 470,000 Sprint Spectrum L.P. sr. notes 11s, 2006 542,850 640,000 US Xchange LLC 144A sr. notes 15s, 2008 680,000 -------------- 13,299,752 Textiles (0.4%) - -------------------------------------------------------------------------------------------------------------------------- 1,740,000 Galey & Lord Inc. company guaranty 9 1/8s, 2008 1,679,100 900,000 Polymer Group, Inc. company guaranty Ser. B, 9s, 2007 922,500 470,000 Polymer Group, Inc. 144A sr. sub. notes 8 3/4s, 2008 477,050 850,000 Polysindo International Eka company guaranty 13s, 2001 (Indonesia) (NON) 272,000 2,000,000 Polysindo International Finance company guaranty 11 3/8s, 2006 (Indonesia) (NON) 640,000 770,000 Westpoint Stevens, Inc. 144A sr. notes 7 7/8s, 2008 785,400 -------------- 4,776,050 Transportation (0.3%) - -------------------------------------------------------------------------------------------------------------------------- 500,000 Coach USA, Inc. 144A company guaranty 9 3/8s, 2007 522,500 500,000 Eletson Holdings, Inc. 1st pfd. mtge. notes 9 1/4s, 2003 (Greece) 516,875 820,000 Hermes Europe Railtel 144A sr. notes 11 1/2s, 2007 (Netherlands) 934,800 1,290,000 Kitty Hawk, Inc. company guaranty 9.95s, 2004 1,360,950 -------------- 3,335,125 Wireless Communications (1.0%) - -------------------------------------------------------------------------------------------------------------------------- 2,110,000 Allbritton Communications Co. sr. sub. notes Ser. B, 8 7/8s, 2008 2,236,600 670,000 CTI Holdings S.A. 144A sr. notes stepped-coupon zero %, (11 1/2s, 4/15/03), 2008 (STP) 376,875 1,690,000 Dobson Wireline Co. 144A sr. notes 12 1/4s, 2008 1,706,900 1,340,000 Iridium LLC/Capital Corp. company guaranty Ser. B, 14s, 2005 1,433,800 180,000 Iridium LLC/Capital Corp. company guaranty Ser. A, 13s, 2005 183,600 1,405,000 Omnipoint Corp. sr. notes 11 5/8s, 2006 1,503,350 490,000 Sygnet Wireless, Inc. sr. notes 11 1/2s, 2006 568,400 505,000 Telesystem International Wireless Inc. sr. disc. notes stepped-coupon Ser. C, zero %, (10 1/2s, 11/1/02), 2007 (STP) 303,000 1,955,000 Teligent, Inc. sr. notes 11 1/2s, 2007 1,989,213 2,250,000 Teligent, Inc. 144A sr. disc. notes stepped-coupon zero % (11 1/2s, 3/1/03), 2008 (STP) 1,276,875 450,000 Western Wireless Corp. sr. sub. notes 10 1/2s, 2007 487,125 -------------- 12,065,738 -------------- Total Corporate Bonds and Notes (cost $458,515,678) $ 463,213,011 U.S. GOVERNMENT AND AGENCY OBLIGATIONS (28.7%) (a) PRINCIPAL AMOUNT VALUE U.S. Government Agency Mortgage Obligations (15.4%) - -------------------------------------------------------------------------------------------------------------------------- Federal National Mortgage Association $33,630,000 6 1/2s, TBA, August 15, 2028 $ 33,451,088 Federal National Mortgage Association Pass-through Certificates 1,306,802 7s, with due dates from June 1, 2028 to July 1, 2028 1,325,175 1,786,907 6 1/2s, with due dates from June 1, 2023 to July 1, 2028 1,779,704 Government National Mortgage Association 2,200,000 7s, TBA, August 15, 2028 2,234,364 Government National Mortgage Association Adjustable Rate Mortgages 4,059,858 7s, with due dates from July 20, 2024 to October 20, 2024 4,160,882 5,263,639 6s, July 20, 2024 5,396,875 732,902 5 1/2s, with due dates from August 20, 2027 to April 20, 2028 737,652 Government National Mortgage Association Pass-through Certificates 14,554,739 8s, with due dates from July 15, 2024 to March 15, 2028 15,101,639 31,656,123 7 1/2s, with due dates from August 15, 2022 to July 15, 2027 32,592,432 54,847,556 7s, with due dates from July 20, 2024 to May 15, 2028 55,706,623 35,976,550 6 1/2s, with due dates from February 15, 2027 to May 15, 2028 35,863,945 -------------- 188,350,379 U.S. Treasury Obligations (13.3%) - -------------------------------------------------------------------------------------------------------------------------- U.S. Treasury Bonds 30,705,000 6 1/2s, November 15, 2026 (SEG) 33,703,650 3,270,000 6 3/8s, August 15, 2027 3,549,977 22,645,000 6 1/8s, November 15, 2027 23,936,444 U.S. Treasury Notes 4,725,000 5 3/4s, November 30, 2002 4,754,531 21,365,000 5 5/8s, April 30, 2000 21,401,748 30,360,000 5 1/2s, May 31, 2003 30,302,923 31,630,000 5 1/2s, March 31, 2003 31,560,730 13,130,000 5 1/2s, May 31, 2000 13,125,930 -------------- 162,335,933 -------------- Total U.S. Government and Agency Obligations (cost $344,757,713) $ 350,686,312 FOREIGN GOVERNMENT BONDS AND NOTES (10.5%) (a) PRINCIPAL AMOUNT VALUE - -------------------------------------------------------------------------------------------------------------------------- DEM 56,520,000 Germany (Federal Republic of) bonds Ser. 98, 5 5/8s, 2028 $ 33,457,424 USD 5,800,000 Korea (Republic of) unsub. 8 7/8s, 2008 5,463,600 USD 5,710,000 Russia (Government of) 144A bonds 12 3/4s, 2028 4,696,475 USD 31,431,000 Russia (Government of) deb. principal loans FRB 6.625s, 2020 (POR) 13,574,263 ZAR 63,000,000 South Africa (Republic of) bonds Ser. 153, 13s, 2010 8,884,853 GBP 11,815,000 United Kingdom Treasury bonds 8s, 2021 25,307,730 GBP 14,885,000 United Kingdom Treasury bonds 8s, 2000 24,936,066 USD 5,335,000 United Mexican States bonds 11 3/8s, 2016 6,028,550 USD 5,660,000 Venezuela (Government of) bonds 13 5/8s, 2018 5,563,780 -------------- Total Foreign Government Bonds and Notes (cost $133,910,945) $ 127,912,741 COLLATERALIZED MORTGAGE OBLIGATIONS (9.1%) (a) PRINCIPAL AMOUNT VALUE - -------------------------------------------------------------------------------------------------------------------------- $ 2,565,000 Chase Mortgage Finance Corp. 6 3/4s, 2028 $ 2,568,206 Commercial Mortgage Acceptance Corp. 41,695,496 Ser. 97-ML1, 0.962s, 2017 (Interest Only) 2,394,989 3,520,000 Ser. 97-ML1, Class D, 7.11s, 2030 3,563,450 4,100,000 Countrywide Mortgage 6 1/2s, 2024 3,997,500 Criimi Mae Commercial Mortgage Trust Ser. 1998-C1 11,790,000 Class A2, 7s, 2011 11,602,281 4,705,000 Class B, 7s, 2011 4,424,170 49,361,167 Deutsche Mortgage & Asset Receiving Corp. Ser. 98-C1, Class X, IO, 1.249s, 2023 3,424,431 Federal Home Loan Mortgage Corp. 1,900,000 Ser. 2040, Class PE, 7 1/2s, 2028 2,072,188 1,539,212 Ser. 1717, Class L, 6 1/2s, 2024 1,543,060 1,105,000 Ser. 1439, Class I, 7 1/2s, 2022 1,185,976 Federal Home Loan Mortgage Corp. Strips 9,685,681 Ser. 195, Interest only (IO), 7 1/2s, 2028 1,894,761 9,985,626 Ser. 195, Principal only (PO), zero %, 2028 8,298,992 14,495,469 Ser. 194, IO, 6 1/2s, 2028 4,190,097 Federal National Mortgage Association 5,669,315 Ser. 1993-251, Class Z, 6 1/2s, 2023 5,353,960 Federal National Mortgage Association Strips 3,746,371 Ser. 294, Class 1, PO, zero %, 2028 2,902,266 8,032,275 Ser. 290, Class 2, IO, 6 1/2s, 2024 2,020,619 5,390,443 Ser. 273, Class 1, PO, zero %, 2026 4,255,081 7,002,000 Ser. 240, Class 2, IO, 7s, 2023 1,641,094 First Union-Lehman Brothers Commercial Mortgage 4,060,000 Ser. 97-C2, Class D, 7.12s, 2012 4,071,419 3,070,000 Ser. 97-C2, Class A2, 6.6s, 2007 3,125,164 5,775,000 Ser. 97-C2, Class A3, 6.65s, 2008 5,890,500 24,779,037 Ser. 97-C2, IO, 1.092s, 2027 2,157,841 4,515,000 Ser. 98-C2, Class D, 6.778s, 2013 4,388,016 1,775,000 Government National Mortgage Association Ser. 1997-8, Class PE, 7 1/2s, 2027 1,902,023 GS Mortgage Securities Corp. II Ser. 98-GLII 3,710,000 Class A2, 6.562s, 2031 3,766,809 2,025,000 Class D, 7.191s, 2031 2,037,023 Merrill Lynch Mortgage Investors, Inc. 650,000 Ser. 98-C2, Class D, 14.045s, 2030 653,148 1,615,000 7.782s, 2025 1,689,441 Mortgage Capital Funding, Inc. Ser. 1998-MC1 3,420,000 Class A2, 6.663s, 2008 3,492,675 53,895,000 Class X, IO, 0.8621s, 2009 2,467,380 Morgan Stanley Capital I 1,120,000 Ser. 1998-XL1, Class E, 7.1504, 2030 1,149,575 1,150,000 Ser. 1998-WF1, Class D, 7.12s, 2008 1,173,359 1,556,296 Prudential Home Mortgage Securities Ser. 93-57, Class A4, 5.9s, 2023 1,552,892 2,505,000 Residential Funding Mortgage Sec. I Ser. 1998-S13, Class A21, 6 3/4s, 2028 2,494,041 2,254,519 Rural Housing Trust Ser. 87-1, Class D, 6.33s, April 1, 2026 2,257,337 -------------- Total Collateralized Mortgage Obligations (cost $111,866,894) $ 111,601,764 BRADY BONDS (5.3%) (a) PRINCIPAL AMOUNT VALUE - -------------------------------------------------------------------------------------------------------------------------- $12,430,000 Argentina (Republic of) Ser. L-GP, stepped-coupon 5 3/4s, (6s, 3/31/99), 2023 (STP) $ 9,384,650 11,170,100 Argentina (Republic of) deb. FRB 6.625s, 2005 10,095,536 14,310,000 Brazil (Government of) disc. bonds Ser. ZL, FRB 6.625s, 2024 10,214,478 21,374,548 Brazil (Government of) stepped-coupon 5s, (8s, 4/30/00), 2014 (STP) 16,298,093 2,725,000 Bulgaria (Government of) Ser. A, FRB 2 1/4s, 2012 1,716,750 4,500,000 Central Bank of Nigeria Ser. WW, 6 1/4s, 2020 3,200,850 3,371,389 Ecuador (Republic of) deb. Ser. PDI, FRB, 6.625s, 2015 2,010,359 8,650,000 Ivory Coast - 144A FLIRB collateralized FRB 2s, 2018 435,220 8,650,000 Ivory Coast - 144A PDI bonds FRB 1.9s, 2018 507,757 3,210,000 Peru (Government of) 144A Ser PDI, 4s, 2017 2,022,300 475,355 Russia (Government of) deb. FRB 6.625s, 2015 241,837 10,499,965 Venezuela (Government of) deb. Ser. A, FRB 6.625s, 2007 8,242,473 -------------- Total Brady Bonds (cost $67,617,944) $ 64,370,303 PREFERRED STOCKS (3.5%) (a) NUMBER OF SHARES VALUE - -------------------------------------------------------------------------------------------------------------------------- 24,623 AmeriKing, Inc. $3.25 pfd. (PIK) $ 664,820 108,000 California Federal Bancorp Inc. Ser. A, $2.281 pfd. 2,970,000 11,849 Capstar Broadcasting Inc. 144A $12.00 pfd. 1,374,484 29,725 Chevy Chase Capital Corp. Ser. A, $5.188 pfd. 1,627,444 6,875 Chevy Chase Savings Bank $3.25 pfd. 213,125 11,832 Citadel Broadcasting Inc. 144A $13.25 cum. pfd. (PIK) 1,419,840 590 Concentric Network Corp. 144A 13.50% pfd. (PIK) 612,125 27,329 CSC Holdings, Inc. Ser. M, 11.125 cum. (PIK) 3,197,493 34,730 Diva Systems Corp. Ser. C, 6.00 pfd. 555,680 399 E. Spire Communications, Inc. 12.75% pfd. (PIK) 439,898 350 Echostar Communications, Inc. 12.125 pfd. 390,250 250,000 Fresenius Medical Care AG. Ser. D, 9.00 pfd. (Germany) 262,500 1,732 Granite Broadcasting 144A 12.75 pfd. (PIK) 2,026,440 349 Hyperion Telecommunications Ser. B, 12.875 pfd. (PIK) 373,430 3,811 ICG Holdings, Inc. 14.25 pfd. (Canada) 4,573,200 2,457 Intermedia Communication Ser. B, 13.50 pfd. (PIK) 2,911,545 1,368 IXC Communications, Inc. 12.50 pfd. (PIK) 1,559,520 23,306 Lady Luck Gaming Corp. 11.25 pfd. 1,013,811 12,807 Nebco Evans Holding Co. 144A 11.25 pfd. (PIK) 1,152,630 4,546 NEXTEL Communications, Inc. Ser. D, 13.00 cum. pfd. (PIK) 5,136,980 720 NEXTEL Communications, Inc. Ser. E, 11.125 pfd. (PIK) 770,400 40,441 Nextlink Communications, Inc. 144A 7.00 pfd. 2,365,799 186 Paxson Communications Corp. 144A 13.25% pfd. (PIK) 1,850,700 8,052 SFX Broadcasting, Inc. Ser. E, 12.625 pfd. (PIK) 946,110 5,000 Sinclair Capital 11.625 cum. pfd. 555,000 1,702 Spanish Broadcasting Systems 14.25 cum. pfd. (PIK) 1,859,435 290 21st Century Telecom Group 144A 13.75 cum. pfd. (PIK) 290,725 8,560 Von Hoffman Corp. 144A 13.50 pfd. 282,480 1,450 WinStar Communications, Inc. 144A 14.25% pfd. (PIK) 1,682,000 -------------- Total Preferred Stocks (cost $39,387,578) $ 43,077,864 UNITS (2.6%) (a) NUMBER OF UNITS VALUE - -------------------------------------------------------------------------------------------------------------------------- 490 Bell Tech Ltd. 144A units 13s, 2005 $ 494,900 810 Bestel S.A.de CV units, stepped-coupon zero % (12 3/4s, 5/15/01), 2005 (STP) 564,975 780 Birch Telecom Inc., 144A units 14s, 2008 780,000 385 Celcaribe S.A. 144A units 13 1/2s, 2004 (Brazil) 8,142,750 685 Covad Communications Group 144A units, stepped-coupon zero % (13 1/2s, 3/15/03), 2008 (STP) 378,463 2,996 Diva Systems Corp. 144A units stepped-coupon zero % (12 5/8s, 3/1/03), 2008 (STP) 1,527,960 4,820 DTI Holdings Inc. units stepped-coupon zero % (12 1/2s, 3/1/03), 2008 (STP) 2,530,500 3,410 Firstworld Communication 144A units stepped-coupon zero %, (13s, 4/15/03), 2008 (STP) 1,508,925 690 ICO Global Communications (Holdings) Ltd. units 15s, 2005 690,000 2,180 Long Distance International Inc. 144A units 12 1/4s, 2008 2,223,600 940 Mediq 144A units, stepped-coupon zero % (13s, 6/1/03), 2009 (STP) 502,900 470 Onepoint Communications, Inc. units 14 1/2s, 2008 439,450 1,570 Pathnet, Inc. 144A units 12 1/4s, 2008 1,656,350 2,290 Rhythms Netcon 144A units stepped-coupon zero % (13 1/2s, 5/15/03), 2008 (STP) 1,041,950 1,640 Startec Global Communications Corp. units 12s, 2008 1,607,200 740 Stone Container Corp. units sr. sub. 12 1/4s, 2002 762,200 630 Telehub Communications Corp. units stepped-coupon zero %, (13 7/8s,7/31/01), 2005 (STP) 428,400 1,240 Transamerican Refining units 16s, 2003 1,267,900 850 Versatel Teleco units 13 1/4s, 2008 896,750 1,990 Viatel Global 144A units 11 1/4s, 2008 2,179,050 845 Wireless One, Inc. units stepped-coupon zero %, (13 1/2s, 8/1/01), 2006 (STP) 84,500 960 XCL Ltd units sr. sec. notes 13 1/2s, 2004 1,084,800 1,120 York Power Funding Ltd. unit 12s, 2007 1,120,000 -------------- Total Units (cost $28,859,758) $ 31,913,523 ASSET-BACKED SECURITIES (0.9%) (a) PRINCIPAL AMOUNT VALUE - -------------------------------------------------------------------------------------------------------------------------- $ 4,135,000 Chemical Master Credit Card Trust Ser. 95-2, Class A, 6.23s, 2003 $ 4,162,126 1,275,000 Contimortgage Home Equity Loan Trust Ser. 97-1, Class M2, 7.67s, 2028 1,296,509 3,860,420 First Plus Ser. 98-ACl 8 1/2s, 2023 3,830,260 1,506,887 Green Tree Recreational Equipment & Cons. Ser. 97-B, Class A1, 6.55s, 2028 1,519,601 -------------- Total Asset-Backed Securities (cost $10,999,855) $ 10,808,496 CONVERTIBLE BONDS AND NOTES (0.6%) (a) PRINCIPAL AMOUNT VALUE - -------------------------------------------------------------------------------------------------------------------------- $ 2,420,000 APP Global Finance Ltd. 144A cv. company guaranty 3 1/2s, 2003 (United Kingdom) $ 1,730,300 1,585,000 APP Global Finance Ltd. 144A cv. sec. 2s, 2000 (United Kingdom) 1,307,625 1,200,000 Corporate Express, Inc. cv. notes 4 1/2s, 2000 1,107,000 647,000 GST Telecommunications, Inc. cv. sr. disc. notes stepped-coupon zero %, (13 7/8s, 12/15/00), 2005 (STP) 1,099,900 700,000 Integrated Device Technology, Inc. cv. sub. notes 5 1/2s, 2002 564,375 1,330,000 Jacor Communications, Inc. cv. sr. notes zero %, 2011 1,102,238 450,000 National Semiconductor Corp. 144A cv. deb. 6 1/2s, 2002 410,625 -------------- Total Convertible Bonds and Notes (cost $7,600,749) $ 7,322,063 COMMON STOCKS (0.5%) (a) NUMBER OF SHARES VALUE - -------------------------------------------------------------------------------------------------------------------------- 33,720 American Mobile Satellite Corp. (NON) $ 242,363 1,325 AmeriKing, Inc. (NON) 48,900 42,880 CellNet Data Systems, Inc. (NON) 356,440 27,940 Chattem, Inc. (NON) 717,709 10,918 Hedstrom Holdings, Inc. 144A 13,648 10,934 IFINT Diversified Holdings 144A (NON) 87,472 466 Mothers Work, Inc. (NON) 3,495 20,101 NEXTEL Communications, Inc. Class A (NON) 538,330 250 Paging Do Brazil Holdings Co., LLC Class B (Brazil) 3 1,186 Premium Holdings L.P. 144A (NON) 4,743 250,248 PSF Holdings LLC Class A (acquired various dates from 9/15/93 to 8/25/94, cost 8,604,327) (RES) 4,384,338 7,950 RSL Communications, Ltd. Class A (NON) 314,025 36,750 Specialty Foods Corp. 144A (NON) 3,675 -------------- Total Common Stocks (cost $11,304,728) $ 6,715,141 WARRANTS (0.4%) (a)(NON) EXPIRATION NUMBER OF WARRANTS DATE VALUE - -------------------------------------------------------------------------------------------------------------------------- 2,140 Allegiance Telecom, Inc. 2/3/08 $ 38,520 850 American Mobile Satellite Corp. 4/1/08 10,625 95,000 Becker Gaming Corp. 144A 11/15/00 950 6,652 Cellnet Data Systems, Inc. 9/15/07 372,512 810 Club Regina, Inc. 144A 4/15/06 24,300 2,905 Colt Telecommunications Group PLC 12/31/06 1,016,750 320 Concentric Network Corp. 12/15/07 41,600 12,892 Consorcio Ecuatoriano 144A (Ecuador) 10/1/00 6,446 5,375 County Seat Holdings, Inc. 10/15/98 108 1,715 Diva Systems Corp. 5/15/06 548,800 2,520 Econophone Inc. 9/9/99 176,400 780 Epic Resorts 6/15/05 8 940 Esat Holdings, Inc. (Ireland) 2/1/07 33,135 20 E. Spire Communications, Inc. 11/1/05 3,600 1,015 Globalstar Telecom 144A 2/15/04 101,500 2,815 Hyperion Telecommunications 144A 4/15/01 273,055 20,856 Intelcom Group 144A 10/15/05 667,392 1,900 Interact Systems, Inc. 8/1/03 19 3,025 Intermedia Communications, Inc. 6/1/00 468,875 1,140 International Wireless Communications Holdings 144A 8/15/01 1,140 2,175 KMC Telecom Holdings, Inc. 4/15/08 43,500 2,185 Knology Holdings, Inc. 144A 10/15/07 3,278 10,452 Louisiana Casino Cruises, Inc. 144A (NON) 1/15/07 553,956 3,590 McCaw International Ltd. 4/15/07 14,360 350 MGC Communications, Inc. 144A 10/1/04 28,700 990 Orbital Imaging Corp. 3/1/05 49,500 1,310 Orion Network Systems 1/15/07 16,375 12,880 Pagemart, Inc. 144A 12/31/03 103,040 1,600 Paxson Communications Corp. 144A 6/30/03 16 46,534 President Riverboat Casinos, Inc. 9/30/99 23,267 990 Spanish Broadcasting Systems 144A 6/30/99 202,950 680 Sterling Chemicals Holdings 8/15/08 16,320 5,820 UIH Australia/Pacific, Inc. 144A 5/15/06 87,300 455 Wright Medical Technology, Inc. 144A 6/30/03 40,939 -------------- Total Warrants (cost $2,092,617) $ 4,969,236 CONVERTIBLE PREFERRED STOCKS (0.2%) (a) NUMBER OF SHARES VALUE - -------------------------------------------------------------------------------------------------------------------------- 6,400 Chancellor Media Corp. $3.00 cv. cum. pfd. $ 668,800 5,750 Chesapeake Energy Corp. 144A $3.50 cv. cum. pfd. 198,375 50 Paxson Communications Corp. 144A cv. pfd. (PIK) 525,000 7,615 XCL Ltd. 144A $9.50 cum. cv. pfd.(PIK) 822,420 697 XCL Ltd. $9.50 cv. pfd. 75,253 -------------- Total Convertible Preferred Stocks (cost $2,208,490) $ 2,289,848 SHORT-TERM INVESTMENTS (2.4%) (a) (cost $29,305,607) PRINCIPAL AMOUNT VALUE - -------------------------------------------------------------------------------------------------------------------------- $29,301,000 Interest in $750,000,000 joint tri-party repurchase agreement dated July 31, 1998 with Goldman Sachs & Co. due August 3, 1998 with respect to various U.S. Treasury obligations - maturity value of $29,314,820 for an effective yield of 5.66% $ 29,305,607 - -------------------------------------------------------------------------------------------------------------------------- Total Investments (cost $1,248,428,556) (b) $1,254,185,909 - -------------------------------------------------------------------------------------------------------------------------- (a) Percentages indicated are based on net assets of $1,221,187,610. (b) The aggregate identified cost on a tax basis is $1,252,538,949, resulting in gross unrealized appreciation and depreciation of $39,874,883 and $38,227,923, respectively, or net unrealized appreciation of $1,646,960. (NON) Non-income-producing security. (STP) 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. (POR) A portion of the income will be received in additional securities. (RES) Restricted, excluding 144A securities, as to public resale. The total market value of restricted securities held at July 31, 1998 was $4,384,338 or less than 0.36% of net assets. (PIK) Income may be received in cash or additional securities at the discretion of the issuer. (SEG) A portion of this security was pledged and segregated with the custodian to cover margin requirements for futures contracts at July 31, 1998. (R) Real Estate Investment Trust 144A after the name of a security represents those exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. TBA after the name of a security represents to be announced securities (Note 1). FLIRB represents Front Loaded Interest Reduction Bond. The rates shown on Floating Rate Bonds (FRB) and Floating Rate Notes (FRN) are the current interest rates shown at July 31, 1998, which are subject to change based on the terms of the security. Diversification by Country Distribution of investments by country of issue at July 31, 1998: (as percentage of Market Value) Argentina 1.7% Brazil 2.9 Canada 1.3 Germany 2.7 Mexico 1.4 Russia 1.5 South Africa 1.0 United Kingdom 4.8 United States 79.2 Venezuela 1.1 Others 2.4 ----- Total 100.0% ===== - ---------------------------------------------------------------------------- Forward Currency Contracts to Buy at July 31, 1998 (aggregate face value $214,219,069) Unrealized Aggregate Face Delivery Appreciation/ Market Value Value Date (Depreciation) - ---------------------------------------------------------------------------- Australian Dollars $ 866,242 $ 889,673 9/16/98 $ (23,431) Danish Krone 6,688,039 6,717,680 9/16/98 (29,641) Deutschemarks 63,532,262 63,744,213 9/16/98 (211,951) French Francs 1,650,601 1,664,863 9/16/98 (14,262) Italian Lira 38,754,137 38,736,733 9/16/98 17,404 Japanese Yen 72,166,456 74,966,360 9/16/98 (2,799,904) Spanish Peseta 10,944,370 10,999,141 9/16/98 (54,771) Swedish Krona 16,139,140 16,394,259 9/16/98 (255,119) Swiss Francs 104,136 106,147 9/16/98 (2,011) - ---------------------------------------------------------------------------- $(3,373,686) - ---------------------------------------------------------------------------- Forward Currency Contracts to Sell at July 31, 1998 (aggregate face value $211,885,545) Unrealized Market Aggregate Face Delivery Appreciation/ Value Value Date (Depreciation) - ---------------------------------------------------------------------------- British Pounds $48,796,883 $48,606,072 9/16/98 $ (190,811) Deutschemarks 91,538,259 91,896,422 9/16/98 358,163 French Franc 1,196,390 1,206,728 9/16/98 10,338 Italian Lira 19,971,641 19,935,797 9/16/98 (35,844) Japanese Yen 38,110,287 39,556,275 9/16/98 1,445,988 South African Rand 9,532,186 10,684,251 9/16/98 1,152,065 - ---------------------------------------------------------------------------- $2,739,899 - ---------------------------------------------------------------------------- Futures Contracts Outstanding at July 31, 1998 Unrealized Market Aggregate Face Expiration Appreciation/ Value Value Date (Depreciation) - ---------------------------------------------------------------------------- Euro Dm (Long) $24,042,014 $23,552,038 Mar-99 $489,976 Euro Lira (Short) 24,358,963 23,901,666 Mar-99 (457,297) U.S. Treasury Bond 20 Yr. (Long) 88,022,313 87,584,008 Sep-98 438,305 - ---------------------------------------------------------------------------- $470,984 - ---------------------------------------------------------------------------- TBA Sale Commitments at July 31, 1998 (Proceeds receivable $26,896,741) Principal Settlement Market Agency Amount Date Value - ---------------------------------------------------------------------------- GNMA, 6 1/2s, August 2028 $26,980,000 8/19/98 $26,895,552 - ---------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements.
Statement of assets and liabilities July 31, 1998 Assets - ----------------------------------------------------------------------------------------------- Investments in securities, at value (identified cost $1,248,428,556) (Note 1) $1,254,185,909 - ----------------------------------------------------------------------------------------------- Cash 549,064 - ----------------------------------------------------------------------------------------------- Foreign currency (cost $414,960) 470,182 - ----------------------------------------------------------------------------------------------- Dividends, interest and other receivables 18,741,268 - ----------------------------------------------------------------------------------------------- Receivable for securities sold 41,331,708 - ----------------------------------------------------------------------------------------------- Receivable for variation margin 179,209 - ----------------------------------------------------------------------------------------------- Receivable for open forward currency contracts 3,061,226 - ----------------------------------------------------------------------------------------------- Receivable for closed forward currency contracts 34,836 - ----------------------------------------------------------------------------------------------- Total assets 1,318,553,402 Liabilities - ----------------------------------------------------------------------------------------------- Distributions payable to shareholders 8,835,536 - ----------------------------------------------------------------------------------------------- Payable for securities purchased 54,993,529 - ----------------------------------------------------------------------------------------------- Payable for compensation of Manager (Note 2) 2,132,255 - ----------------------------------------------------------------------------------------------- Payable for investor servicing and custodian fees (Note 2) 107,051 - ----------------------------------------------------------------------------------------------- Payable for compensation of Trustees (Note 2) 23,825 - ----------------------------------------------------------------------------------------------- Payable for administrative services (Note 2) 1,525 - ----------------------------------------------------------------------------------------------- Payable for open forward currency contracts 3,695,013 - ----------------------------------------------------------------------------------------------- Payable for closed forward currency contracts 386,731 - ----------------------------------------------------------------------------------------------- TBA sales commitments, at value (proceeds receivable $26,896,741) 26,895,552 - ----------------------------------------------------------------------------------------------- Other accrued expenses 294,775 - ----------------------------------------------------------------------------------------------- Total liabilities 97,365,792 - ----------------------------------------------------------------------------------------------- Net assets $1,221,187,610 Represented by - ----------------------------------------------------------------------------------------------- Paid-in capital (Notes 1 and 4) $1,214,943,358 - ----------------------------------------------------------------------------------------------- Distributions in excess of net investment income (Note 1) (8,713,718) - ----------------------------------------------------------------------------------------------- Accumulated net realized gain on investments and foreign currency transactions (Note 1) 9,503,711 - ----------------------------------------------------------------------------------------------- Net unrealized appreciation of investments and assets and liabilities in foreign currencies 5,454,259 - ----------------------------------------------------------------------------------------------- Total -- Representing net assets applicable to capital shares outstanding $1,221,187,610 Computation of net asset value - ----------------------------------------------------------------------------------------------- Net asset value per share ($1,221,187,610 divided by 140,248,960 shares) $8.71 - ----------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements.
Statement of operations Year ended July 31, 1998 Investment income: - ----------------------------------------------------------------------------------------------- Interest income $109,475,452 - ----------------------------------------------------------------------------------------------- Dividends 4,749,929 - ----------------------------------------------------------------------------------------------- Total investment income 114,225,381 Expenses: - ----------------------------------------------------------------------------------------------- Compensation of Manager (Note 2) 8,444,493 - ----------------------------------------------------------------------------------------------- Investor servicing and custodian fees (Note 2) 1,528,873 - ----------------------------------------------------------------------------------------------- Compensation of Trustees (Note 2) 31,664 - ----------------------------------------------------------------------------------------------- Administrative services (Note 2) 18,623 - ----------------------------------------------------------------------------------------------- Reports to shareholders 154,505 - ----------------------------------------------------------------------------------------------- Auditing 82,423 - ----------------------------------------------------------------------------------------------- Legal 66,927 - ----------------------------------------------------------------------------------------------- Postage 218,093 - ----------------------------------------------------------------------------------------------- Exchange listing fees 236,090 - ----------------------------------------------------------------------------------------------- Other 244,921 - ----------------------------------------------------------------------------------------------- Total expenses 11,026,612 - ----------------------------------------------------------------------------------------------- Expense reduction (Note 2) (252,943) - ----------------------------------------------------------------------------------------------- Net expenses 10,773,669 - ----------------------------------------------------------------------------------------------- Net investment income 103,451,712 - ----------------------------------------------------------------------------------------------- Net realized gain on investments (Notes 1 and 3) 11,739,920 - ----------------------------------------------------------------------------------------------- Net realized gain on futures contracts (Note 1) 3,871,920 - ----------------------------------------------------------------------------------------------- Net realized gain on written options (Notes 1 and 3) 465,346 - ----------------------------------------------------------------------------------------------- Net realized loss on foreign currency transactions (Note 1) (22,931,831) - ----------------------------------------------------------------------------------------------- Net unrealized appreciation of assets and liabilities in foreign currencies during the year 3,616,650 - ----------------------------------------------------------------------------------------------- Net unrealized depreciation of investments, futures contracts and TBA sale commitments during the year (22,230,502) - ----------------------------------------------------------------------------------------------- Net loss on investments (25,468,497) - ----------------------------------------------------------------------------------------------- Net increase in net assets resulting from operations $ 77,983,215 - ----------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements.
Statement of changes in net assets Year ended July 31 ------------------------------- 1998 1997 - --------------------------------------------------------------------------------------------------------------- Increase (decrease) in net assets - --------------------------------------------------------------------------------------------------------------- Operations: - --------------------------------------------------------------------------------------------------------------- Net investment income $ 103,451,712 $ 90,919,087 - --------------------------------------------------------------------------------------------------------------- Net realized gain (loss) on investments and foreign currency transactions (6,854,645) 28,287,061 - --------------------------------------------------------------------------------------------------------------- Net unrealized appreciation (depreciation) of investments and assets and liabilities in foreign currencies (18,613,852) 24,519,407 - --------------------------------------------------------------------------------------------------------------- Net increase in net assets resulting from operations 77,983,215 143,725,555 - --------------------------------------------------------------------------------------------------------------- Distributions to shareholders: - --------------------------------------------------------------------------------------------------------------- From net investment income (92,539,997) (90,919,087) - --------------------------------------------------------------------------------------------------------------- In excess of net investment income -- (3,860,069) - --------------------------------------------------------------------------------------------------------------- From net realized gain on investments (9,699,908) -- - --------------------------------------------------------------------------------------------------------------- Shares repurchased (Note 4) -- (3,356,370) - --------------------------------------------------------------------------------------------------------------- Total increase (decrease) in net assets (24,256,690) 45,590,029 Net assets - --------------------------------------------------------------------------------------------------------------- Beginning of year 1,245,444,300 1,199,854,271 - --------------------------------------------------------------------------------------------------------------- End of year (including distributions in excess of net investment income of $8,713,718 and $20,153,722, respectively) $1,221,187,610 $1,245,444,300 Number of fund shares - --------------------------------------------------------------------------------------------------------------- Shares outstanding at beginning of year 140,248,960 140,679,960 - --------------------------------------------------------------------------------------------------------------- Shares repurchased -- (431,000) - --------------------------------------------------------------------------------------------------------------- Shares outstanding at end of year 140,248,960 140,248,960 - --------------------------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements.
Financial highlights (For a share outstanding throughout the period) - ------------------------------------------------------------------------------------------------------------------------------------ Per-share operating performance Year ended July 31 - ------------------------------------------------------------------------------------------------------------------------------------ 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------------ Net asset value, beginning of period $8.88 $8.53 $8.46 $8.29 $8.87 - ------------------------------------------------------------------------------------------------------------------------------------ Investment operations - ------------------------------------------------------------------------------------------------------------------------------------ Net investment income .74 .65 .64 .68 .64 - ------------------------------------------------------------------------------------------------------------------------------------ Net realized and unrealized gain (loss) on investments (.18) .38 .09 .17 (.50) - ------------------------------------------------------------------------------------------------------------------------------------ Total from investment operations .56 1.03 .73 .85 .14 - ------------------------------------------------------------------------------------------------------------------------------------ Less distributions: - ------------------------------------------------------------------------------------------------------------------------------------ From net investment income (.66) (.65) (.65) (.58) (.70) - ------------------------------------------------------------------------------------------------------------------------------------ In excess of net investment income -- (.03) (.01) -- (.02) - ------------------------------------------------------------------------------------------------------------------------------------ From net realized gain (.07) -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------ From return of capital -- -- -- (.10) -- - ------------------------------------------------------------------------------------------------------------------------------------ Total distributions (.73) (.68) (.66) (.68) (.72) - ------------------------------------------------------------------------------------------------------------------------------------ Net asset value, end of period $8.71 $8.88 $8.53 $8.46 $8.29 - ------------------------------------------------------------------------------------------------------------------------------------ Ratios and supplemental data - ------------------------------------------------------------------------------------------------------------------------------------ Total investment return at market value (%)(a) 8.06 26.24 7.94 6.86 .95 - ------------------------------------------------------------------------------------------------------------------------------------ Market value, end of period $8.50 $8.56 $7.38 $7.44 $7.63 - ------------------------------------------------------------------------------------------------------------------------------------ Net assets, end of period (in thousands) $1,221,188 $1,245,444 $1,199,854 $1,190,375 $1,166,726 - ------------------------------------------------------------------------------------------------------------------------------------ Ratio of expenses to average net assets (%)(b) .89 .83 .85 .82 .86 - ------------------------------------------------------------------------------------------------------------------------------------ Ratio of net investment income to average net assets (%) 8.34 7.42 7.43 8.29 7.30 - ------------------------------------------------------------------------------------------------------------------------------------ Portfolio turnover (%) 209.50 262.01 332.00 196.83 242.29 - ------------------------------------------------------------------------------------------------------------------------------------ (a) Total investment return assumes dividend reinvestment. (b) The ratio of expenses to average net assets for the period ended July 31, 1996 and thereafter includes amounts paid through expense offset arrangements. Prior period ratios exclude these amounts. (Note 2)
Notes to financial statements July 31, 1998 Note 1 Significant accounting policies Putnam Premier Income Trust (the "fund") is registered under the Investment Company Act of 1940, as amended, as a non-diversified, closed-end management investment company. The fund's investment objective is to seek high current income consistent with the preservation of capital by allocating its investments among the U.S. government sector, high yield sector and international sector of the fixed income securities market. The following is a summary of significant accounting policies consistently followed by the fund in the preparation of its financial statements. The preparation of financial statements is in conformity with generally accepted accounting principles and requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities. Actual results could differ from those estimates. A) Security valuation Investments for which market quotations are readily available are stated at market value, which is determined using the last reported sale price, or, if no sales are reported -- as in the case of some securities traded over-the-counter -- the last reported bid price. Securities quoted in foreign currencies are translated into U.S. dollars at the current exchange rate. Short-term investments having remaining maturities of 60 days or less are stated at amortized cost, which approximates market value, and other investments, including restricted securities, are stated at fair value following procedures approved by the Trustees. Market quotations are not considered to be readily available for certain debt obligations; such investments are stated at fair value on the basis of valuations furnished by a pricing service or dealers, approved by the Trustees, which determines valuations for normal, institutional-size trading units of such securities using methods based on market transactions for comparable securities and various relationships between securities which are generally recognized by institutional traders. B) Joint trading account Pursuant to an exemptive order issued by the Securities and Exchange Commission, the fund may transfer uninvested cash balances into a joint trading account along with the cash of other registered investment companies and certain other accounts managed by Putnam Investment Management, Inc. ("Putnam Management"), the fund's Manager, a wholly-owned subsidiary of Putnam Investments, Inc. These balances may be invested in one or more repurchase agreements and/or short-term money market instruments. C) Repurchase agreements The fund, or any joint trading account, through its custodian, receives delivery of the underlying securities, the market value of which at the time of purchase is required to be in an amount at least equal to the resale price, including accrued interest. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the fund and the counterparty. Putnam Management is responsible for determining that the value of these underlying securities is at all times at least equal to the resale price, including accrued interest. D) Security transactions and related investment income Security transactions are accounted for on the trade date (date the order to buy or sell is executed). Interest income is recorded on the accrual basis. Dividend income is recorded on the ex-dividend date except that certain dividends from foreign securities are recorded as soon as the fund is informed of the ex-dividend date. Discounts on zero coupon bonds, original issue discount bonds, stepped-coupon bonds and payment in kind bonds are accreted according to the yield-to-maturity basis. Securities purchased or sold on a when-issued or forward commitment or delayed delivery basis may be settled a month or more after the trade date; interest income is accrued based on the terms of the security. Losses may arise due to changes in the market value of the underlying securities or if the counterparty does not perform under the contract. E) Foreign currency translation The accounting records of the fund are maintained in U.S. dollars. The market value of foreign securities, currency holdings, other assets and liabilities are recorded in the books and records of the fund after translation to U.S. dollars based on the exchange rates on that day. The cost of each security is determined using historical exchange rates. Income and withholding taxes are translated at prevailing exchange rates when accrued or incurred. The fund does not isolate that portion of realized or unrealized gains or losses resulting from changes in the foreign exchange rate on investments from fluctuations arising from changes in the market prices of the securities. Such gains and losses are included with the net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent net exchange gains or losses on closed forward currency contracts, disposition of foreign currencies and the difference between the amount of investment income and foreign withholding taxes recorded on the fund's books and the U.S. dollar equivalent amounts actually received or paid. Net unrealized appreciation and depreciation of assets and liabilities in foreign currencies arise from changes in the value of open forward currency contracts and assets and liabilities other than investments at the period end, resulting from changes in the exchange rate. F) Forward currency contracts The fund may engage in forward currency contracts, which are agreements between two parties to buy and sell currencies at a set price on a future date, to protect against a decline in value relative to the U.S. dollar of the currencies in which its portfolio securities are denominated or quoted (or an increase in the value of a currency in which securities a fund intends to buy are denominated, when a fund holds cash reserves and short-term investments). The U.S. dollar value of forward currency contracts is determined using current forward currency exchange rates supplied by a quotation service. The market value of the contract will fluctuate with changes in currency exchange rates. The contract is "marked to market" daily and the change in market value is recorded as an unrealized gain or loss. When the contract is closed, the fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. The fund could be exposed to risk if the value of the currency changes unfavorably, if the counterparties to the contracts are unable to meet the terms of their contracts or if the fund is unable to enter into a closing position. G) Futures and options contracts The fund may use futures and options contracts to hedge against changes in the values of securities the fund owns or expects to purchase. The fund may also write options on securities it owns or in which it may invest to increase its current returns. The potential risk to the fund is that the change in value of futures and options contracts may not correspond to the change in value of the hedged instruments. In addition, losses may arise from changes in the value of the underlying instruments, if there is an illiquid secondary market for the contracts, or if the counterparty to the contract is unable to perform. When the contract is closed, the fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. Futures contracts are valued at the quoted daily settlement prices established by the exchange on which they trade. Exchange traded options are valued at the last sale price, or if no sales are reported, the last bid price for purchased options and the last ask price for written options. Options traded over-the-counter are valued using prices supplied by dealers. H) TBA purchase commitments The fund may enter into "TBA" (to be announced) purchase commitments to purchase securities for a fixed unit price at a future date beyond customary settlement time. Although the unit price has been established, the principal value has not been finalized. However, the amount of the commitments will not fluctuate more than 1.0% from the principal amount. The fund holds, and maintains until settlement date, cash or high-grade debt obligations in an amount sufficient to meet the purchase price, or the fund may enter into offsetting contracts for the forward sale of other securities it owns. Income on the securities will not be earned until settlement date. TBA purchase commitments may be considered securities in themselves, and involve a risk of loss if the value of the security to be purchased declines prior to the settlement date, which risk is in addition to the risk of decline in the value of the fund's other assets. Unsettled TBA purchase commitments are valued at the current market value of the underlying securities, according to the procedures described under "Security valuation" above. Although the fund will generally enter into TBA purchase commitments with the intention of acquiring securities for their portfolio or for delivery pursuant to options contracts it has entered into, the fund may dispose of a commitment prior to settlement if Putnam Management deems it appropriate to do so. I) TBA sale commitments The fund may enter into TBA sale commitments to hedge its portfolio positions or to sell mortgage-backed securities it owns under delayed delivery arrangements. Proceeds of TBA sale commitments are not received until the contractual settlement date. During the time a TBA sale commitment is outstanding, equivalent deliverable securities, or an offsetting TBA purchase commitment deliverable on or before the sale commitment date, are held as "cover" for the transaction. Unsettled TBA sale commitments are valued at the current market value of the underlying securities, generally according to the procedures described under "Security valuation" above. The contract is "marked-to-market" daily and the change in market value is recorded by the fund as an unrealized gain or loss. If the TBA sale commitment is closed through the acquisition of an offsetting purchase commitment, the fund realizes a gain or loss. If the fund delivers securities under the commitment, the fund realizes a gain or a loss from the sale of the securities based upon the unit price established at the date the commitment was entered into. J) Federal taxes It is the policy of the fund to distribute all of its taxable income within the prescribed time and otherwise comply with the provisions of the Internal Revenue Code applicable to regulated investment companies. It is also the intention of the fund to distribute an amount sufficient to avoid imposition of any excise tax under Section 4982 of the Internal Revenue Code of 1986, as amended. Therefore, no provision has been made for federal taxes on income, capital gains or unrealized appreciation on securities held nor for excise tax on income and capital gains. K) Distributions to shareholders Distributions to shareholders are recorded by the fund on the ex-dividend date. At certain times, the fund may pay distributions at a level rate even though, as a result of market conditions or investment decisions, the fund may not achieve projected investment results for a given period. The amount and character of income and gains to be distributed are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. These differences include temporary and permanent differences of losses on wash sale transactions, foreign currency gains and losses, post-October loss deferrals, dividends payable, defaulted bond interest, unrealized gains and losses on certain futures contracts, paydown gains and losses on mortgage-backed securities, market discount and interest on payment-in-kind securities. 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, 1998, the fund reclassified $528,289 to decrease distributions in excess of net investment income and $14,619,839 to decrease paid-in-capital, with an increase to accumulated net realized gains of $14,091,550. 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. The fund reimburses Putnam Management an allocated amount for the compensation and related expenses of certain officers of the fund and their staff who provide administrative services to the fund. The aggregate amount of all such reimbursements is determined annually by the Trustees. Custodial functions for the fund's assets are provided by Putnam Fiduciary Trust Company (PFTC), a subsidiary of Putnam Investments, Inc. Investor servicing agent functions are provided by Putnam Investor Services, a division of PFTC. For the year ended July 31, 1998, fund expenses were reduced by $252,943 under expense offset arrangements with PFTC. Investor servicing and custodian fees reported in the Statement of operations exclude these credits. The fund could have invested a portion of the assets utilized in connection with the expense offset arrangements in an income producing asset if it had not entered into such arrangements. Each Trustee of the fund receives an annual Trustee fee, of which $1,050 has been allocated to the fund, and an additional fee for each Trustee's meeting attended. Trustees who are not interested persons of Putnam Management and who serve on committees of the Trustees receive additional fees for attendance at certain committee meetings. The fund has adopted a Trustee Fee Deferral Plan (the "Deferral Plan") which allows the Trustees to defer the receipt of all or a portion of Trustees Fees payable on or after July 1, 1995. The deferred fees remain in the fund and are invested in certain Putnam funds until distribution in accordance with the Deferral Plan. The fund has adopted an unfunded noncontributory defined benefit pension plan (the "Pension Plan") covering all Trustees of the fund who have served as Trustee for at least five years. Benefits under the Pension Plan are equal to 50% of the Trustee's average total retainer and meeting fees for the three years preceding retirement. Pension expense for the fund is included in Compensation of trustees in the Statement of operations. Accrued pension liability is included in Payable for compensation of Trustees in the Statement of assets and liabilities. Note 3 Purchases and sales of securities During the year ended July 31, 1998, purchases and sales of investment securities other than U.S. government obligations and short-term investments aggregated $1,853,144,825 and $1,748,148,393, respectively. Purchases and sales of U.S. government obligations aggregated $713,325,319 and $830,104,732, respectively. In determining the net gain or loss on securities sold, the cost of securities has been determined on the identified cost basis. Written option transactions during the year are summarized as follows: Contract Premiums Amounts Received - ----------------------------------------------------------------------------- Written options outstanding at beginning of year -- $ -- - ----------------------------------------------------------------------------- Options opened 74,970,000 465,346 Options expired (74,970,000) (465,346) - ----------------------------------------------------------------------------- Written options outstanding at end of year -- $ -- - ----------------------------------------------------------------------------- Note 4 Share Repurchase Program The Trustees authorized the fund to repurchase up to 7,000,000 of its shares in the open market. Repurchases will only be made when the fund's shares are trading at less than net asset value and at such times and amounts as is believed to be in the best interest of the fund's shareholders. Any repurchases of shares will have the effect of increasing the net asset value per share of remaining shares outstanding. For the year ended July 31, 1998, the fund did not repurchase any shares. As of July 31, 1998, 511,000 shares have been repurchased since the inception of the program. Federal tax information (Unaudited) The Form 1099 you receive in January 1999 will show the tax status of all distributions paid to your account in calendar 1998. Pursuant to Section 852 of the Internal Revenue Code, as amended, the Fund hereby designates $3,911,817 as capital gain, which includes $2,068,477 as 20% capital gain, for its taxable year ended July 31, 1998. The fund has designated 4.38% of the distributions from net investment income as qualifying for the dividends received deduction for corporations. Results of July 9, 1998 shareholder meeting (Unaudited) An annual meeting of shareholders of the fund was held on July 9, 1998. At the meeting, each of the nominees for Trustees was elected, as follows: Votes Votes for withheld Jameson Adkins Baxter 93,572,418 2,371,112 Hans H. Estin 93,477,267 2,466,263 John A. Hill 93,598,465 2,345,065 Ronald J. Jackson 93,610,454 2,333,076 Paul L. Joskow 93,581,485 2,362,045 Elizabeth T. Kennan 93,525,478 2,418,052 Lawrence J. Lasser 93,592,594 2,350,936 John H. Mullin III 93,600,668 2,342,862 Robert E. Patterson 93,651,185 2,292,345 Donald S. Perkins 93,429,740 2,513,790 William F. Pounds 93,475,467 2,468,063 George Putnam 93,511,540 2,431,990 George Putnam, III 93,562,026 2,381,504 A.J.C. Smith 93,598,861 2,344,669 W. Thomas Stephens 93,603,533 2,339,997 W. Nicholas Thorndike 93,440,564 2,502,966 A proposal to ratify the selection of PricewaterhouseCoopers LLP as the independent auditors of your fund was approved as follows: 92,831,538 votes for, and 993,442 votes against, with 2,118,550 abstentions and broker non-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 PricewaterhouseCoopers LLP TRUSTEES George Putnam, Chairman William F. Pounds, Vice Chairman Jameson Adkins Baxter Hans H. Estin John A. Hill Ronald J. Jackson Paul L. Joskow Elizabeth T. Kennan Lawrence J. Lasser John H. Mullin III Robert E. Patterson Donald S. Perkins George Putnam, III A.J.C. Smith W. Thomas Stephens W. Nicholas Thorndike OFFICERS George Putnam President Charles E. Porter Executive Vice President Patricia C. Flaherty Senior Vice President John D. Hughes Senior Vice President and Treasurer Lawrence J. Lasser Vice President Gordon H. Silver Vice President Ian C. Ferguson Vice President William J. Curtin Vice President Jennifer E. Leichter Vice President and Fund Manager Robert M. Paine Vice President and Fund Manager D. William Kohli Vice President and Fund Manager Gail S. Attridge Vice President and Fund Manager William N. Shiebler Vice President John R. Verani Vice President Beverly Marcus Clerk and Assistant Treasurer Call 1-800-225-1581 weekdays from 9 a.m. to 5 p.m. Eastern Time, or visit our website (www.putnaminv.com) any time for up-to-date information about the fund's NAV. [LOGO OMITTED] PUTNAM INVESTMENTS The Putnam Funds One Post Office Square Boston, Massachusetts 02109 - --------------- Bulk Rate U.S. Postage PAID Putnam Investments - --------------- 45519-073 9/98 -----END PRIVACY-ENHANCED MESSAGE-----