Putnam
Income
Fund
Item 1. Report to Stockholders:
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The following is a copy of the report transmitted to stockholders pursuant
to Rule 30e-1 under the Investment Company Act of 1940:
SEMIANNUAL REPORT ON PERFORMANCE AND OUTLOOK
4-30-03
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FROM THE TRUSTEES
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Dear Fellow Shareholder:
We are pleased to report that Putnam Income Fund delivered another
period of positive returns (at net asset value) for the six months ended
April 30, 2003. Although the fund outperformed its benchmark index, it
came in somewhat behind the average return of its Lipper peer group. You
will find the details on page 7.
The fund continued to operate in a favorable market environment for
fixed-income securities as equity investors remained generally cautious.
In the following report, the management team credits the positive
contribution to performance by the investment-grade bonds and some of
the slightly lower-rated issues in your fund's portfolio during the
period. It is encouraging to see that they also look with optimism on
prospects for the fiscal year's second half, anticipating a continuation
of the favorable state of affairs in the bond market.
As we look back on one of the most challenging periods in recent
investment history, we would like you to know how much we appreciate
your continued confidence in Putnam. We believe those who maintain a
long-term focus and a diversified approach to investing should
eventually be rewarded for their fortitude.
Respectfully yours,
/S/ JOHN A. HILL /S/ GEORGE PUTNAM, III
John A. Hill George Putnam, III
Chairman of the Trustees President of the Funds
June 18, 2003
REPORT FROM FUND MANAGEMENT
FUND HIGHLIGHTS
* During the semiannual period ended April 30, 2003, Putnam Income
Fund's class A shares returned 4.57% at net asset value (NAV) and -0.41%
at public offering price (POP).
* The fund's corporate bond holdings helped it to edge ahead of its
primary benchmark, the Lehman Aggregate Bond Index, which returned 4.31%
for the period.
* However, due to its allocation of lower-yielding Treasury holdings
and the underperformance of one of its asset-backed holdings, the fund
underperformed the average return for the Lipper Corporate Debt Funds A
Rated category, which was 5.34% for the six-month period.
* The fund's dividend for class A shares was reduced to $0.0210 per
share in February 2003 (other share classes also had dividend
reductions). Please see page 5 for more information.
* Index and Lipper results should be compared to fund performance at
net asset value. See the Performance Summary on page 7 for complete fund
performance, comparative performance, and Lipper data.
* PERFORMANCE COMMENTARY
The U.S. bond markets performed well during the first half of the fund's
fiscal reporting period, benefiting from uncertainty surrounding the war
in Iraq and generally slow economic growth with low inflation, among
other factors. In this positive environment, higher-yielding bonds
significantly outperformed Treasury bonds, as investors became more
willing to take on risk to attain higher yields. Putnam Income Fund
outperformed its benchmark index because of its allocations of corporate
bonds and mortgage-backed securities. We believe that the higher average
return for the fund's Lipper peer group may have been the result of a
higher allocation of corporate bonds (versus the fund) and/or a longer
duration.
Fund Profile
Putnam Income Fund seeks high current income consistent with what Putnam
Management believes to be a prudent level of risk. The fund invests in a
diversified portfolio composed mainly of corporate investment-grade
bonds, U.S. government and agency bonds, and collateralized mortgage
obligations.
* MARKET OVERVIEW
The U.S. bond market has now delivered three consecutive years of strong
returns, and we have seen a continuation of this trend during the past
six months. During this period, investors remained hesitant about the
volatile stock market and nervous about the war with Iraq, which loomed
for the first four months of the period and cast a shadow of uncertainty
over the financial markets. In addition to the war, investors were
concerned about the state of the U.S. economy and the impact of SARS in
Asia and its effect on global trade. As Treasury and money market yields
fell to extremely low levels and reduced corporate debt levels
foreshadowed the possibility of further improvements in credit quality,
investors looked for securities with greater return potential. As a
result, higher-yielding investments such as corporate investment-grade
bonds, high-yield bonds, and mortgage-backed securities became more
popular. The corporate bond sector performed well as corporate default
rates continued to decline, companies retired debt, and overall credit
quality improved. Treasuries, which have seen significant yield declines
over the past several years, underperformed nearly all other bond
sectors. Treasury yields at the close of the period were approaching
45-year lows.
MARKET SECTOR PERFORMANCE 6 MONTHS ENDED 4/30/03
Bonds
Lehman Aggregate Bond Index (broad U.S. bond market) 4.31%
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Lehman Global Aggregate Bond Index
(global investment-grade bonds) 8.50%
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Lehman Government Bond Index (U.S. government bonds) 3.10%
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Lehman GNMA Index (U.S. mortgage-backed securities) 2.18%
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Equities
S&P 500 Index (broad U.S. stock market) 4.48%
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Russell 2000 Growth Index (U.S. growth stocks) 7.68%
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Russell 2000 Value Index (U.S. value stocks) 7.44%
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These indexes provide an overview of performance in different market
sectors for the six months ended 4/30/03.
* STRATEGY OVERVIEW
The fund's benchmark, the Lehman Aggregate Bond Index, is composed
approximately of 27% corporate bonds, 22% U.S. Treasuries, and 51% in a
combination of mortgage-backed securities (MBSs), asset-backed
securities (ABSs), government agency bonds, and commercial
mortgage-backed securities (CMBSs). The fund's sector allocations varied
from those of its benchmark index in several ways, which helped the fund
to outperform the index. The variations that helped the fund outperform
were an underweighted position in Treasuries and an overweight in ABSs,
MBSs, CMBSs, and government agency securities. The fund's overweighted
position in BB-rated corporate bonds was also helpful.
The fund's group of analysts responsible for MBSs, ABSs, CMBSs, and
other agency sectors focused on security selection and diversification.
We believe these securities offer a solid yield advantage over
Treasuries with less issue-specific risk than corporate bonds.
We increased the fund's BB-rated corporate and investment-grade
corporate weightings early in October 2002, based on our belief that
these sectors were attractively valued, especially in relation to
overvalued, low-yielding Treasuries. Near the end of the period, we
noticed that the strong performance of investment-grade corporate bonds
was beginning to moderate and reduced the fund's holdings in this
sector. We retained the fund's weighting in BB-rated corporate bonds,
however, as we believe that these securities may still offer solid
performance potential.
[GRAPHIC OMITTED: horizontal bar chart TOP SECTOR WEIGHTINGS COMPARED]
TOP SECTOR WEIGHTINGS COMPARED*
as of 10/31/02 as of 4/30/03
Mortgage-backed
securities 38.0% 46.2%
Government
bonds 24.1% 16.1%
Investment grade
bonds 20.3% 21.9%
Asset-backed
securities 9.8% 8.5%
High yield
bonds 3.2% 4.4%
Footnote reads:
*This chart shows how the fund's top weightings have changed over the
last six months. Weightings are shown as a percentage of total market
value. Holdings will vary over time.
* HOW FUND HOLDINGS/SECTOR ALLOCATIONS AFFECTED PERFORMANCE
In general, the fund's strategy of maintaining diversity across a range
of generally high-quality U.S. fixed-income sectors and holdings worked
well during the period. The only sector that underperformed was U.S.
Treasuries, and the fund was underweighted in these securities relative
to its benchmark.
[GRAPHIC OMITTED: TOP 3 HOLDINGS BY SECTOR]
TOP 3 HOLDINGS BY SECTOR*
U.S. government and agency obligations
Federal Home Loan Mortgage
Corporation 4.5%, TBA, May 1, 2018
Federal National Mortgage Association
Pass-through certificates, 4.5%, TBA,
May 1, 2018
Federal National Mortgage Association
Pass-through certificates, 6.5%, TBA,
May 1, 2032
Corporate bonds and notes
Principal Financial Group (Australia)
144A notes, 7.95%, 2004
Financial
Peoples Bank - Bridgeport
Subordinated notes, 7.2%, 2006
Financial
Verizon Wireless, Inc.
Notes, 5.375%, 2006
Communication services
Collateralized mortgage obligations
Federal National Mortgage Association
Series 02-T16, class A2, 7.0%, 2042
CS First Boston Mortgage Securities
Corp., Series 97-C2, class A2,
6.52%, 2035
FFCA Secured Lending Corp.
144A Series 00-1, Class A2, 7.77%, 2027
Asset-backed securities
AFC Home Equity Loan Trust
Series 99-2, class 1A, 1.746%, 2029
Green Tree Financial Corp.
Series 99-5, Class A5, 7.86%, 2031
Conseco Finance Securitizations Corp.
Series 02-1, class A, 6.681%, 2032
Footnote reads:
*These holdings represent 29.6% of the fund's net assets as of 4/30/03.
The fund's holdings will change over time.
The fund's mortgage-backed securities (MBSs), asset-backed securities
(ABSs), and other government agency sectors generally performed well
because of their high credit quality and higher yields. Since these are
complicated markets, security selection and diversity is critical. For
example, some MBSs may be adversely affected by prepayments, which have
risen significantly as homeowners have refinanced. Our group of MBS
analysts, who seek to help the fund deliver attractive risk-adjusted
returns, employed hedging and other techniques to manage risk in the
portfolio.
Despite the generally strong performance of ABSs, some of the fund's ABS
holdings detracted from performance. Conseco Finance Securitizations,
Inc., for example, experienced financial difficulties at the corporate
level, which resulted in poor performance for the holdings. However, we
believe that the underlying ABSs, which are backed by mobile home
mortgage payments of the company's GreenTree Financial division, are
sound and should recover. Of course, we will continue to monitor
developments and reduce the position or sell it if necessary.
The fund's BB-rated corporate and investment-grade corporate holdings
made a significant contribution because both of these sectors had such
strong returns during the period. We increased the fund's weighting in
corporate investment-grade bonds early in the period and then trimmed
back these holdings before the period's end. The corporate
investment-grade sector had its best six-month performance ever,
relative to Treasury bonds. Moreover, the fund's higher-yielding
BB-rated bonds, while not a large weighting, made a solid contribution
to performance. We have not reduced this weighting because we believe
these securities still offer value.
Corporate bonds generally have benefited from a number of factors. Among
the most important is the decline in default rates. Although still high
by historical standards, corporate defaults have declined nearly 40%
since hitting a peak of 10.81% in January 2002 -- to a level of 6.94% in
March 2003 (according to Moody's). In addition to lower default rates,
companies have been reducing debt and improving their balance sheets,
which has helped boost credit quality for corporate debt issuers.
Please note that all sectors and holdings discussed in this report are
subject to review in accordance with the fund's investment strategy and
may vary in the future.
OF SPECIAL INTEREST
* Over the past several years, bond yields in all fixed-income sectors
have fallen considerably, particularly in higher-quality sectors such as
Treasuries and mortgage-backed securities. Though the fund was
underweighted in these sectors, their presence in the portfolio
contributed to a dividend reduction in February 2003 for the fund's
class A shares, from $0.025 per share to $0.021 per share. Dividends for
the fund's other share classes were also reduced.
* THE FUND'S MANAGEMENT TEAM
The fund is managed by the Putnam Core Fixed-Income Team. The members of
this team are James Prusko (Portfolio Leader), Kevin Cronin, (Portfolio
Member), Carl Bell, Rob Bloemker, Andrea Burke, Steve Horner, D. William
Kohli, Michael Salm, John Van Tassel, and David Waldman.
THE OUTLOOK FOR YOUR FUND
The following commentary reflects anticipated developments that could
affect your fund over the next six months, as well as your management
team's plans for responding to them.
In our opinion, the remainder of 2003 has the potential to be favorable
for the U.S. bond market -- especially the higher-yielding, non-Treasury
sectors. The completion of the war with Iraq has reduced the level of
geopolitical uncertainty that has been preoccupying investors, and many
are now focusing on the economy and are seeking higher yields from their
fixed-income investments. We anticipate that economic growth in the
United States will be slow to moderate for the rest of 2003 but will not
have a "double dip" back into recession. We believe such conditions
would provide a positive environment for bond sectors with higher yields
than Treasuries, such as MBSs, government agency bonds, and corporate
bonds.
In an environment of slow to moderate growth, with potential volatility
in both the stock and bond markets, it is paramount that a portfolio of
bonds be invested in a wide range of holdings and sectors. We believe
this fund is properly diversified among its fixed-income holdings and
sectors and is well positioned for the coming months.
The views expressed in this report are exclusively those of Putnam
Management. They are not meant as investment advice. Mutual funds that
invest in government securities are not guaranteed. Mortgage-backed
securities are subject to prepayment risk. Lower-rated bonds may offer
higher yields in return for more risk.
PERFORMANCE SUMMARY
This section provides information about your fund's performance during
its semiannual period, which ended April 30, 2003. In accordance with
regulatory requirements, we also include performance for the most
current calendar quarter-end. Performance should always be considered in
light of a fund's investment strategy. Past performance does not
indicate future results. More recent returns may be less or more than
those shown. Investment return and principal value will fluctuate and
you may have a gain or a loss when you sell your shares. A profile of
your fund's strategy appears on the first page of this report. See pages
8 and 9 for definitions of some terms used in this section.
TOTAL RETURN FOR PERIODS ENDED 4/30/03
Class A Class B Class C Class M Class R
(inception dates) (11/1/54) (3/1/93) (7/26/99) (12/14/94) (1/21/03)
NAV POP NAV CDSC NAV CDSC NAV POP NAV
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6 months 4.57% -0.41% 4.21% -0.79% 4.07% 3.07% 4.36% 0.97% 4.53%
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1 year 8.64 3.55 7.89 2.89 7.75 6.75 8.35 4.78 8.41
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5 years 27.99 21.83 23.48 21.59 23.16 23.16 26.59 22.43 26.42
Annual average 5.06 4.03 4.31 3.99 4.25 4.25 4.83 4.13 4.80
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10 years 80.77 72.15 67.63 67.63 67.52 67.52 76.13 70.47 76.24
Annual average 6.10 5.58 5.30 5.30 5.29 5.29 5.82 5.48 5.83
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Annual average
(life of fund) 8.29 8.18 7.27 7.27 7.47 7.47 7.82 7.74 8.02
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Performance assumes reinvestment of distributions and does not account
for taxes. Returns at public offering price (POP) for class A and M
shares reflect a sales charge of 4.75% and 3.25%, respectively. Class B
share returns reflect the applicable contingent deferred sales charge
(CDSC), which is 5% in the first year, declining to 1% in the sixth
year, and is eliminated thereafter. Class C shares reflect a 1% CDSC the
first year that is eliminated thereafter. Class R share returns have no
initial sales charge or CDSC. Performance for class B, C, M, and R
shares before their inception is derived from the historical performance
of class A shares, adjusted for the applicable sales charge (or CDSC)
and higher operating expenses for such shares.
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 4/30/03
Lipper Corporate Debt
Lehman Aggregate Funds A Rated
Bond Index category average*
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6 months 4.31% 5.34%
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1 year 10.47 9.84
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5 years 44.07 35.33
Annual average 7.58 6.23
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10 years 101.19 88.43
Annual average 7.24 6.52
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Annual average
(life of fund) --** --**
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*Over the 6-month and 1-, 5-, and 10-year periods ended 4/30/03, there were
210, 196, 127, and 56 funds, respectively, in this Lipper category.
**The benchmarks were not in existence at the time of the fund's inception. The
Lehman Aggregate Bond Index commenced 12/31/75. The Lipper Average commenced
12/31/59.
PRICE AND DISTRIBUTION INFORMATION 6 MONTHS ENDED 4/30/03
Class A Class B Class C Class M Class R
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Distributions (number) 6 6 6 6 3
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Income $0.138 $0.113 $0.115 $0.132 $0.060
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Capital gains -- -- -- -- --
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Total $0.138 $0.113 $0.115 $0.132 $0.060
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Share value: NAV POP NAV NAV NAV POP NAV
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10/31/02 $6.59 $6.92 $6.55 $6.57 $6.54 $6.76 --
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1/21/03* -- -- -- -- -- -- $6.65
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4/30/03 6.75 7.09 6.71 6.72 6.69 6.91 6.75
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Current return (end of period)
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Current dividend
rate 1 3.73% 3.55% 3.04% 3.04% 3.59% 3.47% 3.56%
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Current 30-day
SEC yield 2 3.04 2.89 2.30 2.30 2.79 2.70 2.78
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* Inception date of class R shares.
1 Most recent distribution, excluding capital gains, annualized and
divided by NAV or POP at end of period.
2 Based only on investment income, calculated using SEC guidelines.
TOTAL RETURN FOR PERIODS ENDED 3/31/03(most recent calendar quarter)
Class A Class B Class C Class M Class R
(inception dates) (11/1/54) (3/1/93) (7/26/99) (12/14/94) (1/21/03)
NAV POP NAV CDSC NAV CDSC NAV POP NAV
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6 months 2.78% -2.07% 2.41% -2.60% 2.43% 1.43% 2.71% -0.60% 2.74%
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1 year 9.67 4.46 8.92 3.92 8.94 7.94 9.39 5.89 9.45
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5 years 27.67 21.68 22.98 21.10 22.93 22.93 26.09 21.95 26.12
Annual average 5.01 4.00 4.22 3.90 4.22 4.22 4.75 4.05 4.75
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10 years 80.61 71.98 67.76 67.76 67.47 67.47 76.00 70.33 76.10
Annual average 6.09 5.57 5.31 5.31 5.29 5.29 5.82 5.47 5.82
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Annual average
(life of fund) 8.28 8.17 7.26 7.26 7.47 7.47 7.81 7.74 8.01
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Past performance does not indicate future results. More recent returns
may be less or more than those shown. Investment return and principal
value will fluctuate and you may have a gain or a loss when you sell
your shares.
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 price, or value, of one share of a mutual
fund, without a sales charge. NAVs fluctuate with market conditions. The
NAV is calculated by dividing the net value of all the fund's assets by
the number of outstanding shares.
Public offering price (POP) is the price of a mutual fund share plus the
maximum sales charge levied at the time of purchase. POP performance
figures shown here assume the 4.75% maximum sales charge for class A
shares and 3.25% for class M shares.
Contingent deferred sales charge (CDSC) is a charge applied at the time
of the redemption of class B or C shares and assumes redemption at the
end of the period. Your fund's class B CDSC declines from a 5% maximum
during the first year to 1% during the sixth year. After the sixth year,
the CDSC no longer applies. The CDSC for class C shares is 1% for one
year after purchase.
Class A shares are generally subject to an initial sales charge and no
sales charge on redemption (except on certain redemptions of shares
bought without an initial sales charge).
Class B shares may be subject to a sales charge upon redemption.
Class C shares are not subject to an initial sales charge and are
subject to a contingent deferred sales charge only if the shares are
redeemed during the first year.
Class M shares have a lower initial sales charge and a higher 12b-1 fee
than class A shares and no sales charge on redemption (except on certain
redemptions of shares bought without an initial sales charge).
Class R shares are not subject to an initial sales charges or CDSC and
are available only to certain defined contribution plans.
COMPARATIVE INDEXES
Lehman Aggregate Bond Index is an unmanaged index used as a general
measure of U.S. fixed-income securities.
Lehman Global Aggregate Bond Index is an unmanaged index of government
and corporate bonds from around the world.
Lehman Government Bond Index is an unmanaged index of U.S. Treasury and
agency securities.
Lehman GNMA Index is an unmanaged index used as a general measure of
U.S. mortgage-backed securities issued by the Government National
Mortgage Association.
Standard & Poor's (S&P) 500 Index is an unmanaged index of common stock
performance.
Russell 2000 Growth Index is an unmanaged index of those companies in
the Russell 2000 index chosen for their growth orientation.
Russell 2000 Value Index is an unmanaged index of those companies in the
Russell 2000 index chosen for their value orientation.
Indexes assume reinvestment of all distributions and do not account for
fees. Securities and performance of a fund and an index will differ. You
cannot invest directly in an index.
Lipper Inc. is a third-party industry ranking entity that ranks funds
(without sales charges) with similar current investment styles or
objectives as determined by Lipper. Lipper category averages reflect
performance trends for funds within a category and are based on results
at net asset value.
A NOTE ABOUT DUPLICATE MAILINGS
In response to investors' requests, the SEC has modified mailing
regulations for proxy statements, semiannual and annual reports, and
prospectuses. Putnam is now able to send a single copy of these
materials to customers who share the same address. This change will
automatically apply to all shareholders except those who notify us. If
you would prefer to receive your own copy, please call Putnam at
1-800-225-1581.
A GUIDE TO THE FINANCIAL STATEMENTS
These sections of the report, as well as the accompanying Notes,
constitute the fund's financial statements.
The fund's portfolio lists all the fund's investments and their values
as of the last day of the reporting period. Holdings are organized by
asset type and industry sector, country, or state to show areas of
concentration and diversification.
Statement of assets and liabilities shows how the fund's net assets and
share price are determined. All investment and noninvestment assets are
added together. Any unpaid expenses and other liabilities are
subtracted from this total. The result is divided by the number of
shares to determine the net asset value per share, which is calculated
separately for each class of shares. (For funds with preferred shares,
the amount subtracted from total assets includes the net assets
allocated to remarketed preferred shares.)
Statement of operations shows the fund's net investment gain or loss.
This is done by first adding up all the fund's earnings -- from
dividends and interest income -- and subtracting its operating expenses
to determine net investment income (or loss). Then, any net gain or
loss the fund realized on the sales of its holdings -- as well as any
unrealized gains or losses over the period -- is added to or subtracted
from the net investment result to determine the fund's net gain or loss
for the fiscal period.
Statement of changes in net assets shows how the fund's net assets were
affected by distributions to shareholders and by changes in the number
of the fund's shares. It lists distributions and their sources (net
investment income or realized capital gains) over the current reporting
period and the most recent fiscal year-end. The distributions listed
here may not match the sources listed in the Statement of operations
because the distributions are determined on a tax basis and may be paid
in a different period from the one in which they were earned.
Financial highlights provide an overview of the fund's investment
results, per-share distributions, expense ratios, net investment income
ratios, and portfolio turnover in one summary table, reflecting the five
most recent reporting periods. In a semiannual report, the highlight
table also includes the current reporting period. For open-end funds, a
separate table is provided for each share class.
THE FUND'S PORTFOLIO
April 30, 2003 (Unaudited)
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (49.7%) (a)
PRINCIPAL AMOUNT VALUE
U.S. Government and Agency Mortgage Obligations (33.2%)
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Federal Home Loan Mortgage Corporation
$278,496 7 1/2s, December 1, 2029 $297,305
137,928 7s, January 1, 2015 147,446
937,897 6s, with due dates from January 1, 2029 to February 1, 2033 977,434
91,575 6s, May 1, 2017 95,679
372,929,000 4 1/2s, TBA, May 1, 2018 377,590,613
552,657 Federal National Mortgage Association Graduated Payment
Mortgages 8s, December 1, 2008 591,737
Federal National Mortgage Association Pass-Through Certificates
65,699 11s, with due dates from September 1, 2014 to October 1, 2015 75,581
6,273,141 8s, with due dates from January 1, 2025 to June 1, 2028 6,843,222
4,863,644 7 1/2s, with due dates from September 1, 2022 to April 1, 2032 5,188,327
115,476,166 7s, with due dates from May 1, 2024 to December 1, 2032 122,025,131
6,066,578 7s, with due dates from January 1, 2007 to July 1, 2015 6,471,134
14,751,000 7s, TBA, June 1, 2033 15,580,744
1,008,728 6 1/2s, with due dates from September 1, 2010 to
September 1, 2016 1,069,514
168,030,818 6 1/2s, TBA, May 1, 2032 175,539,779
71,780 6s, with due dates from December 1, 2031 to January 1, 2033 74,801
13,780,161 6s, with due dates from August 1, 2013 to November 1, 2017 14,446,835
1,096,000 6s, TBA, May 1, 2033 1,140,525
6,000,000 6s, TBA, March 1, 2033 6,221,160
78,499,000 5s, TBA, May 1, 2033 78,891,495
372,929,000 4 1/2s, TBA, May 1, 2018 377,357,532
Government National Mortgage Association
103,621 11s, with due dates from March 15, 2010 to July 15, 2013 119,400
Government National Mortgage Association Pass-Through Certificates
99,068 9s, with due dates from September 15, 2008 to May 15, 2009 108,060
28,654,937 7s, with due dates from April 15, 2026 to April 15, 2032 30,396,205
3,883,642 6 1/2s, with due dates from April 15, 2029 to July 15, 2032 4,084,857
29,200,000 5 1/2s, TBA, May 1, 2033 30,139,890
20,000,000 5 1/2s, TBA, April 1, 2033 20,704,360
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1,276,178,766
U.S. Government and Agency Obligations (4.6%)
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Fannie Mae
19,845,000 7 1/4s, May 15, 2030 25,512,256
123,585,000 7 1/4s, January 15, 2010 149,841,869
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175,354,125
U.S. Treasury Obligations (11.9%)
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U.S. Treasury Bonds
42,870,000 8s, November 15, 2021 (SEG) 60,136,879
112,799,000 6 1/4s, May 15, 2030 135,918,396
U.S. Treasury Bonds
39,315,000 6s, February 15, 2026 45,414,958
U.S. Treasury Notes
79,709,000 6 1/2s, February 15, 2010 94,894,202
12,480,000 3 7/8s, February 15, 2013 12,496,573
106,670,000 3s, November 15, 2007 108,132,552
--------------
456,993,560
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Total U.S. Government and Agency Obligations (cost $1,885,237,663) $1,908,526,451
CORPORATE BONDS AND NOTES (29.0%) (a)
PRINCIPAL AMOUNT VALUE
Basic Materials (1.5%)
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$50,000 Abitibi-Consolidated Finance LP company guaranty 7 7/8s, 2009 $54,354
3,875,000 Abitibi-Consolidated, Inc. company guaranty 6.95s, 2006 (Canada) 4,022,076
1,204,000 Airgas, Inc. company guaranty 9 1/8s, 2011 1,348,480
5,590,000 Alcoa, Inc. notes 6 1/2s, 2011 6,355,718
2,195,000 Avery Dennison Corp. notes 4 7/8s, 2013 2,239,925
2,925,000 Domtar, Inc. notes 7 7/8s, 2011 (Canada) 3,473,964
1,850,000 Dow Chemical Co. (The) debs. 8.55s, 2009 2,190,827
4,925,000 Dow Chemical Co. (The) notes 5 3/4s, 2009 5,212,508
2,350,000 Equistar Chemicals LP/Equistar Funding Corp. company guaranty
10 1/8s, 2008 2,467,500
774,000 Georgia-Pacific Corp. bonds 7 3/4s, 2029 650,160
880,000 Georgia-Pacific Corp. notes 8 1/8s, 2011 871,200
1,070,000 Hercules, Inc. company guaranty 11 1/8s, 2007 1,214,450
6,375,000 International Paper Co. notes 6 3/4s, 2011 7,223,774
1,620,000 International Paper Co. notes 5.85s, 2012 1,731,426
186,000 ISP Chemco, Inc. company guaranty Ser. B, 10 1/4s, 2011 202,740
399,000 Louisiana-Pacific Corp. sr. notes 8 7/8s, 2010 448,813
757,000 Louisiana-Pacific Corp. sr. sub. notes 10 7/8s, 2008 847,840
1,855,000 Lyondell Chemical Co. notes Ser. A, 9 5/8s, 2007 1,910,650
2,100,000 Lyondell Chemical Co. sec. notes Ser. B, 9 7/8s, 2007 2,163,000
1,810,000 Millenium America, Inc. company guaranty 9 1/4s, 2008 1,991,000
520,000 Millenium America, Inc. company guaranty 7s, 2006 527,800
1,040,000 Monsanto Co. sr. notes 7 3/8s, 2012 1,195,610
1,199,000 Norampac, Inc. sr. notes 9 1/2s, 2008 (Canada) 1,258,950
580,000 Oregon Steel Mills, Inc. company guaranty 10s, 2009 585,800
365,000 Smurfit Capital Funding PLC notes 6 3/4s, 2005 (Ireland) 374,125
1,202,000 Tembec Industries, Inc. company guaranty 8 5/8s, 2009 (Canada) 1,250,080
366,000 Tembec Industries, Inc. company guaranty 8 1/2s, 2011 (Canada) 380,640
3,585,000 Weyerhaeuser Co. notes 6 3/4s, 2012 4,016,121
-------------
56,209,531
Capital Goods (1.2%)
- -------------------------------------------------------------------------------------------------------------------
1,395,000 Boeing Co. (The) bonds 6 1/8s, 2033 1,378,851
2,680,000 Browning-Ferris Industries, Inc. debs. 7.4s, 2035 2,331,600
440,000 CenterPoint Energy Resources Corp. debs. 8.9s, 2006 495,242
1,735,000 CenterPoint Energy Resources Corp. notes 7 3/4s, 2011 1,930,188
2,720,000 Emerson Electric Co. notes 4 5/8s, 2012 2,747,275
1,720,000 John Deere Capital Corp. notes 3.9s, 2008 1,754,839
2,220,000 John Deere Capital Corp. sr. notes Ser. D, 3 1/8s, 2005 2,260,628
4,152,000 Lockheed Martin Corp. bonds 8 1/2s, 2029 5,570,265
3,730,000 Martin Marietta Corp. debs. 7 3/8s, 2013 4,430,263
5,385,000 Northrop Grumman Corp. company guaranty 7 1/8s, 2011 6,306,260
1,360,000 Owens-Brockway Glass sr. sec. notes 8 3/4s, 2012 1,451,800
1,881,000 Owens-Brockway Glass company guaranty 8 7/8s, 2009 2,022,075
1,120,000 Parker-Hannifin Corp. notes 4 7/8s, 2013 1,133,736
925,000 Raytheon Co. bonds 5 3/8s, 2013 949,694
3,355,000 Raytheon Co. notes 8.2s, 2006 3,851,966
2,604,000 Raytheon Co. notes 6.15s, 2008 2,877,149
1,300,000 Timken Co. notes 5 3/4s, 2010 1,324,881
1,207,000 Waste Management, Inc. sr. notes 7 3/8s, 2010 1,407,274
2,690,000 Waste Management, Inc. sr. notes 6 1/2s, 2008 3,009,077
-------------
47,233,063
Communication Services (3.2%)
- -------------------------------------------------------------------------------------------------------------------
1,135,000 Ameritech Capital Funding company guaranty 6 1/4s, 2009 1,249,204
98,000 AT&T Corp. notes 6s, 2009 100,577
2,685,000 AT&T Corp. sr. notes 8 1/2s, 2031 2,989,460
2,955,000 AT&T Corp. sr. notes 7.8s, 2011 3,242,288
1,265,000 AT&T Wireless Services, Inc. sr. notes 8 3/4s, 2031 1,575,222
3,665,000 AT&T Wireless Services, Inc. sr. notes 7 7/8s, 2011 4,222,461
1,800,000 Bellsouth Capital Funding notes 7 3/4s, 2010 2,189,826
3,860,000 British Telecommunications PLC bonds 8 7/8s, 2030 (United Kingdom) 5,135,016
4,160,000 British Telecommunications PLC notes 8 3/8s, 2010 (United Kingdom) 5,103,545
7,730,000 Cingular Wireless, LLC sr. notes 5 5/8s, 2006 8,425,522
2,230,000 Citizens Communications Co. notes 9 1/4s, 2011 2,818,555
2,230,000 Citizens Communications Co. sr. notes 7 5/8s, 2008 2,605,452
1,625,000 Citizens Communications Co. sr. notes 6 3/8s, 2004 1,701,505
3,325,000 Deutsche Telekom International Finance BV bonds 8s,
2010 (Netherlands) 4,007,789
5,290,000 Deutsche Telekom International Finance BV company guaranty
8 3/4s, 2030 (Netherlands) 6,443,802
1,655,000 Dobson Communications Corp. sr. notes 10 7/8s, 2010 1,737,750
4,810,000 France Telecom notes 10s, 2031 (France) 6,397,858
3,455,000 France Telecom notes 7 3/4s, 2011 (France) 4,225,323
888,000 Koninklijke (Royal) KPN NV sr. unsub. notes 8s, 2010 (Netherlands) 1,064,637
3,690,000 Qwest Corp. 144A notes 8 7/8s, 2012 4,059,000
375,000 Sprint Capital Corp. company guaranty 7.9s, 2005 397,500
5,110,000 Sprint Capital Corp. company guaranty 6 7/8s, 2028 4,726,750
2,225,000 Sprint Capital Corp. company guaranty 6 1/8s, 2008 2,269,500
2,975,000 Telefonica Europe BV company guaranty 7 3/4s, 2010 (Netherlands) 3,579,472
3,784,000 Telus Corp. notes 8s, 2011 (Canada) 4,275,920
2,372,000 Telus Corp. notes 7 1/2s, 2007 (Canada) 2,632,920
7,825,000 Verizon Global Funding Corp. notes 7 1/4s, 2010 9,149,913
2,950,000 Verizon Virginia Inc. debs. Ser. A, 4 5/8s, 2013 2,920,332
12,035,000 Verizon Wireless, Inc. notes 5 3/8s, 2006 12,997,020
1,855,000 Vodafone Group PLC bonds 6 1/4s, 2032 (United Kingdom) 1,977,806
2,150,000 Vodafone Group PLC notes 7 3/4s, 2010 (United Kingdom) 2,597,643
3,010,000 Vodafone Group PLC notes 7 5/8s, 2005 (United Kingdom) 3,309,649
2,775,000 Voicestream Wireless Corp./Voicestream Wireless Capital
Corp. sr. disc. notes stepped-coupon zero % (11 7/8s, 11/15/04),
2009 (STP) 2,636,250
-------------
122,765,467
Conglomerates (0.2%)
- -------------------------------------------------------------------------------------------------------------------
4,005,000 Textron Financial Corp. notes 6s, 2009 4,257,968
845,000 Tyco International Group SA company guaranty 6 3/4s,
2011 (Luxembourg) 845,000
1,110,000 Tyco International Group SA company guaranty 6 3/8s,
2005 (Luxembourg) 1,121,100
2,255,000 Tyco International Group SA notes 6 3/8s, 2011 (Luxembourg) 2,221,175
-------------
8,445,243
Consumer Cyclicals (2.7%)
- -------------------------------------------------------------------------------------------------------------------
618,000 American Axle & Manufacturing, Inc. company guaranty 9 3/4s, 2009 673,620
735,000 Autonation, Inc. company guaranty 9s, 2008 801,150
2,250,000 Cendant Corp. notes 6 1/4s, 2010 2,383,234
3,025,000 Cendant Corp. sr. notes 7 3/8s, 2013 3,354,428
2,155,000 Cendant Corp. sr. notes 6 1/4s, 2008 2,306,400
1,869,000 D.R. Horton, Inc. company guaranty 8s, 2009 2,027,865
3,195,000 DaimlerChrysler NA Holding Corp. company guaranty 8 1/2s, 2031 3,995,824
4,365,000 DaimlerChrysler NA Holding Corp. company guaranty 7.2s, 2009 4,951,499
4,925,000 DaimlerChrysler NA Holding Corp. company guaranty Ser. D,
3.4s, 2004 5,014,023
3,920,000 Dana Corp. notes 9s, 2011 4,253,200
2,810,000 Deluxe Corp. notes 5s, 2012 2,880,297
285,000 Dillards, Inc. notes 6.43s, 2004 287,850
2,030,000 Federated Department Stores sr. notes 8 1/2s, 2010 2,437,259
3,845,000 Ford Motor Co. notes 7.45s, 2031 3,422,173
5,185,000 Ford Motor Credit Corp. notes 7 3/8s, 2009 5,296,140
1,115,000 Ford Motor Credit Corp. notes 6 1/2s, 2007 1,141,858
2,265,000 General Motors Acceptance Corp. bonds 8s, 2031 2,359,084
630,000 General Motors Acceptance Corp. notes 6 7/8s, 2012 640,670
5,970,000 General Motors Acceptance Corp. notes Ser. MTN, 5.36s, 2004 6,139,423
2,245,000 General Motors Corp. notes 7.2s, 2011 2,301,774
1,391,000 Goodyear Tire & Rubber Co. (The) notes 7.857s, 2011 1,043,250
1,111,000 Harrah's Entertainment, Inc. company guaranty 7 7/8s, 2005 1,197,103
960,000 Hasbro, Inc. notes 6.15s, 2008 984,000
1,215,000 Hilton Hotels Corp. notes 8 1/4s, 2011 1,287,900
680,000 Hilton Hotels Corp. notes 7 5/8s, 2012 714,000
1,981,000 International Game Technology sr. notes 8 3/8s, 2009 2,363,507
1,590,000 International Game Technology sr. notes 7 7/8s, 2004 1,668,664
1,485,000 ITT Corp. notes 6 3/4s, 2005 1,536,975
4,320,000 JC Penney Co., Inc. notes 7.6s, 2007 4,536,000
1,570,000 Lennar Corp. company guaranty Ser. B, 9.95s, 2010 1,833,790
1,895,000 Lennar Corp. notes 5.95s, 2013 2,009,948
1,880,000 Limited, Inc. (The) notes 6 1/8s, 2012 2,009,274
2,035,000 Masco Corp. notes 6 3/4s, 2006 2,260,230
800,000 MGM Mirage, Inc. company guaranty 9 3/4s, 2007 896,000
2,429,000 MGM Mirage, Inc. company guaranty 8 3/8s, 2011 2,653,683
1,375,000 Mohegan Tribal Gaming Authority sr. notes 8 1/8s, 2006 1,460,938
2,090,000 Mohegan Tribal Gaming Authority sr. sub. notes 8 3/4s, 2009 2,220,625
910,000 Park Place Entertainment Corp. sr. notes 7 1/2s, 2009 962,325
1,355,000 Park Place Entertainment Corp. sr. sub. notes 9 3/8s, 2007 1,473,563
195,000 PRIMEDIA, Inc. company guaranty 7 5/8s, 2008 197,925
3,600,000 Pulte Homes, Inc. company guaranty 7 7/8s, 2011 4,203,403
1,677,000 Saks, Inc. company guaranty 8 1/4s, 2008 1,811,160
635,000 Standard Pacific Corp. sr. notes 8 1/2s, 2007 654,844
725,000 Starwood Hotels & Resorts Worldwide, Inc. company guaranty
7 7/8s, 2012 758,531
1,595,000 Starwood Hotels & Resorts Worldwide, Inc. company guaranty
7 3/8s, 2007 1,666,775
1,173,000 Toll Corp. sr. sub. notes 8 1/4s, 2011 1,258,043
2,265,000 Visteon Corp. sr. notes 8 1/4s, 2010 2,353,960
-------------
102,684,187
Consumer Staples (4.0%)
- -------------------------------------------------------------------------------------------------------------------
9,010,000 AOL Time Warner, Inc. bonds 7 5/8s, 2031 9,936,273
765,000 AOL Time Warner, Inc. notes 6 3/4s, 2011 830,560
6,885,000 AOL Time Warner, Inc. notes 5 5/8s, 2005 7,251,695
2,150,000 Archer Daniels Midland Co. notes 5.935s, 2032 2,234,140
2,562,000 AT&T Broadband Corp. company guaranty 8 3/8s, 2013 3,125,822
5,060,000 Campbell Soup Co. notes 6 3/4s, 2011 5,815,979
450,000 Chancellor Media Corp. company guaranty 8s, 2008 515,250
2,160,000 Clear Channel Communications, Inc. notes 4 1/4s, 2009 2,168,424
1,550,000 Clear Channel Communications, Inc. sr. notes 5 3/4s, 2013 1,622,152
2,825,000 Comcast Corp. company guaranty 6 1/2s, 2015 3,065,170
2,030,000 Comcast Corp. company guaranty 5.85s, 2010 2,156,503
2,535,000 ConAgra, Inc. notes 7 7/8s, 2010 3,077,054
4,340,000 ConAgra, Inc. notes 6s, 2006 4,746,129
360,000 Constellation Brands, Inc. company guaranty 8 1/2s, 2009 379,800
2,805,000 Cox Communications, Inc. notes 7 3/4s, 2010 3,368,519
1,305,000 Cox Communications, Inc. notes 7 1/8s, 2012 1,522,379
1,665,000 Cox Enterprises, Inc. 144A notes 8s, 2007 1,895,987
1,280,000 Dean Foods Co. sr. notes 8.15s, 2007 1,385,600
3,830,000 Diageo PLC company guaranty 8s, 2022 (United Kingdom) 4,870,305
7,140,000 Fred Meyer, Inc. Holding Co. company guaranty 7.45s, 2008 8,169,645
1,295,000 General Mills, Inc. notes 5 1/8s, 2007 1,394,762
2,440,000 Hormel Foods Corp. notes 6 5/8s, 2011 2,776,988
2,435,000 Johnson (SC) & Son, Inc. 144A bonds 5 3/4s, 2033 2,407,351
4,120,000 Jones Intercable, Inc. sr. notes 7 5/8s, 2008 4,683,356
9,710,000 Kraft Foods, Inc. notes 4 5/8s, 2006 10,125,277
1,685,000 Kroger Co. company guaranty 6.8s, 2011 1,875,295
1,125,000 Liberty Media Corp. debs. 8 1/2s, 2029 1,314,270
2,665,000 Liberty Media Corp. debs. 8 1/4s, 2030 3,037,087
5,950,000 McDonald's Corp. debs. 6 3/8s, 2028 6,314,307
2,945,000 News America Holdings, Inc. company guaranty 7 3/8s, 2008 3,359,017
1,820,000 News America Holdings, Inc. debs. 7 3/4s, 2045 2,070,669
2,585,000 News America Holdings, Inc. debs. 7.7s, 2025 2,920,807
1,780,000 News America, Inc. sr. notes 6 5/8s, 2008 1,963,842
625,000 News America, Inc. 144A bonds 6.55s, 2033 634,816
255,000 News America, Inc. 144A notes 4 3/4s, 2010 245,014
3,740,000 PepsiAmericas, Inc. notes Ser. MTN, 3 7/8s, 2007 3,803,879
4,465,000 Philip Morris Cos., Inc. notes 7.2s, 2007 4,659,661
3,625,000 Philip Morris Cos., Inc. notes 7 1/8s, 2004 3,700,041
2,645,000 Safeway, Inc. notes 7 1/2s, 2009 3,060,585
1,000,000 Southland Corp. debs. Ser. A, 4 1/2s, 2004 990,000
2,760,000 Southland Corp. sr. sub. debs. 5s, 2003 2,760,000
4,085,000 TCI Communications, Inc. debs. 7 7/8s, 2013 4,780,336
1,215,000 Time Warner, Inc. notes 8.18s, 2007 1,383,653
4,440,000 Tyson Foods, Inc. notes 8 1/4s, 2011 5,150,200
1,015,000 Tyson Foods, Inc. notes 7 1/4s, 2006 1,102,733
2,550,000 Unilever Capital Corp. bonds 5.9s, 2032 2,686,545
3,445,000 Viacom, Inc. company guaranty 7.7s, 2010 4,178,399
3,165,000 Walt Disney Co. notes 5 3/8s, 2007 3,368,538
-------------
154,884,814
Energy (1.9%)
- -------------------------------------------------------------------------------------------------------------------
4,970,000 Amerada Hess Corp. notes 7 1/8s, 2033 5,460,832
3,150,000 Amerada Hess Corp. notes 5.9s, 2006 3,405,326
844,000 BRL Universal Equipment sec. notes 8 7/8s, 2008 905,190
2,600,000 Canadian Natural Resources, Ltd. notes 7.2s, 2032 (Canada) 3,073,509
3,685,000 Canadian Natural Resources, Ltd. sr. notes 6.45s, 2033 (Canada) 3,919,967
5,600,000 Conoco Funding Co. company guaranty 6.35s, 2011 6,346,211
6,450,000 Conoco Funding Co. company guaranty 5.45s, 2006 7,037,608
2,080,000 Devon Financing Corp. ULC company guaranty 7 7/8s, 2031 2,575,221
5,050,000 Devon Financing Corp. ULC company guaranty 6 7/8s, 2011 5,808,389
3,995,000 Kerr-McGee Corp. company guaranty 6 7/8s, 2011 4,484,040
5,505,000 Louis Dreyfus Natural Gas Corp. notes 6 7/8s, 2007 6,134,838
1,950,000 MidAmerican Energy Holdings Co. sr. notes 4 5/8s, 2007 2,005,207
3,120,000 Motiva Enterprises, LLC 144A sr. notes 5.2s, 2012 3,151,305
570,000 Newfield Exploration Co. sr. notes 7 5/8s, 2011 615,600
2,210,000 Pioneer Natural Resources Co. company guaranty 9 5/8s, 2010 2,718,015
1,370,000 Pride Petroleum Services, Inc. sr. notes 9 3/8s, 2007 1,424,800
4,825,000 Transocean Sedco Forex, Inc. notes 6 5/8s, 2011 5,480,525
3,765,000 Union Oil Co. of California company guaranty 7 1/2s, 2029 4,438,389
1,065,000 Vintage Petroleum, Inc. sr. notes 8 1/4s, 2012 1,134,225
1,133,000 Westport Resources Corp. company guaranty 8 1/4s, 2011 1,234,970
1,291,000 XTO Energy, Inc. sr. notes 7 1/2s, 2012 1,420,100
-------------
72,774,267
Financial (9.5%)
- -------------------------------------------------------------------------------------------------------------------
6,620,000 Ace INA Holdings, Inc. company guaranty 8.3s, 2006 7,513,634
1,695,000 Allfirst Financial Inc. sub. notes 7.2s, 2007 1,927,180
5,075,000 Archstone-Smith Operating Trust notes 5s, 2007 (R) 5,198,545
11,125,000 ASIF Global Financing 144A notes 3.85s, 2007 11,387,398
4,000,000 Associates Corp. NA sr. notes Ser. 8, 7 3/8s, 2007 4,631,720
4,265,000 Associates First Capital Corp. debs. 6.95s, 2018 5,016,629
5,285,000 Associates First Capital Corp. sub. debs. 8.15s, 2009 6,324,264
7,080,000 Bank of America Corp. sub. notes 7.4s, 2011 8,499,462
1,765,000 Bank of New York Co., Inc. (The) sr. sub. notes FRN 3.4s, 2013 1,743,467
1,175,000 Bank One Corp. sub. debs. 7 5/8s, 2026 1,450,581
1,697,000 Bank One Corp. sub. notes 7.6s, 2007 1,961,386
10,685,000 Bank United Corp. notes Ser. A, 8s, 2009 12,367,022
600,000 Bank United Corp. sub. notes 8 7/8s, 2007 706,360
3,735,000 Bear Stearns Cos., Inc. (The) notes 3s, 2006 3,801,192
4,830,000 Boston Properties, Inc. 144A notes 6 1/4s, 2013 (R) 5,090,020
1,117,000 Capital One Financial Corp. notes 7 1/4s, 2006 1,105,830
1,430,000 CIT Group, Inc. sr. sub. notes 4 1/8s, 2006 1,459,983
3,655,000 CIT Group, Inc. sr. notes 5 1/2s, 2007 3,863,302
4,705,000 CIT Group, Inc. sr. notes Ser. MTN, 6 7/8s, 2009 5,139,522
800,000 Citigroup, Inc. bonds 5 7/8s, 2033 821,037
3,430,000 Citigroup, Inc. debs. 6 5/8s, 2028 3,867,047
6,385,000 Citigroup, Inc. notes 3 1/2s, 2008 6,448,595
4,670,000 Citigroup, Inc. sub. notes 7 1/4s, 2010 5,536,234
900,000 Colonial Bank sub. notes 9 3/8s, 2011 1,009,474
7,470,000 Colonial Bank sub. notes 8s, 2009 7,781,282
2,480,000 Countrywide Home Loans, Inc. company guaranty Ser. J, 5 1/4s, 2004 2,577,196
4,060,000 Countrywide Home Loans, Inc. company guaranty Ser. K, 5 5/8s, 2007 4,397,926
1,246,000 Crescent Real Estate Equities LP sr. notes 9 1/4s, 2009 (R) 1,322,318
3,120,000 EOP Operating LP sr. notes 7s, 2011 3,545,541
4,100,000 EOP Operating LP sr. notes 6 3/4s, 2008 4,595,169
2,815,000 Executive Risk Capital Trust company guaranty Class B, 8.675s, 2027 3,220,049
1,050,000 Fairfax Financial Holdings, Ltd. notes 6 7/8s, 2008 (Canada) 892,500
4,955,000 First Chicago NBD Corp. sub. notes 6 3/8s, 2009 5,709,882
6,369,000 First Union National Bank sub. notes 7.8s, 2010 7,761,970
695,000 FleetBoston Financial Corp. notes 7 1/4s, 2005 774,662
5,215,000 Franchise Finance Corp. of America sr. notes 8 3/4s, 2010 (R) 6,607,134
1,715,000 General Electric Capital Corp. company guaranty 7 7/8s, 2006 1,986,426
2,600,000 General Electric Capital Corp. notes Ser. A, 6 7/8s, 2010 3,026,787
1,000,000 General Electric Capital Corp. notes Ser. A, 6 3/4s, 2032 1,157,187
1,190,000 General Electric Capital Corp. notes Ser. A, 6s, 2012 1,313,129
5,905,000 General Electric Capital Corp. notes Ser. A, 4 5/8s, 2009 6,188,102
7,685,000 General Electric Capital Corp. notes Ser. A, 3.667s, 2006 7,829,309
1,120,000 Goldman Sachs Group, Inc. (The) notes 6 1/8s, 2033 1,145,509
5,675,000 Goldman Sachs Group, Inc. (The) notes 5 1/2s, 2014 5,919,616
2,845,000 Goldman Sachs Group, Inc. (The) notes 4 1/8s, 2008 2,935,153
2,340,000 Heller Financial, Inc. notes 8s, 2005 2,621,897
1,310,000 Heller Financial, Inc. notes 7 3/8s, 2009 1,541,051
2,295,000 Hospitality Properties Trust notes 6 3/4s, 2013 (R) 2,383,367
3,430,000 Household Finance Corp. notes 6 3/4s, 2011 3,864,825
80,000 Household Finance Corp. notes 6 3/8s, 2012 88,320
4,815,000 Household Finance Corp. sr. unsub. 5 7/8s, 2009 5,214,414
2,755,000 HRPT Properties Trust notes 6 1/2s, 2013 (R) 2,926,617
1,965,000 HSBC Capital Funding LP 144A bank guaranty FRN 9.547s, 2049 (Jersey) 2,536,029
7,050,000 HSBC Holdings PLC sub. notes Ser. (a), 5 1/4s, 2012 (United Kingdom) 7,372,510
440,000 iStar Financial, Inc. sr. notes 8 3/4s, 2008 (R) 475,200
1,590,000 iStar Financial, Inc. sr. notes 7s, 2008 (R) 1,645,650
2,610,000 John Hancock Financial Services, Inc. sr. notes 5 5/8s, 2008 2,802,623
6,850,000 JPMorgan Chase & Co. notes 5.35s, 2007 7,431,860
3,055,000 JPMorgan Chase & Co. sr. notes 3 5/8s, 2008 3,066,731
5,545,000 JPMorgan Chase & Co. sub. notes 5 3/4s, 2013 5,891,662
6,510,000 Lehman Brothers Holdings, Inc. notes 6 5/8s, 2006 7,227,942
2,560,000 Lehman Brothers Holdings, Inc. notes 4s, 2008 2,614,761
9,070,000 Liberty Mutual Insurance 144A notes 7.697s, 2097 6,572,875
7,070,000 Mack-Cali Realty LP notes 7 3/4s, 2011 (R) 8,223,782
2,980,000 Merrill Lynch & Co., Inc. notes Ser. B, 7.08s, 2005 3,296,500
2,490,000 Merrill Lynch & Co., Inc. notes Ser. B, 4 3/4s, 2009 2,596,048
2,075,000 Metlife, Inc. debs. 3.911s, 2005 2,150,505
590,000 Morgan Stanley Dean Witter & Co. bonds 5.8s, 2007 643,105
2,140,000 Morgan Stanley Tracers notes 4 1/4s, 2010 2,128,294
1,250,000 National City Bank sub. notes Ser. BKNT, 6 1/4s, 2011 1,401,911
4,020,000 National City Corp. sub. notes 7.2s, 2005 4,427,467
4,705,000 NationsBank Corp. sub. notes 6 1/2s, 2006 5,204,892
815,000 Nationwide Financial Services, Inc. notes 5 5/8s, 2015 828,644
1,445,000 Nationwide Mutual Insurance Co. 144A notes 8 1/4s, 2031 1,660,814
6,215,000 NB Capital Trust IV company guaranty 8 1/4s, 2027 7,501,909
13,115,000 Peoples Bank - Bridgeport sub. notes 7.2s, 2006 13,499,938
13,975,000 Principal Financial Group 144A notes 7.95s, 2004 (Australia) 14,961,271
2,660,000 Principal Life Global Funding I 144A sec. notes 5 1/4s, 2013 2,718,597
890,000 Prudential Financial, Inc. sr. notes Ser. MTN, 3 3/4s, 2008 892,812
655,000 Prudential Funding LLC 144A notes Ser. MTN, 6.6s, 2008 740,523
3,825,000 Prudential Insurance Co. 144A notes 8.3s, 2025 4,664,186
8,800,000 Royal Bank of Scotland Group PLC FRN 7 3/8s, 2049 (United Kingdom) 9,742,119
1,930,000 Sovereign Bancorp, Inc. sr. notes 10 1/2s, 2006 2,335,300
1,150,000 Sovereign Bank sub. notes 5 1/8s, 2013 1,147,125
2,780,000 St. Paul Co., Inc. (The) sr. notes 5 3/4s, 2007 2,970,611
1,975,000 State Street Capital Trust II FRN 1.869s, 2008 1,974,518
5,081,000 Sun Life Canada Capital Trust 144A company guaranty 8.526s, 2049 5,827,104
1,000,000 Tanger Properties, Ltd. company guaranty 7 7/8s, 2004 1,022,500
995,000 Travelers Property Casualty Corp. 144A notes 3 3/4s, 2008 999,877
2,240,000 US Bank National Association sub. notes 4.8s, 2015 2,245,533
150,000 Vesta Insurance Group, Inc. 144A company guaranty 8.525s, 2027 90,000
3,315,000 Wells Fargo Financial, Inc. notes 6 1/8s, 2006 3,646,536
-------------
363,377,486
Health Care (0.5%)
- -------------------------------------------------------------------------------------------------------------------
5,150,000 American Home Products Corp. FRN 6.7s, 2011 5,913,230
740,000 AmerisourceBergen Corp. sr. notes 8 1/8s, 2008 810,300
1,055,000 AmerisourceBergen Corp. 144A sr. notes 7 1/4s, 2012 1,118,300
1,150,000 Baxter International, Inc. 144A notes 4 5/8s, 2015 1,131,556
1,390,000 Bayer Corp. 144A FRB 6.2s, 2008 1,473,914
950,000 Biovail Corp. sr. sub. notes 7 7/8s, 2010 (Canada) 1,002,250
2,880,000 HCA, Inc. notes Ser. MTN, 8.7s, 2010 3,308,642
1,625,000 HCA, Inc. notes 6 1/4s, 2013 1,677,567
585,000 Integrated Health Services, Inc. sr. sub. notes Ser. A, 9 1/2s, 2007
(In default) (NON) 12,431
600,000 Integrated Health Services, Inc. sr. sub. notes Ser. A, 9 1/4s, 2008
(In default) (NON) 13,500
120,000 Multicare Cos., Inc. sr. sub. notes 9s, 2007 (In default) (NON) 2,400
2,239,000 Service Corp. International notes 6s, 2005 2,250,195
2,015,000 Tenet Healthcare Corp. notes 7 3/8s, 2013 1,989,813
-------------
20,704,098
Technology (0.1%)
- -------------------------------------------------------------------------------------------------------------------
1,085,000 Fiserv, Inc. 144A notes 4s, 2008 1,101,029
2,500,000 Hewlett-Packard Co. notes 5 1/2s, 2007 2,694,700
-------------
3,795,729
Transportation (0.8%)
- -------------------------------------------------------------------------------------------------------------------
27,960 Aran Shipping & Trading SA notes 8.3s, 2004 (Greece) (In default) (NON) 13,980
6,010,000 Burlington Northern Santa Fe Corp. notes 7 1/8s, 2010 7,073,451
1,311,922 Continental Airlines, Inc. pass-through certificates Ser. 97-4C, 6.8s, 2009 646,189
4,698,724 Continental Airlines, Inc. pass-through certificates Ser. 98-1C, 6.541s, 2009 2,530,851
3,840,000 CSX Corp. notes 6 1/4s, 2008 4,290,651
1,825,000 CSX Corp. notes 4 7/8s, 2009 1,879,613
1,915,000 Norfolk Southern Corp. sr. notes 7 1/4s, 2031 2,239,976
1,695,000 Union Pacific Corp. notes 7 3/8s, 2009 2,004,739
7,000,000 Union Pacific Corp. notes 5 3/4s, 2007 7,644,056
2,000,000 United Airlines, Inc. pass-through certificates Ser. 01-1, Class B, 6.932s,
2011 (In default) (NON) 301,743
-------------
28,625,249
Utilities & Power (3.4%)
- -------------------------------------------------------------------------------------------------------------------
875,000 AEP Texas Central Co. 144A notes 5 1/2s, 2013 911,881
3,500,000 Alabama Power Co. sr. notes Ser. S, 5 7/8s, 2022 3,686,246
470,000 American Electric Power Co., Inc. notes Ser. A, 6 1/8s, 2006 507,600
695,000 American Electric Power Co., Inc. sr. notes Ser. C, 5 3/8s, 2010 713,962
710,000 Appalachian Power Co. notes 3.6s, 2008 709,702
5,760,000 Arizona Public Service Co. sr. notes 6 3/4s, 2006 6,392,442
440,000 CMS Panhandle Holding Corp. sr. notes 6 1/2s, 2009 449,900
320,000 CMS Panhandle Holding Corp. sr. notes 6 1/8s, 2004 326,400
3,575,000 Constellation Energy Group, Inc. sr. notes 6 1/8s, 2009 3,949,316
5,200,000 Dominion Resources, Inc. unsub. notes 5.7s, 2012 5,546,174
1,940,000 DTE Energy Co. sr. notes 6 3/8s, 2033 1,999,231
830,000 Duke Energy Corp. 144A 1st mtge. 3 3/4s, 2008 838,544
1,360,000 Duke Energy Field Services, LLC notes 8 1/8s, 2030 1,665,116
2,970,000 Duke Energy Field Services, LLC notes 7 7/8s, 2010 3,470,005
2,035,000 Duke Energy Field Services, LLC notes 5 3/4s, 2006 2,146,406
3,900,000 Exelon Corp. sr. notes 6 3/4s, 2011 4,397,492
2,490,000 Exelon Generation Co., LLC sr. notes 6.95s, 2011 2,791,297
5,840,000 FirstEnergy Corp. notes Ser. A, 5 1/2s, 2006 6,171,146
825,000 Florida Power & Light Co. 1st mtge. 5 5/8s, 2034 830,495
1,555,000 KeySpan Corp. notes 7 5/8s, 2010 1,878,031
3,165,000 Kinder Morgan, Inc. sr. notes 6 1/2s, 2012 3,551,846
250,000 Midland Funding II Corp. debs. Ser. B, 13 1/4s, 2006 281,875
2,045,000 Mirant Americas Generation, Inc. sr. notes 8.3s, 2011 1,513,300
980,000 National Fuel Gas Co. notes 5 1/4s, 2013 990,511
6,100,000 National Rural Utilities Cooperative Finance Corp. coll. trust 6s, 2006 6,697,727
4,490,000 National Rural Utilities Cooperative Finance Corp. coll. trust 3 7/8s, 2008 4,569,275
2,225,000 National Rural Utilities Cooperative Finance Corp. coll. trust 3s, 2006 2,257,414
9,455,000 Nisource Finance Corp. company guaranty 7 7/8s, 2010 11,437,307
246 Northeast Utilities notes Ser. A, 8.58s, 2006 277
2,635,000 Northern States Power Co. mtge. Ser. B, 8s, 2012 3,259,724
4,210,000 Oncor Electric Delivery Co. sec. notes 6 3/8s, 2012 4,709,049
3,150,000 Oncor Electric Delivery Co. 144A sec. sr. notes 6 3/8s, 2015 3,511,847
3,725,000 Pepco Holdings, Inc. 144A notes 5 1/2s, 2007 3,970,399
1,965,000 PP&L Capital Funding, Inc. company guaranty Ser. D, 8 3/8s, 2007 2,286,321
940,000 Progress Energy, Inc. sr. notes 6 3/4s, 2006 1,036,856
2,210,000 Progress Energy, Inc. sr. notes 6.55s, 2004 2,294,610
1,395,000 Progress Energy, Inc. sr. notes 6.05s, 2007 1,529,382
880,000 PSEG Power, LLC company guaranty 8 5/8s, 2031 1,157,609
2,190,000 PSEG Power, LLC company guaranty 6.95s, 2012 2,498,656
8,330,000 PSI Energy, Inc. 1st mtge. Ser. EEE, 6.65s, 2006 8,931,622
2,585,000 Public Service Electric & Gas Co. 1st mtge. FRN 6 3/8s, 2008 2,888,885
1,605,000 Public Services Co. of Colorado sr. notes Ser. A, 6 7/8s, 2009 1,808,867
2,820,000 Sempra Energy notes 7.95s, 2010 3,354,931
445,000 Teco Energy, Inc. notes 7s, 2012 431,650
1,650,000 Texas Eastern Transmission LP sr. notes 7s, 2032 1,843,791
2,080,000 Virginia Electric & Power Co. sr. notes 4 3/4s, 2013 2,107,007
899,000 Western Resources, Inc. 1st mtge. 7 7/8s, 2007 1,000,138
1,001,000 Western Resources, Inc. sr. notes 9 3/4s, 2007 1,071,070
990,239 York Power Funding 144A notes 12s, 2007 (Cayman Islands)
(In default) (NON) 693,167
--------------
131,066,499
--------------
Total Corporate Bonds and Notes (cost $1,053,895,230) $1,112,565,633
COLLATERALIZED MORTGAGE OBLIGATIONS (22.4%) (a)
PRINCIPAL AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------
Arc Net Interest Margin Trust
$1,360,737 Ser. 02-5A, Class A, 7 3/4s, 2032 $1,351,982
1,451,573 Ser. 02-2, Class A, 7 3/4s, 2032 1,449,155
Arc Net Interest Margin Trust 144A
1,650,303 Ser. 02-1A, Class A, 7 3/4s, 2032 1,650,021
184,863 Ser. 01-6A, Class A, 7 1/4s, 2031 184,201
Asset Securitization Corp.
3,529,000 Ser. 97-MD7, Class A1B, 7.41s, 2030 3,958,297
6,723,701 Ser. 95-MD4, Class A1, 7.1s, 2029 7,389,185
1,565,000 Ser. 96-MD6, Class A1B, 6.88s, 2029 1,605,687
8,238,600 Ser. 97-D5, Class A1C, 6 3/4s, 2043 9,325,683
5,140,504 Banc of America Commercial Mortgage, Inc. Ser. 00-2, Class A1,
7.02s, 2032 5,722,923
158,282,754 Bayview Financial Acquisition Trust Ser. 03-X, Class AIO1,
Interest Only (IO), 1.52s, 2006 2,695,753
19,936,000 Bear Stearns Asset Backed Securities, Inc. Ser. 03-AC1, Class A, IO,
5s, 2005 1,925,070
2,900,000 Bear Stearns Commercial Mortgage Securitization Corp. FRN
Ser. 02-HOME, Class D, 3.05s, 2013 2,892,750
2,039,247 Chase Commercial Mortgage Securities Corp. Ser. 98-1, Class A1,
6.34s, 2030 2,147,263
8,220,224 Chase Manhattan Bank-First Union National Ser. 99-1, Class A1,
7.134s, 2031 9,081,758
7,083,000 Commercial Mortgage Acceptance Corp. Ser. 97-ML1, Class A3,
6.57s, 2007 7,810,114
Commercial Mortgage Asset Trust
10,565,410 Ser. 99-C1, Class A3, 6.64s, 2010 12,057,869
134,098,143 Ser. 99-C1, Class X, IO, 1.16s, 2020 7,516,201
4,821,854 Commercial Mortgage Pass-Through Certificates Ser. 00-C1, Class A1,
7.206s, 2033 5,326,642
Countrywide Home Loan
5,878,625 Ser. 98-A12, Class A14, 8s, 2028 6,025,696
3,380,925 Ser. 98-3, Class A5, 6 3/4s, 2028 3,448,423
4,712,495 Countrywide Mortgage Backed Securities, Inc. Ser. 93-C, Class A8,
6 1/2s, 2024 4,826,851
13,599,500 Criimi Mae Commercial Mortgage Trust Ser. 98-C1, Class A2, 7s, 2011 14,880,233
7,975,000 Criimi Mae Commercial Mortgage Trust 144A Ser. 98-C1, Class B,
7s, 2011 8,295,907
CS First Boston Mortgage Securities Corp.
33,755,000 Ser. 97-C2, Class A2, 6.52s, 2035 35,984,518
14,370,000 Ser. 98-C1, Class A1B, 6.48s, 2008 16,219,807
5,222,136 Ser. 01-CK3, Class A1, 5.26s, 2006 5,451,216
1,016,396 Ser. 01-CKN5, Class A1, 3.801s, 2006 1,040,854
DLJ Commercial Mortgage Corp.
16,446,285 Ser. 00-CKP1, Class A1A, 6.93s, 2009 18,191,495
1,830,193 Ser. 98-CG1, Class A1B, 6.41s, 2031 2,063,829
130,118,754 DLJ Commercial Mortgage Corp. 144A Ser. 00-CKP1, Class S, IO,
1.328s, 2010 7,695,223
Fannie Mae
9,717,575 Ser. 02-36, Class SJ, 16.744s, 2029 10,962,130
2,024 Ser. 92-15, Class L, IO, 8s, 2022 25,923
17,660,358 Ser. 02-T19, Class A3, 7 1/2s, 2042 19,458,678
8,461,172 Ser. 03-W2, Class 1A3, 7 1/2s, 2042 9,322,757
20,054,943 Ser. 02-W4, Class A5, 7 1/2s, 2042 22,097,099
6,208,746 Ser. 02-14, Class A2, 7 1/2s, 2042 6,840,970
11,217,147 Ser. 01-T10, Class A2, 7 1/2s, 2041 12,359,367
6,731,303 Ser. 01-T12, Class A2, 7 1/2s, 2041 7,416,738
5,388,602 Ser. 01-T8, Class A1, 7 1/2s, 2041 5,937,312
17,084,478 Ser. 01-T7, Class A1, 7 1/2s, 2041 18,824,157
896,904 Ser. 01-T3, Class A1, 7 1/2s, 2040 988,235
2,636,232 Ser. 01-T1, Class A1, 7 1/2s, 2040 2,904,674
1,059,339 Ser. 99-T2, Class A1, 7 1/2s, 2039 1,167,209
8,777,024 Ser. 00-T6, Class A1, 7 1/2s, 2030 9,670,771
22,037,776 Ser. 01-T4, Class A1, 7 1/2s, 2028 24,281,839
3,309,683 Ser. 02-W3, Class A5, 7 1/2s, 2028 3,646,702
5,003,195 Ser. 02-T18, Class A3, 7s, 2042 5,437,004
48,306,042 Ser. 02-T16, Class A2, 7s, 2042 52,494,482
3,942,580 Ser. 02-27, Class SQ, IO, 6.68s, 2032 142,919
56,410,501 Ser. 03-W3, Class 2IO2, IO, 2.533s, 2042 1,888,381
256,650,461 Ser. 03-T2, Class 2, IO, 2.065s, 2042 9,410,484
21,054,704 Ser. 02-36, Class QH, IO, 6.73s, 2029 1,382,649
11,830,654 Ser. 329, Class 2, IO, 5 1/2s, 2032 2,458,558
79,760,742 Ser. 03-22, IO, 6s, 2033 13,310,074
87,145,927 Ser. 03-W3, Class 2IO1, IO, 0.68s, 2042 1,943,218
112,867,476 Ser. 03-18, Class X1, IO, 0.645s, 2042 2,433,705
132,519,342 Ser. 01-T12, Class IO, 0.575s, 2041 2,360,501
1,417,056 Ser. 01-50, Class B1, IO, 0.491s, 2041 21,920
153,101,855 Ser. 03-W2, Class 1, IO, 0.47s, 2042 2,275,603
32,177,688 Ser. 02-T4, IO, 0.445s, 2041 447,471
97,436,668 Ser. 03-W3, Class 1, IO, 0.435s, 2042 1,389,577
99,454,059 Ser. 02-T1, IO, 0.424s, 2031 1,336,414
325,209 Ser. 02-W4, Principal Only (PO), zero %, 2042 253,663
2,206,510 Ser. 01-T4, PO, zero %, 2041 1,721,078
741,282 Ser. 01-T7, PO, zero %, 2041 578,200
418,278 Ser. 01-T3, PO, zero %, 2040 326,257
155,133 Ser. 01-T1, PO, zero %, 2040 121,003
278,613 Ser. 02-T4, PO, zero %, 2031 217,318
729,672 Ser. 02-T1, PO, zero %, 2031 569,144
212,240 Ser. 02-T6, PO, zero %, 2031 165,547
103,561 Ser. 01-T12, PO, zero %, 2031 80,778
625,240 Ser. 00-T6, PO, zero %, 2030 487,687
259,488 Ser. 02-W7, PO, zero %, 2029 202,401
341,558 Ser. 02-W3, PO, zero %, 2028 266,416
21,595,000 FFCA Secured Lending Corp. 144A Ser. 00-1, Class A2, 7.77s, 2027 24,830,601
7,223,907 First Union-Chase Commercial Mortgage Ser. 99-C2, Class A1,
6.363s, 2031 7,754,971
First Union-Lehman Brothers Commercial Mortgage Trust II
11,815,000 Ser. 97-C1, Class A3, 7.38s, 2029 13,417,114
2,850,653 Ser. 97-C1, Class A2, 7.3s, 2029 2,955,214
Freddie Mac
691,000 Ser. T-39, Class S, IO, 3 1/2s, 2004 19,920
155,047 Ser. 2028, Class SG, IO, 13.568s, 2023 4,458
1,240,023 Ser. 2355, Class WI, IO, 6 1/2s, 2026 9,161
14,485,239 Ser. 2422, Class IB, IO, 6 1/2s, 2028 294,231
37,666,308 Ser. 2579, Class DI, IO, 5 1/2s, 2023 6,599,851
11,882,752 Ser. 2553, Class IJ, IO, 5 1/2s, 2020 1,080,588
1,279,171 G-Force FRB Ser. 01-1A, Class A, 1.929s, 2033 1,282,321
6,727,365 GE Capital Mortgage Services, Inc. Ser. 98-11, Class 2A4, 6 3/4s, 2028 6,806,910
9,726,681 General Growth Properties-Mall Properties Trust FRB Ser. 01-C1A,
Class D3, 3.56s, 2014 9,731,620
GMAC Commercial Mortgage Securities, Inc.
11,894,000 Ser. 97-C2, Class A2, 6.55s, 2007 12,624,886
915,043 Ser. 01-C2, Class A1, 6 1/4s, 2034 1,001,614
12,409,176 Ser. 98-C2, Class X, IO, 0.80s, 2035 385,848
11,852,122 Ser. 99-C1, Class X, IO, 0.845s, 2033 383,342
Government National Mortgage Association
1,023,388 Ser. 99-31, Class MP, PO, zero %, 2029 970,177
5,981,492 Ser. 98-2, Class EA, PO, zero %, 2028 5,502,081
5,040,000 Granite Mortgages PLC FRN Ser. 01-1, Class 1C, 2.729s, 2041
(United Kingdom) 5,008,894
GS Mortgage Securities Corp. II
3,972,735 Ser. 98-C1, Class A2, 6.62s, 2030 4,465,447
8,200,000 Ser. 01-LIB, Class A2, 6.615s, 2016 8,981,001
1,610,982 Ser. 98-GLII, Class A1, 6.312s, 2031 1,731,400
460,578 Headlands Mortgage Securities, Inc. Ser. 98-1, Class X2, IO, 6 1/2s, 2028 12,954
22,675,000 Holmes Financing PLC FRB Ser. 1, Class 2C, 2.439s, 2040 22,528,769
Housing Securities Inc.
580,354 Ser. 93-F, Class F9M2, 7s, 2023 581,986
137,018 Ser. 94-1, Class AB1, 6 1/2s, 2009 135,519
17,062,203 JP Morgan Commercial Mortgage Finance Corp. Ser. 00-C9, Class A1,
7.59s, 2032 18,725,768
LB Commercial Conduit Mortgage Trust
924,907 Ser. 99-C1, Class A1, 6.41s, 2007 1,000,200
16,749,000 Ser. 98-C1, Class A2, 6.4s, 2007 17,890,707
16,023,600 Ser. 98-C4, Class A1B, 6.21s, 2035 17,896,358
9,472,077 Ser. 98-C4, Class A1A, 5.87s, 2006 9,969,361
LB-UBS Commercial Mortgage Trust
16,590,182 Ser. 00-C3, Class A1, 7.95s, 2009 18,806,465
13,106,387 Ser. 00-C4, Class A1, 7.18s, 2009 14,727,150
17,300,000 Ser. 02-C7, Class A2, 3.899s, 2026 17,672,604
72,717,000 LB-UBS Commercial Mortgage Trust 144A Ser. 03-C1, Class XCP, IO,
1.658s, 2036 5,126,767
11,208,726 Merit Securities Corp. FRB Ser. 11PA, Class 3A1, 1.94s, 2027 10,895,670
Merrill Lynch Mortgage Investors, Inc.
8,642,579 Ser. 96-C2, IO, 3.005s, 2028 620,119
9,826,021 Ser. 97-C1, Class A2, 7.03s, 2029 9,965,199
569,000 Ser. 96-C2, Class A3, 6.96s, 2028 622,877
1,025,852 Ser. 98-C2, Class A1, 6.22s, 2030 1,055,666
41,995,000 Merrill Lynch Mortgage Trust 144A Ser. 02-MW1, Class XP, IO, 1.915s,
2034 3,105,333
Morgan Stanley Capital I
2,599,099 Ser. 99-CAM1, Class A2, 6.76s, 2008 2,859,206
7,565,104 Ser. 98-CF1, Class A1, 6.33s, 2007 8,011,918
Morgan Stanley Dean Witter Capital I
2,801,742 Ser. 00-LIF2, Class A1, 6.96s, 2008 3,144,042
91,682,000 Ser. 03-TOP9, Class X2, IO, 1.679s, 2036 7,951,899
Morgan Stanley Dean Witter Capital I 144A
1,371,729 FRB Ser. 01-XLF, Class D, 3.02s, 2013 1,371,729
1,075,889 FRB Ser. 01-XLF, Class E, 2.97s, 2013 1,075,889
150,558,000 Prudential Commercial Mortgage Trust 144A Ser. 03-PWR1, Class X2,
IO, 1.732s, 2036 12,868,004
361,745 Prudential Home Mortgage Securities Ser. 92-25, Class B3, 8s, 2022 361,977
Prudential Home Mortgage Securities 144A
210,747 Ser. 94-31, Class B3, 8s, 2009 210,616
134,992 Ser. 94-31, Class B4, 8s, 2009 134,381
20,668,766 Prudential Securities Secured Financing Corp. Ser. 99-C2, Class A1,
6.955s, 2013 22,642,882
268,000 Residential Asset Mortgage Products, Inc. Ser. 02-SL1, Class AI3, 7s, 2032 276,417
7,268,611 Residential Funding Mortgage Ser. 98-S13, Class A21, 6 3/4s, 2028 7,368,627
24,654,491 Salomon Brothers Mortgage Securities VII 144A Ser. 00-C2, Class X,
IO, 1.098s, 2033 1,136,418
974,629 Sasco Arc Net Interest Margin Notes Ser. 02-BC10, Class A, 7 3/4s, 2033 965,770
2,041,000 Starwood Asset Receivables Trust FRN Ser. 02-1A, Class F, 2.655s, 2020 1,998,187
Structured Asset Securities Corp.
721,000 FRN Ser. 03-AM1, Class B1, 4.81s, 2033 652,505
2,715,000 FRN Ser. 02-HF2, Class M3, 3.32s, 2032 2,309,023
11,026,000 Ser. 02-HF2, Class A, IO, 6s, 2004 700,647
16,662,953 Structured Asset Security Corp. Ser. 98-RF3, Class A, IO, 6.1s, 2028 2,825,704
2,956,706 TIAA Commercial Real Estate Securitization Ser. 01-C1A, Class A1,
5.77s, 2016 3,135,956
20,576,847 TIAA Retail Commercial Mortgage Trust Ser. 99-1, Class A, 7.17s, 2032 22,664,163
-------------
Total Collateralized Mortgage Obligations (cost $847,619,793) $859,688,701
ASSET-BACKED SECURITIES (8.7%) (a)
PRINCIPAL AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------
$4,705,000 Advanta Mortgage Loan Trust Ser. 00-1, Class A4, 8.61s, 2028 $5,239,459
17,874,527 AFC Home Equity Loan Trust Ser. 99-2, Class 1A, 1.746s, 2029 17,874,527
Ameriquest Mortgage Securities, Inc.
725,000 Ser. 02-1, Class S, IO, 4 1/2s, 2004 30,189
22,407,000 Ser. 03-6, Class S, IO, 5s, 2005 1,608,822
2,309,000 FRN Ser. 02-4, Class M4, 5.07s, 2033 1,957,092
1,684,000 FRN Ser. 02-C, Class M2, 3.67s, 2032 1,378,859
Amortizing Residential Collateral Trust
43,777,636 Ser. 01-BC6, Class A, IO, 6s, 2004 1,864,242
22,540,000 Ser. 02-BC1, Class A, IO, 6s, 2005 1,255,519
3,223,000 FRN Ser. 02-BC1, Class M2, 2.42s, 2032 3,117,119
55,860,329 Ser. 02-BC3, Class A, IO, 6s, 2005 3,088,376
2,746,898 Ser. 02-BC3N, Class B2, 7s, 2032 2,720,885
56,959,893 Ser. 02-BC5, Class A, IO, 6s, 2004 2,794,173
45,369,655 Ser. 02-BC6, Class A, IO, 6s, 2004 2,445,381
2,945,000 FRN Ser. 02-BC6, Class M2, 2.52s, 2032 2,844,111
61,068,334 Ser. 02-BC7, Class AIO, IO, 6s, 2004 3,586,481
1,170,000 FRN Ser. 02-BC5, Class B, 3.57s, 2032 997,013
2,308,000 FRN Ser. 02-BC7, Class B3, 3.32s, 2032 1,956,030
1,534,515 AQ Finance NIM Trust Ser. 02-1, Class Note, 9 1/2s, 2032 1,530,199
382,138 Arc Net Interest Margin Trust 144A Ser. 02-8A, Class A1, 7 3/4s, 2032 378,989
Asset Backed Funding Certificates
2,020,207 Ser. 02-NC1, Class N1, 8.84s, 2032 2,010,106
4,414,000 FRN Ser. 02-OPT1, Class M3, 2.72s, 2032 4,420,180
994,521 Asset Backed Funding Corp. NIM Trust Ser. 02-WF1, 9.32s, 2032 989,548
2,336,000 Asset Backed Funding Corp. NIM Trust 144A Ser. 03-WF1, Class N1,
8.35s, 2032 2,335,935
Asset Backed Securities Corp. Home Equity Loan Trust
51,925,000 Ser. 02-HE1, Class A, IO, 5.05s, 2032 2,344,881
5,820,000 FRN Ser. 02-HE2, Class M2, 2.44s, 2032 5,661,769
47,418,000 Ser. 03-HE1, Class A, IO, 5s, 2033 3,610,786
2,187,000 FRN Ser. 03-HE1, Class M4, 5.81s, 2033 1,950,437
9,126,000 Bank One Issuance Trust FRN Ser. 02-C1, Class C1, 2.27s, 2009 9,077,162
Bayview Financial Acquisition Trust
4,351,588 FRN Ser. 01-DA, Class M3, 2.72s, 2031 4,296,003
4,988,000 Ser. 02-CA, Class A, IO, 7 1/4s, 2004 330,455
225,588,635 Bayview Financial Acquisition Trust 144A Ser. 02-XA, Class AIO1, IO,
1.322s, 2005 2,784,610
7,030,772 Bear Stearns Asset Backed Securities, Inc. FRN Ser. 03-1, Class A1,
1.82s, 2042 7,030,772
6,299,000 Capital One Multi-Asset Execution Trust FRN Ser. 03-A1, Class A1,
1.69s, 2009 6,299,000
CDC Mortgage Capital Trust
1,236,997 FRN Ser. 02-HE3, Class B2, 5.32s, 2033 1,063,817
1,838,000 FRN Ser. 03-HE1, Class B2, 5.07s, 2033 1,527,194
2,750,000 Chase Credit Card Master Trust FRN Ser. 00-1, Class C, 2.04s, 2007 2,736,250
Chase Funding Net Interest Margin
827,788 Ser. 02-1, Class Note, 8 1/2s, 2035 823,980
1,785,677 Ser. 02-2, 8 1/2s, 2035 1,778,892
400,407 Ser. 02-C1, Class Note, 8 1/2s, 2035 398,445
1,427,386 Chase Funding Net Interest Margin 144A Ser. 02-3, Class Note, 8 1/2s,
2035 1,423,247
Conseco Finance Securitizations Corp.
8,500,000 Ser. 00-2, Class A5, 8.85s, 2029 9,319,400
17,270,000 Ser. 00-4, Class A6, 8.31s, 2032 16,052,016
10,707,000 Ser. 01-04, Class A4, 7.36s, 2019 10,141,447
6,800,000 Ser. 01-3, Class A4, 6.91s, 2033 6,252,614
4,730,000 Ser. 01-4, Class B1, 9.4s, 2010 1,655,500
16,145,888 Ser. 02-1, Class A, 6.681s, 2032 16,065,046
5,593,000 Ser. 02-1, Class M2, 9.546s, 2032 3,355,800
14,182,073 Ser. 02-2, Class A, IO, 8 1/2s, 2010 4,558,487
43,750,021 Conseco Recreational Enthusiast Consumer Trust Ser. 01-A, Class AP,
IO, 5s, 2025 2,366,001
3,653,000 Consumer Credit Reference IDX Securities FRB Ser. 02-1A, Class A,
3.29s, 2007 3,582,223
CS First Boston Mortgage Securities Corp.
5,390,000 FRN Ser. 02-1, Class M2, 2.72s, 2032 5,014,209
3,048,000 FRN Ser. 02-2, Class M2, 2.67s, 2032 2,989,695
1,001,000 FRN Ser. 03-3, Class B3, 5.82s, 2033 893,693
22,170,000 Federal Home Loan Mortgage Corp. Structured Pass-Through
Securities Ser. T-40, Class S, IO, 4 1/2s, 2004 928,923
18,751,890 First Franklin Mortgage Loan Asset Backed Certificates Ser. 02-FF3,
Class A, IO, 6s, 2004 864,718
2,676,635 First Franklin NIM Trust Ser. 02-FF3, Class Note, 7 3/4s, 2032 2,648,196
3,007,954 First Plus 144A Ser. 98-A, Class A, 8 1/2s, 2023 1,985,250
3,813,050 First Plus Home Loan Trust Ser. 97-3, Class B1, 7.79s, 2023 3,810,677
1,000,000 GMAC Mortgage Corp. Ser. 02-HE2, Class A, IO, 7 1/2s, 2027 96,250
19,225,000 Green Tree Financial Corp. Ser. 99-5, Class A5, 7.86s, 2031 17,352,197
GSAMP Trust
1,486,827 Ser. 02-HE2N, Class Note, 8 1/4s, 2032 1,480,322
2,060,197 Ser. 02-WMC, Class Note, 8s, 2032 2,050,864
3,071,266 Home Equity Asset Trust Ser. 02-1N, Class A, 8s, 2032 2,994,484
57,461,464 Lehman Manufactured Housing Ser. 98-1, Class 1, IO, 0.811s, 2028 1,015,115
6,071,000 LNR CDO, Ltd. Ser. 02-1A, Class FFL, 4.589s, 2037 5,517,457
Madison Avenue Manufactured Housing Contract
5,098,734 FRN Ser. 02-A, Class B1, 4.57s, 2032 3,314,177
335,386,348 Ser. 02-A, IO, 0.3s, 2032 3,982,713
6,444,463 Marriot Vacation Club Owner Trust 144A FRB Ser. 02-1A, Class A1,
2.029s, 2010 6,444,463
2,630,044 Mid-State Trust Ser. 10, Class B, 7.54s, 2036 2,408,068
Morgan Stanley Dean Witter Capital I
1,895,000 FRN Ser. 01-NC3, Class B1, 3.77s, 2031 1,746,695
7,616,000 FRN Ser. 01-NC4, Class B1, 3.82s, 2032 6,791,993
2,425,000 FRN Ser. 02-AM2, Class B1, 3.57s, 2032 2,091,843
3,412,000 FRN Ser. 02-NC3, Class M2, 2.62s, 2032 3,246,859
8,365,000 FRN Ser. 02-HE1, Class B1, 3.12s, 2032 7,744,830
2,250,000 FRN Ser. 02-AM3, Class B2, 5.07s, 2033 1,956,517
1,593,234 Morgan Stanley Dean Witter Capital I 144A Ser. 01-NC4N,
Class Note, 8 1/2s, 2032 1,593,234
1,124,919 NC Finance Trust Ser. 02-1, 9 1/4s, 2032 1,119,294
2,222,000 Option One Mortgage Loan Trust FRN Ser. 03-3, Class M6, 4.829s,
2033 1,931,807
2,373,099 Option One Mortgage Securities Corp. Ser. 02-2A, Class CFTS, 8.83s,
2032 2,367,166
1,632,172 Option One Mortgage Securities Corp. 144A Ser. 02-1, Class CTFS,
6 3/4s, 2032 1,625,278
Pass-Through Amortizing Credit Card Trust
2,306,023 Ser. 02-1A, Class A3FL, 4.32s, 2012 2,297,375
4,597,722 Ser. 02-1A, Class A4FL, 6.78s, 2012 4,580,481
21,265,417 Residential Asset Securities Corp. Ser. 02-KS6, Class AIO, IO, 4 1/2s, 2005 847,895
67,865,000 Residential Funding Mortgage Securities, Inc. Ser. 03-HS1, Class AI, IO,
5 1/2s, 2033 4,207,630
3,146,156 Sasco Arc Net Interest Margin Notes 144A Ser. 03-BC2A, Class A,
7 3/4s, 2033 3,137,013
Structured Asset Investment Loan Trust
94,859,000 Ser. 03-BC2, Class A, IO, 6s, 2005 7,183,747
845,000 Ser. 03-BC2, Class B, 7s, 2033 806,182
49,529,000 Ser. 03-BC3, Class A, IO, 6s, 2004 3,394,767
Structured Asset Securities Corp.
42,357,228 Ser. 02-BC1, Class A, IO, 6s, 2004 2,394,227
57,380,277 Ser. 02-BC10, Class A, IO, 6s, 2004 3,222,276
94,496,102 Ser. 02-BC8, Class A, IO, 6s, 2004 6,004,751
34,387,404 Ser. 02-BC9, Class A, IO, 6s, 2004 1,943,735
1,767,213 Xerox Equipment Lease Owner Trust FRB Ser. 01-1, Class A, 3.31s, 2008 1,767,766
-------------
Total Asset-Backed Securities (cost $355,372,445) $332,704,301
COMMON STOCKS (--%) (a)
NUMBER OF SHARES VALUE
- -------------------------------------------------------------------------------------------------------------------
4,455,936 Contifinancial Corp. Liquidating Trust Units $89,119
3,544 Fitzgeralds Gaming Corp. (NON) 35
136 Genesis Health Ventures, Inc. (NON) 2,035
7,984 Jasper Energy 144A (NON) 499
1,372 Mariner Health Care, Inc. (NON) 10,290
441 PSF Group Holdings, Inc. 144A Class A (NON) 770,893
1,633 York Research Corp. 144A (NON) 102
-------------
Total Common Stocks (cost $6,603,111) $872,973
SHORT-TERM INVESTMENTS (18.6%) (a) (cost $715,380,561)
PRINCIPAL AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------
$715,380,561 Short-term investments held in Putnam commingled cash
account with yields ranging from 1.18% to 2.625% and due
dates ranging from May 1, 2003 to June 16, 2003 (d) $715,380,561
- -------------------------------------------------------------------------------------------------------------------
Total Investments (cost $4,864,108,803) $4,929,738,620
- -------------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $3,838,977,056.
(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 accruing
interest at this rate.
(SEG) A portion of this security was pledged and segregated with the
custodian to cover margin requirements for futures contracts at April
30, 2003.
(R) Real Estate Investment Trust.
(d) See Note 1 to the financial statements.
144A after the name of a security represents those exempt from
registration under Rule 144A of the Securities Act of 1933. These
securities may be resold in transactions exempt from registration,
normally to qualified institutional buyers.
TBA after the name of a security represents to be announced
securities (Note 1).
The rates shown on Floating Rate Bonds (FRB) and Floating Rate
Notes (FRN) are the current interest rates shown at April 30, 2003,
which are subject to change based on the terms of the security.
- ------------------------------------------------------------------------------
Futures Contracts Outstanding at April 30, 2003 (Unaudited)
Unrealized
Market Aggregate Face Expiration Appreciation/
Value Value Date (Depreciation)
- ------------------------------------------------------------------------------
U.S. Treasury Bond
(Long) $14,710,031 $14,783,142 Jun-03 $(73,111)
U.S. Treasury Note
5 yr (Long) 65,178,750 64,920,134 Jun-03 258,616
U.S. Treasury Note
10 yr (Short) 260,067,485 257,364,296 Jun-03 (2,703,189)
- ------------------------------------------------------------------------------
$(2,517,684)
- ------------------------------------------------------------------------------
Credit Default Contracts at April 30, 2003 (Unaudited)
(premiums received $7,029,960)
Notional Market
Amount Value
- ------------------------------------------------------------------------------
Agreement with
JPMorgan Chase
Bank effective
May 16, 2002,
maturing on May
15, 2007, to
receive a premium
equal to 12.53%
times the
notional amount.
For each credit
default event
related to one of
the issues within
the HYDI BB
7.55%, 5/15/07
Bond Index, the
fund makes a
payment of the
proportional
notional amount
times the
difference
between the par
value and the
then-market value
of the defaulted
issue. $41,000,000 $6,970,000
- ------------------------------------------------------------------------------
TBA Sales Commitments at April 30, 2003 (Unaudited)
(proceeds receivable $421,501,893)
Principal Settlement
Agency Amount Date Value
- ------------------------------------------------------------------------------
FHLMC, 6s, March
1, 2033 $7,000,000 3/13/03 $7,258,020
FNMA, 7s, May 1,
2033 14,751,000 5/14/03 15,585,346
FNMA, 6s, May 1,
2033 1,096,000 5/14/03 1,140,525
FNMA, 4 1/2s, May
1, 2018 372,929,000 5/19/03 377,357,532
GNMA, 5 1/2s,
April 1, 2033 20,000,000 4/23/03 20,704,360
- ------------------------------------------------------------------------------
$422,045,783
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Swap Contracts Outstanding at April 30, 2003 (Unaudited)
Unrealized
Notional Termination Appreciation/
Amount Date (Depreciation)
- ------------------------------------------------------------------------------
Agreement with
Lehman Brothers
Special
Financing, Inc.
dated July 31,
2002 to receive
semi-annually the
notional amount
multiplied by
5.7756% and pay
quarterly the
notional amount
multiplied by the
three month
USD-LIBOR-BBA. $54,861,045 08/02/22 $6,084,090
Agreement with
Lehman Brothers
Special
Financing, Inc.
dated July 31,
2002 to pay
semi-annually the
notional amount
multiplied by
5.152% and
receive quarterly
the notional
amount multiplied
by the three
month
USD-LIBOR-BBA. 53,317,584 08/02/12 (4,462,682)
Agreement with
Morgan Stanley
Capital Services,
Inc. dated
October 31, 2002
to pay monthly
the notional
amount multiplied
by the one month
USD LIBOR-BBA
minus a specified
spread and
receive (pay)
monthly the
notional amount
multiplied by the
return of the
Lehman Brothers
CMBS Investment
Grade Index. 19,511,226 11/01/03 105,946
Agreement with
Morgan Stanley
Capital Services,
Inc. dated
September 28,
2000 to pay
semi-annually the
notional amount
multiplied by
6.94% and receive
quarterly the
notional amount
multiplied by the
three month
USD-LIBOR-BBA. 28,000,000 10/02/10 (5,871,320)
Agreement with
Goldman Sachs
Capital Markets,
L.P. dated August
8, 2002 to pay
quarterly the
notional amount
multiplied by the
three month
USD-LIBOR-BBA and
receive
semi-annually the
notional amount
multiplied by
5.601%. 54,861,045 08/12/22 4,816,800
Agreement with
Goldman Sachs
Capital Markets,
L.P. dated August
8, 2002 to
receive quarterly
the notional
amount multiplied
by the three
month
USD-LIBOR-BBA and
pay semi-annually
the notional
amount multiplied
by 5.689%. 61,565,504 08/12/32 (6,390,499)
Agreement with
Deutsche Bank AG
dated July 31,
2002 to pay
quarterly the
notional amount
multiplied by the
three month
LIBOR-BBA and
receive
semi-annually the
notional amount
multiplied by
5.7756%. 54,861,045 08/02/22 6,111,520
Agreement with
Deutsche Bank AG
dated July 31,
2002 to receive
semi-annually the
notional amount
multiplied by the
three month
LIBOR-BBA and pay
quarterly the
notional amount
multiplied by
5.86%. 61,565,504 08/02/32 (8,028,142)
Agreement with
Merrill Lynch
Capital Services,
Inc. dated August
8, 2002 to
receive quarterly
the notional
amount multiplied
by the three
month LIBOR-BBA
and pay
semi-annually the
notional amount
multiplied by
4.94%. 53,317,584 08/13/12 (3,512,541)
Agreement with
Merrill Lynch
Capital Services,
Inc. dated August
8, 2002 to
receive quarterly
the notional
amount multiplied
by the three
month LIBOR-BBA
and pay
semi-annually the
notional amount
multiplied by
5.601%. 54,861,045 08/12/22 4,805,931
Agreement with
Lehman Brothers
Special Financing
dated February
27, 2003 to
receive (pay)
monthly the
notional amount
multiplied by the
return of the
Lehman Brothers
CMBS Investment
Grade Index
adjusted by a
specified spread
and pay monthly
the notional
amount multiplied
by one month USD
LIBOR-BBA
adjusted by a
specified spread. 13,018,110 09/01/03 74,416
- ------------------------------------------------------------------------------
$(6,266,481)
- ------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
STATEMENT OF ASSETS AND LIABILITIES
April 30, 2003 (Unaudited)
Assets
- -------------------------------------------------------------------------------------------
Investments in securities, at value (identified cost
$4,864,108,803) (Note 1) $4,929,738,620
- -------------------------------------------------------------------------------------------
Cash 7,072,729
- -------------------------------------------------------------------------------------------
Dividends, interest and other receivables 43,145,158
- -------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 7,192,556
- -------------------------------------------------------------------------------------------
Receivable for securities sold 865,319,075
- -------------------------------------------------------------------------------------------
Receivable for open swap contracts (Note 1) 21,998,703
- -------------------------------------------------------------------------------------------
Total assets 5,874,466,841
Liabilities
- -------------------------------------------------------------------------------------------
Payable for variation margin (Note 1) 1,289,991
- -------------------------------------------------------------------------------------------
Payable for securities purchased 1,529,191,683
- -------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 40,861,676
- -------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 4,751,312
- -------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 471,102
- -------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 140,257
- -------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 3,984
- -------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 1,339,733
- -------------------------------------------------------------------------------------------
Credit default contracts outstanding, at value (premiums
received $7,029,960) (Note 1) 6,970,000
- -------------------------------------------------------------------------------------------
Payable for open swap contracts (Note 1) 28,265,184
- -------------------------------------------------------------------------------------------
TBA sales commitments, at value (proceeds receivable
$421,501,893) (Note 1) 422,045,783
- -------------------------------------------------------------------------------------------
Other accrued expenses 159,080
- -------------------------------------------------------------------------------------------
Total liabilities 2,035,489,785
- -------------------------------------------------------------------------------------------
Net assets $3,838,977,056
Represented by
- -------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $3,968,444,466
- -------------------------------------------------------------------------------------------
Distributions in excess of net investment income (Note 1) (6,322,462)
- -------------------------------------------------------------------------------------------
Accumulated net realized loss on investments and foreign
currency transactions (Note 1) (179,506,670)
- -------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 56,361,722
- -------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to capital shares
outstanding $3,838,977,056
Computation of net asset value and offering price
- -------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($1,393,751,566 divided by 206,543,667 shares) $6.75
- -------------------------------------------------------------------------------------------
Offering price per class A share (100/95.25 of $6.75)* $7.09
- -------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($590,298,788 divided by 88,033,113 shares)** $6.71
- -------------------------------------------------------------------------------------------
Net asset value and offering price per class C share
($45,064,546 divided by 6,701,616 shares)** $6.72
- -------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($1,245,403,727 divided by 186,208,824 shares) $6.69
- -------------------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $6.69)* $6.91
- -------------------------------------------------------------------------------------------
Net asset value, offering price and redemption price per class R share
($1,026 divided by 152 shares) $6.75
- -------------------------------------------------------------------------------------------
Net asset value, offering price and redemption price per class Y share
($564,457,403 divided by 83,217,603 shares) $6.78
- -------------------------------------------------------------------------------------------
* On single retail sales of less than $50,000. On sales of $50,000
or more and on group sales, the offering price is reduced.
** Redemption price per share is equal to net asset value less any
applicable contingent deferred sales charge.
The accompanying notes are an integral part of these financial statements.
STATEMENT OF OPERATIONS
Six months ended April 30, 2003 (Unaudited)
Investment income:
- -------------------------------------------------------------------------------------------
Interest $94,420,792
- -------------------------------------------------------------------------------------------
Dividends 298
- -------------------------------------------------------------------------------------------
Total investment income 94,421,090
Expenses:
- -------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 9,687,556
- -------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 2,919,595
- -------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 50,346
- -------------------------------------------------------------------------------------------
Administrative services (Note 2) 24,154
- -------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 1,693,933
- -------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 2,882,701
- -------------------------------------------------------------------------------------------
Distribution fees -- Class C (Note 2) 219,894
- -------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 3,542,117
- -------------------------------------------------------------------------------------------
Distribution fees -- Class R (Note 2) 1
- -------------------------------------------------------------------------------------------
Other 767,047
- -------------------------------------------------------------------------------------------
Total expenses 21,787,344
- -------------------------------------------------------------------------------------------
Expense reduction (Note 2) (63,342)
- -------------------------------------------------------------------------------------------
Net expenses 21,724,002
- -------------------------------------------------------------------------------------------
Net investment income 72,697,088
- -------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 58,145,909
- -------------------------------------------------------------------------------------------
Net realized gain on swap contracts (Note 1) 343,752
- -------------------------------------------------------------------------------------------
Net realized loss on futures contracts (Note 1) (156,556)
- -------------------------------------------------------------------------------------------
Net realized loss on foreign currency transactions (Note 1) (622,874)
- -------------------------------------------------------------------------------------------
Net realized loss on credit default contracts (Notes 1 and 3) (417,300)
- -------------------------------------------------------------------------------------------
Net unrealized appreciation of assets and liabilities in foreign
currencies during the period 63,131
- -------------------------------------------------------------------------------------------
Net unrealized appreciation of investments, futures contracts, swap
contracts, credit default contracts and TBA sales commitments during the period 38,916,490
- -------------------------------------------------------------------------------------------
Net gain on investments 96,272,552
- -------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $168,969,640
- -------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
STATEMENT OF CHANGES IN NET ASSETS
Six months ended Year ended
April 30 October 31
2003* 2002
- -------------------------------------------------------------------------------------------------------
Increase (decrease) in net assets
- -------------------------------------------------------------------------------------------------------
Operations:
- -------------------------------------------------------------------------------------------------------
Net investment income $72,697,088 $159,260,768
- -------------------------------------------------------------------------------------------------------
Net realized gain on investments and foreign currency
transactions 57,292,931 40,478,219
- -------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of investments
and assets and liabilities in foreign currencies 38,979,621 (59,523,711)
- -------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 168,969,640 140,215,276
- -------------------------------------------------------------------------------------------------------
Distributions to shareholders: (Note 1)
- -------------------------------------------------------------------------------------------------------
From net investment income
Class A (28,266,858) (66,143,094)
- -------------------------------------------------------------------------------------------------------
Class B (9,951,123) (23,022,355)
- -------------------------------------------------------------------------------------------------------
Class C (770,000) (1,494,196)
- -------------------------------------------------------------------------------------------------------
Class M (28,732,125) (65,789,694)
- -------------------------------------------------------------------------------------------------------
Class R (9) --
- -------------------------------------------------------------------------------------------------------
Class Y (11,516,294) (20,899,773)
- -------------------------------------------------------------------------------------------------------
Increase (decrease) from capital share transactions (Note 4) (180,196,814) 946,878,694
- -------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets (90,463,583) 909,744,858
Net assets
- -------------------------------------------------------------------------------------------------------
Beginning of period 3,929,440,639 3,019,695,781
- -------------------------------------------------------------------------------------------------------
End of period (including distributions in excess of net investment
income and undistributed net investment income of $6,322,462
and $216,859, respectively) $3,838,977,056 $3,929,440,639
- -------------------------------------------------------------------------------------------------------
* Unaudited
The accompanying notes are an integral part of these financial statements.
FINANCIAL HIGHLIGHTS
(For a common share outstanding throughout the period)
CLASS A
- ------------------------------------------------------------------------------------------------------------------
Six months
ended
Per-share April 30
operating performance (Unaudited) Year ended October 31
- ------------------------------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $6.59 $6.69 $6.29 $6.44 $6.87 $7.14
- ------------------------------------------------------------------------------------------------------------------
Investment operations:
- ------------------------------------------------------------------------------------------------------------------
Net investment income (a) .13 .32 .38 .43 .40 .48
- ------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .17 (.07) .43 (.16) (.40) (.28)
- ------------------------------------------------------------------------------------------------------------------
Total from
investment operations .30 .25 .81 .27 -- .20
- ------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------
From net
investment income (.14) (.35) (.41) (.42) (.42) (.40)
- ------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- -- -- -- -- (.04)
- ------------------------------------------------------------------------------------------------------------------
From return of capital -- -- -- (d) -- (.01) (.03)
- ------------------------------------------------------------------------------------------------------------------
Total distributions (.14) (.35) (.41) (.42) (.43) (.47)
- ------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $6.75 $6.59 $6.69 $6.29 $6.44 $6.87
- ------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(b) 4.57* 3.93 13.39 4.39 (.09) 2.78
- ------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $1,393,752 $1,339,061 $1,251,190 $946,755 $1,160,121 $1,426,583
- ------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(c) .47* .92 .95 .95 .96 1.02
- ------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 1.92* 4.84 5.93 6.86 5.95 6.69
- ------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 112.96* (e) 268.10 (e) 233.83 (e) 207.35 209.02 257.12
- ------------------------------------------------------------------------------------------------------------------
* Not annualized.
(a) Per share net investment income has been determined on the basis
of the weighted average number of shares outstanding during the period.
(b) Total return assumes dividend reinvestment and does not reflect
the effect of sales charges.
(c) The ratio of expenses to average net assets includes amounts paid
through expense offset arrangements (Note 2).
(d) Amount represents less than $0.01 per share.
(e) Portfolio turnover excludes certain treasury note transactions
executed in connection with a short-term trading strategy.
The accompanying notes are an integral part of these financial statements.
FINANCIAL HIGHLIGHTS
(For a common share outstanding throughout the period)
CLASS B
- ------------------------------------------------------------------------------------------------------------------
Six months
ended
Per-share April 30
operating performance (Unaudited) Year ended October 31
- ------------------------------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $6.55 $6.65 $6.25 $6.41 $6.83 $7.11
- ------------------------------------------------------------------------------------------------------------------
Investment operations:
- ------------------------------------------------------------------------------------------------------------------
Net investment income (a) .10 .27 .33 .38 .35 .42
- ------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .17 (.07) .44 (.17) (.39) (.28)
- ------------------------------------------------------------------------------------------------------------------
Total from
investment operations .27 .20 .77 .21 (.04) .14
- ------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------
From net
investment income (.11) (.30) (.37) (.37) (.37) (.36)
- ------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- -- -- -- -- (.04)
- ------------------------------------------------------------------------------------------------------------------
From return of capital -- -- -- (d) -- (.01) (.02)
- ------------------------------------------------------------------------------------------------------------------
Total distributions (.11) (.30) (.37) (.37) (.38) (.42)
- ------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $6.71 $6.55 $6.65 $6.25 $6.41 $6.83
- ------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(b) 4.21* 3.19 12.63 3.46 (.69) 1.92
- ------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $590,299 $555,668 $474,783 $373,336 $458,766 $494,703
- ------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(c) .84* 1.67 1.70 1.70 1.71 1.77
- ------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 1.54* 4.07 5.19 6.11 5.20 5.92
- ------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 112.96* (e) 268.10 (e) 233.83 (e) 207.35 209.02 257.12
- ------------------------------------------------------------------------------------------------------------------
* Not annualized.
(a) Per share net investment income has been determined on the basis
of the weighted average number of shares outstanding during the period.
(b) Total return assumes dividend reinvestment and does not reflect
the effect of sales charges.
(c) The ratio of expenses to average net assets includes amounts paid
through expense offset arrangements (Note 2).
(d) Amount represents less than $0.01 per share.
(e) Portfolio turnover excludes certain treasury note transactions
executed in connection with a short-term trading strategy.
The accompanying notes are an integral part of these financial statements.
FINANCIAL HIGHLIGHTS
(For a common share outstanding throughout the period)
CLASS C
- -----------------------------------------------------------------------------------------------------
Six months
ended For the period
Per-share April 30 July 26, 1999+
operating performance (Unaudited) Year ended October 31 to October 31
- -----------------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
- -----------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $6.57 $6.67 $6.27 $6.43 $6.54
- -----------------------------------------------------------------------------------------------------
Investment operations:
- -----------------------------------------------------------------------------------------------------
Net investment income (a) .10 .26 .32 .39 .10
- -----------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .17 (.06) .45 (.17) (.11)
- -----------------------------------------------------------------------------------------------------
Total from
investment operations .27 .20 .77 .22 (.01)
- -----------------------------------------------------------------------------------------------------
Less distributions:
- -----------------------------------------------------------------------------------------------------
From net
investment income (.12) (.30) (.37) (.38) (.10)
- -----------------------------------------------------------------------------------------------------
From return of capital -- -- -- (d) -- -- (d)
- -----------------------------------------------------------------------------------------------------
Total distributions (.12) (.30) (.37) (.38) (.10)
- -----------------------------------------------------------------------------------------------------
Net asset value,
end of period $6.72 $6.57 $6.67 $6.27 $6.43
- -----------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(b) 4.07* 3.18 12.61 3.53 (.13)*
- -----------------------------------------------------------------------------------------------------
Ratios and supplemental data
- -----------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $45,065 $39,017 $34,545 $10,363 $1,869
- -----------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(c) .84* 1.67 1.70 1.70 .46*
- -----------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 1.54* 4.04 5.03 6.17 1.36*
- -----------------------------------------------------------------------------------------------------
Portfolio turnover (%) 112.96* (e) 268.10 (e) 233.83 (e) 207.35 209.02
- -----------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Per share net investment income has been determined on the basis
of the weighted average number of shares outstanding during the period.
(b) Total return assumes dividend reinvestment and does not reflect
the effect of sales charges.
(c) The ratio of expenses to average net assets includes amounts paid
through expense offset arrangements (Note 2).
(d) Amount represents less than $0.01 per share.
(e) Portfolio turnover excludes certain treasury note transactions
executed in connection with a short-term trading strategy.
The accompanying notes are an integral part of these financial statements.
FINANCIAL HIGHLIGHTS
(For a common share outstanding throughout the period)
CLASS M
- ------------------------------------------------------------------------------------------------------------------
Six months
ended
Per-share April 30
operating performance (Unaudited) Year ended October 31
- ------------------------------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $6.54 $6.64 $6.25 $6.41 $6.84 $7.11
- ------------------------------------------------------------------------------------------------------------------
Investment operations:
- ------------------------------------------------------------------------------------------------------------------
Net investment income (a) .12 .30 .37 .42 .38 .47
- ------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .16 (.06) .42 (.17) (.40) (.28)
- ------------------------------------------------------------------------------------------------------------------
Total from
investment operations .28 .24 .79 .25 (.02) .19
- ------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------
From net
investment income (.13) (.34) (.40) (.41) (.40) (.39)
- ------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- -- -- -- -- (.04)
- ------------------------------------------------------------------------------------------------------------------
From return of capital -- -- -- (d) -- (.01) (.03)
- ------------------------------------------------------------------------------------------------------------------
Total distributions (.13) (.34) (.40) (.41) (.41) (.46)
- ------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $6.69 $6.54 $6.64 $6.25 $6.41 $6.84
- ------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(b) 4.36* 3.77 13.10 4.05 (.26) 2.58
- ------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $1,245,404 $1,465,393 $1,024,351 $1,066,539 $1,623,061 $1,188,620
- ------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(c) .59* 1.17 1.20 1.20 1.21 1.27
- ------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 1.81* 4.56 5.74 6.61 5.68 6.53
- ------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 112.96* (e) 268.10 (e) 233.83 (e) 207.35 209.02 257.12
- ------------------------------------------------------------------------------------------------------------------
* Not annualized.
(a) Per share net investment income has been determined on the basis
of the weighted average number of shares outstanding during the period.
(b) Total return assumes dividend reinvestment and does not reflect
the effect of sales charges.
(c) The ratio of expenses to average net assets includes amounts paid
through expense offset arrangements (Note 2).
(d) Amount represents less than $0.01 per share.
(e) Portfolio turnover excludes certain treasury note transactions
executed in connection with a short-term trading strategy.
The accompanying notes are an integral part of these financial statements.
FINANCIAL HIGHLIGHTS
(For a common share outstanding throughout the period)
CLASS R
- -------------------------------------------------
For the period
January 21, 2003+
Per-share to April 30
operating performance (Unaudited)
- -------------------------------------------------
2003
- -------------------------------------------------
Net asset value,
beginning of period $6.65
- -------------------------------------------------
Investment operations:
- -------------------------------------------------
Net investment income (a) .07
- -------------------------------------------------
Net realized and unrealized
gain on investments .09
- -------------------------------------------------
Total from
investment operations .16
- -------------------------------------------------
Less distributions:
- -------------------------------------------------
From net
investment income (.06)
- -------------------------------------------------
Total distributions (.06)
- -------------------------------------------------
Net asset value,
end of period $6.75
- -------------------------------------------------
Total return at
net asset value (%)(b) 2.42*
- -------------------------------------------------
Ratios and supplemental data
- -------------------------------------------------
Net assets, end of period
(in thousands) $1
- -------------------------------------------------
Ratio of expenses to
average net assets (%)(c) 0.33*
- -------------------------------------------------
Ratio of net investment income
to average net assets (%) 0.99*
- -------------------------------------------------
Portfolio turnover (%) 112.96* (d)
- -------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Per share net investment income has been determined on the basis
of the weighted average number of shares outstanding during the period.
(b) Total return assumes dividend reinvestment.
(c) The ratio of expenses to average net assets includes amounts paid
through expense offset arrangements (Note 2).
(d) Portfolio turnover excludes certain treasury note transactions
executed in connection with a short-term trading strategy.
The accompanying notes are an integral part of these financial statements.
FINANCIAL HIGHLIGHTS
(For a common share outstanding throughout the period)
CLASS Y
- ------------------------------------------------------------------------------------------------------------------
Six months
ended
Per-share April 30
operating performance (Unaudited) Year ended October 31
- ------------------------------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $6.63 $6.72 $6.31 $6.46 $6.88 $7.15
- ------------------------------------------------------------------------------------------------------------------
Investment operations:
- ------------------------------------------------------------------------------------------------------------------
Net investment income (a) .14 .33 .39 .45 .41 .50
- ------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .16 (.06) .45 (.17) (.39) (.28)
- ------------------------------------------------------------------------------------------------------------------
Total from
investment operations .30 .27 .84 .28 .02 .22
- ------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------
From net
investment income (.15) (.36) (.43) (.43) (.43) (.42)
- ------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- -- -- -- -- (.04)
- ------------------------------------------------------------------------------------------------------------------
From return of capital -- -- -- (d) -- (.01) (.03)
- ------------------------------------------------------------------------------------------------------------------
Total distributions (.15) (.36) (.43) (.43) (.44) (.49)
- ------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $6.78 $6.63 $6.72 $6.31 $6.46 $6.88
- ------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(b) 4.50* 4.26 13.73 4.58 .27 3.02
- ------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $564,457 $530,302 $234,826 $194,267 $255,873 $246,405
- ------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(c) .34* .67 .70 .70 .71 .77
- ------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.04* 5.03 6.23 7.11 6.19 6.92
- ------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 112.96* (e) 268.10 (e) 233.83 (e) 207.35 209.02 257.12
- ------------------------------------------------------------------------------------------------------------------
* Not annualized.
(a) Per share net investment income has been determined on the basis
of the weighted average number of shares outstanding during the period.
(b) Total return assumes dividend reinvestment.
(c) The ratio of expenses to average net assets includes amounts paid
through expense offset arrangements (Note 2).
(d) Amount represents less than $0.01 per share.
(e) Portfolio turnover excludes certain treasury note transactions
executed in connection with a short-term trading strategy.
The accompanying notes are an integral part of these financial statements.
NOTES TO FINANCIAL STATEMENTS
April 30, 2003 (Unaudited)
Note 1
Significant accounting policies
Putnam Income Fund (the "fund") is registered under the Investment
Company Act of 1940, as amended, as a diversified, open-end management
investment company. The fund seeks high current income consistent with
what Putnam Investment Management, LLC ("Putnam Management"), the fund's
manager, an indirect wholly-owned subsidiary of Putnam, LLC, believes to
be prudent risk. The fund invests in a portfolio of debt securities,
both government and corporate obligations, and may invest in preferred
stocks and common stocks.
The fund offers class A, class B, class C, class M, class R and class Y
shares. The fund began offering class R shares on January 21, 2003.
Class A shares are sold with a maximum front-end sales charge of 4.75%.
Class B shares, which convert to class A shares after approximately
eight years, do not pay a front-end sales charge but pay a higher
ongoing distribution fee than class A, class M and class R shares, and
are subject to a contingent deferred sales charge, if those shares are
redeemed within six years of purchase. Class C shares are subject to the
same fees and expenses as class B shares, except that class C shares
have a one-year 1.00% contingent deferred sales charge and do not
convert to class A shares. Class M shares are sold with a maximum
front-end sales charge of 3.25% and pay an ongoing distribution fee that
is higher than class A shares but lower than class B and class C shares.
Class R shares are sold without a front-end sales charge and pay an
ongoing distribution fee that is higher than class A shares, but lower
than class B and class C shares. Class R shares are offered to qualified
employee-benefit plans. Class Y shares, which are sold at net asset
value, are generally subject to the same expenses as class A, class B,
class C, class M and class R shares, but do not bear a distribution fee.
Class Y shares are sold to certain eligible purchasers including certain
defined contribution plans (including corporate IRAs), certain college
savings plans, bank trust departments and trust companies.
Expenses of the fund are borne pro-rata by the holders of each class of
shares, except that each class bears expenses unique to that class
(including the distribution fees applicable to such class). Each class
votes as a class only with respect to its own distribution plan or other
matters on which a class vote is required by law or determined by the
Trustees. Shares of each class would receive their pro-rata share of the
net assets of the fund, if the fund were liquidated. In addition, the
Trustees declare separate dividends on each class of shares.
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 accounting principles generally accepted in the United States of
America and requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities in the financial
statements and the reported amounts of increases and decreases in net
assets from operations during the reporting period. Actual results could
differ from those estimates.
A) Security valuation Investments for which market quotations are
readily available are valued at the last reported sales price on its
principal exchange, or official closing price for certain markets. If no
sales are reported -- as in the case of some securities traded
over-the-counter -- a security is valued at its last reported bid price.
Market quotations are not considered to be readily available for certain
debt obligations; such investments are valued at market value on the
basis of valuations furnished by an independent pricing service or
dealers, approved by the Trustees. Such services or dealers determine
valuations for normal institutional-size trading units of such
securities using methods based on market transactions for comparable
securities and various relationships, generally recognized by
institutional traders, between securities. For foreign investments, if
trading or events occurring in other markets after the close of the
principal exchange in which the foreign investments are traded are
expected to materially affect the value of the investments, then those
investments are valued, taking into consideration these events, at their
fair value following procedures approved by the Trustees. 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 valued at amortized cost, which
approximates fair value. Other investments, including restricted
securities, are valued at fair value following procedures approved by
the Trustees. Such valuations and procedures are reviewed periodically
by the Trustees.
B) Joint trading account The fund may transfer uninvested cash balances,
including cash collateral received under security lending arrangements,
into a joint trading account along with the cash of other registered
investment companies and certain other accounts managed by Putnam
Management. These balances may be invested in issuers of high-grade
short-term investments having maturities of up to 397 days for
collateral received under security lending arrangements and up to 90
days for other cash investments.
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 recorded on the trade date (date the order to buy or
sell is executed). Gains or losses on securities sold are determined on
the identified cost basis.
Interest income is recorded on the accrual basis. Dividend income is
recognized on the ex-dividend date except that certain dividends from
foreign securities are recognized as soon as the fund is informed of the
ex-dividend date. Non-cash dividends, if any, are recorded at the fair
market value of the securities received. All premiums/discounts are
amortized/accreted on a yield-to-maturity basis.
E) Foreign currency translation The accounting records of the fund are
maintained in U.S. dollars. The market value of foreign securities,
currency holdings, and 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 earned 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 realized
exchange gains or losses on closed forward currency contracts,
disposition of foreign currencies, currency gains and losses realized
between the trade and settlement dates on securities transactions 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. Investments in
foreign securities involve certain risks, including those related to
economic instability, unfavorable political developments, and currency
fluctuations, not present with domestic investments.
F) Forward currency contracts The fund may buy and sell forward currency
contracts, which are agreements between two parties to buy and sell
currencies at a set price on a future date. These contracts are used 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. Forward currency contracts outstanding at
period end are listed after The fund's portfolio.
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. The fund and the broker
agree to exchange an amount of cash equal to the daily fluctuation in
the value of the futures contract. Such receipts or payments are known
as "variation margin." 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.
Futures contracts outstanding at period end are listed after The fund's
portfolio.
H) Total return swap contracts The fund may enter into total return swap
contracts, which are arrangements to exchange a market-linked return for
an interest payment, both based on a notional principal amount. To the
extent that the total return of the security or index underlying the
transaction exceeds or falls short of the offsetting interest rate
obligation, the fund will receive a payment from or make a payment to
the counterparty, respectively. Total return swap contracts are
marked-to-market daily based upon quotations from market makers and the
change, if any, is recorded as unrealized gain or loss. Payments
received or made at the end of the measurement period are recorded as
realized gains or losses. The fund could be exposed to credit or market
risk due to unfavorable changes in the fluctuation of interest rates or
in the price of the underlying security or index, the possibility that
there is no liquid market for these agreements or that the counterparty
may default on its obligation to perform. Total return swap contracts
outstanding at period end are listed after The fund's portfolio.
I) Interest rate swap contracts The fund may enter into interest rate
swap contracts, which are arrangements between two parties to exchange
cash flows based on a notional principal amount, to manage the fund's
exposure to interest rates. Interest rate swap contracts are
marked-to-market daily based upon quotations from market makers and the
change, if any, is recorded as unrealized gain or loss. Payments made or
received are recognized as part of interest income. A portion of the
payments received or made upon early termination are recognized as
realized gain or loss. The fund could be exposed to credit or market
risk due to unfavorable changes in the fluctuation of interest rates or
if the counterparty defaults on its obligation to perform. Interest rate
swap contracts outstanding at period end are listed after The fund's
portfolio.
J) Credit default contracts The fund may enter into credit default
contracts where one party, the protection buyer, makes an upfront
payment to a counterparty, the protection seller, in exchange for the
right to receive a contingent payment as a result of a credit event
related to a specified security or index. The upfront payment received
by the fund, as the protection seller, is recorded as a liability on the
fund's books. The credit default contracts are marked-to-market daily
based upon quotations from market makers and the change, if any, is
recorded as unrealized gain or loss. Payments received or made as a
result of a credit event or termination of the contract are recognized,
net of a proportional amount of the upfront payment, as realized gains
or losses. In addition to bearing the risk that the credit event will
occur, the fund could be exposed to market risk due to unfavorable
changes in interest rates or in the price of the underlying security or
index, the possibility that the fund may be unable to close out its
position at the same time or at the same price as if it had purchased
comparable publicly traded securities or that the counterparty may
default on its obligation to perform. Credit default contracts
outstanding at period end are listed after The fund's portfolio.
K) TBA purchase commitments The fund may enter into "TBA" (to be
announced) 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 significantly differ
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 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 its 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.
L) 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. TBA sale commitments outstanding at period
end are listed after The fund's portfolio.
M) Line of credit The fund has entered into a committed line of credit
with certain banks. This line of credit agreement includes restrictions
that the fund maintain an asset coverage ratio of at least 300% and that
borrowings not exceed prospectus limitations. For the six months ended
April 30, 2003, the fund had no borrowings against the line of credit.
N) 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.
At October 31, 2002, the fund had a capital loss carryover of
approximately $235,115,000 available to the extent allowed by tax law to
offset future capital gains, if any. The amount of the carryover and the
expiration dates are:
Loss Carryover Expiration
- -------------- ------------------
$101,310,000 October 31, 2007
124,225,000 October 31, 2008
9,580,000 October 31, 2009
The aggregate identified cost on a tax basis is $4,866,750,394,
resulting in gross unrealized appreciation and depreciation of
$108,042,764 and $45,054,538, respectively, or net unrealized
appreciation of $62,988,226.
O) Distributions to shareholders Distributions to shareholders from net
investment income are recorded by the fund on the ex-dividend date.
Distributions from capital gains, if any, are recorded on the
ex-dividend date and paid at least annually. The amount and character of
income and gains to be distributed are determined in accordance with
income tax regulations, which may differ from generally accepted
accounting principles. Reclassifications are made to the fund's capital
accounts to reflect income and gains available for distribution (or
available capital loss carryovers) under income tax regulations.
Note 2
Management fee, administrative services
and other transactions
Putnam Management is paid for management and investment advisory
services quarterly based on the average net assets of the fund. Such fee
is based on the following annual rates: 0.65% of the first $500 million,
0.55% of the next $500 million, 0.50% of the next $500 million, 0.45% of
the next $5 billion, 0.425% of the next $5 billion, 0.405% of the next
$5 billion, 0.39% of the next $5 billion and 0.38% thereafter.
The fund reimburses Putnam Management an allocated amount for the
compensation and related expenses of certain officers of the fund and
their staff who provide administrative services to the fund. The
aggregate amount of all such reimbursements is determined annually by
the Trustees.
Custodial functions for the fund's assets are provided by Putnam
Fiduciary Trust Company (PFTC), a wholly-owned subsidiary of Putnam,
LLC. Investor servicing agent functions are provided by Putnam Investor
Services, a division of PFTC.
The fund has entered into an arrangement with PFTC whereby credits
realized as a result of uninvested cash balances are used to reduce a
portion of the fund's expenses. For the six months ended April 30, 2003,
the fund's expenses were reduced by $63,342 under these arrangements.
Each independent Trustee of the fund receives an annual Trustee fee, of
which $3,540 has been allocated to the fund, and an additional fee for
each Trustees meeting attended. 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
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 a 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.
The fund has adopted distribution plans (the "Plans") with respect to
its class A, class B, class C, class M and class R shares pursuant to
Rule 12b-1 under the Investment Company Act of 1940. The purpose of the
Plans is to compensate Putnam Retail Management, a wholly-owned
subsidiary of Putnam, LLC and Putnam Retail Management GP, Inc., for
services provided and expenses incurred by it in distributing shares of
the fund. The Plans provide for payments by the fund to Putnam Retail
Management at an annual rate up to 0.35%, 1.00%, 1.00%, 1.00% and 1.00%
of the average net assets attributable to class A, class B, class C,
class M and class R shares, respectively. The Trustees have approved
payment by the fund at an annual rate of 0.25%, 1.00%, 1.00%, 0.50% and
0.50% of the average net assets attributable to class A, class B, class
C, class M and class R shares, respectively.
For the six months ended April 30, 2003, Putnam Retail Management,
acting as underwriter received net commissions of $177,028 and $371,806
from the sale of class A and class M shares, respectively, and received
$563,046 and $8,252 in contingent deferred sales charges from
redemptions of class B and class C shares, respectively. A deferred
sales charge of up to 1.00% and 0.40% is assessed on certain redemptions
of class A and class M shares, respectively. For the six months ended
April 30, 2003, Putnam Retail Management, acting as underwriter received
$2,180 and no monies on class A and class M redemptions, respectively.
Note 3
Purchases and sales of securities
During the six months ended April 30, 2003, cost of purchases and
proceeds from sales of investment securities other than U.S. government
obligations and short-term investments aggregated $2,861,438,326 and
$3,029,009,950, respectively. Purchases and sales of U.S. government
obligations aggregated $1,056,028,837 and $1,300,191,228, respectively.
Note 4
Capital shares
At April 30, 2003, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
Six months ended April 30, 2003
- ---------------------------------------------------------------------------
Class A Shares Amount
- ---------------------------------------------------------------------------
Shares sold 37,640,602 $251,064,606
- ---------------------------------------------------------------------------
Shares issued in connection
with reinvestment
of distributions 3,683,433 24,468,391
- ---------------------------------------------------------------------------
41,324,035 275,532,997
Shares repurchased (37,831,534) (252,115,723)
- ---------------------------------------------------------------------------
Net increase 3,492,501 $23,417,274
- ---------------------------------------------------------------------------
Year ended October 31, 2002
- ---------------------------------------------------------------------------
Class A Shares Amount
- ---------------------------------------------------------------------------
Shares sold 91,844,500 $601,890,096
- ---------------------------------------------------------------------------
Shares issued in connection
with reinvestment
of distributions 8,591,343 55,989,302
- ---------------------------------------------------------------------------
100,435,843 657,879,398
Shares repurchased (84,346,346) (551,541,071)
- ---------------------------------------------------------------------------
Net increase 16,089,497 $106,338,327
- ---------------------------------------------------------------------------
Six months ended April 30, 2003
- ---------------------------------------------------------------------------
Class B Shares Amount
- ---------------------------------------------------------------------------
Shares sold 23,624,139 $156,649,068
- ---------------------------------------------------------------------------
Shares issued in connection
with reinvestment
of distributions 1,267,272 8,367,551
- ---------------------------------------------------------------------------
24,891,411 165,016,619
Shares repurchased (21,646,371) (143,474,971)
- ---------------------------------------------------------------------------
Net increase 3,245,040 $21,541,648
- ---------------------------------------------------------------------------
Year ended October 31, 2002
- ---------------------------------------------------------------------------
Class B Shares Amount
- ---------------------------------------------------------------------------
Shares sold 51,941,920 $339,142,797
- ---------------------------------------------------------------------------
Shares issued in connection
with reinvestment
of distributions 2,891,498 18,740,150
- ---------------------------------------------------------------------------
54,833,418 357,882,947
Shares repurchased (41,412,667) (269,824,805)
- ---------------------------------------------------------------------------
Net increase 13,420,751 $88,058,142
- ---------------------------------------------------------------------------
Six months ended April 30, 2003
- ---------------------------------------------------------------------------
Class C Shares Amount
- ---------------------------------------------------------------------------
Shares sold 3,327,681 $22,125,144
- ---------------------------------------------------------------------------
Shares issued in connection
with reinvestment
of distributions 93,695 620,573
- ---------------------------------------------------------------------------
3,421,376 22,745,717
Shares repurchased (2,654,569) (17,663,591)
- ---------------------------------------------------------------------------
Net increase 766,807 $5,082,126
- ---------------------------------------------------------------------------
Year ended October 31, 2002
- ---------------------------------------------------------------------------
Class C Shares Amount
- ---------------------------------------------------------------------------
Shares sold 5,110,137 $33,498,794
- ---------------------------------------------------------------------------
Shares issued in connection
with reinvestment
of distributions 185,061 1,203,616
- ---------------------------------------------------------------------------
5,295,198 34,702,410
Shares repurchased (4,537,145) (29,759,799)
- ---------------------------------------------------------------------------
Net increase 758,053 $4,942,611
- ---------------------------------------------------------------------------
Six months ended April 30, 2003
- ---------------------------------------------------------------------------
Class M Shares Amount
- ---------------------------------------------------------------------------
Shares sold 24,732,377 $163,163,180
- ---------------------------------------------------------------------------
Shares issued in connection
with reinvestment
of distributions 121,392 799,377
- ---------------------------------------------------------------------------
24,853,769 163,962,557
Shares repurchased (62,725,112) (415,380,082)
- ---------------------------------------------------------------------------
Net decrease (37,871,343) $(251,417,525)
- ---------------------------------------------------------------------------
Year ended October 31, 2002
- ---------------------------------------------------------------------------
Class M Shares Amount
- ---------------------------------------------------------------------------
Shares sold 99,926,194 $647,389,661
- ---------------------------------------------------------------------------
Shares issued in connection
with reinvestment
of distributions 307,479 1,988,546
- ---------------------------------------------------------------------------
100,233,673 649,378,207
Shares repurchased (30,364,757) (196,715,154)
- ---------------------------------------------------------------------------
Net increase 69,868,916 $452,663,053
- ---------------------------------------------------------------------------
Period from January 21, 2003
(commencement of operations) to
April 30, 2003
- ---------------------------------------------------------------------------
Class R Shares Amount
- ---------------------------------------------------------------------------
Shares sold 151 $1,000
- ---------------------------------------------------------------------------
Shares issued in connection
with reinvestment
of distributions 1 9
- ---------------------------------------------------------------------------
152 1,009
Shares repurchased -- --
- ---------------------------------------------------------------------------
Net increase 152 $1,009
- ---------------------------------------------------------------------------
Six months ended April 30, 2003
- ---------------------------------------------------------------------------
Class Y Shares Amount
- ---------------------------------------------------------------------------
Shares sold 25,089,673 $168,366,309
- ---------------------------------------------------------------------------
Shares issued in connection
with reinvestment
of distributions 1,723,996 11,516,294
- ---------------------------------------------------------------------------
26,813,669 179,882,603
Shares repurchased (23,624,465) (158,703,949)
- ---------------------------------------------------------------------------
Net increase 3,189,204 $21,178,654
- ---------------------------------------------------------------------------
Year ended October 31, 2002
- ---------------------------------------------------------------------------
Class Y Shares Amount
- ---------------------------------------------------------------------------
Shares sold 70,026,055 $459,304,012
- ---------------------------------------------------------------------------
Shares issued in connection
with reinvestment
of distributions 3,191,380 20,899,773
- ---------------------------------------------------------------------------
73,217,435 480,203,785
Shares repurchased (28,148,294) (185,327,224)
- ---------------------------------------------------------------------------
Net increase 45,069,141 $294,876,561
- ---------------------------------------------------------------------------
At April 30, 2003, Putnam Investments, LLC owned 152 class R shares of
the fund (100% of class R shares outstanding), valued at $1,026.
THE PUTNAM FAMILY OF FUNDS
The following is a complete list of Putnam's open-end mutual funds.
Please call your financial advisor or Putnam at 1-800-225-1581 to obtain
a prospectus for any Putnam fund. It contains more complete information,
including charges and expenses. Please read it carefully before you
invest or send money.
GROWTH FUNDS
Discovery Growth Fund
Growth Opportunities Fund
Health Sciences Trust
International New Opportunities Fund
New Opportunities Fund
OTC & Emerging Growth Fund
Small Cap Growth Fund
Vista Fund
Voyager Fund
BLEND FUNDS
Capital Appreciation Fund
Capital Opportunities Fund
Europe Equity Fund
Global Equity Fund
Global Natural Resources Fund
International Capital Opportunities Fund
International Equity Fund
Investors Fund
Research Fund
Tax Smart Equity Fund
Utilities Growth and Income Fund
VALUE FUNDS
Classic Equity Fund
Convertible Income-Growth Trust
Equity Income Fund
The George Putnam Fund of Boston
The Putnam Fund for Growth and Income
International Growth and Income Fund
Mid Cap Value Fund
New Value Fund
Small Cap Value Fund *
INCOME FUNDS
American Government Income Fund
Diversified Income Trust
Global Income Trust
High Yield Advantage Fund *
High Yield Trust
Income Fund
Intermediate U.S. Government Income Fund
Money Market Fund +
U.S. Government Income Trust
TAX-FREE INCOME FUNDS
Municipal Income Fund
Tax Exempt Income Fund
Tax Exempt Money Market Fund +
Tax-Free High Yield Fund
Tax-Free Insured Fund
State tax-free income funds
Arizona, California, Florida, Massachusetts, Michigan, Minnesota, New
Jersey, New York, Ohio and Pennsylvania
State tax-free money market funds +
California, New York
ASSET ALLOCATION FUNDS
Putnam Asset Allocation Funds--three investment portfolios that spread
your money across a variety of stocks, bonds, and money market
investments.
The three portfolios:
Asset Allocation: Balanced Portfolio
Asset Allocation: Conservative Portfolio
Asset Allocation: Growth Portfolio
* Closed to new investors.
+ An investment in a money market fund is not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other government agency.
Although the funds seek to preserve your investment at $1.00 per share,
it is possible to lose money by investing in the fund.
Check your account balances and current performance at
www.putnaminvestments.com.
SERVICES FOR SHAREHOLDERS
HELP YOUR INVESTMENT GROW
Set up a program for systematic investing with as little as $25 a month
from a Putnam fund or from your own savings or checking account.
(Regular investing does not guarantee a profit or protect against loss
in a declining market.)
SWITCH FUNDS EASILY
You can move money from one Putnam fund to another within the same class
of shares without a service charge. (This privilege is subject to change
or termination.)
ACCESS YOUR MONEY EASILY
You can have checks sent regularly or redeem shares any business day at
the then-current net asset value, which may be more or less than the
original cost of the shares. Class B and class C shares carry a sales
charge that is applied to certain withdrawals.
HOW TO BUY ADDITIONAL SHARES
You may buy shares through your financial advisor or directly from
Putnam. To open an account by mail, send a check made payable to the
name of the fund along with a completed fund application. To add to an
existing account, complete the investment slip found at the top of your
Confirmation of Activity statement and return it with a check payable to
your fund.
VISIT US AT WWW.PUTNAMINVESTMENTS.COM
A secure section of our Web site contains complete information on your
account, including balances and transactions, updated daily. You may
also conduct transactions, such as exchanges, additional investments,
and address changes. Log on today to get your password.
USE OUR TOLL-FREE NUMBER
1-800-225-1581 Ask a helpful Putnam representative or your financial
advisor for details about any of these or other services, or see your
prospectus.
[GRAPHIC OMITTED: PHOTO OF SAMUEL PUTNAM]
PUTNAM IS A LEADER IN GLOBAL MONEY MANAGEMENT
Putnam Investments traces its heritage to the early 19th century when
ship captains hired trustees to manage their money while they were away
at sea. In a landmark 1830 decision that involved one such trustee,
Massachusetts Supreme Judicial Court Justice Samuel Putnam established
The Prudent Man Rule, a legal foundation for responsible money
management. In 1937, his great-great grandson founded Putnam with The
George Putnam Fund of Boston, the first fund to offer a balanced
portfolio of stocks and bonds. Today, Putnam Investments is one of the
largest investment management firms in the world, and this balanced
approach remains the foundation of everything we do.
With over 65 years of experience, Putnam has nearly $251 billion in
assets under management, over 100 mutual funds, over 13 million
shareholder accounts, and nearly 3,000 institutional and 401(k) clients.
(Information as of 12/31/02.)
We're one of the largest mutual fund companies in the United States.
Putnam has won the DALBAR award for service twelve times in the past
thirteen years. Putnam offers products in every investment category,
including growth, value, and blend as well as international and fixed
income.
Teamwork is a cornerstone of Putnam's investment philosophy. Our funds
are managed by teams in a collaborative environment that promotes an
active exchange of information.
Putnam's disciplined investment philosophy is based on style
consistency. We aim for less volatility over the short term and strong,
consistent performance over time. Our truth in labeling approach helps
us adhere to every fund's stated objective, style, and risk positioning.
We are committed to helping financial advisors provide sound, sensible
guidance, information, and expertise to help investors reach their
financial goals.
FUND INFORMATION
ABOUT PUTNAM INVESTMENTS
One of the largest mutual fund families in the United States, Putnam
Investments has a heritage of investment leadership dating back to Judge
Samuel Putnam, whose Prudent Man Rule has defined fiduciary tradition
and practice since 1830. Founded over 65 years ago, Putnam Investments
was built around the concept that a balance between risk and reward is
the hallmark of a well-rounded financial program. We presently manage
over 100 mutual funds in growth, value, blend, fixed income, and
international.
INVESTMENT MANAGER
Putnam Investment Management, LLC
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Retail Management
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
TRUSTEES
John A. Hill, Chairman
Jameson Adkins Baxter
Charles B. Curtis
Ronald J. Jackson
Paul L. Joskow
Elizabeth T. Kennan
Lawrence J. Lasser
John H. Mullin III
Robert E. Patterson
George Putnam, III
A.J.C. Smith
W. Thomas Stephens
W. Nicholas Thorndike
OFFICERS
George Putnam, III
President
Charles E. Porter
Executive Vice President, Treasurer and
Principal Financial Officer
Patricia C. Flaherty
Senior Vice President
Karnig H. Durgarian
Vice President and
Principal Executive Officer
Steven D. Krichmar
Vice President and
Principal Financial Officer
Michael T. Healy
Assistant Treasurer and
Principal Accounting Officer
Brett C. Browchuk
Vice President
Charles E. Haldeman, Jr.
Vice President
Lawrence J. Lasser
Vice President
Beth S. Mazor
Vice President
Richard A. Monaghan
Vice President
Stephen M. Oristaglio
Vice President
Gordon H. Silver
Vice President
Mark C. Trenchard
Vice President
Kevin M. Cronin
Vice President
Judith Cohen
Clerk and Assistant Treasurer
This report is for the information of shareholders of Putnam Income
fund. It may also be used as sales literature when preceded or
accompanied by the current prospectus, which gives details of sales
charges, investment objectives, and operating policies of the fund, and
the most recent copy of Putnam's Quarterly Performance Summary and
Putnam's Quarterly Ranking Summary. For more information or to request a
prospectus, call toll free: 1-800-225-1581. The fund's Statement of
Additional Information contains additional information about the fund's
Trustees and is available without charge upon request by calling
1-800-225-1581.
Visit www.putnaminvestments.com or call 1-800-225-1581.
NOT FDIC INSURED, MAY LOSE VALUE, NO BANK GUARANTEE
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
- ---------------------
PRSRT STD
U.S. POSTAGE PAID
PUTNAM
INVESTMENTS
- ---------------------
For account balances, economic forecasts, and the latest on Putnam funds, visit
www.putnaminvestments.com
SA035-88657 004/312/510/514 6/03
PUTNAM INVESTMENTS [SCALE LOGO OMITTED]
- ----------------------------------------------------------------------------
Putnam Income Fund
Supplement to Semiannual Report dated 4/30/03
The following information has been prepared to provide class Y
shareholders with a performance overview specific to their holdings.
Class Y shares are offered exclusively to clients that meet the
eligibility requirements specified in the fund's prospectus for such
shares. Performance of class Y shares, which do not incur a front-end
load, a distribution fee, or a contingent deferred sales charge, will
differ from the performance of class A, B, C, M, and R shares, which are
discussed more extensively in the annual report.
RESULTS AT A GLANCE
- ----------------------------------------------------------------------------
Total return for periods ended 4/30/03
NAV
6 months 4.50%
1 year 8.81
5 years 29.54
Annual average 5.31
10 years 84.68
Annual average 6.33
Life of fund (since class A inception, 11/1/54)
Annual average 8.34
Share value: NAV
10/31/02 $6.63
4/30/03 $6.78
- ----------------------------------------------------------------------------
Distributions: No. Income Capital gains Total
6 $0.145 -- $0.145
- ----------------------------------------------------------------------------
Please note that past performance is not indicative of future results.
More recent returns may be more or less than those shown. Returns shown
for class Y shares for periods prior to their inception are derived from
the historical performance of class A shares, and are not adjusted to
reflect the initial sales charge currently applicable to class A shares.
These returns have not been adjusted to reflect differences in operating
expenses which, for class Y shares, typically are lower than the
operating expenses applicable to class A shares. All returns assume
reinvestment of distributions at net asset value. Investment return and
principal value will fluctuate so your shares, when redeemed, may be
worth more or less than their original cost. See full report for
information on comparative benchmarks. If you have questions, please
consult your fund prospectus or call Putnam toll free at 1-800-752-9894.
Item 2. Code of Ethics:
- -----------------------
Not applicable
Item 3. Audit Committee Financial Expert:
- -----------------------------------------
Not applicable
Item 4. Principal Accountant Fees and Services:
- -----------------------------------------------
Not applicable
Items 5-6. [Reserved]
- ---------------------
Item 7. Disclosure of Proxy Voting Policies and Procedures For Closed End
- -------------------------------------------------------------------------
Management Investment Companies: Not applicable
--------------------------------
Item 8. [Reserved]
- ------------------
Item 9. Controls and Procedures:
- --------------------------------
The registrant's principal executive officer and principal financial
officers have concluded, based on their evaluation of the effectiveness
of the design and operation of the registrant's disclosure controls and
procedures as of a date within 90 days of the filing date of this report
on Form N-CSR, that the design and operation of such procedures are
effective to provide reasonable assurance that information required to
be disclosed by the investment company in the reports that it files or
submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized, and reported within the time periods specified in
the Commission's rules and forms.
There have been no significant changes in the registrant's internal
controls subsequent to the date of their evaluation.
Item 10. Exhibits:
- ------------------
(a) Not applicable
(b) A separate certification for each principal executive officer and
principal financial officer of the registrant as required by Rule 30a-2
under the Investment Company Act of 1940, as amended, and the officer
certifications as required by Section 906 of the Sarbanes-Oxley Act of 2002
are filed herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934
an the Investment Company Act of 1940, the registrant has duly
caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
NAME OF REGISTRANT
By (Signature and Title): /s/Michael T. Healy
--------------------------
Michael T. Healy
Principal Accounting Officer
Date: June 24, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934
an the Investment Company Act of 1940, this report has been signed
below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
By (Signature and Title): /s/Karnig H. Durgarian
---------------------------
Karnig H. Durgarian
Principal Executive Officer
Date: June 24, 2003
By (Signature and Title): /s/Charles E. Porter
---------------------------
Charles E. Porter
Principal Financial Officer
Date: June 24, 2003
By (Signature and Title): /s/Steven D. Krichmar
---------------------------
Steven D. Krichmar
Principal Financial Officer
Date: June 24, 2003