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:
ANNUAL REPORT ON PERFORMANCE AND OUTLOOK
10-31-03
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From the Trustees
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John A. Hill and
George Putnam, III
Dear Fellow Shareholder:
You may have read recent press coverage regarding investigations
involving Putnam Investments. Last month all Putnam shareholders were
sent a letter detailing the steps being taken by Putnam to address the
issues raised by federal and state regulators. Since then, a number of
remedial actions, some of which were discussed in last month's letter,
are being instituted under the terms of an order from the Securities and
Exchange Commission (SEC). These include stringent employee trading
restrictions, enhanced compliance standards and systems, new redemption
fees for certain fund shares held less than three months, and a process
for making full monetary restitution for any losses to fund
shareholders. This process will be directed by an independent third
party approved by the SEC and by Putnam's Board of Trustees.
The Board is also continuing its own independent investigation of these
issues and when complete a report will be issued detailing the
additional steps being taken to make sure that nothing like this happens
at Putnam again. We believe that the new senior management team at
Putnam is fully committed to re-establishing the firm as a model for the
highest ethical standards in the mutual fund industry. Our Board is
committed to working with Putnam's management to ensure that everything
possible is done to restore your full confidence in the Putnam
organization.
Putnam Income Fund closed its fiscal year on October 31, 2003, with
positive results. The portfolio's emphasis on non-Treasury issues helped
the fund outperform its benchmark index during the period at net asset
value. Its lower-yielding Treasury issues, however, contributed to the
fund's underperformance in its Lipper peer group category average, as
did the lackluster performance of one of the fund's asset-backed
securities early in the fiscal year. In the following report, the fund's
management team discusses performance and strategy during the period and
also offers its view of prospects for the fiscal year that has just
begun.
Respectfully yours,
/S/ JOHN A. HILL /S/ GEORGE PUTNAM, III
John A. Hill George Putnam, III
Chairman of the Trustees President of the Funds
December 17, 2003
Report from Fund Management
Fund highlights
* During the fiscal year ended October 31, 2003, Putnam Income Fund's
class A shares returned 5.45% at net asset value (NAV) and 0.42% at
public offering price.
* The fund's emphasis on non-Treasury securities helped it to outperform
its primary benchmark, the Lehman Aggregate Bond Index, based on results
at NAV. The index returned 4.90% during the period.
* Primarily as a result of its allocation to Treasury securities and
early underperformance in one area of its asset-backed holdings, the
fund lagged the average return of 6.25% for the Lipper Corporate Debt
Funds A Rated category.
* The fund's dividend was reduced to $0.019 per share for class A
shares, effective in June. 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
For most of the 12-month period higher-yielding, non-Treasury bonds
outperformed Treasuries. In this environment, four factors played a part
in the fund's outperformance relative to its benchmark. The fund's
overweighting in corporate bonds, which performed strongly, as well as
the timing of that allocation, made a substantial contribution. Second,
the team's security selection and overweighting in mortgage and
asset-backed securities contributed positively. Third, maintaining a
lower sensitivity to changes in interest rates than the benchmark helped
preserve portfolio value during the summer of 2003 when rates rose
sharply. Finally, our industry focus in the corporate bond sector proved
advantageous, as we had emphasized sectors that delivered strong
performance while de-emphasizing some that lagged. The fund's weak
showing relative to its Lipper peer group was primarily due to its
allocation to Treasuries and the underperformance of certain
asset-backed holdings early in the fiscal period. While the fund
outperformed its peer group in the second half of the period, this was
not enough to make up for its earlier underperformance.
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
Dramatic change characterized the bond market over the 12-month period
ended October 31, 2003. At the beginning of the period, investors
remained hesitant about the slow-moving economy and the stock market,
and uncertainties over the war with Iraq added to their concerns. Money
market and Treasury securities increased in popularity, and as their
prices rose, yields fell to extremely low levels. By June 16, the yield
on the bellwether 10-year Treasury bond reached a record low of 3.07%.
However, shortly thereafter, investor sentiment shifted, influenced by
the belief that the active military campaign in Iraq had been completed
and the economy was starting to improve. As investors became more
receptive to investments with a greater element of risk, the 10-year
Treasury yield made a dramatic reversal, rising one-and-a-half
percentage points, one of its most dramatic increases ever in a ten-week
period.
For the remainder of the 12-month period, higher-yielding, non-Treasury
bond sectors -- including corporate high yield, corporate
investment-grade, and mortgage-backed securities -- outperformed
Treasuries. Investors were attracted to these sectors for their
relatively high yields and potential to benefit from an improving
economy. As Treasury bond yields jumped during the summer, the
non-Treasury sectors continued to be attractive as these sectors were
affected to a lesser degree by changes in interest rates.
Mortgage-backed securities performed well for much of the period, but
gains were limited by the record-breaking volume of mortgage
refinancings that continued unabated until interest rates rose
dramatically over the summer. When homeowners refinance their mortgages
at lower rates, higher-yielding mortgages are eliminated and investors
are left with lower-yielding alternatives. Mortgage-backed securities
tend to perform best during periods when interest rates are relatively
stable.
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MARKET SECTOR PERFORMANCE 12 MONTHS ENDED 10/31/03
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Bonds
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Lehman Aggregate Bond Index (broad bond market) 4.90%
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Lehman Global Aggregate Bond Index (international bonds) 12.20%
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Lehman Government Bond Index (U.S. Treasury and agency
securities) 2.90%
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Lehman GNMA Index (Government National Mortgage Association
bonds) 2.65%
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Equities
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S&P 500 Index (broad stock market) 20.80%
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Russell 2000 Growth Index (small-company growth stocks) 46.56%
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Russell 2000 Value Index (small-company value stocks) 40.29%
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These indexes provide an overview of performance in different market
sectors for the 12 months ended 10/31/03.
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Strategy overview
For much of the period we were anticipating rising interest rates as the
supply of Treasuries increased and demand weakened. After several years
of budget surpluses, the federal government began to run a budget
deficit, causing the Treasury Department to stop buying back Treasury
securities and increasing new issuance. Up to this point demand for
Treasuries had been coming from several sources, primarily investors
seeking alternatives to the stock market and those averse to high yield
and investment grade corporate bonds, as well as foreign investors
attracted by a strong dollar and Treasuries' comparatively higher
yields. In this environment, our focus was on maximizing current income,
as we didn't expect returns to come from price appreciation. Our
strategy was to underweight Treasuries and U.S. government agency bonds
and overweight higher yielding sectors, such as mortgage-backed
securities, commercial mortgage-backed securities, asset-backed
securities, and investment grade corporate bonds.
Anticipating a rising-rate environment, we sought to limit the fund's
exposure by maintaining a shorter duration than the benchmark. Duration
is a measure of a bond or portfolio's sensitivity to changes in interest
rates. Generally, for a fund with a duration of four years, a one
percent increase in interest rates results in a four percent price
decline. Conversely, a one percent decrease in rates results in about a
four percent price increase. Through June, the fund's shorter duration
held back performance on a relative basis because we were early in
predicting when interest rates would rise. However, when rates finally
did rise, the strategy worked well, especially because the rate rise was
more than twice the level anticipated.
[GRAPHIC OMITTED: horizontal bar chart TOP SECTOR WEIGHTINGS COMPARED]
TOP SECTOR WEIGHTINGS COMPARED
as of 4/30/03 as of 10/31/03
Mortgage-backed
securities 43.2% 51.8%
Investment-grade
bonds 26.9% 28.2%
Asset-backed
securities 11.0% 12.4%
U.S. government
bonds 10.8% 4.7%
High-yield bonds 3.3% 2.9%
Footnote reads:
This chart shows how the fund's top weighting have changed over the last
six months. Weighting are shown as a percentage of net assets.Holdings
will vary over time.
How fund holdings/sector allocations affected performance
In managing the fund we have maintained a highly diversified portfolio.
In the corporate bond sector, our diversified approach is particularly
evident, with no single holding larger than 1% of assets and a goal of
no individual holding more than one-quarter percentage point greater
than the holding's weight in the benchmark. With this approach, the
overall characteristics of the fund's corporate bond holdings tended to
be the drivers of performance. In this sector, we have been emphasizing
media and telecom companies, particularly European telecom companies
such as Deutsche Telekom and France Telecom because of their improving
credit characteristics. We have also added Comcast and Time Warner. In
contrast, we have underweighted bonds issued by automakers. Their yield
spreads over Treasuries widened dramatically over the last
two-and-one-half months of the period, but they performed well early in
the period. In particular, we underweighted Ford, General Motors, and
DaimlerChrysler, which are among the largest issuers in the corporate
index. Because we were early in establishing this underweighting, we
missed capturing some gains.
In the mortgage-backed securities (MBS) sector, it was a dramatic year
as the torrid pace of refinancings slowed considerably over the summer.
Despite this volatile environment, the fund's mortgage position
performed relatively well. In the first half of the period, the fund
owned a lot of lower-coupon MBSs because we considered them less
vulnerable to refinancing. As refinancings slowed and rates went up,
higher-coupon MBSs underperformed and their prices went down more than
the market had anticipated. During the last two-and-one-half months of
the period, we were able to take advantage of these relatively
attractive securities by shifting the fund's positions from lower-coupon
MBSs into higher-coupon securities.
[GRAPHIC OMITTED: pie chart CREDIT QUALITY OVERVIEW]
CREDIT QUALITY OVERVIEW
Aaa/AAA (61.7%)
Aa/AA (3.1%)
A (13.0%)
Baa/BBB (19.1%)
Ba/BB (3.1%)
Footnote reads:
As a percentage of market value as of 10/31/03. A bond rated Baa/BBB or
higher is considered investment grade. The chart reflects Moody's and
Standard & Poor's ratings; percentages may include unrated bonds
considered by Putnam Management to be of comparable quality. Ratings
will vary over time.
Among asset-backed securities (ABSs), we have had holdings in
lowered-rated home equity loans, which have offered attractive
incremental yields above Treasuries. But we haven't seen any material
spread tightening or price appreciation on those securities. As
discussed in the fund's semiannual report, financially troubled Conseco
Finance Securitizations, Corp. held back performance during the first
half of the fiscal period and also contributed to the fund's
underperformance relative to its peers for the 12-month period.
The fund had a modest allocation to high-yield corporate bonds, mostly
in higher quality, BB-rated bonds, which outperformed the
investment-grade universe. At the beginning of the period, the
environment for high-yield bonds looked precarious, but valuations
remained relatively attractive. Over the 12-month period, the fund's
weighting was as high as 6% and as low as 2% of assets. If we were able
to find more BB-rated bonds that we thought had improving situations
with attractive spreads, the fund's high-yield weighting would have been
higher, but we weren't comfortable with the underlying fundamentals of
many issues. As we cut back on the fund's overall corporate bond
exposure, we have also reduced its exposure to BBB and BB-rated bonds,
but at a more gradual pace.
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
The fund's large allocation to U.S. Treasuries and mortgage-backed
securities has been affected by the falling interest rate environment,
leading to lower overall yields that made it necessary to adjust the
dividend for class A shares from $0.021 to $0.019 per share in June.
Other share classes had similar reductions.
The fund's management team
This fund is managed by the Putnam Core Fixed-Income Team. The members
of this team are Kevin Cronin (Portfolio Leader), Carl Bell, Rob
Bloemker (Portfolio Member), 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.
Going forward, we are expecting a sustained economic recovery and
improvement in corporate profitability, cash flows, and balance sheet
characteristics. We believe that the U.S. economy is in a cyclical
recovery, which would normally be a favorable environment for
investment-grade corporate bonds. However, we think that the
investment-grade sector already reflects these expectations and is
fairly valued. As a result, we don't see as much potential in this
sector as we did a year ago. By the same token, we think the
mortgage-backed securities market will become more volatile as
regulatory scrutiny of Fannie Mae and Freddie Mac increases
dramatically. We believe that these agencies have already slowed their
activity in the mortgage market, which has led to more volatility.
Rather than deriving most of the fund's return from coupon income and
trying to mitigate the principal decline associated with rising interest
rates, as occurred for much of fiscal 2003, we are anticipating a more
stable environment with regard to principal in fiscal 2004. In that type
of environment, we expect to continue to emphasize the sectors that
offer incrementally higher yields, but will probably de-emphasize
investment-grade corporate bonds as we look for attractive opportunities
in the mortgage and U.S. government agency sectors.
The views expressed in this report are exclusively those of Putnam
Management. They are not meant as investment advice. Lower-rated bonds
may offer higher yields in return for more risk. Mutual funds that
invest in government securities are not guaranteed. Mortgage-backed
securities are subject to prepayment risk.
Performance summary
This section provides information about your fund's performance during
its fiscal year, which ended October 31, 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 page
9 for definitions of some terms used in this section.
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TOTAL RETURN FOR PERIODS ENDED 10/31/03
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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)
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NAV POP NAV CDSC NAV CDSC NAV POP NAV
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1 year 5.45% 0.42% 4.68% -0.32% 4.70% 3.70% 5.12% 1.69% 5.26%
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5 years 29.61 23.50 25.00 23.05 24.78 24.78 28.02 23.86 27.98
Annual average 5.32 4.31 4.56 4.24 4.53 4.53 5.06 4.37 5.06
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10 years 71.41 63.20 59.21 59.21 59.06 59.06 66.95 61.49 67.20
Annual average 5.54 5.02 4.76 4.76 4.75 4.75 5.26 4.91 5.27
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Annual average
(life of fund) 8.22 8.11 7.20 7.20 7.41 7.41 7.75 7.68 7.95
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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.
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COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 10/31/03
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Lipper
Corporate
Debt Funds
Lehman A Rated
Aggregate category
Bond Index average*
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1 year 4.90% 6.25%
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5 years 37.27 30.54
Annual average 6.54 5.46
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10 years 92.71 78.18
Annual average 6.78 5.93
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Annual average
(life of fund) --+ --+
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Index and Lipper results should be compared to fund performance at net
asset value.
* Over the 1-, 5-, and 10-year periods ended 10/31/03, there were 197,
125, and 57 funds, respectively, in this Lipper category.
+ The benchmark and Lipper category were not in existence at the time of
the fund's inception. The Lehman Aggregate Bond Index commenced
12/31/75. This Lipper category commenced 12/31/59.
[GRAPHIC OMITTED: worm chart CHANGE IN THE VALUE OF A $10,000 INVESTMENT]
CHANGE IN THE VALUE OF A $10,000 INVESTMENT
Cumulative total return of a $10,000 investment, 10/31/93 to 10/31/03
Fund's class A Lehman Aggregate
Date shares at POP Bond Index
10/31/93 9,525 10,000
10/31/94 9,126 9,633
10/31/95 10,607 11,140
10/31/96 11,251 11,792
10/31/97 12,251 12,840
10/31/98 12,592 14,039
10/31/99 12,580 14,114
10/31/00 13,133 15,144
10/31/01 14,892 17,349
10/31/02 15,477 18,370
10/31/03 $16,320 $19,271
Footnote reads:
Past performance does not indicate future results. At the end of the
same time period, a $10,000 investment in the fund's class B and class C
shares would have been valued at $15,921 and $15,906, respectively, and
no contingent deferred sales charges would apply. A $10,000 investment
in the fund's class M shares would have been valued at $16,695 ($16,149
at public offering price). A $10,000 investment in the fund's class R
shares would have been valued at $16,720. See first page of performance
section for performance calculation method.
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PRICE AND DISTRIBUTION INFORMATION 12 MONTHS ENDED 10/31/03
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Class A Class B Class C Class M Class R
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Distributions (number) 12 12 12 12 9
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Income $0.254 $0.203 $0.205 $0.240 $0.167
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Capital gains -- -- -- -- --
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Total $0.254 $0.203 $0.205 $0.240 $0.167
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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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10/31/03 6.69 7.02 6.65 6.67 6.63 6.85 6.69
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Current return (end of period)
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Current dividend rate 1 3.41% 3.25% 2.71% 2.70% 3.26% 3.15% 3.23%
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Current 30-day
SEC yield 2 3.11 2.97 2.37 2.37 2.86 2.77 2.85
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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.
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TOTAL RETURN FOR PERIODS ENDED 9/30/03 (MOST RECENT CALENDAR QUARTER)
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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)
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NAV POP NAV CDSC NAV CDSC NAV POP NAV
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1 year 5.37% 0.41% 4.60% -0.40% 4.62% 3.62% 5.20% 1.81% 5.20%
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5 years 28.49 22.39 23.73 21.81 23.79 23.79 26.92 22.87 26.92
Annual average 5.14 4.12 4.35 4.02 4.36 4.36 4.88 4.21 4.88
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10 years 73.78 65.46 61.43 61.43 61.15 61.15 69.32 63.78 69.54
Annual average 5.68 5.16 4.91 4.91 4.89 4.89 5.41 5.06 5.42
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Annual average
(life of fund) 8.25 8.14 7.23 7.23 7.44 7.44 7.78 7.71 7.98
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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 used as a broad
measure of international investment grade bonds.
Lehman GNMA Index is an unmanaged index of Government National Mortgage
Association bonds.
Lehman Government Bond Index is an unmanaged index of U.S. Treasury and
agency securities.
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.
S&P 500 Index is an unmanaged index of common stock performance.
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.
Putnam's policy on confidentiality
In order to conduct business with our shareholders, we must obtain
certain personal information such as account holders' addresses,
telephone numbers, Social Security numbers, and the names of their
financial advisors. We use this information to assign an account number
and to help us maintain accurate records of transactions and account
balances.
It is our policy to protect the confidentiality of your information,
whether or not you currently own shares of our funds, and in particular,
not to sell information about you or your accounts to outside marketing
firms. We have safeguards in place designed to prevent unauthorized
access to our computer systems and procedures to protect personal
information from unauthorized use.
Under certain circumstances, we share this information with outside
vendors who provide services to us, such as mailing and proxy
solicitation. In those cases, the service providers enter into
confidentiality agreements with us, and we provide only the information
necessary to process transactions and perform other services related to
your account. We may also share this information with our Putnam
affiliates to service your account or provide you with information about
other Putnam products or services. It is also our policy to share
account information with your financial advisor, if you've listed one on
your Putnam account.
If you would like clarification about our confidentiality policies or
have any questions or concerns, please don't hesitate to contact us at
1-800-225-1581, Monday through Friday, 8:30 a.m. to 7:00 p.m., or
Saturdays from 9:00 a.m. to 5:00 p.m. Eastern Time.
A guide to the financial statements
These sections of the report, as well as the accompanying Notes,
preceded by the Independent Auditors' Report, 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 year.
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.
Independent auditors' report
The Board of Trustees and Shareholders
Putnam Income Fund
We have audited the accompanying statement of assets and liabilities of
Putnam Income Fund, including the fund's portfolio, as of October 31,
2003, and the related statement of operations for the year then ended,
the statements of changes in net assets for each of the two years in the
period then ended and the financial highlights for each of the five
years or periods in the period then ended. These financial statements
and financial highlights are the responsibility of the fund's
management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that
we plan and perform our audit to obtain reasonable assurance about
whether the financial statements and financial highlights are free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as
of October 31, 2003 by correspondence with the custodian and brokers or
by other appropriate auditing procedures. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the
financial position of Putnam Income Fund as of October 31, 2003, the
results of its operations for the year then ended, the changes in its
net assets for each of the two years in the period then ended, and the
financial highlights for each of the five years or periods in the period
then ended in conformity with accounting principles generally accepted
in the United States of America.
KPMG LLP
Boston, Massachusetts
December 11, 2003
The fund's portfolio
October 31, 2003
U.S. government and agency obligations (56.9%) (a)
Principal amount Value
U.S. Government Agency Mortgage Obligations (53.1%)
- -------------------------------------------------------------------------------
Federal Home Loan Mortgage
Corporation
$123,938 7 1/2s, December 1, 2029 $132,391
100,216 7s, January 1, 2015 106,212
56,412 6s, May 1, 2017 58,634
433,690 Federal National Mortgage
Association Graduated Payment
Mortgages 8s, December 1, 2008 462,700
Federal National Mortgage
Association Pass-Through
Certificates
58,635 11s, with due dates from September
1, 2014 to October 1, 2015 66,037
1,716,375 9s, with due dates from January 1,
2027 to July 1, 2032 1,872,720
5,532,241 8s, with due dates from January 1,
2025 to July 1, 2033 5,994,089
7,655,867 7 1/2s, with due dates from
September 1, 2022 to July 1, 2033 8,159,566
4,738,770 7s, with due dates from May 1, 2024
to November 1, 2032 4,993,924
3,969,907 7s, with due dates from January 1,
2007 to July 1, 2015 4,216,647
224,765,897 6 1/2s, with due dates from November
1, 2023 to September 1, 2033 233,527,954
612,439 6 1/2s, with due dates from
September 1, 2010 to September 1,
2016 644,780
390,545,000 6 1/2s, TBA, November 1, 2032 405,678,619
4,990,343 6s, with due dates from December 1,
2016 to December 1, 2031 5,190,492
2,662,694 6s, with due dates from August 1,
2013 to November 1, 2016 2,770,631
174,405,000 6s, TBA, November 1, 2033 179,037,546
512,995,000 5 1/2s, TBA, November 1, 2033 517,643,761
220,181,000 5 1/2s, TBA, November 1, 2017 226,648,817
34,390,892 5s, with due dates from January 1,
2017 to October 1, 2018 34,915,497
185,840,000 5s, TBA, November 1, 2017 188,743,750
Government National Mortgage
Association
97,278 11s, with due dates from March 15,
2010 to July 15, 2013 109,560
Government National Mortgage
Association Pass-Through
Certificates
4,300,589 7s, with due dates from April 15,
2026 to December 15, 2031 4,558,948
--------------
1,825,533,275
U.S. Government Agency Obligations (3.8%)
- -------------------------------------------------------------------------------
112,609,000 Fannie Mae notes 7 1/4s, 2010 132,405,212
--------------
Total U.S. government and agency
obligations (cost $1,954,242,044) $1,957,938,487
Corporate bonds and notes (31.5%) (a)
Principal amount Value
Basic Materials (1.3%)
- -------------------------------------------------------------------------------
$50,000 Abitibi-Consolidated Finance LP
company guaranty 7 7/8s, 2009 $52,605
3,875,000 Abitibi-Consolidated, Inc. company
guaranty 6.95s, 2006 (Canada) 3,994,765
1,204,000 Airgas, Inc. company guaranty
9 1/8s, 2011 1,342,460
5,590,000 Alcoa, Inc. notes 6 1/2s, 2011 6,260,420
2,195,000 Avery Dennison Corp. notes 4 7/8s,
2013 2,174,815
1,850,000 Dow Chemical Co. (The) debs. 8.55s,
2009 2,205,037
4,925,000 Dow Chemical Co. (The) notes 5 3/4s,
2009 5,162,021
1,100,000 Eastman Chemical Co. notes 3 1/4s,
2008 1,047,322
2,000,000 Falconbridge, Ltd. bonds 5 3/8s,
2015 (Canada) 1,920,674
774,000 Georgia-Pacific Corp. bonds 7 3/4s,
2029 731,430
890,000 Georgia-Pacific Corp. company
guaranty 8 7/8s, 2010 1,016,825
2,960,000 Hercules, Inc. company guaranty
11 1/8s, 2007 3,441,000
1,706,000 ISP Chemco, Inc. company guaranty
Ser. B, 10 1/4s, 2011 1,902,190
1,264,000 Louisiana-Pacific Corp. sr. notes
8 7/8s, 2010 1,485,200
757,000 Louisiana-Pacific Corp. sr. sub.
notes 10 7/8s, 2008 889,475
520,000 Millennium America, Inc. company
guaranty 7s, 2006 510,900
2,365,000 Millennium America, Inc. company
guaranty 9 1/4s, 2008 2,500,988
1,118,000 Monsanto Co. notes 4s, 2008 1,120,502
390,000 Monsanto Co. sr. notes 7 3/8s, 2012 446,172
740,000 Packaging Corp. of America 144A
notes 5 3/8s, 2013 737,728
3,255,000 Potlatch Corp. dep. notes FRN
12 1/2s, 2009 3,840,900
770,000 Praxair, Inc. notes 6 3/8s, 2012 855,699
365,000 Smurfit Capital Funding PLC notes
6 3/4s, 2005 (Ireland) 374,125
335,000 WMC Finance USA company guaranty
6 1/4s, 2033 (Australia) 324,269
615,000 WMC Finance USA company guaranty
5 1/8s, 2013 (Australia) 600,242
--------------
44,937,764
Capital Goods (1.1%)
- -------------------------------------------------------------------------------
3,670,000 Allied Waste North America, Inc. sr.
notes 7 7/8s, 2013 3,917,725
1,000,000 Ball Corp. company guaranty 6 7/8s,
2012 1,042,500
2,605,000 Ball Corp. sr. notes 6 7/8s, 2012 2,715,713
290,000 Boeing Capital Corp. sr. notes
4 3/4s, 2008 298,558
1,395,000 Boeing Co. (The) bonds 6 1/8s, 2033 1,367,525
225,000 Bunge Ltd. Finance Corp. company
guaranty 7.8s, 2012 259,132
705,000 Bunge Ltd. Finance Corp. notes
5 7/8s, 2013 709,760
2,220,000 John Deere Capital Corp. sr. notes
Ser. D, 3 1/8s, 2005 2,255,872
2,345,000 Kennametal, Inc. sr. notes 7.2s,
2012 2,475,276
365,000 L-3 Communications Corp. company
guaranty 7 5/8s, 2012 397,850
3,080,000 L-3 Communications Corp. company
guaranty 6 1/8s, 2013 3,049,200
3,145,000 Lockheed Martin Corp. bonds 8 1/2s,
2029 4,088,837
1,900,000 Northrop Grumman Corp. company
guaranty 7 1/8s, 2011 2,183,290
1,881,000 Owens-Brockway Glass company
guaranty 8 7/8s, 2009 2,036,183
1,360,000 Owens-Brockway Glass sr. sec. notes
8 3/4s, 2012 1,489,200
3,120,000 Raytheon Co. debs. 6s, 2010 3,304,476
3,355,000 Raytheon Co. notes 8.2s, 2006 3,750,813
1,135,000 Sealed Air Corp. 144A bonds 6 7/8s,
2033 1,169,206
1,315,000 Sealed Air Corp. 144A notes 5 5/8s,
2013 1,325,110
--------------
37,836,226
Communication Services (3.6%)
- -------------------------------------------------------------------------------
1,135,000 Ameritech Capital Funding company
guaranty 6 1/4s, 2009 1,242,155
2,855,000 AT&T Corp. sr. notes 8s, 2031 3,237,450
2,955,000 AT&T Corp. sr. notes 7.8s, 2011 3,348,828
1,265,000 AT&T Wireless Services, Inc. sr.
notes 8 3/4s, 2031 1,521,222
3,665,000 AT&T Wireless Services, Inc. sr.
notes 7 7/8s, 2011 4,187,930
1,800,000 Bellsouth Capital Funding notes
7 3/4s, 2010 2,129,953
2,735,000 British Telecommunications PLC bonds
8 7/8s, 2030 (United Kingdom) 3,521,575
6,825,000 British Telecommunications PLC notes
8 3/8s, 2010 (United Kingdom) 8,261,493
7,730,000 Cingular Wireless, LLC sr. notes
5 5/8s, 2006 8,335,452
1,320,000 Citizens Communications Co. notes
9 1/4s, 2011 1,647,526
3,325,000 Deutsche Telekom International
Finance BV bonds 8s, 2010
(Netherlands) 4,001,667
4,165,000 Deutsche Telekom International
Finance BV company guaranty
8 3/4s, 2030 (Netherlands) 5,243,027
1,985,000 Deutsche Telekom International
Finance BV notes 5 1/4s,
2013 (Netherlands) 1,972,764
1,915,000 Eircom Funding 144A sr. sub. notes
8 1/4s, 2013 (Ireland) 2,082,562
2,335,000 France Telecom notes 10s, 2031
(France) 3,081,782
3,455,000 France Telecom notes 7 3/4s, 2011
(France) 4,168,178
1,450,000 Koninklijke (Royal) KPN NV sr.
unsub. notes 8 3/8s, 2030
(Netherlands) 1,809,657
888,000 Koninklijke (Royal) KPN NV sr.
unsub. notes 8s, 2010 (Netherlands) 1,058,352
3,690,000 Qwest Corp. 144A notes 8 7/8s, 2012 4,169,700
2,150,000 Sprint Capital Corp. company
guaranty 8 3/4s, 2032 2,445,436
3,550,000 Sprint Capital Corp. company
guaranty 7 5/8s, 2011 3,905,763
5,110,000 Sprint Capital Corp. company
guaranty 6 7/8s, 2028 4,808,878
400,000 Sprint Capital Corp. company
guaranty 6 1/8s, 2008 421,286
2,165,000 Telecom Italia Capital 144A bank
guaranty 4s, 2008 (Luxembourg) 2,162,341
3,380,000 Telecom Italia Capital 144A company
guaranty 6 3/8s, 2033 (Luxembourg) 3,339,474
1,575,000 Telecom Italia Capital 144A company
guaranty 5 1/4s, 2013 (Luxembourg) 1,570,937
2,975,000 Telefonica Europe BV company
guaranty 7 3/4s, 2010 (Netherlands) 3,510,833
3,784,000 Telus Corp. notes 8s, 2011 (Canada) 4,350,348
2,372,000 Telus Corp. notes 7 1/2s, 2007
(Canada) 2,634,279
7,825,000 Verizon Global Funding Corp. notes
7 1/4s, 2010 8,936,643
1,420,000 Verizon Virginia, Inc. debs. Ser. A,
4 5/8s, 2013 1,350,031
12,035,000 Verizon Wireless, Inc. notes 5 3/8s,
2006 12,856,192
2,950,000 Vodafone Group PLC notes 7 7/8s,
2030 (United Kingdom) 3,544,723
3,010,000 Vodafone Group PLC notes 7 5/8s,
2005 (United Kingdom) 3,229,655
--------------
124,088,092
Conglomerates (0.2%)
- -------------------------------------------------------------------------------
4,005,000 Textron Financial Corp. notes 6s,
2009 4,331,536
845,000 Tyco International Group SA company
guaranty 6 3/4s, 2011 (Luxembourg) 898,869
1,110,000 Tyco International Group SA company
guaranty 6 3/8s, 2005 (Luxembourg) 1,164,113
2,255,000 Tyco International Group SA notes
6 3/8s, 2011 (Luxembourg) 2,345,200
--------------
8,739,718
Consumer Cyclicals (3.4%)
- -------------------------------------------------------------------------------
618,000 American Axle & Manufacturing, Inc.
company guaranty 9 3/4s, 2009 659,715
570,000 American Standard Cos., Inc. company
guaranty 7 5/8s, 2010 635,550
2,250,000 Cendant Corp. notes 6 1/4s, 2010 2,426,609
1,605,000 Cendant Corp. sr. notes 7 3/8s, 2013 1,833,598
2,155,000 Cendant Corp. sr. notes 6 1/4s, 2008 2,343,991
2,144,000 D.R. Horton, Inc. company guaranty
8s, 2009 2,390,560
830,000 D.R. Horton, Inc. sr. notes 6 7/8s,
2013 873,575
2,795,000 D.R. Horton, Inc. sr. notes 5 7/8s,
2013 2,739,100
4,365,000 DaimlerChrysler NA Holding Corp.
company guaranty 7.2s, 2009 4,741,058
4,925,000 DaimlerChrysler NA Holding Corp.
company guaranty Ser. D, 3.4s, 2004 4,997,054
3,920,000 Dana Corp. notes 9s, 2011 4,351,200
2,810,000 Deluxe Corp. notes 5s, 2012 2,840,882
2,030,000 Federated Department Stores, Inc.
sr. notes 8 1/2s, 2010 2,494,229
2,875,000 Ford Motor Co. debs. 9.98s, 2047 3,129,573
2,175,000 Ford Motor Co. notes 7.45s, 2031 1,953,803
5,185,000 Ford Motor Credit Corp. notes
7 3/8s, 2009 5,363,198
1,115,000 Ford Motor Credit Corp. notes
6 1/2s, 2007 1,149,542
2,265,000 General Motors Acceptance Corp.
bonds 8s, 2031 2,329,328
630,000 General Motors Acceptance Corp.
notes 6 7/8s, 2012 645,795
5,970,000 General Motors Acceptance Corp.
notes Ser. MTN, 5.36s, 2004 6,105,388
1,105,000 GTECH Holdings Corp. 144A notes
4 3/4s, 2010 1,110,269
1,111,000 Harrah's Entertainment, Inc. company
guaranty 7 7/8s, 2005 1,201,269
1,215,000 Hilton Hotels Corp. notes 8 1/4s,
2011 1,372,950
680,000 Hilton Hotels Corp. notes 7 5/8s,
2012 751,400
1,981,000 International Game Technology sr.
notes 8 3/8s, 2009 2,364,068
1,590,000 International Game Technology sr.
notes 7 7/8s, 2004 1,638,449
1,485,000 ITT Corp. notes 6 3/4s, 2005 1,566,675
4,320,000 JC Penney Co., Inc. notes 7.6s, 2007 4,708,800
1,110,000 K. Hovnanian Enterprises, Inc.
company guaranty 9 1/8s, 2009 1,179,375
3,584,000 K. Hovnanian Enterprises, Inc. sr.
notes 6 1/2s, 2014 3,566,080
570,000 KB Home sr. sub. notes 7 3/4s, 2010 601,350
3,365,000 Lear Corp. company guaranty Ser. B,
8.11s, 2009 3,878,163
1,570,000 Lennar Corp. company guaranty
Ser. B, 9.95s, 2010 1,809,425
2,035,000 Masco Corp. notes 6 3/4s, 2006 2,227,755
800,000 MGM Mirage, Inc. company guaranty
9 3/4s, 2007 907,000
2,429,000 MGM Mirage, Inc. company guaranty
8 3/8s, 2011 2,708,335
1,375,000 Mohegan Tribal Gaming Authority sr.
notes 8 1/8s, 2006 1,493,594
1,670,000 Mohegan Tribal Gaming Authority 144A
sr. sub. notes 6 3/8s, 2009 1,709,663
1,815,000 NVR, Inc. sr. notes 5s, 2010 1,769,625
910,000 Park Place Entertainment Corp. sr.
notes 7 1/2s, 2009 988,488
1,355,000 Park Place Entertainment Corp. sr.
sub. notes 9 3/8s, 2007 1,524,375
195,000 PRIMEDIA, Inc. company guaranty
7 5/8s, 2008 194,025
3,200,000 Pulte Homes, Inc. company guaranty
7 7/8s, 2011 3,748,080
3,885,000 Ryland Group, Inc. sr. notes 5 3/8s,
2008 4,001,550
1,677,000 Saks, Inc. company guaranty 8 1/4s,
2008 1,895,010
1,095,000 Sears Roebuck Acceptance FRN
Ser. MTN, 3.18s, 2004 1,101,362
2,520,000 Sears Roebuck Acceptance FRN
Ser. MTN, 3.07s, 2004 2,544,948
1,080,000 Sears Roebuck Acceptance Corp. bonds
7 1/2s, 2027 1,198,203
2,540,000 SPX Corp. sr. notes 6 1/4s, 2011 2,546,350
725,000 Starwood Hotels & Resorts Worldwide,
Inc. company guaranty 7 7/8s, 2012 801,125
1,595,000 Starwood Hotels & Resorts Worldwide,
Inc. company guaranty 7 3/8s, 2007 1,718,612
1,173,000 Toll Corp. sr. sub. notes 8 1/4s,
2011 1,299,098
1,360,000 Visteon Corp. sr. notes 8 1/4s, 2010 1,442,166
--------------
115,571,385
Consumer Staples (3.9%)
- -------------------------------------------------------------------------------
2,750,000 Albertsons, Inc. sr. notes 7 1/2s,
2011 3,138,069
3,645,000 AOL Time Warner, Inc. bonds 7 5/8s,
2031 4,072,985
6,885,000 AOL Time Warner, Inc. notes 5 5/8s,
2005 7,225,628
2,562,000 AT&T Broadband Corp. company
guaranty 8 3/8s, 2013 3,096,935
3,205,000 British Sky Broadcasting PLC company
guaranty 6 7/8s, 2009 (United
Kingdom) 3,534,548
2,820,000 Cadbury Schweppes US Finance, LLC
144A notes 3 7/8s, 2008 2,798,148
5,060,000 Campbell Soup Co. notes 6 3/4s, 2011 5,736,456
450,000 Chancellor Media Corp. company
guaranty 8s, 2008 516,375
2,910,000 Comcast Corp. company guaranty
7.05s, 2033 3,100,311
2,030,000 Comcast Corp. company guaranty
5.85s, 2010 2,157,390
2,535,000 ConAgra, Inc. notes 7 7/8s, 2010 3,038,976
4,340,000 ConAgra, Inc. notes 6s, 2006 4,717,272
360,000 Constellation Brands, Inc. company
guaranty 8 1/2s, 2009 378,900
2,015,000 Cox Communications, Inc. notes
7 3/4s, 2010 2,369,386
1,665,000 Cox Enterprises, Inc. 144A notes 8s,
2007 1,893,273
1,090,023 CVS Corp. 144A pass-through
certificates 6.117s, 2013 1,142,007
1,280,000 Dean Foods Co. sr. notes 8.15s, 2007 1,414,400
3,830,000 Diageo PLC company guaranty 8s, 2022
(United Kingdom) 4,702,482
4,125,000 Echostar DBS Corp. 144A sr. notes
5 3/4s, 2008 4,109,531
2,740,000 Fred Meyer, Inc. Holding Co. company
guaranty 7.45s, 2008 3,115,079
2,440,000 Hormel Foods Corp. notes 6 5/8s,
2011 2,748,623
2,435,000 Johnson (SC) & Son, Inc. 144A bonds
5 3/4s, 2033 2,306,400
4,120,000 Jones Intercable, Inc. sr. notes
7 5/8s, 2008 4,707,166
9,710,000 Kraft Foods, Inc. notes 4 5/8s, 2006 10,120,646
2,030,000 Liberty Media Corp. debs. 8 1/2s,
2029 2,359,244
2,160,000 Miller Brewing Co. 144A notes
5 1/2s, 2013 2,145,096
2,945,000 News America Holdings, Inc. company
guaranty 7 3/8s, 2008 3,357,468
1,820,000 News America Holdings, Inc. debs.
7 3/4s, 2045 2,087,254
2,585,000 News America Holdings, Inc. debs.
7.7s, 2025 2,955,309
255,000 News America, Inc. company guaranty
4 3/4s, 2010 258,621
1,780,000 News America, Inc. sr. notes 6 5/8s,
2008 1,976,338
3,740,000 PepsiAmericas, Inc. notes Ser. MTN,
3 7/8s, 2007 3,775,193
980,000 R.J. Reynolds Tobacco Holdings, Inc.
company guaranty 6 1/2s, 2007 975,100
2,335,000 Rogers Cable, Inc. sec. notes
6 1/4s, 2013 (Canada) 2,335,000
4,085,000 TCI Communications, Inc. debs.
7 7/8s, 2013 4,786,566
4,035,000 Time Warner, Inc. debs. 9.15s, 2023 5,035,894
435,000 Time Warner, Inc. debs. 9 1/8s, 2013 544,287
1,215,000 Time Warner, Inc. notes 8.18s, 2007 1,402,054
4,440,000 Tyson Foods, Inc. notes 8 1/4s, 2011 5,259,149
125,000 Tyson Foods, Inc. notes 7 1/4s, 2006 138,051
1,075,000 Tyson Foods, Inc. notes 7s, 2018 1,135,836
3,445,000 Viacom, Inc. company guaranty 7.7s,
2010 4,086,614
3,165,000 Walt Disney Co. notes 5 3/8s, 2007 3,380,204
3,505,000 Yum! Brands, Inc. sr. notes 8 7/8s,
2011 4,170,950
100,000 Yum! Brands, Inc. sr. notes 7.65s,
2008 112,000
--------------
134,417,214
Energy (1.7%)
- -------------------------------------------------------------------------------
1,270,000 Amerada Hess Corp. notes 5.9s, 2006 1,342,895
2,435,000 Arch Western Finance, LLC 144A sr.
notes 6 3/4s, 2013 2,520,225
844,000 BRL Universal Equipment sec. notes
8 7/8s, 2008 917,850
8,295,000 Conoco Funding Co. company guaranty
6.35s, 2011 9,236,242
1,205,000 Devon Energy Corp. sr. notes 2 3/4s,
2006 1,199,684
1,760,000 Halliburton Co. 144A notes 5 1/2s,
2010 1,776,120
5,505,000 Louis Dreyfus Natural Gas Corp.
notes 6 7/8s, 2007 6,105,678
1,950,000 MidAmerican Energy Holdings Co. sr.
notes 4 5/8s, 2007 2,011,307
345,000 MidAmerican Energy Holdings Co. sr.
notes 3 1/2s, 2008 337,006
3,120,000 Motiva Enterprises, LLC 144A sr.
notes 5.2s, 2012 3,171,038
570,000 Newfield Exploration Co. sr. notes
7 5/8s, 2011 624,150
1,620,000 Nexen, Inc. notes 7 7/8s, 2032
(Canada) 1,907,825
1,670,000 Noble Affiliates, Inc. sr. notes 8s,
2027 1,900,377
1,100,000 Ocean Energy, Inc. company guaranty
7 1/4s, 2011 1,257,941
890,000 Phillips Petroleum Co. notes 8 3/4s,
2010 1,105,921
2,210,000 Pioneer Natural Resources Co.
company guaranty 9 5/8s, 2010 2,689,594
655,000 Pioneer Natural Resources Co.
company guaranty 6 1/2s, 2008 703,296
843,000 Pride Petroleum Services, Inc. sr.
notes 9 3/8s, 2007 870,398
4,825,000 Transocean Sedco Forex, Inc. notes
6 5/8s, 2011 5,340,971
3,765,000 Union Oil Co. of California company
guaranty 7 1/2s, 2029 4,308,026
3,310,000 Vintage Petroleum, Inc. sr. notes
8 1/4s, 2012 3,624,450
880,000 Weatherford International, Ltd.
notes 4.95s, 2013 (Bermuda) 863,035
1,133,000 Westport Resources Corp. company
guaranty 8 1/4s, 2011 1,249,133
3,276,000 XTO Energy, Inc. sr. notes 7 1/2s,
2012 3,570,840
--------------
58,634,002
Financial (10.3%)
- -------------------------------------------------------------------------------
6,620,000 Ace INA Holdings, Inc. company
guaranty 8.3s, 2006 7,518,274
1,695,000 Allfirst Financial Inc. sub. notes
7.2s, 2007 1,891,177
5,075,000 Archstone-Smith Operating Trust
notes 5s, 2007 (R) 5,314,422
11,125,000 ASIF Global Financing 144A notes
3.85s, 2007 11,296,922
4,000,000 Associates Corp. NA sr. notes Ser.
8, 7 3/8s, 2007 4,528,800
4,265,000 Associates First Capital Corp. debs.
6.95s, 2018 4,862,313
5,285,000 Associates First Capital Corp. sub.
debs. 8.15s, 2009 6,122,889
2,070,000 AXA Financial, Inc. sr. notes
7 3/4s, 2010 2,442,581
735,000 Bank of New York Co., Inc. (The) sr.
sub. notes FRN 3.4s, 2013 719,012
1,680,000 Bank One Corp. sub. debs. 8s, 2027 2,064,707
1,175,000 Bank One Corp. sub. debs. 7 5/8s,
2026 1,388,232
1,697,000 Bank One Corp. sub. notes 7.6s, 2007 1,929,654
10,685,000 Bank United Corp. notes Ser. A, 8s,
2009 12,628,644
600,000 Bank United Corp. sub. notes 8 7/8s,
2007 705,951
3,520,000 Barclays Bank PLC 144A FRN 6.86s,
2049 (United Kingdom) 3,796,855
3,735,000 Bear Stearns Cos., Inc. (The) notes
3s, 2006 3,782,629
1,565,000 Capital One Bank notes 6 1/2s, 2013 1,613,108
735,000 Capital One Bank notes Ser. BKNT,
4 7/8s, 2008 753,704
775,000 Capital One Bank sr. notes
Ser. BKNT, 6.7s, 2008 844,760
1,117,000 Capital One Financial Corp. notes
7 1/4s, 2006 1,199,228
1,035,000 CenterPoint Properties Trust notes
Ser. MTN, 4 3/4s, 2010 1,022,014
3,655,000 CIT Group, Inc. sr. notes 5 1/2s,
2007 3,911,143
4,705,000 CIT Group, Inc. sr. notes Ser. MTN,
6 7/8s, 2009 5,293,512
1,430,000 CIT Group, Inc. sr. sub. notes
4 1/8s, 2006 1,473,533
800,000 Citigroup, Inc. bonds 5 7/8s, 2033 785,117
3,430,000 Citigroup, Inc. debs. 6 5/8s, 2028 3,706,022
4,670,000 Citigroup, Inc. sub. notes 7 1/4s,
2010 5,433,045
900,000 Colonial Bank sub. notes 9 3/8s,
2011 1,030,373
7,470,000 Colonial Bank sub. notes 8s, 2009 7,719,595
1,600,000 Countrywide Capital III company
guaranty Ser. B, 8.05s, 2027 1,814,385
4,060,000 Countrywide Home Loans, Inc. company
guaranty Ser. K, 5 5/8s, 2007 4,350,055
1,610,000 Credit Suisse First Boston USA, Inc.
notes 5 1/2s, 2013 1,649,575
2,110,000 Developers Diversified Realty Corp.
notes 4 5/8s, 2010 2,036,931
2,270,000 EOP Operating LP sr. notes 7s, 2011 2,557,026
2,815,000 Executive Risk Capital Trust company
guaranty Class B, 8.675s, 2027 3,161,670
4,955,000 First Chicago NBD Corp. sub. notes
6 3/8s, 2009 5,605,951
6,369,000 First Union National Bank sub. notes
7.8s, 2010 7,617,228
695,000 FleetBoston Financial Corp. notes
7 1/4s, 2005 759,329
5,215,000 Franchise Finance Corp. of America
sr. notes 8 3/4s, 2010 (R) 6,537,759
2,165,000 Fund American Cos., Inc. notes
5 7/8s, 2013 2,141,109
3,070,000 General Electric Capital Corp.
company guaranty 7 7/8s, 2006 3,520,268
2,600,000 General Electric Capital Corp. notes
Ser. A, 6 7/8s, 2010 2,969,312
1,000,000 General Electric Capital Corp. notes
Ser. A, 6 3/4s, 2032 1,108,863
1,190,000 General Electric Capital Corp. notes
Ser. A, 6s, 2012 1,280,571
7,685,000 General Electric Capital Corp. notes
Ser. A, 3.667s, 2006 7,696,609
280,000 General Electric Capital Corp. notes
Ser. MTNA, 6 1/8s, 2011 305,602
530,000 Goldman Sachs Group, Inc. (The)
notes 6 1/8s, 2033 527,304
4,020,000 Goldman Sachs Group, Inc. (The)
notes 4 3/4s, 2013 3,883,725
1,190,000 Hartford Financial Services Group,
Inc. (The) 144A notes 4 5/8s, 2013 1,141,064
2,200,000 Hartford Life, Inc. sr. notes
7 3/8s, 2031 2,506,170
2,340,000 Heller Financial, Inc. notes 8s,
2005 2,568,737
1,310,000 Heller Financial, Inc. notes 7 3/8s,
2009 1,533,400
2,585,000 Hospitality Properties Trust notes
6 3/4s, 2013 (R) 2,665,342
6,135,000 Household Finance Corp. notes 7s,
2012 6,967,348
3,430,000 Household Finance Corp. notes
6 3/4s, 2011 3,838,465
4,815,000 Household Finance Corp. sr. unsub.
5 7/8s, 2009 5,207,042
710,000 HRPT Properties Trust bonds 5 3/4s,
2014 (R) 711,037
560,000 HRPT Properties Trust sr. notes
6.7s, 2005 (R) 587,830
2,200,000 HSBC Capital Funding LP 144A bank
guaranty FRB 4.61s, 2049 (Jersey) 2,042,564
3,310,000 HSBC Capital Funding LP 144A bank
guaranty FRN 9.547s, 2049 (Jersey) 4,192,873
2,400,000 ING Capital Funding Trust III
company guaranty FRB 8.439s, 2010 2,988,787
2,440,000 International Lease Finance Corp.
notes 4.35s, 2008 2,481,758
440,000 iStar Financial, Inc. sr. notes
8 3/4s, 2008 (R) 497,200
1,645,000 iStar Financial, Inc. sr. notes 7s,
2008 (R) 1,760,150
2,610,000 John Hancock Financial Services,
Inc. sr. notes 5 5/8s, 2008 2,813,410
1,090,000 John Hancock Global Funding II 144A
notes 7.9s, 2010 1,293,447
6,850,000 JPMorgan Chase & Co. notes 5.35s,
2007 7,353,845
1,615,000 JPMorgan Chase & Co. sr. notes
3 5/8s, 2008 1,612,123
5,545,000 JPMorgan Chase & Co. sub. notes
5 3/4s, 2013 5,820,071
1,880,000 Kimco Realty Corp. notes Ser. MTNC,
5.19s, 2013 1,871,856
6,510,000 Lehman Brothers Holdings, Inc. notes
6 5/8s, 2006 7,090,041
9,070,000 Liberty Mutual Insurance 144A notes
7.697s, 2097 7,722,116
2,980,000 Merrill Lynch & Co., Inc. notes
Ser. B, 7.08s, 2005 3,244,743
955,000 Merrill Lynch & Co., Inc. notes
Ser. B, 4 3/4s, 2009 975,665
2,075,000 Metlife, Inc. debs. 3.911s, 2005 2,142,836
2,140,000 Morgan Stanley Tracers notes 4 1/4s,
2010 2,108,283
105,000 National City Bank bonds 4 5/8s,
2013 102,451
1,250,000 National City Bank sub. notes
Ser. BKNT, 6 1/4s, 2011 1,390,484
4,020,000 National City Corp. sub. notes 7.2s,
2005 4,326,581
815,000 Nationwide Financial Services, Inc.
notes 5 5/8s, 2015 823,779
1,445,000 Nationwide Mutual Insurance Co. 144A
notes 8 1/4s, 2031 1,705,851
6,215,000 NB Capital Trust IV company guaranty
8 1/4s, 2027 7,146,759
3,590,000 Nordea Bank Finland PLC sub. notes
6 1/2s, 2009 (Finland) 3,996,492
965,000 OneAmerica Financial Partners, Inc.
144A bonds 7s, 2033 947,115
13,115,000 Peoples Bank -- Bridgeport sub.
notes 7.2s, 2006 14,372,873
3,155,000 PNC Funding Corp. bonds 5 1/4s, 2015 3,217,469
575,000 Popular North America, Inc. sub.
notes 3 7/8s, 2008 570,483
13,975,000 Principal Financial Group 144A notes
7.95s, 2004 (Australia) 14,553,928
2,660,000 Principal Life Global Funding I 144A
sec. notes 5 1/4s, 2013 2,681,017
1,435,000 Protective Life Corp. notes 4.3s,
2013 1,349,178
1,005,000 Prudential Financial, Inc. notes
Ser. MTNB, 4 1/2s, 2013 957,872
3,825,000 Prudential Insurance Co. 144A notes
8.3s, 2025 4,646,652
5,955,000 Royal Bank of Scotland Group PLC FRB
7.648s, 2031 (United Kingdom) 7,051,566
3,625,000 Sovereign Bancorp, Inc. sr. notes
10 1/2s, 2006 4,302,194
1,150,000 Sovereign Bank sub. notes 5 1/8s,
2013 1,125,186
2,780,000 St. Paul Co., Inc. (The) sr. notes
5 3/4s, 2007 2,951,741
1,975,000 State Street Capital Trust II FRN
1.68s, 2008 1,977,443
5,081,000 Sun Life Canada Capital Trust 144A
company guaranty 8.526s, 2049 5,625,368
2,080,000 Suncorp-Metway, Ltd. 144A FRN
3 1/2s, 2013 (Australia) 2,082,912
1,000,000 Tanger Properties, Ltd. company
guaranty 7 7/8s, 2004 1,050,000
995,000 Travelers Property Casualty Corp.
sr. notes 3 3/4s, 2008 995,713
5,000,000 UBS AG/Jersey Branch FRN 4.14s, 2008
(United Kingdom) 5,025,000
3,100,000 USF&G Capital I 144A company
guaranty 8 1/2s, 2045 3,614,259
150,000 Vesta Insurance Group, Inc. 144A
company guaranty 8.525s, 2027 90,000
2,065,000 Westpac Capital Trust III 144A sub.
notes FRN 5.819s, 2013 2,122,593
990,000 XL Capital Europe PLC company
guaranty 6 1/2s, 2012 (United
Kingdom) 1,077,050
--------------
352,919,700
Health Care (0.5%)
- -------------------------------------------------------------------------------
5,150,000 American Home Products Corp. notes
6.7s, 2011 5,787,740
1,055,000 AmerisourceBergen Corp. company
guaranty 7 1/4s, 2012 1,086,650
740,000 AmerisourceBergen Corp. sr. notes
8 1/8s, 2008 801,050
1,390,000 Bayer Corp. 144A FRB 6.2s, 2008 1,497,141
1,515,000 HCA, Inc. bonds 7 1/2s, 2033 1,511,213
215,000 HCA, Inc. notes 6 1/4s, 2013 212,596
2,880,000 HCA, Inc. notes Ser. MTN, 8.7s 2010 3,275,280
585,000 Integrated Health Services, Inc. sr.
sub. notes Ser. A, 9 1/2s, 2007 (In
default) (NON) 1
600,000 Integrated Health Services, Inc. sr.
sub. notes Ser. A, 9 1/4s, 2008 (In
default) (NON) 1
120,000 Multicare Companies, Inc. sr. sub.
notes 9s, 2007 (In default) (NON) 1,800
2,239,000 Service Corp. International notes
6s, 2005 2,255,793
--------------
16,429,265
Oil & Gas (--%)
- -------------------------------------------------------------------------------
940,000 Petro-Canada, Ltd. bonds 5.35s, 2033
(Canada) 838,780
965,000 Petro-Canada, Ltd. notes 4s, 2013
(Canada) 886,001
--------------
1,724,781
Technology (0.4%)
- -------------------------------------------------------------------------------
2,325,000 Arrow Electronics, Inc. notes
6 7/8s, 2013 2,337,116
1,100,000 Computer Associates International,
Inc. sr. notes Ser. B, 6 3/8s, 2005 1,149,500
2,265,000 Electronic Data Systems Corp. 144A
notes 6s, 2013 2,121,894
1,085,000 Fiserv, Inc. notes 4s, 2008 1,078,435
2,500,000 Hewlett-Packard Co. notes 5 1/2s,
2007 2,692,385
1,350,000 Jabil Circuit, Inc. sr. notes
5 7/8s, 2010 1,394,670
630,000 Motorola, Inc. notes 7 5/8s, 2010 709,064
690,000 Motorola, Inc. notes 6 3/4s, 2006 743,124
2,385,000 Science Applications International
Corp. 144A bonds 5 1/2s, 2033 2,075,130
--------------
14,301,318
Transportation (0.9%)
- -------------------------------------------------------------------------------
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 7,001,596
2,275,244 Continental Airlines, Inc.
pass-through certificates Ser.
97-4A, 6.9s, 2018 2,263,867
1,152,894 Continental Airlines, Inc.
pass-through certificates Ser.
98-1A, 6.648s, 2017 1,129,837
3,840,000 CSX Corp. notes 6 1/4s, 2008 4,215,003
1,825,000 CSX Corp. notes 4 7/8s, 2009 1,863,439
1,915,000 Norfolk Southern Corp. sr. notes
7 1/4s, 2031 2,163,157
2,802,476 Northwest Airlines Corp.
pass-through certificates Ser.
99-2A, 7.575s, 2019 2,891,094
7,000,000 Union Pacific Corp. notes 5 3/4s,
2007 7,512,428
2,000,000 United AirLines, Inc. pass-through
certificates Ser. 01-1, Class
B, 6.932s, 2011 (In default) (NON) 561,930
--------------
29,616,331
Utilities & Power (4.2%)
- -------------------------------------------------------------------------------
875,000 AEP Texas Central Co. sr. notes
Ser. D, 5 1/2s, 2013 882,512
3,500,000 Alabama Power Co. sr. notes Ser. S,
5 7/8s, 2022 3,513,043
470,000 American Electric Power Co., Inc.
notes Ser. A, 6 1/8s, 2006 504,804
695,000 American Electric Power Co., Inc.
sr. notes Ser. C, 5 3/8s, 2010 719,716
710,000 Appalachian Power Co. notes 3.6s,
2008 695,480
5,760,000 Arizona Public Services Co. sr.
notes 6 3/4s, 2006 6,391,538
380,000 Carolina Power & Light Co. 1st mtge.
6 1/8s, 2033 382,432
1,365,000 CenterPoint Energy Houston Electric,
LLC 144A general ref. mtge. 5 3/4s,
2014 1,419,442
440,000 CenterPoint Energy Resources Corp.
debs. 8.9s, 2006 500,960
1,735,000 CenterPoint Energy Resources Corp.
notes 7 3/4s, 2011 1,945,499
1,960,000 CenterPoint Energy, Inc. 144A notes
7 1/4s, 2010 2,100,342
970,000 Consumers Energy Co. bonds 6 1/4s,
2006 1,056,122
3,185,000 Consumers Energy Co. 144A 1st. mtge.
5 3/8s, 2013 3,160,886
960,000 Dayton Power & Light Co. (The) 144A
1st mtge. 5 1/8s, 2013 959,679
890,000 DPL, Inc. sr. notes 8 1/4s, 2007 975,455
1,720,000 DPL, Inc. sr. notes 6 7/8s, 2011 1,796,205
2,035,000 Duke Capital Corp. sr. notes Ser. A,
6 1/4s, 2005 2,125,606
3,070,000 Duke Energy Corp. 1st mtge. 5.3s,
2015 3,072,668
2,970,000 Duke Energy Field Services, LLC
notes 7 7/8s, 2010 3,470,294
1,575,000 Enterprise Capital Trust II company
guaranty FRN Ser. B, 2.36s, 2028 1,279,733
3,900,000 Exelon Corp. sr. notes 6 3/4s, 2011 4,321,707
2,490,000 Exelon Generation Co., LLC sr. notes
6.95s, 2011 2,777,226
2,665,000 FirstEnergy Corp. notes Ser. A,
5 1/2s, 2006 2,800,555
1,300,000 FirstEnergy Corp. notes Ser. B,
6.45s, 2011 1,380,903
3,345,000 FirstEnergy Corp. notes Ser. C,
7 3/8s, 2031 3,573,360
1,285,000 Florida Power & Light Co. 1st mtge.
5.95s, 2033 1,297,725
825,000 Florida Power & Light Co. 1st mtge.
5 5/8s, 2034 792,589
1,305,000 Indianapolis Power & Light 144A 1st
mtge. 6.3s, 2013 1,333,004
1,555,000 KeySpan Corp. notes 7 5/8s, 2010 1,849,928
3,165,000 Kinder Morgan, Inc. sr. notes
6 1/2s, 2012 3,453,202
2,940,000 Monongahela Power Co. 1st mtge. 5s,
2006 3,014,650
980,000 National Fuel Gas Co. notes 5 1/4s,
2013 969,029
5,115,000 National Rural Utilities Cooperative
Finance Corp. coll. trust 6s, 2006 5,538,507
1,870,000 National Rural Utilities Cooperative
Finance Corp. coll. trust 3 7/8s,
2008 1,888,713
2,225,000 National Rural Utilities Cooperative
Finance Corp. coll. trust 3s, 2006 2,252,797
1,630,000 Nevada Power Co. 144A 2nd mtge. 9s,
2013 1,731,875
6,115,000 NiSource Finance Corp. company
guaranty 7 7/8s, 2010 7,235,513
246 Northeast Utilities notes Ser. A,
8.58s, 2006 269
2,635,000 Northern States Power Co. mtge.
Ser. B, 8s, 2012 3,206,961
4,210,000 Oncor Electric Delivery Co. sec.
notes 6 3/8s, 2012 4,612,527
1,570,000 PacifiCorp Sinking Fund 1st mtge.
5.45s, 2013 1,614,640
735,000 Panhandle Eastern Pipe Line 144A
notes 4.8s, 2008 750,678
3,725,000 Pepco Holdings, Inc. notes 5 1/2s,
2007 3,941,270
955,000 Potomac Edison Co. 1st mtge. 8s,
2024 979,270
1,850,000 Power Receivable Finance, LLC 144A
sr. notes 6.29s, 2012 1,875,068
2,475,000 PP&L Capital Funding, Inc. company
guaranty Ser. D, 8 3/8s, 2007 2,813,690
940,000 Progress Energy, Inc. sr. notes
6 3/4s, 2006 1,022,914
2,210,000 Progress Energy, Inc. sr. notes
6.55s, 2004 2,245,745
1,395,000 Progress Energy, Inc. sr. notes
6.05s, 2007 1,504,894
8,330,000 PSI Energy, Inc. 1st mtge. Ser. EEE,
6.65s, 2006 9,121,226
785,000 Public Service Company of New Mexico
sr. notes 4.4s, 2008 791,968
2,585,000 Public Service Electric & Gas Co.
1st mtge. FRN 6 3/8s, 2008 2,826,423
1,605,000 Public Services Co. of Colorado sr.
notes Ser. A, 6 7/8s, 2009 1,803,903
785,000 Rochester Gas & Electric notes
6 3/8s, 2033 790,515
2,820,000 Sempra Energy notes 7.95s, 2010 3,302,567
1,455,000 South Carolina Electric & Gas Co.
1st mtge. 5.3s, 2033 1,325,689
2,895,000 Southern California Edison Co. 1st
mtge. 8s, 2007 3,249,638
1,820,000 Southwestern Public Service Co. 144A
bonds 6s, 2033 1,784,424
2,590,000 Tampa Electric Co. notes 6 7/8s,
2012 2,803,781
965,000 TransCanada Pipelines, Ltd. notes
4s, 2013 (Canada) 893,512
2,080,000 Virginia Electric & Power Co. sr.
notes 4 3/4s, 2013 2,036,436
2,215,000 Western Resources, Inc. 1st mtge.
7 7/8s, 2007 2,494,644
1,001,000 Western Resources, Inc. sr. notes
9 3/4s, 2007 1,143,643
825,000 XCEL Energy, Inc. 144A sr. notes
3.4s, 2008 800,482
965,709 York Power Funding 144A notes 12s,
2007 (Cayman Islands) (In default)
(NON) 675,996
--------------
143,576,472
--------------
Total Corporate bonds and notes
(cost $1,043,246,910) $1,082,792,268
Collateralized mortgage obligations (14.0%) (a)
Principal amount Value
- -------------------------------------------------------------------------------
Asset Securitization Corp.
$3,529,000 Ser. 97-MD7, Class A1B, 7.41s, 2030 $3,882,733
2,720,639 Ser. 95-MD4, Class A1, 7.1s, 2029 2,913,341
1,565,000 Ser. 96-MD6, Class A1B, 6.88s, 2029 1,567,086
8,238,600 Ser. 97-D5, Class A1C, 6 3/4s, 2043 9,104,204
Bear Stearns Commercial Mortgage
Securitization Corp.
2,900,000 FRN Ser. 02-HOME, Class D, 2.87s,
2013 2,755,000
860,000 Ser. 02-TOP8, Class X2, Interest
Only (IO), 2.337s, 2038 90,048
Chase Commercial Mortgage Securities Corp.
4,795,592 Ser. 00-1, Class A1, 7.656s, 2032 5,124,536
1,318,124 Ser. 98-1, Class A1, 6.34s, 2030 1,363,950
7,083,000 Commercial Mortgage Acceptance Corp.
Ser. 97-ML1, Class A3, 6.57s, 2007 7,724,897
13,599,500 Criimi Mae Commercial Mortgage Trust
Ser. 98-C1, Class A2, 7s, 2011 15,320,687
7,975,000 Criimi Mae Commercial Mortgage Trust
144A Ser. 98-C1, Class B, 7s, 2011 8,173,010
CS First Boston Mortgage Securities Corp.
32,309,242 Ser. 97-C2, Class A2, 6.52s, 2035 33,927,870
413,364 Ser. 01-CKN5, Class A1, 3.801s, 2006 418,660
CS First Boston Mortgage Securities
Corp. 144A
685,000 Ser. 02-CP3, Class F, 6.295s, 2035 715,611
4,615,000 Ser. 01-CK1, Class ACP, IO, 1.026s,
2035 188,927
1,577,604 Deutsche Mortgage & Asset Receiving
Corp. Ser. 98-C1, Class X, IO,
1.174s, 2023 51,711
Fannie Mae
1,212 Ser. 92-15, Class L, IO, 10.376s,
2022 17,664
4,819,448 Ser. 02-36, Class SJ, 17.325s, 2029 5,348,835
2,205,059 Ser. 02-T18, Class A4, 7 1/2s, 2042 2,402,138
8,193,360 Ser. 03-W3, Class 1A3, 7 1/2s, 2042 8,925,650
11,418,983 Ser. 02-T16, Class A3, 7 1/2s, 2042 12,439,566
14,843,857 Ser. 02-T19, Class A3, 7 1/2s, 2042 16,170,542
3,927,362 Ser. 03-W2, Class 1A3, 7 1/2s, 2042 4,278,374
9,496,523 Ser. 02-W4, Class A5, 7 1/2s, 2042 10,345,285
1,155,256 Ser. 02-14, Class A2, 7 1/2s, 2042 1,258,508
9,105,985 Ser. 01-T10, Class A2, 7 1/2s, 2041 9,919,842
5,567,779 Ser. 01-T12, Class A2, 7 1/2s, 2041 6,065,405
3,178,015 Ser. 01-T8, Class A1, 7 1/2s, 2041 3,462,053
13,935,990 Ser. 01-T7, Class A1, 7 1/2s, 2041 15,181,533
717,197 Ser. 01-T3, Class A1, 7 1/2s, 2040 781,297
2,172,516 Ser. 01-T1, Class A1, 7 1/2s, 2040 2,366,687
865,968 Ser. 99-T2, Class A1, 7 1/2s, 2039 943,365
6,484,586 Ser. 00-T6, Class A1, 7 1/2s, 2030 7,064,152
195,799 Ser. 01-T5, Class A3, 7 1/2s, 2030 213,299
17,713,009 Ser. 01-T4, Class A1, 7 1/2s, 2028 19,296,127
2,702,110 Ser. 02-W3, Class A5, 7 1/2s, 2028 2,943,613
10,442,407 Ser. 02-36, Class QH, IO, 6.93s,
2029 616,755
1,181,504 Ser. 02-27, Class SQ, IO, 6.88s,
2032 41,353
16,211,696 Ser. 03-58, Class ID, IO, 6s, 2033 3,222,075
18,296,505 Ser. 03-63, Class IP, IO, 6s, 2033 4,113,855
56,042,893 Ser. 03-22, Class IO, 6s, 2033 11,103,498
4,433,778 Ser. 02-55, Class IT, IO, 6s, 2026 97,100
8,545,501 Ser. 343, Class 14, IO, 5 1/2s, 2033 1,913,391
8,914,220 Ser. 343, Class 15, IO, 5 1/2s, 2033 2,005,699
4,061,489 Ser. 343, Class 17, IO, 5 1/2s, 2033 932,239
39,041,429 Ser. 329, Class 2, IO, 5 1/2s, 2033 9,211,337
538,000 Ser. 03-29, Class IG, IO, 5 1/2s,
2031 167,957
11,756,541 Ser. 03-42, Class JI, IO, 5 1/2s,
2028 1,275,067
12,125,900 Ser. 03-54, Class IY, IO, 5 1/2s,
2026 1,822,674
4,308,200 Ser. 03-17, Class PI, IO, 5 1/2s,
2025 490,058
661,631 Ser. 03-63, Class SE, IO, 5.48s,
2031 74,227
8,212,567 Ser. 03-16, Class IC, IO, 5s, 2015 1,643,526
46,015,337 Ser. 03-W3, Class 2IO2, IO, 2.322s,
2042 1,254,625
52,553,972 Ser. 03-W6, Class 11, IO, 2.269s,
2042 1,324,748
17,044,169 Ser. 03-W12, Class 2, IO, 2.247s,
2043 1,217,882
26,480,252 Ser. 03-W10, Class 3, IO, 2.135s,
2043 1,754,317
68,877,509 Ser. 03-W10, Class 1, IO, 2.107s,
2043 4,563,135
47,688,172 Ser. 03-W6, Class 21, IO, 1.908s,
2042 836,945
220,227,763 Ser. 03-T2, Class 2, IO, 1.733s,
2042 7,098,824
5,064,829 Ser. 03-W10, Class 1A1, 1.701s, 2032 5,046,628
131,542,475 Ser. 03-W8, Class 12, IO, 1.648s,
2042 6,710,905
103,886,783 Ser. 03-W8, Class 11, IO, 1.174s,
2042 1,572,799
61,762,656 Ser. 03-49, Class SV, IO, 1s, 2033 2,113,441
76,235,021 Ser. 03-W3, Class 2IO1, IO, 0.674s,
2042 1,621,468
54,159,331 Ser. 03-W6, Class 51, IO, 0.669s,
2042 1,029,239
98,775,017 Ser. 03-18, Class X1, IO, 0.636s,
2042 2,068,102
107,230,154 Ser. 01-T12, Class IO, 0.572s, 2041 1,910,037
1,160,846 Ser. 01-50, Class B1, IO, 0.486s,
2041 18,348
127,213,156 Ser. 03-W2, Class 1, IO, 0.470s,
2042 1,889,203
26,091,992 Ser. 02-T4, Class IO, 0.447s, 2041 362,842
80,264,440 Ser. 03-W3, Class 1, IO, 0.436s,
2042 1,097,680
81,033,674 Ser. 02-T1, Class IO, 0.421s, 2031 1,088,890
81,626,220 Ser. 03-W6, Class 3, IO, 0.366s,
2042 895,356
82,477,433 Ser. 03-W6, Class 23, IO, 0.352s,
2042 870,266
Federal Home Loan Mortgage Corp.
Structured Pass-Through Securities
4,997,062 Ser. T-58, Class 4A, 7 1/2s, 2043 5,435,867
1,997,118 Ser. T-42, Class A5, 7 1/2s, 2042 2,175,613
48,906,124 Ser. T-56, Class A, IO, 2.069s, 2043 1,772,847
52,611,170 Ser. T-56, Class 3, IO, 0.377s, 2043 723,404
56,486,269 Ser. T-56, Class 1, IO, 0.285s, 2043 547,211
59,085,496 Ser. T-56, Class 2, IO, 0.058s, 2043 184,642
21,595,000 FFCA Secured Lending Corp. 144A Ser.
00-1, Class A2, 7.77s, 2027 23,514,148
1,000,000 First Union National Bank Commercial
Mortgage 144A Ser. 02-C1, Class
IOII, IO, 1.205s, 2034 50,234
11,815,000 First Union-Lehman Brothers
Commercial Mortgage Trust II Ser.
97-C1, Class A3, 7.38s, 2029 13,170,960
Freddie Mac
17,532,458 Ser. 2437, Class SB, IO, 6.88s, 2032 1,709,415
1,307,761 Ser. 2422, Class IB, IO, 6 1/2s,
2028 17,777
13,410,401 Ser. 2469, Class SH, IO, 6.38s, 2032 1,106,358
4,105,657 Ser. 2507, Class TI, IO, 6s, 2026 118,177
11,993,800 Ser. 2581, Class IE, IO, 5 1/2s,
2025 2,151,448
11,986,752 Ser. 2553, Class IJ, IO, 5 1/2s,
2020 928,973
6,552,742 Ser. 2626, Class JS, IO, 5.48s, 2023 590,771
1,276,551 G-Force FRB Ser. 01-1A, Class A,
1.72s, 2033 (Cayman Islands) 1,276,511
7,420,476 General Growth Properties-Mall
Properties Trust FRB Ser. 01-C1A,
Class D3, 3.37s, 2014 7,429,752
GMAC Commercial Mortgage Securities, Inc.
11,894,000 Ser. 97-C2, Class A2, 6.55s, 2007 12,418,763
888,527 Ser. 01-C2, Class A1, 6 1/4s, 2034 958,809
GMAC Commercial Mortgage Securities,
Inc. 144A
1,845,000 Ser. 03-C1, Class G, 4.817s, 2036 1,745,381
1,050,000 Ser. 02-C2, Class X2, IO, 1.698s,
2038 65,891
835,000 Ser. 02-C1, Class X2, IO, 0.896s,
2039 39,218
Government National Mortgage
Association
674,907 Ser. 99-31, Class MP, Principal Only
(PO), zero %, 2029 622,304
3,783,971 Ser. 98-2, Class EA, PO, zero %,
2028 3,281,412
GS Mortgage Securities Corp. II
8,200,000 Ser. 01-LIB, Class A2, 6.615s, 2016 9,013,838
1,463,917 Ser. 98-GLII, Class A1, 6.312s, 2031 1,555,206
JP Morgan Chase Commercial
Mortgage Securities Corp. 144A
730,000 Ser. 02-C1, Class X2, IO, 1.711s,
2037 51,347
1,581,503 Ser. 02-C2, Class X2, IO, 1.302s,
2034 81,793
21,741,836 JP Morgan Commercial Mortgage
Finance Corp. Ser. 00-C9, Class A1,
7.59s, 2032 23,324,641
40,805,000 LB-UBS Commercial Mortgage Trust
Ser. 03-C7, Class XCP, IO, 0.84s,
2037 1,129,703
LB-UBS Commercial Mortgage Trust
144A
2,390,000 Ser. 02-C4, Class XCP, IO, 1.476s,
2035 167,437
43,570,000 Ser. 03-C5, Class XCP, IO, 1.358s,
2037 2,057,920
2,713,722 Lehman Brothers Floating Rate
Commercial Mtg. Trust 144A Ser.
03-C4, Class A, 1.72s, 2015 2,713,722
Merrill Lynch Mortgage Investors, Inc.
480,686 Ser. 96-C2, Class A3, 6.96s, 2028 520,493
419,759 Ser. 98-C2, Class A1, 6.22s, 2030 428,155
7,557,037 Ser. 96-C2, Class IO, 2.513s, 2028 522,039
2,699,737 Morgan Stanley Dean Witter Capital I
Ser. 00-LIF2, Class A1, 6.96s, 2008 2,983,296
Morgan Stanley Dean Witter Capital I
144A
1,278,677 FRB Ser. 01-XLF, Class D, 2.64s,
2013 1,280,217
1,019,931 FRB Ser. 01-XLF, Class E, 2.59s,
2013 1,020,361
7,038,000 Nomura Asset Securities Corp. Ser.
96-MD5, Class A1B, 7.12s, 2039 7,641,086
150,558,000 Prudential Commercial Mortgage Trust
144A Ser. 03-PWR1, Class X2, IO,
1.732s, 2036 11,832,918
1,450,000 Prudential Mortgage Capital Funding,
LLC 144A Class 01, Ser. IO, 0.117s,
2034 49,657
2,041,000 Starwood Asset Receivables Trust FRN
Ser. 02-1A, Class F, 2.455s, 2020 2,042,225
Starwood Asset Receivables Trust
144A
1,090,000 FRB Ser. 03-1A, Class F, 2.22s, 2022 1,090,654
1,380,000 FRB Ser. 03-1A, Class E, 2.17s, 2022 1,380,828
1,440,000 FRB Ser. 03-1A, Class A2, 1.47s,
2022 1,440,864
2,209,274 TIAA Commercial Real Estate
Securitization Ser. 01-C1A, Class
A1, 5.77s, 2016 (Cayman Islands) 2,326,642
13,243,432 TIAA Retail Commercial Mortgage
Trust Ser. 99-1, Class A, 7.17s,
2032 (Cayman Islands) 14,439,979
973,000 Trizechahn Office Properties Trust
144A Ser. 01-TZHA, Class D3,
6.943s, 2013 1,040,534
--------------
Total Collateralized mortgage
obligations (cost $470,372,008) $479,994,138
Asset-backed securities (12.5%) (a)
Principal amount Value
- -------------------------------------------------------------------------------
$23,183,000 Aames Mortgage Trust Ser. 03-1,
Class A, IO, 6s, 2005 $1,675,945
10,219,000 Ace Securities Corp. Ser. 03-FM1,
Class A, IO, 5 1/2s, 2005 836,936
4,705,000 Advanta Mortgage Loan Trust Ser.
00-1, Class A4, 8.61s, 2028 5,065,227
14,520,848 AFC Home Equity Loan Trust Ser.
99-2, Class 1A, 1.53s, 2029 14,520,848
Ameriquest Mortgage Securities, Inc.
725,000 Ser. 02-1, Class S, IO, 4 1/2s, 2004 14,581
22,407,000 Ser. 03-6, Class S, IO, 5s, 2005 1,385,559
13,957,556 Ser. 03-8, Class S, IO, 5s, 2006 873,743
1,302,000 FRB Ser. 03-8, Class MV6, 4.87s,
2033 1,096,781
716,000 FRN Ser. 02-4, Class M4, 4.87s, 2033 616,120
1,684,000 FRN Ser. 02-C, Class M2, 3.47s, 2032 1,432,058
925,000 FRN Ser. 03-AR3, Class M5, 4.87s,
2033 877,630
Amortizing Residential Collateral
Trust
14,592,545 Ser. 01-BC6, Class A, IO, 6s, 2004 632,756
73,496,968 Ser. 02-BC8, Class A, IO, 6s, 2004 3,340,539
28,135,149 Ser. 02-BC9, Class A, IO, 6s, 2004 1,125,989
46,947,499 Ser. 02-BC10, Class A, IO, 6s, 2004 1,804,319
19,320,000 Ser. 02-BC1, Class A, IO, 6s, 2005 647,302
43,446,922 Ser. 02-BC3, Class A, IO, 6s, 2005 1,818,008
1,190,609 Ser. 02-BC3N, Class B2, 7s, 2032 1,179,334
44,302,139 Ser. 02-BC5, Class A, IO, 6s, 2004 1,363,626
35,287,510 Ser. 02-BC6, Class A, IO, 6s, 2004 1,259,189
47,497,593 Ser. 02-BC7, Class AIO, IO, 6s, 2004 1,927,173
1,773,000 FRN Ser. 02-BC1, Class M2, 2.22s,
2032 1,732,761
1,170,000 FRN Ser. 02-BC5, Class B, 3.37s,
2032 999,070
2,308,000 FRN Ser. 02-BC7, Class B3, 3.12s,
2032 2,014,090
365,763 AQ Finance NIM Trust Ser. 02-1,
Class Note, 9 1/2s, 2032 364,735
1,050,512 AQ Finance NIM Trust 144A Ser.
03-N9A, Class Note, 7.385s, 2033 1,050,512
Arc Net Interest Margin Trust
792,470 Ser. 02-2, Class A, 7 3/4s, 2032 791,150
453,494 Ser. 02-5A, Class A, 7 3/4s, 2032 450,577
Arc Net Interest Margin Trust 144A
46,717 Ser. 01-6A, Class A, 7 1/4s, 2031 46,550
713,962 Ser. 02-1A, Class A, 7 3/4s, 2032 713,840
192,248 Ser. 02-8A, Class A1, 7 3/4s, 2032 190,664
1,993,000 Arcap REIT, Inc. 144A Ser. 03-1A,
Class E, 7.11s, 2038 2,011,684
Argent Securities, Inc.
66,021,301 Ser. 03-W2, Class A, IO, 1.4s, 2004 513,516
1,300,000 FRB Ser. 03-W1, Class MV6, 4.87s,
2033 1,032,369
1,044,000 FRB Ser. 03-W2, Class M6, 4.87s,
2033 838,247
1,035,000 FRB Ser. 03-W5, Class MV6, 4.87s,
2033 848,134
970,000 FRN Ser. 03-W6, Class M3, 4.62s,
2034 783,760
Asset Backed Funding Certificates
422,565 Ser. 02-NC1, Class N1, 8.84s, 2032 421,508
2,097,000 FRN Ser. 02-OPT1, Class M3, 2.52s,
2032 2,085,777
196,706 Asset Backed Funding Corp. NIM Trust
Ser. 02-WF1, Class Note, 9.32s,
2032 196,706
Asset Backed Funding Corp. NIM Trust
144A
1,529,057 Ser. 03-OPT1, Class NOTE, 6.9s, 2033 1,529,057
1,528,648 Ser. 03-WF1, Class N1, 8.35s, 2032 1,528,648
Asset Backed Securities Corp. Home
Equity Loan Trust
51,925,000 Ser. 02-HE1, Class A, IO, 3.6s, 2032 1,209,385
37,587,439 Ser. 03-HE1, Class A, IO, 5s, 2033 2,389,095
21,111,892 Ser. 03-HE5, Class A, IO, 4s, 2033 1,132,864
1,130,000 FRB Ser. 03-HE5, Class M5, 5.37s,
2033 977,451
Asset Backed Securities Corp. Home
Equity Loan Trust
2,305,000 FRN Ser. 02-HE2, Class M2, 2 1/4s,
2032 2,261,800
2,187,000 FRN Ser. 03-HE1, Class M4, 5.62s,
2033 1,917,352
1,546,000 FRN Ser. 03-HE3, Class M5, 5.12s,
2033 1,323,742
1,753,927 Aviation Capital Group Trust 144A
FRB Ser. 03-2A, Class G1, 1.82s,
2033 1,753,927
9,126,000 Bank One Issuance Trust FRN Ser.
02-C1, Class C1, 2.08s, 2009 9,071,458
Bayview Financial Acquisition Trust
4,988,000 Ser. 02-CA, Class A, IO, 5.7s, 2004 215,107
21,866,000 Ser. 03-E, Class A, IO, 4s, 2006 1,326,604
137,027,499 Ser. 03-X, Class A, IO, 1.36s, 2006 2,269,518
3,555,288 FRN Ser. 01-DA, Class M3, 2.52s,
2031 3,519,735
145,633,721 Bayview Financial Acquisition Trust
144A Ser. 02-XA, Class AIO1, IO,
1.321s, 2005 1,479,092
Bayview Financial Asset Trust 144A
4,110,617 FRB Ser. 03-SSRA, Class A, 1.82s,
2038 4,110,617
4,694,512 FRB Ser. 03-SSRA, Class M, 2.47s,
2038 4,694,512
Bear Stearns Asset Backed Securities, Inc.
19,936,000 Ser. 03-AC1, Class A, IO, 5s, 2005 1,470,280
17,501,000 Ser. 03-AC4, Class A, IO, 5s, 2006 1,632,515
2,964,000 FRB Ser. 03-3, Class A2, 1.71s, 2043 2,964,000
5,003,859 FRN Ser. 03-1, Class A1, 1.62s, 2042 5,003,859
4,530,000 Capital One Master Trust 144A FRN
Ser. 01-5, Class C, 2.27s, 2009 4,348,683
880,000 Capital One Multi-Asset Execution
Trust FRB Ser. 02-C1, Class
C1, 3.87s, 2010 891,266
CDC Mortgage Capital Trust
1,335,000 FRB Ser. 03-HE3, Class B3, 4.87s,
2033 1,111,944
1,236,997 FRN Ser. 02-HE3, Class B2, 5.12s,
2033 1,077,082
1,837,998 FRN Ser. 03-HE1, Class B2, 4.87s,
2033 1,564,614
4,870,000 CDO Repackaging Trust Series 144A
FRB Ser. 03-2, Class A, 5.26s, 2008 4,894,350
Chase Credit Card Master Trust
7,095,000 FRB Ser. 02-2, Class C, 2.02s, 2007 7,095,000
2,750,000 FRN Ser. 01-1, Class C, 1.85s, 2007 2,739,925
285,799 Chase Funding Net Interest Margin
Ser. 02-2, Class Note 8 1/2s, 2035 285,084
Chase Funding Net Interest Margin
144A
456,039 Ser. 02-3, Class Note, 8 1/2s, 2035 456,025
1,106,035 Ser. 03-3A, Class Note, 6 7/8s, 2036 1,099,067
88,410 Ser. 03-4A, Class Note, 6 3/4s, 2036 88,327
1,683,261 Ser. 03-C1A, Class Note, 6 3/4s,
2036 1,681,409
Conseco Finance Securitizations Corp.
8,500,000 Ser. 00-2, Class A5, 8.85s, 2029 7,225,000
17,270,000 Ser. 00-4, Class A6, 8.31s, 2032 15,023,626
10,707,000 Ser. 01-04, Class A4, 7.36s, 2019 9,985,784
6,800,000 Ser. 01-3, Class A4, 6.91s, 2033 6,148,500
4,730,000 Ser. 01-4, Class B1, 9.4s, 2010 1,655,500
14,354,576 Ser. 02-1, Class A, 6.681s, 2032 14,582,499
5,593,000 Ser. 02-1, Class M2, 9.546s, 2032 3,355,800
13,402,124 Ser. 02-2, Class A, IO, 8 1/2s, 2010 4,116,958
41,399,700 Conseco Recreational Enthusiast
Consumer Trust Ser. 01-A, Class AP,
IO, 5s, 2025 1,600,223
3,653,000 Consumer Credit Reference IDX
Securities FRB Ser. 02-1A, Class A,
3.14s, 2007 3,642,626
Countrywide Asset-Backed
Certificates FRB
822,000 Ser. 03-BC4, Class B, 4.62s, 2032 749,048
813,000 Ser. 03-4, Class B, 4.62s, 2032 747,960
1,404,408 Credit-Based Asset Servicing and
Securitization 144A Ser.
03-CB2N, Class Note, 8.35s, 2033 1,404,408
CS First Boston Mortgage Securities Corp.
603,271 Ser. 01-26, Class 4AIO, IO, 7 1/2s,
2031 3,205
1,569,000 Equifirst Mortgage Loan Trust FRN
Ser. 03-2, Class M6, 5.37s, 2033 1,215,975
Federal Home Loan Mortgage Corp.
Structured Pass-Through Securities
22,170,000 Ser. T-40, Class S, IO, 2 1/2s, 2004 448,588
1,011,000 Ser. T-39, Class S, IO, 1 1/2s, 2004 12,199
First Franklin Mortgage Loan Asset
Backed Certificates
15,342,455 Ser. 02-FF3, Class , IO, 6s, 2004 415,049
49,419,000 Ser. 03-FF3, Class AIO, 6s, 2005 2,402,336
25,277,000 Ser. 03-FFB, Class A, IO, 6s, 2005 1,579,310
1,016,000 FRB Ser. 03-FF4, Class M6, 4.92s,
2033 924,243
First Franklin NIM Trust
1,768,853 Ser. 02-FF3, Class Note, 7 3/4s,
2032 1,750,059
1,007,784 Ser. 03-FF3A, Class A, 6 3/4s, 2033 1,003,872
1,897,440 First Plus 144A Ser. 98-A, Class A,
8 1/2s, 2023 1,366,157
2,705,085 First Plus Home Loan Trust Ser.
97-3, Class B1, 7.79s, 2023 2,702,937
834,000 Fort Point CDO, Ltd. FRN Ser. 03-2A,
Class A2, 2.19s, 2038 834,000
417,000 G-Star, Ltd. 144A FRN Ser. 02-2A,
Class BFL, 3.12s, 2037 (Cayman
Islands) 414,837
1,000,000 GMAC Mortgage Corp. Ser. 02-HE2,
Class A, IO, 7 1/2s, 2027 60,625
750,000 Goldentree Loan Opportunities II,
Ltd. 144A FRN Ser. 2A, Class
4, 4.37s, 2015 (Cayman Islands) 750,000
Green Tree Financial Corp.
861,895 Ser. 99-3, Class A5, 6.16s, 2031 874,285
19,225,000 Ser. 99-5, Class A5, 7.86s, 2030 16,906,881
GSAMP Trust
615,359 Ser. 02-HE2N, Class Note, 8 1/4s,
2032 616,536
854,305 Ser. 02-WMC, Class Note, 8s, 2032 848,399
1,589,000 FRB Ser. 03-HE2, Class B2, 5.12s,
2033 1,408,251
1,296,000 FRN Ser. 03-HE1, Class B2, 5.12s,
2033 1,140,480
5,040,000 Granite Mortgages PLC FRN Ser. 01-1,
Class 1C, 2.56s, 2041 (United
Kingdom) 5,008,894
1,530,215 GSAMP Trust 144A Ser. 03-HE1N, Class
Note, 7 1/4s, 2033 1,529,259
337,794 Headlands Mortgage Securities, Inc.
Ser. 98-1, Class X2, IO, 6 1/2s,
2028 10,767
22,675,000 Holmes Financing PLC FRB Ser. 1,
Class 2C, 2.3s, 2040 (United
Kingdom) 22,528,769
Home Equity Asset Trust
1,500,155 Ser. 02-1N, Class A, 8s, 2032 1,481,403
1,853,000 FRN Ser. 03-4, Class B3, 5.62s, 2033 1,635,802
1,001,000 FRN Ser. 03-3, Class B3, 5.62s, 2033 883,120
2,792,000 FRN Ser. 02-1, Class M2, 2.52s, 2032 2,754,163
Home Equity Asset Trust 144A
1,355,493 Ser. 03-4N, Class A, 8s, 2033 1,346,546
837,000 Ser. 03-5N, Class A, 7 1/2s, 2034 833,192
91,227 Housing Securities, Inc. Ser. 94-1,
Class AB1, 6 1/2s, 2009 89,716
51,553,138 Lehman Manufactured Housing Ser.
98-1, Class 1, IO, 0.811s, 2028 797,351
6,071,000 LNR CDO, Ltd. Ser. 02-1A, Class FFL,
3.87s, 2037 (Cayman Islands) 5,616,282
4,150,000 LNR CDO, Ltd. 144A FRB Ser. 03-1A,
Class EFL, 4.12s, 2036 (Cayman
Islands) 4,150,000
1,818,331 Long Beach Asset Holdings Corp. NIM
Trust 144A Ser. 03-4, Class N1,
6.535s, 2033 1,817,762
Long Beach Mortgage Loan Trust
1,859,000 FRB Ser. 03-4, Class M6, 5.12s, 2033 1,577,826
1,411,000 FRN Ser. 03-3, Class M4, 4.62s, 2033 1,157,020
Madison Avenue Manufactured Housing
Contract
306,050,634 Ser. 02-A, Class IO, 0.3s, 2032 3,634,351
5,098,734 FRN Ser. 02-A, Class B1, 4.37s, 2032 3,314,177
5,454,387 Marriott Vacation Club Owner Trust
144A FRB Ser. 02-1A, Class A1,
1.82s, 2010 5,454,387
Master Asset Backed Securities Trust
FRB
1,188,000 Ser. 03-WMC2, Class M6, 5.12s, 2033 1,019,777
733,000 Ser. 03-NC1, Class M6, 5.12s, 2033 609,249
907,013 Merrill Lynch Mortgage Investors,
Inc. Ser. 03-WM3N, Class N1, 8s,
2005 898,490
Mid-State Trust
2,553,232 Ser. 10, Class B, 7.54s, 2036 2,261,207
2,815,353 Ser. 11, Class B, 8.221s, 2038 2,655,449
10,562,320 Merit Securities Corp. FRB Ser.
11PA, Class 3A1, 1.74s, 2027 10,212,443
345,180 Morgan Stanley ABS Capital I 144A
Ser. 03-NC9N, Class Note, 7.6s,
2033 345,180
Morgan Stanley Capital I
299,000 FRB Ser. 03-HE2, Class B3, 5.12s,
2033 255,156
1,700,000 FRN Ser. 03-HE1, Class B3, 4.87s,
2033 1,435,395
Morgan Stanley Dean Witter Capital I
1,895,000 FRN Ser. 01-NC3, Class B1, 3.57s,
2031 1,744,197
1,868,000 FRN Ser. 01-NC4, Class B1, 3.62s,
2032 1,699,244
2,425,000 FRN Ser. 02-AM2, Class B1, 3.37s,
2032 2,170,309
2,250,000 FRN Ser. 02-AM3, Class B2, 4.87s,
2033 1,992,959
1,888,000 FRN Ser. 02-HE1, Class B1, 2.92s,
2032 1,777,303
404,273 Morgan Stanley Dean Witter Capital I
144A Ser. 01-NC4N, Class Note,
8 1/2s, 2032 404,606
77,807 NC Finance Trust Ser. 02-1, Class
Note, 9 1/4s, 2032 77,418
New Century Home Equity Loan Trust
2,365,000 Ser. 03-5, Class AI7, 5.15s, 2033 2,353,545
2,222,000 FRN Ser. 03-2, Class M4, 4.72s, 2033 1,894,255
1,939,000 FRN Ser. 03-3, Class M6, 4.87s, 2033 1,595,555
648,000 New Century Mortgage Corp. NIM Trust
144A Ser. 03-5, Class Note, 8s,
2033 651,038
966,000 Newcastle CDO, Ltd. 144A FRB Ser.
3A, Class 4FL, 4.32s, 2038 958,151
Option One Mortgage Loan Trust
(Cayman Islands)
933,000 FRB Ser. 03-5, Class M6,4.62s, 2033 823,300
1,172,000 FRN Ser. 02-6, Class M4, 4.12s, 2032 1,085,845
2,222,000 FRN Ser. 03-3, Class M6, 4.62s, 2033 1,976,887
1,417,000 FRN Ser. 03-4, Class M6, 4.87s, 2033 1,264,008
589,238 Option One Mortgage Securities Corp.
Ser. 02-2A, Class CFTS, 8.83s, 2032 589,238
Option One Mortgage Securities Corp.
144A
506,295 Ser. 02-1, Class CTFS, 6 3/4s, 2032 504,156
1,554,935 Ser. 03-5, Class Note, 6.9s, 2033 1,554,935
Pass-Through Amortizing Credit Card
Trust
1,570,944 Ser. 02-1A, Class A3FL, 4.12s, 2012 1,566,245
3,132,132 Ser. 02-1A, Class A4FL, 6.62s, 2012 3,124,152
368,000 Residential Asset Mortgage Products,
Inc. Ser. 02-SL1, Class AI3, 7s,
2032 377,660
14,915,323 Residential Asset Securities Corp.
Ser. 02-KS6, Class AIO, IO, 4 1/2s,
2005 523,110
1,546,907 Residential Asset Securitization
Trust, Ser. 98-A12, Class A14, 8s,
2028 1,544,745
Residential Funding Mortgage
Securities II
47,641,838 Ser. 03-HS1, Class AI, IO, 5 1/2s,
2033 2,639,358
21,160,000 Ser. 03-HS2, Class AI, IO, 5 1/2s,
2005 1,008,406
11,994,000 Ser. 03-HS3, Class AI, IO, 5s, 2006 789,445
8,648,000 Restructured Asset Securities 144A
FRN Ser. 03-3A, Class A1, 1.724s,
2022 8,550,710
SAIL Net Interest Margin Notes 144A
2,139,357 Ser. 03-BC2A, Class A, 7 3/4s, 2033 2,133,140
1,500,445 Ser. 03-4, Class A, 7 1/2s, 2033
(Cayman Islands) 1,498,868
1,254,491 Ser. 03-6A, Class A, 7s, 2033
(Cayman Islands) 1,245,163
1,550,712 Ser. 03-7A, Class A, 7s, 2033
(Cayman Islands) 1,539,207
977,041 Ser. 03-9A, Class A, 7s, 2033 971,960
605,113 Sasco Arc Net Interest Margin Notes
Ser. 02-BC10, Class A, 7 3/4s, 2033 599,612
551,633 Sasco Arc Net Interest Margin Notes
144A, Ser. 03-AM1, Class A, 7 3/4s,
2033 548,944
959,000 Saxon Net Interest Margin Trust 144A
Ser. 03-A, Class A, 6.656s, 2033 959,000
760,000 SCF III Ser. 3A, Class A2, 2.37s,
2038 (Cayman Islands) 760,000
781,621 SHARP 144A Ser. 03-TC1N, 7 3/4s,
2033 781,621
Structured Asset Investment Loan
Trust
77,612,060 Ser. 03-BC2, Class A, IO, 6s, 2005 4,614,612
845,000 Ser. 03-BC2, Class B, 7s, 2033 796,499
49,529,000 Ser. 03-BC3, Class A, IO, 6s, 2004 2,389,172
24,514,000 Ser. 03-BC4, Class A, IO, 6s, 2004 952,638
44,640,000 Ser. 03-BC5, Class A, IO, 6s, 2004 1,734,752
77,234,000 Ser. 03-BC6, Class AIO, 6s, 2005 4,162,018
2,070,000 Ser. 03-BC7, Class B, 4.12s, 2033 1,786,669
13,165,000 Ser. 03-BC8, Class A, IO, 6s, 2005 950,225
19,586,000 Ser. 03-BC9, Class A, IO, 6s, 2005 1,227,730
1,710,000 FRB Ser. 03-BC6, Class B, 4.12s,
2033 1,491,040
2,004,000 FRN Ser. 03-BC4, Class B, 4.62s,
2033 1,765,399
1,441,000 FRN Ser. 03-BC5, Class B, 4.62s,
2033 1,284,066
792,000 FRN Ser. 03-BC8, Class B, 4.12s,
2033 692,050
1,025,000 FRN Ser. 03-BC9, Class B, 4.12s,
2033 885,224
Structured Asset Securities Corp.
34,655,914 Ser. 02-BC1, Class A, IO, 6s, 2004 1,386,955
7,016,545 Ser. 02-HF2, Class A, IO, 6s, 2004 318,912
13,911,798 Ser. 98-RF3, Class A, IO, 6.1s, 2028 2,359,163
2,715,000 FRN Ser. 02-HF2, Class M3, 3.12s,
2032 2,309,235
721,000 FRN Ser. 03-AM1, Class B1, 4.62s,
2033 642,704
2,298,000 TIAA Commercial Real Estate
Securitization 144A Ser. 03-1A,
Class E, 8s, 2038 2,067,044
728,000 Whole Auto Loan Trust Ser. 03-1,
Class C, 3.13s, 2010 725,270
4,529,000 Whole Auto Loan Trust 144A Ser.
03-1, Class D, 6s, 2010 4,508,478
--------------
Total Asset-backed securities
(cost $455,696,021) $430,250,146
Municipal bonds and notes (0.2%) (a)
Principal amount Rating (RAT) Value
- -------------------------------------------------------------------------------
$4,580,000 IL State G.O. Bonds, 5.1s, 6/1/33 AA $4,141,465
1,795,000 NJ State Tpk. Auth. Rev. Bonds,
Ser. B, AMBAC, 4.252s, 1/1/16 AAA 1,690,890
1,770,000 OR State G.O. Bonds (Taxable
Pension), 5.892s, 6/1/27 Aa3 1,792,214
--------------
Total Municipal bonds and notes (cost $8,145,000) $7,624,569
Purchased options outstanding (0.2%) (a) Expiration date/
Contract amount strike price Value
- -------------------------------------------------------------------------------
22,710,000 HYDI Index OTC option (JPMorgan
Chase) (Put) Jun-08/$100 $2,791,059
20,035,000 HYDI Index OTC option (Goldman Sachs
Capital Markets, L.P.) (Put) Jun-08/$100 2,588,522
--------------
Total Purchased options outstanding
(cost $5,695,365) $5,379,581
Common stocks (--%) (a)
Number of shares Value
- -------------------------------------------------------------------------------
3,544 Fitzgeralds Gaming Corp. (NON) $35
7,984 Jasper Energy 144A (NON) 499
441 PSF Group Holdings, Inc. 144A Class A (NON) 770,893
1,633 York Research Corp. 144A (NON) 102
--------------
Total Common stocks (cost $1,527,280) $771,529
Short-term investments (28.0%) (a)
Principal amount Value
- -------------------------------------------------------------------------------
$957,008,90 Short-term investments held in
Putnam commingled cash account with
yields ranging from 0.95% to 1.15%
and due dates ranging from November
2, 2003 to December 24, 2003 (d) $957,008,900
7,630,000 U.S. Treasury Bill zero%, November
6, 2003 (SEG) 7,629,030
--------------
Total Short-term investments (cost $964,637,930) $964,637,930
- -------------------------------------------------------------------------------
Total Investments (cost $4,903,562,558) $4,929,388,648
- -------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $3,440,030,897.
(RAT) The Moody's or Standard & Poor's ratings indicated are believed to
be the most recent ratings available at October 31, 2003 for the
securities listed. Ratings are generally ascribed to securities at the
time of issuance. While the agencies may from time to time revise such
ratings, they undertake no obligation to do so, and the ratings do not
necessarily represent what the agencies would ascribe to these
securities at October 31, 2003. Ratings are not covered by the
Independent auditors' report.
(NON) Non-income-producing security.
(SEG) This security was pledged and segregated with the custodian to
cover margin requirements for futures contracts at October 31, 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 at October 31, 2003.
AMBAC represents AMBAC Indemnity Corporation.
G.O. Bonds represent General Obligation Bonds.
Futures contracts outstanding at October 31, 2003
Unrealized
Market Aggregate Expiration appreciation/
value face value date (depreciation)
- -----------------------------------------------------------------------------
Euro 90 day (Short) $73,762,500 $73,869,975 Jun-04 $107,475
Euro 90 day (Short) 127,328,500 127,497,467 Sep-04 168,967
Euro 90 day (Long) 71,760,000 71,873,775 Jun-06 (113,775)
Euro 90 day (Long) 124,111,000 123,983,308 Sep-06 127,692
U.S. Treasury Bond
20 yr (Long) 284,408,232 276,280,342 Dec-03 8,127,890
U.S. Treasury Note
5 yr (Long) 131,156,063 130,999,021 Dec-03 157,042
U.S. Treasury Note
10 yr (Short) 32,453,797 32,435,666 Dec-03 (18,131)
- -----------------------------------------------------------------------------
$8,557,160
- -----------------------------------------------------------------------------
TBA sale commitments at October 31, 2003
(proceeds receivable $545,687,003)
Principal Settlement
Agency amount date Value
- -----------------------------------------------------------------------------
FNMA, 5s, November 1, 2018 $220,193,000 11/18/03 $223,633,516
FNMA, 5 1/2s, November 1, 2033 320,135,000 11/13/03 323,036,063
- -----------------------------------------------------------------------------
$546,669,579
- -----------------------------------------------------------------------------
Total return swap contracts outstanding at October 31, 2003
Notional Termination Unrealized
amount date depreciation
- -----------------------------------------------------------------------------------------
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. $19,982,861 11/1/03 $(126,893)
Agreement with Lehman Brothers Special
Financing, Inc. dated August 28, 2003 to receive
(pay) monthly the notional amount multiplied
by the return of the Lehman Brothers CMBS
Investment Grade Index and pay monthly
the notional amount multiplied by the
USD-LIBOR-BBA adjusted by a
specified spread. 13,440,129 3/1/04 (82,622)
- -----------------------------------------------------------------------------------------
$(209,515)
- -----------------------------------------------------------------------------------------
Interest rate swap contracts outstanding at October 31, 2003
Unrealized
Notional Termination appreciation/
amount date (depreciation)
- -------------------------------------------------------------------------------------------
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 8/12/22 $1,813,163
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 8/13/12 (1,614,990)
Agreement with Credit Suisse First Boston
International dated October 16, 2003 to
receive semi-annually the notional amount
multiplied by 2.096% and pay quarterly the
notional amount multiplied by the three month
USD LIBOR. 3,804,000 10/20/05 (2,986)
Agreement with Credit Suisse First Boston
International dated October 16, 2003 to
receive semi-annually the notional amount
multiplied by 4.783% and pay quarterly the
notional amount multiplied by the three month
USD LIBOR. 11,737,000 10/20/13 87,800
Agreement with Credit Suisse First Boston
International dated October 17, 2003 to
receive semi-annually the notional amount
multiplied by 2.2825% and pay quarterly the
notional amount multiplied by the three month
USD LIBOR. 1,499,000 10/21/05 4,163
Agreement with Credit Suisse First Boston
International dated October 17, 2003 to
receive quarterly the notional amount multiplied
by 4.881% and pay semi-annually the notional
amount multiplied by the three month
USD LIBOR. 11,354,000 10/21/13 174,502
Agreement with Credit Suisse First Boston
International dated October 24, 2003 to receive
semi-annually the notional amount multiplied
by the three month USD LIBOR and pay
quarterly the notional amount multiplied
by 2.16%. 3,542,000 10/28/05 130
Agreement with Credit Suisse First Boston
International dated October 24, 2003 to
receive semi-annually the notional amount
multiplied by 4.7025% and pay quarterly the
notional amount multiplied by the three month
USD LIBOR. 11,375,000 10/28/13 (929)
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 8/2/32 (3,990,017)
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 5.776%. 54,861,045 8/2/22 3,115,049
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 8/12/32 (2,277,924)
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 8/12/22 1,711,665
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 10/2/10 (4,692,886)
Agreement with Bank of America, N.A. dated
September 30, 2003 to pay semi-annually
the notional amount multiplied by 1.77% and
receive quarterly the notional amount multiplied
by the three month USD LIBOR. 33,848,540 10/2/05 222,046
Agreement with Bank of America, N.A. dated
September 30, 2003 to receive semi-annually
the notional amount multiplied by 4.3675% and
pay quarterly the notional amount multiplied
by the three month USD LIBOR. 30,988,101 10/2/13 (847,524)
Agreement with Bank of America, N.A. dated
September 30, 2003 to pay semi-annually the
notional amount multiplied by 1.775% and
receive quarterly the notional amount multiplied
by the three month USD LIBOR. 15,494,050 10/2/05 100,092
Agreement with Bank of America, N.A. dated
September 30, 2003 to receive semi-annually
the notional amount multiplied by 4.36% and
pay quarterly the notional amount multiplied
by the three month USD LIBOR. 14,159,178 10/2/13 (395,891)
Agreement with Bank of America, N.A. dated
October 1, 2003 to pay semi-annually the
notional amount multiplied by 1.75803% and
receive quarterly the notional amount multiplied
by the three month USD LIBOR. 20,741,000 10/3/05 140,417
Agreement with Bank of America, N.A. dated
October 1, 2003 to receive semi-annually the
notional amount multiplied by 4.37767% and pay
quarterly the notional amount multiplied by the
three month USD LIBOR. 21,121,000 10/3/13 (560,551)
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 8/2/12 (2,468,604)
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 8/2/22 2,962,496
Agreement with Lehman Brothers Special
Financing, Inc. dated August 1, 2003 to receive
semi-annually the notional amount multiplied
by 3.93% and pay quarterly the notional amount
multiplied by the three month USD LIBOR. 183,930,000 8/5/08 2,814,129
Agreement with Lehman Brothers Special
Financing, Inc. dated September 12, 2003 to
receive semi-annually the notional amount
multiplied by 4.6475% and pay quarterly the
notional amount multiplied by the three month
USD LIBOR. 79,712,500 9/16/13 (263,051)
Agreement with Lehman Brothers Special
Financing, Inc. dated October 1, 2003 to receive
semi-annually the notional amount multiplied
by 4.3770% and pay quarterly the notional
amount multiplied by the three month
USD-LIBOR-BBA. 10,547,000 10/3/13 (271,058)
Agreement with Lehman Brothers Special
Financing, Inc. dated October 9, 2003 to receive
semi-annually the notional amount multiplied
by 4.745% and pay quarterly the notional
amount multiplied by the three month
USD-LIBOR-BBA. 15,820,000 10/13/13 60,116
Agreement with Lehman Brothers Special
Financing, Inc. dated October 9, 2003 to pay
semi-annually the notional amount multiplied
by 2.013% and receive quarterly the notional
amount multiplied by the three month
USD-LIBOR-BBA. 20,040,000 10/13/05 48,096
Agreement with Lehman Brothers Special
Financing, Inc. dated October 23, 2003 to
receive semi-annually the notional amount
multiplied by 4.7220% and pay quarterly the
notional amount multiplied by the three month
USD-LIBOR-BBA. 22,832,000 10/27/13 31,965
Agreement with Lehman Brothers Special
Financing, Inc. dated October 23, 2003 to pay
semi-annually the notional amount multiplied
by 2.193% and receive quarterly the notional
amount multiplied by the three month
USD-LIBOR-BBA. 6,792,000 10/27/05 (2,717)
Agreement with Credit Suisse First Boston
International dated October 30, 2003 to
receive semi-annually the notional amount
multiplied by 2.225% and pay quarterly the
notional amount multiplied by the three month
USD LIBOR. 1,507,000 11/3/05 1,193
Agreement with Credit Suisse First Boston
International dated October 30, 2003 to receive
semi-annually the notional amount multiplied
by 4.764% and pay quarterly the notional amount
multiplied by the three month USD LIBOR. 17,520,000 11/3/13 74,821
- -------------------------------------------------------------------------------------------
$(4,027,285)
- -------------------------------------------------------------------------------------------
Credit default contracts outstanding at October 31, 2003
(premiums received $329,756)
Notional Market
amount value
- ------------------------------------------------------------------------------------------------------
Agreement with Merrill Lynch International effective June 26, 2003,
maturing on September 20, 2008, to receive a premium equal to
11.09% times the notional amount. Upon a credit default event of
The Gap, Inc. 5.75% due 3/15/09 the fund makes a payment of
the proportional notional amount times the difference between
the par value and the then-market value of The Gap, Inc.
5.75%, 2009. $2,200,000 $141,152
Agreement with Merrill Lynch International effective May 1, 2003,
maturing on June 20, 2008, to receive a premium equal to 7.80%
times the notional amount. Upon a credit default event of Liberty
Media Corp 7.875% due 7/15/09 the fund makes a payment of the
proportional notional amount times the difference between the
par value and the then-market value of Liberty Media Corp
7.875%, 2009. 1,100,000 74,976
- ------------------------------------------------------------------------------------------------------
$216,128
- ------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
Statement of assets and liabilities
October 31, 2003
Assets
- -------------------------------------------------------------------------------
Investments in securities, at value (identified cost
$4,903,562,558) (Note 1) $4,929,388,648
- -------------------------------------------------------------------------------
Cash 50,122,426
- -------------------------------------------------------------------------------
Dividends, interest and other receivables 36,445,120
- -------------------------------------------------------------------------------
Receivable for shares of the fund sold 8,874,746
- -------------------------------------------------------------------------------
Receivable for securities sold 611,595,195
- -------------------------------------------------------------------------------
Receivable for open swap contracts (Note 1) 13,361,843
- -------------------------------------------------------------------------------
Receivable for variation margin (Note 1) 1,931,266
- -------------------------------------------------------------------------------
Total assets 5,651,719,244
Liabilities
- -------------------------------------------------------------------------------
Payable for securities purchased 1,598,876,832
- -------------------------------------------------------------------------------
Payable for shares of the fund repurchased 41,937,871
- -------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 4,419,703
- -------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 366,490
- -------------------------------------------------------------------------------
Payable for Trustee compensation and expenses (Note 2) 171,833
- -------------------------------------------------------------------------------
Payable for administrative services (Note 2) 2,611
- -------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 1,159,013
- -------------------------------------------------------------------------------
Credit default contracts outstanding, at value (premiums
received $329,756) (Note 1) 216,128
- -------------------------------------------------------------------------------
Payable for open swap contracts (Note 1) 17,598,643
- -------------------------------------------------------------------------------
TBA sale commitments, at value (proceeds receivable
$545,687,003) (Note 1) 546,669,579
- -------------------------------------------------------------------------------
Other accrued expenses 269,644
- -------------------------------------------------------------------------------
Total liabilities 2,211,688,347
- -------------------------------------------------------------------------------
Net assets $3,440,030,897
Represented by
- -------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $3,595,432,955
- -------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 136,825
- -------------------------------------------------------------------------------
Accumulated net realized loss on investments (Note 1) (184,816,385)
- -------------------------------------------------------------------------------
Net unrealized appreciation of investments 29,277,502
- -------------------------------------------------------------------------------
Total -- Representing net assets applicable to capital
shares outstanding $3,440,030,897
Computation of net asset value and offering price
- -------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($1,279,779,380 divided by 191,322,170 shares) $6.69
- -------------------------------------------------------------------------------
Offering price per class A share (100/95.25 of $6.69)* $7.02
- -------------------------------------------------------------------------------
Net asset value and offering price per class B share
($520,692,225 divided by 78,338,458 shares)** $6.65
- -------------------------------------------------------------------------------
Net asset value and offering price per class C share
($42,946,062 divided by 6,442,522 shares)** $6.67
- -------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($884,379,710 divided by 133,422,991 shares) $6.63
- -------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $6.63)* $6.85
- -------------------------------------------------------------------------------
Net asset value, offering price and redemption price per
class R share ($1,031 divided by 154 shares) $6.69
- -------------------------------------------------------------------------------
Net asset value, offering price and redemption price per
class Y share ($712,232,489 divided by 105,909,684 shares) $6.72
- -------------------------------------------------------------------------------
* 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
Year ended October 31, 2003
Investment income:
- -------------------------------------------------------------------------------
Interest $173,950,316
- -------------------------------------------------------------------------------
Dividends 298
- -------------------------------------------------------------------------------
Total investment income 173,950,614
Expenses:
- -------------------------------------------------------------------------------
Compensation of Manager (Note 2) 18,838,355
- -------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 5,281,995
- -------------------------------------------------------------------------------
Trustee compensation and expenses (Note 2) 90,050
- -------------------------------------------------------------------------------
Administrative services (Note 2) 40,191
- -------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 3,390,179
- -------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 5,719,375
- -------------------------------------------------------------------------------
Distribution fees -- Class C (Note 2) 444,208
- -------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 6,254,052
- -------------------------------------------------------------------------------
Distribution fees -- Class R (Note 2) 4
- -------------------------------------------------------------------------------
Other 1,519,887
- -------------------------------------------------------------------------------
Total expenses 41,578,296
- -------------------------------------------------------------------------------
Expense reduction (Note 2) (220,743)
- -------------------------------------------------------------------------------
Net expenses 41,357,553
- -------------------------------------------------------------------------------
Net investment income 132,593,061
- -------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 74,032,892
- -------------------------------------------------------------------------------
Net realized gain on swap contracts (Note 1) 775,247
- -------------------------------------------------------------------------------
Net realized loss on futures contracts (Note 1) (20,805,126)
- -------------------------------------------------------------------------------
Net realized loss on foreign currency transactions (Note 1) (623,195)
- -------------------------------------------------------------------------------
Net realized loss on credit default contracts (Note 1) (738,744)
- -------------------------------------------------------------------------------
Net unrealized appreciation of assets and liabilities in
foreign currencies during the year 63,131
- -------------------------------------------------------------------------------
Net unrealized appreciation of investments, futures
contracts, swap contracts, credit default contracts and TBA
sale commitments during the year 11,832,270
- -------------------------------------------------------------------------------
Net gain on investments 64,536,475
- -------------------------------------------------------------------------------
Net increase in net assets resulting from operations $197,129,536
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
Statement of changes in net assets
Year ended October 31
Increase (decrease) in net assets 2003 2002
- -------------------------------------------------------------------------------
Operations:
- -------------------------------------------------------------------------------
Net investment income $132,593,061 $159,260,768
- -------------------------------------------------------------------------------
Net realized gain on investments and foreign
currency transactions 52,641,074 40,478,219
- -------------------------------------------------------------------------------
Net unrealized appreciation (depreciation)
of investments and assets and liabilities in
foreign currencies 11,895,401 (59,523,711)
- -------------------------------------------------------------------------------
Net increase in net assets resulting from
operations 197,129,536 140,215,276
- -------------------------------------------------------------------------------
Distributions to shareholders: (Note 1)
- -------------------------------------------------------------------------------
From net investment income
Class A (51,454,385) (66,143,094)
- -------------------------------------------------------------------------------
Class B (17,549,785) (23,022,355)
- -------------------------------------------------------------------------------
Class C (1,369,323) (1,494,196)
- -------------------------------------------------------------------------------
Class M (46,267,697) (65,789,694)
- -------------------------------------------------------------------------------
Class R (25) --
- -------------------------------------------------------------------------------
Class Y (22,813,013) (20,899,773)
- -------------------------------------------------------------------------------
Increase (decrease) from capital share
transactions (Note 4) (547,085,050) 946,878,694
- -------------------------------------------------------------------------------
Total increase (decrease) in net assets (489,409,742) 909,744,858
Net assets
- -------------------------------------------------------------------------------
Beginning of year 3,929,440,639 3,019,695,781
- -------------------------------------------------------------------------------
End of year (including undistributed net
investment income of $136,825 and $216,859,
respectively) $3,440,030,897 $3,929,440,639
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
Financial highlights
(For a common share outstanding throughout the period)
CLASS A
- ---------------------------------------------------------------------------------------------------------------
Per-share Year ended October 31
operating performance 2003 2002 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $6.59 $6.69 $6.29 $6.44 $6.87
- ---------------------------------------------------------------------------------------------------------------
Investment operations:
- ---------------------------------------------------------------------------------------------------------------
Net investment income (a) .24 .32 .38 .43 .40
- ---------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .11 (.07) .43 (.16) (.40)
- ---------------------------------------------------------------------------------------------------------------
Total from
investment operations .35 .25 .81 .27 --
- ---------------------------------------------------------------------------------------------------------------
Less distributions:
- ---------------------------------------------------------------------------------------------------------------
From net
investment income (.25) (.35) (.41) (.42) (.42)
- ---------------------------------------------------------------------------------------------------------------
From return of capital -- -- -- (d) -- (.01)
- ---------------------------------------------------------------------------------------------------------------
Total distributions (.25) (.35) (.41) (.42) (.43)
- ---------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $6.69 $6.59 $6.69 $6.29 $6.44
- ---------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(b) 5.45 3.93 13.39 4.39 (.09)
- ---------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ---------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $1,279,779 $1,339,061 $1,251,190 $946,755 $1,160,121
- ---------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(c) .93 .92 .95 .95 .96
- ---------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 3.64 4.84 5.93 6.86 5.95
- ---------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 251.00 (e) 268.10 (e) 233.83 (e) 207.35 209.02
- ---------------------------------------------------------------------------------------------------------------
(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
- ---------------------------------------------------------------------------------------------------------------
Per-share Year ended October 31
operating performance 2003 2002 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $6.55 $6.65 $6.25 $6.41 $6.83
- ---------------------------------------------------------------------------------------------------------------
Investment operations:
- ---------------------------------------------------------------------------------------------------------------
Net investment income (a) .19 .27 .33 .38 .35
- ---------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .11 (.07) .44 (.17) (.39)
- ---------------------------------------------------------------------------------------------------------------
Total from
investment operations .30 .20 .77 .21 (.04)
- ---------------------------------------------------------------------------------------------------------------
Less distributions:
- ---------------------------------------------------------------------------------------------------------------
From net
investment income (.20) (.30) (.37) (.37) (.37)
- ---------------------------------------------------------------------------------------------------------------
From return of capital -- -- -- (d) -- (.01)
- ---------------------------------------------------------------------------------------------------------------
Total distributions (.20) (.30) (.37) (.37) (.38)
- ---------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $6.65 $6.55 $6.65 $6.25 $6.41
- ---------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(b) 4.68 3.19 12.63 3.46 (.69)
- ---------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ---------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $520,692 $555,668 $474,783 $373,336 $458,766
- ---------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(c) 1.68 1.67 1.70 1.70 1.71
- ---------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.90 4.07 5.19 6.11 5.20
- ---------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 251.00 (e) 268.10 (e) 233.83 (e) 207.35 209.02
- ---------------------------------------------------------------------------------------------------------------
(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
- ---------------------------------------------------------------------------------------------------------------
For the
period
July 26,
1999+ to
Per-share Year ended October 31 October 31
operating performance 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) .20 .26 .32 .39 .10
- ---------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .11 (.06) .45 (.17) (.11)
- ---------------------------------------------------------------------------------------------------------------
Total from
investment operations .31 .20 .77 .22 (.01)
- ---------------------------------------------------------------------------------------------------------------
Less distributions:
- ---------------------------------------------------------------------------------------------------------------
From net
investment income (.21) (.30) (.37) (.38) (.10)
- ---------------------------------------------------------------------------------------------------------------
From return of capital -- -- -- (d) -- -- (d)
- ---------------------------------------------------------------------------------------------------------------
Total distributions (.21) (.30) (.37) (.38) (.10)
- ---------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $6.67 $6.57 $6.67 $6.27 $6.43
- ---------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(b) 4.70 3.18 12.61 3.53 (.13)*
- ---------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ---------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $42,946 $39,017 $34,545 $10,363 $1,869
- ---------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(c) 1.68 1.67 1.70 1.70 .46*
- ---------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.88 4.04 5.03 6.17 1.36*
- ---------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 251.00 (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
- ---------------------------------------------------------------------------------------------------------------
Per-share Year ended October 31
operating performance 2003 2002 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $6.54 $6.64 $6.25 $6.41 $6.84
- ---------------------------------------------------------------------------------------------------------------
Investment operations:
- ---------------------------------------------------------------------------------------------------------------
Net investment income (a) .23 .30 .37 .42 .38
- ---------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .10 (.06) .42 (.17) (.40)
- ---------------------------------------------------------------------------------------------------------------
Total from
investment operations .33 .24 .79 .25 (.02)
- ---------------------------------------------------------------------------------------------------------------
Less distributions:
- ---------------------------------------------------------------------------------------------------------------
From net
investment income (.24) (.34) (.40) (.41) (.40)
- ---------------------------------------------------------------------------------------------------------------
From return of capital -- -- -- (d) -- (.01)
- ---------------------------------------------------------------------------------------------------------------
Total distributions (.24) (.34) (.40) (.41) (.41)
- ---------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $6.63 $6.54 $6.64 $6.25 $6.41
- ---------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(b) 5.12 3.77 13.10 4.05 (.26)
- ---------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ---------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $884,380 $1,465,393 $1,024,351 $1,066,539 $1,623,061
- ---------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(c) 1.18 1.17 1.20 1.20 1.21
- ---------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 3.48 4.56 5.74 6.61 5.68
- ---------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 251.00 (e) 268.10 (e) 233.83 (e) 207.35 209.02
- ---------------------------------------------------------------------------------------------------------------
(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+ to
Per-share October 31
operating performance 2003
- --------------------------------------------------------------------------
Net asset value,
beginning of period $6.65
- --------------------------------------------------------------------------
Investment operations:
- --------------------------------------------------------------------------
Net investment income (a) .18
- --------------------------------------------------------------------------
Net realized and unrealized
gain on investments .03
- --------------------------------------------------------------------------
Total from
investment operations .21
- --------------------------------------------------------------------------
Less distributions:
- --------------------------------------------------------------------------
From net
investment income (.17)
- --------------------------------------------------------------------------
Total distributions (.17)
- --------------------------------------------------------------------------
Net asset value,
end of period $6.69
- --------------------------------------------------------------------------
Total return at
net asset value (%)(b) 3.14*
- --------------------------------------------------------------------------
Ratios and supplemental data
- --------------------------------------------------------------------------
Net assets, end of period
(in thousands) $1
- --------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(c) .92*
- --------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.65*
- --------------------------------------------------------------------------
Portfolio turnover (%) 251.00 (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
- ---------------------------------------------------------------------------------------------------------------
Per-share Year ended October 31
operating performance 2003 2002 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $6.63 $6.72 $6.31 $6.46 $6.88
- ---------------------------------------------------------------------------------------------------------------
Investment operations:
- ---------------------------------------------------------------------------------------------------------------
Net investment income (a) .26 .33 .39 .45 .41
- ---------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .10 (.06) .45 (.17) (.39)
- ---------------------------------------------------------------------------------------------------------------
Total from
investment operations .36 .27 .84 .28 .02
- ---------------------------------------------------------------------------------------------------------------
Less distributions:
- ---------------------------------------------------------------------------------------------------------------
From net
investment income (.27) (.36) (.43) (.43) (.43)
- ---------------------------------------------------------------------------------------------------------------
From return of capital -- -- -- (d) -- (.01)
- ---------------------------------------------------------------------------------------------------------------
Total distributions (.27) (.36) (.43) (.43) (.44)
- ---------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $6.72 $6.63 $6.72 $6.31 $6.46
- ---------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(b) 5.50 4.26 13.73 4.58 .27
- ---------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ---------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $712,232 $530,302 $234,826 $194,267 $255,873
- ---------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(c) .68 .67 .70 .70 .71
- ---------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 3.82 5.03 6.23 7.11 6.19
- ---------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 251.00 (e) 268.10 (e) 233.83 (e) 207.35 209.02
- ---------------------------------------------------------------------------------------------------------------
(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
October 31, 2003
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), bank trust
departments, trust companies and certain college savings plans.
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 Market quotations are not considered to be readily
available for certain debt obligations; such investments are valued at
fair 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. Investments for which market
quotations are readily available are valued at the last reported sales
price on their 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. For foreign investments, if trading or events occurring in other
markets after the close of the principal exchange in which the securities
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 and written option 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 up-front
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 up-front 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 up-front 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 During the period, the fund was entered into a committed
line of credit with certain banks. The line of credit agreement included
restrictions that the fund maintain an asset coverage ratio of at least
300% and borrowings must not exceed prospectus limitations. For the period
ended August 6, 2003, the fund had no borrowings against the line of
credit. Effective August 6, 2003, the fund no longer participated in a
committed 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, 2003, the fund had a capital loss carryover of
$171,955,005 available to the extent allowed by tax law to offset future
net capital gain, if any. The amount of the carryover and the expiration
dates are:
Loss Carryover Expiration
- ---------------------------------------
$38,149,657 October 31, 2007
124,225,024 October 31, 2008
9,580,324 October 31, 2009
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. These differences include temporary and permanent
differences of losses on wash sale transactions, foreign currency gains
and losses, defaulted bond interest, both realized and unrealized gains
and losses on certain futures contracts, market discount and income on
swap contracts. Reclassifications are made to the fund's capital
accounts to reflect income and gains available for distribution (or
available capital loss carryovers) under income tax regulations. For the
year ended October 31, 2003, the fund reclassified $6,781,133 to
decrease distributions in excess of net investment income and $6,123,275
to decrease paid-in-capital, with an increase to accumulated net
realized losses of $657,858.
The tax basis components of distributable earnings and the federal tax
cost as of period end were as follows:
Unrealized appreciation $72,772,020
Unrealized depreciation (51,275,076)
------------
Net unrealized appreciation 21,496,944
Capital loss carryforward (171,955,005)
Cost for federal income
tax purposes $4,907,891,704
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
of average net assets, 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 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 year ended October 31, 2003, the
fund's expenses were reduced by $220,743 under these arrangements.
Each independent Trustee of the fund receives an annual Trustee fee, of
which $3,517 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 Trustee compensation and expenses in the
Statement of operations. Accrued pension liability is included in
Payable for Trustee compensation and expenses 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 year ended October 31, 2003, Putnam Retail Management, acting as
underwriter, received net commissions of $359,193 and $481,193 from the
sale of class A and class M shares, respectively, and received
$1,217,435 and $15,128 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 year ended October
31, 2003, Putnam Retail Management, acting as underwriter, received
$7,070 and no monies on class A and class M redemptions, respectively.
Note 3
Purchases and sales of securities
During the year ended October 31, 2003, cost of purchases and proceeds
from sales of investment securities other than U.S. government
obligations and short-term investments aggregated $6,410,231,745 and
$6,790,487,616, respectively. Purchases and sales of U.S. government
obligations aggregated $1,396,552,929 and $2,088,282,453, respectively.
Note 4
Capital shares
At October 31, 2003, there was an unlimited number of shares of
beneficial interest authorized. Transactions in capital shares were as
follows:
Year ended October 31, 2003
- ----------------------------------------------------------------
Class A Shares Amount
- ----------------------------------------------------------------
Shares sold 64,320,405 $430,702,454
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 6,680,278 44,601,520
- ----------------------------------------------------------------
71,000,683 475,303,974
Shares repurchased (82,729,679) (553,385,989)
- ----------------------------------------------------------------
Net decrease (11,728,996) $(78,082,015)
- ----------------------------------------------------------------
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
- ----------------------------------------------------------------
Year ended October 31, 2003
- ----------------------------------------------------------------
Class B Shares Amount
- ----------------------------------------------------------------
Shares sold 33,665,735 $223,472,856
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 2,225,072 14,761,328
- ----------------------------------------------------------------
35,890,807 238,234,184
Shares repurchased (42,340,422) (281,470,527)
- ----------------------------------------------------------------
Net decrease (6,449,615) $(43,236,343)
- ----------------------------------------------------------------
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
- ----------------------------------------------------------------
Year ended October 31, 2003
- ----------------------------------------------------------------
Class C Shares Amount
- ----------------------------------------------------------------
Shares sold 5,047,846 $33,637,238
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 165,444 1,100,822
- ----------------------------------------------------------------
5,213,290 34,738,060
Shares repurchased (4,705,577) (31,352,525)
- ----------------------------------------------------------------
Net increase 507,713 $3,385,535
- ----------------------------------------------------------------
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
- ----------------------------------------------------------------
Year ended October 31, 2003
- ----------------------------------------------------------------
Class M Shares Amount
- ----------------------------------------------------------------
Shares sold 31,342,625 $207,455,675
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 204,214 1,351,032
- ----------------------------------------------------------------
31,546,839 208,806,707
Shares repurchased (122,204,015) (812,521,239)
- ----------------------------------------------------------------
Net decrease (90,657,176) $(603,714,532)
- ----------------------------------------------------------------
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
- ----------------------------------------------------------------
For the period January 21, 2003
(commencement of operations)
to October 31, 2003
- ----------------------------------------------------------------
Class R Shares Amount
- ----------------------------------------------------------------
Shares sold 151 $1,000
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 3 25
- ----------------------------------------------------------------
154 1,025
Shares repurchased -- --
- ----------------------------------------------------------------
Net increase 154 $1,025
- ----------------------------------------------------------------
Year ended October 31, 2003
- ----------------------------------------------------------------
Class Y Shares Amount
- ----------------------------------------------------------------
Shares sold 59,108,522 $398,637,818
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 3,400,711 22,813,013
- ----------------------------------------------------------------
62,509,233 421,450,831
Shares repurchased (36,627,948) (246,889,551)
- ----------------------------------------------------------------
Net increase 25,881,285 $174,561,280
- ----------------------------------------------------------------
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 October 31, 2003, Putnam, LLC owned 154 class R shares of the fund
(100% of class R shares outstanding), valued at $1,031.
Note 5
Regulatory matters and litigation
On November 13, 2003, Putnam Management agreed to entry of an order
by the Securities and Exchange Commission (SEC) in partial
resolution of administrative and cease-and-desist proceedings
initiated by the SEC on October 28, 2003 in connection with alleged
excessive short-term trading by at least six Putnam Management
investment professionals. The SEC's findings reflect that four of
those employees engaged in such trading in funds over which they had
investment decision-making responsibility and had access to
non-public information regarding, among other things, current
portfolio holdings, and valuations. The six individuals no longer
have investment responsibilities with Putnam Management. Under the
order, Putnam Management will make restitution for losses
attributable to excessive short-term trading by Putnam employees,
institute new employee trading restrictions and enhanced employee
trading compliance, retain an independent compliance consultant, and
take other remedial actions. Putnam Management neither admitted nor
denied the order's findings, which included findings that Putnam
Management willfully violated provisions of the federal securities
laws. A civil monetary penalty and other monetary relief, if any,
will be determined at a later date. If a hearing is necessary to
determine the amounts of such penalty or other relief, Putnam
Management will be precluded from arguing that it did not violate
the federal securities laws in the manner described in the SEC
order, the findings set forth in the SEC order will be accepted as
true by the hearing officer and additional evidence may be
presented. Putnam Management, and not the investors in any Putnam
fund, will bear all costs, including restitution, civil penalties
and associated legal fees. Administrative proceedings instituted by
the Commonwealth of Massachusetts on October 28, 2003 against Putnam
Management in connection with alleged market timing activities by
Putnam employees and by participants in some Putnam-administered
401(k) plans are pending. Putnam Management has committed to make
complete restitution for any losses suffered by Putnam shareholders
as a result of any improper market-timing activities by Putnam
employees or within Putnam-administered 401(k) plans.
The SEC's and Commonwealth's allegations and related matters also
serve as the general basis for numerous lawsuits, including
purported class action lawsuits filed against Putnam Management and
certain related parties, including certain Putnam funds. Putnam
Management has agreed to bear any costs incurred by Putnam funds in
connection with these lawsuits. Based on currently available
information, Putnam Management believes that the likelihood that the
pending private lawsuits and purported class action lawsuits will
have a material adverse financial impact on the fund is remote, and
the pending actions are not likely to materially affect its ability
to provide investment management services to its clients, including
the Putnam funds.
Review of these matters by counsel for Putnam Management and by
separate independent counsel for the Putnam funds and their
independent Trustees is continuing. In addition, Marsh & McLennan
Companies, Inc., Putnam Management's parent company, has engaged
counsel to conduct a separate review of Putnam Management's policies
and controls related to short-term trading. The fund may experience
increased redemptions as a result of these matters, which could
result in increased transaction costs and operating expenses.
Federal tax information
(Unaudited)
The Form 1099 you receive in January 2004 will show the tax status of
all distributions paid to your account in calendar 2003.
About the Trustees
Jameson A. Baxter (9/6/43), Trustee since 1994
Ms. Baxter is the President of Baxter Associates, Inc., a private
investment firm that she founded in 1986.
Ms. Baxter serves as a Director of ASHTA Chemicals, Inc., Banta
Corporation (a printing and digital imaging firm), Ryerson Tull, Inc. (a
steel service corporation), Advocate Health Care, and BoardSource,
formerly the National Center for Nonprofit Boards. She is Chairman
Emeritus of the Board of Trustees, Mount Holyoke College, having served
as Chairman for five years and as a board member for thirteen years.
Until 2002, Ms. Baxter was a Director of Intermatic Corporation (a
manufacturer of energy control products).
Ms. Baxter has held various positions in investment banking and
corporate finance, including Vice President and Principal of the Regency
Group, and Vice President of and Consultant to First Boston Corporation.
She is a graduate of Mount Holyoke College.
Charles B. Curtis (4/27/40), Trustee since 2001
Mr. Curtis is President and Chief Operating Officer of the Nuclear
Threat Initiative (a private foundation dealing with national security
issues) and serves as Senior Advisor to the United Nations Foundation.
Mr. Curtis is a member of the Council on Foreign Relations and the
Trustee Advisory Council of the Applied Physics Laboratory, Johns
Hopkins University. Until 2003, Mr. Curtis was a member of the Electric
Power Research Institute Advisory Council and the University of Chicago
Board of Governors for Argonne National Laboratory. Prior to 2002, Mr.
Curtis was a Member of the Board of Directors of the Gas Technology
Institute and the Board of Directors of the Environment and Natural
Resources Program Steering Committee, John F. Kennedy School of
Government, Harvard University. Until 2001, Mr. Curtis was a member of
the Department of Defense Policy Board and Director of EG&G Technical
Services, Inc. (a fossil energy research and development support
company).
Prior to May 1997, Mr. Curtis was Deputy Secretary of Energy. He served
as Chairman of the Federal Energy Regulatory Commission from 1977 to
1981 and has held positions on the staff of the U.S. House of
Representatives, the U.S. Treasury Department, and the Securities and
Exchange Commission.
John A. Hill (1/31/42), Trustee since 1985 and Chairman since 2000
Mr. Hill is Vice Chairman and Managing Director of First Reserve
Corporation, a private equity buyout firm that specializes in energy
investments in the diversified worldwide energy industry.
Mr. Hill is a Director of Devon Energy Corporation, TransMontaigne Oil
Company, Continuum Health Partners of New York, and various private
companies controlled by First Reserve Corporation, as well as a Trustee
of TH Lee Putnam Investment Trust (a closed-end investment company). He
is also a Trustee of Sarah Lawrence College.
Prior to acquiring First Reserve Corporation in 1983, Mr. Hill held
executive positions in investment banking and investment management with
several firms and with the federal government, including Deputy
Associate Director of the Office of Management and Budget, and Deputy
Director of the Federal Energy Administration. He is active in various
business associations, including the Economic Club of New York, and
lectures on energy issues in the United States and Europe. Mr. Hill
holds a B.A. degree in Economics from Southern Methodist University and
pursued graduate studies there as a Woodrow Wilson Fellow.
Ronald J. Jackson (12/17/43), Trustee since 1996
Mr. Jackson is a private investor.
Mr. Jackson is President of the Kathleen and Ronald J. Jackson
Foundation (a charitable trust). He is also a member of the Board of
Overseers of WGBH (a public television and radio station) as well as a
member of the Board of Overseers of the Peabody Essex Museum.
Mr. Jackson is the former Chairman, President, and Chief Executive
Officer of Fisher-Price, Inc. (a major toy manufacturer), from which he
retired in 1993. He previously served as President and Chief Executive
Officer of Stride-Rite, Inc. (a manufacturer and distributor of
footwear) and of Kenner Parker Toys, Inc. (a major toy and game
manufacturer). Mr. Jackson was President of Talbots, Inc. (a distributor
of women's apparel) and has held financial and marketing positions with
General Mills, Inc. and Parker Brothers (a toy and game company). Mr.
Jackson is a graduate of the University of Michigan Business School.
Paul L. Joskow (6/30/47), Trustee since 1997
Dr. Joskow is the Elizabeth and James Killian Professor of Economics and
Management, and Director of the Center for Energy and Environmental
Policy Research at the Massachusetts Institute of Technology.
Dr. Joskow serves as a Director of National Grid Transco (a UK-based
holding company with interests in electric and gas transmission and
distribution, and telecommunications infrastructure). He also serves on
the board of the Whitehead Institute for Biomedical Research (a
non-profit research institution) and has been President of the Yale
University Council since 1993. Prior to February 2002, he was a Director
of State Farm Indemnity Company (an automobile insurance company) and
prior to March 2000 he was a Director of New England Electric System (a
public utility holding company).
Dr. Joskow has published five books and numerous articles on topics in
industrial organization, government regulation of industry, and
competition policy. He is active in industry restructuring,
environmental, energy, competition, and privatization policies --
serving as an advisor to governments and corporations worldwide. Dr.
Joskow holds a Ph.D. and M. Phil from Yale University and B.A. from
Cornell University.
Elizabeth T. Kennan (2/25/38), Trustee since 1992
Dr. Kennan is a partner in and Chairman of Cambus-Kenneth Bloodstock,
LLC (cattle and thoroughbred horses). She is President Emeritus of Mount
Holyoke College.
Dr. Kennan serves as a Trustee of Northeast Utilities and is a Director
of Talbots, Inc. She has served as Director on a number of other boards,
including Bell Atlantic, Chastain Real Estate, Shawmut Bank, Berkshire
Life Insurance, and Kentucky Home Life Insurance. She is a Trustee of
Centre College and of Midway College in Midway, Kentucky. She is also a
member of The Trustees of Reservations. Dr. Kennan has served on the
oversight committee of the Folger Shakespeare Library, as President of
Five Colleges Incorporated, as a Trustee of Notre Dame University, and
is active in various educational and civic associations.
As a member of the faculty of Catholic University for twelve years,
until 1978, Dr. Kennan directed the post-doctoral program in Patristic
and Medieval Studies, taught history, and published numerous articles.
Dr. Kennan holds a Ph.D. from the University of Washington in Seattle,
an M.S. from St. Hilda's College at Oxford University, and an A.B. from
Mount Holyoke College. She holds several honorary doctorates.
John H. Mullin, III (6/15/41), Trustee since 1997
Mr. Mullin is the Chairman and CEO of Ridgeway Farm (a limited liability
company engaged in timber and farming).
Mr. Mullin serves as a Director of Alex. Brown Realty, Inc., The Liberty
Corporation (a broadcasting company), Progress Energy, Inc. (a utility
company, formerly known as Carolina Power & Light), and Sonoco Products,
Inc. (a packaging company). Mr. Mullin is Trustee Emeritus of Washington
& Lee University, where he served as Chairman of the Investment
Committee. Prior to May 2001, he was a Director of Graphic Packaging
International Corp.
Mr. Mullin also served as a Director of Dillon, Read & Co., Inc. until
October 1997 and The Ryland Group, Inc. until January 1998. Mr. Mullin
is a graduate of Washington & Lee University and The Wharton Graduate
School, University of Pennsylvania.
Robert E. Patterson (3/15/45), Trustee since 1984
Mr. Patterson is Senior Partner of Cabot Properties, L.P. and Chairman
of Cabot Properties, Inc.
Mr. Patterson serves as Chairman of the Joslin Diabetes Center, as a
Trustee of Sea Education Association, and as a Director of Brandywine
Trust Company. Prior to December 2001, he was President and Trustee of
Cabot Industrial Trust (a publicly traded real estate investment trust).
Prior to February 1998, Mr. Patterson was Executive Vice President and
Director of Acquisitions of Cabot Partners Limited Partnership (a
registered investment advisor involved in institutional real estate
investments). Prior to 1990, he served as Executive Vice President of
Cabot, Cabot & Forbes Realty Advisors, Inc. (the predecessor company of
Cabot Partners) and as a Senior Vice President of the Beal Companies (a
real estate management, investment, and development firm).
Mr. Patterson practiced law and held various positions in state
government, and was the founding Executive Director of the Massachusetts
Industrial Finance Agency. Mr. Patterson is a graduate of Harvard
College and Harvard Law School.
W. Thomas Stephens (9/2/42), Trustee since 1997
Mr. Stephens serves on a number of corporate boards.
Mr. Stephens serves as a Director of Xcel Energy Incorporated (a public
utility company), TransCanada Pipelines Limited, Norske Canada, Inc. (a
paper manufacturer), and Qwest Communications. Until 2003, Mr. Stephens
was a Director of Mail-Well, Inc. (a diversified printing company). He
served as Chairman of Mail-Well until 2001 and as CEO of
MacMillan-Bloedel, Ltd. (a forest products company) until 1999.
Prior to 1996, Mr. Stephens was Chairman and Chief Executive Officer of
Johns Manville Corporation. He holds B.S. and M.S. degrees from the
University of Arkansas.
W. Nicholas Thorndike (3/28/33), Trustee since 1992
Mr. Thorndike serves on the boards of various corporations and
charitable organizations.
Mr. Thorndike is a Director of Courier Corporation (a book publisher and
manufacturer) and The Providence Journal Co. (a newspaper publisher). He
is also a Trustee of Northeastern University and an honorary Trustee of
Massachusetts General Hospital, where he previously served as Chairman
and President. Prior to September 2000, he was a Director of Bradley
Real Estate, Inc.; prior to April 2000, he was a Trustee of Eastern
Utilities Associates; and prior to December 2001, he was a Trustee of
Cabot Industrial Trust.
Mr. Thorndike has also served as Chairman of the Board and Managing
Partner of Wellington Management Company/Thorndike, Doran, Paine & Lewis
(a registered investment advisor that manages mutual funds and
institutional assets), as a Trustee of the Wellington Group of Funds
(currently The Vanguard Group), and as Chairman and a Director of Ivest
Fund, Inc. Mr. Thorndike is a graduate of Harvard College.
George Putnam, III* (8/10/51), Trustee since 1984 and President
since 2000
Mr. Putnam is President of New Generation Research, Inc. (a publisher of
financial advisory and other research services), and of New Generation
Advisers, Inc. (a registered investment advisor to private funds). Mr.
Putnam founded the New Generation companies in 1986.
Mr. Putnam is a Director of The Boston Family Office, LLC (a registered
investment advisor). He is a Trustee of St. Mark's School, Shore Country
Day School, and until 2002 was a Trustee of the Sea Education
Association.
Mr. Putnam previously worked as an attorney with the law firm of Dechert
Price & Rhoads in Philadelphia. He is a graduate of Harvard College,
Harvard Business School, and Harvard Law School.
A.J.C. Smith* (4/13/34), Trustee since 1986
Mr. Smith is Chairman of Putnam Investments and a Director of Marsh &
McLennan Companies, Inc.
Mr. Smith is also a Director of Trident Corp. (a limited partnership
with over thirty institutional investors). He is also a Trustee of the
Carnegie Hall Society, the Educational Broadcasting Corporation, and the
National Museums of Scotland. He is Chairman of the Central Park
Conservancy and a Member of the Board of Overseers of the Joan and
Sanford I. Weill Graduate School of Medical Sciences of Cornell
University. Prior to May 2000 and November 1999, Mr. Smith was Chairman
and CEO, respectively, of Marsh & McLennan Companies, Inc.
The address of each Trustee is One Post Office Square, Boston, MA 02109.
As of October 31, 2003, there were 102 Putnam Funds.
Each Trustee serves for an indefinite term, until his or her
resignation, retirement at age 72, death, or removal.
* Trustees who are or may be deemed to be "interested persons" (as
defined in the Investment Company Act of 1940) of the fund, Putnam
Management, Putnam Retail Management, or Marsh & McLennan Companies,
Inc., the parent company of Putnam, LLC and its affiliated companies.
Messrs. Putnam, III, and Smith are deemed "interested persons" by virtue
of their positions as officers or shareholders of the fund or Putnam
Management, Putnam Retail Management, or Marsh & McLennan Companies,
Inc. George Putnam, III is the President of your fund and each of the
other Putnam funds. Mr. Smith serves as a Director of Marsh & McLennan
Companies, Inc.
Officers
In addition to George Putnam, III, the other officers of the
fund are shown below:
Charles E. Porter (7/26/38)
Executive Vice President, Treasurer and
Principal Financial Officer
Since 1989
Managing Director, Putnam Investments
and Putnam Management
Patricia C. Flaherty (12/1/46)
Senior Vice President
Since 1993
Senior Vice President, Putnam Investments and
Putnam Management
Karnig H. Durgarian (1/13/56)
Vice President and Principal Executive Officer
Since 2002
Senior Managing Director, Putnam Investments
Steven D. Krichmar (6/27/58)
Vice President and Principal Financial Officer
Since 2002
Managing Director, Putnam Investments. Prior to
July 2001, Partner, PricewaterhouseCoopers LLP
Michael T. Healy (1/24/58)
Assistant Treasurer and Principal
Accounting Officer
Since 2000
Managing Director, Putnam Investments
Beth S. Mazor (4/6/58)
Vice President
Since 2002
Senior Vice President, Putnam Investments
Gordon H. Silver (7/3/47)
Vice President
Since 1990
Senior Managing Director, Putnam Investments,
Putnam Management and Putnam Retail
Management
Mark C. Trenchard (6/5/62)
Vice President and BSA Compliance Officer
Since 2002
Senior Vice President, Putnam Investments
William H. Woolverton (1/17/51)
Vice President and Chief Legal Officer
Since 2003
Managing Director, Putnam Investments,
Putnam Management and Putnam Retail
Management
Judith Cohen (6/7/45)
Clerk and Assistant Treasurer
Since 1993
Clerk and Assistant Treasurer, The Putnam Funds
The address of each Officer is One Post Office Square,
Boston, MA 02109.
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
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.
Fund information
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 LLP
Independent Auditors
KPMG LLP
Trustees
John A. Hill, Chairman
Jameson Adkins Baxter
Charles B. Curtis
Ronald J. Jackson
Paul L. Joskow
Elizabeth T. Kennan
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
Beth S. Mazor
Vice President
Gordon H. Silver
Vice President
Mark C. Trenchard
Vice President and
BSA Compliance Officer
William H. Woolverton
Vice President and
Chief Legal Officer
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.
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
- ----------------------
PRSRT STD
U.S. POSTAGE PAID
PUTNAM
INVESTMENTS
- ----------------------
Call 1-800-225-1581 or visit our Web site www.putnaminvestments.com.
AN035-203414 004/312/510/514 12/03
Not FDIC Insured May Lose Value No Bank Guarantee
PUTNAM INVESTMENTS [SCALE LOGO OMITTED]
- ----------------------------------------------------------------------------
Putnam Income Fund
Supplement to Annual Report dated 10/31/03
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 10/31/03
NAV
1 year 5.50%
5 years 31.17
Annual average 5.58
10 years 75.31
Annual average 5.77
Life of fund (since class A inception, 11/1/54)
Annual average 8.27
Share value: NAV
10/31/02 $6.63
10/31/03 $6.72
- ----------------------------------------------------------------------------
Distributions: No. Income Capital gains Total
12 $0.269 -- $0.269
- ----------------------------------------------------------------------------
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:
- -----------------------
All officers of the Fund, including its principal executive, financial and
accounting officers, are employees of Putnam Investment Management, LLC,
the Fund's investment manager. As such they are subject to a comprehensive
Code of Ethics adopted and administered by Putnam Investments which is
designed to protect the interests of the firm and its clients. The Fund
has adopted a Code of Ethics which incorporates the Code of Ethics of
Putnam Investments with respect to all of its officers and Trustees who are
employees of Putnam Investment Management, LLC. For this reason, the Fund
has not adopted a separate code of ethics governing its principal
executive, financial and accounting officers.
Item 3. Audit Committee Financial Expert:
- -----------------------------------------
The Funds' Audit and Pricing Committee is comprised solely of Trustees
who are "independent" (as such term has been defined by the Securities
and Exchange Commission ("SEC") in regulations implementing Section 407
of the Sarbanes-Oxley Act (the "Regulations")). The Trustees believe
that each of the members of the Audit and Pricing Committee also possess
a combination of knowledge and experience with respect to financial
accounting matters, as well as other attributes, that qualify them for
service on the Committee. In addition, the Trustees have determined
that all members of the Funds' Audit and Pricing Committee meet the
financial literacy requirements of the New York Stock Exchange's rules
and that Mr. Patterson and Mr. Stephens qualify as "audit committee
financial experts" (as such term has been defined by the Regulations)
based on their review of their pertinent experience and education.
Certain other Trustees, although not on the Audit and Pricing Committee,
would also qualify as "audit committee financial experts." The SEC has
stated that the designation or identification of a person as an audit
committee financial expert pursuant to this Item 3 of Form N-CSR does
not impose on such person any duties, obligations or liability that are
greater than the duties, obligations and liability imposed on such
person as a member of the Audit and Pricing Committee and the Board of
Trustees in the absence of such designation or identification.
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:
- --------------------------------
(a) 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.
(b) Changes in internal control over financial reporting:
Not applicable
Item 10. Exhibits:
- ------------------
(a) The Code of Ethics of The Putnam Funds, which incorporates the
Code of Ethics of Putnam Investments, is filed herewith.
(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
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Michael T. Healy
Principal Accounting Officer
Date: December 23, 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
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Karnig H. Durgarian
Principal Executive Officer
Date: December 23, 2003
By (Signature and Title): /s/Charles E. Porter
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Charles E. Porter
Principal Financial Officer
Date: December 23, 2003
By (Signature and Title): /s/Steven D. Krichmar
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Steven D. Krichmar
Principal Financial Officer
Date: December 23, 2003