-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, M/OJMtnsmHAg6lK5o+Szc8pZe1+jmq+NkOVev6dZL0aNpxrTv0Nwu7FOs59ng+le 4YLwjshDDhsjmtSZssj21g== 0000928816-98-000262.txt : 19980925 0000928816-98-000262.hdr.sgml : 19980925 ACCESSION NUMBER: 0000928816-98-000262 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19980731 FILED AS OF DATE: 19980924 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: GEORGE PUTNAM FUND OF BOSTON CENTRAL INDEX KEY: 0000081259 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 046407893 STATE OF INCORPORATION: MA FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: N-30D SEC ACT: SEC FILE NUMBER: 811-00058 FILM NUMBER: 98713970 BUSINESS ADDRESS: STREET 1: ONE POST OFFICE SQ STREET 2: MAILSTOP A 14 CITY: BOSTON STATE: MA ZIP: 02109 BUSINESS PHONE: 8002252581 FORMER COMPANY: FORMER CONFORMED NAME: PUTNAM EQUITY INCOME FUND/NEW DATE OF NAME CHANGE: 19940302 FORMER COMPANY: FORMER CONFORMED NAME: PUTNAM GEORGE FUND OF BOSTON DATE OF NAME CHANGE: 19920703 N-30D 1 THE GEORGE PUTNAM FUND OF BOSTON The George Putnam Fund of Boston ANNUAL REPORT July 31, 1998 [LOGO: BOSTON * LONDON * TOKYO] Fund highlights * "Reflecting its ability to achieve solid returns over long time periods, The George Putnam Fund of Boston class A shares ranked 27 out of 134 balanced funds tracked by Lipper Analytical Services for 5-year returns as of July 31, 1998, placing the fund in the top 20% of this category.* * "This venerable offering has shown new life under [co-manager Edward] Bousa's watch. It is now a more than respectable choice for moderate investors." -- Morningstar Mutual Funds, May 27, 1998 CONTENTS 4 Report from Putnam Management 9 Fund performance summary 14 Portfolio holdings 44 Financial statements * Past performance is not indicative of future results. Lipper rankings are based on total return performance, vary over time, and do not reflect the effects of sales charges. For periods ended 7/31/98, the fund's class A shares placed 197 out of 379 funds for 1-year and 15 out of 51 funds for 10-year performance. Performance of other share classes will vary. From the Chairman [GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM] [copyright] Karsh, Ottawa Dear Shareholder: The ability of The George Putnam Fund of Boston to invest in both stocks and bonds proved advantageous during the fiscal year ended July 31, 1998. By investing selectively in the stocks of large undervalued companies undertaking positive changes, your fund's managers were able to minimize the effects of the stock market disruptions triggered by events in Asia last year. By directing the fund's bond sector largely into Treasuries and mortgage-backed securities, they were able to capitalize on the bond market's rise as equity investors sought the safety of bonds. I am pleased to note two additions to your fund's management team, David L. Waldman and James M. Prusko. Both are members of Putnam's Core Fixed-Income group. David joined Putnam in 1997, coming from Lazard Freres Asset Management and Goldman Sachs Asset Management. He has 10 years of investment experience. Jim has been at Putnam since 1992 and has 7 years of investment experience. On the following pages, your fund's management team discusses its strategies during fiscal 1998 and prospects for the year ahead in this still unsettled environment. Respectfully yours, /S/GEORGE PUTNAM George Putnam Chairman of the Trustees September 16, 1998 Report from the Fund Managers Edward P. Bousa James M. Prusko David L. Waldman Jeffrey J. Kobylarz The George Putnam Fund of Boston demonstrated the resilience of its balanced strategy during the fiscal year that ended July 31, 1998. Over the past 12 months, the stock market experienced a fair amount of turbulence as Asia's financial crisis caused episodes of volatility and began to slow the growth of U.S. corporate earnings. Nonetheless, many of the large, established companies in your fund's portfolio continued to post gains, while the fixed-income portion benefited from strong demand for bonds. The fund's class A shares posted a gain of 9.53% at net asset value for the year (3.22% at public offering price). For complete performance information, including the returns of all share classes, please turn to the performance tables on page 9. * CHANGING ECONOMIC PERCEPTIONS AFFECT VALUE STOCKS The performance of equities in the portfolio during the past year varied significantly. Companies highly sensitive to economic growth rates faced tougher circumstances because Asia's recession caused a steep decline in demand for capital goods and commodities such as oil and paper. Stocks of companies in more consumer-oriented businesses had better fortunes. The fund owned both types of stocks because, as we have explained in previous reports, we invest in a variety of industries, seeking large, undervalued companies undertaking positive changes to improve financial performance. During the past year, the fund owned several oil, chemical, and basic materials companies that were attractively priced in comparison with the overall stock market. The oil company holdings, in particular, have been undertaking positive changes to improve their earnings. Exxon, one of the portfolio's largest holdings, has been gaining competitiveness for a number of years, but the falling price of oil since late 1997 prompted investors focused on short-term conditions to sell the stock, driving its price down and dampening the fund's performance. Although this holding, as well as others discussed in this report, was viewed favorably at the end of the fiscal period, all are subject to review and adjustment in accordance with the fund's investment strategy and may vary in the future. Fortunately we found undervalued stocks in several other sectors less exposed to Asian economies. We adjusted the portfolio by adding to positions in utilities and consumer nondurables, such as American Home Products, a pharmaceutical company, while trimming our stakes in industrial and capital goods companies. Utility stocks have also offered a degree of protection from market volatility because most of the utility business is well insulated from concerns about Asia. Meanwhile, the portfolio's overweighted position in the financials sector benefited from falling interest rates and from secular trends in the industry -- corporate restructurings and investments in information technology. During the period, many financial companies sought to leverage even more gains from their new efficiencies by merging. Several fund holdings, such as First Chicago NBD, have been parties to mergers recently. [GRAPHIC OMITTED: horizontal bar chart of COMPARATIVE PORTFOLIO COMPOSITION] COMPARATIVE PORTFOLIO COMPOSITION* 7/31/98 7/31/97 Common stocks 62.0% 64.6% U.S. government and agency securities 13.2% 13.0% Corporate bonds and notes 17.8% 12.9% Foreign government bonds and notes 1.2% 3.9% Brady bonds+ 0.6% 1.3% Collateralized mortgage obligations 2.8% 0.9% Convertible and preferred securities 0.4% 0.2% Cash and other 2.4% 0.5% Footnote reads: *Based on percentage of net assets. The balances of the portfolio on dates listed were invested in cash and short-term securities. Portfolio allocation will vary over time. +Brady bonds are U.S.-dollar denominated bonds of foreign governments whose principal is collateralized by U.S. Treasury obligations. * COMPANIES ENHANCE COMPETITIVENESS WITH NEW STRATEGIES Our face-to-face consultations with corporate officers and key decision-makers in the companies we research give us important insights on industry conditions and improve the timeliness of our buy-and-sell decisions. Recently we decided to add to existing positions in Burlington Northern Santa Fe Railroad and AT&T because both have demonstrated improving competitiveness. The railroad industry has undergone consolidation in recent years, resulting in two large entities with nationwide services. Burlington has emerged as the more efficient. Although they do not compete head-to-head in most routes, Burlington has picked up a lot of additional customers because of its rival's massive traffic jams in its Texas freight yards. Burlington also reported a significant increase in second-quarter earnings. With regard to AT&T, we are encouraged by its recent acquisitions strategy. It agreed to acquire Tele-Communications, Inc. during the period, giving AT&T access to TCI's millions of cable television subscribers and allowing it to distribute its voice, data, and entertainment products to a far wider audience. We have also made adjustments to the fund's health-care positions. Several large pharmaceutical companies, for example, have performed especially well this year, including Bristol-Myers and Merck, as consumer spending on drugs and other medical supplies has remained strong and successful new products have been introduced. We decided to take some profits in those positions. We also sold the fund's position in United Healthcare at a favorable price following the stock's resilient performance in much of 1998, when other HMOs came under pressure. The HMO industry's fundamental outlook has deteriorated lately because the federal government has begun to propose new regulatory measures that could increase business costs. [GRAPHIC OMITTED: TOP 10 HOLDINGS] TOP 10 EQUITY HOLDINGS* Citicorp Insurance and finance Exxon Corp. Oil and gas Philip Morris Cos., Inc. Consumer non durables NationsBank Corp. Insurance and finance Ameritech Corp. Utilities American Home Products Corp. Pharmaceuticals Bristol-Myers Squibb Co. Pharmaceuticals IBM Corp. Computer services and software Baxter International, Inc. Medical supplies and devices Pharmacia & Upjohn, Inc. Pharmaceuticals Footnote reads: *These holdings represent 10.9% of the fund's net assets as of 7/31/98. Portfolio holdings will vary over time. * SMOOTH SAILING FOR BONDS Bonds have been clear beneficiaries of the uncertainty in Asia and of the somewhat slower economic growth in the United States as well as of the recent federal budget surplus. Treasuries have led the way, with the yield on the 30-year bond falling to historic lows. Other bond sectors, especially mortgage-backed securities and corporate bonds, have performed well, though they lagged a bit behind Treasuries. Mortgages, for example, suffered from prepayments because many homeowners have refinanced their houses at lower interest rates. As a result, mortgage-backed security investors miss out on long-term interest payments at higher rates. We kept the bond portion of the portfolio well diversified at all times, making only small changes in the allocations to Treasuries, mortgages, and corporate and foreign government bonds. In the second half of the fund's fiscal year, we added a small number of corporate bonds, both investment-grade and high-yield issues, while trimming some of the fund's Treasury holdings. With Treasury yields quite low and relatively steady, we saw greater upside potential for corporate bonds, which are flourishing thanks to continuing economic growth in both the United States and Europe. Although economic uncertainty cast some doubts on corporates during the winter, our analysis suggested they were undervalued, and so we opted to enable the fund to benefit from their yield advantages without, we believe, adding much credit risk. Because of our concerns about volatility, we adjusted the high-yield portion of the fund by adding somewhat higher quality credits. We have added many Ba-rated electric and broadcasting issues that, in our opinions, represent some of the safest offerings in the high-yield universe. * ECONOMY SHOULD REMAIN SOLID, SUPPORT SECURITIES As the fund enters its 62nd year of operation, the stock market continues to experience volatility stemming from the effects of overseas financial conditions on U.S. companies. While your fund's current performance reflects this uncertain environment, our analysis anticipates continued profitability and steady growth in the domestic economy, although at a somewhat slower pace than that of recent years. We also expect low inflation and relatively stable interest rates, providing a favorable environment for both bonds and stocks. Also, based on the lessons of history, we anticipate that the lead of growth stocks will eventually give way to outperformance of value equities. Our fundamental research and ongoing conversations with corporate executives continue to turn up what we consider attractive long-term investments in undervalued companies undertaking positive change, and we will continue to take advantage of these opportunities as we seek to achieve an attractive blend of capital growth and income. The views expressed here are exclusively those of Putnam Management. They are not meant as investment advice. Although the described holdings were viewed favorably as of 7/31/98, there is no guarantee the fund will continue to hold these securities in the future. Performance summary This section provides information about your fund's performance, which should always be considered in light of its investment strategy. The George Putnam Fund of Boston is designed for investors seeking capital appreciation and current income. TOTAL RETURN FOR PERIODS ENDED 7/31/98 Class A Class B Class M (inception date) (11/5/37) (4/27/92) (12/1/94) NAV POP NAV CDSC NAV POP - ------------------------------------------------------------------------------ 1 year 9.53% 3.22% 8.72% 3.76% 8.98% 5.19% - ------------------------------------------------------------------------------ 5 years 101.35 89.76 94.01 92.01 96.26 89.34 Annual average 15.02 13.67 14.17 13.94 14.44 13.62 - ------------------------------------------------------------------------------ 10 years 258.41 237.89 231.12 231.12 238.94 227.16 Annual average 13.62 12.95 12.72 12.72 12.98 12.58 - ------------------------------------------------------------------------------ Annual average (life of fund) 9.99 9.88 8.92 8.92 9.20 9.14 - ------------------------------------------------------------------------------ COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 7/31/98 Standard & Lehman Bros. Lehman Bros. Poor's Govt./Corp. Aggregate Consumer 500 Index Bond Index Bond Index Price Index - ------------------------------------------------------------------------------ 1 year 19.29% 8.06% 7.87% 1.68% - ------------------------------------------------------------------------------ 5 years 180.54 38.67 38.97 13.02 Annual average 22.92 6.76 6.80 2.48 - ------------------------------------------------------------------------------ 10 years 445.10 140.45 139.95 37.72 Annual average 18.48 9.17 9.15 3.25 - ------------------------------------------------------------------------------ Past performance is no assurance of future results. Returns for class A and class M shares reflect the current maximum initial sales charges of 5.75% and 3.50% respectively. Class B share returns for the 1-, 5-, 10-year, and life-of-fund periods reflect the applicable contingent deferred sales charge (CDSC), which is 5% in the first year, declines to 1% in the sixth year, and is eliminated thereafter. Returns shown for class B and class M shares for periods prior to their inception are derived from the historical performance of class A shares, adjusted to reflect both the initial sales charge or CDSC, if any, currently applicable to each class and in the case of class B and class M shares, the higher operating expenses applicable to such shares. All returns assume reinvestment of distributions at net asset value. Investment return and principal value will fluctuate so that an investor's shares when redeemed may be worth more or less than their original cost.
[GRAPHIC OMITTED: worm chart GROWTH OF A $10,000 INVESTMENT] GROWTH OF A $10,000 INVESTMENT Cumulative total return of a $10,000 investment since 7/31/88 Lehman Brothers Lehman Brothers Fund's class A Government/Corporate S&P 500 Date Aggregate Bond Index shares at POP Bond Index Index 7/31/88 10,000 9,425 10,000 10,000 7/31/89 11,520 11,535 11,533 13,193 7/31/90 12,334 12,210 12,252 14,051 7/31/91 13,654 13,588 13,505 15,843 7/31/92 15,672 15,447 15,617 17,870 7/31/93 17,266 16,781 17,340 19,430 7/31/94 17,282 17,362 17,317 20,432 7/31/95 19,029 20,440 19,071 25,767 7/31/96 20,083 23,455 20,084 30,037 7/31/97 22,244 30,848 22,251 45,698 7/31/98 $23,995 $33,789 $24,045 $54,510 Past performance is no assurance of future results. At the end of the same time period, a $10,000 investment in the fund's class B shares would have been valued at $33,112 and no contingent deferred sales charges would apply; a $10,000 investment in the fund's class M shares would have been valued at $33,894 ($32,716 at public offering price).
PRICE AND DISTRIBUTION INFORMATION 12 months ended 7/31/98 Class A Class B Class M - ------------------------------------------------------------------------------ Distributions (number) 4 4 4 - ------------------------------------------------------------------------------ Income $0.600 $0.469 $0.514 - ------------------------------------------------------------------------------ Capital gains - ------------------------------------------------------------------------------ Long-term 0.782 0.782 0.782 - ------------------------------------------------------------------------------ Short-term 0.430 0.430 0.430 - ------------------------------------------------------------------------------ Total $1.812 $1.681 $1.726 - ------------------------------------------------------------------------------ Share value: NAV POP NAV NAV POP - ------------------------------------------------------------------------------ 7/31/97 $18.95 $20.11 $18.82 $18.82 $19.50 - ------------------------------------------------------------------------------ 7/31/98 18.82 19.97 18.67 18.67 19.35 - ------------------------------------------------------------------------------ Current return (end of period) - ------------------------------------------------------------------------------ Current dividend rate1 3.19% 3.00% 2.51% 2.72% 2.63% - ------------------------------------------------------------------------------ Current 30-day SEC yield2 3.11 2.93 2.32 2.58 2.49 - ------------------------------------------------------------------------------ 1 Income portion of most recent distribution, annualized and divided by NAV or POP at end of period. 2 Based on investment income, calculated using SEC guidelines. TOTAL RETURN FOR PERIODS ENDED 6/30/98 (most recent calendar quarter) Class A Class B Class M (inception date) (11/5/37) (4/27/92) (12/1/94) NAV POP NAV CDSC NAV POP - ------------------------------------------------------------------------------ 1 year 16.71% 10.00% 15.82% 10.82% 16.17% 12.11% - ------------------------------------------------------------------------------ 5 years 104.89 93.07 97.41 95.41 99.69 92.64 Annual average 15.43 14.06 14.57 14.34 14.83 14.01 - ------------------------------------------------------------------------------ 10 years 262.51 241.58 234.92 234.92 242.81 230.70 Annual average 13.74 13.07 12.85 12.85 13.11 12.71 - ------------------------------------------------------------------------------ Annual average (life of fund) 10.03 9.93 8.97 8.97 9.24 9.18 - ------------------------------------------------------------------------------ Performance data represent past results, do not reflect future performance, and will differ for each share class. Investment returns and principal value will fluctuate so that an investor's shares, when sold, may be worth more or less than their original cost. See first page of performance section for performance calculation method. 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. Class A shares are generally subject to an initial sales charge. Class B shares may be subject to a sales charge upon redemption. 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. Net asset value (NAV) is the value of all your fund's assets, minus any liabilities, divided by the number of outstanding shares, not including any initial or contingent deferred sales charge. 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 5.75% maximum sales charge for class A shares and 3.50% for class M shares. Contingent deferred sales charge (CDSC) is a charge applied at the time of the redemption of class B shares and assumes redemption at the end of the period. Your fund's 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. COMPARATIVE BENCHMARKS Standard & Poor's 500 Index* is an unmanaged list of common stocks that is frequently used as a general measure of stock market performance. Lehman Brothers Government/Corporate Bond Index* is an index of publicly issued U.S. Treasury obligations, debt obligations of U.S. government agencies (excluding mortgage-backed securities), fixed-rate, non-convertible, investment-grade corporate debt securities and U.S. dollar-denominated, SEC-registered non-convertible debt issued by foreign governmental entities or international agencies used as a general measure of the performance of fixed-income securities. The Lehman Brothers Aggregate Bond Index*+ is composed of securities from Lehman Brothers Government/Corporate Bond Index, Mortgage-Backed Securities Index, and the Asset-Backed Securities Index. Total return comprises price appreciation/depreciation and income as a percentage of the original investment. Indexes are rebalanced monthly by market capitalization. Consumer Price Index (CPI) is a commonly used measure of inflation; it does not represent an investment return. * Securities index returns assume reinvestment of all distributions and interest payments and do not take in account brokerage fees or taxes. Securities in the fund do not match those in the index and performance of the fund will differ. It is not possible to invest directly in an index. + Putnam Management has recently undertaken a review of benchmarks for various funds. This index replaces the Lehman Brothers Government/Corporate Bond Index as a performance benchmark for this fund because, in Putnam Management's opinion, the securities tracked by this index more accurately reflect the types of securities generally held by the fund. Report of independent accountants For the fiscal year ended July 31, 1998 To the Trustees and Shareholders of The George Putnam Fund of Boston In our opinion, the accompanying statement of assets and liabilities, including the portfolio of investments owned (except for bond ratings), and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of The George Putnam Fund of Boston (the "fund") at July 31, 1998, and the results of its operations, the changes in its net assets and the financial highlights for the periods indicated, in conformity with generally accepted accounting principles. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of investments owned at July 31, 1998 by correspondence with the custodian, provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Boston, Massachusetts September 16, 1998
Portfolio of investments owned July 31, 1998 COMMON STOCKS (62.0%) (a) NUMBER OF SHARES VALUE Aerospace and Defense (0.5%) - -------------------------------------------------------------------------------------------------------------------------- 273,800 Lockheed Martin Corp. $ 27,294,438 Agriculture (--%) - -------------------------------------------------------------------------------------------------------------------------- 22,025 PSF Holdings LLC Class A (NON) 385,878 Automotive (2.3%) - -------------------------------------------------------------------------------------------------------------------------- 566,600 Dana Corp. 28,191,314 776,800 Ford Motor Co. 44,229,050 375,000 General Motors Corp. 27,117,188 408,300 Goodyear Tire & Rubber Co. (The) 24,880,781 -------------- 124,418,333 Basic Industrial Products (1.9%) - -------------------------------------------------------------------------------------------------------------------------- 486,400 Cooper Industries, Inc. 25,505,600 612,200 Deere (John) & Co. 24,602,788 416,800 Minnesota Mining & Manufacturing Co. 31,207,900 485,700 Owens-Illinois, Inc. (NON) 21,431,513 -------------- 102,747,801 Broadcasting (0.6%) - -------------------------------------------------------------------------------------------------------------------------- 696,900 Comcast Corp. Class A 31,643,616 Business Equipment and Services (1.7%) - -------------------------------------------------------------------------------------------------------------------------- 506,800 Hewlett-Packard Co. 28,127,400 559,400 Pitney Bowes, Inc. 28,249,700 340,000 Xerox Corp. 35,891,250 -------------- 92,268,350 Chemicals (1.4%) - -------------------------------------------------------------------------------------------------------------------------- 852,000 du Pont (E.I.) de Nemours & Co., Ltd. 52,824,000 447,300 Eastman Chemical Co. 25,384,275 -------------- 78,208,275 Computer Services and Software (1.9%) - -------------------------------------------------------------------------------------------------------------------------- 600,000 Compaq Computer Corp. 19,725,000 775,000 Electronic Data Systems Corp. 27,270,313 411,000 IBM Corp. 54,457,500 -------------- 101,452,813 Conglomerates (0.4%) - -------------------------------------------------------------------------------------------------------------------------- 389,800 Temple Inland, Inc. 20,293,963 Consumer Durable Goods (0.5%) - -------------------------------------------------------------------------------------------------------------------------- 747,900 Hasbro, Inc. 27,064,631 44 Mothers Work, Inc. (NON) 330 -------------- 27,064,961 Consumer Non Durables (2.2%) - -------------------------------------------------------------------------------------------------------------------------- 310,100 Colgate-Palmolive Co. 28,664,869 1,213 Hedstrom Holdings, Inc. 144A 1,516 640,200 Kimberly-Clark Corp. 28,768,988 1,425,700 Philip Morris Cos., Inc. 62,463,481 -------------- 119,898,854 Consumer Services (--%) - -------------------------------------------------------------------------------------------------------------------------- 100 AmeriKing, Inc. (NON) 5,200 Electronics and Electrical Equipment (2.0%) - -------------------------------------------------------------------------------------------------------------------------- 423,300 Eaton Corp. 27,620,325 608,400 Emerson Electric Co. 36,161,775 715,600 Texas Instruments, Inc. 42,444,025 -------------- 106,226,125 Food and Beverages (3.6%) - -------------------------------------------------------------------------------------------------------------------------- 628,000 Anheuser-Busch Cos., Inc. 32,459,750 1,000,000 ConAgra, Inc. 25,875,000 416,000 General Mills, Inc. 25,766,000 591,700 Heinz (H.J.) Co. 32,617,463 423,600 Nabisco Holdings Corp. Class A 15,090,750 524,800 Sara Lee Corp. 26,305,600 686,100 Wendy's International, Inc. 15,308,606 1,167,100 Whitman Corp. 24,727,931 -------------- 198,151,100 Health Care (1.2%) - -------------------------------------------------------------------------------------------------------------------------- 904,600 Columbia/HCA Healthcare Corp. 25,781,100 911,900 HEALTHSOUTH Corp. (NON) 22,911,488 255,800 WeLLPoint Health Networks, Inc. (NON) 15,683,738 -------------- 64,376,326 Insurance and Finance (14.5%) - -------------------------------------------------------------------------------------------------------------------------- 774,000 Allstate Corp. 32,846,625 659,600 American General Corp. 45,058,925 386,000 BankAmerica Corp. 34,643,500 609,600 BankBoston Corp. 29,489,400 202,208 Bankers Trust New York Corp. (CUS) 22,659,934 520,000 Charter One Financial, Inc. 16,932,500 433,400 CIGNA Corp. 28,631,488 414,500 Citicorp 70,465,000 570,600 Federal National Mortgage Association 35,377,200 592,800 First Chicago NBD Corp. 49,684,050 664,000 First Union Corp. 40,006,000 400,200 Fleet Financial Group, Inc. 34,392,188 630,200 Hartford Financial Services Group 32,809,788 356,300 Household International, Inc. 17,725,925 782,800 KeyCorp 26,615,200 220,000 Mercantile Bancorpation, Inc. 11,962,500 304,600 Morgan (J.P.) & Co., Inc. 38,379,600 359,000 Morgan Stanley, Dean Witter, Discover and Co. 31,255,438 747,800 NationsBank Corp. 59,637,050 1,129,000 Norwest Corp. 40,573,438 597,900 PNC Bank Corp. 32,249,231 381,200 Reliastar Financial Corp. 18,917,050 611,250 Synovus Financial Corp. 13,523,906 642,800 Washington Mutual, Inc. 25,671,825 -------------- 789,507,761 Medical Supplies and Devices (1.0%) - -------------------------------------------------------------------------------------------------------------------------- 907,700 Baxter International, Inc. 54,235,075 Oil and Gas (6.2%) - -------------------------------------------------------------------------------------------------------------------------- 934,100 Amoco Corp. 38,998,675 557,150 British Petroleum PLC ADR (United Kingdom) 44,711,288 488,400 Elf Aquitane ADR (France) 31,684,950 525,000 Enron Corp. 27,792,188 935,400 Exxon Corp. 65,594,925 325,700 Halliburton Co. 11,826,981 449,000 Kerr-McGee Corp. 23,039,313 719,100 Mobil Corp. 50,157,225 585,100 Sonat, Inc. 17,114,175 491,500 Total Corp. ADR (France) 28,107,656 -------------- 339,027,376 Paper and Forest Products (0.8%) - -------------------------------------------------------------------------------------------------------------------------- 224,000 Chesapeake Corp. 8,736,000 869,000 Weyerhaeuser Co. 36,498,000 -------------- 45,234,000 Pharmaceuticals (4.1%) - -------------------------------------------------------------------------------------------------------------------------- 1,122,000 American Home Products Corp. 57,783,000 483,600 Bristol-Myers Squibb Co. 55,100,175 437,000 Merck & Co., Inc. 53,887,563 1,141,970 Pharmacia & Upjohn, Inc. 54,100,829 -------------- 220,871,567 Photography (0.3%) - -------------------------------------------------------------------------------------------------------------------------- 200,000 Eastman Kodak Co. 16,825,000 Publishing (0.6%) - -------------------------------------------------------------------------------------------------------------------------- 418,000 McGraw-Hill, Inc. 34,249,875 REIT's (Real Estate Investment Trust) (0.8%) - -------------------------------------------------------------------------------------------------------------------------- 107,800 Duke Realty Investments, Inc. 2,310,963 387,600 Equity Residential Properties Trust 16,279,200 571,000 Starwood Lodging Trust 23,446,688 -------------- 42,036,851 Retail (1.7%) - -------------------------------------------------------------------------------------------------------------------------- 549,500 May Department Stores Co. 35,271,031 660,500 Sears, Roebuck & Co. 33,520,375 1,107,813 Toys "R" Us (NON) 25,202,746 -------------- 93,994,152 Telecommunications (0.7%) - -------------------------------------------------------------------------------------------------------------------------- 519,100 BCE Inc. (Canada) 20,926,219 142,000 Cincinnati Bell, Inc. 4,561,750 3,175 NEXTEL Communications, Inc. Class A (NON) 85,030 196,870 U S West, Inc. 10,507,936 -------------- 36,080,935 Transportation (3.1%) - -------------------------------------------------------------------------------------------------------------------------- 414,100 Burlington Northern Santa Fe Corp. 42,626,419 264,800 Delta Air Lines, Inc. 32,438,000 581,600 FDX Corp. (NON) 35,295,850 945,100 Ryder System, Inc. 27,407,900 425,000 UAL Corp. (NON) 33,096,875 -------------- 170,865,044 Utilities (8.0%) - -------------------------------------------------------------------------------------------------------------------------- 834,400 American Telephone & Telegraph Co. 50,585,500 1,180,500 Ameritech Corp. 58,065,844 489,000 BellSouth Corp. 33,404,813 640,000 Duke Energy Corp. 36,560,000 528,300 Entergy Corp. 14,462,213 805,300 GTE Corp. 43,788,188 816,000 OGE Energy Corp. 21,267,000 600,000 P P & L Resources, Inc. 13,912,500 640,600 Potomac Electric Power Co. 15,454,475 873,402 SBC Communications, Inc. 35,700,307 990,000 Sempra Energy (NON) 24,935,625 315,700 Southern Co. 8,050,350 435,000 Sprint Corp. 30,450,000 781,000 Texas Utilities Co. 31,288,813 425,800 Western Resources, Inc. 16,606,200 -------------- 434,531,828 -------------- Total Common Stocks (cost $2,905,235,629) $3,371,895,497 CORPORATE BONDS AND NOTES (17.8%) (a) PRINCIPAL AMOUNT VALUE Advertising (0.1%) - -------------------------------------------------------------------------------------------------------------------------- $ 400,000 Adams Outdoor Advertising sr. notes 10 3/4s, 2006 $ 440,000 1,370,000 Lamar Advertising Co. sr. sub. notes 9 5/8s, 2006 1,486,450 40,000 Lamar Advertising Co. company guaranty 8 5/8s, 2007 41,700 355,000 Outdoor Communications Inc. sr. sub. notes 9 1/4s, 2007 369,200 45,000 Outdoor Systems, Inc. sr. sub. notes 9 3/8s, 2006 48,319 850,000 Outdoor Systems, Inc. company guaranty 8 7/8s, 2007 896,750 -------------- 3,282,419 Aerospace and Defense (0.3%) - -------------------------------------------------------------------------------------------------------------------------- 100,000 Argo-Tech Corp. company guaranty 8 5/8s, 2007 101,750 530,000 Aviation Sales Co. 144A sr. sub. notes 8 1/8s, 2008 527,350 570,000 BE Aerospace sr. sub. notes Ser. B, 9 7/8s, 2006 611,325 180,000 BE Aerospace sr. sub. notes Ser. B, 8s, 2008 181,800 500,000 Burke Industries, Inc. company guaranty 10s, 2007 517,500 115,000 K&F Industries, Inc. sr. sub. notes Ser. B, 9 1/4s, 2007 116,150 14,405,000 Raytheon Co notes 6.45s, 2002 14,519,664 105,000 Sequa Corp. bonds 8 3/4s, 2001 106,706 115,000 Sequa Corp. sr. notes 9 5/8s, 1999 118,163 115,000 United Defense Industries Inc. company guaranty 8 3/4s, 2007 116,725 -------------- 16,917,133 Agriculture (0.1%) - -------------------------------------------------------------------------------------------------------------------------- 300,000 AGCO Corp. sr. sub. notes 8 1/2s, 2006 306,000 4,120,000 Potash Corp. of Saskatchewan notes 7 1/8s, 2007 (Canada) 4,268,320 255,739 Premium Standard Farms, Inc. sr. secd. notes 11%, 2003 (PIK) 275,560 310,000 Purina Mills, Inc. 144A sr. sub. notes 9s, 2010 318,525 -------------- 5,168,405 Apparel (--%) - -------------------------------------------------------------------------------------------------------------------------- 320,000 Sassco Fashions Ltd. sr. notes 12 3/4s, 2004 345,600 600,000 Tultex Corp. company guaranty 9 5/8s, 2007 570,000 -------------- 915,600 Automotive (0.1%) - -------------------------------------------------------------------------------------------------------------------------- 111,000 Aftermarket Technology Corp. sr. sub. notes 12s, 2004 121,684 40,000 Cambridge Industries Inc. company guaranty Ser. B, 10 1/4s, 2007 40,400 2,630,000 Chrysler Corp. deb. Ser. B, 7.45s, 2097 2,842,767 52,000 Hawk Corp. sr. notes 10 1/4s, 2003 56,290 840,000 Hayes Wheels International, Inc. company guaranty Ser. B, 9 1/8s, 2007 886,200 800,000 Lear Corp. sub. notes 9 1/2s, 2006 884,000 1,260,000 Navistar International Corp. sr. notes Ser. B, 7s, 2003 1,266,300 550,000 Talon Automotive Group 144A sr. sub. notes 9 5/8s, 2008 547,250 500,000 Walbro Corp. sr. notes Ser. B, 9 7/8s, 2005 495,000 -------------- 7,139,891 Banks (1.4%) - -------------------------------------------------------------------------------------------------------------------------- 7,225,000 Advanta Corp. med. term notes Ser. B, 7s, 2001 6,786,804 145,000 Chevy Chase Savings Bank, Inc. sub. deb. 9 1/4s, 2005 146,813 5,330,000 Den Danske Bank 144A sub. notes 6.55s, 2003 (Denmark) 5,433,349 40,000 Dime Capital Trust bank guaranty Ser. A, 9.33s, 2027 46,346 120,000 Espirto Santo Centrais sr. notes 10s, 2007 (Canada) 105,000 595,000 First Nationwide Holdings sr. sub. notes 10 5/8s, 2003 679,788 4,015,000 Firstar Capital Trust I company guaranty Ser. B, 8.32s, 2026 4,423,526 4,480,000 Fuji JGB Inv. LLC 144A FRB 9.87s, 2049 3,922,285 4,130,000 Greenpoint Bank sr. notes 6.7s, 2002 4,182,864 8,895,000 Merita Bank Ltd. sub. notes 6 1/2s, 2006 (Finland) 8,868,315 140,000 North Fork Capital Trust I company guaranty 8.7s, 2026 156,352 5,000 Ocwen Federal Bank FSB sub. deb. 12s, 2005 5,438 9,830,000 Peoples Bank Bridgeport sub. notes 7.2s, 2006 10,043,803 1,685,000 Peoples Heritage Capital Trust company guaranty Ser. B, 9.06s, 2027 1,879,870 90,000 Riggs Capital Trust 144A bonds 8 5/8s, 2006 97,805 3,750,000 Riggs National Corp. sub. deb. 8 1/2s, 2006 3,926,288 4,855,000 Sparbanken Sverige AB (Swedbank) 144A sub. 7 1/2s, 2006 (Sweden) 5,038,034 3,915,000 St. Paul Bancorp sr. notes 7 1/8s, 2004 4,003,440 2,000,000 State Development Bank deb. 12 1/2s, 1999 (China) 2,137,500 2,195,000 State Street Institution 144A company guaranty 7.94s, 2026 2,356,091 4,450,000 Webster Capital Trust I 144A bonds 9.36s, 2027 4,847,830 5,090,000 Webster Financial Corp. sr. notes 8 3/4s, 2000 5,304,798 -------------- 74,392,339 Basic Industrial Products (--%) - -------------------------------------------------------------------------------------------------------------------------- 600,000 Axia, Inc. 144A sr. sub. notes 10 3/4s, 2008 601,500 175,000 Clark-Schwebel sr. notes 10 1/2s, 2006 201,688 120,000 Koppers Industries, Inc. 144A sr. sub. notes 9 7/8s, 2007 122,700 250,000 Newcor, Inc. company guaranty Ser. B, 9 7/8s, 2008 252,500 60,000 Owens-Illinois, Inc. sr. notes 8.1s, 2007 63,137 30,000 Roller Bearing Co. company guaranty Ser. B, 9 5/8s, 2007 30,300 -------------- 1,271,825 Broadcasting (0.3%) - -------------------------------------------------------------------------------------------------------------------------- 50,000 Affinity Group Holdings sr. sub. notes 11 1/2s, 2003 52,750 585,000 Affinity Group Holdings sr. notes 11s, 2007 625,219 800,000 American Radio Systems Corp. company guaranty 9s, 2006 860,000 400,000 Benedek Broadcasting sr. notes 11 7/8s, 2005 446,000 985,000 Benedek Communications Corp. sr. disc. notes stepped-coupon zero % (13 1/4s, 5/15/01), 2006 (STP) 795,388 1,690,000 Capstar Broadcasting sr. sub. notes 9 1/4s, 2007 1,791,400 190,000 Capstar Broadcasting sr. disc. notes stepped-coupon zero % (12 3/4s, 2/1/02), 2009 (STP) 149,150 580,000 Central European Media Enterprises Ltd. sr. notes 9 3/8s, 2004 568,400 185,000 Chancellor Media Corp. sr. sub. notes 9 3/8s, 2004 194,250 990,000 Chancellor Media Corp. sr. sub. notes Ser. B, 8 1/8s, 2007 1,004,850 80,000 Citadel Broadcasting Inc. sr. sub. notes 10 1/4s, 2007 88,600 500,000 Echostar Satellite Broadcast Corp. sr. disc. notes stepped-coupon zero % (13 1/8s, 3/15/00), 2004 (STP) 462,500 930,000 Fox Family Worldwide, Inc. sr. notes 9 1/4s, 2007 918,375 490,000 Fox Family Worldwide, Inc. sr. disc. notes stepped-coupon zero % (10 1/4s, 11/1/02), 2007 (STP) 323,400 480,000 Fox/Liberty Networks LLC sr. notes 8 7/8s, 2007 493,200 650,000 Fox/Liberty Networks LLC sr. disc. notes stepped-coupon zero % (9 3/4s, 8/15/02), 2007 (STP) 464,750 625,000 Granite Broadcasting Corp. sr. sub. notes 10 3/8s, 2005 662,500 640,000 Granite Broadcasting Corp. 144A sr. sub. notes 8 7/8s, 2008 652,800 45,000 Gray Communications Systems, Inc. sr. sub. notes 10 5/8s, 2006 49,275 115,000 Heritage Media Services Corp. sr. sub. notes 8 3/4s, 2006 122,763 100,000 Jacor Communications, Inc. company guaranty 9 3/4s, 2006 109,000 1,125,000 Jacor Communications, Inc. company guaranty Ser. B, 8 3/4s, 2007 1,181,250 50,000 Pegasus Communications Corp. sr. notes Ser. B, 9 5/8s, 2005 51,500 250,000 Pegasus Media & Communications notes Ser. B, 12 1/2s, 2005 282,500 35,000 Radio One Inc. company guaranty stepped-coupon Ser. B, 7s, (12s, 5/15/00), 2004 (STP) 35,700 200,000 Sinclair Broadcasting Group, Inc. sr. sub. notes 10s, 2005 216,500 700,000 Sinclair Broadcasting Group, Inc. company guaranty 9s, 2007 728,000 150,000 Sinclair Broadcasting Group, Inc. sr. sub. notes 8 3/4s, 2007 157,875 700,000 Spanish Broadcasting Systems sr. notes 12 1/2s, 2002 798,000 100,000 Spanish Broadcasting Systems sr. notes Ser. B, 11s, 2004 108,500 85,000 TV Azteca SA de CV sr. notes 10 1/2s, 2007 (Mexico) 85,850 -------------- 14,480,245 Building and Construction (0.1%) - -------------------------------------------------------------------------------------------------------------------------- 115,000 American Architectural Products Corp. company guaranty 11 3/4s, 2007 116,150 175,000 Atrium Companies, Inc. 144A sub. notes 10 1/2s, 2006 183,750 200,000 Beazer Homes USA company guaranty 8 7/8s, 2008 197,000 180,000 Brand Scaffold Services 144A sr. notes 10 1/4s, 2008 183,600 60,000 Building Materials Corp. sr. notes Ser. B, 8 5/8s, 2006 61,650 115,000 Congoleum Corp. sr. notes 9s, 2001 117,300 95,000 D.R. Horton Inc. company guaranty 10s, 2006 102,600 520,000 GS Superhighway Holdings sr. notes 9 7/8s, 2004 410,800 3,300,000 Guangdong Enterprises 144A sr. notes 8 7/8s, 2007 (China) 2,431,407 130,000 Jackson Products, Inc. 144A company guaranty 9 1/2s, 2005 129,675 200,000 M.D.C. Holdings, Inc. notes Ser. B, 11 1/8s, 2003 216,500 1,000,000 Nortek, Inc. sr. sub. notes 9 7/8s, 2004 1,032,500 500,000 NVR, Inc. sr. notes 8s, 2005 500,000 200,000 Republic Group Inc. 144A sr. sub. notes 9 1/2s, 2008 201,250 -------------- 5,884,182 Business Equipment and Services (0.1%) - -------------------------------------------------------------------------------------------------------------------------- 70,000 Axiohm Transactions Solutions Inc. company guaranty 9 3/4s, 2007 69,038 280,000 Cex Holdings, Inc. 144A sr. sub. notes 9 5/8s, 2008 287,000 610,000 Iron Mountain, Inc. med. term notes company guaranty 10 1/8s, 2006 664,900 280,000 Morris Material Handling Inc. 144A sr. notes 9 1/2s, 2008 254,800 100,000 Outsourcing Solutions, Inc. sr. sub. notes Ser. B, 11s, 2006 108,000 649,000 Pierce Leahy Corp. sr. sub. notes 11 1/8s, 2006 729,314 500,000 Production Resource Group sr. sub. notes 11 1/2s, 2008 496,250 1,020,000 U.S. Office Products Co. 144A sr.sub notes 9 3/4s, 2008 1,020,000 800,000 Unicco Service Co. company guaranty Ser. B, 9 7/8s, 2007 808,000 920,000 United Stationer 144A sr. sub. notes 8 3/8s, 2008 929,200 895,000 Williams Scoutman, Inc. 144A sr. notes 9 7/8s, 2007 924,088 -------------- 6,290,590 Cable Television (0.3%) - -------------------------------------------------------------------------------------------------------------------------- 485,000 Acme Television sr. disc. notes stepped-coupon zero % (10 7/8s, 9/30/00), 2004 (STP) 409,825 100,000 Adelphia Communications Corp. sr. notes Ser. B, 10 1/4s, 2000 104,750 250,000 Adelphia Communications Corp. sr. notes Ser. B, 9 7/8s, 2007 275,625 261,875 Adelphia Communications Corp. sr. notes 9 1/2s, 2004 (PIK) 280,206 355,000 Century Communications Corp. sr. notes 9 1/2s, 2005 389,613 850,000 Century Communications Corp. sr. notes 8 7/8s, 2007 915,875 605,000 Comcast Corp. sr. sub. notes 9 1/2s, 2008 643,666 250,000 Comcast Corp. sr. sub. notes 9 3/8s, 2005 266,595 240,000 Comcast Corp. sr. sub. notes 9 1/8s, 2006 255,600 4,825,000 Continental Cablevision, Inc. sr. deb 9 1/2s, 2013 5,697,939 10,000 CSC Holdings, Inc. sr. sub. deb. 9 7/8s, 2023 11,050 100,000 CSC Holdings, Inc. sr. sub. notes 9 1/4s, 2005 106,750 10,000 Diamond Cable Communication Co. sr. disc. notes stepped-coupon zero % (13 1/4s, 9/30/99), 2004 (United Kingdom) (STP) 9,650 625,000 Diamond Cable Communication Co. sr. disc. notes stepped-coupon zero % (11 3/4s, 12/15/00), 2005 (United Kingdom) (STP) 528,125 1,670,000 Diamond Cable Communication Co. sr. disc. notes stepped-coupon zero % (10 3/4s, 2/15/02), 2007 (United Kingdom) (STP) 1,294,250 210,000 Globo Communicacoes 144A sr. notes 10 5/8s, 2008 (Brazil) 192,150 1,010,000 International Cabletel, Inc. sr. notes stepped-coupon Ser. B, zero % (11 1/2s, 2/01/01), 2006 (STP) 838,300 390,000 Jones Intercable, Inc. sr. sub. deb. 10 1/2s, 2008 428,025 650,000 Jones Intercable, Inc. sr. notes 7 5/8s, 2008 656,500 1,250,000 Lenfest Communications, Inc. sr. sub. notes 10 1/2s, 2006 1,462,500 310,000 Lenfest Communications, Inc. 144A sr. sub. notes 8 1/4s, 2008 322,400 500,000 Marcus Cable Co. (L.P.) sr. deb 11 7/8s, 2005 536,250 765,000 Marcus Cable Co. (L.P.) notes stepped-coupon zero % (13 1/2s, 8/1/99), 2004 (STP) 745,875 100,000 Rogers Cablesystems Ltd. notes 11s, 2015 116,000 225,000 Rogers Cablesystems Ltd. sr. notes Ser. B, 10s, 2005 250,313 -------------- 16,737,832 Cellular Communications (--%) - -------------------------------------------------------------------------------------------------------------------------- 80,000 Pronet, Inc. sr. sub. notes 11 7/8s, 2005 86,800 Chemicals (0.1%) - -------------------------------------------------------------------------------------------------------------------------- 360,000 Geo Specialty Chemicals 144A sr. sub. notes 10 1/8s, 2008 368,100 275,000 Huntsman Corp. 144A sr. sub. notes FRN 9.031s, 2007 277,750 1,640,000 Lyondell Petrochemical Co. notes 9 1/8s, 2002 1,737,941 150,000 NL Industries, Inc. sr. notes stepped-coupon zero % (13s, 10/15/98), 2005 (STP) 156,000 500,000 PCI Chemicals & Pharmaceuticals company guaranty 9 1/4s, 2007 (Canada) 470,000 125,000 Sovereign Specialty Chemical 144A company guaranty Ser. A, 9 1/2s, 2007 128,750 135,000 Sterling Chemicals Holdings sr. disc. notes stepped-coupon zero % (13 1/2s, 8/15/01), 2008 (STP) 81,000 100,000 Trikem S.A. 144A bonds 10 5/8s, 2007 (Brazil) 81,500 125,000 Union Carbide Global Enterprises sr. sub. notes Ser. B, 12s, 2005 134,375 -------------- 3,435,416 Computer Services and Software (0.3%) - -------------------------------------------------------------------------------------------------------------------------- 13,380,000 Dell Computer Corp. deb. 7.1s, 2028 13,431,914 670,000 IPC Information Systems sr. disc. notes stepped-coupon zero % (10 7/8s, 11/1/01), 2008 (STP) 489,100 370,000 PSINet, Inc. sr. notes Ser. B, 10s, 2005 388,500 150,000 Unisys Corp. sr. notes 7 7/8s, 2008 155,250 -------------- 14,464,764 Conglomerates (0.1%) - -------------------------------------------------------------------------------------------------------------------------- 2,545,000 Canadian Pacific Ltd. deb. 9.45s, 2021 (Canada) 3,280,836 30,000 Cia Latino Americana 144A company guaranty 11 5/8s, 2004 (Argentina) 29,850 -------------- 3,310,686 Consumer Durable Goods (--%) - -------------------------------------------------------------------------------------------------------------------------- 20,000 Hedstrom Holdings, Inc. 144A sr. disc. notes stepped-coupon zero % (12s, 6/1/02), 2009 (STP) 12,400 570,000 Iron Age Corp. 144A sr. sub. notes 9 7/8s, 2008 552,900 110,000 Sealy Mattress Co. sr. sub. notes Ser. B, 9 7/8s, 2007 114,400 165,000 Selmer Co., Inc. sr. sub. notes 11s, 2005 179,025 -------------- 858,725 Consumer Non Durables (--%) - -------------------------------------------------------------------------------------------------------------------------- 60,000 Amscan Holdings, Inc. sr. sub. notes 9 7/8s, 2007 60,900 205,000 Carson, Inc. company guaranty Ser. B, 10 3/8s, 2007 205,000 160,000 Chattem, Inc. company guaranty Ser. B, 8 7/8s, 2008 161,600 220,000 Coty, Inc. Gtd. sr. sub. notes 10 1/4s, 2005 235,675 845,000 Guess Jeans, Inc. sr. sub. notes 9 1/2s, 2003 853,450 290,000 Revlon Consumer Products sr. sub. notes 8 5/8s, 2008 297,250 -------------- 1,813,875 Consumer Products (0.3%) - -------------------------------------------------------------------------------------------------------------------------- 35,000 French Fragrances, Inc. sr. notes Ser. B, 10 3/8s, 2007 37,188 170,000 French Fragrances, Inc. 144A sr. notes 10 3/8s, 2007 179,350 1,405,000 Philip Morris Cos., Inc. notes 7 1/2s, 2004 1,469,785 5,460,000 Philip Morris Cos., Inc. notes 7 1/4s, 2003 5,635,484 2,925,000 Philip Morris Cos., Inc. notes 7 1/8s, 2004 3,011,346 2,800,000 Philip Morris Cos., Inc. notes 6.8s, 2003 2,839,732 1,190,000 Revlon Worldwide Corp. sr. disc. notes Ser. B, zero %, 2001 943,075 5,025,000 Sampoerna International Finance Co. 144A company guaranty 8 3/8s, 2006 (Indonesia) 2,613,000 -------------- 16,728,960 Consumer Services (0.3%) - -------------------------------------------------------------------------------------------------------------------------- 450,000 Boyd Gaming Corp. sr. sub. notes 9 1/2s, 2007 470,250 685,000 Club Regina, Inc. 144A sr. notes 13s, 2004 678,150 548,750 Coinmach Corp. sr. notes Ser. D, 11 3/4s, 2005 609,113 490,000 Fitzgerald Gaming Corp. company guaranty Ser. B, 12 1/4s, 2004 441,000 120,000 FRD Acquisition Co. sr. notes Ser. B, 12 1/2s, 2004 132,000 1,140,000 HMH Properties, Inc. company guaranty Ser. B, 7 7/8s, 2008 1,135,725 140,000 Host Marriott Travel Plaza sr. notes Ser. B, 9 1/2s, 2005 149,450 100,000 Isle of Capri Black Hawk LLC 1st mortgage Ser. B, 13s, 2004 105,500 535,000 Premier Parks, Inc. sr. notes 9 1/4s, 2006 561,750 9,730,000 TCI Communications, Inc. sr. notes 8.65s, 2004 10,829,587 -------------- 15,112,525 Electronics and Electrical Equipment (0.2%) - -------------------------------------------------------------------------------------------------------------------------- 70,000 Celestica International Ltd. 144A sr. sub. notes 10 1/2s, 2006 (Canada) 77,175 116,476 Cirent Semiconductor sr. sub. notes 10.22s, 2002 120,990 123,587 Cirent Semiconductor 144A sr. sub. notes 10.14s, 2004 128,685 125,000 Details, Inc. sr. sub. notes Ser. B, 10s, 2005 123,750 650,000 DII Group, Inc. (The) sr. sub. notes 8 1/2s, 2007 632,125 120,000 Dobson Communications Corp. sr. notes 11 3/4s, 2007 129,900 1,110,000 Fairchild Semiconductor Corp. 144A sr. sub. notes 11.74s, 2008 (PIK) 1,270,950 1,270,000 Fairchild Semiconductor Corp. sr. sub. notes 10 1/8s, 2007 1,244,600 490,000 Flextronics International Ltd. sr. sub. notes Ser. B, 8 3/4s, 2007 494,900 45,000 HCC Industries, Inc. company guaranty 10 3/4s, 2007 47,475 340,000 Motors and Gears Inc. sr. notes Ser. B, 10 3/4s, 2006 365,500 160,000 Samsung Electronics 144A company guaranty 9 3/4s, 2003 148,800 500,000 Unisys Corp. deb. 9 3/4s, 2016 517,500 50,000 Viasystems, Inc. notes 9 3/4s, 2007 49,250 480,000 Viasystems, Inc. 144A sr. notes 9 3/4s, 2007 463,200 1,225,000 Wavetek Corp. company guaranty 10 1/8s, 2007 1,237,250 610,000 Zilog Inc. 144A sr. notes 9 1/2s, 2005 475,800 -------------- 7,527,850 Energy-Related (0.5%) - -------------------------------------------------------------------------------------------------------------------------- 435,000 AES Corp. sr. sub. notes 8 3/8s, 2007 444,788 8,990,000 Calenergy, Inc. sr. notes 7.63s, 2007 9,035,220 6,230,000 Enron Corp. notes 6.95s, 2028 6,120,103 1,120,000 Gothic Production Corp. company guaranty Ser. B, 11 1/8s, 2005 1,086,400 6,295,000 KN Capital Trust III company guaranty 7.63s, 2028 6,397,294 80,000 Newpark Resources, Inc. company guaranty Ser. B, 8 5/8s, 2007 80,800 340,000 Niagara Mohawk Power Corp. sr. notes Ser. G, 7 3/4s, 2008 351,339 270,000 Niagara Mohawk Power Corp. sr. notes Ser. F, 7 5/8s, 2005 274,830 175,000 Panda Global Energy Co. company guaranty 12 1/2s, 2004 157,500 3,350,000 Quezon Power Ltd. sr. notes 8.86s, 2017 (Philippines) 3,052,085 1,170,000 RAM Energy Inc. sr. notes 11 1/2s, 2008 1,181,700 -------------- 28,182,059 Entertainment (1.2%) - -------------------------------------------------------------------------------------------------------------------------- 310,000 AMC Entertainment, Inc. sr. sub. notes 9 1/2s, 2009 314,650 640,000 Argosy Gaming Co. company guaranty 13 1/4s, 2004 723,200 450,000 Aztar Corp. sr. sub. notes 11s, 2002 461,250 75,000 Casino America, Inc. sr. notes 12 1/2s, 2003 84,750 725,000 Cinemark USA, Inc. notes 9 5/8s, 2008 754,000 280,000 Cinemark USA, Inc. sr. sub. notes Ser. B, 9 5/8s, 2008 289,800 350,000 Coast Hotels & Casinos, Inc. 1st mtge. company guaranty Ser. B, 13s, 2002 404,250 220,000 Empress River Casino sr. notes 10 3/4s, 2002 231,825 150,000 Hollywood Casino Corp. sr. notes 12 3/4s, 2003 166,875 435,000 Lady Luck Gaming 1st mtge. 11 7/8s, 2001 450,225 510,000 Mohegan Tribal Gaming sr. secd. notes Ser. B, 13 1/2s, 2002 647,700 11,065,000 News America Holdings, Inc. deb. 7 3/4s, 2045 11,614,267 500,000 Paramount Communications Inc. deb. 7 1/2s, 2023 496,385 80,000 Penn National Gaming, Inc. 144A sr. notes 10 5/8s, 2004 84,800 125,000 Players International, Inc. sr. notes 10 7/8s, 2005 135,313 210,000 Premier Parks, Inc. sr. notes Ser. A, 12s, 2003 232,050 390,000 PRT Funding Corp. sr. notes 11 5/8s, 2004 (In default) (NON) 279,825 530,000 SFX Entertainment, Inc. 144A company guaranty Ser. B, 9 1/8s, 2008 522,050 575,000 Showboat Marina Casino 1st mtge. Ser. B, 13 1/2s, 2003 668,438 290,000 Silver Cinemas Intl.144A sr. sub. notes 10 1/2s, 2005 294,350 840,000 Six Flags Corp. sr. sub. notes 12 1/4s, 2005 956,550 650,000 Sun International Hotels Ltd. company guaranty 9s, 2007 682,500 2,670,000 Time Warner Entertainment, Inc. notes 8 7/8s, 2012 3,158,049 15,510,000 Time Warner Entertainment, Inc. sr. notes 8 3/8s, 2033 18,120,178 640,000 Time Warner Entertainment, Inc. notes 7 3/4s, 2005 685,811 350,000 Trump A.C. 1st mtge. 11 1/4s, 2006 343,875 600,000 Trump Castle Funding 144A sub. notes 10 1/4s, 2003 606,000 1,000,000 United Artists Theatre 144A sr. sub. notes 9 3/4s, 2008 1,010,000 1,750,000 Viacom International, Inc. sub. deb. 8s, 2006 1,811,250 17,980,000 Viacom International, Inc. sr. notes 7 3/4s, 2005 19,077,679 -------------- 65,307,895 Environmental Control (0.1%) - -------------------------------------------------------------------------------------------------------------------------- 160,000 Allied Waste Industries, Inc. sr. disc. notes stepped-coupon zero % (11.3s, 6/1/02), 2007 (STP) 118,400 120,000 ATC Group Services Inc. company guaranty 12s, 2008 111,600 2,120,000 Waste Management, Inc. notes 6 5/8s, 2002 2,141,666 4,300,000 WMX Technologies, Inc. notes 4.1s, 2002 4,489,716 -------------- 6,861,382 Food and Beverages (0.1%) - -------------------------------------------------------------------------------------------------------------------------- 65,000 Ameriserve Food Co. company guaranty 10 1/8s, 2007 66,950 645,000 Ameriserve Food Co. company guaranty 8 7/8s, 2006 646,613 50,000 Aurora Foods, Inc. sr. sub. notes Ser. B, 9 7/8s, 2007 53,500 370,000 Aurora Foods, Inc. 144A ser. sub. notes Ser. D, 9 7/8s, 2007 395,900 895,000 Canandaigua Wine Co. sr. sub. notes Ser. C, 8 3/4s, 2003 919,613 75,000 Eagle Family Foods company guaranty Ser. B, 8 3/4s, 2008 72,750 135,000 Fleming Companies, Inc. company guaranty Ser. B, 10 1/2s, 2004 140,063 1,000,000 Packaged Ice, Inc. 144A sr. notes 9 3/4s, 2005 1,030,000 490,000 RAB Enterprises, Inc. 144A sr. notes 10 1/2s, 2005 492,450 150,000 Signature Brands Ltd. sr. sub. notes 13s, 2002 (Canada) 167,625 930,000 Smithfield Foods, Inc. sr. sub. notes 7 5/8s, 2008 934,650 100,000 Southern Foods Group sr. sub. notes 9 7/8s, 2007 104,750 670,000 Stater Brothers Holdings sr. sub. notes 9s, 2004 690,938 20,000 Windy Hill Pet Food Co. sr. sub. notes 9 3/4s, 2007 21,000 -------------- 5,736,802 Health Care (0.3%) - -------------------------------------------------------------------------------------------------------------------------- 700,000 Columbia/HCA Healthcare Corp. notes 7.15s, 2004 690,158 400,000 Columbia/HCA Healthcare Corp. deb. 7.05s, 2027 354,324 100,000 Columbia/HCA Healthcare Corp. notes 7s, 2007 95,534 185,000 Conmed Corp. company guaranty 9s, 2008 185,000 380,000 Extendicare Health Services Inc. company guaranty 9.35s, 2007 381,900 265,000 Fresenius Medical Capital Trust I company guaranty 9s, 2006(Germany) 278,250 375,000 Fresenius Medical Capital Trust II company guaranty 7 7/8s, 2008 367,500 280,000 Genesis Health Ventures, Inc. sr. sub. notes 9 1/4s, 2006 280,000 610,000 Global Health Sciences 144A sr. notes 11s, 2008 608,475 300,000 Hudson Respiratory Care, Inc. 144A sr. sub. notes 9 1/8s, 2008 276,000 200,000 Integrated Health Services, Inc. sr. sub. notes Ser. A, 9 1/2s, 2007 205,000 830,000 Integrated Health Services, Inc. sr. sub. notes Ser. A, 9 1/4s, 2008 842,450 1,870,000 Manor Care, Inc. sr. notes 7 1/2s, 2006 1,880,678 1,500,000 MedPartners, Inc. sr. notes 7 3/8s, 2006 1,350,570 925,000 Multicare Cos., Inc. sr. sub. notes 9s, 2007 901,875 175,000 Paracelsus Healthcare sr. sub. notes 10s, 2006 177,625 160,000 Paragon Corp. Holdings 144A sr. notes 9 5/8s, 2008 140,800 2,000,000 Paragon Health Networks, Inc. sr. sub. notes Ser. B, 9 1/2s, 2007 2,030,000 450,000 Quorum Health Group, Inc. sr. sub. notes 8 3/4s, 2005 465,750 480,000 Sun Healthcare Group, Inc. 144A sr. sub. notes 9 1/2s, 2007 489,600 575,000 Sun Healthcare Group, Inc. 144A sr. sub. notes 9 3/8s, 2008 580,750 700,000 Tenet Healthcare Corp. sr. sub. notes 8 5/8s, 2007 724,500 3,825,000 Tenet Healthcare Corp. sr. notes 8s, 2005 3,920,625 -------------- 17,227,364 Insurance and Finance (3.8%) - -------------------------------------------------------------------------------------------------------------------------- 105,000 Aames Financial Corp. sr. notes 9 1/8s, 2003 105,525 10,625,000 AFC Capital Trust I company guaranty Ser. B, 8.207s, 2027 11,952,594 1,990,000 Allstate Financing II company guaranty 7.83s, 2045 2,055,829 1,500,000 AMBAC Indemnity Corp. deb. 9 3/8s, 2011 1,881,885 12,745,000 American General Institute 144A company guaranty 8 1/8s, 2046 14,378,527 8,950,000 Amvescap Corp. PLC 144A sr. notes 6.6s, 2005 (United Kingdom) 9,023,122 340,000 Colonial Capital I 144A company guaranty 8.92s, 2027 373,575 80,000 Delta Financial Corp. sr. notes 9 1/2s, 2004 75,200 110,000 Dine S.A. de C.V. 144A company guaranty 8 3/4s, 2007 (Mexico) 101,475 90,000 Dollar Financial Group Inc. sr. notes Ser. A, 10 7/8s, 2006 97,650 7,890,000 Executive Risk Capital Trust company guaranty Ser. B, 8.675s, 2027 8,464,076 6,045,000 First Citizens Bank Capital Trust I 144A company guaranty 8.05s, 2008 6,214,713 1,880,000 First Financial Caribbean Corp. sr. notes 7.84s, 2006 1,976,726 5,145,000 Firstar Bank Milwaukee sr. notes 6 1/4s, 2002 5,176,076 19,395,000 Ford Motor Credit Corp. sr. notes 6s, 2003 19,315,093 1,920,000 Greenpoint Capital Trust I company guaranty 9.1s, 2027 2,162,554 2,625,000 Hartford Life, Inc. deb. 7.65s, 2027 2,845,080 175,000 Imperial Credit Capital Trust I 144A company guaranty 10 1/4s, 2002 176,750 100,000 Imperial Credit Industries, Inc. sr. notes 9 7/8s, 2007 99,500 205,000 Investors Capital Trust I company guaranty Ser. B, 9.77s, 2027 233,572 6,225,000 Lehman Bros Holdings, Inc. med. term notes 6.4s, 1999 6,260,420 11,410,000 Lehman Bros Holdings, Inc. notes 6 1/4s, 2003 11,406,349 3,970,000 Markel Capital Trust I company guaranty Ser. B, 8.71s, 2046 4,200,101 210,000 Market Hub Partners 144A sr. notes 8 1/4s, 2008 214,200 5,100,000 Merrill Lynch & Co., Inc. med. term notes 6.13s, 2003 5,121,063 4,205,000 Money Store, Inc. notes 8.05s, 2002 4,467,014 620,000 Nationwide Credit Inc. 144A sr. notes 10 1/4s, 2008 621,550 80,000 Netia Holdings B.V. company guaranty Ser. B, 10 1/4s, 2007 (Netherlands) 75,600 50,000 Netia Holdings B.V. company guaranty stepped-coupon Ser. B zero % (11.25s, 11/1/01), 2007 (Netherlands) (STP) 32,250 2,310,000 North Fork Bancorporation, Inc. company guaranty 8s, 2027 2,412,148 70,000 Ocwen Capital Trust I company guaranty 10 7/8s, 2027 75,775 2,000,000 Orion Capital Corp. sr. notes 9 1/8s, 2002 2,179,940 3,885,000 Orion Capital Trust II company guaranty 7.701s, 2028 4,048,364 7,170,000 Paine Webber Group, Inc. sr. notes 6.55s, 2008 7,098,587 8,985,000 Paine Webber Group, Inc. sr. med. term notes 6.52s, 2005 9,007,463 5,825,000 Phoenix Home Life Mutual Insurance Co. 144A notes 6.95s, 2006 5,971,674 290,000 Pindo Deli Finance Mauritius Ltd. company guaranty 10 3/4s, 2007 (Indonesia) 194,300 35,000 Pioneer Americas Acquisition 144A sr. notes 9 1/4s, 2007 33,250 150,000 Polytama International notes 11 1/4s, 2007 52,500 10,770,000 Provident Companies, Inc. bonds 7.405s, 2038 10,813,080 185,000 Reliance Group Holdings, Inc. sr. notes 9s, 2000 192,977 6,350,000 Salomon, Inc. sr. notes 7.3s, 2002 6,570,536 14,225,000 Salomon, Inc. sr. notes 6 3/4s, 2003 14,523,867 3,195,000 Southern Investments Service Co. sr. notes 6.8s, 2006 (United Kingdom) 3,251,232 75,000 Sovereign Capital Trust company guaranty 9s, 2027 82,445 8,015,000 TIG Capital Trust I 144A bonds 8.597s, 2027 8,768,250 5,345,000 Trenwick Capital Trust I company guaranty 8.82s, 2037 5,851,065 9,745,000 Trenwick Group, Inc. 144A sr. notes 6.7s, 2003 9,754,745 -------------- 209,990,267 Lodging (0.1%) - -------------------------------------------------------------------------------------------------------------------------- 1,110,000 Epic Resorts LLP 144A sr. notes 13s, 2005 1,121,100 167,000 John Q Hammons Hotels, Inc. 1st mtge. 8 7/8s, 2004 168,253 1,415,000 Prime Hospitality Corp. sub. notes 9 3/4s, 2007 1,506,975 -------------- 2,796,328 Medical Supplies and Devices (--%) - -------------------------------------------------------------------------------------------------------------------------- 265,000 ALARIS Medical Systems, Inc. company guaranty 9 3/4s, 2006 272,288 150,000 Dade International, Inc. sr. sub. notes Ser. B, 11 1/8s, 2006 168,750 175,000 Graphic Controls Corp. sr. sub. notes Ser. A, 12s, 2005 194,250 55,000 Imagyn Medical Technologies, Inc. company guaranty 12 1/2s, 2004 15,400 480,000 Kinetic Concepts, Inc. company guaranty Ser. B, 9 5/8s, 2007 492,000 360,000 Leiner Health Products sr. sub. notes 9 5/8s, 2007 381,600 610,000 Mediq, Inc. 144A sr. sub. notes 11s, 2008 613,050 430,000 Wright Medical Technology, Inc. 144A notes Ser. C, 11 3/4s, 2000 425,700 -------------- 2,563,038 Metals and Mining (0.2%) - -------------------------------------------------------------------------------------------------------------------------- 630,000 AK Steel Corp. sr. notes 9 1/8s, 2006 658,350 360,000 Ameristeel Corp. 144A sr. notes 8 3/4s, 2008 356,400 150,000 Anker Coal Group, Inc. sr. notes Ser. B, 9 3/4s, 2007 135,000 105,000 Armco, Inc. sr. notes 9s, 2007 102,900 650,000 Continental Global Group sr. notes Ser. B, 11s, 2007 676,000 1,915,000 Freeport-McMoRan Copper & Gold Co., Inc. sr. notes 7 1/2s, 2006 1,512,333 250,000 Hylsa S.A. de C.V. 144A bonds 9 1/4s, (Mexico) 234,375 20,000 Maxxam Group Holdings, Inc. sr. notes Ser. B, 12s, 2003 22,350 760,000 Lodestar Holding, Inc. 144A sr. notes 11 1/2s, 2005 737,200 3,870,000 PT Alatief Freeport sr. notes 9 3/4s, 2001 (Netherlands) 3,714,426 250,000 Weirton Steel Co. sr. notes 11 3/8s, 2004 262,500 220,000 WHX Corp. sr. notes 10 1/2s, 2005 222,200 -------------- 8,634,034 Oil and Gas (1.2%) - -------------------------------------------------------------------------------------------------------------------------- 365,000 Abraxas Petroleum Corp. 144A 11 1/2s, 2004 372,300 830,000 American Eco. Corp. 144A company guaranty 9 5/8s, 2008 800,950 100,000 Benton Oil & Gas Co. sr. notes 11 5/8s, 2003 104,250 70,000 Benton Oil & Gas Co. sr. notes 9 3/8s, 2007 68,075 740,000 Chesapeake Energy Corp. 144A sr. notes 9 5/8s, 2005 714,100 95,000 CIA Naviera Perez Companc S.A. 144A bonds 9s, 2004 (Argentina) 96,425 1,000,000 Cliffs Drilling Co. company guaranty Ser. B, 10 1/4s, 2003 1,035,000 9,185,000 Coastal Corp. bonds 6.95s, 2028 8,972,459 140,000 Coho Energy, Inc. sr. sub. notes 8 7/8s, 2007 130,200 590,000 Costilla Energy, Inc. sr. notes 10 1/4s, 2006 598,850 220,000 Dailey Petroleum Services Corp. company guaranty 9 1/2s, 2008 206,800 370,000 Eagle Geophysical, Inc. 144A sr. notes 10 3/4s, 2008 370,000 3,150,000 Enron Corp. notes 6.4s, 2006 3,129,336 3,365,000 Express Pipeline Ltd. 144A sub. notes Ser. B, 7.39s, 2019 (Canada) 3,375,802 125,000 Flores & Rucks, Inc. sr. sub. notes 9 3/4s, 2006 133,125 100,000 Gulf Canada Resources Ltd. sr. sub. notes 9 5/8s, 2005 (Canada) 108,000 3,205,000 Gulf Canada Resources Ltd. sr. notes 8.35s, 2006 (Canada) 3,425,792 835,000 K N Energy, Inc. sr. notes 6.45s, 2003 836,386 11,195,000 Louis Dreyfus Natural Gas notes 6 7/8s, 2007 11,098,387 1,210,000 Michael Petroleum Corp. 144A sr. notes 11 1/2s, 2005 1,185,800 320,000 Northern Offshore 144A company guaranty 10s, 2005 296,800 200,000 Pacalta Resources Ltd. sr. notes Ser. B, 10 3/4s, 2004 (Canada) 201,000 750,000 Panaco, Inc. company guaranty Ser. B, 10 5/8s, 2004 742,500 2,720,000 Petro Geo-Services AS ADR notes 7 1/2s, 2007 (Norway) 2,882,656 3,000,000 Petro-Canada deb. 9 1/4s, 2021 (Canada) 3,807,510 800,000 Petsec Energy, Inc. sr. sub. notes Ser. B, 9 1/2s, 2007 804,000 7,920,000 Pioneer Natural Resources Co. bonds 7.2s, 2028 7,232,148 15,000 Pogo Producing Co. sr. sub. notes Ser. B, 8 3/4s, 2007 15,000 55,000 Pride Petroleum Services, Inc. sr. notes 9 3/8s, 2007 56,650 4,620,000 Saga Petroleum ASA deb. 7 1/4s, 2027 (Norway) 4,553,564 975,000 Seagull Energy sr. sub notes 8 5/8s, 2005 996,938 40,000 Snyder Oil Corp. sr. sub. notes 8 3/4s, 2007 40,400 720,000 Southwest Royalties, Inc. company guaranty 10 1/2s, 2004 576,000 160,000 Tokai Corp. 144A FRB 9.98s, 2049 (Japan) 148,800 440,000 Transamerican Energy sr. notes Ser. B, 11 1/2s, 2002 391,600 6,830,000 Transamerican Energy sr. disc. notes stepped-coupon Ser. B, zero % (13s, 6/15/00), 2002 (STP) 5,327,400 425,000 TransTexas Gas Corp. sr. sub. notes Ser. D, 13 3/4s, 2001 465,375 185,000 Trico Marine Services, Inc. company guaranty Ser. B, 8 1/2s, 2005 180,375 -------------- 65,480,753 Packaging and Containers (--%) - -------------------------------------------------------------------------------------------------------------------------- 100,000 AEP Industries, Inc. 144A 9 7/8s, 2007 103,750 90,000 Radnor Holdings Inc. sr. notes 10s, 2003 94,500 155,000 Riverwood International Corp. company guaranty 10 7/8s, 2008 158,100 1,700,000 Riverwood International Corp. company guaranty 10 5/8s, 2007 1,776,500 450,000 Riverwood International Corp. company guaranty 10 1/4s, 2006 460,125 -------------- 2,592,975 Paper and Forest Products (--%) - -------------------------------------------------------------------------------------------------------------------------- 135,000 APP Finance II Mauritius Ltd. bonds 12s, (16s, 2/15/04), 2049 (Indonesia) (STP) 86,400 75,000 Florida Coast Paper LLC 1st mtge. Ser. B, 12 3/4s, 2003 81,750 170,000 Huntsman Packaging Corp. company guaranty 9 1/8s, 2007 175,100 510,000 Indah Kiat Financial Mauritius Ltd. company guaranty 10s, 2007 (Indonesia) 344,250 500,000 PT Pabrik Kertas Tjiwi Kimia company guaranty 10s, 2004 (Indonesia) 335,000 145,000 Repap New Brunswick sr. notes 10 5/8s, 2005 (Canada) 142,100 1,240,000 Repap New Brunswick 144A sr. notes 9s, 2004 (Canada) 1,240,000 -------------- 2,404,600 Pharmaceuticals (--%) - -------------------------------------------------------------------------------------------------------------------------- 200,000 ICN Pharmaceuticals, Inc. 144A sr. notes 9 1/4s, 2005 211,500 240,000 PharMerica, Inc. 144A sr. sub. notes 8 3/8s, 2008 238,800 -------------- 450,300 Photography (--%) - -------------------------------------------------------------------------------------------------------------------------- 130,000 Panavision Inc. 144A sr. disc. notes stepped-coupon zero % (9 5/8s, 2/1/02), 2006 (STP) 94,900 Publishing (--%) - -------------------------------------------------------------------------------------------------------------------------- 170,000 American Media Operation, Inc. sr. sub. notes 11 5/8s, 2004 184,450 180,000 Garden State Newspapers, Inc. sr. sub. notes Ser. B, 8 3/4s, 2009 184,500 100,000 Hollinger International Publishing, Inc. sr. sub. notes 9 1/4s, 2006 105,500 120,000 Perry-Judd company guaranty 10 5/8s, 2007 126,000 100,000 Tri State Outdoor Media, Inc. 144A sr. sub. notes 11s, 2008 103,750 40,000 Von Hoffman Press Inc. 144A sr. sub. notes 10 3/8s, 2007 42,000 -------------- 746,200 Real Estate (0.3%) - -------------------------------------------------------------------------------------------------------------------------- 1,090,000 Bluegreen Corp. 144A sr. notes 10 1/2s, 2008 1,068,200 3,650,000 Chelsea GCA Realty, Inc. notes 7 1/4s, 2007 3,625,144 9,950,000 First Industrial LP med. term notes 7s, 2006 10,010,496 -------------- 14,703,840 REIT's (Real Estate Investment Trust) (0.9%) - -------------------------------------------------------------------------------------------------------------------------- 4,920,000 Avalon Properties, Inc. notes 6 7/8s, 2007 4,867,553 4,670,000 Avalon Properties, Inc. notes 6 5/8s, 2005 4,608,029 8,540,000 Equity Residential Properties notes 6.63s, 2015 8,515,917 5,500,000 First Industrial Realty Trust, Inc. notes 7.6s, 2007 5,665,385 1,685,000 Health Care Property Investors, Inc. sr. notes 6 1/2s, 2006 1,638,140 10,015,000 National Health Investors, Inc. bonds 7.3s, 2007 10,211,194 9,095,000 OMEGA Healthcare Investors, Inc. notes 6.95s, 2007 9,034,700 3,050,000 Sun Communities, Inc. sr. notes 7 5/8s, 2003 3,143,300 120,000 Tanger Properties (L.P.) gtd. notes 8 3/4s, 2001 124,337 -------------- 47,808,555 Retail (0.4%) - -------------------------------------------------------------------------------------------------------------------------- 230,000 Eye Care Centers of America 144A sr. sub. notes 9 1/8s, 2008 230,000 13,685,000 Federated Department Stores, Inc. sr. notes 8 1/2s, 2003 14,861,910 190,000 Home Interiors & Gifts, Inc. 144A sr. sub. notes 10 1/8s, 2008 198,075 350,000 Jitney-Jungle Stores company guaranty 12s, 2006 399,875 1,300,000 K mart Corp. deb. 7.95s, 2023 1,322,750 310,000 K mart Corp. med. term notes 7.55s, 2004 307,780 150,000 Mothers Work, Inc. sr. notes 12 5/8s, 2005 163,875 1,000,000 NBTY Inc. 144A sr. sub. notes 8 5/8s, 2007 1,015,000 1,790,000 Service Merchandise Co., Inc. sr. sub. deb. 9s, 2004 1,288,800 695,000 Southland Corp. deb. Ser. A, 4 1/2s, 2004 560,344 60,000 Specialty Retailers, Inc. company guaranty Ser. B, 8 1/2s, 2005 61,800 85,000 William Carter Co. 144A sr. sub. notes 12s, 2008 90,950 230,000 William Carter Co. sr. sub. notes Ser. A, 10 3/8s, 2006 244,950 200,000 Zale Corp. sr. notes Ser. B, 8 1/2s, 2007 207,000 -------------- 20,953,109 Satellite Services (0.1%) - -------------------------------------------------------------------------------------------------------------------------- 205,000 Esat Holdings Ltd. 144A sr. notes stepped-coupon zero % (12 1/2s, 2/01/02), 2007 (Ireland) (STP) 150,675 560,000 Golden Sky Systems 144A sr. sub. notes 12 3/8s, 2006 574,000 4,300,000 ICG Services, Inc. 144A sr. discount notes stepped-coupon zero %, (9 7/8s, 5/1/03), 2008 (STP) 2,623,000 210,000 Satellites Mexicanos S.A. de C.V. 144A sr. notes 10 1/8s, 2004 (Mexico) 201,600 390,000 TCI Satellite Entertainment, Inc. sr. sub. notes 10 7/8s, 2007 385,125 590,000 TCI Satellite Entertainment, Inc. sr. disc. notes stepped-coupon zero % (12 1/4s, 2/1/02), 2007 (STP) 386,450 -------------- 4,320,850 Shipping (--%) - -------------------------------------------------------------------------------------------------------------------------- 1,380,000 International Shipholding Corp. sr. notes 7 3/4s, 2007 1,359,300 Specialty Consumer Products (0.3%) - -------------------------------------------------------------------------------------------------------------------------- 330,000 Decora Industries, Inc. 144A sr. sec. notes 11s, 2005 323,400 35,000 GFSI, Inc. sr. sub. notes Ser. B, 9 5/8s, 2007 36,225 10,090,000 Tyco International Ltd. company guaranty 6 3/8s, 2005 10,087,881 8,385,000 Tyco International Ltd. company guaranty 6 1/4s, 2003 8,357,497 -------------- 18,805,003 Telecommunications (1.7%) - -------------------------------------------------------------------------------------------------------------------------- 3,290,000 AirTouch Communications, Inc. notes 7s, 2003 3,397,287 9,000,000 AirTouch Communications, Inc. notes 6.65s, 2008 9,036,720 920,000 Allbritton Communications Co. sr. sub. notes Ser. B, 8 7/8s, 2008 975,200 170,000 Allegiance Telecom, Inc. sr. notes 12 7/8s, 2008 172,125 1,340,000 Allegiance Telecom, Inc. sr. disc. notes stepped-coupon Ser. B, zero % (11 3/4s, 2/15/03), 2008 (STP) 710,200 6,715,000 AT&T Capital Corp. med. term notes 6.6s, 2005 6,744,277 2,000,000 Barak I.T.C. sr. disc. notes stepped-coupon Ser. B, zero % (12 1/2s, 11/15/02), 2007 (STP) 1,200,000 750,000 BTI Telecom Corp. sr. notes 10 1/2s, 2007 746,250 190,000 Call-Net Enterprises, Inc. sr. disc. notes stepped-coupon zero % (8.94s, 8/15/03), 2008 (Canada) (STP) 123,500 370,000 Caprock Communications Corp. 144A sr. notes 12s, 2008 375,550 400,000 Celcaribe S.A. sr. notes 13 1/2s,2004 (Columbia) 424,000 1,155,000 CellNet Data Systems, Inc. sr. disc. notes stepped-coupon zero % (14s, 10/1/02), 2007 (STP) 652,575 250,000 Cencall Communications Corp. sr. disc. notes stepped-coupon zero % (10 1/8s, 1/15/99), 2004 (STP) 253,125 440,000 Centennial Cellular Corp. sr. notes 8 7/8s, 2001 469,700 260,000 Charter Communications International, Inc. disc. notes stepped-coupon Ser. B, zero % (14s, 3/15/01), 2007 (STP) 226,200 9,610,000 Colt Telecommunications Group PLC sr. notes 8 7/8s, (United Kingdom) 5,999,494 5,625,000 Colt Telecommunications Group PLC bonds 7 5/8s, 2008 (United Kingdom) 3,195,304 210,000 Colt Telecommunications Group PLC sr. disc. notes stepped-coupon zero % (12s, 12/15/01), 2006 (United Kingdom) (STP) 171,150 150,000 Comcast Cellular Holdings sr. notes Ser. B, 9 1/2s, 2007 157,875 40,000 Consorcio Ecuatoriano notes 14s, 2002 (Ecuador) 38,800 1,500,000 CSC Holdings, Inc. deb. 7 5/8s, 2018 1,492,470 190,000 CTI Holdings S.A. 144A sr. notes stepped-coupon zero % (11 1/2s, 4/15/03), 2008 (STP) 106,875 740,000 Dobson Wireline Co. 144A sr. notes 12 1/4s, 2008 747,400 90,000 E. Spire Communications, Inc. sr. notes 13 3/4s, 2007 105,075 785,000 E. Spire Communications, Inc. sr. disc. notes stepped-coupon zero % (12 3/4s, 4/1/01), 2006 (STP) 629,963 1,000,000 Econophone, Inc. 144A notes stepped-coupon zero % (11s, 2/15/03), 2008 (STP) 595,000 140,000 Esprit Telecom Group PLC sr. notes 11 1/2s, 2007 (United Kingdom) 148,400 180,000 Facilicom International sr. notes Ser. B., 10 1/2s, 2008 181,800 360,000 Flag Ltd. 144A sr. notes 8 1/4s, 2008 (Bermuda) 365,400 105,000 Fonorola, Inc. sr. notes 12 1/2s, 2002 (Canada) 118,519 2,140,000 Global Crossing Holdings 144A sr. notes 9 5/8s, 2008 2,268,400 750,000 GST Telecommunications, Inc. company guaranty stepped-coupon zero % (13 7/8s, 15/15/00), 2005 (STP) 622,500 1,310,000 GST Telecommunications, Inc. 144A sr. disc. notes stepped-coupon zero % (10 1/2s, 5/1/03), 2008 (STP) 812,200 1,200,000 Hyperion Telecommunications, Inc. sr. disc. notes stepped-coupon Ser. B, zero % (13s, 4/15/01), 2003 (STP) 924,000 180,000 IDT Corp. sr. notes 8 3/4s, 2006 172,800 300,000 Intercel, Inc. sr. disc. notes stepped-coupon zero % (12s, 5/1/01), 2006 (STP) 234,750 120,000 Intercel, Inc. sr. disc. notes stepped-coupon zero % (12s, 2/1/01), 2006 (STP) 96,600 1,060,000 Intermedia Communications, Inc. 144A sr. notes 8.6s, 2008 1,086,500 440,000 Intermedia Communications, Inc. sr. notes Ser. B, 8 1/2s, 2008 446,050 1,525,000 Intermedia Communications, Inc. sr. disc. notes stepped-coupon Ser. B, zero % (11 1/4s, 7/15/02), 2007 (STP) 1,151,375 370,000 Iridium LLC/Capital Corp. company guaranty Ser. B, 14s, 2005 395,900 370,000 IXC Communications, Inc. 144A sr. sub. notes 9s, 2008 380,175 560,000 KMC Telecom Holdings, Inc. 144A sr. disc. notes stepped-coupon zero % (12 1/2s, 2/15/03), 2008 (STP) 341,600 470,000 Knology Holdings Inc. sr. disc. notes stepped-coupon zero % (11 7/8s, 10/15/02), 2007 (STP) 276,125 60,000 L-3 Communications Corp. sr. sub. notes Ser. B, 10 3/8s, 2007 66,600 310,000 L-3 Communications Corp. sr. sub. notes 8 1/2s, 2008 316,975 14,265,000 LCI International, Inc. sr. notes 7 1/4s, 2007 14,637,031 120,000 Level 3 Communication, Inc. sr. notes 9 1/8s, 2008 118,200 180,000 McCaw International Ltd sr. discount notes stepped-coupon zero % (13s, 4/15/02), 2007 (STP) 119,700 140,000 Metrocall, Inc. sr. sub. notes 9 3/4s, 2007 144,200 115,000 MetroNet Communications Corp. sr. disc. notes stepped-coupon zero % (10 3/4s, 11/1/02), 2007 (Canada) (STP) 77,913 830,000 MetroNet Communications Corp. 144A sr. disc. notes stepped-coupon zero % (9.95s, 6/15/03), 2008 (STP) 527,050 1,150,000 Millicom International Cellular S.A. sr. disc. notes stepped-coupon zero % (13 1/2s, 6/1/01), 2006 (Luxembourg) (STP) 915,688 120,000 MJD Communications Inc. 144A sr. sub. notes 9 1/2s, 2008 124,200 130,000 MJD Communications Inc. 144A FRN 10s, 2008 131,300 205,000 Mobile Telecommunications Tech. sr. notes 13 1/2s, 2002 237,800 860,000 NEXTEL Communications, Inc. sr. disc. notes stepped-coupon zero % (10.65s, 9/15/02), 2007 (STP) 591,250 2,890,000 NEXTEL Communications, Inc. sr. disc. notes stepped-coupon zero % (9.95s, 2/15/03), 2008 (STP) 1,900,175 700,000 NEXTEL Communications, Inc. sr. disc. notes stepped-coupon zero % (9 3/4s, 10/31/02), 2007 (STP) 469,000 1,100,000 NEXTEL Communications, Inc. sr. disc. notes stepped-coupon zero % (9 3/4s, 2/15/99), 2004 (STP) 1,102,750 620,000 NorthEast Optic Network, Inc. sr. notes 12 3/4s, 2008 626,200 2,060,000 NTL Inc. 144A sr. notes stepped-coupon zero % (9 3/4s, 4/01/03), 2008 (STP) 1,382,775 315,000 Omnipoint Corp. sr. notes 11 5/8s, 2006 337,050 250,000 Paging Network, Inc. sr. sub. notes 10s, 2008 263,125 570,000 Price Communications Wireless Inc. 144A sr. notes 9 1/8s, 2006 575,700 1,000,000 Primus Telecom Group sr. notes 11 3/4s, 2004 1,070,000 250,000 Primus Telecom Group 144A sr. notes 9 7/8s, 2008 250,000 700,000 Qwest Communications International, Inc. sr. disc. notes stepped-coupon zero % (9.47s, 10/15/02), 2007 (STP) 540,750 250,000 Qwest Communications International, Inc. sr. disc. notes stepped-coupon zero % (8.29s, 2/1/03), 2008 (STP) 186,250 510,000 RCN Corp. sr. disc. notes stepped-coupon zero % (11 1/8s, 10/15/02), 2007 (STP) 330,225 690,000 RCN Corp. sr. disc. notes stepped-coupon Ser. B, zero % (9.8s, 2/15/03), 2008 (STP) 426,075 180,000 RSL Communications Ltd. company guaranty 9 1/8s, 2008 178,425 260,000 RSL Communications Ltd. company guaranty, stepped-coupon zero % (10 1/8s, 3/1/03), 2008 (STP) 165,100 220,000 Sprint Spectrum L.P. sr. notes 11s, 2006 254,100 300,000 Supercanal Holdings S.A. 144A sr. notes 11 1/2s, 2005 (Argentina) 288,000 190,000 Telecom Tech, Inc. 144A sr. sub. notes 9 3/4s, 2008 194,750 110,000 Telesystem International Wireless Inc. sr. disc. notes stepped-coupon Ser. C, zero % (10 1/2s, 11/1/02), 2007 (STP) 66,000 1,060,000 Time Warner Telecom Inc. sr. notes 9 3/4s, 2008 1,083,850 100,000 Transtel S.A. 144A pass-through certificates 12 1/2s, 2007 (Colombia) 90,000 580,000 United International Holdings sr. disc. notes stepped-coupon Ser. B, zero % (10 3/4s, 2/15/03), 2008 (STP) 366,850 300,000 US Xchange LLC 144A sr. notes 15s, 2008 318,750 1,500,000 WinStar Equipment Corp. company guaranty 12 1/2s, 2004 1,691,250 9,340,000 WorldCom, Inc. notes 7 3/4s, 2007 10,038,072 -------------- 90,972,338 Telephone Utilities (--%) - -------------------------------------------------------------------------------------------------------------------------- 100,000 Iridium LLC company guaranty Ser. A, 13s, 2005 102,000 Textiles (--%) - -------------------------------------------------------------------------------------------------------------------------- 380,000 Day International Group, Inc. company guaranty 9 1/2s, 2008 382,850 810,000 Galey & Lord Inc. company guaranty 9 1/8s, 2008 781,650 50,000 Glenoit Corp. company guaranty 11s, 2007 52,750 105,000 Polymer Group, Inc. company guaranty Ser. B, 9s, 2007 107,625 280,000 Polymer Group, Inc. 144A sr. sub.notes 8 3/4s, 2008 284,200 1,210,000 Polysindo International Finance company guaranty 13s, 2001 (Indonesia) (In default) (NON) 387,200 200,000 Polysindo International Finance company guaranty 11 3/8s, 2006 (Indonesia) (In default) (NON) 64,000 150,000 Tultex Corp. sr. notes 10 5/8s, 2005 153,000 470,000 Westpoint Stevens, Inc. 144A sr. notes 7 7/8s, 2008 479,400 -------------- 2,692,675 Transportation (1.1%) - -------------------------------------------------------------------------------------------------------------------------- 7,185,000 Burlington Northern Santa Fe bonds 6 7/8s, 2027 7,235,295 1,905,000 Burlington Northern Santa Fe notes 6 3/8s, 2005 1,913,058 220,000 Calair LLC 144A company guaranty 8 1/8s, 2008 217,250 390,000 Canadian Airlines Corp. sec. 10s, 2005 (Canada) 386,100 1,570,000 Cathay International Ltd. 144A sr. notes 13s, 2008 1,389,450 25,000 Chemical Leaman Corp. sr. notes 10 3/8s, 2005 28,750 55,000 Coach USA, Inc. 144A company guaranty 9 3/8s, 2007 57,475 190,000 Consorcio/MCII Holdings sec. notes stepped-coupon zero % (12s, 11/15/98), 2002 (STP) 182,163 590,000 Continental Airlines, Inc. sr. notes 9 1/2s, 2001 628,350 2,066,128 Continental Airlines, Inc. pass-through certificates Ser. 97CI, 7.42s, 2007 2,117,223 6,800,000 Continental Airlines, Inc. pass-through certificates Ser. 981C, 6.541s, 2009 6,791,908 17,235,000 CSX Corp. deb. 7.95s, 2027 19,243,395 430,000 Eletson Holdings, Inc. 1st pfd. mtge. notes 9 1/4s, 2003 (Greece) 444,513 140,000 Hermes Europe Railtel sr. notes 11 1/2s (Netherlands) 159,600 150,000 International Shipholding Corp. sr. notes 9s, 2003 154,500 165,000 Johnstown America Industries, Inc. company guaranty Ser. C, 11 3/4s, 2005 182,325 290,000 Kitty Hawk, Inc. company guaranty 9.95s, 2004 305,950 155,000 MC Shipping, Inc. 144A sr. notes 11 1/4s, 2008 153,450 4,665,000 Norfolk Southern Corp. bonds 7.8s, 2027 5,262,680 8,430,000 Norfolk Southern Corp. bonds 7.05s, 2037 8,929,225 600,000 Pegasus Shipping company guaranty Ser. A, 11 7/8s, 2004 603,750 2,000,000 Southwest Airlines Co. deb. 7 7/8s, 2007 2,223,700 30,000 TFM SA DE CV company guaranty 10 1/4s, 2007 (Mexico) 30,375 160,000 TFM SA DE CV company guaranty stepped-coupon zero % (11 3/4s, 6/15/02), 2009 (Mexico) (STP) 106,800 1,000,000 Trans World Airlines, Inc. sr. notes 11 1/2s, 2004 1,051,250 575,000 US Air Inc. pass thru certificates Ser. 93-A2, 9 5/8s, 2003 621,000 125,000 Viking Star Shipping sr. secd. notes 9 5/8s, 2003 129,688 -------------- 60,549,223 Utilities (1.4%) - -------------------------------------------------------------------------------------------------------------------------- 170,000 AES China Generating Co. sr. notes 10 1/8s, 2006 (China) 158,950 3,840,000 Arizona Public Service Co. sr. notes 6 3/4s, 2006 3,900,058 4,035,000 California Energy Corp. disc. notes 10 1/4s, 2005 4,292,998 175,000 California Energy Corp. sr. notes 9 7/8s, 2003 186,688 1,300,000 Calpine Corp. sr. notes 8 3/4s, 2007 1,321,359 5,520,000 CMS Energy Corp. pass-through certificates 7s, 2005 5,358,098 2,200,000 CMS Energy Corp. sr. notes 8 1/8s, 2002 2,261,006 4,140,000 Connecticut Light & Power Co. 1st mtge. Ser. A, 7 7/8s, 2001 4,262,627 3,090,000 Connecticut Light & Power Co. 1st mtge. Ser. C, 7 3/4s, 2002 3,185,327 1,160,000 Edison Mission Energy 144A company guaranty 7.33s, 2008 1,225,436 4,691,000 EIP Funding-Public Service Co. of New Mexico deb. 10 1/4s, 2012 5,514,693 110,000 El Paso Electric Co. 1st mtge. Ser. D, 8.9s, 2006 122,694 6,040,000 El Paso Electric Co. 1st mtge. Ser. B, 7 3/4s, 2001 6,180,853 166,000 First PV Funding Corp. deb. Ser. 86A, 10.3s, 2014 176,031 36,000 First PV Funding Corp. deb. 10.15s, 2016 38,153 3,265,000 Illinova Corp. sr. notes 7 1/8s, 2004 3,315,934 3,745,000 Israel Electric Corp., Ltd. 144A sr. notes 7 1/4s, 2006 (Israel) 3,744,363 135,000 Long Island Lighting Co. deb. 9s, 2022 152,856 255,000 Midland Funding Corp. deb. Ser. A, 11 3/4s, 2005 305,694 1,358,157 Midland Funding Corp. I deb. Ser. C-94, 10.33s, 2002 1,465,018 300,000 Niagara Mohawk Power Corp. med. term notes 9.95s, 2000 304,476 1,133,807 Northeast Utilities System notes Ser. A, 8.58s, 2006 1,172,890 3,065,128 Northeast Utilities System notes Ser. B, 8.38s, 2005 3,105,497 1,970,000 Orange Cogen Funding 144A company guaranty 8.175s, 2022 2,164,833 3,450,000 Salton Sea Funding Corp. company guaranty Ser. E, 8.3s, 2011 3,809,283 3,925,000 Texas New-Mexico Power Utilities 1st mtge. 9 1/4s, 2000 4,132,554 6,455,000 Texas Utilities Co. secd. lease fac. bonds 7.46s, 2015 6,758,514 5,095,000 Texas Utilities Electric Capital Trust V company guaranty 8.175s, 2037 5,281,885 -------------- 73,898,768 -------------- Total Corporate Bonds and Notes (cost $958,403,689) $ 971,054,620 U.S. GOVERNMENT AND AGENCY OBLIGATIONS (13.2%) (a) PRINCIPAL AMOUNT VALUE U.S. Government Agency Mortgage Obligations (0.9%) - -------------------------------------------------------------------------------------------------------------------------- Federal National Mortgage Association $43,285,000 6 1/2s, TBA, August 15, 2028 $ 43,054,724 6,790,000 5.94s, December 12, 2005 6,838,820 -------------- 49,893,544 U.S. Government Agency Mortgage Pass-Through Certificates (5.9%) - -------------------------------------------------------------------------------------------------------------------------- 1,999,139 Federal Home Loan Mortgage Association 8 3/4s, with due dates from May 1, 2009 to June 1, 2009 2,107,833 Federal Home Loan Mortgage Corp. 6,742,007 7s July 1, 2012 6,884,534 24,657,122 5 1/2s, with due dates from March 1, 2011 to July 1, 2011 23,904,596 Federal National Mortgage Association 179,778 11s, with due dates from October 1, 2015 to March 1, 2016 204,498 138,202 8 3/4s, July 1, 2009 144,507 5,875,798 7s, with due dates from September 1, 2027 to July 15, 2028 5,958,416 4,953,353 6 1/2s, with due dates from March 15, 2028 to July 1, 2028 4,927,001 1,831,845 5 1/2s, Dwarf, with due dates from March 1, 2013 to March 15, 2013 1,774,601 Government National Mortgage Association 1,043 15s, September 15, 2011 1,270 43,554,773 8s, with due dates from June 15, 2024 to November 15, 2027 45,195,643 32,113 7 1/2s, September 15, 2005 33,327 123,999,870 7s, with due dates from July 20, 2024 to June 15, 2028 125,936,844 57,527,821 6 1/2s, with due dates from February 15, 2026 to July 15, 2028 57,347,783 Government National Mortgage Association Adjustable Rate Mortgages 13,919,683 7 3/8s, with due dates from June 20, 2022 to May 20, 2024 14,235,743 28,007,035 7s, with due dates from July 20, 2023 to June 15, 2028 28,723,843 3,241,357 5 1/2s, with due dates from August 20, 2027 to April 15, 2028 3,262,371 -------------- 320,642,810 U.S. Treasury Obligations (6.4%) - -------------------------------------------------------------------------------------------------------------------------- U.S. Treasury Bonds 24,380,000 11 5/8s, November 15, 2004 (SEG) 32,074,816 4,500,000 10 3/4s, August 15, 2005 5,828,220 20,330,000 6 1/8s, November 15, 2027 21,489,420 U.S. Treasury Notes 1,220,000 11 7/8s, November 15, 2003 (SEG) 1,565,797 5,765,000 5 3/4s, November 15, 2000 5,793,825 7,750,000 5 5/8s, May 15, 2008 7,822,618 78,375,000 5 5/8s, December 31, 2002 78,570,938 5,985,000 5 5/8s, May 15, 2001 6,008,401 145,970,000 5 1/2s, May 31, 2003 145,695,576 36,420,000 5 1/2s, March 31, 2003 36,340,240 2,105,000 5 1/2s, February 28, 2003 2,099,401 3,075,000 5 1/2s, May 31, 2000 3,074,047 -------------- 346,363,299 -------------- Total U.S. Government and Agency Obligations (cost $715,235,743) $ 716,899,653 COLLATERALIZED MORTGAGE OBLIGATIONS (2.8%) (a) PRINCIPAL AMOUNT VALUE - -------------------------------------------------------------------------------------------------------------------------- $10,081,757 Amresco Commercial Mortgage Funding I Ser. 97-C1, Class A1, 6.73s, 2029 $ 10,221,957 Chase Mortgage Finance Corp. 1,676,065 Ser. 93-3, Class B13, 7.461s, 2028 1,394,276 2,161,486 Ser. 94-G, Class B13, 7s, 2025 2,172,631 3,790,000 Ser. 98-S2, Class A14 6 3/4s, 2028 3,794,738 Commercial Mortgage Acceptance Corp. 4,350,000 Ser. 97-ML1, Class D, 7.11s, 2030 4,403,695 11,325,000 Ser. 97-ML1, Class A2, 6.57s, 2007 11,533,805 4,010,000 Ser. 97-ML1, Class A2, 6.53s, 2007 4,078,295 Commercial Mortgage Trust Co. 17,085,000 Ser. 98-C1, Class A2, 7s, 2011 16,812,708 6,750,000 Ser. 98-C1, Class B, 7s, 2011 6,347,109 First Union-Lehman Brothers Commercial Mortgage Co. 4,390,000 Ser. 97-C2, Class D, 7.12s, 2012 4,402,347 6,665,000 Ser. 98-C2, Class D, 6.778s, 2013 6,477,547 6,740,000 Ser. 97-C2, Class A3, 6.65s, 2007 6,874,800 65,193,570 Ser. 97-C2, Class Interest Only (IO), 1.092s, 2027 5,849,595 1,248,647 GE Capital Mortgage Services, Inc. 144A Ser. 94-12, Class B3, 6s, 2009 1,123,783 GMAC Commercial Mortgage Securities Inc. 6,510,000 Ser. 98-C1, Class E, 7.153s, 2030 6,643,252 19,869 Ser. 97-C2, Class A1, 6.45s, 2004 20,075 9,194,352 Ser. 98-C1, Class A1, 6.44s, 2030 9,283,423 GS Mortgage Securities Corp. II 5,380,000 Ser. 98-GLII, Class A2, 6.562s, 2031 5,462,381 2,940,000 Ser. 98-GLII, Class D, 7.191s, 2031 2,957,456 Housing Securities Inc. 941,244 Ser. 91-B, Class B6, 9s, 2006 940,655 1,341,331 Ser. 93-F, Class F9M2, 7s, 2023 1,324,984 248,509 Ser. 93-J, Class J4, 6.66s, 2009 236,472 135,230 Ser. 93-J, Class J5, 6.66s, 2009 115,030 220,003 Ser. 94-1, Class AB1, 6 1/2s, 2009 207,421 2,687,000 Merrill Lynch Mortgage Investors, Inc. Ser. 98-C2, Class D, 6.96s, 2030 2,700,015 Morgan Stanley Capital I 3,000,000 Ser. 96-WF1, Class A2, 7.218s, 2006 3,117,656 1,670,000 Ser. 98-XL1, Class E, 7.15s, 2030 1,714,098 308,916 Prudential Home Mortgage Securities sub. bonds Ser. 94-31, Class B3, 8s, 2009 308,771 Prudential Home Mortgage Securities 2,965,885 Ser. 92-25, Class B3, 8s, 2022 (In default) (NON) 2,915,372 1,156,046 Ser. 94-A, Class 4B, 7 1/2s, 2023 1,074,039 3,450,298 Ser. 94-A, Class 4B, 6.802s, 2024 3,412,021 Prudential Home Mortgage Securities 144A 3,136,463 Ser. 95-C, Class B1, 7.815s, 2001 3,124,212 1,161,192 Ser. 95-D, Class 5B, 7.54s, 2024 881,780 2,029,513 Ser. 93-E, Class 5B, 7.393s, 2023 1,676,568 3,620,990 Ser. 93-D, Class 2B, 7.108s, 2023 3,657,199 1,114,577 Ser. 94-D, Class B4, 6.312s, 2009 1,062,853 3,725,000 Residential Funding Mortgage Corp. Ser. 98-S13, Class A21 6 3/4s, 2008 3,708,703 Ryland Mortgage Securities Corp. 1,894,750 Ser. 94-7C, Class B1, 7.358s, 2025 1,934,421 1,338,310 Ser. 94-7C, Class B2, 7.358s, 2025 1,339,775 4,238,226 Securitized Asset Sales, Inc. Ser. 93-J, Class 2B, 6.807s 4,189,221 372,000 Travelers Mortgage Securities Corp. coll. oblig. Ser. 1, Class Z2, 12s, 2014 426,173 -------------- Total Collateralized Mortgage Obligations (cost $144,597,647) $ 149,921,312 FOREIGN GOVERNMENT BONDS AND NOTES (1.2%) (a) PRINCIPAL AMOUNT VALUE - -------------------------------------------------------------------------------------------------------------------------- DEM 10,495,000 Germany (Federal Republic of) Unity Fund bonds 8s, 2002 $ 6,608,072 DEM 34,305,000 Germany (Federal Republic of) bonds Ser. 98, 5 5/8s, 2028 20,307,094 USD 5,050,000 Korea (Republic of) unsub. 8 7/8s, 2008 4,757,100 USD 7,400,000 Russia (Government of) 144A bonds 12 3/4s, 2028 6,086,500 USD 10,850,000 Quebec (Province of) deb. Ser. NM, 7 1/8s, 2024 11,486,787 USD 3,260,000 Russia (Government of) deb. principal loans FRB 6.625s, 2020 (POR) 1,407,913 ZAR 48,063,000 South Africa (Republic of) bonds Ser. 153, 13s, 2010 6,778,297 USD 12,785,000 United Mexican States sec. Ser. B, 6 1/4s, 2019 10,564,246 -------------- Total Foreign Government Bonds and Notes (cost $70,815,759) $ 67,996,009 ASSET-BACKED SECURITIES (0.6%) (a) PRINCIPAL AMOUNT VALUE - -------------------------------------------------------------------------------------------------------------------------- $ 5,621,904 First Plus Ser. 98-ACl 8 1/2s, 2023 $ 5,577,983 9,633,146 Green Tree Recreational Equipment & Cons. Ser. 97-B, Class A1, 6.55s, 2028 9,714,427 6,857,978 Green Tree Recreational Equipment & Cons. Ser. 98-A, Class A1C, 6.18s, 2019 6,866,551 39,290,000 Lehman Manufactured Housing Ser. 98-1, Class IO, 0.819s, 2028 1,878,553 7,140,000 Sassco Fashions Ser. RF2 8.58s, 2028 7,636,453 -------------- Total Asset-Backed Securities (cost $31,804,246) $ 31,673,967 BRADY BONDS (0.6%) (a) PRINCIPAL AMOUNT VALUE - -------------------------------------------------------------------------------------------------------------------------- $15,161,000 Argentina (Republic of) Ser. L-GP, stepped-coupon 5 3/4s, (6s, 3/31/99), 2023 (STP) $ 11,446,555 6,195,521 Brazil (Government of) stepped-coupon 5s, (8s, 4/30/00), 2014 (STP) (POR) 4,724,085 11,553,000 Peru (Government of) 144A Ser. PDI, 4s, 2017 7,278,390 7,398,000 Philippines (Government of) Ser. B, 6 1/2s, 2017 6,510,240 76,314 Russian (Government of) deb. 6.625s, 2015 38,825 -------------- Total Brady Bonds (cost $31,030,817) $ 29,998,095 UNITS (0.1%) (a) NUMBER OF UNITS VALUE - -------------------------------------------------------------------------------------------------------------------------- 260 Bestel SA de CV units, stepped-coupon zero % (12 3/4s, 5/15/03), 2005 (STP) $ 181,350 340 Birch Telecom Inc., 144A units 14s, 2008 340,000 810 Diva Systems Corp. 144A units stepped-coupon zero % (12 5/8s, 3/1/03), 2008 (STP) 413,100 1,775 DTI Holdings Inc. units stepped-coupon zero % (12 1/2s, 3/1/03), 2008 (STP) 931,875 330 ICO Global Communications Ltd. units 15s, 2005 330,300 630 Long Distance International Inc. 144A units 12 1/4s, 2008 642,600 430 Mediq 144A units, stepped-coupon zero % (13s, 6/1/03), 2009 (STP) 230,050 150 Onepoint Communications, Inc. units 14 1/2s, 2008 140,250 450 Pathnet, Inc. 144A units 12 1/4s, 2008 474,750 920 Rhythms Netconn 144A units stepped-coupon zero % (13 1/2s, 5/15/03), 2008 (STP) 418,600 390 Startec Global Communications Corp. units 12s, 2008 382,200 70 Stone Container Corp. units sr. sub. 12 1/4s, 2002 72,100 300 Telehub Communications Corp. units stepped-coupon zero % (13 7/8s,7/31/02), 2005 (STP) 204,000 310 Transamerican Refining units 16s, 2003 316,975 270 Versatel Teleco units 13 1/4s, 2008 284,850 540 York Power Funding Ltd. unit 12s, 2007 540,000 -------------- Total Units (cost $6,007,684) $ 5,903,000 PREFERRED STOCKS (0.2%) (a) NUMBER OF SHARES VALUE - -------------------------------------------------------------------------------------------------------------------------- 4,840 AmeriKing, Inc. $3.25 pfd. (PIK) $ 130,680 35 Anvil Holdings Ser. B, $3.25 pfd. (PIK) 805 27,755 California Federal Bancorp Inc. Ser. A, $2.281 pfd. 763,263 676 Capstar Broadcasting Inc. 144A $12.00 pfd. 78,416 16,637 CGA Group Ltd. 144A Ser. A, $13.75 pfd. (PIK) 465,836 6,155 Chevy Chase Capital Corp. Ser. A, $5.188 pfd. 336,986 260 Concentric Network Corp. 144A 13.50% pfd. (PIK) 269,750 2,892 CSC Holdings, Inc. Ser. M, 11.125 cum. (PIK) 338,364 98 Echostar Communications, Inc. 12.125 pfd. 109,270 148 El Paso Electric Co. 11.40 pfd (PIK) 16,132 6,972 Nextlink Communications, Inc. 144A 7.00 pfd. 407,851 81 Paxson Communications Corp. 144A 13.25% pfd. (PIK) 805,950 12,371 Public Service Co. of New Hampshire 2.651 1st mtge. pfd. 327,832 830 SFX Broadcasting, Inc. Ser. E, 12.625 pfd. (PIK) 97,525 6,775 Webster Financial 7.375 pfd. 6,882,316 -------------- Total Preferred Stocks (cost $10,581,822) $ 11,030,976 CONVERTIBLE BONDS AND NOTES (0.1%) (a) PRINCIPAL AMOUNT VALUE - -------------------------------------------------------------------------------------------------------------------------- $ 1,140,000 APP Global Finance Ltd. 144A cv. sec. 2s, 2000 (United Kingdom) $ 940,500 500,000 Corporate Express, Inc. cv. notes 4 1/2s, 2000 461,250 2,160,000 Exide Corp. 144A cv. sr. sub. notes 2.9s, 2005 1,393,200 100,000 Integrated Device Technology, Inc. cv. sub. notes 5 1/2s, 2002 80,625 580,000 Jacor Communications, Inc. cv. sr. notes zero %, 2011 480,675 1,000,000 LAM Research Corp. 144A cv. sub. notes 5s, 2002 810,000 45,000 National Semiconductor Corp. 144A cv. deb. 6 1/2s, 2002 41,063 8,810,000 Western Digital Corp. 144A cv. sub. deb. zero %, 2018 2,136,425 -------------- Total Convertible Bonds and Notes (cost $7,556,249) $ 6,343,738 MUNICIPAL BONDS AND NOTES (0.1%) (a) (cost $5,410,000) PRINCIPAL AMOUNT RATING VALUE - -------------------------------------------------------------------------------------------------------------------------- $ 5,410,000 NJ Econ. Dev. Auth. Rev. Bonds, Ser. A, Municipal Bond Investors Assurance Corporation, 7.425s, 2/15/29 Aaa $ 6,054,331 CONVERTIBLE PREFERRED STOCKS (0.1%) (a) NUMBER OF SHARES VALUE - -------------------------------------------------------------------------------------------------------------------------- 3,000 Chancellor Media Corp. $3.00 cv. cum. pfd. $ 313,500 1,675 Chesapeake Energy Corp. 144A 3.50 cv. cum. pfd. 57,789 77,000 K mart Financing I 3.875 cv. cum. pfd. 4,774,000 -------------- Total Convertible Preferred Stocks (cost $4,452,893) $ 5,145,289 WARRANTS (--%)(a)(NON) EXPIRATION NUMBER OF WARRANTS DATE VALUE - -------------------------------------------------------------------------------------------------------------------------- 660 Allegiance Telecom, Inc. 2/3/08 $ 11,880 1,155 Cellnet Data Systems, Inc. 9/15/07 64,680 16,000 CGA Group Ltd. 144A 1/1/04 320 685 Club Regina, Inc. 144A 12/1/04 20,550 210 Colt Telecommunications Group PLC 12/31/06 73,500 1,110 Epic Resorts 6/15/05 11 205 Esat Holdings, Inc. (Ireland) 9/9/99 7,226 1,732 Fitzgerald Gaming Co. 12/19/98 17 200 Globalstar Telecom 144A 2/15/04 20,000 250 Intermedia Communications, Inc. 6/1/00 38,750 560 KMC Telecom Holdings, Inc. 4/15/08 11,200 470 Knology Holdings, Inc. 144A 10/15/07 705 180 McCaw International Ltd. 4/5/07 720 960 Powertel, Inc. 2/1/06 9,120 625 UIH Australia/Pacific, Inc. 144A 5/15/06 9,375 -------------- Total Warrants (cost $139,903) $ 268,054 SHORT-TERM INVESTMENTS (1.6%) (a) PRINCIPAL AMOUNT VALUE - -------------------------------------------------------------------------------------------------------------------------- $25,000,000 Asset Securitization Corp. effective yield of 5.52%, August 31, 1998 $ 24,885,000 64,000,000 Interest in $750,000,000 joint tri-party repurchase agreement dated July 31, 1998 with Goldman Sachs due August 3, 1998 with respect to various U.S. Treasury obligations -- maturity value of $64,030,187 for an effective yield of 5.66% 64,010,062 -------------- Total Short-Term Investments (cost $88,895,062) $ 88,895,062 - -------------------------------------------------------------------------------------------------------------------------- Total Investments (cost $4,980,167,143) (b) $5,463,079,603 - -------------------------------------------------------------------------------------------------------------------------- (a) Percentages indicated are based on net assets of $5,441,655,519. (b) The aggregate identified cost on a tax basis is $4,982,694,223, resulting in gross unrealized appreciation and depreciation of $642,069,884 and $161,684,504, respectively, or net unrealized appreciation of $480,385,380. (NON) Non-income-producing security. (STP) The interest rate and date shown parenthetically represent the new interest rate to be paid and the date the fund will begin receiving interest at this rate. (POR) Portion of income will be received in additional securities. (PIK) Income may be received in cash or additional securities at the discretion of the issuer. (SEG) A portion of this security was pledged and segregated with the custodian to cover margin requirements for futures contracts at July 31, 1998. (CUS) This entity provides subcustodian services to the fund. 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. ADR after the name of a foreign holding stands for American Depository Receipts, representing ownership of foreign securities on deposit with a domestic custodian bank. TBA after the name of a security represents to be announced securities (Note 1). The rates shown on Floating Rate Bonds (FRB) and Floating Rate Notes (FRN) are the current interest rates shown at July 31, 1998, which are subject to change based on the terms of the security. - ------------------------------------------------------------------------------- Forward Currency Contracts to Buy at July 31, 1998 (aggregate face value $65,661,008) Aggregate Face Delivery Unrealized Market Value Value Date Depreciation - ------------------------------------------------------------------------------- Australian Dollars $ 343,607 $ 352,901 9/16/98 $ (9,294) British Pounds 518,376 518,705 9/16/98 (329) Deutschemarks 64,502,893 64,789,402 9/16/98 (286,509) - ------------------------------------------------------------------------------- $(296,132) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Forward Currency Contracts to Sell at July 31, 1998 (aggregate face value $108,921,359) Market Aggregate Face Delivery Unrealized Value Value Date Appreciation - ------------------------------------------------------------------------------- Deutschemarks $100,577,647 $101,120,181 9/16/98 $ 542,534 South African Rand 7,110,833 7,801,178 9/16/98 690,345 - ------------------------------------------------------------------------------- $1,232,879 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Futures Contracts Outstanding at July 31, 1998 Aggregate Face Expiration Unrealized Total Value Value Date Appreciation - ------------------------------------------------------------------------------- US Treasury 20 year Bonds (long) $33,100,313 $32,712,039 Sep-98 $388,274 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- TBA Sales Commitments at July 31, 1998 (premium received $43,011,857) Principal Settlement Market Description Amount Date Value - ------------------------------------------------------------------------------- GNMA, 6 1/2s, August, 2028 $43,145,000 Aug-98 $43,009,956 - ------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements.
Statement of assets and liabilities July 31, 1998 Assets - ----------------------------------------------------------------------------------------------- Investments in securities, at value (identified cost $4,980,167,143) (Note 1) $5,463,079,603 - ----------------------------------------------------------------------------------------------- Dividends and interest receivable 32,622,321 - ----------------------------------------------------------------------------------------------- Cash 332,571 - ----------------------------------------------------------------------------------------------- Foreign currency (cost $31,651) 32,394 - ----------------------------------------------------------------------------------------------- Receivable for shares of the fund sold 12,709,594 - ----------------------------------------------------------------------------------------------- Receivable for securities sold 89,226,983 - ----------------------------------------------------------------------------------------------- Receivable for variation margin 8,438 - ----------------------------------------------------------------------------------------------- Receivable for open forward currency contracts 1,310,690 - ----------------------------------------------------------------------------------------------- Receivable for closed forward currency contracts 175,999 - ----------------------------------------------------------------------------------------------- Total assets 5,599,498,593 Liabilities - ----------------------------------------------------------------------------------------------- Payable for securities purchased 99,046,366 - ----------------------------------------------------------------------------------------------- Payable for shares of the fund repurchased 4,580,661 - ----------------------------------------------------------------------------------------------- Payable for compensation of Manager (Note 2) 6,611,511 - ----------------------------------------------------------------------------------------------- Payable for investor servicing and custodian fees (Note 2) 790,327 - ----------------------------------------------------------------------------------------------- Payable for compensation of Trustees (Note 2) 72,485 - ----------------------------------------------------------------------------------------------- Payable for administrative services (Note 2) 2,834 - ----------------------------------------------------------------------------------------------- Payable for distribution fees (Note 2) 2,042,266 - ----------------------------------------------------------------------------------------------- Payable for open forward currency contracts 373,943 - ----------------------------------------------------------------------------------------------- Payable for closed forward currency contracts 314,819 - ----------------------------------------------------------------------------------------------- TBA sale commitments at value (proceeds received $43,011,857) 43,009,956 - ----------------------------------------------------------------------------------------------- Other accrued expenses 997,906 - ----------------------------------------------------------------------------------------------- Total liabilities 157,843,074 - ----------------------------------------------------------------------------------------------- Net assets $5,441,655,519 Represented by - ----------------------------------------------------------------------------------------------- Paid-in capital (Notes 1 and 4) $4,581,900,369 - ----------------------------------------------------------------------------------------------- Distributions in excess of net investment income (Note 1) (11,819,799) - ----------------------------------------------------------------------------------------------- Accumulated net realized gain on investments and foreign currency transactions (Note 1) 387,335,567 - ----------------------------------------------------------------------------------------------- Net unrealized appreciation of investments and assets and liabilities in foreign currencies 484,239,382 - ----------------------------------------------------------------------------------------------- Total -- Representing net assets applicable to capital shares outstanding $5,441,655,519 Computation of net asset value and offering price - ----------------------------------------------------------------------------------------------- Net asset value and redemption price per class A share ($3,387,619,998 divided by 180,048,584 shares) $18.82 - ----------------------------------------------------------------------------------------------- Offering price per class A share (100/94.25 of $18.82)* $19.97 - ----------------------------------------------------------------------------------------------- Net asset value and offering price per class B share ($1,305,897,316 divided by 69,962,275 shares)** $18.67 - ----------------------------------------------------------------------------------------------- Net asset value and redemption price per class M share ($276,961,960 divided by 14,838,406 shares) $18.67 - ----------------------------------------------------------------------------------------------- Offering price per class M share (100/96.50 of $18.67)* $19.35 - ----------------------------------------------------------------------------------------------- Net asset value, offering price and redemption price per class Y share ($471,176,245 divided by 25,000,359 shares) $18.85 - ----------------------------------------------------------------------------------------------- * On single retail sales of less than $50,000. On sales of $50,000 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 July 31, 1998 Investment income: - ----------------------------------------------------------------------------------------------- Interest $ 126,755,620 - ----------------------------------------------------------------------------------------------- Dividends (net of foreign tax of $338,714) 68,706,582 - ----------------------------------------------------------------------------------------------- Total investment income 195,462,202 Expenses: - ----------------------------------------------------------------------------------------------- Compensation of Manager (Note 2) 23,461,272 - ----------------------------------------------------------------------------------------------- Investor servicing and custodian fees (Note 2) 11,138,618 - ----------------------------------------------------------------------------------------------- Compensation of Trustees (Note 2) 78,831 - ----------------------------------------------------------------------------------------------- Administrative services (Note 2) 34,088 - ----------------------------------------------------------------------------------------------- Distribution fees -- Class A (Note 2) 7,572,318 - ----------------------------------------------------------------------------------------------- Distribution fees -- Class B (Note 2) 10,970,841 - ----------------------------------------------------------------------------------------------- Distribution fees -- Class M (Note 2) 1,802,024 - ----------------------------------------------------------------------------------------------- Reports to shareholders 245,532 - ----------------------------------------------------------------------------------------------- Registration fees 415,315 - ----------------------------------------------------------------------------------------------- Auditing 73,033 - ----------------------------------------------------------------------------------------------- Legal 34,936 - ----------------------------------------------------------------------------------------------- Postage 461,085 - ----------------------------------------------------------------------------------------------- Other 114,370 - ----------------------------------------------------------------------------------------------- Total expenses 56,402,263 - ----------------------------------------------------------------------------------------------- Expense reduction (Note 2) (1,816,710) - ----------------------------------------------------------------------------------------------- Net expenses 54,585,553 - ----------------------------------------------------------------------------------------------- Net investment income 140,876,649 - ----------------------------------------------------------------------------------------------- Net realized gain on investments (Notes 1 and 3) 469,756,376 - ----------------------------------------------------------------------------------------------- Net realized gain on futures contracts (Note 1) 980,884 - ----------------------------------------------------------------------------------------------- Net realized gain on written options (Notes 1 and 3) 113,337 - ----------------------------------------------------------------------------------------------- Net realized loss on foreign currency transactions (Note 1) (16,365,863) - ----------------------------------------------------------------------------------------------- Net unrealized depreciation of assets and liabilities in foreign currencies during the year (1,650,070) - ----------------------------------------------------------------------------------------------- Net unrealized depreciation of investments, futures contracts, and TBA sale commitments during the year (172,713,772) - ----------------------------------------------------------------------------------------------- Net gain on investments 280,120,892 - ----------------------------------------------------------------------------------------------- Net increase in net assets resulting from operations $420,997,541 - ----------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements.
Statement of changes in net assets Year ended July 31 ------------------------------- 1998 1997 - --------------------------------------------------------------------------------------------------------------- Increase in net assets - --------------------------------------------------------------------------------------------------------------- Operations: - --------------------------------------------------------------------------------------------------------------- Net investment income $ 140,876,649 $ 100,718,238 - --------------------------------------------------------------------------------------------------------------- Net realized gain on investments and foreign currency transactions 454,484,734 229,478,035 - --------------------------------------------------------------------------------------------------------------- Net unrealized appreciation (depreciation) of investments and assets and liabilities in foreign currencies (174,363,842) 505,535,233 - --------------------------------------------------------------------------------------------------------------- Net increase in net assets resulting from operations 420,997,541 835,731,506 - --------------------------------------------------------------------------------------------------------------- Distributions to shareholders: - --------------------------------------------------------------------------------------------------------------- From net investment income Class A (93,857,434) (73,837,380) - --------------------------------------------------------------------------------------------------------------- Class B (26,582,497) (19,404,724) - --------------------------------------------------------------------------------------------------------------- Class M (6,420,081) (3,535,939) - --------------------------------------------------------------------------------------------------------------- Class Y (14,256,392) (11,248,863) - --------------------------------------------------------------------------------------------------------------- From net realized gain on investments Class A (173,044,314) (92,386,949) - --------------------------------------------------------------------------------------------------------------- Class B (63,051,883) (29,105,446) - --------------------------------------------------------------------------------------------------------------- Class M (14,653,375) (4,503,492) - --------------------------------------------------------------------------------------------------------------- Class Y (25,075,114) (13,502,169) - --------------------------------------------------------------------------------------------------------------- Increase from capital share transactions (Note 4) 1,397,644,938 1,244,159,864 - --------------------------------------------------------------------------------------------------------------- Total increase in net assets 1,401,701,389 1,832,366,408 Net assets - --------------------------------------------------------------------------------------------------------------- Beginning of year 4,039,954,130 2,207,587,722 - --------------------------------------------------------------------------------------------------------------- End of year (including distributions in excess of net investment income and undistributed net investment income of $11,819,799 and $4,134,739, respectively) $5,441,655,519 $4,039,954,130 - --------------------------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements.
Financial highlights (For a share outstanding throughout the period) CLASS A - ------------------------------------------------------------------------------------------------------------------------------------ Per-share operating performance Year ended July 31 - ------------------------------------------------------------------------------------------------------------------------------------ 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------------ Net asset value, beginning of period $18.95 $15.82 $14.90 $13.52 $14.24 - ------------------------------------------------------------------------------------------------------------------------------------ Investment operations - ------------------------------------------------------------------------------------------------------------------------------------ Net investment income .60 .60(c) .63 .63 .59 - ------------------------------------------------------------------------------------------------------------------------------------ Net realized and unrealized gain (loss) on investments 1.08 4.11 1.50 1.63 (.11) - ------------------------------------------------------------------------------------------------------------------------------------ Total from investment operations 1.68 4.71 2.13 2.26 .48 - ------------------------------------------------------------------------------------------------------------------------------------ Less distributions: - ------------------------------------------------------------------------------------------------------------------------------------ From net investment income (.60) (.67) (.58) (.56) (.58) - ------------------------------------------------------------------------------------------------------------------------------------ From net realized gain on investments (1.21) (.91) (.63) (.32) (.62) - ------------------------------------------------------------------------------------------------------------------------------------ Total distributions (1.81) (1.58) (1.21) (.88) (1.20) - ------------------------------------------------------------------------------------------------------------------------------------ Net asset value, end of period $18.82 $18.95 $15.82 $14.90 $13.52 - ------------------------------------------------------------------------------------------------------------------------------------ Ratios and supplemental data - ------------------------------------------------------------------------------------------------------------------------------------ Total investment return at net asset value (%)(a) 9.53 31.52 14.75 17.73 3.46 - ------------------------------------------------------------------------------------------------------------------------------------ Net assets, end of period (in thousands) $3,387,620 $2,607,562 $1,515,260 $1,036,674 $913,171 - ------------------------------------------------------------------------------------------------------------------------------------ Ratio of expenses to average net assets (%)(b) 1.00 1.06 .95 .91 .95 - ------------------------------------------------------------------------------------------------------------------------------------ Ratio of net investment income to average net assets (%) 3.11 3.51 4.07 4.58 4.15 - ------------------------------------------------------------------------------------------------------------------------------------ Portfolio turnover (%) 126.19 134.80 119.44 102.57 100.69 - ------------------------------------------------------------------------------------------------------------------------------------ + Commencement of operations. * Not annualized. (a) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges. (b) The ratio of expenses to average net assets for the period ended July 31, 1996 and thereafter includes amounts paid through brokerage service and expense offset arrangements. Prior period ratios exclude these amounts. (Note 2). (c) Per share net investment income has been determined on the basis of the weighted average number of shares outstanding during the period.
Financial highlights (For a share outstanding throughout the period) CLASS B - ------------------------------------------------------------------------------------------------------------------------------------ Per-share operating performance Year ended July 31 - ------------------------------------------------------------------------------------------------------------------------------------ 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------------ Net asset value, beginning of period $18.82 $15.74 $14.83 $13.46 $14.19 - ------------------------------------------------------------------------------------------------------------------------------------ Investment operations - ------------------------------------------------------------------------------------------------------------------------------------ Net investment income .46 .46(c) .51 .52 .50 - ------------------------------------------------------------------------------------------------------------------------------------ Net realized and unrealized gain (loss) on investments 1.07 4.08 1.50 1.63 (.12) - ------------------------------------------------------------------------------------------------------------------------------------ Total from investment operations 1.53 4.54 2.01 2.15 .38 - ------------------------------------------------------------------------------------------------------------------------------------ Less distributions: - ------------------------------------------------------------------------------------------------------------------------------------ From net investment income (.47) (.55) (.47) (.46) (.49) - ------------------------------------------------------------------------------------------------------------------------------------ From net realized gain on investments (1.21) (.91) (.63) (.32) (.62) - ------------------------------------------------------------------------------------------------------------------------------------ Total distributions (1.68) (1.46) (1.10) (.78) (1.11) - ------------------------------------------------------------------------------------------------------------------------------------ Net asset value, end of period $18.67 $18.82 $15.74 $14.83 $13.46 - ------------------------------------------------------------------------------------------------------------------------------------ Ratios and supplemental data - ------------------------------------------------------------------------------------------------------------------------------------ Total investment return at net asset value (%)(a) 8.72 30.46 13.97 16.87 2.70 - ------------------------------------------------------------------------------------------------------------------------------------ Net assets, end of period (in thousands) $1,305,897 $888,666 $435,278 $224,166 $151,327 - ------------------------------------------------------------------------------------------------------------------------------------ Ratio of expenses to average net assets (%)(b) 1.75 1.81 1.71 1.66 1.71 - ------------------------------------------------------------------------------------------------------------------------------------ Ratio of net investment income to average net assets (%) 2.37 2.74 3.31 3.81 3.39 - ------------------------------------------------------------------------------------------------------------------------------------ Portfolio turnover (%) 126.19 134.80 119.44 102.57 100.69 - ------------------------------------------------------------------------------------------------------------------------------------ + Commencement of operations. * Not annualized. (a) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges. (b) The ratio of expenses to average net assets for the period ended July 31, 1996 and thereafter includes amounts paid through brokerage service and expense offset arrangements. Prior period ratios exclude these amounts. (Note 2). (c) Per share net investment income has been determined on the basis of the weighted average number of shares outstanding during the period.
Financial highlights (For a share outstanding throughout the period) CLASS M - ------------------------------------------------------------------------------------------------------------------------------------ For the period Per-share Dec. 1, 1994+ operating performance Year ended July 31 to July 31 - ------------------------------------------------------------------------------------------------------------------------------------ 1998 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------------ Net asset value, beginning of period $18.82 $15.74 $14.84 $12.77 - ------------------------------------------------------------------------------------------------------------------------------------ Investment operations - ------------------------------------------------------------------------------------------------------------------------------------ Net investment income .51 .53(c) .55 .31 - ------------------------------------------------------------------------------------------------------------------------------------ Net realized and unrealized gain (loss) on investments 1.06 4.06 1.50 2.03 - ------------------------------------------------------------------------------------------------------------------------------------ Total from investment operations 1.57 4.59 2.05 2.34 - ------------------------------------------------------------------------------------------------------------------------------------ Less distributions: - ------------------------------------------------------------------------------------------------------------------------------------ From net investment income (.51) (.60) (.52) (.27) - ------------------------------------------------------------------------------------------------------------------------------------ From net realized gain on investments (1.21) (.91) (.63) -- - ------------------------------------------------------------------------------------------------------------------------------------ Total distributions (1.72) (1.51) (1.15) (.27) - ------------------------------------------------------------------------------------------------------------------------------------ Net asset value, end of period $18.67 $18.82 $15.74 $14.84 - ------------------------------------------------------------------------------------------------------------------------------------ Ratios and supplemental data - ------------------------------------------------------------------------------------------------------------------------------------ Total investment return at net asset value (%)(a) 8.98 30.83 14.26 18.52* - ------------------------------------------------------------------------------------------------------------------------------------ Net assets, end of period (in thousands) $276,962 $187,475 $49,541 $8,164 - ------------------------------------------------------------------------------------------------------------------------------------ Ratio of expenses to average net assets (%)(b) 1.50 1.56 1.50 .93* - ------------------------------------------------------------------------------------------------------------------------------------ Ratio of net investment income to average net assets (%) 2.62 3.05 3.50 2.53* - ------------------------------------------------------------------------------------------------------------------------------------ Portfolio turnover (%) 126.19 134.80 119.44 102.57 - ------------------------------------------------------------------------------------------------------------------------------------ + Commencement of operations. * Not annualized. (a) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges. (b) The ratio of expenses to average net assets for the period ended July 31, 1996 and thereafter includes amounts paid through brokerage service and expense offset arrangements. Prior period ratios exclude these amounts. (Note 2). (c) Per share net investment income has been determined on the basis of the weighted average number of shares outstanding during the period.
Financial highlights (For a share outstanding throughout the period) CLASS Y - ------------------------------------------------------------------------------------------------------------------------------------ For the period Per-share April 1, 1994+ operating performance Year ended July 31 to July 31 - ------------------------------------------------------------------------------------------------------------------------------------ 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------------ Net asset value, beginning of period $18.98 $15.85 $14.92 $13.54 $13.21 - ------------------------------------------------------------------------------------------------------------------------------------ Investment operations - ------------------------------------------------------------------------------------------------------------------------------------ Net investment income .64 .64(c) .68 .66 .17 - ------------------------------------------------------------------------------------------------------------------------------------ Net realized and unrealized gain (loss) on investments 1.09 4.11 1.50 1.63 .31 - ------------------------------------------------------------------------------------------------------------------------------------ Total from investment operations 1.73 4.75 2.18 2.29 .48 - ------------------------------------------------------------------------------------------------------------------------------------ Less distributions: - ------------------------------------------------------------------------------------------------------------------------------------ From net investment income (.65) (.71) (.62) (.59) (.15) - ------------------------------------------------------------------------------------------------------------------------------------ From net realized gain on investments (1.21) (.91) (.63) (.32) -- - ------------------------------------------------------------------------------------------------------------------------------------ Total distributions (1.86) (1.62) (1.25) (.91) (.15) - ------------------------------------------------------------------------------------------------------------------------------------ Net asset value, end of period $18.85 $18.98 $15.85 $14.92 $13.54 - ------------------------------------------------------------------------------------------------------------------------------------ Ratios and supplemental data - ------------------------------------------------------------------------------------------------------------------------------------ Total investment return at net asset value (%)(a) 9.79 31.78 15.09 18.00 3.65* - ------------------------------------------------------------------------------------------------------------------------------------ Net assets, end of period (in thousands) $471,176 $356,251 $207,508 $153,597 $71,566 - ------------------------------------------------------------------------------------------------------------------------------------ Ratio of expenses to average net assets (%)(b) .75 .81 .70 .66 .25* - ------------------------------------------------------------------------------------------------------------------------------------ Ratio of net investment income to average net assets (%) 3.37 3.74 4.33 4.78 1.34* - ------------------------------------------------------------------------------------------------------------------------------------ Portfolio turnover (%) 126.19 134.80 119.44 102.57 100.69 - ------------------------------------------------------------------------------------------------------------------------------------ + Commencement of operations. * Not annualized. (a) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges. (b) The ratio of expenses to average net assets for the period ended July 31, 1996 and thereafter includes amounts paid through brokerage service and expense offset arrangements. Prior period ratios exclude these amounts. (Note 2). (c) Per share net investment income has been determined on the basis of the weighted average number of shares outstanding during the period.
Notes to financial statements July 31, 1998 Note 1 Significant accounting policies The George Putnam Fund of Boston (the "fund") is registered under the Investment Company Act of 1940, as amended, as a diversified, open-end management investment company. The fund seeks to provide a balanced investment composed of a well-diversified portfolio of stocks and bonds which will produce both capital growth and current income. The fund offers class A, class B, class M and class Y shares. Class A shares are sold with a maximum front-end sales charge of 5.75%. 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 shares, and are subject to a contingent deferred sales charge, if those shares are redeemed within six years of purchase. Class M shares are sold with a maximum front end sales charge of 3.50% and pay an ongoing distribution fee that is higher than class A shares but lower than class B shares. Class Y shares, which are sold at net asset value, are generally subject to the same expenses as class A shares, class B, and class M shares, but do not bear a distribution fee. Class Y shares are sold to defined contribution plans that invest at least $250 million in a combination of Putnam Funds and other accounts managed by affiliates of Putnam Investment Management, Inc. ("Putnam Management"), the fund's manager, a wholly owned subsidiary of Putnam Investments, Inc. 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 that 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 generally accepted accounting principles and requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities. Actual results could differ from those estimates. A) Security valuation Investments for which market quotations are readily available are stated at market value, which is determined using the last reported sale price, or, if no sales are reported -- as in the case of some securities traded over-the-counter -- the last reported bid price. Securities quoted in foreign currencies are translated into U.S. dollars at the current exchange rate. Short-term investments having remaining maturities of 60 days or less are stated at amortized cost, which approximates market value, and other investments are stated at fair value following procedures approved by the Trustees. Market quotations are not considered to be readily available for certain long-term corporate bonds and notes; such investments are stated at fair value on the basis of valuations furnished by a pricing service, approved by the Trustees, which determines valuations for normal, institutional size trading units of such securities using methods based on market transactions for comparable securities and various relationships between securities which are generally recognized by institutional traders. B) Joint trading account Pursuant to an exemptive order issued by the Securities and Exchange Commission, the fund may transfer uninvested cash balances into a joint trading account along with the cash of other registered investment companies and certain other accounts managed by Putnam Management. These balances may be invested in one or more repurchase agreements and/or short-term money market instruments. C) Repurchase agreements The fund, or any joint trading account, through its custodian, receives delivery of the underlying securities, the market value of which at the time of purchase is required to be in an amount at least equal to the resale price, including accrued interest. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the fund and the counterparty. Putnam Management is responsible for determining that the value of these underlying securities is at all times at least equal to the resale price, including accrued interest. D) Security transactions and related investment income Security transactions are accounted for on the trade date (date the order to buy or sell is executed). Interest income is recorded on the accrual basis. Dividend income is recorded on the ex-dividend date except that certain dividends from foreign securities are recorded as soon as the fund is informed of the ex-dividend date. Discounts on zero coupon bonds, original issue discount bonds, stepped-coupon bonds and payment in kind bonds are accreted according to the yield-to-maturity basis. Securities purchased or sold on a forward commitment or delayed delivery basis may be settled a month or more after the trade date; interest income is accrued based on the terms of the security. Losses may arise due to changes in the market value of the underlying securities or if the counterparty does not perform under the contract. E) Foreign currency translation The accounting records of the fund are maintained in U.S. dollars. The market value of foreign securities, currency holdings, other assets and liabilities are recorded in the books and records of the fund after translation to U.S. dollars based on the exchange rates on that day. The cost of each security is determined using historical exchange rates. Income and withholding taxes are translated at prevailing exchange rates when accrued or incurred. The fund does not isolate that portion of realized or unrealized gains or losses resulting from changes in the foreign exchange rate on investments from fluctuations arising from changes in the market prices of the securities. Such gains and losses are included with the net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent net exchange gains or losses on closed forward currency contracts, disposition of foreign currencies and the difference between the amount of investment income and foreign withholding taxes recorded on the fund's books and the U.S. dollar equivalent amounts actually received or paid. Net unrealized appreciation and depreciation of assets and liabilities in foreign currencies arise from changes in the value of open forward currency contracts and assets and liabilities other than investments at the period end, resulting from changes in the exchange rate. F) Forward currency contracts The fund may engage in forward currency contracts, which are agreements between two parties to buy and sell currencies at a set price on a future date, to protect against a decline in value relative to the U.S. dollar of the currencies in which its portfolio securities are denominated or quoted (or an increase in the value of a currency in which securities a fund intends to buy are denominated, when a fund holds cash reserves and short-term investments). The U.S. dollar value of forward currency contracts is determined using current forward currency exchange rates supplied by a quotation service. The market value of the contract will fluctuate with changes in currency exchange rates. The contract is "marked to market" daily and the change in market value is recorded as an unrealized gain or loss. When the contract is closed, the fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. The fund could be exposed to risk if the value of the currency changes unfavorably, if the counterparties to the contracts are unable to meet the terms of their contracts or if the fund is unable to enter into a closing position. G) Futures and options contracts The fund may use futures and options contracts to hedge against changes in the values of securities the fund owns or expects to purchase. The fund may also write options on securities it owns or in which it may invest to increase its current returns. The potential risk to the fund is that the change in value of futures and options contracts may not correspond to the change in value of the hedged instruments. In addition, losses may arise from changes in the value of the underlying instruments, if there is an illiquid secondary market for the contracts, or if the counterparty to the contract is unable to perform. When the contract is closed, the fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. Futures contracts are valued at the quoted daily settlement prices established by the exchange on which they trade. Exchange traded options are valued at the last sale price, or if no sales are reported, the last bid price for purchased options and the last ask price for written options. Options traded over-the-counter are valued using prices supplied by dealers. H) TBA purchase commitments The fund may enter into "TBA" (to be announced) purchase commitments to purchase securities for a fixed unit price at a future date beyond customary settlement time. Although the unit price has been established, the principal value has not been finalized. However, the amount of the commitments will not fluctuate more than 1.0% from the principal amount. The fund holds, and maintains until settlement date, cash or high-grade debt obligations in an amount sufficient to meet the purchase price, or the fund may enter into offsetting contracts for the forward sale of other securities it owns. Income on the securities will not be earned until settlement date. TBA purchase commitments may be considered securities in themselves, and involve a risk of loss if the value of the security to be purchased declines prior to the settlement date, which risk is in addition to the risk of decline in the value of the fund's other assets. Unsettled TBA purchase commitments are valued at the current market value of the underlying securities, according to the procedures described under "Security valuation" above. Although the fund will generally enter into TBA purchase commitments with the intention of acquiring securities for their portfolio or for delivery pursuant to options contracts it has entered into, the fund may dispose of a commitment prior to settlement if Putnam Management deems it appropriate to do so. I) TBA sale commitments The fund may enter into TBA sale commitments to hedge its portfolio positions or to sell mortgage-backed securities it owns under delayed delivery arrangements. Proceeds of TBA sale commitments are not received until the contractual settlement date. During the time a TBA sale commitment is outstanding, equivalent deliverable securities, or an offsetting TBA purchase commitment deliverable on or before the sale commitment date, are held as "cover" for the transaction. Unsettled TBA sale commitments are valued at the current market value of the underlying securities, generally according to the procedures described under "Security valuation" above. The contract is "marked-to-market" daily and the change in market value is recorded by the fund as an unrealized gain or loss. If the TBA sale commitment is closed through the acquisition of an offsetting purchase commitment, the fund realizes a gain or loss. If the fund delivers securities under the commitment, the fund realizes a gain or a loss from the sale of the securities based upon the unit price established at the date the commitment was entered into. J) Line of credit The fund has entered into a committed line of credit with certain banks. This line of credit agreement includes restrictions that the fund maintain an asset coverage ratio of at least 300% and borrowings must not exceed prospectus limitations. For the year ended July 31, 1998, the fund had no borrowings against the line of credit. K) 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. L) Distributions to shareholders Distributions to shareholders from net investment income are recorded by the fund on the ex-dividend date. Capital gain distributions, 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 treatment of gains and losses on forward foreign currency contracts, losses on wash sale transactions, post-October losses deferrals, nontaxable dividends, defaulted bond interest, paydown gains and losses on mortgage-backed securities, market discount and interest on payment-in-kind securities. Reclassifications are made to the fund's capital accounts to reflect income and gains available for distribution (or available capital loss carryovers) under income tax regulations. For the year ended July 31, 1998, the fund reclassified $15,714,783 to decrease undistributed net investment income and $399,736 to decrease paid-in-capital, with an increase to accumulated net realized gains of $16,114,519. The calculation of net investment income per share in the financial highlights table excludes these adjustments. Note 2 Management fee, administrative services and other transactions Compensation of Putnam Management, for management and investment advisory services is paid quarterly based on the average 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 and 0.425% of the next $5 billion, 0.405% of the next $5 billion, 0.39% of the next $5 billion, 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 Investments, Inc. Investor servicing agent functions are provided by Putnam Investor Services, a division of PFTC. For the year ended July 31, 1998, fund expenses were reduced by $1,816,710 under expense offset arrangements with PFTC and brokerage service arrangements. Investor servicing and custodian fees reported in the Statement of operations exclude these credits. The fund could have invested a portion of the assets utilized in connection with the expense offset arrangements in an income producing asset if it had not entered into such arrangements. Each Trustee of the fund receives an annual Trustee fee, of which $3,250 has been allocated to the fund, and an additional fee for each Trustee's meeting attended. Trustees who are not interested persons of Putnam Management and who serve on committees of the Trustees receive additional fees for attendance at certain committee meetings. The fund has adopted a Trustee Fee Deferral Plan (the "Deferral Plan") which allows the Trustees to defer the receipt of all or a portion of Trustees Fees payable on or after July 1, 1995. The deferred fees remain in the fund and are invested in certain Putnam funds until distribution in accordance with the Deferral Plan. The fund has adopted an unfunded noncontributory defined benefit pension plan (the "Pension Plan") covering all Trustees of the fund who have served as Trustee for at least five years. Benefits under the Pension Plan are equal to 50% of the Trustee's average total retainer and meeting fees for the three years preceding retirement. Pension expense for the fund is included in Compensation of trustees in the Statement of operations. Accrued pension liability is included in Payable for compensation of Trustees in the Statement of assets and liabilities. The fund has adopted distribution plans (the "Plans") with respect to its class A, class B, and class M shares pursuant to Rule 12b-1 under the Investment Company Act of 1940. The purpose of the Plans is to compensate Putnam Mutual Funds Corp., a wholly-owned subsidiary of Putnam Investments 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 Mutual Funds Corp. at an annual rate up to 0.35%, 1.00%, 1.00% of the average net assets attributable to class A, class B, and class M shares, respectively. The Trustees have approved payment by the fund to an annual rate of 0.25%, 1.00%, and 0.75% of the average net assets attributable to class A, class B, and class M shares respectively. For the year ended July 31, 1998, Putnam Mutual Funds Corp., acting as underwriter received net commissions of $2,093,763 and $76,814 from the sale of class A and class M shares, respectively and received $1,277,848 in contingent deferred sales charges from redemptions of class B shares. A deferred sales charge of up to 1% is assessed on certain redemptions of class A shares. For the year ended July 31, 1998, Putnam Mutual Funds Corp., acting as underwriter received $26,282 on class A redemptions. Note 3 Purchases and sales of securities During the year ended July 31, 1998, purchases and sales of investment securities other than U.S. government obligations and short-term investments aggregated $4,678,997,359 and $3,758,890,690, respectively. Purchases and sales of U.S. government obligations aggregated $2,305,592,599 and $2,070,525,868, respectively. In determining the net gain or loss on securities sold, the cost of securities has been determined on the identified cost basis. Written option transactions during the year are summarized as follows: Contract Premiums Amounts Received - ----------------------------------------------------------------------------- Written options outstanding at beginning of year $ -- $ -- - ----------------------------------------------------------------------------- Options opened 35,700,000 113,337 - ----------------------------------------------------------------------------- Options closed (35,700,000) (113,337) - ----------------------------------------------------------------------------- Written options outstanding at end of year $ -- $ -- - ----------------------------------------------------------------------------- Note 4 Capital shares At July 31, 1998, there was an unlimited number of shares of beneficial interest authorized. Transactions in capital shares were as follows: Year ended July 31, 1998 - ----------------------------------------------------------------------------- Class A Shares Amount - ----------------------------------------------------------------------------- Shares sold 68,382,912 $1,271,076,297 - ----------------------------------------------------------------------------- Shares issued in connection with reinvestment of distributions 13,629,619 245,136,594 - ----------------------------------------------------------------------------- 82,012,531 1,516,212,891 Shares repurchased (39,574,947) (742,732,518) - ----------------------------------------------------------------------------- Net increase 42,437,584 $ 773,480,373 - ----------------------------------------------------------------------------- Year ended July 31, 1997 - ----------------------------------------------------------------------------- Class A Shares Amount - ----------------------------------------------------------------------------- Shares sold 57,561,340 $ 980,905,251 - ----------------------------------------------------------------------------- Shares issued in connection with reinvestment of distributions 9,015,602 148,378,857 - ----------------------------------------------------------------------------- 66,576,942 1,129,284,108 Shares repurchased (24,717,591) (422,352,583) - ----------------------------------------------------------------------------- Net increase 41,859,351 $ 706,931,525 - ----------------------------------------------------------------------------- Year ended July 31, 1998 - ----------------------------------------------------------------------------- Class B Shares Amount - ----------------------------------------------------------------------------- Shares sold 27,640,494 $ 514,329,289 - ----------------------------------------------------------------------------- Shares issued in connection with reinvestment of distributions 4,702,492 83,884,848 - ----------------------------------------------------------------------------- 32,342,986 598,214,137 Shares repurchased (9,601,746) (178,587,762) - ----------------------------------------------------------------------------- Net increase 22,741,240 $ 419,626,375 - ----------------------------------------------------------------------------- Year ended July 31, 1997 - ----------------------------------------------------------------------------- Class B Shares Amount - ----------------------------------------------------------------------------- Shares sold 21,764,323 $368,267,529 - ----------------------------------------------------------------------------- Shares issued in connection with reinvestment of distributions 2,767,490 45,275,666 - ----------------------------------------------------------------------------- 24,531,813 413,543,195 Shares repurchased (4,971,519) (84,322,499) - ----------------------------------------------------------------------------- Net increase 19,560,294 $329,220,696 - ----------------------------------------------------------------------------- Year ended July 31, 1998 - ----------------------------------------------------------------------------- Class M Shares Amount - ----------------------------------------------------------------------------- Shares sold 7,042,764 $130,939,053 - ----------------------------------------------------------------------------- Shares issued in connection with reinvestment of distributions 1,109,311 19,785,710 - ----------------------------------------------------------------------------- 8,152,075 150,724,763 Shares repurchased (3,276,702) (60,912,495) - ----------------------------------------------------------------------------- Net increase 4,875,373 $ 89,812,268 - ----------------------------------------------------------------------------- Year ended July 31, 1997 - ----------------------------------------------------------------------------- Class M Shares Amount - ----------------------------------------------------------------------------- Shares sold 7,413,996 $125,678,090 - ----------------------------------------------------------------------------- Shares issued in connection with reinvestment of distributions 457,088 7,498,922 - ----------------------------------------------------------------------------- 7,871,084 133,177,012 Shares repurchased (1,055,770) (18,153,890) - ----------------------------------------------------------------------------- Net increase 6,815,314 $115,023,122 - ----------------------------------------------------------------------------- Year ended July 31, 1998 - ----------------------------------------------------------------------------- Class Y Shares Amount - ----------------------------------------------------------------------------- Shares sold 9,280,297 $173,998,943 - ----------------------------------------------------------------------------- Shares issued in connection with reinvestment of distributions 2,181,250 39,331,506 - ----------------------------------------------------------------------------- 11,461,547 213,330,449 Shares repurchased (5,233,650) (98,604,527) - ----------------------------------------------------------------------------- Net increase 6,227,897 $114,725,922 - ----------------------------------------------------------------------------- Year ended July 31, 1997 - ----------------------------------------------------------------------------- Class Y Shares Amount - ----------------------------------------------------------------------------- Shares sold 8,877,256 $150,219,737 - ----------------------------------------------------------------------------- Shares issued in connection with reinvestment of distributions 1,501,670 24,753,440 - ----------------------------------------------------------------------------- 10,378,926 174,973,177 Shares repurchased (4,702,056) (81,988,656) - ----------------------------------------------------------------------------- Net increase 5,676,870 $ 92,984,521 - ----------------------------------------------------------------------------- Federal tax information (Unaudited) Pursuant to Section 852 of the Internal Revenue Code, as amended, the Fund hereby designates $407,533,403 as capital gain, which includes $228,305,991 as 20% capital gain, for its taxable year ended July 31, 1998. The fund has designated 20.96% of the distributions from net investment income as qualifying for the dividends received deduction for corporations. The Form 1099 you receive in January 1999 will show the tax status of all distributions paid to your account in calendar 1998. Fund information INVESTMENT MANAGER Putnam Investment Management, Inc. One Post Office Square Boston, MA 02109 MARKETING SERVICES Putnam Mutual Funds Corp. One Post Office Square Boston, MA 02109 CUSTODIAN Putnam Fiduciary Trust Company LEGAL COUNSEL Ropes & Gray INDEPENDENT ACCOUNTANTS PricewaterhouseCoopers LLP TRUSTEES George Putnam, Chairman William F. Pounds, Vice Chairman Jameson Adkins Baxter Hans H. Estin John A. Hill Ronald J. Jackson Paul L. Joskow Elizabeth T. Kennan Lawrence J. Lasser John H. Mullin III Robert E. Patterson Donald S. Perkins George Putnam, III A.J.C. Smith W. Thomas Stephens W. Nicholas Thorndike OFFICERS George Putnam President Charles E. Porter Executive Vice President Patricia C. Flaherty Senior Vice President John D. Hughes Senior Vice President and Treasurer Lawrence J. Lasser Vice President Gordon H. Silver Vice President Ian C. Ferguson Vice President Brett C. Browchuk Vice President Thomas V. Reilly Vice President Anthony I. Kreisel Vice President Edward P. Bousa Vice President and Fund Manager James M. Prusko Vice President and Fund Manager David L. Waldman Vice President and Fund Manager Jeffrey J. Kobylarz Vice President and Fund Manager William N. Shiebler Vice President John R. Verani Vice President Beverly Marcus Clerk and Assistant Treasurer This report is for the information of shareholders of The George Putnam Fund of Boston. 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. For more information or to request a prospectus, call toll free: 1-800-225-1581. You can also learn more at Putnam Investments' website: http://www.putnaminv.com. Shares of mutual funds are not deposits or obligations of, or guaranteed or endorsed by, any financial institution; are not insured by the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve Board, or any other agency; and involve risk, including the possible loss of the principal amount invested. [LOGO OMITTED] PUTNAM INVESTMENTS The Putnam Funds One Post Office Square Boston, Massachusetts 02109 - --------------- Bulk Rate U.S. Postage PAID Putnam Investments - --------------- AN021 45518-001/880/242/505 9/98 PUTNAM INVESTMENTS [SCALE LOGO OMITTED] - --------------------------------------------------------------------------- The George Putnam Supplement to Report dated 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 defined contribution plans investing $250 million or more in one or more of Putnam's funds or private accounts. Performance of class Y shares, which incur neither a front-end load, distribution fee, nor contingent deferred sales charge, will differ from performance of class A, B, and M shares, which are discussed more extensively in the report. RESULTS AT A GLANCE - --------------------------------------------------------------------------- Total return for periods ended NAV 9.79% Five years 103.69 Annual average 15.29 10 years 262.58 Annual average 13.75 Life of fund (since class A inception), annual average 10.01 Share value: NAV 7/31/97 $18.98 7/31/98 $18.85 - --------------------------------------------------------------------------- Distributions: No. Income Capital gains Total 4 0.646 1.212 1.858 - --------------------------------------------------------------------------- Please note that past performance does not indicate future results. 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. -----END PRIVACY-ENHANCED MESSAGE-----