Putnam
High Yield
Total Return
Fund
ANNUAL REPORT
June 30, 1997
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* "[High-yield] bonds are clearly enticing to both income-oriented
investors and to people who primarily buy stock."
-- The Wall Street Journal, May 16, 1997
* "Every fund investor, even young people, should have some bonds in
his or her portfolio."
-- Money, June 1997
CONTENTS
4 Report from Putnam Management
9 Fund performance summary
13 Portfolio holdings
30 Financial statements
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
For a growing number of portfolios these days, investing solely in
domestic securities provides neither a sufficiently broad exposure to
investment opportunities nor a desired level of diversification. Thus,
from its inception at the start of 1997, Putnam High Yield Total
Return Fund has included an international component in its portfolio.
Not surprisingly, many of the high-yield securities from which your
fund's non-U.S. holdings are selected are issued by companies located
in emerging economies. Identifying the most creditworthy of these
investments requires specialized expertise and experience. I am
pleased to report that Gail Attridge has been added to your fund's
management team to provide just such a capability.
Gail brings to the task substantial practical and academic experience
in the credit assessment of less-developed countries. Before joining
Putnam in 1993, she was with Keystone Custodian Funds, County NatWest
Securities Asia, and Data Resources/McGraw-Hill. She has 12 years of
investment experience.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
August 20, 1997
Report from the Fund Managers
Jin W. Ho, lead manager
Gail S. Attridge
Charles G. Pohl
A leaner and more fiscally healthy corporate America has restored the
confidence of investors, making them more willing to assume higher
levels of credit risk. Thus, it is no surprise that high-yield bonds
fared better than most other fixed-income market sectors in recent
months. The steady demand for lower-rated higher-yielding bonds and
continued strong economic growth helped Putnam High Yield Total Return
Fund conclude its first fiscal reporting period with a 4.30% total
return for class A shares at net asset value ( - 0.61% at public
offering price) for the period from January 2, 1997, through June 30,
1997. Performance for other share classes appears on pages 9 and 10.
* SUSTAINED DEMAND ABSORBS STRONG NEW-ISSUE VOLUME
Several factors contributed to the high-yield bond market's ability to
post attractive gains over this period. Worry over defaults has
subsided as continued economic strength is reflected in stronger cash
flows. The vibrant U.S. equity market has enabled companies to improve
their balance sheets by selling stock rather than issuing new debt.
Strong demand from individuals and institutions has easily absorbed
supply, even with volume up 40% from the first six months of 1996.
Finally merger and acquisition activity in several industries
continued to support high-yield bond prices over the period.
After months of moderate economic growth, indicators at the start of
the year pointed to a pickup in activity with some potentially
dangerous implications for inflation. As matters turned out, the
economy grew at a brisk 5.8% annual rate in the first quarter of 1997,
while unemployment dropped to its lowest level since 1973. For a brief
period, investors traded bonds for equities, pushing down bond prices
and nudging yields higher. When the Federal Reserve Board raised
short-term interest rates in late March, the action was explained as a
preemptive strike against inflation. All types of bonds suffered price
declines, but high-yield bonds as a group were affected to a lesser
extent than investment-grade issues. A few months later, as investors
became convinced that the Fed was unlikely to increase interest rates
at its May and July meetings, most financial markets reacted with
exuberance and high-yield bonds received additional support.
* TELECOMMUNICATIONS, BROADCASTING, AND CABLE ISSUES PREVAIL
During the fund's first six months, we have been fairly aggressive
about investing in the telecommunications sector. Since deregulation
opened up the marketplace a few years ago, we have come to see this
area as a source of extraordinary opportunity. Many telecommunications
companies turn to the high-yield market as the means of funding
acquisitions or expansion. This increased activity contributed to the
sector's smart rebound from its sharp decline in March. Another
positive factor was the Federal Communications Commission's unveiling
of rules favorable to competitive local exchange carriers (CLECs). As
a consequence, CLECs were able to report strong operating results for
the first quarter.
Deregulation and the loosening of ownership restrictions in the U.S.
broadcasting industry prompted consolidations to take place in this
sector as well. Under the liberalized regulations, for example, an
unlimited number of radio stations may now operate in the same city.
There are already a number of instances in which a single broadcaster
will operate several stations in one market, thus achieving lower
costs through economies of scale.
[GRAPHIC OMITTED: horizontal bar chart TOP INDUSTRY SECTORS]
TOP INDUSTRY SECTORS*
Telecommunications 11.7%
Insurance and finance 9.1%
Broadcasting 6.8%
Utilities 6.2%
Oil and gas 5.4%
Footnote reads:
*Based on net assets as of 6/30/97. Holdings will vary over time.
The cable television sector rallied following Microsoft's takeover of
Comcast, Inc., a cellular telephone services company, and after
industry giant Telecommunications Inc. undertook partnership
agreements with a number of smaller cable companies. Although any
securities of these or other companies that were held by your fund
during the period covered by this report were viewed favorably, there
is no assurance that they will continue to be held in the future.
* OPPORTUNITIES LIE SOUTH OF THE BORDER
One of the fastest-growing high-yield market sectors lies south of the
border -- in Argentina, Brazil, Venezuela, and Mexico. Investments in
these emerging markets, representing approximately 12% of the
portfolio at period's end, contributed positively to fund performance.
These countries are undergoing political and economic reform, which
bodes well for gains in productivity and corporate earnings.
In Brazil, inflation is down to a mere 2%, while in Argentina, it has
been in the single digits since 1993. The governments in both
countries maintain a pro-business stance and are facilitating the
privatization of many formerly government-owned companies. Mexico is
working hard to control corruption and install democratic elections.
In July, for the first time, Mexico City elected its own mayor, rather
than having one appointed by the president.
* UTILITY DEREGULATION TAKING SHAPE
The electric utility sector is another area of increased emphasis that
also
helped drive portfolio returns. Deregulation and recent legislative
changes at national and state levels are reshaping this industry as
they allow for increased competition. Initially concerned that
competition would reduce profitability throughout the industry,
investors indiscriminately sold their bonds. We believed at the time
that those fears were overdone and took the opportunity to make
selective purchases of the bonds we believed would prosper in this new
regulatory environment. As matters turned out, competition has not
been as quick to develop or as detrimental as investors had thought.
[GRAPHIC OMITTED: TOP 3 HOLDINGS PER SECTOR]
TOP THREE HOLDINGS PER SECTOR*
High Yield
Long Island Lighting Co., Debentures, 8.9s, 2019
Utilities
Terex Corp., Senior notes, Series B, 131/4s, 2002
Building and construction
Cencall Communications Corp.,
Senior discounted notes, zero %, 2004
Telecommunications
Emerging Markets
United Mexican States, Debentures, Series B, 61/4s, 2009
Republic of Argentina, Debentures, 63/4s, 2005
Republic of Brazil, 8s, 2014
Convertible Bonds and Notes
Corporate Express, Inc., Convertible notes, 41/2s, 2000
Business equipment and services
Argosy Gaming, Convertible subordinated notes, 12s, 2001
Recreation
Hercules, Inc., Convertible debentures, 8s, 2010
Chemicals
Footnote reads:
These holdings represent 17.0% of the fund's net assets as of 6/30/97.
Portfolio holdings will vary over time.
* OUTLOOK: STRONG ECONOMY BODES WELL FOR
HIGH-YIELD MARKET
Given the positive economic background and the improvement in credit
quality, we currently believe the high-yield market should continue to
perform well over the near term. The economy continues to expand,
inflation appears under control, and merger and acquisition activity
is proceeding at record levels. Earnings are solid across most
industries and global demand for high-yield bonds remains robust as
the second quarter's new issuance and performance data reflect.
Ratings upgrades far outweigh ratings downgrades, and defaults
continue at extremely low levels.
Investors should keep in mind, however, that the economy is in its
seventh year of expansion; history suggests that sooner or later
growth will need to be corralled in order to keep inflation at bay.
Future Fed action could affect the market if the economy becomes too
robust instead of chugging along at its present comfortable rate. We
will keep a watchful eye on such developments and continue to use in-
depth credit research to construct a diversified portfolio that offers
the potential of solid performance in the months ahead.
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 6/30/97, there is no guarantee
the fund will continue to hold these securities in the future. The
lower credit ratings of high-yield corporate and municipal bonds
reflect a greater possibility that adverse changes in the economy or
poor performance by the issuers of these bonds may affect the issuer's
ability to pay principal and interest. International investing
involves risks including political developments, economic instability,
and currency fluctuations. Investing in emerging markets may
involve added risks.
Performance summary
This section provides information about your fund's performance, which
should always be considered in light of its investment strategy.
Putnam High Yield Total Return Fund is designed for investors seeking
a combination of high current income and capital appreciation.
TOTAL RETURN FOR PERIOD ENDED 6/30/97
Class A Class B Class M
(inception date) (1/2/97) (1/2/97) (1/2/97)
NAV POP NAV CDSC NAV POP
- ---------------------------------------------------------------------
Life of fund 4.30% -0.61% 3.93% -1.07% 4.20% 0.76%
- ---------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIOD ENDED 6/30/97
First Boston
High Yield Consumer
Bond Index Price Index
- ----------------------------------------------------------------------
Life of fund 5.85% 1.07%
- ----------------------------------------------------------------------
Class A and class M share performance is shown at net asset value
(NAV) and public offering price (POP) and reflects the current maximum
sales charge of 4.75% for class A shares and 3.25% for class M shares.
Class B share performance reflects the applicable contingent deferred
sales charge, the maximum being 5%, if shares were redeemed on
6/30/97. All returns assume reinvestment of distributions at NAV and
represent past performance; they do not guarantee future results.
Performance data reflect an expense limitation currently in effect.
Without the expense limitation, total return would have been lower.
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.
PRICE AND DISTRIBUTION INFORMATION
Period ended 6/30/97
Class A Class B Class M
- ----------------------------------------------------------------------
Distributions (number) 5 5 5
- ----------------------------------------------------------------------
Income $0.1410 $0.1200 $0.1330
- ----------------------------------------------------------------------
Total $0.1410 $0.1200 $0.1330
- ----------------------------------------------------------------------
Share value: NAV POP NAV NAV POP
- ----------------------------------------------------------------------
1/2/97 $8.50 $8.92 $8.50 $8.50 $8.79
- ----------------------------------------------------------------------
6/30/97 8.72 9.15 8.71 8.72 9.01
- ----------------------------------------------------------------------
Current return (end of period)
- ----------------------------------------------------------------------
Current dividend rate1 5.50% 5.25% 4.82% 5.23% 5.06%
- ----------------------------------------------------------------------
Current 30-day SEC yield2 6.59 6.27 5.82 6.31 6.11
- ----------------------------------------------------------------------
1Income portion of most recent distribution, annualized and divided by
NAV or POP at end of period.
2Based on investment income, calculated using SEC guidelines.
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 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 maximum 4.75% sales charge
for class A shares and 3.25% for class M shares.
Contingent deferred sales charge (CDSC) is a charge applied at the
time of the redemption of class B 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
First Boston High Yield Bond Index is an unmanaged list of lower-
rated, high-yielding U.S. corporate bonds. The index assumes
reinvestment of all distributions, does not take into account
brokerage commissions or other costs, and may pose different risks
than the fund. Securities in the fund's portfolio will differ from
those in the index. It is not possible to invest directly in an index.
Consumer Price Index (CPI) is a commonly used measure of inflation; it
does not represent an investment return.
*Securities indexes assume reinvestment of all distributions and
interest payments and do not take in account brokerage fees or taxes.
Securities in the fund do not match those in the indexes and
performance of the fund will differ. It is not possible to invest
directly in an index.
Report of independent accountants
For the fiscal year ended June 30, 1997
To the Trustees and Shareholders of
Putnam High Yield Total Return Fund
We have audited the accompanying statement of assets and liabilities
of Putnam High Yield Total Return Fund, including the portfolio of
investments owned, as of June 30, 1997 and the related statement of
operations and the statement of changes in net assets and the
financial highlights for the period January 2, 1997 (commencement of
operations) to June 30, 1997. These financial statements and financial
highlights are the responsibility of the fund's management. Our
responsibility is to express an opinion on these financial statements
and financial highlights based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. Our procedures included
confirmation of securities owned as of June 30, 1997, by
correspondence with the custodian and brokers. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the
financial position of Putnam High Yield Total Return Fund as of June
30, 1997, the results of its operations and the changes in its net
assets and the financial highlights for the period January 2, 1997
(commencement of operations) to June 30, 1997 in conformity with
generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
August 14, 1997
Portfolio of investments owned
June 30, 1997
<TABLE>
<CAPTION>
CORPORATE BONDS AND NOTES (63.5%) *
PRINCIPAL AMOUNT VALUE
Advertising (0.2%)
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------
$ 50,000 Lamar Advertising Co. sr. sub. notes 9 5/8s, 2006 $ 51,000
Aerospace and Defense (0.2%)
- ------------------------------------------------------------------------------------------------------------
40,000 L-3 Communications Corp. 144A sr. sub. notes
10 3/8s, 2007 42,300
10,000 Tracor, Inc. sr. sub. notes 8 1/2s, 2007 10,000
--------------
52,300
Agriculture (1.5%)
- ------------------------------------------------------------------------------------------------------------
306,518 Premium Standard Farms, Inc. sr. secd. notes
zero %, 2003 [2 DBL. DAGGERS] 334,105
Apparel (0.1%)
- ------------------------------------------------------------------------------------------------------------
25,000 GFSI, Inc. 144A sr. sub. notes 9 5/8s, 2007 25,250
Automotive (1.9%)
- ------------------------------------------------------------------------------------------------------------
100,000 A.P.S. Inc. company guaranty 11 7/8s, 2006 97,000
75,000 Exide Corp. sr. notes 10s, 2005 77,605
30,000 Harvard Industries Inc. sr. notes 11 1/8s, 2005+ 12,075
80,000 Hawk Corp. sr. notes 10 1/4s, 2003 82,400
150,000 Hayes Wheels International, Inc. 144A sr. sub. notes
9 1/8s, 2007 150,000
--------------
419,080
Basic Industrial Products (0.6%)
- ------------------------------------------------------------------------------------------------------------
15,000 Owens-Illinois, Inc. sr. notes 8.1s, 2007 15,298
120,000 Roller Bearing Co. 144A sr. sub. notes 9 5/8s, 2007 121,500
--------------
136,798
Broadcasting (4.0%)
- ------------------------------------------------------------------------------------------------------------
50,000 Capstar Broadcasting 144A sr. disc. notes
stepped-coupon zero % (12 3/4s, 2/1/02), 2009 ++ 31,750
50,000 Capstar Broadcasting 144A sr. sub. notes 9 1/4s, 2007 48,375
25,000 Citadel Broadcasting Co. 144A sr. sub. notes
10 1/4s, 2007 25,000
150,000 Comcast UK Cable, Ltd. deb. stepped-coupon zero %
(11.2s, 11/15/00), 2007 (Bermuda) ++ 112,500
272,000 Grupo Televisa S.A. sr. disc. notes stepped-coupon
zero % (13 1/4s, 5/15/01), 2008 (Mexico) ++ 191,080
50,000 Marcus Cable Co. (L.P.) sr. sub. disc. notes stepped-
coupon zero % (13 1/2s, 8/1/99), 2004 ++ 43,500
100,000 Pegasus Media & Communications notes Ser. B,
12 1/2s, 2005 110,500
35,000 Radio One Inc. 144A sr. sub. notes stepped-coupon
7s, (12s, 5/1/00), 2004 ++ 31,150
10,000 RBS Participacoes S.A. 144A company guaranty
11s, 2007 (Brazil) 10,476
25,000 SFX Broadcasting, Inc. sr. sub. notes Ser. B,
10 3/4s, 2006 27,000
30,000 Spanish Broadcasting Systems 144A sr. notes
11s, 2004 31,650
125,000 Sullivan Broadcasting sr. sub. notes 10 1/4s, 2005 127,500
10,000 TCI Satellite Entertainment 144A sr. sub. notes
10 7/8s, 2007 10,000
75,000 TV Azteca Sa De Cv 144A sr. notes 10 1/2s, 2007
(Mexico) 76,500
--------------
876,981
Building and Construction (3.7%)
- ------------------------------------------------------------------------------------------------------------
10,000 Cia Latino Americana 144A company guaranty
11 1/8s, 2004 (Argentina) 10,500
100,000 Consumers International 144A sr. notes 10 1/4s, 2005 107,250
5,000 Continental Homes Holding Corp. sr. notes 10s, 2006 5,250
75,000 Nortek, Inc. sr. sub. notes 9 7/8s, 2004 76,875
125,000 Presley Cos. sr. notes 12 1/2s, 2001 125,000
350,000 Terex Corp. sr. notes Ser. B, 13 1/4s, 2002 395,500
75,000 Triangle Pacific Corp. sr. notes 10 1/2s, 2003 80,063
--------------
800,438
Business Services and Equipment (0.1%)
- ------------------------------------------------------------------------------------------------------------
10,000 Coleman Escrow Corp. 144A sr. disc. notes
zero % , 2001 5,750
20,000 Williams Scoutman Inc. 144A sr.notes 9 7/8s, 2007 20,200
--------------
25,950
Cable Television (1.2%)
- ------------------------------------------------------------------------------------------------------------
60,000 Adelphia Communications Corp. 144A sr. notes
9 7/8s, 2007 57,600
50,000 Cablevision Systems Corp. sr. sub. notes 9 1/4s, 2005 51,500
115,000 Diamond Cable Communication Co. 144A sr. disc.
notes stepped-coupon zero % (10 3/4s, 2/15/02),
2007 (United Kingdom) ++ 68,138
125,000 Diamond Cable Communication Co. sr. disc. notes
stepped-coupon zero % (11 3/4s, 12/15/00), 2005
(United Kingdom) ++ 86,563
--------------
263,801
Chemicals (0.7%)
- ------------------------------------------------------------------------------------------------------------
20,000 Chemical Leaman Corp. 144A sr. notes 10 3/8s, 2005 20,400
25,000 Harris Chemical Corp. sr. sub. notes 10 3/4s, 2003 25,750
120,000 NL Industries, Inc. sr. notes stepped-coupon zero %
(13s, 10/15/98), 2005 ++ 112,200
--------------
158,350
Computer Services and Software (0.3%)
- ------------------------------------------------------------------------------------------------------------
70,000 Bell & Howell Co. deb. stepped-coupon Ser. B, zero %
(11 1/2s, 3/1/00), 2005 ++ 56,000
Consumer Non Durables (0.1%)
- ------------------------------------------------------------------------------------------------------------
25,000 Foamex (L.P.) 144A sr. sub. notes 9 7/8s, 2007 25,750
Consumer Products (0.4%)
- ------------------------------------------------------------------------------------------------------------
10,000 Hedstrom Corp. 144A sr. sub. notes 10s, 2007 10,075
100,000 Revlon Worldwide Corp. 144A sr. disc. notes
zero %, 2001 67,750
--------------
77,825
Consumer Services (1.3%)
- ------------------------------------------------------------------------------------------------------------
25,000 Affinity Group Holdings 144A sr. notes 11s, 2007 26,250
20,000 AMC Entertainment, Inc. 144A sr. sub. notes
9 1/2s, 2009 20,800
50,000 Coinmach Corp. sr. notes Ser. B, 11 3/4s, 2005 55,625
26,375 Falcon Holdings Group, Inc. sr. sub. notes 11s, 2003 [2 DBL. DAGGERS] 26,507
125,000 FRD Acquisition Co. sr. notes Ser. B, 12 1/2s, 2004 133,750
10,000 Hollinger International Publishing, Inc. company
guaranty 8 5/8s, 2005 10,125
--------------
273,057
Consumer Durable Goods (--%)
- ------------------------------------------------------------------------------------------------------------
10,000 French Fragrances, Inc. 144A sr. notes 10 3/8s, 2007 10,400
Electronics and Electrical Equipment (2.4%)
- ------------------------------------------------------------------------------------------------------------
150,000 Dobson Communications Corp. 144A sr. notes
11 3/4s, 2007 147,750
20,000 Fairchild Semiconductor Corp. 144A sr. sub. notes
11.74s, 2008 20,900
165,000 Fairchild Semiconductor Corp. 144A sr. sub. notes
10 1/8s, 2007 174,900
15,000 HCC Industries, Inc. 144A sr. sub. notes 10 3/4s, 2007 15,750
60,000 Therma-Wave Inc. 144A sr. notes 10 5/8s, 2004 64,050
30,000 Viasystems Inc. 144A sr. sub. notes 9 3/4s, 2007 30,525
60,000 Wavetek Corp. 144A sr. sub. notes 10 1/8s, 2007 61,200
--------------
515,075
Energy-Related (0.7%)
- ------------------------------------------------------------------------------------------------------------
150,000 Panda Global Energy Co. 144A sr. notes 12 1/2s, 2004 145,500
Entertainment (0.7%)
- ------------------------------------------------------------------------------------------------------------
50,000 Cinemark USA, Inc. notes 9 5/8s, 2008 51,500
45,000 Cobb Theatres LLC company guaranty 10 5/8s, 2003 49,725
50,000 Premier Parks, Inc. sr. notes 9 3/4s, 2007 51,750
--------------
152,975
Environmental Control (0.1%)
- ------------------------------------------------------------------------------------------------------------
45,000 Allied Waste Industries, Inc. 144A sr. disc. notes
stepped-coupon zero % (11.3s, 6/1/02), 2007 ++ 27,675
Food and Beverages (1.5%)
- ------------------------------------------------------------------------------------------------------------
150,000 Doane Products Co. sr. notes 10 5/8s, 2006 159,750
150,000 Mafco, Inc. sr. sub. notes 11 7/8s, 2002 161,250
5,000 Windy Hill Pet Food Co. 144A sr. sub.notes
9 3/4s, 2007 5,013
--------------
326,013
Health Care (1.4%)
- ------------------------------------------------------------------------------------------------------------
10,000 IMED Corp. 144A sr. sub. notes 9 3/4s, 2006 10,300
75,000 Integrated Health Services, Inc. 144A sr. sub. notes
9 1/2s, 2007 76,688
150,000 Paracelsus Healthcare sr. sub. notes 10s, 2006 153,000
55,000 Tenet Healthcare Corp. sr. sub. notes 8 5/8s, 2007 56,100
--------------
296,088
Insurance and Finance (6.9%)
- ------------------------------------------------------------------------------------------------------------
225,000 Aames Financial Corp. sr. notes 9 1/8s, 2003 227,250
75,000 Advanta Corp. med. term notes Ser. C, 7.075s, 1999 74,250
25,000 Albank Capital Trust 144A company guaranty
9.27s, 2027 25,250
125,000 APP Finance II Mauritius Ltd. 144A bonds 12s, 2049
(Indonesia) ++ 127,813
10,000 Dime Capital Trust I bank guarantyd Ser. A, 9.33s, 2027 10,550
150,000 First Nationwide Holdings sr. sub. notes 9 1/8s, 2003 154,500
10,000 Greenpoint Capital Trust I 144A company guaranty
9.1s, 2027 9,983
150,000 Indah Kiat Financial Mauritius 144A company
guaranty 10s, 2007 150,000
70,000 Imperial Credit Capital Trust I 144A company
guaranty 10 1/4s, 2002 70,175
125,000 Imperial Credit Industries, Inc. sr. notes 9 7/8s, 2007 121,250
25,000 Pacalta Resources Ltd. 144A sr. notes 10 3/4s, 2004
(Canada) 25,625
25,000 Pioneer Americas Acquisition 144A sr. notes
9 1/4s, 2007 25,188
190,000 Polytama International notes 11 1/4s, 2007
(Indonesia) 196,175
25,000 Provident Capital Trust company guaranty 8.6s, 2026 24,531
50,000 PRT Funding Corp. sr. notes 11 5/8s, 2004 40,500
60,000 PTC International Finance 144A company
guaranty stepped-coupon zero % (10.75s,
7/1/02), 2007 ++ 36,450
50,000 Reliance Group Holdings, Inc. sr. sub. deb. 9 3/4s, 2003 53,000
10,000 Sovereign Capital Trust 144A company guaranty
9s, 2027 10,013
100,000 Vicap SA. 144A company guaranty 11 3/8s, 2007
(Mexico) 104,625
10,000 Webster Capital Trust I 144A bonds 9.36s, 2027 10,412
--------------
1,497,540
Medical Supplies and Devices (0.5%)
- ------------------------------------------------------------------------------------------------------------
25,000 Leiner Health Products 144A sr. sub. notes
9 5/8s, 2007 25,313
75,000 Wright Medical Technology, Inc. sr. secd. notes
Ser. B, 10 3/4s, 2000 75,750
--------------
101,063
Metals and Mining (1.8%)
- ------------------------------------------------------------------------------------------------------------
10,000 Acindar Industria Argentina de Aceros S.A. bonds
11 1/4s, 2004 (Argentina) 10,550
10,000 Altos Hornos De Mexico 144A bonds 11 7/8s, 2004
(Mexico) 10,750
15,000 Continental Global Group 144A sr. notes Ser. A,
11s, 2007 15,750
35,000 Echo Bay Mines jr. sub. deb. 11s, 2027 (Canada) 35,175
100,000 Maxxam Group Holdings Inc. sr. notes Ser. B, 12s, 2003 103,750
150,000 Royal Oak Mines, Inc. company guaranty Ser. B,
11s, 2006 (Canada) 148,500
50,000 Weirton Steel Co. sr. notes 11 3/8s, 2004 53,500
5,000 Wells Aluminum 144A notes 10 1/8s, 2005 5,150
--------------
383,125
Oil and Gas (4.3%)
- ------------------------------------------------------------------------------------------------------------
125,000 Cliffs Drilling Co. company guaranty Ser. B,
10 1/4s, 2003 133,125
25,000 DI Industries Inc. sr. notes 8 7/8s, 2007 24,625
100,000 Falcon Drilling Co., Inc. sr. notes Ser. B, 9 3/4s, 2001 104,000
50,000 Flores & Rucks, Inc. sr. notes 13 1/2s, 2004 60,125
50,000 Flores & Rucks, Inc. sr. sub. notes 9 3/4s, 2006 52,250
5,000 Forcenergy, Inc. sr. sub. notes Ser. B, 8 1/2s, 2007 4,875
50,000 KCS Energy, Inc. company guaranty Ser. B, 11s, 2003 54,250
25,000 Ocean Energy, Inc. 144A sr. sub. notes 8 7/8s, 2007 25,000
50,000 Parker Drilling Corp. sr. notes Ser. B, 9 3/4s, 2006 52,563
10,000 Petsec Energy, Inc. 144A sr. sub. notes 9 1/2s, 2007 10,000
10,000 Pogo Producing Co. 144A notes 8 3/4s, 2007 10,050
15,000 Pride Petroleum Services, Inc. sr. notes 9 3/8s, 2007 15,675
15,000 Snyder Oil Corp. sr. sub. notes 8 3/4s, 2007 14,925
325,000 Transamerican Energy 144A sr. disc. notes
stepped-coupon zero % (13s 6/15/00,), 2002 ++ 238,063
130,000 Transamerican Energy 144A sr. notes 11 1/2s, 2002 127,400
10,000 Wiser Oil Co. 144A sr. sub. notes 9 1/2s, 2007 10,025
5,000 W. R. Carpenter 144A sr. sub. notes 10 5/8s, 2007 5,000
--------------
941,951
Packaging and Containers (0.7%)
- ------------------------------------------------------------------------------------------------------------
50,000 Gaylord Container Corp. sr. sub. disc. deb.
stepped-coupon zero% (12 3/4s, 5/15/98) 2005 ++ 54,750
15,000 Innova S De R.L. 144A sr. notes 12 7/8s, 2007
(Mexico) 15,900
75,000 Ivex Packaging Corp. sr. sub. notes 12 1/2s, 2002 81,375
--------------
152,025
Paper and Forest Products (1.8%)
- ------------------------------------------------------------------------------------------------------------
100,000 APP International Finance Co. notes 11 3/4s, 2005
(Netherlands) 110,250
50,000 Buckeye Cellulose Corp. sr. sub. notes 9 1/4s, 2008 52,250
100,000 Florida Coast Paper LLC 1st mtge. Ser. B,
12 3/4s, 2003 103,750
50,000 Repap New Brunswick sr. notes 10 5/8s, 2005
(Canada) 47,125
50,000 Riverwood International Corp. company guaranty
10 1/4s, 2006 49,250
25,000 Stone Container Corp. sr. notes 11 7/8s, 2016 26,875
--------------
389,500
Publishing (--%)
- ------------------------------------------------------------------------------------------------------------
5,000 Sun Media Corp. 144A sr. sub. notes 9 1/2s, 2007
(Canada) 5,050
10,000 Von Hoffman Press Inc. 144A sr. sub. notes
10 3/8s, 2007 10,450
--------------
15,500
Real Estate (0.1%)
- ------------------------------------------------------------------------------------------------------------
20,000 Prime Hospitality Corp. sub. notes 9 3/4s, 2007 20,900
Recreation (3.0%)
- ------------------------------------------------------------------------------------------------------------
50,000 Alliance Gaming Corp. sr. notes 12 7/8s, 2003 56,500
100,000 Colorado Gaming & Entertainment Co. sr. notes
12s, 2003 [2 DBL. DAGGERS] 99,500
100,000 Hollywood Casino Corp. sr. notes 12 3/4s, 2003 106,250
100,000 Lady Luck Gaming Corp. 1st mtge. 11 7/8s, 2001 101,250
50,000 Mohegan Tribal Gaming Auth. sr. notes Ser. B,
13 1/2s, 2002 65,750
200,000 Sun International Hotels Ltd. company guaranty
9s, 2007 203,000
25,000 Trump A.C. 1st mtge. 11 1/4s, 2006 24,438
--------------
656,688
Retail (0.7%)
- ------------------------------------------------------------------------------------------------------------
50,000 Loehmanns, Inc. sr. notes 11 7/8s, 2003 50,500
10,000 Specialty Retailers 144A company guaranty 9s, 2007 9,950
30,000 Specialty Retailers 144A company guaranty
8 1/2s, 2005 29,925
25,000 Shoppers Food Warehouse 144A sr. notes
9 3/4s, 2004 25,031
25,000 Star Markets Co. sr. sub. notes 13s, 2004 28,375
10,000 William Carter Holdings Co. 144A sr. sub. notes 12s, 2008 10,550
--------------
154,331
Satellite Services (0.3%)
- ------------------------------------------------------------------------------------------------------------
50,000 Echostar DBS Corp. 144A company guaranty
12 1/2s, 2002 49,563
25,000 Esat Holdings Ltd. 144A sr. notes stepped-coupon
zero % (12 1/2s, 2/1/02), 2007 (Ireland) ++ 15,125
--------------
64,688
Speciality Consumer Products (0.1%)
- ------------------------------------------------------------------------------------------------------------
30,000 Polymer Group Inc. 144A sr. sub. notes 9s, 2007 29,517
Telecommunications (11.3%)
- ------------------------------------------------------------------------------------------------------------
125,000 Arch Communications Group sr. disc. notes stepped-
coupon zero % (10 7/8s, 3/15/01), 2008 ++ 66,250
50,000 Brooks Fiber Properties, Inc. sr. disc. notes stepped-
coupon zero % (10 7/8s, 3/1/01), 2006 ++ 34,000
450,000 Cencall Communications Corp. sr. disc. notes stepped-
coupon zero % (10 1/8s, 1/15/99), 2004 ++ 355,500
75,000 Centennial Cellular Corp. sr. notes 10 1/8s, 2005 78,000
25,000 Charter Communications International, Inc. sr. notes
Ser. B, 11 1/4s, 2006 27,000
40,000 Comcast Cellular 144A sr. notes 9 1/2s, 2007 40,200
10,000 Consorcio Ecuatoriano 144A notes 14s, 2002
(Ecuador) 10,625
25,000 Frontiervision Operating Partners L.P. sr. sub. notes
11s, 2006 25,988
200,000 GST Equipment Funding 144A sr. notes 13 1/4s, 2007 214,000
90,000 GST Telecommunications,Inc. company guaranty stepped-
coupon zero % (13 7/8s, 15/15/00), 2005 ++ 55,800
25,000 Hyperion Telecommunication Corp. sr. disc. notes stepped-
coupon Ser. B, zero % (13s, 4/15/01), 2003 ++ 13,188
275,000 Intelcom Group (USA), Inc. company guaranty stepped-
coupon zero % (12 1/2s, 5/1/01), 2006 ++ 184,250
100,000 Intermedia Communications, Inc. sr. disc. notes stepped-
coupon zero % (12 1/2s, 5/15/01), 2006 ++ 72,000
150,000 International Cabletel, Inc. sr. notes stepped-coupon
Ser. B, zero % (11 1/2s, 2/01/01), 2006 ++ 104,250
40,000 International Cabletel, Inc. 144A sr. notes 10s, 2007 41,200
60,000 International Wire Group 144A sr. sub. notes
11 3/4s, 2005 65,100
80,000 ITC Deltacom, Inc. 144A sr. notes 11s, 2007 81,600
85,000 McLeod, Inc. 144A sr. disc. notes stepped-coupon
zero % (10 1/2s, 3/1/02), 2007 ++ 54,188
50,000 MFS Communications sr. disc. notes stepped-coupon
zero % (8 7/8s, 1/1/01), 2006 ++ 39,590
275,000 Millicom International Cellular S.A. sr. disc. notes
stepped-coupon zero % (13 1/2s, 6/1/01), 2006
(Luxembourg) ++ 200,750
100,000 Mobile Telecommunications Tech. sr. notes
13 1/2s, 2002 107,000
50,000 NEXTEL Communications, Inc. sr. disc. notes stepped-
coupon zero % (9 3/4s, 2/15/99), 2004 ++ 38,250
100,000 Omnipoint Corp. sr. notes 11 5/8s, 2006 96,375
55,000 Omnipoint Corp. sr. notes Ser. A, 11 5/8s, 2006 53,350
25,000 Paging Network, Inc. sr. sub. notes 10 1/8s, 2007 24,250
75,000 Paging Network, Inc. sr. sub. notes 10s, 2008 72,844
75,000 Pricellular Wireless Corp. sr. disc. notes stepped-
coupon Ser. B, zero % (14s, 11/15/97), 2001 ++ 79,500
50,000 Rogers Cantel, Inc. deb. 9 3/8s, 2008 (Canada) 52,750
60,000 RSL Communications, Ltd. company guaranty
12 1/4s, 2006 64,125
65,000 Sygnet Wireless, Inc. sr. notes 11 1/2s, 2006 66,300
45,000 Teleport Communications Group Inc. sr. disc. notes
stepped-coupon zero % (11 1/8s, 7/1/01), 2007 ++ 32,456
15,000 Winstar Equipment Corp. 144A company guaranty
12 1/2s, 2004 14,663
--------------
2,465,342
Textiles (0.8%)
- ------------------------------------------------------------------------------------------------------------
60,000 Glenoit Corp. 144A sr. sub. notes 11s, 2007 62,700
100,000 Polysindo International Finance company guaranty
11 3/8s, 2006 (Indonesia) 110,125
--------------
172,825
Transportation (2.0%)
- ------------------------------------------------------------------------------------------------------------
50,000 Atlantic Express, Inc. 144A company guaranty
10 3/4s, 2004 52,000
40,000 Coach USA, Inc. 144A company guaranty
9 3/8s, 2007 39,400
125,000 Eletson Holdings, Inc. 1st pfd. mtge. notes 9 1/4s, 2003
(Greece) 126,250
70,000 TFM SA DE CV 144A company guaranty
10 1/4s, 2007 71,400
90,000 TFM SA DE CV 144A company guaranty zero %
(11 3/4s, 6/15/02), 2009 ++ 53,100
100,000 Viking Star Shipping sr. secd. notes 9 5/8s, 2003 102,000
--------------
444,150
Utilities (6.1%)
- ------------------------------------------------------------------------------------------------------------
275,000 AES China Generating Co. sr. notes 10 1/8s, 2006
(China) 299,750
225,000 Calpine Corp. sr. notes 10 1/2s, 2006 241,875
50,000 Cleveland Electric Illuminating Co. 1st mtge.
Ser. 17-A, 9 3/8s, 2017 52,145
100,000 Cleveland Electric Illuminating Co. 1st mtge.
Ser. B, 9 1/2s, 2005 107,565
25,000 CMS Energy Corp. sr. notes 8 1/8s, 2002 25,244
500,000 Long Island Lighting Co. deb. 8.9s, 2019 521,135
50,000 Niagara Mohawk Power Corp. mtge. 9 1/2s, 2000 52,001
25,000 Toledo Edison Co. med. term notes 9.22s, 2021 25,570
--------------
1,325,285
--------------
Total Corporate Bonds and Notes
(cost $14,117,605) $ 13,864,841
BRADY BONDS (12.4%) * [DIAMOND]
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
$ 714,890 Argentina (Republic of) deb. 6 3/4s, 2005 $ 671,997
11,000 Brazil (Republic of) bonds 10 1/8s, 2027 10,574
730,663 Brazil (Republic of) 8s, 2014 +++ 587,270
257,000 Bulgaria (Republic of) deb. Ser. IAB, 6.563s, 2011 185,040
87,000 Ecuador (Government of) disc. 6.438s, 2025 61,988
1,242,000 United Mexican States deb. Ser. B, 6 1/4s, 2019 956,340
250,000 Venezuela (Government of) deb. Ser. DL, 6 3/4s, 2007 231,563
--------------
Total Brady Bonds (cost $2,182,603) $ 2,704,772
CONVERTIBLE BONDS AND NOTES (7.6%) *
PRINCIPAL AMOUNT VALUE
Automotive (0.2%)
- ------------------------------------------------------------------------------------------------------------
$ 28,000 Magna International cv. sub. deb. 5s, 2002 $ 33,600
Broadcasting (0.3%)
- ------------------------------------------------------------------------------------------------------------
28,000 International Cabletel Inc. 144A cv. deb. 7 1/4s, 2005 30,170
58,000 Jacor Communications, Inc. cv. sr. notes zero %, 2011 32,553
--------------
62,723
Business Equipment and Services (0.6%)
- ------------------------------------------------------------------------------------------------------------
110,000 Corporate Express, Inc. cv. notes 4 1/2s, 2000 97,625
38,000 U.S. Office Products Co. 144A cv. sub. notes
5 1/2s, 2003 33,630
--------------
131,255
Cellular Broadcasting (0.2%)
- ------------------------------------------------------------------------------------------------------------
75,000 Comcast Corp. cv. notes 1 1/8s, 2007 42,375
Chemicals (0.2%)
- ------------------------------------------------------------------------------------------------------------
16,000 Hercules, Inc. cv. deb. 8s, 2010 52,100
Computer Services and Software (0.1%)
- ------------------------------------------------------------------------------------------------------------
30,000 Intevac, Inc. 144A cv. sub. notes 6 1/2s, 2004 25,875
Computers (0.4%)
- ------------------------------------------------------------------------------------------------------------
25,000 Safeguard Scientifics, Inc. 144A cv. sub. notes 6s, 2006 28,469
38,000 Softkey International, Inc. 144A cv. sr. notes
5 1/2s, 2000 31,065
20,000 Synoptics Communications Inc. 144A cv. sub. deb.
5 1/4s, 2003 19,000
--------------
78,534
Conglomerates (0.3%)
- ------------------------------------------------------------------------------------------------------------
20,000 Hexcel Corp. cv. sub. notes 7s, 2003 27,125
25,000 Thermo Electron Corp. 144A cv. subordinated
4 1/4s, 2003 27,281
--------------
54,406
Consumer Non Durables (0.1%)
- ------------------------------------------------------------------------------------------------------------
29,000 Standard Commercial Corp. cv. sub. deb.
7 1/4s, 2007 + 26,499
Consumer Services (0.5%)
- ------------------------------------------------------------------------------------------------------------
32,000 Boston Chicken, Inc. cv. sub. deb. 7 3/4s, 2004 28,160
22,000 Comcast Corp. cv. sub. deb. stepped-coupon 3 3/8s,
(5 1/2s, 9/9/97), 2005 ++ 22,990
75,000 Hollinger, Inc. cv. Liquid Yield Option Note (LYON)
zero %, 2013 28,031
22,000 Pharmaceutical Marketing Services Inc. 144A cv. deb.
6 1/4s, 2003 18,040
16,000 Protection One, Inc. cv. sr. sub. notes 6 3/4s, 2003 16,420
--------------
113,641
Electronic Components and Equipment (0.1%)
- ------------------------------------------------------------------------------------------------------------
23,000 Thermo Optek Corp. 144A cv. bonds 5s, 2000 23,115
Electronics (0.1%)
- ------------------------------------------------------------------------------------------------------------
20,000 Xilinx, Inc. 144A cv. sub. notes 5 1/4s, 2002 23,175
Electronics and Electrical Equipment (1.1%)
- ------------------------------------------------------------------------------------------------------------
9,000 Diagnostic Retrieval Systems cv. sr. sub. deb. 9s, 2003 11,633
34,000 HMT Technology Corp. 144A cv. sub. notes
5 3/4s, 2004 29,070
39,000 Integrated Device Technology, Inc. cv. sub. notes
5 1/2s, 2002 33,248
28,000 Motorola, Inc. cv. sub. deb. LYON zero %, 2013 25,305
10,000 Photronics, Inc. cv. sub. notes 6s, 2004 11,100
14,000 Plasma & Materials Technologies, Inc. 144A cv. notes
7 1/8s, 2001 9,660
32,000 S3, Inc. 144A cv. sub. notes 5 3/4s, 2003 27,840
16,000 SCI Systems, Inc. cv. sub. notes 5s, 2006 22,960
10,000 Texas Instruments cv. sub. deb. 2 3/4s, 2002 20,381
25,000 Thermo Instrument Systems, Inc. 144A cv. deb.
4 1/2s, 2003 25,250
26,000 Thermo Quest Corp. cv. co. guaranty 5s, 2000 27,560
--------------
244,007
Environmental Control (0.1%)
- ------------------------------------------------------------------------------------------------------------
12,000 USA Waste Services, Inc. cv. sub. notes 4s, 2002 12,915
14,000 WMX Technologies, Inc. cv. sub. notes 2s, 2005 12,985
--------------
25,900
Health Care (0.8%)
- ------------------------------------------------------------------------------------------------------------
53,000 Alza Corp. cv. sub. LYON zero %, 2014 23,386
40,000 NovaCare, Inc. cv. sub. deb. 5 1/2s, 2000 36,400
35,000 PhyMatrix, Inc. cv. sub. deb. 6 3/4s, 2003 31,675
20,000 Renal Treatment Centers, Inc. cv. sub. notes
5 5/8s, 2006 19,800
23,000 Rotech Medical Corp. cv. sub. deb. 5 1/4s, 2003 22,310
22,000 U.S. Diagnostic Laboratories, Inc. 144A cv. sub.
deb. 9s, 2003 21,780
23,000 Vivra, Inc. 144A cv. sub. notes 5s, 2001 22,885
--------------
178,236
Hospital Management and Medical Services (0.1%)
- ------------------------------------------------------------------------------------------------------------
22,000 Integrated Health Services, Inc. cv. sub. deb. 6s, 2003 26,180
Insurance and Finance (0.5%)
- ------------------------------------------------------------------------------------------------------------
29,000 Berkshire Hathaway, Inc. cv. sr. notes 1s, 2001 30,196
27,000 Mitsubishi Bank Ltd. International Finance cv. trust
gtd. notes 3s, 2002 (Japan) 29,160
19,000 Pioneer Financial Services, Inc. cv. sub. notes
6 1/2s, 2003 27,788
40,000 USF&G Corp. cv. sub. notes zero %, 2009 28,900
--------------
116,044
Medical Supplies and Devices (0.1%)
- ------------------------------------------------------------------------------------------------------------
30,000 Uromed Corp. 144A cv. sub. notes 6s, 2003 16,688
Metals and Mining (0.1%)
- ------------------------------------------------------------------------------------------------------------
23,000 Quanex Corp. cv. sub. deb. 6.88s, 2007 24,553
Oil and Gas (0.5%)
- ------------------------------------------------------------------------------------------------------------
26,000 Lomak Petroleum, Inc. 144A cv. sub. deb. 6s, 2007 29,185
30,000 Pennzoil Co. cv. deb. 4 3/4s, 2003 38,175
3,000 Pride Petroleum Services, Inc. cv. sub. deb. 6 1/4s, 2006 5,756
40,000 Swift Energy Co. cv. sub. notes 6 1/4s, 2006 40,250
--------------
113,366
Paper and Forest Products (0.2%)
- ------------------------------------------------------------------------------------------------------------
29,000 Stone Container Corp. cv. sr. sub. notes 8 7/8s, 2000 38,498
Pharmaceuticals (0.2%)
- ------------------------------------------------------------------------------------------------------------
16,000 North American Vaccine, Inc. 144A cv. sub. notes
6 1/2s, 2003 14,500
40,000 Roche Holdings, Inc. 144A cv. unsub. LYON zero %,
2010 (Switzerland) 20,250
--------------
34,750
Pharmaceuticals and Biotechnology (0.1%)
- ------------------------------------------------------------------------------------------------------------
28,000 Nabi, Inc. cv. sub. notes 6 1/2s, 2003 22,855
4,000 North American Vaccine, Inc. 144A cv. sub. notes
6 1/2s, 2003 3,625
--------------
26,480
Recreation (0.4%)
- ------------------------------------------------------------------------------------------------------------
100,000 Argosy Gaming cv. sub. notes 12s, 2001 75,750
Retail (0.3%)
- ------------------------------------------------------------------------------------------------------------
20,000 Einstein/Noah Bagel Corp. 144A cv. sub. deb.
7 1/4s, 2004 17,225
20,000 Home Depot, Inc. cv. sub. notes 3 1/4s, 2001 22,900
31,000 Michaels Stores, Inc. cv. sub. notes 6 3/4s, 2003 27,823
--------------
67,948
Telecommunications (--%)
- ------------------------------------------------------------------------------------------------------------
10,000 MIDCOM Communications, Inc. 144A cv. sub. deb.
8 1/4s, 2003 6,600
--------------
Total Convertible Bonds and Notes
(cost $1,648,986) $ 1,662,298
PREFERRED STOCKS (4.8%) *
NUMBER OF SHARES VALUE
Broadcasting (2.2%)
- ------------------------------------------------------------------------------------------------------------
1,070 Chancellor Radio Broadcasting 144A $12.00 pfd. $ 122,515
350 Citadel Broadcasting Co. 144A $13.50, cum. pfd. [2 DBL. DAGGERS] 35,000
227 Granite Broadcasting Corp. 144A 12.75% cum. pfd. [2 DBL. DAGGERS] 220,190
120 Spanish Broadcasting Systems 144A 14.25%
cum. pfd. [2 DBL. DAGGERS] 111,600
--------------
489,305
Cable Television (0.8%)
- ------------------------------------------------------------------------------------------------------------
1,798 Cablevision Systems Corp. Ser. M, $11.125 dep. shs.
cum. pfd. [2 DBL. DAGGERS] 181,598
Communications (0.4%)
- ------------------------------------------------------------------------------------------------------------
350 Capstar Broadcasting Inc. 144A $12.00 pfd. 35,175
50 Intermedia Communication Ser. B, 13.50% pfd. [2 DBL. DAGGERS] 51,625
--------------
86,800
Electric Utilities (0.1%)
- ------------------------------------------------------------------------------------------------------------
640 Public Service Co. of New Hampshire $2.65 1st mtge.
cum. pfd. 15,840
Entertainment (0.3%)
- ------------------------------------------------------------------------------------------------------------
537 Alliance Gaming Corp. Ser. B, $15.00 pfd. [2 DBL. DAGGERS] 55,043
Insurance and Finance (0.6%)
- ------------------------------------------------------------------------------------------------------------
400 California Federal Bancorp Inc. Ser. A, $2.281 pfd. 10,200
2,000 Cga Group Ltd. Ser. A, 144A Ser. A, 13 75% pfd. [2 DBL. DAGGERS] 51,000
1,500 Chevy Chase Capital Corp. Ser. A, $5.188 pfd. 77,250
--------------
138,450
Telecommunications (0.2%)
- ------------------------------------------------------------------------------------------------------------
25 ICG Holdings, Inc. 14.25% pfd. (Canada) 26,500
51 Nextlink Communications, Inc. Ser. 144A
$7.00 cum. pfd. 2,639
20 NTL Inc. 144A 13.00% pfd. [2 DBL. DAGGERS] 21,000
--------------
50,139
Publishing (0.2%)
- ------------------------------------------------------------------------------------------------------------
1,400 Von Hoffman Corp. 144A 13.50% pfd. 40,040
--------------
Total Preferred Stocks (cost $1,023,837) $ 1,057,215
CONVERTIBLE PREFERRED STOCKS (3.8%) *
NUMBER OF SHARES VALUE
Automotive (0.1%)
- ------------------------------------------------------------------------------------------------------------
90 Ford Motor Co. Ser. A, $4.20 dep. shs. cv. cum. pfd. $ 11,430
Banks (0.1%)
- ------------------------------------------------------------------------------------------------------------
280 Sovereign Bancorp Inc. $3.125 cv. cum. pfd. 26,600
Basic Industrial Products (0.1%)
- ------------------------------------------------------------------------------------------------------------
190 Case Corp. $4.50 cv. cum. pfd. 31,184
Broadcasting (0.2%)
- ------------------------------------------------------------------------------------------------------------
317 Chancellor Broadcasting Corp. 144A $3.50 cv. pfd. 22,190
360 SFX Broadcasting, Inc. Ser. D, $3.25 cv. cum. pfd. 19,665
--------------
41,855
Business Equipment and Services (0.1%)
- ------------------------------------------------------------------------------------------------------------
240 Ikon Office Solutions Inc Ser. BB, $5.03 cv. pfd. 15,450
Communications (0.1%)
- ------------------------------------------------------------------------------------------------------------
300 Evergreen Media Corp. 144A $3.00 cv. pfd. 16,463
Computer Services and Software (0.2%)
- ------------------------------------------------------------------------------------------------------------
240 Vanstar Corp. 144A $3.375 cv. cum. pfd. 9,570
607 Wang Laboratories, Inc. Ser. B, $3.25 cv. pfd. 30,502
--------------
40,072
Energy-Related (0.1%)
- ------------------------------------------------------------------------------------------------------------
300 Calenergy Capital Trust 144A $3.75 cv. cum. pfd. 21,825
Food and Beverages (--%)
- ------------------------------------------------------------------------------------------------------------
126 Chiquita Brands International, Inc. Ser. B, $3.75
cv. cum. pfd. 7,308
Insurance and Finance (1.1%)
- ------------------------------------------------------------------------------------------------------------
285 Ahmanson (H.F.) & Co. $3.00 cv. cum. pfd. 26,363
351 American Bankers Insurance Group, Inc. Ser. B,
$3.125 cv. cum. pfd. 25,272
675 American General Delaware Corp. $3.00 cv. cum. pfd. 42,778
310 Devon Financing Trust $3.25 cv. pfd. 21,700
527 Finova Finance Trust $2.75 cv. cum. pfd. 30,303
700 Matewan Bancshares, Inc. Ser. A, $3.75 cv. cum. pfd. 18,375
435 Penncorp Financial Group, Inc. 144A $3.50 cv. cum. pfd. 27,188
390 St. Paul Capital LLC $3.00 cv. cum. pfd. 27,008
475 Union Planters Corp. Ser. E, $2.00 cv. cum. pfd. 30,400
--------------
249,387
Metals and Mining (0.3%)
- ------------------------------------------------------------------------------------------------------------
1,150 Freeport-McMoRan Copper Co., Inc. $1.75 cv.
cum. pfd. 31,481
200 Hvide Capital Trust 144A $3.25 cv. cum. pfd. 10,425
589 Titanium Metals Corp. $3.313 cv. pfd. 30,923
--------------
72,829
Oil and Gas (0.6%)
- ------------------------------------------------------------------------------------------------------------
410 Neuvo Energy Ser. A, $2.875 cv. pfd. 19,578
485 Occidental Petroleum Corp. 144A $3.875 cv. pfd. 28,251
410 Tejas Gas Corp. $2.625 cv. cum. pfd. 21,730
430 Tosco Financing Trust 144A $2.875 cv. pfd. 24,456
500 Unocal Capital Trust $3.125 cv. cum. pfd. 28,750
--------------
122,765
Packaging and Containers (0.2%)
- ------------------------------------------------------------------------------------------------------------
700 Crown Cork & Seal Co., Inc. $1.885 cv. cum. pfd. 35,350
Real Estate (0.2%)
- ------------------------------------------------------------------------------------------------------------
900 Equity Residential Property Ser. E, $1.75 cv. pfd. (R) 23,963
630 Insignia Financial Group, Inc. 144A $3.25 cv. pfd. 28,980
--------------
52,943
Retail (0.2%)
- ------------------------------------------------------------------------------------------------------------
200 Ann Taylor Finance Trust $4.25 cv. cum. pfd. 11,750
565 K mart Financing I $3.875 cv. cum. pfd. 31,004
--------------
42,754
Telecommunications (0.2%)
- ------------------------------------------------------------------------------------------------------------
800 Airtouch Communications, Inc. Ser. C, $2.125 cv.
cum. pfd. 38,400
--------------
Total Convertible Preferred Stocks (cost $799,647) $ 826,615
UNITS (3.0%) *
NUMBER OF UNITS VALUE
- ------------------------------------------------------------------------------------------------------------
15 Advanced Radio Telecommunications units 14s, 2007 $ 15,000
25,000 Celcaribe S.A. 144A units stepped-coupon zero %
(13 1/2s, 3/15/98), 2004 ++ + 159,500
200 Colt Telecommunications Group PLC units stepped-
coupon zero % (12s, 12/15/01), 2006
(United Kingdom) ++ 130,000
100,000 Echostar Communications Corp. units stepped-coupon
zero % (12 7/8s, 6/01/99), 2004 ++ 84,625
35 Globalstar L.P. Capital units 11 3/8s, 2004 35,088
10 Hedstrom Holdings, Inc. units stepped-coupon zero %
(12s, 6/01/02), 2009 ++ 5,950
20 McCaw International Ltd. 144A units stepped-
coupon zero % (13s, 4/15/02), 2007 ++ 9,700
50 Orion Network Systems units stepped-coupon zero %
(12 1/2s, 1/15/02), 2007 ++ 30,375
30 Stone Container Corp. units sr. sub. 12 1/4s, 2002 30,600
50,000 Winstar Communications, Inc. 144A sr. disc. notes units
stepped-coupon zero % (14s, 10/15/00), 2005 ++ 28,750
55 XCL Ltd. sr. sec. notes units, 13 1/2s, 2004 56,100
900 XCL Ltd. unit cum. pfd., 9.50% 76,500
--------------
Total Units (cost $661,178) $ 662,188
FOREIGN GOVERNMENT BONDS AND NOTES (1.9%) *
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
USD 170,000 Bank of Economic Affairs of Russia
(Vnesheconombank) non performing
loan + $ 155,763
USD 303,000 Bank of Foreign Economic Affairs of Russia
(Vnesheconombank) principal loan FRN
2020 +##+++ 201,495
ZAR 306,000 South Africa (Republic of) bonds
Ser. 153, 13s, 2010 61,801
--------------
Total Foreign Government Bonds and Notes
(cost $505,690) $ 419,059
COMMON STOCKS (0.2%) *
NUMBER OF SHARES VALUE
- ------------------------------------------------------------------------------------------------------------
27,272 Capstar Broadcasting Partners + $ 32,726
26 Service Corp. International 855
--------------
Total Common Stocks (cost $30,876) $ 33,581
WARRANTS (--%)*+ EXPIRATION
NUMBER OF WARRANTS DATE VALUE
- ------------------------------------------------------------------------------------------------------------
2,000 CGA Group Ltd. 144A 1/1/04 $ 20
25 Esat Holdings (Ireland) 9/9/99 500
25 Hyperion Telecommunications 144A 4/15/01 750
50 Nextlink Communications, Inc. 144A 2/1/09 1
20 Spanish Broadcasting Systems 144A 6/30/99 2,400
--------------
Total Warrants (cost $3,442) $ 3,671
SHORT-TERM INVESTMENTS (2.6%) * (cost $571,094)
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
571,000 Interest in $200,289,000 joint repurchase agreement
dated June 30, 1997 with Morgan (J.P.) & Co., Inc.
due July 1, 1997 with respect to various U.S.
Treasury obligations -- maturity values of
$571,094 for an effective yield of 5.95% $ 571,094
- ------------------------------------------------------------------------------------------------------------
Total Investments (cost $21,544,958) *** $ 21,805,334
- ------------------------------------------------------------------------------------------------------------
* Percentages indicated are based on net assets of $21,819,732.
*** The aggregate identified cost on a tax basis is $21,548,480 resulting
in gross unrealized appreciation and depreciation of $519,234 and
$262,380 respectively, or net unrealized appreciation of $256,854.
+ Non-income-producing security.
++ The interest or dividend rate and date shown parenthetically represent
the new interest or dividend rate to be paid and the date the fund
will begin receiving interest or dividend income at this rate.
+++ A portion of the income will be received in additional securities.
[2 DBL. DAGGERS] Income may be received in cash or additional securities at
the discretion of the issuer.
## When-issued securities (Note 1). The coupon rate is LIBOR
plus 13/16.
[DIAMOND] Brady bonds are foreign bonds collateralized by the U.S. Government.
The rates are floating rates and are the current rates at June 30,1997.
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.
Diversification by Country
Distribution of investments by country of issue at June 30, 1997: (as percentage of Market Value)
Argentina 3.2% Russia 1.6%
Brazil 2.8 Venezuela 1.1
Canada 1.6 United Kingdom 1.3
China 1.4 United States 74.6
Indonesia 2.0 Other 4.2
Mexico 6.2 -------------------
Total 100.00%
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
Forward Currency Contracts to Buy at June 30, 1997
(aggregate face value $123,318)
Aggregate Face Delivery Unrealized
Market Value Value Date Depreciation
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------
Polish Zloty $120,626 $123,318 6/5/98 $(2,692)
- ----------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------
Forward Currency Contracts to Sell at June 30, 1997
(aggregate face value $22,565)
Market Aggregate Face Delivery Unrealized
Value Value Date Appreciation
- ----------------------------------------------------------------------------------------
Deutschemarks $22,178 $22,565 6/5/98 $387
- ----------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
June 30, 1997
<S> <C>
Assets
- ---------------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $21,544,958) (Note 1) $21,805,334
- ---------------------------------------------------------------------------------------------------
Cash 103,594
- ---------------------------------------------------------------------------------------------------
Dividends, interest and other receivables 339,283
- ---------------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 401,975
- ---------------------------------------------------------------------------------------------------
Receivable for securities sold 384,209
- ---------------------------------------------------------------------------------------------------
Receivable for open forward currency contracts 387
- ---------------------------------------------------------------------------------------------------
Receivable from Manager (Note 2) 38,405
- ---------------------------------------------------------------------------------------------------
Unamortized organization expenses (Note 1) 80,551
- ---------------------------------------------------------------------------------------------------
Total assets 23,153,738
Liabilities
- ---------------------------------------------------------------------------------------------------
Payable for securities purchased 1,092,023
- ---------------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 62,345
- ---------------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 6,781
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 6,000
- ---------------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 2,000
- ---------------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 15,076
- ---------------------------------------------------------------------------------------------------
Payable for organization expenses (Note 1) 80,943
- ---------------------------------------------------------------------------------------------------
Payable for open forward currency contracts 2,692
- ---------------------------------------------------------------------------------------------------
Other accrued expenses 66,146
- ---------------------------------------------------------------------------------------------------
Total liabilities 1,334,006
- ---------------------------------------------------------------------------------------------------
Net assets $21,819,732
Represented by
- ---------------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $21,277,195
- ---------------------------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 212,757
- ---------------------------------------------------------------------------------------------------
Accumulated net realized gain on investments (Note 1) 71,709
- ---------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments and assets and
liabilities in foreign currencies 258,071
- ---------------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $21,819,732
Computation of net asset value and offering price
- ---------------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($9,407,327 divided by 1,078,330 shares) $8.72
- ---------------------------------------------------------------------------------------------------
Offering price per class A share (100/95.25 of $8.72)* $9.15
- ---------------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($11,098,751 divided by 1,273,850 shares)** $8.71
- ---------------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($1,313,654 divided by 150,648 shares) $8.72
- ---------------------------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $8.72)* $9.01
- ---------------------------------------------------------------------------------------------------
* On single sales of less than $50,000. On sales of $50,000 or more and on group sales the offering
price is reduced.
** Redemption price per share is equal to net asset value less any applicable contingent deferred
sales charge.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
For the period January 2, 1997 (commencement of operations) to June 30, 1997
<S> <C>
Investment income:
- --------------------------------------------------------------------------------------------------
Interest $526,959
- --------------------------------------------------------------------------------------------------
Dividends 34,744
- --------------------------------------------------------------------------------------------------
Total investment income 561,703
- --------------------------------------------------------------------------------------------------
Expenses:
Compensation of Manager (Note 2) 49,964
- --------------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 37,565
- --------------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 6,004
- --------------------------------------------------------------------------------------------------
Administrative services (Note 2) 2,000
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 6,792
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 31,782
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 1,766
- --------------------------------------------------------------------------------------------------
Amortization of organization expenses (Note 1) 392
- --------------------------------------------------------------------------------------------------
Reports to shareholders 9,503
- --------------------------------------------------------------------------------------------------
Registration fees 6,472
- --------------------------------------------------------------------------------------------------
Auditing 34,321
- --------------------------------------------------------------------------------------------------
Legal 6,870
- --------------------------------------------------------------------------------------------------
Postage 11,032
- --------------------------------------------------------------------------------------------------
Other 2,707
- --------------------------------------------------------------------------------------------------
Fees waived and reimbursed by Manager (Note 2) (88,369)
- --------------------------------------------------------------------------------------------------
Total expenses 118,801
- --------------------------------------------------------------------------------------------------
Expense reduction (Note 2) (23,552)
- --------------------------------------------------------------------------------------------------
Net expenses 95,249
- --------------------------------------------------------------------------------------------------
Net investment income 466,454
- --------------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 77,116
- --------------------------------------------------------------------------------------------------
Net realized gain on foreign currency transactions (Note 1) 474
- --------------------------------------------------------------------------------------------------
Net unrealized depreciation of assets and
liabilities in foreign currencies during the period (2,305)
- --------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments during the period 260,376
- --------------------------------------------------------------------------------------------------
Net gain on investments 335,661
- --------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $802,115
- --------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
For the period
January 2, 1997
(commencement of
operations) to
June 30 1997
- -------------------------------------------------------------------------------------------------
Increase in net assets
<S> <C>
- -------------------------------------------------------------------------------------------------
Operations:
- -------------------------------------------------------------------------------------------------
Net investment $ 466,454
- -------------------------------------------------------------------------------------------------
Net realized gain on investments and foreign currency transactions 77,590
- -------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments and assets and liabilities
in foreign currencies 258,071
- -------------------------------------------------------------------------------------------------
Net in net assets resulting from operations 802,115
- -------------------------------------------------------------------------------------------------
Distributions to shareholders:
- -------------------------------------------------------------------------------------------------
From net investment income
Class A (123,230)
- -------------------------------------------------------------------------------------------------
Class B (120,506)
- -------------------------------------------------------------------------------------------------
Class M (15,269)
- -------------------------------------------------------------------------------------------------
Increase from capital share transactions (Note 4) 21,273,622
- -------------------------------------------------------------------------------------------------
Total increase in net assets 21,816,732
Net assets
- -------------------------------------------------------------------------------------------------
Beginning of period 3,000
- -------------------------------------------------------------------------------------------------
End of period (including undistributed net investment income of $212,757) $21,819,732
- -------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS A
- -----------------------------------------------------------------------------------------------------------------------
For the period
Per-share January 2, 1997+
operating performance to June 30
- -----------------------------------------------------------------------------------------------------------------------
1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C>
Net asset value,
beginning of period $8.50
- -----------------------------------------------------------------------------------------------------------------------
Investment operations
- -----------------------------------------------------------------------------------------------------------------------
Net investment income .34 (c)(d)
- -----------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain on investments .02
- -----------------------------------------------------------------------------------------------------------------------
Total from
investment operations .36
- -----------------------------------------------------------------------------------------------------------------------
Less distributions:
- -----------------------------------------------------------------------------------------------------------------------
From net
investment income (.14)
- -----------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments --
- -----------------------------------------------------------------------------------------------------------------------
Total distributions (.14)
- -----------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $8.72
- -----------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- -----------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 4.30 *
- -----------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $9,407
- -----------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .74 *(d)
- -----------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 3.85 *(d)
- -----------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 63.06 *
- -----------------------------------------------------------------------------------------------------------------------
* Not annualized.
+ Commencement of operations.
(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 include amounts paid through expense
offset arrangements. (Note 2)
(c) Per share net investment income has been determined on the basis of weighted average number of
shares outstanding during the period.
(d) Reflects an expense limitation in effect during the period. As a result of such limitation,
expenses for the fund reflect reductuons of $0.07, $0.05, and $0.05 per share for class A, B
and M respectively. (Note 2)
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS B
- ---------------------------------------------------------------------------------------------------------------------
For the period
Per-share January 2, 1997+
operating performance to June 30
- ---------------------------------------------------------------------------------------------------------------------
1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C>
Net asset value,
beginning of period $8.50
- ---------------------------------------------------------------------------------------------------------------------
Investment operations
- ---------------------------------------------------------------------------------------------------------------------
Net investment income .30 (c)(d)
- ---------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain on investments .03
- ---------------------------------------------------------------------------------------------------------------------
Total from
investment operations .33
- ---------------------------------------------------------------------------------------------------------------------
Less distributions:
- ---------------------------------------------------------------------------------------------------------------------
From net
investment income (.12)
- ---------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments --
- ---------------------------------------------------------------------------------------------------------------------
Total distributions (.12)
- ---------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $8.71
- ---------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ---------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 3.93 *
- ---------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $11,099
- ---------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.12 *(d)
- ---------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 3.52 *(d)
- ---------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 63.06 *
- ---------------------------------------------------------------------------------------------------------------------
* Not annualized.
+ Commencement of operations.
(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 include amounts paid through expense
offset arrangements. (Note 2)
(c) Per share net investment income has been determined on the basis of weighted average number of
shares outstanding during the period.
(d) Reflects an expense limitation in effect during the period. As a result of such limitation,
expenses for the fund reflect reductuons of $0.07, $0.05, and $0.05 per share for class A, B
and M respectively. (Note 2)
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS M
- ----------------------------------------------------------------------------------------------------------------------
For the period
Per-share January 2, 1997+
operating performance to June 30
- ----------------------------------------------------------------------------------------------------------------------
1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C>
Net asset value,
beginning of period $8.50
- ----------------------------------------------------------------------------------------------------------------------
Investment operations
- ----------------------------------------------------------------------------------------------------------------------
Net investment income .33 (c)(d)
- ----------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
loss on investments .02
- ----------------------------------------------------------------------------------------------------------------------
Total from
investment operations .35
- ----------------------------------------------------------------------------------------------------------------------
Less distributions:
- ----------------------------------------------------------------------------------------------------------------------
From net
investment income (.13)
- ----------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments --
- ----------------------------------------------------------------------------------------------------------------------
Total distributions (.13)
- ----------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $8.72
- ----------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ----------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%) (a) 4.20 *
- ----------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $1,314
- ----------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%) (b) .87 *(d)
- ----------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 3.79 *(d)
- ----------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 63.06 *
- ----------------------------------------------------------------------------------------------------------------------
* Not annualized.
+ Commencement of operations.
(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 include amounts paid through expense
offset arrangements. (Note 2)
(c) Per share net investment income has been determined on the basis of weighted average number of
shares outstanding during the period.
(d) Reflects an expense limitation in effect during the period. As a result of such limitation,
expenses for the fund reflect reductuons of $0.07, $0.05, and $0.05 per share for class A, B
and M respectively. (Note 2)
</TABLE>
Notes to financial statements
June 30, 1997
Note 1
Significant accounting policies
Putnam High Yield Total Return Fund (the "fund") is a series of
Putnam Funds Trust (the "trust") which is registered under the
Investment Company Act of 1940, as amended, as a diversified, open-
end management investment company. The fund seeks total return
through high current income and capital appreciation by investing
primarily in high-yielding, lower-rated fixed-income securities.
The fund offers class A, class B and class M shares. Class A shares
are sold with a maximum front-end sales charge of 4.75%. Class B
shares, which convert to class A shares after approximately eight
years, do not pay a front-end sales charge, but pay a higher ongoing
distribution fee than class A 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 3.25% and pay an ongoing distribution fee that is lower
than class B shares and higher than class A shares.
Expenses of the fund are borne pro-rata by the holders of each class
of shares, except that each class bears expenses unique to that class
(including the distribution fees applicable to such class). Each
class votes as a class only with respect to its own distribution plan
or other matters on which a class vote is required by law or
determined by the Trustees. Shares of each class would receive their
pro-rata share of the net assets of the fund, if the fund were
liquidated. In addition, the Trustees declare separate dividends on
each class of shares.
The following is a summary of significant accounting policies
consistently followed by the fund in the preparation of its financial
statements. The preparation of financial statements is in conformity
with 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.
B) Joint trading account Pursuant to an exemptive order issued by the
Securities and Exchange Commission, the fund may transfer uninvested
cash balances into a joint trading account along with the cash of
other registered investment companies and certain other accounts
managed by Putnam Investment Management, Inc. ("Putnam Management"),
the fund's Manager, a wholly-owned subsidiary of Putnam Investments,
Inc. These balances may be invested in one or more repurchase
agreements and/or short-term money market instruments.
C) Repurchase agreements The fund, or any joint trading account,
through its custodian, receives delivery of the underlying
securities, the market value of which at the time of purchase is
required to be in an amount at least equal to the resale price,
including accrued interest. 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, stepped-coupon bonds and
payment in kind bonds are accreted according to the effective yield
method. Any premium resulting from the purchase of securities in
excess of maturity value is amortized on a yield-to-maturity basis.
Securities purchased or sold on a when-issued 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 fluctuations are
included with the net realized and unrealized gain or loss on
investments. Net realized gains and losses on foreign currency
transactions represent net exchange gains or losses on closed forward
currency contracts, disposition of foreign currencies and the
difference between the amount of investment income and foreign
withholding taxes recorded on the fund's books and the U.S. dollar
equivalent amounts actually received or paid. Net unrealized
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 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) 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.
H) 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
interest on payment-in-kind securities, market discount, currency
gains and losses on foreign bonds. 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 period ended June 30, 1997, the fund
reclassified $5,308 to increase undistributed net investment income
and $573 to increase paid-in-capital, with a decrease to accumulated
net realized gain on investments of $5,881. The calculation of net
investment income per share in the financial highlights table
excludes these adjustments.
I) Expenses of the trust Expenses directly charged or attributable to
any fund will be paid from the assets of that fund. Generally,
expenses of the trust will be allocated among and charged to the
assets of each fund on a basis that the Trustees deem fair and
equitable, which may be based on the relative assets of each fund or
the nature of the services performed and relative applicability to
each fund.
J) Unamortized organization expenses Expenses incurred by the fund in
connection with its organization, its registration with the
Securities and Exchange Commission and with various states and the
initial public offering of its shares were $80,943. These expenses
are being amortized on projected net asset levels over a five-year
period. The fund will reimburse Putnam Management for the payment of
these expenses.
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: 0.80%
of the first $500 million of the average net assets, 0.70% of the
next $500 million, 0.65% of the next $500 million, 0.60% of the next
$5 billion, 0.575% of the next $5 billion, 0.555% of the next $5
billion, 0.54% of the next $5 billion, 0.53% of any excess
thereafter.
Putnam Management has agreed to limit its compensation (and, to the
extent necessary, bear other expenses) through December 31, 1997, to
the extent that expenses of the fund (exclusive of brokerage,
interest, taxes, deferred organizational and extraordinary expense,
credits from Putnam Fiduciary Trust Company (PFTC), a wholly-owned
subsidiary of Putnam Investments, Inc. and payments under the Trust's
distribution plan) would exceed an annual rate of 1.25% of the fund's
average net assets.
The fund reimburses Putnam Management for the compensation and
related expenses of certain officers of the fund and their staff who
provide administrative services to the fund. The aggregate amount of
all such reimbursements is determined annually by the Trustees.
Custodial functions for the fund's assets are provided by Putnam
Fiduciary Trust Company (PFTC), a wholly-owned subsidiary of Putnam
Investments, Inc. Investor servicing agent functions are provided by
Putnam Investor Services, a division of PFTC.
For the period ended June 30, 1997, fund expenses were reduced by
$23,552 under expense offset arrangements with PFTC. Investor
servicing and custodian fees reported in the Statement of operations
exclude these credits. The fund could have invested a portion of the
assets utilized in connection with the expense offset arrangements in
an income producing asset if it had not entered into such
arrangements.
Trustees of the fund receive an annual Trustees fee of $100 and an
additional fee for each Trustee's meeting attended. Trustees who are
not interested persons of Putnam Management and who serve on
committees of the Trustees receive additional fees for attendance at
certain committee meetings.
The fund adopted a Trustee Fee Deferral Plan (the "Plan") which
allows the Trustees to defer the receipt of all or a portion of
Trustees Fees payable on or after July 1, 1995. The deferred fees
remain in the fund and are invested in certain Putnam funds until
distribution in accordance with the Plan.
The Fund has adopted an unfunded noncontributory defined benefit
pension plan covering all Trustees of the Fund who have served as
Trustee for at least five years. Benefits under the plan are equal to
50% of the Trustee's average total retainer and meeting fees for the
three years preceding retirement. Pension expense for the fund is
included in Trustee fees in the Statement of operations for the
period ended June 30, 1997. 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% and 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 at an annual rate of 0.25%, 1.00%
and 0.50% of the average net assets attributable to class A, class B
and class M shares respectively.
For the period ended June 30, 1997, Putnam Mutual Funds Corp., acting
as underwriter received net commissions of $21,860 and $1,697 from
the sale of class A and class M shares, respectively and $6,237 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 period ended June 30, 1997,
Putnam Mutual Funds Corp., acting as underwriter received no monies
on class A redemptions.
Note 3
Purchase and sales of securities
During the period ended June 30, 1997, purchases and sales of
investment securities other than U.S. government obligations and
short-term investments aggregated $29,185,038 and $8,402,542,
respectively. There were no purchases and sales of U.S. government
obligations. In determining the net gain or loss on securities sold,
the cost of securities has been determined on the identified cost
basis.
Note 4
Capital shares
At June 30, 1997, there was an unlimited number of shares of
beneficial interest authorized. Transactions in capital shares were
as follows:
For the period
January 2, 1997
(commencement of
operations) to
June 30, 1997
- ------------------------------------------------------------
Class A Shares Amount
- ------------------------------------------------------------
Shares sold 1,251,093 $10,640,288
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 11,821 100,715
- ------------------------------------------------------------
1,262,914 10,741,003
Shares
repurchased (184,702) (1,580,322)
- ------------------------------------------------------------
Net increase 1,078,212 $9,160,681
- ------------------------------------------------------------
For the period
January 2, 1997
(commencement of
operations) to
June 30, 1997
- ------------------------------------------------------------
Class B Shares Amount
- ------------------------------------------------------------
Shares sold 1,413,631 $12,020,729
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 12,001 102,193
- ------------------------------------------------------------
1,425,632 12,122,922
Shares
repurchased (151,900) (1,286,397)
- ------------------------------------------------------------
Net increase 1,273,732 $10,836,525
- ------------------------------------------------------------
For the period
January 2, 1997
(commencement of
operations) to
June 30, 1997
- ------------------------------------------------------------
Class M Shares Amount
- ------------------------------------------------------------
Shares sold 153,516 $1,302,143
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 1,438 12,252
- ------------------------------------------------------------
154,954 1,314,395
Shares
repurchased (4,424) (37,979)
- ------------------------------------------------------------
Net increase 150,530 $1,276,416
- ------------------------------------------------------------
Note 5
Initial capitalization and
offering of shares
The fund was established as a Massachusetts business trust on January
22, 1996. During the period January 22, 1996 to January 1, 1997 the
fund had no operations other than those related to organizational
matters, including the initial capital contribution of $1,000, $1,000,
and $1,000 of initial organizational expenses to class A, B and M
respectively, and the issuance of 118 shares for each of the classes
to Putnam Mutual Funds Corp., a wholly-owned subsidiary of Putnam
Investments, Inc.
Federal tax information
(Unaudited)
The fund has designated 6.22% of the distributions from net investment
income as qualifying for the dividends received deduction for corporations.
The Form 1099 you receive in January 1998 will show the tax status of all
distributions paid to your account in calendar 1997.
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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
Coopers & Lybrand L.L.P.
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
John A. Hill
Ronald J. Jackson
Elizabeth T. Kennan
Lawrence J. Lasser
Robert E. Patterson
Donald S. Perkins
George Putnam, III
A.J.C. Smith
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
John D. Hughes
Senior Vice President and Treasurer
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Gary N. Coburn
Vice President
William J. Curtin
Vice President
Jin W. Ho
Vice President and Fund Manager
Gail S Attridge
Vice President and Fund Manager
Charles G. Pohl
Vice President and Fund Manager
William N. Shiebler
Vice President
John R. Verani
Vice President
Paul M. O'Neil
Vice President
Beverly Marcus
Clerk and Assistant Treasurer
This report is for the information of shareholders of Putnam High Yield Total
Return Fund. It may also be used as sales literature when preceded or
accompanied by the current prospectus, which gives details of sales charges,
investment objectives, and operating policies of the fund, and the most recent
copy of Putnam's Quarterly Performance Summary. 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 principal amount invested.
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PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
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Putnam
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