Putnam
High Yield
Trust II
ANNUAL REPORT ON PERFORMANCE AND OUTLOOK
8-31-98
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* "Today's high-yield market is being driven by many factors including
deregulation, new technology, and mergers and acquisitions. Putnam High
Yield Trust II's performance during its fiscal year ended August 31, 1998,
reflected the opportunities created by these factors and the continuing
growth of this market -- growth that we have been able to take full
advantage of."
-- Jennifer E. Leichter, Fund manager
* As reported in the September 1998 issue of Mutual Funds, "Junk
[high-yield bonds] isn't necessarily, well, as junky as you might think.
Many well-known companies carry the tag. Among them: Bethlehem Steel,
Borden, CBS, Northwest Airlines, Ryder, and Sports Authority."
CONTENTS
4 Report from Putnam Management
9 Fund performance summary
13 Portfolio holdings
31 Financial statements
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
An environment of deregulation and a continuing stream of mergers,
acquisitions, and new technology provided plenty of issuance for investors
seeking higher-yielding lower-rated bonds during the past several months.
Worldwide equity investors fleeing to the relative safety of fixed-income
investments added their own demand impetus. Together, these factors helped
mitigate the effects of market turbulence on Putnam High Yield Trust II's
performance during its abbreviated fiscal year ended on August 31, 1998.
Because they usually behave more like stocks than high-quality bonds, your
fund's holdings tended to share in the general rise of equities throughout
much of the period. Then, when a new wave of turbulence hit the world's
stock markets, they began acting more like other fixed-income securities,
which slowed their retreat.
In the following report, the fund's management team discusses performance
and strategies during the period just ended and takes a look at the fund's
prospects as it proceeds into its first full fiscal year.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
October 21, 1998
Report from the Fund Managers
Jennifer E. Leichter
Gail S. Attridge
This report encompasses the period from Putnam High Yield Trust II's
inception, December 31, 1997, through August 31, 1998, marking your fund's
first, although abbreviated, fiscal year. Putnam High Yield Trust II
shares a common strategy with two of Putnam's other well-established
high-yield funds, Putnam High Yield Advantage Fund and Putnam High Yield
Trust. In pursuing its objective of high current income with capital
growth as a secondary goal, Putnam High Yield Trust II invests primarily
in high-yielding lower-rated fixed-income securities. Your fund also
follows the other funds' lead with regard to portfolio diversification.
Your fund's holdings are spread across a broad range of industries and
companies, both large and small, foreign and domestic.
For this abbreviated initial fiscal year, your fund's class A shares
provided an annualized total return of -1.08% at net asset value and
- -5.74% at public offering price. For more information, including returns
for other classes of shares, please see pages 9 and 10.
* FAVORABLE ENVIRONMENT FOR HIGH-YIELD BONDS
Because the performance of high-yield bonds tends to reflect the strength
of the stock market to a greater extent than the performance of other
types of bonds, your fund benefited from the strength of both the stock
and bond markets during the fiscal year. Like stocks, the prices of
high-yield bonds are more sensitive to the outlook for the economy and
corporate earnings than to day-to-day interest-rate fluctuations. So while
high-quality bonds usually provide strong returns during recessions
because their prices rise as interest rates fall, high-yield bonds, like
stocks, may provide attractive returns during strong economic times. While
the U.S. stock market experienced increased volatility throughout the
period, Putnam Management believes the fundamental background for stocks
and high-yield bonds remains favorable.
Early in the period, high-yield bonds were buoyed by a healthy bond market
in addition to the robust stock market. The favorable economic environment
also contributed to a high level of merger and acquisition activity. This
increased activity helped performance of the high-yield securities in
which your fund invests because it often resulted in the acquisition of
high-yield issuers by financially stronger corporations. Credit upgrades
for the high-yield debt frequently followed, along with higher bond
prices. Developments in key high-yield industries such as
telecommunications and cable television as well as mergers and
acquisitions also helped your fund's performance.
During the period, a steady supply of high-yielding securities was
surpassed by an even stronger demand from insurance companies, pension
funds, and individual and foreign investors seeking the higher income
streams these bonds provide. Historically low long-term interest rates and
a flattening U.S. yield curve led to increased high-yield issuance levels
for most of early 1998.
[GRAPHIC OMITTED: worm chart HIGH-YIELD BONDS VERSUS OTHER BONDS]
First Boston Lehman Brothers
High Yield Corporate Bond
Date Bond Index Index
8/31/92 0 0
8/31/93 15.77% 13.63%
8/31/94 19.96% 10.86%
8/31/95 35.80% 25.80%
8/31/96 49.58% 30.57%
8/31/97 72.66% 45.25%
8/31/98 75.18% 59.02%
Past performance is not indicative of future results. This chart
demonstrates that high-yield bonds, as represented by the First Boston
High Yield Index, generally outperformed investment-grade corporate bonds,
as represented by the Lehman Brothers Corporate Bond Index. The chart
shows cumulative returns. The lower credit rating of high-yield bonds
reflects a greater possibility that adverse changes in an issuer's
business or financial condition or in general economic conditions may
impair the issuer's ability to pay principal and interest on the
securities. This chart does not reflect the performance of Putnam High
Yield Trust II.
* ASTUTE SECTOR DIVERSIFICATION INCREASES OPPORTUNITIES
Top-performing industries in the high-yield universe during your fund's
fiscal year included cable television, broadcasting, finance and
telecommunications, which performed well based on very positive operating
results and high equity valuations.
The telecommunications sector, now the largest in the high-yield universe,
experienced a number of positive factors during the period. First,
favorable regulatory developments improved the market positions of
competitive local exchange carriers (CLECs) and specialized mobile radio
operators including one of your fund's top holdings, NEXTEL
Communications. As with all portfolio holdings, in-depth credit research
is critical to determining the companies most likely to succeed within
their market niches. NEXTEL was one of the market's darlings, performing
well for your fund. The company continued to add subscribers to its
digital network at an extraordinary rate. While the securities discussed
in this report were viewed favorably at the end of the period, all
holdings are subject to review in accordance with the fund's investment
strategy and may vary in the future.
Another positive factor for the telecommunications sector was the fact
that commercial launches of these new technologies proceeded smoothly
throughout the year. And finally, merger and acquisition activity in the
sector continued at a healthy pace, led by WorldCom, Inc. A global
telecommunications company, WorldCom has established operations in more
than 50 countries encompassing the Americas, Europe, and the Asia-Pacific
region. WorldCom is a premier provider of facilities-based and fully
integrated local, long distance, international, and Internet services. Its
global networks provide end-to-end connectivity to over 31,000 buildings
worldwide. In November 1997, WorldCom announced a definitive merger
agreement with MCI Communications Corporation.
WinStar Communications is another example of a company that has excelled
in this sector. WinStar provides a full range of telecommunications
services, including local, long distance, and Internet access services, as
a local exchange carrier. In June 1998, WinStar received recognition for
its innovative technology and 1997 deployment of 17 fully integrated voice
and data networks. WinStar was presented with the Best New Competitive
Local Network award at the Supercomm '98 Conference in Atlanta, the
world's largest annual communications conference and exhibition.
[GRAPHIC OMITTED: horizontal bar chart of TOP INDUSTRY SECTORS]
TOP INDUSTRY SECTORS*
Telecommunications 17.1%
Health care 4.6%
Broadcasting 3.6%
Oil and gas 3.5%
Cellular
communications 3.3%
Footnote reads:
*Based on net assets as of 8/31/98. Holdings will vary over time.
Your fund's holdings in the cable sector performed particularly well
during the fiscal year as the industry benefited from Microsoft's
billion-dollar investment in Philadelphia cable operator Comcast Corp.
Prior to this event investors had perceived cable as a mature industry
that would gradually lose market share to satellite television. The
Microsoft investment changed this perception and raised awareness of the
industry's new role as the ideal Internet delivery vehicle. Also during
the period, AT&T announced plans to acquire TCI, another cable company.
The broadcasting sector was also fueled by fevered merger and acquisition
activity resulting from relaxation of the rules controlling the number of
stations operators can own. The new rules allow station operators to own
multiple stations in individual markets and to own a greater absolute
number of stations. By spreading the cost of administration and sales
across several stations, companies can reduce the cost of business and
improve their profit margins. This fact motivated a number of players to
expand rapidly over the course of your fund's fiscal year through
aggressive acquisition campaigns.
* CHANGING MARKET CONDITIONS MAY SIGNAL OPPORTUNITIES
While equity markets have been volatile recently, Putnam Management's
positive outlook for high-yield bonds remains intact. We view the
potential for changing market conditions with an opportunistic eye; bonds
often become mispriced when investors overreact to transitory events.
Because any shifts in the economy, whether real or perceived, affect each
high-yield issuer differently, careful monitoring and research are
critical. An ongoing analysis of corporate cash flow and asset values for
each portfolio company, together with extensive portfolio diversification,
is the key to minimizing risk. We believe that Putnam's disciplined
management style will enable us to take advantage of any resulting
opportunities.
We anticipate that U.S. growth will continue to moderate with little
inflation thanks largely to Asian economic and currency weakness. Slowing
demand and increased exports from that region should help keep U.S. prices
down. We believe the underlying fundamentals and credit quality of the
high-yield market remain strong as does merger activity. Higher coupons --
the annual interest paid on a bond -- have reduced new issuance and
default rates remain low.
We plan to continue to focus on diversification, on companies with little
exposure to Asia, and on securities with yields attractive relative to
their risk levels. We will continue to emphasize improving credits in the
telecommunications, broadcasting, finance, and health-care industries.
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 8/31/98, there is no guarantee the fund will
continue to hold these securities in the future. The lower credit ratings
of high-yield bonds reflect a greater possibility that adverse changes in
the economy or poor performance by the issuers of these bonds may affect
the issuer's ability to pay principal and interest.
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 Trust II is designed for investors seeking high current income
through a diversified portfolio of high-yielding lower-rated corporate
bonds, with a secondary objective of capital growth when consistent with
high current income.
TOTAL RETURN FOR PERIOD ENDED 8/31/98
Class A Class B Class M
(inception date) (12/31/97) (12/31/97) (12/31/97)
NAV POP NAV CDSC NAV POP
- ------------------------------------------------------------------------------
Life of fund -1.08% -5.74% -1.58% -6.29% -1.33% -4.58%
- ------------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIOD ENDED 8/31/98
First Boston Consumer
High Yield Price
Bond Index Index
- ------------------------------------------------------------------------------
Life of fund -2.09% 1.30%
- ------------------------------------------------------------------------------
Past performance is not indicative of future results. Class A and class M
share performance is shown at public offering price 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, which is 5% in the first year, declines
to 1% in the sixth year, and is eliminated thereafter. All returns assume
reinvestment of distributions at NAV. 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
8 months ended 8/31/98
Class A Class B Class M
- -----------------------------------------------------------------------------
Distributions (number) 8 8 8
- -----------------------------------------------------------------------------
Income $0.370333 $0.340062 $0.360229
- -----------------------------------------------------------------------------
Capital gains -- -- --
- -----------------------------------------------------------------------------
Return of capital1 $0.050000 $0.045900 $0.048600
- -----------------------------------------------------------------------------
Total $0.420333 $0.385962 $0.408829
- -----------------------------------------------------------------------------
Share value: NAV POP NAV NAV POP
- -----------------------------------------------------------------------------
12/31/97 $8.50 $8.92 $8.50 $8.50 $8.79
- -----------------------------------------------------------------------------
8/31/98 8.02 8.42 8.01 8.01 8.28
- -----------------------------------------------------------------------------
Current return (end of period)
- -----------------------------------------------------------------------------
Current dividend rate2 10.28% 9.79% 9.48% 10.02% 9.69%
- -----------------------------------------------------------------------------
Current 30-day SEC yield3 9.64 9.17 8.91 9.37 9.06
- -----------------------------------------------------------------------------
1See page 42.
2Income portion of most recent distribution, annualized and divided by NAV
or POP at end of period.
3Based on investment income, calculated using SEC guidelines.
[GRAPHIC OMITTED: worm chart GROWTH OF A $10,000 INVESTMENT]
GROWTH OF A $10,000 INVESTMENT
Cumulative total return of
a $10,000 investment since
12/31/97
Fund's class A First Boston Consumer Price
Date shares at POP High Yield Index Index
12/31/97 9,530 10,000 10,000
1/98 9,989 10,170 10,019
2/98 10,045 10,249 10,038
3/98 10,247 10,301 10,057
4/98 10,323 10,378 10,075
5/98 10,289 10,409 10,093
6/98 10,292 10,431 10,105
7/98 9,341 10,504 10,118
8/98 $9,426 $9,791 $10,130
Past performance is no assurance of future results. At the end of the same
time period, a $10,000 investment in the fund's class B shares would have
been valued at $9,842 ($9,371 at CDSC): a $10,000 investment in the fund's
class M shares would have been valued at $9,867 ($9,542 at public offering
price).
TOTAL RETURN FOR PERIOD ENDED 9/30/98
(most recent calendar quarter)
Class A Class B Class M
(inception date) (12/31/97) (12/31/97) (12/31/97)
NAV POP NAV CDSC NAV POP
- ------------------------------------------------------------------------------
Life of fund -1.20% -5.85% -1.76% -6.42% -1.47% -4.72%
- ------------------------------------------------------------------------------
Performance data represent past results, do not reflect future
performance, and will differ for each share class. Investment returns and
principal value will fluctuate so that an investor's shares, when sold,
may be worth more or less than their original cost. See first page of
performance section for performance calculation method.
This performance information does not reflect any market volatility that
may have occurred since the date of the information. As a result, more
recent returns may be more or less than those shown.
TERMS AND DEFINITIONS
Total return shows how the value of the fund's shares changed over time,
assuming you held the shares through the entire period and reinvested all
distributions in the fund.
Class A shares are generally subject to an initial sales charge.
Class B shares may be subject to a sales charge upon redemption.
Class M shares have a lower initial sales charge and a higher 12b-1 fee
than class A shares and no sales charge on redemption.
Net asset value (NAV) is the value of all your fund's assets, minus any
liabilities, divided by the number of outstanding shares, not including
any initial or contingent deferred sales charge.
Public offering price (POP) is the price of a mutual fund share plus the
maximum sales charge levied at the time of purchase. POP performance
figures shown here assume the 4.75% maximum sales charge for class A
shares and 3.25% for class M shares.
Contingent deferred sales charge (CDSC) is a charge applied at the time of
the redemption of class B 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 Index* is a market-weighted index including
publicly traded bonds having a rating below BBB by Standard & Poor's and
Moody's.
The Lehman Brothers Corporate Bond Index* is an index of publicly issued,
fixed-rate, non-convertible investment-grade domestic corporate debt
securities frequently used as a general measure of the performance of
fixed-income securities.
Consumer Price Index (CPI) is a commonly used measure of inflation; it
does not represent an investment return.
*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. The average quality of bonds included in these indexes will differ
from the average quality of bonds in which the fund customarily invests.
The indexes assume reinvestment of all distributions and interest payments
and do not take in account brokerage fees or taxes.
Report of independent accountants
For the period ended August 31, 1998
To the Trustees of Putnam Funds Trust and
Shareholders of Putnam High Yield Trust II
(a series of Putnam Funds Trust)
In our opinion, the accompanying statement of assets and liabilities,
including the portfolio of investments owned, and the related statements
of operations and of changes in net assets and the financial highlights
present fairly, in all material respects, the financial position of Putnam
High Yield Trust II (the "fund") at August 31, 1998, and the results of
its operations, the changes in its net assets and the financial highlights
for the period December 31, 1997 (commencement of operations) through
August 31, 1998 in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the
fund's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
financial statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audit, which included
confirmation of investments owned at August 31, 1998 by correspondence
with the custodian, provides a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
October 15, 1998
<TABLE>
<CAPTION>
Portfolio of investments owned
August 31, 1998
CORPORATE BONDS AND NOTES (83.0%) (a)
PRINCIPAL AMOUNT VALUE
Advertising (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 2,500,000 Adams Outdoor Advertising sr. notes 10 3/4s, 2006 $ 2,650,000
775,000 Lamar Advertising Co. company guaranty 8 5/8s, 2007 775,000
200,000 Outdoor Communications Inc. sr. sub. notes
9 1/4s, 2007 204,000
1,200,000 Outdoor Systems, Inc. sr. sub. notes 9 3/8s, 2006 1,236,000
--------------
4,865,000
Aerospace and Defense (2.9%)
- --------------------------------------------------------------------------------------------------------------------------
3,355,000 Argo-Tech Corp. company guaranty 8 5/8s, 2007 3,103,375
2,460,000 Aviation Sales Co. company guaranty 8 1/8s, 2008 2,324,700
2,425,000 BE Aerospace sr. sub. notes Ser. B, 8s, 2008 2,352,250
600,000 Burke Industries, Inc. company guaranty 10s, 2007 594,000
1,850,000 Derlan Industries Ltd. sr. notes 10s, 2007 (Canada) 1,794,500
5,540,000 K&F Industries, Inc. sr. sub. notes Ser. B, 9 1/4s, 2007 5,456,900
5,700,000 United Defense Industries Inc. company guaranty
8 3/4s, 2007 5,586,000
--------------
21,211,725
Agriculture (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
1,000,000 AGCO Corp. sr. sub. notes 8 1/2s, 2006 975,000
1,820,000 Purina Mills, Inc. 144A sr. sub. notes 9s, 2010 1,820,000
--------------
2,795,000
Airlines (1.3%)
- --------------------------------------------------------------------------------------------------------------------------
570,000 Calair LLC 144A company guaranty 8 1/8s, 2008 527,250
1,350,000 Canadian Airlines Corp. sr. notes
12 1/4s, 2006 (Canada) 1,255,500
1,830,000 Canadian Airlines Corp. sr. sec. notes
10s, 2005 (Canada) 1,729,350
2,560,000 Cathay International Ltd. 144A sr. notes
13s, 2008 (China) 1,280,000
2,090,000 Continental Airlines, Inc. sr. notes 9 1/2s, 2001 2,152,700
825,000 Trans World Airlines, Inc. sr. notes 11 1/2s, 2004 841,500
2,370,000 Trans World Airlines, Inc. sr. notes 11 3/8s, 2006 2,192,250
--------------
9,978,550
Apparel (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
1,620,000 GFSI, Inc. sr. sub. notes Ser. B, 9 5/8s, 2007 1,539,000
40,000 Guess Jeans, Inc. sr. sub. notes 9 1/2s, 2003 38,400
--------------
1,577,400
Automotive (3.1%)
- --------------------------------------------------------------------------------------------------------------------------
2,250,000 Accuride Corp. sr. sub. notes Ser. B, 9 1/4s, 2008 2,171,250
583,000 Hawk Corp. sr. notes 10 1/4s, 2003 606,320
3,000,000 Lear Corp. sub. notes 9 1/2s, 2006 3,210,000
3,680,000 Navistar International Corp. sr. notes Ser. B, 8s, 2008 3,569,600
5,940,000 Oxford Automotive, Inc. company guaranty
10 1/8s, 2007 5,910,300
3,420,000 Talon Automotive Group 144A sr. sub. notes
9 5/8s, 2008 3,078,000
2,000,000 Walbro Corp. company guaranty Ser. B, 10 1/8s, 2007 1,900,000
3,000,000 Walbro Corp. sr. notes Ser. B, 9 7/8s, 2005 2,842,500
--------------
23,287,970
Automotive Parts (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
2,250,000 Cambridge Industries, Inc. company guaranty
Ser. B, 10 1/4s, 2007 2,092,500
2,000,000 Safety Components International, Inc. sr. sub. notes
Ser. B, 10 1/8s, 2007 1,910,000
--------------
4,002,500
Banks (1.8%)
- --------------------------------------------------------------------------------------------------------------------------
1,900,000 Advanta Corp. company guaranty Ser. B, 8.99s, 2026 1,235,000
1,000,000 Chevy Chase Savings Bank Inc. sub. deb. 9 1/4s, 2008 990,000
550,000 Chevy Chase Savings Bank Inc. sub. deb. 9 1/4s, 2005 544,500
3,000,000 Consumers International sr. notes 10 1/4s, 2005 3,075,000
500,000 Delta Financial Corp. sr. notes 9 1/2s, 2004 400,000
600,000 First Nationwide Holdings sr. notes 12 1/2s, 2003 688,500
570,000 Fuji JGB Inv. LLC 144A FLIRB 9.87s, 2049 438,900
2,775,000 GS Escrow Corp. 144A sr. notes 7 1/8s, 2005 2,694,581
3,175,000 GS Escrow Corp. 144A sr. notes 6 3/4s, 2001 3,145,564
25,000 Korea Development Bank bonds 7 3/8s, 2004 (Korea) 18,349
75,000 Korea Development Bank bonds 7 1/8s, 2001 (Korea) 60,896
--------------
13,291,290
Basic Industrial Products (1.2%)
- --------------------------------------------------------------------------------------------------------------------------
1,990,000 Axia, Inc. 144A sr. sub. notes 10 3/4s, 2008 1,880,550
2,475,000 Clark-Schwebel sr. notes 10 1/2s, 2006 2,858,625
1,628,176 Grove Investors LLC sr. deb. 14 1/2s, 2010 (PIK) 1,432,795
1,500,000 Insilco Holding Co. 144A sr. disc. notes
stepped-coupon zero % (14s, 8/15/03), 2008 (STP) 705,000
2,085,000 Roller Bearing Co. company guaranty Ser. B,
9 5/8s, 2007 2,022,450
--------------
8,899,420
Broadcasting (2.4%)
- --------------------------------------------------------------------------------------------------------------------------
25,000 Allbritton Communications sr. sub. deb. Ser. B,
9 3/4s, 2007 25,750
5,075,000 Benedek Communications Corp. sr. disc. notes
stepped-coupon zero % (13 1/4s, 5/15/01), 2006 (STP) 3,806,250
4,000,000 Capstar Broadcasting sr. sub. notes 9 1/4s, 2007 3,960,000
4,410,000 Chancellor Media Corp. sr. sub notes Ser. B,
8 1/8s, 2007 4,189,500
3,350,000 Fox/Liberty Networks LLC sr. disc. notes stepped-coupon
zero % (9 3/4s, 8/15/02), 2007 (STP) 2,077,000
40,000 Fox/Liberty Networks LLC sr. notes 8 7/8s, 2007 37,000
580,000 Globo Communicacoes company guaranty
10 1/2s, 2006 (Brazil) 348,000
670,000 Globo Communicacoes 144A company guaranty
10 1/2s, 2006 (Brazil) 408,700
1,060,000 Granite Broadcasting Corp. sr. sub. notes 8 7/8s, 2008 1,012,300
100,000 SFX Broadcasting, Inc. sr. sub. notes Ser. B, 10 3/4s, 2006 108,750
1,000,000 Spanish Broadcasting Systems sr. notes
12 1/2s, 2002 (STP) 1,100,000
1,015,000 TV Azteca S.A. de C.V. sr. notes 10 1/2s, 2007 (Mexico) 781,550
--------------
17,854,800
Building and Construction (1.8%)
- --------------------------------------------------------------------------------------------------------------------------
1,980,000 American Architectural Products Corp.
company guaranty 11 3/4s, 2007 1,861,200
1,630,000 Atrium Companies, Inc. 144A sr. sub. notes
10 1/2s, 2006 1,540,350
3,060,000 Beazer Homes USA, Inc. company guaranty 8 7/8s, 2008 2,861,100
2,390,000 Brand Scaffold Services, Inc. 144A sr. notes 10 1/4s, 2008 2,198,800
2,250,000 GS Superhighway Holdings sr. notes 10 1/4s, 2007 1,485,000
250,000 GS Superhighway Holdings sr. notes 9 7/8s, 2004 165,000
400,000 Jackson Products, Inc. 144A company guaranty
9 1/2s, 2005 393,000
3,180,000 Republic Group, Inc. 144A sr. sub. notes 9 1/2s, 2008 2,957,400
--------------
13,461,850
Building Products (0.8%)
- --------------------------------------------------------------------------------------------------------------------------
1,600,000 Albecca Inc. 144A sr. sub. notes 10 3/4s, 2008 1,520,000
2,000,000 Cemex S.A. 144A bonds 12 3/4s, 2006 (Mexico) 1,805,000
3,140,000 Waxman Industries Inc. sr. notes stepped-coupon
Ser. B, zero % (12 3/4s, 6/1/99), 2004 (STP) 2,935,900
--------------
6,260,900
Buses (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
2,000,000 MCII Holdings sec. notes stepped-coupon zero %
(12s, 11/15/98), 2002 (STP) 1,700,000
Business Services (0.9%)
- --------------------------------------------------------------------------------------------------------------------------
2,570,000 Corporate Express Holdings, Inc. 144A
sr. sub. notes 9 5/8s, 2008 2,313,000
3,588,000 Pierce Leahy Corp. sr. sub. notes 11 1/8s, 2006 3,839,160
820,000 Williams Scotsman, Inc. 144A sr. notes 9 7/8s, 2007 807,700
--------------
6,959,860
Cable Television (2.2%)
- --------------------------------------------------------------------------------------------------------------------------
5,000,000 Acme Television sr. disc. notes stepped-coupon zero %
(10 7/8s, 9/30/00), 2004 (STP) 3,850,000
760,000 Adelphia Communications Corp. sr. notes
Ser. B, 9 7/8s, 2007 803,700
2,500,000 Comcast Corp. sr. sub. notes 9 3/8s, 2005 2,683,250
210,000 CSC Holdings, Inc. sr. sub. notes 9 1/4s, 2005 216,300
2,505,000 Diamond Cable Communication Co. sr. disc. notes
stepped-coupon zero % (10 3/4s, 2/15/02), 2007
(United Kingdom) (STP) 1,828,650
350,000 Fox Family Worldwide, Inc. sr. disc. notes stepped-coupon
zero % (10 1/4s, 11/1/02), 2007 (STP) 192,500
2,540,000 Fox Family Worldwide, Inc. sr. notes 9 1/4s, 2007 2,260,600
1,000,000 Lenfest Communications, Inc. sr. sub. notes
10 1/2s, 2006 1,120,000
2,250,000 Lenfest Communications, Inc. 144A sr. sub. notes
8 1/4s, 2008 2,210,625
250,000 RCN Corp. sr. discount notes, stepped-coupon
Ser. B, zero % (9.8s, 2/15/03), 2008 (STP) 133,750
1,290,000 Supercanal Holdings S.A. 144A sr. notes
11 1/2s, 2005 (Argentina) 890,100
35,000 United International Holdings sr. disc. notes
stepped-coupon Ser. B, zero %
(10 3/4s, 2/15/03), 2008 (STP) 15,400
--------------
16,204,875
Cellular Communications (3.0%)
- --------------------------------------------------------------------------------------------------------------------------
700,000 Allegiance Telecom, Inc. sr. notes 12 7/8s, 2008 665,000
6,700,000 Allegiance Telecom, Inc. sr. disc. notes stepped-coupon
Ser. B, zero % (11 3/4s, 2/15/03), 2008 (STP) 3,015,000
6,000,000 CellNet Data Systems, Inc. sr. disc. notes stepped-coupon
zero % (14s, 10/1/02), 2007 (STP) 2,880,000
750,000 Dobson Communications Corp. sr. notes 11 3/4s, 2007 765,000
400,000 McCaw International Ltd sr. discount notes
stepped-coupon zero % (13s, 4/15/02), 2007 (STP) 216,000
3,730,000 MetroNet Communications Corp. 144A sr. disc. notes
stepped-coupon zero % (9.95s, 6/15/03), 2008 (STP) 1,939,600
1,330,000 NEXTEL Communications, Inc. 144A sr. disc. notes
stepped-coupon zero % (12 1/8s, 4/15/03), 2008 (STP) 798,000
12,320,000 NEXTEL Communications, Inc. sr. disc. notes
stepped-coupon zero % (9.95s, 2/15/03), 2008 (STP) 6,960,800
2,520,000 NEXTEL Communications, Inc. sr. disc. notes
stepped-coupon zero % (9 3/4s, 10/31/02), 2007 (STP) 1,436,400
120,000 NEXTEL Communications, Inc. sr. disc. notes
stepped-coupon zero % (10.65s, 9/15/02), 2007 (STP) 71,400
2,280,000 Price Communications Wireless, Inc. 144A sr. notes 9 1/8s, 2006 2,052,000
1,000,000 Sygnet Wireless, Inc. sr. notes 11 1/2s, 2006 1,110,000
--------------
21,909,200
Chemicals (1.6%)
- --------------------------------------------------------------------------------------------------------------------------
1,885,000 Acetex Corp. sr. notes 9 3/4s, 2003 (Canada) 1,790,750
625,000 ARCO Chemical Co. deb. 9.9s, 2000 654,369
1,160,000 Geo Specialty Chemicals, Inc. 144A sr. sub. notes
10 1/8s, 2008 1,044,000
75,000 PCI Chemicals & Pharmaceuticals company guaranty
9 1/4s, 2007 (India) 67,875
2,500,000 Pioneer Americas Acquisition 144A sr. notes
9 1/4s, 2007 2,075,000
130,000 Sterling Chemicals Holdings sr. disc. notes stepped-coupon
zero % (13 1/2s, 8/15/01), 2008 (STP) 63,700
1,490,000 Trikem S.A. 144A bonds 10 5/8s, 2007 (Brazil) 864,200
5,000,000 UCAR Global Enterprises sr. sub. notes Ser. B, 12s, 2005 5,250,000
--------------
11,809,894
Computer Services (0.8%)
- --------------------------------------------------------------------------------------------------------------------------
2,940,000 IPC Information Systems sr. disc. notes stepped-coupon
zero % (10 7/8s, 11/1/01), 2008 (STP) 1,969,800
610,000 PSINet, Inc. sr. notes Ser. B, 10s, 2005 576,450
3,222,000 Unisys Corp. deb. 9 3/4s, 2016 3,254,220
60,000 Viasystems, Inc. 144A sr. notes 9 3/4s, 2007 51,600
90,000 Viasystems, Inc. sr. sub notes 9 3/4s, 2007 85,500
--------------
5,937,570
Consumer Durable Goods (1.1%)
- --------------------------------------------------------------------------------------------------------------------------
1,850,000 Doskocil Manufacturing Co 144A sr. sub. notes
10 1/8s, 2007 1,720,500
1,745,000 Hedstrom Holdings, Inc. 144A sr. disc. notes
stepped-coupon zero % (12s, 6/1/02), 2009 (STP) 1,047,000
1,420,000 Packaged Ice, Inc. company guaranty Ser. B,
9 3/4s, 2005 1,405,800
4,000,000 Sealy Mattress Co. sr. sub. notes Ser. B, 9 7/8s, 2007 3,720,000
--------------
7,893,300
Consumer Non Durables (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
2,835,000 Amscan Holdings, Inc. sr. sub. notes 9 7/8s, 2007 2,608,200
290,000 Samsonite Corp. 144A sr. sub. notes 10 3/4s, 2008 208,800
--------------
2,817,000
Consumer Products (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
5,880,000 Iron Age Holdings Corp. 144A sr. disc. notes,
stepped-coupon zero % (12 1/8s,5/1/03), 2009 (STP) 2,352,000
Consumer Services (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
1,476,000 Coinmach Corp. sr. notes 11 3/4s, 2005 1,608,840
Cosmetics (1.1%)
- --------------------------------------------------------------------------------------------------------------------------
2,350,000 Chattem, Inc. company guaranty Ser. B, 8 7/8s, 2008 2,291,250
400,000 French Fragrances, Inc. company guaranty Ser. D,
10 3/8s, 2007 392,000
1,220,000 French Fragrances, Inc. sr. notes Ser. B, 10 3/8s, 2007 1,281,000
4,000,000 Revlon Consumer Products sr. sub. notes 8 5/8s, 2008 3,790,000
--------------
7,754,250
Electric Utilities (1.1%)
- --------------------------------------------------------------------------------------------------------------------------
500,000 AES China Generating Co. sr. notes
10 1/8s, 2006 (China) 405,000
2,500,000 Calpine Corp. sr. notes 10 1/2s, 2006 2,675,000
3,000,000 Long Island Lighting Co. deb. 9s, 2022 3,459,330
1,200,000 Midland Funding Corp. deb. Ser. A, 11 3/4s, 2005 1,459,380
150,000 Midland Funding Corp. deb. Ser. B, 13 1/4s, 2006 194,954
--------------
8,193,664
Electrical Equipment (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
710,000 Samsung Electronics 144A company guaranty
9 3/4s, 2003 546,700
Electronic Components (0.6%)
- --------------------------------------------------------------------------------------------------------------------------
1,715,000 Flextronics International Ltd. sr. sub. notes
Ser. B, 8 3/4s, 2007 1,577,800
2,875,000 HCC Industries, Inc. company guaranty 10 3/4s, 2007 2,875,000
--------------
4,452,800
Electronics (1.1%)
- --------------------------------------------------------------------------------------------------------------------------
1,370,000 Celestica International Ltd. 144A sr. sub. notes
10 1/2s, 2006 (Canada) 1,452,200
6,790,000 Moog, Inc. sr. sub. notes Ser. B, 10s, 2006 7,061,600
--------------
8,513,800
Energy-Related (1.7%)
- --------------------------------------------------------------------------------------------------------------------------
503,500 Bauang Private Power Corp. 144A sr. notes
10.17s, 2008 (Philippines) 327,275
250,000 CE Casecnan Water & Energy sr. notes Ser. A,
11.45s, 2005 (Philippines) 206,250
810,000 Gothic Production Corp. company guaranty Ser. B,
11 1/8s, 2005 648,000
2,340,000 Niagara Mohawk Power Corp. sr. disc. notes Ser. H,
stepped-coupon zero % (8 1/2s, 7/1/03), 2010 (STP) 1,614,600
4,000,000 Niagara Mohawk Power Corp. sr. notes Ser. G,
7 3/4s, 2008 4,086,320
500,000 Panda Global Energy Co. company guaranty
12 1/2s, 2004 (China) 350,000
3,000,000 RAM Energy Inc. sr. notes 11 1/2s, 2008 2,760,000
1,536,207 Subic Power Corp. 144A sec. 9 1/2s, 2008 1,182,879
1,770,000 York Power Funding 144A company guaranty
12s, 2007 (Cayman Islands) 1,752,300
--------------
12,927,624
Entertainment (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
2,370,000 AMC Entertainment, Inc. sr. sub. notes 9 1/2s, 2009 2,227,800
50,000 SFX Entertainment, Inc. 144A company guaranty
Ser. B, 9 1/8s, 2008 47,000
1,385,000 Silver Cinemas International 144A sr. sub. notes
10 1/2s, 2005 1,288,050
1,675,000 United Artists Theatre 144A sr. sub. notes 9 3/4s, 2008 1,557,750
--------------
5,120,600
Environmental Control (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
3,750,000 Allied Waste Industries, Inc. company guaranty
10 1/4s, 2006 4,035,937
1,430,000 ATC Group Services Inc. company guaranty
12s, 2008 1,158,300
--------------
5,194,237
Financial Services (1.8%)
- --------------------------------------------------------------------------------------------------------------------------
2,400,000 Aames Financial Corp. sr. notes 9 1/8s, 2003 2,256,000
5,000 Colonial Capital II 144A company guaranty 8.92s, 2027 5,445
700,000 Contifinancial Corp. sr. notes 8 3/8s, 2003 705,047
2,880,000 DTI Holdings Inc. 144A sr. disc. notes stepped-coupon
zero % (12 1/2s, 3/1/03), 2008 (STP) 1,180,800
1,200,000 Imperial Credit Industries, Inc. sr. notes 9 7/8s, 2007 1,164,000
1,300,000 Local Financial Corp. 144A sr. notes 11s, 2004 1,326,000
3,075,000 Nationwide Credit, Inc. 144A sr. notes 10 1/4s, 2008 2,921,250
3,940,000 Resource America, Inc. 144A sr. notes 12s, 2004 3,467,200
--------------
13,025,742
Food and Beverages (1.7%)
- --------------------------------------------------------------------------------------------------------------------------
770,000 Aurora Foods, Inc. 144A ser. sub. notes Ser. D,
9 7/8s, 2007 793,100
25,000 Aurora Foods, Inc. sr. sub. notes Ser. B, 9 7/8s, 2007 25,750
45,000 Eagle Family Foods company guaranty Ser. B,
8 3/4s, 2008 42,750
1,000,000 Fleming Companies, Inc. company guaranty
Ser. B, 10 5/8s, 2007 1,020,000
1,045,000 RAB Enterprises, Inc. 144A sr. notes 10 1/2s, 2005 971,850
1,800,000 RAB Food Holdings, Inc. 144A sr. notes 13s, 2008 1,674,000
1,500,000 Signature Brands Ltd. sr. sub. notes 13s, 2002 (Canada) 1,642,500
2,675,000 Southern Foods Group sr. sub. notes 9 7/8s, 2007 2,715,125
3,600,000 Windy Hill Pet Food Co. sr. sub. notes 9 3/4s, 2007 3,618,000
--------------
12,503,075
Food Chains (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
2,000,000 Ameriserve Food Co. company guaranty
10 1/8s, 2007 1,760,000
630,000 Southland Corp. deb. 4s, 2004 517,356
2,000,000 Southland Corp. deb. Ser. A, 4 1/2s, 2004 1,590,000
--------------
3,867,356
Gaming (1.1%)
- --------------------------------------------------------------------------------------------------------------------------
1,950,000 Argosy Gaming Co. company guaranty 13 1/4s, 2004 1,950,000
910,000 Autotote Corp. company guaranty Ser. B, 10 7/8s, 2004 891,800
1,250,000 Aztar Corp. sr. sub. notes 13 3/4s, 2004 1,362,500
100,000 Colorado Gaming & Entertainment Co. sr. notes
12s, 2003 106,250
230,000 Fitzgeralds Gaming Corp. company guaranty Ser. B,
12 1/4s, 2004 170,200
300,000 Harveys Casino Resorts sr. sub. notes 10 5/8s, 2006 312,000
650,000 Isle of Capri Black Hawk LLC 144A 1st mortgage
Ser. B, 13s, 2004 650,000
300,000 Lady Luck Gaming Corp. 1st mtge. 11 7/8s, 2001 306,000
50,000 Louisiana Casino Cruises Corp. 1st mtge. 11 1/2s, 1998 50,000
900,000 Trump A.C. 1st mtge. company guaranty 11 1/4s, 2006 774,000
1,520,000 Trump Castle Funding 144A sub. notes 10 1/4s, 2003 1,535,200
--------------
8,107,950
Health Care (4.4%)
- --------------------------------------------------------------------------------------------------------------------------
2,000,000 Columbia/HCA Healthcare Corp. notes 7 1/4s, 2008 1,920,720
1,880,000 Conmed Corp. company guaranty 9s, 2008 1,598,000
3,500,000 Extendicare Health Services, Inc. company guaranty
9.35s, 2007 3,325,000
1,500,000 Fresenius Medical Capital Trust II company guaranty
7 7/8s, 2008 (Germany) 1,350,000
1,750,000 Genesis Health Ventures, Inc. sr. sub. notes 9 3/4s, 2005 1,662,500
960,000 Genesis Health Ventures, Inc. sr. sub. notes 9 1/4s, 2006 883,200
1,510,000 Global Health Sciences 144A sr. notes 11s, 2008 1,313,700
760,000 Hudson Respiratory Care, Inc. 144A sr. sub. notes
9 1/8s, 2008 684,000
3,130,000 Integrated Health Services, Inc. sr. sub. notes Ser. A,
9 1/2s, 2007 2,926,550
2,170,000 Magellan Health Services, Inc. 144A sr. sub. notes
9s, 2008 1,757,700
50,000 Mariner Post-Acute Network, Inc. sr. sub. notes
Ser. B, 9 1/2s, 2007 47,500
5,510,000 Mariner Post-Acute Network, Inc. sr. sub. notes
Ser. B, stepped-coupon zero %
(10 1/2s, 11/1/02), 2007 (STP) 3,250,900
3,305,000 MedPartners, Inc. sr. notes 7 3/8s, 2006 2,601,531
3,370,000 Multicare Cos., Inc. sr. sub. notes 9s, 2007 3,100,400
510,000 Paragon Corp. Holdings, Inc. company guaranty
Ser. B, 9 5/8s, 2008 372,300
1,499,375 Patriot Amer Hosp Term Loan B 8 1/8s, 2003 1,484,381
320,000 PharMerica, Inc. company guaranty 8 3/8s, 2008 281,600
650,000 Quorum Health Group, Inc. sr. sub. notes 8 3/4s, 2005 656,500
100,000 Sun Healthcare Group, Inc. sr. sub. notes Ser. B,
9 1/2s, 2007 95,000
3,500,000 Sun Healthcare Group Inc. 144A sr. sub. notes
9 3/8s, 2008 3,290,000
--------------
32,601,482
Insurance and Finance (1.0%)
- --------------------------------------------------------------------------------------------------------------------------
4,000,000 Reliance Group Holdings, Inc. sr. notes 9s, 2000 4,213,160
2,110,000 Sampoerna International Finance Co. 144A
company guaranty 8 3/8s, 2006 (Indonesia) 865,100
560,000 Superior Financial 144A sr. notes 8.65s, 2003 554,400
2,000,000 Vesta Insurance Group, Inc. 144A company guaranty
8.525s, 2027 1,891,100
--------------
7,523,760
Lodging (1.0%)
- --------------------------------------------------------------------------------------------------------------------------
1,150,000 Epic Resorts LLP 144A sr. notes 13s, 2005 1,081,000
3,770,000 HMH Properties, Inc. company guaranty
Ser. B, 7 7/8s, 2008 3,562,650
2,570,000 Host Marriott Travel Plaza sr. notes Ser. B, 9 1/2s, 2005 2,659,950
100,000 Raintree Resorts International, Inc. sr. notes
Ser. B, 13s, 2004 88,000
--------------
7,391,600
Machinery (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
3,700,000 Newcor, Inc. company guaranty Ser. B, 9 7/8s, 2008 3,552,000
Media (1.0%)
- --------------------------------------------------------------------------------------------------------------------------
4,220,000 Paramount Communications, Inc. deb. 7 1/2s, 2023 4,048,457
3,044,000 RBS Participacoes S.A. 144A company guaranty
11s, 2007 (Brazil) 1,978,600
1,250,000 Viacom International, Inc. sub. deb. 8s, 2006 1,250,000
--------------
7,277,057
Medical Supplies and Devices (0.9%)
- --------------------------------------------------------------------------------------------------------------------------
2,500,000 Kinetic Concepts, Inc. company guaranty
Ser. B, 9 5/8s, 2007 2,375,000
2,680,000 Leiner Health Products sr. sub. notes 9 5/8s, 2007 2,760,400
1,570,000 Mediq, Inc. 144A sr. sub. notes 11s, 2008 1,491,500
--------------
6,626,900
Metals and Mining (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
35,000 Anker Coal Group, Inc. sr. notes Ser. B, 9 3/4s, 2007 23,800
2,070,000 Lodestar Holding, Inc. 144A sr. notes 11 1/2s, 2005 1,697,400
2,625,000 WHX Corp. sr. notes 10 1/2s, 2005 2,336,250
--------------
4,057,450
Motion Picture Distribution (0.9%)
- --------------------------------------------------------------------------------------------------------------------------
5,000,000 Cinemark USA, Inc. sr. sub. notes Ser. D,
9 5/8s, 2008 (Mexico) 5,025,000
310,000 Panavision Inc. 144A sr. disc. notes stepped-coupon
zero % (9 5/8s, 2/1/02), 2006 (STP) 170,500
1,400,000 United Artist Term Loan B 8.438s, 2006 1,393,000
--------------
6,588,500
Office Equipment (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
3,110,000 U.S. Office Products Co. 144A sr. sub notes 9 3/4s, 2008 2,612,400
Oil and Gas (3.1%)
- --------------------------------------------------------------------------------------------------------------------------
170,000 American Eco. Corp. 144A company guaranty
9 5/8s, 2008 149,600
2,890,000 Chesapeake Energy Corp. 144A sr. notes 9 5/8s, 2005 2,398,700
890,000 Eagle Geophysical, Inc. 144A sr. notes 10 3/4s, 2008 809,900
325,000 Flores & Rucks, Inc. sr. sub. notes 9 3/4s, 2006 302,250
220,000 Gothic Energy Corp. sr. disc. notes, stepped-coupon
Ser. B, zero % (14 1/8s, 5/1/03), 2006 (STP) 105,600
1,200,000 Kelley Oil & Gas Corp. sr. sub. notes Ser. B,
10 3/8s, 2006 1,068,000
2,650,000 Michael Petroleum Corp. 144A sr. notes
11 1/2s, 2005 2,332,000
700,000 Northern Offshore 144A company guaranty 10s, 2005 598,500
3,000,000 Pacalta Resources Ltd. sr. notes Ser. B,
10 3/4s, 2004 (Canada) 2,760,000
1,750,000 Panaco, Inc. company guaranty Ser. B, 10 5/8s, 2004 1,382,500
2,700,000 Pogo Producing Co. sr. sub. notes Ser. B, 8 3/4s, 2007 2,403,000
2,540,000 Seven Seas Petroleum 144A sub. notes 12 1/2s, 2005 2,133,600
3,000,000 Southwest Royalties, Inc. company guaranty
10 1/2s, 2004 1,995,000
320,000 Tokai Corp. 144A FRB Ser. A, 9.98s, 2049 192,000
5,680,000 Transamerican Energy sr. disc. notes Ser. B, stepped-coupon
zero % (13s, 6/15/99), 2002 (STP) 2,840,000
2,215,000 Transamerican Energy sr. notes Ser. B, 11 1/2s, 2002 1,351,150
--------------
22,821,800
Oil Services (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
145,000 Benton Oil & Gas Co. sr. notes 9 3/8s, 2007 123,250
3,000,000 Snyder Oil Corp. sr. sub. notes 8 3/4s, 2007 2,790,000
--------------
2,913,250
Packaging and Containers (1.2%)
- --------------------------------------------------------------------------------------------------------------------------
3,000,000 AEP Industries, Inc. sr. sub. notes 9 7/8s, 2007 2,820,000
1,130,000 Radnor Holdings Inc. sr. notes 10s, 2003 1,118,700
4,000,000 Riverwood International Corp. company guaranty
10 7/8s, 2008 3,520,000
1,250,000 Riverwood International Corp. company guaranty
10 5/8s, 2007 1,143,750
510,000 Riverwood International Corp. company guaranty
10 1/4s, 2006 459,000
--------------
9,061,450
Paging (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
2,500,000 Pagemart Nationwide, Inc. sr. disc. notes stepped-coupon
zero % (15s, 2/1/00), 2005 (STP) 2,250,000
Paper and Forest Products (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
125,000 APP Finance II Mauritius Ltd. bonds stepped-coupon
zero %, (16s, 2/15/04), 2049 (Indonesia) (STP) 62,500
70,000 APP International Finance Co. notes
11 3/4s, 2005 (Netherlands) 37,100
190,000 Florida Coast Paper LLC 1st mtge.
Ser. B, 12 3/4s, 2003 204,250
1,840,000 Impac Group Inc. 144A sr. sub. notes 10 1/8s, 2008 1,748,000
895,000 Indah Kiat Financial Mauritius Ltd. company guaranty
10s, 2007 (Indonesia) 416,175
1,575,000 Pindo Deli Finance Mauritius Ltd. company guaranty
10 3/4s, 2007 (India) 708,750
1,995,000 Repap New Brunswick sr. notes 10 5/8s, 2005 (Canada) 1,735,650
515,000 Repap New Brunswick 144A sr. notes 9s, 2004 (Canada) 468,650
--------------
5,381,075
Publishing (1.2%)
- --------------------------------------------------------------------------------------------------------------------------
4,000,000 Affinity Group Holdings sr. notes 11s, 2007 3,880,000
1,980,845 Alabama River Newsprint 7.562s, 2002 1,762,952
2,550,000 Perry-Judd company guaranty 10 5/8s, 2007 2,448,000
920,000 Tri State Media, Inc. 144A sr. sub. notes 11s, 2008 869,400
--------------
8,960,352
Real Estate (--%)
- --------------------------------------------------------------------------------------------------------------------------
210,000 Bluegreen Corp. company guaranty Ser. B, 10 1/2s, 2008 197,400
Recreation (1.2%)
- --------------------------------------------------------------------------------------------------------------------------
4,500,000 Premier Parks, Inc.144A sr. disc. notes stepped-coupon
zero %, (10s, 4/1/03), 2008 (STP) 2,565,000
2,500,000 Premier Parks Bank Loan Term C 8 3/8s, 2006 2,500,000
1,050,000 Six Flags Corp. sr. notes 8 7/8s, 2006 1,008,000
3,000,000 Sun International Hotels Ltd. sr. sub. notes 8 5/8s, 2007 3,000,000
--------------
9,073,000
Retail (2.7%)
- --------------------------------------------------------------------------------------------------------------------------
3,860,000 Amazon.com Inc. 144A sr. disc. notes stepped-coupon
zero % (10s, 5/1/08), 2008 (STP) 2,045,800
1,570,000 Color Spot Nurseries sr. sub. notes 10 1/2s, 2007 706,500
1,000,000 Community Distributors company guaranty Ser. B,
10 1/4s, 2004 955,000
3,130,000 Guitar Center Management Co. 144A sr. notes
11s, 2006 3,130,000
1,590,000 Home Interiors & Gifts, Inc. 144A sr. sub. notes
10 1/8s, 2008 1,558,200
75,000 K mart Corp. deb. 7.95s, 2023 73,125
2,125,000 Mothers Work, Inc. sr. notes 12 5/8s, 2005 2,241,875
2,500,000 NBTY, Inc. 144A sr. sub. notes 8 5/8s, 2007 2,393,750
2,220,000 North Atlantic Trading Co. company guaranty Ser. B,
11s, 2004 2,086,800
280,000 Service Merchandise Co., Inc. sr. sub. deb. 9s, 2004 168,000
3,310,000 United Stationer 144A sr. sub. notes 8 3/8s, 2008 3,177,600
1,500,000 William Carter Co. sr. sub. notes Ser. A, 10 3/8s, 2006 1,500,000
--------------
20,036,650
Satellite Services (1.1%)
- --------------------------------------------------------------------------------------------------------------------------
1,000,000 Echostar Satellite Broadcast Corp. sr. disc. notes
stepped-coupon zero % (13 1/8s, 3/15/00), 2004 (STP) 850,000
1,645,000 Esat Telecom Group PLC sr. notes stepped-coupon
zero % (12 1/2s, 2/1/02), 2007 (Ireland) (STP) 1,093,925
1,850,000 Golden Sky Systems 144A sr. sub. notes 12 3/8s, 2006 1,808,375
810,000 Iridium LLC/Capital Corp. company guaranty
Ser. B, 14s, 2005 704,700
1,000,000 Primestar Bank Loan 8 5/8s, 2004 970,000
510,000 Satelites Mexicanos S.A. de C.V. 144A sr. notes
10 1/8s, 2004 (Mexico) 387,600
1,230,000 TCI Satellite Entertainment, Inc. sr. sub. notes
10 7/8s, 2007 1,156,200
1,370,000 TCI Satellite Entertainment, Inc. sr. disc. notes
stepped-coupon zero % (12 1/4s, 2/102), 2007 (STP) 822,000
--------------
7,792,800
Semiconductors (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
50,000 Fairchild Semiconductor Corp. 144A sr. sub. notes
11.74s, 2008 57,250
1,720,000 Zilog, Inc. company guaranty Ser. B, 9 1/2s, 2005 860,000
--------------
917,250
Shipping (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
830,000 Johnstown America Industries, Inc. company guaranty
Ser. C, 11 3/4s, 2005 861,125
500,000 Johnstown America Industries, Inc. sr. sub. notes
11 3/4s, 2005 518,750
120,000 MC Shipping, Inc. 144A sr. notes 11 1/4s, 2008 103,200
--------------
1,483,075
Specialty Consumer Products (0.6%)
- --------------------------------------------------------------------------------------------------------------------------
1,950,000 Decora Industries, Inc. 144A sr. sec. notes 11s, 2005 1,833,000
2,535,000 Eye Care Centers of America 144A sr. sub. notes
9 1/8s, 2008 2,420,925
250,000 Polymer Group, Inc. company guaranty Ser. B,
8 3/4s, 2008 227,500
--------------
4,481,425
Supermarkets (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
2,200,000 Star Markets Co. sr. sub. notes 13s, 2004 2,398,000
Telecommunication Equipment (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
2,060,000 NorthEast Optic Network, Inc. sr. notes 12 3/4s, 2008 1,977,600
Telecommunications (13.8%)
- --------------------------------------------------------------------------------------------------------------------------
5,000,000 21st Century Telecom Group, Inc. sr. disc. notes
stepped-coupon zero % (12 1/4s, 2/15/03), 2008 (STP) 2,550,000
2,040,000 BTI Telecom Corp. sr. notes 10 1/2s, 2007 1,897,200
1,220,000 Caprock Communications Corp. 144A sr. notes
12s, 2008 1,159,000
560,000 Charter Communications International, Inc. disc. notes
Ser. B, stepped-coupon zero % (14s, 3/15/01), 2007 (STP) 464,800
5,725,000 COLT Telecom Group PLC sr. disc. notes stepped-coupon
zero % (12s, 12/15/01), 2006 (STP) (United Kingdom) 4,608,625
8,900,000 Covad Communications Group 144A sr. disc. notes
stepped-coupon zero % (13 1/2s, 3/15/03), 2008 (STP) 3,916,000
2,610,000 Econophone, Inc. 144A notes stepped-coupon zero %
(11s, 2/15/03), 2008 (STP) 1,422,450
4,000,000 Focal Communications Corp. 144A sr. disc. notes
stepped-coupon zero % (12 1/8s, 2/15/03), 2008 (STP) 2,000,000
8,540,000 Global Crossing Holdings 144A sr. notes 9 5/8s, 2008 8,113,000
100,000 GST Telecommunications, Inc. company guaranty
stepped-coupon zero % (13 7/8s, 12/15/00), 2005 (STP) 72,000
13,120,000 GST Telecommunications, Inc. 144A sr. disc. notes
stepped-coupon zero % (10 1/2s, 5/1/03), 2008 (STP) 6,035,200
7,770,000 Hyperion Telecommunications Corp., Inc. sr. disc. notes
stepped-coupon Ser. B, zero % (13s, 4/15/01), 2003 (STP) 5,205,900
5,000,000 ICG Communications, Inc. sr. disc. notes stepped-coupon
zero % (10s, 02/15/03), 2008 (STP) 2,700,000
2,400,000 ICG Holdings, Inc. sr. disc. notes stepped-coupon zero %
(13 1/2s, 9/15/00), 2005 (STP) 1,848,000
8,830,000 ICG Services, Inc. 144A sr. discount notes stepped-coupon
zero %, (9 7/8s, 5/1/03), 2008 (STP) 4,679,900
2,000,000 Intermedia Communications, Inc. sr. notes Ser. B,
8 7/8s, 2007 1,920,000
6,350,000 Intermedia Communications, Inc. sr. notes Ser. B,
8.6s, 2008 6,000,750
3,090,000 Intermedia Communications, Inc. sr. notes Ser. B,
8.1/2s, 2008 2,873,700
10,275,000 International Cabletel, Inc. sr. notes Ser. B, stepped-coupon
zero % (11 1/2s, 2/01/01), 2006 (STP) 8,322,750
1,400,000 Ionica Group PLC sr. notes 13 1/2s, 2006
(United Kingdom) 560,000
550,000 Ionica Group PLC sr. disc. notes stepped-coupon zero %
(15s, 5/1/02), 2007 (STP) 41,250
2,930,000 IXC Communications, Inc. sr. sub. notes 9s, 2008 2,666,300
2,000,000 KMC Telecom Holdings, Inc. sr. disc. notes stepped-coupon
zero % (12 1/2s, 2/15/03), 2008 (STP) 1,120,000
2,290,000 Knology Holdings, Inc. sr. disc. notes stepped-coupon
zero % (11 7/8s, 10/15/02), 2007 (STP) 1,225,150
3,140,000 L-3 Communications Corp. sr. sub. notes 8 1/2s, 2008 3,069,350
2,835,000 Microcell Telecommunications sr. disc. notes
Ser. B, stepped-coupon zero % (14s, 12/1/01), 2006
(Canada) (STP) 1,899,450
2,505,000 MJD Communications, Inc. 144A sr. sub. notes
9 1/2s, 2008 2,479,950
560,000 MJD Communications, Inc. 144A notes FRN
6.2315s, 2008 550,200
500,000 Netia Holdings B.V. 144A company guaranty
10 1/4s, 2007 (Poland) 420,000
250,000 Netia Holdings B.V. 144A company guaranty
stepped-coupon zero % (11 1/4s, 11/1/02), 2007
(Poland) (STP) 137,500
7,650,000 NTL, Inc. 144A sr. notes stepped-coupon zero %
(9 3/4s, 4/01/03), 2008 (STP) 4,131,000
1,000,000 Primus Telecom Group sr. notes 11 3/4s, 2004 970,000
760,000 Qwest Communications International, Inc. sr. disc. notes
stepped-coupon zero % (8.29s, 2/1/03), 2008 (STP) 539,600
285,000 RSL Communications, Inc. company guaranty
9 1/8s, 2008 239,400
4,940,000 RSL Communications, Inc. company guaranty
stepped-coupon zero % (10 1/8s, 3/1/03), 2008 (STP) 2,667,600
5,000,000 Telecom Tech, Inc. 144A sr. sub. notes 9 3/4s, 2008 4,550,000
4,500,000 Time Warner Telecom Inc. sr. notes 9 3/4s, 2008 4,308,750
300,000 USN Communications, Inc. sr. disc. notes stepped-coupon
Ser. B, zero % (14 5/8s, 8/15/00), 2004 (STP) 165,000
1,160,000 Versatel Teleco 144A sr. notes 13 1/4s, 2008 1,136,800
5,100,000 WinStar Communications. Inc. 144A sr. sub. notes
11s, 2008 3,825,000
125,000 WinStar Communications, Inc. sr. sub. notes stepped-coupon
zero % (15s, 3/1/02), 2007 (STP) 137,500
--------------
102,629,075
Telephone Services (1.9%)
- --------------------------------------------------------------------------------------------------------------------------
480,000 Call-Net Enterprises, Inc. sr. disc. notes stepped-coupon
zero % (8.94s, 8/15/03), 2008 (Canada) (STP) 273,600
3,425,000 E. Spire Communications, Inc. sr. disc. notes stepped-coupon
zero % (12 3/4s, 4/1/01), 2006 (STP) 2,294,750
2,530,000 Facilicom International sr. notes Ser. B., 10 1/2s, 2008 2,277,000
2,310,000 Flag Ltd. 144A sr. notes 8 1/4s, 2008 (Bermuda) 2,148,300
800,000 IDT Corp. sr. notes 8 3/4s, 2006 628,000
460,000 Level 3 Communication, Inc. sr. notes 9 1/8s, 2008 411,700
1,500,000 Philippine Long Distance Telephone notes
7.85s, 2007 (Philippines) 1,020,000
1,100,000 Primus Telecommunications Group, Inc. sr. notes
Ser. B, 9 7/8s, 2008 1,056,000
440,000 Sprint Spectrum L.P. sr. notes 11s, 2006 488,400
3,000,000 Telefonica de Argentina S.A. notes
9 1/8s, 2008 (Argentina) 2,190,000
1,010,000 US Xchange LLC 144A sr. notes 15s, 2008 1,025,150
--------------
13,812,900
Textiles (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
3,700,000 Galey & Lord Inc. company guaranty 9 1/8s, 2008 3,145,000
2,220,000 Glenoit Corp. company guaranty 11s, 2007 2,109,000
200,000 Tultex Corp. sr. notes 10 5/8s, 2005 178,000
--------------
5,432,000
Transportation (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
2,550,000 Kitty Hawk, Inc. company guaranty 9.95s, 2004 2,550,000
Utilities (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
5,000,000 CMS Energy Corp. pass through certificates 7s, 2005 4,979,850
Wireless Communications (1.6%)
- --------------------------------------------------------------------------------------------------------------------------
2,050,000 Allbritton Communications Co. sr. sub. notes
Ser. B, 8 7/8s, 2008 2,009,000
2,480,000 American Mobile Satellite Corp. company guaranty
12 1/4s, 2008 1,661,600
2,500,000 Clearnet Communications, Inc. sr. disc. notes
stepped-coupon zero % (14 3/4s, 12/15/00), 2005 (STP) 1,925,000
480,000 CTI Holdings S.A. 144A sr. notes stepped-coupon
zero %, (11 1/2s, 4/15/03), 2008 (STP) 192,000
3,690,000 Dobson Wireline Co. 144A sr. notes 12 1/4s, 2008 3,542,400
370,000 Orbital Imaging Corp. sr. notes Ser. B, 11 5/8s, 2005 381,100
4,820,000 Teligent, Inc. sr. disc. Ser. B, notes stepped-coupon
zero % (11 1/2s, 3/1/03), 2008 (STP) 2,361,800
280,000 WAM!NET, Inc. company guaranty stepped-coupon
Ser. B, zero % (13 1/4s, 3/1/02), 2005 (STP) 152,600
--------------
12,225,500
--------------
Total Corporate Bonds and Notes (cost $681,283,381) $ 616,492,343
UNITS (4.0%) (a)
NUMBER OF UNITS VALUE
- --------------------------------------------------------------------------------------------------------------------------
1,130 Bestel S.A. de C.V. units, stepped-coupon zero %
(12 3/4s,5/15/03), 2005 (Mexico) (STP) $ 723,200
4,020 Birch Telecom, Inc. 144A units 14s, 2008 3,537,600
10,180 Diva Systems Corp. 144A units stepped-coupon zero %
(12 5/8s, 3/1/03), 2008 (STP) 3,359,400
5,290 Firstworld Communication units stepped-coupon zero %,
(13s, 4/15/03), 2008 (STP) 1,798,600
1,090 ICO Global Communications (Holdings) Ltd. units
15s, 2005 970,100
2,990 Long Distance International, Inc. 144A units 12 1/4s, 2008 2,870,400
1,200 Mediq 144A units, stepped-coupon zero %
(13s, 6/1/09), 2009 (STP) 600,000
1,695 Onepoint Communications, Inc. units 14 1/2s, 2008 1,356,000
3,140 Pathnet, Inc. 144A units 12 1/4s, 2008 2,826,000
2,440 Pegasus Shipping 144A company guaranty 14 1/2s, 2008 1,146,800
2,210 Rhythms Netcon 144A units stepped-coupon zero %
(13 1/2s, 5/15/03), 2008 (STP) 906,100
1,070 Startec Global Communications Corp. units 12s, 2008 963,000
1,000 Telehub Communications Corp. units stepped-coupon
zero %, (13 7/8s,7/31/02), 2005 (STP) 570,000
1,500 Transam Refinance, Inc. 144A units 16s, 2003 1,275,000
4,160 Viatel, Inc. units 11 1/4s, 2008 4,118,400
1,265 Viatel, Inc. units, stepped-coupon zero %
(12 1/2s, 4/15/03), 2008 (STP) 708,400
17,605 XCL Ltd. 144A units cum. cv. pfd. 9.50%, 2006
with warrants (PIK) 1,769,303
--------------
Total Units (cost $34,221,379) $ 29,498,303
PREFERRED STOCKS (3.9%) (a)
NUMBER OF SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------------
943 21st Century Telecom Group 144A $13.75
cum. pfd. (PIK) $ 801,550
36,257 Adelphia Communications Corp. Ser. B, $13.00
cum. pfd. 3,988,270
13,910 Brand Scaffold Services, Inc. 144A $3.625 cum. pfd. 417,300
6,500 California Federal Bancorp Inc. Ser. A, $2.281 pfd. 170,625
18,000 Chevy Chase Capital Corp. Ser. A, $5.188 pfd. 891,000
780 Concentric Network Corp. 144A $13.50 pfd. (PIK) 702,000
30,549 CSC Holdings, Inc. Ser. M, $11.125 cum. (PIK) 3,390,939
943 Dobson Communications 144A $12.25 pfd. (PIK) 961,860
1,500 Fresenius Medical Care AG Ser. D, 9.00% pfd. (Germany) 1,537,500
1,171 Hyperion Telecommunications Ser. B, $12.875 pfd. (PIK) 1,053,900
2,584 Intermedia Communication Ser. B, $13.50 pfd. (PIK) 2,984,520
1,115 IXC Communications, Inc. $12.50 pfd. (PIK) 1,176,325
3,960 Jitney-Jungle Stores 144A $11.25 pfd 594,000
31,887 Lady Luck Gaming Corp. $11.25 pfd. 1,371,141
8,176 Nebco Evans Holding Co. 144A $11.25 pfd. 572,320
565 NEXTEL Communications, Inc. Ser. E, $11.125 pfd. (PIK) 553,700
326 Paxson Communications Corp. 144A $13.25 pfd. (PIK) 3,097,000
1,721 Spanish Broadcasting Systems $14.25 cum. pfd. 1,841,470
1,017 Spanish Broadcasting Systems 144A $14.25 pfd. (PIK) 1,088,190
30,000 Von Hoffman Corp. 144A $13.50 pfd. 930,000
1,075 WinStar Communications, Inc. 144A $14.25 pfd. 1,118,000
--------------
Total Preferred Stocks (cost $31,449,813) $ 29,241,610
FOREIGN GOVERNMENT BONDS AND NOTES (0.5%) (a)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$ 2,515,000 Korea (Republic of) unsub. 8 7/8s, 2008 $ 1,763,644
1,615,000 Russia (Government of) 144A bonds 12 3/4s, 2028 371,450
635,000 United Mexican States bonds 11 3/8s, 2016 539,750
1,585,000 Venezuela (Government of) bonds 13 5/8s, 2018 737,025
--------------
Total Foreign Government Bonds and Notes
(cost $4,711,051) $ 3,411,869
BRADY BONDS (0.9%) (a)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$ 1,900,000 Argentina (Republic of) stepped-coupon
Ser. L-GP, 5 3/4s, (6s, 3/31/99), 2023 (STP) $ 1,161,470
3,639,578 Brazil (Government of) stepped-coupon 5s,
(8s, 4/30/00), 2014 (STP) 1,919,878
2,265,000 Brazil (Government of) disc. bonds Ser. ZL, FRB
6.625s, 2024 1,313,700
405,000 Bulgaria (Government of) Ser. A, FRB, 2 1/2s, 2012 145,800
750,000 Central Bank of Nigeria Ser. WW, 6 1/4s, 2020 397,500
623,095 Ecuador (Republic of) deb. Ser. PDI, FRB, 6.625s, 2015 185,371
480,000 Peru (Government of) 144A Ser. PDI, 4s, 2017 231,600
2,150,000 United Mexican States sec. Ser. B, 6 1/4s, 2019 1,531,875
--------------
Total Brady Bonds (cost $9,141,826) $ 6,887,194
CONVERTIBLE BONDS AND NOTES (0.7%) (a)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$ 3,000,000 APP Global Finance Ltd. cv. bond zero %, 2012
(United Kingdom) $ 337,500
500,000 APP Global Finance (V) Ltd. 144A cv. 2s, 2000
(United Kingdom) 290,000
1,600,000 APP Global Finance (V) Ltd. 144A cv. sec. 2s, 2000
(United Kingdom) 928,000
1,000,000 Argosy Gaming cv. sub. notes 12s, 2001 830,000
100,000 Exide Corp. 144A cv. sr. sub. notes 2.9s, 2005 56,625
2,050,000 Jacor Communications, Inc. cv. sr. notes zero %, 2011 1,652,813
500,000 Lam Research Corp. 5s, 2002 382,500
390,000 WinStar Communications. Inc. 144A cv. sr. disc. notes
stepped-coupon zero % (14s, 10/15/00), 2005 (STP) 507,000
--------------
Total Convertible Bonds and Notes (cost $6,626,722) $ 4,984,438
CONVERTIBLE PREFERRED STOCKS (0.4%) (a)
NUMBER OF SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------------
52,600 Cendant Corp. $3.75 cv. pfd. $ 1,331,438
10,100 Chancellor Media Corp. $3.00 cv. cum. pfd. 757,500
4,195 Chesapeake Energy Corp. 144A $3.50 cv. cum. pfd. 92,290
70 Paxson Communications Corp. 144A $9.75
cv. pfd. (PIK) 700,000
836 XCL Ltd $8.075 cv. pfd. (STP) 84,018
--------------
Total Convertible Preferred Stocks (cost $4,128,728) $ 2,965,246
WARRANTS (0.2%) (a) (NON) EXPIRATION
NUMBER OF WARRANTS DATE VALUE
- --------------------------------------------------------------------------------------------------------------------------
880 21st Century Telecom Group 144A 2/15/10 $ 48,400
1,200 Allegiance Telecom, Inc. 2/3/08 19,200
2,480 American Mobile Satellite Corp. 4/1/08 17,360
100 Club Regina, Inc. 144A 4/15/06 2,000
2,900 Covad Communications Group 144A 3/15/08 116,000
14,400 DTI Holdings Inc. 3/1/08 28,800
670 E. Spire Communications, Inc. 11/1/05 73,700
1,150 Epic Resorts 6/15/05 12
43,776 Intelcom Group 144A 10/15/05 1,181,952
2,000 KMC Telecom Holdings, Inc. 4/15/08 32,000
2,290 Knology Holdings, Inc. 144A 10/15/07 3,435
650 MGC Communications, Inc. 144A 10/1/04 35,750
370 Orbital Imaging Corp. 144A 3/1/05 14,800
2,240 Paxson Communications Corp. 144A 6/30/03 22
1,160 Versatel Teleco 144A 5/15/08 11,600
840 WAM!NET, Inc. 3/1/05 10,080
--------------
Total Warrants (cost $1,414,049) $ 1,595,111
COMMON STOCKS (-%)
NUMBER OF SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------------
13,250 American Mobile Satellite Corp. $ 72,875
619 Mothers Work, Inc. 4,565
20,000 PsiNet, Inc. 210,000
--------------
Total Common Stocks (cost $455,356) $ 287,440
SHORT-TERM INVESTMENTS (4.4%) (a)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$ 50,000 U.S. Treasury Bills zero %, December 17, 1998(SEG) $ 49,269
33,007,000 Interest in $750,000,000 joint tri-party repurchase agreement
dated August 31,1998 with Lehman Brothers due
September 1,1998 with respect to various
U.S. Treasury obligations -- maturity value of
$33,012,290.29 for an effective yield of 5.77% 33,012,290
--------------
Total Short-Term Investments (cost $33,061,559) $ 33,061,559
- --------------------------------------------------------------------------------------------------------------------------
Total Investments (cost $806,493,864) (b) $ 728,425,113
- --------------------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $742,037,275.
(b) The aggregate identified cost on a tax basis is $806,518,842, resulting in gross unrealized appreciation and
depreciation of $3,415,073 and $81,508,802, respectively, or net unrealized depreciation of $78,093,729.
(NON) Non-income-producing security.
(STP) The interest rate and date shown parenthetically represent the new interest rate to be paid and the date the
fund will begin receiving interest at this rate.
(PIK) Income may be received in cash or additional securities at the discretion of the issuer.
(SEG) This security was pledged and segregated with the custodian to cover margin requirements for futures
contracts at August 31, 1998.
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.
The rates shown on Floating Rate Bonds (FRB) and Floating Rate Notes (FRN) are the current interest rates
shown at August 31,1998, which are subject to change based on the terms of the security.
FLIRB represents Front Loaded Interest Reduction Bond.
- -------------------------------------------------------------------------------
Futures Contracts Outstanding at August 31, 1998
Aggregate Face Expiration Unrealized
Total Value Value Date (Depreciation)
- -------------------------------------------------------------------------------
U.S. Treasury Bond
(Short) $762,000 $736,566 Dec-98 $(25,434)
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
August 31, 1998
<S> <C>
Assets
- -----------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $806,493,864) (Note 1) $728,425,113
- -----------------------------------------------------------------------------------------------
Cash 1,747,540
- -----------------------------------------------------------------------------------------------
Interest and other receivables 15,238,337
- -----------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 10,204,425
- -----------------------------------------------------------------------------------------------
Receivable for securities sold 13,965,305
- -----------------------------------------------------------------------------------------------
Total assets 769,580,720
Liabilities
- -----------------------------------------------------------------------------------------------
Distributions payable to shareholders 2,683,542
- -----------------------------------------------------------------------------------------------
Payable to Manager (Note 2) 1,746,233
- -----------------------------------------------------------------------------------------------
Payable for securities purchased 14,963,104
- -----------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 6,272,836
- -----------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 63,488
- -----------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 605
- -----------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 1,740
- -----------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 516,275
- -----------------------------------------------------------------------------------------------
Payable for variation margin 3,937
- -----------------------------------------------------------------------------------------------
Other accrued expenses 291,298
- -----------------------------------------------------------------------------------------------
Other liabilities 1,000,387
- -----------------------------------------------------------------------------------------------
Total liabilities 27,543,445
- -----------------------------------------------------------------------------------------------
Net assets $742,037,275
Represented by
- -----------------------------------------------------------------------------------------------
Paid-in capital (Notes 1, 4 and 5) $826,711,028
- -----------------------------------------------------------------------------------------------
Distributions in excess of net investment income (Note 1) (2,683,541)
- -----------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (Notes 1 and 3) (3,896,027)
- -----------------------------------------------------------------------------------------------
Net unrealized depreciation of investments (78,094,185)
- -----------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $742,037,275
Computation of net asset value and offering price
- -----------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($278,847,245 divided by 34,782,051 shares) $8.02
- -----------------------------------------------------------------------------------------------
Offering price per class A share (100/95.25 of $8.02)* $8.42
- -----------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($444,096,132 divided by 55,460,168 shares)** $8.01
- -----------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($19,093,898 divided by 2,384,999 shares) $8.01
- -----------------------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $8.01)* $8.28
- -----------------------------------------------------------------------------------------------
* On single retail sales of less than $50,000. On sales of $50,000 or more and on group
sales the offering price is reduced.
** Redemption price per share is equal to net asset value less any applicable contingent
deferred sales charge.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
For the period December 31, 1997 (commencement of operations) to August 31, 1998
<S> <C>
Investment income:
Interest (net of foreign tax $41,525) $ 19,292,551
- -----------------------------------------------------------------------------------------------
Dividend 929,605
- -----------------------------------------------------------------------------------------------
Total investment income 20,222,156
Expenses:
- -----------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 1,768,054
- -----------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 399,970
- -----------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 4,596
- -----------------------------------------------------------------------------------------------
Administrative services (Note 2) 6,070
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 240,298
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 1,470,236
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 40,319
- -----------------------------------------------------------------------------------------------
Reports to shareholders 37,226
- -----------------------------------------------------------------------------------------------
Registration fees 251,335
- -----------------------------------------------------------------------------------------------
Auditing 42,965
- -----------------------------------------------------------------------------------------------
Legal 20,234
- -----------------------------------------------------------------------------------------------
Postage 13,608
- -----------------------------------------------------------------------------------------------
Other expenses 19,606
- -----------------------------------------------------------------------------------------------
Fees waived by Manager (Note 2) (21,821)
- -----------------------------------------------------------------------------------------------
Total expenses 4,292,696
- -----------------------------------------------------------------------------------------------
Expense reduction (Note 2) (216,799)
- -----------------------------------------------------------------------------------------------
Net expenses 4,075,897
- -----------------------------------------------------------------------------------------------
Net investment income 16,146,259
- -----------------------------------------------------------------------------------------------
Net realized loss on investments (Notes 1 and 3) (3,851,466)
- -----------------------------------------------------------------------------------------------
Net realized loss on futures contracts (Notes 1 and 3) (44,561)
- -----------------------------------------------------------------------------------------------
Net unrealized depreciation of investments and futures during the period (78,094,185)
- -----------------------------------------------------------------------------------------------
Net loss on investments (81,990,212)
- -----------------------------------------------------------------------------------------------
Net decrease in net assets resulting from operations $ (65,843,953)
- -----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
For the period
December 31,1997
(commencement
of operations)
to August 31,1998
- ---------------------------------------------------------------------------------------------------------------
<S> <C>
Increase in net assets
- ---------------------------------------------------------------------------------------------------------------
Operations:
- ---------------------------------------------------------------------------------------------------------------
Net investment income $ 16,146,259
- ---------------------------------------------------------------------------------------------------------------
Net realized loss on investments (3,896,027)
- ---------------------------------------------------------------------------------------------------------------
Net unrealized depreciation of investments (78,094,185)
- ---------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations (65,843,953)
- ---------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ---------------------------------------------------------------------------------------------------------------
From net investment income
Class A (6,585,636)
- ---------------------------------------------------------------------------------------------------------------
Class B (9,095,142)
- ---------------------------------------------------------------------------------------------------------------
Class M (465,481)
- ---------------------------------------------------------------------------------------------------------------
In excess of net investment income
Class A (1,095,167)
- ---------------------------------------------------------------------------------------------------------------
Class B (1,512,490)
- ---------------------------------------------------------------------------------------------------------------
Class M (77,408)
- ---------------------------------------------------------------------------------------------------------------
From return of capital
Class A (1,043,290)
- ---------------------------------------------------------------------------------------------------------------
Class B (1,440,844)
- ---------------------------------------------------------------------------------------------------------------
Class M (73,741)
- ---------------------------------------------------------------------------------------------------------------
Increase from capital share transactions (Note 4) 827,268,427
- ---------------------------------------------------------------------------------------------------------------
Total increase in net assets 740,035,275
Net assets
- ---------------------------------------------------------------------------------------------------------------
Beginning of period (Note 5) 2,002,000
- ---------------------------------------------------------------------------------------------------------------
End of period (Including distribution in excess of
net investment income of $2,683,541) $742,037,275
- ---------------------------------------------------------------------------------------------------------------
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 December 31, 1997+
operating performance to August 31
- ------------------------------------------------------------------------------------------------------------------------------------
1998
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Net asset value,
beginning of period $8.50
- ------------------------------------------------------------------------------------------------------------------------------------
Investment activities
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income (a)(b) .41
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain on investments (.47)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations (.06)
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (0.32)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income (.05)
- ------------------------------------------------------------------------------------------------------------------------------------
Return of capital (.05)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (0.42)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $8.02
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(c) (1.08)*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $278,847
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(d) .84*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%)(b) 4.57*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 44.05*
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Per share net investment income has been determined on the basis of the weighted average
number of shares outstanding during the period.
(b) Reflects an expense limitation in effect during the period (Note 2). As a result of such limitation, expenses
for the fund reflect a reduction of less than $0.01 per share for class A, class B, and class M for the
period ended August 31, 1998.
(c) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(d) The ratio of expenses to average net assets for the period includes amounts paid through
expense offset arrangements. (Note 2)
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS B
- ------------------------------------------------------------------------------------------------------------------------------------
For the period
Per-share December 31, 1997+
operating performance to August 31
- ------------------------------------------------------------------------------------------------------------------------------------
1998
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Net asset value,
beginning of period $8.50
- ------------------------------------------------------------------------------------------------------------------------------------
Investment activities
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income (a)(b) .36
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain on investments (.46)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations (.10)
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (0.29)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income (.05)
- ------------------------------------------------------------------------------------------------------------------------------------
Return of capital (.05)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (0.39)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $8.01
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(c) (1.58)*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $444,096
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(d) 1.34*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%)(b) 4.07*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 44.05*
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Per share net investment income has been determined on the basis of the weighted average
number of shares outstanding during the period.
(b) Reflects an expense limitation in effect during the period (Note 2). As a result of such limitation, expenses
for the fund reflect a reduction of less than $0.01 per share for class A, class B, and class M for the
period ended August 31, 1998.
(c) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(d) The ratio of expenses to average net assets for the period includes amounts paid through
expense offset arrangements. (Note 2)
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS M
- ------------------------------------------------------------------------------------------------------------------------------------
For the period
Per-share December 31, 1997+
operating performance to August 31
- ------------------------------------------------------------------------------------------------------------------------------------
1998
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Net asset value,
beginning of period $8.50
- ------------------------------------------------------------------------------------------------------------------------------------
Investment activities
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income (a)(b) .40
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.48)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations (.08)
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (0.31)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income (.05)
- ------------------------------------------------------------------------------------------------------------------------------------
Return of capital (.05)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (0.41)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $8.01
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(c) (1.33)*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $19,094
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b)(d) 1.01*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%)(b) 4.49*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 44.05*
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Per share net investment income has been determined on the basis of the weighted average
number of shares outstanding during the period.
(b) Reflects an expense limitation in effect during the period (Note 2). As a result of such limitation, expenses
for the fund reflect a reduction of less than $0.01 per share for class A, class B, and class M for the
period ended August 31, 1998.
(c) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(d) The ratio of expenses to average net assets for the period includes amounts paid through
expense offset arrangements. (Note 2)
</TABLE>
Notes to financial statements
August 31, 1998
Note 1
Significant accounting policies
Putnam High Yield Trust II ("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 high current income by investing primarily in
high-yielding, lower-rated fixed-income securities constituting a
portfolio that Putnam Investment Management, Inc. ("Putnam Management"),
the fund's Manager, a wholly-owned subsidiary of Putnam Investments, Inc.
believes does not involve undue risk to income or principal.
The fund offers class A, class B and class M shares. The fund commenced
operations of class A, class B, and class M shares on December 31, 1997.
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 quotations are readily
available are stated at market value, which is determined using the last
reported sale price, or, if no sales are reported -- as in the case of
some securities traded over-the-counter -- the last reported bid price.
Securities quoted in foreign currencies are translated into U.S. dollars
at the current exchange rate. Short-term investments having remaining
maturities of 60 days or less are stated at amortized cost, which
approximates market value, and other investments, including restricted
securities, are stated at fair value following procedures approved by the
Trustees. Market quotations are not considered to be readily available for
certain debt obligations, such investments are stated at fair value on the
basis of valuations furnished by a pricing service, approved by the
Trustees, or dealers which determine valuations for normal
institutional-size trading units of such securities using methods based on
market transactions for comparable securities and various relationships
between securities that are generally recognized by institutional traders.
B) Joint trading account Pursuant to an exemptive order issued by the
Securities and Exchange Commission, the fund may transfer uninvested cash
balances into a joint trading account along with the cash of other
registered investment companies and certain other accounts managed by
Putnam Investment Management, Inc. ("Putnam Management"), the fund's
Manager, a wholly-owned subsidiary of Putnam Investments, Inc. These
balances may be invested in one or more repurchase agreements and/or
short-term money market instruments.
C) Repurchase agreements The fund, or any joint trading account, through
its custodian, receives delivery of the underlying securities, the market
value of which at the time of purchase is required to be in an amount at
least equal to the resale price, including accrued interest. Collateral
for certain tri-party repurchase agreements is held at the counterparty's
custodian in a segregated account for the benefit of the fund and the
counterparty. Putnam Management is responsible for determining that the
value of these underlying securities is at all times at least equal to the
resale price, including accrued interest.
D) Security transactions and related investment income Security
transactions are accounted for on the trade date (date the order to buy or
sell is executed). Interest income is recorded on the accrual basis.
Dividend income is recorded on the ex-dividend date, except that certain
dividends from foreign securities are recorded as soon as the fund is
informed of the ex-dividend date. Discounts on zero coupon bonds, original
issue discount bonds, stepped-coupon bonds and payment in kind bonds are
accreted according to the yield-to-maturity basis. Any premium resulting
from the purchase of stepped-coupon securities is amortized on a
yield-to-maturity basis.
E) Futures and options contracts The fund may use futures and options
contracts to hedge against changes in the values of securities the fund
owns or expects to purchase. The fund may also write options on securities
it owns or in which it may invest to increase its current returns. The
potential risk to the fund is that the change in value of futures and
options contracts may not correspond to the change in value of the hedged
instruments. In addition, losses may arise from changes in the value of
the underlying instruments, if there is an illiquid secondary market for
the contracts, or if the counterparty to the contract is unable to
perform. When the contract is closed, the fund records a realized gain or
loss equal to the difference between the value of the contract at the time
it was opened and the value at the time it was closed. Realized gains and
losses on purchased options are included in realized gains and losses on
investment securities. Futures contracts are valued at the quoted daily
settlement prices established by the exchange on which they trade.
Exchange traded options are valued at the last sale price, or if no sales
are reported, the last bid price for purchased options and the last ask
price for written options. Options traded over-the-counter are valued
using prices supplied by dealers.
F) 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.
G) Distributions to shareholders Income dividends are recorded daily by
the fund and are distributed monthly. 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. 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. These
differences include temporary and permanent differences of losses on wash
sale transactions, foreign currency gains and losses, post-October loss
deferrals, dividends payable and interest on payment-in-kind securities.
Reclassifications are made to the fund's capital accounts to reflect
income and gains available for distribution (or available capital loss
carryovers) under income tax regulations. For the year ended August 31,
1998, the fund reclassified $1,524 to decrease distributions in excess of
net investment income and $1,524 to decrease paid-in-capital. The
calculation of net investment income per share in the financial highlights
table excludes these adjustments.
H) 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.
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: 0.70% of the first $500
million of average net assets, 0.60% of the next $500 million, 0.55% of
the next $500 million, and 0.50% of the next $5 billion, 0.475% of the
next $5 billion, 0.455% of the next $5 billion, 0.44% of the next $5
billion and 0.43% thereafter.
Putnam Management has agreed to limit its compensation (and, to the extent
necessary, bear other expenses) through August 31, 1998, to the extent
that expenses of the fund (exclusive of brokerage commissions, interest,
taxes, deferred organizational and extraordinary expense, credits from
PFTC and payments under the Trust's distribution plan) would exceed an
annual rate of 1.00% of the fund's average net assets.
The fund reimburses Putnam Management an allocated amount for the
compensation and related expenses of certain officers of the fund and
their staff who provide administrative services to the fund. The aggregate
amount of all such reimbursements is determined annually by the Trustees.
Custodial functions for the fund's assets are provided by PFTC. Investor
servicing agent functions are provided by Putnam Investor Services, a
division of PFTC.
For the year ended August 31, 1998, fund expenses were reduced by $216,799
under expense offset arrangements with PFTC and brokerage service
arrangements. Investor servicing and custodian fees reported in the
Statement of operations exclude these credits. The fund could have
invested a portion of the assets utilized in connection with the expense
offset arrangements in an income producing asset if it had not entered
into such arrangements.
Each Trustee of the fund receives an annual Trustee fee, of which $860 has
been allocated to the fund and an additional fee for each Trustee's
meeting attended. Trustees who are not interested persons of Putnam
Management and who serve on committees of the Trustees receive additional
fees for attendance at certain committee meetings.
The fund has adopted a Trustee Fee Deferral Plan (the "Deferral Plan")
which allows the Trustees to defer the receipt of all or a portion of
Trustees Fees payable on or after July 1, 1995. The deferred fees remain
in the fund and are invested in certain Putnam funds until distribution in
accordance with the Deferral Plan.
The fund has adopted an unfunded noncontributory defined benefit pension
plan (the "Pension Plan") covering all Trustees of the fund who have
served as Trustee for at least five years. Benefits under the Pension Plan
are equal to 50% of the Trustee's average total retainer and meeting fees
for the three years preceding retirement. Pension expense for the fund is
included in Compensation of Trustees in the Statement of operations.
Accrued pension liability is included in Payable for compensation of
Trustees in the Statement of assets and liabilities.
The fund has adopted distribution plans (the "Plans") with respect to its
class A, class B and class M shares pursuant to Rule 12b-1 under the
Investment Company Act of 1940. The purpose of the Plans is to compensate
Putnam Mutual Funds Corp., a wholly-owned subsidiary of Putnam Investments
Inc., for services provided and expenses incurred by it in distributing
shares of the fund. The Plans provide for payments by the fund to Putnam
Mutual Funds Corp. at an annual rate up to 0.35%, 1.00% 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 to 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 year ended August 31, 1998, Putnam Mutual Funds Corp., acting as
underwriter received net commissions of $977,193 and $36,783 from the sale
of class A and class M shares, respectively and $234,176 in contingent
deferred sales charges from redemptions of class B shares. A deferred
sales charge of up to 1% is assessed on certain redemptions of class A
shares. For the year ended, Putnam Mutual Funds Corp., acting as
underwriter received $1,602 on class A redemptions.
Note 3
Purchases and sales of securities
During the year ended, purchases and sales of investment securities other
than short-term investments aggregated $950,738,758 and $177,318,524,
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 August 31, 1998, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
For the period
December 31, 1997
(commencement of
operations) to
August 31, 1998
- -----------------------------------------------------------------------------
Class A Shares Amount
- -----------------------------------------------------------------------------
Shares sold 40,550,553 $362,372,816
- -----------------------------------------------------------------------------
Shares
reinvested 626,303 5,446,273
- -----------------------------------------------------------------------------
41,176,856 367,819,089
Shares
repurchased (6,630,099) (58,110,433)
- -----------------------------------------------------------------------------
Net increase 34,546,757 $309,708,656
- -----------------------------------------------------------------------------
For the period
December 31, 1997
(commencement of
operations) to
August 31, 1998
- -----------------------------------------------------------------------------
Class B Shares Amount
- -----------------------------------------------------------------------------
Shares sold 62,104,484 $554,585,163
- -----------------------------------------------------------------------------
Shares
reinvested 781,429 6,775,411
- -----------------------------------------------------------------------------
62,885,913 561,360,574
Shares
repurchased (7,425,863) (65,206,680)
- -----------------------------------------------------------------------------
Net increase 55,460,050 $496,153,894
- -----------------------------------------------------------------------------
For the period
December 31, 1997
(commencement of
operations) to
August 31, 1998
- -----------------------------------------------------------------------------
Class M Shares Amount
- -----------------------------------------------------------------------------
Shares sold 3,136,710 $28,080,662
- -----------------------------------------------------------------------------
Shares
reinvested 50,712 441,554
- -----------------------------------------------------------------------------
3,187,422 28,522,216
Shares
repurchased (802,541) (7,116,339)
- -----------------------------------------------------------------------------
Net increase 2,384,881 $21,405,877
- -----------------------------------------------------------------------------
Note 5
Initial capitalization and
offering of shares
The trust was established as a Massachusetts business trust on January 22,
1996. During the period January 22, 1996 to December 30, 1997 the fund had
no operations other than those related to organizational matters,
including the initial capital contribution of $2,000,000, $1,000 and
$1,000 and the issuance of 235,294, 118 and 118 shares of classes A, B,
and M, respectively to Putnam Mutual Funds Corp., a wholly-owned
subsidiary of Putnam Investments, Inc. on December 30, 1997.
Federal tax information
(Unaudited)
The fund has designated 7.56% of the distributions from net investment
income as qualifying for the dividends received deduction for
corporations.
For the year ended August 31, 1998, a portion of the fund's distribution
represents a return of capital and is therefore not taxable to
shareholders.
The Form 1099 you receive in January 1999 will show the tax status of all
distributions paid to your account in calendar 1998.
Fund information
INVESTMENT MANAGER
Putnam Investment
Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
INDEPENDENT
ACCOUNTANTS
PricewaterhouseCoopers LLP
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
John A. Hill, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
Ronald J. Jackson
Paul L. Joskow
Elizabeth T. Kennan
Lawrence J. Lasser
John H. Mullin III
Robert E. Patterson
Donald S. Perkins
George Putnam, III
A.J.C. Smith
W. Thomas Stephens
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
John D. Hughes
Senior Vice President and Treasurer
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Ian C. Ferguson
Vice President
Steven M. Oristaglio
Vice President
William J. Curtin
Vice President
Jennifer E. Leichter
Vice President and Fund Manager
Gail S. Attridge
Vice President and Fund Manager
William N. Shiebler
Vice President
John R. Verani
Vice President
Beverly Marcus
Clerk and Assistant Treasurer
This report is for the information of shareholders of Putnam High Yield
Trust II. It may also be used as sales literature when preceded or
accompanied by the current prospectus, which gives details of sales
charges, investment objectives, and operating policies of the fund, and
the most recent copy of Putnam's Quarterly Performance Summary. For more
information or to request a prospectus, call toll free: 1-800-225-1581.
You can also learn more at Putnam Investments' website:
http://www.putnaminv.com.
Shares of mutual funds are not deposits or obligations of, or guaranteed
or endorsed by, any financial institution; are not insured by the Federal
Deposit Insurance Corporation (FDIC), the Federal Reserve Board, or any
other agency; and involve risk, including the possible loss of the
principal amount invested.
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
- ---------------------
Bulk Rate
U.S. Postage
PAID
Putnam
Investments
- ---------------------
AN064 45961 2HB 10/98
