Putnam
High Yield
Trust II
ANNUAL REPORT ON PERFORMANCE AND OUTLOOK
8-31-99
[LOGO: BOSTON * LONDON * TOKYO]
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
It is satisfying to note that after weathering a somewhat turbulent market
environment during the fiscal year's first half, Putnam High Yield Trust
II ended the year on a generally favorable note. As the market became
somewhat more settled during the second half, your fund's managers believe
that its recent performance has created a positive backdrop for fiscal
2000.
The economy's continuing strength and the Federal Reserve Board's
restrained policy on interest rates have contributed to the development of
a climate that tends to favor high-yield bonds. In fact, there is growing
evidence that this emerging trend has already begun to reignite
risk-sensitive investors' interest in the high-yield bond market.
We are pleased to welcome shareholders of Putnam High Yield Total Return
Fund, who come to us through a merger that was completed on July 12, 1999.
Because the funds' objectives are similar, we believe the investment goals
of our new shareholders will be served equally well by Putnam High Yield
Trust II.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
October 20, 1999
Report from the Fund Managers
Jennifer E. Leichter
Jeffrey A. Kaufman
Over the past 12 months, the high-yield market has been subject to the
severe mood swings of fixed-income investors. The fiscal year began with a
global flight to quality as investors ran to safer havens such as U.S.
Treasuries. Months later, they changed their tune and rediscovered the
potential rewards of attractive yields offered by high-yield bonds.
However, this past summer, fears of higher interest rates and equity
market weakness caused some investors to shun high-yield bonds. Putnam
High Yield Trust II's performance for the 12 months ended August 31, 1999,
reflects this mercurial temperament and challenging environment.
Total return for 12 months ended 8/31/99
Class A Class B Class C Class M
NAV POP NAV CDSC NAV CDSC NAV POP
- ------------------------------------------------------------------------
3.85% -1.08% 3.33% -1.35% 2.52% 1.59% 3.86% 0.47%
- ------------------------------------------------------------------------
Past performance is no indication of future results. Performance
information for longer periods begins on page 7.
* HIGH-YIELD BONDS EXPERIENCE HIGHS AND LOWS
The flight to quality that swept the globe last summer made for one of the
most challenging environments for high-yield bonds since 1990's
recessionary summer. Worried by Russia's financial collapse, investors
became highly risk averse in the summer months of 1998. At the peak of the
rush to safety, yield spreads against Treasuries widened substantially.
A second bout of turbulence hit the market with the anticipated sale of
the high-yield holdings of Long Term Capital Management. This distressed
hedge fund was hit with massive margin calls that forced it to liquidate
holdings and triggered a $3.6 billion bailout. In the aftermath, other,
smaller hedge funds rushed to liquidate their higher-risk holdings,
prompting a world wide stampede to the safer haven of U.S. Treasuries. The
yield differential between Treasuries and all other sectors of the
fixed-income market increased dramatically as a result. Concurrently --
since yield moves in the opposite direction of price -- the value of
non-Treasury investments fell precipitously and the high-yield market was
hit especially hard.
[GRAPHIC OMITTED: horizontal bar chart TOP INDUSTRY SECTORS]
TOP INDUSTRY SECTORS*
Telecommunications 16.8%
Broadcasting 5.2%
Telephone services 4.1%
Cable television 3.5%
Oil and gas 3.4%
Footnote reads:
*Based on net assets as of 8/31/99. Holdings will vary over time.
"Adding a high-yield bond mutual fund to your existing investment portfolio
may actually reduce the investment risk . . . The high-yield sector does not
move in lockstep with either the equity or bond markets. As a result,
increases and decreases in the net asset value of a high-yield bond mutual
fund can smooth out some of the volatility in the value of your stocks and
better-quality-debt securities."
- -- Bloomberg Personal Finance, September 1999
Early in 1999 things changed for the better as the high-yield market
staged a sharp recovery. Investors began taking profits on higher-quality
investments and accepting risk back into their portfolios. High-yield
spreads against Treasuries narrowed and net cash flows into the high-yield
asset class once again became positive as investors were drawn to the
sector's attractive yields.
However, high-yield bonds experienced a minor setback as your fund
approached the end of its fiscal year. This past summer, most bond sectors
came under pressure once again, this time amid fears of rising interest
rates and equity market weakness. The accelerating pace of global economic
growth drove high-yield bond yields higher in markets worldwide.
[GRAPHIC OMITTED: worm chart HIGH-YIELD BONDS VERSUS OTHER CORPORATE
SECURITIES]
HIGH-YIELD BONDS VERSUS OTHER CORPORATE SECURITIES
First Boston Lehman Brothers
High Yield Corporate Bond
Date Bond Index Index
8/31/92 0.00% 0.00%
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%
8/31/99 83.48% 60.15%
Footnote reads:
Past performance is not indicative of future results. This chart demonstrates
that high-yield bonds, as represented by the First Boston High Yield Bond
Index, generally outperformed investment-grade corporate bonds, as represented
by the Lehman Brothers Corporate Bond Index during the period shown. 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.
* FED MAKES SEVERAL RATE ADJUSTMENTS TO REASSURE INVESTORS
Over the course of your fund's fiscal year, the Federal Reserve Board cut
short-term interest rates three times and increased them twice. The three
successive rate cuts enacted last fall served to inject liquidity into the
global marketplace and to ease fears about a worldwide financial crisis.
Faced with indications of an accelerating U.S. economy, investors
subsequently expressed concern that the Fed would implement a series of
interest rate increases. The Fed initiated a modest quarter of a
percentage point increase in June -- the first in two years -- followed by
another quarter of a percentage point increase in August.
"Given the solid fundamentals of the U.S. economy and corporate America, we
believe high-yield bonds present an attractive investment opportunity."
- -- Jennifer E. Leichter, fund manager
Combined with the global flight to quality last fall, the rate cuts helped
push the yield on the benchmark 30-year Treasury bond down -- and its
price up -- to levels last seen in the 1960s. Conversely, the anticipation
of the Fed's interest-rate increase this past spring, combined with a more
relaxed attitude among investors toward riskier investments, added fuel to
already rising yields and propelled the long-term bond's yield past the
psychologically important 6% mark.
Don't believe everything you hear about high-yield issuers
Many investors believe that all companies rated below investment grade level
are "fallen angels." This term refers to corporations that were once rated
Baa/BBB (the lowest tier of the investment-grade sector) or higher but have
since experienced hard times. However, according to Martin Fridson, author of
It Was a Very Good Year: Extraordinary Moments in Stock Market History, the
vast majority of American companies do not qualify for investment-grade
ratings. For one reason, size is a rating consideration and many young but
highly profitable companies cannot hope to achieve Baa/BBB status until their
sales have grown for several more years.
In our opinion, the Fed's gradualist approach to interest-rate tightening
bodes well for the high-yield market, which typically does well in periods
of slowly rising rates. The backdrop of a strong economy and low inflation
also aided the performance of high-yield bonds.
* TELECOMMUNICATIONS AND MEDIA CONTINUE TO SERVE THE FUND WELL
As investment conditions improved for high-yield bonds, telecommunications
and media were among the top-performing sectors within the high-yield
market and continued to be a key focus for your fund. Within these
industries, deregulation has created a favorable environment allowing for
a lot of cost cutting and opportunities for growth. Many of the issuers
represented in your portfolio -- Covad Communications Group, and Charter
Communications Holdings -- either have issued or will soon issue stock,
prompting credit improvements and therefore higher prices for their bonds.
While these holdings and others discussed in this report were viewed
favorably at the end of the fiscal period, all holdings are subject to
review and adjustment in accordance with the fund's investment strategy
and may well vary in the future.
Covad Communications is an example of a portfolio holding that
successfully completed an initial public offering during the period. Covad
provides high-speed digital communications services using digital
subscriber line technology to Internet service providers and customers.
During the period, Covad launched a nationwide remote access program,
integrating for the first time the company's digital subscriber line
service with the networks of investors AT&T and Qwest Communications
International. With the program, Covad is targeting its new TeleSpeed
Remote service to small to midsize businesses that want to connect remote
offices in other cities. The new service is dramatically faster than long
distance dial-up service.
Stricter Medicare reimbursement formulas negatively affected the
performance of several long-term nursing care bonds such as Sun Healthcare
and Mariner Post-Acute Network, Inc. Your fund's position in United
Artists Theatre, along with other movie exhibition companies, reported
disappointing earnings toward the end of the period. The onslaught of new
multiplexes has resulted in over capacity in the marketplace, hurting the
performance of movie exhibition companies.
* MODERATELY POSITIVE OUTLOOK FOR HIGH-YIELD BONDS
Given the solid fundamentals of the U.S. economy and corporate America, we
believe that high-yield bonds continue to present attractive investment
opportunities. In our opinion, at the end of fiscal 1999 the high-yield
market was fairly valued versus other market sectors. We believe that
yield spreads may widen slightly in the next few months, but that yield
premiums will be sufficient to allow the high-yield market to outperform
other fixed-income sectors. As the calendar year-end nears, we expect to
see a rise in year 2000 (Y2K) concerns, which may negatively affect
liquidity across all markets.
Returns for the remainder of 1999 will probably come from individual
security selection rather than from overall market movement. We expect the
Fed to maintain its preemptive attitude on interest rates, to keep a tight
rein on inflation, and to slow economic growth. In the short term, these
events may likely cause some market turbulence; however, your fund will
seek to minimize potential volatility while maximizing any resulting
opportunities.
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 8/31/99, 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 primarily
through a diversified portfolio of high-yielding lower-rated corporate bonds,
with a secondary objective of capital growth when consistent with high current
income.
<TABLE>
<CAPTION>
TOTAL RETURN FOR PERIODS ENDED 8/31/99
Class A Class B Class C Class M
(inception dates) (12/31/97) (12/31/97) (7/26/99) (12/31/97)
NAV POP NAV CDSC NAV CDSC NAV POP
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 year 3.85% -1.08% 3.33% -1.35% 2.52% 1.59% 3.86% 0.47%
- -----------------------------------------------------------------------------------------------
Life of fund 2.77 -2.08 1.74 -1.79 0.98 0.98 2.51 -0.87
Annual average 1.66 -1.26 1.04 -1.08 0.59 0.59 1.51 -0.52
- -----------------------------------------------------------------------------------------------
</TABLE>
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 8/31/99
First Boston
High Yield Consumer
Bond Index price index
- ---------------------------------------------------------------------
1 year 4.74% 2.33%
- ---------------------------------------------------------------------
Life of fund 2.55 3.66
Annual average 1.52 2.18
- ---------------------------------------------------------------------
Past performance is no assurance of future results. More recent returns
may be more or less than those shown. Returns for class A and class M
shares reflect the current maximum initial sales charges of 4.75% and
3.25% respectively. Class B share returns for the 1-, 5-, and 10-year
(where available) and life-of-fund periods reflect the applicable
contingent deferred sales charge (CDSC), which is 5% in the first year,
declines to 1% in the sixth year, and is eliminated thereafter. For class
C shares, returns for periods prior to their inception are derived from
the historical performance of class A shares, adjusted to reflect both the
CDSC currently applicable to class C shares, which is 1% for the first
year and is eliminated thereafter, and the higher operating expenses
applicable to class C shares. 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. Performance data reflects an expense limitation
previously in effect. Without the expense limitation, total returns would
have been lower.
[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
First Boston
Fund's class A High Yield Consumer price
Date shares at POP Bond Index index
12/31/97 9,529 10,000 10,000
3/31/98 10,291 10,301 10,056
6/30/98 10,291 10,431 10,105
9/30/98 9,417 9,790 10,130
12/31/98 9,548 10,058 10,180
3/31/99 10,009 10,224 10,229
6/30/99 9,895 10,342 10,304
8/31/99 $9,792 $10,255 $10,366
Footnote reads:
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 $10,174 ($9.821 at CDSC). Class C shares would have been
valued at $10,098 and no contingent deferred sales charge would apply, a
$10,000 investment in the fund's class M shares would have been valued at
$10,251 ($9,913 at public offering price).
<TABLE>
<CAPTION>
PRICE AND DISTRIBUTION INFORMATION 12 MONTHS ENDED 8/31/99
Class A Class B Class C Class M
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Distributions (number) 12 12 2 12
- --------------------------------------------------------------------------------------
Income $0.798734 $0.742214 $0.069479 $0.780001
- --------------------------------------------------------------------------------------
Capital gains -- -- -- --
- --------------------------------------------------------------------------------------
Return of capital* 0.031100 0.028800 0.002600 0.030300
- --------------------------------------------------------------------------------------
Total $0.829834 $0.771014 $0.072079 $0.810301
- --------------------------------------------------------------------------------------
Share value: NAV POP NAV NAV NAV POP
- --------------------------------------------------------------------------------------
8/31/98 $8.02 $8.42 $8.01 $ -- $8.01 $8.28
- --------------------------------------------------------------------------------------
7/26/99** -- -- -- 7.69 -- --
- --------------------------------------------------------------------------------------
8/31/99 7.49 7.86 7.50 7.50 7.50 7.75
- --------------------------------------------------------------------------------------
Current return (end of period)
- --------------------------------------------------------------------------------------
Current dividend rate1 10.22% 9.74% 9.45% 9.71% 9.95% 9.63%
- --------------------------------------------------------------------------------------
Current 30-day SEC yield2 10.57 10.07 9.80 9.92 10.31 9.97
- --------------------------------------------------------------------------------------
1Income portion of most recent distribution, annualized and divided by NAV or POP at
end of period.
2Based on investment income, calculated using SEC guidelines.
*See page 51.
**Inception date of class C shares.
</TABLE>
<TABLE>
<CAPTION>
TOTAL RETURN FOR PERIODS ENDED 9/30/99 (most recent calendar quarter)
Class A Class B Class C Class M
(inception dates) (12/31/97) (12/31/97) (7/26/99) (12/31/97)
NAV POP NAV CDSC NAV CDSC NAV POP
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 year 3.05% -1.89% 2.54% -2.11% 1.65% 0.73% 2.92% -0.47%
- -----------------------------------------------------------------------------------------
Life of fund 1.84 -2.96 0.77 -2.70 -0.13 -0.13 1.44 -1.91
Annual average 1.05 -1.70 0.44 -1.55 -0.07 -0.07 0.82 -1.09
- -----------------------------------------------------------------------------------------
Past performance is no assurance of future results. More recent returns may be more or
less than those shown. They do not take into account any adjustment for taxes payable on
reinvested distributions. 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.
</TABLE>
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 C shares are not subject to an initial sales charge and are subject
to a contingent deferred sales charge only if the shares are redeemed
during the first year.
Class M shares have a lower initial sales charge and a higher 12b-1 fee
than class A shares and no sales charge on redemption.
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 or C shares and assumes redemption at the end of
the period. Your fund's class B CDSC declines from a 5% maximum during the
first year to 1% during the sixth year. After the sixth year, the CDSC no
longer applies. The CDSC for class C shares is 1% for one year after
purchase.
Comparative benchmarks
The First Boston High Yield Bond 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 indexes assume reinvestment of all distributions and interest
payments and do not take in account brokerage fees or taxes. Securities in
the fund do not match those in the indexes and performance of the fund
will differ. It is not possible to invest directly in an index.
A guide to the financial statements
These sections of the report, preceded by the Report of independent
accountants, constitute the fund's financial statements.
The fund's portfolio lists all the fund's investments and their values as
of the last day of the reporting period. Holdings are organized by asset
type and industry sector, country, or state to show areas of concentration
and diversification.
Statement of assets and liabilities shows how the fund's net assets and
share price is determined. All investment and non-investment assets are
added together. Any unpaid expenses and other liabilities are subtracted
from this total. The result is divided by the number of shares to
determine the net asset value per share, which is calculated separately
for each class of shares. (For funds with preferred shares, the amount
subtracted from total assets includes the net assets allocated to
remarketed preferred shares.)
Statement of operations shows the fund's net investment gain or loss for
the reporting period. This is determined by adding up all the fund's
earnings -- from dividends and interest income -- and subtracting its
operating expenses. This statement also lists any net gain or loss the
fund realized on the sales of its holdings and -- for holdings that remain
in the portfolio -- any change in unrealized gains or losses over the
period.
Statement of changes in net assets shows how the fund's net assets were
affected by distributions to shareholders and by changes in the number of
the fund's shares. It lists distributions and their sources (net
investment income or realized capital gains) over the current reporting
period and the most recent fiscal year-end. The distributions listed here
may not match the sources listed in the Statement of operations because
the distributions are determined on a tax basis and may be paid in a
different period from the one in which they were earned.
Financial highlights provide an overview of the fund's investment results,
per-share distributions, expense ratios, net investment income ratios and
portfolio turnover in one summary table, reflecting the five most recent
reporting periods. In a semiannual report, the highlight table also
includes the current reporting period. For open-ended funds, a separate
table is provided for each share class.
Report of independent accountants
For the fiscal year ended August 31, 1999
To the Board of 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 fund's portfolio, 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, 1999, and the results of its
operations, the changes in its net assets and the financial highlights for
the periods indicated, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the
fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included
confirmation of investments owned at August 31, 1999 by correspondence
with the custodian, provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
October 13, 1999
<TABLE>
<CAPTION>
The fund's portfolio
August 31, 1999
CORPORATE BONDS AND NOTES (84.0%) (a)
PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C>
Advertising (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
$ 3,145,000 Adams Outdoor Advertising sr. notes 10 3/4s, 2006 $ 3,286,525
480,000 AOA Holdings Llc 144A sr. notes 10 3/8s, 2006 480,000
1,050,000 Lamar Media Corp. company guaranty 9 5/8s, 2006 1,057,875
3,065,000 Lamar Advertising Co. company guaranty 8 5/8s, 2007 3,019,025
1,483,000 Outdoor Communications Inc. sr. sub. notes
9 1/4s, 2007 1,483,000
1,180,000 Outdoor Systems, Inc. sr. sub. notes 9 3/8s, 2006 1,239,000
--------------
10,565,425
Aerospace and Defense (2.7%)
- --------------------------------------------------------------------------------------------------------------------------
4,770,000 Argo-Tech Corp. company guaranty 8 5/8s, 2007 4,197,600
1,310,000 Argo-Tech Corp. company guaranty Ser. D,
8 5/8s, 2007 1,152,800
2,840,000 Aviation Sales Co. company guaranty 8 1/8s, 2008 2,676,700
1,000,000 BE Aerospace, Inc. sr. sub. notes Ser. B, 9 7/8s, 2006 1,017,500
5,620,000 BE Aerospace, Inc. sr. sub. notes 9 1/2s, 2008 5,704,300
2,700,000 BE Aerospace, Inc. sr. sub. notes Ser. B, 8s, 2008 2,517,750
5,765,000 Burke Industries, Inc. company guaranty 10s, 2007 4,150,800
6,150,000 Decrane Aircraft Holdings company guaranty
Ser. B, 12s, 2008 6,211,500
2,100,000 Derlan Industries Ltd. sr. notes 10s, 2007 (Canada) 2,058,000
1,280,000 K&F Industries, Inc. sr. sub. notes Ser. B, 9 1/4s, 2007 1,257,600
40,000 L-3 Communications Corp. sr. sub. notes Ser. B,
10 3/8s, 2007 41,500
5,750,000 L-3 Communications Corp. sr. notes 9 1/8s, 2008 5,318,750
3,490,000 L-3 Communications Corp. sr. sub. notes 8 1/2s, 2008 3,359,125
180,000 L-3 Communications Corp. company guaranty
Ser. B, 8s, 2008 167,850
--------------
39,831,775
Agriculture (--%)
- --------------------------------------------------------------------------------------------------------------------------
323,376 Premium Standard Farms, Inc. sr. sec. notes
11s, 2003 (PIK) 299,123
Airlines (1.7%)
- --------------------------------------------------------------------------------------------------------------------------
3,680,000 Calair LLC 144A company guaranty 8 1/8s, 2008 3,358,000
1,500,000 Canadian Airlines Corp. sr. notes 12 1/4s, 2006
(Canada) 990,000
3,660,000 Canadian Airlines Corp. sr. sec. notes 10s, 2005
(Canada) 3,111,000
2,710,000 Cathay International Ltd. 144A sr. notes 13s, 2008
(China) 1,002,700
4,400,000 Continental Airlines, Inc. sr. notes 9 1/2s, 2001 4,433,000
2,425,000 Trans World Airlines, Inc. sr. notes 11 1/2s, 2004 2,073,375
2,600,000 Trans World Airlines, Inc. sr. notes 11 3/8s, 2006 1,664,000
4,140,000 United Pan-Europe N.V. 144A sr. notes
10 7/8s, 2009 (Netherlands) 4,150,350
8,640,000 United Pan-Europe N.V. 144A stepped-coupon zero %
(12 1/2s, 2004), 2009 (Netherlands) (STP) 4,838,400
--------------
25,620,825
Apparel (0.6%)
- --------------------------------------------------------------------------------------------------------------------------
4,480,000 Fruit of the Loom 144A company guaranty
8 7/8s, 2006 2,912,000
10,000 William Carter Holdings Co. sr. sub. notes
Ser. A, 12s, 2008 10,050
5,190,000 William Carter Holdings Co. sr. sub. notes
Ser. A, 10 3/8s, 2006 5,138,100
--------------
8,060,150
Automotive (1.8%)
- --------------------------------------------------------------------------------------------------------------------------
2,480,000 Dura Operating Corp. 144A sr. sub. notes 9s, 2009 2,356,000
4,890,000 Federal Mogul Corp. notes 7 1/2s, 2009 4,451,465
4,250,000 Lear Corp. sub. notes 9 1/2s, 2006 4,388,125
4,070,000 Navistar International Corp. sr. notes Ser. B, 8s, 2008 3,958,075
6,230,000 Oxford Automotive, Inc. company guaranty Ser. D,
10 1/8s, 2007 5,856,200
415,000 San Luis Corp. SA 8 7/8s, 2008 336,150
3,670,000 Talon Automotive Group sr. sub. notes Ser. B,
9 5/8s, 2008 2,936,000
1,780,000 Transportation Manufacturing Operations Inc.
144A company guaranty 11 1/4s, 2009 1,762,200
--------------
26,044,215
Automotive Parts (1.0%)
- --------------------------------------------------------------------------------------------------------------------------
720,000 Aftermarket Technology Corp. sr. sub. notes 12s, 2004 734,400
3,920,000 Exide Corp. sr. notes 10s, 2005 3,929,800
3,678,628 Exide Corp. bank term loan Ser. B FRN 7.6875s, 12/18/05 3,623,448
1,690,000 Hayes Lemmerz International, Inc. company guaranty
Ser. B, 8 1/4s, 2008 1,563,250
3,000,000 Hayes Wheels International, Inc. company guaranty
Ser. B, 9 1/8s, 2007 2,977,500
150,000 Hayes Wheels International, Inc. 144A sr. sub. notes
9 1/8s, 2007 146,625
140,000 Motors and Gears, Inc. sr. notes Ser. D, 10 3/4s, 2006 137,900
3,000,000 Safety Components International, Inc. sr. sub. notes
Ser. B, 10 1/8s, 2007 2,250,000
--------------
15,362,923
Banks (1.1%)
- --------------------------------------------------------------------------------------------------------------------------
2,000,000 Advanta Corp. company guaranty Ser. B, 8.99s, 2026 1,337,500
5,250,000 Advanta Corp. med. term notes Ser. B, 7s, 2001 4,867,853
1,550,000 Chevy Chase Savings Bank Inc. sub. deb. 9 1/4s, 2005 1,557,750
4,820,000 Delta Financial Corp. sr. notes 9 1/2s, 2004 4,097,000
10,000 Dime Capital Trust I bank guaranty Ser. A, 9.33s, 2027 9,959
5,025,000 GS Escrow Corp. sr. notes 7 1/8s, 2005 4,659,884
25,000 Provident Capital Trust company guaranty 8.6s, 2026 23,673
10,000 Webster Capital Trust I 144A bonds 9.36s, 2027 9,603
--------------
16,563,222
Basic Industrial Products (0.6%)
- --------------------------------------------------------------------------------------------------------------------------
5,555,000 Axia, Inc. company guaranty 10 3/4s, 2008 5,221,700
320,000 Grove Holdings LLC deb. stepped-coupon zero %
(11 5/8s, 5/1/03), 2009 (STP) 80,000
1,811,357 Grove Investors LLC 144A 14 1/2s, 2010 (PIK) 615,861
1,560,000 Paragon Corp. Holdings, Inc. company guaranty
Ser. B, 9 5/8s, 2008 702,000
2,205,000 Roller Bearing Co. company guaranty Ser. B,
9 5/8s, 2007 2,028,600
--------------
8,648,161
Broadcasting (3.9%)
- --------------------------------------------------------------------------------------------------------------------------
1,960,000 Ackerly Group, Inc. sr. sub. notes Ser. B, 9s, 2009 1,871,800
4,620,000 Allbritton Communications Co. sr. sub. notes
Ser. B, 8 7/8s, 2008 4,435,200
6,585,000 Benedek Communications Corp. sr. disc. notes stepped-
coupon zero % (13 1/4s, 5/15/01), 2006 (STP) 5,580,788
2,000,000 Benedek Communications bank term loan Ser. B
FRN 8.54s, 11/20/07 1,995,000
1,300,000 Capstar Broadcasting sr. disc. notes stepped-coupon
zero % (12 3/4s, 2/1/02), 2009 (STP) 1,092,000
6,820,000 Capstar Broadcasting sr. sub. notes 9 1/4s, 2007 6,888,200
2,500,000 CD Radio Inc. sr. disc. notes stepped-coupon zero %,
(15s, 12/1/02), 2007 (STP) 1,175,000
20,000 Central European Media Enterprises Ltd. sr. notes
9 3/8s, 2004 (Bermuda) 11,000
9,390,000 Chancellor Media Corp. 144A sr. notes 8s, 2008 8,990,925
220,000 Citadel Broadcasting Co. company guaranty
9 1/4s, 2008 219,450
5,375,300 Citadel Broadcasting Co. sr. sub. notes 10 1/4s, 2007 5,590,312
150,000 Comcast UK Cable, Ltd. deb. stepped-coupon zero %
(11.2s, 11/15/00), 2007 (Bermuda) (STP) 135,000
3,840,000 Fox Family Worldwide, Inc. sr. notes 9 1/4s, 2007 3,600,000
4,580,000 Granite Broadcasting Corp. sr. sub. notes 8 7/8s, 2008 4,431,150
3,750,000 Paxson Communications Corp. 144A sr. sub. notes
11 5/8s, 2002 3,862,500
1,640,000 Pegasus Communications Corp. 144A sr. notes
9 3/4s, 2006 1,623,600
200,000 Pegasus Media & Communications notes Ser. B,
12 1/2s, 2005 220,000
498,000 Radio One Inc. company guaranty stepped-coupon
Ser. B, 7s, (12s, 5/15/00), 2004 (STP) 512,940
100,000 SFX Broadcasting, Inc. sr. sub. notes Ser. B,
10 3/4s, 2006 108,000
1,364,000 Spanish Broadcasting Systems sr. notes 12 1/2s, 2002 1,520,860
30,000 Spanish Broadcasting Systems sr. notes Ser. B, 11s, 2004 33,150
1,285,000 TV Azteca S.A. de C.V. sr. notes 10 1/2s,
2007 (Mexico) 970,175
2,325,000 TV Azteca S.A. de C.V. sr. notes Ser. A, 10 1/8s,
2004 (Mexico) 1,825,125
2,200,000 Young Broadcasting Inc. company guaranty Ser. B,
8 3/4s, 2007 2,123,000
--------------
58,815,175
Building and Construction (1.1%)
- --------------------------------------------------------------------------------------------------------------------------
2,460,000 American Architectural Products Corp. company
guaranty 11 3/4s, 2007 1,353,000
1,190,000 Atrium Companies Inc. 144A sr. sub. notes
10 1/2s, 2009 1,157,275
10,000 Cia Latino Americana 144A company guaranty
11 5/8s, 2004 (Argentina) 5,400
3,200,000 Consumers International 144A sr. notes
10 1/4s, 2005 3,184,000
4,550,000 D.R. Horton, Inc. company guaranty 8s, 2009 4,186,000
2,250,000 GS Superhighway Holdings sr. notes 10 1/4s,
2007 (China) 1,125,000
410,000 GS Superhighway Holdings sr. notes 9 7/8s,
2004 (China) 205,000
480,000 Jackson Products, Inc. company guaranty Ser. B,
9 1/2s, 2005 458,400
1,920,000 NCI Building Systems Inc. sr. sub. notes Ser. B,
9 1/4s, 2009 1,867,200
2,400,000 Toll Corp. company guaranty 8 1/8s, 2009 2,274,000
--------------
15,815,275
Building Products (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
2,150,000 Building Materials Corp. 144A sr. notes 8s, 2008 1,967,250
Business Equipment and Services (1.3%)
- --------------------------------------------------------------------------------------------------------------------------
2,800,000 Cex Holdings, Inc. company guaranty Ser. B,
9 5/8s, 2008 2,824,500
2,275,000 Iron Mountain, Inc. company guaranty 8 3/4s, 2009 2,144,188
350,000 Iron Mountain, Inc. med. term notes company
guaranty 10 1/8s, 2006 356,125
996,656 Outsourcing Solutions Inc. 144A 8.621s, 2004 974,231
2,260,000 Outsourcing Solutions, Inc. sr. sub. notes Ser. B,
11s, 2006 2,192,200
4,133,000 Pierce Leahy Corp. sr. sub. notes 11 1/8s, 2006 4,494,638
440,000 United Stationer Supply, Inc. sr. sub. notes
8 3/8s, 2008 404,800
5,450,000 U.S. Office Products Co. company guaranty
9 3/4s, 2008 3,188,250
2,496,296 U.S. Office Products Co. bank loan FRN 7.8s, 6/9/06 2,146,815
--------------
18,725,747
Cable Television (2.9%)
- --------------------------------------------------------------------------------------------------------------------------
8,640,000 Acme Television sr. disc. notes stepped-coupon zero %
(10 7/8s, 9/30/00), 2004 (STP) 7,128,000
1,190,000 Adelphia Communications Corp. sr. notes Ser. B,
9 7/8s, 2007 1,207,850
2,950,000 Adelphia Communications Corp. sr. notes Ser. B,
8 3/8s, 2008 2,758,250
920,000 Adelphia Communications Corp. sr. notes
7 7/8s, 2009 826,850
1,270,000 Century Communications Corp. sr. notes
8 7/8s, 2007 1,222,375
940,000 Century Communications Corp. sr. notes
8 3/4s, 2007 902,400
2,500,000 Comcast Corp. sr. sub. notes 9 3/8s, 2005 2,638,700
520,000 CSC Holdings, Inc. sr. sub. deb. 10 1/2s, 2016 566,800
210,000 CSC Holdings, Inc. sr. sub. notes 9 1/4s, 2005 210,000
740,000 CSC Holdings, Inc. deb. 7 7/8s, 2018 675,435
5,550,000 CSC Holdings, Inc. sr. notes 7 1/4s, 2008 5,143,685
2,890,000 Diamond Cable Communication Co. sr. disc. notes
stepped-coupon zero % (10 3/4s, 2/15/02), 2007
(United Kingdom) (STP) 2,268,650
12,575,000 Diva Systems Corp. sr. disc. notes, stepped-coupon
Ser. B, zero % (12 5/8s, 3/1/03), 2008 (STP) 2,609,313
1,070,000 Globo Communicacoes 144A company guaranty
10 1/2s, 2006 (Brazil) 781,100
680,000 Globo Communicacoes company guaranty
10 1/2s, 2006 (Brazil) 496,400
1,000,000 Lenfest Communications, Inc. sr. sub. notes
10 1/2s, 2006 1,147,500
2,660,000 Lenfest Communications, Inc. sr. sub. notes
8 1/4s, 2008 2,646,700
1,860,000 NTL Inc. 144A. sr. notes 11 1/2s, 2008 1,976,250
5,150,000 NTL Inc. sr. notes, Ser. B stepped-coupon, zero %
(9 3/4s, 4/1/03), 2008 (United Kingdom) (STP) 3,399,000
60,000 RCN Corp. sr. disc. notes stepped-coupon zero %,
(11 1/8s, 10/15/02), 2007 (STP) 39,600
1,390,000 Supercanal Holdings S.A. 144A sr. notes
11 1/2s, 2005 (In default) (Argentina) (NON) 695,000
3,090,000 TeleWest Communications PLC 144A sr. disc. notes
stepped-coupon zero %, (9 1/4, 4/15/04), 2009
(United Kingdom) (STP) 1,888,763
40,000 TeleWest Communications PLC 144A 11 1/4s, 2008 44,400
4,510,000 United International Holdings sr. disc. Notes Ser. B
stepped-coupon, zero % (10 3/4s, 2/15/03), 2008 (STP) 2,581,975
--------------
43,854,996
Cellular Communications (2.0%)
- --------------------------------------------------------------------------------------------------------------------------
1,330,000 Call-Net Enterprises Inc. sr. disc. notes stepped-coupon
zero % (10.8s, 5/15/04), 2009 (Canada) (STP) 718,200
1,045,000 Celcaribe S.A. sr. notes stepped-coupon zero %
(13 1/2s, 3/15/04), 2004 (STP) 836,000
12,620,000 CellNet Data Systems, Inc. sr. disc. notes stepped-coupon
zero % (14s, 10/1/02), 2007 (STP) 5,300,400
4,315,000 Dobson Communications Corp. sr. notes
11 3/4s, 2007 4,552,325
5,650,000 McCaw International Ltd sr. disc. notes stepped-coupon
zero % (13s, 4/15/02), 2007 (STP) 3,248,750
5,870,000 NEXTEL Communications, Inc. sr. notes 12s, 2008 6,530,375
1,400,000 NEXTEL Communications, Inc. sr. disc. notes stepped-
coupon zero % (12 1/8s, 4/15/03), 2008 (STP) 700,000
3,190,000 NEXTEL Communications, Inc. sr. disc. notes stepped-
coupon zero % (9.95s, 2/15/03), 2008 (STP) 2,201,100
2,670,000 NEXTEL Communications, Inc. sr. disc. notes stepped-
coupon zero % (9 3/4s, 10/31/02), 2007 (STP) 1,869,000
2,790,000 Price Communications Wireless, Inc. 144A sr. notes
9 1/8s, 2006 2,817,900
2,000,000 Triton PCS Inc. company guaranty 11s, 2008 1,360,000
--------------
30,134,050
Chemicals (2.5%)
- --------------------------------------------------------------------------------------------------------------------------
625,000 ARCO Chemical Co. deb. 9.9s, 2000 625,000
4,085,000 Geo Specialty Chemicals, Inc.144A sr. sub. notes
10 1/8s, 2008 3,799,050
1,290,000 Huntsman Corp. 144A sr. sub. notes 9 1/2s, 2007 1,212,600
645,000 Huntsman Corp. 144A sr. sub. notes FRN
9.188s, 2007 583,725
8,160,000 Huntsman ICI Chemicals Inc. 144A sr. sub. notes
10 1/8s, 2009 8,017,200
8,640,000 Lyondell Petrochemical Co. sec. notes Ser. B,
9 7/8s, 2007 8,640,000
2,980,000 Lyondell Petrochemical Co. sr. sub. notes
10 7/8s, 2009 3,009,800
3,325,000 PCI Chemicals & Pharmaceuticals company guaranty
9 1/4s, 2007 (India) 2,327,500
2,500,000 Pioneer Americas Acquisition 144A sr. notes
9 1/4s, 2007 1,850,000
73,857 Polytama International notes 11 1/4s, 2007 (Indonesia) 13,294
2,360,000 Royster-Clark Inc. 144A 1st mtge 10 1/4s, 2009 2,242,000
370,000 Scotts Co 144A sr. sub. notes 8 5/8s, 2009 357,975
5,720,000 Sterling Chemicals Holdings sr. disc. notes stepped-
coupon zero % (13 1/2s, 8/15/01), 2008 (STP) 1,430,000
2,120,000 Sterling Chemicals Inc. 144A sec. notes 12 3/8s, 2006 2,120,000
1,650,000 Trikem S.A. 144A bonds 10 5/8s, 2007 (Brazil) 924,000
--------------
37,152,144
Computer Services (1.8%)
- --------------------------------------------------------------------------------------------------------------------------
20,000 Concentric Network Corp. sr. notes 12 3/4s, 2007 20,300
3,800,000 Exodus Communications, Inc. sr. notes 11 1/4s, 2008 3,871,250
770,000 Exodus Communications, Inc. 144A sr. notes
11 1/4s, 2008 781,550
2,500,000 PSINet, Inc.144A sr. notes 11 1/2s, 2008 2,537,500
4,260,000 PSINet, Inc. 144A sr. notes 11s, 2009 4,206,750
2,580,000 PSINet, Inc. sr. notes Ser. B, 10s, 2005 2,476,800
1,860,000 Unisys Corp. sr. notes Ser. B, 12s, 2003 2,008,800
4,500,000 Unisys Corp. sr. notes 11 3/4s, 2004 4,961,250
5,270,000 Verio Inc. sr. notes 11 1/4s, 2008 5,349,050
90,000 Verio Inc. sr. notes 10 3/8s, 2005 89,550
--------------
26,302,800
Consumer Durable Goods (1.2%)
- --------------------------------------------------------------------------------------------------------------------------
4,505,000 Albecca Inc. 144A sr. sub. notes 10 3/4s, 2008 3,457,588
1,850,000 Doskcil Manufacturing Co 144A sr. sub. notes
10 1/8s, 2007 1,073,000
1,755,000 Hedstrom Holdings, Inc. 144A sr. disc. notes stepped-
coupon zero % (12s, 6/1/02), 2009 (STP) 702,000
8,740,000 Samsonite Corp. sr. sub. notes 10 3/4s, 2008 7,560,100
50,000 Sealy Mattress Co. company guaranty stepped-coupon
Ser. B, zero % (10 7/8s, 12/15/02), 2007 (STP) 33,250
4,470,000 Sealy Mattress Co. 144A sr. sub. notes Ser. B,
9 7/8s, 2007 4,402,950
--------------
17,228,888
Consumer Services (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
3,146,000 Coinmach Corp. sr. notes Ser. D, 11 3/4s, 2005 3,374,085
810,000 Protection One, Inc. sr. disc. notes stepped-coupon
zero %, (13 5/8s, 6/30/00), 2005 (STP) 729,000
1,630,000 Protection One, Inc. 144A sr. sub. notes 8 1/8s, 2009 1,336,600
--------------
5,439,685
Cosmetics (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
2,150,000 French Fragrances, Inc. company guaranty Ser. D,
10 3/8s, 2007 2,085,500
1,580,000 French Fragrances, Inc. sr. notes Ser. B, 10 3/8s, 2007 1,566,175
1,160,000 Revlon Consumer Products sr. notes 9s, 2006 1,081,700
7,000,000 Revlon Consumer Products sr. sub. notes 8 5/8s, 2008 5,810,000
--------------
10,543,375
Electric Utilities (2.0%)
- --------------------------------------------------------------------------------------------------------------------------
775,000 AES China Generating Co. sr. notes 10 1/8s,
2006 (China) 465,000
1,270,000 Applied Power Inc. sr. sub. notes 8 3/4s, 2009 1,200,150
2,675,000 Calpine Corp. sr. notes 10 1/2s, 2006 2,822,125
1,300,000 Calpine Corp. sr. notes 8 3/4s, 2007 1,298,531
3,260,000 Calpine Corp. sr. notes 7 7/8s, 2008 3,097,000
3,090,000 Cleveland Electric Illuminating Co. 144A 6.86s, 2008 2,896,659
5,500,000 CMS Energy Corp. pass-through certificates 7s, 2005 5,213,725
9,000,000 Midland Funding II Corp. deb. Ser. B, 13 1/4s, 2006 10,820,520
2,120,000 Midland Funding II Corp. deb. Ser. A, 11 3/4s, 2005 2,400,815
113,333 Northeast Utilities System notes Ser. B, 8.38s, 2005 112,291
--------------
30,326,816
Electronic Components (0.6%)
- --------------------------------------------------------------------------------------------------------------------------
1,035,000 DII Group, Inc. (The) sr. sub. notes 8 1/2s, 2007 983,250
4,010,000 Flextronics International Ltd. sr. sub. notes
Ser. B, 8 3/4s, 2007 3,929,800
730,000 HCC Industries, Inc. company guaranty
10 3/4s, 2007 591,300
3,670,000 Metromedia Fiber Network, Inc. sr. notes
144A, 10s, 2008 3,614,950
--------------
9,119,300
Electronics (1.0%)
- --------------------------------------------------------------------------------------------------------------------------
1,620,000 Celestica International Ltd. 144A sr. sub. notes
10 1/2s, 2006 (Canada) 1,709,100
6,890,000 Moog, Inc. sr. sub. notes Ser. B, 10s, 2006 7,045,025
500,000 Viasystems, Inc. sr. notes Ser. B, 9 3/4s, 2007 433,750
7,230,000 Viasystems, Inc. sr. sub notes 9 3/4s, 2007 6,272,025
60,000 Wavetek Corp. company guaranty 10 1/8s, 2007 52,200
--------------
15,512,100
Energy-Related (0.8%)
- --------------------------------------------------------------------------------------------------------------------------
3,660,000 AES Corp. sr. notes 9 1/2s, 2009 3,678,300
2,660,000 CMS Energy Corp. sr. notes Ser. B, 6 3/4s, 2004 2,472,736
650,000 Panda Global Energy Co. company guaranty
12 1/2s, 2004 (China) 351,000
6,070,000 York Power Funding 144A notes 12s, 2007
(Cayman Islands) 6,009,300
--------------
12,511,336
Entertainment (0.9%)
- --------------------------------------------------------------------------------------------------------------------------
4,800,000 SFX Entertainment Inc. company guaranty
9 1/8s, 2008 4,608,000
100,000 SFX Entertainment, Inc. 144A company guaranty
Ser. B, 9 1/8s, 2008 94,750
5,000,000 SFX Entertainment bank term loan Ser. B FRN 9s, 6/30/06 5,000,000
1,475,000 Silver Cinemas International sr. sub. notes
10 1/2s, 2005 678,500
99,000 United Artists Theatre bank term loan Ser. C, FRN
8.84s, 2007 79,695
1,386,000 United Artists Theatre bank term loan Ser. B FRN
8.59s, 2006 1,115,730
6,475,000 United Artists Theatre sr. sub. notes Ser. B
9 3/4s, 2008 1,942,500
--------------
13,519,175
Environmental Control (1.2%)
- --------------------------------------------------------------------------------------------------------------------------
7,310,000 Allied Waste Industries, Inc. 144A sr. sub. notes
10s, 2009 7,017,600
3,040,000 Allied Waste Industries, Inc. company guaranty
Ser. B, 7 7/8s, 2009 2,736,000
1,550,000 Allied Waste Industries, Inc. company guaranty
Ser. B, 7 5/8s, 2006 1,414,375
3,215,000 Allied Waste bank term loan Ser. C FRN 8 1/4s, 6/30/07 3,263,514
2,635,000 Allied Waste bank term loan Ser. B FRN 8.0625s, 6/30/06 2,643,432
1,150,000 Waste Management, Inc. sr. notes 7 1/8s, 2007 1,026,375
150,000 Waste Management, Inc. 144A sr. notes 6 7/8s, 2009 129,563
--------------
18,230,859
Financial Services (2.1%)
- --------------------------------------------------------------------------------------------------------------------------
2,775,000 Aames Financial Corp. sr. notes 9 1/8s, 2003 2,102,063
1,380,000 AMRESCO, Inc. sr. sub. notes Ser. 98-A, 9 7/8s, 2005 1,186,800
1,730,000 Capital One Financial Corp. notes 7 1/8s, 2008 1,589,835
105,000 Colonial Capital II 144A company guaranty
8.92s, 2027 96,157
2,950,000 Contifinancial Corp. sr. notes 8 3/8s, 2003 1,017,750
3,370,000 Contifinancial Corp. sr. notes 8 1/8s, 2008 1,145,800
3,460,000 Contifinancial Corp. sr. notes 7 1/2s, 2002 1,245,600
110,000 Greenpoint Capital Trust I company guaranty
9.1s, 2027 108,638
310,000 Green Tree Acceptance Corp. sr. sub. notes
10 1/4s, 2002 323,432
930,000 Imperial Credit Capital Trust I 144A company guaranty
10 1/4s, 2002 744,000
1,700,000 Imperial Credit Industries, Inc. sr. notes 9 7/8s, 2007 1,357,875
3,482,500 Jefferson Smurfit bank term loan Ser. B FRN 8.65s, 3/31/06 3,482,500
1,300,000 Local Financial Corp. sr. notes 11s, 2004 1,339,000
3,485,000 Nationwide Credit Inc. sr. notes Ser. A, 10 1/4s, 2008 2,160,700
210,000 Ocwen Capital Trust I company guaranty
10 7/8s, 2027 136,500
20,000 Ocwen Federal Bank FSB sub. deb. 12s, 2005 19,625
981,000 Ocwen Financial Corp. notes 11 7/8s, 2003 873,090
3,870,000 RBF Finance Co. company guaranty 11 3/8s, 2009 4,102,200
3,480,000 RBF Finance Co. company guaranty 11s, 2006 3,593,100
5,360,000 Resource America Inc. 144A sr. notes 12s, 2004 4,663,200
560,000 Superior Financial 144A sr. notes 8.65s, 2003 522,900
--------------
31,810,765
Food and Beverages (1.5%)
- --------------------------------------------------------------------------------------------------------------------------
3,605,000 Aurora Foods, Inc. sr. sub. notes Ser. B, 9 7/8s, 2007 3,595,988
1,270,000 Aurora Foods, Inc. 144A ser. sub. notes Ser. D,
9 7/8s, 2007 1,266,825
4,005,000 Eagle Family Foods company guaranty Ser. B,
8 3/4s, 2008 3,023,775
125,000 FRD Acquisition Co. sr. notes Ser. B, 12 1/2s, 2004 111,250
1,940,000 RAB Enterprises, Inc. 144A sr. notes 10 1/2s, 2005 1,319,200
1,900,000 RAB Food Holdings, Inc 144A. sr. notes 13s, 2008 855,000
4,100,000 Doane Pet Care Co.sr. sub. notes 9 3/4s, 2007
sr. sub. notes 9 3/4s, 2007 4,130,750
6,220,000 Trairc Consumer Products, Inc. 144A sr. sub. notes
10 1/4s, 2009 6,033,400
2,530,000 Vlassic Foods Intl. Inc. 144A sr. sub. notes
10 1/4s, 2009 2,302,300
--------------
22,638,488
Food Chains (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
2,000,000 Ameriserve Food Co. company guaranty
10 1/8s, 2007 1,545,000
630,000 Southland Corp. deb. 4s, 2004 485,100
2,200,000 Southland Corp. deb. Ser. A, 4 1/2s, 2004 1,804,000
2,700,000 Star Markets Co. sr. sub. notes 13s, 2004 2,889,000
--------------
6,723,100
Gaming (2.4%)
- --------------------------------------------------------------------------------------------------------------------------
356,630 Ameristar Casinos Inc. bonds 8s, 2004 313,834
1,919,873 Ameristar Casinos Inc. company guaranty
Ser. B, 8s, 2004 1,689,488
3,080,000 Argosy Gaming Co. 144A sr. sub. notes 10 3/4s, 2009 3,157,000
1,110,000 Autotote Corp. company guaranty Ser. B,
10 7/8s, 2004 1,137,750
1,500,000 Aztar Corp. sr. sub. notes 13 3/4s, 2004 1,620,000
2,660,000 Boyd Gaming Corp. sr. sub. notes 9 1/2s, 2007 2,620,100
2,000,000 Circus Circus Enterprises, Inc. sr. sub. notes
9 1/4s, 2005 2,005,000
630,000 Circus Circus Enterprises, Inc. deb. 7s, 2036 552,712
1,290,000 Circus Circus Enterprises, Inc. sr. notes 6.45s, 2006 1,136,993
100,000 Colorado Gaming & Entertainment Co. sr. notes
12s, 2003 (PIK) 95,000
350,000 Fitzgeralds Gaming Corp. company guaranty Ser. B,
12 1/4s, 2004 (In default) (NON) 188,125
4,450,000 Hollywood Casino Corp. 144A sec. notes
11 1/4s, 2007 4,472,250
1,820,000 Hollywood Park, Inc. 144A sr. sub. notes Ser. B,
9 1/4s, 2007 1,760,850
1,750,000 Horseshoe Gaming Holdings 144A sr. sub. notes
8 5/8s, 2009 1,680,000
750,000 Isle of Capri Black Hawk LLC 144A 1st mortgage
Ser. B, 13s, 2004 825,000
110,000 Mohegan Tribal Gaming, Auth. sr. notes 8 1/8s, 2006 106,700
3,230,000 Mohegan Tribal Gaming, Auth. sr. sub. notes
8 3/4s, 2009 3,165,400
2,060,000 Park Place Entertainment sr. sub. notes 7 7/8s, 2005 1,936,400
50,000 PRT Funding Corp. sr. notes 11 5/8s, 2004
(In default) (NON) 22,375
3,000,000 Sun International Hotels Ltd. sr. sub. notes
8 5/8s, 2007 2,872,500
1,620,000 Riviera Black Hawk 144A 1st mtge. 13s, 2005 1,701,000
975,000 Trump A.C. 1st mtge. 11 1/4s, 2006 828,750
1,710,000 Trump Castle Funding 144A sub. notes
10 1/4s, 2003 1,731,512
--------------
35,618,739
Health Care (2.4%)
- --------------------------------------------------------------------------------------------------------------------------
3,080,000 Columbia/HCA Healthcare Corp. med. term notes
8.85s, 2007 2,987,600
780,000 Columbia/HCA Healthcare Corp. deb. 8.36s, 2024 698,100
2,070,000 Columbia/HCA Healthcare Corp. notes 7 1/4s, 2008 1,799,368
500,000 Columbia/HCA Healthcare Corp. med. term notes
6.63s, 2045 474,235
1,435,000 Conmed Corp. company guaranty 9s, 2008 1,348,900
750,000 Dade Behring bank term loan Ser. C FRN 8.437s, 6/30/06 750,000
750,000 Dade Behring bank term loan Ser. B FRN 8.175s, 6/30/06 750,000
3,810,000 Extendicare Health Services, Inc. company guaranty
9.35s, 2007 2,466,975
575,000 Hudson Respiratory Care, Inc. sr. sub. notes
9 1/8s, 2008 514,625
4,390,000 Integrated Health Services, Inc. sr. sub. notes
Ser. A, 9 1/2s, 2007 1,317,000
645,000 Integrated Health Services, Inc. sr. sub. notes
Ser. A, 9 1/4s, 2008 193,500
1,140,000 Lifepoint Hospital Holdings 144A sr. sub. notes
10 3/4s, 2009 1,140,000
924,021 Magellan Health bank loan FRN 8.25s, 2/12/05 877,820
1,355,000 Mariner Post-Acute Network, Inc. sr. sub. notes
Ser. B, 9 1/2s, 2007 81,300
9,100,000 Mariner Post-Acute Network, Inc. sr. sub. notes stepped-
coupon Ser. B, zero % (10 1/2s, 11/1/02), 2007 (STP) 455,000
2,150,000 MedPartners, Inc. sr. sub. notes 6 7/8s, 2000 2,074,750
7,500,000 Multicare Cos., Inc. sr. sub. notes 9s, 2007 3,750,000
250,000 Quorum Health Group, Inc. sr. sub. notes
8 3/4s, 2005 237,500
11,055,000 Sun Healthcare Group, Inc. sr. sub. notes Ser. B,
9 1/2s, 2007 (In default) (NON) 1,326,600
3,640,000 Sun Healthcare Group, Inc. 144A sr. sub. notes
9 3/8s, 2008 (In default) (NON) 436,800
55,000 Tenet Healthcare Corp. sr. sub. notes 8 5/8s, 2007 52,250
7,000,000 Tenet Healthcare Corp. sr. notes Ser. B, 8 1/8s, 2008 6,440,000
2,420,000 Tenet Healthcare Corp. sr. notes 8s, 2005 2,323,200
3,275,000 Triad Hospitals Holdings 144A sr. sub. notes
11s, 2009 3,266,813
--------------
35,762,336
Insurance (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
2,000,000 Vesta Insurance Group, Inc. 144A company guaranty
8.525s, 2027 1,515,480
Lodging (2.2%)
- --------------------------------------------------------------------------------------------------------------------------
1,290,000 Epic Resorts LLC company guaranty Ser. B, 13s, 2005 1,122,300
5,595,000 HMH Properties, Inc. company guaranty Ser. B,
7 7/8s, 2008 5,007,525
1,200,000 Host Marriott L.P. sr. notes Ser. E, 8 3/8s, 2006 1,128,000
11,570,000 Host Marriott Travel Plaza sr. notes Ser. B, 9 1/2s, 2005 11,917,100
5,000,000 ITT Corp. notes 6 3/4s, 2005 4,537,700
8,500,000 Starwood Hotels Resorts bank loan FRN 9.095s, 2/23/03 8,489,375
--------------
32,202,000
Machinery (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
4,000,000 Newcor, Inc. company guaranty Ser. B, 9 7/8s, 2008 3,560,000
Manufacturing (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
4,590,000 Blount Inc. 144A sr. sub. notes 13s, 2009 4,739,175
4,000,000 Blount Inc bank term loan Ser. B 9.315s, 9/1/06 4,000,000
1,670,000 Insilco Holding Co. sr. disc. notes stepped-coupon
zero % (14s, 8/15/03), 2008 (STP) 801,600
1,280,000 Kappa Beheer BV. 144A company guaranty
10 5/8s, 2009 (New Zealand) 1,313,600
--------------
10,854,375
Media (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
4,470,000 Paramount Communications, Inc. deb. 7 1/2s, 2023 4,040,567
3,494,000 RBS Participacoes S.A. 144A company guaranty
11s, 2007 (Brazil) 2,480,740
--------------
6,521,307
Medical Supplies and Devices (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
2,760,000 ALARIS Medical Systems, Inc. company guaranty
9 3/4s, 2006 2,559,900
2,500,000 Kinetic Concepts, Inc. company guaranty
Ser. B, 9 5/8s, 2007 1,975,000
2,865,000 Leiner Health Products sr. sub. notes 9 5/8s, 2007 2,406,600
2,350,000 Mediq, Inc. company guaranty 11s, 2008 1,833,000
2,800,000 Mediq, Inc. deb. stepped-coupon zero %
(13s, 6/1/03), 2009 (STP) 1,064,000
--------------
9,838,500
Metals and Mining (1.0%)
- --------------------------------------------------------------------------------------------------------------------------
35,000 Anker Coal Group, Inc. sr. notes Ser. B, 9 3/4s, 2007
(In default) (NON) 16,100
3,430,000 Lodestar Holdings, Inc. company guaranty
11 1/2s, 2005 2,812,600
2,300,000 Neenah Corp. company guaranty Ser. F,
11 1/8s, 2007 2,213,750
1,600,000 Neenah Foundry Co. sr. sub. notes Ser. B,
11 1/8s, 2007 1,540,000
3,500,000 P & L Coal Holdings Corp. company guaranty
Ser. B, 9 5/8s, 2008 3,395,000
3,475,000 Weirton Steel Co. sr. notes 11 3/8s, 2004 3,440,250
1,765,000 WHX Corp. sr. notes 10 1/2s, 2005 1,703,225
--------------
15,120,925
Motion Picture Distribution (0.8%)
- --------------------------------------------------------------------------------------------------------------------------
8,670,000 AMC Entertainment, Inc. sr. sub. notes 9 1/2s, 2009 7,326,150
5,000,000 Cinemark USA, Inc. sr. sub. notes Ser. D, 9 5/8s,
2008 (Mexico) 4,350,000
--------------
11,676,150
Oil and Gas (3.4%)
- --------------------------------------------------------------------------------------------------------------------------
2,200,000 Belco Oil & Gas Corp. company guaranty Ser. B,
10 1/2s, 2006 2,266,000
2,300,000 Belco Oil & Gas Corp. sr. sub. notes Ser. B,
8 7/8s, 2007 2,208,000
100,000 Benton Oil & Gas Co. sr. notes 11 5/8s, 2003 72,750
4,195,000 Benton Oil & Gas Co. sr. notes 9 3/8s, 2007 2,517,000
200,000 Cliffs Drilling Co. company guaranty Ser. D,
10 1/4s, 2003 194,500
80,000 Flores & Rucks, Inc. sr. sub. notes 9 3/4s, 2006 82,000
3,440,000 Gulf Canada Resources, Ltd. sr. notes 8 3/8s,
2005 (Canada) 3,361,774
1,740,000 HS Resources, Inc. sr. sub. notes Ser. B, 9 1/4s, 2006 1,705,200
2,190,000 Leviathan Gas Corp.144A sr. sub. notes 10 3/8s, 2009 2,222,850
2,590,000 Ocean Energy, Inc. company guaranty Ser. B,
8 7/8s, 2007 2,602,950
4,990,000 Ocean Energy, Inc. company guaranty Ser. B,
8 3/8s, 2008 4,865,250
2,525,000 Petroleos Mexicanos 144A 9 3/8s, 2008 2,575,500
2,700,000 Pogo Producing Co. sr. sub. notes Ser. B, 8 3/4s, 2007 2,538,000
2,580,000 R & B Falcon Corp. sr. notes 12 1/4s, 2006 2,721,900
3,340,000 RAM Energy Inc. sr. notes 11 1/2s, 2008 1,661,650
2,840,000 Seven Seas Petroleum sr. notes Ser. B, 12 1/2s, 2005 1,136,000
3,795,000 Snyder Oil Corp. sr. sub. notes 8 3/4s, 2007 3,747,563
2,525,000 Stone Energy Corp. company guaranty 8 3/4s, 2007 2,553,406
1,590,000 Triton Energy Ltd. sr. notes 9 1/4s, 2005 1,538,452
4,790,000 Triton Energy Ltd. sr. notes 8 3/4s, 2002 4,723,515
4,800,000 Vintage Petroleum 144A sr. sub. notes 9 3/4s, 2009 4,896,000
50,000 XCL Ltd. 144A company guaranty 13 1/2s, 2004
(in default) (NON) 18,250
--------------
50,208,510
Packaging and Containers (2.0%)
- --------------------------------------------------------------------------------------------------------------------------
5,800,000 AEP Industries, Inc. sr. sub. notes 9 7/8s, 2007 5,582,500
2,000,000 Ball Corp. company guaranty 7 3/4s, 2006 1,960,000
925,000 Innova S De R.L. sr. notes 12 7/8s, 2007 (Mexico) 684,500
40,000 Owens-Illinois, Inc. sr. notes 8.1s, 2007 38,702
480,000 Owens-Illinois, Inc. deb. 7.8s, 2018 443,645
3,870,000 Owens-Illinois, Inc. sr. notes 7.35s, 2008 3,614,619
4,900,000 Packaging Corp. 144A sr. sub. notes 9 5/8s, 2009 4,961,250
2,419,421 Packaging Corp. Term Loan C 6s, 4/12/08 2,389,952
1,210,000 Radnor Holdings Inc. sr. notes 10s, 2003 1,234,200
5,860,000 Riverwood International Corp. company guaranty
10 7/8s, 2008 5,684,200
2,700,000 Riverwood International Corp. company guaranty
10 5/8s, 2007 2,720,250
555,000 Riverwood International Corp. company guaranty
10 1/4s, 2006 555,000
--------------
29,868,818
Paper and Forest Products (1.6%)
- --------------------------------------------------------------------------------------------------------------------------
4,350,000 APP Finance II Mauritius Ltd. bonds stepped-coupon
zero %, (16s, 2/15/04), 2049 (Indonesia) (STP) 2,631,750
190,000 Boise Cascade Co. med. term notes Ser. A, 7.43s, 2005 183,192
2,000,000 Boise Cascade Co. notes 7.35s, 2004 1,948,920
2,640,000 Doman Industries 144A sec. notes 12s, 2004 (Canada) 2,640,000
1,930,000 Impac Group Inc. company guaranty Ser. B,
10 1/8s, 2008 1,737,000
3,480,000 Pacifica Papers, Inc. 144A sr. notes 10s, 2009 (Canada) 3,532,200
4,585,000 Pindo Deli Finance Mauritius Ltd. company guaranty
10 3/4s, 2007 (Indonesia) 2,751,000
2,775,000 Repap New Brunswick sr. notes 10 5/8s,
2005 (Canada) 2,386,500
2,050,000 Repap New Brunswick 144A sec. notes 11 1/2s,
2004 (Canada) 2,060,250
2,310,000 Republic Group, Inc. sr. sub. notes 9 1/2s, 2008 2,200,275
1,640,000 Tembec Industries, Inc. company guaranty 8 5/8s,
2009 (Canada) 1,599,000
--------------
23,670,087
Pharmaceuticals (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
940,000 Biovail Corp. International sr. notes 10 7/8s, 2005 972,900
575,000 ICN Pharmaceuticals, Inc. 144A sr. notes 9 1/4s, 2005 564,938
6,720,000 ICN Pharmaceuticals, Inc. 144A sr. notes 8 3/4s, 2008 6,232,800
--------------
7,770,638
Photography (--%)
- --------------------------------------------------------------------------------------------------------------------------
340,000 PX Escrow Corp. sr. disc. notes stepped-coupon zero %
(9 5/8s, 2/1/02), 2006 (STP) 183,600
Publishing (1.1%)
- --------------------------------------------------------------------------------------------------------------------------
5,225,000 Affinity Group Holdings sr. notes 11s, 2007 4,911,500
1,808,448 Alabama River Newsprint Bank Term Loan
7.562s, 2002 1,482,927
2,150,000 American Media Operation, Inc. 144A sr. sub. notes
10 1/4s, 2009 2,080,125
2,000,000 Garden State Newspapers sr. sub. notes 8 5/8s, 2011 1,815,000
3,075,000 Garden State Newspapers, Inc. sr. sub. notes Ser. B,
8 3/4s, 2009 2,875,125
2,610,000 Perry-Judd company guaranty 10 5/8s, 2007 2,427,300
1,019,703 Von Hoffman Press, Inc. 144A sr. sub. notes
13 1/2s, 2009 948,324
10,000 Von Hoffman Press, Inc. 144A sr. sub. notes
10 3/8s, 2007 9,950
--------------
16,550,251
Railroads (--%)
- --------------------------------------------------------------------------------------------------------------------------
550,000 MRS Logistica, S.A. bonds Ser. B, 10 5/8s, 2005 (Brazil) 357,500
90,000 TFM S.A. de C.V. company guaranty stepped-coupon
zero %, (11 3/4s, 6/15/02), 2009 (Mexico) (STP) 46,800
--------------
404,300
Recreation (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
170,000 Premier Parks, Inc. sr. notes 9 3/4s, 2007 168,300
1,090,000 Premier Parks, Inc. sr. notes 9 1/4s, 2006 1,049,125
4,500,000 Premier Parks, Inc.144A sr. disc. notes stepped-coupon
zero %, (10s, 4/1/03), 2008 (STP) 2,970,000
3,800,000 Six Flags Corp. sr. notes 8 7/8s, 2006 3,667,000
--------------
7,854,425
REITs (Real Estate Investment Trust) (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
2,335,000 Tanger Properties Ltd. partnership gtd. notes
8 3/4s, 2001 2,326,571
Retail (1.2%)
- --------------------------------------------------------------------------------------------------------------------------
1,000,000 Community Distributors 144A company guaranty
Ser. B, 10 1/4s, 2004 880,000
3,420,000 Home Interiors & Gifts, Inc. company guaranty
10 1/8s, 2008 3,249,000
2,030,000 Iron Age Holdings Corp. company guaranty
9 7/8s, 2008 1,583,400
7,140,000 Iron Age Holdings Corp. sr. disc. notes stepped-coupon
zero % (12 1/8s, 5/1/03), 2009 (STP) 2,142,000
100,000 K mart Corp. med. term notes 7.55s, 2004 95,169
1,500,000 Kasper A.S.L. Ltd. sr. notes 12 3/4s, 2004 1,410,000
2,435,000 Mothers Work, Inc. sr. notes 12 5/8s, 2005 2,508,050
5,000,000 NBTY Inc. 144A sr. sub. notes 8 5/8s, 2007 4,137,500
2,440,000 North Atlantic Trading Co. company guaranty
Ser. B, 11s, 2004 2,342,400
--------------
18,347,519
Satellite Services (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
3,060,000 Golden Sky Systems 144A sr. sub. notes Ser. B,
12 3/8s, 2006 3,289,500
1,275,000 Satelites Mexicanos S.A. de C.V. 144A sr. notes
10 1/8s, 2004 (Mexico) 1,000,875
--------------
4,290,375
Semiconductors (1.1%)
- --------------------------------------------------------------------------------------------------------------------------
5,250,000 Amkor Technologies, Inc. 144A sr. notes 9 1/4s, 2006 5,118,750
1,000,000 Amkor Technology, Inc. 144A sr. sub. notes
10 1/2s, 2009 965,000
5,350,000 Fairchild Semiconductor Corp. sr. sub. notes
10 1/8s, 2007 5,202,875
4,900,000 Zilog, Inc. company guaranty Ser. B, 9 1/2s, 2005 4,459,000
--------------
15,745,625
Shipping (--%)
- --------------------------------------------------------------------------------------------------------------------------
40,000 MC Shipping, Inc. sr. notes Ser. B, 11 1/4s, 2008 29,200
2,680,000 Pegasus Shipping 144A company guaranty stepped-
coupon zero % (14 1/2s. 6/20/03), 2008
(Bermuda) (STP) 536,000
100,000 Pegasus Shipping 144A 11 7/8s, 2004 35,000
--------------
600,200
Specialty Consumer Products (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
3,095,000 Decora Industries, Inc. sr. sec. notes Ser. B, 11s, 2005 2,878,350
Steel (1.5%)
- --------------------------------------------------------------------------------------------------------------------------
5,900,000 AK Steel Corp. 144A sr. notes 7 7/8s, 2009 5,634,500
1,070,000 Armco, Inc. 144A sr. notes 8 7/8s, 2008 1,070,000
2,210,000 National Steel Corp. 1st mtge. Ser. D, 9 7/8s, 2009 2,198,950
2,170,000 Oregon Steel Mills 1st mortgage 11s, 2003 2,278,500
3,750,000 UCAR Global Enterprises sr. sub. notes Ser. B,
12s, 2005 3,956,250
5,075,000 WCI Steel, Inc. sr. notes Ser. B, 10s, 2004 5,100,375
2,945,000 Wheeling-Pittsburgh Steel Corp. sr. notes
9 1/4s, 2007 2,834,563
--------------
23,073,138
Telecommunications (15.1%)
- --------------------------------------------------------------------------------------------------------------------------
6,890,000 21st Century Telecom Group, Inc. sr. disc. notes stepped-
coupon zero % (12 1/4s, 2/15/03), 2008 (STP) 3,083,275
3,150,000 Barak I.T.C. sr. disc. Notes Ser. B stepped-coupon, zero %
(12 1/2s, 11/15/02), 2007 (Israel) (STP) 1,764,000
1,220,000 Bestel S.A.de C.V. sr. disc. notes stepped-coupon zero %
(12 3/4s, 5/15/03), 2005 (Mexico) (STP) 780,800
5,160,000 Birch Telecommunications, Inc. sr. notes 14s, 2008 5,160,000
1,270,000 Caprock Communications Corp. sr. notes Ser. B,
12s, 2008 1,263,650
2,220,000 Caprock Communications Corp. 144A sr. notes
11 1/2s, 2009 2,197,800
3,500,000 Charter Communications bank term loan Ser. B
7 1/2s, 2008 3,491,250
8,950,000 Charter Communications Holdings LLC 144A
sr. disc. notes stepped-coupon zero %
(9.92s, 4/1/04), 2011 (STP) 5,414,750
10,170,000 Charter Communications Holdings LLC 144A
sr. notes 8 5/8s, 2009 9,839,475
35,000 Conecel Holdings 144A notes Ser. A, 14s, 2000 4,550
1,480,000 Covad Communications Group Inc. sr. notes
12 1/2s, 2009 1,435,600
9,680,000 Covad Communications Group, Inc. sr. disc. notes Ser. B
stepped-coupon, zero % (13 1/2s, 3/15/03), 2008 (STP) 5,178,800
9,955,000 DTI Holdings Inc. sr. disc. notes Ser. B, stepped-coupon
zero % (12 1/2s, 3/01/03), 2008 (STP) 3,409,588
8,690,000 Echostar DBS Corp. sr. notes 9 3/8s, 2009 8,559,650
8,530,000 Econophone, Inc. 144A notes stepped-coupon zero %
(11s, 2/15/03), 2008 (STP) 4,862,100
1,850,000 Esprit Telecom Group PLC sr. notes 11 1/2s, 2007
(United Kingdom) 1,924,000
8,410,000 Firstworld Communication Corp. sr. disc. notes stepped-
coupon zero % (13, 4/15/03), 2008 (STP) 4,457,300
12,000,000 Focal Communications Corp. sr. disc. notes Ser. B,
stepped-coupon, zero % (12 1/8s, 2/15/03),
2008 (STP) 6,720,000
7,300,000 Global Crossing Holdings, Ltd. company guaranty
9 5/8s, 2008 7,300,000
1,460,000 Globe Telecom, Inc. 144A 13s, 2009 1,503,800
250,000 GST Equipment Funding sr. notes 13 1/4s, 2007 262,500
9,819,000 GST Telecommunications, Inc. company guaranty stepped-
coupon zero % (13 7/8s, 3/15/00), 2005 (STP) 8,370,698
16,170,000 GST Telecommunications, Inc. 144A sr. disc. notes stepped-
coupon zero % (10 1/2s, 5/1/03), 2008 (STP) 9,378,600
590,000 Hermes Europe Railtel 144A sr. notes 11 1/2s, 2007
(Netherlands) 613,600
2,770,000 Hyperion Telecommunications Corp., Inc. sr. disc. notes
stepped-coupon Ser. B, zero % (13s, 4/15/01),
2003 (STP) 2,312,950
115,000 Hyperion Telecommunications Corp., Inc. sr. notes
Ser. B, 12 1/4s, 2004 119,600
5,700,000 ICG Communications, Inc. sr. disc. notes stepped-coupon
zero % (10s, 2/15/03), 2008 (STP) 3,249,000
2,400,000 ICG Holdings, Inc. sr. disc. notes stepped-coupon zero %
(13 1/2s, 9/15/00), 2005 (Canada) (STP) 2,130,000
9,180,000 ICG Services, Inc. sr. disc. notes stepped-coupon zero %
(9 7/8s, 5/1/03), 2008 (STP) 5,140,800
4,395,000 Intelcom Group (USA), Inc. company guaranty stepped-
coupon zero % (12 1/2s, 5/1/01), 2006 (STP) 3,526,988
1,020,000 Interact Systems, Inc. 144A 14s 2003 183,600
5,570,000 Intermedia Communications, Inc. sr. disc. notes Ser. B
stepped-coupon, zero % (11 1/4s, 7/15/02), 2007 (STP) 3,899,000
3,150,000 Intermedia Communications, Inc. sr. notes Ser. B,
8.6s, 2008 2,795,625
3,350,000 Intermedia Communications, Inc. sr. notes Ser. B,
8 1/2s, 2008 2,956,375
11,065,000 International Cabletel, Inc. sr. notes Ser. B stepped-coupon,
zero % (11 1/2s, 2/01/01), 2006 (STP) 9,930,838
8,720,000 IPC Information Systems Inc. sr. disc. notes zero %
(10 7/8s,), 2008 (STP) 6,627,200
12,555,000 KMC Telecom Holdings, Inc. sr. disc. notes stepped-
coupon zero % (12 1/2s, 2/15/03), 2008 (STP) 6,340,275
2,180,000 KMC Telecommunications 144A sr. notes
13 1/2s, 2009 2,152,750
9,365,000 Knology Holdings, Inc. sr. disc. notes stepped-coupon
zero %, (11 7/8s, 10/15/02), 2007 (STP) 5,455,113
7,145,000 Microcell Telecommunications sr. disc. notes Ser B.
stepped-coupon, zero % (14s, 12/1/01), 2006
(Canada) (STP) 5,876,763
300,000 Netia Holdings B.V. 144A company guaranty
stepped-coupon zero % (11 1/4s, 11/1/01), 2007
(Poland) (STP) 190,500
800,000 Netia Holdings B.V. 144A company guaranty
10 1/4s, 2007 (Poland) 688,000
1,790,000 Nextel Partners Inc. 144A sr. disc. notes stepped-
coupon zero % (14s, 2/1/04), 2009 (STP) 1,047,150
6,385,000 NorthEast Optic Network, Inc. sr. notes 12 3/4s, 2008 6,576,550
1,910,000 Orbital Imaging Corp. sr. notes Ser. D, 11 5/8s, 2005 1,432,500
8,950,000 Pathnet, Inc. sr. notes 12 1/4s, 2008 4,833,000
1,000,000 Primus Telecommunications Group, Inc. sr. notes
11 3/4s, 2004 980,000
1,680,000 Primus Telecommunications Group, Inc. sr. notes
Ser. B, 9 7/8s, 2008 1,512,000
5,260,000 Qwest Communications International, Inc. sr. disc. notes
stepped-coupon zero % (9.47s, 10/15/02), 2007 (STP) 4,113,004
5,450,000 Rhythms Netconnections, Inc. sr. disc. notes Ser. B
stepped-coupon, zero % (13 1/2s, 5/15/03),
2008 (STP) 2,752,250
3,360,000 Rogers Cantel, Inc. sr. sub. notes 8.8s, 2007 (Canada) 3,410,400
3,480,000 Startec Global Communications Corp. sr. notes
12s, 2008 2,958,000
5,070,000 Telecommunications Techniques, Inc. company guaranty
9 3/4s, 2008 4,816,500
1,630,000 Telehub Communications Corp. company guaranty
stepped-coupon zero % (13 7/8s, 7/31/02), 2005 (STP) 978,000
2,610,000 Teligent, Inc. sr. disc. Notes Ser. B stepped-coupon, zero %
(11 1/2s, 3/1/03), 2008 (STP) 1,409,400
10,650,000 Time Warner Telecom Inc. sr. notes 9 3/4s, 2008 10,809,750
2,790,000 WinStar Communications, Inc. sr. sub. notes 10s, 2008 2,427,300
7,825,000 WinStar Communications, Inc. sr. sub. notes 15s, 2007 9,350,875
6,510,000 WinStar Communications. Inc. sr. sub. notes 11s, 2008 5,859,000
--------------
225,816,842
Telephone Services (4.1%)
- --------------------------------------------------------------------------------------------------------------------------
3,870,000 Allegiance Telecom, Inc. sr. disc. notes Ser. B stepped-
coupon, zero % (11 3/4s, 2/15/03), 2008 (STP) 2,457,450
860,000 Allegiance Telecom, Inc. sr. notes 12 7/8s, 2008 928,800
6,705,000 BTI Telecom Corp. sr. notes 10 1/2s, 2007 5,833,350
2,340,000 Call-Net Enterprises Inc. sr. notes 8s, 2008 (Canada) 2,035,800
14,755,000 Call-Net Enterprises, Inc. sr. disc. notes stepped-coupon
zero % (8.94s, 8/15/03), 2008 (Canada) (STP) 8,262,800
5,925,000 Colt Telecommunications Group PLC sr. disc. notes
stepped-coupon zero %, (12s, 12/15/01), 2006
(United Kingdom) (STP) 4,858,500
2,565,000 Facilicom International sr. notes Ser. B, 10 1/2s, 2008 2,231,550
2,660,000 Flag Ltd. 144A sr. notes 8 1/4s, 2008 (Bermuda) 2,367,400
2,450,000 Logix Communications Enterprises sr. notes
12 1/4s, 2008 2,107,000
5,245,000 OnePoint Communications Corp. 144A sr. notes
14 1/2s, 2008 3,409,250
1,400,000 RSL Communications, Ltd. 144A 10 1/2s, 2008 1,274,000
295,000 RSL Communications, Ltd. company guaranty
9 1/8s, 2008 253,700
5,393,000 Sprint Spectrum L.P. sr. disc. notes stepped-coupon
zero % (12 1/2s, 8/15/01), 2006 (STP) 4,930,766
500,000 Sprint Spectrum L.P. sr. notes 11s, 2006 559,995
150,000 Transtel S.A. pass-through certificates 12 1/2s, 2007 73,500
4,780,000 US Xchange LLC sr. notes 15s, 2008 4,708,300
3,030,000 Versatel Telecom B.V. sr. notes 13 1/4s, 2008
(Netherlands) 3,030,000
1,230,000 Versatel Telecom B.V. 144A sr. notes 13 1/4s, 2008
(Netherlands) 1,230,000
8,905,000 Viatel, Inc. sr. disc. notes stepped-coupon zero %
(12 1/2s, 4/15/03), 2008 (STP) 5,432,050
5,455,000 Viatel, Inc. sr. notes 11 1/4s, 2008 5,345,900
--------------
61,330,111
Textiles (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
90,000 Day International Group, Inc. company guaranty
9 1/2s, 2008 76,500
3,420,000 Galey & Lord, Inc. company guaranty 9 1/8s, 2008 1,641,600
405,000 Polymer Group, Inc. company guaranty Ser. B, 9s, 2007 384,750
2,560,000 Polymer Group, Inc. company guaranty Ser. B,
8 3/4s, 2008 2,406,400
1,500,000 Westpoint Stevens, Inc. sr. notes 7 7/8s, 2008 1,402,500
--------------
5,911,750
Transportation (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
125,000 Eletson Holdings, Inc. 1st pfd. mtge. notes 9 1/4s,
2003 (Greece) 115,625
1,345,000 Johnstown America Industries, Inc. company guaranty
Ser. C, 11 3/4s, 2005 1,371,900
2,000,000 Johnstown America Industries, Inc. sr. sub. notes
11 3/4s, 2005 2,040,000
1,260,000 Kitty Hawk, Inc. company guaranty 9.95s, 2004 1,222,200
--------------
4,749,725
Utilities (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
1,900,000 Public Service Co. of New Mexico sr. notes Ser. A,
7.1s, 2005 1,867,529
670,000 Public Service Co. of New Mexico sr. notes Ser. B,
7 1/2s, 2018 642,342
--------------
2,509,871
Wireless Communications (0.6%)
- --------------------------------------------------------------------------------------------------------------------------
1,280,000 American Mobile Satellite Corp. company guaranty
12 1/4s, 2008 985,600
4,500,000 Clearnet Communications, Inc. sr. disc. notes stepped-
coupon zero % (14 3/4s, 12/15/00), 2005 (STP) 4,140,000
440,000 Orbital Imaging Corp. sr. notes Ser. B, 11 5/8s, 2005 346,500
125,000 Paging Network Do Brasil sr. notes 13 1/2s,
2005 (Brazil) 48,750
500,000 Paging Network, Inc. sr. sub. notes 10s, 2008 280,000
4,310,000 Telecorp PCS Inc. 144A sr. disc. notes stepped-
coupon zero %, (11 5/8s, 4/15/04), 2009 (STP) 2,510,575
--------------
8,311,425
--------------
Total Corporate Bonds and Notes
(cost $1,373,703,587) $1,252,439,086
PREFERRED STOCKS (5.3%) (a)
NUMBER OF SHARES VALUE
Banks (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
6,500 California Federal Bancorp Inc. Ser. A, $2.281 pfd. $ 169,000
19,500 Chevy Chase Capital Corp. Ser. A, $5.188 pfd. (PIK) 1,062,750
2,750 First Republic 144A $10.50 pfd. (10.50%) 2,736,250
--------------
3,968,000
Broadcasting (1.3%)
- --------------------------------------------------------------------------------------------------------------------------
400 Benedek Communications $11.50 pfd. (PIK) 308,000
1,393 Capstar Broadcasting, Inc. 144A $12.00 pfd. (PIK) 160,195
926 Citadel Broadcasting Inc. 144A $13.25 cum. pfd. (PIK) 105,101
5,063 Granite Broadcasting 144A $12.75 pfd. (PIK) 5,063,000
752 Paxson Communications Corp. 13.25% cum. pfd. (PIK) 7,219,200
2,461 Paxson Communications Corp. $12.50 pfd. (PIK) 2,313,340
1,000 Sinclair Capital $11.625 cum. pfd. 101,000
3,434 Spanish Broadcasting Systems 14.25% cum. pfd. (PIK) 3,777,400
--------------
19,047,236
Building and Construction (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
227,225 Brand Scaffold Services, Inc. $3.625 pfd. 6,362,300
Cable Television (0.6%)
- --------------------------------------------------------------------------------------------------------------------------
41,257 Adelphia Communications Corp. Ser. B, $13.00
cum. pfd. 4,507,327
36,195 CSC Holdings, Inc. Ser. M, $11.125 cum. pfd. (PIK) 3,836,670
--------------
8,343,997
Cellular Communications (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
5,323 Dobson Communications $13.00 pfd. 5,110,080
1,063 Dobson Communications Corp. 144A $12.25 pfd. (PIK) 935,440
--------------
6,045,520
Chemicals (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
125,000 ZSC Specialty Chemicals PLC $16.00 pfd. (PIK) 3,750,000
Computer Services (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
999 Concentric Network Corp. Ser. B, 13.50% pfd. (PIK) 919,080
Electric Utilities (--%)
- --------------------------------------------------------------------------------------------------------------------------
320 Public Service Co. of New Hampshire $2.651
1st mtge. pfd. 8,000
Financial Services (--%)
- --------------------------------------------------------------------------------------------------------------------------
3,351 CGA Group Ltd. 144A Ser. A, $13.75 pfd. (PIK) 90,477
15,000 CSBI Capital Trust I 144A company guaranty
11.75% pfd. 16,050
--------------
106,527
Gaming (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
34,245 Lady Luck Gaming Corp. $11.25 pfd. 1,438,290
Medical Supplies and Devices (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
1,635 Fresenius Medical Capital Trust I Ser. D company
guaranty, pfd. 9.00% (Germany) 1,610,475
1,590 Fresenius Medical Capital Trust II company guaranty
$7.875, pfd. (Germany) 1,466,775
--------------
3,077,250
Oil and Gas (--%)
- --------------------------------------------------------------------------------------------------------------------------
155 R & B Falcon Corp. $1.3.87 pfd. 145,700
Packaging and Containers (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
12,100 Packaging Corp. America 144A $12.375 pfd. (PIK) 1,318,900
Satellite Services (--%)
- --------------------------------------------------------------------------------------------------------------------------
28 ICG Holdings, Inc. $14.25 pfd. (Canada) 27,160
Telecommunications (1.7%)
- --------------------------------------------------------------------------------------------------------------------------
1,540 21st Century Telecom Group 144A $13.75
cum. pfd. (PIK) 770,000
49,660 Global Crossing Holdings 144A $10.50 pfd. 4,941,170
1,500 Hyperion Telecommunications Ser. B, $12.875 pfd. (PIK) 1,342,500
2,174 ICG Holdings, Inc., 144A $14.00 pfd. (Canada) (PIK) 2,087,040
3,135 Intermedia Communication Ser. B, 13.50% pfd. (PIK) 2,946,900
5,104 IXC Communications, Inc. $12.50 pfd. (PIK) 5,257,120
204 NEXTEL Communications, Inc. Ser. D, 13.00%
cum. pfd. (PIK) 216,240
680 NEXTEL Communications, Inc. Ser. E, 11.125% pfd. (PIK) 669,800
115,784 Nextlink Communications, Inc. 144A $7.00
cum. pfd. (PIK) 5,789,200
523 Trikon Technologies, Inc. Ser. H, $8.125 pfd. (PIK) 1,308
5 Trikon Technologies, Inc. Ser. I, $8.125 pfd. 1,697
1,345 WinStar Communications, Inc. 144A $14.25
cum. pfd. (PIK) 1,129,800
--------------
25,152,775
--------------
Total Preferred Stocks (cost $81,399,992) $ 79,710,735
UNITS (1.4%) (a)
NUMBER OF UNITS VALUE
- --------------------------------------------------------------------------------------------------------------------------
4,056 CD Radio Inc. 144A units 14 1/2s, 2009 $ 4,157,400
4,531 Cybernet 144A units 14s, 2009 4,531,000
2,870 Earthwatch 144A units13s, 2007 1,994,650
3,600 Network Plus Corp. units pfd. 13 1/4s, 2009 3,672,000
3,750 Peninsula Gaming LLC 144A units 12 1/4s, 2006 3,693,750
2,390 Tele1 Europe BV 144A unit 13s, 2009 2,533,400
55,000 XCL Ltd. units sr. sec. notes 13 1/2s, 2004
(In default) (NON) 20,075
19,405 XCL Ltd. 144A units 9.5s, 2006 (PIK) 58,215
--------------
Total Units (cost $22,992,836) $ 20,660,490
FOREIGN GOVERNMENT BONDS AND NOTES (1.0%) (a)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$12,775,000 Argentina (Republic of) 11 3/4s, 2009 $ 11,753,000
4,000,000 Brazil (Government of) 11 5/8s, 2004 3,610,000
--------------
Total Foreign Government Bonds and Notes
(cost $17,090,716) $ 15,363,000
BRADY BONDS (1.4%) (a)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$11,492,617 Brazil (Government of) disc. bonds FRB 8s, 2014 $ 6,881,779
6,180,000 United Mexican States bonds 10 3/8s, 2009 6,210,900
8,230,000 United Mexican States FRB Ser. D, 6 3/4s, 2019 6,830,900
950,000 United Mexican States Sec. Ser. B, 6 1/4s, 2019 679,250
--------------
Total Brady Bonds (cost $21,747,377) $ 20,602,829
CONVERTIBLE BONDS AND NOTES (1.2%) (a)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$ 5,000,000 Aames Financial Corp. cv. sub. deb. 5 1/2s, 2006 $ 1,756,250
6,000,000 Amazon.com Inc. cv. sub. deb. 4 3/4s, 2009 5,640,000
1,075,000 Corporate Express, Inc. cv. notes 4 1/2s, 2000 1,032,000
3,470,000 Cybernet Internet Service 144A cv. sr. disc. notes
stepped-coupon zero %, (13s, 8/15/04), 2009 (STP) 1,873,800
1,310,000 Exide Corp. 144A cv. sr. sub. notes 2.9s, 2005 745,063
140,000 HEALTHSOUTH Corp. cv. sub. deb. 3 1/4s, 2003 111,825
1,400,000 Lam Research Corp. cv. sub. notes 5s, 2002 1,368,500
4,000,000 Micron Technology, Inc cv. 6 1/2s, 2005 3,200,000
3,000,000 Total Renal Care Holdings, Inc. 144A cv. 7s, 2009 1,968,750
--------------
Total Convertible Bonds and Notes
(cost $17,211,843) $ 17,696,188
CONVERTIBLE PREFERRED STOCKS (0.8%) (a)
NUMBER OF SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------------
4,745 Chesapeake Energy Corp. $3.50 cum. cv. pfd. $ 136,419
76,760 Global Telesystems, Inc. 144A $3.625 cv. pfd. 4,288,965
85 Paxson Communications Corp. 144A
9.75% cv. pfd. (PIK) 892,500
143,760 Verio Inc. 144A $3.375 c.v. pfd. 6,864,540
2,937 XCL Ltd 144A Ser. A, $9.50 cv. cum. pfd. 8,811
--------------
Total Convertible Preferred Stocks
(cost $12,373,766) $ 12,191,235
COLLATERALIZED MORTGAGE OBLIGATIONS (0.8%) (a)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$ 3,400,000 Criimi Mae Commercial Mortgage Trust 7s, 2012 $ 2,366,719
1,202,136 Freddie Mac Ser. 147, Class IO, 8s, 2023 343,736
567,106 Financing Corp. 8s, 2023 157,726
3,800,000 GGP Ala Moana Ser. 1999-C1 Class F, 8.113s, 2009 3,800,000
2,600,000 GS Mortgage Securities Corp. 7.094s, 2013 2,429,375
6,026,833 Merrill Lynch Mortgage Investors, Inc. Ser. 1996-C2,
Class IO, 1.5607s, 2028 423,291
51,257,553 Mortgage Capital Funding, Inc. Ser. 98-MC1,
Class X, IO, 0.86s, 2009 1,986,230
--------------
Total Collateralized Mortgage Obligations
(cost $11,640,825) $ 11,507,077
WARRANTS (0.4%) (a) (NON) EXPIRATION
NUMBER OF WARRANTS DATE VALUE
- --------------------------------------------------------------------------------------------------------------------------
1,260 21st Century Telecom Group 144A 2/15/10 $ 25,200
1,280 American Mobile Satellite Corp. 4/1/08 44,800
1,220 Bestel S.A. (Mexico) 5/15/05 36,600
5,160 Birch Telecommunications, Inc. 144A (PIK) 6/15/08 283,800
3,230 Cellnet Data Systems, Inc. 10/1/07 80,750
3,200 CGA Group Ltd. 144A 2/11/07 32
300 Club Regina, Inc. 144A 12/1/04 300
200 Colt Telecommunications Group PLC 12/31/06 75,000
472 Consorcio Ecuatoriano 144A (Ecuador) 10/1/00 47
6,150 Decrane Holdings 9/30/08 6
38,475 Diva Systems Corp. 3/1/08 307,800
43,450 DTI Holdings Inc. 3/1/08 435
850 E. Spire Communications, Inc. 11/1/05 8,500
375 Econophone, Inc. 144A 7/1/07 37,500
1,290 Epic Resorts 6/15/05 13
25 Esat Holdings, Inc. (Ireland) 2/1/07 1,750
8,410 Firstworld Communication 4/15/08 588,700
60 Globalstar Telecommunications 2/15/04 4,500
225 Hyperion Telecommunications 144A 4/15/01 17,888
53,776 ICG Communications 10/15/05 994,856
1,670 Insilco Holding Co. 8/15/08 2
470 Iridium World Com 144A 7/15/05 59
3,805 KMC Telecom Holdings, Inc. 4/15/08 11,415
3,815 Knology Holdings, Inc. 144A 10/15/07 9,538
60 Long Distance International, Inc. 144A 4/13/08 120
320 McCaw International Ltd. 4/15/07 1,360
2,800 Mediq Inc. 144A 6/1/09 28
30 Metronet Communications 144A 8/15/07 2,460
850 MGC Communications, Inc. 144A 10/1/04 76,075
31,929 Network Plus Corp. 12/31/00 2,369,451
5,245 Onepoint Communications, Inc. 6/1/08 5,245
440 Orbital Imaging Corp. 144A 3/1/05 8,800
50 Orion Network Systems 1/15/07 575
10,180 Pathnet, Inc. 144A 4/15/08 101,800
2,560 Paxson Communications Corp. 144A 6/30/03 10,240
150 R & B Falcon Corp. 144A 5/1/09 24,000
2,480 Startec Global Communications Corp. 5/15/08 2,480
1,580 Telehub Communications Corp. 7/31/05 47,400
125 UIH Australia/Pacific, Inc. 144A 5/15/06 3,750
2,260 Versatel Telecom B.V. 144A (Netherlands) 5/15/08 361,600
990 WAM!NET, Inc. 3/1/05 22,523
--------------
Total Warrants (cost $2,780,842) $ 5,567,398
COMMON STOCKS (0.2%) (a) (NON)
NUMBER OF SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------------
2,477 Allegiance Telecom, Inc. $ 148,930
22,400 AMFM, Inc. 1,103,200
27,272 Capstar Broadcasting Partners 67,498
31,082 Celcaribe 15,530
90,040 Celcaribe S.A. 144A (Colombia) 112,550
607 Hedstrom Holdings, Inc. 144A 607
619 Mothers Work, Inc 8,666
8 Spanish Broadcasting System, Inc. 5,200
23,408 Viatel, Inc. 905,597
15,717 WinStar Communications. Inc. 798,620
--------------
Total Common Stocks (cost $3,227,015) $ 3,166,398
SHORT-TERM INVESTMENTS (2.5%) (a) (cost $36,577,000)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$36,577,000 Interest in $432,207,000 joint repurchase agreement
dated August 31, 1999 with Warburg Securities
due September 1, 1999 with respect to various
U.S. Treasury obligations -- maturity value of
$36,582,497 for an effective yield of 5.41% $ 36,577,000
- --------------------------------------------------------------------------------------------------------------------------
Total Investments (cost $1,600,745,799) (b) $1,475,481,436
- --------------------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $1,491,259,543.
(b) The aggregate identified cost on a tax basis is $1,600,859,768 resulting in gross unrealized appreciation and
depreciation of $21,101,601 and $146,479,933, respectively, or net unrealized depreciation of $125,378,332.
(NON) Non-income-producing security.
(STP) The interest or dividend rate and date shown parenthetically represent the new interest or dividend rate to be paid
and the date the fund will begin receiving interest or dividend income at this rate.
(PIK) Income may be received in cash or additional securities at the discretion of the issuer.
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, 1999, which are subject to change based on the terms of the security.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
August 31, 1999
<S> <C>
Assets
- -----------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $1,600,745,799) (Note 1) $1,475,481,436
- -----------------------------------------------------------------------------------------------
Interest and other receivables 30,522,712
- -----------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 5,049,672
- -----------------------------------------------------------------------------------------------
Receivable for securities sold 1,417,120
- -----------------------------------------------------------------------------------------------
Total assets 1,512,470,940
Liabilities
- -----------------------------------------------------------------------------------------------
Payable to subcustodian (Note 2) 792,767
- -----------------------------------------------------------------------------------------------
Distributions payable to shareholders 5,950,984
- -----------------------------------------------------------------------------------------------
Payable for securities purchased 8,400,580
- -----------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 2,111,251
- -----------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 2,272,083
- -----------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 218,095
- -----------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 9,679
- -----------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 4,227
- -----------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 1,015,474
- -----------------------------------------------------------------------------------------------
Other accrued expenses 436,257
- -----------------------------------------------------------------------------------------------
Total liabilities 21,211,397
- -----------------------------------------------------------------------------------------------
Net assets $1,491,259,543
Represented by
- -----------------------------------------------------------------------------------------------
Paid-in capital (Notes 1, 4 and 5) $1,659,763,380
- -----------------------------------------------------------------------------------------------
Distributions in excess of net investment income (Note 1) (7,115,324)
- -----------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (Notes 1 and 3) (36,124,150)
- -----------------------------------------------------------------------------------------------
Net unrealized depreciation of investments (125,264,363)
- -----------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $1,491,259,543
Computation of net asset value and offering price
- -----------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($594,559,328 divided by 79,366,509 shares) $7.49
- -----------------------------------------------------------------------------------------------
Offering price per class A share (100/95.25 of $7.49)* $7.86
- -----------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($855,729,089 divided by 114,085,980 shares)** $7.50
- -----------------------------------------------------------------------------------------------
Net asset value and offering price per class C share
($1,527,718 divided by 203,722 shares)** $7.50
- -----------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($39,443,408 divided by 5,262,166 shares) $7.50
- -----------------------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $7.50)* $7.75
- -----------------------------------------------------------------------------------------------
* 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
Year ended August 31, 1999
<S> <C>
Investment income:
- -----------------------------------------------------------------------------------------------
Interest (net of foreign tax $75,828) $128,261,443
- -----------------------------------------------------------------------------------------------
Dividend 772,069
- -----------------------------------------------------------------------------------------------
Total investment income 129,033,512
Expenses:
- -----------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 7,382,821
- -----------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 1,319,080
- -----------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 26,673
- -----------------------------------------------------------------------------------------------
Administrative services (Note 2) 18,870
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 1,152,849
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 6,764,312
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class C (Note 2) 913
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 160,575
- -----------------------------------------------------------------------------------------------
Reports to shareholders 68,435
- -----------------------------------------------------------------------------------------------
Registration fees 225,569
- -----------------------------------------------------------------------------------------------
Auditing 91,888
- -----------------------------------------------------------------------------------------------
Legal 86,739
- -----------------------------------------------------------------------------------------------
Postage 106,697
- -----------------------------------------------------------------------------------------------
Other expenses 156,763
- -----------------------------------------------------------------------------------------------
Total expenses 17,562,184
- -----------------------------------------------------------------------------------------------
Expense reduction (Note 2) (217,944)
- -----------------------------------------------------------------------------------------------
Net expenses 17,344,240
- -----------------------------------------------------------------------------------------------
Net investment income 111,689,272
- -----------------------------------------------------------------------------------------------
Net realized loss on investments (Notes 1 and 3) (32,170,616)
- -----------------------------------------------------------------------------------------------
Net realized gain on futures contracts (Note 1) 16,845
- -----------------------------------------------------------------------------------------------
Net unrealized depreciation of investments and futures during the year (40,438,269)
- -----------------------------------------------------------------------------------------------
Net loss on investments (72,592,040)
- -----------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $ 39,097,232
- -----------------------------------------------------------------------------------------------
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
Year ended (commencement
August 31 of operations)
1999 to August 31, 1998
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase in net assets
- ----------------------------------------------------------------------------------------------------------------------
Operations:
- ----------------------------------------------------------------------------------------------------------------------
Net investment income $ 111,689,272 $ 16,146,259
- ----------------------------------------------------------------------------------------------------------------------
Net realized loss on investments (32,153,771) (3,896,027)
- ----------------------------------------------------------------------------------------------------------------------
Net unrealized depreciation of investments (40,438,269) (78,094,185)
- ----------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations 39,097,232 (65,843,953)
- ----------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ----------------------------------------------------------------------------------------------------------------------
From net investment income
Class A (45,606,325) (6,585,636)
- ----------------------------------------------------------------------------------------------------------------------
Class B (62,136,212) (9,095,142)
- ----------------------------------------------------------------------------------------------------------------------
Class C (7,209) --
- ----------------------------------------------------------------------------------------------------------------------
Class M (3,191,936) (465,481)
- ----------------------------------------------------------------------------------------------------------------------
In excess of net investment income
Class A (1,343,193) (1,095,167)
- ----------------------------------------------------------------------------------------------------------------------
Class B (1,830,029) (1,512,490)
- ----------------------------------------------------------------------------------------------------------------------
Class C (212) --
- ----------------------------------------------------------------------------------------------------------------------
Class M (94,009) (77,408)
- ----------------------------------------------------------------------------------------------------------------------
From return of capital
Class A (1,827,387) (1,043,290)
- ----------------------------------------------------------------------------------------------------------------------
Class B (2,489,718) (1,440,844)
- ----------------------------------------------------------------------------------------------------------------------
Class C (289) --
- ----------------------------------------------------------------------------------------------------------------------
Class M (127,897) (73,741)
- ----------------------------------------------------------------------------------------------------------------------
Increase from capital share transactions
(Notes 4, 5 and 6) 828,779,452 827,268,427
- ----------------------------------------------------------------------------------------------------------------------
Total increase in net assets 749,222,268 740,035,275
Net assets
- ----------------------------------------------------------------------------------------------------------------------
Beginning of year (Note 5) 742,037,275 2,002,000
- ----------------------------------------------------------------------------------------------------------------------
End of year (Including distributions in excess of
net investment income of $7,115,324 and
$2,683,541, respectively) $1,491,259,543 $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
- ----------------------------------------------------------------------------------------------------------------------------------
Year For the period
Per-share ended Dec. 31, 1997+
operating performance August 31 to August 31
- ----------------------------------------------------------------------------------------------------------------------------------
1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net asset value,
beginning of period $8.02 $8.50
- ----------------------------------------------------------------------------------------------------------------------------------
Investment activities
- ----------------------------------------------------------------------------------------------------------------------------------
Net investment income (a) .78 .41(d)
- ----------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
loss on investments (.48) (.47)
- ----------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .30 (.06)
- ----------------------------------------------------------------------------------------------------------------------------------
Less distributions
- ----------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.78) (.32)
- ----------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income (.02) (.05)
- ----------------------------------------------------------------------------------------------------------------------------------
Return of capital (.03) (.05)
- ----------------------------------------------------------------------------------------------------------------------------------
Total distributions (.83) (.42)
- ----------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $7.49 $8.02
- ----------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ----------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(b) 3.85 (1.08)*
- ----------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $594,559 $278,847
- ----------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(c) 1.06 .84(d)*
- ----------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 9.99 4.57(d)*
- ----------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 51.30(f) 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) Total return assumes dividend reinvestment and does not reflect the effect of sales charges.
(c) The ratio of expenses to average net assets for the period includes amounts paid through expense offset arrangements.
(Note 2)
(d) 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.
(e) Distributions were less than $0.01 per share.
(f) Portfolio turnover excludes the impact of assets received from the acquisition of Putnam High Yield Total Return Fund.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS B
- ----------------------------------------------------------------------------------------------------------------------------------
Year For the period
Per-share ended Dec. 31, 1997+
operating performance August 31 to August 31
- ----------------------------------------------------------------------------------------------------------------------------------
1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net asset value,
beginning of period $8.01 $8.50
- ----------------------------------------------------------------------------------------------------------------------------------
Investment activities
- ----------------------------------------------------------------------------------------------------------------------------------
Net investment income (a) .72 .36(d)
- ----------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
loss on investments (.46) (.46)
- ----------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .26 (.10)
- ----------------------------------------------------------------------------------------------------------------------------------
Less distributions
- ----------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.72) (.29)
- ----------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income (.02) (.05)
- ----------------------------------------------------------------------------------------------------------------------------------
Return of capital (.03) (.05)
- ----------------------------------------------------------------------------------------------------------------------------------
Total distributions (.77) (.39)
- ----------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $7.50 $8.01
- ----------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ----------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(b) 3.33 (1.58)*
- ----------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $855,729 $444,096
- ----------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(c) 1.81 1.34(d)*
- ----------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 9.24 4.07(d)*
- ----------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 51.30(f) 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) Total return assumes dividend reinvestment and does not reflect the effect of sales charges.
(c) The ratio of expenses to average net assets for the period includes amounts paid through expense offset arrangements.
(Note 2)
(d) 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.
(e) Distributions were less than $0.01 per share.
(f) Portfolio turnover excludes the impact of assets received from the acquisition of Putnam High Yield Total Return Fund.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS C
- ----------------------------------------------------------------------------------------------------------------------------------
For the period
Per-share July 26, 1999+
operating performance to August 31
- ----------------------------------------------------------------------------------------------------------------------------------
1999
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Net asset value,
beginning of period $7.69
- ----------------------------------------------------------------------------------------------------------------------------------
Investment activities
- ----------------------------------------------------------------------------------------------------------------------------------
Net investment income (a) .08
- ----------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
loss on investments (.20)
- ----------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations (.12)
- ----------------------------------------------------------------------------------------------------------------------------------
Less distributions
- ----------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.07)
- ----------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income --(e)
- ----------------------------------------------------------------------------------------------------------------------------------
Return of capital --(e)
- ----------------------------------------------------------------------------------------------------------------------------------
Total distributions (.07)
- ----------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $7.50
- ----------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ----------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(b) (1.52)*
- ----------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $1,528
- ----------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(c) .18
- ----------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 1.18
- ----------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 51.30(f)
- ----------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Per share net investment income has been determined on the basis of the weighted average number of shares outstanding
during the period.
(b) Total return assumes dividend reinvestment and does not reflect the effect of sales charges.
(c) The ratio of expenses to average net assets for the period includes amounts paid through expense offset arrangements.
(Note 2)
(d) 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.
(e) Distributions were less than $0.01 per share.
(f) Portfolio turnover excludes the impact of assets received from the acquisition of Putnam High Yield Total Return Fund.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS M
- ------------------------------------------------------------------------------------------------------------------------------------
Year For the period
Per-share ended Dec. 31, 1997+
operating performance August 31 to August 31
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net asset value,
beginning of period $8.01 $8.50
- ------------------------------------------------------------------------------------------------------------------------------------
Investment activities
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income (a) .77 .40(d)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
loss on investments (.47) (.48)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .30 (.08)
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.76) (.31)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income (.02) (.05)
- ------------------------------------------------------------------------------------------------------------------------------------
Return of capital (.03) (.05)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.81) (.41)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $7.50 $8.01
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(b) 3.86 (1.33)*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $39,443 $19,094
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(c) 1.31 1.01(d)*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 9.71 4.49(d)*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 51.30(f) 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) Total return assumes dividend reinvestment and does not reflect the effect of sales charges.
(c) The ratio of expenses to average net assets for the period includes amounts paid through expense offset arrangements.
(Note 2)
(d) 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.
(e) Distributions were less than $0.01 per share.
(f) Portfolio turnover excludes the impact of assets received from the acquisition of Putnam High Yield Total Return Fund.
</TABLE>
Notes to financial statements
August 31, 1999
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, class C and class M shares. The fund
began offering class C shares on July 26, 1999. 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 C shares are
subject to the same fees as class B shares, except that class C shares
have a one year 1.00% contingent deferred sales charge and do not convert
to class A shares. Class M shares are sold with a maximum front-end sales
charge of 3.25% and pay an ongoing distribution fee that is 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 Management. These balances may be invested in one or more
repurchase agreements and/or short-term money market instruments.
C) Repurchase agreements The fund, or any joint trading account, through
its custodian, receives delivery of the underlying securities, the market
value of which at the time of purchase is required to be in an amount at
least equal to the resale price, including accrued interest. Collateral
for certain tri-party repurchase agreements is held at the counterparty's
custodian in a segregated account for the benefit of the fund and the
counterparty. Putnam Management is responsible for determining that the
value of these underlying securities is at all times at least equal to the
resale price, including accrued interest.
D) Security transactions and related investment income Security
transactions are accounted for on the trade date (date the order to buy or
sell is executed). Gains or losses on securities sold are determined on
the identified cost basis. 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.
During the year the fund acquired the assets of Putnam High Yield Total
Return. A portion of the loss carry- forward was acquired in the merger
and is available to offset the future capital gain of the fund to the
extent of IRS regulations. At August 31, 1999, the fund had a capital loss
carryover of approximately $23,167,000 available to offset future net
capital gain, if any, which will expire on the following dates:
Loss Carryover Expiration
- -------------- ---------------
$ 3,691,000 August 31, 2005
4,909,000 August 31, 2006
14,567,000 August 31, 2007
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. These differences include temporary and
permanent differences of losses on wash sale transactions, post-October
loss deferrals, defaulted bond interest, paydown gains and losses on
mortgage-backed securities, 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,
1999, the fund reclassified $1,911,930 to increase distributions in excess
of net investment income and $1,986,282 to increase paid-in-capital, with
an increase to accumulated net realized losses of $74,352. 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, 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.
The fund reimburses Putnam Management an allocated amount for the
compensation and related expenses of certain officers of the fund and
their staff who provide administrative services to the fund. The aggregate
amount of all such reimbursements is determined annually by the Trustees.
Custodial functions for the fund's assets are provided by Putnam Fiduciary
Trust Company (PFTC), a subsidiary of Putnam Investments, Inc. Investor
servicing agent functions are provided by Putnam Investor Services, a
division of PFTC.
As part of the subcustodian contract between the subcustodian bank and
PFTC, the subcustodian bank has a lien on the securities of the fund to
the extent permitted by the fund's investment restrictions to cover any
advances made by the subcustodian bank for the settlement of securities
purchased by the fund. At August 31, 1999, the payable to the subcustodian
bank represents the amount due for cash advance for the settlement of a
security purchased.
For the year ended August 31, 1999, fund expenses were reduced by $217,944
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 $1,729
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
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, class C and class M shares pursuant to Rule 12b-1 under
the Investment Company Act of 1940. The purpose of the Plans is to
compensate Putnam Mutual Funds Corp., a wholly-owned subsidiary of Putnam
Investments Inc., for services provided and expenses incurred by it in
distributing shares of the fund. The Plans provide for payments by the
fund to Putnam Mutual Funds Corp. at an annual rate up to 0.35%, 1.00%,
1.00%, 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%, 1.00%, and 0.50% of the
average net assets attributable to class A, class B, class C, and class M
shares respectively.
For the year ended August 31, 1999, Putnam Mutual Funds Corp., acting as
underwriter received net commissions of $1,085,690 and $37,399 from the
sale of class A and class M shares, respectively and $1,615,621 and no
monies, in contingent deferred sales charges from redemptions of class B
and class C shares, respectively. A deferred sales charge of up to 1% is
assessed on certain redemptions of class A shares. For the year ended
August 31, 1999, Putnam Mutual Funds Corp., acting as underwriter received
$76,935 on class A redemptions.
Note 3
Purchases and sales of securities
During the year ended August 31, 1999, cost of purchases and proceeds from
sales of investment securities other than short-term investments
aggregated $1,241,982,242 and $550,368,841, respectively. There were no
purchases and sales of U.S. government obligations.
Note 4
Capital shares
At August 31, 1999, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
For the year ended August 31, 1999
- -----------------------------------------------------------------------------
Class A Shares Amount
- -----------------------------------------------------------------------------
Shares sold 73,533,980 $573,657,962
- -----------------------------------------------------------------------------
Shares issued in
connection with
the merger of
Putnam High Yield
Total Return Fund 6,137,823 47,322,612
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 3,711,267 28,848,255
- -----------------------------------------------------------------------------
83,383,070 649,828,829
Shares
repurchased (38,798,612) (302,759,530)
- -----------------------------------------------------------------------------
Net increase 44,584,458 $347,069,299
- -----------------------------------------------------------------------------
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 issued in
connection with
reinvestment of
distributions 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 year ended August 31, 1999
- -----------------------------------------------------------------------------
Class B Shares Amount
- -----------------------------------------------------------------------------
Shares sold 77,290,503 $603,463,176
- -----------------------------------------------------------------------------
Shares issued in
connection with
the merger of
Putnam High Yield
Total Return Fund 6,884,889 53,151,342
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 4,473,846 34,805,857
- -----------------------------------------------------------------------------
88,649,238 691,420,375
Shares
repurchased (30,023,426) (233,784,443)
- -----------------------------------------------------------------------------
Net increase 58,625,812 $457,635,932
- -----------------------------------------------------------------------------
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 issued in
connection with
reinvestment of
distributions 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 July 26, 1999
(commencement of operations)
to August 31, 1999
- -----------------------------------------------------------------------------
Class C Shares Amount
- -----------------------------------------------------------------------------
Shares sold 203,605 $1,541,201
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 540 4,053
- -----------------------------------------------------------------------------
204,145 1,545,254
Shares
repurchased (423) (3,181)
- -----------------------------------------------------------------------------
Net increase 203,722 $1,542,073
- -----------------------------------------------------------------------------
For the year ended August 31, 1999
- -----------------------------------------------------------------------------
Class M Shares Amount
- -----------------------------------------------------------------------------
Shares sold 4,887,291 $38,180,718
- -----------------------------------------------------------------------------
Shares issued in
connection with
the merger of
Putnam High Yield
Total Return Fund 409,132 3,158,496
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 281,920 2,191,787
- -----------------------------------------------------------------------------
5,578,343 43,531,001
Shares
repurchased (2,701,176) (20,998,853)
- -----------------------------------------------------------------------------
Net increase 2,877,167 $22,532,148
- -----------------------------------------------------------------------------
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 issued in
connection with
reinvestment of
distributions 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 fund 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 of initial organizational expenses, 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.
Note 6
Acquisition of Putnam High Yield Total Return Fund
On July 12, 1999, the fund issued 6,137,823, 6,884,889, and 409,132 of
class A, class B, and class M shares to the shareholders of Putnam High
Yield Total Return Fund to acquire that fund's net assets in a tax-free
exchange approved by the shareholders. The net assets of the fund and
Putnam High Yield Total Return Fund on July 9, 1999, were $1,404,712,997
and $103,632,450, respectively. On July 9, 1999, Putnam High Yield Total
Return Fund had unrealized depreciation of $6,731,909.
The aggregate net assets of the fund immediately following the acquisition
were $1,508,345,447.
Federal tax information
(Unaudited)
The fund has designated 4.56% of the distributions from net investment
income as qualifying for the dividends received deduction for
corporations.
For the year ended August 31, 1999, a portion of the fund's distribution
represents a return of capital and therefore not taxable to shareholders.
The Form 1099 you receive in January 2000 will show the tax status of all
distributions paid to your account in calendar 1999.
The Putnam family of funds
The following is a complete list of Putnam's open-end mutual funds. Please call
your financial advisor or Putnam at 1-800-225-1581 to obtain a prospectus for
any Putnam fund. It contains more complete information, including charges and
expenses. Please read it carefully before you invest or send money.
GROWTH FUNDS
Asia Pacific Growth Fund
Capital Appreciation Fund [DBL. DAGGER]
Capital Opportunities Fund
Europe Growth Fund
Global Equity Fund
Global Growth Fund
Global Natural Resources Fund
Growth Opportunities Fund
Health Sciences Trust
International Growth Fund
International New Opportunities Fund
Investors Fund
New Opportunities Fund [DBL. DAGGER]
OTC & Emerging Growth Fund
Research Fund
Tax Smart Equity Fund
Vista Fund
Voyager Fund
Voyager Fund II
GROWTH AND INCOME FUNDS
Balanced Retirement Fund
Convertible Income-Growth Trust
Equity Income Fund
The George Putnam Fund of Boston
Global Growth and Income Fund
The Putnam Fund for Growth and Income
Growth and Income Fund II
International Growth and Income Fund
New Value Fund
Small Cap Value Fund
Utilities Growth and Income Fund
INCOME FUNDS
American Government Income Fund
Diversified Income Trust
Global Governmental Income Trust
High Yield Advantage Fund [DBL. DAGGER]
High Yield Trust [DBL. DAGGER]
High Yield Trust II
Income Fund
Intermediate U.S. Government
Income Fund
Money Market Fund **
Preferred Income Fund
Strategic Income Fund *
U.S. Government Income Trust
TAX-FREE INCOME FUNDS
Municipal Income Fund
Tax Exempt Income Fund
Tax Exempt Money Market Fund**
Tax-Free High Yield Fund
Tax-Free Insured Fund
State tax-free income funds [SECTION MARK]
Arizona, California, Florida, Massachusetts, Michigan, Minnesota, New Jersey,
New York, Ohio and Pennsylvania
State tax-free money market funds [SECTION MARK] **
California, New York
ASSET ALLOCATION FUNDS
Putnam Asset Allocation Funds--three investment portfolios that spread your
money across a variety of stocks, bonds, and money market investments.
The three portfolios:
Asset Allocation: Balanced Portfolio
Asset Allocation: Conservative Portfolio
Asset Allocation: Growth Portfolio
* Formerly Putnam Diversified Income Trust II
[DBL. DAGGER] Closed to new investors. Some exceptions may apply. Contact
Putnam for details.
[SECTION MARK] Not available in all states.
** An investment in a money market fund is not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other government agency.
Although the funds seek to preserve your investment at $1.00 per share, it
is possible to lose money by investing in the fund.
Check your account balances and current performance at www.putnaminv.com.
Fund information
WEB SITE
www.putnaminv.com
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
George Putnam, III
A.J.C. Smith
W. Thomas Stephens
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
John D. Hughes
Senior Vice President and Treasurer
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Ian C. Ferguson
Vice President
Brett C. Browchuk
Vice President
Stephen Oristaglio
Vice President
Edward H. D'Alelio
Vice President
Jennifer E. Leichter
Vice President and Fund Manager
Jeffrey A. Kaufman
Vice President and Fund Manager
Richard A. Monaghan
Vice President
John R. Verani
Vice President
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' Web site: 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
- ---------------------
For account balances, economic forecasts, and the latest on Putnam funds, visit
www.putnaminv.com
AN064-55019 2HB/2HD/2HE 10/99
