Putnam
High Yield
Advantage
Fund
ANNUAL REPORT
November 30, 1995
[LOGO]
B O S T O N (bullet) L O N D O N (bullet) T O K Y O
<PAGE>
Fund highlights
(arrow) For the 12 months ended December 31, 1995, Putnam High Yield
Advantage Fund's class A share total return ranked 25 out of 119,
placing it in the top 21% of high current yield funds tracked by
Lipper Analytical Services.*
(arrow) ". . . The best buys for individual investors are in junk. . .
Issuers of junk bonds are willing to offer rich yields to attract
individuals. Junk bonds today yield 9% or more, vs. 6% to 7% for
Treasuries . . . In addition, if the issuer succeeds in generating
enough cash flow to improve its credit rating, the bonds can offer
equitylike gains."
-- Fortune, December 25, 1995
(arrow) CONTENTS
4 Report from the Fund Manager
8 Fund performance summary
13 Portfolio holdings
23 Financial statements
*Lipper Analytical Services, an independent research organization, ranks
funds according to total return performance. Their rankings vary over time
and do not reflect the effects of sales charges. For periods ended
12/31/95: the fund's class A, class B, and class M shares ranked 25, 42,
and 27, respectively, out of 119 high current yield funds for 1-year
performance; class A shares ranked 24 out of 69 and 14 out of 61 high
current yield funds for 3- and 5-year performance, respectively.
2
<PAGE>
From the Chairman
[PHOTO]
(c) Karsh, Ottawa
Dear Shareholder:
The consistently positive results Putnam High Yield Advantage Fund has
generated since its inception nearly a decade ago is a tribute both to astute
selection of portfolio holdings and Putnam's commitment to in-depth research.
Fund Manager Jin Ho, backed by Putnam's taxable fixed-income research group,
regularly uncovers treasures from the large and growing field of what the
investment community calls "junk" bonds.
While many of these securities may be rightly named, many others represent
potentially attractive investment opportunities. The challenge lies in
identifying and investing in the winners and passing up those that may
falter.
Past performance is no assurance of future results, of course, but we are
confident that your fund will continue to find success with its winning
formula in fiscal 1996 and beyond. In the report that follows, Jin discusses
results of the year just ended and takes a look at the fiscal year that lies
ahead.
Respectfully yours,
/s/ George Putnam
George Putnam
Chairman of the Trustees
January 17, 1996
3
<PAGE>
Report from the Fund Manager
Jin W. Ho
The bull market of 1995 dazzled bond investors with returns that, as
of November's close, were on track to be third best on record. Fueled
by the potent brew of low inflation and slow but positive economic
growth, long-term government bonds gained 30.6% -- results surpassed
only by the historic runups of 40.4% in 1982 and 31% in 1985.
While high-yield bonds generally lagged longer-term government bonds
during the past 12 months, Putnam High Yield Advantage Fund was able
to capitalize on opportunities that unfolded. Your fund ended its
fiscal year on November 30, 1995, with total returns of 16.81% for
class A shares, 15.94% for class B shares, and 16.72% for class M
shares, all at net asset value.
For most of 1995, it appeared that investors just couldn't get enough
of high-yield bonds. A pronounced supply shortage in the first six
months of the year drove up the prices of both new issues and
existing securities. However, during the second half, amid slowing
economic growth and a few incidents of defaults, investors caught on
to the idea that quality is even more important than quantity and
began to place more emphasis on the creditworthiness of issuing
companies. The resulting flight to quality reaffirmed the value of
your fund's consistent strategy of maintaining exceptionally high
credit standards.
(arrow) POSITIONING FOR A SLOWING ECONOMY
Although our outlook for corporate profits remains favorable, several
recent reports have suggested that economic activity is slowing. We
have, therefore, begun to upgrade the quality of holdings in the
portfolio slightly. While your fund is still primarily invested in
B-rated securities, we have made a gradual shift from cyclical
credits, such as paper, chemical, and automotive securities, into
telecommunications, cable, utilities, consumer nondurables, and a few
gaming issues. These proved to be the top-performing sectors in 1995,
and we believe they will continue to benefit the fund in 1996.
4
<PAGE>
In particular, cable and communications companies could get a major
boost from the telecommunications bill that's currently being drafted
and will be debated in the coming months. Given passage, of which
there can be no assurance, both high-yield and equity securities for
these companies should have a very good performance in the coming
year.
(arrow) VALUE-ADDED FUNDAMENTAL APPROACH TO SECURITIES SELECTION
Putnam's high-yield group conducts some of the most thorough
fundamental research on the buy-side of the Street. We believe that
our ability to weigh both the upside and the downside potential of
every single security we buy is critical to the fund's success. We
look at companies' financial statements and make detailed financial
projections going out as far as five years. We review the past five-
year record to see whether we can identify a pattern of
inconsistencies. In addition, we conduct extensive industry studies,
meet directly with companies' representatives, and frequently, also
with key competitors, suppliers, and customers.
An essential tenet of our high-yield investing philosophy focuses on
seeking to avoid companies with deteriorating credit profiles that do
not meet our rigorous standards. The securities that we decided not
to purchase over this period are almost as important as the ones we
did invest in. We rely on our exhaustive research techniques to
identify companies that possess an unacceptable risk of declaring
bankruptcy or otherwise defaulting on their bonds.
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[GRAPHIC BAR CHART]
TOP INDUSTRY SECTORS (11/30/95)*
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Cable television 12.9%
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Cellular communications 5.1%
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Broadcasting 4.8%
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Media 4.4%
- --------------------------------------------------------------------------------
Gaming 4.1%
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*Based on net assets as of 11/30/95. Holdings will vary over time.
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5
<PAGE>
(arrow) LOW INTEREST RATES AND SUSTAINED DEMAND BOLSTER THE HIGH-YIELD MARKET
As interest rates have declined in recent months, demand for
high-yield bonds has remained strong. The underlying logic is not
difficult to understand: the lower yields being offered by Treasuries
and other investment-grade bonds have made high-yield securities
more attractive to income-hungry investors.
At the same time, growth in the supply of high-yield bonds has been
modestly restrained by several prevailing market conditions. First,
an abundance of available cash at banks has made it easier for
larger, creditworthy bond issuers to borrow from banks at currently
low interest rates to pay off outstanding high-yield bonds or as an
alternative to issuing new high-yield bonds. Second, corporate
consolidation has often resulted in new owners tendering for
outstanding bonds. Lastly, a vibrant equity market has made it more
cost effective for corporations to issue equity rather than debt.
While these trends suggest a resulting slowdown in supply of
high-yield bonds, the effect has been slight. In fact, a more visible
result has been an improvement in the overall credit profile of
high-yield bond issuers, which are now able to borrow money at lower
interest rates and reduce their cost of capital.
Merger in the chemicals industry enhances total returns. One
corporate consolidation that was particularly beneficial to your fund
occurred in the chemicals sector, which is cyclical in nature. During
the period, we reduced your portfolio's overall allocation to
cyclicals as economic growth slowed. However, your fund's investment
in OSI Specialties Corp., a producer of specialty chemicals, proved
profitable despite the economic slowdown. OSI was acquired by Witco
Corp., a larger chemicals producer, in October of this year. Near the
end of the fiscal period, Witco offered to buy back outstanding OSI
bonds at a premium, and the resulting transaction generated an
attractive return for your fund.
(arrow) A FAVORABLE OUTLOOK FOR 1996
Although it appears that slowing economic activity may translate to a
less robust 1996, our overall outlook for the economy is favorable,
calling for slow but positive growth, with little threat
6
<PAGE>
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TOP 10 HOLDINGS (11/30/95)*
- --------------------------------------------------------------------------------
Viacom International 8.00%, 2006
Media
- --------------------------------------------------------------------------------
Cencall Communications Corp. stepped-coupon 0%, 2004
Cellular communications
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TransTexas Gas Corp. 11.50%, 2002
Oil and gas
- --------------------------------------------------------------------------------
Adelphia Communications Corp. 12.50%, 2002
Cable television
- --------------------------------------------------------------------------------
Intelcom Group stepped-coupon 0%, 2005
Telecommunications
- --------------------------------------------------------------------------------
Midland Funding Corp. 11.75%, 2005
Electric Utilities
- --------------------------------------------------------------------------------
Paccar Financial Corp. 17.00%, 1996
Finance
- --------------------------------------------------------------------------------
PSF Finance 12.00%, 2000
Agriculture
- --------------------------------------------------------------------------------
Telewest Communications 9.625%, 2006
Cable television
- --------------------------------------------------------------------------------
Tele-Communications Inc. Class A (stock)
Cable television
- --------------------------------------------------------------------------------
*These holdings represent 16.0% of the fund's assets. Portfolio
holdings will vary over time.
of inflation. We believe that following extensive restructuring and
cost cutting in corporate America, today's high-yield issuers are far
more resilient to economic downturns than they were in the past. In
fact, we see many opportunities in the high-yield market in today's
slow-growth environment, and your fund is well positioned to continue
its successful performance into fiscal 1996 and beyond.
Putnam High Yield Advantage Fund is a portfolio managed for high
current income primarily through investments in high-yielding
lower-rated fixed-income securities, which pose a greater risk to
principal than higher-rated securities. High-yield securities are
rated lower than investment-grade securities because there is a
greater possibility that negative changes in the issuer's business
condition or in general economic conditions may hinder the issuer's
ability to pay principal and interest on the securities. Although the
bonds of the companies discussed here met the fund's selection
criteria at the time of purchase, Putnam Management's views on these
companies should not be taken as investment advice. Although the
described holdings were viewed favorably as of 11/30/95, there is no
guarantee the fund will continue to hold these securities in the
future.
7
<PAGE>
Performance summary
Performance should always be considered in light of a fund's investment
strategy. Putnam High Yield Advantage Fund is designed for investors seeking
high current income, with capital growth as a secondary objective.
This section provides, at a glance, information about your fund's
performance. 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 back into the fund.
TOTAL RETURN FOR PERIODS ENDED 11/30/95
Class A Class B Class M
(3/25/86) (5/16/94) (12/1/94)
-------------- -------------- ----------------
NAV POP NAV CDSC NAV POP
------------------------------------------------------------------------
1 year 16.81% 11.29% 15.94% 10.94% 16.72% 12.98%
------------------------------------------------------------------------
5 years 132.94 121.82 -- -- -- --
Annual average 18.43 17.27 -- -- --
------------------------------------------------------------------------
Life of class 159.09 146.74 12.33 8.46 16.72 12.98
Annual average 10.32 9.77 7.84 5.42 -- --
------------------------------------------------------------------------
COMPARATIVE RETURNS FOR PERIODS ENDED 11/30/95
Lehman Bros. First Boston
Corporate Bond Index High Yield Index
------------------------------------------------------------------------
1 year 21.26% 17.14%
------------------------------------------------------------------------
5 years 69.26 129.99
Annual average 11.10 18.13
------------------------------------------------------------------------
Life of class A 146.09 176.76
Annual average 9.76 11.10
------------------------------------------------------------------------
Life of class B 21.36 16.93
Annual average 13.77 10.99
------------------------------------------------------------------------
Life of class M 21.26 17.14
------------------------------------------------------------------------
Performance data represent past results, do not reflect future performance,
and will differ for each share class. They do not take into account any
adjustment for taxes payable on reinvested distributions or, for class A
shares, distribution fees prior to implementation of the class A distribution
plan in 1990. Investment returns and net asset value will fluctuate so that
an investor's shares when sold may be worth more or less than their original
cost. POP assumes 4.75% maximum sales charge for class A shares and 3.25% for
class M shares. CDSC for class B shares assumes 5% maximum contingent
deferred sales charge.
8
<PAGE>
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[GRAPHIC OF LINE CHART]
GROWTH OF A $10,000 INVESTMENT
Cumulative total return of a $10,000
investment since 3/25/86 (inception date)
First Boston High
Yield Index $27,676
Putnam High Yield
Advantage A at POP $24,674
Lehman Corporate
Bond Index $24,609
Past performance is no assurance of future results. A $10,000 investment in
the fund's class B shares at inception on 5/16/94 would have been valued at
$11,233 on 11/30/95 ($10,846 with a redemption at the end of the period). A
$10,000 investment in the fund's class M shares at inception on 12/1/94 would
have been valued at $11,672 at net asset value on 11/30/95, $11,298 at public
offering price.
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PRICE AND DISTRIBUTION INFORMATION
12 months ended 11/30/95
<TABLE>
<CAPTION>
Class A Class B Class M
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Distributions (number) 12 12 12
- ------------------------------------------------------------------------------------
Income $0.996 $0.933 $ 0.978
- ------------------------------------------------------------------------------------
Total $0.996 $0.933 $0.978
- ------------------------------------------------------------------------------------
Share value: NAV POP NAV NAV POP
- ------------------------------------------------------------------------------------
11/30/94 $ 9.07 $ 9.52 $ 9.05 -- --
- ------------------------------------------------------------------------------------
12/1/94 (inception of
class M shares) $ 9.05 $ 9.35
- ------------------------------------------------------------------------------------
11/30/95 9.52 9.99 9.49 9.51 9.83
- ------------------------------------------------------------------------------------
Current return
End of period: NAV POP NAV NAV POP
- ------------------------------------------------------------------------------------
Current dividend rate(1) 9.96% 9.49% 9.23% 9.72% 9.40%
- ------------------------------------------------------------------------------------
Current 30-day SEC yield(2) 7.92 7.53 7.15 7.66 7.40
- ------------------------------------------------------------------------------------
</TABLE>
(1)Income portion of most recent distribution, annualized and divided by NAV
or POP at end of period. (2)Based on investment income, calculated using SEC
guidelines.
9
<PAGE>
TOTAL RETURN FOR PERIODS ENDED 12/31/95
(most recent calendar quarter)
Class A Class B Class M
(3/25/86) (5/16/94) (12/1/94)
-------------- -------------- ----------------
NAV POP NAV CDSC NAV POP
- --------------------------------------------------------------------------
1 year 18.81% 13.15% 17.91% 12.91% 18.58% 14.76%
- --------------------------------------------------------------------------
5 years 135.74 124.42 -- -- -- --
Annual average 18.71 17.55 -- -- -- --
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Life of class 163.98 151.41 14.50 10.59 19.03 15.21
Annual average 10.45 9.90 8.66 6.37 17.50 14.01
- --------------------------------------------------------------------------
Performance data represent past results, do not reflect future performance,
and will differ for each share class. They do not take into account any
adjustment for taxes payable on reinvested distributions. Investment returns
and net asset value will fluctuate so that an investor's shares when sold may
be worth more or less than their original cost.
TERMS AND DEFINITIONS
Class A shares are generally subject to an initial sales charge.
Class B shares may be subject to a sales charge upon redemption.
Class M shares have a lower initial sales charge and a higher 12b-1 fee than
class A shares and no sales charge on redemption.
Net asset value (NAV) is the value of all your fund's assets, minus any
liabilities, divided by the number of outstanding shares, not including any
initial or contingent deferred sales charge.
Public offering price (POP) is the price of a mutual fund share plus the
maximum sales charge levied at the time of purchase. POP performance figures
shown here assume the maximum 4.75% sales charge for class A shares and 3.25%
for class M shares.
Contingent deferred sales charge (CDSC) is a charge applied at the time of
the redemption of class B shares and assumes redemption at the end of the
period. Your fund's CDSC declines from a 5% maximum during the first year to
1% during the sixth year. After the sixth year, the CDSC no longer applies.
Lehman Brothers Corporate Bond Index* is an unmanaged list of publicly issued
fixed-income non-convertible securities frequently used as a general measure
of the performance of the corporate bond market.
First Boston High Yield Index* is an ummanaged list of lower-rated
higher-yielding U.S. corporate bonds.
Consumer Price Index (CPI) is a commonly used measure of inflation; it does
not represent an investment return.
*Securities indexes assumed 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.
10
<PAGE>
PUTNAM GROWTH FUNDS
Asia Pacific Growth Fund
Capital Appreciation Fund
Diversified Equity Trust
Europe Growth Fund
Global Growth Fund
Health Sciences Trust
International New Opportunities Fund
Investors Fund
Natural Resources Trust
New Opportunities Fund
OTC Emerging Growth Fund
Overseas Growth Fund
Vista Fund
Voyager Fund
Voyager Fund II
PUTNAM GROWTH
AND INCOME FUNDS
Balanced Retirement Fund
Convertible Income-Growth Trust
Equity Income Fund
The George Putnam Fund of Boston
The Putnam Fund for Growth and Income
Growth and Income Fund II
Utilities Growth and Income Fund
PUTNAM INCOME FUNDS
Adjustable Rate U.S. Government Fund
American Government Income Fund
Diversified Income Trust
Federal Income Trust
Global Governmental Income Trust
High Yield Advantage Fund
High Yield Trust
Income Fund
Intermediate U.S. Government Income Fund
Preferred Income Fund
U.S. Government Income Trust
PUTNAM TAX-FREE
INCOME FUNDS
Municipal Income Fund
Tax Exempt Income Fund
Tax-Free High Yield Fund
Tax-Free Insured Fund
State tax-free income funds*
Arizona, California, Florida, Massachusetts, Michigan, Minnesota, New Jersey,
New York, Ohio, and Pennsylvania
LIFESTAGES(SM) FUNDS
Putnam Asset Allocation Funds--three investment portfolios that spread your
money across a variety of stocks, bonds, and money
market investments to help maximize your return and reduce your risk.
The three portfolios:
Putnam Asset Allocation: Balanced Portfolio
Putnam Asset Allocation: Conservative Portfolio
Putnam Asset Allocation: Growth Portfolio
MOST CONSERVATIVE
INVESTMENTS+
Putnam money market funds:
California Tax Exempt Money Market Fund
Money Market Fund
New York Tax Exempt Money Market Fund
Tax Exempt Money Market Fund
CDs and savings accounts++
* Not available in all states.
+ Relative to above.
++ Not offered by Putnam Investments. Certificates of deposit offer a fixed
rate of return and may be insured, up to certain limits, by federal/state
agencies. Savings accounts may also be insured up to certain limits.
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.
11
<PAGE>
Report of independent accountants
For the year ended November 30, 1995
To the Trustees and Shareholders of
Putnam High Yield Advantage Fund
We have audited the accompanying statement of assets and liabilities of
Putnam High Yield Advantage Fund, including the portfolio of investments
owned, as of November 30, 1995, and the related statement of operations for
the year then ended, the statements of changes in net assets for each of the
two years in the period then ended, and the financial highlights for each of
the periods indicated therein. These financial statements and financial
highlights are the responsibility of the fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free from material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of
securities owned as of November 30, 1995, by correspondence with the
custodian and brokers. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Putnam High Yield Advantage Fund as of November 30, 1995, the results of its
operations for the year then ended, and the financial highlights for each of
the periods indicated therein, in conformity with generally accepted
accounting principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
January 15, 1996
12
<PAGE>
Portfolio of investments owned
November 30, 1995
<TABLE>
<CAPTION>
CORPORATE BONDS AND NOTES (80.2%)*
PRINCIPAL AMOUNT VALUE
Advertising (0.7%)
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<S> <C> <C>
$ 3,500,000 Outdoor Systems, Inc. sr. notes 10-3/4s, 2003 $ 3,360,000
5,000,000 Universal Outdoor, Inc. sub. deb. 11s, 2003 4,850,000
-------------
8,210,000
Aerospace and Defense (0.8%)
- -------------------------------------------------------------------------------------------------
4,500,000 BE Aerospace sr. notes, 9-3/4s, 2003 4,500,000
2,850,000 Howmet Corp. 144A sr. sub. notes 10s, 2003 2,935,500
2,200,000 Sequa Corp. sr. notes 9-5/8s, 1999 2,112,000
-------------
9,547,500
Agriculture (3.0%)
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6,367,000 PMI Holdings Corp. Ser. B, sub. disc. deb. stepped- coupon zero %
(11-1/2s, 9/1/00), 2005++ 3,310,840
5,000,000 PSF Finance (L.P.) sr. disc. notes stepped-coupon zero % (12s,
9/15/96), 2003++ 4,381,250
12,000,000 PSF Finance (L.P.) sr. exch. notes 12-1/4s, 2004 12,381,000
14,620,842 PSF Finance (L.P.) sr. notes 12s, 2000 15,242,228
-------------
35,315,318
Aluminum (0.8%)
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8,600,000 Kaiser Aluminum & Chemical Corp. sr. sub. notes
12-3/4s, 2003 9,417,000
Automotive Parts (1.0%)
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2,000,000 Aftermarket Technology corp. sr. sub. notes 12s, 2004 2,085,000
400,000 Exide Corp. sr. notes 10-3/4s, 1999 431,000
4,470,000 Exide Corp. sr. notes 10s, 2005 4,805,250
4,000,000 Key Plastics Corp. sr. notes 14s, 1999 4,120,000
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11,441,250
Basic Industrial Products (--%)
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400,000 Inter-City Products sr. notes 9-3/4s, 2000 262,000
Broadcasting (3.9%)
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2,000,000 Granite Broadcasting Corp. sr. sub. deb. 12-3/4s, 2002 2,220,000
4,500,000 Granite Broadcasting Corp. sr. sub. notes 10-3/8s, 2005 4,612,500
8,675,000 New City Broadcasting Corp. sr. sub. notes 11-3/8s, 2003 7,981,000
18,500,000 Panamsat (L.P.) sr. sub. notes stepped-coupon zero % (11-3/8s,
8/1/98), 2003++ 14,892,500
4,000,000 Paxson Communications Corp. 144A sr. sub. notes 11-5/8s, 2002 3,950,000
1,000,000 SFX Broadcasting, Inc. sr. sub. notes 11-3/8s, 2000 1,057,500
7,500,000 Spanish Broadcasting Systems stepped coupon 7-1/2s, (12-1/2s,
6/15/97), 2002++ 7,350,000
4,511,000 Telemedia Broadcasting Corp. 144A notes stepped- coupon 6.4s
(16s, 6/15/99), 2004++ 4,059,900
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46,123,400
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
CORPORATE BONDS AND NOTES
PRINCIPAL AMOUNT VALUE
Building and Construction (1.1%)
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
$ 8,250,000 Presley Co. sr. notes 12-1/2s, 2001 $ 6,600,000
6,800,000 Scotsman Group, Inc. sr. secd. notes 9-1/2s, 2000 6,834,000
-------------
13,434,000
Building Products (2.3%)
- -------------------------------------------------------------------------------------------------
6,000,000 American Standard Inc. sr. sub. notes stepped-coupon zero %,
(10-1/2s, 6/1/98), 2005++ 5,047,500
9,000,000 Nortek, Inc. sr. sub. notes 9-7/8s, 2004 8,280,000
7,500,000 Southdown, Inc. sr. Ser. B sub. deb. 14s, 2001 8,250,000
5,000,000 Walter Industries Inc. sr. notes Ser. B, 12.19s, 2000 5,075,000
-------------
26,652,500
Cable Television (9.7%)
- -------------------------------------------------------------------------------------------------
21,000,000 Adelphia Communications Corp. sr. notes 12-1/2s, 2002 20,790,000
12,250,000 Bell Cablemedia PLC stepped-coupon zero % (11-7/8s, 1998), 2005
(United Kingdom)++ 7,411,250
6,000,000 CF Cable TV, Inc. sr. notes 11-5/8s, 2005 (Canada) 6,540,000
8,000,000 Century Communications Corp. sr. sub. deb. 11-7/8s, 2003 8,560,000
2,000,000 Comcast Corp. sr. sub. deb. 10-5/8s, 2012 2,210,000
2,000,000 Comcast Corp. sr. sub. notes 9-3/8s, 2002 2,090,000
7,405,350 Falcon Holdings Group, Inc. sr. sub. notes 11s, 2003## 7,109,136
3,000,000 Jones Intercable, Inc. sub. deb. 11-1/2s, 2004 3,330,000
250,000 Lenfest Communications sr. notes 8-3/8s, 2005 248,750
14,700,000 Marcus Cable Co. (L.P.) sr. sub. disc. notes stepped-
coupon zero % (13-1/2s, 8/1/99), 2004++ 10,731,000
10,000,000 Marcus Cable Co. sr. disc. notes stepped-coupon zero % (14-1/4s,
6/15/00), 2005++ 6,300,000
3,000,000 Rogers Cablesystems Ltd. Ser. B, sr. notes 10s, 2005 3,150,000
6,000,000 Rogers Cablesystems Ltd. notes 10s, 2007 6,255,000
6,000,000 Rogers Cablesystems Ltd. notes 11s, 2015 6,240,000
2,500,000 Tele-Communications, Inc. deb. 9-1/4s, 2023 2,649,150
15,000,000 Telewest Communications PLC deb. 9-5/8s, 2006
(United Kingdom) 15,112,500
1,000,000 Telewest Communications PLC deb. stepped-coupon zero %, (11s,
10/1/00), 2007 (United Kingdom)++ 590,000
1,500,000 Videotron Holdings sr. disc. notes stepped-coupon
zero % (11-1/8s, 7/1/99), 2004 (United Kingdom)++ 1,008,750
7,500,000 Videotron Holdings sr. disc. notes stepped-coupon
zero % (11s, 8/15/00), 2005 (United Kingdom)++ 4,425,000
-------------
114,750,536
Cellular Communications (5.1%)
- -------------------------------------------------------------------------------------------------
5,550,000 Cellular, Inc. sr. sub. disc. notes stepped-coupon zero %
(11-3/4s, 9/1/98), 2003 4,315,125
48,470,000 Cencall Communications Corp. sr. disc. notes stepped-
coupon zero % (10-1/8s, 1/15/99), 2004++ 26,052,625
6,000,000 Centennial Cellular Corp. sr. notes 10-1/8s, 2005 6,255,000
6,900,000 Centennial Cellular Corp. sr. notes 8-7/8s, 2001 6,744,750
2,750,000 Commnet Cellular Inc. bonds 11-1/4s, 2005 2,887,500
6,318,000 Horizon Cellular Telephone Co. Ser. B, sr. sub. disc. notes
stepped-coupon zero % (11-3/8s, 10/1/97), 2000++ 5,433,480
7,500,000 Rogers Cantel Mobile sr. sub. notes 11-1/8s, 2002 (Canada) 7,987,500
-------------
59,675,980
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
CORPORATE BONDS AND NOTES
PRINCIPAL AMOUNT VALUE
Chemicals (3.0%)
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
$ 4,000,000 Arcadian Partner sr. notes 10-3/4s, 2005 $ 4,380,000
5,825,000 Foamex (L.P.) Capital Corp. sr. disc. note stepped-coupon zero %
(14s, 7/1/99), 2004++ 3,232,875
3,500,000 Foamex (L.P.) Capital Corp. sr. notes 11-1/4s, 2002 3,500,000
7,500,000 G-I Holdings, Inc. Ser. B, sr. disc. notes zero %, 1998 5,700,000
4,000,000 Harris Chemical Corp. sr. secd. disc. notes stepped-
coupon zero % (10-1/4s, 1/15/96), 2001++ 3,720,000
11,750,000 Harris Chemical Corp. sr. sub. notes 10-3/4s, 2003 10,340,000
5,000,000 OSI Specialties Corp. Ser. B, sr. secd. disc. deb. stepped-
coupon zero % (11-1/2s, 4/15/99), 2004++ 4,350,000
-------------
35,222,875
Computer Equipment (1.0%)
- -------------------------------------------------------------------------------------------------
11,140,000 Computervision Corp. sr. sub. notes 11-3/8s, 1999 11,697,000
Conglomerates (1.1%)
- -------------------------------------------------------------------------------------------------
10,750,000 Haynes International, Inc. sr. sub. notes 13-1/2s, 1999 6,772,500
2,475,000 MacAndrews & Forbes Holdings, Inc. sub. deb. notes
13s, 1999 2,475,000
4,000,000 Valcor, Inc. sr. notes 9-5/8s, 2003 3,700,000
-------------
12,947,500
Consumer Services (0.8%)
- -------------------------------------------------------------------------------------------------
9,495,000 Coinmach Corp. 144A sr. notes 11-3/4s, 2005 9,566,213
Containers (0.7%)
- -------------------------------------------------------------------------------------------------
7,705,000 Ivex Packaging Corp. sr. sub. notes 12-1/2s, 2002 8,167,300
Electric Utilities (5.0%)
- -------------------------------------------------------------------------------------------------
7,000,000 CTC Mansfield Funding deb. 11-1/8s, 2016 7,305,550
8,035,000 Cleveland Electric Illuminating Co. Ser. B, 1st mtge.
9-1/2s, 2005 8,255,963
5,700,000 First PV Funding deb. Ser. 86A, 10.3s 2014 5,920,875
6,000,000 Long Island Lighting Co. deb. 8.9s, 2019 5,918,160
4,000,000 Long Island Lighting Co. deb. 9s, 2022 4,037,360
15,660,000 Midland Funding Corp. II Ser. A deb. 11-3/4s, 2005 16,443,000
2,000,000 Midland Funding Corp. II Ser. B, deb. 13-1/4s, 2006 2,190,000
8,000,000 Texas New Mexico Pwr. deb. 12-1/2s, 1999 9,000,000
-------------
59,070,908
Electronics (1.9%)
- -------------------------------------------------------------------------------------------------
10,050,000 Amphenol Corp. sr. sub. notes 12-3/4s, 2002 11,507,250
20,000,000 International Semi-Tech. Corp. sr. secd. disc. notes
stepped-coupon zero % (11-1/2s, 8/15/00), 2003 (Canada)++ 10,300,000
-------------
21,807,250
Environmental Control (0.6%)
- -------------------------------------------------------------------------------------------------
6,345,000 Allied Waste Industries sr. sub. notes 12s, 2004 6,789,150
Finance (2.2%)
- -------------------------------------------------------------------------------------------------
10,000,000 IBM Credit Corp. med. term notes 17s, 1996 10,281,500
15,000,000 Paccar Financial Corp. med. term notes 17s, 1996 15,424,350
-------------
25,705,850
15
<PAGE>
CORPORATE BONDS AND NOTES
PRINCIPAL AMOUNT VALUE
Financial Services (0.3%)
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
$ 3,000,000 Comdata Network, Inc. sr. notes 12-1/2s, 1999 $ 3,408,750
Food and Beverages (3.2%)
- -------------------------------------------------------------------------------------------------
15,500,000 Fresh Del Monte Produce Corp. NV 144A Ser.B,
sr. notes, 10s, 2003 (Netherlands) 13,562,500
5,000,000 Mafco, Inc. sr. sub. notes 11-7/8s, 2002 5,175,000
12,500,000 Pepisco Inc. med. term notes 17s, 1996 12,705,125
650,000 Specialty Foods Acquisition Corp. sr. secd. disc. deb.
stepped-coupon zero %, (13s, 8/15/99), 2005++ 299,000
6,750,000 Specialty Foods Acquisition Corp. sr. sub. notes
11-1/4s, 2003 5,805,000
-------------
37,546,625
Gaming (4.1%)
- -------------------------------------------------------------------------------------------------
3,535,000 Arizona Charlies Corp. Ser. B, 1st mtge. 12s, 2000+ 2,474,500
6,450,000 Bally Park Place Funding 1st mtge. 9-1/4s, 2004 6,433,875
5,875,000 Boyd Gaming Corp. sr. sub. notes 10-3/4s, 2003 6,198,125
1,533,000 California Hotel Finance sr. sub. notes 11s, 2002 1,621,148
740,000 Capitol Queen Corp. Ser. B, 1st mtge. notes 12s, 2000+ 592,000
7,000,000 Grand Casinos, Inc. 1st mtge. 10-1/8s, 2003 7,175,000
4,000,000 Mohegan Tribal Gaming 144A sr. notes 13-1/2s, 2002 4,300,000
590,000 Pioneer Finance Corp. 1st. mtge. 13-1/2s, 1998 483,800
2,250,000 Players International Inc. sr. notes 10-7/8s, 2000 2,137,500
1,500,000 Stratosphere Corp. 1st mtge. 14-1/4s, 2002 1,687,500
13,700,000 Trump Castle Funding Corp. mtge. 11-3/4s, 2003 11,045,615
3,078,000 Trump Castle Funding Corp. sr. sub. notes 11-1/2s, 2000 3,078,000
1,320,000 Trump Plaza Funding, Inc. 1st mtge. notes 10-7/8s, 2001 1,320,000
-------------
48,547,063
Health Care (2.1%)
- -------------------------------------------------------------------------------------------------
3,500,000 Charter Medical Corp. sr. sub. notes 11-1/4s, 2004 3,815,000
1,800,000 Integrated Health Services sr. sub. notes 9.625s, 2002 1,831,500
2,000,000 Merit Behavioral Care 144A sr. sub. notes 11-1/2s, 2005 2,040,000
5,625,000 Multicare Cos., Inc. sr. sub. notes 12-1/2s, 2002 6,468,750
4,000,000 Ornda Healthcorp sr. sub. notes 12-1/4s, 2002 4,380,000
6,000,000 Tenet Healthcare Corp. sr. notes 8-5/8s, 2003 6,195,000
-------------
24,730,250
Insurance (1.7%)
- -------------------------------------------------------------------------------------------------
5,600,000 American Life Holding Co. sr. sub. notes 11-1/4s, 2004 5,936,000
6,500,000 Bankers Life Holding sr. sub. notes Ser. B, 13s, 2002 7,410,000
6,750,000 Reliance Group Holdings, Inc. sr. sub. deb. 9-3/4s, 2003 6,910,313
300,000 Terra Nova Insurance Holdings sr. notes 10-3/4s, 2005
(United Kingdom) 324,000
-------------
20,580,313
Lodging (2.0%)
- -------------------------------------------------------------------------------------------------
14,500,000 HMH Properties, Inc. sr. notes 9-1/2s, 2005 14,608,750
9,300,000 Red Roof Inns sr. notes 9-5/8s, 2003 9,207,000
-------------
23,815,750
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
CORPORATE BONDS AND NOTES
PRINCIPAL AMOUNT VALUE
Media (3.6%)
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
$ 3,450,000 Commodore Media, Inc. sr. sub. notes stepped-coupon 7-1/2s,
(13-1/4s, 5/1/98), 2003++ $ 3,174,000
13,000,000 Marvel Parent Holdings, Inc. sr. secd. disc. notes zero %, 1998 9,100,000
4,962,000 Petracom Hldgs. 144A notes stepped-coupon zero %, (17-1/2s,
8/1/98),2003++ 3,380,363
26,725,000 Viacom International, Inc. sub. deb. 8s, 2006 27,059,063
-------------
42,713,426
Medical Supplies and Devices (0.3%)
- -------------------------------------------------------------------------------------------------
3,000,000 Wright Medical Technology, Inc. Ser. B, sr. secd.
notes 10-3/4s, 2000 3,030,000
Motion Picture Distribution (2.5%)
- -------------------------------------------------------------------------------------------------
500,000 AMC Entertainment, Inc. sr. sub. deb. 11-7/8s, 2000 560,000
5,500,000 AMC Entertainment, Inc. sr. sub. deb. 12-5/8s, 2002 6,297,500
2,095,000 Cinemark Mexico notes 12s, 2003 1,948,350
2,750,000 Cinemark USA sr. notes 12s, 2002 2,997,500
8,000,000 Plitt Theatres, Inc. sr. sub. notes 10-7/8s, 2004 7,240,000
10,000,000 United Artists notes 11-1/2s, 2002 10,700,000
-------------
29,743,350
Oil and Gas (3.8%)
- -------------------------------------------------------------------------------------------------
5,500,000 Chesapeake Energy Corp. sr. notes 10-1/2s, 2002 5,692,500
3,700,000 Chesapeake Energy Corp. sr. notes 12s, 2001 3,922,000
5,000,000 Clark USA Inc. 144A sr. notes 10-7/8s, 2005 5,093,750
5,000,000 Gulf Canada Resources Ltd. sr. sub. notes 9-5/8s, 2005 (Canada) 5,150,000
2,000,000 Maxus Energy Corp. deb. 11-1/2s, 2015 2,050,000
20,250,000 Transtexas Gas Corp. sr. secd. notes 11-1/2s, 2002 20,908,125
2,000,000 Triton Energy sr. sub. disc. notes stepped-coupon zero % (9-3/4s,
12/15/96), 2000++ 1,855,000
-------------
44,671,375
Paging (3.2%)
- -------------------------------------------------------------------------------------------------
1,500,000 A+ Network Inc. sr. sub. notes 11-7/8s, 2005 1,503,750
3,000,000 Metrocall, Inc. sr. sub. notes 10-3/8s, 2007 3,112,500
9,500,000 Mobile Telecommunications Tech. sr. notes 13-1/2s, 2002 10,806,250
4,000,000 Mobilemedia Corp. sr. sub. notes 9-3/8s, 2007 4,030,000
7,300,000 Pagemart, Inc. sr. disc. notes stepped-coupon zero % (12-1/4s,
11/1/98), 2003++ 5,402,000
12,500,000 Paging Network, Inc. sr. sub. notes 10-1/8s, 2007 13,328,125
-------------
38,182,625
Paper and Forest Products (2.3%)
- -------------------------------------------------------------------------------------------------
6,000,000 APP International Finance Co. notes 11-3/4s, 2005 (Netherlands) 5,850,000
3,750,000 Gaylord Container Corp. sr. notes 11-1/2s, 2001 3,857,813
6,000,000 Repap New Brunswick sr. notes 10-5/8s, 2005 (Canada) 6,000,000
5,500,000 Riverwood International Corp. sr. sub. notes 11-1/4s, 2002 5,898,750
5,820,000 Stone Container Corp. deb. sr. sub. notes 11-1/2s, 1999 5,878,200
-------------
27,484,763
17
<PAGE>
CORPORATE BONDS AND NOTES
PRINCIPAL AMOUNT VALUE
Real Estate (0.9%)
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
$ 596,000 Chelsea Piers 144A Ser. B, stepped-coupon zero %
(11s, 6/15/99), 2009++ $ 565,455
10,707,000 Chelsea Piers Ser. B, 1st mtge. disc. notes stepped- coupon
zero % (12-1/2s, 6/15/96), 2004++ 10,077,964
-------------
10,643,419
Restaurants (0.5%)
- -------------------------------------------------------------------------------------------------
2,000,000 Flagstar Corp. sr. notes 10-3/4s, 2001 1,845,000
5,000,000 Flagstar Corp. sr. notes 10-7/8s, 2002 4,562,500
-------------
6,407,500
Retail (0.8%)
- -------------------------------------------------------------------------------------------------
4,000,000 County Seat Stores Inc. sr. sub. notes 12s, 2002 3,520,000
4,143,000 Finlay Enterprises, Inc. sr. disc. deb. stepped-coupon
zero % (12s, 5/1/98), 2005++ 2,858,670
2,750,000 Loehmanns' Holdings, Inc. sr. sub. notes 13-3/4s, 1999 2,585,000
-------------
8,963,670
School Buses (0.7%)
- -------------------------------------------------------------------------------------------------
7,750,000 Blue Bird Body Co. Ser. B sub. deb., 11-3/4s, 2002 7,943,750
Specialty Consumer Products (1.2%)
- -------------------------------------------------------------------------------------------------
2,000,000 Herff Jones, Inc. 144A sr. sub. notes 11s, 2005 2,110,000
4,650,000 Playtex Family Products Corp. sr. sub. notes 9s, 2003 4,080,375
8,250,000 Selmer Co., Inc. sr. sub. notes 11s, 2005 8,126,250
-------------
14,316,625
Steel (0.3%)
- -------------------------------------------------------------------------------------------------
4,000,000 Ispat Mexicana, SA 144A deb. 10-3/8s, 2001 (Mexico) 3,520,000
Supermarkets (0.3%)
- -------------------------------------------------------------------------------------------------
3,730,000 Stater Brothers sr. notes 11s, 2001 3,767,300
Telecommunication (1.1%)
- -------------------------------------------------------------------------------------------------
16,800,000 MFS Communications sr. disc. notes stepped-coupon zero % (9-3/8s,
1/15/99), 2004++ 12,999,000
Textiles (0.6%)
- -------------------------------------------------------------------------------------------------
6,375,000 Day International Group 144A sr. sub. notes 11-1/8s, 2005 6,390,938
Total Corporate Bonds and Notes
(cost $925,818,393) $945,210,022
</TABLE>
<TABLE>
<CAPTION>
COMMON STOCKS (6.4%)*
NUMBER OF SHARES VALUE
Agriculture (0.1%)
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
2,141 PMI Holdings Corp.+ $ 428,200
1,730 Premium Holdings L.P. 144A+ 172,970
-------------
601,170
- -------------------------------------------------------------------------------------------------
Automotive (--%)
- -------------------------------------------------------------------------------------------------
1 Lear Seating Corp.+ 28
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
COMMON STOCKS
NUMBER OF SHARES VALUE
Broadcasting (0.9%)
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
560,000 Cox Communications, Inc. Class A+ $ 11,200,000
Cable Television (3.2%)
- -------------------------------------------------------------------------------------------------
130,100 Cablevision Systems Corp. Class A+ 7,220,550
681,100 Comcast Corp. Special Class A 13,451,725
66,875 Tele-Comm. Liberty Media Group, Inc. Class A+ 1,872,500
807,500 Tele-Communications Inc. (TCI Group) Class A 14,938,750
-------------
37,483,525
Chemicals (--%)
- -------------------------------------------------------------------------------------------------
19,703 UCC Investors Holding, Inc. (acquired 19,703 shares
3/28/94 cost $275,842)#+ 187,179
Computer Equipment (0.1%)
- -------------------------------------------------------------------------------------------------
49,854 Computervision Corp.+ 623,175
Food and Beverages (--%)
- -------------------------------------------------------------------------------------------------
60,000 Dr Pepper Bottling Holdings, Inc. Class A+ 210,000
85,200 Specialty Foods Corp.+ 85,200
-------------
295,200
Gaming (--%)
- -------------------------------------------------------------------------------------------------
15,710 Taj Mahal Holding Corp. Class A+ 235,650
Hospital Management (0.2%)
- -------------------------------------------------------------------------------------------------
32,940 Total Renal Care Holdings, Inc. Class B+ 589,297
192,000 Total Renal Care, Inc. 144A+ 1,392,000
-------------
1,981,297
Media (0.8%)
- -------------------------------------------------------------------------------------------------
144,600 Viacom, Inc. Class A+ 6,958,875
60,000 Viacom, Inc. Class B+ 2,895,000
-------------
9,853,875
Oil and Gas (0.2%)
- -------------------------------------------------------------------------------------------------
62,350 Chesapeake Energy Corp.+ 2,649,875
Paper and Forest Products (0.1%)
- -------------------------------------------------------------------------------------------------
150,762 Gaylord Container Corp. A + 1,394,549
Retail (0.2%)
- -------------------------------------------------------------------------------------------------
322,554 Grand Union Co. (acquired 322,554 shares 8/18/95
cost $14,142,875)#+ 2,419,155
Telecommunication (0.6%)
- -------------------------------------------------------------------------------------------------
440,700 NEXTEL Communications, Inc. Class A+ 6,775,763
7,097 Pyramid Communications, Inc. New Class B 144A+ 170,317
-------------
6,946,080
- -------------------------------------------------------------------------------------------------
Total Common Stocks
(cost $78,687,823) $75,870,758
- -------------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
UNITS (5.3%)*
NUMBER OF UNITS VALUE
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
7,000 Australis Media units stepped-coupon zero %, (14s, 5/15/00), 2003
(Australia)++ $ 5,075,000
15,545 Cellnet Data Systems Inc. units stepped-coupon zero % (13s,
6/15/00), 2005++ 8,821,788
3,500 Decorative Home Accents 144A units 13s, 2002 3,500,000
7,355,000 Echostar Communications Corp. units sr. disc. notes
stepped-coupon zero %, (12-7/8s, 6/1/99), 2004++ 4,560,100
8,260 Heartland Wireless Communication 144A units 13s, 2003 9,375,100
5,400,000 In-Flight Phone Corp. 144A units sr. disc. notes stepped-coupon
zero % (14s, 5/15/98), 2002++ 1,890,000
2,950 Intelcom Group (USA) Inc., 144A units stepped-coupon zero %,
(13-1/2s, 9/15/00), 2005++ 16,962,500
5,000,000 Intermedia Communications of Florida units Ser. B, sr. notes
13-1/2s, 2005 5,475,000
5,974 Premium Standard Farms 144A exch. pfd. units 12-1/2s, 2000 657,140
2,379,000 Total Renal Care Holdings units sr. disc. notes stepped-coupon
zero %, (12s, 8/15/97), 2004++ 2,260,050
1,500 Winstar Communications, Inc. 144A units stepped- coupon zero %
(14s, 10/15/00), 2005++ 2,340,000
1,000 Wireless One Inc. units 13s, 2003 1,032,500
- -------------------------------------------------------------------------------------------------
Total Units (cost $59,765,955) $61,949,178
- -------------------------------------------------------------------------------------------------
BRADY BONDS (2.9%)*
PRINCIPAL AMOUNT VALUE
$2,260,000 Argentina (Republic of) FRN 6.813s, 2005 $ 1,477,475
6,609,000 Argentina (Republic of) bonds 5s, 2023 3,453,203
8,255,000 Argentina (Republic of) bonds 6-7/8s, 2023 5,014,913
6,602,000 Brazil (Federative Republic of) bonds 4s, 2024 3,301,000
4,941,000 Brazil (Federative Republic of) notes 6.812s, 2024 2,933,719
1,976,000 Brazil (Federated Republic of) FRN 6.688s, 2001 1,679,600
5,155,000 Brazil (Federated Republic of) FRN 6.813s, 2006 3,395,856
1,940,000 Bulgaria (Republic of) disc. FRN 6-3/4s, 2024 984,550
300,000 Philippines (Central Bank of) bonds 5-3/4s, 2017 216,000
2,561,000 Poland (Government of) 144A FRN 6-7/8s, 2024 1,943,159
1,090,000 Poland (Government of) Ser. RSTA, bonds stepped-coupon 2-3/4s
(with various rates from 3-1/4s to 5s, and dates from 10/96 to
10/14), 2024++ 512,300
3,300,000 United Mexican States FRN 7.609s, 2008 2,904,000
4,200,000 United Mexican States Ser. A, FRB 7.219s, 2001 2,908,500
1,042,000 United Mexican States Ser. A, deb. 6-1/4s, 2019 639,528
4,746,000 United Mexican States deb. Ser. B, 6-1/4s, 2019 2,912,858
- -------------------------------------------------------------------------------------------------
Total Brady Bonds
(cost $32,868,713) $34,276,661
- -------------------------------------------------------------------------------------------------
PREFERRED STOCKS (1.4%)*
NUMBER OF SHARES VALUE
- -------------------------------------------------------------------------------------------------
50,000 California Federal Bank Ser. B, $10.625 exch. pfd. $5,437,500
50,000 First Nationwide Bank $11.50 pfd.+ 5,568,750
236,213 Pyramid Communications, Inc. Ser. C, $3.125 exch. pfd.+ 5,521,482
- -------------------------------------------------------------------------------------------------
Total Preferred Stocks
(cost $15,749,231) $16,527,732
- -------------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
CONVERTIBLE BONDS AND NOTES (0.5%)* (COST $4,476,393)
PRINCIPAL AMOUNT VALUE
- -------------------------------------------------------------------------------- -------------
<S> <C> <C>
$7,543,000 Pricellular Wireless 144A cv. sub. notes stepped-coupon zero %,
(10-3/4s, 8/15/00), 2004++ $5,280,100
- -------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
WARRANTS (0.3%)*+
NUMBER OF WARRANTS EXPIRATION DATE VALUE
<S> <C> <C>
92,500 Becker Gaming Corp. 144A 11/15/00 $ 46,250
32,988 Capital Gaming International, Inc. 2/1/99 4,124
13,320 Casino Magic Finance Corp. 10/14/96 666
23,278 Cinemark Mexico USA, Inc. 8/1/03 215,671
3,450 Commodore Media 144A 5/1/00 345,000
5,000 County Seat Holdings, Inc. 10/15/98 50,000
12,730 Dial Call Communication 144A 12/15/98 127
74,130 Echostar Communications Corp. 6/1/04 833,963
5,825 Foamex (L.P.) Capital Corp. 144A 7/1/99 87,375
125,438 Gaylord Container Corp. 144A 7/31/96 1,027,024
5,400 In-Flight Phone Corp. 144A 8/31/02 5
5,000 Intermedia Communications 144A 6/1/00 50,000
33,580 Pagemart, Inc. 144A 12/31/03 302,220
11,999 Petracom Holdings, Inc. 8/1/05 85,493
30,905 President Riverboat Casinos, Inc. 9/30/99 123,620
21,000 President Riverboat Casinos, Inc. 144A 9/23/96 1,050
55,000 Southdown, Inc. 144A 10/31/96 226,875
102 Telemedia Broadcasting Corp. 144A 4/1/04 76,793
668 Wright Medical Technology, Inc. 144A 6/30/03 110,258
- -------------------------------------------------------------------------------------------------
Total Warrants (cost $2,579,169) $3,586,514
- -------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FOREIGN GOVERNMENT BONDS AND NOTES (0.2%)*
PRINCIPAL AMOUNT VALUE
<S> <C> <C>
$2,058,000 Morocco (Government of) bonds 6.75s, 2009 $ 1,299,113
435,000 Morocco (Government of) notes 6.594s, 2004 324,075
850,000 Panama (Republic of) FRN 7-1/4s, 2002 697,000
500,000 Philippines (Central Bank of) bonds 5s, 2008 380,000
- -------------------------------------------------------------------------------------------------
Total Foreign Government Bonds and Notes (cost
$2,708,124) $ 2,700,188
- -------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SHORT-TERM INVESTMENTS (3.1%)*
PRINCIPAL AMOUNT VALUE
<S> <C> <C>
IDR 5,000,000,000 Bank Tabungan Negara certificate of deposit zero %,
Feburary 12, 1996 $ 2,105,124
$30,414,000 Interest in $798,484,000 joint repurchase agreement
dated November 30, 1995 with Morgan (J.P.) & Co., Inc.
due December 1, 1995 with respect to various U.S.
Treasury obligations-- maturity value of $30,418,951
for an effective yield of 5.86% 30,418,950
TRL 59,400,000,000 Turkey (Republic of) Treasury Bills zero %, December
29, 1995 1,015,675
TRL 29,500,000,000 Turkey (Republic of) Treasury Bills zero %, December
14, 1995 520,793
U.S. Dollar Certificate of Deposit (Issued by
J.P. Morgan Securities, Inc. The principal at
redemption is linked to the bid price for the Polish
Treasury Bill, at maturity, multiplied by the change in
the spot rate of the Polish Zolty from issue date to
maturity date) zero %,
$708,511 May 8, 1996 689,508
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
SHORT-TERM INVESTMENTS
PRINCIPAL AMOUNT VALUE
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
$ 1,697,998 January 31, 1996 $ 1,525,991
212,296 April 17, 1996 188,010
- -------------------------------------------------------------------------------------------------
Total Short-Term Investments
(cost $36,830,858) $ 36,464,051
- -------------------------------------------------------------------------------------------------
Total Investments (cost $1,159,484,659)*** $1,181,865,204
- -------------------------------------------------------------------------------------------------
</TABLE>
* Percentages indicated are based on net assets of $1,178,763,775.
++ The interest rate and date shown parenthetically represent the new interest
rate to be paid and the date the fund will begin receiving interest at this
rate.
## Income may be received in cash or additional securities at the discretion of
the issuer.
+ Non-income-producing security.
# Restricted, excluding 144A securities, as to public resale. At the date of
acquisition, these securities were valued at cost. There were no outstanding
unrestricted securities of the same class as those held. Total market value
of restricted securities owned at November 30, 1995 was $2,606,334 or 0.2%
of net assets.
*** The aggregate identified cost for federal income tax purposes is
$1,159,922,934, resulting in gross unrealized appreciation and depreciation
of $125,518,102 and $103,575,832, respectively, or net unrealized
appreciation of $21,942,270.
Forward Currency Contracts To Sell at November 30, 1995
(aggregate face value $1,236,235)
Aggregate Unrealized
Market Face Delivery Appreciation/
Value Value Date Depreciation
- ----------------------------------------------------------------------
Deutschemarks $762,378 $748,605 1/31/96 $(13,773)
Deutschemarks 94,599 96,338 4/17/96 1,739
Deutschemarks 382,966 391,292 5/9/96 8,326
- ----------------------------------------------------------------------
$ (3,708)
- ----------------------------------------------------------------------
ADR or ADS after the name of a holding stands for American Depository Receipt
or American Depository Shares, respectively, representing ownership of
foreign securities on deposit with a domestic custodian bank.
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 accompanying notes are an integral part of these financial statements.
22
<PAGE>
Statement of assets and liabilities
November 30, 1995
<TABLE>
<CAPTION>
Assets
<S> <C>
- ---------------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $1,159,484,659) (Note 1) $1,181,865,204
- ---------------------------------------------------------------------------------------------------
Receivable for securities sold 8,318,890
- ---------------------------------------------------------------------------------------------------
Dividends, interest and other receivables 22,614,833
- ---------------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 6,143,116
- ---------------------------------------------------------------------------------------------------
Receivable for open foreign currency contracts 10,065
- ---------------------------------------------------------------------------------------------------
Total assets 1,218,952,108
- ---------------------------------------------------------------------------------------------------
Liabilities
- ---------------------------------------------------------------------------------------------------
Distribution payable to shareholders 7,424
- ---------------------------------------------------------------------------------------------------
Payable for securities purchased 29,836,417
- ---------------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 1,368,258
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 1,809,215
- ---------------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 4,294
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 441
- ---------------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 328,889
- ---------------------------------------------------------------------------------------------------
Payable to sub-custodian (Note 2) 5,999,136
- ---------------------------------------------------------------------------------------------------
Payable for open foreign currency contracts 13,773
- ---------------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 598,750
- ---------------------------------------------------------------------------------------------------
Other accrued expenses 221,736
- ---------------------------------------------------------------------------------------------------
Total liabilities 40,188,333
- ---------------------------------------------------------------------------------------------------
Net assets $1,178,763,775
- ---------------------------------------------------------------------------------------------------
Represented by
Paid-in capital (Notes 1 and 4) $1,271,600,531
- ---------------------------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 1,451,218
- ---------------------------------------------------------------------------------------------------
Accumulated net realized loss on investment transactions (Note 1) (116,664,811)
- ---------------------------------------------------------------------------------------------------
Net unrealized appreciation of investment transactions and assets and liabilities
in foreign currencies 22,376,837
- ---------------------------------------------------------------------------------------------------
Total--Representing net assets applicable to capital shares outstanding $1,178,763,775
- ---------------------------------------------------------------------------------------------------
Computation of net asset value and offering price
Net asset value and redemption price of class A shares ($870,810,474 divided by
91,511,281 shares) $9.52
- ---------------------------------------------------------------------------------------------------
Offering price per class A share (100/95.25 of $9.52)* $9.99
- ---------------------------------------------------------------------------------------------------
Net asset value and offering price of class B shares
($287,876,631 divided by 30,335,743 shares)+ $9.49
- ---------------------------------------------------------------------------------------------------
Net asset value and redemption price of class M shares
($20,076,670 divided by 2,111,031 shares) $9.51
- ---------------------------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $9.51)* $9.83
- ---------------------------------------------------------------------------------------------------
</TABLE>
* 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.
23
<PAGE>
Statement of operations
Year ended November 30, 1995
Investment income:
- --------------------------------------------------------------------------
Interest $101,889,005
- --------------------------------------------------------------------------
Dividends 3,249,431
- --------------------------------------------------------------------------
Total investment income 105,138,436
- --------------------------------------------------------------------------
Expenses:
Compensation of Manager (Note 2) 6,014,802
- --------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 1,405,209
- --------------------------------------------------------------------------
Compensation of Trustees (Note 2) 26,308
- --------------------------------------------------------------------------
Reports to shareholders 71,417
- --------------------------------------------------------------------------
Auditing 109,028
- --------------------------------------------------------------------------
Legal 27,203
- --------------------------------------------------------------------------
Postage 153,015
- --------------------------------------------------------------------------
Administrative services (Note 2) 20,020
- --------------------------------------------------------------------------
Distribution fees--class A (Note 2) 1,918,495
- --------------------------------------------------------------------------
Distribution fees--class B (Note 2) 1,413,289
- --------------------------------------------------------------------------
Distribution fees--class M (Note 2) 48,204
- --------------------------------------------------------------------------
Registration fees 165,437
- --------------------------------------------------------------------------
Other expenses 21,140
- --------------------------------------------------------------------------
Total expenses 11,393,567
- --------------------------------------------------------------------------
Expense reduction (Note 2) (313,441)
- --------------------------------------------------------------------------
Net expenses 11,080,126
- --------------------------------------------------------------------------
Net investment income 94,058,310
- --------------------------------------------------------------------------
Net realized loss on investments (Notes 1 and 3) (31,041,787)
- --------------------------------------------------------------------------
Net realized loss on written options (Notes 1 and 3) (33,313)
- --------------------------------------------------------------------------
Net unrealized depreciation on foreign currency contracts (3,708)
- --------------------------------------------------------------------------
Net unrealized appreciation of investments during the
period 75,582,846
- --------------------------------------------------------------------------
Net gain on investments 44,504,038
- --------------------------------------------------------------------------
Net increase in net assets resulting from operations $138,562,348
- --------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
24
<PAGE>
Statement of changes in net assets
<TABLE>
<CAPTION>
Year ended November 30
----------------------------
1995 1994
- -------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets
- -------------------------------------------------------------------------------------
Operations:
- -------------------------------------------------------------------------------------
Net investment income $ 94,058,310 $ 71,407,025
- -------------------------------------------------------------------------------------
Net realized loss on investment transactions (31,075,100) (8,794,847)
- -------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of
investments and assets and liabilities in foreign
currencies 75,579,138 (86,312,209)
- -------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from
operations 138,562,348 (23,700,031)
- -------------------------------------------------------------------------------------
Distributions to shareholders from:
- -------------------------------------------------------------------------------------
Net investment income
Class A (81,579,408) (73,482,433)
Class B (13,725,209) (935,321)
Class M (955,481) --
Increase from capital share transactions 446,350,218 45,756,866
- -------------------------------------------------------------------------------------
Total increase (decrease) in net assets 488,652,468 (52,360,919)
- -------------------------------------------------------------------------------------
Net assets
- -------------------------------------------------------------------------------------
Beginning of year 690,111,307 742,472,226
- -------------------------------------------------------------------------------------
End of year (including undistributed net investment
income of $1,451,218 and $3,232,514, respectively) $1,178,763,775 $690,111,307
- -------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
25
<PAGE>
Financial highlights
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
For the period For the period
December 1, 1994 May 16, 1994
(commencement of (commencement
operations) to Year ended of operations)
November 30 November 30 to November 30
------------------ ------------- ---------------
1995 1995 1994
- ----------------------------------------------------------------------------------------------
Class M Class B
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period $ 9.05 $ 9.05 $ 9.83
- ----------------------------------------------------------------------------------------------
Investment operations
- ----------------------------------------------------------------------------------------------
Net investment income .99 .92 .48
- ----------------------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) on investments .45 .45 (.77)
- ----------------------------------------------------------------------------------------------
Total from investment operations 1.44 1.37 (.29)
- ----------------------------------------------------------------------------------------------
Less distributions:
- ----------------------------------------------------------------------------------------------
From net investment income (.98) (.93) (.49)
- ----------------------------------------------------------------------------------------------
In excess of net investment income -- -- --
- ----------------------------------------------------------------------------------------------
From net realized gain on
investments -- -- --
- ----------------------------------------------------------------------------------------------
From paid in capital -- -- --
- ----------------------------------------------------------------------------------------------
Total distributions (.98) (.93) (.49)
- ----------------------------------------------------------------------------------------------
Net asset value, end of period $ 9.51 $ 9.49 $ 9.05
- ----------------------------------------------------------------------------------------------
Total investment return at net asset
value (%) (a) 16.72 15.94 (3.12)(b)
- ----------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $20,077 $287,877 $37,017
- ----------------------------------------------------------------------------------------------
Ratio of expenses to average net
assets (%) (c) 1.35 1.85 1.02(b)
- ----------------------------------------------------------------------------------------------
Ratio of net investment income to
average net assets (%) 10.06 9.61 7.47(b)
- ----------------------------------------------------------------------------------------------
Portfolio turnover (%) 89.96 89.96 69.61(b)
- ----------------------------------------------------------------------------------------------
</TABLE>
26
<PAGE>
Year ended November 30
------------------------------------------------------
1995 1994 1993 1992 1991
- --------- ------- ------- ------- ---------
Class A
------------------------------------------------------
$ 9.07 $ 10.41 $ 9.74 $ 9.30 $ 7.38
1.00 .98 1.13 1.23 1.14
.45 (1.30) .70 .42 1.98
1.45 (.32) 1.83 1.65 3.12
(1.00) (1.02) (1.15) (1.21) (1.15)
-- -- (.01) -- --
-- -- -- -- --
-- -- -- -- (.05)
(1.00) (1.02) (1.16) (1.21) (1.20)
$ 9.52 $ 9.07 $ 10.41 $ 9.74 $ 9.30
16.81 (3.43) 19.88 18.44 45.46
$870,810 $653,094 $742,472 $484,520 $369,150
1.12 1.03 .96 1.14 1.33
10.35 10.87 11.04 12.40 13.38
89.96 68.61 50.89 68.29 74.45
(a) Total investment return assumes dividend reinvestment and does not
reflect the effect of sales charges.
(b) Not annualized.
(c) The ratio of expenses to average net assets for the year ended November
30, 1995 includes amounts paid through expenses offset arrangements.
Prior period ratios exclude these amounts. (See Note 2)
27
<PAGE>
Notes to financial statements
November 30, 1995
Note 1
Significant accounting policies
The fund is registered under the Investment Company Act of 1940, as amended,
as a diversified, open-end management investment company. The fund seeks high
current income through a diversified portfolio of high-yielding, lower-rated
corporate bonds with potential for capital growth.
The fund offers class A, class B and class M shares. Class A shares are sold
with a maximum front-end sales charge of 4.75%. Class B shares, which convert
to class A shares after eight years, do not pay a front-end sales charge, but
pay a higher ongoing distribution fee than class A shares and are subject to
a contingent deferred sales charge, if those shares are redeemed within six
years of purchase. Class M shares are sold with a maximum front-end sales
charge of 3.25% and pay an ongoing distribution fee that is lower than class
B shares and higher than class A shares.
Expenses of the fund are borne pro-rata by the holders of each class of
shares, except that each class bears expenses unique to that class (including
the distribution fees applicable to such class). Each class votes as a class
only with respect to its own distribution plan or other matters on which a
class vote is required by law or determined by the Trustees. Shares of each
class would receive their pro-rata share of the net assets of the fund, if
the fund were liquidated. In addition, the Trustees declare separate
dividends on each class of shares.
The following is a summary of significant accounting policies consistently
followed by the fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles.
A) Security valuation Investments for which market quotations are readily
available are stated at market value, which is determined using the last
reported sale price, or, if no sales are reported--as in the case of some
securities traded over-the-counter--at the last reported bid price, except
that certain U.S. government obligations are stated at the mean between the
bid and asked prices. Securities whose market quotations are not readily
available are stated at fair value on the basis of valuations furnished by
pricing services approved by the Trustees, 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. Short-term investments having remaining maturities of
60 days or less are stated at amortized cost, which approximates market
value, and other investments are stated at fair value following procedures
approved by the Trustees.
B) Joint trading account Pursuant to an exemptive order issued by the
Securities and Exchange Commission, the fund may transfer uninvested cash
balances into a joint trading account along with the cash of other registered
investment companies managed by Putnam Investment Management, Inc. ("Putnam
Management"), the fund's Manager, a wholly-owned subsidiary of Putnam
Investments, Inc. and certain other accounts. These balances may be invested
in one or more repurchase
28
<PAGE>
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 102% of the resale price, including accrued interest. Putnam
Management is responsible for determining that the value of these underlying
securities is at all times at least equal to the resale price, including
accrued interest.
D) Security transactions and related investment income Security transactions
are accounted for on the trade date (date the order to buy or sell is
executed). Interest income is recorded on the accrual basis and dividend
income is recorded on the ex-dividend date.
Discounts on zero coupon bonds, original issue, stepped-coupon bonds and
payment in kind bonds are accreted according to the effective yield method,
except that certain dividends from foreign securities are recorded as soon as
the fund is informed of the ex-dividend date.
E) Forward currency contracts The fund may engage in forward currency
contracts, which are agreements between two parties to buy and sell
currencies at a set price on a future date, to protect against a decline in
value relative to the U.S. dollar of the currencies in which its portfolio
securities are denominated or quoted (or an increase in the value of a
currency in which securities a fund intends to buy are denominated, when a
fund holds cash reserves and short-term investments). The U.S. dollar value
of forward currency contracts is determined using forward currency exchange
rates supplied by a quotation service. The market value of the contract will
fluctuate with changes in currency exchange rates. The contract is "marked to
market" daily and the change in market value is recorded as an unrealized
gain or loss. When the contract is closed, the fund records a realized gain
or loss equal to the difference between the value of the contract at the time
it was opened and the value at the time it was closed. The maximum potential
loss from forward currency contracts is the aggregate face value in U.S.
dollars at the time the contract was opened. The fund could be exposed to
risk if the value of the currency changes unfavorably, if the counterparties
to the contracts are unable to meet the terms of their contracts or if the
fund is unable to enter into a closing position.
F) 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 which it invests 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.
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.
G) Federal taxes It is the policy of the fund to distribute all of its
taxable income within the prescribed time and
29
<PAGE>
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 subject
to Section 4982 of the Internal Revenue Code of 1986. Therefore, no provision
has been made for federal taxes on income, capital gains or unrealized
appreciation of securities held and excise tax on income and capital gains.
At November 30, 1995, the fund had a capital loss carryover of approximately
$116,227,000, available to offset future capital gains, if any. The amount of
the carryover and the expiration dates are:
Loss Carryover Expiration
- -----------------------------------------
$49,757,478 November 30, 1998
15,408,761 November 30, 1999
16,967,398 November 30, 2002
34,093,363 November 30, 2003
H) Distributions to shareholders Distributions to shareholders are recorded
by the fund on the ex-dividend date. At certain times, the fund may pay
distributions at a level rate even though , as a result of market conditions
or investment decisions, the fund may not achieve projected investment
results for a given period. The amount and character of income and gains to
be distributed are determined in accordance with income tax regulations which
may differ from generally accepted accounting principles.
These differences include treatment of the utilization of capital loss
carryover, defaulted bond interest, losses on wash sale transactions 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 November 30, 1995, the fund reclassified $420,492 to
increase undistributed net investment income and $2,975,582 to increase
paid-in-capital, with an increase to accumulated net realized loss of
$3,396,074. The calculation of net investment income per share in the
financial highlights table excludes these adjustments.
Note 2
Management fee, administrative services, and other transactions
Compensation of Putnam Investment Management, Inc., the fund's Manager, a
wholly-owned subsidiary of Putnam Investments, Inc., for management and
investment advisory services is paid quarterly based on the average net
assets of the fund for the quarter. Such fee is based on the following annual
rates: 0.70% of the first $500 million of average net assets, 0.60% of the
next $500 million, 0.55% of the next $500 million and 0.50% of any amount
over $1.5 billion, under current law, subject to reduction in any year to the
extent that expenses (exclusive of distribution fees, brokerage, interest,
taxes and credits allowed by PFTC) of the fund exceed 2.5% of the first $30
million of average net assets, 2.0% of the next $70 million and 1.5% of any
amount over $100 million and by the amount of certain brokerage commissions
and fees (less expenses) received by affiliates of the Manager on the fund's
portfolio transactions.
The fund reimburses Putnam Management for the compensation and related
expenses of certain officers of the fund and their staff who provide
administrative services to the fund. The aggregate amount of all such
reimbursements is determined annually by the Trustees.
Trustees of the fund receive an annual Trustee's fee of $1,600 and an
additional fee for each Trustees' meeting attended. Trustees who are not
interested persons of the Putnam Management and
30
<PAGE>
who serve on committees of the Trustees receive additional fees for
attendance at certain committee meetings.
During the year ended November 30, 1995, the fund adopted a Trustee Fee
Deferral Plan (the "Plan") which allows the Trustees to defer the receipt of
all or a portion of Trustees Fees payable on or after July 1, 1995. The
deferred fees remain in the fund and are invested in the fund or in other
Putnam funds until distribution in accordance with the Plan.
As part of the custodian 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 November 30, 1995, the payable to the subcustodian bank represents the
amount due for cash advance for the settlement of a security purchased.
Custodial functions for the fund's assets are provided by Putnam Fiduciary
Trust Company (PFTC), a wholly owned subsidiary of Putnam Investments, Inc.
Investor servicing agent functions are provided by Putnam Investor Services,
a division of PFTC.
For the year ended November 30, 1995, fund expenses were reduced by $313,441
under expense offset arrangements with PFTC. Investor servicing and custodian
fees reported in the Statement of operations exclude these credits. The fund
could have invested the assets utilized in connection with the expense offset
arrangements in an income producing asset if it had not entered into such
arrangements.
The fund has adopted distribution plans (the "Plans") with respect to its
class A, class B and class M shares pursuant to Rule 12b-1 under the
Investment Company Act of 1940. The purpose of the Plans is to compensate
Putnam Mutual Funds Corp., a wholly-owned subsidiary of Putnam Investments
Inc., for services provided and expenses incurred by it in distributing
shares of the fund. The Plans provide payments by the fund to Putnam Mutual
Funds Corp. at an annual rate up to 0.35%, 1.00%, and 1.00% of the average
net assets attributable to class A, class B, and class M shares,
respectively. The Trustees have approved payment by the fund at an annual
rate of 0.25%, 1.00% and 0.50% of the average net assets attributable to
class A, class B and class M shares, respectively.
For the year ended November 30, 1995, Putnam Mutual Funds Corp., acting as
underwriter, received net commissions of $626,712 and $22,260 from the sale
of class A and M shares, respectively, and $289,856 in contingent deferred
sales charges from redemptions of class B shares. A deferred sales charge of
up to 1% is assessed on certain redemptions of class A shares. For the year
ended November 30, 1995, Putnam Mutual Funds Corp., acting as underwriter
received $6,964 on class A redemptions
Note 3
Purchases and sales of securities
During the year ended November 30, 1995, gross purchases and gross sales of
investment securities other than short-term investments aggregated
$1,161,625,532 and $733,026,443, respectively. There were no purchases and
sales of U.S. government obligations. In determining the net gain or loss on
securities sold, the cost of securities has been determined on the identified
cost basis.
31
<PAGE>
Written option transactions during the year are summarized as follows:
Contract Premiums
Amounts Received
- ------------------------------------------------------------------------
Contracts outstanding at beginning of year $ -- $ --
- ------------------------------------------------------------------------
Options opened 4,100,000 30,110
- ------------------------------------------------------------------------
Options closed (4,100,000) (30,110)
- ------------------------------------------------------------------------
Written options outstanding at end of year $ -- $ --
- ------------------------------------------------------------------------
Note 4
Capital shares
At November 30, 1995, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
Year ended November 30
-----------------------------
1995
- ---------------------------------------------------------------------------
Class A Shares Amount
- ---------------------------------------------------------------------------
Shares sold 37,029,176 $ 344,750,753
Shares issued in connection with
reinvestment of dividends 3,862,693 35,951,835
- ---------------------------------------------------------------------------
40,891,869 380,702,588
Shares repurchased (21,412,988) (199,585,575)
- ---------------------------------------------------------------------------
Net increase 19,478,881 $ 181,117,013
- ---------------------------------------------------------------------------
Year ended November 30
-----------------------------
1994
- ---------------------------------------------------------------------------
Class A Shares Amount
- ---------------------------------------------------------------------------
Shares sold 35,660,670 $ 358,899,704
Shares issued in connection with
reinvestment of dividends 3,581,537 35,469,811
- ---------------------------------------------------------------------------
39,242,207 394,369,515
Shares repurchased (38,551,619) (387,466,479)
- ---------------------------------------------------------------------------
Net increase 690,588 $ 6,903,036
- ---------------------------------------------------------------------------
Year ended November 30
---------------------------
1995
- ---------------------------------------------------------------------------
Class B Shares Amount
- ---------------------------------------------------------------------------
Shares sold 28,775,818 $269,420,613
Shares issued in connection with
reinvestment of dividends 609,853 5,495,388
- ---------------------------------------------------------------------------
29,385,671 274,916,001
Shares repurchased (3,140,920) (29,409,833)
- ---------------------------------------------------------------------------
Net increase 26,244,751 $245,506,168
- ---------------------------------------------------------------------------
32
<PAGE>
May 16, 1994
(commencement of
operations) to November
30
------------------------
1994
- ----------------------------------------------------------------------
Class B Shares Amount
- ----------------------------------------------------------------------
Shares sold 4,486,855 $42,572,031
Shares issued in connection with
reinvestment of dividends 42,903 401,973
- ----------------------------------------------------------------------
4,529,758 42,974,004
Shares repurchased (438,766) (4,120,174)
- ----------------------------------------------------------------------
Net increase 4,090,992 $38,853,830
- ----------------------------------------------------------------------
December 1, 1994
(commencement of
operations) to November
30
------------------------
1995
- ----------------------------------------------------------------------
Class M Shares Amount
- ----------------------------------------------------------------------
Shares sold 2,308,932 $21,594,908
Shares issued in connection with
reinvestment of dividends 62,000 583,860
- ----------------------------------------------------------------------
2,370,932 22,178,768
Shares repurchased (259,901) (2,451,731)
- ----------------------------------------------------------------------
Net increase 2,111,031 $19,727,037
- ----------------------------------------------------------------------
33
<PAGE>
Federal Tax Information
(Unaudited)
The fund has designated 3.50% of the distributions from net investment income
as qualifying for the dividends received deduction for corporations.
34
<PAGE>
Fund information
INVESTMENT MANAGER
Putnam Investment
Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
John A. Hill
Elizabeth T. Kennan
Lawrence J. Lasser
Robert E. Patterson
Donald S. Perkins
George Putnam, III
Eli Shapiro
A.J.C. Smith
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
Lawrence J. Lasser
Vice President
<PAGE>
Gordon H. Silver
Vice President
Gary N. Coburn
Vice President
Edward H. D'Alelio
Vice President
Jin W. Ho
Vice President and Fund Manager
William N. Shiebler
Vice President
John R. Verani
Vice President
Paul M. O'Neil
Vice President
John D. Hughes
Senior Vice President
and Treasurer
Beverly Marcus
Clerk and Assistant Treasurer
This report is for the information of shareholders of Putnam High Yield
Advantage Fund. It may also be used as sales literature when preceded or
accompanied by the current prospectus, which gives details of sales charges,
investment objectives, and operating policies of the fund, and the most
recent copy of Putnam's Quarterly Performance Summary. For more information,
or to request a prospectus, call toll free: 1-800-225-1581.
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.
35
<PAGE>
PUTNAM INVESTMENTS Bulk Rate
U.S. Postage
The Putnam Funds PAID
One Post Office Square Putnam
Boston, Massachusetts 02109 Investments
22197-060/327/702 1/96
