(Scales logo)
Putnam
High Income
Convertible
and Bond
Fund
Semiannual
Report
February 28, 1994
(Cover artwork)
For investors aggressively
seeking high current income through a portfolio of high-yielding convertible
and debt securities with potential for capital appreciation
A member
of the Putnam
Family of Funds
Contents
2 How your fund performed
3 From the Chairman
4 Report from Putnam Management
Semiannual Report
7 Report of Independent Accountants
8 Portfolio of investments owned
17 Financial statements
23 Fund performance supplement
<PAGE>
How your
fund performed
For periods ended February 28, 1994
Total return* Fund First Merrill Lynch
Boston
High-yield All-Convertible
NAV Market Index Index
price
-----------------------------------------------------------------
6 months 8.98% 4.69% 3.31% 4.45%
1 year 21.29 9.54 9.89 15.61
5 years 110.11 127.47 82.10 94.14
annualized 16.01 17.87 12.74 14.19
Life-of-fund
(since
7/9/87) 125.86 113.49 114.55 --
annualized 13.05 12.10 12.18
-----------------------------------------------------------------
Share data Market
NAV price
- - ------------------------------------
August 31,
1993 $9.52 $10.00
February 28,
1994 $9.91 $10.00
- - ------------------------------------
Distributions Investment Capital
6 months ended Number Income gains Total
---------------------------------------------------------------------------
February 28, 1994 6 $0.445 -- $0.445
---------------------------------------------------------------------------
Current returns at the end of the period
NAV Market price
-----------------------------------------------------------
Current dividend rate 8.60% 8.52%
-----------------------------------------------------------
* Performance data represent past results. Investment return, principal value
and market price will fluctuate so an investor's shares, when sold, may be
worth more or less than their original cost.
Terms you need to know
Total return is the change in value of an investment from the beginning to
the end of a period, assuming the reinvestment of all distributions. It may
be shown at net asset value or at market price.
Net asset value (NAV) is the value of all your fund's assets, minus any
liabilities, divided by the number of outstanding shares, not reflecting any
sales charge.
Market price is the current trading price of one share of the fund. Market
prices are set by transactions between buyers and sellers on the New York
Stock Exchange.
Current dividend rate is calculated by annualizing the income portion of the
fund's most recent distribution and dividing by the NAV or market price on
the last day of the period.
Please see the fund performance supplement on page 23 for additional
information about performance comparisons.
<PAGE>
From the
Chairman
(George Putnam photo)
George Putnam
Chairman
of the Trustees
Dear Shareholder:
Putnam High Income Convertible and Bond Fund continues to reward shareholders
with exceptional performance, generating a total return of 8.98% at net asset
value during the six months ended February 28, 1994. In recognition,
Morningstar Mutual Fund Values has consistently awarded the fund its highest
ratings of either four or five stars for every rating period from March, 1992
to March 25, 1994. The most recent 5-star rating reflects performance as of
February 28, 1994*.
More recognition came from Business Week in its issue dated February 28,
1994. After analyzing the performance of 225 closed-end funds, the magazine
ranked your fund as one of the top 13 on the basis of risk-adjusted total
return during the 1991-1993 period. Business Week ratings are subject to
change and should not be considered indicative of future performance.
In the broader market, the strong performance of higher-yielding lower-rated
securities extended into February. During the rally period, the fund
benefited substantially from gains in the value of its carefully selected
holdings. In the fund's second fiscal quarter, the Federal Reserve raised
short-term interest rates. The yield spread between Treasuries and high-yield
bonds began to narrow and the high yield market began to experience a
correction. Your Fund's Managers, Jennifer Leichter and Charles Pohl, had
worked to position the fund for this eventuality.
It is important to note that performance for this period reflects
exceptionally favorable market conditions. While Charles and Jennifer remain
optimistic about the fund's potential, future gains cannot be expected to
match those of the recent past. Nevertheless, convertibles and high yields
remain a unique segment of the fixed-income market which has shown its
potential to benefit from economic growth--and we believe your fund's focus
on these investments should prove rewarding over the long term.
Respectfully yours,
(signature)
George Putnam
April 20, 1994
* Based on risk-adjusted 3-, 5-, and 10-year total returns, as applicable.
Morningstar ratings are relative to other funds with the same objectives and
are subject to change every two weeks.
<PAGE>
Report from
Putnam Management
Top 10 holdings
(as of 2/28/94)
Flagstar Corp. cv sub Deb
Wainoco Oil Corp. cv sub Deb
Seagate Technology Inc. cv sub
Universal Health Services Inc. cv
Alexander & Alexander Services Inc. cv
SFP Pipeline Holdings Inc.
Maxtor Corp. cv sub Deb
Unisys Corp. Ser. A
Great Lakes Bancorp cv sub
Conner Peripherals Inc. sub Deb
"We believe that in the high yield market, even at these narrow spread
levels, you are still being overcompensated for the level of risk in the
market because in a very strong economy, the level of defaults and the amount
of credit risk is less than it has been."
- - --Jennifer Leichter,
fund manager,
high-yield bonds
During the past six months, another period of outstanding performance for
Putnam High Income Convertible and Bond Fund, the portfolio remained split,
with roughly 50% in convertible securities, and 50% in high-yield bonds. This
allocation has successfully fulfilled the fund's objectives: to generate high
income and capital appreciation. More typically, the allocation would be
tilted 60/40 in favor of convertibles; the 50/50 split reflected the larger
supply of promising issues in the high-yield sector.
Convertible securities and high yield bonds occupy similar positions in the
fixed income universe and tend to share similar market dynamics. During the
recent period of unprecedented low interest rates, both these types of
securities enjoyed an extended rally because they offered yields that
couldn't be found elsewhere. As a result, over the six months ended February
28, 1994, performance of high-yield bonds, as represented by the First Boston
High Yield Index, and that of convertibles, as represented by the Merrill
Lynch Convertible Index, far exceeded that of Standard & Poor's(R) 500 Index.
The high-yield and convertible indexes returned 7.04% and 4.45%,
respectively, compared to the S&P's 0.53%.
January, 1994 saw an acceleration of the narrowing yield spread between
higher- and lower-rated issues. However, early in February, the Federal
Reserve's decision to raise interest rates -- an effort to dampen any signs
of inflation expected to follow strong economic growth -- caused a
significant correction in the bond market. Volatility continued for weeks,
yet, in terms of the fund's total return for the period, February's
correction had only a minor impact.
Convertibles, a specialized niche The convertible securities that make up
half the fund's portfolio are "hybrids," combining the fixed income features
of a bond and, with the option of converting into stock, the appreciation
potential of a stock. The broken, or busted, convertibles that have
contributed the most gains to the fund are those whose stock option component
has little or no market value. Since only the bond portion of these
securities has value in the marketplace, they trade and perform much like
bonds.
Broken convertibles span nearly 50 different industries in a universe of
about 150 issues, with a total market value of about $5 billion. Investors
without strong research capabilities would be wise to avoid this highly
specialized subsector. Your fund's strategy and resources, however, allow it
to exploit the conditions that lead a regular convertible security to become
a broken security. In some cases, the issuer of a convertible is a
fast-saving
<PAGE>
company that has temporarily stumbled; as its stock declines, its
convertibles become "broken." At this point, the convertible price falls such
that its yield increases, and it may well become a candidate for the fund's
portfolio.
Top industry sectors (based on percentage of net assets as of 2/28/94)
Computers 6.8%
Conglomerates 4.7
Health Care 4.7
Restaurants 4.6
Oil & Gas 4.3
Although yield is our primary goal, each potential purchase must undergo a
rigorous assessment of credit quality. For every issue that makes it into the
portfolio, we have carefully evaluated the issuing company for strong
fundamentals, a good balance sheet, and sound or improving credit quality.
The process of examining individual issues and making selections on the basis
of each holding's own merit also helps us diversify the convertible
portfolio. During the recent six-month period, our most profitable holdings
have come from a cross-section of industrial sectors. Several are profiled
below:
Unisys Corporation provides computer-based information systems, hardware and
software as well as related services to customers worldwide. The company
suspended all stock dividends in September, 1990 to embark upon a massive
cost-cutting program and eliminated all businesses except for those with the
greatest promise for return. Now, after nine profitable quarters, with cash
reserves of nearly $1 billion, Unisys has turned the corner. Current
preferred dividends have been reinstated; as of February, all dividend
payments in arrears will be paid.
Roy F. Weston Inc., a diversified engineering and consulting firm, endured
hard times when the federal government eased pollution and other
environmental regulations. This slowed much of the company's work,
particularly in the area of hazardous waste. Weston's convertibles then
became available at price levels that provided double-digit yields. Now, with
a renewed Federal focus on enforcement of environmental regulations, Weston
has contracts for new projects that exceed $400 million and are slated, in
some cases, to run for the next 20-40 years.
" We feel that in many cases, yield spreads over comparable Treasuries
should, against the backdrop of an improving economy, cushion returns and
support the performance of lower-rated high-yield securities."
- - --Charles Pohl, fund manager, convertibles
The hunt for high-yield outperformance Securities for the high-yield bond
sector of the portfolio are chosen using much the same criteria as the
convertible sector. We share the same concerns for credit quality, market,
financial and management
<PAGE>
strength. We also depend on Putnam Management's research capabilities to
assess these factors before we acquire an issue. What we hope to find in each
issue is a constellation of factors indicating the potential for a total
return that outperforms or exceeds the market as a whole.
"For the past five years, the millions of investors who own bond mutual funds
have had powerful friends in high places; the members of the Federal Reserve
Board. The Fed pursued a policy of easy money that allowed interest rates to
fall to levels not seen in a generation. As yields slumped, bond prices
soared and bond investors hit the jackpot. From 1989 through 1993, taxable
bond funds racked up average annual total returns of 10% and tax-free funds,
9.6%"
- - --Business Week, February 21, 1994
In the universe of lower-rated bonds, outperformance generally occurs when an
issue is upgraded in quality. An earnings turnaround, an initial public
offering, or an offer to acquire the issuing company, may trigger an upgrade,
usually followed by a considerable gain in value of the bond.
For example, Nextel Communications, a provider of digital wireless telephone,
data and paging services and one of the fund's star performers, received
intense media attention during the period when MCI announced it would acquire
17% of the smaller company. And Gaylord Container Corporation, a major
producer and distributor of brown paper products and container board for
shipping and packing, experienced dramatically increased earnings as the
economy grew.
The fund has the flexibility to invest in privately placed bonds, which often
have potential for greater gains than publicly traded issues. Viking Star
Shipping is one issue we feel has potential for an upgrade. With its young
fleet of the latest in double-hulled oil tankers, Viking has seen its
earnings increase along with many new regulations calling for safer ships and
protection against oil spills.
Future prospects While your fund has enjoyed exceptional performance and
provided double-digit returns over the past two years, we must acknowledge
that the outperformance of individual issues has been buoyed by a generally
booming market that is now considerably slowed. Going forward, we believe
income, rather than price appreciation, will be the primary driver of
performance.
Our near-term goal is to maintain the focus on individual issues, a strategy
that not only protects the value of the portfolio but also helps to manage
interest rate sensitivity. Although the supply of deeply discounted
convertibles and high yield bonds is somewhat less than it was recently, the
heavy issuance of convertibles during 1993 should provide numerous
opportunities going forward.
The views expressed here are exclusively those of Putnam Management. They are
not intended as investment advice. Although the described holdings were
viewed favorably as of February 28, 1994, there is no guarantee that the fund
will hold these securities in the future.
<PAGE>
Putnam
High Income
Convertible
and Bond
Fund
Semiannual
Report
For the Six Months Ended February 28, 1994
Report of Independent Accountants
To the Trustees and Shareholders of
Putnam High Income Convertible and Bond Fund
In our opinion, the accompanying statement of assets and liabilities,
including the portfolio of investments owned, and the related statements of
operations and of changes in net assets and the financial highlights present
fairly, in all material respects, the financial position of Putnam High
Income Convertible and Bond Fund (the "Fund") at February 28, 1994, 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 portfolio positions at February
28, 1994 by correspondence with the custodian and brokers and the application
of alternative auditing procedures where confirmations from brokers were not
received, provide a reasonable basis for the opinion expressed above.
Price Waterhouse
Boston, Massachusetts
April 20, 1994
<PAGE>
Portfolio of
investments owned
February 28, 1994
<TABLE>
Corporate Bonds and Notes (46.0%)(a)
<CAPTION>
Principal Amount Value
- - ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Recreation (3.5%)
$ 375,000 Bally's Casino Inc. sr. disc. notes zero%, 1998(b) $ 247,500
80,000 Belle Casinos Inc. sr. sub. notes 12s, 2000(b) 80,000
240,000 Capitol Queen Corp. sr. sub. deb. 12s, 2000(b) 211,200
190,000 Casino America Corp. sr. notes 11-1/2s, 2001 195,700
830,000 Casino Magic Finance Corp. 1st mtge. deb. 11-1/2s, 2001(b) 854,900
400,000 Elsinore Corp. unit sub. deb. 12-1/2s, 2000(b) 400,000
400,000 Golden Nugget Finance Corp. 1st mtge. deb. 10-5/8s, 2003 377,000
365,000 Grand Casino Resorts Inc. notes 12-1/2s, 2000 405,150
95,000 Louisiana Casino Cruise Corp. unit 11-1/2s, 1998(b) 101,650
25,000 Santa Fe Hotel, Inc. units, 11s, 2000 262,500
100,000 Treasure Bay Gaming 1st. mtge. unit 12-1/4s, 2000(b) 103,000
243,000 Trump Castle Funding Corp. deb. 11-1/2s, 2000(b) 243,000
974,000 Trump Taj Mahal sub. deb. Ser. A 11.35s, 1999(c) 1,003,220
------------------------------------------------------------------------------------------------------------------------------
4,484,820
------------------------------------------------------------------------------------------------------------------------------
Metals and Mining (2.6%)
750,000 Haynes International Inc. sr. sub. notes 13-1/2s, 1999 780,000
650,000 Horsehead Industries, Inc. sr. ext. reset notes 13-1/2s, 1994 650,000
1,000,000 Horsehead Industries, Inc. sub. notes 14s, 1999 990,000
850,000 Kaiser Aluminum & Chemical Corp. sr. sub. notes 12-3/4s, 2003 909,500
------------------------------------------------------------------------------------------------------------------------------
3,329,500
------------------------------------------------------------------------------------------------------------------------------
Conglomerates (2.5%)
$ 500,000 Coleman Holdings zero%, 1998 $ 330,000
275,000 Collins & Aikman Group, Inc. sr. sub. deb. 11-7/8s, 2001 281,875
100,000 Corporate Express, Inc., 9-5/8s, 2004(b) 99,000
250,000 Doman Ind. Ltd. ser. notes, 8-3/4s, 2004 248,125
46,605 IFINT Diversified Holdings unit 12.514s, 1998 (acquired 3/29/93, cost $46,605)(d) 47,770
475,000 Jordan Industries, Inc. sr. notes 10-3/8s, 2003 489,250
750,000 MacAndrews & Forbes Holdings Inc. sub. deb. 13s, 1999 753,750
400,000 Repap Wisconsin, 9-1/4s, 2002 400,000
1,000,000 Talley Industries, Inc. sr. disc. deb. stepped-coupon zero % (12-1/4s, 10/15/98),
2005(e) 620,000
------------------------------------------------------------------------------------------------------------------------------
3,269,770
------------------------------------------------------------------------------------------------------------------------------
Retail (2.3%)
500,000 County Seat Stores units 12s, 2001 501,250
530,000 Duane Reade Corp. sr. notes 12s, 2002 577,700
250,000 Finlay Enterprises Inc. sr. disc. deb. stepped-coupon zero%, (12s, 5/1/98), 2005(e) 165,000
1,100,000 Loehmann's Holdings Inc. unit 10-1/2s, 1997(b) 1,078,000
20,000 Loehmann's Holdings Inc. units 13-3/4s, 1999 20,200
250,000 Parisian Inc. sr. sub notes 9-7/8s, 2003 242,500
315,000 Specialty Retailers, Inc. sr. sub. notes 11s, 2003(b) 330,750
------------------------------------------------------------------------------------------------------------------------------
2,915,400
------------------------------------------------------------------------------------------------------------------------------
<PAGE>
Principal Amount Value
- - ------------------------------------------------------------------------------------------------------------------------------
Health Care (2.1%)
$ 265,400 EPIC Healthcare Group, Inc. jr. sub. notes 11s, 2003(c) $ 161,231
1,525,000 EPIC Holdings Inc. sr. stepped- coupon zero%, (12s, 3/15/97), 2002(e) 1,193,125
250,000 General Medical, 10-7/8s, 2003(b) 262,500
563,000 Multicare Co., Inc. sr. sub. notes 12-1/2s, 2002 653,080
400,000 Quorum Health Group, Inc. sr. sub. notes 11-7/8s, 2002 454,000
------------------------------------------------------------------------------------------------------------------------------
2,723,936
------------------------------------------------------------------------------------------------------------------------------
Broadcasting (2.1%)
400,000 Granite Broadcasting Corp. sr. sub. deb. 12-3/4s, 2002 428,000
500,000 MFS Communications sr. disc. note stepped-coupon zero%, (9-3/8s, 1/15/99), 2004(e) 316,250
250,000 New City Broadcasting Corp. sr. sub. notes 11-3/8s, 2003 265,000
1,050,000 Panamsat L.P. sr. sub. notes stepped-coupon zero% (11-3/8s, 8/1/98), 2003(e) 721,875
955,000 SPI Holdings Inc. sr. sub. ext reset notes 11.65s, 2002 940,675
------------------------------------------------------------------------------------------------------------------------------
2,671,800
------------------------------------------------------------------------------------------------------------------------------
Forest Products (2.0%)
1,600,000 Gaylord Container Corp. sr. sub. deb. stepped-coupon zero%, (12-3/4s, 5/15/96),
2005(e) 1,392,000
300,000 Stone Container Corp. sr. sub. notes 10-3/4s, 1997 297,000
400,000 Stone Savannah River Pulp & Paper Corp. sr. sub. notes 14-1/8s, 2000 408,500
500,000 Williamhouse Regency Delaware, Inc. sr. sub. deb. 11-1/2s, 2005 540,000
------------------------------------------------------------------------------------------------------------------------------
2,637,500
------------------------------------------------------------------------------------------------------------------------------
Restaurants (2.0%)
$1,250,000 American Restaurant Group, Inc. units stepped-coupon zero%, (14s, 12/15/98),
2005(b)(e) $ 687,500
125,000 American Restaurant Group, Inc. sr. secd. notes 12s, 1998(b) 130,313
250,000 American Restaurant Group, Inc. sr. secd. notes 12s, 1998(b) 260,000
500,000 Family Restaurants Inc. sen. note 9-3/4s, 2002 497,500
1,000 Flagstar Corp. sr. sub. deb. 11-1/4s, 2004 1,025
1,000,000 Flagstar Corp. sr. sub. notes 11-3/8s, 2003 1,016,250
------------------------------------------------------------------------------------------------------------------------------
2,592,588
------------------------------------------------------------------------------------------------------------------------------
Specialty Consumer Products (2.0%)
750,000 Equitable Bag co. sr. notes 12-3/8s, 2002(g) 562,500
650,000 Playtex Family Products Corp. sr sub. notes 9s, 2003 638,625
500,000 Revlon Consumer Products Corp. sr. notes Ser. B, 9-3/8s, 2001 480,000
700,000 Revlon Worldwide Corp. sr. secd. disc. notes zero%, 1998 346,500
1,000,000 International Semi-Tech Corp. sr. secd. disc. notes stepped-coupon zero% (11-1/2s,
8/15/00), 2003(e) 530,000
------------------------------------------------------------------------------------------------------------------------------
2,557,625
------------------------------------------------------------------------------------------------------------------------------
Chemicals (1.8%)
500,000 Agricultural Minerals & Chemicals Corp. sr. notes 10-3/4s, 2003 537,500
125,000 Arcadian Partners L.P. sr. notes 10-3/4s, 2005 130,938
500,000 G-I Holdings Inc. sr notes zero %, 1998(b) 335,000
250,000 Harris Chemical Corp. sr. sub. notes 10-3/4s, 2003 269,375
250,000 OSI Specialties Inc. sr. sub notes 9-1/4s, 2003 256,875
750,000 UCC Investors Holding, Inc. sr. notes 10-1/2s, 2002 821,250
------------------------------------------------------------------------------------------------------------------------------
2,350,938
------------------------------------------------------------------------------------------------------------------------------
<PAGE>
Principal Amount Value
- - ------------------------------------------------------------------------------------------------------------------------------
Cellular Communications (1.7%)
$ 500,000 Cellular, Inc. sr. sub. disc. notes stepped-coupon zero% (11-3/4s, 9/1/98), 2003(e) $ 345,000
300,000 Cencall Communications Corp. sr. disc. notes stepped zero%, (10-1/8s, 1/15/99),
2004(e) 192,000
400,000 Centenial Cellular, sr. notes 8-7/8s, 2001 397,000
1,500,000 Horizon Cellular sr. sub. disc. notes stepped-coupon zero%, (11-3/8s, 10/1/97),
2000(e) 1,110,000
200,000 NEXTEL Communications Inc. sr. disc. note stepped-coupon zero%, (9-3/4s, 2/15/99),
2004(e) 131,500
------------------------------------------------------------------------------------------------------------------------------
2,175,500
------------------------------------------------------------------------------------------------------------------------------
Food (1.6%)
371,000 Del Monte Corp. sub. deb. 12-1/4s, 2002 ($350,000 par acquired 3/12/93, cost
$360,675; $21,000 par acquired 10/18/93, cost $21,000)(c)(d) 381,898
600,000 Fresh Del Monte Produce N.V. Corp. deb. 10s, 2003(b) 594,000
500,000 Mafco, Inc. sr. sub notes 11-7/8s, 2002 527,500
350,000 Specialty Foods Acquisition Corp. sr. sub. notes Ser. B, 11-1/4s, 2003(b) 371,000
450,000 Specialty Foods Acquisition Corp. unit stepped-coupon zero% (13s, 8/15/99),
2005(b)(e) 238,500
------------------------------------------------------------------------------------------------------------------------------
2,112,898
------------------------------------------------------------------------------------------------------------------------------
Cable Television (1.4%)
250,000 Adelphia Communications Corp. notes 9-7/8s, 2005 262,500
100,000 Cablevision Ind. Corp. sub. deb. 9-1/4s, 2008 102,500
420,000 Falcon Holdings Group L.P. sr. sub. notes 11s, 2003(c) 436,800
Cable Television (continued)
$ 650,000 Insight Communications Co. sr. sub. notes 8-1/4s, 2000 $ 661,375
300,000 Summit Communications Group, Inc. sr. sub. deb. 10-1/2s, 2005 325,500
------------------------------------------------------------------------------------------------------------------------------
1,788,675
------------------------------------------------------------------------------------------------------------------------------
Agriculture (1.3%)
300,000 PMI Acquisition Corp. sr. sub notes 10-1/4s, 2003 321,000
585,000 PM Holdings, Inc. sub. deb. stepped-coupon zero% (11-1/2s, 3/1/00), 2005(b)(e) 311,513
446,000 Premium Standard Farms deb. zero%, 2003(b)(f) 333,385
939,000 Premium Standard Farms deb. zero%, 2003(b) 703,076
------------------------------------------------------------------------------------------------------------------------------
1,668,974
------------------------------------------------------------------------------------------------------------------------------
Steel (1.3%)
250,000 Armco Inc. sr. notes 11-3/8s, 1999 275,000
450,000 Earle M. Jorgensen Co. sr. notes 10-3/4s, 2000 474,750
400,000 WCI Steel Inc., sr. notes 10-1/2s, 2002(b) 429,000
450,000 Wheeling-Pittsburgh Corp. sr. notes 9-3/8s, 2003 463,500
------------------------------------------------------------------------------------------------------------------------------
1,642,250
------------------------------------------------------------------------------------------------------------------------------
Insurance (1.2%)
500,000 American Annuity Group, Inc. sr. notes 9-1/2s, 2001 513,750
500,000 Penn Corp. Fin. Group sr. sub. notes 9-1/4s, 2003 515,000
275,000 Reliance Group Holdings sr. notes 9s, 2000 280,500
200,000 Reliance Group Holdings sr. sub. notes 9-3/4s, 2003 204,000
------------------------------------------------------------------------------------------------------------------------------
1,513,250
------------------------------------------------------------------------------------------------------------------------------
<PAGE>
Principal Amount Value
- - ------------------------------------------------------------------------------------------------------------------------------
Containers (1.1%)
$ 500,000 Anchor Glass Container Corp. sr. sub. deb. 9-7/8s, 2008 $ 525,000
750,000 Ivex Packaging Corp. sr. sub. notes 12-1/2s, 2002 834,375
100,000 Stone Container, 9-7/8s, 2001 98,000
------------------------------------------------------------------------------------------------------------------------------
1,457,375
------------------------------------------------------------------------------------------------------------------------------
Shipping (1.0%)
500,000 OMI Corp. sr. notes 10-1/4s, 2003 517,500
750,000 Viking Star Shipping Co. sr. secd., notes 9-5/8s, 2003(b) 813,750
------------------------------------------------------------------------------------------------------------------------------
1,331,250
------------------------------------------------------------------------------------------------------------------------------
Environmental Services (0.9%)
500,000 Envirosource, Inc. sr. notes 9-3/4s, 2003 502,500
650,000 ICF Kaiser Intl. Inc. units 12s, 2003 677,625
------------------------------------------------------------------------------------------------------------------------------
1,180,125
------------------------------------------------------------------------------------------------------------------------------
Motion Picture Distributors (0.9%)
600,000 Act III Theatres sr. sub. notes 11-7/8s, 2003 676,500
195,000 Cinemark Mexico sr. notes 12s, 2003(b) 193,538
275,000 Cinemark USA sr. notes 12s, 2002 308,000
------------------------------------------------------------------------------------------------------------------------------
1,178,038
------------------------------------------------------------------------------------------------------------------------------
Oil and Gas (0.9 %)
100,000 Maxus Energy Corp. notes 9-3/8s, 2003 99,500
200,000 Noble Drilling deb. 9-1/4s, 2003 204,000
750,000 TransTexas Gas Corp., sr. secd., notes 10-1/2s, 2000 810,000
------------------------------------------------------------------------------------------------------------------------------
1,113,500
------------------------------------------------------------------------------------------------------------------------------
Advertising (0.8%)
$ 500,000 Katz Corp. sr. sub. notes 12-3/4s, 2002 $ 560,000
500,000 Universal Outdoor Inc. sub. deb. 11s, 2003 510,000
------------------------------------------------------------------------------------------------------------------------------
1,070,000
------------------------------------------------------------------------------------------------------------------------------
Food Chains (0.8%)
2,500,000 Grand Union Capital Corp. gtd. sr. sub. notes zero%, 2007 318,750
250,000 Grand Union Capital Corp. sr. notes stepped-coupon zero% (15s, 7/15/99), 2004(e) 110,000
250,000 Megafoods Stores Inc. sr. notes 10-1/4s, 2000 250,625
500,000 Southland Corp. 1st priority sr. sub. deb. 5s, 2003 371,250
------------------------------------------------------------------------------------------------------------------------------
1,050,625
------------------------------------------------------------------------------------------------------------------------------
Real Estate (0.8%)
500,000 John Q. Hammons Hotel, 8-7/8s, 2004 492,500
300,000 Kearny St. R.E.L.P. Pay-thru. notes 9.56s, 2003 311,250
200,000 Scotsman Group Inc., sr. secd. notes 9-1/2s, 2000 204,500
------------------------------------------------------------------------------------------------------------------------------
1,008,250
------------------------------------------------------------------------------------------------------------------------------
Electric Utilities (0.8%)
507,199 Midland Cogeneration Venture L.P. sr. secd. lease oblig. bonds, 10.33s, 2002 536,363
400,000 Midland Funding Corp. II sub. secd. lease oblig. bonds Ser. B 13-1/4s, 2006 464,000
------------------------------------------------------------------------------------------------------------------------------
1,000,363
------------------------------------------------------------------------------------------------------------------------------
<PAGE>
Principal Amount Value
- - ------------------------------------------------------------------------------------------------------------------------------
Electrical Equipment (0.8%)
$ 850,000 Amphenol Corp. sr. sub. notes 12-3/4s, 2002 $ 977,500
------------------------------------------------------------------------------------------------------------------------------
Finance (0.7%)
550,000 Comdata Network, Inc. sr. notes 12-1/2s, 1999 607,750
300,000 Comdata Network, Inc. sr. sub. deb. 13-1/4s, 2002 336,000
------------------------------------------------------------------------------------------------------------------------------
943,750
------------------------------------------------------------------------------------------------------------------------------
Automotive Parts (0.7%)
750,000 Key Plastics Corp. sr. notes 14s, 1999 907,500
------------------------------------------------------------------------------------------------------------------------------
Consumer Services (0.7%)
330,000 Arizona Charlies Corp. sub. deb. 12s, 2000(b) 328,350
250,000 Solon Automated Services, Inc. sr. notes 12-3/4s, 2001 276,250
250,000 Solon Automated Services, Inc. sr. sub. deb. 13-3/4s, 2002 280,625
------------------------------------------------------------------------------------------------------------------------------
885,225
------------------------------------------------------------------------------------------------------------------------------
Building Products (0.6%)
250,000 Overhead Door Corp. sr. notes 12-1/4s, 2000 277,500
250,000 Southdown, Inc. sr. sub. deb. Ser. B, 14s, 2001 292,500
250,000 Triangle Pacific Corp. sr. notes 10-1/2s, 2003 265,000
------------------------------------------------------------------------------------------------------------------------------
835,000
------------------------------------------------------------------------------------------------------------------------------
Publishing (0.6%)
1,000,000 Marvel Parent Holdings, Inc. sr. secd. disc. notes zero%, 1998 655,000
150,000 Marvel III Hldgs., 9-1/8s, 1998(b) 148,500
------------------------------------------------------------------------------------------------------------------------------
803,500
------------------------------------------------------------------------------------------------------------------------------
School Busses (0.6%)
700,000 Blue Bird Acquisition Corp. sub. sr. deb. Ser. B, 11-3/4s, 2002 763,000
------------------------------------------------------------------------------------------------------------------------------
Apparel (0.5%)
$ 600,000 Guess, Inc. sr. sub. notes 9-1/2s, 2003 (b) $ 624,000
------------------------------------------------------------------------------------------------------------------------------
Business Services and Equipment (0.4%)
300,000 Specialty Equipment Co. sr. sub. notes 11-3/8s, 2003 316,500
150,000 Paging Network, Inc. sr. sub. notes 8-7/8s, 2006 148,875
------------------------------------------------------------------------------------------------------------------------------
465,375
------------------------------------------------------------------------------------------------------------------------------
Airlines (0.3%)
350,000 USAir, Inc. pass-thru certificates, 10-3/8s, 2013 353,938
------------------------------------------------------------------------------------------------------------------------------
Nursing Homes (0.2%)
250,000 Hillhaven Corp. sr. sub. notes 10-1/8s, 2001 266,250
------------------------------------------------------------------------------------------------------------------------------
Computers (0.2%)
1,665,000 DR Holdings Inc. sr. sub. deb. 15-1/2s, 2002 (g) 237,263
------------------------------------------------------------------------------------------------------------------------------
Banks (0.2%)
200,000 Chevy Chase Savings Bank Inc. sub. notes 9-1/4s, 2005 208,000
------------------------------------------------------------------------------------------------------------------------------
Medical Supplies (0.1%)
100,000 Wright Medical Technology Inc. sr. secd. notes 10-3/4s, 2000 (b) 103,000
------------------------------------------------------------------------------------------------------------------------------
Total Corporate Bonds and Notes
(cost $57,577,760) $59,198,251
------------------------------------------------------------------------------------------------------------------------------
<PAGE>
Convertible Bonds (37.8%)(a)
- - ------------------------------------------------------------------------------------------------------------------------------
Principal Amount Value
- - ------------------------------------------------------------------------------------------------------------------------------
Computer Equipment (5.4%)
$ 950,000 Computer Products, Inc. cv. sub. deb. 9-1/2s, 1997 $ 983,250
1,500,000 Conner Peripherals Inc. cv. sub. deb. 6-1/2s, 2002 1,460,625
1,000,000 Data General Corp. cv. sub. deb. 7-3/4s, 2001 920,000
2,500,000 Maxtor Corp. cv. sub. deb. 5-3/4s, 2012 1,543,750
2,200,000 Seagate Technology Inc. cv. sub. deb. 6-3/4s, 2012 2,037,750
------------------------------------------------------------------------------------------------------------------------------
6,945,375
------------------------------------------------------------------------------------------------------------------------------
Electronics (3.0%)
1,200,000 GenRad, Inc. cv. sub. deb. 7-1/4s, 2011 996,000
1,100,000 M/A Com, Inc. cv. sub. deb. 9-1/4s, 2006 1,102,750
500,000 Network Equipment Technologies Inc. cv. sub. deb. 7-1/4s, 2014 395,000
1,700,000 Richardsons Electronics Ltd. cv. sub. deb. 7-1/4, 2006 1,360,000
------------------------------------------------------------------------------------------------------------------------------
3,853,750
------------------------------------------------------------------------------------------------------------------------------
Environmental Control (3.0%)
1,200,000 Enclean, Inc. cv. sub. deb. 7-1/2s, 2001 1,248,000
1,000,000 OHM Corp. cv. sub. deb. 8s, 2006 1,002,500
1,500,000 Riedel Environmental Technologies, Inc. sub. euro cv. deb. 7s, 1999(g) 375,000
1,300,000 Weston (Roy F.) Inc. cv. deb. 7s, 2002 1,170,000
------------------------------------------------------------------------------------------------------------------------------
3,795,500
------------------------------------------------------------------------------------------------------------------------------
Banks (2.8%)
1,500,000 Great Lakes Bancorp. cv. sub. deb. 7-1/4s, 2011 1,485,000
719,000 Independence Bancorp Inc. cv. sub. deb. 7s, 2011 756,748
300,000 Michigan National Corp. unit 8s, 1998 327,000
1,000,000 Midlantic Banks Inc. cv. sub. deb. 8-1/4s, 2010 1,020,000
------------------------------------------------------------------------------------------------------------------------------
3,588,748
------------------------------------------------------------------------------------------------------------------------------
Restaurants (2.6%)
$1,000,000 Chiquita Brands Intl. conv. deb. 7s, 2001 $ 933,750
2,500,000 Flagstar Corp. cv. jr. sub. deb. 10s, 2014 2,353,125
------------------------------------------------------------------------------------------------------------------------------
3,286,875
------------------------------------------------------------------------------------------------------------------------------
Conglomerates (2.2%)
1,000,000 Fugua Industries, Inc. cv. deb. 6-1/2s, 2002 741,250
1,200,000 Nortek, Inc. sr. cv. deb. 7-1/2s, 2006 978,000
1,100,000 UNC Inc. cv. sub. deb. 7-1/2s, 2006 1,097,250
------------------------------------------------------------------------------------------------------------------------------
2,816,500
------------------------------------------------------------------------------------------------------------------------------
Oil and Gas (2.0%)
350,000 Kelley Oil Corp. sub. cv. deb. 11-1/2s, 2002(b) 392,000
2,250,000 Wainoco Oil Corp. cv. sub. deb. 7-3/4s, 2014 2,210,625
------------------------------------------------------------------------------------------------------------------------------
2,602,625
------------------------------------------------------------------------------------------------------------------------------
Textiles (1.7%)
1,000,000 Dixie Yarns, Inc. cv. deb. 7s, 2012 837,500
1,500,000 Fieldcrest Cannon, Inc. cv. sub. deb. 6s, 2012 1,331,250
------------------------------------------------------------------------------------------------------------------------------
2,168,750
------------------------------------------------------------------------------------------------------------------------------
Chemicals (1.6%)
1,300,000 Quantum Chemical Corp. cv. exch. sub. deb. 6s, 2011 1,196,000
800,000 Terra Industries, Inc. cv. deb. 8-1/2s, 2012 888,000
------------------------------------------------------------------------------------------------------------------------------
2,084,000
------------------------------------------------------------------------------------------------------------------------------
Health Care (1.3%)
1,500,000 Universal Health Services, Inc. cv. sub. deb. 7-1/2s, 2008 1,732,500
------------------------------------------------------------------------------------------------------------------------------
Insurance (1.3%)
1,650,000 Alexander & Alexander Services, Inc. cv. sub. deb. 11s, 2007 1,707,750
------------------------------------------------------------------------------------------------------------------------------
<PAGE>
Pipelines (1.2%)
$1,200,000 SFP Pipeline Holdings, Inc. variable rate exch. deb. 9.67s, 2010 (c) $ 1,528,500
------------------------------------------------------------------------------------------------------------------------------
Aviation Services (1.1%)
2,500,000 Alaska Air Group, Inc. cv. deb. zero%, 2006 996,875
500,000 Hudson General Corp. cv. sub. deb. 7s, 2011 414,375
------------------------------------------------------------------------------------------------------------------------------
1,411,250
------------------------------------------------------------------------------------------------------------------------------
Media (1.1%)
1,324,000 Time Warner, Inc. cv. deb. 8-3/4s, 2015 1,396,820
------------------------------------------------------------------------------------------------------------------------------
Food Chains (1.1%)
1,250,000 Kroger Co. cv. deb. 8-1/4s, 2011 1,334,375
------------------------------------------------------------------------------------------------------------------------------
Business Services (1.0%)
1,800,000 National Education Corp. cv. sub. deb. 6-1/2s, 2011 1,282,500
------------------------------------------------------------------------------------------------------------------------------
Non-Ferrous Metals (0.9%)
3,500,000 Freeport-McMoran, Inc. cv. deb. zero%, 2006 1,168,125
------------------------------------------------------------------------------------------------------------------------------
Aerospace (0.9%)
1,500,000 EDO Corp. cv. sub. deb. 7s, 2011 1,164,375
------------------------------------------------------------------------------------------------------------------------------
Tobacco (0.9%)
1,365,000 Standard Commercial Corp. cv. sub. deb. 7-1/4s, 2007 1,163,663
------------------------------------------------------------------------------------------------------------------------------
Specialty Consumer Products (0.8%)
800,000 ADT Inc. Ltd. cv. deb. 6s, 2002 1,088,000
------------------------------------------------------------------------------------------------------------------------------
Medical Supplies (0.7%)
1,050,000 Cabot Medical Corp. cv. deb. 7-1/2s, 1999 945,000
------------------------------------------------------------------------------------------------------------------------------
Retail (0.7%)
700,000 Perry Drug Stores, Inc. cv. sub. deb. 8-1/2s, 2010 644,000
250,000 Waban, Inc. cv. deb. 6-1/2s, 2002 245,000
------------------------------------------------------------------------------------------------------------------------------
889,000
------------------------------------------------------------------------------------------------------------------------------
Cellular Communications (0.5%)
$ 850,000 Cellular Communications, Inc. cv. sub. deb. zero%, 1999(b) $ 650,250
------------------------------------------------------------------------------------------------------------------------------
Total Convertible Bonds
(cost $41,793,066) $48,604,231
------------------------------------------------------------------------------------------------------------------------------
Convertible Preferred Stocks (8.0%)(a)
------------------------------------------------------------------------------------------------------------------------------
Number of Shares
Steel (1.6%)
24,500 Armco Inc. Class A, 4.50, cv. pfd. 1,225,000
15,000 Bethlehem Steel Corp. 5.00, cum. cv. pfd. 813,750
------------------------------------------------------------------------------------------------------------------------------
2,038,750
------------------------------------------------------------------------------------------------------------------------------
Oil and Gas (1.4%)
32,200 Maxus Energy Corp. 4.00, cv. pfd. 1,344,350
25,325 Santa Fe Energy Resources, Inc. 1.40, cv. pfd. 503,334
------------------------------------------------------------------------------------------------------------------------------
1,847,684
------------------------------------------------------------------------------------------------------------------------------
Computers (1.2%)
30,000 Unisys Corp. Ser. A, 3.75, cv. pfd. 1,507,500
------------------------------------------------------------------------------------------------------------------------------
Forest Products (1.1%)
56,000 Boise Cascade Corp. Ser. G, 1.58, cv. pfd. 1,400,000
------------------------------------------------------------------------------------------------------------------------------
Insurance (1.0%)
27,400 USF&G Corp. Ser. A, 4.10,cv. pfd. 1,387,125
------------------------------------------------------------------------------------------------------------------------------
Construction (0.9%)
50,000 Perini Corp. dep. shares 2.125, cv. pfd. 1,137,500
------------------------------------------------------------------------------------------------------------------------------
Non-Ferrous Metals (0.5%)
13,000 Freeport-McMoran, Inc., 8.75, cv. pfd.(b) 653,250
------------------------------------------------------------------------------------------------------------------------------
Specialty Consumer Products (0.3%)
27,800 Galoob (Lewis) Toys, Inc. 1.70, cv. pfd.(g) 378,775
------------------------------------------------------------------------------------------------------------------------------
Total Convertible Preferred Stocks (cost $9,403,446) $10,350,584
------------------------------------------------------------------------------------------------------------------------------
<PAGE>
Preferred Stocks (1.3%)(a)
- - ------------------------------------------------------------------------------------------------------------------------------
Number of Shares Value
- - ------------------------------------------------------------------------------------------------------------------------------
10,000 National Intergroup, Inc. 4.20, pfd.(c) $ 375,000
306,000 Playtex Family Products Corp. 0.14, jr. pfd. (acquired 2/6/92, cost $469,679)(d) 612,000
25,000 Supermarkets General Holdings Corp. 3.52, exch. pfd.(c) 721,875
------------------------------------------------------------------------------------------------------------------------------
Total Preferred Stock
(cost $1,455,929) $1,708,875
------------------------------------------------------------------------------------------------------------------------------
Common Stocks (0.8%)(a)
- - ------------------------------------------------------------------------------------------------------------------------------
Number of Shares Value
- - ------------------------------------------------------------------------------------------------------------------------------
1,000 Arcadian (acquired 1/19/94, cost $31,400)(d) 32,500
61 CDK Holding Corp. rights (acquired 10/31/88, cost $3,440)(d) 1,952
25,142 Charter Medical Corp.(g) 587,694
4,737 Computervision Corp. (acquired 8/21/92,cost $42,633)(d) 14,507
4,126 Grand Casinos, Inc.(g) 120,170
197 PMI Holdings Corp.(b) 13,790
94 Premium Holdings, L.P. (acquired 1/4/94, cost $5,640)(d) 9,400
71 RJR Nabisco Holdings Corp.(g) 488
14,351 RS Lady Luck Gaming Corp.(g) 157,861
9,232 SPI Holdings Inc. Class B 58,854
27,066 Solon Automated Services, Inc. (acquired 6/18/92, cost $16,163)(d) 16,916
6,750 Specialty Foods Corp. 13,500
1,477 Taj Mahal Holding Corp. Class A 32,494
------------------------------------------------------------------------------------------------------------------------------
Total Common Stocks
(cost $405,810) $1,060,126
------------------------------------------------------------------------------------------------------------------------------
Yankee Bonds and Notes (0.4%)(a)
Principal Amount Value
- - ------------------------------------------------------------------------------------------------------------------------------
$500,000 Banco Rio De La Plata notes, 8-3/4s, 2003 481,563
90,000 Banco de Galicia Inc. sr. notes, 9s, 2003 87,525
------------------------------------------------------------------------------------------------------------------------------
Total Yankee Bonds and Notes (cost $588,813) $ 569,088
------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Warrants (0.3%)(a)(g)
- - ------------------------------------------------------------------------------------------------------------------------------
Expiration
Number of Warrants Date Value
- - ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
15,000 Becker Gaming Corp.(b) 11/15/00 $ 37,500
80 Belle Casinos Inc. 10/15/03 3,200
102 CDK Holding Corp. Class A (acquired 10/31/88, cost $5,694)(d) 07/07/99 3,264
109 CDK Holding Corp. Class B (acquired 10/31/88, cost $3,045)(d) 07/07/99 3,270
620 Casino America Inc. 11/15/96 5,735
4,980 Casino Magic Finance Corp. 10/14/96 9,960
2,160 Cinemark Mexico 08/01/03 19,980
28,850 Gaylord Container Corp. 07/31/96 126,219
900 Presidential Riverboat Casinos 09/15/96 3,375
10,000 Southdown, Inc. (acquired 10/31/91, cost $30,000)(d) 11/01/96 132,500
21 Wright Medical Technology Inc. 06/30/03 2,258
------------------------------------------------------------------------------------------------------------------------------
Total Warrants
(cost $238,411) $347,261
------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Short-Term Investments (4.2%)(a)(cost $5,444,515)
- - ------------------------------------------------------------------------------------------------------------------------------
Principal Amount Value
- - ------------------------------------------------------------------------------------------------------------------------------
<S> <C>
$5,444,000 Interest in $397,671,000 joint repurchase agreement dated February 28, 1994 with
Kidder Peabody, due March 1, 1994 with respect to various U.S. Treasury
obligations -- maturity value of $5,444,515 for an effective yield
of 3.43% $ 5,444,515
------------------------------------------------------------------------------------------------------------------------------
Total Investments
(cost $116,907,750)(h) $127,282,931
==============================================================================================================================
<PAGE>
<FN>
Notes
(a)Percentages indicated are based on total net assets of $128,746,190, which correspond to a net asset value
per share of $9.91.
(b)Security exempt from registration under 144A of the Securities Act of 1933. These securities may be resold
in transactions exempt from registration, normally to qualified institutional buyers. At February 28, 1994
these securities were valued at $12,362,715 or 9.6% of net assets.
(c)Income may be received in cash or additional securities at the discretion of the issuer.
(d)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 February 28, 1994 was $1,255,977 or 1.0% of net assets.
(e)Cash interest will be paid on these obligations at the stated rate beginning on the stated date.
(f)This security, valued at $333,385 or 0.3% of the Fund's net assets has been purchased on a "forward
commitment" basis -- that is, the fund has agreed to take delivery of and make payment for such security beyond
the settlement time of five business days after the trade date and subsequent to the date of this report. The
purchase price and interest rate of such security are fixed at the trade date, although the Fund does not earn
any interest on such security until the settlement date.
(g)Non-income-producing security.
(h)The aggregate identified cost for federal income tax purposes is $116,907,750, resulting in gross unrealized
appreciation and depreciation of $12,726,706 and $2,351,525, respectively, or net unrealized appreciation of
$10,375,181.
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Statement of
assets and liabilities
February 28, 1994
<TABLE>
<S> <S> <C> <C>
-------------------------------------------------------------------------------------------
Assets Investments in securities, at value (identified cost $116,907,750) (Note 1) $127,282,931
Cash 943
Dividends, interest and other receivables 2,670,954
Receivable for securities sold 1,378,300
-------------------------------------------------------------------------------------------
Total assets 131,333,128
Liabilities Payable for securities purchased $1,306,335
Distributions payable to shareholders 924,652
Payable for compensation of Manager (Note 2) 234,818
Payable for administrative services (Note 2) 1,494
Payable for compensation of Trustees (Note 2) 324
Payable for investor servicing and custodian fees (Note 2) 10,167
Other accrued expenses 109,148
-------------------------------------------------------------------------------------------
Total liabilities 2,586,938
-------------------------------------------------------------------------------------------
Net assets $128,746,190
===========================================================================================
Represented by Paid-in capital (Note 4) $120,217,524
Undistributed net investment income 256,826
Accumulated net realized loss on investment transactions (2,103,341)
Net unrealized appreciation of investments 10,375,181
-------------------------------------------------------------------------------------------
Total--Representing net assets applicable to capital shares outstanding $128,746,190
===========================================================================================
Computation of Net asset value per share
net asset ($128,746,190 divided by 12,987,330 shares)
value $ 9.91
===========================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Statement of
operations
Six months ended February 28, 1994
<TABLE>
<S> <C> <C>
------------------------------------------------------------------
Investment Income:
Interest $ 5,241,095
Dividends 443,855
------------------------------------------------------------------
Total investment income 5,684,950
Expenses:
Compensation of Manager (Note 2) $467,582
Investor servicing and custodian fees 58,213
(Note 2)
Compensation of Trustees (Note 2) 6,994
Reports to shareholders 43,508
Exchange listing fees 12,019
Auditing 22,611
Legal 9,961
Postage 68,474
Other 591
------------------------------------------------------------------
Total expenses 689,953
------------------------------------------------------------------
Net investment income 4,994,997
------------------------------------------------------------------
Net realized gain on investments
(Notes 1 and 3) 7,137,530
Net unrealized depreciation of
investments during the period (1,299,367)
------------------------------------------------------------------
Net gain on investments 5,838,163
------------------------------------------------------------------
Net increase in net assets resulting
from operations $10,833,160
==================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Statement of
changes in net assets
<TABLE>
<CAPTION>
Six months
ended Year ended
February August
28 31
1994 1993
- - -------------------------------------------------------------------
<S> <C> <C>
Increase in net assets
Operations:
Net investment income $ 4,994,997 $ 10,849,629
Net realized gain on investments 7,137,530 8,922,192
Net unrealized appreciation/
depreciation of investments (1,299,367) 4,586,371
- - -------------------------------------------------------------------
Net increase in net assets
resulting from operations 10,833,160 24,358,192
Distributions to shareholders from
Net investment income (5,773,484) (10,849,629)
In excess of net investment
(Note 1) -- (261,376)
Increase in capital share
transactions from reinvestment of
distributions 401,584 1,129,005
- - -------------------------------------------------------------------
Total increase in net assets 5,461,260 14,376,192
Net assets
Beginning of year 123,284,930 108,908,738
- - -------------------------------------------------------------------
End of year (including
undistributed and distributions
in excess of net investment
income of $256,826 and
$(890,635), respectively) $128,746,190 $123,284,930
===================================================================
Number of fund shares
Shares outstanding at beginning of
period 12,945,798 12,821,159
Shares issued in connection with
reinvestment of distributions 41,532 124,639
- - -------------------------------------------------------------------
Shares outstanding at end of period 12,987,330 12,945,798
===================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Financial
Highlights*
(For a share
outstanding
throughout the
period)
<TABLE>
<CAPTION>
For the
period
Six July 9, 1987
months (commencement
ended of operations)
February to
28 Year ended August 31 August 31
-----------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988 1987
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of Period $9.52 $8.49 $7.56 $6.94 $8.37 $8.32 $9.24 $9.30
-----------------------------------------------------------------------------------------------------------------------------
Investment Operations
Net Investment Income .39 .84 .88 .83 .83 .93 .88 .09
Net Realized and Unrealized
Gain (Loss) on
Investments .45 1.05 .99 .65 (1.32) (.03) (.95) (.08)
-----------------------------------------------------------------------------------------------------------------------------
Total from Investment
Operations .84 1.89 1.87 1.48 (.49) .90 (.07) .01
-----------------------------------------------------------------------------------------------------------------------------
Less Distributions from:
Net Investment Income (.45) (.84) (.94) (.85) (.92) (.85) (.85) (.07)
In excess of net investment
income -- (.02) -- -- -- -- -- --
Net Realized Gain on
Investments -- -- -- (.01) (.02) -- -- --
-----------------------------------------------------------------------------------------------------------------------------
Total Distributions (.45) (.86) (.94) (.86) (.94) (.85) (.85) (.07)
-----------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of
Period $9.91 $9.52 $8.49 $7.56 $6.94 $8.37 $8.32 $9.24
-----------------------------------------------------------------------------------------------------------------------------
Market Value, End of Period $10.000 $10.000 $8.875 $7.625 $5.875 $7.875 $8.000 $9.625
-----------------------------------------------------------------------------------------------------------------------------
Total Investment Return at
Market Value (%) (c) 9.38(a) 23.78 30.71 48.65 (14.36) 9.45 (7.89) (12.71)
(a)
-----------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period
(in thousands) $128,746 $123,285 $108,909 $95,770 $87,866 $105,845 $105,304 $116,691
-----------------------------------------------------------------------------------------------------------------------------
Ratio of Expenses to
Average Net Assets (%) 1.11(a) 1.03 1.13 1.31 1.26 1.15 1.18 .34(a)
Ratio of Net Investment
Income to Average Net
Assets (%) 7.97(a) 9.39 10.92 12.35 11.07 11.00 10.52 2.02(a)
Portfolio Turnover (%) 31.39(b) 71.63 45.84 68.36 53.30 69.68 85.34 12.90(b)
<FN>
* Financial highlights for periods ended through August 31, 1992 have been restated to conform with requirements
issued by the SEC in December 1992.
(a) Annualized.
(b) Not Annualized.
(c) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges. All
returns are annualized.
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Notes to
financial statements
February 28, 1994
- - -----------------------------------------------------------------------------
Note 1 Significant accounting policies
The Fund is registered under the Investment Company Act of 1940, as amended,
as a diversified, closed-end management investment company. The Fund's
primary investment objective is high current income; its secondary objective
is capital appreciation. The Fund invests in high-yielding convertible
securities. The Fund seeks to augment current income by investing in
nonconvertible high-yielding, lower-rated, or nonrated debt securities, which
are believed not to involve undue risk to income or principal.
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--the last reported bid price, except that
certain U.S. government obligations are stated at the mean between the last
reported bid and asked prices. Securities quoted in foreign currencies are
translated into U.S. dollars at the current exchange rate. Market quotations
are not considered to be readily available for long-term corporate bonds and
notes; such investments are stated at fair value on the basis of valuations
furnished by a pricing service, approved by the Trustees, which determines
valuations for normal, institutional-size trading units of such securities
using methods based on market transactions for comparable securities and
various relationships between securities 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, including restricted securities, 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 and certain other
accounts 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 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. The Fund's Manager 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.
Discount on zero coupon bonds, original issue discount bonds, stepped-coupon
bonds and payment-in-kind bonds are accreted according to the effective
interest method.
Foreign currency-denominated receivables and payables are "marked-to-market"
using the current exchange rate. The fluctuation between the original
exchange rate and the current exchange rate is recorded as unrealized gain or
loss. Upon receipt or payment, the Fund realizes a gain or loss amounting to
the difference between the original value and the ending
value of the receivable or payable. Foreign currency gains and losses related
to interest receivable are reported as part of
interest income.
E) Forward currency contracts A forward currency contract is an agreement
between two parties to buy and sell a currency at a set price on a future
date. 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 by the Fund 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 aggre-
<PAGE>
gate face value in U.S. dollars at the time the contract was opened; however,
management believes the likelihood of such a loss to be remote.
F) Federal taxes It is the policy of the Fund to distribute all of its 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. Therefore, no provision
has been made for federal
taxes on income, capital gains or unrealized appreciation of securities held.
At August 31, 1993 the Fund has a capital loss carryover of approximately
$9,161,665, which may be available to offset realized capital gains to the
extent provided by regulations. Of this amount, $175,001 and $9,016,664 will
expire August 31, 1998 and 1999, respectively. To the extent that capital
loss carryovers are used to offset realized capital gains, it is unlikely
that gains so offset will be distributed to shareholders, since any
distribution might be taxable as ordinary income.
G) 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. Based upon
investment results for the year ended August 31, 1993, $0.02 of per share
distributions have been designated as distributions in excess of net
investment income and relate to a permanent tax difference of foreign
currency gains.
- - -----------------------------------------------------------------------------
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 weekly net assets of the
Fund. Under the management contract, such fee is based on the following
annual rates: 0.75% of the first $500 million of average weekly net assets,
0.65% of the next $500 million, 0.60% of the next $500 million and 0.55% of
any amount over $1.5 billion, subject to reductions in any year 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 also reimburses the Manager 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 $630 and an
additional fee for each Trustees' meeting attended. Trustees who are not
interested persons of the Manager and who serve on committees of the Trustees
receive additional fees for attendance at certain committee meetings.
Custodial functions for the Fund 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.
Fees paid for these investor servicing and custodial functions for the six
months ended February 28, 1994 amounted to $58,213.
Investor servicing and custodian fees reported in the Statement of operations
for the six months ended February 28, 1994 have been reduced by credits
allowed by PFTC.
- - -----------------------------------------------------------------------------
Note 3 Purchases and sales of securities
During the six months ended February 28, 1994, purchases and sales of
investment securities other than short-term investments aggregated
$38,116,605 and $40,718,288, 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.
<PAGE>
- - -----------------------------------------------------------------------------
Note 4 Reclassification of Capital Accounts
Effective September 1, 1993, Putnam High Income Convertible and Bond Fund
adopted the provisions of Statement of Position 93-2 "Determination,
Disclosure and Financial Statement Presentation of Income, Capital Gain and
Return of Capital Distributions by Investment Companies (SOP)". The purpose
of this SOP is to report the accumulated net investment income (loss) and
accumulated net realized gain (loss) accounts in such a manner as to
approximate amounts available for future distributions (or to offset future
realized capital gains) and to achieve uniformity in the presentation of
distributions by investment companies.
As a result of the SOP, the Fund has reclassified amounts to reflect an
increase in paid-in capital of $192,858, an increase in undistributed net
investment income of $1,925,948 and an increase in accumulated net realized
loss on investments of $2,118,806.
Selected
Quarterly
Data
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
--------------------------------------------------------------------------------------------------------------------
Feb. 28 Nov. 30 Aug. 31 May 31 Feb. 28 Nov. 30 Aug. 31 May 31 Feb. 29 Nov. 30
-------- -------- -------- -------- -------- -------- -------- -------- -------- ---------
1994 1993 1993 1993 1993 1992 1992 1992 1992 1991
- - ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total
investment
income
Total $ 2,792,040$ 2,892,910$ 2,948,672$ 2,908,563$ 3,219,026$ 2,962,280$ 3,166,318$ 2,991,628$ 3,117,265$ 3,126,759
Per
share $ .22$ .23$ .22$ .22$ .26$ .23$ .24$ .24$ .25$ .24
- - ---------------------------------------------------------------------------------------------------------------------------------
Net
investment
income
Total $ 2,449,653$ 2,545,344$ 2,668,240$ 2,578,556$ 2,920,535$ 2,682,298$ 2,880,113$ 2,676,755$ 2,837,897$ 2,843,963
Per
share $ .19$ .20$ .20$ .20$ .23$ .21$ .22$ .21$ .23$ .22
Net
realized
and
unrealized
gain on
investments
Total $ 2,732,945$ 3,105,218$ 3,395,626$ 4,222,993$ 4,412,959$ 1,476,985$ 769,794$ 1,856,639$ 9,485,519$ 625,723
Per
share $ .21$ .24$ .26$ .33$ .34$ .12$ .06$ .14$ .74$ .05
- - ---------------------------------------------------------------------------------------------------------------------------------
Net
increase
in net
assets
resulting
from
operations
Total $ 5,182,598$ 5,650,562$ 6,063,866$ 6,801,549$ 7,333,494$ 4,159,283$ 3,649,907$ 4,533,394$ 12,323,416$ 3,469,686
Per
share $ .40$ .44$ .46$ .53$ .57$ .33$ .28$ .35$ .97$ .27
- - ---------------------------------------------------------------------------------------------------------------------------------
Net
assets
at end
of
period
Total $128,746,190$126,456,409$123,284,930$119,697,299$115,365,761$110,611,045$108,908,738$107,714,983$105,634,872$96,795,756
Per
share $ 9.91$ 9.75$ 9.52$ 9.27$ 8.95$ 8.61$ 8.49$ 8.42$ 8.28$ 7.62
=================================================================================================================================
</TABLE>
<PAGE>
Fund
Performance
Supplement
Putnam High Income Convertible and Bond Fund invests in lower-rated,
higher-yielding securities, which may 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 financial condition, or in general economic
conditions, may hinder the issuer's ability to pay principal and interest on
securities. The fund is managed for high current income primarily through
investments in high-yielding convertible and debt securities, with a
secondary objective of capital appreciation.
Salomon Brothers 7-10 Year Treasury Index, an unmanaged list of Treasury
bonds, is used as a general gauge of the market for fixed income securities,
while the Merrill Lynch All-Convertible Bond Index is an unmanaged list of
convertible securities. Neither index takes into account brokerage
commissions or other costs. The fund's portfolio contains securities that do
not match those in the indexes.
The fund performance supplement has been prepared by Putnam Management to
provide additional information about the fund and the indexes used for
performance comparisons. The information is not part of the portfolio of
investments owned or the financial statements.
<PAGE>
Putnam
High Income
Convertible
and Bond
Fund
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
Investor servicing agent
Putnam Investor Services
Mailing address:
P.O. Box 41203
Providence, RI 02940-1203
1-800-225-1581
Custodian
Putnam Fiduciary
Trust Company
Legal Counsel
Ropes & Gray
Independent accountants
Price Waterhouse
(DALBAR LOGO)
Putnam Investor Services
has received the DALBAR
award each year since the
award's 1990 inception.
In more than 10,000 tests
of 38 shareholder
service components,
Putnam outperformed
the industry standard
in every category.
MHI-11531
<PAGE>
Officers
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Peter Carman
Vice President
Thomas V. Reilly
Vice President
Charles Pohl
Vice President
and Fund Manager
Jennifer Leichter
Vice President
and Fund Manager
William N. Shiebler
Vice President
John R. Verani
Vice President
Paul O'Neil
Vice President
John D. Hughes
Vice President
and Treasurer
Beverly Marcus
Clerk and
Assistant Treasurer
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,
A.J.C. Smith, W. Nicholas Thorndike
Associate Trustee: Alla O'Brien
Call 1-800-634-1587 weekdays from 9 a.m. to 5 p.m. Eastern time for
up-to-date information about the fund's NAV or to request Putnam's
quarterly Closed-End Fund Commentary.
PUTNAMINVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
================
Bulk Rate
U.S. Postage
Paid
Boston, MA
Permit No. 53749
================
<PAGE>
APPENDIX TO FORM N-30D FILINGS TO DESCRIBE DIFFERENCES BETWEEN PRINTED
AND EDGAR-FILED TEXTS:
(1) Bold and italic typefaces are displayed in normal type.
(2) Headers (e.g., the name of the fund) and page numbers are omitted.
(3) Certain tabular and columnar headings and symbols are displayed
differently in this filing.
(4) Bullet points and similar graphic signals are omitted.
