PUTNAM HIGH INCOME CONVERTIBLE AND BOND FUND
SEMIANNUAL REPORT
FEBRUARY 28, 1995
[LOGO]
BOSTON * LONDON * TOKYO
<PAGE>
PERFORMANCE HIGHLIGHTS
As of February 28, 1995, the fund continued to hold Morningstar's top
rating of five stars, placing its risk-adjusted performance in the top
10% of all hybrid funds rated.*
Performance should always be considered in light of a fund's investment
strategy. Putnam High Income Convertible and Bond Fund is designed for
investors aggressively seeking high current income through a portfolio
of high-yielding convertible and debt securities with potential for
capital appreciation.
SEMIANNUAL RESULTS AT A GLANCE
<TABLE><CAPTION>
<S> <C> <C>
MARKET
TOTAL RETURN NAV PRICE
- -----------------------------------------------------------------------
- --
(change in value during period plus
reinvested distributions)
6 months ended 2/28/95 2.01% 3.54%
- -----------------------------------------------------------------------
- --
MARKET
SHARE VALUE NAV PRICE
- -----------------------------------------------------------------------
- --
8/31/94 $9.13 $9.750
2/28/95 8.88 9.625
- -----------------------------------------------------------------------
- --
DISTRIBUTIONS NO. INCOME TOTAL
- -----------------------------------------------------------------------
- --
6 $0.4260 $0.4260
- -----------------------------------------------------------------------
- --
MARKET
CURRENT RETURN NAV PRICE
- -----------------------------------------------------------------------
- --
End of period
Current dividend rate(1) 9.59% 8.85%
- -----------------------------------------------------------------------
- --
<FN>
Performance data represent past results. For performance over longer
periods, see page 8. (1)Income portion of most recent distribution,
annualized and divided by net asset value or market price at end of
period. The lower-credit ratings of high-yield corporate bonds reflect
a greater possibility that adverse changes in the economy or their
issuers may affect their ability to pay principal and interest on the
bonds.
*Morningstar, Inc., rates a fund in relation to other funds with
similar investment objectives, based on the fund's three- and five-
year average annual returns, adjusted for risk factors and sales
charges. For the three- and five-year periods ended 2/28/95, there
were 194 and 162 funds, respectively, in the hybrid category. The fund
received a five-star rating for both periods. Ratings are updated
monthly. Past performance is not indicative of future results.
</TABLE>
<PAGE>
FROM THE CHAIRMAN
[PHOTO OF GEORGE PUTNAM]
(C) KARSH, OTTAWA
DEAR SHAREHOLDER:
FOLLOWING ONE OF THE MOST VOLATILE PERIODS ON RECORD, 1995 MAY PROVE TO
BE A TURNAROUND YEAR FOR THE BOND MARKET. BY THE TIME PUTNAM HIGH
INCOME CONVERTIBLE AND BOND FUND REACHED THE MIDPOINT OF ITS CURRENT
FISCAL YEAR ON FEBRUARY 28, 1995, FIXED-INCOME INVESTORS HAD BEGUN TO
EXHIBIT MORE SIGNS OF CONFIDENCE THAN THEY HAD IN OVER A YEAR AND A
HALF.
INVESTORS WERE FINALLY GAINING CONFIDENCE IN THE FEDERAL RESERVE
BOARD'S ABILITY TO CONTROL INFLATION. MOREOVER, THEY WERE BEGINNING TO
THINK THE ECONOMIC RECOVERY, NOW IN ITS FIFTH YEAR, MIGHT SLOW TO THE
POINT WHERE INTEREST RATES WOULD STOP RISING AND, ULTIMATELY, LEAD TO
BETTER BOND PERFORMANCE.
FUND MANAGERS CHARLES POHL AND JENNIFER LEICHTER WATCH THESE TRENDS
CLOSELY, AS THEY APPLY TO THE CONVERTIBLE AND CORPORATE HIGH-YIELD
BONDS IN WHICH YOUR FUND INVESTS. IN THE REPORT THAT FOLLOWS, CHARLIE
AND JENNIFER REPORT ON WHAT HAPPENED DURING THE FISCAL YEAR'S FIRST
HALF AND TAKE A LOOK AT WHAT LIES AHEAD.
RESPECTFULLY YOURS,
[SIGNATURE]
GEORGE PUTNAM
CHAIRMAN OF THE TRUSTEES
APRIL 19, 1995
<PAGE>
REPORT FROM THE FUND MANAGERS
CHARLES POHL, LEAD MANAGER
JENNIFER LEICHTER
Despite the continuation of challenging market conditions during the
six months ended February 28, 1995, Putnam High Income Convertible and
Bond Fund registered another period of strong relative performance. The
fund's 2.01% total return at net asset value reflected positive
contributions from both the convertible and corporate high-yield
holdings.
The fund's solid performance is attributable to several factors. First,
we continued to capitalize on the undervalued opportunities available
in the high-yield sector of the convertible market. Second, the rebound
in the gaming sector and the continuing strong performance of certain
cyclical holdings boosted the returns of our corporate high-yield
holdings. Finally, a growing expectation that the Federal Reserve Board
will succeed in containing inflation led to a significant rally among
intermediate- and longer-maturity bonds, and in improved sentiment
throughout the fixed-income markets.
EXCEPTIONAL BUYING OPPORTUNITIES PROMPT INCREASE IN CONVERTIBLE STAKE
The selling pressure in the convertible market during calendar 1994
left many value-priced investment opportunities in its wake --
especially in the high-yield sector. Consequently, we continued to
increase the fund's convertible stake, bringing it up to approximately
54% of the portfolio as of February 28.
Occasionally, small, rapidly growing companies with convertibles
outstanding experience periods of slower growth, prompting investors to
sell their stocks. This selling activity drives down the prices of
these stocks and their related convertibles, causing the convertibles'
yields to rise. As a result, the convertibles can trade at substantial
discounts to their original issue prices. In many cases, these discount
convertibles provide not only higher current yields but also attractive
capital appreciation potential.
Sometimes the selling pressure on a stock can entice a financially
stronger corporation into acquiring the convertible-issuing company.
When this occurs, the holders of the convertible often benefit by
realizing a significant capital gain on their investment.
One recent example is Rite Aid Corporation's acquisition of Perry Drug
Stores, a pharmacy chain operator with the dominant market share in the
Detroit area. In this takeover, Rite Aid assumed Perry's outstanding
debt, including its convertible issue. Because Rite Aid's credit rating
was significantly higher than Perry's, the price of the assumed
convertible rose immediately. When Rite Aid called in the convertible,
which occurred in early March, just after the semiannual fiscal period
ended, the fund realized a capital gain of nearly 35% on a security
that had been paying a double-digit yield. This was truly an ideal
consummation for a high-yielding convertible position.
<PAGE>
[BAR CHART]
PORTFOLIO ALLOCATIONS BY SECTOR
- -----------------------------------------------------------------------
- --
August 1994 February 1995
Convertible securities 46.8% 53.6%
Nonconvertible high-yield corporate bonds 40.4% 33.5%
Based on percentage of total net assets. Allocations will vary over
time.
GAMING SECTOR RALLIES FOLLOWING ELECTIONS
After struggling for most of calendar 1994, the gaming sector rebounded
strongly following the November elections, and the upturn has continued
into 1995. The uncertainty surrounding the prospect of new competitors
in nearby states had dampened the performance of Mississippi-based
Grand Casino and other portfolio holdings with significant operations
in Mississippi. However, these and other positions rose sharply on the
news that Arkansas and Florida had rejected gaming in November ballot
referendums, effectively eliminating the near-term competitive threat.
The fund's Atlantic City, New Jersey, casino bonds strengthened in
response to the election of a new governor in Pennsylvania. Prior to
the election, the prices of Atlantic City bonds traded down on the
expectation that new casinos could be constructed in nearby
Philadelphia as early as 1996. However, Governor Thomas J. Ridge
appears to be less enthusiastic about approving gaming than was his
predecessor, which may mean such competition could be postponed.
DEEP CYCLICALS CONTINUE TO PERFORM WELL
Many of the fund's "deep cyclical" holdings -- securities of companies
that tend to perform well in the later stages of an economic recovery -
- - continued to post strong results. One noteworthy standout was
Horsehead Industries, a zinc producer whose high-yield bonds
appreciated in line with rising zinc prices.
Despite the generally positive results from the fund's high-yield
investments, one position that proved disappointing was Grand Union
Company, a supermarket operator in the Northeast. In November, the
company announced that it would reorganize its capital structure in an
effort to reduce debt, to improve liquidity, and to refurbish its
supermarket base. The announcement caused the prices of the company's
high-yield bonds to drop precipitously. Fortunately, the fund's Grand
Union holdings amount to less than 1% of the portfolio so the impact on
performance, while discernible, was not substantial.
FAVORABLE MARKET CONDITIONS MAY CONTINUE
The prevailing climate in the fixed-income markets thus far in 1995
represents a significant improvement over the volatility and sweeping
declines that characterized calendar 1994. In this more hospitable
market environment, the fund's investments have the potential to
continue their advance. As long as the issuing companies can maintain
strong cash flows -- a critical factor for all high-yield issuers --
the creditworthiness and the overall performance of their securities
will likely be enhanced. Furthermore, market conditions have enabled us
to expand the diversification of the convertible portfolio across a
broader range of industries and issuers.
TOP 10 HOLDINGS (2/28/95)
- -----------------------------------------------------------------------
- --
UNISYS CORP. $3.75 CONVERTIBLE PREFERRED
Computer systems and related products and services
- -----------------------------------------------------------------------
- --
TIME WARNER, INC. 8.75% CONVERTIBLE
Global media and entertainment
- -----------------------------------------------------------------------
- --
USF&G CORP. $4.10 SERIES A CONVERTIBLE PREFERRED
Property-casualty and life insurance
- -----------------------------------------------------------------------
- --
STANDARD COMMERCIAL CORP. 7.25% CONVERTIBLE
Processing and wholesale distribution of tobacco and wool
- -----------------------------------------------------------------------
- --
CML GROUP, INC. 5.50% CONVERTIBLE (144A)
Sports and fitness equipment
- -----------------------------------------------------------------------
- --
WAINOCO OIL CORP. 7.75% CONVERTIBLE
Oil and natural gas exploration and production
- -----------------------------------------------------------------------
- --
CHIQUITA BRANDS INTERNATIONAL, INC. 7.00% CONVERTIBLE
Marketing and distribution of fresh fruits and vegetables
- -----------------------------------------------------------------------
- --
FREEPORT MCMORAN $4.375 CONVERTIBLE PREFERRED (144A)
Diversified natural resources production
- -----------------------------------------------------------------------
- --
FLAGSTAR CORP. 10% CONVERTIBLE
Restaurants and food service
- -----------------------------------------------------------------------
- --
COMCAST CORP. 1.125% CONVERTIBLE
Cable broadcasting
- -----------------------------------------------------------------------
- --
These holdings represent 16.5% of the fund's net assets. Portfolio
holdings will vary over time.
As for nonconvertible high-yield bonds, the overall technical (that is,
supply and demand) condition of the market is attractive. The volume of
new issues is down from 1994, and many companies have retired debt
early given their improved cash flows. In addition, banks have become
aggressive lenders once again, which directs companies seeking capital
away from the higher-cost high-yield bond market and toward lower-cost
banks to meet their needs. In general, therefore, we anticipate the
declining supply of bonds may provide meaningful support for the
market, and for the fund's holdings, going forward.
The views expressed throughout the report are exclusively those of
Putnam Management. They are not meant as investment advice. Although
the described holdings are viewed favorably as of February 28, 1995,
there is no guarantee the fund will continue to hold these securities
in the future. The lower credit ratings of the high-yield corporate
bonds in which the fund invests reflect a greater possibility that
adverse changes in the economy or their issuers may affect their
ability to pay principal and interest on the bonds.
<PAGE>
PERFORMANCE SUMMARY
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. We show
total return in two ways: on a cumulative long-term basis and on
average how the fund might have grown each year over varying periods.
For comparative purposes, we show how the fund performed relative to
appropriate indexes and benchmarks.
TOTAL RETURN FOR PERIODS ENDED 2/28/95
<TABLE><CAPTION>
<S> <C> <C> <C> <C> <C>
MERRILL LYNCH FIRST BOSTON
MARKET ALL-CONVERTIBLE HIGH YIELD
NAV PRICE INDEX BOND INDEX CPI
- -----------------------------------------------------------------------
- --
6 months 2.01% 3.54% -1.00% 3.91% 1.28%
- -----------------------------------------------------------------------
- --
1 year -1.63 5.67 -5.21 0.61 2.86
- -----------------------------------------------------------------------
- --
5 years 111.88 156.85 76.60 102.21 17.89
Annual average 16.20 20.76 12.05 15.13 3.35
- -----------------------------------------------------------------------
- --
Life of fund
(since 7/9/87) 122.18 125.58 -- 122.60 32.95
Annual average 11.01 11.24 -- 11.00 3.80
- -----------------------------------------------------------------------
- --
</TABLE>
TOTAL RETURN FOR PERIODS ENDED 3/31/95
(most recent calendar quarter)
<TABLE><CAPTION>
<S> <C> <C>
NAV MARKET PRICE
- -----------------------------------------------------------------------
- --
1 year 1.84% 10.44%
- -----------------------------------------------------------------------
- --
5 years 113.36 152.33
Annual average 16.36 20.34
- -----------------------------------------------------------------------
- --
Life of fund
(since 7/9/87) 124.93 119.72
Annual average 11.06 10.72
- -----------------------------------------------------------------------
- --
<FN>
Performance data represent past results. Investment returns, net asset
value, and market price will fluctuate so that an investor's shares,
when sold, may be worth more or less than their original cost. Fund
performance data do not take into account any adjustment for taxes
payable on reinvested distributions.
</TABLE>
<PAGE>
TERMS AND DEFINITIONS
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.
COMPARATIVE BENCHMARKS
MERRILL LYNCH ALL-CONVERTIBLE INDEX is an unmanaged list of convertible
securities. The index does not take into account brokerage commissions
or other costs.
FIRST BOSTON HIGH YIELD INDEX is a market-weighted index including
publicly traded bonds having a rating below BBB by Standard & Poor's
and Moody's. Performance figures for the index reflect changes of
market prices, interest, and reinvestment of all interest payments. The
average quality of bonds included in the index may be lower than the
average quality of those bonds in which the fund customarily invests.
Securities in the fund's portfolio will differ from those in the index.
CONSUMER PRICE INDEX (CPI) is a commonly used measure of inflation; it
does not represent an investment return.
<PAGE>
A PUTNAM PERSPECTIVE ON RISK AND REWARD
You've probably been told how important it is to understand the
relationship between an investment's potential rewards and its
accompanying risks. Given the cautionary nature of such instructions,
it may take most investors a while to realize that risk has a positive
side.
EVERY RISK SIGNALS A POTENTIAL REWARD. Selecting only those
investments that offer the greatest degree of security generally leads
to only modest rewards. Furthermore, even insured or guaranteed
investments may be subject to changes in their rates of return or, in
some cases, in their principal values. Experienced investors know that
no investment is truly risk free and are therefore willing to take on
some measure of risk in order to increase their potential gains.
THE GREATER THE RISK, THE GREATER THE POTENTIAL REWARD. Accepting an
appropriate level of investment risk can give you a better chance of
outpacing inflation over time and seeking to maximize your investment's
return. How much risk? Your financial advisor's feedback and your time
horizon can make all the difference in determining how much risk is
compatible with your investment goals and your peace of mind.
FITTING YOUR FUND SELECTION TO YOUR RISK TOLERANCE
How do you find the right balance between investment risks and their
potential rewards? It's helpful to understand the types of risks that
can apply to different types of investments, and to look at your own
portfolio with this perspective.
For short-term goals, your first priority may be managing market risk.
Longer-term investors may be more concerned with inflation risk. And
all income-oriented investors should consider interest-rate, credit,
and prepayment risks carefully. Within each of Putnam's four investment
categories, you can select funds with differing levels of risk and
reward potential to customize your portfolio.
A RUNDOWN OF RISK TYPES
MARKET RISK Most important for stock funds, but relevant to all funds,
this is a measure of how sensitive a fundOs holdings are to changes in
general market conditions. Remember, though, that securities that lose
value quickly in market declines may also show the strongest gains in
more favorable environments.
INTEREST-RATE RISK Since bond prices fall as interest rates rise, this
type of risk is a particular concern for fixed-income investors.
However, interest-rate increases can also have a substantial negative
effect on the stock market.
INFLATION RISK If your investments cannot keep pace with inflation,
your money will begin to lose its purchasing power. Stock investments
are generally considered among the best ways of addressing inflation
risk over the long term.
CREDIT AND PREPAYMENT RISK Credit risk is the concern that the
securityOs issuer will not be able to meet its payment, while
prepayment risk involves the premature payoff of a loan, with a
resulting loss of interest income. Professional management and in-depth
research are invaluable in managing both these risks.
LIQUIDITY RISK Not all investments can be readily converted into cash
at their perceived market values. Liquidity risk can affect the price
of securities held in the fundOs portfolio and, thus, the fundOs share
prices.
This list covers only the most general types of risks; however, each
investment will also have its own specific risks.
<PAGE>
PORTFOLIO OF INVESTMENTS OWNED
February 28, 1995 (Unaudited)
CONVERTIBLE BONDS (36.2%)*
<TABLE><CAPTION>
<C> <S> <C>
PRINCIPAL AMOUNT VALUE
AEROSPACE (0.8%)
- -----------------------------------------------------------------------
--
$1,100,000 UNC, Inc. cv. sub. deb. 7 1/2s, 2006 $ 874,500
AVIATION SERVICES (0.6%)
- -----------------------------------------------------------------------
- --
1,000,000 Hudson General Corp. cv. sub. deb. 7s, 2011 753,750
BANKS (0.8%)
- -----------------------------------------------------------------------
--
1,000,000 Midlantic Banks, Inc. cv. sub. deb. 8 1/4s, 2010 957,500
BROADCASTING (1.2%)
- -----------------------------------------------------------------------
--
3,500,000 Comcast Corp. cv. notes 1 1/8s, 2007 1,452,500
BUSINESS EQUIPMENT AND SERVICES (0.4%)
- -----------------------------------------------------------------------
--
600,000 Conner Peripherals, Inc. cv. sub.
deb. 6 1/2s, 2002 445,500
CELLULAR COMMUNICATIONS (0.6%)
- -----------------------------------------------------------------------
--
850,000 Cellular Communications, Inc. cv. sub.
deb., zero %, 1999 685,313
COMPUTER EQUIPMENT (3.2%)
- -----------------------------------------------------------------------
--
1,000,000 Bay Networks, Inc. cv. bonds 5 1/4s, 2003 782,500
950,000 Computer Products, Inc. cv.
sub. deb. 9 1/2s, 1997 1,002,250
2,500,000 Maxtor Corp. cv. sub. deb. 5 3/4s, 2012 1,296,875
700,000 Seagate Technology, Inc. cv.
sub. deb. 6 3/4s, 2012 598,500
----------
3,680,125
COMPUTER SOFTWARE (0.4%)
- -----------------------------------------------------------------------
--
500,000 MacNeal-Schwendler cv. sub. deb. 7 7/8s, 2004 477,500
COMPUTERS (1.1%)
- -----------------------------------------------------------------------
--
1,500,000 Data General Corp. cv. sub. deb. 7 3/4s, 2001 1,267,500
CONSUMER SERVICES (0.8%)
- -----------------------------------------------------------------------
--
1,800,000 National Education Corp. cv.
sub. deb. 6 1/2s, 2011 958,500
ELECTRONICS (2.8%)
- -----------------------------------------------------------------------
--
1,200,000 GenRad, Inc. cv. sub. deb. 7 1/4s, 2011 882,000
1,100,000 M/A-Com., Inc. cv. sub. deb. 9 1/4s, 2006 1,017,500
1,700,000 Richardson Electronics Ltd. cv.
sub. deb. 7 1/4s, 2006 1,300,500
----------
3,200,000
ENVIRONMENTAL CONTROL (3.1%)
- -----------------------------------------------------------------------
--
1,200,000 Enclean, Inc. cv. sub. deb. 7 1/2s, 2001 1,254,000
1,000,000 OHM Corp. cv. sub. deb. 8s, 2006 796,250
1,500,000 Riedel Environmental Technologies, Inc.
sub. cv. deb. 7s, 1999+ 450,000
1,300,000 Weston (Roy F.), Inc. cv. deb. 7s, 2002 1,053,000
----------
3,553,250
FOOD (1.4%)
- -----------------------------------------------------------------------
--
$2,000,000 Chiquita Brands International
cv. deb. 7s, 2001 $ 1,620,000
HEALTH CARE (0.7%)
- -----------------------------------------------------------------------
--
1,000,000 Careline, Inc. cv. sr. sub. notes 144A 8s, 2001 802,500
HOUSEHOLD PRODUCTS (0.3%)
- -----------------------------------------------------------------------
--
300,000 Interface, Inc. sinking fund cv. deb. 8s, 2013 292,500
INSURANCE (1.0%)
- -----------------------------------------------------------------------
--
1,150,000 Alexander & Alexander Services, Inc.
cv. sub. deb. 11s, 2007 1,165,812
MEDIA (2.4%)
- -----------------------------------------------------------------------
--
2,824,000 Time-Warner, Inc. cv. deb. 8 3/4s, 2015 2,845,180
MEDICAL SUPPLIES (1.1%)
- -----------------------------------------------------------------------
--
1,550,000 Cabot Medical Corp. cv. deb. 7 1/2s, 1999 1,247,750
NON-FERROUS METALS (1.1%)
- -----------------------------------------------------------------------
--
3,500,000 Freeport-McMoRan, Inc. cv. deb. zero %, 2006 1,277,500
OIL AND GAS (2.3%)
- -----------------------------------------------------------------------
--
1,500,000 Mascotech, Inc. cv. sub. deb. 4 1/2s, 2003 1,038,750
1,850,000 Wainoco Oil Corp. cv. sub. deb. 7 3/4s, 2014 1,632,625
----------
2,671,375
PIPELINES (1.2%)
- -----------------------------------------------------------------------
--
1,200,000 SFP Pipeline Holdings, Inc. var. rate
exch. deb. 10.42s, 2010 1,419,000
REIT'S (1.2%)
- -----------------------------------------------------------------------
--
1,400,000 Liberty Property Trust cv. sub. deb. 8s, 2001 1,421,000
RECREATION (0.4%)
- -----------------------------------------------------------------------
--
600,000 Bell Sports Corp. cv. sub. deb. 4 1/4s, 2000 436,500
RESTAURANTS (1.3%)
- -----------------------------------------------------------------------
--
2,000,000 Flagstar Corp. cv. jr. sub. deb. 10s, 2014 1,505,000
RETAIL (2.4%)
- -----------------------------------------------------------------------
--
2,250,000 CML Group, Inc. cv. jr. deb. 5 1/2s, 2003 1,698,750
400,000 Ingles Markets, Inc. cv. sub. deb. 10s, 2008 415,500
700,000 Perry Drug Stores, Inc. cv. sub.
deb. 8 1/2s, 2010 701,750
----------
2,816,000
TEXTILES (1.5%)
- -----------------------------------------------------------------------
--
1,000,000 Dixie Yarns, Inc. cv. deb. 7s, 2012 700,000
1,500,000 Fieldcrest Cannon, Inc. cv. sub.
deb. 6s, 2012 1,072,500
----------
1,772,500
TOBACCO (2.1%)
- -----------------------------------------------------------------------
--
700,000 Dibrell Brothers, Inc. cv. sub.
deb. 7 3/4s, 2006 707,000
2,515,000 Standard Commercial Corp. cv. sub.
deb. 7 1/4s, 2007 1,763,637
----------
2,470,637
- -----------------------------------------------------------------------
--
Total Convertible Bonds (cost $42,372,556) $42,069,192
- -----------------------------------------------------------------------
--
</TABLE>
<PAGE>
CORPORATE BONDS AND NOTES (33.5%)*
<TABLE><CAPTION>
<C> <S> <C>
PRINCIPAL AMOUNT VALUE
ADVERTISING (0.4%)
- -----------------------------------------------------------------------
--
$ 500,000 Universal Outdoor, Inc. sub. deb. 11s, 2003 $ 455,000
ALUMINUM (0.5%)
- -----------------------------------------------------------------------
--
600,000 Kaiser Aluminum & Chemical Corp. sr.
sub. notes 12 3/4s, 2003 624,000
AGRICULTURE (1.4%)
- -----------------------------------------------------------------------
--
585,000 PM Acquisition Corp.sub. disc. deb.
stepped-coupon zero %
(11 1/2s, 3/1/00), 2005++ 269,100
1,385,000 Premium Standard Farms sr. secd.
disc. note stepped- coupon zero %
(10 1/2s, 9/15/96), 2003++ 1,118,388
250,000 PSF Finance (L.P.) 144A sr. notes
12 1/4s, 2004 257,344
----------
1,644,832
AUTOMOTIVE (0.7%)
- -----------------------------------------------------------------------
--
750,000 Key Plastics Corp. sr. notes 14s, 1999 802,500
BROADCASTING (1.0%)
- -----------------------------------------------------------------------
--
250,000 Dial Call Communications, Inc. sr.
disc. notes stepped- coupon zero %
(12 1/4s, 2004) 2000++ 93,750
400,000 Granite Broadcasting Corp. sr. sub.
deb. 12 3/4s, 2002 412,000
250,000 New City Broadcasting Corp. sr.
sub. notes 11 3/8s, 2003 232,500
250,000 Panamsat (L.P.) sr. sub. notes
stepped-coupon zero %
(11 3/8s, 8/1/98), 2003++ 163,750
365,000 Telemedia Broadcasting Corp. 144A
deb. 6.4s, 2004 317,550
----------
1,219,550
BUILDING AND CONSTRUCTION (0.7%)
- -----------------------------------------------------------------------
--
50,000 Miles Homes Services sr. notes 12s, 2001 32,500
350,000 Presley Co. sr. notes 12 1/2s, 2001 301,000
350,000 Schuller Intl. Corp. bonds 10 7/8s, 2004 369,250
200,000 Scotsman Group, Inc. sr. notes 9 1/2s, 2000 191,000
----------
893,750
BUILDING PRODUCTS (0.5%)
- -----------------------------------------------------------------------
--
250,000 American Standard, Inc. deb. 9 1/4s, 2016 237,500
250,000 American Standard, Inc. sr. sub.
deb. stepped-coupon zero %
(10 1/2s, 6/1/98) 2005++ 170,313
250,000 Overhead Door Corp. sr. notes 12 1/4s, 2000 255,000
----------
662,813
BUSINESS SERVICES (0.1%)
- -----------------------------------------------------------------------
--
100,000 Corporate Express, Inc. 144A sr. sub.
notes 9 5/8s, 2004 93,000
CABLE TELEVISION (1.7%)
- -----------------------------------------------------------------------
--
250,000 Adelphia Communications Corp. notes,
Ser. B, 9 7/8s, 2005 210,000
500,000 Adelphia Communications Corp. sr.
notes 9 1/2s, 2004 ++++ 362,500
100,000 Cablevision Industries Corp. sub.
deb. 9 1/4s, 2008 98,000
467,470 Falcon Holdings Group, Inc. sr. sub.
notes 11s, 2003++++ 388,000
650,000 Insight Communications Co. sr. sub.
notes stepped- coupon 8 1/4s
(11 1/4s, 3/1/96), 2000++ 620,750
300,000 Summit Communications Group, Inc. sr.
sub. deb. 10 1/2s, 2005 312,000
----------
1,991,250
CELLULAR COMMUNICATIONS (1.5%)
- -----------------------------------------------------------------------
--
$ 400,000 Cellular, Inc. sr. sub. disc. notes
stepped-coupon zero % (11 3/4s, 9/1/98),
2003++ $ 278,000
400,000 Centennial Cellular Corp. sr. notes
8 7/8s, 2001 372,000
250,000 Horizon Cellular Telephone Co. sr. sub.
disc. notes Ser. B, stepped-coupon zero %
(11 3/8s, 10/1/97), 2000++ 188,750
250,000 NEXTEL Communications, Inc. sr. disc.
notes stepped- coupon zero %
(9 3/4s, 2/15/99), 2004 ++ 97,500
1,000,000 NEXTEL Communications, Inc. sr. disc.
notes stepped- coupon zero %
(11 1/2s, 9/1/98), 2003++ 435,000
500,000 Pricellular Wire sr. disc. notes
stepped-coupon zero % (14s, 11/15/97),
2001++ 372,500
----------
1,743,750
CHEMICALS (1.6%)
- -----------------------------------------------------------------------
--
500,000 G-I Holdings, Inc. sr. notes zero %, 1998 320,000
500,000 Harris Chemical Corp. sr.
sub. notes 10 3/4s, 2003 492,500
250,000 OSI Specialties Corp. sr.
sub. notes 9 1/4s, 2003 238,750
1,250,000 OSI Specialties Corp. sr.
secd. disc. deb. stepped-coupon zero %
(11 1/2s, 4/15/99), 2004++ 806,250
----------
1,857,500
COMPUTER EQUIPMENT (0.2%)
- -----------------------------------------------------------------------
--
200,000 Computervision Corp. sr. sub. notes 11 3/8s, 1999181,000
CONGLOMERATES (1.1%)
- -----------------------------------------------------------------------
--
750,000 MacAndrews & Forbes Holdings, Inc.
sub. deb. notes 13s, 1999 750,000
1,000,000 Talley Industries, Inc. sr. disc. deb.
stepped-coupon zero %
(12 1/4s, 10/15/98), 2005++ 535,000
----------
1,285,000
CONSUMER SERVICES (0.4%)
- -----------------------------------------------------------------------
--
250,000 Solon Automated Services, Inc.
sr. sub. deb. 13 3/4s, 2002 240,000
250,000 Solon Automated Services, Inc.
notes 12 3/4s, 2001 235,000
----------
475,000
CONTAINERS (0.2%)
- -----------------------------------------------------------------------
--
250,000 Ivex Packaging Corp. sr. sub.
notes 12 1/2s, 2002 261,250
ELECTRIC UTILITIES (1.7%)
- -----------------------------------------------------------------------
--
350,000 Cleveland Electric Illuminating 9s, 2023 297,500
500,000 First PV Funding Corp. deb. 10.15s, 2016 490,000
500,000 Long Island Lighting Co. deb. 9s, 2022 426,875
15,560 Midland Cogeneration Ventures (L.P.)
deb. 10.33s, 2002 15,521
150,000 Midland Funding Corp. II deb.
Ser. B, 13 1/4s, 2006 154,125
650,000 Midland Funding Corp. II deb.
Ser. A, 11 3/4s, 2005 619,125
----------
2,003,146
ELECTRONICS (0.4%)
- -----------------------------------------------------------------------
--
1,000,000 International Semi-Tech. sr. disc. notes
stepped-coupon zero %
(11 1/2s, 8/15/00), 2003 ++ 440,000
ENTERTAINMENT (0.9%)
- -----------------------------------------------------------------------
--
$1,150,000 Viacom International, Inc. sub. deb. 8s, 2006$ 1,032,125
FINANCIAL SERVICES (1.0%)
- -----------------------------------------------------------------------
--
300,000 Comdata Network, Inc. sr.
sub. deb. 13 1/4s, 2002++++ 324,000
550,000 Comdata Network, Inc. sr. notes 12 1/2s, 1999 587,813
250,000 Delaware Management Holdings, Inc.
sr. notes Ser. B, 10 1/4s, 2004 268,750
----------
1,180,563
FOOD (0.8%)
- -----------------------------------------------------------------------
--
417,000 Del Monte Corp. sub. deb. notes
12 1/4s, 2002++++ 359,663
500,000 Mafco, Inc. sr. sub. notes 11 7/8s, 2002 475,000
175,000 Specialty Foods Corp. sr. sub.
notes 11 1/4s, 2003 167,125
----------
1,001,788
FOOD CHAINS (0.4%)
- -----------------------------------------------------------------------
--
1,350,000 Grand Union Co. sr. sub. notes 12 1/4s, 2002+ 445,500
250,000 Grand Union Capital Corp. sr. notes
Ser. A, stepped- coupon zero %
(15s, 7/15/99), 2004+ ++ 3,750
----------
449,250
FOREST PRODUCTS (1.5%)
- -----------------------------------------------------------------------
--
1,500,000 Gaylord Container Corp. sr. sub.
disc. deb. stepped- coupon zero %
(12 3/4s, 5/15/96), 2005 ++ 1,387,500
300,000 Stone Container Corp. deb. sr. sub.
notes 11 1/2s, 1999 309,000
100,000 Stone Container Corp. sr. sub.
notes 9 7/8s, 2001 97,750
----------
1,794,250
Health Care (1.0%)
- -----------------------------------------------------------------------
--
500,000 Charter Medical Corp. sr. sub.
notes 11 1/4s, 2004 525,000
250,000 General Medical Corp. sr. sub.
notes 10 7/8s, 2003 248,125
400,000 Quorum Health Group, Inc. sr.
sub. notes 11 7/8s, 2002 430,000
----------
1,203,125
HOSPITAL MANAGEMENT (0.7%)
- -----------------------------------------------------------------------
--
500,000 National Medical Enterprises, Inc.
sr. notes 10 1/8s, 2005 510,625
250,000 National Medical Enterprises, Inc.
sr. notes 9 5/8s, 2002 254,688
----------
765,313
INSURANCE (0.7%)
- -----------------------------------------------------------------------
--
400,000 Penn Corp. Financial Group sr. sub.
notes 9 1/4s, 2003 370,000
200,000 Reliance Group Holdings, Inc. sr. sub.
deb. 9 3/4s, 2003 183,000
275,000 Reliance Group Holdings, Inc. sr.
notes 9s, 2000 258,500
----------
811,500
LODGING (0.4%)
- -----------------------------------------------------------------------
--
500,000 John Q. Hammons Hotels 1st.
mtge. notes 8 7/8s, 2004 465,000
MACHINERY (0.3%)
- -----------------------------------------------------------------------
--
300,000 Specialty Equipment Co. sr.
sub. notes 11 3/8s, 2003 295,500
MEDICAL SUPPLIES (0.1%)
- -----------------------------------------------------------------------
--
$ 100,000 Wright Medical Technology, Inc. sr.
secd. notes Ser. B, 10 3/4s, 2000 $ 96,000
METALS AND MINING (0.3%)
- -----------------------------------------------------------------------
--
500,000 Haynes International, Inc. sr. sub.
notes 13 1/2s, 1999 325,000
MOTION PICTURE DISTRIBUTION (0.8%)
- -----------------------------------------------------------------------
--
600,000 Act III Theatres, Inc. sr. sub.
notes 11 7/8s, 2003 624,000
275,000 Cinemark Mexico USA, Inc. sr. sub.
notes 12s, 2002 290,125
----------
914,125
NURSING HOMES (0.6%)
- -----------------------------------------------------------------------
--
563,000 Multicare Cos., Inc. sr. sub.
notes 12 1/2s, 2002 641,820
OIL AND GAS (0.3%)
- -----------------------------------------------------------------------
--
140,000 Flores & Rucks, Inc. sr. notes 13 1/2s, 2004 144,200
200,000 Noble Drilling Corp. deb. 9 1/4s, 2003 191,500
----------
335,700
PAGING (0.3%)
- -----------------------------------------------------------------------
--
300,000 Mobile Telecommunications Tech.
sr. notes 13 1/2s, 2002 309,750
PUBLISHING (0.7%)
- -----------------------------------------------------------------------
--
150,000 Marvel III Holdings, Inc. sr. notes
Ser. B, 9 1/8s, 1998 135,000
1,000,000 Marvel Parent Holdings, Inc. sr.
secd. disc. notes zero %, 1998 637,500
----------
772,500
REAL ESTATE (0.6%)
- -----------------------------------------------------------------------
--
25,000 Chelsea Piers 144A Ser. B, stepped-coupon
zero % (11s, 6/15/99), 2009++ 21,125
390,000 Chelsea Piers Ser. B stepped-coupon zero %
(12 1/2s, 6/15/99), 2004 ++ 334,425
300,000 Kearny State Real Estate (L.P.) secd.
notes 9.56s, 2003 300,750
----------
656,300
RECREATION (1.6%)
- -----------------------------------------------------------------------
--
330,000 Arizona Charlies Corp. sub. deb.
Ser. B, 12s, 2000 264,000
120,000 Capitol Queen Corp.1st mtge note
Ser. B, 12s, 2000 108,000
190,000 Casino America, Inc. 1st mtge.
deb. 11 1/2s, 2001 182,400
425,000 Fitzgerald Gaming Co. 144A
sr. notes 13s, 1996++++ 263,500
365,000 Grand Casino Resorts, Inc.
notes 12 1/2s, 2000 365,000
145,000 Louisiana Casino Cruises Corp.
sr. sub. deb. 11 1/2s, 1998 123,250
243,000 Trump Castle Funding Corp.
sr. sub. notes 11 1/2s, 2000 243,000
489,845 Trump Taj Mahal Funding, Inc. deb.
Ser. A, 11.35s, 1999++++ 347,790
----------
1,896,940
RESTAURANTS (1.6%)
- -----------------------------------------------------------------------
--
125,000 American Restaurant Group, Inc.
sr. secd. notes, Ser. A, 12s, 1998 117,500
250,000 American Restaurant Group, Inc.
sr. notes, Ser. B, 12s, 1998 232,500
$1,250,000 American Restaurant Group, Inc.
sr. notes stepped- coupon zero %,
(14s, 12/15/98), 2005++ $ 600,000
1,000,000 Flagstar Corp. sr. sub. notes 11 3/8s, 2003 862,500
----------
1,812,500
RETAIL (2.3%)
- -----------------------------------------------------------------------
--
500,000 County Seat Stores sr. sub. notes 12s, 2001 497,500
530,000 Duane Reade Corp. sr. notes 12s, 2002 392,200
250,000 Finlay Enterprises, Inc.
sr. disc. deb. stepped-coupon zero %
(12s, 5/1/98), 2005++ 157,500
70,000 Loehmanns' Holdings, Inc.
sr. sub. notes 13 3/4s, 1999 67,900
1,100,000 Loehmanns' Holdings, Inc.
sr. notes 10 1/2s, 1997 1,089,000
250,000 Parisian, Inc. sr. sub. notes 9 7/8s, 2003 175,000
300,000 Specialty Retailers, Inc.
sr. sub. notes 11s, 2003 276,000
----------
2,655,100
SCHOOL BUSSES (0.6%)
- -----------------------------------------------------------------------
--
700,000 Blue Bird Body Co. sub. deb.
Ser. B, 11 3/4s, 2002 714,000
SHIPPING (0.6%)
- -----------------------------------------------------------------------
--
750,000 Viking Star Shipping sr. secd. notes 9 5/8s, 2003697,500
SPECIALTY CONSUMER PRODUCTS (0.8%)
- -----------------------------------------------------------------------
--
357,000 Equitable Bag Co. sr. notes 11s, 2004+ 285,600
750,000 Playtex Family Products Corp. sr.
sub. notes 9s, 2003 684,375
----------
969,975
STEEL (0.2%)
- -----------------------------------------------------------------------
--
250,000 Armco, Inc. sr. notes 11 3/8s, 1999 250,625
TELEPHONE SERVICES (0.3%)
- -----------------------------------------------------------------------
--
500,000 MFS Communications sr. disc. notes
stepped-coupon zero % (9 3/8s, 1/15/99), 2004++ 317,500
- -----------------------------------------------------------------------
--
TOTAL CORPORATE BONDS AND NOTES
(cost $40,836,066) $38,997,090
- -----------------------------------------------------------------------
--
</TABLE>
<PAGE>
CONVERTIBLE PREFERRED STOCKS (15.1%)*
<TABLE><CAPTION>
<C> <S> <C>
NUMBER OF SHARES VALUE
ALUMINUM (0.6%)
- -----------------------------------------------------------------------
--
65,000 Kaiser Aluminum Corp. Prides $0.97 cv. pfd. $ 690,625
BUILDING PRODUCTS (0.5%)
- -----------------------------------------------------------------------
--
16,400 Southdown, Inc. $2.875 cv. pfd. 612,950
BUSINESS EQUIPMENT AND SERVICES (2.6%)
- -----------------------------------------------------------------------
--
84,300 Unisys Corp. Ser. A, $3.75 cv. pfd. 3,003,188
CONSTRUCTION (0.9%)
- -----------------------------------------------------------------------
--
50,000 Perini Corp. dep. shares $2.125 cv. pfd. 1,100,000
ELECTRONICS AND ELECTRICAL EQUIPMENT (0.7%)
- -----------------------------------------------------------------------
--
54,500 Westinghouse Electric Corp. Ser. C,
$1.30 cv. pfd. 144A 844,750
ENERGY (0.9%)
- -----------------------------------------------------------------------
--
28,200 Maxus Energy Corp. $4.00 cv. pfd. 994,050
FOREST PRODUCTS (0.2%)
- -----------------------------------------------------------------------
--
10,000 Bowater, Inc. Prides $1.645 cv. pfd. 286,250
INSURANCE (1.9%)
- -----------------------------------------------------------------------
--
45,000 USF&G Corp. Ser. A, $4.10 cv. pfd. 2,160,000
METALS AND MINING (1.3%)
- -----------------------------------------------------------------------
--
33,000 Freeport-McMoRan, Inc. $4.375 cv. pfd. 144A 1,534,500
OIL AND GAS (1.1%)
- -----------------------------------------------------------------------
--
50,864 Atlantic Ritchfield Co. $2.23 cv. pfd. 1,246,168
OILS (0.4%)
- -----------------------------------------------------------------------
--
25,325 Santa Fe Energy Resources, Inc. $1.40 cv. pfd. 433,691
SPECIALTY CONSUMER PRODUCTS (0.3%)
- -----------------------------------------------------------------------
--
25,000 Galoob (Lewis) Toys, Inc. $1.70 cv. pfd.+ 378,125
STEEL (1.4%)
- -----------------------------------------------------------------------
--
24,500 Armco, Inc. Class B, $4.50, cv. pfd. 1,099,438
10,000 Bethlehem Steel Corp. $5.00 cum. cv. pfd. 493,750
----------
1,593,188
TOBACCO (1.1%)
- -----------------------------------------------------------------------
--
212,300 RJR Nabisco Holdings Ser. C,
$0.6012 sr. cv. pfd. 1,247,263
TRUCKING (1.2%)
- -----------------------------------------------------------------------
--
60,000 Consolidated Freightways $1.54 cv. pfd. 1,432,500
- -----------------------------------------------------------------------
--
TOTAL CONVERTIBLE PREFERRED STOCKS
(cost $17,829,479) $17,557,248
- -----------------------------------------------------------------------
--
</TABLE>
<PAGE>
UNITS (2.1%)*
<TABLE><CAPTION>
<C> <S> <C>
NUMBER OF UNITS VALUE
- -----------------------------------------------------------------------
--
50 Celcaribe S.A. units stepped-coupon zero %
(13 1/2s, 3/15/98), 200++ $ 425,250
850 Echostar Communication Corp. units
stepped-coupon zero % (12 7/8s, 6/1/99), 2004++ 391,000
150 Elsinore Corp 144A 1st. property mtge.
units 20s, 1996 150,000
350 Health-O-Meter Product units 13s, 2002 311,500
400,000 Hollywood Casino units 13 1/2s, 1998 400,000
600 ICF Kaiser International, Inc. sr. sub.
units 12s, 2003 544,500
267 Total Renal Care units stepped-coupon zero %
(12s, 8/15/99), 2004++ 234,960
- -----------------------------------------------------------------------
--
TOTAL UNITS (cost $2,547,173) $ 2,457,210
- -----------------------------------------------------------------------
--
</TABLE>
YANKEE BONDS AND NOTES (1.9%)*
<TABLE><CAPTION>
<C> <S> <C>
PRINCIPAL AMOUNT VALUE
- -----------------------------------------------------------------------
--
$ 195,000 Cinemark Mexico notes 12s, 2003 $ 181,350
600,000 Fresh Del Monte Produce Corp. sr. notes,
Ser. B, 10s, 2003 420,000
1,850,000 Hollinger, Inc. cv. sub. notes zero %, 2013 522,625
500,000 Ispat Mexicana 144A sr. notes 10 3/8s, 2001 375,000
1,000,000 Mexico Par-A 6 1/4s, 2019 488,750
400,000 Pharmaceutical Marketing Services, Inc.
cv. notes 6 1/4s, 2003 258,000
- -----------------------------------------------------------------------
--
TOTAL YANKEE BONDS AND NOTES (cost $2,657,007)$ 2,245,725
- -----------------------------------------------------------------------
--
</TABLE>
EUROBONDS (1.7%)*
<TABLE><CAPTION>
<C> <S> <C>
PRINCIPAL AMOUNT VALUE
- -----------------------------------------------------------------------
--
$2,000,000 Banamex cv. bond 7s, 1999 $ 1,100,000
1,300,000 Pharmaceutical Marketing Services, Inc.
cv. deb. 144A 6 1/4s, 2003 845,000
- -----------------------------------------------------------------------
--
TOTAL EUROBONDS (cost $2,397,000) $ 1,945,000
- -----------------------------------------------------------------------
--
</TABLE>
PREFERRED STOCKS (1.5%)*
<TABLE><CAPTION>
<C> <S> <C>
NUMBER OF SHARES VALUE
2,500 California Federal Bank Ser. B, $10.625,
exch. pfd. $ 252,500
4,000 First Nationwide Bank $11.50, exch. pfd. 398,000
11,090 Foxmeyer Health Corp. Ser. A, $4.20 pfd. 377,060
8,773 Pyramid Communications, Inc. Ser. C,
$3.125, exch. pfd. 197,937
25,000 Supermarkets General Holdings Corp.
$3.52 exch. pfd. 487,500
- -----------------------------------------------------------------------
--
TOTAL PREFERRED STOCKS (cost $1,885,710) $ 1,712,997
- -----------------------------------------------------------------------
--
</TABLE>
COMMON STOCKS (1.0%)*
<TABLE><CAPTION>
<C> <S> <C>
NUMBER OF SHARES VALUE
1,250 American Restaurant Group, Inc. $ 25,000
1,000 Arcadian Corp. 37,000
63,006 Computervision Corp. 354,409
3,157 Computervision Corp. (acquired 8/21/92,
cost $28,413)++ 12,431
33,928 Equitable Bag Co. Class A+ 50,892
4,126 Grand Casinos, Inc.+ 66,016
1,885 IFINT Diversified Holdings 144A 132,893
14,351 Lady Luck Gaming Corp. 35,878
58,685 Loehmanns' Holdings, Inc. 144A 58,685
197 PMI Holdings Corp. 144A $ 39,400
144 Premium Holdings L.P. 144A 14,363
280 Pyramid Communications, Inc. New Class B 144A 6,721
71 RJR Nabisco Holdings Corp.+ 399
27,066 Solon Automated Services, Inc. 16,916
3,750 Specialty Foods Corp. 7,500
1,477 Taj Mahal Holding Corp. Class A 14,770
7,409 Tenneco, Inc. 337,110
- -----------------------------------------------------------------------
--
TOTAL COMMON STOCKS (cost $930,844) $ 1,210,383
- -----------------------------------------------------------------------
--
</TABLE>
WARRANTS (0.4%)+*EXPIRATION
<TABLE><CAPTION>
<C> <S> <C> <C>
EXPIRATION
NUMBER OF WARRANTS DATE VALUE
- -----------------------------------------------------------------------
--
15,000 Becker Gaming Corp. 144A 11/15/00 $ 15,938
620 Casino America, Inc. 11/15/96 620
4,980 Casino Magic Finance Corp. 10/14/96 311
2,160 Cinemark Mexico USA, Inc. 8/1/03 19,980
500 County Seat Holdings, Inc. 10/15/98 10,000
250 Dial Page, Inc. 1/1/97 188
5,001 Elsinore Corp. 144A 10/4/98 506
425 Fitzgerald Gaming Co. 144A 3/15/99 23,375
28,850 Gaylord Container Corp. 144A 7/31/96 299,319
135 Louisiana Casino Cruises, Inc. 144A 12/1/98 2,025
600 Miles Homes, Inc. 4/1/97 300
1,250 OSI Specialties Corp. 144A 4/15/99 25,000
900 President Riverboat Casinos, Inc. 144A 9/23/96 56
10,000 Southdown, Inc. 144A 10/31/96 5,000
9 Telemedia Broadcasting Corp. 144A 4/1/04 6,443
2,700 UCC Investor Holding, Inc. 10/30/99 35,100
21 Wright Medical Technology, Inc. 144A 6/30/03 3,079
- -----------------------------------------------------------------------
--
TOTAL WARRANTS (COST $325,375) $ 447,240
- -----------------------------------------------------------------------
--
</TABLE>
SHORT-TERM INVESTMENTS (5.3%)* (cost $6,190,000)
<TABLE><CAPTION>
<C> <S> <C>
PRINCIPAL AMOUNT VALUE
- -----------------------------------------------------------------------
--
$6,190,000 Federal Home Loan Mortgage Corp.
5.95s, March 1, 1995 $ 6,190,000
- -----------------------------------------------------------------------
--
TOTAL INVESTMENTS (cost $117,971,210)*** $114,832,085
- -----------------------------------------------------------------------
--
<FN>
NOTES
* Percentages indicated are based on total net assets of
$116,361,701, which correspond to a net asset value per common
share of $8.88.
++ Restricted, excluding Rule 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 that held. Total market value of restricted securities
owned at February 28, 1995 was $12,431 or --% of net assets.
++++ Income may be received in cash or additonal securities at the
discretion of the issuer.
++ The interest date and rate parenthetically represent the next
interest rate to be paid, and the date the fund will begin
receiving interest at this rate.
+ Non-income-producing security.
*** The aggregate identified cost on a tax basis is $118,020,416,
resulting in gross unrealized appreciation and depreciation of
$5,064,429 and $8,252,760, respectively, or net unrealized
depreciation of $3,188,331.
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 rate shown on Floating Rate Notes (FRN) and Floating Rate
Bonds (FRB) are the current interest rates shown at February 28,
1995, which are subject to change based on the terms of the
security.
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
February 28, 1995 (Unaudited)
</TABLE>
<TABLE>
<S> <C>
ASSETS
- -----------------------------------------------------------------------
--
Investments in securities, at value
(identified cost $117,971,210) (Note 1) $114,832,085
- -----------------------------------------------------------------------
--
Cash 1,291
- -----------------------------------------------------------------------
--
Dividends, interest and other receivables 2,310,042
- -----------------------------------------------------------------------
--
Receivable for securities sold 1,819,413
- -----------------------------------------------------------------------
--
TOTAL ASSETS 118,962,831
- -----------------------------------------------------------------------
--
LIABILITIES
- -----------------------------------------------------------------------
--
Payable for securities purchased 1,331,427
- -----------------------------------------------------------------------
--
Distributions payable to shareholders 931,129
- -----------------------------------------------------------------------
--
Payable for compensation of Manager (Note 2) 206,446
- -----------------------------------------------------------------------
--
Payable for administrative services (Note 2) 1,303
- -----------------------------------------------------------------------
--
Payable for compensation of Trustees (Note 2) 266
- -----------------------------------------------------------------------
--
Payable for investor servicing and custodian fees (Note 2) 22,262
- -----------------------------------------------------------------------
--
Other accrued expenses 108,297
- -----------------------------------------------------------------------
--
TOTAL LIABILITIES 2,601,130
- -----------------------------------------------------------------------
--
NET ASSETS $116,361,701
- -----------------------------------------------------------------------
--
REPRESENTED BY
- -----------------------------------------------------------------------
--
Paid-in capital $121,731,360
- -----------------------------------------------------------------------
--
Undistributed net investment income 134,669
- -----------------------------------------------------------------------
--
Accumulated net realized loss on investment transactions (2,365,203)
- -----------------------------------------------------------------------
--
Net unrealized depreciation of investments (3,139,125)
- -----------------------------------------------------------------------
--
TOTAL -- REPRESENTING NET ASSETS APPLICABLE TO
CAPITAL SHARES OUTSTANDING $116,361,701
- -----------------------------------------------------------------------
--
COMPUTATION OF NET ASSET VALUE
- -----------------------------------------------------------------------
--
Net asset value per share
($116,361,701 divided by 13,099,269 shares) $8.88
- -----------------------------------------------------------------------
--
</TABLE>
<PAGE>
STATEMENT OF OPERATIONS
Six months ended February 28, 1995 (Unaudited)
<TABLE>
<S> <C>
INVESTMENT INCOME
- -----------------------------------------------------------------------
--
Interest $4,697,306
- -----------------------------------------------------------------------
--
Dividends 915,038
- -----------------------------------------------------------------------
--
TOTAL INVESTMENT INCOME 5,612,344
- -----------------------------------------------------------------------
--
EXPENSES:
- -----------------------------------------------------------------------
--
Compensation of Manager (Note 2) 425,661
- -----------------------------------------------------------------------
--
Compensation of Trustees (Note 2) 5,939
- -----------------------------------------------------------------------
--
Reports to shareholders 23,368
- -----------------------------------------------------------------------
--
Auditing 35,068
- -----------------------------------------------------------------------
--
Legal 11,486
- -----------------------------------------------------------------------
--
Postage 41,845
- -----------------------------------------------------------------------
--
Registration fees 125
- -----------------------------------------------------------------------
--
Administrative services (Note 2) 3,692
- -----------------------------------------------------------------------
--
Other 6,622
- -----------------------------------------------------------------------
--
TOTAL EXPENSES 553,806
- -----------------------------------------------------------------------
--
NET INVESTMENT INCOME 5,058,538
- -----------------------------------------------------------------------
--
Net realized loss on investments (Notes 1 and 3) (126,490)
- -----------------------------------------------------------------------
--
Net unrealized depreciation of investments during the period(2,540,181)
- -----------------------------------------------------------------------
--
NET LOSS ON INVESTMENTS (2,666,671)
- -----------------------------------------------------------------------
--
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $2,391,867
- -----------------------------------------------------------------------
--
</TABLE>
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE><CAPTION>
<S> <C> <C>
SIX MONTHS
ENDED YEAR ENDED
FEBRUARY 28 AUGUST 31
------------ ----------
1995* 1994
- -----------------------------------------------------------------------
--
DECREASE IN NET ASSETS
- -----------------------------------------------------------------------
--
Operations:
- -----------------------------------------------------------------------
--
Net investment income $5,058,538 $10,211,539
- -----------------------------------------------------------------------
--
Net realized gain (loss) on investments (126,490) 8,210,595
- -----------------------------------------------------------------------
--
Net unrealized depreciation of investments (2,540,181) (12,273,492)
- -----------------------------------------------------------------------
--
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS 2,391,867 6,148,642
- -----------------------------------------------------------------------
--
Distributions to shareholders:
- -----------------------------------------------------------------------
--
From net investment income (5,569,164) (11,317,308)
- -----------------------------------------------------------------------
--
Increase in capital share transactions from
reinvestment of distributions 550,575 872,159
- -----------------------------------------------------------------------
--
TOTAL DECREASE IN NET ASSETS (2,626,722) (4,296,507)
- -----------------------------------------------------------------------
--
NET ASSETS
Beginning of period 118,988,423 123,284,930
- -----------------------------------------------------------------------
--
End of period (including undistributed net
investment income of $134,669 and $645,295,
respecively) $116,361,701 $118,988,423
- -----------------------------------------------------------------------
--
NUMBER OF FUND SHARES
- -----------------------------------------------------------------------
--
Shares outstanding at beginning of period 13,037,556 12,945,798
- -----------------------------------------------------------------------
--
Shares issued in connection with reinvestment
of distributions 61,713 91,758
- -----------------------------------------------------------------------
--
SHARES OUTSTANDING AT END OF PERIOD 13,099,269 13,037,556
- -----------------------------------------------------------------------
--
<FN>
* Unaudited
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
<TABLE><CAPTION>
<S> <C> <C> <C>
SIX MONTHS
ENDED
FEBRUARY 28, YEAR ENDED AUGUST 31
- -----------------------------------------------------------------------
--
1995* 1994 1993
- -----------------------------------------------------------------------
--
NET ASSET VALUE, BEGINNING OF PERIOD $9.13 $9.52 $8.49
- -----------------------------------------------------------------------
--
INVESTMENT OPERATIONS
Net investment income .39 .78 .84
Net realized and unrealized
gain (loss) on investments (.21) (.30) 1.05
- -----------------------------------------------------------------------
--
TOTAL FROM INVESTMENT OPERATIONS .18 .48 1.89
- -----------------------------------------------------------------------
--
LESS DISTRIBUTIONS:
From net investment income (.43) (.87) (.84)
In excess of net income -- -- (.02)
From net realized gain on investments -- -- --
- -----------------------------------------------------------------------
--
TOTAL DISTRIBUTIONS (.43) (.87) (.86)
- -----------------------------------------------------------------------
--
NET ASSET VALUE, END OF PERIOD $8.88 $9.13 $9.52
- -----------------------------------------------------------------------
--
MARKET VALUE, END OF PERIOD $9.625 $9.750 $10.000
- -----------------------------------------------------------------------
--
TOTAL INVESTMENT RETURN AT
MARKET VALUE (%)(a) 3.54(b) 6.84 23.78
- -----------------------------------------------------------------------
--
NET ASSETS, END OF PERIOD
(in thousands) $116,362 $118,988 $123,285
- -----------------------------------------------------------------------
--
Ratio of expenses to average
net assets (%) .48(b) 1.04 1.03
- -----------------------------------------------------------------------
--
Ratio of net investment income to
average net assets (%) 4.37(b) 8.23 9.39
- -----------------------------------------------------------------------
--
Portfolio turnover (%) 31.65(b) 52.10 71.63
- -----------------------------------------------------------------------
--
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE><CAPTION>
<C> <C> <C> <C> <C> <C>
FOR THE PERIOD
JULY 9, 1987
(COMMENCEMENT OF
YEAR ENDED AUGUST 31
OPERATIONS) TO
1992 1991 1990 1989 1988 August 31, 1987
- -----------------------------------------------------------------------
--
$7.56 $6.94 $8.37 $8.32 $9.24 $9.30
- -----------------------------------------------------------------------
--
- -----------------------------------------------------------------------
--
.88 .83 .83 .93 .88 .09
- -----------------------------------------------------------------------
--
.99 .65 (1.32) (.03) (.95) (.08)
- -----------------------------------------------------------------------
--
1.87 1.48 (.49) .90 (.07) .01
- -----------------------------------------------------------------------
--
- -----------------------------------------------------------------------
--
(.94) (.85) (.92) (.85) (.85) (.07)
- -----------------------------------------------------------------------
--
-- -- -- -- -- --
- -----------------------------------------------------------------------
--
-- (.01) (.02) -- -- --
- -----------------------------------------------------------------------
--
(.94) (.86) (.94) (.85) (.85) (.07)
- -----------------------------------------------------------------------
--
$8.49 $7.56 $6.94 $8.37 $8.32 $9.24
- -----------------------------------------------------------------------
--
$8.875 $7.625 $5.875 $7.875 $8.000 $9.625
- -----------------------------------------------------------------------
--
30.71 48.65 (14.36) 9.45 (7.89) (1.78)(b)
- -----------------------------------------------------------------------
--
$108,909 $95,770 $87,866 $105,845 $105,304 $116,691
- -----------------------------------------------------------------------
--
1.13 1.31 1.26 1.15 1.18 .18(b)
- -----------------------------------------------------------------------
--
10.92 12.35 11.07 11.00 10.52 1.07(b)
- -----------------------------------------------------------------------
--
45.84 68.36 53.30 69.68 85.34 12.90(b)
- -----------------------------------------------------------------------
--
<FN>
* Unaudited.
(a) Total investment return assumes dividend reinvestment and does not
reflect the effect of sales charge.
(b) Not annualized.
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
February 28, 1995 (Unaudited)
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 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 and step-
up bonds is accreted according to the effective yield method.
C 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, 1994, the fund had a capital loss carryover of
approximately $2,239,000, which may be available to offset realized
capital gains to the extent provided by regulations. This amount will
expire August 31, 1999. 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.
D 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 of income and gains to be distributed are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles.
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, under
current law, 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 $810 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.
Investor servicing and custodian fees for the six months ended February
28, 1995 have been reduced by credits allowed by PFTC.
NOTE 3
PURCHASES AND SALES OF SECURITIES
During the six months ended February 28, 1995, purchases and sales of
investment securities other than short-term investments aggregated
$31,334,418 and $33,974,826, respectively. There were no purchases and
sales of U.S. government obligations during the six months ended
February 28, 1995. In determining the net gain or loss on securities
sold, the cost of securities has been determined on the identified cost
basis.
<PAGE>
SELECTED QUARTERLY DATA
(Unaudited)
<TABLE><CAPTION>
<S> <C> <C> <C> <C>
THREE MONTHS ENDED
- -----------------------------------------------------------------------
--
FEBRUARY 28NOVEMBER 30 AUGUST 31 MAY 31
1995 1994 1994 1994
- -----------------------------------------------------------------------
--
Total investment income
Total $2,800,016 $2,812,328 $2,799,478 $3,021,383
Per share $.22 $.21 $.21 $.22
- -----------------------------------------------------------------------
--
Net investment income
Total $2,598,730 $2,459,808 $2,557,000 $2,659,542
Per share $.21 $.18 $.19 $.20
- -----------------------------------------------------------------------
--
Net realized and
unrealized gain (loss)
on investments
Total $2,260,427$(4,927,098)$(1,773,495)$(8,127,565)
Per share $.16 $(.37) $(.13) $(.62)
- -----------------------------------------------------------------------
--
Net increase (decrease) in
net assets resulting from
operations
Total $4,859,157$(2,467,290) $783,506$(5,468,023)
Per share $.37 $(.19) $0.06 $(.42)
- -----------------------------------------------------------------------
--
Net assets at
end of period
Total $116,361,701$114,017,954$118,988,423$120,697,701
Per share $8.88 $8.73 $9.13 $9.28
- -----------------------------------------------------------------------
--
</TABLE>
<PAGE>
SELECTED QUARTERLY DATA (CONTINUED)
<TABLE><CAPTION>
<C> <C> <C> <C> <C> <C>
THREE MONTHS ENDED
- -----------------------------------------------------------------------
--
FEBRUARY 28NOVEMBER 30 AUGUST 31 MAY 31FEBRUARY 28 NOVEMBER 30
1994 1993 1993 1993 1993 1992
- -----------------------------------------------------------------------
--
$2,792,040 $2,892,910 $2,948,672 $2,908,563 $3,219,026 $2,962,280
$.22 $.23 $.22 $.22 $.26 $.23
- -----------------------------------------------------------------------
--
$2,449,653 $2,545,344 $2,668,240 $2,578,556 $2,920,535 $2,682,298
$.19 $.20 $.20 $.20 $.23 $.21
- -----------------------------------------------------------------------
--
$2,732,945 $3,105,218 $3,395,626 $4,222,993 $4,412,959 $1,476,985
$.21 $.24 $.26 $.33 $.34 $.12
- -----------------------------------------------------------------------
--
$5,182,598 $5,650,562 $6,063,866 $6,801,549 $7,333,494 $4,159,283
$.40 $.44 $.46 $.53 $.57 $.33
- -----------------------------------------------------------------------
--
$128,746,190$12,456,409$123,284,930$119,697,299$115,365,761$110,611,045
$9.91 $9.75 $9.52 $9.27 $8.95 $8.61
- -----------------------------------------------------------------------
--
</TABLE>
<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
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
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
John R. Verani
Vice President
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Peter Carman
Vice President
Brett C. Browchuk
Vice President
Charles G. Pohl
Vice President and Fund Manager
Jennifer E. Leichter
Vice President and Fund Manager
William N. Shiebler
Vice President
Paul M. O'Neil
Vice President
John D. Hughes
Vice President and Treasurer
Beverly Marcus
Clerk and Assistant Treasurer
Call 1-800-225-1581 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.
<PAGE>
PUTNAM INVESTMENTS
THE PUTNAM FUNDS
One Post Office Square
Boston, Massachusetts 02109
Bulk Rate
U.S. Postage
PAID
Putnam
Investments
018-17509
<PAGE>
APPENDIX TO FORM N-30D FILINGS TO DESCRIBE DIFFERENCES BETWEEN PRINTED
AND EDGAR-FILED TEXTS.
(1) Rule lines for tables are omitted.
(2) Italic typefaces is displayed in normal type.
(3) Boldface type is displayed in capital letters.
(4) Headers (e.g. the names of the fund) and footers (e.g. page
numbers and OThe accompanying notes are an integral part of these
financial statementsO) are omitted.
(5) Because the printed page breaks are not reflected, certain tabular
and columnar headings and symbols are displayed differently in
this filing.
(6) Bullet points and similar graphic symbols are omitted.
(7) Page numbering is different.
