Putnam
High Income
Convertible and
Bond Fund
ANNUAL REPORT
August 31, 1996
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* "[Putnam High Income Convertible and Bond Fund] withstood the stock
market's recent stumble better than most of its convertible-fund
rivals. With about 60% of assets in high-yielding -- and thus
bondlike -- convertibles and the remainder in junk bonds, the fund
holds up better than most of its peers when stocks falter."
-- Morningstar Closed-End Funds, August 9, 1996
CONTENTS
4 Report from Putnam Management
8 Fund performance summary
11 Portfolio holdings
24 Financial statements
From the Chairman
Dear Shareholder:
Unlike many other income-oriented investments, both convertibles and
lower-rated high-yield bonds thrive on a vibrant economy. For the
former, the reason is their potential convertibility into the underlying
common stock of the issuing company; for the latter, it is because they
are almost always issued by companies under some pressure to maintain
steady cash flows. There is nothing like a strong economy to bolster the
stock market and fill company coffers.
Vigorous economies also invite higher interest rates and, in turn,
rising inflation, conditions not always friendly to the performance of
other income-oriented securities. Thus was the case midway through
Putnam High Income Convertible and Bond Fund's fiscal year. When several
key indicators suggested that the economy was still advancing at a
rather rapid clip, the bond market underwent a significant downturn.
Because of its portfolio orientation, however, your fund was among the
beneficiaries of the prevailing market environment during the 12 months
ended August 31, 1996. In the report that follows, your fund's
management team discusses the year's performance and takes a look at the
fiscal year ahead.
Respectfully yours,
/S/George Putnam
George Putnam
Chairman of the Trustees
October 16, 1996
Report from the Fund Managers
Charles G. Pohl, lead manager
Jennifer E. Leichter
August 31, 1996, marked the end of Putnam High Income Convertible and
Bond Fund's 1996 fiscal year -- a year that saw your fund post solid
total returns of 10.63% at market price and 9.15% at net asset value,
while maintaining its emphasis on producing high current income. (Please
refer to the tables on pages 8 and 9 for complete performance
information.) Strong stock market performance throughout most of the
fiscal year boosted the overall convertible-securities market. Your fund
also benefited from the fact that high-yield corporate bonds
outperformed all other domestic fixed-income sectors over the period.
* TECHNOLOGY, HEALTH CARE HIGHLIGHT CONVERTIBLE HOLDINGS
To a great extent, your fund exists to capitalize on a market anomaly.
Most professional convertible investors tend to sell their holdings when
the price of the underlying stock declines dramatically. This selling
activity drives down the price of the convertible which, in turn, drives
up its yield and generally makes the security attractive to value-
conscious income-oriented investors. That is where we come in. July's
stock market correction created just such a set of circumstances and
produced a multitude of exceptional investment opportunities for your
fund, especially in the technology and health-care sectors.
Prior to the correction, the fund had been underweighted in technology
relative to the sector's representation in the overall convertible
market. (Putnam's research estimated that technology made up
approximately 20% of the convertible market at the end of the fiscal
year.) The market decline enabled us to add such high-quality companies
as National Semiconductor, which is upgrading its mix of microchip
products to meet the growing demand for multi-component, high-
performance semiconductors.
In addition, we added investments in companies such as Ivax, a
manufacturer of generic drugs. The company posted weaker-than-expected
earnings for the quarter ended June 30, 1996, causing its stock price to
fall. Ivax's convertible was then available with a current yield of
approximately 9%, which meets the fund's current yield criterion for
investment candidates. We believe the company's financial structure and
business plan are sound. And satisfactory corporate financial
characteristics supporting a generous yield are the key criteria we
focus on in selecting investments.
A health-care holding with an investment profile similar to that of Ivax
is Healthsource, a health maintenance organization. During calendar
1996, a series of disappointing earnings reports caused Healthsource's
stock price to drop from a high of 40 7/8 to as low as 9 3/4. Prior to
that, the company had posted consistently higher earnings.
Healthsource's convertible bonds were trading at yields approaching
11.5%, so we made a substantial investment and it is now a core holding
in the fund. While we can never provide assurances, we believe it is
likely that Healthsource may resume its pattern of earnings growth in
the near future. While these securities, along with the others discussed
in this report, were viewed favorably at the end of the fiscal year, all
portfolio holdings are subject to review and adjustment in accordance
with the fund's investment strategy and may vary in the future.
[GRAPHIC CHARTS OMITTED: (1) TOP FIVE CONVERTIBLE HOLDINGS &
(2) TOP FIVE CORPORATE HIGH-YIELD HOLDINGS]
TOP FIVE CONVERTIBLE HOLDINGS
Banamex 11.0% convertible, 2003
Banking
Atlantic Richfield $2.23 convertible preferred
Petrochemical refining and marketing
Exide Corp. 2.9% convertible, 2005
Auto and industrial batteries
National Semiconductor 6.5% convertible, 2002
Semiconductor manufacturing
Softkey International 5.5% convertible, 2000
Computer software
TOP FIVE CORPORATE HIGH-YIELD HOLDINGS
Transtexas Gas Corp. 11.5%, 2002
Natural gas exploration and development
Key Plastics Corp. 14.0%, 1999
Auto parts manufacturing
MacAndrews & Forbes Holdings 13.0%, 1999
Conglomerate with interests in cosmetics, publishing, and retailing
Talley Industries 12.25% stepped coupon, 2005
Conglomerate with interests in aerospace and industrial and consumer
products
PSF Finance 12.0% stepped coupon, 2003
Finance subsidiary of pork processor
Footnote reads:
Top holdings are as of 8/31/96 and represent 14.3% of the fund's net
assets. Holdings will vary over time.
One convertible position that proved somewhat disappointing over the
period was the exchangeable note issued Atlantic Richfield, which is
convertible into shares of Lyondell Corporation. The company's
performance lagged due to interim price declines for ethylene, a base
chemical used in many commodity plastics and a major product for
Lyondell. Lyondell is a commodity chemical company and, as such, is
subject to the cyclical nature of that marketplace.
* SEVERAL FACTORS COMBINE TO BOOST HIGH-YIELD MARKET
We believe several factors were responsible for the high-yield market's
strong relative performance over the fiscal year. First, the technical,
or supply and demand, condition of the market was conducive to rising
bond prices. According to AMG Data Services, cash flows into high-yield
bonds -- the principal measure of investor demand -- have been
substantial, averaging upward of $200 million to $300 million per week
over the past year.
Mergers and acquisition activity also bolstered high-yield performance.
Most recently, MFS Communications -- one of the largest issuers in the
high-yield market -- was purchased by WorldCom, the nation's fourth
largest long-distance carrier. Given the substantial price appreciation
in the fund's investment in MFS, we took profits on the bonds during the
fiscal year's second half. MFS is the leading provider of alternative
local telephone services to business customers.
Numerous high-yield issuers became publicly traded companies during the
period, providing a further boost to the market. One noteworthy example
from the portfolio was Loehmann's, a long-standing holding. Loehmann's
successful initial public stock offering during the spring enabled it to
refinance all of its outstanding debt. The company called in all of its
existing high-yield bonds -- which entailed purchasing the bonds at a
premium to face value -- enabling the fund to realize considerable gains
on many of its investments.
Finally, Putnam's research confirmed that continuing economic strength,
resulting in solid corporate earnings, contributed to an extremely low
default rate of less than 1% of the overall high-yield market during the
period.
[GRAPHIC PIE CHART OMITTED: PORTFOLIO COMPOSITION (8/31/96)
Common stocks (including warrants) -- 1.2%
Preferred stocks -- 2.6%
Corporate high-yield bonds -- 34.1%
Convertible securities -- 55.3%
Other -- 6.8%
Footnote reads:
Based on total market value of assets. Composition will vary over time.
One area of underperformance during the period was the fund's
telecommunications holdings. With the passage of the landmark
telecommunications bill last February, telecom companies launched
aggressive financing plans to enable them to compete effectively with
telephone companies. While we believe this legislation fundamentally
improved the business environment for the telecom industry, the
oversupply of telecom bonds placed a drag on the sector's performance
which we believe will be temporary.
* CONTINUED FOCUS ON VALUE BACKED BY SUPPORTIVE FINANCIAL POSITIONS
Despite recent debate regarding a possible increase in the target for
short-term interest rates by the Federal Reserve Board, we consider the
overall rate environment to be relatively benign at present. Although we
can't make predictions, we believe it is unlikely that any near-term Fed
increases will signal the beginning of a series of increases. While the
economy continues to exhibit strength, we believe it is not so strong as
to justify an aggressively restrictive monetary policy by the Fed.
If the pace of economic activity begins to slow as we move into calendar
1997, this could put pressure on the operations of many of the smaller
companies that issue convertibles. Accordingly, we will, as always,
continue to closely monitor economic indicators in the months to come.
We will, moreover, continue to capitalize on opportunities to upgrade
the quality of the portfolio by investing in securities that we believe
offer considerable value and are issued by companies that, in our view,
have solid credit profiles.
The views expressed here are exclusively those of Putnam Management.
They are not meant as investment advice. Although the described holdings
were viewed favorably as of 8/31/96, there is no guarantee the fund will
continue to hold these securities in the future. The lower credit
ratings of high-yield corporate bonds reflect a greater possibility that
adverse changes in an issuer's business or financial condition, or in
general economic conditions, may impair the issuer's ability to pay
principal and interest on its bonds.
Performance summary
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.
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 in the fund.
TOTAL RETURN FOR PERIODS ENDED 8/31/96
Merrill Lynch First Boston Consumer
Market All-Convertible High-Yield Price
NAV price Index* Bond Index Index
- -----------------------------------------------------------------------
1 year 9.15% 10.63% 11.30% 10.15% 2.88%
- -----------------------------------------------------------------------
5 years 103.31 115.30 91.95 83.10 15.15
Annual average 15.25 16.58 13.92 12.85 2.86
- -----------------------------------------------------------------------
Life of fund
(since 7/9/87) 171.26 171.39 -- 167.03 38.59
Annual average 11.52 11.53 -- 11.30 3.63
- -----------------------------------------------------------------------
* Index began on 12/31/87
TOTAL RETURN FOR PERIODS ENDED 9/30/96
(most recent calendar quarter)
Market
NAV price
- -----------------------------------------------------------------------
1 year 10.15% 13.34%
- -----------------------------------------------------------------------
5 years 106.16 106.66
Annual average 15.57 15.62
- -----------------------------------------------------------------------
Life of fund
(since 7/9/87) 177.54 180.09
Annual average 11.69 11.80
- -----------------------------------------------------------------------
Performance data represent past results and do not reflect future
performance. They do not take into account any adjustment for taxes
payable on reinvested distributions. 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. The lower credit
ratings of high-yield corporate bonds reflect a greater possibility that
adverse changes in an issuer's business or financial condition, or in
general economic conditions, may impair the issuer's ability to pay
principal and interest on its bonds.
PRICE AND DISTRIBUTION INFORMATION
12 months ended 8/31/96
- -----------------------------------------------------------------------
Distributions (number) 12
- -----------------------------------------------------------------------
Income $0.852
- -----------------------------------------------------------------------
Total $0.852
- -----------------------------------------------------------------------
Share value: NAV Market price
- -----------------------------------------------------------------------
8/31/95 $9.49 $10.000
- -----------------------------------------------------------------------
8/31/96 9.48 10.125
- -----------------------------------------------------------------------
Current return: NAV Market price
- -----------------------------------------------------------------------
End of period
Current dividend
rate1 8.99% 8.41%
- -----------------------------------------------------------------------
1 Income portion of most recent distribution, annualized and divided by
NAV or market price at end of period.
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.
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
The Merrill Lynch All-Convertible Index* is an unmanaged list of
convertible securities commonly used as a measure of performance for the
convertible market.
The First Boston High-Yield Bond Index* is a market-weighted index
including publicly traded bonds having a rating below BBB by Standard &
Poor's(registered trademark) and Moody's. 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.
Consumer Price Index (CPI) is a commonly used measure of inflation; it
does not represent an investment return.
*Securities indexes assume reinvestment of all distributions and
interest payments and do not take in account brokerage fees or taxes.
Securities in the fund do not match those in the indexes and
performance of the fund will differ. It is not possible to invest
directly in an index.
Report of independent accountants
For the fiscal year ended August 31, 1996
To the Trustees and Shareholders of
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 August 31,
1996, 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 audit, which included confirmation of
investments owned at August 31, 1996 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 LLP
Boston, Massachusetts
October 17, 1996
<TABLE>
<CAPTION>
Portfolio of investments owned
August 31, 1996
<S> <C> <C> <C> <C>
CONVERTIBLE BONDS AND NOTES (45.8%) *
PRINCIPAL AMOUNT VALUE
Aerospace (1.7%)
- --------------------------------------------------------------------------------------------------------------------
$2,450,000 UNC, Inc. cv. sub. deb. 7 1/2s, 2006 $ 2,192,750
Aerospace and Defense (1.7%)
- --------------------------------------------------------------------------------------------------------------------
2,450,000 Rohr Industries, Inc. cv. sub. deb. 7s, 2012 2,146,813
Automotive (3.8%)
- --------------------------------------------------------------------------------------------------------------------
4,500,000 Exide Corp. 144A cv. sr. sub. notes 2.9s, 2005 2,677,500
2,750,000 Mascotech, Inc. cv. sub. deb. 4 1/2s, 2003 2,158,750
-------------
4,836,250
Banks (3.4%)
- --------------------------------------------------------------------------------------------------------------------
3,395,000 Banamex 144A cv. jr. bonds 11s, 2003 3,403,488
832,000 Banco Nacional de Mexico SA cv. bonds 7s, 1999 (Mexico) 773,760
108,000 Banco Nationale de Mexico 144A cv. company guaranty 7s, 1999 (Bahamas) 100,440
-------------
4,277,688
Broadcasting (1.3%)
- --------------------------------------------------------------------------------------------------------------------
3,500,000 Comcast Corp. cv. notes 1 1/8s, 2007 1,596,875
Business Equipment (0.3%)
- --------------------------------------------------------------------------------------------------------------------
550,000 U.S. Office Products Co. 144A cv. sub. notes 5 1/2s, 2003 451,000
Computer Equipment (1.9%)
- --------------------------------------------------------------------------------------------------------------------
600,000 Conner Peripherals, Inc. cv. sub. deb. 6 1/2s, 2002 636,750
2,500,000 Maxtor Corp. cv. sub. deb. 5 3/4s, 2012 1,700,000
-------------
2,336,750
Computer Software (0.4%)
- --------------------------------------------------------------------------------------------------------------------
500,000 MacNeal-Schwendler cv. sub. deb. 7 7/8s, 2004 455,000
Computers (2.0%)
- --------------------------------------------------------------------------------------------------------------------
3,200,000 Softkey International, Inc. 144A cv. sr. notes 5 1/2s, 2000 2,560,000
Consumer Services (0.7%)
- --------------------------------------------------------------------------------------------------------------------
900,000 National Education Corp. cv. sub. deb. 6 1/2s, 2011 823,500
Electrical Equipment (1.1%)
- --------------------------------------------------------------------------------------------------------------------
1,400,000 Magnetek, Inc. cv. deb. 8s, 2001 1,354,500
Electronics (4.1%)
- --------------------------------------------------------------------------------------------------------------------
300,000 Diagnostic Retrieval System cv. sr. sub. deb. 9s, 2003 400,500
3,000,000 National Semiconductor cv. deb. 144A 6 1/2s, 2002 2,640,000
750,000 Park Electrochemical Corp. cv. sub. notes 5 1/2s, 2006 597,188
1,700,000 Richardson Electronics Ltd. cv. sub. deb. 7 1/4s, 2006 1,462,000
-------------
5,099,688
Environmental Control (1.8%)
- --------------------------------------------------------------------------------------------------------------------
1,300,000 OHM Corp. cv. sub. deb. 8s, 2006 1,153,750
1,300,000 Weston (Roy F.), Inc. cv. deb. 7s, 2002 1,096,875
-------------
2,250,625
Food (2.0%)
- --------------------------------------------------------------------------------------------------------------------
2,500,000 Chiquita Brands International, Inc. cv. sub. deb. 7s, 2001 2,162,500
400,000 Chiquita Brands International, Inc. 144A cv. sub deb. 7s, 2001 346,000
-------------
2,508,500
Health Care (5.1%)
- --------------------------------------------------------------------------------------------------------------------
500,000 Careline, Inc. cv. sr. sub. notes 8s, 2001 528,125
2,500,000 Healthsource, Inc. 144A cv. sub. notes 5s, 2003 1,918,750
2,250,000 Theratx Inc. cv. deb. 8s, 2002 2,182,500
1,550,000 Theratx Inc. 144A cv. sub. 8s, 2002 1,488,000
300,000 Quantum Health Resources, Inc. cv. deb. 4 3/4s, 2000 276,000
-------------
6,393,375
Paper and Forest Products (1.0%)
- --------------------------------------------------------------------------------------------------------------------
1,500,000 Stone Container Corp. cv. sub. deb. 6 3/4s, 2007 1,260,000
Pharmaceuticals (2.3%)
- --------------------------------------------------------------------------------------------------------------------
1,250,000 Ivax Corp. cv. deb. 6 1/2s, 2001 1,121,875
400,000 Pharmaceutical Marketing Services Inc. cv. notes 6 1/4s, 2003 292,000
2,150,000 Pharmaceutical Marketing Services Inc. 144A cv. deb. 6 1/4s, 2003 1,529,188
-------------
2,943,063
Pipelines (0.9%)
- --------------------------------------------------------------------------------------------------------------------
950,000 SFP Pipeline Holdings, Inc. var. rate exch. cv. deb. 10.42s, 2010 [2 DOUBLE DAGGERS] 1,140,000
Publishing (1.0%)
- --------------------------------------------------------------------------------------------------------------------
3,850,000 Hollinger, Inc. cv. Liquid Yield Option Notes (LYON) zero %, 2013 1,270,500
REITs(Real Estate Investment Trust) (1.1%)
- --------------------------------------------------------------------------------------------------------------------
850,000 Alexander Haagen Properties cv. sub. deb. Ser. A, 7 1/2s, 2001 773,500
600,000 Liberty Property Trust cv. sub. deb. 8s, 2001 636,000
-------------
1,409,500
Real Estate (1.3%)
- --------------------------------------------------------------------------------------------------------------------
1,750,000 Malan Realty Investors cv. sub. notes 9 1/2s, 2004 1,627,500
Retail (4.0%)
- --------------------------------------------------------------------------------------------------------------------
2,900,000 Baker (J.), Inc. cv. deb. 7s, 2002 2,349,000
550,000 Ingles Markets, Inc. cv. sub. deb. 10s, 2008 680,625
2,550,000 Michaels Stores, Inc. cv. sub. notes 6 3/4s, 2003 1,989,000
-------------
5,018,625
Specialty Consumer Products (0.4%)
- --------------------------------------------------------------------------------------------------------------------
750,000 Bell Sports Corp. cv. sub. deb. 4 1/4s, 2000 551,250
Telecommunication (0.1%)
- --------------------------------------------------------------------------------------------------------------------
300,000 Winstar Communications. Inc. 144A cv. sr. disc. notes stepped-coupon
zero % (14s, 10/15/00), 2005 ++ 189,000
Textiles (0.9%)
- --------------------------------------------------------------------------------------------------------------------
1,000,000 Dixie Yarns, Inc. cv. deb. 7s, 2012 790,000
400,000 Fieldcrest Cannon, Inc. cv. sub. deb. 6s, 2012 294,000
-------------
1,084,000
Tobacco (1.5%)
- --------------------------------------------------------------------------------------------------------------------
2,515,000 Standard Commercial Corp. cv. sub. deb. 7 1/4s, 2007 1,898,825
-------------
Total Convertible Bonds and Notes (cost $54,441,570) $ 57,675,577
CORPORATE BONDS AND NOTES (34.1%) *
PRINCIPAL AMOUNT VALUE
Advertising (0.8%)
- --------------------------------------------------------------------------------------------------------------------
$100,000 Lamar Advertising Co. sr. secd. notes 11s, 2003 $ 104,500
475,000 Universal Outdoor, Inc. sr. notes stepped-coupon zero % (14s,
7/1/99), 2004 ++ 380,000
500,000 Universal Outdoor, Inc. sub. deb. 11s, 2003 537,500
-------------
1,022,000
Aerospace and Defense (0.6%)
- --------------------------------------------------------------------------------------------------------------------
500,000 BE Aerospace sr. notes 9 3/4s, 2003 510,000
160,000 Greenwich Air Services, Inc. sr. notes 10 1/2s, 2006 163,200
50,000 Howmet Corp. sr. sub notes 10s, 2003 52,500
55,000 UNC, Inc. 144A sr. sub. notes 11s, 2006 57,200
-------------
782,900
Agriculture (0.9%)
- --------------------------------------------------------------------------------------------------------------------
585,000 PMI Holdings Corp. sub. disc. deb. stepped-coupon Ser. B, zero %
(11 1/2s, 9/1/00), 2005 ++ 340,763
1,385,000 PSF Finance (L.P.) sr. disc. notes stepped-coupon zero % (12s, 9/15/96), 2003
(acquired 3/15/95, cost $999,954)(In default) +(double dagger)++ 692,500
250,000 PSF Finance (L.P.) sr. exch. notes 12 1/4s, 2004 (acquired 3/15/95, cost
$250,000)(In default) (double dagger)+ 136,550
-------------
1,169,813
Automotive (-%)
- --------------------------------------------------------------------------------------------------------------------
50,000 Delco Remy International, Inc. 144A sr. sub notes 10 5/8s, 2006 50,999
Automotive Parts (0.8%)
- --------------------------------------------------------------------------------------------------------------------
25,000 A.P.S. Inc. company guaranty 11 7/8s, 2006 26,624
750,000 Key Plastics Corp. sr. notes 14s, 1999 774,375
205,000 Lear Corp. sub. notes 9 1/2s, 2006 211,150
-------------
1,012,149
Banking (0.4%)
- --------------------------------------------------------------------------------------------------------------------
250,000 Chevy Chase Savings Bank Inc. sub. deb. 9 1/4s, 2005 243,750
250,000 First Nationwide Holdings sr. sub. notes 9 1/8s, 2003 258,124
501,874
Broadcasting (1.9%)
- --------------------------------------------------------------------------------------------------------------------
100,000 Argyle Television Corp. sr. sub. notes 9 3/4s, 2005 99,000
40,000 Chancellor Broadcasting Co. sr. sub. notes 9 3/8s, 2004 39,000
265,000 Commodore Media, Inc. sr. sub. notes stepped-coupon 7 1/2s, (13 1/4s,
5/1/98), 2003 ++ 272,950
250,000 Echostar Satellite Broadcast Corp. sr. disc. notes stepped-coupon zero %
(13 1/8s, 3/15/00), 2004 ++ 154,374
250,000 Heritage Media Corp. sr. sub. notes 8 3/4s, 2006 232,500
200,000 Lenfest Communications, Inc. sr. notes 8 3/8s, 2005 185,000
125,000 Orbcomm Global Capital Corp. 144A sr. notes 14s, 2004 125,313
475,000 Paxson Communications Corp. 144A sr. sub. notes 11 5/8s, 2002 494,000
360,000 SFX Broadcasting, Inc. sr. sub. notes Ser. B, 10 3/4s, 2006 366,300
490,000 Telemedia Broadcasting Corp. 144A deb. stepped-coupon 3.8s (16s,
6/15/99), 2004 ++ 442,838
-------------
2,411,275
Buses (0.3%)
- --------------------------------------------------------------------------------------------------------------------
90,000 Blue Bird Body Co. sub. deb. Ser. B, 11 3/4s, 2002 93,600
355,000 MCII Holding (USA), Inc. bonds zero %, 2002 275,125
-------------
368,725
Building Materials (0.1%)
- --------------------------------------------------------------------------------------------------------------------
165,000 Cemex S.A. 144A bonds 12 3/4s, 2006 (Mexico) 176,137
Building Products (0.5%)
- --------------------------------------------------------------------------------------------------------------------
250,000 American Standard, Inc. deb. 9 1/4s, 2016 250,625
150,000 Schuller International Corp. sr. notes 10 7/8s, 2004 162,750
125,000 Triangle Pacific Corp. sr. notes 10 1/2s, 2003 130,938
50,000 Waxman Industries Inc. sr. notes stepped-coupon Ser. B, zero % (12 3/4s,
6/1/99), 2004 ++ 33,500
-------------
577,813
Building and Construction (0.8%)
- --------------------------------------------------------------------------------------------------------------------
50,000 Miles Homes Services sr. notes 12s, 2001 43,000
500,000 NVR, Inc. sr. notes 11s, 2003 515,000
300,000 Presley Cos. sr. notes 12 1/2s, 2001 287,250
200,000 Scotsman Group, Inc. sr. secd. notes 9 1/2s, 2000 202,000
-------------
1,047,250
Business Services (0.2%)
- --------------------------------------------------------------------------------------------------------------------
100,000 Corporate Express, Inc. sr. sub. notes Ser. B, 9 1/8s, 2004 99,500
75,000 Pierce Leahy Corp. 144A sr. notes 11 1/8s, 2006 77,813
-------------
177,313
Cable Television (2.0%)
- --------------------------------------------------------------------------------------------------------------------
250,000 Adelphia Communications Corp. notes Ser. B, 9 7/8s, 2005 231,250
601,984 Adelphia Communications Corp. sr. notes 9 1/2s, 2004 (2 double daggers) 496,637
200,000 Century Communications Corp. sr. notes 9 1/2s, 2005 196,000
300,000 Diamond Cable Communication Co. sr. disc. notes stepped-coupon zero %
(11 3/4s, 12/15/00), 2005 ++ 189,000
548,920 Falcon Holdings Group, Inc. sr. sub. notes 11s, 2003 (2 double daggers) 513,240
100,000 International Cabletel, Inc. sr. notes stepped-coupon Ser. A, zero %
(12 3/4s, 4/15/00), 2005 ++ 66,500
90,000 International Cabletel, Inc. sr. notes stepped-coupon Ser. B, zero %
(11 1/2s, 2/01/01), 2006 ++ 53,100
250,000 Marcus Cable Co. (L.P.) sr. sub. disc. notes stepped-coupon zero % (13
1/2s, 8/1/99), 2004 ++ 183,750
860,000 Telewest Communications PLC deb. stepped-coupon zero % (11s, 10/1/00),
2007 (United Kingdom)++ 531,050
-------------
2,460,527
Cellular Communications (2.2%)
- --------------------------------------------------------------------------------------------------------------------
200,000 Cencall Communications Corp. sr. disc. notes stepped-coupon zero %
(10 1/8s, 1/15/99), 2004 ++ 127,000
500,000 Comunicacion Celular bonds stepped-coupon zero % (13 1/8s, 11/15/00),
2003 (Colombia) ++ 301,250
250,000 Dial Call Communications, Inc. sr. disc. notes stepped-coupon zero %
(12 1/4s, 4/15/99), 2004 ++ 156,250
550,000 Intercel, Inc. sr. disc. notes stepped-coupon zero % (12s, 5/1/01), 2006 ++ 291,500
325,000 Milicom International Cellular 144A sr. disc. notes stepped-coupon zero %
(13 1/2s, 6/01/00), 2006 (Luxembourg) ++ 174,688
750,000 NEXTEL Communications, Inc. sr. disc. notes stepped-coupon zero % (9 3/4s,
2/15/99), 2004 ++ 442,500
1,000,000 NEXTEL Communications, Inc. sr. disc. notes stepped-coupon zero % (11 1/2s,
9/1/98), 2003 ++ 680,000
80,000 Omnipoint Corp. 144A sr. notes 11 5/8s, 2006 80,600
500,000 Pricellular Wireless sr. disc. notes stepped-coupon Ser. B, zero % (14s,
11/15/97), 2001 ++ 460,000
-------------
2,713,788
Chemicals (1.0%)
- --------------------------------------------------------------------------------------------------------------------
500,000 Acetex Corp. sr. notes 9 3/4s, 2003 (Canada) 478,750
250,000 Arcadian Partner sr. notes 10 3/4s, 2005 271,875
250,000 G-I Holdings sr. notes Ser. B, 10s, 2006 243,124
250,000 Harris Chemical Corp. sr. secd. disc. notes 10 1/4s, 2001 250,000
40,000 Texas Petrochemical 144A sr. sub. notes 11 1/8s, 2006 41,650
-------------
1,285,399
Computer Equipment (0.3%)
- --------------------------------------------------------------------------------------------------------------------
400,000 Computervision Corp. sr. sub. notes 11 3/8s, 1999 414,000
Conglomerates (1.2%)
- --------------------------------------------------------------------------------------------------------------------
750,000 MacAndrews & Forbes Holdings, Inc. sub. deb. notes 13s, 1999 750,000
859,000 Talley Industries, Inc. sr. disc. deb. stepped-coupon zero % (12 1/4s,
10/15/98), 2005 ++ 712,970
-------------
1,462,970
Consumer Durable Goods (0.2%)
- --------------------------------------------------------------------------------------------------------------------
200,000 Remington Products Co. LLC 144A sr. sub. notes 11s, 2006 201,000
Consumer Services (0.4%)
- --------------------------------------------------------------------------------------------------------------------
526,000 Coinmach Corp. sr. notes Ser. B, 11 3/4s, 2005 553,615
Containers (0.5%)
- --------------------------------------------------------------------------------------------------------------------
350,000 Ivex Packaging Corp. sr. sub. notes 12 1/2s, 2002 371,000
200,000 Four M Corp. 144A sr. notes 12s, 2006 206,499
30,000 Printpack, Inc. 144A sr. notes 10 5/8s, 2006 30,300
60,000 Printpack, Inc. 144A sr. notes 9 7/8s, 2004 60,600
-------------
668,399
Electric Utilities (1.2%)
- --------------------------------------------------------------------------------------------------------------------
600,000 First PV Funding deb. 10.15s, 2016 631,500
150,000 Midland Funding Corp. deb. Ser. B, 13 1/4s, 2006 167,250
650,000 Midland Funding Corp. deb. Ser. A, 11 3/4s, 2005 689,813
-------------
1,488,563
Electronics (0.5%)
- --------------------------------------------------------------------------------------------------------------------
1,000,000 International Semi-Tech. Corp. sr. secd. disc. notes stepped-coupon zero %
(11 1/2s, 8/15/00), 2003 (Canada) ++ 565,000
50,000 Moog, Inc. 144A sr. sub. notes 10s, 2006 50,813
-------------
615,813
Entertainment (0.9%)
- --------------------------------------------------------------------------------------------------------------------
400,000 Premier Parks, Inc. sr. notes Ser. A, 12s, 2003 424,000
500,000 Six Flags Corp. sr. sub. notes stepped-coupon zero % (12 1/4s, 6/15/98),
2005 ++ 425,000
520,000 UIH Australia/Pacific 144A sr. disc. notes zero % (14s, 5/15/01),
2006 (Australia) ++ 257,400
-------------
1,106,400
Financial Services (0.3%)
- --------------------------------------------------------------------------------------------------------------------
110,000 Contifinancial Corp. sr. notes 8 3/8s, 2003 109,449
250,000 Keystone Group, Inc. sr. secd. notes 9 3/4s, 2003 252,500
-------------
361,949
Food (0.7%)
- --------------------------------------------------------------------------------------------------------------------
404,000 Del Monte Corp. sub. notes 12 1/4s, 2002 (2 double daggers) 391,880
500,000 Mafco, Inc. sr. sub. notes 11 7/8s, 2002 527,500
-------------
919,380
Gaming (3.4%)
- --------------------------------------------------------------------------------------------------------------------
100,000 Alliance Gaming Corp. sr. notes 12 7/8s, 2003 99,000
265,000 Argosy Gaming Co. 144A 1st. mtge 13 1/4s, 2004 255,063
330,000 Arizona Charlies Corp. 1st mtge. Ser. B, 12s, 2000 212,850
120,000 Capitol Queen Corp. 1st mtge. notes Ser. B, 12s, 2000 + 82,800
85,000 Casino America, Inc. sr. notes 12 1/2s, 2003 85,424
90,000 Casino Magic 1st mtge. 13s, 2003 89,549
45,000 Cobblestone Golf Group 144A sr. notes 11 1/2s, 2003 45,450
150,000 Elsinore Corp. 1st mtge. 12 1/2s, 2000 (In Default) + 142,500
250,000 Empress River Casino sr. notes 10 3/4s, 2002 268,125
60,000 Harveys Casino Resorts sr. sub. notes 10 5/8s, 2006 61,650
250,000 Grand Casinos, Inc. 1st mtge. 10 1/8s, 2003 243,750
450,000 Hollywood Casino Corp. sr. notes 12 3/4s, 2003 427,500
475,000 Lady Luck Gaming 1st mtge. 11 7/8s, 2001 467,875
125,000 Louisiana Casino Cruises Corp. sr. sub. deb. 11 1/2s, 1998 103,125
550,000 Mohegan Tribal Gaming sr. notes Ser. B, 13 1/2s, 2002 684,750
500,000 Trump A.C. 1st mtge. 11 1/4s, 2006 477,500
243,000 Trump Castle notes 11 1/2s, 2000 243,000
250,000 Trump Holdings & Funding Corp. sr. notes 15 1/2s, 2005 288,750
-------------
4,278,661
Hospital Management and Medical Services (0.9%)
- --------------------------------------------------------------------------------------------------------------------
500,000 Tenet Healthcare Corp. sr. sub. notes 10 1/8s, 2005 535,000
250,000 Integrated Health Services sr. sub. notes 9 5/8s, 2002 251,250
200,000 Merit Behavioral Care sr. sub. notes 11 1/2s, 2005 210,000
145,000 Paracelsus Healthcare sr. sub. notes 10s, 2006 146,450
-------------
1,142,700
Insurance (0.3%)
- --------------------------------------------------------------------------------------------------------------------
200,000 Conseco Inc. sr. notes 10 1/2s, 2004 226,622
200,000 Reliance Group Holdings, Inc. sr. sub. deb. 9 3/4s, 2003 200,500
-------------
427,122
Lodging (0.1%)
- --------------------------------------------------------------------------------------------------------------------
55,000 Wyndham Hotel Corp. sr. sub. notes 10 1/2s, 2006 56,375
Medical Supplies and Devices (0.2%)
- --------------------------------------------------------------------------------------------------------------------
150,000 Graphic Controls Corp. sr. sub. notes Ser. A, 12s, 2005 159,000
100,000 Wright Medical Technology, Inc. sr. secd. notes Ser. B, 10 3/4s, 2000 98,500
-------------
257,500
Metals and Mining (0.7%)
- --------------------------------------------------------------------------------------------------------------------
500,000 Ispat Mexicana, SA 144A deb. 10 3/8s, 2001 (Mexico) 487,500
250,000 Kaiser Aluminum & Chemical Corp. sr. sub. notes 12 3/4s, 2003 268,750
75,000 Renco Metals, Inc. sr. notes 11 1/2s, 2003 78,938
95,000 Royal Oak Mines, Inc. 144A sr. sub. notes 11s, 2006 (Canada) 95,000
-------------
930,188
Motion Picture Distribution (0.8%)
- --------------------------------------------------------------------------------------------------------------------
600,000 Act III Theatres, Inc. sr. sub. notes 11 7/8s, 2003 655,500
195,000 Cinemark Mexico notes 12s, 2003 (Mexico) 180,375
170,000 Cinemark USA 144A sr. sub. notes 9 5/8s, 2008 164,899
-------------
1,000,774
Office Equipment (0.2%)
- --------------------------------------------------------------------------------------------------------------------
250,000 United Stationer Supply, Inc. sr. sub. notes 12 3/4s, 2005 270,625
Oil and Gas (1.8%)
- --------------------------------------------------------------------------------------------------------------------
350,000 Chesapeake Energy Corp. sr. notes 10 1/2s, 2002 366,625
60,000 Cliffs Drilling Co. 144A sr. notes 10 1/4s, 2003 60,600
140,000 Flores & Rucks, Inc. sr. notes 13 1/2s, 2004 163,100
184,000 Maxus Energy Corp. deb. 11 1/4s, 2013 188,140
150,000 Maxus Energy Corp. notes 9 1/2s, 2003 145,875
250,000 OPI International sr. notes 12 7/8s, 2002 276,250
50,000 Transamerican Refining 1st mtge. Ser. 2, 16 1/2s, 2002 46,500
350,000 Transamerican Refining 1st mtge. stepped-coupon Ser.1, zero %, (18 1/2s,
2/1/98), 2002 248,500
750,000 Transtexas Gas Corp. sr. secd. notes 11 1/2s, 2002 781,875
-------------
2,277,465
Paging (1.3%)
- --------------------------------------------------------------------------------------------------------------------
500,000 A+ Network Inc. sr. sub. notes 11 7/8s, 2005 465,000
250,000 Metrocall, Inc. sr. sub. notes 10 3/8s, 2007 191,250
500,000 Mobile Telecommunications Tech. sr. notes 13 1/2s, 2002 520,000
500,000 Pagemart Nationwide, Inc. sr. disc. notes stepped-coupon zero % (15s,
2/1/00), 2005 ++ 332,500
100,000 Pronet, Inc. sub. notes 11 7/8s, 2005 91,000
-------------
1,599,750
Paper and Forest Products (0.7%)
- --------------------------------------------------------------------------------------------------------------------
175,000 Domtar Inc. deb. 9 1/2s, 2016 (Canada) 179,374
135,000 Florida Coast Paper LLC 144A 1st. mtge. 12 3/4s, 2003 142,088
500,000 Gaylord Container Corp. sr. sub. disc. deb. 12 3/4s, 2005 ++ 532,500
-------------
853,962
Publishing (0.5%)
- --------------------------------------------------------------------------------------------------------------------
100,000 Marvel Holdings, Inc. sr. notes Ser. B, zero %, 1998 76,750
150,000 Marvel III Holdings, Inc. notes Ser. B, 9 1/8s, 1998 140,250
500,000 Marvel Parent Holdings, Inc. sr. secd. disc. notes zero %, 1998 380,000
-------------
597,000
Real Estate (0.2%)
- --------------------------------------------------------------------------------------------------------------------
250,000 Chelsea Piers Ser. B, 1st mtge. stepped-coupon zero % (12 1/2s,
6/15/96), 2004 ++ 233,750
15,000 Chelsea Piers 144A Ser. B, 1st mtge. stepped-coupon zero% (11s,
6/15/99), 2009 ++ 14,025
-------------
247,775
Retail (2.0%)
- --------------------------------------------------------------------------------------------------------------------
410,000 Apparel Retailers, Inc. deb. stepped-coupon Ser. B, zero % (12 3/4s,
8/15/98), 2005 ++ 321,850
250,000 Finlay Enterprises, Inc. sr. disc. deb. stepped-coupon zero % (12s,
5/1/98), 2005 ++ 202,500
185,000 Guitar Center Management 144A sr. notes 11s, 2006 187,313
450,000 Kmart Corp. med. term notes Ser. C, 7.85s, 2002 393,890
135,000 Loehmanns, Inc. sr. notes 11 7/8s, 2003 140,738
500,000 Mothers Work, Inc. sr. notes 12 5/8s, 2005 531,250
250,000 Parisian, Inc. sr. sub. notes 9 7/8s, 2003 246,250
100,000 Specialty Retailers, Inc. sr. sub. notes 11s, 2003 100,000
400,000 Waban, Inc. sr. sub. notes 11s, 2004 416,000
-------------
2,539,791
Specialty Consumer Products (0.2%)
- --------------------------------------------------------------------------------------------------------------------
250,000 Herff Jones, Inc. sr. sub. notes 11s, 2005 257,500
Supermarkets (0.2%)
- --------------------------------------------------------------------------------------------------------------------
300,000 Ralphs Grocery sr. notes 10.45s, 2004 295,500
Telecommunication (1.5%)
- --------------------------------------------------------------------------------------------------------------------
250,000 American Communication Services, Inc. sr. disc. notes stepped-coupon zero %
(12 3/4s, 4/1/01), 2006 ++ 126,250
200,000 Brooks Fiber Properties sr. disc. notes stepped-coupon zero % (10 7/8s,
3/1/01), 2006 ++ 113,499
250,000 GST Telecommunications, Inc. company guaranty stepped-coupon zero %
(13 7/8s, 12/15/00), 2005 ++ 132,500
250,000 Hyperion Communication 144A sr. disc. notes stepped-coupon zero % (13s,
4/15/01), 2003 ++ 135,624
890,000 ICG Holding Inc. sr. disc. notes stepped-coupon zero % (13 1/2s,
9/15/00), 2005 ++ 556,250
250,000 Intermedia Communications of Florida sr. notes Ser. B, 13 1/2s, 2005 283,125
250,000 Nextlink Communications, Inc. 144A sr. notes 12 1/2s, 2006 246,250
600,000 Winstar Communications, Inc. sr. disc. notes stepped-coupon zero % (14s,
10/15/00), 2005 ++ 331,500
-------------
1,924,998
Textiles (0.3%)
- --------------------------------------------------------------------------------------------------------------------
165,000 Polysindo International Finance company guaranty 11 3/8s, 2006 (Indonesia) 166,238
200,000 Reeves Industries Inc. sub. deb. 13 3/4s, 2001 179,500
-------------
345,738
Tobacco (0.1%)
- --------------------------------------------------------------------------------------------------------------------
100,000 RJR Nabisco, Inc. notes 8 3/4s, 2007 95,526
-------------
Total Corporate Bonds and Notes (cost $43,994,849) $ 42,949,001
CONVERTIBLE PREFERRED STOCKS (9.0%) *
NUMBER OF SHARES VALUE
Building and Construction (0.3%)
- --------------------------------------------------------------------------------------------------------------------
8,400 Southdown, Inc. $2.875, cv. pfd. $ 375,900
Construction (0.4%)
- --------------------------------------------------------------------------------------------------------------------
25,000 Perini Corp. $2.125, dep. shares cv. pfd. 487,500
Food (0.9%)
- --------------------------------------------------------------------------------------------------------------------
199,300 RJR Nabisco Holdings. Ser. C, $0.6012, sr. cv. pfd. 1,071,238
Insurance (1.8%)
- --------------------------------------------------------------------------------------------------------------------
45,000 USF&G Corp. Ser. A, $4.10, cv. pfd. 2,266,875
Oil and Gas (3.3%)
- --------------------------------------------------------------------------------------------------------------------
130,864 Atlantic Richfield Co. $2.23, cv. pfd. 2,993,514
55,325 Santa Fe Energy Resources, Inc. $1.40, cv. pfd. 1,141,078
-------------
4,134,592
REITs(Real Estate Investment Trust) (1.4%)
- --------------------------------------------------------------------------------------------------------------------
74,500 Oasis Residential, Inc. Ser. A, $2.25, cv. pfd. 1,806,625
Steel (0.9%)
- --------------------------------------------------------------------------------------------------------------------
24,500 Armco, Inc. $4.50, cv. pfd. 1,133,125
-------------
Total Convertible Preferred Stocks (cost $11,947,666) $ 11,275,855
PREFERRED STOCKS (2.6%) *
NUMBER OF SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------
3,126 Cablevision Systems Ser. M, $11.125 dep. shs. pfd. + $ 293,063
5,500 California Federal Bank Ser. B, $10.625, exch. pfd. 574,750
2,000 El Paso Electric Co. $11.40 pfd. (2 double daggers) + 220,000
4,000 First Nationwide Bank $11.50, pfd. 432,000
4,700 Fitzgeralds Gaming Co. $3.75 pfd. + 108,100
12,952 Foxmeyer Health Corp. Ser. A, $4.20, pfd. (2 double daggers) 220,184
4,235 K-III Communications Ser. B, $11.625 pfd. (2 double daggers) 415,030
14,900 SDW Hldgs Corp. 144A $3.50, pfd. + 432,100
511 Time Warner Inc. 144A, Ser. K, $10.25 pfd. + 518,665
-------------
Total Preferred Stocks (cost $3,387,432) $ 3,213,892
UNITS (2.2%) *
NUMBER OF UNITS VALUE
- --------------------------------------------------------------------------------------------------------------------
30 Celcaribe S.A. 144A units stepped-coupon zero % (13 1/2s,3/15/98), 2004 ++ $ 324,000
1,015 Cellnet Data Systems Inc. 144A units stepped-coupon zero % (13s,
6/15/00), 2005 ++ 771,400
80 Cobblestone Holdings, Inc. 144A units zero %, 2004 30,600
195 Diva Systems Corp. 144A units stepped-coupon zero % (13s, 5/15/01), 2006 ++ 106,763
400 Fitzgeralds Gaming Co. units 13s, 2002 296,000
350 Health-O-Meter Product units 13s, 2002 378,000
220 Interact Systems, Inc. 144A units stepped-coupon zero % (14s, 8/1/99),
2003 ++ 146,850
105 International Wireless Communications units zero %, 2001 54,075
65 Ionica PLC units 13 1/2s, 2006 (United Kingdom) 65,325
75 Sterling Chemical Holdings units stepped-coupon zero % (13 1/2s, 8/15/01),
2008 ++ 42,000
500 Terex Corp. 144A units 13 3/4s, 2002 523,750
-------------
Total Units (cost $2,393,659) $ 2,738,763
COMMON STOCKS (1.0%) *
NUMBER OF SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------
6,303 Elsinore Corp. + $ 1,379
22,946 Freeport-McMoRan Copper & Gold Co., Inc. Class B 674,039
23,860 Grand Union Co. (acquired various dates from 11/30/94 to 1/10/95 cost
$529,547)(double dagger) + 138,686
1,885 IFINT Diversified Holdings 144A + 92,601
14,351 Lady Luck Gaming Corp. (acquired 11/4/93, cost $11,820)(double dagger)+ 43,950
10,055 Loehmanns' Holdings, Inc. + 211,532
197 PMI Holdings Corp. 144A + 43,340
144 Premium Holdings L.P. 144A + 3,591
3,750 Specialty Foods Corp. + 1,875
1,602 Total Renal Care Holdings, Inc. + 65,882
-------------
Total Common Stocks (cost $671,934) $ 1,276,875
WARRANTS (0.2%) *+ PIRATION
NUMBER OF WARRANTS DATE VALUE
- --------------------------------------------------------------------------------------------------------------------
15,000 Becker Gaming Corp. 144A 11/15/00 $ 3,000
620 Casino America, Inc. 11/15/96 62
4,980 Casino Magic Finance Corp. 10/14/96 249
3,806 Cinemark Mexico USA, Inc. 8/1/03 35,263
115 Commodore Media 144A 5/1/00 14,950
500 Communication Cellular 144A 11/15/03 25,000
500 County Seat Holdings, Inc. 10/15/98 5,000
5,001 Elsinore Corp. 10/8/98 500
200 Fitzgeralds Gaming Co. 144A (acquired 7/26/96, cost $-)(double dagger) 3/15/99 20
175 Grand Union Co. (acquired 8/23/94, cost $70)(double dagger) 6/16/00 56
349 Grand Union Co. (acquired 8/24/93, cost $35)(double dagger) 6/16/00 14
250 Hyperion Telecommunication 4/15/01 2,500
1,617 Intelcom Group 9/15/05 25,064
250 Intermedia Communications 144A 6/1/00 10,000
135 Louisiana Casino Cruises, Inc. 144A 12/1/98 2,025
600 Miles Homes, Inc. 4/1/97 75
250 NEXTEL Communications Inc. 4/25/99 5
900 President Riverboat Casinos, Inc. 144A 9/23/96 45
1,490 SDW Hldgs Corp. Ser. B 144A 12/15/06 19,370
10,000 Southdown, Inc. 10/31/96 86,250
9 Telemedia Broadcasting Corp. 144A 4/1/04 6,443
2,700 UCC Investor Holding, Inc. (acquired 3/16/94, cost $35,100)(double dagger) 10/30/99 35,100
21 Wright Medical Technology, Inc. 144A 6/30/03 2,669
-------------
Total Warrants (cost $255,486) $ 273,660
SHORT-TERM INVESTMENTS (4.3%) * (cost $5,400,578)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------
$5,400,578 Interest in $883,204,000 joint repurchase agreement dated August 30, 1996
with Goldman, Sachs & Co. due September 3, 1996 with respect to various
U.S. Treasury obligations-maturity value of $5,401,367 for an effective
yield of 5.26% $ 5,400,578
- --------------------------------------------------------------------------------------------------------------------
Total Investments (cost $122,493,174) *** $ 124,804,201
- --------------------------------------------------------------------------------------------------------------------
* Percentages indicated are based on net assets of $125,863,628.
*** The aggregate identified cost on a tax basis is $122,493,174, resulting in gross unrealized
appreciation and depreciation of $11,791,800 and $9,480,773, respectively, or net unrealized
appreciation of $2,311,027.
+ Non-income-producing security.
++ The interest rate and date shown parenthetically represent the new interest rate to be paid and the
date the fund will begin receiving interest at this rate.
(double dagger) Restricted, excluding 144A securities, as to public resale. The total market value of restricted
securities held at August 31, 1996 was $1,046,876 or 0.8% of net assets.
(2 double daggers) Income may be received in cash or additional securities at
the discretion of the issuer.
144A after the name of a security represents those exempt from registration under Rule 144A of the
Securities Act of 1933. These securities may be resold in transactions exempt from registration,
normally to qualified institutional buyers.
The rates shown on variable rate securities are the current interest rates
at August 31, 1996, which are subject to change based on the terms of the security.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
August 31, 1996
<S> <C>
Assets
- --------------------------------------------------------------------------------------------------
Investments in securities, at value (identified cost $122,493,174) (Note 1) $124,804,201
- --------------------------------------------------------------------------------------------------
Cash 137,505
- --------------------------------------------------------------------------------------------------
Dividends, interest and other receivables 2,261,602
- --------------------------------------------------------------------------------------------------
Receivable for securities sold 108,422
- --------------------------------------------------------------------------------------------------
Total assets 127,311,730
Liabilities
- --------------------------------------------------------------------------------------------------
Distributions payable to shareholders 940,337
- --------------------------------------------------------------------------------------------------
Payable for securities purchased 164,028
- --------------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 239,859
- --------------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 277
- --------------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 1,319
- --------------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 23,775
- --------------------------------------------------------------------------------------------------
Other accrued expenses 78,507
- --------------------------------------------------------------------------------------------------
Total liabilities 1,448,102
- --------------------------------------------------------------------------------------------------
Net assets $125,863,628
Represented by
- --------------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $123,719,565
- --------------------------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 490,442
- --------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (Note 1) (657,406)
- --------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 2,311,027
- --------------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to capital shares outstanding $125,863,628
Computation of net asset value
- --------------------------------------------------------------------------------------------------
Net asset value per share ($125,863,628 divided by 13,272,242 shares) $9.48
- --------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Year ended August 31, 1996
<S> <C>
Investment income:
- ------------------------------------------------------------------------------------
Interest $11,476,132
- ------------------------------------------------------------------------------------
Dividends 1,416,499
- ------------------------------------------------------------------------------------
Total investment income 12,892,631
Expenses:
- ------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 947,376
- ------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 166,607
- ------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 12,759
- ------------------------------------------------------------------------------------
Administrative services (Note 2) 8,077
- ------------------------------------------------------------------------------------
Reports to shareholders 29,596
- ------------------------------------------------------------------------------------
Registration fees 450
- ------------------------------------------------------------------------------------
Auditing 50,739
- ------------------------------------------------------------------------------------
Legal 15,784
- ------------------------------------------------------------------------------------
Postage 75,699
- ------------------------------------------------------------------------------------
Exchange listing fees 24,661
- ------------------------------------------------------------------------------------
Other 3,770
- ------------------------------------------------------------------------------------
Total expenses 1,335,518
- ------------------------------------------------------------------------------------
Expense reduction (Note 2) (41,631)
- ------------------------------------------------------------------------------------
Net expenses 1,293,887
- ------------------------------------------------------------------------------------
Net investment income 11,598,744
- ------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 1,260,469
- ------------------------------------------------------------------------------------
Net unrealized depreciation on investments during the year (1,728,563)
- ------------------------------------------------------------------------------------
Net loss on investments (468,094)
- ------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $11,130,650
- ------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Year ended Year ended
August 31 August 31
1996 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase in net assets
- -----------------------------------------------------------------------------------------------------------------
Operations:
- -----------------------------------------------------------------------------------------------------------------
Net investment income $11,598,744 $10,352,272
- -----------------------------------------------------------------------------------------------------------------
Net realized gain on investments 1,260,469 990,977
- -----------------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of investments (1,728,563) 4,638,534
- -----------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 11,130,650 15,981,783
- -----------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- -----------------------------------------------------------------------------------------------------------------
From net investment income (11,263,468) (11,163,497)
- -----------------------------------------------------------------------------------------------------------------
Increase in capital share transactions from reinvestment of distributions 1,085,846 1,103,891
- -----------------------------------------------------------------------------------------------------------------
Total increase in net assets 953,028 5,922,177
- -----------------------------------------------------------------------------------------------------------------
Net assets
- -----------------------------------------------------------------------------------------------------------------
Beginning of year 124,910,600 118,988,423
- -----------------------------------------------------------------------------------------------------------------
End of year (including undistributed net investment income of
$490,442 and $202,643, respectively) $125,863,628 $124,910,600
- -----------------------------------------------------------------------------------------------------------------
Number of fund shares
- -----------------------------------------------------------------------------------------------------------------
Shares outstanding at beginning of year 13,158,906 13,037,556
- -----------------------------------------------------------------------------------------------------------------
Shares issued in connection with reinvestment of distributions 113,336 121,350
- -----------------------------------------------------------------------------------------------------------------
Shares outstanding at end of year 13,272,242 13,158,906
- -----------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
Year ended August 31
----------------------------------------------------
1996 1995 1994
----------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of year $9.49 $9.13 $9.52
- ---------------------------------------------------------------------------------------------------------------------------
Investment operations
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income .88 .79 .78
- ---------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (.04) .42 (.30)
- ---------------------------------------------------------------------------------------------------------------------------
Total from investment operations .84 1.21 .48
- ---------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ---------------------------------------------------------------------------------------------------------------------------
From net investment income (.85) (.85) (.87)
- ---------------------------------------------------------------------------------------------------------------------------
In excess of net investment income -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Total distributions (.85) (.85) (.87)
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $9.48 $9.49 $9.13
- ---------------------------------------------------------------------------------------------------------------------------
Market value, end of year $10.125 $10.000 $9.750
- ---------------------------------------------------------------------------------------------------------------------------
Total investment return at market value (%)(a) 10.63 12.60 6.84
- ---------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in thousands) $125,864 $124,911 $118,988
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%)(b) 1.06 1.00 1.04
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets (%) 9.19 8.73 8.23
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 56.82 61.19 52.10
- ---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Financial highlights (continued)
(For a share outstanding throughout the period)
-----------------------------------
1993 1992
-----------------------------------
<S> <C> <C>
Net asset value, beginning of year $8.49 $7.56
- ------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------
Net investment income .84 .88
- ------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments 1.05 .99
- ------------------------------------------------------------------------------------------------------
Total from investment operations 1.89 1.87
- ------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------
From net investment income (.84) (.94)
- ------------------------------------------------------------------------------------------------------
In excess of net investment income (.02) --
- ------------------------------------------------------------------------------------------------------
Total distributions (.86) (.94)
- ------------------------------------------------------------------------------------------------------
Net asset value, end of year $9.52 $8.49
- ------------------------------------------------------------------------------------------------------
Market value, end of year $10.000 $8.875
- ------------------------------------------------------------------------------------------------------
Total investment return at market value (%)(a) 23.78 30.71
- ------------------------------------------------------------------------------------------------------
Net assets, end of year (in thousands) $123,285 $108,909
- ------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%)(b) 1.03 1.13
- ------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets (%) 9.39 10.92
- ------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 71.63 45.84
- ------------------------------------------------------------------------------------------------------
(a) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) The ratio of expenses to average net assets for the period ended August 31, 1996 includes amounts paid
through expense offset arrangements. Prior period ratios exclude these amounts. (See Note 2).
</TABLE>
Notes to financial statements
August 31, 1996
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 non-convertible securities, lower-rated, or non-
rated 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 preparation of financial statements is in conformity
with generally accepted accounting principles and requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities. Actual results could differ from those
estimates.
A) Security valuation Investments for which market quotations are
readily available are stated at market value, which is determined using
the last reported sale, or, if no sales are reported -- as in the case
of some securities traded over-the-counter -- the last reported bid
price. Market quotations are not considered to be readily available for
certain debt obligations; such investments are stated at fair value on
the basis of valuations furnished by a pricing service or brokers,
approved by the Trustees, which determine valuations for normal,
institutional-size trading units of such securities using methods based
on market transactions for comparable securities and various
relationships between securities that are generally recognized by
institutional traders. Short-term investments having remaining
maturities of 60 days or less are stated at amortized cost, which
approximates market value, and other investments, 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 of other
registered investment companies and certain other accounts managed by
Putnam Investment Management, Inc. ("Putnam Management"), the fund's
Manager, a wholly-owned subsidiary of Putnam Investments, Inc. These
balances may be invested in one or more repurchase agreements and/or
short-term money market instruments.
C) Repurchase agreements The fund, or any joint trading account, through
its custodian, receives delivery of the underlying securities, the
market value of which at the time of purchase is required to be in an
amount at least equal to the resale price, including accrued interest.
Putnam Management is responsible for determining that the value of these
underlying securities is at all times at least equal to the resale
price, including accrued interest.
D) Security transactions and related investment income Security
transactions are accounted for on the trade date (date the order to buy
or sell is executed).
Interest income is recorded on the accrual basis. Dividend income is
recorded on the ex-dividend date. Discounts on zero coupon bonds,
original issue, stepped-coupon bonds and payment in kind bonds are
accreted according to the effective yield method.
E) Federal taxes It is the policy of the fund to distribute all of its
taxable income within the prescribed time and otherwise comply with the
provisions of the Internal Revenue Code applicable to regulated
investment companies. It is also the intention of the fund to distribute
an amount sufficient to avoid imposition of any excise tax under Section
4982 of the Internal Revenue Code of 1986. Therefore, no provision has
been made for federal taxes on income, capital gains or unrealized
appreciation on securities held and for excise tax on income and capital
gains.
At August 31, 1996, the fund had a capital loss carryover of
approximately $657,000 available to offset future net capital gain, if
any, which will expire on August 31, 1999.
F) Distributions to shareholders Distributions to shareholders from net
investment income are recorded by the fund on the ex-dividend date.
Capital gain distributions, if any, are recorded on the ex-dividend date
and paid annually. The amount and character of income and gains to be
distributed are determined in accordance with income tax regulations
which may differ from generally accepted accounting principles. These
differences include treatment of non-taxable dividends, defaulted bond
interest, market discount and interest on payment-in-kind securities.
Reclassifications are made to the fund's capital accounts to reflect
income and gains available for distribution (or available capital loss
carryovers) under income tax regulations. For the year ended August 31,
1996, the fund reclassified $47,477 to decrease undistributed net
investment income and $391,630 to decrease paid-in-capital, with an
increase to accumulated net realized gain on investments of $439,107.
The calculation of net investment income per share in the financial
highlights table excludes these adjustments.
Note 2
Management fee, administrative services and other transactions
Compensation of Putnam Management, for management and investment
advisory services is paid quarterly based on the average net assets of
the fund. Such fee is based on the following annual rates: 0.75% 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 reduction in any year by the
amount of certain brokerage commissions and fees (less expenses)
received by affiliates of Putnam Management on the fund's portfolio
transactions.
The fund reimburses Putnam Management for the compensation and related
expenses of certain officers of the fund and their staff who provide
administrative services to the fund. The aggregate amount of all such
reimbursements is determined annually by the Trustees.
Custodial functions for the fund's assets are provided by Putnam
Fiduciary Trust Company (PFTC), a wholly-owned subsidiary of Putnam
Investments, Inc. Investor servicing agent functions are provided by
Putnam Investor Services, a division of PFTC.
For the year ended August 31, 1996, fund expenses were reduced by
$41,631 under expense offset arrangements with PFTC. Investor servicing
and custodian fees reported in the Statement of operations exclude these
credits. The fund could have invested a portion of the assets utilized
in connection with the expense offset arrangements in an income
producing asset if it had not entered into such arrangements.
Trustees of the fund receive an annual Trustees fee of $820 and an
additional fee for each Trustee's meeting attended. Trustees who are not
interested persons of Putnam Management and who serve on committees of
the Trustees receive additional fees for attendance at certain committee
meetings.
The fund adopted a Trustee Fee Deferral Plan (the "Plan") which allows
the Trustees to defer the receipt of all or a portion of Trustees Fees
payable on or after July 1, 1995. The deferred fees remain in the fund
and are invested in certain Putnam funds until distribution in
accordance with the Plan.
Note 3
Purchase and sales of securities
During the year ended August 31, 1996, purchases and sales of investment
securities other than short-term investments aggregated $68,339,170 and
$73,721,268, 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.
Federal tax information
(Unaudited)
The Form 1099 you receive in January 1997 will show the tax status of
all distributions paid to your account in calendar 1996.
The fund has designated 12.37% of the distributions from net investment
income as qualifying for the dividends received deduction for
corporations.
Results of July 31, 1996 shareholder meeting
An annual meeting of shareholders of the fund was held on
July 11, 1996. At the meeting, each of the nominees for Trustees was
elected, as follows:
Votes
Votes for withheld
Jameson Adkins Baxter 7,595,480 230,274
Hans H. Estin 7,636,160 189,594
John A. Hill 7,640,710 185,044
Elizabeth T. Kennan 7,601,985 223,769
Lawrence J. Lasser 7,610,565 215,189
Robert E. Patterson 7,636,026 189,728
Donald S. Perkins 7,628,159 197,595
William F. Pounds 7,633,421 192,333
George Putnam 7,632,115 193,639
George Putnam, III 7,638,685 187,069
Eli Shapiro 7,576,778 248,976
A.J.C. Smith 7,625,985 199,769
W. Nicholas Thorndike 7,610,451 215,303
A proposal to ratify Price Waterhouse LLP as auditors for the fund was
approved as follows: 7,582,700 votes for, and 103,714 votes against,
with 138,340 abstentions and broker non-votes.
A proposal to amend the fund's fundamental investment restriction with
respect to diversification of investments was approved as follows:
6,890,568 votes for, and 648,269 votes against, with 286,918 abstentions
and broker non-votes.
A proposal to amend the fund's fundamental investment restriction with
respect to owning 10% of the voting securities of a single issuer was
approved as follows: 6,665,284 votes for, and 832,274 votes against,
with 328,196 abstentions and broker non-votes.
A proposal to amend the fund's fundamental investment restriction with
respect to making loans through repurchase agreements and securities
loans was approved as follows: 6,563,544 votes for, and 881,463 votes
against, with 380,747 abstentions and broker non-votes.
A proposal to amend the fund's fundamental investment restriction with
respect to investments in real estate was approved as follows: 6,663,041
votes for, and 829,158 votes against, with 333,554 abstentions and
broker non-votes.
A proposal to amend the fund's fundamental investment restriction with
respect to concentration of its assets was approved as follows:
6,782,287 votes for, and 653,293 votes against, with 390,174 abstentions
and broker non-votes.
A proposal to eliminate the fund's fundamental investment restriction
with respect to investments in securities of issuers in which management
of the fund or Putnam Investment Management, Inc. owns securities was
approved as follows: 6,630,507 votes for, and 801,081 votes against,
with 394,166 abstentions and broker non-votes.
A proposal to eliminate the fund's fundamental investment restriction
with respect to margin transactions was approved as follows: 6,368,013
votes for, and 1,090,042 votes against, with 367,699 abstentions and
broker non-votes.
A proposal to eliminate the fund's fundamental investment restriction
with respect to short sales was approved as follows: 6,480,483 votes
for, and 994,492 votes against, with 350,779 abstentions and broker non-
votes.
A proposal to eliminate the fund's fundamental investment restriction
which limits the fund's ability to pledge assets was approved as
follows: 6,409,381 votes for, and 1,059,850 votes against, with 356,523
abstentions and broker non-votes.
A proposal to eliminate the fund's fundamental investment restriction
with respect to investments in certain oil, gas and mineral interests
was approved as follows: 6,578,663 votes for, and 925,782 votes against,
with 321,309 abstentions and broker non-votes.
A proposal to eliminate the fund's fundamental investment restriction
with respect to invest to gain control of a company's management was
approved as follows: 6,720,192 votes for, and 768,899 votes against,
with 336,663 abstentions and broker non-votes. All tabulations are
rounded to nearest whole number.
Fund information
INVESTMENT MANAGER
Putnam Investment
Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
INDEPENDENT
ACCOUNTANTS
Price Waterhouse LLP
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
John A. Hill
Ronald J. Jackson
Elizabeth T. Kennan
Lawrence J. Lasser
Robert E. Patterson
Donald S. Perkins
George Putnam, III
Eli Shapiro
A.J.C. Smith
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
John D. Hughes
Senior Vice President and Treasurer
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Peter Carman
Vice President
Brett C. Browchuk
Vice President
Thomas V. Reilly
Vice President
Charles G. Pohl
Vice President and Fund Manager
Jennifer E. Leichter
Vice President and Fund Manager
William N. Shiebler
Vice President
John R. Verani
Vice President
Paul M. O'Neil
Vice President
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.
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
- -------------------
Bulk Rate
U.S. Postage
PAID
Putnam
Investments
- -------------------
27662-061 10/96
