Putnam
High Income
Convertible and
Bond Fund
SEMIANNUAL REPORT
February 29, 1996
[Putnam Scales Logo]
BOSTON * LONDON * TOKYO
Fund highlights
* Indicative of the fund's outstanding long-term performance, Putnam
High Income Convertible and Bond Fund's total return at net asset value
ranked first out of seven convertible securities funds for the five-year
period ended February 29, 1996, according to Lipper Analytical
Services.*
* "We seek to buy high-yielding convertibles issued by companies that we
believe exhibit good credit profiles and decent fundamentals, and hold
on to these issues until their stocks start to appreciate. We then
attempt to sell a particular issue before it gets too equity sensitive.
We likewise seek to buy corporate high-yield bonds from issuers that we
judge to have reasonably solid business franchises, and we attempt to
manage risk by spreading our investments over many issuers."+
-- Charles G. Pohl and Jennifer E. Leichter, portfolio managers
CONTENTS
4 Report from Putnam Management
8 Fund performance summary
10 Portfolio holdings
21 Financial statements
*For the five years ended 2/29/96, the fund's cumulative total return
was 137.27% at net asset value. Please refer to page 8 for additional
performance information. Lipper Analytical Services, Inc., is an
independent mutual fund research organization. Its rankings are based on
total-return performance, vary over time, and do not reflect the effects
of sales charges. For the year ended 2/29/96, the fund ranked 6 out of 7
convertible securities funds. The fund was not ranked for periods
exceeding 5 years. Past performance is not indicative of future results.
+Convertibles are hybrid securities containing both equity and fixed-
income components. The term "equity sensitive" refers to a convertible's
tendency to track the performance of its underlying stock more closely.
Because the prices of their underlying stocks have fallen substantially,
high-yield convertibles typically behave more like pure fixed-income
securities, with income constituting the bulk of their returns.
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
(copyright) Karsh, Ottawa
From the Chairman
Dear Shareholder:
Strong stock and bond markets furnished a hospitable environment for
Putnam High Income Convertible and Bond Fund during the six months ended
February 29, 1996, a period representing the first half of the fund's
current fiscal year.
The stock market's steady advance throughout the period provided a solid
underpinning for the convertible securities in which the fund invests.
The lower-rated high-yield corporate bonds that constitute the main
focus of your fund's fixed-income holdings were helped by the overall
strength of the bond market.
In the report that follows, your fund's managers explain their strategy
in the prevailing markets, discuss the fund's performance during the
period, and take a look at prospects as the fund enters the second half
of fiscal 1996.
Respectfully yours,
/s/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
April 17, 1996
Report from the Fund Managers
Charles G. Pohl, lead manager
Jennifer E. Leichter
During the six months ended February 29, 1996, Putnam High Income
Convertible and Bond Fund remained focused on its primary mission:
pursuing high current yields. The fund's current end-of-period dividend
rates, as highlighted on page 9, clearly demonstrate its continuing
emphasis on seeking high levels of income from securities that meet our
credit and value criteria. What's more, your fund managed to capture a
significant portion of the markets' advance. (Please refer to page 8 for
full performance details.)
* FINDING ATTRACTIVE OPPORTUNITIES IN THE HIGH-TECHNOLOGY SECTOR
To a great extent, your fund exists to capitalize on a market anomaly.
Most professional convertible investors tend to unload 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.
Frequently, such a selling scenario develops with the convertibles of
small to medium-sized companies in fast-growing industries. Many
companies that have been on a strong upward growth trajectory may
stumble, often temporarily, before continuing to grow into larger
enterprises. For example, near the end of calendar 1995, concerns about
rising inventory levels and potentially weaker orders created just such
a set of circumstances for several companies in the semiconductor
industry.
We purchased the convertibles of companies such as Xilinx, a California-
based developer of programmable logic devices (a type of semiconductor).
We believe Xilinx may have a particularly bright future, given its
strategy of expanding the number of electronic components on each
microchip, thereby increasing the power and functionality of its
products. (While this security, as well as the others discussed in this
report, was viewed favorably at the end of the period, all portfolio
holdings are subject to review and change in accordance with the fund's
investment strategy and may vary in the future.)
SoftKey International, another holding added during the period,
underwent similar selling pressure following an announcement that it was
planning to acquire two major competitors in the consumer software
industry. Investor uncertainty over the near-term impact of SoftKey's
integration of these companies caused the prices of both its common
stock and its convertible to drop sharply.
We made a substantial investment in SoftKey's convertible bonds at
prices ranging from the low to mid 80s and, thus far, have enjoyed what
we view as very generous yields from the position. Ultimately, we
believe SoftKey will successfully integrate its acquisitions into its
existing operations. Moreover, with a revenue base that is now
considerably greater due to the acquisitions, a solid business plan, and
an attractive product lineup, we believe SoftKey is likely to resume its
rapid growth.
[GRAPHIC OMITTED: chart of TOP FIVE CONVERTIBLE HOLDINGS showing:
Banco Nationale de Mexico, 7.00% convertible, 1999
Banking
Unisys Corp., 8.25% convertible, 2000
Computer systems and related products and services
RJR Nabisco Holdings, $0.60 convertible pfd.
Tobacco and food manufacturing and distribution
Atlantic Richfield, $2.23 convertible pfd.
Petrochemical refining and marketing
SoftKey International, 5.50% convertible, 2000
Consumer software development and distribution
[GRAPHIC OMITTED: chart of TOP FIVE CORPORATE HIGH-YIELD HOLDINGS
showing:
PSF Finance (L.P.), 0%-12% stepped coupon, 2003
Finance subsidiary of major pork processor
Key Plastics Corp., 14.00%, 1999
Auto parts and accessories manufacturing
TransTexas Gas Corp., 11.50%, 2002
Natural gas exploration and development
Talley Industries, 0%-12.25% stepped coupon, 2005
Conglomerate with interests in aerospace and indutrial and consumer
products
MacAndrews & Forbes Holdings, Inc., 13.00%, 1999
Conglomerate with interests in cosmetics, publishing, and retailing
Footnote reads:
Top holdings are as of 2/29/96 and represent 14.1% of the fund's net
assets. Top holdings will vary over time
*LONG-STANDING HOLDINGS DELIVER EXCEPTIONAL PERFORMANCE
Several long-standing holdings performed beyond our expectations during
the period. Specifically, Rohr Industries, a manufacturer of aircraft
engine components, has benefited from the pickup in global demand for
commercial aircraft. Putnam's equity research department accurately
forecast the recovery in aircraft demand, and this recovery resulted in
exceptional performance from several of your fund's aerospace and
defense-related holdings, including Rohr.
Chiquita Brands, a leading distributor of fresh fruits and vegetables,
has been another standout performer. We believed Chiquita would be
successful in using its ample cash flows to strengthen its balance sheet
and improve its overall credit standing. And indeed it has, resulting in
strong, consistent performance from its 7.00% convertible bond.
Although Unisys Corp. remained one of the fund's largest convertible
positions at the close of the period, we have traded the company's $3.75
convertible preferred stock for its 8.25% convertible bond. We made this
switch after Unisys announced another installment in its ongoing
restructuring program. The bond represents a more senior position in the
company's capital structure than does the preferred stock. (In the event
of adverse developments, bondholders always have a higher claim on a
company's assets than do preferred stockholders.) While Unisys is
continuing to make progress in rationalizing its operations, we took
this measure to reduce the fund's risk exposure in the position. We are
encouraged by the bond's substantial appreciation since the exchange,
and its high income level is well within our yield parameters for the
portfolio.
* CORPORATE HIGH-YIELD HOLDINGS: FOCUSING ON TELECOMMUNICATIONS, MEDIA,
CABLE
The fund's corporate high-yield holdings continued to generate solid
returns and substantial income over the semiannual period. However, the
most outstanding performances came from widely diversified investments
in telecommunications, media, and cable television. Holdings such as
Nextel Communications, a major supplier of wireless communications
services, MFS Communications, a competitive access provider that
competes for local telephone services, and an assortment of cable TV
companies, advanced on the passage of landmark telecommunications
legislation. The new law essentially deregulates the cable TV industry
and, among other things, will permit local and long-distance telephone
companies to enter each other's markets. We believe this new legislation
greatly expands the range of possibilities for companies to merge and
grow to meet the accelerating demand for an array of communications
devices and services.
[GRAPHIC OMITTED: pie chart of PORTFOLIO COMPOSITION (2/29/96) showing:
Common stocks 1.3%
Preferred stocks 2.5%
Corporate high-yield bonds 33.4%
Other 6.1%
Convertible securities 56.7%
Footnote reads:
*Based on percentage of total market value of assets. Composition will
vary over time.]
* PROSPECT OF STRONGER ECONOMY COULD PROVIDE SUPPORT FOR HIGH-YIELD
MARKET
During the final two months of the semiannual period, high-yield
securities -- both convertible and nonconvertible -- continued to
advance while U.S. Treasury securities lagged. This divergence is partly
explained by the fact that high-yield investors appear to be
anticipating some degree of pickup in economic activity in the months
ahead. Treasuries generally respond negatively to signs of economic
strength because investors fear the possibility of increasing inflation,
which erodes the value of investments with a fixed income stream.
High-yield securities, however, in keeping with their sensitivity to
both the equity and fixed-income markets, frequently respond positively
to the potential benefits that a stronger economy can bring to high-
yield issuers, including increased revenues and cash flows. An extremely
strong report on February employment levels, which was released shortly
after the close of the fiscal period, certainly seems to lend credence
to the argument for potential strengthening. In any event, we will
continue to pursue the fund's objectives with issuer credit quality as a
paramount consideration in all of our investment decisions.
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 2/29/96, there is no guarantee the fund will
continue to hold these securities in the future.
Performance summary
Performance should always be considered in light of a fund's investment
strategy. Putnam High Income Convertible and Bond Fund 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.
<TABLE>
<CAPTION>
TOTAL RETURN FOR PERIODS ENDED 2/29/96
Merrill Lynch
All- First Boston Consumer
Market Convertible High Yield Price
NAV price Index Index Index
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------
6 months 6.28% 5.83% 7.70% 6.60% 1.31%
- ---------------------------------------------------------------------------------
1 year 18.89 15.09 25.97 16.14 2.65
- ---------------------------------------------------------------------------------
5 years 137.27 166.49 105.72 112.76 14.91
Annual average 18.86 21.66 15.51 16.29 2.82
- ---------------------------------------------------------------------------------
Life of fund
(7/9/87) 164.14 159.61 -- 196.88 36.48
Annual average 11.88 11.66 -- 11.49 3.66
- ---------------------------------------------------------------------------------
</TABLE>
TOTAL RETURN FOR PERIODS ENDED 3/31/96
(most recent calendar quarter)
NAV Market price
- -----------------------------------------------------------
6 months 3.86% 5.05%
- -----------------------------------------------------------
1 year 15.43 17.23
- -----------------------------------------------------------
5 years 123.30 148.81
Annual average 17.43 20.00
- -----------------------------------------------------------
Life of fund
(7/9/87) 161.68 159.61
Annual average 11.65 11.55
- -----------------------------------------------------------
Performance data represent past results and are not indicative of 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.
PRICE AND DISTRIBUTION INFORMATION
6 months ended 2/29/96
- -------------------------------------------------------------------
Distributions (number) 6
- -------------------------------------------------------------------
Income $0.426
- -------------------------------------------------------------------
Total $0.426
- -------------------------------------------------------------------
Share value: NAV Market price
- -------------------------------------------------------------------
8/31/95 $9.49 $10.00
- -------------------------------------------------------------------
2/29/96 9.65 10.125
- -------------------------------------------------------------------
Current return: NAV Market price
- -------------------------------------------------------------------
End of period
Current dividend rate1 8.83% 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 the 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.
COMPETITIVE BENCHMARKS
First Boston High Yield Index is a market-weighted index including
publicly traded bonds having a rating below BBB by Standard &
Poor's(registered trademark) and Moody's. Performance figures for the
index reflect changes in 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.*
Merrill Lynch All-Convertible Index is an unmanaged list of convertible
securities commonly used as a measure of performance for the convertible
market.*
Consumer Price Index 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 into account brokerage fees, taxes, or
other costs. 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.
<TABLE>
<CAPTION>
Portfolio of investments owned
February 29, 1996 (Unaudited)
CONVERTIBLE BONDS AND NOTES (43.8%) *
PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C>
Aerospace (1.1%)
- ---------------------------------------------------------------------------------------------------------------------------------
$1,450,000 UNC, Inc. cv. sub. deb. 7 1/2s, 2006 $1,348,500
Aerospace and Defense (2.2%)
- ---------------------------------------------------------------------------------------------------------------------------------
600,000 Diagnostic Retrieval Systems 144A cv. sr. sub. notes 9s, 2003 630,000
2,450,000 Rohr Industries, Inc. cv. sub. deb. 7s, 2012 2,156,000
------------
2,786,000
Automotive (1.4%)
- ---------------------------------------------------------------------------------------------------------------------------------
2,250,000 Mascotech, Inc. cv. sub. deb. 4 1/2s, 2003 1,766,250
Banks (2.6%)
- ---------------------------------------------------------------------------------------------------------------------------------
3,335,000 Banco Nacional de Mexico SA cv. bonds 7s, 1999 (Mexico) 2,868,100
500,000 Banco Nationale de Mexico 144A cv. company guaranty
7s, 1999 (Mexico) 430,000
------------
3,298,100
Broadcasting (1.4%)
- ---------------------------------------------------------------------------------------------------------------------------------
3,500,000 Comcast Corp. cv. notes 1 1/8s, 2007 1,811,250
Cellular Communications (0.5%)
- ---------------------------------------------------------------------------------------------------------------------------------
850,000 Cellular Communications, Inc. cv. sub. deb. zero%, 1999 682,125
Computer Equipment (4.3%)
- ---------------------------------------------------------------------------------------------------------------------------------
600,000 Conner Peripherals, Inc. cv. sub. deb. 6 1/2s, 2002 735,000
2,500,000 Maxtor Corp. cv. sub. deb. 5 3/4s, 2012 1,931,250
3,100,000 Unisys Corp. cv. sub. notes 8 1/4s, 2000 2,805,500
------------
5,471,750
Computer Software (2.1%)
- ---------------------------------------------------------------------------------------------------------------------------------
3,200,000 Softkey International, Inc. 144A cv. sr. notes 5 1/2s, 2000 2,652,000
Consumer Services (1.1%)
- ---------------------------------------------------------------------------------------------------------------------------------
1,800,000 National Education Corp. cv. sub. deb. 6 1/2s, 2011 1,404,000
Electronics (1.1%)
- ---------------------------------------------------------------------------------------------------------------------------------
1,700,000 Richardson Electronics Ltd. cv. sub. deb. 7 1/4s, 2006 1,436,500
Environmental Control (3.3%)
- ---------------------------------------------------------------------------------------------------------------------------------
$1,200,000 Enclean, Inc. cv. sub. deb. 7 1/2s, 2001 $1,249,856
1,300,000 OHM Corp. cv. sub. deb. 8s, 2006 1,170,000
1,500,000 Riedel Environmental Technologies, Inc.
sub. cv. deb. 7s, 1999 (in default) + 705,000
1,300,000 Weston (Roy F.), Inc. cv. deb. 7s, 2002 1,098,500
------------
4,223,356
Food (2.0%)
- ---------------------------------------------------------------------------------------------------------------------------------
2,500,000 Chiquita Brands International Inc. cv. sub. notes 7s, 2001 2,237,500
400,000 Chiquita Brands International, Inc. 144A cv. deb. 7s, 2001 358,000
------------
2,595,500
Health Care (2.5%)
- ---------------------------------------------------------------------------------------------------------------------------------
500,000 Careline, Inc. cv. sr. sub. notes 8s, 2001 558,750
3,300,000 Quantum Health Resources, Inc. cv. deb. 4 3/4s, 2000 2,648,250
------------
3,207,000
Health Care Services (1.8%)
- ---------------------------------------------------------------------------------------------------------------------------------
2,550,000 Theratx Inc. 144A cv. sub. 8s, 2002 2,320,500
Oil and Gas (0.2%)
- ---------------------------------------------------------------------------------------------------------------------------------
350,000 Wainoco Oil Corp. cv. sub. deb. 7 3/4s, 2014 282,188
Pharmaceuticals (1.7%)
- ---------------------------------------------------------------------------------------------------------------------------------
400,000 Pharmaceutical Marketing Services Inc. cv. notes 6 1/4s, 2003 354,000
2,150,000 Pharmaceutical Marketing Services Inc. cv. deb.
144A cv. deb. 6 1/4s, 2003 1,875,875
------------
2,229,875
Pipelines (1.0%)
- ---------------------------------------------------------------------------------------------------------------------------------
950,000 SFP Pipeline Holdings, Inc. var. rate exch. deb. 10.42s, 2010 ++++ 1,263,500
Publishing (1.0%)
- ---------------------------------------------------------------------------------------------------------------------------------
3,850,000 Hollinger, Inc. cv. liquid yield option note zero%, 2013 1,236,813
REIT's (1.9%)
- ---------------------------------------------------------------------------------------------------------------------------------
1,600,000 Alexander Haagen Properties Ser. A, cv. sub. deb. 7 1/2s, 2001 1,344,000
1,000,000 Liberty Property Trust cv. sub. deb. 8s, 2001 1,080,000
------------
2,424,000
Real Estate (1.1%)
- ---------------------------------------------------------------------------------------------------------------------------------
1,750,000 Malan Realty Investors cv. sub. notes 9 1/2s, 2004 1,452,500
Restaurants (0.3%)
- ---------------------------------------------------------------------------------------------------------------------------------
750,000 Flagstar Corp. cv. jr. sub. deb. 10s, 2014 427,500
Retail (4.1%)
- ---------------------------------------------------------------------------------------------------------------------------------
$2,900,000 Baker (J.) Inc. cv. deb. 7s, 2002 $1,747,250
900,000 CML Group Inc. cv. jr. sub. deb. 5 1/2s, 2003 630,000
2,350,000 CML Group, Inc. 144A cv. jr. deb. 5 1/2s, 2003 1,645,000
1,050,000 Ingles Markets, Inc. cv. sub. deb. 10s, 2008 1,128,750
------------
5,151,000
Semiconductors (.6%)
- ---------------------------------------------------------------------------------------------------------------------------------
700,000 Xilinx, Inc. 144A cv. sub. notes 5 1/4s, 2002 703,500
Specialty Consumer Products (1.1%)
- ---------------------------------------------------------------------------------------------------------------------------------
2,000,000 Bell Sports Corp. cv. sub. deb. 4 1/4s, 2000 1,415,000
Textiles (1.9%)
- ---------------------------------------------------------------------------------------------------------------------------------
1,000,000 Dixie Yarns, Inc. cv. deb. 7s, 2012 767,500
2,200,000 Fieldcrest Cannon, Inc. cv. sub. deb. 6s, 2012 1,666,500
------------
2,434,000
Tobacco (1.5%)
- ---------------------------------------------------------------------------------------------------------------------------------
2,515,000 Standard Commercial Corp. cv. sub. deb. 7 1/4s, 2007 1,842,238
------------
Total Convertible Bonds and Notes (cost $53,204,042) $55,864,945
CORPORATE BONDS AND NOTES (32.9%) *
PRINCIPAL AMOUNT VALUE
Advertising (0.8%)
- ---------------------------------------------------------------------------------------------------------------------------------
$100,000 Lamar Advertising Co. sr. secd. notes 11s, 2003 $106,000
500,000 Universal Outdoor, Inc. sub. deb. 11s, 2003 507,500
475,000 Universal Outdoor, Inc. sr. notes stepped-coupon zero%,
(14s, 7/1/99), 2004 ++ 339,031
------------
952,531
Aerospace and Defense (0.6%)
- ---------------------------------------------------------------------------------------------------------------------------------
500,000 BE Aerospace sr. notes 9 3/4s, 2003 518,750
200,000 Fairchild Corp. sr. notes 12 1/4s, 1999 212,000
50,000 Howmet Corp. 144A sr. sub. notes 10s, 2003 53,000
------------
783,750
Agriculture (1.3%)
- ---------------------------------------------------------------------------------------------------------------------------------
585,000 PMI Holdings Corp. Ser B.sub. disc. deb. stepped-coupon
zero% (11 1/2s, 9/1/00), 2005 ++ 318,825
250,000 PSF Finance (L.P.) sr. exch. notes 12 1/4s, 2004 (in default) + 212,500
1,385,000 PSF Finance (L.P.) sr. disc. notes stepped-coupon zero%
(12s, 9/15/96), 2003 (in default) ++ 1,108,000
------------
1,639,325
Automotive Parts (0.6%)
- ---------------------------------------------------------------------------------------------------------------------------------
$25,000 A.P.S. Inc.144A sr. sub notes 11 7/8s, 2006 $25,938
750,000 Key Plastics Corp. sr. notes 14s, 1999 778,125
------------
804,063
Banks (0.2%)
- ---------------------------------------------------------------------------------------------------------------------------------
250,000 Chevy Chase Savings Bank Inc. sub. deb. 9 1/4s, 2005 255,000
Broadcasting (1.7%)
- ---------------------------------------------------------------------------------------------------------------------------------
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 39,100
215,000 Commodore Media, Inc. sr. sub. notes stepped-coupon
7 1/2s (13 1/4s, 5/1/98), 2003 ++ 212,850
400,000 New City Broadcasting Corp. sr. sub. notes 11 3/8s, 2003 400,000
250,000 Panamsat (L.P.) sr. sub. notes stepped-coupon zero%
(11 3/8s, 8/1/98), 2003 ++ 215,625
500,000 Paxson Communications Corp. sr. 144A sub. notes
11 5/8s, 2002 525,000
350,000 SFX Broadcasting, Inc. sr. sub. notes 11 3/8s, 2000 381,500
378,000 Telemedia Broadcasting Corp. 144A deb. stepped-coupon
3.8s (16s, 6/15/99), 2004 ++ 340,200
------------
2,213,275
Building and Construction (1.1%)
- ---------------------------------------------------------------------------------------------------------------------------------
50,000 Miles Homes Services sr. notes 12s, 2001 37,250
500,000 NVR, Inc. sr. notes 11s, 2003 515,000
500,000 Presley Cos. sr. notes 12 1/2s, 2001 460,000
150,000 Schuller International Corp. sr. notes 10 7/8s, 2004 168,000
200,000 Scotsman Group, Inc. sr. secd. notes 9 1/2s, 2000 206,000
------------
1,386,250
Building Products (0.3%)
- ---------------------------------------------------------------------------------------------------------------------------------
250,000 American Standard, Inc. deb. 9 1/4s, 2016 260,000
125,000 Triangle Pacific Corp. sr. notes 10 1/2s, 2003 133,750
------------
393,750
Business Services (0.1%)
- ---------------------------------------------------------------------------------------------------------------------------------
100,000 Corporate Express, Inc. Ser. B, sr. sub notes 9 1/8s, 2004 104,250
Cable Television (2.3%)
- ---------------------------------------------------------------------------------------------------------------------------------
250,000 Adelphia Communications Corp. notes Ser. B, 9 7/8s, 2005 243,750
574,687 Adelphia Communications Corp. sr. notes 9 1/2s, 2004 ++++ 502,851
200,000 Century Communications Corp. sr. notes 9 1/2s, 2005 206,500
300,000 Diamond Cable Communication Co. sr. disc. notes
stepped-coupon zero% (11 3/4s, 12/15/00), 2005 ++ 183,000
520,304 Falcon Holdings Group, Inc. sr. sub notes 11s, 2003 ++++ 496,890
90,000 International Cabletel, Inc. sr. notes stepped-coupon zero%
(11 1/2s, 2/1/01), 2006 ++ 53,100
100,000 International Cabletel, Inc. Ser. A sr. notes stepped-coupon
Ser. A zero% (12 3/4s, 4/15/200), 2005 ++ 65,000
$400,000 Lenfest Communications, Inc. sr. notes 8 3/8s, 2005 $397,500
250,000 Marcus Cable Co. (L.P.) sr. sub. disc. notes stepped-coupon
zero% (13 1/2s, 8/1/99), 2004 ++ 187,500
860,000 Telewest Communications PLC deb. stepped-coupon
zero% (11s, 10/1/00), 2007 (United Kingdom)++ 528,900
------------
2,864,991
Cellular Communications (2.1%)
- ---------------------------------------------------------------------------------------------------------------------------------
400,000 Cellular, Inc. sr. sub. disc. notes stepped-coupon zero%
(11 3/4s, 9/1/98), 2003 ++ 330,000
200,000 Cencall Communications Corp. sr. disc. notes stepped-coupon
zero% (10 1/8s, 1/15/99), 2004 ++ 121,500
250,000 Commnet Cellular Inc. bonds 11 1/4s, 2005 270,000
250,000 Dial Call Communications, Inc. sr. disc. notes stepped-coupon
zero% (12 1/4s, 4/15/99), 2004 ++ 157,500
250,000 Horizon Cellular Telephone Co. Ser. B sr. sub. disc. notes
stepped-coupon zero% (11 3/8s, 10/1/97), 2000 ++ 225,000
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 ++ 675,000
500,000 Pricellular Wireless Ser. B sr. disc. notes stepped-coupon
zero% (14s, 11/15/97), 2001 ++ 450,000
------------
2,671,500
Chemicals (0.6%)
- ---------------------------------------------------------------------------------------------------------------------------------
500,000 Acetex Corp. 144A sr. notes 9 3/4s, 2003 522,500
250,000 Harris Chemical Corp. sr. notes 10 1/4s, 2001 250,000
------------
772,500
Computer Equipment (0.3%)
- ---------------------------------------------------------------------------------------------------------------------------------
400,000 Computervision Corp. sr. sub notes 11 3/8s, 1999 422,000
Conglomerates (1.2%)
- ---------------------------------------------------------------------------------------------------------------------------------
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 ++ 760,000
------------
1,510,000
Consumer Services (0.4%)
- ---------------------------------------------------------------------------------------------------------------------------------
526,000 Coinmach Corp. 144A sr. notes 11 3/4s, 2005 536,520
Containers (0.3%)
- ---------------------------------------------------------------------------------------------------------------------------------
350,000 Ivex Packaging Corp. sr. sub. notes 12 1/2s, 2002 371,875
Electric Utilities (1.1%)
- ---------------------------------------------------------------------------------------------------------------------------------
$600,000 First PV Funding deb. 10.15s, 2016 $621,000
150,000 Midland Funding Corp. II deb. Ser. B, 13 1/4s, 2006 168,750
650,000 Midland Funding Corp. II deb. Ser. A, 11 3/4s, 2005 698,750
------------
1,488,500
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)++ 600,000
Entertainment (0.7%)
- ---------------------------------------------------------------------------------------------------------------------------------
400,000 Premier Parks, Inc. Ser. A sr. notes 12s, 2003 424,000
500,000 Six Flags Corp. sr. sub notes stepped-coupon zero %
(12 1/4s, 6/15/98), 2005 ++ 422,500
------------
846,500
Financial Services (0.2%)
- ---------------------------------------------------------------------------------------------------------------------------------
250,000 Keystone Group, Inc. sr. secd. notes 9 3/4s, 2003 243,125
Food (1.4%)
- ---------------------------------------------------------------------------------------------------------------------------------
469,000 Del Monte Corp. sub. notes 12 1/4s, 2002 ++++ 426,790
50,000 Doane Products Co. sr. notes 10 5/8s, 2006 50,875
755,000 Fresh Del Monte Produce Corp. Ser. B sr. notes
10s, 2003 (Netherlands) 724,800
500,000 Mafco, Inc. sr. sub. notes 11 7/8s, 2002 525,000
------------
1,727,465
Forest Products (0.2%)
- ---------------------------------------------------------------------------------------------------------------------------------
250,000 Gaylord Container Corp. sr. sub. disc. deb. stepped-coupon
zero% (12 3/4s, 5/15/96), 2005 ++ 256,875
Health Care (0.9%)
- ---------------------------------------------------------------------------------------------------------------------------------
150,000 Graphic Controls Corp. 144A sr. sub. notes 12s, 2005 159,000
250,000 Integrated Health Services sr. sub. notes 9 5/8s, 2002 256,250
200,000 Merit Behavioral Care 144A sr. sub. notes 11 1/2s, 2005 216,000
400,000 Quorum Health Group, Inc. sr. sub. notes 11 7/8s, 2002 450,000
100,000 Wright Medical Technology, Inc. sr. secd. notes Ser. B,
10 3/4s, 2000 103,500
------------
1,184,750
Hospital Management (0.4%)
- ---------------------------------------------------------------------------------------------------------------------------------
500,000 Tenet Healthcare Corp. sr. sub. notes 10 1/8s, 2005 551,875
Industrial (-%)
- ---------------------------------------------------------------------------------------------------------------------------------
50,000 Transamerican Refining 1st Mtge 16 1/2s, 2002 44,000
Insurance (0.6%)
- ---------------------------------------------------------------------------------------------------------------------------------
$200,000 CCP Insurance sr. notes 10 1/2s, 2004 $233,500
200,000 Reliance Group Holdings, Inc. sr. sub. deb. 9 3/4s, 2003 207,500
275,000 Reliance Group Holdings, Inc. sr. notes 9s, 2000 284,625
------------
725,625
Lodging (0.6%)
- ---------------------------------------------------------------------------------------------------------------------------------
250,000 HMH Properties, Inc. sr. notes 9 1/2s, 2005 255,000
500,000 John Q. Hammons Hotels, Inc. 1st mtge. 8 7/8s, 2004 500,000
------------
755,000
Media (0.2%)
- ---------------------------------------------------------------------------------------------------------------------------------
250,000 Heritage Media Corp. sr. sub. notes 8 3/4s, 2006 245,000
Metals and Mining (0.4%)
- ---------------------------------------------------------------------------------------------------------------------------------
470,000 Kaiser Aluminum & Chemical Corp. sr. sub. notes
12 3/4s, 2003 509,950
Motion Picture Distribution (0.9%)
- ---------------------------------------------------------------------------------------------------------------------------------
600,000 Act III Theatres, Inc. sr. sub. notes 11 7/8s, 2003 652,500
195,000 Cinemark Mexico notes 12s, 2003 (Mexico) 181,350
275,000 Cinemark USA sr. notes 12s, 2002 301,813
------------
1,135,663
Office Equipment (0.2%)
- ---------------------------------------------------------------------------------------------------------------------------------
250,000 United Stationer Supply, Inc. sr. sub. notes 12 3/4s, 2005 282,500
Oil Equipment (0.2%)
- ---------------------------------------------------------------------------------------------------------------------------------
250,000 OPI International sr. notes 12 7/8s, 2002 281,875
Oil and Gas (1.3%)
- ---------------------------------------------------------------------------------------------------------------------------------
350,000 Chesapeake Energy Corp. sr. notes 10 1/2s, 2002 367,500
140,000 Flores & Rucks, Inc. sr. notes 13 1/2s, 2004 161,700
184,000 Maxus Energy Corp. deb. 11 1/4s, 2013 191,360
150,000 Maxus Energy Corp. notes 9 1/2s, 2003 151,500
750,000 Transtexas Gas Corp. sr. secd. notes 11 1/2s, 2002 761,250
------------
1,633,310
Paging (1.3%)
- ---------------------------------------------------------------------------------------------------------------------------------
500,000 A+ Network Inc. sr. sub notes 11 7/8s, 2005 522,500
250,000 Metrocall, Inc. sr. sub. notes 10 3/8s, 2007 260,000
500,000 Mobile Telecommunications Tech. sr. notes 13 1/2s, 2002 540,000
500,000 Pagemart Nationwide, Inc. sr. disc. notes stepped-coupon
zero% (15s, 2/1/00), 2005 ++ 342,500
------------
1,665,000
Publishing (0.4%)
- ---------------------------------------------------------------------------------------------------------------------------------
$150,000 Marvel III Holdings, Inc. notes Ser. B 9 1/8s, 1998 $138,000
500,000 Marvel Parent Holdings, Inc. sr. secd. disc. notes zero%, 1998 370,000
------------
508,000
Real Estate (0.3%)
- ---------------------------------------------------------------------------------------------------------------------------------
390,000 Chelsea Piers Ser. B 1st mtge. disc. notes stepped-coupon
zero% (12 1/2s, 6/15/96), 2004 ++ 371,963
25,000 Chelsea Piers Ser. B 144A stepped-coupon zero%
(11s, 6/15/99), 2009 ++ 24,000
------------
395,963
Recreation (3.3%)
- ---------------------------------------------------------------------------------------------------------------------------------
330,000 Arizona Charlies Corp. Ser. B 1st mtge. 12s, 2000 214,500
120,000 Capitol Queen Corp. Ser. B 1st mtge. notes 12s, 2000 + 84,000
190,000 Casino America, Inc. 1st mtge. 11 1/2s, 2001 185,250
150,000 Elsinore Corp. 1st mtge. 20s, 2000 + 127,500
250,000 Empress River Casino, sr. notes 10 3/4s, 2002 258,750
250,000 Grand Casinos, Inc. 1st mtge. 10 1/8s, 2003 269,375
450,000 Hollywood Casino Corp. sr. notes 12 3/4s, 2003 427,500
600,000 Lady Luck Gaming Corp. Ser. B, 1st mtge. 10 1/2s, 2001 534,000
132,000 Louisiana Casino Cruises Corp. sr. sub. deb. 11 1/2s, 1998 129,360
550,000 Mohegan Tribal Gaming 144A sr. notes 13 1/2s, 2002 660,000
450,000 Stratosphere Corp. 1st mtge. 14 1/4s, 2002 537,750
100,000 Trump Castle Funding Corp. mtge. 11 3/4s, 2003 95,000
243,000 Trump Castle Funding Corp. sr. sub. notes 11 1/2s, 2000 243,000
250,000 Trump Holdings & Funding Corp. sr. notes 15 1/2s, 2005 280,000
159,674 Trump Taj Mahal Funding, Inc. deb. Ser. A 11.35s, 1999 ++++ 164,863
------------
4,210,848
Retail (2.0%)
- ---------------------------------------------------------------------------------------------------------------------------------
500,000 County Seat Stores Inc. sr. sub notes 12s, 2002 355,000
250,000 Finlay Enterprises, Inc. sr. disc. deb. stepped-coupon zero%
(12s, 5/1/98), 2005 ++ 166,875
520,000 Loehmanns' Holdings, Inc. sr. sub. notes 13 3/4s, 1999 494,000
600,000 Loehmanns' Holdings, Inc. sr. notes 10 1/2s, 1997 594,000
200,000 Mothers Work, Inc. sr. notes 12 5/8s, 2005 211,000
250,000 Parisian, Inc. sr. sub. notes 9 7/8s, 2003 212,500
100,000 Specialty Retailers, Inc. sr. sub. notes 11s, 2003 95,500
400,000 Waban, Inc. sr. sub. notes 11s, 2004 418,000
------------
2,546,875
School Buses (0.1%)
- ---------------------------------------------------------------------------------------------------------------------------------
90,000 Blue Bird Body Co. Ser. B sub. deb. 11 3/4s, 2002 92,250
Specialty Consumer Products (0.4%)
- ---------------------------------------------------------------------------------------------------------------------------------
410,000 Apparel Retailers, Inc. Ser, B, deb. stepped-coupon
zero % (12 3/4s, 8/15/98), 2005 ++ 270,600
250,000 Herff Jones, Inc. 144A sr. sub. notes 11s, 2005 270,000
------------
540,600
Steel (0.4%)
- ---------------------------------------------------------------------------------------------------------------------------------
$500,000 Ispat Mexicana, SA 144A deb. 10 3/8s, 2001 (Mexico) $462,500
Telecommunication (0.9%)
- ---------------------------------------------------------------------------------------------------------------------------------
100,000 Fonorola, Inc. sr. notes 12 1/2s, 2002 (Canada) 110,000
890,000 Intelcom Group, Inc. sr. disc. notes stepped-coupon zero%
(13 1/2s, 9/15/00), 2005 ++ 582,950
750,000 MFS Communications sr. disc. notes stepped-coupon zero %
(8 7/8s, 1/1/01), 2006 ++ 486,563
------------
1,179,513
Textiles (0.1%)
- ---------------------------------------------------------------------------------------------------------------------------------
200,000 Reeves Industries, Inc. sub. deb. 13 3/4s, 2001 178,000
------------
Total Corporate Bonds and Notes (cost $40,345,777) $41,973,142
CONVERTIBLE PREFERRED STOCKS (12.1%) *
NUMBER OF SHARES VALUE
Building and Construction (0.6%)
- ---------------------------------------------------------------------------------------------------------------------------------
16,400 Southdown, Inc. $2.875 cv. pfd. $752,350
Computer Equipment (0.9%)
- ---------------------------------------------------------------------------------------------------------------------------------
35,000 Unisys Corp. Ser. A, $3.75 cv. pfd. 1,150,625
Construction (0.6%)
- ---------------------------------------------------------------------------------------------------------------------------------
50,000 Perini Corp. dep shares $2.125 cv. pfd. 812,500
Energy (1.0%)
- ---------------------------------------------------------------------------------------------------------------------------------
28,200 Maxus Energy Corp. $4.00 cv. pfd. 1,240,800
Food (2.2%)
- ---------------------------------------------------------------------------------------------------------------------------------
399,300 RJR Nabisco Holdings. Ser. C, $0.601 sr. cv. pfd. 2,745,188
Insurance (1.8%)
- ---------------------------------------------------------------------------------------------------------------------------------
45,000 USF&G Corp. Ser. A, $4.10 cv. pfd. 2,289,375
Oil and Gas (2.1%)
- ---------------------------------------------------------------------------------------------------------------------------------
100,864 Atlantic Richfield Co. $2.23 cv. pfd. 2,723,328
Oils (0.8%)
- ---------------------------------------------------------------------------------------------------------------------------------
55,325 Santa Fe Energy Resources, Inc. $1.40 cv. pfd. 1,071,922
REIT's (1.2%)
- ---------------------------------------------------------------------------------------------------------------------------------
53,500 Oasis Residential, Inc. Ser. A, $2.25 cv pfd. 1,471,250
Steel (0.9%)
- ---------------------------------------------------------------------------------------------------------------------------------
24,500 Armco Inc. Class A, $4.50, cv. pfd. $1,200,500
Total Convertible Preferred Stocks (cost $15,064,783) ------------
$15,457,838
PREFERRED STOCKS (2.5%) *
NUMBER OF SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
3,000 Cablevision Systems Corp. 144A Ser. L, $11.125 pfd. ++++ $309,750
5,500 California Federal Bank Ser. B, $10.625 exch. pfd. 605,000
2,000 El Paso Electric Co. $11.40 pfd. ++++ 210,000
4,000 First Nationwide Bank $11.50 pfd. 452,000
4,700 Fitzgeralds Gaming $3.75 pfd. 117,500
12,299 Foxmeyer Health Corp. Ser. A, $4.20 pfd. ++++ 399,718
4,000 K-III Communications $11.625 pfd 414,000
25,000 Supermarkets General Holdings Corp. $3.52 exch. pfd. ++++ 681,250
------------
Total Preferred Stocks (cost $3,477,827) $3,189,218
COMMON STOCKS (1.3%) *
NUMBER OF SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
6,303 Elsinore Corp. + $3,545
10,675 Freeport McMoran, Inc. 455,022
22,946 Freeport-McMoRan Copper & Gold Co., Inc. Class B + 748,613
23,860 Grand Union Co.(acquired various dates from
11/30/94 to 01/10/95, cost $529,547) +++ 144,651
1,885 IFINT Diversified Holdings 144A + 94,250
14,351 Lady Luck Gaming Corp. + 25,114
58,685 Loehmanns' Holdings, Inc. + 86,194
197 PMI Holdings Corp. 144A + 39,400
144 Premium Holdings L.P. 144A + 3,591
3,750 Specialty Foods Corp. + 2,813
1,477 Taj Mahal Holding Corp. Class A + 36,925
1,602 Total Renal Care Holdings, Inc.+ 47,259
------------
Total Common Stocks (cost $1,987,117) $1,687,377
UNITS (3.4%) *
NUMBER OF UNITS VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
50 Celcaribe S.A. units stepped-coupon
(13 1/2s, 3/15/98), 2004 ++ $465,000
1,015 Cellnet Data Systems Inc. units stepped-coupon
(13s, 6/15/05), 2005 ++ 603,925
500 Comunication Celular SA 144A units stepped-coupon
(13 1/8s, 11/15/00), 2003 (Colombia)++ 297,500
400 Fitzgerald Gaming Co. units 13s, 2002 374,032
350 Health-O-Meter Product units 13s, 2002 329,000
600 ICF Kaiser International, Inc. units 12s, 2003 570,000
250,000 Intermedia Communications of Florida sr. notes Ser. B
13 1/2s, 2005 293,750
1,490 SDW Holdings Corp. 144A units $15 pfd. 417,200
350 Terex Corp. 144A units 13 3/4s, 2002 336,000
174,000 Total Renal Care Holdings. units stepped-coupon
(12s, 8/15/97), 2004 ++ 174,000
300 Winstar Communications, Inc. 144A units stepped-coupon
(14s, 10/15/00), 2005 ++ 507,000
------------
Total Units (cost $4,071,293) $4,367,407
<CAPTION>
WARRANTS (0.2%) * + EXPIRATION
NUMBER OF WARRANTS DATE VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
15,000 Becker Gaming Corp. 11/15/00 $3,750
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 12,650
500 County Seat Holdings, Inc. 10/15/98 5,000
5,001 Elsinore Corp. 10/8/98 500
175 Grand Union Co. Ser 1. (acquired
8/23/94, cost $70) ++ 6/16/00 79
349 Grand Union Co. Ser 1. (acquired
8/24/93, cost $35) ++ 6/16/00 21
1,617 Intelcom Group 10/15/05 14,549
250 Intermedia Communications 144A 6/1/00 5,000
135 Louisiana Casino Cruises, Inc. 144A 12/1/98 2,025
600 Miles Homes, Inc. 4/1/97 300
267 Nextel Communications 1/1/99 3
900 President Riverboat Casinos, Inc. 144A 9/23/96 45
10,000 Southdown, Inc. 144A 10/31/96 70,000
9 Telemedia Broadcasting 144A 4/1/04 6,443
2,700 UCC Investor Holding, Inc. 10/30/99 25,650
21 Wright Medical Technology, Inc. 144A 6/30/03 3,386
------------
Total Warrants (cost $ 217,268) $184,975
<CAPTION>
SHORT-TERM INVESTMENTS (2.4%) * (cost $3,000,452)
PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
$3,000,000 Interest in $1,108,321,000 joint repurchase agreement
dated February 29, 1996 with Morgan (J.P.) & Co. Inc. due
March 1, 1996 with respect to various U.S. Treasuary
Obligations-maturity value of $3,000,452 for an effective
yield of 5.42%. $3,000,452
------------
Total Investments (cost $121,368,559) *** $125,725,354
- ---------------------------------------------------------------------------------------------------------------------------------
* Percentages indicated are based on total net assets of $ 127,516,475
+ 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.
++ Restricted, excluding 144A securities, as to public resale. At the date of acquisition, these securities were valued at
cost. There were no outstanding unrestricted securities of the same class as those held. Total market value of restricted
securities owned at February 29, 1996 was $144,571or less than 2% of net assets.
++++ Income may be received in cash or additional securities at the discretion of the issuer.
*** The aggregate indentified cost for federal income tax purposes is $121,370,014, resulting in gross unrealized appreciation
and depreciation of $15,444,819 and $11,089,479, respectively, or net unrealized appreciation of $ 4,355,340.
144A after the name of a security represents those exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
February 29,1996 (Unaudited)
Assets
- -------------------------------------------------------------------------------
<S> <C>
Investments in securities, at value
(identified cost $ 121,368,559 (Note 1) $125,725,354
- -------------------------------------------------------------------------------
Cash 642,963
- -------------------------------------------------------------------------------
Dividends, interest and other receivables 2,670,696
- -------------------------------------------------------------------------------
Receivable for securities sold 1,116,968
- -------------------------------------------------------------------------------
Total assets 130,155,981
Liabilities
- -------------------------------------------------------------------------------
Distributions payable to shareholders 937,623
- -------------------------------------------------------------------------------
Payable for securities purchased 1,346,549
- -------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 231,634
- -------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 244
- -------------------------------------------------------------------------------
Payable for administrative services (Note 2) 1,385
- -------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 35,658
- -------------------------------------------------------------------------------
Other accrued expenses 86,413
- -------------------------------------------------------------------------------
Total liabilities 2,639,506
- -------------------------------------------------------------------------------
Net assets $127,516,475
Represented by
- -------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $123,587,494
- -------------------------------------------------------------------------------
Distributions in excess of net investment income (Note 1) (57,396)
- -------------------------------------------------------------------------------
Accumulated net realized loss on investments (Note 1) (370,418)
- -------------------------------------------------------------------------------
Net unrealized appreciation of investments 4,356,795
- -------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $127,516,475
Computation of net asset value
- -------------------------------------------------------------------------------
Net asset value per share ($127,516,475 divided by 13,217,739 $9.65
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Six months ended February 29,1996 (Unaudited)
Investment Income
- -------------------------------------------------------------------------------
<S> <C>
Interest $5,297,768
- -------------------------------------------------------------------------------
Dividends 706,388
- -------------------------------------------------------------------------------
Total investment income 6,004,156
Expenses:
- -------------------------------------------------------------------------------
Compensation of Manager (Note 2) 466,225
- -------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 98,128
- -------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 6,216
- -------------------------------------------------------------------------------
Reports to shareholders 28,598
- -------------------------------------------------------------------------------
Auditing 25,017
- -------------------------------------------------------------------------------
Legal 11,064
- -------------------------------------------------------------------------------
Postage 16,399
- -------------------------------------------------------------------------------
Registration Fees 250
- -------------------------------------------------------------------------------
Exchange listing fees 12,321
- -------------------------------------------------------------------------------
Administrative services (Note 2) 4,121
- -------------------------------------------------------------------------------
Other expenses 2,644
- -------------------------------------------------------------------------------
Total expenses 670,983
- -------------------------------------------------------------------------------
Expense reduction (Note 2) (26,457)
- -------------------------------------------------------------------------------
Net expenses 644,526
- -------------------------------------------------------------------------------
Net investment income 5,359,630
- -------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 1,986,564
- -------------------------------------------------------------------------------
Net unrealized appreciation of investments during the period 317,205
- -------------------------------------------------------------------------------
Net gain on investment transactions 2,303,769
- -------------------------------------------------------------------------------
Net increase in net assets resulting from operations $7,663,399
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Six months ended Year ended
February 29 August 31
1996* 1995
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Increase in net assets
- -----------------------------------------------------------------------------------------
Operations:
- -----------------------------------------------------------------------------------------
Net investment income $5,359,630 $10,352,272
- -----------------------------------------------------------------------------------------
Net realized gain on investments 1,986,564 990,977
- -----------------------------------------------------------------------------------------
Net unrealized appreciation of investments 317,205 4,638,534
- ----------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 7,663,399 15,981,783
- -----------------------------------------------------------------------------------------
Distributions to shareholders
- -----------------------------------------------------------------------------------------
From net investment income: (5,619,669) (11,163,497)
- -----------------------------------------------------------------------------------------
Increase in capital share transactions from
reinvestment of distributions 562,145 1,103,891
- -----------------------------------------------------------------------------------------
Total increase in net assets 2,605,875 5,922,177
- -----------------------------------------------------------------------------------------
Net Assets
- -----------------------------------------------------------------------------------------
Beginning of period 124,910,600 118,988,423
- -----------------------------------------------------------------------------------------
End of period (including distributions in excess and
undistributed net investment income of $57,396
and $202,643, respectively) $127,516,475 $124,910,600
- -----------------------------------------------------------------------------------------
Number of Fund Shares
- -----------------------------------------------------------------------------------------
Shares outstanding at beginning of period 13,158,906 13,037,556
- -----------------------------------------------------------------------------------------
Shares issued in connection with reinvestment
of distributions 58,833 121,350
- -----------------------------------------------------------------------------------------
Shares outstanding at end of period 13,217,739 13,158,906
- -----------------------------------------------------------------------------------------
*Unaudited
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
Six months ended
February 29 Year ended
- -------------------------------------------------------------------------------------------------------------------------
1996* 1995 1994 1993 1992 1991
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $9.49 $9.13 $9.52 $8.49 $7.56 $6.94
- -------------------------------------------------------------------------------------------------------------------------
Investment operations
- -------------------------------------------------------------------------------------------------------------------------
Net investment income .41 .79 .78 .84 .88 .83
- -------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investments .18 .42 (.30) 1.05 .99 .65
- -------------------------------------------------------------------------------------------------------------------------
Total from investment operations .59 1.21 .48 1.89 1.87 1.48
- -------------------------------------------------------------------------------------------------------------------------
Less distributions:
- -------------------------------------------------------------------------------------------------------------------------
From net investment income (.43) (.85) (.87) (.84) (.94) (.85)
- -------------------------------------------------------------------------------------------------------------------------
In excess of net investment income -- -- -- (.02) -- --
- -------------------------------------------------------------------------------------------------------------------------
From net realized gain on investments -- -- -- -- -- (.01)
- -------------------------------------------------------------------------------------------------------------------------
Total distributions (.43) (.85) (.87) (.86) (.94) (.86)
- -------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $9.65 $9.49 $9.13 $9.52 $8.49 $7.56
- -------------------------------------------------------------------------------------------------------------------------
Market value, end of period $10.125 $10.000 $9.750 $10.000 $8.875 $7.625
- -------------------------------------------------------------------------------------------------------------------------
Total investment return at market value (%) (a) 5.83(b) 12.60 6.84 23.78 30.71 48.65
- -------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $127,516 $124,911 $118,988 $123,285 $108,909 $95,770
- -------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%)(c) .53(b) 1.00 1.04 1.03 1.13 1.31
- -------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to
average net assets (%) 4.27(b) 8.73 8.23 9.39 10.92 12.35
- -------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 33.03(b) 61.19 52.10 71.63 45.84 68.36
- -------------------------------------------------------------------------------------------------------------------------
* Unaudited
(a) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) Non annualized
(c) The ratio of expenses to average net assets for the period ended February 29, 1996 includes amounts paid through
expense offset arrangements. Prior period ratios exclude these amounts. (See Note 2).
</TABLE>
Notes to financial statements
February 29, 1996 (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 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 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 certain long-term corporate bonds and notes; such
investments are stated at fair value on the basis of valuations
furnished by a pricing service, approved by the Trustees, which
determines valuations for normal, institutional-size trading units of
such securities using methods based on market transactions for
comparable securities and various relationships between securities that
are generally recognized by institutional traders. Short-term
investments having remaining maturities of 60 days or less are stated at
amortized cost, which approximates market value, and other investments,
including restricted securities, are stated at fair value following
procedures approved by the Trustees.
B) Joint trading account Pursuant to an exemptive order issued by the
Securities and Exchange Commission, the fund may transfer uninvested
cash balances into a joint trading account, along with the cash of other
registered investment companies managed by Putnam Investment Management,
Inc. ("Putnam Management"), the fund's Manager, a wholly-owned
subsidiary of Putnam Investments, Inc., and certain other accounts.
These balances may be invested in one or more repurchase agreements
and/or short-term money market instruments.
C) Repurchase agreements The fund, or any joint trading account, through
its custodian, receives delivery of the underlying securities, the
market value of which at the time of purchase is required to be in an
amount at least equal to 102% of the resale price, including accrued
interest. Putnam Mangement is responsible for determining that the
value of these underlying securities is at all times at least equal to
102% of the resale price, including accrued interest.
D) Security transactions and related investment income Security
transactions are accounted for on the trade date (date the order to buy
or sell is executed). Interest income is recorded on the accrual basis
and dividend income is recorded on the ex-dividend date.
Discount on zero coupon bonds, original issue, 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 of securities held and for excise tax on income and capital
gains.
At August 31, 1995, the fund had a capital loss carryover of
approximately $1,721,000, which may be available to offset realized
capital gains to the extent provided by regulations. This amount will
expire 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 semiannually. 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.
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
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.
Trustees of the fund receive an annual Trustees fee of $810 and an
additional fee for each Trustees' 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 the fund or in other Putnam funds until distribution
in accordance with the Plan.
Custodial functions for the fund 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 six months ended February 29, 1996, fund expenses were reduced
by $26,457 under expense offset arrangements with PFTC. Investor
servicing and custodian fees reported in the Statement of operations
exclude these credits. The fund could have invested the assets utilized
in connection with the expense offset arrangements in an income
producing asset if it had not entered into such arrangements.
Note 3
Purchases and sales of securities
During the six months ended February 29, 1996, purchases and sales of
investment securities other than short-term investments aggregated
$36,240,020 and $39,252,737, 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.
<TABLE>
<CAPTION>
Selected quarterly data (unaudited)
- --------------------------------------------------------------------------------------------
Net realized Net increase
Net and unrealized (decrease) in
Investment investment gain (loss) on net assets from
income income investments operations
- --------------------------------------------------------------------------------------------
Quarter Per Per Per Per
Ended Total Share Total Share Total Share Total Share
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
2/29/96 $2,990,811 $0.22 $2,685,249 $0.20 $2,399,562 $0.19 $5,084,811 $0.39
11/30/95 $3,013,345 $0.23 $2,674,381 $0.21 ($95,793) ($0.01) $2,578,588 $0.20
8/31/95 $3,022,190 $0.23 $2,653,049 $0.20 $2,637,436 $0.20 $5,290,485 $0.40
5/31/95 $2,905,323 $0.22 $2,640,685 $0.20 $5,658,746 $0.43 $8,299,431 $0.63
2/28/95 $2,800,016 $0.22 $2,598,730 $0.21 $2,260,427 $0.16 $4,859,157 $0.37
11/30/94 $2,812,328 $0.21 $2,459,808 $0.18 ($4,927,098) ($0.37) ($2,467,290) ($0.19)
8/31/94 $2,799,478 $0.21 $2,557,000 $0.19 ($1,773,495) ($0.13) $783,506 $0.06
5/31/94 $3,021,383 $0.22 $2,659,542 $0.20 ($8,127,565) ($0.62) ($5,468,023) ($0.42)
2/28/94 $2,792,040 $0.22 $2,449,653 $0.19 $2,732,945 $0.21 $5,182,598 $0.40
11/30/93 $2,892,910 $0.23 $2,545,344 $0.20 $3,105,218 $0.24 $5,650,562 $0.44
- --------------------------------------------------------------------------------------------
</TABLE>
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
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
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 or to request Putnam's
quarterly Closed-End Commentary.
- -----------------
Bulk Rate
U.S. Postage
PAID
Putnam
Investments
- -----------------
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
24032-061 4/96
