Putnam
High Income
Convertible
and Bond
Fund
SEMIANNUAL REPORT
February 28, 1998
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* Morningstar, an independent rating agency, awarded Putnam High Income
Convertible and Bond Fund a four-star rating -- out of a possible five
-- as of February 28, 1998. Only 22.5% of fixed-income funds receive
four stars.*
CONTENTS
4 Report from Putnam Management
9 Fund performance summary
12 Portfolio holdings
30 Financial statements
*Morningstar ratings are subject to change every month and are
calculated from a fund's 3-, 5-, and 10-year average annual returns in
excess of 90-day Treasury bill returns, with appropriate sales charge
adjustments and a risk factor that reflects performance compared to
90-day Treasury bill monthly returns. The 1-year rating is calculated
using the same methodology, but it is not a component of the overall
rating. For the 3-, 5-, and 10-year periods ended 2/28/98, there were
143, 106, and 36 funds in the fixed-income category, and the fund
received 3, 4, and 4 stars, respectively. Past performance is not
indicative of future results.
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
Although Putnam High Income Convertible and Bond Fund handily met its
current income objective during the first half of fiscal 1998, it did
so at some cost to total return. As your fund's managers explain in
the following report, such an outcome was entirely understandable,
given the current market for the stocks underlying many of the
convertibles in your fund's portfolio.
In the pursuit of its objective, the fund invests mainly in the
convertibles of high-quality but temporarily troubled companies -- just
the companies that earnings-sensitive investors have been quick to
punish in the current market environment. On a more positive note, many
of these are companies with the potential for substantial rebounds down
the road. Thus this is a time to counsel patience.
It is also an appropriate time to announce the addition of Jeffrey
Kobylarz to your fund's management team. Jeffrey has been a member
of Putnam's High-Yield Bond Group since 1993. Before joining Putnam,
he was with Dean Witter InterCapital and W.R. Huff Asset Management.
He has 11 years of investment industry experience.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
April 15, 1998
Report from the Fund Managers
Charles G. Pohl
Jeffrey J. Kobylarz
Putnam High Income Convertible and Bond Fund continued its string of
positive returns in the first half of its 1998 fiscal year, the six
months ended February 28, 1998, with a 4.20% total return at net asset
value and a 13.59% return at market price. These results compare with
a 7.82% return for the Merrill Lynch All Convertible Index and 6.21%
for the First Boston High Yield Index. Given the continued strength
of the U.S. stock market (the S&P 500(registered trademark) Index rose
more than 17% during the period), your fund's relatively modest return
at net asset value was to be expected. The fund's returns come
primarily from income, which is enhanced when securities prices are
trending lower or experiencing prolonged and widespread volatility.
Please see pages 9 and 10 for more performance information.
* BIG YIELDS FROM CONVERTIBLES
In its pursuit of a high level of income, your fund focuses on the
convertible bonds of high-quality companies that have temporarily
fallen on hard times. Most successful companies eventually encounter a
quarter or more of disappointing earnings. However, with the stock
market now in its fourth year of strong consecutive gains and with
valuations high, investors are quick to punish the securities of
companies that fail to live up to Wall Street's expectations.
When a company's stock price tumbles, its convertible bonds usually
are not far behind. Falling bond prices often can boost the yields of
these fixed-income securities into double-digit territory. In addition
to a high yield, we look for companies that are leaders in their
respective industries, have a history of solid growth, and have very
little debt outstanding. As the stock prices of these companies start
to recover, their convertible bond prices also rise, although not as
quickly. If the yield of a convertible holding moves outside our
desired range, we begin to trim our position, although we generally
retain some portion of the bonds to take advantage of possible price
appreciation.
* TECHNOLOGY SECTOR OFFERS RENEWED OPPORTUNITY
Your fund's research and investment selections are designed to target
individual companies, rather than economic sectors. Nevertheless, this
fall, when the prices of technology stocks succumbed to investor
concerns regarding the Asian financial crisis, we took notice. (Roughly
20% of all existing convertibles were issued by technology-related
companies.)
One company purchased during the period was Micron Technology, a
leading low-cost producer of dynamic random-access memory (DRAM)
computer chips. DRAM prices had already fallen more than 80% when the
Asian crisis unleashed the specter of stiffer competition from South
Korean semiconductor companies. Micron announced lower-than-expected
earnings for the first quarter of its 1998 fiscal year, and investors
sent its stock and bond prices lower (consequently raising the yield
on its convertible securities). The company has worked to diversify its
product offerings and decrease its reliance on DRAM chips.
At the same time, Micron has cut costs substantially by improving its
manufacturing process technology and by making smaller, thinner chips.
We estimate that earnings growth will top 40% this year. While this
holding, along with others discussed in this report, was viewed
favorably at the end of the fiscal period, all portfolio holdings are
subject to review and adjustment in accordance with the fund's
investment strategy and may vary in the future.
[GRAPHIC OMITTED: pie chart PORTFOLIO COMPOSITION (2/28/98)]
PORTFOLIO COMPOSITION (2/28/98)
Convertible securities 58.5%
Corporate high-yield bonds 33.1%
Preferred stocks 3.0%
Common stocks, including warrants 1.3%
Other 4.1%
Footnote reads:
Based on total market value of assets. Composition will vary over time.
Apple Computer is another recent purchase. After a series of well-
publicized management blunders, the company became among the most
derided on Wall Street. Several changes in upper-level management left
the company without a permanent CEO (Apple founder Steve Jobs has
filled the post on an interim basis). We started buying into Apple's
$600 million convertible issue this fall, when the company's stock
price was in the $13 to $14 range. After a modest improvement in
business, including the introduction of the super-fast Power
Macintosh G3, the company's stock price is once again over $20.
* HIGH-YIELD CORPORATE HOLDINGS PROVIDE HEALTHY GAINS
Your fund's corporate bond holdings tend to be more sensitive to stock
market trends than its high-yielding convertibles, and the continued
positive economic backdrop in the United States helped propel high-
yield bond prices during the period. A record-breaking supply of new
issues came to market but was easily absorbed by investors seeking
higher yields than those available through government paper and
investment-grade corporate bonds.
Although merger and acquisition activity soared, the percentage of new
high-yield issues used for acquisition financing actually declined.
Indeed, the typical high-yield issuer today has less debt on the books
and is much less likely to default on payments of principal and
interest than in the junk-bond heyday of the late 1980s and early
1990s. (The average default rate among high-yield issuers was 1.5%
in 1997 versus more than 10% in 1992.)
One area of the high-yield market that helped drive fund performance
during the period was telecommunications. Typical of this high-growth
industry, many of the fund's telecom holdings were in the midst of
launching personal communications systems in major U.S. metropolitan
markets in 1997. During the infrastructure development stage, these
often fledgling companies represent their greatest business risk, and
their bonds are priced accordingly, with relatively high yields to
attract investors.
[GRAPHIC OMITTED: TOP FIVE CONVERTIBLE HOLDINGS]
TOP FIVE CONVERTIBLE HOLDINGS*
NovaCare, Inc., 5.5%, 2000
Health-care services
Softkey International, Inc., 5.5%, 2000
Computers
Micron Technology, Inc., 7.0%, 2004
Semiconductors
Integrated Device Technology, Inc., 5.5%, 2002
Semiconductors
Michael's Stores, Inc., 6.75%, 2003
Retail
[GRAPHIC OMITTED: TOP FIVE CORPORATE HIGH-YIELD HOLDINGS]
TOP FIVE CORPORATE HIGH-YIELD HOLDINGS*
Transamerican Energy, stepped-coupon zeros, 2002
Oil and gas
Regal Cinemas, Inc., 8.50%, 2007
Motion picture distribution
NEXTEL Communications, Inc., stepped-coupon zeros, 2007
Cellular communications
ICG Holdings, Inc., stepped-coupon zeros, 2005
Satellite services
Adelphia Communications Corp., 9.50%, 2004
Cable television
*These combined holdings represent 14.5% of the fund's assets as of
2/28/98. Portfolio holdings will vary over time.
Nextel Communications is a good example. The company undertook a
massive investment in its digital mobile network, which is expected to
deliver wireless telephone, two-way dispatch, and paging services to
approximately 85% of the U.S. population by the end of 1998. With more
than one million subscribers to date, Nextel's potentially sizable
position in the wireless market is all but guaranteed. Its securities
enjoyed a substantial rally during the period.
* FUND FINDS CLEAR WATERS BUT FEWER PEARLS
The outlook for high-income convertibles and corporate bonds remains
favorable in our view. Healthy economic activity in the United States,
coupled with relatively low yields on U.S. Treasuries, should provide
an excellent underpinning for both types of securities. While the
economic crisis in Asia may claim more U.S. corporate victims --
providing the occasional opportunity for a high-yielding convertible --
companies in the high-yield corporate market have relatively few
global operations.
On a more cautious note, the general reduction of yields on below-
investment-grade debt over the past year suggests that the market may
now be fairly valued and that price appreciation may be less of a
contributor to performance going forward. In the convertible market,
the burgeoning popularity of these securities has meant that many of
the new issues we've seen have been priced too high in our opinion,
forcing us to focus our sights on the secondary market. In the coming
months, we intend to remain diligent on credit selection, seeking
overlooked issues and undervalued situations that offer the potential
for income and some price appreciation.
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 2/28/98, 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 is designed for
investors seeking high current income through an aggressive portfolio
of high-yielding convertible and debt securities with potential for
capital appreciation.
TOTAL RETURN FOR PERIODS ENDED 2/28/98
Merrill Lynch First Boston
Market All Convertible High-Yield
NAV price Index Index
- -----------------------------------------------------------------------
6 months 4.20% 13.59% 7.82% 6.21%
- -----------------------------------------------------------------------
1 year 12.96 19.21 21.70 12.48
- -----------------------------------------------------------------------
5 years 81.64 80.79 88.32 71.21
Annual average 12.68 12.57 13.50 11.36
- -----------------------------------------------------------------------
10 years 252.09 291.35 249.54 201.95
Annual average 13.41 14.62 13.33 11.69
- -----------------------------------------------------------------------
Life of fund
(since 7/9/87) 238.21 252.35 -- 227.38
Annual average 12.13 12.57 -- 11.76
- -----------------------------------------------------------------------
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.
PRICE AND DISTRIBUTION INFORMATION
6 months ended 2/28/98
- -----------------------------------------------------------------------
Distributions
- -----------------------------------------------------------------------
Number 6
- -----------------------------------------------------------------------
Income $0.426
- -----------------------------------------------------------------------
Capital gains
- -----------------------------------------------------------------------
Long-term 0.214
- -----------------------------------------------------------------------
Short-term 0.169
- -----------------------------------------------------------------------
Total $0.809
- -----------------------------------------------------------------------
Share value: NAV Market price
- -----------------------------------------------------------------------
8/31/97 $10.35 $10.562
- -----------------------------------------------------------------------
2/28/98 10.00 11.125
- -----------------------------------------------------------------------
Current return (end of period): NAV Market price
- -----------------------------------------------------------------------
Current dividend rate1 8.52% 7.66%
- -----------------------------------------------------------------------
1 Income portion of most recent distribution, annualized and divided by
NAV or market price at end of period.
TOTAL RETURN FOR PERIODS ENDED 3/31/98
NAV Market
price
- -----------------------------------------------------------------------
6 months 3.64% 11.64%
- -----------------------------------------------------------------------
1 year 16.14 21.37
- -----------------------------------------------------------------------
5 years 80.70 79.62
Annual average 12.56 12.43
- -----------------------------------------------------------------------
10 years 254.68 282.78
Annual average 13.50 14.37
- -----------------------------------------------------------------------
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.
TERMS AND DEFINITIONS
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.
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
Merrill Lynch All-Convertible Index* is an unmanaged list of
convertible securities commonly used as a measure of performance for
the convertible market.
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 the
bonds in which the fund customarily invests.
* 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.
Portfolio of investments owned
February 28, 1998 (Unaudited)
<TABLE>
<CAPTION>
CONVERTIBLE BONDS AND NOTES (51.3%) *
PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C> <C>
Aerospace and Defense (0.7%)
- ------------------------------------------------------------------------------------------------------------
$ 1,000,000 SPACEHAB, Inc. 144A cv. sub. notes 8s, 2007 $ 1,000,000
Automotive (3.4%)
- ------------------------------------------------------------------------------------------------------------
2,800,000 Exide Corp. 144A cv. sr. sub. notes 2.9s, 2005 1,876,000
3,000,000 Mascotech, Inc. cv. sub. deb. 4 1/2s, 2003 2,700,000
--------------
4,576,000
Banks (1.2%)
- ------------------------------------------------------------------------------------------------------------
1,395,000 Banamex 144A cv. jr. bonds 11s, 2003 (Bahamas) 1,475,195
108,000 Banco Nationale Mexico 144A cv. company
guaranty 7s, 1999 (Bahamas) 106,380
--------------
1,581,575
Business Equipment and Services (2.2%)
- ------------------------------------------------------------------------------------------------------------
1,000,000 Corporate Express, Inc. cv. notes 4 1/2s, 2000 892,500
2,380,000 Corporate Express, Inc. 144A cv. notes 4 1/2s, 2000 2,124,150
--------------
3,016,650
Computer Equipment (1.5%)
- ------------------------------------------------------------------------------------------------------------
2,800,000 Maxtor Corp. cv. sub. deb. 5 3/4s, 2012 1,960,000
Computer Services (0.9%)
- ------------------------------------------------------------------------------------------------------------
1,500,000 System Software Associates, Inc. cv. sub. notes 7s, 2002 1,230,000
Computer Software (0.9%)
- ------------------------------------------------------------------------------------------------------------
1,200,000 Data General Corp. 144A cv. sub. notes 6s, 2004 1,251,000
Computers (3.4%)
- ------------------------------------------------------------------------------------------------------------
700,000 Apple Computer, Inc. cv. sub. notes 6s, 2001 721,000
500,000 Safeguard Scientifics, Inc. 144A cv. sub. notes 6s, 2006 619,375
3,600,000 Softkey International, Inc. 144A cv. sr. notes 5 1/2s, 2000 3,240,000
--------------
4,580,375
Electronic Components (0.9%)
- ------------------------------------------------------------------------------------------------------------
1,400,000 Kent Electronics Corp. cv. sub. notes 4 1/2s, 2004 1,176,000
Electronics (1.5%)
- ------------------------------------------------------------------------------------------------------------
1,000,000 Cirrus Logic Inc. 144A cv. sub. notes 6s, 2003 787,500
1,500,000 HMT Technology Corp. 144A cv. sub. notes 5 3/4s, 2004 1,235,625
--------------
2,023,125
Entertainment (1.1%)
- ------------------------------------------------------------------------------------------------------------
2,650,000 Rogers Communications cv. deb. 2s, 2005 (Canada) 1,533,688
Environmental Control (2.4%)
- ------------------------------------------------------------------------------------------------------------
2,150,000 OHM Corp. cv. sub. deb. 8s, 2006 2,112,375
1,300,000 Weston (Roy F.), Inc. cv. deb. 7s, 2002 1,163,500
--------------
3,275,875
Food (2.1%)
- ------------------------------------------------------------------------------------------------------------
2,500,000 Chiquita Brands International, Inc. cv. sub. deb. 7s, 2001 2,375,000
400,000 Chiquita Brands International, Inc. 144A cv. sub. deb 7s, 2001 380,000
--------------
2,755,000
Health Care Services (3.1%)
- ------------------------------------------------------------------------------------------------------------
4,000,000 NovaCare, Inc. cv. sub. deb. 5 1/2s, 2000 3,850,000
300,000 Quantum Health Resources, Inc. cv. sub. deb. 4 3/4s, 2000 281,250
--------------
4,131,250
Hospital Management and Medical Services (0.6%)
- ------------------------------------------------------------------------------------------------------------
1,000,000 PhyMatrix, Inc. cv. sub. deb. 6 3/4s, 2003 852,500
Medical Management Services (0.3%)
- ------------------------------------------------------------------------------------------------------------
500,000 Continucare Corp. 144A cv. sub. notes 8s, 2002 410,000
Office Equipment (1.6%)
- ------------------------------------------------------------------------------------------------------------
550,000 U.S. Office Products Co. cv. sub notes 5 1/2s, 2003 459,938
1,897,000 U.S. Office Products Co. 144A cv. sub. notes 5 1/2s, 2003 1,633,791
--------------
2,093,729
Paper and Forest Products (1.0%)
- ------------------------------------------------------------------------------------------------------------
135,000 APP Global Finance (V) Ltd. 144A cv. sec. 2s, 2000
(United Kingdom) 124,200
1,500,000 Stone Container Corp. cv. sub. deb. 6 3/4s, 2007 1,260,000
--------------
1,384,200
Pharmaceuticals (1.6%)
- ------------------------------------------------------------------------------------------------------------
400,000 Pharmaceutical Marketing Services, Inc. cv. notes
6 1/4s, 2003 332,000
2,150,000 Pharmaceutical Marketing Services, Inc. 144A cv. deb.
6 1/4s, 2003 1,849,000
--------------
2,181,000
Pipelines (0.8%)
- ------------------------------------------------------------------------------------------------------------
650,000 SFP Pipeline Holdings, Inc. var. rate exch. deb. 11.16s, 2010 ++ 1,127,750
Publishing (0.7%)
- ------------------------------------------------------------------------------------------------------------
2,350,000 Hollinger, Inc. cv. sub. notes Liquid Yield Option Notes (LYON)
zero %, 2013 938,531
REIT's (Real Estate Investment Trust) (1.4%)
- ------------------------------------------------------------------------------------------------------------
1,750,000 Malan Realty Investors cv. sub. notes 9 1/2s, 2004 1,837,500
Restaurants (2.1%)
- ------------------------------------------------------------------------------------------------------------
15,000,000 Boston Chicken, Inc. cv. notes (LYON) zero %, 2015 2,325,000
750,000 Boston Chicken, Inc. cv. sub. deb. 7 3/4s, 2004 538,125
--------------
2,863,125
Retail (4.4%)
- ------------------------------------------------------------------------------------------------------------
1,100,000 Baker (J.), Inc. cv. deb. 7s, 2002 874,500
2,550,000 Michaels Stores, Inc. cv. sub. notes 6 3/4s, 2003 2,712,563
3,050,000 Sunglass Hut Inernational, Inc. 144A cv. sub. notes
5 1/4s, 2003 2,287,500
--------------
5,874,563
Semiconductors (8.4%)
- ------------------------------------------------------------------------------------------------------------
1,500,000 Credence Systems Corp. 144A cv. sub. notes 5 1/4s, 2002 1,297,500
3,050,000 Integrated Device Technology, Inc. cv. sub. notes 5 1/2s, 2002 2,764,063
1,300,000 Lam Research Corp. 144a cv. sub. notes 5s, 2002 1,095,250
2,950,000 Micron Technology, Inc. cv. sub. notes 7s, 2004 2,876,250
2,000,000 National Semiconductor 144A cv. deb. 6 1/2s, 2002 1,970,000
1,412,000 Richardson Electronics, Ltd. cv. sr. sub. deb 8 1/4s, 2006 1,251,385
--------------
11,254,448
Telecommunications (1.6%)
- ------------------------------------------------------------------------------------------------------------
500,000 International Cabletel Inc. 144A cv. deb. 7 1/4s, 2005 603,750
1,000,000 International Cabletel, Inc. cv. sub. notes 7s, 2008 1,107,500
300,000 WinStar Communications, Inc. 144A cv. sr. disc. notes
stepped-coupon zero % (14s, 10/15/00), 2005 ++ 411,000
--------------
2,122,250
Telephone Services (0.1%)
- ------------------------------------------------------------------------------------------------------------
750,000 MIDCOM Communications, Inc. 144A cv. sub.
deb. 8 1/4s, 2003 150,000
Tobacco (1.4%)
- ------------------------------------------------------------------------------------------------------------
2,115,000 Standard Commercial Corp. cv. sub. deb. 7 1/4s, 2007 1,945,800
--------------
Total Convertible Bonds and Notes
(cost $63,745,323) $69,125,934
CORPORATE BONDS AND NOTES (32.7%) *
PRINCIPAL AMOUNT VALUE
Advertising (0.3%)
- ------------------------------------------------------------------------------------------------------------
$ 175,000 Lamar Advertising Co. company guaranty 8 5/8s, 2007 $ 181,125
95,000 Lamar Advertising Co. sr. sub. notes 9 5/8s, 2006 102,838
100,000 Outdoor Comunications Inc. sr. sub. notes 9 1/4s, 2007 104,250
--------------
388,213
Aerospace and Defense (0.4%)
- ------------------------------------------------------------------------------------------------------------
50,000 Argo-Tech Corp. company guaranty 8 5/8s, 2007 51,125
100,000 Aviation Sales Co. 144A sr. sub. notes 8 1/8s, 2008 99,250
70,000 BE Aerospace, Inc. 144A sr. sub. notes 8s, 2008 69,650
50,000 K & F Industries, Inc.144A sr. sub. notes 9 1/4s, 2007 52,250
100,000 Sequa Corp. med. term notes 10s, 2001 104,657
70,000 Tracor, Inc. sr. sub. notes 8 1/2s, 2007 72,275
70,000 United Defense Industries Inc. 144A sub. notes 8 3/4s, 2007 71,400
--------------
520,607
Agriculture (0.3%)
- ------------------------------------------------------------------------------------------------------------
388,165 Premium Standard Farms, Inc. sr. sec. notes 11s, 2003 [2 DBL. DAGGERS] 419,219
Airlines (0.1%)
- ------------------------------------------------------------------------------------------------------------
70,000 Trans World Airlines, Inc. 144A sr. notes 11 1/2s, 2004 74,025
80,000 Trans World Airlines, Inc. 144A notes 11 3/8s, 2006 80,400
--------------
154,425
Apparel (0.4%)
- ------------------------------------------------------------------------------------------------------------
145,000 Sassco Fashions Ltd. sr. notes 12 3/4s, 2004 153,700
275,000 Tultex Corp. company guaranty 9 5/8s, 2007 281,531
70,000 William Carter Co. 144A sr. sub. notes 12s, 2008 74,900
--------------
510,131
Automotive Parts (0.7%)
- ------------------------------------------------------------------------------------------------------------
262,000 Aftermarket Technology Corp. sr. sub. notes 12s, 2004 291,475
50,000 Hayes Wheels International, Inc. sr. sub. notes 9 1/8s, 2007 53,063
205,000 Lear Corp. sub. notes 9 1/2s, 2006 228,063
70,000 Motors and Gears Inc. sr. notes Ser. D, 10 3/4s, 2006 75,600
350,000 Navistar International Corp. 144A sr. sub. notes 8s, 2008 351,313
--------------
999,514
Banks (0.8%)
- ------------------------------------------------------------------------------------------------------------
70,000 Delta Financial Corp. sr. notes 9 1/2s, 2004 68,250
100,000 Dime Capital Trust I bank guaranty Ser. A, 9.33s, 2027 112,780
100,000 Greenpoint Capital Trust I company guaranty 9.1s, 2027 110,016
150,000 Korea Developmental Bank bonds 7 1/8s, 2001 (Korea) 140,145
25,000 Ocwen Capital Trust I company guaranty 10 7/8s, 2027 27,750
80,000 Ocwen Federal Bank sub. deb. 12s, 2005 88,800
50,000 Ocwen Financial Corp. notes 11 7/8s, 2003 56,750
75,000 Provident Capital Trust company guaranty 8.6s, 2026 79,470
45,000 Riggs Capital Trust 144A bonds 8 5/8s, 2026 47,839
65,000 Sovereign Capital Trust company guaranty 9s, 2027 70,771
145,000 Sumitomo Bank Treasury Co. 144A bonds Ser. A,
FRB 9.4s, 2049 (Japan) 148,625
55,000 Webster Capital Trust I 144A bonds 9.36s, 2027 60,501
--------------
1,011,697
Basic Industrial Products (--%)
- ------------------------------------------------------------------------------------------------------------
30,000 Roller Bearing Co. 144A sr.sub.notes 9 5/8s, 2007 31,050
Broadcasting (2.0%)
- ------------------------------------------------------------------------------------------------------------
100,000 Acme Television/Finance 144A sr. disc. notes
stepped-coupon zero % (10 7/8s, 9/30/00), 2004 ++ 79,750
100,000 Allbritton Communications Co. 144A sr. sub. notes 8 7/8s,
2008 100,500
70,000 Antenna TV S.A. 144A sr. notes 9s, 2007 (Greece) 70,350
70,000 Argyle Television Corp. sr. sub. notes 9 3/4s, 2005 79,800
50,000 Azteca Holdings 144A sr. notes 11s, 2002 52,438
600,000 Benedek Communications Corp. sr. disc. notes
stepped-coupon zero % (13 1/4s, 5/15/01), 2006 ++ 471,000
215,000 Capstar Broadcasting sr. disc. notes stepped-coupon
zero % (12 3/4s, 2/1/02), 2009 ++ 159,100
90,000 Capstar Broadcasting sr. sub. notes 9 1/4s, 2007 94,500
75,000 Central European Media Enterprises Ltd. sr. notes 9 3/8s,
2004 76,500
90,220 Citadel Broadcasting Co. sr. notes 10 1/4s, 2007 99,242
250,000 Comcast UK Cable, Ltd. deb. stepped-coupon zero %
(11.2s, 11/15/00), 2007 (Bermuda) ++ 206,250
265,000 Commodore Media, Inc. sr. sub. notes stepped-coupon
7 1/2s, (13 1/4s, 5/1/98), 2003 ++ 296,800
280,000 Fox/Liberty Networks LLC sr. notes 8 7/8s, 2007 289,800
250,000 Heritage Media Services Corp. sr. sub. notes 8 3/4s, 2006 267,500
120,000 Jacor Communications, Inc. sr. sub. notes 8s, 2010 119,700
110,000 Radio One Inc. 144A sr. sub. notes stepped-coupon 7s,
(12s, 5/15/00), 2004 ++ 111,100
80,000 SFX Entertainment Inc. 144A sr. sub. notes 9 1/8s, 2008 80,300
35,000 TV Azteca S.A. De C.V. sr. notes Ser. B, 10 1/2s, 2007 (Mexico) 37,450
--------------
2,692,080
Building Products (0.5%)
- ------------------------------------------------------------------------------------------------------------
165,000 Cemex S.A. 144A bonds 12 3/4s, 2006 (Mexico) 201,300
150,000 Consumers International 144A sr. notes 10 1/4s, 2005 164,625
250,000 Nortek, Inc. sr. sub. notes 9 7/8s, 2004 260,625
50,000 Waxman Industries, Inc. sr. notes stepped-coupon Ser. B,
zero % (12 3/4s, 6/1/99), 2004 ++ 45,750
--------------
672,300
Building and Construction (0.6%)
- ------------------------------------------------------------------------------------------------------------
55,000 American Architectural Products Corp. 144A sr.
11 3/4s, 2007 57,200
90,000 Atrium Companies Inc. sub. notes 10 1/2s, 2006 95,400
95,000 Brand Scaffold Services 144A sr. notes 10 1/4s, 2008 96,900
150,000 GS Superhighway Holdings sr. notes 10 1/4s, 2007 127,500
80,000 Presley Cos. sr. notes 12 1/2s, 2001 77,000
334,000 Terex Corp. sr. notes Ser. B, 13 1/4s, 2002 387,440
--------------
841,440
Buses (0.2%)
- ------------------------------------------------------------------------------------------------------------
355,000 MCII Holding (USA) sec. notes stepped-coupon zero %
(12s, 11/15/98), 2002 ++ 324,825
Business Equipment and Services (0.2%)
- ------------------------------------------------------------------------------------------------------------
45,000 ATC Group Services Inc. 144A sr. sub. notes 12s, 2008 45,563
110,000 Iron Mountain, Inc. company guaranty 8 3/4s, 2009 113,713
50,000 Outsourcing Solutions, Inc. sr. sub. notes Ser. B, 11s, 2006 53,625
--------------
212,901
Cable Television (2.7%)
- ------------------------------------------------------------------------------------------------------------
660,530 Adelphia Communications Corp. sr. notes 9 1/2s, 2004 [2 DBL. DAGGERS] 686,951
75,000 Australias Holdngs PTY Ltd. sr. disc, notes stepped-coupon
zero % (15s, 11/01/00), 2002 37,500
130,000 Century Communications Corp. 144A sr. disc.
notes zero %, 2008 55,250
215,000 Diamond Cable Communication Co. sr. disc. notes
stepped-coupon zero % (10 3/4s, 2/15/02), 2007
(United Kingdom) ++ 142,975
400,000 Diamond Cable Communication Co. sr. disc. notes
stepped-coupon zero % (11 3/4s, 12/15/00), 2005
(United Kingdom) ++ 306,000
394,561 Falcon Holdings Group, Inc. sr. sub. notes 11s, 2003 [2 DBL. DAGGERS] 418,235
250,000 Fox Kids Worldwide Inc. 144A sr. discount notes
stepped-coupon zero % (10 1/4s, 11/1/02), 2007 ++ 152,500
315,000 Fox Kids Worldwide Inc. 144A sr. notes 9 1/4s, 2007 311,063
270,000 FrontierVision Holdings LP sr. disc. notes
stepped-coupon zero % (11 7/8s, 9/15/01), 2007 ++ 207,900
100,000 Heartland Wireless Communications, Inc. sr. notes 13s, 2003 28,000
80,000 Heartland Wireless Communications, Inc. sr. notes Ser. B, 14s, 2004 30,200
100,000 International Cabletel, Inc. sr. notes stepped-coupon
Ser. A, zero % (12 3/4s, 4/15/00), 2005 ++ 85,500
490,000 International Cabletel, Inc. sr. notes stepped-coupon
Ser. B, zero % (11 1/2s, 2/01/01), 2006 ++ 392,000
190,000 Lenfest Communications, Inc. 144A sr. sub. notes 8 1/4s, 2008 191,663
210,000 NTL Inc. sr. notes Ser. B, 10s, 2007 (United Kingdom) 224,700
270,000 UIH Australia/Pacific, Inc. sr. disc. notes stepped-coupon
Ser. B, zero % (14s, 5/15/01), 2006 (Australia) ++ 183,600
220,000 United International Holdings 144A sr. disc. notes
stepped-coupon zero % (10 3/4s, 2/15/03), 2008 ++ 133,375
--------------
3,587,412
Cellular Communications (1.9%)
- ------------------------------------------------------------------------------------------------------------
721,000 CellNet Data Systems, Inc. sr. disc. notes stepped-coupon zero %
(14s, 10/1/02), 2007 ++ 369,513
500,000 Comunicacion Cellular bonds stepped-coupon zero %
(13 1/8s, 11/15/00), 2003 (Colombia) ++ 386,250
220,000 Interact Systems, Inc. sr. disc. notes stepped-coupon zero %
(14s, 8/1/99), 2003 ++ 83,600
490,000 Intercel, Inc. sr. disc. notes stepped-coupon zero %
(12s, 5/1/01), 2006 ++ 373,625
160,000 McCaw International Ltd sr. discount notes
stepped-coupon zero % (13s, 4/15/02), 2007 ++ 105,600
325,000 Millicom International Cellular S.A. sr. disc. notes
stepped-coupon zero % (13 1/2s, 6/1/01), 2006
(Luxembourg) ++ 250,656
1,270,000 NEXTEL Communications sr. disc. notes stepped-coupon
zero % (10.65s, 9/15/02), 2007 ++ 819,150
340,000 NEXTEL Communications, Inc. 144A sr. disc. notes
stepped-coupon zero % (9.95s, 2/15/03), 2008 ++ 210,800
--------------
2,599,194
Chemicals (1.1%)
- ------------------------------------------------------------------------------------------------------------
500,000 Acetex Corp. sr. notes 9 3/4s, 2003 (Canada) 512,500
180,000 Huntsman Corp. 144A sr. sub. notes 9 1/2s, 2007 186,750
90,000 Huntsman Corp. 144A sr. sub. notes FRN 9.187s, 2007 90,900
50,000 NL Industries, Inc. sr. notes 11 3/4s, 2003 55,625
50,000 Pharmaceutical Fine Chemicals 144A sr. sub. notes 9 3/4s,
2007 (Switzerland) 51,875
100,000 Pioneer Americas Acquisition 144A sr. notes 9 1/4s, 2007 101,500
40,000 Polymer Group, Inc. 144A sr. sub. notes 8 3/4s, 2008 40,000
100,000 Polymer Group, Inc. 144A sr. sub. notes 9s, 2007 102,000
155,000 Polytama International notes 11 1/4s, 2007 (Netherlands) 69,750
105,000 Sovereign Specialty Chemical 144A sr. sub. notes 9 1/2s, 2007 110,250
75,000 Sterling Chemicals Holdings sr. disc. notes stepped-coupon
zero % (13 1/2s, 8/15/01), 2008 ++ 46,875
--------------
1,368,025
Computer Equipment (0.2%)
- ------------------------------------------------------------------------------------------------------------
250,000 Axiohm Transactions Solutions 144A sr. sub. notes 9 3/4s, 2007 255,000
Computer Services (0.3%)
- ------------------------------------------------------------------------------------------------------------
240,000 Unisys Corp. sr. notes 11 3/4s, 2004 278,400
105,000 Viasystems Inc. sr. sub notes 9 3/4s, 2007 110,250
--------------
388,650
Conglomerates (0.2%)
- ------------------------------------------------------------------------------------------------------------
300,000 MacAndrews & Forbes Holdings, Inc. sub. deb. notes 13s, 1999 301,125
Consumer Durable Goods (0.1%)
- ------------------------------------------------------------------------------------------------------------
20,000 Hedstrom Holdings, Inc. 144A sr. disc. notes stepped-coupon
zero % (12s, 6/1/02), 2009 ++ 12,400
140,000 Icon Fitness Corp. sr. disc. notes stepped-coupon
Ser. B, zero % (14s, 11/15/01), 2006 ++ 75,600
50,000 Sealy Mattress Co. 144A sr. sub. notes 9 7/8s, 2007 53,125
--------------
141,125
Consumer Non Durables (0.1%)
- ------------------------------------------------------------------------------------------------------------
25,000 Amscan Holdings, Inc. 144A sr. sub. notes 9 7/8s, 2007 26,000
40,000 French Fragrances, Inc. sr. notes Ser. B, 10 3/8s, 2007 42,800
--------------
68,800
Consumer Services (0.4%)
- ------------------------------------------------------------------------------------------------------------
526,000 Coinmach Corp. sr. notes Ser.D, 11 3/4s, 2005 585,175
Cosmetics (0.5%)
- ------------------------------------------------------------------------------------------------------------
300,000 Carson, Inc. company guaranty Ser. B, 10 3/8s, 2007 300,000
525,000 Revlon Worldwide Corp. sr. disc. notes Ser. B, zero %, 2001 387,188
--------------
687,188
Electric Utilities (0.4%)
- ------------------------------------------------------------------------------------------------------------
50,000 AES Corp. sr. sub. notes 8 3/8s, 2007 51,125
100,000 Espirito Santo Centrais 144A sr. notes 10s, 2007 (Brazil) 96,000
223,000 First PV Funding deb. 10.15s, 2016 236,059
209,518 Northeast Utilities System notes Ser. A, 8.58s, 2006 210,019
--------------
593,203
Electrical Equipment (0.1%)
- ------------------------------------------------------------------------------------------------------------
100,000 Dobson Communications Corp. sr. notes 11 3/4s, 2007 108,500
Electronic Components (0.2%)
- ------------------------------------------------------------------------------------------------------------
80,000 DII Group, Inc. (The) sr. sub. notes 8 1/2s, 2007 80,800
50,000 HCC Industries, Inc. company guaranty 10 3/4s, 2007 51,750
160,000 Zilog Inc. 144A sr. notes 9 1/2s, 2005 159,000
--------------
291,550
Electronics (0.3%)
- ------------------------------------------------------------------------------------------------------------
55,000 Celestica International Ltd. sr. sub. notes 10 1/2s, 2006 (India) 58,919
125,000 Details Holdings Corp. 144A sr. disc. notes stepped-coupon
zero % (12 1/2s, 11/15/02), 2007 ++ 79,375
85,000 Flextronics International Ltd. 144A sr. sub. notes 8 3/4s, 2007 86,063
50,000 Moog, Inc. sr. sub. notes Ser. B, 10s, 2006 54,500
40,000 Therma-Wave Inc. sr. notes Ser. B, 10 5/8s, 2004 41,600
25,000 Wavetek Corp. company guaranty 10 1/8s, 2007 26,000
--------------
346,457
Energy-Related (0.2%)
- ------------------------------------------------------------------------------------------------------------
350,000 Panda Global Energy Co. 144A sr. notes 12 1/2s, 2004 322,000
Environmental Control (0.2%)
- ------------------------------------------------------------------------------------------------------------
95,000 Allied Waste Industries, Inc. company guaranty 10 1/4s, 2006 105,925
175,000 Allied Waste Industries, Inc. 144A sr. disc. notes
stepped-coupon zero % (11.3s, 6/1/07), 2007 ++ 127,750
--------------
233,675
Financial Services (0.5%)
- ------------------------------------------------------------------------------------------------------------
165,000 Aames Financial Corp. sr. notes 9 1/8s, 2003 165,000
100,000 Colonial Capital I 144A company guaranty 8.92s, 2027 107,609
110,000 Contifinancial Corp. sr. notes 8 3/8s, 2003 112,750
50,000 Dine S.A. de C.V. 144A company guaranty 8 3/4s, 2007
(Luxembourg) 48,250
45,000 Dollar Financial Group Inc. sr. notes Ser. A, 10 7/8s, 2006 49,050
75,000 Imperial Credit Capital Trust I 144A company guaranty
10 1/4s, 2002 74,438
45,000 Imperial Credit Industries, Inc. sr. notes 9 7/8s, 2007 44,100
75,000 Intertek Finance PLC 144A sr. sub. notes 10 1/4s, 2006 78,750
40,000 Nationwide Credit Inc. 144A sr. notes 10 1/4s, 2008 41,200
--------------
721,147
Food and Beverages (0.7%)
- ------------------------------------------------------------------------------------------------------------
120,000 Ameriserve Food Co. sr. sub. notes 10 1/8s, 2007 129,900
100,000 Ameriserve Food Co. company guaranty 8 7/8s, 2006 103,500
25,000 Aurora Foods, Inc. 144A sr. sub. notes Ser. C, 9 7/8s, 2007 26,750
125,000 Canandaigua Wine Co. sr. sub. notes Ser. C, 8 3/4s, 2003 129,375
200,000 Doane Products Co. sr. notes 10 5/8s, 2006 220,000
30,000 Eagle Family Foods 144A sr. sub. notes 8 3/4s, 2008 30,150
115,000 Fleming Companies, Inc. company guaranty Ser. B, 10 1/2s,
2004 123,625
100,000 Nebco Evans Holding Co. sr. disc. notes stepped-coupon
zero % (12 3/8s, 7/15/02), 2007 ++ 68,500
60,000 Southern Foods Group 144A sr. sub. notes 9 7/8s, 2007 63,900
20,000 Windy Hill Pet Food Co. sr. sub. notes 9 3/4s, 2007 21,200
--------------
916,900
Gaming (2.0%)
- ------------------------------------------------------------------------------------------------------------
110,000 Argosy Gaming Co. 1st mtge. 13 1/4s, 2004 119,350
70,000 Casino America, Inc. sr. notes 12 1/2s, 2003 77,525
200,000 Coast Hotels & Casinos, Inc. company guaranty Ser. B,
10 7/8s, 2001 202,000
192,786 Elsinore Corp. 144A exch. 1st mtge. 11 1/2s, 2000 185,075
260,000 Fitzgeralds Gaming Corp. 144A company guaranty 12 1/4s,
2004 262,600
125,000 Grand Casinos, Inc. 1st mtge. 10 1/8s, 2003 135,313
350,000 Hollywood Casino Corp. sr. notes 12 3/4s, 2003 385,000
60,000 Isle of Capri Black Hawk LLC 1st mtge. Ser. B, 13s, 2004 61,050
475,000 Lady Luck Gaming Corp. 1st mtge. 11 7/8s, 2001 488,063
125,000 Louisiana Casino Cruises Corp. sr. sub. deb. 11 1/2s, 1998 126,250
40,000 Penn National Gaming, Inc. 144A sr. notes 10 5/8s, 2004 41,900
175,000 PRT Funding Corp. sr. notes 11 5/8s, 2004 131,250
190,000 Trump A.C. 1st mtge. 11 1/4s, 2006 195,463
243,000 Trump Castle notes 11 1/2s, 2000 245,430
--------------
2,656,269
Health Care (0.8%)
- ------------------------------------------------------------------------------------------------------------
200,000 Integrated Health Services, Inc. sr. sub. notes Ser. A, 9 1/4s, 2008 208,500
125,000 Genesis Eldercare 144A sr. sub. notes 9s, 2007 127,500
75,000 MedPartners, Inc. sr. notes 7 3/8s, 2006 71,438
220,000 Paracelsus Healthcare Corp. sr. sub. notes 10s, 2006 232,100
305,000 Paragon Health Networks, Inc. 144A sr. sub. notes 9 1/2s, 2007 314,150
150,000 Sun Healthcare Group Inc. 144A sr. sub. notes 9 1/2s, 2007 156,750
--------------
1,110,438
Health and Fitness (0.2%)
- ------------------------------------------------------------------------------------------------------------
250,000 IHF Holdings, Inc. sr. disc. notes stepped-coupon Ser. B, zero %
(15.0s, 11/15/99), 2004 ++ 215,000
Insurance (0.2%)
- ------------------------------------------------------------------------------------------------------------
200,000 Reliance Group Holdings, Inc. sr. sub. deb. 9 3/4s, 2003 209,520
Lodging (0.1%)
- ------------------------------------------------------------------------------------------------------------
125,000 Prime Hospitality Corp. sub. notes 9 3/4s, 2007 135,313
Medical Supplies and Devices (0.4%)
- ------------------------------------------------------------------------------------------------------------
65,000 Conmed Corp. 144A sr. sub. notes 9s, 2008 65,650
140,000 Fresenius Medical Care AG 144A company guaranty 7 7/8s,
2008 (Germany) 139,300
150,000 Graphic Controls Corp. sr. sub. notes Ser. A, 12s, 2005 168,750
20,000 Imagyn Medical Technologies company guaranty 12 1/2s, 2004 12,000
25,000 Leiner Health Products sr. sub. notes 9 5/8s, 2007 27,250
125,000 Wright Medical Technology, Inc. 144A notes Ser. C, 11 3/4s,
2000 124,375
--------------
537,325
Metals and Mining (0.3%)
- ------------------------------------------------------------------------------------------------------------
35,000 Acindar Industria Argentina de Aceros S.A. bonds 11 1/4s,
2004 (Argentina) 36,444
80,000 Anker Coal Group, Inc. 144A sr. notes 9 3/4s, 2007 82,400
85,000 Continental Global Group sr. notes Ser. B, 11s, 2007 90,950
250,000 Ispat Mexicana, S.A. 144A deb. 10 3/8s, 2001 (Mexico) 258,125
--------------
467,919
Motion Picture Distribution (0.9%)
- ------------------------------------------------------------------------------------------------------------
140,000 AMC Entertainment, Inc. sr. sub. notes 9 1/2s, 2009 146,300
170,000 Cinemark USA, Inc. notes 9 5/8s, 2008 180,200
45,000 Panavision Inc. 144A sr. disc. notes stepped-coupon
zero % (9 5/8s, 2/1/02), 2006 ++ 31,500
850,000 Regal Cinemas, Inc. sr. sub. notes 8 1/2s, 2007 867,000
--------------
1,225,000
Oil and Gas (1.7%)
- ------------------------------------------------------------------------------------------------------------
75,000 Abraxas Petroleum Corp. 144A sr. notes Ser. B, 11 1/2s, 2004 79,125
15,000 Benton Oil & Gas Co. sr. notes 9 3/8s, 2007 15,375
80,000 Coho Energy, Inc. sr. sub. notes 8 7/8s, 2007 80,000
80,000 Dailey International Inc. 144A sr. notes 9 1/2s, 2008 81,200
50,000 DI Industries Inc. sr. notes 8 7/8s, 2007 51,250
80,000 Market Hub Partners 144A sr. notes 8 1/4s, 2008 80,600
35,000 Newpark Resources, Inc. 144A sr. sub. notes 8 5/8s, 2007 35,788
50,000 Panaco, Inc. company guaranty Ser. B, 10 5/8s, 2004 50,000
60,000 Pride Petroleum Services, Inc. sr. notes 9 3/8s, 2007 64,500
60,000 RAM Energy Inc. sr. notes 11 1/2s, 2008 59,700
50,000 Southwest Royalties, Inc. 144A company guaranty 10 1/2s,
2004 45,000
40,000 Texas Petrochemical Corp. sr. sub. notes 11 1/8s, 2006 44,200
1,150,000 Transamerican Energy 144A sr. disc. notes stepped-coupon
zero % (13s, 6/15/99), 2002 ++ 966,000
385,000 Transamerican Energy 144A sr. notes 11 1/2s, 2002 390,294
197,000 TransTexas Gas Corp. sr. sub. notes 13 3/4s, 2001 220,640
80,000 Trico Marine Services, Inc. 144A company guaranty
Ser. C, 8 1/2s, 2005 80,500
--------------
2,344,172
Packaging and Containers (0.4%)
- ------------------------------------------------------------------------------------------------------------
50,000 AEP Industries, Inc. 144A sr. sub. notes 9 7/8s, 2007 53,000
80,000 Huntsman Packaging Corp. 144A sr. sub. notes 9 1/8s, 2007 81,600
110,000 Innova S De R.L. sr. notes 12 7/8s, 2007 (Mexico) 117,425
70,000 Radnor Holdings Corp. 144A sr. notes Ser. B, 10s, 2003 73,500
40,000 Radnor Holdings Inc. sr. notes 10s, 2003 42,400
100,000 Riverwood International Corp. company guaranty 10 5/8s, 2007 106,000
--------------
473,925
Paging (0.5%)
- ------------------------------------------------------------------------------------------------------------
220,000 Metrocall, Inc. sr. sub. notes 10 3/8s, 2007 225,500
200,000 Metrocall, Inc. 144A sr. sub. notes 9 3/4s, 2007 201,500
170,000 Mobile Telecommunications Tech. sr. notes 13 1/2s, 2002 198,050
40,000 Pagemart Nationwide, Inc. sr. disc. notes stepped-coupon
zero % (15s, 2/1/00), 2005 ++ 35,600
55,000 Paging Network Do Brasil sr. notes 13 1/2s, 2005 (Brazil) 54,725
--------------
715,375
Paper and Forest Products (1.1%)
- ------------------------------------------------------------------------------------------------------------
115,000 APP Finance II Mauritius Ltd. bonds 12s, 2049 (Indonesia) ++ 86,825
100,000 APP International Finance Co. notes 11 3/4s, 2005
(Netherlands) 90,000
205,000 Florida Coast Paper LLC 1st mtge. Ser. B, 12 3/4s, 2003 219,350
250,000 Indah Kiat Financial Mauritius company guaranty 10s, 2007
(Indonesia) 200,000
150,000 Pindo Deli Finance Mauritius Ltd. 144A company guaranty
10 3/4s, 2007 (India) 119,250
190,000 PT Pabrik Kertas Tjiwi Kimia 144A company guaranty 10s, 2004
(Indonesia) 146,300
330,000 Repap New Brunswick sr. notes 10 5/8s, 2005 (Canada) 325,050
150,000 Riverwood International Corp. company guaranty 10 7/8s, 2008 150,188
100,000 Stone Container Corp. sr. notes 11 7/8s, 2016 108,000
--------------
1,444,963
Pharmaceuticals (0.1%)
- ------------------------------------------------------------------------------------------------------------
115,000 ICN Pharmaceuticals, Inc. 144A sr. notes 9 1/4s, 2005 121,756
45,000 NBTY Inc. 144A sr. sub. notes 8 5/8s, 2007 46,238
--------------
167,994
Publishing (0.3%)
- ------------------------------------------------------------------------------------------------------------
150,000 Affinity Group Holdings sr. notes 11s, 2007 162,000
180,000 Garden State Newspapers, Inc. sr. sub. notes Ser. B, 8 3/4s, 2009 184,500
60,000 Perry-Judd 144A sr. sub. notes 10 5/8s, 2007 62,850
40,000 Von Hoffman Press Inc. 144A sr. sub. notes 10 3/8s, 2007 43,000
--------------
452,350
REIT's (0.1%)
- ------------------------------------------------------------------------------------------------------------
160,000 HMH Properties, Inc. company guaranty Ser. B, 8 7/8s, 2007
(Canada) 169,200
Railroads (0.2%)
- ------------------------------------------------------------------------------------------------------------
80,000 Hermes Europe Railtel sr. notes 11 1/2s, 2007 (Netherlands) 90,200
30,000 TFM S.A. de C.V. 144A company guaranty 10 1/4s, 2007
(Mexico) 31,200
160,000 TFM S.A. de C.V. 144A company guaranty stepped-coupon
zero % (11 3/4s, 6/15/02), 2009 (Mexico) ++ 105,600
--------------
227,000
Recreation (--%)
- ------------------------------------------------------------------------------------------------------------
40,000 CLN Holdings, Inc. sr. disc. notes zero %, 2001 26,000
Restaurants (0.1%)
- ------------------------------------------------------------------------------------------------------------
100,000 FRD Acquisition Co. sr. notes Ser. B, 12 1/2s, 2004 108,750
Retail (1.1%)
- ------------------------------------------------------------------------------------------------------------
300,000 Big 5 Corp. sr. notes Ser. B 10 7/8s, 2007 303,000
50,000 Color Spot Nurseries sr. sub. notes 10 1/2s, 2007 49,500
100,000 Corporate Express, Inc. sr. sub. notes Ser. B, 9 1/8s, 2004 102,500
123,000 Guitar Center Management Co. 144A sr. notes 11s, 2006 136,530
450,000 K mart Corp. med. term notes 7.85s, 2002 455,661
250,000 Mothers Work, Inc. sr. notes 12 5/8s, 2005 267,500
10,000 Packaged Ice, Inc. 144A sr. notes 9 3/4s, 2005 10,225
110,000 Zale Corp. 144A sr. notes 8 1/2s, 2007 112,475
--------------
1,437,391
Satellite Services (0.9%)
- ------------------------------------------------------------------------------------------------------------
145,000 Echostar DBS Corp. company guaranty 12 1/2s, 2002 160,950
250,000 Echostar Satellite Broadcast Corp. sr. disc. notes
stepped-coupon zero % (13 1/8s, 3/15/00), 2004 ++ 221,250
95,000 Esat Holdings Ltd. 144A sr. notes stepped-coupon zero %
(12 1/2s, 2/01/02), 2007 (Ireland) ++ 70,300
230,000 Iridium LLC/Capital Corp. company guaranty Ser. B, 14s, 2005 261,625
175,000 Iridium LLC/Capital Corp. company gauranty Ser. A, 13s, 2005 190,531
10,000 Iridium LLC/Capital Corp. 144A sr. notes 11 1/4s, 2005 10,250
125,000 Orbcomm Global Capital Corp. sr. notes Ser. B, 14s, 2004 141,250
25,000 Pegasus Communications Corp. sr. notes Ser. B, 9 5/8s, 2005 26,375
85,000 Pratama Datakom Asia BV 144A company guaranty 12 3/4s,
2005 (Indonesia) 45,900
85,000 Satelites Mexicanos S.A. de C.V. 144A sr. notes 10 1/8s, 2004
(Mexico) 86,700
--------------
1,215,131
Semiconductors (0.2%)
- ------------------------------------------------------------------------------------------------------------
58,917 Cirent Semiconductor sr. sub. notes 10.22s, 2002 61,421
67,353 Cirent Semiconductor 144A sr. sub. notes 10.14s, 2004 70,216
90,000 Fairchild Semiconductor Corp. 144A sr. sub. notes 11.74s, 2008 99,900
--------------
231,537
Shipping (0.1%)
- ------------------------------------------------------------------------------------------------------------
40,000 International Shipholding Corp. 144A sr. notes 7 3/4s, 2007 39,400
150,000 Kitty Hawk, Inc. 144A sr. notes 9.95s, 2004 156,750
--------------
196,150
Supermarkets (0.1%)
- ------------------------------------------------------------------------------------------------------------
100,000 Jitney-Jungle Stores company guaranty 10 3/8s, 2007 102,250
Steel (0.1%)
- ------------------------------------------------------------------------------------------------------------
180,000 Hylsa S.A. de C.V. 144A bonds 9 1/4s, 2007 (Mexico) 181,800
Telecommunications (2.5%)
- ------------------------------------------------------------------------------------------------------------
250,000 American Communication Services, Inc. sr. disc. notes
stepped-coupon zero % (12 3/4s, 4/1/01), 2006 ++ 198,125
45,000 Consorcio Ecuatoriano notes 14s, 2002 (Ecuador) 46,800
65,000 Esprit Teleom Group PLC sr. notes 11 1/2s, 2007
(United Kingdom) 70,688
100,000 GST Equipment Funding sr. notes 13 1/4s, 2007 118,500
250,000 GST Telecommunications, Inc. company guaranty
stepped-coupon zero % (13 7/8s, 12/15/00), 2005 ++ 201,250
80,000 Hyperion Telecommunication Corp. sr. disc. notes
stepped-coupon Ser. B, zero % (13s, 4/15/01), 2003 ++ 59,200
180,000 Hyperion Telecommunications , Inc. sr. notes Ser. B, 12 1/4s,
2004 203,400
890,000 ICG Holdings, Inc. sr. disc. notes stepped-coupon zero %
(13 1/2s, 9/15/00), 2005 ++ 738,700
255,000 Intermedia Communications, Inc. sr. disc. notes stepped-coupon
Ser. B, zero % (11 1/4s, 7/15/02), 2007 ++ 187,425
180,000 Intermedia Communications, Inc. sr. notes Ser. B, 8 7/8s, 2007 190,350
65,000 L-3 Communications Corp. sr. sub. notes Ser. B, 10 3/8s, 2007 71,663
55,000 MetroNet Communications Corp. sr. disc. notes
stepped-coupon zero % (10 3/4s, 11/1/02), 2007
(Canada) ++ 35,750
70,000 Microcell Telecommunications sr. disc. notes stepped-coupon
Ser. B, zero % (14s, 12/1/01), 2006 (Canada) ++ 49,000
40,000 Netia Holdings B.V. 144A company guaranty 10 1/4s, 2007
(Poland) 40,400
20,000 Netia Holdings B.V. 144A company guaranty stepped-coupon
zero % (11 1/4s, 11/1/02), 2007 (Poland) ++ 13,300
90,000 Nextlink Communications sr. notes 12 1/2s, 2006 103,500
145,000 Qwest Communications International Inc. sr. disc. notes
stepped-coupon zero % (9.47s, 10/15/02), 2007 ++ 100,413
270,000 RCN Corp. sr. disc. notes stepped-coupon zero %
(11 1/8s, 10/15/02), 2007 ++ 175,500
180,000 RCN Corp. 144A sr. disc. notes stepped-coupon zero %
(9.8s, 2/15/03), 2008 ++ 109,350
600,000 WinStar Communications, Inc. 144A sr. disc. notes
stepped-coupon zero % (14s, 10/15/00), 2005 ++ 492,000
60,000 WinStar Communications. Inc. 144A sr. sub. notes 15s, 2007 80,400
85,000 WinStar Equipment Corp. 144A company guaranty 12 1/2s,
2004 97,750
--------------
3,383,464
Telephone Services (1.3%)
- ------------------------------------------------------------------------------------------------------------
80,000 America Communication Services, Inc. sr. notes 13 3/4s, 2007 96,800
140,000 BTI Telecom Corp. 144A sr. notes 10 1/2s, 2007 148,400
230,000 Econophone Inc. 144A sr. disc. notes stepped-coupon zero %
(11s, 2/15/03), 2008 ++ 135,700
65,000 Facilicom International 144A sr. notes 10 1/2s, 2008 65,163
140,000 Flag Limited 144A sr. notes 8 1/4s, 2008 (Bermuda) 142,450
70,000 Focal Communications Corp. 144A sr. disc. notes
stepped-coupon zero % (12 1/8s, 2/15/03), 2008 ++ 38,500
105,000 Globo Communicacoes 144A company guaranty 10 1/2s,
2006 (Brazil) 104,344
250,000 Ionica Group PLC sr. disc. notes stepped-coupon zero %
(15s, 5/1/02), 2007 (United Kingdom) ++ 100,000
110,000 ITC Deltacom, Inc. sr. notes 11s, 2007 122,650
170,000 McLeodUSA, Inc. sr. disc. notes stepped-coupon zero %
(10 1/2s, 3/1/02), 2007 ++ 128,775
135,000 MGC Communications, Inc. 144A sr. notes 13s, 2004 135,675
255,000 RSL Communications, Ltd. company guaranty 12 1/4s, 2006 290,700
105,000 RSL Communications, Ltd. 144A sr. disc. notes stepped-coupon
zero % (10 1/8s, 3/1/03), 2008 ++ 63,919
70,000 RSL Communications, Ltd. 144A sr. notes 9 1/8s, 2008 69,650
45,000 Transtel S.A. 144A pass through certificates 12 1/2s, 2007
(Colombia) 42,469
55,000 Vialog Corp. 144A company guaranty 12 3/4s, 2001 56,100
85,000 Viatel, Inc. sr. disc. notes stepped-coupon zero % (15s, 1/15/00),
2005 ++ 73,313
--------------
1,814,608
Textiles (0.1%)
- ------------------------------------------------------------------------------------------------------------
40,000 Glenoit Corp. 144A sr. sub. notes 11s, 2007 43,600
160,000 Polysindo International Finance company guaranty 11 3/8s,
2006 (Indonesia) 97,600
--------------
141,200
Transportation (0.1%)
- ------------------------------------------------------------------------------------------------------------
95,000 Johnstown America Industries, Inc. company guaranty Ser. C,
11 3/4s, 2005 105,925
Wireless Communications (0.2%)
- ------------------------------------------------------------------------------------------------------------
225,000 International Wireless Communications, Inc. sr. disc. notes
zero %, 2001 72,000
80,000 Omnipoint Corp. sr. notes 11 5/8s, 2006 87,400
50,000 Telesystem International Wireless Inc. 144A sr. disc. notes
stepped-coupon zero % (10 1/2s, 11/1/02), 2007
(Canada) ++ 30,500
160,000 Wireless One, Inc. sr. notes 13s, 2003 44,800
--------------
234,700
--------------
Total Corporate Bonds and Notes (cost $44,742,321) $ 44,024,197
CONVERTIBLE PREFERRED STOCKS (6.5%) *
NUMBER OF SHARES VALUE
Computer Software (2.2%)
- ------------------------------------------------------------------------------------------------------------
50,000 Vanstar Financial Trust Corp. $3.375 cv. cum. pfd. $ 2,000,000
23,200 Vanstar Financial Trust Corp. 144A $3.375 cv. cum. pfd. 939,600
--------------
2,939,600
Gaming (1.1%)
- ------------------------------------------------------------------------------------------------------------
30,000 Station Casinos, Inc. $3.50 cv. pfd. 1,515,000
Health Care (0.5%)
- ------------------------------------------------------------------------------------------------------------
42,602 MedPartners, Inc. $6.50 cv. pfd. 609,741
Oil and Gas (--%)
- ------------------------------------------------------------------------------------------------------------
25 XCL Ltd $8.075 cv. pfd. 3,250
REIT's (0.8%)
- ------------------------------------------------------------------------------------------------------------
44,500 Oasis Residential, Inc. Ser. A, $2.25 cv. pfd. 1,143,094
Retail (1.9%)
- ------------------------------------------------------------------------------------------------------------
53,000 Ann Taylor Finance Trust $4.25 cv. cum. pfd. 2,577,125
--------------
Total Convertible Preferred Stocks (cost $8,290,735) $ 8,787,810
PREFERRED STOCKS (3.0%) *
NUMBER OF SHARES VALUE
- ------------------------------------------------------------------------------------------------------------
41 American Communications Services 12.75% cum. pfd. [2 DBL. DAGGERS] $ 48,380
2,264 AmeriKing, Inc. $3.25 pfd. [2 DBL. DAGGERS] 61,128
26 Anvil Holdings Ser. B, $3.25 pfd. [2 DBL. DAGGERS] 624
2,899 Cablevision Systems Corp. Ser. M, $11.125 dep. shs. cum. pfd. [2 DBL. DAGGERS] 334,110
4,000 California Federated Bankcorp, Inc. $11.50 pfd. 450,000
638 Capstar Broadcasting Inc. $12.00 pfd. 74,008
3,115 Chevy Chase Capital Corp. Ser. A, $5.19 pfd. 158,086
1,065 Citadel Broadcasting Inc. 144A $13.25 cum. pfd. [2 DBL. DAGGERS] 128,865
90 Dobson Communications 144A 12.25% pfd. [2 DBL. DAGGERS] 93,150
32 Echostar Communications, Corp. Ser. B, 12.125% pfd. [2 DBL. DAGGERS] 35,600
2,424 El Paso Electric Co. $11.40 pfd [2 DBL. DAGGERS] 266,640
4,700 Fitzgeralds Gaming Co. $3.75 cum. pfd. 141,000
130 Fresenius Medical Care AG Ser. D, $9.00 pfd. (Germany) 139,100
51 Hyperion Telecommunications Ser. B, 12.875% pfd. [2 DBL. DAGGERS] 57,758
155 Intermedia Communication Ser. B, 13.50% pfd. [2 DBL. DAGGERS] 189,875
175 IXC Communications, Inc. 144A $12.50 pfd. [2 DBL. DAGGERS] 210,000
800 Nebco Evans Holding Co. 144A $11.25 pfd. [2 DBL. DAGGERS] 80,600
531 NEXTEL Communications, Inc. Ser. D, $13.00 cum. pfd. [2 DBL. DAGGERS] 615,960
20 NEXTEL Communications, Inc. 144A Ser. E, 11.125% pfd. [2 DBL. DAGGERS] 20,650
3,156 Nextlink Communications, Inc. 144A $7.00 pfd. 194,094
173 NTL Inc. 144A Ser. B, $13.00 pfd. [2 DBL. DAGGERS] 202,410
1,722 SFX Broadcasting, Inc. Ser. E, $12.625 pfd. [2 DBL. DAGGERS] 203,196
112 Spanish Broadcasting Systems 144A 14.25% cum. pfd. [2 DBL. DAGGERS] 120,400
1,010 Von Hoffman Corp. 144A $13.50 pfd. 34,088
165 Winstar Communications. Inc. 144A $14.25 cum. pfd. [2 DBL. DAGGERS] 199,650
--------------
Total Preferred Stocks (cost $3,601,814) $ 4,059,372
UNITS (2.2%) *
NUMBER OF UNITS VALUE
- ------------------------------------------------------------------------------------------------------------
250 21st Century Telecom Group 144A units cum. pfd.
13.75% 2010 [2 DBL. DAGGERS] $ 262,500
210 Allegiance Telecom Inc. units sr. disc. notes stepped-coupon
zero %, (11 3/4s, 2/15/03) 2008 ++ 118,650
250 Australis Media, Ltd. units stepped-coupon zero %
(15 3/4s, 5/15/03), 2003 (Australia) ++ 62,500
30 Celcaribe S.A. 144A units stepped-coupon zero %
(13 1/2s, 3/15/98), 2004 ++ 603,000
90 Club Regina/CS Resort 144A units 13s, 2004 92,250
100 Colt Telecommunications Group PLC units stepped-coupon
zero % (12s, 12/15/01), 2006 (United Kingdom) ++ 78,000
35 Concentric Network Corp. units 12 3/4s, 2007 40,250
105,000 Conecel Holdings 144A units 14s, 2000 112,350
310 Diva Systems Corp. 144A units stepped-coupon zero %
(12 5/8s, 3/1/03), 2008 ++ 169,725
210 DTI Holdings Inc. units stepped-coupon zero %
(12 1/2s, 3/1/03), 2008 ++ 113,925
210 KMC Telecom Holdings, Inc. units stepped-coupon zero %
(12 1/2s, 2/15/03), 2008 ++ 119,700
245 Knology Holdings Inc. units zero % (11 7/8s, 10/15/02), 2007 ++ 137,200
100 Orbital Imaging Corp. units 11 5/8s, 2005 103,250
90 Real Time Data 144A units stepped-coupon zero %
(13 1/2s, 8/15/01), 2006 ++ 48,150
350 Signature Brands USA Inc. units 13s, 2002 378,000
80 Stone Container Corp. units sr. sub. 12 1/4s, 2002 81,700
135 Transam Refin P/p 144a units sr. sub. notes 16s, 2003 141,750
210 XCL Ltd units sr. sec. notes 13 1/2s, 2004 273,000
600 XCL Ltd. units cum. pfd. 9.50%, 2006 78,000
--------------
Total Units (cost $3,045,580) $ 3,013,900
COMMON STOCKS (1.0%) *
NUMBER OF SHARES VALUE
- ------------------------------------------------------------------------------------------------------------
50 AmeriKing, Inc. + $ 2,500
8,120 CellNet Data Systems, Inc. + 71,050
2,586 Crompton & Knowles Corp. 77,903
1,213 Hedstrom Holdings, Inc. 144A 1,668
1,885 IFINT Diversified Holdings 144A + 18,850
14,351 Lady Luck Gaming Corp. + 13,454
2,167 NEXTEL Communications, Inc. Class A + 64,062
55 Paging Do Brazil Holdings Co., LLC Class B 1
197 PMI Holdings Corp. 144A + 98,500
144 Premium Holdings (L.P.) 144A + 575
33,430 PSF Holdings LLC Class A + 1,002,900
3,750 Specialty Foods Acquisition Corp. + 938
2,000 Terex Corp. + 40,000
--------------
Total Common Stocks (cost $1,219,813) $ 1,392,401
FOREIGN GOVERNMENT BONDS AND NOTES (0.2%) *(cost $249,263)
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
$ 460,000 Russia (Government of) deb. principle loans FRB 6.719s, 2020 $ 277,150
WARRANTS (0.2%) * [DAGGER] EXPIRATION
NUMBER OF WARRANTS DATE VALUE
- ------------------------------------------------------------------------------------------------------------
15,000 Becker Gaming Corp. 144A 11/15/00 $150
721 Cellnet Data Systems, Inc. 9/15/07 14,420
500 Comunicacion Cellular 144A (Colombia) 11/15/03 35,000
500 County Seat Holdings, Inc. 10/15/98 10
195 Diva Systems Corp. 5/15/06 51,188
95 Esat Holdings, Inc. (Ireland) 9/9/99 3,325
200 Fitzgerald Gaming Co. 144A 3/15/99 20
2,953 Fitzgeralds Gaming Co. 12/19/98 30
250 Hyperion Telecommunication 4/15/01 15,000
1,617 Intelcom Group 10/15/05 32,340
220 Interact Systems Inc. 144A 8/1/03 55
250 Intermedia Communications 144A 6/1/00 37,250
105 International Wireless Communications
Holdings 144A 8/15/01 2,940
175 Iridium World Com 144A 7/15/05 31,500
135 Louisiana Casino Cruises, Inc. 144A 12/1/98 6,750
160 McCaw International Ltd. 4/15/07 48
135 MGC Communications, Inc. 144A 10/1/04 4,725
250 NEXTEL Communications, Inc. 3/15/06 405
255 RSL Communications Ltd. 144A 11/15/06 24,735
105 Spanish Broadcasting Systems 144A 6/30/99 21,000
75 Sterling Chemicals Holdings 144A 8/15/08 2,138
520 UIH Australia/Pacific, Inc. 144A 5/15/06 6,240
55 Vialog Corp. 11/15/01 3,300
21 Wright Medical Technology, Inc. 144A 6/30/03 2,053
--------------
Total Warrants (cost $201,306) $ 294,622
SHORT-TERM INVESTMENTS (1.6%) *(cost $2,181,683)
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
$ 2,181,000 Interest in $700,000,000 joint repurchase agreement
dated February 27, 1998 with Goldman, Sachs & Co. due
March 2, 1998 with respect to various U.S. Treasury
obligations -- maturity value of $2,182,025 for an
effective yield of 5.64% $ 2,181,683
- ------------------------------------------------------------------------------------------------------------
Total Investments (cost $127,277,838) *** $ 133,157,069
- ------------------------------------------------------------------------------------------------------------
* Percentages indicated are based on net assets of
$134,703,654.
*** The aggregate identified cost on a tax basis is
$127,277,838, resulting in gross unrealized
appreciation and depreciation of $13,783,777 and
$7,904,546, respectively, or net unrealized
appreciation of $5,879,231.
+ Non-income-producing security.
++ The interest or dividend rate and date shown
parenthetically represent the new interest or dividend
rate to be paid and the date the fund will begin
receiving interest or dividend income at this rate.
[2 DBL. 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 rate shown on Floating Rate Bonds (FRB) and
Floating Rate Notes (FRN) are the current interest
rates shown at February 28, 1998, 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
February 28, 1998 (Unaudited)
<S> <C>
Assets
- ------------------------------------------------------------------------------------------------------------
Investments in securities, at value (identified cost $127,277,838) (Note 1) $133,157,069
- ------------------------------------------------------------------------------------------------------------
Cash 221,604
- ------------------------------------------------------------------------------------------------------------
Dividends, interest and other receivables 1,972,216
- ------------------------------------------------------------------------------------------------------------
Receivable for securities sold 1,080,179
- ------------------------------------------------------------------------------------------------------------
Total assets 136,431,068
Liabilities
- ------------------------------------------------------------------------------------------------------------
Distributions payable to shareholders 952,645
- ------------------------------------------------------------------------------------------------------------
Payable for securities purchased 453,151
- ------------------------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 243,066
- ------------------------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 36,667
- ------------------------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 9,869
- ------------------------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 1,125
- ------------------------------------------------------------------------------------------------------------
Other accrued expenses 30,891
- ------------------------------------------------------------------------------------------------------------
Total liabilities 1,727,414
- ------------------------------------------------------------------------------------------------------------
Net assets $134,703,654
Represented by
- ------------------------------------------------------------------------------------------------------------
Paid-in capital (Note 1) $125,802,022
- ------------------------------------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 878,600
- ------------------------------------------------------------------------------------------------------------
Accumulated net realized gain on investments (Note 1) 2,143,801
- ------------------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 5,879,231
- ------------------------------------------------------------------------------------------------------------
Total - Representing net assets applicable to capital shares outstanding $134,703,654
Computation of net asset value
- ------------------------------------------------------------------------------------------------------------
Net asset value per share ($134,703,654 divided by 13,466,760 shares) $10.00
- ------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Six months ended February 28, 1998 (Unaudited)
<S> <C>
Investment income:
- -----------------------------------------------------------------------------
Interest income: $6,105,517
- -----------------------------------------------------------------------------
Dividends 552,055
- -----------------------------------------------------------------------------
Total investment income 6,657,572
Expenses:
- -----------------------------------------------------------------------------
Compensation of Manager (Note 2) 505,447
- -----------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 129,407
- -----------------------------------------------------------------------------
Compensation of Trustees (Note 2) 6,862
- -----------------------------------------------------------------------------
Administrative services (Note 2) 3,367
- -----------------------------------------------------------------------------
Reports to shareholders 13,732
- -----------------------------------------------------------------------------
Auditing 29,735
- -----------------------------------------------------------------------------
Legal 8,380
- -----------------------------------------------------------------------------
Postage 7,571
- -----------------------------------------------------------------------------
Exchange listing fees 12,316
- -----------------------------------------------------------------------------
Other 8,375
- -----------------------------------------------------------------------------
Total expenses 725,192
- -----------------------------------------------------------------------------
Expense reduction (Note 2) (29,606)
- -----------------------------------------------------------------------------
Net expenses 695,586
- -----------------------------------------------------------------------------
Net investment income 5,961,986
- -----------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 3,794,112
- -----------------------------------------------------------------------------
Net unrealized depreciation of investments during the period (3,540,456)
- -----------------------------------------------------------------------------
Net gain on investments 253,656
- -----------------------------------------------------------------------------
Net increase in net assets resulting from operations $6,215,642
- -----------------------------------------------------------------------------
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 28 August 31
1998* 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets
- ----------------------------------------------------------------------------------------------------------------------
Operations:
- ----------------------------------------------------------------------------------------------------------------------
Net investment income $5,961,986 $11,563,231
- ----------------------------------------------------------------------------------------------------------------------
Net realized gain on investments 3,794,112 4,981,660
- ----------------------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of investments (3,540,456) 7,108,660
- ----------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 6,215,642 23,653,551
- ----------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ----------------------------------------------------------------------------------------------------------------------
From net investment income (5,716,407) (11,357,565)
- ----------------------------------------------------------------------------------------------------------------------
From net realized gain on investments (5,135,583) (798,322)
- ----------------------------------------------------------------------------------------------------------------------
Increase from capital share transactions 940,068 1,038,642
- ----------------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets (3,696,280) 12,536,306
Net assets
- ----------------------------------------------------------------------------------------------------------------------
Beginning of period 138,399,934 125,863,628
- ----------------------------------------------------------------------------------------------------------------------
End of period (including undistributed net investment
income of $878,600 and $633,021, respectively) $134,703,654 $138,399,934
Number of fund shares
- ----------------------------------------------------------------------------------------------------------------------
Shares outstanding at beginning of period 13,377,770 13,272,242
- ----------------------------------------------------------------------------------------------------------------------
Shares issued in connection with reinvestment of distributions 88,990 105,528
- ----------------------------------------------------------------------------------------------------------------------
Shares outstanding at end of period 13,466,760 13,377,770
- ----------------------------------------------------------------------------------------------------------------------
* 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
Per-share February 28
operating performance (Unaudited) Year ended August 31
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $10.35 $9.48 $9.49 $9.13 $9.52 $8.49
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .44 .86 .88 .79 .78 .84
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .02 .92 (.04) .42 (.30) 1.05
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .46 1.78 .84 1.21 .48 1.89
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.43) (.85) (.85) (.85) (.87) (.84)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized
gains on investments (.38) (.06) -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income -- -- -- -- -- (.02)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.81) (.91) (.85) (.85) (.87) (.86)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $10.00 $10.35 $9.48 $9.49 $9.13 $9.52
- ------------------------------------------------------------------------------------------------------------------------------------
Market price,
end of period $11.125 $10.562 $10.125 $10.000 $9.750 $10.000
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at market price (%)(a) 13.59 * 14.29 10.63 12.60 6.84 23.78
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $134,704 $138,400 $125,864 $124,911 $118,988 $123,285
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .53 * 1.03 1.06 1.00 1.04 1.03
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 4.35 * 8.80 9.19 8.73 8.23 9.39
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 30.77 * 58.88 56.82 61.19 52.10 71.63
- ------------------------------------------------------------------------------------------------------------------------------------
(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 and thereafter includes amounts paid through
expense offset arrangements. Prior period ratios exclude these
amounts. (See Note 2).
</TABLE>
Notes to financial statements
February 28, 1998 (Unaudited)
Note 1
Significant accounting policies
Putnam High Income Convertible and Bond Fund (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 discount bonds, stepped-coupon bonds and
payment in kind bonds are accreted according to the yield-to-maturity
basis. Any premium resulting from the purchase of stepped-coupon
securities is amortized on a yield-to- maturity basis.
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, as amended. Therefore, no
provision has been made for federal taxes on income, capital gains or
unrealized appreciation on securities held nor for excise tax on income
and capital gains.
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 at least 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. 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.
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%, thereafter.
The fund reimburses Putnam Management an allocated amount 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 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 28, 1998, fund expenses were reduced
by $29,606 under expense offset arrangements with PFTC and brokerage
service arrangements. 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.
Each Trustee of the fund receives an annual Trustee fee, of which $560
has been allocated to the fund, 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 has adopted a Trustee Fee Deferral Plan (the "Deferral 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 Deferral Plan.
The fund has adopted an unfunded noncontributory defined benefit pension
plan (the "Pension Plan") covering all Trustees of the fund who have
served as Trustee for at least five years. Benefits under the Pension
Plan are equal to 50% of the Trustee's average total retainer and
meeting fees for the three years preceding retirement. Pension expense
for the fund is included in Compensation of trustees in the Statement of
operations. Accrued pension liability is included in Payable for
compensation of Trustees in the Statement of assets and liabilities.
Note 3
Purchase and sales of securities
During the six months ended February 28, 1998, purchases and sales of
investment securities other than short-term investments aggregated
$40,394,539 and $44,183,084, 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.
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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
Ronald J. Jackson
Paul L. Joskow
Elizabeth T. Kennan
Lawrence J. Lasser
John H. Mullin III
Robert E. Patterson
Donald S. Perkins
George Putnam, III
A.J.C. Smith
W. Thomas Stephens
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
Ian C. Ferguson
Vice President
Brett C. Browchuk
Vice President
Thomas V. Reilly
Vice President
Charles G. Pohl
Vice President and Fund Manager
Jeffrey J. Kobylarz
Vice President and Fund Manager
William N. Shiebler
Vice President
John R. Verani
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.
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
- ---------------------
Bulk Rate
U.S. Postage
PAID
Putnam
Investments
- ---------------------
41232 4/98
