Putnam
High Income
Convertible
and Bond Fund
ANNUAL REPORT ON PERFORMANCE AND OUTLOOK
8-31-98
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* "The market's correction provides a unique opportunity for us to improve
the portfolio with quality companies whose bonds are temporarily selling
at steep discounts."
-- Forrest N. Fontana, co-manager
Putnam High Income Convertible and Bond Fund
CONTENTS
4 Report from Putnam Management
8 Fund performance summary
11 Portfolio holdings
31 Financial statements
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
Putnam High Income Convertible and Bond Fund did not entirely escape the
market turbulence that prevailed throughout most of fiscal 1998. However,
its hybrid portfolio sheltered shareholders from the more serious
consequences experienced elsewhere. Not only that, your fund's managers
were able to use the volatility to improve the portfolio's overall quality
and to acquire attractively yielding securities at bargain-basement
prices.
I am pleased to welcome the appointment of Forrest N. Fontana as your
fund's new co-manager. Forrest joined Putnam in 1993 as an equity analyst
and most recently has been a member of the Small Cap Value team,
co-managing other Putnam convertible funds. He has five years of
investment experience.
In the following report, your fund's managers discuss fiscal 1998's
challenges and successes and then provide an overview of prospects for the
fund as it enters its 12th year of operation.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
October 21, 1998
Report from the Fund Managers
Charles G. Pohl
Forrest N. Fontana
Jeffrey J. Kobylarz
After seven consecutive years of strong investment returns, Putnam High
Income Convertible and Bond Fund's performance was dampened by this
summer's widespread downturn. The fund returned -4.06% at net asset value
and -4.74% at market price for the 12 months ended August 31, 1998. For
more performance information, please see pages 8 and 9.
* ASIAN TURMOIL SPREADS TO U.S. EARNINGS
Although the financial crisis in Asia began more than a year ago, most
U.S. corporations remained immune to what has become known as the Asian
flu until the spring of 1998. In fact, in the first half of fiscal 1998,
the U.S. economy grew at a robust rate, bolstered by record low inflation
and interest rates and by a surge in consumer spending. Consumer
confidence remained high through the first three quarters of the fiscal
year, owing to strong stock market gains, an excellent job market, and
lower prices for global commodities like gasoline.
The good news was eventually overshadowed, however, by evidence that
Asia's problems were beginning to take their toll on the U.S. economy and
corporate earnings. In May, the U.S. trade deficit widened to more than
$15 billion as the dollar reached new highs against the yen. In June,
manufacturing activity declined for the first time in nearly two years.
Reported earnings increasingly fell below expectations in industries with
direct links to Asia, and Wall Street analysts pared back estimated 1998
profit growth for S&P 500(R) companies to 6%, down from more than 12% at
the start of the year. In August, investor sentiment soured in dramatic
fashion as the deteriorating political and economic environment in Japan
and Russia made headlines.
Stocks in a number of industries succumbed to earnings disappointments in
the second half of the period, and convertible bond prices were not far
behind. In addition, as stock fundamentals declined, companies'
creditworthiness deteriorated, further dampening convertible securities
prices and affecting high yield bonds as well. In the portfolio,
underperformers included the bonds of companies in economically sensitive
industries, such as chemicals and paper. Technology companies -- nearly a
quarter of all convertible issuers -- were among the hardest hit, in part
because declining currencies in Asia provided a competitive advantage to
manufacturers in those countries. The bonds of energy-related companies
suffered as a result of declining oil prices. With continued economic
growth less certain, investors looked for stable earnings and flocked to
traditionally defensive groups like drugs and consumer staples. Retailers
were among the best performers, thanks to cheaper Asian-made products and
continued strength in consumer spending.
* MARKET VOLATILITY OFFERS OPPORTUNITIES TO ENHANCE YIELD
Your fund seeks a high level of current income by investing in the
convertible bonds of companies whose stocks have fallen a great deal. When
a company's stock falls, its convertible bonds tend to decline as well,
although to a lesser extent. Since falling bond prices typically translate
into higher yields, we view each episode of market volatility as an
opportunity to secure high current income for the fund. The fund's
closed-end status facilitates our search for downtrodden companies, since
we do not have to sell existing holdings in order to meet shareholder
redemptions.
[GRAPHIC OMITTED: horizontal bar chart of PORTFOLIO COMPOSITION (8/31/98)]
PORTFOLIO COMPOSITION (8/31/98)*
Convertible
securities 58.3%
Corporate
high-yield bonds 32.8%
Other 5.1%
Preferred stocks 2.9%
Common stocks,
including warrants 0.9%
Footnote reads:
*Based on total market value of investments. Composition will vary over
time.
During the period, we employed several strategies aimed at improving
portfolio quality, increasing the fund's yield, and minimizing portfolio
volatility. Where possible, we traded lower-quality names for more
conservatively managed companies in defensive industries such as consumer
staples and services, while also reducing exposure to companies that are
particularly sensitive to an economic slowdown.
We took advantage of falling bond prices in the technology and energy
sectors with purchases such as Data General and Quantum Disk Drives and
increased the portfolio's level of diversification with names such as Park
Electrochemical and Kent Electronics. Where possible, we took advantage of
opportunities to buy short-duration bonds in order to improve the fund's
overall price volatility. While these holdings and others discussed in
this report were viewed favorably at the end of the fiscal period, all are
subject to review and adjustment in accordance with the fund's investment
strategy and may vary in the future.
* HIGH-YIELD CORPORATES PROVIDE SUPPORT
The fund's high-yield corporate bonds fared somewhat better than its
convertible holdings during the year with positive performance from the
telecommunications, cable, broadcasting, and financial industries.
However, investor concern about credit quality put pressure on the prices
of these bonds late in the period.
Holdings in the telecommunications sector benefited from a number of
positive factors during the year. Favorable regulatory developments
improved the market positions of competitive local exchange carriers
(CLECs) and specialized cellular operators, including fund holding NEXTEL.
Merger and acquisition activity in the sector continued at a healthy pace.
Former fund holding Teleport Communications, for example, was bought at a
premium by AT&T during the year.
Merger activity also continued to benefit corporate bond holdings in the
cable television and broadcasting industries, in which relaxed regulations
have increased competition for lucrative business. In both industries,
aggressive companies are seizing opportunities through acquisition to
secure market share and spread their fixed costs over a greater number of
households. These acquisitions are effectively credit upgrades for the
acquired companies, since the buyers are often large, well-established
companies with investment-grade debt.
[GRAPHIC OMITTED: TOP FIVE CONVERTIBLE HOLDINGS]
TOP FIVE CONVERTIBLE HOLDINGS*
NovaCare, Inc., 5.5%, 2000
Health-care services
Mascotech, Inc., 4.5%, 2003
Automotive
Chiquita Brands International, Inc., 7.0%, 2001
Food
Integrated Device Technology, Inc., 5.5%, 2002
Semiconductors
OHM Corporation, 8%, 2006
Environmental control
[GRAPHIC OMITTED: TOP FIVE CORPORATE HIGH-YIELD HOLDINGS]
TOP FIVE CORPORATE HIGH-YIELD HOLDINGS*
Adelphia Communications Corp., 9.5%, 2004
Cable television
NEXTEL Communications, Inc., stepped-coupon zero %, 2007
Cellular communications
Transamerican Energy, stepped-coupon zero %, 2002
Oil and gas
Coinmach Corp., 11.75%, 2005
Consumer services
Lady Luck Gaming Corp. 1st mtge., 11.87%, 2001
Gaming
Footnote reads:
*These combined holdings represent 12.7% of the fund's net assets as of
8/31/98. Portfolio holdings will vary over time.
* MARKET SETBACK MAY HAVE SILVER LINING
Market setbacks are never easy, and Asia's economic woes are likely to
continue plaguing U.S. corporate profits for the foreseeable future.
However, given the severity of this summer's correction, we are optimistic
that convertible and high-yield bonds may now be poised for a rebound. In
September, the Federal Reserve Board signaled its willingness to lower
interest rates, which will undoubtedly contribute to an improvement in
bond prices. Meanwhile, we will continue to look for opportunities to
improve the portfolio with holdings that reflect high yields and quality
management at reasonable prices.
The views expressed here are exclusively those of Putnam Management. They
are not meant as investment advice. Although the described holdings were
viewed favorably as of 8/31/98, there is no guarantee the fund will
continue to hold these securities in the future.
Performance summary
This section provides information about your fund's performance, which
should always be considered in light of its 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 8/31/98
Merrill Lynch First Boston
Market All Convertible High-Yield
NAV price Index Index
- ------------------------------------------------------------------------
1 year -4.06% -4.74% -3.35% 1.46%
- ------------------------------------------------------------------------
5 years 50.27 44.90 52.52 51.31
Annual average 8.49 7.70 8.81 8.64
- ------------------------------------------------------------------------
10 years 210.02 226.60 204.20 178.62
Annual average 11.98 12.56 11.77 10.79
- ------------------------------------------------------------------------
Life of fund
(since 7/9/87) 211.41 195.49 N/A 212.72
Annual average 10.72 10.20 N/A 10.75
- ------------------------------------------------------------------------
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
12 months ended 8/31/98
- ------------------------------------------------------------------------
Distributions (common shares)
- ------------------------------------------------------------------------
Number 12
- ------------------------------------------------------------------------
Income $0.852
- ------------------------------------------------------------------------
Capital gains
- ------------------------------------------------------------------------
Long-term $0.214
- ------------------------------------------------------------------------
Short-term $0.169
- ------------------------------------------------------------------------
Total $1.235
- ------------------------------------------------------------------------
Share value: NAV Market price
- ------------------------------------------------------------------------
8/31/97 $10.35 $10.562
- ------------------------------------------------------------------------
8/31/98 8.82 8.937
- ------------------------------------------------------------------------
Current return (end of period)
- ------------------------------------------------------------------------
Current dividend rate1 9.66% 9.53%
- ------------------------------------------------------------------------
1Income portion of most recent distribution, annualized and divided by
NAV or POP at end of period.
TOTAL RETURN FOR PERIODS ENDED 9/30/98
(most recent calendar quarter)
Market
NAV price
- ------------------------------------------------------------------------
1 year -7.87% 6.74%
- ------------------------------------------------------------------------
5 years 45.38 64.17
Annual average 7.77 10.42
- ------------------------------------------------------------------------
10 years 200.80 263.94
Annual average 11.64 13.79
- ------------------------------------------------------------------------
Performance data represent past results, do not reflect future
performance, and will differ for each share class. Investment returns and
principal value will fluctuate so that an investor's shares, when sold,
may be worth more or less than their original cost.
This performance information does not reflect any market volatility that
may have occurred since the date of the information. As a result, more
recent returns may be more or less than those shown.
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 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.
Report of independent accountants
For the fiscal year ended August 31, 1998
To the Trustees and Shareholders of
Putnam High Income Convertible and Bond Fund
In our opinion, the accompanying statement of assets and liabilities,
including the portfolio of investments owned, and the related statements
of operations and of changes in net assets and the financial highlights
present fairly, in all material respects, the financial position of Putnam
High Income Convertible and Bond Fund (the "fund") at August 31, 1998, and
the results of its operations, the changes in its net assets and the
financial highlights for the periods indicated, in conformity with
generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are
the responsibility of the fund's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with
generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of investments owned at August 31,
1998 by correspondence with the custodian, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
October 14, 1998
<TABLE>
<CAPTION>
Portfolio of investments owned
August 31, 1998
CONVERTIBLE BONDS AND NOTES (49.5%) (a)
PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C> <C>
Aerospace and Defense (0.8%)
- --------------------------------------------------------------------------------------------------------------------------
$ 1,000,000 SPACEHAB, Inc. 144A cv. sub. notes 8s, 2007 $ 995,000
Automotive (3.5%)
- --------------------------------------------------------------------------------------------------------------------------
2,800,000 Exide Corp. 144A cv. sr. sub. notes 2.9s, 2005 1,585,500
3,000,000 Mascotech, Inc. cv. sub. deb. 4 1/2s, 2003 2,520,000
--------------
4,105,500
Banks (1.0%)
- --------------------------------------------------------------------------------------------------------------------------
1,395,000 Banamex S.A. 144A cv. jr. sub. bonds 11s, 2003 (Bahamas) 1,116,000
108,000 Banco Nationale Mexico 144A cv.
company guaranty 7s, 1999 (Bahamas) 93,960
--------------
1,209,960
Broadcasting (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
120,000 Jacor Communications, Inc. cv. sr. notes zero %, 2011 96,750
Business Equipment and Services (2.5%)
- --------------------------------------------------------------------------------------------------------------------------
2,380,000 Corporate Express, Inc. 144A cv. notes 4 1/2s, 2000 2,124,150
1,000,000 Corporate Express, Inc. cv. notes 4 1/2s, 2000 892,500
--------------
3,016,650
Computer Equipment (2.3%)
- --------------------------------------------------------------------------------------------------------------------------
200,000 Quantum Corp. cv. sub. notes 7s, 2004 177,000
2,800,000 Maxtor Corp. cv. sub. deb. 5 3/4s, 2012 1,680,000
4,000,000 Western Digital Corp. 144A cv. sub. deb. zero %, 2018 845,000
--------------
2,702,000
Computer Services (2.5%)
- --------------------------------------------------------------------------------------------------------------------------
1,200,000 Data General Corp. 144A cv. sub. notes 6s, 2004 901,500
300,000 Safeguard Scientifics, Inc. 144A cv. sub. notes 6s, 2006 297,375
2,850,000 System Software Associates, Inc. cv. sub. notes 7s, 2002 1,806,188
--------------
3,005,063
Computer Software (1.6%)
- --------------------------------------------------------------------------------------------------------------------------
2,100,000 Softkey International, Inc. 144A cv. sr. notes 5 1/2s, 2000 1,890,000
Electronics (4.1%)
- --------------------------------------------------------------------------------------------------------------------------
1,000,000 Cirrus Logic Inc. 144A cv. sub. notes 6s, 2003 676,250
1,500,000 HMT Technology Corp. 144A cv. sub. notes 5 3/4s, 2004 1,031,250
2,090,000 Kent Electronics Corp. cv. sub. notes 4 1/2s, 2004 1,400,300
2,500,000 Park Electrochemical Corp. cv. sub. notes 5 1/2s, 2006 1,825,000
--------------
4,932,800
Entertainment (1.5%)
- --------------------------------------------------------------------------------------------------------------------------
2,650,000 Rogers Communications cv. deb. 2s, 2005 (Canada) 1,739,063
Environmental Control (2.7%)
- --------------------------------------------------------------------------------------------------------------------------
2,150,000 OHM Corp. cv. sub. deb. 8s, 2006 2,128,500
1,300,000 Weston (Roy F.), Inc. cv. deb. 7s, 2002 1,069,250
--------------
3,197,750
Food (2.3%)
- --------------------------------------------------------------------------------------------------------------------------
2,500,000 Chiquita Brands International, Inc. cv. sub. deb. 7s, 2001 2,337,500
400,000 Chiquita Brands International, Inc. 144A
cv. sub. deb 7s, 2001 374,000
--------------
2,711,500
Health Care Services (2.6%)
- --------------------------------------------------------------------------------------------------------------------------
3,100,000 NovaCare, Inc. cv. sub. deb. 5 1/2s, 2000 2,867,500
300,000 Quantum Health Resources, Inc. cv. sub. deb. 4 3/4s, 2000 277,875
--------------
3,145,375
Hospital Management and Medical Services (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
1,000,000 PhyMatrix, Inc. cv. sub. deb. 6 3/4s, 2003 448,750
Oil and Gas (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
600,000 Pride International, Inc. cv. sub. deb. zero %, 2018 144,000
Paper and Forest Products (1.2%)
- --------------------------------------------------------------------------------------------------------------------------
280,000 APP Global Finance Ltd. 144A cv. company guaranty
3 1/2s, 2003 (United Kingdom) 128,800
135,000 APP Global Finance (V) Ltd. 144A cv. sec.
2s, 2000 (United Kingdom) 78,300
1,500,000 Stone Container Corp. cv. sub. deb. 6 3/4s, 2007 1,230,000
--------------
1,437,100
Pharmaceuticals (1.8%)
- --------------------------------------------------------------------------------------------------------------------------
2,150,000 Pharmaceutical Marketing Services Inc. 144A
cv. deb. 6 1/4s, 2003 1,838,250
400,000 Pharmaceutical Marketing Services Inc. cv. notes
6 1/4s, 2003 344,000
--------------
2,182,250
REIT's (Real Estate Investment Trust) (1.5%)
- --------------------------------------------------------------------------------------------------------------------------
1,750,000 Malan Realty Investors cv. sub. notes 9 1/2s, 2004 1,750,000
Restaurants (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
12,000,000 Boston Chicken, Inc. cv. notes LYON
(Liquid Yield Option Notes) zero %, 2015 450,000
Retail (4.8%)
- --------------------------------------------------------------------------------------------------------------------------
1,300,000 Baker (J.), Inc. cv. deb. 7s, 2002 1,043,250
1,550,000 Michaels Stores, Inc. cv. sub. notes 6 3/4s, 2003 1,451,188
1,300,000 Saks Holding, Inc. cv. sub. notes 5 1/2s, 2006 1,236,625
2,550,000 Sunglass Hut International, Inc. 144A cv.
sub. notes 5 1/4s, 2003 2,017,688
--------------
5,748,751
Semiconductors (8.8%)
- --------------------------------------------------------------------------------------------------------------------------
1,100,000 Advanced Micro Devices, Inc. sub. notes 6s, 5/15/05 768,625
1,310,000 Credence Systems Corp. 144A cv. sub. notes
5 1/4s, 2002 864,600
2,000,000 Credence Systems Corp. 144A cv. sub. notes
5 1/4s, 2002 1,442,500
3,050,000 Integrated Device Technology, Inc. cv. sub. notes
5 1/2s, 2002 2,325,625
1,600,000 Lam Research Corp. sub. notes 5s, 2002 1,224,000
2,281,000 Micron Technology, Inc. cv. sub. notes 7s, 2004 2,070,008
2,000,000 National Semiconductor 144A cv. deb. 6 1/2s, 2002 1,842,500
--------------
10,537,858
Telecommunications (1.6%)
- --------------------------------------------------------------------------------------------------------------------------
1,500,000 DSC Communications Corp. cv. notes 7s, 2004 1,515,000
300,000 WinStar Communications. Inc. 144A cv. sr. disc. notes
stepped-coupon zero % (14s, 10/15/00), 2005 (STP) 390,000
--------------
1,905,000
Tobacco (1.4%)
- --------------------------------------------------------------------------------------------------------------------------
2,115,000 Standard Commercial Corp. cv. sub. deb. 7 1/4s, 2007 1,665,563
--------------
Total Convertible Bonds and Notes (cost $65,301,434) $ 59,016,683
CORPORATE BONDS AND NOTES (32.5%) (a)
PRINCIPAL AMOUNT VALUE
Advertising (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
$ 90,000 Adams Outdoor Advertising sr. notes 10 3/4s, 2006 $ 95,400
95,000 Lamar Advertising Co. sr. sub. notes 9 5/8s, 2006 98,800
75,000 Lamar Advertising Co. company guaranty 8 5/8s, 2007 75,000
100,000 Outdoor Communications Inc. sr. sub. notes
9 1/4s, 2007 102,000
--------------
371,200
Aerospace and Defense (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
50,000 Argo-Tech Corp. company guaranty 8 5/8s, 2007 46,250
130,000 Aviation Sales Co. company guaranty 8 1/8s, 2008 122,850
70,000 BE Aerospace sr. sub. notes Ser. B, 8s, 2008 67,900
50,000 K&F Industries, Inc. sr. sub. notes Ser. B, 9 1/4s, 2007 49,250
100,000 Sequa Corp. med. term notes 10s, 2001 105,655
70,000 United Defense Industries Inc. company guaranty
8 3/4s, 2007 68,600
--------------
460,505
Agriculture (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
388,166 Premium Standard Farms, Inc. sr. secd. notes 11s, 2003 (PIK) 409,515
110,000 Purina Mills, Inc. 144A sr. sub. notes 9s, 2010 110,000
--------------
519,515
Airlines (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
80,000 Calair LLC 144A company guaranty 8 1/8s, 2008 74,000
80,000 Canadian Airlines Corp. sr. notes 12 1/4s, 2006 (Canada) 74,400
140,000 Canadian Airlines Corp. sr. sec. notes 10s, 2005 (Canada) 132,300
70,000 Trans World Airlines, Inc. sr. notes 11 1/2s, 2004 71,400
180,000 Trans World Airlines, Inc. sr. notes 11 3/8s, 2006 166,500
--------------
518,600
Apparel (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
145,000 Sassco Fashions Ltd. sr. notes 12 3/4s, 2004 154,425
275,000 Tultex Corp. company guaranty 9 5/8s, 2007 222,750
70,000 William Carter Holdings Co. sr. sub. notes
Ser. A, 12s, 2008 71,400
--------------
448,575
Automotive (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
350,000 Navistar International Corp. sr. notes Ser. B, 8s, 2008 339,500
250,000 Oxford Automotive, Inc. company guaranty 10 1/8s, 2007 248,750
--------------
588,250
Automotive Parts (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
262,000 Aftermarket Technology Corp. sr. sub. notes 12s, 2004 272,480
50,000 Hayes Wheels International, Inc. company guaranty
Ser. B, 9 1/8s, 2007 50,500
180,000 Talon Automotive Group 144A sr. sub. notes
9 5/8s, 2008 162,000
--------------
484,980
Banks (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
100,000 Dime Capital Trust I bank guaranty Ser. A, 9.33s, 2027 110,243
40,000 Fuji JGB Inv. LLC 144A FLIRB 9.87s, 2049 30,800
100,000 Greenpoint Capital Trust I company guaranty 9.1s, 2027 112,464
150,000 Korea Developmental Bank 7 1/8s, 2001(Korea) 121,791
25,000 Ocwen Capital Trust I company guaranty 10 7/8s, 2027 25,750
80,000 Ocwen Federal Bank FSB sub. deb. 12s, 2005 86,400
50,000 Ocwen Financial Corp. notes 11 7/8s, 2003 54,000
75,000 Provident Capital Trust company guaranty 8.6s, 2026 81,978
45,000 Riggs Capital Trust 144A bonds 8 5/8s, 2026 50,130
65,000 Sovereign Capital Trust company guaranty 9s, 2027 72,978
55,000 Webster Capital Trust I 144A bonds 9.36s, 2027 60,077
--------------
806,611
Basic Industrial Products (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
120,000 Axia, Inc. 144A sr. sub. notes 10 3/4s, 2008 113,400
90,000 Insilco Holding Co. 144A sr. disc. notes stepped-coupon
zero % (14s, 8/15/03), 2008 (STP) 42,300
30,000 Roller Bearing Co. company guaranty Ser. B, 9 5/8s, 2007 29,100
--------------
184,800
Broadcasting (2.1%)
- --------------------------------------------------------------------------------------------------------------------------
100,000 Acme Television sr. disc. notes stepped-coupon zero %
(10 7/8s, 9/30/00), 2004 (STP) 77,000
100,000 Allbritton Communications Co. sr. sub. notes
Ser. B, 8 7/8s, 2008 98,000
600,000 Benedek Communications Corp. sr. disc. notes
stepped-coupon zero % (13 1/4s, 5/15/01), 2006 (STP) 450,000
70,000 Caprock Communications Corp. 144A sr. notes 12s, 2008 66,500
215,000 Capstar Broadcasting sr. sub. notes 9 1/4s, 2007 212,850
215,000 Capstar Broadcasting sr. disc. notes stepped-coupon
zero % (12 3/4s, 2/1/02), 2009 (STP) 152,650
75,000 Central European Media Enterprises Ltd.
sr. notes 9 3/8s, 2004 67,500
90,220 Citadel Broadcasting Co. sr. sub. notes 10 1/4s, 2007 99,242
285,000 Fox Family Worldwide, Inc. sr. notes 9 1/4s, 2007 253,650
250,000 Fox Family Worldwide, Inc. sr. disc. notes stepped-coupon
zero % (10 1/4s, 11/1/02), 2007 (STP) 137,500
170,000 Fox/Liberty Networks LLC sr. notes 8 7/8s, 2007 157,250
80,000 Granite Broadcasting Corp. sr. sub. notes 8 7/8s, 2008 76,400
250,000 Heritage Media Services Corp. sr. sub. notes 8 3/4s, 2006 262,500
250,000 Lenfest Communications, Inc. sr. sub. notes 10 1/2s, 2006 280,000
110,000 Radio One Inc. company guaranty stepped-coupon
Ser. B, 7s, (12s, 5/15/00), 2004 (STP) 104,500
50,000 TV Azteca Holdings S.A. de C.V. sr. notes
11s, 2002 (Mexico) 41,500
35,000 TV Azteca S.A. de C.V. sr. notes Ser. B,
10 1/2s, 2007 (Mexico) 26,950
--------------
2,563,992
Building and Construction (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
55,000 American Architectural Products Corp. company guaranty
11 3/4s, 2007 51,700
70,000 Beazer Homes USA company guaranty 8 7/8s, 2008 65,450
55,000 Brand Scaffold Services 144A sr. notes 10 1/4s, 2008 50,600
80,000 Presley Cos. sr. notes 12 1/2s, 2001 71,600
--------------
239,350
Building Products (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
90,000 Atrium Companies, Inc. 144A sr. sub. notes 10 1/2s, 2006 85,050
150,000 Consumers International 144A sr. notes 10 1/4s, 2005 153,750
30,000 Republic Group Inc. 144A sr. sub. notes 9 1/2s, 2008 27,900
50,000 Waxman Industries Inc. sr. notes stepped-coupon
Ser. B, zero % (12 3/4s, 6/1/99), 2004 (STP) 46,750
--------------
313,450
Buses (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
355,000 MCII Holding (USA) sec. notes stepped-coupon
zero % (12s, 11/15/98), 2002 (STP) 301,750
Business Equipment and Services (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
90,000 Corporate Express Holdings, Inc. 144A
sr. sub. notes 9 5/8s, 2008 81,000
110,000 Iron Mountain, Inc. company guaranty 8 3/4s, 2009 106,150
50,000 Outsourcing Solutions, Inc. sr. sub. notes Ser. B, 11s, 2006 48,000
110,000 United Stationer 144A sr. sub. notes 8 3/8s, 2008 105,600
120,000 U.S. Office Products Co. 144A sr. sub notes 9 3/4s, 2008 100,800
--------------
441,550
Cable Television (1.2%)
- --------------------------------------------------------------------------------------------------------------------------
660,530 Adelphia Communications Corp. sr. notes 9 1/2s, 2004 (PIK) 650,622
75,000 Australis Holdings PTY Ltd. sr. disc. notes
stepped-coupon zero % (15s, 11/01/00), 2002
(In Default) (Australia) (STP) (NON) 10,313
2,044 Australis Media, Ltd. sr. disc. notes stepped-coupon zero %,
(15 3/4s 5/15/00), 2003 (In default) (Australia) (NON) (STP) 36
400,000 Diamond Cable Communication Co. sr. disc. notes
stepped-coupon zero % (11 3/4s, 12/15/00), 2005
(United Kingdom) (STP) 300,000
215,000 Diamond Cable Communication Co. sr. disc. notes
stepped-coupon zero % (10 3/4s, 2/15/02), 2007
(United Kingdom) (STP) 156,950
115,000 Golden Sky Systems 144A sr. sub. notes 12 3/8s, 2006 112,413
180,000 RCN Corp. sr. discount notes, stepped-coupon Ser. B,
zero % (9.8s, 2/15/03), 2008 (STP) 96,300
130,000 United International Holdings sr. disc. notes
stepped-coupon Ser. B, zero %
(10 3/4s, 2/15/03), 2008 (STP) 57,200
--------------
1,383,834
Cellular Communications (1.7%)
- --------------------------------------------------------------------------------------------------------------------------
391,000 CellNet Data Systems, Inc. sr. disc. notes stepped-coupon
zero % (14s, 10/1/02), 2007 (STP) 187,680
100,000 Dobson Communications Corp. 11 3/4s, 2007 102,000
490,000 Intercel, Inc. sr. disc. notes stepped-coupon zero %
(12s, 5/1/01), 2006 (STP) 362,600
160,000 McCaw International Ltd sr. discount notes
stepped-coupon zero % (13s, 4/15/02), 2007 (STP) 86,400
325,000 Millicom International Cellular S.A. sr. disc. notes stepped-coupon
zero % (13 1/2s, 6/1/01), 2006 (Luxembourg) (STP) 227,500
420,000 NEXTEL International, Inc. sr. disc. notes stepped-coupon
zero % (12 1/8s, 4/15/03), 2008 (STP) 252,000
1,090,000 NEXTEL Communications, Inc. sr. disc. notes
stepped-coupon zero % (10.65s, 9/15/02), 2007 (STP) 648,550
130,000 Price Communications Wireless Inc. 144A sr. notes
9 1/8s, 2006 117,000
--------------
1,983,730
Chemicals (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
500,000 Acetex Corp. sr. notes 9 3/4s, 2003 (Canada) 475,000
70,000 Geo Specialty Chemicals 144A sr. sub. notes 10 1/8s, 2008 63,000
90,000 Huntsman Corp. 144A sr. sub. notes FRN 9.031s, 2007 85,500
50,000 NL Industries, Inc. sr. notes 11 3/4s, 2003 54,250
100,000 Pioneer Americas Acquisition 144A sr. notes 9 1/4s, 2007 83,000
155,000 Polytama International notes 11 1/4s, 2007 (Indonesia) 49,600
75,000 Sterling Chemicals Holdings sr. disc. notes stepped-coupon
zero % (13 1/2s, 8/15/01), 2008 (STP) 36,750
--------------
847,100
Computer Services (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
35,000 Concentric Network Corp. sr. notes 12 3/4s, 2007 33,250
220,000 IPC Information Systems sr. disc. notes stepped-coupon
zero % (10 7/8s, 11/1/01), 2008 (STP) 147,400
240,000 Unisys Corp. sr. notes 11 3/4s, 2004 270,000
--------------
450,650
Computer Software (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
125,000 PSINet, Inc. sr. notes Ser. B, 10s, 2005 118,125
Consumer Durable Goods (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
90,000 Albecca Inc. 144A sr. sub. notes 10 3/4s, 2008 85,500
20,000 Hedstrom Holdings, Inc. 144A sr. disc. notes
stepped-coupon zero % (12s, 6/1/02), 2009 (STP) 12,000
140,000 Icon Fitness Corp. 144A sr. disc. notes stepped-coupon
Ser. B, zero % (14s, 11/15/01), 2006 (STP) 7,000
10,000 Samsonite Corp. 144A sr. sub. notes 10 3/4s, 2008 7,200
50,000 Sealy Mattress Co. sr. sub. notes Ser. B, 9 7/8s, 2007 46,500
--------------
158,200
Consumer Non Durables (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
25,000 Amscan Holdings, Inc. sr. sub. notes 9 7/8s, 2007 23,000
25,000 Leiner Health Products sr. sub. notes 9 5/8s, 2007 25,750
160,000 North Atlantic Trading Co. co. guaranty Ser. B, 11s, 2004 150,400
250,000 Packaged Ice, Inc. company guaranty Ser. B, 9 3/4s, 2005 247,500
--------------
446,650
Consumer Services (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
526,000 Coinmach Corp. sr. notes Ser. B, 11 3/4s, 2005 573,340
Containers (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
50,000 AEP Industries, Inc. sr. sub. notes 9 7/8s, 2007 47,000
40,000 Radnor Holdings Inc. sr. notes 10s, 2003 39,600
--------------
86,600
Cosmetics (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
60,000 Chattem, Inc. company guaranty Ser. B, 8 7/8s, 2008 58,500
30,000 French Fragrances, Inc. company guaranty Ser. D,
10 3/8s, 2007 29,400
40,000 French Fragrances, Inc. sr. notes Ser. B, 10 3/8s, 2007 42,000
525,000 Revlon Worldwide Corp. sr. disc. notes Ser. B,
zero %, 2001 380,625
--------------
510,525
Electric Utilities (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
50,000 AES Corp. sr. sub. notes 8 3/8s, 2007 45,000
40,000 Calpine Corp. 144A sr. notes 7 7/8s, 2008 38,800
100,000 Espirito Santo Centrais sr. notes 10s, 2007 (Brazil) 57,000
80,000 Niagara Mohawk Power Corp. sr. notes
Ser. G, 7 3/4s, 2008 81,726
60,000 Niagara Mohawk Power Corp. sr. notes
Ser. F, 7 5/8s, 2005 61,422
209,518 Northeast Utilities System notes Ser. A, 8.58s, 2006 221,746
110,000 York Power Funding 144A notes 12s, 2007 108,900
--------------
614,594
Electronics (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
35,000 Celestica International Ltd. 144A sr. sub. notes
10 1/2s, 2006 (Canada) 37,100
125,000 Details Inc. sr. discount notes stepped-coupon
Ser. B, zero % (12 1/2s, 11/15/02), 2007 (STP) 68,750
80,000 DII Group, Inc. (The) sr. sub. notes 8 1/2s, 2007 71,200
85,000 Flextronics International Ltd. sr. sub. notes
Ser. B, 8 3/4s, 2007 78,200
50,000 HCC Industries, Inc. company guaranty 10 3/4s, 2007 50,000
50,000 Moog, Inc. sr. sub. notes Ser. B, 10s, 2006 52,000
50,000 Samsung Electronics 144A company guaranty
9 3/4s, 2003 38,500
65,000 Viasystems Inc. sr. sub notes 9 3/4s, 2007 61,750
25,000 Wavetek Corp. company guaranty 10 1/8s, 2007 23,750
--------------
481,250
Entertainment (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
150,000 Affinity Group Holdings sr. notes 11s, 2007 145,500
190,000 Premier Parks, Inc. sr. notes 9 1/4s, 2006 176,700
80,000 SFX Entertainment, Inc. 144A company guaranty
Ser. B, 9 1/8s, 2008 75,200
100,000 Silver Cinemas Intl. 144A sr. sub. notes 10 1/2s, 2005 93,000
85,000 United Artists Theatre 144A sr. sub. notes 9 3/4s, 2008 79,050
--------------
569,450
Environmental Control (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
95,000 Allied Waste Industries, Inc. company guaranty
10 1/4s, 2006 102,244
175,000 Allied Waste Industries, Inc. sr. disc. notes stepped-coupon
zero % (11.3s, 6/1/02), 2007 (STP) 126,875
45,000 ATC Group Services Inc. company guaranty 12s, 2008 36,450
--------------
265,569
Financial Services (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
165,000 Aames Financial Corp. sr. notes 9 1/8s, 2003 155,100
100,000 Colonial Capital II 144A company guaranty
Ser. A 8.92s, 2027 108,891
110,000 Contifinancial Corp. sr. notes 8 3/8s, 2003 110,793
70,000 Delta Financial Corp. sr. notes 9 1/2s, 2004 56,000
50,000 Dine S.A. de C.V. 144A company guaranty
8 3/4s, 2007 (Mexico) 36,000
45,000 Dollar Financial Group, Inc. sr. notes Ser. A,
10 7/8s, 2006 46,350
415,000 DTI Holdings Inc. 144A sr. disc. notes stepped-coupon
zero % (12 1/2s, 3/1/03), 2008 (STP) 170,150
75,000 Imperial Credit Capital Trust I 144A company guaranty
10 1/4s, 2002 72,000
45,000 Imperial Credit Industries, Inc. sr. notes 9 7/8s, 2007 43,650
40,000 Nationwide Credit Inc. 144A sr. notes 10 1/4s, 2008 38,000
30,000 Tokai Corp. 144A FRB Ser. A, 9.98s, 2049 18,000
--------------
854,934
Food and Beverages (0.8%)
- --------------------------------------------------------------------------------------------------------------------------
25,000 Aurora Foods, Inc. sr. sub. notes Ser. B, 9 7/8s, 2007 25,750
120,000 Aurora Foods, Inc. 144A sr. sub. notes Ser. D, 9 7/8s, 2007 123,600
125,000 Canandaigua Wine Co. sr. sub. notes Ser. C, 8 3/4s, 2003 125,000
200,000 Doane Products Co. sr. notes 10 5/8s, 2006 226,000
30,000 Eagle Family Foods company guaranty Ser. B, 8 3/4s, 2008 28,500
115,000 Fleming Companies, Inc. company guaranty
Ser. B, 10 1/2s, 2004 115,000
100,000 Nebco Evans Holding Co. sr. disc. notes stepped-coupon
zero % (12 3/8s, 7/15/02), 2007 (STP) 53,000
160,000 RAB Enterprises, Inc. 144A sr. notes 10 1/2s, 2005 148,800
60,000 Southern Foods Group sr. sub. notes 9 7/8s, 2007 60,900
20,000 Windy Hill Pet Food Co. sr. sub. notes 9 3/4s, 2007 20,100
--------------
926,650
Gaming (2.0%)
- --------------------------------------------------------------------------------------------------------------------------
110,000 Argosy Gaming Co. company guaranty 13 1/4s, 2004 110,000
70,000 Casino America, Inc. sr. notes 12 1/2s, 2003 74,200
200,000 Coast Hotels & Casinos, Inc. company guaranty
Ser. B, 10 7/8s, 2001 207,000
192,787 Elsinore Corp. 1st mortgage 11 1/2s, 2000 192,305
190,000 Fitzgeralds Gaming Corp. company guaranty
Ser. B, 12 1/4s, 2004 140,600
125,000 Grand Casinos, Inc. 1st mtge. 10 1/8s, 2003 132,500
350,000 Hollywood Casino Corp. sr. notes 12 3/4s, 2003 374,500
60,000 Isle of Capri Black Hawk LLC 144A 1st mortgage
Ser. B, 13s, 2004 60,000
475,000 Lady Luck Gaming Corp. 1st mtge. 11 7/8s, 2001 484,500
125,000 Louisiana Casino Cruises Corp. 1st mtge. 11 1/2s, 1998 125,000
175,000 PRT Funding Corp. sr. notes 11 5/8s, 2004 (In default) (NON) 125,563
190,000 Trump A.C. 1st mtge. company guaranty 11 1/4s, 2006 163,400
210,000 Trump Castle Funding 144A sub. notes 10 1/4s, 2003 212,100
--------------
2,401,668
Health Care (1.3%)
- --------------------------------------------------------------------------------------------------------------------------
250,000 Columbia/HCA Healthcare Corp. notes 7 1/4s, 2008 240,090
65,000 Conmed Corp. company guaranty 9s, 2008 55,250
140,000 Fresenius Medical Capital Trust II company guaranty
7 7/8s, 2008 (Germany) 126,000
120,000 Global Health Sciences 144A sr. notes 11s, 2008 104,400
110,000 Hudson Respiratory Care, Inc. 144A sr. sub. notes
9 1/8s, 2008 99,000
100,000 Integrated Health Services, Inc. sr. sub. notes Ser. A,
9 1/2s, 2007 93,500
150,000 Integrated Health Services, Inc. sr. sub. notes Ser. A,
9 1/4s, 2008 138,000
160,000 Mariner Post-Acute Network, Inc. sr. sub. notes
stepped-coupon Ser. B, zero % (10 1/2s, 11/1/02), 2007 94,400
255,000 Multicare Cos., Inc. sr. sub. notes 9s, 2007 234,600
220,000 Paracelsus Healthcare sr. sub. notes 10s, 2006 209,000
55,000 Paragon Corp. Holdings, Inc. company guaranty
Ser. B, 9 5/8s, 2008 40,150
80,000 PharMerica, Inc. company guaranty 8 3/8s, 2008 70,400
--------------
1,504,790
Hospital Management and Medical Services (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
195,000 MedPartners, Inc. sr. notes 7 3/8s, 2006 153,494
Industrial (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
170,000 Cathay International Ltd. 144A sr. notes
13s, 2008 (Hong Kong) 85,000
150,000 Graphic Controls Corp. sr. sub. notes Ser. A, 12s, 2005 160,500
330,000 Grove Holdings LLC 144A deb. stepped-coupon zero %
(11 5/8s, 5/1/03), 2009 (STP) 145,200
190,000 GS Superhighway Holdings sr. notes 9 7/8s, 2004 125,400
70,000 Motors and Gears, Inc. sr. notes Ser. D, 10 3/4s, 2006 70,350
350,000 Panda Global Energy Co. company guaranty
12 1/2s, 2004 245,000
--------------
831,450
Lodging (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
80,000 Epic Resorts LLP 144A sr. notes 13s, 2005 75,200
220,000 HMH Properties, Inc. company guaranty Ser. B,
7 7/8s, 2008 207,900
125,000 Prime Hospitality Corp. sub. notes 9 3/4s, 2007 125,000
90,000 Raintree Resorts International, Inc. sr. notes Ser. B,
13s, 2004 79,200
--------------
487,300
Media (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
135,000 Viacom International, Inc. sub. deb. 8s, 2006 135,000
Medical Supplies and Devices (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
20,000 Imagyn Medical Technologies company guaranty
12 1/2s, 2004 5,600
130,000 Mediq, Inc. 144A sr. sub. notes 11s, 2008 123,500
125,000 Wright Medical Technology, Inc. 144A notes Ser. C,
11 3/4s, 2000 116,563
--------------
245,663
Metals and Mining (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
35,000 Acindar Industria Argentina de Aceros S.A. bonds
11 1/4s, 2004 (Argentina) 25,550
80,000 Anker Coal Group, Inc. sr. notes Ser. B, 9 3/4s, 2007 54,400
85,000 Continental Global Group sr. notes Ser. B, 11s, 2007 79,050
80,000 Lodestar Holding, Inc. 144A sr. notes 11 1/2s, 2005 65,600
--------------
224,600
Motion Picture Distribution (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
110,000 AMC Entertainment, Inc. sr. sub. notes 9 1/2s, 2009 103,400
130,000 Cinemark USA, Inc. sr. sub. notes 9 5/8s, 2008 127,400
35,000 Panavision Inc. 144A sr. disc. notes stepped-coupon
zero % (9 5/8s, 2/1/02), 2006 (STP) 19,250
--------------
250,050
Nursing Homes (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
150,000 Sun Healthcare Group, Inc. sr. sub. notes Ser. B, 9 1/2s, 2007 142,500
Oil and Gas (1.7%)
- --------------------------------------------------------------------------------------------------------------------------
105,000 Abraxas Petroleum Corp. 144A company guaranty
11 1/2s, 2004 92,400
170,000 American Eco Corp. 144A company guaranty 9 5/8s, 2008 149,600
15,000 Benton Oil & Gas Co. sr. notes 9 3/8s, 2007 12,750
160,000 Chesapeake Energy Corp. 144A sr. notes 9 5/8s, 2005 132,800
80,000 Coho Energy, Inc. sr. sub. notes 8 7/8s, 2007 72,000
80,000 Dailey Petroleum Services Corp. company guaranty
9 1/2s, 2008 62,800
70,000 Eagle Geophysical, Inc. 144A sr. notes 10 3/4s, 2008 63,700
20,000 Gothic Energy Corp. sr. disc. notes, stepped-coupon
Ser. B, zero % (14 1/8s, 5/1/03), 2006 (STP) 9,600
70,000 Gothic Production Corp. company guaranty
Ser. B, 11 1/8s, 2005 56,000
70,000 Michael Petroleum Corp. 144A sr. notes 11 1/2s, 2005 61,600
80,000 Northern Offshore 144A company guaranty 10s, 2005 68,400
50,000 Panaco, Inc. company guaranty Ser. B, 10 5/8s, 2004 39,500
60,000 RAM Energy Inc. sr. notes 11 1/2s, 2008 55,200
60,000 Seven Seas Petroleum 144A sub. notes 12 1/2s, 2005 50,400
60,000 Southwest Royalties, Inc. company guaranty 10 1/2s, 2004 39,900
385,000 Transamerican Energy sr. notes Ser. B, 11 1/2s, 2002 234,850
1,150,000 Transamerican Energy sr. disc. notes stepped-coupon
Ser. B, zero % (13s, 6/15/99), 2002 (STP) 575,000
197,000 TransTexas Gas Corp. sr. sub. notes Ser. D, 13 3/4s, 2001 197,000
--------------
1,973,500
Paging (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
40,000 Pagemart Nationwide, Inc. sr. disc. notes
stepped-coupon zero % (15s, 2/1/00), 2005 (STP) 36,000
55,000 Paging Network Do Brasil sr. notes 13 1/2s, 2005 (Brazil) 24,750
--------------
60,750
Paper and Forest Products (0.9%)
- --------------------------------------------------------------------------------------------------------------------------
215,000 APP Finance II Mauritius Ltd. bonds stepped-coupon
12s, (16s, 2/15/04), 2049 (Indonesia) (STP) 107,500
10,000 APP International Finance Co. notes
11 3/4s, 2005 (Netherlands) 5,300
80,000 Huntsman Packaging Corp. company guaranty
9 1/8s, 2007 76,000
250,000 Indah Kiat Financial Mauritius Ltd. company guaranty
10s, 2007 (Indonesia) 116,250
150,000 Pindo Deli Finance Mauritius Ltd. company guaranty
10 3/4s, 2007 67,500
190,000 PT Pabrik Kertas Tjiwi Kimia company guaranty
10s, 2004 (Indonesia) 85,500
155,000 Repap New Brunswick sr. notes 10 5/8s, 2005 (Canada) 134,850
45,000 Repap New Brunswick 144A sr. notes 9s, 2004 (Canada) 40,950
240,000 Riverwood International Corp. company guaranty
10 7/8s, 2008 211,200
100,000 Riverwood International Corp. company guaranty
10 5/8s, 2007 91,500
100,000 Stone Container Corp. sr. notes 12.58s, 2016 110,000
--------------
1,046,550
Pharmaceuticals (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
115,000 ICN Pharmaceuticals, Inc. 144A sr. notes 9 1/4s, 2005 117,300
Publishing (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
180,000 Garden State Newspapers, Inc. sr. sub. notes
Ser. B, 8 3/4s, 2009 173,250
60,000 Perry-Judd company guaranty 10 5/8s, 2007 57,600
40,000 Von Hoffman Press Inc. 144A sr. sub. notes 10 3/8s, 2007 38,400
--------------
269,250
Railroads (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
30,000 TFM S.A. de C.V. company guaranty
10 1/4s, 2007 (Mexico) 27,900
160,000 TFM S.A. de C.V. company guaranty stepped-coupon
zero % (11 3/4s, 6/15/02), 2009 (Mexico) (STP) 96,000
--------------
123,900
Real Estate (--%)
- --------------------------------------------------------------------------------------------------------------------------
20,000 Bluegreen Corp. company guaranty Ser. B, 10 1/2s, 2008 18,800
Restaurants (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
120,000 Ameriserve Food Co. company guaranty 10 1/8s, 2007 105,600
100,000 Ameriserve Food Co. company guaranty 8 7/8s, 2006 88,000
100,000 FRD Acquisition Co. sr. notes Ser. B, 12 1/2s, 2004 106,000
--------------
299,600
Retail (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
210,000 Amazon.com Inc. 144A sr. disc. notes
stepped-coupon zero % (10s, 5/1/03), 2008 (STP) 111,300
50,000 Color Spot Nurseries sr. sub. notes 10 1/2s, 2007 22,500
123,000 Guitar Center Management Co. 144A sr. notes 11s, 2006 123,000
40,000 Home Interiors & Gifts, Inc. 144A sr. sub. notes
10 1/8s, 2008 39,200
250,000 Mothers Work, Inc. sr. notes 12 5/8s, 2005 263,750
45,000 NBTY, Inc. 144A sr. sub. notes 8 5/8s, 2007 43,088
175,000 Service Merchandise Co., Inc. sr. sub. deb. 9s, 2004 105,000
110,000 Zale Corp. sr. notes Ser. B, 8 1/2s, 2007 105,600
--------------
813,438
Satellite Services (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
250,000 Echostar Satellite Broadcast Corp. sr. disc. notes
stepped-coupon zero % (13 1/8s, 3/15/00), 2004 (STP) 212,500
95,000 Esat Holdings Ltd. 144A sr. notes stepped-coupon zero %
(12 1/2s, 2/01/02), 2007 (Ireland) (STP) 64,600
65,000 Satelites Mexicanos S.A. de C.V. 144A sr. notes
10 1/8s, 2004 (Mexico) 49,400
100,000 TCI Satellite Entertainment, Inc. sr. sub. notes
10 7/8s, 2007 94,000
80,000 TCI Satellite Entertainment, Inc. sr. disc. notes
stepped-coupon zero % (12 1/4s, 2/1/02), 2007 (STP) 48,000
--------------
468,500
Semiconductors (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
58,917 Cirent Semiconductor sr. sub. notes 10.22s, 2002 58,328
62,514 Cirent Semiconductor 144A sr. sub. notes 10.14s, 2004 61,888
95,556 Fairchild Semiconductor Corp. 144A sr. sub. notes
11.74s, 2008 (PIK) 109,412
160,000 Zilog, Inc. company guaranty Ser. B, 9 1/2s, 2005 80,000
--------------
309,628
Shipping (--%)
- --------------------------------------------------------------------------------------------------------------------------
40,000 International Shipholding Corp. sr. notes 7 3/4s, 2007 31,600
Specialty Consumer Products (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
105,000 Decora Industries, Inc. 144A sr. sec. notes 11s, 2005 98,700
80,000 Eye Care Centers of America 144A sr. sub. notes
9 1/8s, 2008 76,400
--------------
175,100
Steel (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
30,000 Hylsa S.A. de C.V. 144A bonds 9 1/4s, 2007 (Mexico) 17,100
250,000 Ispat Mexicana S.A. 144A bonds 10 3/8s, 2001 (Mexico) 200,000
80,000 WHX Corp. sr. notes 10 1/2s, 2005 71,200
--------------
288,300
Telecommunications (5.1%)
- --------------------------------------------------------------------------------------------------------------------------
10,000 Allegiance Telecom, Inc. sr. notes 12 7/8s, 2008 9,500
320,000 Allegiance Telecom, Inc. sr. disc. notes stepped-coupon
Ser. B, zero % (11 3/4s, 2/15/03), 2008 (STP) 144,000
140,000 BTI Telecom Corp. sr. notes 10 1/2s, 2004 130,200
50,000 Charter Communications International, Inc. disc. notes
stepped-coupon Ser. B, zero % (14s, 3/15/01), 2007 (STP) 41,500
100,000 Colt Telecom Group PLC sr. disc. notes stepped-coupon
zero % (12s, 12/1/01), 2006 (United Kingdom) (STP) 80,500
45,000 Consorcio Ecuatoriano notes 14s, 2002 (Ecuador) 27,000
305,000 Covad Communications Group 144A sr. disc. notes
stepped-coupon zero % (13 1/2s, 3/15/03), 2008 (STP) 134,200
240,000 Econophone, Inc. 144A notes stepped-coupon zero %
(11s, 2/15/03), 2008 (STP) 130,800
80,000 E.spire Communications, Inc. sr. notes 13 3/4s, 2007 85,600
165,000 E.spire Communications, Inc. sr. disc. notes stepped-coupon
zero % (12 3/4s, 4/1/01), 2006 (STP) 110,550
65,000 Esprit Telecom Group PLC sr. notes 11 1/2s, 2007
(United Kingdom) 63,050
200,000 Focal Communications Corp. 144A sr. disc. notes
stepped-coupon zero % (12 1/8s, 2/15/03), 2008 (STP) 100,000
480,000 Global Crossing Holdings 144A sr. notes 9 5/8s, 2008 456,000
100,000 GST Equipment Funding sr. notes 13 1/4s, 2007 110,000
250,000 GST Telecommunications, Inc. company guaranty
stepped-coupon zero % (13 7/8s, 12/15/00), 2005 (STP) 180,000
220,000 GST Telecommunications, Inc. 144A sr. disc. notes
stepped-coupon zero % (10 1/2s, 5/1/03), 2008 (STP) 101,200
80,000 Hermes Europe Railtel sr. notes 11 1/2s, 2007
(Netherlands) 82,400
150,000 Hyperion Telecommunications Corp., Inc. sr. notes
Ser. B, 12 1/4s, 2004 142,500
70,000 Hyperion Telecommunications Corp., Inc. sr. disc. notes
stepped-coupon Ser. B, zero % (13s, 4/15/01), 2003 (STP) 46,900
150,000 ICG Holdings, Inc. sr. disc. notes stepped-coupon zero %
(13 1/2s, 9/15/00), 2005 (STP) 115,500
755,000 ICG Services, Inc. 144A sr. disc. notes stepped-coupon
zero %, (9 7/8s, 5/1/03), 2008 (STP) 400,150
180,000 Intermedia Communications, Inc. sr. notes Ser. B,
8 7/8s, 2007 172,800
260,000 Intermedia Communications, Inc. sr. notes Ser. B, 8.6s, 2008 245,700
255,000 Intermedia Communications, Inc. sr. disc. notes
stepped-coupon Ser. B, zero % (11 1/4s, 7/15/02),
2007 (STP) 175,950
490,000 International Cabletel, Inc. sr. notes stepped-coupon
Ser. B, zero % (11 1/2s, 2/01/01), 2006 (STP) 396,900
130,000 IXC Communications, Inc. sr. sub. notes 9s, 2008 118,300
210,000 KMC Telecom Holdings, Inc. sr. disc. notes stepped-coupon
zero % (12 1/2s, 2/15/03), 2008 (STP) 117,600
245,000 Knology Holdings, Inc. sr. disc. notes stepped-coupon
zero % (11 7/8s, 10/15/02), 2007 (STP) 131,075
50,000 L-3 Communications Corp. sr. sub. notes 8 1/2s, 2008 48,875
65,000 L-3 Communications Corp. sr. sub. notes Ser. B,
10 3/8s, 2007 70,200
40,000 MJD Communications, Inc. 144A FRN 10s, 2008 39,300
40,000 MJD Communications, Inc. sr. sub. notes 9 1/2s, 2008 39,600
55,000 MetroNet Communications Corp. sr. disc. notes
stepped-coupon zero % (10 3/4s, 11/1/02), 2007
(Canada) (STP) 31,075
180,000 MetroNet Communications Corp. 144A sr. disc. notes
stepped-coupon zero % (9.95s, 6/15/03), 2008 (STP) 93,600
70,000 Microcell Telecommunications sr. disc. notes
stepped-coupon Ser. B, zero % (14s, 12/1/01),
2006 (Canada) (STP) 46,900
40,000 Netia Holdings B.V. 144A company guaranty
10 1/4s, 2007 (Poland) 33,600
20,000 Netia Holdings B.V. 144A company guaranty
stepped-coupon zero % (11 1/4s, 11/1/02),
2007 (Poland) (STP) 11,000
130,000 NorthEast Optic Network, Inc. sr. notes 12 3/4s, 2008 124,800
210,000 NTL Incorporated sr. notes Ser. B 10s, 2007 205,800
250,000 Primus Telecom Group sr. notes 11 3/4s, 2004 242,500
145,000 Qwest Communications International, Inc. sr. disc. notes
stepped-coupon zero % (9.47s, 10/15/02), 2007 (STP) 105,850
270,000 RCN Corp. sr. disc. notes stepped-coupon zero %
(11 1/8s, 10/15/02), 2007 (STP) 151,200
179,000 RSL Communications, Ltd. company guaranty 12 1/4s, 2006 196,900
70,000 RSL Communications, Ltd. company guaranty 9 1/8s, 2008 58,800
105,000 RSL Communications, Ltd. company guaranty
stepped-coupon zero % (10 1/8s, 3/1/03), 2008 (STP) 56,700
60,000 Telecom Tech, Inc. 144A sr. sub. notes 9 3/4s, 2008 54,600
210,000 Time Warner Telecom Inc. sr. notes 9 3/4s, 2008 201,075
45,000 Vialog Corp. company guaranty 12 3/4s, 2001 40,500
90,000 Versatel Teleco sr. notes 13 1/4s, 2008 88,200
60,000 WinStar Communications, Inc. sr. sub. notes 15s, 2007 66,000
85,000 WinStar Equipment Corp. company guaranty
12 1/2s, 2004 82,450
--------------
6,139,400
Telephone Services (0.6%)
- --------------------------------------------------------------------------------------------------------------------------
35,000 Call-Net Enterprises, Inc. sr. disc. notes stepped-coupon
zero % (8.94s, 8/15/03), 2008 (Canada) (STP) 19,950
65,000 Facilicom International sr. notes Ser. B., 10 1/2s, 2008 58,500
140,000 Flag Ltd. 144A sr. notes 8 1/4s, 2008 (Bermuda) 130,200
105,000 Globo Communicacoes 144A company guaranty
10 1/2s, 2006 (Brazil) 64,050
250,000 Ionica Group PLC sr. disc. notes stepped-coupon
zero % (15s, 5/1/02), 2007 (United Kingdom)(STP) 18,750
120,000 Iridium LLC/Capital Corp. company guaranty
Ser. B, 14s, 2005 104,400
25,000 Iridium LLC company guaranty Ser. A, 13s, 2005 22,000
71,000 ITC DeltaCom, Inc. sr. notes 11s, 2007 78,100
30,000 Level 3 Communication, Inc. sr. notes 9 1/8s, 2008 26,850
80,000 Primus Telecommunications Group, Inc. sr. notes
Ser. B, 9 7/8s, 2008 76,800
45,000 Transtel S.A. 144A pass-through certificates
12 1/2s, 2007 (Colombia) 26,100
60,000 US Xchange LLC 144A sr. notes 15s, 2008 60,900
--------------
686,600
Textiles (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
145,000 Day International Group, Inc. company guaranty
9 1/2s, 2008 131,950
40,000 Glenoit Corp. company guaranty 11s, 2007 38,000
70,000 Polymer Group, Inc. company guaranty Ser. B, 9s, 2007 64,400
40,000 Polymer Group, Inc. company guaranty Ser. B,
8 3/4s, 2008 36,400
--------------
270,750
Transportation (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
95,000 Johnstown America Industries, Inc. company guaranty
Ser. C, 11 3/4s, 2005 98,563
150,000 Kitty Hawk, Inc. company guaranty 9.95s, 2004 150,000
--------------
248,563
Wireless Communications (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
105,000 Conecel Holdings 144A notes Ser. A, 14s, 2000 (Ecuador) 63,000
70,000 CTI Holdings S.A. 144A sr. notes stepped-coupon
zero %, (11 1/2s, 4/15/03), 2008 (STP) 28,000
160,000 Dobson Wireline Co. 144A sr. notes 12 1/4s, 2008 153,600
80,000 Omnipoint Corp. sr. notes 11 5/8s, 2006 73,600
100,000 Orbital Imaging Corp. sr. notes Ser. B, 11 5/8s, 2005 103,000
50,000 Telesystem International Wireless, Inc. sr. disc. notes
stepped-coupon Ser. C, zero %, (10 1/2s, 11/1/02),
2007 (STP) 24,000
--------------
445,200
--------------
Total Corporate Bonds and Notes (cost $41,754,618) $ 38,677,573
CONVERTIBLE PREFERRED STOCKS (8.1%) (a)
NUMBER OF SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------------
25,300 Ann Taylor Finance Trust $4.25 cv. cum. pfd. $ 1,698,263
44,500 Camden Property Trust Ser. A, $2.25 cv. cum. pfd. (R) 1,079,125
600 Chancellor Media Corp. $3.00 cum. pfd. 45,000
590 Chesapeake Energy Corp. 144A $3.50 cv. cum. pfd. 12,980
24,400 Lomack Petroleum, Inc. 144A $2.875 cv. pfd. 683,200
33,302 MedPartners, Inc. $6.50 cv. pfd. 197,731
8,000 Penncorp Financial Group, Inc. $3.375 cv. pfd. 104,000
30,000 Station Casinos, Inc. $3.50 cv. pfd. 1,065,000
24,300 Texas Utilities Co. 0.50% cv. pfd. 1,102,613
10,800 Titanium Metals Corp. $3.313 cv. pfd. 324,000
8,000 Tower Automotive, Inc. 144A $3.375 cv. pfd. 362,000
26,000 Unisys Corp. Ser. A, $3.75 cv. pfd. 1,109,875
23,200 Vanstar Financial Trust Corp. $3.375 cv. pfd. 603,200
50,000 Vanstar Financial Trust Corp. 144A $3.375 cv. cum. pfd. 1,300,000
54 XCL Ltd $8.075 cv. pfd. 5,427
--------------
Total Convertible Preferred Stocks (cost $11,015,444) $ 9,692,414
PREFERRED STOCKS (2.9%) (a)
NUMBER OF SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------------
267 21st Century Telecom Group 144A $13.75 cum. pfd. (PIK) $ 226,950
2,419 AmeriKing, Inc. $3.25 pfd. (PIK) 60,475
676 Capstar Broadcasting Inc. 144A $12.00 pfd. (PIK) 75,036
3,115 Chevy Chase Capital Corp. Ser. A, $5.19 pfd. 154,193
1,135 Citadel Broadcasting Inc. 144A $13.25 cum. pfd. (PIK) 119,743
60 Concentric Network Corp. 144A $13.50 pfd. (PIK) 54,000
3,061 CSC Holdings, Inc. Ser. M, $11.125 cum. (PIK) 339,771
94 Dobson Communications 144A $12.25 pfd. (PIK) 95,880
43 E. Spire Communications, Inc. $12.75 pfd. (PIK) 38,700
32 Echostar Communications, Inc. 12.125% pfd. (PIK) 32,000
4,700 Fitzgeralds Gaming Co. $3.75 pfd. 47,000
130 Fresenius Medical Care AG pfd. Ser. D, 9.00% (Germany) 133,250
53 Hyperion Telecommunications Ser. B, $12.875 pfd. (PIK) 47,700
165 Intermedia Communication Ser. B, $13.50 pfd. (PIK) 190,575
185 IXC Communications, Inc. $12.50 pfd. (PIK) 195,175
2,364 Lady Luck Gaming Corp. $11.25 pfd. 101,652
821 Nebco Evans Holding Co. 144A $11.25 pfd. (PIK) 57,470
565 NEXTEL Communications, Inc. Ser. D, $13.00 cum. pfd. (PIK) 598,900
20 NEXTEL Communications, Inc. Ser. E, $11.125 pfd. (PIK) 19,600
3,273 Nextlink Communications, Inc. 144A $7.00 pfd. (PIK) 166,923
18 Paxson Communications Corp. 144A $13.25 pfd. (PIK) 171,000
915 SFX Broadcasting, Inc. Ser. E, $12.625 pfd. (PIK) 107,055
159 Spanish Broadcasting Systems 14.25% cum. pfd. (PIK) 170,130
1,010 Von Hoffman Corp. 144A $13.50 pfd. 31,310
165 WinStar Communications, Inc. 144A 14.25% pfd. 171,600
--------------
Total Preferred Stocks (cost $3,475,824) $ 3,406,088
UNITS (2.4%) (a)
NUMBER OF UNITS VALUE
- --------------------------------------------------------------------------------------------------------------------------
250 Australis Media, Ltd. units stepped-coupon zero %,
(15 3/4s, 5/15/03), 2003 (In Default)
(Australia) (STP) (PIK) (NON) $ 4,375
80 Bestel S.A.de C.V. units, stepped-coupon zero %
(12 3/4s,5/15/03), 2005 (Mexico) (STP) 51,200
80 Birch Telecom, Inc. 144A units 14s, 2008 70,400
30 Celcaribe S.A. 144A units 13 1/2s, 2004 (Colombia) 600,000
350 Diva Systems Corp. 144A units stepped-coupon zero %
(12 5/8s, 3/1/03), 2008 (STP) 115,500
340 Firstworld Communication units stepped-coupon zero %,
(13s, 4/15/03), 2008 (STP) 115,600
105 ICO Global Communications (Holdings) Ltd. units
15s, 2005 93,450
220 Interact Systems, Inc. 144A units stepped-coupon zero %
(14s, 8/1/99), 2003 (STP) 26,400
220 Long Distance International, Inc. 144A units 12 1/4s, 2008 211,200
90 Mediq 144A units, stepped-coupon zero %
(13s, 6/1/03), 2009 (STP) 45,000
45 Onepoint Communications, Inc. units 14 1/2s, 2008 36,000
160 Pathnet, Inc. 144A units 12 1/4s, 2008 144,000
225 Rhythms Netcon 144A units stepped-coupon zero %
(13 1/2s, 5/15/03), 2008 (STP) 92,250
350 Signature Brands USA, Inc. units 13s, 2002 399,000
90 Startec Global Communications Corp. units 12s, 2008 81,000
45 Telehub Communications Corp. units stepped-coupon
zero %, (13 7/8s,7/31/02), 2005 (STP) 25,650
135 Transam Refinance, Inc. 144A units 16s, 2003 114,750
200 Viatel, Inc. 144A units 11 1/4s, 2008 198,000
300 WinStar Communications, Inc. 144A sr. disc. units notes
stepped-coupon zero % (14s, 10/15/00), 2005 (STP) 192,000
210 XCL Ltd. units sr. sec. notes 13 1/2s, 2004 226,800
600 XCL Ltd. 144A units cum. pfd. 9.50%, 2006 (PIK) 60,300
--------------
Total Units (cost $3,163,398) $ 2,902,875
COMMON STOCKS (0.6%) (a)
NUMBER OF SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------------
50 AmeriKing, Inc. (NON) $ 2,500
8,120 CellNet Data Systems, Inc. (NON) 44,650
1,213 Hedstrom Holdings, Inc. 144A 1,516
1,885 IFINT Diversified Holdings 144A (NON) 14,138
2,392 Lady Luck Gaming Corp. (NON) 14,949
73 Mothers Work, Inc. (NON) 538
2,167 NEXTEL Communications, Inc. Class A (NON) 39,141
55 Paging Do Brazil Holdings Co., LLC 144A Class B, (Brazil) 1
144 Premium Holdings (L.P.) 144A (NON) 575
33,430 PSF Holdings LLC Class A (NON) 585,694
1,013 RSL Communications, Ltd. Class A (NON) 23,172
3,750 Specialty Foods Acquisition Corp. (NON) 188
--------------
Total Common Stocks (cost $1,250,931) $ 727,062
FOREIGN GOVERNMENT BONDS AND NOTES (0.1%) (a) (cost $197,357)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
USD 200,000 Korea (Republic of) unsub. 8 7/8s, 2008 $ 140,250
WARRANTS (0.3%) (a) (NON) EXPIRATION
NUMBER OF WARRANTS DATE VALUE
- --------------------------------------------------------------------------------------------------------------------------
250 21st Century Telecom 144A 2/15/10 $ 13,750
230 Allegiance Telecom, Inc. 2/3/08 3,680
15,000 Becker Gaming 144A 11/15/00 150
721 CellNet Data Systems, Inc. 144A 10/1/07 28,840
90 Club Regina, Inc. 144A 12/1/04 1,800
100 Colt Telecommunications 144A (United Kingdom) 12/31/06 30,000
500 Comunicacion Cellular 144A (Colombia) 11/15/03 32,500
35 Concentric Network Corp. 144A 12/15/07 2,450
1,417 Conecel 144A (Ecuador) 10/1/00 531
500 County Seat Holdings, Inc. 10/15/98 10
305 Covad Communications, Inc. 3/15/08 12,200
195 Diva Systems Corp. 5/15/06 54,600
2,075 DTI Holdings, Inc. 144A 3/1/08 4,150
80 Epic Resorts 6/15/05 1
95 Esat Holdings 144A (Ireland) 2/1/07 3,349
2,953 Fitzgerald Gaming Co. 12/19/98 30
200 Fitzgerald Gaming Co. 144A
(acquired 7/26/96, cost $ -) (RES) 3/15/99 20
250 Hyperion Telecommunications 4/15/01 22,500
1,617 Intelcom Group 10/15/05 43,659
90 Insilco Holding Co. 8/15/08 0
220 Interact Systems, Inc. 144A 8/1/03 2
250 Intermedia Communications 6/1/00 35,000
105 International Wireless
Communications Holdings 144A 8/15/01 11
175 Iridium World Communications 144A 7/15/05 19,250
210 KMC Telecom Holdings, Inc. 4/15/08 3,360
245 Knology Holdings, Inc. 144A 10/15/07 368
135 Louisiana Casino Cruises, Inc. 144A 12/1/98 7,155
135 MGC Communication 144A 10/1/04 7,425
160 NEXTEL International Inc. 4/15/07 640
250 NEXTEL Communications Inc. 4/25/99 40
100 Orbital Imaging Corp. 144A 3/1/05 4,000
105 Spanish Broadcasting Systems 144A 6/30/99 21,525
75 Sterling Chemicals Holdings 144A 8/15/08 1,800
520 UIH Australia 5/15/06 2,600
90 Versatel 144A 5/15/08 900
45 Vialog Corp. 144A 11/15/01 1,575
20 Wright Medical Technology, Inc. 144A 6/30/03 1,334
--------------
Total Warrants (cost $425,245) $ 361,205
SHORT-TERM INVESTMENTS (2.5%) (a) (cost $3,006,483)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$ 3,006,000 Interest in $750,000,000 joint repurchase agreement
dated August 31, 1998 with Goldman, Sachs & Co.
due September 1, 1998 with respect to various
U.S. Treasury obligations -- maturity value of
$3,006,483 for an effective yield of 5.78% $ 3,006,483
- --------------------------------------------------------------------------------------------------------------------------
Total Investments (cost $129,590,734) (b) $ 117,930,633
- --------------------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $119,193,146.
(b) The aggregate identified cost on a tax basis is $129,617,209, resulting in gross unrealized appreciation and
depreciation of $3,780,044 and $15,466,620, respectively, or net unrealized depreciation of $11,686,576.
(NON) Non-income-producing security.
(STP) 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.
(RES) Restricted, excluding 144A securities, as to public resale. The total market value of restricted securities
held at August 31, 1998 was $20 or less than 0.1% of net assets.
(PIK) 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.
FLIRB represents Front Loaded Interest Reduction Bond.
The rates shown on Floating Rate Bonds (FRB) and Floating Rate Notes (FRN) are the current interest rates
shown at August 31, 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
August 31, 1998
<S> <C>
Assets
- -----------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $129,590,734) (Note 1) $117,930,633
- -----------------------------------------------------------------------------------------------
Cash 514,350
- -----------------------------------------------------------------------------------------------
Dividends and interest receivable 2,209,564
- -----------------------------------------------------------------------------------------------
Receivable for securities sold 538,388
- -----------------------------------------------------------------------------------------------
Total assets 121,192,935
Liabilities
- -----------------------------------------------------------------------------------------------
Distributions payable to shareholders 956,660
- -----------------------------------------------------------------------------------------------
Payable for securities purchased 665,727
- -----------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 253,386
- -----------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 30,545
- -----------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 11,940
- -----------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 1,103
- -----------------------------------------------------------------------------------------------
Other accrued expenses 80,428
- -----------------------------------------------------------------------------------------------
Total liabilities 1,999,789
- -----------------------------------------------------------------------------------------------
Net assets $119,193,146
Represented by
- -----------------------------------------------------------------------------------------------
Paid-in capital (Note 1) $127,133,984
- -----------------------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 1,302,503
- -----------------------------------------------------------------------------------------------
Accumulated net realized gain on investments (Note 1) 2,416,760
- -----------------------------------------------------------------------------------------------
Net unrealized depreciation of investments (11,660,101)
- -----------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $119,193,146
Computation of net asset value
- -----------------------------------------------------------------------------------------------
Net asset value per share ($119,193,146 divided by 13,515,511 shares) $8.82
- -----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Year ended August 31, 1998
<S> <C>
Investment income:
- -----------------------------------------------------------------------------------------------
Interest income: $ 11,962,124
- -----------------------------------------------------------------------------------------------
Dividends 1,679,208
- -----------------------------------------------------------------------------------------------
Total investment income 13,641,332
Expenses:
- -----------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 1,012,300
- -----------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 259,433
- -----------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 14,305
- -----------------------------------------------------------------------------------------------
Administrative services (Note 2) 6,670
- -----------------------------------------------------------------------------------------------
Reports to shareholders 36,549
- -----------------------------------------------------------------------------------------------
Registration fees 75
- -----------------------------------------------------------------------------------------------
Auditing 69,732
- -----------------------------------------------------------------------------------------------
Legal 17,336
- -----------------------------------------------------------------------------------------------
Postage 38,252
- -----------------------------------------------------------------------------------------------
Exchange listing fees 22,575
- -----------------------------------------------------------------------------------------------
Other 46,030
- -----------------------------------------------------------------------------------------------
Total expenses 1,523,257
- -----------------------------------------------------------------------------------------------
Expense reduction (Note 2) (38,654)
- -----------------------------------------------------------------------------------------------
Net expenses 1,484,603
- -----------------------------------------------------------------------------------------------
Net investment income 12,156,729
- -----------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 4,881,112
- -----------------------------------------------------------------------------------------------
Net unrealized depreciation of investments during the year (21,079,788)
- -----------------------------------------------------------------------------------------------
Net loss on investments (16,198,676)
- -----------------------------------------------------------------------------------------------
Net decrease in net assets resulting from operations $ (4,041,947)
- -----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Year ended August 31
-------------------------------
1998 1997
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets
- ---------------------------------------------------------------------------------------------------------------
Operations:
- ---------------------------------------------------------------------------------------------------------------
Net investment income $ 12,156,729 $ 11,563,231
- ---------------------------------------------------------------------------------------------------------------
Net realized gain on investments 4,881,112 4,981,660
- ---------------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation)
of investments (21,079,788) 7,108,660
- ---------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations (4,041,947) 23,653,551
- ---------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ---------------------------------------------------------------------------------------------------------------
From net investment income (11,465,083) (11,357,565)
From net realized gain on investments (5,135,583) (798,322)
- ---------------------------------------------------------------------------------------------------------------
Increase from capital share transactions 1,435,825 1,038,642
- ---------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets (19,206,788) 12,536,306
Net assets
- ---------------------------------------------------------------------------------------------------------------
Beginning of year 138,399,934 125,863,628
- ---------------------------------------------------------------------------------------------------------------
End of year (including undistributed net investment
income of $1,302,503 and $633,021, respectively) $119,193,146 $138,399,934
- ---------------------------------------------------------------------------------------------------------------
Number of fund shares
- ---------------------------------------------------------------------------------------------------------------
Shares outstanding at beginning of year 13,377,770 13,272,242
- ---------------------------------------------------------------------------------------------------------------
Shares issued in connection with
reinvestment of distributions 137,741 105,528
- ---------------------------------------------------------------------------------------------------------------
Shares outstanding at end of year 13,515,511 13,377,770
- ---------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
- ------------------------------------------------------------------------------------------------------------------------------------
Per-share
operating performance Year ended August 31
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $10.35 $9.48 $9.49 $9.13 $9.52
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .90 .86 .88 .79 .78
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (1.20) .92 (.04) .42 (.30)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations (.30) 1.78 .84 1.21 .48
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.85) (.85) (.85) (.85) (.87)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized
gains on investments (.38) (.06) -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (1.23) (.91) (.85) (.85) (.87)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $8.82 $10.35 $9.48 $9.49 $9.13
- ------------------------------------------------------------------------------------------------------------------------------------
Market price,
end of period $8.937 $10.562 $10.125 $10.000 $9.750
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at market price (%)(a) (4.74) 14.29 10.63 12.60 6.84
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $119,193 $138,400 $125,864 $124,911 $118,988
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.13 1.03 1.06 1.00 1.04
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 9.01 8.80 9.19 8.73 8.23
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 59.13 58.88 56.82 61.19 52.10
- ------------------------------------------------------------------------------------------------------------------------------------
(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
August 31, 1998
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 price, 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 long-term
corporate bonds and notes; 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. Collateral
for certain tri-party repurchase agreements is held at the counterparty's
custodian in a segregated account for the benefit of the fund and the
counterparty. 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, market discount, 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 in
excess of maturity value 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 are
recorded by the fund on the ex-dividend date. At certain times, the fund
may pay distributions at a level rate even though, as a result of market
conditions or investment decisions, the fund may not achieve projected
investment results for a given period. The amount and character of income
and gains to be distributed are determined in accordance with income tax
regulations which may differ from generally accepted accounting
principles. These differences include temporary and permanent differences
of losses on wash sale transactions, nontaxable dividends, dividends
payable, defaulted bond interest, and interest on payment-in-kind
securities. Reclassifications are made to the fund's capital accounts to
reflect income and gains available for distribution (or available capital
loss carryovers) under income tax regulations. For the year ended August
31, 1998, the fund reclassified $22,164 to decrease undistributed net
investment income and $836,205 to increase paid-in-capital, with a
decrease to accumulated net realized gains of $814,041. The calculation of
net investment income per share in the financial highlights table excludes
these adjustments.
Note 2
Management fee, administrative
services and other transactions
Compensation of Putnam Management, for management and investment advisory
services is paid quarterly based on the average net assets of the fund.
Such fee is based on the following annual rates: 0.75% of the first $500
million of average weekly net assets, 0.65% of the next $500 million,
0.60% of the next $500 million, and 0.55% of any amount over $1.5 billion.
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 year ended August 31, 1998, fund expenses were reduced by $38,654
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 $570 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
Purchases and sales of securities
During the year ended August 31, 1998, purchases and sales of investment
securities other than short-term investments aggregated $76,163,210 and
$81,245,490, respectively. There were no purchases and sales of U.S.
government obligations. In determining the net gain or loss on securities
sold, the cost of securities has been determined on the identified cost
basis.
Federal tax information
(Unaudited)
The fund has designated 4.89% of the distributions from net investment
income as qualifying for the dividends received deduction for
corporations.
Pursuant to Section 852 of the Internal Revenue Code, as amended, the fund
hereby designates $2,743,679 as a 28% capital gain, for its taxable year
ended August 31, 1998.
The Form 1099 you receive in January 1999 will show the tax status of all
distributions paid to your account in calendar 1998.
Fund information
INVESTMENT MANAGER
Putnam Investment
Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
INDEPENDENT
ACCOUNTANTS
PricewaterhouseCoopers LLP
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
John A. Hill, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
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
Forrest N. Fontana
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, or visit
our website (www.putnaminv.com) any time for up-to-date information about
the fund's NAV.
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PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
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Bulk Rate
U.S. Postage
PAID
Putnam
Investments
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45963 10/98
