Putnam
High Income
Convertible and
Bond Fund
SEMIANNUAL REPORT ON PERFORMANCE AND OUTLOOK
2-28-99
[LOGO: BOSTON * LONDON * TOKYO]
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
I am pleased to announce the appointment of Kevin J. Rogers to your fund's
management team shortly after the close of the fiscal period. Before
joining Putnam in 1998, Kevin was with INVESCO and Fidelity Investments.
He has 11 years of investment experience.
Generally unfavorable conditions in the convertible and high-yield bond
markets presented Putnam High Income Convertible and Bond Fund with a
challenging first half of its current fiscal year. Your fund's performance
reflects the volatility in both sectors, resulting in total returns of
0.66% at net asset value and 6.94% at market price for the six months
ended February 28, 1999. For more performance information, please see
pages 8 and 9.
* GLOBAL MARGIN CALL SWEEPS GLOBE
Your fund began its fiscal year in the midst of market turmoil. Markets
had recoiled from rising investor discomfort, resulting in a dramatic
selloff and an abrupt market drop. The markets were also sobered by
economic turmoil in Asia, Russia and Latin America and by a global margin
call that forced leveraged investors to turn to U.S. equities for
liquidity. In addition, the market dealt with diminishing upside surprises
as corporate earnings slowed.
A stunning recovery in November and December, however, helped make up for
losses suffered in late summer and fall. The Standard and Poor's 500(R)
Index resumed its record pace. Federal Reserve Board rate cuts in the
fall, which calmed U.S. and global markets alike, supported market
euphoria.
Low inflation and continuing economic growth in the United States, an
apparent lack of repercussions from the presidential crisis and Middle
East military action, and nascent signs of an Asian economic comeback also
supported investor confidence. Earnings were generally better than
expected. Yet disappointments from a few large corporations like
Coca-Cola, Boeing, and Merck hinted at continuing fallout from Asian
weakness and increased pressure on manufacturers to cut costs.
* SMALL CAPS BOW TO LARGE-CAP STOCKS
In its pursuit of a high level of income, your fund focuses on the
convertible bonds of companies that have temporarily fallen on hard times.
Most successful companies eventually encounter a quarter or more of
disappointing earnings. However, with the current high stock valuations,
investors are quick to punish the securities of companies whose earnings
fail to live up to Wall Street's expectations. When a company's stock
price tumbles, its convertible bonds usually are not far behind.
Falling bond prices can boost the yields of these fixed-income securities
into double-digit territory, which often represents a buying opportunity
for your fund. In addition to a high yield, your fund's managers, Charles
Pohl, Forrest Fontana, and Kevin Rogers, look for companies they believe
are leaders in their respective industries, have a history of solid
growth, and have little outstanding debt. As the stock prices of these
companies start to recover, their convertible bond prices also rise,
albeit not as quickly. If the yield of a convertible holding moves outside
the managers' desired range, they begin to trim back the position,
although they generally retain some portion of the bonds to take advantage
of possible price appreciation.
[GRAPHIC OMITTED: horizontal bar chart PORTFOLIO COMPOSITION (2/28/99)]
PORTFOLIO COMPOSITION (2/28/99)*
Convertible
securities 58.8%
Corporate
high-yield bonds 34.3%
Other 3.5%
Preferred stocks 2.5%
Common stocks,
including warrants 0.9%
Footnote reads:
*Based on total market value of investments. Composition will vary over time.
Two factors were primarily behind the fund's underperformance during the
period. The first was the performance differential between securities of
large-capitalization and small-capitalization companies. Throughout 1998,
small-cap companies lagged disproportionately behind their larger
counterparts as investor psychology turned to caution and safety. This
trend has continued in the early months of 1999. For the six months ended
February 28, 1999, the S&P 500 Index returned 30.29% compared with the
small-cap Russell 2000 Index's return of 16.79%. Consequently, this factor
helped to explain your fund's performance during the period.
* INVESTORS FLEE HIGH YIELDS IN FLIGHT TO QUALITY
The widening of high-yield corporate bond spreads against U.S. Treasuries
was a second major influence on the fund's performance. The flight to
quality that swept the globe in late summer made for the worst climate for
high-yield bonds since 1990. Worried by Russia's financial collapse and by
subsequent margin calls on certain hedge funds, investors suddenly became
highly risk averse and began selling off fixed-income investments
perceived to have any degree of credit risk. All quality tiers were caught
in the market rout. However, the period's flight from risk was especially
tough on the lower-quality issues. As the selloff drove prices down, the
spread between high-yield bonds and comparable U.S. Treasuries reached
levels not seen in nearly a decade.
The high-yield market staged a modest recovery in the second half of the
period, as investors recovered some of their appetite for risk. Spreads
against Treasuries narrowed somewhat as prices rose slightly and net cash
flows into the asset class once again turned positive. The high-yield
market's comeback was overshadowed by the lingering aftereffects of the
late summer/early fall slump. Prices of high-yield issues remained
somewhat depressed at the end of the fund's semiannual period, apparently
still discounting an impending recession contrary to most economists'
forecasts.
Although the high-yield market has regained some of the ground it lost,
your fund's managers believe it is still attractively priced given an
environment of dormant inflation, a continued low default rate among
high-yield issuers, repeated Fed interventions to ensure liquidity, and
the lack of recessionary signals in the economy.
[GRAPHIC OMITTED: TOP 5 CONVERTIBLE BOND HOLDINGS]
TOP 5 CONVERTIBLE BOND HOLDINGS*
OHM Corporation, 8%, 2006
Environmental control
Duramed Pharmaceuticals, Inc., 3.5%, 2002
Pharmaceuticals
Lam Research Corporation, 5%, 2002
Semiconductors
Whole Foods Market, Inc., 0%, 2018
Supermarkets
National Semiconductor Corporation, 6.5%, 2002
Semiconductors
[GRAPHIC OMITTED: TOP 5 CORPORATE HIGH-YIELD BOND HOLDINGS]
TOP 5 CORPORATE HIGH-YIELD BOND HOLDINGS*
Global Crossing Holdings, Ltd., 9.625%, 2008
Telecommunications
Weirton Steel Corporation, 10.75%, 2005
Metals and mining
Benedek Communications Corporation, stepped-coupon 0%, 2006
Broadcasting
ICG Services, Inc., stepped-coupon 0%, 2008
Telecommunications
International Cabletel, Inc., Series B stepped-coupon 0%, 2006
Telecommunications
Footnote reads:
*These combined holdings represent 10.0% of the fund's net assets as of
2/28/99. Portfolio holdings will vary over time.
* STRATEGIC MOVES HELP STABILIZE FUND
In this challenging environment, your fund's managers took three strategic
steps to help stabilize the fund. First, they sought to upgrade the credit
quality of the portfolio wherever possible. Second, they sought to
increase liquidity, focusing on securities that are easier to buy and
sell. Finally, they sought to improve the portfolio's diversification. The
fund has a natural technology bias because technology companies issue
nearly a quarter of all convertibles. The fund also emphasizes
convertibles in the media and telecommunications sector. However, in an
attempt to further diversify the portfolio, the managers have increased
the fund's focus on other sectors. Examples of holdings that have helped
add valuable diversification to your fund include Kmart Corp., Tower
Automotive, Inc., and Whole Foods Market, Inc.
Kmart, a mass merchandise retailer, intends to convert another 586 stores
to the Big Kmart format in 1999, completing the conversion program. Tower
Automotive is the leader in supplying car and light truck manufacturers
with components that provide vehicles with structural integrity. In your
fund managers' opinion, the stock's recent price weakness creates an
attractive buying opportunity, since industry and company fundamentals
remain strong. Natural foods supermarket chain Whole Foods Market recently
agreed to acquire Nature's Heartland, which owns and operates several
natural-food supermarkets in the greater Boston area. Within the
technology sector, several software companies, including Platinum
Technology International, Inc., were added to the portfolio. Platinum
Technology develops, markets, and supports an integrated line of system
software products, and related educational programs, and publications for
use in the open enterprise environment. The reason many software companies
are out of favor is because revenue growth has slowed due to Y2K issues.
While these holdings, as well as others discussed in this report, were
viewed favorably at the end of the period, all are subject to review and
adjustment in accordance with the fund's investment strategy and may well
vary in the future.
* SMALL-CAP CONVERTIBLES AND HIGH-YIELD SECURITIES ARE ATTRACTIVELY VALUED
At current oversold levels, your fund's managers believe that small-cap
stocks, which underlie convertibles, are attractively valued.
Convertibles, which have held up better than their underlying stocks, are
extremely undervalued relative to their bond characteristics. The managers
believe the recent decline in small-capitalization stocks has left the
convertible market statistically and fundamentally undervalued.
While negative factors such as the Asian economic slowdown, Russia's
political and economic instability, and concern over emerging markets
still pose serious risks for U.S. equities, fundamental U.S. economic
factors remain relatively stable. Consumer demand is generally strong, and
companies with domestic exposure should continue to post respectable
earnings gains. Inflation remains a nonissue and more importantly,
interest rates are low and show no signs of rising over the near term.
Although your fund's managers anticipate ongoing volatility, they believe
the fund is well positioned to capture the long-term appreciation
potential present in the current U.S. market. The fund's style will
continue to emphasize smaller-capitalization opportunities, which have
typically provided the highest returns within the convertible universe.
Your fund's managers intend to take advantage of opportunities to raise
the proportion of higher-rated securities in the high-yield portion of
your fund over the next several months in order to smooth out volatility
and capture perceived value. The managers will continue to emphasize media
and telecommunications based on a favorable earnings outlook while
underweighting industries such as steel that depend on global price
increases; inflation will likely be too feeble to permit improved profit
margins.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
April 21, 1999
The views expressed here are exclusively those of Putnam Management. They
are not meant as investment advice. Although the described holdings were
viewed favorably as of 2/28/99, there is no guarantee the fund will
continue to hold these securities in the future. The lower credit ratings
of high-yield bonds reflect a greater possibility that adverse changes in
the economy or poor performance by the issuers of these bonds may affect
the issuer's ability to pay principal and interest.
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 2/28/99
Merrill Lynch First Boston
Market All-Convertible High-Yield
NAV price Index* Bond Index
- -----------------------------------------------------------------------
6 months 0.66% 6.94% 16.39% 3.48%
- -----------------------------------------------------------------------
1 year -7.31 -10.31 4.34 -1.15
- -----------------------------------------------------------------------
5 years 38.80 48.01 69.95 46.28
Annual average 6.78 8.16 11.19 7.90
- -----------------------------------------------------------------------
10 years 191.63 236.71 229.95 172.70
Annual average 11.30 12.91 12.68 10.55
- -----------------------------------------------------------------------
Life of fund 213.48 216.00 -- 223.61
(since 7/9/87)
Annual average 10.31 10.39 -- 10.59
- -----------------------------------------------------------------------
Past performance is no assurance of future results. More recent returns
may be more or less than those shown. 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.
*Index began on 12/31/87.
PRICE AND DISTRIBUTION INFORMATION
6 months ended 2/28/99
- -----------------------------------------------------------------------------
Distributions
- -----------------------------------------------------------------------------
Number 6
- -----------------------------------------------------------------------------
Income $0.4260
- -----------------------------------------------------------------------------
Capital gains
- -----------------------------------------------------------------------------
Long term $0.1403
- -----------------------------------------------------------------------------
Short term --
- -----------------------------------------------------------------------------
Total $0.5663
- -----------------------------------------------------------------------------
Share value NAV Market price
- -----------------------------------------------------------------------------
8/31/98 $8.82 $8.937
- -----------------------------------------------------------------------------
2/28/99 8.31 9.000
- -----------------------------------------------------------------------------
Current return (end of period)
- -----------------------------------------------------------------------------
Current dividend rate1 10.25% 9.47%
- -----------------------------------------------------------------------------
1 Income portion of most recent distribution, annualized and divided by
NAV or market price at end of period.
TOTAL RETURN FOR PERIODS ENDED 3/31/99
(most recent calendar quarter)
Market
NAV price
- ------------------------------------------------------------------------------
6 months 2.65% -8.82%
- ------------------------------------------------------------------------------
1 year -8.75 -12.82
- ------------------------------------------------------------------------------
5 years 41.94 54.57
Annual average 7.26 9.10
- ------------------------------------------------------------------------------
10 years 190.76 224.76
Annual average 11.26 12.50
- ------------------------------------------------------------------------------
Life of fund 213.52 207.54
Annual average 10.23 10.05
- ------------------------------------------------------------------------------
Past performance is no assurance of future results. More recent returns
may be more or less than those shown. They do not take into account any
adjustment for taxes payable on reinvested distributions. Investment
returns, net asset value and market price will fluctuate so that an
investor's shares when sold may be worth more or less than their original
cost.
TERMS AND DEFINITIONS
Total return shows how the value of the fund's shares changed over time,
assuming you held the shares through the entire period and reinvested all
distributions in the fund.
Net asset value (NAV) is the value of all your fund's assets, minus any
liabilities divided by the number of outstanding shares.
Market price is the current trading price of one share of the fund. Market
prices are set by transactions between buyers and sellers on the New York
Stock Exchange.
COMPARATIVE BENCHMARKS
Merrill Lynch All-Convertible Index* is an unmanaged list of convertible
securities commonly used as a measure of performance for the convertible
market.
First Boston High-Yield Bond Index* is an unmanaged list of lower-rated,
higher-yielding U.S. corporate bonds.
Standard & Poor's 500 Index* is an unmanaged list of common stocks that is
frequently used as a general measure of stock market performance.
Russell 2000 Index* is an unmanaged list of common stocks that is
frequently used as a general measure of stocks of small to midsize
companies.
*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.
<TABLE>
<CAPTION>
Portfolio of investments owned
February 28, 1999 (Unaudited)
CONVERTIBLE BONDS AND NOTES (47.2%) (a)
PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C> <C>
Advertising (0.6%)
- --------------------------------------------------------------------------------------------------------------------------
$ 750,000 Getty Images, Inc. cv. sub. notes 4 3/4s, 2003 $ 665,625
Aerospace and Defense (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
500,000 SPACEHAB, Inc. 144A cv. sub. notes 8s, 2007 410,625
Automotive (2.6%)
- --------------------------------------------------------------------------------------------------------------------------
1,250,000 Exide Corp. 144A cv. sr. sub. notes 2.9s, 2005 712,500
1,250,000 Mark IV Industries, Inc. cv. sub. notes 4 3/4s, 2004 1,021,875
1,500,000 Mascotech, Inc. cv. sub. deb. 4 1/2s, 2003 1,143,750
--------------
2,878,125
Business Equipment and Services (0.8%)
- --------------------------------------------------------------------------------------------------------------------------
1,000,000 Corporate Express, Inc. cv. notes 4 1/2s, 2000 880,000
Computers (1.3%)
- --------------------------------------------------------------------------------------------------------------------------
1,300,000 Adaptec, Inc. cv. sub. notes 4 3/4s, 2004 1,048,125
500,000 Read Rite Corp. cv. sub. notes 6 1/2s, 2004 355,625
--------------
1,403,750
Computer Services (5.5%)
- --------------------------------------------------------------------------------------------------------------------------
500,000 Aspen Technology, Inc. cv. sub. deb. 5 1/4s, 2005 325,000
1,500,000 Aspen Technology, Inc. 144A cv. sub. deb. 5 1/4s, 2005 975,000
800,000 BEA Systems, Inc. cv. sub. notes 4s, 2005 667,000
500,000 BEA Systems, Inc. cv. sub. notes 4s, 2005 412,500
1,800,000 Data General Corp. 144A cv. sub. notes 6s, 2004 1,566,000
500,000 HNC Software, Inc. cv. sub. notes 4 3/4s, 2003 450,000
1,000,000 Silicon Graphics Corp. cv. sr. notes 5 1/4s, 2004 873,750
1,500,000 System Software Associates, Inc. cv. sub. notes 7s, 2002 900,000
--------------
6,169,250
Computer Software (2.7%)
- --------------------------------------------------------------------------------------------------------------------------
1,250,000 Platinum Technology International, Inc. cv. sub. notes
6 1/4s, 2002 1,007,813
1,000,000 Softkey International, Inc. 144A cv. sr. notes 5 1/2s, 2000 1,012,500
4,000,000 Western Digital Corp. 144A cv. sub. deb. zero %, 2018 965,000
--------------
2,985,313
Electronics (4.7%)
- --------------------------------------------------------------------------------------------------------------------------
1,250,000 Cirrus Logic, Inc. cv. sub notes 6s, 2003 906,250
500,000 HMT Technology Corp. cv. sub. notes 5 3/4s, 2004 332,500
1,500,000 HMT Technology Corp. 144A cv. sub. notes 5 3/4s, 2004 997,500
2,000,000 Kent Electronics Corp. cv. sub. notes 4 1/2s, 2004 1,545,000
1,750,000 Park Electrochemical Corp. cv. sub. notes 5 1/2s, 2006 1,557,500
--------------
5,338,750
Entertainment (1.3%)
- --------------------------------------------------------------------------------------------------------------------------
2,000,000 Rogers Communications cv. deb. 2s, 2005 1,465,000
Environmental Control (2.7%)
- --------------------------------------------------------------------------------------------------------------------------
2,000,000 OHM Corp. cv. sub. deb. 8s, 2006 1,900,000
1,300,000 Weston (Roy F.), Inc. cv. deb. 7s, 2002 1,170,000
--------------
3,070,000
Food (0.8%)
- --------------------------------------------------------------------------------------------------------------------------
1,000,000 Chiquita Brands International, Inc. cv. sub. deb. 7s, 2001 946,250
Information Systems (1.3%)
- --------------------------------------------------------------------------------------------------------------------------
1,750,000 Quantum Corp. cv. sub. 7s, 2004 1,522,500
Medical Supplies and Devices (1.0%)
- --------------------------------------------------------------------------------------------------------------------------
1,400,000 Thermo Instrument Systems, Inc. cv. company
guaranty Ser. RG, 4s, 2005 1,128,750
Metals and Mining (1.8%)
- --------------------------------------------------------------------------------------------------------------------------
1,500,000 Homestake Mining Co. 144A cv. sub. 5 1/2s, 2000 1,445,625
600,000 Quanex Corp. cv. sub. deb. 6.88s, 2007 538,500
--------------
1,984,125
Oil and Gas (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
2,000,000 Pride International, Inc. cv. sub. deb. zero %, 2018 440,000
Paper and Forest Products (1.6%)
- --------------------------------------------------------------------------------------------------------------------------
280,000 APP Global Finance Ltd. 144A cv. company guaranty
3 1/2s, 2003 (United Kingdom) 133,700
2,000,000 Stone Container Corp. cv. sub. deb. 6 3/4s, 2007 1,702,500
--------------
1,836,200
Pharmaceuticals (1.7%)
- --------------------------------------------------------------------------------------------------------------------------
2,500,000 Duramed Pharmaceuticals, Inc. cv. sub. notes 3 1/2s, 2002 1,878,125
REIT's (Real Estate Investment Trust) (1.4%)
- --------------------------------------------------------------------------------------------------------------------------
1,750,000 Malan Realty Investors cv. sub. notes 9 1/2s, 2004 1,629,688
Restaurants (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
500,000 CKE Restaurants, Inc. cv. sub. notes 4 1/4s, 2004 426,250
Retail (2.4%)
- --------------------------------------------------------------------------------------------------------------------------
1,500,000 Baker (J.), Inc. cv. deb. 7s, 2002 1,100,625
600,000 Michaels Stores, Inc. cv. sub. notes 6 3/4s, 2003 519,750
1,500,000 Sunglass Hut International, Inc. 144A cv. sub. notes 5 1/4s, 2003 1,140,000
--------------
2,760,375
Semiconductors (7.4%)
- --------------------------------------------------------------------------------------------------------------------------
1,000,000 Advanced Micro Devices, Inc. cv. sub. notes 6s, 2005 780,000
2,250,000 Credence Systems Corp. cv. sub. notes 5 1/4s, 2002 1,670,625
1,700,000 Integrated Device Technology, Inc. cv. sub. notes 5 1/2s, 2002 1,241,000
2,200,000 Lam Research Corp. cv. sub. notes 5s, 2002 1,837,000
1,000,000 Micron Technology, Inc. cv. sub. notes 7s, 2004 1,103,750
2,000,000 National Semiconductor Corp. cv. sub. deb. 6 1/2s, 2002 1,705,000
--------------
8,337,375
Supermarkets (1.5%)
- --------------------------------------------------------------------------------------------------------------------------
5,500,000 Whole Foods Market, Inc. cv. sub. deb. zero %, 2018 1,739,375
Telecommunications (0.9%)
- --------------------------------------------------------------------------------------------------------------------------
300,000 WinStar Communications, Inc. 144A cv. sr. disc. notes
stepped-coupon zero % (14s, 10/15/00), 2005 (STP) 510,000
1,000,000 World Access, Inc. cv. sub. notes 4 1/2s, 2002 535,000
--------------
1,045,000
Tobacco (1.3%)
- --------------------------------------------------------------------------------------------------------------------------
2,300,000 Standard Commercial Corp. cv. sub. deb. 7 1/4s, 2007 1,503,625
Wireless Communications (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
500,000 Cellstar Corp. cv. sub notes 5s, 2002 383,750
750,000 Telxon Corp. cv. sub. notes 5 3/4s, 2003 456,563
--------------
840,313
--------------
Total Convertible Bonds and Notes (cost $56,836,779) $ 53,284,389
CORPORATE BONDS AND NOTES (34.2%) (a)
PRINCIPAL AMOUNT VALUE
Advertising (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
$ 90,000 Adams Outdoor Advertising sr. notes 10 3/4s, 2006 $ 97,875
75,000 Lamar Advertising Co. company guaranty 8 5/8s, 2007 79,500
95,000 Lamar Advertising Co. sr. sub. notes 9 5/8s, 2006 103,550
100,000 Outdoor Communications, Inc. sr. sub. notes 9 1/4s, 2007 107,750
--------------
388,675
Aerospace and Defense (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
50,000 Argo-Tech Corp. company guaranty 8 5/8s, 2007 47,000
60,000 Argo-Tech Corp. 144A sr. sub. notes 8 5/8s, 2007 56,400
130,000 Aviation Sales Co. company guaranty 8 1/8s, 2008 127,400
70,000 BE Aerospace, Inc sr. sub. notes 9 1/2s, 2008 73,675
70,000 BE Aerospace, Inc. sr. sub. notes Ser. B, 8s, 2008 67,900
50,000 K&F Industries, Inc. sr. sub. notes Ser. B, 9 1/4s, 2007 51,000
100,000 Sequa Corp. med. term notes 10s, 2001 104,163
--------------
527,538
Agriculture (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
388,166 Premium Standard Farms, Inc. sr. sec. notes 11s, 2003
(acquired various dates, cost $379,188) (RES) (PIK) 372,639
110,000 Purina Mills, Inc. 144A sr. sub. notes 9s, 2010 102,300
--------------
474,939
Airlines (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
80,000 Calair LLC company guaranty 8 1/8s, 2008 76,000
80,000 Canadian Airlines Corp. sr. notes 12 1/4s, 2006 (Canada) 41,600
140,000 Canadian Airlines Corp. sr. sec. notes 10s, 2005 (Canada) 112,000
70,000 Trans World Airlines, Inc. sr. notes 11 1/2s, 2004 54,600
180,000 Trans World Airlines, Inc. sr. notes 11 3/8s, 2006 102,600
--------------
386,800
Apparel (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
115,000 Sassco Fashions Ltd. sr. notes 12 3/4s, 2004 113,275
70,000 William Carter Holdings Co. sr. sub. notes Ser. A, 12s, 2008 73,675
--------------
186,950
Automotive (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
210,000 Federal Mogul Corp. 144A notes 7 1/2s, 2009 203,555
70,000 Motors and Gears, Inc. sr. notes Ser. D, 10 3/4s, 2006 72,275
190,000 Navistar International Corp. sr. notes Ser. B, 8s, 2008 194,750
250,000 Oxford Automotive, Inc. company guaranty Ser. B, 10 1/8s, 2007 257,500
--------------
728,080
Automotive Parts (0.6%)
- --------------------------------------------------------------------------------------------------------------------------
262,000 Aftermarket Technology Corp. sr. sub. notes 12s, 2004 268,550
130,000 Hayes Lemmerz International, Inc. 144A company
guaranty 8 1/4s, 2008 131,950
50,000 Hayes Wheels International, Inc. company guaranty
Ser. B, 9 1/8s, 2007 52,750
180,000 Talon Automotive Group sr. sub. notes Ser. B, 9 5/8s, 2008 159,300
--------------
612,550
Banks (0.6%)
- --------------------------------------------------------------------------------------------------------------------------
75,000 Chevy Chase Savings Bank Inc. sub. deb. 9 1/4s, 2008 75,750
100,000 Dime Capital Trust I bank guaranty Ser. A, 9.33s, 2027 102,176
70,000 Fuji JGB Inv. LLC 144A FLIRB 9.87s, 2049 (Japan) 54,684
80,000 Greenpoint Capital Trust I company guaranty 9.1s, 2027 79,846
75,000 Provident Capital Trust company guaranty 8.6s, 2026 75,727
25,000 Ocwen Capital Trust I company guaranty 10 7/8s, 2027 20,250
80,000 Ocwen Federal Bank FSB sub. deb. 12s, 2005 78,000
50,000 Ocwen Financial Corp. notes 11 7/8s, 2003 45,000
45,000 Riggs Capital Trust 144A bonds 8 5/8s, 2026 43,124
65,000 Sovereign Capital Trust company guaranty 9s, 2027 65,031
55,000 Webster Capital Trust I 144A bonds 9.36s, 2027 56,374
--------------
695,962
Basic Industrial Products (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
330,000 Grove Holdings LLC deb. stepped-coupon zero %
(11 5/8s, 5/1/03), 2009 (STP) 112,200
30,000 Roller Bearing Co. company guaranty Ser. B, 9 5/8s, 2007 28,650
--------------
140,850
Broadcasting (2.8%)
- --------------------------------------------------------------------------------------------------------------------------
120,000 Allbritton Communications Co. sr. sub. notes Ser. B,
8 7/8s, 2008 122,700
600,000 Benedek Communications Corp. sr. disc. notes
stepped-coupon zero % (13 1/4s, 5/15/01), 2006 (STP) 444,000
215,000 Capstar Broadcasting sr. disc. notes stepped-coupon
zero % (12 3/4s, 2/1/02), 2009 (STP) 183,825
215,000 Capstar Broadcasting sr. sub. notes 9 1/4s, 2007 231,125
75,000 Central European Media Enterprises Ltd. sr. notes 9 3/8s,
2004 (Bermuda) 61,500
370,000 Chancellor Media Corp. 144A sr. notes 8s, 2008 386,650
90,220 Citadel Broadcasting Co. sr. sub. notes 10 1/4s, 2007 99,016
10,000 Citadel Broadcasting, Inc. 144A sr. sub. notes 9 1/4s, 2008 10,600
330,000 Echostar DBS Corp. 144A sr. notes 9 3/8s, 2009 331,650
125,000 Fox Family Worldwide, Inc. sr. notes 9 1/4s, 2007 120,000
270,000 Fox/Liberty Networks LLC sr. notes 8 7/8s, 2007 278,775
80,000 Granite Broadcasting Corp. sr. sub. notes 8 7/8s, 2008 79,200
250,000 Heritage Media Services Corp. sr. sub. notes 8 3/4s, 2006 267,500
250,000 Lenfest Communications, Inc. sr. sub. notes 10 1/2s, 2006 295,000
30,000 Pegasus Communications Corp. 144A sr. notes 9 3/4s, 2006 31,125
110,000 Radio One, Inc. company guaranty stepped-coupon
Ser. B, 7s, (12s, 5/15/00), 2004 (STP) 114,125
50,000 TV Azteca Holdings S.A. de C.V. sr. notes 11s, 2002 (Mexico) 42,250
35,000 TV Azteca S.A. de C.V. sr. notes 10 1/2s, 2007 (Mexico) 28,350
--------------
3,127,391
Building and Construction (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
55,000 American Architectural Products Corp. company
guaranty 11 3/4s, 2007 46,750
30,000 CSC Holdings, Inc. deb. 7 7/8s, 2018 30,737
160,000 D.R. Horton, Inc. company guaranty 8s, 2009 156,400
190,000 GS Superhighway Holdings sr. notes 9 7/8s, 2004 (China) 96,900
80,000 Presley Cos. sr. notes 12 1/2s, 2001 64,800
80,000 Toll Corp. company guaranty 8 1/8s, 2009 80,800
--------------
476,387
Building Products (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
90,000 Building Materials Corp. 144A sr. notes 8s, 2008 88,988
150,000 Consumers International 144A sr. notes 10 1/4s, 2005 158,250
--------------
247,238
Buses (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
355,000 MCII Holdings sec. notes 12s, 2002 301,750
Business Equipment and Services (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
80,000 Cendant Corp. notes 7 1/2s, 2000 80,934
120,000 Cex Holdings, Inc. company guaranty Ser. B, 9 5/8s, 2008 112,200
110,000 Iron Mountain, Inc. company guaranty 8 3/4s, 2009 114,400
50,000 Outsourcing Solutions, Inc. sr. sub. notes Ser. B, 11s, 2006 48,750
320,000 U.S. Office Products Co. company guaranty 9 3/4s, 2008 227,200
--------------
583,484
Cable Television (1.4%)
- --------------------------------------------------------------------------------------------------------------------------
100,000 Acme Television sr. disc. notes stepped-coupon zero %
(10 7/8s, 9/30/00), 2004 (STP) 84,500
149,530 Adelphia Communications Corp. sr. notes 9 1/2s, 2004 (PIK) 154,764
2,044 Australis Media, Ltd. sr. disc. notes stepped-coupon zero %,
(15 3/4s 5/15/00), 2003 (In default) (Australia) (NON) (STP) (PIK) 15
210,000 Century Communications Corp. sr. notes 8 7/8s, 2007 233,100
50,000 Charter Communications International, Inc. disc. notes
stepped-coupon Ser. B, zero % (14s, 3/15/01), 2007 (STP) 46,250
120,000 CSC Holdings, Inc. sr. sub. deb. 9 7/8s, 2013 132,600
140,000 Diamond Cable Communication Co. sr. disc. notes
stepped-coupon zero % (11 3/4s, 12/15/00),
2005 (United Kingdom) (STP) 121,800
215,000 Diamond Cable Communication Co. sr. disc. notes
stepped-coupon zero % (10 3/4s, 2/15/02),
2007 (United Kingdom) (STP) 168,238
115,000 Golden Sky Systems 144A sr. sub. notes 12 3/8s, 2006 125,350
210,000 NTL, Inc. sr. notes Ser. B, 10s, 2007 (United Kingdom) 225,225
100,000 NTL, Inc. 144A sr. notes 11 1/2s, 2008 (United Kingdom) 113,000
30,000 TeleWest Communications PLC 144A sr. notes 11 1/4s,
2008 (United Kingdom) 35,250
130,000 United International Holdings sr. disc. notes stepped-coupon
Ser. B, zero % (10 3/4s, 2/15/03), 2008 (STP) 85,800
--------------
1,525,892
Cellular Communications (1.1%)
- --------------------------------------------------------------------------------------------------------------------------
220,000 Celcaribe S.A. sr. notes zero % (13 1/2s, 3/15/04),
2004 (Colombia) (STP) 169,400
391,000 CellNet Data Systems, Inc. sr. disc. notes stepped-coupon
zero % (14s, 10/1/02), 2007 (STP) 129,030
100,000 Dobson Communications Corp. sr. notes 11 3/4s, 2007 107,000
160,000 McCaw International Ltd sr. disc. notes stepped coupon
zero % (13s, 4/15/02), 2007 (STP) 83,200
325,000 Millicom International Cellular S.A. sr. disc. notes
stepped-coupon zero % (13 1/2s, 6/1/01),
2006 (Luxembourg) (STP) 240,500
190,000 NEXTEL Communications, Inc. 144A sr. notes 12s, 2008 214,225
330,000 NEXTEL Communications, Inc. sr. disc. notes
stepped-coupon zero % (12 1/8s, 4/15/03), 2008 (STP) 139,425
150,000 NEXTEL Communications, Inc. sr. disc. notes
stepped-coupon zero % (10.65s, 9/15/02), 2007 (STP) 102,375
30,000 Price Communications Wireless, Inc. 144A sr. notes
9 1/8s, 2006 31,500
--------------
1,216,655
Chemicals (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
90,000 Acetex Corp. sr. notes 9 3/4s, 2003 (Canada) 87,300
70,000 Geo Specialty Chemicals, Inc. 144A sr. sub. notes 10 1/8s, 2008 69,300
30,000 Huntsman Corp. 144A sr. sub. notes 9 1/2s, 2007 30,300
90,000 Huntsman Corp. 144A sr. sub. notes FRN 9.188s, 2007 82,800
50,000 NL Industries, Inc. sr. notes 11 3/4s, 2003 53,500
100,000 Pioneer Americas Acquisition 144A sr. notes 9 1/4s, 2007 75,000
133,294 Polytama International notes 11 1/4s, 2007 17,328
100,000 Scotts Co. 144A sr. sub. notes 8 5/8s, 2009 103,000
75,000 Sterling Chemicals Holdings sr. disc. notes stepped-coupon
zero % (13 1/2s, 8/15/01), 2008 (STP) 27,750
--------------
546,278
Computer Services (0.6%)
- --------------------------------------------------------------------------------------------------------------------------
35,000 Concentric Network Corp. sr. notes 12 3/4s, 2007 37,800
351,000 Diva Systems Corp. 144A sr. disc. notes stepped-coupon
zero % (12 5/8s, 3/1/03), 2008 (STP) 108,810
220,000 IPC Information Systems sr. disc. notes stepped-coupon
zero % (10 7/8s, 11/1/01), 2008 (STP) 140,800
240,000 Unisys Corp. sr. notes 11 3/4s, 2004 276,000
60,000 Verio, Inc. 144A sr. notes 11 1/4s, 2008 64,800
--------------
628,210
Computer Software (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
55,000 PSINet, Inc. sr. notes Ser. B, 10s, 2005 56,925
120,000 PSINet, Inc. 144A sr. notes 11 1/2s, 2008 134,100
--------------
191,025
Conglomerates (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
120,000 Axia, Inc. company guaranty 10 3/4s, 2008 120,600
170,000 Cathay International Ltd. 144A sr. notes 13s, 2008 (China) 34,000
90,000 Insilco Holding Co. sr. disc. notes stepped-coupon
zero % (14s, 8/15/03), 2008 (STP) 40,500
--------------
195,100
Consumer Durable Goods (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
90,000 Albecca, Inc. 144A sr. sub. notes 10 3/4s, 2008 79,200
20,000 Hedstrom Holdings, Inc. 144A sr. disc. notes stepped-coupon
zero % (12s, 6/1/02), 2009 (STP) 8,000
30,000 Iron Age Corp. company guaranty 9 7/8s, 2008 22,500
300,000 Samsonite Corp. sr. sub. notes 10 3/4s, 2008 228,000
50,000 Sealy Mattress Co. 144A sr. sub. notes Ser. B, 9 7/8s, 2007 48,500
--------------
386,200
Consumer Non Durables (--%)
- --------------------------------------------------------------------------------------------------------------------------
25,000 Amscan Holdings, Inc. sr. sub. notes 9 7/8s, 2007 22,625
Consumer Services (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
256,000 Coinmach Corp. sr. notes 11 3/4s, 2005 281,600
40,000 Protection One, Inc. sr. disc. notes stepped-coupon
zero %, (13 5/8s, 6/30/00), 2005 (STP) 45,600
--------------
327,200
Cosmetics (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
60,000 Chattem, Inc. company guaranty Ser. B, 8 7/8s, 2008 61,200
30,000 French Fragrances, Inc. company guaranty Ser. D, 10 3/8s, 2007 30,000
40,000 French Fragrances, Inc. sr. notes Ser. B, 10 3/8s, 2007 39,600
60,000 Revlon Consumer Products sr. notes 9s, 2006 58,050
250,000 Revlon Consumer Products sr. notes 8 1/8s, 2006 233,750
--------------
422,600
Electric Utilities (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
40,000 Calpine Corp. sr. notes 7 7/8s, 2008 40,600
60,000 Niagara Mohawk Power Corp. sr. notes Ser. F, 7 5/8s, 2005 62,074
170,000 Niagara Mohawk Power Corp. sr. notes Ser. G, 7 3/4s, 2008 182,480
193,946 Northeast Utilities System notes Ser. A, 8.58s, 2006 201,603
350,000 Panda Global Energy Co. company guaranty 12 1/2s,
2004 (China) 147,000
110,000 York Power Funding 144A notes 12s, 2007 (Cayman Islands) 111,100
--------------
744,857
Electronics (0.6%)
- --------------------------------------------------------------------------------------------------------------------------
35,000 Celestica International Ltd. 144A sr. sub. notes 10 1/2s,
2006 (Canada) 38,675
125,000 Details, Inc. sr. discount notes stepped-coupon Ser. B,
zero %, (12 1/2s, 11/15/02), 2007 (STP) 68,125
80,000 DII Group, Inc. (The) sr. sub. notes 8 1/2s, 2007 80,000
85,000 Flextronics International Ltd. sr. sub. notes Ser. B, 8 3/4s, 2007 88,188
50,000 HCC Industries, Inc. company guaranty 10 3/4s, 2007 48,000
180,000 Metromedia Fiber Network, Inc. 144A sr. notes 10s, 2008 188,100
50,000 Moog, Inc. sr. sub. notes Ser. B, 10s, 2006 52,000
20,000 Samsung Electronics 144A company guaranty 9 3/4s, 2003 19,900
105,000 Viasystems, Inc. sr. sub notes 9 3/4s, 2007 98,963
25,000 Wavetek Corp. company guaranty 10 1/8s, 2007 24,000
--------------
705,951
Entertainment (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
150,000 Affinity Group Holdings sr. notes 11s, 2007 150,000
190,000 ITT Corp. notes 6 3/4s, 2005 171,935
190,000 Premier Parks, Inc. sr. notes 9 1/4s, 2006 199,500
80,000 SFX Entertainment, Inc. 144A company guaranty Ser. B,
9 1/8s, 2008 82,000
80,000 SFX Entertainment, Inc. 144A sr. sub. notes 9 1/8s, 2008 80,400
100,000 Silver Cinemas, Inc. sr. sub. notes 10 1/2s, 2005 59,000
--------------
742,835
Environmental Control (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
260,000 Allied Waste Industries, Inc. 144A sr. notes 7 7/8s, 2009 266,500
Financial Services (0.8%)
- --------------------------------------------------------------------------------------------------------------------------
165,000 Aames Financial Corp. sr. notes 9 1/8s, 2003 115,500
250,000 Advanta Corp. med. term notes Ser. B, 7s, 2001 223,883
70,000 Capital One Financial Corp. notes 7 1/8s, 2008 64,775
100,000 Colonial Capital II 144A company guaranty 8.92s, 2027 97,044
110,000 Contifinancial Corp. sr. notes 8 3/8s, 2003 70,400
70,000 Delta Financial Corp. sr. notes 9 1/2s, 2004 56,000
50,000 Dine S.A. de C.V. company guaranty 8 3/4s, 2007 (Mexico) 40,500
415,000 DTI Holdings Inc. sr. disc. notes, stepped-coupon Ser. B,
zero % (12 1/2s, 03/01/03), 2008 (STP) 95,450
75,000 Imperial Credit Capital Trust I 144A company guaranty
10 1/4s, 2002 56,250
45,000 Imperial Credit Industries, Inc. sr. notes 9 7/8s, 2007 34,538
40,000 Nationwide Credit Inc. sr. notes Ser. A, 10 1/4s, 2008 30,800
35,000 PX Escrow Corp. sr. disc. notes stepped-coupon zero %
(9 5/8s, 2/1/02), 2006 (STP) 19,600
--------------
904,740
Food and Beverages (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
120,000 Aurora Foods, Inc. 144A ser. sub. notes Ser. D, 9 7/8s, 2007 130,800
25,000 Aurora Foods, Inc. sr. sub. notes Ser. B, 9 7/8s, 2007 27,250
35,000 Canandaigua Wine Co. sr. sub. notes Ser. C, 8 3/4s, 2003 35,613
20,000 Doane Products Co. 144A sr. sub. notes 9 3/4s, 2007 21,100
30,000 Eagle Family Foods company guaranty Ser. B, 8 3/4s, 2008 27,300
115,000 Fleming Companies, Inc. company guaranty Ser. B, 10 1/2s, 2004 108,100
100,000 Nebco Evans Holding Co. sr. disc. notes stepped-coupon
zero % (12 3/8s, 7/15/02), 2007 (STP) 40,000
160,000 RAB Enterprises, Inc. 144A sr. notes 10 1/2s, 2005 118,400
90,000 Trairc Consumer Products, Inc. 144A sr. sub. notes 10 1/4s, 2009 88,425
--------------
596,988
Gaming (1.8%)
- --------------------------------------------------------------------------------------------------------------------------
160,000 Argosy Gaming Co. company guaranty 13 1/4s, 2004 180,400
110,000 Boyd Gaming Corp. sr. sub. notes 9 1/2s, 2007 112,750
70,000 Casino America, Inc. sr. notes 12 1/2s, 2003 78,575
50,000 Circus Circus Enterprises, Inc. sr. notes 6.45s, 2006 44,503
10,000 Circus Circus Enterprises, Inc. sr. sub. notes 9 1/4s, 2005 10,200
200,000 Coast Hotels & Casinos, Inc. company guaranty Ser. B,
10 7/8s, 2001 205,000
190,000 Fitzgeralds Gaming Corp. company guaranty Ser. B,
12 1/4s, 2004 86,450
70,000 Harrahs Entertainment, Inc. company guaranty 7 7/8s, 2005 70,000
50,000 Harrahs Entertainment, Inc. company guaranty 7 1/2s, 2009 49,703
80,000 Hollywood Park, Inc. 144A sr. sub. notes 9 1/4s, 2007 80,000
350,000 Hollywood Casino Corp. sr. notes 12 3/4s, 2003 378,000
60,000 Isle of Capri Black Hawk LLC 144A 1st mortgage
Ser. B, 13s, 2004 65,100
100,000 Mohegan Tribal Gaming Auth. 144A sr. sub. notes 8 3/4s, 2009 101,500
80,000 Park Place Entertainment sr. sub. notes 7 7/8s, 2005 78,400
175,000 PRT Funding Corp. sr. notes 11 5/8s, 2004 (In default) (NON) 78,750
190,000 Trump A.C. 1st mtge. 11 1/4s, 2006 161,500
210,000 Trump Castle Funding 144A sub. notes 10 1/4s, 2003 212,100
--------------
1,992,931
Health Care (1.3%)
- --------------------------------------------------------------------------------------------------------------------------
250,000 Columbia/HCA Healthcare Corp. notes 7 1/4s, 2008 226,110
30,000 Columbia/HCA Healthcare Corp. deb. 8.36s, 2024 28,323
235,000 Conmed Corp. company guaranty 9s, 2008 235,000
150,000 Global Health Sciences company guaranty 11s, 2008 91,500
110,000 Hudson Respiratory Care, Inc. sr. sub. notes 9 1/8s, 2008 89,100
100,000 Integrated Health Services, Inc. sr. sub. notes Ser. A, 9 1/2s, 2007 75,000
150,000 Integrated Health Services, Inc. sr. sub. notes Ser. A, 9 1/4s, 2008 111,000
160,000 Mariner Post-Acute Network, Inc. sr. sub. notes
stepped-coupon Ser. B, zero % (10 1/2s, 11/1/02), 2007 (STP) 46,400
255,000 Multicare Cos., Inc. sr. sub. notes 9s, 2007 196,350
220,000 Paracelsus Healthcare sr. sub. notes 10s, 2006 187,000
55,000 Paragon Corp. Holdings, Inc. company guaranty
Ser. B, 9 5/8s, 2008 44,000
100,000 Tenet Healthcare Corp. sr. notes 8 5/8s, 2003 101,750
80,000 Tenet Healthcare Corp. 144A sr. sub. notes 8 1/8s, 2008 78,000
--------------
1,509,533
Hospital Management and Medical Services (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
175,000 MedPartners, Inc. sr. notes 7 3/8s, 2006 151,375
Lodging (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
80,000 Epic Resorts LLC company guaranty Ser. B, 13s, 2005 76,000
220,000 HMH Properties, Inc. company guaranty Ser. B, 7 7/8s, 2008 210,100
125,000 Prime Hospitality Corp. sub. notes 9 3/4s, 2007 128,750
--------------
414,850
Medical Supplies and Devices (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
25,000 Leiner Health Products sr. sub. notes 9 5/8s, 2007 25,813
100,000 Mediq, Inc. company guaranty 11s, 2008 90,000
90,000 Mediq, Inc. deb. stepped-coupon zero % (13s, 6/1/03), 2009 (STP) 36,000
--------------
151,813
Metals and Mining (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
80,000 Anker Coal Group, Inc. sr. notes Ser. B, 9 3/4s, 2007 44,000
85,000 Continental Global Group sr. notes Ser. B, 11s, 2007 69,700
10,000 Kaiser Aluminum & Chemical Corp. sr. notes Ser. B,
10 7/8s, 2006 10,050
40,000 Kaiser Aluminum & Chemical Corp. sr. sub. notes
12 3/4s, 2003 38,700
80,000 Lodestar Holdings, Inc. company guaranty 11 1/2s, 2005 66,400
120,000 Weirton Steel Co. sr. notes 11 3/8s, 2004 112,200
500,000 Weirton Steel Corp. sr. notes 10 3/4s, 2005 455,000
--------------
796,050
Motion Picture Distribution (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
110,000 AMC Entertainment, Inc. sr. sub. notes 9 1/2s, 2009 107,800
130,000 Cinemark USA, Inc. sr. sub. notes 9 5/8s, 2008 133,250
115,000 United Artists Theatre sr. sub. notes Ser. B, 9 3/4s, 2008 102,624
--------------
343,674
Nursing Homes (--%)
- --------------------------------------------------------------------------------------------------------------------------
150,000 Sun Healthcare Group, Inc. sr. sub. notes Ser. B, 9 1/2s, 2007 45,000
Oil and Gas (1.7%)
- --------------------------------------------------------------------------------------------------------------------------
205,000 Abraxas Petroleum Corp. 144A company guaranty
11 1/2s, 2004 102,500
90,000 Belco Oil & Gas Corp. company guaranty Ser. B,
10 1/2s, 2006 89,100
145,000 Benton Oil & Gas Co. sr. notes 9 3/8s, 2007 64,888
260,000 Chesapeake Energy Corp. company guaranty Ser. B,
9 5/8s, 2005 169,000
180,000 CMS Energy Corp. sr. notes 6 3/4s, 2004 175,950
80,000 Dailey Petroleum Services Corp. company guaranty
9 1/2s, 2008 40,000
70,000 Eagle Geophysical, Inc. company guaranty Ser. B,
10 3/4s, 2008 42,000
40,000 Flores & Rucks, Inc. sr. sub. notes 9 3/4s, 2006 40,900
70,000 Gothic Production Corp. company guaranty Ser. B,
11 1/8s, 2005 45,500
20,000 Gothic Energy Corp. sr. disc. notes, stepped-coupon
Ser. B, zero % (14 1/8s, 5/1/03), 2006 (STP) 6,000
70,000 Gulf Canada Resources, Ltd. sr. notes 8 3/8s, 2005 (Canada) 69,300
80,000 HS Resources, Inc. sr. sub. notes Ser. B, 9 1/4s, 2006 76,000
270,000 Michael Petroleum Corp. sr. notes Ser. B, 11 1/2s, 2005 191,700
80,000 Northern Offshore 144A company guaranty 10s, 2005 36,800
80,000 Ocean Energy, Inc. company guaranty Ser. B, 8 7/8s, 2007 74,400
100,000 Ocean Energy, Inc. company guaranty Ser. B, 8 3/8s, 2008 92,500
60,000 RAM Energy Inc. sr. notes 11 1/2s, 2008 39,600
60,000 Seven Seas Petroleum sr. notes Ser. B, 12 1/2s, 2005 37,800
160,000 Snyder Oil Corp. sr. sub. notes 8 3/4s, 2007 159,200
10,000 Transamerican Energy sr. disc. notes stepped-coupon
Ser. B, zero % (13s, 6/15/99), 2002 (STP) 3,000
385,000 Transamerican Energy sr. notes Ser. B, 11 1/2s, 2002 115,500
135,000 Transamerican Refining Corp. 144A sr. sub. notes 16s, 2003 13,500
197,000 TransTexas Gas Corp. sr. sub. notes Ser. D, 13 3/4s, 2001 88,650
160,000 Vintage Petroleum 144A sr. sub. notes 9 3/4s, 2009 156,000
--------------
1,929,788
Packaging and Containers (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
120,000 AEP Industries, Inc. sr. sub. notes 9 7/8s, 2007 120,600
20,000 Owens-Illinois, Inc. deb. 7.8s, 2018 19,316
150,000 Owens-Illinois, Inc. sr. notes 7.35s, 2008 148,344
40,000 Radnor Holdings Inc. sr. notes 10s, 2003 41,600
--------------
329,860
Paper and Forest Products (0.6%)
- --------------------------------------------------------------------------------------------------------------------------
215,000 APP Finance II Mauritius Ltd. bonds stepped-coupon 12s,
(16s, 2/15/04), 2049 (Indonesia) (STP) 90,300
10,000 Boise Cascade Co. med. term notes Ser. A, 7.43s, 2005 9,554
80,000 Huntsman Packaging Corp. company guaranty 9 1/8s, 2007 80,200
110,000 Pindo Deli Finance Mauritius Ltd. company guaranty
10 3/4s, 2007 (Indonesia) 56,100
105,000 PT Pabrik Kertas Tjiwi Kimia company guaranty 10s,
2004 (Indonesia) 55,125
30,000 Republic Group, Inc. sr. sub. notes 9 1/2s, 2008 30,375
240,000 Riverwood International Corp. company guaranty
10 7/8s, 2008 218,400
100,000 Riverwood International Corp. company guaranty
10 5/8s, 2007 102,000
--------------
642,054
Pharmaceuticals (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
40,000 Biovail Corp. International 144A sr. notes 10 7/8s, 2005 40,600
115,000 ICN Pharmaceuticals, Inc. 144A sr. notes 9 1/4s, 2005 118,594
--------------
159,194
Publishing (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
125,000 American Media Operation, Inc. sr. sub. notes 11 5/8s, 2004 128,750
180,000 Garden State Newspapers, Inc. sr. sub. notes Ser. B, 8 3/4s, 2009 181,800
60,000 Perry-Judd company guaranty 10 5/8s, 2007 62,700
40,000 Von Hoffman Press, Inc. 144A sr. sub. notes 10 3/8s, 2007 41,400
30,736 Von Hoffman Press, Inc. 144A sr. sub. notes 13 1/2s, 2009 31,965
--------------
446,615
Railroads (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
30,000 TFM S.A. de C.V. company guaranty 10 1/4s, 2007 (Mexico) 25,200
160,000 TFM S.A. de C.V. company guaranty stepped-coupon
zero %, (11 3/4s, 6/15/02), 2009 (Mexico) (STP) 86,400
--------------
111,600
REIT's (Real Estate Investment Trust) (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
190,000 Tanger Properties Ltd. partnership gtd. notes 8 3/4s, 2001 184,300
40,000 Host Marriott L.P. 144A sr. notes 8 3/8s, 2006 39,800
--------------
224,100
Restaurants (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
100,000 FRD Acquisition Co. sr. notes Ser. B, 12 1/2s, 2004 101,000
120,000 Ameriserve Food Co. company guaranty 10 1/8s, 2007 91,200
100,000 Ameriserve Food Co. company guaranty 8 7/8s, 2006 84,000
--------------
276,200
Retail (0.6%)
- --------------------------------------------------------------------------------------------------------------------------
40,000 Home Interiors & Gifts, Inc. company guaranty 10 1/8s, 2008 40,200
250,000 Mothers Work, Inc. sr. notes 12 5/8s, 2005 260,000
75,000 NBTY, Inc. 144A sr. sub. notes 8 5/8s, 2007 72,000
160,000 North Atlantic Trading Co. company guaranty Ser. B, 11s, 2004 161,600
20,000 United Stationer Supply, Inc. sr. sub. notes 8 3/8s, 2008 20,150
110,000 Zale Corp. sr. notes Ser. B, 8 1/2s, 2007 113,025
--------------
666,975
Satellite Services (--%)
- --------------------------------------------------------------------------------------------------------------------------
65,000 Satelites Mexicanos S.A. de C.V. 144A sr. notes 10 1/8s,
2004 (Mexico) 51,350
Semiconductors (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
51,689 Cirent Semiconductor sr. sub. notes 10.22s, 2002 51,689
58,837 Cirent Semiconductor 144A sr. sub. notes 10.14s, 2004 58,837
106,976 Fairchild Semiconductor Corp. 144A sr. sub. notes 11.74s, 2008 96,278
160,000 Zilog, Inc. company guaranty Ser. B, 9 1/2s, 2005 140,800
--------------
347,604
Shipping (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
40,000 International Shipholding Corp. sr. notes 7 3/4s, 2007 38,800
95,000 Johnstown America Industries, Inc. company guaranty
Ser. C, 11 3/4s, 2005 102,125
--------------
140,925
Specialty Consumer Products (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
105,000 Decora Industries, Inc. sec. Ser. B, 11s, 2005 102,375
50,000 Eye Care Centers of America 144A sr. sub. notes 9 1/8s, 2008 47,000
--------------
149,375
Steel (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
250,000 AK Steel Corp. 144A sr. notes 7 7/8s, 2009 246,875
40,000 Armco, Inc. 144A sr. notes 8 7/8s, 2008 41,500
80,000 WHX Corp. sr. notes 10 1/2s, 2005 78,200
--------------
366,575
Supermarkets (--%)
- --------------------------------------------------------------------------------------------------------------------------
40,000 Pathmark Stores sr. sub. notes 9 5/8s, 2003 40,800
Telecommunications (5.8%)
- --------------------------------------------------------------------------------------------------------------------------
80,000 Bestel S.A. de C.V. sr. disc. notes stepped-coupon zero %
(12 3/4s, 5/15/03), 2005 (Mexico) (STP) 45,600
70,000 CapRock Communications Corp. sr. notes Ser. B, 12s, 2008 70,700
100,000 Colt Telecommunications Group PLC sr. disc. notes
stepped-coupon zero %, (12s, 12/15/01), 2006
(United Kingdom) (STP) 85,000
305,000 Covad Communications Group sr. disc. notes
stepped-coupon Ser. B, zero % (13 1/2s, 03/15/03), 2008 (STP) 161,650
90,000 Covad Communications Group Inc. 144A sr. notes 12 1/2s,
2009 86,850
240,000 Econophone, Inc. 144A notes stepped-coupon zero %
(11s, 2/15/03), 2008 (STP) 120,000
65,000 Esprit Telecom Group PLC sr. notes 11 1/2s,
2007 (United Kingdom) 68,731
420,000 Firstworld Communication Corp. sr. disc. notes
stepped-coupon zero % (13, 4/15/03), 2008 (STP) 151,200
200,000 Focal Communications Corp. sr. disc. notes, stepped-coupon
Ser. B, zero % (12 1/8s, 02/15/03), 2008 (STP) 100,000
470,000 Global Crossing Holdings, Ltd. company guaranty 9 5/8s, 2008 493,500
140,000 GST Equipment Funding sr. notes 13 1/4s, 2007 144,900
250,000 GST Telecommunications, Inc. company guaranty
stepped-coupon zero % (13 7/8s, 12/15/00), 2005 (STP) 176,875
220,000 GST Telecommunications, Inc. 144A sr. disc. notes
stepped-coupon zero % (10 1/2s, 5/1/03), 2008 (STP) 104,500
30,000 Hermes Europe Railtel 144A sr. notes 11 1/2s,
2007 (Netherlands) 31,950
70,000 Hyperion Telecommunications Corp., Inc. sr. disc. notes
stepped-coupon Ser. B, zero % (13s, 4/15/01), 2003 (STP) 53,900
130,800 Hyperion Telecommunications Corp., Inc. sr. notes Ser. B,
12 1/4s, 2004 138,321
60,000 Hyperion Telecommunications Inc. 144A sr. sub. notes
12s, 2007 60,150
150,000 ICG Holdings, Inc. sr. disc. notes stepped-coupon zero %
(13 1/2s, 9/15/00), 2005 (Canada) (STP) 130,125
755,000 ICG Services, Inc. sr. disc. notes stepped-coupon zero %
(9 7/8s, 5/1/03), 2008 (STP) 434,125
220,000 Interact Systems, Inc. 144A stepped-coupon zero %
(14s, 8/1/99), 2003 (STP) 7,700
305,000 Intermedia Communications, Inc. sr. disc. notes
stepped-coupon Ser. B, zero % (11 1/4s, 7/15/02), 2007 (STP) 211,975
200,000 Intermedia Communications, Inc. sr. notes Ser. B, 8.6s, 2008 188,500
490,000 International Cabletel, Inc. sr. notes stepped-coupon Ser. B,
zero % (11 1/2s, 2/01/01), 2006 (STP) 431,200
130,000 IXC Communications, Inc. sr. sub. notes 9s, 2008 135,850
500,000 KMC Telecom Holdings, Inc. sr. disc. notes stepped-coupon
zero % (12 1/2s, 2/15/03), 2008 (STP) 257,500
255,000 Knology Holdings, Inc. sr. disc. notes stepped-coupon zero %,
(11 7/8s, 10/15/02), 2007 (STP) 133,875
40,000 L-3 Communications Corp. company guaranty Ser. B, 8s, 2008 40,400
50,000 L-3 Communications Corp. sr. sub. notes 8 1/2s, 2008 51,750
65,000 L-3 Communications Corp. sr. sub. notes Ser. B, 10 3/8s, 2007 71,338
100,000 Logix Communications Enterprises sr. notes 12 1/4s, 2008 90,000
50,000 Metrocall, Inc. 144A sr. sub. notes 11s, 2008 47,000
130,000 MetroNet Communications Corp. sr. disc. stepped-coupon
notes zero % (9.95s, 6/15/03), 2008 (Canada) (STP) 89,050
55,000 MetroNet Communications Corp. sr. disc. notes
stepped-coupon zero % (10 3/4s, 11/1/02),
2007 (Canada) (STP) 40,150
200,000 MetroNet Communications Corp. 144A sr. notes 10 5/8s,
2008 (Canada) 225,000
200,000 Microcell Telecommunications sr. disc. notes stepped-coupon
Ser. B, zero % (14s, 12/1/01), 2006 (Canada) (STP) 159,000
20,000 Netia Holdings B.V. 144A company guaranty stepped-coupon
zero % (11 1/4s, 11/1/01), 2007 (Poland) (STP) 12,200
40,000 Netia Holdings B.V. 144A company guaranty 10 1/4s,
2007 (Poland) 36,000
130,000 NorthEast Optic Network, Inc. sr. notes 12 3/4s, 2008 130,000
160,000 Pathnet, Inc. sr. notes 12 1/4s, 2008 89,600
185,000 Qwest Communications International, Inc. sr. disc. notes
stepped-coupon zero % (9.47s, 10/15/02), 2007 (STP) 146,150
225,000 Rhythms Netconnections, Inc. sr. disc. notes stepped-coupon
Ser. B, zero % (13 1/2s, 5/15/03), 2008 (STP) 112,500
159,000 RSL Communications, Ltd. company guaranty 12 1/4s, 2006 170,528
70,000 RSL Communications PLC 144A sr. notes 10 1/2s,
2008 (United Kingdom) 71,400
70,000 RSL Communications, Ltd. company guaranty 9 1/8s, 2008 65,975
15,000 RSL Communications, Ltd. company guaranty,
stepped-coupon zero % (10 1/8s, 3/1/03), 2008 (STP) 8,550
90,000 Startec Global Communications Corp. sr. notes 12s, 2008 81,450
60,000 Telecommunications Techniques, Inc. company guaranty
9 3/4s, 2008 60,300
45,000 Telehub Communications Corp. company guaranty
stepped-coupon zero % (13 7/8s, 7/31/02), 2005 (STP) 26,550
210,000 Time Warner Telecom Inc. sr. notes 9 3/4s, 2008 224,700
40,000 Versatel Teleco 144A sr. notes 13 1/4s, 2008 40,800
90,000 Versatel Teleco sr. notes 13 1/4s, 2008 91,800
220,000 Viatel, Inc. sr. notes 11 1/4s, 2008 226,600
160,000 WinStar Communications, Inc. sr. sub. notes stepped-coupon
zero % (15s, 3/1/02), 2007 (STP) 132,800
--------------
6,566,268
Telephone Services (1.5%)
- --------------------------------------------------------------------------------------------------------------------------
40,000 Allegiance Telecom, Inc. sr. notes 12 7/8s, 2008 43,000
290,000 Allegiance Telecom, Inc. sr. disc. notes stepped-coupon Ser. B,
zero % (11 3/4s, 2/15/03), 2008 (STP) 168,200
250,000 BTI Telecom Corp. sr. notes 10 1/2s, 2007 200,000
165,000 Call-Net Enterprises, Inc. sr. disc. notes stepped-coupon
zero % (8.94s, 8/15/03), 2008 (Canada) (STP) 99,825
165,000 E. Spire Communications, Inc. sr. disc. notes stepped-coupon
zero % (12 3/4s, 4/1/01), 2006 (STP) 99,000
65,000 Facilicom International sr. notes Ser. B, 10 1/2s, 2008 48,100
140,000 Flag Ltd. 144A sr. notes 8 1/4s, 2008 (Bermuda) 133,000
105,000 Globo Communicacoes 144A company guaranty 10 1/2s,
2006 (Brazil) 57,750
71,000 ITC Deltacom, Inc. sr. notes 11s, 2007 78,100
250,000 Level 3 Communication, Inc. sr. notes 9 1/8s, 2008 243,438
40,000 Long Distance International, Inc. 144A sr. notes 12 1/4s, 2008 28,000
30,000 McLeod USA, Inc. 144A sr. notes 8 1/8s, 2009 29,550
45,000 OnePoint Communications Corp. 144A sr. notes 14 1/2s, 2008 23,625
80,000 Primus Telecommunications Group, Inc. sr. notes Ser. B,
9 7/8s, 2008 75,600
250,000 Primus Telecom Group sr. notes 11 3/4s, 2004 255,000
30,000 RCN Corp. sr. disc. notes stepped-coupon 11 1/8s,
(11 1/8s, 10/15/02), 2007 (STP) 17,475
45,000 Transtel S.A. 144A pass-through certificates 12 1/2s,
2007 (Colombia) 17,100
60,000 US Xchange LLC sr. notes 15s, 2008 63,000
--------------
1,679,763
Textiles (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
245,000 Day International Group, Inc. company guaranty 9 1/2s, 2008 241,325
250,000 Galey & Lord, Inc. company guaranty 9 1/8s, 2008 188,750
40,000 Glenoit Corp. company guaranty 11s, 2007 36,800
70,000 Polymer Group, Inc. company guaranty Ser. B, 9s, 2007 71,400
40,000 Polymer Group, Inc. company guaranty Ser. B, 8 3/4s, 2008 40,400
--------------
578,675
Transportation (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
60,000 Kitty Hawk, Inc. company guaranty 9.95s, 2004 60,000
Wireless Communications (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
105,000 Conecel Holdings 144A notes Ser. A, 14s, 2000 33,600
100,000 Orbital Imaging Corp. sr. notes Ser. B, 11 5/8s, 2005 100,000
55,000 Paging Network Do Brasil sr. notes 13 1/2s, 2005 (Brazil) 23,650
50,000 Telesystem International Wireless Inc. sr. disc. notes
stepped-coupon Ser. C, zero %, (10 1/2s, 11/1/02),
2007 (Canada) (STP) 19,500
--------------
176,750
--------------
Total Corporate Bonds and Notes (cost $42,054,306) $ 38,651,947
CONVERTIBLE PREFERRED STOCKS (11.2%) (a)
NUMBER OF SHARES VALUE
Apparel (0.8%)
- --------------------------------------------------------------------------------------------------------------------------
25,000 Designer Finance $3.00 cv. cum. pfd. $ 890,625
Automobiles (1.3%)
- --------------------------------------------------------------------------------------------------------------------------
25,000 Tower Automotive Capital Trust 144A $3.375 cv. pfd. 1,053,125
10,000 Tower Automotive Capital Trust $3.375 cv. pfd. 445,000
--------------
1,498,125
Broadcasting (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
600 Chancellor Media Corp. $3.00 cv. cum. pfd. 53,400
Engineering (1.5%)
- --------------------------------------------------------------------------------------------------------------------------
60,000 Evi, Inc. $2.50 cum. cv. pfd. 1,710,000
Financial Services (2.6%)
- --------------------------------------------------------------------------------------------------------------------------
33,300 BTI Cap Trust 144A $3.25 cum. cv. pfd. 370,463
30,000 Budget Group Capital TR $3.13 cum. cv. pfd. 1,080,000
30,000 Suiza Capital Trust II $2.75 cv. pfd. 1,072,500
9,000 USX Capital Trust I $3.375 cum. cv. pfd. 398,813
--------------
2,921,776
Information Systems (1.4%)
- --------------------------------------------------------------------------------------------------------------------------
60,000 Vanstar Financial Trust Corp. $3.375 cv. pfd. 1,627,500
Medical Supplies and Devices (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
20,000 Owens & Minor Trust I 144A Ser. A, $2.688 cv. cum. pfd. 831,260
Metals and Mining (0.8%)
- --------------------------------------------------------------------------------------------------------------------------
30,000 Freeport-McMoRan Copper Co., Inc. $1.75 cv. pfd. 480,000
20,000 Titanium Metals Corp. $3.313 cv. pfd. 437,500
--------------
917,500
Oil and Gas (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
590 Chesapeake Energy Corp. $3.50 cum. cv. pfd. 5,605
25,000 Lomack Petroleum, Inc. 144A $2.875 cv. pfd. 337,500
84 XCL Ltd $8.075 cv. pfd. 3,696
--------------
346,801
Recreation (1.2%)
- --------------------------------------------------------------------------------------------------------------------------
30,000 Station Casinos, Inc. $3.50 cv. pfd. 1,293,750
Retail (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
9,000 K mart Financing I $3.875 cum. cv. pfd. 563,625
--------------
Total Convertible Preferred Stocks (cost $14,352,158) $ 12,654,362
PREFERRED STOCKS (2.5%) (a)
NUMBER OF SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------------
285 21st Century Telecom Group 144A $13.75 cum. pfd. (PIK) $ 142,500
2,577 AmeriKing, Inc. $3.25 pfd. (PIK) 68,291
716 Capstar Broadcasting, Inc. 144A $12.00 pfd. (PIK) 85,562
972 Capstar Communications, Inc. Ser. E, $12.625 cum. pfd. (PIK) 116,154
3,115 Chevy Chase Capital Corp. Ser. A, $5.188 pfd. 168,210
1,210 Citadel Broadcasting, Inc. 144A $13.25 cum. pfd. (PIK) 141,570
63 Concentric Network Corp. Ser. B, $13.50 pfd. (PIK) 60,480
3,233 CSC Holdings, Inc. Ser. M, $11.125 cum. pfd. (PIK) 386,344
99 Dobson Communications Corp. 144A $12.25 pfd. (PIK) 89,100
45 E. Spire Communications, Inc. $12.75 pfd (PIK) 15,300
4,700 Fitzgeralds Gaming $3.75 cum. pfd. 9,400
130,000 Fresenius Medical Capital Trust I company guaranty
Ser. D, 9.00% pfd. (Germany) 135,038
140,000 Fresenius Medical Capital Trust II company
guaranty, $7.875 pfd. (Germany) 141,400
175 Intermedia Communication Ser. B, $13.50 pfd. (PIK) 174,125
201 IXC Communications, Inc. $12.50 pfd. (PIK) 218,085
2,364 Lady Luck Gaming Corp. $11.25 pfd. 94,560
867 Nebco Evans Holding Co. 144A $11.25 pfd. (PIK) 36,414
89 NEXTEL Communications, Inc. Ser. D, $13.00 cum. pfd. (PIK) 93,450
10 NEXTEL Communications, Inc. Ser. E, $11.125 pfd. (PIK) 9,500
3,505 Nextlink Communications, Inc. 144A $7.00 cum. pfd. (PIK) 180,508
19 Paxson Communications Corp. $13.25 cum. pfd. (PIK) 155,800
139 Spanish Broadcasting Systems $14.25 cum. pfd. (PIK) 145,950
16,475 TCR Holding Corp. 923
103 Viatel, Inc. Ser. A, $10.00 cv. pfd. (PIK) 12,875
165 WinStar Communications, Inc. 144A $14.25 pfd. (PIK) 132,000
--------------
Total Preferred Stocks (cost $3,110,624) $ 2,813,539
UNITS (0.9%) (a)
NUMBER OF UNITS VALUE
- --------------------------------------------------------------------------------------------------------------------------
250 Australis Media, Ltd. units stepped-coupon zero %,
(15 3/4s, 5/15/03), 2003 (In default) (Australia) (STP) (NON) (PIK) $ 1,875
80 Birch Telecom, Inc. 144A units 14s, 2008 73,200
36 Celcaribe S.A. 144A units zero %, 2004 (Colombia) (NON) 46,504
210 Decrane Aircraft 144A units 12s, 2008 210,000
90 Mediq Inc. units 144A units stepped-coupon zero %
(13s, 6/1/03) 2009 (STP) 1
120 Network Plus Corp. units pfd. 13 1/4s, 2009 122,400
350 Signature Brands USA, Inc. units 13s, 2002 386,750
210 XCL Ltd. units sr. sec. notes 13 1/2s, 2004 172,200
600 XCL Ltd. 144A units cum. pfd. 9.50%, 2006 (PIK) 26,400
--------------
Total Units (cost $1,230,277) $ 1,039,330
COMMON STOCKS (0.5%) (a)
NUMBER OF SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------------
50 AmeriKing, Inc. (NON) $ 2,000
8,120 CellNet Data Systems, Inc. (NON) 51,258
8,847 Fitzgerald Gaming Corp. (NON) 4,424
1,213 Hedstrom Holdings, Inc. 144A (NON) 1,213
1,885 IFINT Diversified Holdings 144A (NON) 3,770
2,391 Lady Luck Gaming Corp. (NON) 13,748
73 Mothers Work, Inc. (NON) 785
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
(acquired 3/15/96, cost $1,015,896) (NON) (RES) 426,233
1,013 RSL Communications, Ltd. Class A (NON) 28,934
3,750 Specialty Foods Acquisition Corp. (NON) 188
--------------
Total Common Stocks (cost $1,220,471) $ 533,129
WARRANTS (0.4%) (a) (NON) EXPIRATION
NUMBER OF WARRANTS DATE VALUE
- --------------------------------------------------------------------------------------------------------------------------
250 21st Century Telecom Group 144A 2/15/10 $ 5,000
230 Allegiance Telecom, Inc. 2/3/08 6,440
15,000 Becker Gaming Corp. 144A 11/15/00 2
80 Bestel SA (Mexico) 5/15/05 80
721 CellNet Data Systems, Inc. 10/1/07 14,420
90 Club Regina, Inc. 144A 12/1/04 90
100 Colt Telecommunications Group PLC 12/31/06 57,500
500 Comunicacion Cellular 144A (Colombia) 11/15/03 30,000
35 Concentric Network Corp. 12/15/07 5,845
1,417 Consorcio Ecuatoriano 144A (Ecuador) 10/1/00 709
305 Covad Communications Group 144A
(acquired various dates, 3/6/98 to 5/27/98,
cost $12,305) (RES) 3/15/08 175,070
195 Diva Systems Corp. 5/15/06 47,190
1,053 Diva Systems Corp. 3/1/08 13,689
2,075 DTI Holdings Inc. 3/1/08 21
80 Epic Resorts 6/15/05 1
95 Esat Holdings, Inc. (Ireland) 2/1/07 6,745
420 Firstworld Communication 4/15/08 4,200
200 Fitzgerald Gaming Co. 144A
(acquired 7/26/96, cost $-) (RES) 3/15/99 100
250 Hyperion Telecommunications 144A 4/15/01 15,335
1,617 ICG Communications 10/15/05 32,340
90 Insilco Holding Co. 8/15/08 0
220 Interact Systems, Inc. 8/1/03 2
250 Intermedia Communications 6/1/00 13,263
105 International Wireless Communications
Holdings 144A 8/15/01 1
175 Iridium World Com 144A 7/15/05 12,250
210 KMC Telecom Holdings, Inc. 4/15/08 525
245 Knology Holdings, Inc. 144A 10/15/07 368
40 Long Distance International, Inc. 144A 4/13/08 100
160 McCaw International Ltd. 4/15/07 640
135 MGC Communications, Inc. 144A 10/1/04 3,672
250 NEXTEL Communications, Inc. 4/25/99 0
45 Onepoint Communications, Inc. 6/1/08 45
100 Orbital Imaging Corp. 144A 3/1/05 4,000
160 Pathnet, Inc. 144A 4/15/08 1,600
900 Rhythms Netcon 144A 5/15/08 18,000
105 Spanish Broadcasting Systems 144A 6/30/99 21,525
90 Startec Global Communications Corp. 5/15/08 90
75 Sterling Chemicals Holdings 8/15/08 1,125
45 Telehub Communications Corp. 7/31/05 45
135 Transamerican Refining Corp. 6/30/03 0
520 UIH Australia/Pacific, Inc. 144A 5/15/06 520
130 Versatel Teleco 144A 5/15/08 5,200
--------------
Total Warrants (cost $243,687) $ 497,748
SHORT-TERM INVESTMENTS (2.5%) (a) (cost $2,800,000)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$ 2,800,000 Interest in $310,913,000 joint repurchase agreement
dated February 26, 1999 with Warburg Securities
due March 1, 1999 with respect to various U.S. Treasury
obligations -- maturity value of $2,801,106 for an
effective yield of 4.74% $ 2,800,000
- --------------------------------------------------------------------------------------------------------------------------
Total Investments (cost $121,848,302) (b) $ 112,274,444
- --------------------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $112,976,189.
(b) The aggregate identified cost on a tax basis is $121,874,777, resulting in gross unrealized appreciation and
depreciation of $3,183,498 and $12,783,831, respectively, or net unrealized depreciation of $9,600,333.
(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 February 28, 1999 was $974,042 or 0.9% 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 Notes (FRN) are the current interest rates shown at February 28, 1999, which
are subject to change based on the terms of the security.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
February 28, 1999 (Unaudited)
<S> <C>
Assets
- -----------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $121,848,302) (Note 1) $112,274,444
- -----------------------------------------------------------------------------------------------
Dividends and interest receivable 1,921,602
- -----------------------------------------------------------------------------------------------
Receivable for securities sold 589,419
- -----------------------------------------------------------------------------------------------
Total assets 114,785,465
Liabilities
- -----------------------------------------------------------------------------------------------
Payable to subcustodian (Note 2) 447,967
- -----------------------------------------------------------------------------------------------
Distributions payable to shareholders 89,324
- -----------------------------------------------------------------------------------------------
Payable for securities purchased 986,394
- -----------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 207,015
- -----------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 35,126
- -----------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 12,734
- -----------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 1,052
- -----------------------------------------------------------------------------------------------
Other accrued expenses 29,664
- -----------------------------------------------------------------------------------------------
Total liabilities 1,809,276
- -----------------------------------------------------------------------------------------------
Net assets $112,976,189
Represented by
- -----------------------------------------------------------------------------------------------
Paid-in capital (Note 1) $127,853,449
- -----------------------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 1,275,751
- -----------------------------------------------------------------------------------------------
Distributions in excess of net realized gain on investments (Note 1) (6,579,153)
- -----------------------------------------------------------------------------------------------
Net unrealized depreciation of investments (9,573,858)
- -----------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $112,976,189
Computation of net asset value
- -----------------------------------------------------------------------------------------------
Net asset value per share ($112,976,189 divided by 13,594,728 shares) $8.31
- -----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Six months ended February 28, 1999 (Unaudited)
<S> <C>
Investment income:
- -----------------------------------------------------------------------------------------------
Interest income: $5,823,044
- -----------------------------------------------------------------------------------------------
Dividends 532,988
- -----------------------------------------------------------------------------------------------
Total investment income 6,356,032
Expenses:
- -----------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 423,712
- -----------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 115,134
- -----------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 6,029
- -----------------------------------------------------------------------------------------------
Administrative services (Note 2) 3,179
- -----------------------------------------------------------------------------------------------
Reports to shareholders 9,539
- -----------------------------------------------------------------------------------------------
Auditing 39,157
- -----------------------------------------------------------------------------------------------
Legal 4,073
- -----------------------------------------------------------------------------------------------
Postage 4,225
- -----------------------------------------------------------------------------------------------
Exchange listing fees 12,382
- -----------------------------------------------------------------------------------------------
Other 5,015
- -----------------------------------------------------------------------------------------------
Total expenses 622,445
- -----------------------------------------------------------------------------------------------
Expense reduction (Note 2) (12,774)
- -----------------------------------------------------------------------------------------------
Net expenses 609,671
- -----------------------------------------------------------------------------------------------
Net investment income 5,746,361
- -----------------------------------------------------------------------------------------------
Net realized loss on investments (Notes 1 and 3) (7,097,111)
- -----------------------------------------------------------------------------------------------
Net unrealized appreciation of investments during the period 2,086,243
- -----------------------------------------------------------------------------------------------
Net loss on investments (5,010,868)
- -----------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $ 735,493
- -----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Six months ended Year ended
February 28 August 31
1999* 1998
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Decrease in net assets
- ---------------------------------------------------------------------------------------------------------------
Operations:
- ---------------------------------------------------------------------------------------------------------------
Net investment income $ 5,746,361 $ 12,156,729
- ---------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments (7,097,111) 4,881,112
- ---------------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation)
of investments 2,086,243 (21,079,788)
- ---------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 735,493 (4,041,947)
- ---------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ---------------------------------------------------------------------------------------------------------------
From net investment income (5,773,113) (11,465,083)
From net realized gain on investments (1,898,802) (5,135,583)
- ---------------------------------------------------------------------------------------------------------------
Increase from capital share transactions 719,465 1,435,825
- ---------------------------------------------------------------------------------------------------------------
Total decrease in net assets (6,216,957) (19,206,788)
Net assets
- ---------------------------------------------------------------------------------------------------------------
Beginning of period 119,193,146 138,399,934
- ---------------------------------------------------------------------------------------------------------------
End of period (including undistributed net investment
income of $1,275,751 and $1,302,503, respectively) $112,976,189 $119,193,146
- ---------------------------------------------------------------------------------------------------------------
Number of fund shares
- ---------------------------------------------------------------------------------------------------------------
Shares outstanding at beginning of period 13,515,511 13,377,770
- ---------------------------------------------------------------------------------------------------------------
Shares issued in connection with reinvestment
of distributions 79,217 137,741
- ---------------------------------------------------------------------------------------------------------------
Shares outstanding at end of period 13,594,728 13,515,511
- ---------------------------------------------------------------------------------------------------------------
* Unaudited
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
- ------------------------------------------------------------------------------------------------------------------------------------
Six months
ended
Per-share February 28
operating performance (Unaudited) Year ended August 31
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $8.82 $10.35 $9.48 $9.49 $9.13 $9.52
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .42 .90 .86 .88 .79 .78
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.36) (1.20) .92 (.04) .42 (.30)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .06 (.30) 1.78 .84 1.21 .48
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.43) (.85) (.85) (.85) (.85) (.87)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized
gains on investments (.14) (.38) (.06) -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.57) (1.23) (.91) (.85) (.85) (.87)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $8.31 $8.82 $10.35 $9.48 $9.49 $9.13
- ------------------------------------------------------------------------------------------------------------------------------------
Market price,
end of period $9.000 $8.937 $10.562 $10.125 $10.000 $9.750
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total return at
market price (%)(a) 6.94* (4.74) 14.29 10.63 12.60 6.84
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $112,976 $119,193 $138,400 $125,864 $124,911 $118,988
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .54* 1.13 1.03 1.06 1.00 1.04
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 4.96* 9.01 8.80 9.19 8.73 8.23
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 55.03* 59.13 58.88 56.82 61.19 52.10
- ------------------------------------------------------------------------------------------------------------------------------------
(a) Total 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. (Note 2).
</TABLE>
Notes to financial statements
February 28, 1999 (Unaudited)
Note 1
Significant accounting policies
Putnam High Income Convertible and Bond Fund (the "fund") is registered
under the Investment Company Act of 1940, as amended, as a diversified,
closed-end management investment company. The fund's primary investment
objective is high current income; its secondary objective is capital
appreciation. The fund invests in high-yielding convertible securities.
The fund seeks to augment current income by investing in non-convertible
securities, lower-rated, or non-rated debt securities, which are believed
not to involve undue risk to income or principal.
The following is a summary of significant accounting policies consistently
followed by the fund in the preparation of its financial statements. The
preparation of financial statements is in conformity with generally
accepted accounting principles and requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities. Actual results could differ from those estimates.
A) Security valuation Investments for which market quotations are readily
available are stated at market value, which is determined using the last
reported sale, or, if no sales are reported -- as in the case of some
securities traded over-the-counter -- the last reported bid price. Market
quotations are not considered to be readily available for 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. Reclassifications are made to the fund's capital accounts to
reflect income and gains available for distribution (or available capital
loss carryovers) under income tax regulations.
Note 2
Management fee, administrative
services and other transactions
Compensation of Putnam Management, for management and investment advisory
services is paid quarterly based on the average net assets of the fund.
Such fee is based on the following annual rates: 0.75% of the first $500
million of average weekly net assets, 0.65% of the next $500 million,
0.60% of the next $500 million, and 0.55% 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.
As part of the subcustodian contract between the subcustodian bank and
PFTC, the subcustodian bank has a lien on the securities of the fund to
the extent permitted by the fund's investment restrictions to cover any
advances made by the subcustodian bank for the settlement of securities
purchased by the fund. At February 28, 1999, the payable to the
subcustodian bank represents the amount due for cash advance for the
settlement of a security purchased.
For the six months ended February 28, 1999, fund expenses were reduced by
$12,774 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 $550 has
been allocated to the fund, and an additional fee for each Trustee's
meeting attended. Trustees who are not interested persons of Putnam
Management and who serve on committees of the Trustees receive additional
fees for attendance at certain committee meetings.
The fund has adopted a Trustee Fee Deferral Plan (the "Deferral Plan")
which allows the Trustees to defer the receipt of all or a portion of
Trustees Fees payable on or after July 1, 1995. The deferred fees remain
in the fund and are invested in certain Putnam funds until distribution in
accordance with the Deferral Plan.
The fund has adopted an unfunded noncontributory defined benefit pension
plan (the "Pension Plan") covering all Trustees of the fund who have
served as Trustee for at least five years. Benefits under the Pension Plan
are equal to 50% of the Trustee's average total retainer and meeting fees
for the three years preceding retirement. Pension expense for the fund is
included in Compensation of Trustees in the Statement of operations.
Accrued pension liability is included in Payable for compensation of
Trustees in the Statement of assets and liabilities.
Note 3
Purchase and sales of securities
During the six months ended February 28, 1999, purchases and sales of
investment securities other than short-term investments aggregated
$61,375,176 and $63,784,289, 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.
Fund information
INVESTMENT MANAGER
Putnam Investment
Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
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
Stephen Oristaglio
Vice President
Thomas V. Reilly
Vice President
Charles G. Pohl
Vice President and Fund Manager
Forrest Fontana
Vice President and Fund Manager
Kevin Rogers
Vice President and Fund Manager
Richard A. Monaghan
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
www.putnaminv.com
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PUTNAM
INVESTMENTS
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