Putnam
High Income
Convertible and
Bond Fund
ANNUAL REPORT ON PERFORMANCE AND OUTLOOK
8-31-00
[SCALE LOGO OMITTED]
FROM THE TRUSTEES
[GRAPHIC OMITTED: PHOTO OF JOHN A. HILL AND GEORGE PUTNAM III]
Dear Shareholder:
It is a pleasure to greet you in our new roles as Chairman of the
Trustees and President of the Funds. As you know, both of us have been
members of the Board of Trustees for a number of years -- years during
which the global securities markets, the mutual fund industry, and
Putnam itself have experienced tremendous growth and change.
As we look to the future, we are certain that the changes will be
breathtaking in their scope. What will not change is the Trustees'
dedication to serving the best interests of our shareholders.
We are pleased to welcome back Charles Pohl as co-portfolio manager of
your fund's management team. Mr. Pohl was portfolio manager of Putnam
High Income Convertible and Bond Fund from December 1992 to May 1999 and
has eight years of experience managing convertible securities.
Respectfully yours,
/S/ JOHN A. HILL /S/ GEORGE PUTNAM, III
John A. Hill George Putnam, III
Chairman of the Trustees President of the Funds
October 18, 2000
REPORT FROM FUND MANAGEMENT
Charles Pohl
Rosemary H. Thomsen
For the fiscal year ended August 31, 2000, Putnam High Income
Convertible and Bond Fund's performance was largely determined by
challenging circumstances in the two sectors in which it invests. Both
high-income convertible bonds and high-yield bonds experienced
difficulty during the 12-month period, reflecting the volatility
experienced throughout the equity and, to a lesser extent, fixed-income
markets during the year. Despite the unfavorable environment, however,
your fund's managers took steps to mitigate the declines and to find
attractive opportunities in undervalued securities.
Total return for 12 months ended 8/31/00
NAV Market price
-----------------------------------------------------------------------
8.79% 0.78%
-----------------------------------------------------------------------
Past performance is not indicative of future results. Performance
information for longer periods begins on page 6.
* CONVERTIBLE MARKET HINDERED BY EQUITY CORRECTION, ESPECIALLY IN TECH
AND TELECOM
The dampening of last spring's dot-com euphoria has had ripple effects
throughout the equity markets. Since the performance of convertible
bonds is linked to these markets -- especially the over-the-counter
market -- this volatility negatively affected the fund's performance.
However, we firmly believe that the technology shakeout helped weed out
many blatant excesses and has led to more realistic valuations.
To a large degree, the performance of the convertible market also was
affected by the technology and telecommunications sectors. The portion
of the convertible market represented by technology and telecom
increased dramatically in 1999. By the end of that year, these two
sectors represented approximately 60% of the convertible market, having
begun 1999 at roughly 30%. As of the end of the fund's fiscal year, the
percentage had fallen to 13.5%.
[GRAPHIC OMITTED: horizontal bar chart PORTFOLIO COMPOSITION]
PORTFOLIO COMPOSITION*
Convertible
securities 60.8%
Corporate
high-yield bonds 33.0%
Other 4.4%
Preferred stocks 1.2%
Common stocks,
including warrants 0.6%
Footnote reads:
*Based on total market value of investments. Composition will vary over time.
* MARKET VOLATILITY PROVIDED ACQUISITION OPPORTUNITIES FOR CONVERTIBLES
We kept the fund positioned to take advantage of the strong potential in
these sectors. During this year's market volatility, we acquired or
added to several existing technology and telecommunications holdings,
taking advantage of compelling valuations. High-income convertibles
dropped to very attractive levels, providing buyers with
higher-than-average yields. In many cases, these companies had not spent
the capital they raised and carried no debt other than the convertible
bonds they had issued. As a result, their credit quality was high, but
they were trading at significant discounts to their pre-correction
valuations.
Some examples in the technology sector include Internet Capital Group,
an Internet company that serves as an incubator and venture capital
provider, and Juniper Networks+, a manufacturer of advanced data routers
for the Internet's infrastructure which was sold before the end of the
fiscal year. While these holdings and others discussed in this report
were viewed favorably at the end of the fiscal period, all holdings are
subject to review and adjustment in accordance with the fund's
investment strategy and may well vary in the future.
In the cable television sector, we added NTL Inc., a broadband network
operator in the United Kingdom and Ireland. The company also owns
television and radio broadcasting systems, which experienced significant
declines in value during the period as a result of weak financial
results and high debt levels. However, we believe in the firm's
long-term prospects for recovery and feel its high level of income
represents solid value.
+This holding was sold before 8/31/00.
* MIXED RESULTS IN HEALTH CARE; STRONGER RETURNS IN ENERGY AND
FINANCIAL SERVICES
In the health care sector the fund owns Omnicare, a pharmacy benefit
manager. Omnicare's convertible bonds have performed poorly amid
lower-than-expected financial results and continued earnings troubles
among health care companies. We still believe in Omnicare's prospects
over the long term, however. The firm has a strong balance sheet, and
its bonds continue to provide a high level of income for the fund.
[GRAPHICS OMITTED: TOP FIVE CONVERTIBLE BOND HOLDINGS
TOP FIVE CORPORATE HIGH-YIELD BOND HOLDINGS]
TOP FIVE CONVERTIBLE BOND HOLDINGS*
Cirrus Logic, Inc.
convertible subordinated notes 6.0%, 2003
Electronics
Arbor Software Corp.
convertible subordinated notes 4.5%, 2005
Software
Omnicare, Inc.
convertible bonds 5.0%, 2007
Health care services
Dura Pharmaceuticals, Inc.
convertible subordinated notes 3.5%, 2002
Pharmaceuticals
Network Associates, Inc.
convertible subordinated debentures,
zero %, 2018
Software
TOP FIVE CORPORATE HIGH-YIELD BOND HOLDINGS*
Midland Funding II Corp.
debentures, series A, 11.75%, 2005
Power producers
American Mobile Satellite Corp.
company guaranty 12.25%, 2008
Telecommunications
Global Crossing Holdings, Ltd.
company guaranty 9.625%, 2008 (Bermuda)
Telecommunications
Premium Standard Farms, Inc.
senior secured notes 11.0%, 2003
Agriculture
RBF Finance Co.
company guaranty 11.375%, 2009
Energy
Footnote reads:
*These combined holdings represent 11.6% of the fund's net assets as of
8/31/00. Portfolio holdings will vary over time.
In the energy sector, oil services companies performed well for the
fund. We took profits on Weatherford International+, a pipeline
manufacturer that has benefited from higher oil prices and projected
strength for oil-related industries. In the financial services industry,
we added Conseco, an insurance and lending firm that had experienced
operational turmoil. Conseco has recently appointed Gary Wendt, the
high-profile former CEO of General Electric Capital Corp., as its new
CEO. The investor response to Mr. Wendt has been positive thus far, and
the fund benefited from a sharp price increase in the stock after he
joined the company.
+This holding was sold before 8/31/00.
* HIGH-YIELD BONDS ALSO EXPERIENCED TURMOIL
During the fund's fiscal year, the Federal Reserve Board's interest-rate
increases, sustained difficulty with defaults, and an overall exodus of
investor assets from the high-yield market created a strong headwind
for the fund's high-yield bond holdings. The Fed's series of six rate
hikes from June 1999 through May 2000 made short-term investments more
attractive than they had been in several years, drawing investors from
the high-yield market. Furthermore, the U.S. Treasury's buyback of
long-term Treasury securities helped spark fervent demand for a
shrinking supply of longer-term Treasury debt, leading to sharp declines
in long-term yields. The combination of rising short-term interest rates
and declining long-term rates created an inverted yield curve, where
yields offered by short-term investments actually became higher than the
yields of long-term bonds. The end result was that significant attention
was drawn away from high-yield debt.
Increasing default rates over the past two years also reduced demand for
high-yield bonds, a situation that had its inception in 1998, when a
series of international crises dried up liquidity in the market while
investors became more risk averse. The risk aversion sentiment has not
changed, and credit for many issuers remains tight. Rising interest
rates also have made it more expensive for companies to borrow money.
Furthermore, very strong issuance in 1996, 1997, and early 1998 nearly
doubled the size of the high-yield market. That type of increased
activity is usually followed by an increase in defaults, as some bad
deals mix in with the good.
* M&A ACTIVITY BRIGHT SPOT FOR HIGH-YIELD BONDS
One of the most positive developments in the high-yield market over the
past year was the large number of mergers and acquisitions.
Consolidation activity can help support the security prices of the
companies that are involved. The high-yield bonds of acquired companies
often benefit from credit upgrades if they have been acquired by firms
with higher credit ratings.
One fund holding that benefited from this trend over the past year was
21st Century Telecommunications, which was purchased by RCN Corp. More
recently, Verizon Communications agreed to acquire a majority stake in
two fund holdings. One was NorthPoint Communications Group, Inc., which
provides digital subscriber lines (DSL), network connections that can
carry voice and data at the same time. The other, OnePoint
Communications Corp., provides cable and other communications services
to large apartment buildings. We took profits on both NorthPoint and
OnePoint toward the end of the fiscal year. Acquisiton announcements
involving two other holdings, paper company Repap New Brunswick and
energy service firm R&B Falcon, also occured recently, to the fund's
benefit.
On the downside, the fund's European long-distance carrier holdings
underperformed dramatically due to price wars. Among these were Viatel
and RSL Communications. ICG Services, a domestic telecommunications
company, underperformed due to earnings disappointments. However, all
three securities remain in the fund, because we still have faith in
their long-term prospects.
* OUTLOOK: IMPROVING PICTURE
We are cautiously optimistic about the outlook for high-income
convertible bonds and high-yield bonds. Issuers of both types of
securities are benefiting from a moderating Fed stance on interest
rates, lower defaults, a significant increase in global issuance, and
signs of increasing demand. While high-yield convertibles will remain
somewhat under the influence of the fickle equity markets, a number of
factors could work in favor of the high-yield market. First, it appears
the Fed is nearing the end of its rate-increase program, if it hasn't
reached it already. This would be a positive development for all
fixed-income markets. Once investors feel more comfortable about
re-entering the high-yield market, they will find that these securities
are offering very attractive yields on both an historical and relative
basis. The one wild card remains the significant amount of pent-up
issuance waiting for conditions to improve before coming to market. If
high-yield bonds do rebound, it is uncertain what effect this added
supply will have on the market. Nevertheless, our outlook remains
positive.
The views expressed here are exclusively those of Putnam Management.
They are not meant as investment advice. Although the described holdings
were viewed favorably as of 8/31/00, 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 8/31/00
Merrill Lynch First Boston
Market All-Convertible High-Yield
NAV price Index* Bond Index
-------------------------------------------------------------------------
1 year 8.79% 0.78% 36.77% 2.08%
-------------------------------------------------------------------------
5 years 43.81 33.87 131.29 37.92
Annual average 7.54 6.01 18.25 6.64
-------------------------------------------------------------------------
10 year 234.25 287.27 394.85 191.76
Annual average 12.83 14.50 17.34 11.30
-------------------------------------------------------------------------
Life of fund
(since 7/9/87)
Annual average 10.17 9.46 -- 9.60
-------------------------------------------------------------------------
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 redeemed may be worth more or less than their
original cost.
*Index began on 12/31/87.
PRICE AND DISTRIBUTION INFORMATION 12 MONTHS ENDED 8/31/00
------------------------------------------------------------------
Distributions from common shares
------------------------------------------------------------------
Number 12
------------------------------------------------------------------
Income $0.852
------------------------------------------------------------------
Total $0.852
------------------------------------------------------------------
Share value: NAV Market price
------------------------------------------------------------------
8/31/99 $8.32 $8.813
------------------------------------------------------------------
8/31/00 8.09 7.938
------------------------------------------------------------------
Current return (end of period)
------------------------------------------------------------------
Current dividend rate 1 10.53% 10.73%
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1 Most recent distribution, annualized and divided by NAV or market
price at end of period.
TOTAL RETURN FOR PERIODS ENDED 9/30/00 (most recent calendar quarter)
NAV Market price
------------------------------------------------------------------
1 year 9.18% 5.81%
------------------------------------------------------------------
5 years 41.88 27.76
Annual average 7.25 5.02
------------------------------------------------------------------
10 years 254.57 311.35
Annual average 13.49 15.19
------------------------------------------------------------------
Life of fund
(since 7/9/87)
Annual average 10.11 9.08
------------------------------------------------------------------
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 and principal value 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 common shares.
Market price is the current trading price of one share of the fund.
Market prices are set by transactions between buyers and sellers on the
New York Stock Exchange.
COMPARATIVE BENCHMARKS
Merrill Lynch All-Convertible Index* is an unmanaged list of convertible
securities commonly used as a measure of performance for the convertible
market.
First Boston High-Yield Bond Index* is a market-weighted index including
publicly traded bonds having a rating below BBB by Standard & Poor's and
Baa by Moody's. The average quality of bonds included in the index may
be lower than the average quality of the bonds in which the fund
customarily invests.
*Securities indexes assume reinvestment of all distributions and interest
payments and do not take into 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.
A GUIDE TO THE FINANCIAL STATEMENTS
These sections of the report, preceded by the Report of independent
accountants, constitute the fund's financial statements.
The fund's portfolio lists all the fund's investments and their values
as of the last day of the reporting period. Holdings are organized by
asset type and industry sector, country, or state to show areas of
concentration and diversification.
Statement of assets and liabilities shows how the fund's net assets and
share price are determined. All investment and noninvestment assets are
added together. Any unpaid expenses and other liabilities are
subtracted from this total. The result is divided by the number of
shares to determine the net asset value per share, which is calculated
separately for each class of shares. (For funds with preferred shares,
the amount subtracted from total assets includes the net assets
allocated to remarketed preferred shares.)
Statement of operations shows the fund's net investment gain or loss
for the reporting period. This is determined by adding up all the fund's
earnings -- from dividends and interest income -- and subtracting its
operating expenses. This statement also lists any net gain or loss the
fund realized on the sales of its holdings and -- for holdings that
remain in the portfolio -- any change in unrealized gains or losses over
the period.
Statement of changes in net assets shows how the fund's net assets were
affected by distributions to shareholders and by changes in the number
of the fund's shares. It lists distributions and their sources (net
investment income or realized capital gains) over the current reporting
period and the most recent fiscal year-end. The distributions listed
here may not match the sources listed in the Statement of operations
because the distributions are determined on a tax basis and may be paid
in a different period from the one in which they were earned.
Financial highlights provide an overview of the fund's investment
results, per-share distributions, expense ratios, net investment income
ratios and portfolio turnover in one summary table, reflecting the five
most recent reporting periods. In a semiannual report, the highlight
table also includes the current reporting period. For open-end funds, a
separate table is provided for each share class.
REPORT OF INDEPENDENT ACCOUNTANTS
For the fiscal year ended August 31, 2000
To the Trustees and Shareholders of
Putnam High Income Convertible and Bond Fund
In our opinion, the accompanying statement of assets and liabilities,
including the fund's portfolio, and the related statements of
operations and of changes in net assets and the financial highlights
present fairly, in all material respects, the financial position of
Putnam High Income Convertible and Bond Fund (the "fund") at August 31,
2000, and the results of its operations, the changes in its net assets
and the financial highlights for the periods indicated, in conformity
with accounting principles generally accepted in the United States of
America. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the
fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of
these financial statements in accordance with auditing standards
generally accepted in the United States of America, which require that
we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe
that our audits, which included confirmation of investments owned at
August 31, 2000 by correspondence with the custodian, provide a
reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
October 10, 2000
<TABLE>
<CAPTION>
THE FUND'S PORTFOLIO
August 31, 2000
CONVERTIBLE BONDS AND NOTES (44.4%) (a)
PRINCIPAL AMOUNT VALUE
<S> <C> <C>
Aerospace and Defense (1.3%)
-------------------------------------------------------------------------------------------------------------------
$ 1,500,000 Kellstrom Industries, Inc. cv. sub. notes 5 1/2s, 2003 $ 667,500
750,000 Orbital Sciences Corp. cv. sub. notes 5s, 2002 439,688
500,000 SPACEHAB, Inc. cv. sub. notes 8s, 2007 359,375
-------------
1,466,563
Automotive (2.3%)
-------------------------------------------------------------------------------------------------------------------
1,500,000 Mascotech, Inc. cv. sub. deb. 4 1/2s, 2003 1,050,000
1,811,000 Tower Automotive, Inc. cv. sub. notes 5s, 2004 1,453,328
-------------
2,503,328
Biotechnology (2.2%)
-------------------------------------------------------------------------------------------------------------------
700,000 Aviron, Inc. cv. sub. notes 5 3/4s, 2005 1,036,875
480,000 Millennium Pharmaceuticals, Inc. cv. sub. notes 5 1/2s, 2007 895,800
455,000 Protein Design Labs, Inc. 144A cv. sub. notes 5 1/2s, 2007 546,000
-------------
2,478,675
Communications Equipment (0.9%)
-------------------------------------------------------------------------------------------------------------------
724,000 Efficient Networks, Inc. 144A cv. sub. notes 5s, 2005 503,180
477,000 Gilat Satellite Networks, Ltd. 144A cv. sub. notes 4 1/4s,
2005 (Israel) 354,173
118,000 Redback Networks, Inc. 144A cv. sub. notes 5s, 2007 123,310
-------------
980,663
Computers (2.9%)
-------------------------------------------------------------------------------------------------------------------
1,210,000 Adaptec, Inc. cv. sub. notes 4 3/4s, 2004 1,043,625
641,000 Aspen Technology, Inc. cv. sub. deb. 5 1/4s, 2005 674,653
1,750,000 Quantum Corp. cv. sub. 7s, 2004 1,377,040
1,500,000 System Software Associates, Inc. cv. sub. notes 7s, 2002
(In default) (NON) 82,500
-------------
3,177,818
Electrical Equipment (1.7%)
-------------------------------------------------------------------------------------------------------------------
818,000 Amkor Technologies, Inc. 144A cv. sub. notes 5s, 2007 720,863
1,250,000 Mark IV Industries, Inc. cv. sub. notes 4 3/4s, 2004 1,217,188
-------------
1,938,051
Electronics (6.8%)
-------------------------------------------------------------------------------------------------------------------
66,000 Benchmark Electronics, Inc. 144A cv. sub. notes 6s, 2006 93,060
2,250,000 Cirrus Logic, Inc. cv. sub. notes 6s, 2003 2,826,540
955,000 Kent Electronics Corp. cv. sub. notes 4 1/2s, 2004 834,431
686,000 Park Electrochemical Corp. cv. sub. notes 5 1/2s, 2006 710,010
1,250,000 S3, Inc. 144A cv. sub. notes 5 3/4s, 2003 1,184,375
2,000,000 World Access, Inc. cv. sub. notes 4 1/2s, 2002 1,465,000
500,000 World Access, Inc. 144A Inc. cv. sub. notes 4 1/2s, 2002 366,250
-------------
7,479,666
Energy (1.4%)
-------------------------------------------------------------------------------------------------------------------
912,000 Parker Drilling Corp. cv. sub. notes 5 1/2s, 2004 751,260
2,000,000 Pride International, Inc. cv. sub. deb. zero %, 2018 850,000
-------------
1,601,260
Health Care Services (1.8%)
-------------------------------------------------------------------------------------------------------------------
256,000 HEALTHSOUTH Corp. cv. sub. deb. 3 1/4s, 2003 199,680
2,500,000 Omnicare, Inc. cv. bonds 5s, 2007 1,806,250
-------------
2,005,930
Homebuilding (0.7%)
-------------------------------------------------------------------------------------------------------------------
1,708,000 Lennar Corp. cv. deb. zero %, 2018 785,680
Metals (0.4%)
-------------------------------------------------------------------------------------------------------------------
500,000 Inco, Ltd. cv. deb. 7 3/4s, 2016 435,625
Paper and Forest Products (1.6%)
-------------------------------------------------------------------------------------------------------------------
2,000,000 Stone Container Corp. cv. sub. deb. 6 3/4s, 2007 1,737,500
Pharmaceuticals (1.6%)
-------------------------------------------------------------------------------------------------------------------
2,000,000 Dura Pharmaceuticals, Inc. cv. sub. notes 3 1/2s, 2002 1,800,000
Photography and Imaging (0.8%)
-------------------------------------------------------------------------------------------------------------------
1,832,000 Xerox Corp. cv. sub. deb. 0.57s, 2018 922,870
Real Estate (1.1%)
-------------------------------------------------------------------------------------------------------------------
1,350,000 Malan Realty Investors cv. sub. notes 9 1/2s, 2004 1,218,375
Retail (3.2%)
-------------------------------------------------------------------------------------------------------------------
362,000 Amazon.com, Inc. cv. sub. deb. 4 3/4s, 2009 252,948
1,500,000 Baker (J.), Inc. cv. deb. 7s, 2002 1,201,875
400,000 Cybernet Internet Services Intl., Inc. 144A cv. sr. disc. notes
stepped-coupon zero %, (13s, 8/15/04), 2009 (STP) 172,000
3,500,000 Rite Aid Corp. cv. sub. notes 5 1/4s, 2002 1,566,250
450,000 Sunglass Hut International, Inc. cv. sub. notes 5 1/4s, 2003 343,688
-------------
3,536,761
Semiconductor (0.5%)
-------------------------------------------------------------------------------------------------------------------
461,000 Conexant Systems, Inc. cv. sub. notes 4s, 2007 337,106
103,000 Credence Systems Corp. cv. sub. notes 5 1/4s, 2002 177,031
75,000 LAM Research Corp. cv. sub. notes 5s, 2002 90,563
-------------
604,700
Software (3.4%)
-------------------------------------------------------------------------------------------------------------------
2,250,000 Arbor Software Corp. cv. sub. notes 4 1/2s, 2005 1,977,188
4,500,000 Network Associates, Inc. cv. sub. deb. zero %, 2018 1,749,375
-------------
3,726,563
Technology Services (2.7%)
-------------------------------------------------------------------------------------------------------------------
1,481,000 Internet Capital Group, Inc. cv. sub. notes 5 1/2s, 2004 1,016,336
1,000,000 Silicon Graphics Corp. cv. sr. notes 5 1/4s, 2004 637,500
1,500,000 Telxon Corp. cv. sub. notes 5 3/4s, 2003 1,365,000
-------------
3,018,836
Telecommunications (1.4%)
-------------------------------------------------------------------------------------------------------------------
1,600,000 Cellstar Corp. cv. sub. notes 5s, 2002 622,000
1,000,000 Rogers Communications cv. deb. 2s, 2005 896,250
-------------
1,518,250
Tobacco (1.2%)
-------------------------------------------------------------------------------------------------------------------
2,300,000 Standard Commercial Corp. cv. sub. deb. 7 1/4s, 2007 1,365,625
Transaction Processing (0.9%)
-------------------------------------------------------------------------------------------------------------------
1,129,000 National Data Corp. cv. sub. notes 5s, 2003 966,706
Waste Management (3.6%)
-------------------------------------------------------------------------------------------------------------------
1,914,000 OHM Corp. cv. sub. deb. 8s, 2006 1,693,890
1,250,000 Waste Management, Inc. cv. sub. notes 4s, 2002 1,165,625
1,300,000 Weston (Roy F.), Inc. cv. deb. 7s, 2002 1,131,000
-------------
3,990,515
-------------
Total Convertible Bonds and Notes (cost $51,370,354) $ 49,259,960
<CAPTION>
CORPORATE BONDS AND NOTES (32.8%) (a)
PRINCIPAL AMOUNT VALUE
<S> <C> <C>
Advertising and Marketing Services (0.3%)
-------------------------------------------------------------------------------------------------------------------
$ 90,000 Adams Outdoor Advertising sr. notes 10 3/4s, 2006 $ 92,700
125,939 Interact Operating Co. notes 14s, 2003 37,782
45,000 Lamar Media Corp. company guaranty 9 5/8s, 2006 46,013
100,000 Lamar Media Corp. sr. sub. notes 9 1/4s, 2007 100,250
55,000 Lamar Media Corp. company guaranty 8 5/8s, 2007 54,038
-------------
330,783
Aerospace and Defense (0.7%)
-------------------------------------------------------------------------------------------------------------------
50,000 Argo-Tech Corp. company guaranty 8 5/8s, 2007 40,000
150,000 Argo-Tech Corp. company guaranty Ser. D, 8 5/8s, 2007 118,500
120,000 BE Aerospace, Inc. sr. sub. notes 9 1/2s, 2008 116,400
40,000 BE Aerospace, Inc. sr. sub. notes Ser. B, 8s, 2008 35,900
60,000 Decrane Aircraft Holdings company guaranty Ser. B, 12s, 2008 54,000
135,000 L-3 Communications Corp. sr. sub. notes Ser. B, 10 3/8s, 2007 137,700
50,000 L-3 Communications Corp. sr. sub. notes 8 1/2s, 2008 46,500
40,000 L-3 Communications Corp. company guaranty Ser. B, 8s, 2008 36,000
120,000 Moog, Inc. sr. sub. notes Ser. B, 10s, 2006 119,700
30,000 Sequa Corp. med. term notes 10s, 2001 30,219
-------------
734,919
Agriculture (0.4%)
-------------------------------------------------------------------------------------------------------------------
432,037 Premium Standard Farms, Inc. sr. sec. notes 11s, 2003 (PIK) 393,154
Airlines (0.3%)
-------------------------------------------------------------------------------------------------------------------
100,000 Airbus Industries 144A equipment trust 12.266s, 2020 107,259
80,000 Calair LLC 144A company guaranty 8 1/8s, 2008 74,400
30,000 Continental Airlines, Inc. notes 8s, 2005 28,273
70,000 Northwest Airlines, Inc. company guaranty 8.52s, 2004 67,276
50,000 Northwest Airlines, Inc. company guaranty 7 5/8s, 2005 46,478
30,000 US Air, Inc. pass-through certificates Ser. 93A3, 10 3/8s, 2013 27,150
-------------
350,836
Automotive (0.9%)
-------------------------------------------------------------------------------------------------------------------
142,000 Aftermarket Technology Corp. sr. sub. notes 12s, 2004 139,870
80,000 Dura Operating Corp. company guaranty Ser. B, 9s, 2009 73,100
60,000 Exide Corp. sr. notes 10s, 2005 49,800
60,000 Federal Mogul Corp. notes 7 7/8s, 2010 43,800
190,000 Federal Mogul Corp. notes 7 3/4s, 2006 143,925
90,000 Federal Mogul Corp. notes 7 1/2s, 2009 65,700
90,000 Hayes Lemmerz International, Inc. company guaranty Ser. B,
8 1/4s, 2008 78,750
50,000 Hayes Wheels International, Inc. company guaranty Ser. B,
9 1/8s, 2007 45,750
40,000 Lear Corp. company guaranty Ser. B, 7.96s, 2005 38,459
170,000 Oxford Automotive, Inc. company guaranty Ser. D,
10 1/8s, 2007 153,000
180,000 Talon Automotive Group sr. sub. notes Ser. B, 9 5/8s, 2008 72,000
80,000 Tenneco, Inc. company guaranty Ser. B, 11 5/8s, 2009 (Malaysia) 69,600
-------------
973,754
Banking (0.9%)
-------------------------------------------------------------------------------------------------------------------
30,000 Bank United Corp. sub. notes 8 7/8s, 2007 29,758
140,000 Chevy Chase Savings Bank, Inc. sub. deb. 9 1/4s, 2005 129,500
90,000 Colonial Capital II 144A company guaranty 8.92s, 2027 84,291
150,000 GS Escrow Corp. sr. notes 7 1/8s, 2005 137,558
135,000 Hanvit Bank 144A sub. notes 11 3/4s, 2010 (Korea) 135,338
100,000 Local Financial Corp. sr. notes 11s, 2004 100,000
75,000 Provident Capital Trust company guaranty 8.6s, 2026 69,932
45,000 Riggs Capital Trust 144A bonds 8 5/8s, 2026 36,531
80,000 Sovereign Bancorp, Inc. sr. notes 10 1/2s, 2006 81,400
65,000 Sovereign Capital Trust company guaranty 9s, 2027 48,758
100,000 Superior Financial 144A sr. notes 8.65s, 2003 96,257
55,000 Webster Capital Trust I 144A bonds 9.36s, 2027 47,527
-------------
996,850
Beverage (0.2%)
-------------------------------------------------------------------------------------------------------------------
214,000 Triarc Consumer Products, Inc. company guaranty
stepped-coupon zero % (10 1/4s, 2/15/04), 2009 (STP) 208,115
Broadcasting (2.0%)
-------------------------------------------------------------------------------------------------------------------
170,000 Acme Television sr. disc. notes stepped-coupon zero %
(10 7/8s, 9/30/00), 2004 (STP) 161,500
170,000 Allbritton Communications Co. sr. sub. notes Ser. B,
8 7/8s, 2008 158,950
103,300 AMFM Operating, Inc. deb. 12 5/8s, 2006 118,278
2,044 Australis Media, Ltd. sr. disc. notes 15 3/4s, 2003 (In default)
(Australia) (NON) (PIK) 1
250,000 Benedek Communications Corp. sr. disc. notes stepped-coupon
zero % (13 1/4s, 5/15/01), 2006 (STP) 207,500
75,800 Capstar Broadcasting sub. deb. 12s, 2009 (PIK) 87,170
75,000 Central European Media Enterprises, Ltd. sr. notes 9 3/8s, 2004
(Bermuda) 29,250
90,220 Citadel Broadcasting, Inc. sr. sub. notes 10 1/4s, 2007 92,927
251,000 Diva Systems Corp. sr. disc. notes stepped-coupon Ser. B,
zero % (12 5/8s, 3/1/03), 2008 (STP) 112,950
330,000 Echostar DBS Corp. sr. notes 9 3/8s, 2009 325,875
60,000 Fox Family Worldwide, Inc. sr. disc. notes stepped-coupon
zero % (10 1/4s, 11/1/02), 2007 (STP) 43,350
75,000 Fox Family Worldwide, Inc. sr. notes 9 1/4s, 2007 71,813
125,000 Golden Sky DBS, Inc. sr. disc. notes, stepped-coupon Ser. B,
zero % (13 1/2s, 3/1/04), 2007 (STP) 89,375
75,000 Golden Sky Systems company guaranty Ser. B, 12 3/8s, 2006 83,250
80,000 Granite Broadcasting Corp. sr. sub. notes 8 7/8s, 2008 62,000
135,000 Knology Holdings, Inc. sr. disc. notes stepped-coupon zero %
(11 7/8s, 10/15/02), 2007 (STP) 70,200
65,000 LIN Television Corp. company guaranty 8 3/8s, 2008 61,588
45,000 Onepoint Communications, Inc. company guaranty Ser. B,
14 1/2s, 2008 41,400
30,000 Pegasus Communications Corp. sr. notes Ser. B, 9 3/4s, 2006 29,850
40,000 Pegasus Media & Communications notes Ser. B, 12 1/2s, 2005 41,600
50,000 Radio One, Inc. company guaranty stepped-coupon Ser. B,
12s, 2004 52,500
70,000 RCN Corp. sr. notes 10 1/8s, 2010 56,350
100,000 Spanish Broadcasting System, Inc. sr. sub notes 9 5/8s, 2009 99,250
85,000 TV Azteca S.A. de C.V. sr. notes 10 1/2s, 2007 (Mexico) 80,538
-------------
2,177,465
Building Materials (0.3%)
-------------------------------------------------------------------------------------------------------------------
55,000 American Architectural Products Corp. company guaranty
11 3/4s, 2007 (In default) (NON) 13,750
30,000 Atrium Companies, Inc. company guaranty Ser. B, 10 1/2s, 2009 27,300
90,000 Building Materials Corp. company guaranty 8s, 2008 66,150
140,000 Dayton Superior Corp. 144A sr. sub. notes 13s, 2009 137,200
60,000 NCI Building Systems, Inc. sr. sub. notes Ser. B, 9 1/4s, 2009 56,100
-------------
300,500
Cable Television (1.3%)
-------------------------------------------------------------------------------------------------------------------
110,000 Adelphia Communications Corp. sr. notes Ser. B, 9 7/8s, 2007 104,775
10,000 Adelphia Communications Corp. sr. notes 7 7/8s, 2009 8,475
120,000 Century Communications Corp. sr. notes 8 7/8s, 2007 110,700
420,000 Charter Communications Holdings LLC sr. notes 8 5/8s, 2009 384,300
90,000 Classic Cable, Inc. company guaranty 10 1/2s, 2010 74,700
120,000 CSC Holdings, Inc. sr. sub. deb. 9 7/8s, 2013 123,000
215,000 Diamond Cable Communication Co. sr. disc. notes
stepped-coupon zero % (10 3/4s, 2/15/02), 2007
(United Kingdom) (STP) 165,819
200,000 NTL Communications Corp. sr. notes Ser. B, 11 1/2s, 2008 203,000
80,000 TeleWest Communications PLC deb. stepped-coupon zero %
(11s, 10/1/00), 2007 (United Kingdom) (STP) 76,700
90,000 TeleWest Communications PLC 144A sr. disc. notes
stepped-coupon zero % (11 3/8s, 2/1/05), 2010
(United Kingdom) (STP) 47,700
170,000 TeleWest Communications PLC 144A sr. notes 9 7/8s, 2010
(United Kingdom) 161,500
-------------
1,460,669
Chemicals (1.3%)
-------------------------------------------------------------------------------------------------------------------
100,000 Arco Chemical Co. deb. 9.8s, 2020 97,000
70,000 Geo Specialty Chemicals, Inc. sr. sub. notes 10 1/8s, 2008 63,000
100,000 Huntsman Corp. 144A sr. sub. notes 9 1/2s, 2007 90,500
90,000 Huntsman Corp. 144A sr. sub. notes FRN 9.188s, 2007 78,300
300,000 Huntsman ICI Chemicals, Inc. company guaranty 10 1/8s, 2009 304,500
40,000 ISP Holdings, Inc. sr. notes Ser. B, 9 3/4s, 2002 38,800
20,000 ISP Holdings, Inc. sr. notes Ser. B, 9s, 2003 19,200
130,000 Lyondell Petrochemical Co. sr. sub. notes 10 7/8s, 2009 132,275
230,000 Lyondell Petrochemical Co. sec. notes Ser. B, 9 7/8s, 2007 233,163
200,000 PCI Chemicals & Pharmaceuticals company guaranty
9 1/4s, 2007 (India) 106,000
40,000 Pioneer Americas Acquisition 144A sr. notes 9 1/4s, 2007 24,000
70,000 Polymer Group, Inc. company guaranty Ser. B, 9s, 2007 56,350
40,000 Polymer Group, Inc. company guaranty Ser. B, 8 3/4s, 2008 31,500
149,942 Polytama International notes 11 1/4s, 2007 (Indonesia)
(In default) (NON) 7,497
80,000 Royster-Clark, Inc. 1st mtge. 10 1/4s, 2009 62,400
75,000 Sterling Chemicals Holdings sr. disc. notes stepped-coupon
zero % (13 1/2s, 8/15/01), 2008 (STP) 31,875
95,000 Trikem S.A. 144A bonds 10 5/8s, 2007 (Brazil) 76,238
-------------
1,452,598
Coal (--%)
-------------------------------------------------------------------------------------------------------------------
120,000 Lodestar Holdings, Inc. company guaranty 11 1/2s, 2005 18,000
Commercial and Consumer Services (0.3%)
-------------------------------------------------------------------------------------------------------------------
180,000 Coinmach Corp. sr. notes Ser. D, 11 3/4s, 2005 180,900
190,000 GS Superhighway Holdings sr. notes 9 7/8s, 2004 (China) 138,700
-------------
319,600
Communications Equipment (--%)
-------------------------------------------------------------------------------------------------------------------
40,000 USA Mobile Communication, Inc. sr. notes 14s, 2004 32,400
30,000 USA Mobile Communication, Inc. sr. notes 9 1/2s, 2004 21,900
-------------
54,300
Computers (0.2%)
-------------------------------------------------------------------------------------------------------------------
240,000 Unisys Corp. sr. notes 11 3/4s, 2004 252,600
Conglomerates (--%)
-------------------------------------------------------------------------------------------------------------------
90,000 Insilco Holding Co. sr. disc. notes stepped-coupon zero %
(14s, 8/15/03), 2008 (STP) 49,500
Construction (0.1%)
-------------------------------------------------------------------------------------------------------------------
110,000 Morrison Knudsen Corp. 144A sr. notes 11s, 2010 111,650
30,000 Republic Group, Inc. sr. sub. notes 9 1/2s, 2008 30,000
-------------
141,650
Consumer (0.3%)
-------------------------------------------------------------------------------------------------------------------
140,000 Home Interiors & Gifts, Inc. company guaranty 10 1/8s, 2008 42,000
300,000 Samsonite Corp. sr. sub. notes 10 3/4s, 2008 245,250
-------------
287,250
Consumer Finance (0.1%)
-------------------------------------------------------------------------------------------------------------------
120,000 Contifinancial Corp. sr. notes 8 3/8s, 2003 (In default) (NON) 15,000
110,000 Contifinancial Corp. sr. notes 8 1/8s, 2008 (In default) (NON) 13,750
90,000 Contifinancial Corp. sr. notes 7 1/2s, 2002 (In default) (NON) 9,900
90,000 Outsourcing Solutions, Inc. sr. sub. notes Ser. B, 11s, 2006 76,500
-------------
115,150
Consumer Goods (0.4%)
-------------------------------------------------------------------------------------------------------------------
30,000 French Fragrances, Inc. company guaranty Ser. D, 10 3/8s, 2007 29,100
40,000 French Fragrances, Inc. sr. notes Ser. B, 10 3/8s, 2007 38,400
215,000 NBTY, Inc. 144A sr. sub. notes 8 5/8s, 2007 183,825
250,000 Revlon Consumer Products sr. notes 8 1/8s, 2006 177,500
-------------
428,825
Consumer Services (0.1%)
-------------------------------------------------------------------------------------------------------------------
110,000 Iron Mountain, Inc. company guaranty 8 3/4s, 2009 103,675
Containers (0.5%)
-------------------------------------------------------------------------------------------------------------------
190,000 AEP Industries, Inc. sr. sub. notes 9 7/8s, 2007 161,500
20,000 Owens-Illinois, Inc. deb. 7.8s, 2018 17,051
150,000 Owens-Illinois, Inc. sr. notes 7.35s, 2008 127,505
40,000 Radnor Holdings, Inc. sr. notes 10s, 2003 35,600
180,000 Tekni-Plex, Inc. 144A sr. sub. notes 12 3/4s, 2010 181,800
-------------
523,456
Distribution (0.1%)
-------------------------------------------------------------------------------------------------------------------
160,000 RAB Enterprises, Inc. company guaranty 10 1/2s, 2005 113,600
Electric Utilities (0.6%)
-------------------------------------------------------------------------------------------------------------------
90,000 AES China Generating Co. sr. notes 10 1/8s, 2006 (China) 66,600
40,000 CMS Energy Corp. sr. notes 7 1/2s, 2009 36,100
220,000 CMS Energy Corp. sr. notes Ser. B, 6 3/4s, 2004 204,600
175,541 Northeast Utilities System notes Ser. A, 8.58s, 2006 177,769
350,000 Panda Global Energy Co. company guaranty 12 1/2s,
2004 (China) 157,500
-------------
642,569
Energy (0.6%)
-------------------------------------------------------------------------------------------------------------------
90,000 Leviathan Gas Corp. company guaranty Ser. B, 10 3/8s, 2009 94,500
90,000 Parker Drilling Corp. company guaranty Ser. D, 9 3/4s, 2006 87,750
90,000 R&B Falcon Corp. sr. notes 12 1/4s, 2006 106,200
340,000 RBF Finance Co. company guaranty 11 3/8s, 2009 392,700
-------------
681,150
Entertainment (0.9%)
-------------------------------------------------------------------------------------------------------------------
330,000 AMC Entertainment, Inc. sr. sub. notes 9 1/2s, 2009 118,800
170,000 Autotote Corp. 144A company guaranty 12 1/2s, 2010 170,000
70,000 Cinemark USA, Inc. sr. sub. notes 8 1/2s, 2008 (Mexico) 22,400
190,000 Premier Parks, Inc. sr. notes 9 1/4s, 2006 177,650
150,000 SFX Entertainment, Inc. company guaranty 9 1/8s, 2008 156,938
80,000 SFX Entertainment, Inc. 144A company guaranty Ser. B,
9 1/8s, 2008 82,400
100,000 Silver Cinemas, Inc. sr. sub. notes 10 1/2s, 2005 (In default) (NON) 9,000
115,000 United Artists Theatre sr. sub. notes 9 3/4s, 2008 (In default) (NON) 2,300
320,000 United Pan-Europe N.V. sr. disc. notes stepped-coupon Ser. B,
zero % (13 3/4s, 2/01/05), 2010 (Netherlands) (STP) 144,400
280,000 United Pan-Europe N.V. sr. disc. notes stepped coupon zero %
(12 1/2s, 8/1/04), 2009 (Netherlands) (STP) 128,800
-------------
1,012,688
Financial (0.6%)
-------------------------------------------------------------------------------------------------------------------
45,000 Aames Financial Corp. sr. notes 9 1/8s, 2003 20,025
250,000 Advanta Corp. med. term notes Ser. B, 7s, 2001 236,903
50,000 AMRESCO, Inc. sr. sub. notes Ser. 98-A, 9 7/8s, 2005 19,500
110,000 Conseco Finance Trust III, Inc. bonds 8.796s, 2027 39,600
80,000 Delta Financial Corp. sr. notes 9 1/2s, 2004 36,000
75,000 Imperial Credit Capital Trust I 144A company guaranty
10 1/4s, 2002 59,250
45,000 Imperial Credit Industries, Inc. sr. notes 9 7/8s, 2007 31,950
70,000 Nationwide Credit, Inc. sr. notes Ser. A, 10 1/4s, 2008 49,000
25,000 Ocwen Capital Trust I company guaranty 10 7/8s, 2027 12,750
80,000 Ocwen Federal Bank FSB sub. deb. 12s, 2005 74,200
50,000 Ocwen Financial Corp. notes 11 7/8s, 2003 45,375
100,000 Resource America, Inc. 144A sr. notes 12s, 2004 89,500
-------------
714,053
Food (0.2%)
-------------------------------------------------------------------------------------------------------------------
120,000 Aurora Foods, Inc. 144A sr. sub. notes Ser. D, 9 7/8s, 2007 94,200
80,000 Eagle Family Foods company guaranty Ser. B, 8 3/4s, 2008 42,800
135,000 Vlasic Foods Intl., Inc. sr. sub notes Ser. B, 10 1/4s, 2009 67,500
-------------
204,500
Gaming and Lottery (1.5%)
-------------------------------------------------------------------------------------------------------------------
40,000 Ameristar Casinos, Inc. company guaranty Ser. B, 10 1/2s, 2004 40,200
50,000 Boyd Gaming Corp. sr. sub. notes 9 1/2s, 2007 48,000
190,000 Fitzgeralds Gaming Corp. company guaranty Ser. B, 12 1/4s,
2004 (In default) (NON) 104,500
50,000 Harrahs Entertainment, Inc. company guaranty 7 1/2s, 2009 47,246
200,000 Hollywood Casino Corp. company guaranty 11 1/4s, 2007 207,500
60,000 Hollywood Park, Inc. company guaranty Ser. B, 9 1/4s, 2007 61,500
60,000 Isle of Capri Black Hawk LLC 144A 1st mortgage Ser. B,
13s, 2004 65,400
130,000 Isle of Capri Black Hawk LLC company guaranty 8 3/4s, 2009 121,550
30,000 MGM Grand, Inc. company guaranty 9 3/4s, 2007 31,425
110,000 Mohegan Tribal Gaming, Auth. sr. sub. notes 8 3/4s, 2009 108,075
50,000 Mohegan Tribal Gaming, Auth. sr. notes 8 1/8s, 2006 48,750
60,000 Riviera Black Hawk, Inc. 1st mtge. 13s, 2005 60,000
300,000 Trump A.C. 1st mtge. 11 1/4s, 2006 202,500
340,000 Trump Castle Funding 144A sub. notes 10 1/4s, 2003 340,850
130,000 Venetian Casino, Inc. company guaranty 12 1/4s, 2004 132,275
-------------
1,619,771
Health Care (0.9%)
-------------------------------------------------------------------------------------------------------------------
40,000 Bio-Rad Labs Corp. sr. sub. notes 11 5/8s, 2007 41,950
30,000 Columbia/HCA Healthcare Corp. deb. 8.36s, 2024 27,600
100,000 Columbia/HCA Healthcare Corp. notes 7 1/4s, 2008 91,125
100,000 Columbia/HCA Healthcare Corp. notes 6.91s, 2005 93,000
85,000 Conmed Corp. company guaranty 9s, 2008 71,400
210,000 HCA -The Healthcare Co. notes 8 3/4s, 2010 210,263
110,000 Hudson Respiratory Care, Inc. sr. sub. notes 9 1/8s, 2008 77,550
80,000 Mediq, Inc. company guaranty 11s, 2008 (In default) (NON) 2,400
90,000 Mediq, Inc. deb. stepped-coupon zero % (13s, 6/1/03), 2009 (STP) 9
140,000 Paracelsus Healthcare sr. sub. notes 10s, 2006 (In default) (NON) 43,400
100,000 Tenet Healthcare Corp. sr. notes 8 5/8s, 2003 100,000
80,000 Tenet Healthcare Corp. sr. notes Ser. B, 8 1/8s, 2008 76,100
170,000 Triad Hospitals Holdings company guaranty Ser. B, 11s, 2009 177,650
-------------
1,012,447
Homebuilding (0.3%)
-------------------------------------------------------------------------------------------------------------------
70,000 D.R. Horton, Inc. company guaranty 8s, 2009 64,400
10,000 Del Webb Corp. sr. sub. deb. 10 1/4s, 2010 9,350
50,000 Del Webb Corp. sr. sub. deb. 9 3/8s, 2009 42,500
70,000 Lennar Corp. 144A sr. notes 9.95s, 2010 71,750
90,000 Ryland Group, Inc. sr. notes 9 3/4s, 2010 90,900
30,000 Toll Corp. company guaranty 8 1/8s, 2009 28,313
-------------
307,213
Household Furniture & Appliances (0.1%)
-------------------------------------------------------------------------------------------------------------------
90,000 Albecca, Inc. company guaranty 10 3/4s, 2008 80,100
50,000 Sealy Mattress Co. sr. sub. notes Ser. B, 9 7/8s, 2007 48,500
-------------
128,600
Lodging and Tourism (0.4%)
-------------------------------------------------------------------------------------------------------------------
80,000 Epic Resorts LLC company guaranty Ser. B, 13s, 2005 35,200
220,000 HMH Properties, Inc. company guaranty Ser. B, 7 7/8s, 2008 206,250
40,000 Host Marriott L.P. sr. notes Ser. E, 8 3/8s, 2006 38,200
190,000 ITT Corp. notes 6 3/4s, 2005 176,124
-------------
455,774
Manufacturing (1.0%)
-------------------------------------------------------------------------------------------------------------------
150,000 Blount, Inc. company guaranty 13s, 2009 154,500
35,000 Celestica International, Ltd. 144A sr. sub. notes 10 1/2s, 2006
(Canada) 36,400
85,000 Continental Global Group sr. notes Ser. B, 11s, 2007 28,900
245,000 Day International Group, Inc. company guaranty 9 1/2s, 2008 208,250
150,000 Flextronics International Ltd. 144A sr. sub. notes 9 7/8s, 2010 155,625
105,000 Flextronics International, Ltd. sr. sub. notes Ser. B, 8 3/4s, 2007 103,163
140,000 Flowserve Corp. 144A company guaranty 12 1/4s, 2010 141,680
330,000 Grove Holdings LLC deb. stepped-coupon zero %
(11 5/8s, 5/1/03), 2009 (STP) 16,500
180,000 Motors and Gears, Inc. sr. notes Ser. D, 10 3/4s, 2006 176,400
50,000 Roller Bearing Co. company guaranty Ser. B, 9 5/8s, 2007 46,000
-------------
1,067,418
Medical Services (--%)
-------------------------------------------------------------------------------------------------------------------
90,000 Integrated Health Services, Inc. sr. sub. notes Ser. A,
9 1/2s, 2007 (In default) (NON) 1,800
60,000 Integrated Health Services, Inc. sr. sub. notes Ser. A,
9 1/4s, 2008 (In default) (NON) 1,200
160,000 Mariner Post-Acute Network, Inc. sr. sub. notes
stepped-coupon Ser. B, zero % (10 1/2s, 11/1/02), 2007
(In default) (STP) (NON) 1,000
255,000 Multicare Cos., Inc. sr. sub. notes 9s, 2007 (In default) (NON) 13,706
150,000 Sun Healthcare Group, Inc. sr. sub. notes Ser. B, 9 1/2s, 2007
(In default) (NON) 3,000
60,000 Sun Healthcare Group, Inc. 144A sr. sub. notes 9 3/8s, 2008
(In default) (NON) 1,200
-------------
21,906
Medical Technology (0.1%)
-------------------------------------------------------------------------------------------------------------------
70,000 Hanger Orthopedic Group, Inc. sr. sub. notes 11 1/4s, 2009 61,250
Metals (0.8%)
-------------------------------------------------------------------------------------------------------------------
140,000 AK Steel Corp. company guaranty 7 7/8s, 2009 130,550
68,560 Anker Coal Group, Inc. company guaranty Ser. B,
14 1/4s, 2007 (PIK) 30,852
40,000 Armco, Inc. sr. notes 8 7/8s, 2008 38,400
150,000 Consumers International sr. notes 10 1/4s, 2005 60,000
135,000 Kaiser Aluminum & Chemical Corp. sr. sub. notes 12 3/4s, 2003 124,200
10,000 Kaiser Aluminum & Chemical Corp. sr. notes Ser. B,
10 7/8s, 2006 9,850
20,000 Kaiser Aluminum & Chemical Corp. sr. notes 9 7/8s, 2002 19,700
210,000 LTV Corp. company guaranty 11 3/4s, 2009 159,600
210,000 National Steel Corp. 1st mtge. Ser. D, 9 7/8s, 2009 184,275
50,000 Oregon Steel Mills 1st mtge. 11s, 2003 38,000
10,000 Weirton Steel Corp. 144A sr. notes 10 3/4s, 2005 9,300
100,000 Wheeling-Pittsburgh Steel Corp. sr. notes 9 1/4s, 2007 65,000
90,000 WHX Corp. sr. notes 10 1/2s, 2005 69,075
-------------
938,802
Oil & Gas (1.0%)
-------------------------------------------------------------------------------------------------------------------
190,000 Belco Oil & Gas Corp. company guaranty Ser. B, 10 1/2s, 2006 190,475
60,000 Belco Oil & Gas Corp. sr. sub. notes Ser. B, 8 7/8s, 2007 55,800
60,000 Giant Industries Corp. company guaranty 9s, 2007 55,800
20,000 Gulf Canada Resources, Ltd. sr. sub. notes 9 5/8s, 2005 (Canada) 20,500
30,000 HS Resources, Inc. company guaranty 9 1/4s, 2006 30,300
80,000 HS Resources, Inc. sr. sub. notes Ser. B, 9 1/4s, 2006 79,700
90,000 Nuevo Energy Co. sr. sub. notes Ser. B, 9 1/2s, 2008 90,450
260,000 Ocean Energy, Inc. company guaranty Ser. B, 8 3/8s, 2008 259,350
50,000 Pioneer Natural Resources Co. company guaranty 9 5/8s, 2010 52,500
10,000 Port Arthur Finance Corp. company guaranty 12 1/2s, 2009 10,000
60,000 Seven Seas Petroleum sr. notes Ser. B, 12 1/2s, 2005 13,800
90,000 Snyder Oil Corp. sr. sub. notes 8 3/4s, 2007 90,450
30,000 Stone Energy Corp. company guaranty 8 3/4s, 2007 28,500
80,000 Vintage Petroleum sr. sub. notes 9 3/4s, 2009 82,000
-------------
1,059,625
Paper and Forest Products (1.3%)
-------------------------------------------------------------------------------------------------------------------
220,000 APP Finance II Mauritius, Ltd. bonds stepped-coupon zero %
(16s, 2/15/04), 2049 (Indonesia) (STP) 99,000
10,000 Boise Cascade Co. med. term notes Ser. A, 7.43s, 2005 9,649
40,000 Four M Corp. sr. notes Ser. B, 12s, 2006 38,200
180,000 Gaylord Container Corp. sr. sub. notes 9 7/8s, 2008 90,000
90,000 Indah Kiat Financial Mauritius, Ltd. company guaranty 10s, 2007
(Indonesia) 50,400
195,000 Pacifica Papers, Inc. sr. notes 10s, 2009 (Canada) 196,950
70,000 Packaging Corp. company guaranty 9 5/8s, 2009 71,750
255,000 Pindo Deli Finance Mauritius, Ltd. company guaranty 10 3/4s,
2007 (Indonesia) 142,800
280,000 Repap New Brunswick sr. notes 10 5/8s, 2005 (Canada) 288,400
340,000 Riverwood International Corp. company guaranty 10 7/8s, 2008 321,300
20,000 Stone Container Corp. sr. notes 12.58s, 2016 20,750
10,000 Stone Container Corp. sr. sub. deb. stepped-coupon zero %
(12 1/4s, 9/5/00), 2002 (STP) 10,075
50,000 Stone Container 144A company guaranty 11 1/2s, 2006
(Canada) 51,813
110,000 Tembec Industries, Inc. company guaranty 8 5/8s, 2009
(Canada) 108,900
-------------
1,499,987
Pharmaceuticals (0.1%)
-------------------------------------------------------------------------------------------------------------------
140,000 ICN Pharmaceuticals, Inc. 144A sr. notes 8 3/4s, 2008 138,600
Power Producers (1.2%)
-------------------------------------------------------------------------------------------------------------------
60,000 Calpine Corp. sr. notes 10 1/2s, 2006 61,800
30,000 Calpine Corp. sr. notes 9 1/4s, 2004 29,850
70,000 Calpine Corp. sr. notes 8 3/4s, 2007 71,657
40,000 Calpine Corp. sr. notes 7 7/8s, 2008 38,185
900,000 Midland Funding II Corp. deb. Ser. A, 11 3/4s, 2005 986,004
149,000 York Power Funding 144A company guaranty 12s, 2007
(Cayman Islands) 150,490
-------------
1,337,986
Publishing (0.3%)
-------------------------------------------------------------------------------------------------------------------
250,000 Affinity Group Holdings sr. notes 11s, 2007 208,750
180,000 Garden State Newspapers, Inc. sr. sub. notes Ser. B, 8 3/4s, 2009 165,600
-------------
374,350
Railroads (0.1%)
-------------------------------------------------------------------------------------------------------------------
160,000 TFM S.A. de C.V. company guaranty stepped-coupon zero %
(11 3/4s, 6/15/02), 2009 (Mexico) (STP) 124,800
Restaurants (0.1%)
-------------------------------------------------------------------------------------------------------------------
100,000 FRD Acquisition Co. sr. notes Ser. B, 12 1/2s, 2004 47,000
90,000 Sbarro, Inc. company guaranty 11s, 2009 92,700
-------------
139,700
Retail (0.5%)
-------------------------------------------------------------------------------------------------------------------
190,000 Amazon.com, Inc. sr. disc. notes stepped-coupon zero %
(10s, 5/01/03), 2008 (STP) 95,000
75,000 Groupo Elektra S.A. de C.V. 144A sr. notes 12s, 2008 73,500
30,000 Iron Age Corp. company guaranty 9 7/8s, 2008 21,000
135,000 Mothers Work, Inc. sr. notes 12 5/8s, 2005 125,550
330,000 Saks, Inc. company guaranty 8 1/4s, 2008 253,846
20,000 Southland Corp. sr. sub. deb. 5s, 2003 17,961
-------------
586,857
Semiconductor (0.1%)
-------------------------------------------------------------------------------------------------------------------
50,000 Amkor Technologies, Inc. sr. notes 9 1/4s, 2006 49,813
40,000 Chippac Intl., Ltd. company guaranty Ser. B, 12 3/4s, 2009 42,800
-------------
92,613
Shipping (0.1%)
-------------------------------------------------------------------------------------------------------------------
40,000 International Shipholding Corp. sr. notes 7 3/4s, 2007 34,400
30,000 Transportacion Maritima Mexicana S.A. de C.V. notes
9 1/4s, 2003 24,600
-------------
59,000
Software (--%)
-------------------------------------------------------------------------------------------------------------------
55,000 Telehub Communications Corp. company guaranty
stepped-coupon zero % (13 7/8s, 7/31/02), 2005 (STP) 9,900
Specialty Printing (0.1%)
-------------------------------------------------------------------------------------------------------------------
60,000 Perry-Judd company guaranty 10 5/8s, 2007 53,400
37,375 Von Hoffman Press, Inc. 144A sr. sub. notes 13 1/2s, 2009 33,638
40,000 Von Hoffman Press, Inc. 144A sr. sub. notes 10 3/8s, 2007 37,600
-------------
124,638
Technology (0.4%)
-------------------------------------------------------------------------------------------------------------------
140,000 Fairchild Semiconductor Corp. sr. sub. notes 10 1/8s, 2007 141,750
60,000 Telecommunications Techniques, Inc. company guaranty
9 3/4s, 2008 56,400
245,000 Viasystems, Inc. sr. sub notes 9 3/4s, 2007 221,725
-------------
419,875
Technology Services (0.6%)
-------------------------------------------------------------------------------------------------------------------
90,000 Covad Communications Group, Inc. sr. notes 12 1/2s, 2009 71,100
80,000 Covad Communications Group, Inc. sr. notes Ser. B, 12s, 2010 61,600
150,000 Equinix, Inc. sr. notes 13s, 2007 120,000
230,000 Exodus Communications, Inc. 144A sr. notes 11 5/8s, 2010 233,450
50,000 Exodus Communications, Inc. sr. notes 10 3/4s, 2009 49,250
30,000 Globix Corp. sr. notes 12 1/2s, 2010 21,750
20,000 PSINet, Inc. sr. notes 11 1/2s, 2008 17,500
50,000 PSINet, Inc. sr. notes 11s, 2009 43,000
70,000 Rhythms Netconnections sr. notes Ser. B, 14s, 2010 45,500
-------------
663,150
Telecommunications (4.5%)
-------------------------------------------------------------------------------------------------------------------
160,000 360Networks, Inc. 144A sr. notes 13s, 2008 (Canada) 151,200
670,000 American Mobile Satellite Corp. company guaranty
12 1/4s, 2008 497,475
20,000 Arch Communications, Inc. sr. notes 13 3/4s, 2008 16,000
80,000 Bestel S.A. de C.V. sr. disc. notes stepped-coupon zero %
(12 3/4s, 5/15/03), 2005 (Mexico) (STP) 52,400
70,000 Call-Net Enterprises, Inc. sr. notes 8s, 2008 (Canada) 37,800
120,000 Carrier1 Intl. SA sr. notes Ser. B, 13 1/4s, 2009 (Luxembourg) 114,900
220,000 Celcaribe S.A. sr. notes stepped-coupon zero %
(13 1/2s, 3/15/04), 2004 (Colombia) (STP) 176,000
391,000 CellNet Data Systems, Inc. sr. disc. notes stepped-coupon
zero % (14s, 10/1/02), 2007 (In default) (NON) (STP) 27,370
75,000 Crown Castle Intl., Corp. sr. notes 10 3/4s, 2011 78,375
130,000 Dobson/Sygnet Communications, Inc. sr. notes 12 1/4s, 2008 133,250
100,000 Dobson Communications Corp. 144A sr. notes 10 7/8s, 2010 101,000
130,000 Flag Ltd. 144A sr. notes 8 1/4s, 2008 (Bermuda) 115,700
420,000 Global Crossing Holdings, Ltd. company guaranty 9 5/8s,
2008 (Bermuda) 424,200
30,000 Global Crossing Holdings, Ltd. company guaranty 9 1/8s,
2006 (Bermuda) 29,775
70,000 Grupo Iusacell sr. notes 14 1/4s, 2006 75,775
105,000 Innova S De R.L. sr. notes 12 7/8s, 2007 (Mexico) 101,850
220,000 Level 3 Communications, Inc. sr. notes 11s, 2008 217,800
40,000 Level 3 Communication, Inc. sr. notes 9 1/8s, 2008 35,800
70,000 Loral Space & Communication, Ltd. sr. notes 9 1/2s, 2006 53,463
160,000 McCaw International, Ltd. sr. disc. notes stepped coupon zero %
(13s, 4/15/02), 2007 (STP) 123,200
30,000 Metrocall, Inc. sr. sub. notes 11s, 2008 22,500
30,000 Metrocall, Inc. sr. sub. notes 9 3/4s, 2007 22,200
30,000 Metromedia Fiber Network, Inc. sr. notes 10s, 2009 29,625
180,000 Metromedia Fiber Network, Inc. sr. notes Ser. B, 10s, 2008 177,300
170,000 Millicom International Cellular S.A. sr. disc. notes
stepped-coupon zero % (13 1/2s, 6/1/01), 2006
(Luxembourg) (STP) 150,450
330,000 Nextel Communications, Inc. sr. disc. notes stepped-coupon
zero % (12 1/8s, 4/15/03), 2008 (STP) 214,500
190,000 Nextel Communications, Inc. sr. notes 12s, 2008 201,400
10,000 Nextel Communications, Inc. sr. notes 9 3/8s, 2009 9,800
170,000 Nextel International, Inc. 144A sr. notes 12 3/4s, 2010 166,175
300,000 Nextel Partners, Inc. 144A sr. notes 11s, 2010 300,000
100,000 Nextel Partners, Inc. 144A sr. notes 11s, 2010 100,000
90,000 NorthEast Optic Network, Inc. sr. notes 12 3/4s, 2008 78,300
140,000 NorthPoint Communications Group, Inc. sr. notes 12 7/8s, 2010 135,800
100,000 Orbital Imaging Corp. sr. notes Ser. B, 11 5/8s, 2005 40,000
90,000 Pagemart Wireless, Inc. sr. disc. notes stepped-coupon zero %
(11 1/4s, 2/1/03), 2008 (STP) 35,550
55,000 Paging Network Do Brasil sr. notes 13 1/2s, 2005 (Brazil) 3,575
70,000 Pinnacle Holdings, Inc. sr. disc. notes stepped-coupon zero %
(10s, 3/15/03), 2008 (STP) 50,400
30,000 Price Communications Wireless, Inc. 144A sr. notes 9 1/8s, 2006 30,600
105,000 Primus Telecommunications Group, Inc. sr. notes 12 3/4s, 2009 67,200
90,000 RSL Communications PLC company guaranty 12 7/8s, 2010
(United Kingdom) 24,300
89,000 RSL Communications PLC company guaranty 12 1/4s, 2006
(United Kingdom) 32,040
70,000 RSL Communications PLC 144A company guaranty
10 1/2s, 2008 (United Kingdom) 21,175
110,000 RSL Communications PLC company guaranty 9 1/8s, 2008
(United Kingdom) 28,600
65,000 Satelites Mexicanos S.A. de C.V. 144A sr. notes 10 1/8s, 2004
(Mexico) 42,900
60,000 Spectrasite Holdings, Inc. sr. disc. notes stepped-coupon Ser. B,
zero % (12 7/8s, 3/15/05), 2010 (STP) 33,900
40,000 Spectrasite Holdings, Inc. sr. disc. notes stepped-coupon zero %
(11 1/4s, 4/15/04), 2009 (STP) 23,800
90,000 Startec Global Communications Corp. sr. notes 12s, 2008 72,000
120,000 Viatel, Inc. sr. disc. notes stepped-coupon zero %
(12 1/2s, 4/15/03), 2008 (STP) 42,000
164,000 Viatel, Inc. sr. notes 11 1/2s, 2009 93,480
90,000 Williams Communications Group, Inc. sr. notes 10 7/8s, 2009 86,850
115,000 World Access, Inc. sr. notes Ser. B, 13 1/4s, 2008 96,600
-------------
4,996,353
Telephone (2.4%)
-------------------------------------------------------------------------------------------------------------------
210,000 Alamosa PCS Holdings, Inc. company guaranty stepped-coupon
zero % (12 7/8s, 2/15/05), 2010 (STP) 119,700
80,000 Alaska Communications Systems Corp. company guaranty
9 3/8s, 2009 73,600
10,000 Allegiance Telecom, Inc. sr. disc. notes stepped-coupon Ser. B,
zero % (11 3/4s, 2/15/03), 2008 (STP) 7,100
80,000 Birch Telecommunications, Inc. sr. notes 14s, 2008 48,000
180,000 BTI Telecom Corp. sr. notes 10 1/2s, 2007 117,000
60,800 Hyperion Telecommunications Corp., Inc. sr. notes Ser. B,
12 1/4s, 2004 58,672
505,000 ICG Services, Inc. sr. disc. notes stepped-coupon zero %
(9 7/8s, 5/1/03), 2008 (STP) 171,700
80,000 Intermedia Communications, Inc. sr. disc. notes stepped-coupon
Ser. B, zero % (12 1/4s, 3/1/04), 2009 (STP) 39,600
600,000 KMC Telecommunications Holdings, Inc. sr. disc. notes
stepped-coupon zero % (12 1/2s, 2/15/03), 2008 (STP) 240,000
50,000 Leap Wireless International, Inc. company guaranty
12 1/2s, 2010 42,500
210,000 Madison River Capital Corp. sr. notes 13 1/4s, 2010 174,300
90,000 MGC Communications, Inc. sr. notes 13s, 2010 74,700
100,000 Microcell Telecommunications sr. disc. notes stepped-coupon
Ser. B, zero % (14s, 12/1/01), 2006 (Canada) (STP) 96,000
45,000 Netia Holdings B.V. 144A company guaranty stepped-coupon
zero % (11 1/4s, 11/1/01), 2007 (Poland) (STP) 31,725
40,000 Netia Holdings B.V. 144A company guaranty 10 1/4s, 2007
(Poland) 33,700
80,000 NEXTLINK Communications, Inc. sr. notes 10 1/2s, 2009 76,800
300,000 Telecorp PCS, Inc. 144A sr. sub. notes 10 5/8s, 2010 312,000
45,000 Transtel S.A. pass through certificates 12 1/2s, 2007 18,450
220,000 UbiquiTel Operating Co. company guaranty stepped-coupon
zero % (14s, 4/15/05), 2010 (STP) 114,400
260,000 US Unwired, Inc. company guaranty, stepped-coupon Ser. B,
zero % (13 3/8s, 11/1/04), 2009 (STP) 146,900
90,000 Versatel Telecom N.V. sr. notes 13 1/4s, 2008 (Netherlands) 85,950
40,000 Versatel Telecom N.V. 144A sr. notes 13 1/4s, 2008
(Netherlands) 38,200
220,000 Voicestream Wire, Inc. sr. notes 10 3/8s, 2009 237,600
478,000 WinStar Communications, Inc. 144A sr. disc. notes
stepped-coupon zero % (14 3/4s, 4/15/05), 2010 (STP) 188,810
102,000 WinStar Communications, Inc. 144A sr. notes 12 3/4s, 2010 88,740
-------------
2,636,147
Textiles (0.4%)
-------------------------------------------------------------------------------------------------------------------
120,000 Galey & Lord, Inc. company guaranty 9 1/8s, 2008 66,000
115,000 Kasper A.S.L., Ltd. sr. notes 12 3/4s, 2004 65,550
50,000 Levi Strauss & Co. notes 6.8s, 2003 41,000
30,000 Westpoint Stevens, Inc. sr. notes 7 7/8s, 2008 25,950
150,000 Westpoint Stevens, Inc. sr. notes 7 7/8s, 2005 134,250
70,000 William Carter Holdings Co. sr. sub. notes Ser. A, 12s, 2008 64,400
-------------
397,150
Tobacco (0.1%)
-------------------------------------------------------------------------------------------------------------------
160,000 North Atlantic Trading Co. company guaranty Ser. B, 11s, 2004 137,600
Trucks & Parts (0.1%)
-------------------------------------------------------------------------------------------------------------------
130,000 Transportation Manufacturing Operations, Inc. company
guaranty 11 1/4s, 2009 104,000
Utilities (0.1%)
-------------------------------------------------------------------------------------------------------------------
170,000 Cathay International, Ltd. 144A sr. notes 13s, 2008 (China) 88,400
Waste Management (0.6%)
-------------------------------------------------------------------------------------------------------------------
340,000 Allied Waste Industries, Inc. company guaranty Ser. B,
10s, 2009 303,875
140,000 Allied Waste Industries, Inc. company guaranty Ser. B,
7 7/8s, 2009 126,350
250,000 Waste Management, Inc. company guaranty 6 7/8s, 2009 227,645
-------------
657,870
Water Utilities (--%)
-------------------------------------------------------------------------------------------------------------------
70,000 Azurix Corp. 144A notes 10 3/8s, 2007 54,250
-------------
Total Corporate Bonds and Notes (cost $42,668,603) $ 36,358,241
<CAPTION>
CONVERTIBLE PREFERRED STOCKS (16.0%) (a)
NUMBER OF SHARES VALUE
<S> <C> <C>
Automotive (0.6%)
-------------------------------------------------------------------------------------------------------------------
35,000 Federal-Mogul Financial Trust 3.50 cv. cum. pfd. $ 700,000
Banking (0.7%)
-------------------------------------------------------------------------------------------------------------------
15,000 Sovereign Bancorp, Inc. 3.75 cv. pfd. 770,625
Broadcasting (1.5%)
-------------------------------------------------------------------------------------------------------------------
50,000 Sinclair Broadcast Group, Inc. 3.00 cv. pfd. 1,693,750
Electric Utilities (0.5%)
-------------------------------------------------------------------------------------------------------------------
16,000 CMS Energy Corp. 8.75% cv. cum. pfd. 522,000
Electronics (0.5%)
-------------------------------------------------------------------------------------------------------------------
220 Interact Systems, Inc. 14.00% cv. pfd 220
10,000 Pioneer Standard Electronics, Inc. 144A 3.375 cv. pfd. 500,000
13 World Access, Inc. 144A Ser. D, zero% cv. pfd. 12,090
-------------
512,310
Energy (0.7%)
-------------------------------------------------------------------------------------------------------------------
15,000 Evi, Inc. 2.50 cum. cv. pfd. 735,000
Energy (Oil Field) (--%)
-------------------------------------------------------------------------------------------------------------------
600 XCL, Ltd. 144A 9.50% cv. pfd. (PIK) 300
115 XCL, Ltd. 144A Ser. A, 9.50 cv. cum. pfd. 58
-------------
358
Engineering & Construction (0.9%)
-------------------------------------------------------------------------------------------------------------------
30,000 Txi Capital Trust I 2.75 cv. pfd. 945,000
Food (0.5%)
-------------------------------------------------------------------------------------------------------------------
15,807 Suiza Capital Trust II 2.75 cv. pfd. 608,570
Health Care Services (1.5%)
-------------------------------------------------------------------------------------------------------------------
24,000 Caremark RX Capital Trust I 144A 3.50 cv. pfd. 1,707,000
Household Furniture and Appliances (1.0%)
-------------------------------------------------------------------------------------------------------------------
27,658 Newell Financial Trust I 2.625 cv. cum. pfd. 1,057,919
Insurance (0.9%)
-------------------------------------------------------------------------------------------------------------------
91,181 Conseco Financing Trust IV. 3.50 cv. cum. pfd. 1,002,991
Medical Technology (1.7%)
-------------------------------------------------------------------------------------------------------------------
45,000 Owens & Minor Trust I 144A Ser. A, 2.688 cv. cum. pfd. 1,890,000
Metals (1.5%)
-------------------------------------------------------------------------------------------------------------------
60,000 Freeport-McMoRan Copper & Gold Co., Inc. 1.75 cv. pfd. 795,000
28,000 USX Capital Trust I 3.375 cum. cv. pfd. 878,500
-------------
1,673,500
Natural Gas Utilities (0.3%)
-------------------------------------------------------------------------------------------------------------------
34,640 Semco Energy, Inc. 11.00% cv. cum. pfd. 387,535
Oil & Gas (0.5%)
-------------------------------------------------------------------------------------------------------------------
10,000 Tosco Financing Trust 2.875 cv. pfd. 502,500
Paper & Forest Products (0.7%)
-------------------------------------------------------------------------------------------------------------------
39,349 Owens-Illinois, Inc. 2.375 cv.pfd. 826,329
Publishing (0.3%)
-------------------------------------------------------------------------------------------------------------------
22,411 Tribune Co. 1.75 cv. pfd. 282,939
Real Estate (0.4%)
-------------------------------------------------------------------------------------------------------------------
17,500 Equity Residential Properties Trust Ser. E, 1.75 cv. pfd. 465,938
Retail (0.8%)
-------------------------------------------------------------------------------------------------------------------
25,000 K mart Financing I 3.875 cum. cv. pfd. 878,125
Technology Services (0.1%)
-------------------------------------------------------------------------------------------------------------------
1,700 PSINet, Inc. 144A 3.50 cv. pfd. 45,050
60,000 Vanstar Financial Trust Corp. 3.375 cv. pfd. (In default) (NON) 60,000
-------------
105,050
Textiles (0.4%)
-------------------------------------------------------------------------------------------------------------------
26,000 Designer Finance 3.00 cv. cum. pfd. 442,000
-------------
Total Convertible Preferred Stocks (cost $21,210,817) $ 17,709,439
<CAPTION>
PREFERRED STOCKS (1.2%) (a)
NUMBER OF SHARES VALUE
<S> <C> <C>
-------------------------------------------------------------------------------------------------------------------
3,119 AmeriKing, Inc. 3.25 cum. pfd. (PIK) $ 18,714
3,115 Chevy Chase Preferred Corporation Ser. A, 5.19 pfd. 146,405
1,024 Citadel Broadcasting Co. Ser. B, 13.25 cum. pfd. (PIK) 110,628
50,000 CSBI Capital Trust I 144A company guaranty 53,500
1,371 CSC Holdings, Inc. Ser. M, 11.13 cum. pfd. (PIK) 145,326
117 Dobson Communications 12.25% pfd. (PIK) 112,203
4,700 Fitzgeralds Gaming Corp. zero % cum. pfd. 47
110 Fresenius Medical Capital Trust I Ser. D, 9.00%
company guaranty, pfd. (Germany) 108,900
100 Fresenius Medical Capital Trust II 7.875
company guaranty, pfd. (Germany) 93,500
1 Intermedia Communications Ser. B, 13.50% pfd. (PIK) 650
102 Nextel Communications, Inc. 13.00% cum. pfd. (PIK) 108,120
139 NEXTLINK Communications, Inc. 14.00 cum. pfd. (PIK) 6,394
76 NEXTLINK Communications, Inc. Ser. B, 13.50% pfd. (PIK) 65,740
17 Paxson Communications Corp. 144A 13.25% cum. pfd. (PIK) 166,600
94 R& B Falcon Corp. 13.875% cum. pfd. (PIK) 116,288
138 Rural Cellular Corp. 12.25% pfd. (PIK) 120,147
-------------
Total Preferred Stocks (cost $1,560,235) $ 1,373,162
<CAPTION>
UNITS (0.5%) (a)
NUMBER OF UNITS VALUE
<S> <C> <C>
-------------------------------------------------------------------------------------------------------------------
135,000 App China Group, Ltd. units 14s, 2010 $ 78,300
250,000 Australis Media, Ltd. units stepped-coupon zero %
(15 3/4s, 10/13/00), 2003 (In default) (NON) (STP) 23
220,000 CFW Communications Co. 144A units 13s, 2010 215,600
60,000 Huntsman Packaging Corp. units 13s, 2010 54,000
140,000 Ipcs, Inc. units stepped-coupon zero % (14s 7/15/05), 2010 (STP) 79,800
120,000 Maxcom Telecomunicacione units 13 3/4s, 2007 73,800
210,000 XCL Ltd. units 13 1/2s, 2004 (In default) (NON) 37,800
-------------
Total Units (cost $1,051,907) $ 539,323
<CAPTION>
COMMON STOCKS (0.4%) (a) (NON)
NUMBER OF SHARES VALUE
<S> <C> <C>
-------------------------------------------------------------------------------------------------------------------
50 AmeriKing, Inc. $ 500
25,470 Celcaribe S.A. 3,184
9,047 Fitzgeralds Gaming Corp. 90
1,885 IFINT Diversified Holdings 144A 3,770
378 Intermedia Communications, Inc. 7,844
1,092 MGC Communications, Inc. 20,134
73 Mothers Work, Inc. 671
55 Paging Do Brazil Holdings Co., LLC 144A
Class B (Brazil) 1
144 Premium Holdings (L.P.) 144A 1,436
334 PSF Holdings LLC Class A 334,000
79 RCN Corp. 1
2,200 Spanish Broadcasting System, Inc. 22,138
3,750 Specialty Foods Acquisition Corp. 38
-------------
Total Common Stocks (cost $1,157,164) $ 393,807
<CAPTION>
WARRANTS (0.2%) (a) (NON) EXPIRATION
NUMBER OF WARRANTS DATE VALUE
<S> <C> <C> <C>
-------------------------------------------------------------------------------------------------------------------
1 Anker Coal Group, Inc. 144A 10/28/09 $ 1
80 Bestel S.A. de C.V. (Mexico) 5/15/05 9,600
80 Birch Telecommunications, Inc. 144A (PIK) 6/15/08 8,000
112 Carrier1 Intl. SA 2/19/09 30,240
721 CellNet Data Systems, Inc. 10/1/07 1
500 Comunicacion Cellular 144A (Colombia) 11/15/03 1,000
140 Dayton Superior Corp. 6/15/09 2,800
210 Decrane Aircraft Holdings 9/30/08 2
195 Diva Systems Corp. 5/15/06 117,000
753 Diva Systems Corp. 3/1/08 10,537
80 Epic Resorts 6/15/05 1
420 Firstworld Communication Corp. 4/15/08 8,400
1,617 ICG Communications 10/15/05 1,617
90 Insilco Corp. 144A 8/15/07 1
220 Interact Systems, Inc. 8/1/03 2
220 Interact Systems, Inc. 144A 12/15/09 2
105 International Wireless Communications
Holdings 144A 8/15/01 1
175 Iridium World Com 144A 7/15/05 1
210 KMC Telecommunications Holdings, Inc. 4/15/08 630
245 Knology Holdings 10/22/07 1,470
50 Leap Wireless International 144A 4/15/10 125
160 McCaw International, Ltd. 4/15/07 640
90 Mediq, Inc. 144A 6/1/09 1
670 Motient Corp. 144A 4/1/08 23,450
45 Onepoint Communications, Inc. 6/1/08 4,050
100 Orbital Imaging Corp. 144A 3/1/05 500
90 Raintree Resort 144A 12/1/04 1
350 Signature Brands, Ltd. 8/15/02 4
90 Startec Global Communications Corp. 5/15/08 90
75 Sterling Chemicals Holdings 8/15/08 675
55 Telehub Communications Corp. 7/31/05 28
220 Ubiquitel, Inc. 144A 4/15/10 15,400
520 UIH Australia/Pacific, Inc. 144A 5/15/06 15,600
10 Versatel Telecom N.V. 5/15/08 3,200
20,520 Wright Medical Technology, Inc. 144A 6/30/03 1
-------------
Total Warrants (cost $151,429) $ 255,071
<CAPTION>
SHORT-TERM INVESTMENTS (3.9%) (a)
PRINCIPAL AMOUNT VALUE
<S> <C> <C>
-------------------------------------------------------------------------------------------------------------------
$ 50,000 U.S. Treasury Bill effective yield of zero %,
September 21, 2000 (SEG) $ 49,825
4,254,000 Interest in $470,000,000 joint repurchase agreement
dated August 31, 2000 with Morgan (J.P.) & Co., Inc.
due September 1, 2000 with respect to various U.S.
Treasury obligations -- maturity value of $4,254,786
for an effective yield of 6.65% 4,254,000
-------------
Total Short-Term Investments (cost $4,303,825) $ 4,303,825
-------------------------------------------------------------------------------------------------------------------
Total Investments (cost $123,474,334) (b) $ 110,192,828
-------------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $110,839,013.
(b) The aggregate identified cost on a tax basis is $123,558,897,
resulting in gross unrealized appreciation and depreciation of
$6,683,935 and $20,050,004, respectively, or net unrealized depreciation
of $13,366,069.
(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.
(PIK) Income may be received in cash or additional securities at the
discretion of the issuer.
(SEG) This security was pledged and segregated with the custodian to
cover margin requirements for futures contracts at August 31, 2000.
144A after the name of a security represents those exempt from
registration under Rule 144A of the Securities Act of 1933. These
securities may be resold in transactions exempt from registration,
normally to qualified institutional buyers.
The rates shown on Floating Rate Notes (FRN) are the current
interest rates shown at August 31, 2000, which are subject to change
based on the terms of the security.
------------------------------------------------------------------------------
Futures Contracts Outstanding at August 31, 2000
Aggregate Face Expiration Unrealized
Total Value Value Date Appreciation
------------------------------------------------------------------------------
S & P 500 Index
(Long) $760,600 $741,664 Sep-00 $18,936
------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
August 31, 2000
<S> <C>
Assets
-------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $123,474,334) (Note 1) $110,192,828
-------------------------------------------------------------------------------------------
Cash 15,012
-------------------------------------------------------------------------------------------
Dividends, interest and other receivables 1,973,801
-------------------------------------------------------------------------------------------
Receivable for securities sold 374,495
-------------------------------------------------------------------------------------------
Receivable for variation margin 8,800
-------------------------------------------------------------------------------------------
Total assets 112,564,936
Liabilities
-------------------------------------------------------------------------------------------
Distributions payable to shareholders 967,129
-------------------------------------------------------------------------------------------
Payable for securities purchased 434,643
-------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 211,632
-------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 29,995
-------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 17,172
-------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 1,012
-------------------------------------------------------------------------------------------
Other accrued expenses 64,340
-------------------------------------------------------------------------------------------
Total liabilities 1,725,923
-------------------------------------------------------------------------------------------
Net assets $110,839,013
Represented by
-------------------------------------------------------------------------------------------
Paid-in capital (Note 1) $128,408,720
-------------------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 222,131
-------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (Note 1) (4,529,268)
-------------------------------------------------------------------------------------------
Net unrealized depreciation of investments (13,262,570)
-------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $110,839,013
Computation of net asset value
-------------------------------------------------------------------------------------------
Net asset value per share ($110,839,013 divided by 13,694,062 shares) $8.09
-------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
Year ended August 31, 2000
<S> <C>
Investment income:
-------------------------------------------------------------------------------------------
Interest income $9,691,046
-------------------------------------------------------------------------------------------
Dividends 1,657,130
-------------------------------------------------------------------------------------------
Total investment income 11,348,176
Expenses:
-------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 839,677
-------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 189,095
-------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 14,630
-------------------------------------------------------------------------------------------
Administrative services (Note 2) 6,250
-------------------------------------------------------------------------------------------
Auditing 93,495
-------------------------------------------------------------------------------------------
Other 102,065
-------------------------------------------------------------------------------------------
Total expenses 1,245,212
-------------------------------------------------------------------------------------------
Expense reduction (Note 2) (5,506)
-------------------------------------------------------------------------------------------
Net expenses 1,239,706
-------------------------------------------------------------------------------------------
Net investment income 10,108,470
-------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 2,218,340
-------------------------------------------------------------------------------------------
Net realized loss on futures contracts (Note 1) (25,068)
-------------------------------------------------------------------------------------------
Net unrealized depreciation of investments and
futures contracts during the year (3,753,700)
-------------------------------------------------------------------------------------------
Net loss on investments (1,560,428)
-------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $8,548,042
-------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
Year ended August 31
---------------------------------
2000 1999
--------------------------------------------------------------------------------------------------
<S> <C> <C>
Decrease in net assets
--------------------------------------------------------------------------------------------------
Operations:
--------------------------------------------------------------------------------------------------
Net investment income $ 10,108,470 $ 11,187,772
--------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments 2,193,272 (6,660,169)
--------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of investments (3,753,700) 2,151,231
--------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 8,548,042 6,678,834
--------------------------------------------------------------------------------------------------
Distributions to shareholders:
--------------------------------------------------------------------------------------------------
From net investment income (11,655,991) (11,015,483)
--------------------------------------------------------------------------------------------------
From net realized gain on investments -- (2,461,525)
--------------------------------------------------------------------------------------------------
Increase from capital share transactions 371,418 1,180,572
--------------------------------------------------------------------------------------------------
Total decrease in net assets (2,736,531) (5,617,602)
Net assets
--------------------------------------------------------------------------------------------------
Beginning of year 113,575,544 119,193,146
--------------------------------------------------------------------------------------------------
End of year (including undistributed net investment
income of $222,131 and $1,736,704, respectively) $110,839,013 $113,575,544
--------------------------------------------------------------------------------------------------
Number of fund shares
--------------------------------------------------------------------------------------------------
Shares outstanding at beginning of year 13,648,608 13,515,511
--------------------------------------------------------------------------------------------------
Shares issued in connection with
reinvestment of distributions 45,454 133,097
--------------------------------------------------------------------------------------------------
Shares outstanding at end of year 13,694,062 13,648,608
--------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
------------------------------------------------------------------------------------------------
Per-share
operating performance Year ended August 31
------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $8.32 $8.82 $10.35 $9.48 $9.49
------------------------------------------------------------------------------------------------
Investment operations
------------------------------------------------------------------------------------------------
Net investment income .74 .82 .90 .86 .88
------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.12) (.33) (1.20) .92 (.04)
------------------------------------------------------------------------------------------------
Total from
investment operations .62 .49 (.30) 1.78 .84
------------------------------------------------------------------------------------------------
Less distributions:
------------------------------------------------------------------------------------------------
From net
investment income (.85) (.81) (.85) (.85) (.85)
------------------------------------------------------------------------------------------------
From net realized
gains on investments -- (.18) (.38) (.06) --
------------------------------------------------------------------------------------------------
Total distributions (.85) (.99) (1.23) (.91) (.85)
------------------------------------------------------------------------------------------------
Net asset value,
end of period $8.09 $8.32 $8.82 $10.35 $9.48
------------------------------------------------------------------------------------------------
Market price,
end of period $7.938 $8.813 $8.937 $10.562 $10.125
------------------------------------------------------------------------------------------------
Ratios and supplemental data
------------------------------------------------------------------------------------------------
Total return at
market price (%)(a) .78 10.29 (4.74) 14.29 10.63
------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $110,839 $113,576 $119,193 $138,400 $125,864
------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.11 1.11 1.13 1.03 1.06
------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 9.03 9.72 9.01 8.80 9.19
------------------------------------------------------------------------------------------------
Portfolio turnover (%) 26.31 78.62 59.13 58.88 56.82
------------------------------------------------------------------------------------------------
(a) Total return assumes dividend reinvestment and does not reflect
the effect of sales charges.
(b) Includes amounts paid through expense offset arrangements.
</TABLE>
NOTES TO FINANCIAL STATEMENTS
August 31, 2000
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 of the financial statements and the reported
amounts of increases and decreases in net assets from operations during
the reporting period. 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 sales price on its principal exchange, or if no sales
are reported -- as in the case of some securities traded
over-the-counter -- the last reported bid price. Securities quoted in
foreign currencies are translated into U.S. dollars at the current
exchange rate. Short-term investments having remaining maturities of 60
days or less are stated at amortized cost, which approximates market
value. Other investments, including restricted securities, are stated at
fair value following procedures approved by the Trustees. Market
quotations are not considered to be readily available for certain debt
obligations; such investments are stated at fair value on the basis of
valuations furnished by a pricing service or dealers, 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 variable relationships
between securities that are generally recognized by institutional
traders.
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). Gains or losses on securities sold are determined
on the identified cost basis. Interest income is recorded on the accrual
basis. Dividend income is recorded on the ex-dividend date. Non-cash
dividends, if any, are recorded at the fair market value of the
securities received. Discounts on zero coupon bonds, original issue
discount bonds, stepped-coupon bonds and payment in kind bonds are
accreted according to the yield-to-maturity basis.
Any premium resulting from the purchase of stepped-coupon in excess of
market value is amortized on a yield-to-maturity basis.
E) Futures and options contracts The fund may use futures and options
contracts to hedge against changes in the values of securities the fund
owns or expects to purchase. The fund may also write options on
securities it owns or in which it may invest to increase its current
returns.
The potential risk to the fund is that the change in value of futures
and options contracts may not correspond to the change in value of the
hedged instruments. In addition, losses may arise from changes in the
value of the underlying instruments, if there is an illiquid secondary
market for the contracts, or if the counterparty to the contract is
unable to perform. When the contract is closed, the fund records a
realized gain or loss equal to the difference between the value of the
contract at the time it was opened and the value at the time it was
closed. Realized gains and losses on purchased options are included in
realized gains and losses on investment securities.
Futures contracts are valued at the quoted daily settlement prices
established by the exchange on which they trade. Exchange traded options
are valued at the last sale price, or if no sales are reported, the last
bid price for purchased options and the last ask price for written
options. Options traded over-the-counter are valued using prices
supplied by dealers.
F) 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. At August 31, 2000, the fund had a capital loss
carryover of approximately $4,426,000 available to offset future net
capital gain, if any, which will expire on August 31, 2007.
G) Distributions to shareholders Distributions to shareholders from net
investment income are recorded by the fund on the ex-dividend date.
Capital gain distributions, if any, are recorded on the ex-dividend date
and paid at least annually. The amount and character of income and gains
to be distributed are determined in accordance with income tax
regulations which may differ from generally accepted accounting
principles. These differences include temporary and permanent
differences of losses on wash sale transactions, dividends payable,
defaulted bond interest, unrealized gains and losses on certain futures
contracts, paydown gains and losses on mortgage-backed securities,
interest on payment-in-kind securities and book accretion/amortization
adjustment. Reclassifications are made to the fund's capital accounts to
reflect income and gains available for distribution (or available
capital loss carryovers) under income tax regulations. For the year
ended August 31, 2000, the fund reclassified $32,948 to increase
undistributed net investment income and $121,046 to decrease
paid-in-capital, with a decrease to accumulated net realized losses of
$88,098. The calculation of net investment income per share in the
financial highlights table excludes these adjustments.
Note 2
Management fee, administrative
services and other transactions
Compensation of Putnam Management, for management and investment
advisory services, is paid quarterly based on the average net assets of
the fund. Such fee is based on the following annual rates: 0.75% of the
first $500 million of average weekly net assets, 0.65% of the next $500
million, 0.60% of the next $500 million, and 0.55% of any amount over
$1.5 billion.
The fund reimburses Putnam Management an allocated amount for the
compensation and related expenses of certain officers of the fund and
their staff who provide administrative services to the fund. The
aggregate amount of all such reimbursements is determined annually by
the Trustees.
Custodial functions for the fund's assets are provided by Putnam
Fiduciary Trust Company (PFTC), a subsidiary of Putnam Investments, Inc.
Investor servicing agent functions are provided by Putnam Investor
Services, a division of PFTC.
For the year ended August 31, 2000, fund expenses were reduced by $5,506
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 $622
has been allocated to the fund, and an additional fee for each Trustees
meeting attended. 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
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 a Trustee for at least five years. Benefits under the Pension
Plan are equal to 50% of the Trustee's average total retainer and
meeting fees for the three years preceding retirement. Pension expense
for the fund is included in Compensation of Trustees in the Statement of
operations. Accrued pension liability is included in Payable for
compensation of Trustees in the Statement of assets and liabilities.
Note 3
Purchases and sales of securities
During the year ended August 31, 2000, cost of purchases and proceeds
from sales of investment securities other than short-term investments
aggregated $28,513,587 and $32,569,276, respectively. There were no
purchases and sales of U.S. government obligations.
FEDERAL TAX INFORMATION
(Unaudited)
The fund has designated 13.19% of the distributions from net investment
income as qualifying for the dividends received deduction for
corporations.
The Form 1099 you receive in January 2001 will show the tax status of
all distributions paid to your account in calendar 2000.
RESULTS OF JUNE 1, 2000 SHAREHOLDER MEETING
(Unaudited)
An annual meeting of shareholders of the fund was held on June 1, 2000.
At the meeting, each of the nominees for Trustees was elected, as
follows:
Votes
Votes for withheld
Jameson Adkins Baxter 11,691,188 245,110
Hans H. Estin 11,673,748 262,550
John A. Hill 11,698,553 237,745
Ronald J. Jackson 11,694,819 241,478
Paul L. Joskow 11,689,608 246,690
Elizabeth T. Kennan 11,688,535 247,763
Lawrence J. Lasser 11,691,456 244,842
John H. Mullin III 11,694,208 242,842
Robert E. Patterson 11,694,338 241,960
George Putnam, III 11,693,918 242,380
A.J.C. Smith 11,686,238 250,060
W. Thomas Stephens 11,691,816 244,482
W. Nicholas Thorndike 11,683,301 252,997
A proposal to ratify the selection of PricewaterhouseCoopers LLP as the
independent auditors of your fund was approved as follows:
11,764,260 votes for, and 84,724 votes against, with 87,314 abstentions
and broker non-votes.
All tabulations are rounded to nearest whole number.
WELCOME TO WWW.PUTNAMINVESTMENTS.COM
Now you can use your PC to get up-to-date information about your funds,
learn more about investing and retirement planning, and access market
news and economic outlooks from Putnam.
VISIT PUTNAM'S SITE ON THE WORLD WIDE WEB FOR:
* the benefits of investing with Putnam
* Putnam's money management philosophy
* complete fund information, daily pricing and long-term performance
* the latest on new funds and other Putnam news
You can also read Putnam economist Dr. Robert Goodman's commentary and
Putnam's Capital Markets outlook, search for a particular fund by name
or objective, use our glossary to decode investment terms . . . and much
more.
The site can be accessed through any of the major online services
(America Online, CompuServe, Prodigy) that offer web access. Of course,
you can also access it via Netscape or Microsoft Internet Explorer,
using an independent Internet service provider.
New features will be added to the site regularly. So be sure to bookmark us at
http://www.putnaminvestments.com
FUND INFORMATION
WEB SITE
www.putnaminvestments.com
INVESTMENT MANAGER
Putnam Investment Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Retail Management, Inc.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
TRUSTEES
John A. Hill, 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
George Putnam, III
A.J.C. Smith
W. Thomas Stephens
W. Nicholas Thorndike
OFFICERS
George Putnam, III
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
Rosemary H. Thomsen
Vice President and Fund Manager
Charles Pohl
Vice President and Fund Manager
Richard A. Monaghan
Vice President
Richard G. Leibovitch
Vice President
John R. Verani
Vice President
Call 1-800-225-1581 weekdays from 9 a.m. to 5 p.m. Eastern Time, or
visit our Web site (www.putnaminvestments.com) any time for up-to-date
information about the fund's NAV.
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
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www.putnaminvestments.com
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