Putnam
Managed
High Yield
Trust
ANNUAL REPORT
May 31, 1996
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* "Putnam Managed High Yield Trust's attractive risk/return package is
the result of management's well-timed sector plays, a lack of leverage -
- - which keeps volatility down -- and an emphasis on lower-quality junk
issues. (Lower-tier credits have generally outperformed upper-tier
issues since the fund's inception.)"
-- Morningstar Closed-End Funds, May 3, 1996
CONTENTS
4 Report from Putnam Management
8 Fund performance summary
11 Portfolio holdings
21 Financial statements
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
(copyright) Karsh, Ottawa
Dear Shareholder:
Unlike many other fixed-income investments, lower-rated high-yield bonds
thrive on a vibrant economy. That is because they are almost always
issued by companies under some pressure to maintain steady cash flows.
There is nothing like a strong economy to help in this regard.
Vigorous economies also invite higher interest rates and, in turn,
rising inflation -- conditions not always friendly to the performance of
other fixed-income securities. Thus, when recent economic indicators
suggested that the economy was still advancing at a rather rapid clip,
the broader bond market underwent a significant downturn.
Putnam Managed High Yield Trust was among the beneficiaries of the
existing market environment during the fiscal year that ended on May 31,
1996. In the report that follows, Fund Manager Jennifer Leichter
discusses performance to date and takes a look at the fiscal year that
has just begun.
Respectfully yours,
/S/George Putnam
George Putnam
Chairman of the Trustees
July 17, 1996
Report from the Fund Manager
Jennifer E. Leichter
Putnam Managed High Yield Trust posted index-beating performance for its
1996 fiscal year, which ended on May 31. Your fund's 12-month returns of
16.31% at net asset value and 15.30% at market price both surpassed the
10.45% return measured by the First Boston High Yield Bond Index -- the
fund's principal performance benchmark. We attribute the fund's results
to a combination of factors: our focus on growth-oriented sectors, such
as telecommunications; our emphasis on lower-rated securities, which
outperformed higher-rated securities over the period; and a generally
favorable market environment.
* STRONG DEMAND MEETS HEAVY SUPPLY, PROPELLING MARKET
Demand for high-yield securities was extremely strong throughout most of
the fiscal year as investors became increasingly convinced that
recession was unlikely in 1996. This greater confidence in a reasonably
healthy economy stemmed both from the Federal Reserve Board's interest-
rate cuts in December and January and from improvement in a number of
economic indicators. At the same time, high-yield bonds outperformed all
other fixed-income categories over the 12 months ended May 31, 1996.
One sign of the depth of high-yield market strength during the period is
the current exceptionally high level of new issuance. A total of $33.7
billion in new high-yield bonds was issued in just the first four months
of calendar 1996, which is more than twice the amount ($14.4 billion)
issued over the same period last year. The fact that the market was able
to digest this profusion of securities and still outperform other fixed-
income categories attests to the strong demand for high-yield bonds over
the period. An additional indicator of market demand was the relatively
strong level of new cash flows into high-yield funds compared with the
flows into other types of bond funds.
According to our research, lower-quality high-yield bonds outperformed
higher-quality BB-rated securities. Investors became more comfortable
buying lower-grade bonds when the economy began to exhibit stronger-
than-expected signs of growth. With over 71% of its bond investments in
securities rated single B, your fund benefited substantially from the
superior relative performance of lower-quality bonds during the fiscal
year. (Please see the chart below.)
* WATERSHED LEGISLATION ENHANCES PROSPECTS FOR KEY MARKET SECTORS
The long-awaited passage of the telecommunications deregulation reform
bill was a major event for the high-yield market during the period. This
legislation eases onerous and dated restrictions on the broadcast, cable
television, and telephone industries -- all of which are important
sectors in the high-yield market, given the volume of securities issued
by these industries.
In the telecommunications sector, after posting strong returns during
the fiscal year's first half, the vast amount of new bonds that were
issued following passage of the bill caused the sector to underperform
the broader high-yield market during the second half. We were,
nevertheless, pleased by the performance of your fund's investments in
NEXTEL Communications. After spending the past few years developing its
specialized mobile radio system nationwide, NEXTEL should begin to
receive the initial results of the technology's performance over the
summer months. Nextel's common stock and bonds -- both owned by your
fund -- moved up nicely over the period as the market anticipated that
the new technology is likely to be well received.
[GRAPHIC OMITTED: vertical bar chart CREDIT QUALITY OVERVIEW*]
BBB 0.9%
BB/Ba 23.9%
B 71.4%
Below B 3.8%
Footnote reads:
*Based on net assets. Industry weightings will vary over time.
* GAMING, RETAIL BOOST OVERALL PERFORMANCE
Your fund continued to benefit from its exposure to the gaming industry,
which was its largest industry weighting and was one of the best-
performing sectors over the period. Given the failure of gaming
referendums in several states and an overall decline in new gaming
jurisdictions, established operators were able to realize greater cash
flows and profits from existing casinos. In addition, Hilton Hotels'
acquisition of Bally provided a boost to the industry and may signal the
beginning of a trend, albeit modest, toward larger operators acquiring
profitable smaller operators with established franchises outside of Las
Vegas and Atlantic City. For the larger gaming companies, small to
medium-sized operators with significant presence in new gaming
jurisdictions represent the potential for significant volume growth in
lucrative developing markets.
Retailers represented another substantial sector concentration for your
fund with Loehmann's, a long-standing holding, producing excellent
returns during the period. Loehmann's went public in the spring of 1996
and in the process, refinanced all of its outstanding debt. As a result,
the company called its 10.5% bond of 10/1/97, a former top-10 holding,
enabling the fund to realize a considerable gain on the investment.
* CONTINUING ECONOMIC GROWTH MAY PROVIDE FAVORABLE MARKET
BACKDROP
Indications of stronger-than-expected economic growth, such as the
report estimating that nearly 350,000 new jobs were created during May,
may provide continuing support for the high-yield market in the months
to come. A stronger economy typically translates into improving cash
flows for many high-yield issuers, enabling them to meet their debt
payments more easily.
[GRAPHIC OMITTED: horizontal bar chart TOP INDUSTRY SECTORS (5/31/96)*]
Recreation and gaming 9.4%
Cable television 7.5%
Telecommunications 7.0%
Broadcasting 5.7%
Cellular communications 5.5%
Footnote reads:
* Based on net assets. Industry weightings will vary over time.
Although the outlook for interest rates and Federal Reserve Board policy
remains uncertain, we believe the coupon income currently available from
high-yield bonds is attractive even in light of the risk of rising rates
and their potential impact on high-yield issuers. In any event, we will
continue to take a broadly diversified approach to selecting bonds with
yields that we believe represent a favorable risk-reward tradeoff.
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 5/31/96, there is no guarantee the fund will
continue to hold these securities in the future.
High-yielding lower-rated securities pose a greater risk to principal
than higher-rated securities. High-yield securities are rated lower than
investment-grade securities because there is a greater possibility that
negative changes in the issuer's business conditions or in general
economic conditions may hinder the issuer's ability to pay principal and
interest on its securities.
Performance summary
Performance should always be considered in light of a fund's investment
strategy. Putnam Managed High Yield Trust is designed for investors
seeking high current income with a secondary objective of capital
growth.
This section provides, at a glance, information about your fund's
performance. Total return shows how the value of the fund's shares
changed over time, assuming you held the shares through the entire
period and reinvested all distributions in the fund.
TOTAL RETURN FOR PERIODS ENDED 5/31/96
First Boston
Market High Yield Consumer
NAV price Bond Index Price Index
- ------------------------------------------------------------------------
1 year 16.31% 15.30% 10.45% 2.89%
- ------------------------------------------------------------------------
Life of fund
(since 6/25/93) 31.94 22.96 28.79 8.45
Annual average 9.92 7.31 9.06 2.81
- ------------------------------------------------------------------------
TOTAL RETURN FOR PERIODS ENDED 6/30/96
(most recent calendar quarter)
Market
NAV price
- ------------------------------------------------------------------------
1 year 16.03% 15.27%
- ------------------------------------------------------------------------
Life of fund
(since 6/25/93) 32.41 23.94
Annual average 9.74 7.37
- ------------------------------------------------------------------------
Performance data represent past results and do not reflect future
performance. They do not take into account any adjustment for taxes
payable on reinvested distributions. Investment returns, net asset value
and market price will fluctuate so that an investor's shares, when sold,
may be worth more or less than their original cost.
PRICE AND DISTRIBUTION INFORMATION
12 months ended 5/31/96
- ------------------------------------------------------------------------
Distributions (number) 12
- ------------------------------------------------------------------------
Income $1.32
- ------------------------------------------------------------------------
Total $1.32
- ------------------------------------------------------------------------
Share value: NAV Market price
- ------------------------------------------------------------------------
5/31/95 $13.04 $13.125
- ------------------------------------------------------------------------
5/31/96 13.78 13.750
- ------------------------------------------------------------------------
Current return (end of period) NAV Market price
- ------------------------------------------------------------------------
Current dividend rate1 9.58% 9.60%
- ------------------------------------------------------------------------
1Income portion of most recent distribution, annualized and divided by
NAV or market price at end of period.
TERMS AND DEFINITIONS
Net asset value (NAV) is the value of the fund's assets, minus any
liabilities, divided by the number of outstanding 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
First Boston High Yield Bond Index is an unmanaged list of lower-rated,
high-yielding U.S. corporate bonds. The index assumes reinvestment of
all distributions, does not take into account brokerage commissions or
other costs, and may pose different risks than the fund. Securities in
the fund's portfolio will differ from those in the index. It is not
possible to invest directly in an index.
Consumer Price Index (CPI) is a commonly used measure of inflation; it
does not represent an investment return.
Report of independent accountants
To the Trustees and Shareholders of
Putnam Managed High Yield Trust
In our opinion, the accompanying statement of assets and liabilities,
including the portfolio of investments owned, and the related statements
of operations and of changes in net assets and the financial highlights
present fairly, in all material respects, the financial position of
Putnam Managed High Yield Trust (the "fund") at May 31, 1996, and the
results of its operations, the changes in its net assets, and the
financial highlights for the periods indicated, in conformity with
generally accepted accounting principles. These financial statements
and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the fund's management; our
responsibility is to express an opinion on these financial statements
based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made
by management, and evaluating the overall financial statement
presentation. We believe that our audits, which included confirmation
of investments owned at May 31, 1996 by correspondence with the
custodian and brokers and the application of alternative auditing
procedures where confirmations from brokers were not received, provide a
reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
July 15, 1996
<TABLE>
<CAPTION>
Portfolio of investments owned
May 31,1996
CORPORATE BONDS AND NOTES (79.5%)*
PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Advertising (1.9%)
- ---------------------------------------------------------------------------------------------------------------------------
$200,000 Lamar Advertising Co. sr. secd. notes 11s, 2003 $ 208,000
750,000 Outdoor Systems, Inc. sr. notes 10 3/4s, 2003 772,500
995,000 Universal Outdoor, Inc. sub. deb. 11s, 2003 1,029,825
------------
2,010,325
Aerospace and Defense (3.2%)
- ---------------------------------------------------------------------------------------------------------------------------
850,000 BE Aerospace sr. notes 9 3/4s, 2003 858,500
440,000 Howmet Corp. 144A sr. sub. notes 10s, 2003 466,400
857,000 K&F Industries Inc. sub. deb. 13 3/4s, 2001 889,138
110,000 UNC, Inc. 144A sr. sub. notes 11s, 2006 111,650
1,000,000 UNC, Inc. sr. notes 9 1/8s, 2003 990,000
------------
3,315,688
Agriculture (2.3%)
- ---------------------------------------------------------------------------------------------------------------------------
1,102,000 PMI Holdings Corp. sub. disc. deb. stepped-coupon Ser. B, zero % (11 1/2s, 9/1/00),
2005 ++ 628,140
300,000 PSF Finance (L.P.) sr. exch. notes 12 1/4s, 2004 (acquired 3/15/95, cost $300,000)
(In Default) +(double dagger) 210,000
2,250,000 PSF Finance (L.P.) sr. notes 12s, 2000 (acquired 3/15/95, cost $2,300,625)
(In Default)+(double dagger) 1,575,000
------------
2,413,140
Automotive Parts (1.5%)
- ---------------------------------------------------------------------------------------------------------------------------
275,000 A.P.S., Inc. 144A sr. sub. notes 11 7/8s, 2006 284,625
500,000 Aftermarket Technology Corp. sr. sub. notes 12s, 2004 535,000
250,000 Exide Corp. sr. notes 10s, 2005 246,250
500,000 Key Plastics Corp. sr. notes 14s, 1999 518,750
------------
1,584,625
Banking (0.3%)
- ---------------------------------------------------------------------------------------------------------------------------
340,000 Banco del Sud S.A. sr. unsub. med. term notes 10 1/8s, 1997 (Argentina) 342,550
Broadcasting (4.9%)
- ---------------------------------------------------------------------------------------------------------------------------
500,000 Argyle Television Corp. sr. sub. notes 9 3/4s, 2005 482,500
85,000 Chancellor Broadcasting Co. sr. sub. notes 9 3/8s, 2004 79,475
1,150,000 Commodore Media, Inc. sr. sub. notes stepped-coupon 7 1/2s, (13 1/4s, 5/1/98), 2003 ++ 1,184,500
1,025,000 Echostar Satellite Broadcasting 144A sr. disc. notes stepped-coupon zero %
(13 1/8s, 3/15/00), 2004 ++ 681,625
650,000 Panamsat (L.P.) sr. sub. notes stepped-coupon zero % (11 3/8s, 8/1/98), 2003 ++ 557,375
750,000 Paxson Communications Corp. sr. sub. notes 11 5/8s, 2002 787,500
848,000 Petracom Holdings, Inc. notes stepped-coupon zero % (17 1/2s, 8/1/98), 2003 ++ 620,100
700,000 SFX Broadcasting, Inc. 144A sr. sub. notes 10 3/4s, 2006 700,000
------------
5,093,075
Building Products (0.9%)
- ---------------------------------------------------------------------------------------------------------------------------
500,000 American Standard, Inc. sr. sub. notes stepped-coupon zero %
(10 1/2s, 6/1/98), 2005 ++ 430,000
500,000 Inter-City Products sr. notes 9 3/4s, 2000 460,000
------------
890,000
Building and Construction (2.3%)
- ---------------------------------------------------------------------------------------------------------------------------
185,000 Fortress Group, Inc. sr. notes 13 3/4s, 2003 190,550
100,000 Miles Homes Services sr. notes 12s, 2001 72,000
750,000 NVR, Inc. sr. notes 11s, 2003 761,250
1,000,000 Presley Cos. sr. notes 12 1/2s, 2001 965,000
400,000 Scotsman Group, Inc. sr. secd. notes 9 1/2s, 2000 404,000
------------
2,392,800
Business Services (0.8%)
- ---------------------------------------------------------------------------------------------------------------------------
720,000 Corporate Express, Inc. sr. sub. notes Ser. B, 9 1/8s, 2004 709,200
100,000 United Stationer Supply, Inc. sr. sub. notes 12 3/4s, 2005 108,500
------------
817,700
Cable Television (6.4%)
- ---------------------------------------------------------------------------------------------------------------------------
929,924 Adelphia Communications Corp. sr. notes 9 1/2s, 2004 (2 double daggers) 822,983
250,000 CF Cable TV, Inc. sr. notes 11 5/8s, 2005 (Canada) 271,875
250,000 CF Cable TV, Inc. sr. notes 9 1/8s, 2007 (Canada) 251,250
500,000 Diamond Cable Communication Co. sr. disc. notes stepped-coupon zero %
(11 3/4s, 12/15/00), 2005 ++ 301,250
1,113,025 Falcon Holdings Group, Inc. sr. sub. notes 11s, 2003 (2 double daggers) 1,074,069
1,000,000 Heartland Wireless Communication, Inc. 144A sr. notes 13s, 2003 1,091,250
750,000 International Cabeltel, Inc. sr. notes stepped-coupon Ser. B, zero %
(11 1/2s, 2/01/01), 2006 ++ 438,750
800,000 Lenfest Communications, Inc. sr. notes 8 3/8s, 2005 740,000
750,000 Marcus Cable Co. (L.P.) sr. sub. disc. notes stepped-coupon zero %
(13 1/2s, 8/1/99), 2004 ++ 544,688
1,535,000 Telewest Communications PLC deb. stepped-coupon zero % (11s, 10/1/00), 2007
(United Kingdom) ++ 913,325
250,000 Videotron Holdings. sr. disc. notes stepped-coupon zero % (11s, 8/15/2005), 2005
(United Kingdom) ++ 167,500
------------
6,616,940
Cellular Communications (4.3%)
- ---------------------------------------------------------------------------------------------------------------------------
945,000 Call-Net Enterprises sr. disc. notes stepped-coupon zero % (13 1/4s, 12/1/99), 2004 ++ 698,119
250,000 Communication Celular SA144A bonds stepped-coupon zero % (13 1/8s, 11/15/00), 2003
(Columbia)++ 154,375
635,000 Milicom International Cellular 144A sr. disc. notes steooed-coupon zero % (13 1/2s,
6/01/00), 2006 (Luxemborg)++ 336,550
1,000,000 NEXTEL Communications, Inc. sr. disc. notes stepped-coupon zero % (9 3/4s, 2/15/99),
2004 ++ 607,500
1,900,000 NEXTEL Communications, Inc. sr. disc. notes stepped-coupon zero % (11 1/2s, 9/1/98),
2003 ++ 1,320,500
1,650,000 Pricellular Wireless Corp. sr. disc. notes stepped-coupon zero % (12 1/4s, 10/1/98),
2003 ++ 1,295,250
------------
4,412,294
Chemicals (1.3%)
- ---------------------------------------------------------------------------------------------------------------------------
600,000 Acetex Corp. sr. notes 9 3/4s, 2003 (Canada) 594,000
700,000 Harris Chemical Corp. sr. secd. disc. notes 10 1/4s, 2001 710,500
------------
1,304,500
Computer Equipment (1.1%)
- ---------------------------------------------------------------------------------------------------------------------------
1,100,000 Computervision Corp. sr. sub. notes 11 3/8s, 1999 1,149,500
Conglomerates (1.2%)
- ---------------------------------------------------------------------------------------------------------------------------
600,000 Axia, Inc. sr. sub. notes 11s, 2001 591,000
850,000 Talley Industries, Inc. sr. disc. deb. stepped-coupon zero % (12 1/4s, 10/15/98),
2005 ++ 646,000
------------
1,237,000
Consumer Durable Goods (0.4%)
- ---------------------------------------------------------------------------------------------------------------------------
400,000 Remington Products Co. LLC 144A sr. sub. notes 11s, 2006 398,000
Consumer Services (0.4%)
- ---------------------------------------------------------------------------------------------------------------------------
422,000 Coinmach Corp. sr. notes Ser. B, 11 3/4s, 2005 434,660
Containers (1.1%)
- ---------------------------------------------------------------------------------------------------------------------------
1,000,000 Ivex Holdings Corp. sr. disc. deb. stepped-coupon zero % (13 1/4s, 3/15/00), 2005 ++ 597,500
500,000 Ivex Packaging Corp. sr. sub. notes 12 1/2s, 2002 527,500
------------
1,125,000
Electric Utilities (3.7%)
- ---------------------------------------------------------------------------------------------------------------------------
150,000 Cleveland Electric Illuminating Co. 1st mtge. Ser. B, 9 1/2s, 2005 145,875
250,000 El Paso Electric Co. 1st mtge. Ser. E, 9.4s, 2011 251,250
1,250,000 First PV Funding deb. 10.15s, 2016 1,306,250
1,600,000 Midland Funding Corp. deb. Ser. A, 11 3/4s, 2005 1,692,000
500,000 Niagara Mohawk Power Corp. 1st mtge. 8 3/4s, 2022 440,000
------------
3,835,375
Electronics (1.8%)
- ---------------------------------------------------------------------------------------------------------------------------
500,000 Amphenol Corp. sr. notes 10.95s, 2001 535,000
216,000 Amphenol Corp. sr. sub. notes 12 3/4s, 2002 237,600
1,700,000 International Semi-Tech. Corp. sr. secd. disc. notes stepped-coupon zero %
(11 1/2s, 8/15/00), 2003 (Canada) ++ 994,500
100,000 Moog, Inc. 144A sr. sub. notes 10s, 2006 102,000
------------
1,869,100
Entertainment (1.2%)
- ---------------------------------------------------------------------------------------------------------------------------
150,000 Cobblestone Golf Group 144A sr. notes 11 1/2s, 2003 152,250
250,000 Premier Parks, Inc. sr. notes Ser. A, 12s, 2003 266,875
250,000 Six Flags Corp. sr. sub. notes stepped-coupon zero % (12 1/4s, 6/15/98), 2005 ++ 215,000
1,200,000 UIH Australia /Pacific 144A sr. disc. notes stepped-coupon zero % (14s, 5/15/01),
2006 (Australia)++ 636,000
------------
1,270,125
Financial Services (0.6%)
- ---------------------------------------------------------------------------------------------------------------------------
600,000 Keystone Group, Inc. sr. secd. notes 9 3/4s, 2003 594,000
Food Chains (1.2%)
- ---------------------------------------------------------------------------------------------------------------------------
500,000 Safeway, Inc. med. term notes 8.57s, 2003 508,750
500,000 Southland Corp. 1st priority sr. sub. deb. 5s, 2003 395,000
500,000 Southland Corp. deb. Ser. A, 4 1/2s, 2004 363,750
------------
1,267,500
Health Care (0.2%)
- ---------------------------------------------------------------------------------------------------------------------------
200,000 Merit Behavorial Care sr. sub. notes 11 1/2s, 2005 211,500
Hospital Management (1.5%)
- ---------------------------------------------------------------------------------------------------------------------------
750,000 Integrated Health Services sr. sub. notes 9 5/8s, 2002 738,750
750,000 Tenet Healthcare Corp. sr. sub. notes 10 1/8s, 2005 795,000
------------
1,533,750
Insurance (0.3%)
- ---------------------------------------------------------------------------------------------------------------------------
300,000 Reliance Group Holdings, Inc. sr. sub. deb. 9 3/4s, 2003 297,000
Lodging (1.5%)
- ---------------------------------------------------------------------------------------------------------------------------
500,000 HMH Properties, Inc. sr. notes 9 1/2s, 2005 483,750
500,000 John Q Hammons Hotels, Inc. 1st mtge. 9 3/4s, 2005 490,000
500,000 John Q Hammons Hotels, Inc. 1st mtge. 8 7/8s, 2004 477,500
110,000 Wyndham Hotel Corp. sr. sub. notes 10 1/2s, 2006 110,138
------------
1,561,388
Medical Supplies and Devices (2.0%)
- ---------------------------------------------------------------------------------------------------------------------------
1,000,000 Graphic Controls Corp. sr. sub. notes Ser. A, 12s, 2005 1,065,000
1,000,000 Ivac Corp. sr. notes 9 1/4s, 2002 1,007,500
------------
2,072,500
Motion Picture Distribution (1.3%)
- ---------------------------------------------------------------------------------------------------------------------------
300,000 Cinemark Mexico notes 12s, 2003 279,000
1,000,000 Cinemark USA sr. notes 12s, 2002 1,085,000
------------
1,364,000
Oil and Gas (4.2%)
- ---------------------------------------------------------------------------------------------------------------------------
1,000,000 Chesapeake Energy Corp. sr. notes 12s, 2001 1,082,500
250,000 Chesapeake Energy Corp. sr. notes 9 1/8s, 2006 248,750
110,000 Cliffs Drilling Co. 144A sr. notes 10 1/4s, 2003 110,550
700,000 Flores & Rucks, Inc. sr. notes 13 1/2s, 2004 812,000
250,000 Maxus Energy Corp. deb. 11 1/4s, 2013 255,000
100,000 Maxus Energy Corp. global notes 9 7/8s, 2002 100,000
750,000 Maxus Energy Corp. notes 9 1/2s, 2003 740,625
1,000,000 Transtexas Gas Corp. sr. secd. notes 11 1/2s, 2002 980,000
------------
4,329,425
Paging (3.4%)
- ---------------------------------------------------------------------------------------------------------------------------
1,000,000 Metrocall, Inc. sr. sub. notes 10 3/8s, 2007 985,000
1,000,000 Mobile Telecommunications Tech. sr. notes 13 1/2s, 2002 1,047,500
500,000 Mobilemedia Corp. sr. sub. notes 9 3/8s, 2007 472,500
300,000 Pagemart Nationwide, Inc. sr. disc. notes stepped-coupon zero % (15s, 2/1/00),
2005 ++ 203,250
700,000 Pagemart, Inc. sr. disc. notes stepped-coupon zero % (12 1/4s, 11/1/98), 2003 ++ 526,750
225,000 Pronet, Inc. sr. sub. notes 10 7/8s, 2006 225,000
------------
3,460,000
Paper and Forest Products (0.3%)
- ---------------------------------------------------------------------------------------------------------------------------
270,000 Florida Coast Paper LLC 144A 1st. mtge. 12 3/4s, 2003 276,075
Publishing (0.9%)
- ---------------------------------------------------------------------------------------------------------------------------
500,000 Marvel Holdings, Inc. sr. notes Ser. B, zero %, 1998 395,000
750,000 Marvel Parent Holdings, Inc. sr. secd. disc. notes zero %, 1998 585,000
------------
980,000
Real Estate Investment Trust (0.2%)
- ---------------------------------------------------------------------------------------------------------------------------
250,000 Tanger Properities Ltd. Partnership Gtd. notes 8 3/4s, 2001 243,125
Real Estate (0.7%)
- ---------------------------------------------------------------------------------------------------------------------------
750,000 Chelsea Piers 1st mtge. stepped-coupon Ser. B, zero % (12 1/2s, 6/15/96), 2004 ++ 712,500
50,000 Chelsea Piers 144A 1st mtge. stepped-coupon Ser. B, zero % (11s, 6/15/99), 2009 ++ 47,813
------------
760,313
Recreation (8.2%)
- ---------------------------------------------------------------------------------------------------------------------------
415,000 Argosy Gaming Co. 144A 1st.mtge. 13 1/4s, 2004 415,000
550,000 Arizona Charlies Corp. 1st mtge. Ser. B, 12s, 2000 357,500
200,000 Capitol Queen Corp. 1st mtge. notes Ser. B, 12s, 2000 (In Default)+ 140,000
700,000 Casino America, Inc. 1st mtge. 11 1/2s, 2001 742,000
500,000 Coast Hotels & Casinos, Inc. 144A 1st mtge. 13s, 2002 532,500
250,000 Elsinore Corp. 1st mtge. 20s, 2000 (In Default) + 212,500
600,000 Grand Casinos, Inc. 1st mtge. 10 1/8s, 2003 615,000
120,000 Harveys Casino Resorts sr. sub. notes 10 5/8s, 2006 120,600
850,000 Hollywood Casino Corp. sr. notes 12 3/4s, 2003 828,750
950,000 Lady Luck Gaming 1st. mtge. 11 7/8s, 2001 940,500
376,000 Louisiana Casino Cruises Corp. 1st mtge. 11 1/2s, 1998 357,200
500,000 Mohegan Tribal Gaming 144A sr. secd. notes 13 1/2s, 2002 612,500
450,000 Stratosphere Corp. 1st mtge. 14 1/4s, 2002 547,875
1,000,000 Trump A.C. 1st. mtge. 11 1/4s, 2006 1,007,500
432,000 Trump Castle Funding Corp. sr. sub. notes 11 1/2s, 2000 432,000
500,000 Trump Holdings & Funding Corp. sr. notes 15 1/2s, 2005 582,500
------------
8,443,925
Retail (2.8%)
- ---------------------------------------------------------------------------------------------------------------------------
1,500,000 Finlay Enterprises, Inc. sr. disc. deb. stepped-coupon zero % (12s, 5/1/98), 2005 ++ 1,203,750
850,000 KMart Corp. med. term notes Ser. C, 7.85s, 2002 742,390
275,000 Loehmann's, Inc. sr. notes 11 7/8s, 2003 283,250
600,000 Mothers Work, Inc. sr. notes 12 5/8s, 2005 640,500
------------
2,869,890
School Buses (0.2%)
- ---------------------------------------------------------------------------------------------------------------------------
190,000 Blue Bird Body Co. sub. deb. Ser. B, 11 3/4s, 2002 196,650
Specialty Consumer Products (1.1%)
- ---------------------------------------------------------------------------------------------------------------------------
500,000 Apparel Retailers, Inc. deb. stepped-coupon Ser. B, zero % (12 3/4s, 8/15/98), 2005 ++ 375,000
500,000 Herff Jones, Inc. sr. sub. notes 11s, 2005 525,000
250,000 Selmer Co., Inc. sr. sub. notes 11s, 2005 266,250
------------
1,166,250
Steel (1.1%)
- ---------------------------------------------------------------------------------------------------------------------------
1,150,000 Ispat Mexicana, SA 144A deb. 10 3/8s, 2001 (Mexico) 1,104,000
Super Markets (1.4%)
- ---------------------------------------------------------------------------------------------------------------------------
900,000 Ralphs Grocery sr. notes 10.45s, 2004 861,750
550,000 Smith's Food & Drug Centers sr. sub. notes 11 1/4s, 2007 559,625
------------
1,421,375
Telecommunication (5.4%)
- ---------------------------------------------------------------------------------------------------------------------------
930,000 America Communication Services, Inc. 144A sr. disc. notes stepped-coupon zero %
(12 3/4s, 4/1/01), 2006 ++ 488,250
1,700,000 Brooks Fiber Properties 144A sr. disc. notes stepped-coupon zero % (10 7/8s, 3/1/01),
2006 ++ 941,375
200,000 Fonorola, Inc. sr. notes 12 1/2s, 2002 (Canada) 217,000
1,250,000 Intercel Inc. sr. disc. notes stepped-coupon zero %(12s, 5/01/01), 2006 ++ 700,000
1,270,000 Intelcom Group, Inc. sr. disc. notes stepped-coupon zero % (13 1/2s, 9/15/00), 2005 ++ 774,700
750,000 Intermedia Communications of Florida, Inc. sr. disc. notes stepped-coupon zero %
(12 1/2s, 5/15/01), 2006++ 418,125
450,000 Intermedia Communications of Florida sr. notes Ser. B, 13 1/2s, 2005 504,000
1,000,000 MFS Communications sr. disc. notes stepped-coupon zero % (8 7/8s, 1/1/01), 2006 ++ 612,500
1,600,000 Winstar Communications, Inc. sr. disc. notes stepped-coupon zero % (14s, 10/15/00),
2005 ++ 920,000
5,575,950
------------
Total Corporate Bonds and Notes (cost $80,737,732) $82,241,013
UNITS (6.2%)*
NUMBER OF UNITS VALUE
- ---------------------------------------------------------------------------------------------------------------------------
1,000 Australis Media units stepped-coupon zero % (14s, 5/15/00), 2003 (Australia) ++ $625,000
90 Celcaribe S.A. 144A units stepped-coupon zero % (13 1/2s, 3/15/98), 2004 ++ 900,000
1,315 Cellnet Data Systems Inc. units stepped-coupon zero % (13s, 6/15/00), 2005 ++ 923,788
1,100 Fitzgerald Gaming Co. units 13s, 2002 968,000
140 GST Telecommunications, Inc. 144A units stepped-coupon zero % (13 7/8s, 12/15/00),
2005 (Canada) ++ 791,000
500 Health-O-Meter Product units 13s, 2002 530,000
470 Hyperion Communications 144A units stepped-coupon zero % (13s, 4/15/01), 2003 ++ 267,900
305 ICF Kaiser International, Inc. units 13s, 2003 286,700
1,100 Terex Corp. 144A units 13 3/4s, 2002 1,127,500
------------
Total Units (cost $5,640,766) $6,419,888
PREFERRED STOCKS (6.5%) *
NUMBER OF SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------------
6,085 Cablevision Systems Corp. 144A Ser. L, $11.125, pfd. (2 double daggers) $591,766
14,000 California Federal Bank Ser. B, $10.625, exch. pfd. 1,522,500
5,000 El Paso Electric Co. $11.40, pfd (2 double daggers) 510,000
11,000 First Nationwide Bank $11.50, pfd. 1,210,000
11,765 Fitzgerald Gaming $3.75, pfd. 294,125
2,572 K-III Communications Ser. B, $3.85, pfd. (2 double daggers) 257,200
37,100 SDW Holdings Corp. Ser. B, $3.50, pfd. 1,075,900
1,250 Time Warner, Inc. 144A Ser. K, $10.25, pfd. 1,250,000
------------
Total Preferred Stocks (cost $6,428,824) $6,711,491
COMMON STOCKS (3.8%) *
NUMBER OF SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------------
1,800 Axia Holding Corp. 144A + $54,000
15,375 Chesapeake Energy Corp. + 1,180,031
10,504 Elsinore Corp. + 7,222
10,000 Exide Corp. 235,000
3,333 Finlay Enterprises, Inc. 54,578
40,650 Grand Union Co. (acquired various dates from 7/13/94 to 1/10/95, cost $1,727,265)
+(double dagger) 274,388
18,282 Loehmann's Holdings, Inc. + 371,125
60,000 NEXTEL Communications, Inc. Class A + 1,245,000
303 PMI Holdings Corp. + 60,600
244 Premium Holdings L.P. 144A + 6,112
12,750 Specialty Foods Corp. + 6,375
6,000 Total Renal Care Holdings, Inc. (acquired 1/10/95, cost $10,129)(double dagger)+ 247,500
6,549 Total Renal Care Holdings + 200,727
------------
Total Common Stocks (cost $3,322,860) $3,942,658
CONVERTIBLE PREFERRED STOCKS (1.2%)*
NUMBER OF SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------------
20,000 Cablevision Systems Corp. $527,500
10,000 Granite Broadcasting 676,250
------------
Total Convertible Preferred Stocks (cost $1,101,250) $1,203,750
<CAPTION>
WARRANTS (0.6%)+*
NUMBER OF WARRANTS EXPIRATION DATE VALUE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
25,000 Becker Gaming Corp. 144A 11/15/00 $6,250
4,550 Capital Gaming International, Inc. 2/1/99 182
1,142 Casino America, Inc. 11/15/96 114
6,900 Casino Magic Finance Corp. 10/14/96 345
5,885 Cinemark Mexico USA, Inc. 8/1/03 54,525
1,150 Commodore Media 144A 5/1/00 149,500
250 Communication Celular SA 144A 11/15/20 313
10,000 Elsinore Corp.(acquired 4/5/95 cost $28,588)(double dagger) 10/8/98 1,000
6,000 Heartland Wireless Communications 144A 4/15/00 30,000
4,191 Intelcom Group 144A 10/15/05 48,191
450 Intermedia Communications 144A 6/1/00 20,250
492 Louisiana Casino Cruises, Inc. 144A 12/1/98 7,380
6,000 Miles Homes, Inc. 4/1/97 1,500
500 Nextel Communications 1/1/99 5
6,900 Pagemart, Inc. 144A 12/31/03 59,513
600 Petracom Holdings, Inc. 144A 8/1/05 4,275
1,800 President Riverboat Casinos, Inc. 144A 9/23/96 90
3,710 SDW Holdings, Inc. 144A 12/15/06 48,230
4,560 UCC Investor Holding, Inc. 144A (acquired 3/16/94 cost $59,280)(double dagger) 10/30/99 63,840
750 Universal Outdoor, Inc. 144A 7/1/04 108,750
101 Wright Medical Technology, Inc. 144A 6/30/03 13,083
------------
Total Warrants (cost $480,812) $617,336
<CAPTION>
BRADY BONDS (0.5%)*(cost $467,500)
PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
$1,000,000 Argentina (Republic of) FRN 5 1/4s, 2023 $538,750
CONVERTIBLE BONDS AND NOTES (0.5%)*(cost $409,818)
PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------
$800,000 Winstar Communications. Inc. cv sr. disc. notes stepped-coupon zero %
(14s, 10/15/00), 2005 $528,000
SHORT-TERM INVESTMENTS (0.6%)*(cost $666,098)
PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------
$666,000 Interest in $530,273,000 joint repurchase agreement dated May 31, 1996
with Morgan Stanley & Co. Inc. due June 3, 1996 with respect to various
U.S. Treasury obligations-maturity value $666,294 for an effective yield of 5.29% $666,098
- ---------------------------------------------------------------------------------------------------------------------------
Total Investments (cost $99,255,659)*** $102,868,984
- ---------------------------------------------------------------------------------------------------------------------------
* Percentages indicated are based on net assets of $103,465,597.
+ Non-income-producing security.
++ The interest rate and date shown parenthetically represent the new interest rate to be paid and the date the
fund will begin receiving interest at this rate.
(double dagger) Restricted, excluding 144A, as to public resale. The total market value of restricted securities
held at May 31, 1996 was $2,371,728 or 2.3% of net assets.
(2 double daggers) Income may be received in cash or additional securities at the discretion of the issuer.
*** The aggregate identified cost on a tax basis is $99,266,799, resulting in gross unrealized appreciation
and depreciation of $10,301,677, and $6,699,492, respectively, or net unrealized appreciation of
$3,602,185.
144A after the name of a security represents those securities exempt from registration under Rule 144A of
the Securities Act of 1933. These securities may be resold in transactions exempt from registration,
normally to qualified institutional buyers.
The rate shown on Floating Rate Notes (FRN) is the current interest rate shown at May 31, 1996, which
is subject to change based on the terms of the security.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
May 31, 1996
<S> <C>
Assets
- --------------------------------------------------------------------------------------------
Investments in securities, at value (identified cost $99,255,659) (Note 1) $102,868,984
- --------------------------------------------------------------------------------------------
Cash 849,129
- --------------------------------------------------------------------------------------------
Dividends and interest receivable 1,642,072
- --------------------------------------------------------------------------------------------
Receivable for securities sold 319,648
- --------------------------------------------------------------------------------------------
Unamortized organization expenses (Note 1) 12,337
- --------------------------------------------------------------------------------------------
Total assets 105,692,170
Liabilities
- --------------------------------------------------------------------------------------------
Distributions payable to shareholders $825,476
- --------------------------------------------------------------------------------------------
Payable for securities purchased 1,120,677
- --------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 193,978
- --------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 273
- --------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 1,354
- --------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 31,411
- --------------------------------------------------------------------------------------------
Other accrued expenses 53,404
- --------------------------------------------------------------------------------------------
Total liabilities 2,226,573
- --------------------------------------------------------------------------------------------
Net assets $103,465,597
Represented by
- --------------------------------------------------------------------------------------------
Paid-in capital (Note 1) $106,051,065
- --------------------------------------------------------------------------------------------
Distributions in excess of net investment income (Note 1) (207,835)
- --------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (Note 1) (5,990,958)
- --------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 3,613,325
- --------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to capital shares outstanding $103,465,597
Computation of net asset value and offering price
- --------------------------------------------------------------------------------------------
Net asset value per share ($103,465,597 divided by 7,507,107 shares) $13.78
- --------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Year ended May 31, 1996
<S> <C>
Investment Income:
- ---------------------------------------------------------------------------
Interest $ 10,220,968
- ---------------------------------------------------------------------------
Dividends 368,505
- ---------------------------------------------------------------------------
Total investment income 10,589,473
Expenses:
- ---------------------------------------------------------------------------
Compensation of Manager (Note 2) $754,933
- ---------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 135,262
- ---------------------------------------------------------------------------
Compensation of Trustees (Note 2) 9,322
- ---------------------------------------------------------------------------
Administrative services (Note 2) 7,908
- ---------------------------------------------------------------------------
Reports to shareholders 42,206
- ---------------------------------------------------------------------------
Auditing 26,858
- ---------------------------------------------------------------------------
Legal 11,236
- ---------------------------------------------------------------------------
Postage 38,275
- ---------------------------------------------------------------------------
Registration fees 633
- ---------------------------------------------------------------------------
Exchange listing fees 16,170
- ---------------------------------------------------------------------------
Amortization of organization expenses (Note 1) 6,004
- ---------------------------------------------------------------------------
Other 3,590
- ---------------------------------------------------------------------------
Total expenses 1,052,397
- ---------------------------------------------------------------------------
Expense reduction (Note 2) (26,934)
- ---------------------------------------------------------------------------
Total expenses 1,025,463
- ---------------------------------------------------------------------------
Net investment income 9,564,010
- ---------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 3,310,311
- ---------------------------------------------------------------------------
Net unrealized appreciation on investments 2,599,237
- ---------------------------------------------------------------------------
Net gain on investments 5,909,548
- ---------------------------------------------------------------------------
Net increase in net assets resulting from operations $ 15,473,558
- ---------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Year ended Year ended
May 31 May 31
1996 1995
- -------------------------------------------------------------------------------------------------------------
Increase in net assets
<S> <C> <C>
- -------------------------------------------------------------------------------------------------------------
Operations:
- -------------------------------------------------------------------------------------------------------------
Net investment income $9,564,010 $9,915,722
- -------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments 3,310,311 (7,982,715)
- -------------------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 2,599,237 5,262,308
- -------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 15,473,558 7,195,315
- -------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- -------------------------------------------------------------------------------------------------------------
From net investment income (9,771,229) (9,909,206)
- -------------------------------------------------------------------------------------------------------------
In excess of net investment income (137,769) --
- -------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets 5,564,560 (2,713,891)
- -------------------------------------------------------------------------------------------------------------
Net Assets
- -------------------------------------------------------------------------------------------------------------
Beginning of year 97,901,037 100,614,928
- -------------------------------------------------------------------------------------------------------------
End of year (including distributions in excess of net investment income
of $207,835 and $70,066, respectively) $103,465,597 $97,901,037
- -------------------------------------------------------------------------------------------------------------
Number of fund shares
- -------------------------------------------------------------------------------------------------------------
Shares outstanding at beginning and end of year 7,507,107 7,507,107
- -------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
For the Period
June 25, 1993
(commencement
of operations)
Year ended May 31 to May 31
------------------------------------------------
1996 1995 1994
------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period $13.04 $13.40 $14.01 *
- -------------------------------------------------------------------------------------------------------------
Investment operations
- -------------------------------------------------------------------------------------------------------------
Net investment income 1.27 1.32 1.23
- -------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments .79 (.36) (.59)
- -------------------------------------------------------------------------------------------------------------
Total from investment operations 2.06 .96 .64
- -------------------------------------------------------------------------------------------------------------
Less distributions:
- -------------------------------------------------------------------------------------------------------------
From net investment income (1.30) (1.32) (1.22)
- -------------------------------------------------------------------------------------------------------------
In excess of net investment income (.02) -- (.03)
- -------------------------------------------------------------------------------------------------------------
Total distributions (1.32) (1.32) (1.25)
- -------------------------------------------------------------------------------------------------------------
Net asset value, end of period $13.78 $13.04 $13.40
- -------------------------------------------------------------------------------------------------------------
Market value, end of period $13.75 $13.125 $13.375
- -------------------------------------------------------------------------------------------------------------
Total investment return at market value (%)(b) 15.30 9.20 (2.52)(a)
- -------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $103,466 $97,901 $100,615
- -------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%) (c) 1.04 1.00 1.00 (a)
- -------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets (%) 9.49 10.32 8.82 (a)
- -------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 74.70 103.91 80.21 (a)
- -------------------------------------------------------------------------------------------------------------
* Represents initial net asset value of $14.07 less offering expenses
of approximately $0.06.
(a) Not annualized.
(b) Total investment return assumes dividend reinvestment
and does not reflect the effect of sales charges.
(c) The ratio of expenses to average net assets for the period ended May 31, 1996
includes amounts paid through expense offset arangements. Prior period ratios
exclude these amounts. (Note 2)
The accompanying notes are an integral part of these financial statements.
</TABLE>
Notes to financial statements
May 31, 1996
Note 1
Significant accounting policies
The fund is registered under the Investment Company Act of 1940, as
amended, as a non-diversified, closed-end management investment company.
The fund's investment objective is to seek high current income. The fund
intends to achieve its objective by investing in high yielding income
securities.
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 require management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities. Actual results could differ from those
estimates.
A) Security valuation Investments for which market quotations are
readily available are stated at market value, which is determined using
the last reported sale price, or, if no sales are reported -- as in the
case of some securities traded over-the-counter -- the last reported bid
price. Market quotations are not considered to be readily available for
long-term corporate bonds and notes; such investments are stated at fair
value on the basis of valuations furnished by a pricing service,
approved by the Trustees, or dealers which determine valuations for
normal, institutional-size trading units of such securities using
methods based on market transactions for comparable securities and
various relationships between securities that are generally recognized
by institutional traders. Short-term investments having remaining
maturities of 60 days or less are stated at amortized cost, which
approximates market value, and other investments including restricted
securities are stated at fair value following procedures approved by the
Trustees.
B) Joint trading account Pursuant to an exemptive order issued by the
Securities and Exchange Commission, the fund may transfer uninvested
cash balances into a joint trading account, along with the cash of other
registered investment companies managed by Putnam Investment Management,
Inc. ("Putnam Management"), the fund's manager, a wholly-owned
subsidiary of Putnam Investments Inc., and certain other accounts. These
balances may be invested in one or more repurchase agreements and/or
short-term money market instruments.
C) Repurchase agreements The fund, through its custodian, receives
delivery of the underlying securities, the market value of which at the
time of purchase is required to be in an amount at least equal to the
resale price, including accrued interest. Putnam Management is
responsible for determining that the value of these underlying
securities is at all times at least equal to the resale price, including
accrued interest.
D) Security transactions and related investment income Security
transactions are accounted for on the trade date (date the order to buy
or sell is executed).
Interest income is recorded on the accrual basis. Dividend income is
recorded on the ex-dividend date. Discounts on zero coupon bonds,
original issue, stepped-coupon bonds and payment in kind bonds are
accreted according to the effective yield method.
E) Federal taxes It is the policy of the fund to distribute all of its
taxable income within the prescribed time and otherwise comply with the
provisions of the Internal Revenue Code applicable to regulated
investment companies. It is also the intention of the fund to distribute
an amount sufficient to avoid imposition of any excise tax under Section
4982 of the Internal Revenue Code of 1986. Therefore, no provision has
been made for federal taxes on income, capital gains or unrealized
appreciation of securities held and excise tax on income and capital
gains.
At May 31, 1996, the fund had capital loss carryovers of approximately
$5,970,000 available to offset future realized capital gains, if any.
The amount of the carryover and the expiration dates are:
Loss Carryover Expiration
- --------------------------------------------
$ 307,000 May 31, 2002
4,212,000 May 31, 2003
1,451,000 May 31, 2004
F) Distributions to shareholders Distributions to shareholders from net
investment income are recorded by the fund on the ex-dividend date.
Capital gain distributions, if any, are recorded on the ex-dividend date
and paid 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
treatment of market discount, defaulted bond interest and dividends
payable. 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 May 31, 1996, the fund reclassified $207,219 to decrease
distributions in excess of net investment income, $915,711 to increase
accumulated net realized loss, and $708,492 to increase paid-in capital.
The calculation of net investment income per share in the financial
highlights table excludes these adjustments.
G) Unamortized organization expenses Expenses incurred by the fund in
connection with its organization, its registration with the Securities
and Exchange Commission and with various states and the initial public
offering of its shares were $29,884. These expenses are being amortized
on a straight-line basis over a five-year period.
Note 2
Management fee, administrative services, and other transactions
Compensation of Putnam Management, for management and investment
advisory services is paid quarterly based on the average weekly net
assets of the fund. Such management and investment advisory fees are
based on the following annual rates: 0.75% of the first $500 million,
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 for the compensation and related
expenses of certain officers of the fund and their staff who provide
administrative services to the fund. The aggregate amount of all such
reimbursements is determined annually by the Trustees.
Trustees of the fund receive an annual Trustees fee of $590 and an
additional fee for each Trustee's meeting attended. Trustees who are not
interested persons of Putnam Management and who serve on committees of
the Trustees receive additional fees for attendance at certain committee
meetings.
The fund adopted a Trustee Fee Deferral Plan (the "Plan") which allows
the Trustees to defer the receipt of all or a portion of Trustees Fees
payable on or after July 1, 1995. The deferred fees remain invested in
certain Putnam funds until distribution in accordance with the Plan.
Custodial functions for the fund's assets are provided by Putnam
Fiduciary Trust Company (PFTC), a wholly-owned subsidiary of Putnam
Investments, Inc. Investor servicing agent functions are provided by
Putnam Investor Services, a division of PFTC.
For the year ended May 31, 1996, fund expenses were reduced by $26,934
under expense offset arrangements with PFTC. Investor servicing and
custodian fees reported in the Statement of operations exclude these
credits. The fund could have invested 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.
Note 3
Purchase and sales of securities
During the year ended May 31, 1996, purchases and sales of investment
securities other than short-term investments aggregated $72,940,966 and
$75,148,922, respectively. There were no purchases and sales of U.S.
government obligations. In determining the net gain or loss on
securities sold, the cost of securities has been determined on the
identified cost basis.
Selected Quarterly Data
(Unaudited)
<TABLE>
<CAPTION>
Net realized and Net increase (decrease)
Investment Net investment unrealized gain in net assets
income income (loss) on investments from operations
- ------------------------------------------------------------------------------------------------------
Quarter Per Per Per Per
Ended Total Share Total Share Total Share Total Share
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
8/31/94 $2,602,834 $.34 $2,357,192 $.31 $(3,421,646) $(.45) $(1,064,454) $(.14)
11/30/94 2,960,538 .40 2,721,030 .37 (4,144,729) (.56) (1,423,699) (.19)
2/28/95 2,681,975 .36 2,454,668 .33 1,360,907 .18 3,815,575 .51
5/31/95 2,632,637 .35 2,382,832 .31 3,485,061 .47 5,867,893 .78
8/31/95 2,719,048 .36 2,452,855 .33 1,237,195 .16 3,690,050 .49
11/30/95 2,577,487 .35 2,324,078 .31 1,244,163 .17 3,568,241 .48
2/29/96 2,469,069 .33 2,204,961 .29 2,980,924 .40 5,185,885 .69
5/31/96 2,823,869 .37 2,582,116 .34 447,266 .06 3,029,382 .40
</TABLE>
Federal tax information
(Unaudited)
The fund has designated 3.17% of the distributions from net investment
income as qualifying for the dividends received deduction for
corporations.
The Form 1099 you receive in January 1997 will show the tax status of
all distributions paid to your account in calendar 1996.
Results of March 7, 1996 shareholder meeting
(Unaudited)
An annual meeting of shareholders of the fund was held on March 7, 1996.
At the meeting, each of the nominees for Trustees was elected, as
follows:
Votes for Votes withheld
- ------------------------------------------------------------------------
Jameson Adkins Baxter 6,645,891 78,670
Hans H. Estin 6,643,201 81,360
John A. Hill 6,648,196 76,365
Elizabeth T. Kennan 6,647,420 77,141
Lawrence J. Lasser 6,648,486 76,075
Robert E. Patterson 6,647,996 76,565
Donald S. Perkins 6,644,366 80,195
William F. Pounds 6,644,816 79,745
George Putnam 6,645,016 76,545
George Putnam, III 6,645,503 79,058
E. Shapiro 6,641,444 83,118
A.J.C. Smith 6,649,016 75,545
W. Nicholas Thorndike 6,647,666 76,895
A proposal to ratify the selection of Price Waterhouse LLP as auditors
for the fund was approved as follows: 6,111,242 votes for, and 22,377
votes against, with 90,943 abstentions and broker non-votes. All
tabulations have been rounded to the nearest whole number.
Fund information
INVESTMENT MANAGER
Putnam Investment
Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
INDEPENDENT
ACCOUNTANTS
Price Waterhouse LLP
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
John A. Hill
Ronald J. Jackson
Elizabeth T. Kennan
Lawrence J. Lasser
Robert E. Patterson
Donald S. Perkins
George Putnam, III
Eli Shapiro
A.J.C. Smith
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
John D. Hughes
Senior Vice President and Treasurer
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Gary N. Coburn
Vice President
Edward H. D'Alelio
Vice President
Jennifer E. Leichter
Vice President and Fund Manager
William N. Shiebler
Vice President
John R. Verani
Vice President
Paul M. O'Neil
Vice President
Beverly Marcus
Clerk and Assistant Treasurer
Call 1-800-225-1581 weekdays from 9 a.m. to 5 p.m. Eastern Time for up-
to-date information about the fund's NAV.
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
- --------------
Bulk Rate
U.S. Postage
PAID
Putnam
Investments
- --------------
25856-590 7/96
