Putnam
Managed
High Yield
Trust
ANNUAL REPORT
May 31, 1998
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* "In our view, the high-yield market is likely to continue to perform well.
Credit profiles continue to improve, corporate profitability remains strong,
and inflation remains under control. Seemingly all the factors that have
supported this bull market remain intact. Although there can be no
guarantees, this favorable backdrop, combined with a fundamental change in
how investors view high-yield bonds, sets the stage for Putnam Managed High
Yield Trust to continue performing in line with expectations."
-- Jennifer Leichter, Fund Manager
CONTENTS
4 Report from Putnam Management
9 Fund performance summary
12 Portfolio holdings
28 Financial statements
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
The global flight to quality in the aftermath of events in Asia temporarily
stalled the U.S. high-yield bond market in late 1997 as investors flocked to
the safety of U.S. Treasury issues. But by the time Putnam Managed High Yield
Trust closed its fiscal year on May 31, 1998, the lower-rated high-yield bonds
in which your fund invests were once again in favor.
The Federal Reserve Board's decision to leave interest rates unchanged helped
reassure investors about economic prospects. A boom in merger and acquisition
activity helped the high-yield bond market, but the main driver of the
market's solid performance was a strong economic backdrop coupled with vibrant
equity markets.
In the report that follows, Fund Manager Jennifer Leichter provides greater
detail about the market environment in which your fund delivered its positive
results. Then she offers her views on prospects for the months ahead.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
July 15, 1998
Report from the Fund Manager
Jennifer E. Leichter
Powerful and often opposing forces were at work in the financial markets over
the past 12 months, creating an investment environment filled with contrasts.
Robust economic growth and negligible inflation had investors charging ahead
with bullish delight while simultaneously darting for cover as they awaited
each new release of leading economic indicators. The Asian currency debacle,
which hit the boiling point in late October, wreaked havoc among markets
worldwide and yet the broad U.S. stock market regained its footing rather
quickly and flourished through the period's end.
While some industry pundits debated whether valuations were too lofty, others
questioned whether traditional measures were even applicable in light of the
current economic environment. As the Federal Reserve Board stood pat on
interest rates and foreign investors flocked to the relative safety of U.S.
Treasury securities, the yield curve flattened significantly and yields, in
general, declined across the fixed-income spectrum.
Against this fitful backdrop, Putnam Managed High Yield Trust closed fiscal
1998 with solid results at both net asset value and market price. For complete
performance information, please refer to the summary that begins on page 9.
* MANY FACTORS HELP SUSTAIN HIGH-YIELD BONDS' HEADY PACE
High-yield issues are influenced by trends that affect the stock market as
well as those that affect the bond market. Your fund's fiscal 1998 performance
was a perfect case in point. On the equity front, a brisk economy with low
inflation continued to bolster the financial health of corporate America,
enabling many companies to improve their balance sheets and de-leverage
assets. This, in turn, dramatically lowered default rates and paved the way
for credit rating upgrades. Heavy merger and acquisition activity also had an
overall positive effect on the credit ratings of many issuers. On the
fixed-income side, low interest rates and subdued inflation induced investors
- -- individual and institutional, domestic and foreign -- to turn to the U.S.
high-yield market for greater income potential, thereby increasing demand.
Price appreciation naturally ensued as a result.
Despite pockets of short-term underperformance relative to the Treasury
market, high-yield bonds remained the stars of the domestic fixed-income
universe over the past 12 months. Their outperformance is especially
noteworthy given the record amount of new issuance in calendar 1997 and during
the first quarter of calendar 1998.
* TELECOMMUNICATIONS ISSUES DOMINATE PERFORMANCE
Your fund benefited from substantial investments in three key high-yield
industries: telecommunications, cable television, and broadcasting.
Telecommunications holdings, by far, were the fund's performance leaders.
Strong operating results, high equity valuations, favorable regulatory
developments, and new technologies have allowed the telecommunications sector
to evolve rapidly into one of today's most dynamic growth industries. We have
capitalized successfully on the opportunities available in this sector through
investments in competitive local exchange carriers (CLECs) and specialized
mobile radio operators whose competitive positions have dramatically improved
because of enhanced network buildouts, strategic commercial launches of new
technologies, or mergers.
[GRAPHIC OMITTED: horizontal bar chart of TOP INDUSTRY SECTORS]
TOP INDUSTRY SECTORS*
Telecommunications 13.9%
Cellular
communications 8.5%
Broadcasting 7.3%
Oil and gas 5.1%
Telephone services 4.8%
Footnote reads:
* Based on net assets as of 5/31/98. Holdings will vary over time.
Worth mentioning are NEXTEL Communications, Winstar Communications, and
Teleport Communications (which was recently acquired by AT&T and is now no
longer a fund holding). Using fiber-optic and wireless technologies to compete
with local phone companies, these issues, among others, enjoyed substantial
price appreciation over the period. While these securities and others
discussed in this report were viewed favorably during the period, all holdings
are subject to review in accordance with the fund's investment strategy and
may vary in the future.
Deregulation has been a boon to companies in the broadcasting industry,
allowing radio station operators to own multiple stations within a single
market. The resulting consolidation fueled this sector's performance, with the
fund's holdings of Capstar Broadcasting, SFX Broadcasting, and Citadel
Broadcasting bonds making substantial contributions to performance.
The prospect of delivering Internet technology through conventional cable
systems has breathed new life into the cable industry. Microsoft's decision to
invest $1 billion in Comcast Corp., a Philadelphia-based cable operator,
renewed investor interest in an industry sector previously viewed as mature.
Adelphia Communications Corp. is one among several other holdings that have
benefited from this sector's revitalization.
* FORAY INTO NEW SECTORS OFFERS SOLID POTENTIAL
Over the period, we enhanced the portfolio's diversification by tapping
opportunities in companies not typically considered mainstream high-yield
issuers. For example, we purchased bonds from Internet-related companies that
are just now starting to issue high-yield debt as their growth gets underway.
We believe holdings such as Amazon.com and PSINet are poised for solid gains
as Internet access and usage become easier and more widespread.
[GRAPHIC OMITTED: TOP 10 HOLDINGS]
TOP 10 HOLDINGS
Midland Funding Corporation Debentures
Series A, 11 3/4s, 2005
Transamerican Energy, Series B
Senior discount notes, stepped-coupon zero % (13s, 6/15/99), 2002
NEXTEL Communications, Inc.
Senior discount notes, stepped-coupon zero % (10.65s, 9/15/02) 2007
Celcaribe S.A. 144A
Units 13 1/2s, 2004 (Colombia)
NEXTEL Communications, Inc., Series D
$13.00 cumulative preferred
WinStar Communications, Inc. 144A Convertible senior discount notes
stepped-coupon zero % (14s,10/15/00) 2005
Adelphia Communications Corporation
Senior notes 9 1/2s, 2004
Graphic Controls Corporation
Senior subordinated notes Series A, 12s, 2005
PSF Holdings LLC, Class A
Common stock
GST Telecommunications, Inc.
Company guaranty stepped-coupon zero % (13 7/8s, 12/15/00) 2005
These holdings represent 12.2% of the fund's net assets as of 5/31/98.
Portfolio holdings will vary over time.
Another previously untapped area in which the fund has made successful
investments is in European long distance companies. Just as telecommunications
companies in the United States underwent deregulation several years ago, their
European counterparts are just now experiencing it and solid growth is
occurring as a result. Many companies, including three new portfolio holdings
- -- Econophone, Viatel, and Long Distance International -- are taking advantage
of recent developments to issue high-yield debt in order to finance their
growth. We believe this market is ripe with potential.
For several years now, we have also had an interest in cable companies in the
United Kingdom. The United Kingdom permits corporations to market telephone
and cable television services jointly. The positive effects of deregulation
and acquisition activity have helped to focus investor interest on the
telephone/cable television duopolies in the United Kingdom and boosted the
value of several fund holdings, such as Diamond Cable Communications and NTL.
* FUND IS POSITIONED WELL FOR FISCAL 1999
We enter the fund's new fiscal year with optimism. The U.S. economy appears to
be growing at a healthy pace with inflation remaining subdued. For the near
term, it seems the Fed is content to leave interest rates alone, allowing
instead for the ongoing turmoil in Asia to serve as a deterrent to runaway
economic growth at home. Demand for high-yield issues remains strong and
credit quality continues to improve. As we move ahead, our goal is to continue
structuring a well-diversified portfolio of bonds with attractive risk/reward
characteristics and to focus on improving credits.
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 5/31/98, there is no guarantee the fund will continue to hold
these securities in the future. The lower credit ratings of high-yield
corporate bonds reflect a greater possibility that adverse changes in the
economy or their issuers may affect their ability to pay principal and
interest on the bonds.
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.
TOTAL RETURN FOR PERIODS ENDED 5/31/98
First Boston
Market High Yield Consumer
NAV price Bond Index Price Index
- ------------------------------------------------------------------------
1 year 15.18% 16.96% 5.04% 0.80%
- ------------------------------------------------------------------------
Life of fund (6/25/93) 70.62 65.21 63.92 12.74
Annual average 11.45 10.72 10.57 2.47
- ------------------------------------------------------------------------
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 5/31/98
- ------------------------------------------------------------------------
Distributions
- ------------------------------------------------------------------------
Number 12
- ------------------------------------------------------------------------
Income $1.375
- ------------------------------------------------------------------------
Total $1.375
- ------------------------------------------------------------------------
Share value NAV Market price
- ------------------------------------------------------------------------
5/31/97 $14.08 $14.375
- ------------------------------------------------------------------------
5/31/98 14.83 15.375
- ------------------------------------------------------------------------
Current return (end of period) NAV Market price
- ------------------------------------------------------------------------
Current dividend rate1 9.31% 8.98%
- ------------------------------------------------------------------------
1Income portion of most recent distribution, annualized and
divided by NAV or Market price at end of period.
TOTAL RETURN FOR PERIODS ENDED 6/30/98
(most recent calendar quarter)
Market
NAV price
- ------------------------------------------------------------------------
1 year 12.99% 14.54%
- ------------------------------------------------------------------------
Life of fund (6/25/93) 70.80 64.44
Annual average 11.28 10.44
- ------------------------------------------------------------------------
Performance data represent past results and do not reflect future
performance. They do not take into account any adjustment for taxes
payable on reinvested distributions. Investment returns, net asset
value, and market price will fluctuate so that an investor's shares
when sold may be worth more or less than their original cost.
TERMS AND DEFINITIONS
Total return shows how the value of the fund's shares changed over
time, assuming you held the shares through the entire period and
reinvested all distributions in the fund.
Net asset value (NAV) is the value of all your fund's assets, minus
any liabilities, divided by the number of outstanding 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, 1998, and the results of its
operations, the changes in its net assets and the financial highlights for the
periods indicated, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the fund's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of investments owned at May 31, 1998 by correspondence with the
custodian and the application of alternative auditing procedures where
investments purchased were not yet received by the custodian, provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
July 17, 1998
Portfolio of investments owned
May 31, 1998
<TABLE>
<CAPTION>
CORPORATE BONDS AND NOTES (74.4%) (a)
PRINCIPAL AMOUNT VALUE
Advertising (0.2%)
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------
$ 240,000 Lamar Advertising Co. company guaranty 8 5/8s, 2007 $ 244,800
Aerospace and Defense (1.6%)
- -------------------------------------------------------------------------------------------------------------
110,000 Argo-Tech Corp. company guaranty 8 5/8s, 2007 110,275
210,000 Aviation Sales Co. 144A sr. sub. notes 8 1/8s, 2008 205,800
850,000 BE Aerospace sr. sub. notes Ser. B, 9 7/8s, 2006 905,250
125,000 BE Aerospace sr. sub. notes Ser. B, 8s, 2008 124,375
120,000 K&F Industries, Inc. sr. sub. notes Ser. B, 9 1/4s, 2007 123,000
200,000 Sequa Corp. med. term notes 10s, 2001 208,784
125,000 United Defense Industries Inc. company guaranty 8 3/4s, 2007 126,250
--------------
1,803,734
Agriculture (0.9%)
- -------------------------------------------------------------------------------------------------------------
668,553 Premium Standard Farms, Inc. sr. secd. notes 11s, 2003 (PIK) 722,037
230,000 Purina Mills, Inc. 144A sr. sub. notes 9s, 2010 235,750
--------------
957,787
Airlines (1.1%)
- -------------------------------------------------------------------------------------------------------------
160,000 Calair LLC 144A company guaranty 8 1/8s, 2008 159,400
280,000 Canadian Airlines Corp. sec. 10s, 2005 (Canada) 284,550
350,000 Cathay International Ltd. 144A sr. notes 13s, 2008 332,500
300,000 Trans World Airlines, Inc. sr. notes 11 1/2s, 2004 315,000
170,000 Trans World Airlines, Inc. 144A notes 11 3/8s, 2006 170,000
--------------
1,261,450
Apparel (0.6%)
- -------------------------------------------------------------------------------------------------------------
150,000 GFSI, Inc. sr. disc. notes stepped-coupon Ser. B, zero %
(11 3/8s, 9/15/04) 2009 (STP) 168,000
295,000 Sassco Fashions Ltd. sr. notes 12 3/4s, 2004 319,338
135,000 William Carter Co. 144A sr. sub. notes 12s, 2008 145,463
--------------
632,801
Automotive Parts (2.1%)
- -------------------------------------------------------------------------------------------------------------
375,000 Aftermarket Technology Corp. sr. sub. notes Ser. D, 12s, 2004 413,906
500,000 Cambridge Industries Inc. company guaranty Ser. B,
10 1/4s, 2007 520,000
500,000 Talon Automotive Group 144A sr. sub. notes 9 5/8s, 2008 505,000
400,000 Walbro Corp. 144A sr. notes 10 1/8s, 2007 398,000
500,000 Walbro Corp. sr. notes Ser. B, 9 7/8s, 2007 495,000
--------------
2,331,906
Banks (2.5%)
- -------------------------------------------------------------------------------------------------------------
125,000 Albank Capital Trust Ser. B co. guaranty 9.27s, 2027 143,019
320,000 Delta Financial Corp. sr. notes 9 1/2s, 2004 320,000
315,000 Dime Capital Trust I bank guaranty Ser. A, 9.33s, 2027 361,711
400,000 Greenpoint Capital Trust I company guaranty 9.1s, 2027 449,028
600,000 Korea Development Bank bonds 7 3/8s, 2004 (Korea) 505,980
75,000 Ocwen Capital Trust I company guaranty 10 7/8s, 2027 81,750
165,000 Ocwen Federal Bank sub. deb. 12s, 2005 181,500
100,000 Ocwen Financial Corp. notes 11 7/8s, 2003 114,000
150,000 Peoples Heritage Capital Trust company guaranty
Ser. B, 9.06s, 2027 165,809
150,000 Provident Capital Trust company guaranty 8.6s, 2026 160,016
85,000 Riggs Capital Trust 144A bonds 8 5/8s, 2026 91,520
125,000 Sovereign Capital Trust company guaranty 9s, 2027 136,709
110,000 Webster Capital Trust I 144A bonds 9.36s, 2027 122,790
--------------
2,833,832
Broadcasting (5.7%)
- -------------------------------------------------------------------------------------------------------------
200,000 Acme Television Ser. B, co. guaranty stepped-coupon zero %
(10 7/8s, 9/30/00) 2004 (STP) 164,000
300,000 Affinity Group Holdings sr. notes 11s, 2007 324,000
410,000 Allbritton Communication Ser. B, sr. sub. notes 8 7/8s, 2008 410,000
200,000 Australias Hldngs PTY Ltd. sr. disc. notes stepped-coupon
zero % (15s, 11/01/00), 2002 (In Default) (STP) (NON) 40,000
750,000 Benedek Communications Corp. sr. disc. notes stepped-coupon
zero % (13 1/4s, 5/15/01) 2006 (STP) 588,750
435,000 Capstar Broadcasting sr. disc. notes stepped-coupon zero %
(12 3/4s, 2/1/02) 2009 (STP) 327,338
180,000 Capstar Broadcasting sr. sub. notes 9 1/4s, 2007 186,300
160,000 Citadel Broadcasting Inc. sr. sub. notes 10 1/4s, 2007 175,200
510,000 Fox Family Worldwide, Inc. sr. disc. notes stepped-coupon
zero % (10 1/4s, 11/1/02) 2007 (STP) 317,475
575,000 Fox Family Worldwide, Inc. sr. notes 9 1/4s, 2007 560,625
340,000 Fox/Liberty Networks LLC sr. notes 8 7/8s, 2007 344,250
80,000 Globo Communicacoes 144A sr. notes 10 5/8s, 2008 (Brazil) 77,200
210,000 Globo Communicacoes 144A company guaranty
10 1/2s, 2006 (Brazil) 205,800
160,000 Granite Broadcasting Corp. 144A sr. sub. notes 8 7/8s, 2008 160,400
95,000 Jacor Communications, Inc. company guaranty 9 3/4s, 2006 102,600
500,000 Lenfest Communications, Inc. sr. sub. notes 10 1/2s, 2006 567,500
55,000 Pegasus Communications Corp. sr. notes Ser. B, 9 5/8s, 2005 57,475
100,000 Pegasus Media & Communications notes Ser. B, 12 1/2s, 2005 113,000
904,000 PHI Holdings, Inc. 16s, 2001 654,586
225,000 Radio One Inc. company guaranty stepped-coupon
Ser. B, 7s, (12s, 5/15/00) 2004 (STP) 229,500
500,000 RBS Participacoes S.A. 144A company guaranty
11s, 2007 (Brazil) 487,500
165,000 SFX Entertainment Inc. 144A sr. sub. notes 9 1/8s, 2008 161,700
100,000 TV Azteca Holdings S.A. de C.V. sr. notes 11s, 2002 (Mexico) 102,000
--------------
6,357,199
Building and Construction (0.6%)
- -------------------------------------------------------------------------------------------------------------
110,000 American Architectural 144A sr. notes 11 3/4s, 2007 114,950
390,000 GS Superhighway Holdings sr. notes 9 7/8s, 2004 335,400
100,000 Jackson Products, Inc. 144A company guaranty 9 1/2s, 2005 100,750
150,000 Presley Cos. sr. notes 12 1/2s, 2001 141,000
--------------
692,100
Buses (0.6%)
- -------------------------------------------------------------------------------------------------------------
715,000 Consorcio/MCII Holdings sec. notes stepped-coupon
zero % (12s, 11/15/98) 2002 (STP) 672,100
Business Services and Equipment (0.3%)
- -------------------------------------------------------------------------------------------------------------
95,000 ATC Group Services, Inc. 144A sr. sub. notes 12s, 2008 88,350
180,000 Corporate Express, Inc. 144A sr. sub. notes 9 5/8s, 2008 180,900
100,000 Outsourcing Solutions, Inc. sr. sub. notes Ser. B, 11s, 2006 106,250
--------------
375,500
Cable Television (2.2%)
- -------------------------------------------------------------------------------------------------------------
1,068,831 Adelphia Communications Corp. sr. notes 9 1/2s, 2004 (PIK) 1,116,928
500,000 Diamond Cable Communication Co. sr. disc. notes stepped-
coupon zero % (11 3/4s, 12/15/00), 2005
(United Kingdom) (STP) 401,250
795,000 Diamond Cable Communication Co. sr. disc. notes stepped-
coupon zero % (10 3/4s, 2/15/02), 2007
(United Kingdom) (STP) 565,444
450,000 United International Holdings sr. disc. notes stepped-coupon
Ser. B, zero % (10 3/4s, 2/15/03) 2008 (STP) 280,125
190,000 Wireless One, Inc. sr. notes 13s, 2003 45,125
--------------
2,408,872
Cellular Communications (5.1%)
- -------------------------------------------------------------------------------------------------------------
1,110,000 CellNet Data Systems, Inc. sr. disc. notes stepped-coupon
zero % (14s, 10/1/02) 2007 (STP) 635,475
500,000 Comcast UK Cable, Ltd. deb. stepped-coupon zero %
(11.2s, 11/15/00), 2007 (Bermuda) (STP) 411,250
250,000 Comunicacion Cellular bonds stepped-coupon zero %
(13 1/8s, 11/15/00), 2003 (Colombia) (STP) 197,500
215,000 Conecel Holdings 144A notes Ser. A, 14s, 2000 210,700
200,000 Dobson Communications Corp. 11 3/4s, 2007 215,000
820,000 Intercel, Inc. sr. disc. notes stepped-coupon zero %
(12s, 5/1/01) 2006 (STP) 623,200
615,000 McCaw International Ltd sr. discount notes stepped-
coupon zero % (13s, 4/15/02) 2007 (STP) 407,438
635,000 Millicom International Cellular S.A. sr. disc. notes stepped-
coupon zero % (13 1/2s, 6/1/01), 2006 (Luxembourg) (STP) 500,063
330,000 NEXTEL Communications, Inc. 144A sr. disc. notes
stepped-coupon zero % (12 1/8s, 4/15/03) 2008 (STP) 204,600
2,470,000 NEXTEL Communications, Inc. sr. disc. notes stepped-coupon
zero % (10.65s, 9/15/02) 2007 (STP) 1,642,550
690,000 NEXTEL Communications, Inc. 144A sr. disc. notes stepped-
coupon zero % (9.95s, 2/15/03) 2008 (STP) 435,563
160,000 Omnipoint Corp. sr. notes 11 5/8s, 2006 171,200
--------------
5,654,539
Chemicals (0.7%)
- -------------------------------------------------------------------------------------------------------------
300,000 Acetex Corp. sr. notes 9 3/4s, 2003 (Canada) 309,750
200,000 PCI Chemicals & Pharmaceuticals company guaranty
9 1/4s, 2007 (Canada) 200,000
115,000 Pharmaceutical Fine Chemicals 144A sr. sub. notes
9 3/4s, 2007 (Switzerland) 128,225
175,000 Trikem S.A. 144A bonds 10 5/8s, 2007 (Brazil) 157,500
--------------
795,475
Computer Services and Equipment (0.7%)
- -------------------------------------------------------------------------------------------------------------
70,000 Concentric Network Corp. sr. notes 12 3/4s, 2007 75,950
440,000 IPC Information Systems sr. disc. notes stepped-coupon
zero % (10 7/8s, 11/1/01) 2008 (STP) 321,200
285,000 Unisys Corp. sr. notes 11 3/4s, 2004 329,175
--------------
726,325
Consumer Durable Goods (0.7%)
- -------------------------------------------------------------------------------------------------------------
40,000 Hedstrom Holdings, Inc. 144A sr. disc. notes stepped-coupon
zero % (12s, 6/1/02) 2009 (STP) 24,900
275,000 Icon Fitness Corp. 144A sr. disc. notes stepped-coupon
Ser. B, zero % (14s, 11/15/01) 2006 (STP) 123,750
550,000 Packaged Ice, Inc. 144A sr. notes 9 3/4s, 2005 555,500
170,000 Sealy Mattress Co. 144A sr. disc. notes stepped-coupon
zero % (10 7/8s, 12/15/02) 2007 (STP) 113,900
--------------
818,050
Consumer Non Durables (0.5%)
- -------------------------------------------------------------------------------------------------------------
60,000 Amscan Holdings, Inc. sr. sub. notes 9 7/8s, 2007 61,950
445,000 Viasystems Inc. sr. sub notes 9 3/4s, 2007 463,913
--------------
525,863
Containers (1.4%)
- -------------------------------------------------------------------------------------------------------------
100,000 AEP Industries, Inc. sr. sub. notes 9 7/8s, 2005 103,000
320,000 Consumers International 144A sr. notes 10 1/4s, 2005 343,200
350,000 Gaylord Container Corp. sr. sub. notes 9 7/8s, 2008 352,625
215,000 Innova S De R.L. sr. notes 12 7/8s, 2007 (Mexico) 226,288
485,000 Radnor Holdings Inc. sr. notes 10s, 2003 511,675
--------------
1,536,788
Cosmetics (0.1%)
- -------------------------------------------------------------------------------------------------------------
150,000 French Fragrances, Inc. 144A sr. notes 10 3/8s, 2007 160,500
Electric Utilities (2.9%)
- -------------------------------------------------------------------------------------------------------------
200,000 Espirito Santo Centrais 144A sr. notes 10s, 2007 (Brazil) 179,500
245,000 First PV Funding deb. 10.15s, 2016 258,522
1,600,000 Midland Funding Corp. deb. Ser. A, 11 3/4s, 2005 1,920,160
508,193 Northeast Utilities System notes Ser. A, 8.58s, 2006 522,117
379,310 Subic Power Corp. 144A sec. 9 1/2s 362,241
--------------
3,242,540
Electrical Equipment (0.1%)
- -------------------------------------------------------------------------------------------------------------
110,000 Samsung Electronics 144A company guaranty 9 3/4s, 2003 105,050
Electronic Components (1.3%)
- -------------------------------------------------------------------------------------------------------------
115,000 Celestica International Ltd. sr. sub. notes 10 1/2s, 2006 (Canada) 126,213
113,762 Cirent Semiconductor sr. sub. notes 10.22s, 2002 118,313
136,153 Cirent Semiconductor sr. sub. notes 10.14s, 2004 140,918
125,000 Details, Inc. sr. sub. notes Ser. B, 10s, 2005 127,500
160,000 DII Group, Inc. (The) sr. sub. notes 8 1/2s, 2007 158,800
280,000 Flag Ltd. 144A sr. notes 8 1/4s, 2008 (Bermuda) 284,200
140,000 Motors and Gears Inc. sr. notes Ser. B, 10 3/4s, 2006 151,200
55,000 Wavetek Corp. company guaranty 10 1/8s, 2007 56,925
330,000 Zilog Inc. 144A sr. notes 9 1/2s, 2005 267,300
--------------
1,431,369
Energy-Related (0.9%)
- -------------------------------------------------------------------------------------------------------------
300,000 Calpine Corp. sr. notes 9 1/4s, 2004 309,000
545,000 Panda Global Energy Co. company guaranty 12 1/2s, 2004 517,750
130,000 RAM Energy Inc. sr. notes 11 1/2s, 2008 131,625
--------------
958,375
Environmental Control (0.4%)
- -------------------------------------------------------------------------------------------------------------
355,000 Allied Waste Industries sr. disc. notes stepped-coupon zero %
(11.3s, 6/01/02) 2007 (STP) 260,925
195,000 Allied Waste Industries, Inc. company guaranty 10 1/4s, 2006 214,988
--------------
475,913
Financial Services (2.2%)
- -------------------------------------------------------------------------------------------------------------
325,000 Aames Financial Corp. sr. notes 9 1/8s, 2003 325,000
20,000 APP Intl. Finance Co,11 3/4s, 2005 17,400
250,000 Colonial Capital I 144A company guaranty 8.92s, 2027 271,758
220,000 Contifinancial Corp. sr. notes 8 3/8s, 2003 228,228
120,000 Dine S.A. de C.V. 144A company guaranty 8 3/4s,
2007 (Mexico) 115,200
155,000 Imperial Credit Capital Trust I 144A company guaranty
10 1/4s, 2002 155,000
175,000 Investors Capital Trust I company guaranty Ser. B, 9.77s, 2027 193,252
90,000 Nationwide Credit Inc. 144A sr. notes 10 1/4s, 2008 91,350
50,000 Netia Holdings B.V. 144A co. guaranty zero % (11 1/4s,
11/01/01) 2007 (Poland) (STP) 34,563
300,000 Netia Holdings B.V. 144A 10 1/4s, 2007 (Poland) 297,375
525,000 Pindo Deli Finance Mauritius Ltd. company guaranty
10 3/4s, 2007 (Indonesia) 362,250
350,000 Resource America Inc. 144A sr. notes 12s, 2004 374,500
--------------
2,465,876
Food and Beverages (0.9%)
- -------------------------------------------------------------------------------------------------------------
250,000 Canandaigua Wine Co. sr. sub. notes Ser. C, 8 3/4s, 2003 254,375
300,000 Doane Products Co. sr. notes 10 5/8s, 2006 325,500
320,000 RAB Enterprises, Inc. 144A sr. notes 10 1/2s, 2005 323,200
105,000 Windy Hill Pet Food Co. sr. sub. notes 9 3/4s, 2007 108,150
--------------
1,011,225
Food Chains (1.6%)
- -------------------------------------------------------------------------------------------------------------
230,000 Ameriserve Food Distribution co. guaranty 8 7/8s, 2006 232,300
250,000 Aurora Foods, Inc. 144A sr. sub. notes Ser. D, 9 7/8s, 2007 266,250
50,000 Aurora Foods, Inc. sr. sub. notes Ser. B, 9 7/8s, 2007 53,250
235,000 Fleming Companies, Inc. company guaranty Ser. B, 10 1/2s, 2004 245,575
200,000 Jitney-Jungle Stores company guaranty 12s, 2006 225,250
300,000 Nebco Evans Holding Co. sr. disc. notes stepped-coupon
zero % (12 3/8s, 7/15/02) 2007 (STP) 204,000
110,000 Southern Foods Group 144A sr. sub. notes 9 7/8s, 2007 113,300
500,000 Southland Corp. deb. Ser. A, 4 1/2s, 2004 416,250
--------------
1,756,175
Health Care (2.2%)
- -------------------------------------------------------------------------------------------------------------
500,000 Columbia/HCA Healthcare Corp. notes 7 1/4s, 2008 489,315
350,000 Columbia/HCA Healthcare Corp. notes 6.91s, 2005 337,740
190,000 Global Health Sciences 144A sr. notes 11s, 2008 185,725
220,000 Hudson Respiratory Care, Inc. 144A sr. sub. notes 9 1/8s, 2008 221,650
220,000 Integrated Health Services, Inc. sr. sub. notes Ser. A, 9 1/4s, 2008 225,500
120,000 Paragon Corp. Holdings 144A sr. notes 9 5/8s, 2008 115,200
610,000 Paragon Health Networks, Inc. sr. sub. notes Ser. B, 9 1/2s, 2007 616,100
305,000 Sun Healthcare Group Inc. 144A sr. sub. notes 9 1/2s, 2007 306,525
--------------
2,497,755
Hospital Management and Medical Services (0.1%)
- -------------------------------------------------------------------------------------------------------------
170,000 MedPartners, Inc. sr. notes 7 3/8s, 2006 153,483
Lodging (0.2%)
- -------------------------------------------------------------------------------------------------------------
250,000 Prime Hospitality Corp. sub. notes 9 3/4s, 2007 267,500
Media (0.2%)
- -------------------------------------------------------------------------------------------------------------
4,871 Australis Media, Ltd. sr. disc. notes stepped-coupon 1 3/4s,
(15 3/4s 5/15/00), 2003 (Australia) (In Default) (STP) (PIK) (NON) 244
250,000 Viacom International, Inc. sub. deb. 8s, 2006 257,500
--------------
257,744
Medical Management (0.5%)
- -------------------------------------------------------------------------------------------------------------
520,000 Paracelsus Healthcare sr. sub. notes 10s, 2006 530,400
Medical Supplies and Devices (2.4%)
- -------------------------------------------------------------------------------------------------------------
500,000 Dade International, Inc. sr. sub. notes Ser. B, 11 1/8s, 2006 566,250
290,000 Fresenius Medical Care AG 144A company guaranty
7 7/8s, 2008 (Germany) 285,650
1,000,000 Graphic Controls Corp. sr. sub. notes Ser. A, 12s, 2005 1,110,000
210,000 Imagyn Medical Technologies, Inc. company guaranty
12 1/2s, 2004 117,600
280,000 Mediq, Inc. 144A sr. sub. notes 11s, 2008 285,600
350,000 Wright Medical Technology, Inc. 144A notes Ser. C,
11 3/4s, 2000 346,500
--------------
2,711,600
Metals and Mining (0.4%)
- -------------------------------------------------------------------------------------------------------------
70,000 Acindar Industria Argentina de Aceros S.A. bonds
11 1/4s, 2004 (Argentina) 71,750
170,000 Continental Global Group sr. notes Ser. B, 11s, 2007 179,350
160,000 Lodestar Holding, Inc. 144A sr. notes 11 1/2s, 2005 160,800
--------------
411,900
Motion Picture Distribution (0.6%)
- -------------------------------------------------------------------------------------------------------------
230,000 AMC Entertainment, Inc. sr. sub. notes 9 1/2s, 2009 235,750
260,000 Cinemark USA, Inc. sr. sub. notes Ser. B, 9 5/8s, 2008 270,400
180,000 United Artists Theatre 144A sr. sub. notes 9 3/4s, 2008 180,225
--------------
686,375
Natural Gas (0.1%)
- -------------------------------------------------------------------------------------------------------------
110,000 Tokai Corp. 144A bonds FRB 9.98s, 2008 102,300
Networking (0.2%)
- -------------------------------------------------------------------------------------------------------------
270,000 IXC Communications, Inc. 144A sr. sub. notes 9s, 2008 266,963
Oil and Gas (4.0%)
- -------------------------------------------------------------------------------------------------------------
145,000 Abraxas Petroleum Corp. Ser. D company guaranty
11 1/2s, 2004 151,871
180,000 American Eco Corp. 144A company guaranty 9 5/8s, 2008 181,350
40,000 Benton Oil & Gas Co. sr. notes 9 3/8s, 2007 39,200
20,000 Chesapeake Energy Corp. 144A sr. notes 9 5/8s, 2005 19,975
250,000 Chesapeake Energy Corp. sr. notes 9 1/8s, 2006 245,000
150,000 Coho Energy, Inc. sr. sub. notes 8 7/8s, 2007 141,000
150,000 Michael Petroleum Corp. 144A sr. notes 11 1/2s, 2005 148,125
170,000 Northern Offshore 144A co. guaranty 10s, 2005 168,300
100,000 Panaco, Inc. company guaranty Ser. B, 10 5/8s, 2004 101,250
120,000 Southwest Royalties, Inc. company guaranty 10 1/2s, 2004 105,600
2,300,000 Transamerican Energy sr. disc. notes stepped-coupon
Ser. B, zero % (13s, 6/15/99) 2002 (STP) 1,909,000
780,000 Transamerican Energy sr. notes Ser. B, 11 1/2s, 2002 748,800
402,000 TransTexas Gas Corp. sr. sub. notes Ser. D, 13 3/4s, 2001 446,220
--------------
4,405,691
Paging (0.8%)
- -------------------------------------------------------------------------------------------------------------
440,000 Metrocall, Inc. sr. sub. notes 10 3/8s, 2007 453,200
350,000 Mobile Telecommunications Tech. sr. notes 13 1/2s, 2002 406,000
--------------
859,200
Paper and Forest Products (2.1%)
- -------------------------------------------------------------------------------------------------------------
200,000 APP Finance II Mauritius Ltd. bonds 12s, (16s, 2/15/04)
2049 (Indonesia) (STP) 144,000
110,000 Florida Coast Paper LLC 1st mtge. Ser. B, 12 3/4s, 2003 121,550
185,000 Huntsman Packaging Corp. company guaranty 9 1/8s, 2007 188,238
250,000 Impac Group Inc. 144A sr. sub. notes 10 1/8s, 2008 250,000
420,000 Indah Kiat Financial Mauritius Ltd. company guaranty
10s, 2007 (Indonesia) 294,000
380,000 PT Pabrik Kertas Tjiwi Kimia company guaranty
10s, 2004 (Indonesia) 266,000
15,000 Repap New Brunswick sr. notes 10 5/8s, 2005 (Canada) 15,469
45,000 Repap New Brunswick 144A sr. notes 9s, 2004 (Canada) 45,506
150,000 Riverwood International Corp. company guaranty 10 7/8s, 2008 152,250
250,000 Riverwood International Corp. company guaranty
10 5/8s, 2007 262,813
300,000 Riverwood International Corp. company guaranty
10 1/4s, 2006 309,000
250,000 Stone Container Corp. sr. notes 12.58s, 2016 281,250
--------------
2,330,076
Pharmaceuticals (0.4%)
- -------------------------------------------------------------------------------------------------------------
400,000 ICN Pharmaceuticals, Inc. 144A sr. notes 9 1/4s, 2005 430,000
Photography (0.1%)
- -------------------------------------------------------------------------------------------------------------
100,000 Panavision Inc. 144A sr. disc. notes stepped-coupon zero %
(9 5/8s, 2/1/02) 2006 (STP) 71,250
Publishing (0.2%)
- -------------------------------------------------------------------------------------------------------------
110,000 Perry-Judd 144A sr. sub. notes 10 5/8s, 2007 115,500
60,000 Tri State Outdoor Media, Inc. 144A sr. sub. notes 11s, 2008 61,068
85,000 Von Hoffman Press Inc. 144A sr. sub. notes 10 3/8s, 2007 91,375
--------------
267,943
Railroads (0.2%)
- -------------------------------------------------------------------------------------------------------------
320,000 TFM S.A. de C.V. company guaranty stepped-coupon
zero %, (11 3/4s, 6/15/02) 2009 (Mexico) (STP) 215,600
Recreation and Gaming (3.4%)
- -------------------------------------------------------------------------------------------------------------
250,000 Argosy Gaming Co. 1st mtge. 13 1/4s, 2004 281,875
250,000 Aztar Corp. sr. sub. notes 13 3/4s, 2004 286,250
155,000 Casino America, Inc. sr. notes 12 1/2s, 2003 174,375
500,000 Coast Hotels & Casinos, Inc. company guaranty Ser. B,
13s, 2002 578,750
321,183 Elsinore Corp. 144A exch. 1st mortgage 11 1/2s, 2000 321,183
380,000 Fitzgeralds Gaming Corp. 144A company guaranty
12 1/4s, 2004 380,000
120,000 Isle of Capri Black Hawk LLC 1st mortgage Ser. B, 13s, 2004 123,000
357,000 Louisiana Casino Cruises Corp. 1st mtge. 11 1/2s, 1998 360,570
225,000 Premier Parks, Inc.144A sr. disc. notes stepped-coupon
zero % (10s, 4/1/03) 2008 (STP) 143,438
525,000 PRT Funding Corp. sr. notes 11 5/8s, 2004 (In Default) (NON) 409,500
250,000 Six Flags Corp. sr. notes 8 7/8s, 2006 252,500
430,000 Trump Castle Funding 144A sub. notes 10 1/4s, 2003 434,300
--------------
3,745,741
Restaurants (0.2%)
- -------------------------------------------------------------------------------------------------------------
250,000 FRD Acquisition Co. sr. notes Ser. B, 12 1/2s, 2004 273,750
Retail (1.3%)
- -------------------------------------------------------------------------------------------------------------
430,000 Amazon.com, Inc. 144A sr. disc. notes stepped-coupon
zero % (10s, 5/01/03) 2008 (STP) 264,450
100,000 Color Spot Nurseries sr. sub. notes 10 1/2s, 2007 95,000
80,000 Guitar Center Management Co. 144A sr. notes 11s, 2006 88,300
90,000 Home Interiors & Gifts, Inc. 144A sr. sub. notes 10 1/8s, 2008 90,900
600,000 Mothers Work, Inc. sr. notes 12 5/8s, 2005 655,500
100,000 NBTY Inc. 144A sr. sub. notes 8 5/8s, 2007 101,500
95,000 William Carter Co. sr. sub. notes Ser. A, 10 3/8s, 2006 101,650
--------------
1,397,300
Satellite Services (1.7%)
- -------------------------------------------------------------------------------------------------------------
535,000 Echostar Satellite Broadcast Corp. sr. disc. notes stepped-
coupon zero % (13 1/8s, 3/15/00) 2004 (STP) 490,863
190,000 Esat Holdings Ltd. 144A sr. notes stepped-coupon zero %
(12 1/2s, 2/01/02), 2007 (Ireland) (STP) 140,600
500,000 Esat Telecom Group PLC sr. notes stepped-coupon zero %
(12 1/2s, 2/01/02), (Ireland) (STP) 370,000
390,000 ICG Services, Inc. 144A sr. discount notes stepped-coupon
zero % (9 7/8s, 5/01/03) 2008 (STP) 241,313
250,000 Iridium LLC/Capital Corp. company guaranty Ser. A, 13s, 2005 268,750
215,000 Iridium LLC/Capital Corp. company guaranty Ser. B, 14s, 2005 239,725
30,000 TCI Satellite Entertainment, Inc. sr. disc. notes stepped-
coupon zero % (12 1/4s, 2/102) 2007 (STP) 19,200
120,000 TCI Satellite Entertainment Inc. sr. sub. notes 10 7/8s, 2007 116,100
--------------
1,886,551
Semiconductors (0.5%)
- -------------------------------------------------------------------------------------------------------------
486,398 Fairchild Semiconductor Corp. 144A sr. sub. notes
11.74s, 2008(PIK) 498,741
Shipping (0.4%)
- -------------------------------------------------------------------------------------------------------------
190,000 Johnstown America Industries, Inc. company guaranty
Ser. C, 11 3/4s, 2005 210,425
120,000 MC Shipping, Inc. 144A sr. notes 11 1/4s, 2008 120,300
110,000 Stena Line AB sr. notes 10 5/8s, 2008 (Sweden) 111,238
--------------
441,963
Specialty Consumer Products (0.4%)
- -------------------------------------------------------------------------------------------------------------
220,000 Decora Industries, Inc. 144A sr. sec. notes 11s, 2005 215,050
210,000 Sovereign Specialty Chemical 144A company guaranty
Ser. A, 9 1/2s, 2007 218,400
--------------
433,450
Steel (0.4%)
- -------------------------------------------------------------------------------------------------------------
250,000 Hylsa S.A. de C.V. 144A bonds 9 1/4s, 2007 (Mexico) 243,125
160,000 WHX Corp. 144A sr. notes 10 1/2s, 2005 164,000
--------------
407,125
Telecommunications (9.2%)
- -------------------------------------------------------------------------------------------------------------
385,000 21st Century Telecom Group 144A sr. disc. notes stepped-
coupon zero % (12 1/4s, 2/15/03) 2008 (STP) 219,450
500,000 Barak I.T.C. sr. disc. notes stepped-coupon Ser. B, zero %
(12 1/2s, 11/15/02) 2007 (STP) 300,000
85,000 Consorcio Ecuatoiano notes 14s, 2002 (Ecuador) 83,300
480,000 Econophone, Inc. 144A notes stepped-coupon zero %
(11s, 2/15/03) 2008 (STP) 278,400
200,000 Esprit Telecom Group PLC sr. notes 11 1/2s, 2007
(United Kingdom) 212,000
800,000 Focal Communications Corp. 144A sr. disc. notes
stepped-coupon zero % (12 1/8s, 2/15/03) 2008 (STP) 480,000
930,000 Global Crossing Holdings 144A sr. notes 9 5/8s, 2008 957,900
1,250,000 GST Telecommunications, Inc. company guaranty stepped-
coupon zero % (13 7/8s, 12/15/00) 2005 (STP) 987,500
140,000 Hyperion Telecommunication, Inc. sr. disc. notes stepped-
coupon Ser. B, zero % (13s, 4/15/01) 2003 (STP) 102,900
300,000 Hyperion Telecommunication, Inc. sr. notes Ser. B,
12 1/4s, 2004 329,250
300,000 ICG Holdings, Inc. sr. disc. notes stepped-coupon zero %
(13 1/2s, 9/15/00) 2005 (STP) 255,750
145,000 Intermedia Communications, Inc. sr. notes Ser. B, 8 7/8s, 2007 148,625
290,000 Intermedia Communications, Inc. 144A sr. notes 8.6s, 2008 291,813
450,000 Intermedia Communications, Inc. sr. notes Ser. B, 8 1/2s, 2008 452,250
1,200,000 International Cabletel, Inc. sr. notes stepped-coupon
Ser. B, zero % (11 1/2s, 2/01/01) 2006 (STP) 984,000
360,000 International Wireless Communications, Inc. sr. disc. notes
zero %, 2001 124,200
100,000 Ionica Group PLC sr. notes 13 1/2s, 2006 (United Kingdom) 63,000
143,000 ITC Deltacom, Inc. sr. notes 11s, 2007 163,020
700,000 Knology Holdings Inc. sr. disc. notes stepped-coupon zero %
(11 7/8s, 10/15/02) 2007 (STP) 410,375
100,000 L-3 Communications Corp. sr. sub. notes 8 1/2s, 2008 100,250
130,000 L-3 Communications Corp. sr. sub. notes Ser. B, 10 3/8s, 2007 143,650
120,000 MetroNet Communications Corp. sr. disc. notes stepped-
coupon zero % (10 3/4s, 11/1/02), 2007 (Canada) (STP) 80,400
150,000 Microcell Telecommunications sr. disc. notes stepped-coupon
Ser. B, zero % (14s, 12/1/01), 2006 (Canada) (STP) 111,000
500,000 Primus Telecom Group sr. notes 11 3/4s, 2004 537,500
160,000 Primus Telecom Group 144A sr. notes 9 7/8s, 2008 158,400
240,000 PSINet, Inc. 144A sr. notes 10s, 2005 243,600
200,000 RSL Communications, Ltd. 144A sr. disc. notes stepped-
coupon zero % (10 1/8s, 3/1/03) 2008 (STP) 122,500
130,000 RSL Communications, Ltd. 144A sr. notes 9 1/8s, 2008 128,050
190,000 Supercanal Holdings S.A. 144A sr. notes 11 1/2s,
2005 (Argentina) 186,200
130,000 Telecom Tech, Inc. 144A sr. sub. notes 9 3/4s, 2008 131,300
560,000 Teligent, Inc. sr. notes 11 1/2s, 2007 569,800
150,000 USN Communications, Inc. sr. disc. notes stepped-coupon
Ser. B, zero % (14 5/8s, 8/15/00) 2004 (STP) 118,500
320,000 WinStar Communications, Inc. sr. sub. notes 15s, 2007 412,800
170,000 WinStar Communications, Inc. 144A sr. sub. notes 11s, 2008 163,625
170,000 WinStar Equipment Corp. company guaranty 12 1/2s, 2004 190,400
--------------
10,241,708
Telephone Services (2.5%)
- -------------------------------------------------------------------------------------------------------------
280,000 BTI Telecom Corp. sr. notes 10 1/2s, 2007 289,450
200,000 Colt Telecom Group PLC sr. disc. notes stepped-coupon
zero % (12s, 12/15/01), 2006 (United Kingdom) (STP) 158,000
160,000 E. Spire Communications, Inc. sr. notes 13 3/4s, 2007 184,000
140,000 Facilicom International 144A sr. notes 10 1/2s, 2008 139,300
850,000 Ionica Group PLC sr. disc. notes stepped-coupon zero %
(15s, 5/1/02), 2007 (United Kingdom) (STP) 221,000
130,000 Level 3 Communication, Inc. 144A sr. notes 9 1/8s, 2008 126,750
80,000 MJD Communications Inc. 144A notes FRN, 10s, 2008 80,700
75,000 MJD Communications Inc. 144A sr. sub. notes 9 1/2s, 2008 76,313
430,000 NEXTLINK Communications, Inc. 144A sr. disc. notes
stepped-coupon zero %, (9.45s, 4/15/03) 2008 (STP) 262,300
430,000 NTL Inc. sr. notes Ser. B, 10s, 2007 (United Kingdom) 460,100
540,000 RCN Corp. sr. disc. notes stepped-coupon zero % (11 1/8s,
10/15/02) 2007 (STP) 355,050
370,000 RCN Corp. 144A sr. disc. notes stepped-coupon zero %
(9.8s, 2/15/03) 2008 (STP) 233,100
100,000 Transtel S.A. 144A pass through certificates 12 1/2s,
2007 (Colombia) 94,000
110,000 Vialog Corp. company guaranty 12 3/4s, 2001 115,500
--------------
2,795,563
Textiles (0.6%)
- -------------------------------------------------------------------------------------------------------------
200,000 Polymer Group, Inc. company guaranty Ser. B, 9s, 2007 205,000
90,000 Polymer Group, Inc. 144A sr. sub. notes 8 3/4s, 2008 90,900
350,000 Polysindo Inernational Eka company guaranty 13s, 2001
(Indonesia) 178,500
330,000 Polysindo International Finance company guaranty
11 3/8s, 2006 (Indonesia) 158,400
200,000 Polysindo International Finance company guaranty 9 3/8s,
2007 (Indonesia) 86,000
--------------
718,800
Transportation (0.3%)
- -------------------------------------------------------------------------------------------------------------
290,000 Kitty Hawk, Inc. company guaranty 9.95s, 2004 304,500
Wireless Communications (0.9%)
- -------------------------------------------------------------------------------------------------------------
140,000 CTI Holdings S.A. 144A sr. notes stepped-coupon zero %
(11 1/2s, 4/15/03) 2008 (STP) 80,150
200,000 Orbital Imaging Corp. 144A sr. notes 11 5/8s, 2005 207,000
300,000 Paging Network Do Brasil sr. notes 13 1/2s, 2005 (Brazil) 286,500
115,000 Telesystem International Wireless Inc. sr. disc. notes stepped-
coupon Ser. C, zero % (10 1/2s, 11/1/02) 2007 (STP) 69,000
650,000 Teligent, Inc. 144A sr. disc. notes stepped-coupon zero %
(11 1/2s, 3/1/03) 2008 (STP) 357,500
--------------
1,000,150
--------------
Total Corporate Bonds and Notes (cost $80,834,652) $ 82,847,266
PREFERRED STOCKS (7.4%) (a)
NUMBER OF SHARES VALUE
Apparel (--%)
- -------------------------------------------------------------------------------------------------------------
52 Anvil Holdings Ser. B, $3.25 pfd (PIK) $ 1,325
Banks (0.3%)
- -------------------------------------------------------------------------------------------------------------
6,240 Chevy Chase Capital Corp. Ser. A, $5.188 pfd. (PIK) 340,080
Broadcasting (1.5%)
- -------------------------------------------------------------------------------------------------------------
1,330 Capstar Broadcasting Inc. 144A $12.00 pfd. 156,608
2,237 Citadel Broadcasting Inc. 144A $13.25 cum. pfd. (PIK) 276,270
281 Granite Broadcasting 144A $12.75 pfd. (PIK) 319,638
3,444 SFX Broadcasting, Inc. Ser. E, $12.625 pfd. (PIK) 406,392
531 Spanish Broadcasting Systems $14.25 cum. pfd. (PIK) 557,550
--------------
1,716,458
Building and Construction (0.6%)
- -------------------------------------------------------------------------------------------------------------
6,062 CSC Holdings Inc. Ser. M, $11.125 cum. pfd. (PIK) 700,161
Cable Television (0.4%)
- -------------------------------------------------------------------------------------------------------------
33,000 Diva Systems Corp. Ser. C, $6.00 pfd. 429,000
Cellular Communications (1.7%)
- -------------------------------------------------------------------------------------------------------------
215 Dobson Communications 144A $12.25 pfd. (PIK) 236,500
6,389 Nextlink Communications, Inc. 144A $7.00 pfd. 380,146
1,097 NEXTEL Communications, Inc. Ser. D, $13.00 cum. pfd. (PIK) 1,247,838
--------------
1,864,484
Electric Utilities (--%)
- -------------------------------------------------------------------------------------------------------------
177 El Paso Electric Co. $11.40 cum. pfd. (PIK) 19,293
Food Chains (0.3%)
- -------------------------------------------------------------------------------------------------------------
4,688 AmeriKing, Inc. $3.25 pfd. (PIK) 126,576
1,700 Nebco Evans Holding Co. 144A $11.25 pfd. (PIK) 173,400
--------------
299,976
Health Care (0.2%)
- -------------------------------------------------------------------------------------------------------------
260,000 Fresenius Medical Care AG Ser. D, $9.00 pfd. (Germany) 271,700
Insurance (0.4%)
- -------------------------------------------------------------------------------------------------------------
14,500 CGA Group Ltd. 144A Ser. A, $13.75 pfd. (PIK) 391,500
Publishing (0.1%)
- -------------------------------------------------------------------------------------------------------------
2,020 Von Hoffman Corp. 144A $13.50 pfd. 66,660
Satellite Services (--%)
- -------------------------------------------------------------------------------------------------------------
4 Echostar Communications, Inc. $12.125 pfd. 4,510
Telecommunications (1.7%)
- -------------------------------------------------------------------------------------------------------------
640 Intermedia Communication Ser. B, $13.50 pfd. 771,200
240 Hyperion Telecommunications Ser. B, $12.875 pfd. (PIK) 261,600
387 IXC Communications, Inc. $12.50 pfd. (PIK) 445,050
330 Winstar Communications. Inc. 144A $14.25 cum. pfd. (PIK) 392,700
--------------
1,870,550
Telephone Services (0.2%)
- -------------------------------------------------------------------------------------------------------------
212 E. Spire Communications, Inc. pfd. (12.75%) (PIK) 241,680
--------------
Total Preferred Stocks (cost $7,422,851) $ 8,217,377
UNITS (7.5%) (a)
NUMBER OF UNITS VALUE
- -------------------------------------------------------------------------------------------------------------
220 21st Century Telecom Group units cum. pfd. 13 3/4s 2010 (PIK) $ 240,900
700 Allegiance Telecom, Inc. units stepped-coupon zero %
(11 3/4s, 2/15/03) 2008 (STP) 388,500
180 American Mobile Satellite Corp. units 12 1/4s, 2008 181,800
550 Australis Media, Ltd. units stepped-coupon zero % (15 3/4s,
5/15/00), 2003 (Australia) (In Default) (STP) (NON) 27,500
170 Bestel S.A.de C.V. units, stepped-coupon zero %
(12 3/4s, 5/15/01) 2005 (STP) 116,450
70 Celcaribe S.A. 144A units 13 1/2s, 2004 (Columbia) 1,480,500
300 Club Regina, Inc. 144A units 13s, 2004 324,000
640 Covad Communications Group 144A units, stepped-
coupon zero % (13.5s, 3/15/03) 2008 (STP) 344,000
620 Diva Systems Corp. 144A units stepped-coupon zero %
(12 5/8s, 3/1/03) 2008 (STP) 328,600
730 DTI Holdings Inc. units stepped-coupon zero % (12 1/2s,
3/1/03) 2008 (STP) 416,100
610 Firstworld Communication 144A units zero % (13s,
4/15/03) 2008 (STP) 305,000
800 KMC Telecom Holdings, Inc. units stepped-coupon zero %
(12 1/2s, 2/15/03) 2008 (STP) 478,000
450 Long Distance International Inc. 144A units 12 1/4s, 2008 459,000
240 Mediq 144A units, stepped-coupon zero % (13.0s,
6/1/03) 2009 (STP) 128,400
100 Onepoint Communications, Inc. units 14 1/2s, 2008 99,750
320 Pathnet, Inc. 144A units 12 1/4s, 2008 348,800
365 Rhythms Netcon 144A units zero % (13.5s, 5/15/03) 2008 (STP) 178,850
500 Signature Brands USA, Inc. units 13s, 2002 565,000
170 Stone Container Corp. units sr. sub. 12 1/4s, 2002 175,313
280 Transamerican Refining units 16s, 2003 294,000
180 Versatel Telecom units 13 1/4s, 2008 186,300
725 Viatel, Inc. units, stepped-coupon zero % (12 1/2s,
4/15/03) 2008 (STP) 431,375
300 Wireless One, Inc. units stepped-coupon zero % (13 1/2s,
8/1/01) 2006 (STP) 30,000
450 XCL Ltd units sr. sec. notes 13 1/2s, 2004 517,500
2,950 XCL Ltd. 144A units c.v. cum. pfd. 9 1/2s, 2006 (PIK) 336,300
--------------
Total Units (cost $8,060,405) $ 8,381,938
CONVERTIBLE BONDS AND NOTES (3.2%) (a)
PRINCIPAL AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------
$ 650,000 Argosy Gaming cv. sub. notes 12s, 2001 $ 641,875
550,000 APP Global Finance (V) Ltd. 144A cv. sec. 2s, 2000
(United Kingdom) 475,750
275,000 Corporate Express, Inc. cv. notes 4 1/2s, 2000 253,000
500,000 Exide Corp. 144A cv. sr. sub. notes 2.9s, 2005 322,500
140,000 GST Telecommunications, Inc. cv. sr. disc. notes stepped-
coupon zero % (13 7/8s, 12/15/00) 2005 (STP) 222,600
200,000 Integrated Device Technology, Inc. cv. sub. notes 5 1/2s, 2002 172,250
100,000 National Semiconductor Corp. 144A cv. deb. 6 1/2s, 2002 93,375
350,000 Polymax 144A cv. notes 2s, 2006 187,250
800,000 WinStar Communications. Inc. 144A cv. sr. disc. notes
stepped-coupon zero % (14s, 10/15/00) 2005 (STP) 1,176,000
--------------
Total Convertible Bonds and Notes (cost $2,941,036) $ 3,544,600
COMMON STOCKS (1.8%) (a)
NUMBER OF SHARES VALUE
- -------------------------------------------------------------------------------------------------------------
6,950 American Mobile Satellite Corp. (NON) $ 79,925
100 AmeriKing, Inc. (NON) 5,000
1,800 Axia Holding Corp. 144A (NON) 144,000
10,520 CellNet Data Systems, Inc. (NON) 106,515
10,124 Chesapeake Energy Corp. (NON) 43,660
4,500 Exide Corp. 81,281
3,333 Finlay Enterprises, Inc. 85,408
1,000 French Fragrances Inc. (NON) 17,188
2,426 Hedstrom Holdings, Inc. 144A 3,033
13,019 NEXTEL Communications, Inc. Class A (NON) 306,760
150 Paging Do Brazil Holdings Co., LLC Class B (Brazil) 2
303 PMI Holdings Corp. (NON) 151,500
244 Premium Holdings L.P. 144A (NON) 978
57,579 PSF Holdings LLC Class A (acquired on 3/15/95,
cost $1,982,405) (NON) (RES) 1,008,784
12,750 Specialty Foods Corp. (NON) 1,275
--------------
Total Common Stocks (cost $2,728,617) $ 2,035,309
WARRANTS (0.8%) (a) (NON) EXPIRATION
NUMBER OF WARRANTS DATE VALUE
- -------------------------------------------------------------------------------------------------------------
25,000 Becker Gaming Corp. 144A 11/15/00 $ 250
4,550 Capital Gaming International, Inc. 2/1/99 182
1,490 Cellnet Data Systems, Inc. 6/15/00 81,950
14,500 CGA Group Ltd. 144A 1/1/04 145
200 Colt Telecommunications Group PLC 12/31/06 27,000
250 Comunicacion Cellular 144A (Colombia) 11/15/20 17,500
70 Concentric Network Corp. 12/15/07 6,650
2,902 Consorcio Ecuatoriano 144A 10/1/00 1,451
190 Esat Holdings, Inc. (Ireland) 2/1/07 6,650
500 Fitzgerald Gaming Co. 144A 3/15/99 50
8,269 Fitzgerald Gaming Co. 3/15/99 83
270 Hyperion Telecommunications 144A 4/15/01 28,890
6,691 Intelcom Group 144A 10/15/05 214,112
450 Intermedia Communications, Inc. 6/1/00 60,750
200 International Wireless Communications
Holdings 144A 8/15/01 200
1,250 Iridium World Com 144A 7/15/05 275,000
700 Knology Holdings, Inc. 144A 10/15/07 350
492 Louisiana Casino Cruises, Inc. 144A 12/1/98 26,076
815 McCaw International Ltd. 4/15/07 245
500 NEXTEL Communications Inc. 1/1/99 530
200 Orbital Imaging Corp. 3/1/05 10,000
6,900 Pagemart, Inc. 144A 12/31/03 51,750
215 Spanish Broadcasting Systems 144A 6/30/99 44,075
155 Sterling Chemicals Holdings 8/15/08 3,720
1,045 UIH Australia/Pacific, Inc. 144A 5/15/06 15,675
210 Urohealth Systems Inc. 4/10/04 2
1,500 USN Communications Inc. 8/15/00 25,500
110 Vialog Corp. 11/15/01 6,600
101 Wright Medical Technology, Inc. 144A 6/30/03 10,064
--------------
Total Warrants (cost $528,722) $ 915,450
FOREIGN GOVERNMENT BONDS AND NOTES (0.8%) (a)
PRINCIPAL AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------
$ 410,000 Korea (Republic of) unsub. 8 7/8s, 2008 $ 382,325
920,000 Russia (Government of) deb. principal loans FRB
6.719s, 2020 (POR) 511,704
--------------
Total Foreign Government Bonds and Notes
(cost $904,535) $ 894,029
CONVERTIBLE PREFERRED STOCKS (0.1%) (a) (cost $59,750)
NUMBER OF SHARES VALUE
- -------------------------------------------------------------------------------------------------------------
1,195 Chesapeake Energy Corp. 144A $3.50 cv. cum. pfd. $ 54,970
SHORT-TERM INVESTMENTS (2.9%) (a) (cost $3,201,467)
PRINCIPAL AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------
$ 3,200,000 Interest in $453,400,000 joint repurchase agreement
dated May 29, 1998 with First Boston due
June 1, 1998 with respect to various U.S. Treasury
obligations -- maturity value of $3,201,467 for an
effective yield of 5.50% $ 3,201,467
- -------------------------------------------------------------------------------------------------------------
Total Investments (cost $106,682,035) (b) $ 110,092,406
- -------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $111,332,937.
(b) The aggregate identified cost on a tax basis is $106,682,748,resulting in gross unrealized appreciation
and depreciation of $7,678,175 and $4,268,517, respectively, or net unrealized appreciation of
$3,409,658.
(NON) Non-income-producing security.
(STP) 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.
(POR) A portion of the income will be received in additional securities.
(RES) Restricted, excluding 144A securities, as to public resale. The total market value of restricted
securities held at May 31, 1998 was $1,008,784 or 0.9% of net assets.
(PIK) Income may be received in cash or additional securities at the discretion of the issuer.
144A after the name of a security represents those exempt from registration under Rule 144A of the
Securities Act of 1933. These securities may be resold in transactions exempt from registration,
normally to qualified institutional buyers.
The rates shown on Floating Rate Bonds (FRB) and Floating Rate Notes (FRN) are the current interest rates
shown at May 31, 1998, which are subject to change based on the terms of the security.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
May 31, 1998
<S> <C>
Assets
- ---------------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $106,682,035) (Note 1) $110,092,406
- ---------------------------------------------------------------------------------------------------
Cash 1,145,841
- ---------------------------------------------------------------------------------------------------
Dividends, interest and other receivables 2,038,153
- ---------------------------------------------------------------------------------------------------
Receivable for securities sold 728,470
- ---------------------------------------------------------------------------------------------------
Unamortized organization expenses (Note 1) 384
- ---------------------------------------------------------------------------------------------------
Total assets 114,005,254
Liabilities
- ---------------------------------------------------------------------------------------------------
Payable to subcustodian (Note 2) 465,270
- ---------------------------------------------------------------------------------------------------
Distributions payable to shareholders 862,463
- ---------------------------------------------------------------------------------------------------
Payable for securities purchased 1,052,801
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 209,432
- ---------------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 28,494
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 7,381
- ---------------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 1,107
- ---------------------------------------------------------------------------------------------------
Other accrued expenses 45,369
- ---------------------------------------------------------------------------------------------------
Total liabilities 2,672,317
- ---------------------------------------------------------------------------------------------------
Net assets $111,332,937
Represented by
- ---------------------------------------------------------------------------------------------------
Paid-in capital (Note 1) $105,946,586
- ---------------------------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 713,405
- ---------------------------------------------------------------------------------------------------
Accumulated net realized gain on investments (Note 1) 1,262,575
- ---------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 3,410,371
- ---------------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $111,332,937
Computation of net asset value
- ---------------------------------------------------------------------------------------------------
Net asset value per share ($111,332,937 divided by 7,507,107 shares) $14.83
- ---------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Year ended May 31, 1998
<S> <C>
Investment income:
- --------------------------------------------------------------------------------------------------
Dividends $ 987,310
- --------------------------------------------------------------------------------------------------
Interest income (net of foreign tax of $6,875) 10,943,322
- --------------------------------------------------------------------------------------------------
Total investment income 11,930,632
Expenses:
- --------------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 828,288
- --------------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 187,382
- --------------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 13,165
- --------------------------------------------------------------------------------------------------
Administrative services (Note 2) 6,705
- --------------------------------------------------------------------------------------------------
Amortization of organization expenses (Note 1) 5,976
- --------------------------------------------------------------------------------------------------
Reports to shareholders 26,650
- --------------------------------------------------------------------------------------------------
Registration fees 75
- --------------------------------------------------------------------------------------------------
Auditing 37,665
- --------------------------------------------------------------------------------------------------
Legal 18,132
- --------------------------------------------------------------------------------------------------
Postage 10,501
- --------------------------------------------------------------------------------------------------
Exchange listing fees 17,518
- --------------------------------------------------------------------------------------------------
Other 16,993
- --------------------------------------------------------------------------------------------------
Total expenses 1,169,050
- --------------------------------------------------------------------------------------------------
Expense reduction (Note 2) (45,996)
- --------------------------------------------------------------------------------------------------
Net expenses 1,123,054
- --------------------------------------------------------------------------------------------------
Net investment income 10,807,578
- --------------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 5,444,693
- --------------------------------------------------------------------------------------------------
Net unrealized depreciation of investments during the year (287,467)
- --------------------------------------------------------------------------------------------------
Net gain on investments 5,157,226
- --------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $15,964,804
- --------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Year ended May 31
--------------------------------
1998 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase in net assets
- ----------------------------------------------------------------------------------------------------------------------
Operations:
- ----------------------------------------------------------------------------------------------------------------------
Net investment income $ 10,807,578 $ 10,073,281
- ----------------------------------------------------------------------------------------------------------------------
Net realized gain on investments 5,444,693 2,080,249
- ----------------------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of investments (287,467) 84,513
- ----------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 15,964,804 12,238,043
- ----------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ----------------------------------------------------------------------------------------------------------------------
From net investment income (10,321,574) (10,013,933)
- ----------------------------------------------------------------------------------------------------------------------
Total increase in net assets 5,643,230 2,224,110
Net assets
- ----------------------------------------------------------------------------------------------------------------------
Beginning of year 105,689,707 103,465,597
- ----------------------------------------------------------------------------------------------------------------------
End of year (including and undistributed net investment
income of $713,405 and $149,955, respectively) $111,332,937 $105,689,707
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
Per-share June 25, 1993+
operating performance Year ended May 31 to May 31
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $14.08 $13.78 $13.04 $13.40 $14.01(c)
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income 1.44 1.34 1.27 1.32 1.23
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .69 .29 .79 (.36) (.59)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations 2.13 1.63 2.06 .96 .64
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (1.38) (1.33) (1.30) (1.32) (1.22)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income -- -- (.02) -- (.03)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (1.38) (1.33) (1.32) (1.32) (1.25)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $14.83 $14.08 $13.78 $13.04 $13.40
- ------------------------------------------------------------------------------------------------------------------------------------
Market value,
end of period $15.375 $14.375 $13.750 $13.125 $13.375
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at market value (%)(a) 16.96 14.88 15.30 9.20 (2.52)*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $111,333 $105,690 $103,466 $97,901 $100,615
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.05 1.06 1.04 1.00 1.00*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 9.75 9.70 9.49 10.32 8.82*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 85.45 62.57 74.70 103.91 80.21*
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) The ratio of expenses to average net assets for the period ended May 31, 1996, and thereafter,
includes amounts paid through expense offset arangements. Prior period ratios exclude
these amounts. (Note 2)
(c) Represents initial net asset value of $14.07 less offering expenses of approximately $0.06.
</TABLE>
Notes to financial statements
May 31, 1998
Note 1
Significant accounting policies
Putnam Managed High Yield Trust (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 requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities. Actual
results could differ from those estimates.
A) Security valuation Investments for which market quotations are readily
available are stated at market value, which is determined using the last
reported sale price, or, if no sales are reported -- as in the case of some
securities traded over-the-counter -- the last reported bid price. 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. Market quotations are not considered to be readily
available for certain 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 determines valuations for
normal, institutional-size trading units of such securities using methods
based on market transactions for comparable securities and various
relationships between securities which 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. Putnam Management is responsible
for determining that the value of these underlying securities is at all times
at least equal to the resale price, including accrued interest.
D) Security transactions and related investment income Security transactions
are accounted for on the trade date (date the order to buy or sell is
executed). Interest income is recorded on the accrual basis. Dividend income
is recorded on the ex-dividend date. Discounts on zero coupon bonds, original
issue discount bonds, stepped-coupon bonds and payment in kind bonds are
accreted according to the yield-to-maturity basis.
E) Federal taxes It is the policy of the fund to distribute all of its taxable
income within the prescribed time and otherwise comply with the provisions of
the Internal Revenue Code applicable to regulated investment companies. It is
also the intention of the fund to distribute an amount sufficient to avoid
imposition of any excise tax under Section 4982 of the Internal Revenue Code
of 1986, as amended. Therefore, no provision has been made for federal taxes
on income, capital gains or unrealized appreciation on securities held nor for
excise tax on income and capital gains.
F) Distributions to shareholders Distributions to shareholders from net
investment income are recorded by the fund on the ex-dividend date. Capital
gain distributions, if any, are recorded on the ex-dividend date and paid at
least annually.
The amount and character of income and gains to be distributed are determined
in accordance with income tax regulations which may differ from generally
accepted accounting principles. These differences include temporary and
permanent differences of interest on payment-in-kind securities, defaulted
bond interest, prior year straddle less deferral and market discount.
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, 1998, the fund
reclassified $77,446 to increase undistributed net investment income and
$211,485 to increase paid-in-capital, with a decrease to accumulated net
realized gains of $288,931. 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 net assets of the fund. Such
fee is based on the following annual rates: 0.75% of the first $500 million of
average net assets, 0.65% of the next $500 million, 0.60% of the next $500
million, and 0.55% thereafter.
The fund reimburses Putnam Management an allocated amount for the compensation
and related expenses of certain officers of the fund and their staff who
provide administrative services to the fund. The aggregate amount of all such
reimbursements is determined annually by the Trustees.
Custodial functions for the fund's assets are provided by Putnam Fiduciary
Trust Company (PFTC), a subsidiary of Putnam Investments, Inc. Investor
servicing agent functions are provided by Putnam Investor Services, a division
of PFTC.
For the year ended May 31,1998, fund expenses were reduced by $45,996 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.
As part of the subcustodian contract between the subcustodian bank and PFTC,
the subcustodian bank has a lien on the securities of the fund to the extent
permitted by the fund's investment restrictions to cover any advances made by
the subcustodian bank for the settlement of securities purchased by the fund.
At May 31, 1998, the payable to the subcustodian bank represents the amount
due for cash advance for the settlement of a security purchased.
Each Trustee of the fund receives an annual Trustee fee, of which $540 has
been allocated to the fund, and an additional fee for each Trustee's meeting
attended. Trustees who are not interested persons of Putnam Management and who
serve on committees of the Trustees receive additional fees for attendance at
certain committee meetings.
The fund has adopted a Trustee Fee Deferral Plan (the "Deferral Plan") which
allows the Trustees to defer the receipt of all or a portion of Trustees Fees
payable on or after July 1, 1995. The deferred fees remain in the fund and are
invested in certain Putnam funds until distribution in accordance with the
Deferral Plan.
The fund has adopted an unfunded noncontributory defined benefit pension plan
(the "Pension Plan") covering all Trustees of the fund who have served as
Trustee for at least five years. Benefits under the Pension Plan are equal to
50% of the Trustee's average total retainer and meeting fees for the three
years preceding retirement. Pension expense for the fund is included in
Compensation of Trustees in the Statement of operations. Accrued pension
liability is included in Payable for compensation of Trustees in the Statement
of assets and liabilities.
Note 3
Purchase and sales of securities
During the year ended May 31, 1998, purchases and sales of investment
securities other than short-term investments aggregated $91,773,351 and
$93,471,861, respectively. There were no purchases and sales of U.S.
government obligations. In determining the net gain or loss on securities
sold, the cost of securities has been determined on the identified cost basis.
Federal tax information
(Unaudited)
Pursuant to Section 852 of the Internal Revenue Code, as amended, the Fund
hereby designates $1,285,976 as capital gain, which includes $488,955 as 20%
capital gain, for its taxable year ended May 31, 1998.
The Form 1099 you receive in January 1999 will show the tax status of all
distributions paid to your account in calendar 1998.
Fund information
INVESTMENT MANAGER
Putnam Investment
Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
John A. Hill
Ronald J. Jackson
Paul L. Joskow
Elizabeth T. Kennan
Lawrence J. Lasser
John H. Mullin III
Robert E. Patterson
Donald S. Perkins
George Putnam, III
A.J.C. Smith
W. Thomas Stephens
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
John D. Hughes
Senior Vice President and Treasurer
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Ian C. Ferguson
Vice President
William J. Curtin
Vice President
Jennifer E. Leichter
Vice President and Fund Manager
William N. Shiebler
Vice President
John R. Verani
Vice President
Beverly Marcus
Clerk and Assistant Treasurer
Call 1-800-225-1581 weekdays from 9 a.m. to 5 p.m. Eastern Time, or visit our
website (www.putnaminv.com) any time for up-to-date information about the
fund's NAV.
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
- --------------------
Bulk Rate
U.S. Postage
PAID
Putnam
Investments
- --------------------
43773-590 7/98
