Putnam
Convertible
Opportunities
and Income
Trust
ANNUAL REPORT
February 28, 1997
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* "[Historically], we've been able to get convertibles that go up
about 75% as fast as the underlying stock, but go down only about
half as much."
-- Hugh H. Mullin, lead manager, Putnam
Convertible Opportunities and Income Trust,
as quoted in "Your Guide to Bond Funds,"
Business Week, February 10, 1997
* "The high-yield bond market has been rising along with a strong
economy and falling interest rates through the 1990s. This sector has
thrived as the economy has grown for five years without a recession. The
rising tide has improved the prospects of the small, risky companies that
generally issue high-yield debt."
-- Morningstar Mutual Funds, December 20, 1996
CONTENTS
4 Report from Putnam Management
9 Fund performance summary
12 Portfolio holdings
29 Financial statements
37 Results of December 5, 1996 Shareholder meeting
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
(copyright) Karsh, Ottawa
Dear Shareholder:
Generally favorable convertible and high-yield bond markets undeniably
contributed to Putnam Convertible Opportunities and Income Trust's positive
results during fiscal 1997. But it was astute security selection in both
markets that was perhaps the most important differentiating factor in the
fund's exceptional competitive performance during the fiscal year ended
February 28, 1997.
With Hugh Mullin managing the fund's convertible sector and Jennifer Leichter
managing the high-yield bond sector, your fund was able once again to
outperform the benchmark indexes in both market sectors during the period.
Among the managers' security selections were holdings that benefited from
strong sector performance and those that rose with the recovery of the stock
market from its summer correction.
On the following pages, Hugh and Jennifer discuss fiscal 1997's results and
look at prospects for the months ahead.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
April 16, 1997
Report from the Fund Managers
Hugh H. Mullin
Jennifer E. Leichter
Strong security selection and a buoyant high-yield market propelled Putnam
Convertible Opportunities and Income Trust past its comparative market
benchmarks for the fiscal year ended February 28, 1997. Your fund's total
returns of 14.54% at net asset value and 23.54% at market price outperformed
the 11.62% return measured by the Merrill Lynch All Convertible Index and the
12.62% result tracked by the First Boston High Yield Bond Index.
The fund's eclipsing of the Merrill index is all the more noteworthy given
that your fund's convertible holdings are largely of the
smaller-capitalization variety -- a sector that was out of favor during the
period -- while the Merrill index is more heavily weighted toward
larger-capitalization convertibles, which led the market. (Please refer to the
tables on pages 9 and 10 for complete performance information.)
* FINANCE, TECHNOLOGY LEAD CONVERTIBLES
Among the fund's convertible holdings, finance was the top-performing industry
sector over the period. Convertibles issued by banks, savings and loans, and
insurance companies benefited from a combination of improving corporate
profits, a generally favorable interest-rate environment, continuing
consolidation through mergers and acquisitions, and stock repurchase programs
implemented by numerous companies. Standout performers in this sector included
Sovereign Bancorp and Tennessee-based banking concern Union Planters Corp.
(While these securities, along with others discussed in this report, were
viewed favorably at the end of the period, all portfolio holdings are subject
to review and adjustment in accordance with the fund's investment strategy and
may vary in the future.)
We took advantage of the corrections that gripped the stock and convertible
markets during the late summer and early fall to increase substantially the
fund's weighting in technology. Primarily, we added convertibles issued by
software producers and semiconductor manufacturers. This proved timely, since
the sector rebounded significantly during the final four months of calendar
1996. Notable holdings in this sector include S3, based in San Jose,
California, an industry-leading manufacturer of chipsets for the
ever-expanding computer graphics marketplace.
The fund's exposure to the health-care sector continued to provide mixed
results. The sector underperformed for most of the year but began to improve
during the final two months of the period. Continuing uncertainty surrounding
Medicare and Medicaid reform and the scope of the reimbursement system for
managed health-care providers held the sector in check. There is, however, an
improved earnings outlook for many health-care companies over the 1997 - 98
period and we continue to believe that the securities contain a great deal of
value yet to be realized.
[GRAPHIC OMITTED: chart TOP FIVE CONVERTIBLE HOLDINGS]
TOP FIVE CONVERTIBLE HOLDINGS
Sovereign Bancorp, Inc. $3.13 convertible preferred
Banking
Softkey International, Inc. 5.5% 144A convertible, 2000
Computer software
Union Planters Corp. Series E $2.00 convertible pfd.
Banking
Freeport-McMoRan Copper Co., Inc. $1.75 dep. shares conv. pfd.
Metals mining and production
J. Baker, Inc. 7.0% convertible, 2002
Footwear retailing
[GRAPHIC OMITTED: chart TOP FIVE HIGH-YIELD HOLDINGS]
TOP FIVE HIGH-YIELD HOLDINGS
Adelphia Communications Corp. 9.50% PIK, 2004
Cable television
Midland Funding Corp. Series A 11.75%, 2005
Finance subsidiary of electric utility
Foamex (L.P.) Capital Corp. 11.875%, 2004
Textile manufacturing
PMI Holdings Corp. Series B 0%-11.5% stepped-coupon, 2005
Agriculture
ICG Holdings, Inc. 0%-13.5% stepped-coupon, 2005
Telecommunications
Footnote reads:
Top 10 holdings are as of 2/28/97 and represent 7.7% of the fund's net
assets. Top holdings will vary over time.
* MERGERS AND ACQUISITIONS PACE HIGH-YIELD MARKET
Merger-and-acquisition activity was one of the key driving forces behind the
high-yield market's strong performance over the fiscal year. Rapid
consolidation is occurring in a variety of industries with stronger companies
buying out their principal competitors. Near the end of the period, a
consolidation was completed by two fund holdings. First, aerospace contractor
Greenwich Air Services acquired UNC, Inc. Approximately one month later,
General Electric acquired Greenwich Air. Other consolidations benefiting your
fund included the acquisition of fund holding Dade International, a medical
supplies manufacturer, by Hoescht, the German chemical giant.
The fund's investments in electric utility bonds proved particularly
successful during the period. Negative investor reaction caused the bonds of
high-cost power producers to decline substantially in the face of utility
deregulation and the uncertain profile of retail competition. Given this price
weakness, which we viewed as overdone, we established and then increased
positions in operators such as Long Island Lighting. Late in the fiscal year,
as investors developed clearer conceptions of the shape that regulatory change
is likely to take, the bonds of these and other high-yield utility issuers
appreciated dramatically from their previously depressed levels.
After underperforming for much of the fiscal year's first half,
telecommunications holdings rallied impressively over the second half. With
the passage of the landmark telecommunications bill in February 1996, telecom
companies launched aggressive financing plans to enable them to compete
effectively with the telephone companies. This activity created a temporary
oversupply of telecom bonds, dampening the sector's performance.
Once the market absorbed this supply, investors were free to focus on the ways
in which telecom providers were deploying their capital. Many companies used
the money to launch such technology as cellular communications systems. Once
investors saw that many telecom operators were successfully following through
on their business plans, high-yield investors returned to telecom bonds,
believing that one element of risk was reduced in the industry, at least for
now.
[GRAPHIC OMITTED: pie chart PORTFOLIO COMPOSITION (2/28/97)
Common stocks
(including warrants) -- 1.0%
Corporate high-yield
bonds -- 43.5%
Convertible securities -- 47.5%
Other -- 8.0%
Footnote reads:
Based on total market value of assets. Composition will vary over time.
Other highlights of the period included an increase in the fund's dividend
from $0.141 to $0.155 per share during the fiscal year's second half. This was
the second dividend increase during the course of the year and was made
possible by the consistent level of high income earned by the fund's
high-yield investments.
* VALUE SEEN AMONG SMALL-CAP CONVERTIBLES
In the convertible market, we believe the persistent underperformance of
small-capitalization relative to large-capitalization issuers has created
tremendous value in the small-capitalization sector. While it is uncertain
when this value will be fully recognized in the market, as long-term,
value-oriented investors, we are confident about the sector's prospects going
forward. We will continue to follow a disciplined security selection process
that places equal emphasis on company fundamentals -- sales, earnings, cash
flow, etc. -- and valuation considerations.
Recent comments by Federal Reserve Board Chairman Alan Greenspan aimed at both
the equity and high-yield markets were followed by a 0.25% increase in the
target for overnight bank-lending rates. Regardless, a recent study by Merrill
Lynch discussing the impact of Fed rate increases on the various bond market
sectors highlighted the fact that, historically, the high-yield market, being
the least sensitive market sector to interest-rate changes, has held its value
the best during periods of Fed tightening. The threat of further Fed activity
as well as elevated valuations in many high-yield sectors could make
high-yield performance somewhat choppy over the near term. Nevertheless, we
remain optimistic about the market's potential, given the continuing moderate
growth/low inflation economic environment. After all, if the Fed continues to
raise rates, it will be in response to a strong economy -- a state of affairs
that has always been supportive to high-yield issuers.
The views expressed here are exclusively those of Putnam Management. They are
not meant as investment advice. Although the described holdings were viewed
favorably as of 2/28/97, there is no guarantee the fund will continue to hold
these securities in the future.
Performance summary
Performance should always be considered in light of a fund's investment
strategy. Putnam Convertible Opportunities and Income Trust is designed
for investors aggressively seeking capital appreciation and current income
through a diversified portfolio of lower-grade and nonrated convertible
securities and nonconvertible high-yielding securities.
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 2/28/97
Merrill Lynch First Boston
All High Yield Consumer
Market Convertible Bond Price
NAV price Index Index Index
- ------------------------------------------------------------------------------
1 year 14.54% 23.54% 11.62% 12.62% 2.71%
- ------------------------------------------------------------------------------
Life of fund
(since 6/29/95) 28.52 17.95 25.96 22.25 4.33
Annual average 16.21 10.39 14.84 12.81 2.57
- ------------------------------------------------------------------------------
TOTAL RETURN FOR PERIODS ENDED 3/31/97
(most recent calendar quarter)
Market
NAV price
- ------------------------------------------------------------------------------
1 year 10.97% 21.15%
- ------------------------------------------------------------------------------
Life of fund
(since 6/29/95) 25.59 15.07
Annual average 13.82 8.30
- ------------------------------------------------------------------------------
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, principal 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 2/28/97
- ------------------------------------------------------------------------------
Distributions (number) 12
- ------------------------------------------------------------------------------
Income $2.001
- ------------------------------------------------------------------------------
Capital gains
- ------------------------------------------------------------------------------
Long term 0.144
- ------------------------------------------------------------------------------
Short term 1.191
- ------------------------------------------------------------------------------
Total $3.336
- ------------------------------------------------------------------------------
Share value: NAV Market price
- ------------------------------------------------------------------------------
2/29/96 $26.43 $22.625
- ------------------------------------------------------------------------------
2/28/97 26.40 24.375
- ------------------------------------------------------------------------------
Current return
(end of period) NAV Market price
- ------------------------------------------------------------------------------
Current dividend rate1 7.05% 7.63%
- ------------------------------------------------------------------------------
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 all your fund's assets, minus any
liabilities, divided by the number of outstanding shares.
Market price is the current trading price of one share of the fund. Market
prices are set by transactions between buyers and sellers on the New York
Stock Exchange.
COMPARATIVE BENCHMARKS
The Merrill Lynch All Convertible Index is an unmanaged list of convertible
securities commonly used as a measure of performance for the convertible
market.*
The First Boston High Yield Bond Index is a market-weighted index including
publicly traded bonds having a rating below BBB by Standard & Poor's
(registered trademark) and Baa by Moody's. The average quality of bonds
included in theindex may be lower than the average quality of those bonds in
which the fund customarily invests.*
Consumer Price Index (CPI ) is a commonly used measure of inflation; it
does not represent an investment return.
*Securities indexes assume reinvestment of all distributions and interest
payments and do not take in account brokerage fees or taxes. Securities in
the fund do not match those in the indexes and performance of the fund
will differ. It is not possible to invest directly in an index.
Report of independent accountants
For the fiscal year ended February 28, 1997
To the Trustees and Shareholders of
Putnam Convertible Opportunities and Income Trust
We have audited the accompanying statement of assets and liabilities of Putnam
Convertible Opportunities and Income Trust, including the portfolio of
investments owned, as of February 28, 1997, and the related statement of
operations for the year then ended, and the statements of changes in net
assets and the financial highlights for the year then ended and the period
from June 29, 1995 (commencement of operations) to February 29, 1996. These
financial statements and financial highlights are the responsibility of the
fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned as of February 28, 1997, by correspondence with the custodian and
brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Putnam Convertible Opportunities and Income Trust as of February 28, 1997, the
results of its operations for the year then ended, and the changes in its net
assets and the financial highlights for the year then ended and the period
from June 29, 1995 (commencement of operations) to February 29, 1996, in
conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
April 15, 1997
<TABLE>
<CAPTION>
Portfolio of investments owned
February 28, 1997
CORPORATE BONDS AND NOTES (43.7%) *
PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C> <C>
Advertising (0.1%)
- ---------------------------------------------------------------------------------------------------------
$90,000 Lamar Advertising Co. sr. sub. notes 9 5/8s, 2006 $ 93,600
Aerospace and Defense (0.9%)
- ---------------------------------------------------------------------------------------------------------
155,000 Greenwich Air Services, Inc. sr. notes 10 1/2s, 2006 167,400
100,000 Sequa Corp. med. term notes 10s, 2001 103,150
500,000 UNC, Inc. sr. notes 9 1/8s, 2003 512,500
50,000 UNC, Inc. sr. sub. notes 11s, 2006 55,000
--------------
838,050
Agriculture (1.0%)
- ---------------------------------------------------------------------------------------------------------
1,000,000 PMI Holdings Corp. sub. disc. deb. stepped-coupon
Ser. B, zero % (11 1/2s, 9/1/00), 2005 ++ 710,000
242,548 PSF, Inc. sr. sec. notes 11s, 2003 [2 DBL. DAGGERS] 264,378
--------------
974,378
Apparel (0.2%)
- ---------------------------------------------------------------------------------------------------------
30,000 GFSI, Inc. 144A sr. sub. notes 9 5/8s, 2007 30,450
140,000 Sassco Fashions Ltd. 144A notes 12 3/4s, 1999 ## 140,000
--------------
170,450
Automotive (0.1%)
- ---------------------------------------------------------------------------------------------------------
90,000 CSK Auto, Inc. 144A sr. sub. notes 11s, 2006 93,600
Automotive Parts (0.8%)
- ---------------------------------------------------------------------------------------------------------
100,000 APS Inc. 144A sr. sub. notes 11 7/8s, 2006 107,000
188,000 Aftermarket Technology Corp. sr. sub. notes 12s, 2004 210,560
100,000 Harvard Industries Inc. sr. notes 11 1/8s, 2005 62,000
150,000 Key Plastics Corp. sr. notes 14s, 1999 166,500
195,000 Lear Corp. sub. notes 9 1/2s, 2006 210,356
--------------
756,416
Banks (0.4%)
- ---------------------------------------------------------------------------------------------------------
200,000 First Nationwide Holdings sr. sub. notes 9 1/8s, 2003 208,000
60,000 North Fork Bancorp, Inc. 144A bonds 8.7s, 2026 59,175
70,000 Provident Capital Trust 144A bonds 8.6s, 2026 70,630
40,000 Riggs Capital Trust 144A bonds 8 5/8s, 2026 40,795
50,000 Webster Capital Trust I 144A bonds 9.36s, 2027 51,060
--------------
429,660
Basic Industry (--%)
- ---------------------------------------------------------------------------------------------------------
65,000 Tractor Inc. 144A sr. notes 8 1/2s, 2007 65,163
Broadcasting (2.5%)
- ---------------------------------------------------------------------------------------------------------
215,000 Capstar Broadcasting 144A sr. disc. notes stepped-
coupon zero % (12 3/4s, 2/1/02), 2009 ++ 124,700
40,000 Chancellor Radio Broadcasting Corp. sr. sub. notes
9 3/8s, 2004 41,200
350,000 Commodore Media, Inc. sr. sub. notes stepped-coupon
7 1/2s, (13 1/4s, 5/1/98), 2003 ++ 369,250
500,000 Heritage Media Services Corp. sr. sub. notes 8 3/4s,
2006 496,250
45,000 Jacor Communications, Inc. company guaranty 9 3/4s,
2006 47,700
160,000 Net Sat Servicos Ltd. 144A sr. notes 12 3/4s, 2004
(Brazil) 174,800
175,000 Paxson Communications Corp. 144A sr. sub. notes
11 5/8s, 2002 186,375
414,000 Petracom Holdings, Inc. notes stepped-coupon zero %
(17 1/2s, 8/1/98), 2003 ++ 356,040
250,000 SFX Broadcasting, Inc. sr. sub. notes Ser. B, 10 3/4s,
2006 270,000
140,000 TCI Satellite Entertainment 144A sr. disc. notes stepped-
coupon zero % (12 1/4s, 2/15/02), 2007 ++ 77,700
80,000 TCI Satellite Entertainment 144A sr. sub. notes 10 7/8s,
2007 80,400
209,000 Telemedia Broadcasting Corp. 144A deb. stepped-coupon
3.8s, (16s, 6/15/99), 2004 ++ + 190,190
35,000 TV Azteca Sa De Cv 144A sr. notes 10 1/2s, 2007
(Mexico) 35,525
--------------
2,450,130
Building and Construction (1.5%)
- ---------------------------------------------------------------------------------------------------------
85,000 Atrium Companies Inc. 144A sr. sub. notes 10 1/2s, 2006 87,338
60,000 Continental Homes Holding Corp. sr. notes 10s, 2006 63,000
40,000 Del. Webb Corp. sr. sub. notes 9 3/4s, 2008 40,750
300,000 Presley Cos. sr. notes 12 1/2s, 2001 291,750
450,000 Scotsman Group, Inc. sr. notes 9 1/2s, 2000 463,500
450,000 Terex Corp. sr. notes Ser. B, 13 1/4s, 2002 499,500
--------------
1,445,838
Building Products (0.9%)
- ---------------------------------------------------------------------------------------------------------
160,000 Cemex S.A. 144A bonds 12 3/4s, 2006 (Mexico) 186,800
275,000 Inter-City Products sr. notes 9 3/4s, 2000 281,875
275,000 Schuller International Corp. sr. notes 10 7/8s, 2004 305,250
150,000 Waxman Industries Inc. sr. notes stepped-coupon Ser. B,
zero % (12 3/4s, 6/1/99), 2004 ++ 123,000
--------------
896,925
Business Services (0.2%)
- ---------------------------------------------------------------------------------------------------------
75,000 Intertek Finance PLC 144A sr. sub. notes 10 1/4s, 2006
(United Kingdom) 78,655
75,000 Pierce Leahy Corp. sr. sub. notes 11 1/8s, 2006 82,500
--------------
161,155
Cable Television (4.4%)
- ---------------------------------------------------------------------------------------------------------
1,017,355 Adelphia Communications Corp. sr. notes 9 1/2s, 2004 [2 DBL. DAGGERS] 915,620
250,000 American Telecasting, Inc. sr. disc. notes stepped-coupon
ser. B, zero % (14 1/2s, 8/15/00), 2005 ++ 72,500
250,000 Comcast UK Cable, Ltd. deb. stepped-coupon zero %
(11.2s, 11/15/00), 2007 (Bermuda) ++ 178,125
300,000 Diamond Cable Communications Co. sr. disc. notes
stepped-coupon zero % (11 3/4s, 12/15/00), 2005 ++ 207,000
295,000 Diamond Cable Communications Co. 144A sr. disc. notes
stepped-coupon zero % (10 3/4s, 2/15/02), 2007 ++ 177,738
206,230 Falcon Holdings Group, Inc. sr. sub. notes 11s, 2003 [2 DBL. DAGGERS] 185,606
195,000 Heartland Wireless Communications, Inc. 144A sr. notes
14s, 2004 185,250
100,000 Heartland Wireless Communications, Inc. sr. notes 13s,
2003 97,000
250,000 International Cabletel, Inc. sr. notes stepped-coupon
Ser. A, zero % (12 3/4s, 4/15/200), 2005 ++ 187,500
375,000 International Cabletel, Inc. sr. notes stepped-coupon
Ser. B, zero % (11 1/2s, 2/01/01), 2006 ++ 251,250
170,000 International Cabletel, Inc. 144A sr. notes 10s, 2007 170,850
175,000 Lenfest Communications, Inc. sr. sub. notes 10 1/2s,
2006 187,250
175,000 Lenfest Communications, Inc. sr. notes 8 3/8s, 2005 169,750
250,000 Marcus Cable Co. (L.P.) sr. deb. 11 7/8s, 2005 265,000
250,000 Marcus Cable Co. (L.P.) sr. sub. disc. notes stepped-
coupon zero % (13 1/2s, 8/1/99), 2004 ++ 208,750
705,000 Telewest Communications PLC deb. stepped-coupon
zero % (11s, 10/1/00), 2007 (United Kingdom) ++ 484,687
40,000 TV Filme, Inc. 144A sr. notes 12 7/8s, 2004 (Brazil) 41,600
435,000 UIH Australia/Pacific, Inc. sr. disc. notes stepped-coupon
Ser. B, zero % (14s, 5/15/01), 2006 (Australia) ++ 234,900
150,000 Wireless One, Inc. sr. notes 13s, 2003 139,500
--------------
4,359,876
Chemicals (1.2%)
- ---------------------------------------------------------------------------------------------------------
350,000 Acetex Corp. 144A sr. notes 9 3/4s, 2003 (Canada) 353,500
40,000 Freedom Chemicals, Inc. 144A sr. sub. notes 10 5/8s, 2006 42,500
125,000 Harris Chemical Corp. sr. secd. disc. notes 10 1/4s, 2001 132,188
500,000 ISP Holdings, Inc. 144A sr. notes 9 3/4s, 2002 532,500
75,000 NL Industries, Inc. sr. notes stepped-coupon zero %
(13s, 10/15/98), 2005 ++ 68,625
75,000 Sterling Chemicals Holdings sr. disc. notes stepped-
coupon zero % (13 1/2s, 8/15/01), 2008 ++ 49,125
--------------
1,178,438
Computer Services (0.3%)
- ---------------------------------------------------------------------------------------------------------
235,000 Unisys Corp. sr. notes 11 3/4s, 2004 256,150
Consumer Durable Goods (0.2%)
- ---------------------------------------------------------------------------------------------------------
130,000 Icon Fitness Corp. 144A sr. disc. notes stepped-coupon
zero % (14s, 11/15/01), 2006 ++ 71,825
100,000 Remington Products Co. sr. sub. notes Ser. B, 11s, 2006 93,250
--------------
165,075
Consumer Services (0.3%)
- ---------------------------------------------------------------------------------------------------------
311,000 Coinmach Corp. 144A sr. notes Ser. B, 11 3/4s, 2005 342,878
Cosmetics (0.4%)
- ---------------------------------------------------------------------------------------------------------
500,000 Revlon Worldwide Corp. 144A sr. disc. notes zero %,
2001 328,125
65,000 Revlon Worldwide Corp. sr. disc. notes Ser. B, zero %,
1998 60,938
--------------
389,063
Electric Utilities (2.1%)
- ---------------------------------------------------------------------------------------------------------
50,000 AES China Generating Co. sr. notes 10 1/8s, 2006 53,000
150,000 BVPS II Funding Corp. secd. lease oblig. bonds 9s, 2017 150,655
240,000 First PV Funding deb. 10.15s, 2016 254,400
35,000 Hidro Pierda Aguila 144A bonds 10 5/8s, 2001
(Argentina) 36,575
500,000 Long Island Lighting Co. deb. 9s, 2022 527,810
750,000 Midland Funding Corp. deb. Ser. A, 11 3/4s, 2005 844,425
128,493 Northeast Utilities System notes Ser. A, 8.58s, 2006 122,636
104,000 Northeast Utilities System notes Ser. B, 8.38s, 2005 102,370
--------------
2,091,871
Electronics (1.2%)
- ---------------------------------------------------------------------------------------------------------
500,000 Amphenol Corp. sr. notes 10.45s, 2001 538,750
55,000 Celestica International Ltd. 144A sr. sub. notes 10 1/2s,
2006 (India) 59,469
64,737 Cirent Semiconductor sr. sub. notes 10.22s, 2002 64,656
65,003 Cirent Semiconductor 144A sr. sub. notes 10.14s, 2004 64,921
700,000 International Semi-Tech. Corp. sr. disc. notes stepped-
coupon zero % (11 1/2s, 8/15/00), 2003 (Canada) ++ 402,500
50,000 Moog, Inc. sr. sub. notes Ser. B, 10s, 2006 52,500
--------------
1,182,796
Entertainment (1.0%)
- ---------------------------------------------------------------------------------------------------------
245,300 Cinemark Mexico notes 13s, 2003 (Mexico) [2 DBL. DAGGERS] 237,941
160,000 Cinemark USA, Inc. notes 9 5/8s, 2008 164,800
500,000 Premier Parks, Inc. sr. notes Ser. A, 12s, 2003 562,500
--------------
965,241
Environmental Control (0.1%)
- ---------------------------------------------------------------------------------------------------------
90,000 Allied Waste Industries, Inc. 144A sr. sub. notes 10 1/4s,
2006 96,300
Financial Services (0.6%)
- ---------------------------------------------------------------------------------------------------------
60,000 Aames Financial Corp. sr. notes 9 1/8s, 2003 60,000
40,000 Colonial Capital Trust I 144A company guaranty
8.92s, 2027 40,488
105,000 Contifinancial Corp. sr. notes 8 3/8s, 2003 108,150
45,000 Dollar Financial Group Inc. 144A sr. notes 10 7/8s, 2006 47,363
45,000 Imperial Credit Industries, Inc. 144A sr. notes 9 7/8s, 2007 45,900
80,000 Ocwen Federal Bank FSB sub. deb. 12s, 2005 88,600
50,000 Ocwen Financial Corp. notes 11 7/8s, 2003 55,375
55,000 Olympic Financial Ltd. sr. notes 13s, 2000 61,600
50,000 Outsourcing Solutions Inc. 144A sr. sub. notes 11s, 2006 53,625
--------------
561,101
Food (0.8%)
- ---------------------------------------------------------------------------------------------------------
25,000 MBW Foods, Inc. 144A sr. sub. notes 9 7/8s, 2007 25,438
750,000 Southland Corp. 1st priority sr. sub. deb 5s, 2003 621,563
170,000 Specialty Foods Corp. sr. notes Ser. B, 10 1/4s, 2001 167,450
--------------
814,451
Food and Beverages (--%)
- ---------------------------------------------------------------------------------------------------------
30,000 Canandaigua Wine Co. 144A sr. sub. notes 8 3/4s, 2003 30,300
Health Care (1.2%)
- ---------------------------------------------------------------------------------------------------------
45,000 Genesis Health Ventures, Inc. sr. sub. notes 9 1/4s, 2006 45,900
500,000 Integrated Health Services, Inc. sr. sub. notes 10 3/4s, 2004 547,500
275,000 Paracelsus Healthcare Corp. sr. sub. notes 10s, 2006 269,500
165,000 Tenet Healthcare Corp. sr. notes 8s, 2005 167,888
160,000 Tenet Healthcare Corp. sr. sub. notes 8 5/8s, 2007 165,600
--------------
1,196,388
Lodging (0.1%)
- ---------------------------------------------------------------------------------------------------------
100,000 John Q Hammons Hotels, Inc. 1st mtge. 8 7/8s, 2004 100,125
Medical Supplies and Devices (0.6%)
- ---------------------------------------------------------------------------------------------------------
150,000 Dade International, Inc. sr. sub. notes Ser. B, 11 1/8s, 2006 164,250
100,000 Graphic Controls Corp. 144A sr. sub. notes Ser. A,
12s, 2005 110,750
125,000 IMED Corp. sr. sub. notes 9 3/4s, 2006 129,687
150,000 Wright Medical Technology, Inc. sr. secd. notes Ser. B,
10 3/4s, 2000 151,500
--------------
556,187
Metals and Mining (0.5%)
- ---------------------------------------------------------------------------------------------------------
30,000 Acindar Industria Argentina de Aceros S.A. bonds
11 1/4s, 2004 (Argentina) 31,125
80,000 AK Steel Corp. 144A sr. notes 9 1/8s, 2006 83,000
50,000 NL Industries, Inc. sr. notes 11 3/4s, 2003 54,375
70,000 Renco Metals, Inc. sr. notes 11 1/2s, 2003 73,675
70,000 Royal Oak Mines, Inc. company guaranty Ser. B, 11s,
2006 (Canada) 72,100
125,000 WCI Steel, Inc. 144A sr. notes 10s, 2004 131,250
--------------
445,525
Networking (0.4%)
- ---------------------------------------------------------------------------------------------------------
600,000 CellNet Data Systems, Inc. sr. disc. notes stepped-
coupon Ser. B, zero % (13s, 6/15/00), 2005 ++ 426,000
Office Supplies (0.3%)
- ---------------------------------------------------------------------------------------------------------
250,000 United Stationer Supply, Inc. sr. sub. notes 12 3/4s, 2005 282,500
Oil and Gas (3.6%)
- ---------------------------------------------------------------------------------------------------------
70,000 Abraxas Petrolem Corp. 144A sr. notes 11 1/2s, 2004 76,038
250,000 Chesapeake Energy Corp. sr. notes 10 1/2s, 2002 270,625
200,000 Chesapeake Energy Corp. sr. notes 9 1/8s, 2006 210,000
40,000 CIA Naviera Perez Companc S.A. 144A bonds 9s, 2004
(Argentina) 40,000
50,000 Cliffs Drilling Co. company guaranty Ser. B, 10 1/4s, 2003 53,688
300,000 Flores & Rucks, Inc. sr. notes 13 1/2s, 2004 358,500
45,000 Flores & Rucks, Inc. sr. sub. notes 9 3/4s, 2006 48,488
45,000 Forcenergy, Inc. sr. sub. notes 9 1/2s, 2006 47,925
40,000 Forcenergy, Inc. 144A sr. sub. notes 8 1/2s, 2007 39,600
500,000 Gulf Canada Resources Ltd. sr. sub. notes 9 5/8s, 2005
(Canada) 543,750
50,000 Kelley Oil & Gas Corp. sr. sub. notes Ser. B, 10 3/8s, 2006 53,125
500,000 Maxus Energy Corp. deb. 11 1/4s, 2013 517,500
250,000 Maxus Energy Corp. med. term notes 10.83s, 2004 275,000
75,000 Parker Drilling Corp. sr. notes Ser. B, 9 3/4s, 2006 79,875
40,000 Texas Petrochemical Corp. sr. sub. notes 11 1/8s, 2006 42,900
400,000 Transamerican Refining Corp. var. coupon 1st mtge.
zero % (18.5s 2/15/98), 2002 ++ 370,000
304,000 TransTexas Gas Corp. sr. disc. notes stepped-coupon
zero % (13 1/4s, 12/16/01), 2003 ++ 191,520
250,000 TransTexas Gas Corp. sr. secd. notes 11 1/2s, 2002 277,188
--------------
3,495,722
Packaging & Containers (0.7%)
- ---------------------------------------------------------------------------------------------------------
500,000 Ivex Packaging Corp. sr. sub. notes 12 1/2s, 2002 545,000
60,000 Printpack, Inc. sr. notes Ser. B, 9 7/8s, 2004 63,000
40,000 Radnor Holdings Corp. 144A sr. notes 10s, 2003 41,400
--------------
649,400
Paging (0.7%)
- ---------------------------------------------------------------------------------------------------------
375,000 Mobile Telecommunications Tech. sr. notes 13 1/2s, 2002 368,438
300,000 Pagemart Nationwide, Inc. sr. disc. notes stepped-coupon
zero % (15s, 2/1/00), 2005 ++ 210,000
100,000 Pronet, Inc. sr. sub. notes 11 7/8s, 2005 96,000
--------------
674,438
Paper and Forest Products (1.7%)
- ---------------------------------------------------------------------------------------------------------
250,000 APP International Finance Co. notes 11 3/4s, 2005
(Netherlands) 275,625
75,000 Domtar, Inc. deb. 9 1/2s, 2016 (Canada) 82,500
230,000 Florida Coast Paper LLC 1st mtge. Ser. B, 12 3/4s, 2003 248,400
250,000 Gaylord Container Corp. sr. sub. disc. deb. 12 3/4s, 2005 ++ 276,875
300,000 Repap New Brunswick sr. notes 10 5/8s, 2005 (Canada) 301,500
350,000 Riverwood International Corp. company guaranty
10 7/8s, 2008 300,125
200,000 Stone Container Corp. sr. notes 11 7/8s, 2016 209,500
--------------
1,694,525
Publishing (0.3%)
- ---------------------------------------------------------------------------------------------------------
30,000 Sun Media Corp. 144A sr. sub. notes 9 1/2s, 2007
(Canada) 30,900
250,000 Affinity Group sr. sub. notes 11 1/2s, 2003 262,500
--------------
293,400
REIT's (Real Estate Investment Trust) (0.3%)
- ---------------------------------------------------------------------------------------------------------
250,000 Tanger Properties L.P. Gtd. notes 8 3/4s, 2001 255,800
Recreation (2.6%)
- ---------------------------------------------------------------------------------------------------------
100,000 Alliance Gaming Corp. sr. notes 12 7/8s, 2003 110,000
100,000 Argosy Gaming Co. 1st mtge. 13 1/4s, 2004 87,750
250,000 Casino America, Inc. sr. notes 12 1/2s, 2003 256,250
85,000 Casino Magic Corp. 144A 1st mtge. 13s, 2003 85,000
158,700 Colorado Gaming & Entertainment Co. sr. notes 12s, 2003 152,352
200,000 Grand Casinos, Inc. 1st mtge. 10 1/8s, 2003 206,000
350,000 Hollywood Casino Corp. sr. notes 12 3/4s, 2003 353,500
350,000 Lady Luck Gaming Corp. 1st mtge. 11 7/8s, 2001 336,000
216,000 Louisiana Casino Cruises Corp. 1st mtge. 11 1/2s, 1998 218,160
400,000 Mohegan Tribal Gaming Auth. Rev. Bonds Ser. B,
13 1/2s, 2002 531,000
125,000 Trump Holdings & Funding Corp. sr. notes 15 1/2s, 2005 143,125
125,000 PRT Funding Corp. sr. notes 11 5/8s, 2004 88,750
--------------
2,567,887
Restaurants (0.1%)
- ---------------------------------------------------------------------------------------------------------
35,000 AmeriKing. Inc. sr. notes 10 3/4s, 2006 + 36,750
100,000 FRD Acquisition Co. sr. notes Ser. B, 12 1/2s, 2004 106,000
--------------
142,750
Retail (1.6%)
- ---------------------------------------------------------------------------------------------------------
120,000 Finlay Enterprises, Inc. sr. disc. deb. stepped-coupon
zero % (12s, 5/1/98), 2005 ++ 111,000
180,000 Guitar Center Management Co. 144A sr. notes 11s, 2006 197,100
350,000 K mart Corp. med. term notes 7.85s, 2002 333,680
130,000 Loehmanns, Inc. sr. notes 11 7/8s, 2003 142,350
200,000 Mothers Work, Inc. sr. notes 12 5/8s, 2005 212,000
500,000 Specialty Retailers, Inc. sr. sub. notes 11s, 2003 520,000
--------------
1,516,130
School Buses (0.4%)
- ---------------------------------------------------------------------------------------------------------
55,000 Blue Bird Body Co. sr. sub. notes Ser. B, 10 3/4s, 2006 58,850
335,000 Consorcio/MCII Holdings sec. notes stepped-coupon
zero % (12s, 11/15/98), 2002 ++ 285,588
--------------
344,438
Specialty Consumer Products (0.3%)
- ---------------------------------------------------------------------------------------------------------
65,000 Genesco, Inc. sr. notes 10 3/8s, 2003 66,950
250,000 Herff Jones, Inc. sr. sub. notes 11s, 2005 271,250
--------------
338,200
Supermarkets (0.4%)
- ---------------------------------------------------------------------------------------------------------
300,000 Ralphs Grocery Co. sr. notes 10.45s, 2004 319,500
50,000 Supermercados Norte 144A bonds 10 7/8s, 2004
(Argentina) 50,563
--------------
370,063
Telecommunication (5.0%)
- ---------------------------------------------------------------------------------------------------------
620,000 American Communication Services, Inc. sr. disc. notes
stepped-coupon zero % (12 3/4s, 4/1/01), 2006 ++ 381,300
250,000 Call-Net Enterprises sr. disc. notes stepped-coupon
zero % (13 1/4s, 12/1/99), 2004(Canada) ++ 213,125
575,000 Cencall Communications Corp. sr. disc. notes stepped-
coupon zero % (10 1/8s, 1/15/99), 2004 ++ 437,000
100,000 Dobson Communications Corp. 144A sr. notes
11 3/4s, 2007 101,750
496,000 GST USA,Inc. company guaranty stepped-coupon
zero % (13 7/8s, 15/15/00), 2005 ++ 319,920
250,000 Hyperion Telecommunication Corp. sr. disc. notes
stepped-coupon Ser. B, zero % (13s, 4/15/01), 2003 ++ 146,875
930,000 ICG Holdings, Inc. sr. disc. notes stepped-coupon zero %
(13 1/2s, 9/15/00), 2005 ++ 690,525
500,000 Intercel, Inc. sr. disc. notes stepped-coupon zero %
(12s, 5/1/01), 2006 ++ 325,000
250,000 Metrocall, Inc. sr. sub. notes 10 3/8s, 2007 224,375
305,000 Millicom International Cellular S.A. sr. disc. notes
stepped-coupon zero % (13 1/2s, 6/1/01), 2006
(Luxembourg) ++ 205,875
250,000 NEXTEL Communications, Inc. sr. disc. notes
stepped-coupon zero % (9 3/4s, 2/15/99), 2004 ++ 183,125
750,000 NEXTEL Communications, Inc. sr. disc. notes
stepped-coupon zero % (11 1/2s, 9/1/98), 2003 ++ 626,250
120,000 Orbcomm Global Capital Corp. sr. notes Ser. B, 14s, 2004 129,000
250,000 Pricellular Wireless Corp. sr. notes 10 3/4s, 2004 262,500
500,000 Pricellular Wire sr. disc. notes stepped-coupon Ser. B,
zero % (14s, 11/15/98), 2001 ++ 502,500
250,000 Teleport Communications Group Inc. sr. disc. notes
stepped-coupon zero % (11 1/8s, 7/1/01), 2007 ++ 176,250
--------------
4,925,370
Telephone Services (0.5%)
- ---------------------------------------------------------------------------------------------------------
145,000 Globo Communicacoes 144A company guaranty
10 1/2s, 2006 (Brazil) 148,625
160,000 McLeod, Inc. 144A sr. disc. notes stepped-coupon zero %
(10 1/2s, 3/1/02), 2007 ++ 96,400
200,000 Nextlink Communications, Inc. sr. notes 12 1/2s, 2006 217,500
--------------
462,525
Textiles (1.0%)
- ---------------------------------------------------------------------------------------------------------
750,000 Foamex (L.P.) Capital Corp. sr. sub. deb. 11 7/8s, 2004 806,250
155,000 Polysindo International Finance company guaranty
11 3/8s, 2006 (Indonesia) 169,338
--------------
975,588
Utilities (0.1%)
- ---------------------------------------------------------------------------------------------------------
100,000 Calpine Corp. sr. notes 9 1/4s, 2004 103,250
Wireless Communications (0.1%)
- ---------------------------------------------------------------------------------------------------------
85,000 International Wireless Communications, Inc. sr. disc.
notes zero %, 2001 50,575
75,000 Omnipoint Corp. sr. notes 11 5/8s, 2006 74,250
25,000 Omnipoint Corp. 144A sr. notes Ser. A, 11 5/8s, 2006 25,063
--------------
149,888
--------------
Total Corporate Bonds and Notes (cost $41,084,351) $ 42,775,004
CONVERTIBLE BONDS AND NOTES (29.9%) *
PRINCIPAL AMOUNT VALUE
Aerospace and Defense (0.4%)
- ---------------------------------------------------------------------------------------------------------
$ 310,000 Diagnostic Retrieval Systems 144A cv. sr. sub. deb.
9s, 2003 $ 408,813
Automotive (1.0%)
- ---------------------------------------------------------------------------------------------------------
400,000 Magna International cv. sub. deb. 5s, 2002 441,000
JPY 40,000,000 Toyota Motor Corp. cv. deb. 1.2s, 1998 (Japan) 533,200
--------------
974,200
Banks (0.9%)
- ---------------------------------------------------------------------------------------------------------
409,000 Banamex 144A cv. jr. sub. notes 11s, 2003 (Austria) 431,495
480,000 Mitsubishi Bank Ltd. International Finance cv. trust gtd.
notes 3s, 2002 (Japan) 485,400
--------------
916,895
Basic Industrial Products (0.4%)
- ---------------------------------------------------------------------------------------------------------
420,000 Cooper Industries, Inc. cv. sub. 7.05s, 2015 457,800
Broadcasting (0.4%)
- ---------------------------------------------------------------------------------------------------------
900,000 Jacor Communications, Inc. cv. sr. notes zero %, 2011 427,500
Building and Construction (0.2%)
- ---------------------------------------------------------------------------------------------------------
149,000 Trimas Corp. cv. sub. deb. 5s, 2003 159,058
Business Equipment and Services (1.2%)
- ---------------------------------------------------------------------------------------------------------
460,000 Corporate Express, Inc. 144A cv. notes 4 1/2s, 2000 418,025
250,000 National Data Corp. cv. sub. notes 5s, 2003 238,750
540,000 U.S. Office Products Co. 144A cv. sub. notes 5 1/2s, 2003 498,150
--------------
1,154,925
Cable Television (0.9%)
- ---------------------------------------------------------------------------------------------------------
955,000 Comcast Corp. cv. notes 1 1/8s, 2007 496,600
365,000 International Cabletel Inc. 144A cv. deb. 7 1/4s, 2005 344,469
--------------
841,069
Computer Equipment (0.8%)
- ---------------------------------------------------------------------------------------------------------
385,000 Intevac, Inc. 144A cv. sub. notes 6 1/2s, 2004 386,925
460,000 Synoptics Communications Inc. 144A cv. sub. deb.
5 1/4s, 2003 400,775
--------------
787,700
Computers (1.3%)
- ---------------------------------------------------------------------------------------------------------
610,000 Safeguard Scientifics, Inc. 144A cv. sub. notes 6s, 2006 555,100
925,000 Softkey International, Inc. 144A cv. sr. notes 5 1/2s, 2000 714,563
--------------
1,269,663
Conglomerates (0.3%)
- ---------------------------------------------------------------------------------------------------------
240,000 Hexcel Corp. cv. sub. notes 7s, 2003 345,600
Consumer Non Durables (1.1%)
- ---------------------------------------------------------------------------------------------------------
1,925,000 Coleman Worldwide Corp. cv. sr. sec. notes LYON
zero %, 2013 560,656
550,000 Standard Commercial Corp. cv. sub. deb. 7 1/4s, 2007 + 491,562
--------------
1,052,218
Consumer Services (2.0%)
- ---------------------------------------------------------------------------------------------------------
1,525,000 Boston Chicken, Inc. cv. notes zero %, 2015 451,781
1,650,000 Hollinger, Inc. cv. LYON zero %, 2013 594,000
350,000 Protection One, Inc. cv. sr. sub. notes 6 3/4s, 2003 325,938
555,000 WMS Industries, Inc. cv. deb. 5 3/4s, 2002 538,350
--------------
1,910,069
Electronics and Electrical Equipment (3.6%)
- ---------------------------------------------------------------------------------------------------------
340,000 Lernout & Hauspie Speech Products N.V. 144A cv.
sub. notes 8s, 2001 (Belgium) 363,800
670,000 Motorola, Inc. cv. sub. deb. LYON zero %, 2013 491,613
430,000 S3, Inc. 144A cv. sub. notes 5 3/4s, 2003 490,200
365,000 SCI Systems, Inc. cv. sub. notes 5s, 2006 470,394
225,000 Texas Instruments cv. sub. deb. 2 3/4s, 2002 418,781
540,000 Thermo Electron Corp. 144A cv. sub. deb. 4 1/4s, 2003 585,900
395,000 Thermo Optek Corp. 144A cv. bonds 5s, 2000 418,700
295,000 Thermo Quest Corp. 144A cv. company guaranty 5s, 2000 312,700
--------------
3,552,088
Environmental Control (1.1%)
- ---------------------------------------------------------------------------------------------------------
460,000 U.S. Filter Corp. cv. sub. notes 4 1/2s, 2001 489,900
230,000 USA Waste Services, Inc. cv. sub. notes 4s, 2002 237,763
355,000 WMX Technologies, Inc. cv. sub. notes 2s, 2005 319,500
--------------
1,047,163
Gaming (0.2%)
- ---------------------------------------------------------------------------------------------------------
250,000 Argosy Gaming cv. sub. notes 12s, 2001 167,500
Health Care (1.7%)
- ---------------------------------------------------------------------------------------------------------
340,000 Renal Treatment Centers, Inc. 144A cv. sub. notes 5
5/8s, 2006 331,925
80,000 Renal Treatment Centers, Inc. cv. sub. notes 5 5/8s, 2006 78,100
465,000 Rotech Medical Corp. 144A cv. sub. deb. 5 1/4s, 2003 423,731
400,000 TheraTx Inc. cv. sub. 8s, 2002 397,000
430,000 Vivra, Inc. 144A cv. sub. notes 5s, 2001 439,138
--------------
1,669,894
Hospital Management and Medical Services (1.4%)
- ---------------------------------------------------------------------------------------------------------
420,000 Integrated Health Services, Inc. cv. sub. deb. 6s, 2003 430,500
530,000 Sun Healthcare Group Inc. 144A cv. sub. notes 6s, 2004 487,600
320,000 U.S. Diagnostic Laboratories, Inc. 144A cv. sub. deb.
9s, 2003 432,000
--------------
1,350,100
Insurance and Finance (1.4%)
- ---------------------------------------------------------------------------------------------------------
470,000 Berkshire Hathaway, Inc. cv. sr. notes 1s, 2001 491,150
335,000 Pioneer Financial Services, Inc. cv. sub. notes 6 1/2s, 2003 468,163
550,000 USF&G Corp. cv. sub. notes zero %, 2009 380,875
--------------
1,340,188
Lodging and Gaming (0.4%)
- ---------------------------------------------------------------------------------------------------------
375,000 Signature Resorts, Inc. cv. sub. notes 5 3/4s, 2007 362,813
Medical Supplies and Devices (0.5%)
- ---------------------------------------------------------------------------------------------------------
350,000 Phoenix Shannon 144A cv. sr. sub. notes 9 1/2s, 2000 + 105,000
415,000 Uromed Corp. 144A cv. sub. notes 6s, 2003 365,719
--------------
470,719
Metals and Mining (0.4%)
- ---------------------------------------------------------------------------------------------------------
440,000 Quanex Corp. cv. sub. deb. 6.88s, 2007 453,200
Oil and Gas (0.8%)
- ---------------------------------------------------------------------------------------------------------
500,000 Lomak Petroleum, Inc. 144A cv. sub. deb. 6s, 2007 550,000
225,000 Swift Energy Co. cv. sub. notes 6 1/4s, 2006 212,625
--------------
762,625
Paper and Forest Products (0.4%)
- ---------------------------------------------------------------------------------------------------------
320,000 Stone Container Corp. cv. sr. sub. notes 8 7/8s, 2000 411,200
Pharmaceuticals (2.2%)
- ---------------------------------------------------------------------------------------------------------
1,145,000 Alza Corp. cv. sub. notes. LYON zero %, 2014 495,213
390,000 Nabi, Inc. 144A cv. sub. notes 6 1/2s, 2003 389,025
355,000 North American Vaccine 144A cv. sub. notes 6 1/2s, 2003 338,581
715,000 Pharmaceutical Marketing Services Inc. 144A cv. deb.
6 1/4s, 2003 561,275
745,000 Roche Holdings, Inc. 144A cv. unsub. LYON zero %, 2010
(Switzerland) 350,150
--------------
2,134,244
Publishing (0.3%)
- ---------------------------------------------------------------------------------------------------------
325,000 Graphic Industries cv. sub. deb. 7s, 2006 297,780
REIT's (Real Estate Investment Trust) (0.3%)
- ---------------------------------------------------------------------------------------------------------
305,000 LTC Properties, Inc. cv. sub. deb. 7 3/4s, 2002 325,588
Recreation (0.3%)
- ---------------------------------------------------------------------------------------------------------
275,000 Speedway Motorsports, Inc. 144A cv. sub. notes 5 3/4s,
2003 275,000
Retail (2.6%)
- ---------------------------------------------------------------------------------------------------------
790,000 Baker (J.), Inc. cv. deb. 7s, 2002 673,475
470,000 Home Depot, Inc. cv. sub. notes 3 1/4s, 2001 471,175
585,000 Michaels Stores, Inc. cv. sub. notes 6 3/4s, 2003 470,193
425,000 Pier 1 Imports, Inc. cv. sub. notes 5 3/4s, 2003 478,655
675,000 Rite Aid Corp. cv. deb. zero %, 2006 458,156
--------------
2,551,654
Semiconductors (0.8%)
- ---------------------------------------------------------------------------------------------------------
370,000 Plasma & Materials Technologies, Inc. 144A cv. notes
7 1/8s, 2001 379,712
350,000 Xilinx, Inc. 144A cv. sub. notes 5 1/4s, 2002 385,000
--------------
764,712
Telecommunication (0.6%)
- ---------------------------------------------------------------------------------------------------------
62,000 GST Telecommunications, Inc. 144A cv. sr. disc. notes
stepped-coupon zero % (13 7/8s, 15/15/00), 2005 ++ 51,770
465,000 MIDCOM Communications, Inc. 144A cv. sub. deb.
8 1/4s, 2003 434,775
225,000 Winstar Communications. Inc. cv sr. disc. notes zero %,
2005 157,500
--------------
644,045
--------------
Total Convertible Bonds and Notes (cost $28,343,686) $ 29,286,023
CONVERTIBLE PREFERRED STOCKS (17.7%) *
NUMBER OF SHARES VALUE
Automotive (1.0%)
- ---------------------------------------------------------------------------------------------------------
7,335 Federal Mogul Corp. 144A $3.875 cv. pfd. $ 507,949
4,590 Ford Motor Co. Ser. A, $4.20 dep. shs. cv. pfd. 496,294
--------------
1,004,243
Banks (2.3%)
- ---------------------------------------------------------------------------------------------------------
7,740 Matewan Bancshares, Inc. Ser. A, $1.875 cv. pfd. 187,695
6,070 Roosevelt Financial Group $3.25 cv. pfd. 519,744
10,450 Sovereign Bancorp Inc. $3.13 cv. pfd. 796,813
12,540 Union Planters Corp. Ser. E, $2.00 cv. pfd. 700,673
--------------
2,204,925
Basic Industrial Product (1.0%)
- ---------------------------------------------------------------------------------------------------------
3,935 Case Corp. $ 4.50 cv. pfd. 492,858
12,200 Greenfield Capital Trust 144A $ 3.00 cv. pfd. 503,250
--------------
996,108
Broadcasting (1.2%)
- ---------------------------------------------------------------------------------------------------------
7,725 Chancellor Broadcasting Corp. 144A $ 3.50 cv. pfd. 409,425
9,630 SFX Broadcasting, Inc. 144A Ser. D, $ 3.25 cv. pfd. 440,573
350 SFX Broadcasting, Inc. Ser. D, $ 3.25 cv. pfd. 16,013
32,400 Triathlon Broadcasting Co. $ 0.945 cv. pfd. 324,000
--------------
1,190,011
Business Services (0.3%)
- ---------------------------------------------------------------------------------------------------------
3,645 Ikon Office Solutions Inc, $ 5.03 cv.pfd 340,808
Computer Products (0.5%)
- ---------------------------------------------------------------------------------------------------------
13,450 Vanstar Corp. 144A $ 3.375 cv. pfd. 511,100
Conglomerates (0.5%)
- ---------------------------------------------------------------------------------------------------------
7,990 Corning Deleware(L.P.) $ 3.00 cv. pfd. 498,376
Consumer Services (0.6%)
- ---------------------------------------------------------------------------------------------------------
5,740 Service Corp. International $ 3.125 cv. pfd. 553,910
Financial Services (0.9%)
- ---------------------------------------------------------------------------------------------------------
6,750 Finova Finance Trust $ 2.75 cv. pfd. 389,813
8,640 Penncorp Financial Group, Inc. 144A $ 3.50 cv.pfd. 501,120
--------------
890,933
Food (0.5%)
- ---------------------------------------------------------------------------------------------------------
8,770 Chiquita Brands International, Inc. Ser. B, $ 3.75 cv. pfd. 482,350
Insurance and Finance (2.3%)
- ---------------------------------------------------------------------------------------------------------
6,450 Ahmanson (H.F.) & Co. $ 3.00 cv. pfd. 548,250
6,400 American Bankers Insurance Group, Inc. Ser. B, $ 3.125
cv. pfd. 419,200
9,150 American General Delaware Corp. $ 3.00 cv. pfd. 531,843
6,300 Neuvo Financing I ser. A, $ 2.875 cv. pfd. 307,125
6,930 St. Paul Capital LLC $ 3.00 cv. pfd. 427,928
--------------
2,234,346
Metals and Mining (1.7%)
- ---------------------------------------------------------------------------------------------------------
23,320 Freeport-McMoRan Copper Co., Inc. $ 1.75 dep.
shs. cv. pfd. 685,025
11,970 Pittston Mineral Corp. 144A $3.125 dep. shs. cv. pfd. 454,860
10,195 Timet Capital Trust I 144A $ 3.3125 cv. pfd. 498,281
--------------
1,638,166
Non-Ferrous Metals (0.4%)
- ---------------------------------------------------------------------------------------------------------
7,020 Amax Gold, Inc. Ser. B, $ 3.75 cv. pfd. 389,610
Oil and Gas (1.4%)
- ---------------------------------------------------------------------------------------------------------
6,775 Occidental Petroleum Corp. 144A $ 3.875 cv. pfd. 403,958
9,205 Tejas Gas Corp. $ 2.65 cv. pfd. 506,275
8,300 Tosco Financing Trust 144A $ 2.875 cv. pfd. 444,050
--------------
1,354,283
Real Estate (0.9%)
- ---------------------------------------------------------------------------------------------------------
5,375 Catellus Development Corp. 144A Ser. B, $ 3.625 cv. pfd. 424,625
9,180 Insignia Financial Group, Inc. 144A $ 3.25 cv. pfd. 467,032
--------------
891,657
Recreation (0.5%)
- ---------------------------------------------------------------------------------------------------------
10,330 Station Casinos, Inc. $ 3.50 cv. pfd. 475,180
Retail (0.7%)
- ---------------------------------------------------------------------------------------------------------
11,650 K mart Financing I $ 3.875 cv. pfd. 637,837
Telecommunication (0.5%)
- ---------------------------------------------------------------------------------------------------------
10,970 Airtouch Communications, Inc. Ser. C, $ 2.125 cv. pfd. 529,302
Utilities (0.5%)
- ---------------------------------------------------------------------------------------------------------
7,970 Calenergy Capital Trust 144A $ 3.125 cv. pfd. 502,110
--------------
Total Convertible Preferred Stocks (cost $15,408,180) $ 17,325,255
PREFERRED STOCKS (4.1%) *
NUMBER OF SHARES VALUE
- ---------------------------------------------------------------------------------------------------------
2,075 Alliance Gaming Corp. Ser. B, $15.00 pfd.[2 DBL. DAGGERS] $ 211,650
300 American Radio Systems Corp. 144A $13.375 pfd.[2 DBL. DAGGERS] 31,050
2,000 AmeriKing, Inc. $ 3.25 pfd. [2 DBL. DAGGERS] 54,000
2,381 Cablevision Systems Corp. Ser. H, $ 11.75 cv. pfd. Ser. H [2 DBL. DAGGERS] 225,600
3,081 Cablevision Systems Corp. Ser. M, $ 11.125 dep. shs. pfd. [2 DBL. DAGGERS] 283,452
3,000 California Federal Bankcorp Inc. Ser. B, $ 11.50 pfd. 342,750
2,000 California Federal Bank Ser. B, $ 10.625 exch. pfd. 222,500
1,000 Chancellor Radio Broadcasting 144A $12.00 pfd. 103,000
2,970 Chevy Chase Capital Corp. Ser. A,$5.1875 pfd. 158,152
3,755 Diva Systems Corp. Ser. C, $ 6.00 pfd. 32,856
2,229 El Paso Electric Co. $ 11.40 pfd [2 DBL. DAGGERS] 248,534
125 Fresenius Medical Care AG $9.00 pfd. 128,750
85 International CableTel, Inc. 144A $ 13.00 pfd. [2 DBL. DAGGERS] 85,000
5,000 Pantry Pride Inc. Ser. B, $ 14.875 pfd. 503,750
22,000 SDW Hldgs Corp. 144A $3.75 pfd. + 638,000
1,950 SFX Broadcasting, Inc. Ser. E, $12.625 pfd. [2 DBL. DAGGERS] 200,850
483 Time Warner Inc. Ser. M, $ 10.25 pfd. [2 DBL. DAGGERS] 536,130
--------------
Total Preferred Stocks (cost $3,799,395) $ 4,006,024
UNITS (2.1%) *
NUMBER OF UNITS VALUE
- ---------------------------------------------------------------------------------------------------------
75 Advanced Radio Telecommunications units 14s, 2007 $ 90,000
50 Celcaribe S.A. 144A units stepped-coupon zero %
(13 1/2s, 3/15/98), 2004 ++ 640,000
95 Colt Telecommunications Group PLC units
stepped-coupon zero % (12s, 12/15/01), 2006
(United Kingdom) ++ 61,275
185 Diva Systems Corp. 144A units stepped-coupon zero %
(13s, 5/15/01), 2006 ++ 109,150
90 Esat Holdings Ltd. 144A units stepped-coupon zero %
(12 1/2s, 2/1/02), 2007 ++ 53,100
200 Fitzgerald Gaming Co. units 13s, 2002 160,000
115 Globalstar L.P. Capital units 11 3/8s, 2004 120,750
200 Interact Systems, Inc. 144A units stepped-coupon
zero % (14s, 8/1/99), 2003 ++ 108,000
2,525 Nextlink Communications 144A pfd. units zero %
(14s, 2/1/99), 2009 [2 DBL. DAGGERS] 126,250
190 Real Time Data 144A units stepped-coupon zero %
(13 1/2s, 8/15/01), 2006 ++ 105,450
135 RSL Communications, Ltd. 144A units 12 1/4s, 2006 140,400
450 Winstar Communications, Inc. 144A sr disc. notes
stepped-coupon zero % (14s, 10/15/00), 2005 ++ 292,500
--------------
Total Units (cost $1,705,610) $ 2,006,875
COMMON STOCKS (0.9%) *
NUMBER OF SHARES VALUE
- ---------------------------------------------------------------------------------------------------------
50 AmeriKing, Inc. + $ 2,500
22,025 PSF Holdings LLC Class A + 550,625
1,800 Terex Corp. Rights 144A + 5,400
19,800 Titan Wheel International, Inc. 279,675
--------------
Total Common Stocks (cost $1,168,969) $ 838,200
FOREIGN GOVERNMENT BONDS AND NOTES (0.3%) *(cost $249,263)
PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------
USD 460,000 Russia (Government of) non performing
loan 2020 +## $ 277,150
WARRANTS (0.2%) *+
NUMBER OF WARRANTS EXPIRATION DATE VALUE
- ---------------------------------------------------------------------------------------------------------
2,400 Cellnet Data Systems 144A 6/15/00 $ 42,000
250 Hyperion Telecommunications 144A 4/15/01 5,564
6,534 Intelcom Group 10/15/05 91,475
200 Interact Systems Inc 144A 3/19/99 50
85 International Wireless Communications Holdings 3/21/99 1
1,001 Petracom Holdings, Inc. 8/1/00 7,132
2,200 SDW Hldgs Corp. Senior B 144A 4/1/04 28,600
75 Sterling Chemicals Holdings 8/15/08 2,625
4 Telemedia Broadcasting Corp. 4/1/04 3,370
--------------
Total Warrants (cost $182,269) $ 180,817
SHORT-TERM INVESTMENTS (1.6%) *(cost $1,571,234)
PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------
1,571,000 Interest in $594,385,000 joint repurchase agreement
dated February 28, 1997 with Morgan (J.P.) &
Co. due March 3, 1997 with respect to various
U.S. Treasury obligations -- maturity value of
$1,571,702 for an effective yield of 5.36 % $ 1,571,234
- ---------------------------------------------------------------------------------------------------------
Total Investments (cost $93,512,957) *** $ 98,266,582
- ---------------------------------------------------------------------------------------------------------
* Percentages indicated are based on net assets of $97,790,522.
*** The aggregate identified cost for federal income purpose is $93,520,495, resulting in gross unrealized
appreciation and depreciation of $6,853,372 and $2,107,285, respectively, or net unrealized appreciation
of $4,746,087.
+ 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.
[2 DBL. DAGGERS] Income may be received in cash or additional securities at the discretion of the issuer.
## When-issued securities (Note 1)
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.
<CAPTION>
- ----------------------------------------------------------------------------------------
Forward Currency Contracts to Sell at February 28, 1997
(Aggregate Face Value $408,930)
Market Aggregate Face Delivery Unrealized
Value Value Date Appreciation
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Japanese Yen $353,970 $404,234 1/28/98 $50,264
Japanese Yen 4,085 4,696 7/28/97 611
- ----------------------------------------------------------------------------------------
$50,875
- ----------------------------------------------------------------------------------------
The accompanying notes are an integral part of these finanical statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
February 28, 1997
<S> <C>
Assets
- ---------------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $93,512,957) (Note 1) $ 98,266,582
- ---------------------------------------------------------------------------------------------------
Cash 20,075
- ---------------------------------------------------------------------------------------------------
Dividends, interest and other receivables 1,189,000
- ---------------------------------------------------------------------------------------------------
Receivable for securities sold 334,410
- ---------------------------------------------------------------------------------------------------
Receivable for open forward currency contracts 50,875
- ---------------------------------------------------------------------------------------------------
Unamortized organization expenses (Note 1) 24,294
- ---------------------------------------------------------------------------------------------------
Total assets 99,885,236
Liabilities
- ---------------------------------------------------------------------------------------------------
Distributions payable to shareholders 573,659
- ---------------------------------------------------------------------------------------------------
Payable for securities purchased 1,117,645
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 3) 315,686
- ---------------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 3) 31,888
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 3) 4,857
- ---------------------------------------------------------------------------------------------------
Payable for administrative services (Note 3) 826
- ---------------------------------------------------------------------------------------------------
Other accrued expenses 50,153
- ---------------------------------------------------------------------------------------------------
Total liabilities 2,094,714
- ---------------------------------------------------------------------------------------------------
Net assets $97,790,522
Represented by
- ---------------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 2) $ 92,004,703
- ---------------------------------------------------------------------------------------------------
Distributions in excess of net investment income (Note 1) (636,454)
- ---------------------------------------------------------------------------------------------------
Accumulated net realized gain on investments and
foreign currency transactions (Note 1) 1,617,773
- ---------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments and assets and
liabilities in foreign currencies 4,804,500
- ---------------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $97,790,522
Computation of net asset value
- ---------------------------------------------------------------------------------------------------
Net asset value per share ($97,790,522 divided by
3,704,000 shares) $26.40
- ---------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Year ended February 28, 1997
<S> <C>
Investment income:
- --------------------------------------------------------------------------------------------------
Interest income (net of foreign tax of $219) $ 7,054,117
- --------------------------------------------------------------------------------------------------
Dividends 1,164,920
- --------------------------------------------------------------------------------------------------
Total investment income 8,219,037
Expenses:
- --------------------------------------------------------------------------------------------------
Compensation of Manager (Note 3) 1,323,367
- --------------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 3) 141,557
- --------------------------------------------------------------------------------------------------
Compensation of Trustees (Note 3) 15,930
- --------------------------------------------------------------------------------------------------
Administrative services (Note 3) 5,705
- --------------------------------------------------------------------------------------------------
Amortization of organization expenses (Note 1) 7,128
- --------------------------------------------------------------------------------------------------
Reports to shareholders 42,950
- --------------------------------------------------------------------------------------------------
Registration fees 433
- --------------------------------------------------------------------------------------------------
Auditing 31,573
- --------------------------------------------------------------------------------------------------
Legal 106,487
- --------------------------------------------------------------------------------------------------
Postage 16,497
- --------------------------------------------------------------------------------------------------
Other 79
- --------------------------------------------------------------------------------------------------
Total expenses 1,691,706
- --------------------------------------------------------------------------------------------------
Expense reduction (Note 3) (22,681)
- --------------------------------------------------------------------------------------------------
Net expenses 1,669,025
- --------------------------------------------------------------------------------------------------
Net investment income 6,550,012
- --------------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 4) 5,138,324
- --------------------------------------------------------------------------------------------------
Net realized gain on foreign currency transactions (Note 1) 516
- --------------------------------------------------------------------------------------------------
Net unrealized appreciation of assets and liabilities
in foreign currencies during the year 50,875
- --------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments during the year 525,919
- --------------------------------------------------------------------------------------------------
Net gain on investments 5,715,634
- --------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $12,265,646
- --------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
For the period
June 29, 1995
(commencement
Year ended of operations)
February 28 to February 29,
1997 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets
- ----------------------------------------------------------------------------------------------------------------------
Operations:
- ----------------------------------------------------------------------------------------------------------------------
Net investment income $ 6,550,012 $ 4,340,467
- ----------------------------------------------------------------------------------------------------------------------
Net realized gain on investments and
foreign currency transactions 5,138,840 1,791,739
- ----------------------------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments and
assets and liabilities in foreign currencies 576,794 4,227,706
- ----------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 12,265,646 10,359,912
- ----------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ----------------------------------------------------------------------------------------------------------------------
From net investment income (6,781,670) (4,259,594)
- ----------------------------------------------------------------------------------------------------------------------
From net realized gain on investments (4,938,258) (251,871)
- ----------------------------------------------------------------------------------------------------------------------
In excess of net investment income (636,454) --
- ----------------------------------------------------------------------------------------------------------------------
Increase from capital share transactions -- 91,932,811
- ----------------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets (90,736) 97,781,258
Net assets
- ----------------------------------------------------------------------------------------------------------------------
Beginning of period 97,881,258 100,000
- ----------------------------------------------------------------------------------------------------------------------
End of period (including distributions in excess of net
investment income and undistributed net investment
income of $636,454 and $124,797, respectively) $97,790,522 $97,881,258
Number of fund shares
- ----------------------------------------------------------------------------------------------------------------------
Shares outstanding at beginning of period 3,704,000 4,000
- ----------------------------------------------------------------------------------------------------------------------
Shares issued in connection with public offering -- 3,700,000
- ----------------------------------------------------------------------------------------------------------------------
Shares outstanding at end of period 3,704,000 3,704,000
- ----------------------------------------------------------------------------------------------------------------------
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 Year ended June 29, 1995+
operating performance Feb. 28 to Feb. 29
- ------------------------------------------------------------------------------------------
1997 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Net asset value,
beginning of period $26.43 $24.85(a)
- ------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------
Net investment income 1.77 1.17
- ------------------------------------------------------------------------------------------
Net realized and unrealized
gain on investments 1.54 1.63
- ------------------------------------------------------------------------------------------
Total from
investment operations 3.31 2.80
- ------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------
From net
investment income (1.83) (1.15)
- ------------------------------------------------------------------------------------------
From net realized gain
on investments (1.34) (.07)
- ------------------------------------------------------------------------------------------
In excess of
net investment income (.17) --
- ------------------------------------------------------------------------------------------
Total distributions (3.34) (1.22)
- ------------------------------------------------------------------------------------------
Net asset value,
end of period $26.40 $26.43
- ------------------------------------------------------------------------------------------
Market value,
end of period $24.375 $22.625
- ------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------
Total investment return
at market value (%)(b) 23.54 (4.53)*
- ------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $97,791 $97,881
- ------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(c) 1.72 1.14*
- ------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 6.66 4.56*
- ------------------------------------------------------------------------------------------
Portfolio turnover (%) 70.33 38.92*
- ------------------------------------------------------------------------------------------
Average commission
rate paid (d) $.0539
- ------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Represents initial net asset value of $25.00 less offering expenses of $0.15. Original
offering costs were reduced by $0.03 to reflect actual cost incurred.
(b) Total investment return assumes dividend reinvestment and does not reflect the effect of
sales charges.
(c) Includes amounts paid through expense offset arrangements. (Note 3)
(d) Average commission rate paid on security trades is required for fiscal periods beginning
on or after September 1, 1995.
</TABLE>
Notes to financial statements
February 28, 1997
Note 1
Significant accounting policies
Putnam Convertible Opportunities and Income Trust (the "fund") is registered
under the Investment Company Act of 1940, as amended, as a diversified,
closed-end management investment company. The fund seeks current income and
capital appreciation by investing primarily in a diversified portfolio of
convertible securities and non-convertible, higher risk, high yield
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. Securities
quoted in foreign currencies are translated into U.S. dollars at the current
exchange rate. Market quotations are not considered to be readily available
for long-term corporate bonds and notes, preferred stocks and certain foreign
securities. These investments are stated at fair value on the basis of
valuations furnished by a pricing service, approved by the Trustees, 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 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.
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 except that certain dividends from foreign
securities are recorded as soon as the fund is informed of the ex-dividend
date. Discounts on zero coupon bonds, original issue discount, stepped-coupon
bonds and payment in kind bonds are accreted according to the effective yield
method.
Securities purchased or sold on a when-issued basis may be settled a month or
more after the trade date; interest income is accrued based on the terms of
the security. Losses may arise due to changes in the market value of the
underlying securities or if the counterparty does not perform under the
contract.
E) Foreign currency translation The accounting records of the fund are
maintained in U.S. dollars. The market value of foreign securities, currency
holdings, other assets and liabilities are recorded in the books and records
of the fund after translation to U.S. dollars based on the exchange rates on
that day. The cost of each security is determined using historical exchange
rates. Income and withholding taxes are translated at prevailing exchange
rates when accrued or incurred. The fund does not isolate that portion of
realized or unrealized gains or losses resulting from changes in the foreign
exchange rate on investments from fluctuations arising from changes in the
market prices of the securities. Such fluctuations are included with the net
realized and unrealized gain or loss on investments. Net realized gains and
losses on foreign currency transactions represent net exchange gains or losses
on closed forward currency contracts, disposition of foreign currencies and
the difference between the amount of investment income and foreign withholding
taxes recorded on the fund's books and the U.S. dollar equivalent amounts
actually received or paid. Net unrealized appreciation and depreciation of
assets and liabilities in foreign currencies arise from changes in the value
of open forward currency contracts and assets and liabilities other than
investments at the period end, resulting from changes in the exchange rate.
F) Forward currency contracts The fund may engage in forward currency
contracts, which are agreements between two parties to buy and sell currencies
at a set price on a future date, to protect against a decline in value
relative to the U.S. dollar of the currencies in which its portfolio
securities are denominated or quoted (or an increase in the value of a
currency in which securities a fund intends to buy are denominated, when a
fund holds cash reserves and short-term investments). The U.S. dollar value of
forward currency contracts is determined using forward currency exchange rates
supplied by a quotation service. The market value of the contract will
fluctuate with changes in currency exchange rates. The contract is "marked to
market" daily and the change in market value is recorded as an unrealized gain
or loss. When the contract is closed, the fund records a realized gain or loss
equal to the difference between the value of the contract at the time it was
opened and the value at the time it was closed. The fund could be exposed to
risk if the value of the currency changes unfavorably, if the counterparties
to the contracts are unable to meet the terms of their contracts or if the
fund is unable to enter into a closing position.
G) 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 on securities held nor for excise tax
on income and capital gains.
H) Distributions to shareholders Distributions to shareholders are recorded by
the fund on the ex-dividend date. At certain times, the fund may pay
distributions at a level rate even though, as a result of market conditions or
investment decisions, the fund may not achieve projected investment results
for a given period. The amount and character of income and gains to be
distributed are determined in accordance with income tax regulations which may
differ from generally accepted accounting principles.
These differences include treatment of losses on wash sale transactions,
interest on payment-in-kind securities, market discount, amortization of bond
premium, defaulted bond interest, organization expenses, non-taxable
dividends, realized and unrealized gains and losses on forward foreign
currency contracts. 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 February
28, 1997, the fund reclassified $106,861 to decrease distributions in excess
of net investment income and $10,111 to decrease paid-in-capital, with a
decrease to accumulated net realized gain on investments of $96,750. The
calculation of net investment income per share in the financial highlights
table excludes these adjustments.
I) 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 $36,134. These expenses are being amortized on a straight line
basis over a five-year period.
Note 2
Initial capitalization and offering of shares
The fund was established as a Massachusetts business trust on February
23, 1995. During the period February 23, 1995 to June 28, 1995 the fund had no
operations other than those related to organizational matters, including the
initial capital contribution of $100,000, and the issuance of 4,000 shares to
Putnam Mutual Funds Corp. on June 12, 1995.
On June 29, 1995, the fund completed the initial public offering of 3,700,000
of its shares for which it received net proceeds of $92,500,000 before
deducting $567,189 of initial offering expenses. The fund will reimburse
Putnam Management for these expenses.
Note 3
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 annual rate of 1.10% of average net assets.
The fund compensates Putnam Management for administrative services based on
quarterly net assets of the fund. Such administrative fees are based at an
annual rate of 0.25% of the average net assets of the fund.
The fund also 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.
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 February 28, 1997, fund expenses were reduced by $22,681
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.
Trustees of the fund receive an annual Trustees fee of $620 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 "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 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 4
Purchase and sales of securities
During the year ended February 28, 1997, purchases and sales of investment
securities other than short-term investments aggregated $68,088,697 and
$76,290,067, 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, the fund hereby
designates $0.144 per share as capital gain dividends for its taxable year
ended February 28, 1997.
The fund has designated 11.69% of the distributions from net investment income
as qualifying for the dividends received deduction for corporations.
The Form 1099 you receive in January 1998 will show the tax status of all
distributions paid to your account in calendar 1997.
Results of December 5, 1996 shareholder meeting (Unaudited)
A meeting of shareholders of the fund was held on December 5, 1996. At the
meeting, a proposal to fix the number of and to elect Class A Trustees was
elected, as follows:
Votes
Votes for withheld
Jameson Adkins Baxter 2,016,764 49,823
Hans H. Estin 2,014,929 51,658
Lawrence J. Lasser 2,016,064 50,523
William F. Pounds 2,014,229 52,358
A proposal to ratify the selection of Coopers & Lybrand L.L.P. as auditors for
the fund was approved as follows: 2,019,644 votes for, and 16,054 votes
against, with 30,889 abstentions and broker non-votes.
A proposal to amend the fund's fundamental investment restriction with respect
to investments in the securities of a single issuer was approved as follows:
1,666,793 votes for, and 56,761 votes against, with 343,033 abstentions and
broker non-votes.
A proposal to amend the fund's fundamental investment restriction with respect
to making loans through purchases of debt obligations, repurchase agreements
and securities loans was approved as follows: 1,600,009 votes for, and 117,171
votes against, with 349,407 abstentions and broker non-votes.
A proposal to amend the fund's fundamental investment restriction with respect
to concentration of its assets was approved as follows: 1,668,990 votes for,
and 59,272 votes against, with 338,325 abstentions and broker non-votes.
A proposal to amend the fund's fundamental investment restriction with respect
to investments in commodities or commodity contracts was approved as follows:
1,606,577 votes for, and 108,831 votes against, with 351,179 abstentions and
broker non-votes.
All tabulations are rounded to 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
Coopers & Lybrand L.L.P.
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
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
Peter Carman
Vice President
Brett C. Browchuk
Vice President
Thomas V. Reilly
Vice President
Hugh H. Mullin
Vice President and Fund Manager
Jennifer E. Leichter
Vice President and Fund Manager
William N. Sheibler
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.
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
- --------------------
Bulk Rate
U.S. Postage
PAID
Putnam
Investments
- --------------------
32142-224 2/97
