Putnam
Convertible
Opportunities
and Income Trust
ANNUAL REPORT ON PERFORMANCE AND OUTLOOK
2-28-99
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* "In our opinion, we can expect a benign or stable interest rate
environment, which offers a favorable backdrop for convertible
securities."
-- Charles G. Pohl, manager
Putnam Convertible Opportunities and Income Trust
* "Unless you expect a U.S. recession next year, which seems most
unlikely, the U.S. high-yield debt remains cheap by historical standards.
Between 1992 and the present, the average spread for this index was 450
basis points, nearly 200 basis points below today's levels."
-- Forbes, December 28, 1998
CONTENTS
4 Report from Putnam Management
9 Fund performance summary
12 Portfolio holdings
37 Financial statements
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
The global market environment remained challenging for investors in
convertible securities during Putnam Convertible Opportunities and Income
Trust's fiscal year ended February 28, 1999. For the fund's management
team, the strategy became one of reducing the portfolio's risk profile,
broadening diversification, and taking advantage, on a case-by-case basis,
of opportunities as they present themselves.
Since technology companies issue a large percentage of all convertible
securities and generally tend to weigh heavily among the fund's holdings,
it is not surprising that many of the opportunities arose in this
industry. The managers explain their strategy in detail in the following
report. They also tell why they take a generally optimistic view of
prospects for the fiscal year just begun.
I am pleased to announce the appointment of Kevin J. Rogers to your fund's
management team shortly after the close of the fiscal year. Before joining
Putnam in 1998, Kevin was with INVESCO and Fidelity Investments. He has 11
years of investment experience.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
April 21, 1999
Report from the Fund Managers
Charles G. Pohl
Kevin J. Rogers
For convertible securities and high-yield bonds -- the two sectors that
make up Putnam Convertible Opportunities and Income Trust's portfolio --
1998 was a challenging year. In this unusually volatile environment, we
took some strategic steps to help limit the portfolio's overall risk. For
the 12 months ended February 28, 1999, your fund provided a return of
- -6.52% at net asset value and -7.47% at market price.
* DIVERGENCE BETWEEN LARGE AND SMALL COMPANIES
The fund typically invests a substantial portion of its portfolio in
convertible securities of small-capitalization companies. Late summer
through fall 1998 was a difficult period for these companies. From the
peak to the low point in September 1998, small-cap companies, as
represented by the Russell 2000 Index, were down approximately 40%, and
many small-cap stocks lost as much as two thirds of their value. Although
they were not generally affected to the same extent, small-cap
convertibles suffered as well, dampening your fund's performance.
In sharp contrast to their smaller brethren, securities of
large-capitalization companies continued to lead the market. For the
12-month period ended February 28, 1999, large-capitalization stocks, as
measured by the Standard and Poor's 500(R) Index, provided a 19.74%
return, reflecting the shift of investor psychology toward caution and
safety. Larger-cap convertibles benefited from the trend.
Your fund's small-cap bias clearly accounts for its underperformance
within the general convertible market. During the reporting period, there
were some unusual divergences in the convertible securities universe that
were not dissimilar to what occurred in the stock market as reflected by
the S&P 500. The issues of a handful of large companies led performance in
the convertible market and because of the uninterrupted appreciation they
experienced during the period, they ultimately represented an unduly large
portion of the overall convertible market, as represented by the Merrill
Lynch All Convertible Bond Index.
While your fund held positions in most of these large companies, which led
performance in the convertible market during fiscal '99, we followed the
discipline of our value-oriented investing style and trimmed the positions
to lock in the resulting gains. While this strategy helped reduce the
overall risk of the fund by ensuring that it did not become overly
concentrated in a few select holdings, it also resulted in the fund's
underperformance of its benchmark index over the period. Because we take a
longer-term perspective, we believe that steering the portfolio slightly
away from the benchmark in favor of a more appropriate risk/reward profile
was in the best long-term interest of shareholders.
* TECHNOLOGY, ENERGY SECTORS OFFER OPPORTUNITY
The technology sector makes up approximately 20% of the convertible
universe. During the period, falling prices of small-cap convertibles
within the sector presented us with some unusually attractive
opportunities. We moved aggressively to take advantage of the situation
and made some opportunistic purchases of a number of issues in this
sector.
While energy sector securities have been in a downtrend for some time, we
noted some modest progress this year. However, with prices of oil and gas
issues falling to attractive levels during the period, we purchased some
of the higher-quality names. During the period, your fund's energy-related
convertible securities included Pennzoil-Quaker State Co. and Diamond
Offshore; both of which were sold by the end of the fiscal year.
[GRAPHIC OMITTED: pie chart PORTFOLIO COMPOSITION]
PORTFOLIO COMPOSITION*
Preferred stocks -- 3.4%
Corporate high-yield bonds -- 43.8%
Other -- 1.7%
Convertible securities -- 49.8%
Common stocks,
including warrants -- 1.3%
Footnote reads:
*Based on total market value of assets as of 2/28/99. Composition will vary
over time.
Pennzoil-Quaker State Co. is a leading worldwide automotive consumer
products company that markets Pennzoil(R) and Quaker State(R) brand motor
oils, the number one and number two selling motor oils in the United
States. Diamond Offshore is a leader in deep-water drilling. The company's
fleet of 46 offshore drilling rigs consists of 30 semisubmersibles, 15
jackups, and 1 drill ship. The fleet operates in the waters off 6 of the
world's 7 continents. While these holdings, along with others discussed in
this report, were viewed favorably at the end of the fiscal period, all
portfolio holdings are subject to review and adjustment in accordance with
the fund's investment strategy and may vary in the future.
* INVESTORS FLEE HIGH YIELDS IN SEARCH OF QUALITY
The flight to quality that swept the globe in the late summer and fall of
1998 made for the worst climate for high-yield bonds since 1990. Worried
by Russia's financial collapse and subsequent margin calls on certain
hedge funds, investors suddenly became highly risk averse and generally
sold off fixed-income investments with any hint of credit risk. All
quality tiers were caught in the market rout with only U.S. Treasuries
remaining immune. As a result, spreads against Treasuries widened as bond
prices fell. As a result, the lower-quality issues emphasized in your
fund's portfolio were especially hard hit.
The high-yield market staged a modest recovery toward the end of the
period, as investors recovered some of their appetite for risk. Spreads
against Treasuries narrowed somewhat and net cash flows into the asset
class once again turned positive. However, this comeback was overshadowed
by the lingering aftereffects of the late summer/early fall market slump.
Prices of high-yield issues remained somewhat depressed at the period's
end, apparently still discounting an impending recession, contrary to most
economists' forecasts.
[GRAPHIC OMITTED: TOP 5 CONVERTIBLE BOND HOLDINGS]
TOP 5 CONVERTIBLE BOND HOLDINGS*
PennzEnergy Co., 4.95% convertible, 2008
Oil and gas
Berkshire Hathaway, Inc. 1% convertible, 2001
Insurance
Mediaone Group, Inc., $2.25 convertible preferred
Cable television
American General Delaware Corp., $3.00 convertible preferred
Insurance and finance
Wang Laboratories, Inc., $3.25 convertible preferred
Computer services
[GRAPHIC OMITTED: TOP 5 CORPORATE HIGH-YIELD BOND HOLDINGS]
TOP 5 CORPORATE HIGH-YIELD BOND HOLDINGS*
Midland Funding Corp. Series A, 11.75%, 2005
Electric utilities (finance subsidiary)
Cencall Communications Corp. stepped-coupon 0%, 2004
Cellular communications
Global Crossing Holdings, Ltd. company guaranty 9.625%, 2008
Telecommunications
Weirton Steel Corp. 10.75%, 2005
Metals and mining
ICG Services, Inc. stepped-coupon 0%, 2008
Telecommunications
Footnote reads:
*These combined holdings represent 7.5% of the fund's net assets as of
2/28/99. Portfolio holdings will vary over time.
* CONVERTIBLES, HIGH-YIELDS STILL OFFER OPPORTUNITIES
One of the major underpinnings of the convertible securities market is the
interest-rate environment. In our opinion, we can expect a benign or
stable interest-rate environment to continue in the months ahead, a
prognosis that offers a favorable backdrop for convertible securities. We
also believe that last year's bear market for small-cap stocks has created
some outstanding buying opportunities.
We will continue to emphasize -- on a highly selective basis -- the
convertibles of technology stocks as they come through a down cycle that
has been prolonged by Asia's turmoil. Within the strategy parameters of
the fund, we will also seek to increase the fund's weighting of large-cap
convertible holdings somewhat.
Although the market has regained some of its lost ground in the high-yield
sector, we believe prices there remain attractively low. This conclusion
is based on an environment of dormant inflation, a continued low default
rate among high-yield issuers, repeated Fed interventions to ensure
liquidity, and the lack of recessionary signals in the economy. Given such
an environment, we anticipate that the positions we established over the
second half of 1998 will prove their effectiveness in fiscal 1999.
The views expressed here are exclusively those of Putnam Management. They
are not meant as investment advice. Although the described holdings were
viewed favorably as of 2/28/99, there is no guarantee the fund will
continue to hold these securities in the future.
Performance summary
This section provides information about your fund's performance, which
should always be considered in light of its 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.
TOTAL RETURN FOR PERIODS ENDED 2/28/99
Merrill Lynch First Boston Consumer
Market All-Convertible High Yield price
NAV price Index Bond Index index
- -------------------------------------------------------------------------
1 year -6.52% -7.47% 4.34% -1.15% 1.73%
- -------------------------------------------------------------------------
Life of fund
(since 6/29/95) 41.12 37.55 59.94 35.93 8.00
Annual average 9.84 9.08 13.67 8.73 2.12
- -------------------------------------------------------------------------
Past performance is no assurance of future results. More recent returns
may be more or less than those shown. They do not take into account any
adjustment for taxes payable on reinvested distributions. Investment
returns, net asset value, and market price will fluctuate so that an
investor's shares when sold may be worth more or less than their original
cost.
PRICE AND DISTRIBUTION INFORMATION
12 months ended 2/28/99
- -------------------------------------------------------------------------
Distributions
- -------------------------------------------------------------------------
Number 12
- -------------------------------------------------------------------------
Income $1.9083
- -------------------------------------------------------------------------
Capital gains
- -------------------------------------------------------------------------
Long term 0.7169
- -------------------------------------------------------------------------
Short term 0.1856
- -------------------------------------------------------------------------
Total $2.8108
- -------------------------------------------------------------------------
Share value NAV Market price
- -------------------------------------------------------------------------
2/28/98 $27.57 $27.312
- -------------------------------------------------------------------------
2/28/99 22.93 22.500
- -------------------------------------------------------------------------
Current return (end of period)
- -------------------------------------------------------------------------
Current dividend rate1 8.11% 8.27%
- -------------------------------------------------------------------------
1Income portion of most recent distribution, annualized and divided by NAV
or market price at end of period.
TOTAL RETURN FOR PERIODS ENDED 3/31/99
(most recent calendar quarter)
Market
NAV price
- ------------------------------------------------------------------------------
1 year -7.08% -12.06%
- ------------------------------------------------------------------------------
Life of fund (since 6/29/95) 43.67 29.68
Annual average 10.14 7.18
- ------------------------------------------------------------------------------
Past performance is no assurance of future results. More recent returns
may be more or less than those shown. They do not take into account any
adjustment for taxes payable on reinvested distributions. Investment
returns, net asset value and market price will fluctuate so that an
investor's shares when sold may be worth more or less than their original
cost.
TERMS AND DEFINITIONS
Total return shows how the value of the fund's shares changed over time,
assuming you held the shares through the entire period and reinvested all
distributions in the fund.
Net asset value (NAV) is the value of all your fund's assets, minus any
liabilities, divided by the number of outstanding shares.
Market price is the current trading price of one share of the fund. Market
prices are set by transactions between buyers and sellers on the New York
Stock Exchange.
COMPARATIVE BENCHMARKS
Merrill Lynch All-Convertible Index* is an unmanaged list of convertible
securities commonly used as a measure of performance for the convertible
market.
First Boston High-Yield Bond Index* is an unmanaged list of lower-rated,
higher-yielding U.S. corporate bonds.
Standard & Poor's 500 Index* is an unmanaged list of common stocks that is
frequently used as a general measure of stock market performance.
Russell 2000 Index* is an unmanaged list of common stocks that is
frequently used as a general measure of stocks of small to midsize
companies.
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, 1999
To the Trustees and Shareholders of
Putnam Convertible Opportunities and Income 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
Convertible Opportunities and Income Trust (the "fund"), at February 28,
1999, 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 February
28, 1999 by correspondence with the custodian, provide a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 15, 1999
<TABLE>
<CAPTION>
Portfolio of investments owned
February 28, 1999
CORPORATE BONDS AND NOTES (43.9%) (a)
PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C> <C>
Advertising (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
$ 90,000 Adams Outdoor Advertising sr. notes 10 3/4s, 2006 $ 97,875
90,000 Lamar Advertising Co. sr. sub. notes 9 5/8s, 2006 98,100
65,000 Lamar Advertising Co. company guaranty 8 5/8s, 2007 68,900
100,000 Outdoor Communications Inc. sr. sub. notes
9 1/4s, 2007 107,750
--------------
372,625
Aerospace and Defense (0.6%)
- --------------------------------------------------------------------------------------------------------------------------
50,000 Argo-Tech Corp. company guaranty 8 5/8s, 2007 47,000
120,000 Aviation Sales Co. company guaranty 8 1/8s, 2008 117,600
80,000 BE Aerospace sr. sub. notes 9 1/2s, 2008 84,200
60,000 BE Aerospace, Inc. sr. sub. notes Ser. B, 8s, 2008 58,200
50,000 K&F Industries, Inc. sr. sub. notes Ser. B, 9 1/4s, 2007 51,000
50,000 Moog, Inc. sr. sub. notes Ser. B, 10s, 2006 52,000
100,000 Sequa Corp. med. term notes 10s, 2001 104,163
--------------
514,163
Agriculture (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
255,740 Premium Standard Farms, Inc. sr. sec. notes 11s, 2003
(acquired on various dates from 9/17/96 to 4/8/97
cost $249,825) (RES) (PIK) 245,510
110,000 Purina Mills, Inc. 144A sr. sub. notes 9s, 2010 102,300
--------------
347,810
Airlines (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
80,000 Calair LLC company guaranty 8 1/8s, 2008 76,000
75,000 Canadian Airlines Corp. sr. notes
12 1/4s, 2006 (Canada) 39,000
130,000 Canadian Airlines Corp. sr. sec. notes
10s, 2005 (Canada) 104,000
160,000 Cathay International Ltd. 144A sr. notes
13s, 2008 (China) 32,000
65,000 Trans World Airlines, Inc. sr. notes 11 1/2s, 2004 50,700
180,000 Trans World Airlines, Inc. sr. notes 11 3/8s, 2006 102,600
--------------
404,300
Apparel (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
110,000 Sassco Fashions Ltd. sr. notes 12 3/4s, 2004 108,350
65,000 William Carter Holdings Co. sr. sub. notes
Ser. A, 12s, 2008 68,413
--------------
176,763
Automotive Parts (1.4%)
- --------------------------------------------------------------------------------------------------------------------------
188,000 Aftermarket Technology Corp. sr. sub. notes 12s, 2004 192,700
35,000 Cambridge Industries, Inc. company guaranty
Ser. B, 10 1/4s, 2007 27,650
200,000 Federal Mogul Corp. 144A notes 7 1/2s, 2009 193,862
120,000 Hayes Lemmerz International, Inc. 144A
company guaranty 8 1/4s, 2008 121,800
55,000 Hayes Wheels International, Inc. company guaranty
Ser. B, 9 1/8s, 2007 58,025
180,000 Navistar International Corp. sr. notes Ser. B, 8s, 2008 184,500
250,000 Oxford Automotive, Inc. company guaranty
Ser. B, 10 1/8s, 2007 257,500
170,000 Talon Automotive Group sr. sub. notes
Ser. B, 9 5/8s, 2008 150,450
--------------
1,186,487
Banks (0.9%)
- --------------------------------------------------------------------------------------------------------------------------
75,000 Chevy Chase Savings Bank Inc. sub. deb. 9 1/4s, 2008 75,750
70,000 Delta Financial Corp. sr. notes 9 1/2s, 2004 56,000
100,000 Dime Capital Trust I bank guaranty Ser. A, 9.33s, 2027 102,176
70,000 Fuji JGB Inv. LLC 144A FLIRB 9.87s, 2049 (Japan) 54,684
80,000 Greenpoint Capital Trust I company guaranty
9.1s, 2027 79,846
60,000 North Fork Capital Trust I company guaranty
8.7s, 2026 62,559
25,000 Ocwen Capital Trust I company guaranty
10 7/8s, 2027 20,250
80,000 Ocwen Federal Bank FSB sub. deb. 12s, 2005 78,000
50,000 Ocwen Financial Corp. notes 11 7/8s, 2003 45,000
70,000 Provident Capital Trust company guaranty 8.6s, 2026 70,678
40,000 Riggs Capital Trust 144A bonds 8 5/8s, 2026 38,332
60,000 Sovereign Capital Trust company guaranty 9s, 2027 60,029
50,000 Webster Capital Trust I 144A bonds 9.36s, 2027 51,250
--------------
794,554
Basic Industrial Products (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
310,000 Grove Holdings LLC deb. stepped-coupon zero %
(11 5/8s, 5/1/03), 2009 (STP) 105,400
90,000 Insilco Holding Co. sr. disc. notes stepped-coupon zero %
(14s, 8/15/03), 2008 (STP) 40,500
30,000 Roller Bearing Co. company guaranty Ser. B,
9 5/8s, 2007 28,650
--------------
174,550
Broadcasting (3.6%)
- --------------------------------------------------------------------------------------------------------------------------
95,000 Acme Television sr. disc. notes stepped-coupon zero %
(10 7/8s, 9/30/00), 2004 (STP) 80,275
75,000 Affinity Group Holdings sr. notes 11s, 2007 75,000
2,044 Australis Media, Ltd. sr. disc. notes stepped-coupon
1 3/4s, (15 3/4s 5/15/00), 2003 (In default)
(Australia) (NON) (STP) (PIK) 15
500,000 Benedek Communications Corp. sr. disc. notes
stepped-coupon zero % (13 1/4s, 5/15/01),
2006 (STP) 370,000
205,000 Capstar Broadcasting sr. disc. notes stepped-coupon
zero % (12 3/4s, 2/1/02), 2009 (STP) 175,275
85,000 Capstar Broadcasting sr. sub. notes 9 1/4s, 2007 91,375
75,000 Central European Media Enterprises Ltd. sr. notes
9 3/8s, 2004 (Bermuda) 61,500
350,000 Chancellor Media Corp. 144A sr. notes 8s, 2008 365,750
79,370 Citadel Broadcasting Co. sr. sub. notes 10 1/4s, 2007 87,109
10,000 Citadel Broadcasting, Inc. 144A sr. sub. notes
9 1/4s, 2008 10,600
250,000 Comcast UK Cable, Ltd. deb. stepped-coupon zero %
(11.2s, 11/15/00), 2007 (Bermuda) (STP) 218,125
115,000 Fox Family Worldwide, Inc. sr. notes 9 1/4s, 2007 110,400
270,000 Fox/Liberty Networks LLC sr. notes 8 7/8s, 2007 278,775
80,000 Granite Broadcasting Corp. sr. sub. notes 8 7/8s, 2008 79,200
300,000 Heritage Media Services Corp. sr. sub. notes
8 3/4s, 2006 321,000
200,000 Interact Systems, Inc. 144A stepped-coupon zero %
(14s, 8/1/99), 2003 (STP) 7,000
30,000 Pegasus Communications Corp. 144A sr. notes
9 3/4s, 2006 31,125
447,000 PHI Holdings, Inc. sr. sub. notes zero %, 2001 348,749
110,000 Radio One Inc. company guaranty stepped-coupon
Ser. B, 7s, (12s, 5/15/00), 2004 (STP) 114,125
80,000 SFX Entertainment Inc. 144A sr. sub. notes
9 1/8s, 2008 80,400
75,000 SFX Entertainment, Inc. 144A company guaranty
Ser. B, 9 1/8s, 2008 76,875
50,000 TV Azteca Holdings S.A. de C.V. sr. notes
11s, 2002 (Mexico) 42,250
35,000 TV Azteca Holdings S.A. de C.V. sr. notes
10 1/2s, 2007 (Mexico) 28,350
--------------
3,053,273
Building and Construction (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
50,000 American Architectural Products Corp.
company guaranty 11 3/4s, 2007 42,500
30,000 CSC Holdings, Inc. deb. 7 7/8s, 2018 30,737
150,000 D.R. Horton, Inc. company guaranty 8s, 2009 146,625
180,000 GS Superhighway Holdings sr. notes
9 7/8s, 2004 (China) 91,800
70,000 Presley Cos. sr. notes 12 1/2s, 2001 56,700
80,000 Toll Corp. company guaranty 8 1/8s, 2009 80,800
--------------
449,162
Building Products (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
85,000 Albecca Inc. 144A sr. sub. notes 10 3/4s, 2008 74,800
80,000 Building Materials Corp. 144A sr. notes 8s, 2008 79,100
--------------
153,900
Buses (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
335,000 MCII Holdings sec. notes 12s, 2002 284,750
Business Equipment and Services (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
80,000 Cendant Corp. notes 7 1/2s, 2000 80,934
110,000 Cex Holdings, Inc. company guaranty Ser. B,
9 5/8s, 2008 102,850
110,000 Iron Mountain, Inc. company guaranty 8 3/4s, 2009 114,400
50,000 Outsourcing Solutions, Inc. sr. sub. notes Ser. B,
11s, 2006 48,750
49,000 Pierce Leahy Corp. sr. sub. notes 11 1/8s, 2006 53,410
260,000 U.S. Office Products Co. company guaranty
9 3/4s, 2008 184,600
20,000 United Stationer Supply, Inc. sr. sub. notes
8 3/8s, 2008 20,150
--------------
605,094
Cable Television (1.6%)
- --------------------------------------------------------------------------------------------------------------------------
93,679 Adelphia Communications Corp. sr. notes
9 1/2s, 2004 (PIK) 96,958
200,000 Century Communications Corp. sr. notes
8 7/8s, 2007 222,000
30,000 CSC Holdings, Inc. sr. sub. deb. 9 7/8s, 2013 33,150
100,000 Diamond Cable Communication Co. sr. disc. notes
stepped-coupon zero % (11 3/4s, 12/15/00), 2005
(United Kingdom) (STP) 87,000
295,000 Diamond Cable Communication Co. sr. disc. notes
stepped-coupon zero % (10 3/4s, 2/15/02), 2007
(United Kingdom) (STP) 230,838
293,000 Diva Systems Corp. 144A sr. disc. notes stepped-coupon
zero % (12 5/8s, 3/1/03), 2008 (STP) 90,830
250,000 Lenfest Communications, Inc. sr. sub. notes
10 1/2s, 2006 295,000
180,000 Lenfest Communications, Inc. sr. sub. notes
8 1/4s, 2008 188,100
30,000 TeleWest Communications PLC 144A sr. notes
11 1/4s, 2008 (United Kingdom) 35,250
130,000 United International Holdings sr. disc. notes stepped-coupon
Ser. B, zero % (10 3/4s, 2/15/03), 2008 (STP) 85,800
--------------
1,364,926
Cellular Communications (1.6%)
- --------------------------------------------------------------------------------------------------------------------------
380,000 CellNet Data Systems, Inc. sr. disc. notes stepped-coupon
zero % (14s, 10/1/02), 2007 (STP) 125,400
505,000 Cencall Communications Corp. sr. disc. notes
10 1/8s, 2004 512,575
450,000 McCaw International Ltd sr. disc. notes stepped coupon
zero % (13s, 4/15/02), 2007 (STP) 234,000
305,000 Millicom International Cellular S.A. sr. disc. notes
stepped-coupon zero % (13 1/2s, 6/1/01), 2006
(Luxembourg) (STP) 225,700
180,000 NEXTEL Communications, Inc. 144A sr. notes
12s, 2008 202,950
90,000 NEXTEL Communications, Inc. sr. disc. notes
stepped-coupon zero % (10.65s, 9/15/02), 2007 (STP) 61,425
30,000 Price Communications Wireless, Inc. 144A sr. notes
9 1/8s, 2006 31,500
--------------
1,393,550
Chemicals (0.6%)
- --------------------------------------------------------------------------------------------------------------------------
85,000 Acetex Corp. sr. notes 9 3/4s, 2003 (Canada) 82,450
60,000 Geo Specialty Chemicals, Inc. 144A sr. sub. notes
10 1/8s, 2008 59,400
20,000 Huntsman Corp. 144A sr. sub. notes 9 1/2s, 2007 20,200
90,000 Huntsman Corp. 144A sr. sub. notes FRN 9.188s, 2007 82,800
100,000 Pioneer Americas Acquisition 144A sr. notes
9 1/4s, 2007 75,000
124,694 Polytama International notes 11 1/4s, 2007 (Indonesia) 16,210
100,000 Scotts Co 144A sr. sub. notes 8 5/8s, 2009 103,000
75,000 Sterling Chemicals Holdings sr. disc. notes stepped-coupon
zero % (13 1/2s, 8/15/01), 2008 (STP) 27,750
--------------
466,810
Computer Services (0.8%)
- --------------------------------------------------------------------------------------------------------------------------
30,000 Concentric Network Corp. sr. notes 12 3/4s, 2007 32,400
210,000 IPC Information Systems sr. disc. notes stepped-coupon
zero % (10 7/8s, 11/1/01), 2008 (STP) 134,400
120,000 PSINet, Inc. 144A sr. notes 11 1/2s, 2008 134,100
55,000 PSINet, Inc. sr. notes Ser. B, 10s, 2005 56,925
235,000 Unisys Corp. sr. notes 11 3/4s, 2004 270,250
60,000 Verio Inc. 144A sr. notes 11 1/4s, 2008 64,800
--------------
692,875
Conglomerates (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
120,000 Axia, Inc. company guaranty 10 3/4s, 2008 120,600
Consumer Durable Goods (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
20,000 Hedstrom Holdings, Inc. 144A sr. disc. notes
stepped-coupon zero % (12s, 6/1/02), 2009 (STP) 8,000
30,000 Iron Age Corp. company guaranty 9 7/8s, 2008 22,500
45,000 Sealy Mattress Co. 144A sr. sub. notes Ser. B, 9 7/8s, 2007 43,650
--------------
74,150
Consumer Non Durables (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
25,000 Amscan Holdings, Inc. sr. sub. notes 9 7/8s, 2007 22,625
150,000 Consumers International 144A sr. notes 10 1/4s, 2005 158,250
20,000 Doane Products Co. 144A sr. sub. notes 9 3/4s, 2007 21,100
140,000 Samsonite Corp. sr. sub. notes 10 3/4s, 2008 106,400
--------------
308,375
Consumer Services (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
256,000 Coinmach Corp. sr. notes 11 3/4s, 2005 281,600
40,000 Protection One, Inc. sr. disc. notes stepped-coupon
zero %, (13 5/8s, 6/30/00), 2005 (STP) 45,600
--------------
327,200
Cosmetics (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
50,000 Chattem, Inc. company guaranty Ser. B, 8 7/8s, 2008 51,000
30,000 French Fragrances, Inc. company guaranty Ser. D,
10 3/8s, 2007 30,000
35,000 French Fragrances, Inc. sr. notes Ser. B, 10 3/8s, 2007 34,650
60,000 Revlon Consumer Products sr. notes 9s, 2006 58,050
250,000 Revlon Consumer Products sr. notes 8 1/8s, 2006 233,750
--------------
407,450
Electric Utilities (0.9%)
- --------------------------------------------------------------------------------------------------------------------------
500,000 Midland Funding Corp. deb. Ser. A, 11 3/4s, 2005 583,475
111,416 Northeast Utilities System notes Ser. A, 8.58s, 2006 115,814
80,000 Northeast Utilities System notes Ser. B, 8.38s, 2005 82,273
--------------
781,562
Electronics and Electrical Equipment (0.8%)
- --------------------------------------------------------------------------------------------------------------------------
60,000 Argo-Tech Corp. 144A sr. sub. notes 8 5/8s, 2007 56,400
35,000 Celestica International Ltd. 144A sr. sub. notes
10 1/2s, 2006 (Canada) 38,675
125,000 Details, Inc. sr. discount notes stepped-coupon
Ser. B, zero %, (12 1/2s, 11/15/02), 2007 (STP) 68,125
80,000 DII Group, Inc. (The) sr. sub. notes 8 1/2s, 2007 80,000
100,000 Dobson Communications Corp. sr. notes
11 3/4s, 2007 107,000
80,000 Flextronics International Ltd. sr. sub. notes
Ser. B, 8 3/4s, 2007 83,000
50,000 HCC Industries, Inc. company guaranty 10 3/4s, 2007 48,000
70,000 Motors and Gears, Inc. sr. notes Ser. D, 10 3/4s, 2006 72,275
20,000 Samsung Electronics 144A company guaranty
9 3/4s, 2003 19,900
95,000 Viasystems Inc. sr. sub notes 9 3/4s, 2007 89,538
25,000 Wavetek Corp. company guaranty 10 1/8s, 2007 24,000
--------------
686,913
Energy-related (1.0%)
- --------------------------------------------------------------------------------------------------------------------------
100,000 Calpine Corp. sr. notes 9 1/4s, 2004 103,250
170,000 CMS Energy Corp. sr. notes 6 3/4s, 2004 166,175
70,000 Gothic Production Corp. company guaranty
Ser. B, 11 1/8s, 2005 45,500
60,000 Niagara Mohawk Power Corp. sr. notes Ser. F,
7 5/8s, 2005 62,074
160,000 Niagara Mohawk Power Corp. sr. notes Ser. G,
7 3/4s, 2008 171,746
290,000 Panda Global Energy Co. company guaranty
12 1/2s, 2004 (China) 121,800
60,000 RAM Energy Inc. sr. notes 11 1/2s, 2008 39,600
100,000 York Power Funding 144A notes 12s, 2007
(Cayman Islands) 101,000
--------------
811,145
Entertainment (0.6%)
- --------------------------------------------------------------------------------------------------------------------------
100,000 AMC Entertainment, Inc. sr. sub. notes 9 1/2s, 2009 98,000
120,000 Cinemark USA, Inc. sr. sub. notes 9 5/8s, 2008 123,000
180,000 ITT Corp. notes 6 3/4s, 2005 162,886
100,000 Silver Cinemas Inc. sr. sub. notes 10 1/2s, 2005 59,000
110,000 United Artists Theatre sr. sub. notes Ser. B, 9 3/4s, 2008 98,175
--------------
541,061
Environmental Control (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
250,000 Allied Waste Industries, Inc. 144A sr. notes
7 7/8s, 2009 256,250
Financial Services (0.9%)
- --------------------------------------------------------------------------------------------------------------------------
60,000 Aames Financial Corp. sr. notes 9 1/8s, 2003 42,000
250,000 Advanta Corp. med. term notes Ser. B, 7s, 2001 223,883
70,000 Capital One Financial Corp. notes 7 1/8s, 2008 64,775
100,000 Colonial Capital II 144A company guaranty
8.92s, 2027 97,044
105,000 Contifinancial Corp. sr. notes 8 3/8s, 2003 67,200
50,000 Dine S.A. de C.V. company guaranty 8 3/4s,
2007 (Mexico) 40,500
400,000 DTI Holdings Inc. sr. disc. notes, stepped-coupon
Ser. B, zero % (12 1/2s, 3/1/03), 2008 (STP) 92,000
75,000 Imperial Credit Capital Trust I 144A company guaranty
10 1/4s, 2002 56,250
45,000 Imperial Credit Industries, Inc. sr. notes 9 7/8s, 2007 34,538
40,000 Nationwide Credit Inc. sr. notes Ser. A, 10 1/4s, 2008 30,800
--------------
748,990
Food and Beverages (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
100,000 Ameriserve Food Co. company guaranty 8 7/8s, 2006 84,000
110,000 Aurora Foods, Inc. 144A ser. sub. notes Ser. D,
9 7/8s, 2007 119,900
25,000 Aurora Foods, Inc. sr. sub. notes Ser. B, 9 7/8s, 2007 27,250
30,000 Canandaigua Wine Co. sr. sub. notes Ser. C,
8 3/4s, 2003 30,525
25,000 Eagle Family Foods company guaranty Ser. B,
8 3/4s, 2008 22,750
115,000 Fleming Companies, Inc. company guaranty Ser. B,
10 1/2s, 2004 108,100
30,000 Nebco Evans Holding Co. sr. disc. notes stepped-coupon
zero % (12 3/8s, 7/15/02), 2007 (STP) 12,000
150,000 RAB Enterprises, Inc. 144A sr. notes 10 1/2s, 2005 111,000
90,000 Triarc Consumer Products, Inc. 144A sr. sub. notes
10 1/4s, 2009 88,425
--------------
603,950
Health Care (1.7%)
- --------------------------------------------------------------------------------------------------------------------------
30,000 Columbia/HCA Healthcare Corp. deb. 8.36s, 2024 28,323
30,000 Columbia/HCA Healthcare Corp. notes 7.69s, 2025 25,383
50,000 Columbia/HCA Healthcare Corp. notes 7 1/4s, 2008 45,222
130,000 Columbia/HCA Healthcare Corp. med term notes
notes 6.63s, 2045 122,233
225,000 Conmed Corp. company guaranty 9s, 2008 225,000
140,000 Global Health Sciences company guaranty 11s, 2008 85,400
100,000 Hudson Respiratory Care, Inc. sr. sub. notes
9 1/8s, 2008 81,000
90,000 Integrated Health Services, Inc. sr. sub. notes Ser. A,
9 1/2s, 2007 67,500
140,000 Integrated Health Services, Inc. sr. sub. notes Ser. A,
9 1/4s, 2008 103,600
150,000 Mariner Post-Acute Network, Inc. sr. sub. notes stepped-
coupon Ser. B, zero % (10 1/2s, 11/1/02), 2007 (STP) 43,500
165,000 MedPartners, Inc. sr. notes 7 3/8s, 2006 142,725
245,000 Multicare Cos., Inc. sr. sub. notes 9s, 2007 188,650
50,000 Paragon Corp. Holdings, Inc. company guaranty
Ser. B, 9 5/8s, 2008 40,000
145,000 Sun Healthcare Group, Inc. sr. sub. notes Ser. B,
9 1/2s, 2007 43,500
90,000 Tenet Healthcare Corp. sr. notes 8 5/8s, 2003 91,575
70,000 Tenet Healthcare Corp. sr. notes 8s, 2005 69,650
--------------
1,403,261
Lodging (0.6%)
- --------------------------------------------------------------------------------------------------------------------------
70,000 Epic Resorts LLC company guaranty Ser. B, 13s, 2005 66,500
100,000 John Q Hammons Hotels, Inc. 1st mtge. 8 7/8s, 2004 94,375
30,000 Host Marriott L.P. 144A sr. notes 8 3/8s, 2006 29,850
210,000 HMH Properties, Inc. company guaranty Ser. B,
7 7/8s, 2008 200,550
120,000 Prime Hospitality Corp. sub. notes 9 3/4s, 2007 123,600
--------------
514,875
Medical Supplies and Devices (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
125,000 ALARIS Medical Systems, Inc. company guaranty
9 3/4s, 2006 126,250
135,000 Fresenius Medical Care AG 144A company guaranty
7 7/8s, 2008 (Germany) 136,350
25,000 Leiner Health Products sr. sub. notes 9 5/8s, 2007 25,813
90,000 Mediq, Inc. company guaranty 11s, 2008 81,000
85,000 Mediq, Inc. deb. stepped-coupon zero %
(13s, 6/1/03), 2009 (STP) 34,000
--------------
403,413
Metals and Mining (1.1%)
- --------------------------------------------------------------------------------------------------------------------------
80,000 Anker Coal Group, Inc. sr. notes Ser. B, 9 3/4s, 2007 44,000
80,000 Continental Global Group sr. notes Ser. B, 11s, 2007 65,600
40,000 Kaiser Aluminum & Chemical Corp. sr. sub. notes
12 3/4s, 2003 38,700
10,000 Kaiser Aluminum & Chemical Corp. sr. notes Ser. B,
10 7/8s, 2006 10,050
70,000 Lodestar Holdings, Inc. company guaranty
11 1/2s, 2005 58,100
50,000 NL Industries, Inc. sr. notes 11 3/4s, 2003 53,500
120,000 Weirton Steel Co. sr. notes 11 3/8s, 2004 112,200
500,000 Weirton Steel Corp. sr. notes 10 3/4s, 2005 455,000
70,000 WHX Corp. sr. notes 10 1/2s, 2005 68,425
--------------
905,575
Oil and Gas (1.6%)
- --------------------------------------------------------------------------------------------------------------------------
100,000 Abraxas Petroleum Corp. 144A company guaranty
11 1/2s, 2004 50,000
80,000 Belco Oil & Gas Corp. company guaranty Ser. B,
10 1/2s, 2006 79,200
130,000 Benton Oil & Gas Co. sr. notes 9 3/8s, 2007 58,175
250,000 Chesapeake Energy Corp. company guaranty Ser. B,
9 5/8s, 2005 162,500
80,000 Dailey Petroleum Services Corp. company guaranty
9 1/2s, 2008 40,000
70,000 Eagle Geophysical, Inc. company guaranty Ser. B,
10 3/4s, 2008 42,000
35,000 Flores & Rucks, Inc. sr. sub. notes 9 3/4s, 2006 35,788
20,000 Gothic Energy Corp. sr. disc. notes, stepped-coupon
Ser. B, zero % (14 1/8s, 5/1/03), 2006 (STP) 6,000
70,000 Gulf Canada Resources, Ltd. sr. notes 8 3/8s,
2005 (Canada) 69,300
70,000 HS Resources, Inc. sr. sub. notes Ser. B, 9 1/4s, 2006 66,500
270,000 Michael Petroleum Corp. sr. notes Ser. B, 11 1/2s, 2005 191,700
80,000 Northern Offshore 144A company guaranty
10s, 2005 36,800
10,000 Ocean Energy, Inc. company guaranty Ser. B,
8 7/8s, 2007 9,300
150,000 Ocean Energy, Inc. company guaranty Ser. B,
8 3/8s, 2008 138,750
55,000 Seven Seas Petroleum sr. notes Ser. B, 12 1/2s, 2005 34,650
75,000 Snyder Oil Corp. sr. sub. notes 8 3/4s, 2007 74,625
15,000 Transamerican Energy sr. disc. notes stepped-coupon
Ser. B, zero % (13s, 6/15/99), 2002 (STP) 4,500
130,000 Transamerican Refining Corp. 144A sr. sub. notes
16s, 2003 13,000
186,000 TransTexas Gas Corp. sr. sub. notes Ser. D,
13 3/4s, 2001 83,700
150,000 Vintage Petroleum 144A sr. sub. notes 9 3/4s, 2009 146,250
--------------
1,342,738
Packaging and Containers (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
120,000 AEP Industries, Inc. sr. sub. notes 9 7/8s, 2007 120,600
80,000 Huntsman Packaging Corp. company guaranty
9 1/8s, 2007 80,200
20,000 Owens-Illinois, Inc. deb. 7.8s, 2018 19,316
140,000 Owens-Illinois, Inc. sr. notes 7.35s, 2008 138,454
40,000 Radnor Holdings Inc. sr. notes 10s, 2003 41,600
--------------
400,170
Paper and Forest Products (0.6%)
- --------------------------------------------------------------------------------------------------------------------------
325,000 APP Finance II Mauritius Ltd. bonds stepped-coupon
12s, (16s, 2/15/04), 2049 (Indonesia) (STP) 136,500
100,000 Pindo Deli Finance Mauritius Ltd. company guaranty
10 3/4s, 2007 (Indonesia) 51,000
30,000 Republic Group Inc. sr. sub. notes 9 1/2s, 2008 30,375
160,000 Riverwood International Corp. company guaranty
10 7/8s, 2008 145,600
160,000 Riverwood International Corp. company guaranty
10 1/4s, 2006 161,600
--------------
525,075
Pharmaceuticals (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
40,000 Biovail Corp. International 144A sr. notes
10 7/8s, 2005 40,600
155,000 ICN Pharmaceuticals, Inc. 144A sr. notes
9 1/4s, 2005 159,844
--------------
200,444
Photography (--%)
- --------------------------------------------------------------------------------------------------------------------------
35,000 PX Escrow Corp. sr. disc. notes stepped-coupon zero %
(9 5/8s, 2/1/02), 2006 (STP) 19,600
Publishing (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
180,000 Garden State Newspapers, Inc. sr. sub. notes Ser. B,
8 3/4s, 2009 181,800
50,000 Perry-Judd company guaranty 10 5/8s, 2007 52,250
28,910 Von Hoffman Press, Inc. 144A sr. sub. notes
13 1/2s, 2009 30,066
40,000 Von Hoffman Press Inc. 144A sr. sub. notes
10 3/8s, 2007 41,400
--------------
305,516
Railroads (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
20,000 Hermes Europe Railtel 144A sr. notes
11 1/2s, 2007 (Netherlands) 21,300
30,000 TFM S.A. de C.V. company guaranty
10 1/4s, 2007 (Mexico) 25,200
155,000 TFM S.A. de C.V. company guaranty stepped-coupon
zero %, (11 3/4s, 6/15/02), 2009 (Mexico) (STP) 83,700
--------------
130,200
Recreation (2.0%)
- --------------------------------------------------------------------------------------------------------------------------
155,000 Argosy Gaming Co. company guaranty 13 1/4s, 2004 174,763
100,000 Boyd Gaming Corp. sr. sub. notes 9 1/2s, 2007 102,500
75,000 Casino America, Inc. sr. notes 12 1/2s, 2003 84,188
50,000 Circus Circus Enterprises, Inc. sr. notes 6.45s, 2006 44,503
10,000 Circus Circus Enterprises, Inc. sr. sub. notes
9 1/4s, 2005 10,200
158,700 Colorado Gaming & Entertainment Co. sr. notes
12s, 2003 169,016
160,000 Fitzgeralds Gaming Corp. company guaranty Ser. B,
12 1/4s, 2004 72,800
60,000 Harrahs Entertainment, Inc. company guaranty
7 7/8s, 2005 60,000
50,000 Harrahs Entertainment, Inc. company guaranty
7 1/2s, 2009 49,703
70,000 Hollywood Park Inc. 144A sr. sub. notes 9 1/4s, 2007 70,000
60,000 Isle of Capri Black Hawk LLC 144A 1st mortgage
Ser. B, 13s, 2004 65,100
100,000 Mohegan Tribal Gaming, Auth. 144A sr. sub. notes
8 3/4s, 2009 101,500
70,000 Park Place Entertainment sr. sub. notes 7 7/8s, 2005 68,600
180,000 Premier Parks, Inc. sr. notes 9 1/4s, 2006 189,000
175,000 PRT Funding Corp. sr. notes 11 5/8s, 2004 (in default) (NON) 78,750
180,000 Trump A.C. 1st mtge. 11 1/4s, 2006 153,000
200,000 Trump Castle Funding 144A sub. notes 10 1/4s, 2003 202,000
--------------
1,695,623
REIT's (Real Estate Investment Trust) (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
170,000 Tanger Properties Ltd. partnership gtd. notes
8 3/4s, 2001 168,343
Restaurants (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
100,000 FRD Acquisition Co. sr. notes Ser. B, 12 1/2s, 2004 101,000
Retail (0.8%)
- --------------------------------------------------------------------------------------------------------------------------
40,000 Home Interiors & Gifts, Inc. company guaranty
10 1/8s, 2008 40,200
100,000 K mart Corp. deb. 7 3/4s, 2012 103,000
200,000 Mothers Work, Inc. sr. notes 12 5/8s, 2005 208,000
65,000 NBTY Inc. 144A sr. sub. notes 8 5/8s, 2007 62,400
160,000 North Atlantic Trading Co. company guaranty
Ser. B, 11s, 2004 161,600
40,000 Pathmark Stores sr. sub. notes 9 5/8s, 2003 40,800
100,000 Zale Corp. sr. notes Ser. B, 8 1/2s, 2007 102,750
--------------
718,750
Satellite Services (0.6%)
- --------------------------------------------------------------------------------------------------------------------------
310,000 Echostar DBS Corp. 144A sr. notes 9 3/8s, 2009 311,550
110,000 Golden Sky Systems 144A sr. sub. notes 12 3/8s, 2006 119,900
60,000 Satelites Mexicanos S.A. de C.V. 144A 10 1/8s,
2004 (Mexico) 47,400
--------------
478,850
Semiconductors (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
56,279 Cirent Semiconductor sr. sub. notes 10.22s, 2002 56,279
56,203 Cirent Semiconductor 144A sr. sub. notes
10.14s, 2004 56,203
101,033 Fairchild Semiconductor Corp. 144A sr. sub. notes
11.74s, 2008 90,930
275,000 Fairchild Semiconductor Corp. sr. sub. notes
10 1/8s, 2007 280,500
160,000 Zilog, Inc. company guaranty Ser. B, 9 1/2s, 2005 140,800
--------------
624,712
Specialty Consumer Products (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
100,000 Decora Industries, Inc. sec. Ser. B, 11s, 2005 97,500
50,000 Eye Care Centers of America 144A sr. sub. notes
9 1/8s, 2008 47,000
--------------
144,500
Steel (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
230,000 AK Steel Corp. 144A sr. notes 7 7/8s, 2009 227,125
40,000 Armco, Inc. 144A sr. notes 8 7/8s, 2008 41,500
--------------
268,625
Telecommunications (7.6%)
- --------------------------------------------------------------------------------------------------------------------------
30,000 Allegiance Telecom, Inc. sr. notes 12 7/8s, 2008 32,250
270,000 Allegiance Telecom, Inc. sr. disc. notes stepped-coupon
Ser. B, zero % (11 3/4s, 2/15/03), 2008 (STP) 156,600
80,000 Bestel S.A.de C.V. sr. disc. notes stepped-coupon zero %
(12 3/4s, 5/15/03), 2005 (Mexico) (STP) 45,600
70,000 CapRock Communications Corp. sr. notes
Ser. B, 12s, 2008 70,700
50,000 Charter Communications International, Inc. disc. notes
stepped-coupon Ser. B, zero % (14s, 3/15/01), 2007 (STP) 46,250
95,000 Colt Telecommunications Group PLC sr. disc. notes
stepped-coupon zero %, (12s, 12/15/01), 2006
(United Kingdom) (STP) 80,750
100,000 Conecel Holdings 144A notes Ser. A, 14s, 2000 32,000
285,000 Covad Communications Group sr. disc. notes stepped-coupon
Ser. B, zero % (13 1/2s, 3/15/03), 2008 (STP) 151,050
90,000 Covad Communications Group Inc. 144A sr. notes
12 1/2s, 2009 86,850
230,000 Econophone, Inc. 144A notes stepped-coupon zero %
(11s, 2/15/03), 2008 (STP) 115,000
60,000 Esprit Telecom Group PLC sr. notes 11 1/2s, 2007
(United Kingdom) 63,444
155,000 E. Spire Communications, Inc. sr. disc. notes stepped-coupon
zero % (12 3/4s, 4/1/01), 2006 (STP) 93,000
65,000 Facilicom International sr. notes Ser. B, 10 1/2s, 2008 48,100
400,000 Firstworld Communication Corp. sr. disc. notes
stepped-coupon zero % (13s, 4/15/03), 2008 (STP) 144,000
190,000 Focal Communications Corp. sr. disc. notes, stepped-coupon
Ser. B, zero % (12 1/8s, 2/15/03), 2008 (STP) 95,000
95,000 Globo Communicacoes 144A company guaranty
10 1/2s, 2006 (Brazil) 52,250
450,000 Global Crossing Holdings, Ltd. company guaranty
9 5/8s, 2008 472,500
426,000 GST Telecommunications, Inc. company guaranty
stepped-coupon zero % (13 7/8s, 12/15/00), 2005 (STP) 301,395
50,000 GST Telecommunications, Inc. 144A sr. disc. notes
stepped-coupon zero % (10 1/2s, 5/1/03), 2008 (STP) 23,750
60,000 Hyperion Telecommunications Corp., Inc. sr. disc. notes
stepped-coupon Ser. B, zero % (13s, 4/15/01), 2003 (STP) 46,200
129,200 Hyperion Telecommunications Corp., Inc. sr. notes
Ser. B, 12 1/4s, 2004 136,629
50,000 Hyperion Telecommunications Inc. 144A sr. sub. notes
12s, 2007 50,125
140,000 ICG Holdings, Inc. sr. disc. notes stepped-coupon zero %
(13 1/2s, 9/15/00), 2005 (Canada) (STP) 121,450
730,000 ICG Services, Inc. sr. disc. notes stepped-coupon zero %
(9 7/8s, 5/1/03), 2008 (STP) 419,750
300,000 Intermedia Communications, Inc. sr. disc. notes stepped-
coupon Ser. B, zero % (11 1/4s, 7/15/02), 2007 (STP) 208,500
170,000 Intermedia Communications, Inc. sr. notes Ser. B,
8.6s, 2008 160,225
375,000 International Cabletel, Inc. sr. notes stepped-coupon
Ser. B, zero % (11 1/2s, 2/1/01), 2006 (STP) 330,000
120,000 IXC Communications, Inc. sr. sub. notes 9s, 2008 125,400
460,000 KMC Telecom Holdings, Inc. sr. disc. notes stepped-coupon
zero % (12 1/2s, 2/15/03), 2008 (STP) 236,900
245,000 Knology Holdings, Inc. sr. disc. notes stepped-coupon
zero %, (11 7/8s, 10/15/02), 2007 (STP) 128,625
60,000 L-3 Communications Corp. sr. sub. notes Ser. B,
10 3/8s, 2007 65,850
50,000 L-3 Communications Corp. sr. sub. notes 8 1/2s, 2008 51,750
40,000 L-3 Communications Corp. company guaranty
Ser. B, 8s, 2008 40,400
90,000 Logix Communications Enterprises sr. notes
12 1/4s, 2008 81,000
50,000 Metrocall, Inc. 144A sr. sub. notes 11s, 2008 47,000
170,000 Metromedia Fiber Network, Inc. 144A sr. notes
10s, 2008 177,650
190,000 MetroNet Communications Corp. 144A sr. notes
10 5/8s, 2008 (Canada) 213,750
55,000 MetroNet Communications Corp. sr. disc. notes
stepped-coupon zero % (10 3/4s, 11/1/02), 2007
(Canada) (STP) 40,150
120,000 MetroNet Communications Corp. sr. disc. stepped-coupon
notes zero % (9.95s, 6/15/03), 2008 (Canada) (STP) 82,200
75,000 Microcell Telecommunications sr. disc. notes stepped-coupon
Ser. B, zero % (14s, 12/1/01), 2006 (Canada) (STP) 59,625
20,000 Netia Holdings B.V. 144A company guaranty
stepped-coupon zero % (11 1/4s, 11/1/01), 2007
(Poland) (STP) 12,200
40,000 Netia Holdings B.V. 144A company guaranty
10 1/4s, 2007 (Poland) 36,000
120,000 NorthEast Optic Network, Inc. sr. notes 12 3/4s, 2008 120,000
170,000 NTL Inc. sr. notes Ser. B, 10s, 2007 (United Kingdom) 182,325
90,000 NTL Inc. 144A sr. notes 11 1/2s, 2008
(United Kingdom) 101,700
150,000 Pathnet, Inc. sr. notes 12 1/4s, 2008 84,000
250,000 Primus Telecommunications Group, Inc. sr. notes
11 3/4s, 2004 255,000
80,000 Primus Telecommunications Group, Inc. sr. notes
Ser. B, 9 7/8s, 2008 75,600
175,000 Qwest Communications International, Inc. sr. disc. notes
stepped-coupon zero % (9.47s, 10/15/02), 2007 (STP) 138,250
210,000 Rhythms Netconnections, Inc. sr. disc. notes stepped-
coupon Ser. B, zero % (13 1/2s, 5/15/03), 2008 (STP) 105,000
80,000 Startec Global Communications Corp. sr. notes
12s, 2008 72,400
60,000 Telecommunications Techniques, Inc. company guaranty
9 3/4s, 2008 60,300
40,000 Telehub Communications Corp. company guaranty
stepped-coupon zero % (13 7/8s, 7/31/02), 2005 (STP) 23,600
205,000 Time Warner Telecom Inc. sr. notes 9 3/4s, 2008 219,350
100,000 WinStar Communications, Inc. sr. sub. notes stepped-
coupon zero % (15s, 3/1/02), 2007 (STP) 83,000
--------------
6,502,393
Telephone Services (1.6%)
- --------------------------------------------------------------------------------------------------------------------------
240,000 BTI Telecom Corp. sr. notes 10 1/2s, 2007 192,000
160,000 Call-Net Enterprises, Inc. sr. disc. notes stepped-coupon
zero % (8.94s, 8/15/03), 2008 (Canada) (STP) 96,800
210,000 Celcaribe S.A. sr. notes 13 1/2s, 2004 (Colombia) 161,700
130,000 Flag Ltd. 144A sr. notes 8 1/4s, 2008 (Bermuda) 123,500
68,000 ITC Deltacom, Inc. sr. notes 11s, 2007 74,800
40,000 Long Distance International, Inc. 144A sr. notes
12 1/4s, 2008 28,000
20,000 McLeod USA, Inc. 144A sr. notes 8 1/8s, 2009 19,700
45,000 OnePoint Communications, Corp. 144A sr. notes
14 1/2s, 2008 23,625
30,000 RCN Corp. sr. disc. notes stepped-coupon zero %
(11 1/8s, 10/15/02), 2007 (STP) 17,475
95,000 RSL Communications, Ltd. company guaranty
12 1/4s, 2006 101,888
60,000 RSL Communications, Ltd. company guaranty
9 1/8s, 2008 56,550
20,000 RSL Communications, Ltd. company guaranty, stepped-
coupon zero % (10 1/8s, 3/1/03), 2008 (STP) 11,400
70,000 RSL Communications PLC. 144A sr. notes 10 1/2s,
2008 (United Kingdom) 71,400
45,000 Transtel S.A. 144A pass-through certificates 12 1/2s,
2007 (Colombia) 17,100
60,000 US Xchange LLC sr. notes 15s, 2008 63,000
115,000 Versatel Telecom sr. notes 13 1/4s, 2008 117,300
210,000 Viatel, Inc. sr. notes 11 1/4s, 2008 216,300
--------------
1,392,538
Textiles (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
235,000 Day International Group, Inc. company guaranty
9 1/2s, 2008 231,475
250,000 Galey & Lord Inc. company guaranty 9 1/8s, 2008 188,750
40,000 Glenoit Corp. company guaranty 11s, 2007 36,800
80,000 Polymer Group, Inc. company guaranty Ser. B, 9s, 2007 81,600
30,000 Polymer Group, Inc. company guaranty Ser. B,
8 3/4s, 2008 30,300
--------------
568,925
Transportation (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
40,000 International Shipholding Corp. sr. notes 7 3/4s, 2007 38,800
90,000 Johnstown America Industries, Inc. company guaranty
Ser. C, 11 3/4s, 2005 96,750
50,000 Kitty Hawk, Inc. company guaranty 9.95s, 2004 50,000
--------------
185,550
Wireless Communications (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
110,000 Allbritton Communications Co. sr. sub. notes Ser. B,
8 7/8s, 2008 112,475
90,000 Orbital Imaging Corp. sr. notes Ser. B, 11 5/8s, 2005 90,000
55,000 Paging Network Do Brasil sr. notes 13 1/2s,
2005 (Brazil) 23,650
55,000 Telesystem International Wireless Inc. sr. disc. notes
stepped-coupon Ser. C, zero %, (10 1/2s, 11/1/02),
2007 (Canada) (STP) 21,450
--------------
247,575
--------------
Total Corporate Bonds and Notes
(cost $44,281,526) $ 37,351,489
CONVERTIBLE BONDS AND NOTES (27.2%) (a)
PRINCIPAL AMOUNT VALUE
Advertising (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
$ 212,000 Omnicom Group Inc. cv. sub. deb. 2 1/4s, 2013 $ 316,145
Aerospace and Defense (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
160,000 Diagnostic Retrieval Systems, Inc. cv. sr. sub. deb 9s, 2003 171,200
210,000 SPACEHAB, Inc. 144A cv. sub. notes 8s, 2007 172,463
--------------
343,663
Airlines (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
55,000 Atlantic Coast Airlines 144A cv. sub. notes 7s, 2004 197,450
282,000 Continental Airlines, Inc. cv. sub. deb. 6 3/4s, 2006 337,343
458,000 World Airways, Inc. 144A cv. sub. deb. 8s, 2004 91,600
--------------
626,393
Automotive (1.1%)
- --------------------------------------------------------------------------------------------------------------------------
250,000 Exide Corp. 144A cv. sr. sub. notes 2.9s, 2005 142,500
375,000 Magna International cv. sub. deb. 5s, 2002 425,156
380,000 Tower Automotive, Inc. cv. sub. notes 5s, 2004 362,900
--------------
930,556
Broadcasting (0.6%)
- --------------------------------------------------------------------------------------------------------------------------
350,000 Jacor Communications, Inc. cv. sr. notes zero %, 2011 329,438
210,000 Scandinavian Broadcasting System S.A. 144A cv.
sub. notes 7s, 2004 (Luxembourg) 220,500
--------------
549,938
Business Equipment and Services (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
170,000 National Data Corp. cv. sub. notes 5s, 2003 189,338
125,000 Personnel Group of America, Inc. cv. sub. notes
5 3/4s, 2004 122,969
--------------
312,307
Computer Equipment (1.1%)
- --------------------------------------------------------------------------------------------------------------------------
120,000 Intevac, Inc. cv. sub. notes 6 1/2s, 2004 84,450
470,000 Intevac, Inc. 144A cv. sub. notes 6 1/2s, 2004 330,763
460,000 Synoptics Communications Inc. 144A cv. sub. deb.
5 1/4s, 2003 487,025
--------------
902,238
Computer Services and Software (2.9%)
- --------------------------------------------------------------------------------------------------------------------------
16,000 America Online cv. sub. notes 4s, 2002 108,840
240,000 Apple Computer, Inc. cv. sub. notes 6s, 2001 300,600
271,000 Aspen Technology, Inc. cv. sub. deb. 5 1/4s, 2005 176,150
122,000 Aspen Technology, Inc. 144A cv. sub. deb. 5 1/4s, 2005 79,300
47,000 EMC Corp. cv. sub. notes 3 1/4s, 2002 212,675
185,000 Platinum Technology, Inc. cv. sub. notes 6 1/4s, 2002 149,156
262,000 Safeguard Scientifics, Inc. 144A cv. sub. notes 6s, 2006 359,595
250,000 S3, Inc. 144A cv. sub. notes 5 3/4s, 2003 195,000
573,000 System Software Associates, Inc. cv. sub. notes 7s, 2002 343,800
119,000 Vantive Corp. (The) cv. sub. notes 4 3/4s, 2002 86,424
1,945,000 Western Digital Corp. 144A cv. sub. deb. zero %, 2018 469,231
--------------
2,480,771
Conglomerates (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
250,000 Thermo Electron Corp. 144A cv. sub. deb.
4 1/4s, 2003 223,750
Consumer Durable Goods (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
1,380,000 Sunbeam Corp. 144A cv. sr. sub. notes zero %, 2018 163,875
Consumer Services (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
540,000 Fine Host Corp. 144A cv. sub. notes 5s, 2004 (NON) 378,000
Electronics and Electrical Equipment (3.4%)
- --------------------------------------------------------------------------------------------------------------------------
79,000 ADT Operations, Inc. cv. sub. notes zero %, 2010 160,469
605,000 Kent Electronics Corp. cv. sub. notes 4 1/2s, 2004 467,363
120,000 Lernout & Hauspie Speech Products N.V. 144A cv.
sub. notes 8s, 2001 (Belgium) 321,300
383,000 Motorola, Inc. cv. sub. deb. LYON (Liquid Yield
Option Note) zero %, 2013 315,975
580,000 Park Electrochemical Corp. cv. sub. notes 5 1/2s, 2006 516,200
195,000 SCI Systems, Inc. cv. sub. notes 5s, 2006 253,013
86,000 Solectron Corp. 144A cv. sub. notes 6s, 2006 225,535
395,000 Thermo Optek Corp. 144A cv. bonds 5s, 2000 377,719
310,000 Thermo Quest Corp. cv. co. guaranty 5s, 2000 296,438
--------------
2,934,012
Environmental Control (0.8%)
- --------------------------------------------------------------------------------------------------------------------------
250,000 Thermo Ecotek Corp. 144A cv. bonds 4 7/8s, 2004 201,250
300,000 USA United Waste Systems, Inc. cv. sub. notes
4 1/2s, 2001 489,375
--------------
690,625
Health Care (0.8%)
- --------------------------------------------------------------------------------------------------------------------------
615,000 HEALTHSOUTH Corp. cv. sub. deb. 3 1/4s, 2003 510,450
239,000 Integrated Health Services, Inc. cv. sr. sub. deb
5 3/4s, 2001 165,508
--------------
675,958
Information Systems (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
110,000 Automatic Data Processing cv. deb. zero %, 2012 112,475
335,000 Quantum Corp. cv. sub. 7s, 2004 291,450
--------------
403,925
Insurance and Finance (1.5%)
- --------------------------------------------------------------------------------------------------------------------------
470,000 Berkshire Hathaway, Inc. cv. sr. notes 1s, 2001 838,950
600,000 Mutual Risk Management 144A cv. sub. deb.
zero %, 2015 469,500
--------------
1,308,450
Medical Supplies and Devices (1.2%)
- --------------------------------------------------------------------------------------------------------------------------
505,000 Centocor, Inc. cv. sub. deb. 4 3/4s, 2005 522,675
350,000 Phoenix Shannon 144A cv. sr. sub. notes 9 1/2s,
2000 (In default) (NON) 3,500
291,000 Thermo Cardiosystems, Inc. 144A cv. company guaranty
4 3/4s, 2004 245,168
300,000 Thermo Instrument Systems, Inc. cv. company guaranty
Ser. RG, 4s, 2005 241,875
--------------
1,013,218
Metals and Mining (0.6%)
- --------------------------------------------------------------------------------------------------------------------------
100,000 Inco Ltd. cv. deb. 5 3/4s, 2004 (Canada) 86,000
440,000 Quanex Corp. cv. sub. deb. 6.88s, 2007 394,900
--------------
480,900
Oil and Gas (1.6%)
- --------------------------------------------------------------------------------------------------------------------------
330,000 Lomak Petroleum, Inc. 144A cv. sub. deb. 6s, 2007 138,600
888,000 Pennzenergy Co. cv. deb. 4.95s, 2008 859,140
190,000 Pride International, Inc. cv. sub. deb. 6 1/4s, 2006 135,138
380,000 Swift Energy Co. cv. sub. notes 6 1/4s, 2006 270,750
--------------
1,403,628
Paper and Forest Products (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
270,000 APP Global Finance Ltd. 144A cv. company guaranty
3 1/2s, 2003 (United Kingdom) 128,925
Pharmaceuticals (2.0%)
- --------------------------------------------------------------------------------------------------------------------------
709,000 Alza Corp. cv. sub. notes zero %, 2014 490,983
333,000 Elan Corp. cv. notes 4 3/4s, 2004 416,250
435,000 Roche Holdings, Inc. 144A cv. unsub. LYON zero %,
2010 (Switzerland) 284,925
149,000 Sepracor, Inc. cv. sub. deb. 6 1/4s, 2005 401,555
78,000 Sepracor, Inc. 144A cv. notes 7s, 2005 96,720
--------------
1,690,433
Publishing (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
235,000 World Color Press, Inc. cv. sub. notes 6s, 2007 218,550
Restaurants (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
181,000 CKE Restaurants, Inc. cv. sub. notes 4 1/4s, 2004 154,303
Retail (2.4%)
- --------------------------------------------------------------------------------------------------------------------------
223,000 Costco Cos, Inc. cv. sub. notes zero %, 2017 208,505
212,000 Home Depot, Inc. cv. sub. notes 3 1/4s, 2001 550,140
230,000 Michaels Stores, Inc. cv. sub. notes 6 3/4s, 2003 199,238
494,000 Office Depot, Inc. cv. LYON zero %, 2007 518,700
252,000 Pier 1 Imports, Inc. cv. sub. notes 5 3/4s, 2003 296,100
203,000 Rite Aid Corp. cv. sub. notes 5 1/4s, 2002 259,333
--------------
2,032,016
Satellite Services (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
223,000 Gilat Satellite Networks Ltd. cv. sub. notes
6 1/2s, 2004 (Israel) 337,845
Semiconductors (1.7%)
- --------------------------------------------------------------------------------------------------------------------------
509,000 Credence Systems Corp. cv. sub. notes 5 1/4s, 2002 377,933
400,000 Integrated Device Technology, Inc. cv. sub. notes
5 1/2s, 2002 292,000
265,000 Lam Research Corp. cv. sub. notes 5s, 2002 221,275
149,000 LAM Research Corp. 144A cv. sub. notes 5s, 2002 124,415
383,000 Micron Technology, Inc. cv. sub. notes 7s, 2004 422,736
--------------
1,438,359
Supermarkets (--%)
- --------------------------------------------------------------------------------------------------------------------------
100,000 Whole Foods Market, Inc. cv. sub. deb. zero %, 2018 31,625
Telecommunications (0.8%)
- --------------------------------------------------------------------------------------------------------------------------
62,000 GST Telecommunications, Inc. cv. sr. disc. notes stepped-
coupon zero %, (13 7/8s, 12/15/00), 2005 (STP) 57,040
289,000 Inacom Corp. cv. sub. deb. 4 1/2s, 2004 275,273
225,000 WinStar Communications. Inc. 144A cv. sr. disc. notes
stepped-coupon zero % (14s, 10/15/00), 2005 (STP) 382,500
--------------
714,813
Telephone Services (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
465,000 MIDCOM Communications, Inc. 144A cv. sub. deb.
8 1/4s, 2003 (In default) (NON) 76,725
Tobacco (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
270,000 Standard Commercial Corp. cv. sub. deb.
7 1/4s, 2007 (NON) 176,513
--------------
Total Convertible Bonds and Notes
(cost $22,303,432) $ 23,138,459
CONVERTIBLE PREFERRED STOCKS (22.8%) (a)
NUMBER OF SHARES VALUE
Automobiles (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
5,820 Tower Automotive Capital Trust 144A $3.375 cv. pfd. $ 245,168
Banks (0.6%)
- --------------------------------------------------------------------------------------------------------------------------
5,035 National Australia Bank Ltd. $1.969 cv. pfd. 151,679
5,880 Union Planters Corp. Ser. E, $2.00 cv. cum. pfd. 330,015
--------------
481,694
Basic Industrial Products (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
4,625 Case Corp. $4.50 cv. cum. pfd. 239,922
1,795 Corning Delaware (L.P.) $3.00 cv. pfd. 146,517
--------------
386,439
Broadcasting (0.8%)
- --------------------------------------------------------------------------------------------------------------------------
1,910 Chancellor Media Corp. $3.00 cv. cum. pfd. 169,990
3,800 Sinclair Broadcast Group, Inc. $3.00 cv. pfd. 156,750
32,400 Triathlon Broadcasting Co. $0.945 cv. pfd. 352,350
--------------
679,090
Building and Construction (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
5,641 Fleetwood Capital Trust $3.00 cv. cum. pfd. 255,255
Business Equipment and Services (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
7,844 Unisys Corp. Ser. A, $3.75 cv. pfd. 408,869
Cable Television (1.0%)
- --------------------------------------------------------------------------------------------------------------------------
7,649 Mediaone Group, Inc. Ser. D, $2.25 cv. pfd. 826,092
Computer Services (0.8%)
- --------------------------------------------------------------------------------------------------------------------------
12,826 Wang Laboratories, Inc. Ser. B, $3.25 cv. pfd. 660,539
Cosmetics (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
2,898 Estee Lauder Aces TR II $5.41 cv. pfd. 250,496
Electronics and Electrical Equipment (1.0%)
- --------------------------------------------------------------------------------------------------------------------------
4,431 Coltec Capital Trust $2.625 cv. pfd. 177,794
3,408 Lernout & Hauspie Speech Products N.V. 144A
$2.375 cv. pfd 99,684
10,065 Pioneer Standard Electronics, Inc. 144A $3.375 cv. pfd. 387,503
10,440 Sensormatic Electronics Corp. 144A $1.625 cv. pfd. 191,835
--------------
856,816
Entertainment (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
7,930 Metromedia International Group, Inc. $3.625
cv. cum. pfd. 220,058
Financial Services (1.3%)
- --------------------------------------------------------------------------------------------------------------------------
4,743 Devon Financing Trust $3.25 cv. pfd. 221,735
5,450 Finova Finance Trust $2.75 cv. cum. pfd. 377,413
200 Matewan Bancshares, Inc. Ser. A, $3.75 cv. cum. pfd. 7,625
4,090 Penncorp Financial Group, Inc. 144A $3.50 cv.
cum. pfd. 31,186
10,195 Timet Capital Trust I 144A $3.312 cv. pfd. 223,016
14,000 Walbro Capital Trust $2.00 cv. pfd. 236,250
--------------
1,097,225
Food and Beverages (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
6,258 Monsanto Co. $2.60 cv. pfd. 290,606
1,994 Ralston Purina Co. $4.336 cv. pfd. 96,709
--------------
387,315
Gas Pipelines (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
1,387 Williams Companies, Inc. $1.25 cum. cv. pfd. 239,258
Health Care (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
20,360 MedPartners, Inc. $6.50 cv. pfd. 150,155
Information Systems (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
13,450 Vanstar Financial Trust Corp. $3.375 cv. pfd. 364,831
Insurance and Finance (4.2%)
- --------------------------------------------------------------------------------------------------------------------------
5,441 Aetna, Inc. $6.25 cv. pfd. 383,591
4,808 American Bankers, Inc. $1.5625 cv. pfd. 473,588
8,566 American General Delaware Corp. $3.00 cv. cum. pfd. 780,577
7,295 American Heritage Life Investment Corp. $4.25 cv. pfd. 449,554
12,100 Decs Trust IV $0.91 cv. pfd. 107,388
16,300 Lincoln National Corp. $0.463 cv. cum. pfd. 376,938
6,700 Newell Financial Trust 144A $2.625 cv. cum. pfd. 347,563
4,800 Protective Life Corp. $3.25 cv. cum. pfd. 298,800
1,572 QUALCOMM Financial Trust $2.875 cum. cv. pfd. 89,211
4,130 St. Paul Capital LLC $3.00 cv. cum. pfd. 245,735
--------------
3,552,945
Investment Companies (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
5,300 Suiza Capital Trust II 144A $2.75 cv. pfd. 189,475
Medical Supplies and Devices (0.6%)
- --------------------------------------------------------------------------------------------------------------------------
1,465 Mckesson Corp. $2.50 cv. pfd. 136,611
1,440 Owens & Minor Trust I 144A Ser. A, $2.688 cv.
cum. pfd. 59,851
8,500 Owens & Minor, Inc. 144A $5.375 cv. pfd. 353,813
--------------
550,275
Metals and Mining (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
11,970 Pittston Mineral Corp. 144A $3.125 dep. shs. cv. pfd. 173,565
Oil and Gas (1.2%)
- --------------------------------------------------------------------------------------------------------------------------
560 Chesapeake Energy Corp. $3.50 cum. cv. pfd. 5,320
10,200 Tosco Financing Trust $2.875 cv. pfd. 446,250
12,390 Unocal Capital Trust $3.125 cv. cum. pfd. 586,976
84 XCL Ltd $8.075 cv. pfd. 3,696
--------------
1,042,242
Packaging and Containers (0.6%)
- --------------------------------------------------------------------------------------------------------------------------
7,540 Owens-Illinois, Inc. $2.375 cv. pfd. 291,233
5,188 Sealed Air Corp. Ser. A, $2.00 cv. pfd. 261,994
--------------
553,227
Paper and Forest Products (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
10,113 International Paper Co. $2.625 cv. pfd. 462,670
Publishing (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
6,915 Tribune Co. $1.75 cv. pfd. 185,841
Railroads (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
9,636 Union Pacific Capital Trust 144A $3.125 cum. cv. pfd. 452,892
3,718 Union Pacific Capital Trust $3.125 cum. cv. pfd. 174,746
--------------
627,638
Recreation (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
1,000 Royal Caribbean Cruises Ltd. Ser. A, $3.625 cum. cv. pfd. 99,063
REIT's (Real Estate Investment Trust) (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
16,640 Equity Residential Property Ser. E, $1.75 cv. pfd. 384,800
Restaurants (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
8,269 Wendy's Financing Ser. A, $2.50 cv. pfd. 444,459
Retail (0.9%)
- --------------------------------------------------------------------------------------------------------------------------
3,865 Dollar General Strypes Trust $3.352 cv. pfd. 156,049
9,160 K mart Financing I $3.875 cum. cv. pfd. 573,645
--------------
729,694
Telecommunications (1.3%)
- --------------------------------------------------------------------------------------------------------------------------
4,011 AirTouch Communications, Inc. Ser. C, $2.125 cv. pfd. 502,879
245 TCI Pacific Comm $5.00 cv. pfd. 82,810
4,020 Tele-Communications (TCI Group) Ser. A, $2.125
cv. pfd. 535,665
--------------
1,121,354
Tobacco (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
8,900 DIMON, Inc. $2.00 cv. pfd. 52,288
Transportation (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
6,000 CNF Trust I Ser. A, $2.50 cv. cum. pfd. 360,000
Utilities (1.6%)
- --------------------------------------------------------------------------------------------------------------------------
2,030 CalEnergy Capital Trust $3.125 cv. cum. pfd. 106,575
8,765 El Paso Energy Capital Trust $2.375 cv. pfd. 431,676
3,200 KN Energy Inc. $3.55 cv. pfd. 111,400
4,705 Houston Industries, Inc. $3.22 cv. pfd 511,669
3,100 Nipsco $3.875 cv. pfd. 151,125
600 Texas Utilities Co. $0.205 cv. pfd. 27,975
--------------
1,340,420
--------------
Total Convertible Preferred Stocks
(cost $19,068,264) $ 19,379,256
PREFERRED STOCKS (3.5%) (a)
NUMBER OF SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------------
2,577 AmeriKing, Inc. $3.25 pfd. (PIK) $ 68,291
716 Capstar Broadcasting Inc. $12.00 pfd. 85,562
3,574 Capstar Communications, Inc. Ser. E, $12.625
cum. pfd. (PIK) 427,066
2,970 Chevy Chase Capital Corp. Ser. A, $5.19 pfd. 160,380
1,210 Citadel Broadcasting Inc. 144A $13.25 cum. pfd. (PIK) 141,570
52 Concentric Network Corp. Ser. B, $13.50 pfd. (PIK) 49,920
1 CSC Holding Inc. Ser. H, $11.75 cum. pfd. (PIK) 119
3,072 CSC Holdings, Inc. Ser. M, $11.125 cum. pfd. (PIK) 367,104
7,510 Diva Systems Corp. Ser. C, $6.00 pfd. 45,060
99 Dobson Communications Corp. 144A 12.25% pfd. (PIK) 89,100
45 E. Spire Communications, Inc. $12.75 pfd. (PIK) 15,300
125 Fresenius Medical Care AG Ser. D, $9.00 pfd.
(Germany) 129,844
161 Intermedia Communication Ser. B, $13.50 pfd. (PIK) 160,195
207 IXC Communications, Inc. $12.50 pfd. (PIK) 224,595
2,247 Lady Luck Gaming Corp. $11.25 pfd. 89,880
867 Nebco Evans Holding Co. 144A $11.25 pfd (PIK) 36,414
79 NEXTEL Communications, Inc. Ser. D, 13.00%
cum. pfd. (PIK) 82,950
3,321 Nextlink Communications, Inc. 144A $7.00 cum. pfd. 171,032
17 Paxson Communications Corp. $13.25 cum. pfd. (PIK) 139,400
123 Spanish Broadcasting Systems 14.25% cum. pfd. 129,150
15,080 TCR Holding Corp. 6.25% cum. pfd. 905
22,261 Trikon Technologies, Inc. Ser. H, $8.125 pfd. (PIK) 33,392
228 Trikon Technologies, Inc. Ser. I, $8.125 pfd. 22,800
285 21st Century Telecom Group 144A $13.75
cum. pfd. (PIK) 142,500
98 Viatel, Inc. Ser. A, $10.00 cv. pfd. (PIK) 12,250
150 WinStar Communications, Inc. 144A 14.25%
cum. pfd. (PIK) 120,000
--------------
Total Preferred Stocks (cost $3,465,177) $ 2,944,779
UNITS (0.7%) (a)
NUMBER OF UNITS VALUE
- --------------------------------------------------------------------------------------------------------------------------
250 Australis Media, Ltd. units stepped-coupon zero %,
(15 3/4s, 5/15/03), 2003 (In default) (Australia) (STP) (NON) $ 1,875
70 Birch Telecom, Inc. 144A units 14s, 2008 64,050
200 Decrane Aircraft 144A units 12s, 2008 200,000
110 Network Plus Corp. units 13 1/4s, 2009 112,200
200 XCL Ltd. units sr. sec. notes 13 1/2s, 2004 164,000
600 XCL Ltd. units cum. pfd. 9.50%, 2006 26,400
--------------
Total Units (cost $839,917) $ 568,525
COMMON STOCKS (0.7%) (a)
NUMBER OF SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------------
50 AmeriKing, Inc. (NON) $ 2,000
34,146 Celcaribe S.A. 144A (Colombia) (NON) 44,390
4,800 CellNet Data Systems, Inc. (NON) 30,300
7,440 DII Group Inc., (The) (NON) 173,910
1,379 Fitzgerald Gaming Corp. (NON) 690
1,213 Hedstrom Holdings, Inc. 144A (NON) 1,213
58 Mothers Work, Inc. (NON) 624
55 Paging Do Brazil Holdings Co., LLC 144A
Class B, (Brazil) (NON) 1
22,025 PSF Holdings LLC Class A (acquired 6/29/96, cost $796,497) (NON) (RES) 280,819
537 RSL Communications, Ltd. Class A (NON) 15,338
1,449 Sensormatic Electronics Corp. (NON) 15,215
--------------
Total Common Stocks (cost $988,086) $ 564,500
WARRANTS (0.6%) (A) (NON) EXPIRATION
NUMBER OF WARRANTS DATE VALUE
- --------------------------------------------------------------------------------------------------------------------------
220 Allegiance Telecom, Inc. 2/3/08 $ 6,160
80 Bestel SA de C.V. (Mexico) 5/15/05 80
690 CellNet Data Systems, Inc. 10/1/07 13,800
80 Club Regina, Inc. 144A 4/15/06 80
95 Colt Telecommunications Group PLC 12/31/06 54,625
30 Concentric Network Corp. 12/15/07 5,010
1,350 Consorcio Ecuatoriano 144A (Ecuador) 10/1/00 675
285 Covad Communications Group
(acquired on various dates from 3/6/98
to 5/27/98, cost $137,624) (RES) 3/15/08 163,590
185 Diva Systems Corp. 5/15/06 44,770
879 Diva Systems Corp. 3/1/08 11,427
2,000 DTI Holdings Inc. 3/1/08 20
70 Epic Resorts 6/15/05 1
90 Esat Holdings, Inc. (Ireland) 2/1/07 6,390
400 Firstworld Communication 4/15/08 4,000
250 Hyperion Telecommunications 144A 4/15/01 15,335
6,534 ICG Communications 10/15/05 130,680
90 Insilco Holding Co. 8/15/08 0
200 Interact Systems, Inc. 8/1/03 2
85 International Wireless
Communications Holdings 144A 8/15/01 1
175 Iridium World Com 144A 7/15/05 12,250
200 KMC Telecom Holdings, Inc. 4/15/08 500
235 Knology Holdings, Inc. 144A 10/15/07 353
40 Long Distance International, Inc. 144A 4/13/08 100
650 McCaw International Ltd. 4/15/07 2,600
85 Mediq Inc. 144A 6/1/09 1
285 MGC Communications, Inc. 144A 10/1/04 7,752
45 Onepoint Communications, Inc. 6/1/08 45
90 Orbital Imaging Corp. 144A 3/1/05 3,600
150 Pathnet, Inc. 144A 4/15/08 1,500
840 Rhythms Netcon 144A 5/15/08 16,800
100 Spanish Broadcasting Systems 144A 6/30/99 20,500
80 Startec Global Communications Corp. 5/15/08 80
75 Sterling Chemicals Holdings 8/15/08 1,125
40 Telehub Communications Corp. 7/31/05 40
130 Transamerican Refining Corp. 6/30/03 0
250 21st Century Telecom Group 144A 2/15/10 5,000
435 UIH Australia/Pacific, Inc. 144A 5/15/06 435
115 Versatel Teleco 144A 5/15/08 4,600
--------------
Total Warrants (cost $204,384) $ 533,927
SHORT-TERM INVESTMENTS (1.0%) (a)(cost $854,000)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$ 854,000 Interest in $310,913,000 joint repurchase agreement
dated February 26, 1999 with Warburg Securities
due March 1, 1999 with respect to various U.S.
Treasury obligations -- maturity value of $854,337
for an effective yield of 4.74% $ 854,000
- --------------------------------------------------------------------------------------------------------------------------
Total Investments (cost $92,004,786) (b) $ 85,334,935
- --------------------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $85,133,646.
(b) The aggregate identified cost on a tax basis is $92,124,982, resulting in gross unrealized appreciation and
depreciation of $6,177,740 and $12,967,787, respectively, or net unrealized depreciation of $6,790,047.
(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.
(RES) Restricted, excluding 144A securities, as to public resale. The total market value of restricted securities
held at February 28, 1999 was $689,919 or 0.8% of net assets.
(PIK) Income may be received in cash or additional securities at the discretion of the issuer.
(R) Real Estate Investment Trust.
FLIRB represents Front Loaded Interest Reduction Bond.
The rates shown on Floating Rate Notes (FRN) are the current interest rates shown at February 28, 1999, which
are subject to change based on the terms of the security.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
February 28, 1999
<S> <C>
Assets
- -----------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $92,004,786) (Note 1) $85,334,935
- -----------------------------------------------------------------------------------------------
Dividends and interest receivables 1,294,499
- -----------------------------------------------------------------------------------------------
Receivable for securities sold 339,214
- -----------------------------------------------------------------------------------------------
Unamortized organization expenses (Note 1) 9,682
- -----------------------------------------------------------------------------------------------
Total assets 86,978,330
Liabilities
- -----------------------------------------------------------------------------------------------
Payable to subcustodian (Note 2) 366,832
- -----------------------------------------------------------------------------------------------
Distributions payable to shareholders 26,346
- -----------------------------------------------------------------------------------------------
Payable for securities purchased 1,078,492
- -----------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 279,845
- -----------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 30,382
- -----------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 11,158
- -----------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 709
- -----------------------------------------------------------------------------------------------
Other accrued expenses 50,920
- -----------------------------------------------------------------------------------------------
Total liabilities 1,844,684
- -----------------------------------------------------------------------------------------------
Net assets $85,133,646
Represented by
- -----------------------------------------------------------------------------------------------
Paid-in capital (unlimited shares authorized) (Note 1) $92,405,327
- -----------------------------------------------------------------------------------------------
Distributions in excess of net investment income (Note 1) (378,403)
- -----------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (Note 1) (223,427)
- -----------------------------------------------------------------------------------------------
Net unrealized depreciation of investments (6,669,851)
- -----------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $85,133,646
Computation of net asset value
- -----------------------------------------------------------------------------------------------
Net asset value per share ($85,133,646 divided by 3,712,567 shares) $22.93
- -----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Year ended February 28, 1999
<S> <C>
Investment income:
- -----------------------------------------------------------------------------------------------
Interest income (net of foreign tax of $8,155) $ 7,199,394
- -----------------------------------------------------------------------------------------------
Dividends 1,351,272
- -----------------------------------------------------------------------------------------------
Total investment income 8,550,666
Expenses:
- -----------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 1,277,268
- -----------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 189,196
- -----------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 12,759
- -----------------------------------------------------------------------------------------------
Administrative services (Note 2) 5,069
- -----------------------------------------------------------------------------------------------
Amortization of organization expenses (Note 1) 7,247
- -----------------------------------------------------------------------------------------------
Reports to shareholders 23,698
- -----------------------------------------------------------------------------------------------
Registration fees 75
- -----------------------------------------------------------------------------------------------
Auditing 46,218
- -----------------------------------------------------------------------------------------------
Legal 61,845
- -----------------------------------------------------------------------------------------------
Postage 13,653
- -----------------------------------------------------------------------------------------------
Other 37,984
- -----------------------------------------------------------------------------------------------
Total expenses 1,675,012
- -----------------------------------------------------------------------------------------------
Expense reduction (Note 2) (13,090)
- -----------------------------------------------------------------------------------------------
Net expenses 1,661,922
- -----------------------------------------------------------------------------------------------
Net investment income 6,888,744
- -----------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 1,118,740
- -----------------------------------------------------------------------------------------------
Net unrealized depreciation of investments during the year (14,771,161)
- -----------------------------------------------------------------------------------------------
Net loss on investments (13,652,421)
- -----------------------------------------------------------------------------------------------
Net decrease in net assets resulting from operations $(6,763,677)
- -----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Year ended February 28
----------------------
1999 1998
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets
- ---------------------------------------------------------------------------------------------------------------
Operations:
- ---------------------------------------------------------------------------------------------------------------
Net investment income $ 6,888,744 $ 6,505,941
- ---------------------------------------------------------------------------------------------------------------
Net realized gain on investments and
foreign currency transactions 1,118,740 5,915,359
- ---------------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of
investments and assets and liabilities in foreign currencies (14,771,161) 3,296,810
- ---------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations (6,763,677) 15,718,110
- ---------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ---------------------------------------------------------------------------------------------------------------
From net investment income (7,065,789) (6,530,769)
- ---------------------------------------------------------------------------------------------------------------
From net realized gain on investments (3,348,343) (4,866,110)
- ---------------------------------------------------------------------------------------------------------------
Increase in capital share transactions from
reinvestment of dividends 199,702 --
- ---------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets (16,978,107) 4,321,231
Net assets
- ---------------------------------------------------------------------------------------------------------------
Beginning of year 102,111,753 97,790,522
- ---------------------------------------------------------------------------------------------------------------
End of year (including distributions in excess of
net investment income of $378,403 and
$366,908, respectively) $85,133,646 $102,111,753
- ---------------------------------------------------------------------------------------------------------------
Number of fund shares
- ---------------------------------------------------------------------------------------------------------------
Shares outstanding at the beginning of year 3,704,000 3,704,000
- ---------------------------------------------------------------------------------------------------------------
Shares issued in connection with reinvestment
of distributions 8,567 --
- ---------------------------------------------------------------------------------------------------------------
Shares outstanding at the end of year 3,712,567 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 June 29, 1995+
operating performance Year ended February 28 to February 29
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value,
beginning of period $27.57 $26.40 $26.43 $24.85(c)
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income 1.86 1.76 1.77 1.17
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (3.69) 2.49 1.54 1.63
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations (1.83) 4.25 3.31 2.80
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (1.91) (1.77) (1.83) (1.15)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments (.90) (1.31) (1.34) (.07)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of
net investment income -- -- (.17) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (2.81) (3.08) (3.34) (1.22)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $22.93 $27.57 $26.40 $26.43
- ------------------------------------------------------------------------------------------------------------------------------------
Market value,
end of period $22.500 $27.312 $24.375 $22.625
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total return at
market value (%)(a) (7.47) 26.03 23.54 (4.53)*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $85,134 $102,112 $97,791 $97,881
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.78 1.71 1.72 1.14*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 7.31 6.45 6.66 4.56*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 56.58 60.69 70.33 38.92*
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) Includes amounts paid through expense offset arrangements. (Note 2)
(c) 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.
</TABLE>
Notes to financial statements
February 28, 1999
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 sales 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, and other
investments, including restricted securities, are stated at fair value
following procedures approved by the Trustees.
B) Joint trading account Pursuant to an exemptive order issued by the
Securities and Exchange Commission, the fund may transfer uninvested cash
balances into a joint trading account along with the cash of other
registered investment companies and certain other accounts managed by
Putnam Investment Management, Inc. ("Putnam Management"), the fund's
Manager, a wholly-owned subsidiary of Putnam Investments, Inc. These
balances may be invested in one or more repurchase agreements and/or
short-term money market instruments.
C) Repurchase agreements The fund, or any joint trading account, through
its custodian, receives delivery of the underlying securities, the market
value of which at the time of purchase is required to be in an amount at
least equal to the resale price, including accrued interest. Collateral
for certain tri-party repurchase agreements is held at the counterparty's
custodian in a segregated account for the benefit of the fund and the
counterparty. Putnam Management is responsible for determining that the
value of these underlying securities is at all times at least equal to the
resale price, including accrued interest.
D) Security transactions and related investment income Security
transactions are accounted for on the trade date (date the order to buy or
sell is executed). Interest income is recorded on the accrual basis.
Dividend income is recorded on the ex-dividend date 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 bonds, stepped-coupon bonds and payment in kind bonds are
accreted according to the yield-to-maturity basis. Any premium resulting
from the purchase of stepped-coupon bonds is amortized on a
yield-to-maturity basis.
E) Foreign currency translation The accounting records of the fund are
maintained in U.S. dollars. The market value of foreign securities,
currency holdings, and 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 gains and losses 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
current 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, 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.
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 losses on wash sale
transactions, interest on payment-in-kind securities, market discount,
defaulted bond interest and organization costs. 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, 1999, the fund reclassified
$165,550 to decrease distributions in excess of net investment income and
$147,978 to increase paid-in-capital, with an increase to accumulated net
realized losses of $313,528. 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
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: 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.
Custodial functions for the fund's assets are provided by Putnam Fiduciary
Trust Company (PFTC), a subsidiary of Putnam Investments, Inc. Investor
servicing agent functions are provided by Putnam Investor Services, a
division of PFTC.
As part of the subcustodian contract between the subcustodian bank and
PFTC, the subcustodian bank has a lien on the securities of the fund to
the extent permitted by the fund's investment restrictions to cover any
advances made by the subcustodian bank for the settlement of securities
purchased by the fund. At February 28, 1999, the payable to the
subcustodian bank represents the amount due for cash advance for the
settlement of a security purchased.
For the year ended February 28, 1999, fund expenses were reduced by
$13,090 under expense offset arrangements with PFTC and brokerage service
arrangements. Investor servicing and custodian fees reported in the
Statement of operations exclude these credits. The fund could have
invested a portion of the assets utilized in connection with the expense
offset arrangements in an income producing asset if it had not entered
into such arrangements.
Each Trustee of the fund receives an annual Trustee fee, of which $530 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
Purchases and sales of securities
During the year ended February 28, 1999, purchases and sales of investment
securities other than short-term investments aggregated $52,289,094 and
$56,198,919, 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 $897,532 as capital gain at the 20% rate capital gain
dividends for its taxable year ended February 28, 1999.
The fund has designated 18.92% of the distributions from net investment
income as qualifying for the dividends received deduction for
corporations.
The Form 1099 you receive in January 2000 will show the tax status of all
distributions paid to your account in calendar 1999.
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
John A. Hill, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
Ronald J. Jackson
Paul L. Joskow
Elizabeth T. Kennan
Lawrence J. Lasser
John H. Mullin III
Robert E. Patterson
Donald S. Perkins
George Putnam, III
A.J.C. Smith
W. Thomas Stephens
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
John D. Hughes
Senior Vice President and Treasurer
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Ian C. Ferguson
Vice President
Brett C. Browchuk
Vice President
Stephen Oristaglio
Vice President
Thomas V. Reilly
Vice President
Charles G. Pohl
Vice President and Fund Manager
Kevin J. Rogers
Vice President and Fund Manager
Richard A. Monaghan
Vice President
John R. Verani
Vice President
Beverly Marcus
Clerk and Assistant Treasurer
Call 1-800-225-1581 weekdays from 9 a.m. to 5 p.m. Eastern Time, or visit
our website (www.putnaminv.com) any time for up-to-date information about
the fund's NAV.
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
www.putnaminv.com
- ---------------------
BULK RATE
U.S. POSTAGE PAID
PUTNAM
INVESTMENTS
- ---------------------
51078 224 4/99
