Putnam
High Income
Bond Fund
Item 1. Report to Stockholders:
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The following is a copy of the report transmitted to stockholders pursuant
to Rule 30e-1 under the Investment Company Act of 1940:
SEMIANNUAL REPORT ON PERFORMANCE AND OUTLOOK
2-29-04
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From the Trustees
[GRAPHIC OMITTED: PHOTO OF JOHN A. HILL AND GEORGE PUTNAM, III]
John A. Hill and
George Putnam, III
Dear Fellow Shareholder:
In the first months of 2004, we have continued to see the same positive
conditions in financial markets that arose during the recovery of 2003.
The U.S. economy and corporate profits have grown impressively based on
a solid foundation of rising productivity, low inflation, and low
interest rates. With both consumer spending and business capital
investment contributing to the expansion, the economy also shows greater
equilibrium than has been the case in recent years. These favorable
economic conditions have contributed to strong returns in both the stock
and bond markets over the reporting period.
Experience teaches us that a run of good news like this does not give
reason to be complacent. Rather, in such an environment, active research
plays an even more important role in evaluating potential risks.
Uncertainties include the possibilities of a rise in interest rates and
the adverse effects of a weaker U.S. dollar. Putnam's investment
management teams are focused on analyzing these and similar issues. They
are also working to identify new opportunities, which may be less
abundant than they were in last year's broad rally.
The first half of your fund's fiscal year occurred during a highly
favorable period for both convertible and high-yield bonds. Because of
the stock market's strong performance during the six-month period, the
fund's convertible bond holdings had especially robust returns --
returns that we consider unlikely to recur over the near term. The fund
was held back somewhat by its allocation to high-yield bonds, which,
despite a strong showing, underperformed convertible bonds.
Nevertheless, we believe this diversification is advantageous for
shareholders over the long term, as it is designed to reduce volatility.
Respectfully yours,
/S/ JOHN A. HILL /S/ GEORGE PUTNAM, III
John A. Hill George Putnam, III
Chairman of the Trustees President of the Funds
April 21, 2004
Report from Fund Management
Fund highlights
* For the semiannual period ending February 29, 2004, Putnam High Income
Bond Fund had total returns of 14.77% at net asset value (NAV) and
12.29% at market price.
* Due to management's selection of several strong-performing securities,
especially in the convertible portion of the portfolio, the fund at NAV
outperformed the 12.75% return of its benchmark, the Merrill Lynch
All-Convertible Index.
* The fund's return at NAV slightly outperformed the average return of
14.51% for the Lipper Convertible Securities Funds (closed-end)
category. Comparisons in this category can be problematic, however,
because at period-end it consisted of only 14 funds.
* We believe the fund's slightly lower return at market price could be
due, in part, to investor concerns that the stronger-than-normal
performance in these markets during the past 18 months may be nearing an
end. (Market price returns generally reflect changes in investor demand
as well.)
* See the Performance Summary that begins on page 7 for complete fund
performance, comparative performance, and Lipper data.
Performance commentary
Over the past six months, the extraordinarily favorable environment for
convertible and high-yield corporate bonds continued the trend of the
previous nine months. After three years of negative returns, the stock
market rallied strongly, helping to boost convertible securities.
Default rates continued to decline, credit quality improved as companies
retired or refinanced debt, and investor demand for convertible and
high-yield bonds was strong. We focused on fundamental research to
select individual securities, many of which performed well. This
strategy helped the fund to out perform its benchmark index and its
Lipper category average, which contained only convertible securities,
based on results at NAV.
FUND PROFILE
Putnam High Income Bond Fund seeks to provide high current income in a
portfolio of high-yielding convertible and nonconvertible securities
with potential for capital appreciation. The fund invests, under normal
circumstances, at least 80% of its net assets in bonds rated below
investment grade.
Market overview
Since convertible securities are tied to the equity markets by their
ability to convert to the underlying common stocks of their issuing
companies, the stock market is an important driver of convertible bond
performance. High-yield bonds can also benefit from an improving stock
market, because rising equity valuations help improve debt/equity ratios
in corporate balance sheets. Of course, the contrary is also true -- a
declining stock market can have a negative effect on both convertible
and high-yield bonds.
The fund's fiscal year began in the midst of an economic recovery. Key
economic indicators such as productivity, manufacturing growth, capital
spending, and consumer confidence became increasingly positive while
inflation remained in check. These favorable economic reports helped
propel the stock market higher, bolstering the returns of your fund's
convertible holdings. Moreover, the more volatile sectors in the stock
market, including technology and telecommunications, saw the strongest
performance.
The best-performing portion of the convertible market contained bonds
with underlying equities that had had significant price declines (known
as "busted convertibles") during the three-year bear market from 2000 to
2002, and these securities recovered strongly in 2003.
The narrowing of credit yield spreads (the difference in yield between
high-rated and low-rated bonds) continued to indicate that, as news
about the economy grew more positive, investors seeking higher yields
were becoming more willing to take on credit risk. The fact that
short-term interest rates have been at historically low levels provided
investors with more incentive to seek higher yields.
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MARKET SECTOR PERFORMANCE 6 MONTHS ENDED 2/29/04
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Bonds
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Merrill Lynch All-Convertible Index (convertible securities) 12.75%
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JP Morgan Chase Global High Yield Index (global high-yield
corporate bonds) 10.92%
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Lehman Aggregate Bond Index (broad bond market) 4.92%
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Lehman Global Aggregate Bond Index (international bonds) 10.00%
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Equities
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S&P 500 Index (broad stock market) 14.59%
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Russell 2000 Index (stocks of small and midsize companies) 18.34%
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MSCI EAFE Index (international stocks) 25.22%
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These indexes provide an overview of performance in different market
sectors for the six months ended 2/29/04.
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Strategy overview
While most of the fund's convertible holdings appreciated during the
period, those with greater equity sensitivity -- i.e., those that
generally perform better when the prices of the underlying stocks
appreciate (and worse when the stocks decline) -- had the strongest
performance. We continued to focus primarily on "busted convertibles,"
which are securities that have seen large price declines (in both the
convertible and the underlying stock price). Some of the fund's busted
convertibles benefited from dramatic corporate turnarounds, causing
their prices to recover to a greater extent than we had anticipated.
We also increased the number of "mandatory" convertibles in the fund.
Unlike a traditional convertible, which converts to the underlying stock
only if that stock reaches a certain price, mandatory convertibles
automatically convert to stock after a specified period of time. As a
result, these securities are more sensitive to the stock market's
performance than traditional convertibles, and, because of the strong
stock market in 2003, the fund's higher allocation to mandatory
convertibles was beneficial for performance.
In the high-yield portion of the fund, we maintained diversity across
industry sectors and holdings, which is designed to help protect the
fund against increased market volatility. As yields have declined
throughout the market, we continued to focus on selectively adding
lower-rated, higher-yielding bonds to the portfolio.
[GRAPHIC OMITTED: horizontal bar chart PORTFOLIO COMPOSITION COMPARED]
PORTFOLIO COMPOSITION COMPARED
as of 8/31/03 as of 2/29/04
Convertible securities 49.9% 49.4%
Corporate bonds and notes 43.6% 40.2%
Short-term investments 3.8% 8.0%
Common stocks 2.0% 1.7%
Preferred stocks 0.3% 0.4%
Other 0.4% 0.3%
Footnote reads:
This chart shows how the fund's top weightings have changed over the
last six months. Weightings are shown as a percentage of market value.
Holdings will vary over time.
How fund holdings affected performance
Within the busted convertible part of the convertible market, the fund
invested in a significant position in Northrop Grumman, the defense
contractor. As the post-9/11 terrorism concerns have receded, the stock
prices of several defense companies have declined to pre-9/11 levels.
The Northrop Grumman issue came with an attractive yield, is backed by a
large, solid company, and exemplifies the types of holdings we have been
seeking for the fund.
The increase in the fund's holdings of mandatory convertibles toward the
end of the period, while not large, contributed positively to returns.
The credit quality of these securities tends to be higher than that of
busted convertibles, and in this environment, with the potential for
interest rates to rise sometime this year, we feel mandatory
convertibles provide attractive risk-return characteristics because of
their equity sensitivity -- contingent, of course, on continued positive
stock market performance.
[GRAPHIC OMITTED: TOP HOLDINGS]
TOP HOLDINGS
Convertible Securities
1 Northrop Grumman Corp.
Series B, $7.00 cumulative convertible preferred
Capital goods
2 Service Corp. International
Convertible subordinated notes, 6.75%, 2008
Consumer cyclicals
3 United States Cellular Corp.
Convertible liquid yield option notes,
zero coupon, 2015
Communications services
4 Host Marriott Financial Trust
$3.375 convertible preferred
Financial
5 FelCor Lodging Trust, Inc.
Series A, $1.95 cumulative convertible preferred
Financial
Corporate Bonds
1 Dow Jones TRAC-X NA HY T1
144A notes, 7.375%, 2009
Other
2 CSC Holdings, Inc.
Senior notes, 7.875%, 2007
Consumer staples
3 Finova Group, Inc.
Notes, 7.5%, 2009
Financial
4 Qwest Corp.
144A notes, 8.875%, 2012
Communications services
5 Six Flags, Inc.
Senior notes, 8.875%, 2010
Consumer staples
Footnote reads:
These holdings represent 10.8% of the fund's net assets as of 2/29/04.
The fund's holdings will change over time.
One example of a troubled holding that performed well was Silicon
Graphics, a technology company specializing in three-dimensional
graphics and animation, desktop workstations, and Web servers. Early in
2004, the company restructured its convertible bonds, resulting in
securities that were much more sensitive to its underlying stock price.
Shortly after this restructuring, the company's stock more than doubled,
boosting the value of the fund's Silicon Graphics holdings
significantly. We sold approximately two-thirds of the position shortly
before the end of the period and realized an attractive gain for the
fund.
In the high-yield portion of the fund, nearly all of the holdings in the
portfolio contributed positively to returns. Among the fund's larger
positions, cable television company Charter Communications was one of the
top performers. While the firm faced competitive and financial pressures,
the company met expectations and management's moves to refinance debt eased
investor concerns about the company's liquidity.
In addition, finance company Finova Group provided solid returns. The
company had encountered significant difficulties a few years ago,
particularly in its airplane leasing business. The firm has worked to
liquidate assets and manage its sizeable portfolio of loans, and was
helped by a significant loan in 2001 from noted investor Warren Buffett
through a joint venture. The company repaid the loan earlier this year,
ahead of schedule, and prospects for the airline sector have improved
more than expected.
Our sizeable stake in the chemicals sector, where we were more heavily
weighted than the index, also boosted returns, including investments in
Huntsman International, a major producer of basic chemicals and
petrochemicals like ethylene and propylene, and Millennium America (a
subsidiary of Millennium Chemicals*), which owns three specialty
chemical businesses. Although energy prices were high, leading to
skepticism about the sector's prospects, this cyclical sector benefited
from the improving economy.
Among the fund's few detractors during the period were high-yield bonds
issued by Solutia, a diversified specialty chemical company. The firm
made news when it settled a high-profile PCB contamination lawsuit in
Alabama, and appeared to be on its way to working out balance sheet
problems. However, the company surprised the market by filing for
bankruptcy. We eliminated the bonds from the portfolio, although we
still hold a small warrant position, which gives the fund's management
the option to purchase the company's stock in the future.
Please note that all holdings discussed in this report are subject to
review in accordance with the fund's investment strategy and may vary in
the future.
The fund's management teams
The fund is managed by the Putnam Large-Cap Value and Core Fixed-Income
High-Yield teams. The members of the Large-Cap Value Team are David King
(Portfolio Leader), Mike Abata, Bart Geer, Deborah Kuenstner, Cole
Lannum, Christopher Miller, Jeanne Mockard, and Hugh Mullin. The members
of the Core Fixed-Income High-Yield Team are Norm Boucher, Jeffrey
Kaufman, Geoffrey Kelley, Stephen Peacher, Neil Reiner, Paul Scanlon,
Rosemary Thomsen, and Joseph Towell.
* After the close of the reporting period, Lyondell Chemical Co.,
another fund holding, agreed to acquire Millennium Chemicals Inc. This
transaction would also involve a third fund holding, Equistar Chemicals
LP, which is currently 70% owned by Lyondell and 30% owned by
Millennium. Announcement of this merger had a substantial impact on
Millennium's stock price; however, thus far it has had little impact on
the prices of these bonds or their credit profiles.
The outlook for your fund
The following commentary reflects anticipated developments that could
affect your fund over the next six months, as well as your management
teams' plans for responding to them.
The fund's returns over this six-month period have been much higher than
the historical average for these types of securities because of optimal
conditions. There has been tremendous stimulus in the form of tax cuts,
a weaker dollar, increased government spending, and interest rates that
have been at historically low levels for some time. Meanwhile, there
have been few clear signs from the Federal Reserve Board that
significant tightening will occur in 2004. The increased willingness
among investors to accept risk has helped boost the capital markets,
which has also provided economic stimulus.
While we believe it is not likely that the performance of the past six
months will be repeated in the near future, that doesn't necessarily
mean, in our view, that the environment for these markets will turn
negative. The economy is still in a relatively early stage of its
recovery, and this economic backdrop has historically been conducive to
solid performance for these types of securities. We are cautiously
optimistic about the fund's prospects for the remainder of 2004, and we
believe that solid returns from individual securities can be attained.
We will seek to uncover those opportunities, and, as always, monitor
economic and market developments and make necessary adjustments to the
portfolio as we see fit.
The views expressed in this report are exclusively those of Putnam
Management. They are not meant as investment advice. Lower-rated bonds
may offer higher yields in return for more risk.
Performance summary
This section shows your fund's performance during the first half of its
fiscal year, which ended February 29, 2004. In accordance with
regulatory requirements, we also include performance for the most
current calendar quarter-end. Performance should always be considered in
light of a fund's investment strategy. Data represent past performance.
Past performance does not guarantee future results. More recent returns
may be less or more than those shown. Investment return, net asset
value, and market price will fluctuate and you may have a gain or a loss
when you sell your shares.
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TOTAL RETURN FOR PERIODS ENDED 2/29/04
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NAV Market price
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6 months 14.77% 12.29%
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1 year 33.35 24.10
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5 years 64.76 40.75
Annual average 10.50 7.08
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10 years 127.77 108.78
Annual average 8.58 7.64
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Life of fund
(since 7/9/87)
Annual average 10.35 9.40
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Performance does not reflect taxes on reinvested distributions.
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COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 2/29/04
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Lipper
JP Morgan Convertible
Merrill Lynch Chase Global Securities Funds
All-Convertible High Yield (closed-end)
Index Index category average+
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6 months 12.75% 10.92% 14.51%
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1 year 27.20 24.82 37.28
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5 years 49.64 35.37 47.61
Annual average 8.39 6.24 7.44
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10 years 154.31 102.18 116.43
Annual average 9.78 7.29 7.95
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Life of fund
(since 7/9/87)
Annual average --* --** 9.48
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Index and Lipper results should be compared to fund performance at net
asset value.
* Index began operations on 12/31/87.
+ Over the 6-month and 1-, 5-, and 10-year periods ended 2/29/04, there
were 14, 10, 9, and 7 funds, respectively, in this Lipper category.
** Index began operations on 12/31/93.
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PRICE AND DISTRIBUTION INFORMATION 6 MONTHS ENDED 2/29/04
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Distributions (number) 6
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Income $0.279
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Capital gains --
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Total $0.279
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Share value: NAV Market price
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8/31/03 $7.73 $7.31
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2/29/04 8.56 7.92
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Current return (end of period)
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Current dividend rate 1 6.52% 7.05%
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1 Most recent distribution, excluding capital gains, annualized and
divided by NAV or market price at end of period.
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TOTAL RETURN FOR PERIODS ENDED 3/31/04 (MOST RECENT CALENDER QUARTER)
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NAV Market price
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6 months 12.69% 9.17%
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1 year 32.50 23.00
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5 years 65.29 44.91
Annual average 10.57 7.70
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10 years 133.63 124.51
Annual average 8.86 8.42
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Life of fund (since 7/9/87)
Annual average 10.31 9.36
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Terms and definitions
Total return shows how the value of the fund's shares changed over time,
assuming you held the shares through the entire period and reinvested
all distributions in the fund.
Net asset value (NAV) is the value of all your fund's assets, minus any
liabilities divided by the number of outstanding common shares.
Market price is the current trading price of one share of the fund.
Market prices are set by transactions between buyers and sellers on
exchanges such as the American Stock Exchange and the New York Stock
Exchange.
Comparative indexes
JP Morgan Chase Global High Yield Index is an unmanaged index used to
mirror the investable universe of the U.S. dollar global high-yield
corporate debt market of both developed and emerging markets.
Lehman Aggregate Bond Index is an unmanaged index used as a general
measure of U.S. fixed-income securities.
Lehman Global Aggregate Bond Index is an unmanaged index used as a broad
measure of international investment-grade bonds.
Merrill Lynch All-Convertible Index is an unmanaged index of domestic
convertible securities.
Morgan Stanley Capital International (MSCI) EAFE Index is an unmanaged
index of international stocks from Europe, Australasia, and the Far
East.
Russell 2000 Index is an unmanaged index of common stocks that generally
measure performance of small to midsize companies within the Russell
3000 Index.
S&P 500 Index is an unmanaged index of common stock performance.
Indexes assume reinvestment of all distributions and do not account for
fees. Securities and performance of a fund and an index will differ. You
cannot invest directly in an index.
Lipper Inc. is a third-party industry ranking entity that ranks funds
(without sales charges) with similar current investment styles or
objectives as determined by Lipper. Lipper category averages reflect
performance trends for funds within a category and are based on results
at net asset value.
A note about duplicate mailings
In response to investors' requests, the SEC has modified mailing
regulations for proxy statements, semiannual and annual reports, and
prospectuses. Putnam is now able to send a single copy of these
materials to customers who share the same address. This change will
automatically apply to all shareholders except those who notify us. If
you would prefer to receive your own copy, please call Putnam at
1-800-225-1581.
Putnam is committed to managing our mutual funds in the best interests
of our shareholders. Our proxy voting guidelines and policies are
available on the Putnam Individual Investor Web site,
www.putnaminvestments.com, by calling Putnam's Shareholder Services at
1-800-225-1581, or on the SEC's Web site, www.sec.gov.
A guide to the financial statements
These sections of the report, as well as the accompanying Notes,
constitute the fund's financial statements.
The fund's portfolio lists all the fund's investments and their values
as of the last day of the reporting period. Holdings are organized by
asset type and industry sector, country, or state to show areas of
concentration and diversification.
Statement of assets and liabilities shows how the fund's net assets and
share price are determined. All investment and noninvestment assets are
added together. Any unpaid expenses and other liabilities are subtracted
from this total. The result is divided by the number of shares to
determine the net asset value per share, which is calculated separately
for each class of shares. (For funds with preferred shares, the amount
subtracted from total assets includes the net assets allocated to
remarketed preferred shares.)
Statement of operations shows the fund's net investment gain or loss.
This is done by first adding up all the fund's earnings -- from
dividends and interest income -- and subtracting its operating expenses
to determine net investment income (or loss). Then, any net gain or loss
the fund realized on the sales of its holdings -- as well as any
unrealized gains or losses over the period -- is added to or subtracted
from the net investment result to determine the fund's net gain or loss
for the fiscal period.
Statement of changes in net assets shows how the fund's net assets were
affected by distributions to shareholders and by changes in the number
of the fund's shares. It lists distributions and their sources (net
investment income or realized capital gains) over the current reporting
period and the most recent fiscal year-end. The distributions listed
here may not match the sources listed in the Statement of operations
because the distributions are determined on a tax basis and may be paid
in a different period from the one in which they were earned.
Financial highlights provide an overview of the fund's investment
results, per-share distributions, expense ratios, net investment
income ratios, and portfolio turnover in one summary table, reflecting
the five most recent reporting periods. In a semiannual report, the
highlight table also includes the current reporting period. For open-end
funds, a separate table is provided for each share class.
The fund's portfolio
February 29, 2004 (Unaudited)
Corporate bonds and notes (41.0%) (a)
Principal amount Value
Basic Materials (3.9%)
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$1,000 Abitibi-Consolidated Finance LP
company guaranty 7 7/8s, 2009 $1,078
95,000 Acetex Corp. sr. notes 10 7/8s, 2009
(Canada) 104,500
110,000 AK Steel Corp. company guaranty
7 7/8s, 2009 97,350
10,000 AK Steel Corp. company guaranty
7 3/4s, 2012 8,600
80,000 Appleton Papers, Inc. company
guaranty Ser. B, 12 1/2s, 2008 91,000
40,000 Armco, Inc. sr. notes 8 7/8s, 2008 35,200
55,000 Avecia Group PLC company guaranty
11s, 2009 (United Kingdom) 47,025
75,000 Better Minerals & Aggregates Co.
company guaranty 13s, 2009 54,000
100,000 Compass Minerals Group, Inc. company
guaranty 10s, 2011 114,000
110,000 Compass Minerals International Inc.
sr. notes stepped-coupon zero %
(12 3/4s, 12/15/07), 2012 (STP) 89,100
32,000 Equistar Chemicals LP notes 8 3/4s,
2009 32,720
219,000 Equistar Chemicals LP/Equistar
Funding Corp. company guaranty
10 1/8s,2008 237,600
55,000 Equistar Chemicals LP/Equistar
Funding Corp. sr. notes 10 5/8s,
2011 59,675
55,000 Four M Corp. sr. notes Ser. B, 12s,
2006 55,000
60,000 Georgia-Pacific Corp. bonds 7 3/4s,
2029 58,800
55,000 Georgia-Pacific Corp. debs. 7.7s,
2015 58,025
4,000 Georgia-Pacific Corp. sr. notes
7 3/8s, 2008 4,320
95,000 Gerdau Ameristeel Corp. sr. notes
10 3/8s, 2011 (Canada) 106,875
238,000 Hercules, Inc. company guaranty
11 1/8s, 2007 283,200
161,000 HMP Equity Holdings Corp. 144A sr.
disc. notes zero %, 2008 85,330
75,000 Huntsman Advanced Materials, LLC
144A sec. notes 11s, 2010 84,375
165,000 Huntsman ICI Chemicals, Inc. company
guaranty 10 1/8s, 2009 167,877
180,000 Huntsman ICI Holdings sr. disc.
notes zero %, 2009 84,600
EUR 10,000 Huntsman International, LLC sr. sub.
notes Ser. EXCH, 10 1/8s, 2009 11,926
$55,000 Huntsman LLC 144A company guaranty
11 5/8s, 2010 57,475
170,000 ISP Chemco, Inc. company guaranty
Ser. B, 10 1/4s, 2011 191,250
35,000 ISP Holdings, Inc. sec. sr. notes
Ser. B, 10 5/8s, 2009 38,675
10,000 Kaiser Aluminum & Chemical Corp. sr.
notes Ser. B, 10 7/8s, 2006 (In
default) (NON) 8,950
120,000 Kaiser Aluminum & Chemical Corp. sr.
sub. notes 12 3/4s, 2003 (In
default) (DEF) (NON) 17,700
4,000 Louisiana-Pacific Corp. sr. sub.
notes 10 7/8s, 2008 4,690
10,000 Lyondell Chemical Co. bonds 11 1/8s,
2012 10,900
15,000 Lyondell Chemical Co. company
guaranty 9 1/2s, 2008 15,600
270,000 Lyondell Chemical Co. notes Ser. A,
9 5/8s, 2007 283,500
100,000 MDP Acquisitions PLC sr. notes
9 5/8s, 2012 (Ireland) 112,500
49,559 MDP Acquisitions PLC sub. notes
15 1/2s, 2013 (Ireland) (PIK) 56,993
155,000 Millennium America, Inc. company
guaranty 9 1/4s, 2008 168,175
25,000 Millennium America, Inc. company
guaranty 7 5/8s, 2026 23,750
20,000 Millennium America, Inc. 144A sr.
notes 9 1/4s, 2008 21,700
40,000 Nalco Co. 144A sr. notes 7 3/4s,
2011 41,600
EUR 10,000 Nalco Co. 144A sr. notes 7 3/4s,
2011 12,547
EUR 10,000 Nalco Co. 144A sr. sub. notes 9s,
2013 12,547
$175,000 Nalco Co. 144A sr. sub. notes
8 7/8s, 2013 183,750
30,000 Noveon International company
guaranty Ser. B, 11s, 2011 34,350
2,000 OM Group, Inc. company guaranty
9 1/4s, 2011 2,100
45,000 Pacifica Papers, Inc. sr. notes 10s,
2009 (Canada) 47,306
75,504 PCI Chemicals Canada sec. sr. notes
10s, 2008 (Canada) 73,616
23,909 Pioneer Cos., Inc. sec. FRN 4.663s,
2006 (acquired various dates from
9/11/97 to 1/7/00, cost $43,530)
(RES) 23,311
128,000 Potlatch Corp. company guaranty 10s,
2011 144,000
30,000 Resolution Performance Products, LLC
sr. notes 9 1/2s, 2010 30,000
25,000 Resolution Performance Products, LLC
144A sec. notes 8s, 2009 25,250
EUR 30,000 Rhodia SA unsub. Ser. EMTN, 6 1/4s,
2005 (France) 36,524
$40,000 Salt Holdings Corp. 144A sr. disc.
notes stepped-coupon zero % (12s,
6/1/06), 2013 (STP) 30,400
EUR 65,000 SGL Carbon SA 144A sr. notes 8 1/2s,
2012 (Luxembourg) 82,970
$80,000 Steel Dynamics, Inc. company
guaranty 9 1/2s, 2009 88,800
120,000 Stone Container Corp. sr. notes
9 3/4s, 2011 133,800
45,000 Stone Container Corp. sr. notes
8 3/8s, 2012 48,881
30,000 Texas Petrochemical Corp. sr. sub.
notes 11 1/8s, 2006 (In default)
(NON) 12,900
305,000 Ucar Finance, Inc. company guaranty
10 1/4s, 2012 347,700
55,000 United Agri Products 144A sr. notes
8 1/4s, 2011 56,925
80,000 United States Steel Corp. sr. notes
9 3/4s, 2010 90,200
130,000 WCI Steel, Inc. sr. notes Ser. B,
10s, 2004 (In default) (NON) 63,700
5,500 Weirton Steel Corp. sr. notes 10s,
2008 (In default) (NON) 1,980
5,729 Wheeling-Pittsburgh Steel Corp. sr.
notes 6s, 2010 3,724
11,459 Wheeling-Pittsburgh Steel Corp. sr.
notes 5s, 2011 7,563
40,000 WHX Corp. sr. notes 10 1/2s, 2005 36,400
--------------
4,656,878
Capital Goods (4.4%)
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115,000 AEP Industries, Inc. sr. sub. notes
9 7/8s, 2007 118,163
190,000 AGCO Corp. company guaranty 9 1/2s,
2008 208,050
96,410 Air2 US 144A sinking fund Ser. D,
12.266s, 2020 (In default) (NON) 1
230,000 Allied Waste North America, Inc.
company guaranty Ser. B, 9 1/4s,
2012 259,325
177,000 Allied Waste North America, Inc.
company guaranty Ser. B, 8 1/2s,
2008 197,355
120,000 Allied Waste North America, Inc.
company guaranty Ser. B, 7 5/8s,
2006 127,200
75,000 Allied Waste North America, Inc.
144A sec. notes 6 1/2s, 2010 76,125
124,000 Argo-Tech Corp. company guaranty
8 5/8s, 2007 123,690
150,000 Argo-Tech Corp. company guaranty
Ser. D, 8 5/8s, 2007 149,625
30,000 BE Aerospace, Inc. sr. notes 8 1/2s,
2010 32,550
85,000 BE Aerospace, Inc. sr. sub. notes
9 1/2s, 2008 84,788
47,000 BE Aerospace, Inc. sr. sub. notes
Ser. B, 8 7/8s, 2011 45,943
40,000 BE Aerospace, Inc. sr. sub. notes
Ser. B, 8s, 2008 38,000
32,000 Berry Plastics Corp. company
guaranty 10 3/4s, 2012 37,120
105,000 Blount, Inc. company guaranty 13s,
2009 113,400
125,000 Blount, Inc. company guaranty 7s,
2005 127,500
111,000 Briggs & Stratton company guaranty
8 7/8s, 2011 131,535
40,000 Browning-Ferris Industries, Inc.
debs. 7.4s, 2035 38,600
40,000 Browning-Ferris Industries, Inc. sr.
notes 6 3/8s, 2008 41,200
90,000 Buhrmann US, Inc. company guaranty
12 1/4s, 2009 100,800
70,000 Crown Holdings SA notes 10 7/8s,
2013 (France) 81,550
240,000 Crown Holdings SA notes 9 1/2s, 2011
(France) 270,000
60,000 Decrane Aircraft Holdings Co.
company guaranty Ser. B, 12s, 2008 39,600
109,000 Earle M. Jorgensen Co. sec. notes
9 3/4s, 2012 120,990
100,000 FIMEP SA sr. notes 10 1/2s, 2013
(France) 119,250
EUR 50,000 Flender Holdings 144A sr. notes 11s,
2010 (Denmark) 71,743
$78,000 Flowserve Corp. company guaranty
12 1/4s, 2010 89,700
15,000 Fonda Group, Inc. sr. sub. notes
Ser. B, 9 1/2s, 2007 15,300
130,000 Hexcel Corp. sr. sub. notes 9 3/4s,
2009 136,175
DEM 95,000 Impress Metal Packaging Holding NV
sr. sub. notes 9 7/8s,
2007 (Netherlands) 56,118
$105,000 Invensys, PLC notes 9 7/8s, 2011
(United Kingdom) 103,054
EUR 35,000 Invensys, PLC sr. unsub. notes
5 1/2s, 2005 (United Kingdom) 44,307
$70,000 K&F Industries, Inc. sr. sub. notes
Ser. B, 9 5/8s, 2010 78,225
16,000 K&F Industries, Inc. sr. sub. notes
Ser. B, 9 1/4s, 2007 16,520
50,000 L-3 Communications Corp. company
guaranty 7 5/8s, 2012 55,500
40,000 L-3 Communications Corp. company
guaranty 6 1/8s, 2013 41,100
195,000 Laidlaw International, Inc. 144A sr.
notes 10 3/4s, 2011 223,763
35,000 Legrand SA debs. 8 1/2s, 2025
(France) 37,800
12,000 Manitowoc Co., Inc. (The) company
guaranty 10 1/2s, 2012 13,650
EUR 25,000 Manitowoc Co., Inc. (The) company
guaranty 10 3/8s, 2011 34,629
$30,000 Manitowoc Co., Inc. (The) sr. notes
7 1/8s, 2013 31,500
47,000 Motors and Gears, Inc. sr. notes
Ser. D, 10 3/4s, 2006 41,125
5,000 Owens-Brockway Glass company
guaranty 8 7/8s, 2009 5,450
75,000 Owens-Brockway Glass company
guaranty 8 1/4s, 2013 78,938
70,000 Owens-Brockway Glass company
guaranty 7 3/4s, 2011 74,200
102,000 Owens-Brockway Glass sr. sec. notes
8 3/4s, 2012 111,945
70,000 Pliant Corp. sec. notes 11 1/8s,
2009 72,975
75,000 Roller Bearing Company of America
company guaranty Ser. B, 9 5/8s,
2007 73,875
105,000 Sensus Metering Systems, Inc. 144A
sr. sub. notes 8 5/8s, 2013 106,706
175,000 Sequa Corp. sr. notes Ser. B,
8 7/8s, 2008 192,500
20,000 Siebe PLC 144A notes 7 1/8s, 2007
(United Kingdom) 19,750
65,000 Solo Cup Co. 144A sr. sub. notes
8 1/2s, 2014 67,763
70,000 TD Funding Corp. company guaranty
8 3/8s, 2011 73,850
170,000 Tekni-Plex, Inc. company guaranty
Ser. B, 12 3/4s, 2010 183,600
65,000 Tekni-Plex, Inc. 144A sr. sec. notes
8 3/4s, 2013 67,763
25,000 Terex Corp. company guaranty 9 1/4s,
2011 28,000
46,000 Terex Corp. company guaranty Ser. B,
10 3/8s, 2011 52,095
75,000 Titan Corp. (The) 144A sr. sub.
notes 8s, 2011 85,500
88,000 Trimas Corp. company guaranty
9 7/8s, 2012 95,040
50,000 Vought Aircraft Industries, Inc.
144A sr. notes 8s, 2011 51,750
--------------
5,214,269
Communication Services (3.6%)
-------------------------------------------------------------------------------
58,000 Alamosa Delaware, Inc. company
guaranty 11s, 2010 62,205
105,000 Alamosa Delaware, Inc. 144A sr.
notes 8 1/2s, 2012 100,275
25,000 American Cellular Corp. company
guaranty 9 1/2s, 2009 23,250
120,000 American Cellular Corp. sr. notes
Ser. B, 10s, 2011 120,600
230,000 American Tower Corp. sr. notes
9 3/8s, 2009 243,800
55,000 American Tower Corp. 144A sr. notes
7 1/2s, 2012 52,800
100,000 American Towers, Inc. 144A sr. sub.
notes 7 1/4s, 2011 102,250
30,000 Asia Global Crossing, Ltd. sr. notes
13 3/8s, 2010 (Bermuda) (In default)
(NON) 3,375
240,000 Centennial Cellular Operating Co.
company guaranty 10 1/8s, 2013 252,000
20,000 Cincinnati Bell Telephone Co.
company guaranty 6.3s, 2028 18,900
100,000 Cincinnati Bell, Inc. company
guaranty 7 1/4s, 2013 103,000
50,000 Cincinnati Bell, Inc. notes 7 1/4s,
2023 50,000
60,000 Cincinnati Bell, Inc. sr. sub. notes
8 3/8s, 2014 63,150
121,000 Crown Castle International Corp. sr.
notes 9 3/8s, 2011 133,100
185,000 Dobson Communications Corp. sr.
notes 8 7/8s, 2013 159,563
35,000 Eircom Funding notes 8 1/4s, 2013
(Ireland) 38,850
50,000 Fairpoint Communications, Inc. sr.
sub. notes 12 1/2s, 2010 54,000
125,000 Inmarsat Finance PLC 144A company
guaranty 7 5/8s, 2012 (United
Kingdom) 131,250
140,000 iPCS, Inc. sr. disc. notes
stepped-coupon zero % (14s,7/15/05),
2010 (In default) (NON) (STP) 38,150
40,000 IWO Holdings, Inc. company guaranty
14s, 2011 (In default) (NON) 10,800
10,000 Level 3 Communications, Inc. sr.
notes 9 1/8s, 2008 8,325
165,000 Level 3 Financing Inc. 144A sr.
notes 10 3/4s, 2011 165,825
95,000 Madison River Capital Corp. sr.
notes 13 1/4s, 2010 104,500
53,000 Nextel Communications, Inc. sr.
notes 9 1/2s, 2011 59,493
5,000 Nextel Communications, Inc. sr.
notes 9 3/8s, 2009 5,431
210,000 Nextel Communications, Inc. sr.
notes 7 3/8s, 2015 226,275
41,000 Nextel Partners, Inc. sr. notes
12 1/2s, 2009 47,560
75,000 Nextel Partners, Inc. sr. notes 11s,
2010 83,063
175,000 Nextel Partners, Inc. sr. notes
8 1/8s, 2011 184,625
74,000 PanAmSat Corp. company guaranty
8 1/2s, 2012 76,960
180,000 Qwest Communications International,
Inc. 144A sr. notes 7 1/2s, 2014 170,100
370,000 Qwest Corp. 144A notes 8 7/8s, 2012 421,800
50,000 Qwest Services Corp. 144A notes 14s,
2014 60,500
5,000 Rogers Cantel, Ltd. debs. 9 3/8s,
2008 (Canada) 5,250
65,000 Rogers Wireless, Inc. sec. notes
9 5/8s, 2011 (Canada) 79,300
45,000 Rural Cellular Corp. sr. sub. notes
Ser. B, 9 5/8s, 2008 43,200
25,000 SBA Communications Corp. sr. notes
10 1/4s, 2009 25,063
45,000 SBA Telecommunications Inc. 144A sr.
disc.notes stepped-coupon zero %
(9 3/4s, 12/15/07), 2011 (STP) 31,050
184,000 Telus Corp. notes 8s, 2011 (Canada) 219,725
49,000 Telus Corp. notes 7 1/2s, 2007
(Canada) 55,384
50,000 Time Warner Telecom, Inc. 144A sr.
notes 9 1/4s, 2014 49,625
80,000 TSI Telecommunication Services, Inc.
company guaranty Ser. B, 12 3/4s,
2009 88,400
52,000 UbiquiTel Operating Co. bonds
stepped-coupon zero % (14s,
4/15/05), 2010 (STP) 48,880
50,000 UbiquiTel Operating Co. 144A sr.
notes 9 7/8s, 2011 48,625
60,000 US UnWired, Inc. company guaranty
stepped-coupon Ser. B, zero %
(13 3/8s, 11/1/04), 2009 (STP) 55,500
145,000 Western Wireless Corp. sr. notes
9 1/4s, 2013 152,250
--------------
4,278,027
Conglomerates (0.4%)
-------------------------------------------------------------------------------
153,000 Tyco International Group SA company
guaranty 7s, 2028 (Luxembourg) 162,453
165,000 Tyco International Group SA company
guaranty 6 7/8s, 2029 (Luxembourg) 172,771
20,000 Tyco International Group SA company
guaranty 6 3/4s, 2011 (Luxembourg) 22,093
1,000 Tyco International Group SA company
guaranty 6 3/8s, 2005 (Luxembourg) 1,050
38,000 Tyco International Group SA notes
6 3/8s, 2011 (Luxembourg) 41,054
35,000 Tyco International Group SA 144A sr.
notes 6s, 2013 (Luxembourg) 36,620
--------------
436,041
Consumer Cyclicals (9.9%)
-------------------------------------------------------------------------------
100,000 Ameristar Casinos, Inc. company
guaranty 10 3/4s, 2009 115,000
50,000 Argosy Gaming Co. sr. sub. notes 9s,
2011 55,750
95,000 Argosy Gaming Co. 144A sr. sub.
notes 7s, 2014 97,256
40,000 ArvinMeritor, Inc. notes 8 3/4s,
2012 44,800
65,000 Asbury Automotive Group, Inc. 144A
sr. sub. notes 8s, 2014 65,163
160,000 Autonation, Inc. company guaranty
9s, 2008 184,800
60,000 Beazer Homes USA, Inc. company
guaranty 8 5/8s, 2011 66,600
20,000 Beazer Homes USA, Inc. company
guaranty 8 3/8s, 2012 22,200
15,000 Beazer Homes USA, Inc. 144A sr.
notes 6 1/2s, 2013 15,263
40,000 Building Materials Corp. company
guaranty 8s, 2008 40,000
40,000 CanWest Media, Inc. sr. sub. notes
10 5/8s, 2011 (Canada) 45,300
50,000 Chumash Casino & Resort Enterprise
144A sr. notes 9s, 2010 54,688
158,000 Coinmach Corp. sr. notes 9s, 2010 168,270
115,000 Collins & Aikman Products company
guaranty 10 3/4s, 2011 112,125
30,000 D.R. Horton, Inc. sr. notes 7 7/8s,
2011 34,350
20,000 D.R. Horton, Inc. sr. notes 6 7/8s,
2013 21,350
130,000 D.R. Horton, Inc. sr. notes 5 7/8s,
2013 131,300
20,000 Dana Corp. notes 10 1/8s, 2010 23,300
100,000 Dana Corp. notes 9s, 2011 120,250
20,000 Dana Corp. notes 7s, 2029 19,700
30,000 Dana Corp. notes 6 1/4s, 2004 30,000
105,000 Dayton Superior Corp. 144A sec.
notes 10 3/4s, 2008 110,250
20,000 Delco Remy International, Inc.
company guaranty 11s, 2009 21,100
65,000 Delco Remy International, Inc.
company guaranty 10 5/8s, 2006 65,325
150,000 Dex Media West, LLC 144A sr. notes
8 1/2s, 2010 167,625
70,000 Dex Media, Inc. 144A disc. notes
stepped-coupon zero % (9s,
11/15/08), 2013 (STP) 46,725
80,000 Dex Media, Inc. 144A notes 8s, 2013 80,000
81,000 Dura Operating Corp. company
guaranty Ser. D, 9s, 2009 82,620
25,000 Dura Operating Corp. 144A sr. notes
8 5/8s, 2012 26,875
130,000 FelCor Lodging LP company guaranty
9 1/2s, 2008 (R) 138,125
56,000 Gap, Inc. (The) notes 6.9s, 2007 61,880
95,000 Gaylord Entertainment Co. 144A sr.
notes 8s, 2013 100,581
205,000 Goodyear Tire & Rubber Co. (The)
notes 7.857s, 2011 174,250
30,000 Goodyear Tire & Rubber Co. (The)
notes 6 3/8s, 2008 25,800
129,000 Herbst Gaming, Inc. sec. notes
Ser. B, 10 3/4s, 2008 144,803
125,000 Hilton Hotels Corp. notes 7 5/8s,
2012 141,250
224,000 HMH Properties, Inc. company
guaranty Ser. B, 7 7/8s, 2008 231,840
97,329 Hollinger Participation Trust 144A
sr. notes 12 1/8s, 2010 (Canada)
(PIK) 112,172
85,000 Hollywood Entertainment Corp. sr.
sub. notes 9 5/8s, 2011 87,550
92,000 Hollywood Park, Inc. company
guaranty Ser. B, 9 1/4s, 2007 94,990
215,000 Horseshoe Gaming Holdings company
guaranty 8 5/8s, 2009 226,556
30,000 Host Marriott LP company guaranty
Ser. G, 9 1/4s, 2007 (R) 33,225
30,000 Host Marriott LP sr. notes 7 1/8s,
2013 (R) 30,975
75,000 Host Marriott LP sr. notes Ser. E,
8 3/8s, 2006 (R) 79,875
131,000 Icon Health & Fitness company
guaranty 11 1/4s, 2012 149,995
99,000 IESI Corp. company guaranty 10 1/4s,
2012 107,910
65,000 Inn of the Mountain Gods 144A sr.
notes 12s, 2010 70,688
30,000 Interface, Inc. 144A sr. sub. notes
9 1/2s, 2014 29,700
65,000 ITT Corp. debs. 7 3/8s, 2015 69,225
100,000 ITT Corp. notes 6 3/4s, 2005 104,750
90,000 JC Penney Co., Inc. debs. 7.95s,
2017 101,700
11,000 JC Penney Co., Inc. debs. 7.65s,
2016 12,320
130,000 JC Penney Co., Inc. debs. 7 1/8s,
2023 140,725
75,000 JC Penney Co., Inc. notes 9s, 2012 91,500
5,000 JC Penney Co., Inc. notes 8s, 2010 5,775
180,000 John Q. Hammons Hotels LP/John Q.
Hammons Hotels Finance Corp. III
1st mtge. Ser. B, 8 7/8s, 2012 195,750
135,000 Jostens Holding Corp. 144A sr. disc.
notes stepped-coupon zero %
(10 1/4s, 12/1/08), 2013 (STP) 89,775
80,000 Jostens, Inc. sr. sub. notes
12 3/4s, 2010 91,200
60,000 K. Hovnanian Enterprises, Inc.
company guaranty 10 1/2s, 2007 70,500
75,000 K. Hovnanian Enterprises, Inc.
company guaranty 8 7/8s, 2012 82,313
30,000 K. Hovnanian Enterprises, Inc.
company guaranty 8s, 2012 32,550
40,000 K. Hovnanian Enterprises, Inc. sr.
notes 6 1/2s, 2014 40,500
55,000 K. Hovnanian Enterprises, Inc. 144A
sr. notes 6 3/8s, 2014 54,588
2,000 KB Home sr. sub. notes 9 1/2s, 2011 2,250
80,000 Lamar Media Corp. company guaranty
7 1/4s, 2013 86,400
32,000 Lear Corp. company guaranty Ser. B,
8.11s, 2009 37,600
340,000 Lear Corp. company guaranty Ser. B,
7.96s, 2005 362,100
EUR 30,000 Lear Corp. sr. notes 8 1/8s, 2008 42,300
$191,000 Levi Strauss & Co. sr. notes
12 1/4s, 2012 131,790
60,000 Mandalay Resort Group sr. notes
6 1/2s, 2009 63,300
140,000 MediaNews Group Inc. 144A sr. sub.
notes 6 7/8s, 2013 144,200
70,000 Meristar Hospitality Corp. company
guaranty 9 1/8s, 2011 (R) 72,450
80,000 Meristar Hospitality Corp. company
guaranty 9s, 2008 (R) 82,600
40,000 Meritage Corp. company guaranty
9 3/4s, 2011 44,800
55,000 Meritor Automotive, Inc. notes 6.8s,
2009 57,063
85,000 Metaldyne Corp. 144A sr. notes 10s,
2013 87,975
65,000 MGM Mirage, Inc. company guaranty
8 1/2s, 2010 75,888
1,000 MGM Mirage, Inc. company guaranty
8 3/8s, 2011 1,153
95,000 Mohegan Tribal Gaming Authority sr.
notes 8 1/8s, 2006 102,125
30,000 Mohegan Tribal Gaming Authority sr.
sub. notes 8 3/8s, 2011 33,075
65,000 Mohegan Tribal Gaming Authority sr.
sub. notes 6 3/8s, 2009 67,925
80,000 Nortek Holdings, Inc. 144A sr. notes
stepped-coupon zero % (10s,
11/15/07), 2011 (STP) 59,000
55,000 Nortek, Inc. sr. sub. notes Ser. B,
9 7/8s, 2011 61,325
20,000 Nortek, Inc. 144A sr. notes Ser. B,
9 1/8s, 2007 20,608
60,000 Oxford Industries, Inc. 144A sr.
notes 8 7/8s, 2011 63,900
25,000 Park Place Entertainment Corp. sr.
notes 7 1/2s, 2009 27,813
65,000 Park Place Entertainment Corp. sr.
notes 7s, 2013 70,688
161,000 Park Place Entertainment Corp. sr.
sub. notes 8 7/8s, 2008 182,333
110,000 Penn National Gaming, Inc. company
guaranty Ser. B, 11 1/8s, 2008 123,475
132,000 Penn National Gaming, Inc. sr. sub.
notes 8 7/8s, 2010 141,900
30,000 Phillips-Van Heusen Corp. 144A sr.
notes 7 1/4s, 2011 30,150
75,000 Pinnacle Entertainment, Inc. sr.
sub. notes 8 3/4s, 2013 77,438
65,000 Pinnacle Entertainment, Inc. 144A
sr. sub. notes 8 1/4s, 2012 64,533
30,000 PRIMEDIA, Inc. company guaranty
8 7/8s, 2011 30,975
140,000 PRIMEDIA, Inc. company guaranty
7 5/8s, 2008 140,000
150,000 PRIMEDIA, Inc. 144A sr. notes 8s,
2013 150,375
55,000 Reader's Digest Association, Inc.
(The) 144A sr. notes 6 1/2s, 2011 55,000
103,000 Resorts International Hotel and
Casino, Inc. company guaranty
11 1/2s, 2009 113,815
15,000 RH Donnelley Finance Corp. I company
guaranty 8 7/8s, 2010 16,950
134,000 RH Donnelley Finance Corp. I 144A
sr. notes 8 7/8s, 2010 151,420
77,000 RH Donnelley Finance Corp. I 144A
sr. sub. notes 10 7/8s, 2012 91,630
80,000 Riviera Holdings Corp. company
guaranty 11s, 2010 84,000
82,000 Russell Corp. company guaranty
9 1/4s, 2010 86,510
175,000 Saks, Inc. 144A company guaranty 7s,
2013 182,438
246,000 Samsonite Corp. sr. sub. notes
10 3/4s, 2008 256,455
64,000 Schuler Homes, Inc. company guaranty
10 1/2s, 2011 74,640
265,000 Sealy Mattress Co. sr. sub. notes
Ser. B, 9 7/8s, 2007 274,275
10,000 Service Corp. International notes
7.2s, 2006 10,475
5,000 Service Corp. International notes
6 7/8s, 2007 5,225
21,000 Service Corp. International notes
6 1/2s, 2008 21,525
194,000 Service Corp. International notes
6s, 2005 198,850
25,000 Service Corp. International notes
Ser. (a), 7.7s, 2009 26,750
79,000 Starwood Hotels & Resorts Worldwide,
Inc. company guaranty 7 7/8s, 2012 88,085
71,000 Starwood Hotels & Resorts Worldwide,
Inc. company guaranty 7 3/8s, 2007 76,858
169,000 Station Casinos, Inc. sr. notes
8 3/8s, 2008 181,675
75,000 Station Casinos, Inc. 144A sr. sub.
notes 6 7/8s, 2016 75,750
45,000 Technical Olympic USA, Inc. company
guaranty 10 3/8s, 2012 51,075
40,000 Technical Olympic USA, Inc. company
guaranty 9s, 2010 43,300
30,000 Tenneco Automotive, Inc. company
guaranty Ser. B, 11 5/8s, 2009 32,400
100,000 Tenneco Automotive, Inc. sec. notes
Ser. B, 10 1/4s, 2013 116,500
60,000 Tommy Hilfiger USA, Inc. company
guaranty 6.85s, 2008 62,100
283,000 Trump Atlantic City Associates
company guaranty 11 1/4s, 2006 232,060
209,000 Trump Casino Holdings, LLC company
guaranty 11 5/8s, 2010 207,433
70,000 United Auto Group, Inc. company
guaranty 9 5/8s, 2012 77,350
101,000 Venetian Casino Resort, LLC company
guaranty 11s, 2010 116,150
115,000 Vertis, Inc. company guaranty
Ser. B, 10 7/8s, 2009 117,300
65,000 Vertis, Inc. sec. notes 9 3/4s, 2009 69,225
100,000 Vertis, Inc. sub. notes 13 1/2s,
2009 98,750
40,000 Von Hoffman Press, Inc. company
guaranty 10 3/8s, 2007 39,400
75,000 Von Hoffman Press, Inc. company
guaranty 10 1/4s, 2009 78,000
59,035 Von Hoffman Press, Inc. debs. 13s,
2009 (PIK) 52,836
21,000 WCI Communities, Inc. company
guaranty 10 5/8s, 2011 23,573
101,000 WCI Communities, Inc. company
guaranty 9 1/8s, 2012 110,595
59,000 William Carter Holdings Co. (The)
company guaranty Ser. B, 10 7/8s,
2011 68,440
35,000 WRC Media Corp. sr. sub. notes
12 3/4s, 2009 35,306
--------------
11,736,947
Consumer Staples (6.1%)
-------------------------------------------------------------------------------
10,000 Adelphia Communications Corp. notes
Ser. B, 9 7/8s, 2005 (In default)
(NON) 9,650
20,000 Adelphia Communications Corp. sr.
notes 10 7/8s, 2010 (In default)
(NON) 19,500
235,000 Adelphia Communications Corp. sr.
notes Ser. B, 9 7/8s, 2007 (In
default) (NON) 226,775
80,000 Affinity Group Inc. 144A sr. sub.
notes 9s, 2012 83,000
40,000 AMC Entertainment, Inc. sr. sub.
notes 9 7/8s, 2012 44,100
29,000 AMC Entertainment, Inc. sr. sub.
notes 9 1/2s, 2011 30,378
160,000 AMC Entertainment, Inc. sr. sub.
notes 9 1/2s, 2009 164,200
80,000 AMC Entertainment, Inc. 144A sr.
sub. notes 8s, 2014 79,800
148,000 Armkel, LLC/Armkel Finance sr. sub.
notes 9 1/2s, 2009 163,910
60,000 Atlantic Broadband Finance LLC 144A
sr. sub. notes 9 3/8s, 2014 60,150
136,000 Brand Services, Inc. company
guaranty 12s, 2012 159,120
90,000 Capital Records, Inc. 144A company
guaranty 8 3/8s, 2009 95,285
19,000 Charter Communications Holdings,
LLC/Capital Corp. sr. disc. notes
stepped-coupon zero % (11 3/4s,
5/15/06), 2011 (STP) 12,445
35,000 Charter Communications Holdings,
LLC/Capital Corp. sr. disc. notes
stepped-coupon zero % (11 3/4s,
1/15/05), 2010 (STP) 28,525
365,000 Charter Communications Holdings,
LLC/Capital Corp. sr. notes
11 1/8s, 2011 323,938
70,000 Charter Communications Holdings,
LLC/Capital Corp. sr. notes
10 3/4s, 2009 61,600
60,000 Charter Communications Holdings,
LLC/Capital Corp. sr. notes
10 1/4s, 2010 52,050
120,000 Charter Communications Holdings,
LLC/Capital Corp. sr. notes 10s,
2011 100,200
63,000 Charter Communications Holdings,
LLC/Capital Corp. sr. notes 9 5/8s,
2009 53,708
61,000 Charter Communications Holdings,
LLC/Capital Corp. sr. notes 8 5/8s,
2009 50,783
90,000 Cinemark USA, Inc. sr. sub. notes
9s, 2013 100,575
70,000 Cinemark USA, Inc. sr. sub. notes
Ser. B, 8 1/2s, 2008 72,800
35,000 Constellation Brands, Inc. company
guaranty Ser. B, 8s, 2008 38,850
5,000 Constellation Brands, Inc. sr. sub.
notes Ser. B, 8 1/8s, 2012 5,425
3,000 CSC Holdings, Inc. debs. Ser. B,
8 1/8s, 2009 3,270
412,000 CSC Holdings, Inc. sr. notes 7 7/8s,
2007 443,930
60,000 CSC Holdings, Inc. sr. sub. debs.
10 1/2s, 2016 68,850
30,000 Dean Foods Co. sr. notes 6 5/8s,
2009 31,800
40,000 Del Monte Corp. company guaranty
Ser. B, 9 1/4s, 2011 44,300
80,000 Del Monte Corp. sr. sub. notes
8 5/8s, 2012 88,400
175,000 DirecTV Holdings, LLC sr. notes
8 3/8s, 2013 199,063
271,000 Diva Systems Corp. sr. disc. notes
Ser. B, 12 5/8s, 2008 (In default)
(NON) 16,938
155,000 Doane Pet Care Co. sr. sub. debs.
9 3/4s, 2007 141,050
35,000 Dole Food Co. sr. notes 8 7/8s, 2011 37,538
25,000 Dole Food Co. sr. notes 8 5/8s, 2009 26,875
90,000 Domino's, Inc. sr. sub. notes
8 1/4s, 2011 96,750
20,000 Eagle Family Foods company guaranty
Ser. B, 8 3/4s, 2008 16,000
30,000 Echostar DBS Corp. sr. notes
10 3/8s, 2007 32,775
42,000 Echostar DBS Corp. sr. notes 9 1/8s,
2009 47,460
220,000 Echostar DBS Corp. 144A sr. notes
6 3/8s, 2011 233,200
35,000 Elizabeth Arden, Inc. 144A company
guaranty 7 3/4s, 2014 36,138
154,000 Fleming Cos., Inc. company guaranty
10 1/8s, 2008 (In default) (NON) 25,410
9,000 Fleming Cos., Inc. sr. notes 9 1/4s,
2010 (In default) (NON) 1,485
210,000 Granite Broadcasting Corp. 144A sec.
notes 9 3/4s, 2010 206,325
52,000 Gray Television, Inc. company
guaranty 9 1/4s, 2011 57,850
110,000 Hasbro, Inc. notes 5.6s, 2005 114,923
2,287 Knology, Inc. 144A sr. notes 12s,
2009 (PIK) 2,321
71,000 Land O'Lakes, Inc. sr. notes 8 3/4s,
2011 61,770
50,000 Mediacom LLC/Mediacom Capital Corp.
sr. notes 9 1/2s, 2013 50,750
55,000 North Atlantic Trading Co. 144A sr.
notes 9 1/4s, 2012 56,375
35,000 ONO Finance PLC sr. notes 14s, 2011
(United Kingdom) 39,025
15,000 ONO Finance PLC sr. notes 13s, 2009
(United Kingdom) 15,900
EUR 20,000 ONO Finance PLC sr. notes Ser. REGS,
14s, 2011 (United Kingdom) 27,331
$10,000 Pegasus Communications Corp. sr.
notes Ser. B, 9 3/4s, 2006 9,100
75,000 Pegasus Satellite sr. notes 12 3/8s,
2006 69,750
55,000 Pinnacle Foods Holding Corp. 144A
sr. sub. notes 8 1/4s, 2013 57,613
206,000 Playtex Products, Inc. company
guaranty 9 3/8s, 2011 191,065
110,000 Playtex Products, Inc. 144A secd.
notes 8s, 2011 114,400
80,000 Premier International Foods PLC sr.
notes 12s, 2009 (United Kingdom) 86,800
25,000 Quebecor Media, Inc. sr. disc. notes
stepped-coupon zero % (13 3/4s,
7/15/06), 2011 (Canada) (STP) 22,125
196,000 Quebecor Media, Inc. sr. notes
11 1/8s, 2011 (Canada) 223,440
49,000 Regal Cinemas, Inc. company guaranty
Ser. B, 9 3/8s, 2012 55,125
95,000 Remington Arms Co., Inc. company
guaranty 10 1/2s, 2011 99,275
40,000 Revlon Consumer Products sr. notes
9s, 2006 42,200
80,000 Rite Aid Corp. company guaranty
9 1/2s, 2011 89,200
5,000 Rite Aid Corp. debs. 6 7/8s, 2013 4,750
10,000 Rite Aid Corp. notes 7 1/8s, 2007 10,050
125,000 Rite Aid Corp. 144A notes 6 1/8s,
2008 120,313
5,000 Rite Aid Corp. 144A notes 6s, 2005 4,988
120,000 Sbarro, Inc. company guaranty 11s,
2009 99,000
35,000 Scotts Co. (The) 144A sr. sub. notes
6 5/8s, 2013 36,225
364,000 Six Flags, Inc. sr. notes 8 7/8s,
2010 374,465
125,000 Six Flags, Inc. 144A sr. notes
9 5/8s, 2014 131,875
290,000 TeleWest Communications PLC debs.
11s, 2007 (United Kingdom) (In
default) (NON) 192,850
40,000 Videotron Ltee company guaranty
6 7/8s, 2014 (Canada) 41,900
90,000 Vivendi Universal SA sr. notes
9 1/4s, 2010 (France) 105,975
135,000 Vivendi Universal SA sr. notes
6 1/4s, 2008 (France) 144,788
114,000 Williams Scotsman, Inc. company
guaranty 9 7/8s, 2007 112,005
203,000 Young Broadcasting, Inc. company
guaranty 10s, 2011 217,210
50,000 Young Broadcasting, Inc. 144A sr.
sub. notes 8 3/4s, 2014 51,750
20,000 Yum! Brands, Inc. sr. notes 8 7/8s,
2011 24,700
39,000 Yum! Brands, Inc. sr. notes 8 1/2s,
2006 43,485
105,000 Yum! Brands, Inc. sr. notes 7.7s,
2012 122,850
105,000 Yum! Brands, Inc. sr. notes 7.65s,
2008 120,225
--------------
7,280,066
Energy (3.0%)
-------------------------------------------------------------------------------
110,000 Arch Western Finance, LLC 144A sr.
notes 6 3/4s, 2013 116,050
90,000 Belden & Blake Corp. company
guaranty Ser. B, 9 7/8s, 2007 89,100
90,000 BRL Universal Equipment sec. notes
8 7/8s, 2008 96,075
54,000 Chesapeake Energy Corp. company
guaranty 9s, 2012 62,303
35,000 Chesapeake Energy Corp. company
guaranty 7 3/4s, 2015 38,238
135,000 Chesapeake Energy Corp. sr. notes
7 1/2s, 2013 147,488
75,000 Comstock Resources, Inc. sr. notes
6 7/8s, 2012 75,844
100,000 Dresser, Inc. company guaranty
9 3/8s, 2011 108,500
16,000 El Paso Energy Partners LP company
guaranty Ser. B, 8 1/2s, 2011 17,920
80,000 Encore Acquisition Co. company
guaranty 8 3/8s, 2012 85,600
80,000 Exco Resources, Inc. 144A company
guaranty 7 1/4s, 2011 82,200
105,000 Forest Oil Corp. company guaranty
7 3/4s, 2014 110,250
62,000 Forest Oil Corp. sr. notes 8s, 2008 66,960
50,000 Hanover Compressor Co. sr. notes
8 5/8s, 2010 52,500
75,000 Hanover Compressor Co. sub. notes
zero %, 2007 56,813
50,000 Hanover Equipment Trust sec. notes
Ser. A, 8 1/2s, 2008 53,000
68,000 Hornbeck Offshore Services, Inc. sr.
notes 10 5/8s, 2008 75,310
40,000 Key Energy Services, Inc. sr. notes
6 3/8s, 2013 41,600
5,000 Leviathan Gas Corp. company guaranty
Ser. B, 10 3/8s, 2009 5,263
75,000 Massey Energy Co. 144A sr. notes
6 5/8s, 2010 77,250
80,000 Newfield Exploration Co. sr. notes
7 5/8s, 2011 90,000
65,000 Offshore Logistics, Inc. company
guaranty 6 1/8s, 2013 63,050
20,000 Parker & Parsley Co. sr. notes
8 1/4s, 2007 22,862
90,000 Parker Drilling Co. company guaranty
Ser. B, 10 1/8s, 2009 99,000
250,000 Pemex Project Funding Master Trust
company guaranty 7 3/8s, 2014 271,250
80,000 Petro Geo-Services notes 10s, 2010
(Norway) 86,800
210,000 Pioneer Natural Resources Co.
company guaranty 9 5/8s, 2010 267,511
16,000 Pioneer Natural Resources Co.
company guaranty 7.2s, 2028 17,647
55,000 Plains All American Pipeline
LP/Plains All American Finance
Corp. company guaranty 7 3/4s, 2012 64,488
80,000 Plains Exploration & Production Co.
company guaranty Ser. B, 8 3/4s,
2012 89,400
65,000 Plains Exploration & Production Co.
sr. sub. notes 8 3/4s, 2012 72,638
115,000 Pogo Producing Co. sr. sub. notes
Ser. B, 8 1/4s, 2011 128,225
10,000 Pride International, Inc. sr. notes
10s, 2009 10,663
113,000 Pride Petroleum Services, Inc. sr.
notes 9 3/8s, 2007 115,966
80,000 Seabulk International, Inc. company
guaranty 9 1/2s, 2013 84,000
105,000 Star Gas Partners LP/Star Gas
Finance Co. sr. notes 10 1/4s, 2013 116,550
25,000 Star Gas Partners LP/Star Gas
Finance Co. 144A sr. notes 10 1/4s,
2013 27,750
25,000 Swift Energy Co. sr. sub. notes
9 3/8s, 2012 27,875
125,000 Trico Marine Services, Inc. company
guaranty 8 7/8s, 2012 88,750
20,000 Universal Compression, Inc. sr.
notes 7 1/4s, 2010 21,400
24,000 Vintage Petroleum, Inc. sr. sub.
notes 7 7/8s, 2011 25,440
90,000 Westport Resources Corp. company
guaranty 8 1/4s, 2011 99,450
70,000 Westport Resources Corp. 144A
company guaranty 8 1/4s, 2011 77,350
52,000 XTO Energy, Inc. sr. notes 7 1/2s,
2012 60,710
45,000 XTO Energy, Inc. sr. notes 6 1/4s,
2013 49,106
--------------
3,536,145
Financial (0.7%)
-------------------------------------------------------------------------------
35,000 Crescent Real Estate Equities LP
notes 7 1/2s, 2007 (R) 36,925
110,000 Crescent Real Estate Equities LP sr.
notes 9 1/4s, 2009 (R) 121,138
685,000 Finova Group, Inc. notes 7 1/2s,
2009 429,838
65,000 iStar Financial, Inc. sr. notes
8 3/4s, 2008 (R) 73,613
10,000 iStar Financial, Inc. sr. notes 7s,
2008 (R) 10,750
60,000 iStar Financial, Inc. sr. notes 6s,
2010 (R) 62,100
70,000 Western Financial Bank sub. debs.
9 5/8s, 2012 80,150
--------------
814,514
Health Care (2.4%)
-------------------------------------------------------------------------------
189,000 Alderwoods Group, Inc. company
guaranty 12 1/4s, 2009 210,026
52,000 Alliance Imaging, Inc. sr. sub.
notes 10 3/8s, 2011 52,390
82,000 AmerisourceBergen Corp. company
guaranty 7 1/4s, 2012 88,150
160,000 AmerisourceBergen Corp. sr. notes
8 1/8s, 2008 178,000
135,000 Ardent Health Services 144A sr. sub.
notes 10s, 2013 149,850
70,000 Beverly Enterprises, Inc. sr. notes
9 5/8s, 2009 79,100
60,000 Biovail Corp. sr. sub. notes 7 7/8s,
2010 (Canada) 60,000
29,863 Dade Behring, Inc. company guaranty
11.91s, 2010 34,454
60,000 Extendicare Health Services, Inc.
company guaranty 9 1/2s, 2010 66,600
70,000 Hanger Orthopedic Group, Inc.
company guaranty 10 3/8s, 2009 79,013
10,000 HCA, Inc. debs. 7.19s, 2015 11,159
40,000 HCA, Inc. sr. notes 6.95s, 2012 44,017
175,000 Healthsouth Corp. notes 7 5/8s, 2012 167,563
37,000 Healthsouth Corp. sr. notes 8 1/2s,
2008 36,538
37,000 Healthsouth Corp. sr. notes 8 3/8s,
2011 36,723
61,000 IASIS Healthcare Corp. company
guaranty 13s, 2009 68,320
10,000 IASIS Healthcare Corp. company
guaranty 8 1/2s, 2009 10,700
55,000 Insight Health Services Corp. 144A
company guaranty 9 7/8s, 2011 55,825
39,220 Magellan Health Services, Inc. sr.
notes Ser. A, 9 3/8s, 2008 41,769
90,000 Mediq, Inc. debs. 13s, 2009 (In
default) (NON) 9
106,000 MedQuest, Inc. company guaranty
Ser. B, 11 7/8s, 2012 119,780
255,000 Multicare Companies, Inc. sr. sub.
notes 9s, 2007 (In default) (NON) 1
50,000 NeighborCare, Inc. 144A sr. sub.
notes 6 7/8s, 2013 52,000
90,000 Omnicare, Inc. sr. sub. notes
6 1/8s, 2013 92,250
70,000 Owens & Minor, Inc. company guaranty
8 1/2s, 2011 76,650
100,000 PacifiCare Health Systems, Inc.
company guaranty 10 3/4s, 2009 117,250
90,000 Province Healthcare Co. sr. sub.
notes 7 1/2s, 2013 92,925
60,000 Stewart Enterprises, Inc. notes
10 3/4s, 2008 66,900
45,000 Tenet Healthcare Corp. notes 7 3/8s,
2013 41,625
10,000 Tenet Healthcare Corp. sr. notes
6 1/2s, 2012 8,825
170,000 Tenet Healthcare Corp. sr. notes
6 3/8s, 2011 150,875
195,000 Tenet Healthcare Corp. sr. notes
5 3/8s, 2006 185,250
150,000 Triad Hospitals, Inc. 144A sr. sub.
notes 7s, 2013 155,250
75,000 Universal Hospital Services, Inc.
144A sr. notes 10 1/8s, 2011 80,063
40,000 Ventas Realty LP/Capital Corp.
company guaranty 9s, 2012 45,500
--------------
2,755,350
Other (1.4%)
-------------------------------------------------------------------------------
1,680,000 Dow Jones TRAC-X NA HY T1 144A notes
7 3/8s, 2009 1,686,871
Technology (1.4%)
-------------------------------------------------------------------------------
64,000 AMI Semiconductor, Inc. company
guaranty 10 3/4s, 2013 75,200
68,000 DigitalNet Holdings Inc. sr. notes
9s, 2010 73,270
EUR 105,000 Getronics NV sub. notes 13s, 2008
(Netherlands) 62,612
$211,000 Iron Mountain, Inc. company guaranty
8 5/8s, 2013 229,990
135,000 Lucent Technologies, Inc. debs.
6.45s, 2029 110,363
5,000 Lucent Technologies, Inc. notes
5 1/2s, 2008 4,813
170,000 Nortel Networks Corp. notes 6 1/8s,
2006 (Canada) 175,950
69,000 ON Semiconductor Corp. company
guaranty 13s, 2008 82,455
141,555 Peregrine Systems, Inc. 144A sr.
notes 6 1/2s, 2007 137,308
75,000 SCG Holding & Semiconductor Corp.
company guaranty 12s, 2009 81,469
45,000 SCG Holding Corp. 144A notes zero %,
2011 63,450
85,000 Seagate Technology Hdd Holdings
company guaranty 8s, 2009 (Cayman
Islands) 92,013
55,000 Viasystems, Inc. 144A sr. sub. notes
10 1/2s, 2011 59,950
105,000 Xerox Capital Trust I company
guaranty 8s, 2027 102,900
18,000 Xerox Corp. company guaranty 9 3/4s,
2009 20,970
55,000 Xerox Corp. notes Ser. MTN, 7.2s,
2016 56,650
144,000 Xerox Corp. sr. notes 7 5/8s, 2013 153,360
95,000 Xerox Corp. sr. notes 7 1/8s, 2010 101,413
--------------
1,684,136
Transportation (0.7%)
-------------------------------------------------------------------------------
69,000 Allied Holdings, Inc. company
guaranty Ser. B, 8 5/8s, 2007 66,930
70,000 American Airlines, Inc. pass-through
certificates Ser. 01-1, 6.817s,
2011 67,200
140,000 Calair, LLC/Calair Capital Corp.
company guaranty 8 1/8s, 2008 124,600
60,000 Delta Air Lines, Inc. notes 7.9s,
2009 44,100
50,000 Delta Air Lines, Inc. pass-through
certificates Ser. 00-1, 7.779s, 2005 46,582
185,000 Kansas City Southern Railway Co.
company guaranty 9 1/2s, 2008 206,275
25,000 Kansas City Southern Railway Co.
company guaranty 7 1/2s, 2009 25,750
97,000 Navistar International Corp. company
guaranty Ser. B, 9 3/8s, 2006 107,428
20,000 Navistar International Corp. sr.
notes Ser. B, 8s, 2008 20,450
60,000 Northwest Airlines, Inc. company
guaranty 7 5/8s, 2005 58,950
20,000 Travel Centers of America, Inc.
company guaranty 12 3/4s, 2009 23,500
85,055 US Air, Inc. pass-through
certificates Ser. 93-A3,
10 3/8s, 2013 (In default) (NON) 27,218
--------------
818,983
Utilities & Power (3.1%)
-------------------------------------------------------------------------------
22,000 AES Corp. (The) sr. notes 8 7/8s,
2011 23,485
6,000 AES Corp. (The) sr. notes 8 3/4s,
2008 6,300
105,000 AES Corp. (The) 144A sec. notes 9s,
2015 116,025
150,000 AES Corp. (The) 144A sec. notes
8 3/4s, 2013 165,188
130,000 Allegheny Energy Supply 144A bonds
8 1/4s, 2012 128,700
45,000 Allegheny Energy Supply 144A sec.
notes 10 1/4s, 2007 48,375
32,000 Calpine Canada Energy Finance
company guaranty 8 1/2s, 2008
(Canada) 24,720
10,000 Calpine Corp. sr. notes 8 3/4s, 2007 8,125
10,000 Calpine Corp. sr. notes 8 5/8s, 2010 7,625
105,000 Calpine Corp. sr. notes 7 7/8s, 2008 79,800
338,000 Calpine Corp. 144A sec. notes
8 1/2s, 2010 310,960
35,000 CenterPoint Energy Resources Corp.
debs. 6 1/2s, 2008 37,744
20,000 CenterPoint Energy Resources Corp.
sr. notes Ser. B, 7 7/8s, 2013 22,981
20,000 CMS Energy Corp. pass-through
certificates 7s, 2005 20,350
30,000 CMS Energy Corp. sr. notes 8.9s,
2008 32,513
55,000 CMS Energy Corp. sr. notes 8 1/2s,
2011 58,988
25,000 CMS Energy Corp. 144A sr. notes
7 3/4s, 2010 25,875
15,000 Dynegy Holdings, Inc. sr. notes
6 7/8s, 2011 13,088
190,000 Dynegy Holdings, Inc. 144A sec.
notes 10 1/8s, 2013 211,850
50,000 Dynegy-Roseton Danskamme company
guaranty Ser. A, 7.27s, 2010 50,000
75,000 Dynegy-Roseton Danskamme company
guaranty Ser. B, 7.67s, 2016 71,250
110,000 Edison Mission Energy sr. notes
9 7/8s, 2011 115,500
55,000 El Paso Corp. sr. notes 7 3/8s, 2012 47,850
115,000 El Paso Corp. sr. notes Ser. MTN,
7 3/4s, 2032 92,288
25,000 El Paso Natural Gas Co. debs.
8 5/8s, 2022 26,313
25,000 El Paso Natural Gas Co. sr. notes
Ser. A, 7 5/8s, 2010 25,563
160,000 El Paso Production Holding Co.
company guaranty 7 3/4s, 2013 150,400
30,000 Kansas Gas & Electric debs. 8.29s,
2016 31,050
69,650 Midland Funding II Corp. debs.
Ser. A, 11 3/4s, 2005 74,525
110,000 Mirant Americas Generation, Inc. sr.
notes 7.2s, 2008 (In default) (NON) 88,550
40,000 Mission Energy Holding Co. sec.
notes 13 1/2s, 2008 41,500
90,000 Nevada Power Co. 144A 2nd mtge. 9s,
2013 99,900
135,000 Northwest Pipeline Corp. company
guaranty 8 1/8s, 2010 147,150
260,000 NRG Energy, Inc. 144A sr. sec. notes
8s, 2013 268,450
75,000 Orion Power Holdings, Inc. sr. notes
12s, 2010 91,500
115,000 PG&E Corp. 144A sec. notes 6 7/8s,
2008 123,625
20,000 PG&E Gas Transmission Northwest sr.
notes 7.1s, 2005 20,400
80,000 PSEG Energy Holdings, Inc. notes
7 3/4s, 2007 83,900
65,000 SEMCO Energy, Inc. sr. notes 7 3/4s,
2013 68,900
40,000 Teco Energy, Inc. notes 10 1/2s,
2007 46,350
25,000 Teco Energy, Inc. notes 7.2s, 2011 26,375
70,000 Teco Energy, Inc. notes 7s, 2012 72,713
50,000 Teco Energy, Inc. sr. notes 7 1/2s,
2010 53,813
10,000 Tennessee Gas Pipeline Co. debs. 7s,
2028 9,350
15,000 Transcontinental Gas Pipeline Corp.
debs. 7 1/4s, 2026 15,300
85,000 Utilicorp Canada Finance Corp.
company guaranty 7 3/4s, 2011
(Canada) 81,600
25,000 Utilicorp United, Inc. sr. notes
9.95s, 2011 26,500
70,000 Western Resources, Inc. sr. notes
9 3/4s, 2007 80,500
20,000 Williams Cos., Inc. (The) notes
8 3/4s, 2032 21,500
20,000 Williams Cos., Inc. (The) notes
8 1/8s, 2012 21,800
25,000 Williams Cos., Inc. (The) notes
7 5/8s, 2019 25,375
4,000 Williams Cos., Inc. (The) notes
Ser. A, 6 3/4s, 2006 4,135
95,000 Williams Cos., Inc. (The) sr. notes
8 5/8s, 2010 103,550
50,000 Williams Holdings Of Delaware notes
6 1/2s, 2008 51,250
--------------
3,701,417
--------------
Total Corporate bonds and notes
(cost $46,500,339) $48,599,644
Convertible preferred stocks (26.9%) (a)
Number of shares Value
Basic Materials (2.7%)
-------------------------------------------------------------------------------
1,240 Hercules Trust II 6.50% units cum.
cv. pfd. $961,000
12,604 IMC Global, Inc. Ser. MEDS, $3.75
cv. pfd. 1,019,664
52,400 Smurfit-Stone Container Corp.
Ser. A, $1.75 cum. cv. pfd. 1,277,250
--------------
3,257,914
Capital Goods (3.3%)
-------------------------------------------------------------------------------
19,600 Northrop Grumman Corp. Ser. B, $7.00
cum. cv. pfd. 2,616,600
39,100 Owens-Illinois, Inc. $2.375 cv. pfd. 1,334,288
--------------
3,950,888
Communication Services (1.4%)
-------------------------------------------------------------------------------
35,020 CenturyTel, Inc. $1.719 cv. pfd. 871,123
16,123 Crown Castle International Corp.
$3.125 cv. pfd. 735,612
417 Microcell Telecommunications, Inc.
Ser. D, 9.00% cv. pfd. (Canada) 7,363
--------------
1,614,098
Consumer Cyclicals (4.1%)
-------------------------------------------------------------------------------
1,500,000 Baker Hughes, Inc. $7.00 cv. pfd. 2
1,350 Radio One, Inc. 6.50% cum. cv. pfd. 1,442,223
25,200 Sinclair Broadcast Group, Inc.
Ser. D, $3.00 cv. pfd. 1,165,500
31,700 Tower Automotive Capital Trust
$3.375 cv. pfd. 895,525
30,300 TXI Capital Trust I $2.75 cv. pfd. 1,318,050
--------------
4,821,300
Consumer Staples (0.5%)
-------------------------------------------------------------------------------
20,120 Constellation Brands, Inc. Ser. A,
$1.438 cv. pfd. 601,085
Energy (1.7%)
-------------------------------------------------------------------------------
16,950 Amerada Hess Corp. $3.50 cv. pfd. 1,055,138
19,700 Hanover Compressor Capital Trust
$3.625 cv. pfd. 938,213
--------------
1,993,351
Financial (6.5%)
-------------------------------------------------------------------------------
19,200 Capital One Financial Corp. $3.125
cv. pfd. 998,400
22,300 Chubb Corp. (The) $1.75 cv. pfd. 655,063
44,996 Decs Trust IX $6.75 cv. pfd. 545,577
60,700 FelCor Lodging Trust, Inc. Ser. A,
$1.95 cum. cv. pfd. (R) 1,502,325
15,403 Hartford Financial Services Group,
Inc. (The) $3.50 cv. pfd. 1,008,897
28,600 Host Marriott Financial Trust $3.375
cv. pfd. 1,512,225
21,130 Provident Finance Group $2.25 units
cv. pfd. 763,321
20,500 UnumProvident Corp. $2.063 cv. pfd. 656,000
--------------
7,641,808
Technology (1.7%)
-------------------------------------------------------------------------------
33,168 Solectron Corp. 1.813 units cv. pfd. 576,294
10,800 Xerox Corp. 6.25% cv. pfd. 1,425,600
--------------
2,001,894
Transportation (0.8%)
-------------------------------------------------------------------------------
25,869 Teekay Shipping Corp. $1.813 cv.
pfd. (Marshall Islands) 1,002,424
Utilities & Power (4.2%)
-------------------------------------------------------------------------------
25,250 El Paso Energy Capital Trust I
$2.375 cv. pfd. 795,375
20,000 ONEOK, Inc. $2.125 units cv. pfd. 617,500
9,000 Public Service Enterprise Group,
Inc. $5.125 cv. pfd. 574,875
40,900 Sempra Energy $2.125 units cv. pfd. 1,175,875
17,200 Sierra Pacific Resources $4.50 units
cum. cv. pfd. 652,568
44,400 Williams Cos., Inc. (The) $2.25 cv.
pfd. 577,200
9,830 Williams Cos., Inc. (The) 144A $2.75
cv. pfd. 626,663
--------------
5,020,056
--------------
Total Convertible preferred stocks
(cost $27,042,848) $31,904,818
Convertible bonds and notes (23.5%) (a)
Principal amount Value
Communication Services (1.6%)
-------------------------------------------------------------------------------
$400,000 Cybernet Internet Services
International, Inc. 144A cv. sr.
disc. notes stepped-coupon zero %
(13s, 8/15/04) 2009 (Denmark) (In
default) (NON) (STP) $4
81,000 Nextel Communications, Inc. cv. sr.
notes 6s, 2011 95,175
3,580,000 United States Cellular Corp. cv.
liquid yield option notes (LYON)
zero %, 2015 1,852,650
--------------
1,947,829
Conglomerates (1.1%)
-------------------------------------------------------------------------------
1,250,000 GenCorp, Inc. cv. sub. notes 5 3/4s,
2007 1,275,000
Consumer Cyclicals (3.9%)
-------------------------------------------------------------------------------
612,000 Amazon.com, Inc. cv. sub. debs.
4 3/4s, 2009 624,240
300,000 Grey Global Group, Inc. 144A cv.
debs. 5s, 2033 315,563
614,000 Meristar Hospitality Corp. cv. notes
9 1/2s, 2010 743,708
1,760,000 Service Corp. International cv. sub.
notes 6 3/4s, 2008 1,942,600
1,036,000 Tower Automotive, Inc. cv. sub.
notes 5s, 2004 1,036,000
--------------
4,662,111
Consumer Staples (2.4%)
-------------------------------------------------------------------------------
1,300,000 Charter Communications, Inc. cv. sr.
notes 5 3/4s, 2005 1,217,125
193,000 CKE Restaurants, Inc. cv. sub. notes
4 1/4s, 2004 193,483
1,260,000 Rite Aid Corp. cv. notes 4 3/4s,
2006 1,444,275
--------------
2,854,883
Energy (0.9%)
-------------------------------------------------------------------------------
1,000,000 Parker Drilling Co. cv. sub. bonds
5 1/2s, 2004 1,003,750
Financial (1.7%)
-------------------------------------------------------------------------------
620,000 E*Trade Group, Inc. cv. sub. notes
6s, 2007 633,175
1,410,000 Providian Financial Corp. cv. sr.
notes 3 1/4s, 2005 1,387,088
--------------
2,020,263
Health Care (0.5%)
-------------------------------------------------------------------------------
610,000 LifePoint Hospitals, Inc. cv. notes
4 1/2s, 2009 641,263
Technology (8.2%)
-------------------------------------------------------------------------------
750,000 Amkor Technologies, Inc. cv. notes
5 3/4s, 2006 743,438
1,297,000 Aspen Technology, Inc. cv. sub.
debs. 5 1/4s, 2005 1,271,060
980,000 Avaya, Inc. cv. LYON zero %, 2021 683,550
680,000 Kulicke & Soffa Industries, Inc. cv.
sub. notes 5 1/4s, 2006 690,200
1,200,000 Lucent Technologies, Inc. cv. sub.
debs. 8s, 2031 1,449,000
930,000 Manugistics Group, Inc. cv. sub.
notes 5s, 2007 924,188
1,509,000 Safeguard Scientifics, Inc. cv. sub.
notes 5s, 2006 1,495,796
2,180,000 Sanmina Corp. cv. sub. debs. zero %,
2020 1,122,700
280,000 Silicon Graphics, Inc. cv. notes
6 1/2s, 2009 743,400
1,065,000 Solectron Corp. cv. LYON zero %,
2020 620,363
--------------
9,743,695
Transportation (0.6%)
-------------------------------------------------------------------------------
750,000 Continental Airlines, Inc. cv. notes
4 1/2s, 2007 665,625
Utilities & Power (2.6%)
-------------------------------------------------------------------------------
620,000 AES Corp. (The) cv. sub. notes
4 1/2s, 2005 612,250
1,400,000 El Paso Corp. cv. debs. zero %, 2021 647,500
526,000 Sierra Pacific Resources 144A cv.
notes 7 1/4s, 2010 1,074,355
440,000 XCEL Energy, Inc. 144A cv. notes
7 1/2s, 2007 689,700
--------------
3,023,805
--------------
Total Convertible bonds and notes
(cost $22,582,893) $27,838,224
Common stocks (1.7%) (a)
Number of shares Value
-------------------------------------------------------------------------------
214 AboveNet, Inc. (NON) $10,058
14,000 Altria Group, Inc. 805,700
50,000 AMRESCO Creditor Trust (acquired
9/20/00, cost $38,655) (NON) (RES)
(R) 500
21 Arch Wireless, Inc. Class A (NON) 468
2,125 Aurora Foods, Inc. (NON) 11
156 Birch Telecom, Inc. (acquired
various dates from 9/30/02 to
6/5/03, cost $--) (NON) (RES) 2
293,993 Contifinancial Corp. Liquidating
Trust Units 2,940
2,031 Covad Communications Group, Inc.
(NON) 6,723
165 Crown Castle International Corp.
(NON) 1,988
28,300 GATX Corp. 665,616
144 Genesis HealthCare Corp. (NON) 3,924
3,492 Globix Corp. (NON) 10,546
16 Knology, Inc. (NON) 133
64 Leucadia National Corp. 3,328
96 Magellan Health Services, Inc. (NON) 2,592
93 Mariner Health Care, Inc. (NON) 2,023
147 Mediq, Inc. (NON) 591
3 Microcell Telecommunications, Inc.
Class A (Canada) (NON) 56
414 Microcell Telecommunications, Inc.
Class B (Canada) (NON) 7,714
1,710 Pioneer Cos., Inc. (NON) 11,406
334 PSF Group Holdings, Inc. 144A Class
A (acquired 3/15/96, cost
$1,015,896) (NON) (RES) 501,450
115 RCN Corp. (NON) 32
25 Sterling Chemicals, Inc. (NON) 650
102 Sun Healthcare Group, Inc. (NON) 1,219
14,550 VS Holdings, Inc. (NON) 1,455
235 Washington Group International, Inc. (NON) 9,048
--------------
Total Common stocks
(cost $3,377,739) $2,050,173
Preferred stocks (0.4%) (a)
Number of shares Value
-------------------------------------------------------------------------------
3,964 Avecia Group PLC $4.00 pfd.
(acquired various dates from
12/3/03 to 1/26/04, cost $53,174)
(United Kingdom) (RES) (PIK) $67,388
70 Dobson Communications Corp. 13.00%
pfd. (PIK) 65,100
1,714 iStar Financial, Inc. $1.95 cum.
pfd. 44,735
9 Metrocall Holdings, Inc. Ser. A,
15.00% cum. pfd. 103
12 Paxson Communications Corp. 14.25%
cum. pfd. (PIK) 113,700
181 Rural Cellular Corp. 12.25% pfd.
(PIK) 142,085
--------------
Total Preferred stocks
(cost $451,275) $433,111
Foreign government bonds and notes (0.2%) (a)
Principal amount Value
-------------------------------------------------------------------------------
$25,000 Colombia (Republic of) notes
10 3/4s, 2013 $28,725
75,000 Colombia (Republic of) unsub.
9 3/4s, 2009 84,938
95,000 Ecuador (Republic of) bonds
stepped-coupon Ser. REGS, 7s (8s,
8/15/04), 2030 (STP) 78,850
--------------
Total Foreign government bonds and
notes (cost $147,427) $192,513
Units (0.1%) (a)
Number of units Value
-------------------------------------------------------------------------------
80,000 Morrison Knudsen Corp. $12,800
208 XCL Equity Units 92,328
--------------
Total Units (cost $353,608) $105,128
Brady bonds (0.1%) (a) (cost $50,235)
Principal amount Value
-------------------------------------------------------------------------------
$80,000 Peru (Republic of) coll. FLIRB Ser.
20YR, 4 1/2s, 2017 $68,200
Warrants (--%) (a) (NON) Expiration
Number of warrants date Value
-------------------------------------------------------------------------------
83 AboveNet, Inc. 9/8/10 $2,332
71 AboveNet, Inc. 9/8/08 2,095
140 Dayton Superior Corp. 144A 6/15/09 1
161 Huntsman Co., LLC 144A 5/15/11 22,540
72 MDP Acquisitions PLC (Ireland) 10/1/13 3,564
256 Microcell Telecommunications
(Canada) 5/1/08 1,269
154 Microcell Telecommunications
(Canada) 5/1/05 643
60 Pliant Corp. 144A 6/1/10 1
99 Solutia, Inc. 144A 7/15/09 1
240 Travel Centers of America, Inc. 144A 5/1/09 1,200
220 Ubiquitel, Inc. 144A 4/15/10 1
144 Washington Group International, Inc.
Ser. A 1/25/06 1,656
165 Washington Group International, Inc.
Ser. B 1/25/06 1,518
90 Washington Group International, Inc.
Ser. C 1/25/06 725
--------------
Total Warrants (cost $100,468) $37,546
Short-term investments (8.1%) (a)
Principal amount Value
-------------------------------------------------------------------------------
$2,796,432 Short-term investments held as
collateral for loaned
securities with yields ranging from
1.03% to 1.08% and a due date of
March 1, 2004 (d) $2,796,349
6,839,479 Short-term investments held in
Putnam commingled cash account with
yields ranging from 1.01% to 1.07%
and due dates ranging from March 1,
2004 to April 23, 2004 (d) 6,839,479
--------------
Total Short-term investments
(cost $9,635,828) $9,635,828
-------------------------------------------------------------------------------
Total Investments
(cost $110,242,660) $120,865,185
-------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $118,411,692.
(DEF) Security is in default of principal and interest.
(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 accruing
interest at this rate.
(RES) Restricted, excluding 144A securities, as to public resale. The
total market value of restricted securities held at
February 29, 2004 was $592,651 or 0.5% of net assets.
(PIK) Income may be received in cash or additional securities at the
discretion of the issuer.
(R) Real Estate Investment Trust.
(d) See Note 1 to the financial statements.
144A after the name of a security represents those exempt from
registration under Rule 144A of the Securities Act of 1933. These
securities may be resold in transactions exempt from registration,
normally to qualified institutional buyers.
FLIRB represents Front Loaded Interest Reduction Bond.
The rates shown on Floating Rate Notes (FRN) are the current interest
rates shown at February 29, 2004.
Forward currency contracts to buy at February 29, 2004 (Unaudited)
(aggregate face value $29,452)
Aggregate Delivery Unrealized
Value face value date depreciation
------------------------------------------------------------------------------
British Pound $29,440 $29,452 6/16/04 $(12)
------------------------------------------------------------------------------
Forward currency contracts to sell at February 29, 2004 (Unaudited)
(aggregate face value $482,710)
Aggregate Delivery Unrealized
Value face value date appreciation
------------------------------------------------------------------------------
Euro $481,270 $482,710 6/16/04 $1,440
------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
Statement of assets and liabilities
February 29, 2004 (Unaudited)
Assets
-------------------------------------------------------------------------------
Investments in securities, at value, including $2,704,897 of
securities on loan (identified cost $110,242,660) (Note 1) $120,865,185
-------------------------------------------------------------------------------
Cash 290,964
-------------------------------------------------------------------------------
Dividends, interest and other receivables 1,310,228
-------------------------------------------------------------------------------
Receivable for securities sold 275,772
-------------------------------------------------------------------------------
Receivable for open forward currency contracts (Note 1) 1,440
-------------------------------------------------------------------------------
Receivable for closed forward currency contracts (Note 1) 3,906
-------------------------------------------------------------------------------
Total assets 122,747,495
Liabilities
-------------------------------------------------------------------------------
Distributions payable to shareholders 637,975
-------------------------------------------------------------------------------
Payable for securities purchased 550,560
-------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 213,469
-------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 31,983
-------------------------------------------------------------------------------
Payable for Trustee compensation and expenses (Note 2) 27,485
-------------------------------------------------------------------------------
Payable for administrative services (Note 2) 1,104
-------------------------------------------------------------------------------
Payable for open forward currency contracts (Note 1) 12
-------------------------------------------------------------------------------
Payable for closed forward currency contracts (Note 1) 19,890
-------------------------------------------------------------------------------
Collateral on securities loaned, at value (Note 1) 2,796,349
-------------------------------------------------------------------------------
Other accrued expenses 56,976
-------------------------------------------------------------------------------
Total liabilities 4,335,803
-------------------------------------------------------------------------------
Net assets $118,411,692
Represented by
-------------------------------------------------------------------------------
Paid-in capital (Note 1) $129,476,986
-------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 61,546
-------------------------------------------------------------------------------
Accumulated net realized loss on investments and foreign
currency transactions (Note 1) (21,751,530)
-------------------------------------------------------------------------------
Net unrealized appreciation of investments and assets and
liabilities in foreign currencies 10,624,690
-------------------------------------------------------------------------------
Total -- Representing net assets applicable to capital
shares outstanding $118,411,692
Computation of net asset value and offering price
-------------------------------------------------------------------------------
Net asset value per share ($118,411,692 divided by
13,825,527 shares) $8.56
-------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
Statement of operations
Six months ended February 29, 2004 (Unaudited)
Investment income:
-------------------------------------------------------------------------------
Interest $3,605,269
-------------------------------------------------------------------------------
Dividends 950,273
-------------------------------------------------------------------------------
Securities lending 2,115
-------------------------------------------------------------------------------
Total investment income 4,557,657
Expenses:
-------------------------------------------------------------------------------
Compensation of Manager (Note 2) 419,674
-------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 94,386
-------------------------------------------------------------------------------
Trustee compensation and expenses (Note 2) 6,434
-------------------------------------------------------------------------------
Administrative services (Note 2) 3,295
-------------------------------------------------------------------------------
Auditing 31,210
-------------------------------------------------------------------------------
Other 54,458
-------------------------------------------------------------------------------
Total expenses 609,457
-------------------------------------------------------------------------------
Expense reduction (Note 2) (1,037)
-------------------------------------------------------------------------------
Net expenses 608,420
-------------------------------------------------------------------------------
Net investment income 3,949,237
-------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 3,063,931
-------------------------------------------------------------------------------
Net realized loss on foreign currency transactions (Note 1) (55,086)
-------------------------------------------------------------------------------
Net unrealized appreciation of assets and liabilities in
foreign currencies during the period 6,263
-------------------------------------------------------------------------------
Net unrealized appreciation of investments during the period 8,370,199
-------------------------------------------------------------------------------
Net gain on investments 11,385,307
-------------------------------------------------------------------------------
Net increase in net assets resulting from operations $15,334,544
-------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
Statement of changes in net assets
Six months ended Year ended
February 29 August 31
Increase in net assets 2004* 2003
-------------------------------------------------------------------------------
Operations:
-------------------------------------------------------------------------------
Net investment income $3,949,237 $7,963,721
-------------------------------------------------------------------------------
Net realized gain (loss) on investments and
foreign currency transactions 3,008,845 (1,728,985)
-------------------------------------------------------------------------------
Net unrealized appreciation of investments
and assets and liabilities in foreign
currencies 8,376,462 17,624,892
-------------------------------------------------------------------------------
Net increase in net assets resulting from
operations 15,334,544 23,859,628
-------------------------------------------------------------------------------
Distributions to shareholders: (Note 1)
-------------------------------------------------------------------------------
From net investment income (3,857,047) (7,704,436)
-------------------------------------------------------------------------------
Increase from issuance of common shares in
connection with reinvestment of
distributions -- 217,676
-------------------------------------------------------------------------------
Total increase in net assets 11,477,497 16,372,868
Net assets
-------------------------------------------------------------------------------
Beginning of period 106,934,195 90,561,327
-------------------------------------------------------------------------------
End of period (including undistributed net
investment income of $61,546 and
distributions in excess of net investment
income of $30,644, respectively) $118,411,692 $106,934,195
-------------------------------------------------------------------------------
Number of fund shares
-------------------------------------------------------------------------------
Shares outstanding at beginning of period 13,825,527 13,794,807
-------------------------------------------------------------------------------
Shares issued in connection with
reinvestment of distributions -- 30,720
-------------------------------------------------------------------------------
Shares outstanding at end of period 13,825,527 13,825,527
-------------------------------------------------------------------------------
* Unaudited
The accompanying notes are an integral part of these financial statements.
Financial highlights
(For a common share outstanding throughout the period)
Six months
ended
February 29
Per-share (Unaudited) Year ended August 31
operating performance 2004 2003 2002 2001 2000 1999
---------------------------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $7.73 $6.56 $7.30 $8.09 $8.32 $8.82
---------------------------------------------------------------------------------------------------------------------------------
Investment operations:
---------------------------------------------------------------------------------------------------------------------------------
Net investment income (a) .29 .58 .60 .67 .74 .82
---------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .82 1.15 (.72) (.71) (.12) (.33)
---------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations 1.11 1.73 (.12) (.04) .62 .49
---------------------------------------------------------------------------------------------------------------------------------
Less distributions:
---------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.28) (.56) (.62) (.75) (.85) (.81)
---------------------------------------------------------------------------------------------------------------------------------
From net realized
gain on investments -- -- -- -- -- (.18)
---------------------------------------------------------------------------------------------------------------------------------
Total distributions (.28) (.56) (.62) (.75) (.85) (.99)
---------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $8.56 $7.73 $6.56 $7.30 $8.09 $8.32
---------------------------------------------------------------------------------------------------------------------------------
Market price,
end of period $7.92 $7.31 $6.35 $7.45 $7.94 $8.81
---------------------------------------------------------------------------------------------------------------------------------
Total return at
market price (%)(b) 12.29* 24.73 (6.77) 3.91 .78 10.29
---------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
---------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $118,412 $106,934 $90,561 $100,130 $110,839 $113,576
---------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(c) .53* 1.13 1.10 1.14 1.11 1.11
---------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 3.46* 8.20 8.65 8.91 9.03 9.72
---------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 30.02* 69.94 56.70 106.41 26.31 78.62
---------------------------------------------------------------------------------------------------------------------------------
* Not annualized.
(a) Per share net investment income has been determined on the basis of the weighted average number of shares outstanding
during the period.
(b) Total return assumes dividend reinvestment.
(c) Includes amounts paid through expense offset and brokerage service arrangements. (Note 2)
The accompanying notes are an integral part of these financial statements.
Notes to financial statements
February 29, 2004 (Unaudited)
Note 1
Significant accounting policies
Putnam High Income Bond Fund (the "fund"), is registered under the
Investment Company Act of 1940, as amended, as a diversified, closed-end
management investment company. The fund seeks to provide high current
income by investing in a portfolio consisting primarily of high-yielding
convertible and nonconvertible securities with the potential for capital
appreciation. The fund invests in higher yielding, lower rated bonds
that have a higher rate of default due to the nature of the investments.
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 accounting principles generally accepted in the United States of
America and requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities in the financial
statements and the reported amounts of increases and decreases in net
assets from operations during the reporting period. Actual results could
differ from those estimates.
A) Security valuation Investments for which market quotations are
readily available are valued at the last reported sales price on their
principal exchange, or official closing price for certain markets. If no
sales are reported -- as in the case of some securities traded
over-the-counter -- a security is valued at its last reported bid price.
Market quotations are not considered to be readily available for certain
debt obligations; such investments are valued at fair value on the basis
of valuations furnished by an independent pricing service or dealers,
approved by the Trustees. Such services or dealers determine valuations
for normal institutional-size trading units of such securities using
methods based on market transactions for comparable securities and
various relationships, generally recognized by institutional traders,
between securities. Many securities markets and exchanges outside the
U.S. close prior to the close of the New York Stock Exchange and
therefore the closing prices for securities in such markets or on such
exchanges may not fully reflect events that occur after such close but
before the close of the New York Stock Exchange. Accordingly, on certain
days, the fund will fair value foreign securities taking into account
multiple factors, including movements in the U.S. securities markets.
The number of days on which fair value prices will be used will depend
on market activity and it is possible that fair value prices will be
used by the fund to a significant extent. Securities quoted in foreign
currencies are translated into U.S. dollars at the current exchange
rate. Short-term investments having remaining maturities of 60 days or
less are valued at amortized cost, which approximates fair value. Other
investments, including restricted securities, are valued at fair value
following procedures approved by the Trustees. Such valuations and
procedures are reviewed periodically by the Trustees.
B) Joint trading account The fund may transfer uninvested cash balances,
including cash collateral received under security lending arrangements,
into a joint trading account along with the cash of other registered
investment companies and certain other accounts managed by Putnam
Investment Management, LLC ("Putnam Management"), the fund's manager, an
indirect wholly-owned subsidiary of Putnam, LLC. These balances may be
invested in issuers of high-grade short-term investments having
maturities of up to 397 days for collateral received under security
lending arrangements and up to 90 days for other cash investments.
C) Security transactions and related investment income Security
transactions are recorded on the trade date (date the order to buy or
sell is executed). Gains or losses on securities sold are determined on
the identified cost basis.
Interest income is recorded on the accrual basis. Dividend income, net
of applicable holding taxes, is recognized on the ex-dividend date
except that certain dividends from foreign securities are recognized as
soon as the fund is informed of the ex-dividend date. Non-cash
dividends, if any, are recorded at the fair market value of the
securities received.
All premiums/discounts are amortized/accreted on a yield-to-maturity
basis.
D) 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 earned 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 realized
exchange gains or losses on closed forward currency contracts,
disposition of foreign currencies, currency gains and losses realized
between the trade and settlement dates on securities transactions 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. Investments in
foreign securities involve certain risks, including those related to
economic instability, unfavorable political developments, and currency
fluctuations, not present with domestic investments.
E) Forward currency contracts The fund may buy and sell forward currency
contracts, which are agreements between two parties to buy and sell
currencies at a set price on a future date. These contracts are used 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. Forward currency contracts outstanding at
period end, if any, are listed after the fund's portfolio.
F) Security lending The fund may lend securities, through its agents, to
qualified borrowers in order to earn additional income. The loans are
collateralized by cash and/or securities in an amount at least equal to
the market value of the securities loaned. The market value of
securities loaned is determined daily and any additional required
collateral is allocated to the fund on the next business day. The risk
of borrower default will be borne by the fund's agents; the fund will
bear the risk of loss with respect to the investment of the cash
collateral. Income from securities lending is included in investment
income on the statement of operations. At February 29, 2004, the value
of securities loaned amounted to $2,704,897. The fund received cash
collateral of $2,796,349 which is pooled with collateral of other Putnam
funds into 10 issuers of high grade short-term investments.
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 (the "Code"), as amended.
Therefore, no provision has been made for federal taxes on income,
capital gains or unrealized appreciation on securities held nor for
excise tax on income and capital gains.
At August 31, 2003, the fund had a capital loss carryover of $24,507,868
available to the extent allowed by tax law to offset future net capital
gain, if any. The amount of the carryover and the expiration dates are:
Loss Carryover Expiration
--------------------------------
$4,424,357 August 31, 2008
1,283,239 August 31, 2009
9,205,575 August 31, 2010
9,594,697 August 31, 2011
Pursuant to federal income tax regulations applicable to regulated
investment companies, the fund has elected to defer to its fiscal year
ending August 31, 2004 $139,111 of losses recognized during the period
November 1, 2002 to August 31, 2003.
The aggregate identified cost on a tax basis is $110,700,755, resulting
in gross unrealized appreciation and depreciation of $14,739,225 and
$4,574,795, respectively, or net unrealized appreciation of $10,164,430.
H) Distributions to shareholders Distributions to shareholders from net
investment income are recorded by the fund on the ex-dividend date.
Distributions from capital gains, if any, are recorded on the
ex-dividend date and paid at least annually. The amount and character of
income and gains to be distributed are determined in accordance with
income tax regulations, which may differ from generally accepted
accounting principles. 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.
Note 2
Management fee, administrative
services and other transactions
Putnam Management is paid for management and investment advisory
services quarterly based on the average net assets of the fund. Such fee
is based on the annual rate of 0.75% of the average weekly net assets of
the fund.
The fund reimburses Putnam Management an allocated amount for the
compensation and related expenses of certain officers of the fund and
their staff who provide administrative services to the fund. The
aggregate amount of all such reimbursements is determined annually by
the Trustees.
Custodial functions for the fund's assets are provided by Putnam
Fiduciary Trust Company (PFTC), a subsidiary of Putnam, LLC. Putnam
Investor Services, a division of PFTC, provides investor serving agent
functions to the fund. During the six months ended February 29, 2004,
the fund paid PFTC $94,386 for these services.
The fund has entered into an arrangement with PFTC whereby credits
realized as a result of uninvested cash balances are used to reduce a
portion of the fund's expenses. The fund also reduced expenses through
brokerage service arrangements. For the six months ended February 29,
2004, the fund's expenses were reduced by $1,037 under these
arrangements.
Each independent Trustee of the fund receives an annual Trustee fee, of
which $746, as a quarterly retainer, has been allocated to the fund, and
an additional fee for each Trustees meeting attended. Trustees receive
additional fees for attendance at certain committee meetings.
The fund has adopted a Trustee Fee Deferral Plan (the "Deferral Plan")
which allows the Trustees to defer the receipt of all or a portion of
Trustees fees payable on or after July 1, 1995. The deferred fees remain
invested in certain Putnam funds until distribution in accordance with
the Deferral Plan.
The fund has adopted an unfunded noncontributory defined benefit pension
plan (the "Pension Plan") covering all Trustees of the fund who have served
as a Trustee for at least five years. Benefits under the Pension Plan are
equal to 50% of the Trustee's average total retainer and meeting fees for
the three years preceding retirement. Pension expense for the fund is
included in Trustee compensation and expenses in the statement of
operations. Accrued pension liability is included in Payable for Trustee
compensation and expenses in the statement of assets and liabilities.
Note 3
Purchases and sales of securities
During the six months ended February 29, 2004, cost of purchases and
proceeds from sales of investment securities other than short-term
investments aggregated $32,232,242 and $35,645,856, respectively. There
were no purchases or sales of U.S. government securities.
Note 4
Regulatory matters and litigation
On April 8, 2004, Putnam Management entered into agreements with the
Securities and Exchange Commission and the Massachusetts Securities
Division representing a final settlement of all charges brought
against Putnam Management by those agencies on October 28, 2003 in
connection with excessive short-term trading by Putnam employees
and, in the case of the charges brought by the Massachusetts
Securities Division, by participants in some Putnam-administered
401(k) plans. The settlement with the SEC requires Putnam Management
to pay $5 million in disgorgement plus a civil monetary penalty of
$50 million, and the settlement with the Massachusetts Securities
Division requires Putnam Management to pay $5 million in restitution
and an administrative fine of $50 million. The settlements also
leave intact the process established under an earlier partial
settlement with the SEC under which Putnam Management agreed to pay
the amount of restitution determined by an independent consultant,
which may exceed the disgorgement and restitution amounts specified
above, pursuant to a plan to be developed by the independent
consultant.
Putnam Management, and not the investors in any Putnam fund, will
bear all costs, including restitution, civil penalties and
associated legal fees stemming from both of these proceedings. The
SEC's and Massachusetts Securities Division's allegations and
related matters also serve as the general basis for numerous
lawsuits, including purported class action lawsuits filed against
Putnam Management and certain related parties, including certain
Putnam funds. Putnam Management has agreed to bear any costs
incurred by Putnam funds in connection with these lawsuits. Based on
currently available information, Putnam Management believes that the
likelihood that the pending private lawsuits and purported class
action lawsuits will have a material adverse financial impact on the
fund is remote, and the pending actions are not likely to materially
affect its ability to provide investment management services to its
clients, including the Putnam funds.
Review of these matters by counsel for Putnam Management and by
separate independent counsel for the Putnam funds and their
independent Trustees is continuing.
Fund information
About Putnam Investments
One of the largest mutual fund families in the United States, Putnam
Investments has a heritage of investment leadership dating back to Judge
Samuel Putnam, whose Prudent Man Rule has defined fiduciary tradition
and practice since 1830. Founded over 65 years ago, Putnam Investments
was built around the concept that a balance between risk and reward is
the hallmark of a well-rounded financial program. We presently manage
over 100 mutual funds in growth, value, blend, fixed income, and
international.
Investment Manager
Putnam Investment
Management, LLC
One Post Office Square
Boston, MA 02109
Marketing Services
Putnam Retail Management
One Post Office Square
Boston, MA 02109
Custodian
Putnam Fiduciary Trust Company
Legal Counsel
Ropes & Gray LLP
Trustees
John A. Hill, Chairman
Jameson Adkins Baxter
Charles B. Curtis
Ronald J. Jackson
Paul L. Joskow
Elizabeth T. Kennan
John H. Mullin III
Robert E. Patterson
George Putnam, III
A.J.C. Smith
W. Thomas Stephens
W. Nicholas Thorndike
Officers
George Putnam, III
President
Charles E. Porter
Executive Vice President,
Treasurer and Principal
Executive Officer
Patricia C. Flaherty
Senior Vice President
Steven D. Krichmar
Vice President and
Principal Financial Officer
Michael T. Healy
Assistant Treasurer and
Principal Accounting Officer
Beth S. Mazor
Vice President
Mark C. Trenchard
Vice President and
BSA Compliance Officer
William H. Woolverton
Vice President and
Chief Legal Officer
Judith Cohen
Clerk and Assistant Treasurer
Call 1-800-225-1581 weekdays from 9 a.m. to 5 p.m. Eastern Time, or
visit our Web site (www.putnaminvestments.com) any time for up-to-date
information about the fund's NAV.
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
PRSRT STD
U.S. POSTAGE PAID
PUTNAM
INVESTMENTS
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www.putnaminvestments.com.
212134 061 4/04
Item 2. Code of Ethics:
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Not applicable
Item 3. Audit Committee Financial Expert:
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Not applicable
Item 4. Principal Accountant Fees and Services:
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Not applicable
Items 5-6. [Reserved]
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Item 7. Disclosure of Proxy Voting Policies and Procedures For Closed End
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Management Investment Companies: Not applicable
--------------------------------
Item 8. [Reserved]
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Item 9. Submission of Matters to a Vote of Security Holders:
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Not applicable
Item 10. Controls and Procedures:
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(a) The registrant's principal executive officer and principal financial
officer have concluded, based on their evaluation of the
effectiveness of the design and operation of the registrant's
disclosure controls and procedures as of a date within 90 days of
the filing date of this report on Form N-CSR, that the design and
operation of such procedures are generally effective to provide
reasonable assurance that information required to be disclosed by
the investment company in the reports that it files or submits under
the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the
Commission's rules and forms.
Although such officers reached the conclusion expressed in the
preceding paragraph, they are aware of matters that raise concerns
with respect to controls, each of which arose in connection with the
administration of 401(k) plans by Putnam Fiduciary Trust Company.
The first matter, which occurred in early 2001, involved the willful
circumvention of controls by certain Putnam employees in connection
with the correction of operational errors with respect to a 401(k)
client's investment in certain Putnam Funds, which led to losses in
five Putnam Funds (not including the registrant). Such officers
became aware of this matter in February 2004. The second matter,
which occurred in 2002, involved the willful circumvention by
certain Putnam employees of policies and procedures in connection
with the payment of Putnam corporate expenses. Such officers did
not learn that this matter involved a Putnam Fund until January
2004. Putnam has made restitution to the affected Funds,
implemented a number of personnel changes, including senior
personnel, begun to implement changes in procedures to address these
items and informed the SEC, the Funds' Trustees and independent
auditors. An internal investigation and review of procedures and
controls are currently ongoing.
In reaching the conclusion expressed herein, the registrant's
principal executive officer and principal financial officer
considered a number of factors, including the nature of the matters
described above, when the matters occurred, the individuals
involved, personnel changes that have occurred since these matters
occurred, the results to date of the current ongoing investigation
and the overall quality of controls at Putnam at this time.
(b) Changes in internal control over financial reporting:
Not applicable
Item 11. Exhibits:
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(a) Not applicable
(b) A separate certification for each principal executive officer and
principal financial officer of the registrant as required by Rule 30a-2
under the Investment Company Act of 1940, as amended, and the officer
certifications as required by Section 906 of the Sarbanes-Oxley Act of 2002
are filed herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934
an the Investment Company Act of 1940, the registrant has duly
caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
NAME OF REGISTRANT
By (Signature and Title): /s/Michael T. Healy
--------------------------
Michael T. Healy
Principal Accounting Officer
Date: May 4, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934
an the Investment Company Act of 1940, this report has been signed
below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
By (Signature and Title): /s/Charles E. Porter
---------------------------
Charles E. Porter
Principal Executive Officer
Date: May 4, 2004
By (Signature and Title): /s/Steven D. Krichmar
---------------------------
Steven D. Krichmar
Principal Financial Officer
Date: May 4, 2004