Putnam
High Income
Bond Fund
ANNUAL REPORT ON PERFORMANCE AND OUTLOOK
8-31-04
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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:
From the Trustees
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John A. Hill and
George Putnam, III
Dear Fellow Shareholder:
We are pleased to announce that three new Trustees have joined the Board
of Trustees of your fund. All three have had outstanding careers as
leaders in the investment management industry. Myra R. Drucker is a Vice
Chair of the Board of Trustees of Sarah Lawrence College and serves as
Chair of the New York Stock Exchange (NYSE) Pension Managers Advisory
Committee and as a Trustee of Commonfund, a not-for-profit asset
management firm. Richard B. Worley is Managing Partner of Permit Capital
LLC, an investment management firm. Both Ms. Drucker and Mr. Worley are
independent Trustees (i.e., Trustees who are not "interested persons" of
your fund or its investment advisor). Charles E. Haldeman, Jr., the
third new Trustee, is President and Chief Executive Officer of Putnam
Investments. We look forward to the contributions that these new
Trustees will make to the continued success of the Putnam funds.
Investment returns during the 12-month period covered by the following
report were generally positive, though advances varied across investment
styles as well as sectors of the equity and fixed-income markets. Putnam
High Income Bond Fund delivered strong results. As the economic and
market environment changed from one of strength in 2003 to a period of
greater uncertainty in 2004, the members of your fund's management teams
made strategic decisions regarding security selection, sector
weightings, and credit quality. The fund's performance validates the
success of these strategies, which were both in reaction to, as well as
in anticipation of, the changing investment landscape. In the following
pages, the management teams describe how market conditions changed
during the year and how the fund responded. They also outline their
expectations for the coming months.
Respectfully yours,
/S/ JOHN A. HILL /S/ GEORGE PUTNAM, III
John A. Hill George Putnam, III
Chairman of the Trustees President of the Funds
October 20, 2004
Report from Fund Management
Fund highlights
* During its fiscal year ended August 31, 2004, Putnam High Income Bond
Fund had total returns of 16.40% at net asset value (NAV) and 12.06% at
market price.
* The fund's primary benchmark, the Merrill Lynch All Convertible Index,
returned 9.72%. The fund's secondary benchmark, the JP Morgan Global
High Yield Index, returned 14.62%.
* The average return for the fund's Lipper category, Convertible
Securities Funds (closed-end), was 10.59%.
* See the Performance Summary that begins on page 8 for additional fund
performance, comparative performance, and Lipper data.
Performance commentary
Over the past 12 months, returns in the global capital markets underwent
a fundamental change, significantly cooling off from the strong returns
that had characterized the first half of the period. Expectations of
rising interest rates and renewed concerns about geopolitical turmoil
contributed to a more cautious investor approach in the second half of
the fiscal year. Management's selection of strong-performing convertible
bonds in the first half of the period and the fund's significant
allocation to high-yield corporate bonds helped the fund outperform both
of its benchmarks and the average return of its Lipper peer group. It is
important to note that a fund's performance at market price may differ
from its results at NAV. Although market price performance generally
reflects investment results, it may also be influenced by several other
factors, including changes in investor perceptions of the fund or its
investment advisor, market conditions, fluctuations in supply and
demand for the fund's shares, and changes in fund distributions.
TOTAL RETURN FOR
PERIODS ENDED 8/31/04
Market
(inception 7/9/87) NAV price
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1 year 16.40% 12.06%
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5 years 58.79 36.49
Annual average 9.69 6.42
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10 years 139.54 104.14
Annual average 9.13 7.40
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Annual average
(life of fund) 10.12 9.10
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Data is historical. 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. Performance does not
reflect taxes on reinvested distributions.
FUND PROFILE
Putnam High Income Bond Fund seeks to provide high current income by
investing 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
Convertible bonds, which are tied to the stock market by their
convertibility to an underlying stock, continued to feel the influence
of equity fluctuations during the past 12 months. After a strong year in
2003, in which stocks made an impressive comeback from a three-year bear
market, the stock market changed significantly in 2004. High-growth
industries such as biotechnology and semiconductors, which had led the
way in 2003, gave way in 2004 to sectors with less volatility, such as
consumer products, pharmaceuticals, and utilities. As investors factored
in high gasoline prices, continued threats of global terrorism, and
uncertainty over the impact of higher interest rates on economic growth,
many took profits in 2004 and adopted a wait-and-see attitude,
especially as the looming presidential election was generating
increasing uncertainty.
After stellar returns in 2003, led by lower-quality companies,
convertible bonds cooled off in 2004, following the equity trend.
Convertibles posted slightly negative returns for the six-month period
that nearly matched the performance of the Standard & Poor's 500 Index,
a broad-based measure of the stock market.
A strong 18-month run in the high-yield corporate bond market leveled
off during the middle of the period, in early 2004. However, credit
spreads, which reflect the yield difference between lower-rated bonds
and Treasuries, narrowed further, while the income produced by
high-yield bonds continued to make a solid contribution to returns.
Meanwhile, important positive factors such as declining default rates
and improved corporate balance sheets remained in place throughout the
fund's fiscal year.
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MARKET SECTOR PERFORMANCE 12 MONTHS ENDED 8/31/04
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Bonds
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Merrill Lynch All Convertible Index (convertible securities) 9.72%
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JP Morgan Global High Yield Index (global high-yield
corporate bonds) 14.62%
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Lehman Aggregate Bond Index (broad bond market) 6.13%
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Lehman Global Aggregate Bond Index (international bonds) 10.33%
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Equities
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S&P 500 Index (broad stock market) 11.46%
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Russell 2000 Index (stocks of small and midsize companies) 11.35%
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MSCI EAFE Index (international stocks) 22.64%
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These indexes provide an overview of performance in different market
sectors for the 12 months ended 8/31/04.
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Strategy overview
During the first half of the period, when the stock and convertible bond
markets were strong, we focused on "busted convertibles," which are
securities that have seen large price declines (in both the convertible
and the underlying stock price). These securities continued to perform
well through early 2004; however, in the second half of the period,
stock valuations were much higher and, as a result, there was less room
for growth in the busted convertible universe. We turned our attention
toward finding opportunities in select industries that we believed could
outperform, such as pharmaceuticals and utilities, and we found value in
another type of security known as a "mandatory" convertible. These
securities require a mandatory conversion to the stock upon maturity (as
opposed to a return of principal), and they are therefore more sensitive
to the performance of the stock. Mandatory convertibles also tend to be
less sensitive to changes in interest rates and typically offer
significantly higher yields than new-issue convertibles.
In the high-yield corporate bond portion of the portfolio, we kept the
fund overweighted in lower-quality bonds, which were the
strongest-performing part of the market. As always, we sought companies
offering a sustainable competitive advantage, a manageable debt
structure, and the ability to generate adequate cash flows. As the
market's strength eased in early 2004, we began to take profits by
reducing the fund's holdings of lower-rated securities.
[GRAPHIC OMITTED: horizontal bar chart PORTFOLIO COMPOSITION COMPARED]
PORTFOLIO COMPOSITION COMPARED
as of 2/29/04 as of 8/31/04
Convertible
securities 49.4% 48.9%
Corporate bonds
and notes 40.2% 41.0%
Short-term
investments 8.0% 7.2%
Common stocks 1.7% 2.0%
Other 0.3% 0.6%
Preferred stocks 0.4% 0.3%
Footnote reads:
This chart shows how the fund's 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
The busted convertible part of the convertible bond market performed
well during the first half of the period, and the fund's holdings of
Northrop Grumman, a defense contractor, benefited. As the post-9/11
terrorism concerns receded, the stock prices of several defense
companies had declined to pre-9/11 levels by the fall of 2003. The
Northrop Grumman issue came with an attractive yield and was backed by a
large company with ample cash flows.
By the midpoint of the fund's fiscal year, several of the fund's
convertible holdings were being called, or redeemed, by the issuers.
While this locked in attractive gains for the fund, it removed any
potential for future gains that these securities might have provided for
the rest of the fund's fiscal year. Examples included U.S. Cellular, a
telecommunications company, and Kulicke & Soffa Industries, a leading
supplier of semiconductor assembly equipment. Approximately 5% of the
portfolio was affected by this activity. Fortunately, we were able to
find opportunities for reinvestment into mandatory convertible
securities, which offer higher yields in exchange for a mandatory
conversion to equity upon maturity. Although these carry more equity
risk, they are typically offered by larger, more substantial companies
that we believe have lower chances of defaulting than other types of
convertibles.
[GRAPHIC OMITTED: TOP HOLDINGS]
TOP HOLDINGS
(Percent of fund's net assets as of 8/31/04)
Convertible Securities
1 Northrop Grumman Corp. (2.2%)
Cumulative convertible preferred, series B, $7.00
Capital goods
2 Schering-Plough Corp. (1.6%)
Convertible preferred, $3.00
Health care
3 TXI Capital Trust I (1.3%)
Convertible preferred, $2.75
Consumer cyclicals
4 Host Marriott Financial Trust (1.3%)
Convertible preferred, $3.375
Financial
5 FelCor Lodging Trust, Inc. (1.3%)
Cumulative convertible preferred, series A, $1.95
Financial
Corporate Bonds
1 Dow Jones CDX HY (2.3%)
144A pass-through certificates 7.75%, 2009
Other
2 Qwest Corp. (0.3%)
144A notes 9.125%, 2012
Communication services
3 NRG Energy, Inc. (0.3%)
144A senior secured notes 8%, 2013
Utilities and power
4 Charter Communications Holdings, LLC/Capital Corp. (0.3%)
Senior notes 11.125%, 2011
Consumer staples
5 Huntsman ICI Chemicals, Inc. (0.3%)
Company guaranty 10.125%, 2009
Basic materials
Footnote reads:
The fund's holdings will change over time.
We took a significant position for the fund in a mandatory convertible
offered by Schering-Plough, which is now a top holding in the fund. This
large pharmaceutical company has stumbled over the past few years due to
management problems and the transition to over-the-counter drugs,
notably of Claritin, an allergy medication. The stock price has been low
for the past few years, but the company is regrouping with new
management and came out with an attractive convertible issue to help
finance new research initiatives. Despite its problems, Schering-Plough
is an investment-grade company, and we believe the company is on the
right track and that these convertible bonds should benefit the fund.
The fund was generally overweighted in the utilities sector relative to
the Merrill Lynch All Convertible Index, and this positioning made a
positive contribution. In this sector, Sierra Pacific, a Nevada-based
utility, has been a big success for the fund, as the stock and
convertible bond prices have seen enormous gains. We also acquired the
mandatory convertibles of Great Plains Energy, a Midwestern utility that
came with an attractive coupon rate.
In the high-yield portion of the fund, bonds issued by subsidiaries of
Edison International were among the strongest performers. Edison, which
owns California's second-largest electric utility, Southern California
Edison, also owns Edison Mission Energy. This subsidiary owns a
portfolio of independent power plants located around the world. After
poor performance in 2002, the company sold assets and shored up its
balance sheet, which drove strong returns for the fund's Edison Mission
holdings. Another top performer was diversified chemicals manufacturer
Huntsman International, which benefited from a rebound in chemical
prices. The company carries a significant debt load, but its cash flow
has improved as commodity prices have risen. Finally, Williams Companies
experienced significant capital appreciation as management improved the
company's balance sheet by focusing on its core pipeline business,
selling nonproductive assets, and paying down debt.
We sold the fund's high-yield holdings of Trico Marine, an energy
service company that underperformed, and Dobson Communications, a
wireless communications firm. Dobson has had poor financial performance,
in part because of its reliance on revenues from AT&T Wireless, which
has been struggling. Overall, however, the fund's high-yield corporate
holdings performed well and significantly helped the fund's relative
performance.
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), George Maris (Portfolio Member), Mike Abata, Ronald
Bukovac, Bartlett Geer, Deborah Kuenstner, Coleman Lannum, Christopher
Miller, Jeanne Mockard, and Hugh Mullin. George Maris, who became a
Portfolio Member in April 2004, has been at Putnam Management since July
1999. The members of the Core Fixed-Income High-Yield Team are Robert
Salvin (Portfolio Member), Jeffrey Kaufman, Geoffrey Kelley, Stephen
Peacher, Neil Reiner, Paul Scanlon, Rosemary Thomsen, and Joseph Towell.
Robert Salvin became a Portfolio Member in April 2004 and has been at
Putnam Management since July 2000. Prior to July 2000, he was at
BancBoston Robertson Stephens, and prior to June 2000 he was
self-employed.
OF SPECIAL INTEREST
MERGER WITH PUTNAM HIGH INCOME OPPORTUNITIES TRUST PROPOSED
The fund's Trustees have approved the merger of Putnam High Income
Opportunities Trust into your fund. Putnam High Income Opportunities
Trust is a closed-end fixed-income fund whose objectives, strategy, and
investments are substantially similar to those of your fund. The merger
may result in lower expenses for shareholders of each fund due to the
larger asset base of the combined fund. A prospectus/proxy statement
containing more information about the proposed merger is expected to be
sent to shareholders of each fund in November 2004. Completion of the
merger is subject to a number of conditions, including approval by
shareholders of each fund at a joint shareholder meeting expected to be
held within the coming months.
This report is not an offer to sell, nor a solicitation of an offer to
buy, shares of any fund, nor is it a solicitation of a proxy. To receive
a free copy of the prospectus/proxy statement relating to the proposed
merger (which contains important information about fees, expenses, and
risk considerations) after a registration statement has been filed with
the SEC and becomes effective, please call 1-800-225-1581. The
prospectus/proxy statement will also be available without charge on the
SEC's Web site (www.sec.gov). Read the prospectus/proxy statement
carefully before making any investment decisions.
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 downshift in the market for convertible bonds, traditional bonds,
and stocks reflects the wait-and-see attitude among investors regarding
a number of issues -- notably, the economy, corporate profits, the war
in Iraq, and the U.S. presidential election. The impact of high oil
prices and higher interest rates on economic growth has yet to be
determined, although initial reports show that these factors have not
affected business investment or consumer spending -- two key drivers of
the economy -- nearly as much as had been anticipated. Credit yield
spreads, which measure the difference in yield between lower-rated bonds
(such as convertibles and high-yield corporates) and Treasuries, have
narrowed considerably, but we believe spreads may have room to narrow
further. Most importantly, we believe we are not in an economic or
market "bubble" phase right now. Rather, the economy and corporate and
high-yield bond markets appear to be on hold, but we believe they still
have the potential for further growth. In the coming months, we will
continue to maintain vigilance against potential headwinds that could
adversely affect the fund's holdings, while continuing to seek
opportunities for both income and capital appreciation.
The views expressed in this report are exclusively those of Putnam
Management. They are not meant as investment advice. Mutual funds that
invest in bonds are subject to certain risks, including interest-rate
risk, credit risk, and inflation risk. As interest rates rise, the
prices of bonds fall. Long-term bonds are more exposed to interest-rate
risk than short-term bonds. Unlike bonds, bond funds have ongoing fees
and expenses. Lower-rated bonds may offer higher yields in return for
more risk.
Performance summary
This section shows your fund's performance during its fiscal year, which
ended August 31, 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 represents 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 8/31/04
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NAV Market price
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1 year 16.40% 12.06%
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5 years 58.79 36.49
Annual average 9.69 6.42
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10 years 139.54 104.14
Annual average 9.13 7.40
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Life of fund
(since 7/9/87)
Annual average 10.12 9.10
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Performance does not reflect taxes on reinvested distributions.
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COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 8/31/04
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Lipper
JP Morgan Convertible
Merrill Lynch Global Securities Funds
All Convertible High Yield (closed-end)
Index Index category average ++
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1 year 9.72% 14.62% 10.59%
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5 years 31.43 38.05 21.12
Annual average 5.62 6.66 3.80
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10 years 158.46 115.52 113.01
Annual average 9.96 7.98 7.78
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Life of fund
(since 7/9/87)
Annual average --* --+ 9.02
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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.
+ Index began operations on 12/31/93.
++ Over the 1-, 5-, and 10-year periods ended 8/31/04, there were 13, 8,
and 7 funds, respectively, in this Lipper category.
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PRICE AND DISTRIBUTION INFORMATION 12 MONTHS ENDED 8/31/04
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Distributions (number) 12
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Income $0.558
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Capital gains --
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Total $0.558
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Share value: NAV Market price
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8/31/03 $7.73 $7.31
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8/31/04 8.37 7.62
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Current return (end of period)
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Current dividend rate 1 6.67% 7.32%
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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 9/30/04 (MOST RECENT CALENDER QUARTER)
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NAV Market price
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1 year 15.52% 11.36%
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5 years 61.56 52.70
Annual average 10.07 8.83
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10 years 141.54 112.98
Annual average 9.22 7.85
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Life of fund
(since 7/9/87)
Annual average 10.16 9.20
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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 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 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 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.
Putnam's policy on confidentiality
In order to conduct business with our shareholders, we must obtain
certain personal information such as account holders' addresses,
telephone numbers, Social Security numbers, and the names of their
financial advisors. We use this information to assign an account number
and to help us maintain accurate records of transactions and account
balances.
It is our policy to protect the confidentiality of your information,
whether or not you currently own shares of our funds, and in particular,
not to sell information about you or your accounts to outside marketing
firms. We have safeguards in place designed to prevent unauthorized
access to our computer systems and procedures to protect personal
information from unauthorized use.
Under certain circumstances, we share this information with outside
vendors who provide services to us, such as mailing and proxy
solicitation. In those cases, the service providers enter into
confidentiality agreements with us, and we provide only the information
necessary to process transactions and perform other services related to
your account. We may also share this information with our Putnam
affiliates to service your account or provide you with information about
other Putnam products or services. It is also our policy to share
account information with your financial advisor, if you've listed one on
your Putnam account.
If you would like clarification about our confidentiality policies or
have any questions or concerns, please don't hesitate to contact us at
1-800-225-1581, Monday through Friday, 8:30 a.m. to 7:00 p.m., or
Saturdays from 9:00 a.m. to 5:00 p.m. Eastern Time.
Proxy voting
Putnam is committed to managing our mutual funds in the best interests
of our shareholders. The Putnam funds' proxy voting guidelines and
procedures, as well as information regarding how your fund voted proxies
relating to portfolio securities during the 12-month period ended June
30, 2004, are available on the Putnam Individual Investor Web site,
www.putnaminvestments.com/individual, and on the SEC's Web site,
www.sec.gov. If you have questions about finding forms on the SEC's Web
site, you may call the SEC at 1-800-SEC-0330. You may also obtain the
Putnam funds' proxy voting guidelines and procedures by calling Putnam's
Shareholder Services at 1-800-225-1581.
Fund portfolio holdings
For periods ending on or after July 9, 2004, the fund will file a
complete schedule of its portfolio holdings with the SEC for the first
and third quarters of each fiscal year on Form N-Q. Shareholders may
obtain the fund's Forms N-Q on the SEC's Web site at www.sec.gov. In
addition, the fund's Forms N-Q may be reviewed and copied at the SEC's
public reference room in Washington, D.C. You may call the SEC at
1-800-SEC-0330 for information about the SEC's Web site or the operation
of the public reference room.
A guide to the financial statements
These sections of the report, as well as the accompanying Notes,
preceded by the Report of Independent Registered Public Accounting Firm,
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 year.
Statement of changes in net assets shows how the fund's net assets were
affected by the fund's net investment gain or loss, 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.
Report of Independent Registered Public Accounting Firm
To the Trustees and Shareholders of
Putnam High Income Bond Fund
In our opinion, the accompanying statement of assets and liabilities,
including the fund's portfolio, and the related statements of operations
and of changes in net assets and the financial highlights present
fairly, in all material respects, the financial position of Putnam High
Income Bond Fund (the "fund") at August 31, 2004, and the results of its
operations, the changes in its net assets and the financial highlights
for each of the periods indicated, in conformity with accounting
principles generally accepted in the United States of America. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the fund's management;
our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these
financial statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made
by management, and evaluating the overall financial statement
presentation. We believe that our audits, which included confirmation of
investments owned at August 31, 2004 by correspondence with the
custodian, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
October 12, 2004
The fund's portfolio
August 31, 2004
Corporate bonds and notes (42.3%) (a)
Principal amount Value
Basic Materials (4.9%)
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$1,000 Abitibi-Consolidated Finance LP
company guaranty 7 7/8s, 2009 $1,050
105,000 Acetex Corp. sr. notes 10 7/8s, 2009
(Canada) 115,500
110,000 AK Steel Corp. company guaranty
7 7/8s, 2009 106,150
10,000 AK Steel Corp. company guaranty
7 3/4s, 2012 9,400
40,000 Armco, Inc. sr. notes 8 7/8s, 2008 39,600
30,000 Avecia Group PLC company guaranty
11s, 2009 (United Kingdom) 24,000
160,000 BCP Caylux Holdings Luxembourg SCA
144A sr. sub. notes 9 5/8s, 2014
(Luxembourg) 171,800
50,000 Century Aluminum Co. 144A company
guaranty 7 1/2s, 2014 51,250
145,000 Compass Minerals Group, Inc. company
guaranty 10s, 2011 160,950
40,000 Compass Minerals International, Inc.
sr. disc. notes stepped-coupon zero %
(12s, 6/1/08), 2013 (STP) 31,200
110,000 Compass Minerals International, Inc.
sr. notes stepped-coupon zero %
(12 3/4s, 12/15/07), 2012 (STP) 90,200
87,000 Equistar Chemicals LP notes 8 3/4s,
2009 91,568
219,000 Equistar Chemicals LP/Equistar
Funding Corp. company guaranty
10 1/8s, 2008 243,090
60,000 Georgia-Pacific Corp. bonds 7 3/4s,
2029 62,400
100,000 Georgia-Pacific Corp. company
guaranty 9 3/8s, 2013 117,750
170,000 Georgia-Pacific Corp. debs. 7.7s,
2015 189,975
4,000 Georgia-Pacific Corp. sr. notes
7 3/8s, 2008 4,370
145,000 Gerdau Ameristeel Corp. sr. notes
10 3/8s, 2011 (Canada) 164,575
198,000 Hercules, Inc. company guaranty
11 1/8s, 2007 232,650
110,000 Hercules, Inc. 144A sr. sub. notes
6 3/4s, 2029 109,175
30,000 Huntsman Advanced Materials, LLC
144A sec. FRN 11.86s, 2008 31,500
40,000 Huntsman Advanced Materials, LLC
144A sec. notes 11s, 2010 45,600
111,000 Huntsman Co., LLC sr. disc. notes
zero %, 2008 66,045
295,000 Huntsman ICI Chemicals, Inc. company
guaranty 10 1/8s, 2009 303,850
205,000 Huntsman ICI Holdings sr. disc.
notes zero %, 2009 104,550
EUR 10,000 Huntsman International, LLC sr. sub.
notes Ser. EXCH, 10 1/8s, 2009 12,254
$90,000 Huntsman, LLC company guaranty
11 5/8s, 2010 100,800
50,000 Huntsman, LLC 144A company guaranty
11 1/2s, 2012 51,250
75,000 Innophos, Inc. 144A sr. sub. notes
8 7/8s, 2014 78,000
70,000 International Steel Group, Inc. 144A
sr. notes 6 1/2s, 2014 67,550
170,000 ISP Chemco, Inc. company guaranty
Ser. B, 10 1/4s, 2011 189,125
90,000 Jefferson Smurfit Corp. company
guaranty 7 1/2s, 2013 94,050
10,000 Kaiser Aluminum & Chemical Corp. sr.
notes Ser. B, 10 7/8s, 2006 (In
default) (NON) 9,775
120,000 Kaiser Aluminum & Chemical Corp. sr.
sub. notes 12 3/4s, 2003 (In
default) (NON) (DEF) 24,900
10,000 Lyondell Chemical Co. bonds 11 1/8s,
2012 11,375
165,000 Lyondell Chemical Co. company
guaranty 10 1/2s, 2013 185,625
70,000 Lyondell Chemical Co. notes Ser. A,
9 5/8s, 2007 74,813
170,000 MDP Acquisitions PLC sr. notes
9 5/8s, 2012 (Ireland) 191,250
53,473 MDP Acquisitions PLC sub. notes
15 1/2s, 2013 (Ireland) (PIK) 62,029
180,000 Millennium America, Inc. company
guaranty 9 1/4s, 2008 196,200
20,000 Millennium America, Inc. 144A sr.
notes 9 1/4s, 2008 21,800
EUR 10,000 Nalco Co. 144A sr. notes 7 3/4s,
2011 12,923
EUR 70,000 Nalco Co. 144A sr. sub. notes 9s,
2013 90,331
$170,000 Nalco Co. 144A sr. sub. notes
8 7/8s, 2013 183,388
160,000 Norske Skog Canada, Ltd. sr. notes
7 3/8s, 2014 (Canada) 162,800
75,504 PCI Chemicals Canada sec. sr. notes
10s, 2008 (Canada) 73,616
23,909 Pioneer Companies, Inc. sec. FRN
5.086s, 2006 22,594
128,000 Potlatch Corp. company guaranty 10s,
2011 144,640
10,000 Resolution Performance Products, LLC
sr. notes 9 1/2s, 2010 10,425
90,000 Rhodia SA unsub. notes 10 1/4s, 2010
(France) 91,800
EUR 65,000 SGL Carbon SA 144A sr. notes 8 1/2s,
2012 (Luxembourg) 81,035
$125,000 Steel Dynamics, Inc. company
guaranty 9 1/2s, 2009 138,125
120,000 Stone Container Corp. sr. notes
9 3/4s, 2011 134,100
45,000 Stone Container Corp. sr. notes
8 3/8s, 2012 49,500
25,000 Stone Container Finance 144A company
guaranty 7 3/8s, 2014 (Canada) 25,813
200,000 Ucar Finance, Inc. company guaranty
10 1/4s, 2012 227,000
55,000 United Agri Products 144A sr. notes
8 1/4s, 2011 59,125
172,000 United States Steel Corp. sr. notes
9 3/4s, 2010 193,500
6,000 Wheeling-Pittsburgh Steel Corp. sr.
notes 6s, 2010 4,200
11,665 Wheeling-Pittsburgh Steel Corp. sr.
notes 5s, 2011 8,165
20,000 WHX Corp. sr. notes 10 1/2s, 2005 19,000
--------------
5,671,074
Capital Goods (3.8%)
-------------------------------------------------------------------------------
95,000 AEP Industries, Inc. sr. sub. notes
9 7/8s, 2007 97,375
190,000 AGCO Corp. company guaranty 9 1/2s,
2008 205,675
96,410 Air2 US 144A sinking fund Ser. D,
12.266s, 2020 (In default) (NON) 1
177,000 Allied Waste North America, Inc.
company guaranty Ser. B, 8 1/2s,
2008 194,258
120,000 Allied Waste North America, Inc.
company guaranty Ser. B, 7 5/8s,
2006 125,850
75,000 Allied Waste North America, Inc.
sec. notes 6 1/2s, 2010 75,000
90,000 Argo-Tech Corp. 144A sr. notes
9 1/4s, 2011 94,950
30,000 BE Aerospace, Inc. sr. notes 8 1/2s,
2010 32,400
85,000 BE Aerospace, Inc. sr. sub. notes
9 1/2s, 2008 86,700
2,000 BE Aerospace, Inc. sr. sub. notes
Ser. B, 8 7/8s, 2011 1,950
40,000 BE Aerospace, Inc. sr. sub. notes
Ser. B, 8s, 2008 38,950
15,000 Berry Plastics Corp. company
guaranty 10 3/4s, 2012 16,838
105,000 Blount, Inc. company guaranty 13s,
2009 111,956
50,000 Blount, Inc. company guaranty 7s,
2005 51,750
60,000 Blount, Inc. sr. sub. notes 8 7/8s,
2012 62,700
40,000 Browning-Ferris Industries, Inc.
debs. 7.4s, 2035 35,600
40,000 Browning-Ferris Industries, Inc. sr.
notes 6 3/8s, 2008 40,600
EUR 10,000 Crown Holdings SA bonds 10 1/4s,
2011 (France) 13,761
$250,000 Crown Holdings SA notes 10 7/8s,
2013 (France) 290,625
60,000 Crown Holdings SA notes 9 1/2s, 2011
(France) 66,600
119,000 Decrane Aircraft Holdings Co.
company guaranty 17s, 2008 45,220
109,000 Earle M. Jorgensen Co. sec. notes
9 3/4s, 2012 120,990
95,000 FIMEP SA sr. notes 10 1/2s, 2013
(France) 109,725
EUR 50,000 Flender Holdings 144A sr. notes 11s,
2010 (Germany) 69,291
78,000 Flowserve Corp. company guaranty
12 1/4s, 2010 88,530
130,000 Hexcel Corp. sr. sub. notes 9 3/4s,
2009 136,825
DEM 10,000 Impress Metal Packaging Holding NV
sr. sub. notes 9 7/8s,
2007 (Netherlands) 6,197
EUR 95,000 Impress Metal Packaging Holding NV
sr. sub. notes 9 7/8s,
2007 (Netherlands) 58,873
$105,000 Invensys, PLC notes 9 7/8s, 2011
(United Kingdom) 106,575
70,000 K&F Industries, Inc. sr. sub. notes
Ser. B, 9 5/8s, 2010 77,525
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 54,125
40,000 L-3 Communications Corp. company
guaranty 6 1/8s, 2013 39,400
265,000 Legrand SA debs. 8 1/2s, 2025
(France) 288,519
117,000 Manitowoc Co., Inc. (The) company
guaranty 10 1/2s, 2012 133,380
EUR 25,000 Manitowoc Co., Inc. (The) company
guaranty 10 3/8s, 2011 33,461
$30,000 Manitowoc Co., Inc. (The) sr. notes
7 1/8s, 2013 30,975
25,000 Mueller Group, Inc. 144A sec. FRN
6.44s, 2011 25,563
75,000 Mueller Group, Inc. 144A sr. sub.
notes 10s, 2012 80,438
5,000 Owens-Brockway Glass company
guaranty 8 7/8s, 2009 5,438
145,000 Owens-Brockway Glass company
guaranty 8 1/4s, 2013 152,975
70,000 Owens-Brockway Glass company
guaranty 7 3/4s, 2011 74,200
132,000 Owens-Brockway Glass sr. sec. notes
8 3/4s, 2012 146,520
50,000 Pliant Corp. sec. notes 11 1/8s,
2009 53,625
175,000 Sequa Corp. sr. notes Ser. B,
8 7/8s, 2008 188,125
125,000 Siebe PLC 144A sr. unsub. 6 1/2s,
2010 (United Kingdom) 112,500
75,000 Solo Cup Co. sr. sub. notes 8 1/2s,
2014 72,750
95,000 Tekni-Plex, Inc. company guaranty
Ser. B, 12 3/4s, 2010 91,200
65,000 Tekni-Plex, Inc. 144A sr. sec. notes
8 3/4s, 2013 62,400
25,000 Terex Corp. company guaranty 9 1/4s,
2011 28,000
46,000 Terex Corp. company guaranty Ser. B,
10 3/8s, 2011 51,980
75,000 Titan Corp. (The) company guaranty
8s, 2011 77,438
53,000 Trimas Corp. company guaranty
9 7/8s, 2012 56,180
50,000 Vought Aircraft Industries, Inc. sr.
notes 8s, 2011 49,625
--------------
4,388,627
Communication Services (3.3%)
-------------------------------------------------------------------------------
29,000 Alamosa Delaware, Inc. company
guaranty 11s, 2010 32,117
29,000 Alamosa Delaware, Inc. company
guaranty stepped-coupon zero %
(12s, 7/31/05), 2009 (STP) 28,855
55,000 Alamosa Delaware, Inc. sr. notes
8 1/2s, 2012 54,725
25,000 American Cellular Corp. company
guaranty 9 1/2s, 2009 20,125
65,000 American Cellular Corp. sr. notes
Ser. B, 10s, 2011 52,813
230,000 American Tower Corp. sr. notes
9 3/8s, 2009 245,525
55,000 American Tower Corp. 144A sr. notes
7 1/2s, 2012 55,550
100,000 American Towers, Inc. company
guaranty 7 1/4s, 2011 103,500
30,000 Asia Global Crossing, Ltd. sr. notes
13 3/8s, 2010 (Bermuda) (In default)
(NON) 2,400
130,000 Centennial Cellular Operating Co.
company guaranty 10 1/8s, 2013 133,575
20,000 Cincinnati Bell Telephone Co.
company guaranty 6.3s, 2028 17,500
80,000 Cincinnati Bell, Inc. company
guaranty 7 1/4s, 2013 75,200
50,000 Cincinnati Bell, Inc. notes 7 1/4s,
2023 43,750
115,000 Cincinnati Bell, Inc. sr. sub. notes
8 3/8s, 2014 101,775
166,000 Crown Castle International Corp. sr.
notes 9 3/8s, 2011 191,730
35,000 Eircom Funding notes 8 1/4s, 2013
(Ireland) 37,800
50,000 Fairpoint Communications, Inc. sr.
sub. notes 12 1/2s, 2010 53,500
11,436 Globix Corp. company guaranty 11s,
2008 (PIK) 9,549
140,000 Inmarsat Finance PLC 144A company
guaranty 7 5/8s, 2012 (United
Kingdom) 137,200
45,000 iPCS, Inc. 144A sr. notes 11 1/2s,
2012 47,138
110,000 Level 3 Financing, Inc. 144A sr.
notes 10 3/4s, 2011 92,950
95,000 Madison River Capital Corp. sr.
notes 13 1/4s, 2010 101,412
235,000 MCI, Inc. sr. notes 7.735s, 2014 217,081
135,000 MCI, Inc. sr. notes 6.688s, 2009 127,238
53,000 Nextel Communications, Inc. sr.
notes 9 1/2s, 2011 59,890
5,000 Nextel Communications, Inc. sr.
notes 9 3/8s, 2009 5,300
230,000 Nextel Communications, Inc. sr.
notes 7 3/8s, 2015 240,350
155,000 Nextel Communications, Inc. sr.
notes 5.95s, 2014 147,250
41,000 Nextel Partners, Inc. sr. notes
12 1/2s, 2009 47,765
175,000 Nextel Partners, Inc. sr. notes
8 1/8s, 2011 182,438
120,000 Qwest Communications International,
Inc. 144A sr. notes 7 1/2s, 2014 106,800
370,000 Qwest Corp. 144A notes 9 1/8s, 2012 396,825
50,000 Qwest Services Corp. 144A notes
14 1/2s, 2014 59,375
90,000 Qwest Services Corp. 144A notes 14s,
2010 104,625
20,000 Rogers Cantel, Ltd. debs. 9 3/4s,
2016 (Canada) 23,100
65,000 Rogers Wireless, Inc. sec. notes
9 5/8s, 2011 (Canada) 73,775
35,000 Rural Cellular Corp. sr. notes
9 7/8s, 2010 34,738
45,000 Rural Cellular Corp. sr. sub. notes
Ser. B, 9 5/8s, 2008 41,850
25,000 SBA Communications Corp. sr. notes
10 1/4s, 2009 26,313
45,000 SBA Telecommunications Inc./SBA
Communication Corp. sr. disc. notes
stepped-coupon zero % (9 3/4s,
12/15/07), 2011 (STP) 35,100
80,000 TSI Telecommunication Services, Inc.
company guaranty Ser. B, 12 3/4s,
2009 88,800
52,000 UbiquiTel Operating Co. bonds
stepped-coupon zero % (14s,
4/15/05), 2010 (STP) 53,300
50,000 UbiquiTel Operating Co. sr. notes
9 7/8s, 2011 51,250
80,000 Western Wireless Corp. sr. notes
9 1/4s, 2013 82,200
--------------
3,844,052
Conglomerates (0.3%)
-------------------------------------------------------------------------------
20,000 Tyco International Group SA company
guaranty 6 3/4s, 2011 (Luxembourg) 22,350
1,000 Tyco International Group SA company
guaranty 6 3/8s, 2005 (Luxembourg) 1,030
255,000 Tyco International Group SA company
guaranty 6s, 2013 (Luxembourg) 273,017
38,000 Tyco International Group SA notes
6 3/8s, 2011 (Luxembourg) 41,630
--------------
338,027
Consumer Cyclicals (9.7%)
-------------------------------------------------------------------------------
60,000 Ameristar Casinos, Inc. company
guaranty 10 3/4s, 2009 67,650
50,000 Argosy Gaming Co. sr. sub. notes 9s,
2011 56,000
95,000 Argosy Gaming Co. sr. sub. notes 7s,
2014 96,900
40,000 ArvinMeritor, Inc. notes 8 3/4s,
2012 44,000
65,000 Asbury Automotive Group, Inc. sr.
sub. notes 8s, 2014 63,375
160,000 Autonation, Inc. company guaranty
9s, 2008 182,800
50,000 Beazer Homes USA, Inc. company
guaranty 8 5/8s, 2011 54,375
20,000 Beazer Homes USA, Inc. company
guaranty 8 3/8s, 2012 21,750
30,000 Boyd Gaming Corp. sr. sub. notes
8 3/4s, 2012 32,850
25,000 Boyd Gaming Corp. sr. sub. notes
7 3/4s, 2012 26,406
40,000 Building Materials Corp. company
guaranty 8s, 2008 40,600
40,000 CanWest Media, Inc. sr. sub. notes
10 5/8s, 2011 (Canada) 45,400
50,000 Chumash Casino & Resort Enterprise
144A sr. notes 9s, 2010 55,000
158,000 Coinmach Corp. sr. notes 9s, 2010 159,580
80,000 Collins & Aikman Products company
guaranty 10 3/4s, 2011 82,400
20,000 D.R. Horton, Inc. company guaranty
8s, 2009 22,700
30,000 D.R. Horton, Inc. sr. notes 7 7/8s,
2011 34,200
20,000 D.R. Horton, Inc. sr. notes 6 7/8s,
2013 21,550
130,000 D.R. Horton, Inc. sr. notes 5 7/8s,
2013 131,625
20,000 Dana Corp. notes 10 1/8s, 2010 22,900
185,000 Dana Corp. notes 9s, 2011 221,075
20,000 Dana Corp. notes 7s, 2029 20,100
75,000 Dayton Superior Corp. sec. notes
10 3/4s, 2008 79,875
20,000 Delco Remy International, Inc.
company guaranty 11s, 2009 21,350
165,000 Delco Remy International, Inc. sr.
sub. notes 9 3/8s, 2012 167,888
150,000 Dex Media West, LLC/Dex Media
Finance Co. sr. notes Ser. B,
8 1/2s, 2010 168,938
70,000 Dex Media, Inc. 144A disc. notes
stepped-coupon zero % (9s,
11/15/08), 2013 (STP) 51,275
280,000 Dex Media, Inc. 144A notes 8s, 2013 290,500
25,000 Dura Operating Corp. company
guaranty Ser. B, 8 5/8s, 2012 25,938
29,000 FelCor Lodging LP company guaranty
10s, 2008 (R) 30,523
65,000 Finlay Fine Jewelry Corp. 144A sr.
notes 8 3/8s, 2012 69,225
95,000 Gaylord Entertainment Co. sr. notes
8s, 2013 98,563
40,000 Goodyear Tire & Rubber Co. (The)
notes 8 1/2s, 2007 41,500
265,000 Goodyear Tire & Rubber Co. (The)
notes 7.857s, 2011 249,100
30,000 Goodyear Tire & Rubber Co. (The)
notes 6 3/8s, 2008 29,250
45,000 Herbst Gaming, Inc. 144A sr. sub.
notes 8 1/8s, 2012 45,338
160,000 Hilton Hotels Corp. notes 7 5/8s,
2012 183,600
119,000 HMH Properties, Inc. company
guaranty Ser. B, 7 7/8s, 2008 (R) 122,570
177,414 Hollinger Participation Trust 144A
sr. notes 12 1/8s, 2010 (Canada)
(PIK) 200,034
147,000 Hollywood Park, Inc. company
guaranty Ser. B, 9 1/4s, 2007 151,226
30,000 Host Marriott LP company guaranty
Ser. G, 9 1/4s, 2007 (R) 33,600
75,000 Host Marriott LP sr. notes Ser. E,
8 3/8s, 2006 (R) 79,688
130,000 Host Marriott LP 144A sr. notes 7s,
2012 (R) 132,275
110,000 Houghton Mifflin Co. sr. sub. notes
9 7/8s, 2013 114,813
131,000 Icon Health & Fitness company
guaranty 11 1/4s, 2012 142,790
99,000 IESI Corp. company guaranty 10 1/4s,
2012 107,168
35,000 Inn of the Mountain Gods sr. notes
12s, 2010 39,550
30,000 Interface, Inc. sr. sub. notes
9 1/2s, 2014 30,750
70,000 ITT Corp. debs. 7 3/8s, 2015 74,200
100,000 ITT Corp. notes 6 3/4s, 2005 103,750
90,000 JC Penney Co., Inc. debs. 7.95s,
2017 101,700
11,000 JC Penney Co., Inc. debs. 7.65s,
2016 12,183
130,000 JC Penney Co., Inc. debs. 7 1/8s,
2023 134,875
75,000 JC Penney Co., Inc. notes 9s, 2012 90,000
5,000 JC Penney Co., Inc. notes 8s, 2010 5,638
180,000 John Q. Hammons Hotels LP/John Q.
Hammons Hotels Finance Corp. III
1st mtge. Ser. B, 8 7/8s, 2012 201,150
135,000 Jostens Holding Corp. sr. disc.
notes stepped-coupon zero %
(10 1/4s, 12/1/08), 2013 (STP) 89,100
80,000 Jostens, Inc. sr. sub. notes
12 3/4s, 2010 90,300
10,000 K. Hovnanian Enterprises, Inc.
company guaranty 10 1/2s, 2007 11,600
75,000 K. Hovnanian Enterprises, Inc.
company guaranty 8 7/8s, 2012 83,625
55,000 K. Hovnanian Enterprises, Inc.
company guaranty 6 3/8s, 2014 54,175
40,000 K. Hovnanian Enterprises, Inc. sr.
notes 6 1/2s, 2014 39,700
60,000 K2, Inc. 144A sr. notes 7 3/8s, 2014 62,100
2,000 KB Home sr. sub. notes 9 1/2s, 2011 2,230
195,000 Laidlaw International, Inc. sr.
notes 10 3/4s, 2011 222,300
80,000 Lamar Media Corp. company guaranty
7 1/4s, 2013 85,200
32,000 Lear Corp. company guaranty Ser. B,
8.11s, 2009 37,135
201,000 Levi Strauss & Co. sr. notes
12 1/4s, 2012 208,538
60,000 Mandalay Resort Group sr. notes
6 3/8s, 2011 61,500
140,000 MediaNews Group, Inc. sr. sub. notes
6 7/8s, 2013 141,050
105,000 MeriStar Hospitality Corp. company
guaranty 9 1/8s, 2011 (R) 108,150
45,000 MeriStar Hospitality Corp. company
guaranty 9s, 2008 (R) 46,350
40,000 Meritage Corp. company guaranty
9 3/4s, 2011 44,600
30,000 Meritage Corp. sr. notes 7s, 2014 29,475
90,000 Meritor Automotive, Inc. notes 6.8s,
2009 92,700
85,000 Metaldyne Corp. 144A sr. notes 10s,
2013 83,938
100,000 MGM Mirage, Inc. company guaranty
8 1/2s, 2010 112,500
1,000 MGM Mirage, Inc. company guaranty
8 3/8s, 2011 1,085
65,000 Mohegan Tribal Gaming Authority sr.
sub. notes 6 3/8s, 2009 66,138
60,000 Oxford Industries, Inc. 144A sr.
notes 8 7/8s, 2011 64,200
25,000 Park Place Entertainment Corp. sr.
notes 7 1/2s, 2009 27,750
65,000 Park Place Entertainment Corp. sr.
notes 7s, 2013 69,713
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 120,725
132,000 Penn National Gaming, Inc. sr. sub.
notes 8 7/8s, 2010 144,540
30,000 Phillips-Van Heusen Corp. sr. notes
7 1/4s, 2011 30,975
75,000 Pinnacle Entertainment, Inc. sr.
sub. notes 8 3/4s, 2013 77,250
40,000 Pinnacle Entertainment, Inc. sr.
sub. notes 8 1/4s, 2012 40,200
30,000 PRIMEDIA, Inc. company guaranty
8 7/8s, 2011 29,400
140,000 PRIMEDIA, Inc. company guaranty
7 5/8s, 2008 137,200
150,000 PRIMEDIA, Inc. 144A sr. notes 8s,
2013 138,750
100,000 Reader's Digest Association, Inc.
(The) sr. notes 6 1/2s, 2011 101,000
103,000 Resorts International Hotel and
Casino, Inc. company guaranty
11 1/2s, 2009 116,905
15,000 RH Donnelley Finance Corp. I company
guaranty 8 7/8s, 2010 16,894
134,000 RH Donnelley Finance Corp. I 144A
sr. notes 8 7/8s, 2010 150,918
77,000 RH Donnelley Finance Corp. I 144A
sr. sub. notes 10 7/8s, 2012 91,053
82,000 Russell Corp. company guaranty
9 1/4s, 2010 88,355
175,000 Saks, Inc. company guaranty 7s, 2013 175,875
205,000 Samsonite Corp. 144A sr. sub. notes
8 7/8s, 2011 211,150
64,000 Schuler Homes, Inc. company guaranty
10 1/2s, 2011 73,440
160,000 Sealy Mattress Co. 144A sr. sub.
notes 8 1/4s, 2014 165,200
50,000 Standard Pacific Corp. sr. notes
7 3/4s, 2013 52,625
10,000 Standard Pacific Corp. sr. notes
6 7/8s, 2011 10,375
175,000 Standard Pacific Corp. sr. notes
6 1/4s, 2014 168,438
74,000 Starwood Hotels & Resorts Worldwide,
Inc. company guaranty 7 7/8s, 2012 82,880
71,000 Starwood Hotels & Resorts Worldwide,
Inc. company guaranty 7 3/8s, 2007 75,970
118,000 Station Casinos, Inc. sr. notes 6s,
2012 118,295
75,000 Station Casinos, Inc. sr. sub. notes
6 7/8s, 2016 74,906
45,000 Technical Olympic USA, Inc. company
guaranty 10 3/8s, 2012 48,937
65,000 Technical Olympic USA, Inc. company
guaranty 9s, 2010 68,900
30,000 Tenneco Automotive, Inc. company
guaranty Ser. B, 11 5/8s, 2009 32,025
100,000 Tenneco Automotive, Inc. sec. notes
Ser. B, 10 1/4s, 2013 115,750
95,000 THL Buildco, Inc. (Nortek, Inc.)
144A sr. sub. notes 8 1/2s, 2014 99,038
60,000 Tommy Hilfiger USA, Inc. company
guaranty 6.85s, 2008 61,350
55,000 Toys "R" Us, Inc. notes 7 5/8s, 2011 54,313
283,000 Trump Atlantic City Associates
company guaranty 11 1/4s, 2006 240,196
70,000 United Auto Group, Inc. company
guaranty 9 5/8s, 2012 77,700
53,000 Venetian Casino Resort, LLC company
guaranty 11s, 2010 60,354
200,000 Vertis, Inc. company guaranty
Ser. B, 10 7/8s, 2009 216,500
100,000 Vertis, Inc. 144A sub. notes
13 1/2s, 2009 101,125
40,000 Von Hoffman Press, Inc. company
guaranty 10 3/8s, 2007 40,750
75,000 Von Hoffman Press, Inc. company
guaranty 10 1/4s, 2009 83,438
63,019 Von Hoffman Press, Inc. debs. 13s,
2009 (PIK) 65,540
21,000 WCI Communities, Inc. company
guaranty 10 5/8s, 2011 23,573
101,000 WCI Communities, Inc. company
guaranty 9 1/8s, 2012 111,605
59,000 William Carter Holdings Co. (The)
company guaranty Ser. B, 10 7/8s,
2011 66,670
80,000 WRC Media Corp. sr. sub. notes
12 3/4s, 2009 72,800
--------------
11,185,427
Consumer Staples (6.3%)
-------------------------------------------------------------------------------
10,000 Adelphia Communications Corp. notes
Ser. B, 9 7/8s, 2005 (In default)
(NON) 9,000
20,000 Adelphia Communications Corp. sr.
notes 10 7/8s, 2010 (In default)
(NON) 18,250
235,000 Adelphia Communications Corp. sr.
notes Ser. B, 9 7/8s, 2007 (In
default) (NON) 211,500
105,000 Affinity Group, Inc. sr. sub. notes
9s, 2012 109,725
40,000 AMC Entertainment, Inc. sr. sub.
notes 9 7/8s, 2012 41,600
29,000 AMC Entertainment, Inc. sr. sub.
notes 9 1/2s, 2011 29,580
190,000 AMC Entertainment, Inc. 144A sr.
sub. notes 8s, 2014 177,175
148,000 Armkel, LLC/Armkel Finance sr. sub.
notes 9 1/2s, 2009 161,320
60,000 Atlantic Broadband Finance, LLC 144A
sr. sub. notes 9 3/8s, 2014 56,550
136,000 Brand Services, Inc. company
guaranty 12s, 2012 155,040
210,000 Cablevision Systems Corp. 144A sr.
notes 8s, 2012 215,250
70,000 Capital Records, Inc. 144A company
guaranty 8 3/8s, 2009 76,125
19,000 Charter Communications Holdings,
LLC/Capital Corp. sr. disc. notes
stepped-coupon zero % (11 3/4s,
5/15/06), 2011 (STP) 12,065
365,000 Charter Communications Holdings,
LLC/Capital Corp. sr. notes
11 1/8s, 2011 304,775
70,000 Charter Communications Holdings,
LLC/Capital Corp. sr. notes
10 3/4s, 2009 58,800
60,000 Charter Communications Holdings,
LLC/Capital Corp. sr. notes
10 1/4s, 2010 49,350
120,000 Charter Communications Holdings,
LLC/Capital Corp. sr. notes 10s,
2011 94,800
63,000 Charter Communications Holdings,
LLC/Capital Corp. sr. notes 9 5/8s,
2009 50,873
61,000 Charter Communications Holdings,
LLC/Capital Corp. sr. notes 8 5/8s,
2009 48,495
125,000 Cinemark USA, Inc. sr. sub. notes
9s, 2013 138,438
145,000 Cinemark, Inc. sr. disc. notes
stepped-coupon zero %
(9 3/4s, 3/15/07), 2014 (STP) 99,869
70,000 Constellation Brands, Inc. company
guaranty Ser. B, 8s, 2008 77,175
5,000 Constellation Brands, Inc. sr. sub.
notes Ser. B, 8 1/8s, 2012 5,463
60,000 CSC Holdings, Inc. debs. 7 5/8s,
2018 60,300
3,000 CSC Holdings, Inc. debs. Ser. B,
8 1/8s, 2009 3,218
65,000 CSC Holdings, Inc. sr. notes Ser. B,
7 5/8s, 2011 67,438
60,000 CSC Holdings, Inc. sr. sub. debs.
10 1/2s, 2016 68,250
65,000 CSC Holdings, Inc. 144A sr. notes
6 3/4s, 2012 64,675
30,000 Dean Foods Co. sr. notes 6 5/8s,
2009 31,913
40,000 Del Monte Corp. company guaranty
Ser. B, 9 1/4s, 2011 44,000
80,000 Del Monte Corp. sr. sub. notes
8 5/8s, 2012 89,000
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
(acquired various dates from 5/15/96
to 5/24/01, cost $98,675) (In
default) (NON) (RES) 339
155,000 Doane Pet Care Co. sr. sub. debs.
9 3/4s, 2007 144,538
35,000 Dole Food Co. sr. notes 8 7/8s, 2011 37,450
25,000 Dole Food Co. sr. notes 8 5/8s, 2009 26,625
60,000 Dole Food Co. company guaranty
7 1/4s, 2010 60,300
66,000 Domino's, Inc. sr. sub. notes
8 1/4s, 2011 70,620
20,000 Eagle Family Foods company guaranty
Ser. B, 8 3/4s, 2008 15,000
30,000 Echostar DBS Corp. sr. notes
10 3/8s, 2007 31,800
42,000 Echostar DBS Corp. sr. notes 9 1/8s,
2009 46,358
220,000 Echostar DBS Corp. sr. notes 6 3/8s,
2011 220,550
35,000 Elizabeth Arden, Inc. company
guaranty 7 3/4s, 2014 36,225
205,000 Granite Broadcasting Corp. sec.
notes 9 3/4s, 2010 193,213
52,000 Gray Television, Inc. company
guaranty 9 1/4s, 2011 58,110
110,000 Hasbro, Inc. notes 5.6s, 2005 113,025
60,000 Jean Coutu Group, Inc. 144A sr.
notes 7 5/8s, 2012 (Canada) 61,800
125,000 Jean Coutu Group, Inc. 144A sr. sub.
notes 8 1/2s, 2014 (Canada) 125,938
230,000 Kabel Deutsheland GmbH 144A sr.
notes 10 5/8s, 2014 (Germany) 235,750
2,435 Knology, Inc. 144A sr. notes 12s,
2009 (PIK) 2,313
71,000 Land O'Lakes, Inc. sr. notes 8 3/4s,
2011 66,208
35,000 LCE Acquisition Corp. 144A company
guaranty 9s, 2014 35,525
90,000 North Atlantic Trading Co. sr. notes
9 1/4s, 2012 87,750
105,000 Paxson Communications Corp. company
guaranty 10 3/4s, 2008 105,525
150,000 Pinnacle Foods Holding Corp. 144A
sr. sub. notes 8 1/4s, 2013 142,875
156,000 Playtex Products, Inc. company
guaranty 9 3/8s, 2011 158,535
110,000 Playtex Products, Inc. 144A sec.
notes 8s, 2011 114,675
80,000 Premier International Foods PLC sr.
notes 12s, 2009 (United Kingdom) 84,800
105,000 Prestige Brands, Inc. 144A sr. sub.
notes 9 1/4s, 2012 104,475
25,000 Quebecor Media, Inc. sr. disc. notes
stepped-coupon zero %
(13 3/4s, 7/15/06), 2011 (Canada)
(STP) 23,813
196,000 Quebecor Media, Inc. sr. notes
11 1/8s, 2011 (Canada) 225,400
125,000 Rainbow National Services, LLC 144A
sr. notes 8 3/4s, 2012 127,500
160,000 Remington Arms Co., Inc. company
guaranty 10 1/2s, 2011 147,200
80,000 Rite Aid Corp. company guaranty
9 1/2s, 2011 88,000
130,000 Rite Aid Corp. debs. 6 7/8s, 2013 119,600
10,000 Rite Aid Corp. notes 7 1/8s, 2007 10,200
5,000 Rite Aid Corp. 144A notes 6s, 2005 5,050
130,000 Sbarro, Inc. company guaranty 11s,
2009 117,325
35,000 Scotts Co. (The) sr. sub. notes
6 5/8s, 2013 36,575
75,000 Sinclair Broadcast Group, Inc.
company guaranty 8s, 2012 77,438
140,000 Six Flags, Inc. sr. notes 9 5/8s,
2014 129,850
314,000 Six Flags, Inc. sr. notes 8 7/8s,
2010 288,880
40,000 Videotron Ltee company guaranty
6 7/8s, 2014 (Canada) 40,400
90,000 Vivendi Universal SA sr. notes
9 1/4s, 2010 (France) 106,313
135,000 Vivendi Universal SA sr. notes
6 1/4s, 2008 (France) 144,450
75,000 Warner Music Group 144A sr. sub.
notes 7 3/8s, 2011 74,625
114,000 Williams Scotsman, Inc. company
guaranty 9 7/8s, 2007 112,290
108,000 Young Broadcasting, Inc. company
guaranty 10s, 2011 110,430
50,000 Young Broadcasting, Inc. sr. sub.
notes 8 3/4s, 2014 47,938
--------------
7,242,674
Energy (3.0%)
-------------------------------------------------------------------------------
145,000 Arch Western Finance, LLC 144A sr.
notes 7 1/2s, 2013 150,075
75,000 Belden & Blake Corp. 144A sec. notes
8 3/4s, 2012 78,188
90,000 BRL Universal Equipment sec. notes
8 7/8s, 2008 96,075
80,000 CHC Helicopter Corp. sr. sub. notes
7 3/8s, 2014 (Canada) 80,900
54,000 Chesapeake Energy Corp. company
guaranty 9s, 2012 61,560
35,000 Chesapeake Energy Corp. company
guaranty 7 3/4s, 2015 37,538
115,000 Chesapeake Energy Corp. sr. notes
7 1/2s, 2013 123,625
50,000 Chesapeake Energy Corp. sr. notes
7s, 2014 51,500
75,000 Comstock Resources, Inc. sr. notes
6 7/8s, 2012 75,375
100,000 Dresser, Inc. company guaranty
9 3/8s, 2011 107,500
16,000 El Paso Energy Partners LP company
guaranty Ser. B, 8 1/2s, 2011 18,000
80,000 Encore Acquisition Co. company
guaranty 8 3/8s, 2012 88,000
35,000 Encore Acquisition Co. sr. sub.
notes 6 1/4s, 2014 34,125
105,000 Exco Resources, Inc. company
guaranty 7 1/4s, 2011 110,250
55,000 Forest Oil Corp. company guaranty
7 3/4s, 2014 58,300
62,000 Forest Oil Corp. sr. notes 8s, 2008 67,580
45,000 Forest Oil Corp. 144A sr. notes 8s,
2011 49,388
55,000 Hanover Compressor Co. sr. notes 9s,
2014 58,988
50,000 Hanover Compressor Co. sr. notes
8 5/8s, 2010 53,250
75,000 Hanover Compressor Co. sub. notes
zero %, 2007 63,188
50,000 Hanover Equipment Trust sec. notes
Ser. A, 8 1/2s, 2008 53,375
68,000 Hornbeck Offshore Services, Inc. sr.
notes 10 5/8s, 2008 74,800
50,000 KCS Energy, Inc. sr. notes 7 1/8s,
2012 51,250
40,000 Key Energy Services, Inc. sr. notes
6 3/8s, 2013 38,200
75,000 Massey Energy Co. sr. notes 6 5/8s,
2010 77,625
80,000 Newfield Exploration Co. sr. notes
7 5/8s, 2011 87,800
65,000 Newfield Exploration Co. 144A sr.
sub. notes 6 5/8s, 2014 66,138
100,000 Offshore Logistics, Inc. company
guaranty 6 1/8s, 2013 99,000
60,000 Pacific Energy Partners/Pacific
Energy Finance Corp. 144A sr. notes
7 1/8s, 2014 63,450
90,000 Parker Drilling Co. company guaranty
Ser. B, 10 1/8s, 2009 95,625
110,000 Peabody Energy Corp. sr. notes
5 7/8s, 2016 105,050
250,000 Pemex Project Funding Master Trust
company guaranty 7 3/8s, 2014 270,000
113,029 Petro Geo-Services notes 10s, 2010
(Norway) 121,506
55,000 Plains All American Pipeline
LP/Plains All American Finance
Corp. company guaranty 7 3/4s, 2012 63,673
80,000 Plains Exploration & Production Co.
company guaranty Ser. B, 8 3/4s,
2012 89,200
45,000 Plains Exploration & Production Co.
sr. sub. notes 8 3/4s, 2012 50,175
70,000 Plains Exploration & Production Co.
144A sr. notes 7 1/8s, 2014 74,200
115,000 Pogo Producing Co. sr. sub. notes
Ser. B, 8 1/4s, 2011 126,212
110,000 Pride International, Inc. 144A sr.
notes 7 3/8s, 2014 117,150
80,000 Seabulk International, Inc. company
guaranty 9 1/2s, 2013 83,400
130,000 Star Gas Partners LP/Star Gas
Finance Co. sr. notes 10 1/4s, 2013 140,400
20,000 Universal Compression, Inc. sr.
notes 7 1/4s, 2010 20,800
24,000 Vintage Petroleum, Inc. sr. sub.
notes 7 7/8s, 2011 25,140
--------------
3,457,574
Financial (0.5%)
-------------------------------------------------------------------------------
35,000 Crescent Real Estate Equities LP
notes 7 1/2s, 2007 (R) 35,700
110,000 Crescent Real Estate Equities LP sr.
notes 9 1/4s, 2009 (R) 117,700
140,000 E(a)Trade Finance Corp. 144A sr.
notes 8s, 2011 142,800
206,550 Finova Group, Inc. notes 7 1/2s,
2009 103,017
44,000 iStar Financial, Inc. sr. notes
8 3/4s, 2008 (R) 50,050
10,000 iStar Financial, Inc. sr. notes 7s,
2008 (R) 10,738
95,000 iStar Financial, Inc. sr. notes 6s,
2010 (R) 97,138
70,000 Western Financial Bank sub. debs.
9 5/8s, 2012 77,000
--------------
634,143
Health Care (2.6%)
-------------------------------------------------------------------------------
100,000 Alderwoods Group, Inc. 144A sr.
notes 7 3/4s, 2012 104,000
82,000 AmerisourceBergen Corp. company
guaranty 7 1/4s, 2012 87,740
160,000 AmerisourceBergen Corp. sr. notes
8 1/8s, 2008 175,600
135,000 Ardent Health Services, Inc. sr.
sub. notes 10s, 2013 145,125
40,000 Extendicare Health Services, Inc.
company guaranty 9 1/2s, 2010 44,700
75,000 Extendicare Health Services, Inc.
sr. sub. notes 6 7/8s, 2014 74,250
50,000 Hanger Orthopedic Group, Inc.
company guaranty 10 3/8s, 2009 46,500
10,000 HCA, Inc. debs. 7.19s, 2015 10,790
30,000 HCA, Inc. notes 5 3/4s, 2014 29,739
40,000 HCA, Inc. sr. notes 6.95s, 2012 43,048
175,000 Healthsouth Corp. notes 7 5/8s, 2012 167,125
37,000 Healthsouth Corp. sr. notes 8 1/2s,
2008 37,000
37,000 Healthsouth Corp. sr. notes 8 3/8s,
2011 36,353
65,000 IASIS Healthcare/IASIS Capital Corp.
144A sr. sub. notes 8 3/4s, 2014 68,250
55,000 Insight Health Services Corp. 144A
company guaranty 9 7/8s, 2011 55,688
39,220 Magellan Health Services, Inc. sr.
notes Ser. A, 9 3/8s, 2008 42,358
90,000 Mediq, Inc. debs. 13s, 2009 (In
default) (NON) 9
31,000 MedQuest, Inc. company guaranty
Ser. B, 11 7/8s, 2012 35,030
145,000 MQ Associates, Inc. 144A sr. disc.
notes zero %, 2012 90,263
90,000 Omnicare, Inc. sr. sub. notes
6 1/8s, 2013 87,300
70,000 Owens & Minor, Inc. company guaranty
8 1/2s, 2011 77,000
100,000 PacifiCare Health Systems, Inc.
company guaranty 10 3/4s, 2009 116,000
155,000 Province Healthcare Co. sr. sub.
notes 7 1/2s, 2013 173,600
10,000 Service Corp. International notes
7.2s, 2006 10,450
5,000 Service Corp. International notes
6 7/8s, 2007 5,175
21,000 Service Corp. International notes
6 1/2s, 2008 21,683
25,000 Service Corp. International notes
Ser. (a), 7.7s, 2009 26,563
110,000 Service Corp. International 144A sr.
notes 6 3/4s, 2016 105,875
60,000 Stewart Enterprises, Inc. notes
10 3/4s, 2008 66,300
70,000 Tenet Healthcare Corp. notes 7 3/8s,
2013 64,750
10,000 Tenet Healthcare Corp. sr. notes
6 1/2s, 2012 8,850
170,000 Tenet Healthcare Corp. sr. notes
6 3/8s, 2011 150,875
145,000 Tenet Healthcare Corp. 144A sr.
notes 9 7/8s, 2014 151,163
100,000 Triad Hospitals, Inc. sr. notes 7s,
2012 104,250
245,000 Triad Hospitals, Inc. sr. sub. notes
7s, 2013 246,531
75,000 Universal Hospital Services, Inc.
sr. notes 10 1/8s, 2011 76,125
45,000 US Oncology, Inc. 144A sr. notes 9s,
2012 47,138
30,000 US Oncology, Inc. 144A sr. sub.
notes 10 3/4s, 2014 31,575
40,000 Ventas Realty LP/Capital Corp.
company guaranty 9s, 2012 44,600
55,000 VWR International, Inc. 144A sr.
notes 6 7/8s, 2012 56,650
--------------
2,966,021
Other (2.3%)
-------------------------------------------------------------------------------
2,680,000 Dow Jones CDX HY 144A pass-through
certificates 7 3/4s, 2009 2,690,050
Technology (1.7%)
-------------------------------------------------------------------------------
64,000 AMI Semiconductor, Inc. company
guaranty 10 3/4s, 2013 74,400
55,000 Amkor Technologies, Inc. sr. notes
7 3/4s, 2013 46,200
55,000 Amkor Technologies, Inc. sr. sub.
notes 10 1/2s, 2009 49,775
120,000 Celestica, Inc. sr.sub. notes
7 7/8s, 2011 (Canada) 125,550
68,000 DigitalNet Holdings, Inc. sr. notes
9s, 2010 73,780
120,000 Freescale Semiconductor, Inc. 144A
sr. notes 7 1/8s, 2014 121,950
211,000 Iron Mountain, Inc. company guaranty
8 5/8s, 2013 227,880
135,000 Lucent Technologies, Inc. debs.
6.45s, 2029 105,975
5,000 Lucent Technologies, Inc. notes
5 1/2s, 2008 4,813
55,000 New ASAT Finance, Ltd. 144A company
guaranty 9 1/4s, 2011 (Cayman
Islands) 46,200
170,000 Nortel Networks Corp. notes 6 1/8s,
2006 (Canada) 172,550
119,000 ON Semiconductor Corp. company
guaranty 13s, 2008 133,875
106,166 Peregrine Systems, Inc. 144A sr.
notes 6 1/2s, 2007 104,043
45,000 SCG Holding Corp. 144A notes zero %,
2011 63,225
85,000 Seagate Technology Hdd Holdings
company guaranty 8s, 2009 (Cayman
Islands) 89,250
120,000 UGS Corp. 144A sr. sub. notes 10s,
2012 130,800
105,000 Xerox Capital Trust I company
guaranty 8s, 2027 100,538
18,000 Xerox Corp. company guaranty 9 3/4s,
2009 20,925
55,000 Xerox Corp. notes Ser. MTN, 7.2s,
2016 55,275
144,000 Xerox Corp. sr. notes 7 5/8s, 2013 153,000
95,000 Xerox Corp. sr. notes 6 7/8s, 2011 98,325
--------------
1,998,329
Transportation (0.5%)
-------------------------------------------------------------------------------
70,000 American Airlines, Inc. pass-through
certificates Ser. 01-1, 6.817s, 2011 61,600
140,000 Calair, LLC/Calair Capital Corp.
company guaranty 8 1/8s, 2008 105,700
60,000 Delta Air Lines, Inc. notes 7.9s,
2009 19,200
185,000 Kansas City Southern Railway Co.
company guaranty 9 1/2s, 2008 200,956
25,000 Kansas City Southern Railway Co.
company guaranty 7 1/2s, 2009 25,250
97,000 Navistar International Corp. company
guaranty Ser. B, 9 3/8s, 2006 104,275
60,000 Northwest Airlines, Inc. company
guaranty 7 5/8s, 2005 58,650
20,000 Travel Centers of America, Inc.
company guaranty 12 3/4s, 2009 23,200
--------------
598,831
Utilities & Power (3.4%)
-------------------------------------------------------------------------------
22,000 AES Corp. (The) sr. notes 8 7/8s,
2011 23,980
6,000 AES Corp. (The) sr. notes 8 3/4s,
2008 6,450
105,000 AES Corp. (The) 144A sec. notes 9s,
2015 116,813
150,000 AES Corp. (The) 144A sec. notes
8 3/4s, 2013 166,875
75,000 Allegheny Energy Supply 144A bonds
8 1/4s, 2012 79,500
45,000 Allegheny Energy Supply 144A sec.
notes 10 1/4s, 2007 49,500
62,000 Calpine Canada Energy Finance
company guaranty 8 1/2s, 2008
(Canada) 39,680
248,000 Calpine Corp. 144A sec. notes
8 1/2s, 2010 194,680
35,000 CenterPoint Energy Resources Corp.
debs. 6 1/2s, 2008 37,836
20,000 CenterPoint Energy Resources Corp.
sr. notes Ser. B, 7 7/8s, 2013 23,593
15,000 CMS Energy Corp. pass-through
certificates 7s, 2005 15,094
30,000 CMS Energy Corp. sr. notes 8.9s,
2008 32,625
55,000 CMS Energy Corp. sr. notes 8 1/2s,
2011 59,675
25,000 CMS Energy Corp. 144A sr. notes
7 3/4s, 2010 26,375
140,000 DPL, Inc. sr. notes 6 7/8s, 2011 145,600
15,000 Dynegy Holdings, Inc. sr. notes
6 7/8s, 2011 13,950
190,000 Dynegy Holdings, Inc. 144A sec.
notes 10 1/8s, 2013 213,750
50,000 Dynegy-Roseton Danskamme company
guaranty Ser. A, 7.27s, 2010 48,750
75,000 Dynegy-Roseton Danskamme company
guaranty Ser. B, 7.67s, 2016 66,188
5,000 Edison Mission Energy sr. notes
9 7/8s, 2011 5,738
55,000 El Paso Corp. sr. notes 7 3/8s, 2012 51,425
115,000 El Paso Corp. sr. notes Ser. MTN,
7 3/4s, 2032 97,606
25,000 El Paso Natural Gas Co. debs.
8 5/8s, 2022 26,750
25,000 El Paso Natural Gas Co. sr. notes
Ser. A, 7 5/8s, 2010 26,500
130,000 El Paso Production Holding Co.
company guaranty 7 3/4s, 2013 127,725
95,000 Ferrellgas Partners LP/Ferrellgas
Partners Finance sr. notes 6 3/4s,
2014 94,525
30,000 Kansas Gas & Electric debs. 8.29s,
2016 31,050
165,000 Midwest Generation, LLC sec. sr.
notes 8 3/4s, 2034 175,313
95,000 Mission Energy Holding Co. sec.
notes 13 1/2s, 2008 119,463
55,000 Monongahela Power Co. 144A 1st.
mtge. 6.7s, 2014 57,471
90,000 Nevada Power Co. 2nd mtge. 9s, 2013 100,800
135,000 Northwest Pipeline Corp. company
guaranty 8 1/8s, 2010 152,044
335,000 NRG Energy, Inc. 144A sr. sec. notes
8s, 2013 351,750
75,000 Orion Power Holdings, Inc. sr. notes
12s, 2010 93,750
115,000 PG&E Corp. sec. notes 6 7/8s, 2008 124,775
20,000 PG&E Gas Transmission Northwest sr.
notes 7.1s, 2005 20,600
80,000 PSEG Energy Holdings, Inc. notes
7 3/4s, 2007 85,000
65,000 SEMCO Energy, Inc. sr. notes 7 3/4s,
2013 68,250
90,000 SEMCO Energy, Inc. 144A sr. notes
7 3/4s, 2013 85,050
20,000 Sierra Pacific Power Co. 144A
general ref. mtge. 6 1/4s, 2012 19,800
130,000 Sierra Pacific Resources 144A sr.
notes 8 5/8s, 2014 136,500
40,000 Teco Energy, Inc. notes 10 1/2s,
2007 46,200
25,000 Teco Energy, Inc. notes 7.2s, 2011 26,313
40,000 Teco Energy, Inc. notes 7s, 2012 41,400
10,000 Tennessee Gas Pipeline Co. debs. 7s,
2028 9,363
35,000 Tennessee Gas Pipeline Co. unsecd.
notes 7 1/2s, 2017 35,919
15,000 Transcontinental Gas Pipeline Corp.
debs. 7 1/4s, 2026 15,413
85,000 Utilicorp Canada Finance Corp.
company guaranty 7 3/4s, 2011
(Canada) 86,700
55,000 Utilicorp United, Inc. sr. notes
9.95s, 2011 59,950
47,000 Western Resources, Inc. sr. notes
9 3/4s, 2007 53,882
20,000 Williams Cos., Inc. (The) notes
8 3/4s, 2032 22,450
20,000 Williams Cos., Inc. (The) notes
8 1/8s, 2012 23,000
25,000 Williams Cos., Inc. (The) notes
7 5/8s, 2019 27,000
95,000 Williams Cos., Inc. (The) sr. notes
8 5/8s, 2010 110,200
--------------
3,970,589
--------------
Total Corporate bonds and notes
(cost $47,535,278) $48,985,418
Convertible preferred stocks (32.5%) (a)
Number of shares Value
Basic Materials (3.1%)
-------------------------------------------------------------------------------
1,360 Freeport-McMoRan Copper & Gold, Inc.
144A 5.50% cv. pfd. $1,328,516
1,240 Hercules Trust II 6.50% units cum.
cv. pfd. 936,200
52,400 Smurfit-Stone Container Corp.
Ser. A, $1.75 cum. cv. pfd. 1,303,450
--------------
3,568,166
Capital Goods (4.2%)
-------------------------------------------------------------------------------
21,300 Coltec Capital Trust $2.625 cv. pfd. 966,019
19,600 Northrop Grumman Corp. Ser. B, $7.00
cum. cv. pfd. 2,548,000
39,100 Owens-Illinois, Inc. $2.375 cv. pfd. 1,383,163
--------------
4,897,182
Communication Services (2.4%)
-------------------------------------------------------------------------------
21,700 Broadwing, Inc. Ser. B, $3.378 cum.
cv. pfd. 873,425
35,020 CenturyTel, Inc. $1.719 cv. pfd. 893,010
21,923 Crown Castle International Corp.
$3.125 cum. cv. pfd. 1,005,718
--------------
2,772,153
Consumer Cyclicals (3.6%)
-------------------------------------------------------------------------------
4,370 Central Parking Finance Trust 144A
$1.313 cv. pfd. 77,568
11,200 Ford Motor Company Capital Trust II
$3.25 cum. cv. pfd. 596,400
1,350 Radio One, Inc. 6.50% cum. cv. pfd. 1,381,304
31,700 Tower Automotive Capital Trust
$3.375 cv. pfd. (S) 645,888
30,300 TXI Capital Trust I $2.75 cv. pfd. 1,473,338
--------------
4,174,498
Consumer Staples (2.7%)
-------------------------------------------------------------------------------
25,100 Albertson's, Inc. 1.813 cv. pfd. 657,871
20,120 Constellation Brands, Inc. Ser. A,
$1.438 cv. pfd. (S) 643,840
25,200 Sinclair Broadcast Group, Inc.
Ser. D, $3.00 cv. pfd. 1,026,900
38,900 Six Flags, Inc. $1.813 cum. cv. pfd.
(S) 743,963
--------------
3,072,574
Energy (1.9%)
-------------------------------------------------------------------------------
16,950 Amerada Hess Corp. $3.50 cv. pfd. 1,228,875
19,700 Hanover Compressor Capital Trust
$3.625 cum. cv. pfd. (S) 952,988
--------------
2,181,863
Financial (5.9%)
-------------------------------------------------------------------------------
11,800 Capital One Financial Corp. $3.125
cv. pfd. 588,525
22,300 Chubb Corp. (The) $1.75 cv. pfd. 613,250
44,996 Decs Trust IX 6.75% cv. pfd. 421,838
60,700 FelCor Lodging Trust, Inc. Ser. A,
$1.95 cum. cv. pfd. (R) 1,449,213
15,403 Hartford Financial Services Group,
Inc. (The) $3.50 cv. pfd. 931,882
28,600 Host Marriott Financial Trust $3.375
cv. pfd. (R) 1,458,600
21,130 Provident Finance Group $2.25 units
cv. pfd. 787,093
25,600 XL Capital, Ltd. $1.625 cv. pfd.
(Cayman Islands) 608,768
--------------
6,859,169
Health Care (1.6%)
-------------------------------------------------------------------------------
36,650 Schering-Plough Corp. $3.00 cv. pfd. 1,882,894
Technology (1.5%)
-------------------------------------------------------------------------------
33,168 Solectron Corp. $1.813 units cv.
pfd. 456,060
10,800 Xerox Corp. 6.25% cv. pfd. 1,336,500
--------------
1,792,560
Utilities & Power (5.6%)
-------------------------------------------------------------------------------
3,700 Aquila, Inc. $1.688 cv. pfd. (S) 108,225
25,250 El Paso Energy Capital Trust I
$2.375 cv. pfd. 817,469
49,200 Great Plains Energy, Inc. $2.00 cum.
cv. pfd. 1,223,850
20,000 ONEOK, Inc. $2.125 units cv. pfd. 609,000
9,000 Public Service Enterprise Group,
Inc. $5.125 cv. pfd. 511,875
40,900 Sempra Energy $2.125 units cv. pfd. 1,257,675
17,200 Sierra Pacific Resources $4.50 units
cum. cv. pfd. 665,468
44,400 Williams Cos., Inc. (The) $2.25 cv.
pfd. (S) 571,650
9,830 Williams Cos., Inc. (The) 144A $2.75
cv. pfd. 689,329
--------------
6,454,541
--------------
Total Convertible preferred stocks
(cost $34,301,403) $37,655,600
Convertible bonds and notes (17.9%) (a)
Principal amount Value
Capital Goods (0.6%)
-------------------------------------------------------------------------------
$660,000 Titan International, Inc. 144A cv.
sr. notes 5 1/4s, 2009 $679,800
Communication Services (1.1%)
-------------------------------------------------------------------------------
1,300,000 Charter Communications, Inc. cv. sr.
notes 5 3/4s, 2005 1,217,125
400,000 Cybernet Internet Services
International, Inc. 144A cv. sr.
disc. notes 13s, 2009 (In default)
(NON) 4
--------------
1,217,129
Conglomerates (1.1%)
-------------------------------------------------------------------------------
1,250,000 GenCorp, Inc. cv. sub. notes 5 3/4s,
2007 1,254,688
Consumer Cyclicals (2.2%)
-------------------------------------------------------------------------------
612,000 Amazon.com, Inc. cv. sub. debs.
4 3/4s, 2009 606,645
650,000 Mediacom Communications Corp. cv.
sr. notes 5 1/4s, 2006 612,625
614,000 Meristar Hospitality Corp. cv. notes
9 1/2s, 2010 713,775
595,000 WCI Communities, Inc. cv. sr. sub.
notes 4s, 2023 676,813
--------------
2,609,858
Consumer Staples (1.1%)
-------------------------------------------------------------------------------
1,260,000 Rite Aid Corp. cv. notes 4 3/4s,
2006 1,289,925
Financial (1.5%)
-------------------------------------------------------------------------------
310,000 E*Trade Group, Inc. cv. sub. notes
6s, 2007 316,975
1,410,000 Providian Financial Corp. cv. sr.
notes 3 1/4s, 2005 1,383,563
--------------
1,700,538
Technology (7.3%)
-------------------------------------------------------------------------------
600,000 Agere Systems, Inc. cv. notes
6 1/2s, 2009 604,500
1,170,000 Amkor Technologies, Inc. cv. notes
5 3/4s, 2006 1,083,713
1,297,000 Aspen Technology, Inc. cv. sub.
debs. 5 1/4s, 2005 1,293,758
980,000 Avaya, Inc. cv. liquid yield option
notes (LYON) zero %, 2021 541,450
600,000 Fairchild Semiconductor
International, Inc. cv. company
guaranty 5s, 2008 594,000
1,200,000 Lucent Technologies, Inc. cv. sub.
debs. 8s, 2031 1,291,500
930,000 Manugistics Group, Inc. cv. sub.
notes 5s, 2007 831,188
920,000 ON Semiconductor Corp. 144A cv.
bonds zero %, 2024 605,452
1,730,000 Safeguard Scientifics, Inc. 144A cv.
sr. notes 2 5/8s, 2024 1,193,700
280,000 Silicon Graphics, Inc. cv. notes
6 1/2s, 2009 372,400
--------------
8,411,661
Transportation (0.4%)
-------------------------------------------------------------------------------
750,000 Continental Airlines, Inc. cv. notes
4 1/2s, 2007 523,125
Utilities & Power (2.6%)
-------------------------------------------------------------------------------
605,000 AES Corp. (The) cv. sub. notes
4 1/2s, 2005 602,731
1,400,000 El Paso Corp. cv. debs. zero %, 2021 687,750
526,000 Sierra Pacific Resources 144A cv.
notes 7 1/4s, 2010 1,120,380
440,000 XCEL Energy, Inc. 144A cv. notes
7 1/2s, 2007 671,550
--------------
3,082,411
--------------
Total Convertible bonds and notes
(cost $18,817,584) $20,769,135
Common stocks (2.1%) (a)
Number of shares Value
-------------------------------------------------------------------------------
214 AboveNet, Inc. (NON) (S) $5,136
11,800 Altria Group, Inc. 577,610
50,000 AMRESCO Creditor Trust (acquired
9/20/00, cost $38,655) (NON) (RES)
(R) 50
28 Arch Wireless, Inc. Class A (NON) 854
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 5,880
2,031 Covad Communications Group, Inc.
(NON) (S) 2,965
305 Crown Castle International Corp.
(NON) 4,365
28,300 GATX Corp. (S) 763,202
144 Genesis HealthCare Corp. (NON) (S) 4,477
3,492 Globix Corp. (NON) 9,638
75,000 iPCS Escrow, Inc. (NON) 75
2,137 iPCS, Inc. (NON) 39,748
16 Knology, Inc. (NON) 56
64 Leucadia National Corp. (S) 3,456
227 Polymer Group, Inc. Class A (NON) 2,792
334 PSF Group Holdings, Inc. 144A Class
A (NON) 501,450
83,600 Service Corp. International (NON) 502,436
25 Sterling Chemicals, Inc. (NON) 575
102 Sun Healthcare Group, Inc. (NON) 877
14,550 VS Holdings, Inc. (acquired various
dates from 11/1/00 to 10/22/02, cost
$180,000) (NON) (RES) 728
408 Washington Group International, Inc.
(NON) 14,353
--------------
Total Common stocks
(cost $3,658,197) $2,440,725
Foreign government bonds and notes (0.5%) (a)
Principal amount Value
-------------------------------------------------------------------------------
$70,000 Colombia (Republic of) bonds
Ser. NOV, 9 3/4s, 2009 $77,875
25,000 Colombia (Republic of) notes
10 3/4s, 2013 28,850
95,000 Ecuador (Republic of) bonds
Ser. REGS, stepped-coupon 8s (9s,
8/15/05), 2030 (STP) 74,575
110,000 Indonesia (Republic of) 144A sr.
notes 6 3/4s, 2014 105,325
40,000 Peru (Republic of) bonds 8 3/4s,
2033 38,400
110,000 Russia (Federation of) unsub.
stepped-coupon 5s (7 1/2s,
3/31/07), 2030 (STP) 105,490
100,000 Ukraine (Government of) 144A bonds
7.65s, 2013 100,500
--------------
Total Foreign government bonds and
notes (cost $492,729) $531,015
Preferred stocks (0.3%) (a)
Number of shares Value
-------------------------------------------------------------------------------
4,281 Avecia Group PLC $4.00 pfd. (United
Kingdom) (PIK) $61,004
2 Dobson Communications Corp. 13.00%
pfd. (PIK) 1,210
1,714 iStar Financial, Inc. Ser. F, $1.95
cum. pfd. (R) 42,850
13 Paxson Communications Corp. 14.25%
cum. pfd. (PIK) (S) 111,800
196 Rural Cellular Corp. 12.25% pfd.
(PIK) 113,825
--------------
Total Preferred stocks
(cost $399,827) $330,689
Units (0.1%) (a)
Number of units Value
-------------------------------------------------------------------------------
80,000 Morrison Knudsen Corp. $5,000
208 XCL Equity Units (acquired 6/19/03,
cost $303,520) (RES) 92,328
--------------
Total Units (cost $354,027) $97,328
Brady bonds (--%) (a) (cost $54,802)
Principal amount Value
-------------------------------------------------------------------------------
$59,150 Peru (Republic of) FRB Ser. PDI, 5s,
2017 $53,756
Warrants (--%) (a) (NON) Expiration
Number of warrants date Value
-------------------------------------------------------------------------------
71 AboveNet, Inc. 9/8/08 $533
83 AboveNet, Inc. 9/8/10 498
140 Dayton Superior Corp. 144A 6/15/09 1
161 Huntsman Co., LLC 144A 5/15/11 30,588
72 MDP Acquisitions PLC 144A 10/1/13 1,998
60 Pliant Corp. 144A 6/1/10 1
240 Travel Centers of America, Inc. 144A 5/1/09 1,200
220 Ubiquitel, Inc. 144A 4/15/10 1
250 Washington Group International, Inc.
Ser. A 1/25/06 2,200
287 Washington Group International, Inc.
Ser. B 1/25/06 1,937
156 Washington Group International, Inc.
Ser. C 1/25/06 936
--------------
Total Warrants (cost $88,220) $39,893
Short-term investments (7.4%) (a)
Principal amount Value
-------------------------------------------------------------------------------
$5,733,235 Putnam Prime Money Market Fund (e) $5,733,235
2,867,267 Short-term investments held as
collateral for loaned
securities with yields ranging from
1.52% to 1.71% and due dates ranging
from September 1, 2004 to September
24, 2004 (d) 2,866,478
--------------
Total Short-term investments
(cost $8,599,713) $8,599,713
-------------------------------------------------------------------------------
Total Investments
(cost $114,301,780) $119,503,272
-------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $115,776,369.
(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
August 31, 2004 was $93,447 or 0.1% of net assets.
(PIK) Income may be received in cash or additional securities at the
discretion of the issuer.
(R) Real Estate Investment Trust.
(S) Securities on loan, in part or in entirety, at August 31, 2004.
(d) See Note 1 to the financial statements.
(e) See Note 4 to the financial statements regarding investments in the
Putnam Prime Money Market Fund.
144A after the name of a security represents those exempt from
registration under Rule 144A of the Securities Act of 1933. These
securities may be resold in transactions exempt from registration,
normally to qualified institutional buyers.
The rates shown on Floating Rate Bonds (FRB) and Floating Rate Notes
(FRN) are the current interest rates at August 31, 2004.
Forward currency contracts to sell at August 31, 2004
(aggregate face value $344,729)
----------------------------------------------------------------------------
Aggregate Delivery Unrealized
Value face value date depreciation
----------------------------------------------------------------------------
Euro $346,128 $344,729 12/15/04 $(1,399)
----------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
Statement of assets and liabilities
August 31, 2004
Assets
-------------------------------------------------------------------------------
Investment in securities, at value, including $2,734,371 of securities
on loan (Note 1):
-------------------------------------------------------------------------------
Unaffiliated issuers (identified cost $108,568,545) $113,770,037
-------------------------------------------------------------------------------
Affiliated issuers (identified cost $5,733,235) (Note 4) 5,733,235
-------------------------------------------------------------------------------
Cash 250
-------------------------------------------------------------------------------
Dividends, interest and other receivables 1,295,091
-------------------------------------------------------------------------------
Receivable for securities sold 24,750
-------------------------------------------------------------------------------
Receivable for closed forward currency contracts (Note 1) 177
-------------------------------------------------------------------------------
Total assets 120,823,540
Liabilities
-------------------------------------------------------------------------------
Distributions payable to shareholders 637,999
-------------------------------------------------------------------------------
Payable for securities purchased 1,233,298
-------------------------------------------------------------------------------
Payable for compensation of Manager (Notes 2 and 4) 220,347
-------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 35,843
-------------------------------------------------------------------------------
Payable for Trustee compensation and expenses (Note 2) 31,887
-------------------------------------------------------------------------------
Payable for administrative services (Note 2) 781
-------------------------------------------------------------------------------
Payable for open forward currency contracts (Note 1) 1,399
-------------------------------------------------------------------------------
Payable for closed forward currency contracts (Note 1) 334
-------------------------------------------------------------------------------
Collateral on securities loaned, at value (Note 1) 2,866,478
-------------------------------------------------------------------------------
Other accrued expenses 18,805
-------------------------------------------------------------------------------
Total liabilities 5,047,171
-------------------------------------------------------------------------------
Net assets $115,776,369
Represented by
-------------------------------------------------------------------------------
Paid-in capital (Note 1) $129,480,103
-------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 449,705
-------------------------------------------------------------------------------
Accumulated net realized loss on investments and foreign
currency transactions (Note 1) (19,353,493)
-------------------------------------------------------------------------------
Net unrealized appreciation of investments and assets and
liabilities in foreign currencies 5,200,054
-------------------------------------------------------------------------------
Total -- Representing net assets applicable to capital
shares outstanding $115,776,369
Computation of net asset value
-------------------------------------------------------------------------------
Net asset value per share ($115,776,369 divided by
13,825,527 shares) $8.37
-------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial
statements.
Statement of operations
Year ended August 31, 2004
Investment income:
-------------------------------------------------------------------------------
Interest (including interest income of $15,626 from
investments in affiliated issuers) (Note 4) $6,922,317
-------------------------------------------------------------------------------
Dividends 2,214,753
-------------------------------------------------------------------------------
Securities lending 19,215
-------------------------------------------------------------------------------
Total investment income 9,156,285
Expenses:
-------------------------------------------------------------------------------
Compensation of Manager (Note 2) 861,556
-------------------------------------------------------------------------------
Investor servicing fees (Note 2) 58,227
-------------------------------------------------------------------------------
Custodian fees (Note 2) 135,604
-------------------------------------------------------------------------------
Trustee compensation and expenses (Note 2) 15,052
-------------------------------------------------------------------------------
Administrative services (Note 2) 8,368
-------------------------------------------------------------------------------
Auditing 69,228
-------------------------------------------------------------------------------
Other 104,719
-------------------------------------------------------------------------------
Fees waived and reimbursed by Manager (Note 4) (1,782)
-------------------------------------------------------------------------------
Total expenses 1,250,972
-------------------------------------------------------------------------------
Expense reduction (Note 2) (1,143)
-------------------------------------------------------------------------------
Net expenses 1,249,829
-------------------------------------------------------------------------------
Net investment income 7,906,456
-------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 5,740,727
-------------------------------------------------------------------------------
Net realized loss on foreign currency transactions (Note 1) (42,751)
-------------------------------------------------------------------------------
Net unrealized appreciation of assets and liabilities in
foreign currencies during the year 2,660
-------------------------------------------------------------------------------
Net unrealized appreciation of investments during the year 2,949,166
-------------------------------------------------------------------------------
Net gain on investments 8,649,802
-------------------------------------------------------------------------------
Net increase in net assets resulting from operations $16,556,258
-------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial
statements.
Statement of changes in net assets
Year ended August 31
Increase in net assets 2004 2003
-------------------------------------------------------------------------------
Operations:
-------------------------------------------------------------------------------
Net investment income $7,906,456 $7,963,721
-------------------------------------------------------------------------------
Net realized gain (loss) on investments and
foreign currency transactions 5,697,976 (1,728,985)
-------------------------------------------------------------------------------
Net unrealized appreciation of investments
and assets and liabilities in foreign
currencies 2,951,826 17,624,892
-------------------------------------------------------------------------------
Net increase in net assets resulting from
operations 16,556,258 23,859,628
-------------------------------------------------------------------------------
Distributions to shareholders: (Note 1)
-------------------------------------------------------------------------------
From net investment income (7,714,084) (7,704,436)
-------------------------------------------------------------------------------
Increase from issuance of common shares in
connection with reinvestment of
distributions -- 217,676
-------------------------------------------------------------------------------
Total increase in net assets 8,842,174 16,372,868
Net assets
-------------------------------------------------------------------------------
Beginning of year 106,934,195 90,561,327
-------------------------------------------------------------------------------
End of year (including undistributed net
investment income of $449,705 and
distributions in excess of net investment
income of $30,644, respectively) $115,776,369 $106,934,195
-------------------------------------------------------------------------------
Number of fund shares
-------------------------------------------------------------------------------
Shares outstanding at beginning of year 13,825,527 13,794,807
-------------------------------------------------------------------------------
Shares issued in connection with
reinvestment of distributions -- 30,720
-------------------------------------------------------------------------------
Shares outstanding at end of year 13,825,527 13,825,527
-------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial
statements.
Financial highlights
(For a common share outstanding throughout the period)
Per-share Year ended August 31
operating performance 2004 2003 2002 2001 2000
---------------------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $7.73 $6.56 $7.30 $8.09 $8.32
---------------------------------------------------------------------------------------------------------------------------
Investment operations:
---------------------------------------------------------------------------------------------------------------------------
Net investment income (a) .57 (d) .58 .60 .67 .74
---------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .63 1.15 (.72) (.71) (.12)
---------------------------------------------------------------------------------------------------------------------------
Total from
investment operations 1.20 1.73 (.12) (.04) .62
---------------------------------------------------------------------------------------------------------------------------
Less distributions:
---------------------------------------------------------------------------------------------------------------------------
From net
investment income (.56) (.56) (.62) (.75) (.85)
---------------------------------------------------------------------------------------------------------------------------
Total distributions (.56) (.56) (.62) (.75) (.85)
---------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $8.37 $7.73 $6.56 $7.30 $8.09
---------------------------------------------------------------------------------------------------------------------------
Market price,
end of period $7.62 $7.31 $6.35 $7.45 $7.94
---------------------------------------------------------------------------------------------------------------------------
Total return at
market price (%)(b) 12.06 24.73 (6.77) 3.91 .78
---------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
---------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $115,776 $106,934 $90,561 $100,130 $110,839
---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(c) 1.09 (d) 1.13 1.10 1.14 1.11
---------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 6.88 (d) 8.20 8.65 8.91 9.03
---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 61.92 69.94 56.70 106.41 26.31
---------------------------------------------------------------------------------------------------------------------------
(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).
(d) Reflects waivers of certain fund expenses in connection with
investments in Putnam Prime Money Market Fund during the period. As a
result of such waivers, the expenses of the fund for the period ended
August 31, 2004 reflect a reduction of less than 0.01% of average net
assets (Note 4).
The accompanying notes are an integral part of these financial
statements.
Notes to financial statements
August 31, 2004
Note 1
Significant accounting policies
Putnam High Income Bond Fund (the "fund"), a Massachusetts business
trust, 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) Repurchase agreements The fund, or any joint trading account, through
its custodian, receives delivery of the underlying securities, the
market value of which at the time of purchase is required to be in an
amount at least equal to the resale price, including accrued interest.
Collateral for certain tri-party repurchase agreements is held at the
counterparty's custodian in a segregated account for the benefit of the
fund and the counterparty. Putnam Management is responsible for
determining that the value of these underlying securities is at all
times at least equal to the resale price, including accrued interest.
D) Security transactions and related investment income Security
transactions are 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 withholding 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.
E) Foreign currency translation The accounting records of the fund are
maintained in U.S. dollars. The market value of foreign securities,
currency holdings, and other assets and liabilities are recorded in the
books and records of the fund after translation to U.S. dollars based on
the exchange rates on that day. The cost of each security is determined
using historical exchange rates. Income and withholding taxes are
translated at prevailing exchange rates when 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.
F) 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. Risks may exceed amounts recognized on the
statement of assets and liabilities. Forward currency contracts
outstanding at period end, if any, are listed after the fund's
portfolio.
G) 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 August 31, 2004, the value of
securities loaned amounted to $2,734,371. The fund received cash
collateral of $2,866,478 which is pooled with collateral of other Putnam
funds into 20 issuers of high grade short-term investments.
H) 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, 2004, the fund had a capital loss carryover of $19,335,434
available to the extent allowed by the Code to offset future net capital
gain, if any. The amount of the carryover and the expiration dates are:
Loss Carryover Expiration
--------------------------------
$535,162 August 31, 2009
9,205,575 August 31, 2010
9,594,697 August 31, 2011
I) 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. These differences include temporary and permanent
differences of losses on wash sale transactions, foreign currency gains
and losses, nontaxable dividends, dividends payable, defaulted bond
interest and interest on payment-in-kind securities. Reclassifications
are made to the fund's capital accounts to reflect income and gains
available for distribution (or available capital loss carryovers) under
income tax regulations. For the year ended August 31, 2004, the fund
reclassified $287,977 to increase undistributed net investment income
and $3,117 to increase paid-in-capital, with an increase to accumulated
net realized losses of $291,094.
The tax basis components of distributable earnings and the federal tax
cost as of period end were as follows:
Unrealized appreciation $10,115,463
Unrealized depreciation (5,140,254)
------------
Net unrealized appreciation 4,975,209
Undistributed ordinary income 1,410,767
Capital loss carryforward (19,335,434)
Cost for federal income
tax purposes $114,528,063
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.
Effective September 13, 2004, Putnam Investments Limited ("PIL"), an
affiliate of Putnam Management, is authorized by the Trustees to manage
a separate portion of the assets of the fund as determined by Putnam
Management from time to time. Putnam Management pays a quarterly
sub-management fee to PIL for its services at an annual rate of 0.40% of
the average net assets of the portion of the fund managed by PIL.
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 servicing agent
functions to the fund. During the year ended August 31, 2004, the fund
paid PFTC $193,831 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 year ended August 31, 2004, the
fund's expenses were reduced by $1,143 under these arrangements.
Each independent Trustee of the fund receives an annual Trustee fee, of
which $744, 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.
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. The Trustees have terminated the Pension Plan with
respect to any Trustee first elected after 2003.
Note 3
Purchases and sales of securities
During the year ended August 31, 2004, cost of purchases and proceeds
from sales of investment securities other than short-term investments
aggregated $67,448,002 and $69,036,548, respectively. There were no
purchases or sales of U.S. government securities.
Note 4
Investment in Putnam Prime Money Market Fund
The fund invests in the Putnam Prime Money Market Fund, an open-end
management investment company managed by Putnam Management. Management
fees paid by the fund are reduced by an amount equal to the management
fees paid by Putnam Prime Money Market Fund with respect to assets
invested by the fund in Putnam Prime Money Market Fund. For the year
ended August 31, 2004, management fees paid were reduced by $1,782
relating to the fund's investment in Putnam Prime Money Market Fund.
Income distributions earned by the fund are recorded as income in the
statement of operations and totaled $15,626 for the period ended August
31, 2004.
Note 5
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.
Federal tax information
(Unaudited)
The fund has designated 24.3% of the distributions from net investment
income as qualifying for the dividends received deduction for
corporations.
For its tax year ended August 31, 2004, the fund hereby designates
24.4%, the maximum amount allowable, of its net taxable income as
qualified dividends taxed at individual net capital gain rates.
The Form 1099 you receive in January 2005 will show the tax status of
all distributions paid to your account in calendar 2004.
Results of June 10, 2004 shareholder meeting
(Unaudited)
An annual meeting of shareholders of the fund was held on June 10, 2004.
At the meeting, each of the nominees for Trustees was elected, as
follows:
Votes
Votes for withheld
----------------------------------------------------------------
Jameson A. Baxter 12,196,059 375,041
Charles B. Curtis 12,202,530 368,570
John A. Hill 12,195,497 375,603
Ronald J. Jackson 12,205,030 366,070
Paul L. Joskow 12,202,255 368,845
Elizabeth T. Kennan 12,185,834 385,266
John H. Mullin, III 12,200,304 370,796
Robert E. Patterson 12,198,583 372,517
George Putnam, III 12,186,730 384,370
A.J.C. Smith 12,180,595 390,505
W. Thomas Stephens 12,184,558 386,542
All tabulations are rounded to nearest whole number.
About the Trustees
Jameson A. Baxter (9/6/43), Trustee since 1994
Ms. Baxter is the President of Baxter Associates, Inc., a private
investment firm that she founded in 1986.
Ms. Baxter serves as a Director of ASHTA Chemicals, Inc., Banta
Corporation (a printing and digital imaging firm), Ryerson Tull, Inc. (a
steel service corporation), Advocate Health Care and BoardSource,
formerly the National Center for Nonprofit Boards. She is Chairman
Emeritus of the Board of Trustees, Mount Holyoke College, having served
as Chairman for five years and as a board member for thirteen years.
Until 2002, Ms. Baxter was a Director of Intermatic Corporation (a
manufacturer of energy control products).
Ms. Baxter has held various positions in investment banking and
corporate finance, including Vice President and Principal of the Regency
Group, and Vice President of and Consultant to First Boston Corporation.
She is a graduate of Mount Holyoke College.
Charles B. Curtis (4/27/40), Trustee since 2001
Mr. Curtis is President and Chief Operating Officer of the Nuclear
Threat Initiative (a private foundation dealing with national security
issues) and serves as Senior Advisor to the United Nations Foundation.
Mr. Curtis is a member of the Council on Foreign Relations and the
Trustee Advisory Council of the Applied Physics Laboratory, Johns
Hopkins University. Until 2003, Mr. Curtis was a member of the Electric
Power Research Institute Advisory Council and the University of Chicago
Board of Governors for Argonne National Laboratory. Prior to 2002, Mr.
Curtis was a Member of the Board of Directors of the Gas Technology
Institute and the Board of Directors of the Environment and Natural
Resources Program Steering Committee, John F. Kennedy School of
Government, Harvard University. Until 2001, Mr. Curtis was a member of
the Department of Defense Policy Board and Director of EG&G Technical
Services, Inc. (a fossil energy research and development support
company).
From August 1997 to December 1999, Mr. Curtis was a Partner at Hogan &
Hartson L.L.P., a Washington, D.C. law firm. Prior to May 1997, Mr.
Curtis was Deputy Secretary of Energy. He served as Chairman of the
Federal Energy Regulatory Commission from 1977 to 1981 and has held
positions on the staff of the U.S. House of Representatives, the U.S.
Treasury Department, and the SEC.
Myra R. Drucker (1/16/48)
Ms. Drucker is a Vice Chair of the Board of Trustees of Sarah Lawrence
College, a Trustee of Commonfund (a not-for-profit firm specializing in
asset management for educational endowments and foundations) and a
member of the Investment Committee of the Kresge Foundation (a
charitable trust). She is also Chair of the New York Stock Exchange
(NYSE) Pension Managers Advisory Committee and a member of the Executive
Committee of the Committee on Investment of Employee Benefit Assets.
Until August 31, 2004, Ms. Drucker was Managing Director and a member of
the Board of Directors of General Motors Asset Management and Chief
Investment Officer of General Motors Trust Bank. Ms. Drucker also served
as a member of the NYSE Corporate Accountability and Listing Standards
Committee and the NYSE/NASD IPO Advisory Committee.
Prior to joining General Motors Asset Management in 2001, Ms. Drucker
held various executive positions in the investment management industry.
Ms. Drucker served as Chief Investment Officer of Xerox Corporation (a
technology and service company in the document industry), where she was
responsible for the investment of the company 's pension assets. Ms.
Drucker was also Staff Vice President and Director of Trust Investments
for International Paper (a paper, paper distribution, packaging and
forest products company) and previously served as Manager of Trust
Investments for Xerox Corporation. Ms. Drucker received a B.A. degree in
Literature and Psychology from Sarah Lawrence College and pursued
graduate studies in economics, statistics and portfolio theory at Temple
University.
John A. Hill (1/31/42), Trustee since 1985 and Chairman since 2000
Mr. Hill is Vice Chairman of First Reserve Corporation, a private equity
buyout firm that specializes in energy investments in the diversified
worldwide energy industry.
Mr. Hill is a Director of Devon Energy Corporation, TransMontaigne Oil
Company, Continuum Health Partners of New York and various private
companies controlled by First Reserve Corporation, as well as a Trustee
of TH Lee, Putnam Investment Trust (a closed-end investment company
advised by an affiliate of Putnam Management). He is also a Trustee of
Sarah Lawrence College.
Prior to acquiring First Reserve Corporation in 1983, Mr. Hill held
executive positions in investment banking and investment management with
several firms and with the federal government, including Deputy
Associate Director of the Office of Management and Budget and Deputy
Director of the Federal Energy Administration. He is active in various
business associations, including the Economic Club of New York, and
lectures on energy issues in the United States and Europe. Mr. Hill
holds a B.A. degree in Economics from Southern Methodist University and
pursued graduate studies there as a Woodrow Wilson Fellow.
Ronald J. Jackson (12/17/43), Trustee since 1996
Mr. Jackson is a private investor.
Mr. Jackson is President of the Kathleen and Ronald J. Jackson
Foundation (a charitable trust). He is also a member of the Board of
Overseers of WGBH (a public television and radio station) as well as a
member of the Board of Overseers of the Peabody Essex Museum.
Mr. Jackson is the former Chairman, President and Chief Executive
Officer of Fisher-Price, Inc. (a major toy manufacturer), from which he
retired in 1993. He previously served as President and Chief Executive
Officer of Stride-Rite, Inc. (a manufacturer and distributor of
footwear) and of Kenner Parker Toys, Inc. (a major toy and game
manufacturer). Mr. Jackson was President of Talbots, Inc. (a distributor
of women's apparel) and has held financial and marketing positions with
General Mills, Inc. and Parker Brothers (a toy and game company). Mr.
Jackson is a graduate of Michigan State University Business School.
Paul L. Joskow (6/30/47), Trustee since 1997
Dr. Joskow is the Elizabeth and James Killian Professor of Economics and
Management, and Director of the Center for Energy and Environmental
Policy Research at the Massachusetts Institute of Technology.
Dr. Joskow serves as a Director of National Grid Transco (a UK-based
holding company with interests in electric and gas transmission and
distribution and telecommunications infrastructure) and TransCanada
Corporation (an energy company focused on natural gas transmission and
power services). He also serves on the board of the Whitehead Institute
for Biomedical Research (a non-profit research institution) and has been
President of the Yale University Council since 1993. Prior to February
2002, he was a Director of State Farm Indemnity Company (an automobile
insurance company), and, prior to March 2000, he was a Director of New
England Electric System (a public utility holding company).
Dr. Joskow has published five books and numerous articles on topics in
industrial organization, government regulation of industry, and
competition policy. He is active in industry restructuring,
environmental, energy, competition and privatization policies -- serving
as an advisor to governments and corporations worldwide. Dr. Joskow
holds a Ph.D. and M. Phil from Yale University and B.A. from Cornell
University.
Elizabeth T. Kennan (2/25/38), Trustee since 1992
Dr. Kennan is a Partner of Cambus-Kenneth Farm (thoroughbred horse and
cattle breeding). She is President Emeritus of Mount Holyoke College.
Dr. Kennan served as Chairman and is now Lead Director of Northeast
Utilities and is a Director of Talbots, Inc. She has served as Director
on a number of other boards, including Bell Atlantic, Chastain Real
Estate, Shawmut Bank, Berkshire Life Insurance and Kentucky Home Life
Insurance. She is a Trustee of the National Trust for Historic
Preservation, of Centre College and of Midway College in Midway,
Kentucky. She is also a member of The Trustees of Reservations. Dr.
Kennan has served on the oversight committee of the Folger Shakespeare
Library, as President of Five Colleges Incorporated, as a Trustee of
Notre Dame University and is active in various educational and civic
associations.
As a member of the faculty of Catholic University for twelve years,
until 1978, Dr. Kennan directed the post-doctoral program in Patristic
and Medieval Studies, taught history and published numerous articles.
Dr. Kennan holds a Ph.D. from the University of Washington in Seattle,
an M.S. from St. Hilda's College at Oxford University and an A.B. from
Mount Holyoke College. She holds several honorary doctorates.
John H. Mullin, III (6/15/41), Trustee since 1997
Mr. Mullin is the Chairman and CEO of Ridgeway Farm (a limited liability
company engaged in timber and farming).
Mr. Mullin serves as a Director of The Liberty Corporation (a
broadcasting company), Progress Energy, Inc. (a utility company,
formerly known as Carolina Power & Light) and Sonoco Products, Inc. (a
packaging company). Mr. Mullin is Trustee Emeritus of The National
Humanities Center and Washington & Lee University, where he served as
Chairman of the Investment Committee. Prior to May 2001, he was a
Director of Graphic Packaging International Corp. Prior to February
2004, he was a Director of Alex Brown Realty, Inc.
Mr. Mullin is also a past Director of Adolph Coors Company; ACX
Technologies, Inc.; Crystal Brands, Inc.; Dillon, Read & Co., Inc.;
Fisher-Price, Inc.; and The Ryland Group, Inc. Mr. Mullin is a graduate
of Washington & Lee University and The Wharton Graduate School,
University of Pennsylvania.
Robert E. Patterson (3/15/45), Trustee since 1984
Mr. Patterson is Senior Partner of Cabot Properties, L.P. and Chairman
of Cabot Properties, Inc. (a private equity firm investing in commercial
real estate).
Mr. Patterson serves as Chairman of the Joslin Diabetes Center and as a
Director of Brandywine Trust Company. Prior to June 2003, he was a
Trustee of Sea Education Association. Prior to December 2001, he was
President and Trustee of Cabot Industrial Trust (a publicly traded real
estate investment trust). Prior to February 1998, he was Executive Vice
President and Director of Acquisitions of Cabot Partners Limited
Partnership (a registered investment adviser involved in institutional
real estate investments). Prior to 1990, he served as Executive Vice
President of Cabot, Cabot & Forbes Realty Advisors, Inc. (the
predecessor company of Cabot Partners) and as a Senior Vice President of
the Beal Companies (a real estate management, investment and development
firm).
Mr. Patterson practiced law and held various positions in state
government and was the founding Executive Director of the Massachusetts
Industrial Finance Agency. Mr. Patterson is a graduate of Harvard
College and Harvard Law School.
W. Thomas Stephens (9/2/42), Trustee since 1997
Mr. Stephens serves on a number of corporate boards.
Effective November 2004, Mr. Stephens is expected to become Chief
Executive Officer of Boise Cascade, L.L.C. (a paper, forest products and
timberland assets company). Mr. Stephens serves as a Director of
TransCanada Pipelines Limited. Until 2004, Mr. Stephens was a Director
of Xcel Energy Incorporated, a public utility company, Qwest
Communications, and Norske Canada, Inc. (a paper manufacturer). Until
2003, Mr. Stephens was a Director of Mail-Well, Inc. (a diversified
printing company). He served as Chairman of Mail-Well until 2001 and as
CEO of MacMillan-Bloedel, Ltd. (a forest products company) until 1999.
Prior to 1996, Mr. Stephens was Chairman and Chief Executive Officer of
Johns Manville Corporation. He holds B.S. and M.S. degrees from the
University of Arkansas.
Richard B. Worley (11/15/45)
Mr. Worley is Managing Partner of Permit Capital, LLC, an investment
management firm.
Mr. Worley serves on the Executive Committee of the University of
Pennsylvania Medical Center, is a Trustee of The Robert Wood Johnson
Foundation (a philanthropic organization devoted to health care issues)
and is a Director of The Colonial Williamsburg Foundation (a historical
preservation organization). Mr. Worley also serves on the investment
committees of Mount Holyoke College and World Wildlife Fund (a wildlife
conservation organization).
Prior to joining Permit Capital LLC in 2002, Mr. Worley served as Chief
Strategic Officer of Morgan Stanley Investment Management. He previously
served as President, Chief Executive Officer and Chief Investment
Officer of Morgan Stanley Dean Witter Investment Management and as a
Managing Director of Morgan Stanley, a financial services firm. Mr.
Worley also was the Chairman of Miller Anderson & Sherrerd, an
investment management firm.
Mr. Worley holds a B.S. degree from University of Tennessee and pursued
graduate studies in economics at the University of Texas.
Charles E. Haldeman, Jr.* (10/29/48)
Mr. Haldeman is President and Chief Executive Officer of Putnam, LLC
("Putnam Investments").He is a member of Putnam Investments' Executive
Board of Directors and Advisory Council. Prior to November 2003, Mr.
Haldeman served as Co-Head of Putnam Investments' Investment Division.
Prior to joining Putnam Investments in 2002, Mr. Haldeman held executive
positions in the investment management industry. He previously served as
Chief Executive Officer of Delaware Investments and President & Chief
Operating Officer of United Asset Management. Mr. Haldeman was also a
partner and director of Cooke & Bieler, Inc.(an investment management
firm).
Mr. Haldeman currently serves as a Trustee of Dartmouth College and as
Emeritus Trustee of Abington Memorial Hospital. He is a graduate of
Dartmouth College, Harvard Law School and Harvard Business School. Mr.
Haldeman is also a Chartered Financial Analyst (CFA) charterholder.
George Putnam, III* (8/10/51), Trustee since 1984 and President
since 2000
Mr. Putnam is President of New Generation Research, Inc. (a publisher of
financial advisory and other research services), and of New Generation
Advisers, Inc. (a registered investment advisor to private funds). Mr.
Putnam founded the New Generation companies in 1986.
Mr. Putnam is a Director of The Boston Family Office, LLC (a registered
investment adviser). He is a Trustee of St. Mark's School, Shore Country
Day School, and until 2002 was a Trustee of the Sea Education
Association.
Mr. Putnam previously worked as an attorney with the law firm of Dechert
LLP (formerly known as Dechert Price & Rhoads) in Philadelphia. He is a
graduate of Harvard College, Harvard Business School and Harvard Law
School.
A.J.C. Smith* (4/13/34), Trustee since 1986
Mr. Smith is the Chairman of Putnam Investments and Director of and
Consultant to Marsh & McLennan Companies, Inc.
Mr. Smith is also a Director of Trident Corp. (a limited partnership
with over thirty institutional investors). He is also a Trustee of the
Carnegie Hall Society, the Educational Broadcasting Corporation, and the
National Museums of Scotland. He is Chairman of the Central Park
Conservancy and a Member of the Board of Overseers of the Joan and
Sanford I. Weill Graduate School of Medical Sciences of Cornell
University. Prior to May 2000 and November 1999, Mr. Smith was Chairman
and CEO, respectively, of Marsh & McLennan Companies, Inc.
The address of each Trustee is One Post Office Square, Boston, MA 02109.
As of August 31, 2004, there were 103 Putnam Funds. All Trustees other
than Ms. Drucker and Messrs. Worley and Haldeman serve as Trustees of
all 103 Putnam Funds. Ms. Drucker and Messrs. Worley and Haldeman
currently serve as Trustees of 23 Putnam Funds.
Each Trustee serves for an indefinite term, until his or her
resignation, retirement at age 72, death, or removal.
* Trustees who are or may be deemed to be "interested persons" (as
defined in the Investment Company Act of 1940) of the fund, Putnam
Management, Putnam Retail Management, or Marsh & McLennan Companies,
Inc., the parent company of Putnam, LLC and its affiliated companies.
Messrs. Putnam, III, and Smith are deemed "interested persons" by virtue
of their positions as officers of the fund, Putnam Management, Putnam
Retail Management or Marsh & McLennan Companies, Inc. and as
shareholders of Marsh & McLennan Companies, Inc. Mr. Putnam, III is the
President of your fund and each of the other Putnam funds. Mr. Smith
serves as a Director of and Consultant to Marsh & McLennan Companies,
Inc. and as Chairman of Putnam Investments.
Officers
In addition to George Putnam, III, the other officers of the
fund are shown below:
Charles E. Porter (7/26/38)
Executive Vice President, Associate Treasurer and Principal
Executive Officer
Since 1989
Managing Director, Putnam Investments
and Putnam Management
Jonathan S. Horwitz (6/4/55)
Senior Vice President and Treasurer
Since 2004
Managing Director, Putnam Investments
Steven D. Krichmar (6/27/58)
Vice President and Principal Financial Officer
Since 2002
Senior Managing Director, Putnam Investments. Prior to July
2001, Partner, PricewaterhouseCoopers LLP
Michael T. Healy (1/24/58)
Assistant Treasurer and Principal
Accounting Officer
Since 2000
Managing Director, Putnam Investments
Beth S. Mazor (4/6/58)
Vice President
Since 2002
Senior Vice President, Putnam Investments
Daniel T. Gallagher (2/27/62)
Vice President and Legal and Compliance Liaison Officer
Since 2004
Vice President, Putnam Investments. Prior to 2004,
Associate, Ropes & Gray LLP; prior to 2000, Law Clerk,
Massachusetts Supreme Judicial Court
Francis J. McNamara, III (8/19/55)
Vice President and Chief Legal Officer
Since 2004
Senior Managing Director, Putnam
Investments, Putnam Management and
Putnam Retail Management. Prior to 2004, General Counsel,
State Street Research & Management Company
James P. Pappas (2/24/53)
Vice President
Since 2004
Managing Director, Putnam Investments and Putnam Management.
From 2001 to 2002, Chief Operating Officer, Atalanta/Sosnoff
Management Corporation; prior to 2001, President and Chief
Executive Officer, UAM Investment Services, Inc.
Richard S. Robie, III (3/30/60)
Vice President
Since 2004
Senior Managing Director, Putnam
Investments, Putnam Management and
Putnam Retail Management. Prior to 2003, Senior Vice
President, United Asset Management Corporation
Charles A. Ruys de Perez (10/17/57)
Vice President and Chief Compliance Officer
Since 2004
Managing Director, Putnam Investments
Mark C. Trenchard (6/5/62)
Vice President and BSA Compliance Officer
Since 2002
Senior Vice President, Putnam Investments
Judith Cohen (6/7/45)
Clerk and Assistant Treasurer
Since 1993
Clerk and Assistant Treasurer, The Putnam Funds
The address of each Officer is One Post Office Square,
Boston, MA 02109.
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
Investment Sub-Manager
Putnam Investments Limited
Cassini House
57-59 St. James Street
London, England SW1A 1LD
Marketing Services
Putnam Retail Management
One Post Office Square
Boston, MA 02109
Custodian
Putnam Fiduciary Trust Company
Legal Counsel
Ropes & Gray LLP
Independent Registered Public Accounting Firm
PricewaterhouseCoopers LLP
Trustees
John A. Hill, Chairman
Jameson Adkins Baxter
Charles B. Curtis
Myra R. Drucker
Charles E. Haldeman, Jr.
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
Richard B. Worley
Officers
George Putnam, III
President
Charles E. Porter
Executive Vice President,
Associate Treasurer and Principal Executive
Officer
Jonathan S. Horwitz
Senior Vice President and Treasurer
Steven D. Krichmar
Vice President and
Principal Financial Officer
Michael T. Healy
Assistant Treasurer and
Principal Accounting Officer
Beth S. Mazor
Vice President
Daniel T. Gallagher
Vice President and Legal and
Compliance Liaison Officer
James P. Pappas
Vice President
Richard S. Robie, III
Vice President
Mark C. Trenchard
Vice President and
BSA Compliance Officer
Francis J. McNamara, III
Vice President and
Chief Legal Officer
Charles A. Ruys de Perez
Vice President and
Chief Compliance 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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216506 10/04
Item 2. Code of Ethics:
-----------------------
All officers of the Fund, including its principal executive, financial and
accounting officers, are employees of Putnam Investment Management, LLC,
the Fund's investment manager. As such they are subject to a comprehensive
Code of Ethics adopted and administered by Putnam Investments which is
designed to protect the interests of the firm and its clients. The Fund
has adopted a Code of Ethics which incorporates the Code of Ethics of
Putnam Investments with respect to all of its officers and Trustees who are
employees of Putnam Investment Management, LLC. For this reason, the Fund
has not adopted a separate code of ethics governing its principal
executive, financial and accounting officers.
Item 3. Audit Committee Financial Expert:
-----------------------------------------
The Funds' Audit and Pricing Committee is comprised solely of Trustees
who are "independent" (as such term has been defined by the Securities
and Exchange Commission ("SEC") in regulations implementing Section 407
of the Sarbanes-Oxley Act (the "Regulations")). The Trustees believe
that each of the members of the Audit and Pricing Committee also possess
a combination of knowledge and experience with respect to financial
accounting matters, as well as other attributes, that qualify them for
service on the Committee. In addition, the Trustees have determined
that all members of the Funds' Audit and Pricing Committee meet the
financial literacy requirements of the New York Stock Exchange's rules
and that Mr. Patterson and Mr. Stephens qualify as "audit committee
financial experts" (as such term has been defined by the Regulations)
based on their review of their pertinent experience and education.
Certain other Trustees, although not on the Audit and Pricing Committee,
would also qualify as "audit committee financial experts." The SEC has
stated that the designation or identification of a person as an audit
committee financial expert pursuant to this Item 3 of Form N-CSR does
not impose on such person any duties, obligations or liability that are
greater than the duties, obligations and liability imposed on such
person as a member of the Audit and Pricing Committee and the Board of
Trustees in the absence of such designation or identification.
Item 4. Principal Accountant Fees and Services:
-----------------------------------------------
The following table presents fees billed in each of the last two
fiscal years for services rendered to the fund by the fund's
independent auditors:
Audit Audit-Related Tax All Other
Fiscal year ended Fees Fees Fees Fees
----------------- ---------- ------------- ------- ---------
August 31, 2004 $61,486 $-- $7,700 $23
August 31, 2003 $54,273 $-- $7,711 $--
For the fiscal years ended August 31, 2004 and August 31, 2003, the
fund's independent auditors billed aggregate non-audit fees in the
amounts of $ 139,982 and $82,391 , respectively, to the fund,
Putnam Management and any entity controlling, controlled by or under
common control with Putnam Management that provides ongoing services
to the fund.
Audit Fees represents fees billed for the fund's last two fiscal
years.
Audit-Related Fees represents fees billed in the fund's last two
fiscal years for services traditionally performed by the fund's
auditor, including accounting consultation for proposed transactions
or concerning financial accounting and reporting standards and other
audit or attest services not required by statute or regulation.
Tax Fees represent fees billed in the fund's last two fiscal years
for tax compliance, tax planning and tax advice services. Tax
planning and tax advice services include assistance with tax audits,
employee benefit plans and requests for rulings or technical advice
from taxing authorities.
All Other Fees Fees represent fees billed for services relating to
fund expense processing.
Pre-Approval Policies of the Audit and Pricing Committee. The Audit
and Pricing Committee of the Putnam funds has determined that, as a
matter of policy, all work performed for the funds by the funds'
independent auditors will be pre-approved by the Committee and will
generally not be subject to pre-approval procedures.
Under certain circumstances, the Audit and Pricing Committee
believes that it may be appropriate for Putnam Investment
Management, LLC ("Putnam Management") and certain of its affiliates
to engage the services of the funds' independent auditors, but only
after prior approval by the Committee. Such requests are required
to be submitted in writing to the Committee and explain, among other
things, the nature of the proposed engagement, the estimated fees,
and why this work must be performed by that particular audit firm.
The Committee will review the proposed engagement at its next
meeting.
Since May 6, 2003, all work performed by the independent auditors
for the funds, Putnam Management and any entity controlling,
controlled by or under common control with Putnam Management that
provides ongoing services to the fund was pre-approved by the
Committee or a member of the Committee pursuant to the pre-approval
policies discussed above. Prior to that date, the Committee had a
general policy to pre-approve the independent auditor's engagements
for non-audit services with the funds, Putnam Management and any
entity controlling, controlled by or under common control with
Putnam Management that provides ongoing services to the fund.
The following table presents fees billed by the fund's principal
auditor for services required to be approved pursuant to paragraph
(c)(7)(ii) of Rule 2-01 of Regulation S-X.
Audit-Related Tax All Other Total Non-
Fiscal year ended Fees Fees Fees Audit Fees
----------------- ------------- ---- --------- ----------
August 31, 2004 $-- $-- $-- $--
August 31, 2003 $-- $-- $-- $--
Item 5. Audit Committee
------------------------
(a) The fund has a separately-designated audit committee
established in accordance with Section 3(a)(58)(A) of the Securities
Exchange Act of 1934, as amended. The Audit Committee of the fund's
Board of Trustees is composed of the following persons:
Paul L. Joskow (Chairperson)
Robert E. Patterson
W. Thomas Stephens
Elizabeth T. Kennan
(b) Not applicable
Item 6. Schedule of Investments: Not applicable
--------------------------------
Item 7. Disclosure of Proxy Voting Policies and Procedures For Closed-End
-------------------------------------------------------------------------
Management Investment Companies:
--------------------------------
Proxy Voting Guidelines of the Putnam Funds
-------------------------------------------
The proxy voting guidelines below summarize the Funds' positions on
various issues of concern to investors, and give a general indication of
how Fund portfolio securities will be voted on proposals dealing with a
particular issue. The Funds' proxy voting service is instructed to vote
all proxies relating to Fund portfolio securities in accordance with
these guidelines, except as otherwise instructed by the Proxy
Coordinator.
The proxy voting guidelines are just that - guidelines. The guidelines
are not exhaustive and do not include all potential voting issues.
Because proxy issues and the circumstances of individual companies are
so varied, there may be instances when the Funds may not vote in strict
adherence to these guidelines. For example, the proxy voting service is
expected to bring to the Proxy Coordinator's attention proxy questions
that are company-specific and of a non-routine nature and, although
covered by the guidelines, may be more appropriately handled on a
case-by-case basis.
Similarly, Putnam Management's investment professionals, as part of
their ongoing review and analysis of all Fund portfolio holdings, are
responsible for monitoring significant corporate developments, including
proxy proposals submitted to shareholders, and notifying the Proxy
Coordinator of circumstances where the interests of Fund shareholders
may warrant a vote contrary to these guidelines. In such instances, the
investment professionals will submit a written recommendation to the
Proxy Coordinator and the person or persons designated by Putnam
Management's Legal and Compliance Department to assist in processing
referral items pursuant to the Funds' "Proxy Voting Procedures." The
Proxy Coordinator, in consultation with the Senior Vice President,
Executive Vice President and/or the Chair of the Board Policy and
Nominating Committee, as appropriate, will determine how the Funds'
proxies will be voted. When indicated, the Chair of the Board Policy
and Nominating Committee may consult with other members of the Committee
or the full board of Trustees.
The following guidelines are grouped according to the types of proposals
generally presented to shareholders. Part I deals with proposals which
have been approved and recommended by a company's board of directors.
Part II deals with proposals submitted by shareholders for inclusion in
proxy statements. Part III addresses unique considerations pertaining
to foreign issuers.
I. Board-Approved Proposals
---------------------------
The vast majority of matters presented to shareholders for a vote
involve proposals made by a company itself (sometimes referred to as
"management proposals"), which have been approved and recommended by its
board of directors. In view of the enhanced corporate governance
practices currently being implemented in public companies and the Funds'
intent to hold corporate boards accountable for their actions in
promoting shareholder interests, the Funds' proxies generally will be
voted in support of decisions reached by independent boards of
directors. Accordingly, the Funds' proxies will be voted for
board-approved proposals, except as follows:
A. Matters Relating to the Board of Directors
---------------------------------------------
The board of directors has the important role of overseeing management
and its performance on behalf of shareholders. The Funds' proxies will
be voted for the election of the company's nominees for directors and
for board-approved proposals on other matters relating to the board of
directors (provided that such nominees and other matters have been
approved by an independent nominating committee), except as follows:
* The Funds will withhold votes for the entire board of directors if
* The board does not have a majority of independent directors; or
* The board does not have nominating, audit and compensation committees
composed solely of independent directors.
Commentary: While these requirements will likely become mandatory for
most public companies in the near future as a result of pending NYSE and
NASDAQ rule proposals, the Funds' Trustees believe that there is no
excuse for public company boards that fail to implement these vital
governance reforms at their next annual meeting. For these purposes, an
"independent director" is a director who meets all requirements to serve
as an independent director of a company under the pending NYSE rule
proposals (i.e., no material business relationships with the company, no
present or recent employment relationship with the company (including
employment of immediate family members) and, in the case of audit
committee members, no compensation for non-board services). As
indicated below, the Funds will generally vote on a case-by-case basis
on board-approved proposals where the board fails to meet these basic
independence standards.
* The Funds will withhold votes for any nominee for director who is
considered an independent director by the company and who has received
compensation from the company other than for service as a director
(e.g., investment banking, consulting, legal or financial advisory
fees).
Commentary: The Funds' Trustees believe that receipt of compensation
for services other than service as a director raises significant
independence issues. The Funds will withhold votes for any nominee for
director who is considered an independent director by the company and
who receives such compensation.
* The Funds will withhold votes for the entire board of directors if the
board has more than 19 members or fewer than five members, absent
special circumstances.
Commentary: The Funds' Trustees believe that the size of the board of
directors can have a direct impact on the ability of the board to govern
effectively. Boards that have too many members can be unwieldy and
ultimately inhibit their ability to oversee management performance.
Boards that have too few members can stifle innovation and lead to
excessive influence by management.
* The Funds will vote on a case-by-case basis in contested elections of
directors.
* The Funds will withhold votes for any nominee for director who attends
less than 75% of board and committee meetings without valid reasons for
the absences (i.e., illness, personal emergency, etc.).
Commentary: Being a director of a company requires a significant time
commitment to adequately prepare for and attend the company's board and
committee meetings. Directors must be able to commit the time and
attention necessary to perform their fiduciary duties in proper fashion,
particularly in times of crisis.
The Funds' Trustees are concerned about over-committed directors. In
some cases, directors may serve on too many boards to make a meaningful
contribution. This may be particularly true for senior executives of
public companies (or other directors with substantially full-time
employment) who serve on more than a few outside boards. The Funds may
withhold votes from such directors on a case-by-case basis where it
appears that they may be unable to discharge their duties properly
because of excessive commitments.
* The Funds will withhold votes for any nominee for director of a public
company (Company A) who is employed as a senior executive of another
public company (Company B) if a director of Company B serves as a senior
executive of Company A (commonly referred to as an "interlocking
directorate").
Commentary: The Funds' Trustees believe that interlocking directorships
are inconsistent with the degree of independence required for outside
directors of public companies.
Board independence depends not only on its members' individual
relationships, but also the board's overall attitude toward management.
Independent boards are committed to good corporate governance practices
and, by providing objective independent judgment, enhancing shareholder
value. The Funds may withhold votes on a case-by-case basis from some or
all directors that, through their lack of independence, have failed to
observe good corporate governance practices or, through specific
corporate action, have demonstrated a disregard for the interest of
shareholders.
* The Funds will vote against proposals to classify a board, absent
special circumstances indicating that shareholder interests would be
better served by this structure.
Commentary: Under a typical classified board structure, the directors
are divided into three classes, with each class serving a three-year
term. The classified board structure results in directors serving
staggered terms, with usually only a third of the directors up for
re-election at any given annual meeting. The Funds' Trustees generally
believe that it is appropriate for directors to stand for election each
year, but recognize that, in special circumstances, shareholder
interests may be better served under a classified board structure.
B. Executive Compensation
-------------------------
The Funds generally favor compensation programs that relate executive
compensation to a company's long-term performance. The Funds will vote
on a case-by-case basis on board-approved proposals relating to
executive compensation, except as follows:
* Except where the Funds are otherwise withholding votes for the entire
board of directors, the Funds will vote for stock option plans which
will result in an average annual dilution of 1.67% or less (including
all equity-based plans).
* The Funds will vote against stock option plans that permit replacing
or repricing of underwater options (and against any proposal to
authorize such replacement or repricing of underwater options).
* The Funds will vote against stock option plans that permit issuance of
options with an exercise price below the stock's current market price.
* Except where the Funds are otherwise withholding votes for the entire
board of directors, the Funds will vote for employee stock purchase
plans that have the following features: (1) the shares purchased under
the plan are acquired for no less than 85% of their market value, (2)
the offering period under the plan is 27 months or less, and (3)
dilution is 10% or less.
Commentary: Companies should have compensation programs that are
reasonable and that align shareholder and management interests over the
longer term. Further, disclosure of compensation programs should provide
absolute transparency to shareholders regarding the sources and amounts
of, and the factors influencing, executive compensation. Appropriately
designed equity-based compensation plans can be an effective way to
align the interests of long-term shareholders with the interests of
management. The Funds may vote against executive compensation proposals
on a case-by-case basis where compensation is excessive by reasonable
corporate standards, or where a company fails to provide transparent
disclosure of executive compensation. In voting on proposals relating to
executive compensation, the Funds will consider whether the proposal has
been approved by an independent compensation committee of the board.
C. Capitalization
-----------------
Many proxy proposals involve changes in a company's capitalization,
including the authorization of additional stock, the repurchase of
outstanding stock or the approval of a stock split. The management of a
company's capital structure involves a number of important issues,
including cash flow, financing needs and market conditions that are
unique to the circumstances of each company. As a result, the Funds will
vote on a case-by-case basis on board-approved proposals involving
changes to a company's capitalization, except that where the Funds are
not otherwise withholding votes from the entire board of directors:
* The Funds will vote for proposals relating to the authorization of
additional common stock (except where such proposals relate to a
specific transaction).
* The Funds will vote for proposals to effect stock splits (excluding
reverse stock splits.)
* The Funds will vote for proposals authorizing share repurchase
programs.
Commentary: A company may decide to authorize additional shares of
common stock for reasons relating to executive compensation or for
routine business purposes. For the most part, these decisions are best
left to the board of directors and senior management. The Funds will
vote on a case-by-case basis, however, on other proposals to change a
company's capitalization, including the authorization of common stock
with special voting rights, the authorization or issuance of common
stock in connection with a specific transaction (e.g., an acquisition,
merger or reorganization) or the authorization or issuance of preferred
stock. Actions such as these involve a number of considerations that may
impact a shareholder's investment and warrant a case-by-case
determination.
D. Acquisitions, Mergers, Reincorporations, Reorganizations and
Other Transactions
---------------------------------------------------------------
Shareholders may be confronted with a number of different types of
transactions, including acquisitions, mergers, reorganizations involving
business combinations, liquidations and sale of all or substantially all
of a company's assets, which may require their consent. Voting on such
proposals involves considerations unique to each transaction. As a
result, the Funds will vote on a case-by-case basis on board-approved
proposals to effect these types of transactions, except as follows:
* The Funds will vote for mergers and reorganizations involving business
combinations designed solely to reincorporate a company in Delaware.
Commentary: A company may reincorporate into another state through a
merger or reorganization by setting up a "shell" company in a different
state and then merging the company into the new company. While
reincorporation into states with extensive and established corporate
laws - notably Delaware - provides companies and shareholders with a
more well-defined legal framework, generally speaking, shareholders must
carefully consider the reasons for a reincorporation into another
jurisdiction, including especially offshore jurisdictions.
E. Anti-Takeover Measures
-------------------------
Some proxy proposals involve efforts by management to make it more
difficult for an outside party to take control of the company without
the approval of the company's board of directors. These include adoption
of a shareholder rights plan, requiring supermajority voting on
particular issues, adoption of fair price provisions, issuance of blank
check preferred stock and creating a separate class of stock with
disparate voting rights. Such proposals may adversely affect shareholder
rights, lead to management entrenchment, or create conflicts of
interest. As a result, the Funds will vote against board-approved
proposals to adopt such anti-takeover measures, except as follows:
* The Funds will vote on a case-by-case basis on proposals to ratify or
approve shareholder rights plans (commonly referred to as "poison
pills"); and
* The Funds will vote on a case-by-case basis on proposals to adopt fair
price provisions.
Commentary: The Funds' Trustees recognize that poison pills and fair
price provisions may enhance shareholder value under certain
circumstances. As a result, the Funds will consider proposals to approve
such matters on a case-by-case basis.
F. Other Business Matters
-------------------------
Many proxies involve approval of routine business matters, such as
changing the company's name, ratifying the appointment of auditors and
procedural matters relating to the shareholder meeting. For the most
part, these routine matters do not materially affect shareholder
interests and are best left to the board of directors and senior
management of the company. The Funds will vote for board-approved
proposals approving such matters, except as follows:
* The Funds will vote on a case-by-case basis on proposals to amend a
company's charter or bylaws (except for charter amendments necessary or
to effect stock splits to change a company's name or to authorize
additional shares of common stock).
* The Funds will vote against authorization to transact other
unidentified, substantive business at the meeting.
* The Funds will vote on a case-by-case basis on other business matters
where the Funds are otherwise withholding votes for the entire board of
directors.
Commentary: Charter and bylaw amendments and the transaction of other
unidentified, substantive business at a shareholder meeting may directly
affect shareholder rights and have a significant impact on shareholder
value. As a result, the Funds do not view such items as routine business
matters. Putnam Management's investment professionals and the Funds'
proxy voting service may also bring to the Proxy Coordinator's attention
company-specific items which they believe to be non-routine and
warranting special consideration. Under these circumstances, the Funds
will vote on a case-by-case basis.
II. Shareholder Proposals
-------------------------
SEC regulations permit shareholders to submit proposals for inclusion in
a company's proxy statement. These proposals generally seek to change
some aspect of a company's corporate governance structure or to change
some aspect of its business operations. The Funds will vote in
accordance with the recommendation of the company's board of directors
on all shareholder proposals, except as follows:
* The Funds will vote for shareholder proposals to declassify a board,
absent special circumstances which would indicate that shareholder
interests are better served by a classified board structure.
* The Funds will vote for shareholder proposals to require shareholder
approval of shareholder rights plans.
* The Funds will vote for shareholder proposals that are consistent with
the Fund's proxy voting guidelines for board-approved proposals.
* The Funds will vote on a case-by-case basis on other shareholder
proposals where the Funds are otherwise withholding votes for the entire
board of directors.
Commentary: In light of the substantial reforms in corporate governance
that are currently underway, the Funds' Trustees believe that effective
corporate reforms should be promoted by holding boards of directors -
and in particular, their independent directors - accountable for their
actions, rather than imposing additional legal restrictions on board
governance through piecemeal proposals. Generally speaking, shareholder
proposals relating to business operations are often motivated primarily
by political or social concerns, rather than the interests of
shareholders as investors in an economic enterprise. As stated above,
the Funds' Trustees believe that boards of directors and management are
responsible for ensuring that their businesses are operating in
accordance with high legal and ethical standards and should be held
accountable for resulting corporate behavior. Accordingly, the Funds
will generally support the recommendations of boards that meet the basic
independence and governance standards established in these guidelines.
Where boards fail to meet these standards, the Funds will generally
evaluate shareholder proposals on a case-by-case basis.
III. Voting Shares of Foreign Issuers
-------------------------------------
Many of the Funds invest on a global basis and, as a result, they may be
required to vote shares held in foreign issuers - i.e., issuers that are
incorporated under the laws of a foreign jurisdiction and that are not
listed a U.S. securities exchange or the NASDAQ stock market. Because
foreign issuers are incorporated under the laws of countries and
jurisdictions outside the U.S., protection for shareholders may vary
significantly from jurisdiction to jurisdiction. Laws governing foreign
issuers may, in some cases, provide substantially less protection for
shareholders. As a result, the foregoing guidelines, which are premised
on the existence of a sound corporate governance and disclosure
framework, may not be appropriate under some circumstances for foreign
issuers. The Funds will vote proxies of foreign issuers in accordance
with the foregoing guidelines where applicable, except as follows:
* The Funds will vote for shareholder proposals calling for a majority
of the directors to be independent of management.
* The Funds will vote for shareholder proposals seeking to increase the
independence of board nominating, audit and compensation committees.
* The Funds will vote for shareholder proposals that implement corporate
governance standards similar to those established under U.S. federal law
and the listing requirements of U.S. stock exchanges, and that do not
otherwise violate the laws of the jurisdiction under which the company
is incorporated.
* The Funds will vote on case-by-case basis on proposals relating to (1)
the issuance of common stock in excess of 20% of a company's outstanding
common stock where shareholders do not have preemptive rights, or (2)
the issuance of common stock in excess of 100% of a company's
outstanding common stock where shareholders have preemptive rights.
Commentary: In many non-U.S. markets, shareholders who vote proxies for
shares of a foreign issuer are not able to trade in that company's stock
within a given period of time on or around the shareholder meeting date.
This practice is known as "share blocking." In countries where share
blocking is practiced, the Funds will vote proxies only with direction
from Putnam Management's investment professionals.
As adopted March 14, 2003
Proxy Voting Procedures of the Putnam Funds
-------------------------------------------
The Role of the Funds' Trustees
-------------------------------
The Trustees of the Putnam Funds exercise control of the voting of
proxies through their Board Policy and Nominating Committee, which is
composed entirely of independent Trustees. The Board Policy and
Nominating Committee oversees the proxy voting process and participates,
as needed, in the resolution of issues which need to be handled on a
case-by-case basis. The Committee annually reviews and recommends for
approval by the Trustees guidelines governing the Funds' proxy votes,
including how the Funds vote on specific proposals and which matters are
to be considered on a case-by-case basis. The Trustees are assisted in
this process by their independent administrative staff ("Fund
Administration"), independent legal counsel, and an independent proxy
voting service. The Trustees also receive assistance from Putnam
Investment Management, LLC ("Putnam Management"), the Funds' investment
adviser, on matters involving investment judgments. In all cases, the
ultimate decision on voting proxies rests with the Trustees, acting as
fiduciaries on behalf of the shareholders of the Funds.
The Role of the Proxy Voting Service
------------------------------------
The Funds have engaged an independent proxy voting service to assist in
the voting of proxies. The proxy voting service is responsible for
coordinating with the Funds' custodians to ensure that all proxy
materials received by the custodians relating to the Funds' portfolio
securities are processed in a timely fashion. To the extent applicable,
the proxy voting service votes all proxies in accordance with the proxy
voting guidelines established by the Trustees. The proxy voting service
will refer proxy questions to the Proxy Coordinator (described below)
for instructions under circumstances where: (1) the application of the
proxy voting guidelines is unclear, (2) a particular proxy question is
not covered by the guidelines, or (3) the guidelines call for specific
instructions on a case-by-case basis. The proxy voting service is also
requested to call to the Proxy Coordinator's attention specific proxy
questions which, while governed by a guideline, appear to involve
unusual or controversial issues. The Funds also utilize research
services relating to proxy questions provided by the proxy voting
service and by other firms.
The Role of the Proxy Coordinator
---------------------------------
Each year, a member of Fund Administration is appointed Proxy
Coordinator to assist in the coordination and voting of the Funds'
proxies. The Proxy Coordinator will deal directly with the proxy voting
service and, in the case of proxy questions referred by the proxy voting
service, will solicit voting recommendations and instructions from Fund
Administration, the Chair of the Board Policy and Nominating Committee,
and Putnam Management's investment professionals, as appropriate. The
Proxy Coordinator is responsible for ensuring that these questions and
referrals are responded to in a timely fashion and for transmitting
appropriate voting instructions to the proxy voting service.
Voting Procedures for Referral Items
------------------------------------
As discussed above, the proxy voting service will refer proxy questions
to the Proxy Coordinator under certain circumstances. When the
application of the proxy voting guidelines is unclear or a particular
proxy question is not covered by the guidelines (and does not involve
investment considerations), the Proxy Coordinator will assist in
interpreting the guidelines and, as appropriate, consult with the Senior
Vice President of Fund Administration, the Executive Vice President of
Fund Administration and the Chair of the Board Policy and Nominating
Committee on how the Funds' shares will be voted.
For proxy questions that require a case-by-case analysis pursuant to the
guidelines or that are not covered by the guidelines but involve
investment considerations, the Proxy Coordinator will refer such
questions, through a written request, to Putnam Management's investment
professionals for a voting recommendation. Such referrals will be made
in cooperation with the person or persons designated by Putnam
Management's Legal and Compliance Department to assist in processing
such referral items. In connection with each such referral item, the
Legal and Compliance Department will conduct a conflicts of interest
review, as described below under "Conflicts of Interest," and provide a
conflicts of interest report (the "Conflicts Report") to the Proxy
Coordinator describing the results of such review. After receiving a
referral item from the Proxy Coordinator, Putnam Management's investment
professionals will provide a written recommendation to the Proxy
Coordinator and the person or persons designated by the Legal and
Compliance Department to assist in processing referral items. Such
recommendation will set forth (1) how the proxies should be voted, (2)
the basis and rationale for such recommendation, and (3) any contacts
the investment professionals have had with respect to the referral item
with non-investment personnel of Putnam Management or with outside
parties (except for routine communications from proxy solicitors). The
Proxy Coordinator will then review the investment professionals'
recommendation and the Conflicts Report with the Senior Vice President
and/or Executive Vice President in determining how to vote the Funds'
proxies. The Proxy Coordinator will maintain a record of all proxy
questions that have been referred to Putnam Management's investment
professionals, the voting recommendation and the Conflicts Report.
In some situations, the Proxy Coordinator, the Senior Vice President
and/or the Executive Vice President may determine that a particular
proxy question raises policy issues requiring consultation with the
Chair of the Board Policy and Nominating Committee who, in turn, may
decide to bring the particular proxy question to the Committee or the
full board of Trustees for consideration.
Conflicts of Interest
---------------------
Occasions may arise where a person or organization involved in the proxy
voting process may have a conflict of interest. A conflict of interest
may exist, for example, if Putnam Management has a business relationship
with (or is actively soliciting business from) either the company
soliciting the proxy or a third party that has a material interest in
the outcome of a proxy vote or that is actively lobbying for a
particular outcome of a proxy vote. Any individual with knowledge of a
personal conflict of interest (e.g., familial relationship with company
management) relating to a particular referral item shall disclose that
conflict to the Proxy Coordinator and the Legal and Compliance
Department and otherwise remove himself or herself from the proxy voting
process. The Legal and Compliance Department will review each item
referred to Putnam Management's investment professionals to determine if
a conflict of interest exists and will provide the Proxy Coordinator
with a Conflicts Report for each referral item that (1) describes any
conflict of interest; (2) discusses the procedures used to address such
conflict of interest; and (3) discloses any contacts from parties
outside Putnam Management (other than routine communications from proxy
solicitors) with respect to the referral item not otherwise reported in
an investment professional's recommendation. The Conflicts Report will
also include written confirmation that any recommendation from an
investment professional provided under circumstances where a conflict of
interest exists was made solely on the investment merits and without
regard to any other consideration.
As adopted March 14, 2003
Item 8. Purchases of Equity Securities by Closed-End Management Investment
--------------------------------------------------------------------------
Companies and Affiliated Purchasers: Not applicable
------------------------------------
Item 9. Submission of Matters to a Vote of Security Holders:
------------------------------------------------------------
Not applicable
Item 10. Controls and Procedures:
--------------------------------
(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.
(b) Changes in internal control over financial reporting:
Not applicable
Item 11. Exhibits:
------------------
(a) The Code of Ethics of The Putnam Funds, which incorporates the
Code of Ethics of Putnam Investments, is filed herewith.
(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: October 27, 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: October 27, 2004
By (Signature and Title): /s/Steven D. Krichmar
---------------------------
Steven D. Krichmar
Principal Financial Officer
Date: October 27, 2004