-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HE6YWLXvext/mkq6TUDnAuzCdaM5tPEdmv3iRhfwKiW7TrZZAr10Gj/veM4YkktX yTzqCicIVy3V/Al7BcYrQg== 0000928816-99-000095.txt : 19990421 0000928816-99-000095.hdr.sgml : 19990421 ACCESSION NUMBER: 0000928816-99-000095 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19990228 FILED AS OF DATE: 19990420 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PUTNAM FUNDS TRUST CENTRAL INDEX KEY: 0001005942 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-30D SEC ACT: SEC FILE NUMBER: 811-07513 FILM NUMBER: 99597487 BUSINESS ADDRESS: STREET 1: ONE POST STREET 2: ONE POST OFFICE SQUARE CITY: BOSTON STATE: MA ZIP: 02109 BUSINESS PHONE: 6172921010 MAIL ADDRESS: STREET 1: ONE POST OFFICE SQUARE CITY: BOSTON STATE: MA ZIP: 02109 N-30D 1 PUTNAM HIGH YIELD TRUST II Putnam High Yield Trust II SEMIANNUAL REPORT ON PERFORMANCE AND OUTLOOK 2-28-99 [LOGO: BOSTON * LONDON * TOKYO] Fund highlights * "U.S. corporate junk bonds have actually risen in value so far this year, and their yields have dropped -- a sign, analysts say, that this volatile but popular market sector may hold up much better in 1999 than it did in '98." -- The Los Angeles Times, January 26, 1999 * "Given the recent strength of the U.S. economy, it is quite unusual to see the high-yield market struggling to keep pace with other asset classes, and we believe this has been based mainly on unexplained negative market sentiment rather than on any fundamental weakness. Evidently, the high-yield market is going through an adjustment period, but as the period drew to an end, we saw signs that investors are slowly but steadily gravitating back to high-yield securities." -- Rosemary H. Thomsen, manager Putnam High Yield Trust II CONTENTS 4 Report from Putnam Management 9 Fund performance summary 12 Portfolio holdings 31 Financial statements From the Chairman [GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM] [copyright] Karsh, Ottawa Dear Shareholder: The first half of Putnam High Yield Trust II's current fiscal year coincided with the most difficult market environment in a decade for the lower-rated, high-yielding bonds in which the fund invests. There are signs that the worst of investors' flight to safer havens may be over, but your fund's managers are prepared for continued volatility over the shorter term. Longer term, however, they believe the high-yield bond market's fundamentals remain positive. In their opinion, these strengths will eventually re-emerge and reward investors who have patience and a long-term investment perspective. I am pleased to announce the appointment of three new members to your fund's management team. Rosemary H. Thomsen, who has 16 years of investment experience, has been with Putnam since 1986. Robert M. Paine, who joined Putnam the following year, has more than 10 years of experience in the industry. Jeffrey A. Kaufman joined Putnam last year after serving with MFS Investment Management and, prior to that, with Salomon Brothers. He has 8 years of investment experience. Respectfully yours, /S/GEORGE PUTNAM George Putnam Chairman of the Trustees April 21, 1999 Report from the Fund Managers Rosemary H. Thomsen Jennifer E. Leichter Robert M. Paine Jeffrey A. Kaufman The six months ended February 28, 1999, proved to be a particularly challenging period for the high-yield bond market. Problems overseas and broad-based selling of high-yield debt by highly leveraged hedge funds curbed Wall Street's appetite for high-yield securities, driving prices down to lows we have not seen for almost 10 years. While Putnam High Yield Trust II took advantage of the buying opportunities that resulted, inevitably its performance was affected by the market decline. As a result, your fund's class A shares provided a total return of 2.30% at net asset value and -2.56% at public offering price for the period. For more information, including returns for other classes of shares, please see pages 9 through 11. * WORLDWIDE RISK AVERSION DRIVES DOWN HIGH-YIELD MARKET The 1998 crisis in the fixed-income markets started when the Russian ruble was devalued in August. Although Russia makes up only a tiny portion of the global economy, this move sparked a cascade of subsequent events that caused investors worldwide to become risk averse in a very short period of time. Several large hedge funds had significant investments in Russia and other emerging markets. Losses from those investments forced these and other, smaller hedge funds to liquidate their higher-risk holdings, prompting a worldwide rush to the safer haven of U.S. Treasuries. The yield differential between Treasuries and all other sectors of the fixed-income market increased dramatically as a result. Concurrently -- since yield moves in the opposite direction of price -- the value of non-Treasury investments fell precipitously and the high-yield market was hit especially hard. The stock market, which historically has been a major influence on high-yield bond prices, also declined dramatically. Fortunately for the financial markets, the Federal Reserve Board stepped in to provide liquidity to the system by cutting short-term interest rates three times from late September through Thanksgiving. These moves were successful in restoring liquidity and providing the stock market with a much-needed shot in the arm. Equities quickly rebounded from their lows. High-yield bonds have strengthened somewhat, but have yet to recover fully. For example, in July 1998, yields in this market were approximately 3.80 percentage points higher than those of comparable Treasuries. That yield differential widened out to 7.65 percentage points in early October, fell back to 6.32 percentage points at the end of 1998, and at the end of the period, was back down to 5.81 percentage points. This semiannual period was the worst for high-yield bonds since 1990, when default rates in the high-yield market ranged as high as 10%, the U.S. economy was in recession, and the U.S. was at war in the Persian Gulf. Unlike other types of bonds, high-yield bonds react more to prospects for economic growth and corporate earnings growth rates than they do to interest-rate movements. It is typical for the high-yield market to lag at times of predicted economic weakness. Given the recent strength of the U.S. economy, it is quite unusual to see the high-yield market struggling to keep pace with other asset classes, and we believe this struggle has been based mainly on unexplained negative market sentiment rather than on any fundamental weakness. Evidently, the high-yield market is going through an adjustment period, but as the reporting period drew to an end, we saw signs that investors are slowly but steadily gravitating back to high-yield securities. [GRAPHIC OMITTED: horizontal bar chart TOP INDUSTRY SECTORS] TOP INDUSTRY SECTORS* Telecommunications 15.8% Broadcasting 4.7% Cable TV 4.4% Telephone services 4.3% Health care 3.7% Footnote reads: *Based on net assets as of 2/28/99. Holdings will vary over time. * OPPORTUNITIES IN TELECOMMUNICATIONS REMAIN A FOCUS Your fund has emphasized investments in the telecommunications industry for some time and continued to do so during the period. In this sector, fundamentals, or business prospects, remained extremely strong with demand for telecommunications services expanding dramatically. Competitive, fast-growing telecommunications companies that are rapidly gaining market share typically issue high-yield debt to finance their expansion plans. Bonds from this sector also offer particularly high yields -- an important consideration in light of your fund's high-income objective. Unfortunately, during the recent market turmoil, telecommunications bonds suffered as investors became concerned these companies would lose access to capital to finance their business plans. However, that fear has proved ungrounded, and the sector continues to demonstrate exceptional growth potential and operating performance. Throughout the telecommunications business, consolidation remains an ongoing trend. As deregulation continues to move forward in the United States and elsewhere, large telecommunications firms seek to become more competitive through acquisition, both domestically and across borders. One portfolio holding that exemplifies this trend is NTL, a provider of local telephone and cable TV services in the United Kingdom. Through creative marketing and aggressive management, this company has succeeded in reaching a steadily growing number of homes by using its fiber optic backbone and by acquiring other companies. Recently, the company received about $500 million in funding from Microsoft. The fund's investment in NTL reflects both the company's outstanding business prospects and its potential strategic value at some point in the future. While this and other securities discussed in this report were viewed favorably at the end of the period, all holdings are subject to review in accordance with the fund's investment strategy and may vary in the future. [GRAPHIC OMITTED: worm chart HIGH-YIELD BONDS VERSUS OTHER CORPORATE SECURITIES] HIGH-YIELD BONDS VERSUS OTHER CORPORATE SECURITIES First Boston Lehman Brothers Date High Yield Index Corporate Bond Index 2/29/92 37.30% 14.71% 2/28/93 57.42% 30.91% 2/28/94 82.13% 39.61% 2/28/95 83.19% 41.58% 2/29/96 112.76% 61.86% 2/28/97 139.61% 71.12% 2/28/98 169.52% 89.75% 2/28/99 166.42% 100.82% Footnote reads: Past performance is not indicative of future results. This chart demonstrates that high-yield bonds, as represented by the First Boston High Yield Index, generally outperformed investment-grade corporate bonds, as represented by the Lehman Brothers Corporate Bond Index. The chart shows cumulative returns. The lower credit rating of high-yield bonds reflects a greater possibility that adverse changes in an issuer's business or financial condition or in general economic conditions may impair the issuer's ability to pay principal and interest on the securities. This chart does not reflect the performance of Putnam High Yield Trust II. We should also add that given our concerns about liquidity in the market, we have added a layer of higher-quality, more-liquid securities to the portfolio. Because of the higher quality, their yields are somewhat lower than our typical high-yield holding. However, in light of the recent market volatility, we consider it important to provide the portfolio with a greater element of stability. * OUTLOOK FOR HIGH-YIELD MARKET REMAINS POSITIVE At the end of the period, the environment for the high-yield market was characterized by low default rates and a strong economy. In addition, valuations were unusually compelling and demand for high-yield issues had stabilized. Over this period, we have been able to buy bonds at historically low prices and to position the fund in sectors and industries we consider likely to show strong growth prospects in the future. Putnam's economic forecast currently calls for continued strong economic growth and low inflation. Although the recovery in the equity market has not yet spread to the high-yield market, we believe it will gradually start to do so. Meanwhile, merger and acquisition activity has continued to strengthen a number of high-yield issuers during the period. Over the remainder of fiscal 1999, we anticipate that the positions we established during this buying opportunity will enable the fund to benefit as the high-yield market strengthens once again. The views expressed here are exclusively those of Putnam Management. They are not meant as investment advice. Although the described holdings were viewed favorably as of 2/28/99, there is no guarantee the fund will continue to hold these securities in the future. The lower credit ratings of high-yield bonds reflect a greater possibility that adverse changes in the economy or poor performance by the issuers of these bonds may affect the issuer's ability to pay principal and interest. Performance summary This section provides information about your fund's performance, which should always be considered in light of its investment strategy. Putnam High Yield Trust II is designed for investors seeking high current income through a diversified portfolio of high-yielding lower-rated corporate bonds, with a secondary objective of capital growth when consistent with high current income. TOTAL RETURN FOR PERIODS ENDED 2/28/99 Class A Class B Class M (inception date) (12/31/97) (12/31/97) (12/31/97) NAV POP NAV CDSC NAV POP - ------------------------------------------------------------------------------ 6 months 2.30% -2.56% 2.05% -2.81% 2.30% -1.04% - ------------------------------------------------------------------------------ 1 year -3.90 -8.49 -4.51 -8.86 -4.03 -7.14 - ------------------------------------------------------------------------------ Life of fund 1.23 -3.55 0.47 -3.19 0.97 -2.36 Annual average 1.06 -3.07 0.41 -2.76 0.84 -2.04 - ------------------------------------------------------------------------------ COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 2/28/99 First Boston Consumer High Yield price Index index - ------------------------------------------------------------------------------ 6 months 3.48% 0.80% - ------------------------------------------------------------------------------ 1 year -1.15 1.73 - ------------------------------------------------------------------------------ Life of fund 1.31 2.11 Annual average 1.13 1.81 - ------------------------------------------------------------------------------ Past performance is no assurance of future results. More recent returns may be more or less than those shown. Returns for class A and class M shares reflect the current maximum initial sales charges of 4.75% and 3.25% respectively. Class B share returns for the 1-, 5-, and 10-year (where available) and life-of-fund periods reflect the applicable contingent deferred sales charge (CDSC), which is 5% in the first year, declines to 1% in the sixth year, and is eliminated thereafter. All returns assume reinvestment of distributions at NAV. Investment return and principal value will fluctuate so that an investor's shares when redeemed may be worth more or less than their original cost. PRICE AND DISTRIBUTION INFORMATION 6 months ended 2/28/99 Class A Class B Class M - ------------------------------------------------------------------------------ Distributions (number) 6 6 6 - ------------------------------------------------------------------------------ Income $0.424030 $0.394615 $0.414311 - ------------------------------------------------------------------------------ Capital gains -- -- -- - ------------------------------------------------------------------------------ Total $0.424030 $0.394615 $0.414311 - ------------------------------------------------------------------------------ Share value: NAV POP NAV NAV POP - ------------------------------------------------------------------------------ 8/31/98 $8.02 $8.42 $8.01 $8.01 $8.28 - ------------------------------------------------------------------------------ 2/28/99 7.78 8.17 7.78 7.78 8.04 - ------------------------------------------------------------------------------ Current return (end of period) - ------------------------------------------------------------------------------ Current dividend rate1 10.80% 10.28% 10.10% 10.56% 10.06% - ------------------------------------------------------------------------------ Current 30-day SEC yield2 9.83 9.35 9.04 9.57 9.25 - ------------------------------------------------------------------------------ 1Income portion of most recent distribution, annualized and divided by NAV or POP at end of period. 2Based on investment income, calculated using SEC guidelines. TOTAL RETURN FOR PERIODS ENDED 3/31/99 (most recent calendar quarter) Class A Class B Class M (inception date) (12/31/97) (12/31/97) (12/31/97) NAV POP NAV CDSC NAV POP - ------------------------------------------------------------------------------ 6 months 4.00 -0.99 3.88 -1.06 4.14 0.71 - ------------------------------------------------------------------------------ 1 year -4.83 -9.31 -5.32 -9.63 -4.84 -7.98 - ------------------------------------------------------------------------------ Life of fund 2.79 -2.06 2.08 -1.61 2.64 -0.75 Annual average 2.23 -1.65 1.66 -1.29 2.11 -0.60 - ------------------------------------------------------------------------------ Past performance is no assurance of future results. More recent returns may be more or less than those shown. They do not take into account any adjustment for taxes payable on reinvested distributions. Investment returns and principal value will fluctuate so that an investor's shares when sold may be worth more or less than their original cost. TERMS AND DEFINITIONS Total return shows how the value of the fund's shares changed over time, assuming you held the shares through the entire period and reinvested all distributions in the fund. Class A shares are generally subject to an initial sales charge. Class B shares may be subject to a sales charge upon redemption. Class M shares have a lower initial sales charge and a higher 12b-1 fee than class A shares and no sales charge on redemption. Net asset value (NAV) is the value of all your fund's assets, minus any liabilities, divided by the number of outstanding shares, not including any initial or contingent deferred sales charge. Public offering price (POP) is the price of a mutual fund share plus the maximum sales charge levied at the time of purchase. POP performance figures shown here assume the 4.75% maximum sales charge for class A shares and 3.25% for class M shares. Contingent deferred sales charge (CDSC) is a charge applied at the time of the redemption of class B shares and assumes redemption at the end of the period. Your fund's CDSC declines from a 5% maximum during the first year to 1% during the sixth year. After the sixth year, the CDSC no longer applies. COMPARATIVE BENCHMARKS The First Boston High Yield Index* is an unmanaged list of lower-rated higher-yielding U.S. corporate bonds. The average quality of bonds included in this index will differ from the average quality of bonds in which the fund customarily invests. The Lehman Brothers Corporate Bond Index* is an index of publicly issued, fixed-rate, non-convertible investment-grade domestic corporate debt securities frequently used as a general measure of the performance of the corporate bond market. Consumer price index (CPI) is a commonly used measure of inflation; it does not represent an investment return. *Securities indexes assume reinvestment of all distributions and interest payments and do not take in account brokerage fees or taxes. Securities in the fund do not match those in the indexes and performance of the fund will differ. It is not possible to invest directly in an index.
Portfolio of investments owned February 28, 1999 (Unaudited) CORPORATE BONDS AND NOTES (88.5%) (a) PRINCIPAL AMOUNT VALUE Advertising (0.8%) - -------------------------------------------------------------------------------------------------------------------------- $ 3,000,000 Adams Outdoor Advertising sr. notes 10 3/4s, 2006 $ 3,262,500 1,000,000 Lamar Advertising Co. sr. sub. notes 9 5/8s, 2006 1,090,000 2,785,000 Lamar Advertising Co. company guaranty 8 5/8s, 2007 2,952,100 1,068,000 Outdoor Communications Inc. sr. sub. notes 9 1/4s, 2007 1,150,770 1,180,000 Outdoor Systems, Inc. sr. sub. notes 9 3/8s, 2006 1,268,500 -------------- 9,723,870 Aerospace and Defense (2.4%) - -------------------------------------------------------------------------------------------------------------------------- 4,355,000 Argo-Tech Corp. company guaranty 8 5/8s, 2007 4,093,700 1,190,000 Argo-Tech Corp. 144A sr. sub. notes 8 5/8s, 2007 1,118,600 2,710,000 Aviation Sales Co. company guaranty 8 1/8s, 2008 2,655,800 1,000,000 BE Aerospace, Inc. sr. sub. notes Ser. B, 9 7/8s, 2006 1,045,000 5,560,000 BE Aerospace, Inc. sr. sub. notes 9 1/2s, 2008 5,851,900 2,425,000 BE Aerospace, Inc. sr. sub. notes Ser. B, 8s, 2008 2,352,250 4,490,000 Burke Industries, Inc. company guaranty 10s, 2007 4,085,900 1,850,000 Derlan Industries Ltd. sr. notes 10s, 2007 (Canada) 1,646,500 5,540,000 K&F Industries, Inc. sr. sub. notes Ser. B, 9 1/4s, 2007 5,650,800 -------------- 28,500,450 Agriculture (0.2%) - -------------------------------------------------------------------------------------------------------------------------- 2,440,000 Purina Mills, Inc. 144A sr. sub. notes 9s, 2010 2,269,200 Airlines (1.0%) - -------------------------------------------------------------------------------------------------------------------------- 570,000 Calair LLC company guaranty 8 1/8s, 2008 541,500 1,350,000 Canadian Airlines Corp. sr. notes 12 1/4s, 2006 (Canada) 702,000 3,430,000 Canadian Airlines Corp. sr. sec. notes 10s, 2005 (Canada) 2,744,000 4,090,000 Continental Airlines, Inc. sr. notes 9 1/2s, 2001 4,212,700 2,325,000 Trans World Airlines, Inc. sr. notes 11 1/2s, 2004 1,813,500 2,370,000 Trans World Airlines, Inc. sr. notes 11 3/8s, 2006 1,350,900 -------------- 11,364,600 Apparel (0.1%) - -------------------------------------------------------------------------------------------------------------------------- 40,000 Guess Jeans, Inc. sr. sub. notes 9 1/2s, 2003 39,600 1,500,000 Sassco Fashions Ltd. sr. notes 12 3/4s, 2004 1,477,500 -------------- 1,517,100 Automotive (2.3%) - -------------------------------------------------------------------------------------------------------------------------- 4,870,000 Federal Mogul Corp. 144A notes 7 1/2s, 2009 4,720,540 583,000 Hawk Corp. sr. notes 10 1/4s, 2003 606,320 4,000,000 Lear Corp. sub. notes 9 1/2s, 2006 4,380,000 3,630,000 Navistar International Corp. sr. notes Ser. B, 8s, 2008 3,720,750 5,940,000 Oxford Automotive, Inc. company guaranty 10 1/8s, 2007 6,118,200 3,420,000 Talon Automotive Group sr. sub. notes Ser. B, 9 5/8s, 2008 3,026,700 2,000,000 Walbro Corp. company guaranty Ser. B, 10 1/8s, 2007 2,000,000 2,241,000 Walbro Corp. sr. notes Ser. B, 9 7/8s, 2005 2,196,180 -------------- 26,768,690 Automotive Parts (1.7%) - -------------------------------------------------------------------------------------------------------------------------- 660,000 Aftermarket Technology Corp. sr. sub. notes 12s, 2004 676,500 2,250,000 Cambridge Industries, Inc. company guaranty Ser. B, 10 1/4s, 2007 1,777,500 3,570,000 Exide Corp. sr. notes 10s, 2005 3,534,300 3,689,809 Exide Corp. Term Loan B 7 3/4s, 2005 3,616,013 4,700,000 Hayes Lemmerz International, Inc. 144A company guaranty 8 1/4s, 2008 4,770,500 3,000,000 Hayes Wheels International, Inc. company guaranty Ser. B, 9 1/8s, 2007 3,165,000 3,000,000 Safety Components International, Inc. sr. sub. notes Ser. B, 10 1/8s, 2007 2,970,000 -------------- 20,509,813 Banks (1.9%) - -------------------------------------------------------------------------------------------------------------------------- 1,900,000 Advanta Corp. company guaranty Ser. B, 8.99s, 2026 1,102,000 5,250,000 Advanta Corp. med. term notes Ser. B, 7s, 2001 4,701,533 3,460,000 Chevy Chase Savings Bank Inc. sub. deb. 9 1/4s, 2008 3,494,600 550,000 Chevy Chase Savings Bank Inc. sub. deb. 9 1/4s, 2005 552,750 4,500,000 Delta Financial Corp. sr. notes 9 1/2s, 2004 3,600,000 850,000 Fuji JGB Inv. LLC 144A FLIRB 9.87s, 2049 (Japan) 664,020 5,025,000 GS Escrow Corp. sr. notes 7 1/8s, 2005 4,869,728 3,175,000 GS Escrow Corp. sr. notes 6 3/4s, 2001 3,159,855 -------------- 22,144,486 Basic Industrial Products (0.9%) - -------------------------------------------------------------------------------------------------------------------------- 2,990,000 Axia, Inc. company guaranty 10 3/4s, 2008 3,004,950 2,560,000 Cathay International Ltd. 144A sr. notes 13s, 2008 (China) 512,000 1,748,357 Grove Investors LLC 144A 14 1/2s, 2010 (PIK) 1,136,432 1,500,000 Insilco Holding Co. sr. disc. notes stepped-coupon zero % (14s, 8/15/03), 2008 (STP) 675,000 2,000,000 Neenah Foundry Co. 144A sr. sub. notes 11 1/8s, 2007 2,090,000 1,510,000 Paragon Corp. Holdings, Inc. company guaranty Ser. B, 9 5/8s, 2008 1,208,000 2,085,000 Roller Bearing Co. company guaranty Ser. B, 9 5/8s, 2007 1,991,175 -------------- 10,617,557 Broadcasting (4.7%) - -------------------------------------------------------------------------------------------------------------------------- 425,000 Allbritton Communications Co. sr. sub. deb. Ser. B, 9 3/4s, 2007 454,750 3,890,000 Allbritton Communications Co. sr. sub. notes Ser. B, 8 7/8s, 2008 3,977,525 6,075,000 Benedek Communications Corp. sr. disc. notes stepped- coupon zero % (13 1/4s, 5/15/01), 2006 (STP) 4,495,500 1,000,000 Capstar Broadcasting sr. disc. notes stepped-coupon zero % (12 3/4s, 2/1/02), 2009 (STP) 855,000 6,500,000 Capstar Broadcasting sr. sub. notes 9 1/4s, 2007 6,987,500 8,640,000 Chancellor Media Corp. 144A sr. notes 8s, 2008 9,028,800 5,350,300 Citadel Broadcasting Co. sr. sub. notes 10 1/4s, 2007 5,871,954 8,870,000 Echostar DBS Corp. 144A sr. notes 9 3/8s, 2009 8,914,350 40,000 Fox/Liberty Networks LLC sr. notes 8 7/8s, 2007 41,300 580,000 Globo Communicacoes company guaranty 10 1/2s, 2006 (Brazil) 319,000 670,000 Globo Communicacoes 144A company guaranty 10 1/2s, 2006 (Brazil) 368,500 800,000 Granite Broadcasting Corp. sr. sub. notes 9 3/8s, 2005 784,000 3,560,000 Granite Broadcasting Corp. sr. sub. notes 8 7/8s, 2008 3,524,400 1,000,000 Jacor Communications, Inc. company guaranty Ser. B, 8 3/4s, 2007 1,080,000 1,750,000 Paxson Communications Corp. 144A sr. sub. notes 11 5/8s, 2002 1,754,375 580,000 Pegasus Communications Corp. 144A sr. notes 9 3/4s, 2006 601,750 348,000 Radio One Inc. company guaranty Ser. B, stepped-coupon zero %, (12s, 5/15/00), 2004 (STP) 361,050 100,000 SFX Broadcasting, Inc. sr. sub. notes Ser. B, 10 3/4s, 2006 112,000 1,630,000 SFX Broadcasting, Inc. 144A sr. sub. notes 9 1/8s, 2008 1,638,150 1,000,000 Spanish Broadcasting Systems sr. notes 12 1/2s, 2002 (STP) 1,125,000 1,015,000 TV Azteca S.A. de C.V. sr. notes 10 1/2s, 2007 (Mexico) 822,150 2,000,000 Young Broadcasting Inc. company guaranty Ser. B, 8 3/4s, 2007 2,075,000 -------------- 55,192,054 Building and Construction (0.8%) - -------------------------------------------------------------------------------------------------------------------------- 2,300,000 American Architectural Products Corp. company guaranty 11 3/4s, 2007 1,955,000 4,210,000 D.R. Horton, Inc. company guaranty 8s, 2009 4,115,275 2,250,000 GS Superhighway Holdings sr. notes 10 1/4s, 2007 1,080,000 250,000 GS Superhighway Holdings sr. notes 9 7/8s, 2004 127,500 400,000 Jackson Products, Inc. company guaranty Ser. B, 9 1/2s, 2005 401,000 2,220,000 Toll Corp. company guaranty 8 1/8s, 2009 2,242,200 -------------- 9,920,975 Building Products (0.4%) - -------------------------------------------------------------------------------------------------------------------------- 1,980,000 Building Materials Corp. 144A sr. notes 8s, 2008 1,957,725 2,000,000 Cemex S.A. 144A bonds 12 3/4s, 2006 (Mexico) 2,170,000 -------------- 4,127,725 Buses (0.1%) - -------------------------------------------------------------------------------------------------------------------------- 2,000,000 MCII Holdings sec. notes stepped-coupon 12%, (15s, 11/15/99), 2002 (STP) 1,700,000 Business Equipment and Services (1.3%) - -------------------------------------------------------------------------------------------------------------------------- 1,580,000 Cendant Corp. notes 7 1/2s, 2000 1,598,454 2,570,000 Cex Holdings, Inc. company guaranty Ser. B, 9 5/8s, 2008 2,402,950 350,000 Iron Mountain, Inc. med. term notes company guaranty 10 1/8s, 2006 381,500 260,000 Outsourcing Solutions, Inc. sr. sub. notes Ser. B, 11s, 2006 253,500 998,885 Outsourcing Solutions, Inc. 144A 8.621s, 2004 978,907 3,973,000 Pierce Leahy Corp. sr. sub. notes 11 1/8s, 2006 4,330,570 4,510,000 U.S. Office Products Co. company guaranty 9 3/4s, 2008 3,202,100 2,498,765 U.S. Office Products Co. Bank Loan 7.53s, 2006 1,999,012 -------------- 15,146,993 Cable Television (4.4%) - -------------------------------------------------------------------------------------------------------------------------- 5,000,000 21st Century Telecom Group, Inc. sr. disc. notes stepped- coupon zero % (12 1/4s, 2/15/03), 2008 (STP) 1,750,000 7,990,000 Acme Television sr. disc. notes stepped-coupon zero % (10 7/8s, 9/30/00), 2004 (STP) 6,751,550 760,000 Adelphia Communications Corp. sr. notes Ser. B, 9 7/8s, 2007 845,500 2,980,000 Adelphia Communications Corp. 144A sr. notes 8 3/8s, 2008 3,076,850 1,400,000 Century Communications Corp. sr. notes 9 1/2s, 2005 1,571,500 2,550,000 Century Communications Corp. sr. notes 8 7/8s, 2007 2,830,500 1,110,000 Century Communications Corp. sr. notes 8 3/4s, 2007 1,232,100 560,000 Charter Communications International, Inc. disc. notes Ser. B, stepped-coupon zero % (14s, 3/15/01), 2007 (STP) 518,000 1,900,000 Comcast Corp. sr. sub. notes 9 1/2s, 2008 2,004,462 2,500,000 Comcast Corp. sr. sub. notes 9 3/8s, 2005 2,660,725 170,000 CSC Holdings, Inc. sr. sub. deb. 10 1/2s, 2016 203,575 210,000 CSC Holdings, Inc. sr. sub. notes 9 1/4s, 2005 225,225 680,000 CSC Holdings, Inc. deb. 7 7/8s, 2018 696,708 5,550,000 CSC Holdings, Inc. sr. notes 7 1/4s, 2008 5,575,086 2,505,000 Diamond Cable Communication Co. sr. disc. notes stepped-coupon zero % (10 3/4s, 2/15/02), 2007 (United Kingdom) (STP) 1,960,163 3,540,000 Fox Family Worldwide, Inc. sr. notes 9 1/4s, 2007 3,398,400 1,000,000 Lenfest Communications, Inc. sr. sub. notes 10 1/2s, 2006 1,180,000 2,250,000 Lenfest Communications, Inc. sr. sub. notes 8 1/4s, 2008 2,351,250 3,200,000 Marcus Cable Co. (L.P.) sr. disc. notes stepped-coupon zero % (14 1/4s, 6/15/00), 2005 (STP) 3,172,000 1,650,000 NTL Inc. 144A sr. notes 11 1/2s, 2008 1,864,500 4,920,000 NTL Inc. sr. notes Ser. B, stepped-coupon zero % (9 3/4s, 4/1/03), 2008 (STP) 3,345,600 1,290,000 Supercanal Holdings S.A. 144A sr. notes 11 1/2s, 2005 (Argentina) 593,400 670,000 TeleWest Communications PLC 144A sr. notes 11 1/4s, 2008 (United Kingdom) 787,250 5,035,000 United International Holdings sr. disc. notes Ser. B, stepped-coupon zero % (10 3/4s, 2/15/03), 2008 (STP) 3,323,100 -------------- 51,917,444 Cellular Communications (2.4%) - -------------------------------------------------------------------------------------------------------------------------- 3,865,000 Dobson Communications Corp. sr. notes 11 3/4s, 2007 4,135,550 5,400,000 McCaw International Ltd sr. disc. notes stepped-coupon zero % (13s, 4/15/02), 2007 (STP) 2,808,000 1,330,000 NEXTEL Communications, Inc. sr. disc. notes stepped- coupon zero % (12 1/8s, 4/15/03), 2008 (STP) 561,925 5,450,000 NEXTEL Communications, Inc. 144A sr. notes 12s, 2008 6,144,875 7,790,000 NEXTEL Communications, Inc. sr. disc. notes stepped- coupon zero % (10.65s, 9/15/02), 2007 (STP) 5,316,675 4,980,000 NEXTEL Communications, Inc. sr. disc. notes stepped- coupon zero % (9.95s, 2/15/03), 2008 (STP) 3,187,200 4,395,000 NEXTEL Communications, Inc. sr. disc. notes stepped- coupon zero % (9 3/4s, 10/31/02), 2007 (STP) 2,867,738 2,790,000 Price Communications Wireless, Inc. 144A sr. notes 9 1/8s, 2006 2,929,500 -------------- 27,951,463 Chemicals (1.5%) - -------------------------------------------------------------------------------------------------------------------------- 2,150,000 Acetex Corp. sr. notes 9 3/4s, 2003 (Canada) 2,085,500 625,000 ARCO Chemical Co. deb. 9.9s, 2000 629,306 3,830,000 Geo Specialty Chemicals, Inc. 144A sr. sub. notes 10 1/8s, 2008 3,791,700 1,160,000 Huntsman Corp. 144A sr. sub. notes 9 1/2s, 2007 1,171,600 645,000 Huntsman Corp. 144A sr. sub. notes FRN 9.188s, 2007 593,400 2,000,000 Lyondell Petrochemical Bank Loan D 7 1/4s, 2000 1,947,500 2,000,000 Lyondell Petrochemical Bank Loan C 7 1/4s, 1999 1,947,500 1,575,000 PCI Chemicals & Pharmaceuticals company guaranty 9 1/4s, 2007 (India) 1,118,250 2,500,000 Pioneer Americas Acquisition 144A sr. notes 9 1/4s, 2007 1,875,000 2,350,000 Scotts Co 144A sr. sub. notes 8 5/8s, 2009 2,420,500 130,000 Sterling Chemicals Holdings sr. disc. notes stepped- coupon zero % (13 1/2s, 8/15/01), 2008 (STP) 48,100 1,490,000 Trikem S.A. 144A bonds 10 5/8s, 2007 (Brazil) 551,300 -------------- 18,179,656 Computer Services (1.4%) - -------------------------------------------------------------------------------------------------------------------------- 4,990,000 IPC Information Systems sr. disc. notes stepped-coupon zero % (10 7/8s, 11/1/01), 2008 (STP) 3,193,600 2,280,000 PSINet, Inc. 144A sr. notes 11 1/2s, 2008 2,547,900 610,000 PSINet, Inc. sr. notes Ser. B, 10s, 2005 631,350 1,860,000 Unisys Corp. sr. notes Ser. B, 12s, 2003 2,069,250 4,000,000 Unisys Corp. sr. notes 11 3/4s, 2004 4,600,000 1,150,000 Verio Inc. 144A sr. notes 11 1/4s, 2008 1,242,000 2,590,000 Viasystems, Inc. sr. sub notes 9 3/4s, 2007 2,441,075 310,000 Viasystems, Inc. 144A sr. notes 9 3/4s, 2007 287,525 -------------- 17,012,700 Consumer Durable Goods (1.2%) - -------------------------------------------------------------------------------------------------------------------------- 1,830,000 Albecca Inc. 144A sr. sub. notes 10 3/4s, 2008 1,610,400 1,850,000 Doskocil Manufacturing Co 144A sr. sub. notes 10 1/8s, 2007 1,517,000 1,745,000 Hedstrom Holdings, Inc. 144A sr. disc. notes stepped- coupon zero % (12s, 6/1/02), 2009 (STP) 698,000 5,890,000 Samsonite Corp. sr. sub. notes 10 3/4s, 2008 4,476,400 4,000,000 Sealy Mattress Co. 144A sr. sub. notes Ser. B, 9 7/8s, 2007 3,880,000 1,500,000 Signature Brands Ltd. sr. sub. notes 13s, 2002 (Canada) 1,657,500 -------------- 13,839,300 Consumer Non Durables (0.5%) - -------------------------------------------------------------------------------------------------------------------------- 2,835,000 Amscan Holdings, Inc. sr. sub. notes 9 7/8s, 2007 2,565,675 3,600,000 Doane Products Co. 144A sr. sub. notes 9 3/4s, 2007 3,798,000 -------------- 6,363,675 Consumer Products (0.3%) - -------------------------------------------------------------------------------------------------------------------------- 5,880,000 Iron Age Holdings Corp. sr. disc. notes stepped-coupon zero % (12 1/8s, 5/1/03), 2009 (STP) 2,058,000 1,830,000 Iron Age Holdings Corp. company guaranty 9 7/8s, 2008 1,372,500 -------------- 3,430,500 Consumer Services (0.3%) - -------------------------------------------------------------------------------------------------------------------------- 2,476,000 Coinmach Corp. sr. notes 11 3/4s, 2005 2,723,600 740,000 Protection One, Inc. sr. disc. notes stepped-coupon zero % (13 5/8s, 6/30/00), 2005 (STP) 843,600 -------------- 3,567,200 Cosmetics (0.9%) - -------------------------------------------------------------------------------------------------------------------------- 2,350,000 Chattem, Inc. company guaranty Ser. B, 8 7/8s, 2008 2,397,000 2,150,000 French Fragrances, Inc. company guaranty Ser. D, 10 3/8s, 2007 2,150,000 1,220,000 French Fragrances, Inc. sr. notes Ser. B, 10 3/8s, 2007 1,207,800 1,050,000 Revlon Consumer Products sr. notes 9s, 2006 1,015,875 4,000,000 Revlon Consumer Products sr. sub. notes 8 5/8s, 2008 3,480,000 -------------- 10,250,675 Electric Utilities (1.1%) - -------------------------------------------------------------------------------------------------------------------------- 500,000 AES China Generating Co. sr. notes 10 1/8s, 2006 (China) 324,991 2,500,000 Calpine Corp. sr. notes 10 1/2s, 2006 2,725,000 1,300,000 Calpine Corp. sr. notes 8 3/4s, 2007 1,324,310 3,000,000 Calpine Corp. sr. notes 7 7/8s, 2008 3,045,000 3,090,000 Cleveland Electric Illuminating Co. 144A bonds 6.86s, 2008 3,095,995 150,000 Midland Funding Corp. deb. Ser. B, 13 1/4s, 2006 184,980 1,370,000 Midland Funding Corp. deb. Ser. A, 11 3/4s, 2005 1,598,722 804,951 Midland Funding Corp. I deb. Ser. C-94, 10.33s, 2002 846,607 -------------- 13,145,605 Electrical Equipment (--%) - -------------------------------------------------------------------------------------------------------------------------- 130,000 Samsung Electronics 144A company guaranty 9 3/4s, 2003 129,350 Electronic Components (1.0%) - -------------------------------------------------------------------------------------------------------------------------- 335,000 Details, Inc. sr. sub. notes Ser. B, 10s, 2005 308,200 1,000,000 DII Group, Inc. (The) sr. sub. notes 8 1/2s, 2007 1,000,000 3,810,000 Flextronics International Ltd. sr. sub. notes Ser. B, 8 3/4s, 2007 3,952,875 2,875,000 HCC Industries, Inc. company guaranty 10 3/4s, 2007 2,760,000 4,150,000 Metromedia Fiber Network, Inc. 144A sr. notes 10s, 2008 4,336,750 -------------- 12,357,825 Electronics (0.8%) - -------------------------------------------------------------------------------------------------------------------------- 1,620,000 Celestica International Ltd. 144A sr. sub. notes 10 1/2s, 2006 (Canada) 1,790,100 6,790,000 Moog, Inc. sr. sub. notes Ser. B, 10s, 2006 7,061,600 -------------- 8,851,700 Energy-Related (1.7%) - -------------------------------------------------------------------------------------------------------------------------- 3,400,000 CalEnergy, Inc. sr. notes 7.63s, 2007 3,597,030 250,000 CE Casecnan Water & Energy sr. notes Ser. A, 11.45s, 2005 (Philippines) 207,500 2,610,000 Gothic Production Corp. company guaranty Ser. B, 11 1/8s, 2005 1,696,500 5,650,000 Niagara Mohawk Power Corp. sr. notes Ser. G, 7 3/4s, 2008 6,064,767 500,000 Panda Global Energy Co. company guaranty 12 1/2s, 2004 (China) 210,000 3,000,000 RAM Energy Inc. sr. notes 11 1/2s, 2008 1,980,000 1,466,379 Subic Power Corp. 144A sec. 9 1/2s, 2008 1,026,466 5,670,000 York Power Funding 144A notes 12s, 2007 (Cayman Islands) 5,726,700 -------------- 20,508,963 Entertainment (0.9%) - -------------------------------------------------------------------------------------------------------------------------- 2,080,000 AMC Entertainment, Inc. sr. sub. notes 9 1/2s, 2009 2,038,400 4,580,000 ITT Corp. notes 6 3/4s, 2005 4,144,534 50,000 SFX Entertainment, Inc. 144A company guaranty Ser. B, 9 1/8s, 2008 51,250 1,385,000 Silver Cinemas International 144A sr. sub. notes 10 1/2s, 2005 817,150 4,075,000 United Artists Theatre sr. sub. notes Ser. B, 9 3/4s, 2008 3,636,938 -------------- 10,688,272 Environmental Control (0.4%) - -------------------------------------------------------------------------------------------------------------------------- 5,100,000 Allied Waste Industries, Inc. company guaranty Ser. B, 7 7/8s, 2009 5,227,500 Financial Services (1.1%) - -------------------------------------------------------------------------------------------------------------------------- 2,400,000 Aames Financial Corp. sr. notes 9 1/8s, 2003 1,680,000 1,590,000 Capital One Financial Corp. notes 7 1/8s, 2008 1,471,307 5,000 Colonial Capital II 144A company guaranty 8.92s, 2027 4,852 700,000 Contifinancial Corp. sr. notes 8 3/8s, 2003 448,000 780,000 Imperial Credit Capital Trust I 144A company guaranty 10 1/4s, 2002 585,000 1,300,000 Imperial Credit Industries, Inc. sr. notes 9 7/8s, 2007 997,750 1,300,000 Local Financial Corp. 144A sr. notes 11s, 2004 1,339,000 3,075,000 Nationwide Credit Inc. sr. notes Ser. A, 10 1/4s, 2008 2,367,750 185,000 Ocwen Capital Trust I company guaranty 10 7/8s, 2027 149,850 20,000 Ocwen Federal Bank FSB sub. deb. 12s, 2005 19,500 4,040,000 Resource America Inc. 144A sr. notes 12s, 2004 3,595,600 -------------- 12,658,609 Food and Beverages (0.9%) - -------------------------------------------------------------------------------------------------------------------------- 3,025,000 Aurora Foods, Inc. sr. sub. notes Ser. B, 9 7/8s, 2007 3,297,250 1,270,000 Aurora Foods, Inc. 144A ser. sub. notes Ser. D, 9 7/8s, 2007 1,384,300 780,000 Canandaigua Wine Co. sr. sub. notes Ser. C, 8 3/4s, 2003 793,650 245,000 Eagle Family Foods company guaranty Ser. B, 8 3/4s, 2008 222,950 1,645,000 RAB Enterprises, Inc. 144A sr. notes 10 1/2s, 2005 1,217,300 1,800,000 RAB Food Holdings, Inc. 144A sr. notes 13s, 2008 1,260,000 2,500,000 Trairc Consumer Products, Inc. 144A sr. sub. notes 10 1/4s, 2009 2,456,250 -------------- 10,631,700 Food Chains (0.8%) - -------------------------------------------------------------------------------------------------------------------------- 2,000,000 Ameriserve Food Co. company guaranty 10 1/8s, 2007 1,520,000 1,000,000 Ameriserve Food Co. company guaranty 8 7/8s, 2006 840,000 630,000 Southland Corp. deb. 4s, 2004 492,975 2,000,000 Southland Corp. deb. Ser. A, 4 1/2s, 2004 1,680,000 4,570,000 Tricon Global Restaurants, Inc. sr. notes 7.45s, 2005 4,613,278 -------------- 9,146,253 Gaming (2.3%) - -------------------------------------------------------------------------------------------------------------------------- 4,935,000 Argosy Gaming Co. company guaranty 13 1/4s, 2004 5,564,213 910,000 Autotote Corp. company guaranty Ser. B, 10 7/8s, 2004 950,950 1,250,000 Aztar Corp. sr. sub. notes 13 3/4s, 2004 1,375,000 2,450,000 Boyd Gaming Corp. sr. sub. notes 9 1/2s, 2007 2,511,250 360,000 Circus Circus Enterprises, Inc. sr. sub. notes 9 1/4s, 2005 367,200 1,190,000 Circus Circus Enterprises, Inc. sr. notes 6.45s, 2006 1,059,171 2,475,000 Coast Hotels & Casinos, Inc. 1st mtge. company guaranty Ser. B, 13s, 2002 2,799,844 100,000 Colorado Gaming & Entertainment Co. sr. notes 12s, 2003 106,500 230,000 Fitzgeralds Gaming Corp. company guaranty Ser. B, 12 1/4s, 2004 104,650 1,560,000 Harrahs Entertainment, Inc. company guaranty 7 7/8s, 2005 1,560,000 1,220,000 Harrahs Entertainment, Inc. company guaranty 7 1/2s, 2009 1,212,741 300,000 Harveys Casino Resorts sr. sub. notes 10 5/8s, 2006 316,500 2,110,000 Hollywood Park Inc. 144A sr. sub. notes 9 1/4s, 2007 2,110,000 650,000 Isle of Capri Black Hawk LLC 144A 1st mortgage Ser. B, 13s, 2004 705,250 2,500,000 Mohegan Tribal Gaming, Auth. 144A sr. sub. notes 8 3/4s, 2009 2,537,500 1,890,000 Park Place Entertainment sr. sub. notes 7 7/8s, 2005 1,852,200 900,000 Trump A.C. 1st mtge. 11 1/4s, 2006 765,000 1,520,000 Trump Castle Funding 144A sub. notes 10 1/4s, 2003 1,535,200 -------------- 27,433,169 Health Care (3.7%) - -------------------------------------------------------------------------------------------------------------------------- 3,080,000 Columbia/HCA Healthcare Corp. med. term notes 8.85s, 2007 3,072,485 720,000 Columbia/HCA Healthcare Corp. deb. 8.36s, 2024 679,752 2,000,000 Columbia/HCA Healthcare Corp. notes 7 1/4s, 2008 1,808,880 400,000 Columbia/HCA Healthcare Corp. notes 7s, 2007 358,464 240,000 Columbia/HCA Healthcare Corp. med term notes 6.63s, 2045 225,660 3,630,000 Conmed Corp. company guaranty 9s, 2008 3,630,000 3,500,000 Extendicare Health Services, Inc. company guaranty 9.35s, 2007 3,045,000 2,690,000 Global Health Sciences company guaranty 11s, 2008 1,640,900 485,000 Hudson Respiratory Care, Inc. sr. sub. notes 9 1/8s, 2008 392,850 3,130,000 Integrated Health Services, Inc. sr. sub. notes Ser. A, 9 1/2s, 2007 2,347,500 1,000,000 Integrated Health Services, Inc. sr. sub. notes Ser. A, 9 1/4s, 2008 740,000 2,170,000 Magellan Health Services, Inc. sr. sub. notes 9s, 2008 1,855,350 1,000,000 Magellan Health Services bank term loan 8s, 2005 910,000 9,010,000 Mariner Post-Acute Network, Inc. sr. sub. notes Ser. B, stepped-coupon zero % (10 1/2s, 11/1/02), 2007 (STP) 2,612,900 1,050,000 Mariner Post-Acute Network, Inc. sr. sub. notes Ser. B, 9 1/2s, 2007 525,000 2,495,000 MedPartners, Inc. sr. notes 7 3/8s, 2006 2,158,175 2,000,000 MedPartners, Inc. sr. sub. notes 6 7/8s, 2000 1,875,000 4,370,000 Multicare Cos., Inc. sr. sub. notes 9s, 2007 3,364,900 1,498,125 Patriot American Hospital bank term loan B 8 1/8s, 2003 1,486,889 650,000 Quorum Health Group, Inc. sr. sub. notes 8 3/4s, 2005 617,500 90,000 Sun Healthcare Group, Inc. sr. sub. notes Ser. B, 9 1/2s, 2007 27,000 3,500,000 Sun Healthcare Group, Inc. 144A sr. sub. notes 9 3/8s, 2008 1,050,000 2,000,000 Tenet Healthcare Corp. sr. sub. notes 8 5/8s, 2007 2,000,000 4,500,000 Tenet Healthcare Corp. 144A sr. sub. notes 8 1/8s, 2008 4,387,500 2,340,000 Tenet Healthcare Corp. sr. notes 8s, 2005 2,328,300 -------------- 43,140,005 Insurance (0.5%) - -------------------------------------------------------------------------------------------------------------------------- 4,000,000 Reliance Group Holdings, Inc. sr. notes 9s, 2000 4,113,080 560,000 Superior Financial 144A sr. notes 8.65s, 2003 527,100 2,000,000 Vesta Insurance Group, Inc. 144A company guaranty 8.525s, 2027 1,600,960 -------------- 6,241,140 Lodging (1.6%) - -------------------------------------------------------------------------------------------------------------------------- 1,150,000 Epic Resorts LLC company guaranty Ser. B, 13s, 2005 1,092,500 2,570,000 Host Marriott Travel Plaza sr. notes Ser. B, 9 1/2s, 2005 2,685,650 1,200,000 Host Marriott L.P. 144A sr. notes 8 3/8s, 2006 1,194,000 5,020,000 HMH Properties, Inc. company guaranty Ser. B, 7 7/8s, 2008 4,794,100 8,500,000 Starwood Hotels Resorts Bank Loan 7.861s, 2003 8,489,375 -------------- 18,255,625 Machinery (0.3%) - -------------------------------------------------------------------------------------------------------------------------- 3,700,000 Newcor, Inc. company guaranty Ser. B, 9 7/8s, 2008 3,256,000 Media (0.8%) - -------------------------------------------------------------------------------------------------------------------------- 1,700,000 Ackerly Group, Inc. 144A sr. sub. notes 9s, 2009 1,763,750 4,220,000 Paramount Communications, Inc. deb. 7 1/2s, 2023 4,080,782 2,400,000 Paramount Communications, Inc. sr. notes 7 1/2s, 2002 2,469,576 3,044,000 RBS Participacoes S.A. 144A company guaranty 11s, 2007 (Brazil) 1,126,280 -------------- 9,440,388 Medical Supplies and Devices (0.9%) - -------------------------------------------------------------------------------------------------------------------------- 2,500,000 ALARIS Medical Systems, Inc. company guaranty 9 3/4s, 2006 2,525,000 2,500,000 Kinetic Concepts, Inc. company guaranty Ser. B, 9 5/8s, 2007 2,387,500 2,680,000 Leiner Health Products sr. sub. notes 9 5/8s, 2007 2,767,100 1,200,000 Mediq, Inc. deb. stepped-coupon zero % (13s, 6/1/03), 2009 (STP) 480,000 2,570,000 Mediq, Inc. company guaranty 11s, 2008 2,313,000 -------------- 10,472,600 Metals and Mining (1.0%) - -------------------------------------------------------------------------------------------------------------------------- 35,000 Anker Coal Group, Inc. sr. notes Ser. B, 9 3/4s, 2007 19,250 2,070,000 Lodestar Holdings, Inc. company guaranty 11 1/2s, 2005 1,718,100 2,145,000 Kaiser Aluminum & Chemical Corp. sr. sub. notes 12 3/4s, 2003 2,075,288 3,000,000 P & L Coal Holdings Corp. company guaranty Ser. B, 9 5/8s, 2008 3,075,000 3,225,000 Weirton Steel Co. sr. notes 11 3/8s, 2004 3,015,375 1,955,000 WHX Corp. sr. notes 10 1/2s, 2005 1,911,013 -------------- 11,814,026 Motion Picture Distribution (0.6%) - -------------------------------------------------------------------------------------------------------------------------- 5,000,000 Cinemark USA, Inc. sr. sub. notes Ser. D, 9 5/8s, 2008 (Mexico) 5,137,500 1,393,000 United Artist Term Loan B 8.438s, 2006 1,370,364 -------------- 6,507,864 Oil and Gas (3.6%) - -------------------------------------------------------------------------------------------------------------------------- 2,100,000 Belco Oil & Gas Corp. company guaranty Ser. B, 10 1/2s, 2006 2,079,000 145,000 Benton Oil & Gas Co. sr. notes 9 3/8s, 2007 64,888 2,890,000 Chesapeake Energy Corp. company guaranty Ser. B, 9 5/8s, 2005 1,878,500 890,000 Eagle Geophysical, Inc. company guaranty Ser. B, 10 3/4s, 2008 534,000 895,000 Flores & Rucks, Inc. sr. sub. notes 9 3/4s, 2006 915,138 220,000 Gothic Energy Corp. sr. disc. notes Ser. B, stepped- coupon zero % (14 1/8s, 5/1/03), 2006 (STP) 66,000 3,130,000 Gulf Canada Resources, Ltd. sr. notes 8 3/8s, 2005 (Canada) 3,098,700 1,600,000 HS Resources, Inc. sr. sub. notes Ser. B, 9 1/4s, 2006 1,520,000 1,200,000 Kelley Oil & Gas Corp. sr. sub. notes Ser. B, 10 3/8s, 2006 768,000 2,650,000 Michael Petroleum Corp. sr. notes Ser. B, 11 1/2s, 2005 1,881,500 700,000 Northern Offshore 144A company guaranty 10s, 2005 322,000 2,000,000 Ocean Energy, Inc. company guaranty Ser. B, 8 7/8s, 2007 1,860,000 4,810,000 Ocean Energy, Inc. company guaranty Ser. B, 8 3/8s, 2008 4,449,250 2,525,000 Petroleos Mexicanos 144A 9 3/8s, 2008 2,487,125 2,700,000 Pogo Producing Co. sr. sub. notes Ser. B, 8 3/4s, 2007 2,416,500 2,540,000 Seven Seas Petroleum sr. notes Ser. B, 12 1/2s, 2005 1,600,200 3,000,000 Snyder Oil Corp. sr. sub. notes 8 3/4s, 2007 2,985,000 2,315,000 Stone Energy Corp. company guaranty 8 3/4s, 2007 2,245,550 160,000 Transamerican Energy sr. disc. notes Ser. B, stepped- coupon zero % (13s, 6/15/99), 2002 (STP) 48,000 2,215,000 Transamerican Energy sr. notes Ser. B, 11 1/2s, 2002 664,500 1,500,000 Transamerican Refining Corp. 144A sr. sub. notes 16s, 2003 150,000 1,380,000 Triton Energy Ltd. sr. notes 9 1/4s, 2005 1,250,666 4,680,000 Triton Energy Ltd. sr. notes 8 3/4s, 2002 4,250,470 4,440,000 Vintage Petroleum 144A sr. sub. notes 9 3/4s, 2009 4,329,000 -------------- 41,863,987 Packaging and Containers (1.5%) - -------------------------------------------------------------------------------------------------------------------------- 3,000,000 AEP Industries, Inc. sr. sub. notes 9 7/8s, 2007 3,015,000 2,000,000 Ball Corp. company guaranty 7 3/4s, 2006 2,040,000 440,000 Owens-Illinois, Inc. deb. 7.8s, 2018 424,961 3,440,000 Owens-Illinois, Inc. sr. notes 7.35s, 2008 3,402,022 1,130,000 Radnor Holdings Inc. sr. notes 10s, 2003 1,175,200 5,100,000 Riverwood International Corp. company guaranty 10 7/8s, 2008 4,641,000 2,250,000 Riverwood International Corp. company guaranty 10 5/8s, 2007 2,295,000 510,000 Riverwood International Corp. company guaranty 10 1/4s, 2006 515,100 -------------- 17,508,283 Paper and Forest Products (1.2%) - -------------------------------------------------------------------------------------------------------------------------- 125,000 APP Finance II Mauritius Ltd. bonds stepped-coupon zero % (16s, 2/15/04), 2049 (Indonesia) (STP) 52,500 170,000 Boise Cascade Co. med. term notes Ser. A, 7.43s, 2005 162,423 2,000,000 Boise Cascade Co. notes 7.35s, 2004 1,931,340 3,000,000 Consumers International 144A sr. notes 10 1/4s, 2005 3,165,000 1,840,000 Impac Group Inc. company guaranty Ser. B, 10 1/8s, 2008 1,840,000 895,000 Indah Kiat Financial Mauritius Ltd. company guaranty 10s, 2007 (Indonesia) 438,550 3,500,000 Jefferson Smurfit bank term loan B 8.65s, 2006 3,500,000 1,575,000 Pindo Deli Finance Mauritius Ltd. company guaranty 10 3/4s, 2007 (Indonesia) 803,250 2,230,000 Republic Group Inc. sr. sub. notes 9 1/2s, 2008 2,257,875 -------------- 14,150,938 Pharmaceuticals (0.1%) - -------------------------------------------------------------------------------------------------------------------------- 850,000 Biovail Corp. International sr. notes 10 7/8s, 2005 862,750 440,000 ICN Pharmaceuticals, Inc. 144A sr. notes 9 1/4s, 2005 453,750 -------------- 1,316,500 Photography (--%) - -------------------------------------------------------------------------------------------------------------------------- 310,000 PX Escrow Corp. sr. disc. notes stepped-coupon zero % (9 5/8s, 2/1/02), 2006 (STP) 173,600 Publishing (1.4%) - -------------------------------------------------------------------------------------------------------------------------- 5,000,000 Affinity Group Holdings sr. notes 11s, 2007 5,000,000 1,885,069 Alabama River Newsprint bank term loan 7.562s, 2002 1,413,802 2,750,000 American Media Operation, Inc. sr. sub. notes 11 5/8s, 2004 2,832,500 3,175,000 Garden State Newspapers, Inc. sr. sub. notes Ser. B, 8 3/4s, 2009 3,206,750 2,550,000 Perry-Judd company guaranty 10 5/8s, 2007 2,664,750 912,957 Von Hoffman Press, Inc. 144A sr. sub. notes 13 1/2s, 2009 949,475 -------------- 16,067,277 Recreation (0.9%) - -------------------------------------------------------------------------------------------------------------------------- 990,000 Premier Parks, Inc. sr. notes 9 1/4s, 2006 1,039,500 4,500,000 Premier Parks, Inc.144A sr. disc. notes stepped-coupon zero % (10s, 4/1/03), 2008 (STP) 3,138,750 3,440,000 Six Flags Corp. sr. notes 8 7/8s, 2006 3,543,200 3,000,000 Sun International Hotels Ltd. sr. sub. notes 8 5/8s, 2007 3,090,000 -------------- 10,811,450 REIT's (Real Estate Investment Trust) (0.2%) - -------------------------------------------------------------------------------------------------------------------------- 2,335,000 Tanger Properties Ltd. partnership gtd. notes 8 3/4s, 2001 2,312,234 Retail (1.4%) - -------------------------------------------------------------------------------------------------------------------------- 1,000,000 Community Distributors 144A company guaranty Ser. B, 10 1/4s, 2004 910,000 3,090,000 Home Interiors & Gifts, Inc. company guaranty 10 1/8s, 2008 3,105,450 2,125,000 Mothers Work, Inc. sr. notes 12 5/8s, 2005 2,210,000 2,500,000 NBTY Inc. 144A sr. sub. notes 8 5/8s, 2007 2,400,000 2,220,000 North Atlantic Trading Co. company guaranty Ser. B, 11s, 2004 2,242,200 2,450,000 Specialty Retailers, Inc. company guaranty Ser. B, 8 1/2s, 2005 2,180,500 410,000 United Stationer Supply, Inc. sr. sub. notes 8 3/8s, 2008 413,075 3,000,000 William Carter Holdings Co. sr. sub. notes Ser. A, 10 3/8s, 2006 3,195,000 -------------- 16,656,225 Satellite Services (0.3%) - -------------------------------------------------------------------------------------------------------------------------- 2,850,000 Golden Sky Systems 144A sr. sub. notes 12 3/8s, 2006 3,106,500 510,000 Satelites Mexicanos S.A. de C.V. 144A 10 1/8s, 2004 402,900 -------------- 3,509,400 Semiconductors (0.7%) - -------------------------------------------------------------------------------------------------------------------------- 59,431 Fairchild Semiconductor Corp. 144A sr. sub. notes 11.74s, 2008 53,488 5,000,000 Fairchild Semiconductor Corp. sr. sub. notes 10 1/8s, 2007 5,100,000 3,590,000 Zilog, Inc. company guaranty Ser. B, 9 1/2s, 2005 3,159,200 -------------- 8,312,688 Shipping (0.2%) - -------------------------------------------------------------------------------------------------------------------------- 830,000 Johnstown America Industries, Inc. company guaranty Ser. C, 11 3/4s, 2005 892,250 120,000 MC Shipping, Inc. sr. notes Ser. B, 11 1/4s, 2008 67,200 2,440,000 Pegasus Shipping 144A company guaranty zero %, 2008 (Bermuda) (STP) 1,098,000 -------------- 2,057,450 Specialty Consumer Products (0.6%) - -------------------------------------------------------------------------------------------------------------------------- 2,680,000 Decora Industries, Inc. sr. sec. notes Ser. B, 11s, 2005 2,613,000 1,185,000 Eye Care Centers of America 144A sr. sub. notes 9 1/8s, 2008 1,113,900 375,000 Polymer Group, Inc. company guaranty Ser. B, 9s, 2007 382,500 3,250,000 Polymer Group, Inc. company guaranty Ser. B, 8 3/4s, 2008 3,282,500 -------------- 7,391,900 Steel (1.7%) - -------------------------------------------------------------------------------------------------------------------------- 5,860,000 AK Steel Corp. 144A sr. notes 7 7/8s, 2009 5,786,750 980,000 Armco, Inc. 144A sr. notes 8 7/8s, 2008 1,016,750 1,820,000 Oregon Steel Mills 1st mortgage 11s, 2003 1,892,800 3,500,000 UCAR Global Enterprises sr. sub. notes Ser. B, 12s, 2005 3,692,500 4,845,000 WCI Steel, Inc. sr. notes Ser. B, 10s, 2004 4,978,238 2,680,000 Wheeling -Pittsburgh Steel Corp. sr. notes 9 1/4s, 2007 2,626,400 -------------- 19,993,438 Supermarkets (0.5%) - -------------------------------------------------------------------------------------------------------------------------- 3,000,000 Pathmark Stores sr. sub. notes 9 5/8s, 2003 3,060,000 2,200,000 Star Markets Co. sr. sub. notes 13s, 2004 2,464,000 -------------- 5,524,000 Telecommunications (15.8%) - -------------------------------------------------------------------------------------------------------------------------- 2,100,000 Barak I.T.C. sr. disc. notes Ser. B, stepped-coupon zero % (12 1/2s, 11/15/02), 2007 (Israel) (STP) 1,134,000 1,130,000 Bestel S.A. de C.V. sr. disc. notes stepped-coupon zero % (12 3/4s, 5/15/03), 2005 (Mexico) (STP) 644,100 6,255,000 BTI Telecom Corp. sr. notes 10 1/2s, 2007 5,004,000 1,220,000 Caprock Communications Corp. sr. notes Ser. B, 12s, 2008 1,232,200 5,725,000 COLT Telecommunications Group PLC sr. disc. notes stepped-coupon zero % (12s, 12/15/01), 2006 (United Kingdom) (STP) 4,866,250 8,900,000 Covad Communications Group, Inc. sr. disc. notes Ser. B, stepped-coupon zero % (13 1/2s, 03/15/03), 2008 (STP) 4,717,000 1,330,000 Covad Communications Group, Inc. 144A sr. notes 12 1/2s, 2009 1,283,450 10,180,000 Diva Systems Corp. 144A sr. disc. notes stepped-coupon zero % (12 5/8s, 3/1/03), 2008 (STP) 3,155,800 8,880,000 DTI Holdings Inc. sr. disc. notes Ser. B, stepped-coupon zero % (12 1/2s, 3/1/03), 2008 (STP) 2,042,400 5,610,000 Econophone, Inc. 144A notes stepped-coupon zero % (11s, 2/15/03), 2008 (STP) 2,805,000 1,750,000 Esprit Telecom Group PLC sr. notes 11 1/2s, 2007 (United Kingdom) 1,850,450 5,360,000 Firstworld Communication Corp. sr. disc. notes stepped- coupon zero % (13, 4/15/03), 2008 (STP) 1,929,600 11,000,000 Focal Communications Corp. sr. disc. notes Ser. B, stepped-coupon zero % (12 1/8s, 02/15/03), 2008 (STP) 5,500,000 10,440,000 Global Crossing Holdings, Ltd. company guaranty 9 5/8s, 2008 10,962,000 9,054,000 GST Telecommunications, Inc. company guaranty stepped-coupon zero % (13 7/8s, 15/15/00), 2005 (STP) 6,405,705 16,060,000 GST Telecommunications, Inc. 144A sr. disc. notes stepped-coupon zero % (10 1/2s, 5/1/03), 2008 (STP) 7,628,500 7,770,000 Hyperion Telecommunications, Inc. sr. disc. notes Ser. B, stepped-coupon zero % (13s, 4/15/01), 2003 (STP) 5,982,900 60,000 Hyperion Telecommunications Inc. 144A sr. sub. notes 12s, 2007 60,150 5,000,000 ICG Communications, Inc. sr. disc. notes stepped-coupon zero % (10s, 02/15/03), 2008 (STP) 2,962,500 2,400,000 ICG Holdings, Inc. sr. disc. notes stepped-coupon zero % (13 1/2s, 9/15/00), 2005 (Canada) (STP) 2,082,000 8,830,000 ICG Services, Inc. sr. disc. notes stepped-coupon zero % (9 7/8s, 5/1/03), 2008 (STP) 5,077,250 5,000,000 Intelcom Group (USA), Inc. company guaranty stepped- coupon zero % (12 1/2s, 5/1/01), 2006 (STP) 3,975,000 1,020,000 Interact Systems, Inc. 144A units stepped-coupon zero % (14s, 8/1/99), 2003 (STP) 35,700 8,900,000 Intermedia Communications, Inc. sr. disc. notes Ser. B, stepped-coupon zero % (11 1/4s, 7/15/02), 2007 (STP) 6,185,500 4,760,000 Intermedia Communications, Inc. sr. notes Ser. B, 8.6s, 2008 4,486,300 4,790,000 Intermedia Communications, Inc. sr. notes Ser. B, 8 1/2s, 2008 4,478,650 10,275,000 International Cabletel, Inc. sr. notes Ser. B, stepped-coupon zero % (11 1/2s, 2/01/01), 2006 (STP) 9,042,000 2,930,000 IXC Communications, Inc. sr. sub. notes 9s, 2008 3,061,850 10,250,000 KMC Telecom Holdings, Inc. sr. disc. notes stepped-coupon zero % (12 1/2s, 2/15/03), 2008 (STP) 5,278,750 5,580,000 Knology Holdings, Inc. sr. disc. notes stepped-coupon zero % (11 7/8s, 10/15/02), 2007 (STP) 2,929,500 3,140,000 L-3 Communications Corp. sr. sub. notes 8 1/2s, 2008 3,249,900 180,000 L-3 Communications Corp. company guaranty Ser. B, 8s, 2008 181,800 2,225,000 Logix Communications Enterprises sr. notes 12 1/4s, 2008 2,002,500 1,170,000 Metrocall, Inc. 144A sr. sub. notes 11s, 2008 1,099,800 7,470,000 MetroNet Communications Corp. 144A sr. notes 10 5/8s, 2008 (Canada) 8,403,750 2,080,000 MetroNet Communications Corp. sr. disc. stepped-coupon notes zero % (9.95s, 6/15/03), 2008 (Canada) (STP) 1,424,800 6,835,000 Microcell Telecommunications sr. disc. notes Ser. B, stepped-coupon zero % (14s, 12/1/01), 2006 (Canada) (STP) 5,433,825 250,000 Netia Holdings B.V. 144A company guaranty stepped- coupon zero % (11 1/4s, 11/1/01), 2007 (Poland) (STP) 152,500 500,000 Netia Holdings B.V. 144A company guaranty 10 1/4s, 2007 (Poland) 450,000 4,060,000 NorthEast Optic Network, Inc. sr. notes 12 3/4s, 2008 4,060,000 8,640,000 Pathnet, Inc. sr. notes 12 1/4s, 2008 4,838,400 1,000,000 Primus Telecommunications Group, Inc. sr. notes 11 3/4s, 2004 1,020,000 1,600,000 Primus Telecommunications Group, Inc. sr. notes Ser. B, 9 7/8s, 2008 1,512,000 8,660,000 Qwest Communications International, Inc. sr. disc. notes stepped-coupon zero % (9.47s, 10/15/02), 2007 (STP) 6,841,400 6,460,000 Rhythms Netconnections, Inc. sr. disc. notes Ser. B, stepped-coupon zero % (13 1/2s, 5/15/03), 2008 (STP) 3,230,000 790,000 Rogers Cantel, Inc. sr. sub. notes 8.8s, 2007 (Canada) 809,750 1,400,000 RSL Communications, Ltd. 144A sr. notes 10 1/2s, 2008 (United Kingdom) 1,428,000 420,000 RSL Communications, Ltd. company guaranty, stepped- coupon zero % (10 1/8s, 3/1/03), 2008 (STP) 239,400 285,000 RSL Communications, Ltd. company guaranty 9 1/8s, 2008 268,613 1,070,000 Startec Global Communications Corp. sr. notes 12s, 2008 968,350 5,000,000 Telecommunications Techniques, Inc. company guaranty 9 3/4s, 2008 5,025,000 1,000,000 Telehub Communications Corp. company guaranty stepped-coupon zero % (13 7/8s, 7/31/02), 2005 (STP) 590,000 4,500,000 Time Warner Telecom Inc. sr. notes 9 3/4s, 2008 4,815,000 300,000 USN Communications, Inc. sr. disc. notes Ser. B, stepped- coupon zero % (14 5/8s, 8/15/00), 2004 (STP) 30,000 1,160,000 Versatel Teleco sr. notes 13 1/4s, 2008 1,183,200 670,000 Versatel Teleco 144A sr. notes 13 1/4s, 2008 683,400 7,000,000 WinStar Communications, Inc. sr. sub. notes stepped- coupon zero % (15s, 3/1/02), 2007 (STP) 5,810,000 5,100,000 WinStar Communications, Inc. sr. sub. notes 11s, 2008 3,213,000 -------------- 185,762,893 Telephone Services (4.3%) - -------------------------------------------------------------------------------------------------------------------------- 860,000 Allegiance Telecom, Inc. sr. notes 12 7/8s, 2008 924,500 6,090,000 Allegiance Telecom, Inc. sr. disc. notes Ser. B, stepped- coupon zero % (11 3/4s, 2/15/03), 2008 (STP) 3,532,200 8,990,000 CellNet Data Systems, Inc. sr. disc. notes stepped-coupon zero % (14s, 10/1/02), 2007 (STP) 2,966,700 4,230,000 Call-Net Enterprises, Inc. sr. disc. notes stepped-coupon zero % (8.94s, 8/15/03), 2008 (Canada) (STP) 2,559,150 3,425,000 E. Spire Communications, Inc. sr. disc. notes stepped- coupon zero % (12 3/4s, 4/1/01), 2006 (STP) 2,055,000 2,530,000 Facilicom International sr. notes Ser. B, 10 1/2s, 2008 1,872,200 2,310,000 Flag Ltd. 144A sr. notes 8 1/4s, 2008 (Bermuda) 2,194,500 10,500,000 Level 3 Communication, Inc. sr. notes 9 1/8s, 2008 10,224,375 990,000 Long Distance International, Inc. 144A sr. notes 12 1/4s, 2008 693,000 5,000,000 McLeod USA, Inc. sr. disc. notes stepped-coupon zero % (10 1/2s, 3/1/02), 2007 (STP) 3,950,000 640,000 McLeod USA, Inc. 144A sr. notes 8 1/8s, 2009 630,400 5,195,000 OnePoint Communications, Corp. 144A sr. notes 14 1/2s, 2008 2,727,375 5,090,000 Sprint Spectrum L.P. sr. disc. notes stepped-coupon zero % (12 1/2s, 8/15/01), 2006 (STP) 4,530,100 440,000 Sprint Spectrum L.P. sr. notes 11s, 2006 506,282 2,740,000 US Xchange LLC sr. notes 15s, 2008 2,877,000 6,265,000 Viatel, Inc. sr. disc. notes stepped-coupon zero % (12 1/2s, 4/15/03), 2008 (STP) 3,759,000 4,760,000 Viatel, Inc. sr. notes 11 1/4s, 2008 4,902,800 -------------- 50,904,582 Textiles (0.5%) - -------------------------------------------------------------------------------------------------------------------------- 3,700,000 Galey & Lord Inc. company guaranty 9 1/8s, 2008 2,793,500 2,220,000 Glenoit Corp. company guaranty 11s, 2007 2,042,400 1,500,000 Westpoint Stevens, Inc. sr. notes 7 7/8s, 2008 1,545,000 -------------- 6,380,900 Transportation (0.2%) - -------------------------------------------------------------------------------------------------------------------------- 540,000 Hermes Europe Railtel 144A sr. notes 11 1/2s, 2007 (Netherlands) 575,100 500,000 Johnstown America Industries, Inc. sr. sub. notes 11 3/4s, 2005 537,500 1,180,000 Kitty Hawk, Inc. company guaranty 9.95s, 2004 1,180,000 -------------- 2,292,600 Utilities (0.8%) - -------------------------------------------------------------------------------------------------------------------------- 5,000,000 CMS Energy Corp. pass-through certificates 7s, 2005 4,806,600 2,450,000 CMS Energy Corp. sr. notes 6 3/4s, 2004 2,394,875 670,000 Public Service Co. of New Mexico sr. notes Ser. B, 7 1/2s, 2018 643,334 1,900,000 Public Service Co. of New Mexico sr. notes Ser. A, 7.1s, 2005 1,904,541 -------------- 9,749,350 Wireless Communications (0.7%) - -------------------------------------------------------------------------------------------------------------------------- 2,480,000 American Mobile Satellite Corp. company guaranty 12 1/4s, 2008 1,202,800 4,500,000 Clearnet Communications, Inc. sr. disc. notes stepped-coupon zero % (14 3/4s, 12/15/00), 2005 (STP) 4,050,000 370,000 Orbital Imaging Corp. sr. notes Ser. B, 11 5/8s, 2005 370,000 4,380,000 Teligent, Inc. sr. disc. notes Ser. B, stepped-coupon zero % (11 1/2s, 3/1/03), 2008 (STP) 2,157,150 -------------- 7,779,950 -------------- Total Corporate Bonds and Notes (cost $1,115,138,441) $1,042,442,365 PREFERRED STOCKS (4.3%)(a) NUMBER OF SHARES VALUE - -------------------------------------------------------------------------------------------------------------------------- 1,008 21st Century Telecom Group 144A 13.75% cum. pfd. (PIK) $ 504,000 36,257 Adelphia Communications Corp. Ser. B, $13.00 cum. pfd. 4,151,427 13,910 Brand Scaffold Services, Inc. 144A $3.625 pfd. 417,300 6,500 California Federal Bancorp Inc. Ser. A, $2.281 pfd. 169,000 3,290 Centaur Funding Corp 144A 9.08% pfd. (Cayman Islands) 3,582,382 18,000 Chevy Chase Capital Corp. Ser. A, $5.188 pfd. 972,000 831 Concentric Network Corp. Ser. B, 13.50% pfd. (PIK) 797,760 32,271 CSC Holdings, Inc. Ser. M, $11.125 cum. pfd. (PIK) 3,856,385 1,002 Dobson Communications Corp. 144A $12.25 pfd. (PIK) 901,800 1,500,000 Fresenius Medical Capital Trust I company guaranty, Ser. D, 9.00% pfd. (Germany) 1,558,125 1,500,000 Fresenius Medical Capital Trust II company guaranty, 7.875% pfd. (Germany) 1,515,000 46,300 Global Crossing Holdings Ltd. 144A $10.50 pfd. (PIK) 4,537,400 4,103 Granite Broadcasting 144A 12.75% pfd. (PIK) 4,349,180 2,000 ICG Holdings, Inc., 144A $14.00 pfd. (Canada) (PIK) 2,010,000 2,761 Intermedia Communication Ser. B, 13.50% pfd. (PIK) 2,747,195 4,375 IXC Communications, Inc. $12.50 pfd. (PIK) 4,746,875 31,887 Lady Luck Gaming Corp. $11.25 pfd. 1,275,480 8,641 Nebco Evans Holding Co. 144A $11.25 pfd. (PIK) 362,922 612 NEXTEL Communications, Inc. Ser. E, $11.125 pfd. (PIK) 581,400 100,000 Nextlink Communications, Inc. 144A $7.00 cum. pfd. (PIK) 5,150,000 345 Paxson Communications Corp. 13.25% cum. pfd. (PIK) 2,829,000 1,843 Spanish Broadcasting Systems 14.25% cum. pfd. (PIK) 1,935,150 1,089 Spanish Broadcasting Systems 144A 14.25% pfd. (PIK) 1,143,450 84,745 TCR Holding Corp. Ser. E, zero %, pfd. 4,491 1,075 WinStar Communications, Inc. 144A $14.25 pfd. (PIK) 860,000 -------------- Total Preferred Stocks (cost $53,476,577) $ 50,957,722 BRADY BONDS (2.0%)(a) PRINCIPAL AMOUNT VALUE - -------------------------------------------------------------------------------------------------------------------------- $ 1,360,000 Argentina (Republic of) unsub. Ser. BGL4, 11s, 2006 $ 1,229,168 916,500 Argentina (Republic of) deb. FRB 6.1875s, 2005 751,530 1,950,000 Brazil (Government of) bonds 9 3/8s, 2008 1,365,000 10,930,000 Brazil (Government of) disc. bonds FRB 6.625s, 2024 6,011,500 6,665,000 Bulgaria (Government of) Ser. A, FRB, 6.688s, 2024 4,648,838 1,480,000 Bulgaria (Government of) deb. Ser. PDI, FRB, 6.688s, 2011 1,006,400 405,000 Bulgaria (Government of) Ser. A, FRB, 2 1/2s, 2012 240,975 2,150,000 United Mexican States Ser. B, 6 1/4s, 2019 1,604,545 7,435,000 United Mexican States Ser. D, FRB, 6.098s, 2019 6,013,056 1,071,425 Venezuela (Government of) deb. Ser. DL, FRB, 5.938s, 2007 665,676 -------------- Total Brady Bonds (cost $23,252,737) $ 23,536,688 UNITS (1.5%)(a) NUMBER OF UNITS VALUE - -------------------------------------------------------------------------------------------------------------------------- 4,760 Birch Telecom, Inc. 144A units 14s, 2008 $ 4,355,400 5,710 Decrane Aircraft 144A units 12s, 2008 5,710,000 3,750 Network Plus 144A units pfd. 13.3s, 2009 (PIK) 3,825,000 2,840 Carrier1 144A units pfd. 13 1/4s, 2009 2,896,800 17,605 XCL Ltd. 144A units cum. pfd. 9.50s, 2006 774,620 -------------- Total Units (cost $18,969,860) $ 17,561,820 FOREIGN GOVERNMENT BONDS AND NOTES (0.3%)(a) PRINCIPAL AMOUNT VALUE - -------------------------------------------------------------------------------------------------------------------------- $ 1,385,000 Korea (Republic of) unsub. 8 7/8s, 2008 $ 1,468,793 1,615,000 Russia (Government of) 144A bonds 12 3/4s, 2028 432,013 830,000 Russia (Government of) 144A bonds 12 3/4s, 2028 222,025 1,440,000 United Mexican States bonds 11 3/8s, 2016 1,458,000 -------------- Total Foreign Government Bonds and Notes (cost $4,384,752) $ 3,580,831 WARRANTS (0.3%)(a)(NON) EXPIRATION NUMBER OF WARRANTS DATE VALUE - -------------------------------------------------------------------------------------------------------------------------- 880 21st Century Telecom Group 144A 2/15/10 $ 17,600 3,020 Allegiance Telecom, Inc. 2/3/08 84,560 2,480 American Mobile Satellite Corp. 4/1/08 8,159 1,130 Bestel SA (Mexico) 5/15/05 1,130 3,000 CellNet Data Systems, Inc. 10/1/07 60,000 100 Club Regina, Inc. 144A 4/15/06 100 2,900 Covad Communications Group 144A (acquired various dates from 8/18/98 to 8/26/98, cost $123,297) (RES) 3/15/08 1,664,600 30,540 Diva Systems Corp. 3/1/08 397,020 14,400 DTI Holdings Inc. 3/1/08 144 670 E. Spire Communications, Inc. 11/1/05 4,020 1,150 Epic Resorts 6/15/05 12 5,360 Firstworld Communication 4/15/08 53,600 43,776 ICG Communications 10/15/05 875,516 1,500 Insilco Holding Co. 8/15/08 2 20 Interact Systems, Inc. 8/1/03 2 2,000 KMC Telecom Holdings, Inc. 4/15/08 5,000 2,290 Knology Holdings, Inc. 144A 10/15/07 3,435 1,050 Long Distance International, Inc. 144A 4/13/08 2,625 1,200 Mediq Inc. 144A 6/1/09 12 650 MGC Communications, Inc. 144A 10/1/04 17,680 5,195 Onepoint Communications, Inc. 6/1/08 5,195 370 Orbital Imaging Corp. 144A 3/1/05 14,800 8,640 Pathnet, Inc. 144A 4/15/08 86,400 2,240 Paxson Communications Corp. 144A 6/30/03 22 8,840 Rhythms Netcon 144A 5/15/08 176,800 1,070 Startec Global Communications Corp. 5/15/08 1,070 1,000 Telehub Communications Corp. 7/31/05 1,000 1,500 Transamerican Refining Corp. 6/30/03 2 1,980 Versatel Teleco 144A 5/15/08 79,200 840 WAM!NET, Inc. 3/1/05 6,720 -------------- Total Warrants (cost $2,350,571) $ 3,566,426 CONVERTIBLE BONDS AND NOTES (0.2%)(a) PRINCIPAL AMOUNT VALUE - -------------------------------------------------------------------------------------------------------------------------- $1,000,000 Argosy Gaming cv. sub. notes 12s, 2001 $ 1,022,500 1,100,000 Exide Corp. 144A cv. sr. sub. notes 2.9s, 2005 627,000 500,000 Lam Research Corp. cv. sub. notes 5s, 2002 417,500 390,000 WinStar Communications. Inc. 144A cv. sr. disc. notes stepped-coupon zero % (14s, 10/15/00), 2005 (STP) 663,000 -------------- Total Convertible Bonds and Notes (cost $2,472,466) $ 2,730,000 CONVERTIBLE PREFERRED STOCKS (0.2%) (a) NUMBER OF SHARES VALUE - -------------------------------------------------------------------------------------------------------------------------- 10,100 Chancellor Media Corp. $3.00 cv. cum. pfd. $ 898,900 4,195 Chesapeake Energy Corp. $3.50 cum. cv. pfd. 39,853 73 Paxson Communications Corp. 144A $9.75 cv. pfd. (PIK) 715,400 2,835 Viatel, Inc. Ser. A, $10.00 cv. pfd. (PIK) 354,375 1,711 XCL Ltd $8.075 cv. pfd. 75,284 -------------- Total Convertible Preferred Stocks (cost $2,867,557) $ 2,083,812 COMMON STOCKS (--%)(a)(cost $--) NUMBER OF SHARES VALUE - -------------------------------------------------------------------------------------------------------------------------- 619 Mothers Work, Inc. (NON) $ 6,654 SHORT-TERM INVESTMENTS (1.3%)(a)(cost $14,811,000) PRINCIPAL AMOUNT VALUE - -------------------------------------------------------------------------------------------------------------------------- $ 14,811,000 Interest in $310,913,000 joint repurchase agreement dated February 26, 1999 with SBC Warburg Securities due March 1, 1999 with respect to various U.S. Treasury obligations -- maturity value of $14,816,850 for an effective yield of 4.74% $ 14,811,000 - -------------------------------------------------------------------------------------------------------------------------- Total Investments (cost $1,237,723,961) (b) $1,161,277,318 - -------------------------------------------------------------------------------------------------------------------------- (a) Percentages indicated are based on net assets of $1,177,737,576. (b) The aggregate identified cost on a tax basis is $1,237,748,939, resulting in gross unrealized appreciation and depreciation of $19,048,014 and $95,519,635, respectively, or net unrealized depreciation of $76,471,621. (NON) Non-income-producing security. (STP) The interest rate and date shown parenthetically represent the new interest rate to be paid and the date the fund will begin receiving interest at this rate. (RES) Restricted, excluding 144A securities, as to public resale. The total market value of restricted securities held at February 28, 1999 was $1,664,600 or 0.1% of net assets. (PIK) Income may be received in cash or additional securities at the discretion of the issuer. 144A after the name of a security represents those exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. The rates shown on Floating Rate Bonds (FRB) and Floating Rate Notes (FRN) are the current interest rates shown at February 28, 1999, which are subject to change based on the terms of the security. The accompanying notes are an integral part of these financial statements.
Statement of assets and liabilities February 28, 1999 (Unaudited) Assets - ----------------------------------------------------------------------------------------------- Investments in securities, at value (identified cost $1,237,723,961) (Note 1) $ 1,161,277,318 - ----------------------------------------------------------------------------------------------- Cash 56,638 - ----------------------------------------------------------------------------------------------- Interest and other receivables 23,496,851 - ----------------------------------------------------------------------------------------------- Receivable for shares of the fund sold 10,559,492 - ----------------------------------------------------------------------------------------------- Receivable for securities sold 5,025,213 - ----------------------------------------------------------------------------------------------- Total assets 1,200,415,512 Liabilities - ----------------------------------------------------------------------------------------------- Distributions payable to shareholders 4,567,917 - ----------------------------------------------------------------------------------------------- Payable for securities purchased 10,681,563 - ----------------------------------------------------------------------------------------------- Payable for shares of the fund repurchased 4,583,930 - ----------------------------------------------------------------------------------------------- Payable for compensation of Manager (Note 2) 1,754,715 - ----------------------------------------------------------------------------------------------- Payable for investor servicing and custodian fees (Note 2) 165,992 - ----------------------------------------------------------------------------------------------- Payable for compensation of Trustees (Note 2) 966 - ----------------------------------------------------------------------------------------------- Payable for administrative services (Note 2) 2,951 - ----------------------------------------------------------------------------------------------- Payable for distribution fees (Note 2) 725,816 - ----------------------------------------------------------------------------------------------- Other accrued expenses 194,086 - ----------------------------------------------------------------------------------------------- Total liabilities 22,677,936 - ----------------------------------------------------------------------------------------------- Net assets $1,177,737,576 Represented by - ----------------------------------------------------------------------------------------------- Paid-in capital (Notes 1 and 4) $1,285,551,420 - ----------------------------------------------------------------------------------------------- Distributions in excess of net investment income (Note 1) (1,866,342) - ----------------------------------------------------------------------------------------------- Accumulated net realized loss on investments (Notes 1 and 3) (29,500,859) - ----------------------------------------------------------------------------------------------- Net unrealized depreciation of investments (76,446,643) - ----------------------------------------------------------------------------------------------- Total -- Representing net assets applicable to capital shares outstanding $1,177,737,576 Computation of net asset value and offering price - ----------------------------------------------------------------------------------------------- Net asset value and redemption price per class A share ($462,564,821 divided by 59,447,653 shares) $7.78 - ----------------------------------------------------------------------------------------------- Offering price per class A share (100/95.25 of $7.78)* $8.17 - ----------------------------------------------------------------------------------------------- Net asset value and offering price per class B share ($676,910,767 divided by 87,000,642 shares)** $7.78 - ----------------------------------------------------------------------------------------------- Net asset value and redemption price per class M share ($38,261,988 divided by 4,916,950 shares) $7.78 - ----------------------------------------------------------------------------------------------- Offering price per class M share (100/96.75 of $7.78)* $8.04 - ----------------------------------------------------------------------------------------------- * On single retail sales of less than $50,000. On sales of $50,000 or more and on group sales the offering price is reduced. ** Redemption price per share is equal to net asset value less any applicable contingent deferred sales charge. The accompanying notes are an integral part of these financial statements.
Statement of operations Six months ended February 28, 1999 (Unaudited) Investment income: - ----------------------------------------------------------------------------------------------- Interest (net of foreign tax $75,828) $ 55,260,095 - ----------------------------------------------------------------------------------------------- Dividend 2,245,649 - ----------------------------------------------------------------------------------------------- Total investment income 57,505,744 Expenses: - ----------------------------------------------------------------------------------------------- Compensation of Manager (Note 2) 3,095,586 - ----------------------------------------------------------------------------------------------- Investor servicing and custodian fees (Note 2) 572,263 - ----------------------------------------------------------------------------------------------- Compensation of Trustees (Note 2) 9,083 - ----------------------------------------------------------------------------------------------- Administrative services (Note 2) 8,328 - ----------------------------------------------------------------------------------------------- Distribution fees -- Class A (Note 2) 471,676 - ----------------------------------------------------------------------------------------------- Distribution fees -- Class B (Note 2) 2,793,775 - ----------------------------------------------------------------------------------------------- Distribution fees -- Class M (Note 2) 63,873 - ----------------------------------------------------------------------------------------------- Reports to shareholders 32,341 - ----------------------------------------------------------------------------------------------- Registration fees 116,525 - ----------------------------------------------------------------------------------------------- Auditing 23,832 - ----------------------------------------------------------------------------------------------- Legal 4,036 - ----------------------------------------------------------------------------------------------- Postage 41,142 - ----------------------------------------------------------------------------------------------- Other expenses 50,138 - ----------------------------------------------------------------------------------------------- Total expenses 7,282,598 - ----------------------------------------------------------------------------------------------- Expense reduction (Note 2) (148,107) - ----------------------------------------------------------------------------------------------- Net expenses 7,134,491 - ----------------------------------------------------------------------------------------------- Net investment income 50,371,253 - ----------------------------------------------------------------------------------------------- Net realized loss on investments (Notes 1 and 3) (25,621,677) - ----------------------------------------------------------------------------------------------- Net realized gain on futures contracts (Note 1) 16,845 - ----------------------------------------------------------------------------------------------- Net unrealized appreciation of investments and futures during the period 1,647,542 - ----------------------------------------------------------------------------------------------- Net loss on investments (23,957,290) - ----------------------------------------------------------------------------------------------- Net increase in net assets resulting from operations $ 26,413,963 - ----------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements.
Statement of changes in net assets For the period December 31, 1997 Six months ended (commencement February 28, of operations) to 1999* August 31, 1998 - --------------------------------------------------------------------------------------------------------------------- Increase in net assets - --------------------------------------------------------------------------------------------------------------------- Operations: - --------------------------------------------------------------------------------------------------------------------- Net investment income $ 50,371,253 $ 16,146,259 - --------------------------------------------------------------------------------------------------------------------- Net realized loss on investments (25,604,832) (3,896,027) - --------------------------------------------------------------------------------------------------------------------- Net unrealized appreciation (depreciation) of investments 1,647,542 (78,094,185) - --------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations 26,413,963 (65,843,953) - --------------------------------------------------------------------------------------------------------------------- Distributions to shareholders: - --------------------------------------------------------------------------------------------------------------------- From net investment income Class A (20,231,145) (6,585,636) - --------------------------------------------------------------------------------------------------------------------- Class B (27,889,018) (9,095,142) - --------------------------------------------------------------------------------------------------------------------- Class M (1,433,891) (465,481) - --------------------------------------------------------------------------------------------------------------------- In excess of net investment income Class A -- (1,095,167) - --------------------------------------------------------------------------------------------------------------------- Class B -- (1,512,490) - --------------------------------------------------------------------------------------------------------------------- Class M -- (77,408) - --------------------------------------------------------------------------------------------------------------------- From return of capital Class A -- (1,043,290) - --------------------------------------------------------------------------------------------------------------------- Class B -- (1,440,844) - --------------------------------------------------------------------------------------------------------------------- Class M -- (73,741) - --------------------------------------------------------------------------------------------------------------------- Increase from capital share transactions (Note 4) 458,840,392 827,268,427 - --------------------------------------------------------------------------------------------------------------------- Total increase in net assets 435,700,301 740,035,275 Net assets - --------------------------------------------------------------------------------------------------------------------- Beginning of period (Note 5) 742,037,275 2,002,000 - --------------------------------------------------------------------------------------------------------------------- End of period (Including distributions in excess of net investment income of $1,866,342 and 2,683,541, respectively) $1,177,737,576 $742,037,275 - --------------------------------------------------------------------------------------------------------------------- * Unaudited The accompanying notes are an integral part of these financial statements.
Financial highlights (For a share outstanding throughout the period) CLASS A - ------------------------------------------------------------------------------------------------------------------------------------ Six months ended For the period Per-share February 28 Dec. 31, 1997+ operating performance (Unaudited) to August 31 - ------------------------------------------------------------------------------------------------------------------------------------ 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------------ Net asset value, beginning of period $8.02 $8.50 - ------------------------------------------------------------------------------------------------------------------------------------ Investment activities - ------------------------------------------------------------------------------------------------------------------------------------ Net investment income (a) .42 .41(d) - ------------------------------------------------------------------------------------------------------------------------------------ Net realized and unrealized loss on investments (.24) (.47) - ------------------------------------------------------------------------------------------------------------------------------------ Total from investment operations .18 (.06) - ------------------------------------------------------------------------------------------------------------------------------------ Less distributions - ------------------------------------------------------------------------------------------------------------------------------------ From net investment income (.42) (.32) - ------------------------------------------------------------------------------------------------------------------------------------ In excess of net investment income -- (.05) - ------------------------------------------------------------------------------------------------------------------------------------ Return of capital (.05) - ------------------------------------------------------------------------------------------------------------------------------------ Total distributions (.42) (.42) - ------------------------------------------------------------------------------------------------------------------------------------ Net asset value, end of period $7.78 $8.02 - ------------------------------------------------------------------------------------------------------------------------------------ Ratios and supplemental data - ------------------------------------------------------------------------------------------------------------------------------------ Total return at net asset value (%)(b) 2.30* (1.08)* - ------------------------------------------------------------------------------------------------------------------------------------ Net assets, end of period (in thousands) $462,565 $278,847 - ------------------------------------------------------------------------------------------------------------------------------------ Ratio of expenses to average net assets (%)(c) .53* .84(d)* - ------------------------------------------------------------------------------------------------------------------------------------ Ratio of net investment income to average net assets (%) 5.33* 4.57(d)* - ------------------------------------------------------------------------------------------------------------------------------------ Portfolio turnover (%) 25.84* 44.05* - ------------------------------------------------------------------------------------------------------------------------------------ + Commencement of operations. * Not annualized. (a) Per share net investment income has been determined on the basis of the weighted average number of shares outstanding during the period. (b) Total return assumes dividend reinvestment and does not reflect the effect of sales charges. (c) The ratio of expenses to average net assets for the period includes amounts paid through expense offset arrangements. (Note 2) (d) Reflects an expense limitation in effect during the period (Note 2). As a result of such limitation, expenses for the fund reflect a reduction of less than $0.01 per share for class A, class B, and class M for the period ended August 31, 1998.
Financial highlights (For a share outstanding throughout the period) CLASS B - ------------------------------------------------------------------------------------------------------------------------------------ Six months ended For the period Per-share February 28 Dec. 31, 1997+ operating performance (Unaudited) to August 31 - ------------------------------------------------------------------------------------------------------------------------------------ 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------------ Net asset value, beginning of period $8.01 $8.50 - ------------------------------------------------------------------------------------------------------------------------------------ Investment activities - ------------------------------------------------------------------------------------------------------------------------------------ Net investment income (a) .40 .36(d) - ------------------------------------------------------------------------------------------------------------------------------------ Net realized and unrealized loss on investments (.24) (.46) - ------------------------------------------------------------------------------------------------------------------------------------ Total from investment operations .16 (.10) - ------------------------------------------------------------------------------------------------------------------------------------ Less distributions - ------------------------------------------------------------------------------------------------------------------------------------ From net investment income (.39) (.29) - ------------------------------------------------------------------------------------------------------------------------------------ In excess of net investment income -- (.05) - ------------------------------------------------------------------------------------------------------------------------------------ Return of capital (.05) - ------------------------------------------------------------------------------------------------------------------------------------ Total distributions (.39) (.39) - ------------------------------------------------------------------------------------------------------------------------------------ Net asset value, end of period $7.78 $8.01 - ------------------------------------------------------------------------------------------------------------------------------------ Ratios and supplemental data - ------------------------------------------------------------------------------------------------------------------------------------ Total return at net asset value (%)(b) 2.05* (1.58)* - ------------------------------------------------------------------------------------------------------------------------------------ Net assets, end of period (in thousands) $676,911 $444,096 - ------------------------------------------------------------------------------------------------------------------------------------ Ratio of expenses to average net assets (%)(c) .91* 1.34(d)* - ------------------------------------------------------------------------------------------------------------------------------------ Ratio of net investment income to average net assets (%) 5.12* 4.07(d)* - ------------------------------------------------------------------------------------------------------------------------------------ Portfolio turnover (%) 25.84* 44.05* - ------------------------------------------------------------------------------------------------------------------------------------ + Commencement of operations. * Not annualized. (a) Per share net investment income has been determined on the basis of the weighted average number of shares outstanding during the period. (b) Total return assumes dividend reinvestment and does not reflect the effect of sales charges. (c) The ratio of expenses to average net assets for the period includes amounts paid through expense offset arrangements. (Note 2) (d) Reflects an expense limitation in effect during the period (Note 2). As a result of such limitation, expenses for the fund reflect a reduction of less than $0.01 per share for class A, class B, and class M for the period ended August 31, 1998.
Financial highlights (For a share outstanding throughout the period) CLASS M - ------------------------------------------------------------------------------------------------------------------------------------ Six months ended For the period Per-share February 28 Dec. 31, 1997+ operating performance (Unaudited) to August 31 - ------------------------------------------------------------------------------------------------------------------------------------ 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------------ Net asset value, beginning of period $8.01 $8.50 - ------------------------------------------------------------------------------------------------------------------------------------ Investment activities - ------------------------------------------------------------------------------------------------------------------------------------ Net investment income (a) .41 .40(d) - ------------------------------------------------------------------------------------------------------------------------------------ Net realized and unrealized loss on investments (.23) (.48) - ------------------------------------------------------------------------------------------------------------------------------------ Total from investment operations .18 (.08) - ------------------------------------------------------------------------------------------------------------------------------------ Less distributions - ------------------------------------------------------------------------------------------------------------------------------------ From net investment income (.41) (.31) - ------------------------------------------------------------------------------------------------------------------------------------ In excess of net investment income -- (.05) - ------------------------------------------------------------------------------------------------------------------------------------ Return of capital (.05) - ------------------------------------------------------------------------------------------------------------------------------------ Total distributions (.41) (.41) - ------------------------------------------------------------------------------------------------------------------------------------ Net asset value, end of period $7.78 $8.01 - ------------------------------------------------------------------------------------------------------------------------------------ Ratios and supplemental data - ------------------------------------------------------------------------------------------------------------------------------------ Total return at net asset value (%)(b) 2.30* (1.33)* - ------------------------------------------------------------------------------------------------------------------------------------ Net assets, end of period (in thousands) $38,262 $19,094 - ------------------------------------------------------------------------------------------------------------------------------------ Ratio of expenses to average net assets (%)(c) .66* 1.01(d)* - ------------------------------------------------------------------------------------------------------------------------------------ Ratio of net investment income to average net assets (%) 5.28* 4.49(d)* - ------------------------------------------------------------------------------------------------------------------------------------ Portfolio turnover (%) 25.84* 44.05* - ------------------------------------------------------------------------------------------------------------------------------------ + Commencement of operations. * Not annualized. (a) Per share net investment income has been determined on the basis of the weighted average number of shares outstanding during the period. (b) Total return assumes dividend reinvestment and does not reflect the effect of sales charges. (c) The ratio of expenses to average net assets for the period includes amounts paid through expense offset arrangements. (Note 2) (d) Reflects an expense limitation in effect during the period (Note 2). As a result of such limitation, expenses for the fund reflect a reduction of less than $0.01 per share for class A, class B, and class M for the period ended August 31, 1998.
Notes to financial statements February 28, 1999 (Unaudited) Note 1 Significant accounting policies Putnam High Yield Trust II ("the fund") is a series of Putnam Funds Trust (the "trust") which is registered under the Investment Company Act of 1940, as amended, as a diversified, open-end management investment company. The fund seeks high current income by investing primarily in high-yielding, lower-rated fixed-income securities constituting a portfolio that Putnam Investment Management, Inc. ("Putnam Management"), the fund's Manager, a wholly-owned subsidiary of Putnam Investments, Inc. believes does not involve undue risk to income or principal. The fund offers class A, class B and class M shares. Class A shares are sold with a maximum front-end sales charge of 4.75%. Class B shares, which convert to class A shares after approximately eight years, do not pay a front-end sales charge, but pay a higher ongoing distribution fee than class A shares, and are subject to a contingent deferred sales charge, if those shares are redeemed within six years of purchase. Class M shares are sold with a maximum front-end sales charge of 3.25% and pay an ongoing distribution fee that is lower than class B shares and higher than class A shares. Expenses of the fund are borne pro-rata by the holders of each class of shares, except that each class bears expenses unique to that class (including the distribution fees applicable to such class). Each class votes as a class only with respect to its own distribution plan or other matters on which a class vote is required by law or determined by the Trustees. Shares of each class would receive their pro-rata share of the net assets of the fund, if the fund were liquidated. In addition, the Trustees declare separate dividends on each class of shares. The following is a summary of significant accounting policies consistently followed by the fund in the preparation of its financial statements. The preparation of financial statements is in conformity with generally accepted accounting principles and requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities. Actual results could differ from those estimates. A) Security valuation Investments for which quotations are readily available are stated at market value, which is determined using the last reported sale price, or, if no sales are reported -- as in the case of some securities traded over-the-counter -- the last reported bid price. Securities quoted in foreign currencies are translated into U.S. dollars at the current exchange rate. Short-term investments having remaining maturities of 60 days or less are stated at amortized cost, which approximates market value, and other investments, including restricted securities, are stated at fair value following procedures approved by the Trustees. Market quotations are not considered to be readily available for certain debt obligations, such investments are stated at fair value on the basis of valuations furnished by a pricing service, approved by the Trustees, or dealers which determine valuations for normal institutional-size trading units of such securities using methods based on market transactions for comparable securities and various relationships between securities that are generally recognized by institutional traders. B) Joint trading account Pursuant to an exemptive order issued by the Securities and Exchange Commission, the fund may transfer uninvested cash balances into a joint trading account along with the cash of other registered investment companies and certain other accounts managed by Putnam Management. These balances may be invested in one or more repurchase agreements and/or short-term money market instruments. C) Repurchase agreements The fund, or any joint trading account, through its custodian, receives delivery of the underlying securities, the market value of which at the time of purchase is required to be in an amount at least equal to the resale price, including accrued interest. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the fund and the counterparty. Putnam Management is responsible for determining that the value of these underlying securities is at all times at least equal to the resale price, including accrued interest. D) Security transactions and related investment income Security transactions are accounted for on the trade date (date the order to buy or sell is executed). Interest income is recorded on the accrual basis. Dividend income is recorded on the ex-dividend date, except that certain dividends from foreign securities are recorded as soon as the fund is informed of the ex-dividend date. Discounts on zero coupon bonds, original issue discount bonds, stepped-coupon bonds and payment in kind bonds are accreted according to the yield-to-maturity basis. Any premium resulting from the purchase of stepped-coupon securities is amortized on a yield-to-maturity basis. E) Futures and options contracts The fund may use futures and options contracts to hedge against changes in the values of securities the fund owns or expects to purchase. The fund may also write options on securities it owns or in which it may invest to increase its current returns. The potential risk to the fund is that the change in value of futures and options contracts may not correspond to the change in value of the hedged instruments. In addition, losses may arise from changes in the value of the underlying instruments, if there is an illiquid secondary market for the contracts, or if the counterparty to the contract is unable to perform. 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. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. Futures contracts are valued at the quoted daily settlement prices established by the exchange on which they trade. Exchange traded options are valued at the last sale price, or if no sales are reported, the last bid price for purchased options and the last ask price for written options. Options traded over-the-counter are valued using prices supplied by dealers. F) Federal taxes It is the policy of the fund to distribute all of its taxable income within the prescribed time and otherwise comply with the provisions of the Internal Revenue Code applicable to regulated investment companies. It is also the intention of the fund to distribute an amount sufficient to avoid imposition of any excise tax under Section 4982 of the Internal Revenue Code of 1986, as amended. Therefore, no provision has been made for federal taxes on income, capital gains or unrealized appreciation on securities held nor for excise tax on income and capital gains. G) Distributions to shareholders Income dividends are recorded daily by the fund and are distributed monthly. Capital gain distributions if any, are recorded on the ex-dividend date and paid at least annually. The amount and character of income and gains to be distributed are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. 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. H) Expenses of the trust Expenses directly charged or attributable to any fund will be paid from the assets of that fund. Generally, expenses of the trust will be allocated among and charged to the assets of each fund on a basis that the Trustees deem fair and equitable, which may be based on the relative assets of each fund or the nature of the services performed and relative applicability to each fund. Note 2 Management fee, administrative services and other transactions Compensation of Putnam Management, for management and investment advisory services is paid quarterly based on the average net assets of the fund. Such fee is based on the following annual rates: 0.70% of the first $500 million of average net assets, 0.60% of the next $500 million, 0.55% of the next $500 million, 0.50% of the next $5 billion, 0.475% of the next $5 billion 0.455% of the next $5 billion, 0.44% of the next $5 billion and 0.43% thereafter. The fund reimburses Putnam Management an allocated amount for the compensation and related expenses of certain officers of the fund and their staff who provide administrative services to the fund. The aggregate amount of all such reimbursements is determined annually by the Trustees. Custodial functions for the fund's assets are provided by Putnam Fiduciary Trust Company (PFTC), a subsidiary of Putnam Investments, Inc. Investor servicing agent functions are provided by Putnam Investor Services, a division of PFTC. For the six months ended February 28, 1999, fund expenses were reduced by $148,107 under expense offset arrangements with PFTC. Investor servicing and custodian fees reported in the Statement of operations exclude these credits. The fund could have invested a portion of the assets utilized in connection with the expense offset arrangements in an income producing asset if it had not entered into such arrangements. Each Trustee of the fund receives an annual Trustee fee, of which $1,080 has been allocated to the fund, and an additional fee for each Trustee's meeting attended. Trustees who are not interested persons of Putnam Management and who serve on committees of the Trustees receive additional fees for attendance at certain committee meetings. The fund has adopted a Trustee Fee Deferral Plan (the "Deferral Plan") which allows the Trustees to defer the receipt of all or a portion of Trustees Fees payable on or after July 1, 1995. The deferred fees remain in the fund and are invested in certain Putnam funds until distribution in accordance with the Deferral Plan. The fund has adopted an unfunded noncontributory defined benefit pension plan (the "Pension Plan") covering all Trustees of the fund who have served as Trustee for at least five years. Benefits under the Pension Plan are equal to 50% of the Trustee's average total retainer and meeting fees for the three years preceding retirement. Pension expense for the fund is included in Compensation of Trustees in the Statement of operations. Accrued pension liability is included in Payable for compensation of Trustees in the Statement of assets and liabilities. The fund has adopted distribution plans (the "Plans") with respect to its class A, class B and class M shares pursuant to Rule 12b-1 under the Investment Company Act of 1940. The purpose of the Plans is to compensate Putnam Mutual Funds Corp., a wholly-owned subsidiary of Putnam Investments Inc., for services provided and expenses incurred by it in distributing shares of the fund. The Plans provide for payments by the fund to Putnam Mutual Funds Corp. at an annual rate up to 0.35%, 1.00% and 1.00% of the average net assets attributable to class A, class B and class M shares, respectively. The Trustees have approved payment by the fund to an annual rate of 0.25%, 1.00% and 0.50% of the average net assets attributable to class A, class B and class M shares respectively. For the six months ended February 28, 1999, Putnam Mutual Funds Corp., acting as underwriter received net commissions of $624,536 and $22,001 from the sale of class A and class M shares, respectively and $608,411 in contingent deferred sales charges from redemptions of class B shares. A deferred sales charge of up to 1% is assessed on certain redemptions of class A shares. For the six months ended February 28, 1999, Putnam Mutual Funds Corp., acting as underwriter received $47,860 on class A redemptions. Note 3 Purchase and sales of securities During the six months ended February 28, 1999, purchases and sales of investment securities other than short-term investments aggregated $684,864,687 and $225,484,940, respectively. There were no purchases and sales of U.S. government obligations. In determining the net gain or loss on securities sold, the cost of securities has been determined on the identified cost basis. Note 4 Capital shares At February 28, 1999, there was an unlimited number of shares of beneficial interest authorized. Transactions in capital shares were as follows: Six months ended February 28, 1999 - ----------------------------------------------------------------------------- Class A Shares Amount - ----------------------------------------------------------------------------- Shares sold 40,934,963 $ 320,162,545 - ----------------------------------------------------------------------------- Shares reinvested 1,548,327 12,135,347 - ----------------------------------------------------------------------------- 42,483,290 332,297,892 Shares repurchased (17,817,688) (139,961,368) - ----------------------------------------------------------------------------- Net increase 24,665,602 $ 192,336,524 - ----------------------------------------------------------------------------- For the period December 31, 1997 (commencement of operations) to August 31, 1998 - ----------------------------------------------------------------------------- Class A Shares Amount - ----------------------------------------------------------------------------- Shares sold 40,550,553 $362,372,816 - ----------------------------------------------------------------------------- Shares reinvested 626,303 5,446,273 - ----------------------------------------------------------------------------- 41,176,856 367,819,089 Shares repurchased (6,630,099) (58,110,433) - ----------------------------------------------------------------------------- Net increase 34,546,757 $309,708,656 - ----------------------------------------------------------------------------- Six months ended February 28, 1999 - ----------------------------------------------------------------------------- Class B Shares Amount - ----------------------------------------------------------------------------- Shares sold 43,254,234 $ 338,561,155 - ----------------------------------------------------------------------------- Shares reinvested 1,906,880 14,941,314 - ----------------------------------------------------------------------------- 45,161,114 353,502,469 Shares repurchased (13,620,640) (106,805,923) - ----------------------------------------------------------------------------- Net increase 31,540,474 $ 246,696,546 - ----------------------------------------------------------------------------- For the period December 31, 1997 (commencement of operations) to August 31, 1998 - ----------------------------------------------------------------------------- Class B Shares Amount - ----------------------------------------------------------------------------- Shares sold 62,104,484 $554,585,163 - ----------------------------------------------------------------------------- Shares reinvested 781,429 6,775,411 - ----------------------------------------------------------------------------- 62,885,913 561,360,574 Shares repurchased (7,425,863) (65,206,680) - ----------------------------------------------------------------------------- Net increase 55,460,050 $496,153,894 - ----------------------------------------------------------------------------- Six months ended February 28, 1999 - ----------------------------------------------------------------------------- Class M Shares Amount - ----------------------------------------------------------------------------- Shares sold 3,114,701 $24,373,944 - ----------------------------------------------------------------------------- Shares reinvested 120,334 943,045 - ----------------------------------------------------------------------------- 3,235,035 25,316,989 Shares repurchased (703,084) (5,509,667) - ----------------------------------------------------------------------------- Net increase 2,531,951 $19,807,322 - ----------------------------------------------------------------------------- For the period December 31, 1997 (commencement of operations) to August 31, 1998 - ----------------------------------------------------------------------------- Class M Shares Amount - ----------------------------------------------------------------------------- Shares sold 3,136,710 $28,080,662 - ----------------------------------------------------------------------------- Shares reinvested 50,712 441,554 - ----------------------------------------------------------------------------- 3,187,422 28,522,216 Shares repurchased (802,541) (7,116,339) - ----------------------------------------------------------------------------- Net increase 2,384,881 $21,405,877 - ----------------------------------------------------------------------------- Note 5 Initial capitalization and offering of shares The trust was established as a Massachusetts business trust on January 22, 1996. During the period January 22, 1996 to December 30, 1997, the fund had no operations other than those related to organizational matters, including the initial capital contribution of $2,000,000, $1,000, and $1,000 and the issuance of 235,294, 118, and 118 shares of class A, B, and M, respectively to Putnam Mutual Funds Corp., a wholly-owned subsidiary of Putnam Investments, Inc. on December 30, 1997. PUTNAM GROWTH FUNDS Asia Pacific Growth Fund Capital Appreciation Fund [DBL. DAGGER] Capital Opportunities Fund Diversified Equity Trust Europe Growth Fund Global Growth Fund Global Natural Resources Fund Growth Opportunities Fund Health Sciences Trust International Growth Fund International New Opportunities Fund Investors Fund New Opportunities Fund [DBL. DAGGER] OTC & Emerging Growth Fund Research Fund Vista Fund Voyager Fund Voyager Fund II PUTNAM GROWTH AND INCOME FUNDS Balanced Retirement Fund Convertible Income-Growth Trust Equity Income Fund The George Putnam Fund of Boston Global Growth and Income Fund The Putnam Fund for Growth and Income Growth and Income Fund II International Growth and Income Fund New Value Fund Utilities Growth and Income Fund PUTNAM INCOME FUNDS American Government Income Fund Diversified Income Trust Global Governmental Income Trust High Quality Bond Fund + High Yield Advantage Fund [DBL. DAGGER] High Yield Total Return Fund High Yield Trust [DBL. DAGGER] High Yield Trust II Income Fund Intermediate U.S. Government Income Fund Money Market Fund ** Preferred Income Fund Strategic Income Fund * U.S. Government Income Trust PUTNAM TAX-FREE INCOME FUNDS Municipal Income Fund Tax Exempt Income Fund Tax Exempt Money Market Fund** Tax-Free High Yield Fund Tax-Free Insured Fund State tax-free income funds [SECTION MARK] Arizona, California, Florida, Massachusetts, Michigan, Minnesota, New Jersey, New York, Ohio and Pennsylvania State tax-free money market funds [SECTION MARK] California, New York LIFESTAGE SM FUNDS Putnam Asset Allocation Funds-three investment portfolios that spread your money across a variety of stocks, bonds, and money market investments. The three portfolios: Asset Allocation: Balanced Portfolio Asset Allocation: Conservative Portfolio Asset Allocation: Growth Portfolio * Formerly Putnam Diversified Income Trust II + Formerly Putnam Federal Income Trust [DBL. DAGGER] Closed to new investors. Some exceptions may apply. Contact Putnam for details. [SECTION MARK] Not available in all states. **An investment in a money market fund is neither insured nor guaranteed by the U.S. government. These funds are managed to maintain a price of $1.00 per share, although there is no assurance that this price will be maintained in the future. Please call your financial advisor or Putnam at 1-800-225-1581 to obtain a prospectus for any Putnam fund. It contains more complete information, including charges and expenses. Please read it carefully before you invest or send money. Fund information INVESTMENT MANAGER Putnam Investment Management, Inc. One Post Office Square Boston, MA 02109 MARKETING SERVICES Putnam Mutual Funds Corp. One Post Office Square Boston, MA 02109 CUSTODIAN Putnam Fiduciary Trust Company LEGAL COUNSEL Ropes & Gray TRUSTEES George Putnam, Chairman William F. Pounds, Vice Chairman John A. Hill, Vice Chairman Jameson Adkins Baxter Hans H. Estin Ronald J. Jackson Paul L. Joskow Elizabeth T. Kennan Lawrence J. Lasser John H. Mullin III Robert E. Patterson Donald S. Perkins George Putnam, III A.J.C. Smith W. Thomas Stephens W. Nicholas Thorndike OFFICERS George Putnam President Charles E. Porter Executive Vice President Patricia C. Flaherty Senior Vice President John D. Hughes Senior Vice President and Treasurer Lawrence J. Lasser Vice President Gordon H. Silver Vice President Ian C. Ferguson Vice President Brett C. Browchuk Vice President Stephen Oristaglio Vice President Edward H. D'Alelio Vice President Rosemary H. Thomsen Vice President and Fund Manager Jennifer E. Leichter Vice President and Fund Manager Robert M. Paine Vice President and Fund Manager Jeffrey A. Kaufman Vice President and Fund Manager Richard A. Monaghan Vice President John R. Verani Vice President Beverly Marcus Clerk and Assistant Treasurer This report is for the information of shareholders of Putnam High Yield Trust II. It may also be used as sales literature when preceded or accompanied by the current prospectus, which gives details of sales charges, investment objectives, and operating policies of the fund, and the most recent copy of Putnam's Quarterly Performance Summary. For more information or to request a prospectus, call toll free: 1-800-225-1581. You can also learn more at Putnam Investments' website: http://www.putnaminv.com. Shares of mutual funds are not deposits or obligations of, or guaranteed or endorsed by, any financial institution; are not insured by the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve Board, or any other agency; and involve risk, including the possible loss of the principal amount invested. [LOGO OMITTED] PUTNAM INVESTMENTS The Putnam Funds One Post Office Square Boston, Massachusetts 02109 www.putnaminv.com - --------------------- BULK RATE U.S. POSTAGE PAID PUTNAM INVESTMENTS - --------------------- SA064 51083 2HB/2HD/2HE 4/99 -----END PRIVACY-ENHANCED MESSAGE-----