Putnam
High Income
Bond Fund
Item 1. Report to Stockholders:
-------------------------------
The following is a copy of the report transmitted to stockholders pursuant
to Rule 30e-1 under the Investment Company Act of 1940:
SEMIANNUAL REPORT ON PERFORMANCE AND OUTLOOK
2-28-05
[GRAPHIC OMITTED: WATCH]
[SCALE LOGO OMITTED]
From the Trustees
[GRAPHIC OMITTED: PHOTO OF JOHN A. HILL AND GEORGE PUTNAM, III]
John A. Hill and
George Putnam, III
Dear Fellow Shareholder:
Over the past year, Putnam has introduced a number of reforms for the
benefit of shareholders, including increasing the amount of disclosure
for our funds. We are now including additional disclosure about your
fund's management teams. Following the Outlook for Your Fund, we provide
manager compensation information that pertains to your fund, list any
changes in your fund's Portfolio Leader and Portfolio Members during the
prior year, and disclose these individuals' other fund management
responsibilities at Putnam. We also show how much these individuals, as
well as the members of Putnam's Executive Board, have invested in the
fund (in dollar ranges). Finally, on page 12, we provide certain
information about the most recent approval by the Trustees of your
fund's management contract with Putnam.
During the reporting period just ended, the Federal Reserve Board's
series of gradual increases in the federal funds rate have occupied much
of investors' attention, but generally did not have a significant impact
on stock and bond prices. However, over the last two months, we have
begun to see a measurable increase in longer-term rates. This, along
with the continued high levels of energy prices, has slowed the stock
market's momentum even though the U.S. economy is continuing to expand
at a moderate pace. Concerns about inflation, dormant for many months,
are beginning to influence the markets once again and may well have a
negative impact on bond prices.
In the following pages, members of your fund's management teams discuss
the fund's performance, the strategies used to keep your fund on track
during the reporting period, and the team's plan for responding to the
changing market environment.
Respectfully yours,
/S/ JOHN A. HILL /S/ GEORGE PUTNAM, III
John A. Hill George Putnam, III
Chairman of the Trustees President of the Funds
April 20, 2005
Report from Fund Management
Fund highlights
* For the semiannual period ended February 28, 2005, Putnam High Income
Bond Fund had total returns of 8.86% at net asset value (NAV) and 6.94%
at market price.
* The fund's new primary benchmark, the Merrill Lynch All-Convertibles
Index, returned 5.85%. The fund's former benchmark, the Merrill Lynch
All-Convertibles Ex-Mandatory Index, returned 4.80%. The fund's
secondary benchmark, the JP Morgan Global High Yield Index, returned
7.37%.
* The average return for the fund's Lipper category, Convertible
Securities Funds (closed-end), was 9.03%.
* During the period, Putnam High Income Opportunities Trust was merged
into your fund. See page 5 for details.
* See the Performance Summary beginning on page 9 for additional fund
performance, comparative performance, and Lipper data.
--------------------------------------------------
TOTAL RETURN FOR
PERIODS ENDED 2/28/05
--------------------------------------------------
Market
(inception 7/9/87) NAV Price
--------------------------------------------------
6 months 8.86% 6.94%
--------------------------------------------------
1 year 10.40 6.71
--------------------------------------------------
5 years 60.32 76.85
Annual average 9.90 12.08
--------------------------------------------------
10 years 155.64 110.85
Annual average 9.84 7.75
--------------------------------------------------
Annual average
(life of fund) 10.35 9.25
--------------------------------------------------
Data is historical. Past performance does not guarantee future results.
More recent returns may be less or more than those shown. Investment
return, net asset value, and market price will fluctuate and you may
have a gain or a loss when you sell your shares. Performance assumes
reinvestment of distributions and does not account for taxes.
Performance commentary
We are pleased to report that your fund posted solid returns during the
period and outpaced both its primary and secondary benchmarks, based on
results at NAV. We attribute this to effective security selection and
generally favorable market conditions. Strong performance from
convertible holdings and the fund's significant allocation to high-yield
corporate bonds helped it rank competitively in its Lipper peer group;
however, the fund slightly underperformed the average return for the
group, which currently includes only 12 funds. It is important to note
that a fund's performance at market price may differ from its results at
NAV. Although market price performance generally reflects investment
results, it may also be influenced by several other factors, including
changes in investor perceptions of the fund or its investment advisor,
market conditions, fluctuations in supply and demand for the fund's
shares, and changes in fund distributions.
FUND PROFILE
Putnam High Income Bond Fund seeks to provide high current income by
investing in a portfolio of high-yielding convertible and nonconvertible
securities with potential for capital appreciation. The fund invests,
under normal circumstances, at least 80% of its net assets in bonds
rated below investment grade.
Market overview
Over the past six months, market sentiment shifted between caution and
exhilaration. From September 1 through November's U.S. presidential
election, the market reflected investors' uncertainty. The Federal
Reserve Board (the Fed) had begun periodically raising short-term
interest rates starting in June 2004. Despite rising rates, bond sales
were strong, signaling investors' high level of risk aversion. The
possibility of a terrorist incident or voting irregularities weighed on
investors' minds in the weeks before Election Day. Sustained high oil
prices were an additional cause for concern. However, after voters
handed George W. Bush a decisive victory, relieved investors sought more
speculative opportunities. The stock market rallied and posted strong
gains through the end of the calendar year. The high-yield market,
moving in concert with equities, experienced seasonal strength at the
end of the calendar year and was further buoyed by increased
consolidation activity. Yield spreads -- the difference in yield between
higher- and lower-rated bonds of comparable maturities -- narrowed
significantly. When this is the case, high-yield bonds offer less of a
yield advantage over Treasury bonds of similar maturities.
-------------------------------------------------------------------------------
MARKET SECTOR PERFORMANCE 6 MONTHS ENDED 2/28/05
-------------------------------------------------------------------------------
Bonds
-------------------------------------------------------------------------------
Merrill Lynch All-Convertibles Index (convertible
securities) 5.85%
-------------------------------------------------------------------------------
JP Morgan Global High Yield Index (global high-yield
corporate bonds) 7.37%
-------------------------------------------------------------------------------
Lehman Aggregate Bond Index (broad bond market) 1.26%
-------------------------------------------------------------------------------
Lehman Global Aggregate Bond Index (international bonds) 7.05%
-------------------------------------------------------------------------------
Equities
-------------------------------------------------------------------------------
S&P 500 Index (broad stock market) 9.99%
-------------------------------------------------------------------------------
Russell 2000 Index (small-company stocks) 16.40%
-------------------------------------------------------------------------------
MSCI EAFE Index (international stocks) 21.18%
-------------------------------------------------------------------------------
These indexes provide an overview of performance in different market
sectors for the six months ended 2/28/05.
-------------------------------------------------------------------------------
Strategy overview
Because yield spreads have narrowed in recent months, and lower-rated
bonds now offer a less compelling yield advantage, investors in
high-yield and convertible bonds now receive less of a premium for the
additional risk they are taking. Consequently, our goal has been to
improve the quality of the portfolio while still targeting securities
that offer attractive yields.
For example, we emphasized mandatory convertible securities, which must
be converted, at a specified date, to common stocks. If the issuing
company pays its stockholders a dividend, then the yield on its
mandatory convertibles is generally two to three percentage points
higher than the stock dividend yield, in order to attract potential
investors. On these securities, the higher yield is not a reflection of
a weaker credit rating. Our emphasis on mandatory convertibles increased
both the quality and the equity sensitivity of the portfolio, a term
that indicates how likely the portfolio is to reflect stock market
trends.
We also established the fund's first position in non-accreting
zero-coupon convertibles, which are described more fully on page 4. We
don't typically invest in this type of security but when one of these
bonds became available in the secondary market at an attractive
discount, we viewed it as an opportunity worth pursuing.
Among the portfolio's high-yield bonds, we also trimmed some of the
lower-quality holdings, which had been strong performers. We reduced
positions in wireless communications, chemicals, media companies, auto
suppliers, and technology companies.
[GRAPHIC OMITTED: horizontal bar chart PORTFOLIO COMPOSITION COMPARED]
PORTFOLIO COMPOSITION COMPARED
as of 8/31/04 as of 2/28/05
Convertible
securities 48.9% 50.6%
Corporate bonds
and notes 41.0% 41.2%
Short-term
investments 7.2% 6.5%
Common stocks 2.0% 0.9%
Other 0.6% 0.7%
Preferred stocks 0.3% 0.1%
Footnote reads:
This chart shows how the fund's weightings have changed over the past
six months. Weightings are shown as a percentage of market value.
Holdings will vary over time.
How fund holdings affected performance
Among the fund's convertible holdings, our position in Titan
International was a top contributor to relative performance during the
period. The company is the largest independent manufacturer of tires and
wheels for tractors and other off-road vehicles. The convertible bonds,
which we purchased at par value, have appreciated over 30% in the short
time the fund has owned them. We continue to hold this position. The
fund also established a position in the convertible preferred stock of
Huntsman Corporation, a chemical manufacturer that, until just recently,
had been privately owned. The value of these shares increased nearly 20%
since the company went public. We maintained the position.
As noted in the Strategy Overview section, we established a position in
a non-accreting, zero-coupon convertible. Unlike conventional zero
coupon bonds, which are issued at a discount and increase in value
through accretion (the accumulation of capital gains), these bonds are
issued at par value. They offer no interest income and can increase in
value only through their link to the underlying stock. The value of the
zero coupon convertible bonds issued by ON Semiconductor had declined in
response to weakening of the underlying common stock. Given our positive
assessment of the firm's credit rating, we believed these zero coupon
bonds were so undervalued that despite their lack of interest payments,
they offered an implied yield of more than 6%. By the end of the
reporting period, they had contributed positively to the fund's returns.
[GRAPHIC OMITTED: TOP HOLDINGS]
TOP HOLDINGS
(Percent of fund's net assets as of 2/28/05)
Convertible Securities
1 Northrop Grumman Corp. (2.1%)
Cumulative convertible preferred, series B, $7.00
Capital goods
2 Schering-Plough Corp. (1.6%)
Convertible preferred, $3.00
Health care
3 Owens-Illinois, Inc. (1.4%)
Convertible preferred, $2.375
Capital goods
4 TXI Capital Trust I (1.3%)
Convertible preferred, $2.75
Consumer cyclicals
5 Host Marriott Financial Trust (1.3%)
Convertible preferred, $3.375
Financial
Corporate Bonds
1 Dow Jones CDX HY (2.3%)
144A pass-through certificates 7 3/4s, 2009
Other
2 Qwest Corp. (0.4%)
144A notes 9 1/8s, 2012
Communications services
3 Nextel Communications, Inc. (0.3%)
Senior notes 5.95s, 2014
Communications services
4 Charter Communications Holdings,
LLC/Capital Corp. (0.3%)
Senior notes 11 1/8s, 2011
Consumer staples
5 Qwest Communications International,
Inc. (0.3%)
144A Senior notes 7 3/4s, 2014
Communications services
Footnote reads:
The fund's holdings will change over time.
The fund's positions in natural gas-related utilities also performed well,
as a result of strong and growing demand. Notable among these utilities were
Williams Companies, Aquila, ONEOK, and Southern Union. Among traditional oil
companies, the fund's Amerada-Hess holdings posted strong results, as oil
prices remained high. Bonds issued by Lyondell Chemical were standout
performers among the fund's high-yield holdings. This company had been
through some difficult years, as the costs of the raw materials used to
produce its products had risen, foreign competition had intensified, and
economic variables not in its control caused demand for its products to
fluctuate. Eventually, the improving economy helped chemical companies in
general. Lyondell was able to pass along higher energy costs to consumers,
which improved its financial performance.
A position in the high-yield bonds of Icon Health detracted from the
fund's results during the period. The company, which manufactures
exercise equipment for home gyms, faced rising materials costs and was
not able to pass these costs on to consumers. We believe this situation
is likely to be temporary and we continue to hold the position. Star Gas
Partners, LP was another detractor during the period. This distributor
of home heating oil had not hedged against rising oil prices, and as a
result suffered when oil prices rose higher. The company also had some
service issues that led to a decline in its customer base. We think the
issues will be resolved and we continue to hold the position.
Please note that all holdings discussed in this report are subject to
review in accordance with the fund's investment strategy and may vary in
the future.
OF SPECIAL INTEREST
Merger with Putnam High Income Opportunities Trust completed
On January 13, 2005, shareholders of your fund and Putnam High Income
Opportunities Trust approved a merger of Putnam High Income
Opportunities Trust into your fund, and the merger was completed on
January 21, 2005. Putnam High Income Opportunities Trust was a
closed-end, fixed income fund whose objectives, strategy, and
investments were substantially similar to those of your fund.
The outlook for your fund
The following commentary reflects anticipated developments that could
affect your fund over the next six months, as well as your management
teams' plans for responding to them.
We believe the fundamental backdrop remains favorable for high-yield
bonds and convertible bond investing. Default rates have been low, and
the strong economy has contributed to a healthy credit environment. In
our opinion, companies that exhibit poor credit ratings in this economy
probably have significant operational problems that we would choose to
avoid. However, at this point in the credit cycle, spreads have
tightened to such an extent that returns will likely be muted compared
to the strong results of 2004. We believe the opportunity to capitalize
on narrowing yield spreads has essentially passed. Because the economy
has matured, we are looking for select opportunities that offer high
yields without increased credit risk. Among convertibles, we will
continue to target securities and situations that offer a structurally
high yield, as we discussed in the Strategy Overview of this report. We
will seek to achieve higher-quality holdings and a greater degree of
equity sensitivity in the portfolio.
Within the convertible portion of the portfolio we will continue to seek
special opportunities, without emphasis on particular sectors, and
generally will seek to own about 70 issues. The high-yield portion of
the portfolio typically holds a larger number of issues and we actively
manage sector exposures in an effort to improve relative performance.
We remain committed to combining our strengths in fundamental and
quantitative research to uncover attractive opportunities within the
high-yield and convertible markets.
The views expressed in this report are exclusively those of Putnam
Management. They are not meant as investment advice. Mutual funds that
invest in bonds are subject to certain risks, including interest-rate
risk, credit risk, and inflation risk. As interest rates rise, the
prices of bonds fall. Long-term bonds are more exposed to interest-rate
risk than short-term bonds. Unlike bonds, bond funds have ongoing fees
and expenses. Lower-rated bonds may offer higher yields in return for
more risk.
Your fund's management
Your fund is managed by the members of the Putnam Large-Cap Value and
Core Fixed-Income High-Yield teams. David King is the Portfolio Leader
and Robert Salvin is a Portfolio Member of your fund. The Portfolio
Leader and Portfolio Member coordinate the teams' management of the
fund.
For a complete listing of the members of the Putnam Large-Cap Value and
Core Fixed-Income High-Yield teams, including those who are not
Portfolio Leaders or Portfolio Members of your fund, visit Putnam's
Individual Investor Web site at www.putnaminvestments.com.
Fund ownership
The table below shows how much the fund's current Portfolio Leader and
Portfolio Member have invested in the fund (in dollar ranges).
Information shown is for February 28, 2005, and February 29, 2004.
-------------------------------------------------------------------------------------------------------------
FUND PORTFOLIO LEADER AND PORTFOLIO MEMBER
-------------------------------------------------------------------------------------------------------------
$1 - $10,001 - $50,001- $100,001 - $500,001 - $1,000,001
Year $0 $10,000 $50,000 $100,000 $500,000 $1,000,000 and over
-------------------------------------------------------------------------------------------------------------
David King 2005 *
-------------------------------------------------------------------------------------------------------------
Portfolio Leader 2004 *
-------------------------------------------------------------------------------------------------------------
Robert Salvin 2005 *
-------------------------------------------------------------------------------------------------------------
Portfolio Member N/A
-------------------------------------------------------------------------------------------------------------
N/A indicates the individual was not a Portfolio Leader or Portfolio
Member as of 2/29/04.
Changes in your fund's Portfolio Leader and Portfolio Members
During the year ended February 28, 2005, Portfolio Member George Maris
left your fund's management team.
Fund manager compensation
The total 2004 fund manager compensation that is attributable to your fund
is approximately $600,000. This amount includes a portion of 2004
compensation paid by Putnam Management to the fund managers listed in this
section for their portfolio management responsibilities, calculated based on
the fund assets they manage taken as a percentage of the total assets they
manage. The compensation amount also includes a portion of the 2004
compensation paid to the Group Chief Investment Officers of the fund's
broader investment categories for their oversight responsibilities,
calculated based on the fund assets they oversee taken as a percentage of
the total assets they oversee. These percentages are determined as of the
fund's fiscal period-end. For personnel who joined Putnam Management during
or after 2004, the calculation reflects annualized 2004 compensation or an
estimate of 2005 compensation, as applicable.
Other Putnam funds managed by the Portfolio Leader
and Portfolio Member
David King is also a Portfolio Leader of Putnam Convertible Income-Growth
Trust and Putnam New Value Fund. He is also a Portfolio Member of The Putnam
Fund for Growth and Income. David King and Robert Salvin may also manage
other accounts and variable trust funds advised by Putnam Management or an
affiliate.
Fund ownership
The table below shows how much the members of Putnam's Executive Board
have invested in the fund (in dollar ranges). Information shown is for
February 28, 2005, and February 29, 2004.
--------------------------------------------------------------------------------------------------
PUTNAM EXECUTIVE BOARD
--------------------------------------------------------------------------------------------------
$1 - $10,001 - $50,001- $100,001
Year $0 $10,000 $50,000 $100,000 and over
--------------------------------------------------------------------------------------------------
Philippe Bibi 2005 *
--------------------------------------------------------------------------------------------------
Chief Technology Officer 2004 *
--------------------------------------------------------------------------------------------------
John Boneparth 2005 *
--------------------------------------------------------------------------------------------------
Head of Global Institutional Mgmt 2004 *
--------------------------------------------------------------------------------------------------
Joshua Brooks 2005 *
--------------------------------------------------------------------------------------------------
Deputy Head of Investments N/A
--------------------------------------------------------------------------------------------------
Kevin Cronin 2005 *
--------------------------------------------------------------------------------------------------
Head of Investments N/A
--------------------------------------------------------------------------------------------------
Charles Haldeman, Jr. 2005 *
--------------------------------------------------------------------------------------------------
President and CEO 2004 *
--------------------------------------------------------------------------------------------------
Amrit Kanwal 2005 *
--------------------------------------------------------------------------------------------------
Chief Financial Officer N/A
--------------------------------------------------------------------------------------------------
Steven Krichmar 2005 *
--------------------------------------------------------------------------------------------------
Chief of Operations N/A
--------------------------------------------------------------------------------------------------
Francis McNamara, III 2005 *
--------------------------------------------------------------------------------------------------
General Counsel N/A
--------------------------------------------------------------------------------------------------
Richard Monaghan 2005 *
--------------------------------------------------------------------------------------------------
Head of Retail Management 2004 *
--------------------------------------------------------------------------------------------------
Richard Robie, III 2005 *
--------------------------------------------------------------------------------------------------
Chief Administrative Officer N/A
--------------------------------------------------------------------------------------------------
Edward Shadek 2005 *
--------------------------------------------------------------------------------------------------
Deputy Head of Investments N/A
--------------------------------------------------------------------------------------------------
N/A indicates the individual was not a member of Putnam's Executive
Board as of 2/29/04.
Performance summary
This section shows your fund's performance during the first half of its
fiscal year, which ended February 28, 2005. In accordance with
regulatory requirements, we also include performance for the most
current calendar quarter-end. Performance should always be considered in
light of a fund's investment strategy. Data represents past performance.
Past performance does not guarantee future results. More recent returns
may be less or more than those shown. Investment return, net asset
value, and market price will fluctuate and you may have a gain or a loss
when you sell your shares.
------------------------------------------------------------
TOTAL RETURN FOR PERIODS ENDED 2/28/05
------------------------------------------------------------
NAV Market price
------------------------------------------------------------
6 months 8.86% 6.94%
------------------------------------------------------------
1 year 10.40 6.71
------------------------------------------------------------
5 years 60.32 76.85
Annual average 9.90 12.08
------------------------------------------------------------
10 years 155.64 110.85
Annual average 9.84 7.75
------------------------------------------------------------
Annual average
Life of fund (since 7/9/87) 10.35 9.25
------------------------------------------------------------
Performance assumes reinvestment of distributions and does
not account for taxes.
------------------------------------------------------------
PRICE AND DISTRIBUTION INFORMATION 6 MONTHS ENDED 2/28/05
------------------------------------------------------------
Distributions (number) 6
------------------------------------------------------------
Income $0.279
------------------------------------------------------------
Capital gains --
------------------------------------------------------------
Total $0.279
------------------------------------------------------------
Share value: NAV Market price
------------------------------------------------------------
8/31/04 $8.37 $7.62
------------------------------------------------------------
2/28/05 8.80 7.87
------------------------------------------------------------
Current return (end of period)
------------------------------------------------------------
Current dividend rate 1 6.34% 7.09%
------------------------------------------------------------
1 Most recent distribution, excluding capital gains,
annualized and divided by NAV or market price at end
of period.
-----------------------------------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 2/28/05
-----------------------------------------------------------------------------------------------------
Lipper
Merrill Lynch JP Morgan Convertible
All-Convertibles Global Merrill Lynch Securities Funds
Ex-Mandatory High Yield All-Convertibles (closed-end)
Index Index Index* category average++
-----------------------------------------------------------------------------------------------------
6 months 4.80% 7.37% 5.85% 9.03%
-----------------------------------------------------------------------------------------------------
1 year 1.98 10.95 3.00 7.04
-----------------------------------------------------------------------------------------------------
5 years -2.31 46.25 -1.35 10.40
Annual average -0.47 7.90 -0.27 1.54
-----------------------------------------------------------------------------------------------------
10 years 172.45 120.98 170.48 125.38
Annual average 10.54 8.25 10.46 8.39
-----------------------------------------------------------------------------------------------------
Annual average
-----------------------------------------------------------------------------------------------------
Life of fund
(since 7/9/87) --[SECTION MARK] --+ --* 9.17
-----------------------------------------------------------------------------------------------------
Index and Lipper results should be compared to fund performance at net
asset value. Lipper calculations for reinvested dividends may differ
from actual performance.
* Putnam Management has recently undertaken a review of the fund's
benchmarks. The Merrill Lynch All-Convertibles Index replaces the
Merrill Lynch All-Convertibles Ex-Mandatory Index as the primary
performance benchmark for this fund because, in Putnam Management's
opinion, the securities tracked by this index more accurately reflect
the types of securities that will be held by the fund. Index began
operations on 12/31/87.
+ Index began operations on 12/31/93.
++ Over the 6-month and 1-, 5-, and 10-year periods ended 2/28/05, there
were 12, 12, 7, and 7 funds, respectively, in this Lipper category.
[SECTION MARK] Index began operations on 12/31/87.
----------------------------------------------------------------------
TOTAL RETURN FOR PERIODS ENDED 3/31/05 (MOST RECENT CALENDER QUARTER)
----------------------------------------------------------------------
NAV Market price
----------------------------------------------------------------------
6 months 4.80% -0.70%
----------------------------------------------------------------------
1 year 7.44 1.31
----------------------------------------------------------------------
5 years 59.72 62.15
Annual average 9.82 10.15
----------------------------------------------------------------------
10 years 144.65 104.31
Annual average 9.36 7.41
----------------------------------------------------------------------
Annual average
Life of fund (since 7/9/87) 10.15 8.89
----------------------------------------------------------------------
Terms and definitions
Total return shows how the value of the fund's shares changed over time,
assuming you held the shares through the entire period and reinvested all
distributions in the fund.
Net asset value (NAV) is the value of all your fund's assets, minus any
liabilities, divided by the number of outstanding shares.
Market price is the current trading price of one share of the fund. Market
prices are set by transactions between buyers and sellers on exchanges such
as the American Stock Exchange and the New York Stock Exchange.
Comparative indexes
JP Morgan Global High Yield Index is an unmanaged index of global high-yield
fixed-income securities.
Lehman Aggregate Bond Index is an unmanaged index of U.S. investment-grade
fixed-income securities.
Lehman Global Aggregate Bond Index is an unmanaged index of global
investment-grade fixed-income securities.
Merrill Lynch All-Convertibles Index is an unmanaged index of U.S.
convertible securities.
Merrill Lynch All-Convertibles Ex-Mandatory Index is an unmanaged index of
U.S. convertible securities, excluding those with mandatory conversion
provisions.
Morgan Stanley Capital International (MSCI) EAFE Index is an unmanaged index
of equity securities from developed countries in Western Europe, the Far
East, and Australasia.
Russell 2000 Index is an unmanaged index of the 2,000 smallest companies in
the Russell 3000 Index.
S&P 500 Index is an unmanaged index of common stock performance.
Indexes assume reinvestment of all distributions and do not account for
fees. Securities and performance of a fund and an index will differ. You
cannot invest directly in an index.
Lipper is a third-party industry ranking entity that ranks funds (without
sales charges) with similar current investment styles or objectives as
determined by Lipper. Lipper category averages reflect performance trends
for funds within a category and are based on results at net asset value.
Trustee approval of management contract
General conclusions
The Board of Trustees of the Putnam funds oversees the management of each
fund and, as required by law, determines annually whether to approve the
continuance of each fund's management contract with Putnam Management. In
this regard the Board of Trustees, with the assistance of its Contract
Committee consisting solely of Independent Trustees, requests and evaluates
all information it deems reasonably necessary in the circumstances. Over the
course of several months beginning in March and ending in June of 2004, the
Contract Committee reviewed the information provided by Putnam Management
and other information developed with the assistance of the Board's
independent counsel and independent staff. The Contract Committee reviewed
and discussed key aspects of this information with all of the Independent
Trustees. Upon completion of this review, the Contract Committee recommended
and the Independent Trustees approved the continuance of your fund's
contract, effective July 1, 2004.
This approval was based on the following conclusions:
* That the fee schedule currently in effect for your fund represents
reasonable compensation in light of the nature and quality of the
services being provided to the fund, the fees paid by competitive funds
and the costs incurred by Putnam Management in providing such service,
and
* That such fee schedule represents an appropriate sharing between fund
shareholders and Putnam Management of such economies of scale as may
exist in the management of the fund at current asset levels.
These conclusions were based on a comprehensive consideration of all
information provided to the Trustees and were not the result of any
single factor. Some of the factors that figured particularly in the
Trustees' deliberations are described below.
Model fee schedules and categories; total expenses
The Trustees, working in cooperation with Putnam Management, have developed
and implemented a series of model fee schedules for the Putnam funds
designed to ensure that each fund's management fee is consistent with the
fees for similar funds in the Putnam complex and compares favorably with
fees paid by competitive funds sponsored by other advisors. The Trustees
reviewed the model fee schedule currently in effect for the fund, including
fee levels and breakpoints, and the assignment of the fund to a particular
fee category under this structure. The Trustees also reviewed comparative
fee and expense information for competitive funds. The Trustees concluded
that no changes should be made in the fund's current fee schedule at this
time. The Trustees noted that expense ratios for a number of Putnam funds
had been increasing recently as a result of declining net assets and the
natural operation of fee breakpoints. They noted that such expense ratio
increases were currently being controlled by expense limitations implemented
in January 2004. They also noted that the competitive landscape regarding
mutual fund fees may be changing as a result of fee reductions accepted by
various other fund groups in connection with recent regulatory settlements
and greater focus on fees and expenses in the mutual fund industry
generally. The Trustees indicated an intention to monitor these developments
closely.
Economies of scale
As noted above, the Trustees concluded that the fee schedule currently
in effect for your fund represents an appropriate sharing of economies
of scale at current asset levels. The Trustees indicated their intention
to continue their ongoing consideration of economies of scale and in
particular to consider further the possible operation of such economies
in the event that a significant recovery in the equity markets or net
fund sales were to raise asset levels substantially above current
levels. In this regard, the Trustees noted that they had reviewed data
relating to the substantial increase in asset levels of the Putnam funds
that occurred during the years leading up to the market peak in 2000,
the subsequent decline in assets and the resulting impact on revenues
and expenses of Putnam Management. The Trustees also noted that recent
declines in net assets in many Putnam funds, together with significant
changes in the cost structure of Putnam Management have altered the
economics of Putnam Management's business in significant ways. The
Trustees concluded that they would monitor these changes carefully and
evaluate the resulting impact on Putnam Management's economics and the
sharing of economies of scale between the parties.
Investment performance
The quality of the investment process provided by Putnam Management
represented a major factor in the Trustees' evaluation of the quality of
services provided by Putnam Management under the Management Contracts.
The Trustees recognized that a high quality investment process -- as
measured by the experience and skills of the individuals assigned to the
management of fund portfolios, the resources made available to such
personnel, and in general the ability of Putnam Management to attract
and retain high-quality personnel -- does not guarantee favorable
investment results for every fund in every time period. The Trustees
considered the investment performance of each fund over multiple time
periods and considered information comparing the fund's performance with
various benchmarks and with the performance of competitive funds. The
Trustees noted the satisfactory investment performance of many Putnam
funds.
They also noted the disappointing investment performance of certain
funds in recent years and continued to discuss with senior management of
Putnam Management the factors contributing to such under-performance and
actions being taken to improve performance. The Trustees recognized
that, in recent years, Putnam Management has made significant changes in
its investment personnel and processes and in the fund product line in
an effort to address areas of underperformance. The Trustees indicated
their intention to continue to monitor performance trends to assess the
effectiveness of these changes and to evaluate whether additional
remedial changes are warranted. As a general matter, the Trustees
concluded that consultation between the Trustees and Putnam Management
represents the most effective way to address investment performance
problems. The Trustees believe that investors in the Putnam funds and
their financial advisors have, as a general matter, effectively placed
their trust in the Putnam organization, under the supervision of the
funds' Trustees, to make appropriate decisions regarding the management
of the funds. The Trustees believe that the termination of the
Management Contract and engagement of a new investment adviser for
under-performing funds, with all the attendant disruptions, would not
serve the interests of fund shareholders at this time and would not
necessarily provide any greater assurance of improved investment
performance.
Brokerage and soft-dollar allocations; other benefits
The Trustees considered various potential benefits that Putnam
Management may receive in connection with the services it provides under
the Management Contract with your fund. These include principally
benefits related to brokerage and soft-dollar allocations, which pertain
mainly to funds investing in equity securities. The Trustees believe
that soft-dollar credits and other potential benefits associated with
the allocation of fund brokerage represent assets of the funds that
should be used for the benefit of fund shareholders. The Trustees noted
recent trends in the allocation of fund brokerage, including commission
costs, the allocation of brokerage to firms that provide research
services to Putnam Management, and the sources and application of
available soft-dollar credits. Effective December 31, 2003, reflecting a
decision made by the Trustees earlier that year, Putnam Management
ceased allocating brokerage in connection with the sale of fund shares.
In addition, in preparing its budget for commission allocations in 2004,
Putnam Management voluntarily reduced substantially the allocation of
brokerage commissions to acquire research services from third-party
service providers. In light of evolving best practices in the mutual
fund industry, the Trustees concluded that this practice should be
further curtailed and possibly eliminated in the near future. The
Trustees indicated that they would continue to monitor the allocation of
the funds' brokerage to ensure that the principle of "best price and
execution" remains paramount in the portfolio trading process.
Comparison of retail and institutional fee schedules
The information examined by the Trustees as part of the annual contract
reviews included information regarding fees charged by Putnam Management and
its affiliates to institutional clients such as defined benefit pension
plans and college endowments. This information included comparison of such
fees with fees charged to the Putnam funds, as well as a detailed assessment
of the differences in the services provided to these two types of clients.
The Trustees devoted special attention to these issues and reviewed recent
articles by critics of mutual fund fees, articles by the ICI defending such
fee differences, and relevant guidance provided by decisions of the courts.
The Trustees observed, in this regard, that the differences in fee rates
between institutional clients and mutual funds are by no means uniform when
examined by individual asset sectors, suggesting that differences in the
pricing of investment management services to these types of clients reflects
to a substantial degree historical competitive forces operating in separate
market places. In reaching their conclusions, the Trustees considered the
fact that fee rates across all asset sectors are higher on average for
mutual funds than for institutional clients, and also considered the
differences between the services that Putnam provides to the Putnam funds
and those that it provides to institutional clients of the firm.
Settlement of regulatory charges related to market timing
Finally, in reaching their conclusions, the Trustees considered all
matters pertinent to the administrative charges filed against Putnam
Management by the SEC and the Commonwealth of Massachusetts in October
2003 relating to market timing, the firm's settlement of those charges,
and the conclusions and recommendations of the Trustees' Audit and
Pricing Committee based on its review of these matters. The Trustees
considered the actions taken by the owner of Putnam Management and its
new senior management to terminate or discipline the individuals
involved, to implement new compliance systems, to indemnify the funds
against all costs and liabilities related to these matters, and
otherwise to ensure that the interests of the funds and their
shareholders are fully protected. The Trustees noted that, in addition
to the settlements of the regulatory charges which will provide
comprehensive restitution for any losses suffered by shareholders, the
new senior management of Putnam Management has moved aggressively to
control expense ratios of funds affected by market timing, to reduce
charges to new investors, to improve disclosure of fees and expenses,
and to emphasize the paramount role of investment performance in
achieving shareholders' investment goals.
Other information for shareholders
A note about duplicate mailings
In response to investors' requests, the SEC has modified mailing
regulations for proxy statements, semiannual and annual reports, and
prospectuses. Putnam is now able to send a single copy of these
materials to customers who share the same address. This change will
automatically apply to all shareholders except those who notify us. If
you would prefer to receive your own copy, please call Putnam at
1-800-225-1581.
Proxy voting
Putnam is committed to managing our mutual funds in the best interests
of our shareholders. The Putnam funds' proxy voting guidelines and
procedures, as well as information regarding how your fund voted proxies
relating to portfolio securities during the 12-month period ended June
30, 2004, are available on the Putnam Individual Investor Web site,
www.putnaminvestments.com/individual, and on the SEC's Web site,
www.sec.gov. If you have questions about finding forms on the SEC's Web
site, you may call the SEC at 1-800-SEC-0330. You may also obtain the
Putnam funds' proxy voting guidelines and procedures at no charge by
calling Putnam's Shareholder Services at 1-800-225-1581.
Fund portfolio holdings
For periods ending on or after July 9, 2004, the fund will file a
complete schedule of its portfolio holdings with the SEC for the first
and third quarters of each fiscal year on Form N-Q. Shareholders may
obtain the fund's Forms N-Q on the SEC's Web site at www.sec.gov. In
addition, the fund's Forms N-Q may be reviewed and copied at the SEC's
public reference room in Washington, D.C. You may call the SEC at
1-800-SEC-0330 for information about the SEC's Web site or the operation
of the public reference room.
A guide to the financial statements
These sections of the report, as well as the accompanying Notes,
constitute the fund's financial statements.
The fund's portfolio lists all the fund's investments and their values
as of the last day of the reporting period. Holdings are organized by
asset type and industry sector, country, or state to show areas of
concentration and diversification.
Statement of assets and liabilities shows how the fund's net assets and
share price are determined. All investment and noninvestment assets are
added together. Any unpaid expenses and other liabilities are subtracted
from this total. The result is divided by the number of shares to
determine the net asset value per share, which is calculated separately
for each class of shares. (For funds with preferred shares, the amount
subtracted from total assets includes the net assets allocated to
remarketed preferred shares.)
Statement of operations shows the fund's net investment gain or loss.
This is done by first adding up all the fund's earnings -- from
dividends and interest income -- and subtracting its operating expenses
to determine net investment income (or loss). Then, any net gain or loss
the fund realized on the sales of its holdings -- as well as any
unrealized gains or losses over the period -- is added to or subtracted
from the net investment result to determine the fund's net gain or loss
for the fiscal period.
Statement of changes in net assets shows how the fund's net assets were
affected by the fund's net investment gain or loss, by distributions to
shareholders, and by changes in the number of the fund's shares. It
lists distributions and their sources (net investment income or realized
capital gains) over the current reporting period and the most recent
fiscal year-end. The distributions listed here may not match the sources
listed in the Statement of operations because the distributions are
determined on a tax basis and may be paid in a different period from the
one in which they were earned.
Financial highlights provide an overview of the fund's investment
results, per-share distributions, expense ratios, net investment
income ratios, and portfolio turnover in one summary table, reflecting
the five most recent reporting periods. In a semiannual report, the
highlight table also includes the current reporting period. For open-end
funds, a separate table is provided for each share class.
The fund's portfolio
February 28, 2005 (Unaudited)
Corporate bonds and notes (42.4%) (a)
Principal amount Value
Basic Materials (4.4%)
-------------------------------------------------------------------------------
$2,000 Abitibi-Consolidated Finance LP
company guaranty 7 7/8s, 2009 $2,090
160,000 Acetex Corp. sr. notes 10 7/8s, 2009
(Canada) 172,800
20,000 AK Steel Corp. company guaranty
7 3/4s, 2012 21,200
220,000 Almatis Investment Holdings,
S.a.r.l. bonds 11s, 2013
(Luxembourg) (PIK) 224,400
260,000 BCP Caylux Holdings Luxembourg SCA
144A sr. sub. notes 9 5/8s, 2014
(Luxembourg) 300,300
80,000 Century Aluminum Co. 144A company
guaranty 7 1/2s, 2014 86,000
EUR 70,000 Cognis Holding GmbH & Co. 144A sr.
notes 9 1/2s, 2014 (Germany) 105,678
$235,000 Compass Minerals Group, Inc. company
guaranty 10s, 2011 263,788
65,000 Compass Minerals International, Inc.
sr. disc. notes
stepped-coupon Ser. B, zero % (12s,
6/1/08), 2013 (STP) 54,600
180,000 Compass Minerals International, Inc.
sr. notes stepped-coupon zero %
(12 3/4s, 12/15/07), 2012 (STP) 158,400
155,000 Crystal US Holdings, LLC/US Sub 3
Corp. 144A sr. disc. notes
stepped-coupon zero % (10s,
10/1/09), 2014 (STP) 115,088
148,000 Equistar Chemicals LP notes 8 3/4s,
2009 165,390
352,000 Equistar Chemicals LP/Equistar
Funding Corp. company guaranty
10 1/8s, 2008 405,680
95,000 Georgia-Pacific Corp. bonds 7 3/4s,
2029 111,863
165,000 Georgia-Pacific Corp. company
guaranty 9 3/8s, 2013 190,781
272,000 Georgia-Pacific Corp. debs. 7.7s,
2015 316,200
240,000 Gerdau Ameristeel Corp. sr. notes
10 3/8s, 2011 (Canada) 276,000
309,000 Hercules, Inc. company guaranty
11 1/8s, 2007 363,075
180,000 Hercules, Inc. company guaranty
6 3/4s, 2029 185,400
50,000 Huntsman Advanced Materials, LLC
144A sec. FRN 10.89s, 2008 53,500
65,000 Huntsman Advanced Materials, LLC
144A sec. notes 11s, 2010 76,538
37,000 Huntsman ICI Holdings sr. disc.
notes zero %, 2009 21,090
97,000 Huntsman, LLC company guaranty
11 5/8s, 2010 117,128
80,000 Huntsman, LLC 144A company guaranty
11 1/2s, 2012 95,200
425,000 Innophos, Inc. 144A sr. sub. notes
8 7/8s, 2014 456,875
85,000 International Steel Group, Inc. sr.
notes 6 1/2s, 2014 90,950
3,000 ISP Holdings, Inc. sec. sr. notes
Ser. B, 10 5/8s, 2009 3,270
150,000 Jefferson Smurfit Corp. company
guaranty 7 1/2s, 2013 158,063
EUR 150,000 JSG Holding PLC sr. notes 11 1/2s,
2015 (Ireland) (PIK) 198,085
$20,000 Lyondell Chemical Co. bonds 11 1/8s,
2012 23,600
270,000 Lyondell Chemical Co. company
guaranty 10 1/2s, 2013 319,275
108,000 Lyondell Chemical Co. notes Ser. A,
9 5/8s, 2007 118,260
275,000 MDP Acquisitions PLC sr. notes
9 5/8s, 2012 (Ireland) 304,563
EUR 15,000 Nalco Co. sr. notes 7 3/4s, 2011 21,988
EUR 190,000 Nalco Co. sr. sub. notes 9s, 2013 286,085
$285,000 Nalco Co. sr. sub. notes 8 7/8s,
2013 314,925
265,000 Norske Skog Canada, Ltd. sr. notes
7 3/8s, 2014 (Canada) 278,250
260,000 Novels, Inc. 144A sr. notes 7 1/4s,
2015 (Canada) 269,100
148,822 PCI Chemicals Canada sec. sr. notes
10s, 2008 (Canada) 159,240
24,074 Pioneer Companies, Inc. sec. sr.
notes FRN 6.05s, 2006 25,398
75,000 PQ Corp. 144A company guaranty
7 1/2s, 2013 77,719
EUR 310,000 Rockwood Specialties Group, Inc.
company guaranty 7 5/8s, 2014 432,004
EUR 105,000 SGL Carbon SA 144A sr. notes 8 1/2s,
2012 (Luxembourg) 156,218
$180,000 Steel Dynamics, Inc. company
guaranty 9 1/2s, 2009 196,425
17,046 Sterling Chemicals, Inc. sec. notes
10s, 2007 (PIK) 17,046
170,000 Stone Container Corp. sr. notes
9 3/4s, 2011 185,300
95,000 Stone Container Corp. sr. notes
8 3/8s, 2012 102,838
40,000 Stone Container Finance company
guaranty 7 3/8s, 2014 (Canada) 42,050
3,000 Tembec Industries, Inc. company
guaranty 8 5/8s, 2009 (Canada) 3,008
120,000 Ucar Finance, Inc. company guaranty
10 1/4s, 2012 133,500
57,000 United Agri Products 144A sr. notes
8 3/4s, 2011 62,130
279,000 United States Steel Corp. sr. notes
9 3/4s, 2010 318,060
12,000 Wheeling-Pittsburgh Steel Corp. sr.
notes 6s, 2010 (PIK) 10,200
23,330 Wheeling-Pittsburgh Steel Corp. sr.
notes 5s, 2011 (PIK) 19,831
40,000 WHX Corp. sr. notes 10 1/2s, 2005 37,600
--------------
8,704,045
Capital Goods (4.0%)
-------------------------------------------------------------------------------
153,000 AEP Industries, Inc. sr. sub. notes
9 7/8s, 2007 156,251
EUR 350,000 Aero Invest 1 SA 144A company
guaranty FRN 10.635s, 2015
(Luxembourg) 461,617
$310,000 AGCO Corp. company guaranty 9 1/2s,
2008 327,050
293,000 Allied Waste North America, Inc.
company guaranty Ser. B, 8 1/2s,
2008 314,975
180,000 Amsted Industries, Inc. 144A sr.
notes 10 1/4s, 2011 203,400
415,000 Argo-Tech Corp. sr. notes 9 1/4s,
2011 456,500
50,000 BE Aerospace, Inc. sr. notes 8 1/2s,
2010 55,750
6,000 BE Aerospace, Inc. sr. sub. notes
Ser. B, 8 7/8s, 2011 6,315
455,000 BE Aerospace, Inc. sr. sub. notes
Ser. B, 8s, 2008 456,138
160,000 Blount, Inc. sr. sub. notes 8 7/8s,
2012 174,800
65,000 Browning-Ferris Industries, Inc.
debs. 7.4s, 2035 57,688
140,000 Browning-Ferris Industries, Inc. sr.
notes 6 3/8s, 2008 138,950
340,000 Crown Euro Holdings SA sec. notes
10 7/8s, 2013 (France) 403,750
EUR 15,000 Crown Euro Holdings SA sec. notes
10 1/4s, 2011 (France) 22,894
$115,000 Crown Euro Holdings SA sec. notes
9 1/2s, 2011 (France) 129,375
238,000 Decrane Aircraft Holdings Co.
company guaranty zero %, 2008 90,440
199,000 Earle M. Jorgensen Co. sec. notes
9 3/4s, 2012 222,880
EUR 80,000 Flender Holdings 144A sr. notes 11s,
2010 (Germany) 128,898
$129,000 Flowserve Corp. company guaranty
12 1/4s, 2010 141,900
75,000 Hexcel Corp. sr. sub. notes 9 3/4s,
2009 78,000
170,000 Invensys, PLC notes 9 7/8s, 2011
(United Kingdom) 183,600
100,000 L-3 Communications Corp. company
guaranty 7 5/8s, 2012 109,250
80,000 L-3 Communications Corp. company
guaranty 6 1/8s, 2013 82,600
405,000 Legrand SA debs. 8 1/2s, 2025
(France) 502,200
124,000 Manitowoc Co., Inc. (The) company
guaranty 10 1/2s, 2012 142,910
EUR 45,000 Manitowoc Co., Inc. (The) company
guaranty 10 3/8s, 2011 67,010
$50,000 Manitowoc Co., Inc. (The) sr. notes
7 1/8s, 2013 54,125
315,000 Milacron Escrow Corp. sec. notes
11 1/2s, 2011 346,500
50,000 Mueller Group, Inc. sec. FRN 7.493s,
2011 51,375
335,000 Mueller Group, Inc. sr. sub. notes
10s, 2012 368,500
5,000 Owens-Brockway Glass company
guaranty 8 7/8s, 2009 5,413
240,000 Owens-Brockway Glass company
guaranty 8 1/4s, 2013 264,000
100,000 Owens-Brockway Glass company
guaranty 7 3/4s, 2011 108,000
217,000 Owens-Brockway Glass sr. sec. notes
8 3/4s, 2012 242,498
15,000 Owens-Illinois, Inc. debs. 7.8s,
2018 16,088
205,000 Polypore, Inc. sr. sub. notes
8 3/4s, 2012 205,000
285,000 Sequa Corp. sr. notes Ser. B,
8 7/8s, 2008 310,650
205,000 Siebe PLC 144A sr. unsub. 6 1/2s,
2010 (United Kingdom) 197,313
125,000 Solo Cup Co. sr. sub. notes 8 1/2s,
2014 130,000
40,000 Terex Corp. company guaranty 9 1/4s,
2011 44,600
82,000 Terex Corp. company guaranty Ser. B,
10 3/8s, 2011 91,225
430,000 Titan Corp. (The) company guaranty
8s, 2011 462,250
--------------
8,012,678
Communication Services (3.4%)
-------------------------------------------------------------------------------
54,000 Alamosa Delaware, Inc. company
guaranty 11s, 2010 62,910
49,000 Alamosa Delaware, Inc. company
guaranty stepped-coupon zero %
(12s, 7/31/05), 2009 (STP) 53,410
90,000 Alamosa Delaware, Inc. sr. notes
8 1/2s, 2012 97,650
45,000 American Cellular Corp. company
guaranty 9 1/2s, 2009 43,875
71,000 American Tower Corp. sr. notes
9 3/8s, 2009 74,550
90,000 American Tower Corp. sr. notes
7 1/2s, 2012 94,725
165,000 American Towers, Inc. company
guaranty 7 1/4s, 2011 175,725
28,862 Asia Global Crossing, Ltd. sr. notes
13 3/8s, 2010 (Bermuda) (In default)
(NON) 1,443
215,000 Centennial Cellular Operating Co.
company guaranty 10 1/8s, 2013 249,400
35,000 Cincinnati Bell Telephone Co.
company guaranty 6.3s, 2028 32,550
180,000 Cincinnati Bell, Inc. sr. sub. notes
8 3/8s, 2014 186,075
80,000 Cincinnati Bell, Inc. sr. sub. notes
7 1/4s, 2023 80,200
240,000 Citizens Communications Co. notes
9 1/4s, 2011 276,600
205,000 Citizens Communications Co. sr.
notes 6 1/4s, 2013 203,463
272,000 Crown Castle International Corp. sr.
notes 9 3/8s, 2011 301,920
60,000 Eircom Funding company guaranty
Ser. US$, 8 1/4s, 2013 (Ireland) 67,050
22,872 Globix Corp. company guaranty 11s,
2008 (PIK) 21,728
230,000 Inmarsat Finance PLC company
guaranty 7 5/8s, 2012 (United
Kingdom) 240,925
230,000 Inmarsat Finance PLC company
guaranty stepped-coupon zero %
(10 3/8s, 10/15/08), 2012 (United
Kingdom) (STP) 173,938
70,000 iPCS, Inc. sr. notes 11 1/2s, 2012 81,200
25,000 IWO Escrow Co. 144A sec. FRN 5.77s,
2012 25,875
25,000 IWO Escrow Co. 144A sr. disc. notes
stepped-coupon zero % (10 3/4s,
1/15/10), 2015 (STP) 16,375
180,000 Level 3 Financing, Inc. 144A sr.
notes 10 3/4s, 2011 162,000
160,000 Madison River Capital Corp. sr.
notes 13 1/4s, 2010 171,200
270,000 MCI, Inc. sr. notes 8.735s, 2014 303,413
220,000 MCI, Inc. sr. notes 7.688s, 2009 231,825
22,000 Nextel Communications, Inc. sr.
notes 6 7/8s, 2013 23,760
625,000 Nextel Communications, Inc. sr.
notes 5.95s, 2014 649,219
68,000 Nextel Partners, Inc. sr. notes
12 1/2s, 2009 76,075
290,000 Nextel Partners, Inc. sr. notes
8 1/8s, 2011 320,450
540,000 Qwest Communications International,
Inc. 144A sr. notes 7 3/4s, 2014 556,200
615,000 Qwest Corp. 144A notes 9 1/8s, 2012 711,863
85,000 Qwest Services Corp. 144A notes
14 1/2s, 2014 106,675
150,000 Qwest Services Corp. 144A notes 14s,
2010 178,125
30,000 Rogers Cantel, Inc. debs. 9 3/4s,
2016 (Canada) 37,050
110,000 Rogers Wireless Communications, Inc.
sec. notes 9 5/8s, 2011 (Canada) 130,900
55,000 Rural Cellular Corp. sr. notes
9 7/8s, 2010 58,025
235,000 Rural Cellular Corp. sr. sub. notes
9 3/4s, 2010 224,425
75,000 SBA Communications Corp. 144A sr.
notes 8 1/2s, 2012 81,000
75,000 SBA Telecommunications Inc./SBA
Communications Corp. sr. disc. notes
stepped-coupon zero % (9 3/4s,
12/15/07), 2011 (STP) 65,625
29,000 TSI Telecommunication Services, Inc.
company guaranty Ser. B, 12 3/4s,
2009 32,698
75,000 Valor Telecommunications Enterprises
LLC/Finance Corp. 144A sr. notes
7 3/4s, 2015 77,813
--------------
6,759,928
Consumer Cyclicals (9.8%)
-------------------------------------------------------------------------------
400,000 Advertising Direct 144A sr. notes
9 1/4s, 2012 (Canada) 422,500
100,000 Ameristar Casinos, Inc. company
guaranty 10 3/4s, 2009 111,125
65,000 ArvinMeritor, Inc. notes 8 3/4s,
2012 73,450
105,000 Asbury Automotive Group, Inc. sr.
sub. notes 8s, 2014 108,413
260,000 Autonation, Inc. company guaranty
9s, 2008 293,800
75,000 Bear Creek Corp. 144A sr. notes 9s,
2013 76,688
95,000 Beazer Homes USA, Inc. company
guaranty 8 5/8s, 2011 103,313
35,000 Beazer Homes USA, Inc. company
guaranty 8 3/8s, 2012 38,456
30,000 Boyd Gaming Corp. sr. sub. notes
8 3/4s, 2012 33,225
25,000 Boyd Gaming Corp. sr. sub. notes
7 3/4s, 2012 27,031
290,000 Boyd Gaming Corp. sr. sub. notes
6 3/4s, 2014 302,688
70,000 Building Materials Corp. company
guaranty 8s, 2008 72,363
90,000 CanWest Media, Inc. sr. sub. notes
10 5/8s, 2011 (Canada) 99,900
356,394 CanWest Media, Inc. 144A sr. sub.
notes 8s, 2012 (Canada) 383,124
85,000 Chumash Casino & Resort Enterprise
144A sr. notes 9s, 2010 93,075
30,000 D.R. Horton, Inc. company guaranty
8s, 2009 33,223
50,000 D.R. Horton, Inc. sr. notes 7 7/8s,
2011 57,375
35,000 D.R. Horton, Inc. sr. notes 6 7/8s,
2013 38,325
215,000 D.R. Horton, Inc. sr. notes 5 7/8s,
2013 220,036
35,000 Dana Corp. notes 10 1/8s, 2010 38,068
251,000 Dana Corp. notes 9s, 2011 302,587
25,000 Dana Corp. notes 7s, 2029 24,358
125,000 Dayton Superior Corp. sec. notes
10 3/4s, 2008 134,375
44,000 Delco Remy International, Inc.
company guaranty 11s, 2009 46,420
270,000 Delco Remy International, Inc. sr.
sub. notes 9 3/8s, 2012 259,875
245,000 Dex Media West, LLC/Dex Media
Finance Co. sr. notes Ser. B,
8 1/2s,2010 268,275
115,000 Dex Media, Inc. disc. notes zero %,
2013 90,563
455,000 Dex Media, Inc. notes 8s, 2013 493,675
40,000 Dura Operating Corp. company
guaranty Ser. B, 8 5/8s, 2012 40,000
100,000 FelCor Lodging LP company guaranty
9s, 2008 (R) 113,125
160,000 Gaylord Entertainment Co. sr. notes
8s, 2013 173,400
60,000 Goodyear Tire & Rubber Co. (The)
notes 8 1/2s, 2007 63,600
435,000 Goodyear Tire & Rubber Co. (The)
notes 7.857s, 2011 453,488
45,000 Goodyear Tire & Rubber Co. (The)
notes 6 3/8s, 2008 45,450
180,000 Hasbro, Inc. notes 5.6s, 2005 181,800
78,000 HMH Properties, Inc. company
guaranty Ser. B, 7 7/8s, 2008 (R) 80,145
60,000 Host Marriott LP company guaranty
Ser. G, 9 1/4s, 2007 (R) 66,000
128,000 Host Marriott LP sr. notes Ser. E,
8 3/8s, 2006 (R) 132,480
215,000 Host Marriott LP 144A sr. notes 7s,
2012 (R) 225,750
405,000 Houghton Mifflin Co. sr. sub. notes
9 7/8s, 2013 428,288
155,000 Icon Health & Fitness company
guaranty 11 1/4s, 2012 120,900
150,000 JC Penney Co., Inc. debs. 7.95s,
2017 179,036
220,000 JC Penney Co., Inc. debs. 7 1/8s,
2023 245,263
130,000 JC Penney Co., Inc. notes 9s, 2012 159,575
10,000 JC Penney Co., Inc. notes 8s, 2010 11,328
120,000 Jostens Holding Corp. sr. disc.
notes stepped-coupon zero %
(10 1/4s, 12/1/08), 2013 (STP) 86,400
325,000 Jostens IH Corp. 144A company
guaranty 7 5/8s, 2012 335,563
130,000 K. Hovnanian Enterprises, Inc.
company guaranty 8 7/8s, 2012 144,300
90,000 K. Hovnanian Enterprises, Inc.
company guaranty 6 3/8s, 2014 93,150
60,000 K. Hovnanian Enterprises, Inc. sr.
notes 6 1/2s, 2014 63,000
50,000 K2, Inc. sr. notes 7 3/8s, 2014 54,125
360,000 KB Home sr. notes 5 3/4s, 2014 365,392
2,000 KB Home sr. sub. notes 9 1/2s, 2011 2,179
320,000 Laidlaw International, Inc. sr.
notes 10 3/4s, 2011 366,800
130,000 Lamar Media Corp. company guaranty
7 1/4s, 2013 139,100
51,000 Lear Corp. company guaranty Ser. B,
8.11s, 2009 57,141
359,000 Levi Strauss & Co. sr. notes
12 1/4s, 2012 411,055
175,000 Levi Strauss & Co. 144A sr. notes
9 3/4s, 2015 184,406
95,000 Mandalay Resort Group sr. notes
6 3/8s, 2011 99,275
225,000 MediaNews Group, Inc. sr. sub. notes
6 7/8s, 2013 228,938
170,000 MeriStar Hospitality Corp. company
guaranty 9 1/8s, 2011 (R) 186,363
75,000 MeriStar Hospitality Corp. company
guaranty 9s, 2008 (R) 79,875
65,000 Meritage Homes Corp. company
guaranty 9 3/4s, 2011 72,639
75,000 Meritage Homes Corp. 144A sr. notes
6 1/4s, 2015 75,281
145,000 Meritor Automotive, Inc. notes 6.8s,
2009 148,988
125,000 Metaldyne Corp. 144A sr. notes 10s,
2013 123,125
160,000 MGM Mirage, Inc. company guaranty
8 1/2s, 2010 182,800
2,000 MGM Mirage, Inc. company guaranty
8 3/8s, 2011 2,240
55,000 Mirage Resorts, Inc. debs. 7 1/4s,
2017 57,750
140,000 Mohegan Tribal Gaming Authority sr.
sub. notes 6 3/8s, 2009 143,500
100,000 Oxford Industries, Inc. sr. notes
8 7/8s, 2011 107,000
30,000 Park Place Entertainment Corp. sr.
notes 7 1/2s, 2009 33,338
165,000 Park Place Entertainment Corp. sr.
notes 7s, 2013 183,563
278,000 Park Place Entertainment Corp. sr.
sub. notes 8 7/8s, 2008 314,488
200,000 Penn National Gaming, Inc. sr. sub.
notes 8 7/8s, 2010 217,250
65,000 Penn National Gaming, Inc. 144A sr.
sub. notes 6 3/4s, 2015 66,300
120,000 Pinnacle Entertainment, Inc. sr.
sub. notes 8 3/4s, 2013 132,000
170,000 Pinnacle Entertainment, Inc. sr.
sub. notes 8 1/4s, 2012 181,475
200,000 PRIMEDIA, Inc. company guaranty
7 5/8s, 2008 203,000
330,000 PRIMEDIA, Inc. sr. notes 8s, 2013 351,450
25,000 R.H. Donnelley, Inc. company
guaranty 8 7/8s, 2010 27,625
105,000 R.H. Donnelley Corp. 144A sr. notes
6 7/8s, 2013 107,888
223,000 R.H. Donnelley Finance Corp. I 144A
company guaranty 8 7/8s, 2010 246,415
129,000 R.H. Donnelley Finance Corp. I 144A
sr. sub. notes 10 7/8s, 2012 151,253
440,000 Reader's Digest Association, Inc.
(The) sr. notes 6 1/2s, 2011 461,450
158,000 Resorts International Hotel and
Casino, Inc. company guaranty
11 1/2s, 2009 186,440
134,000 Russell Corp. company guaranty
9 1/4s, 2010 144,385
286,000 Saks, Inc. company guaranty 7s, 2013 297,440
335,000 Samsonite Corp. sr. sub. notes
8 7/8s, 2011 360,963
104,000 Schuler Homes, Inc. company guaranty
10 1/2s, 2011 117,000
175,000 Scientific Games Corp. 144A sr. sub.
notes 6 1/4s, 2012 180,250
260,000 Sealy Mattress Co. sr. sub. notes
8 1/4s, 2014 272,350
15,000 Standard Pacific Corp. sr. notes
6 7/8s, 2011 15,938
285,000 Standard Pacific Corp. sr. notes
6 1/4s, 2014 289,988
95,000 Starwood Hotels & Resorts Worldwide,
Inc. company guaranty 7 7/8s, 2012 109,963
121,000 Starwood Hotels & Resorts Worldwide,
Inc. company guaranty 7 3/8s, 2007 128,563
120,000 Starwood Hotels & Resorts Worldwide,
Inc. debs. 7 3/8s, 2015 137,550
165,000 Starwood Hotels & Resorts Worldwide,
Inc. notes 6 3/4s, 2005 167,888
193,000 Station Casinos, Inc. sr. notes 6s,
2012 199,996
120,000 Station Casinos, Inc. sr. sub. notes
6 7/8s, 2016 126,450
75,000 Technical Olympic USA, Inc. company
guaranty 10 3/8s, 2012 84,000
105,000 Technical Olympic USA, Inc. company
guaranty 9s, 2010 113,663
290,000 Technical Olympic USA, Inc. 144A sr.
sub. notes 7 1/2s, 2015 287,100
390,000 Tenneco Automotive, Inc. sec. notes
Ser. B, 10 1/4s, 2013 458,250
130,000 Tenneco Automotive, Inc. 144A sr.
sub. notes 8 5/8s, 2014 138,450
460,000 THL Buildco, Inc. (Nortek Holdings,
Inc.) sr. sub. notes 8 1/2s, 2014 469,200
100,000 Tommy Hilfiger USA, Inc. company
guaranty 6.85s, 2008 101,000
230,000 Toys R Us, Inc. notes 7 5/8s, 2011 234,025
110,000 United Auto Group, Inc. company
guaranty 9 5/8s, 2012 122,100
326,000 Vertis, Inc. company guaranty
Ser. B, 10 7/8s, 2009 333,335
160,000 Vertis, Inc. 144A sub. notes
13 1/2s, 2009 158,400
37,000 WCI Communities, Inc. company
guaranty 10 5/8s, 2011 40,885
171,000 WCI Communities, Inc. company
guaranty 9 1/8s, 2012 190,665
99,000 William Carter Holdings Co. (The)
company guaranty Ser. B, 10 7/8s,
2011 110,633
130,000 WRC Media Corp. sr. sub. notes
12 3/4s, 2009 120,900
365,000 Wynn Las Vegas, LLC/Wynn Las Vegas
Capital Corp. 144A 1st mtge. 6 5/8s,
2014 364,088
--------------
19,515,672
Consumer Staples (7.0%)
-------------------------------------------------------------------------------
20,000 Adelphia Communications Corp. sr.
notes 10 7/8s, 2010 (In default)
(NON) 18,100
235,000 Adelphia Communications Corp. sr.
notes Ser. B, 9 7/8s, 2007 (In
default) (NON) 203,863
360,000 Affinity Group, Inc. sr. sub. notes
9s, 2012 388,800
35,000 AMC Entertainment, Inc. sr. sub.
notes 9 7/8s, 2012 38,238
394,000 AMC Entertainment, Inc. sr. sub.
notes 8s, 2014 397,940
285,000 Atlantic Broadband Finance, LLC 144A
sr. sub. notes 9 3/8s, 2014 279,300
224,000 Brand Services, Inc. company
guaranty 12s, 2012 252,560
250,000 Cablevision Systems Corp. 144A sr.
notes 8s, 2012 281,250
94,000 Charter Communications Holdings,
LLC/Capital Corp. sr. disc. notes
stepped-coupon zero % (11 3/4s,
5/15/06), 2011 (STP) 67,445
735,000 Charter Communications Holdings,
LLC/Capital Corp. sr. notes
11 1/8s, 2011 628,425
120,000 Charter Communications Holdings,
LLC/Capital Corp. sr. notes
10 3/4s, 2009 103,500
100,000 Charter Communications Holdings,
LLC/Capital Corp. sr. notes
10 1/4s, 2010 83,500
240,000 Charter Communications Holdings,
LLC/Capital Corp. sr. notes 10s,
2011 196,800
117,000 Charter Communications Holdings,
LLC/Capital Corp. sr. notes 9 5/8s,
2009 96,818
74,000 Charter Communications Holdings,
LLC/Capital Corp. sr. notes 8 5/8s,
2009 60,495
130,000 Church & Dwight Co., Inc. 144A sr.
sub. notes 6s, 2012 132,275
205,000 Cinemark USA, Inc. sr. sub. notes
9s, 2013 229,088
235,000 Cinemark, Inc. sr. disc. notes
stepped-coupon zero %
(9 3/4s, 3/15/07), 2014 (STP) 175,663
115,000 Constellation Brands, Inc. company
guaranty Ser. B, 8s, 2008 125,063
10,000 Constellation Brands, Inc. sr. sub.
notes Ser. B, 8 1/8s, 2012 10,900
100,000 CSC Holdings, Inc. debs. 7 5/8s,
2018 116,500
3,000 CSC Holdings, Inc. debs. Ser. B,
8 1/8s, 2009 3,338
105,000 CSC Holdings, Inc. sr. notes Ser. B,
7 5/8s, 2011 116,813
130,000 CSC Holdings, Inc. sr. sub. debs.
10 1/2s, 2016 145,600
205,000 CSC Holdings, Inc. 144A sr. notes
6 3/4s, 2012 220,375
440,000 Dean Foods Co. sr. notes 6 5/8s,
2009 459,800
130,000 Del Monte Corp. sr. sub. notes
8 5/8s, 2012 144,950
105,000 Del Monte Corp. 144A sr. sub. notes
6 3/4s, 2015 107,888
285,000 DirecTV Holdings, LLC sr. notes
8 3/8s, 2013 322,050
271,000 Diva Systems Corp. sr. disc. notes
Ser. B, 12 5/8s, 2008 (In default)
(NON) 1,186
265,000 Doane Pet Care Co. sr. sub. debs.
9 3/4s, 2007 255,725
106,000 Domino's, Inc. sr. sub. notes
8 1/4s, 2011 114,480
310,000 Echostar DBS Corp. sr. notes 6 3/8s,
2011 319,300
210,000 Echostar DBS Corp. 144A company
guaranty 6 5/8s, 2014 215,775
60,000 Elizabeth Arden, Inc. company
guaranty 7 3/4s, 2014 63,825
490,000 Granite Broadcasting Corp. sec.
notes 9 3/4s, 2010 469,175
87,000 Gray Television, Inc. company
guaranty 9 1/4s, 2011 95,700
210,000 Intelsat Bermuda, Ltd. 144A sr.
notes 8 5/8s, 2015 (Bermuda) 224,175
100,000 Intelsat Bermuda, Ltd. 144A sr.
notes 8 1/4s, 2013 (Bermuda) 104,750
100,000 Jean Coutu Group, Inc. sr. notes
7 5/8s, 2012 (Canada) 105,000
125,000 Jean Coutu Group, Inc. sr. sub.
notes 8 1/2s, 2014 (Canada) 128,125
405,000 Kabel Deutsheland GmbH 144A sr.
notes 10 5/8s, 2014 (Germany) 465,750
2,435 Knology, Inc. 144A sr. notes 12s,
2009 (PIK) 2,350
440,000 LCE Acquisition Corp. 144A company
guaranty 9s, 2014 460,900
175,000 Paxson Communications Corp. company
guaranty 10 3/4s, 2008 184,188
375,000 Pinnacle Foods Holding Corp. sr.
sub. notes 8 1/4s, 2013 341,250
258,000 Playtex Products, Inc. company
guaranty 9 3/8s, 2011 277,673
180,000 Playtex Products, Inc. sec. notes
8s, 2011 197,550
345,000 Prestige Brands, Inc. sr. sub. notes
9 1/4s, 2012 374,325
60,000 Quebecor Media, Inc. sr. disc. notes
stepped-coupon zero % (13 3/4s,
7/15/06), 2011 (Canada) (STP) 59,550
317,000 Quebecor Media, Inc. sr. notes
11 1/8s, 2011 (Canada) 360,191
205,000 Rainbow National Services, LLC 144A
sr. notes 8 3/4s, 2012 233,700
200,000 Rainbow National Services, LLC 144A
sr. sub. debs. 10 3/8s, 2014 238,000
275,000 Remington Arms Co., Inc. company
guaranty 10 1/2s, 2011 271,563
GBP 150,000 RHM Finance, Ltd. sinking fund 8.8s,
2017 (Cayman Islands) 340,091
$130,000 Rite Aid Corp. company guaranty
9 1/2s, 2011 141,050
215,000 Rite Aid Corp. debs. 6 7/8s, 2013 202,100
15,000 Rite Aid Corp. notes 7 1/8s, 2007 15,225
105,000 Rite Aid Corp. 144A sec. notes
7 1/2s, 2015 103,950
210,000 Sbarro, Inc. company guaranty 11s,
2009 211,050
55,000 Scotts Co. (The) sr. sub. notes
6 5/8s, 2013 58,094
125,000 Sinclair Broadcast Group, Inc.
company guaranty 8 3/4s, 2011 135,000
353,000 Six Flags, Inc. sr. notes 8 7/8s,
2010 336,674
EUR 260,000 United Biscuits Finance company
guaranty 10 5/8s, 2011 (United
Kingdom) 364,051
$80,000 United Rentals (North America), Inc.
company guaranty 6 1/2s, 2012 80,600
70,000 Universal City Florida Holding Co.
144A sr. notes 8 3/8s, 2010 73,675
107,000 Universal City Florida Holding Co.
144A sr. notes FRN 7.493s, 2010 112,083
65,000 Videotron Ltee company guaranty
6 7/8s, 2014 (Canada) 68,250
125,000 Warner Music Group 144A sr. sub.
notes 7 3/8s, 2014 132,500
187,000 Williams Scotsman, Inc. company
guaranty 9 7/8s, 2007 187,468
189,000 Young Broadcasting, Inc. company
guaranty 10s, 2011 199,395
85,000 Young Broadcasting, Inc. sr. sub.
notes 8 3/4s, 2014 84,150
--------------
13,816,949
Energy (3.6%)
-------------------------------------------------------------------------------
235,000 Arch Western Finance, LLC sr. notes
6 3/4s, 2013 244,400
105,000 Arch Western Finance, LLC 144A sr.
notes 6 3/4s, 2013 109,200
92,000 Bluewater Finance, Ltd. company
guaranty 10 1/4s, 2012 (Cayman
Islands) 101,660
130,000 CHC Helicopter Corp. sr. sub. notes
7 3/8s, 2014 (Canada) 135,525
91,000 Chesapeake Energy Corp. company
guaranty 9s, 2012 103,285
60,000 Chesapeake Energy Corp. company
guaranty 7 3/4s, 2015 66,150
190,000 Chesapeake Energy Corp. sr. notes
7 1/2s, 2013 210,900
80,000 Chesapeake Energy Corp. sr. notes
7s, 2014 87,600
120,000 Comstock Resources, Inc. sr. notes
6 7/8s, 2012 123,600
210,000 Dresser, Inc. company guaranty
9 3/8s, 2011 226,800
30,000 Dresser-Rand Group, Inc. 144A sr.
sub. notes 7 3/8s, 2014 31,350
130,000 Encore Acquisition Co. company
guaranty 8 3/8s, 2012 143,650
60,000 Encore Acquisition Co. sr. sub.
notes 6 1/4s, 2014 60,450
170,000 Exco Resources, Inc. company
guaranty 7 1/4s, 2011 180,625
100,000 Forest Oil Corp. company guaranty
7 3/4s, 2014 108,500
135,000 Forest Oil Corp. sr. notes 8s, 2011 155,588
94,000 Forest Oil Corp. sr. notes 8s, 2008 102,930
90,000 Hanover Compressor Co. sr. notes 9s,
2014 100,125
60,000 Hanover Compressor Co. sr. notes
8 5/8s, 2010 65,100
125,000 Hanover Compressor Co. sub. notes
zero %, 2007 112,188
40,000 Hanover Equipment Trust sec. notes
Ser. B, 8 3/4s, 2011 43,400
365,000 Harvest Operations Corp. sr. notes
7 7/8s, 2011 (Canada) 375,950
365,000 Inergy LP/Inergy Finance Corp. 144A
sr. notes 6 7/8s, 2014 370,475
85,000 KCS Energy, Inc. sr. notes 7 1/8s,
2012 89,463
365,000 Key Energy Services, Inc. sr. notes
6 3/8s, 2013 370,475
335,000 Massey Energy Co. sr. notes 6 5/8s,
2010 349,238
150,000 Newfield Exploration Co. sr. notes
7 5/8s, 2011 169,500
210,000 Newfield Exploration Co. 144A sr.
sub. notes 6 5/8s, 2014 227,325
165,000 Offshore Logistics, Inc. company
guaranty 6 1/8s, 2013 165,825
95,000 Pacific Energy Partners/Pacific
Energy Finance Corp. sr. notes
7 1/8s, 2014 100,938
180,000 Peabody Energy Corp. sr. notes
5 7/8s, 2016 182,250
80,000 Pemex Project Funding Master Trust
company guaranty 8 5/8s, 2022 96,800
115,000 Pemex Project Funding Master Trust
company guaranty 7 3/8s, 2014 128,662
179,543 Petroleum Geo-Services notes 10s,
2010 (Norway) 207,372
130,000 Plains Exploration & Production Co.
sr. notes 7 1/8s, 2014 143,650
190,000 Plains Exploration & Production Co.
sr. sub. notes 8 3/4s, 2012 211,850
195,000 Pogo Producing Co. sr. sub. notes
Ser. B, 8 1/4s, 2011 208,650
400,000 Pride International, Inc. sr. notes
7 3/8s, 2014 445,000
130,000 Seabulk International, Inc. company
guaranty 9 1/2s, 2013 143,325
195,000 Star Gas Partners LP/Star Gas
Finance Co. sr. notes 10 1/4s, 2013 177,938
370,000 Stone Energy Corp. 144A sr. sub.
notes 6 3/4s, 2014 371,850
35,000 Universal Compression, Inc. sr.
notes 7 1/4s, 2010 37,100
7,000 Vintage Petroleum, Inc. sr. notes
8 1/4s, 2012 7,718
40,000 Vintage Petroleum, Inc. sr. sub.
notes 7 7/8s, 2011 42,900
--------------
7,137,280
Financial (0.5%)
-------------------------------------------------------------------------------
60,000 Crescent Real Estate Equities LP
notes 7 1/2s, 2007 (R) 62,100
110,000 Crescent Real Estate Equities LP sr.
notes 9 1/4s, 2009 (R) 119,900
230,000 E*Trade Finance Corp. 144A sr.
notes 8s, 2011 248,400
273,004 Finova Group, Inc. notes 7 1/2s,
2009 120,804
320,000 Western Financial Bank sub. debs.
9 5/8s, 2012 358,400
--------------
909,604
Health Care (2.3%)
-------------------------------------------------------------------------------
137,000 AmerisourceBergen Corp. company
guaranty 7 1/4s, 2012 152,070
260,000 AmerisourceBergen Corp. sr. notes
8 1/8s, 2008 288,600
225,000 Ardent Health Services, Inc. sr.
sub. notes 10s, 2013 237,375
105,000 Community Health Systems, Inc. 144A
sr. sub. notes 6 1/2s, 2012 105,656
105,000 Coventry Health Care, Inc. 144A sr.
notes 5 7/8s, 2012 107,888
255,000 Elan Finance PLC/Elan Finance Corp.
144A sr. notes 7 3/4s, 2011
(Ireland) 226,950
67,000 HCA, Inc. debs. 7.19s, 2015 70,733
80,000 HCA, Inc. notes 6 3/8s, 2015 81,197
75,000 HCA, Inc. notes 5 3/4s, 2014 73,302
70,000 HCA, Inc. sr. notes 6.95s, 2012 73,988
289,000 Healthsouth Corp. notes 7 5/8s, 2012 293,335
63,000 Healthsouth Corp. sr. notes 8 1/2s,
2008 65,520
61,000 Healthsouth Corp. sr. notes 8 3/8s,
2011 64,203
27,586 Magellan Health Services, Inc. sr.
notes Ser. A, 9 3/8s, 2008 29,793
31,000 MedQuest, Inc. company guaranty
Ser. B, 11 7/8s, 2012 35,185
240,000 MQ Associates, Inc. sr. disc. notes
stepped-coupon zero % (12 1/4s,
8/15/08), 2012 (STP) 177,600
155,000 Omnicare, Inc. sr. sub. notes
6 1/8s, 2013 155,388
110,000 Owens & Minor, Inc. company guaranty
8 1/2s, 2011 119,350
215,000 Province Healthcare Co. sr. sub.
notes 7 1/2s, 2013 239,725
15,000 Service Corp. International notes
7.2s, 2006 15,506
5,000 Service Corp. International notes
6 7/8s, 2007 5,238
35,000 Service Corp. International notes
6 1/2s, 2008 36,488
41,000 Service Corp. International notes
Ser. *, 7.7s, 2009 44,075
180,000 Service Corp. International/US 144A
sr. notes 6 3/4s, 2016 183,600
180,000 Stewart Enterprises, Inc. 144A sr.
notes 6 1/4s, 2013 180,000
120,000 Tenet Healthcare Corp. notes 7 3/8s,
2013 113,700
145,000 Tenet Healthcare Corp. sr. notes
6 1/2s, 2012 133,763
365,000 Tenet Healthcare Corp. 144A sr.
notes 9 7/8s, 2014 388,725
165,000 Triad Hospitals, Inc. sr. notes 7s,
2012 174,694
300,000 Triad Hospitals, Inc. sr. sub. notes
7s, 2013 309,375
120,000 Universal Hospital Services, Inc.
sr. notes 10 1/8s, 2011 124,200
130,000 Vanguard Health Holding Co. II, LLC
sr. sub. notes 9s, 2014 143,000
65,000 Ventas Realty LP/Capital Corp.
company guaranty 9s, 2012 (R) 75,400
50,000 Ventas Realty LP/Capital Corp. sr.
notes 6 5/8s, 2014 (R) 51,000
--------------
4,576,622
Other (2.3%)
-------------------------------------------------------------------------------
4,510,000 Dow Jones CDX HY 144A pass-through
certificates 7 3/4s, 2009 4,560,738
Technology (1.5%)
-------------------------------------------------------------------------------
260,000 Advanced Micro Devices, Inc. 144A
sr. notes 7 3/4s, 2012 265,200
103,000 AMI Semiconductor, Inc. company
guaranty 10 3/4s, 2013 119,738
90,000 Amkor Technologies, Inc. sr. sub.
notes 10 1/2s, 2009 84,825
320,000 Celestica, Inc. sr.sub. notes
7 7/8s, 2011 (Canada) 336,800
355,000 Iron Mountain, Inc. company guaranty
8 5/8s, 2013 374,525
225,000 Lucent Technologies, Inc. debs.
6.45s, 2029 214,031
90,000 New ASAT Finance, Ltd. 144A company
guaranty 9 1/4s, 2011 (Cayman
Islands) 77,400
75,000 SCG Holding Corp. 144A notes zero %,
2011 107,063
145,000 Seagate Technology Hdd Holdings
company guaranty 8s, 2009 (Cayman
Islands) 156,238
350,000 UGS Corp. 144A sr. sub. notes 10s,
2012 395,500
175,000 Xerox Capital Trust I company
guaranty 8s, 2027 184,625
3,000 Xerox Corp. company guaranty 9 3/4s,
2009 3,484
90,000 Xerox Corp. notes Ser. MTN, 7.2s,
2016 96,525
231,000 Xerox Corp. sr. notes 7 5/8s, 2013 250,346
185,000 Xerox Corp. sr. notes 6 7/8s, 2011 197,950
--------------
2,864,250
Transportation (0.5%)
-------------------------------------------------------------------------------
120,000 American Airlines, Inc. pass-through
certificates Ser. 01-1, 6.817s,
2011 114,600
230,000 Calair, LLC/Calair Capital Corp.
company guaranty 8 1/8s, 2008 184,000
300,000 Kansas City Southern Railway Co.
company guaranty 9 1/2s, 2008 334,500
40,000 Kansas City Southern Railway Co.
company guaranty 7 1/2s, 2009 41,900
157,000 Navistar International Corp. company
guaranty Ser. B, 9 3/8s, 2006 166,616
110,000 Navistar International Corp. 144A
sr. notes 6 1/4s, 2012 110,825
40,000 Travelcenters of America, Inc.
company guaranty 12 3/4s, 2009 44,600
--------------
997,041
Utilities & Power (3.1%)
-------------------------------------------------------------------------------
22,000 AES Corp. (The) sr. notes 8 7/8s,
2011 25,163
14,000 AES Corp. (The) sr. notes 8 3/4s,
2008 15,435
175,000 AES Corp. (The) 144A sec. notes 9s,
2015 200,375
240,000 AES Corp. (The) 144A sec. notes
8 3/4s, 2013 273,000
120,000 Allegheny Energy Supply Co., LLC
144A bonds 8 1/4s, 2012 136,800
70,000 Allegheny Energy Supply Co., LLC144A
sec. notes 10 1/4s, 2007 78,663
60,000 CMS Energy Corp. sr. notes 8.9s,
2008 66,750
70,000 CMS Energy Corp. sr. notes 8 1/2s,
2011 79,800
40,000 CMS Energy Corp. sr. notes 7 3/4s,
2010 43,900
445,000 DPL, Inc. bonds 8 1/8s, 2031 544,519
25,000 Dynegy Holdings, Inc. sr. notes
6 7/8s, 2011 23,281
315,000 Dynegy Holdings, Inc. 144A sec.
notes 10 1/8s, 2013 359,100
90,000 Dynegy-Roseton Danskamme company
guaranty Ser. A, 7.27s, 2010 89,100
125,000 Dynegy-Roseton Danskamme company
guaranty Ser. B, 7.67s, 2016 117,188
115,000 El Paso Corp. sr. notes 8.05s, 2030 116,725
90,000 El Paso Corp. sr. notes 7 3/8s, 2012 92,025
85,000 El Paso Corp. sr. notes Ser. MTN,
7 3/4s, 2032 85,638
40,000 El Paso Natural Gas Co. debs.
8 5/8s, 2022 47,800
215,000 El Paso Production Holding Co.
company guaranty 7 3/4s, 2013 230,588
155,000 Ferrellgas Partners LP/Ferrellgas
Partners Finance sr. notes 6 3/4s,
2014 155,775
50,000 Kansas Gas & Electric debs. 8.29s,
2016 51,745
280,000 Midwest Generation, LLC sec. sr.
notes 8 3/4s, 2034 321,300
155,000 Mission Energy Holding Co. sec.
notes 13 1/2s, 2008 193,750
90,000 Monongahela Power Co. 1st mtge.
6.7s, 2014 99,675
95,000 Nevada Power Co. 2nd mtge. 9s, 2013 109,725
75,000 Nevada Power Co. 144A general ref.
mtge. 5 7/8s, 2015 75,938
225,000 Northwest Pipeline Corp. company
guaranty 8 1/8s, 2010 247,219
454,000 NRG Energy, Inc. 144A sr. sec. notes
8s, 2013 501,670
125,000 Orion Power Holdings, Inc. sr. notes
12s, 2010 156,250
135,000 PSEG Energy Holdings, Inc. notes
7 3/4s, 2007 142,088
110,000 SEMCO Energy, Inc. sr. notes 7 3/4s,
2013 115,666
145,000 SEMCO Energy, Inc. 144A sr. notes
7 3/4s, 2013 150,800
35,000 Sierra Pacific Power Co. general
ref. mtge. 6 1/4s, 2012 36,663
215,000 Sierra Pacific Resources sr. notes
8 5/8s, 2014 237,575
65,000 Teco Energy, Inc. notes 10 1/2s,
2007 74,750
35,000 Teco Energy, Inc. notes 7.2s, 2011 38,500
60,000 Teco Energy, Inc. notes 7s, 2012 66,000
15,000 Tennessee Gas Pipeline Co. debs. 7s,
2028 15,600
100,000 Tennessee Gas Pipeline Co. unsecd.
notes 7 1/2s, 2017 111,250
185,000 Texas Genco LLC/Texas Genco
Financing Corp. 144A sr. notes
6 7/8s, 2014 197,488
25,000 Transcontinental Gas Pipeline Corp.
debs. 7 1/4s, 2026 28,156
140,000 Utilicorp Canada Finance Corp.
company guaranty 7 3/4s, 2011
(Canada) 148,400
95,000 Utilicorp United, Inc. sr. notes
9.95s, 2011 109,013
30,000 Williams Cos., Inc. (The) notes
8 3/4s, 2032 37,950
35,000 Williams Cos., Inc. (The) notes
8 1/8s, 2012 40,688
50,000 Williams Cos., Inc. (The) notes
7 5/8s, 2019 57,750
--------------
6,147,234
--------------
Total Corporate bonds and notes
(cost $79,806,751) $84,002,041
Convertible preferred stocks (35.1%) (a)
Number of shares Value
Basic Materials (3.7%)
-------------------------------------------------------------------------------
2,210 Freeport-McMoRan Copper & Gold, Inc.
144A 5.50% cv. pfd. $2,268,013
2,020,000 Hercules Trust II Ser. UNIT, 6.50%
cv. pfd. 1,656,400
21,000 Huntsman Corp. $2.50 cv. pfd. 1,234,170
85,120 Smurfit-Stone Container Corp.
Ser. A, $1.75 cum. cv. pfd. 2,181,200
--------------
7,339,783
Capital Goods (4.3%)
-------------------------------------------------------------------------------
34,600 Coltec Capital Trust $2.625 cv. pfd. 1,721,350
31,900 Northrop Grumman Corp. Ser. B, $7.00
cum. cv. pfd. 4,214,788
63,770 Owens-Illinois, Inc. $2.375 cv. pfd. 2,686,311
--------------
8,622,449
Communication Services (2.4%)
-------------------------------------------------------------------------------
56,894 CenturyTel, Inc. $1.719 cv. pfd. 1,429,462
35,300 Cincinnati Bell, Inc. Ser. B, $3.378
cum. cv. pfd. (S) 1,561,672
35,614 Crown Castle International Corp.
$3.125 cum. cv. pfd. 1,749,538
--------------
4,740,672
Consumer Cyclicals (3.0%)
-------------------------------------------------------------------------------
12,870 Central Parking Finance Trust 144A
$1.313 cv. pfd. 250,965
24,100 Emmis Communications Corp. Ser. A,
$3.125 cum. cv. pfd. 1,129,688
40,000 Ford Motor Company Capital Trust II
$3.25 cum. cv. pfd. 2,000,000
49,100 TXI Capital Trust I $2.75 cv. pfd. 2,553,200
--------------
5,933,853
Consumer Staples (2.7%)
-------------------------------------------------------------------------------
40,800 Albertson's, Inc. $1.813 cv. pfd. 989,400
32,687 Constellation Brands, Inc. Ser. A,
$1.438 cv. pfd. 1,348,339
41,100 Sinclair Broadcast Group, Inc.
Ser. D, $3.00 cv. pfd. 1,618,313
63,200 Six Flags, Inc. $1.813 cum. cv. pfd.
(S) 1,358,800
--------------
5,314,852
Energy (1.7%)
-------------------------------------------------------------------------------
20,800 Amerada Hess Corp. $3.50 cv. pfd. 1,817,400
32,000 Hanover Compressor Capital Trust
$3.625 cum. cv. pfd. 1,616,000
--------------
3,433,400
Financial (9.0%)
-------------------------------------------------------------------------------
19,200 Capital One Financial Corp. $3.125
cv. pfd. 986,400
55,500 Chubb Corp. (The) $1.75 cv. pfd. 1,651,125
20 Fannie Mae Ser. 04-1, 5.375% cv.
pfd. 2,041,933
99,200 FelCor Lodging Trust, Inc. Ser. A,
$1.95 cum. cv. pfd. (R) 2,492,400
2,079 Fortis Insurance NV 144A 7.75% cv.
pfd. (Netherlands) 2,254,416
25,024 Hartford Financial Services Group,
Inc. (The) $3.50 cv. pfd. 1,682,864
46,720 Host Marriott Financial Trust $3.375
cv. pfd. (R) 2,552,080
40,190 Lehman Brothers Holdings, Inc.
$1.563 cv. pfd. 1,125,320
38,400 Washington Mutual Capital Trust I
$2.688 cum. cv. pfd. 2,109,850
41,600 XL Capital, Ltd. $1.625 cv. pfd.
(Cayman Islands) 1,016,704
--------------
17,913,092
Health Care (1.6%)
-------------------------------------------------------------------------------
59,600 Schering-Plough Corp. $3.00 cv. pfd.
(S) 3,136,450
Technology (1.2%)
-------------------------------------------------------------------------------
17,600 Xerox Corp. 6.25% cv. pfd. 2,376,000
Utilities & Power (5.5%)
-------------------------------------------------------------------------------
34,200 Aquila, Inc. $1.688 cv. pfd. 1,115,775
38,950 El Paso Energy Capital Trust I
$2.375 cv. pfd. (S) 1,567,738
80,000 Great Plains Energy, Inc. $2.00 cum.
cv. pfd. (S) 2,160,000
34,000 ONEOK, Inc. $2.125 units cv. pfd. 1,230,460
14,640 Public Service Enterprise Group,
Inc. $5.125 cv. pfd. 1,011,990
27,900 Sierra Pacific Resources $4.50 units
cum. cv. pfd. 1,082,241
30,700 Southern Union Co. $2.50 cv. pfd. 1,591,795
11,390 Williams Cos., Inc. (The) 144A $2.75
cv. pfd. 1,046,456
--------------
10,806,455
--------------
Total Convertible preferred stocks
(cost $59,776,956) $69,617,006
Convertible bonds and notes (17.0%) (a)
Principal amount Value
Capital Goods (0.7%)
-------------------------------------------------------------------------------
$1,070,000 Titan International, Inc. 144A cv.
sr. notes 5 1/4s, 2009 $1,419,088
Communication Services (1.0%)
-------------------------------------------------------------------------------
2,075,000 Charter Communications, Inc. 144A
cv. sr. notes 5 7/8s, 2009 2,033,500
780,000 Cybernet Internet Services
International, Inc. 144A cv. sr.
disc. notes 13s, 2009 (Denmark) (In
default) (NON) 8
--------------
2,033,508
Conglomerates (1.1%)
-------------------------------------------------------------------------------
2,030,000 GenCorp, Inc. cv. sub. notes 5 3/4s,
2007 2,215,238
Consumer Cyclicals (2.3%)
-------------------------------------------------------------------------------
$1,050,000 Mediacom Communications Corp. cv.
sr. notes 5 1/4s, 2006 $1,034,250
1,730,000 MeriStar Hospitality Corp. cv. sr.
sub. notes 9 1/2s, 2010 (R) 2,194,938
965,000 WCI Communities, Inc. cv. sr. sub.
notes 4s, 2023 1,328,081
--------------
4,557,269
Consumer Staples (1.0%)
-------------------------------------------------------------------------------
1,660,000 Rite Aid Corp. cv. notes 4 3/4s,
2006 1,643,400
264,000 Rite Aid Corp. 144A cv. notes
4 3/4s, 2006 261,360
--------------
1,904,760
Electronics (0.6%)
-------------------------------------------------------------------------------
1,450,000 Kulicke & Soffa Industries, Inc. cv.
sub. notes 1/2s, 2008 1,100,188
Energy (0.3%)
-------------------------------------------------------------------------------
400,000 McMoran Exploration Co. cv. sr.
notes 6s, 2008 649,500
Financial (1.1%)
-------------------------------------------------------------------------------
1,050,000 American Equity Investment Life
Holding Co. 144A cv. sr. notes
5 1/4s, 2024 1,157,625
1,300,000 Rewards Network, Inc. cv. sub. debs.
3 1/4s, 2023 978,250
--------------
2,135,875
Technology (6.5%)
-------------------------------------------------------------------------------
980,000 Agere Systems, Inc. cv. notes
6 1/2s, 2009 1,051,050
1,800,000 Amkor Technologies, Inc. cv. notes
5 3/4s, 2006 1,725,750
2,098,000 Aspen Technology, Inc. cv. sub.
debs. 5 1/4s, 2005 2,071,775
980,000 Fairchild Semiconductor
International, Inc. cv. company
guaranty 5s, 2008 987,350
1,950,000 Lucent Technologies, Inc. cv. sub.
debs. 8s, 2031 2,067,000
1,500,000 Manugistics Group, Inc. cv. sub.
notes 5s, 2007 1,378,125
1,500,000 ON Semiconductor Corp. 144A cv. sr.
sub. notes zero %, 2024 1,162,500
2,800,000 Safeguard Scientifics, Inc. 144A cv.
sr. notes 2 5/8s, 2024 2,040,500
450,000 Silicon Graphics, Inc. cv. notes
6 1/2s, 2009 429,750
--------------
12,913,800
Transportation (0.5%)
-------------------------------------------------------------------------------
1,200,000 Continental Airlines, Inc. cv. notes
4 1/2s, 2007 960,000
Utilities & Power (1.9%)
-------------------------------------------------------------------------------
980,000 AES Corp. (The) cv. sub. notes
4 1/2s, 2005 987,350
2,300,000 El Paso Corp. cv. debs. zero %, 2021 1,213,250
200,000 Sierra Pacific Resources 144A cv.
notes 7 1/4s, 2010 472,750
720,000 XCEL Energy, Inc. 144A cv. notes
7 1/2s, 2007 1,082,700
--------------
3,756,050
--------------
Total Convertible bonds and notes
(cost $31,214,623) $33,645,276
Common stocks (0.9%) (a)
Number of shares Value
-------------------------------------------------------------------------------
393 AboveNet, Inc. (NON) (S) $11,790
17,713 Alderwoods Group, Inc. (NON)
(Canada) 216,984
140,000 AMRESCO Creditor Trust (acquired
various dates from 9/20/00 to
10/16/02, cost $56,998) (NON) (RES)
(F) (R) 140
293 Birch Telecom, Inc. (NON) (F) 3
5,780 Celanese Corp. Ser. A (NON) (S) 96,526
25,623 Coinmach Service Corp. IDS (Income
Deposit Securities) (S) 337,967
147 Compass Minerals International, Inc. 3,675
574,207 Contifinancial Corp. Liquidating
Trust Units 14,355
3,432 Covad Communications Group, Inc.
(NON) (S) 5,217
209 Crown Castle International Corp.
(NON) (S) 3,415
6,393 Globix Corp. (NON) 22,376
145,000 iPCS Escrow, Inc. (NON) (F) 145
3,374 iPCS, Inc. (NON) 101,220
32 Knology, Inc. (NON) 86
153 Leucadia National Corp. (S) 5,127
386 Polymer Group, Inc. Class A (NON) 7,720
555 PSF Group Holdings, Inc. 144A Class
A (NON) (F) 970,413
50 Sterling Chemicals, Inc. (NON) 2,250
202 Sun Healthcare Group, Inc. (NON) 1,378
56 USA Mobility, Inc. (NON) (S) 2,197
28,292 VS Holdings, Inc. (NON) 28
--------------
Total Common stocks
(cost $4,160,210) $1,803,012
Foreign government bonds and notes (0.7%) (a)
Principal amount Value
-------------------------------------------------------------------------------
$60,000 Brazil (Federal Republic of) bonds
10 1/2s, 2014 $70,140
110,000 Colombia (Republic of) bonds
Ser. NOV, 9 3/4s, 2009 124,025
90,000 Colombia (Republic of) notes
10 3/4s, 2013 105,075
85,000 Ecuador (Republic of) bonds
stepped-coupon Ser. REGS, 8s (9s,
8/15/05), 2030 (STP) 79,050
180,000 Indonesia (Republic of) 144A sr.
notes 6 3/4s, 2014 184,770
65,000 Peru (Republic of) bonds 8 3/4s,
2033 70,363
155,000 Philippines (Republic of) bonds
9 1/2s, 2030 155,775
195,000 Philippines (Republic of) bonds
8 3/8s, 2011 202,118
220,000 Russia (Federation of) unsub.
stepped-coupon 5s (7 1/2s,
3/31/07), 2030 (STP) 231,110
60,000 United Mexican States bonds
Ser. MTN, 8.3s, 2031 72,330
55,000 Venezuela (Republic of) notes
10 3/4s, 2013 63,498
--------------
Total Foreign government bonds and
notes (cost $1,272,626) $1,358,254
Units (0.1%) (a) (cost $594,350)
Number of units Value
-------------------------------------------------------------------------------
406 XCL Equity Units (F) $180,261
Preferred stocks (0.1%) (a)
Number of shares Value
-------------------------------------------------------------------------------
3 Dobson Communications Corp. 13.000% pfd. (PIK) $1,680
15 Paxson Communications Corp. 14.25%
cum. pfd. (PIK) 121,500
43 Rural Cellular Corp. Ser. B, 11.375%
cum. pfd. (PIK) 40,850
--------------
Total Preferred stocks
(cost $191,030) $164,030
Brady bonds (0.1%) (a) (cost $127,098)
Principal amount Value
-------------------------------------------------------------------------------
$136,400 Peru (Republic of) FRB Ser. 20 YR,
5s, 2017 $129,921
Warrants (--%) (a) (NON) Expiration
Number of warrants date Value
-------------------------------------------------------------------------------
130 AboveNet, Inc. 9/8/08 $1,300
152 AboveNet, Inc. 9/8/10 912
270 Dayton Superior Corp. 144A 6/15/09 1
119 MDP Acquisitions PLC 144A 10/1/13 3,330
120 Pliant Corp. 144A 6/1/10 1
420 Travelcenters of America, Inc. 144A 5/1/09 2,100
420 Ubiquitel, Inc. 144A 4/15/10 1
312 Washington Group International, Inc.
Ser. C 1/25/06 3,416
--------------
Total Warrants (cost $127,880) $11,061
Short-term investments (6.7%) (a)
Principal amount Value
-------------------------------------------------------------------------------
$5,708,363 Putnam Prime Money Market Fund (e) $5,708,363
7,489,369 Short-term investments held as
collateral for loaned
securities with yields ranging from
2.46% to 2.78% and due dates ranging
from March 1, 2005 to March 29, 2005
(d) 7,484,215
--------------
Total Short-term investments
(cost $13,192,578) $13,192,578
-------------------------------------------------------------------------------
Total Investments
(cost $190,464,102) $204,103,440
-------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $198,219,764.
(NON) Non-income-producing security.
(STP) The interest rate and date shown parenthetically represent the new
interest rate to be paid and the date the fund will begin accruing
interest at this rate.
(RES) Restricted, excluding 144A securities, as to public resale. The
total market value of restricted securities held at February 28, 2005
was $140 or less than 0.1% of net assets.
(PIK) Income may be received in cash or additional securities at the
discretion of the issuer.
(F) Security is valued at fair value following procedures approved by
the Trustees.
(R) Real Estate Investment Trust.
(S) Securities on loan, in part or in entirety, at February 28, 2005.
(d) See Note 1 to the financial statements.
(e) See Note 4 to the financial statements regarding investments in
Putnam Prime Money Market Fund.
144A after the name of a security represents those exempt from
registration under Rule 144A of the Securities Act of 1933. These
securities may be resold in transactions exempt from registration,
normally to qualified institutional buyers.
The rates shown on Floating Rate Bonds (FRB) and Floating Rate Notes
(FRN) are the current interest rates at February 28, 2005.
Forward currency contracts to sell at February 28, 2005 (Unaudited)
(aggregate face value $2,521,525)
Unrealized
Aggregate Delivery appreciation/
Value face value date (depreciation)
------------------------------------------------------------------------------------------------------
British Pound $339,359 $340,276 3/16/05 $917
Euro 2,193,879 2,181,249 3/16/05 (12,630)
------------------------------------------------------------------------------------------------------
$(11,713)
------------------------------------------------------------------------------------------------------
Credit default contracts outstanding at February 28, 2005 (Unaudited)
Notional Unrealized
amount appreciation
------------------------------------------------------------------------------------------------------
Agreement with Goldman Sachs effective September 2, 2004,
terminating on the date on which the notional amount is
reduced to zero or the date on which the assets securing
the reference obligation are liquidated, the fund receives
a payment of the outstanding notional amount times 2.35%
and the fund pays in the event of a credit default in one
of the underlying securities in the basket of BB CMBS
securities. $32,000 $1,592
Agreement with Goldman Sachs effective September 2, 2004,
terminating on the date on which the notional amount is
reduced to zero or the date on which the assets securing
the reference obligation are liquidated, the fund receives
a payment of the outstanding notional amount times 2.55625%
and the fund pays in the event of a credit default in one
of the underlying securities in the basket of BB CMBS
securities. 32,000 848
Agreement with Goldman Sachs effective September 2, 2004,
terminating on the date on which the notional amount is
reduced to zero or the date on which the assets securing
the reference obligation are liquidated, the fund receives
a payment of the outstanding notional amount times 2.4625%
and the fund pays in the event of a credit default in one
of the underlying securities in the basket of BB CMBS
securities. 16,000 745
Agreement with Goldman Sachs effective September 2, 2004,
terminating on the date on which the notional amount is
reduced to zero or the date on which the assets securing
the reference obligation are liquidated, the fund receives
a payment of the outstanding notional amount times 2.433%
and the fund pays in the event of a credit default in one
of the underlying securities in the basket of BB CMBS
securities. 12,000 527
Agreement with Goldman Sachs effective September 2, 2004,
terminating on the date on which the notional amount is
reduced to zero or the date on which the assets securing
the reference obligation are liquidated, the fund receives
a payment of the outstanding notional amount times 2.475%
and the fund pays in the event of a credit default in one
of the underlying securities in the basket of BB CMBS
securities. 8,000 261
Agreement with Goldman Sachs effective September 2, 2004,
terminating on the date on which the notional amount is
reduced to zero or the date on which the assets securing
the reference obligation are liquidated, the fund receives
a payment of the outstanding notional amount times 2.5%
and the fund pays in the event of a credit default in one
of the underlying securities in the basket of BB CMBS
securities. 4,000 254
Agreement with Goldman Sachs effective September 2, 2004,
terminating on the date on which the notional amount is
reduced to zero or the date on which the assets securing
the reference obligation are liquidated, the fund receives
a payment of the outstanding notional amount times 2.6%
and the fund pays in the event of a credit default in one
of the underlying securities in the basket of BB CMBS
securities. 4,000 40
------------------------------------------------------------------------------------------------------
$4,267
------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
Statement of assets and liabilities
February 28, 2005 (Unaudited)
Assets
-------------------------------------------------------------------------------
Investment in securities, at value, including $7,265,954 of securities
on loan (Note 1):
-------------------------------------------------------------------------------
Unaffiliated issuers (identified cost $184,755,739) $198,395,077
-------------------------------------------------------------------------------
Affiliated issuers (identified cost $5,708,363) (Note 4) 5,708,363
-------------------------------------------------------------------------------
Cash 239,414
-------------------------------------------------------------------------------
Dividends, interest and other receivables 2,364,271
-------------------------------------------------------------------------------
Receivable for securities sold 1,348,501
-------------------------------------------------------------------------------
Receivable for open credit default contracts (Note 1) 4,267
-------------------------------------------------------------------------------
Receivable for open forward currency contracts (Note 1) 917
-------------------------------------------------------------------------------
Total assets 208,060,810
Liabilities
-------------------------------------------------------------------------------
Distributions payable to shareholders 638,020
-------------------------------------------------------------------------------
Payable for securities purchased 1,045,888
-------------------------------------------------------------------------------
Payable for compensation of Manager (Notes 2 and 4) 416,317
-------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 43,475
-------------------------------------------------------------------------------
Payable for Trustee compensation and expenses (Note 2) 60,415
-------------------------------------------------------------------------------
Payable for administrative services (Note 2) 6,345
-------------------------------------------------------------------------------
Payable for open forward currency contracts (Note 1) 12,630
-------------------------------------------------------------------------------
Collateral on securities loaned, at value (Note 1) 7,484,215
-------------------------------------------------------------------------------
Other accrued expenses 133,741
-------------------------------------------------------------------------------
Total liabilities 9,841,046
-------------------------------------------------------------------------------
Net assets $198,219,764
Represented by
-------------------------------------------------------------------------------
Paid-in capital (Unlimited shares authorized) (Notes 1 and 6) $221,972,930
-------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 16,279
-------------------------------------------------------------------------------
Accumulated net realized loss on investments and foreign
currency transactions (Note 1) (37,401,356)
-------------------------------------------------------------------------------
Net unrealized appreciation of investments and assets and
liabilities in foreign currencies (Note 6) 13,631,911
-------------------------------------------------------------------------------
Total -- Representing net assets applicable to capital
shares outstanding $198,219,764
Computation of net asset value
-------------------------------------------------------------------------------
Net asset value per share ($198,219,764 divided by
22,519,551 shares) $8.80
-------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
Statement of operations
Six months ended February 28, 2005 (Unaudited)
Investment income:
-------------------------------------------------------------------------------
Interest (including interest income of $38,965 from
investments in affiliated issuers) (Note 4) $3,407,545
-------------------------------------------------------------------------------
Dividends 1,551,548
-------------------------------------------------------------------------------
Securities lending 16,254
-------------------------------------------------------------------------------
Total investment income 4,975,347
Expenses:
-------------------------------------------------------------------------------
Compensation of Manager (Note 2) 491,895
-------------------------------------------------------------------------------
Investor servicing fees (Note 2) 34,215
-------------------------------------------------------------------------------
Custodian fees (Note 2) 66,071
-------------------------------------------------------------------------------
Trustee compensation and expenses (Note 2) 7,541
-------------------------------------------------------------------------------
Administrative services (Note 2) 14,416
-------------------------------------------------------------------------------
Other 98,911
-------------------------------------------------------------------------------
Fees waived and reimbursed by Manager (Note 4) (2,591)
-------------------------------------------------------------------------------
Total expenses 710,458
-------------------------------------------------------------------------------
Expense reduction (Note 2) (2,262)
-------------------------------------------------------------------------------
Net expenses 708,196
-------------------------------------------------------------------------------
Net investment income 4,267,151
-------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 3,063,084
-------------------------------------------------------------------------------
Net realized loss on foreign currency transactions (Note 1) (31,075)
-------------------------------------------------------------------------------
Net realized gain on credit default contracts (Note 1) 753
-------------------------------------------------------------------------------
Net unrealized depreciation of assets and liabilities in
foreign currencies during the period (10,256)
-------------------------------------------------------------------------------
Net unrealized appreciation of investments and credit
-------------------------------------------------------------------------------
default contracts during the period 4,115,723
-------------------------------------------------------------------------------
Net gain on investments 7,138,229
-------------------------------------------------------------------------------
Net increase in net assets resulting from operations $11,405,380
-------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
Statement of changes in net assets
Six months ended Year ended
February 28 August 31
Increase in net assets 2005* 2004
-------------------------------------------------------------------------------
Operations:
-------------------------------------------------------------------------------
Net investment income $4,267,151 $7,906,456
-------------------------------------------------------------------------------
Net realized gain on investments and foreign
currency transactions 3,032,762 5,697,976
-------------------------------------------------------------------------------
Net unrealized appreciation of investments
and assets and liabilities in foreign
currencies 4,105,467 2,951,826
-------------------------------------------------------------------------------
Net increase in net assets resulting from
operations 11,405,380 16,556,258
-------------------------------------------------------------------------------
Distributions to shareholders: (Note 1)
-------------------------------------------------------------------------------
From net investment income (4,261,298) (7,714,084)
-------------------------------------------------------------------------------
Increase from issuance of shares in
connection with the merger of Putnam High
Income Opportunities Trust (Note 6) 75,299,313 --
-------------------------------------------------------------------------------
Total increase in net assets 82,443,395 8,842,174
Net assets
-------------------------------------------------------------------------------
Beginning of period 115,776,369 106,934,195
-------------------------------------------------------------------------------
End of period (including undistributed net
investment income of $16,279 and $449,705,
respectively) $198,219,764 $115,776,369
-------------------------------------------------------------------------------
Number of fund shares
Shares outstanding at beginning of period 13,825,527 13,825,527
-------------------------------------------------------------------------------
Shares issued in connection with the merger
of Putnam High Income Opportunities Trust
(Note 6) 8,694,024 --
-------------------------------------------------------------------------------
Shares outstanding at end of period 22,519,551 13,825,527
-------------------------------------------------------------------------------
* Unaudited
The accompanying notes are an integral part of these financial statements.
Financial highlights
(For a common share outstanding throughout the period)
Six months
ended
February 28
Per-share (Unaudited) Year ended August 31
operating performance 2005 2004 2003 2002 2001 2000
---------------------------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $8.37 $7.73 $6.56 $7.30 $8.09 $8.32
---------------------------------------------------------------------------------------------------------------------------------
Investment operations:
---------------------------------------------------------------------------------------------------------------------------------
Net investment income (a) .27 (d) .57 (d) .58 .60 .67 .74
---------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .44 .63 1.15 (.72) (.71) (.12)
---------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .71 1.20 1.73 (.12) (.04) .62
---------------------------------------------------------------------------------------------------------------------------------
Less distributions:
---------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.28) (.56) (.56) (.62) (.75) (.85)
---------------------------------------------------------------------------------------------------------------------------------
Total distributions (.28) (.56) (.56) (.62) (.75) (.85)
---------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $8.80 $8.37 $7.73 $6.56 $7.30 $8.09
---------------------------------------------------------------------------------------------------------------------------------
Market price,
end of period $7.87 $7.62 $7.31 $6.35 $7.45 $7.94
---------------------------------------------------------------------------------------------------------------------------------
Total return at
market price (%)(b) 6.94* 12.06 24.73 (6.77) 3.91 .78
---------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
---------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $198,220 $115,776 $106,934 $90,561 $100,130 $110,839
---------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(c) .53 (d)* 1.09 (d) 1.13 1.10 1.14 1.11
---------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 3.18 (d)* 6.88 (d) 8.20 8.65 8.91 9.03
---------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 25.04* 61.92 69.94 56.70 106.41 26.31
---------------------------------------------------------------------------------------------------------------------------------
* Not annualized.
(a) Per share net investment income has been determined on the basis of
the weighted average number of shares outstanding during the period.
(b) Total return assumes dividend reinvestment.
(c) Includes amounts paid through expense offset and brokerage service
arrangements (Note 2).
(d) Reflects waivers of certain fund expenses in connection with
investments in Putnam Prime Money Market Fund during the period. As a
result of such waivers, the expenses of the fund for the periods ended
February 28, 2005 and August 31, 2004 reflect a reduction of less than
0.01% of average net assets (Note 4).
The accompanying notes are an integral part of these financial
statements.
Notes to financial statements
February 28, 2005 (Unaudited)
Note 1
Significant accounting policies
Putnam High Income Bond Fund (the "fund"), a Massachusetts business
trust, is registered under the Investment Company Act of 1940, as
amended, as a diversified, closed-end management investment company. The
fund seeks to provide high current income as a primary objective and
capital appreciation as a secondary objective by investing in a
portfolio primarily consisting of high-yielding convertible and
nonconvertible securities with the potential for capital appreciation.
The fund invests in higher yielding, lower rated bonds that have a
higher rate of default due to the nature of the fund's investments.
The following is a summary of significant accounting policies
consistently followed by the fund in the preparation of its financial
statements. The preparation of financial statements is in conformity
with accounting principles generally accepted in the United States of
America and requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities in the financial
statements and the reported amounts of increases and decreases in net
assets from operations during the reporting period. Actual results could
differ from those estimates.
A) Security valuation Investments for which market quotations are
readily available are valued at the last reported sales price on their
principal exchange, or official closing price for certain markets. If no
sales are reported -- as in the case of some securities traded
over-the-counter -- a security is valued at its last reported bid price.
Market quotations are not considered to be readily available for certain
debt obligations; such investments are valued at fair value on the basis
of valuations furnished by an independent pricing service or dealers,
approved by the Trustees. Such services or dealers determine valuations
for normal institutional-size trading units of such securities using
methods based on market transactions for comparable securities and
various relationships, generally recognized by institutional traders,
between securities. Many securities markets and exchanges outside the
U.S. close prior to the close of the New York Stock Exchange and
therefore the closing prices for securities in such markets or on such
exchanges may not fully reflect events that occur after such close but
before the close of the New York Stock Exchange. Accordingly, on certain
days, the fund will fair value foreign securities taking into account
multiple factors, including movements in the U.S. securities markets.
The number of days on which fair value prices will be used will depend
on market activity and it is possible that fair value prices will be
used by the fund to a significant extent. Securities quoted in foreign
currencies are translated into U.S. dollars at the current exchange
rate. Short-term investments having remaining maturities of 60 days or
less are valued at amortized cost, which approximates fair value. Other
investments, including certain restricted securities, are valued at fair
value following procedures approved by the Trustees. Such valuations and
procedures are reviewed periodically by the Trustees.
B) Joint trading account Pursuant to an exemptive order from the
Securities and Exchange Commission ("SEC"), the fund may transfer
uninvested cash balances, including cash collateral received under
security lending arrange ments, into a joint trading account along with
the cash of other registered investment companies and certain other
accounts managed by Putnam Investment Management, LLC ("Putnam
Management"), the fund's manager, an indirect wholly-owned subsidiary of
Putnam, LLC. These balances may be invested in issues of high-grade
short-term investments having maturities of up to 397 days for
collateral received under security lending arrangements and up to 90
days for other cash investments.
C) Security transactions and related investment income Security
transactions are recorded on the trade date (date the order to buy or
sell is executed). Gains or losses on securities sold are determined on the
identified cost basis.
Interest income is recorded on the accrual basis. Dividend income, net
of applicable withholding taxes, is recognized on the ex-dividend date
except that certain dividends from foreign securities are recognized as
soon as the fund is informed of the ex-dividend date. Non-cash
dividends, if any, are recorded at the fair market value of the
securities received.
All premiums/discounts are amortized/accreted on a yield-to-maturity
basis.
D) Foreign currency translation The accounting records of the fund are
maintained in U.S. dollars. The market value of foreign securities,
currency holdings, and other assets and liabilities are recorded in the
books and records of the fund after translation to U.S. dollars based on
the exchange rates on that day. The cost of each security is determined
using historical exchange rates. Income and withholding taxes are
translated at prevailing exchange rates when earned or incurred. The
fund does not isolate that portion of realized or unrealized gains or
losses resulting from changes in the foreign exchange rate on
investments from fluctuations arising from changes in the market prices
of the securities. Such gains and losses are included with the net
realized and unrealized gain or loss on investments. Net realized gains
and losses on foreign currency transactions represent net realized
exchange gains or losses on closed forward currency contracts,
disposition of foreign currencies, currency gains and losses realized
between the trade and settlement dates on securities transactions and
the difference between the amount of investment income and foreign
withholding taxes recorded on the fund's books and the U.S. dollar
equivalent amounts actually received or paid. Net unrealized
appreciation and depreciation of assets and liabilities in foreign
currencies arise from changes in the value of open forward currency
contracts and assets and liabilities other than investments at the
period end, resulting from changes in the exchange rate. Investments in
foreign securities involve certain risks, including those related to
economic instability, unfavorable political developments, and currency
fluctuations, not present with domestic investments.
E) Forward currency contracts The fund may buy and sell forward currency
contracts, which are agreements between two parties to buy and sell
currencies at a set price on a future date. These contracts are used to
protect against a decline in value relative to the U.S. dollar of the
currencies in which its portfolio securities are denominated or quoted
(or an increase in the value of a currency in which securities a fund
intends to buy are denominated, when a fund holds cash reserves and
short term investments). The U.S. dollar value of forward currency
contracts is determined using current forward currency exchange rates
supplied by a quotation service. The market value of the contract will
fluctuate with changes in currency exchange rates. The contract is
marked to market daily and the change in market value is recorded as an
unrealized gain or loss. When the contract is closed, the fund records a
realized gain or loss equal to the difference between the value of the
contract at the time it was opened and the value at the time it was
closed. The fund could be exposed to risk if the value of the currency
changes unfavorably, if the counterparties to the contracts are unable
to meet the terms of their contracts or if the fund is unable to enter
into a closing position. Risks may exceed amounts recognized on the
statement of assets and liabilities. Forward currency contracts
outstanding at period end, if any, are listed after the fund's
portfolio.
F) Credit default contracts The fund may enter into credit default
contracts where one party, the protection buyer, makes an upfront or
periodic payment to a counter party, the protection seller, in exchange
for the right to receive a contingent payment. The maximum amount of the
payment may equal the notional amount, at par, of the underlying index
or security as a result of a related credit event. An upfront payment
received by the fund, as the protection seller, is recorded as a
liability on the fund's books. An upfront payment made by the fund, as
the protection buyer, is recorded as an asset on the fund's books.
Periodic payments received or paid by the fund are recorded as realized
gains or losses. The credit default contracts are marked to market
daily based upon quotations from market makers and the change, if any,
is recorded as unrealized gain or loss. Payments received or made as a
result of a credit event or termination of the contract are recognized,
net of a proportional amount of the upfront payment, as realized gains
or losses. In addition to bearing the risk that the credit event will
occur, the fund could be exposed to market risk due to unfavorable
changes in interest rates or in the price of the underlying security or
index, the possibility that the fund may be unable to close out its
position at the same time or at the same price as if it had purchased
comparable publicly traded securities or that the counterparty may
default on its obligation to perform. Risks of loss may exceed amounts
recognized on the statement of assets and liabilities. Credit default
contracts outstanding at period end, if any, are listed after the fund's
portfolio.
G) Security lending The fund may lend securities, through its agents, to
qualified borrowers in order to earn additional income. The loans are
collateralized by cash and/or securities in an amount at least equal to
the market value of the securities loaned. The market value of
securities loaned is determined daily and any additional required
collateral is allocated to the fund on the next business day. The risk
of borrower default will be borne by the fund's agents; the fund will
bear the risk of loss with respect to the investment of the cash
collateral. Income from securities lending is included in investment
income on the statement of operations. At February 28, 2005, the value
of securities loaned amounted to $7,265,954. The fund received cash
collateral of $7,484,215 which is pooled with collateral of other Putnam
funds into 33 issuers of high grade short-term investments.
H) Federal taxes It is the policy of the fund to distribute all of its
taxable income within the prescribed time and otherwise comply with the
provisions of the Internal Revenue Code of 1986 (the "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 Code, as amended. Therefore, no provision has
been made for federal taxes on income, capital gains or unrealized
appreciation on securities held nor for excise tax on income and capital
gains.
At August 31, 2004, the fund had a capital loss carryover of $19,335,434
available to the extent allowed by the Code to offset future net capital
gain, if any. The amount of the carryover and the expiration dates are:
Loss Carryover Expiration
------------------------------------
$535,162 August 31, 2009
9,205,575 August 31, 2010
9,594,697 August 31, 2011
As a result of the January 21, 2005 merger of Putnam High Income
Opportunities Trust into the fund, the fund acquired $21,216,278 in
capital loss carryovers which are subject to limitations imposed by the
Code. The acquired capital loss carryovers and their expiration dates
are:
Loss Carryover Expiration
------------------------------------
$11,425,662 August 31, 2009
9,790,616 August 31, 2010
The aggregate identified cost on a tax basis is $190,690,385, resulting
in gross unrealized appreciation and depreciation of $19,092,173 and
$5,679,118, respectively, or net unrealized appreciation of
$13,413,055.
I) Distributions to shareholders Distributions to shareholders from net
investment income are recorded by the fund on the ex-dividend date.
Distributions from capital gains, if any, are recorded on the
ex-dividend date and paid at least annually. The amount and character of
income and gains to be distributed are determined in accordance with
income tax regulations, which may differ from generally accepted
accounting principles. Reclassifications are made to the fund's capital
accounts to reflect income and gains available for distribution (or
available capital loss carryovers) under income tax regulations.
Note 2
Management fee, administrative
services and other transactions
Putnam Management is paid for management and investment advisory
services quarterly based on the average net assets of the fund. Such fee
is based on the annual rate of 0.75% of the average weekly net assets of
the fund.
Effective September 13, 2004, Putnam Invest ments Limited ("PIL"), an
affiliate of Putnam Management is authorized by the Trustees to manage a
separate portion of the assets of the fund as determined by Putnam
Management from time to time. Putnam Management pays a quarterly
sub-management fee to PIL for its services at an annual rate of 0.40% of
the average net assets of the portion of the fund managed by PIL.
The fund reimburses Putnam Management an allocated amount for the
compensation and related expenses of certain officers of the fund and
their staff who provide administrative services to the fund. The
aggregate amount of all such reimbursements is determined annually by
the Trustees.
Custodial functions for the fund's assets are provided by Putnam
Fiduciary Trust Company ("PFTC"), a subsidiary of Putnam, LLC. Putnam
Investor Services, a division of PFTC, provides investor servicing agent
functions to the fund. During the six months ended February 28, 2005,
the fund paid PFTC $100,286 for these services.
The fund has entered into an arrangement with PFTC whereby credits
realized as a result of uninvested cash balances are used to reduce a
portion of the fund's expenses. The fund also reduced expenses through
brokerage service arrangements. For the six months ended February 28,
2005, the fund's expenses were reduced by $2,262 under these
arrangements.
Each independent Trustee of the fund receives an annual Trustee fee, of
which $1,287, as a quarterly retainer, has been allocated to the fund,
and an additional fee for each Trustees meeting attended. Trustees
receive additional fees for attendance at certain committee meetings.
The fund has adopted a Trustee Fee Deferral Plan (the "Deferral Plan")
which allows the Trustees to defer the receipt of all or a portion of
Trustees fees payable on or after July 1, 1995. The deferred fees remain
invested in certain Putnam funds until distribution in accordance with
the Deferral Plan.
The fund has adopted an unfunded noncontributory defined benefit pension
plan (the "Pension Plan") covering all Trustees of the fund who have
served as a Trustee for at least five years. Benefits under the Pension
Plan are equal to 50% of the Trustee's average total retainer and
meeting fees for the three years preceding retirement. Pension expense
for the fund is included in Trustee compensation and expenses in the
statement of operations. Accrued pension liability is included in
Payable for Trustee compensation and expenses in the statement of assets
and liabilities. The Trustees have terminated the Pension Plan with
respect to any Trustee first elected after 2003.
Note 3
Purchases and sales of securities
During the six months ended February 28, 2005, cost of purchases and
proceeds from sales of investment securities other than short-term
investments aggregated $33,709,923 and $33,901,231, respectively. There
were no purchases or sales of U.S. government securities.
Note 4
Investment in Putnam Prime Money Market Fund
Pursuant to an exemptive order from the Securities and Exchange
Commission, the fund invests in Putnam Prime Money Market Fund, an
open-end management investment company managed by Putnam Management.
Management fees paid by the fund are reduced by an amount equal to the
management fees paid by Putnam Prime Money Market Fund with respect to
assets invested by the fund in Putnam Prime Money Market Fund. For the
period ended February 28, 2005, management fees paid were reduced by
$2,591 relating to the fund's investment in Putnam Prime Money Market
Fund. Income distributions earned by the fund are recorded as income in
the statement of operations and totaled $38,965 for the period ended
February 28, 2005.
Note 5
Regulatory matters and litigation
Putnam Management has entered into agreements with the Securities and
Exchange Commission and the Massachusetts Securities Division settling
charges connected with excessive short-term trading by Putnam employees and,
in the case of the charges brought by the Massachusetts Securities Division,
by participants in some Putnam-administered 401(k) plans. Pursuant to these
settlement agreements, Putnam Manage ment will pay a total of $193.5 million
in penalties and restitution, with $153.5 million being paid to shareholders
and the funds. The restitution amount will be allocated to shareholders
pursuant to a plan developed by an independent consultant, with payments to
shareholders currently expected by the end of the summer.
The SEC's and Massachusetts Securities Division's allegations and
related matters also serve as the general basis for numerous lawsuits,
including purported class action lawsuits filed against Putnam
Management and certain related parties, including certain Putnam funds.
Putnam Manage ment will bear any costs incurred by Putnam funds in
connection with these lawsuits. Putnam Management believes that the
likelihood that the pending private lawsuits and purported class action
lawsuits will have a material adverse financial impact on the fund is
remote, and the pending actions are not likely to materially affect its
ability to provide investment management services to its clients,
including the Putnam funds.
On March 23, 2005, Putnam Management entered into a settlement with the
SEC resolving its inquiry into Putnam Management's alleged failure to
fully and effectively disclose a former brokerage allocation practice to
the Board of Trustees and shareholders of the Putnam Funds. This
practice, which Putnam Management ceased as of January 1, 2004, involved
allocating a portion of the brokerage on mutual fund portfolio
transactions to certain broker-dealers who sold shares of Putnam mutual
funds. Under the settlement order, Putnam Management has paid a civil
penalty of $40 million and disgorgement of $1 to the SEC. These amounts
subsequently will be distributed to certain Putnam funds pursuant to a
plan to be approved by the SEC. As part of the settlement, Putnam
Management neither admitted nor denied any wrongdoing.
Note 6
Acquisition of Putnam High Income
Opportunities Trust
On January 21, 2005, the fund issued 8,694,024 shares in exchange for
3,712,567 shares of Putnam High Income Opportunities Trust to acquire
that fund's net assets in a tax-free exchange approved by the
shareholders. The net assets of the fund and Putnam High Income
Opportunities Trust on January 21, 2005, valuation date, were
$119,743,477 and $75,299,313, respectively. On January 21, 2005, Putnam
High Income Opportunities Trust had distributions in excess of net
investment income of $439,279, accumulated net realized loss of
$21,080,625 and unrealized appreciation of $4,326,390. The aggregate net
assets of the fund immediately following the acquisition were
$195,042,790.
Information presented in the Statement of operations and changes in net
assets reflect only the operations of Putnam High Income Bond Fund.
Results of January 13, 2005 shareholder meeting
(Unaudited)
A special meeting of the shareholders of the fund was held on January
13, 2005. At the meeting, the proposed merger of Putnam High Income
Opportunities Trust into Putnam High Income Bond Fund was approved. In
this merger, Putnam High Income Bond Fund will acquire all of the assets
of Putnam High Income Opportunities Trust in exchange for the issuance
and delivery of shares of beneficial interest of Putnam High Income Bond
Fund and the assumption by Putnam High Income Bond Fund of the
liabilities of Putnam High Income Opportunities Trust and the
distribution of such shares to the shareholders of Putnam High Income
Opportunities Trust. This was approved as follows:
Votes Votes
For Against Abstentions
------------------------------------------------------------------------
7,023,242 530,636 325,383
All tabulations are rounded to nearest whole number.
Fund information
About Putnam Investments
One of the largest mutual fund families in the United States, Putnam
Investments has a heritage of investment leadership dating back to Judge
Samuel Putnam, whose Prudent Man Rule has defined fiduciary tradition
and practice since 1830. Founded over 65 years ago, Putnam Investments
was built around the concept that a balance between risk and reward is
the hallmark of a well-rounded financial program. We presently manage
over 100 mutual funds in growth, value, blend, fixed income, and
international.
Investment Manager
Putnam Investment
Management, LLC
One Post Office Square
Boston, MA 02109
Investment Sub-Manager
Putnam Investments Limited
57-59 St. James Street
London, England SW1A 1LD
Marketing Services
Putnam Retail Management
One Post Office Square
Boston, MA 02109
Custodian
Putnam Fiduciary
Trust Company
Legal Counsel
Ropes & Gray LLP
Trustees
John A. Hill, Chairman
Jameson Adkins Baxter
Charles B. Curtis
Myra R. Drucker
Charles E. Haldeman, Jr.
Ronald J. Jackson
Paul L. Joskow
Elizabeth T. Kennan
John H. Mullin, III
Robert E. Patterson
George Putnam, III
W. Thomas Stephens
Richard B. Worley
Officers
George Putnam, III
President
Charles E. Porter
Executive Vice President,
Associate Treasurer and
Principal Executive Officer
Jonathan S. Horwitz
Senior Vice President
and Treasurer
Steven D. Krichmar
Vice President and
Principal Financial Officer
Michael T. Healy
Assistant Treasurer and
Principal Accounting Officer
Daniel T. Gallagher
Vice President and Legal
and Compliance Liaison Officer
Beth S. Mazor
Vice President
James P. Pappas
Vice President
Richard S. Robie, III
Vice President
Mark C. Trenchard
Vice President and
BSA Compliance Officer
Francis J. McNamara, III
Vice President and
Chief Legal Officer
Charles A. Ruys de Perez
Vice President and
Chief Compliance Officer
Judith Cohen
Clerk and Assistant Treasurer
Call 1-800-225-1581 weekdays from 9:00 a.m. to 5:00 p.m. Eastern Time,
or visit our Web site (www.putnaminvestments.com) anytime for up-to-date
information about the fund's NAV.
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
PRSRT STD
U.S. POSTAGE PAID
PUTNAM
INVESTMENTS
Do you want to save paper and receive this document faster?
Shareholders can sign up for email delivery of shareholder reports on
www.putnaminvestments.com.
220226 4/05
Item 2. Code of Ethics:
-----------------------
Not applicable
Item 3. Audit Committee Financial Expert:
-----------------------------------------
Not applicable
Item 4. Principal Accountant Fees and Services:
-----------------------------------------------
Not applicable
Item 5. Audit Committee: Not applicable
-------------------------
Item 6. Schedule of Investments: Not applicable
--------------------------------
Item 7. Disclosure of Proxy Voting Policies and Procedures For Closed-End
-------------------------------------------------------------------------
Management Investment Companies: Not applicable
--------------------------------
Item 8. Purchases of Equity Securities by Closed-End Management Investment
--------------------------------------------------------------------------
Companies and Affiliated Purchasers: Not applicable
------------------------------------
Item 9. Submission of Matters to a Vote of Security Holders:
------------------------------------------------------------
Not applicable
Item 10. Controls and Procedures:
---------------------------------
(a) The registrant's principal executive officer and principal
financial officer have concluded, based on their evaluation of the
effectiveness of the design and operation of the registrant's
disclosure controls and procedures as of a date within 90 days of
the filing date of this report, that the design and operation of
such procedures are generally effective to provide reasonable
assurance that information required to be disclosed by the registrant
in this report is recorded, processed, summarized and reported within
the time periods specified in the Commission's rules and forms.
(b) Changes in internal control over financial reporting:
Not applicable
Item 11. Exhibits:
------------------
(a) Not applicable
(b) A separate certification for each principal executive officer and
principal financial officer of the registrant as required by Rule 30a-2
under the Investment Company Act of 1940, as amended, and the officer
certifications as required by Section 906 of the Sarbanes-Oxley Act
of 2002 are filed herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934
and the Investment Company Act of 1940, the registrant has duly
caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
NAME OF REGISTRANT
By (Signature and Title): /s/Michael T. Healy
--------------------------
Michael T. Healy
Principal Accounting Officer
Date: April 27, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934
and the Investment Company Act of 1940, this report has been signed
below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
By (Signature and Title): /s/Charles E. Porter
---------------------------
Charles E. Porter
Principal Executive Officer
Date: April 27, 2005
By (Signature and Title): /s/Steven D. Krichmar
---------------------------
Steven D. Krichmar
Principal Financial Officer
Date: April 27, 2005