Putnam
Master
Intermediate
Income Trust
ANNUAL REPORT
September 30, 1996
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* Morningstar, Inc., an independent rating agency, once more awarded the
fund its 4-star rating for overall performance (based on the 3- and 5-
year average annual return) as of September 30, 1996. This rating puts
the fund's class A shares among 22.5% of the 96 closed-end fixed-income
funds rated.*
* "Putnam Master Intermediate Income Trust's appeal extends beyond its
solid risk scores. The fund's managers often make well-timed adjustments
within each sector, and indeed, their recent changes have been on
target."
-- Morningstar Closed-End Funds, September 6,1996
CONTENTS
4 Report from Putnam Management
9 Fund performance summary
12 Portfolio holdings
25 Financial statements
Footnote reads:
* Morningstar rates a fund relative to other funds with similar
investment objectives based on the fund's 3-, 5-, and 10-year
performance, adjusted for risk factors and sales charges. Ratings are
updated monthly; 10% of funds receive 5 stars and 22.5% receive 4 stars.
For the 3- and 5-year periods ended 9/30/96, there were 96 and 63 funds
in the fixed-income category; the fund received 4 stars for each
respective period.
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
(copyright) Karsh, Ottawa
Dear Shareholder:
A portfolio invested in U.S. high-yield, U.S. government, and
international fixed-income securities once again provided shareholders
of Putnam Master Intermediate Income Trust with positive results during
the fiscal year ended September 30, 1996. Vibrant performance by high-
yield and international bonds offset the more restrained results posted
by U.S. government securities during the period, demonstrating the value
of diversification across a wide spectrum of the world's bond markets.
The U.S. high-yield bond market was the beneficiary of continued
economic strength, and the growth-oriented companies represented in the
fund's high-yield sector were among the best performing. The
international bond sector's focus on core European and emerging markets
also proved advantageous. Even within the less vibrant U.S. government
sector, a shift in emphasis to mortgage-backed securities away from
Treasuries was worthwhile.
Your fund's management team comments in depth about fiscal 1996
performance and prospects for fiscal 1997 in the following report.
Respectfully yours,
/S/George Putnam
George Putnam
Chairman of the Trustees
November 20, 1996
Report from the Fund Managers
Jennifer E. Leichter, lead manager
Neil J. Powers
D. William Kohli
Mark J. Siegel
Thanks once again to its broadly diversified trisector investment
strategy, Putnam Master Intermediate Income Trust ended fiscal 1996 with
solid returns: 11.09% at net asset value and 10.34% at market price.
Through much of the fiscal year ended September 30, 1996, U.S. economic
growth remained strong, while corporate earnings slipped and then
rebounded. Because the economy continued to grow at a faster-than-
expected pace, investors' fears of inflation lingered, producing an
unfriendly environment for U.S. Treasury securities.
Throughout this turbulence, your fund delivered exactly what it is
designed to deliver. Its diversified investment strategy successfully
capitalized on thriving sectors of the bond market. Vibrant performance
by the fund's U.S. high-yield bond sector was the big story throughout
this fiscal year. In addition, the contribution of international bonds
was essential to the fund's resilience. Please see pages 9 and 10 for
complete performance information.
* HIGH-YIELD HOLDINGS DRIVE PERFORMANCE RESULTS
The high-yield sector has performed extremely well during the past
several years, continuing to do so in fiscal 1996. Corporate
profitability remained robust despite some slowing in overall U.S.
economic growth and uncertainties concerning inflation throughout the
period. Several industries in which the fund has substantial positions,
including telecommunications, media, recreation, and retailers,
delivered attractive results.
During the period, we continued to reduce the fund's allocation to core
cyclical issues, a shift we first began implementing in mid-1995 as the
U.S. economy showed signs of diminishing growth. Cyclical companies,
such as those in the chemical, paper, and automotive industries, are so
called because their performance typically rises and falls along with
the pace of the economy. At the same time, we added to the fund's
holdings of more growth-oriented companies in the telecommunications
sector -- the industry with the largest representation in the portfolio
- -- and in other media such as television and radio.
In February of this year, Congress passed legislation to deregulate the
telecommunications and broadcasting industries. This new
telecommunications deregulation reform law eased business restrictions
on radio stations, cable television, and long-distance telephone
service. It will ultimately allow a single company to offer services in
more than one area (for example, a telephone company may also provide
cable television service) or to own more than one provider of a
particular service in a certain region (a company may own several radio
stations in one city).
[GRAPHIC OMITTED: TOP THREE HOLDINGS PER SECTOR*]
HIGH-YIELD BONDS MARKET VALUE PERCENTAGE
Bancomext Trust
Bank guaranteed 11 1/4s, 2006 $3,666,250 1.1%
Midland Funding Corp. $2,100,989 0.6%
Deb. Ser. A, 11 3/4s, 2005
Columbia/HCA Healthcare Corp $2,084,320 6.0%
Med. term notes, 8.05s, 2006
INTERNATIONAL FIXED-INCOME SECURITIES
Italy (Government of) $8,671,224 2.6%
Bonds 9 1/2s, 2001
Canada (Government of) $6,092,976 1.8%
Deb. 8 3/4s, 2005
Spain (Government of) $6,031,834 1.8%
Deb. 10.1s, 2001
U.S. GOVERNMENT OBLIGATIONS
GNMA $19,503,550 5.9%
7 1/2s, with various due dates from
12/15/23 to 4/15/26
FNMA $16,032,426 4.8%
7 1/2s, with various due dates from
1/1/26 to 7/1/26
FNMA TBA $13,174,275 3.9%
8s, 10/16/26
Footnote reads:
*Based on net assets as of 9/30/96. Portfolio holdings will vary over
time.
Among the fund's holdings, Intel Com Group and Intermedia Communications
of Florida, along with several domestic and foreign cellular
communications companies, were among the strongest performers during the
period. Several of these companies issue high-yield securities to help
finance the construction of the fiber-optic network required to attract
corporate customers and to compete with larger telephone service
providers. While these securities and others mentioned in this report
were viewed favorably as of September 30, 1996, all portfolio holdings
are subject to review and adjustment in accordance with the fund's
investment strategy and may vary in the future.
Elsewhere in the high-yield sector, recreation holdings in general
enjoyed robust performance. Two portfolio stars were Lady Luck Gaming
and Mohegan Tribal Gaming. Also, as the economy picked up steam and
valuations became too compelling to ignore, we selectively increased the
fund's retail exposure. Retailers in niche businesses fared well, such
as Loehmanns' Holdings, a discount clothing retailer whose stock has
risen dramatically in price since the start of the period.
* EMPHASIS ON PERIPHERAL EUROPE STRENGTHENS INTERNATIONAL PERFORMANCE
As with the high-yield sector, the fund's investments in international
bonds contributed significantly to its performance during fiscal 1996.
While international bond markets generally delivered positive returns,
we believe our emphasis on country selection and currency management,
rather than on duration management, is what allowed the fund to derive
superior returns from its international holdings.
In this portion of the fund, we focused on bonds in higher-yielding
European markets, particularly those of Italy and Spain, rather than the
core markets. Since then, these and most other European countries have
focused their efforts on reining in fiscal budgets in order to gain
acceptance into the European Monetary Union (EMU), which intends to
create a single currency to be used among member nations. As a result of
these efforts, Italy, Spain, Sweden, and Finland have driven down both
inflation and bond yields. As yields declined, the fund's holdings in
these markets benefited from price appreciation.
We increased the fund's holdings in emerging markets securities, which
enjoyed robust gains through much of the period. Bond markets in Russia
and Poland benefited from upgraded credit ratings in recent months, and
our investments in these markets added to the fund's total return.
Similarly the fund's investments in Mexico and Argentina boosted
performance.
Our currency strategy involved hedging the fund's exposure to various
foreign currencies. This helped protect the portfolio's value as several
European currencies declined in value against the dollar. We
underweighted the yen and deutschemark and capitalized on currency
movements as European nations struggled to be eligible for inclusion in
the EMU.
* MORTGAGE-BACKED SECURITIES REPLACE AND OUTPERFORM TREASURIES
When 1995's bond market rally showed signs of dissipating earlier this
year, we gradually sold the bulk of the fund's U.S. Treasury security
holdings and purchased mortgage-backed securities. At the time we began
this shift, yields on mortgage-backed securities were significantly
above those of comparable Treasuries. Because prices and yields move in
opposite directions, prices on mortgage-backed securities were
relatively low, and we were able to capitalize on some attractive deals.
As the year progressed, yields on Treasuries rose, and the yield spread
between these securities and mortgage-backed securities is now much
closer to the historical average of roughly one percentage point. At the
same time, the value of the fund's mortgage-related holdings has
appreciated as demand for such securities has improved. We will look for
opportunities to harvest this appreciation as market conditions continue
to evolve.
* CONTINUED MODERATE ECONOMIC GROWTH AHEAD
Our outlook for the coming months reflects what we have seen during much
of this year: moderate economic growth, low inflation, and interest
rates that move within a limited range.
For this reason, we anticipate that the sectors and securities that
have served the fund well in recent months will continue to do so into
the beginning of calendar 1997. In the event that economic growth slows,
we have positioned the fund to capitalize on the decline in interest
rates that will likely occur.
We currently plan to increase somewhat the fund's considerable weighting
in high-yield securities to take advantage of the atmosphere of improved
corporate earnings and to protect the fund's value while interest rates
remain stable.
Footnote reads:
The views expressed here are exclusively those of Putnam Management.
They are not meant as investment advice. Although the described holdings
were viewed favorably as of 9/30/96, there is no guarantee the fund will
continue to hold these securities in the future. Investments in non-U.S.
securities may be subject to certain risks such as currency
fluctuations, economic instability and political developments. The lower
ratings of high-yield debt securities reflect a greater possibility that
adverse changes in an issuer's business or financial condition or in
general economic conditions may impair the issuer's ability to pay
principal and interest on the securities. Although the U.S. government
guarantees the timely payment of principal and interest on the U.S.
government and agency obligations, the value of the fund shares is not
guaranteed and will fluctuate.
Performance summary
Performance should always be considered in light of a fund's investment
strategy. Putnam Master Intermediate Income Trust is designed for
investors seeking high current income and relative stability of net
asset value through U.S. government, high-yield, and international
fixed-income securities with limited maturities.
This section provides, at a glance, information about your fund's
performance. 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.
TOTAL RETURN FOR PERIODS ENDED 9/30/96
(most recent calendar quarter)
NAV Market price
- ------------------------------------------------------------------------
1 year 11.09% 10.34%
- ------------------------------------------------------------------------
5 years 64.07 51.02
Annual average 10.41 8.59
- ------------------------------------------------------------------------
Life of fund (since 4/29/88) 115.49 75.18
Annual average 9.55 6.88
- ------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 9/30/96
Lehman Bros Salomon Bros.
Govt. Non-U.S. First Boston Consumer
Intermediate World Govt. High Yield Price
Bond Index Bond Index Index Index
- ------------------------------------------------------------------------
1 year 5.10% 4.03% 10.77% 3.00%
- ------------------------------------------------------------------------
5 years 38.62 72.06 82.11 15.02
Annual average 6.75 11.46 12.73 2.84
- ------------------------------------------------------------------------
Life of fund 92.52 104.70 150.47 34.76
Annual average 8.09 8.88 11.52 3.61
- ------------------------------------------------------------------------
Performance data represent past results and do not reflect future
performance. They do not take into account any adjustment for taxes
payable on reinvested distributions. Investment returns, net asset value
and market price will fluctuate so that an investor's shares, when sold,
may be worth more or less than their original cost.
PRICE AND DISTRIBUTION INFORMATION
12 months ended 9/30/96
- ------------------------------------------------------------------------
Distributions (number) 12
- ------------------------------------------------------------------------
Income $0.616
- ------------------------------------------------------------------------
Return of capital2 0.008
- ------------------------------------------------------------------------
Total $0.624
- -----------------------------------------------------------------------
Share value NAV Market price
- ------------------------------------------------------------------------
9/30/95 $8.38 $7.375
- ------------------------------------------------------------------------
9/30/96 8.58 7.500
- ------------------------------------------------------------------------
Current return
(common shares): NAV Market price
- ------------------------------------------------------------------------
End of period
Current dividend rate1 7.18% 8.21%
- ------------------------------------------------------------------------
1 Income portion of most recent distribution, annualized and divided by
NAV or market price at end of period.
2 See page 34.
TERMS AND DEFINITIONS
Net asset value (NAV) is the value of all your fund's assets, minus any
liabilities, divided by the number of outstanding common shares.
Market price is the current trading price of one share of the fund.
Market prices are set by transactions between buyers and sellers on the
New York Stock Exchange.
COMPARATIVE BENCHMARKS
Lehman Brothers Government Intermediate Bond Index* is an unmanaged list
of U.S. government and mortgage-backed securities composed of all bonds
covered by the Lehman Brothers Government Bond Index with maturities
between 1 and 9.99 years.
Salomon Brothers Non-U.S. World Government Bond Index* is an unmanaged
list of bonds issued by 10 countries.
First Boston High Yield Index* is an unmanaged list of lower-rated
higher-yielding U.S. corporate bonds.
Consumer Price Index (CPI) is a commonly used measure of inflation; it
does not represent an investment return.
*Securities indexes assume reinvestment of all distributions and
interest payments and do not take in account brokerage fees or taxes.
Securities in the fund do not match those in the indexes and performance
of the fund will differ. It is not possible to invest directly in an
index.
Report of independent accountants
September 30, 1996
To the Trustees and Shareholders of
Putnam Master Intermediate Income Trust
We have audited the accompanying statement of assets and liabilities of
Putnam Master Intermediate Income Trust, including the portfolio of
investments owned, as of September 30, 1996, and the related statement
of operations for the year then ended, the statement of changes in net
assets for each of the two years in the period then ended, and the
financial highlights for each of the five years in the period then
ended. These financial statements and financial highlights are the
responsibility of the fund's management. Our responsibility is to
express an opinion on these financial statements and financial
highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included
confirmation of securities owned as of September 30, 1996, by
correspondence with the custodian and brokers. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the
financial position of Putnam Master Intermediate Income Trust as of
September 30, 1996, the results of its operations for the year then
ended, the changes in its net assets for each of the two years in the
period then ended and the financial highlights for each of the five
years in the period then ended, in conformity with generally accepted
accounting principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
November 14, 1996
<TABLE>
<CAPTION>
Portfolio of investments owned
September 30, 1996
CORPORATE BONDS AND NOTES (34.2%) *
PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C> <C>
Advertising (0.5%)
- -----------------------------------------------------------------------------------------------------------------------------
$50,000 Adams Outdoor Advertising sr. notes 10 3/4s, 2006 $ 52,250
750,000 Universal Outdoor, Inc. sr. notes stepped-coupon zero % (14s, 7/1/99), 2004 ++ 652,500
800,000 Universal Outdoor, Inc. sub. deb. 11s, 2003 896,000
------------
1,600,750
Aerospace and Defense (0.4%)
- -----------------------------------------------------------------------------------------------------------------------------
250,000 Alliant Techsystems, Inc. sr. sub. notes 11 3/4s, 2003 270,625
385,000 Greenwich Air Services, Inc. sr. notes 10 1/2s, 2006 395,588
300,000 Howmet Corp. sr. sub. notes 10s, 2003 322,500
95,000 K & F Industries, Inc. 144A sr. sub. notes 10 3/8s, 2004 98,325
100,000 Moog Inc. sr. sub. notes Ser. B, 10s, 2006 100,500
135,000 Unc, Inc. 144A sr. sub. notes 11s, 2006 141,750
------------
1,329,288
Agriculture (0.5%)
- -----------------------------------------------------------------------------------------------------------------------------
1,380,000 PMI Holdings Corp. sub. disc. deb. stepped-coupon Ser. B, zero % (11 1/2s,
9/1/00), 2005 ++ 841,800
787,739 Premium Standard Farms Inc. sr. Secd. notes 11s 2003 (2 double daggers) 768,046
------------
1,609,846
Automotive Parts (0.5%)
- -----------------------------------------------------------------------------------------------------------------------------
300,000 A.P.S. Inc. company guaranty 11 7/8s, 2006 319,500
200,000 Aftermarket Technology Corp. sr. sub. notes 12s, 2004 218,000
950,000 Key Plastics Corp. sr. notes 14s, 1999 978,500
100,000 Speedy Muffler King, Inc. company guaranty 10 7/8s, 2006 (Canada) 102,625
------------
1,618,625
Banks (1.7%)
- -----------------------------------------------------------------------------------------------------------------------------
3,500,000 Bancomext Trust (bank guaranteed) 11 1/4s, 2006 (Mexico) 3,666,250
200,000 Berkeley Federal Bank & Trust sub. deb. 12s, 2005 217,000
1,540,000 First Nationwide Hldgs. 144A sr. sub. notes 10 5/8s, 2003 1,609,300
------------
5,492,550
Broadcasting (1.7%)
- -----------------------------------------------------------------------------------------------------------------------------
250,000 Affinity Group sr. sub. notes 11 1/2s, 2003 257,500
100,000 Chancellor Broadcasting Co. sr. sub. notes 9 3/8s, 2004 99,000
1,150,000 Commodore Media, Inc. sr. sub. notes stepped-coupon 7 1/2s, (13 1/4s,
5/1/98), 2003 ++ 1,193,125
100,000 Granite Broadcasting Corp. sr. sub. notes 9 3/8s, 2005 96,000
250,000 New City Broadcasting Corp. sr. sub. notes 11 3/8s, 2003 276,250
1,000,000 Paxson Communications Corp. 144A sr. sub. notes 11 5/8s, 2002 1,045,000
929,000 Petracom Holdings, Inc. notes stepped-coupon zero % (17 1/2s, 8/1/98), 2003 ++ 790,810
875,000 SFX Broadcasting, Inc. sr. sub. notes Ser. B, 10 3/4s, 2006 910,000
1,248,000 Telemedia Broadcasting Corp. 144A deb. stepped-coupon 3.8s, (16s, 6/15/99),
2004 ++ 1,132,560
------------
5,800,245
Building Products (0.7%)
- -----------------------------------------------------------------------------------------------------------------------------
400,000 Cemex S.A. 144A bonds 12 3/4s, 2006 (Mexico) 436,000
1,000,000 Schuller International Corp. sr. notes 10 7/8s, 2004 1,092,500
500,000 Southdown Inc. sr. sub. notes Ser. B, 10s, 2006 505,000
248,000 Waxman Industries Inc. sr. notes stepped-coupon Ser. B, zero % (12 3/4s,
6/1/99), 2004 ++ 176,080
------------
2,209,580
Building and Construction (0.8%)
- -----------------------------------------------------------------------------------------------------------------------------
250,000 Miles Homes Services sr. notes 12s, 2001 200,000
1,000,000 NVR, Inc. sr. notes 11s, 2003 1,035,000
500,000 Presley Cos. sr. notes 12 1/2s, 2001 486,250
800,000 Scotsman Group, Inc. sr. secd. notes 9 1/2s, 2000 802,000
------------
2,523,250
Buses (0.3%)
- -----------------------------------------------------------------------------------------------------------------------------
220,000 Blue Bird Body Co. sub. deb. Ser. B, 11 3/4s, 2002 227,700
855,000 MCII Holding (USA), Inc. bonds stepped-coupn zero % (12s, 11/15/1998), 2002 ++ 692,550
------------
920,250
Business Services (0.2%)
- -----------------------------------------------------------------------------------------------------------------------------
500,000 Corporate Express, Inc. sr. sub. notes Ser. B, 9 1/8s, 2004 500,000
80,000 Iron Mountain Inc. sr. sub. notes 10 1/8s, 2006 81,500
75,000 Muzak Inc. sr. notes 10s, 2003 75,469
185,000 Pierce Leahy Corp. 144A sr. sub. notes 11 1/8s, 2006 197,488
------------
854,457
Cable Television (3.0%)
- -----------------------------------------------------------------------------------------------------------------------------
1,805,955 Adelphia Communications Corp. sr. notes 9 1/2s, 2004 (2 double daggers) 1,625,360
500,000 American Telecasting, Inc. sr. disc. notes stepped-coupon zero % (14 1/2s,
8/15/00), 2005 ++ 330,000
1,000,000 CF Cable TV, Inc. sr. notes 11 5/8s, 2005 (Canada) 1,130,000
600,000 Charter Communications International disc. notes stepped-coupon Ser. B, zero %
(14s, 3/15/01), 2007 ++ 363,000
500,000 Diamond Cable Communication Co. sr. disc. notes stepped-coupon zero %
(11 3/4s, 12/15/00), 2005 ++ 322,500
1,329,968 Falcon Holdings Group, Inc. sr. sub. notes 11s, 2003 (2 double daggers) 1,230,220
500,000 Lenfest Communications, Inc. sr. notes 8 3/8s, 2005 468,750
2,190,000 International Cabletel, Inc. sr. notes stepped-coupon Ser. B, zero %
(11 1/2s, 2/01/01), 2006 ++ 1,314,000
750,000 Marcus Cable Co. (L.P.) sr. sub. disc. notes stepped-coupon zero %
(13 1/2s, 8/1/99), 2004 ++ 585,000
1,740,000 Telewest Communications PLC deb. stepped-coupon zero % (11s, 10/1/00),
2007 (United Kingdom) ++ 1,104,900
1,260,000 UIH Australia sr. disc. notes stepped-coupon Ser. B, zero % (14s, 5/15/01),
2006 ++ 674,100
800,000 Wireless One, Inc. sr. notes 13s, 2003 828,000
------------
9,975,830
Cellular Communications (1.9%)
- -----------------------------------------------------------------------------------------------------------------------------
285,000 Call-Net Enterprises sr. disc. notes stepped-coupon zero % (13 1/4s,
12/1/99), 2004 ++ 221,587
250,000 Cencall Communications Corp. sr. disc. notes stepped-coupon zero %
(10 1/8s, 1/15/99), 2004 ++ 165,000
1,500,000 Comunicacion Celular bonds stepped-coupon zero % (13 1/8s, 11/15/00),
2003 (Colombia) ++ 922,500
750,000 Dial Call Communications, Inc. sr. disc. notes stepped-coupon zero %
(12 1/4s, 4/15/99), 2004 ++ 517,500
750,000 Intercel, Inc. sr. disc. notes stepped-coupon zero % (12s, 5/1/01), 2006 ++ 412,500
775,000 Milicom International Cellular 144A sr. disc. notes stepped-coupon zero %
(13 1/2s, 6/01/00), 2006 (Luxembourg) ++ 442,719
1,000,000 NEXTEL Communications, Inc. sr. disc. notes stepped-coupon zero %
(9 3/4s, 2/15/99), 2004 ++ 645,000
1,500,000 NEXTEL Communications, Inc. sr. disc. notes stepped-coupon zero %
(11 1/2s, 9/1/98), 2003 ++ 1,110,000
375,000 Orbcomm Global Capital Corp. 144A sr. notes 14s, 2004 384,375
1,700,000 Pricellular Wireless sr. disc. notes stepped-coupon Ser. B, zero %
(14s, 11/15/97), 2001 ++ 1,606,500
------------
6,427,681
Chemicals (0.9%)
- -----------------------------------------------------------------------------------------------------------------------------
1,000,000 Acetex Corp. sr. notes 9 3/4s, 2003 (Canada) 975,000
750,000 Arcadian Partner sr. notes 10 3/4s, 2005 825,000
500,000 G-I Holdings sr. notes Ser. B, 10s, 2006 500,000
500,000 Harris Chemical Corp. sr. secd. disc. notes 10 1/4s, 2001 510,000
100,000 Texas Petrochemical 144A sr. sub. notes 11 1/8s, 2006 105,500
------------
2,915,500
Computer Equipment (0.3%)
- -----------------------------------------------------------------------------------------------------------------------------
1,000,000 Computervision Corp. sr. sub. notes 11 3/8s, 1999 1,047,500
Conglomerates (0.8%)
- -----------------------------------------------------------------------------------------------------------------------------
985,000 Axia, Inc. sr. sub. notes Ser. B, 11s, 2001 994,850
750,000 MacAndrews & Forbes Holdings, Inc. sub. deb. notes 13s, 1999 750,000
966,000 Talley Industries, Inc. sr. disc. deb. stepped-coupon zero % (12 1/4s,
10/15/98), 2005 ++ 828,828
------------
2,573,678
Consumer Durable Goods (0.2%)
- -----------------------------------------------------------------------------------------------------------------------------
500,000 Remington Products Co. LLC 144A sr. sub. notes 11s, 2006 505,000
Consumer Services (0.5%)
- -----------------------------------------------------------------------------------------------------------------------------
1,582,000 Coinmach Corp. sr. notes Ser. B, 11 3/4s, 2005 1,692,740
100,000 E&S Holdings Corp. 144A sr. sub. notes 10 3/8s, 2006 101,750
------------
1,794,490
Containers (0.7%)
- -----------------------------------------------------------------------------------------------------------------------------
1,000,000 Ivex Holdings Corp. sr. disc. deb. stepped-coupon zero % (13 1/4s, 3/15/00),
2005 ++ 632,500
1,500,000 Ivex Packaging Corp. sr. sub. notes 12 1/2s, 2002 1,582,500
75,000 Printpack, Inc. 144A sr. notes 10 5/8s, 2006 77,250
145,000 Printpack, Inc. 144A sr. notes 9 7/8s, 2004 148,263
------------
2,440,513
Electric Utilities (1.0%)
- -----------------------------------------------------------------------------------------------------------------------------
1,000,000 El Paso Electric Co. 1st mtge. Ser. D, 8.9s, 2006 1,012,070
85,000 Hidroelectric Pierda Aguila 144A bonds 10 5/8s, 2001 (Argentina) 85,425
1,950,000 Midland Funding Corp. deb. Ser. A, 11 3/4s, 2005 2,100,989
------------
3,198,484
Electronics (0.8%)
- -----------------------------------------------------------------------------------------------------------------------------
1,300,000 Amphenol Corp. sr. sub. notes 12 3/4s, 2002 1,433,250
2,100,000 International Semi-Tech. Corp. sr. secd. disc. notes stepped-coupon zero %
(11 1/2s, 8/15/00), 2003 (Canada) ++ 1,275,750
------------
2,709,000
Entertainment (0.7%)
- -----------------------------------------------------------------------------------------------------------------------------
650,000 Guitar Center Management 144A sr. notes 11s, 2006 680,875
1,000,000 Premier Parks, Inc. sr. notes Ser. A, 12s, 2003 1,070,000
550,000 Trump Holdings & Funding Corp. sr. notes 15 1/2s, 2005 638,000
------------
2,388,875
Finance (--%)
- -----------------------------------------------------------------------------------------------------------------------------
120,000 Owen Financial Corp. notes 11 7/8s, 2003 125,700
Financial Services (0.4%)
- -----------------------------------------------------------------------------------------------------------------------------
265,000 Contifinacial Corp. sr. notes 8 3/8s, 2003 264,338
500,000 First Federal Financial Corp. notes 11 3/4s, 2004 510,000
460,000 Keystone Group, Inc. sr. secd. notes 9 3/4s, 2003 492,200
------------
1,266,538
Food (0.5%)
- -----------------------------------------------------------------------------------------------------------------------------
619,000 Del Monte Corp. notes 12 1/4s, 2002 (2 double daggers) 619,000
1,000,000 Mafco, Inc. sr. sub. notes 11 7/8s, 2002 1,080,000
------------
1,699,000
Food Chains (0.8%)
- -----------------------------------------------------------------------------------------------------------------------------
1,250,000 Southland Corp. deb. 4s, 2004 853,750
1,750,000 Stater Brothers sr. notes 11s, 2001 1,855,000
------------
2,708,750
Gaming Equipment (0.1%)
- -----------------------------------------------------------------------------------------------------------------------------
180,000 Alliance Gaming Corp. sr. notes 12 7/8s, 2003 186,300
Hospital Management (0.7%)
- -----------------------------------------------------------------------------------------------------------------------------
2,000,000 Columbia/HCA Healthcare Corp. med. term notes 8.05s, 2006 2,084,320
345,000 Paracelsus Healthcare sr. sub. notes 10s, 2006 357,075
------------
2,441,395
Insurance (0.2%)
- -----------------------------------------------------------------------------------------------------------------------------
500,000 Reliance Group Holdings, Inc. sr. sub. deb. 9 3/4s, 2003 505,000
Lodging (0.5%)
- -----------------------------------------------------------------------------------------------------------------------------
750,000 HMH Properties, Inc. sr. notes Ser. B, 9 1/2s, 2005 750,000
1,000,000 Host Marriott Corp. sr. notes Ser. B, 9 1/2s, 2005 1,005,000
------------
1,755,000
Media (--%)
- -----------------------------------------------------------------------------------------------------------------------------
60,000 Gray Communications System Inc. sr. sub. notes 10 5/8s, 2006 61,650
Medical Supplies and Devices (0.6%)
- -----------------------------------------------------------------------------------------------------------------------------
1,000,000 Graphic Controls Corp. sr. sub. notes Ser. A, 12s, 2005 1,082,500
450,000 Ivac Corp. sr. notes 9 1/4s, 2002 455,625
350,000 Wright Medical Technology, Inc. sr. secd. notes Ser. B, 10 3/4s, 2000 349,125
------------
1,887,250
Metals and Mining (0.2%)
- -----------------------------------------------------------------------------------------------------------------------------
190,000 Renco Metals, Inc. sr. notes 11 1/2s, 2003 198,075
235,000 Royal Oak Mines, Inc. 144A sr. sub. notes 11s, 2006 (Canada) 240,581
250,000 Weirton Steel Co. sr. notes 11 3/8s, 2004 251,250
------------
689,906
Motion Picture Distribution (0.6%)
- -----------------------------------------------------------------------------------------------------------------------------
1,100,000 Act III Theatres, Inc. sr. sub. notes 11 7/8s, 2003 1,204,500
505,900 Cinemark Mexico notes Ser. B, 13s, 2003 (Mexico)(2 double daggers) 480,605
34,100 Cinemark Mexico notes Ser. D, 13s, 2003 (Mexico)(2 double daggers) 32,395
400,000 Cinemark USA, Inc. 144A sr. sub. notes 9 5/8s, 2008 400,000
------------
2,117,500
Oil & Gas (1.4%)
- -----------------------------------------------------------------------------------------------------------------------------
500,000 Chesapeake Energy Corp. sr. notes 10 1/2s, 2002 528,750
225,000 Chesapeake Energy Corp. sr. notes 9 1/8s, 2006 222,188
140,000 Cliffs Drilling Co. company guaranty Ser. B, 10 1/4s, 2003 145,600
115,000 Flores & Rucks Corp. sr. sub. notes 9 3/4s, 2006 116,438
600,000 Flores & Rucks, Inc. sr. notes 13 1/2s, 2004 705,000
750,000 Maxus Energy Corp. global notes 9 7/8s, 2002 761,250
250,000 Maxus Energy Corp. notes 9 1/2s, 2003 247,500
350,000 Plains Resources, Inc. sr. sub. notes Ser. B, 10 1/4s, 2006 364,000
500,000 Transamerican Refining Corp. stepped-coupon 1st mtge. Ser. 1, zero %
(18.5s, 2/15/98), 2002 ++ 372,500
1,250,000 Transtexas Gas Corp. sr. secd. notes 11 1/2s, 2002 1,328,125
------------
4,791,351
Paging (0.7%)
- -----------------------------------------------------------------------------------------------------------------------------
1,000,000 Mobile Telecommunications Tech. sr. notes 13 1/2s, 2002 1,040,000
1,000,000 Mobilemedia Corp. sr. sub. notes 9 3/8s, 2007 800,000
500,000 Pronet, Inc. sr. sub. notes 11 7/8s, 2005 455,000
------------
2,295,000
Paper and Forest Products (0.8%)
- -----------------------------------------------------------------------------------------------------------------------------
400,000 Domtar, Inc. notes 8 3/4s, 2006 (Canada) 408,000
330,000 Florida Coast Paper LLC 144A 1st. mtge. 12 3/4s, 2003 355,575
400,000 Four M Corp. 144A sr. notes 12s, 2006 424,000
750,000 Gaylord Container Corp. sr. sub. disc. deb. 12 3/4s, 2005 823,125
500,000 Riverwood International company guaranty 10 7/8s, 2008 492,500
------------
2,503,200
Pharmaceuticals (0.2%)
- -----------------------------------------------------------------------------------------------------------------------------
600,000 Twin Laboratories, Inc. 144A sr. sub. notes 10 1/4s, 2006 603,000
Publishing (0.4%)
- -----------------------------------------------------------------------------------------------------------------------------
850,000 Marvel Holdings, Inc. sr. notes Ser. B, zero %, 1998 673,625
1,000,000 Marvel Parent Holdings, Inc. sr. secd. disc. notes zero %, 1998 785,000
------------
1,458,625
Recreation (2.8%)
- -----------------------------------------------------------------------------------------------------------------------------
585,000 Argosy Gaming Co. 144A 1st. mtge. 13 1/4s, 2004 582,075
715,000 Arizona Charlies Corp. 1st mtge. Ser. B, 12s, 2000 461,175
260,000 Capitol Queen Corp. 1st mtge. notes Ser. B, 12s, 2000 (In default) + 162,500
210,000 Casino America, Inc. sr. notes 12 1/2s, 2003 219,713
215,000 Casino Magic Corp. 144A 1st mtge. 13s, 2003 218,225
400,000 Coast Hotels & Casino company guaranty Ser. B, 13s, 2002 433,000
105,000 Cobblestone Golf Group 144A sr. notes 11 1/2s, 2003 108,150
350,000 Colorado Gaming & Entertainment Co. sr. notes 12s, 2003 (2 double daggers) 336,000
400,000 Elsinore Corp. 1st mtge. 20s, 2000 (In default) + 380,000
500,000 Grand Casinos, Inc. 1st mtge. 10 1/8s, 2003 491,875
1,000,000 Grate Bay Property Funding Corp. 1st mtge. 10 7/8s, 2004 870,000
150,000 Harveys Casino Resorts sr. sub. notes 10 5/8s, 2006 156,750
900,000 Hollywood Casino Corp. sr. notes 12 3/4s, 2003 891,000
1,200,000 Lady Luck Gaming 1st mtge. 11 7/8s, 2001 1,176,000
444,000 Louisiana Casino Cruises Corp. 1st mtge. 11 1/2s, 1998 359,640
750,000 Mohegan Tribal Gaming Auth. sr. notes, Ser. B, 13 1/2s, 2002 937,500
1,100,000 Trump A.C. 1st. mtge. 11 1/4s, 2006 1,083,500
594,000 Trump Castle Funding notes 11 1/2s, 2000 601,425
------------
9,468,528
Restaurants (0.3%)
- -----------------------------------------------------------------------------------------------------------------------------
750,000 FRD Acquisition 144A sr. notes 12 1/2s, 2004 761,250
250,000 Foodmaker, Inc. sr. sub. notes 9 3/4s, 2002 243,750
------------
1,005,000
Retail (1.3%)
- -----------------------------------------------------------------------------------------------------------------------------
2,500,000 Finlay Enterprises, Inc. sr. disc. deb. stepped-coupon zero %
(12s, 5/1/98), 2005 ++ 2,050,000
1,250,000 K Mart Corp. med. term notes 7.55s, 2004 1,036,188
330,000 Loehmanns, Inc. sr. notes 11 7/8s, 2003 349,800
500,000 Mothers Work, Inc. sr. notes 12 5/8s, 2005 528,750
250,000 Specialty Retailers, Inc. sr. sub. notes 11s, 2003 256,250
------------
4,220,988
Specialty Consumer Products (--%)
- -----------------------------------------------------------------------------------------------------------------------------
75,000 Herff Jones, Inc. sr. sub. notes 11s, 2005 79,500
Steel (0.4%)
- -----------------------------------------------------------------------------------------------------------------------------
1,250,000 Ispat Mexicana, SA 144A notes 10 3/8s, 2001 (Mexico) 1,231,250
Supermarkets (0.2%)
- -----------------------------------------------------------------------------------------------------------------------------
500,000 Ralphs Grocery sr. notes 10.45s, 2004 506,875
Telecommunication (2.5%)
- -----------------------------------------------------------------------------------------------------------------------------
1,180,000 American Communication Services, Inc. sr. disc. notes stepped-coupon zero %
(12 3/4s, 4/1/01), 2006 ++ 625,400
425,000 Brooks Fiber Propertities sr. disc. notes stepped-coupon zero % (10 7/8s,
3/1/01), 2006 ++ 261,375
250,000 Fonorola, Inc. sr. notes 12 1/2s, 2002 (Canada) 267,500
1,312,000 GST Telecommunications,Inc. company guaranty stepped-coupon zero % (13 7/8s,
15/15/00), 2005 ++ 711,760
770,000 Hyperion Telecommunication sr. disc. notes stepped-coupon Ser. B, zero % (13s,
4/15/01), 2003 ++ 477,400
100,000 ICG Holding Inc. company guaranty stepped-coupon zero % (12 1/2s, 5/1/01),
2006 ++ 60,000
2,960,000 ICG Holding Inc. sr. disc. notes stepped-coupon zero % (13 1/2s, 9/15/00),
2005 ++ 1,983,200
1,000,000 Intermedia Communications of Florida, Inc. sr. disc. notes stepped-coupon
zero % (12 1/2s, 5/15/01), 2006 ++ 625,000
700,000 Intermedia Communications of Florida, Inc. sr. notes Ser. B, 13 1/2s, 2005 801,500
750,000 Metrocall, Inc. sr. sub. notes 10 3/8s, 2007 622,500
750,000 Nextlink Communications sr. notes 12 1/2s, 2006 768,750
190,000 Omnipoint Corp. 144A sr. notes 11 5/8s, 2006 197,600
500,000 Teleport Communications Group Inc. sr. disc. notes stepped-coupon zero %
(11 1/8s, 7/1/01), 2007 ++ 320,000
1,300,000 Winstar Communications, Inc. sr. disc. notes stepped-coupon zero % (14s,
10/15/00), 2005 ++ 728,000
------------
8,449,985
Textiles (0.5%)
- -----------------------------------------------------------------------------------------------------------------------------
750,000 Foamex (L.P.) Capital Corp. sr. sub. deb. 11 7/8s, 2004 795,000
500,000 Polysindo Inernational Eka company guaranty 13s, 2001 (Indonesia) 555,000
395,000 Polysindo International Finance company guaranty 11 3/8s, 2006 (Indonesia) 415,738
------------
1,765,738
------------
Total Corporate Bonds and Notes (cost $109,846,701) $113,758,421
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (27.7%)
PRINCIPAL AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------
U.S. Government Agency Mortgage Pass-Through Certificates (22.9%)
Federal National Mortgage Association
$6,407 1/2s, Dwarf, March 1, 2006 6,639
5,257,112 8s, with various due dates from November 1, 2025 to June 1, 2026 5,303,119
13,060,000 8s, TBA, October 16, 2026 13,174,275
16,225,177 7 1/2s, with various due dates from January 1, 2026 to July 1, 2026 16,032,426
10,586,053 7s, with various due dates from April 1, 2023 to March 1, 2026 10,212,160
Government National Mortgage Association
19,741,832 7 1/2s, with various due dates from December 15, 2023 to April 15, 2026 19,503,550
12,281,801 7s, with various due dates from July 15, 2025 to June 15, 2026 11,821,241
------------
76,053,410
U.S. Treasury Obligations (4.8%)
- -----------------------------------------------------------------------------------------------------------------------------
3,000,000 U.S. Treasury Bonds 10 3/4s, August 15, 2005 3,796,860
U.S. Treasury Notes
7,000,000 8 1/8s, February 15, 1998 7,193,620
4,955,000 7s, July 15, 2006 5,057,965
------------
16,048,445
------------
Total U.S. Government and Agency Obligations (cost $92,683,498) $ 92,101,855
<CAPTION>
FOREIGN GOVERNMENT BONDS AND NOTES (21.5%) *
PRINCIPAL AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
AUD 1,570,000 Australia (Government of) bonds Ser. 803, 9 1/2s, 2003 $ 1,365,263
CAD 3,205,000 Canada (Government of) bonds 7s, 2006 (Canada) 2,329,732
CAD 7,455,000 Canada (Government of) deb. 8 3/4s, 2005 6,092,976
DKK 26,330,000 Denmark (Government of) bonds 8s, 2003 4,897,180
DKK 9,780,000 Denmark (Government of) bonds 7s, 2004 1,708,662
FRF 19,120,000 France Treasury bill 7s, 2000 3,987,039
FRF 12,740,000 France Treasury bill 4 1/2s, 1998 2,489,978
DEM 1,420,000 Germany (Federal Republic of) bonds 5 5/8s, 1998 964,203
DEM 5,820,000 Germany (Federal Republic of) bonds Ser. 118, 5 1/4s, 2001 3,873,638
DEM 2,570,000 Germany (Federal Republic of) bonds Ser. 96, 6 1/4s, 2006 1,703,784
DEM 5,375,000 Germany (Federal Republic of) bonds 7 3/8s, 2005 3,836,516
DEM 4,260,000 Germany ( FederalRepublic of) bonds 6 7/8s, 2005 2,945,685
ITL 4,765,000,000 Italy (Government of) bonds 9 1/2s, 2001 3,313,291
ITL 12,500,000,000 Italy (Government of) bonds 9 1/2s, 2001 8,671,224
USD 480,000 Poland (Government of) deb. 7 3/4s, 2000 490,800
ZAR 16,750,000 South Africa (Republic of) bonds 12s, 2005 3,147,316
ESP 701,900,000 Spain (Government of) deb. 10.1s, 2001 6,031,834
SEK 14,900,000 Sweden (Government of) bonds 10 1/4s, 2000 2,525,729
SEK 13,800,000 Sweden(Government of) deb. 6s, 2005 1,910,400
GBP 855,000 United Kingdom government guaranty 9s, 2000 1,426,763
GBP 2,560,000 United Kingdom Treasury bonds 8 1/2s, 2007 4,226,860
GBP 1,435,000 United Kingdom Treasury bonds 6 3/4s, 2004 2,144,008
GBP 720,000 United Kingdom Treasury notes 7 3/4s, 2006 1,131,387
USD 397,000 US Dollar Certificate of Deposit (Issued by CSFP(Credit Suisse Financial
Products)The principal at redemption is linked to the bid
price for the Russian Ministry of Finance dollar denominated local bond.
2.5%, May 14, 1999 307,675
------------
Total Foreign Government Bonds and Notes (cost $70,994,477) $ 71,521,943
BRADY BONDS (1.9%) *
PRINCIPAL AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------
$4,018,000 Argentina (Republic of) FRN 6.6563s, 2005 $3,360,052
3,400,000 Brazil (Republic of) FRN, ser. EI-L, 6.5s, 2006 2,953,750
------------
Total Brady Bonds (cost $5,584,601) $ 6,313,802
UNITS (1.9%) *
NUMBER OF UNITS VALUE
- -----------------------------------------------------------------------------------------------------------------------------
600 Australis Media units stepped-coupon zero % (14s, 5/15/2000), 2003 (Australia) ++ $ 351,000
95 Celcaribe S.A. 144A units stepped-coupon zero % (13 1/2s, 3/15/98), 2004 ++ 1,035,500
1,735 Cellnet Data Systems Inc. units stepped-coupon zero % (13s, 6/15/00), 2005 ++ 1,353,300
190 Cobblestone Holdings, Inc. 144A units zero %, 2004 75,050
475 Diva Systems Corp. 144A units stepped-coupon zero % (13s, 5/15/01), 2006 ++ 270,750
1,100 Fitzgerald Gaming Co. units 13s, 2002 836,000
520 Interact Systems, Inc. 144A units stepped-coupon zero % (14s, 8/1/99), 2003 ++ 358,800
245 International Wireless Communications units zero %, 2001 129,850
615 RSL Communications Ltd. 144A units 12 1/4s, 2006 615,000
185 Sterling Chemical Holdings units stepped-coupon zero % (13 1/2s, 8/15/01), 2008 ++ 109,613
1,100 Terex Corp. 144A units 13 3/4s, 2002 1,157,750
200 Wireless One Inc. units stepped-coupon zero % (13 1/2s, 8/1/01), 2006 ++ 108,500
------------
Total Units (cost $5,447,879) $ 6,401,113
COMMON STOCKS (1.6%) *
NUMBER OF SHARES VALUE
- -----------------------------------------------------------------------------------------------------------------------------
12,730 Applause Enterprises, Inc.(acquired various dates from 1/17/89 to 6/7/89,
cost $3,340,795) +(double dagger) $ 38,190
2,955 Axia Holding Corp. 144A + 88,650
12,062 Chesapeake Energy Corp. + 755,383
39,603 Computervision Corp. + 346,526
16,807 Elsinore Corp. + 3,677
10,000 Exide Corp. 258,750
53,023 Grand Union Co.(acquired 6/20/95, cost $1,711,961) +(double dagger) 338,022
3,770 IFINT Diversified Holdings 144A + 185,200
35,327 Lady Luck Gaming Corp.(acquired 10/1/93, cost $29,100) +(double dagger) 94,940
20,110 Loehmanns' Holdings, Inc. + 485,279
50,000 NEXTEL Communications, Inc. Class A + 925,000
464 PMI Holdings Corp. 144A + 102,080
327 Premium Holdings L.P. + 8,175
71,533 PSF Holding LLC Class A 1,072,995
12,500 Southdown, Inc. 307,813
10,050 Specialty Foods Corp. + 5,025
8,186 Total Renal Care Holdings 242,510
------------
Total Common Stocks (cost $9,321,924) $5,258,215
ASSET-BACKED SECURITIES (1.0%) *
PRINCIPAL AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------
$1,096,000 Chemical Master Credit Card Trust Ser. 95-2, Class A, 6.23s, 2003 $1,078,190
2,255,000 Sears Credit Account Master Trust Ser. 95-5, Class A, 6.05s, 2004 2,147,888
------------
Total Asset-Backed Securities (cost $3,376,359) $3,226,078
PREFERRED STOCKS (0.6%) *
NUMBER OF SHARES VALUE
- -----------------------------------------------------------------------------------------------------------------------------
7,400 Cablevision Systems Ser. M, $11.125 dep. shs. pfd. $721,500
9,600 Diva Systems Corp. Ser. C, $6.00 pfd. 84,000
11,765 Fitzgeralds Gaming $3.75 pfd. 270,595
37,000 SDW Hldgs Corp. 144A $3.50 pfd. 1,073,000
------------
Total Preferred Stocks (cost $2,038,826) $ 2,149,095
CONVERTIBLE BONDS AND NOTES (0.4%) *
PRINCIPAL AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------
$164,000 GST Telecommunications, Inc. cv sr. disc. notes stepped-coupon zero %
(13 7/8s, 15/15/00), 2005++ $ 152,520
900,000 Pricellular Wireless Corp. 144A cv. sub. notes stepped-coupon zero %
(10 3/4s, 8/15/00),2004 ++ 855,000
650,000 Winstar Communications. Inc. cv sr. disc. notes stepped-coupon zero %
(14s, 10/15/00), 2005 ++ 416,000
------------
Total Convertible Bonds and Notes (cost $949,525) $ 1,423,520
COLLATERALIZED MORTGAGE OBLIGATIONS (0.9%) *
PRINCIPAL AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------
$1,000,000 Citicorp Mtge. Securities, Inc. Ser. 92-10 M, 8s, 2022 $ 1,006,250
534,351 Resolution Trust Corp. Ser. 94-1 A2A, 7 3/4s, 2029 535,520
1,359,984 Resolution Trust Corp. Ser. 94-1 M1, 7.14s, 2029 1,302,185
------------
Total Collateralized Mortgage Obligations (cost $2,659,572) $ 2,843,955
<CAPTION>
PURCHASED OPTIONS OUTSTANDING (0.2%) *
NUMBER OF EXPIRATION DATE/
CONTRACTS STRIKE PRICE VALUE
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ITL 4,400,000,000 Italian Government Bonds Futures Contracts (Call) Nov.96/119.6 $69,915
JPY 1,337,000,000 Japanese Government Bonds Futures Contracts (Call) Nov.96/117.5 570,546
------------
Total Purchased Options Outstanding (cost $551,869) $640,461
<CAPTION>
WARRANTS (0.2%) * +
NUMBER OF WARRANTS EXPIRATION DATE VALUE
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
32,500 Becker Gaming Corp. 144A 11/15/00 $6,500
6,825 Capital Gaming International, Inc. 2/1/99 273
1,387 Casino America, Inc. 11/15/96 139
7,860 Casino Magic Finance Corp. 10/14/96 79
1,150 Commodore Media 144A 7/5/01 149,500
1,500 Comunicacion Celular 144A (Colombia) 11/15/20 75,000
1,200 County Seat Holdings, Inc. 10/15/98 1,200
9,999 Elsinore Corp. 10/8/98 1,000
500 Fitzgerald Gaming Co. 144A 3/15/99 50
770 Hyperion Telecommunications 144A 4/15/01 7,700
9,768 Intelcom Group 9/15/03 151,404
700 Intermedia Communications 144A 6/1/00 28,000
1,470 Louisiana Casino Cruises, Inc. 144A 12/1/98 22,050
750 NEXTEL Communications Inc. 1/1/98 15
1,840 Pagemart, Inc. 144A 12/31/03 15,180
1,750 Payless Cashways, Inc. 11/1/96 2
1,400 Petracom Holdings, Inc. 9/30/99 9,975
3,700 Sdw Hldgs Corp. Senior B 144A 4/1/04 48,100
21 Telemedia Broadcasting Corp. 144A 4/1/04 15,923
100 Wright Medical Technology, Inc. 144A 6/30/03 13,030
------------
Total Warrants (cost $390,607) $545,120
<CAPTION>
CONVERTIBLE PREFERRED STOCKS (0.2%) * (cost $700,000)
NUMBER OF SHARES VALUE
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
28,000 Cablevision Systems Corp. Ser. I, $8.50 cv. pfd. $689,500
SHORT-TERM INVESTMENTS (9.9%) * (cost $32,777,121)
PRINCIPAL AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------
$32,772,000 Interest in $365,453,000 joint repurchase agreement dated September 30,
1996 with Goldman, Sachs and Co. due October 1,1996 with respect to
various U.S. Treasury obligations -- maturity value of $32,777,121 for
an effective yield of 5.625%
32,777,121
- -----------------------------------------------------------------------------------------------------------------------------
Total Investments (cost $337,322,959)*** $339,650,199
- -----------------------------------------------------------------------------------------------------------------------------
* Percentages indicated are based on net assets of $332,536,514.
*** The aggregate identified cost on a tax basis is
$337,394,686, resulting in gross unrealized appreciation and
depreciation of $16,281,165 and $14,025,652, respectively,
or net unrealized appreciation of $2,255,513.
+ Non-income-producing security.
++ The interest rate and date shown parenthetically represent
the new interest rate to be paid and the date the fund will
begin receiving interest at this rate.
(double dagger) Restricted, excluding 144A securities, as to public resale.
The total market value of restricted securities held at
September 30, 1996 was $471,152 or less than 1% of
net assets.
(2 double daggers) Income may be received in cash or additional securities at
the discretion of the issuer.
144A after the name of a security represents those exempt
from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions exempt
from registration, normally to qualified institutional
buyers.
TBA after the name of a security represents to be announced
securities (See Note 1).
<CAPTION>
- -----------------------------------------------------------------------------------
Forward Currency Contracts to Buy at September 30, 1996
(aggregate face value $52,990,845)
Unrealized
Aggregate Face Delivery Appreciation/
Market Value Value Date (Depreciation)
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Australian Dollars $ 4,270,955 $ 4,268,837 12/18/96 $ 2,118
British Pounds 2,928,140 2,923,633 12/18/96 4,507
Canadian Dollars 579,909 576,050 12/18/96 3,859
Deutschemarks 14,536,908 14,762,607 12/18/96 (225,699)
Euro Currency 1,757,293 1,777,724 12/18/96 (20,431)
French Franc 9,599,753 9,810,870 12/18/96 (211,117)
Italian Lira 1,658,076 1,662,001 12/18/96 (3,925)
Japanese Yen 16,508,576 17,043,919 12/18/96 (535,343)
Swedish Krona 165,252 165,204 12/18/96 48
- -----------------------------------------------------------------------------------
$(985,983)
- -----------------------------------------------------------------------------------
Forward Currency Contracts to Sell at September 30, 1996
(aggregate face value $61,579,964)
Unrealized
Market Aggregate Face Delivery Appreciation/
Value Value Date (Depreciation)
- -----------------------------------------------------------------------------------
Canadian Dollars $ 1,082,889 $ 1,078,209 12/18/96 $ (4,680)
Danish Krone 3,793,295 3,875,187 12/18/96 81,892
Deutschemarks 17,704,141 17,926,116 12/18/96 221,975
French Francs 6,263,666 6,414,305 12/18/96 150,639
Italian Lira 5,681,504 5,675,175 12/18/96 (6,329)
Japanese Yen 17,680,662 17,925,944 12/18/96 245,282
Spanish Peseta 2,300,850 2,317,000 12/18/96 16,150
Swedish Krona 2,128,796 2,131,828 12/18/96 3,032
Swiss Francs 4,164,153 4,236,200 12/18/96 72,047
- -----------------------------------------------------------------------------------
$780,008
- -----------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
September 30, 1996
<S> <C>
Assets
- ------------------------------------------------------------------------------------------------------------
Investments in securities, at value (identified cost $337,322,959) (Note 1) $339,650,199
- ------------------------------------------------------------------------------------------------------------
Cash 255,455
- ------------------------------------------------------------------------------------------------------------
Dividends, interest and other receivables 5,458,583
- ------------------------------------------------------------------------------------------------------------
Receivable for securities sold 13,244,880
- ------------------------------------------------------------------------------------------------------------
Receivable for open forward currency contracts 806,054
- ------------------------------------------------------------------------------------------------------------
Receivable for closed forward currency contracts 1,038,380
- ------------------------------------------------------------------------------------------------------------
Total assets 360,453,551
Liabilities
- ------------------------------------------------------------------------------------------------------------
Distributions payable to shareholders 1,929,517
- ------------------------------------------------------------------------------------------------------------
Payable for securities purchased 23,599,193
- ------------------------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 623,492
- ------------------------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 60,489
- ------------------------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 6,150
- ------------------------------------------------------------------------------------------------------------
Payable for open forward currency contracts 1,012,029
- ------------------------------------------------------------------------------------------------------------
Payable for closed forward currency contracts 639,143
- ------------------------------------------------------------------------------------------------------------
Other accrued expenses 47,024
- ------------------------------------------------------------------------------------------------------------
Total liabilities 27,917,037
- ------------------------------------------------------------------------------------------------------------
Net assets $332,536,514
Represented by
- ------------------------------------------------------------------------------------------------------------
Paid-in capital (Note 1) 356,695,640
- ------------------------------------------------------------------------------------------------------------
Distributions in excess of net investment income (Note 1) (1,968,520)
- ------------------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments and foreign currency transactions (Note 1) (24,289,437)
- ------------------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments and assets and liabilities in foreign currencies 2,098,831
- ------------------------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to capital shares outstanding $332,536,514
Computation of net asset value
- ------------------------------------------------------------------------------------------------------------
Net asset value per share ($332,536,514 divided by 38,737,138 shares) $8.58
- ------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Year ended September 30, 1996
<S> <C>
Investment Income:
- ------------------------------------------------------------------------------------------------------------
Interest income (net of foreign tax of $57,143) $27,602,851
- ------------------------------------------------------------------------------------------------------------
Dividends 206,521
- ------------------------------------------------------------------------------------------------------------
Total investment income 27,809,372
Expenses:
- ------------------------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 2,479,579
- ------------------------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 409,785
- ------------------------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 14,758
- ------------------------------------------------------------------------------------------------------------
Administrative services (Note 2) 12,383
- ------------------------------------------------------------------------------------------------------------
Reports to shareholders 19,280
- ------------------------------------------------------------------------------------------------------------
Registration fees 934
- ------------------------------------------------------------------------------------------------------------
Auditing 63,160
- ------------------------------------------------------------------------------------------------------------
Legal 30,850
- ------------------------------------------------------------------------------------------------------------
Postage 190,571
- ------------------------------------------------------------------------------------------------------------
Exchange listing fees 34,008
- ------------------------------------------------------------------------------------------------------------
Other 7,106
- ------------------------------------------------------------------------------------------------------------
Total expenses 3,262,414
- ------------------------------------------------------------------------------------------------------------
Expense reduction (Note 2) (60,421)
- ------------------------------------------------------------------------------------------------------------
Net expenses 3,201,993
- ------------------------------------------------------------------------------------------------------------
Net investment income 24,607,379
- ------------------------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 6,730,795
- ------------------------------------------------------------------------------------------------------------
Net realized gain on written options (Notes 1 and 3) 87,232
- ------------------------------------------------------------------------------------------------------------
Net realized loss on foreign currency transactions (494,540)
- ------------------------------------------------------------------------------------------------------------
Net unrealized appreciation of assets and liabilities in foreign currencies during the year 272,679
- ------------------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments during the year 807,211
- ------------------------------------------------------------------------------------------------------------
Net gain on investments 7,403,377
- ------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $32,010,756
- ------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Year ended
September 30
1996 1995
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase in net assets
- ------------------------------------------------------------------------------------------------------------------------------
Operations:
- ------------------------------------------------------------------------------------------------------------------------------
Net investment income $24,607,379 $26,125,369
- ------------------------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments and foreign currency transactions 6,323,487 (8,566,768)
- ------------------------------------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments and assets and liabilities in foreign currencies 1,079,890 16,501,196
- ------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 32,010,756 34,059,797
- ------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ------------------------------------------------------------------------------------------------------------------------------
From net investment income (23,973,364) (19,003,541)
- ------------------------------------------------------------------------------------------------------------------------------
From return of capital (318,440) (5,547,437)
- ------------------------------------------------------------------------------------------------------------------------------
Shares repurchased(Note 4) (1,917,095) (70,000)
- ------------------------------------------------------------------------------------------------------------------------------
Total increase in net assets 5,801,857 9,438,819
- ------------------------------------------------------------------------------------------------------------------------------
Net Assets
- ------------------------------------------------------------------------------------------------------------------------------
Beginning of year 326,734,657 317,295,838
- ------------------------------------------------------------------------------------------------------------------------------
End of year (including distributions in excess of net investment income
of $1,968,520 and $2,958,512 respectively) $332,536,514 $ 326,734,657
- ------------------------------------------------------------------------------------------------------------------------------
Number of fund shares
- ------------------------------------------------------------------------------------------------------------------------------
Shares outstanding at beginning of year 38,995,338 39,005,338
- ------------------------------------------------------------------------------------------------------------------------------
Shares repurchased (258,200) (10,000)
- ------------------------------------------------------------------------------------------------------------------------------
Shares outstanding at end of year 38,737,138 38,995,338
- ------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
Year ended September 30
- ------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period $8.38 $8.13 $8.91
- ------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------
Net investment income .63 .67 .62
- ------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments .19 .21 (.71)
- ------------------------------------------------------------------------------------------------------------------
Total from investment operations .82 .88 (.09)
- ------------------------------------------------------------------------------------------------------------------
Less distributions to shareholders:
- ------------------------------------------------------------------------------------------------------------------
From net investment income (.61) (.49) (.55)
- ------------------------------------------------------------------------------------------------------------------
In excess of net investment income -- -- --
- ------------------------------------------------------------------------------------------------------------------
From net realized gain on investments -- -- (.06)
- ------------------------------------------------------------------------------------------------------------------
From return of capital (.01) (.14) (.08)
- ------------------------------------------------------------------------------------------------------------------
Total distributions (.62) (.63) (.69)
- ------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $8.58 $8.38 $8.13
- ------------------------------------------------------------------------------------------------------------------
Market value, end of period $7.500 $7.375 $7.250
- ------------------------------------------------------------------------------------------------------------------
Total investment return at market value (%)(a) 10.34 10.90 (5.57)
- ------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $332,537 $326,735 $317,296
- ------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%)(b) .99 1.03 .92
- ------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets (%) 7.44 8.24 7.18
- ------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 232.90 219.63 204.92
- ------------------------------------------------------------------------------------------------------------------
<CAPTION>
Financial highlights (continued)
(For a share outstanding throughout the period)
Year ended September 30
- --------------------------------------------------------------------------------------------------------------
1993 1992
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net asset value, beginning of period $8.71 $8.16
- --------------------------------------------------------------------------------------------------------------
Investment operations
- --------------------------------------------------------------------------------------------------------------
Net investment income .68 .74
- --------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments .29 .63
- --------------------------------------------------------------------------------------------------------------
Total from investment operations .97 1.37
- --------------------------------------------------------------------------------------------------------------
Less distributions to shareholders:
- --------------------------------------------------------------------------------------------------------------
From net investment income (.68) (.74)
- --------------------------------------------------------------------------------------------------------------
In excess of net investment income (.09) --
- --------------------------------------------------------------------------------------------------------------
From net realized gain on investments -- --
- --------------------------------------------------------------------------------------------------------------
From return of capital -- (.08)
- --------------------------------------------------------------------------------------------------------------
Total distributions (.77) (.82)
- --------------------------------------------------------------------------------------------------------------
Net asset value, end of period $8.91 $8.71
- --------------------------------------------------------------------------------------------------------------
Market value, end of period $8.375 $8.500
- --------------------------------------------------------------------------------------------------------------
Total investment return at market value (%)(a) 7.89 21.13
- --------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $347,620 $339,871
- --------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%)(b) .96 .98
- --------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets (%) 7.83 8.76
- --------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 237.63 134.43
- --------------------------------------------------------------------------------------------------------------
(a) Total investment return does not reflect the effect of sales charges.
(b) The ratio of expenses to average net assets for the year ended September 30,1995 and thereafter includes
amounts paid through expense offset arrangements (Note 2).
</TABLE>
Notes to financial statements
September 30, 1996
Note 1
Significant accounting policies
The fund is registered under the Investment Company Act of 1940, as
amended, as a diversified, closed-end management investment company. The
fund's investment objective is to seek, with equal emphasis, high
current income and relative stability of net asset value, by allocating
its investments among the U.S. government sector, high-yield sector and
international sector.
The following is a summary of significant accounting policies
consistently followed by the fund in the preparation of its financial
statements. The preparation of financial statements is in conformity
with generally accepted accounting principles and requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities. Actual results could differ from those
estimates.
A) Security valuation Investments for which market quotations are
readily available are stated at market value, which is determined using
the last reported sale price, or, if no sales are reported -- as in the
case of some securities traded over-the-counter -- the last reported bid
price. Securities quoted in foreign currencies are translated into U.S.
dollars at the current exchange rate. Short-term investments having
remaining maturities of 60 days or less are stated at amortized cost,
which approximates market value, and other investments, including
restricted securities, are stated at fair value following procedures
approved by the Trustees. Market quotations are not considered to be
readily available for long-term corporate bonds and notes; such
investments are stated at fair value on the basis of valuations
furnished by a pricing service, approved by the Trustees, or dealers
which determines valuations for normal, institutional-size trading units
of such securities using methods based on market transactions for
comparable securities and various relationships between securities which
are generally recognized by institutional traders.
B) Joint trading account Pursuant to an exemptive order issued by the
Securities and Exchange Commission, the fund may transfer uninvested
cash balances into a joint trading account along with the cash of other
registered investment companies and certain other accounts managed by
Putnam Investment Management, Inc. ("Putnam Management"), the fund's
Manager, a wholly-owned subsidiary of Putnam Investments, Inc.. These
balances may be invested in one or more repurchase agreements and/or
short-term money market instruments.
C) Repurchase agreements The fund, or any joint trading account, through
its custodian, receives delivery of the underlying securities, the
market value of which at the time of purchase is required to be in an
amount at least equal to the resale price, including accrued interest.
Putnam Management is responsible for determining that the value of these
underlying securities is at all times at least equal to the resale
price, including accrued interest.
D) Security transactions and related investment income Security
transactions are accounted for on the trade date (date the order to buy
or sell is executed).
Interest income is recorded on the accrual basis. Dividend income is
recorded on the ex-dividend date except that certain dividends from
foreign securities are recorded as soon as the fund is informed of the
ex-dividend date. Discounts on zero coupon bonds, original issue,
stepped-coupon bonds and payment in kind bonds are accreted according to
the effective yield method.
E) Foreign currency translation The accounting records of the fund are
maintained in U.S. dollars. The market value of foreign securities,
currency holdings, other assets and liabilities are recorded in the
books and records of the fund after translation to U.S. dollars based on
the exchange rates on that day. The cost of each security is determined
using historical exchange rates. Income and withholding taxes are
translated at prevailing exchange rates when accrued or incurred. The
fund does not isolate that portion of realized or unrealized gains or
losses resulting from changes in the foreign exchange rate on
investments from fluctuations arising from changes in the market prices
of the securities. Such fluctuations are included with the net realized
and unrealized gain or loss on investments. Net realized gains and
losses on foreign currency transactions represent net exchange gains or
losses on closed forward currency contracts, disposition of foreign
currencies and the difference between the amount of investment income
and foreign withholding taxes recorded on the fund's books and the U.S.
dollar equivalent amounts actually received or paid. Net unrealized
gains and losses on foreign currency transactions arise from changes in
the value of open forward currency contracts and assets and liabilities
other than investments at the period end, resulting from changes in the
exchange rate.
F) Forward currency contracts The fund may engage in forward currency
contracts, which are agreements between two parties to buy and sell
currencies at a set price on a future date, to protect against a decline
in value relative to the U.S. dollar of the currencies in which its
portfolio securities are denominated or quoted (or an increase in the
value of a currency in which securities a fund intends to buy are
denominated, when a fund holds cash reserves and short-term
investments). The U.S. dollar value of forward currency contracts is
determined using forward currency exchange rates supplied by a quotation
service. The market value of the contract will fluctuate with changes in
currency exchange rates. The contract is "marked to market" daily and
the change in market value is recorded as an unrealized gain or loss.
When the contract is closed, the fund records a realized gain or loss
equal to the difference between the value of the contract at the time it
was opened and the value at the time it was closed. The fund could be
exposed to risk if the value of the currency changes unfavorably, if the
counterparties to the contracts are unable to meet the terms of their
contracts or if the fund is unable to enter into a closing position.
G) Futures and options contracts The fund may use futures and options
contracts to hedge against changes in the values of securities the fund
owns or expects to purchase. The fund may also write options on
securities it owns or in which it may invest to increase its current
returns.
The potential risk to the fund is that the change in value of futures
and options contracts may not correspond to the change in value of the
hedged instruments. In addition, losses may arise from changes in the
value of the underlying instruments, if there is an illiquid secondary
market for the contracts, or if the counterparty to the contract is
unable to perform.
Futures contracts are valued at the quoted daily settlement prices
established by the exchange on which they trade. Exchange traded options
are valued at the last sale price, or if no sales are reported, the last
bid price for purchased options and the last ask price for written
options. Options traded over-the-counter are valued using prices
supplied by dealers.
H) TBA purchase commitments The fund may enter into "TBA" (to be
announced) purchase commitments to purchase securities for a fixed unit
price at a future date beyond customary settlement time. Although the
unit price has been established, the principal value has not been
finalized. However, the amount of the commitments will not fluctuate
more than 1.0% from the principal amount. The fund holds, and maintains
until settlement date, cash or high-grade debt obligations in an amount
sufficient to meet the purchase price, or the fund may enter into
offsetting contracts for the forward sale of other securities it owns.
Income on the securities will not be earned until settlement date. TBA
purchase commitments may be considered securities in themselves, and
involve a risk of loss if the value of the security to be purchased
declines prior to the settlement date, which risk is in addition to the
risk of decline in the value of the fund's other assets. Unsettled TBA
purchase commitments are valued at the current market value of the
underlying securities, according to the procedures described under
Security valuation above.
Although the fund will generally enter into TBA purchase commitments
with the intention of acquiring securities for their portfolio or for
delivery pursuant to options contracts it has entered into, the fund may
dispose of a commitment prior to settlement if Putnam Management deems
it appropriate to do so.
I) Federal taxes It is the policy of the fund to distribute all of its
taxable income within the prescribed time and otherwise comply with the
provisions of the Internal Revenue Code applicable to regulated
investment companies. It is also the intention of the fund to distribute
an amount sufficient to avoid imposition of any excise tax under Section
4982 of the Internal Revenue Code of 1986. Therefore, no provision has
been made for federal taxes on income, capital gains or unrealized
appreciation on securities held and for excise tax on income and capital
gains.
At September 30, 1996, the fund had a capital loss carryover of
approximately $24,218,000 available to offset future capital gains, if
any. The amount of the carryover and the expiration dates are:
Loss Carryover Expiration
- --------------------------------------------
$14,419,000 September 30, 1999
7,035,000 September 30, 2003
2,764,000 September 30, 2004
J) Distributions to shareholders Distributions to shareholders are
recorded by the fund on the ex-dividend date. At certain times, the fund
may pay distributions at a level rate even though, as a result of market
conditions or investment decisions, the fund may not achieve projected
investment results for a given period. The amount and character of
income and gains to be distributed are determined in accordance with
income tax regulations which may differ from generally accepted
accounting principles. These differences include losses on wash sale
transactions, realized and unrealized gains and losses on forward
foreign currency contracts, currency gains and losses on foreign bonds,
post October loss deferrals, market discount, interest on payment-in-
kind securities, amortization of bond premium and defaulted bond
interest. Reclassifications are made to the fund's capital accounts to
reflect income and gains available for distribution (or available
capital loss carryovers) under income tax regulations. For the year
ended September 30, 1996, the fund reclassified $355,977 to decrease
distributions in excess of net investment income and $366,714 to
decrease paid-in-capital, with a decrease to accumulated net realized
loss on investments of $10,737. The calculation of net investment income
per share in the financial highlights table excludes these adjustments.
Note 2
Management fee, administrative services and other transactions
Compensation of Putnam Management, for management and investment
advisory services is paid quarterly based on the average weekly net
assets of the fund. Such fee is based on the following annual rates:
0.75% of the first $500 million of average weekly net assets, 0.65% of
the next $500 million, 0.60% of the next $500 million, and 0.55% of any
amount over $1.5 billion, subject, under current law, to reduction in
any year by the amount of certain brokerage commissions and fees (less
expenses) received by affiliates of Putnam Management on the fund's
portfolio transactions.
The fund reimburses Putnam Management 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 wholly-owned subsidiary of Putnam
Investments, Inc. Investor servicing agent functions are provided by
Putnam Investor Services, a division of PFTC.
For the year ended September 30, 1996, fund expenses were reduced by
$60,421 under expense offset arrangements with PFTC. Investor servicing
and custodian fees reported in the Statement of operations exclude these
credits. The fund could have invested a portion of the assets utilized
in connection with the expense offset arrangements in an income
producing asset if it had not entered into such arrangements.
Trustees of the fund receive an annual Trustees fee of $880 and an
additional fee for each Trustee's meeting attended. Trustees who are not
interested persons of Putnam Management and who serve on committees of
the Trustees receive additional fees for attendance at certain committee
meetings.
The fund adopted a Trustee Fee Deferral Plan (the "Plan") which allows
the Trustees to defer the receipt of all or a portion of Trustees Fees
payable on or after July 1, 1995. The deferred fees remain in the fund
and are invested in certain Putnam funds until distribution in
accordance with the Plan.
Note 3
Purchase and sales of securities
During the year ended September 30, 1996, purchases and sales of
investment securities other than U.S. government obligations and short-
term investments aggregated $338,118,816 and $340,636,533, respectively.
Purchases and sales of U.S. government obligations aggregated
$389,332,617 and $429,094,526, respectively. In determining the net gain
or loss on securities sold, the cost of securities has been determined
on the identified cost basis.
Written option transactions during the year are summarized as follows:
Contract Premiums
Amounts Received
- ----------------------------------------------------
Written options
outstanding at
beginning of year $7,740,000 $33,282
- ----------------------------------------------------
Options opened 16,600,000 53,950
- ----------------------------------------------------
Options closed (24,340,000) (87,232)
- ----------------------------------------------------
Written options
outstanding at
end of year $ -- $ --
- ----------------------------------------------------
Note 4
Share Repurchase
Program
In November 1994, the Trustees authorized the fund to repurchase up to
1,950,000 of its shares in the open market. Repurchases will only be
made when the fund's shares are trading at less than net asset value and
at such times and amounts as is believed to be in the best interest of
the fund's shareholders. Any repurchases of shares will have the effect
of increasing the net asset value per share of remaining shares
outstanding.
For the year ended September 30, 1996, the fund repurchased 258,200
shares for $1,917,095, which reflects a discount from net asset value of
$264,505 or 12.1%.
Dividend Policy
It is the fund's dividend policy to pay monthly distributions from net
investment income and any net realized short-term gains (including gains
from options and futures transactions). Long-term capital gains are
distributed at least annually. In an effort to maintain a more stable
level of distributions, the fund's monthly distribution rate will be
based on Putnam Management's projections of net investment income and
net realized short-term capital gains that the fund is likely to earn
over the long term.
At the time of each distribution, shareholders are furnished Putnam
Management's current estimate of the sources of such distribution. These
estimates are subject to adjustment depending on investment results for
the fund's entire fiscal year. Final information regarding such matters
is furnished to shareholders in the fund's annual reports and in tax
information provided following the end of each calendar year.
Results of July 11, 1996 shareholder meeting (Unaudited)
A meeting of shareholders of the fund was held on July 11, 1996. At the
meeting, each of the nominees for Trustees was elected, as follows:
Votes
Votes for withheld
Jameson Adkins Baxter 35,511,252 1,030,034
Hans H. Estin 35,530,685 1,010,601
John A. Hill 35,537,577 1,003,709
Elizabeth T. Kennan 35,511,635 1,029,651
Lawrence J. Lasser 35,511,604 1,029,682
Robert E. Patterson 35,536,457 1,004,829
Donald S. Perkins 35,528,960 1,012,326
William F. Pounds 35,518,939 1,022,347
George Putnam 35,505,658 1,035,628
George Putnam, III 35,489,129 1,052,157
Eli Shapiro 35,447,146 1,094,140
A.J.C. Smith 35,518,541 1,022,745
W. Nicholas Thorndike 35,509,402 1,031,884
A proposal to ratify the selection of Coopers & Lybrand L.L.P. as
auditors for the fund was approved as follows: 35,603,303 votes for, and
352,486 votes against, with 585,497 abstentions and broker non-votes.
A proposal to convert the fund from closed-end to open-end status and
authorize certain related amendments to the Agreement and Declaration of
Trust was defeated as follows: 5,510,613 votes for, 16,580,228 votes
against, with 14,450,445 abstentions and broker non-votes.
Federal tax information
(Unaudited)
For the year ended September 30, 1996, a portion of the Fund's
distribution represents a return of capital and is therefore not taxable
to shareholders.
The Form 1099 you receive in January 1997 will show the tax status of
all distributions paid to your account in calendar 1996.
Fund information
INVESTMENT MANAGER
Putnam Investment
Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
INDEPENDENT
ACCOUNTANTS
Coopers & Lybrand L.L.P.
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
John A. Hill
Ronald J. Jackson
Elizabeth T. Kennan
Lawrence J. Lasser
Robert E. Patterson
Donald S. Perkins
George Putnam, III
Eli Shapiro
A.J.C. Smith
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
John D. Hughes
Senior Vice President and Treasurer
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Gary N. Coburn
Vice President
William J. Curtin
Vice President
Jennifer E. Leichter
Vice President and Fund Manager
Neil J. Powers
Vice President and Fund Manager
D. William Kohli
Vice President and Fund Manager
Mark J. Siegel
Vice President and Fund Manager
William N. Shiebler
Vice President
John R. Verani
Vice President
Paul M. O'Neil
Vice President
Beverly Marcus
Clerk and Assistant Treasurer
Call 1-800-225-1581 weekdays from 9 a.m. to 5 p.m. Eastern time for up-
to-date information about the fund's NAV.
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
- -------------------
Bulk Rate
U.S. Postage
PAID
Putnam
Investments
- -------------------
28353-074 11/96
