Putnam
Master
Intermediate
Income Trust
SEMIANNUAL REPORT
March 31, 1997
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* "During the six periods in the past decade when U.S. government
bonds lost more than 2%, junk bonds beat government bonds every time,
while international bonds went five for six. A portfolio that included a
fund representing each bond type would've outperformed government bonds in
each instance. Those who can't be bothered with picking several types of
bond funds might consider a multisector bond fund . . . the best choice
for one-stop diversification."
-- Morningstar Investor, April 1997
CONTENTS
4 Report from Putnam Management
9 Fund performance summary
11 Portfolio holdings
26 Financial statements
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
(copyright) Karsh, Ottawa
Dear Shareholder:
Global diversification, astute currency strategies, and careful security
selection all contributed to Putnam Master Intermediate Income Trust's
positive performance during the semiannual period ended March 31, 1997.
Supervision of such a diverse, multinational portfolio requires a depth and
breadth of expertise your fund's management team is superbly equipped to
provide.
I am pleased to announce the addition of Kenneth J. Taubes and Gail A.
Attridge to that team. Ken becomes the fund's lead manager and will oversee
the taxable investment grade sector. He has been managing funds at Putnam for
nearly six years. Before joining Putnam, Ken was employed by United States
Trust Company of Boston, Home Owners Savings Bank, and Bank of New England,
N.A. He has 15 years of investment experience. Gail came to Putnam in 1993
from Keystone Custodian Funds, prior to which she was employed by County
NatWest Securities Asia and Data Resources/McGraw-Hill. She has 12 years of
investment experience. She will manage the fund's emerging markets securities.
In the following report, your fund's managers discuss overall results for the
fiscal year and then review prospects for the year ahead.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
May 21, 1997
Report from the Fund Managers
Kenneth J. Taubes, lead manager
Jennifer E. Leichter
D. William Kohli
Gail A. Attridge
For most of the first half of Putnam Master Intermediate Income Trust's fiscal
year, U.S. financial markets enjoyed a continuing trend of steady growth,
falling interest rates, and low inflation. In March, however, the tables
turned. In the midst of a sharply declining U.S. stock market, the Federal
Reserve Board raised short-term interest rates by a quarter percentage point
in what appeared to be the first in a series of interest-rate increases.
Both the stock market correction and the rate increase -- a much-anticipated
preemptive move by the Fed designed to keep inflation in check -- were viewed
as necessary events in an economy that may have been overheating. Fortunately
they were also events for which your fund's portfolio was strategically
positioned. Anticipating this changing environment, we began to adjust the
portfolio's allocations in February, taking a more defensive position in the
U.S. government sector of the portfolio and trimming back exposure to the
high-yield market. High-yield bonds tend to mirror the direction of the stock
market, and so this move enabled us to cushion the fund against the expected
stock market correction. Meanwhile, the international sector, specifically
investments in European countries, produced attractive results through most of
the period. For complete performance information, see page 9 of this report.
* TELECOMMUNICATIONS AND MEDIA STRONG IN HIGH-YIELD SECTOR
Even with the cutback, the high-yield sector, or sleeve, still made a handsome
contribution to the fund's performance over the period. Because we began
reducing exposure before the stock market correction began, we were able to
realize gains on most of the sales. In addition, this sector still includes
some of the fund's best-performing holdings.
Among the period's strongest performers were bonds of competitive local
exchange carriers, or CLECs -- smaller telephone companies that compete with
the large telephone providers, such as the Bell operating companies, within
local markets. CLECs benefited substantially from the Telecommunications Act
of 1996, which allowed them to enter local markets on a much wider basis. Also
contributing stellar performance were bonds of foreign cellular companies,
which are profiting from consumers who use cellular telephones as a
replacement for traditional wire-line telephones. These companies are
especially profitable in countries such as Venezuela and Brazil, where it is
difficult to get wire-line phones installed. At the close of the period, the
fund maintained a relatively heavy weighting in telecommunications, an
industry that we believe has positive fundamentals and strong long-term
potential.
Broadcasting was another industry to profit from the Telecommunications Act of
1996. Passage of this legislation allowed for ownership of multiple radio and
television stations, which boosted the value of many broadcasting companies
poised for expansion. Two examples in the fund's portfolio are Chancellor
Broadcasting Company, which owns and operates about 50 stations in more than a
dozen major markets, and SFX Broadcasting, Inc., which owns and provides
programming for 80 AM and FM radio stations in southern United States. Just
after the close of the semiannual period, SFX announced the acquisition of
three more stations in Indiana. While these holdings, along with others
discussed in this report, were viewed favorably as of March 31, 1997, all
portfolio holdings are subject to review and adjustment in accordance with the
fund's investment strategy and may well vary in the future.
[GRAPHIC HORIZONTAL BAR CHART OMITTED: TOP FIVE COUNTRY ALLOCATIONS
(INTERNATIONAL SECTOR)]
TOP FIVE COUNTRY ALLOCATIONS*
(INTERNATIONAL SECTOR)
Germany 9.1%
France 6.6%
United Kingdom 6.5%
Canada 1.7%
Australia 1.5%
Footnote reads:
* Based on net assets as of 3/31/97. Holdings will vary over time.
Outdoor advertising -- or billboards -- was another profitable sector for the
fund's high-yield portfolio. One example is Universal Outdoor, Inc., which
operates over 30,000 displays in 23 markets in the Midwest, in the Southeast,
and on the East Coast. Universal, which performed well, recently completed its
acquisition of Klein Outdoor Advertising, Inc., a privately held company based
in New Jersey. In the gaming sector of the high-yield holdings, Argosy Gaming
Company was a standout. Argosy operates several riverboat casinos in the
Midwestern and Southeastern United States and is building a new riverboat
casino and entertainment complex near Cincinnati.
* CONTINUED EMPHASIS ON MORTGAGE-BACKED SECURITIES
The taxable investment grade sector of the portfolio consists primarily of
mortgage-backed securities and U.S. Treasuries, in varying proportions.
Throughout the semiannual period, we maintained a relatively heavy weighting
of mortgage-backed securities, which have been offering higher yields and
greater potential price appreciation than U.S. Treasury holdings and appear
likely to do so for some time.
Please note that this portion of the portfolio was formerly known as the U.S.
government securities sector. Within this sector, the fund has always had the
flexibility to invest in investment-grade bonds as well as U.S. government
securities, and we believe the new name is a more accurate reflection of its
strategy.
The emphasis on mortgage-backed securities remains in place as we begin the
second half of the year. However, in February, anticipating that the Fed would
begin to tighten monetary policy, we began shifting the sector into a more
defensive position. We sold a significant portion of intermediate-term
Treasury securities in favor of a combination of cash and 10-year Treasuries.
This configuration, known as a barbell strategy, emphasizes the shorter and
longer ends of the yield curve in order to shorten the average maturity of the
portfolio. We established this positioning while maintaining the fund's
intermediate focus -- limiting the long end of the barbell to 10-year
Treasuries rather than to holdings with longer maturities. This barbell
positioning can be beneficial in a period of rising interest rates. We took
the same approach with the fund's mortgage-backed securities, swapping
current-coupon mortgages -- which had performed very well -- for a combination
of shorter-duration high-coupon mortgages and long-term mortgage securities.
This defensive configuration was still in effect at the close of the period.
[GRAPHIC OMITTED: TOP THREE HOLDINGS PER SECTOR]
TOP THREE HOLDINGS PER SECTOR*
HIGH-YIELD BONDS
Midland Funding Corp.
Stater Brothers
Columbia/HCA Healthcare Corp.
FOREIGN BONDS
United Kingdom Treasury bonds
Federal Republic of Germany bills
France Treasury notes
U.S. GOVERNMENT OBLIGATIONS
Government National Mortgage Association, 7.5%
Government National Mortgage Association, 7%
Federal National Mortgage Association, 7.5%
Footnote reads:
* Based on net assets as of 3/31/97. Portfolio holdings will vary over time.
* INTERNATIONAL FOCUS SHIFTS TO CORE EUROPE
Early in the fiscal year, the fund's international sector profited from
holdings in higher-yielding markets in Europe, such as Italy, Spain, and
Sweden. We had focused on bonds in these peripheral regions rather than in
core Europe because of the attractive yields they offered. These countries had
been making significant efforts to rein 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, and Sweden made significant reductions in their inflation levels
- -- which resulted in lower bond yields. As yields declined, the fund's
holdings in these markets benefited from price appreciation.
Toward the middle of the period, we began to reduce the fund's position in
peripheral Europe, taking profits and shifting the portfolio's focus toward
core European markets, such as Germany and France. This positioning was
successful, as the higher-yielding markets later declined while bonds from
core Europe proved less volatile and delivered strong performance.
Keeping a low exposure to Japanese bonds had helped the fund's performance
during much of fiscal '96. Unfortunately this was not the case during the
first half of fiscal '97, as Japanese bonds performed better than we had
expected. Toward the end of the period, while many world bond markets declined
in response to the U.S. market decline, Japanese bonds began to rally. In
fact, Japan's bond market became one of the top-performing bond markets of the
period.
* OUTLOOK: POTENTIAL FOR MORE RATE INCREASES
In bond markets around the world, we expect a modest acceleration in economic
growth with low inflation during 1997. In the United States, we expect that
concern about inflation may cause a series of interest-rate increases
throughout the year. At the same time, we anticipate a modest acceleration in
economic growth. We believe that the fund's portfolio is positioned
appropriately for this environment and that its multisector strategy will
allow it to continue to take advantage of opportunities in fixed-income
markets around the world.
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 3/31/97, there is no guarantee the fund will continue to hold
these securities in the future.
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 3/31/97
Market
NAV price
- --------------------------------------------------------------------------
6 months 2.78% 4.12%
- --------------------------------------------------------------------------
1 year 8.64 10.36
- --------------------------------------------------------------------------
5 years 56.50 42.42
Annual average 9.37 7.33
- --------------------------------------------------------------------------
Life of fund (4/29/88) 121.49 82.4
Annual average 9.32 6.97
- --------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 3/31/97
Lehman Bros. Salomon Bros.
Govt. Non-U.S. First Boston Consumer
Intermediate World Govt High-Yield Price
Bond Index Bond Index Index Index
- ------------------------------------------------------------------------------
6 months 2.29% -3.78% 5.95% 1.39%
- ------------------------------------------------------------------------------
1 year 4.75 -0.25 11.66 2.76
- ------------------------------------------------------------------------------
5 years 36.71 57.45 70.03 14.86
Annual average 6.45 9.51 11.20 2.81
- ------------------------------------------------------------------------------
Life of fund 96.93 96.96 165.37 36.64
Annual average 7.90 7.90 11.57 3.56
- ------------------------------------------------------------------------------
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
6 months ended 3/31/97
- ------------------------------------------------------------------------------
Distributions
- ------------------------------------------------------------------------------
Number 6
- ------------------------------------------------------------------------------
Income $0.312
- ------------------------------------------------------------------------------
Capital gains --
- ------------------------------------------------------------------------------
Total $0.312
- ------------------------------------------------------------------------------
Share value NAV Market price
- ------------------------------------------------------------------------------
9/30/96 $8.58 $7.500
- ------------------------------------------------------------------------------
3/31/97 8.47 7.500
- ------------------------------------------------------------------------------
Current return NAV Market price
- ------------------------------------------------------------------------------
End of period
Current dividend rate1 7.37% 8.32%
- ------------------------------------------------------------------------------
1 Income portion of most recent distribution, annualized and divided by
NAV or Market price at end of period.
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 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 Bros. 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.
Portfolio of investments owned
March 31, 1997 (Unaudited)
<TABLE>
<CAPTION>
CORPORATE BONDS AND NOTES (35.7%) *
PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C> <C>
Advertising (0.1%)
- ------------------------------------------------------------------------------------------------------------
$ 50,000 Adams Outdoor Advertising, Ltd. sr. notes 10 3/4s, 2006 $ 52,750
250,000 Lamar Advertising Co. sr. sub. notes 9 5/8s, 2006 248,750
--------------
301,500
Aerospace and Defense (0.6%)
- ------------------------------------------------------------------------------------------------------------
250,000 Alliant Techsystems, Inc. sr. sub. notes 11 3/4s, 2003 267,500
465,000 BE Aerospace sr. sub. notes Ser. B, 9 7/8s, 2006 476,625
300,000 Howmet Corp. sr. sub. notes 10s, 2003 319,500
100,000 Moog, Inc. sr. sub. notes Ser. B, 10s, 2006 103,750
600,000 Sequa Corp. sr. sub. notes 9 3/8s, 2003 594,000
185,000 Tracor, Inc. 144A sr. sub. notes 8 1/2s, 2007 177,600
--------------
1,938,975
Agriculture (0.6%)
- ------------------------------------------------------------------------------------------------------------
1,380,000 PMI Holdings Corp. sub. disc. deb. stepped-coupon Ser. B,
zero % (11 1/2s, 9/1/00), 2005 ++ 1,007,400
787,737 Premium Standard Farms, Inc. sr. sec. notes 11s, 2003 [2 DBL. DAGGERS] 827,124
--------------
1,834,524
Apparel (0.2%)
- ------------------------------------------------------------------------------------------------------------
165,000 Anvil Knitwear Inc. 144A sr. notes 10 7/8s, 2007 160,050
85,000 GFSI, Inc. 144A sr. sub. notes 9 5/8s, 2007 82,875
125,000 Guess Jeans, Inc. sr. sub. notes 9 1/2s, 2003 125,000
170,000 William Carter Co. 144A sr. sub. notes 12s, 2008 171,700
--------------
539,625
Automotive Parts (0.5%)
- ------------------------------------------------------------------------------------------------------------
300,000 A.P.S. Inc. company guaranty 11 7/8s, 2006 301,500
248,000 Aftermarket Technology Corp. sr. sub. notes 12s, 2004 272,800
150,000 Aftermarket Technology Corp. sr. sub. notes Ser. D, 12s, 2004 165,000
230,000 CSK Auto, Inc. 144A sr. sub. notes 11s, 2006 232,300
210,000 DRA Inc. 144A notes 11 1/2s, 2004 [2 DBL. DAGGERS] 212,100
250,000 Harvard Industries Inc. sr. notes 11 1/8s, 2005 128,750
210,000 Key Plastics Corp. 144A sr. sub. notes 10 1/4s, 2007 208,425
60,000 Titan Wheel International Inc. sr. sub. notes 8 3/4s, 2007 59,100
--------------
1,579,975
Beverages (0.1%)
- ------------------------------------------------------------------------------------------------------------
310,000 Canandaigua Wine Co. sr. sub. notes Ser. C, 8 3/4s, 2003 311,550
Broadcasting (1.9%)
- ------------------------------------------------------------------------------------------------------------
250,000 Affinity Group sr. sub. notes 11 1/2s, 2003 262,500
605,000 Capstar Broadcasting 144A sr. disc. notes stepped-coupon
zero % (12 3/4s, 2/1/02), 2009 ++ 320,650
100,000 Chancellor Broadcasting Corp. sr. sub. notes 9 3/8s, 2004 98,000
750,000 Comcast UK Cable, Ltd. deb. stepped-coupon zero %
(11.2s, 11/15/00), 2007 (Bermuda) ++ 487,500
1,150,000 Commodore Media, Inc. sr. sub. notes stepped-coupon
7 1/2s, (13 1/4s, 5/1/98), 2003 ++ 1,230,500
100,000 Granite Broadcasting Corp. sr. sub. notes 9 3/8s, 2005 94,000
120,000 Jacor Communications, Inc. company guaranty 9 3/4s, 2006 120,000
250,000 New City Broadcasting Corp. sr. sub. notes 11 3/8s, 2003 277,500
200,000 Pegasus Media & Communications notes Ser. B, 12 1/2s, 2005 216,000
929,000 Petracom Holdings, Inc. notes stepped-coupon zero %
(17 1/2s, 8/1/98), 2003 ++ 891,840
700,000 SFX Broadcasting, Inc. sr. sub. notes Ser. B, 10 3/4s, 2006 731,500
210,000 Spanish Broadcasting Systems 144A sr. notes 11s, 2004 208,950
220,000 TCI Satellite Entertainment 144A sr. sub. notes 10 7/8s, 2007 191,400
1,248,000 Telemedia Broadcasting Corp. 144A deb. stepped-coupon
3.8s, (16s, 6/15/99), 2004 ++ 1,135,680
95,000 TV Azteca S.A. 144A sr. notes 10 1/2s, 2007 (Mexico) 92,562
--------------
6,358,582
Building Products (0.6%)
- ------------------------------------------------------------------------------------------------------------
400,000 Cemex S.A. 144A bonds 12 3/4s, 2006 (Mexico) 449,000
650,000 Schuller International Corp. sr. notes 10 7/8s, 2004 705,250
500,000 Southdown, Inc. sr. sub. notes Ser. B, 10s, 2006 535,000
248,000 Waxman Industries Inc. sr. notes stepped-coupon Ser. B,
zero % (12 3/4s, 6/1/99), 2004 ++ 208,320
--------------
1,897,570
Building and Construction (1.4%)
- ------------------------------------------------------------------------------------------------------------
225,000 Atrium Companies Inc. 144A sr. sub. notes 10 1/2s, 2006 222,750
115,000 Continental Homes Holding Corp. sr. notes 10s, 2006 119,025
695,000 Inter-City Products sr. notes 9 3/4s, 2000 712,375
1,000,000 NVR, Inc. sr. notes 11s, 2003 1,062,500
500,000 Presley Cos. sr. notes 12 1/2s, 2001 486,250
800,000 Scotsman Group, Inc. sr. secd. notes 9 1/2s, 2000 804,000
1,100,000 Terex Corp. sr. notes Ser. B, 13 1/4s, 2002 1,210,000
110,000 Webb (Del E.) Corp. sr. sub. notes 9 3/4s, 2008 110,000
--------------
4,726,900
Buses (0.2%)
- ------------------------------------------------------------------------------------------------------------
855,000 MCII Holdings sec. notes stepped-coupon zero %
(12s, 11/15/98), 2002 ++ 733,163
Business Services (0.3%)
- ------------------------------------------------------------------------------------------------------------
500,000 Corporate Express, Inc. sr. sub. notes Ser. B, 9 1/8s, 2004 482,500
190,000 Intertek Finance PLC 144A sr. sub. notes 10 1/4s, 2006
(United Kingdom) 192,375
185,000 Pierce Leahy Corp. sr. sub. notes 11 1/8s, 2006 199,800
--------------
874,675
Cable Television (3.0%)
- ------------------------------------------------------------------------------------------------------------
1,891,737 Adelphia Communications Corp. sr. notes 9 1/2s, 2004 [2 DBL. DAGGERS] 1,607,976
500,000 American Telecasting, Inc. sr. disc. notes stepped-coupon
zero % (14 1/2s, 8/15/00), 2005 ++ 150,000
600,000 Charter Communications International, Inc. disc. notes
stepped-coupon Ser. B, zero % (14s, 3/15/01), 2007 ++ 363,000
1,000,000 Comcast Corp. sr. sub. notes 9 3/8s, 2005 1,000,000
700,000 Diamond Cable Communication Co. sr. disc. notes
stepped-coupon zero % (11 3/4s, 12/15/00), 2005 ++ 448,000
1,000,000 Diamond Cable Communication Co. 144A sr. disc. notes
stepped-coupon zero % (10 3/4s, 2/15/02), 2007 ++ 540,000
1,403,116 Falcon Holdings Group, Inc. sr. sub. notes 11s, 2003 [2 DBL. DAGGERS] 1,220,711
480,000 Heartland Wireless Communications, Inc. 144A sr. notes
14s, 2004 216,000
1,390,000 International Cabletel, Inc. sr. notes stepped-coupon Ser. B,
zero % (11 1/2s, 2/1/01), 2006 ++ 861,800
500,000 Lenfest Communications, Inc. sr. notes 8 3/8s, 2005 455,000
750,000 Marcus Cable Co. (L.P.) sr. sub. disc. notes stepped-coupon
zero % (13 1/2s, 8/1/99), 2004 ++ 596,250
1,740,000 Telewest Communications PLC deb. stepped-coupon zero %
(11s, 10/1/00), 2007 (United Kingdom) ++ 1,131,000
250,000 Tevecap S.A. 144A sr. notes 12 5/8s, 2004 (Brazil) 257,500
115,000 TV Filme, Inc. 144A sr. notes 12 7/8s, 2004 (Brazil) 117,366
1,260,000 UIH Australia/Pacific, Inc. sr. disc. notes stepped-coupon
Ser. B, zero % (14s, 5/15/01), 2006 (Australia) ++ 655,200
310,000 Wireless One, Inc. sr. notes 13s, 2003 201,500
--------------
9,821,303
Cellular Communications (2.1%)
- ------------------------------------------------------------------------------------------------------------
285,000 Call-Net Enterprises sr. disc. notes stepped-coupon zero %
(13 1/4s, 12/1/99), 2004 ++ 237,263
1,380,000 Cencall Communications Corp. sr. disc. notes stepped-coupon
zero % (10 1/8s, 1/15/99), 2004 ++ 952,200
1,500,000 Comunicacion Celular bonds stepped-coupon zero %
(13 1/8s, 11/15/00), 2003 (Colombia) 1,035,000
750,000 Dial Call Communications, Inc. sr. disc. notes stepped-coupon
zero % (12 1/4s, 4/15/99), 2004 ++ 540,000
750,000 Intercel, Inc. sr. disc. notes stepped-coupon zero %
(12s, 5/1/01), 2006 ++ 442,500
245,000 International Wireless Communications, Inc. sr. disc. notes
zero %, 2001 137,200
775,000 Millicom International Cellular S.A. sr. disc. notes
stepped-coupon zero % (13 1/2s, 6/1/01), 2006
(Luxembourg) ++ 503,750
1,045,000 NEXTEL Communications, Inc. sr. disc. notes stepped-coupon
zero % (11 1/2s, 9/1/98), 2003 ++ 815,100
190,000 Omnipoint Corp. sr. notes 11 5/8s, 2006 165,300
210,000 Omnipoint Corp. sr. notes Ser. A, 11 5/8s, 2006 174,300
1,200,000 Pricellular Wireless Corp. sr. disc. notes stepped-coupon
Ser. B, zero % (14s, 11/15/97), 2001 ++ 1,224,000
500,000 Pricellular Wireless Corp. sr. notes 10 3/4s, 2004 506,250
--------------
6,732,863
Chemicals (0.5%)
- ------------------------------------------------------------------------------------------------------------
1,000,000 Acetex Corp. sr. notes 9 3/4s, 2003 (Canada) 980,000
105,000 Freedom Chemicals, Inc. sr. sub. notes 10 5/8s, 2006 109,200
500,000 ISP Holdings, Inc. 144A sr. notes 9 3/4s, 2002 520,000
185,000 Sterling Chemicals Holdings sr. disc. notes stepped-coupon
zero % (13 1/2s, 8/15/01), 2008 ++ 113,775
--------------
1,722,975
Computer Equipment (0.3%)
- ------------------------------------------------------------------------------------------------------------
1,000,000 Computervision Corp. sr. sub. notes 11 3/8s, 1999 1,037,500
Computer Services (0.2%)
- ------------------------------------------------------------------------------------------------------------
545,000 Unisys Corp. sr. notes 11 3/4s, 2004 569,525
Conglomerates (0.5%)
- ------------------------------------------------------------------------------------------------------------
985,000 Axia, Inc. sr. sub. notes Ser. B, 11s, 2001 1,026,863
600,000 MacAndrews & Forbes Holdings, Inc. sub. deb. notes 13s, 1999 601,500
--------------
1,628,363
Consumer Durable Goods (0.2%)
- ------------------------------------------------------------------------------------------------------------
345,000 Icon Fitness Corp. 144A sr. disc. notes stepped-coupon zero %
(14s, 11/15/01), 2006 ++ 186,300
500,000 Remington Products Co. LLC. sr. sub. notes Ser. B, 11s, 2006 415,000
--------------
601,300
Consumer Products (0.1%)
- ------------------------------------------------------------------------------------------------------------
520,000 Interact Systems, Inc. 144A sr. notes stepped-coupon zero %
(14s, 8/1/99), 2003 ++ 280,800
Consumer Services (0.6%)
- ------------------------------------------------------------------------------------------------------------
375,000 Affinity Group Holdings 144A sr. notes 11s, 2007 373,125
1,582,000 Coinmach Corp. sr. notes Ser. B, 11 3/4s, 2005 1,748,110
--------------
2,121,235
Containers (0.6%)
- ------------------------------------------------------------------------------------------------------------
270,000 Innova S De R.L. 144A sr. notes 12 7/8s, 2007 (Mexico) 268,313
1,500,000 Ivex Packaging Corp. sr. sub. notes 12 1/2s, 2002 1,631,250
--------------
1,899,563
Cosmetics (0.3%)
- ------------------------------------------------------------------------------------------------------------
1,415,000 Revlon Worldwide Corp. 144A sr. disc. notes zero %, 2001 877,300
Electric Utilities (1.3%)
- ------------------------------------------------------------------------------------------------------------
335,000 AES China Generating Co. sr. notes 10 1/8s, 2006 (China) 353,425
1,000,000 El Paso Electric Co. 1st mtge. Ser. D, 8.9s, 2006 1,042,450
85,000 Hidroelec Pierda Aguila 144A bonds 10 5/8s, 2001 (Argentina) 88,719
1,950,000 Midland Funding Corp. deb. Ser. A, 11 3/4s, 2005 2,214,908
556,807 Northeast Utilities System notes Ser. A, 8.58s, 2006 525,604
153,333 Northeast Utilities System notes Ser. B, 8.38s, 2005 146,665
--------------
4,371,771
Electronics (0.4%)
- ------------------------------------------------------------------------------------------------------------
140,000 Celestica International Ltd. 144A sr. sub. notes 10 1/2s,
2006 (India) 147,000
169,861 Cirent Semiconductor sr. sub. notes 10.22s, 2002 169,650
170,559 Cirent Semiconductor 144A sr. sub. notes 10.14s, 2004 170,346
1,350,000 International Semi-Tech. Corp. sr. secd. disc. notes stepped-
coupon zero % (11 1/2s, 8/15/00), 2003 (Canada) ++ 688,500
240,000 Motors and Gears Inc. 144A sr. notes Ser. A, 10 3/4s, 2006 243,600
--------------
1,419,096
Entertainment (0.4%)
- ------------------------------------------------------------------------------------------------------------
1,000,000 Premier Parks, Inc. sr. notes Ser. A, 12s, 2003 1,100,000
275,000 Trump Holdings & Funding Corp. sr. notes 15 1/2s, 2005 310,750
--------------
1,410,750
Environmental Control (0.1%)
- ------------------------------------------------------------------------------------------------------------
250,000 Allied Waste Industries, Inc. 144A sr. sub. notes 10 1/4s, 2006 255,000
Financial Services (0.9%)
- ------------------------------------------------------------------------------------------------------------
260,000 Aames Financial Corp. sr. notes 9 1/8s, 2003 254,800
115,000 Dollar Financial Group Inc. 144A sr. notes 10 7/8s, 2006 116,725
500,000 First Federal Financial Corp. notes 11 3/4s, 2004 510,000
1,540,000 First Nationwide Holdings 144A sr. sub. notes
10 5/8s, 2003 1,632,400
125,000 Imperial Credit Industries, Inc. 144A sr. notes 9 7/8s, 2007 122,500
200,000 Ocwen Federal Bank FSB sub. deb. 12s, 2005 221,000
120,000 Ocwen Financial Corp. notes 11 7/8s, 2003 129,600
125,000 Outsourcing Solutions Inc. 144A sr. sub. notes 11s, 2006 130,625
--------------
3,117,650
Food (0.7%)
- ------------------------------------------------------------------------------------------------------------
654,000 Del Monte Corp. notes 12 1/4s, 2002 [2 DBL. DAGGERS] 712,860
1,000,000 Mafco, Inc. sr. sub. notes 11 7/8s, 2002 1,057,500
65,000 MBW Foods, Inc. 144A sr. sub. notes 9 7/8s, 2007 63,213
100,000 Specialty Foods Corp. sr. sub. notes 11 1/4s, 2003 ++ 88,500
250,000 Specialty Foods Corp. sr. notes Ser. B, 10 1/4s, 2001 244,375
--------------
2,166,448
Food Chains (0.9%)
- ------------------------------------------------------------------------------------------------------------
1,250,000 Southland Corp. deb. 4s, 2004 896,500
1,750,000 Stater Brothers sr. notes 11s, 2001 1,907,500
--------------
2,804,000
Gaming Equipment (0.2%)
- ------------------------------------------------------------------------------------------------------------
180,000 Alliance Gaming Corp. sr. notes 12 7/8s, 2003 196,200
650,000 Argosy Gaming Co. 1st mtge. 13 1/4s, 2004 568,750
--------------
764,950
Health Care (0.4%)
- ------------------------------------------------------------------------------------------------------------
340,000 IMED Corp. sr. sub. notes 9 3/4s, 2006 350,200
465,000 Tenet Healthcare Corp. sr. notes 8s, 2005 452,213
465,000 Tenet Healthcare Corp. sr. sub. notes 8 5/8s, 2007 453,375
--------------
1,255,788
Health Care Services (--%)
- ------------------------------------------------------------------------------------------------------------
105,000 Genesis Health Ventures, Inc. sr. sub. notes 9 1/4s, 2006 104,475
Hospital Management (0.8%)
- ------------------------------------------------------------------------------------------------------------
2,000,000 Columbia/HCA Healthcare Corp. med. term notes
8.05s, 2006 2,066,820
700,000 Paracelsus Healthcare Corp. sr. sub. notes 10s, 2006 658,000
--------------
2,724,820
Insurance (0.2%)
- ------------------------------------------------------------------------------------------------------------
500,000 Reliance Group Holdings, Inc. sr. sub. deb. 9 3/4s, 2003 515,000
Lodging (0.4%)
- ------------------------------------------------------------------------------------------------------------
750,000 HMH Properties, Inc. sr. notes Ser. B, 9 1/2s, 2005 761,250
500,000 Host Marriott Corp. sr. notes Ser. B, 9 1/2s, 2005 507,500
--------------
1,268,750
Media (--%)
- ------------------------------------------------------------------------------------------------------------
130,000 RBS Participacoes S.A. 144A company guaranty 11s,
2007 (Brazil) 129,194
Medical Supplies and Devices (0.4%)
- ------------------------------------------------------------------------------------------------------------
1,000,000 Graphic Controls Corp. sr. sub. notes Ser. A, 12s, 2005 1,087,500
350,000 Wright Medical Technology, Inc. sr. secd. notes Ser. B,
10 3/4s, 2000 353,500
--------------
1,441,000
Metals and Mining (0.3%)
- ------------------------------------------------------------------------------------------------------------
90,000 Acindar Industria Argentina de Aceros S.A. bonds 11 1/4s,
2004 (Argentina) 90,450
210,000 Continental Global Group 144A sr. notes Ser. A, 11s, 2007 208,950
200,000 NL Industries, Inc. sr. notes 11 3/4s, 2003 210,000
190,000 Renco Metals, Inc. sr. notes 11 1/2s, 2003 197,600
175,000 Royal Oak Mines, Inc. company guaranty Ser. B, 11s, 2006
(Canada) 176,750
250,000 Weirton Steel Co. sr. notes 11 3/8s, 2004 250,000
--------------
1,133,750
Motion Picture Distribution (0.7%)
- ------------------------------------------------------------------------------------------------------------
1,100,000 Act III Theatres, Inc. sr. sub. notes 11 7/8s, 2003 1,193,500
527,700 Cinemark Mexico USA notes Ser. B, 13s, 2003 (Mexico) [2 DBL. DAGGERS] 509,231
35,500 Cinemark Mexico USA notes Ser. D, 13s, 2003 (Mexico) [2 DBL. DAGGERS] 34,258
400,000 Cinemark USA, Inc. notes 9 5/8s, 2008 400,000
--------------
2,136,989
Networking (0.3%)
- ------------------------------------------------------------------------------------------------------------
1,735,000 CellNet Data Systems, Inc. sr. disc. notes stepped-coupon
Ser. B, zero % (13s, 6/15/00), 2005 ++ 1,101,725
Oil and Gas (1.6%)
- ------------------------------------------------------------------------------------------------------------
185,000 Abraxas Petroleum Corp. 144A sr. notes Ser. B, 11 1/2s, 2004 192,863
115,000 CIA Naviera Perez Companc S.A. 144A bonds 9s, 2004
(Argentina) 113,850
140,000 Cliffs Drilling Co. company guaranty Ser. B, 10 1/4s, 2003 144,200
65,000 Costilla Energy, Inc. sr. notes 10 1/4s, 2006 68,250
115,000 Flores & Rucks, Inc. sr. sub. notes 9 3/4s, 2006 117,300
160,000 Kelley Oil & Gas Corp. sr. sub. notes Ser. B, 10 3/8s, 2006 164,800
750,000 Maxus Energy Corp. global notes 9 7/8s, 2002 776,250
250,000 Maxus Energy Corp. notes 9 1/2s, 2003 258,750
195,000 Parker Drilling Corp. sr. notes Ser. B, 9 3/4s, 2006 205,725
100,000 Texas Petrochemical Corp. sr. sub. notes 11 1/8s, 2006 105,500
205,000 Transamerican Refining Corp. 144A 15s, 1998 205,000
1,000,000 Transamerican Refining Corp. 1st mtge. stepped-coupon
Ser. 1, zero % (18.5s, 2/15/98), 2002 ++ 915,000
846,000 TransTexas Gas Corp. sr. disc. notes stepped-coupon zero %
(13 1/4s, 12/16/01), 2003 ++ 532,980
1,200,000 TransTexas Gas Corp. sr. secd. notes 11 1/2s, 2002 1,314,000
--------------
5,114,468
Packaging and Containers (0.1%)
- ------------------------------------------------------------------------------------------------------------
145,000 Printpack, Inc. sr. notes Ser. B, 9 7/8s, 2004 147,175
115,000 US Can Corp. company guaranty Ser. B, 10 1/8s, 2006 119,600
--------------
266,775
Paging (0.4%)
- ------------------------------------------------------------------------------------------------------------
1,000,000 Mobile Telecommunications Tech. sr. notes 13 1/2s, 2002 940,000
500,000 Pronet, Inc. sr. sub. notes 11 7/8s, 2005 465,000
--------------
1,405,000
Paper and Forest Products (1.5%)
- ------------------------------------------------------------------------------------------------------------
500,000 APP International Finance Co. notes 11 3/4s, 2005
(Netherlands) 532,500
400,000 Domtar, Inc. notes 8 3/4s, 2006 (Canada) 404,000
670,000 Florida Coast Paper LLC 1st mtge. Ser. B, 12 3/4s, 2003 686,750
250,000 Gaylord Container Corp. sr. sub. disc. deb. 12 3/4s, 2005 272,500
1,500,000 Repap New Brunswick sr. notes 10 5/8s, 2005 (Canada) 1,500,000
1,800,000 Riverwood International Corp. company guaranty
10 7/8s, 2008 1,476,000
--------------
4,871,750
Pharmaceuticals (0.2%)
- ------------------------------------------------------------------------------------------------------------
600,000 Twin Laboratories, Inc. company guaranty 10 1/4s, 2006 616,500
Publishing (0.1%)
- ------------------------------------------------------------------------------------------------------------
135,000 Hollinger International Publishing, Inc. company guaranty
9 1/4s, 2007 129,600
135,000 Hollinger International Publishing, Inc. company guaranty
8 5/8s, 2005 130,613
90,000 Sun Media Corp. 144A sr. sub. notes 9 1/2s, 2007 (Canada) 85,500
--------------
345,713
Real Estate (0.1%)
- ------------------------------------------------------------------------------------------------------------
315,000 Prime Hospitality Corp. 144A sr. sub. notes 9 3/4s, 2007 311,850
Recreation (2.6%)
- ------------------------------------------------------------------------------------------------------------
715,000 Arizona Charlies Corp. 1st mtge. Ser. B, 12s, 2000 + 407,550
260,000 Capitol Queen Corp. 1st mtge. notes Ser. B, 12s, 2000
(In default) + 65,000
485,000 Casino America, Inc. sr. notes 12 1/2s, 2003 465,600
215,000 Casino Magic Corp. 144A 1st mtge. 13s, 2003 208,013
400,000 Coast Hotels & Casinos, Inc. company guaranty Ser. B,
13s, 2002 450,000
370,300 Colorado Gaming & Entertainment Co. sr. notes 12s, 2003 [2 DBL. DAGGERS] 366,597
513,970 Elsinore Corp. 144A exch. 1st mtge. 11 1/2s, 2000 493,411
250,000 Grand Casinos, Inc. 1st mtge. 10 1/8s, 2003 245,625
1,000,000 Grate Bay Property Funding Corp. 1st mtge. 10 7/8s, 2004 820,000
150,000 Harveys Casino Resorts sr. sub. notes 10 5/8s, 2006 162,000
900,000 Hollywood Casino Corp. sr. notes 12 3/4s, 2003 895,500
1,200,000 Lady Luck Gaming Corp. 1st mtge. 11 7/8s, 2001 1,152,000
444,000 Louisiana Casino Cruises Corp. 1st mtge. 11 1/2s, 1998 448,440
750,000 Mohegan Tribal Gaming Auth. sr notes Ser. B, 13 1/2s, 2002 986,250
300,000 PRT Funding Corp. sr. notes 11 5/8s, 2004 210,000
425,000 Trump A.C. 1st mtge. 11 1/4s, 2006 386,750
594,000 Trump Castle Funding Corp. notes 11 1/2s, 2000 594,000
--------------
8,356,736
Restaurants (0.2%)
- ------------------------------------------------------------------------------------------------------------
90,000 AmeriKing. Inc. sr. notes 10 3/4s, 2006 90,900
500,000 FRD Acquisition Co. sr. notes Ser. B, 12 1/2s, 2004 520,000
--------------
610,900
Retail (1.0%)
- ------------------------------------------------------------------------------------------------------------
650,000 Guitar Center Management Co. 144A sr. notes 11s, 2006 695,500
1,250,000 K mart Corp. med. term notes 7.55s, 2004 1,133,638
330,000 Loehmanns, Inc. sr. notes 11 7/8s, 2003 353,100
600,000 Mothers Work, Inc. sr. notes 12 5/8s, 2005 624,000
250,000 Specialty Retailers, Inc. sr. sub. notes 11s, 2003 265,625
135,000 Supermercados Norte 144A bonds 10 7/8s, 2004 (Argentina) 131,288
--------------
3,203,151
Semiconductors (0.1%)
- ------------------------------------------------------------------------------------------------------------
215,000 Fairchild Semiconductor Corp. 144A sr. sub. notes
10 1/8s, 2007 213,925
Shipping (0.2%)
- ------------------------------------------------------------------------------------------------------------
125,000 Newport News Shipbuilding sr. notes 8 5/8s, 2006 125,938
500,000 Transport Maritima Mexicana S.A. de CV sr. notes 10s, 2006
(Mexico) 490,000
--------------
615,938
Specialty Consumer Products (0.2%)
- ------------------------------------------------------------------------------------------------------------
160,000 Genesco, Inc. sr. notes 10 3/8s, 2003 164,800
395,000 Sassco Fashions Ltd. 144A notes 12 3/4s, 1999 398,950
--------------
563,750
Steel (0.5%)
- ------------------------------------------------------------------------------------------------------------
220,000 AK Steel Corp. sr. notes 9 1/8s, 2006 216,700
1,250,000 Ispat Mexicana, S.A. 144A notes 10 3/8s, 2001 (Mexico) 1,253,125
--------------
1,469,825
Supermarkets (0.2%)
- ------------------------------------------------------------------------------------------------------------
145,000 Quality Food Centers, Inc. 144A sr. sub. notes 8.7s, 2007 139,925
500,000 Ralphs Grocery Co. sr. notes 10.45s, 2004 517,500
--------------
657,425
Telecommunications (2.5%)
- ------------------------------------------------------------------------------------------------------------
1,180,000 American Communication Services, Inc. sr. disc. notes
stepped-coupon zero % (12 3/4s, 4/1/01), 2006 ++ 649,000
290,000 Brooks Fiber Properties, Inc. sr. disc. notes stepped-coupon
zero % (11 7/8s, 11/1/01), 2006 ++ 172,550
425,000 Brooks Fiber Properties, Inc. sr. disc. notes stepped-coupon
zero % (10 7/8s, 3/1/01), 2006 ++ 263,500
285,000 Dobson Communications Corp. 144A sr. notes 11 3/4s, 2007 285,713
250,000 Fonorola, Inc. sr. notes 12 1/2s, 2002 (Canada) 279,375
140,000 Frontiervision Operating Partners L.P. sr. sub. notes 11s, 2006 138,600
1,002,000 GST Telecommunications,Inc. company guaranty
stepped-coupon zero % (13 7/8s, 15/15/00), 2005 ++ 631,260
770,000 Hyperion Telecommunication Corp. sr. disc. notes
stepped-coupon Ser. B, zero % (13s, 4/15/01), 2003 ++ 419,650
1,260,000 ICG Holdings, Inc. sr. disc. notes stepped-coupon zero %
(13 1/2s, 9/15/00), 2005 ++ 844,200
700,000 Intermedia Communication, Inc. sr. notes Ser. B, 13 1/2s, 2005 789,250
675,000 International Cabletel, Inc. 144A sr. notes 10s, 2007 641,250
750,000 Metrocall, Inc. sr. sub. notes 10 3/8s, 2007 600,000
605,000 Nextlink Communications, Inc. sr. notes 12 1/2s, 2006 614,075
525,000 Orbcomm Global Capital Corp. sr. notes Ser. B, 14s, 2004 519,750
500,000 Teleport Communications Group Inc. sr. disc. notes
stepped-coupon zero % (11 1/8s, 7/1/01), 2007 ++ 335,000
1,300,000 Winstar Communications, Inc. 144A sr. disc. notes
stepped-coupon zero % (14s, 10/15/00), 2005 ++ 767,000
210,000 Winstar Equipment Corp. 144A company guaranty
12 1/2s, 2004 205,275
--------------
8,155,448
Telephone Services (0.2%)
- ------------------------------------------------------------------------------------------------------------
400,000 Globo Communicacoes 144A company guaranty
10 1/2s, 2006 404,000
455,000 McLeod, Inc. 144A sr. disc. notes stepped-coupon zero %
(10 1/2s, 3/1/02), 2007 ++ 250,250
--------------
654,250
Textiles (0.7%)
- ------------------------------------------------------------------------------------------------------------
750,000 Foamex (L.P.) Capital Corp. sr. sub. deb. 11 7/8s, 2004 791,250
105,000 Glenoit Corp. 144A sr. sub. notes 11s, 2007 104,344
1,000,000 Polysindo International Eka company guaranty 13s, 2001
(Indonesia) 1,120,000
395,000 Polysindo International Finance company guaranty 11 3/8s,
2006 (Indonesia) 423,638
--------------
2,439,232
--------------
Total Corporate Bonds and Notes (cost $108,904,497) $116,383,558
FOREIGN GOVERNMENT BONDS AND NOTES (25.8%) *
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
AUD 4,530,000 Australia (Government of) notes 8 3/4s, 2001 $ 3,721,524
CAD 1,850,000 Canada (Government of) bonds 7s, 2006 1,361,807
DKK 11,140,000 Denmark (Government of) bonds 8s, 2006 1,904,824
DKK 11,460,000 Denmark (Government of) notes 8s, 2001 1,986,547
FRF 48,106,000 France Treasury notes 7s, 2000 9,256,399
FRF 39,030,000 France Treasury notes 5 1/2s, 2001 7,136,598
FRF 29,110,000 France Treasury notes 4 1/2s, 1998 5,224,740
DEM 7,915,000 Germany (Federal Republic of) notes 8s, 2002 5,331,763
DEM 5,375,000 Germany (Federal Republic of) bonds Ser. 95,
7 3/8s, 2005 3,542,176
DEM 2,260,000 Germany (Federal Republic of) bonds Ser. 95,
6 7/8s, 2005 1,446,211
DEM 3,935,000 Germany (Federal Republic of) bonds Ser. 96,
6 1/4s, 2006 2,413,592
DEM 9,575,000 Germany (Federal Republic of) bonds Ser. 118,
5 1/4s, 2001 5,855,832
DEM 18,045,000 Germany (Federal Republic of) bills Ser. 121,
4 3/4s, 2001 10,777,463
USD 2,655,000 Russian Ministry of Finance notes 9 1/4s, 2001 2,575,350
ZAR 9,185,000 South Africa (Republic of) bonds 12s, 2005 1,783,374
GBP 6,665,000 United Kingdom Treasury bonds 7 1/2s, 2006 10,821,294
GBP 3,080,000 United Kingdom Treasury bonds 7s, 2002 4,973,866
GBP 2,480,000 United Kingdom Treasury bonds 6s, 1999 3,982,033
--------------
Total Foreign Government Bonds and Notes
(cost $92,374,237) $ 84,095,393
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (23.4%) *
PRINCIPAL AMOUNT VALUE
U.S. Government Agency Obligations (3.0%)
- ------------------------------------------------------------------------------------------------------------
$ 4,050,000 Federal Home Loan Mortgage Association 8 1/2s, TBA,
April 16, 2027 $ 4,149,954
5,970,000 Federal National Mortgage Association 7s, TBA,
April 16, 2027 5,706,902
--------------
9,856,856
U.S. Government Agency Mortgage Pass-Through Certificates (16.6%)
- ------------------------------------------------------------------------------------------------------------
Federal National Mortgage Association
5,959 8 1/2s, Dwarf, with various due dates from March 1, 2006 to
March 1, 2006 6,168
5,493,898 8s, with various due dates from July 1, 2026 to
October 1, 2026 5,514,503
10,611,800 7 1/2s, with various due dates from June 1, 2026 to
February 1, 2027 10,412,841
4,315,917 7s, with various due dates from April 1, 2023 to
March 1, 2026 4,125,718
Government National Mortgage Association
6,632,115 8s, with various due dates from January 15, 2026 to
February 15, 2027 6,659,050
16,192,136 7 1/2s, with various due dates from February 15, 2023 to
February 15, 2027 15,870,178
12,072,570 7s, with various due dates from July 15, 2025 to
June 15, 2026 11,514,219
--------------
54,102,677
U.S. Treasury Obligations (3.8%)
- ------------------------------------------------------------------------------------------------------------
$ 3,000,000 U.S. Treasury Bonds 10 3/4s, August 15, 2005 $ 3,713,910
U.S. Treasury Notes
5,359,000 6 1/2s, October 15, 2006 5,192,389
3,475,000 5 5/8s, November 30, 1998 3,434,829
--------------
12,341,128
--------------
Total U.S. Government and Agency Obligations
(cost $78,109,995) $ 76,300,661
UNITS (1.8%) *
NUMBER OF UNITS VALUE
- ------------------------------------------------------------------------------------------------------------
210 Advanced Radio Telecommunications units 14s, 2007 $ 228,900
600 Australis Media, Ltd. units stepped-coupon zero %
(15 3/4s, 5/15/00), 2003 (Australia) ++ 348,000
95 Celcaribe S.A. 144A units stepped-coupon zero %
(13 1/2s, 3/15/98), 2004 ++ 1,244,500
1,010 Colt Telecommunications Group PLC units stepped-coupon
zero % (12s, 12/15/01), 2006 (United Kingdom) ++ 638,825
475 Diva Systems Corp. 144A units stepped-coupon zero %
(13s, 5/15/01), 2006 ++ 279,656
255 Esat Holdings Ltd. 144A units stepped-coupon zero %
(12 1/2s, 2/1/02), 2007 ++ 142,800
1,035 Fitzgerald Gaming Co. units 13s, 2002 714,150
225 Globalstar L.P. Capital 144A units 11 3/8s, 2004 219,375
170 Ionica PLC units stepped-coupon zero % (15s, 5/1/02), 2007
(United Kingdom) ++ 75,650
930 Mccaw Intl. Ltd. 144A units zero % (13s, 4/15/02), 2007 ++ 465,000
7,220 Nextlink Communications 144A pfd. units 14s, 2009 [2 DBL. DAGGERS] 317,680
380 Real Time Data 144A units stepped-coupon zero %
(13 1/2s, 8/15/01), 2006 ++ 201,400
615 RSL Communications, Ltd. 144A units 12 1/4s, 2006 630,375
265 Spanish Broadcasting System 144A units 14 1/4s, 2005 259,700
200 Wireless One Inc. units stepped-coupon zero %
(13 1/2s, 8/1/01), 2006 ++ 60,000
--------------
Total Units (cost $5,585,519) $ 5,826,011
BRADY BONDS (1.6%) *
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
$ 2,832,400 Argentina (Republic of) deb. 6 3/4s, 2005 $ 2,531,458
2,855,000 Brazil (Republic of) deb. Ser. RG, 6 7/8s, 2006 2,540,950
--------------
Total Brady Bonds (cost $5,066,243) $ 5,072,408
ASSET-BACKED SECURITIES (1.1%) *
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
$ 1,096,000 Chemical Master Credit Card Trust Ser. 95-2, Class A,
6.23s, 2003 $ 1,075,450
350,000 Contimortgage Home Equity Loan Trust Ser. 97-1, Class M2,
7.67s, 2028 346,500
2,255,000 Sears Credit Account Master Trust Ser. 95-5, Class A,
6.05s, 2008 2,147,888
--------------
Total Asset-Backed Securities (cost $3,726,304) $ 3,569,838
COMMON STOCKS (1.0%) *
NUMBER OF SHARES VALUE
- ------------------------------------------------------------------------------------------------------------
150 AmeriKing, Inc. + $ 7,500
12,730 Applause Enterprises, Inc. (acquired various dates
from 1/17/89 to 6/7/89, cost $3,340,795) +[DBL. DAGGER] 38,190
2,955 Axia Inc. 144A + 147,750
12,124 Chesapeake Energy Corp. + 253,089
16,807 Elsinore Corp. + 1,849
5,000 Exide Corp. 81,875
53,023 Grand Union Co. (acquired 6/20/95,
cost $1,711,961) +[DBL. DAGGER] 188,894
3,770 IFINT Diversified Hldgs. 144A 60,320
35,327 Lady Luck Gaming Corp. + 61,822
20,000 NEXTEL Communications, Inc. Class A + 267,500
464 PMI Holdings Corp. 144A + 116,000
327 Premium Holdings L.P. + 1,635
71,533 PSF Holdings LLC Class A + 1,895,625
10,050 Specialty Foods Acquisition Corp. + 2,513
4,400 Terex Corp. Rights expiration date 5/15/02 22,000
--------------
Total Common Stocks (cost $8,273,343) $ 3,146,562
COLLATERALIZED MORTGAGE OBLIGATIONS (1.1%) *
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
$ 1,000,000 Citicorp Mtge. Securities, Inc. Ser. 92-10, Class M, 8s, 2022 $ 1,002,220
441,093 Resolution Trust Corp. Ser. 94-1, Class A2A, 7 3/4s, 2029 442,196
1,305,659 Resolution Trust Corp. Ser. 94-1, Class M1, 7.2021s, 2029 1,277,914
793,451 Rural Housing Trust Ser. 87-1, Class D, 6.33s, 2026 770,402
--------------
Total Collateralized Mortgage Obligations (cost $3,304,794) $ 3,492,732
PREFERRED STOCKS (0.8%) *
NUMBER OF SHARES VALUE
- ------------------------------------------------------------------------------------------------------------
800 American Radio Systems Corp. 144A $11.375 pfd. $ 78,400
6,000 AmeriKing, Inc. $3.25 pfd. [2 DBL. DAGGERS] 159,000
11,716 Cablevision Systems Ser. M, $11.125 dep. shs. pfd. 1,045,653
2,800 Chancellor Radio Broadcasting 144A $12.00 pfd. 273,000
9,600 Diva Systems Corp. Ser. C, $6.00 pfd. 79,200
11,765 Fitzgeralds Gaming Co. $3.75 pfd. 200,005
340 Fresenius Medical Care Ser. D, $9.00 trust pfd. 333,200
5,600 SFX Broadcasting, Inc. Ser. E, $12.625 pfd. [2 DBL. DAGGERS] 543,200
--------------
Total Preferred Stocks (cost $2,929,577) $ 2,711,658
CONVERTIBLE BONDS AND NOTES (0.6%) *
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
$ 350,000 Argosy Gaming cv. sub. notes 12s, 2001 $ 217,000
164,000 GST Telecommunications, Inc. cv. sr. disc. notes stepped-coupon
zero % (13 7/8s, 15/15/00), 2005 ++ 114,800
290,000 Integrated Device Technology, Inc. cv. sub. notes 5 1/2s, 2002 234,175
125,000 National Semiconductor Corp. cv. deb. 6 1/2s, 2002 125,781
900,000 Pricellular Wireless Corp. 144A cv. sub. notes stepped-coupon
zero % (10 3/4s, 8/15/00) ++ 765,000
60,000 VLSI Technology, Inc. cv. sub. notes 8 1/4s, 2005 56,625
650,000 Winstar Communications. Inc. 144A cv. sr. disc. notes
stepped-coupon zero% (14s, 10/15/00), 2005 ++ 403,000
--------------
Total Convertible Bonds and Notes (cost $1,660,860) $ 1,916,381
WARRANTS (0.2%) * +
NUMBER OF WARRANTS EXPIRATION DATE VALUE
- ------------------------------------------------------------------------------------------------------------
32,500 Becker Gaming Corp. 144A 11/15/00 $ 325
6,825 Capital Gaming International, Inc. 2/1/99 273
6,940 Cellnet Data Systems 144A 6/15/00 100,630
1,500 Comunicacion Cellular S.A. 144A (acquired
11/17/95, cost $15,961) (Colombia) [DBL. DAGGERS] 11/15/20 105,000
1,200 County Seat Hldgs., Inc. 10/15/98 24
500 Fitzgerald Gaming Co. 144A 3/15/99 50
770 Hyperion Telecommunications 144A 4/15/01 23,100
9,768 Intelcom Group Inc. 144A 10/15/05 136,752
520 Interact Systems Inc. 144A 8/1/03 130
700 Intermedia Communications 144A 6/1/00 14,000
245 International Wireless Communications Hldgs. 8/15/01 2
1,470 Louisiana Casino Cruises, Inc. 144A 12/1/98 73,500
750 NEXTEL Communications Inc. 4/25/99 8
1,840 Pagemart, Inc. 144A 12/31/03 11,960
1,400 Petracom Hldgs., Inc. 144A 2/1/03 9,975
3,700 SDW Hldgs. Corp. Ser. B 144A 12/15/06 48,100
185 Sterling Chemicals Hldgs. 8/15/08 6,475
21 Telemedia Broadcasting Corp. 144A 4/1/04 15,923
100 Wright Medical Technology, Inc. 144A 7/1/00 12,028
--------------
Total Warrants (cost $728,724) $ 558,255
PURCHASED OPTIONS OUTSTANDING (--%) * EXPIRATION DATE/
NUMBER OF CONTRACTS STRIKE PRICE VALUE
- ------------------------------------------------------------------------------------------------------------
JPY 4,700,000,000 U.S. Dollars in exchange for
Japanese Yen (Call) Apr. 97/125 JPY $ 23,970
DEM 14,100,000 U.S. Dollars in exchange for
Deutschemarks (Call) May 97/1.69 DEM 114,210
--------------
Total Purchased Options Outstanding
(cost $147,580) $ 138,180
SHORT-TERM INVESTMENTS (9.2%) * (cost $30,044,340)
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
30,039,000 Interest in $576,440,000 joint repurchase agreement
dated March 31, 1997 with S.B.C. Warburg Inc. due
April 1, 1997 with respect to various
U.S. Treasury obligations -- maturity value of
$30,044,340 for an effective yield of 6.40% $ 30,044,340
- ------------------------------------------------------------------------------------------------------------
Total Investments (cost $340,856,013) *** $333,255,977
- ------------------------------------------------------------------------------------------------------------
* Percentages indicated are based on net assets of $325,734,652.
*** The aggregate identified cost on a tax basis is $340,927,740,
resulting in gross unrealized appreciation and depreciation of
$7,156,548 and $14,828,311, respectively, or net unrealized
depreciation of $7,671,763.
+ 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.
[DBL. DAGGER] Restricted, excluding 144A securities, as to public resale. The total
market value of restricted securities held at March 31, 1997 was
$332,084 or less than 1% of net assets.
[2 DBL. 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
(Note 1).
Diversification by Country
Distribution of investments by country of issue at Report March 31,
1997:
(as percentage of Market Value)
Australia 1.4%
Canada 1.6
Denmark 1.2
France 6.5
Germany 8.8
United Kingdom 6.5
United States 68.5
Other 5.5
------
Total 100.0%
======
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
Forward Currency Contracts to Buy at March 31, 1997
(aggregate face value $62,755,167)
Unrealized
Aggregate Face Delivery Appreciation/
Market Value Value Date (Depreciation)
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Australian Dollars $ 2,764,799 $ 2,766,367 6/18/97 $ (1,568)
British Pounds 423,297 422,387 6/18/97 910
Canadian Dollars 5,649,315 5,746,577 6/18/97 (97,262)
Deutschemarks 23,070,482 22,867,298 6/18/97 203,184
Italian Lira 8,187,768 8,050,543 6/18/97 137,225
Japanese Yen 12,310,584 12,542,404 6/18/97 (231,820)
Spanish Peseta 4,782,769 4,766,190 6/18/97 16,579
Swedish Krona 307,079 303,735 6/18/97 3,344
Swiss Francs 5,284,666 5,289,666 6/18/97 (5,000)
- ----------------------------------------------------------------------------------------
$ 25,592
- ----------------------------------------------------------------------------------------
Forward Currency Contracts to Sell at March 31, 1997
(aggregate face value $56,939,955)
Unrealized
Market Aggregate Face Delivery Appreciation/
Value Value Date (Depreciation)
- ----------------------------------------------------------------------------------------
British Pounds $14,975,121 $14,596,161 6/18/97 $(378,960)
Danish Krone 1,129,636 1,124,906 6/18/97 (4,730)
Deutschemarks 16,929,483 16,792,127 6/18/97 (137,356)
French Francs 10,644,652 10,627,140 6/18/97 (17,512)
Japanese Yen 6,354,915 6,461,259 6/18/97 106,344
Swedish Krona 2,087,752 2,056,407 6/18/97 (31,345)
Swiss Francs 5,289,817 5,281,955 6/18/97 (7,862)
- ----------------------------------------------------------------------------------------
$(471,421)
- ----------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
March 31, 1997 (Unaudited)
<S> <C>
Assets
- ---------------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $340,856,013) (Note 1) $ 333,255,977
- ---------------------------------------------------------------------------------------------------
Cash 718,957
- ---------------------------------------------------------------------------------------------------
Dividends, interest and other receivables 5,344,598
- ---------------------------------------------------------------------------------------------------
Receivable for securities sold 1,845,152
- ---------------------------------------------------------------------------------------------------
Receivable for open forward currency contracts 476,502
- ---------------------------------------------------------------------------------------------------
Receivable for closed forward currency contracts 229,379
- ---------------------------------------------------------------------------------------------------
Total assets 341,870,565
Liabilities
- ---------------------------------------------------------------------------------------------------
Distributions payable to shareholders 1,919,499
- ---------------------------------------------------------------------------------------------------
Payable for securities purchased 11,963,719
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 600,531
- ---------------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 81,584
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 5,787
- ---------------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 5,766
- ---------------------------------------------------------------------------------------------------
Payable for open forward currency contracts 922,331
- ---------------------------------------------------------------------------------------------------
Payable for closed forward currency contracts 561,231
- ---------------------------------------------------------------------------------------------------
Other accrued expenses 75,465
- ---------------------------------------------------------------------------------------------------
Total liabilities 16,135,913
- ---------------------------------------------------------------------------------------------------
Net assets $ 325,734,652
Represented by
- ---------------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $ 354,481,237
- ---------------------------------------------------------------------------------------------------
Distributions in excess of net investment income (Note 1) (1,352,008)
- ---------------------------------------------------------------------------------------------------
Accumulated net realized loss on investment and
foreign currency transactions (Note 1) (19,320,541)
- ---------------------------------------------------------------------------------------------------
Net unrealized depreciation of investments and
assets and liabilities in foreign currencies (8,074,036)
- ---------------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $ 325,734,652
Computation of net asset value
- ---------------------------------------------------------------------------------------------------
Net asset value per share ($325,734,652 divided by
38,448,138 shares) $ 8.47
- ---------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Six months ended March 31, 1997 (Unaudited)
<S> <C>
Investment income:
- --------------------------------------------------------------------------------------------------
Interest (net of foreign tax of $21,963) $ 14,072,499
- --------------------------------------------------------------------------------------------------
Dividends 88,785
- --------------------------------------------------------------------------------------------------
Total investment income 14,161,284
Expenses:
- --------------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 1,236,424
- --------------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 205,221
- --------------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 14,498
- --------------------------------------------------------------------------------------------------
Administrative services (Note 2) 3,518
- --------------------------------------------------------------------------------------------------
Reports to shareholders 12,027
- --------------------------------------------------------------------------------------------------
Auditing 27,143
- --------------------------------------------------------------------------------------------------
Legal 19,716
- --------------------------------------------------------------------------------------------------
Postage 11,161
- --------------------------------------------------------------------------------------------------
Exchange listing fees 11,337
- --------------------------------------------------------------------------------------------------
Other 2,794
- --------------------------------------------------------------------------------------------------
Total expenses 1,543,839
- --------------------------------------------------------------------------------------------------
Expense reduction (Note 2) (34,131)
- --------------------------------------------------------------------------------------------------
Net expenses 1,509,708
- --------------------------------------------------------------------------------------------------
Net investment income 12,651,576
- --------------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 5,050,279
- --------------------------------------------------------------------------------------------------
Net realized loss on foreign currency transactions (Note 1) (81,383)
- --------------------------------------------------------------------------------------------------
Net unrealized depreciation of assets and liabilities in
foreign currencies during the period (245,590)
- --------------------------------------------------------------------------------------------------
Net unrealized depreciation of investments during the period (9,927,277)
- --------------------------------------------------------------------------------------------------
Net loss on investments (5,203,971)
- --------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $ 7,447,605
- --------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Six months ended Year ended
March 31 September 30
1997* 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets
- ----------------------------------------------------------------------------------------------------------------------
Operations:
- ----------------------------------------------------------------------------------------------------------------------
Net investment income $ 12,651,576 $ 24,607,379
- ----------------------------------------------------------------------------------------------------------------------
Net realized gain on investments 4,968,896 6,323,487
- ----------------------------------------------------------------------------------------------------------------------
Net unrealized appreciation
(depreciation) of investments (10,172,867) 1,079,890
- ----------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 7,447,605 32,010,756
- ----------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ----------------------------------------------------------------------------------------------------------------------
From net investment income (12,035,064) (23,973,364)
- ----------------------------------------------------------------------------------------------------------------------
From return of capital -- (318,440)
- ----------------------------------------------------------------------------------------------------------------------
Shares repurchased (Note 4) (2,214,403) (1,917,095)
- ----------------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets (6,801,862) 5,801,857
Net assets
- ----------------------------------------------------------------------------------------------------------------------
Beginning of period 332,536,514 326,734,657
- ----------------------------------------------------------------------------------------------------------------------
End of period (including distributions in excess of
net investment income of $1,352,008 and $1,968,520,
respectively) $ 325,734,652 $ 332,536,514
- ----------------------------------------------------------------------------------------------------------------------
Number of fund shares
- ----------------------------------------------------------------------------------------------------------------------
Shares outstanding at beginning of period 38,737,138 38,995,338
- ----------------------------------------------------------------------------------------------------------------------
Shares repurchased (289,000) (258,200)
- ----------------------------------------------------------------------------------------------------------------------
Shares outstanding at end of period 38,448,138 38,737,138
- ----------------------------------------------------------------------------------------------------------------------
* Unaudited
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
- ------------------------------------------------------------------------------------------------------------------------------------
Six months
ended
Per-share March 31
operating performance (Unaudited) Year ended September 30
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $8.58 $8.38 $8.13 $8.91 $8.71 $8.16
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .33 .63 .67 .62 .68 .74
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.13) .19 .21 (.71) .29 .63
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .20 .82 .88 (.09) .97 1.37
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.31) (.61) (.49) (.55) (.68) (.74)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net investment income -- -- -- -- (.09) --
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- -- -- (.06) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
From return of capital -- (.01) (.14) (.08) -- (.08)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.31) (.62) (.63) (.69) (.77) (.82)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $8.47 $8.58 $8.38 $8.13 $8.91 $8.71
- ------------------------------------------------------------------------------------------------------------------------------------
Market value,
end of period $7.500 $7.500 $7.375 $7.250 $8.375 $8.500
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at market value (%)(a) 4.12* 10.34 10.90 (5.57) 7.89 21.13
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $325,735 $332,537 $326,735 $317,296 $347,620 $339,871
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .46* .99 1.03 .92 .96 .98
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 3.79* 7.44 8.24 7.18 7.83 8.76
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 107.73* 232.90 219.63 204.92 237.63 134.43
- ------------------------------------------------------------------------------------------------------------------------------------
* Not annualized
(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
March 31, 1997 (Unaudited)
Note 1
Significant accounting policies
Putnam Master Intermediate Income Trust (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, 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, 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 appreciation (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.
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) 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.
H) Federal taxes It is the policy of the fund to distribute all of its taxable
income within the prescribed time and otherwise comply with the provisions of
the Internal Revenue Code applicable to regulated investment companies. It is
also the intention of the fund to distribute an amount sufficient to avoid
imposition of any excise tax under Section 4982 of the Internal Revenue Code
of 1986. 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
I) 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. 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
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.
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 six months ended March 31, 1997, fund expenses were reduced by $34,131
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 $770 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.
The fund has adopted an unfunded noncontributory defined benefit pension plan
(the "Pension Plan") covering all Trustees of the fund who have served as
Trustee for at least five years. Benefits under the Pension Plan are equal to
50% of the Trustee's average total retainer and meeting fees for the three
years preceding retirement. Pension expense for the fund is included in
Compensation of Trustees in the Statement of operations. Accrued pension
liability is included in Payable for compensation of Trustees in the Statement
of assets and liabilities.
Note 3
Purchase and sales of securities
During the six months ended March 31, 1997, purchases and sales of investment
securities other than U.S. government obligations and short-term investments
aggregated $187,999,166 and $173,320,519, respectively. Purchases and sales of
U.S. government obligations aggregated $153,582,632 and $168,689,473,
respectively. In determining the net gain or loss on securities sold, the cost
of securities has been determined on the identified cost basis.
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 six months ended March 31, 1997, the fund repurchased 289,000 shares
for $2,214,403, which reflects a discount from net asset value of $289,097 or
13.1%.
Actions by the Trustees
MERGER PLAN APPROVED
The Trustees have approved a merger of another Putnam closed-end fund,
Putnam Intermediate Government Income Trust, into this fund. The merger
is intended to benefit the fund through reduced overall costs per share
and, accordingly, higher yields resulting from the increased size of the
fund. The Intermediate Government fund has approximately $525 million in
assets. The transaction is scheduled to occur in October of this year. It
is subject to a number of conditions and there is no guarantee it will occur.
INVESTMENT POLICY CHANGES ADOPTED
The Trustees also approved the following modifications to the fund's
investment policies, effective immediately:
The fund may invest up to 65% of its assets in any of the three sectors of
the fixed-income market -- (1) U.S. government and high-grade domestic
corporate bonds, (2) international fixed-income securities and (3)
high-yield or below-investment-grade securities -- with a minimum allocation
to each sector of 15%.
Securities purchased for the international sector will no longer need a
minimum rating of A. Emerging-market securities issued by governmental
entities will be included in the international sector rather than, as
previously, the high-yield sector. However, not more than 20% of the
fund may be invested in international fixed-income securities not rated
investment grade by rating agencies (or unrated securities of equivalent
quality).
The fund will not invest more than 65% of its assets in securities rated
below investment grade by rating agencies (or unrated securities of
equivalent quality).
These changes increase the fund's flexibility to make larger allocations to
the high-yield and international markets, which have grown considerably in
depth and breadth since the fund was launched in 1988. The added flexibility
is designed to let the fund take greater advantage of these markets when the
manager believes it prudent while still maintaining the fund's character as
a diversified fixed-income fund with a commitment to each sector.
Fund information
INVESTMENT MANAGER
Putnam Investment
Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
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
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
Kenneth J. Taubes
Vice President and Fund Manager
Jennifer E. Leichter
Vice President and Fund Manager
D. William Kohli
Vice President and Fund Manager
Gail A. Attridge
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.
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
- --------------------
Bulk Rate
U.S. Postage
PAID
Putnam
Investments
- --------------------
32909-074 5/97
