Putnam
Master
Intermediate
Income Trust
ANNUAL REPORT
September 30, 1997
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* Morningstar Inc., an independent rating agency, awarded Putnam Master
Intermediate Income Trust a 4-star rating for overall performance (based
on the 3- and 5-year average annual returns) as of September 30, 1997.
Only 22.5% of the 146 funds in Morningstar's fixed-income category receive
this rating.*
* Shareholder meeting: The fund's annual shareholder meeting is
scheduled for December 18, 1997. In addition to the annual selection of
Trustees and approval of auditors, shareholders will consider a proposal
to combine the fund with Putnam Intermediate Government Income Trust. If
this proposal is approved, the fund will become substantially larger, but
will continue to operate under its existing investment objectives and
policies. Please read the proxy statement and vote your shares promptly.
CONTENTS
4 Report from Putnam Management
9 Fund performance summary
12 Portfolio holdings
30 Financial statements
* 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 9/30/97, there were 146 and 98 funds in the fixed-income
category; the fund received 3 and 4 stars for the respective periods. Past
performance is not indicative of future results.
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
Putnam Master Intermediate Income Trust ended fiscal 1997 with gratifyingly
positive results derived from its globally diverse portfolio of fixed-income
securities. The fund's carefully selected high-yield bonds led the charge
during the period, but the protective role of the fund's more conservative
sectors should not be overlooked. It is this diversification across a broad
band of the risk/return spectrum that gives your fund's investment strategy
much of its appeal.
Your fund's management team, with expertise as varied as the securities in
which the fund invests, closely monitors the world's fixed-income markets,
continually fine-tuning the portfolio and seeking attractive investment
opportunities. In the following report, your fund's managers review
performance in the fiscal year just ended and discuss prospects for fiscal
1998.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
November 19, 1997
Report from the Fund Managers
Kenneth J. Taubes
Jennifer E. Leichter
D. William Kohli
Gail A. Attridge
Spurred by low inflation, moderate economic growth, and a relatively stable
interest-rate environment around the world, Putnam Master Intermediate Income
Trust closed fiscal 1997 with attractive results at both net asset value and
market price. While interest-rate, currency fluctuation, and inflation
concerns occasionally sparked volatility in various sectors and regions, we
met the challenges by emphasizing sectors that we believed offered
sufficiently strong potential to weather short-term market movements. Domestic
high-yield bonds, domestic mortgage-backed securities, and emerging-markets
bonds were the three asset classes that provided the lion's share of
performance. On pages 9 and 10 of this report, you'll find full performance
details for all share classes.
* MORTGAGE-BACKED SECURITIES EMPHASIZEd; DURATION EXTENDED
Your fund's taxable investment-grade holdings consisted mainly of
mortgage-backed securities, which offered higher yields and greater
appreciation than U.S. Treasury bonds for much of the fiscal year. The
relatively stable interest-rate climate has meant less inherent prepayment
risk for mortgage issues. This environment, combined with highly favorable
supply/demand dynamics, bolstered the attractiveness of the mortgage-backed
securities the fund primarily owns: current coupon mortgage securities, whose
coupons reflect current market rates, and discount coupon issues, whose
coupons are below current market rates.
Although declining interest rates have recently heightened prepayment fears
and dampened performance in this market, we remain confident that the fund's
mortgage-backed holdings can continue to make a positive contribution.
Historically current coupon and discount coupon issues tend to experience less
prepayment risk in a falling-rate environment.
Your fund's Treasury holdings also contributed positively to performance,
particularly during the market's summer rallies. At the fiscal year's
midpoint, we moved into longer-term intermediate issues in order to extend
duration and position the fund for the likelihood of declining bond yields and
rising prices -- a move that proved timely as the period progressed. Duration
is a measure of a bond's sensitivity to interest rate changes. Longer duration
tends to offer more attractive appreciation potential should rates decline.
* HIGH-YIELD BONDS CONTINUE TO ENJOY FAVORABLE MARKET CLIMATE
The economic and business environment that prevailed during fiscal 1997 was
ideal for U.S. corporate high-yield bonds. Extremely low default rates, robust
stock market activity, favorable supply/demand characteristics, strong
corporate profitability, and continued brisk consolidation activity that often
leads to credit upgrades fueled the portfolio's performance during the period.
We invested a substantial portion of the high-yield sector's assets in three
industries -- telecommunications, broadcasting, and cable -- a strategy that
required nerves of steel during March's market plunge. Rising interest rates
and inflation fears had investors fleeing to higher-quality issues. Not
surprisingly, the high-yield bonds of companies in these growth-oriented
industries were among the hardest hit because of their capital-intensive
nature.
[GRAPHIC OMITTED: horizontal bar chart TOP 5 COUNTRY ALLOCATIONS]
TOP 5 COUNTRY ALLOCATIONS*
(INTERNATIONAL SECTOR)
Germany 6.6%
United Kingdom 5.5%
Mexico 4.2%
Russia 3.3%
France 2.6%
Footnote reads:
*Based on net assets as of 9/30/97. Holdings will vary over time.
Nevertheless, we remained optimistic about their performance potential and
took the opportunity to increase several positions during the downturn. We
believed the combined effects of deregulation and industry consolidation would
continue to provide a positive backdrop for many fund holdings. When the
market regained its footing, many issues appreciated substantially.
Brooks Fiber Properties, which was recently purchased by WorldCom, Nextel
Communications, Hyperion Telecommunication Corp., and American Communication
Services Inc. have been notable performers. While these securities and others
discussed in this report were viewed favorably during the period, all holdings
are subject to review in accordance and adjustment with the fund's investment
strategy and may vary in the future.
In broadcasting, we increased the fund's position in Echostar Satellite
Broadcast Corp. Communications and increased the weighting in several
preferred stocks. Similarly, during the period's second half, we increased the
fund's exposure to foreign cellular and foreign dollar-based corporate bonds,
particularly paper companies. Millicom International Cellular, Celcaribe, and
Macaw International are three companies profiting from the exploding worldwide
demand for wireless communication. Paper companies are also experiencing a
global rally and we've added credits in Indonesia, including APP International
Finance Company, and in the Philippines. We've also boosted positions in
issues such as Riverwood International, Repap New Brunswick, and Florida Coast
Paper.
* EMERGING MARKETS AND JAPAN GARNER ATTENTION
On the international front, since the fiscal year's midpoint core European
markets remained our area of concentration, although their performance in
dollar terms has been a bit flat. Long-term bonds in Germany, Denmark, and
France were our primary interest mainly because of the attractively steep
yield curves present in these countries. While the fund's bond holdings
performed well, the surge in value of the U.S. dollar relative to European
currencies caused the portfolio's European holdings to provide lackluster
dollar-adjusted returns.
[GRAPHIC OMITTED: TOP THREE HOLDINGS PER SECTOR]
TOP THREE HOLDINGS PER SECTOR*
HIGH-YIELD BONDS
Banco Nacional de Comercio, 7-1/4s, 2004
Banque Nationale pour le Development Economique (BNDE), 9s, 2007
Banco Nacional de Comercio, 8s, 2003
FOREIGN BONDS
Federal Republic of Germany, 6s, 2007
United Kingdom Treasury bonds, 7-1/2s, 2006
Russian bonds, 9-1/4s, 2001
U.S. INVESTMENT-GRADE SECURITIES
Government National Mortgage Association, 7.5%
U.S. Treasury obligation, 6.25%
Government National Mortgage Association, 8.5%
Footnote reads:
* These holdings represent 30.9% of the fund's assets as of 9/30/97.
Portfolio holdings will vary over time.
Performance of the core markets was further overshadowed by the dramatic
comeback staged by the higher-yielding peripheral markets of Spain, Italy, and
Sweden in response to budget improvements and the probability of a broader
European Monetary Union (EMU). We were not anticipating the strength of the
rallies and had consequently kept our exposure to the peripheral markets
fairly low. On the currency front, we did employ hedging strategies in the
Italian lire and Swedish krona against the German deutschemark -- all of which
proved effective.
We had significant exposure to bonds in the United Kingdom -- the
best-performing government bond market thus far in this calendar year. The
Bank of England's independence and tighter monetary policy as well as the
possibility that the United Kingdom may enter EMU after all provided the
catalyst that U.K. bonds needed to rally. Other positive dollar-bloc
performance came from holding nondollar surrogates in Australia and Canada.
During the period's second half, we reversed our negative view on Japanese
bonds and forayed into that market after a long period of avoidance. Signs of
continued economic weakness in Japan and difficulties in Southeast Asia
prompted our decision. By period's end, our renewed interest had proved
worthwhile. In early spring, our dollar/yen currency hedges hampered the
sleeve's returns as the yen unexpectedly soared in value against the dollar.
The yen has since declined and our currency hedges have allowed the fund to
fully realize the positive results Japanese bonds recently posted in local
terms.
We've increased your fund's emerging-markets exposure considerably since the
outset of the fiscal year -- a strategy that has contributed substantially to
your fund's performance. Lower risk premiums worldwide, improving
fundamentals, increased global liquidity, and investors' appetite for yield
have fueled the performance of many holdings. Top performers included issues
in South Africa, Eastern Europe (including Russia and Bulgaria), Mexico, and
Argentina.
* PROSPECTS FOR FIXED-INCOME INVESTING LOOK GOOD
At this writing, we remain reasonably optimistic about the prospects for
fixed-income investing. Increased fiscal responsibility on the part of many
governments, low global inflation, and relatively stable interest rates in
most countries give us reason to remain optimistic going forward. Of course,
change is a constant and the sustainability of today's conditions bears close
watching. In our opinion, the fund's multisector strategy and the flexibility
it provides give us the ability to pursue the best fixed-income opportunities
the world has to offer. We will continue to take advantage of Putnam's
extensive credit research and global experience to provide your investment
with solid performance potential in any market environment.
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 9/30/97, there is no guarantee the fund will continue to hold
these securities in the future. While U.S. government backing does not insure
principal, which will fluctuate, it does guarantee the fund's government
backed holdings will make timely payments of interest and principal.
Mortgage-backed securities may be subject to prepayment risk. Foreign
investments are subject to certain risks, such as currency fluctuations,
economic instability, and political developments, that are not present with
domestic investments. The lower credit ratings of high-yield corporate and
municipal bonds reflect a greater possibility that adverse changes in the
economy or their issuers may affect the fund's ability to pay principal and
interest on the bonds.
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, investment grade, high-yield, and
international fixed-income securities with limited maturities.
TOTAL RETURN FOR PERIODS ENDED 9/30/97
Market
NAV price
- ------------------------------------------------------------------------------
1 year 11.15% 17.54%
- ------------------------------------------------------------------------------
5 years 54.69 46.53
Annual average 9.12 7.94
- ------------------------------------------------------------------------------
Life (4/29/88) 139.52 105.91
Annual average 9.72 7.97
- ------------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 9/30/97
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 7.83% 12.24% 15.72% 2.15%
- ------------------------------------------------------------------------------
5 years 32.91 59.65 74.94 14.08
Annual average 5.86 9.81 11.84 2.67
- ------------------------------------------------------------------------------
Life of fund 107.59 110.19 189.85 37.66
Annual average 8.06 8.21 11.96 3.45
- ------------------------------------------------------------------------------
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 9/30/97
- ------------------------------------------------------------------------------
Distributions (number) 12
- ------------------------------------------------------------------------------
Income $0.644
- ------------------------------------------------------------------------------
Capital gains --
- ------------------------------------------------------------------------------
Total $0.644
- ------------------------------------------------------------------------------
Share value NAV Market price
- ------------------------------------------------------------------------------
9/30/96 $8.58 $7.50
- ------------------------------------------------------------------------------
9/30/97 8.79 8.125
- ------------------------------------------------------------------------------
Current return (end of period) NAV Market price
- ------------------------------------------------------------------------------
Current dividend rate1 7.65% 8.27%
- ------------------------------------------------------------------------------
1 Income portion of most recent distribution, annualized and divided by
NAV or market price at end of period.
TERMS AND DEFINITIONS
Total return shows how the value of the fund's shares changed over time,
assuming you held the shares through the entire period and reinvested all
distributions in the fund.
Net asset value (NAV) is the value of all fund assets, minus any
liabilities and net assets allocated to remarketed preferred shares,
divided by 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 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.
Report of independent accountants
For the fiscal year ended September 30, 1997
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, 1997, and the related statement of operations for
the year then ended and the statements 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, 1997, 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, 1997, the results
of its operations for the year then ended and 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 12, 1997
Portfolio of investments owned
September 30, 1997
<TABLE>
<CAPTION>
CORPORATE BONDS AND NOTES (38.0%) *
PRINCIPAL AMOUNT VALUE
Advertising (0.2%)
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------
$ 250,000 Lamar Advertising Co. sr. sub. notes 9 5/8s, 2006 $ 263,125
410,000 Lamar Advertising Co. 144A sr. sub. notes 8 5/8s, 2007 408,975
--------------
672,100
Aerospace and Defense (0.7%)
- ------------------------------------------------------------------------------------------------------------
250,000 Alliant Techsystems, Inc. sr. sub. notes 11 3/4s, 2003 276,875
465,000 BE Aerospace sr. sub. notes Ser. B, 9 7/8s, 2006 499,875
300,000 Howmet Corp. sr. sub. notes 10s, 2003 327,000
150,000 L-3 Communications Corp. 144A sr. sub. notes
10 3/8s, 2007 161,250
100,000 Moog, Inc. sr. sub. notes Ser. B, 10s, 2006 106,000
600,000 Sequa Corp. sr. sub. notes 9 3/8s, 2003 622,500
185,000 Tracor, Inc. sr. sub. notes 8 1/2s, 2007 189,625
--------------
2,183,125
Agriculture (0.6%)
- ------------------------------------------------------------------------------------------------------------
1,380,000 PMI Holdings Corp. sub. disc. deb. stepped-coupon
Ser. B, zero % (11 1/2s, 9/1/00), 2005 ++ 1,069,500
830,580 Premium Standard Farms, Inc. sr. secd. notes
11s, 2003 [2 DBL. DAGGERS] 913,638
--------------
1,983,138
Apparel (0.2%)
- ------------------------------------------------------------------------------------------------------------
85,000 GFSI, Inc. sr. sub. notes Ser. B, 9 5/8s, 2007 87,125
125,000 Guess Jeans, Inc. sr. sub. notes 9 1/2s, 2003 129,063
395,000 Sassco Fashions Ltd. sr. notes 12 3/4s, 2004 418,700
170,000 William Carter Co. 144A sr. sub. notes 12s, 2008 181,050
--------------
815,938
Automotive Parts (0.1%)
- ------------------------------------------------------------------------------------------------------------
70,000 A.P.S. Inc. company guaranty 11 7/8s, 2006 65,100
250,000 Harvard Industries Inc. sr. notes 11 1/8s, 2005
(In default) + 95,000
135,000 Hayes Wheels International, Inc. 144A sr. sub. notes
9 1/8s, 2007 139,050
200,000 Safety Component International, Inc. 144A
sr. sub. notes 10 1/8s, 2007 207,000
--------------
506,150
Banks (5.5%)
- ------------------------------------------------------------------------------------------------------------
3,632,000 Banco Nacional de Comercio Exterior bank
guaranteed 8s, 2003 (Mexico) 3,577,520
8,350,000 Banco Nacional de Comercio Exterior deb.
7 1/4s, 2004 (Mexico) 7,953,375
5,000,000 Banque Nationale pour le Development Economique
(BNDE) 144A bonds 9s, 2007 (Morocco) 4,962,500
170,000 Delta Financial Corp. sr. notes 9 1/2s, 2004 172,125
240,000 Espirto Santo Centrais 144A sr. notes
10s, 2007 (Brazil) 240,000
1,540,000 First Nationwide Holdings sr. sub. notes 10 5/8s, 2003 1,694,000
--------------
18,599,520
Beverages (0.1%)
- ------------------------------------------------------------------------------------------------------------
310,000 Canandaigua Wine Co. sr. sub. notes Ser. C,
8 3/4s, 2003 314,650
Broadcasting (2.8%)
- ------------------------------------------------------------------------------------------------------------
240,000 Acme Television/Finance 144A sr. disc. notes stepped-
coupon zero % (10 7/8s, 9/30/00), 2004 ++ 175,800
375,000 Affinity Group Holdings sr. notes 11s, 2007 402,188
250,000 Affinity Group Holdings sr. sub. notes 11 1/2s, 2003 268,125
200,000 Australias Hldngs PTY Ltd. sr. disc, notes stepped-
coupon zero % (15s, 11/01/00), 2002 ++ 156,250
1,000,000 Benedek Communications Corp. sr. disc. notes stepped-
coupon zero % (13 1/4s, 5/15/01), 2006 ++ 705,000
515,000 Capstar Broadcasting sr. disc. notes stepped-coupon
zero % (12 3/4s, 2/1/02), 2009 ++ 352,775
215,000 Capstar Broadcasting sr. sub. notes 9 1/4s, 2007 220,375
115,000 Central European Media Enterprises Ltd. sr. notes
9 3/8s, 2004 115,288
26,020 Citadel Broadcasting Co. 144A sr. notes 10 1/4s, 2007 27,972
190,000 Citadel Broadcasting Inc. 144A sr. sub. notes
10 1/4s, 2007 204,250
750,000 Comcast UK Cable, Ltd. deb. stepped-coupon zero %
(11.2s, 11/15/00), 2007 (Bermuda) ++ 588,750
480,000 Commodore Media, Inc. sr. sub. notes stepped-coupon
7 1/2s, (13 1/4s, 5/1/98), 2003 ++ 528,000
1,350,000 Echostar Satellite Broadcast Corp. sr. disc. notes stepped-
coupon zero % (13 1/8s, 3/15/00), 2004 ++ 1,128,938
600,000 Fox/Liberty Networks LLC 144A sr. disc. notes
stepped-coupon zero % (9 3/4s,8/15/02), 2007 ++ 381,750
670,000 Fox/Liberty Networks LLC 144A sr. notes
8 7/8s, 2007 674,188
380,000 Heartland Wireless Communications, Inc. sr. notes
Ser. B, 14s, 2004 171,000
200,000 Pegasus Media & Communications notes Ser. B,
12 1/2s, 2005 223,500
929,000 Petracom Holdings, Inc. notes stepped-coupon zero %
(17 1/2s, 8/1/98), 2003 ++ 891,840
275,000 Radio One Inc. 144A sr. sub. notes stepped-coupon
7s, (12s, 5/1/00), 2004 ++ 264,000
700,000 SFX Broadcasting, Inc. sr. sub. notes Ser. B,
10 3/4s, 2006 763,000
210,000 Spanish Broadcasting sr. notes Ser. B, 11s, 2004 229,425
220,000 TCI Satellite Entertainment 144A sr. sub. notes
10 7/8s, 2007 231,000
545,000 TV Azteca Sa De Cv sr. notes Ser. B, 10 1/2s,
2007 (Mexico) 580,425
--------------
9,283,839
Building Products (0.5%)
- ------------------------------------------------------------------------------------------------------------
400,000 Cemex S.A. 144A bonds 12 3/4s, 2006 (Mexico) 483,000
500,000 Nortek, Inc. sr. sub. notes 9 7/8s, 2004 511,250
70,000 Roller Bearing Co. 144A sr. sub. notes 9 5/8s, 2007 71,575
500,000 Southdown, Inc. sr. sub. notes Ser. B, 10s, 2006 555,000
248,000 Waxman Industries Inc. sr. notes stepped-coupon
Ser. B, zero % (12 3/4s, 6/1/99), 2004 ++ 215,760
--------------
1,836,585
Building and Construction (0.5%)
- ------------------------------------------------------------------------------------------------------------
225,000 Atrium Companies Inc. sub. notes 10 1/2s, 2006 234,000
400,000 GS Superhighway Holdings 144A sr. notes
10 1/4s, 2007 401,000
180,000 Presley Cos. sr. notes 12 1/2s, 2001 171,000
733,000 Terex Corp. sr. notes Ser. B, 13 1/4s, 2002 842,950
--------------
1,648,950
Buses (0.2%)
- ------------------------------------------------------------------------------------------------------------
855,000 Consorcio/MCII Holdings sec. notes stepped-coupon
zero % (12s, 11/15/98), 2002 ++ 780,188
Business Equipment and Services (0.4%)
- ------------------------------------------------------------------------------------------------------------
600,000 Axiohm Transactions Solutions 144A sr. sub. notes
9 3/4s, 2007 607,500
100,000 Coleman Escrow Corp. 144A sr. disc. notes
zero % , 2001 60,250
500,000 Corporate Express, Inc. sr. sub. notes Ser. B,
9 1/8s, 2004 510,000
125,000 Outsourcing Solutions, Inc. sr. sub. notes Ser. B,
11s, 2006 138,750
--------------
1,316,500
Cable Television (2.4%)
- ------------------------------------------------------------------------------------------------------------
1,981,594 Adelphia Communications Corp. sr. notes
9 1/2s, 2004 [2 DBL. DAGGERS] 1,951,870
500,000 American Telecasting, Inc. sr. disc. notes stepped-coupon
zero % (14 1/2s, 8/15/00), 2005 ++ 170,000
300,000 Charter Communications International, Inc. disc. notes
stepped-coupon Ser. B, zero % (14s, 3/15/01),
2007 ++ 226,500
700,000 Diamond Cable Communication Co. sr. disc. notes
stepped-coupon zero % (11 3/4s, 12/15/00), 2005
(United Kingdom) ++ 524,125
1,000,000 Diamond Cable Communication Co. sr. disc. notes
stepped-coupon zero % (10 3/4s, 2/15/02), 2007
(United Kingdom) ++ 651,250
1,480,216 Falcon Holdings Group, Inc. sr. sub. notes 11s, 2003 [2 DBL. DAGGERS] 1,539,425
600,000 FrontierVision Holdings LP 144A sr. disc. notes stepped
coupon zero % (11 7/8s, 9/15/01), 2007 ++ 408,000
1,390,000 International Cabletel, Inc. sr. notes stepped-coupon
Ser. B, zero % (11 1/2s, 2/01/01), 2006 ++ 1,039,025
460,000 Marcus Cable Co. (L.P.) sr. sub. disc. notes stepped-
coupon zero % (13 1/2s, 8/1/99), 2004 ++ 414,575
1,260,000 UIH Australia/Pacific, Inc. sr. disc. notes stepped-coupon
Ser. B, zero % (14s, 5/15/01), 2006 (Australia) ++ 904,050
310,000 Wireless One, Inc. sr. notes 13s, 2003 148,800
--------------
7,977,620
Cellular Communications (1.8%)
- ------------------------------------------------------------------------------------------------------------
1,380,000 Cencall Communications Corp. sr. disc. notes stepped-
coupon zero % (10 1/8s, 1/15/99), 2004 ++ 1,217,850
1,500,000 Comunicacion Cellular bonds stepped-coupon zero %
(13 1/8s, 11/15/00), 2003 (Colombia) ++ 1,162,500
540,000 Intercel, Inc. sr. disc. notes stepped-coupon zero %
(12s, 5/1/01), 2006 ++ 368,550
510,000 International Wireless Communications, Inc. sr. disc.
notes zero %, 2001 290,700
930,000 McCaw International Ltd sr. disc. notes stepped
coupon zero % (13s, 4/15/02), 2007 ++ 560,325
775,000 Millicom International Cellular S.A. sr. disc. notes
stepped-coupon zero % (13 1/2s, 6/1/01), 2006
(Luxembourg) ++ 600,625
2,090,000 NEXTEL Communications, Inc. 144A sr. disc. notes
stepped-coupon zero % (10.65s, 9/15/02), 2007 ++ 1,287,963
190,000 Omnipoint Corp. sr. notes 11 5/8s, 2006 195,700
460,000 Omnipoint Corp. sr. notes Ser. A, 11 5/8s, 2006 473,800
--------------
6,158,013
Chemicals (0.9%)
- ------------------------------------------------------------------------------------------------------------
1,000,000 Acetex Corp. sr. notes 9 3/4s, 2003 (Canada) 1,035,000
70,000 Chemical Leaman Corp. 144A sr. notes 10 3/8s, 2005 73,325
580,000 Harris Chemical Corp. sr. sub. notes 10 3/4s, 2003 598,850
320,000 Huntsman Corp. 144A sr. sub. notes 9 1/2s, 2007 336,000
15,000 Huntsman Corp. 144A sr. sub. notes FRN 9.187s, 2007 15,563
500,000 ISP Holdings, Inc. sr. notes Ser. B, 9 3/4s, 2002 540,000
250,000 Sovereign Specialty Chemical 144A sr. sub. notes
9 1/2s, 2007 255,000
185,000 Sterling Chemicals Holdings sr. disc. notes stepped-
coupon zero % (13 1/2s, 8/15/01), 2008 ++ 130,425
205,000 Trikem S.A. 144A bonds 10 5/8s, 2007 (Brazil) 206,281
--------------
3,190,444
Computer Equipment (0.2%)
- ------------------------------------------------------------------------------------------------------------
725,000 Computervision Corp. sr. sub. notes 11 3/8s, 1999 580,000
Computer Services (0.2%)
- ------------------------------------------------------------------------------------------------------------
115,000 DecisionOne Corp. sr. sub. notes 9 3/4s, 2007 120,175
545,000 Unisys Corp. sr. notes 11 3/4s, 2004 615,850
--------------
736,025
Conglomerates (0.3%)
- ------------------------------------------------------------------------------------------------------------
518,000 Axia, Inc. sr. sub. notes Ser. B, 11s, 2001 538,720
600,000 MacAndrews & Forbes Holdings, Inc. sub. deb. notes
13s, 1999 602,250
--------------
1,140,970
Consumer Durable Goods (0.1%)
- ------------------------------------------------------------------------------------------------------------
345,000 Icon Fitness Corp. sr. disc. notes stepped-coupon
Ser. B, zero % (14s, 11/15/01), 2006 ++ 203,550
100,000 Remington Products Co. sr. sub. notes Ser. B, 11s, 2006 84,000
--------------
287,550
Consumer Non Durables (--%)
- ------------------------------------------------------------------------------------------------------------
100,000 Foamex L.P. 144A sr. sub. notes 9 7/8s, 2007 103,500
Consumer Services (0.6%)
- ------------------------------------------------------------------------------------------------------------
1,582,000 Coinmach Corp. sr. notes Ser. B, 11 3/4s, 2005 1,752,065
520,000 Interact Systems, Inc. 144A sr. notes stepped-coupon
zero % (14s, 8/1/99), 2003 ++ 208,000
--------------
1,960,065
Containers (0.1%)
- ------------------------------------------------------------------------------------------------------------
243,000 Ivex Packaging Corp. sr. sub. notes 12 1/2s, 2002 261,225
Cosmetics (0.2%)
- ------------------------------------------------------------------------------------------------------------
95,000 French Fragrances, Inc. sr. notes Ser. B., 10 3/8s, 2007 98,800
915,000 Revlon Worldwide Corp. sr. disc. notes Ser. B,
zero %, 2001 665,663
--------------
764,463
Electric Utilities (1.0%)
- ------------------------------------------------------------------------------------------------------------
245,000 AES Corp. sr. sub. notes 8 3/8s, 2007 245,613
1,950,000 Midland Funding Corp. deb. Ser. A, 11 3/4s, 2005 2,314,455
556,807 Northeast Utilities System notes Ser. A, 8.58s, 2006 552,019
153,333 Northeast Utilities System notes Ser. B, 8.38s, 2005 155,365
--------------
3,267,452
Electronics and Electrical Equipment (0.6%)
- ------------------------------------------------------------------------------------------------------------
130,000 Argo-Tech Corp. 144A sr. sub. notes 8 5/8s, 2007 130,325
140,000 Celestica International Ltd. 144A sr. sub. notes
10 1/2s, 2006 (Canada) 151,375
160,712 Cirent Semiconductor sr. sub. notes 10.22s, 2002 164,127
170,559 Cirent Semiconductor 144A sr. sub. notes
10.14s, 2004 174,397
190,000 DII Group, Inc. 144A sr. sub. notes 8 1/2s, 2007 190,238
120,000 HCC Industries, Inc. 144A sr. sub. notes 10 3/4s, 2007 127,200
1,160,000 International Semi-Tech. Corp. sr. secd. disc. notes
stepped-coupon zero % (11 1/2s,8/15/00),
2003 (Canada) ++ 725,000
240,000 Motors and Gears, Inc. sr. notes Ser. B, 10 3/4s, 2006 256,800
100,000 Therma-Wave Inc. 144A sr. notes 10 5/8s, 2004 108,000
70,000 Wavetek Corp. 144A sr. sub. notes 10 1/8s, 2007 72,800
--------------
2,100,262
Energy-Related (0.2%)
- ------------------------------------------------------------------------------------------------------------
710,000 Panda Global Energy Co. 144A sr. notes 12 1/2s, 2004 692,250
Environmental Control (0.2%)
- ------------------------------------------------------------------------------------------------------------
250,000 Allied Waste Industries, Inc. company guaranty
10 1/4s, 2006 273,750
420,000 Allied Waste Industries, Inc. 144A sr. disc. notes stepped-
coupon zero % (11.3s, 6/1/02), 2007 ++ 284,550
--------------
558,300
Financial Services (0.5%)
- ------------------------------------------------------------------------------------------------------------
260,000 Aames Financial Corp. sr. notes 9 1/8s, 2003 265,200
115,000 Dollar Financial Group Inc. sr. notes Ser. A,
10 7/8s, 2006 124,200
500,000 First Federal Financial Corp. notes 11 3/4s, 2004 510,000
125,000 Imperial Credit Industries, Inc. sr. notes 9 7/8s, 2007 126,250
190,000 Intertek Finance PLC 144A sr. sub. notes 10 1/4s, 2006 199,975
200,000 Ocwen Federal Bank FSB sub. deb. 12s, 2005 222,000
120,000 Ocwen Financial Corp. notes 11 7/8s, 2003 135,600
120,000 Resource America Inc. 144A bonds 12s, 2004 125,700
--------------
1,708,925
Food and Beverages (0.3%)
- ------------------------------------------------------------------------------------------------------------
80,000 Del Monte Corp. sr. sub. notes Ser. B, 12 1/4s, 2007 [2 DBL. DAGGERS] 87,200
500,000 Doane Products Co. sr. notes 10 5/8s, 2006 538,750
65,000 MBW Foods, Inc. 144A sr. sub. notes 9 7/8s, 2007 67,275
130,000 Southern Foods Group 144A sr. sub. notes
9 7/8s, 2007 134,550
50,000 Windy Hill Pet Food Co. 144A sr. sub. notes
9 3/4s, 2007 51,750
--------------
879,525
Food Chains (0.4%)
- ------------------------------------------------------------------------------------------------------------
280,000 Fleming Companies, Inc. 144A sr. sub. notes
10 1/2s, 2004 289,800
1,250,000 Southland Corp. deb. Ser. B, 4s, 2004 960,000
--------------
1,249,800
Gaming Equipment (0.1%)
- ------------------------------------------------------------------------------------------------------------
150,000 Argosy Gaming Co. 1st mtge. 13 1/4s, 2004 150,000
Health Care (0.3%)
- ------------------------------------------------------------------------------------------------------------
300,000 Genesis Eldercare 144A sr. sub. notes 9s, 2007 298,500
5,000 Genesis Health Ventures, Inc. sr. sub. notes 9 1/4s, 2006 5,113
340,000 IMED Corp. sr. sub. notes 9 3/4s, 2006 350,200
480,000 Integrated Health Services, Inc. 144A sr. sub. notes
9 1/4s, 2008 487,200
--------------
1,141,013
Hospital Management (0.2%)
- ------------------------------------------------------------------------------------------------------------
700,000 Paracelsus Healthcare Corp. sr. sub. notes 10s, 2006 722,750
Insurance and Finance (0.5%)
- ------------------------------------------------------------------------------------------------------------
500,000 Indah Kiat Financial Mauritius 144A company guaranty
10s, 2007 (Indonesia) 488,750
200,000 Pioneer Americas Acquisition 144A sr. notes
9 1/4s, 2007 199,000
370,000 Polytama International notes 11 1/4s, 2007 359,825
500,000 Reliance Group Holdings, Inc. sr. sub. deb. 9 3/4s, 2003 529,030
--------------
1,576,605
Lodging (0.4%)
- ------------------------------------------------------------------------------------------------------------
750,000 HMH Properties, Inc. sr. notes Ser. B, 9 1/2s, 2005 789,375
500,000 Host Marriott Travel Plaza sr. notes Ser. B, 9 1/2s, 2005 528,750
--------------
1,318,125
Machinery (--%)
- ------------------------------------------------------------------------------------------------------------
100,000 Bucyrus International, Inc. 144A sr. notes 9 3/4s, 2007 100,875
Medical Supplies and Devices (0.6%)
- ------------------------------------------------------------------------------------------------------------
250,000 Dade International, Inc. sr. sub. notes Ser. B, 11 1/8s, 2006 281,563
1,000,000 Graphic Controls Corp. sr. sub. notes Ser. A, 12s, 2005 1,120,000
350,000 Urohealth Systems, Inc. 144A sr. sub. notes
12 1/2s, 2004 347,375
350,000 Wright Medical Technology, Inc. 144A notes
Ser. C, 11 3/4s, 2000 358,750
--------------
2,107,688
Metals and Mining (0.4%)
- ------------------------------------------------------------------------------------------------------------
90,000 Acindar Industria Argentina de Aceros S.A. bonds
11 1/4s, 2004 (Argentina) 97,763
200,000 Anker Coal Group, Inc. 144A sr. notes 9 3/4s, 1997 203,000
210,000 Continental Global Group sr. notes Ser. B, 11s, 2007 224,700
175,000 Murrin Holdings 144A sr. notes 9 3/8s, 2007
(Australia) 176,750
200,000 NL Industries, Inc. sr. notes 11 3/4s, 2003 219,500
45,000 Royal Oak Mines, Inc. company guaranty Ser. B,
11s, 2006 (Canada) 43,425
250,000 Weirton Steel Co. sr. notes 11 3/8s, 2004 271,250
--------------
1,236,388
Motion Picture Distribution (0.3%)
- ------------------------------------------------------------------------------------------------------------
561,900 Cinemark Mexico USA notes Ser. B, 13s, 2003
(Mexico) [2 DBL. DAGGERS] 561,900
37,800 Cinemark Mexico USA notes Ser. D, 13s, 2003
(Mexico) [2 DBL. DAGGERS] 37,800
400,000 Cinemark USA, Inc. sr. sub. notes Ser. B, 9 5/8s, 2008 411,500
--------------
1,011,200
Networking (0.4%)
- ------------------------------------------------------------------------------------------------------------
1,735,000 CellNet Data Systems, Inc. sr. disc. notes stepped-
coupon Ser. B, zero % (13s, 6/15/00), 2005 ++ 1,231,850
Nursing Homes (0.1%)
- ------------------------------------------------------------------------------------------------------------
365,000 Sun Healthcare Group Inc. 144A sr. sub. notes
9 1/2s, 2007 375,038
Oil and Gas (1.8%)
- ------------------------------------------------------------------------------------------------------------
185,000 Abraxas Petroleum Corp. 144A sr. notes Ser. B,
11 1/2s, 2004 201,650
180,000 Coho Energy Inc. sr. sub. notes 8 7/8s, 2007 178,639
80,000 Dailey Petroleum Services Corp. 144A company
guaranty 9 3/4s, 2007 83,200
100,000 DI Industries Inc. sr. notes 8 7/8s, 2007 102,750
750,000 Maxus Energy Corp. global notes 9 7/8s, 2002 787,320
100,000 Pacalta Resources Ltd. sr. notes Ser. B, 10 3/4s,
2004 (Canada) 103,250
195,000 Parker Drilling Corp. sr. notes Ser. B, 9 3/4s, 2006 207,675
300,000 Pogo Producing Co. 144A notes 8 3/4s, 2007 306,000
150,000 Pride Petroleum Services, Inc. sr. notes 9 3/8s, 2007 160,500
2,725,000 Transamerican Energy 144A sr. disc. notes stepped-
coupon zero % (13s 6/01/99), 2002 ++ 2,166,375
1,080,000 Transamerican Energy 144A sr. notes 11 1/2s, 2002 1,071,900
518,000 TransTexas Gas Corp. 144A sr. sub. notes 13 3/4s, 2001 593,110
100,000 Wiser Oil Co. 144A sr. sub. notes 9 1/2s, 2007 96,500
--------------
6,058,869
Packaging and Containers (0.2%)
- ------------------------------------------------------------------------------------------------------------
215,000 Huntsman Packaging Corp. 144A sr. sub. notes
9 1/8s, 2007 219,838
270,000 Innova S De R.L. sr. notes 12 7/8s, 2007 (Mexico) 289,575
--------------
509,413
Paging (0.2%)
- ------------------------------------------------------------------------------------------------------------
500,000 Mobile Telecommunications Tech. sr. notes
13 1/2s, 2002 567,500
Paper and Forest Products (1.2%)
- ------------------------------------------------------------------------------------------------------------
250,000 APP International Finance Co. notes 11 3/4s, 2005
(Netherlands) 269,063
670,000 Florida Coast Paper LLC 1st mtge. Ser. B,
12 3/4s, 2003 728,625
375,000 Pindo Deli Finance Mauritius Ltd. 144A company
guaranty 10 3/4s, 2007 (India) 382,500
445,000 PT Pabrik Kertas Tjiwi Kimia 144A company guaranty
10s, 2004 (Indonesia) 436,100
660,000 Repap New Brunswick sr. notes 10 5/8s,
2005 (Canada) 650,100
200,000 Riverwood International Corp. company guaranty
10 7/8s, 2008 199,500
450,000 Riverwood International Corp. 144A sr. notes
10 5/8s, 2007 470,250
850,000 Stone Container Corp. 144A company guaranty
11 1/2s, 2006 898,875
--------------
4,035,013
Pharmaceuticals and Biotechnology (0.3%)
- ------------------------------------------------------------------------------------------------------------
500,000 ICN Pharmaceuticals, Inc. 144A sr. notes 9 1/4s, 2005 525,000
600,000 Twin Laboratories, Inc. company guaranty
10 1/4s, 2006 651,000
--------------
1,176,000
Publishing (0.1%)
- ------------------------------------------------------------------------------------------------------------
350,000 Garden State Newspapers 144A sr. sub. notes
8 3/4s, 2009 352,625
100,000 Von Hoffman Press Inc. 144A sr. sub. notes
10 3/8s, 2007 106,000
--------------
458,625
Railroads (--%)
- ------------------------------------------------------------------------------------------------------------
75,000 TFM SA DE CV 144A company guaranty 10 1/4s,
2007 (Mexico) 79,125
Real Estate (0.2%)
- ------------------------------------------------------------------------------------------------------------
380,000 HMH Properties, Inc. 144A sr. notes 8 7/8s, 2007
(Canada) (R) 390,450
315,000 Prime Hospitality Corp. Ser. B, sub. notes 9 3/4s, 2007 333,113
--------------
723,563
Recreation (2.1%)
- ------------------------------------------------------------------------------------------------------------
185,000 Casino America, Inc. sr. notes 12 1/2s, 2003 197,950
400,000 Coast Hotels & Casinos, Inc. company guaranty
Ser. B, 13s, 2002 451,000
370,300 Colorado Gaming & Entertainment Co. sr. notes
12s, 2003 [2 DBL. DAGGERS] 403,627
513,970 Elsinore Corp. 144A exch. 1st mortgage 11 1/2s, 2000 493,411
250,000 Grand Casinos, Inc. 1st mtge. 10 1/8s, 2003 265,000
1,000,000 Grate Bay Property Funding Corp. 1st mtge.
10 7/8s, 2004 897,500
900,000 Hollywood Casino Corp. sr. notes 12 3/4s, 2003 985,500
150,000 Isle of Capri Black Hawk LLC 144A 1st mortgage
13s, 2004 151,500
1,200,000 Lady Luck Gaming Corp. 1st mtge. 11 7/8s, 2001 1,197,000
444,000 Louisiana Casino Cruises Corp. 1st mtge.
11 1/2s, 1998 448,440
500,000 PRT Funding Corp. sr. notes 11 5/8s, 2004 410,000
750,000 Trump A.C. 1st mtge. 11 1/4s, 2006 727,500
594,000 Trump Castle Funding Corp. notes 11 1/2s, 2000 599,940
--------------
7,228,368
Restaurants (0.2%)
- ------------------------------------------------------------------------------------------------------------
500,000 FRD Acquisition Co. sr. notes Ser. B, 12 1/2s, 2004 535,000
Retail (1.0%)
- ------------------------------------------------------------------------------------------------------------
434,000 Guitar Center Management Co. 144A sr. notes
11s, 2006 481,740
650,000 Johns Manville International Group sr. notes
10 7/8s, 2004 732,875
1,250,000 K mart Corp. med. term notes 7.55s, 2004 1,203,350
600,000 Mothers Work, Inc. sr. notes 12 5/8s, 2005 654,000
110,000 NBTY, Inc. 144A sr. sub. notes 8 5/8s, 2007 109,450
260,000 Zale Corp. 144A sr. notes 8 1/2s, 2007 260,000
--------------
3,441,415
Satellite Services (0.5%)
- ------------------------------------------------------------------------------------------------------------
255,000 Esat Holdings Ltd. sr. notes stepped-coupon
zero % (12 1/2s, 2/01/02), 2007 (Ireland) ++ 167,025
400,000 Iridium LLC/Capital Corp. 144A sr. notes 13s, 2005 418,000
190,000 Pratama Datakom Asia BV 144A company guaranty
12 3/4s, 2005 (Indonesia) 181,925
1,300,000 Winstar Communications, Inc. sr. disc. notes
stepped-coupon zero % (14s, 10/15/00), 2005 ++ 910,000
--------------
1,676,950
Semiconductors (0.2%)
- ------------------------------------------------------------------------------------------------------------
220,000 Fairchild Semiconductor Corp. 144A sr. sub. notes
11.74s, 2008 [2 DBL. DAGGERS] 222,200
215,000 Fairchild Semiconductor Corp. sr. sub. notes
10 1/8s, 2007 230,588
245,000 Viasystems Inc. 144A sr. sub. notes 9 3/4s, 2007 254,800
--------------
707,588
Shipping (0.1%)
- ------------------------------------------------------------------------------------------------------------
230,000 Johnstown America Industries, Inc. 144A sr. sub. notes
11 3/4s, 2005 247,250
Steel (0.2%)
- ------------------------------------------------------------------------------------------------------------
215,000 Altos Hornos de Mexico 144A bonds 11 3/8s,
2002 (Mexico) 233,006
140,000 Armco, Inc. 144A sr. notes 9s, 2007 141,750
420,000 Hylsa S.A. de C.V. 144A bonds 9 1/4s, 2007 (Mexico) 429,450
--------------
804,206
Supermarkets (0.5%)
- ------------------------------------------------------------------------------------------------------------
280,000 Ameriserve Food Co. 144A sr. sub. notes
10 1/8s, 2007 291,200
400,000 Jitney-Jungle Stores company guaranty 12s, 2006 451,000
240,000 Jitney-Jungle Stores 144A sr. sub. notes 10 3/8s, 2007 247,200
200,000 Nebco Evans Holding Co. 144A sr. disc. notes stepped-
coupon zero % (12 3/8s, 7/15/02), 2007 ++ 126,000
500,000 Ralphs Grocery Co. sr. notes 10.45s, 2004 547,500
--------------
1,662,900
Telecommunications (2.3%)
- ------------------------------------------------------------------------------------------------------------
170,000 Antenna TV S.A. 144A sr. notes 9s, 2007 (Greece) 170,850
190,000 America Communication Services, Inc. 144A sr. notes
13 3/4s, 2007 220,400
640,000 American Communication Services, Inc. sr. disc. notes
stepped-coupon zero % (12 3/4s, 4/1/01), 2006 ++ 448,000
105,000 Consorcio Ecuatoriano 144A notes 14s, 2002
(Ecuador) 113,400
285,000 Dobson Communications Corp. sr. notes 11 3/4s, 2007 283,219
325,000 Echostar DBS Corp. 144A company guaranty
12 1/2s, 2002 357,906
140,000 Frontiervision Operating Partners L.P. sr. sub. notes
11s, 2006 152,600
1,002,000 GST Telecommunications,Inc. company guaranty stepped-
coupon zero % (13 7/8s, 12/15/00), 2005 ++ 756,510
770,000 Hyperion Telecommunication Corp. sr. disc. notes
stepped-coupon Ser. B, zero % (13s, 4/15/01),
2003 ++ 539,963
400,000 Hyperion Telecommunications, Inc. 144A sr. notes
12 1/4s, 2004 438,000
1,260,000 ICG Holdings, Inc. sr. disc. notes stepped-coupon
zero % (13 1/2s, 9/15/00), 2005 ++ 1,008,000
1,000,000 Intermedia Communications, Inc. sr. disc. notes stepped-
coupon Ser. B, zero % (11 1/4s, 7/15/02), 2007 ++ 690,000
260,000 ITC Deltacom, Inc. 144A sr. notes 11s, 2007 285,350
750,000 Metrocall, Inc. sr. sub. notes 10 3/8s, 2007 751,875
605,000 Nextlink Communications, Inc. sr. notes 12 1/2s, 2006 695,750
525,000 Orbcomm Global Capital Corp. sr. notes Ser. B,
14s, 2004 546,000
250,000 Teleport Communications Group Inc. sr. disc. notes
stepped-coupon zero % (11 1/8s, 7/1/01), 2007 ++ 195,000
250,000 Winstar Equipment Corp. company guaranty
12 1/2s, 2004 265,000
--------------
7,917,823
Telephone Services (1.0%)
- ------------------------------------------------------------------------------------------------------------
330,000 Brooks Fiber Properties, Inc. sr. notes 10s, 2007 373,725
330,000 BTI Telecom Corp. 144A sr. notes 10 1/2s, 2007 341,550
280,000 Globo Communicacoes 144A company guaranty
10 1/2s, 2006 (Brazil) 289,800
455,000 McLeodUSA, Inc. sr. disc. notes stepped-coupon zero %
(10 1/2s, 3/1/02), 2007 ++ 332,150
360,000 Nextlink Communications sr. notes 9 5/8s, 2007 372,600
675,000 NTL Inc. sr. notes Ser. B, 10s, 2007 (United Kingdom) 705,375
615,000 RSL Communications, Ltd. company guaranty
12 1/4s, 2006 658,050
210,000 Viatel, Inc. sr. disc. notes stepped-coupon zero %
(15s, 1/15/00), 2005 ++ 154,350
--------------
3,227,600
Textiles (0.3%)
- ------------------------------------------------------------------------------------------------------------
105,000 Glenoit Corp. 144A sr. sub. notes 11s, 2007 112,350
240,000 Polymer Group, Inc. 144A sr. sub. notes 9s, 2007 242,400
250,000 Polysindo Inernational Eka company guaranty
13s, 2001 (Indonesia) 279,688
395,000 Polysindo International Finance company guaranty
11 3/8s, 2006 (Indonesia) 429,069
--------------
1,063,507
Wireless Communications (0.5%)
- ------------------------------------------------------------------------------------------------------------
700,000 Advanced Radio Telecom Corp. sr. notes 14s, 2007 608,125
100,000 Grupo Iusacell S.A. 144A sr. notes 10s, 2004 (Mexico) 103,500
525,000 Iridium LLC/Capital Corp. 144A sr. notes 14s, 2005 567,000
410,000 Powertel, Inc. sr. notes 11 1/8s, 2007 426,400
--------------
1,705,025
--------------
Total Corporate Bonds and Notes
(cost $116,263,849) $ 128,354,344
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (32.6%) *
PRINCIPAL AMOUNT VALUE
U.S. Government Agency Mortgage Obligations (24.6%)
- ------------------------------------------------------------------------------------------------------------
Federal Home Loan Mortgage Corp.
Pass-Through Certificates
$ 2,483,464 8 1/2s, with due dates from March 1, 2025 to
June 15, 2027 $ 2,595,223
3,197,462 6 1/2s, with due dates from February 1, 2012 to
June 1, 2012 3,175,470
Federal National Mortgage Association
Pass-Through Certificates
5,443 8 1/2s, Dwarf, with due dates from March 1, 2006 to
March 1, 2006 5,689
8,414,975 7 1/2s, with due dates from January 1, 2027 to
June 1, 2027 8,554,331
10,097,778 7s, with due dates from April 1, 2023 to
April 15, 2027 10,056,686
9,594,990 6 1/2s, with due dates from April 1, 2027 to
September 1, 2027 9,343,125
1,260,000 6 3/8s, August 15, 2007 925,500
Government National Mortgage Association
2,480,000 8 1/2s, TBA, October 16, 2027 2,594,700
8,405,000 7 1/2s, TBA, October 16, 2027 8,549,398
1,990,000 5 1/2s, TBA, October 16, 2027 1,988,129
Government National Mortgage Association
Pass-Through Certificates
11,274,800 8 1/2s, with due dates from January 15, 2026 to
August 15, 2027 11,796,266
6,406,838 8s, with due dates from January 15, 2026 to
February 15, 2027 6,623,075
16,794,040 7 1/2s, with due dates from February 15, 2023 to
August 15, 2027 17,087,247
--------------
83,294,839
U.S. Treasury Obligations (8.0%)
- ------------------------------------------------------------------------------------------------------------
U.S. Treasury Notes
4,000 6 1/2s, October 15, 2006 4,086
3,875,000 6 3/8s, April 30, 1999 3,909,526
1,600,000 6 1/4s, August 31, 2002 1,614,496
13,535,000 6 1/4s, March 31, 1999 # 13,630,151
2,500,000 6 1/8s, August 15, 2007 2,501,175
2,830,000 6s, July 31, 2002 2,830,000
2,455,000 5 7/8s, July 31, 1999 2,456,915
--------------
26,946,349
--------------
Total U.S. Government and Agency Obligations
(cost $108,352,855) $ 110,241,188
FOREIGN GOVERNMENT BONDS AND NOTES (22.7%) *
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
AUD 3,000,000 Australia (Government of) bonds Ser. 206,
10s, 2006 $ 2,728,955
CAD 1,850,000 Canada (Government of) bonds Ser. WB60,
7 1/4s, 2007 1,484,957
DKK 16,890,000 Denmark (Government of) bonds 8s, 2006 2,878,376
FRF 51,085,000 France Treasury Bill notes 4 3/4s, 2002 8,645,154
DEM 2,270,000 Germany (Federal Republic of) bonds Ser. 92,
8s, 2002 1,459,194
DEM 35,065,000 Germany (Federal Republic of) bonds Ser. 97,
6s, 2007 20,608,901
USD 9,723,000 Russia Ministry of Finance 9 1/4s, 2001 11,297,520
NZD 1,735,000 New Zealand (Government of) bonds
8s, 2004 1,187,760
USD 1,800,000 Mendoza (Providence of) 144A
10s, 2007 1,824,750
USD 3,685,000 Ecuador (Republic of) 11 1/4s, 2002 3,947,556
ZAR 21,520,000 South Africa (Republic of) bonds Ser. 150,
12s, 2005 4,219,826
GBP 7,695,000 United Kingdom Treasury bonds
7 1/2s, 2006 13,315,884
GBP 1,765,000 United Kingdom Treasury bonds 7s, 2002 2,913,391
--------------
Total Foreign Government Bonds and Notes
(cost $81,999,318) $ 76,512,224
UNITS (1.9%) *
NUMBER OF UNITS VALUE
- ------------------------------------------------------------------------------------------------------------
600 Australis Media, Ltd. units stepped-coupon zero %
(15 3/4s, 5/15/00), 2003 (Australia) ++ $ 498,000
91 Celcaribe S.A. 144A units stepped-coupon zero %
(13 1/2s, 3/15/98), 2004 ++ 1,820,000
410 Colt Telecommunications Group PLC units stepped-
coupon zero % (12s, 12/15/01), 2006
(United Kingdom) ++ 307,500
255 Conecel Holdings 144A units 14s, 2000 261,375
100 DecisionOne Corp. units stepped-coupon zero %
(11 1/2s, 8/01/02), 2008 ++ 66,500
475 Diva Systems Corp. 144A units stepped-coupon zero %
(13s, 5/15/01), 2006 ++ 416,219
1,035 Fitzgerald Gaming Co. units 13s, 2002 988,425
50 Hedstrom Holdings, Inc. units stepped-coupon zero %
(12s, 6/01/02), 2009 ++ 31,500
840 MGC communications, Inc. 144A units 13s, 2004 867,300
130 Paging Network Do Brazil 144A units 13 1/2s, 2005 (Brazil) 127,725
190 Real Time Data 144A units stepped-coupon zero %
(13 1/2s, 8/15/99), 2006 ++ 111,150
200 Stone Container Corp. units sr. sub. 12 1/4s, 2002 207,500
200 Wireless One, Inc. units stepped-coupon zero %
(13 1/2s, 8/1/01), 2006 ++ 42,000
500 XCL Ltd. units sr. sec. notes 13 1/2s, 2004 525,000
--------------
Total Units (cost $4,785,257) $ 6,270,194
COMMON STOCKS (1.2%) *
NUMBER OF SHARES VALUE
- ------------------------------------------------------------------------------------------------------------
8,599 Advanced Radio Telecom Corp. + $ 79,003
150 AmeriKing, Inc. + 7,500
2,955 Axia Inc. 144A + 147,750
13,880 CellNet Data Systems, Inc. + 174,368
12,124 Chesapeake Energy Corp. 137,911
4,500 Exide Corp. 102,094
53,023 Grand Union Co. (acquired 6/20/95,
cost $1,711,961)[DBL. DAGGER]+ 92,790
3,770 IFINT Diversified Holdings 144A + 37,700
35,327 Lady Luck Gaming Corp. (acquired 10/1/93,
cost $29,100)[DBL. DAGGER]+ 46,367
20,000 NEXTEL Communications, Inc. Class A + 577,500
4,918 NEXTEL Communications, Inc. (acquired
9/12/97, cost $79,358) [DBL. DAGGER] 134,907
464 PMI Holdings Corp. 144A + 148,480
327 Premium Holdings L.P. + 1,308
71,533 PSF Holdings LLC Class A + 2,145,990
10,050 Specialty Foods Acquisition Corp. + 2,513
4,400 Terex Corp. Rights 144A + 88,000
--------------
Total Common Stocks (cost $5,268,424) $ 3,924,181
PREFERRED STOCKS (1.3%) *
NUMBER OF SHARES VALUE
- ------------------------------------------------------------------------------------------------------------
6,000 AmeriKing, Inc. $3.25 pfd. [2 DBL. DAGGERS] $ 169,500
12,375 Cablevision Systems Corp. Ser. M, $11.125
dep. shs. pfd. [2 DBL. DAGGERS] 1,358,156
9,600 Diva Systems Corp. Ser. C, $6.00 pfd. 110,400
180 Echostar Communications Corp. 144A 12.125% pfd. 187,200
11,765 Fitzgeralds Gaming Co. $3.75 pfd. 258,830
340 Fresenius Medical Care AG Ser. D, $9.00 (Germany) 352,750
410 IXC Communications, Inc. 144A 12.50% pfd. [2 DBL. DAGGERS] 475,600
7,736 Nextlink Communications, Inc. 144A $7.00 pfd. 495,104
3,850 SFX Broadcasting, Inc. Ser. E, $12.625 pfd. [2 DBL. DAGGERS] 444,675
282 Spanish Broadcasting Systems 144A 14.25% pfd. [2 DBL. DAGGERS] 295,395
2,390 Von Hoffman Corp. 144A $13.50 pfd. 68,354
--------------
Total Preferred Stocks (cost $3,417,989) $ 4,215,964
ASSET-BACKED SECURITIES (1.1%) *
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
$ 1,096,000 Chemical Master Credit Card Trust Ser. 95-2,
Class A, 6.23s, 2003 $ 1,096,680
350,000 Contimortgage Home Equity Loan Trust Ser. 97-1,
Class M2, 7.67s, 2028 356,671
2,255,000 Sears Credit Account Master Trust Ser. 95-5, Class A,
6.05s, 2008 2,220,453
--------------
Total Asset-Backed Securities (cost $3,726,304) $ 3,673,804
COLLATERALIZED MORTGAGE OBLIGATIONS (1.0%) *
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
$ 1,000,000 Citicorp Mtge. Securities, Inc. Ser. 92-10 M,
Class M, 8s, 2022 $ 1,007,010
339,166 Resolution Trust Corp. Ser. 94-1, Class A2A,
7.75s, 2029 341,604
1,268,496 Resolution Trust Corp. Ser. 94-1, Class M1,
7.205s, 2029 1,257,000
727,425 Rural Housing Trust Ser. 87-1, Class D, 6.33s,
April 1, 2026 723,563
--------------
Total Collateralized Mortgage Obligations
(cost $3,108,282) $ 3,329,177
CONVERTIBLE BONDS AND NOTES (0.6%) *
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
$ 280,000 APP Global Finance (V) Ltd. 144A cv. sec. 2s, 2000
(United Kingdom) $ 303,100
164,000 GST Telecommunications, Inc. 144A cv. sr. disc. notes
stepped-coupon zero % (13 7/8s, 12/15/00), 2005 ++ 167,280
290,000 Integrated Device Technology, Inc. cv. sub. notes
5 1/2s, 2002 249,038
125,000 National Semiconductor Corp. 144A cv. deb.
6 1/2s, 2002 143,438
900,000 Pricellular Wireless Corp. 144A cv. sub. notes stepped-
coupon zero % (10 3/4s, 8/15/00) ++ 771,750
60,000 VLSI Technology, Inc. cv. sub. notes 8 1/4s, 2005 62,925
650,000 Winstar Communications. Inc. 144A cv. sr. disc. notes
stepped-coupon zero % (14s, 10/15/00), 2005 ++ 492,375
--------------
Total Convertible Bonds and Notes
(cost $1,643,610) $ 2,189,906
PURCHASE OPTIONS OUTSTANDING (0.6%)* EXPIRATION DATE/
CONTRACT AMOUNT STRIKE PRICE VALUE
- ------------------------------------------------------------------------------------------------------------
USD 2,995,000 U.S. Dollars in exchange for
Deutschemarks German (put) Nov. 97 /
1.78 DEM $ 26,356
JPY 2,000,000,000 Japanese Government Bond futures
contracts (call) Nov. 97 /
118.0 JPY 1,764,120
USD 19,000,000 Call Option on U.S. Treasury Bond
6 1/8s, 2007 Nov. 97 /
$101.08 161,547
--------------
Total Purchased Options Outstanding
(cost $1,679,943) $ 1,952,023
WARRANTS (0.2%)*+ EXPIRATION
NUMBER OF WARRANTS DATE VALUE
- ------------------------------------------------------------------------------------------------------------
32,500 Becker Gaming Corp. 144A 11/15/00 $ 325
6,825 Capital Gaming International, Inc. 2/1/99 273
1,500 Comunicacion Cellular (Colombia) 11/15/20 83,250
1,200 County Seat Holdings, Inc. 10/15/98 24
255 Esat Holdings, Inc. 144A (Ireland) 2/1/07 7,013
500 Fitzgerald Gaming Co. 3/15/99 50
770 Hyperion Telecommunications 4/15/01 30,800
9,768 Intelcom Group 10/15/05 141,636
520 Interact Systems Inc. 8/1/03 130
700 Intermedia Communications 6/1/00 48,125
245 International Wireless Communications Holdings 8/15/01 20,825
400 Iridium World Com 144A 7/15/05 60,000
1,470 Louisiana Casino Cruises, Inc. 144A 12/1/98 73,500
930 McCaw International Ltd. 4/15/07 279
750 NEXTEL Communications Inc. 1/1/98 8
7,220 Nextlink Communications, Inc. 144A 2/1/09 72
1,840 Pagemart, Inc. 144A 12/31/03 13,800
1,400 Petracom Holdings, Inc. 9/30/99 9,975
615 RSL Communications Ltd. 11/15/06 36,900
265 Spanish Broadcasting Systems 144A 6/30/99 50,350
185 Sterling Chemicals Holdings 8/15/08 7,030
350 Urohealth Systems Inc. 4/10/04 1,750
100 Wright Medical Technology, Inc. 6/30/03 10,023
--------------
Total Warrants (cost $462,691) $ 596,138
SHORT-TERM INVESTMENTS (3.0%) *(cost $10,033,686)
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
10,032,000 Interest in $565,867,000 joint repurchase
agreement dated September 30, 1997 with
UBS Securities due October 1, 1997 with
respect to various U.S. Treasury obligations --
maturity value of $10,033,686 for an effective
yield of 6.05% $ 10,033,686
- ------------------------------------------------------------------------------------------------------------
Total Investments (cost $340,742,208) *** $ 351,292,829
- ------------------------------------------------------------------------------------------------------------
* Percentages indicated are based on net assets of $337,663,563.
*** The aggregate identified cost on a tax basis is
$340,925,318, resulting in gross unrealized appreciation
and depreciation of $18,945,054 and $8,577,543, respectively,
or net unrealized appreciation of $10,367,511.
+ 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
September 30, 1997 was $767,475 or 0.2% of net assets.
[2 DBL. DAGGERS] Income may be received in cash or additional securities
at the discretion of the issuer.
# A portion of this security was pledged and segregated with
the custodian to cover margin requirements for futures
contracts at September 30, 1997.
(R) Real Estate Investment Trust.
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 September 30, 1997: (as percentage of
Market Value)
Australia 1.2% Morocco 1.4
Canada 1.3 Russia 3.2
Ecuador 1.2 South Africa 1.2
France 2.5 United Kingdom 5.3
Germany 6.4 United States 68.3
Mexico 4.1 Other 3.9
------
Total 100.0%
======
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
Forward Currency Contracts to Sell at September 30, 1997
(aggregate face value $83,225,489)
Market Aggregate Face Delivery Unrealized
Value Value Date Depreciation
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------
Australian Dollars $ 3,303,179 $ 3,288,414 12/17/97 $ (14,765)
British Pounds 8,965,764 8,929,261 12/17/97 (36,503)
Danish Krone 1,132,189 1,101,498 12/17/97 (30,691)
Deutschemarks 35,751,297 34,833,848 12/17/97 (917,449)
French Franc 8,858,163 8,794,826 12/17/97 (63,337)
Japanese Yen 15,117,225 15,050,262 12/17/97 (66,963)
New Zealand Dollar 2,401,139 2,363,716 12/17/97 (37,423)
South African Rand 2,299,571 2,232,524 12/17/97 (67,047)
Swedish Krona 552,034 536,924 12/17/97 (15,110)
Swiss Franc 6,234,137 6,094,216 12/17/97 (139,921)
- ----------------------------------------------------------------------------------------
$(1,389,209)
- ----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
Forward Currency Contracts to Buy at September 30, 1997
(aggregate face value $66,207,315)
Unrealized
Aggregate Face Delivery Appreciation/
Market Value Value Date (Depreciation)
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------
Australian Dollars $ 825,417 $ 852,964 12/17/97 $ (27,547)
Canadian Dollar 1,572,711 1,560,214 12/17/97 12,497
Deutschemarks 11,937,965 11,675,722 12/17/97 262,243
Indonesian Rupiah 2,482,531 2,733,211 2/23/98 (250,680)
Italian Lira 8,955,013 8,759,609 12/17/97 195,404
Japanese Yen 22,860,761 22,857,861 12/17/97 2,900
Philippines Peso 459,447 480,300 3/25/98 (20,853)
Polish Zolty 5,211,216 5,439,440 6/5/98 (228,224)
Spanish Peseta 3,099,124 3,034,506 12/17/97 64,618
Swedish Krona 3,518,055 3,444,441 12/17/97 73,614
Swiss Franc 4,359,992 4,247,593 12/17/97 112,399
Venezuelan Bolivar 1,126,768 1,121,454 6/5/98 5,314
- ----------------------------------------------------------------------------------------
$ 201,685
- ----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
Futures Contracts Outstanding at September 30, 1997
Market Aggregate Face Expiration Unrealized
Value Value Date Depreciation
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------
Dec 97 20yr T-note
Future (Short) $ 7,723,843 $ 7,738,523 Dec-97 $ 14,680
Dec 97 10yr T-note
Future (Long) 28,081,875 27,767,122 Dec-97 314,753
- ----------------------------------------------------------------------------------------
$ 329,433
- ----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
TBA Sale Commitments at September 30, 1997
(proceeds receivable $11,073,552)
Principal Settlement Market
Description Amount Date Value
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------
FHLMC, 8.5s, October 1999 $ 2,483,000 10/14/97 $ 2,594,735
FNMA, 7.5s, October 1999 8,414,000 10/14/97 8,553,336
- ----------------------------------------------------------------------------------------
$ 11,148,071
- ----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
Written Options Outstanding at September 30, 1997
(premium received $37,288)
Contract Expiration Date/ Market
Amount Strike Price Value
<S> <C> <C>
- ----------------------------------------------------------------------------------------
$2,995,100 U.S. Dollars in exchange
for Deutschemarks (call) Nov.97/ 1.73 DEM $ 24,559
- ----------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
September 30, 1997
<S> <C>
Assets
- ---------------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $340,742,208) (Note 1) $351,292,829
- ---------------------------------------------------------------------------------------------------
Cash 1,017,503
- ---------------------------------------------------------------------------------------------------
Dividends, interest and other receivables 5,795,703
- ---------------------------------------------------------------------------------------------------
Receivable for securities sold 21,116,772
- ---------------------------------------------------------------------------------------------------
Receivable for open forward currency contracts 792,246
- ---------------------------------------------------------------------------------------------------
Receivable for closed forward currency contracts 329,567
- ---------------------------------------------------------------------------------------------------
Total assets 380,344,620
Liabilities
- ---------------------------------------------------------------------------------------------------
Payable for variation margin 17,195
- ---------------------------------------------------------------------------------------------------
Distributions payable to shareholders 2,071,002
- ---------------------------------------------------------------------------------------------------
Payable for securities purchased 26,058,455
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 632,133
- ---------------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 62,480
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 14,193
- ---------------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 5,513
- ---------------------------------------------------------------------------------------------------
Payable for open forward currency contracts 1,979,770
- ---------------------------------------------------------------------------------------------------
Payable for closed forward currency contracts 602,840
- ---------------------------------------------------------------------------------------------------
Written options outstanding, at value
(premiums received $37,288) (Note 3) 24,559
- ---------------------------------------------------------------------------------------------------
TBA sale commitments, at value
(proceeds receivable $11,073,552) 11,148,071
- ---------------------------------------------------------------------------------------------------
Other accrued expenses 64,846
- ---------------------------------------------------------------------------------------------------
Total liabilities 42,681,057
- ---------------------------------------------------------------------------------------------------
Net assets $337,663,563
Represented by
- ---------------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $354,365,606
- ---------------------------------------------------------------------------------------------------
Distributions in excess of net investment income (Note 1) (6,853,337)
- ---------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments and
foreign currency transactions (Note 1) (19,499,422)
- ---------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments and
assets and liabilities in foreign currencies 9,650,716
- ---------------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $337,663,563
Computation of net asset value
- ---------------------------------------------------------------------------------------------------
Net asset value per share ($337,663,563 divided by
38,435,338 shares) $8.79
- ---------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Year ended September 30, 1997
<S> <C>
Investment income:
- --------------------------------------------------------------------------------------------------
Interest income (net of foreign tax of $21,963) $27,895,983
- --------------------------------------------------------------------------------------------------
Dividends 252,156
- --------------------------------------------------------------------------------------------------
Total investment income 28,148,139
Expenses:
- --------------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 2,490,608
- --------------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 453,934
- --------------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 27,320
- --------------------------------------------------------------------------------------------------
Administrative services (Note 2) 7,049
- --------------------------------------------------------------------------------------------------
Reports to shareholders 72,202
- --------------------------------------------------------------------------------------------------
Registration fees 168,712
- --------------------------------------------------------------------------------------------------
Auditing 70,034
- --------------------------------------------------------------------------------------------------
Legal 33,022
- --------------------------------------------------------------------------------------------------
Postage 66,942
- --------------------------------------------------------------------------------------------------
Exchange listing fees 33,747
- --------------------------------------------------------------------------------------------------
Other 21,322
- --------------------------------------------------------------------------------------------------
Total expenses 3,444,892
- --------------------------------------------------------------------------------------------------
Expense reduction (Note 2) (90,650)
- --------------------------------------------------------------------------------------------------
Net expenses 3,354,242
- --------------------------------------------------------------------------------------------------
Net investment income 24,793,897
- --------------------------------------------------------------------------------------------------
Net realized loss on investments (Notes 1 and 3) (9,705)
- --------------------------------------------------------------------------------------------------
Net realized loss on futures contracts (Note 1) (148,683)
- --------------------------------------------------------------------------------------------------
Net realized gain on written options (Notes 1 and 3) 136,067
- --------------------------------------------------------------------------------------------------
Net realized loss on foreign currency transactions (Note 1) (92,196)
- --------------------------------------------------------------------------------------------------
Net unrealized depreciation of assets and liabilities in
foreign currencies during the year (939,139)
- --------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments, futures,
written options and TBA sale commitments during the year 8,491,024
- --------------------------------------------------------------------------------------------------
Net gain on investments 7,437,368
- --------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $32,231,265
- --------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Year ended September 30
--------------------------------
1997 1996
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase in net assets
- --------------------------------------------------------------------------------------------------
Operations:
- --------------------------------------------------------------------------------------------------
Net investment income $ 24,793,897 $ 24,607,379
- --------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments and
foreign currency transactions (114,517) 6,323,487
- --------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments and asset and
liabilities in foreign currencies 7,551,885 1,079,890
- --------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 32,231,265 32,010,756
Distributions to shareholders:
- --------------------------------------------------------------------------------------------------
From net investment income (24,795,303) (23,973,364)
- --------------------------------------------------------------------------------------------------
Return of capital -- (318,440)
- --------------------------------------------------------------------------------------------------
Shares repurchased (Note 4) (2,308,913) (1,917,095)
- --------------------------------------------------------------------------------------------------
Total increase in net assets 5,127,049 5,801,857
Net assets
- --------------------------------------------------------------------------------------------------
Beginning of year 332,536,514 326,734,657
- --------------------------------------------------------------------------------------------------
End of year (including distributions in excess of
net investment income of $6,853,337 and
$1,968,520, respectively) $337,663,563 $332,536,514
- --------------------------------------------------------------------------------------------------
Number of fund shares
- --------------------------------------------------------------------------------------------------
Shares outstanding at beginning of year 38,737,138 38,995,338
- --------------------------------------------------------------------------------------------------
Shares repurchased (301,800) (258,200)
- --------------------------------------------------------------------------------------------------
Shares outstanding at end of year 38,435,338 38,737,138
- --------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
- --------------------------------------------------------------------------------------------------
Per-share
operating performance Year ended September 30
- --------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $8.58 $8.38 $8.13 $8.91 $8.71
- --------------------------------------------------------------------------------------------------
Investment operations
- --------------------------------------------------------------------------------------------------
Net investment income .64 .63 .67 .62 .68
- --------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .21 .19 .21 (.71) .29
- --------------------------------------------------------------------------------------------------
Total from
investment operations .85 .82 .88 (.09) .97
- --------------------------------------------------------------------------------------------------
Less distributions:
- --------------------------------------------------------------------------------------------------
From net
investment income (.64) (.61) (.49) (.55) (.68)
- --------------------------------------------------------------------------------------------------
In excess of net
investment income -- -- -- -- (.09)
- --------------------------------------------------------------------------------------------------
From net realized gain
on investments -- -- -- (.06) --
- --------------------------------------------------------------------------------------------------
From return of capital -- (.01) (.14) (.08) --
- --------------------------------------------------------------------------------------------------
Total distributions (.64) (.62) (.63) (.69) (.77)
- --------------------------------------------------------------------------------------------------
Net asset value,
end of period $8.79 $8.58 $8.38 $8.13 $8.91
- --------------------------------------------------------------------------------------------------
Market value,
end of period $8.125 $7.500 $7.375 $7.250 $8.375
- --------------------------------------------------------------------------------------------------
Ratios and supplemental data
- --------------------------------------------------------------------------------------------------
Total investment return
at market value (%)(a) 17.54 10.34 10.90 (5.57) 7.89
- --------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $337,664 $332,537 $326,735 $317,296 $347,620
- --------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.04 .99 1.03 .92 .96
- --------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 7.47 7.44 8.24 7.18 7.83
- --------------------------------------------------------------------------------------------------
Portfolio turnover (%) 220.61 232.90 219.63 204.92 237.63
- --------------------------------------------------------------------------------------------------
(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, 1997
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 and is authorized to issue an unlimited number
of shares. 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. taxable investment grade sector (formerly the
U.S. government sector), high-yield sector and international sector. In May
1997, the Trustees approved the proposal to merge Putnam Intermediate
Government Income Trust into the fund. The shareholders of the fund will be
voting on this proposal at the December 18, 1997 shareholder meeting.
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. Discounts on zero coupon bonds, original issue
discount bonds, stepped-coupon bonds and payment in kind bonds are accreted
according to the effective yield method. Any premium resulting from the
purchase of stepped-coupon securities in is amortized on a yield-to maturity
basis.
E) Foreign currency translation The accounting records of the fund are
maintained in U.S. dollars. The market value of foreign securities, currency
holdings, 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 gains and losses are included with the
net realized and unrealized gain or loss on investments. Net realized gains
and losses on foreign currency transactions represent net 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 and
depreciation of assets and liabilities in foreign currencies arise from
changes in the value of open forward currency contracts and assets and
liabilities other than investments at the period end, resulting from changes
in the exchange rate.
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 current forward currency
exchange rates supplied by a quotation service. The market value of the
contract will fluctuate with changes in currency exchange rates. The contract
is "marked to market" daily and the change in market value is recorded as an
unrealized gain or loss. When the contract is closed, the fund records a
realized gain or loss equal to the difference between the value of the
contract at the time it was opened and the value at the time it was closed.
The fund could be exposed to risk if the value of the currency changes
unfavorably, if the counterparties to the contracts are unable to meet the
terms of their contracts or if the fund is unable to enter into a closing
position.
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) TBA sale commitments The fund may enter into TBA sale commitments to hedge
its portfolio positions or to sell mortgage-backed securities it owns under
delayed delivery arrangements. Proceeds of TBA sale commitments are not
received until the contractual settlement date. During the time a TBA sale
commitment is outstanding, equivalent deliverable securities, or an offsetting
TBA purchase commitment deliverable on or before the sale commitment date, are
held as "cover" for the transaction.
Unsettled TBA sale commitments are valued at the current market value of the
underlying securities, generally according to the procedures described under
"Security valuation" above. The contract is "marked-to-market" daily and the
change in market value is recorded by the fund as an unrealized gain or loss.
If the TBA sale commitment is closed through the acquisition of an offsetting
purchase commitment, the fund realizes a gain or loss. If the fund delivers
securities under the commitment, the fund realizes a gain or a loss from the
sale of the securities based upon the unit price established at the date the
commitment was entered into.
J) Federal taxes It is the policy of the fund to distribute all of its taxable
income within the prescribed time and otherwise comply with the provisions of
the Internal Revenue Code applicable to regulated investment companies. It is
also the intention of the fund to distribute an amount sufficient to avoid
imposition of any excise tax under Section 4982 of the Internal Revenue Code
of 1986, as amended. Therefore, no provision has been made for federal taxes
on income, capital gains or unrealized appreciation on securities held nor for
excise tax on income and capital gains.
At September 30, 1997, the fund had a capital loss carryover of approximately
$18,987,000 available to offset future capital gains, if any. The amount of
the carryover and the expiration dates are:
Loss Carryover Expiration
- ------------------------------------------------------------
$9,158,000 September 30, 1999
7,035,000 September 30, 2003
2,794,000 September 30, 2004
K) 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 and amortization of bond premium. 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, 1997, the fund reclassified
$4,883,411 to increase distributions in excess of net investment income and
$21,121 to decrease paid-in-capital, with a decrease to accumulated net
realized loss on investments of $4,904,532. 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.
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, 1997, fund expenses were reduced by $90,650
under expense offset arrangements with PFTC and brokerage service
arrangements. 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 $680 and an additional
fee for each Trustee's meeting attended. Trustees who are not interested
persons of Putnam Management and who serve on committees of the Trustees
receive additional fees for attendance at certain committee meetings.
The fund has adopted a Trustee Fee Deferral Plan (the "Deferral Plan") which
allows the Trustees to defer the receipt of all or a portion of Trustees Fees
payable on or after July 1, 1995. The deferred fees remain in the fund and are
invested in certain Putnam funds until distribution in accordance with the
Deferral Plan.
The fund has adopted an unfunded noncontributory defined benefit pension plan
(the "Pension Plan") covering all Trustees of the fund who have served as
Trustee for at least five years. Benefits under the Pension Plan are equal to
50% of the Trustee's average total retainer and meeting fees for the three
years preceding retirement. Pension expense for the fund is included in
Compensation of trustees in the Statement of operations. Accrued pension
liability is included in Payable for compensation of Trustees in the Statement
of assets and liabilities.
Note 3
Purchase and sales of securities
During the year ended September 30, 1997, purchases and sales of investment
securities other than U.S. government obligations and short-term investments
aggregated $467,189,803 and $460,272,994, respectively. Purchases and sales of
U.S. government obligations aggregated $253,700,424 and $249,959,396,
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 $ -- $ --
- ------------------------------------------------------------
Options
opened 18,106,100 215,412
- ------------------------------------------------------------
Options
expired (7,861,000) (120,668)
- ------------------------------------------------------------
Options
closed (7,250,000) (57,456)
- ------------------------------------------------------------
Written options
outstanding at
end of year $ 2,995,100 $ 37,288
- ------------------------------------------------------------
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, 1997, the fund repurchased 301,800 shares for
$2,308,913, which reflects a discount from net asset value of $299,085 or
11.5%. As of September 30, 1997 570,000 shares had been repurchased since the
inception of the program.
Federal tax information
(Unaudited)
The Form 1099 you receive in January 1998 will show the tax status of all
distributions paid to your account in calendar 1997.
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
A.J.C. Smith
W. Thomas Stephens
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
John D. Hughes
Senior Vice President and Treasurer
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Gary N. Coburn
Vice President
William J. Curtin
Vice President
Jennifer E. Leichter
Vice President and Fund Manager
Kenneth J. Taubes
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.
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
- --------------------
Bulk Rate
U.S. Postage
PAID
Putnam
Investments
- --------------------
36845-074 11/97
