Putnam
Master
Intermediate
Income Trust
ANNUAL REPORT ON PERFORMANCE AND OUTLOOK
9-30-98
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* "Periods of fear and uncertainty have often proved the best time to
invest. . . . Since World War II, no bear market has lasted longer than
two years, and nothing now suggests anything that would break the mold and
subject us to a catastrophe the likes of which we haven't seen in this
country since the 1930s."
-- SmartMoney, November 1998
* "A flexible, trisector strategy has always been one of Putnam Master
Intermediate Income Trust's most prized features, particularly during
periods of market volatility. Having the ability to invest the fund's
assets in fixed-income markets around the world has enabled us to meet
this past year's unique challenges head on. When some investment sectors
came under pressure, having exposure to others helped buoy performance."
-- Jennifer E. Leichter, fund manager
CONTENTS
4 Report from Putnam Management
9 Fund performance summary
12 Portfolio holdings
32 Financial statements
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
The concept of diversification was invented for markets such as we have
seen over the past year. The profits forgone by avoiding more aggressive
investments in rising markets are gladly forgiven, the benefits of
spreading risks among a variety of securities happily accepted in
turbulent times such as these.
By playing to the strengths and de-emphasizing the vulnerabilities of
Putnam Master Intermediate Income Trust's trisector portfolio, the fund's
managers were able to moderate the effects of a volatile market climate
during the period. Thus fiscal 1998 results, while not positive, were
showing neither the sharp declines nor the solid gains of many
single-sector portfolios in the prevailing environment.
Shortly after the close of the fiscal year, David L. Waldman was appointed
to your fund's management team. David joined Putnam in 1997 following
positions with Lazard Freres Asset Management and Goldman Sachs Asset
Management. He has 10 years of investment experience.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
November 18, 1998
Report from the Fund Managers
Jennifer E. Leichter, lead manager
D. William Kohli
Throughout the 12 months ended September 30, 1998, resurgent financial and
political instability in many of the world's developing countries unnerved
even the most experienced investors. Knee-jerk reactions to the turmoil
had a dramatic effect on securities markets around the globe -- and not
necessarily for the right reasons. As Asia's woes intensified and Russia's
currency crisis hit the boiling point, equity and fixed-income investors
worldwide rushed to the relative safety of developed-country government
bonds at the expense of all credit-sensitive sectors.
While Putnam Master Intermediate Income Trust did not escape the
volatility unscathed, its trisector investment strategy helped cushion the
more severe blows experienced by certain fixed-income areas. The fund
closed fiscal 1998 in positive territory, producing a total return of
0.86% at net asset value and 3.91% at market price. For complete
performance information, please refer to the summary that begins on
page 9.
* MARKET LEADERSHIP CHANGES AS INVESTORS' CONCERNS MOUNT
Signs of recession overseas, an unexpectedly weak U.S. employment report,
lower-than-expected corporate earnings forecasts, Russia's financial
collapse, and broad-based selling of high-yield debt by highly leveraged,
distressed hedge funds created a sky-is-falling atmosphere late in the
fiscal period. In response, investors began selling off just about any
fixed-income security that involved credit risk.
The intense bouts of market turbulence -- followed by a global flight to
quality -- dramatically reversed the pattern of market leadership that had
prevailed over the past several years. The fund's high-yield and
investment-grade corporate positions suffered a severe setback,
eradicating nearly seven years of price gains, while U.S. Treasury
securities and mortgage-backed issues emerged as the portfolio's dominant
performers. The core bond markets of Europe held firm and helped offset
plunging emerging-markets debt.
Despite the price declines, we chose to stay the course and maximize yield
potential by emphasizing high-yield bonds, high-grade corporate issues,
mortgage-backed securities, and a little bit of emerging-markets debt. We
believe that by overweighting these sectors in combination with some
exposure to U.S. government securities, your fund's portfolio can offer
the potential to outperform the broad fixed-income market over the long
term.
* HIGH-YIELD AND INVESTMENT-GRADE CORPORATE BONDS STILL A FOCUS
In our opinion, investors' sudden aversion to the risks associated with
corporate debt this past summer had more to do with global investor
sentiment than with the current business and economic fundamentals in the
United States. In our view, a favorable backdrop continues to exist for
investing in high-yield and investment-grade corporate bonds. Economic
growth appears solid. Corporate profitability is healthy. Inflation is
subdued. Interest rates are declining. Merger and acquisition activity is
still brisk. Defaults remain low. And the fiscal health of corporate
America and the U.S. government is far better than it has been in years.
For these reasons, combined with Putnam's ability to conduct extensive
credit research, we remain committed to maintaining your fund's heavy
weighting to this area of the fixed-income market.
We emphasized bonds in the telecommunications, broadcasting, cable, and
finance industries throughout the fiscal year. The ongoing consolidation,
deregulation, and dynamic long-term growth potential of these industries
bode well for companies that are focused and driven.
[GRAPHIC OMITTED: horizontal bar chart of TOP FIVE COUNTRY ALLOCATIONS
(INTERNATIONAL SECTOR)]
TOP FIVE COUNTRY ALLOCATIONS*
(INTERNATIONAL SECTOR)
United Kingdom 6.0%
Germany 5.5%
Mexico 2.5%
France 1.7%
Brazil 1.0%
Footnote reads:
*Based on net assets as of 9/30/98. Holdings will vary over time.
* U.S. TREASURY BOND PRICES SOAR TO HISTORIC HEIGHTS
The U.S. Treasury market has rallied impressively since the Asian
financial debacle first affected the world's bourses last October.
Investors continued to flock to the high credit quality of U.S. Treasury
bonds throughout the fiscal period. With each new wave of investor
uncertainty, the yield on the bellwether 30-year Treasury bond -- which
moves in the opposite direction from its price -- inched inexorably toward
historic lows. As other sectors of the market came under considerable
pressure, your fund's U.S. Treasury holdings significantly helped
performance.
As dramatic as the price gains were in the Treasury market, our focus in
the U.S. government sector remained on higher-yielding mortgage-backed
securities. While at times this prohibited the fund from fully
participating in the Treasury market rally, our emphasis on securities
with lower prepayment sensitivity, such as adjustable-rate, lower-coupon,
and 15-year maturity mortgage-backed securities, benefited the fund. These
securities, which are considered intermediate term, provided exposure to
what proved to be an advantageous area of the yield curve throughout the
period. And as rates declined more dramatically at the short and
intermediate part of the curve toward period's end, the fund's
intermediate-term mortgage-backed holdings appreciated substantially.
* CORE EUROPEAN ISSUES ANCHOR FOREIGN SECTOR
The government bonds of core European countries, such as Germany, France,
and Great Britain, benefited from the global flight to quality as did U.S.
Treasury securities. The fund held bonds of the core European markets at
the expense of higher-yielding peripheral market issues, such as Spain,
Italy, and Sweden, which until recently performed better. The fund's
European positions posted solid returns in local currency terms for most
of the period. Then, as the dollar weakened against most other major
currencies this past summer, we elected to avoid hedging currencies back
to the dollar whenever possible, choosing instead to allow for full
exposure to local currency. This strategy served to enhance the local
foreign bond returns when translated back to dollars.
[GRAPHIC OMITTED: TOP THREE HOLDINGS PER SECTOR]
TOP THREE HOLDINGS PER SECTOR
HIGH-YIELD BONDS
Banco Nacional de Comercio, 7 1/4s, 2004
Banco Nacional de Desenvolvimiento Econimico e Social (BNDES), 9s, 2007
Banco Nacional de Comerico, 8s, 2003
FOREIGN BONDS
Germany (Federal Republic of) bonds, 5 1/4s, 2008
United Kingdom Treasury bonds, 7 1/4s, 2007
United Kingdom Treasury bonds, 8s, 2000
U.S. INVESTMENT-GRADE SECURITIES
U. S. Treasury Notes, 5 1/2s, 2003
Federal National Mortgage Association pass-through
certificates, 6 1/2s, 2026-2028
Government National Mortgage Association pass-through
certificates, 7s, 2025-2028
Footnote reads:
These holdings represent 33.1% of the fund's net assets as of 9/30/98.
Portfolio holdings will vary over time.
The fund's exposure to emerging markets, although limited, hindered
returns as the crisis in Asia worsened and Russia's financial system
collapsed. We continue to avoid Japanese government bonds, anticipating
that the sad state of economic affairs in that country may well continue
for some time.
* MARKET ROUT MAY NOW BE OVERDONE; OPPORTUNITY IS AT HAND
As the fund begins fiscal 1999, our research indicates that the landscape
for fixed-income investing is favorable in many parts of the world --
despite current price moves suggesting the contrary. The forthcoming
unification of monetary policy and interest rates across 11 European
countries as well as the Continent's general economic recovery bode well
for the total return potential of Europe's government debt issues. On the
home front, positive budget developments, continued low inflation, and a
proactive, accommodative Federal Reserve Board have set the stage for a
rebound in the corporate sector and ongoing positive performance by U.S.
Treasuries.
Of course, it is important to remember that investor psychology serves as
a perennial wild card and therefore markets do not necessarily perform in
a logical manner or as expected. Thus, continued short-term bouts of
volatility would not come as a surprise to us. But with volatility comes
the opportunity to add selectively -- at highly attractive prices -- to
well-researched positions that stand to benefit from a change in market
sentiment. With this in mind, we plan to maximize the full potential of
your fund's trisector strategy while emphasizing the yield enhanced
sectors of the global fixed-income universe.
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 9/30/98, there is no guarantee the fund will
continue to hold these securities in the future. The lower credit ratings
of high-yield corporate bonds reflect a greater possibility that adverse
changes in the economy or their issuers may affect their ability to pay
principal and interest on the bonds. Investments in non-U.S. securities
may be subject to certain risks such as currency fluctuations, economic
instability, and political developments. Although the U.S. government
guarantees the timely payment of principal and interest on some of the
underlying securities, the value of the fund shares is not guaranteed and
will fluctuate.
Performance summary
This section provides information about your fund's performance, which
should always be considered in light of its investment strategy. Putnam
Master Intermediate Income Trust is designed for investors seeking high
current income and relative stability of net asset value through U.S.
government, high-yield, and international fixed-income securities with
limited maturities.
TOTAL RETURN FOR PERIODS ENDED 9/30/98
Market
NAV price
- -------------------------------------------------------------------------
1 year 0.86% 3.91%
- -------------------------------------------------------------------------
5 years 39.30 41.13
Annual average 6.85 7.13
- -------------------------------------------------------------------------
10 years 133.68 123.02
Annual average 8.86 8.35
- -------------------------------------------------------------------------
Life (4/29/88) 141.59 113.97
Annual average 8.83 7.57
- -------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 9/30/98
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 10.61% 10.35% -0.52% 1.36%
- -------------------------------------------------------------------------
5 years 36.58 41.54 50.44 12.61
Annual average 6.43 7.20 8.51 2.40
- -------------------------------------------------------------------------
10 years 123.54 139.64 176.09 36.39
Annual average 8.38 9.13 10.69 3.15
- -------------------------------------------------------------------------
Life of fund 129.62 123.95 188.34 39.54
Annual average 8.31 8.05 10.70 3.25
- -------------------------------------------------------------------------
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.
This performance information does not reflect any market volatility that
may have occurred since the date of the information. As a result, more
recent returns may be more or less than those shown.
PRICE AND DISTRIBUTION INFORMATION
12 months ended 9/30/98
- ------------------------------------------------------------------------------
Distributions (number) 12
- ------------------------------------------------------------------------------
Income $0.692
- ------------------------------------------------------------------------------
Capital gains --
- ------------------------------------------------------------------------------
Total $0.692
- ------------------------------------------------------------------------------
Share value NAV Market price
- ------------------------------------------------------------------------------
9/30/97 $8.79 $8.125
- ------------------------------------------------------------------------------
9/30/98 8.14 7.750
- ------------------------------------------------------------------------------
Current return (end of period) NAV Market price
- ------------------------------------------------------------------------------
Current dividend rate1 8.85% 9.29%
- ------------------------------------------------------------------------------
1Income 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 your fund's assets, minus any
liabilities, divided by the number of outstanding shares.
Market price is the current trading price of one share of the fund. Market
prices are set by transactions between buyers and sellers on the New York
Stock Exchange.
COMPARATIVE BENCHMARKS
Lehman Bros. Government Intermediate Bond Index* is an unmanaged list of
U.S. government and mortgage-backed securities composed of all bonds
covered by the Lehman Brothers Government Bond Index with maturities
between 1 and 9.99 years.
Salomon Brothers Non-U.S. World Government Bond Index* is an unmanaged
list of bonds issued by 10 countries.
First Boston High Yield Index* is an unmanaged list of lower-rated
higher-yielding U.S. corporate bonds.
Consumer Price Index (CPI) is a commonly used measure of inflation; it
does not represent an investment return.
*Securities indexes assume reinvestment of all distributions and interest
payments and do not take in account brokerage fees or taxes. Securities in
the fund do not match those in the indexes and performance of the fund
will differ. It is not possible to invest directly in an index.
Report of independent accountants
For the fiscal year ended September 30, 1998
To the Trustees and Shareholders of
Putnam Master Intermediate Income Trust
In our opinion, the accompanying statement of assets and liabilities,
including the portfolio of investments owned, and the related statements
of operations and of changes in net assets and the financial highlights
present fairly, in all material respects, the financial position of Putnam
Master Intermediate Income Trust (the "fund") at September 30, 1998, and
the results of its operations, the changes in its net assets and the
financial highlights for the periods indicated, in conformity with
generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are
the responsibility of the fund's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with
generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of investments owned at September
30, 1998 by correspondence with the custodian, provide a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
November 18, 1998
<TABLE>
<CAPTION>
Portfolio of investments owned
September 30, 1998
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (46.1%) (a)
PRINCIPAL AMOUNT VALUE
U.S. Government Agency Mortgage Obligations (22.8%)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal Home Loan Mortgage Corp.
$ 525,412 7s, February 1, 2012 $ 539,693
174,911 6 1/2s, September 1, 2002 175,730
Federal National Mortgage Association
2,370,000 7s, Dwarf, TBA, October 15, 2013 2,432,947
17,245,000 6s, Dwarf, TBA, October 15, 2013 17,422,796
Federal National Mortgage Association Pass-through Certificates
4,240 8 1/2s, Dwarf, March 1, 2006 4,415
48,398,269 6 1/2s, with due dates from March 1, 2026 to
August 1, 2028 49,215,153
914,049 6 1/2s, Dwarf, with due dates from August 1, 2010 to
August 1, 2013 933,181
Government National Mortgage Association
Pass-through Certificates
12,313,040 8s, with due dates from July 15, 2023 to
February 15, 2028 12,829,527
34,424,541 7 1/2s, with due dates from January 15, 2023 to
October 15, 2027 35,687,923
47,048,278 7s, with due dates from January 15, 2025 to
May 15, 2028 48,563,775
17,172,567 6 1/2s, with due dates from December 15, 2027 to
February 15, 2028 17,555,484
Government National Mortgage Association Adjustable
Rate Mortgages
307,649 5 1/2s, April 20, 2028 308,322
--------------
185,668,946
U.S. Treasury Obligations (23.3%)
- --------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Bonds
9,540,000 12 3/8s, May 15, 2004 13,262,126
12,680,000 11 5/8s, November 15, 2004 17,498,400
16,605,000 5 1/4s, August 15, 2003 17,347,077
U.S. Treasury Notes
2,100,000 7s, July 15, 2006 2,446,500
4,000 6 1/2s, October 15, 2006 4,542
1,600,000 6 1/4s, August 31, 2002 1,706,752
11,655,000 6 1/8s, August 15, 2007 13,046,257
830,000 6s, July 31, 2002 877,468
6,500,000 5 3/4s, April 30, 2003 6,879,860
990,000 5 3/4s, November 30, 2002 1,041,510
3,040,000 5 3/4s, November 15, 2000 3,123,114
30,400,000 5 5/8s, May 15, 2008 33,250,000
65,600,000 5 1/2s, May 31, 2003 68,818,336
U.S. Treasury Notes
650,000 5 1/2s, February 28, 2003 680,167
9,325,000 5 1/2s, May 31, 2000 9,482,313
--------------
189,464,422
--------------
Total U.S. Government and Agency Obligations
(cost $364,243,168) $ 375,133,368
CORPORATE BONDS AND NOTES (33.5%) (a)
PRINCIPAL AMOUNT VALUE
Advertising (0.6%)
- --------------------------------------------------------------------------------------------------------------------------
$ 1,400,000 Adams Outdoor Advertising sr. notes 10 3/4s, 2006 $ 1,470,000
950,000 Big Flower Holdings, Inc. sr. sub. notes 8 7/8s, 2007 912,000
400,000 Lamar Advertising Co. sr. sub. notes 9 5/8s, 2006 424,000
840,000 Lamar Advertising Co. company guaranty 8 5/8s, 2007 863,100
1,450,000 Outdoor Communications Inc. sr. sub. notes 9 1/4s, 2007 1,479,000
--------------
5,148,100
Aerospace and Defense (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
130,000 Argo-Tech Corp. company guaranty 8 5/8s, 2007 122,850
760,000 Aviation Sales Co. company guaranty 8 1/8s, 2008 706,800
715,000 BE Aerospace sr. sub. notes Ser. B, 9 7/8s, 2006 757,900
370,000 BE Aerospace sr. sub. notes Ser. B, 8s, 2008 362,600
650,000 Derlan Industries Ltd. sr. notes 10s, 2007 (Canada) 585,000
145,000 K&F Industries, Inc. sr. sub. notes Ser. B, 9 1/4s, 2007 142,100
600,000 Sequa Corp. sr. sub. notes 9 3/8s, 2003 600,000
270,000 United Defense Industries Inc. company guaranty 8 3/4s, 2007 270,675
--------------
3,547,925
Agriculture (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
830,580 Premium Standard Farms, Inc. sr. secd. notes 11s, 2003 (acquired
various dates 9/15/93 to 4/8/97, cost $757,695) (PIK) (RES) 876,262
700,000 Purina Mills, Inc. sr. sub. notes 9s, 2010 686,000
--------------
1,562,262
Airlines (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
490,000 Calair LLC 144A company guaranty 8 1/8s, 2008 448,350
510,000 Canadian Airlines Corp. sr. notes 12 1/4s, 2006 (Canada) 438,600
840,000 Canadian Airlines Corp. secd. notes 10s, 2005 (Canada) 756,000
1,075,000 Cathay International Ltd. 144A sr. notes 13s, 2008 580,500
270,000 Trans World Airlines, Inc. sr. notes 11 1/2s, 2004 254,475
1,220,000 Trans World Airlines, Inc. sr. notes 11 3/8s, 2006 1,073,600
--------------
3,551,525
Apparel (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
85,000 GFSI, Inc. sr. sub. notes Ser. B, 9 5/8s, 2007 79,900
975,000 Guess Jeans, Inc. sr. sub. notes 9 1/2s, 2003 916,500
395,000 Sassco Fashions Ltd. sr. notes 12 3/4s, 2004 418,700
170,000 William Carter Holdings Co. sr. sub. notes Ser. A, 12s, 2008 175,100
--------------
1,590,200
Automotive Parts (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
400,000 Accuride Corp. sr. sub. notes Ser. B, 9 1/4s, 2008 384,000
260,000 Aftermarket Technology Corp. sr. sub. notes 12s, 2004 276,250
1,000,000 Cambridge Industries, Inc. company guaranty Ser. B,
10 1/4s, 2007 950,000
135,000 Hayes Wheels International, Inc. company guaranty Ser. B,
9 1/8s, 2007 130,950
900,000 Lear Corp. sub. notes 9 1/2s, 2006 972,000
1,280,000 Navistar International Corp. 144A sr. notes Ser. B, 8s, 2008 1,273,600
200,000 Safety Components International, Inc. sr. sub. notes Ser. B,
10 1/8s, 2007 200,000
--------------
4,186,800
Banks (3.2%)
- --------------------------------------------------------------------------------------------------------------------------
6,719,000 Banco Nacional de Comercio Exterior bank guaranteed
8s, 2003 (Mexico) 5,375,200
9,246,000 Banco Nacional de Comercio Exterior bank guaranteed
7 1/4s, 2004 (Mexico) 7,553,982
8,500,000 Banco National de Desenvolvimiento Economico e Social
(BNDES) 144A bonds 9s, 2007 (Brazil) 5,440,000
2,500,000 Chevy Chase Savings Bank Inc. sub. deb. 9 1/4s, 2008 2,425,000
255,000 Conecel Holdings 144A notes Ser. A, 14s, 2000 135,150
500,000 Delta Financial Corp. sr. notes 9 1/2s, 2004 300,000
500,000 First Federal Financial Corp. notes 11 3/4s, 2004 515,000
3,040,000 First Nationwide Holdings sr. sub. notes 10 5/8s, 2003 3,526,400
500,000 Korea Developmental Bank bonds 7 3/8s, 2004 (Korea) 389,790
250,000 Korea Developmental Bank Bonds 7 1/8s, 2001 (Korea) 218,253
200,000 Ocwen Federal Bank FSB sub. deb. 12s, 2005 204,000
120,000 Ocwen Financial Corp. notes 11 7/8s, 2003 120,000
--------------
26,202,775
Basic Equipment Services (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
1,175,000 Cex Holdings, Inc. 144A sr. sub. notes 9 5/8s, 2008 1,081,000
Basic Industrial Products (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
740,000 Axia, Inc. 144A sr. sub. notes 10 3/4s, 2008 714,100
140,000 Koppers Industries, Inc. 144A sr. sub. notes 9 7/8s, 2007 130,200
70,000 Roller Bearing Co. company guaranty Ser. B, 9 5/8s, 2007 67,200
200,000 W. R. Carpenter North America, Inc. company guaranty
10 5/8s, 2007 197,000
--------------
1,108,500
Broadcasting (3.0%)
- --------------------------------------------------------------------------------------------------------------------------
375,000 Affinity Group Holdings sr. notes 11s, 2007 363,750
1,050,000 Allbritton Communications sr. sub. deb. Ser. B, 9 3/4s, 2007 1,076,250
1,500,000 American Radio Systems Corp. company guaranty 9s, 2006 1,605,000
10,263 Australis Media, Ltd. sr. disc. notes stepped-coupon 1 3/4s,
(15 3/4s 5/15/00), 2003 (In default) (Australia) (STP) (PIK) (NON) 77
1,420,000 Benedek Communications Corp. sr. disc. notes
stepped-coupon zero % (13 1/4s, 5/15/01), 2006 (STP) 1,050,800
515,000 Capstar Broadcasting sr. disc. notes stepped-coupon
zero % (12 3/4s, 2/1/02), 2009 (STP) 388,825
2,025,000 Capstar Broadcasting sr. sub. notes 9 1/4s, 2007 2,065,500
115,000 Central European Media Enterprises Ltd. sr. notes
9 3/8s, 2004 103,500
1,500,000 Chancellor Media Corp. sr. sub notes Ser. B, 8 1/8s, 2007 1,447,500
216,020 Citadel Broadcasting Inc. sr. sub. notes 10 1/4s, 2007 231,141
1,350,000 Echostar Satellite Broadcast Corp. sr. disc. notes
stepped-coupon zero % (13 1/8s, 3/15/00), 2004 (STP) 1,188,000
605,000 Fox Family Worldwide, Inc. sr. disc. notes stepped-coupon
zero % (10 1/4s, 11/1/02), 2007 (STP) 375,100
1,500,000 Fox Family Worldwide, Inc. sr. notes 9 1/4s, 2007 1,417,500
600,000 Fox/Liberty Networks LLC sr. disc. notes stepped-coupon
zero % (9 3/4s, 8/15/02), 2007 (STP) 399,000
980,000 Fox/Liberty Networks LLC sr. notes 8 7/8s, 2007 960,400
1,260,000 Granite Broadcasting Corp. sr. sub. notes 8 7/8s, 2008 1,222,200
2,750,000 Grupo Televisa S.A. sr. disc. notes stepped-coupon zero %
(13 1/4s, 5/15/01), 2008 (Mexico) (STP) 2,035,000
2,000,000 Jacor Communications, Inc. company guaranty
Ser. B, 8 3/4s, 2007 2,050,000
1,000,000 Lenfest Communications, Inc. sr. sub. notes 10 1/2s, 2006 1,120,000
200,000 Pegasus Media & Communications notes Ser. B, 12 1/2s, 2005 218,000
997,000 PHI Holdings, Inc. sr. notes 16s, 2001 755,826
275,000 Radio One Inc. company guaranty stepped-coupon
Ser. B, 7s, (12s, 5/15/00), 2004 (STP) 258,500
986,000 SFX Broadcasting, Inc. sr. sub. notes Ser. B, 10 3/4s, 2006 1,074,740
1,000,000 Sinclair Broadcast Group, Inc. company guaranty 9s, 2007 1,005,000
200,000 Sinclair Broadcast Group, Inc. sr. sub. notes 8 3/4s, 2007 198,000
210,000 Spanish Broadcasting sr. notes Ser. B, 11s, 2004 210,000
2,545,000 TV Azteca S.A. de C.V. sr. notes Ser. B, 10 1/2s, 2007 (Mexico) 1,730,600
--------------
24,550,209
Building and Construction (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
130,000 American Architectural Products Corp. company
guaranty 11 3/4s, 2007 119,600
1,725,000 Atrium Companies Inc. sub. notes 10 1/2s, 2006 1,707,750
250,000 Beazer Homes USA, Inc. company guaranty 8 7/8s, 2008 232,500
1,030,000 GS Superhighway Holdings sr. notes 9 7/8s, 2004 432,600
290,000 Jackson Products, Inc. 144A company guaranty 9 1/2s, 2005 276,950
180,000 Presley Cos. sr. notes 12 1/2s, 2001 160,200
850,000 Republic Group Inc. 144A sr. sub. notes 9 1/2s, 2008 807,500
--------------
3,737,100
Building Products (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
600,000 Albecca Inc. 144A sr. sub. notes 10 3/4s, 2008 570,000
570,000 Morris Material Handling, Inc. company guaranty 9 1/2s,
2008 410,400
500,000 Southdown, Inc. sr. sub. notes Ser. B, 10s, 2006 535,000
248,000 Waxman Industries Inc. sr. notes stepped-coupon Ser. B,
zero % (12 3/4s, 6/1/99), 2004 (STP) 230,640
--------------
1,746,040
Buses (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
855,000 MCII Holdings sec. notes stepped-coupon zero %
(12s, 11/15/98), 2002 (STP) 641,250
Business Equipment and Services (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
2,000,000 Iron Mountain, Inc. med. term notes company guaranty
10 1/8s, 2006 2,100,000
125,000 Outsourcing Solutions, Inc. sr. sub. notes Ser. B, 11s, 2006 119,688
--------------
2,219,688
Cable Television (1.5%)
- --------------------------------------------------------------------------------------------------------------------------
660,000 Acme Television sr. disc. notes stepped-coupon zero %
(10 7/8s, 9/30/00), 2004 (STP) 514,800
1,340,000 Adelphia Communications Corp. sr. notes Ser. B, 9 7/8s, 2007 1,440,500
2,000,000 Comcast Corp. sr. sub. notes 9 3/8s, 2005 2,157,700
2,000,000 CSC Holdings, Inc. sr. notes 7 7/8s, 2007 2,101,920
700,000 Diamond Cable Communication Co. sr. disc. notes
stepped-coupon zero % (11 3/4s, 12/15/00), 2005
(United Kingdom) (STP) 561,750
3,500,000 Diamond Cable Communication Co. sr. disc. notes
stepped-coupon zero % (10 3/4s, 2/15/02), 2007
(United Kingdom) (STP) 2,450,000
380,000 Globo Communicacoes 144A sr. notes 10 5/8s,
2008 (Brazil) 193,800
280,000 Globo Communicacoes 144A company guaranty
10 1/2s, 2006 (Brazil) 145,600
1,000,000 Jones Intercable, Inc. sr. notes 8 7/8s, 2007 1,055,000
650,000 Lenfest Communications, Inc. sr. sub. notes 8 1/4s, 2008 656,500
460,000 Marcus Cable Co. (L.P.) sr. sub. disc. notes stepped-coupon
zero % (13 1/2s, 8/1/99), 2004 (STP) 450,800
560,000 Supercanal Holdings S.A. 144A sr. notes 11 1/2s,
2005 (Argentina) 235,200
770,000 United International Holdings sr. disc. notes stepped-
coupon Ser. B, zero % (10 3/4s, 2/15/03), 2008 (STP) 361,900
--------------
12,325,470
Cellular Communications (1.5%)
- --------------------------------------------------------------------------------------------------------------------------
1,845,000 Allegiance Telecom, Inc. sr. disc. notes stepped-coupon
Ser. B, zero % (11 3/4s, 2/15/03), 2008 (STP) 793,350
2,418,000 CellNet Data Systems, Inc. sr. disc. notes stepped-coupon
zero % (14s, 10/1/02), 2007 (STP) 1,160,640
1,240,000 Cencall Communications Corp. sr. disc. notes stepped-
coupon zero % (10 1/8s, 1/15/99), 2004 (STP) 1,221,400
1,875,000 McCaw International Ltd sr. discount notes stepped-coupon
zero % (13s, 4/15/02), 2007 (STP) 937,500
1,130,000 MetroNet Communications Corp. sr. disc. stepped-coupon
notes zero % (9.95s, 6/15/03), 2008 (Canada) (STP) 624,325
3,030,000 Millicom International Cellular S.A. sr. disc. notes
stepped-coupon zero % (13 1/2s, 6/1/01), 2006
(Luxembourg) (STP) 1,924,050
5,090,000 NEXTEL Communications, Inc. sr. disc. notes
stepped-coupon zero % (10.65s, 9/15/02), 2007 (STP) 3,206,700
3,300,000 NEXTEL Communications, Inc. sr. disc. notes
stepped-coupon zero % (9.95s, 2/15/03), 2008 (STP) 1,947,000
345,000 NEXTEL Communications, Inc. sr. disc. notes stepped-
coupon zero % (9 3/4s, 10/31/02), 2007 (STP) 207,000
--------------
12,021,965
Chemicals (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
1,000,000 Acetex Corp. sr. notes 9 3/4s, 2003 (Canada) 950,000
430,000 Geo Specialty Chemicals 144A sr. sub. notes 10 1/8s, 2008 412,800
15,000 Huntsman Corp. 144A sr. sub. notes FRN 9.188s, 2007 14,250
1,000,000 ISP Holdings, Inc. sr. notes Ser. B, 9 3/4s, 2002 1,030,000
200,000 Pioneer Americas Acquisition 144A sr. notes 9 1/4s, 2007 162,000
370,000 Polytama International notes 11 1/4s, 2007 (Indonesia) 55,500
185,000 Sterling Chemicals Holdings sr. disc. notes stepped-coupon
zero % (13 1/2s, 8/15/01), 2008 (STP) 74,000
555,000 Trikem S.A. 144A bonds 10 5/8s, 2007 (Brazil) 305,250
--------------
3,003,800
Computer Services and Software (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
85,000 Concentric Network Corp. sr. notes 12 3/4s, 2007 78,625
690,000 PSINet, Inc. sr. notes Ser. B, 10s, 2005 690,000
545,000 Unisys Corp. sr. notes 11 3/4s, 2004 613,125
200,000 Unisys Corp. sr. notes 7 7/8s, 2008 199,500
--------------
1,581,250
Computers (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
1,360,000 IPC Information Systems sr. disc. notes stepped-coupon
zero % (10 7/8s, 11/1/01), 2008 (STP) 911,200
Consumer Durable Goods (--%)
- --------------------------------------------------------------------------------------------------------------------------
50,000 Hedstrom Holdings, Inc. sr. disc. notes stepped-coupon
zero % (12s, 6/1/02), 2009 (STP) 30,000
345,000 Icon Fitness Corp. 144A sr. disc. notes stepped-coupon
Ser. B, zero % (14s, 11/15/01), 2006 (STP) 17,250
120,000 Sealy Mattress Co. sr. sub. notes Ser. B, 9 7/8s, 2007 117,600
--------------
164,850
Consumer Non Durables (--%)
- --------------------------------------------------------------------------------------------------------------------------
65,000 Amscan Holdings, Inc. sr. sub. notes 9 7/8s, 2007 57,200
130,000 United Stationer Supply, Inc. 144A 8 3/8s, 2008 129,675
--------------
186,875
Consumer Services (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
1,050,000 Coinmach Corp. sr. notes Ser. D, 11 3/4s, 2005 1,102,500
Cosmetics (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
360,000 Chattem, Inc. company guaranty Ser. B, 8 7/8s, 2008 342,000
95,000 French Fragrances, Inc. sr. notes Ser. B, 10 3/8s, 2007 97,850
320,000 French Fragrances, Inc. company guaranty Ser. D,
10 3/8s, 2007 320,000
850,000 Revlon Consumer Products sr. sub. notes 8 5/8s, 2008 835,125
--------------
1,594,975
Electric Utilities (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
2,300,000 Midland Funding II Corp. deb. Ser. A, 11 3/4s, 2005 2,853,081
1,825,387 Northeast Utilities System notes Ser. A, 8.58s, 2006 1,980,782
133,333 Northeast Utilities System notes Ser. B, 8.38s, 2005 139,106
660,000 York Power Funding 144A notes 12s, 2007 640,200
--------------
5,613,169
Electronics and Electrical Equipment (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
905,000 Celestica International Ltd. 144A sr. sub. notes 10 1/2s,
2006 (Canada) 959,300
147,667 Cirent Semiconductor sr. sub. notes 10.22s, 2002 146,190
156,681 Cirent Semiconductor 144A sr. sub. notes 10.14s, 2004 155,114
120,000 Details, Inc. sr. sub. notes Ser. B, 10s, 2005 115,200
190,000 DII Group, Inc. (The) sr. sub. notes 8 1/2s, 2007 172,900
1,410,000 Dobson Communications Corp. sr. notes 11 3/4s, 2007 1,410,000
675,000 Flextronics International Ltd. sr. sub. notes Ser. B, 8 3/4s, 2007 641,250
120,000 HCC Industries, Inc. company guaranty 10 3/4s, 2007 120,000
100,000 Moog, Inc. sr. sub. notes Ser. B, 10s, 2006 104,000
410,000 Motors and Gears, Inc. sr. notes Ser. D, 10 3/4s, 2006 397,700
130,000 Samsung Electronics 144A company guaranty 9 3/4s, 2003 95,550
1,250,000 Viasystems, Inc. 144A sr. notes 9 3/4s, 2007 1,062,500
570,000 Wavetek Corp. company guaranty 10 1/8s, 2007 524,400
--------------
5,904,104
Energy-Related (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
450,000 Gothic Production Corp. company guaranty
Ser. B, 11 1/8s, 2005 328,500
1,035,000 Niagara Mohawk Power Corp. sr. notes Ser. G, 7 3/4s, 2008 1,103,921
370,000 Niagara Mohawk Power Corp. sr. notes Ser. F, 7 5/8s, 2005 385,303
1,290,000 Panda Global Energy Co. company guaranty 12 1/2s, 2004 774,000
400,000 RAM Energy Inc. sr. notes 11 1/2s, 2008 368,000
--------------
2,959,724
Entertainment (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
640,000 AMC Entertainment, Inc. sr. sub. notes 9 1/2s, 2009 598,400
730,000 SFX Entertainment, Inc. 144A company guaranty Ser. B,
9 1/8s, 2008 678,900
640,000 Silver Cinemas Intl.144A sr. sub. notes 10 1/2s, 2005 609,600
1,320,000 Trump Castle Funding 144A sub. notes 10 1/4s, 2003 1,333,200
860,000 United Artists Theatre 144A sr. sub. notes 9 3/4s, 2008 795,500
1,500,000 Viacom International, Inc. sub. deb. 8s, 2006 1,511,250
--------------
5,526,850
Environmental Control (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
1,720,000 Allied Waste Industries, Inc. sr. disc. notes stepped-coupon
zero % (11.3s, 6/1/02), 2007 (STP) 1,272,800
250,000 Allied Waste Industries, Inc. company guaranty 10 1/4s, 2006 272,500
--------------
1,545,300
Financial Services (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
1,050,000 Aames Financial Corp. sr. notes 9 1/8s, 2003 945,000
140,000 Dine S.A. de C.V. 144A company guaranty 8 3/4s, 2007
(Mexico) 91,000
1,615,000 Dollar Financial Group Inc. sr. notes Ser. A, 10 7/8s, 2006 1,566,550
2,795,000 DTI Holdings Inc. sr. disc. notes, stepped-coupon Ser. B,
zero % (12 1/2s, 03/01/03), 2008 (STP) 1,062,100
750,000 Imperial Credit Capital Trust I 144A company guaranty
10 1/4s, 2002 600,000
125,000 Imperial Credit Industries, Inc. sr. notes 9 7/8s, 2007 96,250
500,000 Nationwide Credit Inc. 144A sr. notes 10 1/4s, 2008 475,000
2,375,000 Pindo Deli Finance Mauritius Ltd. company guaranty
10 3/4s, 2007 (Indonesia) 950,000
120,000 Resource America Inc. 144A sr. notes 12s, 2004 100,200
--------------
5,886,100
Food and Beverages (0.6%)
- --------------------------------------------------------------------------------------------------------------------------
500,000 Ameriserve Food Co. company guaranty 10 1/8s, 2007 440,000
870,000 Ameriserve Food Co. company guaranty 8 7/8s, 2006 765,600
65,000 Aurora Foods, Inc. sr. sub. notes Ser. B, 9 7/8s, 2007 69,550
920,000 Aurora Foods, Inc. 144A ser. sub. notes Ser. D, 9 7/8s, 2007 984,400
310,000 Canandaigua Wine Co. sr. sub. notes Ser. C, 8 3/4s, 2003 316,200
500,000 Doane Products Co. sr. notes 10 5/8s, 2006 540,000
780,000 Fleming Companies, Inc. company guaranty Ser. B,
10 1/2s, 2004 756,600
200,000 Nebco Evans Holding Co. sr. disc. notes stepped-coupon
zero % (12 3/8s, 7/15/02), 2007 (STP) 90,000
990,000 RAB Enterprises, Inc. 144A sr. notes 10 1/2s, 2005 920,700
50,000 Windy Hill Pet Food Co. sr. sub. notes 9 3/4s, 2007 50,500
--------------
4,933,550
Gaming (1.1%)
- --------------------------------------------------------------------------------------------------------------------------
970,000 Argosy Gaming Co. company guaranty 13 1/4s, 2004 1,030,625
1,500,000 Boyd Gaming Corp. sr. sub. notes 9 1/2s, 2007 1,485,000
185,000 Casino America, Inc. sr. notes 12 1/2s, 2003 199,800
1,400,000 Coast Hotels & Casinos, Inc. 1st mtge. company guaranty
Ser. B, 13s, 2002 1,568,000
370,300 Colorado Gaming & Entertainment Co. sr. notes
12s, 2003 (PIK) 394,370
720,000 Fitzgerald Gaming Corp. company guaranty
Ser. B, 12 1/4s, 2004 489,600
250,000 Grand Casinos, Inc. 1st mtge. 10 1/8s, 2003 265,000
900,000 Hollywood Casino Corp. sr. notes 12 3/4s, 2003 931,500
150,000 Isle of Capri Black Hawk LLC 1st mortgage Ser. B, 13s, 2004 150,000
444,000 Louisiana Casino Cruises Corp. 1st mtge. 11 1/2s, 1998 444,000
1,000,000 Mohegan Tribal Gaming Auth. sr. secd. notes Ser. B, 13 1/2s, 2002 1,240,000
500,000 PRT Funding Corp. sr. notes 11 5/8s, 2004 (In default) (NON) 325,000
1,040,000 Trump A.C. 1st mtge. 11 1/4s, 2006 868,400
--------------
9,391,295
Health Care (1.7%)
- --------------------------------------------------------------------------------------------------------------------------
300,000 Columbia/HCA Healthcare Corp. notes 7 1/4s, 2008 292,569
430,000 Conmed Corp. company guaranty 9s, 2008 405,275
1,250,000 Extendicare Health Services, Inc. company guaranty
9.35s, 2007 1,187,500
900,000 Fresenius Medical Capital Trust II company guaranty 7 7/8s,
2008 (Germany) 832,500
350,000 Genesis Health Ventures, Inc. sr. sub. notes 9 1/4s, 2006 337,750
750,000 Global Health Sciences company guaranty 11s, 2008 652,500
660,000 Hudson Respiratory Care, Inc. sr. sub. notes 9 1/8s, 2008 511,500
730,000 Integrated Health Services, Inc. sr. sub. notes Ser. A,
9 1/2s, 2007 708,100
710,000 Integrated Health Services, Inc. sr. sub. notes Ser. A,
9 1/4s, 2008 681,600
960,000 Magellan Health Services, Inc. 144A sr. sub. notes 9s, 2008 816,000
310,000 Mariner Post-Acute Network, Inc. sr. sub. notes
stepped-coupon Ser. B, zero % (10 1/2s, 11/1/02), 2007 (STP) 168,950
1,690,000 Mariner Post-Acute Network, Inc. sr. sub. notes Ser. B,
9 1/2s, 2007 1,554,800
1,100,000 MedPartners, Inc. sr. notes 7 3/8s, 2006 908,754
1,130,000 MedPartners, Inc. sr. sub. notes 6 7/8s, 2000 955,664
1,590,000 Multicare Cos., Inc. sr. sub. notes 9s, 2007 1,494,600
620,000 Paracelsus Healthcare Corp. sr. sub. notes 10s, 2006 570,400
350,000 Paragon Corp. Holdings, Inc. company guaranty Ser. B,
9 5/8s, 2008 262,500
1,355,000 Sun Healthcare Group, Inc. sr. sub. notes Ser. B, 9 1/2s, 2007 1,219,500
--------------
13,560,462
Lodging (0.6%)
- --------------------------------------------------------------------------------------------------------------------------
460,000 Epic Resorts LLP 144A sr. notes 13s, 2005 437,000
1,405,000 HMH Properties, Inc. company guaranty Ser. B, 7 7/8s, 2008 1,387,438
1,750,000 Host Marriott Travel Plaza sr. notes Ser. B, 9 1/2s, 2005 1,811,250
1,220,000 Raintree Resorts International, Inc. sr. notes Ser. B, 13s, 2004 915,000
100,000 Sun International Hotels Ltd. sr. sub. notes 8 5/8s, 2007 100,000
--------------
4,650,688
Medical Supplies and Devices (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
340,000 ALARIS Medical Systems, Inc. company guaranty
9 3/4s, 2006 316,200
450,000 Dade International, Inc. sr. sub. notes Ser. B, 11 1/8s, 2006 483,750
1,000,000 Graphic Controls Corp. sr. sub. notes Ser. A, 12s, 2005 1,130,000
240,000 Imagyn Medical Technologies, Inc. company guaranty
12 1/2s, 2004 66,000
140,000 Kinetic Concepts, Inc. company guaranty Ser. B, 9 5/8s, 2007 138,600
500,000 Leiner Health Products sr. sub. notes 9 5/8s, 2007 510,625
760,000 Mediq, Inc. 144A sr. sub. notes 11s, 2008 714,400
350,000 Wright Medical Technology, Inc. 144A notes Ser. C,
11 3/4s, 2000 313,250
--------------
3,672,825
Metals and Mining (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
90,000 Acindar Industria Argentina de Aceros S.A. bonds 11 1/4s,
2004 (Argentina) 61,200
200,000 Anker Coal Group, Inc. sr. notes Ser. B, 9 3/4s, 2007 124,000
210,000 Continental Global Group sr. notes Ser. B, 11s, 2007 182,700
1,030,000 Lodestar Holding, Inc. 144A sr. notes 11 1/2s, 2005 844,600
200,000 NL Industries, Inc. sr. notes 11 3/4s, 2003 216,000
250,000 Weirton Steel Co. sr. notes 11 3/8s, 2004 225,000
490,000 WHX Corp. sr. notes 10 1/2s, 2005 450,800
--------------
2,104,300
Motion Picture Distribution (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
900,000 Cinemark USA, Inc. sr. sub. notes 9 5/8s, 2008 (PIK) 918,000
190,000 Panavision Inc. 144A sr. disc. notes stepped-coupon
zero % (9 5/8s, 2/1/02), 2006 (STP) 108,300
--------------
1,026,300
Office Equipment (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
710,000 U.S. Office Products Co. 144A sr. sub notes 9 3/4s, 2008 592,850
Oil and Gas (1.5%)
- --------------------------------------------------------------------------------------------------------------------------
625,000 Abraxas Petroleum Corp. 144A company guaranty, Ser. D
11 1/2s, 2004 487,500
90,000 American Eco Corp. company guaranty Ser. B, 9 5/8s, 2008 67,500
640,000 Benton Oil & Gas Co. sr. notes 11 5/8s, 2003 544,000
75,000 Benton Oil & Gas Co. sr. notes 9 3/8s, 2007 58,875
1,020,000 Chesapeake Energy Corp. company guaranty Ser. B,
9 5/8s, 2005 897,600
1,000,000 Cliffs Drilling Co. company guaranty Ser. D, 10 1/4s, 2003 1,050,000
180,000 Coho Energy, Inc. sr. sub. notes 8 7/8s, 2007 163,800
520,000 Costilla Energy, Inc. sr. notes 10 1/4s, 2006 452,400
460,000 Dailey Petroleum Services Corp. company guaranty
9 1/2s, 2008 276,000
440,000 Eagle Geophysical, Inc. 144A sr. notes 10 3/4s, 2008 387,200
100,000 Gothic Energy Corp. sr. disc. notes, stepped-coupon
Ser. B, zero % (14 1/8s, 5/1/03), 2006 (STP) 40,000
450,000 Michael Petroleum Corp. sr. notes Ser. B, 11 1/2s, 2005 400,500
530,000 Northern Offshore 144A company guaranty 10s, 2005 392,200
100,000 Pacalta Resources Ltd. sr. notes Ser. B, 10 3/4s,
2004 (Canada) 90,000
870,000 Panaco, Inc. company guaranty Ser. B, 10 5/8s, 2004 696,000
300,000 Pogo Producing Co. sr. sub. notes Ser. B, 8 3/4s, 2007 285,000
360,000 Seven Seas Petroleum sr. notes Ser. B, 12 1/2s, 2005 293,400
335,000 Southwest Royalties, Inc. company guaranty 10 1/2s, 2004 177,550
7,175,000 Transamerican Energy sr. disc. notes stepped-coupon
Ser. B, zero % (13s, 6/15/99), 2002 (STP) 3,444,000
2,150,000 Transamerican Energy sr. notes Ser. B, 11 1/2s, 2002 1,182,500
518,000 TransTexas Gas Corp. sr. sub. notes Ser. D, 13 3/4s, 2001 492,100
500,000 XCL Ltd. 144A company guaranty 13 1/2s, 2004 515,000
--------------
12,393,125
Packaging and Containers (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
120,000 AEP Industries, Inc. 144A sr. sub. notes 9 7/8s, 2007 115,200
1,510,000 Riverwood International Corp. company guaranty
10 7/8s, 2008 1,253,300
450,000 Riverwood International Corp. company guaranty
10 5/8s, 2007 414,000
--------------
1,782,500
Paging (--%)
- --------------------------------------------------------------------------------------------------------------------------
150,000 Mobile Telecommunications Tech. sr. notes 13 1/2s, 2002 168,000
255,000 Paging Network Do Brasil sr. notes 13 1/2s, 2005 (Brazil) 94,350
--------------
262,350
Paper and Forest Products (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
60,000 APP International Finance Co. notes 11 3/4s, 2005
(Netherlands) 35,400
90,000 Florida Coast Paper LLC 1st mtge. Ser. B, 12 3/4s, 2003 85,050
215,000 Huntsman Packaging Corp. company guaranty 9 1/8s, 2007 204,250
780,000 Impac Group Inc. 144A sr. sub. notes 10 1/8s, 2008 737,100
2,500,000 Indah Kiat Financial Mauritius Ltd. company guaranty 10s,
2007 (Indonesia) 1,087,500
2,445,000 PT Pabrik Kertas Tjiwi Kimia company guaranty 10s,
2004 (Indonesia) 1,039,125
975,000 Repap New Brunswick sr. notes 10 5/8s, 2005 (Canada) 614,250
325,000 Repap New Brunswick 144A sr. notes 9s, 2004 (Canada) 296,563
--------------
4,099,238
Pharmaceuticals (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
900,000 ICN Pharmaceuticals, Inc. 144A sr. notes 9 1/4s, 2005 891,000
Publishing (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
500,000 American Media Operation, Inc. sr. sub. notes 11 5/8s, 2004 517,500
750,000 Garden State Newspapers, Inc. sr. sub. notes Ser. B,
8 3/4s, 2009 727,500
1,390,000 Perry-Judd company guaranty 10 5/8s, 2007 1,334,400
680,000 Tri State Media, Inc. 144A sr. sub. notes 11s, 2008 661,300
100,000 Von Hoffman Press Inc. 144A sr. sub. notes 10 3/8s, 2007 101,500
--------------
3,342,200
Railroads (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
1,575,000 TFM S.A. de C.V. company guaranty 10 1/4s, 2007 (Mexico) 1,464,750
Real Estate (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
120,000 Bluegreen Corp. company guaranty Ser. B, 10 1/2s, 2008 109,200
550,000 Prime Hospitality Corp. sub. notes Ser. B, 9 3/4s, 2007 506,000
--------------
615,200
Recreation (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
1,275,000 Premier Parks, Inc. sr. notes 9 1/4s, 2006 1,249,500
Restaurants (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
500,000 FRD Acquisition Co. sr. notes Ser. B, 12 1/2s, 2004 530,000
Retail (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
1,320,000 Amazon.com Inc. sr. disc. notes stepped-coupon zero %
(10s, 05/01/03), 2008 (STP) 726,000
510,000 Fred Meyer, Inc. company guaranty 7.45s, 2008 534,220
434,000 Guitar Center Management Co. 144A sr. notes 11s, 2006 455,700
260,000 Home Interiors & Gifts, Inc. 144A sr. sub. notes
10 1/8s, 2008 245,700
600,000 Mothers Work, Inc. sr. notes 12 5/8s, 2005 633,000
110,000 NBTY Inc. 144A sr. sub. notes 8 5/8s, 2007 106,425
995,000 North Atlantic Trading Co. company guaranty Ser. B,
11s, 2004 925,350
110,000 Service Merchandise Co., Inc. sr. sub. deb. 9s, 2004 66,000
260,000 Zale Corp. sr. notes Ser. B, 8 1/2s, 2007 252,200
--------------
3,944,595
Satellite Services (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
255,000 Esat Holdings Ltd. sr. notes stepped-coupon
zero % (12 1/2s, 2/01/02), 2007 (Ireland) (STP) 163,200
700,000 Golden Sky Systems 144A sr. sub. notes 12 3/8s, 2006 700,000
390,000 Satelites Mexicanos S.A. de C.V. 144A sr. notes 10 1/8s,
2004 (Mexico) 265,200
535,000 TCI Satellite Entertainment, Inc. sr. disc. notes stepped-
coupon zero % (12 1/4s, 2/102), 2007 (STP) 315,650
610,000 TCI Satellite Entertainment, Inc. sr. sub. notes 10 7/8s, 2007 564,250
--------------
2,008,300
Semiconductors (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
261,498 Fairchild Semiconductor Corp. 144A sr. sub. notes
11.74s, 2008 (PIK) 231,426
1,375,000 Fairchild Semiconductor Corp. sr. sub. notes 10 1/8s, 2007 (PIK) 1,237,500
5,000 Viasystems Inc. sr. sub notes 9 3/4s, 2007 4,600
1,010,000 Zilog, Inc. company guaranty Ser. B, 9 1/2s, 2005 626,200
--------------
2,099,726
Shipping (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
240,000 International Shipholding Corp. sr. notes 7 3/4s, 2007 218,400
900,000 Johnstown America Industries, Inc. company guaranty
Ser. C, 11 3/4s, 2005 927,000
360,000 MC Shipping, Inc. sr. notes Ser. B, 11 1/4s, 2008 291,600
--------------
1,437,000
Specialty Consumer Products (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
670,000 Decora Industries, Inc. 144A sr. sec. notes 11s, 2005 589,600
500,000 Eye Care Centers of America 144A sr. sub. notes
9 1/8s, 2008 420,000
580,000 Polymer Group, Inc. company guaranty Ser. B, 8 3/4s, 2008 549,550
--------------
1,559,150
Supermarkets (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
310,000 Jitney-Jungle Stores company guaranty 12s, 2006 341,000
1,250,000 Southland Corp. deb. Ser. B, 4s, 2004 1,061,500
200,000 Southland Corp. deb. Ser. A, 4 1/2s, 2004 157,500
--------------
1,560,000
Telecommunications (3.3%)
- --------------------------------------------------------------------------------------------------------------------------
50,000 21st Century Telecom Group, Inc. sr. disc. notes stepped-
coupon zero % (12 1/4s, 2/15/03), 2008 (STP) 25,500
100,000 Allegiance Telecom, Inc. sr. notes 12 7/8s, 2008 92,000
300,000 Barak I.T.C. sr. disc. notes stepped-coupon Ser. B, zero %
(12 1/2s, 11/15/02), 2007 (Israel) (STP) 153,000
460,000 Caprock Communications Corp. 144A sr. notes 12s, 2008 414,000
380,000 Charter Communications International, Inc. disc. notes
stepped-coupon Ser. B, zero % (14s, 3/15/01), 2007 (STP) 326,800
105,000 Consorcio Ecuatoriano notes 14s, 2002 (Ecuador) 55,650
615,000 Covad Communications Group sr. disc. notes stepped-
coupon Ser. B, zero % (13 1/2s, 03/15/03), 2008 (STP) 246,000
1,500,000 Econophone Inc. company guaranty 13 1/2s, 2007 1,627,500
1,060,000 Econophone, Inc. 144A notes stepped-coupon zero %
(11s, 2/15/03), 2008 (STP) 577,700
155,000 Esprit Telecom Group PLC sr. notes 11 1/2s, 2007
(United Kingdom) 144,150
1,300,000 Focal Communications Corp. sr. disc. notes, stepped-
coupon Ser. B, zero % (12 1/8s, 02/15/03), 2008 (STP) 650,000
2,910,000 Global Crossing Holdings 144A sr. notes 9 5/8s, 2008 2,837,250
2,597,000 GST Telecommunications, Inc. company guaranty
stepped-coupon zero % (13 7/8s, 12/15/00), 2005 (STP) 1,869,840
860,000 GST Telecommunications, Inc. 144A sr. disc. notes
stepped-coupon zero % (10 1/2s, 5/1/03), 2008 (STP) 417,100
380,000 Hyperion Telecommunication Corp. sr. disc. notes
stepped-coupon Ser. B, zero % (13s, 4/15/01), 2003 (STP) 262,200
400,000 Hyperion Telecommunications, Inc. sr. notes Ser. B,
12 1/4s, 2004 394,000
860,000 ICG Holdings, Inc. sr. disc. notes stepped-coupon zero %
(13 1/2s, 9/15/00), 2005 (STP) 670,800
520,000 Interact Systems, Inc. 144A stepped-coupon zero %
(14s, 8/1/99), 2003 (STP) 62,400
100,000 Intercel, Inc. sr. disc. notes stepped-coupon zero %
(12s, 2/1/01), 2006 (STP) 65,500
1,000,000 Intermedia Communications, Inc. sr. disc. notes stepped-
coupon Ser. B, zero % (11 1/4s, 7/15/02), 2007 (STP) 710,000
540,000 Intermedia Communications, Inc. sr. notes Ser. B,
8 7/8s, 2007 542,700
2,420,000 Intermedia Communications, Inc. sr. notes Ser. B, 8.6s, 2008 2,395,800
830,000 Intermedia Communications, Inc. sr. notes Ser. B, 8 1/2s, 2008 817,550
1,390,000 International Cabletel, Inc. sr. notes stepped-coupon
Ser. B, zero % (11 1/2s, 2/01/01), 2006 (STP) 1,132,850
810,000 IXC Communications, Inc. sr. sub. notes 9s, 2008 801,900
2,255,000 KMC Telecom Holdings, Inc. sr. disc. notes stepped-coupon
zero % (12 1/2s, 2/15/03), 2008 (STP) 1,037,300
1,180,000 Knology Holdings, Inc. sr. disc. notes stepped-coupon zero %,
(11 7/8s, 10/15/02), 2007 (STP) 601,800
150,000 L-3 Communications Corp. sr. sub. notes Ser. B, 10 3/8s, 2007 163,875
530,000 L-3 Communications Corp. sr. sub. notes 8 1/2s, 2008 537,288
140,000 MetroNet Communications Corp. sr. disc. notes stepped-
coupon zero % (10 3/4s, 11/1/02), 2007 (Canada) (STP) 84,700
1,270,000 Microcell Telecommunications sr. disc. notes stepped-
coupon Ser. B, zero % (14s, 12/1/01), 2006 (Canada) (STP) 901,700
60,000 Netia Holdings B.V. 144A company guaranty stepped-
coupon zero % (11 1/4s, 11/1/01), 2007 (Poland) (STP) 24,600
100,000 Netia Holdings B.V. 144A company guaranty 10 1/4s,
2007 (Poland) 76,000
770,000 NorthEast Optic Network, Inc. sr. notes 12 3/4s, 2008 708,400
1,050,000 NTL Inc. 144A sr. notes stepped-coupon zero %
(9 3/4s, 4/01/03), 2008 (STP) 635,250
340,000 Qwest Communications International, Inc. sr. disc. notes
stepped-coupon zero % (9.47s, 10/15/02), 2007 (STP) 261,800
1,240,000 Qwest Communications International, Inc. sr. disc. notes
stepped-coupon zero % (8.29s, 2/1/03), 2008 (STP) 917,600
895,000 Telecom Tech, Inc. 144A sr. sub. notes 9 3/4s, 2008 814,450
2,095,000 Teligent, Inc. sr. notes 11 1/2s, 2007 1,613,150
1,300,000 Time Warner Telecom Inc. sr. notes 9 3/4s, 2008 1,306,500
250,000 WinStar Equipment Corp. company guaranty 12 1/2s, 2004 227,500
--------------
27,204,103
Telephone Services (2.4%)
- --------------------------------------------------------------------------------------------------------------------------
1,650,000 BTI Telecom Corp. sr. notes 10 1/2s, 2007 1,369,500
230,000 Call-Net Enterprises, Inc. sr. disc. notes stepped-coupon
zero % (8.94s, 8/15/03), 2008 (Canada) (STP) 133,400
1,910,000 Colt Telecommunications Group PLC sr. disc. notes
stepped-coupon zero %, (12s, 12/15/01), 2006
(United Kingdom) (STP) 1,489,800
525,000 E. Spire Communications, Inc. sr. disc. notes stepped-
coupon zero % (12 3/4s, 4/1/01), 2006 (STP) 387,188
1,000,000 E. Spire Communications, Inc. sr. disc. notes
stepped-coupon zero % (13s, 11/1/00), 2005 (STP) 780,000
190,000 E. Spire Communications, Inc. sr. notes 13 3/4s, 2007 205,200
170,000 Facilicom International sr. notes Ser. B., 10 1/2s, 2008 147,900
340,000 Flag Ltd. 144A sr. notes 8 1/4s, 2008 (Bermuda) 323,850
4,580,000 ICG Services, Inc. sr. disc. notes stepped-coupon zero %
(9 7/8s, 5/1/03), 2008 2,106,800
355,000 IDT Corp. sr. notes 8 3/4s, 2006 312,400
800,000 Ionica Group PLC sr. disc. notes stepped-coupon zero %
(15s, 5/1/02), 2007 (United Kingdom) (STP) 48,000
1,142,000 ITC Deltacom, Inc. sr. notes 11s, 2007 1,221,940
389,000 MJD Communications Inc. 144A FRN 10s, 2008 389,000
410,000 MJD Communications, Inc. 144A sr. sub. notes 9 1/2s, 2008 410,000
1,675,000 NTL Inc. sr. notes Ser. B, 10s, 2007 (United Kingdom) 1,695,938
990,000 Pathnet, Inc. 144A sr. notes 12 1/4s, 2008 752,400
990,000 Primus Telecommunications Group, Inc. sr. notes
Ser. B, 9 7/8s, 2008 861,300
640,000 RCN Corp. sr. disc. notes stepped-coupon zero %,
(11 1/8s, 10/15/02), 2007 (STP) 355,200
2,000,000 RCN Corp. sr. discount notes, stepped-coupon Ser. B,
zero % (9.8s, 2/15/03), 2008 (STP) 1,060,000
1,830,000 RSL Communications, Ltd. company guaranty 12 1/4s, 2006 1,894,050
620,000 RSL Communications, Ltd. company guaranty, stepped-
coupon zero % (10 1/8s, 3/1/03), 2008 (STP) 316,200
410,000 RSL Communications, Ltd. company guaranty 9 1/8s, 2008 352,600
360,000 Sprint Spectrum L.P. sr. disc. notes stepped-coupon zero %
(12 1/2s, 8/15/01), 2006 (STP) 293,400
275,000 Sprint Spectrum L.P. sr. notes 11s, 2006 309,375
115,000 Transtel S.A. 144A pass-through certificates 12 1/2s, 2007
(Colombia) 46,000
380,000 Us Xchange Llc 144A sr. notes 15s, 2008 378,100
510,000 Versatel Teleco sr. notes 13 1/4s, 2008 484,500
1,260,000 Viatel, Inc. 144A sr. notes 11 1/4s, 2008 1,197,000
--------------
19,321,041
Textiles (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
1,020,000 Galey & Lord Inc. company guaranty 9 1/8s, 2008 877,200
105,000 Glenoit Corp. company guaranty 11s, 2007 101,850
190,000 Polymer Group, Inc. company guaranty Ser. B, 9s, 2007 181,925
--------------
1,160,975
Transportation (--%)
- --------------------------------------------------------------------------------------------------------------------------
350,000 Kitty Hawk, Inc. company guaranty 9.95s, 2004 350,000
Utilities (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
1,500,000 Calpine Corp. sr. notes 8 3/4s, 2007 1,578,525
Wireless Communications (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
190,000 Allbritton Communications Co. sr. sub. notes Ser. B,
8 7/8s, 2008 188,100
750,000 American Mobile Satellite Corp. company guaranty
12 1/4s, 2008 431,250
420,000 CTI Holdings S.A. 144A sr. notes stepped-coupon zero %,
(11 1/2s, 4/15/03), 2008 (STP) 159,600
610,000 Dobson Wireline Co. 144A sr. notes 12 1/4s, 2008 585,600
360,000 Iridium LLC/Capital Corp. company guaranty Ser. B,
14s, 2005 320,400
210,000 Iridium LLC/Capital Corp. company guaranty Ser. A,
13s, 2005 184,800
620,000 Orbital Imaging Corp. sr. notes Ser. B, 11 5/8s, 2005 582,800
610,000 Price Communications Wireless Inc. 144A sr. notes
9 1/8s, 2006 597,800
135,000 Telesystem International Wireless Inc. sr. disc. notes stepped-
coupon Ser. C, zero %, (10 1/2s, 11/1/02), 2007 (STP) 62,775
--------------
3,113,125
--------------
Total Corporate Bonds and Notes (cost $306,337,514) $ 273,100,179
FOREIGN GOVERNMENT BONDS AND NOTES (12.9%) (a)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
USD 2,600,000 Brazil (Government of) bonds 9 3/8s, 2008 $ 1,586,000
FRF 70,060,000 France (Government of) bonds 5 1/2s, 2007 13,914,107
DEM 65,750,000 Germany (Federal Republic of) bonds Ser. 98,
5 1/4s, 2008 43,511,609
USD 340,000 Korea (Republic of) unsub. 8 7/8s, 2008 285,600
USD 5,230,000 Mendoza (Province of) 144A 10s, 2007 2,876,500
GBP 10,950,000 United Kingdom Treasury bonds 8s, 2000 19,473,854
GBP 10,807,000 United Kingdom Treasury bonds 7 1/4s, 2007 21,596,740
USD 2,100,000 United Mexican States bonds 8 5/8s, 2008 1,774,500
RUB 28,930,000 U.S. Dollar GKO Pass Through Structured Note
(Issued by Deutsche Bank) The principal at
redemption is linked to the bid price for the
Russian Treasury Bill at maturity, and the change
in the spot rate of the Russian Ruble from issue
date to maturity date zero %, 1998 (in default) 271,363
--------------
Total Foreign Government Bonds and Notes
(cost $101,297,734) $ 105,290,273
COLLATERALIZED MORTGAGE OBLIGATIONS (1.6%) (a)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$ 931,653 Citicorp Mortgage Securities, Inc. Ser. 92-10, Class M,
8s, 2022 $ 930,172
410,456 Freddie Mac Ser. 1717, Class L, 6 1/2s, 2024 433,416
74,735,000 First Union-Lehman Brothers Commercial Mortgage Co.
Ser. 98-C2, Interest Only, 0.816s, 2028 3,272,576
4,990,000 Merrill Lynch Mortgage Investors, Inc. Ser. 98-C2, Class D,
14.045s, 2030 5,181,023
1,023,980 Prudential Home Mortgage Securities Ser. 93-57, Class A4,
5.9s, 2023 1,029,991
76,626 Resolution Trust Corp. Ser. 94-1, Class A2A, 7 3/4s, 2029 77,603
1,193,787 Resolution Trust Corp. Ser. 94-1, Class M1, 7.14s, 2029 1,197,145
597,138 Rural Housing Trust Ser. 87-1, Class D, 6.33s, 2026 604,178
--------------
Total Collateralized Mortgage Obligations
(cost $12,441,114) $ 12,726,104
PREFERRED STOCKS (1.5%) (a)
NUMBER OF SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------------
235 21st Century Telecom Group 144A 13.75% cum. pfd. (PIK) $ 188,000
7,496 AmeriKing, Inc. $3.25 pfd. (PIK) 187,400
360 Concentric Network Corp. Ser. B, 13.50% pfd. (PIK) 315,000
7,459 CSC Holdings, Inc. Ser. M, $11.125 cum. (PIK) 820,490
9,600 Diva Systems Corp. Ser. C, $6.00 pfd. 105,600
1,271 Dobson Communications 144A 12.25% pfd. (PIK) 1,271,000
109 E. Spire Communications, Inc. 12.75% pfd. (PIK) 90,470
195 Echostar Communications, Inc. 12.125% pfd. 188,175
340 Fresenius Medical Care AG. Ser. D, 9.00% pfd. (Germany) 338,300
1,329 Granite Broadcasting 144A 12.75% pfd. (PIK) 1,342,290
98 Hyperion Telecommunications Ser. B, 12.875% pfd. (PIK) 80,360
1,380 Intermedia Communication Ser. B, 13.50% pfd. (PIK) 1,545,600
448 IXC Communications, Inc. 12.50% pfd. (PIK) 477,120
14,704 Lady Luck Gaming Corp. $11.25 pfd. 632,272
7,996 Nebco Evans Holding Co. 144A $11.25 pfd. (PIK) 519,740
28,158 Nextlink Communications, Inc. 144A $7.00 cum. pfd. 1,464,216
110 Paxson Communications Corp. 13.25% cum. pfd. (PIK) 1,045,000
2,176 SFX Broadcasting, Inc. Ser. E, $12.625 pfd. (PIK) 258,944
1,005 Spanish Broadcasting Systems 14.25% cum. pfd. 984,900
2,390 Von Hoffman Corp. 144A $13.50 pfd. 74,090
390 WinStar Communications, Inc. 144A 14.25% pfd. (PIK) 351,000
--------------
Total Preferred Stocks (cost $13,608,877) $ 12,279,967
UNITS (1.1%) (a)
NUMBER OF UNITS VALUE
- --------------------------------------------------------------------------------------------------------------------------
600 Australis Media, Ltd. units stepped-coupon 0s,
(15 3/4s, 5/15/00), 2003 (In default) (Australia) (STP) (NON) $ 4,500
480 Bestel S.A.de CV units, stepped-coupon zero %
(12 3/4s,5/15/03), 2005 (Mexico) (STP) 268,800
460 Birch Telecom, Inc. 144A units 14s, 2008 404,800
91 Celcaribe S.A. 144A units 13 1/2s, 2004 (Colombia) 1,820,000
2,142 Diva Systems Corp. 144A units stepped-coupon zero %
(13s, 5/15/01), 2008 (STP) 728,280
2,050 Firstworld Communication 144A units stepped-coupon
zero%, (13s, 4/15/03), 2008 (STP) 615,000
11,765 Fitzgerald Gaming Co. $3.75 units 15s, 2005 58,825
700 ICO Global Communications (Holdings) Ltd. units
15s, 2005 600,600
1,380 Long Distance International, Inc. 144A units 12 1/4s, 2008 1,324,800
560 Mediq, Inc. 144A units 13s, 2009 280,000
280 Onepoint Communications, Inc. units 14 1/2s, 2008 204,400
840 Pegasus Shipping 144A units company guaranty
zero %, 2008 386,400
1,380 Rhythms Netcon 144A units stepped-coupon zero %
(13 1/2s, 5/15/03), 2008 (STP) 552,000
860 Startec Global Communications Corp. units 12s, 2008 743,900
370 Telehub Communications Corp. units stepped-coupon
zero%, (13 7/8s,7/31/02), 2005 (STP) 196,100
335 Transamerican Refining, Inc. 144A units 16s, 2003 224,450
500 XCL Ltd. units sr. sec. notes 13 1/2s, 2004 525,000
--------------
Total Units (cost $10,682,883) $ 8,937,855
ASSET-BACKED SECURITIES (0.7%) (a)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$ 1,096,000 Chemical Master Credit Card Trust Ser. 95-2, Class A,
6.23s, 2003 $ 1,121,000
350,000 Contimortgage Home Equity Loan Trust Ser. 97-1,
Class M2, 7.67s, 2028 357,655
3,280,000 Green Tree Financial Corp. Ser. 98-2, Class A5, 6.24s, 2016 3,356,106
975,137 Green Tree Recreational Equipment & Cons Ser. 97-B,
Class A1, 6.55s, 2028 1,002,639
--------------
Total Asset-Backed Securities (cost $5,738,004) $ 5,837,400
- --------------------------------------------------------------------------------------------------------------------------
BRADY BONDS (0.4%) (a)(cost $4,217,415)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$ 6,380,925 Venezuela (Government of) deb., Ser. A, FRB 6 3/4s, 2007 $ 3,445,700
COMMON STOCKS (0.3%) (a)
NUMBER OF SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------------
21,270 American Mobile Satellite Corp. (NON) $ 111,668
150 AmeriKing, Inc. (NON) 6,000
2,955 Axia Holding Inc. 144A 44,325
13,880 CellNet Data Systems, Inc. (NON) 83,280
17,630 Chattem, Inc. (NON) 481,519
12,124 Chesapeake Energy Corp. (NON) 14,397
4,500 Exide Corp. 51,750
3,033 Hedstrom Holdings, Inc. 144A 3,791
3,770 IFINT Diversified Holdings 144A (NON) 28,275
5,887 Lady Luck Gaming Corp. (NON) 30,907
175 Mothers Work, Inc. (NON) 1,881
24,918 NEXTEL Communications, Inc. Class A (NON) 503,032
255 Paging Do Brazil Holdings Co., LLC Class B, (Brazil) 3
327 Premium Holdings L.P. 144A (NON) 1,308
71,533 PSF Holdings LLC Class A (acquired 5/29/98,
cost $2,464,371) (NON) (RES) 1,253,258
2,444 RSL Communications, Ltd. Class A (NON) 66,294
10,050 Specialty Foods Acquisition Corp. 144A (NON) 503
--------------
Total Common Stocks (cost $4,200,458) $ 2,682,191
CONVERTIBLE BONDS AND NOTES (0.3%) (a)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$ 2,190,000 APP Global Finance Ltd. 144A cv. company guaranty
3 1/2s, 2003 (United Kingdom) $ 832,200
280,000 APP Global Finance (V) Ltd. 144A cv. sec. 2s, 2000
(United Kingdom) 165,200
164,000 GST Telecommunications, Inc. cv. sr. disc. notes
stepped-coupon zero %, (13 7/8s, 12/15/00), 2005 (STP) 213,200
290,000 Integrated Device Technology, Inc. cv. sub. notes 5 1/2s, 2002 195,750
650,000 WinStar Communications. Inc. 144A cv. sr. disc. notes
stepped-coupon zero % (14s, 10/15/00), 2005 (STP) 845,000
--------------
Total Convertible Bonds and Notes (cost $3,314,312) $ 2,251,350
WARRANTS (0.2%) (a)(NON)
NUMBER OF WARRANTS EXPIRATION DATE VALUE
- --------------------------------------------------------------------------------------------------------------------------
1,235 Allegiance Telecom, Inc. 2/3/08 $ 19,760
750 American Mobile Satellite Corp. 4/1/08 3,533
32,500 Becker Gaming Corp. 144A 11/15/00 325
6,825 Capital Gaming International, Inc. 2/1/99 273
2,428 Cellnet Data Systems, Inc. 10/1/07 97,120
1,220 Club Regina, Inc. 144A 4/15/06 7,320
1,910 Colt Telecommunications Group PLC 12/31/06 573,000
1,500 Comunicacion Cellular 144A (Colombia) 11/15/03 99,000
85 Concentric Network Corp. 12/15/07 7,650
3,442 Consorcio Ecuatoriano 144A (Equador) 10/1/00 1,291
1,200 County Seat Holdings, Inc. 10/15/98 24
615 Covad Communications Group 144A 3/15/08 6,150
475 Diva Systems Corp. 5/15/06 133,000
13,975 DTI Holdings Inc. 3/1/08 13,975
10 E. Spire Communications, Inc. 11/1/05 700
460 Epic Resorts 6/15/05 5
255 Esat Holdings, Inc. (Ireland) 2/1/07 8,925
500 Fitzgerald Gaming Co. 144A 3/15/99 50
8,151 Fitzgerald Gaming Co. 12/19/98 82
770 Hyperion Telecommunications 144A 4/15/01 32,525
9,768 Intelcom Group 144A 10/15/05 263,736
520 Interact Systems, Inc. 8/1/03 5
700 Intermedia Communications 6/1/00 72,653
245 International Wireless Communications
Holdings 144A 8/15/01 25
400 Iridium World Com 144A 7/15/05 48,000
2,085 KMC Telecom Holdings, Inc. 4/15/08 33,360
1,180 Knology Holdings, Inc. 144A 10/15/07 1,770
1,470 Louisiana Casino Cruises, Inc. 144A 12/1/98 77,910
930 McCaw International Ltd. 4/15/07 3,720
840 MGC Communications, Inc. 144A 10/1/04 41,563
750 NEXTEL Communications Inc. 4/15/07 8
620 Orbital Imaging Corp. 144A 3/1/05 24,800
1,840 Pagemart, Inc. 144A 12/31/03 14,720
990 Pathnet, Inc. 144A 4/15/08 14,850
960 Paxson Communications Corp. 144A 6/30/99 10
265 Spanish Broadcasting Systems 144A 6/30/99 54,325
185 Sterling Chemicals Holdings 8/15/08 3,885
1,260 UIH Australia/Pacific, Inc. 144A 5/15/06 6,300
510 Versatel 144A 5/15/08 5,100
100 Wright Medical Technology, Inc. 144A 6/30/03 6,515
--------------
Total Warrants (cost $892,672) $ 1,677,963
CONVERTIBLE PREFERRED STOCKS (--%)(a)
NUMBER OF SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------------
30 Paxson Communications Corp. 144A 9.75% cv. pfd. (PIK) $ 300,000
624 Viatel, Inc. Ser. A, $10.00 cv. pfd. (PIK) 37,440
--------------
Total Convertible Preferred Stocks (cost $432,086) $ 337,440
SHORT-TERM INVESTMENTS (4.0%) (a) (cost $32,381,902)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$32,377,000 Interest in $750,000,000 joint tri-party repurchase agreement
dated September 30, 1998 with Goldman Sachs due
October 1, 1998 with respect to various U.S. Treasury
obligations -- maturity value of $32,381,902 for an
effective yield of 5.45% $ 32,381,902
- --------------------------------------------------------------------------------------------------------------------------
Total Investments (cost $859,788,139) (b) $ 836,081,692
- --------------------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $814,341,822.
(b) The aggregate identified cost on a tax basis is $859,893,202, resulting in gross unrealized appreciation and
depreciation of $32,510,461 and $56,321,971, respectively, or net unrealized depreciation of $23,811,510.
(NON) Non-income-producing security.
(STP) The interest rate and date shown parenthetically represent the new interest rate to be paid and the date the
fund will begin receiving interest at this rate.
(RES) Restricted, excluding 144A securities, as to public resale. The total market value of restricted securities
held at September 30, 1998 was $2,129,520 or 0.3% of net assets.
(PIK) Income may be received in cash or additional securities at the discretion of the issuer.
144A after the name of a security represents those exempt from registration under Rule 144A of the Securities
Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified
institutional buyers.
TBA after the name of a security represents to be announced securities (Note 1).
The rates shown on Floating Rate Bonds (FRB) and Floating Rate Notes (FRN) are the current interest rates
shown at September 30, 1998, which are subject to change based on the terms of the security.
Distribution of investments by country of issue at September 30, 1998: (as percentage of Market Value)
Brazil 1.00%
France 1.66
Germany 5.35
Mexico 2.43
United Kingdom 5.80
United States 81.20
Other 2.56
-----
Total 100.0%
=====
- -------------------------------------------------------------------------------
Forward Currency Contracts to Buy at September 30, 1998
(aggregate face value $93,759,034)
Unrealized
Aggregate Face Delivery Appreciation/
Market Value Value Date (Depreciation)
- -------------------------------------------------------------------------------
Australian Dollars $ 521,564 $ 511,392 12/16/98 $10,172
Danish Krone 90,156 85,886 12/16/98 4,270
Deutschemarks 52,230,436 50,375,196 12/16/98 1,855,240
Italian Lira 42,302 40,733 12/16/98 1,569
Japanese Yen 41,747,472 42,584,140 12/16/98 (836,668)
Spanish Peseta 169,166 161,687 12/16/98 7,479
- -------------------------------------------------------------------------------
$1,042,062
- -------------------------------------------------------------------------------
Forward Currency Contracts to Sell at September 30, 1998
(aggregate face value $190,813,455)
Unrealized
Aggregate Face Delivery Appreciation/
Market Value Value Date (Depreciation)
- -------------------------------------------------------------------------------
British Pounds $ 38,587,190 $38,179,775 12/16/98 $ (407,415)
Deutschemarks 94,657,674 91,314,419 12/16/98 (3,343,255)
French Franc 13,532,138 12,938,381 12/16/98 (593,757)
Japanese Yen 46,985,680 47,850,212 12/16/98 864,532
Swedish Krona 534,309 530,668 12/16/98 (3,641)
- -------------------------------------------------------------------------------
$(3,483,536)
- -------------------------------------------------------------------------------
TBA Sale Commitments at September 30, 1998
(Proceeds receivable $17,261,553)
Principal Settlement Market
Agency Amount Date Value
- -------------------------------------------------------------------------------
FNMA, 6.5s, October 2028 $17,165,000 10/14/98 $17,454,574
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
September 30, 1998
<S> <C>
Assets
- -----------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $859,788,139) (Note 1) $836,081,692
- -----------------------------------------------------------------------------------------------
Cash 532,590
- -----------------------------------------------------------------------------------------------
Foreign currency (cost $488,602) 512,139
- -----------------------------------------------------------------------------------------------
Dividends, interest and other receivables 15,075,582
- -----------------------------------------------------------------------------------------------
Receivable for securities sold 22,807,924
- -----------------------------------------------------------------------------------------------
Receivable for open forward currency contracts 2,743,262
- -----------------------------------------------------------------------------------------------
Receivable for closed forward currency contracts 121,054
- -----------------------------------------------------------------------------------------------
Total assets 877,874,243
Liabilities
- -----------------------------------------------------------------------------------------------
Distributions payable to shareholders 5,919,873
- -----------------------------------------------------------------------------------------------
Payable for securities purchased 33,166,496
- -----------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 1,504,951
- -----------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 89,926
- -----------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 22,345
- -----------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 2,638
- -----------------------------------------------------------------------------------------------
Payable for open forward currency contracts 5,184,736
- -----------------------------------------------------------------------------------------------
Payable for closed forward currency contracts 40,824
- -----------------------------------------------------------------------------------------------
TBA sales commitments at value (proceeds receivable $17,261,553) 17,454,574
- -----------------------------------------------------------------------------------------------
Other accrued expenses 146,058
- -----------------------------------------------------------------------------------------------
Total liabilities 63,532,421
- -----------------------------------------------------------------------------------------------
Net assets $814,341,822
Represented by
- -----------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $881,972,211
- -----------------------------------------------------------------------------------------------
Distributions in excess of net investment income (Note 1) (13,561,328)
- -----------------------------------------------------------------------------------------------
Accumulated net realized loss on investment and foreign
currency transactions (Note 1) (27,954,689)
- -----------------------------------------------------------------------------------------------
Net unrealized appreciation of investments and assets and
liabilities in foreign currencies (26,114,372)
- -----------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $814,341,822
Computation of net asset value
- -----------------------------------------------------------------------------------------------
Net asset value per share ($814,341,822 divided by 100,014,650 shares) $8.14
- -----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Year ended September 30, 1998
<S> <C>
Investment income:
- -----------------------------------------------------------------------------------------------
Interest income: $ 60,743,001
- -----------------------------------------------------------------------------------------------
Dividends 914,098
- -----------------------------------------------------------------------------------------------
Total investment income 61,657,099
Expenses:
- -----------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 4,894,677
- -----------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 870,840
- -----------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 32,281
- -----------------------------------------------------------------------------------------------
Administrative services (Note 2) 5,186
- -----------------------------------------------------------------------------------------------
Reports to shareholders 80,047
- -----------------------------------------------------------------------------------------------
Registration fees 150
- -----------------------------------------------------------------------------------------------
Auditing 113,739
- -----------------------------------------------------------------------------------------------
Legal 182,859
- -----------------------------------------------------------------------------------------------
Postage 105,498
- -----------------------------------------------------------------------------------------------
Exchange listing fees 30,301
- -----------------------------------------------------------------------------------------------
Total expenses 6,315,578
- -----------------------------------------------------------------------------------------------
Expense reduction (Note 2) (172,585)
- -----------------------------------------------------------------------------------------------
Net expenses 6,142,993
- -----------------------------------------------------------------------------------------------
Net investment income 55,514,106
- -----------------------------------------------------------------------------------------------
Net realized loss on investments (Notes 1 and 3) (10,877,295)
- -----------------------------------------------------------------------------------------------
Net realized gain on futures contracts (Note 1) 1,434,016
- -----------------------------------------------------------------------------------------------
Net realized gain on written options (Notes 1 and 3) 70,622
- -----------------------------------------------------------------------------------------------
Net realized loss on foreign currency transactions (5,403,571)
- -----------------------------------------------------------------------------------------------
Net unrealized depreciation of assets and liabilities in
foreign currencies during the year (1,047,356)
- -----------------------------------------------------------------------------------------------
Net unrealized depreciation of investments, futures and
written options and TBA sale commitments during the year (35,942,636)
- -----------------------------------------------------------------------------------------------
Net loss on investments (51,766,220)
- -----------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $ 3,747,886
- -----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Year ended September 30
-------------------------------
1998 1997
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
Increase in net assets
- ---------------------------------------------------------------------------------------------------------------
Operations:
- ---------------------------------------------------------------------------------------------------------------
Net investment income $ 55,514,106 $ 24,793,897
- ---------------------------------------------------------------------------------------------------------------
Net realized loss on investments and
foreign currency transactions (14,776,228) (114,517)
- ---------------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of
investments and assets and liabilities in foreign currencies (36,989,992) 7,551,885
- ---------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 3,747,886 32,231,265
- ---------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ---------------------------------------------------------------------------------------------------------------
From net investment income (55,414,822) (24,795,303)
- ---------------------------------------------------------------------------------------------------------------
Shares issued in connection with the merger of
Putnam Intermediate Government Income Trust (Note 5) 528,345,195 --
- ---------------------------------------------------------------------------------------------------------------
Shares repurchased (Note 4) -- (2,308,913)
- ---------------------------------------------------------------------------------------------------------------
Total increase in net assets 476,678,259 5,127,049
Net assets
- ---------------------------------------------------------------------------------------------------------------
Beginning of year 337,663,563 332,536,514
- ---------------------------------------------------------------------------------------------------------------
End of year (including distributions in excess of
net investment income of $13,561,328 and
$6,853,337 respectively) $814,341,822 $337,663,563
- ---------------------------------------------------------------------------------------------------------------
Number of fund shares
- ---------------------------------------------------------------------------------------------------------------
Shares outstanding at beginning of year 38,435,338 38,737,138
- ---------------------------------------------------------------------------------------------------------------
Shares issued in connection with the merger of
Putnam Intermediate Government Income Trust (Note 5) 61,579,312 --
- ---------------------------------------------------------------------------------------------------------------
Shares repurchased -- (301,800)
- ---------------------------------------------------------------------------------------------------------------
Shares outstanding at end of year 100,014,650 38,435,338
- ---------------------------------------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $8.79 $8.58 $8.38 $8.13 $8.91
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .71 .64 .63 .67 .62
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.67) .21 .19 .21 (.71)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .04 .85 .82 .88 (.09)
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.69) (.64) (.61) (.49) (.55)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net investment income -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- -- -- -- (.06)
- ------------------------------------------------------------------------------------------------------------------------------------
From return of capital -- -- (.01) (.14) (.08)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.69) (.64) (.62) (.63) (.69)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $8.14 $8.79 $8.58 $8.38 $8.13
- ------------------------------------------------------------------------------------------------------------------------------------
Market value,
end of period $7.750 $8.125 $7.500 $7.375 $7.250
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at market value (%)(a) 3.91 17.54 10.34 10.90 (5.57)
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $814,342 $337,664 $332,537 $326,735 $317,296
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .92 1.04 .99 1.03 .92
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 8.13 7.47 7.44 8.24 7.18
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 179.84(c) 220.61 232.90 219.63 204.92
- ------------------------------------------------------------------------------------------------------------------------------------
(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).
(c) Portfolio turnover excludes the impact of assets received from the acquisition of Putnam Intermediate Government Income Trust.
</TABLE>
Notes to financial statements
September 30, 1998
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.
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. Collateral
for certain tri-party repurchase agreements is held at the counterparty's
custodian in a segregated account for the benefit of the fund and the
counterparty. Putnam Management is responsible for determining that the
value of these underlying securities is at all times at least equal to the
resale price, including accrued interest.
D) Security transactions and related investment income Security
transactions are accounted for on the trade date (date the order to buy or
sell is executed). Interest income is recorded on the accrual basis.
Dividend income is recorded on the ex-dividend date. Discounts on zero
coupon bonds, original issue discount bonds, stepped-coupon bonds and
payment in kind bonds are accreted according to the yield-to-maturity
basis. Any premium resulting from the purchase of stepped-coupon
securities in excess of maturity value 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, and other assets and liabilities are recorded in the
books and records of the fund after translation to U.S. dollars based on
the exchange rates on that day. The cost of each security is determined
using historical exchange rates. Income and withholding taxes are
translated at prevailing exchange rates when 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 realized 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. When the contract is closed, the fund records a realized gain or
loss equal to the difference between the value of the contract at the time
it was opened and the value at the time it was closed. Realized gains and
losses on purchased options are included in realized gains and losses on
investment securities.
Futures contracts are valued at the quoted daily settlement prices
established by the exchange on which they trade. Exchange traded options
are valued at the last sale price, or if no sales are reported, the last
bid price for purchased options and the last ask price for written
options. Options traded over-the-counter are valued using prices supplied
by dealers.
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 month September 30, 1998, the fund had a capital loss carryover of
approximately $19,897,000 available to offset future capital gains, if
any. The amount of the carryover and the expiration dates are:
Loss Carryover Expiration
- -------------- ------------------
$ 8,261,000 September 30, 1999
253,000 September 30, 2001
7,035,000 September 30, 2003
2,793,000 September 30, 2004
1,555,000 September 30, 2005
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 temporary and permanent differences
of losses on wash sale transactions, foreign currency gains and losses,
post-October loss deferrals, dividends payable, accretion/amortization
adjustments, defaulted bond interest, paydown gains and losses on
mortgage-backed securities, market discount, and interest on
payment-in-kind securities. 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, 1998, the fund reclassified $6,807,275 to
increase distributions in excess of net investment income and $486,314 to
increase paid-in-capital, with a decrease to accumulated net realized
losses on investments of $6,320,961. 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% thereafter.
The fund reimburses Putnam Management an allocated amount for the
compensation and related expenses of certain officers of the fund and
their staff who provide administrative services to the fund. The aggregate
amount of all such reimbursements is determined annually by the Trustees.
Custodial functions for the fund's assets are provided by Putnam Fiduciary
Trust Company (PFTC), a subsidiary of Putnam Investments, Inc. Investor
servicing agent functions are provided by Putnam Investor Services, a
division of PFTC.
For the year ended September 30, 1998, fund expenses were reduced by
$172,585 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.
Each Trustee of the fund receives an annual Trustee fee, of which $890 has
been allocated to the fund, and an additional fee for each Trustee's
meeting attended. Trustees who are not interested persons of Putnam
Management and who serve on committees of the Trustees receive additional
fees for attendance at certain committee meetings.
The fund has adopted a Trustee Fee Deferral Plan (the "Deferral Plan")
which allows the Trustees to defer the receipt of all or a portion of
Trustees Fees payable on or after July 1, 1995. The deferred fees remain
in the fund and are invested in certain Putnam funds until distribution in
accordance with the Deferral Plan.
The fund has adopted an unfunded noncontributory defined benefit pension
plan (the "Pension Plan") covering all Trustees of the fund who have
served as Trustee for at least five years. Benefits under the Pension Plan
are equal to 50% of the Trustee's average total retainer and meeting fees
for the three years preceding retirement. Pension expense for the fund is
included in Compensation of Trustees in the Statement of operations.
Accrued pension liability is included in Payable for compensation of
Trustees in the Statement of assets and liabilities.
Note 3
Purchase and sales of securities
During the year ended September 30, 1998, purchases and sales of
investment securities other than U.S. government obligations and
short-term investments aggregated $462,234,405 and $634,079,917,
respectively. Purchases and sales of U.S. government obligations
aggregated $664,684,353 and $487,728,231, 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 $ 2,995,100 $37,288
- --------------------------------------------------------------------
Options opened 10,500,000 33,234
- --------------------------------------------------------------------
Options expired 13,495,100 70,522
- --------------------------------------------------------------------
Options closed -- --
- --------------------------------------------------------------------
Written options
outstanding at
end of year $ -- $ --
- --------------------------------------------------------------------
Note 4
Share Repurchase Program
In November 1994, the Trustees authorized the fund to repurchase up to
1,950,000 of its shares in the open market. Repurchases will only be made
when the fund's shares are trading at less than net asset value and at
such times and amounts as is believed to be in the best interest of the
fund's shareholders. Any repurchases of shares will have the effect of
increasing the net asset value per share of remaining shares outstanding.
For the year ended September 30, 1998, the fund repurchased no shares.
As of September 30, 1998, 570,000 shares have been repurchased since the
inception of the program.
Note 5
Acquisition of Putnam
Intermediate
Government Income Trust
On January 23, 1998, the fund issued 61,579,312 shares to the shareholders
of Putnam Intermediate Government Income Trust to acquire that fund's net
assets in a tax-free exchange approved by the shareholders. The assets of
the fund and Putnam Intermediate Government Income Trust on January 23,
1998, valuation date, were $329,648,831 and $528,345,195 respectively. On
January 23, 1998, the fund had unrealized depreciation of $1,224,904. The
aggregate net assets of the fund immediately following the acquisition
were $857,994,026.
Federal tax information
(Unaudited)
The fund has designated 1.78% of the distributions from net investment
income as qualifying for dividends received deduction for corporations.
The Form 1099 you receive in January 1999 will show the tax status of all
distributions paid to your account in calendar 1998.
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
PricewaterhouseCoopers LLP
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
John A. Hill, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
Ronald J. Jackson
Paul L. Joskow
Elizabeth T. Kennan
Lawrence J. Lasser
John H. Mullin III
Robert E. Patterson
Donald S. Perkins
George Putnam, III
A.J.C. Smith
W. Thomas Stephens
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
John D. Hughes
Senior Vice President and Treasurer
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Ian C. Ferguson
Vice President
Brett C. Browchuk
Vice President
Stephen Oristaglio
Vice President
Jennifer E. Leichter
Vice President and Fund Manager
D. William Kohli
Vice President and Fund Manager
William N. Shiebler
Vice President
John R. Verani
Vice President
Beverly Marcus
Clerk and Assistant Treasurer
Call 1-800-225-1581 weekdays from 9 a.m. to 5 p.m. Eastern Time, or visit
our website (www.putnaminv.com) any time for up-to-date information about
the fund's NAV.
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
www.putnaminv.com
- ---------------------
BULK RATE
U.S. POSTAGE PAID
PUTNAM
INVESTMENTS
- ---------------------
47021 074 11/98
