N-30D 1 0001.txt PUTNAM MASTER INTERMEDIATE INCOME TRUST Putnam Master Intermediate Income Trust ANNUAL REPORT ON PERFORMANCE AND OUTLOOK 9-30-00 [SCALE LOGO OMITTED] FROM THE TRUSTEES Dear Shareholder: It is a pleasure to greet you in our new roles as Chairman of the Trustees and President of the Funds. As you know, both of us have been members of the Board of Trustees for a number of years -- years during which the global securities markets, the mutual fund industry, and Putnam itself have experienced tremendous growth and change. As we look to the future, we are certain that the changes will be breathtaking in their scope. What will not change is the Trustees' dedication to serving the best interests of our shareholders. We welcome the challenges that lie ahead and are confident that Putnam and your Board will continue to face those challenges successfully as they have for more than 60 years. We look forward to helping you meet your financial objectives for many years to come. Respectfully yours, /S/ JOHN A. HILL /S/ GEORGE PUTNAM, III John A. Hill George Putnam, III Chairman of the Trustees President of the Funds November 15, 2000 REPORT FROM FUND MANAGEMENT David L. Waldman and the Core Fixed Income Team Putnam Master Intermediate Income Trust weathered changing market environments in the 12 months ended September 30, 2000. At the beginning of fiscal 2000, investors were uncertain of what to expect, given Y2K-related concerns, but they also were confident enough to focus attention on the riskier sectors of the market. This confidence contributed to positive performance for these sectors into the new year. After the Y2K transition passed without incident, the euphoria of the market quickly dissipated into an environment filled with fears of inflation and fallout from the Federal Reserve Board's decisions to increase interest rates. After mid 2000, a more stable market environment returned. Inflation appeared to remain benign, the U.S. economy showed signs of slowing down, and the risk of further Fed rate increases ceased to be a real threat. This most recent environment, combined with the fund's diversified portfolio, helped to deliver a competitive performance over the period. Total return for 12 months ended 9/30/00 NAV Market price ------------------------------- 4.29% 10.72% ------------------------------- Past performance is not indicative of future results. Performance information for longer periods begins on page 5. * YIELD CURVE INVERSION IMPACTS FIXED-INCOME MARKET Within the investment-grade market, the action of the U.S. Treasury yield curve affected all sectors. The increases in short-term interest rates made short-term fixed-income securities much more attractive to investors. At the same time, the U.S. Treasury's buyback of long-term Treasury securities reduced supply and increased demand for longer-term Treasury debt. This combination created an inverted yield curve for most of the fiscal year, in which yields offered by short-term investments actually became higher than those of long-term bonds. As Treasuries serve as a benchmark for most other segments of the fixed-income market, the chain of events caused a volatile environment for fixed-income investments. [GRAPHIC OMITTED: horizontal bar chart TOP FIVE COUNTRY ALLOCATIONS (INTERNATIONAL SECTOR)] TOP FIVE COUNTRY ALLOCATIONS (INTERNATIONAL SECTOR)* Canada 4.1% Denmark 3.1% Mexico 3.0% Brazil 2.5% Russia 2.1% Footnote reads: *Based on net assets as of 9/30/00. Holdings will vary over time. Because of the fund's focus on fixed-income investments with limited maturities, we were unable to take advantage of the demand for long-term U.S. Treasury bonds. Fortunately, the fund's position in U.S. Treasuries of 7- to 10-year maturities was rewarded by these same market dynamics. Our position in mortgage-backed securities also served the fund well. With rising interest rates, fewer mortgages were being refinanced and we focused on mortgage-backed securities likely to benefit from the resulting decline in prepayments. * EMERGING MARKETS, DEVELOPED MARKETS BOLSTER RETURNS WHILE HIGH-YIELD BONDS DISAPPOINT Emerging markets have proved their resiliency since the correction in 1998. During the fiscal year, global growth was sustained, valuations were very cheap, and commodity prices were firm. The fund's holdings in Russia benefited from higher oil prices as well as the country's restructuring into a more market-oriented economy. Holdings in Mexico benefited both from U.S. economic growth and the increased economic stability. Within the developed market universe, the fund took advantage of opportunities over the fiscal year in various countries. The potential for further European integration was an incentive to have positions in Greece and Denmark. In addition, the fund remained underweight in Japan as economic growth and potential supply of Japanese government securities weighed on the market. Unfortunately, the fund's currency exposure did not contribute to positive performance. The euro in particular continued its slow deterioration since the beginning of the period. The attractiveness of the U.S. economy lured capital flows from abroad, and as a result, investors tended to buy the dollar and sell foreign securities. [GRAPHIC OMITTED: TOP THREE HOLDINGS PER SECTOR] TOP THREE HOLDINGS PER SECTOR HIGH-YIELD BONDS Nextel Communications, Inc. sr. notes, 9 3/8s, 2009 Hanvit Bank 144A sub. notes 11 3/4s, 2010 (Korea) Midland Funding II Corp., deb. Series A, 11 3/4s, 2005 FOREIGN BONDS Brazil (Federal Republic of) notes 14 1/2s, 2009 Denmark (Kingdom of) bonds 6s, 2009 United Mexican States bonds Series XW, 10 3/8s, 2009 U.S. INVESTMENT-GRADE SECURITIES U.S. Treasury Notes, 6 3/4s, May 15, 2005 U.S. Treasury Strip, zero %, August 15, 2009 Federal National Mortgage Association TBA 7 1/2s, 2015 Footnote reads: These holdings represent 19.2% of the fund's net assets as of 9/30/00. Portfolio holdings will vary over time. The combination of poor equity markets, defaults, and negative industry-wide mutual fund cash flows contributed to the underperformance of high-yield bonds during the period. Although the sector delivered attractive yields, the price performance was negative as spreads widened throughout the period. The high-yield bond market rallied in the fourth quarter of 1999, consistent with the performance of U.S. equity markets. However, throughout most of 2000, as equity markets were experiencing corrections, this volatility also spilled over into the high-yield market. Rising default rates over the past two years reduced demand for high-yield bonds even more. The rise in the default rate has received a great deal of attention. Historically, the most stressful time for a corporation is the three-year period following the issuance of high-yield bonds. The pattern of defaults that is now emerging can be attributed in part to the strong issuance in 1997 and 1998. As it did in the equity markets, the technology and telecommunications sector of the high-yield market hit a rough patch in 2000. The fund trimmed back its holdings in the sector but did not completely escape the effects. * OUTLOOK REMAINS POSITIVE Looking forward, we believe that increasing stability is on the horizon as the opportunity for a U.S. economic soft landing has become a stronger probability. With the threat of continued Fed tightening dissipating, bond prices should trade within a relatively narrow range. We remain supportive on the long-term performance of the high-yield bond market. Given the attractive valuations and our expectation that defaults will peak in 2001, we believe that many of the uncertainties that have caused the high-yield market to struggle show signs of subsiding. Emerging markets have shown continued strength in volatile times. But, despite global economic stability and firm commodity prices, we remain neutral on this sector because of pockets of specific country risk. With regard to developed country interest rates, we expect to minimize exposure to Japan and continue to take advantage of opportunities in Greece, Canada, and Denmark. We will continue to monitor events closely and maintain the fund's diversification while emphasizing strong valuations and working to minimize risk. 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 9/30/00, there is no guarantee the fund will continue to hold these securities in the future. International investments are subject to certain risks, such as currency fluctuations, economic instability, and political developments. While the U.S. government backing of individual securities does not insure your principal, which will fluctuate, it does guarantee that the fund's government-backed holdings will make timely payments of interest and principal. Mortgage-backed securities in the portfolio may be subject to prepayment risk. The lower credit ratings of high-yield bonds reflect a greater possibility that adverse changes in the economy or poor performance by the issuers of these bonds will affect the issuers' ability to pay principal and interest. 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. investment-grade high-yield, and international fixed-income securities with limited maturities. TOTAL RETURN FOR PERIODS ENDED 9/30/00 NAV Market price --------------------------------------------------------------------------- 1 year 4.29% 10.72% --------------------------------------------------------------------------- 5 years 32.20 35.62 Annual average 5.74 6.28 --------------------------------------------------------------------------- 10 years 135.94 153.96 Annual average 8.96 9.77 --------------------------------------------------------------------------- Annual average (life of fund, since 4/29/88) 7.88 6.37 --------------------------------------------------------------------------- Past performance is no assurance of future results. More recent returns may be more or less than those shown. 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 redeemed may be worth more or less than their original cost. COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 9/30/00 Lehman Bros. Salomon Bros. Govt. Non-U.S. First Boston Intermediate World Govt. High Yield Consumer Bond Index Bond Index Bond Index price index ---------------------------------------------------------------------------- 1 year 6.21% -7.86% 1.92% 3.46% ---------------------------------------------------------------------------- 5 years 34.19 6.47 35.09 13.32 Annual average 6.06 1.26 6.20 2.53 ---------------------------------------------------------------------------- 10 years 101.03 101.90 204.16 30.82 Annual average 7.23 7.28 11.76 2.72 ---------------------------------------------------------------------------- Annual average (life of fund, since 4/29/88) 7.51 6.14 9.41 3.22 ---------------------------------------------------------------------------- Past performance is no assurance of future results. More recent returns may be more or less than those shown. They do not take into account any adjustment for taxes payable on reinvested distributions. Investment returns, net asset value and market price will fluctuate so that an investor's shares when sold may be worth more or less than their original cost. PRICE AND DISTRIBUTION INFORMATION 12 MONTHS ENDED 9/30/00 ---------------------------------------------------------------------------- Distributions from common shares ---------------------------------------------------------------------------- Number 12 ---------------------------------------------------------------------------- Income $0.642 ---------------------------------------------------------------------------- Capital gains -- ---------------------------------------------------------------------------- Total $0.642 ---------------------------------------------------------------------------- Share value NAV Market price ---------------------------------------------------------------------------- 9/30/99 $7.57 $6.438 ---------------------------------------------------------------------------- 9/30/00 7.13 6.438 ---------------------------------------------------------------------------- Current return ---------------------------------------------------------------------------- Current dividend rate1 8.92% 9.88% ---------------------------------------------------------------------------- 1 Income portion of most recent distribution, annualized and divided by NAV or market price at end of period. TERMS AND DEFINITIONS Total return shows how the value of the fund's shares changed over time, assuming you held the shares through the entire period and reinvested all distributions in the fund. Net asset value (NAV) is the value of all your fund's assets, minus any liabilities, divided by the number of outstanding common shares. Market price is the current trading price of one share of the fund. Market prices are set by transactions between buyers and sellers on the New York Stock Exchange. COMPARATIVE BENCHMARKS Lehman Brothers Government Intermediate Bond Index* is an unmanaged list of U.S. government and mortgage-backed securities composed of all bonds covered by the Lehman Brothers Government Bond Index with maturities between 1 and 9.99 years. Salomon Brothers Non-U.S. World Government Bond Index* is an unmanaged list of bonds issued by 10 countries. First Boston High Yield Bond 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 into 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. A GUIDE TO THE FINANCIAL STATEMENTS These sections of the report, preceded by the Report of independent accountants, constitute the fund's financial statements. The fund's portfolio lists all the fund's investments and their values as of the last day of the reporting period. Holdings are organized by asset type and industry sector, country, or state to show areas of concentration and diversification. Statement of assets and liabilities shows how the fund's net assets and share price are determined. All investment and noninvestment assets are added together. Any unpaid expenses and other liabilities are subtracted from this total. The result is divided by the number of shares to determine the net asset value per share, which is calculated separately for each class of shares. (For funds with preferred shares, the amount subtracted from total assets includes the net assets allocated to remarketed preferred shares.) Statement of operations shows the fund's net investment gain or loss for the reporting period. This is determined by adding up all the fund's earnings -- from dividends and interest income -- and subtracting its operating expenses. This statement also lists any net gain or loss the fund realized on the sales of its holdings and -- for holdings that remain in the portfolio -- any change in unrealized gains or losses over the period. Statement of changes in net assets shows how the fund's net assets were affected by distributions to shareholders and by changes in the number of the fund's shares. It lists distributions and their sources (net investment income or realized capital gains) over the current reporting period and the most recent fiscal year-end. The distributions listed here may not match the sources listed in the Statement of operations because the distributions are determined on a tax basis and may be paid in a different period from the one in which they were earned. Financial highlights provide an overview of the fund's investment results, per-share distributions, expense ratios, net investment income ratios and portfolio turnover in one summary table, reflecting the five most recent reporting periods. In a semiannual report, the highlight table also includes the current reporting period. For open-end funds, a separate table is provided for each share class. REPORT OF INDEPENDENT ACCOUNTANTS The Board of Trustees and Shareholders Putnam Master Intermediate Income Trust We have audited the accompanying statement of assets and liabilities of Putnam Master Intermediate Income Trust, including the fund's portfolio, as of September 30, 2000, the related statement of operations for the year then ended, statement of changes in net assets for the year then ended and financial highlights for the year then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audit. The statement of changes in net assets for the year ended September 30, 1999 and the financial highlights for each of the years or periods in the four-year period ended September 30, 1999 were audited by other auditors whose report dated November 11, 1999 expressed an unqualified opinion on that financial statement and those financial highlights. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform our audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of September 30, 2000 by correspondence with the custodian and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Putnam Master Intermediate Income Trust as of September 30, 2000, and the results of its operations, changes in its net assets and financial highlights for the year described above, in conformity with accounting principles generally accepted in the United States of America. KPMG LLP Boston, Massachusetts November 2, 2000
THE FUND'S PORTFOLIO September 30, 2000 CORPORATE BONDS AND NOTES (44.2%) (a) PRINCIPAL AMOUNT VALUE Advertising and Marketing Services (0.5%) ------------------------------------------------------------------------------------------------------------------- $ 165,000 Adams Outdoor Advertising sr. notes 10 3/4s, 2006 $ 169,950 688,200 Interact Operating Co. notes 14s, 2003 34,410 360,000 Lamar Media Corp. company guaranty 8 5/8s, 2007 354,600 1,450,000 Lamar Media Corp. sr. sub. notes 9 1/4s, 2007 1,471,750 860,000 SFX Entertainment, Inc. company guaranty 9 1/8s, 2008 898,700 730,000 SFX Entertainment, Inc. 144A company guaranty Ser. B, 9 1/8s, 2008 762,850 ------------- 3,692,260 Aerospace and Defense (0.8%) ------------------------------------------------------------------------------------------------------------------- 1,140,000 Argo-Tech Corp. company guaranty 8 5/8s, 2007 940,500 665,000 BE Aerospace, Inc. sr. sub. notes 9 1/2s, 2008 650,038 530,000 BE Aerospace, Inc. sr. sub. notes Ser. B, 8s, 2008 475,675 580,000 Decrane Aircraft Holdings company guaranty Ser. B, 12s, 2008 536,500 330,000 L-3 Communications Corp. company guaranty Ser. B, 8s, 2008 298,650 1,130,000 L-3 Communications Corp. sr. sub. notes 8 1/2s, 2008 1,053,725 140,000 L-3 Communications Corp. sr. sub. notes Ser. B, 10 3/8s, 2007 143,150 600,000 Moog, Inc. sr. sub. notes Ser. B, 10s, 2006 595,500 1,150,000 Sequa Corp. med. term notes Ser. A, 10.15s, 2001 1,159,200 ------------- 5,852,938 Agriculture (0.3%) ------------------------------------------------------------------------------------------------------------------- 1,979,455 Premium Standard Farms, Inc. sr. sec. notes 11s, 2003 (PIK) 1,801,304 Airlines (0.5%) ------------------------------------------------------------------------------------------------------------------- 1,030,000 Calair LLC 144A company guaranty 8 1/8s, 2008 968,200 180,000 Continental Airlines notes 8s, 2005 170,827 70,000 Northwest Airlines, Inc. company guaranty 8.52s, 2004 67,609 240,000 Northwest Airlines, Inc. company guaranty 8 3/8s, 2004 229,898 490,000 Northwest Airlines, Inc. company guaranty 7 5/8s, 2005 458,238 2,000,000 US Air, Inc. pass-thru certificates Ser. 93-A2, 9 5/8s, 2003 1,911,440 ------------- 3,806,212 Automotive (1.0%) ------------------------------------------------------------------------------------------------------------------- 844,000 Aftermarket Technology Corp. sr. sub. notes 12s, 2004 844,000 50,000 Aftermarket Technology Corp. sr. sub. notes Ser. D, 12s, 2004 50,000 220,000 Collins & Aikman Products company guaranty 11 1/2s, 2006 213,400 910,000 Dura Operating Corp. company guaranty Ser. B, 9s, 2009 782,600 370,000 Exide Corp. sr. notes 10s, 2005 284,900 410,000 Federal Mogul Corp. notes 7 7/8s, 2010 155,800 1,220,000 Federal Mogul Corp. notes 7 3/4s, 2006 475,800 630,000 Federal Mogul Corp. notes 7 1/2s, 2009 239,400 420,000 Federal Mogul Corp. notes 7 3/8s, 2006 163,800 225,000 Hayes Wheels International, Inc. company guaranty Ser. B, 9 1/8s, 2007 200,250 780,000 Hayes Wheels International, Inc. 144A sr. sub. notes 9 1/8s, 2007 682,500 490,000 Lear Corp. company guaranty 8.11s, 2009 465,823 760,000 Lear Corp. sub. notes 9 1/2s, 2006 766,924 990,000 Oxford Automotive, Inc. company guaranty Ser. D, 10 1/8s, 2007 891,000 200,000 Safety Components International, Inc. sr. sub. notes Ser. B, 10 1/8s, 2007 (In default) (NON) 80,000 1,020,000 Tenneco Automotive, Inc. company guaranty Ser. B, 11 5/8s, 2009 652,800 ------------- 6,948,997 Banking (1.2%) ------------------------------------------------------------------------------------------------------------------- 180,000 Bank United Corp. sub. notes 8 7/8s, 2007 178,085 110,000 Chevy Chase Savings Bank, Inc. sub. deb. 9 1/4s, 2008 101,475 590,000 Chevy Chase Savings Bank, Inc. sub. deb. 9 1/4s, 2005 555,338 1,060,000 GS Escrow Corp. sr. notes 7 1/8s, 2005 978,719 4,320,000 Hanvit Bank 144A sub. notes 11 3/4s, 2010 (Korea) 4,287,600 670,000 Local Financial Corp. sr. notes 11s, 2004 670,000 1,100,000 Sovereign Bancorp, Inc. sr. notes 10 1/2s, 2006 1,116,500 630,000 Superior Financial Corp. sr. notes 8.65s, 2003 610,796 ------------- 8,498,513 Beverage (0.2%) ------------------------------------------------------------------------------------------------------------------- 1,370,000 Trairc Consumer Products, Inc. company guaranty 10 1/4s, 2009 1,532,688 Broadcasting (3.3%) ------------------------------------------------------------------------------------------------------------------- 1,140,000 Acme Television sr. disc. notes 10 7/8s, 2004 1,083,000 970,000 Allbritton Communications Co. sr. sub. notes Ser. B, 8 7/8s, 2008 906,950 245,900 AMFM Operating, Inc. deb. 12 5/8s, 2006 (PIK) 281,556 10,263 Australis Media, Ltd. sr. disc. notes 15 3/4s, 2003 (In default) (Australia) (PIK) (NON) 1 1,480,000 Benedek Communications Corp. sr. disc. notes stepped-coupon zero % (13 1/4s, 5/15/01), 2006 (STP) 1,276,500 2,105,000 Capstar Broadcasting sr. disc. notes stepped-coupon zero % (12 3/4s, 2/1/02), 2009 (STP) 2,015,538 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 (In default) (Bermuda) (NON) 25,300 256,020 Citadel Broadcasting, Inc. sr. sub. notes 10 1/4s, 2007 266,261 2,542,000 Diva Systems Corp. sr. disc. notes, stepped-coupon Ser. B, zero % (12 5/8s, 3/1/03), 2008 (STP) 1,118,480 3,340,000 Echostar Broadband Corp. 144A sr. notes 10 3/8s, 2007 3,340,000 580,000 Fox Family Worldwide, Inc. sr. disc. notes stepped-coupon zero % (10 1/4s, 11/1/02), 2007 (STP) 421,950 380,000 Fox Family Worldwide, Inc. sr. notes 9 1/4s, 2007 363,850 890,000 Golden Sky Systems company guaranty Ser. B, 12 3/8s, 2006 974,550 560,000 Granite Broadcasting Corp. sr. sub. notes 8 7/8s, 2008 392,000 950,000 Knology Holdings, Inc. sr. disc. notes stepped-coupon zero % (11 7/8s, 10/15/02), 2007 (STP) 498,750 1,650,000 Lin Holdings Corp. sr. disc. notes stepped-coupon zero % (10s, 3/1/2003), 2008 (STP) 1,188,000 520,000 OnePoint Communications Corp. company guaranty Ser. B, 14 1/2s, 2008 522,600 610,000 Paxson Communications Corp. 144A sr. sub. notes 11 5/8s, 2002 625,250 70,000 Pegasus Communications sr. notes Ser. B, 12 1/2s, 2007 74,200 2,170,000 Pegasus Communications sr. notes Ser. B, 9 3/4s, 2006 2,115,750 140,000 Pegasus Communications sr. notes Ser. B, 9 5/8s, 2005 136,500 90,000 Pegasus Media & Communications sr. sub.notes Ser. B, 12 1/2s, 2005 93,600 997,000 PHI Holdings, Inc. sr. sub. notes zero %, 2001 937,978 275,000 Radio One, Inc. company guaranty Ser. B, 12s, 2004 291,500 490,000 RCN Corp. sr. notes 10 1/8s, 2010 350,350 510,000 Spanish Broadcasting System, Inc. sr. sub notes 9 5/8s, 2009 508,725 1,530,000 TV Azteca S.A. de C.V. sr. notes 10 1/2s, 2007 (Mexico) 1,413,338 590,000 XM Satellite Radio, Inc. 144A sr. notes 14s, 2010 436,600 ------------- 23,724,577 Building Materials (0.4%) ------------------------------------------------------------------------------------------------------------------- 130,000 American Architectural Products Corp. company guaranty 11 3/4s, 2007 (In default) (NON) 23,400 765,000 American Standard, Inc. company guaranty 7 5/8s, 2010 721,013 80,000 American Standard, Inc. company guaranty 7 1/8s, 2003 77,800 230,000 Atrium Companies, Inc. company guaranty Ser. B, 10 1/2s, 2009 207,000 540,000 Building Materials Corp. company guaranty 8s, 2008 340,200 940,000 Dayton Superior Corp. company guaranty 13s, 2009 944,700 410,000 NCI Building Systems, Inc. sr. sub. notes Ser. B, 9 1/4s, 2009 386,425 ------------- 2,700,538 Cable Television (1.9%) ------------------------------------------------------------------------------------------------------------------- 1,123,000 Adelphia Communications Corp. sr. notes Ser. B, 9 7/8s, 2007 1,055,620 100,000 Charter Communications Holdings LLC sr. disc. notes, stepped-coupon zero % (11 3/4s, 1/15/05), 2010 (STP) 58,500 2,580,000 Charter Communications Holdings LLC sr. notes 8 5/8s, 2009 2,309,100 150,000 Charter Communications Holdings LLC bank term loan FRN 8.518s, 2008 150,000 210,000 Classic Cable, Inc. company guaranty 10 1/2s, 2010 178,500 1,600,000 CSC Holdings, Inc. sr. sub notes 9 7/8s, 2006 1,640,000 2,700,000 Diamond Cable Communication Co. sr. disc. notes stepped-coupon zero % (10 3/4s, 2/15/02), 2007 (United Kingdom) (STP) 2,072,250 860,000 NTL Communications Corp. 144A sr. notes 11 7/8s, 2010 842,800 1,130,000 NTL Communications Corp. sr. notes Ser. B, 11 1/2s, 2008 1,098,925 560,000 Supercanal Holdings S.A. 144A sr. notes 11 1/2s, 2005 (In default) (Argentina) (NON) 235,200 1,200,000 TeleWest Communications PLC 144A sr. disc. notes stepped-coupon zero % (11 3/8s, 2/1/05), 2010 (United Kingdom) (STP) 636,000 150,000 TeleWest Communications PLC deb. stepped-coupon zero % (11s, 10/1/00), 2007 (United Kingdom) (STP) 143,250 410,000 TeleWest Communications PLC structured note 10 7/8s, 2005 (issued by DLJ International Capital) (United Kingdom) 421,480 610,000 TeleWest Communications PLC 144A 9 7/8s, 2010 561,200 90,000 TeleWest Communications PLC sr. disc. notes stepped-coupon zero % (9.25s, 4/15/04), 2009 (United Kingdom) (STP) 47,700 1,270,000 United Pan-Europe N.V. sr. disc. notes stepped-coupon zero % (13 3/4s, 2/01/05), 2010 (Netherlands) (STP) 584,200 1,090,000 United Pan-Europe N.V. sr. discount notes Ser. B, 12 1/2s, 2009 (Netherlands) 523,200 890,000 United Pan-Europe N.V. sr. notes 10 7/8s, 2009 (Netherlands) 754,275 560,000 Williams Communications Group, Inc. 144A sr. notes 11.7s, 2008 543,200 ------------- 13,855,400 Chemicals (1.7%) ------------------------------------------------------------------------------------------------------------------- 1,430,000 Geo Specialty Chemicals, Inc. sr. sub. notes 10 1/8s, 2008 1,258,400 635,000 Huntsman Corp. 144A sr. sub. notes 9 1/2s, 2007 546,100 600,000 Huntsman Corp. 144A sr. sub. notes 9 1/2s, 2007 522,000 2,070,000 Huntsman ICI Chemicals, Inc. company guaranty 10 1/8s, 2009 2,038,950 450,000 ISP Holdings, Inc. sr. notes Ser. B, 9 3/4s, 2002 439,875 390,000 Lyondell Petrochemical Co. sr. sub. notes 10 7/8s, 2009 378,300 1,700,000 Lyondell Petrochemical Co. sec. notes Ser. B, 9 7/8s, 2007 1,666,000 590,000 Lyondell Petrochemical Co. notes Ser. A, 9 5/8s, 2007 578,200 2,000,000 PCI Chemicals & Pharmaceuticals company guaranty 9 1/4s, 2007 (India) 990,000 466,000 Pioneer Americas Acquisition 144A sr. notes 9 1/4s, 2007 298,240 120,000 Polymer Group, Inc. company guaranty Ser. B, 9s, 2007 96,000 580,000 Polymer Group, Inc. company guaranty Ser. B, 8 3/4s, 2008 458,200 357,928 Polytama International notes 11 1/4s, 2007 (In default ) (Indonesia) (NON) 29,100 810,000 Royster-Clark, Inc. 1st mtge. 10 1/4s, 2009 607,500 325,000 Sterling Chemicals Holdings sr. disc. notes stepped- coupon zero % (13 1/2s, 8/15/01), 2008 (STP) 130,000 680,000 Sterling Chemicals, Inc. company guaranty Ser. B, 12 3/8s, 2006 693,600 720,000 Sterling Chemicals, Inc. sr. sub. notes 11 3/4s, 2006 504,000 220,000 Sterling Chemicals, Inc. sr. sub. notes Ser. A, 11 1/4s, 2007 149,600 200,000 Texas Petrochemical Corp. sr. sub. notes Ser. B, 11 1/8s, 2006 170,000 830,000 Trikem S.A. 144A bonds 10 5/8s, 2007 (Brazil) 651,550 ------------- 12,205,615 Coal (--%) ------------------------------------------------------------------------------------------------------------------- 1,030,000 Lodestar Holdings, Inc. company guaranty 11 1/2s, 2005 144,200 Commercial and Consumer Services (0.3%) ------------------------------------------------------------------------------------------------------------------- 1,170,000 Coinmach Corp. sr. notes Ser. D, 11 3/4s, 2005 1,170,000 485,000 GS Superhighway Holdings sr. notes 10 1/4s, 2007 (China) 344,332 790,000 GS Superhighway Holdings sr. notes 9 7/8s, 2004 (China) 576,700 ------------- 2,091,032 Communications Equipment (--%) ------------------------------------------------------------------------------------------------------------------- 30,000 USA Mobile Communication, Inc. sr. notes 9 1/2s, 2004 22,050 Computers (0.1%) ------------------------------------------------------------------------------------------------------------------- 885,000 Unisys Corp. sr. notes 11 3/4s, 2004 935,888 Construction (0.4%) ------------------------------------------------------------------------------------------------------------------- 1,390,000 Better Minerals & Aggregates Co. company guaranty 13s, 2009 1,292,700 850,000 Republic Group, Inc. sr. sub. notes 9 1/2s, 2008 841,500 980,000 Washington Group, Intl. 144A company guaranty 11s, 2010 1,004,500 ------------- 3,138,700 Consumer (0.1%) ------------------------------------------------------------------------------------------------------------------- 710,000 Home Interiors & Gifts, Inc. company guaranty 10 1/8s, 2008 212,113 810,000 Samsonite Corp. sr. sub. notes 10 3/4s, 2008 639,900 ------------- 852,013 Consumer Finance (0.2%) ------------------------------------------------------------------------------------------------------------------- 1,090,000 Contifinancial Corp. sr. notes 8 3/8s, 2003 (In default) (NON) 152,600 1,340,000 Contifinancial Corp. sr. notes 8 1/8s, 2008 (In default) (NON) 187,600 1,320,000 Contifinancial Corp. sr. notes 7 1/2s, 2002 (In default) (NON) 184,800 150,000 Finova Capital Corp. sr. notes 7 5/8s, 2009 104,250 565,000 Outsourcing Solutions, Inc. sr. sub. notes Ser. B, 11s, 2006 480,250 ------------- 1,109,500 Consumer Goods (0.3%) ------------------------------------------------------------------------------------------------------------------- 320,000 French Fragrances, Inc. company guaranty Ser. D, 10 3/8s, 2007 312,000 180,000 French Fragrances, Inc. sr. notes Ser. B, 10 3/8s, 2007 179,100 500,000 Leiner Health Products sr. sub. notes 9 5/8s, 2007 215,000 1,370,000 NBTY, Inc. 144A sr. sub. notes 8 5/8s, 2007 1,171,350 460,000 Revlon Consumer Products sr. notes 9s, 2006 331,200 270,000 Revlon Consumer Products sr. notes 8 1/8s, 2006 191,700 ------------- 2,400,350 Consumer Staples (--%) ------------------------------------------------------------------------------------------------------------------- 570,000 Doskcil Manufacturing Co., Inc. sr. sub. notes 10 1/8s, 2007 193,800 Containers (1.3%) ------------------------------------------------------------------------------------------------------------------- 1,100,000 AEP Industries, Inc. sr. sub. notes 9 7/8s, 2007 929,500 2,210,000 Huntsman Packaging Corp. bank term loan FRN 9.72s, 2008 2,154,750 410,000 Huntsman Packaging Corp. 144A company guaranty 13s, 2010 358,750 127,779 Jefferson Smurfit bank term loan FRN 8.65s, 2006 127,779 550,000 Owens-Illinois, Inc. sr. notes 7.35s, 2008 473,732 1,110,000 Owens-Illinois, Inc. sr. notes 7.15s, 2005 1,014,684 100,000 Radnor Holdings, Inc. sr. notes 10s, 2003 89,000 207,000 Stone Container Corp. sr. sub. notes 12 1/4s, 2002 209,070 310,000 Stone Container 144A company guaranty 11 1/2s, 2006 (Canada) 318,525 903,500 Stone Container bank term loan FRN 10.105s, 2006 (Canada) 903,500 1,094,261 Stone Container bank term loan FRN 9 3/8s, 2006 (Canada) 1,091,525 1,360,000 Tekni-Plex, Inc. 144A sr. sub. notes 12 3/4s, 2010 1,339,600 ------------- 9,010,415 Distribution (0.1%) ------------------------------------------------------------------------------------------------------------------- 990,000 RAB Enterprises, Inc. company guaranty 10 1/2s, 2005 792,000 Electric Utilities (0.6%) ------------------------------------------------------------------------------------------------------------------- 800,000 AES China Generating Co. sr. notes 10 1/8s, 2006 (China) 560,000 270,000 CMS Energy Corp. sr. notes 7 1/2s, 2009 241,064 1,700,000 CMS Energy Corp. sr. notes Ser. B, 6 3/4s, 2004 1,589,500 869,216 Northeast Utilities System notes Ser. A, 8.58s, 2006 884,210 246,400 Northeast Utilities System notes Ser. B, 8.38s, 2005 247,068 1,290,000 Panda Global Energy Co. company guaranty 12 1/2s, 2004 (China) 580,500 ------------- 4,102,342 Energy (0.8%) ------------------------------------------------------------------------------------------------------------------- 1,710,000 AES Corp. sr. notes 9 3/8s, 2010 1,735,650 1,000,000 Cliffs Drilling Co. company guaranty Ser. D, 10 1/4s, 2003 1,030,000 580,000 Leviathan Gas Corp. company guaranty Ser. B, 10 3/8s, 2009 611,900 590,000 Parker Drilling Co. company guaranty Ser. D, 9 3/4s, 2006 594,425 1,440,000 RBF Finance Co. company guaranty 11 3/8s, 2009 1,663,200 ------------- 5,635,175 Entertainment (0.7%) ------------------------------------------------------------------------------------------------------------------- 180,000 AMC Entertainment, Inc. sr. sub. notes 9 1/2s, 2011 82,800 690,000 AMC Entertainment, Inc. sr. sub. notes 9 1/2s, 2009 317,400 920,000 Autotote Corp. 144A company guaranty 12 1/2s, 2010 933,800 1,600,000 Cinemark USA, Inc. sr. sub. notes 8 1/2s, 2008 (Mexico) 768,000 2,775,000 Premier Parks, Inc. sr. notes 9 1/4s, 2006 2,584,219 1,480,000 Regal Cinemas, Inc. sr. sub. notes 9 1/2s, 2008 177,600 640,000 Regal Cinemas, Inc. sr. sub. notes 8 7/8s, 2010 70,400 800,000 Silver Cinemas, Inc. sr. sub. notes 10 1/2s, 2005 (In default) (NON) 64,000 1,475,000 United Artists Theatre sr. sub. notes 9 3/4s, 2008 (In default) (NON) 25,813 586,000 United Artists Theatre 144A notes, FRN, 10.415s, 2007 (In default) (NON) 11,720 ------------- 5,035,752 Financial (0.9%) ------------------------------------------------------------------------------------------------------------------- 640,000 Aames Financial Corp. sr. notes 9 1/8s, 2003 328,000 1,270,000 Advanta Corp. med. term notes Ser. B, 7s, 2001 1,211,948 1,060,000 Advanta Corp. med. term notes Ser. D, 6.92s, 2002 949,113 820,000 AMRESCO, Inc. sr. sub. notes Ser. 97-A, 10s, 2004 369,000 240,000 AMRESCO, Inc. sr. sub. notes Ser. 98-A, 9 7/8s, 2005 108,000 700,000 Conseco Financial Corp. sr. sub. notes 10 1/4s, 2002 525,000 1,380,000 Delta Financial Corp. sr. notes 9 1/2s, 2004 621,000 950,000 Imperial Credit Capital Trust I 144A company guaranty 10 1/4s, 2002 617,500 125,000 Imperial Credit Industries, Inc. sr. notes 9 7/8s, 2007 68,750 420,000 Nationwide Credit, Inc. sr. notes Ser. A, 10 1/4s, 2008 264,600 620,000 Ocwen Federal Bank sub. deb. 12s, 2005 570,400 500,000 Ocwen Financial Corp. notes 11 7/8s, 2003 451,250 760,000 Resource America, Inc. 144A sr. notes 12s, 2004 691,600 ------------- 6,776,161 Food (0.4%) ------------------------------------------------------------------------------------------------------------------- 120,000 Archibald Candy Corp. company guaranty 10 1/4s, 2004 69,600 65,000 Aurora Foods, Inc. sr. sub. notes Ser. B, 9 7/8s, 2007 51,025 730,000 Aurora Foods, Inc. sr. sub. notes Ser. D, 9 7/8s, 2007 573,050 1,370,000 Doane Pet Care Co. sr. sub. notes 9 3/4s, 2007 1,185,050 380,000 Eagle Family Foods company guaranty Ser. B, 8 3/4s, 2008 201,400 190,000 Premier International Foods PLC sr. notes 12s, 2009 (United Kingdom) 157,700 735,000 Vlasic Foods Intl., Inc. sr. sub notes Ser. B, 10 1/4s, 2009 404,250 ------------- 2,642,075 Gaming & Lottery (2.0%) ------------------------------------------------------------------------------------------------------------------- 270,000 Ameristar Casinos, Inc. company guaranty Ser. B, 10 1/2s, 2004 270,675 720,000 Fitzgeralds Gaming Corp. company guaranty Ser. B, 12 1/4s, 2004 (In default) (NON) 388,800 270,000 Harrahs Entertainment, Inc. company guaranty 7 1/2s, 2009 254,416 1,360,000 Hollywood Casino Corp. company guaranty 11 1/4s, 2007 1,424,600 510,000 Hollywood Park, Inc. company guaranty Ser. B, 9 1/4s, 2007 520,200 1,710,000 International Game Technology sr. notes 7 7/8s, 2004 1,662,975 70,000 International Game Technology sr. notes 8 3/8s, 2009 68,600 1,220,000 Isle of Capri Black Hawk LLC company guaranty 8 3/4s, 2009 1,134,600 150,000 Isle of Capri Black Hawk LLC 144A 1st mortgage Ser. B, 13s, 2004 163,500 830,000 Mirage company guaranty 9 3/4s, 2007 856,975 800,000 Mohegan Tribal Gaming, Auth. sr. sub. notes 8 3/4s, 2009 794,000 330,000 Mohegan Tribal Gaming, Auth. sr. notes 8 1/8s, 2006 321,750 590,000 Park Place Entertainment sr. sub. notes 8 7/8s, 2008 584,100 80,000 Park Place Entertainment sr. sub. notes 9 3/8s, 2007 81,500 3,310,000 Trump Atlantic City 1st mtge. 11 1/4s, 2006 2,292,175 2,430,000 Trump Castle Funding 144A sub. notes 10 1/4s, 2003 2,430,000 100,000 Trump Castle Funding mortgage 11 3/4s, 2003 83,500 850,000 Venetian Casino, Inc. company guaranty 12 1/4s, 2004 875,500 ------------- 14,207,866 Health Care (1.6%) ------------------------------------------------------------------------------------------------------------------- 340,000 ALARIS Medical Systems, Inc. company guaranty 9 3/4s, 2006 248,200 330,000 Bio-Rad Labs sr. sub. notes 11 5/8s, 2007 346,500 1,500,000 Columbia/HCA Healthcare Corp. med. term notes 8.85s, 2007 1,503,750 600,000 Columbia/HCA Healthcare Corp. notes 6.91s, 2005 564,000 2,310,000 Conmed Corp. company guaranty 9s, 2008 1,940,400 560,000 HCA-The Healthcare Co. notes 8 3/4s, 2010 567,511 660,000 Hudson Respiratory Care, Inc. sr. sub. notes 9 1/8s, 2008 462,000 290,000 Kinetic Concepts, Inc. company guaranty Ser. B, 9 5/8s, 2007 223,300 680,000 Lifepoint Hospital Holdings company guaranty Ser. B, 10 3/4s, 2009 714,000 510,000 Magellan Health Services sr. sub. notes 9s, 2008 336,600 862,829 Magellan Health Services bank term loan FRN 8s, 2005 776,546 760,000 Mediq, Inc. company guaranty 11s, 2008 (In default) (NON) 22,800 560,000 Mediq, Inc. deb. stepped-coupon zero % (13s, 6/1/03), 2009 (STP) 56 815,000 Paracelsus Healthcare sr. sub. notes 10s, 2006 (In default) (NON) 326,000 370,000 Tenet Healthcare Corp. sr. sub. notes 8 5/8s, 2007 364,450 230,000 Tenet Healthcare Corp. sr. notes 8 5/8s, 2003 231,150 500,000 Tenet Healthcare Corp. sr. notes Ser. B, 8 1/8s, 2008 476,875 1,370,000 Tenet Healthcare Corp. sr. notes Ser. B, 7 5/8s, 2008 1,291,225 960,000 Triad Hospitals Holdings company guaranty Ser. B, 11s, 2009 984,000 ------------- 11,379,363 Homebuilding (0.5%) ------------------------------------------------------------------------------------------------------------------- 540,000 D.R. Horton, Inc. company guaranty 8s, 2009 504,225 140,000 Del Webb Corp. sr. sub. deb. 10 1/4s, 2010 135,100 280,000 Del Webb Corp. sr. sub. deb. 9 3/8s, 2009 257,600 670,000 K. Hovnanian Enterprises 144A company guaranty 10 1/2s, 2007 655,763 130,000 Lennar Corp. company guaranty Ser. B, 9.95s, 2010 133,900 350,000 Lennar Corp. sr. notes 7 5/8s, 2009 322,000 590,000 Ryland Group sr. notes 9 3/4s, 2010 597,375 570,000 Standard Pacific Corp. sr. notes 9 1/2s, 2010 571,425 520,000 Toll Corp. company guaranty 8 1/8s, 2009 492,700 ------------- 3,670,088 Household Furniture & Appliances (0.3%) ------------------------------------------------------------------------------------------------------------------- 830,000 Albecca, Inc. company guaranty 10 3/4s, 2008 749,075 1,000,000 Sealy Mattress Co. company guaranty stepped-coupon Ser. B, zero % (10 7/8s, 12/15/02), 2007 (STP) 745,000 410,000 Sealy Mattress Co. sr. sub. notes Ser. B, 9 7/8s, 2007 396,675 ------------- 1,890,750 Lodging/Tourism (0.6%) ------------------------------------------------------------------------------------------------------------------- 720,000 Epic Resorts LLC company guaranty Ser. B, 13s, 2005 216,000 220,000 HMH Properties, Inc. sr. notes Ser. C, 8.45s, 2008 210,100 1,665,000 HMH Properties, Inc. company guaranty Ser. B, 7 7/8s, 2008 1,535,963 1,000,000 Starwood Hotels & Resorts bank term loan FRN 8.763s, 2003 1,002,500 150,000 Starwood Hotels & Resorts notes 6 3/4s, 2003 144,135 1,330,000 Starwood Hotels & Resorts notes 6 3/4s, 2005 1,241,462 ------------- 4,350,160 Manufacturing (1.2%) ------------------------------------------------------------------------------------------------------------------- 1,410,000 Blount, Inc. company guaranty 13s, 2009 1,448,775 1,216,372 Blount, Inc. bank term loan FRN 9.315s, 2006 1,220,934 210,000 Continental Global Group sr. notes Ser. B, 11s, 2007 69,300 1,210,000 Flextronics International Ltd. 144A sr. sub. notes 9 7/8s, 2010 1,252,350 920,000 Flowserve Corp. 144A company guaranty 12 1/4s, 2010 943,000 1,140,000 Motors and Gears, Inc. sr. notes Ser. D, 10 3/4s, 2006 1,117,200 320,000 Roller Bearing Co. company guaranty Ser. B, 9 5/8s, 2007 294,400 1,995,000 Transportation Tech bank term loan FRN 9.859s, 2007 1,980,038 ------------- 8,325,997 Medical Services (0.1%) ------------------------------------------------------------------------------------------------------------------- 1,000,000 Extendicare Health Services, Inc. company guaranty 9.35s, 2007 580,000 1,000,000 Integrated Health Services, Inc. sr. sub. notes Ser. A, 9 1/2s, 2007 (In default) (NON) 10,000 380,000 Integrated Health Services, Inc. sr. sub. notes Ser. A, 9 1/4s, 2008 (In default) (NON) 3,800 1,480,000 Mariner Post-Acute Network, Inc. sr. sub. notes Ser. B, 9 1/2s, 2007 (In default) (NON) 11,100 310,000 Mariner Post-Acute Network, Inc. sr. sub. notes stepped-coupon Ser. B, zero % (10 1/2s, 11/1/02), 2007 (In default) (STP) (NON) 2,325 1,590,000 Multicare Cos., Inc. sr. sub. notes 9s, 2007 (In default) (NON) 87,450 240,000 Service Corp. International notes 6s, 2005 136,200 1,005,000 Sun Healthcare Group, Inc. sr. sub. notes Ser. B, 9 1/2s, 2007 (In default) (NON) 20,100 500,000 Sun Healthcare Group, Inc. 144A sr. sub. notes 9 3/8s, 2008 (In default) (NON) 10,625 ------------- 861,600 Medical Technology (--%) ------------------------------------------------------------------------------------------------------------------- 360,000 Hanger Orthopedic Group sr. sub. notes 11 1/4s, 2009 322,200 Metals (0.9%) ------------------------------------------------------------------------------------------------------------------- 440,000 AK Steel Corp. company guaranty 7 7/8s, 2009 393,800 171,400 Anker Coal Group, Inc. company guaranty Ser. B, 14 1/4s, 2007 (PIK) 77,130 1,000,000 Armco, Inc. sr. notes 9s, 2007 960,000 935,000 Kaiser Aluminum & Chemical Corp. sr. sub. notes 12 3/4s, 2003 832,150 60,000 Kaiser Aluminum & Chemical Corp. sr. notes Ser. B, 10 7/8s, 2006 59,100 110,000 Kaiser Aluminum & Chemical Corp. sr. notes 9 7/8s, 2002 107,800 1,410,000 LTV Corp. company guaranty 11 3/4s, 2009 733,200 1,310,000 National Steel Corp. 1st mtge. Ser. D, 9 7/8s, 2009 786,000 348,000 Oregon Steel Mills 1st mortgage 11s, 2003 278,400 996,667 UCAR Global bank term loan FRN 8.663s, 2008 976,733 550,000 WCI Steel, Inc. sr. notes Ser. B, 10s, 2004 495,000 70,000 Weirton Steel Corp. sr. notes 10 3/4s, 2005 56,350 780,000 Wheeling-Pittsburgh Steel Corp. sr. notes 9 1/4s, 2007 273,000 490,000 WHX Corp. sr. notes 10 1/2s, 2005 271,950 ------------- 6,300,613 Oil & Gas (1.3%) ------------------------------------------------------------------------------------------------------------------- 1,350,000 Belco Oil & Gas Corp. company guaranty Ser. B, 10 1/2s, 2006 1,353,375 410,000 Belco Oil & Gas Corp. sr. sub. notes Ser. B, 8 7/8s, 2007 387,450 440,000 Giant Industries Corp. company guaranty 9s, 2007 405,900 110,000 Gulf Canada Resources, Ltd. sr. sub. notes 9 5/8s, 2005 (Canada) 112,888 840,000 HS Resources, Inc. company guaranty 9 1/4s, 2006 846,300 960,000 Nuevo Energy Co. sr. sub. notes Ser. B, 9 1/2s, 2008 962,400 790,000 Ocean Energy, Inc. company guaranty Ser. B, 8 7/8s, 2007 797,900 870,000 Ocean Energy, Inc. company guaranty Ser. B, 8 3/8s, 2008 865,650 330,000 Pioneer Natural Resources Co. company guaranty 9 5/8s, 2010 349,800 90,000 Port Arthur Finance Corp. company guaranty 12 1/2s, 2009 90,000 270,000 Seven Seas Petroleum sr. notes Ser. B, 12 1/2s, 2005 64,800 580,000 Snyder Oil Corp. sr. sub. notes 8 3/4s, 2007 593,537 230,000 Stone Energy Corp. company guaranty 8 3/4s, 2007 219,650 740,000 Triton Energy, Ltd. 144A sr. notes 8 7/8s, 2007 (Cayman Islands) 740,000 740,000 Vintage Petroleum sr. sub. notes 9 3/4s, 2009 773,300 500,000 Vintage Petroleum sr. sub. notes 9s, 2005 505,000 500,000 XCL, Ltd. 144A company guaranty 13 1/2s, 2004 (In default) (NON) 90,000 500,000 XCL Ltd. units sr. sec. notes 13 1/2s, 2004 (In default) (NON) 90,000 ------------- 9,247,950 Paper & Forest Products (1.8%) ------------------------------------------------------------------------------------------------------------------- 1,150,000 APP China Group, Ltd. 144A sr. disc. notes 14s, 2010 (Bermuda) 563,500 830,000 Doman Industries, Ltd. company guaranty 12s, 2004 (Canada) 842,450 1,025,000 Doman Industries, Ltd. 144A 8 3/4s, 2004 (Canada) 738,000 300,000 Four M Corp. sr. notes Ser. B, 12s, 2006 285,750 820,000 Gaylord Container Corp. sr. sub. notes 9 7/8s, 2008 369,000 160,000 Gaylord Container Corp. sr. notes Ser. B, 9 3/8s, 2007 107,200 1,295,000 Indah Kiat Financial Mauritius, Ltd. company guaranty 10s, 2007 (Indonesia) 634,550 1,370,000 Pacifica Papers, Inc. sr. notes 10s, 2009 (Canada) 1,376,850 490,000 Packaging Corp. company guaranty 9 5/8s, 2009 494,900 1,620,000 Pindo Deli Finance Mauritius, Ltd. company guaranty 10 3/4s, 2007 (Indonesia) 793,800 1,925,000 PT Pabrik Kertas Tjiwi Kimia company guaranty 10s, 2004 (Indonesia) 1,039,500 1,933,000 Repap New Brunswick sr. notes 10 5/8s, 2005 (Canada) 1,990,990 2,480,000 Riverwood International Corp. company guaranty 10 7/8s, 2008 2,306,400 990,000 Tembec Industries, Inc. company guaranty 8 5/8s, 2009 (Canada) 965,250 ------------- 12,508,140 Pharmaceuticals (0.3%) ------------------------------------------------------------------------------------------------------------------- 890,000 ICN Pharmaceuticals, Inc. 144A sr. notes 9 1/4s, 2005 883,325 890,000 ICN Pharmaceuticals, Inc. 144A sr. notes 8 3/4s, 2008 881,100 80,000 ICN Pharmaceuticals, Inc. 144A sr. notes 8 3/4s, 2008 79,200 ------------- 1,843,625 Power Producers (1.0%) ------------------------------------------------------------------------------------------------------------------- 390,000 Calpine Corp. sr. notes 10 1/2s, 2006 401,700 170,000 Calpine Corp. sr. notes 9 1/4s, 2004 169,978 460,000 Calpine Corp. sr. notes 8 3/4s, 2007 462,525 260,000 Calpine Corp. sr. notes 7 7/8s, 2008 249,363 30,000 Calpine Corp. sr. notes 7 3/4s, 2009 28,538 730,000 Midland Funding II Corp. deb. Ser. B, 13 1/4s, 2006 821,360 3,420,000 Midland Funding II Corp. deb. Ser. A, 11 3/4s, 2005 3,697,875 1,119,000 York Power Funding 144A notes 12s, 2007 (Cayman Islands) 1,130,190 ------------- 6,961,529 Publishing (0.6%) ------------------------------------------------------------------------------------------------------------------- 1,665,000 Affinity Group Holdings sr. notes 11s, 2007 1,381,950 561,900 Big Flower Holdings bank term loan FRN 9.004s, 2010 560,495 750,000 Garden State Newspapers, Inc. sr. sub. notes Ser. B, 8 3/4s, 2009 701,250 1,450,000 Garden State Newspapers, Inc. sr. sub. notes 8 5/8s, 2011 1,334,000 ------------- 3,977,695 Railroads (0.2%) ------------------------------------------------------------------------------------------------------------------- 740,000 Kansas City Southern Railway 144A sr. notes 9 1/2s, 2008 751,100 1,335,000 TFM S.A. de C.V. company guaranty stepped-coupon zero % (11 3/4s, 6/15/02), 2009 (Mexico) (STP) 1,011,263 ------------- 1,762,363 Restaurants (0.3%) ------------------------------------------------------------------------------------------------------------------- 560,000 Felcor Lodging 144A sr. notes 9 1/2s, 2008 561,400 810,000 FRD Acquisition Co. sr. notes Ser. B, 12 1/2s, 2004 376,650 600,000 Sbarro, Inc. company guaranty 11s, 2009 618,000 700,000 Tricon Global Restaurants, Inc. sr. notes 7.65s, 2008 653,674 ------------- 2,209,724 Retail (1.0%) ------------------------------------------------------------------------------------------------------------------- 1,300,000 Amazon.com, Inc. sr. disc. notes stepped-coupon zero % (10s, 5/1/03), 2008 (STP) 689,000 1,055,000 Groupo Elektra S.A. de C.V. 144A sr. notes 12s, 2008 (Mexico) 1,020,713 400,000 Iron Age Corp. company guaranty 9 7/8s, 2008 280,000 30,000 Iron Age Holdings Corp. sr. disc. notes stepped-coupon zero % (12 1/8s, 5/1/03), 2009 (STP) 4,500 1,730,000 K mart Corp. notes 8 3/8s, 2004 1,486,606 790,000 Mothers Work, Inc. sr. notes 12 5/8s, 2005 726,800 2,610,000 Saks, Inc. company guaranty 8 1/4s, 2008 1,566,000 200,000 Southland Corp. deb. Ser. A, 4 1/2s, 2004 165,000 1,437,000 Southland Corp. deb. 4s, 2004 1,171,155 ------------- 7,109,774 Semiconductor (--%) ------------------------------------------------------------------------------------------------------------------- 270,000 ChipPac Intl., Ltd. 144A company guaranty Ser. B, 12 3/4s, 2009 286,200 Shipping (0.3%) ------------------------------------------------------------------------------------------------------------------- 65,000 International Shipholding Corp. sr. notes 9s, 2003 65,000 240,000 International Shipholding Corp. sr. notes 7 3/4s, 2007 208,800 250,000 Kitty Hawk, Inc. company guaranty 9.95s, 2004 (In default) (NON) 142,500 840,000 Pegasus Shipping stepped-coupon zero % (14 1/2s, 12/20/03), 2008 (STP) 37,800 1,790,000 Navistar International Corp. sr. notes Ser. B, 8s, 2008 1,654,562 200,000 Transportacion Maritima Mexicana S.A. de C.V. notes 9 1/4s, 2003 (Mexico) 162,000 ------------- 2,270,662 Software (--%) ------------------------------------------------------------------------------------------------------------------- 410,000 Telehub Communications Corp. company guaranty stepped-coupon zero % (13 7/8s, 7/31/02), 2005 (STP) 73,800 Specialty Printing (0.2%) ------------------------------------------------------------------------------------------------------------------- 1,390,000 Perry-Judd company guaranty 10 5/8s, 2007 1,237,100 88,444 Von Hoffman Press, Inc. 144A sr. sub. notes 13 1/2s, 2009 79,600 100,000 Von Hoffman Press, Inc. 144A sr. sub. notes 10 3/8s, 2007 92,000 ------------- 1,408,700 Technology (1.0%) ------------------------------------------------------------------------------------------------------------------- 390,000 Amkor Technologies, Inc., structured note 12.58s, 2005 (issued by Steers, Credit Linked Trust 2000) 390,975 360,000 Amkor Technologies, Inc. sr. notes 9 1/4s, 2006 356,400 905,000 Celestica International, Ltd. 144A sr. sub. notes 10 1/2s, 2006 (Canada) 932,150 20,000 Fairchild Semiconductor Corp. company guaranty 10 3/8s, 2007 20,200 1,375,000 Fairchild Semiconductor Corp. sr. sub. notes 10 1/8s, 2007 1,375,000 745,000 Flextronics International, Ltd. sr. sub. notes Ser. B, 8 3/4s, 2007 730,100 1,645,000 Telecommunications Techniques, Inc. company guaranty 9 3/4s, 2008 1,546,300 370,000 U.S. Can Corp. 144A sr. sub. notes 12 3/8s, 2010 373,700 1,400,000 Viasystems, Inc. sr. notes Ser. B, 9 3/4s, 2007 1,274,000 320,000 Viasystems, Inc. sr. sub notes 9 3/4s, 2007 300,800 ------------- 7,299,625 Technology Services (1.2%) ------------------------------------------------------------------------------------------------------------------- 1,066,667 American Cellular Corp. bank term loan FRN 8.941s, 2008 1,066,667 933,333 American Cellular Corp. bank term loan FRN 9.609s, 2008 933,333 970,000 Covad Communications Group, Inc. sr. notes 12 1/2s, 2009 732,350 670,000 Equinix, Inc. sr. notes 13s, 2007 536,000 390,000 Exodus Communications, Inc. sr. notes 10 3/4s, 2009 377,325 1,570,000 Exodus Communications, Inc. 144A sr. notes 11 5/8s, 2010 1,577,850 360,000 Globix Corp. sr. notes 12 1/2s, 2010 259,200 1,320,000 Iron Mountain, Inc. company guaranty 8 3/4s, 2009 1,280,400 700,000 Pierce Leahy Corp. sr. sub. notes 11 1/8s, 2006 724,500 530,000 PSINet, Inc. sr. notes 11 1/2s, 2008 352,450 560,000 PSINet, Inc. sr. notes 11s, 2009 364,000 530,000 Rhythms Netconnections sr. notes Ser. B, 14s, 2010 349,800 ------------- 8,553,875 Telecommunications (5.4%) ------------------------------------------------------------------------------------------------------------------- 730,000 360Networks, Inc. 144A sr. notes 13s, 2008 (Canada) 678,900 100,000 Motient Corp. company guaranty Ser. B, 12 1/4s, 2008 74,500 440,000 Arch Communications Group sr. disc. notes stepped- coupon zero % (10 7/8s, 3/15/01), 2008 (STP) 223,300 875,000 Barak I.T.C. sr. disc. notes stepped-coupon Ser. B, zero % (12 1/2s, 11/15/02), 2007 (Israel) (STP) 472,500 480,000 Bestel S.A. de C.V. sr. disc. notes stepped-coupon zero % (12 3/4s, 5/15/03), 2005 (Mexico) (STP) 314,400 400,000 Call-Net Enterprises, Inc. sr. notes 8s, 2008 (Canada) 160,000 670,000 Carrier1 Intl. SA sr. notes Ser. B, 13 1/4s, 2009 (Luxembourg) 589,600 1,780,000 Celcaribe SA sr. notes stepped-coupon zero % (13 1/2s, 3/15/04), 2004 (STP) 1,352,800 4,238,000 CellNet Data Systems, Inc. sr. disc. notes stepped-coupon zero % (14s, 10/1/02), 2007 (In default) (STP) (NON) 296,660 90,000 Clearnet Communications, Inc. sr. disc. notes stepped- coupon zero % (14 3/4s, 12/15/00), 2005 (STP) 94,500 1,000,000 Clearnet Racers notes Ser. 00-17A, 9.709s, 2007 995,000 740,000 Crown Castle Intl., Corp. sr. notes 10 3/4s, 2011 747,400 200,000 Dobson Communications Corp. sr. notes 10 7/8s, 2010 195,000 940,000 Dobson/Sygnet Communications, Inc. sr. notes 12 1/4s, 2008 944,700 1,500,000 Econophone, Inc. company guaranty 13 1/2s, 2007 930,000 535,000 Esprit Telecom Group PLC sr. notes 11 1/2s, 2007 (United Kingdom) 250,113 220,000 Exodus Communications, Inc. sr. notes 11 1/4s, 2008 216,700 880,000 Flag Ltd. 144A sr. notes 8 1/4s, 2008 (Bermuda) 774,400 1,150,000 Global Crossing Holdings, Ltd. company guaranty 9 5/8s, 2008 (Bermuda) 1,147,125 130,000 Global Crossing Holdings, Ltd. company guaranty 9 1/2s, 2009 (Bermuda) 129,350 990,000 Global Crossing Holdings, Ltd. company guaranty 9 1/8s, 2006 (Bermuda) 977,625 585,000 Grupo Iusacell S.A. de C.V. sr. notes 14 1/4s, 2006 (Mexico) 621,563 790,000 Innova S De R.L. sr. notes 12 7/8s, 2007 (Mexico) 750,500 710,000 Intira Corp. bonds 13s, 2010 369,200 550,000 Level 3 Communications, Inc. sr. notes 11 1/4s, 2010 530,750 700,000 Level 3 Communications, Inc. sr. notes 11s, 2008 679,000 440,000 Level 3 Communication, Inc. sr. notes 9 1/8s, 2008 379,500 330,000 Loral Space & Communication, Ltd. sr. notes 9 1/2s, 2006 239,250 1,040,000 Maxcom Telecomunicacione 144A sr. notes 13 3/4s, 2007 (Mexico) 587,600 220,000 Metrocall, Inc. sr. sub. notes 11s, 2008 147,400 180,000 Metrocall, Inc. sr. sub. notes 10 3/8s, 2007 111,600 190,000 Metrocall, Inc. sr. sub. notes 9 3/4s, 2007 125,875 740,000 Metromedia Fiber Network, Inc. sr. notes 10s, 2009 691,900 1,160,000 Metromedia Fiber Network, Inc. sr. notes Ser. B, 10s, 2008 1,084,600 1,971,000 Millicom International Cellular S.A. sr. disc. notes stepped-coupon zero % (13 1/2s, 6/1/01), 2006 (Luxembourg) (STP) 1,695,060 1,180,000 Nextel Communications, Inc. sr. notes 12s, 2008 1,262,600 4,690,000 Nextel Communications, Inc. sr. notes 9 3/8s, 2009 4,596,200 1,770,000 Nextel International, Inc. 144A sr. notes 12 3/4s, 2010 1,752,300 890,000 Nextel Partners, Inc. sr. notes 11s, 2010 894,450 690,000 Nextel Partners, Inc. 144A sr. notes 11s, 2010 690,000 610,000 NorthEast Optic Network, Inc. sr. notes 12 3/4s, 2008 524,600 520,000 NorthPoint Communications Group, Inc. sr. notes 12 7/8s, 2010 520,000 620,000 Orbital Imaging Corp. sr. notes Ser. B, 11 5/8s, 2005 229,400 950,000 Pagemart Wireless, Inc. sr. disc. notes stepped-coupon zero % (11 1/4s, 2/1/03), 2008 (STP) 380,000 310,000 Paging Network, Inc. sr. sub. notes 10s, 2008 (In default) (NON) 111,600 90,000 Paging Network, Inc. sr. sub. notes 8 7/8s, 2006 (In default) (NON) 32,400 255,000 Paging Network Do Brasil sr. notes 13 1/2s, 2005 (In default) (Brazil) (NON) 16,575 1,540,000 Pinnacle Holdings, Inc. sr. disc. notes stepped-coupon zero % (10s, 3/15/03), 2008 (STP) 1,108,800 645,000 Price Communications Wireless, Inc. 144A sr. notes 9 1/8s, 2006 645,000 970,000 Primus Telecommunications Group, Inc. sr. notes Ser. B, 9 7/8s, 2008 543,200 770,000 RSL Communications company guaranty 12 1/4s, 2006 (Bermuda) 231,000 710,000 RSL Communications PLC company guaranty 12 7/8s, 2010 (United Kingdom) 127,800 450,000 RSL Communications PLC 144A company guaranty 10 1/2s, 2008 (United Kingdom) 114,750 500,000 RSL Communications PLC company guaranty, stepped-coupon zero % (10 1/8s, 3/1/03), 2008 (United Kingdom) (STP) 85,000 70,000 RSL Communications PLC company guaranty 9 1/8s, 2008 (United Kingdom) 17,500 200,000 Satelites Mexicanos S.A. de C.V. 144A sr. notes 10 1/8s, 2004 (Mexico) 125,000 450,000 Spectrasite Holdings, Inc. sr. disc. notes stepped-coupon Ser. B, zero % (12 7/8s, 3/15/05), 2010 (STP) 229,500 310,000 Spectrasite Holdings, Inc. sr. disc. notes stepped-coupon zero % (11 1/4s, 4/15/04), 2009 (STP) 168,950 1,000,000 Startec Global Communications Corp. sr. notes 12s, 2008 800,000 270,000 Viatel, Inc. sr. disc. notes stepped-coupon zero % (12 1/2s, 4/15/03), 2008 (STP) 97,200 1,890,000 Viatel, Inc. sr. notes 11 1/4s, 2008 963,900 1,500,000 Western Wireless bank term loan FRN 8.65s, 2008 1,500,000 440,000 Williams Communications Group, Inc. sr. notes 10 7/8s, 2009 401,500 900,000 World Access, Inc. sr. notes Ser. B, 13 1/4s, 2008 702,000 ------------- 38,449,596 Telephone (2.5%) ------------------------------------------------------------------------------------------------------------------- 760,000 Airgate PCS, Inc. sr. sub. notes stepped-coupon zero % (13 1/2s, 10/1/04), 2009 (STP) 456,000 1,430,000 Alamosa PCS Holdings, Inc. company guaranty stepped- coupon zero % (12 7/8s, 2/15/05), 2010 (STP) 757,900 510,000 Alaska Communications Systems Corp. company guaranty 9 3/8s, 2009 469,200 50,000 Allegiance Telecom, Inc. sr. disc. notes stepped-coupon Ser. B, zero % (11 3/4s, 2/15/03), 2008 (STP) 33,500 90,000 Allegiance Telecom, Inc. sr. notes 12 7/8s, 2008 89,100 460,000 Birch Telecommunications, Inc. sr. notes 14s, 2008 276,000 1,210,000 BTI Telecom Corp. sr. notes 10 1/2s, 2007 701,800 145,000 Covad Communications Group, Inc. sr. disc. notes stepped-coupon Ser. B, zero % (13 1/2s, 03/15/03), 2008 (STP) 66,700 220,000 Covad Communications Group, Inc. sr. notes Ser. B, 12s, 2010 162,800 1,250,000 Firstworld Communication Corp. sr. disc. notes stepped- coupon zero % (13, 4/15/03), 2008 (STP) 300,000 1,110,000 Focal Communications Corp. sr. disc. notes, stepped-coupon Ser. B, zero % (12 1/8s, 02/15/03), 2008 (STP) 555,000 60,000 Focal Communications Corp. sr. notes 11 7/8s, 2010 46,200 10,000 ICG Holdings, Inc. company guaranty stepped-coupon zero % (12 1/2s, 5/1/01), 2006 (STP) 2,000 550,000 Intermedia Communications, Inc. sr. disc. notes stepped- coupon Ser. B, zero % (12 1/4s, 3/1/04), 2009 (STP) 387,750 2,445,000 KMC Telecommunications Holdings, Inc. sr. disc. notes stepped-coupon zero % (12 1/2s, 2/15/03), 2008 (STP) 978,000 1,440,000 Madison River Capital Corp. 144A sr. notes 13 1/4s, 2010 1,152,000 1,580,000 McLeodUSA, Inc. sr. notes 9 1/2s, 2008 1,477,300 440,000 MGC Communications, Inc. sr. notes 13s, 2010 264,000 1,130,000 Microcell Telecommunications sr. disc. notes stepped- coupon Ser. B, zero % (14s, 12/1/01), 2006 (Canada) (STP) 1,081,975 765,000 Netia Holdings B.V. 144A company guaranty stepped- coupon zero % (11 1/4s, 11/1/01), 2007 (Poland) (STP) 512,550 100,000 Netia Holdings B.V. 144A company guaranty 10 1/4s, 2007 (Poland) 77,000 420,000 NEXTLINK Communications, Inc. sr. notes 10 1/2s, 2009 382,200 1,740,000 Telecorp PCS, Inc. 144A sr. sub. notes 10 5/8s, 2010 1,748,700 490,000 Time Warner Telecom, Inc. sr. notes 9 3/4s, 2008 454,475 370,000 Transtel S.A. pass-through certificates 12 1/2s, 2007 125,800 170,000 Triton PCS Inc. company guaranty 11s, 2008 129,200 1,670,000 UbiquiTel Operating Co. company guaranty stepped- coupon zero % (14s, 4/15/05), 2010 (STP) 793,250 1,700,000 US Unwired, Inc. company guaranty, stepped-coupon Ser. B, zero % (13 3/8s, 11/1/04), 2009 (STP) 901,000 510,000 Versatel Telecom N.V. sr. notes 13 1/4s, 2008 (Netherlands) 459,000 180,000 Versatel Telecom N.V. sr. notes 13 1/4s, 2008 (Netherlands) 162,000 1,660,000 Voicestream Wire, Inc. sr. notes 10 3/8s, 2009 1,784,500 3,096,000 WinStar Communications, Inc. 144A sr. disc. notes zero % (14 3/4s, 4/15/05), 2010 (STP) 959,760 290,000 WinStar Communications, Inc. 144A sr. notes 12 3/4s, 2010 208,800 ------------- 17,955,460 Textiles (0.7%) ------------------------------------------------------------------------------------------------------------------- 250,000 Galey & Lord, Inc. company guaranty 9 1/8s, 2008 158,750 905,000 Guess, Inc. sr. sub. notes 9 1/2s, 2003 899,344 315,000 Kasper A.S.L., Ltd. sr. notes 12 3/4s, 2004 179,550 1,030,000 Levi Strauss & Co. notes 6.8s, 2003 865,200 400,000 Westpoint Stevens, Inc. sr. notes 7 7/8s, 2008 332,000 1,620,000 Westpoint Stevens, Inc. sr. notes 7 7/8s, 2005 1,401,300 405,000 William Carter Holdings Co. sr. sub. notes Ser. A, 12s, 2008 372,600 1,000,000 William Carter Holdings Co. sr. sub. notes Ser. A, 10 3/8s, 2006 965,000 ------------- 5,173,744 Tobacco (0.2%) ------------------------------------------------------------------------------------------------------------------- 1,745,000 North Atlantic Trading Co. company guaranty Ser. B, 11s, 2004 1,483,250 Trucks & Parts (0.1%) ------------------------------------------------------------------------------------------------------------------- 910,000 Transportation Manufacturing Operations, Inc. company guaranty 11 1/4s, 2009 682,500 Utilities (0.1%) ------------------------------------------------------------------------------------------------------------------- 1,470,000 Cathay International, Ltd. 144A sr. notes 13s, 2008 (China) 764,400 Waste Management (0.6%) ------------------------------------------------------------------------------------------------------------------- 550,000 Allied Waste Industries bank term loan FRN 8 7/8s, 2006 536,839 670,000 Allied Waste Industries bank term loan FRN 8.311s, 2007 656,868 2,440,000 Allied Waste Industries, Inc. company guaranty Ser. B, 10s, 2009 2,116,700 745,000 Allied Waste Industries, Inc. company guaranty Ser. B, 7 7/8s, 2009 650,013 310,000 Waste Management, Inc. company guaranty 6 1/2s, 2004 291,029 ------------- 4,251,449 Water Utilities (--%) ------------------------------------------------------------------------------------------------------------------- 380,000 Azurix Corp. 144A notes 10 3/8s, 2007 345,800 ------------- Total Corporate Bonds and Notes (cost $362,790,247) $ 315,428,993 U.S. GOVERNMENT AND AGENCY OBLIGATIONS (21.2%) (a) PRINCIPAL AMOUNT VALUE U.S. Government Agency Mortgage Obligations (8.6%) ------------------------------------------------------------------------------------------------------------------- Federal Home Loan Mortgage Association $ 57,752 6 1/2s, September 1, 2002 $ 57,280 7,336,926 6s, June 1, 2029 6,855,404 21,170,000 Federal National Mortgage Association 7 1/2s, TBA, October 1, 2015 21,322,212 Federal National Mortgage Association Pass-Through Certificates 961 8 1/2s, March 1, 2006 984 1,429,236 8s, with due dates from July 1, 2028 to July 1, 2030 1,448,430 3,665,472 7 1/2s, with due dates from January 1, 2030 to July 1, 2030 3,657,041 10,889 6 1/2s, August 1, 2010 10,676 270,000 6s, May 15, 2008 257,934 Government National Mortgage Association Pass-Through Certificates 5,877,316 8s, with due dates from July 15, 2023 to December 15, 2027 5,985,186 4,864,845 7 1/2s, with due dates from January 15, 2023 to May 15, 2024 4,892,381 15,208,623 7s, with due dates from April 15, 2023 to December 15, 2028 15,006,699 1,906,012 6 1/2s, with due dates from December 15, 2027 to January 15, 2029 1,839,312 ------------- 61,333,539 U.S. Treasury Obligations (12.6%) ------------------------------------------------------------------------------------------------------------------- U.S. Treasury Bonds 5,725,000 12 3/8s, May 15, 2004 (SEG) 6,899,541 12,680,000 11 5/8s, November 15, 2004 (SEG) 15,263,550 U.S. Treasury Notes 29,130,000 6 3/4s, May 15, 2005 30,176,932 8,510,000 6 1/2s, February 15, 2010 8,867,675 5,000,000 6 3/8s, January 31, 2002 5,010,950 40,000,000 U.S. Treasury Strip zero % 8/15/2009 23,606,400 ------------- 89,825,048 ------------- Total U.S. Government and Agency Obligations (cost $152,840,853) $ 151,158,587 FOREIGN GOVERNMENT BONDS AND NOTES (18.4%) (a) PRINCIPAL AMOUNT VALUE ------------------------------------------------------------------------------------------------------------------- USD 6,016,000 Argentina (Republic of) unsub. 11 3/4s, 2009 $ 5,662,861 USD 15,440,000 Brazil (Federal Republic of) notes 14 1/2s, 2009 16,984,000 CAD 19,250,000 Canada (Government of) bonds Ser. WH31, 6s, 2008 12,966,010 CAD 13,055,000 Canada (Government of) bonds Ser. WE00, 5 1/2s, 2002 8,637,947 COP 450,000 Colombia (Republic of) unsub. 9 3/4s, 2009 358,875 DKK 137,190,000 Denmark (Kingdom of) bonds 6s, 2009 16,641,928 DKK 44,955,000 Denmark (Kingdom of) bonds 4s, 2001 5,277,779 EUR 11,560,000 Germany (Federal Republic of) bonds Ser. 99, 5 3/8s, 2010 10,315,512 GRD 4,000,000,000 Hellenic Greece (Republic of) bonds 6s, 2010 10,397,398 KRW 870,000 Korea (Republic of) unsub. 8 7/8s, 2008 912,456 MAD 972,778 Morocco (Government of) bonds Ser. A, 6.844s, 2009 875,500 NZD 9,690,000 New Zealand (Government of) bonds Ser. 709, 7s, 2009 3,992,168 USD 19,680,000 Russia (Federation of) unsub. 10s, 2007 15,104,400 GBP 4,030,000 United Kingdom Treasury bonds 7 1/4s, 2007 6,575,799 USD 15,295,000 United Mexican States bonds Ser. XW, 10 3/8s, 2009 16,595,075 ------------- Total Foreign Government Bonds and Notes (cost $132,962,952) $ 131,297,708 COLLATERALIZED MORTGAGE OBLIGATIONS (5.7%) (a) PRINCIPAL AMOUNT VALUE ------------------------------------------------------------------------------------------------------------------- $ 4,100,000 Amresco Commercial Mortgage Funding I Ser. 97-C1, Class F, 7.64s, 2029 $ 3,912,297 1,660,000 Commercial Mortgage Acceptance Corp. Ser. 97-ML1, Class D, 7.053s, 2010 1,575,703 54,651,402 Commercial Mortgage Asset Trust Ser. 99-C1, Class X, IO, 1.17s, 2020 3,430,597 31,381,278 Deutsche Mortgage & Asset Receiving Corp. Ser. 98-C1, Class X, Interest Only (IO), 1.241s, 2023 1,581,322 Fannie Mae 793,587 Ser. 203, Class 2, IO, 8s, 2023 225,180 897,663 Ser. 251, Class 2, IO, 8s, 2023 254,712 7,674,589 Ser. 266, Class 2, IO, 7.5s, 2024 2,163,275 10,813,433 Ser. 218, Class 2, IO, 7.5s, 2023 3,078,449 4,828,899 Ser. 221, Class 2, IO, 7.5s, 2023 1,376,236 3,871,261 Ser. 97-91, Class SL, IO, 2.763s, 2023 391,360 5,321,155 Ser. 98-66, Class SB, IO, 1.528s, 2028 281,023 Freddie Mac 2,171,513 Ser. 90, Class SC, IO, 2.179s, 2028 122,148 688,687 Ser. 147, Class IO, 8s, 2023 192,402 410,456 Ser. 1717, Class L, 6 1/2s, 2024 398,864 113,495 Ser. 2113, Class ZM, 6 1/2s, 2028 92,924 6,226,020 Ser. 90, Class SB, IO, 2.179s, 2028 350,214 1,434,000 Ser. 2044, Class SG, IO, 3.02s, 2023 217,789 241,466 Ser. 180, Principal Only (PO), zero %, 2026 173,591 1,990,000 General Growth Properties-Ala Moana Ser. 99-C1, Class E, FRN, 8.87s, 2004 1,990,544 410,000 General Growth Properties-Homart Ser. 99-C1, Class G, 9.12s, 2003 410,705 General Growth Properties-Ivanhoe 510,000 Ser. 99-C1, Class G, FRN, 9.87s, 2004 510,100 862,000 Ser. 99-C1, Class F, FRN, 9.12s, 2004 862,168 Government National Mortgage Association 1,153,012 Ser. 99-30, Class SG, 9.638s, 2025 1,119,863 1,885,325 Ser. 00-17, Class SB, 9.138s, 2026 1,945,693 820,352 Ser. 99-44, Class SZ, 9.13s, 2029 788,564 1,428,917 Ser. 98-2, Class EA, PO, zero %, 2028 1,000,242 Merrill Lynch Mortgage Investors, Inc. 1,070,000 Ser. 96-C2, 6.96s, 2028 949,625 21,112,248 Ser. 96-C2, IO, 3.061s, 2028 1,372,296 209,094 Ser. 98-C2, Class A1, 6.22s, 2030 205,141 4,330,000 Ser. 98-C2, Class D, 7.105s, 2030 4,066,817 1,150,000 Ser. 98-C2, Class F, 6 1/4s, 2030 748,039 17,563,232 Ser. 98-C2, Class IO, 1.568s, 2030 1,199,239 6,074,873 Mortgage Capital Funding, Inc. Ser. 97-MC2, Class X, IO, 1.579s, 2012 401,037 237,584 Prudential Home Mortgage Securities Ser. 93-57, Class A4, 5.9s, 2023 234,010 383,155 Rural Housing Trust Ser. 87-1, Class D, 6.33s, 2026 374,082 2,500,000 Starwood Asset Receivables Trust Ser. 00-1, Class E, 9.372s, 2005 2,510,938 ------------- Total Collateralized Mortgage Obligations (cost $39,976,944) $ 40,507,189 PREFERRED STOCKS (2.1%) (a) NUMBER OF SHARES VALUE ------------------------------------------------------------------------------------------------------------------- 9,671 AmeriKing, Inc. 3.25 cum. pfd. $ 38,684 30,000 Chevy Chase Capital Corp. Ser. A, 5.188 pfd. 1,530,000 4,000 Chevy Chase Savings Bank, Inc. 3.25 pfd. 102,000 17,430 CSC Holdings, Inc. Ser. M, 11.125 cum. pfd. (PIK) 1,869,368 19,200 Diva Systems Corp. Ser. C, 6.00 cum. pfd. 158,400 1,620 Dobson Communications 12.25% pfd. (PIK) 1,522,941 89 Dobson Communications 13.00% pfd. (PIK) 84,105 320 First Republic 144A, 10.50% pfd. 270,400 11,765 Fitzgeralds Gaming Corp. 3.75 cum. pfd. 118 1,400,000 Fresenius Medical Capital Trust I company guaranty 9.00% pfd. (Germany) 1,389,500 56,000 Golden State Bancorp Ser. A, 2.281 pfd. 1,302,000 987 Granite Broadcasting 144A 12.75% cum. pfd. (PIK) 641,550 1,949 ICG Holdings, Inc. 144A 14.00% pfd. (Canada) (PIK) 38,980 1,196 Intermedia Communication Ser. B, 13.50% pfd. (PIK) 1,136,200 23,724 NEXTLINK Communications, Inc. 7.00 cum. pfd. (PIK) 1,067,580 452 NEXTLINK Communications, Inc. Ser. B, 13.50% pfd. (PIK) 348,040 5 Paxson Communications Corp. 12.50% cum pfd. (PIK) 5,200 150 Paxson Communications Corp. 13.25 cum. pfd. (PIK) 1,470,000 140 Pegasus Communications Corp. Ser. A, 12.75 cum. pfd. 145,600 964 R&B Falcon Corp. 13.875% cum. pfd. (PIK) 1,233,754 977 Rural Cellular Corp. 12.25% pfd. (PIK) 830,450 ------------- Total Preferred Stocks (cost $18,473,784) $ 15,184,870 BRADY BONDS (1.3%) (a) PRINCIPAL AMOUNT VALUE ------------------------------------------------------------------------------------------------------------------- $ 1,339,200 Argentina (Republic of) deb. FRB 6.813s, 2005 1,225,368 3,500,000 Bulgaria (Government of) deb. Ser. PDI, FRB, 7.063s, 2011 2,660,000 6,071,380 Venezuela (Republic of) deb. Ser. DL, FRB, 7s, 2007 5,198,923 ------------- Total Brady Bonds (cost $9,042,850) $ 9,084,291 ASSET-BACKED SECURITIES (1.2%) (a) PRINCIPAL AMOUNT VALUE ------------------------------------------------------------------------------------------------------------------- $ 7,205,000 Conseco Finance Securitization Ser. 00-4, Class A6, 8.31s, 2032 $ 7,353,567 248,094 Contimortgage Home Equity Loan Trust Ser. 97-1, Class M2, 7.67s, 2028 122,729 1,032,435 Resolution Trust Corp. Ser. 94-1, Class M1, 7.14s, 2029 1,032,435 ------------- Total Asset-Backed Securities (cost $8,347,607) $ 8,508,731 UNITS (0.6%) (a) NUMBER OF UNITS VALUE ------------------------------------------------------------------------------------------------------------------- 600 Australis Media, Ltd. units 15 3/4s, 2003 (In default) (Australia) (NON) $ 1 1,400 CFW Communications Co. units 13s, 2010 1,302,000 900 Colo.com 144A units 13 7/8s, 2010 918,000 1,110 Horizon Pcs., Inc. units stepped-coupon zero % (14s, 10/1/05), 2010 (STP) 566,100 910 Investcorp units 12 3/4s, 2010 937,300 910 iPCS Inc. units stepped-coupon zero % (14s 7/15/05), 2010 473,200 460 Railamerica Transportation Corp. units 12 7/8s, 2010 432,400 ------------- Total Units (cost $5,253,875) $ 4,629,001 CONVERTIBLE BONDS AND NOTES (0.3%) (a) PRINCIPAL AMOUNT VALUE ------------------------------------------------------------------------------------------------------------------- $ 2,430,000 Cybernet Internet Services 144A cv. sr. disc. notes stepped-coupon zero % (13s, 8/15/04), 2009 (STP) $ 1,044,900 1,130,000 Exide Corp. 144A cv. sr. sub. notes 2.9s, 2005 525,450 490,000 HEALTHSOUTH Corp. cv. sub. deb. 3 1/4s, 2003 407,925 490,000 Parker Drilling Corp. cv. sub. notes 5 1/2s, 2004 415,275 ------------- Total Convertible Bonds and Notes (cost $2,873,919) $ 2,393,550 COMMON STOCKS (0.2%) (a) (NON) NUMBER OF SHARES VALUE ------------------------------------------------------------------------------------------------------------------- 150 AmeriKing, Inc. $ 1,500 14,079 Aurora Foods, Inc. 47,517 2,955 Axia Holding, Inc. 144A (PIK) 38,415 149,352 Celcaribe 18,669 23,404 Fitzgeralds Gaming Corp. 234 6,795 MGC Communications, Inc. 59,244 175 Mothers Work, Inc. 1,684 255 Paging Do Brazil Holdings Co., LLC 144A Class B, (Brazil) 3 327 Premium Holdings (L.P.) 144A 4,578 715 PSF Holdings LLC Class A (acquired 5/29/98, cost 2,463,234) (RES) 1,001,000 5,650 Spanish Broadcasting System, Inc. 67,094 10,050 Specialty Foods Acquisition Corp. 101 58 Waste Management, Inc. 1,133 ------------- Total Common Stocks (cost $2,659,688) $ 1,241,172 WARRANTS (0.1%) (a)(NON) EXPIRATION NUMBER OF WARRANTS DATE VALUE ------------------------------------------------------------------------------------------------------------------- 4 Anker Coal Group, Inc. 144A 10/25/09 $ 1 1,150 Asia Pulp & Paper Co., Ltd.144A 3/15/05 1 480 Bestel S.A. (Mexico) 5/15/05 57,600 460 Birch Telecommunications, Inc. 144A 6/15/08 46,000 357 Carrier1 International 2/19/09 89,250 2,428 CellNet Data Systems, Inc. 10/1/07 2 1,500 Comunicacion Cellular 144A (Colombia) 11/15/03 3,000 940 Dayton Superior Corp. 6/15/09 18,800 475 Diva Systems Corp. 5/15/06 270,750 7,566 Diva Systems Corp. 3/1/08 124,839 830 Epic Resorts 6/15/05 8 680 Firstworld Communication 4/15/08 13,600 410 Huntsman Packaging Corp. 144A 6/1/10 4,100 9,768 ICG Communications 10/15/05 9,768 520 Interact Systems, Inc. 8/1/03 5 520 Interact Systems, Inc. 144A 12/15/09 5 245 International Wireless Communications Holdings 144A 8/15/01 1 11,713 Intira Corp. Class A 2/1/10 1 4,025 Intira Corp. Class B 2/1/10 1 400 Iridium World Com 144A 7/15/05 1 2,085 KMC Telecom Holdings, Inc. 4/15/08 6,250 1,180 Knology Holdings 10/22/07 7,080 1,040 Maxcom Telecomunicaciones SA de CV 144A (Mexico) 4/1/07 10 930 McCaw International, Ltd. 4/15/07 18,600 560 Mediq, Inc. 144A 6/1/09 6 100 Motient Corp. 144A 4/1/08 3,800 280 OnePoint Communications, Inc. 6/1/08 22,400 620 Orbital Imaging Corp. 144A 3/1/05 3,100 1,840 Pagemart, Inc. 144A 12/31/03 21,160 960 Paxson Communications Corp. 144A 6/30/03 5,280 1,220 Raintree Resort 144A 12/1/04 12 860 Startec Global Communications Corp. 5/15/08 860 185 Sterling Chemicals Holdings 8/15/08 740 410 Telehub Communications Corp. 7/31/05 205 1,670 Ubiquitel, Inc. 144A 4/15/10 66,800 1,260 UIH Australia/Pacific, Inc. 144A 5/15/06 37,800 30 Versatel Telecom N.V. 144A (Netherlands) 5/15/08 7,800 100,230 Wright Medical Technology, Inc. 144A 6/30/03 1 590 XM Satellite Radio Holdings, Inc. 144A 3/15/10 112,100 ------------- Total Warrants (cost $785,754) $ 951,737 CONVERTIBLE PREFERRED STOCKS (0.1%) (a) NUMBER OF SHARES VALUE ------------------------------------------------------------------------------------------------------------------- 23,600 Global Telesystems Group, Inc. 3.63 cum. cv. pfd. $ 250,868 520 Interact Electronic 14.00 cum. cv. pfd 5 3,800 LTV Corp. (The) 144A 4.125 cum. cv. pfd. 87,400 30 Paxson Communications Corp. 144A 9.75% cv. pfd. (PIK) 291,000 107 World Access, Inc. Ser. D, zero % cv. pfd. 93,090 ------------- Total Convertible Preferred Stocks (cost $1,221,454) $ 722,363 PURCHASED OPTIONS OUTSTANDING (--%) (a) EXPIRATION DATE/ CONTRACT AMOUNT STRIKE PRICE VALUE ------------------------------------------------------------------------------------------------------------------- $ 7,124,774 USD/JPY Call Oct-00/110 $ 3,976 7,197,107 USD/JPY Call Oct-00/110 4,318 ------------- Total Purchased Options Outstanding (cost $133,593) $ 8,294 SHORT-TERM INVESTMENTS (5.4%) (a) PRINCIPAL AMOUNT VALUE ------------------------------------------------------------------------------------------------------------------- $ 19,810,000 Interest in $843,280,000 joint repurchase agreement dated September 29, 2000 with Morgan Stanley & Co., Inc. due October 2, 2000 with respect to various U.S. Treasury obligations -- maturity value of $19,820,945 for an effective yield of 6.63% $ 19,810,000 19,000,000 Interest in $789,642,000 joint repurchase agreement dated September 29, 2000 with Morgan (J.P.) & Co., Inc. due October 2, 2000 with respect to various U.S. Treasury obligations -- maturity value of $19,010,529 for an effective yield, of 6.65% 19,000,000 ------------- Total Short-Term Investments (cost $38,810,000) $ 38,810,000 ------------------------------------------------------------------------------------------------------------------- Total Investments (cost $776,173,520) (b) $ 719,926,486 ------------------------------------------------------------------------------------------------------------------- (a) Percentages indicated are based on net assets of $713,893,948. (b) The aggregate identified cost on a tax basis is $777,152,977, resulting in gross unrealized appreciation and depreciation of $13,042,511 and $70,269,002, respectively, or net unrealized depreciation of $57,226,491. (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, 2000 was $1,001,000 or 0.1% of nets assets. (PIK) Income may be received in cash or additional securities at the discretion of the issuer. (SEG) A portion of these securities was pledged and segregated with the custodian to cover margin requirements for futures contracts at September 30, 2000. 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, 2000, which are subject to change based on the terms of the security. DIVERSIFICATION BY COUNTRY Distribution of investments by country of issue at September 30, 2000: (as percentage of Market Value) Argentina 1.0% Brazil 2.5 Canada 4.1 Denmark 3.0 Germany 1.6 Greece 1.4 Korea 0.7 Mexico 3.0 New Zealand 0.6 Russia 2.1 United Kingdom 1.5 United States 74.6 Venezuela 0.7 Other 3.2 ------ Total 100.0% ====== ------------------------------------------------------------------------------ Forward Currency Contracts to Buy at September 30, 2000 (aggregate face value of $174,198,567) Unrealized Aggregate Face Delivery Appreciation/ Market Value Value Date (Depreciation) ------------------------------------------------------------------------------ Australian Dollars $20,332,682 $21,555,773 12/20/2000 $(1,223,091) Canadian Dollars 12,234,179 12,454,686 12/20/2000 (220,507) Euro 76,491,061 76,956,320 12/20/2000 (465,259) Japanese Yen 7,349,997 7,405,703 10/16/2000 (55,706) Japanese Yen 48,259,225 49,773,796 12/20/2000 (1,514,571) Swedish Krona 4,307,989 4,339,375 12/20/2000 (31,386) Swiss Franc 1,716,206 1,712,914 12/20/2000 3,292 ------------------------------------------------------------------------------ $(3,507,228) ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ Forward Currency Contracts to Sell at September 30, 2000 (aggregate face value of $183,305,320) Unrealized Market Aggregate Face Delivery Appreciation/ Value Value Date (Depreciation) ------------------------------------------------------------------------------ Australian Dollars $ 3,149,844 $ 3,199,599 12/20/2000 $ 49,755 British Pounds 6,338,264 6,264,358 12/20/2000 (73,906) Canadian Dollar 35,294,344 35,963,601 12/20/2000 669,257 Danish Krone 21,596,191 21,891,325 12/20/2000 295,134 Euro 61,050,293 61,399,169 12/20/2000 348,876 Japanese Yen 48,806,625 50,329,224 12/20/2000 1,522,599 New Zealand Dollar 4,041,560 4,258,044 12/20/2000 216,484 ------------------------------------------------------------------------------ $3,028,199 ------------------------------------------------------------------------------ Futures Contracts Outstanding at September 30, 2000 Unrealized Aggregate Face Expiration Appreciation/ Total Value Value Date (Depreciation) ------------------------------------------------------------------------------ 3 Month Libor (long) $1,461,949 $1,461,469 Jun-02 $ 480 3 Month Libor (short) 1,464,264 1,463,807 Jun-01 (457) 3 Month EuroYen (short) 10,115,153 10,111,962 Sep-01 (3,191) 90 Day Libor (short) 3,637,654 3,635,243 Jun-01 (2,411) 90 Day Libor (long) 3,633,386 3,629,071 Jun-02 4,315 90 Day Libor (short) 1,212,810 1,212,394 Mar-01 (416) 90 Day Libor (long) 1,211,646 1,210,639 Mar-02 1,007 Euro-Bund (short) 11,054,582 11,036,621 Dec-00 (17,961) Gilt (short) 2,343,783 2,325,933 Dec-00 (17,850) JGB 10 Yr. (long) 17,278,145 17,150,789 Dec-00 127,356 U.S. Treasury Note 10 Yr. (long) 13,729,969 13,704,835 Dec-00 25,134 U.S. Treasury Note 10 Yr. (short) 6,113,344 6,099,593 Dec-00 (13,751) ------------------------------------------------------------------------------ $102,255 The accompanying notes are an integral part of these financial statements.
STATEMENT OF ASSETS AND LIABILITIES September 30, 2000 Assets ------------------------------------------------------------------------------------------- Investments in securities, at value (identified cost $776,173,520) (Note 1) $719,926,486 ------------------------------------------------------------------------------------------- Foreign currency (cost $551,112) 545,230 ------------------------------------------------------------------------------------------- Dividends, interest and other receivables 15,614,635 ------------------------------------------------------------------------------------------- Receivable for securities sold 11,907,495 ------------------------------------------------------------------------------------------- Receivable for variation margin 35,782 ------------------------------------------------------------------------------------------- Receivable for open forward currency contracts 3,111,843 ------------------------------------------------------------------------------------------- Receivable for closed forward currency contracts 164,730 ------------------------------------------------------------------------------------------- Total assets 751,306,201 Liabilities ------------------------------------------------------------------------------------------- Payable to subcustodian (Note 2) 361,148 ------------------------------------------------------------------------------------------- Distributions payable to shareholders 5,284,207 ------------------------------------------------------------------------------------------- Payable for securities purchased 26,095,776 ------------------------------------------------------------------------------------------- Payable for compensation of Manager (Note 2) 1,296,427 ------------------------------------------------------------------------------------------- Payable for investor servicing and custodian fees (Note 2) 160,367 ------------------------------------------------------------------------------------------- Payable for compensation of Trustees (Note 2) 36,477 ------------------------------------------------------------------------------------------- Payable for administrative services (Note 2) 2,354 ------------------------------------------------------------------------------------------- Payable for open forward currency contracts 3,590,872 ------------------------------------------------------------------------------------------- Payable for closed forward currency contracts 495,965 ------------------------------------------------------------------------------------------- Other accrued expenses 88,660 ------------------------------------------------------------------------------------------- Total liabilities 37,412,253 ------------------------------------------------------------------------------------------- Net assets $713,893,948 Represented by ------------------------------------------------------------------------------------------- Paid-in capital (Notes 1 and 4) $861,575,486 ------------------------------------------------------------------------------------------- Distributions in excess of net investment income (Note 1) (18,506,036) ------------------------------------------------------------------------------------------- Accumulated net realized loss on investment and foreign currency transactions (Note 1) (71,967,786) ------------------------------------------------------------------------------------------- Net unrealized depreciation of investments and assets and liabilities in foreign currencies (57,207,716) ------------------------------------------------------------------------------------------- Total -- Representing net assets applicable to capital shares outstanding $713,893,948 Computation of net asset value ------------------------------------------------------------------------------------------- Net asset value per share ($713,893,948 divided by 100,133,127 shares) $7.13 ------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements.
STATEMENT OF OPERATIONS Year ended September 30, 2000 Investment income: ------------------------------------------------------------------------------------------- Interest income (net of foreign tax of $53,770) $68,237,629 ------------------------------------------------------------------------------------------- Dividends 1,716,580 ------------------------------------------------------------------------------------------- Total investment income 69,954,209 Expenses: ------------------------------------------------------------------------------------------- Compensation of Manager (Note 2) 5,303,019 ------------------------------------------------------------------------------------------- Investor servicing and custodian fees (Note 2) 754,191 ------------------------------------------------------------------------------------------- Compensation of Trustees (Note 2) 22,539 ------------------------------------------------------------------------------------------- Administrative services (Note 2) 9,629 ------------------------------------------------------------------------------------------- Other 359,784 ------------------------------------------------------------------------------------------- Total expenses 6,449,162 ------------------------------------------------------------------------------------------- Expense reduction (Note 2) (66,434) ------------------------------------------------------------------------------------------- Net expenses 6,382,728 ------------------------------------------------------------------------------------------- Net investment income 63,571,481 ------------------------------------------------------------------------------------------- Net realized loss on investments (Notes 1 and 3) (29,722,647) ------------------------------------------------------------------------------------------- Net realized gain on futures contracts (Note 1) 228,978 ------------------------------------------------------------------------------------------- Net realized loss on foreign currency transactions (8,357,239) ------------------------------------------------------------------------------------------- Net unrealized depreciation of assets and liabilities in foreign currencies during the year (470,965) ------------------------------------------------------------------------------------------- Net unrealized depreciation of investments, futures and TBA sale commitments during the year (4,598,902) ------------------------------------------------------------------------------------------- Net loss on investments (42,920,775) ------------------------------------------------------------------------------------------- Net increase in net assets resulting from operations $20,650,706 ------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements.
STATEMENT OF CHANGES IN NET ASSETS Year ended September 30 --------------------------------- 2000 1999 -------------------------------------------------------------------------------------------------- Increase in net assets -------------------------------------------------------------------------------------------------- Operations: -------------------------------------------------------------------------------------------------- Net investment income $ 63,571,481 $ 58,419,638 -------------------------------------------------------------------------------------------------- Net realized loss on investments and foreign currency transactions (37,850,908) (22,122,171) -------------------------------------------------------------------------------------------------- Net unrealized depreciation of investments and assets and liabilities in foreign currencies (5,069,867) (26,023,477) -------------------------------------------------------------------------------------------------- Net increase in net assets resulting from operations 20,650,706 10,273,990 -------------------------------------------------------------------------------------------------- Distributions to shareholders: -------------------------------------------------------------------------------------------------- From net investment income (64,290,088) (55,752,154) -------------------------------------------------------------------------------------------------- From return of capital -- (12,290,601) -------------------------------------------------------------------------------------------------- Increase in capital shares transactions from reinvestment of distributions -- 960,273 -------------------------------------------------------------------------------------------------- Total decrease in net assets (43,639,382) (56,808,492) Net assets -------------------------------------------------------------------------------------------------- Beginning of year 757,533,330 814,341,822 -------------------------------------------------------------------------------------------------- End of year (including distributions in excess of net investment income of $18,506,036 and $5,255,468 respectively) $713,893,948 $757,533,330 -------------------------------------------------------------------------------------------------- Number of fund shares -------------------------------------------------------------------------------------------------- Shares outstanding at beginning of year 100,133,127 100,014,650 -------------------------------------------------------------------------------------------------- Shares increased issued in connection with reinvestment of distributions -- 118,477 -------------------------------------------------------------------------------------------------- Shares outstanding at end of year 100,133,127 100,133,127 -------------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements.
FINANCIAL HIGHLIGHTS (For a share outstanding throughout the period) ----------------------------------------------------------------------------------------------------- Per-share operating performance Year ended September 30 ----------------------------------------------------------------------------------------------------- 2000 1999 1998 1997 1996 ----------------------------------------------------------------------------------------------------- Net asset value, beginning of period $7.57 $8.14 $8.79 $8.58 $8.38 ----------------------------------------------------------------------------------------------------- Investment operations ----------------------------------------------------------------------------------------------------- Net investment income .63 .58 .71 .64 .63 ----------------------------------------------------------------------------------------------------- Net realized and unrealized gain (loss) on investments (.43) (.47) (.67) .21 .19 ----------------------------------------------------------------------------------------------------- Total from investment operations .20 .11 .04 .85 .82 ----------------------------------------------------------------------------------------------------- Less distributions: ----------------------------------------------------------------------------------------------------- From net investment income (.64) (.56) (.69) (.64) (.61) ----------------------------------------------------------------------------------------------------- From return of capital -- (.12) -- -- (.01) ----------------------------------------------------------------------------------------------------- Total distributions (.64) (.68) (.69) (.64) (.62) ----------------------------------------------------------------------------------------------------- Net asset value, end of period $7.13 $7.57 $8.14 $8.79 $8.58 ----------------------------------------------------------------------------------------------------- Market value, end of period $6.438 $6.438 $7.750 $8.125 $7.500 ----------------------------------------------------------------------------------------------------- Ratios and supplemental data ----------------------------------------------------------------------------------------------------- Total return at market value (%)(a) 10.72 (9.09) 3.91 17.54 10.34 ----------------------------------------------------------------------------------------------------- Net assets, end of period (in thousands) $713,894 $757,533 $814,342 $337,664 $332,537 ----------------------------------------------------------------------------------------------------- Ratio of expenses to average net assets (%)(b) .87 .93 .92 1.04 .99 ----------------------------------------------------------------------------------------------------- Ratio of net investment income to average net assets (%) 8.60 7.39 8.13 7.47 7.44 ----------------------------------------------------------------------------------------------------- Portfolio turnover (%) 116.71 133.72 179.84(c) 220.61 232.90 ----------------------------------------------------------------------------------------------------- (a) Total return does not reflect the effect of sales charges. (b) 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.
NOTES TO FINANCIAL STATEMENTS September 30, 2000 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. 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 of the financial statements and the reported amounts of increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates. A) Security valuation Investments for which market quotations are readily available are stated at market value, which is determined using the last reported sales price on its principal exchange, 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. 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 certain debt obligations; such investments are stated at fair value on the basis of valuations furnished by a pricing service or dealers, approved by the Trustees, which determine valuations for normal institutional-size trading units of such securities using methods based on market transactions for comparable securities and variable relationships between securities that 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). Gains or losses on securities sold are determined on the identified cost basis. Interest income is recorded on the accrual basis. Dividend income is recorded on the ex-dividend date. Non-cash dividends, if any, are recorded at the fair market value of the securities received. 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 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. Investments in foreign securities involve certain risks, including those related to economic instability, unfavorable political developments, and currency fluctuations, not present with domestic investments. 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 0.01% from the principal amount. The fund holds, and maintains until settlement date, cash or high-grade debt obligations in an amount sufficient to meet the purchase price, or the fund may enter into offsetting contracts for the forward sale of other securities it owns. Income on the securities will not be earned until settlement date. TBA purchase commitments may be considered securities in themselves, and involve a risk of loss if the value of the security to be purchased declines prior to the settlement date, which risk is in addition to the risk of decline in the value of the fund's other assets. Unsettled TBA purchase commitments are valued at the current market value of the underlying securities, according to the procedures described under "Security valuation" above. Although the fund will generally enter into TBA purchase commitments with the intention of acquiring securities for their portfolio or for delivery pursuant to options contracts it has entered into, the fund may dispose of a commitment prior to settlement if Putnam Management deems it appropriate to do so. I) TBA sale commitments The fund may enter into TBA sale commitments to hedge its portfolio positions or to sell mortgage-backed securities it owns under delayed delivery arrangements. Proceeds of TBA sale commitments are not received until the contractual settlement date. During the time a TBA sale commitment is outstanding, equivalent deliverable securities, or an offsetting TBA purchase commitment deliverable on or before the sale commitment date, are held as "cover" for the transaction. Unsettled TBA sale commitments are valued at the current market value of the underlying securities, generally according to the procedures described under "Security valuation" above. The contract is "marked-to-market" daily and the change in market value is recorded by the fund as an unrealized gain or loss. If the TBA sale commitment is closed through the acquisition of an offsetting purchase commitment, the fund realizes a gain or loss. If the fund delivers securities under the commitment, the fund realizes a gain or a loss from the sale of the securities based upon the unit price established at the date the commitment was entered into. J) Federal taxes It is the policy of the fund to distribute all of its taxable income within the prescribed time and otherwise comply with the provisions of the Internal Revenue Code applicable to regulated investment companies. It is also the intention of the fund to distribute an amount sufficient to avoid imposition of any excise tax under Section 4982 of the Internal Revenue Code of 1986, as amended. Therefore, no provision has been made for federal taxes on income, capital gains or unrealized appreciation on securities held nor for excise tax on income and capital gains. At September 30, 2000, the fund had a capital loss carryover of approximately $47,316,000 available to offset future capital gains, if any. The amount of the carryover and the expiration dates are: Loss Carryover Expiration -------------- -------------------- $ 253,000 September 30, 2001 7,035,000 September 30, 2003 2,793,000 September 30, 2004 1,554,000 September 30, 2005 10,040,000 September 30, 2007 25,641,000 September 30, 2008 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. Capital gains distributions, if any, are recorded on the ex-dividend date and paid at least annually. The amount and character of income and gains to be distributed are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. These differences include temporary and permanent differences of losses on wash sale transactions, foreign currency gains and losses, post-October loss deferrals, dividends payable, defaulted bond interest, unrealized gains and losses on certain futures contracts, paydown gains and losses on mortgage-backed securities, market discount, interest on payment-in-kind securities, book accretion/amortization adjustment, and foreign market discount. 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, 2000, the fund reclassified $12,531,961 to increase distributions in excess of net investment income and $622,530 to decrease paid-in-capital, with a decrease to accumulated net realized losses of $13,154,491. 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 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. Under the subcustodian contract between the subcustodian bank and PFTC, the subcustodian bank has a lien on the securities of the fund to the extent permitted by the fund's investment restrictions to cover any advances made by the subcustodian bank for the settlement of securities purchased by the fund. At September 30, 2000, the payable to the subcustodian bank represents the amount due for cash advance for the settlement of a security purchased. For the year ended September 30, 2000, fund expenses were reduced by $66,434 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 $928 has been allocated to the fund, and an additional fee for each Trustees meeting attended. Trustees receive additional fees for attendance at certain committee meetings. The fund has adopted a Trustee Fee Deferral Plan (the "Deferral Plan") which allows the Trustees to defer the receipt of all or a portion of Trustees Fees payable on or after July 1, 1995. The deferred fees remain invested in certain Putnam funds until distribution in accordance with the Deferral Plan. The fund has adopted an unfunded noncontributory defined benefit pension plan (the "Pension Plan") covering all Trustees of the fund who have served as a Trustee for at least five years. Benefits under the Pension Plan are equal to 50% of the Trustee's average total retainer and meeting fees for the three years preceding retirement. Pension expense for the fund is included in 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 Purchases and sales of securities During the year ended September 30, 2000, cost of purchases and proceeds from sales of investment securities other than U.S. government obligations and short-term investments aggregated $689,974,000 and $686,736,388, respectively. Purchases and sales of U.S. government obligations aggregated $137,087,972 and $184,092,681, respectively. 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, 2000, the fund repurchased no shares. As of September 30, 2000, 570,000 shares have been repurchased since the inception of the program. Note 5 Change in independent accountants (unaudited) Based on the recommendation of the Audit Committee of the fund, the Board of Trustees has determined not to retain PricewaterhouseCoopers LLP as this fund's independent accountant and voted to appoint KPMG LLP for the fund's fiscal year ended September 30, 2000. During the two previous fiscal years, PricewaterhouseCoopers LLP audit reports contained no adverse opinion or disclaimer of opinion; nor were its reports qualified or modified as to uncertainty, audit scope, or accounting principle. Further, in connection with its audits for the two previous fiscal years and through July 24, 2000, there were no disagreements between the fund and PricewaterhouseCoopers LLP on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which if not resolved to the satisfaction of PricewaterhouseCoopers LLP would have caused it to make reference to the disagreements in its report on the financial statements for such years. FEDERAL TAX INFORMATION (Unaudited) The fund has designated 0.32% of the distributions from net investment income as qualifying for the dividends received deduction for corporations. The Form 1099 you receive in January 2001 will show the tax status of all distributions paid to your account in calendar 2000. RESULTS OF JUNE 1, 2000 SHAREHOLDER MEETING (Unaudited) An annual meeting of shareholders of the fund was held on June 1, 2000. At the meeting, each of the nominees for Trustees was elected, as follows: Votes Votes for withheld Jameson Adkins Baxter 84,781,347 3,061,784 Hans H. Estin 84,680,557 3,162,573 J. A. Hill 84,802,648 3,040,483 Ronald J. Jackson 84,783,977 3,059,154 Paul L. Joskow 84,749,654 3,093,477 Elizabeth T. Kennan 84,728,632 3,114,499 Lawrence J. Lasser 84,771,993 3,071,138 John H. Mullin III 84,756,259 3,086,871 R. E. Patterson 84,799,728 3,043,403 George Putnam, III 84,750,875 3,092,256 A.J.C. Smith 84,747,183 3,095,948 W. Thomas Stephens 84,764,821 3,078,310 W. Nicholas Thorndike 84,676,532 3,166,599 A proposal to ratify the selection of PricewaterhouseCoopers LLP as the independent auditors of your fund was approved as follows: 86,426,707 votes for, and 511,321 votes against, with 905,103 abstentions and broker non-votes.* All tabulations are rounded to nearest whole number. *At their July, 2000 meeting, the Trustees approved the election of KPMG LLP as the fund's auditors for fiscal year 2000 (see note 5). FUND INFORMATION WEB SITE www.putnaminvestments.com INVESTMENT MANAGER Putnam Investment Management, Inc. One Post Office Square Boston, MA 02109 MARKETING SERVICES Putnam Retail Management, Inc. One Post Office Square Boston, MA 02109 CUSTODIAN Putnam Fiduciary Trust Company LEGAL COUNSEL Ropes & Gray INDEPENDENT ACCOUNTANTS KPMG LLP TRUSTEES John A. Hill, 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 George Putnam, III A.J.C. Smith W. Thomas Stephens W. Nicholas Thorndike OFFICERS George Putnam, III 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 David L. Waldman Vice President and Fund Manager Richard A. Monaghan Vice President Richard G. Leibovitch Vice President John R. Verani Vice President Call 1-800-225-1581 weekdays from 9 a.m. to 5 p.m. Eastern Time, or visit our Web site (www.putnaminvestments.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 --------------------- PRST STD U.S. POSTAGE PAID PUTNAM INVESTMENTS --------------------- For account balances, economic forecasts, and the latest on Putnam funds, visit www.putnaminvestments.com 074 65457 11/00