-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DqWrH75KULWNWKYXxh5bkIqyO/qxceeMSUSiWNVXOiANBC8D62TZE9XCRow0FStB pIJeD4hlsQ+JTnvAn0x3pQ== 0000928816-97-000390.txt : 19971208 0000928816-97-000390.hdr.sgml : 19971208 ACCESSION NUMBER: 0000928816-97-000390 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971205 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PUTNAM MASTER INTERMEDIATE INCOME TRUST CENTRAL INDEX KEY: 0000830622 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 046584465 STATE OF INCORPORATION: MA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: N-30D SEC ACT: SEC FILE NUMBER: 811-05498 FILM NUMBER: 97733084 BUSINESS ADDRESS: STREET 1: ONE POST OFFICE SQ CITY: BOSTON STATE: MA ZIP: 02109 BUSINESS PHONE: 6172921562 N-30D 1 PUTNAM MASTER INTERMEDIATE INCOME TRUST Putnam Master Intermediate Income Trust ANNUAL REPORT September 30, 1997 [LOGO: BOSTON * LONDON * TOKYO] Fund highlights * Morningstar Inc., an independent rating agency, awarded Putnam Master Intermediate Income Trust a 4-star rating for overall performance (based on the 3- and 5-year average annual returns) as of September 30, 1997. Only 22.5% of the 146 funds in Morningstar's fixed-income category receive this rating.* * Shareholder meeting: The fund's annual shareholder meeting is scheduled for December 18, 1997. In addition to the annual selection of Trustees and approval of auditors, shareholders will consider a proposal to combine the fund with Putnam Intermediate Government Income Trust. If this proposal is approved, the fund will become substantially larger, but will continue to operate under its existing investment objectives and policies. Please read the proxy statement and vote your shares promptly. CONTENTS 4 Report from Putnam Management 9 Fund performance summary 12 Portfolio holdings 30 Financial statements * Morningstar rates a fund relative to other funds with similar investment objectives based on the fund's 3-, 5-, and 10-year performance, adjusted for risk factors and sales charges. Ratings are updated monthly: 10% of funds receive 5 stars and 22.5% receive 4 stars. For the 3- and 5-year periods ended 9/30/97, there were 146 and 98 funds in the fixed-income category; the fund received 3 and 4 stars for the respective periods. Past performance is not indicative of future results. From the Chairman [GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM] [copyright] Karsh, Ottawa Dear Shareholder: Putnam Master Intermediate Income Trust ended fiscal 1997 with gratifyingly positive results derived from its globally diverse portfolio of fixed-income securities. The fund's carefully selected high-yield bonds led the charge during the period, but the protective role of the fund's more conservative sectors should not be overlooked. It is this diversification across a broad band of the risk/return spectrum that gives your fund's investment strategy much of its appeal. Your fund's management team, with expertise as varied as the securities in which the fund invests, closely monitors the world's fixed-income markets, continually fine-tuning the portfolio and seeking attractive investment opportunities. In the following report, your fund's managers review performance in the fiscal year just ended and discuss prospects for fiscal 1998. Respectfully yours, /S/GEORGE PUTNAM George Putnam Chairman of the Trustees November 19, 1997 Report from the Fund Managers Kenneth J. Taubes Jennifer E. Leichter D. William Kohli Gail A. Attridge Spurred by low inflation, moderate economic growth, and a relatively stable interest-rate environment around the world, Putnam Master Intermediate Income Trust closed fiscal 1997 with attractive results at both net asset value and market price. While interest-rate, currency fluctuation, and inflation concerns occasionally sparked volatility in various sectors and regions, we met the challenges by emphasizing sectors that we believed offered sufficiently strong potential to weather short-term market movements. Domestic high-yield bonds, domestic mortgage-backed securities, and emerging-markets bonds were the three asset classes that provided the lion's share of performance. On pages 9 and 10 of this report, you'll find full performance details for all share classes. * MORTGAGE-BACKED SECURITIES EMPHASIZEd; DURATION EXTENDED Your fund's taxable investment-grade holdings consisted mainly of mortgage-backed securities, which offered higher yields and greater appreciation than U.S. Treasury bonds for much of the fiscal year. The relatively stable interest-rate climate has meant less inherent prepayment risk for mortgage issues. This environment, combined with highly favorable supply/demand dynamics, bolstered the attractiveness of the mortgage-backed securities the fund primarily owns: current coupon mortgage securities, whose coupons reflect current market rates, and discount coupon issues, whose coupons are below current market rates. Although declining interest rates have recently heightened prepayment fears and dampened performance in this market, we remain confident that the fund's mortgage-backed holdings can continue to make a positive contribution. Historically current coupon and discount coupon issues tend to experience less prepayment risk in a falling-rate environment. Your fund's Treasury holdings also contributed positively to performance, particularly during the market's summer rallies. At the fiscal year's midpoint, we moved into longer-term intermediate issues in order to extend duration and position the fund for the likelihood of declining bond yields and rising prices -- a move that proved timely as the period progressed. Duration is a measure of a bond's sensitivity to interest rate changes. Longer duration tends to offer more attractive appreciation potential should rates decline. * HIGH-YIELD BONDS CONTINUE TO ENJOY FAVORABLE MARKET CLIMATE The economic and business environment that prevailed during fiscal 1997 was ideal for U.S. corporate high-yield bonds. Extremely low default rates, robust stock market activity, favorable supply/demand characteristics, strong corporate profitability, and continued brisk consolidation activity that often leads to credit upgrades fueled the portfolio's performance during the period. We invested a substantial portion of the high-yield sector's assets in three industries -- telecommunications, broadcasting, and cable -- a strategy that required nerves of steel during March's market plunge. Rising interest rates and inflation fears had investors fleeing to higher-quality issues. Not surprisingly, the high-yield bonds of companies in these growth-oriented industries were among the hardest hit because of their capital-intensive nature. [GRAPHIC OMITTED: horizontal bar chart TOP 5 COUNTRY ALLOCATIONS] TOP 5 COUNTRY ALLOCATIONS* (INTERNATIONAL SECTOR) Germany 6.6% United Kingdom 5.5% Mexico 4.2% Russia 3.3% France 2.6% Footnote reads: *Based on net assets as of 9/30/97. Holdings will vary over time. Nevertheless, we remained optimistic about their performance potential and took the opportunity to increase several positions during the downturn. We believed the combined effects of deregulation and industry consolidation would continue to provide a positive backdrop for many fund holdings. When the market regained its footing, many issues appreciated substantially. Brooks Fiber Properties, which was recently purchased by WorldCom, Nextel Communications, Hyperion Telecommunication Corp., and American Communication Services Inc. have been notable performers. While these securities and others discussed in this report were viewed favorably during the period, all holdings are subject to review in accordance and adjustment with the fund's investment strategy and may vary in the future. In broadcasting, we increased the fund's position in Echostar Satellite Broadcast Corp. Communications and increased the weighting in several preferred stocks. Similarly, during the period's second half, we increased the fund's exposure to foreign cellular and foreign dollar-based corporate bonds, particularly paper companies. Millicom International Cellular, Celcaribe, and Macaw International are three companies profiting from the exploding worldwide demand for wireless communication. Paper companies are also experiencing a global rally and we've added credits in Indonesia, including APP International Finance Company, and in the Philippines. We've also boosted positions in issues such as Riverwood International, Repap New Brunswick, and Florida Coast Paper. * EMERGING MARKETS AND JAPAN GARNER ATTENTION On the international front, since the fiscal year's midpoint core European markets remained our area of concentration, although their performance in dollar terms has been a bit flat. Long-term bonds in Germany, Denmark, and France were our primary interest mainly because of the attractively steep yield curves present in these countries. While the fund's bond holdings performed well, the surge in value of the U.S. dollar relative to European currencies caused the portfolio's European holdings to provide lackluster dollar-adjusted returns. [GRAPHIC OMITTED: TOP THREE HOLDINGS PER SECTOR] TOP THREE HOLDINGS PER SECTOR* HIGH-YIELD BONDS Banco Nacional de Comercio, 7-1/4s, 2004 Banque Nationale pour le Development Economique (BNDE), 9s, 2007 Banco Nacional de Comercio, 8s, 2003 FOREIGN BONDS Federal Republic of Germany, 6s, 2007 United Kingdom Treasury bonds, 7-1/2s, 2006 Russian bonds, 9-1/4s, 2001 U.S. INVESTMENT-GRADE SECURITIES Government National Mortgage Association, 7.5% U.S. Treasury obligation, 6.25% Government National Mortgage Association, 8.5% Footnote reads: * These holdings represent 30.9% of the fund's assets as of 9/30/97. Portfolio holdings will vary over time. Performance of the core markets was further overshadowed by the dramatic comeback staged by the higher-yielding peripheral markets of Spain, Italy, and Sweden in response to budget improvements and the probability of a broader European Monetary Union (EMU). We were not anticipating the strength of the rallies and had consequently kept our exposure to the peripheral markets fairly low. On the currency front, we did employ hedging strategies in the Italian lire and Swedish krona against the German deutschemark -- all of which proved effective. We had significant exposure to bonds in the United Kingdom -- the best-performing government bond market thus far in this calendar year. The Bank of England's independence and tighter monetary policy as well as the possibility that the United Kingdom may enter EMU after all provided the catalyst that U.K. bonds needed to rally. Other positive dollar-bloc performance came from holding nondollar surrogates in Australia and Canada. During the period's second half, we reversed our negative view on Japanese bonds and forayed into that market after a long period of avoidance. Signs of continued economic weakness in Japan and difficulties in Southeast Asia prompted our decision. By period's end, our renewed interest had proved worthwhile. In early spring, our dollar/yen currency hedges hampered the sleeve's returns as the yen unexpectedly soared in value against the dollar. The yen has since declined and our currency hedges have allowed the fund to fully realize the positive results Japanese bonds recently posted in local terms. We've increased your fund's emerging-markets exposure considerably since the outset of the fiscal year -- a strategy that has contributed substantially to your fund's performance. Lower risk premiums worldwide, improving fundamentals, increased global liquidity, and investors' appetite for yield have fueled the performance of many holdings. Top performers included issues in South Africa, Eastern Europe (including Russia and Bulgaria), Mexico, and Argentina. * PROSPECTS FOR FIXED-INCOME INVESTING LOOK GOOD At this writing, we remain reasonably optimistic about the prospects for fixed-income investing. Increased fiscal responsibility on the part of many governments, low global inflation, and relatively stable interest rates in most countries give us reason to remain optimistic going forward. Of course, change is a constant and the sustainability of today's conditions bears close watching. In our opinion, the fund's multisector strategy and the flexibility it provides give us the ability to pursue the best fixed-income opportunities the world has to offer. We will continue to take advantage of Putnam's extensive credit research and global experience to provide your investment with solid performance potential in any market environment. The views expressed here are exclusively those of Putnam Management. They are not meant as investment advice. Although the described holdings were viewed favorably as of 9/30/97, there is no guarantee the fund will continue to hold these securities in the future. While U.S. government backing does not insure principal, which will fluctuate, it does guarantee the fund's government backed holdings will make timely payments of interest and principal. Mortgage-backed securities may be subject to prepayment risk. Foreign investments are subject to certain risks, such as currency fluctuations, economic instability, and political developments, that are not present with domestic investments. The lower credit ratings of high-yield corporate and municipal bonds reflect a greater possibility that adverse changes in the economy or their issuers may affect the fund's ability to pay principal and interest on the bonds. Performance summary Performance should always be considered in light of a fund's investment strategy. Putnam Master Intermediate Income Trust is designed for investors seeking high current income and relative stability of net asset value through U.S. government, investment grade, high-yield, and international fixed-income securities with limited maturities. TOTAL RETURN FOR PERIODS ENDED 9/30/97 Market NAV price - ------------------------------------------------------------------------------ 1 year 11.15% 17.54% - ------------------------------------------------------------------------------ 5 years 54.69 46.53 Annual average 9.12 7.94 - ------------------------------------------------------------------------------ Life (4/29/88) 139.52 105.91 Annual average 9.72 7.97 - ------------------------------------------------------------------------------ COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 9/30/97 Lehman Bros. Salomon Bros. Govt. Non-U.S. First Boston Consumer Intermediate World Govt. High-Yield Price Bond Index Bond Index Index Index - ------------------------------------------------------------------------------ 1 year 7.83% 12.24% 15.72% 2.15% - ------------------------------------------------------------------------------ 5 years 32.91 59.65 74.94 14.08 Annual average 5.86 9.81 11.84 2.67 - ------------------------------------------------------------------------------ Life of fund 107.59 110.19 189.85 37.66 Annual average 8.06 8.21 11.96 3.45 - ------------------------------------------------------------------------------ Performance data represent past results and do not reflect future performance. They do not take into account any adjustment for taxes payable on reinvested distributions. Investment returns, net asset value, and market price will fluctuate so that an investor's shares when sold may be worth more or less than their original cost. PRICE AND DISTRIBUTION INFORMATION 12 months ended 9/30/97 - ------------------------------------------------------------------------------ Distributions (number) 12 - ------------------------------------------------------------------------------ Income $0.644 - ------------------------------------------------------------------------------ Capital gains -- - ------------------------------------------------------------------------------ Total $0.644 - ------------------------------------------------------------------------------ Share value NAV Market price - ------------------------------------------------------------------------------ 9/30/96 $8.58 $7.50 - ------------------------------------------------------------------------------ 9/30/97 8.79 8.125 - ------------------------------------------------------------------------------ Current return (end of period) NAV Market price - ------------------------------------------------------------------------------ Current dividend rate1 7.65% 8.27% - ------------------------------------------------------------------------------ 1 Income portion of most recent distribution, annualized and divided by NAV or market price at end of period. TERMS AND DEFINITIONS Total return shows how the value of the fund's shares changed over time, assuming you held the shares through the entire period and reinvested all distributions in the fund. Net asset value (NAV) is the value of all fund assets, minus any liabilities and net assets allocated to remarketed preferred shares, divided by number of outstanding common shares. Market price is the current trading price of one share of the fund. Market prices are set by transactions between buyers and sellers on the New York Stock Exchange. COMPARATIVE BENCHMARKS Lehman Bros. Government Intermediate Bond Index* is an unmanaged list of U.S. government and mortgage-backed securities composed of all bonds covered by the Lehman Brothers Government Bond Index with maturities between 1 and 9.99 years. Salomon Brothers Non-U.S. World Government Bond Index* is an unmanaged list of bonds issued by 10 countries. First Boston High Yield Index* is an unmanaged list of lower-rated higher-yielding U.S. corporate bonds. Consumer Price Index (CPI) is a commonly used measure of inflation; it does not represent an investment return. * Securities indexes assume reinvestment of all distributions and interest payments and do not take in account brokerage fees or taxes. Securities in the fund do not match those in the indexes and performance of the fund will differ. It is not possible to invest directly in an index. Report of independent accountants For the fiscal year ended September 30, 1997 To the Trustees and Shareholders of Putnam Master Intermediate Income Trust We have audited the accompanying statement of assets and liabilities of Putnam Master Intermediate Income Trust, including the portfolio of investments owned, as of September 30, 1997, and the related statement of operations for the year then ended and the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of September 30, 1997, by correspondence with the custodian and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Putnam Master Intermediate Income Trust as of September 30, 1997, the results of its operations for the year then ended and the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with generally accepted accounting principles. Coopers & Lybrand L.L.P. Boston, Massachusetts November 12, 1997 Portfolio of investments owned September 30, 1997
CORPORATE BONDS AND NOTES (38.0%) * PRINCIPAL AMOUNT VALUE Advertising (0.2%) - ------------------------------------------------------------------------------------------------------------ $ 250,000 Lamar Advertising Co. sr. sub. notes 9 5/8s, 2006 $ 263,125 410,000 Lamar Advertising Co. 144A sr. sub. notes 8 5/8s, 2007 408,975 -------------- 672,100 Aerospace and Defense (0.7%) - ------------------------------------------------------------------------------------------------------------ 250,000 Alliant Techsystems, Inc. sr. sub. notes 11 3/4s, 2003 276,875 465,000 BE Aerospace sr. sub. notes Ser. B, 9 7/8s, 2006 499,875 300,000 Howmet Corp. sr. sub. notes 10s, 2003 327,000 150,000 L-3 Communications Corp. 144A sr. sub. notes 10 3/8s, 2007 161,250 100,000 Moog, Inc. sr. sub. notes Ser. B, 10s, 2006 106,000 600,000 Sequa Corp. sr. sub. notes 9 3/8s, 2003 622,500 185,000 Tracor, Inc. sr. sub. notes 8 1/2s, 2007 189,625 -------------- 2,183,125 Agriculture (0.6%) - ------------------------------------------------------------------------------------------------------------ 1,380,000 PMI Holdings Corp. sub. disc. deb. stepped-coupon Ser. B, zero % (11 1/2s, 9/1/00), 2005 ++ 1,069,500 830,580 Premium Standard Farms, Inc. sr. secd. notes 11s, 2003 [2 DBL. DAGGERS] 913,638 -------------- 1,983,138 Apparel (0.2%) - ------------------------------------------------------------------------------------------------------------ 85,000 GFSI, Inc. sr. sub. notes Ser. B, 9 5/8s, 2007 87,125 125,000 Guess Jeans, Inc. sr. sub. notes 9 1/2s, 2003 129,063 395,000 Sassco Fashions Ltd. sr. notes 12 3/4s, 2004 418,700 170,000 William Carter Co. 144A sr. sub. notes 12s, 2008 181,050 -------------- 815,938 Automotive Parts (0.1%) - ------------------------------------------------------------------------------------------------------------ 70,000 A.P.S. Inc. company guaranty 11 7/8s, 2006 65,100 250,000 Harvard Industries Inc. sr. notes 11 1/8s, 2005 (In default) + 95,000 135,000 Hayes Wheels International, Inc. 144A sr. sub. notes 9 1/8s, 2007 139,050 200,000 Safety Component International, Inc. 144A sr. sub. notes 10 1/8s, 2007 207,000 -------------- 506,150 Banks (5.5%) - ------------------------------------------------------------------------------------------------------------ 3,632,000 Banco Nacional de Comercio Exterior bank guaranteed 8s, 2003 (Mexico) 3,577,520 8,350,000 Banco Nacional de Comercio Exterior deb. 7 1/4s, 2004 (Mexico) 7,953,375 5,000,000 Banque Nationale pour le Development Economique (BNDE) 144A bonds 9s, 2007 (Morocco) 4,962,500 170,000 Delta Financial Corp. sr. notes 9 1/2s, 2004 172,125 240,000 Espirto Santo Centrais 144A sr. notes 10s, 2007 (Brazil) 240,000 1,540,000 First Nationwide Holdings sr. sub. notes 10 5/8s, 2003 1,694,000 -------------- 18,599,520 Beverages (0.1%) - ------------------------------------------------------------------------------------------------------------ 310,000 Canandaigua Wine Co. sr. sub. notes Ser. C, 8 3/4s, 2003 314,650 Broadcasting (2.8%) - ------------------------------------------------------------------------------------------------------------ 240,000 Acme Television/Finance 144A sr. disc. notes stepped- coupon zero % (10 7/8s, 9/30/00), 2004 ++ 175,800 375,000 Affinity Group Holdings sr. notes 11s, 2007 402,188 250,000 Affinity Group Holdings sr. sub. notes 11 1/2s, 2003 268,125 200,000 Australias Hldngs PTY Ltd. sr. disc, notes stepped- coupon zero % (15s, 11/01/00), 2002 ++ 156,250 1,000,000 Benedek Communications Corp. sr. disc. notes stepped- coupon zero % (13 1/4s, 5/15/01), 2006 ++ 705,000 515,000 Capstar Broadcasting sr. disc. notes stepped-coupon zero % (12 3/4s, 2/1/02), 2009 ++ 352,775 215,000 Capstar Broadcasting sr. sub. notes 9 1/4s, 2007 220,375 115,000 Central European Media Enterprises Ltd. sr. notes 9 3/8s, 2004 115,288 26,020 Citadel Broadcasting Co. 144A sr. notes 10 1/4s, 2007 27,972 190,000 Citadel Broadcasting Inc. 144A sr. sub. notes 10 1/4s, 2007 204,250 750,000 Comcast UK Cable, Ltd. deb. stepped-coupon zero % (11.2s, 11/15/00), 2007 (Bermuda) ++ 588,750 480,000 Commodore Media, Inc. sr. sub. notes stepped-coupon 7 1/2s, (13 1/4s, 5/1/98), 2003 ++ 528,000 1,350,000 Echostar Satellite Broadcast Corp. sr. disc. notes stepped- coupon zero % (13 1/8s, 3/15/00), 2004 ++ 1,128,938 600,000 Fox/Liberty Networks LLC 144A sr. disc. notes stepped-coupon zero % (9 3/4s,8/15/02), 2007 ++ 381,750 670,000 Fox/Liberty Networks LLC 144A sr. notes 8 7/8s, 2007 674,188 380,000 Heartland Wireless Communications, Inc. sr. notes Ser. B, 14s, 2004 171,000 200,000 Pegasus Media & Communications notes Ser. B, 12 1/2s, 2005 223,500 929,000 Petracom Holdings, Inc. notes stepped-coupon zero % (17 1/2s, 8/1/98), 2003 ++ 891,840 275,000 Radio One Inc. 144A sr. sub. notes stepped-coupon 7s, (12s, 5/1/00), 2004 ++ 264,000 700,000 SFX Broadcasting, Inc. sr. sub. notes Ser. B, 10 3/4s, 2006 763,000 210,000 Spanish Broadcasting sr. notes Ser. B, 11s, 2004 229,425 220,000 TCI Satellite Entertainment 144A sr. sub. notes 10 7/8s, 2007 231,000 545,000 TV Azteca Sa De Cv sr. notes Ser. B, 10 1/2s, 2007 (Mexico) 580,425 -------------- 9,283,839 Building Products (0.5%) - ------------------------------------------------------------------------------------------------------------ 400,000 Cemex S.A. 144A bonds 12 3/4s, 2006 (Mexico) 483,000 500,000 Nortek, Inc. sr. sub. notes 9 7/8s, 2004 511,250 70,000 Roller Bearing Co. 144A sr. sub. notes 9 5/8s, 2007 71,575 500,000 Southdown, Inc. sr. sub. notes Ser. B, 10s, 2006 555,000 248,000 Waxman Industries Inc. sr. notes stepped-coupon Ser. B, zero % (12 3/4s, 6/1/99), 2004 ++ 215,760 -------------- 1,836,585 Building and Construction (0.5%) - ------------------------------------------------------------------------------------------------------------ 225,000 Atrium Companies Inc. sub. notes 10 1/2s, 2006 234,000 400,000 GS Superhighway Holdings 144A sr. notes 10 1/4s, 2007 401,000 180,000 Presley Cos. sr. notes 12 1/2s, 2001 171,000 733,000 Terex Corp. sr. notes Ser. B, 13 1/4s, 2002 842,950 -------------- 1,648,950 Buses (0.2%) - ------------------------------------------------------------------------------------------------------------ 855,000 Consorcio/MCII Holdings sec. notes stepped-coupon zero % (12s, 11/15/98), 2002 ++ 780,188 Business Equipment and Services (0.4%) - ------------------------------------------------------------------------------------------------------------ 600,000 Axiohm Transactions Solutions 144A sr. sub. notes 9 3/4s, 2007 607,500 100,000 Coleman Escrow Corp. 144A sr. disc. notes zero % , 2001 60,250 500,000 Corporate Express, Inc. sr. sub. notes Ser. B, 9 1/8s, 2004 510,000 125,000 Outsourcing Solutions, Inc. sr. sub. notes Ser. B, 11s, 2006 138,750 -------------- 1,316,500 Cable Television (2.4%) - ------------------------------------------------------------------------------------------------------------ 1,981,594 Adelphia Communications Corp. sr. notes 9 1/2s, 2004 [2 DBL. DAGGERS] 1,951,870 500,000 American Telecasting, Inc. sr. disc. notes stepped-coupon zero % (14 1/2s, 8/15/00), 2005 ++ 170,000 300,000 Charter Communications International, Inc. disc. notes stepped-coupon Ser. B, zero % (14s, 3/15/01), 2007 ++ 226,500 700,000 Diamond Cable Communication Co. sr. disc. notes stepped-coupon zero % (11 3/4s, 12/15/00), 2005 (United Kingdom) ++ 524,125 1,000,000 Diamond Cable Communication Co. sr. disc. notes stepped-coupon zero % (10 3/4s, 2/15/02), 2007 (United Kingdom) ++ 651,250 1,480,216 Falcon Holdings Group, Inc. sr. sub. notes 11s, 2003 [2 DBL. DAGGERS] 1,539,425 600,000 FrontierVision Holdings LP 144A sr. disc. notes stepped coupon zero % (11 7/8s, 9/15/01), 2007 ++ 408,000 1,390,000 International Cabletel, Inc. sr. notes stepped-coupon Ser. B, zero % (11 1/2s, 2/01/01), 2006 ++ 1,039,025 460,000 Marcus Cable Co. (L.P.) sr. sub. disc. notes stepped- coupon zero % (13 1/2s, 8/1/99), 2004 ++ 414,575 1,260,000 UIH Australia/Pacific, Inc. sr. disc. notes stepped-coupon Ser. B, zero % (14s, 5/15/01), 2006 (Australia) ++ 904,050 310,000 Wireless One, Inc. sr. notes 13s, 2003 148,800 -------------- 7,977,620 Cellular Communications (1.8%) - ------------------------------------------------------------------------------------------------------------ 1,380,000 Cencall Communications Corp. sr. disc. notes stepped- coupon zero % (10 1/8s, 1/15/99), 2004 ++ 1,217,850 1,500,000 Comunicacion Cellular bonds stepped-coupon zero % (13 1/8s, 11/15/00), 2003 (Colombia) ++ 1,162,500 540,000 Intercel, Inc. sr. disc. notes stepped-coupon zero % (12s, 5/1/01), 2006 ++ 368,550 510,000 International Wireless Communications, Inc. sr. disc. notes zero %, 2001 290,700 930,000 McCaw International Ltd sr. disc. notes stepped coupon zero % (13s, 4/15/02), 2007 ++ 560,325 775,000 Millicom International Cellular S.A. sr. disc. notes stepped-coupon zero % (13 1/2s, 6/1/01), 2006 (Luxembourg) ++ 600,625 2,090,000 NEXTEL Communications, Inc. 144A sr. disc. notes stepped-coupon zero % (10.65s, 9/15/02), 2007 ++ 1,287,963 190,000 Omnipoint Corp. sr. notes 11 5/8s, 2006 195,700 460,000 Omnipoint Corp. sr. notes Ser. A, 11 5/8s, 2006 473,800 -------------- 6,158,013 Chemicals (0.9%) - ------------------------------------------------------------------------------------------------------------ 1,000,000 Acetex Corp. sr. notes 9 3/4s, 2003 (Canada) 1,035,000 70,000 Chemical Leaman Corp. 144A sr. notes 10 3/8s, 2005 73,325 580,000 Harris Chemical Corp. sr. sub. notes 10 3/4s, 2003 598,850 320,000 Huntsman Corp. 144A sr. sub. notes 9 1/2s, 2007 336,000 15,000 Huntsman Corp. 144A sr. sub. notes FRN 9.187s, 2007 15,563 500,000 ISP Holdings, Inc. sr. notes Ser. B, 9 3/4s, 2002 540,000 250,000 Sovereign Specialty Chemical 144A sr. sub. notes 9 1/2s, 2007 255,000 185,000 Sterling Chemicals Holdings sr. disc. notes stepped- coupon zero % (13 1/2s, 8/15/01), 2008 ++ 130,425 205,000 Trikem S.A. 144A bonds 10 5/8s, 2007 (Brazil) 206,281 -------------- 3,190,444 Computer Equipment (0.2%) - ------------------------------------------------------------------------------------------------------------ 725,000 Computervision Corp. sr. sub. notes 11 3/8s, 1999 580,000 Computer Services (0.2%) - ------------------------------------------------------------------------------------------------------------ 115,000 DecisionOne Corp. sr. sub. notes 9 3/4s, 2007 120,175 545,000 Unisys Corp. sr. notes 11 3/4s, 2004 615,850 -------------- 736,025 Conglomerates (0.3%) - ------------------------------------------------------------------------------------------------------------ 518,000 Axia, Inc. sr. sub. notes Ser. B, 11s, 2001 538,720 600,000 MacAndrews & Forbes Holdings, Inc. sub. deb. notes 13s, 1999 602,250 -------------- 1,140,970 Consumer Durable Goods (0.1%) - ------------------------------------------------------------------------------------------------------------ 345,000 Icon Fitness Corp. sr. disc. notes stepped-coupon Ser. B, zero % (14s, 11/15/01), 2006 ++ 203,550 100,000 Remington Products Co. sr. sub. notes Ser. B, 11s, 2006 84,000 -------------- 287,550 Consumer Non Durables (--%) - ------------------------------------------------------------------------------------------------------------ 100,000 Foamex L.P. 144A sr. sub. notes 9 7/8s, 2007 103,500 Consumer Services (0.6%) - ------------------------------------------------------------------------------------------------------------ 1,582,000 Coinmach Corp. sr. notes Ser. B, 11 3/4s, 2005 1,752,065 520,000 Interact Systems, Inc. 144A sr. notes stepped-coupon zero % (14s, 8/1/99), 2003 ++ 208,000 -------------- 1,960,065 Containers (0.1%) - ------------------------------------------------------------------------------------------------------------ 243,000 Ivex Packaging Corp. sr. sub. notes 12 1/2s, 2002 261,225 Cosmetics (0.2%) - ------------------------------------------------------------------------------------------------------------ 95,000 French Fragrances, Inc. sr. notes Ser. B., 10 3/8s, 2007 98,800 915,000 Revlon Worldwide Corp. sr. disc. notes Ser. B, zero %, 2001 665,663 -------------- 764,463 Electric Utilities (1.0%) - ------------------------------------------------------------------------------------------------------------ 245,000 AES Corp. sr. sub. notes 8 3/8s, 2007 245,613 1,950,000 Midland Funding Corp. deb. Ser. A, 11 3/4s, 2005 2,314,455 556,807 Northeast Utilities System notes Ser. A, 8.58s, 2006 552,019 153,333 Northeast Utilities System notes Ser. B, 8.38s, 2005 155,365 -------------- 3,267,452 Electronics and Electrical Equipment (0.6%) - ------------------------------------------------------------------------------------------------------------ 130,000 Argo-Tech Corp. 144A sr. sub. notes 8 5/8s, 2007 130,325 140,000 Celestica International Ltd. 144A sr. sub. notes 10 1/2s, 2006 (Canada) 151,375 160,712 Cirent Semiconductor sr. sub. notes 10.22s, 2002 164,127 170,559 Cirent Semiconductor 144A sr. sub. notes 10.14s, 2004 174,397 190,000 DII Group, Inc. 144A sr. sub. notes 8 1/2s, 2007 190,238 120,000 HCC Industries, Inc. 144A sr. sub. notes 10 3/4s, 2007 127,200 1,160,000 International Semi-Tech. Corp. sr. secd. disc. notes stepped-coupon zero % (11 1/2s,8/15/00), 2003 (Canada) ++ 725,000 240,000 Motors and Gears, Inc. sr. notes Ser. B, 10 3/4s, 2006 256,800 100,000 Therma-Wave Inc. 144A sr. notes 10 5/8s, 2004 108,000 70,000 Wavetek Corp. 144A sr. sub. notes 10 1/8s, 2007 72,800 -------------- 2,100,262 Energy-Related (0.2%) - ------------------------------------------------------------------------------------------------------------ 710,000 Panda Global Energy Co. 144A sr. notes 12 1/2s, 2004 692,250 Environmental Control (0.2%) - ------------------------------------------------------------------------------------------------------------ 250,000 Allied Waste Industries, Inc. company guaranty 10 1/4s, 2006 273,750 420,000 Allied Waste Industries, Inc. 144A sr. disc. notes stepped- coupon zero % (11.3s, 6/1/02), 2007 ++ 284,550 -------------- 558,300 Financial Services (0.5%) - ------------------------------------------------------------------------------------------------------------ 260,000 Aames Financial Corp. sr. notes 9 1/8s, 2003 265,200 115,000 Dollar Financial Group Inc. sr. notes Ser. A, 10 7/8s, 2006 124,200 500,000 First Federal Financial Corp. notes 11 3/4s, 2004 510,000 125,000 Imperial Credit Industries, Inc. sr. notes 9 7/8s, 2007 126,250 190,000 Intertek Finance PLC 144A sr. sub. notes 10 1/4s, 2006 199,975 200,000 Ocwen Federal Bank FSB sub. deb. 12s, 2005 222,000 120,000 Ocwen Financial Corp. notes 11 7/8s, 2003 135,600 120,000 Resource America Inc. 144A bonds 12s, 2004 125,700 -------------- 1,708,925 Food and Beverages (0.3%) - ------------------------------------------------------------------------------------------------------------ 80,000 Del Monte Corp. sr. sub. notes Ser. B, 12 1/4s, 2007 [2 DBL. DAGGERS] 87,200 500,000 Doane Products Co. sr. notes 10 5/8s, 2006 538,750 65,000 MBW Foods, Inc. 144A sr. sub. notes 9 7/8s, 2007 67,275 130,000 Southern Foods Group 144A sr. sub. notes 9 7/8s, 2007 134,550 50,000 Windy Hill Pet Food Co. 144A sr. sub. notes 9 3/4s, 2007 51,750 -------------- 879,525 Food Chains (0.4%) - ------------------------------------------------------------------------------------------------------------ 280,000 Fleming Companies, Inc. 144A sr. sub. notes 10 1/2s, 2004 289,800 1,250,000 Southland Corp. deb. Ser. B, 4s, 2004 960,000 -------------- 1,249,800 Gaming Equipment (0.1%) - ------------------------------------------------------------------------------------------------------------ 150,000 Argosy Gaming Co. 1st mtge. 13 1/4s, 2004 150,000 Health Care (0.3%) - ------------------------------------------------------------------------------------------------------------ 300,000 Genesis Eldercare 144A sr. sub. notes 9s, 2007 298,500 5,000 Genesis Health Ventures, Inc. sr. sub. notes 9 1/4s, 2006 5,113 340,000 IMED Corp. sr. sub. notes 9 3/4s, 2006 350,200 480,000 Integrated Health Services, Inc. 144A sr. sub. notes 9 1/4s, 2008 487,200 -------------- 1,141,013 Hospital Management (0.2%) - ------------------------------------------------------------------------------------------------------------ 700,000 Paracelsus Healthcare Corp. sr. sub. notes 10s, 2006 722,750 Insurance and Finance (0.5%) - ------------------------------------------------------------------------------------------------------------ 500,000 Indah Kiat Financial Mauritius 144A company guaranty 10s, 2007 (Indonesia) 488,750 200,000 Pioneer Americas Acquisition 144A sr. notes 9 1/4s, 2007 199,000 370,000 Polytama International notes 11 1/4s, 2007 359,825 500,000 Reliance Group Holdings, Inc. sr. sub. deb. 9 3/4s, 2003 529,030 -------------- 1,576,605 Lodging (0.4%) - ------------------------------------------------------------------------------------------------------------ 750,000 HMH Properties, Inc. sr. notes Ser. B, 9 1/2s, 2005 789,375 500,000 Host Marriott Travel Plaza sr. notes Ser. B, 9 1/2s, 2005 528,750 -------------- 1,318,125 Machinery (--%) - ------------------------------------------------------------------------------------------------------------ 100,000 Bucyrus International, Inc. 144A sr. notes 9 3/4s, 2007 100,875 Medical Supplies and Devices (0.6%) - ------------------------------------------------------------------------------------------------------------ 250,000 Dade International, Inc. sr. sub. notes Ser. B, 11 1/8s, 2006 281,563 1,000,000 Graphic Controls Corp. sr. sub. notes Ser. A, 12s, 2005 1,120,000 350,000 Urohealth Systems, Inc. 144A sr. sub. notes 12 1/2s, 2004 347,375 350,000 Wright Medical Technology, Inc. 144A notes Ser. C, 11 3/4s, 2000 358,750 -------------- 2,107,688 Metals and Mining (0.4%) - ------------------------------------------------------------------------------------------------------------ 90,000 Acindar Industria Argentina de Aceros S.A. bonds 11 1/4s, 2004 (Argentina) 97,763 200,000 Anker Coal Group, Inc. 144A sr. notes 9 3/4s, 1997 203,000 210,000 Continental Global Group sr. notes Ser. B, 11s, 2007 224,700 175,000 Murrin Holdings 144A sr. notes 9 3/8s, 2007 (Australia) 176,750 200,000 NL Industries, Inc. sr. notes 11 3/4s, 2003 219,500 45,000 Royal Oak Mines, Inc. company guaranty Ser. B, 11s, 2006 (Canada) 43,425 250,000 Weirton Steel Co. sr. notes 11 3/8s, 2004 271,250 -------------- 1,236,388 Motion Picture Distribution (0.3%) - ------------------------------------------------------------------------------------------------------------ 561,900 Cinemark Mexico USA notes Ser. B, 13s, 2003 (Mexico) [2 DBL. DAGGERS] 561,900 37,800 Cinemark Mexico USA notes Ser. D, 13s, 2003 (Mexico) [2 DBL. DAGGERS] 37,800 400,000 Cinemark USA, Inc. sr. sub. notes Ser. B, 9 5/8s, 2008 411,500 -------------- 1,011,200 Networking (0.4%) - ------------------------------------------------------------------------------------------------------------ 1,735,000 CellNet Data Systems, Inc. sr. disc. notes stepped- coupon Ser. B, zero % (13s, 6/15/00), 2005 ++ 1,231,850 Nursing Homes (0.1%) - ------------------------------------------------------------------------------------------------------------ 365,000 Sun Healthcare Group Inc. 144A sr. sub. notes 9 1/2s, 2007 375,038 Oil and Gas (1.8%) - ------------------------------------------------------------------------------------------------------------ 185,000 Abraxas Petroleum Corp. 144A sr. notes Ser. B, 11 1/2s, 2004 201,650 180,000 Coho Energy Inc. sr. sub. notes 8 7/8s, 2007 178,639 80,000 Dailey Petroleum Services Corp. 144A company guaranty 9 3/4s, 2007 83,200 100,000 DI Industries Inc. sr. notes 8 7/8s, 2007 102,750 750,000 Maxus Energy Corp. global notes 9 7/8s, 2002 787,320 100,000 Pacalta Resources Ltd. sr. notes Ser. B, 10 3/4s, 2004 (Canada) 103,250 195,000 Parker Drilling Corp. sr. notes Ser. B, 9 3/4s, 2006 207,675 300,000 Pogo Producing Co. 144A notes 8 3/4s, 2007 306,000 150,000 Pride Petroleum Services, Inc. sr. notes 9 3/8s, 2007 160,500 2,725,000 Transamerican Energy 144A sr. disc. notes stepped- coupon zero % (13s 6/01/99), 2002 ++ 2,166,375 1,080,000 Transamerican Energy 144A sr. notes 11 1/2s, 2002 1,071,900 518,000 TransTexas Gas Corp. 144A sr. sub. notes 13 3/4s, 2001 593,110 100,000 Wiser Oil Co. 144A sr. sub. notes 9 1/2s, 2007 96,500 -------------- 6,058,869 Packaging and Containers (0.2%) - ------------------------------------------------------------------------------------------------------------ 215,000 Huntsman Packaging Corp. 144A sr. sub. notes 9 1/8s, 2007 219,838 270,000 Innova S De R.L. sr. notes 12 7/8s, 2007 (Mexico) 289,575 -------------- 509,413 Paging (0.2%) - ------------------------------------------------------------------------------------------------------------ 500,000 Mobile Telecommunications Tech. sr. notes 13 1/2s, 2002 567,500 Paper and Forest Products (1.2%) - ------------------------------------------------------------------------------------------------------------ 250,000 APP International Finance Co. notes 11 3/4s, 2005 (Netherlands) 269,063 670,000 Florida Coast Paper LLC 1st mtge. Ser. B, 12 3/4s, 2003 728,625 375,000 Pindo Deli Finance Mauritius Ltd. 144A company guaranty 10 3/4s, 2007 (India) 382,500 445,000 PT Pabrik Kertas Tjiwi Kimia 144A company guaranty 10s, 2004 (Indonesia) 436,100 660,000 Repap New Brunswick sr. notes 10 5/8s, 2005 (Canada) 650,100 200,000 Riverwood International Corp. company guaranty 10 7/8s, 2008 199,500 450,000 Riverwood International Corp. 144A sr. notes 10 5/8s, 2007 470,250 850,000 Stone Container Corp. 144A company guaranty 11 1/2s, 2006 898,875 -------------- 4,035,013 Pharmaceuticals and Biotechnology (0.3%) - ------------------------------------------------------------------------------------------------------------ 500,000 ICN Pharmaceuticals, Inc. 144A sr. notes 9 1/4s, 2005 525,000 600,000 Twin Laboratories, Inc. company guaranty 10 1/4s, 2006 651,000 -------------- 1,176,000 Publishing (0.1%) - ------------------------------------------------------------------------------------------------------------ 350,000 Garden State Newspapers 144A sr. sub. notes 8 3/4s, 2009 352,625 100,000 Von Hoffman Press Inc. 144A sr. sub. notes 10 3/8s, 2007 106,000 -------------- 458,625 Railroads (--%) - ------------------------------------------------------------------------------------------------------------ 75,000 TFM SA DE CV 144A company guaranty 10 1/4s, 2007 (Mexico) 79,125 Real Estate (0.2%) - ------------------------------------------------------------------------------------------------------------ 380,000 HMH Properties, Inc. 144A sr. notes 8 7/8s, 2007 (Canada) (R) 390,450 315,000 Prime Hospitality Corp. Ser. B, sub. notes 9 3/4s, 2007 333,113 -------------- 723,563 Recreation (2.1%) - ------------------------------------------------------------------------------------------------------------ 185,000 Casino America, Inc. sr. notes 12 1/2s, 2003 197,950 400,000 Coast Hotels & Casinos, Inc. company guaranty Ser. B, 13s, 2002 451,000 370,300 Colorado Gaming & Entertainment Co. sr. notes 12s, 2003 [2 DBL. DAGGERS] 403,627 513,970 Elsinore Corp. 144A exch. 1st mortgage 11 1/2s, 2000 493,411 250,000 Grand Casinos, Inc. 1st mtge. 10 1/8s, 2003 265,000 1,000,000 Grate Bay Property Funding Corp. 1st mtge. 10 7/8s, 2004 897,500 900,000 Hollywood Casino Corp. sr. notes 12 3/4s, 2003 985,500 150,000 Isle of Capri Black Hawk LLC 144A 1st mortgage 13s, 2004 151,500 1,200,000 Lady Luck Gaming Corp. 1st mtge. 11 7/8s, 2001 1,197,000 444,000 Louisiana Casino Cruises Corp. 1st mtge. 11 1/2s, 1998 448,440 500,000 PRT Funding Corp. sr. notes 11 5/8s, 2004 410,000 750,000 Trump A.C. 1st mtge. 11 1/4s, 2006 727,500 594,000 Trump Castle Funding Corp. notes 11 1/2s, 2000 599,940 -------------- 7,228,368 Restaurants (0.2%) - ------------------------------------------------------------------------------------------------------------ 500,000 FRD Acquisition Co. sr. notes Ser. B, 12 1/2s, 2004 535,000 Retail (1.0%) - ------------------------------------------------------------------------------------------------------------ 434,000 Guitar Center Management Co. 144A sr. notes 11s, 2006 481,740 650,000 Johns Manville International Group sr. notes 10 7/8s, 2004 732,875 1,250,000 K mart Corp. med. term notes 7.55s, 2004 1,203,350 600,000 Mothers Work, Inc. sr. notes 12 5/8s, 2005 654,000 110,000 NBTY, Inc. 144A sr. sub. notes 8 5/8s, 2007 109,450 260,000 Zale Corp. 144A sr. notes 8 1/2s, 2007 260,000 -------------- 3,441,415 Satellite Services (0.5%) - ------------------------------------------------------------------------------------------------------------ 255,000 Esat Holdings Ltd. sr. notes stepped-coupon zero % (12 1/2s, 2/01/02), 2007 (Ireland) ++ 167,025 400,000 Iridium LLC/Capital Corp. 144A sr. notes 13s, 2005 418,000 190,000 Pratama Datakom Asia BV 144A company guaranty 12 3/4s, 2005 (Indonesia) 181,925 1,300,000 Winstar Communications, Inc. sr. disc. notes stepped-coupon zero % (14s, 10/15/00), 2005 ++ 910,000 -------------- 1,676,950 Semiconductors (0.2%) - ------------------------------------------------------------------------------------------------------------ 220,000 Fairchild Semiconductor Corp. 144A sr. sub. notes 11.74s, 2008 [2 DBL. DAGGERS] 222,200 215,000 Fairchild Semiconductor Corp. sr. sub. notes 10 1/8s, 2007 230,588 245,000 Viasystems Inc. 144A sr. sub. notes 9 3/4s, 2007 254,800 -------------- 707,588 Shipping (0.1%) - ------------------------------------------------------------------------------------------------------------ 230,000 Johnstown America Industries, Inc. 144A sr. sub. notes 11 3/4s, 2005 247,250 Steel (0.2%) - ------------------------------------------------------------------------------------------------------------ 215,000 Altos Hornos de Mexico 144A bonds 11 3/8s, 2002 (Mexico) 233,006 140,000 Armco, Inc. 144A sr. notes 9s, 2007 141,750 420,000 Hylsa S.A. de C.V. 144A bonds 9 1/4s, 2007 (Mexico) 429,450 -------------- 804,206 Supermarkets (0.5%) - ------------------------------------------------------------------------------------------------------------ 280,000 Ameriserve Food Co. 144A sr. sub. notes 10 1/8s, 2007 291,200 400,000 Jitney-Jungle Stores company guaranty 12s, 2006 451,000 240,000 Jitney-Jungle Stores 144A sr. sub. notes 10 3/8s, 2007 247,200 200,000 Nebco Evans Holding Co. 144A sr. disc. notes stepped- coupon zero % (12 3/8s, 7/15/02), 2007 ++ 126,000 500,000 Ralphs Grocery Co. sr. notes 10.45s, 2004 547,500 -------------- 1,662,900 Telecommunications (2.3%) - ------------------------------------------------------------------------------------------------------------ 170,000 Antenna TV S.A. 144A sr. notes 9s, 2007 (Greece) 170,850 190,000 America Communication Services, Inc. 144A sr. notes 13 3/4s, 2007 220,400 640,000 American Communication Services, Inc. sr. disc. notes stepped-coupon zero % (12 3/4s, 4/1/01), 2006 ++ 448,000 105,000 Consorcio Ecuatoriano 144A notes 14s, 2002 (Ecuador) 113,400 285,000 Dobson Communications Corp. sr. notes 11 3/4s, 2007 283,219 325,000 Echostar DBS Corp. 144A company guaranty 12 1/2s, 2002 357,906 140,000 Frontiervision Operating Partners L.P. sr. sub. notes 11s, 2006 152,600 1,002,000 GST Telecommunications,Inc. company guaranty stepped- coupon zero % (13 7/8s, 12/15/00), 2005 ++ 756,510 770,000 Hyperion Telecommunication Corp. sr. disc. notes stepped-coupon Ser. B, zero % (13s, 4/15/01), 2003 ++ 539,963 400,000 Hyperion Telecommunications, Inc. 144A sr. notes 12 1/4s, 2004 438,000 1,260,000 ICG Holdings, Inc. sr. disc. notes stepped-coupon zero % (13 1/2s, 9/15/00), 2005 ++ 1,008,000 1,000,000 Intermedia Communications, Inc. sr. disc. notes stepped- coupon Ser. B, zero % (11 1/4s, 7/15/02), 2007 ++ 690,000 260,000 ITC Deltacom, Inc. 144A sr. notes 11s, 2007 285,350 750,000 Metrocall, Inc. sr. sub. notes 10 3/8s, 2007 751,875 605,000 Nextlink Communications, Inc. sr. notes 12 1/2s, 2006 695,750 525,000 Orbcomm Global Capital Corp. sr. notes Ser. B, 14s, 2004 546,000 250,000 Teleport Communications Group Inc. sr. disc. notes stepped-coupon zero % (11 1/8s, 7/1/01), 2007 ++ 195,000 250,000 Winstar Equipment Corp. company guaranty 12 1/2s, 2004 265,000 -------------- 7,917,823 Telephone Services (1.0%) - ------------------------------------------------------------------------------------------------------------ 330,000 Brooks Fiber Properties, Inc. sr. notes 10s, 2007 373,725 330,000 BTI Telecom Corp. 144A sr. notes 10 1/2s, 2007 341,550 280,000 Globo Communicacoes 144A company guaranty 10 1/2s, 2006 (Brazil) 289,800 455,000 McLeodUSA, Inc. sr. disc. notes stepped-coupon zero % (10 1/2s, 3/1/02), 2007 ++ 332,150 360,000 Nextlink Communications sr. notes 9 5/8s, 2007 372,600 675,000 NTL Inc. sr. notes Ser. B, 10s, 2007 (United Kingdom) 705,375 615,000 RSL Communications, Ltd. company guaranty 12 1/4s, 2006 658,050 210,000 Viatel, Inc. sr. disc. notes stepped-coupon zero % (15s, 1/15/00), 2005 ++ 154,350 -------------- 3,227,600 Textiles (0.3%) - ------------------------------------------------------------------------------------------------------------ 105,000 Glenoit Corp. 144A sr. sub. notes 11s, 2007 112,350 240,000 Polymer Group, Inc. 144A sr. sub. notes 9s, 2007 242,400 250,000 Polysindo Inernational Eka company guaranty 13s, 2001 (Indonesia) 279,688 395,000 Polysindo International Finance company guaranty 11 3/8s, 2006 (Indonesia) 429,069 -------------- 1,063,507 Wireless Communications (0.5%) - ------------------------------------------------------------------------------------------------------------ 700,000 Advanced Radio Telecom Corp. sr. notes 14s, 2007 608,125 100,000 Grupo Iusacell S.A. 144A sr. notes 10s, 2004 (Mexico) 103,500 525,000 Iridium LLC/Capital Corp. 144A sr. notes 14s, 2005 567,000 410,000 Powertel, Inc. sr. notes 11 1/8s, 2007 426,400 -------------- 1,705,025 -------------- Total Corporate Bonds and Notes (cost $116,263,849) $ 128,354,344 U.S. GOVERNMENT AND AGENCY OBLIGATIONS (32.6%) * PRINCIPAL AMOUNT VALUE U.S. Government Agency Mortgage Obligations (24.6%) - ------------------------------------------------------------------------------------------------------------ Federal Home Loan Mortgage Corp. Pass-Through Certificates $ 2,483,464 8 1/2s, with due dates from March 1, 2025 to June 15, 2027 $ 2,595,223 3,197,462 6 1/2s, with due dates from February 1, 2012 to June 1, 2012 3,175,470 Federal National Mortgage Association Pass-Through Certificates 5,443 8 1/2s, Dwarf, with due dates from March 1, 2006 to March 1, 2006 5,689 8,414,975 7 1/2s, with due dates from January 1, 2027 to June 1, 2027 8,554,331 10,097,778 7s, with due dates from April 1, 2023 to April 15, 2027 10,056,686 9,594,990 6 1/2s, with due dates from April 1, 2027 to September 1, 2027 9,343,125 1,260,000 6 3/8s, August 15, 2007 925,500 Government National Mortgage Association 2,480,000 8 1/2s, TBA, October 16, 2027 2,594,700 8,405,000 7 1/2s, TBA, October 16, 2027 8,549,398 1,990,000 5 1/2s, TBA, October 16, 2027 1,988,129 Government National Mortgage Association Pass-Through Certificates 11,274,800 8 1/2s, with due dates from January 15, 2026 to August 15, 2027 11,796,266 6,406,838 8s, with due dates from January 15, 2026 to February 15, 2027 6,623,075 16,794,040 7 1/2s, with due dates from February 15, 2023 to August 15, 2027 17,087,247 -------------- 83,294,839 U.S. Treasury Obligations (8.0%) - ------------------------------------------------------------------------------------------------------------ U.S. Treasury Notes 4,000 6 1/2s, October 15, 2006 4,086 3,875,000 6 3/8s, April 30, 1999 3,909,526 1,600,000 6 1/4s, August 31, 2002 1,614,496 13,535,000 6 1/4s, March 31, 1999 # 13,630,151 2,500,000 6 1/8s, August 15, 2007 2,501,175 2,830,000 6s, July 31, 2002 2,830,000 2,455,000 5 7/8s, July 31, 1999 2,456,915 -------------- 26,946,349 -------------- Total U.S. Government and Agency Obligations (cost $108,352,855) $ 110,241,188 FOREIGN GOVERNMENT BONDS AND NOTES (22.7%) * PRINCIPAL AMOUNT VALUE - ------------------------------------------------------------------------------------------------------------ AUD 3,000,000 Australia (Government of) bonds Ser. 206, 10s, 2006 $ 2,728,955 CAD 1,850,000 Canada (Government of) bonds Ser. WB60, 7 1/4s, 2007 1,484,957 DKK 16,890,000 Denmark (Government of) bonds 8s, 2006 2,878,376 FRF 51,085,000 France Treasury Bill notes 4 3/4s, 2002 8,645,154 DEM 2,270,000 Germany (Federal Republic of) bonds Ser. 92, 8s, 2002 1,459,194 DEM 35,065,000 Germany (Federal Republic of) bonds Ser. 97, 6s, 2007 20,608,901 USD 9,723,000 Russia Ministry of Finance 9 1/4s, 2001 11,297,520 NZD 1,735,000 New Zealand (Government of) bonds 8s, 2004 1,187,760 USD 1,800,000 Mendoza (Providence of) 144A 10s, 2007 1,824,750 USD 3,685,000 Ecuador (Republic of) 11 1/4s, 2002 3,947,556 ZAR 21,520,000 South Africa (Republic of) bonds Ser. 150, 12s, 2005 4,219,826 GBP 7,695,000 United Kingdom Treasury bonds 7 1/2s, 2006 13,315,884 GBP 1,765,000 United Kingdom Treasury bonds 7s, 2002 2,913,391 -------------- Total Foreign Government Bonds and Notes (cost $81,999,318) $ 76,512,224 UNITS (1.9%) * NUMBER OF UNITS VALUE - ------------------------------------------------------------------------------------------------------------ 600 Australis Media, Ltd. units stepped-coupon zero % (15 3/4s, 5/15/00), 2003 (Australia) ++ $ 498,000 91 Celcaribe S.A. 144A units stepped-coupon zero % (13 1/2s, 3/15/98), 2004 ++ 1,820,000 410 Colt Telecommunications Group PLC units stepped- coupon zero % (12s, 12/15/01), 2006 (United Kingdom) ++ 307,500 255 Conecel Holdings 144A units 14s, 2000 261,375 100 DecisionOne Corp. units stepped-coupon zero % (11 1/2s, 8/01/02), 2008 ++ 66,500 475 Diva Systems Corp. 144A units stepped-coupon zero % (13s, 5/15/01), 2006 ++ 416,219 1,035 Fitzgerald Gaming Co. units 13s, 2002 988,425 50 Hedstrom Holdings, Inc. units stepped-coupon zero % (12s, 6/01/02), 2009 ++ 31,500 840 MGC communications, Inc. 144A units 13s, 2004 867,300 130 Paging Network Do Brazil 144A units 13 1/2s, 2005 (Brazil) 127,725 190 Real Time Data 144A units stepped-coupon zero % (13 1/2s, 8/15/99), 2006 ++ 111,150 200 Stone Container Corp. units sr. sub. 12 1/4s, 2002 207,500 200 Wireless One, Inc. units stepped-coupon zero % (13 1/2s, 8/1/01), 2006 ++ 42,000 500 XCL Ltd. units sr. sec. notes 13 1/2s, 2004 525,000 -------------- Total Units (cost $4,785,257) $ 6,270,194 COMMON STOCKS (1.2%) * NUMBER OF SHARES VALUE - ------------------------------------------------------------------------------------------------------------ 8,599 Advanced Radio Telecom Corp. + $ 79,003 150 AmeriKing, Inc. + 7,500 2,955 Axia Inc. 144A + 147,750 13,880 CellNet Data Systems, Inc. + 174,368 12,124 Chesapeake Energy Corp. 137,911 4,500 Exide Corp. 102,094 53,023 Grand Union Co. (acquired 6/20/95, cost $1,711,961)[DBL. DAGGER]+ 92,790 3,770 IFINT Diversified Holdings 144A + 37,700 35,327 Lady Luck Gaming Corp. (acquired 10/1/93, cost $29,100)[DBL. DAGGER]+ 46,367 20,000 NEXTEL Communications, Inc. Class A + 577,500 4,918 NEXTEL Communications, Inc. (acquired 9/12/97, cost $79,358) [DBL. DAGGER] 134,907 464 PMI Holdings Corp. 144A + 148,480 327 Premium Holdings L.P. + 1,308 71,533 PSF Holdings LLC Class A + 2,145,990 10,050 Specialty Foods Acquisition Corp. + 2,513 4,400 Terex Corp. Rights 144A + 88,000 -------------- Total Common Stocks (cost $5,268,424) $ 3,924,181 PREFERRED STOCKS (1.3%) * NUMBER OF SHARES VALUE - ------------------------------------------------------------------------------------------------------------ 6,000 AmeriKing, Inc. $3.25 pfd. [2 DBL. DAGGERS] $ 169,500 12,375 Cablevision Systems Corp. Ser. M, $11.125 dep. shs. pfd. [2 DBL. DAGGERS] 1,358,156 9,600 Diva Systems Corp. Ser. C, $6.00 pfd. 110,400 180 Echostar Communications Corp. 144A 12.125% pfd. 187,200 11,765 Fitzgeralds Gaming Co. $3.75 pfd. 258,830 340 Fresenius Medical Care AG Ser. D, $9.00 (Germany) 352,750 410 IXC Communications, Inc. 144A 12.50% pfd. [2 DBL. DAGGERS] 475,600 7,736 Nextlink Communications, Inc. 144A $7.00 pfd. 495,104 3,850 SFX Broadcasting, Inc. Ser. E, $12.625 pfd. [2 DBL. DAGGERS] 444,675 282 Spanish Broadcasting Systems 144A 14.25% pfd. [2 DBL. DAGGERS] 295,395 2,390 Von Hoffman Corp. 144A $13.50 pfd. 68,354 -------------- Total Preferred Stocks (cost $3,417,989) $ 4,215,964 ASSET-BACKED SECURITIES (1.1%) * PRINCIPAL AMOUNT VALUE - ------------------------------------------------------------------------------------------------------------ $ 1,096,000 Chemical Master Credit Card Trust Ser. 95-2, Class A, 6.23s, 2003 $ 1,096,680 350,000 Contimortgage Home Equity Loan Trust Ser. 97-1, Class M2, 7.67s, 2028 356,671 2,255,000 Sears Credit Account Master Trust Ser. 95-5, Class A, 6.05s, 2008 2,220,453 -------------- Total Asset-Backed Securities (cost $3,726,304) $ 3,673,804 COLLATERALIZED MORTGAGE OBLIGATIONS (1.0%) * PRINCIPAL AMOUNT VALUE - ------------------------------------------------------------------------------------------------------------ $ 1,000,000 Citicorp Mtge. Securities, Inc. Ser. 92-10 M, Class M, 8s, 2022 $ 1,007,010 339,166 Resolution Trust Corp. Ser. 94-1, Class A2A, 7.75s, 2029 341,604 1,268,496 Resolution Trust Corp. Ser. 94-1, Class M1, 7.205s, 2029 1,257,000 727,425 Rural Housing Trust Ser. 87-1, Class D, 6.33s, April 1, 2026 723,563 -------------- Total Collateralized Mortgage Obligations (cost $3,108,282) $ 3,329,177 CONVERTIBLE BONDS AND NOTES (0.6%) * PRINCIPAL AMOUNT VALUE - ------------------------------------------------------------------------------------------------------------ $ 280,000 APP Global Finance (V) Ltd. 144A cv. sec. 2s, 2000 (United Kingdom) $ 303,100 164,000 GST Telecommunications, Inc. 144A cv. sr. disc. notes stepped-coupon zero % (13 7/8s, 12/15/00), 2005 ++ 167,280 290,000 Integrated Device Technology, Inc. cv. sub. notes 5 1/2s, 2002 249,038 125,000 National Semiconductor Corp. 144A cv. deb. 6 1/2s, 2002 143,438 900,000 Pricellular Wireless Corp. 144A cv. sub. notes stepped- coupon zero % (10 3/4s, 8/15/00) ++ 771,750 60,000 VLSI Technology, Inc. cv. sub. notes 8 1/4s, 2005 62,925 650,000 Winstar Communications. Inc. 144A cv. sr. disc. notes stepped-coupon zero % (14s, 10/15/00), 2005 ++ 492,375 -------------- Total Convertible Bonds and Notes (cost $1,643,610) $ 2,189,906 PURCHASE OPTIONS OUTSTANDING (0.6%)* EXPIRATION DATE/ CONTRACT AMOUNT STRIKE PRICE VALUE - ------------------------------------------------------------------------------------------------------------ USD 2,995,000 U.S. Dollars in exchange for Deutschemarks German (put) Nov. 97 / 1.78 DEM $ 26,356 JPY 2,000,000,000 Japanese Government Bond futures contracts (call) Nov. 97 / 118.0 JPY 1,764,120 USD 19,000,000 Call Option on U.S. Treasury Bond 6 1/8s, 2007 Nov. 97 / $101.08 161,547 -------------- Total Purchased Options Outstanding (cost $1,679,943) $ 1,952,023 WARRANTS (0.2%)*+ EXPIRATION NUMBER OF WARRANTS DATE VALUE - ------------------------------------------------------------------------------------------------------------ 32,500 Becker Gaming Corp. 144A 11/15/00 $ 325 6,825 Capital Gaming International, Inc. 2/1/99 273 1,500 Comunicacion Cellular (Colombia) 11/15/20 83,250 1,200 County Seat Holdings, Inc. 10/15/98 24 255 Esat Holdings, Inc. 144A (Ireland) 2/1/07 7,013 500 Fitzgerald Gaming Co. 3/15/99 50 770 Hyperion Telecommunications 4/15/01 30,800 9,768 Intelcom Group 10/15/05 141,636 520 Interact Systems Inc. 8/1/03 130 700 Intermedia Communications 6/1/00 48,125 245 International Wireless Communications Holdings 8/15/01 20,825 400 Iridium World Com 144A 7/15/05 60,000 1,470 Louisiana Casino Cruises, Inc. 144A 12/1/98 73,500 930 McCaw International Ltd. 4/15/07 279 750 NEXTEL Communications Inc. 1/1/98 8 7,220 Nextlink Communications, Inc. 144A 2/1/09 72 1,840 Pagemart, Inc. 144A 12/31/03 13,800 1,400 Petracom Holdings, Inc. 9/30/99 9,975 615 RSL Communications Ltd. 11/15/06 36,900 265 Spanish Broadcasting Systems 144A 6/30/99 50,350 185 Sterling Chemicals Holdings 8/15/08 7,030 350 Urohealth Systems Inc. 4/10/04 1,750 100 Wright Medical Technology, Inc. 6/30/03 10,023 -------------- Total Warrants (cost $462,691) $ 596,138 SHORT-TERM INVESTMENTS (3.0%) *(cost $10,033,686) PRINCIPAL AMOUNT VALUE - ------------------------------------------------------------------------------------------------------------ 10,032,000 Interest in $565,867,000 joint repurchase agreement dated September 30, 1997 with UBS Securities due October 1, 1997 with respect to various U.S. Treasury obligations -- maturity value of $10,033,686 for an effective yield of 6.05% $ 10,033,686 - ------------------------------------------------------------------------------------------------------------ Total Investments (cost $340,742,208) *** $ 351,292,829 - ------------------------------------------------------------------------------------------------------------ * Percentages indicated are based on net assets of $337,663,563. *** The aggregate identified cost on a tax basis is $340,925,318, resulting in gross unrealized appreciation and depreciation of $18,945,054 and $8,577,543, respectively, or net unrealized appreciation of $10,367,511. + Non-income-producing security. ++ The interest rate and date shown parenthetically represent the new interest rate to be paid and the date the fund will begin receiving interest at this rate. [DBL. DAGGER] Restricted, excluding 144A securities, as to public resale. The total market value of restricted securities held at September 30, 1997 was $767,475 or 0.2% of net assets. [2 DBL. DAGGERS] Income may be received in cash or additional securities at the discretion of the issuer. # A portion of this security was pledged and segregated with the custodian to cover margin requirements for futures contracts at September 30, 1997. (R) Real Estate Investment Trust. 144A after the name of a security represents those exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. TBA after the name of a security represents to be announced securities (Note 1). Diversification by Country Distribution of investments by country of issue at September 30, 1997: (as percentage of Market Value) Australia 1.2% Morocco 1.4 Canada 1.3 Russia 3.2 Ecuador 1.2 South Africa 1.2 France 2.5 United Kingdom 5.3 Germany 6.4 United States 68.3 Mexico 4.1 Other 3.9 ------ Total 100.0% ======
- ---------------------------------------------------------------------------------------- Forward Currency Contracts to Sell at September 30, 1997 (aggregate face value $83,225,489) Market Aggregate Face Delivery Unrealized Value Value Date Depreciation - ---------------------------------------------------------------------------------------- Australian Dollars $ 3,303,179 $ 3,288,414 12/17/97 $ (14,765) British Pounds 8,965,764 8,929,261 12/17/97 (36,503) Danish Krone 1,132,189 1,101,498 12/17/97 (30,691) Deutschemarks 35,751,297 34,833,848 12/17/97 (917,449) French Franc 8,858,163 8,794,826 12/17/97 (63,337) Japanese Yen 15,117,225 15,050,262 12/17/97 (66,963) New Zealand Dollar 2,401,139 2,363,716 12/17/97 (37,423) South African Rand 2,299,571 2,232,524 12/17/97 (67,047) Swedish Krona 552,034 536,924 12/17/97 (15,110) Swiss Franc 6,234,137 6,094,216 12/17/97 (139,921) - ---------------------------------------------------------------------------------------- $(1,389,209) - ----------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------- Forward Currency Contracts to Buy at September 30, 1997 (aggregate face value $66,207,315) Unrealized Aggregate Face Delivery Appreciation/ Market Value Value Date (Depreciation) - ---------------------------------------------------------------------------------------- Australian Dollars $ 825,417 $ 852,964 12/17/97 $ (27,547) Canadian Dollar 1,572,711 1,560,214 12/17/97 12,497 Deutschemarks 11,937,965 11,675,722 12/17/97 262,243 Indonesian Rupiah 2,482,531 2,733,211 2/23/98 (250,680) Italian Lira 8,955,013 8,759,609 12/17/97 195,404 Japanese Yen 22,860,761 22,857,861 12/17/97 2,900 Philippines Peso 459,447 480,300 3/25/98 (20,853) Polish Zolty 5,211,216 5,439,440 6/5/98 (228,224) Spanish Peseta 3,099,124 3,034,506 12/17/97 64,618 Swedish Krona 3,518,055 3,444,441 12/17/97 73,614 Swiss Franc 4,359,992 4,247,593 12/17/97 112,399 Venezuelan Bolivar 1,126,768 1,121,454 6/5/98 5,314 - ---------------------------------------------------------------------------------------- $ 201,685 - ----------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------- Futures Contracts Outstanding at September 30, 1997 Market Aggregate Face Expiration Unrealized Value Value Date Depreciation - ---------------------------------------------------------------------------------------- Dec 97 20yr T-note Future (Short) $ 7,723,843 $ 7,738,523 Dec-97 $ 14,680 Dec 97 10yr T-note Future (Long) 28,081,875 27,767,122 Dec-97 314,753 - ---------------------------------------------------------------------------------------- $ 329,433 - ----------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------- TBA Sale Commitments at September 30, 1997 (proceeds receivable $11,073,552) Principal Settlement Market Description Amount Date Value - ---------------------------------------------------------------------------------------- FHLMC, 8.5s, October 1999 $ 2,483,000 10/14/97 $ 2,594,735 FNMA, 7.5s, October 1999 8,414,000 10/14/97 8,553,336 - ---------------------------------------------------------------------------------------- $ 11,148,071 - ----------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------- Written Options Outstanding at September 30, 1997 (premium received $37,288) Contract Expiration Date/ Market Amount Strike Price Value - ---------------------------------------------------------------------------------------- $2,995,100 U.S. Dollars in exchange for Deutschemarks (call) Nov.97/ 1.73 DEM $ 24,559 - ---------------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements.
Statement of assets and liabilities September 30, 1997 Assets - --------------------------------------------------------------------------------------------------- Investments in securities, at value (identified cost $340,742,208) (Note 1) $351,292,829 - --------------------------------------------------------------------------------------------------- Cash 1,017,503 - --------------------------------------------------------------------------------------------------- Dividends, interest and other receivables 5,795,703 - --------------------------------------------------------------------------------------------------- Receivable for securities sold 21,116,772 - --------------------------------------------------------------------------------------------------- Receivable for open forward currency contracts 792,246 - --------------------------------------------------------------------------------------------------- Receivable for closed forward currency contracts 329,567 - --------------------------------------------------------------------------------------------------- Total assets 380,344,620 Liabilities - --------------------------------------------------------------------------------------------------- Payable for variation margin 17,195 - --------------------------------------------------------------------------------------------------- Distributions payable to shareholders 2,071,002 - --------------------------------------------------------------------------------------------------- Payable for securities purchased 26,058,455 - --------------------------------------------------------------------------------------------------- Payable for compensation of Manager (Note 2) 632,133 - --------------------------------------------------------------------------------------------------- Payable for investor servicing and custodian fees (Note 2) 62,480 - --------------------------------------------------------------------------------------------------- Payable for compensation of Trustees (Note 2) 14,193 - --------------------------------------------------------------------------------------------------- Payable for administrative services (Note 2) 5,513 - --------------------------------------------------------------------------------------------------- Payable for open forward currency contracts 1,979,770 - --------------------------------------------------------------------------------------------------- Payable for closed forward currency contracts 602,840 - --------------------------------------------------------------------------------------------------- Written options outstanding, at value (premiums received $37,288) (Note 3) 24,559 - --------------------------------------------------------------------------------------------------- TBA sale commitments, at value (proceeds receivable $11,073,552) 11,148,071 - --------------------------------------------------------------------------------------------------- Other accrued expenses 64,846 - --------------------------------------------------------------------------------------------------- Total liabilities 42,681,057 - --------------------------------------------------------------------------------------------------- Net assets $337,663,563 Represented by - --------------------------------------------------------------------------------------------------- Paid-in capital (Notes 1 and 4) $354,365,606 - --------------------------------------------------------------------------------------------------- Distributions in excess of net investment income (Note 1) (6,853,337) - --------------------------------------------------------------------------------------------------- Accumulated net realized loss on investments and foreign currency transactions (Note 1) (19,499,422) - --------------------------------------------------------------------------------------------------- Net unrealized appreciation of investments and assets and liabilities in foreign currencies 9,650,716 - --------------------------------------------------------------------------------------------------- Total -- Representing net assets applicable to capital shares outstanding $337,663,563 Computation of net asset value - --------------------------------------------------------------------------------------------------- Net asset value per share ($337,663,563 divided by 38,435,338 shares) $8.79 - --------------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements.
Statement of operations Year ended September 30, 1997 Investment income: - -------------------------------------------------------------------------------------------------- Interest income (net of foreign tax of $21,963) $27,895,983 - -------------------------------------------------------------------------------------------------- Dividends 252,156 - -------------------------------------------------------------------------------------------------- Total investment income 28,148,139 Expenses: - -------------------------------------------------------------------------------------------------- Compensation of Manager (Note 2) 2,490,608 - -------------------------------------------------------------------------------------------------- Investor servicing and custodian fees (Note 2) 453,934 - -------------------------------------------------------------------------------------------------- Compensation of Trustees (Note 2) 27,320 - -------------------------------------------------------------------------------------------------- Administrative services (Note 2) 7,049 - -------------------------------------------------------------------------------------------------- Reports to shareholders 72,202 - -------------------------------------------------------------------------------------------------- Registration fees 168,712 - -------------------------------------------------------------------------------------------------- Auditing 70,034 - -------------------------------------------------------------------------------------------------- Legal 33,022 - -------------------------------------------------------------------------------------------------- Postage 66,942 - -------------------------------------------------------------------------------------------------- Exchange listing fees 33,747 - -------------------------------------------------------------------------------------------------- Other 21,322 - -------------------------------------------------------------------------------------------------- Total expenses 3,444,892 - -------------------------------------------------------------------------------------------------- Expense reduction (Note 2) (90,650) - -------------------------------------------------------------------------------------------------- Net expenses 3,354,242 - -------------------------------------------------------------------------------------------------- Net investment income 24,793,897 - -------------------------------------------------------------------------------------------------- Net realized loss on investments (Notes 1 and 3) (9,705) - -------------------------------------------------------------------------------------------------- Net realized loss on futures contracts (Note 1) (148,683) - -------------------------------------------------------------------------------------------------- Net realized gain on written options (Notes 1 and 3) 136,067 - -------------------------------------------------------------------------------------------------- Net realized loss on foreign currency transactions (Note 1) (92,196) - -------------------------------------------------------------------------------------------------- Net unrealized depreciation of assets and liabilities in foreign currencies during the year (939,139) - -------------------------------------------------------------------------------------------------- Net unrealized appreciation of investments, futures, written options and TBA sale commitments during the year 8,491,024 - -------------------------------------------------------------------------------------------------- Net gain on investments 7,437,368 - -------------------------------------------------------------------------------------------------- Net increase in net assets resulting from operations $32,231,265 - -------------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements.
Statement of changes in net assets Year ended September 30 -------------------------------- 1997 1996 - -------------------------------------------------------------------------------------------------- Increase in net assets - -------------------------------------------------------------------------------------------------- Operations: - -------------------------------------------------------------------------------------------------- Net investment income $ 24,793,897 $ 24,607,379 - -------------------------------------------------------------------------------------------------- Net realized gain (loss) on investments and foreign currency transactions (114,517) 6,323,487 - -------------------------------------------------------------------------------------------------- Net unrealized appreciation of investments and asset and liabilities in foreign currencies 7,551,885 1,079,890 - -------------------------------------------------------------------------------------------------- Net increase in net assets resulting from operations 32,231,265 32,010,756 Distributions to shareholders: - -------------------------------------------------------------------------------------------------- From net investment income (24,795,303) (23,973,364) - -------------------------------------------------------------------------------------------------- Return of capital -- (318,440) - -------------------------------------------------------------------------------------------------- Shares repurchased (Note 4) (2,308,913) (1,917,095) - -------------------------------------------------------------------------------------------------- Total increase in net assets 5,127,049 5,801,857 Net assets - -------------------------------------------------------------------------------------------------- Beginning of year 332,536,514 326,734,657 - -------------------------------------------------------------------------------------------------- End of year (including distributions in excess of net investment income of $6,853,337 and $1,968,520, respectively) $337,663,563 $332,536,514 - -------------------------------------------------------------------------------------------------- Number of fund shares - -------------------------------------------------------------------------------------------------- Shares outstanding at beginning of year 38,737,138 38,995,338 - -------------------------------------------------------------------------------------------------- Shares repurchased (301,800) (258,200) - -------------------------------------------------------------------------------------------------- Shares outstanding at end of year 38,435,338 38,737,138 - -------------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements.
Financial highlights (For a share outstanding throughout the period) - -------------------------------------------------------------------------------------------------- Per-share operating performance Year ended September 30 - -------------------------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 - -------------------------------------------------------------------------------------------------- Net asset value, beginning of period $8.58 $8.38 $8.13 $8.91 $8.71 - -------------------------------------------------------------------------------------------------- Investment operations - -------------------------------------------------------------------------------------------------- Net investment income .64 .63 .67 .62 .68 - -------------------------------------------------------------------------------------------------- Net realized and unrealized gain (loss) on investments .21 .19 .21 (.71) .29 - -------------------------------------------------------------------------------------------------- Total from investment operations .85 .82 .88 (.09) .97 - -------------------------------------------------------------------------------------------------- Less distributions: - -------------------------------------------------------------------------------------------------- From net investment income (.64) (.61) (.49) (.55) (.68) - -------------------------------------------------------------------------------------------------- In excess of net investment income -- -- -- -- (.09) - -------------------------------------------------------------------------------------------------- From net realized gain on investments -- -- -- (.06) -- - -------------------------------------------------------------------------------------------------- From return of capital -- (.01) (.14) (.08) -- - -------------------------------------------------------------------------------------------------- Total distributions (.64) (.62) (.63) (.69) (.77) - -------------------------------------------------------------------------------------------------- Net asset value, end of period $8.79 $8.58 $8.38 $8.13 $8.91 - -------------------------------------------------------------------------------------------------- Market value, end of period $8.125 $7.500 $7.375 $7.250 $8.375 - -------------------------------------------------------------------------------------------------- Ratios and supplemental data - -------------------------------------------------------------------------------------------------- Total investment return at market value (%)(a) 17.54 10.34 10.90 (5.57) 7.89 - -------------------------------------------------------------------------------------------------- Net assets, end of period (in thousands) $337,664 $332,537 $326,735 $317,296 $347,620 - -------------------------------------------------------------------------------------------------- Ratio of expenses to average net assets (%)(b) 1.04 .99 1.03 .92 .96 - -------------------------------------------------------------------------------------------------- Ratio of net investment income to average net assets (%) 7.47 7.44 8.24 7.18 7.83 - -------------------------------------------------------------------------------------------------- Portfolio turnover (%) 220.61 232.90 219.63 204.92 237.63 - -------------------------------------------------------------------------------------------------- (a) Total investment return does not reflect the effect of sales charges. (b) The ratio of expenses to average net assets for the year ended September 30,1995 and thereafter includes amounts paid through expense offset arrangements (Note 2).
Notes to financial statements September 30, 1997 Note 1 Significant accounting policies Putnam Master Intermediate Income Trust (the "fund") is registered under the Investment Company Act of 1940, as amended, as a diversified, closed-end management investment company and is authorized to issue an unlimited number of shares. The fund's investment objective is to seek, with equal emphasis, high current income and relative stability of net asset value, by allocating its investments among the U.S. taxable investment grade sector (formerly the U.S. government sector), high-yield sector and international sector. In May 1997, the Trustees approved the proposal to merge Putnam Intermediate Government Income Trust into the fund. The shareholders of the fund will be voting on this proposal at the December 18, 1997 shareholder meeting. The following is a summary of significant accounting policies consistently followed by the fund in the preparation of its financial statements. The preparation of financial statements is in conformity with generally accepted accounting principles and requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities. Actual results could differ from those estimates. A) Security valuation Investments for which market quotations are readily available are stated at market value, which is determined using the last reported sale price, or, if no sales are reported -- as in the case of some securities traded over-the-counter -- the last reported bid price. Securities quoted in foreign currencies are translated into U.S. dollars at the current exchange rate. Short-term investments having remaining maturities of 60 days or less are stated at amortized cost, which approximates market value, and other investments, including restricted securities, are stated at fair value following procedures approved by the Trustees. Market quotations are not considered to be readily available for long-term corporate bonds and notes; such investments are stated at fair value on the basis of valuations furnished by a pricing service, approved by the Trustees, which determines valuations for normal, institutional-size trading units of such securities using methods based on market transactions for comparable securities and various relationships between securities which are generally recognized by institutional traders. B) Joint trading account Pursuant to an exemptive order issued by the Securities and Exchange Commission, the fund may transfer uninvested cash balances into a joint trading account along with the cash of other registered investment companies and certain other accounts managed by Putnam Investment Management, Inc. ("Putnam Management"), the fund's Manager, a wholly-owned subsidiary of Putnam Investments, Inc.. These balances may be invested in one or more repurchase agreements and/or short-term money market instruments. C) Repurchase agreements The fund, or any joint trading account, through its custodian, receives delivery of the underlying securities, the market value of which at the time of purchase is required to be in an amount at least equal to the resale price, including accrued interest. Putnam Management is responsible for determining that the value of these underlying securities is at all times at least equal to the resale price, including accrued interest. D) Security transactions and related investment income Security transactions are accounted for on the trade date (date the order to buy or sell is executed). Interest income is recorded on the accrual basis. Dividend income is recorded on the ex-dividend date. Discounts on zero coupon bonds, original issue discount bonds, stepped-coupon bonds and payment in kind bonds are accreted according to the effective yield method. Any premium resulting from the purchase of stepped-coupon securities in is amortized on a yield-to maturity basis. E) Foreign currency translation The accounting records of the fund are maintained in U.S. dollars. The market value of foreign securities, currency holdings, other assets and liabilities are recorded in the books and records of the fund after translation to U.S. dollars based on the exchange rates on that day. The cost of each security is determined using historical exchange rates. Income and withholding taxes are translated at prevailing exchange rates when accrued or incurred. The fund does not isolate that portion of realized or unrealized gains or losses resulting from changes in the foreign exchange rate on investments from fluctuations arising from changes in the market prices of the securities. Such gains and losses are included with the net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent net exchange gains or losses on closed forward currency contracts, disposition of foreign currencies and the difference between the amount of investment income and foreign withholding taxes recorded on the fund's books and the U.S. dollar equivalent amounts actually received or paid. Net unrealized appreciation and depreciation of assets and liabilities in foreign currencies arise from changes in the value of open forward currency contracts and assets and liabilities other than investments at the period end, resulting from changes in the exchange rate. F) Forward currency contracts The fund may engage in forward currency contracts, which are agreements between two parties to buy and sell currencies at a set price on a future date, to protect against a decline in value relative to the U.S. dollar of the currencies in which its portfolio securities are denominated or quoted (or an increase in the value of a currency in which securities a fund intends to buy are denominated, when a fund holds cash reserves and short-term investments). The U.S. dollar value of forward currency contracts is determined using current forward currency exchange rates supplied by a quotation service. The market value of the contract will fluctuate with changes in currency exchange rates. The contract is "marked to market" daily and the change in market value is recorded as an unrealized gain or loss. When the contract is closed, the fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. The fund could be exposed to risk if the value of the currency changes unfavorably, if the counterparties to the contracts are unable to meet the terms of their contracts or if the fund is unable to enter into a closing position. G) Futures and options contracts The fund may use futures and options contracts to hedge against changes in the values of securities the fund owns or expects to purchase. The fund may also write options on securities it owns or in which it may invest to increase its current returns. The potential risk to the fund is that the change in value of futures and options contracts may not correspond to the change in value of the hedged instruments. In addition, losses may arise from changes in the value of the underlying instruments, if there is an illiquid secondary market for the contracts, or if the counterparty to the contract is unable to perform. Futures contracts are valued at the quoted daily settlement prices established by the exchange on which they trade. Exchange traded options are valued at the last sale price, or if no sales are reported, the last bid price for purchased options and the last ask price for written options. Options traded over-the-counter are valued using prices supplied by dealers. H) TBA purchase commitments The fund may enter into "TBA" (to be announced) purchase commitments to purchase securities for a fixed unit price at a future date beyond customary settlement time. Although the unit price has been established, the principal value has not been finalized. However, the amount of the commitments will not fluctuate more than 1.0% from the principal amount. The fund holds, and maintains until settlement date, cash or high-grade debt obligations in an amount sufficient to meet the purchase price, or the fund may enter into offsetting contracts for the forward sale of other securities it owns. Income on the securities will not be earned until settlement date. TBA purchase commitments may be considered securities in themselves, and involve a risk of loss if the value of the security to be purchased declines prior to the settlement date, which risk is in addition to the risk of decline in the value of the fund's other assets. Unsettled TBA purchase commitments are valued at the current market value of the underlying securities, according to the procedures described under "Security valuation" above. Although the fund will generally enter into TBA purchase commitments with the intention of acquiring securities for their portfolio or for delivery pursuant to options contracts it has entered into, the fund may dispose of a commitment prior to settlement if Putnam Management deems it appropriate to do so. I) TBA sale commitments The fund may enter into TBA sale commitments to hedge its portfolio positions or to sell mortgage-backed securities it owns under delayed delivery arrangements. Proceeds of TBA sale commitments are not received until the contractual settlement date. During the time a TBA sale commitment is outstanding, equivalent deliverable securities, or an offsetting TBA purchase commitment deliverable on or before the sale commitment date, are held as "cover" for the transaction. Unsettled TBA sale commitments are valued at the current market value of the underlying securities, generally according to the procedures described under "Security valuation" above. The contract is "marked-to-market" daily and the change in market value is recorded by the fund as an unrealized gain or loss. If the TBA sale commitment is closed through the acquisition of an offsetting purchase commitment, the fund realizes a gain or loss. If the fund delivers securities under the commitment, the fund realizes a gain or a loss from the sale of the securities based upon the unit price established at the date the commitment was entered into. J) Federal taxes It is the policy of the fund to distribute all of its taxable income within the prescribed time and otherwise comply with the provisions of the Internal Revenue Code applicable to regulated investment companies. It is also the intention of the fund to distribute an amount sufficient to avoid imposition of any excise tax under Section 4982 of the Internal Revenue Code of 1986, as amended. Therefore, no provision has been made for federal taxes on income, capital gains or unrealized appreciation on securities held nor for excise tax on income and capital gains. At September 30, 1997, the fund had a capital loss carryover of approximately $18,987,000 available to offset future capital gains, if any. The amount of the carryover and the expiration dates are: Loss Carryover Expiration - ------------------------------------------------------------ $9,158,000 September 30, 1999 7,035,000 September 30, 2003 2,794,000 September 30, 2004 K) Distributions to shareholders Distributions to shareholders are recorded by the fund on the ex-dividend date. At certain times, the fund may pay distributions at a level rate even though, as a result of market conditions or investment decisions, the fund may not achieve projected investment results for a given period. The amount and character of income and gains to be distributed are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. These differences include losses on wash sale transactions, realized and unrealized gains and losses on forward foreign currency contracts, currency gains and losses on foreign bonds, post October loss deferrals, market discount, interest on payment-in-kind securities and amortization of bond premium. Reclassifications are made to the fund's capital accounts to reflect income and gains available for distribution (or available capital loss carryovers) under income tax regulations. For the year ended September 30, 1997, the fund reclassified $4,883,411 to increase distributions in excess of net investment income and $21,121 to decrease paid-in-capital, with a decrease to accumulated net realized loss on investments of $4,904,532. The calculation of net investment income per share in the financial highlights table excludes these adjustments. Note 2 Management fee, administrative services and other transactions Compensation of Putnam Management, for management and investment advisory services is paid quarterly based on the average weekly net assets of the fund. Such fee is based on the following annual rates: 0.75% of the first $500 million of average weekly net assets, 0.65% of the next $500 million, 0.60% of the next $500 million, and 0.55% of any amount over $1.5 billion. The fund reimburses Putnam Management for the compensation and related expenses of certain officers of the fund and their staff who provide administrative services to the fund. The aggregate amount of all such reimbursements is determined annually by the Trustees. Custodial functions for the fund's assets are provided by Putnam Fiduciary Trust Company (PFTC), a wholly-owned subsidiary of Putnam Investments, Inc. Investor servicing agent functions are provided by Putnam Investor Services, a division of PFTC. For the year ended September 30, 1997, fund expenses were reduced by $90,650 under expense offset arrangements with PFTC and brokerage service arrangements. Investor servicing and custodian fees reported in the Statement of operations exclude these credits. The fund could have invested a portion of the assets utilized in connection with the expense offset arrangements in an income producing asset if it had not entered into such arrangements. Trustees of the fund receive an annual Trustees fee of $680 and an additional fee for each Trustee's meeting attended. Trustees who are not interested persons of Putnam Management and who serve on committees of the Trustees receive additional fees for attendance at certain committee meetings. The fund has adopted a Trustee Fee Deferral Plan (the "Deferral Plan") which allows the Trustees to defer the receipt of all or a portion of Trustees Fees payable on or after July 1, 1995. The deferred fees remain in the fund and are invested in certain Putnam funds until distribution in accordance with the Deferral Plan. The fund has adopted an unfunded noncontributory defined benefit pension plan (the "Pension Plan") covering all Trustees of the fund who have served as Trustee for at least five years. Benefits under the Pension Plan are equal to 50% of the Trustee's average total retainer and meeting fees for the three years preceding retirement. Pension expense for the fund is included in Compensation of trustees in the Statement of operations. Accrued pension liability is included in Payable for compensation of Trustees in the Statement of assets and liabilities. Note 3 Purchase and sales of securities During the year ended September 30, 1997, purchases and sales of investment securities other than U.S. government obligations and short-term investments aggregated $467,189,803 and $460,272,994, respectively. Purchases and sales of U.S. government obligations aggregated $253,700,424 and $249,959,396, respectively. In determining the net gain or loss on securities sold, the cost of securities has been determined on the identified cost basis. Written option transactions during the year are summarized as follows: Contract Premiums Amounts Received - ------------------------------------------------------------ Written options outstanding at beginning of year $ -- $ -- - ------------------------------------------------------------ Options opened 18,106,100 215,412 - ------------------------------------------------------------ Options expired (7,861,000) (120,668) - ------------------------------------------------------------ Options closed (7,250,000) (57,456) - ------------------------------------------------------------ Written options outstanding at end of year $ 2,995,100 $ 37,288 - ------------------------------------------------------------ Note 4 Share Repurchase Program In November 1994, the Trustees authorized the fund to repurchase up to 1,950,000 of its shares in the open market. Repurchases will only be made when the fund's shares are trading at less than net asset value and at such times and amounts as is believed to be in the best interest of the fund's shareholders. Any repurchases of shares will have the effect of increasing the net asset value per share of remaining shares outstanding. For the year ended September 30, 1997, the fund repurchased 301,800 shares for $2,308,913, which reflects a discount from net asset value of $299,085 or 11.5%. As of September 30, 1997 570,000 shares had been repurchased since the inception of the program. Federal tax information (Unaudited) The Form 1099 you receive in January 1998 will show the tax status of all distributions paid to your account in calendar 1997. Fund information INVESTMENT MANAGER Putnam Investment Management, Inc. One Post Office Square Boston, MA 02109 MARKETING SERVICES Putnam Mutual Funds Corp. One Post Office Square Boston, MA 02109 CUSTODIAN Putnam Fiduciary Trust Company LEGAL COUNSEL Ropes & Gray INDEPENDENT ACCOUNTANTS Coopers & Lybrand L.L.P. TRUSTEES George Putnam, Chairman William F. Pounds, Vice Chairman Jameson Adkins Baxter Hans H. Estin John A. Hill Ronald J. Jackson Elizabeth T. Kennan Lawrence J. Lasser Robert E. Patterson Donald S. Perkins George Putnam, III A.J.C. Smith W. Thomas Stephens W. Nicholas Thorndike OFFICERS George Putnam President Charles E. Porter Executive Vice President Patricia C. Flaherty Senior Vice President John D. Hughes Senior Vice President and Treasurer Lawrence J. Lasser Vice President Gordon H. Silver Vice President Gary N. Coburn Vice President William J. Curtin Vice President Jennifer E. Leichter Vice President and Fund Manager Kenneth J. Taubes Vice President and Fund Manager D. William Kohli Vice President and Fund Manager Gail A. Attridge Vice President and Fund Manager William N. Shiebler Vice President John R. Verani Vice President Paul M. O'Neil Vice President Beverly Marcus Clerk and Assistant Treasurer Call 1-800-225-1581 weekdays from 9 a.m. to 5 p.m. Eastern Time for up-to-date information about the fund's NAV. PUTNAM INVESTMENTS The Putnam Funds One Post Office Square Boston, Massachusetts 02109 - -------------------- Bulk Rate U.S. Postage PAID Putnam Investments - -------------------- 36845-074 11/97 -----END PRIVACY-ENHANCED MESSAGE-----