-----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, Ab08eJFpXjWqkPtDJzksc+NcuaGbE8sslQErYFaiuLhuVr6L+e1s5ZDi6eAI0QBN nrvAqehZU99lxPtuzRVeLw== 0000928816-98-000153.txt : 19980528 0000928816-98-000153.hdr.sgml : 19980528 ACCESSION NUMBER: 0000928816-98-000153 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980527 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: 98632258 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 SEMIANNUAL REPORT March 31, 1998 [LOGO: BOSTON * LONDON * TOKYO] Fund highlights * "We expect that economic weakness and uncertainty in Asia may continue to impact foreign bond markets, while the demand for domestic high-yield bonds is likely to remain strong in the months ahead. Our management team will continue to closely monitor all the fixed-income sectors in which your fund invests, seeking to position the portfolio defensively while taking advantage of attractive income opportunities." -- Jennifer E. Leichter, lead manager Putnam Master Intermediate Income Trust CONTENTS 4 Report from Putnam Management 8 Fund performance summary 10 Portfolio holdings 29 Financial statements 38 Results of December 18, 1997 shareholder meeting From the Chairman [GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM] [copyright] Karsh, Ottawa Dear Shareholder: Access to a wide variety of fixed-income assets was one of Putnam Master Intermediate Income Trust's particularly useful attributes in the challenging global market environment that prevailed during the first half of the fund's fiscal year. As you might imagine, events in Asia dominated the thinking of your fund's management team throughout the period. The U.S. bond market actually thrived in the wake of the Asian currency and debt crisis as investors worldwide shifted assets to the safe haven represented by U.S. Treasury securities. Once again, the U.S. high-yield bonds in your fund's portfolio continued to show the strongest performance. European bonds also delivered solid results, as your fund's managers point out in the following report. I am pleased to announce the appointment of Jeffrey Kobylarz to your fund's management team. Jeffrey came to Putnam in 1993 as a senior credit analyst in the High-Yield Bond Group. Before joining Putnam, he was with Dean Witter InterCapital and W.R. Huff Asset Management. He has 11 years of investment industry experience. Respectfully yours, /S/GEORGE PUTNAM George Putnam Chairman of the Trustees May 20, 1998 Report from the Fund Managers Jennifer E. Leichter, lead manager Jeffrey J. Kobylarz D. William Kohli Gail A. Attridge As Putnam Master Intermediate Income Trust began its fiscal year last October, we were reasonably optimistic about prospects for fixed-income markets around the world. Less than one month into the period, however, several Asian economies experienced economic meltdowns, sparking the largest single-day point decline in the history of the Dow Jones Industrial Average. This event, combined with continued economic weakness and uncertainty in Asia, put the world's financial markets, as well as investors' nerves, on edge. While this backdrop has created a tumultuous environment for many markets, two of the three key sectors in which your fund invests -- U.S. taxable investment-grade securities and high-yield bonds -- actually fared quite well during the semiannual period, the six months ended March 31, 1998. The third sector, international bonds, obviously faced tougher times. But strategic portfolio shifts allowed us to soften the blow of Asia's currency and debt crisis. For complete performance information, please refer to the summary that begins on page 8. * U.S. BONDS BENEFIT FROM ASIAN CRISIS Throughout the period, the Asian crisis actually boosted performance in the domestic bond market. Nervous international investors flocked to the high credit quality and attractive yields offered by U.S. bonds, bidding up prices of Treasuries dramatically. While this flight to quality was good news for your fund, our focus on mortgage-backed securities, which also performed well early in the period, meant we didn't take full advantage of the Treasury rally. Toward the end of the period, the momentum of Treasuries slowed, while the performance of mortgage-backed securities began to lag as well. Our decision to focus on mortgage-backed securities was based on the interest-rate climate during the period. When interest rates are falling, mortgage-backed securities present a higher prepayment risk -- that is the chance that homeowners will refinance or pay off their mortgage loans early, which tends to dampen the value of these securities. To compensate investors for this prepayment risk, mortgage-backed securities will carry a higher yield than most other U.S. government issues. The fund's emphasis on mortgage-backed securities was designed to take advantage of those higher yield opportunities. * EMERGING MARKETS PLUNGE, THEN REBOUND The Asian currency and debt crisis took its toll on many international markets, hitting the emerging markets especially hard. As investors deserted these bonds in favor of more established markets, emerging markets plunged in October, although they posted handsome gains for most of calendar 1997. After that rather brief swoon, however, these bonds staged a remarkable recovery. In a situation similar to the Treasury rally, this rebound helped your fund, but because we had positioned this portion of the portfolio defensively, the fund did not take full advantage of the comeback in emerging-markets securities. In Europe, bond markets turned in robust returns as a result of sluggish economic growth in Germany and expectations that the European Economic and Monetary Union (EMU) would begin as scheduled in January 1999. The EMU will unify the monetary policy and interest rates of 11 European countries. Europe's peripheral markets, such as Spain, Italy, and Sweden, posted the best performance, but your fund's underweight position in these areas dragged performance somewhat. [GRAPHIC OMITTED: horizontal bar chart TOP 5 COUNTRY ALLOCATIONS (international sector)] TOP 5 COUNTRY ALLOCATIONS (international sector)* United Kingdom 6.8% Germany 4.0% Mexico 2.9% Australia 2.6% South Africa 2.0% Footnote reads: *Based on net assets as of 3/31/98. Holdings will vary over time. The fund benefited from a significant position in the United Kingdom, where the bond market was buoyed by slowing economic growth and low inflation. Our decision to underweight Japanese government bonds meant the fund had only minimal exposure to these bonds, which were hurt by the country's troubled political and economic climate and increasing concerns about the long-term health of its economy. * HIGH-YIELD SECTOR POWERS PORTFOLIO ONCE AGAIN The high-yield bond market was the strongest-performing sector of the domestic bond market in the first calendar quarter of 1998, propelled by the same forces that pushed Treasury bonds and stocks higher. These forces included solid economic growth and low inflation, which kept the Federal Reserve Board from increasing interest rates. Leading the way among high-yield issues were those of companies in the telecommunications, cable TV, and broadcasting industries -- following a pattern that has prevailed for well over a year. New issuance in the high-yield market has continued at a record-breaking pace, driven by favorable interest rates, expanding businesses, and strong investor demand. Another factor boosting the high-yield bond market has been the tremendous amount of merger and acquisition activity. Larger, more creditworthy companies that have completed cost-cutting programs are buying smaller high-yield bond issuers in an effort to further grow their businesses or add niche products. This consolidation trend was evident in many sectors, including consumer products, telecommunications, and cable TV. Highlights among your fund's high-yield holdings included NEXTEL Communications, which provides digital wireless communications service, and Teleport Communications Group, a long-distance provider acquired by AT&T. Several cable companies in your fund's portfolio also contributed to performance during the period. The cable TV industry as a whole was boosted by increasing interest in the delivery of Internet technology through conventional cable systems. [GRAPHIC OMITTED: TOP THREE HOLDINGS PER SECTOR] TOP THREE HOLDINGS PER SECTOR HIGH-YIELD BONDS Banco Nacional de Comercio, 7 1/4s, 2004 Banco Nacional de Desenvolvimiento Economico e Social (BNDES), 9s, 2007 Banco Nacional de Comercio, 8s, 2003 FOREIGN BONDS United Kingdom Treasury bonds, 8s, 2007 Germany (Federal Rebublic of) Unity bonds, 8s, 2002 Government of Australia, 8 3/4s, 2008 U.S. INVESTMENT-GRADE SECURITIES Government National Mortgage Association (GNMA), 7 1/2s GNMA, 6 1/2s U.S. Treasury notes, 5 3/4s Footnote reads: These holdings represent 35.2% of the fund's net assets as of 3/31/98. Portfolio holdings will vary over time. Technology giant Microsoft's recent decision to invest $1 billion in Philadelphia cable operator Comcast Corp. was a signal to investors that this is an area with strong growth potential. While these holdings, along with others discussed in this report, were viewed favorably at the end of the fiscal period, all portfolio holdings are subject to review and adjustment in accordance with the fund's investment strategy and may vary in the future. * OUTLOOK: CURRENT TRENDS SHOULD CONTINUE In general, we believe the domestic economy, driven by consumer demand, is poised for continued strong growth with relatively low inflation. As a result, we expect that demand for high-yield bonds will remain strong in the months ahead as investor confidence remains high. We are more cautious about international bond markets and the outlook for global economic growth. Valuations in most foreign markets appear stretched, particularly after the global flight to quality that has driven bond yields lower worldwide. We will continue to monitor the Asian turbulence closely, realizing that its impact may be greater than previously forecast. Your fund's ability to invest across multiple fixed-income sectors should enable us to position the portfolio defensively while taking advantage of attractive income opportunities. The views expressed here are exclusively those of Putnam Management. They are not meant as investment advice. Although the described holdings were viewed favorably as of 3/31/98, there is no guarantee the fund will continue to hold these securities in the future. The lower credit ratings of high-yield corporate bonds reflect a greater possibility that adverse changes in the economy or their issuers may affect their ability to pay principal and interest on the bonds. Investments in non-U.S. securities may be subject to certain risks such as currency fluctuations, economic instability, and political developments. Although the U.S. government guarantees the timely payment of principal and interest on some of the underlying securities, the value of the fund shares is not guaranteed and will fluctuate. Performance summary Performance should always be considered in light of a fund's investment strategy. Putnam Master Intermediate Income Trust is designed for investors seeking high current income and relative stability of net asset value through U.S. government, high-yield, and international fixed-income securities with limited maturities. TOTAL RETURN FOR PERIODS ENDED 3/31/98 Market NAV price - ------------------------------------------------------------------------------ 6 months 2.43% 1.00% - ------------------------------------------------------------------------------ 1 year 10.77 14.02 - ------------------------------------------------------------------------------ 5 years 50.48 42.97 Annual average 8.52 7.41 - ------------------------------------------------------------------------------ Life (4/29/88) 145.35 107.98 Annual average 9.47 7.66 - ------------------------------------------------------------------------------ COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 3/31/98 Lehman Bros. Salomon Bros. Govt. Non-U.S First Boston Consumer Intermediate World Govt High Yield Price Bond Index Bond Index Index Index - ------------------------------------------------------------------------------ 6 months 3.76% -0.98% 4.67% 0.62% - ------------------------------------------------------------------------------ 1 year 9.38 2.03 14.33 1.38 - ------------------------------------------------------------------------------ 5 years 33.38 37.76 68.52 12.95 Annual average 5.93 6.62 11.00 2.47 - ------------------------------------------------------------------------------ Life of fund 115.40 100.97 203.39 38.51 Annual average 8.04 7.29 11.84 3.34 - ------------------------------------------------------------------------------ Performance data represent past results and do not reflect future performance. They do not take into account any adjustment for taxes payable on reinvested distributions. Investment returns, net asset value and market price will fluctuate so that an investor's shares when sold may be worth more or less than their original cost. PRICE AND DISTRIBUTION INFORMATION 6 months ended 3/31/98 - ------------------------------------------------------------------------------ Distributions (number) 6 - ------------------------------------------------------------------------------ Income $0.34 - ------------------------------------------------------------------------------ Capital gains -- - ------------------------------------------------------------------------------ Total $0.34 - ------------------------------------------------------------------------------ Share value NAV Market price - ------------------------------------------------------------------------------ 9/30/97 $8.79 $8.125 - ------------------------------------------------------------------------------ 3/31/98 8.64 7.875 - ------------------------------------------------------------------------------ Current return (end of period) NAV Market price - ------------------------------------------------------------------------------ Current dividend rate1 7.78% 8.53% - ------------------------------------------------------------------------------ 1Income portion of most recent distribution, annualized and divided by NAV or Market price at end of period. TERMS AND DEFINITIONS Total return shows how the value of the fund's shares changed over time, assuming you held the shares through the entire period and reinvested all distributions in the fund. Net asset value (NAV) is the value of all your fund's assets, divided by the number of outstanding common shares. Market price is the current trading price of one share of the fund. Market prices are set by transactions between buyers and sellers on the New York Stock Exchange. COMPARATIVE BENCHMARKS Lehman Bros. Government Intermediate Bond Index* is an unmanaged list of U.S. government and mortgage-backed securities composed of all bonds covered by the Lehman Brothers Government Bond Index with maturities between 1 and 9.99 years. Salomon Brothers Non-U.S. World Government Bond Index* is an unmanaged list of bonds issued by 10 countries. First Boston High Yield Index* is an unmanaged list of lower-rated higher-yielding U.S. corporate bonds. Consumer Price Index (CPI) is a commonly used measure of inflation; it does not represent an investment return. * Securities indexes assume reinvestment of all distributions and interest payments and do not take in account brokerage fees or taxes. Securities in the fund do not match those in the indexes and performance of the fund will differ. It is not possible to invest directly in an index. Portfolio of investments owned March 31, 1998 (Unaudited)
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (37.1%) * PRINCIPAL AMOUNT VALUE U.S. Government Agency Mortgage Obligations (22.6%) - -------------------------------------------------------------------------------------------- Federal Home Loan Mortgage Corp. $601,529 7s, February 1, 2012 $611,863 192,690 6 1/2s, September 1, 2002 192,270 Federal National Mortgage Association 4,908 8 1/2s, Dwarf, with due dates from March 1, 2006 to March 1, 2006 5,117 1,374,042 6 1/2s, with due dates from March 1, 2026 to October 1, 2026 1,358,584 Federal National Mortgage Association Adjustable Rate Mortgages 563,832 7.837s, May 1, 2025 587,795 859,940 7.143s, July 1, 2027 872,839 Government National Mortgage Association 8,510,000 7s, TBA, April 15, 2028 8,595,100 2,840,000 5 1/2s, TBA, April 15, 2028 2,855,080 Government National Mortgage Association Adjustable Rate Mortgages 1,057,017 7s, July 20, 2024 1,084,764 Government National Mortgage Association Pass-through Certificates 14,066,668 8s, with due dates from July 15, 2023 to February 15, 20281 4,568,636 91,113,663 7 1/2s, with due dates from January 15, 2023 to November 15, 2027 93,516,584 30,613,475 7s, with due dates from July 20, 2024 to November 15, 2027 30,922,916 40,986,015 6 1/2s, with due dates from December 15, 2027 to February 15, 2028 40,563,043 -------------- 195,734,591 U.S. Treasury Obligations (14.5%) - -------------------------------------------------------------------------------------------- U.S. Treasury Bonds 9,540,000 12 3/8s, May 15, 2004 # 12,771,675 12,680,000 11 5/8s, November 15, 2004 16,737,600 U.S. Treasury Notes 2,100,000 7s, July 15, 2006 2,269,638 12,805,000 6 7/8s, May 15, 2006 13,729,393 18,790,000 6 5/8s, June 30, 2001 19,321,381 4,000 6 1/2s, October 15, 2006 4,197 1,600,000 6 1/4s, August 31, 2002 # 1,634,992 11,255,000 6 1/8s, August 15, 2007 # 11,575,092 830,000 6s, July 31, 2002 840,242 990,000 5 3/4s, November 30, 2002 992,940 40,025,000 5 3/4s, November 15, 2000 # 40,137,470 1,425,000 5 5/8s, December 31, 1999 1,425,670 650,000 5 1/2s, February 28, 2003 646,139 2,875,000 5 1/2s, February 28, 2000 2,869,595 -------------- 124,956,024 -------------- Total U.S. Government and Agency Obligations (cost $321,177,914) $320,690,615 CORPORATE BONDS AND NOTES (36.2%) * PRINCIPAL AMOUNT VALUE Advertising (0.8%) - -------------------------------------------------------------------------------------------- $1,400,000 Adams Outdoor Advertising sr. notes 10 3/4s, 2006 $1,540,000 950,000 Big Flower Holdings, Inc. sr. sub. notes 8 7/8s, 2007 978,500 400,000 Lamar Advertising Co. sr. sub. notes 9 5/8s, 2006 434,000 1,660,000 Lamar Advertising Co. company guaranty 8 5/8s, 2007 1,718,100 1,750,000 Outdoor Communications Inc. sr. sub. notes 9 1/4s, 2007 1,820,000 -------------- 6,490,600 Aerospace and Defense (0.6%) - -------------------------------------------------------------------------------------------- 250,000 Alliant Techsystems, Inc. sr. sub. notes 11 3/4s, 2003 275,000 130,000 Argo-Tech Corp. company guaranty 8 5/8s, 2007 132,925 570,000 Aviation Sales Co. 144A sr. sub. notes 8 1/8s, 2008 561,450 715,000 BE Aerospace sr. sub. notes Ser. B, 9 7/8s, 2006 766,838 370,000 BE Aerospace, Inc. 144A sr. sub. notes 8s, 2008 369,075 650,000 Derlan Industries Ltd. sr. notes 10s, 2007 (Canada) 682,500 145,000 K&F Industries, Inc. sr. sub. notes Ser. B, 9 1/4s, 2007 150,075 100,000 Moog, Inc. sr. sub. notes Ser. B, 10s, 2006 108,500 800,000 Sabreliner Corp. sr. notes Ser. B, 12 1/2s, 2003 840,000 600,000 Sequa Corp. sr. sub. notes 9 3/8s, 2003 630,000 500,000 Sequa Corp. bonds 8 3/4s, 2001 510,000 185,000 Tracor, Inc. sr. sub. notes 8 1/2s, 2007 191,244 160,000 United Defense Industries Inc. company guaranty 8 3/4s, 20071 63,600 -------------- 5,381,207 Agriculture (0.2%) - -------------------------------------------------------------------------------------------- 830,580 Premium Standard Farms, Inc. sr. secd. notes 11s, 2003 [2DBL. DAGGERS] 897,027 700,000 Purina Mills, Inc. 144A sr. sub. notes 9s, 2010 722,750 -------------- 1,619,777 Airlines (0.1%) - -------------------------------------------------------------------------------------------- 270,000 Trans World Airlines, Inc. sr. notes 11 1/2s, 2004 285,525 520,000 Trans World Airlines, Inc. 144A notes 11 3/8s, 2006 523,900 -------------- 809,425 Apparel (0.1%) - -------------------------------------------------------------------------------------------- 85,000 GFSI, Inc. sr. sub. notes Ser. B, 9 5/8s, 2007 89,250 125,000 Guess Jeans, Inc. sr. sub. notes 9 1/2s, 2003 127,500 395,000 Sassco Fashions Ltd. sr. notes 12 3/4s, 2004 416,725 170,000 William Carter Co. 144A sr. sub. notes 12s, 2008 184,450 -------------- 817,925 Automotive Parts (0.6%) - -------------------------------------------------------------------------------------------- 3,000,000 Cambridge Industries Inc. company guaranty Ser. B, 10 1/4s, 2007 3,120,000 135,000 Hayes Wheels International, Inc. 144A company guaranty Ser. B, 9 1/8s, 2007 142,425 900,000 Lear Corp. sub. notes 9 1/2s, 2006 999,000 700,000 Navistar International Corp. 144A sr. sub.notes 8s, 2008 697,375 200,000 Safety Component International, Inc. 144A sr. sub. notes Ser. B, 10 1/8s, 2007 207,000 -------------- 5,165,800 Banks (3.7%) - -------------------------------------------------------------------------------------------- 6,719,000 Banco Nacional de Comercio Exterior bank guaranteed 8s, 2003 (Mexico) 6,618,215 9,246,000 Banco Nacional de Comercio Exterior bank guaranteed 7 1/4s, 2004 (Mexico) 8,760,585 8,500,000 Banco National de Desenvolvimiento Economico e Social (BNDES) 144A bonds 9s, 2007 (Brazil) 8,181,250 2,500,000 Chevy Chase Savings Bank sub. deb. 9 1/4s, 2008 2,612,500 500,000 Delta Financial Corp. sr. notes 9 1/2s, 2004 495,000 500,000 First Federal Financial Corp. notes 11 3/4s, 2004 540,000 3,040,000 First Nationwide Holdings sr. sub. notes 10 5/8s, 2003 3,412,400 125,000 Imperial Credit Industries, Inc. sr. notes 9 7/8s, 2007 124,375 500,000 Korea Development Bank bonds 7 3/8s, 2004 (Korea) 450,825 250,000 Korea Developmental Bank bonds 7 1/8s, 2001 (Korea) 235,085 200,000 Ocwen Federal Bank FSB sub. deb. 12s, 2005 223,000 120,000 Owen Financial Corp. notes 11 7/8s, 2003 136,200 -------------- 31,789,435 Basic Industrial Products (0.1%) - -------------------------------------------------------------------------------------------- 405,000 American Standard Companies Inc. sr. notes 7 3/8s, 2008 398,925 140,000 Koppers Industries, Inc. 144A company guaranty 9 7/8s, 2007 146,650 70,000 Roller Bearing Co. company guaranty Ser. B, 9 5/8s, 2007 71,925 400,000 W. R. Carpenter North America, Inc. company guaranty 10 5/8s, 2007 428,000 -------------- 1,045,500 Broadcasting (2.6%) - -------------------------------------------------------------------------------------------- 1,250,000 Allbritton Communications sr. sub. deb. Ser. B, 9 3/4s, 2007 1,315,625 3,000,000 American Radio Systems Corp. company guaranty 9s, 2006 3,210,000 200,000 Australis Hldngs PTY Ltd. sr. disc, notes stepped-coupon zero % (15s, 11/01/00), 2002 (in default) (Australia) ++ + 80,000 1,000,000 Benedek Communications Corp. sr. disc. notes stepped- coupon zero % (13 1/4s, 5/15/01), 2006 ++ 800,000 515,000 Capstar Broadcasting sr. disc. notes stepped-coupon zero % 3/4s, 2/1/02), 2009 ++ 388,825 215,000 Capstar Broadcasting sr. sub. notes 9 1/4s, 2007 225,750 115,000 Central European Media Enterprises Ltd. sr. notes 9 3/8s, 2004 117,300 1,500,000 Chancellor Media Corp. 144A sr. sub. notes 8 1/8s, 2007 1,526,250 216,020 Citadel Broadcasting Inc. sr. sub. notes 10 1/4s, 2007 239,242 750,000 Comcast UK Cable, Ltd. deb. stepped-coupon zero % (11.2s, 11/15/00), 2007 (Bermuda) ++ 622,500 480,000 Commodore Media, Inc. sr. sub. notes stepped-coupon 7 1/2s, (13 1/4s, 5/1/98), 2003 ++ 538,800 600,000 Fox/Liberty Networks LLC sr. disc. notes stepped-coupon zero % (9 3/4s, 8/15/02), 2007 ++ 411,000 1,920,000 Fox/Liberty Networks LLC sr. notes 8 7/8s, 2007 1,992,000 2,750,000 Grupo Televisa S.A. sr. disc. notes stepped-coupon zero % (13 1/4s, 5/15/01), 2008 (Mexico) ++ 2,200,000 380,000 Heartland Wireless Communications, Inc. sr. notes Ser. B, 14s, 2004 + 114,000 2,000,000 Jacor Communications, Inc. company guaranty Ser. B, 8 3/4s, 2007 2,090,000 200,000 Pegasus Media & Communications notes Ser. B, 12 1/2s, 2005 229,000 929,000 Petracom Holdings, Inc. notes stepped-coupon zero % (17 1/2s, 8/1/98), 2003 ++ 933,645 275,000 Radio One Inc. company guaranty stepped-coupon Ser. B, 7s, (12s, 5/15/00), 2004 ++ 280,500 1,500,000 SFX Broadcasting, Inc. sr. sub. notes Ser. B, 10 3/4s, 2006 1,657,500 460,000 SFX Entertainment Inc. 144A sr. sub. notes 9 1/8s, 2008 453,100 210,000 Spanish Broadcasting sr. notes Ser. B, 11s, 2004 231,000 220,000 TCI Satellite Entertainment 144A sr. sub. notes 10 7/8s, 2007 232,650 2,545,000 TV Azteca S.A. de C.V. sr. notes 10 1/2s, 2007 (Mexico) 2,710,425 -------------- 22,599,112 Building Products (0.2%) - -------------------------------------------------------------------------------------------- 400,000 Cemex S.A. 144A bonds 12 3/4s, 2006 (Mexico) 484,000 500,000 Nortek, Inc. sr. sub. notes 9 7/8s, 2004 520,000 500,000 Southdown, Inc. sr. sub. notes Ser. B, 10s, 2006 546,875 248,000 Waxman Industries Inc. sr. notes stepped-coupon Ser. B, zero % (12 3/4s, 6/1/99), 2004 ++ 226,300 -------------- 1,777,175 Building and Construction (0.6%) - -------------------------------------------------------------------------------------------- 130,000 American Architectural Products Corp. 144A sr. notes 11 3/4s, 2007 135,850 1,725,000 Atrium Companies Inc. 144A sub. notes 10 1/2s, 2006 1,811,250 450,000 Beazer Homes USA, Inc. 144A sr. notes 8 7/8s, 2008 450,563 600,000 Brand Scaffold Services 144A sr. notes 10 1/4s, 2008 618,000 400,000 GS Superhighway Holdings sr. notes 10 1/4s, 2007 340,000 630,000 GS Superhighway Holdings, sr. notes 9 7/8s, 2004 554,400 650,000 Johns Manville International Group sr. notes 10 7/8s, 2004 719,875 180,000 Presley Cos. sr. notes 12 1/2s, 2001 173,700 -------------- 4,803,638 Buses (0.1%) - -------------------------------------------------------------------------------------------- 855,000 Consorcio/MCII Holdings sec. notes stepped-coupon zero % (12s, 11/15/98), 2002 ++ 790,875 Business Equipment and Services (0.5%) - -------------------------------------------------------------------------------------------- 600,000 Axiohm Transactions Solutions Inc. company guaranty 9 3/4s, 2007 610,500 500,000 Corporate Express, Inc. sr. sub. notes Ser. B, 9 1/8s, 2004 512,500 2,000,000 Iron Mountain, Inc. med. term notes company guaranty 10 1/8s, 2006 2,210,000 920,000 Morris Material Handling Inc. 144A sr. notes 9 1/2s, 2008 924,600 125,000 Outsourcing Solutions, Inc. sr. sub. notes Ser. B, 11s, 2006 133,750 -------------- 4,391,350 Cable Television (3.2%) - -------------------------------------------------------------------------------------------- 240,000 Acme Television sr. disc. notes stepped-coupon zero % (10 7/8s, 9/30/00), 2004 ++ 197,400 1,340,000 Adelphia Communications Corp. sr. notes Ser. B, 9 7/8s, 2007 1,457,250 1,981,594 Adelphia Communications Corp. sr. notes 9 1/2s, 2004 [2DBL. DAGGERS] 2,075,720 5,314 Australis Media, Ltd. sr. disc. notes stepped-coupon 1 3/4s, (15 3/4s 5/15/00), 2003 (in default) (Australia) ++ [2DBL. DAGGERS] + 1,063 300,000 Charter Communications International, Inc. disc. notes stepped-coupon Ser. B, zero % (14s, 3/15/01), 2007 ++ 240,750 2,000,000 Comcast Corp. sr. sub. notes 9 3/8s, 2005 2,141,300 2,000,000 CSC Holdings, Inc. sr. notes 7 7/8s, 2007 2,060,000 3,500,000 Diamond Cable Communication Co. sr. disc. notes stepped-coupon zero % (10 3/4s, 2/15/02), 2007 (United Kingdom) ++ 2,467,500 700,000 Diamond Cable Communication Co. sr. disc. notes stepped-coupon zero % (11 3/4s, 12/15/00), 2005 (United Kingdom) ++ 556,500 980,287 Falcon Holdings Group, Inc. sr. sub. notes 11s, 2003 [2DBL. DAGGERS] 1,052,583 1,290,000 Falcon Holdings Group, Inc. 144A deb. stepped-coupon zero % (9.285s, 4/15/03), 2010 ++ 816,944 605,000 Fox Kids Worldwide Inc. 144A sr. discount notes stepped-coupon zero % (10 1/4s, 11/1/02), 2007 ++ 385,688 3,280,000 Fox Kids Worldwide Inc. 144A sr. notes 9 1/4s, 2007 3,296,400 600,000 FrontierVision Holdings LP sr. disc. notes stepped-coupon zero % (11 7/8s, 9/15/01), 2007 ++ 465,000 140,000 FrontierVision Operating Partners L.P. sr. sub. notes 11s, 2006 156,100 380,000 Globo Communicacoes 144A sr. notes 10 5/8s, 2008 (Brazil) 386,175 280,000 Globo Communicacoes 144A company guaranty 10 1/2s, 2006 (Brazil) 284,900 1,390,000 International Cabletel, Inc. sr. notes stepped-coupon Ser. B, zero % (11 1/2s, 2/01/01), 2006 ++ 1,132,850 1,000,000 Jones Intercable, Inc. sr. notes 8 7/8s, 2007 1,055,000 1,000,000 Lenfest Communications, Inc. sr. sub. notes 10 1/2s, 2006 1,140,000 1,050,000 Lenfest Communications, Inc. 144A sr. sub. notes 8 1/4s, 2008 1,063,125 460,000 Marcus Cable Co. (L.P.) sr. sub. disc. notes stepped-coupon zero % (13 1/2s, 8/1/99), 2004 ++ 437,000 640,000 RCN Corp. sr. disc. notes stepped-coupon zero % (11 1/8s, 10/15/02), 2007 ++ 427,200 2,000,000 RCN Corp. 144A sr. disc. notes stepped-coupon zero % (9.8s, 2/15/03), 2008 ++ 1,255,000 1,500,000 Rogers Cablesystems Ltd. sr. notes Ser. B, 10s, 2005 1,661,250 1,260,000 UIH Australia/Pacific, Inc. sr. disc. notes stepped-coupon Ser. B, zero % (14s, 5/15/01), 2006 (Australia) ++ 869,400 1,250,000 United International Holdings 144A sr. disc. notes stepped- coupon zero % (10 3/4s, 2/15/03), 2008 ++ 781,250 -------------- 27,863,348 Cellular Communications (2.0%) - -------------------------------------------------------------------------------------------- 2,618,000 CellNet Data Systems, Inc. sr. disc. notes stepped-coupon zero % (14s, 10/1/02), 2007 ++ 1,498,805 1,240,000 Cencall Communications Corp. sr. disc. notes stepped- coupon zero % (10 1/8s, 1/15/99), 2004 ++ 1,202,800 1,500,000 Comunicacion Cellular bonds stepped-coupon zero % (13 1/8s, 11/15/00), 2003 (Colombia) ++ 1,170,000 2,285,000 Dobson Communications Corp. sr. notes 11 3/4s, 2007 2,513,500 520,000 Interact Systems, Inc. 144A sr. notes stepped-coupon zero % (14s, 8/1/99), 2003 ++ 197,600 1,500,000 Intercel, Inc. sr. disc. notes stepped-coupon zero % (12s, 2/1/01), 2006 ++ 1,170,000 540,000 Intercel, Inc. sr. disc. notes stepped-coupon zero % (12s, 5/1/01), 2006 ++ 413,100 510,000 International Wireless Communications, Inc. sr. disc. notes zero %, 2001 163,200 930,000 McCaw International Ltd sr. discount notes stepped- coupon zero % (13s, 4/15/02), 2007 ++ 618,450 2,775,000 Millicom International Cellular S.A. sr. disc. notes stepped- coupon zero % (13 1/2s, 6/1/01), 2006 (Luxembourg) ++ 2,164,500 345,000 NEXTEL Communications sr. disc. notes stepped-coupon zero % (9 3/4s, 10/31/02), 2007 ++ 224,250 5,090,000 NEXTEL Communications sr. disc. notes stepped-coupon zero % (10.65s, 9/15/02), 2007 ++ 3,410,300 1,900,000 NEXTEL Communications, Inc. 144A sr. disc. notes stepped- coupon zero % (9.95s, 2/15/03), 2008 ++ 1,213,625 550,000 Omnipoint Corp, 144A sr. notes FRN 8.906s, 2006 552,750 190,000 Omnipoint Corp. sr. notes 11 5/8s, 2006 209,000 460,000 Omnipoint Corp. sr. notes Ser. A, 11 5/8s, 2006 506,000 410,000 Powertel, Inc. sr. notes 11 1/8s, 2007 446,900 -------------- 17,674,780 Chemicals (0.6%) - -------------------------------------------------------------------------------------------- 1,000,000 Acetex Corp. sr. notes 9 3/4s, 2003 (Canada) 1,035,000 1,000,000 Great Lakes Carbon Corp. sr. notes 10s, 2006 1,090,000 320,000 Huntsman Corp. 144A sr. sub. notes 9 1/2s, 2007 332,000 15,000 Huntsman Corp. 144A sr. sub. notes FRN 9.187s, 2007 15,038 1,000,000 ISP Holdings, Inc. sr. notes Ser. B, 9 3/4s, 2002 1,065,000 200,000 NL Industries, Inc. sr. notes 11 3/4s, 2003 222,500 140,000 Pharmaceutical Fine Chemicals 144A sr. sub. notes 9 3/4s, 2007 (Switzerland) 145,250 200,000 Pioneer Americas Acquisition 144A sr. notes 9 1/4s, 2007 203,000 370,000 Polytama International company guaranty 11 1/4s, 2007 229,400 250,000 Sovereign Specialty Chemical 144A sr. sub. notes 9 1/2s, 2007 263,750 185,000 Sterling Chemicals Holdings sr. disc. notes stepped-coupon zero % (13 1/2s, 8/15/01), 2008 ++ 110,075 205,000 Trikem S.A. 144A bonds 10 5/8s, 2007 (Brazil) 194,750 -------------- 4,905,763 Computer Services (0.1%) - -------------------------------------------------------------------------------------------- 545,000 Unisys Corp. sr. notes 11 3/4s, 2004 630,838 Conglomerates (0.1%) - -------------------------------------------------------------------------------------------- 518,000 Axia, Inc. sr. sub. notes Ser. B, 11s, 2001 528,360 300,000 MacAndrews & Forbes Holdings, Inc. sub. deb. notes 13s, 1999 301,125 -------------- 829,485 Consumer Durable Goods (0.1%) - -------------------------------------------------------------------------------------------- 100,000 Foamex, L.P. company guaranty 9 7/8s, 2007 106,000 50,000 Hedstrom Holdings, Inc. 144A sr. disc. notes zero % (12s, 6/01/02), 2009 ++ 31,000 345,000 Icon Fitness Corp. 144A sr. disc. notes stepped-coupon Ser. B, zero % (14s, 11/15/01), 2006 ++ 172,500 120,000 Sealy Mattress Co. 144A sr. sub. notes 9 7/8s, 2007 127,200 -------------- 436,700 Consumer Non Durables (--%) - -------------------------------------------------------------------------------------------- 65,000 Amscan Holdings, Inc. sr. sub. notes 9 7/8s, 2007 67,844 Consumer Services (0.3%) - -------------------------------------------------------------------------------------------- 2,332,000 Coinmach Corp. sr. notes 11 3/4s, 2005 2,600,180 Cosmetics (0.4%) - -------------------------------------------------------------------------------------------- 360,000 Chattem, Inc. 144A sr. sub. notes 8 7/8s, 2008 364,500 95,000 French Fragrances, Inc. sr. notes Ser. B, 10 3/8s, 2007 101,175 1,900,000 Revlon Consumer Products 144A sr. sub. notes 8 5/8s, 2008 1,926,125 915,000 Revlon Worldwide Corp. sr. disc. notes Ser. B, zero %, 2001 699,975 -------------- 3,091,775 Electric Utilities (0.9%) - -------------------------------------------------------------------------------------------- 245,000 AES Corp. sr. sub. notes 8 3/8s, 2007 249,900 240,000 Espirito Santo Centrais 144A sr. notes 10s, 2007 (Brazil) 234,600 4,100,000 Midland Funding Corp. deb. Ser. A, 11 3/4s, 2005 4,917,376 1,825,387 Northeast Utilities System notes Ser. A, 8.58s, 2006 1,825,314 133,333 Northeast Utilities System notes Ser. B, 8.38s, 2005 135,765 -------------- 7,362,955 Electronics and Electrical Equipment (0.5%) - -------------------------------------------------------------------------------------------- 1,390,000 Celestica International Ltd. 144A sr. sub. notes 10 1/2s, 2006 (Canada) 1,515,100 145,918 Cirent Semiconductor sr. sub. notes 10.22s, 2002 152,120 170,559 Cirent Semiconductor 144A sr. sub. notes 10.14s, 2004 178,234 120,000 Details, Inc. sr. sub. notes Ser. B, 10s, 2005 125,700 190,000 DII Group, Inc. (The) sr. sub. notes 8 1/2s, 2007 191,900 200,000 Flextronics International Ltd. 144A sr. sub. notes 8 3/4s, 2007 201,500 120,000 HCC Industries, Inc. company guaranty 10 3/4s, 2007 125,400 410,000 Motors and Gears Inc. sr. notes Ser. D, 10 3/4s, 2006 442,800 100,000 Therma-Wave Inc. sr. notes Ser. B, 10 5/8s, 2004 104,000 570,000 Wavetek Corp. company guaranty 10 1/8s, 2007 601,350 1,000,000 Zilog Inc. 144A sr. notes 9 1/2s, 2005 972,500 -------------- 4,610,604 Energy-Related (0.1%) - -------------------------------------------------------------------------------------------- 710,000 Panda Global Energy Co. company guaranty 12 1/2s, 2004 674,500 400,000 RAM Energy Inc. sr. notes 11 1/2s, 2008 393,000 -------------- 1,067,500 Entertainment (0.8%) - -------------------------------------------------------------------------------------------- 640,000 AMC Entertainment, Inc. sr. sub. notes 9 1/2s, 2009 675,200 1,100,000 Premier Parks, Inc. sr. notes 9 1/4s, 2006 1,104,125 2,500,000 Six Flags Term Loan B 10s, 2004 ## 2,509,375 2,500,000 Viacom International, Inc. sub. deb. 8s, 2006 2,553,125 -------------- 6,841,825 Environmental Control (0.2%) - -------------------------------------------------------------------------------------------- 250,000 Allied Waste Industries, Inc. company guaranty 10 1/4s, 2006 277,500 1,920,000 Allied Waste Industries, Inc. sr. disc. notes stepped-coupon zero % (11.3s, 6/1/07), 2007 ++ 1,411,200 -------------- 1,688,700 Financial Services (0.3%) - -------------------------------------------------------------------------------------------- 260,000 Aames Financial Corp. sr. notes 9 1/8s, 2003 262,600 140,000 Dine S.A. de C.V. 144A company guaranty 8 3/4s, 2007 (Mexico) 136,675 1,615,000 Dollar Financial Group Inc. sr. notes Ser. A, 10 7/8s, 20061, 768,425 190,000 Intertek Finance PLC 144A sr. sub. notes 10 1/4s, 2006 203,300 100,000 Nationwide Credit Inc. 144A sr. notes 10 1/4s, 2008 103,000 120,000 Resource America Inc. 144A sr. notes 12s, 2004 126,900 -------------- 2,600,900 Food and Beverages (0.4%) - -------------------------------------------------------------------------------------------- 500,000 Ameriserve Food Co. company guaranty 10 1/8s, 2007 540,000 270,000 Ameriserve Food Co. company guaranty 8 7/8s, 2006 278,100 65,000 Aurora Foods, Inc. sr. sub. notes Ser. B, 9 7/8s, 2007 69,875 920,000 Aurora Foods, Inc. 144A ser. sub. notes Ser. D, 9 7/8s, 2007 989,000 310,000 Canandaigua Wine Co. sr. sub. notes Ser. C, 8 3/4s, 2003 316,200 500,000 Doane Products Co. sr. notes 10 5/8s, 2006 547,500 200,000 Nebco Evans Holding Co. sr. disc. notes stepped-coupon zero % (12 3/8s, 7/15/02), 2007 ++ 138,000 130,000 Southern Foods Group 144A sr. sub. notes 9 7/8s, 2007 138,450 50,000 Windy Hill Pet Food Co. sr. sub. notes 9 3/4s, 2007 53,250 -------------- 3,070,375 Gaming (1.3%) - -------------------------------------------------------------------------------------------- 850,000 Argosy Gaming Co. company guaranty 13 1/4s, 2004 941,375 1,500,000 Boyd Gaming Corp. sr. sub. notes 9 1/2s, 2007 1,601,250 185,000 Casino America, Inc. sr. notes 12 1/2s, 2003 205,350 1,400,000 Coast Hotels & Casinos, Inc. company guaranty Ser. B, 13s, 2002 1,627,500 370,300 Colorado Gaming & Entertainment Co. sr. notes 12s, 2003 [2DBL. DAGGERS] 401,776 513,970 Elsinore Corp. 144A exch. 1st mtge. 11 1/2s, 2000 513,970 720,000 Fitzgeralds Gaming Corp. 144A company guaranty 12 1/4s, 2004 727,200 250,000 Grand Casinos, Inc. 1st mtge. 10 1/8s, 2003 270,000 900,000 Hollywood Casino Corp. sr. notes 12 3/4s, 2003 994,500 150,000 Isle of Capri Black Hawk LLC 1st mtge. Ser. B, 13s, 2004 152,250 1,200,000 Lady Luck Gaming Corp. 1st mtge. 11 7/8s, 2001 1,233,000 444,000 Louisiana Casino Cruises Corp. 1st mtge. 11 1/2s, 1998 448,440 250,000 Mohegan Tribal Gaming Auth. sr notes Ser. B, 13 1/2s, 2002 320,625 90,000 Penn National Gaming, Inc. 144A sr. notes 10 5/8s, 2004 95,400 500,000 PRT Funding Corp. sr. notes 11 5/8s, 2004 375,000 1,040,000 Trump A.C. company guaranty 11 1/4s, 2006 1,068,600 594,000 Trump Castle Funding Corp. notes 11 1/2s, 2000 599,940 -------------- 11,576,176 Health Care (1.6%) - -------------------------------------------------------------------------------------------- 550,000 Columbia/HCA Healthcare Corp. notes 7 1/4s, 2008 513,931 1,250,000 Extendicare Inc. 144A sr. sub. notes 9.35s, 2007 (Canada) 1,300,000 300,000 Genesis Eldercare 144A sr. sub. notes 9s, 2007 307,500 500,000 Genesis Health Ventures, Inc. sr. sub. notes 9 1/4s, 2006 522,500 1,000,000 Graphic Controls Corp. sr. sub. notes Ser. A, 12s, 2005 1,117,500 1,600,000 Integrated Health Services, Inc. sr. sub. notes Ser. A, 9 1/4s, 2008 1,686,000 960,000 Magellan Health Services, Inc. 144A sr. sub. notes 9s, 2008 967,200 210,000 MedPartners, Inc. sr. notes 7 3/8s, 2006 188,154 1,000,000 MedPartners, Inc. sr. sub.notes 6 7/8s, 2000 952,500 620,000 Paracelsus Healthcare Corp. sr. sub. notes 10s, 2006 641,700 350,000 Paragon Corp. Holdings 144A sr. notes 9 5/8s, 2008 347,375 2,720,000 Paragon Health Networks, Inc. sr. sub. notes Ser. B, 9 1/2s, 2007 2,788,000 2,365,000 Sun Healthcare Group Inc. 144A sr. sub. notes 9 1/2s, 2007 2,483,250 -------------- 13,815,610 Insurance and Finance (0.4%) - -------------------------------------------------------------------------------------------- 750,000 Imperial Credit Capital Trust I 144A company guaranty 10 1/4s, 2002 750,000 500,000 Reliance Group Holdings, Inc. sr. sub. deb. 9 3/4s, 2003 522,175 2,000,000 Reliance Group Holdings, Inc. sr. notes 9s, 2000 2,092,040 -------------- 3,364,215 Lodging (0.3%) - -------------------------------------------------------------------------------------------- 1,750,000 Host Marriott Travel Plaza sr. notes Ser. B, 9 1/2s, 2005 1,859,375 1,000,000 HMH Properties, Inc. company guaranty Ser. B, 8 7/8s, 2007 1,052,500 -------------- 2,911,875 Medical Supplies and Devices (0.3%) - -------------------------------------------------------------------------------------------- 340,000 ALARIS Medical Systems, Inc. company guaranty 9 3/4s, 2006 363,800 430,000 Conmed Corp. 144A sr. sub. notes 9s, 2008 436,450 250,000 Dade International, Inc. sr. sub. notes Ser. B, 11 1/8s, 2006 279,375 900,000 Fresenius Medical Care AG 144A company guaranty 7 7/8s, 2008 (Germany) 900,000 240,000 Imagyn Medical Technologies company guaranty, 12 1/2s, 2004 144,000 140,000 Kinetic Concepts, Inc. company guaranty Ser. B, 9 5/8s, 2007 143,850 350,000 Wright Medical Technology, Inc. 144A notes Ser. C, 11 3/4s, 2000 343,000 -------------- 2,610,475 Metals and Mining (0.1%) - -------------------------------------------------------------------------------------------- 90,000 Acindar Industria Argentina de Aceros S.A. bonds 11 1/4s, 2004 (Argentina) 94,950 200,000 Anker Coal Group, Inc. sr. notes Ser. B, 9 3/4s, 2007 194,000 140,000 Armco, Inc. sr. notes 9s, 2007 145,250 210,000 Continental Global Group sr. notes Ser. B, 11s, 2007 224,700 250,000 Weirton Steel Co. sr. notes 11 3/8s, 2004 270,000 -------------- 928,900 Motion Picture Distribution (0.2%) - -------------------------------------------------------------------------------------------- 1,400,000 Cinemark USA, Inc. sr. sub. notes 9 5/8s, 2008 1,477,000 270,000 Panavision Inc. 144A sr. disc. notes stepped-coupon zero % (9 5/8s, 2/1/02), 2006 ++ 192,038 -------------- 1,669,038 Oil and Gas (2.0%) - -------------------------------------------------------------------------------------------- 185,000 Abraxas Petroleum Corp. 144A sr. notes Ser. B, 11 1/2s, 2004 190,550 1,500,000 Benton Oil & Gas Co. sr. notes 11 5/8s, 2003 1,635,000 35,000 Benton Oil & Gas Co. sr. notes 9 3/8s, 2007 35,350 1,000,000 Cliffs Drilling Co. company guaranty Ser. D, 10 1/4s, 2003 1,082,500 180,000 Coho Energy, Inc. sr. sub. notes 8 7/8s, 2007 169,200 1,500,000 Costilla Energy, Inc. sr. notes 10 1/4s, 2006 1,515,000 460,000 Dailey International Inc. 144A sr. notes 9 1/2s, 2008 460,000 100,000 DI Industries Inc. sr. notes 8 7/8s, 2007 102,250 200,000 Gulf Canada Resources Ltd. sr. sub. notes 9 5/8s, 2005 (Canada) 216,000 490,000 Market Hub Partners 144A sr. notes 8 1/4s, 2008 499,800 450,000 Michael Petroleum Corp. 144A sr. notes 11 1/2s, 2005 444,938 85,000 Newpark Resources, Inc. 144A sr. sub. notes 8 5/8s, 2007 86,913 100,000 Pacalta Resources Ltd. sr. notes Ser. B, 10 3/4s, 2004 (Canada) 101,500 870,000 Panaco, Inc. company guaranty Ser. B, 10 5/8s, 2004 878,700 300,000 Pogo Producing Co. sr. sub. notes Ser. B, 8 3/4s, 2007 310,500 150,000 Pride Petroleum Services, Inc. sr. notes 9 3/8s, 2007 159,750 335,000 Southwest Royalties, Inc. company guaranty 10 1/2s, 2004 301,500 7,175,000 Transamerican Energy sr. disc. notes stepped-coupon Ser. B, zero % (13s, 6/15/99), 2002 ++ 6,027,000 2,150,000 Transamerican Energy sr. notes Ser. B, 11 1/2s, 2002 2,128,500 518,000 TransTexas Gas Corp. sr. sub. notes Ser. D, 13 3/4s, 2001 580,160 100,000 Wiser Oil Co. company guaranty 9 1/2s, 2007 96,500 500,000 XCL Ltd. 144A company guaranty 13 1/2s, 2004 540,000 -------------- 17,561,611 Packaging and Containers (0.4%) - -------------------------------------------------------------------------------------------- 120,000 AEP Industries, Inc. 144A sr. sub. notes 9 7/8s, 2007 125,850 215,000 Huntsman Packaging Corp. 144A sr. sub. notes 9 1/8s, 2007 220,375 270,000 Innova S De R.L. sr. notes 12 7/8s, 2007 (Mexico) 288,900 1,530,000 Riverwood International Corp. company guaranty 10 7/8s, 2008 1,541,475 450,000 Riverwood International Corp. company guaranty 10 5/8s, 2007 475,875 1,000,000 Vicap SA. 144A company guaranty 11 3/8s, 2007 1,102,500 -------------- 3,754,975 Paging (0.1%) - -------------------------------------------------------------------------------------------- 410,000 Mobile Telecommunications Tech. sr. notes 13 1/2s, 2002 482,775 255,000 Paging Network Do Brasil sr. notes 13 1/2s, 2005 (Brazil) 258,188 400,000 Paging Network, Inc. sr. sub. notes 10s, 2008 418,000 -------------- 1,158,963 Paper and Forest Products (1.3%) - -------------------------------------------------------------------------------------------- 1,670,000 Florida Coast Paper LLC 1st mtge. Ser. B, 12 3/4s, 2003 1,786,900 780,000 Impac Group Inc. 144A sr. sub. notes 10 1/8s, 2008 793,650 2,500,000 Indah Kiat Financial Mauritius Ltd. company guaranty 10s, 2007 (Indonesia) 2,068,750 2,375,000 Pindo Deli Finance Mauritius Ltd. 144A company guaranty 10 3/4s, 2007 (India) 1,923,750 2,445,000 PT Pabrik Kertas Tjiwi Kimia company guaranty 10s, 2004 (Indonesia) 2,017,125 1,860,000 Repap New Brunswick sr. notes 10 5/8s, 2005 (Canada) 1,887,900 160,000 Radnor Holdings Corp. company guaranty 10s, 2003 167,600 850,000 Stone Container Corp. 144A company guaranty 11 1/2s, 2006 901,000 -------------- 11,546,675 Pharmaceuticals and Biotechnology (0.3%) - -------------------------------------------------------------------------------------------- 900,000 ICN Pharmaceuticals, Inc. 144A sr. notes 9 1/4s, 2005 952,875 110,000 NBTY Inc. 144A sr. sub. notes 8 5/8s, 2007 112,200 530,000 PharMerica, Inc. 144A sr. sub. notes 8 3/8s, 2008 531,325 600,000 Twin Laboratories, Inc. company guaranty 10 1/4s, 2006 663,000 -------------- 2,259,400 Publishing (0.4%) - -------------------------------------------------------------------------------------------- 375,000 Affinity Group Holdings sr. notes 11s, 2007 405,938 500,000 American Media Operation, Inc. sr. sub. notes 11 5/8s, 2004 542,500 750,000 Garden State Newspapers, Inc. sr. sub. notes Ser. B, 8 3/4s, 2009 766,875 405,000 Hollinger International Publishing, Inc. company guaranty 9 1/4s, 2007 429,300 1,390,000 Perry-Judd 144A sr. sub. notes 10 5/8s, 2007 1,487,300 100,000 Von Hoffman Press Inc. 144A sr. sub. notes 10 3/8s, 2007 107,500 -------------- 3,739,413 Railroads (0.2%) - -------------------------------------------------------------------------------------------- 1,575,000 TFM S.A. de C.V. company guaranty 10 1/4s, 2007 (Mexico) 1,638,000 Real Estate (0.1%) - -------------------------------------------------------------------------------------------- 240,000 Bluegreen Corp. 144A sr. notes 10 1/2s, 2008 238,800 840,000 Prime Hospitality Corp. sub. notes 9 3/4s, 2007 907,200 -------------- 1,146,000 Recreation (--%) - -------------------------------------------------------------------------------------------- 100,000 CLN Holdings, Inc. sr. disc. notes zero %, 2001 78,500 Restaurants (0.1%) - -------------------------------------------------------------------------------------------- 500,000 FRD Acquisition Co. sr. notes Ser. B, 12 1/2s, 2004 546,250 Retail (0.4%) - -------------------------------------------------------------------------------------------- 120,000 Color Spot Nurseries sr. sub. notes 10 1/2s, 2007 118,200 434,000 Guitar Center Management Co. 144A sr. notes 11s, 2006 481,740 1,500,000 K mart Corp. notes 8 1/8s, 2006 1,560,000 600,000 Mothers Work, Inc. sr. notes 12 5/8s, 2005 651,000 260,000 Zale Corp. sr. notes Ser. B, 8 1/2s, 2007 266,500 -------------- 3,077,440 Satellite Services (1.0%) - -------------------------------------------------------------------------------------------- 1,350,000 Echostar Satellite Broadcast Corp. sr. disc. notes stepped- coupon zero % (13 1/8s, 3/15/00), 2004 ++ 1,231,875 255,000 Esat Holdings Ltd. 144A sr. notes stepped-coupon zero % (12 1/2s, 2/01/02), 2007 (Ireland) ++ 191,250 1,500,000 Globalstar L.P. Capital sr. notes 11 3/8s, 2004 1,571,250 3,760,000 ICG Holdings, Inc. sr. disc. notes stepped-coupon zero % (13 1/2s, 9/15/00), 2005 ++ 3,205,400 360,000 Iridium LLC/Capital Corp. company guaranty Ser. B, 14s, 2005 417,600 400,000 Iridium LLC/Capital Corp. company guaranty Ser. A, 13s, 2005 448,000 60,000 Iridium LLC/Capital Corp. 144A sr. notes 11 1/4s, 2005 63,600 1,500,000 Satelites Mexicanos S.A. de C.V. 144A sr. notes 10 1/8s, 2004 (Mexico) 1,545,000 -------------- 8,673,975 Semiconductors (0.4%) - -------------------------------------------------------------------------------------------- 1,375,000 Fairchild Semiconductor Corp. sr. sub. notes 10 1/8s, 2007 1,430,000 220,000 Fairchild Semiconductor Corp. 144A sr. sub. notes 11.74s, 2008 246,950 245,000 Viasystems Inc. sr. sub notes 9 3/4s, 2007 256,025 1,250,000 Viasystems Inc. 144A sr. sub. notes 9 3/4s, 2007 1,306,250 -------------- 3,239,225 Shipping (0.2%) - -------------------------------------------------------------------------------------------- 240,000 International Shipholding Corp. sr. notes 7 3/4s, 2007 235,800 900,000 Johnstown America Industries, Inc. company guaranty Ser. C, 11 3/4s, 2005 1,005,750 360,000 MC Shipping, Inc. 144A sr. notes 11 1/4s, 2008 361,800 -------------- 1,603,350 Steel (--%) - -------------------------------------------------------------------------------------------- 420,000 Hylsa S.A. de C.V. 144A bonds 9 1/4s, 2007 (Mexico) 421,050 Supermarkets (0.3%) - -------------------------------------------------------------------------------------------- 780,000 Fleming Companies, Inc. company guaranty Ser. B, 10 1/2s, 2004 836,550 400,000 Jitney-Jungle Stores company guaranty 12s, 2006 456,000 240,000 Jitney-Jungle Stores company guaranty 10 3/8s, 2007 249,600 1,250,000 Southland Corp. deb. 4s, 2004 976,375 200,000 Southland Corp. deb. Ser. A, 4 1/2s, 2004 166,500 -------------- 2,685,025 Telecommunications (3.0%) - -------------------------------------------------------------------------------------------- 190,000 American Communication Services, Inc. sr. notes 13 3/4s, 2007 225,150 1,000,000 American Communication Services, Inc. sr. disc. notes stepped- coupon zero % (13s, 11/1/00), 2005 ++ 852,500 1,890,000 American Communication Services, Inc. sr. disc. notes stepped- coupon zero % (12 3/4s, 4/1/01), 2006 ++ 1,521,450 170,000 Antenna TV S.A. 144A sr. notes 9s, 2007 (Greece) 171,700 300,000 Barak ITC 144A sr. disc. notes stepped-coupon zero % (12 1/2s, 11/15/02), 2007 (Israel) ++ 175,500 105,000 Consorcio Ecuatoriano notes 14s, 2002 (Ecuador) 110,250 1,500,000 Econophone Inc. company guaranty 13 1/2s, 2007 1,725,000 370,000 Econophone Inc. 144A sr. disc. notes stepped-coupon zero % (11s, 2/15/03), 2008 ++ 218,300 325,000 Echostar DBS Corp. company guaranty 12 1/2s, 2002 367,250 155,000 Esprit Teleom Group PLC sr. notes 11 1/2s, 2007 (United Kingdom) 169,725 410,000 Focal Communications Corp. 144A sr. disc. notes stepped- coupon zero % (12 1/8s, 2/15/03), 2008 ++ 239,850 2,597,000 GST Telecommunications,Inc. company guaranty stepped- coupon zero % (13 7/8s, 12/15/00), 2005 ++ 2,155,510 380,000 Hyperion Telecommunication Corp. sr. disc. notes stepped- coupon Ser. B, zero % (13s, 4/15/01), 2003 ++ 291,650 400,000 Hyperion Telecommunications , Inc. sr. notes Ser. B, 12 1/4s, 2004 450,000 1,000,000 Intermedia Communications, Inc. sr. disc. notes stepped- coupon Ser. B, zero % (11 1/4s, 7/15/02), 2007 ++ 750,000 540,000 Intermedia Communications, Inc. sr. notes Ser. B, 8 7/8s, 2007 577,800 300,000 Intermedia Communications, Inc. sr. notes Ser. B, 8 1/2s, 2008 314,250 1,180,000 Knology Holdings Inc. sr. disc. notes stepped-coupon zero % (11 7/8s, 10/15/02), 2007 ++ 708,000 150,000 L-3 Communications Corp. sr. sub. notes Ser. B, 10 3/8s, 2007 166,125 750,000 Metrocall, Inc. sr. sub. notes 10 3/8s, 2007 781,875 140,000 MetroNet Communications Corp. sr. disc. notes stepped- coupon zero % (10 3/4s, 11/1/02), 2007 (Canada) ++ 93,100 430,000 Microcell Telecommunications sr. disc. notes stepped-coupon Ser. B, zero % (14s, 12/1/01), 2006 (Canada) ++ 319,275 100,000 Netia Holdings B.V. 144A company guaranty 10 1/4s, 2007 (Poland) 102,750 60,000 Netia Holdings B.V. 144A company guaranty stepped-coupon zero % (11 1/4s, 11/1/02), 2007 (Poland) 40,950 400,000 NEXTLINK Communications, Inc. 144A sr. disc. notes stepped- coupon zero % (9.45s, 4/15/03), 2008 ++ 253,000 1,050,000 NTL Inc. 144A sr.notes stepped-coupon zero % (9 3/4s, 4/01/03), 2008 ++ 682,500 525,000 Orbcomm Global Capital Corp. sr. notes Ser. B, 14s, 2004 612,938 340,000 Qwest Communications International Inc. sr. disc. notes stepped-coupon zero % (9.47s, 10/15/02), 2007 ++ 249,900 2,615,000 RSL Communications, Ltd. company guaranty 12 1/4s, 2006 2,981,100 410,000 RSL Communications, Ltd. 144A sr. notes 9 1/8s, 2008 414,100 620,000 RSL Communications, Ltd. 144A sr. disc. notes stepped-coupon zero % (10 1/8s, 3/1/03), 2008 ++ 389,825 2,670,000 Teligent, Inc. sr. notes 11 1/2s, 2007 2,803,500 1,300,000 WinStar Communications, Inc. sr. disc. notes stepped-coupon zero % (14s, 10/15/00), 2005 ++ 1,082,250 3,890,000 WinStar Communications. Inc. 144A sr. sub. notes 10s, 2008 3,948,350 250,000 WinStar Equipment Corp. company guaranty 12 1/2s, 2004 286,250 310,000 Wireless One, Inc. sr. notes 13s, 2003 86,800 -------------- 26,318,473 Telephone Services (1.2%) - -------------------------------------------------------------------------------------------- 1,330,000 BTI Telecom Corp. sr. notes 10 1/2s, 2007 1,393,175 1,910,000 Colt Telecom Group PLC sr. disc. notes stepped-coupon zero % (12s, 12/15/01), 2006 (United Kingdom) ++ 1,528,000 170,000 Facilicom International 144A sr. notes 10 1/2s, 2008 177,650 340,000 Flag Limited 144A sr. notes 8 1/4s, 2008 (Bermuda) 348,500 415,000 IDT Corp. 144A sr. notes 8 3/4s, 2006 412,925 800,000 Ionica Group PLC sr. disc. notes stepped-coupon zero % (15s, 5/1/02), 2007 (United Kingdom) ++ 340,000 1,142,000 ITC Deltacom, Inc. sr. notes 11s, 2007 1,296,170 540,000 McLeod USA, Inc. 144A sr. notes 8 3/8s, 2008 558,900 840,000 MGC communications, Inc. sr. notes Ser. B, 13s, 2004 842,100 1,675,000 NTL Inc. sr. notes Ser. B, 10s, 2007 (United Kingdom) 1,817,375 825,000 Sprint Spectrum L.P. sr. notes 11s, 2006 952,875 115,000 Transtel S.A. 144A pass through certificates 12 1/2s, 2007 (Colombia) 110,113 210,000 Viatel, Inc. sr. disc. notes stepped-coupon zero % (15s, 1/15/00), 2005 ++ 197,400 -------------- 9,975,183 Textiles (0.2%) - -------------------------------------------------------------------------------------------- 105,000 Glenoit Corp. 144A sr. sub. notes 11s, 2007 113,663 240,000 Polymer Group, Inc. company guaranty Ser. B, 9s, 2007 247,800 580,000 Polymer Group, Inc. 144A sr. sub.notes 8 3/4s, 2008 590,150 250,000 Polysindo International Eka company guaranty 13s, 2001 (Indonesia) 182,500 250,000 Polysindo International Finance company guaranty 11 3/8s, 2006 (Indonesia) 170,000 170,000 Worldtex, Inc. 144A sr. notes 9 5/8s, 2007 172,550 -------------- 1,476,663 Transportation (--%) - -------------------------------------------------------------------------------------------- 350,000 Kitty Hawk, Inc. company guaranty 9.95s, 2004 367,500 Utilities (0.2%) - -------------------------------------------------------------------------------------------- 1,500,000 Calpine Corp. sr. notes 8 3/4s, 2007 1,548,750 Wireless Communications (--%) - -------------------------------------------------------------------------------------------- 135,000 Telesystem International Wireless Inc. sr. disc. notes stepped- coupon Ser. C, zero % (10 1/2s, 11/1/02), 2007 ++ 85,755 -------------- Total Corporate Bonds and Notes (cost $304,103,496) $312,603,856 FOREIGN GOVERNMENT BONDS AND NOTES (16.3%) * PRINCIPAL AMOUNT VALUE - -------------------------------------------------------------------------------------------- AUD 26,395,000 Australia (Government of) bonds Ser. 808, 8 3/4s, 2008 $21,446,450 DEM 54,995,000 Germany (Federal Republic of) Unity Fund bonds 8s, 2002 33,428,625 FRF 70,060,000 France (Government of) bonds 5 1/2s, 2007 11,806,847 USD 5,230,000 Mendoza (Province of) 144A 10s, 2007 5,073,100 ZAR 90,907,000 South Africa (Republic of) bonds Ser. 150, 12s, 2005 17,292,829 GBP 27,995,000 United Kingdom Treasury bonds 8s, 2007 51,410,830 -------------- Total Foreign Government Bonds and Notes (cost $140,308,799) $140,458,681 BRADY BONDS (1.5%) * (cost $12,560,740) PRINCIPAL AMOUNT VALUE - -------------------------------------------------------------------------------------------- $13,655,300 Argentina (Republic of) deb. FRB 6.625s, 2005 $12,597,014 COLLATERALIZED MORTGAGE OBLIGATIONS (1.3%) * PRINCIPAL AMOUNT VALUE - -------------------------------------------------------------------------------------------- $1,000,000 Citicorp Mtge. Securities, Inc. Ser. 92-10 M, Class M, 8s, 2022 $1,003,700 410,456 Freddie Mac Ser. 1717, Class L, 6 1/2s, 2024 407,337 3,113,509 GMAC Commercial Mortgage Securities Inc. Ser. 97-C2, Class A1, 6.45s, 2004 3,138,806 4,990,000 Merrill Lynch Mortgage Investors, Inc. Ser. 98-C2, Class D, 6.96s, 2030 4,998,577 1,085,000 Prudential Home Mortgage Securities Ser. 93-57, Class A4, 5.9s, 2023 1,075,561 666,021 Rural Housing Trust Ser. 87-1, Class D, 6.33s, 2026 666,348 -------------- Total Collateralized Mortgage Obligations (cost $11,259,996) $11,290,329 PREFERRED STOCKS (1.3%) * NUMBER OF SHARES VALUE - -------------------------------------------------------------------------------------------- 100 American Communications Services $12.75 pfd. [2DBL. DAGGERS] $116,250 6,812 AmeriKing, Inc. $3.25 pfd. [2DBL. DAGGERS] 183,924 7,062 CSC Holdings Inc. Ser. M, $11.125 cum. [2DBL. DAGGERS] 808,599 9,600 Diva Systems Corp. Ser. C, $6.00 pfd. 124,800 1,200 Dobson Communications 144A $12.25 pfd. [2DBL. DAGGERS] 1,314,000 185 Echostar Communications, Inc. $12.125 pfd. 206,275 11,765 Fitzgeralds Gaming Co. $3.75 pfd. 352,950 340,000 Fresenius Medical Care AG Ser. D, $9.00 pfd. (Germany) 355,300 1,250 Granite Broadcasting 144A $12.75 pfd. [2DBL. DAGGERS] 1,418,750 92 Hyperion Telecommunications Ser. B, $12.875 pfd. [2DBL. DAGGERS] 105,340 1,250 Intermedia Communication Ser. B, $13.50 pfd. 1,531,250 422 IXC Communications, Inc. $12.50 pfd. [2DBL. DAGGERS] 514,840 5,200 Nebco Evans Holding Co. 144A $11.25 pfd. [2DBL. DAGGERS] 540,800 26,006 Nextlink Communications, Inc. 144A $7.00 pfd. 1,638,378 3,850 SFX Broadcasting, Inc. Ser. E, $12.625 pfd. [2DBL. DAGGERS] 456,225 807 Spanish Broadcasting Systems $14.25 cum. pfd. 847,311 2,390 Von Hoffman Corp. 144A $13.50 pfd. 80,663 390 WinStar Communications. Inc. 144A $14.25 cum. pfd. [2DBL. DAGGERS] 475,800 -------------- Total Preferred Stocks (cost $10,323,457) $11,071,455 UNITS (1.1%) * NUMBER OF UNITS VALUE - -------------------------------------------------------------------------------------------- 1,095 Allegiance Telecom Inc. units sr. disc. notes zero %, (11 3/4s, 2/15/08) 2008 ++ $635,100 150 American Mobile Satellite Corp. units 12 1/4s, 2008 156,000 600 Australis Media, Ltd. units stepped-coupon zero % (15 3/4s, 5/15/03), 2003 (in default) (Australia) ++ + 120,000 91 Celcaribe S.A. 144A units 13 1/2s, 2004 (Columbia) 1,829,100 1,220 Club Regina, Inc. 144A units 13s, 2004 1,311,500 85 Concentric Network Corp. units 12 3/4s, 2007 99,875 255 Conecel Holdings 144A units 14s, 2000 276,675 1,752 Diva Systems Corp. 144A units stepped-coupon zero % (12 5/8s, 3/1/03), 2008 ++ 963,600 1,600 DTI Holdings Inc. units stepped-coupon zero % (12 1/2s, 3/1/03), 2008 ++ 932,000 2,085 KMC Telecom Holdings, Inc. units stepped-coupon zero % (12 1/2s, 2/15/03), 2008 ++ 1,240,575 620 Orbital Imaging Corp. units 11 5/8s, 2005 677,350 190 Real Time Data 144A units stepped-coupon zero % (13 1/2s, 8/15/01), 2006 ++ 96,900 200 Stone Container Corp. units sr. sub. 12 1/4s, 2002 205,500 335 Transam Refin P/p 144a, units 16s, 2003 355,100 200 Wireless One, Inc. units stepped-coupon zero % (13 1/2s, 8/1/01), 2006 ++ 24,000 500 XCL Ltd units sr. sec. notes 13 1/2s, 2004 650,000 -------------- Total Units (cost $8,470,427) $9,573,275 ASSET-BACKED SECURITIES (0.8%) * PRINCIPAL AMOUNT VALUE - -------------------------------------------------------------------------------------------- $1,096,000 Chemical Master Credit Card Trust Ser. 95-2, Class A, 6.23s, 2003 $1,102,499 350,000 Contimortgage Home Equity Loan Trust Ser. 97-1, Class M2, 7.67s, 2025 352,296 3,280,000 Green Tree Financial Corp. Ser. 98-2, Class A5, 6.24s, 2016 3,271,288 1,192,939 Green Tree Recreational Equipment & Cons Ser. 97-B, Class A1, 6.55s, 2028 1,201,886 221,906 Resolution Trust Corp. Ser. 94-1, Class A2A, 7 3/4s, 2029 222,751 1,233,248 Resolution Trust Corp. Ser. 94-1, Class M1, 7.14s, 2029 1,217,832 -------------- Total Asset-Backed Securities (cost $7,271,176) $7,368,552 COMMON STOCKS (0.6%) * NUMBER OF SHARES VALUE - -------------------------------------------------------------------------------------------- 21,270 American Mobile Satellite Corp. + $303,098 150 AmeriKing, Inc. + 7,500 2,955 Axia Holding Inc. 144A + 236,400 13,880 CellNet Data Systems, Inc. + 152,680 17,630 Chattem, Inc. 449,565 12,124 Chesapeake Energy Corp. + 71,229 4,500 Exide Corp. 76,219 53,023 Grand Union Co. + 21,541 3,033 Hedstrom Holdings, Inc. 144A 4,170 3,770 IFINT Diversified Holdings 144A + 26,390 35,327 Lady Luck Gaming Corp. + 50,783 24,918 NEXTEL Communications, Inc. Class A + 840,983 255 Paging Do Brazil Holdings Co., LLC Class B 3 464 PMI Holdings Corp. 144A + 232,000 327 Premium Holdings L.P. + 1,308 71,533 PSF Holdings LLC Class A (acquired various dates from 2/8/93 to 3/16/96, cost $2,464,394) +++ 2,145,990 10,050 Specialty Foods Acquisition Corp. + 1,508 4,400 Terex Corp. Rights + 88,000 490,000 WHX Corp. 490,000 -------------- Total Common Stocks (cost $6,429,615) $5,199,367 CONVERTIBLE BONDS AND NOTES (0.3%) * PRINCIPAL AMOUNT VALUE - -------------------------------------------------------------------------------------------- $280,000 APP Global Finance (V) Ltd. 144A cv. sec. 2s, 2000 (United Kingdom) $289,100 164,000 GST Telecommunications, Inc. cv. sr. disc. notes stepped- coupon zero % (13 7/8s, 12/15/00), 2005 ++ 257,480 290,000 Integrated Device Technology, Inc. cv. sub. notes 5 1/2s, 2002 260,275 125,000 National Semiconductor Corp. 144A cv. deb. 6 1/2s, 2002120,469 900,000 Pricellular Wireless Corp. 144A cv. sub. notes stepped- coupon zero % (10 3/4s, 8/15/00) ++ 994,500 650,000 WinStar Communications. Inc. 144A cv. sr. disc. notes stepped- coupon zero % (14s, 10/15/00), 2005 ++ 908,375 -------------- Total Convertible Bonds and Notes (cost $1,586,610) $2,830,199 WARRANTS (0.2%) * + NUMBER OF WARRANTS EXPIRATION DATE VALUE - -------------------------------------------------------------------------------------------- 10 American Communication Services 11/1/05 $1,750 32,500 Becker Gaming Corp. 144A 11/15/00 325 6,825 Capital Gaming International, Inc. 2/1/99 273 2,428 Cellnet Data Systems, Inc. 10/1/07 48,560 1,910 Colt Telecom 12/31/06 257,850 1,500 Comunicacion Cellular 144A (Colombia) 11/15/03 97,500 1,200 County Seat Holdings, Inc. 10/15/98 24 475 Diva Systems Corp. 5/15/06 124,688 255 Esat Holdings, Inc. (Ireland) 2/1/07 8,925 500 Fitzgerald Gaming Co. 144A 3/15/99 50 8,151 Fitzgeralds Gaming Co. 12/19/98 82 770 Hyperion Telecommunications 144A 4/15/01 53,900 9,768 Intelcom Group 144A 10/15/05 322,344 520 Interact Systems Inc. 8/1/03 130 700 Intermedia Communications 6/1/00 112,700 245 International Wireless Communications Holdings 144A 8/15/01 5,635 400 Iridium World Com 144A 7/15/05 98,000 1,180 Knology Holdings 144A 10/15/07 590 1,470 Louisiana Casino Cruises, Inc. 144A 12/1/98 73,500 840 MGC communications, Inc. 144A 10/1/04 29,400 750 NEXTEL Communications Inc. 4/15/07 2,168 930 Nextel Intl, Inc. 4/15/07 279 1,840 Pagemart, Inc. 144A 12/31/03 13,800 1,400 Petracom Holdings, Inc. 9/30/99 11,200 615 RSL Communications Ltd. 11/15/06 59,655 265 Spanish Broadcasting Systems 144A 6/30/99 54,325 185 Sterling Chemicals Holdings 8/15/08 4,810 1,260 UIH Australia/Pacific, Inc. 144A 5/15/06 15,120 240 Urohealth Systems Inc. 4/10/04 2 100 Wright Medical Technology, Inc. 144A 6/30/03 10,023 -------------- Total Warrants (cost $627,148) $1,407,608 SHORT-TERM INVESTMENTS (5.0%) * PRINCIPAL AMOUNT VALUE - -------------------------------------------------------------------------------------------- TRL 1,983,040,000,000 Turkey Treasury Bill zero %, June 17, 1998 $6,888,308 $36,371,000 Interest in $321,730,000 joint repurchase agreement dated March 31, 1998 with JP Morgan due April 1, 1998 with respect to various U.S. Treasury obligations -- maturity value of $36,376,961 for an effective yield of 5.90% 36,376,961 -------------- Total Short-Term Investments (cost $43,701,276) $43,265,269 - -------------------------------------------------------------------------------------------- Total Investments (cost $867,820,654) *** $878,356,220 - -------------------------------------------------------------------------------------------- * Percentages indicated are based on net assets of $863,976,120. *** The aggregate identified cost on a tax basis is $867,977,979, resulting in gross unrealized appreciation and depreciation of $42,627,501 and $32,249,260, respectively, or net unrealized appreciation of $10,378,241. + Non-income-producing security. ++ The interest rate and date shown parenthetically represent the new interest rate to be paid and the date the fund will begin receiving interest at this rate. [DBL. DAGGER] Restricted, excluding 144A securities, as to public resale. The total market value of restricted securities held at March 31, 1998 was $2,145,990 or 0.2% of net assets. [2DBL DAGGERS] Income may be received in cash or additional securities at the discretion of the issuer. +++ A portion of the income will be received in additional securities. # A portion of these securities were pledged and segregated with the custodian to cover margin requirements for futures contracts at March 31, 1998. ## When-issued, securities (Note 1). 144A after the name of a security represents those exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. TBA after the name of a security represents to be announced securities (Note 1). The rate shown on Floating Rate Bonds (FRB) and Floating Rate Notes (FRN) are the current interest rates shown at March 31, 1998, which are subject to change based on the terms of the security. Distribution of investments by country of issue at March 31, 1998: (as percentage of Market Value) Argentina 1.4% Australia 2.6 Brazil 1.1 France 1.3 Germany 4.0 Mexico 2.8 South Africa 2.0 United Kingdom 6.7 United States 75.0 Other 3.1 ----- Total 100.0% =====
- -------------------------------------------------------------------------------------------- Futures Currency Contracts to Buy at March 31, 1998 (Unaudited) (aggregate face value $237,526,041) Unrealized Market Aggregate Face Delivery Appreciation/ Value Value Date (Depreciation) - -------------------------------------------------------------------------------------------- Danish Krone $7,833,705 $8,069,751 6/17/98 $(236,046) Deutschemarks 76,467,442 78,059,576 6/17/98 (1,592,134) Italian Lira 20,712,647 21,063,489 6/17/98 (350,842) Japanese Yen 72,568,878 75,799,906 6/17/98 (3,231,028) Mexican Peso 1,328,369 1,310,814 5/12/98 17,555 Mexican Peso 1,648,965 1,631,334 5/11/98 17,631 New Zealand Dollar 1,471,753 1,508,944 6/17/98 (37,191) Philippines Peso 2,227,863 2,253,880 4/27/98 (26,017) South Korean Won 3,851,067 3,487,718 3/11/99 363,349 Spanish Peseta 12,204,843 12,448,096 6/17/98 (243,253) Swedish Krona 18,195,076 18,161,620 6/17/98 33,456 Swiss Franc 13,167,018 13,730,913 6/17/98 (563,895) - -------------------------------------------------------------------------------------------- $(5,848,415) - --------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------- Futures Currency Contracts to Sell at March 31, 1998 (Unaudited) (aggregate face value $236,480,008) Unrealized Market Aggregate Face Delivery Appreciation/ Value Value Date (Depreciation) - -------------------------------------------------------------------------------------------- Australian Dollars $21,448,272 $21,577,688 6/17/98 $129,416 British Pounds 50,266,465 49,427,505 6/17/98 (838,960) Deutschemarks 105,540,293 107,533,832 6/17/98 1,993,539 French Franc 10,523,529 10,825,868 6/17/98 302,339 Japanese Yen 30,452,877 31,635,817 6/17/98 1,182,940 New Zealand Dollar 1,771,253 1,851,431 6/17/98 80,178 Swiss Franc 13,051,958 13,627,867 6/17/98 575,909 - -------------------------------------------------------------------------------------------- $3,425,361 - --------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------- Futures Contracts Outstanding at March 31, 1998 (Unaudited) Unrealized Aggregate Face Expiration Appreciation/ Total Value Value Date (Depreciation) - -------------------------------------------------------------------------------------------- Euro Dm (long) $16,073,857 $16,087,804 March-99 $(13,947) Muni Bond Index (long) 8,452,500 8,459,688 June-98 (7,188) Euro Lira (short) 16,312,456 16,314,929 March-99 2,473 US Treasury 20 Year Bond (short) 8,297,250 8,353,731 June-98 56,481 US Treasury 10 Year Note (short) 9,439,500 9,447,298 June-98 7,798 - -------------------------------------------------------------------------------------------- $45,617 - --------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
Statement of assets and liabilities March 31, 1998 (Unaudited) Assets - --------------------------------------------------------------------------------------------------- Investments in securities, at value (identified cost $867,820,654) (Note 1) $878,356,220 - --------------------------------------------------------------------------------------------------- Cash 4,624,090 - --------------------------------------------------------------------------------------------------- Foreign currency (cost $412,310) 416,659 - --------------------------------------------------------------------------------------------------- Dividends, interest and other receivables 13,001,704 - --------------------------------------------------------------------------------------------------- Receivable for securities sold 24,991,777 - --------------------------------------------------------------------------------------------------- Receivable for open forward currency contracts 4,749,208 - --------------------------------------------------------------------------------------------------- Receivable for closed forward currency contracts 1,287,622 - --------------------------------------------------------------------------------------------------- Receivable for variation margin 993,439 - --------------------------------------------------------------------------------------------------- Total assets 928,420,719 Liabilities - --------------------------------------------------------------------------------------------------- Distributions payable to shareholders 5,519,412 - --------------------------------------------------------------------------------------------------- Payable for securities purchased 43,595,678 - --------------------------------------------------------------------------------------------------- Payable for compensation of Manager (Note 2) 1,234,598 - --------------------------------------------------------------------------------------------------- Payable for investor servicing and custodian fees (Note 2) 175,623 - --------------------------------------------------------------------------------------------------- Payable for compensation of Trustees (Note 2) 4,455 - --------------------------------------------------------------------------------------------------- Payable for administrative services (Note 2) 7,857 - --------------------------------------------------------------------------------------------------- Payable for open forward currency contracts 7,172,262 - --------------------------------------------------------------------------------------------------- Payable for closed forward currency contracts 6,640,379 - --------------------------------------------------------------------------------------------------- Other accrued expenses 94,335 - --------------------------------------------------------------------------------------------------- Total liabilities 64,444,599 - --------------------------------------------------------------------------------------------------- Net assets $863,976,120 Represented by - --------------------------------------------------------------------------------------------------- Paid-in capital (Notes 1 and 4) $881,485,897 - --------------------------------------------------------------------------------------------------- Distributions in excess of net investment income (Note 1) (5,748,047) - --------------------------------------------------------------------------------------------------- Accumulated net realized loss on investment and foreign currency transactions (Note 1) (19,925,082) - --------------------------------------------------------------------------------------------------- Net unrealized appreciation of investments and assets and liabilities in foreign currencies 8,163,352 - --------------------------------------------------------------------------------------------------- Total -- Representing net assets applicable to capital shares outstanding $863,976,120 Computation of net asset value - --------------------------------------------------------------------------------------------------- Net asset value per share ($863,976,120 divided by 100,014,650 shares) $8.64 - --------------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements.
Statement of operations Six months ended March 31, 1998 (Unaudited) Investment income: - -------------------------------------------------------------------------------------------------- Interest income: $23,037,606 - -------------------------------------------------------------------------------------------------- Dividends 351,990 - -------------------------------------------------------------------------------------------------- Total investment income 23,389,596 Expenses: - -------------------------------------------------------------------------------------------------- Compensation of Manager (Note 2) 1,874,426 - -------------------------------------------------------------------------------------------------- Investor servicing and custodian fees (Note 2) 338,170 - -------------------------------------------------------------------------------------------------- Compensation of Trustees (Note 2) 5,643 - -------------------------------------------------------------------------------------------------- Administrative services (Note 2) 5,107 - -------------------------------------------------------------------------------------------------- Reports to shareholders 113,797 - -------------------------------------------------------------------------------------------------- Auditing 5,245 - -------------------------------------------------------------------------------------------------- Legal 11,771 - -------------------------------------------------------------------------------------------------- Postage 108,700 - -------------------------------------------------------------------------------------------------- Exchange listing fees 18,069 - -------------------------------------------------------------------------------------------------- Other 35,412 - -------------------------------------------------------------------------------------------------- Total expenses 2,516,340 - -------------------------------------------------------------------------------------------------- Expense reduction (Note 2) (42,682) - -------------------------------------------------------------------------------------------------- Net expenses 2,473,658 - -------------------------------------------------------------------------------------------------- Net investment income 20,915,938 - -------------------------------------------------------------------------------------------------- Net realized gain on investments (Notes 1 and 3) 2,193,334 - -------------------------------------------------------------------------------------------------- Net realized gain on futures contracts (Note 1) 1,548,576 - -------------------------------------------------------------------------------------------------- Net realized gain on written options (Notes 1 and 3) 70,622 - -------------------------------------------------------------------------------------------------- Net realized loss on foreign currency transactions (Note 1) (4,238,192) - -------------------------------------------------------------------------------------------------- Net unrealized depreciation of assets and liabilities in foreign currencies during the period (1,250,282) - -------------------------------------------------------------------------------------------------- Net unrealized depreciation of investments, futures and written options during the period (1,461,986) - -------------------------------------------------------------------------------------------------- Net loss on investments (3,137,928) - -------------------------------------------------------------------------------------------------- Net increase in net assets resulting from operations $17,778,010 - -------------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements.
Statement of changes in net assets Six months ended Year ended March 31 September 30 1998* 1997 - ---------------------------------------------------------------------------------------------------------------------- Increase in net assets - ---------------------------------------------------------------------------------------------------------------------- Operations: - ---------------------------------------------------------------------------------------------------------------------- Net investment income $20,915,938 $24,793,897 - ---------------------------------------------------------------------------------------------------------------------- Net realized loss on investments and foreign currency transactions (425,660) (114,517) - ---------------------------------------------------------------------------------------------------------------------- Net unrealized appreciation (depreciation) of investments and assets and liabilities in foreign currencies (2,712,268) 7,551,885 - ---------------------------------------------------------------------------------------------------------------------- Net increase in net assets resulting from operations 17,778,010 32,231,265 - ---------------------------------------------------------------------------------------------------------------------- Distributions to shareholders: - ---------------------------------------------------------------------------------------------------------------------- From net investment income (19,810,648) (24,795,303) - ---------------------------------------------------------------------------------------------------------------------- Shares issued in connection with the merger of Putnam Intermediate Government Income Trust (Note 5) 528,345,195 -- - ---------------------------------------------------------------------------------------------------------------------- Shares repurchased (Note 4) -- (2,308,913) - ---------------------------------------------------------------------------------------------------------------------- Total increase in net assets 526,312,557 5,127,049 Net assets - ---------------------------------------------------------------------------------------------------------------------- Beginning of period 337,663,563 332,536,514 - ---------------------------------------------------------------------------------------------------------------------- End of period (including distributions in excess of net investment income of $5,748,047 and $6,853,337, respectively) 863,976,120 337,663,563 - ---------------------------------------------------------------------------------------------------------------------- Number of fund shares - ---------------------------------------------------------------------------------------------------------------------- Shares outstanding at beginning of period 38,435,338 38,737,138 - ---------------------------------------------------------------------------------------------------------------------- Shares issued in connection with the merger of Putnam Intermediate Government Income Trust (Note 5) 61,579,312 -- - ---------------------------------------------------------------------------------------------------------------------- Shares repurchased -- (301,800) - ---------------------------------------------------------------------------------------------------------------------- Shares outstanding at end of period 100,014,650 38,435,338 - ---------------------------------------------------------------------------------------------------------------------- * Unaudited The accompanying notes are an integral part of these financial statements.
Financial highlights (For a share outstanding throughout the period) - ------------------------------------------------------------------------------------------------------------------------------------ Six months ended Per-share March 31 operating performance (Unaudited) Year ended September 30 - ------------------------------------------------------------------------------------------------------------------------------------ 1998 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------------ Net asset value, beginning of period $8.79 $8.58 $8.38 $8.13 $8.91 $8.71 - ------------------------------------------------------------------------------------------------------------------------------------ Investment operations - ------------------------------------------------------------------------------------------------------------------------------------ Net investment income .36 .64 .63 .67 .62 .68 - ------------------------------------------------------------------------------------------------------------------------------------ Net realized and unrealized gain (loss) on investments (.17) .21 .19 .21 (.71) .29 - ------------------------------------------------------------------------------------------------------------------------------------ Total from investment operations .19 .85 .82 .88 (.09) .97 - ------------------------------------------------------------------------------------------------------------------------------------ Less distributions: - ------------------------------------------------------------------------------------------------------------------------------------ From net investment income (.34) (.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 (.34) (.64) (.62) (.63) (.69) (.77) - ------------------------------------------------------------------------------------------------------------------------------------ Net asset value, end of period $8.64 $8.79 $8.58 $8.38 $8.13 $8.91 - ------------------------------------------------------------------------------------------------------------------------------------ Market value, end of period $7.875 $8.125 $7.500 $7.375 $7.250 $8.375 - ------------------------------------------------------------------------------------------------------------------------------------ Ratios and supplemental data - ------------------------------------------------------------------------------------------------------------------------------------ Total investment return at market value (%)(a) 1.00 * 17.54 10.34 10.90 (5.57) 7.89 - ------------------------------------------------------------------------------------------------------------------------------------ Net assets, end of period (in thousands) $863,976 $337,664 $332,537 $326,735 $317,296 $347,620 - ------------------------------------------------------------------------------------------------------------------------------------ Ratio of expenses to average net assets (%)(b) .49 * 1.04 .99 1.03 .92 .96 - ------------------------------------------------------------------------------------------------------------------------------------ Ratio of net investment income to average net assets (%) 4.04 * 7.47 7.44 8.24 7.18 7.83 - ------------------------------------------------------------------------------------------------------------------------------------ Portfolio turnover (c)(%) 108.25 * 220.61 232.90 219.63 204.92 237.63 - ------------------------------------------------------------------------------------------------------------------------------------ * Not annualized. (a) Total investment return does not reflect the effect of sales charges. (b) The ratio of expenses to average net assets for the year ended September 30,1995 and thereafter includes amounts paid through expense offset arrangements (Note 2). (c) Portfolio turnover excludes the impact of assets received from the acquisition of Putnam Intermediate Government Income Trust.
Notes to financial statements March 31, 1998 (Unaudited) Note 1 Significant accounting policies Putnam Master Intermediate Income Trust (the "fund") is registered under the Investment Company Act of 1940, as amended, as a diversified, closed-end management investment company and is authorized to issue an unlimited number of shares. The fund's investment objective is to seek, with equal emphasis, high current income and relative stability of net asset value, by allocating its investments among the U.S. taxable investment grade sector (formerly the U.S. government sector), high-yield sector and international sector. The following is a summary of significant accounting policies consistently followed by the fund in the preparation of its financial statements. The preparation of financial statements is in conformity with generally accepted accounting principles and requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities. Actual results could differ from those estimates. A) Security valuation Investments for which market quotations are readily available are stated at market value, which is determined using the last reported sale price, or, if no sales are reported -- as in the case of some securities traded over-the-counter -- the last reported bid price. Securities quoted in foreign currencies are translated into U.S. dollars at the current exchange rate. Short-term investments having remaining maturities of 60 days or less are stated at amortized cost, which approximates market value, and other investments, including restricted securities, are stated at fair value following procedures approved by the Trustees. Market quotations are not considered to be readily available for long-term corporate bonds and notes; such investments are stated at fair value on the basis of valuations furnished by a pricing service, approved by the Trustees, which determines valuations for normal, institutional-size trading units of such securities using methods based on market transactions for comparable securities and various relationships between securities which are generally recognized by institutional traders. B) Joint trading account Pursuant to an exemptive order issued by the Securities and Exchange Commission, the fund may transfer uninvested cash balances into a joint trading account along with the cash of other registered investment companies and certain other accounts managed by Putnam Investment Management, Inc. ("Putnam Management"), the fund's Manager, a wholly-owned subsidiary of Putnam Investments, Inc.. These balances may be invested in one or more repurchase agreements and/or short-term money market instruments. C) Repurchase agreements The fund, or any joint trading account, through its custodian, receives delivery of the underlying securities, the market value of which at the time of purchase is required to be in an amount at least equal to the resale price, including accrued interest. Putnam Management is responsible for determining that the value of these underlying securities is at all times at least equal to the resale price, including accrued interest. D) Security transactions and related investment income Security transactions are accounted for on the trade date (date the order to buy or sell is executed). Interest income is recorded on the accrual basis. Dividend income is recorded on the ex-dividend date. Discounts on zero coupon bonds, original issue discount bonds, stepped-coupon bonds and payment in kind bonds are accreted according to the yield-to-maturity basis. Any premium resulting from the purchase of stepped-coupon securities in excess of maturity value is amortized on a yield-to maturity basis. E) Foreign currency translation The accounting records of the fund are maintained in U.S. dollars. The market value of foreign securities, currency holdings, 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. When the contract is closed, the fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. Futures contracts are valued at the quoted daily settlement prices established by the exchange on which they trade. Exchange traded options are valued at the last sale price, or if no sales are reported, the last bid price for purchased options and the last ask price for written options. Options traded over-the-counter are valued using prices supplied by dealers. H) TBA purchase commitments The fund may enter into "TBA" (to be announced) purchase commitments to purchase securities for a fixed unit price at a future date beyond customary settlement time. Although the unit price has been established, the principal value has not been finalized. However, the amount of the commitments will not fluctuate more than 1.0% from the principal amount. The fund holds, and maintains until settlement date, cash or high-grade debt obligations in an amount sufficient to meet the purchase price, or the fund may enter into offsetting contracts for the forward sale of other securities it owns. Income on the securities will not be earned until settlement date. TBA purchase commitments may be considered securities in themselves, and involve a risk of loss if the value of the security to be purchased declines prior to the settlement date, which risk is in addition to the risk of decline in the value of the fund's other assets. Unsettled TBA purchase commitments are valued at the current market value of the underlying securities, according to the procedures described under "Security valuation" above. Although the fund will generally enter into TBA purchase commitments with the intention of acquiring securities for their portfolio or for delivery pursuant to options contracts it has entered into, the fund may dispose of a commitment prior to settlement if Putnam Management deems it appropriate to do so. I) 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 J) Distributions to shareholders Distributions to shareholders are recorded by the fund on the ex-dividend date. At certain times, the fund may pay distributions at a level rate even though, as a result of market conditions or investment decisions, the fund may not achieve projected investment results for a given period. The amount and character of income and gains to be distributed are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. Reclassifications are made to the fund's capital accounts to reflect income and gains available for distribution (or available capital loss carryovers) under income tax regulations. Note 2 Management fee, administrative services and other transactions Compensation of Putnam Management, for management and investment advisory services is paid quarterly based on the average weekly net assets of the fund. Such fee is based on the following annual rates: 0.75% of the first $500 million of average weekly net assets, 0.65% of the next $500 million, 0.60% of the next $500 million, and 0.55% thereafter. The fund reimburses Putnam Management an allocated amount for the compensation and related expenses of certain officers of the fund and their staff who provide administrative services to the fund. The aggregate amount of all such reimbursements is determined annually by the Trustees. Custodial functions for the fund's assets are provided by Putnam Fiduciary Trust Company (PFTC), a wholly-owned subsidiary of Putnam Investments, Inc. Investor servicing agent functions are provided by Putnam Investor Services, a division of PFTC. For the six months ended March 31, 1998, fund expenses were reduced by $42,682 under expense offset arrangements with PFTC and brokerage service arrangements. Investor servicing and custodian fees reported in the Statement of operations exclude these credits. The fund could have invested a portion of the assets utilized in connection with the expense offset arrangements in an income producing asset if it had not entered into such arrangements. Each Trustee of the fund receives an annual Trustee fee, of which $640 has been allocated to the fund, and an additional fee for each Trustee's meeting attended. Trustees who are not interested persons of Putnam Management and who serve on committees of the Trustees receive additional fees for attendance at certain committee meetings. The fund has adopted a Trustee Fee Deferral Plan (the "Deferral Plan") which allows the Trustees to defer the receipt of all or a portion of Trustees Fees payable on or after July 1, 1995. The deferred fees remain in the fund and are invested in certain Putnam funds until distribution in accordance with the Deferral Plan. The fund has adopted an unfunded noncontributory defined benefit pension plan (the "Pension Plan") covering all Trustees of the fund who have served as Trustee for at least five years. Benefits under the Pension Plan are equal to 50% of the Trustee's average total retainer and meeting fees for the three years preceding retirement. Pension expense for the fund is included in Compensation of Trustees in the Statement of operations. Accrued pension liability is included in Payable for compensation of Trustees in the Statement of assets and liabilities. Note 3 Purchase and sales of securities During the six months ended March 31, 1998, purchases and sales of investment securities other than U.S. government obligations and short-term investments aggregated $262,870,320 and $260,135,890, respectively. Purchases and sales of U.S. government obligations aggregated $256,104,382 and $248,981,585, 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 six months are summarized as follows: Contract Premiums Amounts Received - ------------------------------------------------------------ Written options outstanding at beginning of year $2,995,000 37,288 - ------------------------------------------------------------ Options opened 10,500,000 33,234 - ------------------------------------------------------------ Options expired 13,495,000 70,522 - ------------------------------------------------------------ Options closed -- -- - ------------------------------------------------------------ Written options outstanding at end of year $-- $-- - ------------------------------------------------------------ Note 4 Share Repurchase Program In November 1994, the Trustees authorized the fund to repurchase up to 1,950,000 of its shares in the open market. Repurchases will only be made when the fund's shares are trading at less than net asset value and at such times and amounts as is believed to be in the best interest of the fund's shareholders. Any repurchases of shares will have the effect of increasing the net asset value per share of remaining shares outstanding. For the six months ended March 31, 1998, the fund repurchased no shares. As of March 31, 1998, 570,000 shares had been repurchased since the inception of the program. Note 5 Acquisition of Putnam Intermediate Government Income Trust On January 23, 1998, the fund issued 61,579,312 shares to the shareholders of Putnam Intermediate Government Income Trust to acquire that fund's net assets in a tax-free exchange approved by the shareholders. The net assets of the fund and Putnam Intermediate Government Income Trust on January 23, 1998, valuation date, were $329,648,831 and $528,345,195 respectively. On January 23, 1998, Putnam Intermediate Government Income Trust had unrealized appreciation of $1,224,904. The aggregate net assets of the fund immediately following the acquisition were $857,994,026. Results of December 18, 1997 shareholder meeting An annual meeting of shareholders of the fund was held on December 18, 1997. At the meeting, each of the nominees for Trustees was elected, as follows: An approval of the Agreement and Plan of Reorganization providing for the acquisition by Putnam Master Intermediate Income Trust (the "Master Fund") of all of the assets and assumption of all the liabilities of Putnam Intermediate Government Income Trust at net asset value in exchange for shares of the Master Fund was approved as follows: 20,402,721 votes for, 1,245,197 votes against with 14,104,154 abstentions and broker non-votes. Votes Votes for withheld Jameson Adkins Baxter 34,802,679 949,393 Hans H. Estin 34,775,537 976,535 John A. Hill 34,802,659 949,413 R.J. Jackson 34,805,103 946,969 Paul L. Joskow 34,792,567 959,505 Elizabeth T. Kennan 34,786,247 965,825 Lawrence J. Lasser 34,801,811 950,261 John H. Mullin III 34,794,449 957,623 Robert E. Patterson 34,816,129 935,943 Donald S. Perkins 34,769,397 982,675 William F. Pounds 34,781,363 970,709 George Putnam 34,782,347 969,725 George Putnam, III 34,790,857 961,215 A.J.C. Smith 34,809,144 942,928 W. Thomas Stephens 34,764,565 987,507 W. Nicholas Thorndike 34,798,492 953,580 A proposal to ratify the selection of Coopers & Lybrand L.L.P. as auditors for the fund was approved as follows: 34,616,282 votes for, and 503,663 votes against, with 632,127 abstentions and broker non-votes. All tabulations are rounded to nearest whole number. Fund information INVESTMENT MANAGER Putnam Investment Management, Inc. One Post Office Square Boston, MA 02109 MARKETING SERVICES Putnam Mutual Funds Corp. One Post Office Square Boston, MA 02109 CUSTODIAN Putnam Fiduciary Trust Company LEGAL COUNSEL Ropes & Gray TRUSTEES George Putnam, Chairman William F. Pounds, Vice Chairman Jameson Adkins Baxter Hans H. Estin John A. Hill Ronald J. Jackson Paul L. Joskow Elizabeth T. Kennan Lawrence J. Lasser John H. Mullin III Robert E. Patterson Donald S. Perkins George Putnam, III A.J.C. Smith W. Thomas Stephens W. Nicholas Thorndike OFFICERS George Putnam President Charles E. Porter Executive Vice President Patricia C. Flaherty Senior Vice President John D. Hughes Senior Vice President and Treasurer Lawrence J. Lasser Vice President Gordon H. Silver Vice President Ian C. Ferguson Vice President William J. Curtin Vice President Edward H. D'Alelio Vice President David Waldman Vice President Jennifer E. Leichter Vice President and Fund Manager Jeffrey J. Kobylarz 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 Beverly Marcus Clerk and Assistant Treasurer Call 1-800-225-1581 weekdays from 9 a.m. to 5 p.m. Eastern Time, or visit our website (www.putnaminv.com) any time for up-to-date information about the fund's NAV. [LOGO OMITTED] PUTNAM INVESTMENTS The Putnam Funds One Post Office Square Boston, Massachusetts 02109 - -------------------- Bulk Rate U.S. Postage PAID Putnam Investments - -------------------- 42045 074 5/98 -----END PRIVACY-ENHANCED MESSAGE-----