Putnam
Master
Intermediate
Income Trust
ANNUAL REPORT ON PERFORMANCE AND OUTLOOK
9-30-01
[SCALE LOGO OMITTED]
FROM THE TRUSTEES
[GRAPHIC OMITTED: PHOTO OF JOHN A. HILL AND GEORGE PUTNAM III]
Dear Shareholder:
Putnam Master Intermediate Income Trust was clearly among the
beneficiaries as jittery investors continued to flee equities for safer
havens in the wake of a worldwide economic decline and global markets'
general unease. At fiscal year's end on September 30, 2001, the fund's
performance was in positive territory, a consequence, at least in part,
of the brisk demand for fixed-income securities.
It is important for shareholders to keep in mind Putnam's commitment to
style consistency. In your fund's case, its high-quality bonds are
providing a measure of safety during the current market turbulence,
while the lower-rated holdings await the opportunity to perform well
when the markets and the underlying economy turn more positive.
In the following report, David Waldman and the Core Fixed Income Team
provide a detailed discussion of the market environment during the
fiscal year just ended. Then they offer their views of what we can
expect in the months ahead.
Respectfully yours,
/S/ JOHN A. HILL /S/ GEORGE PUTNAM, III
John A. Hill George Putnam, III
Chairman of the Trustees President of the Funds
November 14, 2001
REPORT FROM FUND MANAGEMENT
David L. Waldman
and the Core Fixed
Income Team
The fiscal year ended September 30, 2001, was a challenging period for
Putnam Master Intermediate Income Trust. The U.S. economy's rapid
deceleration in the fall of 2000 was followed by continued difficulties
in 2001. Equity markets declined sharply, led by the struggling
technology and telecommunications sectors. In the bond market, the
higher-quality sectors performed well, while results in the
lower-quality sectors and in emerging markets were poor. Finally, the
period ended on a particularly tragic note, with the terrorist attacks
on September 11 that sent financial markets down sharply in the final
weeks of the period. In this difficult environment, your fund's
performance at net asset value was relatively flat. The fund's market
price showed stronger returns, reflecting the generally favorable
attitudes among investors for fixed-income investments.
Total return for 12 months ended 9/30/01
NAV Market price
-----------------------------------------------------------------------
0.58% 3.06%
-----------------------------------------------------------------------
Past performance is not indicative of future results. Performance based
on market prices for the shares will vary from performance based on the
portfolio's net asset value. Performance information for longer periods
begins on page 8.
* AMID HEIGHTENED UNCERTAINTY, INVESTORS SOUGHT QUALITY
Throughout the period, world markets showed continued volatility amid
fears that the U.S. economy might enter a recession. In January 2001,
the Federal Reserve Board responded by signaling an end to its
tightening policy and beginning a program of interest-rate cuts,
eventually reducing the federal funds rate from 6.50% to 3.00% as of the
close of the reporting period. This was one of the fastest and most
aggressive series of cuts in the history of the Fed, and the bond market
generally benefited. The decline in interest rates, however, led to a
reduction in the fund's dividend in June 2001.
[GRAPHIC OMITTED: horizontal bar chart TOP FIVE COUNTRY ALLOCATIONS
(INTERNATIONAL SECTOR)]
TOP FIVE COUNTRY ALLOCATIONS (INTERNATIONAL SECTOR)*
Germany 5.3%
Canada 3.0%
Russia 2.7%
Mexico 2.3%
Brazil 2.3%
Footnote reads:
*Based on net assets as of 9/30/01. Holdings will vary over time.
Hopes for a quick economic recovery, however, soon proved overly
optimistic as corporate profits continued to sag and the equity markets
struggled to stay afloat. In the aftermath of the September 11 events,
most positive returns were shattered as investors took flight from
riskier asset classes and rushed to the relative security of government
bonds.
As your fund began the second half of its 2001 fiscal year, fixed-income
investments had begun to lose some of their appeal. The Fed appeared to
have staved off a recession in the United States. Equity markets
generally stabilized, despite a rise in unemployment and disappointing
corporate earnings. Nevertheless, consumer confidence and spending
remained steady, albeit on a lower level, and an upturn in the stock
market seemed possible.
Through the summer, the Fed continued easing, which was helpful for bond
markets generally. The stock market's performance was lackluster,
reflecting poor second-quarter earnings and uncertainty about the timing
of a recovery. In the bond market, the high-yield sector was hurt by
poor returns in telecommunications bonds, but most other industry
sectors showed strong performance, especially the higher-quality
BB-rated issues. Treasuries, mortgage-backed securities, and corporate
investment-grade bonds also performed well during the summer. The fund's
international position in developed markets held up, while holdings in
emerging markets struggled amid concerns about Argentina.
After September 11, the Fed acted quickly to support the already
weakened economy by cutting interest rates by another half percentage
point in an unscheduled meeting just before the markets reopened.
Central banks worldwide lowered short-term rates in an attempt to
minimize the damage of the attacks on the fragile world markets.
"For bond investors, slow but steady -- the tortoise approach -- has won
the race this year. People who viewed bonds as hopelessly boring in the
late 1990s suddenly appreciate what these corporate or government IOUs
can do for a portfolio."
-- Los Angeles Times, 10/3/01
In seeking to minimize risk and uncertainty, investors turned primarily
to investment-grade fixed-income securities. The U.S. Treasury market
fared the best as investors moved assets into government-backed bonds, a
traditional safe haven in times of uncertainty. This was evident in the
dramatic steepening of the Treasury yield curve. After beginning the
calendar year in a basically flat position, the curve steepened
considerably as the Fed lowered short-term rates a total of eight times
during the fund's reporting period, while rates on long-term bonds fell
more modestly. Long-term rates were pressured in part by concerns over
the possibility of inflation and a reduced budget surplus. After
September 30, the Fed lowered interest rates two more times for an
additional percentage point.
The events of September 11 wreaked havoc on the lower-rated fixed-income
sectors as concerned investors shunned the added risk of these
securities. Credit spreads (the difference in yield between Treasuries
and bonds with greater risk) immediately widened to historic levels,
while investors sold off higher-risk fixed-income investments.
* HIGH-YIELD BONDS SHOWED SIGNS OF IMPROVEMENT, THEN FALTERED
High-yield bonds encountered much difficulty in 2000 at the hands of
volatile equity markets, increasing defaults, and slowing economic
growth. Credit spreads widened during the fourth quarter of 2000 and
then narrowed in January, allowing the sector to recoup some of these
losses. The surprise interest-rate cut in early January sparked a rally
that endured through mid February and our increased weighting in
high-yields at that time helped performance.
Deteriorating economic and corporate fundamentals, however, dampened
performance for the rest of the period, offsetting much of the previous
gains. In particular, continued woes in the telecommunications sector,
beset the market again in the second quarter. In the latter weeks of
September, credit spreads widened further because of heightened fears of
recession, and the sector declined sharply. Nevertheless, we believe the
high-yield sector will perform well as defaults peak, valuations remain
attractive, and economic recovery seems likely.
[GRAPHIC OMITTED: horizontal bar chart TOP THREE HOLDINGS PER SECTOR]
TOP THREE HOLDINGS
PER SECTOR
FOREIGN BONDS
Germany (Federal Republic of)
bonds Ser. 132, 4 1/8s, 2004
Russia (Federation of)
unsub. 10s, 2007
Sweden (Government of)
Ser. 1045, 5 1/4s, 2011
HIGH-YIELD BONDS
Allied Waste Industries, Inc.
company guaranty Ser. B, 10s, 2009
Echostar Broadband Corp.
sr. notes 10 3/8s, 2007
HMH Properties, Inc.
company guaranty Ser. B, 7 7/8s, 2008
U.S. INVESTMENT-GRADE
SECURITIES
U.S. Treasury Notes
5 3/4s, August 15, 2010
U.S. Treasury Notes
2 3/4s, September 30, 2003
Federal National Mortgage Association
Pass-Through Certificates
7 1/2s, with due dates from December 1, 2029
to June 1, 2031
Footnote reads:
These holdings represent 16.7% of the fund's net assets as of 9/30/01.
Portfolio holdings will vary over time.
* NON-U.S. SECTOR DELIVERED SOLID PERFORMANCE DESPITE STUMBLING EMERGING
MARKETS
International bonds in developed markets performed well during the
annual period as the global economy slowed and central banks worldwide
initiated monetary easing policies. Global sovereign bonds continued to
advance subsequent to the September 11 attacks. G-7 government bonds
(issued by the Group of Seven, the seven largest industrialized nations)
benefited from a flight-to-quality bid from investors in reaction to the
increased political and economic uncertainty caused by the tragic
events in the United States.
As a result of the fragile state of the global economy at the time of
the attacks, central banks initiated a coordinated round of easings in
an attempt to limit negative effects on economic activity. Lower
interest rates, in addition to heightened investor aversion to equity
markets and a weakening U.S. dollar, helped boost returns for U.S.
investors. The fund's holdings in Greece and Germany contributed
positively to performance.
Despite a volatile period, emerging markets had generated positive
returns primarily because of their attractive valuation levels. However,
the emerging-bond market collapsed in July as Argentina struggled to
avoid default. The market suffered considerably after the terrorist
attacks as investors pulled back from riskier assets. Country selection,
such as positions in Mexico and Russia, was favorable for fund
performance.
* UNCERTAIN OUTLOOK SHOULD BENEFIT BOND MARKET
The terrorist attacks have significantly altered the economic landscape,
postponing the anticipated economic recovery at least until the second
half of next year. While the U.S. economy now faces the risk of a
recession, we believe the aggressive monetary and fiscal policies that
are being implemented have strong potential to stimulate the economy.
With little reason for concern over inflation, we expect the Fed to
continue bolstering the economy by cutting rates further in the near
term. We continue to monitor the fixed-income universe closely and look
for positive fundamentals and attractive valuations. Within the
investment-grade market, we will continue to take advantage of
opportunities in the mortgage-backed sector, which should benefit as
volatility returns to more typical levels.
We do expect near-term volatility in the high-yield market, however, as
investors continue to trade on uncertainty rather than fundamentals.
However, as defaults roll over and the economy returns to trend-line
growth, the high-yield sector should benefit. We believe that the market
has already taken into account a recessionary economic environment and
an increase in defaults, and the positive policy response should lend
some stability to the markets.
Within the international marketplace, we continue to take advantage of
opportunities in the developed market universe by focusing on positions
in Germany and maintaining minimal exposure in Japan. Although
valuations are attractive, we are cautious with regard to the emerging
markets sector where economic and political uncertainties remain.
Overall, we believe that fixed-income investments should benefit as
aggressive government spending and monetary easing takes hold.
The views expressed here are exclusively those of Putnam Management.
They are not meant as investment advice. Although the described holdings
were viewed favorably as of 9/30/01, there is no guarantee the fund will
continue to hold these securities in the future. International
investments are subject to certain risks, such as currency fluctuations,
economic instability, and political developments. While the U.S.
government backing of individual securities does not insure your
principal, which will fluctuate, it does guarantee that the fund's
government-backed holdings will make timely payments of interest and
principal. Mortgage-backed securities in the portfolio may be subject to
prepayment risk. The lower credit ratings of high-yield bonds reflect a
greater possibility that adverse changes in the economy or poor
performance by the issuers of these bonds will affect the issuers'
ability to pay principal and interest.
NEWS FROM THE TRUSTEES
In July 2001, we welcomed Charles B. Curtis to Putnam's Board of Trustees.
He brings an impressive list of credentials that include several key positions
in Washington and directorships in education and energy-related industries.
We look forward to the contributions Charles will make to the continued
success of the Putnam funds.
PUTNAM'S POLICY ON CONFIDENTIALITY
In order to conduct business with our shareholders, we must obtain certain
personal information such as account holders' addresses, telephone numbers,
Social Security numbers, and the names of their financial advisors. We use
this information to assign an account number and to help us maintain
accurate records of transactions and account balances.
It is our policy to protect the confidentiality of your information,
whether or not you currently own shares of our funds, and in particular,
not to sell information about you or your accounts to outside marketing
firms. We have safeguards in place designed to prevent unauthorized
access to our computer systems and procedures to protect personal
information from unauthorized use.
Under certain circumstances, we share this information with outside
vendors who provide services to us, such as mailing and proxy
solicitation. In those cases, the service providers enter into
confidentiality agreements with us, and we provide only the information
necessary to process transactions and perform other services related to
your account. We may also share this information with our Putnam
affiliates to service your account or provide you with information about
other Putnam products or services. It is also our policy to share
account information with your financial advisor, if you've listed one on
your Putnam account.
If you would like clarification about our confidentiality policies or
have any questions or concerns, please don't hesitate to contact us at
1-800-225-1581, Monday through Friday, 8:30 a.m. to 7:00 p.m., or
Saturdays from 9:00 a.m. to 5:00 p.m. Eastern Time.
PERFORMANCE SUMMARY
This section provides information about your fund's performance, which
should always be considered in light of its investment strategy. Putnam
Master Intermediate Income Trust is designed for investors seeking high
current income and relative stability of net asset value through U.S.
government, high-yield, and international fixed-income securities with
limited maturities.
TOTAL RETURN FOR PERIODS ENDED 9/30/01
Market
NAV price
----------------------------------------------------------------------
1 year 0.58% 3.06%
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5 years 19.70 26.68
Annual average 3.66 4.84
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10 years 96.40 91.30
Annual average 6.98 6.70
----------------------------------------------------------------------
Annual average
(life of fund,
since 4/29/88) 7.32 6.12
----------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 9/30/01
Lehman Salomon Bros.
Intermediate Non-U.S. CSFB
Government/ World Govt. High Yield Consumer
Credit Index Bond Index Bond Index price index
-----------------------------------------------------------------------------
1 year 12.91% 4.47% -4.94% 2.65%
-----------------------------------------------------------------------------
5 years 44.19 6.92 15.93 12.93
Annual average 7.59 1.35 3.00 2.46
-----------------------------------------------------------------------------
10 years 102.39 83.97 111.14 29.88
Annual average 7.30 6.28 7.76 2.65
-----------------------------------------------------------------------------
Annual average
(life of fund,
since 4/29/88) 8.03 6.01 8.27 3.18
-----------------------------------------------------------------------------
Past performance is no assurance of future results. More recent returns
may be more or less than those shown. They do not take into account any
adjustment for taxes payable on reinvested distributions. Investment
returns, net asset value and market price will fluctuate so that an
investor's shares when sold may be worth more or less than their
original cost.
PRICE AND DISTRIBUTION INFORMATION 12 MONTHS ENDED 9/30/01
--------------------------------------------------------------------------
Distributions from common shares
--------------------------------------------------------------------------
Number 12
--------------------------------------------------------------------------
Income $0.4592
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Capital gains --
--------------------------------------------------------------------------
Return of
capital 1 $0.1448
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Total $0.6040
--------------------------------------------------------------------------
Share value: NAV Market price
--------------------------------------------------------------------------
9/30/00 $7.13 $6.438
--------------------------------------------------------------------------
9/30/01 6.54 6.050
--------------------------------------------------------------------------
Current return
--------------------------------------------------------------------------
Current
dividend
rate 2 8.26% 8.93%
--------------------------------------------------------------------------
1 See page 46.
2 Income portion of most recent distribution, excluding capital gains,
annualized and divided by NAV or market price at end of period.
TERMS AND DEFINITIONS
Total return shows how the value of the fund's shares changed over time,
assuming you held the shares through the entire period and reinvested
all distributions in the fund.
Net asset value (NAV) is the value of all your fund's assets, minus any
liabilities, divided by the number of outstanding common shares.
Market price is the current trading price of one share of the fund.
Market prices are set by transactions between buyers and sellers on the
New York Stock Exchange.
COMPARATIVE BENCHMARKS
Lehman Intermediate Government/Credit Index* is an unmanaged list of
U.S. government and corporate securities 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.
Credit Suisse First Boston High Yield Bond Index* is an unmanaged list
of lower-rated higher-yielding U.S. corporate bonds.
Consumer price index (CPI) is a commonly used measure of inflation; it
does not represent an investment return.
*Securities indexes assume reinvestment of all distributions and interest
payments and do not take into account brokerage fees or taxes. Securities
in the fund do not match those in the indexes and performance of the fund will
differ. It is not possible to invest directly in an index.
A GUIDE TO THE FINANCIAL STATEMENTS
These sections of the report, as well as the accompanying Notes,
preceded by the Report of independent accountants, constitute the fund's
financial statements.
The fund's portfolio lists all the fund's investments and their values
as of the last day of the reporting period. Holdings are organized by
asset type and industry sector, country, or state to show areas of
concentration and diversification.
Statement of assets and liabilities shows how the fund's net assets and
share price are determined. All investment and noninvestment assets are
added together. Any unpaid expenses and other liabilities are
subtracted from this total. The result is divided by the number of
shares to determine the net asset value per share, which is calculated
separately for each class of shares. (For funds with preferred shares,
the amount subtracted from total assets includes the net assets
allocated to remarketed preferred shares.)
Statement of operations shows the fund's net investment gain or loss.
This is done by first adding up all the fund's earnings -- from
dividends and interest income -- and subtracting its operating expenses
to determine net investment income (or loss). Then, any net gain or
loss the fund realized on the sales of its holdings -- as well as any
unrealized gains or losses over the period -- is added to or subtracted
from the net investment result to determine the fund's net gain or loss
for the fiscal year.
Statement of changes in net assets shows how the fund's net assets were
affected by distributions to shareholders and by changes in the number
of the fund's shares. It lists distributions and their sources (net
investment income or realized capital gains) over the current reporting
period and the most recent fiscal year-end. The distributions listed
here may not match the sources listed in the Statement of operations
because the distributions are determined on a tax basis and may be paid
in a different period from the one in which they were earned.
Financial highlights provide an overview of the fund's investment results,
per-share distributions, expense ratios, net investment income ratios and
portfolio turnover in one summary table, reflecting the five most recent
reporting periods. In a semiannual report, the highlight table also includes
the current reporting period. For open-end funds, a separate table is
provided for each share class.
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Trustees and Shareholders
Putnam Master Intermediate Income Trust
We have audited the accompanying statement of assets and liabilities of
Putnam Master Intermediate Income Trust, including the fund's portfolio,
as of September 30, 2001, and the related statement of operations for
the year then ended, the statements of changes in net assets for each of
the years in the two-year period then ended and financial highlights for
each of the years in the two-year period then ended. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits. The
financial highlights for each of the years in the three-year period
ended September 30, 1999 were audited by other auditors whose report
dated November 11, 1999 expressed an unqualified opinion on those
financial highlights.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that
we plan and perform our audit to obtain reasonable assurance about
whether the financial statements and financial highlights are free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as
of September 30, 2001 by correspondence with the custodian and brokers.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the
financial position of Putnam Master Intermediate Income Trust as of
September 30, 2001, the results of its operations, changes in its net
assets and financial highlights for each of the years or periods
described above in conformity with accounting principles generally
accepted in the United States of America.
KPMG LLP
Boston, Massachusetts
November 2, 2001
THE FUND'S PORTFOLIO
September 30, 2001
CORPORATE BONDS AND NOTES (47.3%) (a)
PRINCIPAL AMOUNT VALUE
Basic Materials (5.9%)
-------------------------------------------------------------------------------------------------------------------
$ 730,000 Acetex Corp. 144A sr. notes 10 7/8s, 2009 (Canada) $ 704,450
900,000 AEP Industries, Inc. sr. sub. notes 9 7/8s, 2007 801,000
300,000 Airgas, Inc. 144A sr. sub. notes 9 1/8s, 2011 306,000
510,000 AK Steel Corp. company guaranty 7 7/8s, 2009 474,300
220,000 AK Steel Corp. sr. notes 9 1/8s, 2006 214,500
120,400 Anker Coal Group, Inc. company guaranty Ser. B,
14 1/4s, 2007 (PIK) 51,772
1,000,000 Armco, Inc. sr. notes 9s, 2007 970,000
270,000 Avecia Group PLC company guaranty 11s, 2009
(United Kingdom) 256,500
1,840,000 Better Minerals & Aggregates Co. company guaranty 13s, 2009 1,398,400
530,000 Centaur Mining & Exploration company guaranty 11s, 2007
(Australia) (In default) (NON) 63,600
260,000 Doe Run Resources Corp. company guaranty Ser. B,
11 1/4s, 2005 104,000
130,000 Doe Run Resources Corp. company guaranty Ser. B,
11 1/4s, 2005 62,400
300,000 Doe Run Resources Corp. company guaranty FRN Ser. B,
9.38s, 2003 120,000
835,000 Doman Industries, Ltd. sr. notes 8 3/4s, 2004 (Canada) 317,300
1,800,000 Equistar Chemicals LP/Equistar Funding Corp. 144A sr. notes
10 1/8s, 2008 1,667,821
840,000 Fibermark, Inc. 144A sr. notes 10 3/4s, 2011 747,600
1,040,000 Four M Corp. sr. notes Ser. B, 12s, 2006 915,200
220,000 Gaylord Container Corp. sr. notes Ser. B, 9 3/4s, 2007 158,400
160,000 Gaylord Container Corp. sr. notes Ser. B, 9 3/8s, 2007 115,200
1,300,000 Gaylord Container Corp. sr. sub. notes 9 7/8s, 2008 338,000
450,000 Geo Specialty Chemicals, Inc. sr. sub. notes 10 1/8s, 2008 400,500
170,000 Georgia Gulf Corp. company guaranty 10 3/8s, 2007 168,300
20,000 Georgia-Pacific Group notes 8 1/8s, 2011 20,061
1,560,000 Hercules, Inc. 144A company guaranty 11 1/8s, 2007 1,497,600
1,140,000 Huntsman Corp. 144A sr. sub. notes 9 1/2s, 2007 364,800
80,000 Huntsman Corp. 144A sr. sub. notes 9 1/2s, 2007 25,600
2,020,000 Huntsman ICI Chemicals, Inc. company guaranty 10 1/8s, 2009 1,737,200
410,000 Huntsman Packaging Corp. company guaranty 13s, 2010 344,400
360,000 IMC Global, Inc. 144A sr. notes 11 1/4s, 2011 355,158
810,000 IMC Global, Inc. 144A sr. notes 10 7/8s, 2008 798,417
1,630,000 ISP Chemco, Inc. 144A sr. sub. notes 10 1/4s, 2011 1,601,475
70,000 ISP Holdings, Inc. sr. notes Ser. B, 9s, 2003 69,650
30,000 Kaiser Aluminum & Chemical Corp. sr. notes 9 7/8s, 2002 29,250
60,000 Kaiser Aluminum & Chemical Corp. sr. notes Ser. B,
10 7/8s, 2006 51,000
1,685,000 Kaiser Aluminum & Chemical Corp. sr. sub. notes 12 3/4s, 2003 1,213,200
1,200,000 LTV Corp. (The) company guaranty 11 3/4s, 2009
(acquired various dates 11/2/99 to 2/10/00, cost $1,215,418)
(In default) (NON) (RES) 24,000
20,000 LTV Corp. (The) 144A company guaranty 8.2s, 2007
(acquired 12/19/00, cost $2,500,000) (In default) (NON) (RES) 550
1,520,000 Lyondell Petrochemical Co. notes Ser. A, 9 5/8s, 2007 1,383,200
960,000 Lyondell Petrochemical Co. sec. notes Ser. B, 9 7/8s, 2007 868,800
710,000 Lyondell Petrochemical Co. sr. sub. notes 10 7/8s, 2009 582,200
EUR 210,000 Messer Griesheim Holdings AG sr. notes 10 3/8s,
2011 (Germany) 177,916
$ 910,000 Millenium America, Inc. company guaranty 9 1/4s, 2008 854,162
870,000 Morrison Knudsen Corp. 144A sr. notes 11s, 2010
(In default) (NON) 87,000
430,000 National Steel Corp. 1st mtge. Ser. D, 9 7/8s, 2009 163,400
370,000 Noveon, Inc. company guaranty Ser. B, 11s, 2011 362,600
348,000 Oregon Steel Mills 1st mtge. 11s, 2003 325,380
410,000 Owens-Illinois, Inc. deb. 7 1/2s, 2010 307,500
370,000 Owens-Illinois, Inc. sr. notes 7.35s, 2008 277,500
630,000 Owens-Illinois, Inc. sr. notes 7.15s, 2005 497,700
347,000 P&L Coal Holdings Corp. company guaranty Ser. B,
9 5/8s, 2008 359,145
920,000 Pacifica Papers, Inc. sr. notes 10s, 2009 (Canada) 933,800
2,000,000 PCI Chemicals & Pharmaceuticals company guaranty
9 1/4s, 2007 (Canada) (In default) (NON) 720,000
466,000 Pioneer Americas Acquisition company guaranty 9 1/4s,
2007 (In default) (NON) 149,120
340,000 Polymer Group, Inc. company guaranty Ser. B, 9s, 2007 127,500
760,000 Polymer Group, Inc. company guaranty Ser. B, 8 3/4s, 2008 285,000
550,000 Potlatch Corp. 144A sr. sub. notes 10s, 2011 557,854
1,160,000 Premium Standard Farms, Inc. sr. notes 9 1/4s, 2011 1,148,400
2,190,000 Riverwood International Corp. company guaranty
10 7/8s, 2008 2,036,700
810,000 Royster-Clark, Inc. 1st mtge. 10 1/4s, 2009 567,000
325,000 Sterling Chemicals Holdings sr. disc. notes 13 1/2s, 2008
(In default) (NON) 9,750
1,040,000 Sterling Chemicals, Inc. company guaranty Ser. B, 12 3/8s,
2006 (In default) (NON) 832,000
310,000 Stone Container Corp. 144A company guaranty 11 1/2s,
2006 (Canada) 317,750
515,089 Stone Container Corp. bank term loan FRN Ser. H, 7 1/8s,
2006 (acquired 7/17/00, cost $515,088) (RES) 512,642
1,660,000 Stone Container Corp. sr. notes 9 3/4s, 2011 1,684,900
350,000 Stone Container Corp. sr. notes 9 1/4s, 2008 350,000
1,040,000 Tembec Industries, Inc. company guaranty 8 5/8s, 2009
(Canada) 1,034,800
610,000 Tembec Industries, Inc. company guaranty 8 1/2s, 2011
(Canada) 610,000
200,000 Texas Petrochemical Corp. sr. sub. notes Ser. B, 11 1/8s, 2006 158,000
790,000 United States Steel, LLC 144A company guaranty
10 3/4s, 2008 718,900
940,000 WCI Steel, Inc. sr. notes Ser. B, 10s, 2004 676,800
70,000 Weirton Steel Co. 144A sr. notes 10 3/4s, 2005 14,000
780,000 Wheeling-Pittsburgh Steel Corp. sr. notes 9 1/4s, 2007
(In default) (NON) 20,475
410,000 WHX Corp. sr. notes 10 1/2s, 2005 168,100
-------------
38,367,598
Capital Goods (3.4%)
-------------------------------------------------------------------------------------------------------------------
1,130,000 Alliant Techsystems, Inc. 144A sr. sub. notes 8 1/2s, 2011 1,130,000
330,000 Allied Waste North America, Inc. Structured Notes 8.20s
(Issued by Credit and Repackaged Securities Limited),
2006 (Cayman Islands) 331,650
4,830,000 Allied Waste Industries, Inc. company guaranty Ser. B, 10s, 2009 4,830,000
370,000 Allied Waste Industries, Inc. company guaranty Ser. B,
7 5/8s, 2006 361,675
580,000 Applied Extrusion Technologies, Inc. 144A sr. notes
10 3/4s, 2011 580,000
200,000 Argo-Tech Corp. company guaranty Ser. D, 8 5/8s, 2007 140,000
1,140,000 Argo-Tech Corp. 144A company guaranty 8 5/8s, 2007 798,000
1,035,000 BE Aerospace, Inc. sr. sub. notes 9 1/2s, 2008 724,500
120,000 BE Aerospace, Inc. sr. sub. notes Ser. B, 8 7/8s, 2011 79,200
810,000 BE Aerospace, Inc. sr. sub. notes Ser. B, 8s, 2008 526,500
2,270,000 Blount, Inc. company guaranty 13s, 2009 976,100
380,000 Briggs & Stratton company guaranty 8 7/8s, 2011 374,000
320,000 Case Corp. notes 7 1/4s, 2005 281,600
1,000,000 Decrane Aircraft Holdings Co. company guaranty Ser. B,
12s, 2008 910,000
1,320,000 Flowserve Corp. company guaranty 12 1/4s, 2010 1,379,400
750,000 Hexcel Corp. sr. sub. notes 9 3/4s, 2009 375,000
460,000 Insilco Holding Co. sr. disc. notes stepped-coupon zero %
(14s, 8/15/03), 2008 (STP) 69,000
330,000 L-3 Communications Corp. company guaranty Ser. B, 8s, 2008 330,000
1,130,000 L-3 Communications Corp. sr. sub. notes 8 1/2s, 2008 1,130,000
410,000 Moog, Inc. sr. sub. notes Ser. B, 10s, 2006 422,300
1,550,000 Motors and Gears, Inc. sr. notes Ser. D, 10 3/4s, 2006 1,457,000
100,000 Radnor Holdings, Inc. sr. notes 10s, 2003 76,000
60,000 Roller Bearing Co. company guaranty Ser. B, 9 5/8s, 2007 51,000
1,600,000 Sequa Corp. sr. notes 9s, 2009 1,376,000
410,000 Sequa Corp. sr. notes Ser. B, 8 7/8s, 2008 348,500
1,350,000 Tekni-Plex, Inc. company guaranty Ser. B, 12 3/4s, 2010 1,174,500
20,000 Terex Corp. company guaranty 8 7/8s, 2008 18,425
330,000 Terex Corp. company guaranty Ser. B, 10 3/8s, 2011 313,500
260,000 Terex Corp. company guaranty Ser. D, 8 7/8s, 2008 236,600
490,000 U.S. Can Corp. company guaranty Ser. B, 12 3/8s, 2010 436,100
500,000 Xerox Cap Europe PLC company guaranty 5 7/8s, 2004
(United Kingdom) 410,000
390,000 Xerox Credit Corp. sr. notes 6.1s, 2003 335,400
-------------
21,981,950
Communication Services (5.7%)
-------------------------------------------------------------------------------------------------------------------
1,070,000 360Networks, Inc. sr. notes 13s, 2008 (Canada) (In default) (NON) 10,700
200,000 Airgate PCS, Inc. sr. sub. notes stepped-coupon zero %
(13 1/2s, 10/1/04), 2009 (STP) 126,000
110,000 Alamosa Delaware, Inc. company guaranty 12 1/2s, 2011 100,100
550,000 Alamosa Delaware, Inc. 144A sr. notes 13 5/8s, 2011 519,750
380,000 Alamosa PCS Holdings, Inc. company guaranty stepped-coupon
zero % (12 7/8s, 2/15/05), 2010 (STP) 182,400
513,019 American Cellular Corp. bank term loan FRN Ser. C, 6.83s,
2009 (acquired 2/29/00, cost $513,019) (RES) 502,652
820,000 American Cellular Corp. company guaranty 9 1/2s, 2009 762,600
720,000 American Tower Corp. sr. notes 9 3/8s, 2009 612,000
400,000 Arch Communications, Inc. sr. notes 13 3/4s, 2008
(In default) (NON) 4,000
290,000 Asia Global Crossing, Ltd. sr. notes 13 3/8s, 2010 (Bermuda) 147,900
460,000 Birch Telecommunications, Inc. sr. notes 14s, 2008 184,000
400,000 Call-Net Enterprises, Inc. sr. notes 8s, 2008 (Canada) 88,000
1,030,000 Celcaribe S.A. sr. notes 13 1/2s, 2004 618,000
900,000 Colo.com, Inc. 144A sr. notes 13 7/8s, 2010 (In default) (NON) 126,000
145,000 Covad Communications Group, Inc. sr. disc. notes
stepped-coupon Ser. B, zero % (13 1/2s, 3/15/03), 2008 (STP) 13,775
600,000 Covad Communications Group, Inc. sr. notes 12 1/2s, 2009
(In default) (NON) 96,000
30,000 Covad Communications Group, Inc. sr. notes Ser. B, 12s, 2010
(In default) (NON) 4,800
350,000 Crown Castle International Corp. sr. disc. notes
stepped-coupon zero % (11 1/4s, 8/1/04), 2011 (STP) 196,000
170,000 Crown Castle International Corp. sr. notes 10 3/4s, 2011 158,100
1,090,000 Crown Castle International Corp. sr. notes 9 3/8s, 2011 937,400
2,430,000 Cybernet Internet Services International, Inc. 144A sr. disc.
notes stepped-coupon zero % (13s, 8/15/04), 2009
(Denmark) (STP) 36,450
200,000 Dobson Communications Corp. sr. notes 10 7/8s, 2010 204,000
940,000 Dobson/Sygnet Communications, Inc. sr. notes 12 1/4s, 2008 977,600
1,500,000 Econophone, Inc. company guaranty 13 1/2s, 2007
(In default) (NON) 30,000
535,000 Esprit Telecom Group PLC sr. notes 11 1/2s, 2007
(United Kingdom) (In default) (NON) 8,025
850,000 Equinix, Inc. sr. notes 13s, 2007 297,500
100,000 Exodus Communications, Inc. sr. notes 11 5/8s, 2010
(In default) (NON) 11,500
880,000 Exodus Communications, Inc. sr. notes 10 3/4s, 2009
(In default) (NON) 96,800
220,000 Exodus Communications, Inc. 144A sr. notes 11 1/4s, 2008
(In default) (NON) 25,300
110,000 FLAG Telecom Holdings, Ltd. sr. notes 11 5/8s, 2010 (Bermuda) 39,600
580,000 FLAG, Ltd. 144A sr. notes 8 1/4s, 2008 (Bermuda) 353,800
710,000 Focal Communications Corp. sr. sub. notes stepped-coupon
Ser. B, zero % (12 1/8s, 2/15/03), 2008 (STP) 134,900
50,000 Global Crossing Holdings, Ltd. company guaranty 9 5/8s, 2008
(Bermuda) 21,750
630,000 Global Crossing Holdings, Ltd. company guaranty 9 1/2s, 2009
(Bermuda) 261,450
1,880,000 Global Crossing Holdings, Ltd. company guaranty 8.7s, 2007
(Bermuda) 780,200
1,500,000 Globix Corp. sr. notes 12 1/2s, 2010 345,000
1,050,000 Horizon PCS, Inc. company guaranty stepped-coupon zero %
(14s, 10/1/05), 2010 (STP) 430,500
160,000 Hyperion Telecommunications Corp., Inc. sr. disc. notes Ser. B,
13s, 2003 64,000
1,220,000 Hyperion Telecommunications Corp., Inc. sr. sub. notes 12s, 2007 414,800
10,000 ICG Holdings, Inc. company guaranty 12 1/2s, 2006
(In default) (NON) 900
2,420,000 ICG Holdings, Inc. sr. sub. notes 13 1/2s, 2005 (In default) (NON) 266,200
60,000 Intermedia Communications, Inc. sr. notes Ser. B, 8.6s, 2008 61,800
430,000 Intermedia Communications, Inc. sr. notes Ser. B, 8 1/2s, 2008 441,825
630,000 Intermedia Communications, Inc. sr. sub. notes Ser. B, zero %
(12 1/4s, 3/1/04), 2009 (STP) 582,334
910,000 Ipcs Inc. sr. disc. notes stepped-coupon zero % (14s, 7/15/05),
2010 (STP) 455,000
1,150,000 Iron Mountain, Inc. company guaranty 8 3/4s, 2009 1,161,500
270,000 Iron Mountain, Inc. company guaranty 8 1/8s, 2008 (Canada) 263,250
750,000 Iron Mountain, Inc. sr. sub. notes 8 1/4s, 2011 751,875
590,000 IWO Holdings, Inc. company guaranty 14s, 2011 495,600
1,245,000 KMC Telecommunications Holdings, Inc. sr. disc. notes
stepped-coupon zero % (12 1/2s, 2/15/03), 2008 (STP) 87,150
490,000 Leap Wireless International, Inc. company guaranty
12 1/2s, 2010 318,500
310,000 Level 3 Communications, Inc. sr. disc. notes stepped-coupon
zero % (10 1/2s, 12/1/03), 2008 (STP) 83,700
180,000 Level 3 Communications, Inc. sr. notes 11 1/4s, 2010 76,500
2,790,000 Level 3 Communications, Inc. sr. notes 11s, 2008 1,213,650
580,000 Level 3 Communications, Inc. sr. notes 9 1/8s, 2008 249,400
770,000 Madison River Capital Corp. sr. notes 13 1/4s, 2010 469,700
940,000 McCaw International, Ltd. sr. disc. notes stepped-coupon
zero % (13s, 4/15/02), 2007 (STP) 216,200
80,000 McLeodUSA, Inc. sr. notes 11 3/8s, 2009 23,200
860,000 McLeodUSA, Inc. sr. notes 9 1/2s, 2008 292,400
220,000 Metrocall, Inc. sr. sub. notes 11s, 2008 (In default) (NON) 2,200
180,000 Metrocall, Inc. sr. sub. notes 10 3/8s, 2007 (In default) (NON) 1,800
190,000 Metrocall, Inc. sr. sub. notes 9 3/4s, 2007 (In default) (NON) 1,900
530,000 Metromedia Fiber Network, Inc. sr. notes 10s, 2009 66,250
880,000 Metromedia Fiber Network, Inc. sr. notes Ser. B, 10s, 2008 110,000
1,300,000 Microcell Telecommunications sr. disc. notes stepped-coupon
Ser. B, zero % (14s, 12/1/01), 2006 (Canada) (STP) 585,000
1,251,000 Millicom International Cellular SA sr. disc. notes 13 1/2s, 2006
(Luxembourg) 875,700
1,180,000 Nextel Communications, Inc. sr. notes 12s, 2008 932,200
3,770,000 Nextel Communications, Inc. sr. notes 9 1/2s, 2011 2,318,550
890,000 Nextel International, Inc. sr. notes 12 3/4s, 2010 195,800
530,000 Nextel Partners, Inc. sr. notes 11s, 2010 333,900
320,000 Nextel Partners, Inc. sr. notes 11s, 2010 201,600
920,000 Nextlink Communications, Inc. sr. disc. notes stepped-coupon
zero % (12 1/8s, 12/1/04), 2009 (STP) 69,000
1,000,000 Nextlink Communications, Inc. sr. disc. notes stepped-coupon
zero % (12 1/4s, 6/1/04), 2009 (STP) 85,000
150,000 Nextlink Communications, Inc. sr. notes 9 5/8s, 2007 39,000
610,000 NorthEast Optic Network, Inc. sr. notes 12 3/4s, 2008 170,800
620,000 Orbital Imaging Corp. sr. notes Ser. B, 11 5/8s, 2005
(In default) (NON) 102,300
410,000 Orion Network systems, Inc. sr. notes 11 1/4s, 2007 151,700
950,000 Pagemart Wireless, Inc. sr. disc. notes stepped-coupon zero %
(11 1/4s, 2/1/03), 2008 (STP) 26,125
1,195,000 Price Communications Wireless, Inc. 144A sr. notes
9 1/8s, 2006 1,195,000
530,000 PSINet, Inc. sr. notes 11 1/2s, 2008 (In default) (NON) 31,800
840,000 PSINet, Inc. sr. notes 11s, 2009 (In default) (NON) 50,400
130,000 PSINet, Inc. sr. notes Ser. B, 10s, 2005 (In default) (NON) 7,800
110,000 Rhythms Netconnections, Inc. sr. notes Ser. B, 14s, 2010
(In default) (NON) 5,500
550,000 Rogers Wireless, Inc. sec. notes 9 5/8s, 2011 (Canada) 522,500
710,000 RSL Communications PLC company guaranty 12 7/8s, 2010
(United Kingdom) (In default) (NON) 21,300
500,000 RSL Communications PLC company guaranty stepped-coupon
zero % (10 1/8s, 3/1/03), 2008 (United Kingdom)
(In default) (NON) (STP) 13,750
770,000 RSL Communications, Ltd. company guaranty 12 1/4s, 2006
(Bermuda) (In default) (NON) 21,175
270,000 Rural Cellular Corp. sr. sub. notes Ser. B, 9 5/8s, 2008 263,925
600,000 SBA Communications Corp. sr. notes 10 1/4s, 2009 486,000
970,000 Spectrasite Holdings, Inc. sr. disc. notes stepped-coupon zero %
(11 1/8s, 4/15/04), 2009 (STP) 305,550
1,270,000 Spectrasite Holdings, Inc. sr. disc. notes stepped-coupon Ser. B,
zero % (12 7/8s, 3/15/05), 2010 (STP) 330,200
1,000,000 Startec Global Communications Corp. sr. notes 12s, 2008 35,000
320,000 Tele1 Europe B.V. sr. notes 13s, 2009 (Netherlands) 67,200
1,330,000 Telecorp PCS, Inc. company guaranty 10 5/8s, 2010 1,170,400
300,000 Time Warner Telecom, Inc. sr. notes 10 1/8s, 2011 207,000
130,000 Time Warner Telecom, Inc. sr. notes 9 3/4s, 2008 89,700
960,000 Tritel PCS, Inc. company guaranty 10 3/8s, 2011 825,600
480,000 Triton PCS, Inc. company guaranty 9 3/8s, 2011 475,200
70,000 Triton PCS, Inc. company guaranty stepped-coupon zero %
(11s, 5/01/03), 2008 (STP) 58,100
1,670,000 UbiquiTel Operating Co. company guaranty stepped-coupon
zero % (14s, 4/15/05), 2010 (STP) 684,700
1,070,000 US UnWired, Inc. company guaranty stepped-coupon Ser. B,
zero % (13 3/8s, 11/1/04), 2009 (STP) 588,500
30,000 USA Mobile Communications, Inc. sr. notes 9 1/2s, 2004
(In default) (NON) 1,200
180,000 Versatel Telecom B.V. sr. notes 13 1/4s, 2008 (Netherlands) 44,100
510,000 Versatel Telecom NV sr. notes 13 1/4s, 2008 (Netherlands) 124,950
270,000 Viatel, Inc. sr. disc. notes stepped-coupon zero %
(12 1/2s, 4/15/03), 2008 (STP) 2,830
1,760,000 Viatel, Inc. sr. notes 11 1/4s, 2008 (In default) (NON) 37,400
2,480,000 Voicestream Wireless Corp. sr. notes 10 3/8s, 2009 2,836,128
1,500,000 Western Wireless Corp. bank term loan FRN Ser. B,
6 3/8s, 2008 (acquired 4/24/00, cost $1,498,125) (RES) 1,481,876
290,000 Western Wireless Corp. 144A sr. sub. notes 10 1/2s, 2007 298,700
730,000 Williams Communications Group, Inc. sr. notes 11 7/8s, 2010 306,600
1,570,000 Williams Communications Group, Inc. sr. notes 11.7s, 2008 651,550
180,000 Williams Communications Group, Inc. sr. notes 10 7/8s, 2009 75,600
200,000 Williams Communications Group, Inc. sr. notes 10.7s, 2007 84,000
3,976,000 WinStar Communications, Inc. sr. disc. notes stepped-coupon
zero % (14 3/4s, 4/15/05), 2010 (In default) (NON) (STP) 24,850
920,000 WinStar Communications, Inc. sr. notes 12 3/4s, 2010
(In default) (NON) 9,200
10,000 WinStar Communications, Inc. sr. notes 12 1/2s, 2008
(In default) (NON) 63
900,000 World Access, Inc. sr. notes Ser. B, 13 1/4s, 2008 (In default) (NON) 9,000
670,000 XO Communications, Inc. sr. disc. notes stepped-coupon
zero % (9.45s, 4/15/03), 2008 (STP) 87,100
250,000 XO Communications, Inc. sr. notes 10 3/4s, 2008 50,000
640,000 XO Communications, Inc. 144A sr. notes 12 1/2s, 2006 134,400
-------------
37,418,708
Consumer Cyclicals (9.9%)
-------------------------------------------------------------------------------------------------------------------
570,000 Adams Outdoor Advertising bank term loan FRN Ser. B,
6.465s, 2008 (acquired 8/1/01, cost $570,000) (RES) 566,438
1,565,000 Affinity Group Holdings sr. notes 11s, 2007 1,205,050
844,000 Aftermarket Technology Corp. sr. sub. notes 12s, 2004 818,680
250,000 Aftermarket Technology Corp. sr. sub. notes Ser. D, 12s, 2004 242,500
470,000 Aladdin Gaming Holdings, LLC sr. disc. notes stepped-coupon
Ser. B, zero % (13 1/2s, 3/1/03), 2010 (In default) (NON) (STP) 61,100
1,040,000 Amazon.com, Inc. sr. sub. notes stepped-coupon zero %
(10s, 5/1/03), 2008 (STP) 691,600
1,455,000 American Standard Companies, Inc. company guaranty
7 5/8s, 2010 1,429,538
80,000 American Standard Companies, Inc. company guaranty
7 1/8s, 2003 78,800
560,000 Ameristar Casinos, Inc. company guaranty 10 3/4s, 2009 565,600
650,000 Argosy Gaming Co. company guaranty 10 3/4s, 2009 689,000
390,000 Argosy Gaming Co. sr. sub. notes 9s, 2011 390,000
230,000 Atrium Companies, Inc. company guaranty Ser. B, 10 1/2s, 2009 190,900
750,000 Autonation, Inc. 144A sr. notes 9s, 2008 705,000
1,060,159 Autotote Corp. bank term loan FRN Ser. B, 7.795s, 2007
(acquired 10/13/00, cost $1,057,509) (RES) 1,054,858
167,821 Autotote Corp. bank term loan FRN Ser. A, 7.125s, 2007
(acquired 6/6/01, cost $161,871) (RES) 165,303
220,000 Autotote Corp. company guaranty Ser. B, 12 1/2s, 2010 217,800
540,000 Beazer Homes USA, Inc. company guaranty 8 5/8s, 2011 518,400
320,000 Building Materials Corp. company guaranty 8s, 2008 201,600
510,000 CanWest Media, Inc. 144A sr. sub. notes 10 5/8s, 2011
(Canada) 502,350
1,530,000 Coinmach Corp. sr. notes Ser. D, 11 3/4s, 2005 1,560,600
840,000 Collins & Aikman Products, Inc. company guaranty
11 1/2s, 2006 756,000
740,000 D.R. Horton, Inc. company guaranty 8s, 2009 666,000
270,000 Dana Corp. notes 6 1/4s, 2004 240,300
1,330,000 Dana Corp. 144A sr. notes 9s, 2011 1,170,400
1,020,000 Dayton Superior Corp. company guaranty 13s, 2009 986,850
260,000 Del Webb Corp. sr. sub. debs 9 3/4s, 2008 265,200
360,000 Del Webb Corp. sr. sub. debs 9 3/8s, 2009 363,600
60,000 Del Webb Corp. sr. sub. debs 9s, 2006 60,450
360,000 Delco Remy International, Inc. company guaranty 11s, 2009 356,400
60,000 Delco Remy International, Inc. company guaranty 10 5/8s, 2006 59,400
584,000 Derby Cycle Corp. (The) sr. notes 10s, 2008 (In default) (NON) 204,400
1,674,000 Derby Cycle Corp. (The) sr. notes 9 3/8s, 2008 (In default) (NON) 225,997
1,420,000 Dura Operating Corp. company guaranty Ser. D, 9s, 2009 1,199,900
310,000 Exide Corp. sr. notes 10s, 2005 217,000
260,000 Federal Mogul Corp. notes 7 7/8s, 2010 (In default) (NON) 24,700
810,000 Federal Mogul Corp. notes 7 3/4s, 2006 (In default) (NON) 76,950
90,000 Felcor Lodging company guaranty 9 1/2s, 2008 77,400
1,050,000 Felcor Lodging 144A sr. notes 8 1/2s, 2011 945,000
1,299,784 Fitzgeralds Gaming Corp. company guaranty Ser. B,
12 1/4s, 2004 (In default) (NON) 779,870
560,000 Galey & Lord, Inc. company guaranty 9 1/8s, 2008 210,000
670,000 Garden State Newspapers, Inc. sr. sub. notes 8 5/8s, 2011 603,000
80,000 Garden State Newspapers, Inc. sr. sub. notes Ser. B, 8 3/4s, 2009 68,800
20,000 Harrah's Entertainment, Inc. company guaranty 7 7/8s, 2005 19,800
270,000 Harrah's Entertainment, Inc. company guaranty 7 1/2s, 2009 261,455
560,000 Harrah's Operating Co., Inc. company guaranty 8s, 2011 539,329
1,090,000 Hayes Lemmerz International, Inc. company guaranty Ser. B,
8 1/4s, 2008 218,000
380,000 Hayes Lemmerz International, Inc. 144A company guaranty
11 7/8s, 2006 216,600
220,000 Hayes Wheels International, Inc. company guaranty Ser. B,
9 1/8s, 2007 44,000
590,000 Hayes Wheels International, Inc. 144A sr. sub. notes
9 1/8s, 2007 129,800
650,000 Herbst Gaming, Inc. 144A secd. notes 10 3/4s, 2008 601,250
3,695,000 HMH Properties, Inc. company guaranty Ser. B, 7 7/8s, 2008 2,974,475
360,000 Hollinger International Publishing, Inc. company guaranty
9 1/4s, 2007 331,200
420,000 Hollinger Participation Trust 144A sr. notes 12 1/8s, 2010
(Canada) 310,800
980,000 Hollywood Casino Corp. company guaranty 11 1/4s, 2007 980,000
380,000 Hollywood Park, Inc. company guaranty Ser. B, 9 1/4s, 2007 315,400
1,040,000 Horseshoe Gaming Holdings company guaranty 8 5/8s, 2009 1,019,200
843,074 Interact Operating Co. notes 14s, 2003 (In default) (NON) (PIK) 84
720,000 International Game Technology sr. notes 8 3/8s, 2009 720,000
1,710,000 International Game Technology sr. notes 7 7/8s, 2004 1,692,900
150,000 Isle of Capri Black Hawk LLC 1st mtge. Ser. B, 13s, 2004 163,500
410,000 Isle of Capri Black Hawk LLC company guaranty 8 3/4s, 2009 364,900
660,000 ITT Corp. notes 6 3/4s, 2005 644,985
150,000 John Q. Hammons Hotels, Inc. 1st mtge. 8 7/8s, 2004 138,000
1,140,000 Jostens, Inc. sr. sub. notes 12 3/4s, 2010 1,151,400
640,000 K mart Corp. notes 8 3/8s, 2004 611,200
550,000 K mart Corp. 144A notes 9 7/8s, 2008 511,500
670,000 K. Hovnanian Enterprises, Inc. company guaranty 10 1/2s, 2007 663,300
315,000 Kasper A.S.L., Ltd. sr. notes 12 3/4s, 2004 (In default) (NON) 88,200
920,000 KB Home sr. sub. notes 9 1/2s, 2011 860,200
530,000 Key3media Group, Inc. company guaranty 11 1/4s, 2011 381,600
460,000 Lamar Media Corp. company guaranty 9 5/8s, 2006 466,900
600,000 Lamar Media Corp. sr. sub. notes 9 1/4s, 2007 603,000
670,000 Lear Corp. company guaranty Ser. B, 8.11s, 2009 663,689
1,100,000 Lear Corp. company guaranty Ser. B, 7.96s, 2005 1,087,339
250,000 Lennar Corp. company guaranty Ser. B, 9.95s, 2010 263,750
510,000 Lennar Corp. sr. notes 7 5/8s, 2009 479,400
930,000 Levi Strauss & Co. sr. notes 11 5/8s, 2008 660,300
80,000 M.D.C. Holdings, Inc. sr. notes 8 3/8s, 2008 77,300
910,000 Mandalay Resort Group sr. sub. notes Ser. B, 10 1/4s, 2007 841,750
740,000 Meristar Hospitality Corp. 144A sr. notes 9 1/8s, 2011 562,400
170,000 Meristar Hospitality Corp. 144A sr. notes 9s, 2008 137,700
1,240,000 MGM Mirage company guaranty 8 1/2s, 2010 1,160,603
790,000 MGM Mirage company guaranty 8 3/8s, 2011 711,000
560,000 Mohegan Tribal Gaming sr. notes 8 1/8s, 2006 565,600
600,000 Mohegan Tribal Gaming sr. sub. notes 8 3/4s, 2009 603,000
60,000 Mothers Work, Inc. sr. notes 12 5/8s, 2005 56,400
410,000 NCI Building Systems, Inc. sr. sub. notes Ser. B, 9 1/4s, 2009 369,513
360,000 Nortek, Inc. sr. notes Ser. B, 8 7/8s, 2008 320,400
90,000 Nortek, Inc. sr. sub. notes Ser. B, 9 7/8s, 2011 78,300
200,000 Nortek, Inc. 144A sr. notes Ser. B, 9 1/8s, 2007 192,000
1,320,000 Oxford Automotive, Inc. company guaranty Ser. D,
10 1/8s, 2007 726,000
180,000 Park Place Entertainment Corp. sr. sub. notes 9 3/8s, 2007 174,600
1,210,000 Park Place Entertainment Corp. sr. sub. notes 8 7/8s, 2008 1,152,525
600,000 Penn National Gaming, Inc. company guaranty Ser. B,
11 1/8s, 2008 600,000
1,390,000 Perry-Judd company guaranty 10 5/8s, 2007 1,153,700
350,000 PRIMEDIA, Inc. company guaranty 7 5/8s, 2008 227,500
770,000 PRIMEDIA, Inc. company guaranty Ser. B, 8 1/2s, 2006 704,550
1,140,000 PRIMEDIA, Inc. 144A sr. notes 8 7/8s, 2011 855,000
640,000 Ryland Group, Inc. sr. notes 9 3/4s, 2010 657,600
140,000 Ryland Group, Inc. sr. sub. notes 8 1/4s, 2008 131,600
1,940,000 Saks, Inc. company guaranty 8 1/4s, 2008 1,455,000
1,781,000 Samsonite Corp. sr. sub. notes 10 3/4s, 2008 1,264,510
1,000,000 Sealy Mattress Co. company guaranty stepped-coupon Ser. B,
zero % (10 7/8s, 12/15/02), 2007 (STP) 800,000
410,000 Sealy Mattress Co. sr. sub. notes Ser. B, 9 7/8s, 2007 379,250
560,000 Standard Pacific Corp. sr. notes 9 1/2s, 2010 520,800
870,000 Station Casinos, Inc. sr. notes 8 3/8s, 2008 809,100
130,000 Station Casinos, Inc. sr. sub. notes 9 7/8s, 2010 118,300
210,000 Station Casinos, Inc. 144A sr. sub. notes 9 3/4s, 2007 191,100
360,000 Tenneco, Inc. company guaranty 11 5/8s, 2009 (Malaysia) 117,000
360,000 Toll Corp. company guaranty 8 1/8s, 2009 324,000
220,000 Tommy Hilfiger USA, Inc. company guaranty 6 1/2s, 2003 205,700
1,140,000 Trump A.C. 1st mtge. 11 1/4s, 2006 706,800
900,000 Trump Castle Funding, Inc. sr. sub. notes 11 3/4s, 2003 711,000
2,430,000 Trump Castle Funding, Inc. sub. notes 10 1/4s, 2003 2,460,375
700,000 Venetian Casino, Inc. company guaranty 12 1/4s, 2004 637,000
190,000 Venture Holdings Trust 144A sr. notes Ser. B, 9 1/2s, 2005 142,500
100,786 Von Hoffman Press, Inc. 144A sr. sub. notes 13 1/2s, 2009 80,628
100,000 Von Hoffman Press, Inc. 144A sr. sub. notes 10 3/8s, 2007 89,000
1,350,000 Westpoint Stevens, Inc. sr. notes 7 7/8s, 2005 445,500
-------------
65,106,794
Consumer Goods (9.9%)
-------------------------------------------------------------------------------------------------------------------
1,020,000 Acme Television company guaranty 10 7/8s, 2004 897,600
1,610,000 Adelphia Communications Corp. sr. notes 10 7/8s, 2010 1,416,800
990,000 Adelphia Communications Corp. sr. notes 10 1/4s, 2011 866,250
560,000 Adelphia Communications Corp. sr. notes 7 7/8s, 2009 453,600
1,793,000 Adelphia Communications Corp. sr. notes Ser. B, 9 7/8s, 2007 1,559,910
1,000,000 Adelphia Communications Corp. sr. notes Ser. B, 7 3/4s, 2009 810,000
930,000 Albecca, Inc. company guaranty 10 3/4s, 2008 934,650
300,000 Allbritton Communications Co. sr. sub. notes Ser. B, 8 7/8s, 2008 294,000
350,000 AMC Entertainment, Inc. sr. sub. notes 9 1/2s, 2009 304,500
245,900 AMFM Operating, Inc. deb. 12 5/8s, 2006 (PIK) 265,572
700,000 Archibald Candy Corp. company guaranty 10 1/4s, 2004 434,000
410,000 Armkel, LLC/Armkel Finance 144A sr. sub. notes 9 1/2s, 2009 414,100
235,000 Aurora Foods, Inc. sr. sub. notes Ser. B, 9 7/8s, 2007 190,350
800,000 Aurora Foods, Inc. 144A sr. sub. notes Ser. D, 9 7/8s, 2007 648,000
10,263 Australis Media, Ltd. sr. disc. notes 15 3/4s, 2003 (Australia)
(In default) (NON) (PIK) 1
800,000 Benedek Communications Corp. sr. disc. notes 13 1/4s, 2006 432,000
120,000 British Sky Broadcasting PLC company guaranty 8.2s, 2009
(United Kingdom) 121,510
1,560,000 British Sky Broadcasting PLC company guaranty 6 7/8s, 2009
(United Kingdom) 1,465,261
115,000 Central European Media Enterprises, Ltd. sr. notes 9 3/8s, 2004
(Bermuda) 28,750
1,910,000 Chancellor Media Corp. company guaranty 8s, 2008 1,967,300
160,000 Charter Communications Holdings, LLC sr. disc. notes
stepped-coupon zero % (13 1/2s, 1/15/06) 2011 (STP) 94,400
1,340,000 Charter Communications Holdings, LLC sr. disc. notes
stepped-coupon zero % (11 3/4s, 5/15/06), 2011 (STP) 723,600
1,620,000 Charter Communications Holdings, LLC sr. notes 11 1/8s, 2011 1,620,000
170,000 Charter Communications Holdings, LLC sr. notes 10 3/4s, 2009 170,850
610,000 Charter Communications Holdings, LLC sr. notes 10s, 2009 573,400
1,890,000 Charter Communications Holdings, LLC sr. notes 8 5/8s, 2009 1,682,100
310,000 Charter Communications Holdings, LLC sr. notes 8 1/4s, 2007 279,000
390,000 Chiquita Brands International, Inc. sr. notes 10 1/4s, 2006
(In default) (NON) 257,400
1,600,000 Cinemark USA, Inc. sr. sub. notes Ser. B, 8 1/2s, 2008 1,248,000
30,000 Comcast UK Cable, Ltd. deb. 11.2s, 2007 (Bermuda) 19,425
150,000 Constellation Brands, Inc. company guaranty 8 1/2s, 2009 145,125
700,000 Constellation Brands, Inc. company guaranty Ser. B, 8s, 2008 703,500
210,000 Cott Corp. sr. notes 8 1/2s, 2007 (Canada) 211,050
1,600,000 CSC Holdings, Inc. sr. sub. notes 9 7/8s, 2006 1,600,000
210,000 Del Monte Corp. 144A sr. sub. notes 9 1/4s, 2011 212,100
2,550,000 Diamond Cable Communication PLC sr. disc. notes
stepped-coupon zero % (10 3/4s, 2/15/02), 2007
(United Kingdom) (STP) 1,013,625
2,742,000 Diva Systems Corp. sr. disc. notes stepped-coupon Ser. B,
zero % (12 5/8s, 3/1/03), 2008 (STP) 308,475
1,370,000 Doane Pet Care Co. sr. sub. deb. 9 3/4s, 2007 1,075,450
350,000 Domino's, Inc. company guaranty Ser. B, 10 3/8s, 2009 357,000
570,000 Doskocil Manufacturing Co. sr. sub. notes 10 1/8s, 2007
(In default) (NON) 68,400
380,000 Eagle Family Foods company guaranty Ser. B, 8 3/4s, 2008 228,000
3,000,000 Echostar Broadband Corp. sr. notes 10 3/8s, 2007 3,030,000
1,480,000 Echostar DBS Corp. sr. notes 9 3/8s, 2009 1,443,000
250,000 Elizabeth Arden, Inc. sec. notes Ser. B, 11 3/4s, 2011 231,250
400,000 Emmis Communications Corp. sr. disc. notes stepped-coupon
zero % (12 1/2s, 3/15/06), 2011 (STP) 220,000
730,000 Fleming Companies, Inc. company guaranty 10 1/8s, 2008 737,300
330,000 Fleming Companies, Inc. company guaranty Ser. B, 10 1/2s, 2004 326,700
850,000 Fox Family Worldwide, Inc. sr. disc. notes stepped-coupon
zero % (10 1/4s, 11/1/02), 2007 (STP) 799,000
1,320,000 Fox Family Worldwide, Inc. sr. notes 9 1/4s, 2007 1,372,800
350,000 Fox/Liberty Networks, LLC sr. notes 8 7/8s, 2007 358,750
270,000 French Fragrances, Inc. company guaranty Ser. D, 10 3/8s, 2007 245,700
90,000 Granite Broadcasting Corp. sr. sub. notes 9 3/8s, 2005 60,300
530,000 Granite Broadcasting Corp. sr. sub. notes 8 7/8s, 2008 360,400
260,000 Great Atlantic & Pacific Tea Co. notes 7 3/4s, 2007 228,800
260,000 Great Atlantic & Pacific Tea Co. sr. notes 7.7s, 2004 241,800
680,000 Home Interiors & Gifts, Inc. company guaranty 10 1/8s, 2008 442,000
1,850,000 Insight Communications Company, Inc. sr. disc. notes
stepped-coupon zero % (12 1/4s, 2/15/06), 2011 (STP) 1,017,500
1,000,000 Insight Midwest LP/Insight Capital, Inc. bank term loan FRN
5 1/2s, 2009 (acquired 1/9/01, cost $998,500) (RES) 996,500
530,000 Insight Midwest LP/Insight Capital, Inc. sr. notes 10 1/2s, 2010 548,550
650,000 International Cabletel, Inc. sr. disc. notes 11 1/2s, 2006 334,750
30,000 Iron Age Holdings Corp. sr. disc. notes stepped-coupon zero %
(12 1/8s, 5/1/03), 2009 (STP) 2,700
60,000 Knology Holdings, Inc. sr. disc. notes stepped-coupon zero %
(11 7/8s, 10/15/02), 2007 (STP) 19,800
500,000 Leiner Health Products sr. sub. notes 9 5/8s, 2007 (In default) (NON) 36,250
1,320,000 LIN Holdings Corp. sr. disc. notes stepped-coupon zero %
(10s, 3/1/03), 2008 (STP) 957,000
120,000 LIN Holdings Corp. 144A sr. disc. notes stepped-coupon
zero % (10s, 3/1/03), 2008 (STP) 66,000
260,000 LIN Television Corp. company guaranty 8 3/8s, 2008 237,900
390,000 NBTY, Inc. sr. sub. notes Ser. B, 8 5/8s, 2007 370,500
190,000 News America, Inc. sr. notes 6 5/8s, 2008 192,280
1,115,000 North Atlantic Trading Co. company guaranty Ser. B, 11s, 2004 981,200
1,510,000 NTL Communications Corp. sr. notes Ser. B, 11 7/8s, 2010 777,650
1,150,000 NTL Communications Corp. sr. notes Ser. B, 11 1/2s, 2008 598,000
510,000 NTL Communications Corp. sr. notes stepped-coupon Ser. B,
zero % (12 3/8s, 10/1/03), 2008 (STP) 158,100
1,090,000 NTL, Inc. sr. notes Ser. A, 12 3/4s, 2005 566,800
400,000 ONO Finance PLC sr. notes 14s, 2011 (United Kingdom) 232,000
180,000 ONO Finance PLC sr. notes 13s, 2009 (United Kingdom) 106,200
25,000 Pegasus Communications Corp. sr. notes 12 1/2s, 2007 24,000
190,000 Pegasus Communications Corp. sr. notes Ser. B, 9 3/4s, 2006 161,500
680,000 Pegasus Satellite sr. notes 12 3/8s, 2006 557,600
550,000 Playtex Products, Inc. company guaranty 9 3/8s, 2011 552,750
310,000 Polaroid Corp. sr. notes 11 1/2s, 2006 75,950
650,000 Premier International Foods PLC sr. notes 12s, 2009
(United Kingdom) 659,750
2,775,000 Premier Parks, Inc. sr. notes 9 1/4s, 2006 2,622,375
570,000 Quebecor Media, Inc. 144A sr. disc. notes stepped-coupon
zero % (13 3/4s, 7/15/06), 2011 (Canada) (STP) 290,700
720,000 Quebecor Media, Inc. 144A sr. notes 11 1/8s, 2011 (Canada) 712,800
1,896,149 Quorum Broadcast Holdings, LLC notes stepped-coupon
zero % (15s, 5/15/06), 2009 (acquired 5/15/01,
cost $753,466) (RES) (STP) 753,530
990,000 RAB Enterprises, Inc. company guaranty 10 1/2s, 2005 524,700
500,000 Radio One, Inc. 144A sr. sub. notes 8 7/8s, 2011 497,500
100,000 RCN Corp. sr. disc. notes stepped-coupon zero %
(11 1/8s, 10/15/02), 2007 (STP) 23,000
470,000 RCN Corp. sr. disc. notes stepped-coupon Ser. B, zero %
(9.8s, 2/15/03), 2008 (STP) 108,100
780,000 RCN Corp. sr. notes 10 1/8s, 2010 265,200
1,265,850 Regal Cinemas, Inc. bank term loan FRN Ser. B, 7 3/4s, 2006
(acquired various dates 3/1/01 to 3/14/01,
cost $1,113,743) (RES) 1,271,276
146,029 Regal Cinemas, Inc. bank term loan FRN Ser. C, 7 1/2s, 2006
(acquired 3/26/01, cost $131,426) (RES) 146,655
699,791 Regal Cinemas, Inc. bank term loan FRN Ser. A, 7s, 2006
(acquired 3/14/01, cost $627,188) (RES) 704,457
1,000 Regal Cinemas, Inc. sr. sub. notes 9 1/2s, 2008 (In default) (NON) 180
130,000 Revlon Consumer Products sr. notes 9s, 2006 94,900
810,000 Revlon Consumer Products sr. sub. notes 8 5/8s, 2008 372,600
130,000 Rogers Cablesystems, Ltd. deb. 10 1/8s, 2012 (Canada) 135,200
550,000 Rogers Cablesystems, Ltd. sr. notes Ser. B, 10s, 2005 (Canada) 572,000
650,000 Rogers Cablesystems, Ltd. sr. sub. notes 8.8s, 2007 (Canada) 585,000
940,000 Sbarro, Inc. company guaranty 11s, 2009 864,800
470,000 Scotts Co. (The) company guaranty 8 5/8s, 2009 460,600
800,000 Silver Cinemas, Inc. sr. sub. notes 10 1/2s, 2005 (In default) (NON) 80
700,000 Sinclair Broadcast Group, Inc. company guaranty 9s, 2007 637,000
30,000 Sinclair Broadcast Group, Inc. sr. sub. notes 10s, 2005 28,500
440,000 Sinclair Broadcast Group, Inc. sr. sub. notes 8 3/4s, 2007 396,000
350,000 Six Flags, Inc. sr. notes 9 1/2s, 2009 329,000
200,000 Southland Corp. deb. Ser. A, 4 1/2s, 2004 173,000
1,437,000 Southland Corp. deb. Ser. B, 4s, 2004 1,293,300
560,000 Supercanal Holdings SA 144A sr. notes 11 1/2s, 2005
(Argentina) (In default) (NON) 56,000
320,000 TeleWest Communications PLC deb. 11s, 2007
(United Kingdom) 198,400
260,000 TeleWest Communications PLC deb. 9 5/8s, 2006
(United Kingdom) 150,800
280,000 TeleWest Communications PLC Structured Notes 10 7/8s
(issued by DLJ International Capital) 2005 (United Kingdom) 179,844
60,000 Tricon Global Restaurants, Inc. sr. notes 8 7/8s, 2011 60,600
1,060,000 Tricon Global Restaurants, Inc. sr. notes 7.65s, 2008 1,022,900
560,000 Tricon Global Restaurants, Inc. sr. notes 7.45s, 2005 551,600
586,000 United Artists Theatre sr. sub. notes Ser. B, 10.415s, 2007
(In default) (NON) 23,440
1,475,000 United Artists Theatre sr. sub. notes Ser. B, 9 3/4s, 2008
(In default) (NON) 59,000
2,610,000 United Pan-Europe NV sr. disc. notes 12 1/2s, 2009
(Netherlands) 234,900
2,360,000 United Pan-Europe NV sr. disc. notes stepped-coupon zero %
(13 3/4s, 2/1/05), 2010 (Netherlands) (STP) 200,600
250,000 United Pan-Europe NV sr. disc. notes stepped-coupon zero %
(12 1/2s, 8/1/04), 2009 (Netherlands) (STP) 23,750
50,000 United Pan-Europe NV sr. notes Ser. B, 10 7/8s, 2007
(Netherlands) 7,000
890,000 United Pan-Europe NV 144A bonds 10 7/8s, 2009
(Netherlands) 133,500
290,000 United Rentals (North America), Inc. 144A company guaranty
10 3/4s, 2008 284,925
895,000 Vlasic Foods International, Inc. sr. sub. notes Ser. B, 10 1/4s, 2009
(In default) (NON) 214,800
590,000 XM Satellite Radio Holdings, Inc. sec. notes 14s, 2010 277,300
1,330,000 Young Broadcasting, Inc. 144A sr. sub. notes 10s, 2011 1,064,000
-------------
65,029,896
Energy (2.7%)
-------------------------------------------------------------------------------------------------------------------
410,000 Belco Oil & Gas Corp. sr. sub. notes Ser. B, 8 7/8s, 2007 405,900
550,000 BRL Universal Equipment sec. notes 8 7/8s, 2008 541,750
1,780,000 Chesapeake Energy Corp. company guaranty 8 1/8s, 2011 1,673,200
410,000 El Paso Energy Partners L.P. 144A company guaranty
8 1/2s, 2011 410,000
290,000 Forest Oil Corp. company guaranty 10 1/2s, 2006 292,900
380,000 Forest Oil Corp. 144A sr. notes 8s, 2008 368,600
60,000 Giant Industries Corp. company guaranty 9s, 2007 55,200
400,000 Grant Prideco, Inc. company guaranty Ser. B, 9 5/8s, 2007 380,000
370,000 Hanover Equipment Trust 144A sec. notes 8 1/2s, 2008 367,225
840,000 HS Resources, Inc. company guaranty 9 1/4s, 2006 877,800
370,000 Key Energy Services, Inc. company guaranty Ser. B, 8 3/8s, 2008 368,124
580,000 Leviathan Gas Corp. company guaranty Ser. B, 10 3/8s, 2009 617,700
310,000 Lone Star Technologies, Inc. 144A sr. sub. notes 9s, 2011 260,400
820,000 Newfield Exploration Co. sr. notes 7 5/8s, 2011 818,975
1,270,000 Nuevo Energy Co. sr. sub. notes Ser. B, 9 1/2s, 2008 1,200,150
210,000 Nuevo Energy Co. sr. sub. notes Ser. B, 9 3/8s, 2010 195,825
800,000 Ocean Energy, Inc. company guaranty Ser. B, 8 3/8s, 2008 836,504
1,140,000 Parker Drilling Corp. company guaranty Ser. D, 9 3/4s, 2006 1,128,600
2,260,000 Pioneer Natural Resources Co. company guaranty 9 5/8s, 2010 2,406,900
290,000 Pogo Producing Co. sr. sub. notes Ser. B, 8 1/4s, 2011 288,550
90,000 Port Arthur Finance Corp. company guaranty 12 1/2s, 2009 90,900
800,000 Pride Petroleum Services, Inc. sr. notes 9 3/8s, 2007 824,000
270,000 Seven Seas Petroleum sr. notes Ser. B, 12 1/2s, 2005 121,500
580,000 Snyder Oil Corp. sr. sub. notes 8 3/4s, 2007 613,489
230,000 Stone Energy Corp. company guaranty 8 3/4s, 2007 223,100
50,000 Triton Energy, Ltd. sr. notes 9 1/4s, 2005 54,875
490,000 Triton Energy, Ltd. sr. notes 8 7/8s, 2007 (Cayman Islands) 539,000
600,000 Vintage Petroleum, Inc. sr. sub. notes 9 3/4s, 2009 634,500
500,000 Vintage Petroleum, Inc. sr. sub. notes 9s, 2005 488,750
360,000 Vintage Petroleum, Inc. sr. sub. notes 7 7/8s, 2011 355,500
500,000 XCL, Ltd. 144A company guaranty 13 1/2s, 2004 (In default) (NON) 150,000
160,000 XTO Energy, Inc. 144A sr. sub. notes Ser. B, 8 3/4s, 2009 163,200
-------------
17,753,117
Financial (2.6%)
-------------------------------------------------------------------------------------------------------------------
100,000 Aames Financial Corp. sr. notes 9 1/8s, 2003 63,000
820,000 AMRESCO, Inc. sr. sub. notes Ser. 97-A, 10s, 2004 (In default) (NON) 311,600
460,000 Chevy Chase Savings Bank, Inc. sub. deb. 9 1/4s, 2005 450,800
700,000 Conseco Financial Corp. sr. sub. notes 10 1/4s, 2002 665,000
790,000 Conseco, Inc. sr. notes 10 3/4s, 2008 616,200
1,380,000 Delta Financial Corp. company guaranty 9 1/2s, 2004
(In default) (NON) 400,200
3,439,000 Finova Group, Inc. notes 7 1/2s, 2009 1,375,600
1,010,000 GS Escrow Corp. sr. notes 7 1/8s, 2005 1,029,422
2,980,000 Hanvit Bank 144A sub. notes 11 3/4s, 2010 (South Korea) 3,069,400
352,000 Imperial Credit Industries, Inc. sec. notes 12s, 2005 176,000
390,000 iStar Financial, Inc. sr. notes 8 3/4s, 2008 374,400
EUR 2,450,000 Kredit Fuer Wiederaufbau bonds 5 1/2s, 2007 (Germany) 2,338,915
$ 670,000 Local Financial Corp. sr. notes 11s, 2004 670,000
420,000 Nationwide Credit, Inc. sr. notes Ser. A, 10 1/4s, 2008 126,000
620,000 Ocwen Federal Bank sub. deb. 12s, 2005 576,600
360,000 Ocwen Financial Corp. notes 11 7/8s, 2003 342,000
655,000 Outsourcing Solutions, Inc. sr. sub. notes Ser. B, 11s, 2006 546,925
760,000 Resource America, Inc. 144A sr. notes 12s, 2004 729,600
2,130,000 Sovereign Bancorp, Inc. sr. notes 10 1/2s, 2006 2,332,350
630,000 Superior Financial 144A sr. notes 8.65s, 2003 646,392
340,000 Willis Corroon Corp. 144A company guaranty 9s, 2009 343,400
-------------
17,183,804
Health Care (2.7%)
-------------------------------------------------------------------------------------------------------------------
570,000 ALARIS Medical Systems, Inc. 144A company guaranty
9 3/4s, 2006 456,000
940,000 ALARIS Medical, Inc. sr. disc. notes stepped-coupon zero %
(11 1/8s, 8/1/03), 2008 (STP) 413,600
560,000 AmerisourceBergen Corp. 144A sr. notes 8 1/8s, 2008 574,000
360,000 Beverly Enterprises, Inc. sr. notes 9 5/8s, 2009 378,000
360,000 Bio-Rad Labs Corp. sr. sub. notes 11 5/8s, 2007 388,800
760,000 Conmed Corp. company guaranty 9s, 2008 760,000
190,000 DaVita, Inc. company guaranty Ser. B, 9 1/4s, 2011 196,650
120,000 Genesis Health Ventures, Inc. bank term loan FRN 6.751s,
2004 (acquired 6/8/01, cost $83,100) (In default) (NON) (RES) 86,700
480,000 Hanger Orthopedic Group, Inc. sr. sub. notes 11 1/4s, 2009 340,800
1,500,000 HCA, Inc. med. term notes 8.85s, 2007 1,627,500
560,000 HCA, Inc. notes 8 3/4s, 2010 604,800
1,370,000 HCA, Inc. notes 7s, 2007 1,370,000
490,000 Healthsouth Corp. sr. sub. notes 10 3/4s, 2008 529,200
1,000,000 Integrated Health Services, Inc. sr. sub. notes Ser. A,
9 1/2s, 2007 (In default) (NON) 4,490
380,000 Integrated Health Services, Inc. sr. sub. notes Ser. A,
9 1/4s, 2008 (In default) (NON) 1,706
735,000 Kinetic Concepts, Inc. company guaranty Ser. B, 9 5/8s, 2007 712,950
200,000 Lifepoint Hospital Holdings company guaranty Ser. B,
10 3/4s, 2009 221,500
120,000 Loewen Group International, Inc. company guaranty Ser. 6,
7.2s, 2003 (In default) (NON) 55,800
120,000 Loewen Group International, Inc. 144A company guaranty
Ser. 4, 8 1/4s, 2003 (In default) (NON) 69,000
120,000 Loewen Group International, Inc. company guaranty Ser. 7,
7.6s, 2008 (In default) (NON) 55,800
CAD 200,000 Loewen Group, Inc. (The) company guaranty Ser. 5,
6.1s, 2002 (Canada) (In default) (NON) 79,139
$ 1,190,000 Magellan Health Services, Inc. sr. sub. notes 9s, 2008 1,142,400
260,000 Magellan Health Services, Inc. 144A sr. notes 9 3/8s, 2007 263,250
1,480,000 Mariner Post-Acute Network, Inc. sr. sub. notes Ser. B,
9 1/2s, 2007 (In default) (NON) 10,330
310,000 Mariner Post-Acute Network, Inc. sr. sub. notes
stepped-coupon Ser. B, zero % (10 1/2s, 11/1/02),
2007 (In default) (NON) (STP) 2,164
760,000 Mediq, Inc. company guaranty 11s, 2008 (In default) (NON) 7,600
560,000 Mediq, Inc. deb. stepped-coupon zero % (13s, 6/1/03),
2009 (In default) (NON) (STP) 56
80,000 Multicare Cos., Inc. bank term loan FRN Ser. B, 8 1/4s,
2004 (acquired 6/8/01, cost $55,400) (In default) (NON) (RES) 60,400
1,590,000 Multicare Cos., Inc. sr. sub. notes 9s, 2007 (In default) (NON) 63,600
570,000 Omnicare, Inc. 144A sr. sub. notes 8 1/8s, 2011 581,400
815,000 Paracelsus Healthcare sr. sub. notes 10s, 2006 (In default) (NON) 257,744
80,000 Service Corp. International notes 7.7s, 2009 68,800
1,930,000 Service Corp. International notes 6s, 2005 1,621,200
720,000 Stewart Enterprises, Inc. notes 10 3/4s, 2008 759,600
1,005,000 Sun Healthcare Group, Inc. sr. sub. notes Ser. B, 9 1/2s, 2007
(In default) (NON) 101
500,000 Sun Healthcare Group, Inc. 144A sr. sub. notes 9 3/8s, 2008
(In default) (NON) 50
320,000 Tenet Healthcare Corp. sr. notes Ser. B, 8 1/8s, 2008 339,200
1,710,000 Triad Hospitals Holdings company guaranty Ser. B,
11s, 2009 1,846,800
1,000,000 Triad Hospitals, Inc. bank term loan FRN Ser. B,
6.53s, 2008 (acquired 4/24/01, cost $999,000) (RES) 1,006,000
100,000 Triad Hospitals, Inc. company guaranty Ser. B, 8 3/4s, 2009 102,000
560,000 Vanguard Health Systems, Inc. 144A sr. sub. notes
9 3/4s, 2011 574,000
-------------
17,633,130
Technology (0.7%)
-------------------------------------------------------------------------------------------------------------------
390,000 Amkor Technologies, Inc. Structured Notes 12.58s, 2005
(issued by STEERS Credit Linked Trust 2000) 358,800
200,000 Amkor Technology, Inc. sr. notes 9 1/4s, 2008 160,000
320,000 Amkor Technology, Inc. sr. notes 9 1/4s, 2006 265,600
340,000 Comdisco, Inc. notes 5.95s, 2002 (In default) (NON) 243,100
720,000 Fairchild Semiconductor Corp. sr. sub. notes 10 1/8s, 2007 667,800
1,250,000 Firstworld Communication Corp. sr. disc. notes stepped-coupon
zero % (13s, 4/15/03), 2008 (STP) 50,000
100,000 Flextronics International, Ltd. sr. sub. notes 9 7/8s, 2010
(Singapore) 98,000
710,000 Intira Corp. bonds zero %, 2010 (acquired 1/31/00,
cost $378,366) (RES) 7,100
1,700,000 Lucent Technologies, Inc. notes 7 1/4s, 2006 1,394,000
450,000 SCG Holding & Semiconductor Corp. company guaranty
12s, 2009 225,000
150,000 Seagate Technology, Inc. 144A company guaranty 12 1/2s, 2007
(Cayman Islands) 148,500
545,000 Telecommunications Techniques, Inc. company guaranty
9 3/4s, 2008 381,500
410,000 Telehub Communications Corp. company guaranty
stepped-coupon zero % (13 7/8s, 7/31/02), 2005
(In default) (NON) (STP) 41
290,000 Telex Communications, Inc. company guaranty 10 1/2s, 2007 72,500
980,000 Viasystems, Inc. sr. notes Ser. B, 9 3/4s, 2007 196,000
-------------
4,267,941
Transportation (1.3%)
-------------------------------------------------------------------------------------------------------------------
80,000 Air Canada Corp. sr. notes 10 1/4s, 2011 (Canada) 33,600
420,000 American Airlines, Inc. bonds Ser. 01-2, Class B, 8.608s, 2011 430,500
210,000 American Airlines, Inc. 144A pass thru certificates Ser. 01-2,
Class A-2, 7.858s, 2011 217,014
980,000 Calair, LLC 144A company guaranty 8 1/8s, 2008 943,250
65,000 International Shipholding Corp. sr. notes 9s, 2003 64,919
740,000 Kansas City Southern Railway Co. company guaranty
9 1/2s, 2008 754,800
250,000 Kitty Hawk, Inc. company guaranty 9.95s, 2004 (In default) (NON) 36,250
380,000 Navistar International Corp. company guaranty Ser. B,
9 3/8s, 2006 368,600
990,000 Navistar International Corp. sr. notes Ser. B, 8s, 2008 871,200
130,000 Newport News Shipbuilding, Inc. sr. notes 8 5/8s, 2006 132,600
240,000 Northwest Airlines, Inc. company guaranty 8 3/8s, 2004 177,600
540,000 Northwest Airlines, Inc. company guaranty 7 5/8s, 2005 388,800
790,000 Railamerica Transportation Corp. company guaranty
12 7/8s, 2010 805,800
140,000 Transportation Manufacturing Operations, Inc. company
guaranty 11 1/4s, 2009 57,400
1,831,810 Transportation Tech. bank term loan FRN Ser. B, 7.546s, 2007
(acquired 2/29/00, cost $1,827,230) (RES) 1,190,676
190,000 Travel Centers of America notes 12 3/4s, 2009 190,000
1,200,000 United Airlines, Inc. deb. 9 1/8s, 2012 924,000
1,450,000 US Air, Inc. pass thru certificates Ser. 93-A2, 9 5/8s, 2003 1,102,000
-------------
8,689,009
Utilities (2.5%)
-------------------------------------------------------------------------------------------------------------------
480,000 AES Corp. (The) notes 8 3/4s, 2008 408,000
1,510,000 AES Corp. (The) sr. notes 9 3/8s, 2010 1,283,500
910,000 AES Corp. (The) sr. notes 8 7/8s, 2011 773,500
370,000 Azurix Corp. sr. notes Ser. B, 10 3/4s, 2010 377,400
660,000 Azurix Corp. sr. notes Ser. B, 10 3/8s, 2007 660,000
1,270,000 Calpine Canada Energy Finance company guaranty
8 1/2s, 2008 (Canada) 1,280,610
390,000 Calpine Corp. sr. notes 10 1/2s, 2006 397,800
460,000 Calpine Corp. sr. notes 8 3/4s, 2007 459,351
1,630,000 Calpine Corp. sr. notes 8 1/2s, 2011 1,582,192
700,000 Calpine Corp. sr. notes 7 7/8s, 2008 675,977
30,000 Calpine Corp. sr. notes 7 3/4s, 2009 28,092
280,000 CMS Energy Corp. sr. notes 8.9s, 2008 278,399
1,410,000 CMS Energy Corp. sr. notes Ser. B, 6 3/4s, 2004 1,367,700
340,000 Edison International notes 6 7/8s, 2004 290,700
370,000 Edison Mission Energy 144A sr. notes 10s, 2008 377,766
1,650,000 Midland Funding II Corp. deb. Ser. A, 11 3/4s, 2005 1,834,767
760,000 Mission Energy Holding 144A sec. notes 13 1/2s, 2008 780,900
771,079 Northeast Utilities notes Ser. A, 8.58s, 2006 820,875
193,600 Northeast Utilities notes Ser. B, 8.38s, 2005 204,633
360,000 Pacific Gas & Electric Co. 144A sr. notes 7 3/8s, 2005 334,800
920,000 Southern California Edison Co. notes 8.95s, 2003 802,700
90,000 Southern California Edison Co. notes 6 3/8s, 2006 74,700
1,116,000 York Power Funding 144A notes 12s, 2007 (Cayman Islands) 1,127,160
--------------
16,221,522
--------------
Total Corporate Bonds and Notes (cost $387,573,289) $ 309,653,469
FOREIGN GOVERNMENT BONDS AND NOTES (16.0%) (a)
PRINCIPAL AMOUNT VALUE
-------------------------------------------------------------------------------------------------------------------
USD 9,075,000 Argentina (Republic of) unsub. notes stepped-coupon
Ser. 2008, 7s (15 1/2s, 12/19/04), 2008 (STP) $ 5,456,798
USD 7,795,000 Brazil (Federal Republic of) notes 14 1/2s, 2009 7,356,921
CAD 2,465,000 Canada (Government of) bonds 6s, 2011 1,640,103
CAD 1,630,000 Canada (Government of) bonds 5 1/2s, 2010 1,048,277
CAD 9,250,000 Canada (Government of) bonds Ser. WH31, 6s, 2008 6,184,236
USD 450,000 Colombia (Republic of) unsub. 9 3/4s, 2009 439,915
EUR 1,080,000 France (Government of) deb. 4s, 2009 933,190
EUR 30,810,000 Germany (Federal Republic of) bonds Ser. 132, 4 1/8s, 2004 28,375,109
EUR 3,585,000 Germany (Federal Republic of) bonds Ser. 97, 6s, 2007 3,546,491
EUR 6,220,000 Italy (Government of) treasury bonds 5 1/2s, 2010 5,861,526
NZD 3,685,000 New Zealand (Government of) bonds Ser. 709, 7s, 2009 1,558,985
USD 11,290,000 Russia (Federation of) unsub. 10s, 2007 9,991,650
USD 10,520,000 Russia (Federation of) unsub. 8 1/4s, 2010 7,995,200
SEK 93,685,000 Sweden (Government of) Ser. 1045, 5 1/4s, 2011 8,738,954
USD 785,000 Turkey (Republic of) bonds 11 3/4s, 2010 682,008
GBP 4,030,000 United Kingdom Treasury bonds 7 1/4s, 2007 6,644,579
USD 7,830,000 United Mexican States notes Ser. A, 9 7/8s, 2010 8,349,129
--------------
Total Foreign Government Bonds and Notes
(cost $104,170,263) $ 104,803,071
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (11.2%) (a)
PRINCIPAL AMOUNT VALUE
U.S. Government Agency Mortgage Obligations (3.1%)
-------------------------------------------------------------------------------------------------------------------
$ 24,783 Federal Home Loan Mortgage Association 6 1/2s,
September 1, 2002 $ 24,906
Federal Home Loan Mortgage Corporation
1,950,000 5 1/4s, January 15, 2006 1,842,148
Federal Home Loan Mortgage Corporation Strip
732,995 7s, December 1, 2026 122,777
665,226 zero %, October 1, 2027 591,740
Federal National Mortgage Association
Pass-Through Certificates
619 8 1/2s, March 1, 2006 650
47,848 8s, with due dates from October 1, 2025 to July 1, 2028 50,521
6,267,755 7 1/2s, with due dates from December 1, 2029
to June 1, 2031 6,520,209
230,000 6 5/8s, September 15, 2009 252,246
8,379 6 1/2s, August 1, 2010 8,685
3,999,997 6s, June 1, 2031 3,990,437
Government National Mortgage Association
Pass-Through Certificates
26,622 8s, July 15, 2023 28,356
2,450,070 7 1/2s, with due dates from July 15, 2029
to January 15, 2030 2,560,838
4,040,254 7s, with due dates from January 15, 2025
to December 15, 2028 4,206,536
272,079 6 1/2s, January 15, 2029 278,805
-------------
20,478,854
U.S. Treasury Obligations (8.1%)
-------------------------------------------------------------------------------------------------------------------
U.S. Treasury Notes
30,465,000 5 3/4s, August 15, 2010 (SEG) 32,992,680
1,655,000 4 5/8s, May 15, 2006 1,712,925
12,185,000 2 3/4s, September 30, 2003 12,164,042
8,700,000 U.S. Treasury Strip zero %, August 15, 2009 6,042,150
--------------
52,911,797
--------------
Total U.S. Government and Agency Obligations
(cost $70,296,050) $ 73,390,651
COLLATERALIZED MORTGAGE OBLIGATIONS (6.8%) (a)
PRINCIPAL AMOUNT VALUE
-------------------------------------------------------------------------------------------------------------------
$ 4,100,000 Amresco Commercial Mortgage Funding I Ser. 97-C-I,
Class F, 7.64s, 2029 $ 4,301,797
545,000 Chase Commercial Mortgage Securities Corp. Ser. 00-3,
Class G, 6.887s, 2019 446,900
1,660,000 Commercial Mortgage Acceptance Corp. Ser. 97-ML1,
Class D, 7.052s, 2010 1,637,823
54,121,370 Commercial Mortgage Asset Trust Ser. 99-C1, Class X,
Interest Only (IO), 1.165s, 2020 3,276,880
CS First Boston Mortgage Securities Corp.
520,000 Ser. 01-CF2, Class E, 7.29s, 2011 544,183
540,000 Ser. 01-CF2, Class G, 6.93s, 2011 531,213
30,873,886 Deutsche Mortgage & Asset Receiving Corp. Ser. 98-C1,
Class X, IO, 1.234s, 2023 1,411,033
Euro Loan Conduit 144A
500,000 FRN Ser. 7A, Class E, 8.43s, 2006 (United Kingdom) 690,665
1,000,000 FRN Ser. 7A, Class D, 6.68s, 2006 (United Kingdom) 1,454,805
Fannie Mae
835,576 Ser. 93-245, Class SD, 12.404s, 2023 856,074
1,502,714 Ser. 99-52, Class MO zero %, 2026 1,393,649
8,818,803 FFCA Secured Lending Corp. Ser. 00-1, Class X, IO, 1.72s, 2020 800,582
Freddie Mac
672,197 Ser. 2319, Class S, 13.607s, 2031 667,366
396,471 Ser. 1717, Class L, 6 1/2s, 2024 414,142
1,434,000 Ser. 44, Class SG, IO, 4s, 2023 100,994
723,763 Ser. 2302, Class LO, Principal Only (PO), zero %, 2031 648,447
186,822 Ser. 180, PO, zero %, 2026 166,242
550,000 GE Capital Commercial Mortgage Corp. Ser. 01-1, Class G,
7.04s, 2011 543,813
1,990,000 General Growth Properties Ala Moa FRB Ser. 99-C1, Class E,
5.83s, 2009 1,990,000
410,000 General Growth Properties-Homart 144A FRB Ser. 99-C1,
Class G, 6.08s, 2003 410,000
General Growth Properties-Ivanhoe
468,778 FRB Ser. 99-C1, Class G, 6.83s, 2004 468,778
792,327 FRB Ser. 99-C1, Class F, 6.08s, 2004 792,327
Government National Mortgage Association
12,933,944 Ser. 99-42, Class SB, IO, 4.96s, 2027 832,623
8,696,354 Ser. 99-34, Class SB, IO, 4.51s, 2027 521,781
1,090,700 Ser. 98-2, Class EA, PO, zero %, 2028 971,100
650,356 Ser. 99-42, PO, zero %, 2027 621,903
1,075,000 Granite Mortgages PLC FRN Ser. 01-1, Class 1C, 5.16s, 2041
(United Kingdom) 1,072,313
5,065,000 Holmes Financing PLC Ser. 1, Class 2C, 4.92s, 2040 5,034,610
Merrill Lynch Mortgage Investors, Inc.
18,099,017 Ser. 96-C2, IO, 9.038s, 2028 1,218,856
17,043,265 Ser. 98-C2, IO, 7.86s, 2030 1,142,431
4,330,000 Ser. 98-C2, Class D, 7.86s, 2030 4,465,096
1,070,000 Ser. 96-C2, Class E, 6.96s, 2028 1,066,238
1,150,000 Ser. 98-C2, Class F, 6 1/4s, 2030 829,168
5,916,631 Mortgage Capital Funding, Inc. Ser. 97-MC2, Class X, IO,
8.05s, 2012 342,980
100,996 Prudential Home Mortgage Securities Ser. 93-57, Class A4,
5.9s, 2023 102,750
303,622 Rural Housing Trust Ser. 87-1, Class D, 6.33s, 2026 313,520
2,500,000 Starwood Asset Receivables Trust FRB Ser. 00-1, Class E,
6.33s, 2005 2,515,750
--------------
Total Collateralized Mortgage Obligations
(cost $42,714,201) $ 44,598,832
BRADY BONDS (3.6%) (a)
PRINCIPAL AMOUNT VALUE
-------------------------------------------------------------------------------------------------------------------
$ 2,214,400 Argentina (Republic of) debs. FRB 3 3/8s, 2005 $ 1,555,616
12,915,000 Brazil (Federal Republic of) govt. guaranty FRB 5 1/2s, 2012 7,619,850
4,821,300 Bulgaria (Government of) deb. Ser. PDI, 4.563s, 2011 3,748,561
1,415,000 Ecuador (Republic of) bonds Ser. REGS, 12s, 2012 918,052
6,015,000 United Mexican States bonds Ser. XW, 10 3/8s, 2009 6,579,207
3,869,000 Venezuela (Republic of) deb. Ser. DL, 4 3/4s, 2007 3,066,183
--------------
Total Brady Bonds (cost $25,681,060) $ 23,487,469
PREFERRED STOCKS (1.8%) (a)
NUMBER OF SHARES VALUE
-------------------------------------------------------------------------------------------------------------------
10,644 AmeriKing, Inc. $3.25 cum. pfd. (PIK) $ 106
56,000 California Federal Bancorp, Inc. Ser. A, $2.281 pfd. 1,400,000
30,000 Chevy Chase Capital Corp. Ser. A, $5.188 pfd. (PIK) 1,695,000
3,150 Chevy Chase Savings Bank, Inc. $3.25 pfd. 81,900
18,412 CSC Holdings, Inc. Ser. M, $11.125 cum. pfd. (PIK) 1,933,260
19,200 Diva Systems Corp. Ser. C, 6.00% cum. pfd. 67,200
1,828 Dobson Communications Corp. 144A 12.25% pfd. (PIK) 1,663,480
320 First Republic Capital Corp. 144A 10.50% pfd. 283,200
11,765 Fitzgeralds Gaming Corp. 15% cum. pfd. 118
1,793 Granite Broadcasting Corp. 12.75% cum. pfd. (PIK) 376,530
2,019 ICG Holdings, Inc. 144A 14.00% pfd. (Canada) (In default) (NON) (PIK) 20
1,266 Intermedia Communications, Inc. Ser. B, 13.50% pfd. (PIK) 1,341,960
7 Nextel Communications, Inc. Ser. D, 13.00% cum. pfd. (PIK) 3,640
330 Nextel Communications, Inc. 144A Ser. E, 11.125% pfd. (PIK) 135,300
247 Paxson Communications Corp. 13.25% cum. pfd. (PIK) 2,198,300
1,100 Rural Cellular Corp. 12.25% pfd. (PIK) 879,744
--------------
Total Preferred Stocks (cost $15,672,076) $ 12,059,758
ASSET-BACKED SECURITIES (1.1%) (a)
PRINCIPAL AMOUNT VALUE
-------------------------------------------------------------------------------------------------------------------
$ 4,605,000 Conseco Finance Securitization Corp. Ser. 00-4, Class A6,
8.31s, 2032 $ 5,072,695
1,100,000 Conseco Finance Securitizations Corp. Ser. 00-6, Class M2,
8.2s, 2032 1,142,362
901,517 Resolution Trust Corp. Ser. 94-1, Class M1, 7.14s, 2029 887,994
--------------
Total Asset-Backed Securities (cost $6,486,226) $ 7,103,051
CONVERTIBLE BONDS AND NOTES (0.5%) (a)
PRINCIPAL AMOUNT VALUE
-------------------------------------------------------------------------------------------------------------------
$ 570,000 American Tower Corp. cv. notes 5s, 2010 $ 424,821
570,000 DaVita, Inc. cv. sub. notes 7s, 2009 549,708
1,430,000 Exide Corp. 144A cv. sr. sub. notes 2.9s, 2005 543,400
490,000 Healthsouth Corp. cv. sub. deb. 3 1/4s, 2003 463,050
111,000 Hexcel Corp. cv. sub. notes 7s, 2003 90,465
1,010,000 Nextel Communications, Inc. cv. sr. notes 5 1/4s, 2010 512,575
310,000 Rogers Communications cv. deb. 2s, 2005 (Canada) 235,600
50,000 Spectrasite Holdings, Inc. cv. sr. notes 6 3/4s, 2010 24,581
310,000 Telewest Finance Corp. cv. sub. notes 6s, 2005
(United Kingdom) 172,825
190,000 Total Renal Care Holdings, Inc. 144A cv. notes 7s, 2009 180,025
--------------
Total Convertible Bonds and Notes (cost $3,487,945) $ 3,197,050
COMMON STOCKS (0.2%) (a)
NUMBER OF SHARES VALUE
-------------------------------------------------------------------------------------------------------------------
150 AmeriKing, Inc. (NON) $ 2
28,107 Arch Wireless, Inc. (NON) 562
14,080 Aurora Foods, Inc. (NON) 56,179
2,955 Axia Holding, Inc. 144A (PIK) 35,460
149,352 Celcaribe SA (NON) 18,669
23,404 Fitzgeralds Gaming Corp. (NON) 234
4,817 Imperial Credit Industries, Inc. (NON) 2,119
11,477 Intira Corp. (NON) 1
6,795 MPower Holdings Corp. 144A (NON) 1,359
327 Premium Holdings (L.P.) 144A 5,232
715 PSF Holdings LLC Class A (NON) 1,144,527
167 Quorum Broadcast Holdings, Inc. Class E
(acquired 5/15/01, cost $166,517) (RES) 166,871
10,704 Safety Components International, Inc.
(acquired 7/21/97, cost $200,000) (RES) (NON) 85,632
10,050 Specialty Foods Acquisition Corp. (NON) 101
1,335 Vast Solutions, Inc. Class B1 (NON) 4,005
1,335 Vast Solutions, Inc. Class B2 (NON) 4,005
1,335 Vast Solutions, Inc. Class B3 (NON) 4,005
--------------
Total Common Stocks (cost $3,168,430) $ 1,528,963
UNITS (0.1%) (a)
NUMBER OF UNITS VALUE
-------------------------------------------------------------------------------------------------------------------
600 Australis Media, Ltd. units 15 3/4s, 2003 (Australia)
(In default) (NON) $ 60
3,272,864 Contifinancial Corp. Liquidating Trust units 8 1/8s, 2031 294,558
390 Mikohn Gaming Corp. 144A units 11 7/8s, 2008 366,600
840 Pegasus Shipping 144A units stepped-coupon zero %
(14 1/2s, 6/20/03), 2008 (Bermuda) (STP) 29,400
500 XCL, Ltd. 144A units 13 1/2s, 2004 (In default) (NON) 150,000
--------------
Total Units (cost $4,201,604) $ 840,618
WARRANTS (0.1%) (a) (NON) EXPIRATION
NUMBER OF WARRANTS DATE VALUE
-------------------------------------------------------------------------------------------------------------------
4 Anker Coal Group, Inc. 144A 10/28/09 $ 1
480 Bestel SA de CV (Mexico) 5/15/05 57,600
460 Birch Telecommunications, Inc. 144A (PIK) 6/15/08 46
2,428 CellNet Data Systems, Inc. 10/1/07 2
900 Colo.com, Inc. 144A 3/15/10 9
1,500 Comunicacion Cellular 144A 11/15/03 3,000
1,020 Dayton Superior Corp. 6/15/09 20,400
90 Decrane Aircraft Holdings Co. 9/30/08 1
14,628 Delta Financial Corp. 12/21/10 1
809 Diva Systems Corp. 5/15/06 202,250
8,173 Diva Systems Corp. 144A 3/1/08 24,516
1,050 Horizon PCS, Inc. 10/1/01 21,000
9,768 ICG Communications, Inc. 10/15/05 98
16,858 Imperial Credit Industries, Inc. 8/1/08 1,686
520 Interact Systems, Inc. 8/1/03 1
520 Interact Systems, Inc. 144A 12/15/09 5
69,097 Intira Corp. Class B 9/29/10 7
910 Ipcs Inc. 144A 7/15/10 54,600
400 Iridium World Com 144A 7/15/05 1
590 IWO Holdings, Inc. 1/15/11 41,300
1,140 Jostens, Inc. 5/1/10 22,940
2,085 KMC Telecommunications Holdings, Inc. 144A 4/15/08 21
1,180 Knology Holdings, Inc. 10/22/07 59
544 Leap Wireless International, Inc. 144A 4/15/10 16,320
930 McCaw International, Ltd. 4/15/07 11,160
560 Mediq, Inc. 144A 6/1/09 6
400 ONO Finance PLC 144A (United Kingdom) 2/15/11 16,000
620 Orbital Imaging Corp. 144A 3/1/05 1
1,840 Pagemart, Inc. 144A 12/31/03 18
960 Paxson Communications Corp. 144A 6/30/03 3,840
410 Pliant Corp. 144A 6/1/10 820
1,220 Raintree Resort 144A 12/1/04 12
860 Startec Global Communications Corp. 5/15/08 26
185 Sterling Chemicals Holdings 8/15/08 111
410 Telehub Communications Corp. 144A 7/31/05 1
1,830 Travel Centers of America 5/1/09 18
1,670 UbiquiTel, Inc. 144A 4/15/10 100,200
1,260 UIH Australia/Pacific, Inc. 144A 5/15/06 13
680 Veraldo Holdings, Inc. 144A 4/15/08 340
30 Versatel Telecom NV (Netherlands) 5/15/08 30
100 Wright Medical Technology, Inc. 144A 6/30/03 1
590 XM Satellite Radio Holdings, Inc. 144A 3/15/10 590
--------------
Total Warrants (cost $1,001,004) $ 599,051
CONVERTIBLE PREFERRED STOCKS (0.1%) (a)
NUMBER OF SHARES VALUE
-------------------------------------------------------------------------------------------------------------------
51 Anker Coal Group, Inc. 14.25% cv. pfd. $ 255
520 Interact Systems, Inc. 144A 14.00% cv. pfd. (In default) (NON) 5
3,800 LTV Corp. (The) 144A $4.125 cv. pfd. (In default) (NON) 11,400
39 Paxson Communications Corp. 144A 9.75% cv. pfd. (PIK) 339,300
115 World Access, Inc. 144A Ser. D, zero % cv. pfd. 173
--------------
Total Convertible Preferred Stocks (cost $704,684) $ 351,133
SHORT-TERM INVESTMENTS (8.4%) (a)
PRINCIPAL AMOUNT VALUE
-------------------------------------------------------------------------------------------------------------------
$ 21,707 Short-term investments held as collateral for loaned securities
with yields ranging from 3.62% to 4.05% and due dates
ranging from November 2, 2001 to November 26, 2001 (d) $ 21,675
27,775,000 Interest in $634,000,000 joint repurchase agreement dated
September 28, 2001 with Morgan Stanley Dean Witter & Co.,
due October 1, 2001 with respect to various U.S.
Government obligations -- maturity value of $27,782,812
for an effective yield of 3.375% 27,775,000
27,500,000 Interest in $500,000,000 joint tri-party repurchase agreement
dated September 28, 2001 with Credit Suisse First Boston
due October 1, 2001 with respect to various U.S.
Government obligations -- maturity value of $27,507,734
for an effective yield of 3.375% 27,500,000
--------------
Total Short-Term Investments (cost $55,296,675) $ 55,296,675
-------------------------------------------------------------------------------------------------------------------
Total Investments (cost $720,453,507) (b) $ 636,909,791
-------------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $655,160,767.
(b) The aggregate identified cost on a tax basis is $723,430,315,
resulting in gross unrealized appreciation and depreciation of
$15,181,333 and $101,701,857, respectively, or net unrealized
depreciation of $86,520,524.
(d) See footnote J to the financial statements.
(NON) Non-income-producing security.
(STP) The interest rate and date shown parenthetically represent the new
interest rate to be paid and the date the fund will begin accruing
interest at this rate.
(RES) Restricted, excluding 144A securities, as to public resale. The
total market value of restricted securities held at September 30, 2001
was $10,784,116 or 1.6% of net assets.
(PIK) Income may be received in cash or additional securities at the
discretion of the issuer.
(SEG) A portion of this security was pledged and segregated with the
custodian to cover margin requirements for futures contracts and forward
currency contracts at September 30, 2001.
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.
The rates shown on Floating Rate Bonds (FRB) and Floating Rate
Notes (FRN) are the current interest rates shown at September 30, 2001,
which are subject to change based on the terms of the security.
DIVERSIFICATION BY COUNTRY
Distribution of investments by country of issue at September 30, 2001:
(as percentage of Market Value)
Argentina 1.1%
Brazil 2.4
Canada 3.1
Germany 5.4
Mexico 2.4
Russia 2.8
Sweden 1.4
United Kingdom 2.3
United States 75.0
Other 4.1
-----
Total 100.0%
------------------------------------------------------------------------------
Forward Currency Contracts to Buy at September 30, 2001
(aggregate face value $19,728,906)
Unrealized
Aggregate Face Delivery Appreciation/
Market Value Value Date (Depreciation)
------------------------------------------------------------------------------
Australian Dollars $ 679,400 $ 718,907 12/19/2001 $(39,507)
Danish Krone 788,532 769,391 12/19/2001 19,141
Japanese Yen 18,089,622 17,892,833 12/19/2001 196,789
Swiss Franc 365,405 347,775 12/19/2001 17,630
------------------------------------------------------------------------------
$194,053
------------------------------------------------------------------------------
Forward Currency Contracts to Sell at September 30, 2001
(aggregate face value $47,483,569)
Unrealized
Market Aggregate Face Delivery Appreciation/
Value Value Date (Depreciation)
------------------------------------------------------------------------------
British Pounds $ 6,835,178 $ 6,742,687 12/19/2001 $ (92,491)
Canadian Dollar 7,774,081 7,960,510 12/19/2001 186,429
Euro Dollars 23,246,579 22,904,470 12/19/2001 (342,109)
New Zealand Dollar 1,447,487 1,533,438 12/19/2001 85,951
Swedish Krona 8,318,086 8,342,464 12/19/2001 24,378
------------------------------------------------------------------------------
$(137,842)
------------------------------------------------------------------------------
Futures Contracts Outstanding at September 30, 2001
Unrealized
Aggregate Face Expiration Appreciation/
Total Value Value Date (Depreciation)
------------------------------------------------------------------------------
3 Month Eurodollar
(long) $ 1,704,938 $ 1,684,230 Mar 02 $20,708
3 Month Eurodollar
(short) 1,706,950 1,686,708 Dec-01 (20,242)
Euro-Bobl (long) 20,653,957 20,504,834 Dec-01 149,123
Euro-Bund (short) 3,858,106 3,854,933 Dec-01 (3,173)
US Treasury Note
10 Yr. (long) 27,195,313 26,907,313 Dec-01 288,000
US Treasury Note
10 Yr. (short) 37,309,629 36,766,172 Dec-01 (543,457)
------------------------------------------------------------------------------
$(109,041)
------------------------------------------------------------------------------
Swap Contracts Outstanding at September 30, 2001
Notional Termination Unrealized
Amount Date Appreciation
------------------------------------------------------------------------------
Agreement with
Merrill Lynch
Capital Services
dated November
18, 2000, to pay
semiannually the
notional amount
multiplied by the
return of
LIBOR-BBA and
receive the
notional amount
multiplied by
3.5475%. $6,500,000 Nov-05 $576,676
------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
STATEMENT OF ASSETS AND LIABILITIES
September 30, 2001
Assets
-------------------------------------------------------------------------------------------
Investments in securities, at value, including $1,821 of securities
on loan (identified cost $720,453,507) (Note 1) $636,909,791
-------------------------------------------------------------------------------------------
Cash 1,780,036
-------------------------------------------------------------------------------------------
Foreign currency (cost $895,441) 918,167
-------------------------------------------------------------------------------------------
Dividends, interest and other receivables 14,235,843
-------------------------------------------------------------------------------------------
Receivable for securities sold 30,975,219
-------------------------------------------------------------------------------------------
Receivable for open forward currency contracts (Note 1) 530,318
-------------------------------------------------------------------------------------------
Receivable for open swap contracts (Note 1) 576,676
-------------------------------------------------------------------------------------------
Total assets 685,926,050
Liabilities
-------------------------------------------------------------------------------------------
Payable for variation margin (Note 1) 10,350
-------------------------------------------------------------------------------------------
Distributions payable to shareholders 4,483,549
-------------------------------------------------------------------------------------------
Payable for securities purchased 23,947,990
-------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 1,226,790
-------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 139,810
-------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 61,818
-------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 3,422
-------------------------------------------------------------------------------------------
Payable for open forward currency contracts (Note 1) 474,107
-------------------------------------------------------------------------------------------
Payable for closed forward currency contracts (Note 1) 301,645
-------------------------------------------------------------------------------------------
Collateral on securities loaned, at value (Note 1) 21,675
-------------------------------------------------------------------------------------------
Other accrued expenses 94,127
-------------------------------------------------------------------------------------------
Total liabilities 30,765,283
-------------------------------------------------------------------------------------------
Net assets $655,160,767
Represented by
-------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $844,899,761
-------------------------------------------------------------------------------------------
Distributions in excess of net investment income (Note 1) (9,436,074)
-------------------------------------------------------------------------------------------
Accumulated net realized loss on investment
and foreign currency transactions (Note 1) (97,088,172)
-------------------------------------------------------------------------------------------
Net unrealized depreciation of investments
and assets and liabilities in foreign currencies (83,214,748)
-------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $655,160,767
Computation of net asset value
-------------------------------------------------------------------------------------------
Net asset value per share ($655,160,767 divided by 100,133,127 shares) $6.54
-------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
STATEMENT OF OPERATIONS
Year ended September 30, 2001
Investment income:
-------------------------------------------------------------------------------------------
Interest income $ 63,053,356
-------------------------------------------------------------------------------------------
Dividends 1,709,999
-------------------------------------------------------------------------------------------
Securities lending 164
-------------------------------------------------------------------------------------------
Total investment income 64,763,519
Expenses:
-------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 4,982,371
-------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 699,966
-------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 45,716
-------------------------------------------------------------------------------------------
Administrative services (Note 2) 12,762
-------------------------------------------------------------------------------------------
Other 444,654
-------------------------------------------------------------------------------------------
Total expenses 6,185,469
-------------------------------------------------------------------------------------------
Expense reduction (Note 2) (71,633)
-------------------------------------------------------------------------------------------
Net expenses 6,113,836
-------------------------------------------------------------------------------------------
Net investment income 58,649,683
-------------------------------------------------------------------------------------------
Net realized loss on investments (Notes 1 and 3) (26,574,428)
-------------------------------------------------------------------------------------------
Net realized gain on futures contracts (Note 1) 715,591
-------------------------------------------------------------------------------------------
Net realized gain on written options (Note 1) 16,274
-------------------------------------------------------------------------------------------
Net realized loss on foreign currency transactions (Note 1) (5,329,099)
-------------------------------------------------------------------------------------------
Net realized gain on swap contracts (Note 1) 273,838
-------------------------------------------------------------------------------------------
Net unrealized appreciation of assets and liabilities
in foreign currencies during the year 924,270
-------------------------------------------------------------------------------------------
Net unrealized depreciation of investments,
futures and swap contracts during the year (26,931,302)
-------------------------------------------------------------------------------------------
Net loss on investments (56,904,856)
-------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $ 1,744,827
-------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
STATEMENT OF CHANGES IN NET ASSETS
Year ended September 30
---------------------------------
2001 2000
--------------------------------------------------------------------------------------------------
Decrease in net assets
--------------------------------------------------------------------------------------------------
Operations:
--------------------------------------------------------------------------------------------------
Net investment income $ 58,649,683 $ 63,571,481
--------------------------------------------------------------------------------------------------
Net realized loss on investments
and foreign currency transactions (30,897,824) (37,850,908)
--------------------------------------------------------------------------------------------------
Net unrealized depreciation of investments
and assets and liabilities in foreign currencies (26,007,032) (5,069,867)
--------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 1,744,827 20,650,706
--------------------------------------------------------------------------------------------------
Distributions to shareholders: (Note 1)
--------------------------------------------------------------------------------------------------
From net investment income (45,980,550) (64,290,088)
--------------------------------------------------------------------------------------------------
From return of capital (14,497,458) --
--------------------------------------------------------------------------------------------------
Total decrease in net assets (58,733,181) (43,639,382)
Net assets
--------------------------------------------------------------------------------------------------
Beginning of year 713,893,948 757,533,330
--------------------------------------------------------------------------------------------------
End of year (including distributions
in excess of net investment income
of $9,436,074 and $18,506,036, respectively) $655,160,767 $713,893,948
--------------------------------------------------------------------------------------------------
Number of fund shares
--------------------------------------------------------------------------------------------------
Shares outstanding at beginning and end of year 100,133,127 100,133,127
--------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
FINANCIAL HIGHLIGHTS
(For a common share outstanding throughout the period)
-----------------------------------------------------------------------------------------------------
Per-share
operating performance Year ended September 30
-----------------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
-----------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $7.13 $7.57 $8.14 $8.79 $8.58
-----------------------------------------------------------------------------------------------------
Investment operations
-----------------------------------------------------------------------------------------------------
Net investment income (a) .58 .63 .58 .71 .64
-----------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.57) (.43) (.47) (.67) .21
-----------------------------------------------------------------------------------------------------
Total from
investment operations .01 .20 .11 .04 .85
-----------------------------------------------------------------------------------------------------
Less distributions:
-----------------------------------------------------------------------------------------------------
From net
investment income (.46) (.64) (.56) (.69) (.64)
-----------------------------------------------------------------------------------------------------
From return of capital (.14) -- (.12) -- --
-----------------------------------------------------------------------------------------------------
Total distributions (.60) (.64) (.68) (.69) (.64)
-----------------------------------------------------------------------------------------------------
Net asset value,
end of period $6.54 $7.13 $7.57 $8.14 $8.79
-----------------------------------------------------------------------------------------------------
Market value,
end of period $6.050 $6.438 $6.438 $7.750 $8.125
-----------------------------------------------------------------------------------------------------
Total return at
market value (%)(b) 3.06 10.72 (9.09) 3.91 17.54
-----------------------------------------------------------------------------------------------------
Ratios and supplemental data
-----------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $655,161 $713,894 $757,533 $814,342 $337,664
-----------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(c) .90 .87 .93 .92 1.04
-----------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 8.50 8.60 7.39 8.13 7.47
-----------------------------------------------------------------------------------------------------
Portfolio turnover (%) 111.45 116.71 133.72 179.84(d) 220.61
-----------------------------------------------------------------------------------------------------
(a) Per share net investment income has been determined on the basis
of weighted average number of shares outstanding during the period.
(b) Total return does not reflect the effect of sales charges.
(c) Includes amounts paid through expense offset arrangements (Note 2).
(d) Portfolio turnover excludes the impact of assets received from the
acquisition of Putnam Intermediate Government Income Trust.
NOTES TO FINANCIAL STATEMENTS
September 30, 2001
Note 1
Significant accounting policies
Putnam Master Intermediate Income Trust (the "fund") is registered under
the Investment Company Act of 1940, as amended, as a diversified,
closed-end management investment company and is authorized to issue an
unlimited number of shares. The fund's investment objective is to seek,
with equal emphasis, high current income and relative stability of net
asset value, by allocating its investments among the U.S. investment
grade sector, 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 accounting principles generally accepted in the United States of
America and requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities in the financial
statements and the reported amounts of increases and decreases in net
assets from operations during the reporting period. Actual results could
differ from those estimates.
A) Security valuation Investments for which market quotations are
readily available are stated at market value, which is determined using
the last reported sales price on its principal exchange, or if no sales
are reported -- as in the case of some securities traded
over-the-counter -- the last reported bid price. Securities quoted in
foreign currencies are translated into U.S. dollars at the current
exchange rate. Short-term investments having remaining maturities of 60
days or less are stated at amortized cost, which approximates market
value. Other investments, including restricted securities, are stated at
fair value following procedures approved by the Trustees. Market
quotations are not considered to be readily available for certain debt
obligations; such investments are stated at fair value on the basis of
valuations furnished by an independent pricing service or dealers,
approved by the Trustees, which determine valuations for normal
institutional-size trading units of such securities using methods based
on market transactions for comparable securities and variable
relationships between securities that are generally recognized by
institutional traders.
B) Joint trading account Pursuant to an exemptive order issued by the
Securities and Exchange Commission, the fund may transfer uninvested
cash balances into a joint trading account along with the cash of other
registered investment companies and certain other accounts managed by
Putnam Investment Management, LLC ("Putnam Management"), the fund's
manager, a wholly-owned subsidiary of Putnam Investments, LLC. These
balances may be invested in one or more repurchase agreements and/or
short-term money market instruments.
C) Repurchase agreements The fund, or any joint trading account, through
its custodian, receives delivery of the underlying securities, the
market value of which at the time of purchase is required to be in an
amount at least equal to the resale price, including accrued interest.
Collateral for certain tri-party repurchase agreements is held at the
counterparty's custodian in a segregated account for the benefit of the
fund and the counterparty. Putnam Management is responsible for
determining that the value of these underlying securities is at all
times at least equal to the resale price, including accrued interest.
D) Security transactions and related investment income Security
transactions are accounted for on the trade date (date the order to buy
or sell is executed). Gains or losses on securities sold are determined
on the identified cost basis.
Interest income is recorded on the accrual basis. Dividend income is
recorded on the ex-dividend date. Non-cash dividends, if any, are
recorded at the fair market value of the securities received. Discounts
on zero coupon bonds, original issue discount bonds, stepped-coupon
bonds and payment in kind bonds are accreted according to the
yield-to-maturity basis. Any premium resulting from the purchase of
stepped-coupon bonds is amortized on a yield-to-maturity basis.
E) Foreign currency translation The accounting records of the fund are
maintained in U.S. dollars. The market value of foreign securities,
currency holdings, and other assets and liabilities are recorded in the
books and records of the fund after translation to U.S. dollars based on
the exchange rates on that day. The cost of each security is determined
using historical exchange rates. Income and withholding taxes are
translated at prevailing exchange rates when accrued or incurred. The
fund does not isolate that portion of realized or unrealized gains or
losses resulting from changes in the foreign exchange rate on
investments from fluctuations arising from changes in the market prices
of the securities. Such gains and losses are included with the net
realized and unrealized gain or loss on investments. Net realized gains
and losses on foreign currency transactions represent net realized
exchange gains or losses on closed forward currency contracts,
disposition of foreign currencies and the difference between the amount
of investment income and foreign withholding taxes recorded on the
fund's books and the U.S. dollar equivalent amounts actually received or
paid. Net unrealized appreciation and depreciation of assets and
liabilities in foreign currencies arise from changes in the value of
open forward currency contracts and assets and liabilities other than
investments at the period end, resulting from changes in the exchange
rate. Investments in foreign securities involve certain risks, including
those related to economic instability, unfavorable political
developments, and currency fluctuations, not present with domestic
investments.
F) Forward currency contracts The fund may engage in forward currency
contracts, which are agreements between two parties to buy and sell
currencies at a set price on a future date. These contracts are used 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) Interest rate swap contracts The fund may engage in interest rate
swap agreements, which are arrangements between two parties to exchange
cash flows based on a notional principal amount. The fund may enter into
interest rate swap agreements, to manage the funds exposure to interest
rates. Interest rate swaps are marked to market daily based upon
quotations from market makers and the change, if any, is recorded as
unrealized gain or loss. Payments made or received are included as part
of interest income. Payments received or made upon early termination are
recorded as realized gain or loss. The fund could be exposed to credit
or market risk due to unfavorable changes in the fluctuation of interest
rates or that the counterparty may default on its obligation to perform.
I) 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 .01% from the principal amount. The fund holds, and maintains
until settlement date, cash or high-grade debt obligations in an amount
sufficient to meet the purchase price, or the fund may enter into
offsetting contracts for the forward sale of other securities it owns.
Income on the securities will not be earned until settlement date. TBA
purchase commitments may be considered securities in themselves, and
involve a risk of loss if the value of the security to be purchased
declines prior to the settlement date, which risk is in addition to the
risk of decline in the value of the fund's other assets. Unsettled TBA
purchase commitments are valued at the current market value of the
underlying securities, according to the procedures described under
"Security valuation" above.
Although the fund will generally enter into TBA purchase commitments
with the intention of acquiring securities for their portfolio or for
delivery pursuant to options contracts it has entered into, the fund may
dispose of a commitment prior to settlement if Putnam Management deems
it appropriate to do so.
J) Security lending The fund may lend securities, through its agent
Citibank N.A., to qualified borrowers in order to earn additional
income. The loans are collateralized by cash and/or securities in an
amount at least equal to the market value of the securities loaned. The
market value of securities loaned is determined daily and any additional
required collateral is allocated to the fund on the next business day.
The risk of borrower default will be borne by Citibank N.A., the fund
will bear the risk of loss with respect to the investment of the cash
collateral. Income from securities lending is included in investment
income on the Statement of operations. At September 30, 2001, the value
of securities loaned amounted to $1,821. The fund received cash
collateral of $21,675 which is pooled with collateral of other Putnam
funds into 36 issuers of high grade short-term investments.
K) Federal taxes It is the policy of the fund to distribute all of its
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, 2001, the fund had a capital loss carryover of
approximately $71,656,000 available to offset future capital gains, if
any. The amount of the carryover and the expiration dates are:
Loss Carryover Expiration
-------------- ------------------
$ 7,035,000 September 30, 2003
2,793,000 September 30, 2004
1,555,000 September 30, 2005
10,040,000 September 30, 2007
25,640,000 September 30, 2008
24,593,000 September 30, 2009
L) Distributions to shareholders Distributions to shareholders from net
investment income are recorded by the fund on the ex-dividend date.
Distributions from capital gains, if any, are recorded on the
ex-dividend date and paid at least annually. The amount and character of
income and gains to be distributed are determined in accordance with
income tax regulations, which may differ from generally accepted
accounting principles. These differences include temporary and permanent
differences of losses on wash sale transaction, foreign currency gains
and losses, post-October loss deferrals, expiration of a capital loss
carryover, dividends payable, defaulted bond interest, both realized and
unrealized gains and losses on certain futures contracts, paydown gains
and losses on mortgage-backed securities, market discount and interest
on payment-in-kind securities. Reclassifications are made to the fund's
capital accounts to reflect income and gains available for distribution
(or available capital loss carryovers) under income tax regulations. For
the year ended September 30, 2001, the fund reclassified $3,599,171 to
increase distributions in excess of net investment income and $2,178,267
to decrease paid-in-capital, with a decrease to accumulated net realized
losses of $5,777,438. The calculation of net investment income per share
in the financial highlights table excludes these adjustments.
Note 2
Management fee, administrative
services and other transactions
Compensation of Putnam Management, for management and investment
advisory services is paid quarterly based on the average net assets of
the fund. Such fee is based on the following annual rates: 0.75% of the
first $500 million of average weekly net assets, 0.65% of the next $500
million, 0.60% of the next $500 million, and 0.55% thereafter.
The fund reimburses Putnam Management an allocated amount for the
compensation and related expenses of certain officers of the fund and
their staff who provide administrative services to the fund. The
aggregate amount of all such reimbursements is determined annually by
the Trustees.
Custodial functions for the fund's assets are provided by Putnam
Fiduciary Trust Company (PFTC), a subsidiary of Putnam Investments, LLC.
Investor servicing agent functions are provided by Putnam Investor
Services, a division of PFTC.
The fund has entered into an arrangement with PFTC whereby credits
realized as a result of uninvested cash balances are used to reduce a
portion of the fund's expenses. For the year ended September 30, 2001,
the fund's expenses were reduced by $71,633 under these arrangements.
Each independent Trustee of the fund receives an annual Trustee fee, of
which $968 has been allocated to the fund, and an additional fee for
each Trustees meeting attended. Trustees receive additional fees for
attendance at certain committee meetings.
The fund has adopted a Trustee Fee Deferral Plan (the "Deferral Plan")
which allows the Trustees to defer the receipt of all or a portion of
Trustees Fees payable on or after July 1, 1995. The deferred fees remain
invested in certain Putnam funds until distribution in accordance with
the Deferral Plan.
The fund has adopted an unfunded noncontributory defined benefit pension
plan (the "Pension Plan") covering all Trustees of the fund who have
served as a Trustee for at least five years. Benefits under the Pension
Plan are equal to 50% of the Trustee's average total retainer and
meeting fees for the three years preceding retirement. Pension expense
for the fund is included in Compensation of Trustees in the Statement of
operations. Accrued pension liability is included in Payable for
compensation of Trustees in the Statement of assets and liabilities.
Note 3
Purchases and sales of securities
During the year ended September 30, 2001, cost of purchases and proceeds
from sales of investment securities other than U.S. government
obligations and short-term investments aggregated $536,563,429 and
$542,446,862, respectively. Purchases and sales of U.S. government
obligations aggregated $168,574,804 and $214,175,745, respectively.
Written option transactions during the year are summarized as follows:
Contract Premiums
Amounts Received
---------------------------------------------------------------------------
Written options
outstanding at
beginning of year $ -- $ --
---------------------------------------------------------------------------
Options opened 1,216,010 47,062
---------------------------------------------------------------------------
Options expired -- --
---------------------------------------------------------------------------
Options closed (1,216,010) (47,062)
---------------------------------------------------------------------------
Written options
outstanding at
end of year $ -- $ --
---------------------------------------------------------------------------
Note 4
Share repurchase program
In November 1994, the Trustees authorized the fund to repurchase up to
1,950,000 of its shares in the open market. Repurchases will only be
made when the fund's shares are trading at less than net asset value and
at such times and amounts as is believed to be in the best interest of
the fund's shareholders. Any repurchases of shares will have the effect
of increasing the net asset value per share of remaining shares
outstanding.
For the year ended September 30, 2001, the fund repurchased no shares.
As of September 30, 2001, 570,000 shares have been repurchased since the
inception of the program.
Note 5
New accounting pronouncement
In November 2000, the AICPA issued a revised Audit and Accounting Guide,
Audits of Investment Companies, which is effective for fiscal years
beginning after December 15, 2000. The revised Guide will require the
fund to amortize premium and accrete discount on all fixed-income
securities, and classify as interest income gains and losses realized on
paydowns on mortgage-backed securities which are presently included in
realized gain/loss. Adopting these accounting principles will not affect
the fund's net asset value, but will change the classification of
certain amounts between interest income and realized and unrealized
gain/loss in the Statement of operations. The adoption of this principle
will not be material to the financial statements.
FEDERAL TAX INFORMATION
(Unaudited)
The Form 1099 you receive in January 2002 will show the tax status of
all distributions paid to your account in calendar 2001.
For the year ended September 30, 2001, a portion of the Fund's
distribution represents a return of capital and is therefore not taxable
to shareholders.
The fund has designated 1.19% of the distributions from net investment
income as qualifying for the dividends received deduction for
corporations.
RESULTS OF JUNE 14, 2001 SHAREHOLDER MEETING
(Unaudited)
An annual meeting of shareholders of the fund was held on June 14, 2001.
At the meeting, each of the nominees for Trustees was elected, as
follows:
Votes Votes
for withheld
Jameson Adkins Baxter 92,030,321 3,057,267
J. A. Hill 92,043,276 3,044,312
Ronald J. Jackson 92,040,207 3,047,381
Paul L. Joskow 92,039,989 3,047,599
Elizabeth T. Kennan 91,993,193 3,094,395
Lawrence J. Lasser 92,038,673 3,048,915
John H. Mullin III 92,029,320 3,058,268
R. E. Patterson 92,066,227 3,021,361
George Putnam, III 92,025,494 3,062,094
A.J.C. Smith 91,979,894 3,107,694
W. Thomas Stephens 92,026,404 3,061,184
W. Nicholas Thorndike 91,943,693 3,143,895
A proposal to convert your fund from closed-end to open-end status and
authorize certain related amendments to the Agreement and Declaration of
Trust was defeated as follows: 9,185,005 votes for, and 36,532,101 votes
against, with 49,370,482 abstentions and broker non-votes.
All tabulations are rounded to nearest whole number.
FUND INFORMATION
WEB SITE
www.putnaminvestments.com
INVESTMENT MANAGER
Putnam Investment Management, LLC
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Retail Management
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
INDEPENDENT ACCOUNTANTS
KPMG LLP
TRUSTEES
John A. Hill, Chairman
Jameson Adkins Baxter
Charles B. Curtis
Ronald J. Jackson
Paul L. Joskow
Elizabeth T. Kennan
Lawrence J. Lasser
John H. Mullin III
Robert E. Patterson
George Putnam, III
A.J.C. Smith
W. Thomas Stephens
W. Nicholas Thorndike
OFFICERS
George Putnam, III
President
Charles E. Porter
Executive Vice President and Treasurer
Patricia C. Flaherty
Senior Vice President
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Ian C. Ferguson
Vice President
Brett C. Browchuk
Vice President
Stephen Oristaglio
Vice President
Kevin Cronin
Vice President
David L. Waldman
Vice President and Fund Manager
Richard A. Monaghan
Vice President
Richard G. Leibovitch
Vice President
John R. Verani
Vice President
Call 1-800-225-1581 weekdays from 9 a.m. to 5 p.m. Eastern Time, or
visit our Web site (www.putnaminvestments.com) any time for up-to-date
information about the fund's NAV.
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
---------------------
PRSRT STD
U.S. POSTAGE PAID
PUTNAM
INVESTMENTS
---------------------
For account balances, economic forecasts, and the latest on Putnam funds, visit
www.putnaminvestments.com
76216 074 9/01