Putnam
Master
Intermediate
Income Trust
SEMIANNUAL REPORT ON PERFORMANCE AND OUTLOOK
3-31-02
[SCALE LOGO OMITTED]
FROM THE TRUSTEES
[GRAPHIC OMITTED: PHOTO OF JOHN A. HILL AND GEORGE PUTNAM III]
Dear Fellow Shareholder:
Given the dramatic events that aggravated an already troubled economic
environment, it is encouraging to report that Putnam Master Intermediate
Income Trust closed the first half of fiscal 2002 with a slight gain. On
the following pages, your management team's report will provide a full
discussion of the reasons behind these results.
The team's report will also afford you a good understanding of what has
been driving your fund's performance as well as offer its view of the
outlook for fiscal 2003. Since the economic recovery is likely to be
gradual, we counsel patience as you view your fund's progress in the
months ahead.
As you read this report, you may notice that we are now listing the team
that manages your fund. We do this to reflect more accurately how your
fund is managed as well as Putnam's firm belief in the value of team
management. The individuals who comprise the management team are shown
at the end of Management's discussion of performance.
We know that Putnam Investments values its relationship with you and its
other shareholders and appreciates your loyalty during these times of
restructuring of staff and products in the pursuit of superior
investment performance for the future.
Respectfully yours,
/S/ JOHN A. HILL /S/ GEORGE PUTNAM, III
John A. Hill George Putnam, III
Chairman of the Trustees President of the Funds
May 8, 2002
REPORT FROM FUND MANAGEMENT
This fund is managed by the Putnam Core Fixed-Income Team
Thanks to positions in high-yield and emerging-market bonds, which
benefited from increased optimism about economic recovery, Putnam Master
Intermediate Income Trust generated a solid return at net asset value
for the six months ended March 31, 2002, while its stronger return at
market value reflected strong investor enthusiasm for fixed-income
investments. Your fund outperformed its benchmark, the Lehman
Intermediate Government Credit Index, as well as an additional
comparative index, the Salomon Smith Barney Non-U.S. World Government
Bond Index. However, your fund underperformed the CSFB High Yield Index,
primarily because the fund does not invest solely in high-yield bonds
(all based on performance at net asset value). The primary reason for
the fund's generally strong relative performance was its high-yield and
emerging-market emphasis.
Total return for 6 months ended 3/31/02
NAV Market price
-----------------------------------------------------------------------
5.16% 5.74%
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Past performance does not indicate 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 6.
* INVESTORS FAVORED HIGHER-YIELDING BONDS AMID SIGNS OF RECOVERY
The fixed-income markets have been volatile in the past six months, due
to changing economic expectations, equity market volatility, and
geopolitical turmoil. As the fourth quarter of 2001 began, investors
were still jittery in the wake of the terrorist attacks but a series of
encouraging economic reports sparked a major shift in investor sentiment
towards the end of the year. Overcoming their risk aversion, investors
sold off investment-grade bonds and reallocated funds into riskier asset
classes, such as equities and high-yield bonds. Meanwhile,
emerging-market bonds performed well despite Argentina's default. As
with the U.S., international bonds in developed markets lost steam
toward the end of 2001, as positive economic data suggested that the
fourth quarter of 2001 might represent the bottom of the current
recession cycle, causing interest rates to begin moving upward in 2002.
[GRAPHIC OMITTED: horizontal bar chart TOP FIVE COUNTRY ALLOCATIONS
(INTERNATIONAL SECTOR)]
TOP FIVE COUNTRY ALLOCATIONS (INTERNATIONAL SECTOR)*
Germany 5.2%
Russia 3.5%
Brazil 3.0%
Mexico 2.4%
Canada 2.2%
Footnote reads:
*Based on net assets as of 3/31/02. Holdings will vary over time.
However, central banks remained cautious and continued to lower interest
rates through the end of 2001. The Federal Reserve Board cut rates three
times during the period, leaving the Fed funds rate at a 40-year low of
1.75%. As a result, the yield curve continued to steepen, as yields on
short-term bonds declined as a result of the Fed's rate cuts.
Just as the overall market began to embrace the idea of an economic
turnaround at the start of 2002, a new bout of investor risk aversion
took hold in response to the bankruptcy of Enron. Questionable corporate
accounting practices and credit concerns following the Enron collapse
resulted in solid performance for the higher-quality bond sectors.
However, increasingly robust economic data in January and February once
again turned investors' attention toward the prospect of a strong
economic rebound. In response, the investment-grade sector saw a sharp
sell-off during March, with expectations that the Fed, having left
interest rates unchanged at its January meeting, was positioning itself
for a possible rate increase later this year. High-yield bonds, however,
were buoyed by the improvement in investor sentiment and evidence of
economic growth.
International bond markets, pressured by signs of a global economic
recovery that could lead to higher interest rates, advanced only
modestly. However, the improved economic outlook, rising oil prices, and
attractive valuations of emerging-market bonds boosted returns in this
sector. These events continue to underscore the value of diversifying
across the different sectors of the fixed-income universe, as your fund
has always been designed to do.
* HIGHER-QUALITY SECTORS LAGGED HIGH-YIELD POSITIONS
The fund's emphasis on high yield, the strongest-performing sector for
the semiannual period, benefited its performance overall. Within the
fund's investment-grade holdings, our exposure to U.S. government bonds
dampened performance somewhat, while positions in mortgage-backed
securities made a positive contribution. With the end of the Federal
Reserve's easing cycle, higher-quality bonds have become much more
sensitive to a potential increase in interest rates, which is typically
the case after a long easing cycle. As reports on the economy through
the first quarter of 2002 indicated that stronger growth was occurring,
interest rates rose and prices for higher-quality bonds, were negatively
affected. Your fund's focus on shorter-maturity issues was a positive
for performance, as interest rates rose and these issues performed
better than longer-term securities.
Fund Profile
Putnam Master Intermediate Income Trust seeks high current income and
relative stability by investing in the intermediate-maturity,
investment-grade, and high-yield bond sectors, as well as in foreign
bond markets. The fund's diversification among these markets and sectors
is designed to provide more stable returns over time. The fund is
designed for investors seeking high current income, asset class
diversification, or both.
Strong performance from the fund's holdings of emerging-market bonds
boosted performance. In particular, positions in Russia, Mexico, and
Brazil and the avoidance of Argentina were positive for the fund's
performance. Bonds in the international developed markets had a mixed
impact on results. The U.S. dollar strengthened against most of the
major foreign currencies, which was a negative factor for the
international sector.
* A MODEST RECOVERY APPEARED UNDERWAY AT END OF PERIOD
The recession appears to have been much milder than both economists and
investors thought it would be. A modest recovery is under way, due in
large part to the deep tax and interest-rate cuts in 2001. Also,
significant reductions in corporate inventories led to robust growth
during the first quarter as companies restocked. However, we believe
that growth in the second half of 2002 will be more moderate. Consumer
spending should remain solid this year, although there is more
uncertainty around business investments.
[GRAPHIC OMITTED: TOP THREE HOLDINGS PER SECTOR]
TOP THREE HOLDINGS PER SECTOR
HIGH-YIELD BONDS
Allied Waste Industries, Inc.,
company guaranty Series B, 10%, 2009
Hanvit Bank 144A
sub. notes, 11.75%, 2010 (South Korea)
Echostar Broadband Corp.,
Senior notes, 10.375%, 2007
FOREIGN BONDS
Germany (Federal Republic of)
bonds, Series 95, 7.375%, 2005
Brazil (Federal Republic of)
government guaranty, FRB, 3.25%, 2012
United Mexican States
notes, Series A, 9.875%, 2010
U.S. INVESTMENT-GRADE SECURITIES
Federal National Mortgage Association,
pass-through certificates, 7.25%,
January 15, 2010
U.S. Treasury Notes,
3.5%, November 15, 2006
Federal National Mortgage Association
pass-through certificates, 6.5%, with
due dates from August 1, 2010, to
February 1, 2032.
Footnote reads:
These holdings represent 22.3% of the fund's net assets as of 3/31/02.
Portfolio holdings will vary over time.
We are expecting that inflation will remain low, which should keep the
Fed from raising interest rates at least until the end of summer. We
will continue to monitor these developments closely, and, as always,
focus on securities with positive fundamentals and attractive
valuations.
We remain cautiously optimistic on the high-yield market, which appears
poised for solid performance in a recovering economic environment. Other
positive factors for high-yield bonds include strong demand and
manageable supply, an emphasis by companies on reducing debt, and
evidence that default rates are beginning to decline. In the short term,
the market may be susceptible to any signs of economic weakness, so we
will proceed with caution.
We also remain positive on the mortgage-backed sector, as it continues
to offer attractive valuations relative to Treasuries.
Finally, we continue to find value in the international developed bond
markets, while we are neutral toward emerging-market bonds. These
securities remain attractive, as continued strong demand and evidence of
a global economic recovery are offsetting the negative impact of
specific countries.
The views expressed here are exclusively those of Putnam Management.
They are not meant as investment advice. Although the described holdings
were viewed favorably as of 3/31/02, there is no guarantee the fund will
continue to hold these securities in the future. International investing
involves certain risks, such as currency fluctuations, economic
instability, and political developments. Lower-rated bonds may offer
higher yields in return for more risk. Government securities guarantee
principal and interest; mutual funds that invest in these securities are
not guaranteed. Mortgage-backed securities are subject to prepayment
risk.
This fund is managed by the Putnam Core Fixed-Income Team. The members
of this team are Kevin Cronin, Rob Bloemker, Andrea Burke, Joanne
Driscoll, D. William Kohli, Krishna Memani, James Prusko, and David
Waldman.
PERFORMANCE SUMMARY
This section provides information about your fund's performance, which
should always be considered in light of its investment strategy.
TOTAL RETURN FOR PERIODS ENDED 3/31/02
Lehman SSB Non-
Intermediate U.S. World
Market Govt. Credit Govt. Bond CSFB High Consumer
NAV price Index Index Yield Index price index
-------------------------------------------------------------------------------------------
6 months 5.16% 5.74% -0.14% -5.76% 8.30% 0.22%
-------------------------------------------------------------------------------------------
1 year 3.50 1.55 5.16 -0.45 3.34 1.30
-------------------------------------------------------------------------------------------
5 years 22.47 28.65 40.71 4.73 18.51 11.62
Annual average 4.14 5.17 7.07 0.93 3.46 2.22
-------------------------------------------------------------------------------------------
10 years 91.66 83.22 94.61 64.90 101.51 28.21
Annual average 6.72 6.24 6.89 5.13 7.26 2.52
-------------------------------------------------------------------------------------------
Life of fund
(since 4/29/88)
Annual average 7.43 6.32 7.72 5.34 8.58 3.08
-------------------------------------------------------------------------------------------
Past performance does not indicate future results. More recent returns
may be less or more than those shown. Investment return, net asset value
and market price will fluctuate and you may have a gain or a loss when
you sell your shares. Performance does not reflect taxes on reinvested
distributions.
PRICE AND DISTRIBUTION INFORMATION 6 MONTHS ENDED 3/31/02
-------------------------------------------------------------------------------
Distributions from common shares
-------------------------------------------------------------------------------
Number 6
-------------------------------------------------------------------------------
Income $0.270
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Capital gains --
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Total $0.270
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Share value: NAV Market price
-------------------------------------------------------------------------------
9/30/01 $6.54 $6.050
-------------------------------------------------------------------------------
3/31/02 6.59 6.130
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Current return
-------------------------------------------------------------------------------
Current
dividend
rate 1 8.19% 8.81%
-------------------------------------------------------------------------------
1 Based only on investment income, calculated using SEC guidelines.
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 index of
government bonds with maturities between 1 and 10 years.
Salomon Smith Barney Non-U.S. World Government Bond Index* is an
unmanaged index of government bonds from 10 countries.
Credit Suisse First Boston (CSFB) High Yield Index* is an unmanaged
index of high-yield debt securities.
Consumer price index (CPI) is a commonly used measure of inflation; it
does not represent an investment return.
Lipper Inc. is a third-party industry ranking entity that ranks funds
(without sales charges) with similar current investment styles or
objectives as determined by Lipper.
*Indexes assume reinvestment of all distributions and do not account for
fees. Securities and performance of a fund and an index will differ. You
cannot invest directly in an index.
A NOTE ABOUT DUPLICATE MAILINGS
In response to investors' requests, the SEC has modified mailing
regulations for proxy statements, semiannual and annual reports, and
prospectuses. Putnam is now able to send a single copy of these materials
to customers who share the same address. This change will automatically
apply to all shareholders except those who notify us. If you would prefer
to receive your own copy, please call Putnam at 1-800-225-1581.
A GUIDE TO THE FINANCIAL STATEMENTS
These sections of the report, as well as the accompanying Notes,
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 period.
Statement of changes in net assets shows how the fund's net assets were
affected by distributions to shareholders and by changes in the number
of the fund's shares. It lists distributions and their sources (net
investment income or realized capital gains) over the current reporting
period and the most recent fiscal year-end. The distributions listed
here may not match the sources listed in the Statement of operations
because the distributions are determined on a tax basis and may be paid
in a different period from the one in which they were earned.
Financial highlights provide an overview of the fund's investment results,
per-share distributions, expense ratios, net investment income ratios, and
portfolio turnover in one summary table, reflecting the five most recent
reporting periods. In a semiannual report, the highlight table also
includes the current reporting period. For open-end funds, a separate table
is provided for each share class.
THE FUND'S PORTFOLIO
March 31, 2002 (Unaudited)
CORPORATE BONDS AND NOTES (49.7%) (a)
PRINCIPAL AMOUNT VALUE
Basic Materials (6.0%)
-------------------------------------------------------------------------------------------------------------------
$ 850,000 Acetex Corp. sr. notes 10 7/8s, 2009 (Canada) $ 879,750
900,000 AEP Industries, Inc. sr. sub. notes 9 7/8s, 2007 920,250
300,000 Airgas, Inc. sub. notes 9 1/8s, 2011 318,000
450,000 AK Steel Corp. company guaranty 7 7/8s, 2009 450,000
220,000 AK Steel Corp. sr. notes 9 1/8s, 2006 226,600
120,400 Anker Coal Group, Inc. company guaranty Ser. B, 14 1/4s, 2007 (PIK) 42,140
1,050,000 Appleton Papers, Inc. 144A sr. sub. notes 12 1/2s, 2008 1,029,000
190,000 Applied Extrusion Technologies, Inc. company guaranty Ser. B,
10 3/4s, 2011 198,075
1,000,000 Armco, Inc. sr. notes 9s, 2007 1,020,000
360,000 Avecia Group PLC company guaranty 11s, 2009 (United Kingdom) 372,600
840,000 Better Minerals & Aggregates Co. company guaranty 13s, 2009 835,800
250,000 Bowater Canada Finance company guaranty 7.95s, 2011 (Canada) 253,975
530,000 Centaur Mining & Exploration company guaranty 11s, 2007 (Australia)
(In default) (NON) 26,500
530,000 Compass Minerals Group, Inc. 144A sr. sub. notes 10s, 2011 559,150
900,000 Doe Run Resources Corp. company guaranty Ser. B, 11 1/4s, 2005 189,000
130,000 Doe Run Resources Corp. company guaranty Ser. B, 11 1/4s, 2005 26,000
300,000 Doe Run Resources Corp. company guaranty FRN Ser. B, 8.536s, 2003 60,000
1,640,000 Equistar Chemicals LP/Equistar Funding Corp. sr. notes 10 1/8s, 2008 1,697,400
260,000 Ferro Corp. sr. notes 9 1/8s, 2009 270,400
210,000 Foamex-LP/Capital Corp. 144A sec. notes 10 3/4s, 2009 214,200
810,000 Four M Corp. sr. notes Ser. B, 12s, 2006 822,150
170,000 Georgia Gulf Corp. company guaranty 10 3/8s, 2007 182,750
610,000 Georgia-Pacific Corp. notes 8 1/8s, 2011 595,195
150,000 Georgia-Pacific Corp. notes 7 1/2s, 2006 147,047
120,000 Haynes International, Inc. sr. notes 11 5/8s, 2004 82,800
1,140,000 Hercules, Inc. company guaranty 11 1/8s, 2007 1,248,300
1,000,000 Hughes Electronics bank term loan FRN Ser. L, 4.881s, 2002
(acquired 3/15/02, cost $1,000,000) (RES) 1,000,417
151,249 Huntsman Corp. bank term loan FRN Ser. B, 5.131s, 2004
(acquired 3/11/02, cost $118,580) (RES) 120,243
220,000 Huntsman Corp. bank term loan FRN Ser. C, 5.381s, 2005
(acquired 3/22/02, cost $174,400) (RES) 175,120
246,022 Huntsman Corp. bank term loan FRN Ser. L, 5.881s, 2002
(acquired 3/28/02, cost $180,927) (RES) 195,834
96,251 Huntsman Corp. bank term loan FRN Ser. L, 5.881s, 2002
(acquired 3/28/02, cost $76,957) (RES) 76,520
2,050,000 Huntsman ICI Chemicals, Inc. company guaranty 10 1/8s, 2009 1,927,000
340,000 Huntsman International, LLC sr. notes 9 7/8s, 2009 343,400
360,000 IMC Global, Inc. sr. notes Ser. B, 11 1/4s, 2011 397,404
810,000 IMC Global, Inc. sr. notes Ser. B, 10 7/8s, 2008 894,062
1,500,000 ISP Chemco, Inc. sr. notes Ser. B, 10 1/4s, 2011 1,601,250
60,000 Kaiser Aluminum & Chemical Corp. sr. notes Ser. B, 10 7/8s, 2006
(In default) (NON) 44,100
1,685,000 Kaiser Aluminum & Chemical Corp. sr. sub. notes 12 3/4s, 2003
(In default) (NON) 353,850
1,200,000 LTV Corp. (The) company guaranty 11 3/4s, 2009 (In default) (NON) 6,000
20,000 LTV Corp. (The) 144A company guaranty 8.2s, 2007 (In default) (NON) 25
320,000 Lyondell Chemical Co. 144A sec. notes 9 1/2s, 2008 323,200
1,520,000 Lyondell Petrochemical Co. notes Ser. A, 9 5/8s, 2007 1,546,600
440,000 Lyondell Petrochemical Co. sec. notes Ser. B, 9 7/8s, 2007 447,700
EUR 210,000 Messer Griesheim Holdings AG sr. notes 10 3/8s, 2011 (Germany) 197,632
$ 620,000 Millenium America, Inc. company guaranty 9 1/4s, 2008 638,600
260,000 Norske Skog Canada, Ltd. 144A sr. notes 8 5/8s, 2011 (Canada) 263,900
370,000 Noveon, Inc. company guaranty Ser. B, 11s, 2011 395,900
690,000 OM Group, Inc. 144A sr. sub. notes 9 1/4s, 2011 717,600
348,000 Oregon Steel Mills 1st mtge. 11s, 2003 348,435
410,000 Owens-Illinois, Inc. deb. 7 1/2s, 2010 375,150
90,000 Owens-Illinois, Inc. sr. notes 8.1s, 2007 86,850
490,000 Owens-Illinois, Inc. sr. notes 7.15s, 2005 467,950
347,000 P&L Coal Holdings Corp. company guaranty Ser. B, 9 5/8s, 2008 369,555
920,000 Pacifica Papers, Inc. sr. notes 10s, 2009 (Canada) 979,800
769,464 PCI Chemicals Canada sec. sr. notes 10s, 2008 (Canada) 577,098
256,488 Pioneer Companies, Inc. sec. sr. notes FRN 5.381s, 2006 189,801
510,000 Polymer Group, Inc. company guaranty Ser. B, 8 3/4s, 2008 178,500
870,000 Potlatch Corp. company guaranty 10s, 2011 935,250
1,160,000 Premium Standard Farms, Inc. sr. notes 9 1/4s, 2011 1,186,100
2,190,000 Riverwood International Corp. company guaranty 10 7/8s, 2008 2,266,650
810,000 Royster-Clark, Inc. 1st mtge. 10 1/4s, 2009 534,600
460,000 Steel Dynamics, Inc. 144A sr. notes 9 1/2s, 2009 473,800
325,000 Sterling Chemicals Holdings sr. disc. notes 13 1/2s, 2008 (In default) (NON) 1,625
530,000 Sterling Chemicals, Inc. company guaranty Ser. B, 12 3/8s, 2006
(In default) (NON) 447,850
515,089 Stone Container Corp. bank term loan FRN Ser. H, 5.438s, 2006
(acquired 7/17/00, cost $515,088) (RES) 514,338
930,000 Stone Container Corp. sr. notes 9 3/4s, 2011 1,002,075
350,000 Stone Container Corp. sr. notes 9 1/4s, 2008 374,500
310,000 Stone Container Corp. 144A company guaranty 11 1/2s, 2006
(Canada) 333,250
1,070,000 Tekni-Plex, Inc. company guaranty Ser. B, 12 3/4s, 2010 1,118,150
1,040,000 Tembec Industries, Inc. company guaranty 8 5/8s, 2009 (Canada) 1,071,200
130,000 Tembec Industries, Inc. company guaranty 8 1/2s, 2011 (Canada) 132,600
80,000 Tembec Industries, Inc. 144A sr. notes 7 3/4s, 2012 (Canada) 78,200
50,000 Texas Petrochemical Corp. sr. sub. notes 11 1/8s, 2006 43,000
200,000 Texas Petrochemical Corp. sr. sub. notes Ser. B, 11 1/8s, 2006 168,000
790,000 United States Steel, LLC 144A company guaranty 10 3/4s, 2008 786,050
510,000 WCI Steel, Inc. sr. notes Ser. B, 10s, 2004 193,800
70,000 Weirton Steel Corp 144A sr. notes 10 3/4s, 2005 (In default) (NON) 11,200
780,000 Wheeling-Pittsburgh Steel Corp. sr. notes 9 1/4s, 2007 (In default) (NON) 15,600
410,000 WHX Corp. sr. notes 10 1/2s, 2005 225,500
-------------
39,819,916
Capital Goods (3.5%)
-------------------------------------------------------------------------------------------------------------------
46,928 Allied Waste Industries, Inc. bank term loan 5.05s, 2007
(acquired 2/27/02, cost $46,342) (RES) 46,697
781,521 Allied Waste Industries, Inc. bank term loan 4.766s, 2006
(acquired 2/27/02, cost $766,751) (RES) 777,671
5,755,000 Allied Waste Industries, Inc. company guaranty Ser. B, 10s, 2009 5,855,713
20,000 Allied Waste Industries, Inc. company guaranty Ser. B, 7 5/8s, 2006 19,650
330,000 Allied Waste North America, Inc. Structured Notes (issued by
Credit and Repackaged Securities) 8.2s, 2006 (Cayman Islands) 324,225
270,000 Amkor Technologies, Inc. sr. notes 9 1/4s, 2006 265,275
390,000 Amkor Technologies, Inc. Structured Note 12.58s, 2005 (issued by
STEERS Credit Linked Trust 2000) 362,700
200,000 Argo-Tech Corp. company guaranty Ser. D, 8 5/8s, 2007 179,000
1,310,000 Argo-Tech Corp. 144A company guaranty 8 5/8s, 2007 1,172,450
725,000 BE Aerospace, Inc. sr. sub. notes 9 1/2s, 2008 681,500
810,000 BE Aerospace, Inc. sr. sub. notes Ser. B, 8s, 2008 741,150
1,620,000 Blount, Inc. company guaranty 13s, 2009 1,020,600
380,000 Briggs & Stratton company guaranty 8 7/8s, 2011 393,323
1,000,000 Decrane Aircraft Holdings Co. company guaranty Ser. B, 12s, 2008 925,000
194,174 Flowserve Corp. bank term loan FRN 5.382s, 2006
(acquired 10/24/01, cost $194,296) (RES) 194,508
695,000 Flowserve Corp. company guaranty 12 1/4s, 2010 788,825
750,000 Hexcel Corp. sr. sub. notes 9 3/4s, 2009 532,500
530,000 High Voltage Engineering Corp. sr. notes 10 3/4s, 2004 198,750
460,000 Insilco Holding Co. sr. disc. notes stepped-coupon zero %
(14s, 8/15/03), 2008 (STP) 59,800
510,000 Jackson Products, Inc. company guaranty Ser. B, 9 1/2s, 2005 255,000
160,000 Jordan Industries, Inc. sr. notes Ser. D, 10 3/8s, 2007 92,800
190,000 Joy Global, Inc. 144A company guaranty 8 3/4s, 2012 195,700
330,000 L-3 Communications Corp. company guaranty Ser. B, 8s, 2008 334,950
1,150,000 L-3 Communications Corp. sr. sub. notes 8 1/2s, 2008 1,178,750
140,000 L-3 Communications Corp. 144A Structured Notes (issued by
Credit and Repackaged Securities) 8 1/2s, 2006 (Cayman Islands) 148,400
410,000 Moog, Inc. sr. sub. notes Ser. B, 10s, 2006 419,225
950,000 Owens-Brockway Glass 144A sec. notes 8 7/8s, 2009 961,875
410,000 Pliant Corp. company guaranty 13s, 2010 432,550
660,000 Roller Bearing Company of America company guaranty Ser. B,
9 5/8s, 2007 594,000
1,550,000 Sequa Corp. sr. notes 9s, 2009 1,550,000
410,000 Sequa Corp. sr. notes Ser. B, 8 7/8s, 2008 410,000
160,000 Terex Corp. company guaranty 8 7/8s, 2008 161,600
330,000 Terex Corp. company guaranty Ser. B, 10 3/8s, 2011 355,575
260,000 Terex Corp. company guaranty Ser. D, 8 7/8s, 2008 265,850
488,765 U.S. Can Corp. bank term loan FRN Ser. B, 6.14s, 2008
(acquired 10/17/01, cost $451,803) (RES) 420,109
320,000 U.S. Can Corp. company guaranty Ser. B, 12 3/8s, 2010 198,400
247,225 United Defense Industries, Inc. bank term loan FRN 4.85s, 2009
(acquired 10/19/01, cost $247,225) (RES) 248,384
-------------
22,762,505
Communication Services (4.5%)
-------------------------------------------------------------------------------------------------------------------
1,070,000 360Networks, Inc. sr. notes 13s, 2008 (Canada) (In default) (NON) 10,700
780,000 Airgate PCS, Inc. sr. sub. notes stepped-coupon zero %
(13 1/2s, 10/1/04), 2009 (STP) 522,600
640,000 Alamosa Delaware, Inc. company guaranty 13 5/8s, 2011 547,200
280,000 Alamosa Delaware, Inc. company guaranty 12 1/2s, 2011 232,400
90,000 Alamosa PCS Holdings, Inc. company guaranty stepped-coupon
zero % (12 7/8s, 2/15/05), 2010 (STP) 43,200
509,162 American Cellular Corp. bank term loan FRN 5.13s, 2009
(acquired 2/29/00, cost $509,162) (RES) 455,700
1,090,000 American Cellular Corp. company guaranty 9 1/2s, 2009 801,150
2,370,000 American Tower Corp. sr. notes 9 3/8s, 2009 1,753,800
400,000 Arch Communications, Inc. sr. notes 13 3/4s, 2008 (In default) (NON) 2,000
290,000 Asia Global Crossing, Ltd. sr. notes 13 3/8s, 2010 (Bermuda) 46,400
460,000 Birch Telecommunications, Inc. sr. notes 14s, 2008 55,200
400,000 Call-Net Enterprises, Inc. sr. notes 8s, 2008 (Canada) 98,000
900,000 Colo.com, Inc. 144A sr. notes 13 7/8s, 2010 (In default) (NON) 18,000
940,000 Dobson/Sygnet Communications, Inc. sr. notes 12 1/4s, 2008 925,900
1,500,000 Econophone, Inc. company guaranty 13 1/2s, 2007 (In default) (NON) 3,750
535,000 Esprit Telecom Group PLC sr. notes 11 1/2s, 2007 (United Kingdom)
(In default) (NON) 2,675
110,000 FLAG Telecom Holdings, Ltd. sr. notes 11 5/8s, 2010 (Bermuda) 15,538
580,000 FLAG, Ltd. 144A sr. notes 8 1/4s, 2008 (Bermuda) 113,100
50,000 Global Crossing Holdings, Ltd. company guaranty 9 5/8s, 2008
(Bermuda) (In default) (NON) 1,063
190,000 Global Crossing Holdings, Ltd. company guaranty 9 1/2s, 2009
(Bermuda) (In default) (NON) 4,038
2,680,000 Global Crossing Holdings, Ltd. company guaranty 9 1/8s, 2006
(Bermuda) (In default) (NON) 56,950
1,890,000 Horizon PCS, Inc. company guaranty stepped-coupon zero %
(14s, 10/1/05), 2010 (STP) 680,400
160,000 Horizon PCS, Inc. 144A sr. notes 13 3/4s, 2011 124,000
160,000 Hyperion Telecommunications Corp., Inc. sr. disc. notes Ser. B, 13s, 2003 3,400
1,220,000 Hyperion Telecommunications Corp., Inc. sr. sub. notes 12s, 2007 24,400
60,000 Intermedia Communications, Inc. sr. notes Ser. B, 8.6s, 2008 51,900
430,000 Intermedia Communications, Inc. sr. notes Ser. B, 8 1/2s, 2008 369,800
630,000 Intermedia Communications, Inc. sr. sub. notes stepped-coupon Ser. B,
zero% (12 1/4s, 3/1/04), 2009 (STP) 459,900
910,000 iPCS, Inc. sr. disc. notes stepped-coupon zero %
(14s, 7/15/05), 2010 (STP) 509,600
60,000 Knology Holdings, Inc. sr. disc. notes stepped-coupon zero %
(11 7/8s, 10/15/02), 2007 (STP) 22,800
1,020,000 Leap Wireless International, Inc. company guaranty 12 1/2s, 2010 663,000
527,000 Level 3 Communications, Inc. sr. disc. notes stepped-coupon zero %
(10 1/2s, 12/1/03), 2008 (STP) 134,385
940,000 McCaw International, Ltd. sr. disc. notes stepped-coupon zero %
(13s, 4/15/02), 2007 (STP) 56,400
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) 1,350
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 (In default) (NON) 34,450
570,000 Metromedia Fiber Network, Inc. sr. notes Ser. B, 10s, 2008 (In default) (NON) 37,050
900,000 Microcell Telecommunications sr. disc. notes Ser. B, 14s, 2006 (Canada) 639,000
581,000 Millicom International Cellular SA sr. disc. notes 13 1/2s, 2006
(Luxembourg) 325,360
560,000 Nextel Communications, Inc. sr. disc. notes stepped-coupon zero %
(9 3/4s, 10/31/02), 2007 (STP) 361,200
870,000 Nextel Communications, Inc. sr. notes 12s, 2008 652,500
2,530,000 Nextel Communications, Inc. sr. notes 9 1/2s, 2011 1,644,500
690,000 Nextel Communications, Inc. sr. notes 9 3/8s, 2009 453,675
530,000 Nextel Partners, Inc. sr. notes 11s, 2010 339,200
320,000 Nextel Partners, Inc. sr. notes 11s, 2010 204,800
330,000 Nextel Partners, Inc. 144A sr. notes 12 1/2s, 2009 227,700
250,000 NorthEast Optic Network, Inc. sr. notes 12 3/4s, 2008 (In default) (NON) 50,000
490,000 PanAmSat Corp. bank term loan FRN Ser. B, 5.35s, 2009
(acquired 2/21/02, cost $489,388) (RES) 487,958
1,090,000 PanAmSat Corp. 144A sr. notes 8 1/2s, 2012 1,078,677
1,195,000 Price Communications Wireless, Inc. 144A sr. notes 9 1/8s, 2006 1,254,750
100,000 Qwest Capital Funding, Inc. company guaranty 7 1/4s, 2011 80,971
1,380,000 Qwest Capital Funding, Inc. company guaranty 7s, 2009 1,122,837
190,000 Qwest Capital Funding, Inc. company guaranty 6 3/8s, 2008 153,881
130,000 Rogers Cablesystems, Ltd. debs. 10 1/8s, 2012 (Canada) 136,500
550,000 Rogers Cablesystems, Ltd. sr. notes Ser. B, 10s, 2005 (Canada) 594,000
650,000 Rogers Cablesystems, Ltd. sr. sub. notes 8.8s, 2007 (Canada) 562,250
330,000 Rogers Wireless, Inc. sec. notes 9 5/8s, 2011 (Canada) 306,900
500,000 RSL Communications PLC company guaranty stepped-coupon zero %
(10 1/8s, 3/1/03), 2008 (Bermuda) (STP) 20,000
770,000 RSL Communications, Ltd. company guaranty 12 1/4s, 2006 (Bermuda)
(In default) (NON) 30,800
193,749 Rural Cellular Corp. bank term loan FRN Ser. C, 5.36s, 2009
(acquired x11/5/01, cost $188,421) (RES) 175,182
270,000 Rural Cellular Corp. sr. sub. notes Ser. B, 9 5/8s, 2008 218,700
1,040,000 SBA Communications Corp. sr. notes 10 1/4s, 2009 707,200
970,000 Spectrasite Holdings, Inc. sr. disc. notes stepped-coupon zero %
(11 1/8s, 4/15/04), 2009 (STP) 266,750
1,270,000 Spectrasite Holdings, Inc. sr. disc. notes stepped-coupon Ser. B, zero %
(12 7/8s, 3/15/05), 2010 (STP) 323,850
1,000,000 Startec Global Communications Corp. sr. notes 12s, 2008 (In default) (NON) 20,000
280,000 Tele1 Europe B.V. sr. notes 13s, 2009 (Netherlands) 47,600
1,330,000 Telecorp PCS, Inc. company guaranty 10 5/8s, 2010 1,516,200
640,000 Time Warner Telecom, Inc. sr. notes 9 3/4s, 2008 427,200
960,000 Tritel PCS, Inc. company guaranty 10 3/8s, 2011 1,084,800
80,000 Triton PCS, Inc. company guaranty 9 3/8s, 2011 77,000
780,000 Triton PCS, Inc. company guaranty 8 3/4s, 2011 733,200
70,000 Triton PCS, Inc. company guaranty stepped-coupon zero %
(11s, 5/01/03), 2008 (STP) 61,600
510,000 TSI Telecommunication Services, Inc. 144A sr. sub. notes 12 3/4s, 2009 489,600
390,000 U S West, Inc. notes 5 5/8s, 2008 331,208
1,670,000 UbiquiTel Operating Co. company guaranty stepped-coupon zero %
(14s, 4/15/05), 2010 (STP) 617,900
900,000 US UnWired, Inc. company guaranty stepped-coupon Ser. B, zero %
(13 3/8s, 11/1/04), 2009 (STP) 585,000
30,000 USA Mobile Communications, Inc. sr. notes 9 1/2s, 2004 (In default) (NON) 1,200
510,000 Versatel Telecom B.V. sr. notes 13 1/4s, 2008 (Netherlands) 137,700
180,000 Versatel Telecom B.V. sr. notes 13 1/4s, 2008 (Netherlands) 48,600
1,389,000 Voicestream Wireless Corp. sr. notes 10 3/8s, 2009 1,491,522
950,000 WebLink Wireless, Inc. sr. disc. notes stepped-coupon zero %
(11 1/4s, 2/1/03), 2008 (STP) 2,375
750,000 Western Wireless Corp. bank term loan FRN 4.755s, 2008
(acquired 4/24/00, cost $749,063) (RES) 657,857
10,000 Williams Communications Group, Inc. sr. notes 11 7/8s, 2010 1,500
220,000 Williams Communications Group, Inc. sr. notes 11.7s, 2008 31,900
200,000 Williams Communications Group, Inc. sr. notes 10.7s, 2007 31,000
3,976,000 WinStar Communications, Inc. sr. disc. notes stepped-coupon zero %
(14 3/4s, 4/15/05), 2010 (STP) 398
920,000 WinStar Communications, Inc. sr. notes 12 3/4s, 2010 (In default) (NON) 92
10,000 WinStar Communications, Inc. sr. notes 12 1/2s, 2008 (In default) (NON) 1
-------------
29,700,893
Conglomerates (0.4%)
-------------------------------------------------------------------------------------------------------------------
890,000 Autonation, Inc. company guaranty 9s, 2008 934,500
430,000 Nortek, Inc. sr. notes Ser. B, 8 7/8s, 2008 440,750
90,000 Nortek, Inc. sr. sub. notes Ser. B, 9 7/8s, 2011 93,150
330,000 Nortek, Inc. 144A sr. notes Ser. B, 9 1/8s, 2007 339,900
260,000 Tenneco, Inc. company guaranty 11 5/8s, 2009 (Malaysia) 204,100
990,000 Tyco International Group SA company guaranty 6 3/8s, 2006
(Luxembourg) 916,829
-------------
2,929,229
Consumer Cyclicals (11.3%)
-------------------------------------------------------------------------------------------------------------------
568,575 Adams Outdoor Advertising bank term loan FRN Ser. B, 5.406s, 2008
(acquired 8/1/01, cost $570,000) (RES) 572,484
844,000 Aftermarket Technology Corp. sr. sub. notes 12s, 2004 860,880
250,000 Aftermarket Technology Corp. sr. sub. notes Ser. D, 12s, 2004 255,000
470,000 Aladdin Gaming Holdings, LLC sr. disc. notes stepped-coupon Ser. B,
zero % (13 1/2s, 3/1/03), 2010 (STP) 14,100
480,000 Amazon.com, Inc. sr. sub. notes stepped-coupon zero %
(10s, 5/1/03), 2008 (STP) 412,800
1,455,000 American Standard Companies, Inc. company guaranty 7 5/8s, 2010 1,469,550
80,000 American Standard Companies, Inc. company guaranty 7 1/8s, 2003 81,600
280,000 Ameristar Casinos, Inc. company guaranty 10 3/4s, 2009 305,900
650,000 Argosy Gaming Co. company guaranty 10 3/4s, 2009 721,500
90,000 Argosy Gaming Co. sr. sub. notes 9s, 2011 94,950
440,000 ArvinMeritor, Inc. notes 8 3/4s, 2012 457,765
230,000 Atrium Companies, Inc. company guaranty Ser. B, 10 1/2s, 2009 227,700
1,052,148 Autotote Corp. bank term loan FRN 6.165s, 2007
(acquired 6/6/01, cost $161,871) (RES) 1,054,339
700,000 Autotote Corp. company guaranty Ser. B, 12 1/2s, 2010 784,000
540,000 Beazer Homes USA, Inc. company guaranty 8 5/8s, 2011 561,600
580,000 Belo Corp. sr. notes 7 1/8s, 2007 573,568
380,000 Belo Corp. sr. unsub. notes 8s, 2008 388,360
510,000 Boyd Gaming Corp. 144A sr. sub. notes 8 3/4s, 2012 515,100
320,000 Building Materials Corp. company guaranty 8s, 2008 259,200
230,000 Coinmach Corp. bank term loan FRN Ser. B, 4 5/8s, 2009
(acquired 1/31/02, cost $229,713) (RES) 231,629
1,380,000 Coinmach Corp. 144A sr. notes 9s, 2010 1,407,600
343,715 Collins & Aikman Products, Inc. bank term loan FRN Ser. B, 7s, 2005
(acquired 12/20/01, cost $340,277) (RES) 344,574
740,000 Collins & Aikman Products, Inc. company guaranty 11 1/2s, 2006 678,950
790,000 Collins & Aikman Products, Inc. 144A sr. notes 10 3/4s, 2011 799,875
2,430,000 Cybernet Internet Services International, Inc. 144A sr. disc. notes
stepped-coupon zero% (13s, 8/15/04), 2009 (Denmark) (STP) 24,300
80,000 D.R. Horton, Inc. company guaranty 8s, 2009 78,800
630,000 D.R. Horton, Inc. sr. notes 7 7/8s, 2011 626,850
360,000 Dana Corp. notes 6 1/4s, 2004 342,000
1,140,000 Dana Corp. sr. notes 9s, 2011 1,131,450
730,000 Dayton Superior Corp. company guaranty 13s, 2009 733,650
360,000 Del Webb Corp. sr. sub. deb. 9 3/8s, 2009 378,900
480,000 Delco Remy International, Inc. company guaranty 11s, 2009 470,400
120,000 Delco Remy International, Inc. company guaranty 10 5/8s, 2006 111,000
110,000 Delco Remy International, Inc. sr. notes 8 5/8s, 2007 100,650
503,128 Derby Cycle Corp. (The) sr. notes 10s, 2008 (In default) (NON) 10,063
EUR 1,592,627 Derby Cycle Corp. (The) sr. notes 9 3/8s, 2008 (In default) (NON) 14,205
$ 1,420,000 Dura Operating Corp. company guaranty Ser. D, 9s, 2009 1,412,900
100,000 Dura Operating Corp. sr. sub. notes Ser. B, 9s, 2009 85,912
510,000 Exide Corp. sr. notes 10s, 2005 56,100
260,000 Federal Mogul Corp. notes 7 7/8s, 2010 (In default) (NON) 44,200
810,000 Federal Mogul Corp. notes 7 3/4s, 2006 (In default) (NON) 137,700
517,000 Felcor Lodging LP company guaranty 8 1/2s, 2011 (R) 526,048
880,000 Felcor Lodging LP company guaranty 9 1/2s, 2008 (R) 928,400
360,000 Felcor Lodging LP 144A company guaranty 9 1/2s, 2008 (R) 379,800
299,024 Felcor Lodging LP 144A company guaranty 9 1/2s, 2008 (R) 104,658
560,000 Galey & Lord, Inc. company guaranty 9 1/8s, 2008 72,800
670,000 Garden State Newspapers, Inc. sr. sub. notes 8 5/8s, 2011 663,300
80,000 Garden State Newspapers, Inc. sr. sub. notes Ser. B, 8 3/4s, 2009 80,000
660,000 Harrah's Entertainment, Inc. company guaranty 7 1/2s, 2009 662,977
560,000 Harrah's Operating Co., Inc. company guaranty 8s, 2011 575,353
80,000 Hasbro, Inc. notes 7.95s, 2003 80,600
1,090,000 Hayes Lemmerz International, Inc. company guaranty Ser. B,
8 1/4s, 2008 (In default) (NON) 65,400
380,000 Hayes Lemmerz International, Inc. 144A company guaranty
11 7/8s, 2006 (In default) (NON) 201,400
650,000 Herbst Gaming, Inc. sec. notes Ser. B, 10 3/4s, 2008 689,000
3,005,000 HMH Properties, Inc. company guaranty Ser. B, 7 7/8s, 2008 2,944,900
360,000 Hollinger International Publishing, Inc. company guaranty 9 1/4s, 2007 367,200
1,728,132 Hollinger Participation Trust 144A sr. notes 12 1/8s, 2010 (Canada) (PIK) 1,693,570
980,000 Hollywood Casino Corp. company guaranty 11 1/4s, 2007 1,090,250
90,000 Hollywood Park, Inc. company guaranty Ser. B, 9 1/4s, 2007 85,950
940,000 Horseshoe Gaming Holdings company guaranty 8 5/8s, 2009 982,300
902,089 Interact Operating Co. notes 14s, 2003 (PIK) 90
720,000 International Game Technology sr. notes 8 3/8s, 2009 757,800
1,710,000 International Game Technology sr. notes 7 7/8s, 2004 1,763,438
30,000 Iron Age Holdings Corp. sr. disc. notes stepped-coupon zero %
(12 1/8s, 5/1/03), 2009 (STP) 2,100
220,000 Isle of Capri Casinos, Inc. 144A sr. sub. notes 9s, 2012 220,550
660,000 ITT Corp. notes 6 3/4s, 2005 646,081
180,000 JC Penney Company, Inc. notes 7.6s, 2007 174,600
320,000 JC Penney Company, Inc. notes Ser.A, 7.05s, 2005 305,600
150,000 John Q. Hammons Hotels, Inc. 1st mtge. 8 7/8s, 2004 148,875
1,140,000 Jostens, Inc. sr. sub. notes 12 3/4s, 2010 1,273,950
450,000 K. Hovnanian Enterprises, Inc. company guaranty 10 1/2s, 2007 490,500
1,000,000 K mart Corp. bank term loan FRN Ser. B, 5.13s, 2004
(acquired 3/7/02, cost $1,000,000) (RES) 1,004,375
315,000 Kasper A.S.L., Ltd. sr. notes 12 3/4s, 2004 (In default) (NON) 63,000
920,000 KB Home sr. sub. notes 9 1/2s, 2011 956,800
440,000 Lamar Media Corp. company guaranty 9 5/8s, 2006 463,100
600,000 Lamar Media Corp. sr. sub. notes 9 1/4s, 2007 630,000
650,000 Lear Corp. company guaranty Ser. B, 8.11s, 2009 663,930
1,100,000 Lear Corp. company guaranty Ser. B, 7.96s, 2005 1,126,191
250,000 Lennar Corp. company guaranty Ser. B, 9.95s, 2010 276,250
510,000 Lennar Corp. sr. notes 7 5/8s, 2009 511,275
930,000 Levi Strauss & Co. sr. notes 11 5/8s, 2008 969,525
80,000 M.D.C. Holdings, Inc. sr. notes 8 3/8s, 2008 81,600
1,450,000 Majestic Investor Holdings/Majestic Investor Capital Corp. 144A
company guaranty 11.653s, 2007 1,384,750
80,000 Mandalay Resort Group sr. notes 9 1/2s, 2008 86,600
1,040,000 Mandalay Resort Group sr. sub. notes Ser. B, 10 1/4s, 2007 1,128,400
250,000 Mandalay Resort Group 144A sr. sub. notes 9 3/8s, 2010 264,375
470,000 Meristar Hospitality Corp. sr. notes 9 1/8s, 2011(R) 479,400
170,000 Meristar Hospitality Corp. sr. notes 9s, 2008 (R) 172,763
290,000 MeriStar Hospitality Operating Partnership/MeriStar Hospitality
Finance Corp. 144A sr. notes 10 1/2s, 2009 (R) 308,850
1,670,000 MGM Mirage company guaranty 8 1/2s, 2010 1,750,628
390,000 Mikohn Gaming Corp. company guaranty Ser. B, 11 7/8s, 2008 384,150
220,000 Mohegan Tribal Gaming Authority sr. notes 8 1/8s, 2006 223,850
970,000 Mohegan Tribal Gaming Authority sr. sub. notes 8 3/4s, 2009 982,125
280,000 Mohegan Tribal Gaming Authority sr. sub. notes 8 3/8s, 2011 280,700
700,000 Mohegan Tribal Gaming Authority 144A sr. sub. notes 8s, 2012 707,000
870,000 Morrison Knudsen Corp. 144A sr. notes 11s, 2010 (In default) (NON) 182,700
60,000 Mothers Work, Inc. sr. notes 12 5/8s, 2005 56,400
750,000 Park Place Entertainment Corp. sr. notes 7 1/2s, 2009 717,353
1,050,000 Park Place Entertainment Corp. sr. sub. notes 8 7/8s, 2008 1,093,313
140,000 Penn National Gaming, Inc. company guaranty Ser. B, 11 1/8s, 2008 152,600
360,000 Penn National Gaming, Inc. sr. sub. notes 8 7/8s, 2010 356,400
1,390,000 Perry-Judd company guaranty 10 5/8s, 2007 1,320,500
350,000 PRIMEDIA, Inc. company guaranty 7 5/8s, 2008 297,500
770,000 PRIMEDIA, Inc. company guaranty Ser. B, 8 1/2s, 2006 700,700
1,360,000 PRIMEDIA, Inc. sr. notes 8 7/8s, 2011 1,237,600
380,000 Resorts International Hotel and Casino, Inc. 144A 1st mtge.
11 1/2s, 2009 359,100
640,000 Ryland Group, Inc. sr. notes 9 3/4s, 2010 697,600
140,000 Ryland Group, Inc. sr. sub. notes 8 1/4s, 2008 141,400
1,820,000 Saks, Inc. company guaranty 8 1/4s, 2008 1,774,500
1,801,000 Samsonite Corp. sr. sub. notes 10 3/4s, 2008 1,319,233
470,000 Scotts Co. (The) company guaranty 8 5/8s, 2009 486,450
249,388 Sealy Mattress Co. bank term loan FRN Ser. B, 4.063s, 2004
(acquired 12/17/01, cost $250,167) (RES) 249,284
249,434 Sealy Mattress Co. bank term loan FRN Ser. C, 4.313s, 2005
(acquired 12/17/01, cost $250,214) (RES) 249,330
249,447 Sealy Mattress Co. bank term loan FRN Ser. D, 4.563s, 2005
(acquired 12/17/01, cost $250,226) (RES) 249,342
1,000,000 Sealy Mattress Co. company guaranty stepped-coupon Ser. B,
zero %, 2007 (10 7/8s, 12/15/02) (STP) 950,000
410,000 Sealy Mattress Co. sr. sub. notes Ser. B, 9 7/8s, 2007 420,250
340,000 Standard Pacific Corp. sr. notes 9 1/2s, 2010 353,600
350,000 Starwood Hotels & Resorts Worldwide, Inc. bank term loan
FRN 4.62s, 2003 (acquired 11/14/01, cost $345,406) (RES) 350,365
720,000 Station Casinos, Inc. sr. notes 8 3/8s, 2008 741,600
40,000 Station Casinos, Inc. sr. sub. notes 9 7/8s, 2010 42,600
210,000 Station Casinos, Inc. 144A sr. sub. notes 9 3/4s, 2007 216,300
410,000 Telehub Communications Corp. company guaranty stepped-coupon
zero % (13 7/8s, 7/31/02), 2005 (STP) 1
600,000 The William Carter Holdings Co. company guaranty Ser. B,
10 7/8s, 2011 640,500
360,000 Toll Corp. company guaranty 8 1/8s, 2009 364,050
250,000 Toll Corp. sr. sub. notes 8 1/4s, 2011 251,250
220,000 Tommy Hilfiger USA, Inc. company guaranty 6 1/2s, 2003 217,525
190,000 Travel Centers of America, Inc. company guaranty 12 3/4s, 2009 209,000
40,000 Trump A.C. 1st mtge. Ser. B, 11 1/4s, 2006 28,000
410,000 Trump Atlantic City Associates company guaranty 11 1/4s, 2006 290,075
560,000 Trump Castle Funding, Inc. sr. sub. notes 11 3/4s, 2003 442,400
2,430,000 Trump Castle Funding, Inc. sub. notes 10 1/4s, 2003 2,460,375
420,000 United Auto Group, Inc. 144A sr. sub. notes 9 5/8s, 2012 429,450
790,000 Venetian Casino, Inc. company guaranty 12 1/4s, 2004 829,500
190,000 Venture Holdings Trust 144A sr. notes Ser. B, 9 1/2s, 2005 176,700
920,000 Von Hoffman Press, Inc. 144A company guaranty 10 1/4s, 2009 933,800
107,589 Von Hoffman Press, Inc. 144A sr. sub. notes 13 1/2s, 2009 102,210
100,000 Von Hoffman Press, Inc. 144A sr. sub. notes 10 3/8s, 2007 93,000
1,310,000 Westpoint Stevens, Inc. sr. notes 7 7/8s, 2005 648,450
320,000 Wheeling Island Gaming, Inc. 144A sr. notes 10 1/8s, 2009 331,200
-------------
74,872,737
Consumer Staples (9.7%)
-------------------------------------------------------------------------------------------------------------------
1,020,000 Acme Television company guaranty 10 7/8s, 2004 1,035,300
445,000 Adelphia Communications Corp. sr. notes 10 7/8s, 2010 427,200
1,635,000 Adelphia Communications Corp. sr. notes 10 1/4s, 2011 1,504,200
90,000 Adelphia Communications Corp. sr. notes 10 1/4s, 2006 83,700
400,000 Adelphia Communications Corp. sr. notes 7 7/8s, 2009 344,000
2,723,000 Adelphia Communications Corp. sr. notes Ser. B, 9 7/8s, 2007 2,559,620
1,190,000 Adelphia Communications Corp. sr. notes Ser. B, 7 3/4s, 2009 1,035,300
330,000 Albecca, Inc. company guaranty 10 3/4s, 2008 371,250
300,000 Allbritton Communications Co. sr. sub. notes Ser. B, 8 7/8s, 2008 313,500
680,000 AMC Entertainment, Inc. sr. sub. notes 9 1/2s, 2011 676,600
350,000 AMC Entertainment, Inc. sr. sub. notes 9 1/2s, 2009 348,250
510,000 AMF Bowling Worldwide bank term loan FRN Ser. B, 6.38s, 2008
(acquired 3/1/02, cost $508,725) (RES) 510,000
1,090,000 Archibald Candy Corp. company guaranty 10 1/4s, 2004 (In default) (NON) 555,900
410,000 Armkel, LLC/Armkel Finance sr. sub. notes 9 1/2s, 2009 436,650
1,067,263 Aurora Foods, Inc. bank term loan FRN Ser. B2, 6.1s, 2010
(acquired 1/11/02, cost $1,058,014) (RES) 1,056,057
235,000 Aurora Foods, Inc. sr. sub. notes Ser. B, 9 7/8s, 2007 235,000
800,000 Aurora Foods, Inc. 144A sr. sub. notes Ser. D, 9 7/8s, 2007 800,000
10,263 Australis Media, Ltd. sr. disc. notes 15 3/4s, 2003 (Australia)
(In default) (NON) (PIK) 1
620,000 Benedek Communications Corp. sr. disc. notes 13 1/4s, 2006
(In default) (NON) 427,800
310,000 British Sky Broadcasting PLC company guaranty 8.2s, 2009
(United Kingdom) 312,285
1,420,000 British Sky Broadcasting PLC company guaranty 6 7/8s, 2009
(United Kingdom) 1,332,159
1,630,000 Chancellor Media Corp. company guaranty 8s, 2008 1,711,500
690,000 Charter Communications Holdings, LLC bank term loan FRN Ser. B,
4.52s, 2008 (acquired 10/22/01, cost $674,675) (RES) 667,632
1,620,000 Charter Communications Holdings, LLC sr. notes 11 1/8s, 2011 1,632,150
410,000 Charter Communications Holdings, LLC sr. notes 10 3/4s, 2009 412,050
1,340,000 Charter Communications Holdings, LLC sr. disc. notes stepped-coupon
zero % (11 3/4s, 5/15/06), 2011 (STP) 777,200
160,000 Charter Communications Holdings, LLC sr. disc. notes stepped-coupon
zero % (13 1/2s, 1/15/06), 2011 (STP) 103,000
550,000 Charter Communications Holdings, LLC sr. notes 10s, 2009 528,000
690,000 Charter Communications Holdings, LLC 144A sr. disc. notes
stepped-coupon zero % (12 1/8s, 1/15/07), 2012 (STP) 376,050
150,000 Charter Communications Holdings, LLC 144A sr. notes 10s, 2011 143,250
300,000 Charter Communications Holdings, LLC 144A sr. notes 9 5/8s, 2009 286,500
1,600,000 Cinemark USA, Inc. sr. sub. notes Ser. B, 8 1/2s, 2008 1,600,000
150,000 Constellation Brands, Inc. company guaranty 8 1/2s, 2009 156,000
620,000 Constellation Brands, Inc. company guaranty Ser. B, 8s, 2008 632,400
860,000 Constellation Brands, Inc. sr. sub. notes Ser. B, 8 1/8s, 2012 877,200
360,000 Cumulus Media, Inc. bank term loan FRN Ser. B, 4.909s, 2007
(acquired 3/20/02, cost $359,550) (RES) 363,000
210,000 Del Monte Corp. sr. sub. notes, 9 1/4s, 2011 220,500
2,550,000 Diamond Cable Communications PLC sr. disc. notes 10 3/4s, 2007
(United Kingdom) 816,000
150,000 Diamond Cable Communications PLC sr. disc. notes 13 7/8s, 2005
(United Kingdom) 48,000
2,742,000 Diva Systems Corp. sr. disc. notes stepped-coupon Ser. B, zero %
(12 5/8s, 3/1/03), 2008 (STP) 383,880
1,370,000 Doane Pet Care Co. sr. sub. deb. 9 3/4s, 2007 1,137,100
350,000 Domino's, Inc. company guaranty Ser. B, 10 3/8s, 2009 379,750
380,000 Eagle Family Foods company guaranty Ser. B, 8 3/4s, 2008 304,000
3,070,000 Echostar Broadband Corp. sr. notes 10 3/8s, 2007 3,292,575
1,480,000 Echostar DBS Corp. sr. notes 9 3/8s, 2009 1,539,200
830,000 Echostar DBS Corp. 144A sr. notes 9 1/8s, 2009 850,750
780,000 Emmis Communications Corp. bank term loan FRN Ser. A, 4.938s, 2009
(acquired 1/31/02, cost $777,075) (RES) 778,440
140,000 Emmis Communications Corp. company guaranty Ser. B, 8 1/8s, 2009 142,800
400,000 Emmis Communications Corp. sr. disc. notes stepped-coupon zero %
(12 1/2s, 3/15/06), 2011 (STP) 292,000
610,000 Fleming Companies, Inc. company guaranty 10 1/8s, 2008 634,400
200,000 Fleming Companies, Inc. company guaranty Ser. B, 10 1/2s, 2004 201,000
10,000 Fleming Companies, Inc. 144A sr. sub. notes 10 5/8s, 2007 10,175
705,799 Fox Family Worldwide, Inc. sr. disc. notes 10 1/4s, 2007 762,262
1,320,000 Fox Family Worldwide, Inc. sr. notes 9 1/4s, 2007 1,387,505
190,000 Fox/Liberty Networks, LLC sr. disc. notes zero %
(9 3/4s, 8/15/02), 2007 (STP) 193,800
1,010,000 Fox/Liberty Networks, LLC sr. notes 8 7/8s, 2007 1,052,925
290,000 French Fragrances, Inc. company guaranty Ser. D, 10 3/8s, 2007 249,400
160,000 French Fragrances, Inc. sr. notes Ser. B, 10 3/8s, 2007 141,200
90,000 Granite Broadcasting Corp. sr. sub. notes 9 3/8s, 2005 80,100
700,000 Granite Broadcasting Corp. sr. sub. notes 8 7/8s, 2008 581,000
260,000 Great Atlantic & Pacific Tea Co. notes 7 3/4s, 2007 258,050
1,970,000 Insight Communications Company, Inc. sr. disc. notes stepped-coupon
zero % (12 1/4s, 2/15/06), 2011 (STP) 1,285,425
1,000,000 Insight Midwest LP/Insight Capital, Inc. bank term loan FRN 5.063s,
2009 (acquired 1/19/01, cost $998,500) (RES) 1,003,958
20,000 Insight Midwest LP/Insight Capital, Inc. sr. notes 10 1/2s, 2010 21,700
650,000 International Cabletel, Inc. sr. disc. notes 11 1/2s, 2006 224,250
530,000 Key3media Group, Inc. company guaranty 11 1/4s, 2011 482,300
500,000 Leiner Health Products sr. sub. notes 9 5/8s, 2007 (In default) (NON) 70,000
1,320,000 LIN Holdings Corp. sr. disc. notes stepped-coupon zero %
(10s, 3/1/03), 2008 (STP) 1,188,000
120,000 LIN Holdings Corp. sr. disc. notes stepped-coupon zero %
(10s, 3/1/03), 2008 (STP) 104,400
260,000 LIN Television Corp. company guaranty 8 3/8s, 2008 260,000
390,000 NBTY, Inc. sr. sub. notes Ser. B, 8 5/8s, 2007 380,250
1,115,000 North Atlantic Trading Co. company guaranty Ser. B, 11s, 2004 1,036,950
470,000 NTL Communications Corp. sr. notes Ser. B, 11 7/8s, 2010 162,150
1,010,000 NTL Communications Corp. sr. notes Ser. B, 11 1/2s, 2008 348,450
510,000 NTL Communications Corp. sr. notes stepped-coupon Ser. B, zero %
(12 3/8s, 10/1/03), 2008 (STP) 175,950
1,090,000 NTL, Inc. sr. notes Ser. A, 12 3/4s, 2005 354,250
220,000 NTL, Inc. sr. notes Ser. B, 10s, 2007 75,900
655,000 Outsourcing Solutions, Inc. sr. sub. notes Ser. B, 11s, 2006 553,475
15,000 Pegasus Communications Corp. sr. notes 12 1/2s, 2007 11,850
190,000 Pegasus Communications Corp. sr. notes Ser. B, 9 3/4s, 2006 142,500
400,000 Pegasus Satellite sr. notes 12 3/8s, 2006 320,000
550,000 Playtex Products, Inc. company guaranty 9 3/8s, 2011 585,750
650,000 Premier International Foods PLC sr. notes 12s, 2009 (United Kingdom) 711,750
570,000 Quebecor Media, Inc. sr. disc. notes stepped-coupon zero %
(13 3/4s, 7/15/06), 2011 (Canada) (STP) 381,900
380,000 Quebecor Media, Inc. sr. notes 11 1/8s, 2011 (Canada) 415,150
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 346,500
352,000 RCN Corp. sr. disc. notes stepped-coupon Ser. B, zero %
(9.8s, 2/15/03), 2008 (STP) 63,360
454,250 Regal Cinemas, Inc. bank term loan FRN Ser. B, 5 3/8s, 2008
(acquired various dates from 3/1/01 to 3/14/01, cost $1,113,743) (RES) 458,225
530,000 Regal Cinemas, Inc. 144A sr. sub. notes 9 3/8s, 2012 559,150
270,000 Revlon Consumer Products sr. notes 9s, 2006 187,650
260,000 Revlon Consumer Products sr. notes 8 1/8s, 2006 176,800
390,000 Revlon Consumer Products sr. sub. notes 8 5/8s, 2008 177,450
650,000 Sbarro, Inc. company guaranty 11s, 2009 667,063
800,000 Silver Cinemas, Inc. sr. sub. notes 10 1/2s, 2005 (In default) (NON) 80
148,000 Sinclair Broadcast Group, Inc. bank term loan FRN 5.9s, 2009
(acquired 10/23/01, cost $145,318) (RES) 148,962
1,010,000 Sinclair Broadcast Group, Inc. company guaranty 9s, 2007 1,032,725
90,000 Sinclair Broadcast Group, Inc. sr. sub. notes 8 3/4s, 2007 91,800
340,000 Sinclair Broadcast Group, Inc. 144A sr. sub. notes 8 3/4s, 2011 351,900
350,000 Six Flags, Inc. sr. notes 9 1/2s, 2009 364,000
160,000 Smithfield Foods, Inc. sr. notes Ser. B, 8s, 2009 163,200
200,000 Southland Corp. deb. Ser. A, 4 1/2s, 2004 185,530
1,437,000 Southland Corp. deb. Ser. B, 4s, 2004 1,336,410
688,139 Suiza Foods Corp. bank term loan FRN Ser. B, 4.91s, 2008
(acquired 12/10/01, cost $692,726) (RES) 692,563
60,000 TeleWest Communications PLC deb. 11s, 2007 (United Kingdom) 30,600
260,000 TeleWest Communications PLC deb. 9 5/8s, 2006 (United Kingdom) 130,000
280,000 TeleWest Communications PLC Structured Notes 10 7/8s, 2005
(issued by DLJ International Capital) (United Kingdom) 148,400
60,000 Tricon Global Restaurants, Inc. sr. notes 8 7/8s, 2011 64,500
1,060,000 Tricon Global Restaurants, Inc. sr. notes 7.65s, 2008 1,075,900
560,000 Tricon Global Restaurants, Inc. sr. notes 7.45s, 2005 568,400
1,749,000 United Pan-Europe NV sr. disc. notes 12 1/2s, 2009 (Netherlands) 192,390
1,630,000 United Pan-Europe NV sr. disc. notes stepped-coupon zero %
(13 3/4s, 2/1/05), 2010 (Netherlands) (STP) 163,000
250,000 United Pan-Europe NV sr. disc. notes stepped-coupon zero %
(12 1/2s, 8/1/04), 2009 (Netherlands) (STP) 27,500
290,000 United Rentals (North America), Inc. company guaranty, 10 3/4s, 2008 316,825
895,000 Vlasic Foods International, Inc. sr. sub. notes Ser. B, 10 1/4s, 2009
(In default) (NON) 192,425
1,490,000 XM Satellite Radio Holdings, Inc. sec. notes 14s, 2010 1,057,900
1,750,000 Young Broadcasting, Inc. sr. sub. notes 10s, 2011 1,820,000
120,000 Young Broadcasting, Inc. company guaranty Ser. B, 8 3/4s, 2007 117,600
-------------
64,326,162
Energy (2.6%)
-------------------------------------------------------------------------------------------------------------------
710,000 Belco Oil & Gas Corp. sr. sub. notes Ser. B, 8 7/8s, 2007 724,200
640,000 BRL Universal Equipment sec. notes 8 7/8s, 2008 659,200
390,000 Chesapeake Energy Corp. company guaranty 8 3/8s, 2008 395,850
1,210,000 Chesapeake Energy Corp. company guaranty 8 1/8s, 2011 1,213,025
190,000 Comstock Resources, Inc. company guaranty 11 1/4s, 2007 197,600
340,000 Comstock Resources, Inc. 144A sr. notes 11 1/4s, 2007 353,600
470,000 Dresser, Inc. company guaranty 9 3/8s, 2011 479,400
410,000 El Paso Energy Partners L.P. company guaranty Ser. B, 8 1/2s, 2011 422,300
290,000 Forest Oil Corp. company guaranty 10 1/2s, 2006 309,213
520,000 Forest Oil Corp. sr. notes 8s, 2008 530,400
300,000 Forest Oil Corp. 144A sr. notes 8s, 2011 307,500
110,000 Grant Prideco, Inc. company guaranty Ser. B, 9 5/8s, 2007 114,400
370,000 Key Energy Services, Inc. company guaranty Ser. B, 8 3/8s, 2008 379,250
580,000 Leviathan Gas Corp. company guaranty Ser. B, 10 3/8s, 2009 629,300
340,000 Magnum Hunter Resources, Inc. 144A sr. notes 9.6s, 2012 351,900
700,000 Newfield Exploration Co. sr. notes 7 5/8s, 2011 682,500
370,000 Nuevo Energy Co. sr. sub. notes Ser. B, 9 1/2s, 2008 355,200
140,000 Ocean Energy, Inc. company guaranty Ser. B, 8 7/8s, 2007 147,668
800,000 Ocean Energy, Inc. company guaranty Ser. B, 8 3/8s, 2008 845,808
540,000 Parker Drilling Corp. company guaranty Ser. D, 9 3/4s, 2006 550,800
2,260,000 Pioneer Natural Resources Co. company guaranty 9 5/8s, 2010 2,486,000
290,000 Pogo Producing Co. sr. sub. notes Ser. B, 8 1/4s, 2011 300,875
800,000 Pride Petroleum Services, Inc. sr. notes 9 3/8s, 2007 832,000
270,000 Seven Seas Petroleum, Inc. sr. notes Ser. B, 12 1/2s, 2005 156,600
400,000 Snyder Oil Corp. sr. sub. notes 8 3/4s, 2007 414,688
230,000 Stone Energy Corp. company guaranty 8 3/4s, 2007 236,038
390,000 Stone Energy Corp. sr. sub. notes 8 1/4s, 2011 395,850
930,000 Vintage Petroleum, Inc. sr. sub. notes 9 3/4s, 2009 948,600
500,000 Vintage Petroleum, Inc. sr. sub. notes 9s, 2005 500,000
150,000 Vintage Petroleum, Inc. sr. sub. notes 7 7/8s, 2011 140,250
370,000 Westport Resources Corp. company guaranty 8 1/4s, 2011 381,100
500,000 XCL, Ltd. 144A company guaranty 13 1/2s, 2004 (In default) (NON) 150,000
310,000 XTO Energy, Inc. 144A sr. sub. notes Ser. B, 8 3/4s, 2009 323,950
-------------
16,915,065
Financial (2.5%)
-------------------------------------------------------------------------------------------------------------------
1,565,000 Affinity Group Holdings sr. notes 11s, 2007 1,537,613
820,000 AMRESCO, Inc. sr. sub. notes Ser. 97-A, 10s, 2004 (In default) (NON) 213,200
460,000 Chevy Chase Savings Bank, Inc. sub. deb. 9 1/4s, 2005 462,300
390,000 CIT Group, Inc. sr. notes 7 3/4s, 2012 391,338
110,000 Comdisco, Inc. notes 7 1/4s, 2001 (In default) (NON) (DEF) 89,925
350,000 Comdisco, Inc. notes 5.95s, 2002 (In default) (NON) 282,625
790,000 Conseco, Inc. sr. notes 10 3/4s, 2008 406,850
2,167,000 Finova Group, Inc. notes 7 1/2s, 2009 753,033
190,000 Ford Motor Credit Corp. notes 7 3/8s, 2009 186,375
240,000 Green Tree Financial notes Ser. A, 6 1/2s, 2002 238,800
1,010,000 GS Escrow Corp. sr. notes 7 1/8s, 2005 994,436
2,980,000 Hanvit Bank 144A sub. notes 11 3/4s, 2010 (South Korea) 3,404,650
302,000 Imperial Credit Industries, Inc. sec. notes 12s, 2005 15,855
710,000 iStar Financial, Inc. sr. notes 8 3/4s, 2008 724,200
620,000 Madison River Capital Corp. sr. notes 13 1/4s, 2010 483,600
420,000 Nationwide Credit, Inc. sr. notes Ser. A, 10 1/4s, 2008 119,700
400,000 Newcourt Credit Group, Inc. company guaranty 6 7/8s, 2005 388,692
620,000 Ocwen Federal Bank sub. deb. 12s, 2005 607,600
200,000 Ocwen Financial Corp. notes 11 7/8s, 2003 196,000
400,000 ONO Finance PLC sr. notes 14s, 2011 (United Kingdom) 184,000
180,000 ONO Finance PLC sr. notes 13s, 2009 (United Kingdom) 77,400
20,000 Port Arthur Finance Corp. company guaranty 12 1/2s, 2009 22,000
770,000 Resource America, Inc. 144A sr. notes 12s, 2004 773,850
400,000 RFS Partnership LP 144A sr. notes 9 3/4s, 2012 412,000
2,130,000 Sovereign Bancorp, Inc. sr. notes 10 1/2s, 2006 2,327,025
630,000 Superior Financial Corp. 144A sr. notes 8.65s, 2003 643,065
340,000 Willis Corroon Corp. 144A company guaranty 9s, 2009 355,300
-------------
16,291,432
Health Care (3.6%)
-------------------------------------------------------------------------------------------------------------------
720,000 Accredo Health, Inc. bank term loan FRN Ser. B, 4.556s, 2009
(acquired 3/20/02, cost $718,200) (RES) 723,600
940,000 ALARIS Medical, Inc. sr. disc. notes stepped-coupon zero %
(11 1/8s, 8/1/03), 2008 (STP) 658,000
340,000 ALARIS Medical Systems, Inc. sec. notes Ser. B, 11 5/8s, 2006 370,600
190,000 ALARIS Medical Systems, Inc. 144A company guaranty 9 3/4s, 2006 184,300
1,200,700 Alderwoods Group, Inc. company guaranty 12 1/4s, 2009 1,266,739
3,100 Alderwoods Group, Inc. company guaranty 12 1/4s, 2004 3,100
15,700 Alderwoods Group, Inc. company guaranty 11s, 2007 15,896
450,000 Alliance Imaging, Inc. sr. sub. notes 10 3/8s, 2011 481,500
560,000 AmerisourceBergen Corp. sr. notes 8 1/8s, 2008 586,600
380,000 Beverly Enterprises, Inc. sr. notes 9 5/8s, 2009 387,600
360,000 Bio-Rad Labs Corp. sr. sub. notes 11 5/8s, 2007 401,400
720,000 Biovail Corp. sr. sub. notes 7 7/8s, 2010 (Canada) 716,400
460,560 Concentra Operating Corp. bank term loan FRN Ser. B, 5.897s, 2006
(acquired 1/15/02, cost $461,590) (RES) 461,136
230,280 Concentra Operating Corp. bank term loan FRN Ser. C, 6.147s, 2007
(acquired 1/15/02, cost $230,782) (RES) 230,568
760,000 Conmed Corp. company guaranty 9s, 2008 775,200
210,000 Conventry Health Care, Inc. 144A sr. notes 8 1/8s, 2012 211,575
38,100 Genesis Health Ventures, Inc. sec. notes FRN 7.59s, 2007 37,719
780,000 Hanger Orthopedic Group, Inc. 144A sr. notes 10 3/8s, 2009 817,050
1,500,000 HCA, Inc. med. term notes 8.85s, 2007 1,640,625
560,000 HCA, Inc. notes 8 3/4s, 2010 612,297
1,370,000 HCA, Inc. notes 7s, 2007 1,407,675
490,000 Healthsouth Corp. sr. sub. notes 10 3/4s, 2008 539,000
530,000 Icon Health & Fitness 144A sr. sub. notes 11 1/4s, 2012 522,522
410,000 Insight Health Services Corp. 144A sr. sub. notes 9 7/8s, 2011 421,275
1,000,000 Integrated Health Services, Inc. sr. sub. notes Ser. A, 9 1/2s, 2007
(In default) (NON) 100
380,000 Integrated Health Services, Inc. sr. sub. notes Ser. A, 9 1/4s, 2008
(In default) (NON) 38
278,545 Kinetic Concepts, Inc. bank term loan FRN Ser. C, 5.56s, 2005
(acquired 11/5/01, cost $278,894) (RES) 277,617
735,000 Kinetic Concepts, Inc. company guaranty Ser. B, 9 5/8s, 2007 757,050
1,440,000 Magellan Health Services, Inc. sr. sub. notes 9s, 2008 1,094,400
170,000 Magellan Health Services, Inc. 144A sr. notes 9 3/8s, 2007 166,600
1,480,000 Mariner Post-Acute Network, Inc. sr. sub. notes Ser. B, 9 1/2s, 2007
(In default) (NON) 14,800
310,000 Mariner Post-Acute Network, Inc. sr. sub. notes stepped-coupon Ser. B,
zero % (10 1/2s, 11/1/02), 2007 (STP) 1,550
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 (STP) 56
1,590,000 Multicare Companies, Inc. sr. sub. notes 9s, 2007 (In default) (NON) 159
570,000 Omnicare, Inc. sr. sub. notes, 8 1/8s, 2011 599,925
550,000 Rotech Healthcare, Inc. 144A sr. sub. notes 9 1/2s, 2012 567,875
80,000 Service Corp. International notes 7.7s, 2009 75,000
1,930,000 Service Corp. International notes 6s, 2005 1,773,188
720,000 Stewart Enterprises, Inc. notes 10 3/4s, 2008 792,000
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 348,704
1,710,000 Triad Hospitals Holdings company guaranty Ser. B, 11s, 2009 1,898,100
994,545 Triad Hospitals, Inc. bank term loan FRN Ser. B, 4.85s, 2008
(acquired 4/24/01, cost $999,000) (RES) 1,003,801
270,000 Triad Hospitals, Inc. company guaranty Ser. B, 8 3/4s, 2009 287,213
560,000 Vanguard Health Systems, Inc. sr. sub. notes 9 3/4s, 2011 588,000
-------------
23,726,304
Technology (1.9%)
-------------------------------------------------------------------------------------------------------------------
980,000 Crown Castle International Corp. sr. disc. notes stepped-coupon zero %
(10 3/8s, 5/15/04), 2011 (STP) 573,300
460,000 Crown Castle International Corp. sr. notes 10 3/4s, 2011 411,700
930,000 Crown Castle International Corp. sr. notes 9 3/8s, 2011 783,525
432,000 CSG Systems International, Inc. bank term loan FRN Ser. B, 4.593s, 2008
(acquired 3/4/02, cost $433,080) (RES) 425,520
850,000 Equinix, Inc. sr. notes 13s, 2007 263,500
100,000 Exodus Communications, Inc. sr. notes 11 5/8s, 2010 (In default) (NON) 20,250
450,000 Exodus Communications, Inc. sr. notes 10 3/4s, 2009 (In default) (NON) 95,063
720,000 Fairchild Semiconductor International, Inc. sr. sub. notes 10 1/8s, 2007 752,400
1,250,000 Firstworld Communication Corp. sr. disc. notes stepped-coupon zero %
(13s, 4/15/03), 2008 (STP) 125,000
1,500,000 Globix Corp. sr. notes 12 1/2s, 2010 (In default) (NON) 228,750
710,000 Intira Corp. bonds stepped-coupon zero % (13s, 2/1/05), 2010
(acquired 1/31/00, cost $378,366) (RES) (STP) 71
1,150,000 Iron Mountain, Inc. company guaranty 8 3/4s, 2009 1,197,438
270,000 Iron Mountain, Inc. company guaranty 8 1/8s, 2008 (Canada) 273,375
390,000 Iron Mountain, Inc. sr. sub. notes 8 1/4s, 2011 400,608
760,000 IWO Holdings, Inc. company guaranty 14s, 2011 646,000
1,760,000 Lucent Technologies, Inc. notes 7 1/4s, 2006 1,460,800
1,000,000 Micron Technology, Inc. notes 6 1/2s, 2005 930,000
1,550,000 Motors and Gears, Inc. sr. notes Ser. D, 10 3/4s, 2006 1,503,500
620,000 Orbital Imaging Corp. sr. notes Ser. B, 11 5/8s, 2005 (In default) (NON) 49,600
480,000 Polaroid Corp. sr. notes 11 1/2s, 2006 (In default) (NON) 28,800
530,000 PSINet, Inc. sr. notes 11 1/2s, 2008 (In default) (NON) 53,000
840,000 PSINet, Inc. sr. notes 11s, 2009 (In default) (NON) 84,000
130,000 PSINet, Inc. sr. notes Ser. B, 10s, 2005 (In default) (NON) 13,000
110,000 Rhythms Netconnections, Inc. sr. notes Ser. B, 14s, 2010 (In default) (NON) 7,150
370,000 SCG Holding & Semiconductor Corp. company guaranty 12s, 2009 240,500
150,000 Seagate Technology, Inc. 144A company guaranty 12 1/2s, 2007
(Cayman Islands) 170,250
545,000 Telecommunications Techniques, Inc. company guaranty 9 3/4s, 2008 147,150
144,297 Telex Communications Group, Inc. sr. sub. notes zero %, 2006 79,363
170,000 Viasystems, Inc. sr. notes Ser. B, 9 3/4s, 2007 46,750
900,000 World Access, Inc. sr. notes Ser. B, 13 1/4s, 2008 (In default) (NON) 27,000
100,000 Xerox Corp. notes 5 1/2s, 2003 93,500
1,280,000 Xerox Corp. 144A sr. notes 9 3/4s, 2009 1,212,800
40,000 Xerox Credit Corp. sr. notes 6.1s, 2003 37,400
-------------
12,381,063
Transportation (1.4%)
-------------------------------------------------------------------------------------------------------------------
60,000 Air Canada Corp. sr. notes 10 1/4s, 2011 (Canada) 45,000
420,000 American Airlines, Inc. bonds Ser. 01-2, Class B, 8.608s, 2011 429,131
210,000 American Airlines, Inc. 144A pass-through certificates Ser. 01-2,
Class A-2, 7.858s, 2011 215,605
300,000 AMR Corp. debs. 9s, 2012 291,000
980,000 Calair, LLC. 144A company guaranty 8 1/8s, 2008 872,200
320,000 Continental Airlines, Inc. pass-through certificates Ser. D, 7.568s, 2006 288,000
390,000 Delta Air Lines, Inc. pass-through certificates Ser. 00-1, Class C,
7.779s, 2005 387,664
65,000 International Shipholding Corp. sr. notes 9s, 2003 65,650
740,000 Kansas City Southern Railway Co. company guaranty 9 1/2s, 2008 799,200
250,000 Kitty Hawk, Inc. company guaranty 9.95s, 2004 (In default) (NON) 25,000
870,000 Navistar International Corp. company guaranty Ser. B, 9 3/8s, 2006 920,025
210,000 Navistar International Corp. sr. notes Ser. B, 8s, 2008 207,900
240,000 Northwest Airlines, Inc. company guaranty 8 3/8s, 2004 229,200
540,000 Northwest Airlines, Inc. company guaranty 7 5/8s, 2005 499,500
610,000 Northwest Airlines, Inc. sr. notes 9 7/8s, 2007 602,375
281,077 NWA Trust sr. notes Ser. A, 9 1/4s, 2012 283,888
790,000 RailAmerica Transportation Corp. company guaranty 12 7/8s, 2010 869,000
140,000 Transportation Manufacturing Operations, Inc. company guaranty
11 1/4s, 2009 109,200
1,200,000 United Airlines, Inc. deb. 9 1/8s, 2012 840,000
1,450,000 US Air, Inc. pass-through certificates Ser. 93-A2, 9 5/8s, 2003 1,189,000
-------------
9,168,538
Utilities (2.3%)
-------------------------------------------------------------------------------------------------------------------
480,000 AES Corp. (The) notes 8 3/4s, 2008 374,400
1,490,000 AES Corp. (The) sr. notes 9 3/8s, 2010 1,169,650
270,000 Azurix Corp. sr. notes Ser. B, 10 3/4s, 2010 236,250
220,000 Azurix Corp. sr. notes Ser. B, 10 3/8s, 2007 191,400
1,640,000 Calpine Canada Energy Finance company guaranty
8 1/2s, 2008 (Canada) 1,303,800
390,000 Calpine Corp. sr. notes 10 1/2s, 2006 327,600
460,000 Calpine Corp. sr. notes 8 3/4s, 2007 365,700
720,000 Calpine Corp. sr. notes 8 5/8s, 2010 568,800
1,680,000 Calpine Corp. sr. notes 8 1/2s, 2011 1,314,600
700,000 Calpine Corp. sr. notes 7 7/8s, 2008 560,000
30,000 Calpine Corp. sr. notes 7 3/4s, 2009 23,700
600,000 CMS Energy Corp. sr. notes 8.9s, 2008 625,500
320,000 CMS Energy Corp. sr. notes 8 1/2s, 2011 328,838
600,000 CMS Energy Corp. sr. notes Ser. B, 6 3/4s, 2004 597,420
370,000 Edison Mission Energy sr. notes 10s, 2008 370,000
1,650,000 Midland Funding Corp. II debs. Ser. A, 11 3/4s, 2005 1,792,511
1,460,000 Mission Energy Holding Co. sec. notes 13 1/2s, 2008 1,587,750
665,932 Northeast Utilities notes Ser. A, 8.58s, 2006 699,122
140,800 Northeast Utilities notes Ser. B, 8.38s, 2005 147,267
360,000 Pacific Gas & Electric Co. 144A sr. notes 7 3/8s, 2005 (In default) (NON) 406,800
920,000 Southern California Edison Co. notes 8.95s, 2003 936,100
90,000 Southern California Edison Co. notes 6 3/8s, 2006 83,925
1,116,000 York Power Funding 144A notes 12s, 2007 (Cayman Islands)
(In default) (NON) 1,026,720
--------------
15,037,853
--------------
Total Corporate Bonds and Notes (cost $375,627,154) $ 327,931,697
FOREIGN GOVERNMENT BONDS AND NOTES (16.6%) (a)
PRINCIPAL AMOUNT VALUE
-------------------------------------------------------------------------------------------------------------------
AUD 10,940,000 Australia (Government of) bonds Ser. 513, 6 1/2s, 2013 $ 5,863,853
USD 1,870,000 Brazil (Federal Republic of) notes 11s, 2012 1,739,100
CAD 3,680,000 Canada (Government of) bonds Ser. WH31, 6s, 2008 2,357,212
USD 1,415,000 Ecuador (Republic of) bonds Ser. REGS, 12s, 2012 1,135,538
EUR 1,440,000 Germany (Federal Republic of) bonds 5s, 2012 1,232,105
EUR 30,830,000 Germany (Federal Republic of) bonds Ser. 95, 7 3/8s, 2005 28,758,776
EUR 5,130,000 Germany (Federal Republic of) bonds Ser. 99, 4s, 2009 4,163,416
EUR 3,400,000 Italy (Government of) treasury bonds 5 1/2s, 2010 2,992,762
USD 360,000 Malaysia (Government of) bonds 7 1/2s, 2011 370,080
NZD 3,945,000 New Zealand (Government of) bonds Ser. 709, 7s, 2009 1,749,686
USD 2,685,000 Philippines (Republic of) notes 8 3/8s, 2009 2,668,890
USD 11,290,000 Russia (Federation of) unsub. 10s, 2007 11,882,725
USD 11,690,000 Russia (Federation of) unsub. 8 1/4s, 2010 11,105,500
EUR 1,000,000 Spain (Government of) bonds 5.4s, 2011 871,328
EUR 1,690,000 Spain (Government of) bonds 4.8s, 2006 1,465,911
SEK 84,980,000 Sweden (Government of) bonds Ser. 1044, 3 1/2s, 2006 7,650,917
USD 785,000 Turkey (Republic of) bonds 11 3/4s, 2010 807,765
USD 520,000 Turkey (Republic of) notes 11 1/2s, 2012 529,750
GBP 4,030,000 United Kingdom Treasury bonds 7 1/4s, 2007 6,257,195
USD 1,470,000 United Mexican States notes 7 1/2s, 2012 1,464,855
USD 12,790,000 United Mexican States notes Ser. A, 9 7/8s, 2010 14,439,910
--------------
Total Foreign Government Bonds and Notes (cost $104,324,808) $ 109,507,274
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (12.6%) (a)
PRINCIPAL AMOUNT VALUE
U.S. Government Agency Mortgage Obligations (8.9%)
-------------------------------------------------------------------------------------------------------------------
$ 7,960 Federal Home Loan Mortgage Corporation 6 1/2s, September 1, 2002 $ 7,973
Federal National Mortgage Association Pass-Through Certificates
472 8 1/2s, March 1, 2006 502
42,853 8s, with due dates from October 1, 2025 to July 1, 2028 45,276
165,192 7 1/2s, with due date from December 1, 2029 to June 1, 2031 171,333
44,225,000 7 1/4s, January 15, 2010 47,870,457
5,313,271 6 1/2s, with due dates from August 1, 2010 to February 1, 2032 5,303,515
54,432 6s, June 1, 2031 52,816
Government National Mortgage Association Pass-Through Certificates
20,978 8s, July 15, 2023 22,365
1,750,826 7 1/2s, with due dates from July 15, 2029 to January 15, 2030 1,824,534
2,896,698 7s, with due dates from January 15, 2025 to December 15, 2028 2,968,011
240,739 6 1/2s, May 15, 2029 241,061
-------------
58,507,843
U.S. Treasury Obligations (3.7%)
-------------------------------------------------------------------------------------------------------------------
U.S. Treasury Notes
4,565,000 4 7/8s, February 15, 2012 4,379,524
21,570,000 3 1/2s, November 15, 2006 20,400,475
--------------
24,779,999
--------------
Total U.S. Government and Agency Obligations (cost $85,130,758) $ 83,287,842
COLLATERALIZED MORTGAGE OBLIGATIONS (9.0%) (a)
PRINCIPAL AMOUNT VALUE
-------------------------------------------------------------------------------------------------------------------
Amortizing Residential Collateral Trust
$ 35,390,000 Ser. 02-BC1, Class A, Interest Only (IO), 6s, 2005 $ 3,088,330
2,270,000 Ser. 02-BC1, Class M2, FRN, 2.98s, 2032 2,242,527
4,100,000 Amresco Commercial Mortgage Funding I Ser. 97-C1, Class F,
7.64s, 2029 4,208,906
3,747,996 Bank of America Commercial Mortgage, Inc. Ser. 01-PB1, Class XC, IO,
0.535s, 2035 164,707
5,966,097 Bank of America Mortgage Securities Ser. 01-10, Class 1A11, IO,
0.211s, 2031 464,237
545,000 Chase Commercial Mortgage Securities Corp. Ser. 00-3, Class G,
6.887s, 2019 439,917
8,577,607 Citicorp Mortgage Securities, Inc. Ser. 01-15, Class A3A, IO, 0.307s, 2031 507,955
1,660,000 Commercial Mortgage Acceptance Corp. Ser. 97-ML1, Class D,
7.052s, 2010 1,588,931
30,776,114 Commercial Mortgage Asset Trust Ser. 99-C1, Class X, IO, 0.560s, 2020 1,772,031
CS First Boston Mortgage Securities Corp.
520,000 Ser. 01-CF2, Class E, 7.29s, 2011 529,425
540,000 Ser. 01-CF2, Class G, 6.93s, 2011 520,425
30,614,876 Deutsche Mortgage & Asset Receiving Corp. Ser. 98-C1, Class X, IO,
1.04s, 2023 1,215,028
Euro Loan Conduit 144A
500,000 FRN Ser. 7A, Class E, 8.493s, 2006 (United Kingdom) 683,424
500,000 FRN Ser. 7A, Class D, 6.743s, 2006 (United Kingdom) 711,789
Fannie Mae
68,326 Ser. 93-245, Class SD, 18.662s, 2023 69,287
298,704 Ser. 98-63, Class S, 14.64s, 2026 298,704
3,951,292 Ser. 319, Class 2, IO, 6 1/2s, 2032 1,200,822
1,759,710 Ser. 01-55, Class CZ, 6 1/2s, 2031 1,714,068
Fannie Mae
931,400 Ser. 01-58, Class HI, IO, 6 1/2s, 2026 234,014
3,508,000 Ser. 01-62, Class PI, IO, 6 1/2s, 2025 588,686
2,335,800 Ser. 01-72, Class NI, IO, 6s, 2021 328,937
3,319,200 Ser. 01-70, Class PI, IO, 6s, 2021 485,477
2,343,700 Ser. 01-74, Class QI, IO, 6s, 2018 277,490
1,666,700 Ser. 01-74, Class MI, IO, 6s, 2015 304,303
6,565,495 Ser. 318, Class 2, IO, 2.981s, 2032 2,094,803
1,773,879 Ser. 01-62, Class BI, IO, 1.723s, 2026 333,711
700,606 Ser. 2351, Class EO, Principal Only (PO), zero %, August 15, 2031 113,832
79,925 Ser. 2001-30, Class DO, zero %, 2031 72,207
687,225 Ser. 1999-54, Class N, zero %, 2029 544,196
716,602 Ser. 1999-52, Class MO, zero %, 2026 626,131
351,872 Ser. 1997-92, Class PO, zero %, 2025 332,079
914,957 Ser. 1996-5, Class PB, zero %, 2024 654,766
309,039 Ser. 1999-4, Class M, zero %, 2023 289,556
892,766 Ser. 1993-159, Class D, zero %, 2023 664,274
17,802,362 FFCA Secured Lending Corp. Ser. 00-1, Class X, IO, 1.72s, 2020 1,504,856
Freddie Mac
489,872 Ser. 2154, Class SA, 24.83s, 2029 479,921
221,193 Ser. 2149, Class ST, 22.43s, 2029 218,601
769,670 Ser. 2319, Class S, 21.797s, 2031 691,501
1,223,684 Ser. 2360, Class SC, 16.257s, 2031 1,096,344
217,167 Ser. 2286, Class LR, 15.533s, 2024 219,678
378,520 Ser. 1717, Class L, 6 1/2s, 2024 380,767
1,154,654 Ser. 2044, Class SG, IO, 2.18s, 2023 89,129
1,687,179 Ser. 2389, Class EI, IO, 0.755s, 2021 240,423
700,606 Ser. 2351, Class EO, PO, zero %, 2031 484,294
345,225 Ser. 2337, PO, zero %, 2031 236,910
185,174 Ser. 2331, PO, zero %, 2031 167,293
2,779,630 Ser. 215, PO, zero %, 2031 2,352,262
52,862 Ser. 2312, PO, zero %, 2031 47,758
205,166 Ser. 2317, PO, zero %, 2031 159,517
56,457 Ser. 2302, Class LO, PO, zero %, 2031 55,892
32,365 Ser. 2291, Class QO, PO, zero %, 2031 29,240
518,527 Ser. 57, Class A, PO, zero %, 2023 393,513
255,846 Ser. 2078, Class KC, PO, zero %, 2023 228,982
121,202 Ser. 2190, PO, zero %, 2014 119,990
9,188,635 Ser. 216, IO, 6s, January 1, 2032 2,951,849
13,072,147 Ser. 212, IO, 1.917s, May 1, 2031 3,815,433
550,000 GE Capital Commercial Mortgage Corp. Ser. 01-1, Class G, 7.04s, 2011 525,164
Government National Mortgage Association
868,808 Ser. 98-2, Class EA, PO, zero %, 2028 683,916
304,813 Ser. 99-42, PO, zero %, 2027 280,333
1,075,000 Granite Mortgages PLC FRN Ser. 01-1, Class 1C, 3.17s, 2041
(United Kingdom) 1,074,321
5,065,000 Holmes Financing PLC Ser. 1, Class 2C, 2.977s, 2040 5,039,675
Merrill Lynch Mortgage Investors, Inc.
16,896,587 Ser. 96-C2, IO, 8.59s, 2028 1,008,515
1,070,000 Ser. 96-C2, Class E, 6.96s, 2028 1,008,141
5,743,730 Mortgage Capital Funding, Inc. Ser. 97-MC2, Class X, IO, 7.18s, 2012 299,751
60,788 Prudential Home Mortgage Securities Ser. 93-57, Class A4, 5.9s, 2023 61,557
17,922,400 Residential Funding Mortgage Securities, Inc. Ser. 01-S26, Class A9, IO,
0.765s, 2031 1,080,945
264,296 Rural Housing Trust Ser. 87-1, Class D, 6.33s, 2026 268,892
2,500,000 Starwood Asset Receivables Trust FRB Ser. 00-1, Class E, 4.6s, 2005 2,525,000
--------------
Total Collateralized Mortgage Obligations (cost $57,962,190) $ 59,185,338
BRADY BONDS (4.1%) (a)
PRINCIPAL AMOUNT VALUE
-------------------------------------------------------------------------------------------------------------------
$ 23,510,000 Brazil (Federal Republic of) govt. guaranty FRB 3 1/4s, 2012 $ 17,898,163
5,272,400 Bulgaria (Government of) debs. FRB Ser. PDI, 2.813s, 2011 4,613,350
499,800 Bulgaria (Government of) debs. FRB Ser. RPDI, 4.563s, 2011 437,325
4,714,215 Venezuela (Republic of) debs. FRB Ser. DL, 4 3/4s, 2007 3,848,214
--------------
Total Brady Bonds (cost $25,171,537) $ 26,797,052
ASSET-BACKED SECURITIES (2.9%) (a)
PRINCIPAL AMOUNT VALUE
-------------------------------------------------------------------------------------------------------------------
$ 852,000 Aames Mortgage Trust Ser. 02-1, Class A3, FRN, 6.869s, 2032 $ 849,603
807,000 Arc Net Interest Margin Trust 144A Ser. 02-1A, Class A, 7 3/4s, 2032 799,056
662,610 Asset Backed Funding Corporation NIM Trust Ser. 02-WF1, 9.32s, 2032 655,984
3,055,000 Conseco Finance Securitization Corp. Ser. 00-4, Class A6, 8.31s, 2032 3,171,472
1,100,000 Conseco Finance Securitization Corp. Ser. 00-6, Class M2, 8.2s, 2032 1,090,691
1,030,000 Conseco Finance Securitization Corp. Ser. 01-4, Class B1, 9.4s, 2010 966,953
1,185,000 Consumer Credit Reference Index Securities Ser. 02-2A, Class BFL,
FRN, 3.881s, 2007 1,187,592
2,713,497 Greenpoint Manufactured Housing Ser. 00-3, Class IA, 8.45s, 2031 2,824,056
1,046,356 Madison Avenue Manufactured Housing Contract Ser. 02-A, Class B1,
FRN, 5.15s, 2034 784,767
630,563 Mid-State Trust Ser. 10, Class B, 7.54s, 2026 587,803
390,000 Morgan Stanley Dean Witter Capital I Ser. 01-NC3, Class B1, FRN,
4.35s, 2031 384,820
1,660,000 Morgan Stanley Dean Witter Capital I Ser. 01-NC4, Class B1, FRN,
4.35s, 2032 1,637,694
598,877 Morgan Stanley Dean Witter Capital I 144A Ser. 01-AM1N,
12 3/4s, 2032 597,847
1,252,107 Morgan Stanley Dean Witter Capital I 144A Ser. 01-NC4N,
8 1/2s, 2032 1,245,846
1,268,915 Option One Mortgage Securities Corp. Ser. 02-2A, Class CFTS,
8.83s, 2032 1,268,788
1,185,448 Option One Mortgage Securities Corp. 144A Ser. 02-1, Class CTFS,
6 3/4s, 2032 1,167,145
--------------
Total Asset-Backed Securities (cost $19,174,991) $ 19,220,117
PREFERRED STOCKS (1.6%) (a)
NUMBER OF SHARES VALUE
-------------------------------------------------------------------------------------------------------------------
11,714 AmeriKing, Inc. $3.25 cum. pfd. (PIK) $ 117
56,000 California Federal Bancorp, Inc. Ser. A, $2.281 pfd. 1,394,960
28,531 Chevy Chase Capital Corp. Ser. A, $5.188 pfd. (PIK) 1,592,030
3,150 Chevy Chase Savings Bank, Inc. $3.25 pfd. 85,050
18,412 CSC Holdings, Inc. Ser. M, $11.125 cum. pfd. (PIK) 1,910,245
1,380 Delta Financial Corp. Ser. A, $10.00 cum. pfd. 15,870
19,200 Diva Systems Corp. Ser. C, 6.00% cum. pfd. 192
238 Dobson Communications Corp. 144A 12.25% pfd. (PIK) 204,886
320 First Republic Capital Corp. 144A 10.50% pfd. 318,400
11,765 Fitzgeralds Gaming Corp. 15% cum. pfd. 118
1,116 Granite Broadcasting Corp. 12.75% cum. pfd. (PIK) 546,840
1,352 Intermedia Communications, Inc. Ser. B, 13.50% pfd. (PIK) 1,257,360
357 Nextel Communications, Inc. 144A Ser. E, 11.125% pfd. (PIK) 132,090
269 Paxson Communications Corp. 13.25% cum. pfd. (PIK) 2,488,250
1,168 Rural Cellular Corp. 12.25% pfd. (PIK) 584,020
--------------
Total Preferred Stocks (cost $11,731,912) $ 10,530,428
COMMON STOCKS (0.9%) (a) (NON)
NUMBER OF SHARES VALUE
-------------------------------------------------------------------------------------------------------------------
2,305 Alderwoods Group, Inc. $ 20,515
150 AmeriKing, Inc. 2
28,107 Arch Wireless, Inc. 253
14,080 Aurora Foods, Inc. 58,995
149,352 Celcaribe SA 4,481
15,321 Covad Communications Group, Inc. 144A 34,932
1,380 Delta Funding Residual Exchange Co., LLC 301,530
1,380 Delta Funding Residual Management, Inc. 14
20,520 Doskocil Manufacturing Company, Inc. 61,560
23,404 Fitzgeralds Gaming Corp. 234
2,708 Focal Communications Corp. 11,563
6,936 Genesis Health Ventures, Inc. 126,235
11,477 Intira Corp. 1
6,795 MPower Holdings Corp. 144A 272
815,000 Paracelsus Healthcare Corp. 82
49,759 Pioneer Cos., Inc. 93,298
327 Premium Holdings (L.P.) 144A 6,867
715 PSF Holdings LLC Class A 1,502,193
167 Quorum Broadcast Holdings, Inc. Class E (acquired 5/15/01,
cost $166,517) (RES) 166,870
21,831 Regal Cinemas, Inc. 3,383,817
10,704 Safety Components International, Inc. (acquired 7/21/97,
cost $200,000) (RES) 58,872
10,050 Specialty Foods Acquisition Corp. 101
1,335 Vast Solutions, Inc. Class B1 4,005
1,335 Vast Solutions, Inc. Class B2 4,005
1,335 Vast Solutions, Inc. Class B3 4,005
65 Waste Management, Inc. 959
--------------
Total Common Stocks (cost $7,145,037) $ 5,845,661
CONVERTIBLE BONDS AND NOTES (0.5%) (a)
PRINCIPAL AMOUNT VALUE
-------------------------------------------------------------------------------------------------------------------
$690,000 American Tower Corp. cv. notes 5s, 2010 $ 379,500
990,000 DaVita, Inc. cv. sub. notes 7s, 2009 986,337
1,220,000 Exide Corp. 144A cv. sr. sub. notes 2.9s, 2005 6,100
490,000 Healthsouth Corp. cv. sub. deb. 3 1/4s, 2003 472,238
111,000 Hexcel Corp. cv. sub. notes 7s, 2003 72,289
1,680,000 Nextel Communications, Inc. cv. sr. notes 5 1/4s, 2010 840,000
310,000 Rogers Communications cv. deb. 2s, 2005 (Canada) 243,738
50,000 Spectrasite Holdings, Inc. cv. sr. notes 6 3/4s, 2010 16,886
1,300,000 Telewest Finance Corp. cv. sub. notes 6s, 2005 (United Kingdom) 598,000
--------------
Total Convertible Bonds and Notes (cost $4,837,362) $ 3,615,088
UNITS (0.1%) (a)
NUMBER OF UNITS VALUE
-------------------------------------------------------------------------------------------------------------------
600 Australis Media, Ltd. units 15 3/4s, 2003 (Australia) (In default) (NON) $ 60
3,445,121 Contifinancial Corp. Liquidating Trust units 8 1/8s, 2031 (NON) 172,256
608 Hercules Trust II units cum. cv. pfd. 6 1/2s 352,640
840 Pegasus Shipping 144A units stepped-coupon zero %
(14 1/2s, 6/20/03), 2008 (Bermuda) (STP) 8,400
500 XCL, Ltd. 144A units 13 1/2s, 2004 (In default) (NON) 150,000
--------------
Total Units (cost $3,873,892) $ 683,356
CONVERTIBLE PREFERRED STOCKS (0.1%) (a)
NUMBER OF SHARES VALUE
-------------------------------------------------------------------------------------------------------------------
51 Anker Coal Group, Inc. 14.25% cv. pfd. $ 255
55 Genesis Health Ventures, Inc. $6.00 cv. pfd. (PIK) 6,050
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) 475
41 Paxson Communications Corp. 144A 9.75% cv. pfd. (PIK) 369,000
6,846 Telex Communications, Inc. zero % cv. pfd. 6,846
115 World Access, Inc. 144A Ser. D, zero % cv. pfd. 29
--------------
Total Convertible Preferred Stocks (cost $740,705) $ 382,660
WARRANTS (--%) (a) (NON) EXPIRATION
NUMBER OF WARRANTS DATE VALUE
-------------------------------------------------------------------------------------------------------------------
4 Anker Coal Group, Inc. 144A 10/28/09 $ 1
460 Birch Telecommunications, Inc. 144A 6/15/08 46
1,220 Club Regina, Inc. 144A 12/1/04 12
900 Colo.com, Inc. 144A 3/15/10 9
1,500 Comunicacion Cellular 144A 11/15/03 1,500
1,020 Dayton Superior Corp. 6/15/09 10,200
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 8
8,173 Diva Systems Corp. 144A 3/1/08 82
6,915 Genesis Health Ventures, Inc. 10/1/02 14,660
1,050 Horizon PCS, Inc. 10/1/10 21,000
9,768 ICG Communications, Inc. 10/15/05 98
16,858 Imperial Credit Industries, Inc. 8/1/08 17
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 4,550
400 Iridium World Com 144A 7/15/05 1
590 IWO Holdings, Inc. 1/15/11 17,700
1,140 Jostens, Inc. 5/1/10 11,400
2,085 KMC Telecommunications Holdings, Inc. 144A 4/15/08 21
1,180 Knology Holdings, Inc. 10/22/07 30
544 Leap Wireless International, Inc. 144A 4/15/10 16,320
3,034 Loral Space & Communications, Ltd. 12/27/06 30
930 McCaw International, Ltd. 4/15/07 9
560 Mediq, Inc. 144A 6/1/09 6
390 Mikohn Gaming Corp. 144A 8/15/08 1,950
400 ONO Finance PLC 144A (United Kingdom) 2/15/11 1,000
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 4,320
410 Pliant Corp. 144A 6/1/10 820
860 Startec Global Communications Corp. 5/15/08 9
185 Sterling Chemicals Holdings 8/15/08 111
410 Telehub Communications Corp. 144A 7/31/05 1
270 Telex Communications Group, Inc. 3/30/07 3
1,830 Travel Centers of America, Inc. 5/1/09 18
1,670 Ubiquitel, Inc. 144A 4/15/10 59,285
1,260 UIH Australia/Pacific, Inc. 144A 5/15/06 13
13,865 United Artists Theatre 3/2/08 124,785
680 Veraldo Holdings, Inc. 144A 4/15/08 7
30 Versatel Telecom NV (Netherlands) 5/15/08 15
590 XM Satellite Radio Holdings, Inc. 144A 3/15/10 590
--------------
Total Warrants (cost $2,036,761) $ 290,661
SHORT-TERM INVESTMENTS (4.6%) (a)
PRINCIPAL AMOUNT VALUE
-------------------------------------------------------------------------------------------------------------------
$ 970,000 U.S. Treasury Notes zero %, June 13, 2002 (SEG) $ 966,624
12,191 Short-term investments held as collateral for loaned securities
with yields ranging from 1.80% to 2.19% and due dates ranging
from April 1, 2002 to May 13, 2002 (d) 12,180
29,646,000 Interest in $715,000,000 joint tri-party repurchase agreement dated
March 28, 2002 with Goldman Sachs & Co. due April 1, 2002 with
respect to various U.S. Government obligations -- maturity value
of $29,652,325 for an effective yield of 1.92% 29,646,000
--------------
Total Short-Term Investments (cost $30,624,804) $ 30,624,804
-------------------------------------------------------------------------------------------------------------------
Total Investments (cost $728,381,911) (b) $ 677,901,978
-------------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $659,748,443.
(b) The aggregate identified cost on a tax basis is $731,358,719,
resulting in gross unrealized appreciation and depreciation of
$24,562,495 and $78,019,236, respectively, or net unrealized
depreciation of $53,456,741.
(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 March 31, 2002 was
$19,632,682 or 3.0% of net assets.
(DEF) Security is in default of principal and interest.
(PIK) Income may be received in cash or additional securities at the
discretion of the issuer.
(SEG) This security was pledged and segregated with the custodian to
cover margin requirements for futures contracts at March 31, 2002.
(R) Real Estate Investment Trust.
(d) See footnote 1 to the financial statements.
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 March 31, 2002,
which are subject to change based on the terms of the security.
DIVERSIFICATION BY COUNTRY
Distribution of investments by country of issue at March 31, 2002:
(as percentage of Market Value)
Australia 0.9%
Brazil 2.9
Canada 2.1
Germany 5.1
Mexico 2.3
Russia 3.4
Sweden 1.1
United Kingdom 2.0
United States 75.9
Other 4.3
-----
Total 100.0%
------------------------------------------------------------------------------
Forward Currency Contracts to Buy at March 31, 2002
(aggregate face value $43,549,258)
Unrealized
Aggregate Face Delivery Appreciation/
Market Value Value Date (Depreciation)
------------------------------------------------------------------------------
Australian Dollars $ 9,415,610 $ 9,227,511 6/19/2002 $ 188,099
British Pounds 2,258,753 2,252,093 6/19/2002 6,660
Canadian Dollars 2,163,334 2,170,749 6/19/2002 (7,415)
Danish Krone 755,243 753,481 6/19/2002 1,762
Euro 12,329,094 12,413,405 6/19/2002 (84,311)
Japanese Yen 16,263,163 16,380,452 6/19/2002 (117,289)
Swiss Franc 351,248 351,567 6/19/2002 (319)
------------------------------------------------------------------------------
$(12,813)
------------------------------------------------------------------------------
Forward Currency Contracts to Sell at March 31, 2002
(aggregate face value $39,008,477)
Unrealized
Market Aggregate Face Delivery Appreciation/
Value Value Date (Depreciation)
------------------------------------------------------------------------------
Australian Dollars $ 4,092,040 $ 4,025,716 6/19/2002 $ (66,324)
British Pounds 2,204,257 2,201,772 6/19/2002 (2,485)
Canadian Dollars 1,649,287 1,658,417 6/19/2002 9,130
Euro 22,356,065 22,252,590 6/19/2002 (103,475)
New Zealand
Dollars 1,680,240 1,638,003 6/19/2002 (42,237)
Swedish Krona 7,217,070 7,231,979 6/19/2002 14,909
------------------------------------------------------------------------------
$(190,482)
------------------------------------------------------------------------------
Futures Contracts Outstanding at March 31, 2002
Unrealized
Aggregate Face Expiration Appreciation/
Total Value Value Date (Depreciation)
------------------------------------------------------------------------------
3 Month Eurodollar
(long) $ 1,705,725 $ 1,710,655 Jun-02 $ (4,930)
3 Month Eurodollar
(long) 1,692,862 1,702,955 Sep-02 (10,093)
3 Month Eurodollar
(long) 1,662,587 1,664,630 Jun-03 (2,043)
Euro-Bobl 5yr
(long) 17,684,815 17,823,327 Jun-02 (138,512)
Euro-Bund 10yr
(long) 3,564,176 3,599,361 Jun-02 (35,185)
Interest Rate Swap
10yr (long) 1,477,031 1,490,097 Jun-02 (13,066)
Japanese
Government Bond
10yr (long) 4,583,292 4,552,460 Jun-02 30,832
Japanese
Government Bond
10yr (long) 4,167,535 4,138,569 Jun-02 28,966
US Treasury Note
10yr (long) 31,862,922 32,787,523 Jun-02 (924,601)
US Treasury Note
10yr (short) 23,666,672 23,829,527 Jun-02 162,855
US Treasury Note
10yr (long) 9,526,856 9,804,629 Jun-02 (277,773)
US Treasury Note
5yr (short) 3,630,703 3,631,101 Jun-02 398
------------------------------------------------------------------------------
$(1,183,152)
------------------------------------------------------------------------------
Written Call Options on Foreign Currency Outstanding at March 31, 2002
(premiums received $7,815)
Contract Expiration Date/ Market
Amount Strike Price Value
------------------------------------------------------------------------------
7 Eurodollar 3 Month - CME (call) Sep 02/$97.25 $1,750
7 Eurodollar 3 Month - CME (call) Jun 02/$97.75 569
------------------------------------------------------------------------------
$2,319
------------------------------------------------------------------------------
------------------------------------------------------------------------------
TBA Sales Commitments at March 31, 2002
(Proceeds receivable $4,935,181)
Principal Settlement Market
Agency Amount Date Value
------------------------------------------------------------------------------
FNMA, 6 1/2s,
April 2032 $4,946,000 4/11/02 $4,919,737
------------------------------------------------------------------------------
Swap Contracts outstanding at March 31, 2002
Notional Termination Unrealized
Amount Date Appreciation
------------------------------------------------------------------------------
Agreement with
Merrill Lynch
Capital Services
dated November
17, 2000 to pay
semi-annually the
notional amount
multiplied by the
return of
LIBOR-BAA and
receive quarterly
the notional
amount multiplied
by 6.7506% $6,500,000 11/21/05 $363,174
------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
STATEMENT OF ASSETS AND LIABILITIES
March 31, 2002 (Unaudited)
Assets
-------------------------------------------------------------------------------------------
Investments in securities, at value, including $10,402 of securities on loan
(identified cost $728,381,911) (Note 1) $677,901,978
-------------------------------------------------------------------------------------------
Cash 5,072,787
-------------------------------------------------------------------------------------------
Foreign currency (cost $182,782) 165,468
-------------------------------------------------------------------------------------------
Dividends, interest and other receivables 13,648,858
-------------------------------------------------------------------------------------------
Receivable for securities sold 26,107,882
-------------------------------------------------------------------------------------------
Receivable for open swap contracts (Note 1) 363,174
-------------------------------------------------------------------------------------------
Receivable for open forward currency contracts (Note 1) 235,088
-------------------------------------------------------------------------------------------
Receivable for closed forward currency contracts (Note 1) 469,140
-------------------------------------------------------------------------------------------
Total assets 723,964,375
Liabilities
-------------------------------------------------------------------------------------------
Payable for variation margin (Note 1) 29,698
-------------------------------------------------------------------------------------------
Distributions payable to shareholders 4,483,710
-------------------------------------------------------------------------------------------
Payable for securities purchased 52,905,851
-------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 1,142,284
-------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 127,441
-------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 64,490
-------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 3,434
-------------------------------------------------------------------------------------------
Payable for open forward currency contracts (Note 1) 438,383
-------------------------------------------------------------------------------------------
Payable for closed forward currency contracts (Note 1) 53,218
-------------------------------------------------------------------------------------------
Written options outstanding, at value (premiums received $7,815) (Notes 1 and 3) 2,319
-------------------------------------------------------------------------------------------
TBA sales commitments, at value (proceeds receivable $4,935,181) (Note 1) 4,919,737
-------------------------------------------------------------------------------------------
Collateral on securities loaned, at value (Note 1) 12,180
-------------------------------------------------------------------------------------------
Other accrued expenses 33,187
-------------------------------------------------------------------------------------------
Total liabilities 64,215,932
-------------------------------------------------------------------------------------------
Net assets $659,748,443
Represented by
-------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $844,899,761
-------------------------------------------------------------------------------------------
Distributions in excess of net investment income (Note 1) (10,210,451)
-------------------------------------------------------------------------------------------
Accumulated net realized loss on investment and foreign currency
transactions (Note 1) (123,309,210)
-------------------------------------------------------------------------------------------
Net unrealized depreciation of investments and assets and liabilities in
foreign currencies (51,631,657)
-------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $659,748,443
Computation of net asset value
-------------------------------------------------------------------------------------------
Net asset value per share ($659,748,443 divided by 100,133,127 shares) $6.59
-------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
STATEMENT OF OPERATIONS
Six months March 31, 2002 (Unaudited)
Investment income:
-------------------------------------------------------------------------------------------
Interest income $28,421,421
-------------------------------------------------------------------------------------------
Dividends 601,320
-------------------------------------------------------------------------------------------
Securities lending 315
-------------------------------------------------------------------------------------------
Total investment income 29,023,056
-------------------------------------------------------------------------------------------
Expenses:
-------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 2,300,863
-------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 332,366
-------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 10,559
-------------------------------------------------------------------------------------------
Administrative services (Note 2) 7,023
-------------------------------------------------------------------------------------------
Other 132,189
-------------------------------------------------------------------------------------------
Total expenses 2,783,000
-------------------------------------------------------------------------------------------
Expense reduction (Note 2) (20,386)
-------------------------------------------------------------------------------------------
Net expenses 2,762,614
-------------------------------------------------------------------------------------------
Net investment income 26,260,442
-------------------------------------------------------------------------------------------
Net realized loss on investments (Notes 1 and 3) (25,334,614)
-------------------------------------------------------------------------------------------
Net realized loss on foreign currency transactions (Note 1) (900,223)
-------------------------------------------------------------------------------------------
Net realized gain on futures contracts (Note 1) 5,817
-------------------------------------------------------------------------------------------
Net realized gain on written options (Note 1) 7,982
-------------------------------------------------------------------------------------------
Net unrealized depreciation of assets and liabilities in foreign currencies
during the period (214,019)
-------------------------------------------------------------------------------------------
Net unrealized appreciation of investments, futures, TBA sales commitments,
written options and swap contracts during the period 31,797,110
-------------------------------------------------------------------------------------------
Net gain on investments 5,362,053
-------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $31,622,495
-------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
STATEMENT OF CHANGES IN NET ASSETS
Six months ended Year ended
March 31 September 30
2002* 2001
--------------------------------------------------------------------------------------------------
Increase (decrease) in net assets
--------------------------------------------------------------------------------------------------
Operations:
--------------------------------------------------------------------------------------------------
Net investment income $ 26,260,442 $ 58,649,683
--------------------------------------------------------------------------------------------------
Net realized loss on investments and foreign currency transactions (26,221,038) (30,897,824)
--------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of investments
and assets and liabilities in foreign currencies 31,583,091 (26,007,032)
--------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 31,622,495 1,744,827
--------------------------------------------------------------------------------------------------
Distributions to shareholders: (Note 1)
--------------------------------------------------------------------------------------------------
From net investment income (27,034,819) (45,980,550)
--------------------------------------------------------------------------------------------------
From return of capital -- (14,497,458)
--------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets 4,587,676 (58,733,181)
Net assets
--------------------------------------------------------------------------------------------------
Beginning of period 655,160,767 713,893,948
--------------------------------------------------------------------------------------------------
End of period (including distributions in excess
of net investment income of $10,210,451
and $9,436,074 respectively) $ 659,748,443 $ 655,160,767
--------------------------------------------------------------------------------------------------
Number of fund shares
--------------------------------------------------------------------------------------------------
Shares outstanding at beginning and end of period 100,133,127 100,133,127
--------------------------------------------------------------------------------------------------
*Unaudited
The accompanying notes are an integral part of these financial statements.
FINANCIAL HIGHLIGHTS
(For a common share outstanding throughout the period)
------------------------------------------------------------------------------------------------------------------
Six months
ended
Per-share March 31
operating performance (Unaudited) Year ended September 30
------------------------------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998 1997
------------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $6.54 $7.13 $7.57 $8.14 $8.79 $8.58
------------------------------------------------------------------------------------------------------------------
Investment operations:
------------------------------------------------------------------------------------------------------------------
Net investment income (a) .26 .58 .63 .58 .71 .64
------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .06 (.57) (.43) (.47) (.67) .21
------------------------------------------------------------------------------------------------------------------
Total from
investment operations .32 .01 .20 .11 .04 .85
------------------------------------------------------------------------------------------------------------------
Less distributions:
------------------------------------------------------------------------------------------------------------------
From net
investment income (.27) (.46) (.64) (.56) (.69) (.64)
------------------------------------------------------------------------------------------------------------------
From return of capital -- (.14) -- (.12) -- --
------------------------------------------------------------------------------------------------------------------
Total distributions (.27) (.60) (.64) (.68) (.69) (.64)
------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $6.59 $6.54 $7.13 $7.57 $8.14 $8.79
------------------------------------------------------------------------------------------------------------------
Market value,
end of period $6.130 $6.050 $6.438 $6.438 $7.750 $8.125
------------------------------------------------------------------------------------------------------------------
Total return at
market value (%)(b) 5.74* 3.06 10.72 (9.09) 3.91 17.54
------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $659,748 $655,161 $713,894 $757,533 $814,342 $337,664
------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(c) .42* .90 .87 .93 .92 1.04
------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 3.97* 8.50 8.60 7.39 8.13 7.47
------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 85.88* (e) 111.45 116.71 133.72 179.84(d) 220.61
------------------------------------------------------------------------------------------------------------------
* Not annualized.
(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.
(e) Portfolio turnover excludes certain treasury note transactions
executed in connection with a short-term trading strategy.
The accompanying notes are an integral part of these financial statements.
NOTES TO FINANCIAL STATEMENTS
March 31, 2002 (Unaudited)
Note 1
Significant accounting policies
Putnam Master Intermediate Income Trust (the "fund") is registered under
the Investment Company Act of 1940, as amended, as a diversified,
closed-end management investment company and is authorized to issue an
unlimited number of shares. The fund's investment objective is to seek,
with equal emphasis, high current income and relative stability of net
asset value, by allocating its investments among the U.S. 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, generally recognized by institutional traders, between
securities.
B) Joint trading account The fund may transfer uninvested cash balances,
including cash collateral received under security lending arrangements,
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, an
indirect wholly-owned subsidiary of Putnam, 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. All
premiums/discounts are amortized /accreted 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. The Fund agrees to
receive from or pay to the broker an amount of cash equal to the daily
fluctuation in the value of the futures contract. Such receipts or
payments are known as "variation margin". 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) TBA sale commitments The fund may enter into TBA sale commitments to
hedge its portfolio positions or to sell mortgage-backed securities it
owns under delayed delivery arrangements. Proceeds of TBA sale
commitments are not received until the contractual settlement date.
During the time a TBA sale commitment is outstanding, equivalent
deliverable securities, or an offsetting TBA purchase commitment
deliverable on or before the sale commitment date, are held as "cover"
for the transaction.
Unsettled TBA sale commitments are valued at the current market value of
the underlying securities, generally according to the procedures
described under "Security valuation" above. The contract is
"marked-to-market" daily and the change in market value is recorded by
the fund as an unrealized gain or loss. If the TBA sale commitment is
closed through the acquisition of an offsetting purchase commitment, the
fund realizes a gain or loss. If the fund delivers securities under the
commitment, the fund realizes a gain or a loss from the sale of the
securities based upon the unit price established at the date the
commitment was entered into.
K) 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 March 31, 2002, the value of
securities loaned amounted to $10,402. The fund received cash collateral
of $12,180 which is pooled with collateral of other Putnam funds into 35
issuers of high grade short-term investments.
L) 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
M) 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. Reclassifications are made to the fund's
capital accounts to reflect income and gains available for distribution (or
available capital loss carryovers) under income tax regulations.
Note 2
Management fee, administrative
services and other transactions
Compensation of Putnam Management, for management and investment
advisory services is paid quarterly based on the average net assets of
the fund. Such fee is based on the following annual rates: 0.75% of the
first $500 million of average weekly net assets, 0.65% of the next $500
million, 0.60% of the next $500 million, and 0.55% thereafter.
The fund reimburses Putnam Management an allocated amount for the
compensation and related expenses of certain officers of the fund and
their staff who provide administrative services to the fund. The
aggregate amount of all such reimbursements is determined annually by
the Trustees.
Custodial functions for the fund's assets are provided by Putnam
Fiduciary Trust Company (PFTC), a wholly-owned subsidiary of Putnam,
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 six months ended March 31, 2002,
the fund's expenses were reduced by $20,386 under these arrangements.
Each independent Trustee of the fund receives an annual Trustee fee, of
which $988 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 six months ended March 31, 2002, cost of purchases and
proceeds from sales of investment securities other than U.S. government
obligations and short-term investments aggregated $394,094,903 and
$318,636,193, respectively. Purchases and sales of U.S. government
obligations aggregated $625,100,281 and $646,044,770, respectively.
Written option transactions during the period are summarized as follows:
Contract Premiums
Amounts Received
---------------------------------------------------------------------------
Written options
outstanding at
beginning of year $ -- $ --
---------------------------------------------------------------------------
Options opened 4,378,014 15,797
---------------------------------------------------------------------------
Options expired (4,378,000) (7,982)
---------------------------------------------------------------------------
Options closed -- --
---------------------------------------------------------------------------
Written options
outstanding at
end of period $ 14 $ 7,815
---------------------------------------------------------------------------
Note 4
Share repurchase program
In November 1994, the Trustees authorized the fund to repurchase up to
1,950,000 of its shares in the open market. Repurchases will only be
made when the fund's shares are trading at less than net asset value and
at such times and amounts as is believed to be in the best interest of
the fund's shareholders. Any repurchases of shares will have the effect
of increasing the net asset value per share of remaining shares
outstanding.
For the six months ended March 31, 2002, 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
As required, effective January 1, 2001, the fund has adopted the
provisions of the AICPA Audit and Accounting Guide, Audits of Investment
Companies. This Guide requires that the fund 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. Prior to January 1, 2001, the fund did not amortize premium
and accrete discounts for certain fixed income securities and
characterized as realized gains and losses paydowns on mortgage backed
securities. 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 is not
material to the financial statements.
AMENDMENT TO BYLAWS
(Unaudited)
On March 9, 2001, the Trustees amended the fund's Bylaws to require
advance notice of shareholder Trustee nominations and shareholder
proposals fixing the number of Trustees. Shareholders wishing to propose
one or more nominees for election as Trustees or wishing to make a
proposal fixing the number of Trustees at an annual meeting of
shareholders must provide written notice to the fund (including all
required information) so that such notice is received in good order by
the fund not less than sixty (60) nor more than ninety (90) days prior
to the anniversary date of the immediately preceding annual meeting. An
exception applies in the case of the annual meeting to be held in
calendar year 2001, to the effect that the notice described above to be
timely must be received in good order by the fund not less than thirty
(30) days prior to that anniversary date. A further exception to the
notice deadline applies in the event the date of the annual meeting is
substantially advanced or delayed from that anniversary date. Copies of
these amendments to the Bylaws have been filed with the Securities and
Exchange Commission and are available from its public reference
facilities.
FUND INFORMATION
ABOUT PUTNAM INVESTMENTS
One of the largest mutual fund families in the United States, Putnam
Investments has a heritage of investment leadership dating back to Judge
Samuel Putnam, whose Prudent Man Rule has defined fiduciary tradition and
practice since 1830. Founded 65 years ago, Putnam Investments was built
around the concept that a balance between risk and reward is the hallmark
of a well-rounded financial program. We presently manage over 100 mutual
funds in growth, value, blend, fixed income, and international.
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
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
Richard G. Leibovitch
Vice President
Richard A. Monaghan
Vice President
Michael T. Healy
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.
NOT FDIC INSURED, MAY LOSE VALUE, NO BANK GUARANTEE
[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
79285 074 5/02