<PAGE>
Putnam
Diversified
Income Trust
[ARTWORK APPEARS HERE]
SEMIANNUAL REPORT
March 31, 1994
BOSTON - LONDON - TOKYO
[LOGO]
<PAGE>
Performance summary
Morningstar awarded the fund its (****) rating as of March 31, 1994, and in its
most recent analysis on January 7, 1994, described the fund as "one of the most
successful choices for diversified bond exposure."*
CDA/Wiesenberger ranked the fund among the top seven corporate bond funds for
one, three, and five years as of March 31, 1994.+
Performance should always be considered in light of a fund's investment
strategy. Putnam Diversified Income Trust is designed for investors seeking high
current income consistent with capital preservation through U.S. government,
high-yield, and international fixed-income securities.
SEMIANNUAL RESULTS AT A GLANCE
- --------------------------------------------------------------------------------
Total return: NAV POP NAV CDSC
Six months ended 3/31/94 Class A Class B
(change in value plus
reinvested earnings) 0.61% -4.17% 0.29% -4.54%
Current returns: NAV POP NAV
(end of period:)
Current dividend rate1 6.79% 6.47% 6.13%
Current 30-day SEC yield2 6.53% 6.21% 5.75%
Investment value: NAV POP NAV
9/30/93 $12.82 $13.46 $12.79
3/31/94 12.37 12.99 12.34
Distributions: Investment Short term
income gain Total
Six months ended 3/31/94
Class A $0.420 $0.120 $0.540
Class B $0.378 $0.120 $0.498
Performance data represent past results. For performance over longer periods,
see page 8. POP assumes 4.75% maximum sales charge. CDSC assumes 5% maximum
contingent deferred sales charge.1 Income portion of most recent distribution
annualized and divided by NAV or POP at end of period.2 Based only on investment
income, calculated per SEC guidelines.
* Morningstar is an independent research firm that rates funds relative to
funds with similar objectives, based on risk-adjusted medium- and long-term
total return performance, as applicable, and adjusted for sales charges.
Ratings are subject to change monthly.
+ CDA/Wiesenberger rankings are updated monthly, based entirely on total return
and do not take into account sales charges or fees. The fund ranked third of
312 corporate bond funds for one year, second of 178 funds for three years,
and seventh of 133 funds for five years as of March 31, 1994.
2
<PAGE>
From the Chairman [PHOTO OF GEORGE PUTNAM
APPEARS HERE]
(c) Karsh, Ottawa
Dear Shareholder:
These are times that test the mettle of investors. As uncertainties over a host
of concerns -- real and perceived -- generate jitters in the securities markets,
many shareholders have been asking: "What's happening and why?" "How long will
this volatility last?" and, "What should I do?"
We have been responding by pointing out that the recent market adjustments are a
natural occurrence at this stage of the economic recovery. The resulting
volatility will likely continue for a while as investors digest new realities in
such areas as interest rates, inflation, and the pace of recovery. But the
economy is still strong, interest rates remain historically low, and inflation
appears under control. We believe overall prospects for the long term remain
positive.
We have been cautioning shareholders against taking hasty actions, for long-term
investment programs should rarely be altered in response to short-term events.
Your investment advisor can provide helpful guidance regarding your own
investment program.
Respectfully yours,
George Putnam
Chairman of the Trustees
May 18, 1994
3
<PAGE>
Report from the Fund Managers,
Jennifer E. Leichter
Lawrence J. Daly
Jeffrey B. Saef
Volatility in the world's financial markets during the six months ended March
31, 1994, presented some daunting challenges for Putnam Diversified Income
Trust. Nevertheless, the fund's relative performance continues to demonstrate
the validity of its three-sector investment strategy.
MARKET OVERVIEW: VOLATILITY IN ALL SECTORS
The strategy calls for actively reallocating assets within the three sector
portfolios, or "sleeves." Each sleeve is managed by specialists in its field.
Through this specialized expertise, we seek to tap strength in one market sector
to offset weakness in another. The challenge comes when all three sectors
encounter turbulence, as they did during the period, particularly in February
and March, when the world's major bond markets took a sudden and rather sharp
drop.
International bonds The decline in international bond prices began in January
with Japanese bonds, then spread to Europe and elsewhere in February as highly
leveraged investors were forced to sell off their overextended positions, which
further depressed bond prices in those markets.
Treasury securities The U.S. bond market, already weakening in response to
inflation fears, declined sharply after the Federal Reserve Board raised short-
term interest rates in February and again in March. Mortgage-backed government
securities were doubly impacted: by rising rates and uncertainty over
prepayments.
4
<PAGE>
High-yield bonds Because they are tied more closely to the fortunes of the
companies that issue them than to the market at large, the lower-rated high-
yield securities in your fund's portfolio continued to benefit from the
improving economy. They delivered a positive return for your fund during the
period, despite the market decline in February and March.
STRATEGY: HEAVY EMPHASIS ON HIGH-YIELD BONDS
As the fund began fiscal 1994 last October, we increased the weighting in high-
yield bonds, not only to enable the fund to benefit from the economy's continued
improvement but to help insulate the portfolio from the rise in interest rates
we believed inevitable.
[LINE GRAPH APPEARS HERE]
Diversified Income Trust
Cummulative % Change
04/27/94
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
1 2 3 4 5 6
09/30/93 09/30/93 09/30/93 09/30/93 09/30/93 09/30/93
10/31/93 11/30/93 12/31/93 01/31/94 02/28/94 03/31/94
Cum Cum Cum Cum Cum Cum
Fund Name Tot Ret Tot Ret Tot Ret Tot Ret Tot Ret Tot Ret
- --------------------- --------- --------- --------- --------- --------- --------
U.S. Government Securities2 0.37 -0.73 -0.34 1.03 -1.14 -3.36
International Bonds3 -0.46 -0.92 0.19 0.62 0.90 2.13
U.S. High Yield Bonds1 1.83 3.11 4.41 6.28 6.44 3.31
</TABLE>
* Month to month.
Sources: 1First Boston High Yield Index; 2Lehman Brothers Government/Mortgage
Index; 3Salomon Brothers Non-U.S. World Government Bond Index.
5
<PAGE>
The high-yield market continued to rally into February, but also fell off after
the Fed's boosts in rates. However, because this sector was affected to a much
lesser degree than others in the fixed-income markets, we continued to increase
the weighting in it, taking advantage of attractive prices at the same time.
In the U.S. government sleeve, we shortened the average maturity of holdings
during the period. We also dramatically increased the weighting of mortgage-
backed securities as they continued to show signs of strength. Then, as these
securities also came under fire, we reduced these positions as well. A fairly
heavy portion of the proceeds from trimming down mortgage-related securities has
gone into cash equivalents, which we expect to maintain until the current
volatility subsides.
In the international sleeve, the fund's heavier emphasis on intermediate-term
securities helped cushion the extent of the decline, since these dropped less
severely than either short-term or long-term issues. We invested a small portion
of the international sleeve in securities of companies in developing countries.
At period's end, the 45% of the fund's assets allocated to the high-yield sleeve
included a 5% position in markets of emerging countries; 24% of assets were in
the U.S. government sleeve, and 31% in the international sleeve.
OUTLOOK: MORE TURBULENCE BEFORE CALM
We expect to maintain the relatively large weighting of high-yield bonds, at
least over the near term, since these should continue to demonstrate more
resiliency than other fixed-income securities. In the U.S. government sleeve, we
will likely rebuild the weighting in mortgage-related securities as market
volatility subsides. In the international area, heaviest emphasis will probably
be on Europe, where we believe the best values are likely to emerge.
6
<PAGE>
[BAR GRAPH APPEARS HERE]
Portfolio Allocation
U.S. Government High Yield + International Bond
Sleeve Sleeve Sleeve
10/1/93 31.17 38.03 30.80
12/31/93 29.40 40.93 29.67
3/31/94 24.00 45.00 26.00
* Based on net assets; + 3/31/94 data includes 5% position in emerging markets.
The blow inflicted on investor psychology by the sharp decline in worldwide bond
prices will take time to heal. This means we can probably expect more short-term
volatility in these markets. But it also means some extraordinary values may be
present and, with them, the potential for reaping above-average profits down the
road. We are already seeking out the best prospects for helping your fund take
advantage of these opportunities.
Here is some information you should keep in mind about the high-yield bonds,
non-U.S. investments, and U.S. government securities in which the fund invests.
The lower ratings on high-yield debt securities reflect a greater possibility
that negative changes in the issuer's business condition or in general economic
conditions may hinder the issuer's ability to pay principal and interest on the
securities.
Investments in non-U.S. securities may be subject to certain risks such as
currency fluctuations and political developments.
Although the U.S. government guarantees the timely payment of principal and
interest on the U.S. government securities in which the fund invests, the value
of fund shares is not guaranteed and will fluctuate.
7
<PAGE>
Performance summary
The tables below provide, at a glance, information about your fund's
performance. 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 back into the fund. We show total return in two ways: on a
cumulative long-term basis and on average how the fund might have grown each
year over varying periods. For comparative purposes, we show how the fund
performed relative to appropriate indexes and benchmarks.
TOTAL RETURN FOR PERIODS ENDING 3/31/94
Putnam Diversified Income Trust
Class A Class B
NAV POP NAV CDSC
- ----------------------------------------------------------------------
6 months 0.61% -4.17% 0.29% -4.54%
- ----------------------------------------------------------------------
1 year 7.33 2.19 6.66 1.73
- ----------------------------------------------------------------------
5 years 70.69 62.52 -- --
Annual average 11.29 10.20 -- --
- ----------------------------------------------------------------------
Life of class A* 76.22 67.88 -- --
Annual average 10.87 9.90 -- --
- ----------------------------------------------------------------------
Life of class B* -- -- 7.52 3.57
Annual average -- -- 6.94 3.30
- ----------------------------------------------------------------------
Comparative indexes and benchmarks
Salomon Bros.
Lehman Bros. Non-U.S. First Boston Consumer
Government World Govt. High Yield Price
Mortgage Index Bond Index Index Index
- --------------------------------------------------------------------------------
6 months -2.68% 2.13% 3.31% 1.45%
- --------------------------------------------------------------------------------
1 year 2.21 10.77 9.89 2.51
- --------------------------------------------------------------------------------
5 years 62.99 68.96 82.10 20.36
Annual average 10.26 11.06 12.74 3.78
- --------------------------------------------------------------------------------
Life of class A* 65.95 72.93 89.43 22.87
Annual average 9.67 10.47 12.34 3.82
- --------------------------------------------------------------------------------
Life of class B* 2.65 13.52 12.21 2.87
Annual average 2.45 12.42 11.26 2.65
- --------------------------------------------------------------------------------
* The fund began investment operations October 3, 1988, offering shares now
known as class A. Effective March 1, 1993, the fund began offering class B
shares. Performance for each share class will differ.
Performance data represent past results. Investment returns and principal value
will fluctuate so an investor's shares, when sold, may be worth more or less
than their original cost. Fund performance data do not take into account any
adjustment for taxes payable on reinvested distributions.
8
<PAGE>
TERMS AND DEFINITIONS
Class A shares are the shares of your fund that are subject to an initial sales
charge.
Class B shares are the shares of your fund that may be subject to a sales charge
upon redemption.
Net asset value (NAV) is the value of all your fund's assets, minus any
liabilities, divided by the number of outstanding shares, not including any
initial or contingent deferred sales charge.
Public offering price (POP) is the price of a mutual fund share plus the maximum
sales charge levied at the time of purchase. POP performance figures shown here
assume the maximum 4.75% sales charge.
Contingent deferred sales charge (CDSC) is a charge applied at the time of the
redemption of shares. Your fund's CDSC declines from a 5% maximum during the
first year to 1% during the sixth year. After the sixth year, the CDSC no
longer applies.
COMPARATIVE BENCHMARKS
Lehman Bros. Government/Mortgage Index* is an unmanaged list of U.S. government
and mortgage-backed securities.
Salomon Brothers Non-U.S. World Government Bond Index* is an unmanaged list of
bonds issued by 10 countries.
First Boston High Yield Index* is an unmanaged list of lower-rated higher-
yielding U.S. corporate bonds.
Consumer Price Index is a commonly used measure of inflation; it does not
represent an investment return.
* The securities indexes assume reinvestment of all distributions and interest
payments and do not take into account brokerage fees or taxes. Securities in
the fund do not match those in the indexes and performance of the fund will
differ.
9
<PAGE>
Life cycle investing
As we move through life, our investment needs change. As these needs change, so
does the way we allocate our assets. Here are some basic rules for setting up
and maintaining an investment program and some examples of how assets might be
allocated.
DETERMINE YOUR INVESTMENT OBJECTIVES.
Objectives may include such goals as a new home or college tuition or, they may
be less specific but equally important, such as income in retirement.
EVALUATE YOUR RISK TOLERANCE.
Generally, risk tolerance is higher for younger investors with longer timelines
and lower for older investors who may depend on their investment for income to
meet living expenses.
ALLOCATE YOUR INVESTABLE SAVINGS.
Your investment advisor will help you determine how many of your investable
dollars should be allocated to each investment category.
CHOOSE THE APPROPRIATE PUTNAM FUNDS.
Using Putnam's free exchange privilege, you can adjust your own Putnam fund
investments as your financial needs change -- without a service fee.*
Look at the facing page for some ways you can allocate your assets, then turn
the page to see how the Putnam Fund Selector(TM) can help you make your choices.
* Putnam reserves the right to change or terminate the exchange privilege. In
some cases, a sales charge may apply. See prospectus for details.
10
<PAGE>
Four ways to allocate assets
- --------------------------------------------------------------------------------
SEEKING MAXIMUM GROWTH
Risk tolerance: 30% - 40% Growth and Income
Generally
investors with a 40% - 50% Growth
higher risk [PIE CHART APPEARS HERE]
tolerance 5% - 20% Income or
(often in their 20s
and early 30s.) tax-free income
- --------------------------------------------------------------------------------
SEEKING GROWTH AND SOME INCOME
Risk tolerance: 40% - 50% Growth and income
Generally
investors with a 30% - 40% Growth
high to moderate [PIE CHART APPEARS HERE]
risk tolerance 10% - 30% Income or
(often in their late
30s and early 40s) tax-free income
- --------------------------------------------------------------------------------
SEEKING INCOME AND SOME GROWTH WITH
PROTECTION AGAINST INFLATION
Risk tolerance: 30% - 40% Growth and income
Generally
investors with a 10% - 20% Growth
moderate risk [PIE CHART APPEARS HERE]
tolerance 25% - 60% Income or
(often in their late
40s and 50s.) tax-free income
- --------------------------------------------------------------------------------
SEEKING HIGH CURRENT INCOME AND PROTECTION
AGAINST INFLATION
Risk tolerance: 20% - 30% Growth and income
Generally
investors with 5% - 10% Growth
a moderate to [PIE CHART APPEARS HERE]
low risk 40% - 70% Income or
tolerance
(often over 60 tax-free income
and retired)
11
<PAGE>
The Putnam Fund Selector(TM)
The Putnam Fund Selector shows the many opportunities
for investors within every investment strategy. All investors
should first accumulate a base of conservative, cash-
equivalent investments. Then, with the help of your
investment advisor, diversify your portfolio by investing in
the Putnam Family of Funds.
[RISK/REWARD PYRAMID GRAPH APPEARS HERE]
Details of graph:
Highest Risk/Reward = Putnam Growth Funds
High Risk/Reward = Putnam Growth and Income Funds
Lower Risk/Reward = Putnam Income or Tax-free Income Funds
Low Risk/Reward = Most Conservative Investments
12
<PAGE>
PUTNAM GROWTH FUNDS
Asia Pacific Growth Fund
Energy-Resources Trust
Europe Growth Fund
Global Growth Fund
Health Sciences Trust
Investors Fund
New Opportunities Fund
OTC Emerging Growth Fund
Vista Fund
Voyager Fund
PUTNAM GROWTH
AND INCOME FUNDS
Convertible Income-Growth Trust
Dividend Growth Fund
Equity Income Fund
The George Putnam Fund of Boston
The Putnam Fund for Growth and Income
Utilities Growth and Income Fund
PUTNAM INCOME FUNDS
Adjustable Rate U.S. Government Fund
American Government Income Fund
Balanced Government Fund
Corporate Asset Trust
Diversified Income Trust
Federal Income Trust
Global Governmental Income Trust
High Yield Advantage Fund
High Yield Trust
Income Fund
Managed Income Trust
U.S. Government Income Trust
PUTNAM TAX-FREE INCOME
FUNDS
Municipal Income Fund
Tax Exempt Income Fund
Tax-Free Insured Fund
Tax-Free High Yield Fund
State tax-free income funds*
Arizona, California, Florida, Massachusetts,
Michigan, Minnesota, New Jersey, New York,
Ohio, and Pennsylvania
MOST CONSERVATIVE
INVESTMENTS+
Putnam money market funds
Daily Dividend Trust
Tax Exempt Money Market Fund
CDs and savings accounts++
LIFESTAGES(SM) FUNDS
Putnam Asset Allocation Funds -- three
investment portfolios that spread your money
across a variety of stocks, bonds, and money
market investments to help maximize your
return and reduce your risk.
The three portfolios:
Putnam Asset Allocation: Growth Portfolio
Putnam Asset Allocation: Balanced Portfolio
Putnam Asset Allocation: Conservative
Portfolio
* Not available in all states.
+ Relative to above.
++ Not offered by Putnam Investments. Certificates of deposit offer a fixed
rate of return and may be insured, up to certain limits, by federal/state
agencies. Savings accounts may also be insured up to certain limits.
Please call your financial advisor or Putnam to obtain a prospectus for any
Putnam fund. It contains more complete information, including charges and
expenses. Please read it carefully before you invest or send money.
13
<PAGE>
Report of independent accountants
for the six months ended March 31, 1994
To the Trustees and Shareholders of Putnam Diversified Income Trust
We have audited the accompanying statement of assets and liabilities of Putnam
Diversified Income Trust, including the portfolio of investments owned, as of
March 31, 1994, and the related statement of operations for the six months then
ended, the statement of changes in net assets for the six months then ended and
for the year ended September 30, 1993 and the "Financial Highlights" for class A
shares for the six months ended March 31, 1994 and for each of the four years in
the period ended September 30, 1993 and for the period October 3, 1988
(commencement of operations) to September 30, 1989 and for class B shares for
the six months ended March 31, 1994 and for the period March 1, 1993
(commencement of operations) to September 30, 1993. These financial statements
and "Financial Highlights" are the responsibility of the Trust's management. Our
responsibility is to express an opinion on these financial statements and
"Financial Highlights" based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and "Financial
Highlights" are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of March
31, 1994 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and "Financial Highlights" referred to
above present fairly, in all material respects, the financial position of Putnam
Diversified Income Trust as of March 31, 1994, the results of its operations for
the six months then ended, the changes in its net assets for the six months then
ended and for the year ended September 30, 1993 and the "Financial Highlights"
for class A shares for the six months ended March 31, 1994 and for each of the
four years in the period ended September 30, 1993, and for the period October 3,
1988 (commencement of operations) to September 30, 1989, and for class B shares
for the six months ended March 31, 1994 and for the period March 1, 1993
(commencement of operations) to September 30, 1993, in conformity with generally
accepted accounting principles.
Coopers & Lybrand
Boston, Massachusetts
May 25, 1994
14
<PAGE>
Portfolio of investments owned
March 31, 1994
<TABLE>
<CAPTION>
CORPORATE BONDS AND NOTES (37.9%) (a)
PRINCIPAL AMOUNT VALUE
Recreation(3.1%)
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
$ 6,370,000 Arizona Charlies Corp. sub deb. 12s. 2000(b) $ 6,370,000
3,825,000 Bally's Casino Inc. sr. disc. notes zero %, 1998(b) 2,390,625
800,000 Belle Casinos Inc. 1st mtge. deb. 12s, 2000(b) 784,000
2,960,000 Capitol Queen Corp. sr. sub. deb. 12s, 2000(b) 2,634,400
6,210,000 Casino America Inc. 1st mtge. deb. 11 1/2s, 2001 6,334,200
7,220,000 Casino Magic Finance 1st mtge. 11 1/2s, 2001(b) 7,400,500
8,250,000 Fitzgerald Gaming Co. sr. notes 13s, 1996(b) 7,755,000
13,000,000 Greate Bay Property Funding Corp. 1st. Mtge 10 7/8s, 2004 11,830,000
3,000,000 GNS Finance Corp. sr. sub. notes 9 1/4s, 2003 2,910,000
4,700,000 Golden Nugget Finance Corp. 1st mtge. deb. Ser. B, 10 5/8s, 2003 4,230,000
4,135,000 Grand Casino Resorts, Inc. notes 12 1/2s, 2000 4,507,150
3,725,000 Lady Luck Gaming 10 1/2s, 2001 3,743,625
3,000,000 Louisiana Casino Cruises Corp. sr. sub. deb. 11 1/2s, 1998(b) 2,880,000
2,825,000 Pioneer Finance Corp. gtd. 1st mtge. 13 1/2s, 1998 2,973,313
4,250,000 President Riverboat Casinos sr. sub. notes 11 3/4s, 2001(b) 4,207,500
1,500,000 Sam Houston Race Park notes 11 3/4s, 1999 1,530,000
1,125,000 Treasure Bay Gaming 1st. mtge. units 12 1/4s, 2000(b) 1,091,250
3,456,000 Trump Castle Funding Corp. deb. 11 1/2s, 2000(b) 3,456,000
1,975,000 Trump Plaza Funding, Inc. 1st. mtge. notes 10 7/8s, 2001 1,836,750
8,403,000 Trump Taj Mahal deb. 11.35s, 1999(c) 8,234,940
--------------
87,099,253
Forest Products(2.4%)
- -------------------------------------------------------------------------------------------------
1,500,000 Container Corp. of America sr. notes 9 3/4s, 2003 1,455,000
7,250,000 Doman Industrial Ltd. sr. notes 8 3/4s, 2004 6,670,000
15,850,000 Gaylord Container Corp. sr. sub. disc. deb. stepped-coupon zero %
(12 3/4s, 5/15/96), 2005 (d) 12,838,500
7,250,000 Repap Wisconsin Inc. sr. secd. notes 9 7/8s, 2006 6,887,500
3,575,000 Repap Wisconsin Inc. sr. secd. notes 9 1/4s, 2002 3,432,000
1,500,000 Riverwood International Corp. sr. sub. notes 11 1/4s, 2002 1,605,000
1,750,000 Stone Container Corp. sr. sub. deb. 10 3/4s, 2002 1,662,500
10,945,000 Stone Container Corp. sr. sub. notes 10 3/4s, 1997 10,726,100
11,450,000 Stone Container Corp. sr. sub. notes 9 7/8s, 2001 10,534,000
2,450,000 Stone Savannah River Pulp & Paper Corp. sr. sub. notes 14 1/8s, 2000 2,327,500
5,975,000 Webb (Delaware) sr. sub. deb. 9s, 2006 5,691,188
3,200,000 Williamhouse Regency (Delaware), Inc. sr. sub. deb. 11 1/2s, 2005 3,312,000
--------------
67,141,288
Steel(2.1%)
- -------------------------------------------------------------------------------------------------
9,000,000 AK Steel Corp. sr. notes 10 3/4s, 2004 8,955,000
6,800,000 Armco Inc. sr. notes 11 3/8s, 1999 7,276,000
10,000,000 Armco Inc. sr. notes 9 3/8s, 2000 9,325,000
8,225,000 Bayou Steel Corp. 1st. mtge. 10 1/4s, 2001 7,978,250
3,875,000 Earle M. Jorgensen Co. sr. notes 10 3/4s, 2000 3,923,438
2,350,000 Geneva Steel corp. sr. notes 9 1/2s, 2004 2,173,750
2,500,000 Inland Steel Industries, Inc. notes 12 3/4s, 2002 (b) 2,787,500
7,800,000 WCI Steel Inc. sr. notes 10 1/2s, 2002 (b) 8,365,500
11,200,000 Wheeling-Pittsburgh Corp. sr. notes 9 3/8s, 2003 10,584,000
--------------
61,368,438
Retail(1.7%)
- -------------------------------------------------------------------------------------------------
775,000 Bradlees, Inc. sr. sub. notes 11s, 2002 782,750
4,325,000 Bradlees, Inc. sr. sub. notes 9 1/4s, 2003 4,022,250
3,540,000 Brylane L.P. sr. sub. notes 10s, 2003 3,717,000
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
CORPORATE BONDS AND NOTES
PRINCIPAL AMOUNT VALUE
<S> <C> <C>
$ 1,335,000 Duane Reade Corp. sr. notes 12s, 2002 $ 1,428,450
12,920,000 Finlay Enterprises Inc. sr. disc. deb. stepped-coupon zero %
(12s, 5/1/98), 2005 (d) 8,010,400
650,000 Finlay Enterprises, Inc. sr. notes 10 5/8s, 2003 650,000
1,175,000 Loehmanns' Holdings Inc. sr. sub. notes 13 3/4s, 1999 1,139,750
13,000,000 Loehmanns' Holdings Inc. sr. notes 10 1/2s, 1997 (b) 12,675,000
10,850,000 Parisian Inc. sr. sub. notes 9 7/8s, 2003 9,927,750
6,100,000 Specialty Retailers, Inc. sr. sub. notes 11s, 2003 6,100,000
250,000 Specialty Retailers, Inc. notes 10s, 2000 250,000
--------------
48,703,350
Restaurants(1.6%)
- -------------------------------------------------------------------------------------------------
3,950,000 American Restaurant Group, Inc. sr. secd. notes 12s, 1998 (b) 3,831,500
15,000,000 American Restaurant Group, Inc. sr. notes stepped-coupon zero%,
(14s, 12/15/98), 2005 (b)(d) 7,350,000
12,500,000 Family Restaurants Inc. sr. notes 9 3/4s, 2002 11,562,500
14,200,000 Flagstar Corp. sr. sub. notes 11 3/8s, 2003 13,987,000
10,500,000 Flagstar Corp. sr. sub. deb. 11 1/4s, 2004 10,342,500
--------------
47,073,500
Chemicals(1.6%)
- -------------------------------------------------------------------------------------------------
7,000,000 Agricultural Minerals & Chemicals Corp. sr. notes 10 3/4s, 2003 7,052,500
8,450,000 Arcadian Partners L.P. sr. notes Ser. B, 10 3/4s, 2005 8,450,000
20,350,000 G-I Holdings Inc. sr. notes zero %, 1998(b) 13,074,875
5,000,000 Harris Chemical Corp. sr. sub. notes 10 3/4s, 2003 5,100,000
750,000 Koppers Industries Inc. sr. notes 8 1/2s, 2004 695,625
1,135,000 OSI Specialties Inc. sr. sub. notes 9 1/4s, 2003 1,135,000
4,600,000 UCC Investors Holding, Inc. sr. sub. notes 11s, 2003 4,795,500
3,710,000 UCC Investors Holding, Inc. sr. notes 10 1/2s, 2002 3,932,600
2,000,000 UCC Investors Holding, Inc. sub. disc. notes stepped-coupon zero%
(12s, 5/1/98), 2005(d) 1,320,000
--------------
45,556,100
Cable Television(1.6%)
- -------------------------------------------------------------------------------------------------
1,550,000 Adelphia Communications Corp. sr. notes 12 1/2s, 2002 1,650,750
750,000 Adelphia Communications Corp. sr. deb. 11 7/8s, 2004 798,750
9,000,000 Adelphia Communications Corp. notes Ser. B, 9 7/8s, 2005 8,640,000
625,000 Cablevision Systems Corp. sr. sub. deb. 10 3/4s, 2004 650,000
4,250,000 Cablevision Industries Corp. sub. deb. 9 1/4s, 2008 3,867,500
5,000,000 Century Communications Corp. sr. disc. notes zero %, 2003 2,025,000
800,000 Continental Cablevision Inc. sr. sub. deb. 11s, 2007 864,000
11,350,000 Continental Cablevision, Inc. sr. deb. 9 1/2s, 2013 10,952,750
1,325,000 Continental Cablevision, Inc. sr. deb. 9s, 2008 1,265,375
2,893,000 Falcon Holdings Group, Inc. sr. sub. notes 11s, 2003 (c) 2,806,210
3,550,000 Insight Communications Co. sr. sub. notes 8 1/4s 2000 3,550,000
2,500,000 Jones Intercable, Inc. sub. deb. 11 1/2s, 2004 2,700,000
$ 2,500,000 Jones Intercable, Inc. sr. sub. deb. 10 1/2s, 2008 $ 2,675,000
1,500,000 Summit Communications Group, Inc. sr. sub. deb. 10 1/2s, 2005 1,575,000
--------------
44,020,335
Food Chains(1.5%)
- -------------------------------------------------------------------------------------------------
24,000,000 Grand Union Capital Corp. gtd. sr. sub. notes zero %, 2007 2,760,000
3,500,000 Grand Union Capital Corp. sr. notes stepped-coupon zero %
(15s, 7/15/99), 2004 (d) 1,470,000
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
CORPORATE BONDS AND NOTES
PRINCIPAL AMOUNT VALUE
<S> <C> <C>
Food Chains(continued)
- -------------------------------------------------------------------------------------------------
$11,950,000 Grand Union Co. sr. sub. notes 12 1/4s, 2002 $ 11,830,500
2,000,000 Grand Union Co. sr. sub. notes 12 1/4s, 2002 (b) 1,980,000
3,250,000 Megafoods Stores Inc. sr. notes 10 1/4s, 2000 2,990,000
9,750,000 Southland Corp. sr. deb. 4 1/2s, 2004 6,435,000
2,402,000 Southland Corp. deb. 4s, 2004 1,441,200
14,000,000 Stater Brothers sr. notes 11s, 2001(b) 13,825,000
--------------
42,731,700
Cellular Communications(1.4%)
- -------------------------------------------------------------------------------------------------
8,000,000 Cellular, Inc. sr. sub. disc. notes stepped-coupon zero %
(11 3/4s, 9/1/98), 2003 (d) 4,960,000
6,345,000 Cencall Communications Corp. sr. disc. notes stepped-coupon zero %
(10 1/8s, 1/15/99), 2004 (d) 3,680,100
6,000,000 Centennial Cellular Corp. sr. notes 8 7/8s, 2001 5,520,000
1,850,000 Dial Call Communication sr. disc. notes stepped-coupon zero %,
(10 1/4s, 12/15/98), 2005 (b)(d) 1,073,000
17,405,000 Horizon Cellular Telephone sr. sub. disc. notes stepped-coupon zero %
(11 3/8s, 10/1/97), 2000(b)(d) 12,357,550
1,250,000 NEXTEL Communications Inc. sr. disc. notes stepped-coupon zero %
(11 1/2s, 9/1/98), 2003 (d) 793,750
21,500,000 NEXTEL Communications Inc. sr. disc. notes stepped-coupon zero %
(9 3/4s, 2/15/99), 2004 (d) 12,792,500
--------------
41,176,900
Health Care(1.4%)
- -------------------------------------------------------------------------------------------------
4,895,000 Abbey Healthcare Group, Inc. sr. sub. notes 9 1/2s, 2002 4,674,725
1,000,000 American Healthcare Management Inc. sr. sub. notes 10s, 2003 1,020,000
1,000,000 American Medical International Inc. jr. sub. deb. 15s, 2005 (c) 1,665,000
360,000 American Medical International Inc. sr. sub. notes 13 1/2s, 2001 414,000
2,000,000 American Medical International Inc. sr. sub. notes 9 1/2, 2006 1,980,000
593,300 EPIC Healthcare Group, Inc. jr. sub. bonds 11s, 2003 (c) 372,295
19,791,000 EPIC Holdings Inc. sr. notes stepped-coupon zero % (12s, 3/15/97),
2002 (d) 15,907,016
1,250,000 General Medical Corp. sr. sub. notes 10 7/8s, 2003(b) 1,300,000
6,700,000 Healthsouth Rehablitaton 9 1/2s, 2000 6,582,750
170,000 Mediplex Group, Inc. sr. sub. notes 11 3/4s, 2002 183,600
2,437,000 Multicare Cos., Inc. sr. sub. notes 12 1/2s, 2002 2,851,290
1,500,000 Ornda Healthcorp sr. sub. notes 12 1/4s, 2002 1,638,750
810,000 Quorum Health Group, Inc. sr. sub. notes 11 7/8s, 2002 899,100
--------------
39,488,526
Food(1.4%)
- -------------------------------------------------------------------------------------------------
10,000,000 Chiquita Brands sr. notes 9 1/8s, 2004 9,400,000
1,379,000 Del Monte Corp. sub. notes 12 1/4s, 2002 (acquired 3/12/93, cost
$1,421,060)(c)(f) 1,427,265
17,650,000 Fresh Del Monte Produce Corp. sr. notes 10s, 2003 (b) 16,944,000
2,750,000 Mafco, Inc. sr. sub. notes 11 7/8s, 2002 2,860,000
4,475,000 RJR Nabisco, Inc. sr. notes 8 3/4s, 2004 4,108,609
2,750,000 Specialty Foods Corp. sr. sub. notes 11 1/4s, 2003 2,818,750
3,250,000 Specialty Foods Acquisition Corp. sr. secd. disc. deb. stepped-
coupon zero% (13s, 8/15/99), 2005(d) 1,608,750
--------------
39,167,374
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
CORPORATE BONDS AND NOTES
PRINCIPAL AMOUNT VALUE
<S> <C> <C>
Specialty Consumer Products(1.3%)
- -------------------------------------------------------------------------------------------------
$ 500,000 ADT Ltd. sr. sub. notes 9 1/4s, 2003 $ 475,000
6,000,000 Coleman Holdings sr. secd. disc. notes zero %, 1998 3,780,000
16,525,000 International Semi-Tech. Micro-Electric sr. disc. notes stepped-
coupon zero % (11 1/2s, 8/15/00), 2003(d) 8,262,500
20,160,000 Playtex Family Products Corp. sr. sub. notes 9s, 2003 18,345,600
2,150,000 Revlon Group Inc. sr. sub. notes 10 1/2s, 2003 1,849,000
12,850,000 Revlon Worldwide Corp. sr. secd. disc. notes zero %, 1998 5,750,375
--------------
38,462,475
Conglomerates(1.2%)
- -------------------------------------------------------------------------------------------------
2,000,000 Collins & Aikman Group, Inc. deb. 15s, 1995 2,000,000
16,245,000 Collins & Aikman Group, Inc. sr. sub. deb. 11 7/8s, 2001 16,163,775
1,250,000 Congoleum Corp. sr. notes 9s, 2001 1,234,375
2,625,000 Haynes International, Inc. sr. sub. notes 13 1/2s, 1999 2,651,250
5,500,000 Jordan Industries, Inc. sr. notes 10 3/8s, 2003 5,445,000
7,500,000 Jordan Industries, Inc. sr. sub. disc. deb. stepped-coupon zero %,
(11 3/4s, 8/1/98) 2005 (d) 4,462,500
1,000,000 MacAndrews & Forbes Holdings Inc. sub. deb. 13s, 1999 1,002,500
1,150,000 MacAndrews & Forbes Group Inc. deb. 12 1/4s, 1996 1,161,500
--------------
34,120,900
Shipping(1.1%)
- -------------------------------------------------------------------------------------------------
12,300,000 OMI Corp. sr. notes 10 1/4s, 2003 12,300,000
19,700,000 Viking Star Shipping sr. secd. notes 9 5/8s, 2003 20,291,000
--------------
32,591,000
Motion Picture Distribution(1.1%)
- -------------------------------------------------------------------------------------------------
3,200,000 AMC Entertainment, Inc. sr. sub. notes 12 5/8s, 2002 3,616,000
6,175,000 Act III Theatres sr. sub. notes 11 7/8s, 2003 6,916,000
2,065,000 Cinemark Mexico notes 12s, 2003(b) 2,003,050
1,500,000 Cinemark USA sr. notes 12s, 2002 1,665,000
17,998,000 SPI Holdings Inc. sr. sub. ext. reset notes 11.65s, 2002 16,378,180
--------------
30,578,230
Insurance(1.0%)
- -------------------------------------------------------------------------------------------------
4,750,000 American Annuity Group, Inc. sr. notes 9 1/2s, 2001 4,797,500
11,900,000 Penn Corp. Financial Group sr. sub. notes 9 1/4s, 2003 11,424,000
4,950,000 Reliance Group Holdings sr. sub. notes 9 3/4s, 2003 4,603,500
7,275,000 Reliance Group Holdings sr. notes 9s, 2000 6,765,750
--------------
27,590,750
Agriculture(1.0%)
- -------------------------------------------------------------------------------------------------
$ 3,950,000 PMI Acquisition Corp. sr. sub. notes 10 1/4s, 2003 $ 4,029,000
3,521,000 PMI Holdings Corp. sub. disc. deb. stepped-coupon zero %
(11 1/2s, 9/1/00), 2005 (b)(d) 1,883,735
458,700 Premium Standard Farms each, pfd. units 12 1/2s 2000 (b) 499,983
10,271,900 Premium Standard Farms sr. secd. notes 12s, 2000(b) 11,196,371
13,436,000 Premium Standard Farms deb. zero %, 2003(b) 10,160,975
--------------
27,770,064
Broadcasting(1.0%)
- -------------------------------------------------------------------------------------------------
14,475,000 Argyle TV Operations sr. sub. notes 9 7/8s, 2003 14,185,500
1,000,000 Continental Broadcasting Inc. sr. sub. notes 10 5/8s, 2003 980,000
2,100,000 Granite Broadcasting Corp. sr. sub. deb. 12 3/4s, 2002 2,184,000
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
CORPORATE BONDS AND NOTES
PRINCIPAL AMOUNT VALUE
<S> <C> <C>
Broadcasting(continued)
- -------------------------------------------------------------------------------------------------
$ 1,650,000 New City Broadcasting Corp. sr. sub. notes 11 3/8s, 2003 $ 1,732,500
1,950,000 Outlet Broadcasting, Inc. sr. sub. notes 10 7/8s, 2003 1,969,500
6,220,000 SFX Broadcasting sr. sub. notes 11 3/8s, 2000 6,375,500
--------------
27,427,000
Metals and Mining(0.9%)
- -------------------------------------------------------------------------------------------------
7,561,000 Horsehead Industries, Inc. sub. notes 14s, 1999 7,485,390
2,900,000 Horsehead Industries, Inc. sr. sub. ext. reset notes 13 1/2s, 1994 2,900,000
13,550,000 Kaiser Aluminum & Chemical Corp. sr. sub. notes 12 3/4s, 2003 13,821,000
3,050,000 Kaiser Aluminum & Chemical Co. sr. notes 9 7/8s, 2002 2,813,625
--------------
27,020,015
Textiles(0.9%)
- -------------------------------------------------------------------------------------------------
7,050,000 Dan River Inc. deb. 10 1/8s, 2003 6,662,250
2,300,000 Foamex (L.P.) Capital Corp. sr. sub. deb. 11 7/8s, 2004 2,438,000
3,850,000 Foamex (L.P.) Capital Corp. sr. notes 11 1/4s, 2002 4,119,500
729,000 Foamex (L.P.) Capital Corp. sr. secd. notes 9 1/2s, 2000 714,420
1,000,000 JPS Textile Group deb. sub. notes 9.85s 1999 990,000
5,050,000 JPS Textile Group deb. sub. notes 9 1/4s, 1999 4,949,000
1,300,000 New Street Acquisition 12s, 1998 1,300,000
6,175,000 Westpoint Stevens, Inc. sr. sub. deb. 9 3/8s, 2005 5,773,625
--------------
26,946,795
Publishing(0.9%)
- -------------------------------------------------------------------------------------------------
1,400,000 Affinity Group Inc. sr. sub. notes 11 1/2s, 2003, 1,428,000
1,750,000 General Media sr. secd. notes 10 5/8s, 2000 (b) 1,719,375
10,725,000 Marvel Holdings Inc. sr. notes 9 1/8s, 1998 (b) 9,867,000
17,180,000 Marvel Holdings, Inc. sr. secd. disc. notes zero %, 1998 10,651,600
5,300,000 Marvel Holdings, Inc. sr. secd. notes zero %, 1998 3,233,000
--------------
26,898,975
Advertising(0.7%)
- -------------------------------------------------------------------------------------------------
3,750,000 Katz Corp. sr. sub. notes 12 3/4s, 2002 4,050,000
2,975,000 Lamar Advertising Co. sr. secd. notes 11s, 2003 3,004,750
3,000,000 Outdoor Systems, Inc. sr. notes 10 3/4s, 2003 3,090,000
8,590,000 Universal Outdoor Inc. sr. notes 11s, 2003 (b) 8,675,900
--------------
18,820,650
Containers(0.6%)
- -------------------------------------------------------------------------------------------------
6,150,000 Anchor Glass Container Corp. sr. sub. deb. 9 7/8s, 2008 5,904,000
3,100,000 Ivex Packaging Corp. sr. sub. notes 12 1/2s, 2002 3,448,750
9,000,000 Ivex Holdings Corp. sr. disc. deb. zero % (13 1/4s, 3/15/00), 2005(d) 4,410,000
1,000,000 Stone Container deb. sr. sub. notes 11 1/2s, 1999 985,000
1,525,000 United States Can Co. sr. sub. notes 13 1/2s, 2002 1,738,500
--------------
16,486,250
Environmental Control(0.6%)
- -------------------------------------------------------------------------------------------------
16,875,000 Envirosource, Inc. sr. notes 9 3/4s, 2003 15,862,500
Airlines(0.5%)
- -------------------------------------------------------------------------------------------------
9,780,000 USAir, Inc. pass thru certif. 10 3/8s, 2013 9,132,075
1,500,000 USAir, Inc. sr. notes 10s, 2003 1,164,375
4,300,000 USAir, Inc. notes 9 5/8s, 2003 4,109,187
--------------
14,405,637
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
CORPORATE BONDS AND NOTES
PRINCIPAL AMOUNT VALUE
<S> <C> <C>
Finance(0.5%)
- -------------------------------------------------------------------------------------------------
$ 3,250,000 Comdata Network, Inc. sr. sub. deb. 13 1/4s, 2002 $ 3,575,000
3,150,000 Comdata Network, Inc. sr. notes 12 1/2s, 1999 3,402,000
1,000,000 Guangdong Enterprise Inc. sr. notes 8 3/4s, 2003 (b) 940,625
500,000 Keystone Group, Inc. sr. secd. notes 9 3/4s, 2003 490,000
4,800,000 Mesa Capital Corp. disc. notes stepped-coupon zero%
(12 3/4s, 6/30/95), 1998 (d) 4,272,000
1,500,000 PRT Funding Corp. sr. notes 11 5/8s, 2004 1,380,000
--------------
14,059,625
Building Products(0.5%)
- -------------------------------------------------------------------------------------------------
3,000,000 American Standard, Inc. jr. sub. deb. 12 3/4s, 2003 3,015,000
1,000,000 American Standard, Inc. sr. deb. 11 3/8s, 2004 1,055,000
500,000 American Standard, Inc. deb. 9 1/4s, 2016 490,000
2,750,000 American Standard, Inc. sr. sub. deb. stepped-coupon zero %
(10 1/2s, 6/1/98), 2005 (d) 1,663,750
1,000,000 Overhead Door Corp. sr. notes 12 1/4s, 2000 1,080,000
2,000,000 Southdown, Inc. sr. sub. notes Ser. B, 14s, 2001 2,240,000
625,000 Southdown, Inc. sr. sub. notes 12s, 1997 637,500
2,425,000 Triangle Pacific Corp. sr. notes 10 1/2s, 2003 2,473,500
--------------
12,654,750
Lodging(0.4%)
- -------------------------------------------------------------------------------------------------
8,000,000 John Q. Hammons Hotels 1st. mtge. 8 7/8s, 2004 7,400,000
2,500,000 La Quinta Motor Inns Inc. deb. 9 1/4s, 2003 2,400,000
2,600,000 Red Roof Inns sr. notes 9 5/8s, 2003 (b) 2,496,000
--------------
12,296,000
Basic Industrial Products(0.4%)
- -------------------------------------------------------------------------------------------------
8,750,000 Joy Technologies sr. notes 10 1/4s, 2003 8,706,250
5,900,000 Talley Industries, Inc. sr. disc. deb. stepped-coupon zero %
(12 1/4s, 10/15/98), 2005(d) 3,377,750
--------------
12,084,000
Telephone Services(0.4%)
- -------------------------------------------------------------------------------------------------
16,950,000 MFS Communications sr. disc. notes stepped-coupon zero%
(9 3/8s, 1/15/99), 2004(d) 10,085,250
1,350,000 USA Mobile Communications sr. notes 9 1/2s, 2004 1,282,500
--------------
11,367,750
Oil and Gas(0.4%)
- -------------------------------------------------------------------------------------------------
4,110,000 Giant Industries Inc. sr. sub. notes 9 3/4s, 2003 3,904,500
1,500,000 Maxus Energy Corp. deb. 8 1/2s, 2008 1,402,500
2,100,000 Noble Drilling Corp. deb. 9 1/4s, 2003 1,995,000
5,300,000 Triton Energy sr. sub. disc. notes stepped-coupon zero %
(9 3/4s, 12/15/96), 2000 (d) 3,816,000
--------------
11,118,000
Communications(0.3%)
- -------------------------------------------------------------------------------------------------
3,250,000 Paging Network, Inc. sr. sub. notes 8 7/8s, 2006 2,990,000
11,050,000 Panamsat L.P. sr. sub. notes stepped-coupon zero %
(11 3/8s, 8/1/98), 2003(d) 6,740,500
--------------
9,730,500
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
CORPORATE BONDS AND NOTES
PRINCIPAL AMOUNT VALUE
<S> <C> <C>
Real Estate(0.3%)
- -------------------------------------------------------------------------------------------------
$ 1,850,000 Kearny Street Real Estate secd. notes 9.56s, 2003 $ 1,896,250
7,700,000 Scotsman Group Inc. sr. secd. notes 9 1/2s, 2000 7,392,000
--------------
9,288,250
Electric Utilities(0.3%)
- -------------------------------------------------------------------------------------------------
1,383,269 Midland Cogeneration Venture L.P. sr. deb. 10.33s, 2002 1,424,767
1,600,000 Midland Funding Corp. II deb. Ser. B, 13 1/4s, 2006 1,804,000
3,750,000 Midland Funding Corp. II deb. Ser. A, 11 3/4s, 2005 4,012,500
800,000 Texas New Mexico Power Corp. secd. deb. 12 1/2s, 1999 884,000
--------------
8,125,267
Gas(0.3%)
- -------------------------------------------------------------------------------------------------
7,500,000 TransTexas Gas Corp. sr. secd. notes 10 1/2s, 2000 7,650,000
Machinery(0.3%)
- -------------------------------------------------------------------------------------------------
7,050,000 Specialty Equipment Co. sr. sub. notes 11 3/8s, 2003 7,191,000
Business Services(0.2%)
- -------------------------------------------------------------------------------------------------
4,800,000 Corporate Express, Inc. sr. notes 9 5/8s, 2004 ($2,800,000 par
acquired 2/22/94, cost $2,800,800; $2,000,000 par acquired
3/07/94 cost $1,967,500)(f) 4,488,000
2,625,000 Equitable Bag Co. sr. notes 12 3/8s, 2002(e) 1,995,000
--------------
6,483,000
Electronics(0.2%)
- -------------------------------------------------------------------------------------------------
1,200,000 Ampex Group, Inc. sr. notes 13 1/4s, 1996(e) 180,000
5,050,000 Amphenol Corp. sr. sub. notes 12 3/4s, 2002 5,605,500
--------------
5,785,500
Apparel(0.2%)
- -------------------------------------------------------------------------------------------------
5,650,000 Guess Jeans, Inc. sr. sub. notes 9 1/2s, 2003(b) 5,678,250
Medical Supplies(0.2%)
- -------------------------------------------------------------------------------------------------
4,915,000 Wright Medical Technology Inc. sr. secd. notes Ser. B, 10 3/4s,
2000(b) 4,964,150
Automotive Parts(0.2%)
- -------------------------------------------------------------------------------------------------
4,075,000 Key Plastics Corp. sr. notes 14s, 1999 4,890,000
Consumer Services(0.1%)
- -------------------------------------------------------------------------------------------------
750,000 Solon Automated Services, Inc. sr. sub. deb. 13 3/4s, 2002 817,500
2,750,000 Solon Automated Services, Inc. notes 12 3/4s, 2001 2,956,250
--------------
3,773,750
Banks(0.1%)
- -------------------------------------------------------------------------------------------------
3,525,000 Riggs National Corp. sub. deb. 8 1/2s, 2006 3,463,314
School Busses(--%)
- -------------------------------------------------------------------------------------------------
1,500,000 Blue Bird Acquisition Corp. sr. sub. deb. Ser. B, 11 3/4s, 2002 1,605,000
Nursing Homes(--%)
- -------------------------------------------------------------------------------------------------
1,200,000 Hillhaven Corp. sr. sub. notes 10 1/8s, 2001 1,218,000
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
CORPORATE BONDS AND NOTES
PRINCIPAL AMOUNT VALUE
<S> <C> <C>
Home Furnishings(--%)
- -------------------------------------------------------------------------------------------------
$ 500,000 Simmons Mattress Corp. deb. 8s, 2003 (b)(c) $ 487,500
Computers(--%)
- -------------------------------------------------------------------------------------------------
$ 2,095,000 DR Holdings Inc. sr. sub. deb. 15 1/2s, 2002(c)(e) $ 356,150
- -------------------------------------------------------------------------------------------------
Total Corporate Bonds and Notes (cost $1,106,762,074) $1,082,777,761
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (21.8%)(a)
PRINCIPAL AMOUNT VALUE
Federal National Mortgage Association
$ 614,743 12s, with various due dates to January 1, 2015 $ 695,813
3,861,610 Interest Only (IO) Strips, 7 1/2s, 2007(g) 1,008,846
51,941,798 7s, with various due dates to February 1, 2024 49,799,201
51,195,000 TBA, 7s, April 14, 2024 (h) 49,083,206
Government National Mortgage Association
208,072 9 1/2s, May 15, 2021 221,987
36,973,852 7 1/2s, with various due dates to March 15, 2024 36,338,363
99,830,810 7s, with various due dates to March 15, 2024 95,182,433
59,758,730 6 1/2s, with various due dates to March 15,2024 54,976,203
13,470,000 U.S. Treasury Notes 7 7/8s, April 15, 1998 14,341,341
19,820,000 U.S. Treasury Notes 7 3/8s, May 15, 1996 20,625,188
28,705,000 U.S. Treasury Notes 6s, November 30, 1997 28,758,822
59,000,000 U.S. Treasury Notes 5 3/4s, August 15, 2003 54,528,906
51,530,000 U.S. Treasury Notes 5 3/4s, October 31, 1997 51,256,247
32,080,000 U.S. Treasury Notes 5 1/4s, July 31, 1998 31,017,350
59,705,000 U.S. Treasury Notes 5 1/8s, December 31, 1998 57,055,591
18,415,000 U.S. Treasury Notes 5 1/8s, November 30, 1998 17,620,853
13,160,000 U.S. Treasury Notes 5s, January 31, 1999 12,493,775
21,710,000 U.S. Treasury Notes 4s, January 31, 1996 21,289,369
61,200,000 U.S. Treasury Stripped Principal Payment
Coupon Securities zero %, February 15, 2020 9,103,500
61,500,000 U.S. Treasury Stripped Interest Payment
Coupon Securities zero%, February 15, 2012 16,355,156
- -------------------------------------------------------------------------------------------------
Total U.S. Government and Agency Obligations
(cost $652,298,154) $621,752,150
</TABLE>
<TABLE>
<CAPTION>
FOREIGN BONDS AND NOTES(21.6%)(a)(i)
PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C>
ECU 17,000,000 Argentina (Republic of) notes 4 1/4s, 2005 $ 12,006,250
$A 27,570,000 Australia (Government of) bonds 7 1/2s, 2005 18,626,981
ECU 2,250,000 Brazil (Government of) notes 10s, 1997 2,283,750
C$ 10,000,000 Canada (Government of) bonds 4 1/4s, 2021 7,700,000
KRN 5,200,000 Denmark (Government of) bonds 9 1/4s, 1995 822,250
KRN 46,150,000 Denmark (Government of) bonds 1.46, 2000 7,874,344
KRN 53,469,000 Denmark (Government of) bonds 8s, 2003 8,755,549
KRN 75,000,000 Denmark (Kingdom of) bonds 7s, 2004 11,531,250
FM 36,000,000 Finland (Republic of) bonds 9 1/2s, 2004 7,335,000
FM 40,000,000 Finland (Republic of) notes 11s, 1999 8,425,000
ECU 8,450,000 France (Government of) BTAN 7 1/4s, 1998 10,055,500
FF 81,400,000 France (Government of) Balladurs 6s, 1997 $ 14,295,875
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
FOREIGN BONDS AND NOTES
PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C>
ECU 18,864,000 French Treasury bonds 8 1/4s, 2022 23,662,530
DM 25,100,000 Germany (Republic of) bonds 8 1/4s, 2001 16,581,688
DM 15,360,000 Germany (Republic of) bonds 7 3/4s, 2002 9,878,400
DM 39,785,000 Germany (Republic of) bonds 7 1/8s, 2003 24,691,566
DM 27,672,000 Germany (Republic of) bonds 6 1/4s, 2024 15,012,060
ITL 1,240,000,000 Italy (Government of) bonds 12s, 2002 868,000
ITL 13,440,000,000 Italy (Government of) BTPS 11 1/2s, 1996 8,694,000
ECU 2,300,000 Italy (Government of) bonds 11 1/2s, 2003 1,589,875
ITL 3,550,000,000 Italy (Government of) bonds 10s, 2003 2,287,531
ITL 10,500,000,000 Italy (Government of) bonds 10s, 1998 6,733,125
ECU 14,300,000 Italy (Government of) notes 9 1/4s, 2011 18,330,813
ECU 42,030,000 Italy (Government of) bonds 9s, 1998 26,163,675
(YEN) 3,175,000,000 Japan (Government of) bonds 4.9s, 2003 32,801,719
(YEN) 413,700,000 Japan (Government of) bonds 4.9s, 2008(j) 4,116,315
(YEN) 1,360,300,000 Japan (Government of) BTPS 4.8s, 2002 13,926,071
(YEN) 6,096,700,000 Japan (Government of) bonds 4.7s, 2014 58,490,216
(YEN) 319,500,000 Japan (Government of) bonds 3.6s, 2003 2,983,331
MXP 52,000,000 Mexico (Government of) bonds 6.63s, 2019 6,012,500
MXP 2,000,000 Mexico (Government of) bonds 6 1/4s, 2019 1,391,250
MXP 4,000,000 Mexico (Government of) bonds 6 1/4s, 2019 2,740,000
MXP 2,000,000 Mexico (Government of) notes, 4.563s, 1999 1,990,000
MXP 10,000,000 Ispat Mexicana deb. 10 3/8s, 2001(b) 9,637,500
MXP 6,000,000 Mexico (Government of) bonds 4.188s, 2019 4,957,500
ECU 11,000,000 National Bank Hungary bond 7.95s, 2003 9,790,000
NLG 78,545,000 Netherlands (Government of) bonds 7 1/2s, 2023 44,230,653
NZ$ 21,700,000 New Zealand (Government of) bonds 10s, 2002 14,633,938
NZ$ 50,560,000 New Zealand (Government of) notes 8s, 1995 29,135,200
SEK 25,800,000 Statens Bostads bonds 11s, 1999 3,628,125
SEK 25,200,000 Sweden (Government of) bonds 11s, 1999 3,638,250
SEK 74,400,000 Sweden (Government of) bonds 10 1/4s, 2003 10,834,500
SEK 99,300,000 Sweden (Government of) bonds 6s, 2005 10,736,813
(POUND) 200,000 United Kingdom Treasury bonds 10 1/4s, 1999 334,750
(POUND) 20,715,000 United Kingdom Treasury bonds 9 1/2s, 2004 34,710,572
(POUND) 950,000 United Kingdom Treasury bonds 9 1/8s, 2001 1,230,844
(POUND) 16,500,000 United Kingdom Treasury bonds 6 3/4s, 2004 23,182,500
(POUND) 12,625,000 United Kingdom Treasury notes 9s, 2000 20,136,875
(POUND) 2,080,000 United Kingdom Treasury bonds 3 1/2s, 2049 1,394,900
A$ 10,000,000 Victoria Treasury bonds 9s, 2002 7,112,500
-----------
Total Foreign Bonds and Notes
(cost $619,721,703) 617,981,834
</TABLE>
<TABLE>
<CAPTION>
UNITS(1.6%)(a)
NUMBER OF UNITS VALUE
<S> <C> <C>
1,950,000 Capital Gaming Inc. sr. secd. units 11 1/2s, 2001(b) $ 2,301,000
6,000,000 Chesapeake Energy Corp. units 12s, 2001(b) 6,000,000
9,350,000 County Seat Stores sr. sub. units 12s, 2001 9,163,000
3,800,000 Elsinore Corp. 1st mtge. units 12 1/2s, 2000(b) 3,496,000
18,500,000 ICF Kaiser International Inc. sr. sub. units 12s, 2003 18,685,000
186,413 IFINT Diversified Holdings sub. units 12.5135s, 1998
(acquired 3/29/93, cost $186,413)(f) 191,073
1,175,000 Louisiana Casino Cruises Corp. sr. sub. units 11 1/2s, 1998(b) 1,198,500
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
UNITS
NUMBER OF UNITS VALUE
<S> <C> <C>
300,000 Page Mart Inc. sr. units stepped-coupon
zero % (12 1/4s, 11/1/98), 2003 (b)(d) $ 1,866,000
30,600,000 Santa Fe Hotel, Inc. units 11s, 2000 3,098,250
--------------
Total Units (cost $51,168,432) $ 45,998,823
<CAPTION>
PREFERRED STOCKS(1.2%)(a)
NUMBER OF SHARES VALUE
<S> <C> <C>
102,500 Calfed Inc. Ser. B, $10.625 pfd. $ 10,173,125
11,950 Grand Union Co. $12.00 pfd. 1,404,125
118,000 National Intergroup Corp. Ser. A, $4.20 exch. pfd. 4,307,000
181,200 Pyramid Commerce units $3.125 pfd. 4,620,600
15,343 Stone Savannah River Pulp & Paper Corp. $3.84 exch. pfd. 1,380,870
153,977 Supermarkets General Holdings Corp. $3.52 exch. pfd 4,465,333
375,000 USX Capital LLC. $8.75 cum. pfd. 9,234,375
--------------
Total Preferred Stocks (cost $35,408,074) $ 35,585,428
<CAPTION>
YANKEE BONDS AND NOTES(1.2%)(a)
PRINCIPAL AMOUNT VALUE
<S> <C> <C>
$ 8,000,000 Argentina (Republic of) sr. sub. notes 8 3/8s, 2003(i) $ 7,600,000
13,000,000 Banco de Galicia Inc. global notes 9s, 2003 11,756,875
1,980,000 Brazil (Government of) bonds 8 3/4s, 2001(i) 1,400,850
9,775,000 Eletson Holdings, Inc. 1st pfd. mtge. notes 9 1/4s, 2003 9,823,875
3,125,000 Maxus Energy Corp. global notes 9 3/8s, 2003 2,875,000
--------------
Total Yankee Bonds and Notes (cost $35,693,065) $ 33,456,600
<CAPTION>
CONVERTIBLE PREFERRED STOCKS(0.3%)(a)
NUMBER OF SHARES VALUE
<S> <C> <C>
22,500 Chrysler Corp. Ser. A, $4.625 dep. shs. cv. pfd.(b) $ 3,240,000
40,020 Conseco, Inc. Ser. D, $3.25 cv. pfd. 2,111,055
39,200 Unisys Corp. Ser. A, $3.75 cv. pfd. 1,656,200
--------------
Total Convertible Preferred Stocks(cost $4,353,677) $ 7,007,255
<CAPTION>
COMMON STOCKS(0.2%)(a)
NUMBER OF SHARES VALUE
<S> <C> <C>
75,080 American Restaurant Group, Inc. $ 300,318
34,000 Arcadian Partners (acquired 1/19/94, cost $1,067,600)(f) 1,190,000
58,021 Charter Medical Corp.(e) 1,443,272
5,533 Computervision Corp. (acquired 8/24/92, cost $49,797)(f) 18,155
7,795 Federated Dept. Stores Inc.(e) 171,490
4,540 Finly Enterprises Inc. Class A 63,560
12,831 Grand Casinos, Inc.(e) 352,853
49,679 Lady Luck Gaming Corp.(e) 357,689
693,550 Loehmanns' Holdings, Inc.(b)(e) 693,550
1,184 PMI Holdings Corp. 82,880
1,271 Premium Holdings L.P. (acquired 1/4/94, cost $76,260)(f) 127,100
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
COMMON STOCKS(0.2%)(a)
NUMBER OF SHARES VALUE
<S> <C> <C>
$ 23,141 SPI Holdings Inc. Class B(e) $ 121,490
81,197 Solon Automated Services, Inc. (acquired 6/18/92,
cost $1,271)(b)(e)(f) 50,748
48,750 Specialty Foods Corp. 85,313
7,981 Taj Mahal Holding Corp. Class A(e) 175,582
50,000 Triangle Pacific Corp.(e) 656,250
--------------
Total Common Stocks(cost $3,720,647) $ 5,890,250
<CAPTION>
CONVERTIBLE BONDS(0.2%)(a)
PRINCIPAL AMOUNT VALUE
<S> <C> <C>
$ 7,500,000 News America Holdings Inc. liquid yield option notes
zero %, 2013(b) $3,009,375
1,610,000 Sahara Mission cv. sub. notes 12s, 1995 1,610,000
--------------
Total Convertible Bonds(cost $4,293,152) $ 4,619,375
<CAPTION>
WARRANTS(0.1%)(a)(c) EXPIRATION
NUMBER OF WARRANTS DATE VALUE
<S> <C> <C> <C>
185,000 Becker Gaming Corp.(b) 11/15/00 $ 647,500
800 Belle Casinos Inc. 10/15/00 32,000
4,875 Capital Gaming 2/1/99 9,750
9,658 Casino America Inc. 11/15/96 33,805
43,320 Casino Magic Finance Corp. 10/14/96 86,640
11,839 Cinemark Mexico 8/1/03 109,511
2,855 Dial Call Communication 12/15/98 34,260
8,250 Fitzgerald Gaming 3/15/99 495,000
379,200 Gaylord Container Corp.
($295,260 par acquired 12/2/93, cost
$1,008,313; $83,940 par acquired
1/20/94, cost $422,638)(f) 7/31/96 1,279,800
750 General Media(b) 12/31/00 11,250
250 Payless Cashways, Inc. 11/1/96 4,750
6,300 President Riverboat Casinos 9/15/96 18,900
7,500 Southdown, Inc. (acquired 10/31/91,
cost $22,500)(f) 11/1/96 69,375
1,480 Southland Corp. 3/5/96 3,700
53,660 UCC Investor Holding, Inc.(j) 10/30/99 697,580
1,001 Wright Medical Technology Inc. 6/30/03 100,059
--------------
Total Warrants(cost $3,601,992) $ 3,633,880
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
CALL OPTIONS ON FOREIGN CURRENCIES(0.1%)(a)(i) EXPIRATION DATE/ VALUE
CURRENCY STRIKE PRICE
<S> <C> <C> <C> <C>
DM 138,600,000 Deutschemarks Jun 94/DM 1.725 $ 1,427,580
DM 81,000,000 Deutschemarks Jun 94/DM 1.725 761,400
DM 35,300,000 Deutschemarks Jul 94/DM 1.685 850,730
--------------
Total Call Options On Foreign
Currencies(cost $4,613,454) $ 3,039,710
<CAPTION>
ASSET-BACKED SECURITIES(0.1%)(a)(cost $2,170,242)
PRINCIPAL AMOUNT VALUE
<S> <C> <C>
$ 2,175,000 First Deposit Master Trust Ser. 93-2A, 5 3/4s, 2001 $ 2,124,703
<CAPTION>
PUT OPTIONS ON FOREIGN CURRENCIES(--%)(a)(i)(cost $800,080)
CURRENCY EXPIRATION DATE/ VALUE
STRIKE PRICE
<S> <C> <C> <C> <C>
(YEN) 109,600,000 Japanese Yen April 94/(YEN) 100 $ 613,760
<CAPTION>
CALL OPTIONS ON CROSS FORWARD CURRENCY CONTRACTS
NUMBER OF CONTRACTS EXPIRATION DATE/ VALUE
STRIKE PRICE
<S> <C> <C> <C>
71,900 Deutschemarks In Exchange
For French Francs June 94/3.4125 $ 208,510
<CAPTION>
CALL OPTIONS ON FOREIGN BONDS(--%)(a)(i)
NUMBER OF CONTRACTS EXPIRATION DATE/ VALUE
STRIKE PRICE
<S> <C> <C> <C>
504,000 French Treasury Bonds April 94/FF20.41 $ 4,385
1,717,000 Japanese Government
Bonds April 94/(YEN)124.79 17
--------------
Total Call Options On Foreign
Bonds(cost $1,204,770) $ 4,402
<CAPTION>
SHORT TERM INVESTMENTS(17.5%)(a)
PRINCIPAL AMOUNT VALUE
<S> <C> <C>
$ 15,000,000 American Telephone & Telegraph Co. 3.52s, dated April 15, 1994 $ 14,978,000
20,000,000 Bell Atlantic Network Funding Corp. 3 1/2s, April 11, 1994 19,978,611
20,000,000 Ciesco, Inc. 3 1/2s, April 18, 1994 19,965,000
10,000,000 Ciesco, Inc. 3.12s, April 21, 1994 9,981,800
10,000,000 Corporate Asset Funding Co. Inc. 3.12s,April 15, 1994 9,987,000
5,990,000 Corporate Asset Funding Co. Inc. 3.07s, April 4, 1994 5,987,957
20,000,000 Corporate Receivables Corp. 3.53s, April 18, 1994 19,964,700
3,200,000 Corporate Receivables Corp. 3.52s, April 12, 1994 3,196,245
20,000,000 Federal Home Loan Mortgage Corp. 3.54s, May 2, 1994 19,937,067
25,000,000 Federal Home Loan Mortgage Corp. 3.4s, April 4, 1994 24,987,625
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
SHORT TERM INVESTMENTS
PRINCIPAL AMOUNT VALUE
<S> <C> <C>
$ 10,000,000 Federal Home Loan Mortgage Corp. 3.33s, April 4, 1994 $ 9,996,300
20,000,000 Ford Motor Credit Co. 3.47s, April 11, 1994 19,978,795
35,000,000 General Electric Capital Corp. 3.55s, April 15, 1994 34,951,681
20,000,000 General Motors Acceptance Corp. 3 3/4s,April 29,1994 19,939,583
40,000,000 General Motors Acceptance Corp. 3 3/4s,April 7, 1994 39,975,000
20,000,000 Goldman Sachs Group, 3.10s, April 26, 1994 19,955,222
GRD4,354,000,000 Greece Treasury bills zero%, February 14, 1995(i) 14,994,087
GRD 670,000,000 Greece Treasury bills zero%, May 31, 1994(i) 2,629,750
GRD 300,000,000 Greece Treasury bills zero%, May 17, 1994(i) 1,186,875
20,000,000 Household Finance Corp. 3.60s, April 22, 1994 19,956,000
20,000,000 Lehman Brothers Holdings Inc. 3.65s, April 14, 1994 19,971,611
25,000,000 Lehman Brothers Holdings Inc. 3.52s, April 4, 1994 24,990,222
20,000,000 Merrill Lynch & Co. Inc. 3.57s, April 11, 1994 19,978,183
20,000,000 Merrill Lynch & Co. Inc. 3.12s, April 20, 1994 19,965,333
25,000,000 Preferred Receivables Funding Corp. 3.62s, May 2, 1994 24,919,555
15,000,000 Preferred Receivables Funding Corp. 3.10s, April 20, 1994 14,974,167
43,385,000 Interest in $388,043,000 repurchase agreement dated
March, 31 1994 with Bankers Trust due April 4, 1994 with
respect to various U.S. Treasury obligations--maturity value
of $43,402,113 for an effective yield of 3.55% 43,389,278
--------------
Total Short-Term Investments(cost $501,064,857) $ 500,715,647
--------------
Total Investments (cost $3,027,084,223)(k) $2,965,410,088
==============
</TABLE>
(a) Percentages indicated are based on total net assets of $2,855,863,083,
which correspond to a net asset value per Class A share and Class B share
of $12.37 and $12.34, respectively.
(b) Securities 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. At March 31,
1994, these securities amounted to $216,596,579 or 7.3% of net assets.
(c) Income may be received in cash or additional securities at the discretion
of the user.
(d) The interest rate and date shown parenthetically represent the new interest
rate to be paid and the date the Fund will begin accruing this rate.
(e) Non-income-producing security.
(f) Restricted, excluding 144A securities, as to public resale. At the date of
acquisition, these securities were valued at cost. There were no
outstanding unrestricted securities of the same class as that held. Total
market value of restricted securities owned at March 31, 1994 was
$8,841,516 or 0.3% of net assets.
(g) Interest Only (IO) Strips represent the right to receive the monthly
interest payments on an underlying pool of mortgage loans. Nominal payments
on an underlying pool are passed through to IO holders.
(h) TBAs are mortgage backed securities traded under delayed delivery
commitments, settling after March 31, 1994. Although the unit price for the
trades has been established, the principal value has not been finalized.
However, the amount of the commitments will not fluctuate more than 2.0%
from the principal amount. Income on the securities will not be earned
until settlement date. The cost of TBA purchases held at March 31, 1994 was
$54,278,456.
TBA Sale Commitments at March 31, 1994 (proceeds receivable $54,278,456)
Agency Principal Amount Delivery Month Coupon Rate Market Value
- -------------------------------------------------------------------------------
GNMA $59,260,000 Apr 6 1/2% $54,278,456
- -------------------------------------------------------------------------------
(i) Foreign currency-denominated. Market value is translated at current
exchange rate.
(j) This security, valued at $4,813,895 or 0.2% of the Fund's net assets have
been purchased on a "forward commitment" basis-that is, the Fund has agreed
to take delivery of and make payment for such securities beyond the
settlement time of five business days after the trade date and subsequent to
the date of this report. The purchase price and interest rate of such
security is fixed at the trade date, although the Fund does not earn any
interest until settlement date.
(k) The aggregate identified cost on a tax basis is $3,050,980,950, resulting in
gross unrealized appreciation and depreciation of $32,285,837 and
$117,856,699, respectively, or net unrealized depreciation of $85,570,862
27
<PAGE>
<TABLE>
<CAPTION>
Forward Currency Contracts Outstanding at March 31, 1994 (aggregate face value of 9,989,193)
- ---------------------------------------------------------------------------------------------------
Unrealized
Market Aggregate Delivery Appreciation/
Value Face Value Date (Depreciation)
<S> <C> <C> <C> <C>
Australian
Dollars
(Sell) $ 9,909,245 $ 9,989,193 5/25/94 $ 79,948
Australian
Dollars
(Sell) 9,906,415 9,952,367 5/31/94 45,952
Canadian
Dollars
(Sell) 3,821,300 3,854,826 5/25/94 33,526
Deutschemarks
(Sell) 31,535,000 31,551,000 6/30/94 16,000
Deutschemarks
(Sell) 70,566,750 70,318,063 6/6/94 (248,687)
Deutschemarks
(Sell) 39,005,250 38,863,178 6/6/94 (142,072)
Deutschemarks
(Sell) 70,566,750 70,229,505 6/6/94 (337,245)
Japanese Yen
(Sell) 21,936,375 21,391,391 5/16/94 (544,984)
Japanese Yen
(Sell) 35,150,760 34,126,459 6/16/94 (1,024,301)
Japanese Yen
(Sell) 5,655,000 5,473,764 5/17/94 (181,236)
Japanese Yen
(Sell) 35,805,254 34,568,831 5/31/94 (1,236,423)
Japanese Yen
(Sell) 12,768,963 12,521,835 5/11/94 (247,128)
New Zealand Dollars
(Sell) 4,432,691 4,511,888 5/16/94 79,197
------------------
$ (3,707,453)
</TABLE>
<TABLE>
<CAPTION>
Forward Cross Currency Contracts Outstanding at March 31, 1994(aggregate face value of 37,822,620)
- ---------------------------------------------------------------------------------------------------
In
Market Exchange Market Delivery Unrealized
Contracts Value For Value Date Depreciation
Deutschemarks
<S> <C> <C> <C> <C> <C>
(Buy) $37,661,400 French Francs $37,779,610 5/31/94 $(118,210)
</TABLE>
<TABLE>
<CAPTION>
Diversification of Foreign Bonds and Notes at March 31, 1994(as a percentage of net assets)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Japan 3.9 % Denmark 1.0 %
United Kingdom 2.9 Sweden 1.0
Italy 2.3 Finland 0.6
Germany 2.3 Mexico 0.6
France 1.7 Argentina 0.4
Netherlands 1.5 Hungary 0.3
New Zealand 1.5 Canada 0.3
Australia 1.1 Brazil 0.2
</TABLE>
The accompanying notes are an integral part of these financial statements.
28
<PAGE>
Statement of assets and liabilities
March 31, 1994
<TABLE>
<S> <C>
Assets
- ----------------------------------------------------------------------------------------
Investments at value (identified cost $3,027,084,223) (Note 1) $2,965,410,088
- ----------------------------------------------------------------------------------------
Cash 1,679,473
- ----------------------------------------------------------------------------------------
Dividends, interest and other receivables 46,569,837
- ----------------------------------------------------------------------------------------
Receivable for shares of the Fund sold 29,363,743
- ----------------------------------------------------------------------------------------
Receivable for securities sold 122,495,285
- ----------------------------------------------------------------------------------------
Receivable for open forward currency contracts 254,634
- ----------------------------------------------------------------------------------------
Receivable for closed forward currency contracts 2,745,699
- ----------------------------------------------------------------------------------------
Total assets $3,168,518,759
Liabilities
- ----------------------------------------------------------------------------------------
Payable for securities purchased $ 202,545,764
- ----------------------------------------------------------------------------------------
Payable for shares of the Fund repurchased 8,416,066
- ----------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 3,621,928
- ----------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 9,821
- ----------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 2,173
- ----------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 820,458
- ----------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 1,922,523
- ----------------------------------------------------------------------------------------
Payable for variation margin on futures 10,490
- ----------------------------------------------------------------------------------------
Payable for open forward currency contracts 4,080,297
- ----------------------------------------------------------------------------------------
Payable for closed forward currency contracts 6,914,177
- ----------------------------------------------------------------------------------------
Other accrued expenses 33,523
- ----------------------------------------------------------------------------------------
TBA sale commitments at value
(proceeds receivable $54,278,456)(Note 1) 54,278,456
- ----------------------------------------------------------------------------------------
Total Liabilities 282,655,676
- ----------------------------------------------------------------------------------------
Net Assets $2,885,863,083
- ----------------------------------------------------------------------------------------
Represented by Paid-in capital (Notes 1, 4 and 5) $2,963,850,464
Distribution in excess of net investment income (5,577,715)
Accumulated net realized loss on investment
transactions (6,909,868)
Net unrealized depreciation of investment options,
forward currency contracts and TBA sale commitments (65,499,798)
- ----------------------------------------------------------------------------------------
Total--Representing net assets applicable to
capital shares outstanding $2,885,863,083
- ----------------------------------------------------------------------------------------
Computation of net asset value and offering price
Net unit value and redemption price of Class A shares
($1,460,061,734 divided by 118,006,860 shares) $12.37
---------------
offering price per Class A share (100/95.25 of 12.37)* $12.99
Net asset value and offering price of Class B shares
($1,425,909,394 divided by 115,593,479)** $12.34
- ----------------------------------------------------------------------------------------
</TABLE>
* On single retail sales of less than $50,000.
On sales of $50,000 or more and on group sales the offering price is reduced.
** Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
The accompanying notes are an integral part of these financial statements.
29
<PAGE>
Statement of operations
Six months ended March 31, 1994
<TABLE>
<S> <C>
Investment income:
- --------------------------------------------------------------------------
Interest $ 78,847,024
- --------------------------------------------------------------------------
Dividends 534,071
- --------------------------------------------------------------------------
Total investment income 79,381,095
Expenses:
- --------------------------------------------------------------------------
Compensation of Manager (Note 2) $ 6,328,300
- --------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 1,224,382
- --------------------------------------------------------------------------
Compensation of Trustees (Note 2) 21,480
- --------------------------------------------------------------------------
Registration fees 78,457
- --------------------------------------------------------------------------
Reports to shareholders 78,174
- --------------------------------------------------------------------------
Auditing 48,827
- --------------------------------------------------------------------------
Legal 23,351
- --------------------------------------------------------------------------
Postage 95,187
- --------------------------------------------------------------------------
Administrative services (Note 2) 17,964
- --------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 1,487,335
- --------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 4,890,375
- --------------------------------------------------------------------------
Other expenses 56,698
- --------------------------------------------------------------------------
Total expenses 14,350,530
- --------------------------------------------------------------------------
Net investment income 65,030,565
- --------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 7,219,568
- --------------------------------------------------------------------------
Net realized gain on options (Notes 1 and 3) 468,914
- --------------------------------------------------------------------------
Net realized gain on Future contracts (Notes 1 and 3) 31,982
- --------------------------------------------------------------------------
Net realized loss on forward currency contracts
(Notes 1 and 3) (4,623,475)
- --------------------------------------------------------------------------
Net realized loss on foreign currency (Note 1) (221,003)
- --------------------------------------------------------------------------
Net unrealized depreciation of investments, options,
forward currency contracts, and TBA sale commitments
during the period (94,321,019)
- --------------------------------------------------------------------------
Net (loss) on investment transactions (91,445,033)
- --------------------------------------------------------------------------
Net decrease in net assets resulting from operations (26,414,468)
- --------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
30
<PAGE>
Statement of changes of net assets
<TABLE>
<CAPTION>
Six Months ended Year ended
March 31 September 30
- -----------------------------------------------------------------------------------------------------
1994 1993
<S> <C> <C>
Increase (decrease) in net assets
- -----------------------------------------------------------------------------------------------------
Operations:
- -----------------------------------------------------------------------------------------------------
Net investment income $ 65,030,565 $ 41,931,553
- -----------------------------------------------------------------------------------------------------
Net realized gain on investments 7,219,568 14,487,183
- -----------------------------------------------------------------------------------------------------
Net realized gain (loss) on options 468,914 (43,954)
- -----------------------------------------------------------------------------------------------------
Net realized gain on futures contracts 31,982 --
- -----------------------------------------------------------------------------------------------------
Net realized loss (gain) on forward
currency contracts (4,623,475) 7,418,259
- -----------------------------------------------------------------------------------------------------
Net realized loss on foreign currency (221,003) (84,442)
- -----------------------------------------------------------------------------------------------------
Net unrealized foreign currency
transaction gain (losses) -- 4,849
- -----------------------------------------------------------------------------------------------------
Net unrealized (depreciation) appreciation of investments,
options, and forward currency contracts
and TBA sale commitments (94,321,019) 12,024,963
- -----------------------------------------------------------------------------------------------------
Net (decrease) increase in net assets
resulting from operations (26,414,468) 75,738,411
- -----------------------------------------------------------------------------------------------------
Undistributed net investment income
included in price of shares sold and
repurchased, net -- 1,073,962
Distributions to shareholders from:
- -----------------------------------------------------------------------------------------------------
Net investment income -- Class A (38,501,109) (38,506,310)
- -----------------------------------------------------------------------------------------------------
Net investment income -- Class B (28,348,782) (5,097,798)
- -----------------------------------------------------------------------------------------------------
Net realized gain on investment -- Class A (10,999,422) (15,751,822)
- -----------------------------------------------------------------------------------------------------
Net realized gain on investment -- Class B (9,011,401) (1,587,050)
- -----------------------------------------------------------------------------------------------------
Increase from capital share
transactions (Note 4) 1,619,784,241 998,232,093
- -----------------------------------------------------------------------------------------------------
Total increase in net assets 1,506,509,059 1,014,101,486
Net assets:
- -----------------------------------------------------------------------------------------------------
Beginning of period 1,379,354,024 365,252,538
- -----------------------------------------------------------------------------------------------------
End of period (including distributions
in excess of and undistributed net
investment income of $5,577,715 and
$354,481, respectively 2,885,863,083 1,379,354,024
</TABLE>
The accompanying notes are an integral part of these financial statements.
31
<PAGE>
Financial Highlights*
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
For the period
March 1, 1993
(commencement
Six Months ended of operations) to
March 31 September 30
- -------------------------------------------------------------------------------------------
1994 1993
- -------------------------------------------------------------------------------------------
Class B
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Net Asset Value, Beginning of Period $ 12.79 $ 12.51
- -------------------------------------------------------------------------------------------
Investment Operations
Net Investment Income .36 .49
- -------------------------------------------------------------------------------------------
Net Realized and Unrealized
Gain (Loss) on Investments (.31) .39
- -------------------------------------------------------------------------------------------
Total from Investment Operations (.05) .88
- -------------------------------------------------------------------------------------------
Distributions to Shareholders from:
Net Investment Income (.38) (.46)
- -------------------------------------------------------------------------------------------
Net Realized Gain on Investments (.12) (.14)
- -------------------------------------------------------------------------------------------
Paid-in Capital (b) -- --
- -------------------------------------------------------------------------------------------
Total Distributions (.50) (.60)
- -------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 12.34 $ 12.79
- -------------------------------------------------------------------------------------------
Total Investment Return at
Net Asset Value (%) (d) 0.58(e) 12.43(e)
- -------------------------------------------------------------------------------------------
Net assets, End of Period (in thousands) $1,425,909 $504,417
===========================================================================================
Ratio of Expenses to Average
Net Assets (%) 1.72(e) 1.91(e)
- -------------------------------------------------------------------------------------------
Ratio of Net Investment Income
to Average Net Assets (%) 5.57(e) 5.80(e)
- -------------------------------------------------------------------------------------------
Portfolio Turnover (%) 120.72(f) 243.73
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
</TABLE>
* Financial highlights for periods ended through September 30, 1992 have been
restated to conform with requirements issued by the SEC in April 1993.
As of October 1, 1993, the Fund discontinued the use of equalization
Accounting (see Note 1 of Notes of Financial Statements.)
(a)Reflects an expense limitation applicable during the years ended September
30, 1991, and 1990 and the period ended September 30, 1989. As a result of
such limitation, expenses of the Fund for the year ended September 30, 1991
reflect a reduction of less than $0.01 per share. Expenses for the year
ended September 30, 1990 and the period ended September 30, 1989 reflect
reductions of $0.04 and $0.05 per share, respectively.
(b)See Note 1 to Financial Statements.
(c)Portfolio turnover excludes the impact of assets received from the
acquisition of Putnam Diversified Premium Income Trust and subsequent sales
to realign the portfolio. (See Note 6)
(d)Total investment return assumes dividend reinvestment and does not reflect
the effect of sales charges.
(e)Annualized.
(f)Not annualized.
32
<PAGE>
<TABLE>
<CAPTION>
For the period
October 3, 1988
Six (commenement
Months ended Year ended of operations) to
March 31 September 30 September 30
- ------------------------------------------------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989
- ------------------------------------------------------------------------------------------------------------------------------------
Class A
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $12.82 $12.66 $11.85 $10.91 $12.03 $12.50
- ------------------------------------------------------------------------------------------------------------------------------------
Investment Operations
Net Investment Income .42 .96 1.04 1.05(a) 1.14(a) 1.13(a)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Realized and Unrealized
Gain (Loss) on Investments (.33) .56 .97 1.15 (.92) (.37)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations .09 1.52 2.01 2.20 .22 .76
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions to Shareholders from:
Net Investment Income (.42) (.94) (1.01) (1.05) (1.16) (1.11)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Realized Gain on Investments (.12) (.42) (.19) (.21) -- (.12)
- ------------------------------------------------------------------------------------------------------------------------------------
Paid-in Capital (b) -- -- -- -- (.18) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total Distributions (.54) (1.36) (1.20) (1.26) (1.34) (1.23)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $12.37 $12.82 $12.66 $11.85 $10.91 $12.03
- ------------------------------------------------------------------------------------------------------------------------------------
Total Investment Return at
Net Asset Value (%) (d) 1.22(e) 12.85(e) 17.88 21.43 1.99 6.38(e)
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, End of Period (in thousands) $1,459,954 $874,937 $365,253 $168,106 $125,301 $106,818
====================================================================================================================================
Ratio of Expenses to Average
Net Assets (%) .98(e) 1.21 1.36 1.47(a) 1.25(a) 1.26(a)(e)
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of Net Investment Income
to Average Net Assets (%) 6.28(e) 6.80 8.27 9.18(a) 9.98(a) 9.71(a)(e)
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover (%) 120.72(f) 343.73 221.09(c) 481.06 264.09 163.96(f)
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
33
<PAGE>
Notes to financial statements
March 31, 1994
Note 1
Significant accounting policies
The Fund is registered under the Investment Company Act of 1940, as amended, as
a diversified, open-end management investment company. The Fund seeks high
current income consistent with preservation of capital by allocating its
investments among the U.S. Government sector, high yield sector and
international sector of the fixed-income securities market.
The Fund offers both Class A and Class B shares. The Fund commenced its public
offering of Class B shares on March 1, 1993. Class A shares are sold with a
maximum front-end sales charge of 4.75%. Class B shares do not pay a front-end
sales charge, but pay a higher ongoing distribution fee than Class A shares, and
are subject to a contingent deferred sales charge, if those shares are redeemed
within six years of purchase. Expenses of the Fund are borne pro-rata by the
holders of both classes of shares, except that each class bears expenses unique
to that class (including the distribution fees applicable to such class), and
votes as a class only with respect to its own distribution plan or other matters
on which a class vote is required by law or determined by the Trustees. Shares
of each class would receive their pro-rata share of the net assets of the Fund,
if the Fund were liquidated. In addition, the Trustees declare separate
dividends on each class of shares.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles.
A Security valuation Investments for which market quotations are readily
available are stated at market value, which is determined using the last
reported sale price, or, if no sales are reported--as in the case of some
securities traded over-the-counter--the last reported bid price, except that
certain U.S. government obligations are stated at the mean between the last
reported bid and asked prices. Securities quoted in foreign currencies are
translated into U.S. dollars at the current exchange rate. Short-term
investments having remaining maturities of 60 days or less are stated at
amortized cost which approximates market value, and other investments, including
restricted securities, are stated at fair value following procedures approved by
the Trustees. Market quotations are not considered to be readily available for
long-term corporate bonds and notes; such investments are stated at fair value
on the basis of valuations furnished by a pricing service, approved by the
Trustees, which determines valuations for normal, institutional-size trading
units of such securities using methods based on market transactions for
comparable securities and various relationships between securities that are
generally recognized by institutional traders. See Sections F and G of Note 1
with respect to valuations of options, forward currency contracts and futures
outstanding.
B 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
34
<PAGE>
of the commitment will not fluctuate more than 2.0% from the principal amount.
The Fund holds, and maintains until the settlement date, cash or high-grade debt
obligations in an amount sufficient to meet the purchase price, or the Fund
enters into offsetting contracts for the forward sale of other securities it
owns. 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, generally
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 its portfolio or for delivery pursuant to
options contracts it has entered into, the Fund may dispose of a commitment
prior to settlement if the Fund Manager deems it appropriate to do so.
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 dates 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 on the commitment without
regard to any unrealized gain or loss on the underlying security. If the Fund
delivers securities under the commitment, the Fund realizes a gain or loss from
the sale of the securities based upon the unit price established at the date the
commitment was entered into.
C Joint trading account Pursuant to an exemptive order issued by the
Securities and Exchange Commission, the Fund may transfer uninvested cash
balances into a joint trading account, along with the cash of other registered
investment companies managed by Putnam Investment Management, Inc. the Fund's
Manager, a wholly-owned subsidiary of Putnam Investments, Inc., and certain
other accounts. These balances may be invested in one or more repurchase
agreements and/or short-term money market instruments.
D Repurchase agreements The Fund, 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. The Fund's Manager 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.
35
<PAGE>
E Security transactions and related investment income Security transactions
are accounted for on the trade date (date the order to buy or sell is executed).
Interest income is recorded on the accrual basis and dividend income is recorded
on the ex-dividend date.
Discount on zero-coupon bonds, original issue discount bonds and step-up bonds
is accreted according to the effective yield method. Certain securities held by
the Fund pay interest in the form of additional securities; interest on such
securities is recorded on the accrual basis at the lower of the coupon rate or
market value of the securities to be received, and is allocated to the cost of
the securities received on the payment date.
Foreign currency-denominated receivables and payables are "marked-to-market"
using the current exchange rate. The fluctuation between the original exchange
rate and the current rate is recorded as unrealized translation gain or loss.
Upon receipt or payment, the Fund realizes a gain or loss on foreign currency
amounting to the difference between the original value and the ending value of
the receivable or payable. Foreign currency gains and losses related to interest
receivable are reported as part of interest income.
F Option accounting principles When the Fund writes a call or put option, an
amount equal to the premium received by the Fund is included in the Fund's
"statement of assets and liabilities" as an asset and an equivalent liability.
The amount of the liability is sub-sequentialy "marked-to-market" to reflect the
current market value of an option written. The current market value of an option
is the last sale price or, in the absence of a sale, the last offering price,
except that certain options on U.S. Government obligations are stated at fair
maket value on the basis of valuations furnished by a pricing service approved
by the Trustees. If an option expires on its stipulated expiration date, or if
the Fund enters into a closing purchase transaction, the Fund realizes a gain
(or loss if the cost of a closing purchase transaction exceeds the premium
received when the option was written) without regard to any unrealized gain or
loss on the underlying security, and the liability related to such option is
extinguished. If a written call option is exercised, the Fund realizes a gain or
loss from the sale of the underlying security and the proceeds of the sale are
increased by the premium originally received. If a written put option is
exercised, the amount of the premium originally received reduces the cost of the
security which the Fund purchases upon exercise of the option.
The premium paid by the Fund for the purchase of a call or put option is
included in the Fund's "statement of assets and liabilities" as an investment
and is subsequently "marked-to-market" to reflect the current market value of
the option. If an option which the Fund has purchased expires on the stipulated
expiration date, the Fund realizes a loss in the amount of the cost of the
option. If the Fund enters into a closing sale transaction, the Fund realizes a
gain or loss, depending on whether proceeds from the closing sale transaction
are greater or less than the cost of the option. If the Fund exercises a call
option, the cost of securities acquired by exercising the call is increased by
the premium paid to buy the call. If the Fund exercises a put option, it
realizes a gain or loss from the sale of the underlying security and the
proceeds from such sale are decreased by the premium originally paid.
Options on foreign currencies The
36
<PAGE>
Fund writes and purchases put and call options on foreign currencies. The
accounting principles and risks involved are similar to those described above
relating to options on securities. The amount of potential loss to the Fund upon
exercise of a written call option is the value (in U.S. dollars) of the currency
sold, converted at the spot price, less the value of U.S. dollars received in
exchange. The amount of potential loss to the Fund upon exercise of a written
put option is the value (in U.S. dollars) of the currency received converted at
the spot price, less the value of the U.S. dollars paid in exchange.
Forward currency contracts A forward currency contract is an agreement between
two parties to buy and sell a currency at a set price on a future date. 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 by the Fund 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 maximum potential loss from forward currency contracts is the
aggregate face value in U.S. dollars at the time the contracts were opened;
however, management believes the likelihood of such a loss to be remote.
G Futures A futures contract is an agreement between two parties to buy and
sell a security at a set price on a future date. Upon entering into such a
contract the Fund is required to pledge to the broker an amount of cash or tax-
exempt securities equal to the minimum "initial margin" requirements of the
exchange. Pursuant to the contract, the Fund agrees to receive from or pay to
the broker an amount of cash equal to the daily fluctuation in value of the
contract. Such receipts or payments are known as "variation margin" and are
recorded by the Fund as unrealized gains or losses. 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 potential risk to the Fund is that the change in value of the
underlying securities may not correspond to the change in value of the futures
contracts.
H 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.
Therefore, no provision has been made for federal taxes on income, capital gains
or unrealized appreciation of securities held and excise tax on income and
capital gains.
I Distributions to shareholders Distributions to shareholders are recorded by
the Fund on the ex-dividend date. At certain times, the Fund may pay
distributions at a level rate even though, as a result of market conditions or
investment decisions, the Fund may not achieve projected investment results for
a given period.
J Unamortized organization expenses Expenses incurred by the Fund in
connection with its organization, its registration with the Securities and
Exchange Commission and with
37
<PAGE>
various states, and the initial public offering of its shares aggregated
$41,432. These expenses were being amortized on a straight-line basis over a
five-year period which concluded during the fiscal year ended September 30,
1993.
K Equalization Prior to October 1, 1993, the Fund used the accounting practice
known as equalization to keep a continuing shareholder's per share interest in
undistributed net investment income unaffected by sales or repurchases of Fund
shares. This was accomplished by allocating a per share portion of the proceeds
from sales and the costs of repurchases of shares to undistributed net
investment income. As of October 31, 1993, the Fund discontinued using
equalization. This change has no effect on the Fund's total net assets, net
asset value per share, or its net increase (decrease) in net assets resulting
from operations. Discontinuing the use of equalization will result in simpler
financial statements. The cumulative effect of the change was to decrease
undistributed net investment income and increase paid-in capital previously
reported through September 30, 1993 by $1,363,321
Note 2
Management fee, administrative services, and other transactions
Compensation of Putnam Investment Management Inc. for management and investment
advisory services is paid quarterly based on the average net assets of the Fund
for the quarter. Such fee is based on the following annual rates: 0.70% of the
first $500 million of average net assets, 0.60% of the next $500 million, 0.55%
of the next $500 million, and 0.50% of any amount over $1.5 billion. Fees are
subject to reduction in any year to the extent that expenses (exclusive of
brokerage, interest and taxes) of the Fund exceed 2.5% of the first $30 million
of average net assets, 2.0% of the next $70 million and 1.5% of any amount over
$100 million and by the amount of certain brokerage commissions and fees (less
expenses) received by affiliates of the Manager on the Fund's portfolio
transactions.
The Fund also reimburses the Manager 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. For the six months ended March 31, 1994,
the Trust paid $17,964 for these services.
Trustees of the Fund receive an annual Trustee's fee of $3,270, and an
additional fee for each Trustees' meeting attended. Trustees who are not
interested persons of the Manager and who serve on committees of the Trustees
receive additional fees for attendance at certain committee meetings.
Custodial functions for the Fund's assets are provided by Putnam Fiduciary Trust
Company (PFTC), a subsidiary of Putnam Investments, Inc. Investor servicing
agent functions are provided to the Fund by Putnam Investor Services, a division
of PFTC. Fees paid for investor servicing functions for the six months ended
March 31, 1994, amounted to $1,224,382.
Investor servicing and custodian fees reported in the Statement of operations
for the six months ended March 31,
38
<PAGE>
1994 have been reduced by credits allowed by PFTC.
The Fund has adopted a distribution plan with respect to its Class A shares (the
Class A Plan) pursuant to Rule 12b-1 under the Investment Company Act of 1940.
The purpose of the Class A Plan is to compensate Putnam Mutual Funds Corp. a
wholly-owned subsidiary of Putnam Investments, Inc., for services provided and
expenses incurred by it in distributing Class A shares. The Trustees have
approved payment by the Fund to Putnam Mutual Funds Corp. at an annual rate of
0.25% of the Fund's average net assets attributable to Class A shares. For the
six months ended March 31, 1994, the Fund paid $1,487,335 in distribution fees
for Class A shares.
The Fund has adopted a separate distribution plan with respect to its Class B
shares (the "Class B Plan") pursuant to Rule 12b-1 under the Investment Company
Act of 1940. The purpose of the Class B Plan is to compensate Putnam Mutual
Funds Corp. for services provided and expenses incurred by it in distributing
Class B shares. The Class B Plan provides for payments by the Fund to Putnam
Mutual Funds Corp. at an annual rate of up to 1.00% without shareholder
approval. For the six months ended March 31, 1994, the Fund paid Putnam Mutual
Funds Corp. distribution fees of $4,890,375 for Class B shares.
During the six months ended March 31, 1994, Putnam Mutual Funds Corp., acting as
an underwriter, received net commissions of $1,383,287 from the sale of Class A
shares of the Fund.
A deferred sales charge of up to 1% is assessed on certain redemptions of Class
A shares purchased as part of an investment of $1 million or more. For the six
months ended March 31, 1994 Putnam Mutual Funds Corp., acting as underwriter,
received $25,560 on such redemptions.
Putnam Mutual Funds Corp. also receives the proceeds of the contingent deferred
sales charges levied on Class B share redemptions within six years of purchase.
The charge is based on declining rates, which begin at 5.0% of the net asset
value of the redeemed shares. Putnam Mutual Funds Corp., received contingent
deferred sales charges of $890,497 from such redemptions during the six months
ended March 31, 1994.
Note 3
Purchases and sales of securities
During the six months ended March 31, 1994, purchases and sales of investment
securities other than U.S. government obligations and short-term investments
aggregated $2,132,982,023 and $525,187,255, respectively. Purchases and sales of
U.S. government obligations aggregated $1,527,241,855 and $1,834,515,013,
respectively. In determining the net gain or loss on securities sold, the cost
of securities has been determined on the identified cost basis.
39
<PAGE>
The following is a summary of futures contracts activity during the year.
<TABLE>
<CAPTION>
Purchase of Futures Contracts
---------------------------------
Number of Aggregate
Contracts Face Value
- ----------------------------------------------------------------------
<S> <C> <C>
Contracts purchased 220 $ 24,507,250
Contracts closed (220) (24,507,250)
- ----------------------------------------------------------------------
Open at end of period -- $ --
- ----------------------------------------------------------------------
</TABLE>
Written option transactions on foreign currencies during the period summarized
as follows:
<TABLE>
<CAPTION>
Premiums
Received
- -----------------------------------------------------------
<S> <C>
Options written $ 753,380
- -----------------------------------------------------------
Options closed (753,380)
- -----------------------------------------------------------
Written options outstanding
at end of period $ --
- -----------------------------------------------------------
<CAPTION>
<S> <C>
Purchased option transactions
on foreign bonds and currencies during
the period summarized as follows: Cost
- -----------------------------------------------------------
Outstanding
at beginning of period $2,595,685
- -----------------------------------------------------------
Options purchased 15,159,882
- -----------------------------------------------------------
Options sold (10,927,413)
- -----------------------------------------------------------
Purchased options
outstanding at end
of period $6,828,154
- -----------------------------------------------------------
</TABLE>
Transactions in forward currency contracts during the period are summarized as
follows:
<TABLE>
<CAPTION>
Forward
Currency
Contracts
- -----------------------------------------------------------
Aggregate
Face Value
- -----------------------------------------------------------
<S> <C>
Outstanding at beginning of period $176,542,299
- -----------------------------------------------------------
Contracts opened 1,616,755,114
- -----------------------------------------------------------
Contracts closed (1,445,945,113)
- -----------------------------------------------------------
Open at end of period $347,352,300
- -----------------------------------------------------------
<CAPTION>
<S> <C>
Forward
Cross
Currency
Contracts
- -----------------------------------------------------------
Aggregate
Face Value
- -----------------------------------------------------------
Outstanding at beginning of period $47,289,750
- -----------------------------------------------------------
Contracts opened 752,362,355
- -----------------------------------------------------------
Contracts closed (761,829,485)
- -----------------------------------------------------------
Open at end of period $37,822,620
- -----------------------------------------------------------
</TABLE>
Note 4
Capital shares
At March 31, 1994, there was an unlimited number of shares of beneficial
interest authorized, divided into two classes, Class A and Class B capital
stock. Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
Six Months ended Year ended
March 31 September 30
1994 1993
Shares Amount
Shares Amount Class A
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Class A
Shares sold 58,725,522 45,589,638
$ 755,732,957 $ 575,985,947
- ------------------------------------------------------------------------------------------------
Shares issued in connection with acquisition of Putnam
Diversified Premium Income Trust (Note 6)
Reinvestment of distributions
2,089,420 2,139,493
$ 26,850,135 $ 26,716,371
- ------------------------------------------------------------------------------------------------
60,814,942 47,729,131
$ 782,583,092 $ 602,702,318
- ------------------------------------------------------------------------------------------------
Shares repurchased
(11,062,859) (8,326,293)
$(141,973,879) $(104,854,886)
- ------------------------------------------------------------------------------------------------
Portion represented by undistributed net
investment income
-- --
-- $ (127,373)
- ------------------------------------------------------------------------------------------------
Net increase
Shares 49,752,083 39,402,838
$ 640,609,213 $ 497,720,059
- ------------------------------------------------------------------------------------------------
<CAPTION>
<S> <C> <C>
March 1, 1993
Six Months (commencement
ended operations) to
March 31 September 30
1994 1993
Shares Shares
Amount Amount
- ------------------------------------------------------------------------------------------------
Class B
Shares sold 80,935,157 40,163,044
$1,040,225,961 $ 510,474,232
- ------------------------------------------------------------------------------------------------
Shares issued in connection with
reinvestment of distributions
1,757,664 311,964
$ 22,524,104 $ 3,969,515
- ------------------------------------------------------------------------------------------------
82,692,821 40,475,008
$1,062,750,065 $ 514,443,747
- ------------------------------------------------------------------------------------------------
Shares repurchased (6,554,320) (1,020,030)
$ (83,575,038) $ (12,985,124)
- ------------------------------------------------------------------------------------------------
Portion represented by undistributed
net investment income
-- --
-- $ (946,589)
- ------------------------------------------------------------------------------------------------
Net increase
Shares 76,138,501 39,454,978
$ 979,175,028 $ 500,512,034
- ------------------------------------------------------------------------------------------------
</TABLE>
40
<PAGE>
Note 5
Reclassification of Capital Accounts
The Fund has adopted the provisions of Statement of Position 93-2
"Determination, Disclosure and Financial Statement Presentation of Income,
Capital Gain and Return of Capital Distributions by Investment Companies"
("SOP"). The SOP requires the Fund to report the undistributed net investment
income (accumulated loss) and accumulated net realized gain (loss) accounts in
such a manner as to approximate amounts available for future tax distributions
(or to offset future taxable realized capital gains).
In implementing the SOP the Fund has reclassified $2,749,549 to decrease
undistributed net investment income and $3,280,275 to increase accumulated net
realized gain with a decrease of $530,726 to paid-in capital. These adjustments
represent the cumulative amounts necessary to report these balances on a tax
basis through September 30, 1993. These reclassifications, which have no impact
on the total net asset value of the Fund, are primarily attributable to tax
equalization which is treated differently in the computation of distributable
income and capital gains under federal income tax rules and regulations versus
generally accepted accounting principles.
Permanent book and tax basis differences relating to shareholder distributions
will result in reclassification to paid-in capital.
Note 6
Acquisition of Putnam Diversified Premium Income Trust
On January 20, 1992, the exchange date, the Fund acquired the net assets of
Putnam Diversified Premium Income Trust ("PDPIT") by a tax free exchange
approved by the shareholders of PDPIT.
The net assets of the Fund immediately following the acquisition on January 20,
1992 were $280,361,810
<TABLE>
<CAPTION>
PDPIT
- -------------------------------------------------------
<S> <C>
Net assets of PDPIT on
January 17, 1992, valuation
date (including unrealized
appreciation of $3,089,155)
103,989,036
- -------------------------------------------------------
Shares of the Fund exchanged
in the acquisition for 9,213,702
outstanding shares of PDPIT
8,558,768
- -------------------------------------------------------
</TABLE>
41
<PAGE>
Our commitment to quality service
. CHOOSE AWARD-WINNING SERVICE.
Putnam Investor Services has won the DALBAR Quality Tested Service Seal
every year since the award's 1990 inception through 1993. DALBAR, an
independent research firm, ran more than 10,000 tests of 38 shareholder
service components. In every category, Putnam outperformed the industry
standard.
. HELP YOUR INVESTMENT GROW.
You can set up a regular program for investing with as little as $25 a
month from a Putnam money market fund or your own bank account.*
. SWITCH FUNDS EASILY.
You can move money from one account to another with the same class of
shares without a service charge. (This privilege is subject to change or
termination.)
. ACCESS YOUR MONEY QUICKLY.
You can get checks sent regularly or redeem shares any business day at the
then-current net asset value, which may be more or less than their original
cost.
For details about any of these or other services, contact your financial
advisor or call the toll-free number shown below and speak with a helpful
Putnam representative.
. To make an additional investment in this or any other Putnam fund, contact
your financial advisor or call our toll-free number: 1-800-225-1581.
* Regular investing, of course, does not guarantee a profit or protect
against a loss in a declining market. Investors should consider their
ability to continue purchasing shares during periods of low price levels.
42
<PAGE>
INVESTMENT
MANAGER
Putnam Investment
Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand
TRUSTEES
George Putnam, Chairman
William Pounds, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
John A. Hill
Elizabeth T. Kennan
Lawrence J. Lasser
Donald S. Perkins
Robert E. Patterson
George Putnam, III
A.J.C. Smith
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C.Flaherty
Senior Vice President
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Gary N. Coburn
Vice President
Alan J. Bankart
Vice President
F. Mark Turner
Vice President
Jennifer Leichter
Vice President and Fund Manager
William N. Shiebler
Vice President
John R. Verani
Vice President
Paul O'Neil
Vice President
John D. Hughes
Vice President and Treasurer
Beverly Marcus
Clerk and Assistant Treasurer
This report is for the information of shareholders of Putnam Diversified Income
Trust. It may also be used as sales literature when preceded or accompanied by
the current prospectus, which gives details of sales charges, investment
objectives, and operating policies of the fund.
43
<PAGE>
-----------------
PUTNAM INVESTMENTS Bulk Rate
U.S. Postage
The Putnam Funds Boston, MA
One Post Office Square Permit No. 53749
Boston, Massachusetts 02109 -----------------
29/75-11903
<PAGE>
GRAPHICS APPENDIX LIST
----------------------
Page Where Description of Graphic or Cross -
Graphic Appears Reference
- --------------- ---------------------------------
pg 5 Mountain Graph depicting 3 Funds. Vertical
Axis is based on percent change, Horizontal
Axis is in time increments by months.
pg 7 Bar Graph depicting portfolio allocations for
3 Funds. Vertical Axis is in percents and
horizontal is in time.
pg 11 4 Pie charts with slices corresponding to
listed percentages.
pg 12 Pyramid image listing categories of Funds
Risk vs Reward with most conservative at
Base.
