<PAGE>
PUTNAM
DIVERSIFIED
INCOME TRUST
ANNUAL REPORT
September 30, 1994
[LOGO APPEARS HERE]
BOSTON * LONDON * TOKYO
<PAGE>
PERFORMANCE HIGHLIGHTS
Lipper Analytical Services ranked the fund's class A shares #1 of the 18
general bond funds tracked for the 3 years ended September 30, 1994, and #2
of the 16 funds tracked for the 5 years ended as of the same date.*
The fund has maintained its Morningstar rating of four stars out of a
possible five, based on risk-adjusted performance through September 30, 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.
FISCAL 1994 RESULTS AT A GLANCE
<TABLE>
<CAPTION>
CLASS A CLASS B
TOTAL RETURN NAV POP NAV CDSC
<S> <C> <C> <C> <C>
12 months ended 9/30/94
(change in value during
period plus reinvested
distributions) -0.93% -5.65% -1.62% -6.16%
SHARE VALUE NAV POP NAV
9/30/93 $12.82 $13.46 $12.79
9/30/94 11.64 12.22 11.61
</TABLE>
<TABLE>
<CAPTION>
IN EXCESS IN EXCESS PAID-
OF OF CAPITAL IN
DISTRIBUTIONS NO. INCOME INCOME GAINS CAPITAL/(S)/ TOTAL
<S> <C> <C> <C> <C> <C> <C>
Class A 12 $0.71 0.12 $0.08 $0.17 $1.080
Class B 12 0.654 0.10 0.08 0.16 0.994
</TABLE>
<TABLE>
<CAPTION>
CURRENT RETURNS NAV POP NAV
<S> <C> <C> <C>
End of period
Current dividend rate/1/ 9.28% 8.84% 8.58%
Current 30-day SEC yield/2/ 8.92 8.49 8.15
</TABLE>
Performance data represent past results. For performance over longer
periods, see pages 9 and 10. 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 using SEC
guidelines.
* Lipper Analytical Services is an independent research firm whose rankings
vary over time and do not include the effects of sales charges. For the 12
months ended September 30, 1994, the fund's class A shares were ranked 9th
and class B shares were ranked 14th of the 35 general bond funds traded.
Past performance is not indicative of future results.
+ Morningstar is an independent research firm that rates funds relative to
funds with similar objectives, based on risk-adjusted medium- and long-term
performance, as applicable, and adjusted for sales charges. A rating of four
stars puts the fund in the top 32.5% of all rated funds. Ratings are subject
to change monthly. Past performance is no assurance of future results.
(S) For more information, see pages 7 and 8.
2
<PAGE>
[PHOTO APPEARS HERE]
FROM THE CHAIRMAN
DEAR SHAREHOLDER:
A PROLONGED PERIOD OF BOND MARKET VOLATILITY HAS GIVEN FIXED-INCOME INVESTORS
MORE THAN THEIR SHARE OF ANXIETY OVER THE PAST SEVERAL MONTHS. YOUR FUND'S
RECENT PERFORMANCE REFLECTS THIS UNSETTLED ENVIRONMENT.
AFTER DECLINING SHARPLY IN THE SPRING, BOND PRICES HAVE BEGUN TO STABILIZE.
WE MAY YET SEE FURTHER INCREASES IN SHORT-TERM INTEREST RATES AS THE FEDERAL
RESERVE BOARD ADAMANTLY STICKS TO ITS POLICY OF KEEPING INFLATION IN CHECK.
IN KEEPING WITH OUR COMMITMENT TO MAINTAIN DISTRIBUTIONS THAT REFLECT CURRENT
ESTIMATED EARNINGS, YOUR MANAGERS RECENTLY RECOMMENDED A DIVIDEND REDUCTION
- -- THE FIRST SINCE JANUARY 1993.
IN THE REPORT THAT FOLLOWS, LEAD FUND MANAGER JENNIFER LEICHTER DISCUSSES THE
FUND'S PERFORMANCE AND PROSPECTS. ALSO CONTRIBUTING WERE NEIL POWERS, WHO NOW
MANAGES THE U.S. GOVERNMENT SECURITIES SECTOR, MARK SIEGEL, WHO IS
SUPERVISING THE FUND'S EMERGING MARKET HOLDINGS AND D. WILLIAM KOHLI, WHO NOW
MANAGES THE FUND'S INTERNATIONAL FIXED-INCOME HOLDINGS. BILL WAS FORMERLY
SENIOR VICE PRESIDENT AND CO-DIRECTOR OF GLOBAL BOND MANAGEMENT FOR FRANKLIN
ADVISORS/TEMPLETON INVESTMENT COUNSEL.
RESPECTFULLY YOURS,
/S/ GEORGE PUTNAM
GEORGE PUTNAM
CHAIRMAN OF THE TRUSTEES
OCTOBER 19, 1994
3
<PAGE>
REPORT FROM THE FUND MANAGERS
JENNIFER E. LEICHTER, LEAD MANAGER
D. WILLIAM KOHLI
MICHAEL MARTINO
NEIL POWERS
F. MARK TURNER
MARK SIEGEL
Few fixed-income investments fared well through the challenges of 1994's bond
market environment, but Putnam Diversified Income Trust fared better than
many. Your fund's exposure to U.S. government and international securities --
both of which came under pressure in the wake of this year's interest rate
increases -- meant a decline in the value of holdings in both these sectors.
However, the strength of the high-yield sector, where we had concentrated
holdings, enabled the fund to finish the year with only a modest loss.
The year's rapidly changing markets brought home once again the value of
investing in sectors that respond to different economic factors. Although
declines in two of its three sectors could not be completely offset by the
relative strength of the third, the fund's total return of -0.93% for class A
shares and -1.62% for class B shares over the 12 months ended September 30,
1994, compares quite favorably with that of the average general bond fund
tracked by Lipper (-2.69% over the same period).
INTERNATIONAL SECTOR: RISING RATES AND SELL-OFFS DAMPEN RETURNS
The first nine months of 1994 have provided a volatile environment for
international fixed-income markets. The cyclical recovery which began in the
United States has expanded and now includes all of the developed economies of
the world. With it has come an increase in cyclical inflationary pressures,
which would typically result in lower bond prices and higher yields. However,
the reaction we have seen in the global bond markets has been more severe
than we believe justified by the cyclical pressures.
4
<PAGE>
Over the last few years, as many countries became accustomed running large
budget and current account deficits, they also have become accustomed to high
levels of dependence on foreign capital. Canada is a good example. In recent
years, a relatively large portion of Canadian government obligations has
generally been held by investors outside Canada. This spring, when a rise in
U.S. interest rates sparked a wave of volatility throughout global
fixed-income markets, foreign investors reacted by liquidating holdings and
moving their money back home. In Canada, as in many other countries, the
resulting sell-off brought down bond prices considerably.
Countries, like companies, compete for investors' capital. If an increased
supply and lower yields make a country's bonds less attractive to investors,
the country must raise rates until the bonds become competitive enough to
attract foreign capital again. Although higher interest rates make the bonds
more inviting for new investors, they inevitably mean some loss of value for
existing investors. This occurred with a number of the fund's international
holdings this year. Furthermore, as countries compete aggressively for
capital, prices of "safe-harbor" currencies, such as the dollar, may
depreciate. Consequently, our currency hedging strategies, which had been
intended to help protect the value of these holdings relative to the U.S.
dollar, were not effective.
CHANGES IN SECTOR PERFORMANCE 1988 - 1994
[GRAPH APPEARS HERE]
5
<PAGE>
Remember, though, that this equation works both ways. As we take profits on
some of the fund's high-yield holdings, which have continued to perform
relatively well this year, we will be able to reinvest the resulting assets
to take advantage of income opportunities created by this chain of events.
EMERGING MARKETS: OPENING UP NEW INCOME OPPORTUNITIES
This year, we began to invest a small portion of the fund's holdings --
approximately 5% of the overall portfolio -- in emerging market securities.
These markets are volatile, because they are sensitive to emerging country
politics as well as global economics, but we believe they have the potential
for rewarding returns. We are focusing primarily on emerging market bonds
that are denominated in dollars. In addition, we are being highly selective,
emphasizing government issues in countries where we consider that we have the
best understanding of the internal and external risk factors that can affect
bond performance.
U.S. GOVERNMENT SECTOR: YIELD CURVE STRATEGY HELPS CUSHION DECLINE
Careful yield curve positioning throughout the year enabled us to provide
some protection for the U.S. government portfolio during this spring's
dramatic interest rate increases. Anticipating that intermediate-term
securities would be among the hardest hit, we had shifted the portfolio into
a barbell configuration early in calendar 1994, with holdings concentrated in
both short-term and longer-term securities. This strategy shortened the
portfolio's average maturity -- which, in turn, helped reduce interest rate
sensitivity and protect the value of fund holdings
However, the focus on stability had a tradeoff: the barbell position did not
provide as high a yield as we had been able to generate in previous months.
Toward the end of the fiscal year, prices on intermediate-term bonds had
fallen to the point where they became attractive again. Consequently, we have
shifted the portfolio into a more concentrated, or bulleted, position in
order to generate additional income.
The fund's exposure to mortgage-backed securities had been reduced during the
springtime turbulence. However, the signs of
6
<PAGE>
strengthening that we noted in the semiannual report have returned in full
force. Prepayments have declined substantially and the yield spread between
mortgage-backed securities and Treasuries has widened once again.
Consequently, we are now building up the fund's position in this sector. We
believe that under current market conditions, this shift, combined with a
more bulleted yield curve strategy designed to take advantage of the higher
yields now available, is likely to make the U.S. government securities
sector a stronger contributor to the fund's overall performance.
HIGH-YIELD SECTOR: CONTINUING STRENGTH SUPPORTS OVERALL PERFORMANCE
Over the past three years, your fund's ability to invest in lower-rated
higher-yielding bonds proved invaluable; as the U.S. economy strengthened,
these bonds became the fixed-income market's top performers. The vast
majority of U.S. corporations are not able to issue investment-grade bonds
and must use lower-rated instruments to raise capital. As these companies
benefited from cost-cutting and downsizing trends, their profit levels
increased, debt levels were reduced, and the overall risk level of the
high-yield bond market declined.
As the sector strengthened, we built up the fund's weighting to an all-time
peak this past February. Toward the end of the fiscal year, however, we
became convinced that although high-yield bonds remain attractive,
opportunities in the other two sectors are becoming compelling. We expect to
take profits on some high-yield holdings, reduce the fund's dependence on
lower-rated bonds, and take full advantage of the opportunities this year's
volatility has created in the U.S. government and international sectors. The
recent dividend adjustment, which became effective with the October dividend,
is intended to facilitate this reallocation process.
LOOKING FORWARD -- AND BACK
Concurrently with announcing October's dividend adjustment, we also alerted
you to the possibility that some portion of fiscal 1994 distributions would
be redesignated as a return of capital. This is indeed the case; 15.6% of the
fiscal year's distribution is being
7
<PAGE>
redesignated as a return of capital and will not be taxable to shareholders.
Your Form 1099, which will be mailed in January 1995, will indicate the exact
amount of the distributions not subject to tax. In addition, you will now
need to adjust the cost basis of your shares when you eventually redeem or
exchange them. This will increase any resulting capital gain or decrease any
capital loss you incur at that time.
A return of capital is determined in accordance with federal tax law, which
requires that certain gains and losses on foreign currency transactions which
are considered capital gains and losses for book accounting purposes, be
reclassified as ordinary income for tax purposes. Losses on these transactions
result in a reduction of net investment income available for distribution. These
losses can occur unpredictably at a point in the year after monthly or quarterly
distributions have already been made, necessitating a redesignation.
It is important to recall that in previous fiscal years, your fund's use of
these transactions and investments has produced gains, which have been paid
out to shareholders in unexpected year-end distributions. Furthermore, your
fund's relatively modest losses in a year that severely challenged most
fixed-income investments stand as evidence that its strategy remains an
effective and valuable one for today's income investor.
The views expressed in this report are exclusively those of Putnam
Management, and are not meant as investment advice. Although the described
holdings were viewed favorably as of September 30, 1994, there is no
guarantee the fund will continue to hold these securities in the future.
8
<PAGE>
PERFORMANCE SUMMARY
This section provides, 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 9/30/94
<TABLE>
<CAPTION>
Class A Class B
NAV POP NAV CDSC
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1 year -0.93% -5.65% -1.62% -6.16%
- ------------------------------------------------------------------------------
5 years 63.19 55.44 -- --
Annual average 10.29 9.22 -- --
- ------------------------------------------------------------------------------
Life of class A 73.51 65.30 -- --
Annual average 9.64 8.75 -- --
- ------------------------------------------------------------------------------
Life of class B -- -- 5.47 1.75
Annual average -- -- 3.43 1.11
- ------------------------------------------------------------------------------
</TABLE>
COMPARATIVE INDEXES AND BENCHMARKS
<TABLE>
<CAPTION>
Salomon Bros.
Lehman Bros. Non-U.S. First Boston Consumer
Aggregate Bond World Govt. High Yield Price
Index Bond Index Index Index
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1 year -3.22% 5.58% 3.47% 2.96%
- ------------------------------------------------------------------------------------
5 years 49.45 74.28 79.77 19.52
Annual average 8.37 11.75 12.45 3.63
- ------------------------------------------------------------------------------------
Life of class A 66.29 78.77 89.74 24.71
Annual average 8.85 10.17 11.27 3.75
- ------------------------------------------------------------------------------------
Life of class B 2.36 17.36 12.39 4.40
Annual average 1.48 10.64 7.65 2.76
- ------------------------------------------------------------------------------------
</TABLE>
Fund performance data do not take into account any adjustment for taxes
payable on reinvested distributions or, for class A shares, distribution fees
prior to implementation of the class A distribution plan in 1990. The fund
began operations on October 3, 1988, offering shares now known as class A.
Effective March 1, 1993, the fund began offering class B shares. Performance
data represent past results and will differ for each share class. Investment
returns and principal value will fluctuate so an investor's shares, when
sold, may be worth more or less than their original cost.
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 bonds reflect a greater possibility that
adverse changes in the economy or in general economic conditions may hinder
the issuers' ability to pay principal and interest on the bonds.
Investments in non-U.S. securities may be subject to certain risks such as
currency fluctuations 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.
9
<PAGE>
GROWTH OF A $10,000 INVESTMENT
[GRAPH APPEARS HERE]
TERMS AND DEFINITIONS
CLASS A SHARES are generally subject to an initial sales charge.
CLASS B SHARES 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 class B shares and assumes redemption at the end of the
period. 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. AGGREGATE BOND INDEX is an unmanaged index consisting of 77% in
U.S. Treasuries, 27% in mortage-backed securities, and 23% in
investment-grade corporate bonds. Since the fund's U.S. government sector
consists primarily of Treasury and mortgage-backed holdings but may also
include a small portion of investment grade corporate bonds, it is Putnam
Management's opinion that this index is a more appropriate benchmark than the
Lehman Government/Corporate Index, used in previous fiscal years.
SALOMON BROTHERS NON-U.S. WORLD GOVERNMENT BOND INDEX is an unmanaged list of
bonds issued by 10 countries.
FIRST BOSTON HIGH YIELD INDEX is an unmanaged list of lower-rated
higher-yielding U.S. corporate bonds.
CONSUMER PRICE INDEX (CPI) is a commonly used measure of inflation; it does
not represent an investment return.
Securities indexes assume reinvestment of all distributions and interest
payments and do not take into account brokerage fees or taxes. Securities in
the fund do not match those in the indexes and performance of the fund will
differ.
10
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
For the Year ended September 30, 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 September 30, 1994, and the related statement of operations for
the year ended, the statement of changes in net assets for each of the two
years in the period then ended and the "Financial Highlights" for class A
shares for each of the five years in the period then ended and for the period
October 3, 1988 (commencement of operations) to September 30, 1989 and for
class B shares for the year ended September 30, 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 September 30, 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 September 30, 1994, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended and the "Financial Highlights" for
class A shares for each of the five years in the period then ended and the
period October 3, 1988 (commencement of operations) to September 30, 1989,
and for class B shares for the year ended September 30, 1994 and for the
period March 1, 1993 (commencement of operations) to September 30, 1994, in
conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
November 2, 1994
11
<PAGE>
PORTFOLIO OF INVESTMENTS OWNED
September 30, 1994
<TABLE>
<CAPTION>
CORPORATE BONDS AND NOTES (35.2%)(a)
PRINCIPAL AMOUNT VALUE
<C> <S> <C>
RECREATION (2.2%)
- -------------------------------------------------------------------------------------------------------------
$ 6,370,000 Arizona Charlies Corp. sub. deb. Ser. B, 12s, 2000 $ 5,470,238
1,950,000 Capital Gaming International, Inc. sr. notes 11 1/2s, 2001 1,355,250
2,960,000 Capitol Queen Corp. 1st mtge. Ser. B 12s, 2000 2,245,900
6,210,000 Casino America Inc. 1st mtge. deb. 11 1/2s, 2001 5,402,700
5,400,000 Casino Magic Finance Corp. 1st mtge., deb. 11 1/2s, 2001 3,996,000
3,800,000 Elsinore Corp. 1st mtge. 12 1/2s, 2000(b) 2,356,000
8,250,000 Fitzgerald Gaming Co. sr. notes 13s, 1996(b) 5,775,000
3,000,000 GNS Finance Corp. sr. sub. notes 9 1/4s, 2003 2,820,000
4,700,000 Golden Nugget Finance Corp. 1st mtge.
deb. Ser. B, 10 5/8s, 2003 2,538,000
4,135,000 Grand Casino Resorts Inc. notes 12 1/2s, 2000 3,969,600
11,750,000 Grate Bay Property Funding Corp. 1st
mtge. 10 7/8s, 2004 8,812,500
3,725,000 Lady Luck Gaming gtd. 1st mtge. 10 1/2s, 2001 1,490,000
5,675,000 Louisiana Casino Cruises Corp. sr. sub.
deb. 11 1/2s, 1998 4,937,250
500,000 MGM Grand Hotels Fing. Corp. 1st mtge. 12s, 1997 547,500
2,825,000 Pioneer Finance Corp. gtd. 1st mtge. 13 1/2s, 1998 2,599,000
4,250,000 President Riverboat Casinos, Inc. sr. sub. notes 13s, 2001 3,867,500
3,456,000 Trump Castle Funding Corp.
sr. sub. notes, Ser. B, 11 1/2s, 2000(b) 3,456,000
2,275,000 Trump Plaza Funding, Inc. 1st mtge. notes 10 7/8s, 2001 1,626,625
8,539,700 Trump Taj Mahal Funding, Inc., sub. deb. Ser. A,
11.35s, 1999(e) 5,636,202
--------------
68,901,265
CHEMICALS (2.1%)
- -------------------------------------------------------------------------------------------------------------
11,025,000 Arcadian Partners L.P. sr. notes, Ser.
B, 10 3/4s, 2005 10,914,750
20,100,000 G-I Holdings Inc. sr. notes zero %, 1998 12,462,000
10,550,000 Harris Chemical Corp. sr. sub. notes 10 3/4s, 2003 9,864,250
7,000,000 Huntsman Corp. 1st mtge. 11s, 2004 7,280,000
1,135,000 OSI Specialty Inc. sr. sub. notes 9 1/4s, 2003 1,061,225
18,160,000 UCC Investors Holding, Inc. sr. notes 10 1/2s, 2002 18,704,800
6,000,000 UCC Investors Holding, Inc. sr. sub. notes 11s, 2003 6,180,000
--------------
66,467,025
BROADCASTING (1.8%)
- -------------------------------------------------------------------------------------------------------------
18,500,000 Adelphia Communications Corp. sr. notes 9 1/2s, 2004(e) 14,522,500
6,500,000 Continental Broadcasting Inc. sr. sub. notes 10 5/8s, 2003 6,565,000
2,100,000 Granite Broadcasting Corp. sr. sub. deb. 12 3/4s, 2002 2,173,500
1,650,000 New City Broadcasting Corp. sr. sub notes 11 3/8s, 2003 1,612,875
2,300,000 Outlet Broadcasting, Inc. sr. sub. notes 10 7/8s, 2003 2,277,000
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
CORPORATE BONDS AND NOTES
PRINCIPAL AMOUNT VALUE
<C> <S> <C>
BROADCASTING (continued)
- -------------------------------------------------------------------------------------------------------------
$ 11,050,000 Panamsat (L.P.) sr. sub. notes stepped-coupon zero %
(11 3/8s, 8/1/98), 2003(c) $ 7,458,750
7,020,000 SFX Broadcasting Inc. sr. sub. notes 11 3/8s, 2000 7,283,250
21,986,000 Spectra Vision Inc. sr. sub. ext. reset notes 11.65s, 2002(e) 11,212,860
8,302,000 Telemedia Broadcasting Corp. 6.4s, 2004(b) 4,981,200
--------------
58,086,935
RETAIL (2.0%)
- -------------------------------------------------------------------------------------------------------------
4,325,000 Bradlees, Inc. sr. sub. notes 9 1/4s, 2003 3,827,625
3,540,000 Brylane L.P. sr. sub. notes 10s, 2003 3,363,000
9,350,000 County Seat Stores 12s, 2001 9,256,500
1,335,000 Duane Reade Corp. sr. notes, Ser. B, 12s, 2002 1,281,600
12,920,000 Finlay Enterprises Inc. sr. disc. deb. stepped-coupon
zero % (12s, 5/1/98), 2005(c) 7,752,000
650,000 Finlay Enterprises, Inc. sr. notes 10 5/8s, 2003 617,500
7,435,000 Loehmanns' Holdings, Inc. sr. sub. notes 13 3/4s, 1999 7,435,000
13,000,000 Loehmanns' Holdings, Inc. sr. sub. notes 10 1/2s, 1997 12,788,750
13,300,000 Parisian Inc. sr. sub. notes 9 7/8s, 2003 11,305,000
250,000 Specialty Retailers notes 10s, 2000 238,750
6,100,000 Specialty Retailers, Inc. sr. sub. notes 11s, 2003 5,825,500
--------------
63,691,225
STEEL (1.7%)
- -------------------------------------------------------------------------------------------------------------
9,000,000 AK Steel Corp. sr. notes 10 3/4s, 2004 9,067,500
6,800,000 Armco Inc. sr. notes 11 3/8s, 1999 6,868,000
10,000,000 Armco Inc. sr. notes 9 3/8s, 2000 9,250,000
11,725,000 Bayou Steel Corp. 1st mtge. 10 1/4s, 2001 11,080,125
1,875,000 Earle M. Jorgensen Co. sr. notes 10 3/4s, 2000 1,865,625
2,500,000 Inland Steel Industries, Inc. notes 12 3/4s, 2002 2,806,250
8,600,000 WCI Steel Inc. sr. secd. notes 10 1/2s, 2002 8,471,000
5,450,000 Wheeling-Pittsburgh Corp. sr. notes 9 3/8s, 2003 4,932,250
--------------
54,340,750
FOREST PRODUCTS (1.7%)
- -------------------------------------------------------------------------------------------------------------
4,000,000 Container Corp. America, Ser. B, 10 3/4s, 2002 4,120,000
1,500,000 Container Corp. of America sr. notes 9 3/4s, 2003 1,447,500
1,250,000 Gaylord Container Corp. sr. notes 11 1/2s, 2001 1,278,125
15,850,000 Gaylord Container Corp. sr. sub. disc. deb. stepped-
coupon zero % (12 3/4s, 5/15/96), 2005(c) 13,413,063
2,575,000 Repap Wisconsin Inc. sr. secd. notes 9 1/4s, 2002 2,266,000
2,200,000 Riverwood International Corp. sr. sub. notes 11 1/4s, 2002 2,299,000
5,250,000 Riverwood International Corp. sr. sub. notes 10 3/8s, 2004 5,355,000
1,000,000 Stone Container Corp. sr. notes 12 5/8s, 1998 1,047,500
1,000,000 Stone Container Corp. deb. sr. sub. notes 11 1/2s, 1999 1,000,000
9,200,000 Stone Container sr. sub. notes 9 7/8s, 2001 8,648,000
8,350,000 Stone Savannah River Pulp & Paper Corp. sr. sub. notes 14 1/8s, 2000 8,944,938
3,200,000 Williamhouse Regency (Delaware), Inc. sr. sub. deb. 11 1/2s, 2005 3,104,000
--------------
52,923,126
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
CORPORATE BONDS AND NOTES
PRINCIPAL AMOUNT VALUE
<C> <S> <C>
HEALTH CARE (1.5%)
- -------------------------------------------------------------------------------------------------------------
$ 4,895,000 Abbey Healthcare Group, Inc. sr. sub. notes 9 1/2s, 2002 $ 4,491,163
1,000,000 American Medical International Inc. jr. sub. deb. stepped-
coupon zero % (15s, 10/26/95), 2005(c)(e) 1,790,000
360,000 American Medical International Inc.
sr. sub. notes 13 1/2s, 2001 401,400
2,000,000 American Medical International Inc.
sr. sub. notes 9 1/2s, 2006 1,945,000
8,300,000 Charter Medical sr. sub. notes 11 1/4s, 2004 8,549,000
1,250,000 General Medical Corp. sr. sub. notes 10 7/8s, 2003 1,259,375
4,700,000 Healthsouth Rehablitaton 9 1/2s, 2001 4,606,000
5,500,000 Healthtrust, Inc. notes, 10 1/4s, 2004 5,665,000
3,200,000 Integrated Health Services sr. sub. notes 10 3/4s, 2004 3,232,000
9,400,000 McGaw, Inc. sr. notes 10 3/8s, 1999 9,682,000
2,420,000 Mediplex Group, Inc. sr. sub. notes 11 3/4s, 2002 2,607,550
1,300,000 Ornda Healthcorp sr. sub. notes 12 1/4s, 2002 1,371,500
2,500,000 Paracelsus Healthcare Corp. sr. sub. notes 9 7/8s, 2003 2,381,250
810,000 Quorum Health Group, Inc. sr. sub. notes 11 7/8s, 2002 862,650
--------------
48,843,888
CABLE TELEVISION (1.5%)
- -------------------------------------------------------------------------------------------------------------
1,550,000 Adelphia Communications Corp. sr. notes 12 1/2s, 2002 1,534,500
750,000 Adelphia Communications Corp. sr. deb. 11 7/8s, 2004 723,750
5,750,000 Adelphia Communications Corp. notes 9 7/8s, 2005 4,945,000
4,250,000 Cablevision Industries Corp. sub. deb. 9 1/4s, 2008 3,718,750
2,000,000 Cablevision System Corp. sr. sub. reset deb. 14s, 2003 2,035,000
625,000 Cablevision Systems Corp. sr. sub. reset
deb. 10 3/4s, 2004 634,375
1,000,000 Century Communications Corp. sr. sub.
deb. 11 7/8s, 2003 1,050,000
5,000,000 Century Communications Corp. sr. disc.
notes zero %, 2003 2,037,500
800,000 Continental Cablevision Inc. sr. sub. deb. 11s, 2007 812,000
11,350,000 Continental Cablevision, Inc. sr. deb. 9 1/2s, 2013 10,158,250
1,325,000 Continental Cablevision, Inc. sr. deb. 9s, 2008 1,185,875
3,053,027 Falcon Holdings Group Inc. sr. sub. notes 11s, 2003(e) 2,747,724
3,550,000 Insight Communications Co. sr. sub. notes stepped-
coupon notes 8 1/4s (11 1/4s, 3/1/96), 2000(c) 3,390,250
2,500,000 Jones Intercable, Inc. sub. deb. 11 1/2s, 2004 2,637,500
2,500,000 Jones Intercable, Inc. sr. sub. deb. 10 1/2s, 2008 2,512,500
500,000 Rogers Cablesystems Inc. notes 9 5/8s, 2002 485,000
1,500,000 Summit Communications Group, Inc. sr.
sub. deb. 10 1/2s, 2005 1,582,500
--------------
42,190,474
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
CORPORATE BONDS AND NOTES
PRINCIPAL AMOUNT VALUE
<C> <S> <C>
CELLULAR COMMUNICATIONS (1.2%)
- -------------------------------------------------------------------------------------------------------------
$ 8,000,000 Cellular, Inc. sr. sub. disc. notes stepped-coupon
zero % (11 3/4s, 9/1/98), 2003(c) $ 5,280,000
2,610,000 Cencall Communications Corp. sr. disc. notes stepped-
coupon zero % (10 1/8s, 1/15/99), 2004(c) 1,265,850
6,000,000 Centennial Cellular Corp. sr. notes 8 7/8s, 2001 5,400,000
11,000,000 Comcast Cellular Corp. sr. participating notes Ser. B,
zero %, 2000 6,792,500
1,850,000 Dial Call Communication sr. disc. notes Ser. B
stepped coupon zero %, (10 1/4s,12/15/98) 2005(c) 888,000
17,405,000 Horizon Cellular Telephone Co. sr. sub. disc. notes
stepped-coupon zero % (11 3/8s, 10/1/00), 2004(c) 12,705,650
4,000,000 NEXTEL Communications Inc. sr. disc. notes stepped-
coupon zero % (11 1/2s, 9/1/98), 2003(c) 2,180,000
8,000,000 NEXTEL Communications Inc. sr. disc. notes stepped-
coupon zero % (9 3/4s, 2/15/99), 2004(c) 3,840,000
--------------
38,352,000
FOOD (1.2%)
- -------------------------------------------------------------------------------------------------------------
10,000,000 Chiquita Brands sr. notes 9 1/8s, 2004 9,300,000
1,379,000 Del Monte Corp. sub. deb. notes 12 1/4s, 2002 (e) 1,379,000
25,150,000 Fresh Del Monte Produce Corp. sr. notes,
Ser. B, 10s, 2003 22,132,000
2,750,000 Mafco, Inc. sr. sub. notes 11 7/8s, 2002 2,701,875
1,200,000 Specialty Foods Acquisition Corp. sr. secd. disc. deb.
stepped-coupon zero %, (13s, 8/15/99), 2005(c) 444,000
2,750,000 Specialty Foods Corp. sr. sub. notes 11 1/4s, 2003 2,310,000
--------------
38,266,875
FOOD CHAINS (1.2%)
- -------------------------------------------------------------------------------------------------------------
24,000,000 Grand Union Capital Corp. gtd. sr. sub.
notes zero %, 2007 840,000
3,500,000 Grand Union Capital Corp. sr. notes stepped-
coupon zero % (15s, 12/15/99), 2004(c) 385,000
16,450,000 Grand Union Co. sr. sub. notes 12 1/4s, 2002 12,214,125
3,250,000 Safeway, Inc. 8.57s, 2003 3,115,938
2,402,000 Southland Corp. deb. 4s, 2004 1,393,160
9,750,000 Southland Corp. sr. deb. 4 1/2s, 2004 6,008,438
14,250,000 Stater Brothers sr. notes 11s, 2001 13,644,375
--------------
37,601,036
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
CORPORATE BONDS AND NOTES
PRINCIPAL AMOUNT VALUE
<C> <S> <C>
OIL AND GAS (1.1%)
- -------------------------------------------------------------------------------------------------------------
$ 3,125,000 Maxus Energy Corp. notes 9 3/8s, 2003 $ 2,906,250
5,000,000 Global Marine deb. notes 12 3/4s, 1999 5,425,000
1,500,000 Maxus Energy Corp. deb. 8 1/2s, 2008 1,402,500
4,800,000 Mesa Capital Corp. disc. notes stepped-coupon zero%
(12 3/4s, 6/30/95), 1998(c) 4,242,000
2,100,000 Noble Drilling Corp. deb. 9 1/4s, 2003 2,021,250
1,000,000 OPI International sr. notes 12 7/8s, 2002 1,120,000
2,500,000 Oryx Energy Co. deb. 9 3/4s, 1998 2,504,688
11,750,000 TransTexas Gas Corp. sr. secd. notes 10 1/2s, 2000 11,515,000
5,300,000 Triton Energy sr. sub. disc. notes stepped-coupon
zero % (9 3/4s, 12/15/96), 2000(c) 4,014,750
--------------
35,151,438
INSURANCE (1.0%)
- -------------------------------------------------------------------------------------------------------------
4,750,000 American Annuity Group, Inc. sr. notes 9 1/2s, 2001 4,560,000
5,900,000 American Life Holding Co. sr. sub. notes 11 1/4s, 2004 5,988,500
11,900,000 Penn Corp. Financial Group sr. sub. notes 9 1/4s, 2003 10,948,000
4,950,000 Reliance Group Holdings sr. sub. deb. 9 3/4s, 2003 4,479,750
7,275,000 Reliance Group Holdings sr. notes 9s, 2000 6,729,375
--------------
32,705,625
RESTAURANTS (1.0%)
- -------------------------------------------------------------------------------------------------------------
15,000,000 American Restaurant Group, Inc. sr. notes stepped-
coupon zero %, (14s, 12/15/98), 2005(c) 7,200,000
4,500,000 American Restaurant Group, Inc. sr.
notes, Ser. B, 12s, 1998 4,275,000
950,000 American Restaurant Group, Inc. sr.
secd. notes, Ser. A, 12s, 1998 902,500
7,300,000 Family Restaurants Inc. sr. notes 9 3/4s, 2002 6,424,000
14,200,000 Flagstar Corp. sr. sub. notes 11 3/8s, 2003 12,212,000
--------------
31,013,500
PUBLISHING (1.0%)
- -------------------------------------------------------------------------------------------------------------
8,300,000 Enquirer/Star Inc. sr. sub. notes zero %, 1997 6,764,500
1,750,000 General Media sr. secd. notes 10 5/8s, 2000 1,636,250
9,750,000 Marvel III Holdings, Inc. sr. notes Ser. B, 9 1/8s, 1998 8,531,250
5,300,000 Marvel Holdings, Inc. sr. secd. notes zero %, 1998 3,339,000
17,180,000 Marvel Parent Holdings, Inc. sr. secd. disc.
notes zero %, 1988 10,737,500
--------------
31,008,500
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
CORPORATE BONDS AND NOTES
PRINCIPAL AMOUNT VALUE
<C> <S> <C>
METALS AND MINING (0.8%)
- -------------------------------------------------------------------------------------------------------------
$ 2,900,000 Horsehead Industries, Inc. sr. sub. ext.
reset notes 15 3/4s, 1994 $ 2,987,000
7,561,000 Horsehead Industries, Inc. sub. notes 14s, 1999 7,561,000
13,550,000 Kaiser Aluminum & Chemical Corp. sr.
sub. notes 12 3/4s, 2003 13,211,250
3,050,000 Kaiser Aluminum & Chemical Co. sr. notes 9 7/8s, 2002 2,729,750
--------------
26,489,000
ENTERTAINMENT (0.8%)
- -------------------------------------------------------------------------------------------------------------
28,950,000 Viacom International sub. deb. 8s, 2006 25,186,500
BUILDING PRODUCTS (0.8%)
- -------------------------------------------------------------------------------------------------------------
7,000,000 American Standard, Inc. jr. sub. deb. 12 3/4s, 2003 7,070,000
1,000,000 American Standard, Inc. sr. deb. 11 3/8s, 2004 1,065,000
3,500,000 American Standard, Inc. deb. 9 1/4s, 2016 3,263,750
13,250,000 American Standard, Inc. sr. sub. deb. stepped-coupon
zero % (10 1/2s, 6/1/98) 2005(c) 8,645,625
1,000,000 Overhead Door Corp. sr. notes 12 1/4s, 2000 1,031,250
2,000,000 Southdown, Inc. sr. sub. notes Ser. B, 14s, 2001 2,220,000
1,425,000 Triangle Pacific Corp. sr. notes 10 1/2s, 2003 1,396,500
--------------
24,692,125
FINANCE (0.7%)
- -------------------------------------------------------------------------------------------------------------
3,521,000 PMI Acquisition Corp. sub. disc.
deb. stepped-coupon zero % (11 1/2s, 3/1/00),
2005(c) 1,795,710
20,000,000 PSF Finance L.P. sr. notes 12 1/4s, 2004(b) 20,437,500
--------------
22,233,210
AGRICULTURE (0.7%)
- -------------------------------------------------------------------------------------------------------------
1,500,000 PRT Funding Corp. sr. notes 11 5/8s, 2004 975,000
13,436,000 Premium Standard Farms deb. zero %, 2003 10,614,440
10,271,900 Premium Standard Farms sr. secd. notes 12s, 2000(b) 11,119,332
--------------
22,708,772
CONTAINERS (0.6%)
- -------------------------------------------------------------------------------------------------------------
6,150,000 Anchor Glass Container Corp. sr. sub.
deb. 9 7/8s, 2008 5,596,500
9,000,000 Ivex Holdings Corp. sr. disc. deb. stepped-coupon
zero % (13 1/4s, 3/15/00), 2005(c) 4,410,000
8,600,000 Ivex Packaging Corp. sr. sub. notes 12 1/2s, 2002 8,944,000
1,525,000 United States Can Co. sr. sub. notes 13 1/2s, 2002 1,696,563
--------------
20,647,063
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
CORPORATE BONDS AND NOTES
PRINCIPAL AMOUNT VALUE
<C> <S> <C>
BUILDING AND CONSTRUCTION (0.6%)
- -------------------------------------------------------------------------------------------------------------
$ 11,650,000 Presley Co. sr. notes 12 1/2s, 2001 $ 11,300,500
7,700,000 Scotsman Group Inc. sr. notes 9 1/2s, 2000 7,238,000
1,000,000 Webb (DEL. E.) sr. notes 10 7/8s, 2000 995,000
--------------
19,533,500
SHIPPING (0.6%)
- -------------------------------------------------------------------------------------------------------------
19,700,000 Viking Star Shipping sr. secd. notes 9 5/8s, 2003 18,862,750
MOTION PICTURE DISTRIBUTION (0.6%)
- -------------------------------------------------------------------------------------------------------------
5,200,000 AMC Entertainment, Inc. sr. sub. deb. 11 7/8s, 2000 5,616,000
3,200,000 AMC Entertainment, Inc. sr. sub. deb. 12 5/8s, 2002 3,552,000
5,870,000 Act III Theatres sr. sub. notes 11 7/8s, 2003 6,280,900
1,500,000 Cinemark USA sr. notes 12s, 2002 1,608,750
1,000,000 United Artists notes 11 1/2s, 2002 1,070,000
--------------
18,127,650
CONGLOMERATES (0.5%)
- -------------------------------------------------------------------------------------------------------------
500,000 ADT Ltd. sr. sub. notes 9 1/4s, 2003 475,000
1,250,000 Congoleum Corp. sr. notes 9s, 2001 1,175,000
2,625,000 Haynes International, Inc. sr. sub. notes 13 1/2s, 1999 1,601,250
4,400,000 Jordan Industries, Inc. sr. notes 10 3/8s, 2003 4,015,000
7,500,000 Jordan Industries, Inc. sr. sub. disc. deb. stepped-
coupon zero %, (11 3/4s, 8/1/98) 2002(c) 3,975,000
1,150,000 MacAndrews & Forbes Group Inc. deb. 12 1/4s, 1996 1,150,000
1,000,000 MacAndrews & Forbes Holdings Inc. sub. deb. 13s, 1999 1,000,000
5,900,000 Talley Industries, Inc. sr. disc. deb. stepped-coupon
zero % (12 1/4s, 10/15/98), 2005(c) 3,171,250
--------------
16,562,500
ELECTRONICS (0.5%)
- -------------------------------------------------------------------------------------------------------------
1,200,000 Ampex Group, Inc. sr. sub. deb. 13 1/4s, 1996(f) 84,000
5,050,000 Amphenol Corp. sr. sub. notes 12 3/4s, 2002 5,731,750
1,000,000 Amphenol Corp. sr. notes 10.95s, 2001(b) 1,085,000
17,525,000 International Semi-Tech. Corp. sr. disc. notes stepped-
coupon zero % (11 1/2s, 8/15/00), 2003(c) 8,368,188
--------------
15,268,938
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
CORPORATE BONDS AND NOTES
PRINCIPAL AMOUNT VALUE
<C> <S> <C>
ENVIRONMENTAL CONTROL (0.5%)
- -------------------------------------------------------------------------------------------------------------
$ 16,875,000 Envirosource, Inc. sr. notes 9 3/4s, 2003 $ 15,187,500
ELECTRIC UTILITIES (0.4%)
- -------------------------------------------------------------------------------------------------------------
5,714,623 Midland Cogeneration Venture (L.P.) sr. deb. 10.33s, 2002 5,571,757
899,344 Midland Cogeneration Ventures deb. 10.33s, 2002 876,860
1,600,000 Midland Funding Corp. II deb. Ser. B, 13 1/4s, 2006 1,632,000
4,750,000 Midland Funding Corp. II deb. Ser. A, 11 3/4s, 2005 4,666,875
800,000 Texas New Mexico Power Corp. secd. deb. 12 1/2s, 1999 856,000
--------------
13,603,492
ADVERTISING (0.4%)
- -------------------------------------------------------------------------------------------------------------
2,975,000 Lamar Advertising Co. sr. secd. notes 11s, 2003 2,915,500
3,000,000 Outdoor Systems, Inc. sr. notes 10 3/4s, 2003 2,820,000
7,740,000 Universal Outdoor Inc. sub. deb. 11s, 2003 7,236,900
--------------
12,972,400
CONSUMER SERVICES (0.4%)
- -------------------------------------------------------------------------------------------------------------
10,500,000 Flagstar Corp. sr. sub. deb. 11 1/4s, 2004 9,003,750
2,750,000 Solon Automated Services, Inc. notes 12 3/4s, 2001 2,722,500
750,000 Solon Automated Services, Inc. sr. sub. deb. 13 3/4s, 2002 772,500
--------------
12,498,750
BANKS (0.4%)
- -------------------------------------------------------------------------------------------------------------
730,000 Chevy Chase Savings Bank Inc. sub. deb. 9 1/4s, 2005 649,700
2,600,000 First Federal Financial Corp. notes 11 3/4s, 2004 2,600,000
2,000,000 Riggs National Corp. sub. deb. 8 1/2s, 2006 1,880,000
6,945,000 Westpac Banking Corp. sub. deb. 9 1/8s, 2001 7,270,547
--------------
12,400,247
TEXTILES (0.4%)
- -------------------------------------------------------------------------------------------------------------
4,875,000 Dan River Inc. deb. 10 1/8s, 2003 4,411,875
2,300,000 Foamex (L.P.) Capital Corp. sr. sub. deb. 11 7/8s, 2004 2,369,000
3,850,000 Foamex (L.P.) Capital Corp. sr. notes 11 1/4s, 2002 3,888,500
512,000 Foamex (L.P.) Capital Corp. sr. secd. notes 9 1/2s, 2000 483,840
1,375,000 Westpoint Stevens, Inc. sr. sub. deb. 9 3/8s, 2005 1,240,938
--------------
12,394,153
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
CORPORATE BONDS AND NOTES
PRINCIPAL AMOUNT VALUE
<C> <S> <C>
AIRLINES (0.4%)
- -------------------------------------------------------------------------------------------------------------
$ 9,780,000 USAir, Inc. sr. notes 10 3/8s, 2013 $ 8,459,700
4,300,000 USAir, Inc. notes 9 5/8s, 2003 3,698,000
--------------
12,157,700
LODGING (0.3%)
- -------------------------------------------------------------------------------------------------------------
4,400,000 John Q. Hammons Hotels 1st. mtge. notes 8 7/8s, 2004 4,015,000
2,500,000 La Quinta Motor Inns Inc. deb. 9 1/4s, 2003 2,350,000
5,000,000 Red Roof Inns sr., notes 9 5/8s, 2003 4,650,000
--------------
11,015,000
HOME BUILDING (0.3%)
- -------------------------------------------------------------------------------------------------------------
5,975,000 Del. Webb Corp. sr. sub. deb. 9s, 2006 4,929,375
6,000,000 Miles Homes Services sr. notes 12s, 2001 5,640,000
--------------
10,569,375
CONSUMER PRODUCTS (0.3%)
- -------------------------------------------------------------------------------------------------------------
6,000,000 Coleman Holdings sr. secd. disc. notes zero %, 1998 4,020,000
2,625,000 Equitable Bag Co. sr. notes 12 3/8s, 2002(f) 1,548,750
5,680,000 Playtex Family Products Corp. sr. sub. notes 9s, 2003 4,884,800
--------------
10,453,550
FINANCIAL SERVICES (0.3%)
- -------------------------------------------------------------------------------------------------------------
3,150,000 Comdata Network, Inc. sr. notes 12 1/2s, 1999 3,386,250
5,400,000 Comdata Network, Inc. sr. sub. deb. 13 1/4s, 2002 5,967,000
500,000 Keystone Group, Inc. sr. secd. notes 9 3/4s, 2003 475,000
--------------
9,828,250
REAL ESTATE (0.3%)
- -------------------------------------------------------------------------------------------------------------
8,440,000 Chelsea Piers Ser.A, stepped-coupon zero %
(12 1/2s, 6/15/99), 2004(b)(c) 6,868,050
520,000 Chelsea Piers Ser.B, stepped-coupon zero %
(11s, 6/15/99), 2009(b)(c) 430,950
1,850,000 Kearny State Real Estate (L.P.) secd. notes 9.56s, 2003 1,868,500
--------------
9,167,500
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
CORPORATE BONDS AND NOTES
PRINCIPAL AMOUNT VALUE
<C> <S> <C>
AUTOMOTIVE PARTS (0.2%)
- -------------------------------------------------------------------------------------------------------------
$ 6,825,000 Key Plastics Corp. sr. notes 14s, 1999 $ 7,737,844
MACHINERY (0.2%)
- -------------------------------------------------------------------------------------------------------------
7,050,000 Specialty Equipment Co. sr. sub. notes 11 3/8s, 2003 7,014,750
COMPUTER EQUIPMENT (0.2%)
- -------------------------------------------------------------------------------------------------------------
8,050,000 Computervision Corp. sr. sub. notes 11 3/8s, 1999 6,681,500
APPAREL (0.2%)
- -------------------------------------------------------------------------------------------------------------
6,350,000 Guess Jeans, Inc. sr. sub. notes 9 1/2s, 2003 5,969,000
COMMUNICATIONS (0.2%)
- -------------------------------------------------------------------------------------------------------------
3,730,000 MFS Communications sr. disc. notes stepped-coupon
zero % (9 3/8s, 1/15/99), 2004(c) 2,163,400
3,000,000 Pagemart Inc. sr. disc. notes 12 1/4s, 2003 1,890,000
500,000 Paging Network, Inc. sr. sub. notes 8 7/8s, 2006 422,500
1,350,000 USA Mobile Communications sr. notes 9 1/2s, 2004 1,188,000
--------------
5,663,900
MEDICAL SUPPLIES (0.2%)
- -------------------------------------------------------------------------------------------------------------
4,915,000 Wright Medical Technology Inc. sr. secd. notes Ser. B,
10 3/4s, 2000 4,865,850
BUSINESS SERVICES (0.1%)
- -------------------------------------------------------------------------------------------------------------
4,800,000 Corporate Express, Inc. sr. notes 9 5/8s, 2004 4,452,000
NURSING HOMES (0.1%)
- -------------------------------------------------------------------------------------------------------------
1,200,000 Hillhaven Corp. sr. sub. notes 10 1/8s, 2001 1,212,000
2,437,000 Multicare Cos., Inc. sr. sub. notes 12 1/2s, 2002 2,692,885
--------------
3,904,885
SCHOOL BUSES (--%)
- -------------------------------------------------------------------------------------------------------------
1,500,000 Blue Bird Body Co. sub. deb. Ser. B, 11 3/4s, 2002 1,526,250
HOME FURNISHINGS (--%)
- -------------------------------------------------------------------------------------------------------------
541,041 Simmons Mattress Corp. deb. 8s, 2003(b)(e) 516,694
--------------
Total Corporate Bonds and Notes
(cost $1,206,752,661) $1,120,436,260
--------------
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (27.0%)
PRINCIPAL AMOUNT VALUE
<C> <S> <C>
$ 487,781 Federal National Mortgage Association
12s, with various due dates to October 1, 2015 $ 547,535
126,546,915 Federal National Mortgage Association
7s, with various due dates to June 1, 2024 116,225,616
Government National Mortgage Association
150,083 9 1/2s, with various due dates to May 15, 2021 158,244
126,722,185 7 1/2s, with various due dates to June 15, 2024 119,039,651
100,621,958 7s, with various due dates June 15, 2024 91,188,253
137,395,000 TBA, 8s, October 14, 2024(h) 133,273,150
45,000,000 U.S. Treasury Notes 9 1/4s, August 15, 1998 48,164,063
50,000,000 U.S. Treasury Notes 8 7/8s, 2005 52,984,375
30,000,000 U.S. Treasury Notes 8 3/4s, October 15, 1997 31,462,500
13,470,000 U.S. Treasury Notes 7 7/8s, April 15, 1998 13,798,331
19,820,000 U.S. Treasury Notes 7 3/8s, May 15, 1996 20,104,913
61,450,000 U.S. Treasury Notes 7 1/2s, November 15, 2001 61,526,813
28,705,000 U.S. Treasury Notes 6s, November 30, 1997 27,933,553
13,160,000 U.S. Treasury Notes 5s, January 31, 1999 12,094,863
51,530,000 U.S. Treasury Notes 5 3/4s, October 31, 1997 49,855,275
18,415,000 U.S. Treasury Notes 5 1/8s, November 30, 1998 17,068,403
15,155,000 U.S. Treasury Notes 5 1/8s, December 31, 1998 14,023,111
32,080,000 U.S. Treasury Notes 5 1/4s, July 31, 1998 30,095,050
19,560,000 U.S. Treasury Notes 4s, January 31, 1996 19,009,875
--------------
Total U.S. Government and Agency Obligations
(cost $895,067,450) $ 858,553,574
</TABLE>
<TABLE>
<CAPTION>
FOREIGN BONDS AND NOTES (25.5%)(a)(g)
PRINCIPAL AMOUNT VALUE
<C> <C> <S> <C>
ARP 3,500,000 Argentina (Republic of) Floating Rate
Notes (FRN), 4.875%, 2001 $ 2,572,500
AUD 10,000,000 Australia (Government of) bonds 13s, 1996 7,950,000
AUD 8,120,000 Australia (Government of) bonds 9 1/2s, 2003 5,739,825
AUD 96,580,000 Australia (Government of) bonds 6 3/4s, 2006 53,420,813
USD 5,000,000 Banco Nacional bonds 8s, 2003 4,437,500
USD 1,500,000 Banco Nacional bonds 7 1/4s, 2004 1,245,000
USD 3,000,000 Bancomer S.A. deb. 9s, 1998 2,936,250
USD 9,150,000 Brazil (Republic of) FRN 5.875s, 2006 6,393,563
USD 4,000,000 Brazil (Republic of) FRN 5.25s, 2009 2,640,000
USD 14,357,000 Brazil (Government of) bonds 8 3/4s, 2001 11,952,203
CAD 14,400,000 Canada (Government of) deb. 9s, 2004 10,827,000
CAD 10,000,000 Canada (Government of) bonds 4 1/4s, 2021 7,268,750
CAD 185,045,000 Canada (Government of) bonds 5 3/4s, 1999 125,136,681
USD 10,000,000 Philippines (Government of) bonds 5 1/4s, 2017 6,462,500
USD 3,500,000 Philippines (Government of) FRN 5.25s, 2005 3,066,875
USD 3,000,000 Essar Gujart Ltd. sub. deb. 8.025s, 1999 3,000,000
FIM 99,000,000 Finland (Republic of) notes 10 3/4s, 2002 20,975,625
FIM 95,000,000 Finland (Government of) bonds 9 1/2s, 2004 18,584,375
ECU 18,864,000 France Treasury bonds 8 1/4s, 2022 21,269,160
FRF 6,900,000 France (Government of) Balladurs 6s, 1997 1,267,875
ECU 1,200,000 France (Government of) OAT 6s, 2004 1,230,000
FRF 373,770,000 France (Government of) bonds 5 1/2s, 2004 58,635,169
ECU 5,890,000 France (Government of) bonds 5s, 1999 6,398,013
FRF 31,100,000 France (Government of) bonds 4 3/4s, 1999 5,248,125
FRF 7,000,000 France (Government of) 4 1/2s, 1996 1,277,500
IDR 4,000,000 P.T. Astra bonds 9 3/4, 2001 3,840,000
THB 90,000,000 Industrial Finance Corp. (Thailand of)
bonds 8s, 1996 3,600,000
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
FOREIGN BONDS AND NOTES (continued)
PRINCIPAL AMOUNT VALUE
<C> <C> <S> <C>
ITL 83,690,000,000 Italy (Government of) bonds 12s, 2003 $ 53,927,744
ECU 14,300,000 Italy (Government of) notes 9 1/4s, 2011 16,838,250
ITL 63,160,000,000 Italy (Government of) bonds 8 1/2s, 2004 33,790,600
ITL 8,530,000,000 Italy (Government of) notes, 8 1/2s, 1999 4,926,075
USD 5,750,000 Mexico (Government of) disc bonds,
Ser. D, 4.313s, 2019 4,966,563
USD 10,000,000 Mexico (Government of) bonds 6 1/4s, 2019 6,475,000
USD 6,000,000 Mexico (Government of) bonds 4.188s, 2019 5,182,500
USD 11,000,000 Morocco (Government of) FRN 4 1/2s, 1999 8,023,125
NLG 10,575,000 Netherlands (Government of) deb. 7 1/2s, 2023 5,763,375
NLG 9,500,000 Netherlands (Government of) deb. 5 3/4s, 2004 4,833,125
NZD 21,700,000 New Zealand (Government of) bonds 10s, 2002 13,535,375
NZD 31,760,000 New Zealand (Government of) notes 8s, 1995 19,016,300
USD 2,000,000 Petroleos Mexicanos med. term notes
7.66s, 2000(b) 1,860,000
USD 3,550,000 Russia (Government of) Non Performing,
loan zero %, 1999 1,357,875
ESP 2,098,200,000 Spain (Government of) bonds 10.55s, 1996 16,365,960
ESP 2,432,700,000 Spain (Government of) bonds 10 1/4s, 1998 18,397,294
SEK 25,800,000 Statens Bostadsfinansier deb. 11s, 1999 3,418,500
SEK 25,200,000 Sweden (Government of) bonds 11s, 1999 3,402,000
SEK 104,300,000 Sweden (Government of) bonds 10 1/4s, 2003 13,233,063
SEK 194,300,000 Sweden (Government of) bonds 6s, 2005 17,729,875
USD 3,000,000 Telecom Argentina deb. 8 3/8s, 2000 2,745,000
GBP 24,805,000 United Kingdom Exchequer notes 9 3/4s, 1998 40,370,138
ECU 950,000 United Kingdom Treasury bonds 9 1/8s, 2001 1,198,188
GBP 13,025,000 United Kingdom Treasury bonds 9s, 2000 20,709,750
GBP 10,000,000 United Kingdom Treasury bonds 8 3/4s, 2017 15,956,250
GBP 3,000,000 United Kingdom Treasury bonds 8s, 2003 4,471,875
GBP 13,085,000 United Kingdom Treasury notes 7 3/4s, 2006 19,022,319
GBP 36,870,000 United Kingdom Treasury bonds 6 3/4s, 2004 50,166,244
GBP 2,080,000 United Kingdom Treasury war bonds
3 1/2s, 2049 1,331,200
AUD 10,000,000 Victoria Treasury bonds 9s, 2002 6,693,750
Total Foreign Bonds and Notes
--------------
(cost $836,776,869) $ 813,082,615
<CAPTION>
UNITS (3.3%)(a)
NUMBER OF UNITS VALUE
<C> <S> <C>
815 Celcaribe S.A. units stepped-coupon zero %
(13 1/2s, 3/15/98), 2004(b)(c) $ 6,846,000
6,100,000 Chesapeake Energy Corp. deb. units 12s, 2001 7,350,500
21,750 Dial Call units stepped-coupon zero %
(12 1/4s, 10/15/99), 2004(c) 11,527,500
27,750 Echostar Communication Corp. units
stepped-coupon zero % (12 7/8s, 12/1/99), 2004(c) 12,903,750
11,550 Foamex (L.P.) Capital Corp. units
stepped-coupon zero % (13 1/2s, 1999), 2004(c) 6,352,500
6,650 Health-O-Meter Product units 13s, 2002 6,450,500
4,800,000 Hollywood Casino units 13 1/2s, 1998(b) 3,792,000
18,500,000 ICF Kaiser International Inc. sr. sub. units 12s, 2003 16,650,000
1,378,000 New Street Acquisition units 12s, 1998
(acquired 02/22/94 par 1,300,000 cost $1,300,000,
acquired 09/23/94 par 78,000 cost $78,000)(d)(e) 1,378,000
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
UNITS (continued)
NUMBER OF UNITS VALUE
<C> <S> <C>
32,300,000 OSI Specialties units stepped-coupon zero %
(11 1/2s, 4/15/99), 2004(c) $ 19,703,000
4,587 Premium Standard Farms exch. pfd. units
12 1/2s, 2000(b) 496,543
451 Santa Fe Hotel, Inc. units 11s, 2000 4,059,000
2,900 Total Renal Care units stepped-coupon zero %
(12s, 8/15/99), 2004(c) 2,073,500
10,950 Universal Outdoor Inc. sub. deb. units 14s, 2004 5,673,469
---------------
Total Units (cost $108,825,314) $ 105,256,262
<CAPTION>
YANKEE BONDS AND NOTES (2.1%)(a)
PRINCIPAL AMOUNT VALUE
<C> <S> <C>
4,000,000 Argentina (Government of) bonds 4 1/4s, 2023 $ 1,985,000
8,500,000 Argentina (Government of) bonds 4s, 2023 6,056,250
8,500,000 Argentina (Republic of) notes 4 1/4s, 2005 6,481,250
2,440,000 Australia New Zealand Bank sub. notes 6 1/4s, 2004 2,112,125
13,000,000 Banco de Galicia Inc. global notes 9s, 2003 10,749,375
2,065,000 Cinemark Mexico notes 12s, 2003(b) 2,003,050
5,775,000 Eletson Holdings, Inc. mtge. notes 9 1/4s, 2003 5,327,438
12,650,000 Grupo Industrial Durango sr. notes 12s, 2001 13,029,500
11,500,000 Ispat Mexicana sr. notes. 10 3/8s, 2001 10,838,750
5,000,000 Methanex Corp. sr. notes 8 7/8s, 2001 4,900,000
3,000,000 United Mexican States notes 8 1/2s, 2002 2,812,500
---------------
Total Yankee Bonds and Notes (cost $73,082,086) $ 66,295,238
<CAPTION>
PREFERRED STOCKS (2.0%)(a)
NUMBER OF SHARES VALUE
<C> <S> <C>
102,500 California Federal Bank Ser. B, $10.625 pfd. $ 10,826,563
152,000 First Nationwide Bank $11.50 pfd. 15,884,000
11,950 Grand Union Holdings Ser. C, $12.00 pfd.(d)
(acquired 11/5/93 cost $1,380,225) 648,288
124,275 National Intergroup Corp. Ser. A, $4.20 exch. pfd.(e) 4,349,625
5,000 Pantry Pride Inc. Ser. B, $14.875 pfd. 487,500
186,862 Pyramid Communications Inc. Ser. C, $3.125 exch. pfd. 4,367,899
128,087 Stone Savannah Corp. Ser. A, $15.375 pfd.(e) 15,370,440
153,977 Supermarkets General Holdings Corp. $3.52 exch. pfd. 3,810,931
284,300 USX Capital LLC $8.75 cum. Pfd. 6,574,438
---------------
Total Preferred Stocks (cost $61,367,333) $ 62,319,684
<CAPTION>
COLLATERALIZED MORTGAGE OBLIGATIONS (0.3%)(a)
PRINCIPAL AMOUNT VALUE
<C> <S> <C>
$ 2,175,000 First Deposit Master Trust Ser. 93-2A, 5 3/4s, 2001 $ 2,060,813
7,035,000 First Chicago Master Trust II Ser. 1994-L Class A,
7.15s, 2001 6,898,697
---------------
Total Collateralized Mortgage Obligations (cost $9,186,555) $ 8,959,510
<CAPTION>
EUROBONDS (0.3%)(a)(g)
PRINCIPAL AMOUNT VALUE
<C> <S> <C>
5,000,000 Banco del Sud sr. notes Ser. B, 10 1/8s, 1997 $ 5,000,000
3,000,000 Petroleo Brasileiro S.A. FRN 9.275s, 1998 3,033,750
250,000 Telecomunication Brasilerias, S.A. unsubor. debenture
10s, 1997 244,688
---------------
Total Eurobonds (cost $8,281,250) $ 8,278,438
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
WARRANTS (0.2%)(a)(f)
NUMBER OF WARRANTS EXPIRATION DATE VALUE
<C> <S> <C> <C>
185,000 Becker Gaming Corp.(b) 11/15/00 $ 196,563
44,363 Capital Gaming Inc. 02/01/99 133,089
9,658 Casino America Inc. 11/15/99 9,658
32,400 Casino Magic Finance Corp. 10/14/96 8,100
11,839 Cinemark Mexico 08/01/03 109,511
9,350 County Seat Holdings, Inc. 10/15/98 187,000
2,855 Dial Page Inc.(b) 12/15/98 19,985
202,517 Elsinore Corp. 10/04/98 151,888
8,250 Fitzgerald Gaming(b) 03/15/99 412,500
379,200 Gaylord Container Corp. 07/31/96 2,654,400
750 General Media Corp.(b) 12/31/00 7,500
8,025 Louisiana Casino Cruises, Inc.(b) 12/01/98 120,375
72,000 Miles Homes, Inc. 04/01/97 54,000
32,300 OSI Specialties Corp.(b) 04/15/99 323,000
13,800 Pagemart, Inc.(b) 12/31/03 69,000
250 Payless Cashways, Inc. 11/01/96 750
6,300 President Riverboat(b) 9/15/96 3,151
37,527 President Riverboat Casinos, Inc.(b) 9/30/99 131,344
7,500 Southdown, Inc. 11/01/96 35,625
1,480 Southland Corp. 03/05/96 4,255
196 Telemedia Broadcasting Corp.(b) 04/01/04 146,853
53,660 UCC Investor Holding, Inc.
(acquired 3/16/94, cost $697,580)(d) 10/30/99 697,580
1,001 Wright Medical Technology Inc.(b) 6/30/03 125,073
----------
Total Warrants (cost $4,874,495) $ 5,601,200
<CAPTION>
COMMON STOCKS (0.2%)(a)
NUMBER OF SHARES VALUE
<C> <S> <C>
15,000 American Restaurant Group, Inc. $ 300,000
35,000 Arcadian Corp. 1,225,000
39,007 Capital Gaming International, Inc. 307,180
82,812 Computervision Corp.(f)
(acquired 4/11/94 par 77,141 cost $231,423,
acquired 6/28/94 par 1,984 cost $5,952,
acquired 8/24/92 par 3,687 cost $433,183)(d) 256,023
7,795 Federated Dept. Stores Inc.(f) 179,285
4,540 Finlay Enterprises Inc. Class A 54,480
12,831 Grand Casinos, Inc.(f) 174,822
7,541 IFINT Diversified Holdings(b) 527,870
49,679 Lady Luck Gaming Corp.
(acquired 10/1/93, cost $40,922)(d)(f) 192,506
693,557 Loehmanns' Holdings, Inc.(b)(f) 693,557
1,184 PMI Holdings Corp. 236,800
1,942 Premium Holdings (L.P.) (acquired 01/04/94 par
1,271 cost $76,260, acquired 09/29/94 par 671
cost $50,332)(d) 194,209
6,343 Pyramid Communications Inc.
New Class B (b)(f) 160,951
81,197 Solon Automated Services, Inc. 50,748
18,000 Specialty Foods Corp. 13,500
23,141 Spectra Vision, Inc.(f) 50,621
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
COMMON STOCKS (continued)
NUMBER OF SHARES VALUE
<C> <S> <C>
7,981 Taj Mahal Holding Corp. Class A $ 79,810
50,000 Triangle Pacific Corp.(f) 684,375
--------------
Total Common Stocks (cost $4,523,308) $ 5,381,737
<CAPTION>
CONVERTIBLE BONDS (0.1%)(a)
PRINCIPAL AMOUNT VALUE
<C> <S> <C>
7,500,000 News America Holdings Inc. LYON zero %, 2013 $ 2,981,250
1,710,000 Sahara Mission Cv. sub. notes 12s, 1995 1,710,000
--------------
Total Convertible Bonds (cost $4,243,875) $ 4,691,250
<CAPTION>
CONVERTIBLE PREFERRED STOCKS (0.1%)(a)
NUMBER OF SHARES VALUE
<C> <S> <C>
40,020 Conseco, Inc. Ser. D, $3.25 cv. pfd. 1,720,860
39,200 Unisys Corp. Ser. A, $3.75 Cv. Pfd. 1,430,800
--------------
Total Convertible Preferred Stocks
(cost $3,222,249) $ 3,151,660
<CAPTION>
PUT OPTIONS ON FOREIGN CURRENCIES (--%)(a)(g)
CURRENCY EXPIRATION DATE/
STRIKE PRICE VALUE
<C> <C> <S> <C> <C>
DEM 147,150,000 Deutschemarks October 94/DEM 1.525 132,435
CHF 49,050,000 Swiss Francs October 94/DEM 1.26 53,955
--------------
Total Put Options On Foreign Currencies
(cost $1,226,250) $ 186,390
<CAPTION>
SHORT-TERM INVESTMENTS (6.2%)(a)
PRINCIPAL AMOUNT VALUE
<C> <S> <C>
$30,000,000 American Telephone & Telegraph Co. 4.8s,
November 28, 1994 $ 29,764,000
$20,989,000 Federal Home Loan Mortgage Corp. 4.72s,
October 20, 1994 20,892,684
$30,000,000 Federal National Mortgage Assn. 4.87s,
October 25, 1994 29,898,542
$30,000,000 Ford Motor Credit Co. 4.78s, October 13, 1994 29,948,217
$30,000,000 Merrill Lynch & Co. Inc. 4.8s, October 24, 1994 29,904,000
MXP 2,250,000 Mexican Cetes zero %, April 27, 1995(g) 618,750
MXP 4,150,000 Mexican Cetes zero %, October 27, 1994(g) 1,219,062
MXP 34,340,400 Mexican Cetes zero %, October 20, 1994(g) 10,087,493
USD 1,000,000 Mexican Tesobono zero %, October 13, 1994(g) 998,125
$20,000,000 Sears Roebuck Accept. Corp. 4.87s,
October 11, 1994 19,970,239
$25,626,000 Interest in $81,000,000 joint
repurchase agreement dated September
30, 1994 with J.P. Morgan Securities
Inc. due October 3, 1994 with respect
to various U.S. Treasury
obligations--maturity value of
$25,632,904 for an effective yield of 4.85% $ 25,629,452
--------------
Total Short-Term Investments (cost $198,918,175) $ 198,930,564
--------------
Total Investments (cost $3,416,347,870)(i) $3,261,124,382
==============
</TABLE>
26
<PAGE>
NOTES
----------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $3,183,936,054, which
correspond to a net asset value per share for Class A and Class B
shareholders of $11.64 and $11.61, respectively.
(b) Securities exempt from registration under Rule 144A of the Securities Act
of 1993. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers. For the year ended
September 30, 1994 these securities amounted to $74,962,041 or 2.4% of net
assets.
(c) 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.
(d) Restricted, excluding 144A securities, as to public resale. At the date
of acquisition, this security was valued at cost. There were no outstanding
unrestricted securities of the same class as that held. Total market value
of restricted securities owned at September 30, 1994 was $3,366,606 or 0.11%
of net assets.
(e) Income may be received in cash or additional securities at the discretion
of the issuer.
(f) Non-income-producing security.
(g) Foreign currency-denominated. Market value is translated at current
exchange rate.
(h) TBA's are mortgage backed securities traded under delayed delivery
commitments, settling after September 30, 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% from
the principal amount. Income on the securities will not be earned until
settlement date. The cost of TBA purchases held at September 30, 1994 was
$136,025,874.
(i) The aggregate identified cost for federal income tax purposes is
$3,417,646,813, resulting in gross unrealized appreciation and depreciation
of $250,869,200 and $407,391,631, respectively, or net unrealized
depreciation of $156,522,431.
Forward Cross Currency Contracts Outstanding at September 30, 1994
(Aggregate face value of $52,959,206)
<TABLE>
<CAPTION>
In
Market Exchange Market Delivery Unrealized
Contracts Value For Value Date Appreciation
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
British
Pounds (Buy) $53,399,280 Deutschemarks $53,082,162 10/19/94 $317,118
</TABLE>
<TABLE>
<CAPTION>
DIVERSIFICATION OF FOREIGN BONDS AND NOTES
at September 30, 1994 (as a percentage of net assets):
--------------------------------------------------------------
<S> <C> <C> <C>
United Kingdom 4.8% Brazil 0.7%
Canada 4.5 Netherlands 0.3
Italy 3.4 Philippines 0.3
France 2.9 Morocco 0.3
Australia 2.3 Argentina 0.2
Finland 1.2 India 0.1
Sweden 1.2 Thailand 0.1
Spain 1.1 Indonesia 0.1
New Zealand 1.0 Russia 0.1
Mexico 0.9
</TABLE>
The accompanying notes are an integral part of these financial statements.
27
<PAGE>
FORWARD CURRENCY CONTRACTS OUTSTANDING at September 30, 1994
(aggregate face value $503,301,136)
<TABLE>
<CAPTION>
Unrealized
Market Aggregate Delivery Appreciation/
Value Face Value Date (Depreciation)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Australian
Dollars (Sell) $14,283,930 $14,282,000 10/05/94 $ (1,930)
- -----------------------------------------------------------------------------------------------
Australian
Dollars (Sell) 34,322,080 34,187,520 11/02/94 (134,560)
- -----------------------------------------------------------------------------------------------
Australian
Dollars (Sell) 11,167,960 11,029,777 11/07/94 (138,183)
- -----------------------------------------------------------------------------------------------
Australian
Dollars (Sell) 21,682,000 21,349,152 11/11/94 (332,848)
- -----------------------------------------------------------------------------------------------
Deutschemarks
(Sell) 18,508,630 18,096,409 10/05/94 (412,221)
- -----------------------------------------------------------------------------------------------
Deutschemarks
(Sell) 37,699,734 37,699,734 1/5/95 --
- -----------------------------------------------------------------------------------------------
Deutschemarks
(Sell) 38,694,000 37,735,849 10/13/94 (958,151)
- -----------------------------------------------------------------------------------------------
Deutschemarks
(Sell) 7,740,000 7,759,256 11/08/94 19,256
- -----------------------------------------------------------------------------------------------
Deutschemarks
(Sell) 38,958,000 38,893,718 11/22/94 (64,282)
- -----------------------------------------------------------------------------------------------
Deutschemarks
(Sell) 15,288,870 15,353,470 11/28/94 64,600
- -----------------------------------------------------------------------------------------------
Deutschemarks
(Sell) 20,901,240 20,805,908 12/6/94 (95,332)
- -----------------------------------------------------------------------------------------------
Deutschemarks
(Sell) 39,209,920 38,456,673 10/20/94 (753,247)
- -----------------------------------------------------------------------------------------------
Deutschemarks
(Sell) 5,159,200 5,061,049 10/21/94 (98,151)
- -----------------------------------------------------------------------------------------------
Deutschemarks
(Sell) 28,633,560 28,136,080 10/17/94 (497,480)
- -----------------------------------------------------------------------------------------------
Deutschemarks
(Sell) 67,263,070 66,012,240 11/02/94 (1,250,830)
- -----------------------------------------------------------------------------------------------
Deutschemarks
(Sell) 75,218,660 73,797,001 11/30/94 (1,421,659)
- -----------------------------------------------------------------------------------------------
New Zealand
Dollars (Sell) 9,018,000 9,007,500 10/31/94 (10,500)
- -----------------------------------------------------------------------------------------------
New Zealand
Dollars (Sell) 16,828,000 16,735,600 11/07/94 (92,400)
- -----------------------------------------------------------------------------------------------
New Zealand
Dollars (Sell) 8,897,760 8,902,200 11/03/94 4,440
- -----------------------------------------------------------------------------------------------
$(6,173,478)
- -----------------------------------------------------------------------------------------------
</TABLE>
U.S. TREASURY FUTURES OUTSTANDING AT SEPTEMBER 30, 1994
Futures Contracts Outstanding
<TABLE>
<CAPTION>
Total Aggregate Expiration Unrealized
Value Face Value Date Appreciation
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury
Bond Futures (sell) $20,776,881 $20,871,375 Dec./94 $ 94,494
- -----------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
28
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
September 30, 1994
<TABLE>
<CAPTION>
ASSETS
- ---------------------------------------------------------------------------------------------
<S> <C>
Investments at value
(identified cost $3,416,347,870) (Note 1) $3,261,124,382
- ---------------------------------------------------------------------------------------------
Dividends, interest and other receivables 65,950,869
- ---------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 15,092,838
- ---------------------------------------------------------------------------------------------
Receivable for securities sold 26,411,281
- ---------------------------------------------------------------------------------------------
Receivable for open forward currency contracts 405,414
- ---------------------------------------------------------------------------------------------
Receivable for closed forward currency contracts 4,550,731
- ---------------------------------------------------------------------------------------------
Total assets $3,373,535,515
LIABILITIES
- ---------------------------------------------------------------------------------------------
Payable for securities purchased $158,105,782
- ---------------------------------------------------------------------------------------------
Payable to subcustodian 1,463,627
- ---------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 7,722,940
- ---------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 4,405,285
- ---------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 12,062
- ---------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 2,283
- ---------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 867,029
- ---------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 2,311,825
- ---------------------------------------------------------------------------------------------
Payable for open forward currency contracts 6,261,774
- ---------------------------------------------------------------------------------------------
Payable for closed forward currency contracts 7,568,320
- ---------------------------------------------------------------------------------------------
Payable for variation margin 52,500
- ---------------------------------------------------------------------------------------------
Other accrued expenses 826,034
- ---------------------------------------------------------------------------------------------
Total liabilities 189,599,461
- ---------------------------------------------------------------------------------------------
Net assets $3,183,936,054
- ---------------------------------------------------------------------------------------------
Represented by
Paid-in capital (Notes 1, 4 and 5) $3,411,516,155
- ---------------------------------------------------------------------------------------------
Distribution in excess of net investment income (27,571,431)
- ---------------------------------------------------------------------------------------------
Accumulated net realized loss on investment transactions (39,023,316)
- ---------------------------------------------------------------------------------------------
Net unrealized depreciation of investments options
forward currency contracts and futures contracts (160,985,354)
- ---------------------------------------------------------------------------------------------
Total--Representing net assets applicable to capital
shares outstanding $3,183,936,054
Computation of net asset value, offering price and redemption price
- ---------------------------------------------------------------------------------------------
Net asset value and redemption price of Class A
shares ($1,539,075,793 divided by 132,219,538 shares) 11.64
- ---------------------------------------------------------------------------------------------
Offering price per Class A share (100/95.25 of $11.64)* 12.22
- ---------------------------------------------------------------------------------------------
Net asset value and offering price of Class B shares
($1,644,860,261 divided by 141,729,977)+ 11.61
=============================================================================================
</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
Year ended September 30, 1994
<TABLE>
<CAPTION>
INVESTMENT INCOME:
- ------------------------------------------------------------------------------------------------
<S> <C>
Interest $ 209,012,054
- ------------------------------------------------------------------------------------------------
Dividends 1,273,475
- ------------------------------------------------------------------------------------------------
Total investment income 210,285,529
EXPENSES:
- ------------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) $ 14,880,234
- ------------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 3,484,425
- ------------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 56,007
- ------------------------------------------------------------------------------------------------
Registration fees 724,432
- ------------------------------------------------------------------------------------------------
Reports to shareholders 147,706
- ------------------------------------------------------------------------------------------------
Auditing 120,417
- ------------------------------------------------------------------------------------------------
Legal 76,524
- ------------------------------------------------------------------------------------------------
Postage 334,622
- ------------------------------------------------------------------------------------------------
Administrative services (Note 2) 44,350
- ------------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 3,378,672
- ------------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 12,701,489
- ------------------------------------------------------------------------------------------------
Other expenses 102,547
- ------------------------------------------------------------------------------------------------
TOTAL EXPENSES 36,051,425
- ------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 174,234,104
- ------------------------------------------------------------------------------------------------
Net realized loss on investments (Notes 1 and 3) (28,274,784)
- ------------------------------------------------------------------------------------------------
Net realized loss on options (Notes 1 and 3) (5,806,965)
- ------------------------------------------------------------------------------------------------
Net realized loss on forward currency contracts (Notes 1 and 3) (27,715,242)
- ------------------------------------------------------------------------------------------------
Net realized gain on foreign currency (Note 1) 5,089
- ------------------------------------------------------------------------------------------------
Net realized loss on futures (75,083)
- ------------------------------------------------------------------------------------------------
Net unrealized depreciation of investments, options and
forward currency contracts and futures contracts during the period (189,806,575)
- ------------------------------------------------------------------------------------------------
NET LOSS ON INVESTMENT TRANSACTIONS (251,673,560)
- ------------------------------------------------------------------------------------------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $ (77,439,456)
=================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
30
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year ended September 30
-----------------------------
1994 1993
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
- ----------------------------------------------------------------------------------------------------
Operations:
- ----------------------------------------------------------------------------------------------------
Net investment income $ 174,234,104 $ 41,931,553
- ----------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments (28,274,784) 14,487,183
- ----------------------------------------------------------------------------------------------------
Net realized loss on options (5,806,965) (43,954)
- ----------------------------------------------------------------------------------------------------
Net realized loss on futures contracts (75,083) --
- ----------------------------------------------------------------------------------------------------
Net realized gain (loss) on forward currency contracts (27,715,242) 7,418,259
- ----------------------------------------------------------------------------------------------------
Net realized gain (loss) on foreign currency 5,089 (84,442)
- ----------------------------------------------------------------------------------------------------
Net unrealized foreign currency translation gain -- 4,849
- ----------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation)
of investments, options, forward currency contracts
and futures contracts (189,806,575) 12,024,963
- ----------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations (77,439,456) 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 (78,325,153) (38,506,310)
- ----------------------------------------------------------------------------------------------------
Class B (69,458,154) (5,097,798)
- ----------------------------------------------------------------------------------------------------
In excess of net investment income
- ----------------------------------------------------------------------------------------------------
Class A (12,620,912) --
- ----------------------------------------------------------------------------------------------------
Class B (11,192,129) --
- ----------------------------------------------------------------------------------------------------
In excess of net realized gain on investments
- ----------------------------------------------------------------------------------------------------
Class A (7,510,985) (15,751,822)
- ----------------------------------------------------------------------------------------------------
Class B (6,145,352) (1,587,050)
- ----------------------------------------------------------------------------------------------------
Paid in capital
- ----------------------------------------------------------------------------------------------------
Class A (18,280,431) --
- ----------------------------------------------------------------------------------------------------
Class B (15,971,156) --
- ----------------------------------------------------------------------------------------------------
Increase from capital share transactions (Note 4) 2,101,525,758 998,232,093
- ----------------------------------------------------------------------------------------------------
Total increase in net assets 1,804,582,030 1,014,101,486
NET ASSETS:
- ----------------------------------------------------------------------------------------------------
Beginning of year 1,379,354,024 365,252,538
- ----------------------------------------------------------------------------------------------------
End of year (including distributions in
excess of and undistributed net
investment income of $27,571,431 and
$354,481, respectively) $3,183,936,054 $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
Year ended of operations) to
September 30 September 30 Year ended September 30
- ---------------------------------------------------------------------------------------------------------------------------------
1994 1993 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------------
Class B Class A
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $12.79 $12.51 $12.82 $12.66
- ---------------------------------------------------------------------------------------------------------------------------------
Investment Operations
Net Investment Income .72 .49 .78 .96
- ---------------------------------------------------------------------------------------------------------------------------------
Net Realized and Unrealized
Gain (Loss) on investments (.91) .39 (.88) .56
- ---------------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations (.19) .88 (.10) 1.52
- ---------------------------------------------------------------------------------------------------------------------------------
Distributions to Shareholders from:
Net Investment Income (.65) (.46) (.71) (.94)
- ---------------------------------------------------------------------------------------------------------------------------------
In Excess of Net Investment Income (.10) -- (.12) --
- ---------------------------------------------------------------------------------------------------------------------------------
Net Realized Gain on Investments -- (.14) -- (.42)
- ---------------------------------------------------------------------------------------------------------------------------------
In Excess of Net Realized Gain on Investments (.08) (.08) --
- ---------------------------------------------------------------------------------------------------------------------------------
Paid-in Capital (b) (.16) -- (.17) --
- ---------------------------------------------------------------------------------------------------------------------------------
Total Distributions (.99) (.60) (1.08) (1.36)
- ---------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $11.61 $12.79 $11.64 $12.82
- ---------------------------------------------------------------------------------------------------------------------------------
Total Investment Return at
Net Asset Value (%) (d) (1.62) 7.21(e) (0.93) 12.85
- ---------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (in thousands) $1,644,860 $504,417 $1,539,076 $874,937
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of Expenses to Average
Net Assets (%) 1.76 1.91(e) 1.01 1.21
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of Net Investment Income
to Average Net Assets (%) 8.05 5.80(e) 7.96 6.80
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover (%) 201.53 243.73 201.53 243.73
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
For the period
October 3, 1988
(commencement
of operations) to
Year ended September 30 September 30
- ---------------------------------------------------------------------------------------------------------------------------------
1992 1991 1990 1989
- ---------------------------------------------------------------------------------------------------------------------------------
Class A
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $11.85 $10.91 $12.03 $12.50
- ---------------------------------------------------------------------------------------------------------------------------------
Investment Operations
Net Investment Income 1.04 1.05(a) 1.14(a) 1.13(a)
- ---------------------------------------------------------------------------------------------------------------------------------
Net Realized and Unrealized
Gain (Loss) on investments .97 1.15 (.92) (.37)
- ---------------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 2.01 2.20 .22 .76
- ---------------------------------------------------------------------------------------------------------------------------------
Distributions to Shareholders from:
Net Investment Income (1.01) (1.05) (1.16) (1.11)
- ---------------------------------------------------------------------------------------------------------------------------------
In Excess of Net Investment Income -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Net Realized Gain on Investments (.19) (.21) -- (.12)
- ---------------------------------------------------------------------------------------------------------------------------------
In Excess of Net Realized Gain on Investments -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Paid-in Capital (b) -- -- (.18) --
- ---------------------------------------------------------------------------------------------------------------------------------
Total Distributions (1.20) (1.26) (1.34) (1.23)
- ---------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $12.66 $11.85 $10.91 $12.03
- ---------------------------------------------------------------------------------------------------------------------------------
Total Investment Return at
Net Asset Value (%) (d) 17.88 21.43 1.99 6.32(e)
- ---------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (in thousands) $365,253 $168,106 $125,301 $106,818
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of Expenses to Average
Net Assets (%) 1.36 1.47(a) 1.25(a) 1.26(a)(e)
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of Net Investment Income
to Average Net Assets (%) 8.27 9.18(a) 9.98(a) 9.71(a)(e)
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover (%) 221.09(c) 481.06 264.09 163.96
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(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) Distributions from capital for the year ended 9/30/94 has been
calculated in accordance with Statement of Position 93-2, "Determination,
Disclosure, and Financial Statement Presentation of Income, Capital Gain
and Return of Capital Distributions by Investment Companies" (See notes 1
and 5).
(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 5)
(d) Total investment return assumes dividend reinvestment and does not
reflect the effect of sales charges.
(e) Not annualized.
33
<PAGE>
NOTES TO FINANCIAL STATEMENTS
September 30, 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
to be 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 Section F 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 date, are held as "cover" for the transaction.
Unsettled TBA sale commitments are valued at the current market value of the
underlying securities, generally according to the procedures described under
"Security valuation" above. The contract is "marked-to-market" daily and the
change in market value is recorded by the fund as an unrealized gain or loss. If
the TBA sale commitment is closed through the acquisition of an offsetting
purchase commitment, the fund realizes a gain or loss 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.
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 by means of the effective yield
35
<PAGE>
method, 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 exchange 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 subsequently "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
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 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 unre-
36
<PAGE>
alized 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 contract was opened; however, management
believes the likelihood of such a loss to be remote.
G 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.
H 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. Distributions of 15.6% made during fiscal year ended September
30, 1994 have been redesignated as a return of capital. The amount and character
of income and gains to be distributed are determined in accordance with income
tax regulations which may differ from generally accepted accounting principles.
These differences include treatment of organizational expense and treatment of
certain gains and losses on foreign currency transactions which are considered
capital gains and losses for book accounting purposes but ordinary income for
tax purposes. Losses on these transactions result in a reduction of net
investment income available for distribution. These losses can occur
unpredictably at a point in the year after monthly or quarterly distributions
have already been made, necessitating a redesignation. Reclassifications are
made to the fund's capital accounts to reflect income and gains available for
distribution (or available capital loss carryovers) under income tax
regulations. For the year ended September 30, 1994, the fund reclassified
$26,450,798 to increase distributions in excess of net investment income and
$26,275,037 to decrease realized losses and $175,761 to increase paid-in
capital.
I EQUALIZATION Prior to September 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 September 1, 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 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.
J FOREIGN CURRENCY TRANSLATION The accounting records of the fund are
maintained in U.S. dollars. Investment securities and other assets and
liabilities denominated in a foreign currency are translated into U.S. dollars
at the prevailing rates of exchange at period end. Purchases and sales of
securities, income receipts, and expense payments are translated into U.S.
dollars at the
37
<PAGE>
prevailing exchange rate on the respective dates of transactions.
Effective October 1, 1993, the fund adopted Statement of Position (SOP) 93-4:
Foreign Currency Accounting and Financial Statement Presentation for
Investment Companies. In accordance with this SOP, reported net realized
gains and losses on foreign currency transactions represent net gains and
losses from sales and maturities of forward currency contracts, disposition
of foreign currencies, currency gains and losses realized between the trade
and settlement dates on securities transactions and the difference between
the amount of net investment income accrued and the U.S. dollar amount
actually received. Further, as permitted under the SOP, the effects of
changes in foreign currency exchange rates on investments in securities are
not segregated in the Statement of Operations from the effects of changes in
market prices of those securities, but are included with the net realized and
unrealized gain or loss on investments.
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: .70% of the first $500 million of average net assets, .60% of the next
$500 million, .55% of the next $500 million and .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 year ended September 30, 1994, the
Trust paid $44,350 for these services.
Trustees of the fund receive an annual Trustee's fee of $4,690 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 by Putnam Investor Services, a
division of PFTC. Fees paid for custodian and investor servicing functions
for the year ended September 30, 1994, amounted to $3,484,425.
Investor servicing and custodian fees reported in the Statement of operations
for the year ended September 30, 1994 have been reduced by credits allowed by
PFTC.
As part of the custodian contract between the subcustodian bank and PFTC, the
subcustodian bank has a lien on the securities of the fund to the extent
permitted by the fund's investment restrictions to cover any advances made
by the subcustodian bank for the settlement of securities purchased by the
fund. At September 30, 1994, the payable to subcustodian bank represents the
amount due for cash advance for the settlement of a security purchased.
The fund has adopted a distribution plan with respect to 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. (formerly known as Putnam Financial Services, Inc.) a wholly owned
subsidiary of Putnam Investments Inc. for services
38
<PAGE>
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 year ended September 30, 1994, the fund paid $3,378,672 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 Trustees have approved payments by the fund
to Putnam Mutual Funds Corp. at an annual rate of 1.00% without shareholder
approval. For the year ended September 30, 1994 the fund paid Putnam Mutual
Funds Corp. distribution fees of $12,701,489 for Class B shares.
During the year ended September 30, 1994, Putnam Mutual Funds Corp., acting
as an underwriter, received net commissions of $688,076 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 year ended September 30, 1994, Putnam Mutual Funds Corp., acting as
underwriter, received $37,750 on such redemptions.
Putnam Mutual Funds Corp. also receives the proceeds of 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 $2,349,229 from such redemptions during
the year ended September 30, 1994.
NOTE 3
PURCHASES AND SALES OF SECURITIES
During the year ended September 30, 1994, purchases and sales of investment
securities other than U.S. government obligations and short-term investments
aggregated $3,973,119,831 and $2,529,343,613, respectively. Purchases and
sales of U.S. government obligations aggregated $2,908,572,475 and
$2,314,586,336, respectively. In determining the net gain or loss on
securities sold, the cost of securities has been determined on the identified
cost basis.
Written option transactions on foreign currencies during the period are
summarized as follows:
<TABLE>
<CAPTION>
Premiums
Received
- ---------------------------------------------------
<S> <C>
Options written $ 753,380
- ---------------------------------------------------
Options expired (128,100)
- ---------------------------------------------------
Options closed (625,280)
- ---------------------------------------------------
Written options outstanding
at end of period $ --
- ---------------------------------------------------
</TABLE>
Purchased option transactions on foreign currencies during the period are
summarized as follows:
<TABLE>
<CAPTION>
Cost
- ---------------------------------------------------
<S> <C>
Outstanding at beginning
of period $ 2,595,685
- ---------------------------------------------------
Options purchased 23,137,401
- ---------------------------------------------------
Options expired (5,587,865)
- ---------------------------------------------------
Options closed (18,918,971)
- ---------------------------------------------------
Purchased options outstanding
at end of period $ 1,226,250
- ---------------------------------------------------
</TABLE>
Transactions in forward currency contracts during the period are summarized
as follows:
<TABLE>
<CAPTION>
Sales of Forward
Currency Contracts
- ----------------------------------------------------------
Aggregate
Face Value
- ----------------------------------------------------------
<S> <C>
Outstanding at beginning
of period $ 176,542,299
- ----------------------------------------------------------
Contracts opened 3,843,156,311
- ----------------------------------------------------------
Contracts closed (3,516,397,474)
- ----------------------------------------------------------
Open at end of period $ 503,301,136
- ----------------------------------------------------------
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
Purchases of Forward
Currency Contracts
- ----------------------------------------------------------
Aggregate
Face Value
- ----------------------------------------------------------
<S> <C>
Outstanding at beginning
of period $ 47,289,750
- ----------------------------------------------------------
Contracts opened 1,835,093,787
- ----------------------------------------------------------
Contracts closed (1,829,424,331)
- ----------------------------------------------------------
Open at end of period $ 52,959,206
- ----------------------------------------------------------
</TABLE>
NOTE 4
CAPITAL SHARES
At September 30, 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>
Year ended
September 30, 1994
- --------------------------------------------------------------------
Class A Shares Amount
- --------------------------------------------------------------------
<S> <C> <C>
Shares sold 84,902,277 $1,068,262,414
- --------------------------------------------------------------------
Shares issued in connection with:
- --------------------------------------------------------------------
Reinvestment of
distributions 5,314,495 65,110,997
- --------------------------------------------------------------------
90,216,772 1,133,373,411
- --------------------------------------------------------------------
Shares
repurchased (26,251,664) (322,650,602)
- --------------------------------------------------------------------
Net increase $63,965,108 $810,722,809
- --------------------------------------------------------------------
<CAPTION>
Year ended
September 30, 1993
- --------------------------------------------------------------------
Class A Shares Amount
- --------------------------------------------------------------------
<S> <C> <C>
Shares sold 45,589,638 $575,985,947
- --------------------------------------------------------------------
Shares issued in connection with:
- --------------------------------------------------------------------
Reinvestment of
distributions 2,139,493 26,716,371
- --------------------------------------------------------------------
47,729,131 602,702,318
- --------------------------------------------------------------------
Shares
repurchased (8,326,293) (104,854,886)
- --------------------------------------------------------------------
Portion
represented by
undistributed net
investment income -- (127,373)
- --------------------------------------------------------------------
Net increase 39,402,838 $497,720,059
- --------------------------------------------------------------------
<CAPTION>
Year ended
September 30, 1994
- --------------------------------------------------------------------
Class B Shares Amount
- --------------------------------------------------------------------
<S> <C> <C>
Shares sold 117,759,526 $1,478,591,215
- --------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 5,061,958 61,608,578
- --------------------------------------------------------------------
122,821,484 1,540,199,793
- --------------------------------------------------------------------
Shares
repurchased (20,546,485) (249,396,844)
- --------------------------------------------------------------------
Net increase 102,274,999 $1,290,802,949
- --------------------------------------------------------------------
<CAPTION>
March 1, 1993
(commencement of
operations) to
September 30 1993
- --------------------------------------------------------------------
Class B Shares Amount
- --------------------------------------------------------------------
<S> <C> <C>
Shares sold 40,163,044 $510,474,232
- --------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 311,964 3,969,515
- --------------------------------------------------------------------
40,475,008 514,443,747
- --------------------------------------------------------------------
Shares
repurchased (1,020,030) (12,985,124)
- --------------------------------------------------------------------
Portion
represented by
undistributed net
investment income -- (946,589)
- --------------------------------------------------------------------
Net increase 39,454,978 $500,512,034
- --------------------------------------------------------------------
</TABLE>
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
have no impact on the total net asset value of the fund.
40
<PAGE>
FEDERAL TAX INFORMATION
For federal income tax purposes, distributions of $0.73 from net investment
income and $0.07 from short-term capital gains totalling $0.80 per share for
the year ended September 30, 1994, constitute "dividend income." The fund has
designated 1.00% of the net investment income as qualify for the
dividends-received deduction for corporations. The fund has designated .316%
of its' distributions as long term capital gain dividends. This represents
less than $0.005 per share.
The Form 1099 you receive in January 1995 will show the tax status of all
distributions paid to your amount in calendar 1994.
As required by law, your fund reports to the Internal Revenue Service on a
calendar year basis the amount of distributions paid to each shareholder.
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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. 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.
Set up a systematic program for investing with as little as $25 a month from
a Putnam fund or from your checking or savings 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
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FUND INFORMATION
INVESTMENT MANAGER
Putnam Investment
Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
John A. Hill
Elizabeth T. Kennan
Lawrence J. Lasser
Donald S. Perkins
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
Jennifer E. Leichter
Vice President and Fund Manager
D. William Kohli
Vice President and Fund Manager
Michael Martino
Vice President and Fund Manager
Neil Powers
Vice President and Fund Manager
Mark Siegel
Vice President and Fund Manager
F. Mark Turner
Vice President and Fund Manager
William N. Shiebler
Vice President
John R. Verani
Vice President
Paul M. 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, and the most
recent copy of Putnam's Quarterly Performance Summary. For more information,
or to request a prospectus, call toll free: 1-800-225-1581.
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PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
----------------
Bulk Rate
U.S. Postage
PAID
Boston, MA
Permit No. 53749
----------------
075/387-14787
