Putnam
Diversified
Income
Trust
ANNUAL REPORT
September 30, 1995
(Graphic--Balance Scales)
B O S T O N (bullet) L O N D O N (bullet) T O K Y O
<PAGE>
Performance highlights
> Morningstar, Inc., an independent rating agency, gave Putnam Diversified
Income Trust's class A shares its highest rating of five stars for overall
performance as of September 30, 1995. This put the fund in the top 10% of
all 642 fixed-income funds rated.
> "Here's an overlooked bond market fact: Returns this year are shaping up to
be the third best in modern times. Bond investors already are ahead about
13% since January and will reap nearly an 18% gain if the upward trend
continues at its current pace."
--The Wall Street Journal, October 9, 1995
FISCAL 1995 RESULTS AT A GLANCE
<TABLE>
<CAPTION>
Class A Class B Class M
Total return: NAV POP NAV CDSC NAV POP
<S> <C> <C> <C> <C> <C> <C>
................................................................................................
(change in value during
period plus reinvested
distributions)
12 months ended
9/30/95 11.89% 6.58% 11.01% 6.01%
Life of Class M -- -- -- -- 12.90% 9.24%
Class A Class B Class M
Share value: NAV POP NAV NAV POP
................................................................................................
9/30/94 $ 11.64 $12.22 $11.61 -- --
12/1/94 (inception of class M shares) $11.34 $11.72
9/30/95 11.99 12.59 11.95 11.97 12.37
Distributions: No. Income Return of capital(1) Total
................................................................................................
Class A 12 $0.799 0.161 $0.960
Class B 12 0.726 0.147 0.873
Class M 10 0.650 0.131 0.781
Current return: NAV POP NAV NAV POP
................................................................................................
End of period
Current dividend rate(2) 8.01% 7.63% 7.33% 7.82% 7.57%
Current 30-day
SEC yield(3) 7.31 6.96 6.55 6.50 6.28
</TABLE>
Performance data above represent past results and are not indicative of
future performance. For performance over longer periods, see pages 9 through
11. POP assumes 4.75% maximum sales charge for class A and 3.25% for class M
shares. CDSC assumes 5% maximum contingent deferred sales
charge. (1)For more information regarding return of capital see page 38.
(2)Income portion of most recent distribution, annualized and divided by NAV
or POP at end of period. (3)Based only on investment income, calculated using
SEC guidelines.
* Morningstar rates a fund relative to other funds with similar investment
objectives based on the fund's 3- and 5-year average annual returns and
adjusted for risk factors and sales charges. Ratings are updated monthly.
For the 3-year period, there were 642 funds in the fixed-income category
and the fund's class A shares received 4 stars (top 32.5%). For the 5-year
period, there were 392 funds in the category and the fund's class A shares
received 5 stars (top 10%). Past performance is not indicative of future
results and will vary for other classes.
<PAGE>
From the Chairman
(Photo of George Putnam)
(c) Karsh, Ottawa
Dear Shareholder:
The skill of managing a fund with weightings in international, high-yield,
and U.S. government securities lies not just in continually shifting heaviest
emphasis to the more promising sectors, but in regularly working to achieve
the best possible performance in each individual sector.
Putnam Diversified Income Trust's management successfully met the challenge
during the fiscal year that ended September 30, 1995. The fund's positive
results across the board came as welcome relief after 1994's worldwide
drought in the fixed-income markets.
The pursuit of opportunities for maximizing both capital appreciation and
income in the U.S. government sector and a more defensive stance in
high-yield bonds paid off in fiscal 1995. We believe it has also succeeded in
positioning the fund well as it begins its new fiscal year.
In the report that follows, your fund's management team provides more detail
about performance to date and prospects for the months ahead.
Respectfully yours,
George Putnam
Chairman of the Trustees
November 15, 1995
<PAGE>
Report from the Fund Managers
Jennifer E. Leichter, lead manager
D. William Kohli
Michael Martino
Neil J. Powers
Mark J. Siegel
The handsome double-digit returns posted by Putnam Diversified Income Trust's
class A and class B shares at the close of the fiscal year on September 30,
1995, validate the view we consistently encourage all Putnam fund investors
to take -- that investment success requires time, not timing.
The sustained interest rate increases that rattled financial markets during
the fund's fiscal 1994 gave way to increasingly favorable market conditions
as fiscal 1995 progressed. The fund's high-yield and U.S. government sectors
posted the strongest results throughout the past 12 months, while the
international segment played catch-up following a disappointing currency
strategy in the first half of the fiscal year.
We scaled back the fund's high-yield exposure from 41% of net assets at
fiscal 1994 year's end to roughly 33% by March -- and increased the fund's
U.S. government weighting. We did so believing the high-yield market had
reached fair value, while U.S. government bonds showed further appreciation
potential. We remained neutral on international bonds, maintaining a sector
weighting of roughly 28% of net assets throughout the period.
> LONG DURATION A KEY FOCUS IN U.S. GOVERNMENT SEGMENT
Our strategy for the fund's U.S. government portfolio sector, or "sleeve,"
throughout the period was to take advantage of the strong performance of both
government securities and mortgage- backed issues with a focus on longer
duration. Duration, as you may know, is a measure of sensitivity to interest
rate changes. A portfolio with a longer duration will appreciate
substantially if interest rates decline.
<PAGE>
Very early in the fiscal year, intermediate-term Treasury securities composed
the bulk of the U.S. government segment. This concentration proved rewarding
as investors regained confidence in the Federal Reserve Board's
inflation-fighting ability and reentered the market. Intermediates held
particular appeal, appreciating more than 4% in the first quarter of calendar
1995 alone.*
By fiscal 1995's midpoint, however, we had begun shifting away from
intermediate securities in favor of longer-term Treasury bonds. This
positioning was due to our belief that the market would begin to factor a
slowing economy into the pricing structure of bonds. As the economy slowed,
the Treasury rally gained further momentum. Finally, to head off further
economic malaise, the Fed -- as we had anticipated -- cut short-term interest
rates in July. Thanks to the sleeve's longer duration and emphasis on
longer-term Treasury bonds, the fund was able to benefit.
Holdings in the mortgage-backed securities market also proved advantageous
for the fund. We kept a watchful eye on the effect prepayment fears had on
prices, trading in and out of discount- coupon mortgages as fears waxed and
waned. When we perceived worries were not justified and the prices became too
compelling to ignore, we bought. When prepayment concerns diminished and
demand began to increase, we sold holdings at a profit.
*As measured by the Lehman Intermediate Government Bond Index.
TOP 10 COUNTRY ALLOCATIONS*
(international sector)
Germany 5.56%
France 4.79%
Italy 3.19%
United Kingdom 2.65%
Netherlands 2.37%
Canada 2.35%
Spain 1.38%
Mexico 1.04%
Agrentina 0.76%
Brazil 0.55%
*Based on total net assets as of 9/30/95. Allocations will vary over time.
<PAGE>
> BOND SELECTION FAVORED OVER CURRENCY STRATEGIES IN INTERNATIONAL ARENA
Although we eliminated the fund's defensive currency hedges in March because
of the dollar's dramatic, unexpected decline -- their legacy affected the
international sector's performance potential throughout the fiscal year. Our
country positioning and duration strategy, however, proved on target.
In the first half, when real yields around the world were high relative to
historic levels, we maintained a fairly long duration by investing in
longer-term bonds within core markets like Germany, Japan, the Netherlands,
and the United Kingdom. As real yields then began to decline -- and bond
prices appreciated -- we selectively sold core European market positions and
drastically reduced Japanese holdings in favor of higher yielding
markets like Italy, Sweden, and Spain. By midsummer, the strength of these
peripheral markets and rallies throughout Europe helped boost performance.
Recently, we have emphasized intermediate-term securities, believing the
near-term performance potential of longer-term bonds is no longer attractive
enough to offset their inherent risks. Additionally, we have cautiously
reintroduced currency hedging strategies against several currencies, which
have since helped protect the value of the fund's foreign holdings as a
number of European currencies declined against the U.S. dollar. A hedge is a
currency strategy designed to lock in specific exchange rates.
Emerging market securities comprised roughly 3% of the fund's overall
portfolio. During periods when core markets produced lackluster results, the
emerging market holdings helped buoy performance.
> STRONG CORPORATE PROFITS KEPT HIGH YIELDS FLYING HIGH
Improving credit situations and sustained corporate profitability kept
high-yield bonds -- and the sector of your fund which invests in them --
performing well during fiscal 1995, despite economic slowing and recent
concerns about the possibility of weak corporate earnings. A shortage of
new-issue supply earlier in the period also helped boost the sleeve's
performance, as investors were forced to compete for bonds in the secondary
market, driving prices up.
<PAGE>
TOP THREE HOLDINGS PER SECTOR
<TABLE>
<CAPTION>
<S> <C> <C>
High-yield bonds Market value Percentage
.........................................................................
OSI Specialties Corp. zero%, 2004 $ 26,691,000 .78
.........................................................................
Midland Funding Corp.
11-3/4s, 2005 25,475,200 .75
.........................................................................
PSF Finance (L.P.)
12-1/4s, 2004 21,924,688 .64
.........................................................................
foreign bonds
.........................................................................
France Treasury Bill 82,581,566 2.42
.........................................................................
France (Government of) bonds 80,632,709 2.37
.........................................................................
Netherlands (Government of)
bonds(1) 80,588,797 2.37
.........................................................................
u.s. government obligations
.........................................................................
U.S. Treasury Notes
6-1/2, May 15, 2005 298,927,179 8.77
.........................................................................
U.S. Treasury Bonds
6-7/8s, August 15, 2005 251,330,814 7.38
.........................................................................
Federal National Mortgage Association
71/2s, with various due dates to 5.28
July 1, 2025 179,884,886
</TABLE>
(1)Based on net asset as of 9/30/95. Portfolio holdings will vary over time.
A number of industries in which the fund has holdings sustained positive
results, including health care, paper, chemicals, telecommunications, cable,
and broadcasting. In general, we maintained a dual focus, investing in bonds
at the higher end of the below-investment grade spectrum, and in select
lower-quality bonds.
Merger and acquisition activity, as well as initial public offerings of
stock, remained strong throughout the period. This trend provided the
opportunity for credit upgrades -- and price appreciation -- in many of the
fund's high-yield holdings. For example, OSI Specialties Corp., one of the
fund's largest chemical holdings, was purchased by Witco, a broad-based
petroleum and chemical manufacturer whose long-term debt is rated A by S&P.
As a result, OSI received an immediate upgrade. Continental Medical and
Healthtrust are other examples of holdings that benefited.
<PAGE>
> THE ECONOMY SEEMS TO HAVE LANDED -- SOFTLY
It appears that the desired soft-landing scenario has actually materialized.
Going forward, we anticipate a continuation of global disinflation. World
economic growth seems to be moderating and real yields have begun to decline.
Combined, these factors bode well for bond performance over the long term. In
the high-yield sector, we anticipate emphasizing issues in industries that
have historically performed well in the later stages of the business cycle,
while in the U.S. government segment we are looking to maintain a relatively
long duration. We will keep a watchful eye on currencies and foreign markets
and consider reentering certain peripheral European markets once valuations
become more reasonable.
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 9/30/95, there is no guarantee the fund will continue
to hold these securities in the future.
Investments in non-U.S. securities may be subject to certain risks such as
currency fluctuations and political developments.
The lower ratings of high-yield debt securities reflect a greater possibility
that adverse changes in an issuer's business or financial condition, or in
general economic conditions, may impair the issuer's ability to pay principal
and interest on the securities.
Although the U.S. government guarantees the timely payment of principal and
interest on U.S. government and agency obligations in the fund's portfolio,
the value of the fund shares is not guaranteed and will fluctuate.
<PAGE>
Performance summary
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.
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.
TOTAL RETURN FOR PERIODS ENDED 9/30/95
<TABLE>
<CAPTION>
Class A Class B Class M
NAV POP NAV CDSC NAV POP
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1 year 11.89% 6.58% 11.01% 6.01% -- --
--------------------------------------------------------------------
5 years 79.04 70.60 -- -- -- --
Annual average 12.35 11.27 -- -- -- --
--------------------------------------------------------------------
Life of class A 94.14 84.96 -- -- -- --
Annual average 9.96 9.20 -- -- -- --
--------------------------------------------------------------------
Life of class B -- -- 17.07 14.20 -- --
Annual average -- -- 6.30 5.28 -- --
--------------------------------------------------------------------
Life of class M -- -- -- -- 12.90% 9.24%
--------------------------------------------------------------------
</TABLE>
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED
9/30/95
<TABLE>
<CAPTION>
Salomon Bros.
Lehman Bros. Non-U.S. First Boston Consumer
Aggregate World Govt. High Yield Price
Bond Index Bond Index Index Index
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1 year 14.06% 17.79% 14.05% 2.54%
--------------------------------------------------------------------------------------------
5 years 58.48 89.62 125.14 15.45
Annual average 9.65 13.65 17.63 2.91
--------------------------------------------------------------------------------------------
Life of class A
(10/3/88) 89.67 110.56 116.51 27.88
Annual average 9.58 11.23 11.67 3.58
--------------------------------------------------------------------------------------------
Life of class B (3/1/93) 16.75 38.23 28.25 7.06
Annual average 6.18 13.35 10.10 2.68
--------------------------------------------------------------------------------------------
Life of class M
(12/1/94) 14.42 17.18 15.31 2.34
--------------------------------------------------------------------------------------------
</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 10/3/88, offering shares now known as class A. Class B
shares have been offered since 3/1/93, and class M shares since 12/1/94.
Performance data represent past results and will differ for each share class.
Investment returns and net asset value will fluctuate so an investor's
shares, when sold, may be worth more or less than their original cost.
<PAGE>
GROWTH OF A $10,000 INVESTMENT
Cumulative total return of a $10,000
investment since inception 10/3/88
Lehman Bros. Aggregate Bond Index
First Boston High Yield Index
Fund at POP
(PLOTS POINT FOR LINE CHART)
GROWTH OF A $10,000 INVESTMENT
10/3/88 9525 10000 10000 10000
9/30/89 10129 11126 10555 10257
9/30/90 10331 11968 9617 11104
9/30/91 12544 13882 13170 12731
9/30/92 14786 15624 15864 15724
9/30/93 16686 17183 18352 16930
9/30/94 16530 16629 18983 17876
9/30/95 18496 18967 21651 21056
Past performance is no assurance of future results. A $10,000 investment in the
funds class B shares at inception on 3/1/93 would have been valued at $11,707
on 9/30/95 ($11,420 with a redemption at the end of the period). A $10,000
investment in the funds class M shares at commencement of operations on 12/1/94
would have been valued at $11,290 at net asset value on 9/30/95 ($10,924 at
public offering price).
(End line chart)
Past performance is no assurance of future results. A $10,000 investment in
the fund's class B shares at commencement of operations on 3/1/93 would have
been valued at $11,707 on 9/30/95 ($11,420 with a redemption at the end of the
period). A $10,000 investment in the fund's class M shares at commencement of
operations on 12/1/94 would have been valued at $11,290 at net asset value on
9/30/95 ($10,924 at public offering price).
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.
Class M shares have a lower initial sales charge and a higher 12b-1 fee than
class A shares and no sales charge on 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 for class A shares and 3.25%
for class M shares.
<PAGE>
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 Brothers Aggregate Bond Index is an unmanaged index consisting of
securities from Lehman Brothers Government/Corporate Bond Index,
Mortgage-Backed Securities Index, and the Asset-Backed Securities Index.
Salomon Brothers Non-U.S. World Government Bond Index* is a market
capitalization-weighted benchmark that tracks the performance of the
government bond markets tracked by the Salomon Brothers World Government Bond
Index, excluding the United States.
First Boston High Yield Index* is an unmanaged index of lower-rated,
higher-yielding U.S. corporate bonds. It includes over 180 issues with an
average maturity range of 7 to 10 years.
Consumer Price Index (CPI) is a commonly used measure of inflation; it does
not represent an investment return.
* Securities indexes assume reinvestment of all distributions and interest
payments and do not take in account brokerage fees or taxes. Securities in
the fund do not match those in the indexes and performance of the fund will
differ.
<PAGE>
Report of independent accountants
For the year ended September 30, 1995
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, 1995, and the related statement of operations for
the year then ended, the statement of changes in net assets for each of the
two years in the period then ended and the financial highlights for each of
the periods indicated therein. These financial statements and financial
highlights are the responsibility of the fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
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, 1995 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, 1995, 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 each
of the periods indicated therein, in conformity with generally accepted
accounting principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
November 14, 1995
<PAGE>
Portfolio of investments owned
September 30, 1995
<TABLE>
<CAPTION>
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (38.8%)*
PRINCIPAL AMOUNT VALUE
<S> <C> <C>
Federal National Mortgage Association
$178,767,587 7-1/2s, with various due dates to July 1, 2025 $ 179,969,736
113,025,981 7s, with various due dates to August 1, 2025 111,387,520
Government National Mortgage Association
29,166,903 8s, with various due dates to August 15, 2025 30,007,112
77,008,000 7-1/2s, TBA, October 14, 2025+++ 77,778,080
42,614,886 7-1/2s, with various due dates to December 1, 2005 43,041,034
161,766,034 7s, with various due dates to July 15, 2025 159,946,167
93,493,000 6-1/2s, TBA, October 14, 2025+++ 90,220,745
52,975,000 U.S. Treasury Bonds 10-3/4s, May 15, 2003 67,485,382
239,185,000 U.S. Treasury Bonds 6-7/8, August 15, 2005 251,330,814
10,060,000 U.S. Treasury Notes 6-1/2s, August 15, 2005 10,306,772
292,215,000 U.S. Treasury Notes 6-1/2s, May 15, 2005 298,927,179
- ------------------------------------------------------------------------------------------
Total U.S. Government and Agency Obligations
(cost $1,303,805,859) $1,320,400,541
- ------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CORPORATE BONDS AND NOTES (29.9%)*
PRINCIPAL AMOUNT VALUE
<S> <C> <C>
Advertising (0.5%)
- ------------------------------------------------------------------------------------------
$ 3,000,000 Outdoor Systems, Inc. sr. notes 10-3/4s, 2003 $ 2,895,000
7,740,000 Universal Outdoor, Inc. sub. deb. 11s, 2003 7,585,200
10,950,000 Universal Outdoor, Inc. sr. notes stepped-coupon zero % (14s,
7/1/99), 2004++ 6,817,470
------------
17,297,670
Aerospace and Defense (0.5%)
- ------------------------------------------------------------------------------------------
2,850,000 Alliant Techsystems, Inc. sr. sub. notes 11-3/4s, 2003 3,092,250
3,750,000 BE Aerospace sr. notes, 9-3/4s, 2003 3,768,750
2,250,000 K&F Industries Inc. sub. deb. 13-3/4s, 2001 2,334,375
1,500,000 MacAndrews & Forbes Group, Inc. deb. 12-1/4s, 1996 1,507,500
2,300,000 MacAndrews & Forbes Holdings, Inc. sub. deb. notes 13s, 1999 2,300,000
2,800,000 UNC, Inc. sr. notes 9-1/8s, 2003 2,758,000
------------
15,760,875
Agriculture (1.4%)
- ------------------------------------------------------------------------------------------
5,821,000 PMI Holdings Corp. Ser. B, sub. disc. deb. stepped-coupon
zero % (11-1/2s, 9/1/00), 2005++ 3,026,920
21,250,000 PSF Finance (L.P.) sr. exch. notes 12-1/4s, 2004 21,924,688
10,271,900 PSF Finance (L.P.) sr. notes 12s, 2000 10,708,456
13,436,000 PSF Finance (L.P.) sr. disc. notes stepped-coupon zero % (12s,
9/15/96), 2003++ 11,722,910
------------
47,382,974
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CORPORATE BONDS AND NOTES
PRINCIPAL AMOUNT VALUE
<S> <C> <C>
Aluminum (0.4%)
- ------------------------------------------------------------------------------------------
$13,735,000 Kaiser Aluminum & Chemical Corp. sr. sub. notes 12-3/4s,
2003 $ 14,868,138
Apparel (--%)
1,500,000 Guess Jeans, Inc. 144A sr. sub. notes 10s, 2003 1,466,250
- ------------------------------------------------------------------------------------------
Automobiles (--%)
1,657,000 P.T. Astra International bonds 9-3/4s, 2001(Indonesia) 1,694,283
- ------------------------------------------------------------------------------------------
Automotive (0.5%)
- ------------------------------------------------------------------------------------------
2,450,000 Aftermarket Technology corp. sr. sub. notes 12s, 2004 2,578,625
7,375,000 Exide Corp. 144A sr. notes 10s, 2005 7,780,625
7,025,000 Key Plastics Corp. sr. notes 14s, 1999 7,376,250
------------
17,735,500
Banks (0.1%)
- ------------------------------------------------------------------------------------------
2,500,000 Banco del Sud S.A. sr. unsub. med. term notes 10-1/8s, 1997
(Argentina) 2,368,750
2,600,000 First Federal Financial Corp. notes 11-3/4s, 2004 2,600,000
------------
4,968,750
Basic Industrial Products (0.1%)
- ------------------------------------------------------------------------------------------
5,750,000 Inter-City Products sr. notes 9-3/4s, 2000 4,916,250
Broadcasting (1.7%)
- ------------------------------------------------------------------------------------------
2,750,000 Affinity Group sr. sub. notes 11-1/2s, 2003 2,763,750
6,730,000 Commodore Media, Inc. sr. sub. notes stepped-coupon 7-1/2s
(13-1/4s, 5/1/98), 2003++ 6,023,350
3,645,000 Echostar Communications sr. disc. notes stepped-coupon zero
% (12-7/8s, 6/1/99), 2004++ 1,713,150
4,150,000 New City Broadcasting Corp. sr. sub. notes 11-3/8s, 2003 4,046,250
3,950,000 Outlet Broadcasting, Inc. sr. sub. notes 10-7/8s, 2003 4,305,500
8,200,000 Panamsat (L.P.) sr. sub. notes stepped-coupon zero % (11-3/8s,
8/1/98), 2003++ 6,396,000
7,250,000 Paxson Communications Corp. 144A sr. sub. notes 11-5/8s, 2002 7,105,000
7,237,000 Petracom Hldgs. notes stepped-coupon zero %
(17-1/2s, 8/1/98), 2003++ 4,604,541
8,770,000 SFX Broadcasting, Inc. sr. sub. notes 11-3/8s, 2000 9,142,725
3,800,000 Sinclair Broadcasting Group sr. sub. notes 10s, 2005 3,866,500
8,615,847 Telemedia Broadcasting Corp. 144A notes stepped- coupon 6.4s
(16s, 6/15/99), 2004++ 7,754,262
------------
57,721,028
Building and Construction (1.1%)
- ------------------------------------------------------------------------------------------
4,350,000 Miles Homes Services sr. notes 12s, 2001 3,262,500
14,700,000 Presley Co. sr. notes 12-1/2s, 2001 12,274,500
8,000,000 Schuller International Corp. sr. notes 10-7/8s, 2004 8,800,000
7,925,000 Scotsman Group, Inc. sr. secd. notes 9-1/2s, 2000 7,905,188
1,000,000 Webb (DEL E.) Corp. sr. notes 10-7/8s, 2000 1,025,000
5,975,000 Webb (DEL E.) Corp. sr. sub. deb. 9s, 2006 5,541,813
------------
38,809,001
<PAGE>
CORPORATE BONDS AND NOTES
PRINCIPAL AMOUNT VALUE
Building Products (0.1%)
- ------------------------------------------------------------------------------------------
$ 1,000,000 American Standard, Inc. sr. deb. 11-3/8s, 2004 $ 1,100,000
3,500,000 American Standard, Inc. deb. 9-1/4s, 2016 3,605,000
------------
4,705,000
Business Services (0.1%)
- ------------------------------------------------------------------------------------------
4,800,000 Corporate Express, Inc. Ser. B, sr. sub. notes 9-1/8s, 2004 4,752,000
Cable Television (1.6%)
- ------------------------------------------------------------------------------------------
1,250,000 Adelphia Communications Corp. sr. notes 12-1/2s, 2002 1,253,125
17,942,365 Adelphia Communications Corp. sr. notes 9-1/2s, 2004## 15,071,587
1,750,000 CF Cable TV, Inc. sr. notes 11-5/8s, 2005 (Canada) 1,890,000
3,050,000 CF Cable TV, Inc. sr. notes 9-1/8s, 2007 (Canada) 3,080,500
4,250,000 Cablevision Industries Corp. sub. deb. 9-1/4s, 2008 4,515,625
10,850,000 Continental Cablevision, Inc. sr. deb. 9-1/2s, 2013 11,229,750
1,325,000 Continental Cablevision, Inc. sr. deb. 9s, 2008 1,354,813
4,189,344 Falcon Holdings Group, Inc. sr. sub. notes 11s, 2003## 3,937,983
11,400,000 Insight Communications Co. sr. sub. notes stepped-coupon
8-1/4s (11-1/4s, 2/29/96), 2000++ 11,514,000
------------
53,847,383
Cellular Communications (1.8%)
- ------------------------------------------------------------------------------------------
1,990,000 Call-Net Enterprises sr. disc. notes stepped-coupon
zero % (13-1/4s, 12/1/99), 2004++ 1,283,550
7,475,000 Cellular, Inc. sr. sub. disc. notes stepped-coupon zero %
(11-3/4s, 9/1/98), 2003++ 5,755,750
5,910,000 Cencall Communications Corp. sr. disc. notes stepped- coupon
zero % (10-1/8s, 1/15/99), 2004++ 3,058,425
6,000,000 Centennial Cellular Corp. sr. notes 8-7/8s, 2001 5,730,000
11,000,000 Comcast Cellular Corp. Ser. B, sr. participating notes, zero
%, 2000 8,415,000
2,350,000 Commnet Cellular Inc. sub. notes 11-1/4s, 2005 2,432,250
21,500,000 Dial Call Communications, Inc. sr. disc. notes stepped-coupon
zero % (12-1/4s, 4/15/99), 2004++ 11,341,250
7,400,000 Horizon Cellular Telephone Co. Ser. B, sr. sub. disc. notes
stepped-coupon zero % (11-3/8s, 10/1/97), 2000++ 6,216,000
2,750,000 NEXTEL Communications, Inc. sr. disc. notes stepped-coupon
zero % (9-3/4s, 2/15/99), 2004++ 1,354,375
5,450,000 NEXTEL Communications, Inc. sr. disc. notes stepped-coupon
zero % (11-1/2s, 9/1/98), 2003++ 3,079,250
14,435,000 Pricellular Wireless Ser. B, sr. disc. notes stepped-coupon
zero % (14s, 11/15/97), 2001++ 12,017,138
------------
60,682,988
Chemicals (0.6%)
- ------------------------------------------------------------------------------------------
750,000 Acetex Corp. 144A sr. notes 9-3/4s, 2003 756,563
3,075,000 Carlisle Plastics Inc. sr. notes 10-1/4s, 1997 3,075,000
14,250,000 G-I Holdings, Inc. Ser. B, sr. disc. notes zero %, 1998 10,331,250
3,250,000 Harris Chemical Corp. sr. sub. notes 10 3/4s, 2003 2,738,125
5,050,000 Harris Chemical Corp. sr. secd. disc. notes stepped-coupon
zero % (10-1/4s, 1/15/96), 2001++ 4,469,250
------------
21,370,188
<PAGE>
CORPORATE BONDS AND NOTES
PRINCIPAL AMOUNT VALUE
Computer Equipment (0.3%)
- ------------------------------------------------------------------------------------------
$ 9,450,000 Computervision Corp. sr. sub. notes 11-3/8s, 1999 $ 9,639,000
Conglomerates (0.3%)
- ------------------------------------------------------------------------------------------
2,625,000 Haynes International, Inc. sr. sub. notes 13-1/2s, 1999 1,758,750
6,900,000 Talley Industries, Inc. sr. disc. deb. stepped-coupon
zero % (12-1/4s, 10/15/98), 2005++ 4,968,000
2,150,000 Valcor, Inc. sr. notes 9-5/8s, 2003 1,999,500
-----------
8,726,250
Consumer Services (0.1%)
- ------------------------------------------------------------------------------------------
750,000 Solon Automated Services, Inc. sr. sub. deb. 13-3/4s, 2002 750,000
3,750,000 Solon Automated Services, Inc. notes 12-3/4s, 2001 3,750,000
------------
4,500,000
Containers (0.5%)
- ------------------------------------------------------------------------------------------
10,000,000 Ivex Holdings Corp. sr. disc. deb. stepped-coupon zero %
(13-1/4s, 3/15/00), 2005++ 5,800,000
9,000,000 Ivex Packaging Corp. sr. sub. notes 12-1/2s, 2002 9,765,000
1,525,000 United States Can Co. sr. sub. notes 13-1/2s, 2002 1,673,688
------------
17,238,688
Electric Utilities (1.9%)
- ------------------------------------------------------------------------------------------
6,800,000 Cleveland Electric Illuminating Co. Ser. B, 1st mtge. 9-1/2s,
2005 6,809,520
18,300,000 First PV Funding deb. 10.15s, 2016 18,300,000
6,250,000 Long Island Lighting Co. deb. 9s, 2022 6,342,625
24,320,000 Midland Funding Corp. II Ser. A, deb. 11-3/4s, 2005 25,475,200
6,070,000 Public Service Co. of New Hampshire deb. 15.23s, 2000 7,018,438
------------
63,945,783
Electronics (0.5%)
- ------------------------------------------------------------------------------------------
5,050,000 Amphenol Corp. sr. sub. notes 12-3/4s, 2002 5,731,750
1,000,000 Amphenol Corp. sr. notes 10.45s, 2001 1,090,000
17,525,000 International Semi-Tech. Corp. sr. secd. disc. notes
stepped-coupon zero % (11-1/2s, 8/15/00), 2003++ 9,113,000
------------
15,934,750
Entertainment (0.3%)
- ------------------------------------------------------------------------------------------
5,500,000 Alliance Entertainment 144A sr. sub. notes 11-1/4s, 2005 5,500,000
1,250,000 Premier Parks, Inc. sr. notes 12s, 2003 1,275,000
1,275,000 Time Warner, Inc. notes 8.18s, 2007 1,305,587
1,275,000 Time Warner, Inc. notes 8.11s, 2006 1,306,238
637,000 Time Warner, Inc. notes 7.975s, 2004 651,568
------------
10,038,393
Finance (0.3%)
- ------------------------------------------------------------------------------------------
10,950,000 APP International Finance Co. company guaranty 11-3/4s, 2005
(Netherlands) 11,114,250
Financial Services (0.3%)
- ------------------------------------------------------------------------------------------
8,100,000 Comdata Network, Inc. sr. sub. deb. 13-1/4s, 2002 9,558,000
<PAGE>
CORPORATE BONDS AND NOTES
PRINCIPAL AMOUNT VALUE
Food (1.0%)
- ------------------------------------------------------------------------------------------
$10,000,000 Chiquita Brands Intl., Inc. sr. notes 9-1/8s, 2004 $ 9,825,000
1,552,000 Del Monte Corp. sub. deb. notes 12-1/4s, 2002## 1,319,200
25,150,000 Fresh Del Monte Produce Corp. NV Ser. B, 144A,
sr. notes 10s, 2003 (Netherlands) 21,377,500
2,750,000 Mafco, Inc. sr. sub. notes 11-7/8s, 2002 2,832,500
------------
35,354,200
Food Chains (0.8%)
- ------------------------------------------------------------------------------------------
3,250,000 Safeway, Inc. sr. notes 8.57s, 2003 3,404,375
2,600,000 Southland Corp. 1st priority sr. sub. deb. 5s, 2003 1,989,000
10,750,000 Southland Corp. Ser. A, deb. 4-1/2s, 2004 7,551,875
2,402,000 Southland Corp. deb. 4s, 2004 1,534,278
12,500,000 Stater Brothers sr. notes 11s, 2001 12,593,750
------------
27,073,278
Forest Products (0.8%)
- ------------------------------------------------------------------------------------------
5,000,000 Gaylord Container Corp. sr. notes 11-1/2s, 2001 5,200,000
4,200,000 Gaylord Container Corp. sr. sub. disc. deb. stepped- coupon
zero % (12-3/4s, 5/15/96), 2005++ 4,137,000
2,200,000 Riverwood International Corp. sr. sub. notes 11-1/4s, 2002 2,359,500
5,250,000 Riverwood International Corp. sr. sub. notes 10-3/8s, 2004 5,775,000
2,750,000 Stone Container Corp. sr. sub. notes 10-3/4s, 1997 2,853,125
8,400,000 Stone Container Corp. sr. sub. notes 9-7/8s, 2001 8,295,000
------------
28,619,625
Health Care (0.2%)
- ------------------------------------------------------------------------------------------
1,250,000 General Medical Corp. sr. sub. notes 10-7/8s, 2003 1,281,250
4,700,000 Healthsouth Rehabilitation sr. sub. notes 9-1/2s, 2001 4,899,750
-----------
6,181,000
Home Furnishings (--%)
- ------------------------------------------------------------------------------------------
1,374,257 Simmons Mattress Corp. 144A deb. 8s, 2003## 1,374,257
Hospital Management (0.9%)
- ------------------------------------------------------------------------------------------
11,245,000 Columbia/HCA Healthcare med. term notes 7.58s, 2025 11,287,169
3,800,000 Integrated Health Services 144A sr. sub. notes 9-5/8s, 2002 3,923,500
4,250,000 Paracelsus Healthcare Corp. sr. sub. notes 9-7/8s, 2003 4,324,375
11,250,000 Tenet Healthcare Corp. sr. sub. notes 10-1/8s, 2005 11,896,875
------------
31,431,919
Insurance (1.1%)
- ------------------------------------------------------------------------------------------
2,600,000 American Annuity Group, Inc. sr. sub. notes 11-1/8s, 2003 2,736,500
4,750,000 American Annuity Group, Inc. sr. notes 9-1/2s, 2001 4,797,500
9,900,000 Penn Corp. Financial Group sr. sub. notes 9-1/4s, 2003 9,949,500
4,950,000 Reliance Group Holdings, Inc. sr. sub. deb. 9-3/4s, 2003 4,912,875
8,275,000 Reliance Group Holdings, Inc. sr. notes 9s, 2000 8,233,625
6,800,000 Terra Nova Insurance Holdings sr. notes 10-3/4s, 2005 7,242,000
------------
37,872,000
17
<PAGE>
CORPORATE BONDS AND NOTES
PRINCIPAL AMOUNT VALUE
Lodging (0.7%)
- ------------------------------------------------------------------------------------------
$ 7,550,000 HMH Properties Inc. 144A sr. notes 9-1/2s, 2005 $ 7,436,750
6,400,000 John Q. Hammons Hotels 1st mtge. notes 8-7/8s, 2004 6,048,000
2,500,000 La Quinta Motor Inns, Inc. deb. 9-1/4s, 2003 2,618,750
7,500,000 Red Roof Inns sr. notes 9-5/8s, 2003 7,293,750
------------
23,397,250
Medical Management Services (0.1%)
- ------------------------------------------------------------------------------------------
3,200,000 Integrated Health Services sr. sub. notes 10-3/4s, 2004 3,432,000
Medical Supplies and Devices (0.1%)
- -------------------------------------------------------------------------------------------
4,915,000 Wright Medical Technology, Inc. Ser. B, sr. secd. notes 10-3/4s,
2000 4,939,575
Metals and Mining (0.1%)
- ------------------------------------------------------------------------------------------
2,786,000 Essar Gujarat Ltd. 144A deb. FRN 8.4s, 1999 (India) 2,765,105
Motion Picture Distribution (0.6%)
- -----------------------------------------------------------------------------------------
3,200,000 AMC Entertainment, Inc. sr. sub. deb. 12-5/8s, 2002 3,536,000
5,200,000 AMC Entertainment, Inc. sr. sub. deb. 11-7/8s, 2000 5,668,000
5,870,000 Act III Theatres, Inc. sr. sub. notes 11-7/8s, 2003 6,251,550
2,065,000 Cinemark Mexico notes 12s, 2003 1,920,450
1,500,000 Cinemark USA, Inc. sr. sub. notes 12s, 2002 1,635,000
1,000,000 United Artists sr. notes 11-1/2s, 2002 1,070,000
------------
20,081,000
Oil and Gas (1.8%)
- ------------------------------------------------------------------------------------------
6,100,000 Chesapeake Energy Corp. sr. exch. notes 12s, 2001 6,374,500
3,750,000 Chesapeake Energy Corp. sr. notes 10-1/2s, 2002 3,750,000
5,290,000 Flores & Rucks, Inc. sr. notes 13-1/2s, 2004 5,924,800
2,950,000 Gulf Canada Resources Ltd. sr. sub. notes 9-5/8s, 2005 2,994,250
1,100,000 Maxus Energy Corp. deb. 11-1/4s, 2013 1,127,500
2,400,000 Maxus Energy Corp. med. term notes 10.2s, 1996 2,388,888
5,030,000 Maxus Energy Corp. global notes 9-7/8s, 2002 5,004,850
950,000 Maxus Energy Corp. notes 9-1/2s, 2003 914,375
4,490,000 Maxus Energy Corp. notes 9-3/8s, 2003 4,287,950
1,500,000 Maxus Energy Corp. deb. 8-1/2s, 2008 1,402,500
1,750,000 Mesa Capital Corp. disc. 12-3/4s, 1996 1,653,750
1,200,000 OPI International sr. notes 12-7/8s, 2002 1,362,000
18,250,000 Trans Texas Gas Corp. sr. secd. notes 11-1/2s, 2002 19,116,875
5,300,000 Triton Energy Corp. sr. sub. disc. notes stepped-coupon zero
% (9-3/4s, 12/15/96), 2000++ 4,849,500
-----------
61,151,738
- ------------------------------------------------------------------------------------------
Paging (0.3%)
- ------------------------------------------------------------------------------------------
6,900,000 Mobile Telecommunications Tech. sr. notes 13-1/2s, 2002 7,728,000
Paper (--%)
1,000,000 Stone Consolidated Corp. sr. notes 10-1/4s, 2000 1,055,000
<PAGE>
CORPORATE BONDS AND NOTES
PRINCIPAL AMOUNT VALUE
Publishing (0.4%)
- ------------------------------------------------------------------------------------------
$ 900,000 General Media Corp. sr. secd. notes 10-5/8s, 2000 $ 711,000
9,050,000 Marvel Holdings, Inc. Ser. B, sr. notes zero %, 1998 6,516,000
8,590,000 Marvel Parent Holdings, Inc. sr. secd. disc. notes zero %,
1998 6,098,900
------------
13,325,900
Rail Equipment (0.1%)
- ------------------------------------------------------------------------------------------
2,950,000 Westinghouse Air Brake sr. notes 9-3/8s, 2005 3,082,750
Real Estate (0.3%)
- ------------------------------------------------------------------------------------------
530,000 Chelsea Piers 144A Ser. B, stepped-coupon zero %
(11s, 6/15/99), 2009++ 498,863
8,590,000 Chelsea Piers Ser. B, 1st mtge. disc. notes stepped-coupon
zero % (12-1/2s, 6/15/99), 2004++ 8,020,913
------------
8,519,776
Recreation (2.3%)
- ------------------------------------------------------------------------------------------
6,370,000 Arizona Charlies Corp. Ser. B, 1st mtge. 12s, 2000 5,159,700
1,480,000 Capitol Queen Corp. Ser. B, 1st mtge. notes 12s, 2000 1,302,400
6,210,000 Casino America, Inc. 1st mtge. deb. 11-1/2s, 2001 5,961,600
2,000,000 Elsinore Corp. 1st mtge. 12-1/2s, 2000 2,000,000
6,850,000 Fitzgerald Gaming Co. 144A sr. notes 13s, 1996 5,206,000
2,335,000 Grand Casino Resorts, Inc. 1st mtge. 12-1/2s, 2000 2,521,800
12,750,000 Grate Bay Property Funding Corp. 1st mtge. 10-7/8s, 2004 10,741,875
14,825,000 Lady Luck Gaming Corp. Ser. B, 1st mtge. 10-1/2s, 2001 11,415,250
5,675,000 Louisiana Casino Cruises Corp. 1st mtge. 11-1/2s, 1998 5,391,250
2,000,000 Mohegan Tribal Gaming 144A sr. notes 13-1/2s, 2002 2,075,000
1,500,000 PRT Funding Corp. sr. notes 11-5/8s, 2004 1,237,500
7,150,000 Stratosphere Corp. 1st mtge. 14-1/4s, 2002 7,543,250
5,500,000 Trump Castle Funding Corp. mtge. 11-3/4s, 2003 4,248,750
3,456,000 Trump Castle Funding Corp. sr. sub. notes 11-1/2s, 2000 3,456,000
5,500,000 Trump Holdings & Funding Corp. sr. notes 15-1/2s, 2005 5,445,000
3,650,000 Trump Plaza Funding, Inc. 1st mtge. notes 10-7/8s, 2001 3,344,313
129,159 Trump Taj Mahal Funding, Inc. Ser. B, deb. 11.35s, 1999## 114,629
------------
77,164,317
Restaurants (0.2%)
- ------------------------------------------------------------------------------------------
7,450,000 Flagstar Corp. sr. sub. notes 11-3/8s, 2003 5,755,125
Retail (1.3%)
- ------------------------------------------------------------------------------------------
9,350,000 County Seat Stores Inc. sr. sub. notes 12s, 2002 8,835,750
650,000 Finlay Enterprises, Inc. sr. notes 10-5/8s, 2003 643,500
11,920,000 Finlay Enterprises, Inc. sr. disc. deb. stepped-coupon
zero % (12s, 5/1/98), 2005++ 8,224,800
8,785,000 Loehmanns' Holdings, Inc. sr. sub. notes 13-3/4s, 1999 8,697,150
12,150,000 Loehmanns' Holdings, Inc. sr. notes 10-1/2s, 1997 12,150,000
4,400,000 Parisian, Inc. sr. sub. notes 9-7/8s, 2003 3,740,000
------------
42,291,200
School Buses (--%)
- ------------------------------------------------------------------------------------------
1,500,000 Blue Bird Body Co. sub. deb. Ser. B, 11-3/4s, 2002 1,541,250
<PAGE>
CORPORATE BONDS AND NOTES
PRINCIPAL AMOUNT VALUE
Shipping (0.4%)
- ------------------------------------------------------------------------------------------
$ 5,775,000 Eletson Holdings, Inc. 1st. pfd. mtge. notes 9-1/4s, 2003
(Greece) $ 5,630,625
5,200,000 Viking Star Shipping sr. secd. notes 9-5/8s, 2003 5,317,000
------------
10,947,625
Specialty Consumer Products (0.1%)
- ------------------------------------------------------------------------------------------
3,200,000 Selmer Co., Inc. sr. sub. notes 11s, 2005 3,104,000
Steel (0.3%)
- ------------------------------------------------------------------------------------------
11,500,000 Ispat Mexicana, SA 144A notes 10-3/8s, 2001 (Mexico) 10,292,500
Telephone Utilities (0.8%)
- ------------------------------------------------------------------------------------------
8,050,000 Intermedia Communications of Florida sr. notes 13-1/2s, 2005 8,573,250
31,800,000 Telewest Communications PLC deb. stepped-coupon zero % (11s,
10/1/00), 2007 (United Kingdom)++ 18,801,750
------------
27,375,000
Textiles (0.1%)
- ------------------------------------------------------------------------------------------
4,885,000 Foamex (L.P.) Capital Corp. Ser. B, sr. disc. notes
stepped-coupon zero % (14s, 7/1/99), 2004++ 2,686,750
Wireless Communications (0.1%)
- ------------------------------------------------------------------------------------------
6,500,000 Dial Call Communications, Inc. Ser. B, sr. disc. notes
stepped-coupon zero % (10-1/4s, 12/15/98), 2005++ 3,120,000
- ------------------------------------------------------------------------------------------
Total Corporate Bonds and Notes
(cost $992,807,946) $1,020,335,532
- ------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FOREIGN GOVERNMENT BONDS AND NOTES (22.7%)*
PRINCIPAL AMOUNT VALUE
<S> <C> <C>
AUD 20,510,000 Australia (Government of) notes 8-3/4s, 2001 $15,869,941
CAD 55,145,000 Canada (Government of) deb. 8-3/4s, 2005 43,936,800
CAD 37,480,000 Canada (Government of) bonds, 6-1/2 2004 25,783,737
CAD 10,000,000 Canada (Government of) deb. 4-1/4s, 2021 7,300,962
FRF 371,710,000 France (Government of) OAT deb. 8-1/2s, 2002 80,632,709
FRF 393,390,000 France Treasury bill 7-3/4s, 2000 82,581,566
DEM 29,900,000 Germany (Republic of) bonds 8-1/4s, 2001 23,068,404
DEM 109,030,000 Germany (Republic of) bonds 7-3/8s, 2005 79,960,419
DEM 35,460,000 Germany (Republic of) bonds 6-7/8s, 2005 25,261,217
DEM 101,270,000 Germany (Republic of) bonds 6-1/4s, 2024 61,265,161
ITL 83,690,000,000 Italy (Government of) bonds 12s, 2003 52,753,587
ITL 58,360,000,000 Italy (Government of) bonds 10-1/2s, 2005 33,939,412
ITL 38,230,000,000 Italy (Government of) notes 8-1/2s, 1999 21,887,146
USD 4,810,000 Morocco (Government of) notes 6.6875s, 2009 3,148,713
NLG 114,000,000 Netherlands (Government of) bonds 9s, 2000 80,588,787
USD 2,550,000 Panama (Republic of) FRN 7-1/4s, 2002 2,008,125
ESP 5,518,500,000 Spain (Government of) bonds 10.833s, 2000 47,100,949
THB 60,000,000 Thailand (IFC of) bonds FRN 11s, 1996 2,410,287
GBP 23,200,000 United Kingdom Treasury notes 7-3/4s, 2006 35,510,371
GBP 31,360,000 United Kingdom Treasury notes 7s, 2001 47,504,580
-------------------------------------------------------------------------------------------
Total Foreign Government Bonds and
Notes (cost $792,746,627) $772,512,873
-------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
UNITS (2.9%)*
NUMBER OF UNITS VALUE
<S> <C> <C>
2,350 America Telecasting 144A units stepped-coupon zero %
(14-1/2s, 8/15/00), 2005++ $ 1,104,500
3,500 Australis Media units stepped-coupon zero %
(14s, 5/15/00), 2003 (Australia)++ 2,100,000
1,077 Celcaribe S.A. 144A units stepped-coupon zero % (13-1/2s,
3/15/98), 2004++ 9,585,300
12,300 Cellnet Data Systems Inc. units zero %, 2005++ 7,011,000
1,500 Decorative Home Accents 144A units 13s, 2002 1,500,000
3,980 Health-O-Meter Product units 13s, 2002 3,621,800
1,040 Heartland Wireless Communication 144A units 13s, 2003 1,112,800
30,000 Hollywood Casino 144A units 13-1/2s, 1998 36,300
4,800,000 Hollywood Casino units 13-1/2s, 1998 5,808,000
18,400 ICF Kaiser International, Inc. sr. sub. units 12s, 2003 17,434,000
5,000 In-Flight Phone Corp. units zero %, 2002 2,000,000
1,986 Intelcom Group (USA) Inc. 144A units stepped-coupon zero
% (13-1/2s, 9/15/00), 2005++ 10,923,000
32,550,000 OSI Specialties Corp. sr. secd. disc. deb. units stepped-
coupon zero % (11-1/2s, 4/15/99), 2004++ 26,691,000
4,587 Premium Standard Farms 144A exch. pfd. units 12-1/2s, 2000 504,570
6,650 Terex Corp. 144A units 13-3/4s, 2002 5,419,750
5,595 Total Renal Care, Inc. units stepped-coupon zero %
(12s, 8/15/99), 2004++ 5,315,250
--------------------------------------------------------------------------------------
Total Units (cost $89,438,598) $100,167,270
--------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
BRADY BONDS (2.3%)*
PRINCIPAL AMOUNT VALUE
<S> <C> <C>
$26,225,000 Argentina (Republic of) FRN 6-7/8s, 2023 $15,177,719
4,435,000 Argentina (Republic of) FRN 6.813s, 2005 2,749,700
16,624,000 Argentina (Republic of) bonds 5s, 2023 7,979,520
8,325,000 Brazil (Republic of) FRN 7-1/4s, 2006 5,525,719
7,806,150 Brazil (Republic of) FRN 6.688s, 2001 6,615,712
13,600,000 Brazil (Republic of) FRN 4-1/4s, 2024 6,545,000
8,549,000 Bulgaria (Republic of) disc. notes 6-3/4s, 2024 4,338,618
9,448,000 Ecuador (Government of) FRN 6.813s, 2025 4,629,520
5,000,000 Government of Mexico disc. Ser. A, FRB 7.219s, 2019 3,506,250
290,000 Government of Mexico disc. Ser. C, FRB 6.969s, 2019 203,363
3,000,000 Government of Mexico disc. Ser. D, FRB 6-7/8s, 2019 2,103,750
1,270,000 Philippines (Central Bank of) bonds 5-3/4s, 2017 939,800
1,500,000 Philippines (Central Bank of) bonds 5s, 2008 1,151,250
5,796,000 Poland (Government of) 144A FRN 7-1/8s, 2024 4,484,655
5,500,000 United Mexican States FRN 7.609s, 2008 4,895,000
14,725,000 United Mexican States Ser. B, bonds 6-1/4s, 2019 8,890,219
396,000 United Mexican States Ser. A, deb. 6-1/4s, 2019 239,085
---------------------------------------------------------------------------------
Total Brady Bonds (cost $74,991,186) $79,974,880
---------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
PREFERRED STOCKS (1.8%)*
NUMBER OF SHARES VALUE
<S> <C> <C>
46,000 Cablevision System Corp 144A Ser. G, $11.75 exch.
pfd.## $ 4,646,000
152,500 California Federal Bank Ser. B, $10.625 exch. pfd. 16,736,875
152,000 First Nationwide Bank $11.50 pfd. 16,682,000
137,844 Foxmeyer Health Corp. Ser. A, $4.20 pfd.## 5,151,920
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PREFERRED STOCKS (CONTINUED)
NUMBER OF SHARES VALUE
<S> <C> <C>
11,950 Grand Union Holdings 144A Ser. C, $12.00 pfd.
(acquired 11/5/93, cost $1,380,225) (In Default)+# $ 120
5,000 Pantry Pride Inc. Ser. B, $14.875 pfd. 515,000
211,127 Pyramid Communications, Inc. Ser. C, $3.125 exch.
pfd.+ 5,093,438
276,670 School District Warren Co. Ser. B, $3.50 pfd. 8,576,770
153,977 Supermarkets General Holdings Corp. $3.52 exch.
pfd.## 4,195,873
--------------------------------------------------------------------------------
Total Preferred Stocks (cost $60,790,257) $61,597,996
--------------------------------------------------------------------------------
COMMON STOCKS (0.8%)*
Number of Shares Value
66,289 Ampex Corp. Class A+ $ 294,157
26,000 Capital Gaming International, Inc. 144A+ 13,000
125,050 Chesapeake Energy Corp.+ 3,954,706
82,812 Computervision Corp.+ 1,004,096
84,033 Elsinore Corp.+ 42,017
7,795 Federated Department Stores+ 221,183
3,026 Finlay Enterprises, Inc.+ 52,199
132,100 Gaylord Container Corp.+ 1,246,694
539,505 Grand Union Co. (acquired various dates 6/14/93 to
3/14/95, cost $24,485,117)+# 7,013,565
7,541 IFINT Diversified Holdings 144A+ 377,050
49,679 Lady Luck Gaming Corp. (acquired 10/1/93,
cost $ 40,922)+ 99,358
693,557 Loehmanns' Holdings, Inc. 144A+ 1,213,725
500,000 NEXTEL Communications, Inc. Class A+ 8,437,500
1,184 PMI Holdings Corp. 144A+ 236,800
1,942 Premium Holdings L.P. 144A (acquired various dates
1/4/94 to 9/29/94, cost $126,592)+# 194,209
6,343 Pyramid Communications, Inc. New Class B 144A+ 152,230
7,981 Taj Mahal Holding Corp. Class A+ 79,810
247,000 Total Renal Care, Inc. 144A+ 1,790,750
--------------------------------------------------------------------------------
Total Common Stocks (cost $37,479,714) $26,423,049
--------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
WARRANTS (0.2%)*+
NUMBER OF WARRANTS EXPIRATION DATE VALUE
<S> <C> <C> <C>
185,000 Becker Gaming Corp. 144A 11/15/00 $ 92,500
44,363 Capital Gaming International, Inc. 2/1/99 5,545
9,658 Casino America, Inc. 11/15/96 1,449
32,400 Casino Magic Finance Corp. 10/14/96 1,620
20,861 Cinemark Mexico USA, Inc. 8/1/03 193,277
2,430 Commodore Media 144A 5/1/00 194,400
9,350 County Seat Holdings, Inc. 10/15/98 187,000
10,030 Dial Call Communication 144A 12/15/98 17,553
21,500 Dial Page, Inc. 1/1/97 37,625
44,070 Echostar Communications Corp. 6/1/04 495,788
47,500 Elsinore Corp. 10/4/98 4,750
30,200 Fitzgerald Gaming Co. 144A 3/15/99 302,000
4,885 Foamex (L.P.) Capital Corp. 144A 7/1/99 73,275
33,800 Gaylord Container Corp. 144A 7/31/96 287,300
280 General Media Corp. 144A 12/31/00 2,800
2,352 Grand Union Co. Ser. 1 6/16/00 2,352
4,705 Grand Union Co. Ser. 2 6/16/00 941
8,050 Intermedia Communications 144A 6/1/00 80,500
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
WARRANTS (CONTINUED)
NUMBER OF WARRANTS EXPIRATION DATE VALUE
<S> <C> <C> <C>
8,025 Louisiana Casino Cruises, Inc. 144A 12/1/98 $ 120,375
72,000 Miles Homes, Inc. 4/1/97 36,000
32,300 OSI Specialties Corp. 144A 4/15/99 1,938,000
13,800 Pagemart, Inc. 144A 12/31/03 124,200
250 Payless Cashways, Inc. 11/1/96 63
17,500 Petracom Holdings, Inc. 8/1/05 124,688
37,527 President Riverboat Casinos, Inc. 9/30/99 150,108
6,300 President Riverboat Casinos, Inc. 144A 9/23/96 315
7,500 Southdown, Inc. 144A 10/31/96 18,750
1,480 Southland Corp. 3/5/96 3,700
196 Telemedia Broadcasting Corp. 144A 4/1/04 146,670
54,910 UCC Investor Holding, Inc. 10/30/99 604,010
10,950 Universal Outdoor, Inc. 144A 7/1/04 438,000
1,001 Wright Medical Technology, Inc. 144A 6/30/03 165,096
---------------------------------------------------------------------------------
Total Warrants (cost $4,627,929) $5,850,650
---------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CONVERTIBLE BONDS AND NOTES (0.2%)* (COST $5,644,175)
PRINCIPAL AMOUNT VALUE
<S> <C>
$9,500,000 Pricellular Wireless 144A cv. sub. notes stepped-coupon
zero % (10-3/4s, 8/15/00), 2004++ $5,747,500
-------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
COLLATERALIZED MORTGAGE OBLIGATIONS (0.2%)* (COST $5,026,738)
PRINCIPAL AMOUNT VALUE
<S> <C> <C>
$5,249,000 Citicorp Mortgage Secs. Ser. 1992-14M, 7-1/2s, 2022 $5,229,317
---------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCKS (0.1%)*
Number of Shares Value
40,020 Conseco, Inc. Ser. D, $3.25 cv. pfd. $1,920,960
31,300 Granite Broadcasting $1.938 cv. pfd. 1,674,550
39,200 Unisys Corp. Ser. A, $3.75 cv. pfd. 1,470,000
---------------------------------------------------------------------------------
Total Convertible Preferred Stocks
(cost $5,104,162) $5,065,510
---------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
PURCHASED OPTIONS OUTSTANDING (-%)* (cost $1,320,277)
EXPIRATION DATE/
CURRENCY STRIKE PRICE VALUE
<S> <C> <C>
USD80,260,000 US Dollar in Exchange
For Deutschemarks Dec 95/DEM 1.49 $ 666,157
--------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SHORT-TERM INVESTMENTS (5.7%)*
PRINCIPAL AMOUNT VALUE
<S> <C> <C>
$ 25,000,000 American Telephone & Telegraph Capital Corp.
5.62s, December 4, 1995 $24,745,296
IDR 2,000,000,000 Bank Negara Certificate of Deposit zero %,
July 18, 1996 770,594
IDR 9,000,000,000 Bank Tabunga Negara zero %, Feburary 12, 1996 3,738,269
$ 25,000,000 Corporate Asset Funding Corp. 5.95s,
October 11, 1995 24,993,514
24,500,000 Federal National Mortgage Assn. 5.5s,
February 20, 1996 23,970,426
30,000,000 General Electric Capital Corp. 5.56s,
January 13, 1996 29,420,442
15,000,000 Hewlett Packard Co. 5.6s, January 1, 1996 14,771,979
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SHORT-TERM INVESTMENTS (continued)
PRINCIPAL AMOUNT VALUE
<S> <C> <C>
$
$ 15,000,000 IBM Credit Corp. 5.95s, November 3, 1995 $14,922,250
17,000,000 Metropolitan Life Funding, 5.9s, October 10,
1995 17,028,432
1,240,000 Mexican Tesobono bonds zero %, October 19, 1995 1,232,634
25,000,000 Morgan (J.P.) & Co., Inc. 5.7s, November 27,
1995 24,774,375
TRL 187,480,000,000 Turkey (Government of) Treasury Bill zero %,
December 29, 1995 3,166,631
U.S. Dollar Certificate of Deposit (Issued by
J.P. Morgan Securities, Inc. The principal
at redemption is linked to the bid price for
the Polish Treasury Bill, at maturity,
multiplied by the change in the spot rate of
the Polish Zloty from issue date to maturity
date.)
$ 3,511,012 zero %, January 25, 1996 3,171,848
2,147,569 zero %, October 20, 1995 2,051,787
4,940,000 USAA Capital Corp. 6.28s, October 6, 1995 4,938,611
215,000 Interest in $234,608,000 joint repurchase
agreement dated September 29, 1995 with Lehman
Bros. due October 2, 1995 with respect to various
U.S. Treasury obligations-- maturity value
of $215,115 for an effective yield of 6.4% 215,076
- ---------------------------------------------------------------------------------
Total Short-Term Investments
(cost $193,663,037) $ 193,912,164
- ---------------------------------------------------------------------------------
Total Investments (cost $3,567,446,505)*** $3,597,883,439
- ---------------------------------------------------------------------------------
</TABLE>
* Percentages indicated are based on net assets of $3,407,241,553, which
correspond to a net asset value per share for class A, class B and class
M shareholders of $11.99, $11.95 and $11.97, respectively.
+ Non-income-producing security.
++ The interest rate and date shown parenthetically represent the new
interest rate to be paid, and the date the fund will begin receiving
interest at this rate.
+++ TBA's are mortgage-backed securities traded under delayed delivery
commitments, settling after September 30, 1995. 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, 1995 was $168,215,150.
TBA Sale Commitments at September 30,1995 (proceeds receivable $143,580,540)
<TABLE>
<CAPTION>
Principal Delivery Coupon Market
Agency Amount Month Rate Value
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
GNMA $29,166,000 October 8s $ 29,986,148
GNMA 63,327,000 October 7-1/2s 63,722,794
FNMA 50,468,000 October 7s 49,774,065
- ------------------------------------------------------------------------------
$143,483,007
- ------------------------------------------------------------------------------
</TABLE>
# Restricted, excluding 144A securities, as to public resale. At the date
of acquisition, these securities were valued at cost. There were no
outstanding unrestricted securities of the same class as those held.
Total market value of restricted securities owned at September 30, 1995
was $7,307,252 or 0.2% of net assets.
## Income may be received in cash or additional securities at the discretion
of the issuer.
*** The aggregate identified cost for federal income tax purposes is
$3,571,050,643, resulting in gross unrealized appreciation and
depreciation of $74,854,183 and $48,021,387, respectively, or net
unrealized appreciation of $26,832,796.
<PAGE>
NOTES
-----------------------------------------------------------------------------
144A after the name of a security represents those exempt from registration
under Rule 144A of the Securities Act of 1933. These securities may be resold
in transactions exempt from registration, normally to qualified institutional
buyers.
The rate shown on Floating Rate Bonds (FRB) and Floating Rate Notes (FRN) are
the current interest rates shown at September 30, 1995, which are subject to
change based on the terms of the security.
Diversification of Foreign Assets at September 30, 1995 (as a percentage of
net assets):
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Argentina 0.76% Mexico 1.04%
Australia 0.53 Morocco 0.09
Brazil 0.55 Netherlands 2.37
Bulgaria 0.13 Panama 0.06
Canada 2.35 Philippines 0.06
Ecuador 0.14 Poland 0.28
France 4.79 Spain 1.38
Germany 5.56 Thailand 0.34
India 0.08 Turkey 0.09
Indonesia 0.18 United Kingdom 2.65
Italy 3.19
</TABLE>
Forward Cross Currency Contracts Outstanding at September 30, 1995
(aggregate face value $37,013,482)
<TABLE>
<CAPTION>
Market In Exchange Market Delivery Unrealized
Contracts Value For Value Date Depreciation
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Deutschemarks (Buy) $19,866,328 French Francs $19,921,982 11/14/95 $ (55,654)
Deutschemarks (Buy) 18,238,860 French Francs 18,289,481 11/14/95 (50,621)
-----------------------------------------------------------------------------------------------
$38,105,188 $38,211,463 $(106,275)
-----------------------------------------------------------------------------------------------
</TABLE>
Forward Currency Contracts to Buy at September 30, 1995
<TABLE>
<CAPTION>
Unrealized
Market Aggregate Delivery Appreciation/
Value Face Value Date (Depreciation)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Australian Dollars $ 15,979,924 $ 16,109,244 12/13/95 $ (129,320)
Australian Dollars 19,040,230 18,889,933 12/13/95 150,297
Canadian Dollars 21,741,672 21,676,708 12/13/95 64,964
Danish Krona 26,397,854 25,608,262 12/13/95 789,592
Deutschemarks 20,103,051 19,549,925 12/13/95 553,126
Deutschemarks 16,363,359 15,926,179 12/13/95 437,180
Deutschemarks 26,321,833 25,672,112 12/13/95 649,721
Deutschemarks 16,061,372 15,594,699 12/13/95 466,673
Deutschemarks 21,841,222 21,922,096 12/13/95 (80,874)
Deutschemarks 10,580,000 10,626,329 12/13/95 (46,329)
Deutschemarks 3,181,374 3,056,886 12/13/95 124,488
Deutschemarks 21,349,616 20,820,777 12/13/95 528,839
Deutschemarks 21,394,609 21,394,609 12/14/95 --
Japanese Yen 105,674,432 105,205,811 12/14/95 468,621
Japanese Yen 35,468,020 35,323,208 12/14/95 144,812
Japanese Yen 66,976,998 66,498,840 12/14/95 478,158
New Zealand Dollars 14,652,901 14,583,053 10/16/95 69,848
Spanish Peseta 10,615,031 10,374,504 12/13/95 240,527
Spanish Peseta 13,059,705 12,771,813 12/13/95 287,892
Spanish Peseta 2,412,507 2,416,240 12/13/95 (3,733)
Swedish Krona 24,941,598 24,067,555 12/13/95 874,043
- ----------------------------------------------------------------------------------------------
$514,157,308 $508,088,783 $6,068,525
- ----------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Forward Currency Contracts to Sell at September 30, 1995
<TABLE>
<CAPTION>
Unrealized
Market Aggregate Delivery Appreciation/
Value Face Value Date (Depreciation)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Australian Dollars $ 874,374 $ 873,944 12/13/95 $ (430)
British Pounds 7,195,712 7,202,520 12/13/95 6,808
Canadian Dollars 23,550,996 23,467,003 12/13/95 (83,993)
Deutschemarks 41,926,719 40,984,451 12/13/95 (942,268)
Deutschemarks 13,343,512 12,926,401 12/13/95 (417,111)
Deutschemarks 23,793,589 23,167,396 12/13/95 (626,193)
Deutschemarks 23,007,024 22,407,661 12/13/95 (599,363)
Deutschemarks 81,786,598 79,639,609 12/13/95 (2,146,989)
Deutschemarks 18,259,543 18,142,488 12/13/95 (117,055)
Deutschemarks 1,050,631 1,016,687 10/20/95 (33,944)
Deutschemarks 1,548,442 1,496,599 1/25/96 (51,843)
French Francs 71,388,990 69,450,472 12/13/95 (1,938,518)
Italian Lira 3,004,805 3,009,144 12/13/95 4,339
Italian Lira 53,539,923 52,971,102 12/13/95 (568,821)
Japanese Yen 15,830,144 16,391,754 12/13/95 561,610
Japanese Yen 2,780,028 2,881,076 12/13/95 101,048
Japanese Yen 32,169,322 32,524,406 12/13/95 355,084
Japanese Yen 21,976,460 21,750,903 12/13/95 (225,557)
Netherland Guilders 40,946,392 39,610,993 12/13/95 (1,335,399)
Netherland Guilders 41,856,312 40,300,897 12/13/95 (1,555,415)
Spanish Peseta 40,047,616 39,017,510 12/13/95 (1,030,106)
- ----------------------------------------------------------------------------------------------
$559,877,132 $549,233,016 $(10,644,116)
- ----------------------------------------------------------------------------------------------
</TABLE>
Written Put Options on Foreign Curency Outstanding at September 30, 1995
(premium received $345,118)
<TABLE>
<CAPTION>
Expiration Date/
Currency Strike Price Value
--------------------------------------------------------------------------------------------
<S> <C> <C> <C>
USD 80,260,000 US Dollars In Exchange For
Deutschemarks Dec 95/DEM 1.565 $200,651
------------ --------------------------------- ------------------ -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Statement of assets and liabilities
September 30, 1995
<TABLE>
<CAPTION>
Assets
----------------------------------------------------------------------------------------------------------
<S> <C>
Investments, at value (identified cost $3,567,446,505) (Note 1) $3,597,883,439
----------------------------------------------------------------------------------------------------------
Cash 1,635,664
----------------------------------------------------------------------------------------------------------
Dividends, interest and other receivables 69,903,875
----------------------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 9,817,276
----------------------------------------------------------------------------------------------------------
Receivable for securities sold 286,173,191
----------------------------------------------------------------------------------------------------------
Receivable for open forward currency contracts 7,357,670
----------------------------------------------------------------------------------------------------------
Receivable for closed forward currency contracts 12,358,300
----------------------------------------------------------------------------------------------------------
Total assets 3,985,129,415
----------------------------------------------------------------------------------------------------------
Liabilities
----------------------------------------------------------------------------------------------------------
Payable for securities purchased 397,276,462
----------------------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 3,115,496
----------------------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 4,654,534
----------------------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 12,414
----------------------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 3,710
----------------------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 842,578
----------------------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 2,471,050
----------------------------------------------------------------------------------------------------------
Payable for open forward currency contracts 12,039,536
----------------------------------------------------------------------------------------------------------
Payable for closed forward currency contracts 13,529,707
----------------------------------------------------------------------------------------------------------
Other accrued expenses 258,717
----------------------------------------------------------------------------------------------------------
Written options outstanding, at value (premiums received $345,118) (Note 3) 200,651
----------------------------------------------------------------------------------------------------------
TBA sale commitments, at value (proceeds receivable $143,580,540) (Note 1) 143,483,007
----------------------------------------------------------------------------------------------------------
Total liabilities 577,887,862
----------------------------------------------------------------------------------------------------------
Net assets $3,407,241,553
----------------------------------------------------------------------------------------------------------
Represented by
----------------------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $3,505,120,474
----------------------------------------------------------------------------------------------------------
Distributions in excess of net investment income (Note 1) (4,013,314)
----------------------------------------------------------------------------------------------------------
Accumulated net realized loss on investment transactions and foreign currency transactions
(Note 1) (119,801,643)
----------------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments, and assets and liabilities in foreign currencies 25,936,036
----------------------------------------------------------------------------------------------------------
Total--Representing net assets applicable to capital shares outstanding $3,407,241,553
----------------------------------------------------------------------------------------------------------
Computation of net asset value and offering price
----------------------------------------------------------------------------------------------------------
Net asset value and redemption price of class A shares
($1,597,034,365 divided by 133,203,022 shares) $11.99
----------------------------------------------------------------------------------------------------------
Offering price per class A share (100/95.25 of $11.99)* $12.59
----------------------------------------------------------------------------------------------------------
Net asset value and offering price of class B shares
($1,795,456,058 divided by 150,281,723)+ $11.95
----------------------------------------------------------------------------------------------------------
Net asset value and redemption price of class M shares
($14,751,130 divided by 1,232,012 shares) $11.97
----------------------------------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $11.97)* $12.37
----------------------------------------------------------------------------------------------------------
</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.
<PAGE>
Statement of operations
Year ended September 30, 1995
<TABLE>
<CAPTION>
<S> <C>
Investment income:
- ------------------------------------------------------------------------
Interest (net of foreign tax of $1,937,703) $285,484,893
- ------------------------------------------------------------------------
Dividends 6,346,860
- ------------------------------------------------------------------------
Total investment income 291,831,753
- ------------------------------------------------------------------------
Expenses:
- ------------------------------------------------------------------------
Compensation of Manager (Note 2) 17,596,123
- ------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 5,186,824
- ------------------------------------------------------------------------
Compensation of Trustees (Note 2) 79,548
- ------------------------------------------------------------------------
Registration fees 16,929
- ------------------------------------------------------------------------
Reports to shareholders 210,980
- ------------------------------------------------------------------------
Auditing 208,480
- ------------------------------------------------------------------------
Legal 53,191
- ------------------------------------------------------------------------
Postage 571,118
- ------------------------------------------------------------------------
Administrative services (Note 2) 50,916
- ------------------------------------------------------------------------
Distribution fees--Class A (Note 2) 3,771,497
- ------------------------------------------------------------------------
Distribution fees--Class B (Note 2) 16,555,968
- ------------------------------------------------------------------------
Distribution fees--Class M (Note 2) 24,889
- ------------------------------------------------------------------------
Other expenses 112,595
- ------------------------------------------------------------------------
Total expenses 44,439,058
- ------------------------------------------------------------------------
Fees paid indirectly (Note 2) (464,582)
- ------------------------------------------------------------------------
Net expenses 43,974,476
- ------------------------------------------------------------------------
Net investment income 247,857,277
- ------------------------------------------------------------------------
Net realized loss on investments (Notes 1 and 3) (29,550,690)
- ------------------------------------------------------------------------
Net realized gain on written options 70,309
- ------------------------------------------------------------------------
Net realized loss on forward currency contracts and
foreign currency transactions (Notes 1 and 3) (62,020,405)
- ------------------------------------------------------------------------
Net realized loss on futures contracts (Notes 1 and 3) (102,771)
- ------------------------------------------------------------------------
Unrealized appreciation of forward currency contracts
and foreign currency translation loss during the year 1,113,466
- ------------------------------------------------------------------------
Net unrealized appreciation of investments, options,
and TBA sale commitments during the year 185,807,924
- ------------------------------------------------------------------------
Net gain on investment transactions $ 95,317,833
- ------------------------------------------------------------------------
Net increase in net assets resulting from operations $343,175,110
- ------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Statement of changes in net assets
<TABLE>
<CAPTION>
Year ended
September 30
-----------------------------
1995 1994
-----------------------------------------------------------------------------------
<S> <C> <C>
Increase in net assets
- ------------------------------------------------------------------------------------
Operations:
- ------------------------------------------------------------------------------------
Net investment income $ 247,857,277 $ 174,234,104
- ------------------------------------------------------------------------------------
Net realized loss on investments and
foreign currency transactions (91,603,557) (61,866,985)
- ------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of
investments, and assets and liabilities in foreign
currencies 186,921,390 (189,806,575)
- ------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations 343,175,110 (77,439,456)
- ------------------------------------------------------------------------------------
Distributions to shareholders
- ------------------------------------------------------------------------------------
From net investment income
- ------------------------------------------------------------------------------------
Class A (103,443,301) (78,325,153)
- ------------------------------------------------------------------------------------
Class B (103,501,273) (69,458,154)
- ------------------------------------------------------------------------------------
Class M (306,880) --
- ------------------------------------------------------------------------------------
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)
- ------------------------------------------------------------------------------------
Class B (6,145,352)
- ------------------------------------------------------------------------------------
Return of capital (Note 1)
- ------------------------------------------------------------------------------------
Class A (20,901,496) (18,280,431)
- ------------------------------------------------------------------------------------
Class B (20,913,210) (15,971,156)
- ------------------------------------------------------------------------------------
Class M (62,008) --
- ------------------------------------------------------------------------------------
Increase from capital share transactions (Note 4) 129,258,557 2,101,525,758
- ------------------------------------------------------------------------------------
Total increase in net assets 223,305,499 1,804,582,030
- ------------------------------------------------------------------------------------
Net assets
- ------------------------------------------------------------------------------------
Beginning of year 3,183,936,054 1,379,354,024
- ------------------------------------------------------------------------------------
End of year (including distributions in excess of
net investment income of $4,013,314 and
$27,571,431, respectively) $3,407,241,553 $3,183,936,054
-----------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Financial highlights
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
For the period For the period
December 1, 1994 March 1, 1993
(commencement (commencement
of operations) to Year ended Year ended of operations) to
September 30 September 30 September 30 September 30
---------------------------------------------------------------------------
1995 1995 1994 1993
---------------------------------------------------------------------------
Class M Class B
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value,
beginning of period $ 11.34 $ 11.61 $ 12.79 $ 12.51
- ------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------
Net investment income .78 .88 .72 .49
- ------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investments .63 .33 (.91) .39
- ------------------------------------------------------------------------------------------------------------------
Total from investment operations 1.41 1.21 (.19) .88
- ------------------------------------------------------------------------------------------------------------------
Distributions to shareholders
- ------------------------------------------------------------------------------------------------------------------
From net investment income (.65) (.72) (.65) (.46)
- ------------------------------------------------------------------------------------------------------------------
In excess of net investment income -- -- (.10) --
- ------------------------------------------------------------------------------------------------------------------
From net realized gain on
investments -- -- -- (.14)
- ------------------------------------------------------------------------------------------------------------------
In excess of net realized gain on
investments -- -- (.08) --
- ------------------------------------------------------------------------------------------------------------------
Return of capital (.13) (.15) (.16) --
- ------------------------------------------------------------------------------------------------------------------
Total distributions (.78) (.87) (.99) (.60)
- ------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 11.97 $ 11.95 $ 11.61 $ 12.79
- ------------------------------------------------------------------------------------------------------------------
Total investment return at net asset
value (%) (c) 12.90(d) 11.01 (1.62) 7.21(d)
- ------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $14,751 $1,795,456 $1,644,860 $504,417
- ------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets
(%) (e) 1.07(d) 1.76 1.76 1.91(d)
- ------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to
average net assets (%) 6.30(d) 7.46 8.05 5.80(d)
- ------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 235.88 235.88 201.53 243.73
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended
September 30
-----------------------------------------------------------
1995 1994 1993 1992 1991
-----------------------------------------------------------
Class A
-----------------------------------------------------------
<S> <C> <C> <C> <C>
$11.64 $ 12.82 $ 12.66 $ 11.85 $ 10.91
-----------------------------------------------------------
-----------------------------------------------------------
.95 .78 .96 1.04 1.05(a)
-----------------------------------------------------------
.36 (.88) .56 .97 1.15
-----------------------------------------------------------
1.31 (.10) 1.52 2.01 2.20
-----------------------------------------------------------
-----------------------------------------------------------
(.80) (.71) (.94) (1.01) (1.05)
-----------------------------------------------------------
-- (.12) -- -- --
-----------------------------------------------------------
-- -- (.42) (.19) (.21)
-----------------------------------------------------------
-- (.08) -- -- --
-----------------------------------------------------------
(.16) (.17) -- -- --
-----------------------------------------------------------
(.96) (1.08) (1.36) (1.20) (1.26)
-----------------------------------------------------------
$ 11.99 $ 11.64 $ 12.82 $ 12.66 $ 11.85
-----------------------------------------------------------
11.89 (.93) 12.85 17.88 21.43
-----------------------------------------------------------
$1,597,034 $1,539,076 $874,937 $365,253 $168,106
-----------------------------------------------------------
1.01 1.01 1.21 1.36 1.47(a)
-----------------------------------------------------------
8.22 7.96 6.80 8.27 9.18(a)
-----------------------------------------------------------
235.88 201.53 243.73 221.09(b) 481.06
-----------------------------------------------------------
</TABLE>
(a) Reflects an expense limitation applicable during the year ended September
30, 1991. 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.
(b) Portfolio turnover excludes the impact of assets received from the
acquisition of Putnam Diversified Premium Income Trust and subsequent
sales to realign the portfolio.
(c) Total investment return assumes dividend reinvestment and does not
reflect the effect of sales charges.
(d) Not annualized.
(e) The ratio of expenses to average net assets for the year or period ended
September 30, 1995 includes amounts paid through expense offset
arrangements. Prior period ratios exclude these amounts. See Note 2.
<PAGE>
Notes to financial statements
September 30, 1995
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 class A, class B and class M shares. The fund commenced its
public offering of class M shares on December 1, 1994. 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. Class M shares are
sold with a maximum front-end sales charge of 3.25% and pay an ongoing
distribution fee that is lower than class B shares and higher than class A
shares. Expenses of the fund are borne pro-rata by the holders of each class
of shares, except that each class bears expenses unique to that class
including the distribution fees applicable to such class. Each class votes as
a class only with respect to its own distribution plan or other matters on
which a class vote is required by law or determined by the Trustees. Shares
of each class would receive their pro-rata share of the net assets of the
fund, if the fund were liquidated. In addition, the Trustees declare separate
dividends on each class of shares.
The following is a summary of significant accounting policies consistently
followed by the fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles.
A) Security valuation Investments for which market quotations are readily
available are stated at market value, which is determined using the last
reported sale price, or, if no sales are reported--as in the case of some
securities traded over-the-counter--the last reported bid price, except that
certain U.S. government obligations are stated at the mean between the last
reported bid and asked prices. 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 G of Note 1
with respect to valuations of options, forward currency contracts and futures
outstanding.
B) TBA purchase commitments The fund may enter into "TBA" (to be announced)
purchase commitments to
<PAGE>
purchase securities for a fixed unit price at a future date beyond customary
settlement time. Although the unit price has been established, the principal
value has not been finalized. However, the amount of the 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's 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 and certain accounts managed by Putnam
Investment Management, Inc. ("Putnam Management"), the fund's Manager, a
wholly-owned subsidiary of Putnam Investments, Inc. These balances may be
invested in one or more repurchase agreements and/or short-term money market
instruments.
D) Repurchase agreements The fund, or any joint trading account, through its
custodian, receives delivery of the underlying securities, the market value
of which at the time of purchase is required to be in an amount at least
equal to the resale price, including accrued interest. 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
<PAGE>
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 stepped-
coupon bonds is accreted according to the effective yield method. Certain
securities held by the fund pay interest in the form of additional
securities; interest on such securities is recorded on the accrual basis at
the lower of the coupon rate or market value of the securities to be
received, and is allocated to the cost of the securities received on the
payment date.
F) Foreign currency translation The accounting records of the fund are
maintained in U.S. dollars. The market value of foreign securities, currency
holdings, other assets and liabilities are recorded in the books and records
of the fund after translation to U.S. dollars based on the exchange rates on
that day. The cost of each security is determined using historical exchange
rates. Income and withholding taxes are translated at prevailing exchange
rates when accrued or incurred. The fund does not isolate that portion of
realized or unrealized gains or losses resulting from changes in the foreign
exchange rate on investments from fluctuations arising from changes in the
market prices of the securities. Such fluctuations are included with the net
realized and unrealized gain or loss on investments. Net realized gains and
losses on foreign currency transactions represent net exchange gains or
losses on closed forward currency contracts, disposition of foreign
currencies and the difference between the amount of investment income and
foreign withholding taxes recorded on the fund's books and the U.S. dollar
equivalent amounts actually received or paid. Net unrealized gains and losses
on foreign currency transactions arise from changes in the value of open
forward currency contracts and assets and liabilities other than investments
at the period end, resulting from changes in the exchange rate.
G) Futures and options contracts The fund may use futures and options
contracts to hedge against changes in the values of securities the fund owns
or expects to purchase. The fund may also write options on securities it owns
or in which it may invest to increase its current returns.
The potential risk to the fund is that the change in value of futures and
options contracts may not correspond to the change in value of the hedged
instruments. In addition, losses may arise from changes in the value of the
underlying instruments, if there is an illiquid secondary market for the
contracts, or if the counterparty to the contract is unable to perform.
Futures contracts are valued at the quoted daily settlement prices
established by the exchange on which they trade. Exchange traded options are
valued at the last sale price, or if no sales are reported, the last bid
price for purchased options and the last ask price for written options.
Options traded over-the- counter are valued using prices supplied by dealers.
Forward currency contracts The fund may engage in forward currency contracts,
which are agreements between two parties to buy and sell currencies at a set
price on a future date, to protect against a decline in value relative to the
U.S. dollar of the currencies in which its portfolio securities are
denominated or quoted (or an increase in the value of a currency in which
securities a fund intends to buy are denominated, when a fund holds cash
reserves and short-term investments). The market value of the contract will
fluctuate with changes in currency exchange rates. The contract is "marked to
market" daily and the change in market value is recorded as an unrealized
gain or loss. When the
<PAGE>
contract is closed, the fund records a realized gain or loss equal to the
difference between the value of the contract at the time it was opened and
the value at the time it was closed. The fund could be exposed to risk if the
value of the currency changes unfavorably, if the counterparties to the
contracts are unable to meet the terms of their contracts or if the fund is
unable to enter into a closing position. 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.
H) Federal taxes It is the policy of the fund to distribute all of its income
within the prescribed time and otherwise comply with the provisions of the
Internal Revenue Code applicable to regulated investment companies. It is
also the intention of the fund to distribute an amount sufficient to avoid
imposition of any excise tax under Section 4982 of the Internal Revenue Code
of 1986. Therefore, no provision has been made for federal taxes on income,
capital gains or unrealized appreciation on securities held and for excise
tax on income and capital gains.
At September 30, 1995, the fund had a capital loss carryover of approximately
$58,495,000 available to offset future net capital gains, if any, which will
expire on September 30, 2003.
I) Distributions to shareholders Distributions to shareholders are recorded
by the fund on the ex-dividend date. At certain times, the fund may pay
distributions at a level rate even though, as a result of market conditions
or investment decisions, the fund may not achieve projected investment
results for a given period.
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
unrealized gains and losses on forward foreign currency contracts,
post-October loss deferrals and losses on wash sales transactions.
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, 1995, the fund
reclassified $17,047,706 to increase distributions in excess of net
investment income and $10,825,230 to decrease accumulated net realized loss
on investments, with an increase of $6,222,476 to paid-in capital.
Note 2
Management fee, administrative services, and other transactions
Compensation of Putnam Management, for management and investment advisory
services is paid quarterly based on the average net assets of the fund 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, under current law, 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.
Trustees of the fund receive an annual Trustee's fee of $4,700 and an addi-
<PAGE>
tional 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.
During the year ended September 30, 1995, the fund adopted a Trustee Fee
Deferral Plan (the "Plan") which allows the Trustees to defer the receipt of
all or a portion of Trustees fees payable on or after July 1, 1995. The
deferred fees remain in the fund and are invested in the fund or in other
Putnam funds until distribution in accordance with the Plan.
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.
For the year ended September 30, 1995, fund expense were reduced by $464,582
under expense offset arrangements with PFTC. Investor servicing and custodian
fees reported in the Statement of operations exclude these credits. The fund
could have invested a portion of the assets utilized in connection with the
offset arrangements in an income-producing asset if it had not entered into
such arrangements.
The fund has adopted distribution plans (the "Plans") with respect to its
class A shares, class B and class M shares pursuant to Rule 12b-1 under the
Investment Company Act of 1940. The purpose of the Plans is to compensate
Putnam Mutual Funds Corp., a wholly-owned subsidiary of Putnam Investments,
Inc., for services provided and expenses incurred by it in distributing
shares of the fund. The Plans provide for payments by the fund to Putnam
Mutual Funds Corp. at an annual rate up to 0.35%, 1.00% and 1.00% of the
average net assets attributable to class A, class B and class M shares,
respectively. The Trustees have approved payment by the fund at an annual
rate of 0.25%, 1.00%, and 0.50% of the average net assets attributable to
class A, class B, and class M shares, respectively.
For the year ended September 30, 1995 Putnam Mutual Funds Corp., acting as
underwriter, received net commissions of $684,160 from the sale of class A
shares, $5,312,884 in contingent deferred sales charges from redemptions of
class B shares and net commissions of $17,388 from the sale of class M
shares. A deferred sales charge of up to 1% is assessed on certain
redemptions of class A shares. For the year ended September 30, 1995, Putnam
Mutual Funds Corp., acting as underwriter received $14,962 on class A
redemptions.
Note 3
Purchases and sales of securities
During the year ended September 30, 1995, purchases and sales of investment
securities other than U.S. government obligations and short-term investments
aggregated $2,962,795,221 and $3,181,154,609, respectively. Purchases and
sales of U.S. government obligations aggregated $4,429,420,770 and
$4,043,115,563, 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 year are
summarized as follows:
<PAGE>
<TABLE>
<CAPTION>
Contracts Premiums
Amount Received
-----------------------------------------------------------------------
<S> <C> <C>
Options written 155,494,000 $ 687,183
Options closed (75,234,000) (342,065)
-----------------------------------------------------------------------
Written options outstanding at end of year 80,260,000 $ 345,118
-----------------------------------------------------------------------
</TABLE>
Note 4
Capital shares
At September 30, 1995, there was an unlimited number of shares of beneficial
interest authorized, divided into three classes, class A, class B and class M
capital stock. Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
Year ended September 30
-----------------------------------------------------------
1995 1994
- -------------------------------------------------------------------------------------
Class A Shares Amount Shares Amount
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 29,561,536 $ 343,042,280 84,902,277 $1,068,262,414
Shares issued in
connection with
reinvestment of
distributions: 6,272,747 72,551,475 5,314,495 65,110,997
- -------------------------------------------------------------------------------------
35,834,283 415,593,755 90,216,772 1,133,373,411
Shares repurchased (34,850,799) (402,384,755) (26,251,664) (322,650,602)
- -------------------------------------------------------------------------------------
Net increase 983,484 $ 13,209,000 63,965,108 $ 810,722,809
- -------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Year ended September 30
-----------------------------------------------------------
1995 1994
- ----------------- --------------------------- ----------------------------
Class B Shares Amount Shares Amount
- ----------------- ----------- ------------ ----------- -------------
<S> <C> <C> <C> <C>
Shares sold 36,302,330 $ 421,020,169 117,759,526 $1,478,591,215
Shares issued in
connection with
reinvestment of
distributions 6,462,302 74,500,296 5,061,958 61,608,578
- ----------------- ----------- ------------ ----------- -------------
42,764,632 495,520,465 122,821,484 1,540,199,793
Shares
repurchased (34,212,886) (393,928,631) (20,546,485) (249,396,844)
- ----------------- ----------- ------------ ----------- -------------
Net increase 8,551,746 $ 101,591,834 102,274,999 $1,290,802,949
- ----------------- ----------- ------------ ----------- -------------
</TABLE>
<TABLE>
<CAPTION>
For the period
December 1, 1994
(commencement operations)
to September 30
-----------------------------------
1995
- --------------------------------------------------------------------------
Class M Shares Amount
- --------------------------------------------------------------------------
<S> <C> <C>
Shares sold 1,339,043 $15,723,397
Shares issued in connection with
reinvestment of distributions 24,234 286,016
- --------------------------------------------------------------------------
1,363,277 16,009,413
Shares repurchased (131,265) (1,551,690)
- --------------------------------------------------------------------------
Net increase 1,232,012 $14,457,723
- --------------------------------------------------------------------------
</TABLE>
37
<PAGE>
Federal tax information
For the year ended September 30, 1995, a portion of the fund's distribution
represents a return of capital and is therefore not taxable to shareholders.
This is the result of losses on foreign currency transactions incurred in the
fiscal year ended September 30, 1994. Federal tax law allows certain losses
sustained in a fund's fiscal year to be deferred into the following year.
These losses must be reclassified as ordinary losses for tax purposes,
reducing the amount of net investment income the fund has available for
distribution.
The fund has designated 3.06% of distributions from net investment income as
qualifying for the dividends received deduction for corporations.
The Form 1099 you receive in January 1996 will show the tax status of all
distributions paid to your account in calendar 1995, including the amount of
the distribution not subject to tax. You will need to adjust the cost basis
of your shares by the amount that is not subject to tax when you eventually
redeem or exchange them. This will increase any resulting capital gain or
decrease any capital loss you incur at that time.
38
<PAGE>
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
Robert E. Patterson
Donald S. Perkins
George Putnam, III
Eli Shapiro
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 J. Powers
Vice President and Fund Manager
Mark J. Siegel
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.
Shares of mutual funds are not deposits or obligations of, or guaranteed or
endorsed by, any financial institution, are not insured by the Federal
Deposit Insurance Corporation (FDIC), the Federal Reserve Board or any other
agency, and involve risk, including the possible loss of principal amount
invested.
<PAGE>
Bulk Rate
U.S. Postage
PAID
Putnam
Investments
20981-075/387/80311/95
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
<PAGE>
APPENDIX TO FORM N-30D FILINGS TO DESCRIBE DIFFERENCES BETWEEN PRINTED
AND EDGAR-FILED TEXTS:
(1) Bold and italic typefaces are displayed in normal type.
(2) Headers (e.g., the name of the fund) are omitted.
(3) Certain tabular and columnar headings and symbols are displayed
differently in this filing.
(4) Bullet points and similar graphic signals are omitted.
(5) Page numbering is omitted.
(6) Trademark symbol replaced with (TM); Service Mark symbol is replaced
with (SM)
