Putnam
Diversified
Income
Trust
SEMIANNUAL REPORT
March 31, 1996
[Logo]
B O S T O N * L O N D O N * T O K Y O
<PAGE>
Fund highlights
Morningstar, an independent rating agency, awarded the fund's
class A shares its highest overall rating of five stars as of
March 31, 1996. Only 10% of all fixed income funds receive this
rating.*
For the past five years, Putnam Diversified Income Trust's class A
shares have consistently outperformed more than two thirds of the
funds in Lipper Analytical Services' general bond fund category.
Specifically, for the one- and three-year periods ended March 31,
1996, the fund's class A shares ranked in the top quartile and top
29th percentile, respectively.+
CONTENTS
4 Report from Putnam Management
9 Fund performance summary
12 Portfolio holdings
27 Financial statements
*Morningstar, an independent rating organization, rates a fund
relative to funds with similar investment objectives based on the
fund's 3-, 5-, and 10-year performance, adjusted for risk factors
and sales charges. Ratings are updated monthly. 10% of funds
receive 5 stars and 22.5% receive 4 stars. For the 3- and 5-year
periods ended 3/31/96 there were 831 and 443 funds in the fixed
income category; the fund's class A shares received 4 stars and 5
stars for each respective period. The fund's class B shares
received 4 stars for the 3-year period ended 3/31/96. Performance
for other share classes will vary. Past performance is not
indicative of future results.
+Lipper Analytical Services, an independent research organization,
ranks funds according to total return performance; rankings vary
over time and do not reflect the effects of sales charges. The
fund's class A shares ranked 12 out of 51 for 1-year performance,
6 out of 20 for 3 years, and 4 out of 12 for 5 years as of March
31, 1996. Class B shares ranked 21 out of 51 for the 1-year period
and 8 out of 20 for 3 years ended March 31, 1996. Other share
class rankings will vary. Past performance is not indicative of
future results.
2
<PAGE>
From the Chairman
[Photo]
(c) Karsh, Ottawa
Dear Shareholder:
For most of the first half of Putnam Diversified Income Trust's
current fiscal year, the six months ended March 31, 1996, bonds
enjoyed one of the most vibrant markets in recent memory. Toward
the end of the period, however interest rates rose dramatically
and the bond market turned downward, resulting in losses for most
sectors of the market.
Your fund's multisector strategy often proves effective in this
type of market environment. The U.S. bond market, which
characteristically retreats in anticipation of bad news, was
reacting to concern over a pickup in inflation resulting from
economic overheating. Long-term U.S. government securities were
hardest hit. Because your fund's managers have the flexibility to
invest also in foreign holdings and high-yield securities, they
were able to minimize the impact of the U.S. market decline. The
fund's high-yield sector responded positively to signs of economic
strength, and international bonds, especially those in the
higher-yielding European markets, made solid contributions to
performance.
Your fund's management team expects the high-yield market to
continue to provide strength and that foreign holdings may
outshine many domestic investment-grade issues in the months
ahead. A full discussion of your fund's performance and outlook is
provided in the report that follows.
Respectfully yours,
/s/ George Putnam
George Putnam
Chairman of the Trustees
May 15, 1996
3
<PAGE>
Report from the Fund Managers
Jennifer E. Leichter, lead manager
D. William Kohli
Michael Martino
Neil J. Powers
Mark J. Siegel
Although Putnam Diversified Income Trust began fiscal 1996 amid
one of the most robust bond market rallies in recent history, your
fund ended the first half of its fiscal year buffeted by investor
uncertainty. Confusion concerning the direction of the U.S.
economy, interest rates, and inflation brought the year-long rally
to an abrupt halt. Thanks to its trisector asset allocation, your
fund was able to hold its own during the turbulence.
The lower-rated high-yield bond sector continued to post positive
returns, while the international segment registered respectable
performance for much of the period. By March 31, 1996, however,
the U.S. government sector had given back most of the gains it
realized in the first four months of the fiscal year. Full
performance details can be found on pages 9 and 10 of this report.
HIGH-YIELD HOLDINGS CONTINUE TO DRIVE
PERFORMANCE
Changing market dynamics, while adversely affecting most U.S.
Treasury securities, remained hospitable to the performance of
your fund's high-yield holdings. Our emphasis on noncyclical
companies -- those whose growth patterns are not influenced by
economic activity -- in the telecommunications, cable television,
and broadcasting industries benefited the fund substantially.
Anticipation of the passage of the telecommunications bill and its
subsequent approval pushed up the prices of many fund holdings in
these sectors. Some of the fund's strongest performers included
competitive access providers such as IntelCom Group and Intermedia
Group Communications, cellular commu-
4
<PAGE>
nications companies like Nextel Communications, satellite
broadcasters like Echostar Communications, and cable television
companies like Continental Cablevision, which we sold at
considerable profit near period's end. While these holdings and
others discussed in this report were viewed favorably on March 31,
1996, all are subject to review and adjustment in accordance with
the fund's investment strategy and may well vary in the future.
We've kept the fund's exposure to the health-care, banking,
utility, and gaming industries relatively unchanged. We have,
however, increased the fund's weighting in energy companies in
light of new technology that is making oil drilling more cost-
effective. We also expect oil prices to remain relatively strong
over the near term. One position we've been adding to is
Chesapeake Energy Corp., a small domestic company that stands to
benefit handsomely from its enhanced ability to exploit the
existing oil fields of larger multinational producers.
Retailing is also an area in which we've increased our interest,
purchasing the attractively priced bonds of companies with niche
businesses like Mother's Work, a maternity apparel retailer. One
long-standing holding, discount clothing retailer Loehmann's Inc.,
appreciated dramatically over the period as the company's
management announced an initial public offering of its stock.
Several casino holdings, Lady Luck Gaming in particular, have also
risen in value.
[Description of Top 5 Country Allocations Bar Chart]
------------------------------------------------------------------
TOP 5 COUNTRY ALLOCATIONS, 3/31/96*
------------------------------------------------------------------
United States 72.2%
Germany 8.52%
United Kingdom 3.28%
Canada 2.75%
Australia 2.15%
*Based on net assets as of 3/31/96. Allocations will vary over
time.
5
<PAGE>
CONDITIONS WARRANT STRATEGIC SHIFT IN
U.S. GOVERNMENT SEGMENT
The U.S. Treasury market enjoyed a rip-roaring ride through the
end of calendar 1995 and the first month of calendar 1996 -- and
the fund was able to take advantage of it. At the outset, the
sector's security composition, which involved a light emphasis on
mortgage-backed securities and a high concentration in
intermediate- to long-term Treasury securities, created a long
duration bias. As a measure of sensitivity to interest-rate
changes, duration plays an important role in performance
potential. Typically, the longer the duration, the greater the
price appreciation potential during periods of declining interest
rates. The sleeve's long duration bolstered the performance during
the first three months of the fiscal year.
By January, however, it seemed that much of the good news had
already been priced into the Treasury market and we began to
change our focus. Because intermediate-term securities tend to be
the hardest hit by interest-rate increases, we sold these
securities in favor of a combination of short-term and long-term
Treasury securities. At the same time, the market was pricing in a
substantial amount of prepayment risk and, as a result,
mortgage-backed securities cheapened. Before the market could
adjust -- in other words, before prices began to return to fair
value -- we made a large allocation to the attractively priced
current-coupon mortgage-backed securities, nearly doubling the
fund's weighting. This move enabled us to shorten the portfolio's
duration and also enabled us to stay fully invested during a
period of high market volatility. Although this shift into
mortgages has since proved worthwhile, we did not entirely
eliminate the fund's Treasury position, and we still felt the
impact of the backup in interest rates during February and March,
which had negated some earlier gains.
COUNTRY PICKS AND CURRENCY HEDGES ARE KEY
FACTORS IN INTERNATIONAL BOND PERFORMANCE
The fund's international sector made a respectable contribution to
the portfolio's positive return. Our country selection and
currency strategy, rather than duration management, drove
performance.
European government bonds have been our focus, with substantial
emphasis on some of the higher-yielding markets, such as
6
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- -----------------------------------------------------------------------------
TOP THREE HOLDINGS PER SECTOR*
-----------------------------------------------------------------------------
HIGH-YIELD BONDS Market value Percentage
..........................................................................
Sears Credit Account Master Trust
Ser. 95-5 Class A 6.05s, 2004 $ 28,940,100 0.6%
..........................................................................
Midland Funding Corp. II Ser. A,
deb 11 3/4s, 2005 26,022,400 0.5%
..........................................................................
Telewest Communications PLC deb. stepped-
coupon zero %, (11s,10/1/00), 2007 19,398,000 0.4%
..........................................................................
FOREIGN BONDS
..........................................................................
Germany (Republic of) bonds 5-3/4s, 2000 132,285,882 2.5%
..........................................................................
Treuhandanstalt (Germany, Republic of)
7-1/8s, 2003 91,429,036 2.4%
..........................................................................
Canada (Government of) deb. 7-1/2s, 2001 84,022,960 1.6%
..........................................................................
U.S. GOVERNMENT OBLIGATIONS
..........................................................................
Government National Mortgage Association
7s 211,578,703 4.0%
..........................................................................
Government National Mortgage Association
7-1/2s, 132,767,582 2.5%
..........................................................................
Government National Mortgage Association
TBA 7s, 128,415,200 2.4%
--------------------------------------------------------------------------
*Based on net asset as of 3/31/96. Portfolio holdings will vary over time.
Spain and Italy. Holdings in these peripheral markets proved most profitable,
as investors showed their willingness to tolerate higher risk in return for
potentially higher return. In February we decided to take profits on some of
the fund's Italian and Spanish holdings in order to preserve our gains. We
redeployed these assets into core European markets, such as Germany and
Denmark, where we believe slow economic growth and the likelihood of further
interest rate cuts provide a positive backdrop for bond performance.
Emerging markets enjoyed robust gains throughout the period, boosting the
fund's performance. The U.S. market's recent selloff caused a temporary
setback, but emerging markets had recovered by the end of the period. The
Japanese bond market, beset by low nominal yields and an improving domestic
economy, fared poorly throughout much of the period but picked up noticeably
in the past month and a half. Nevertheless, we are not convinced that its
recent uptick is sustainable and plan to continue our policy of avoiding
Japanese bonds.
7
<PAGE>
Our successful currency strategy involved overweighting the U.S. dollar
relative to its benchmark index. This helped protect the portfolio's value,
as several European currencies declined in value against the dollar. We
underweighted the yen and deutschemark and hedged several European currencies
against each other, capitalizing on the currency movements in some of the
higher-yielding markets as they struggle to be eligible for inclusion into
the European Monetary Union.
RECENT UNCERTAINTY DOESN'T DAMPEN OUR
OUTLOOK
We believe the current volatility experienced by the U.S. Treasury market is
more of a short-term correction than a bear market similar to that of 1994.
Our long-term view remains optimistic because the current inflation, interest
rate, and economic environments -- both at home and abroad -- are conducive
to stronger bond performance when viewed in a historical context. That said,
we believe income rather than price appreciation will play the greater role
in the fund's total return potential during the remainder of fiscal 1996.
Our plan is to stay defensively positioned in the U.S. government sleeve and
to emphasize mortgage-backed securities in an attempt to maximize yield. In
the high-yield sector, we will try to maintain our focus on B-rated bonds.
Additionally, we have begun to selectively purchase bonds issued by several
cyclical companies as their valuations became too compelling to ignore. With
European economic growth a pace behind that of the U.S. and interest rates
poised to continue their downward trend, European bonds will likely dominate
the fund's international segment in the months ahead.
The views expressed here are exclusively those of Putnam Management. They are
not meant as investment advice. Although the described holdings were viewed
favorably as of 3/31/96, there is no guarantee the fund will continue to hold
these securities in the future. While U.S. government backing of individual
securities does not insure principal, which will fluctuate, it does guarantee
that the fund's government backed holdings will make timely payments of
interest and principal. Mortgage-backed securities may be subject to
prepayment risk. Foreign investments are subject to certain risks, such as
currency fluctuations, economic instability and political developments, that
are not present with domestic investments. The lower credit ratings of
high-yield corporate and municipal bonds reflect a greater possibility that
adverse changes in the economy or their issuers may affect the fund's ability
to pay principal and interest on the bonds.
8
<PAGE>
Performance summary
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.
This section provides, at a glance, information about your fund's
performance. Total return shows how the value of the fund's shares
changed over time, assuming you held the shares through the entire
period and reinvested all distributions in the fund.
TOTAL RETURN FOR PERIODS ENDED 3/31/96
Class A Class B Class M
(inception date) (10/3/88) (3/1/93) (12/1/94)
NAV POP NAV CDSC NAV POP
- ------------------ ------- ------- ------ ------- ------ --------
6 months 4.75% -0.24% 4.29% -0.71% 4.65% 1.27%
- ------------------ ----- ----- ---- ----- ---- -----
1 year 13.82 8.44 12.92 7.92 13.62 9.88
- ------------------ ----- ----- ---- ----- ---- -----
5 years 68.84 60.81 -- -- -- --
Annual average 11.04 9.97 -- -- -- --
- ------------------ ----- ----- ---- ----- ---- -----
Life of class A 103.38 93.75 -- -- -- --
Annual average 9.94 9.23 -- -- -- --
- ------------------ ----- ----- ---- ----- ---- -----
Life of class B -- -- 22.09 19.20 -- --
Annual average -- -- 6.67 5.85 -- --
- ------------------ ----- ----- ---- ----- ---- -----
Life of class M -- -- -- -- 18.15 14.32
Annual average -- -- -- -- 13.36 10.59
- ------------------ ----- ----- ---- ----- ---- -----
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED
3/31/96
Salomon Bros.
Lehman Bros. Non-U.S. First Boston Consumer
Aggregate World Govt. High Yield Price
Bond Index Bond Index Index Index
- -------------- -------------- --------------- -------------- --------
6 months 2.41% 0.35% 5.10% 1.63%
- -------------- ------------ ------------- ------------ ------
1 year 10.79 2.70 14.54 2.84
- -------------- ------------ ------------- ------------ ------
5 years 50.29 82.35 99.81 15.33
Annual average 8.49 12.76 14.84 2.89
- -------------- ------------ ------------- ------------ ------
Life of class
A 94.24 111.29 127.56 29.97
Annual average 9.26 10.49 11.59 3.56
- -------------- ------------ ------------- ------------ ------
Life of class
B 19.57 38.71 34.79 8.80
Annual average 5.96 11.19 10.16 2.77
- -------------- ------------ ------------- ------------ ------
Life of class
M 17.18 17.59 21.20 4.01
Annual average 12.62 12.92 15.51 3.00
- -------------- ------------ ------------- ------------ ------
Performance data represent past results, do not reflect future
performance, and will differ for each share class. They do not
take into account any adjustment for taxes payable on reinvested
distributions. Investment returns and net asset value will
fluctuate so that an investor's shares, when sold, may be worth
more or less than their original cost. POP assumes 4.75% maximum
sales charge for class A shares and 3.25% for class M shares. CDSC
for class B shares assumes the applicable sales charge, with the
maximum being 5%.
9
<PAGE>
PRICE AND DISTRIBUTION INFORMATION
6 months ended 3/31/96
Class A Class B Class M
- ------------------------------------------- ------- -------------------
Distributions (number) 6 6 6
- -------------------------- ---------------- ----- ------------------
Income $ 0.464 $ 0.418 $ 0.451
- -------------------------- ---------------- ----- ------------------
Total $ 0.464 $ 0.418 $ 0.451
- -------------------------- ---------------- ----- ------------------
Share value: NAV POP NAV NAV POP
- -------------------------- ----- ----- ----- ----- -------
9/30/95 $11.99 $12.59 $11.95 $11.97 $12.37
3/31/96 12.09 12.69 12.04 12.07 12.48
- -------------------------- ----- ----- ----- ----- -------
Current return
End of period
Current dividend rate(1) 7.34 % 7.00% 6.68 % 7.16 % 6.92%
- -------------------------- ----- ----- ----- ----- -------
Current 30-day SEC
yield(2) 7.04 6.70 6.29 6.77 6.54
- -------------------------- ----- ----- ----- ----- -------
(1) Income portion of most recent distribution, annualized and divided by NAV
or POP at end of period.
(2) Based on investment income, calculated using SEC guidelines.
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.
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.
10
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COMPARATIVE BENCHMARKS
Lehman Brothers Aggregate Bond Index* is composed of securities
from Lehman Brothers Government/Corporate Bond Index,
Mortgage-Backed Securities Index, and the Asset-Backed Securities
Index. Total return comprises price appreciation/ depreciation and
income as a percentage of the original investment. Indexes are
rebalanced monthly by market capitalization.
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. It is not possible to
invest directly in an index.
11
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Portfolio of investments owned
March 31, 1996 (Unaudited)
<TABLE>
<CAPTION>
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (33.8%)*
PRINCIPAL AMOUNT VALUE
<S> <C> <C>
Federal National Mortgage Association
pass-through certificates
$ 121,880,000 7-1/2s, TBA, April 16, 2026 $ 121,575,300
86,546,254 7s, with various dates from August 1, 2024 to
February 1, 2025 84,328,095
38,640,000 7s, April 16, 2026 37,649,657
Government National Mortgage Association
pass-through certificates
109,617,7677 7-1/2s, with various due dates from January 15,
2022 to February 15, 2026 109,377,764
133,050,000 7-1/2s, TBA, April 16, 2026 132,767,582
217,212,972 7s, with various due dates from October 15,
2022 to March 15, 2026 211,578,703
44,099 7s, Midget, November 15, 2007 42,955
131,835,000 7s, TBA, April 16, 2026 128,415,200
33,082,366 6-1/2s, with various due dates from January 15,
2022 to December 15, 2025 31,334,957
24,650,000 6-1/2s, TBA, April 16, 2026 23,347,987
U.S. Treasury Bonds
52,975,000 10-3/4s, May 15, 2003 66,268,547
63,550,000 7-7/8s, February 1, 2005 70,957,388
24,412,000 6-7/8s, August 15, 2025 24,793,315
8,600,000 6s, February 15, 2026 7,856,874
U.S. Treasury Notes
29,010,000 8s, August 15, 1999 30,755,242
99,125,000 7-1/2s, February 15, 2005 106,373,020
60,880,000 6-1/4s, February 15, 2003 60,699,186
13,535,000 5-5/8s, February 15, 2006 12,837,135
- ------------- ----------------------------------------------- -----------------
Total U.S. Government and Agency Obligations
(cost $1,271,059,869) $1,260,958,907
- ------------- ----------------------------------------------- -----------------
CORPORATE BONDS AND NOTES (29.4%)*
PRINCIPAL AMOUNT VALUE
Advertising (0.3%)
- ----------------------------------------------------------------------------------------
$ 5,000,000 Outdoor Systems, Inc. sr. notes 10-3/4s, 2003 $ 5,050,000
4,268,000 Universal Outdoor, Inc. sub. deb. 11s, 2003 4,332,020
-----------------
9,382,020
Aerospace and Defense (0.5%)
- ----------------------------------------------------------------------------------------
4,400,000 Alliant Techsystems, Inc. sr. sub. notes
11-3/4s, 2003 4,840,000
9,350,000 BE Aerospace sr. notes, 9-3/4s, 2003 9,583,750
1,930,000 K&F Industries Inc. sub. deb. 13-3/4s, 2001 2,007,200
2,800,000 UNC, Inc. sr. notes 9-1/8s, 2003 2,786,000
-----------------
19,216,950
12
<PAGE>
CORPORATE BONDS AND NOTES
PRINCIPAL AMOUNT VALUE
Agriculture (1.1%)
- ----------------------------------------------------------------------------------------
$21,250,000 PSF Finance (L.P.) sr. exch. notes 12-1/4s, 2004
(acquired 3/16/95 cost $21,733,594) (In
Default)+++ + $18,062,500
5,821,000 PMI Holdings Corp. Ser. B, sub. disc. deb.
stepped-coupon zero % (11-1/2s, 9/1/00), 2005++ 3,317,970
10,271,900 PSF Finance (L.P.) sr. notes 12s, 2000 (acquired
3/16/95 cost $11,151,442) (In Default)+++ + 8,731,115
13,436,000 PSF Finance (L.P.) sr. disc. notes stepped-coupon
zero % (12s, 9/15/96), 2003 (acquired 3/16/95,
cost $10,505,273) (In Default)+++ + ++ 10,748,800
-----------------
40,860,385
Automotive Parts (0.6%)
- ----------------------------------------------------------------------------------------
4,150,000 A.P.S., Inc. 144A sr. sub. notes 11-7/8s, 2006 4,222,625
2,450,000 Aftermarket Technology Corp. sr. sub. notes 12s,
2004 2,646,000
7,375,000 Exide Corp. 144A sr. notes 10s, 2005 7,504,063
7,025,000 Key Plastics Corp. sr. notes 14s, 1999 7,288,438
-----------------
21,661,126
Banks (0.2%)
- ----------------------------------------------------------------------------------------
2,500,000 Banco del Sud S.A. sr. notes 10-1/8s, 1997 2,500,000
1,425,000 Chevy Chase Savings Bank Inc. sub. deb. 9-1/4s,
2005 1,425,000
2,600,000 First Federal Financial Corp. notes 11-3/4s, 2004 2,470,000
1,370,000 First Nationwide Holdings 144A sr. sub. notes
9-1/8s, 2003 1,356,300
-----------------
7,751,300
Broadcasting (2.4%)
- ----------------------------------------------------------------------------------------
5,875,000 Affinity Group sr. sub. notes 11-1/2s, 2003 6,021,875
7,350,000 Argyle Television Corp. sr. sub. notes 9-3/4s,
2005 7,056,000
1,150,000 Chancellor Broadcasting Co. sr. sub. notes
9-3/8s, 2004 1,106,875
7,510,000 Commodore Media, Inc. sr. sub. notes
stepped-coupon 7-1/2s (13-1/4s, 5/1/98), 2003++ 7,453,675
3,850,000 Echostar Satellite Broadcasting 144A sr. disc.
notes 13-1/8s, 2004 2,338,875
1,040,000 Heartland Wireless Comm. Inc. sr. notes 13s, 1999 1,144,000
5,000,000 International Cabletel Inc. Ser. A sr. notes
stepped-coupon zero % (12-3/4s, 4/15/00), 2005++ 3,225,000
30,210,000 International Cabletel, Inc. Ser. A sr. notes
stepped-coupon zero % (11-1/2s, 2/1/01), 2006++ 17,219,700
4,150,000 New City Broadcasting Corp. sr. sub. notes
11-3/8s, 2003 4,201,875
8,200,000 Panamsat (L.P.) sr. sub. notes stepped-coupon
zero % (11-3/8s, 8/1/98), 2003++ 6,888,000
7,250,000 Paxson Communications Corp. 144A sr. sub. notes
11-5/8s, 2002 7,721,250
1,900,000 Pegasus Media & Communications Ser. B, notes
12-1/2s, 2005 1,976,000
7,237,000 Petracom Holdings Corp. notes stepped-coupon zero
% (17-1/2s, 8/1/98), 2003++ 5,283,010
8,000,000 SFX Broadcasting, Inc. sr. sub. notes 11-3/8s,
2000 8,640,000
9,466,000 Telemedia Broadcasting Corp. 144A deb. stepped-
coupon 6.4s (16s, 6/15/99), 2004++ 8,550,165
-----------------
88,826,300
13
<PAGE>
CORPORATE BONDS AND NOTES
PRINCIPAL AMOUNT VALUE
Building and Construction (1.3%)
- ----------------------------------------------------------------------------------------
$ 5,750,000 Inter-City Products sr. notes 9-3/4s, 2000 $ 5,088,750
4,350,000 Miles Homes Services sr. notes 12s, 2001 3,153,750
3,065,000 NVR, Inc. sr. notes 11s, 2003 3,095,650
17,075,000 Presley Co. sr. notes 12-1/2s, 2001 15,538,250
7,200,000 Schuller International Corp. sr. notes 10-7/8s,
2004 7,866,000
7,925,000 Scotsman Group, Inc. sr. secd. notes 9-1/2s, 2000 8,123,125
1,000,000 Webb (DEL E.) Corp. sr. notes 10-7/8s, 2000 1,005,000
5,975,000 Webb (DEL E.) Corp. sr. sub. deb. 9s, 2006 5,736,000
-----------------
49,606,525
Building Products (0.1%)
- ----------------------------------------------------------------------------------------
1,000,000 American Standard, Inc. sr. deb. 11-3/8s, 2004 1,090,000
2,890,000 American Standard, Inc. deb. 9-1/4s, 2016 2,955,025
-----------------
4,045,025
Business Services (0.1%)
- ----------------------------------------------------------------------------------------
4,800,000 Corporate Express, Inc. Ser. B, sr. sub. notes
9-1/8s, 2004 4,920,000
Cable Television (2.7%)
- ----------------------------------------------------------------------------------------
3,505,000 Adelphia Communications Corp. sr. notes 12-1/2s,
2002 3,689,013
18,794,627 Adelphia Communications Corp. sr. notes 9-1/2s,
2004++++ 16,727,218
5,900,000 Allbritton Communications Corp. 144A sr. sub.
notes 9-3/4s, 2007 5,560,750
7,990,000 American Telecasting, Inc. Ser. B, sr. disc.
notes, stepped-coupon zero % (14-1/2s,
8/15/00), 2005++ 5,233,450
1,750,000 CF Cable TV, Inc. sr. notes 11-5/8s, 2005
(Canada) 1,881,250
3,050,000 CF Cable TV, Inc. sr. notes 9-1/8s, 2007 (Canada) 3,050,000
7,150,000 Charter Communications Holdings 144A sr. disc.
notes stepped-coupon zero % (14s, 3/15/01),
2007++ 3,682,250
3,450,000 Charter Communications International, Inc. 144A
sr. notes 11-1/4s, 2006 3,450,000
5,000,000 Diamond Cable Communication Co. sr. disc. notes
stepped-coupon zero % (11-3/4s, 12/15/00), 2005
(United Kingdom)++ 2,925,000
7,057,257 Falcon Holdings Group, Inc. sr. sub. notes 11s,
2003++++ 6,774,967
950,000 Heartland Wireless Communication Inc.144A sr.
notes 13s, 2003 1,040,250
7,650,000 Lenfest Communications, Inc. sr. notes 8-3/8s,
2005 7,305,750
700,000 Marcus Cable Co. (L.P.) sr. deb. 11-7/8s, 2005 745,500
3,640,000 Marcus Cable Co. (L.P.) sr. sub. disc. notes
stepped-coupon zero % (13-1/2s, 8/1/99), 2004++ 2,639,000
10,490,000 Marcus Cable Co. sr. disc. notes stepped-coupon
zero % (14-1/4s, 6/15/00) 2005++ 6,713,600
31,800,000 Telewest Communications PLC deb. stepped-coupon
zero % (11s, 10/1/00), 2007 (United Kingdom)++ 19,398,000
13,000,000 Videotron Holdings sr. disc. notes stepped-coupon
zero % (11s, 8/15/05), 2005 (United Kingdom)++ 8,255,000
2,125,000 Wireless One, Inc. sr. notes 13s, 2003 2,263,125
-----------------
101,334,123
14
<PAGE>
CORPORATE BONDS AND NOTES
PRINCIPAL AMOUNT VALUE
Cellular Communications (1.6%)
$ 7,475,000 Cellular, Inc. sr. sub. disc. notes
stepped-coupon zero % (11-3/4s, 9/1/98), 2003++ $ 6,129,500
8,910,000 Cencall Communications Corp. sr. disc. notes
stepped-coupon zero % (10-1/8s, 1/15/99), 2004++ 5,301,450
11,000,000 Comcast Cellular Corp. Ser,. B, sr. participating
notes zero %, 2000 7,920,000
2,350,000 Commnet Cellular Inc. bonds 11-1/4s, 2005 2,491,000
6,500,000 Dial Call Communication, Inc. Ser. B, sr. disc.
notes stepped-coupon zero % (10-1/4s,
12/15/98), 2005++ 3,802,500
21,500,000 Dial Call Communications, Inc. sr. disc. notes
stepped-coupon zero % (12-1/4s, 4/15/99), 2004++ 13,545,000
6,500,000 NEXTEL Communications, Inc. sr. disc. notes
stepped-coupon zero % (9-3/4s, 2/15/99), 2004++ 3,802,500
5,600,000 NEXTEL Communications, Inc. sr. disc. notes
stepped-coupon zero % (11-1/2s, 9/1/98), 2003++ 3,724,000
14,435,000 Pricellular Wire Ser. B, sr. disc. notes
stepped-coupon zero % (14s, 11/15/97), 2001++ 12,991,500
-----------------
59,707,450
Chemicals (0.3%)
- ----------------------------------------------------------------------------------------
750,000 Acetex Corp. sr. notes 9-3/4s, 2003 (Canada) 753,750
2,400,000 Arcadian Partner sr. notes 10-3/4s, 2005 2,610,000
250,000 Carlisle Plastic sr. notes 10-1/4s, 1997 245,625
6,550,000 Harris Chemical Corp. sr. disc. notes
stepped-coupon zero % (10-1/4s, 1/15/96), 2001++ 6,468,125
-----------------
10,077,500
Telecommunications (0.2%)
- ----------------------------------------------------------------------------------------
8,000,000 MFS Communications sr. disc. notes stepped-coupon
zero % (9-3/8s, 1/15/99), 2004++ 6,080,000
Computer Equipment (0.3%)
- ----------------------------------------------------------------------------------------
9,450,000 Computervision Corp. sr. sub. notes 11-3/8s, 1999 9,922,500
Conglomerates (0.2%)
- ----------------------------------------------------------------------------------------
1,500,000 MacAndrews & Forbes Group, Inc. deb. 12-1/4s,
1996 1,485,000
2,300,000 MacAndrews & Forbes Holdings, Inc. sub. deb.
notes 13s, 1999 2,302,875
6,900,000 Talley Industries, Inc. sr. disc. deb.
stepped-coupon
zero % (12-1/4s, 10/15/98), 2005++ 5,382,000
-----------------
9,169,875
Consumer Services (0.1%)
- ----------------------------------------------------------------------------------------
4,747,000 Coinmach Corp. 144A sr. notes 11-3/4s, 2005 4,782,603
Containers (0.5%)
- ----------------------------------------------------------------------------------------
10,000,000 Ivex Holdings Corp. sr. disc. deb. stepped-coupon
zero % (13-1/4s, 3/15/00), 2005++ 6,100,000
9,000,000 Ivex Packaging Corp. sr. sub. notes 12-1/2s, 2002 9,540,000
1,525,000 United States Can Co. sr. sub. notes 13-1/2s,
2002 1,616,500
-----------------
17,256,500
15
<PAGE>
CORPORATE BONDS AND NOTES
PRINCIPAL AMOUNT VALUE
Electric Utilities (1.8%)
- ----------------------------------------------------------------------------------------
$ 6,800,000 Cleveland Electric Illuminating Co. 1st Ser. B,
mtge. 9-1/2s, 2005 $ 6,849,640
3,000,000 El Paso Electric Co. Ser. E., 1st. mtge. 9.4s,
2011 3,037,500
2,800,000 El Paso Electric Co. Ser. D, 1st. mtge. 8.9s,
2006 2,835,000
18,300,000 First PV Funding deb. 10.15s, 2016 19,123,500
1,585,000 Midland Funding Corp. II Ser. B, deb. 13-1/4s,
2006 1,775,200
24,320,000 Midland Funding Corp. II. Ser. A, deb. 11-3/4s,
2005 26,022,400
3,490,000 Niagara Mohawk Power Corp. med. term notes 9.99s,
2004 3,228,250
2,925,000 Niagara Mohawk Power Corp. 1st. mtge. 8-3/4s,
2022 2,683,688
-----------------
65,555,178
Electronics (0.4%)
- ----------------------------------------------------------------------------------------
5,050,000 Amphenol Corp. sr. sub. notes 12-3/4s, 2002 5,618,125
17,925,000 International Semi-Tech. Corp. sr. disc. notes
stepped-coupon zero % (11-1/2s, 8/15/00), 2003
(Canada)++ 10,844,625
-----------------
16,462,750
Entertainment (0.2%)
- ----------------------------------------------------------------------------------------
5,500,000 Alliance Entertainment Corp. Ser. B, sr. sub.
notes 11-1/4s, 2005 5,500,000
1,250,000 Casino Magic Finance Corp. 1st. mtge. 11-1/2s,
2001 1,187,500
1,250,000 Premier Parks, Inc. Ser. A, sr. notes 12s, 2003 1,325,000
750,000 Six Flags Corp. sr. sub. notes stepped-coupon
zero % (12-1/4s, 6/15/98), 2005++ 626,250
-----------------
8,638,750
Food (0.4%)
- ----------------------------------------------------------------------------------------
1,647,000 Del Monte Corp. sub. deb. notes 12-1/4s, 2002++++ 1,515,240
1,325,000 Doane Products Co. sr. notes 10-5/8s, 2006 1,351,500
8,480,000 Fresh Del Monte Produce Corp. NV 144A Ser. B,
sr. notes 10s, 2003 (Netherlands) 7,886,400
2,750,000 Mafco, Inc. sr. sub. notes 11-7/8s, 2002 2,866,875
-----------------
13,620,015
Food Chains (0.8%)
- ----------------------------------------------------------------------------------------
3,250,000 Safeway, Inc. 8.57s, 2003 3,384,063
2,600,000 Southland Corp. 1st priority sr. sub. deb. 5s,
2003 2,093,000
10,750,000 Southland Corp. Ser. A, deb. 4-1/2s, 2004 8,277,500
2,402,000 Southland Corp. deb. 4s, 2004 1,687,885
12,500,000 Stater Brothers sr. notes 11s, 2001 12,875,000
-----------------
28,317,448
Health Care (1.0%)
- ----------------------------------------------------------------------------------------
11,245,000 Columbia/HCA Healthcare med. term notes 7.58s,
2025 10,975,795
4,700,000 Healthsouth Rehabilitaton sr. sub. notes 9-1/2s,
2001 4,935,000
3,800,000 Integrated Health Services sr. sub. notes 9.625s,
2002 3,828,500
3,750,000 Ivac Corp. sr. notes 9-1/4s, 2002 3,900,000
5,000,000 Merit Behavioral Care 144A sr. sub. notes
11-1/2s, 2005 5,387,500
16
<PAGE>
CORPORATE BONDS AND NOTES
PRINCIPAL AMOUNT VALUE
Health Care continued
- ----------------------------------------------------------------------------------------
$ 4,250,000 Paracelsus Healthcare Corp. sr. sub. notes
9-7/8s, 2003 $ 4,292,500
3,637,000 Total Renal Care Holdings, Inc. sr. disc. notes
stepped-coupon zero % (12s, 8/15/97), 2004++ 3,600,630
-----------------
36,919,925
Home Furnishings (--%)
- ----------------------------------------------------------------------------------------
1,374,257 Simmons Mattress Corp. 144A deb. 8s, 2003++++ 1,504,812
Hospital Management (0.1%)
- ----------------------------------------------------------------------------------------
2,000,000 Dynacare, Inc. sr. notes 10-3/4s, 2006 (Canada) 2,017,500
Hospital Management and Medical Services (0.1%)
- ----------------------------------------------------------------------------------------
4,250,000 Tenet Healthcare Corp. sr. sub. notes 10-1/8s,
2005 4,547,500
Insurance (0.9%)
- ----------------------------------------------------------------------------------------
2,600,000 American Annuity Group, Inc. sr. sub. notes
11-1/8s, 2003 2,795,000
4,750,000 American Annuity Group, Inc. sr. notes 9-1/2s,
2001 4,940,000
1,750,000 CCP Insurance, Inc. sr. notes 10-1/2s, 2004 1,992,813
4,950,000 Reliance Group Holdings, Inc. sr. sub. deb.
9-3/4s, 2003 5,036,625
8,275,000 Reliance Group Holdings, Inc. sr. notes 9s, 2000 8,357,750
10,000,000 Terra Nova Insurance Holdings sr. notes 10-3/4s,
2005 (United Kingdom) 11,212,500
-----------------
34,334,688
Lodging (0.5%)
- ----------------------------------------------------------------------------------------
7,550,000 HMH Properties, Inc. Ser. B, sr. notes 9-1/2s,
2005 7,361,250
5,000,000 Host Marriott Corp. Ser. B, sr. notes 9-1/2s,
2005 4,850,000
4,550,000 John Q. Hammons Hotels, Inc. 1st. mtge. 9-3/4s,
2005 4,470,375
2,000,000 Prime Hospitality Corp. 1st mtge., 9-1/4s, 2006 1,932,500
-----------------
18,614,125
Medical Management Services (0.1%)
- ----------------------------------------------------------------------------------------
3,200,000 Integrated Health Services sr. sub. notes
10-3/4s, 2004 3,360,000
Medical Supplies and Devices (0.1%)
- ----------------------------------------------------------------------------------------
4,915,000 Wright Medical Technology, Inc. Ser. B, sr. secd.
notes 10-3/4s, 2000 5,062,450
Metals and Mining (--%)
- ----------------------------------------------------------------------------------------
800,000 Kaiser Aluminum & Chemical Corp. sr. sub. notes
12-3/4s, 2003 848,000
Motion Picture Distribution (0.3%)
- ----------------------------------------------------------------------------------------
7,620,000 Act III Theatres, Inc. sr. sub. notes 11-7/8s,
2003 8,382,000
2,065,000 Cinemark Mexico notes 12s, 2003 (Mexico) 1,920,450
1,500,000 Cinemark USA, Inc. sr. sub. notes 12s, 2002 1,642,500
-----------------
11,944,950
17
<PAGE>
CORPORATE BONDS AND NOTES
PRINCIPAL AMOUNT VALUE
Oil and Gas (1.6%)
- ----------------------------------------------------------------------------------------
$ 6,100,000 Chesapeake Energy Corp. sr. notes 12s, 2001 $ 6,618,500
3,750,000 Chesapeake Energy Corp. sr. notes 10-1/2s, 2002 3,937,500
5,290,000 Flores & Rucks, Inc. sr. notes 13-1/2s, 2004 6,083,500
2,950,000 Gulf Canada Resources Ltd. sr. sub. notes 9-5/8s,
2005 (Canada) 3,023,750
1,100,000 Maxus Energy Corp. deb. 11-1/4s, 2013 1,138,500
2,400,000 Maxus Energy Corp. med. term notes 10.2s, 1996 2,399,064
5,030,000 Maxus Energy Corp. notes 9-7/8s, 2002 5,030,000
950,000 Maxus Energy Corp. notes 9-1/2s, 2003 940,500
4,490,000 Maxus Energy Corp. notes 9-3/8s, 2003 4,422,650
1,500,000 Maxus Energy Corp. deb. 8-1/2s, 2008 1,387,500
1,200,000 OPI International sr. notes 12-7/8s, 1998 1,332,000
18,250,000 Trans Texas Gas Corp. sr. secd. notes 11-1/2s,
2002 17,976,250
5,300,000 Triton Energy sr. sub. disc. notes stepped-coupon
zero % (9-3/4s, 12/15/96), 2000++ 5,088,000
-----------------
59,377,714
Paging (0.6%)
- ----------------------------------------------------------------------------------------
4,000,000 A+ Network Inc. sr. sub. notes 11-7/8s, 2005 4,080,000
2,720,000 Arch Communications Group sr. disc. notes
stepped-coupon zero % (10-7/8s, 3/15/01), 2008++ 1,557,200
9,650,000 Mobile Telecommunications Tech. sr. notes
13-1/2s, 2002 10,277,250
1,750,000 Mobilemedia Corp. sr. sub. notes 9-3/8s, 2007 1,715,000
4,450,000 Pagemart Nationwide, Inc. sr. disc. notes
stepped-coupon zero % (15s, 2/1/00), 2005++ 3,003,750
-----------------
20,633,200
Paper (--%)
- ----------------------------------------------------------------------------------------
1,000,000 Stone Consolidated Corp. sr. notes 10-1/4s, 2000 1,050,000
Paper and Forest Products (0.3%)
- ----------------------------------------------------------------------------------------
4,000,000 APP International Finance Co. notes 11-3/4s, 2005
(Netherlands) 3,950,000
6,200,000 Gaylord Container Corp. sr. sub. disc. deb.
stepped-coupon zero % (12-3/4s, 5/15/96), 2005++ 6,262,000
-----------------
10,212,000
Pharmaceuticals (0.1%)
- ----------------------------------------------------------------------------------------
1,925,000 Phar-Mor, Inc. sr. notes 11.72s, 2002 1,872,063
Publishing (0.4%)
- ----------------------------------------------------------------------------------------
9,550,000 Marvel Holdings, Inc. Ser. B, sr. notes zero %,
1998 7,210,250
8,590,000 Marvel Parent Holdings, Inc. sr. secd. disc.
notes zero %, 1998 6,399,550
-----------------
13,609,800
Real Estate Investment Trust (0.2%)
- ----------------------------------------------------------------------------------------
5,900,000 Tanger Properties Ltd. Partnership gtd. notes
8-3/4s, 2001 5,796,750
18
<PAGE>
CORPORATE BONDS AND NOTES
PRINCIPAL AMOUNT VALUE
Real Estate (0.2%)
- ----------------------------------------------------------------------------------------
$ 7,240,000 Chelsea Piers Ser. B, 1st mtge. stepped-coupon
zero % (12-1/2s, 6/15/96), 2004++ $ 6,905,150
Recreation (3.2%)
- ----------------------------------------------------------------------------------------
6,370,000 Arizona Charlies Corp. Ser. B, 1st mtge. 12s,
2000+ 4,140,500
1,480,000 Capitol Queen Corp. Ser. B, 1st mtge. notes 12s,
2000 (In Default)+ 1,036,000
6,710,000 Casino America, Inc. 1st mtge. 11-1/2s, 2001 6,710,000
5,000,000 Coast Hotels & Casinos, Inc. 144A 1st mtge. 13s,
2002 5,000,000
2,000,000 Elsinore Corp. 1st mtge. 12-1/2s, 2000 (In
Default)+ 1,700,000
2,200,000 Empress River Casino sr. notes 10-3/4s, 2002 2,255,000
6,350,000 Grand Casinos, Inc. 1st mtge. 10-1/8s, 2003 6,731,000
12,750,000 Grate Bay Property Funding Corp. 1st mtge.
10-7/8s, 2004 11,347,500
9,050,000 Hollywood Casino Corp. sr. notes 12-3/4s, 2003 8,280,750
14,825,000 Lady Luck Gaming Corp. Ser. B, 1st mtge. 10-1/2s,
2001 13,490,750
5,100,000 Louisiana Casino Cruises Corp. 1st mtge. 11-1/2s,
1998 4,857,750
6,200,000 Mohegan Tribal Gaming 144A sr. secd. notes
13-1/2s, 2002 7,378,000
1,500,000 PRT Funding Corp. sr. notes 11-5/8s, 2004 1,215,000
1,500,000 Showboat Marina Casino 144A 1st mtge. 13-1/2s,
2003 1,530,000
7,150,000 Stratosphere Corp. 1st mtge. 14-1/4s, 2002 8,705,125
6,250,000 Trump Castle Funding Corp. 1st mtge. 11-3/4s,
2003 6,093,750
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 6,297,500
6,150,000 Trump Plaza Funding, Inc. 1st mtge. notes
10-7/8s, 2001 6,826,500
12,604,159 Trump Taj Mahal Funding, Inc. Ser. A, deb.
11.35s, 1999++++ 13,250,122
-----------------
120,301,247
Refining (0.3%)
- ----------------------------------------------------------------------------------------
9,250,000 Transamerican Refining Corp. 1st. mtge. 16-1/2s,
2002 8,047,500
2,200,000 Transamerican Refining Corp. 1st. mtge.
stepped-coupon zero % (18-1/2s, 8/15/98),
2002++ 1,353,000
-----------------
9,400,500
Retail (1.3%)
- ----------------------------------------------------------------------------------------
3,000,000 Brylane (L.P.) sr. sub. notes 10s, 2003 2,775,000
9,350,000 County Seat Stores Inc. sr. sub. notes 12s, 2002 6,919,000
11,920,000 Finlay Enterprises, Inc. sr. disc. deb.
stepped-coupon zero % (12s, 5/1/98), 2005++ 8,284,400
650,000 Finlay Enterprises, Inc. sr. notes 10-5/8s, 2003 632,125
2,650,000 K Mart Corp. deb. 7.95s, 2023 2,086,875
2,850,000 K Mart Funding Corp. notes 7.36s, 1998 2,718,188
8,785,000 Loehmanns' Holdings, Inc. sr. sub. notes 13-3/4s,
1999 8,170,050
4,650,000 Loehmanns' Holdings, Inc. sr. notes 10-1/2s, 1997 4,557,000
750,000 Mothers Work, Inc. sr. notes 12-5/8s, 2005 778,125
4,400,000 Parisian, Inc. sr. sub. notes 9-7/8s, 2003 3,960,000
5,000,000 Specialty Retailers, Inc. sr. sub. notes 11s,
2003 4,875,000
3,310,000 Waban, Inc. sr. sub. notes 11s, 2004 3,442,400
-----------------
49,198,163
19
<PAGE>
CORPORATE BONDS AND NOTES
PRINCIPAL AMOUNT VALUE
School Buses (--%)
- ----------------------------------------------------------------------------------------
$ 1,500,000 Blue Bird Body Co. Ser. B, sub. deb. 11-3/4s,
2002 $ 1,530,000
Shipping (0.3%)
- ----------------------------------------------------------------------------------------
5,775,000 Eletson Holdings, Inc. 1st pfd. mtge. notes
9-1/4s, 2003(Greece) 5,659,500
5,200,000 Viking Star Shipping sr. secd. notes 9-5/8s, 2003 5,330,000
-----------------
10,989,500
Specialty Consumer Products (0.1%)
- ----------------------------------------------------------------------------------------
1,000,000 Apparel Retailers, Inc. Ser. B, deb.
stepped-coupon zero % (12-3/4s, 8/15/98), 2005++ 700,000
3,200,000 Selmer Co., Inc. sr. sub. notes 11s, 2005 3,384,000
-----------------
4,084,000
Steel (0.3%)
- ----------------------------------------------------------------------------------------
11,500,000 Ispat Mexicana, SA 144A deb. 10-3/8s,
2001(Mexico) 10,350,000
Telecommunication (1.0%)
- ----------------------------------------------------------------------------------------
2,230,000 America Communication Services, Inc. 144A sr.
disc. notes stepped-coupon zero % (12-3/4s,
4/1/01), 2006++ 1,176,325
4,375,000 Brooks Fiber Properties 144A sr. disc. notes
stepped-coupon zero % (10-7/8s, 3/1/01), 2006++ 2,553,906
20,910,000 Intelcom Group, Inc. sr. disc. notes
stepped-coupon zero % (13-1/2s, 9/15/00), 2005++ 13,486,950
8,050,000 Intermedia Communications of Florida Ser. B, sr.
notes 13-1/2s, 2005 9,338,000
20,000,000 MFS Communications sr. disc. notes stepped-coupon
zero % (8-7/8s, 1/1/01), 2006++ 12,400,000
-----------------
38,955,181
Telephone Services (--.1%)
- ----------------------------------------------------------------------------------------
1,990,000 Call-Net Enterprises sr. disc. notes
stepped-coupon zero % (13-1/4s, 12/1/99), 2004++ 1,492,500
1,500,000 Fonorola, Inc. sr. notes 12-1/2s, 2002 (Canada) 1,635,000
-----------------
3,127,500
Textiles (0.2%)
- ----------------------------------------------------------------------------------------
1,000,000 Decorative Home Accents Ser. B, sr. notes 13s,
2002 980,000
4,885,000 Foamex (L.P.) Capital Corp. Ser. B, sr. disc.
notes stepped-coupon zero % (14s, 7/1/99), 2004++ 2,857,725
5,465,000 Reeves Industries Inc. bonds 11s, 2002 5,096,113
-----------------
8,933,838
- ------------- ------------------------------------------------- -----------------
Total Corporate Bonds and Notes
(cost $1,081,037,241) $1,092,674,879
- ------------- ------------------------------------------------- -----------------
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
FOREIGN GOVERNMENT BONDS AND NOTES (25.3%)*
PRINCIPAL AMOUNT VALUE
<S> <C> <C>
AUD 18,360,000 Australia (Government of) bonds 12s, 2001 $ 16,454,408
AUD 30,065,000 Australia (Government of) bonds 9s, 2004 23,741,344
AUD 61,580,000 Australia (Government of) notes 8-3/4s, 2001 48,482,981
CAD 2,755,000 Canada (Government of) deb. 8-3/4s, 2005 2,179,428
CAD 111,940,000 Canada (Government of) deb. 7-1/2s, 2001 84,022,960
CAD 10,000,000 Canada (Government of) deb. 4-1/4s, 2021 7,066,451
DKK 221,660,000 Denmark (Government of) bonds 9s, 2000 43,003,439
DKK 140,390,000 Denmark (Government of) bonds 8s, 2003 25,957,142
DKK 105,260,000 Denmark (Government of) bonds 7s, 2004 18,115,199
FRF 323,975,000 France Treasury bill 7-3/4s, 2000 69,413,111
DEM 58,230,000 Germany (Federal Republic of) bonds 7-3/8s, 2005 41,953,188
DEM 47,060,000 Germany (Federal Republic of) bonds 6-7/8s, 2005 32,822,558
DEM 76,570,000 Germany (Federal Republic of) bonds 5-7/8s, 2000 53,249,188
DEM 191,245,000 Germany (Federal Republic of) bonds 5-3/4s, 2000 132,285,882
ITL 43,815,000,000 Italy (Government of) bonds 10-1/2s, 2005 27,747,841
ITL 48,180,000,000 Italy (Government of) deb. 10-1/2s, 2000 30,990,942
USD 12,128,000 Morocco (Government of) bonds 6.594s, 2009 8,413,800
USD 4,822,000 Panama (Republic of) FRN 6.75s, 2002 4,291,580
USD 30,223,000 Russia (Government of) non performing loans
zero %+ 10,256,931
ESP 2,700,400,000 Spain (Government of) bonds 12-1/4s, 2000 23,916,822
ESP 1,670,600,000 Spain (Government of) bonds 10.15s, 2006 13,759,145
THB 60,000,000 Thailand (IFC of) bonds FRN 11-1/4s, 1996 2,380,061
DEM 127,440,000 Treuhandanstalt (Germany Republic of) 7-1/8s,
2003 91,429,036
GBP 36,175,000 United Kingdom Treasury bonds 9-3/4s, 2002 60,252,709
GBP 24,040,000 United Kingdom Treasury bonds 8s, 2000 37,337,029
GBP 23,980,000 United Kingdom Treasury bonds 7-1/2s, 2006 34,798,073
--------------------- ------------------------------------------------ ------------
Total Foreign Government Bonds and Notes (cost
$948,192,803) $ 944,321,248
--------------------- ------------------------------------------------ ------------
</TABLE>
<TABLE>
<CAPTION>
UNITS (3.1%)*
NUMBER OF UNITS VALUE
<S> <C> <C>
3,500 Australis Media units stepped-coupon zero %
(14s, 5/15/00), 2003 (Australia)++ $ 2,415,000
1,077 Celcaribe S.A. 144A units stepped-coupon zero %
(13-1/2s, 3/15/98), 2004++ 10,393,050
21,575 Cellnet Data Systems Inc. units stepped-coupon zero
% (13s, 6/15/00), 2005++ 14,023,750
12,400 Comunicacion Celular SA 144A units stepped-coupon
zero % (13-1/8s, 11/15/00), 2003(Columbia)++ 7,161,000
4,645,000 Echostar Communications Corp. units sr. disc. notes
stepped-coupon zero % (12-7/8s, 6/1/99), 2004++ 3,379,238
14,200 Fitzgerald Gaming Co. units 13s, 2002 13,135,000
2,782 GST Telecommunications, Inc. 144A units stepped-
coupon zero % (13-7/8s, 12/15/00), 2005
(Canada)++ 16,066,050
3,980 Health-O-Meter Product units 13s, 2002 3,860,600
17,400 ICF Kaiser International, Inc. units 12s, 2003 16,530,000
910 Intercel, Inc. unit stepped-coupon zero % (12s,
2/1/01), 2006++ 5,460,000
458,700 Premium Standard Farms 144A exch. pfd. units
12-1/2s, 2000 229,350
21
<PAGE>
UNITS (continued)
NUMBER OF UNITS VALUE
14,260 Terex Corp. 144A units 13-3/4s, 2002 $ 14,117,400
15,670,000 Winstar Communications, Inc. 144A units stepped-
coupon zero % (14s, 10/15/00), 2005++ 8,931,900
-------------- --------------------------------------------------- ----------
Total Units (cost $107,624,228) $ 115,702,338
-------------- --------------------------------------------------- ----------
BRADY BONDS (2.9%)*
PRINCIPAL AMOUNT VALUE
$ 26,547,000 Argentina (Republic of) bonds 6.563s, 2023 $ 17,023,264
19,772,000 Argentina (Republic of) bonds 5.25s, 2023 10,232,010
17,638,000 Brazil (Government of) notes 6-1/2s, 2024 11,266,273
13,693,000 Brazil (Government of) FRN 6-7/8s, 2012 8,472,544
9,985,410 Brazil (Government of) FRN 6.375s, 2001 8,949,424
5,965,000 Ecuador (Government of) FRN 6.063s, 2025 3,221,100
11,152,000 Mexico (Government of) Ser. B, disc. notes 6.766s,
2019 8,447,640
290,000 Mexico (Government of) Ser. C, disc. notes 6.609s,
2019 219,675
3,000,000 Mexico (Government of) Ser. D, disc. notes 6.547s,
2019 2,272,500
8,643,000 Mexico (Government of) Ser. A, disc. notes 6.398s,
2019 6,547,073
3,731,000 Philippines (Central Bank of) bonds 6.25s, 2017 2,928,835
10,143,000 Poland (Government of) 144A FRN 6.875s, 2024 9,039,949
3,136,000 Poland (Government of) Ser. RSTA, bonds stepped-
coupon 2-3/4s (with various rates from 3-1/4s
to 5s, and dates from 10/96 to 10/14), 2024++ 1,654,240
6,621,000 United Mexican States Ser. A, deb. 6-1/4s, 2019 4,196,059
15,886,000 United Mexican States Ser. B, deb. 6-1/4s, 2019 10,067,753
8,000,000 Venezuela (Government of) FRN 6.563s, 2007 4,820,000
-------------- --------------------------------------------------- ----------
Total Brady Bonds (cost $114,047,484) $ 109,358,339
-------------- --------------------------------------------------- ----------
PREFERRED STOCKS (1.9%)*
NUMBER OF SHARES VALUE
48,822 Cablevision System Corp Ser. G, $11.75 exch. pfd. $ 4,992,024
152,500 California Federal Bank Ser. B, $10.625 exch. pfd. 16,698,750
152,000 First Nationwide Bank $11.50 pfd. 16,872,000
145,175 Foxmeyer Health Corp. Ser. A, $4.20 pfd.++++ 4,718,188
11,950 Grand Union Holdings 144A Ser. C, $12.00 pfd.
(acquired 11/05/93, cost $1,380,225))+++ + 120
5,000 Pantry Pride Inc. Ser. B, $14.875 pfd. 500,000
276,670 SD Warren Co. Ser. B, $3.50 pfd. 9,406,780
153,977 Supermarkets General Holdings Corp. $3.52 exch.
pfd.+ ++++ 4,195,873
79,200 Cablevision Systems Corp. 144A Ser. L, $11.125
pfd. 7,920,000
25,000 El Paso Electric Co. $11.40 pfd.++++ 2,575,000
161,170 Fitzgeralds Gaming $3.75 pfd. 4,029,250
-------------- --------------------------------------------------- ----------
Total Preferred Stocks (cost $70,551,486) $ 71,907,985
-------------- --------------------------------------------------- ----------
ASSET-BACKED SECURITIES (1.1%)
PRINCIPAL AMOUNT VALUE
$12,195,000 Chemical Master Credit Card Trust Ser. 95-2, Class
A, 6.23s, 2003 $ 12,126,342
29,845,000 Sears Credit Account Master Trust Ser. 95-5 Class
A, 6.05s, 2004 28,940,100
-------------- --------------------------------------------------- ----------
Total Asset-Backed Securities (cost $42,310,278) $ 41,066,442
-------------- --------------------------------------------------- ----------
22
<PAGE>
COMMON STOCKS (0.9%)*
NUMBER OF SHARES VALUE
66,289 Ampex Corp. Class A $ 406,020
150,825 Chesapeake Energy Corp.+ 6,975,656
82,812 Computervision Corp.+ 859,175
1,000 Decorative Home Accents 10,000
84,033 Elsinore Corp.+ 57,773
250,000 Exide Corp. 5,843,750
7,795 Federated Department Stores+ 251,389
3,026 Finlay Enterprises, Inc. 43,121
539,505 Grand Union Co. (acquired various dates from
6/14/93 to 3/14/95 cost $24,485,117)+++ + 3,237,030
7,541 IFINT Diversified Holdings 144A+ 377,050
49,679 Lady Luck Gaming Corp.+++ + 99,358
693,557 Loehmanns' Holdings, Inc.+ 1,018,662
500,000 NEXTEL Communications, Inc. Class A+ 9,437,500
1,184 PMI Holdings Corp. 144A+ 236,800
1,942 Premium Holdings L.P. 144A+ 48,552
1,480 Southland Corp.+ 4,903
7,981 Taj Mahal Holding Corp. Class A+ 207,506
33,570 Total Renal Care Holdings, Inc.+ 1,044,866
164,667 Total Renal Care Holdings, Inc. 144A 3,721,474
-------------- --------------------------------------------------- ----------
Total Common Stocks (cost $45,085,022) $33,880,585
-------------- --------------------------------------------------- ----------
CONVERTIBLE PREFERRED STOCKS (0.4%)*
NUMBER OF SHARES VALUE
314,000 Cablevision Systems Corp. Ser. I, $2.125 cv. pfd. $ 8,870,500
40,020 Conseco, Inc. Ser. D, $3.25 cv. pfd. 2,321,160
75,000 Kelly Oil & Gas Corp. $2.625 pfd. 1,218,750
31,300 Granite Broadcasting $1.938 cv. pfd. 1,913,213
-------------- --------------------------------------------------- ----------
Total Convertible Preferred Stocks
(cost $12,714,163) $14,323,623
-------------- --------------------------------------------------- ----------
CONVERTIBLE BONDS AND NOTES (0.3%)*
PRINCIPAL AMOUNT VALUE
$ 9,500,000 Pricellular Wireless 144A cv. sub. notes
stepped-coupon zero % (10-3/4s, 8/15/00), 2004++ $ 8,075,000
7,835,000 Winstar Communications. Inc. cv. sr. disc. notes
14s, 2005 4,701,000
-------------- --------------------------------------------------- ----------
Total Convertible Bonds and Notes
(cost $9,654,409) $12,776,000
-------------- --------------------------------------------------- ----------
COLLATERALIZED MORTGAGE OBLIGATIONS (0.1%)* (cost $5,026,738)
PRINCIPAL AMOUNT VALUE
$ 5,249,000 Citicorp Mortgage Secs. Ser. 1992-14M, 7-1/2s, 2022 $ 5,251,460
-------------- --------------------------------------------------- ----------
</TABLE>
<TABLE>
<CAPTION>
WARRANTS (0.1%)*+
NUMBER OF WARRANTS EXPIRATION DATE VALUE
<S> <C> <C> <C>
185,000 Becker Gaming Corp. 11/15/00 $ 46,250
44,363 Capital Gaming International, Inc. 02/01/99 5,545
9,658 Casino America, Inc. 11/15/96 966
32,400 Casino Magic Finance Corp. 10/14/96 1,620
20,861 Cinemark Mexico USA, Inc. 08/01/03 193,277
2,430 Commodore Media 144A 05/01/00 291,600
23
<PAGE>
WARRANTS continued
NUMBER OF WARRANTS EXPIRATION DATE VALUE
9,350 County Seat Holdings, Inc. 10/15/98 $ 93,500
47,500 Elsinore Corp. 10/08/98 4,750
4,885 Foamex (L.P.) Capital Corp. 144A 07/01/99 24,425
2,352 Grand Union Co. Ser. 1 (acquired various
dates from 06/16/93 to 10/06/94 Cost
$941)+++ 06/16/00 1,058
4,705 Grand Union Co. Ser. 2 (acquired various
dates from 06/16/93 to 10/04/94 Cost
$471)+++ 06/16/00 282
6,240 Heartland Wireless Communications 144A 04/15/00 31,200
65,538 Intelcom Group 10/15/05 589,842
8,050 Intermedia Communications 144A 06/01/00 201,250
8,025 Louisiana Casino Cruises, Inc. 144A 120/1/98 120,375
72,000 Miles Homes, Inc. 04/01/97 28,800
23,013 Nextel Communications Inc. 01/01/99 230
10,736 Nextel Communications Inc. 01/01/98 107
13,800 Pagemart, Inc. 144A 12/31/03 124,200
17,500 Petracom Holdings, Inc. 08/01/05 124,688
37,527 President Riverboat Casinos, Inc. 09/30/99 150,108
6,300 President Riverboat Casinos, Inc. 144A 09/23/96 315
7,500 Southdown, Inc. 144A 10/31/96 64,688
215 Telemedia Broadcasting 04/01/04 160,995
54,910 UCC Investor Holding, Inc. 10/30/99 521,645
10,950 Universal Outdoor, Inc. 144A 07/01/04 438,000
6,375 Wireless One, Inc. 10/14/00 80,325
1,001 Wright Medical Technology, Inc. 144A 06/30/03 165,096
--------------------- ---------------------------------------- ----- --------
Total Warrants (cost $4,077,179) $ 3,465,137
--------------------- ---------------------------------------- ----- --------
</TABLE>
<TABLE>
<CAPTION>
PURCHASED OPTIONS (--%)*
CONTRACT EXPIRATION DATE/
AMOUNT STRIKE PRICE VALUE
<S> <C> <C> <C>
JPY 9,737,000,000 Japanese Government
10 Yr Bonds Apr. 96 JPY 110. $190,744
$ 93,200,000 US Dollar In Exchange
for Swiss Francs Apr. 96 $1.21 335,520
---------------- ----------------------------- --------------- -------
Total Purchased Options Outstanding
(cost $1,307,723) $526,264
---------------- ---------------------------------------------------- -------
</TABLE>
<TABLE>
<CAPTION>
SHORT-TERM INVESTMENTS (11.3%)*
PRINCIPAL AMOUNT VALUE
<S> <C> <C>
$25,000,000 American Telephone & Telegraph Capital Corp.
effective yield of 5.20%, April 1, 1996 $ 25,000,000
IDR 2,000,000,000 Bank Negara Certificate of Deposit zero %,
July 18, 1996 809,672
$20,000,000 Bank of America Corp. effective yield of 5.3%,
April 17, 1996 19,952,889
25,000,000 Federal Home Loan Bank effective yield of
5.00%, May 7, 1996 24,739,583
15,000,000 Federal National Mortgage Assn. effective
yield 5.14%, May 3, 1996 14,798,683
40,000,000 General Motors Acceptance Corp. effective
yield of 5.27%, April 8, 1996 39,950,011
30,000,000 Household Finance Corp. effective yield of
5.32%, April 12,1996 29,951,233
24
<PAGE>
SHORT-TERM INVESTMENTS (CONTINUED)
PRINCIPAL AMOUNT VALUE
$25,000,000 Metropolitan Life Funding, effective yield
5.16%, April 8, 1996 $ 24,974,917
40,000,000 Morgan (J.P.) & Co., Inc. effective yield of
5.27%, April 11, 1996 39,941,445
10,000,000 National Rural Utilities effective yield of
5.16%, May 3, 1996 9,954,133
IDR 30,000,000 Nationsbank Corp. effective yield of 5.29%,
April 22, 1996 29,598,841
U.S. Dollar Certificate of Deposit (Issued by
J.P. Morgan Securities, Inc. The principal
amount 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)
$1,434,259 zero %, December 19,1996 1,213,240
3,491,088 zero %, May 9, 1996 3,258,581
4,867,723 zero %, April 18, 1996 4,563,977
153,463,000 Interest in $844,579,000 joint repurchase
agreement dated March 29, 1996, Morgan
(J.P.) & Co., due April 1, 1996 with
respect to various U.S. Treasury
obligations-maturity value of $153,532,058
for an effective yield of 5.4% 153,532,058
---------------- ---------------------------------------------- -------------
Total Short-Term Investments
(cost $422,718,284) $ 422,239,263
---------------- ---------------------------------------------- -------------
Total Investments (cost $4,135,406,907)*** $4,128,452,470
---------------- ---------------------------------------------- -------------
</TABLE>
* Percentages indicated are based on net assets of $3,734,803,696.
*** The aggregate identified cost for on a tax cost basis is $4,136,141,143,
resulting in gross unrealized appreciation and depreciation of
$80,760,023 and $88,448,696, respectively, or net unrealized
depreciation of $7,688,673.
+ Non-income-producing security.
+++ Restricted, excluding 144A securities, as to public resale. Total market
value of restricted securities owned at March 31,1996 was $37,542,415 or
1% of net assets.
++++ Income may be received in cash or additional securities at the
discretion of the issuer.
++ The interest rate and date shown represents the new interest rate to be
paid and the date the fund will begin receiving interest at this rate.
R Real Estate Investment Trust.
25
<PAGE>
Forward Currency Contracts to Buy at March 31, 1996
(aggregate face value $353,786,938)
<TABLE>
<CAPTION>
Unrealized
Aggregate Delivery Appreciation/
Market Value Face Value Date (Depreciation)
-------------------- ------------------ --------------- ------ -------------
<S> <C> <C> <C> <C>
Deutschemarks $100,675,680 $ 101,020,524 6/12/96 $ (344,844)
French Francs 46,950,991 47,501,988 6/12/96 (550,997)
Italian Lira 21,315,159 21,423,334 6/12/96 (108,175)
Japanese Yen 149,370,119 152,583,405 6/12/96 (3,213,286)
Spanish Peseta 3,722,995 3,768,433 6/12/96 (45,438)
Swedish Krona 27,721,507 27,489,254 6/12/96 232,253
-------------------- ----------------- ------------- ---- -----------
$(4,030,487)
-------------------- ----------------- ------------- ---- -----------
</TABLE>
Forward Currency Contracts to Sell at March 31,1996
(aggregate face value $642,372,094)
<TABLE>
<CAPTION>
Unrealized
Aggregate Delivery Appreciation/
Market Value Face Value Date (Depreciation)
-------------------- ------------------ --------------- ------ -------------
<S> <C> <C> <C> <C>
Australian Dollars $ 70,522,412 $ 69,486,732 6/12/96 $(1,035,680)
British Pounds 44,267,447 44,642,408 6/12/96 374,961
Canadian Dollars 38,694,179 38,365,261 6/12/96 (328,918)
Danish Krona 9,095,057 9,151,949 6/12/96 56,892
Deutschemarks 399,567,194 399,745,989 4/17/96 178,795
Italian Lira 14,301,645 14,408,504 6/12/96 106,859
Japanese Yen 65,182,997 66,571,251 6/12/96 1,388,254
-------------------- ----------------- ------------- ---- -----------
$ 741,163
-------------------- ----------------- ------------- ---- -----------
</TABLE>
Forward Cross Currency Contracts Outstanding at March 31, 1996
(aggregate face value $93,613,656)
<TABLE>
<CAPTION>
Unrealized
Market Currency Market Delivery Appreciation/
Currency Purchased Value Sold Value Date (Depreciation)
-------------------- ----------- ----------------- ---------- ------ -------------
<S> <C> <C> <C> <C> <C>
Deutschemarks $30,961,753 Swiss Francs $31,013,950 6/12/96 $(52,197)
Danish Krona 23,110,883 Deutschemarks 23,054,151 6/12/96 56,732
Spanish Peseta 38,807,378 Deutschemarks 38,726,486 6/12/96 80,892
-------------------- --------- --------------- -------- ---- -----------
$ 85,427
-------------------- --------- --------------- -------- ---- -----------
</TABLE>
TBA Sale Commitments Outstanding at March 31,1996
(proceeds receivable $79,569,656)
Principal Delivery Coupon Market
Agency Amount Month Rate Value
- ------- ---------- ---------- ---- -----------
GNMA $81,925,000 Apr. 99 8s $79,799,866
- ------- -------- -------- -- ---------
ADR, ADS or GDR after the name of a foreign holding stands for American
Depository Receipts, American Depository Shares or Global Depository
Receipts, respectively, representing ownership of foreign securities on
deposit with a domestic custodian bank.
TBA after the name of a security represents to be announced securities (See
Note 1 to Financial Statements).
144A after the name of a security represents those exempt from registration
under Rule 144A of the Securities Act of 1933. These securities may be resold
in transactions exempt from registration, normally to qualified institutional
buyers.
The accompanying notes are an integral part of these financial statements.
26
<PAGE>
Statement of assets and liabilities
March 31, 1996 (Unaudited)
<TABLE>
<CAPTION>
Assets
----------------------------------------------------------------------------------------------
<S> <C>
Investments in securities, at value (identified cost $4,135,406,907) (Note 1) $4,128,452,470
- ------------------------------------------------------------------------------ -----------
Cash 792,426
- ------------------------------------------------------------------------------ -----------
Dividends and interest receivable 63,762,440
- ------------------------------------------------------------------------------ -----------
Receivable for shares of the fund sold 13,164,716
- ------------------------------------------------------------------------------ -----------
Receivable for securities sold 85,468,242
- ------------------------------------------------------------------------------ -----------
Receivable for open forward currency contracts 2,475,638
- ------------------------------------------------------------------------------ -----------
Receivable for closed forward currency contracts 2,820,153
- ------------------------------------------------------------------------------ -----------
Total assets 4,296,936,085
- ------------------------------------------------------------------------------ -----------
Liabilities
- ------------------------------------------------------------------------------ -----------
Payable for securities purchased 458,229,459
- ------------------------------------------------------------------------------ -----------
Payable for shares of the fund repurchased 4,445,784
- ------------------------------------------------------------------------------ -----------
Payable for compensation of Manager (Note 2) 5,041,424
- ------------------------------------------------------------------------------ -----------
Payable for investor servicing and custodian fees (Note 2) 1,108,730
- ------------------------------------------------------------------------------ -----------
Payable for compensation of Trustees (Note 2) 6,251
- ------------------------------------------------------------------------------ -----------
Payable for administrative services (Note 2) 11,157
- ------------------------------------------------------------------------------ -----------
Payable for distribution fees (Note 2) 2,773,678
- ------------------------------------------------------------------------------ -----------
Payable for open forward currency contracts 5,679,535
- ------------------------------------------------------------------------------ -----------
Payable for closed forward currency contracts 4,734,100
- ------------------------------------------------------------------------------ -----------
TBA sale commitments, at value (proceeds receivable $79,569,656) 79,799,866
- ------------------------------------------------------------------------------ -----------
Other accrued expenses 302,405
- ------------------------------------------------------------------------------ -----------
Total liabilities 562,132,389
- ------------------------------------------------------------------------------ -----------
Net assets $3,734,803,696
- ------------------------------------------------------------------------------ -----------
Represented by
- ------------------------------------------------------------------------------ -----------
Paid-in capital (Notes 1 and 4) $3,807,537,377
- ------------------------------------------------------------------------------ -----------
Distributions in excess net investment income (Note 1) (11,757,995)
- ------------------------------------------------------------------------------ -----------
Accumulated net realized loss on investments and foreign currency transactions
(Note 1) (50,337,294)
- ------------------------------------------------------------------------------ -----------
Net unrealized depreciation of Investments and assets and liabilities in
foreign currencies (10,638,392)
- ------------------------------------------------------------------------------ -----------
Total--Representing net assets applicable to capital shares outstanding $3,734,803,696
- ------------------------------------------------------------------------------ -----------
Computation of net asset value and offering price
- ------------------------------------------------------------------------------ -----------
Net asset value and redemption price per class A share
($1,706,921,648 divided by 141,202,873 shares) $ 12.09
- ------------------------------------------------------------------------------ -----------
Offering price per class A share (100/95.25 of $12.09)* $ 12.69
- ------------------------------------------------------------------------------ -----------
Net asset value and offering price per class B share
($1,996,062,220 divided by 165,737,386 shares)+ $ 12.04
- ------------------------------------------------------------------------------ -----------
Net asset value and redemption price per class M share
($31,819,828 divided by 2,636,578 shares) $ 12.07
- ------------------------------------------------------------------------------ -----------
Offering price per class M share (100/96.75 of $12.07)* $ 12.48
- ------------------------------------------------------------------------------ -----------
</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.
27
<PAGE>
Statement of operations
Six months ended March 31, 1996 (Unaudited)
Investment income:
- ---------------------------------------------------- -----------
Interest $144,592,404
- ---------------------------------------------------- -----------
Dividends (net of foreign tax of $903,679) 1,724,647
- ---------------------------------------------------- -----------
Total investment income 146,317,051
- ---------------------------------------------------- -----------
Expenses:
- ---------------------------------------------------- -----------
Compensation of Manager (Note 2) 9,884,676
- ---------------------------------------------------- -----------
Investor servicing and custodian fees (Note 2) 2,934,987
- ---------------------------------------------------- -----------
Compensation of Trustees (Note 2) 38,550
- ---------------------------------------------------- -----------
Administrative services (Note 2) 21,594
- ---------------------------------------------------- -----------
Distribution fees--Class A (Note 2) 2,084,429
- ---------------------------------------------------- -----------
Distribution fees--Class B (Note 2) 9,588,813
- ---------------------------------------------------- -----------
Distribution fees--Class M (Note 2) 56,105
- ---------------------------------------------------- -----------
Reports to shareholders 66,907
- ---------------------------------------------------- -----------
Registration fees 77,852
- ---------------------------------------------------- -----------
Auditing 67,847
- ---------------------------------------------------- -----------
Legal 100,871
- ---------------------------------------------------- -----------
Postage 108,612
- ---------------------------------------------------- -----------
Other 63,259
- ---------------------------------------------------- -----------
Total expenses 25,094,502
- ---------------------------------------------------- -----------
Expense reduction (Note 2) (581,362)
- ---------------------------------------------------- -----------
Net expenses 24,513,140
- ---------------------------------------------------- -----------
Net investment income 121,803,911
- ---------------------------------------------------- -----------
Net realized gain on investments (Notes 1 and 3) 66,851,533
- ---------------------------------------------------- -----------
Net realized gain on written options
(Notes 1 and 3) 345,118
- ---------------------------------------------------- -----------
Net realized gain on forward currency contracts and
foreign currency translation (Note 1) 2,267,698
- ---------------------------------------------------- -----------
Net unrealized appreciation on forward currency
contracts and foreign currency translation during
the period 902,596
- ---------------------------------------------------- -----------
Net unrealized depreciation of investments and TBA
sale commitments during the period (37,477,024)
- ---------------------------------------------------- -----------
Net gain on investments 32,889,921
- ---------------------------------------------------- -----------
Net increase in net assets resulting from operations $154,693,832
- ---------------------------------------------------- -----------
The accompanying notes are an integral part of these financial statements.
28
<PAGE>
Statement of changes in net assets
<TABLE>
<CAPTION>
Six months
ended Year ended
March 31 September 30
1996* 1995
- ---------------------------------------------------- ------------ --------------
<S> <C> <C>
Increase in net assets
- ---------------------------------------------------- -------------- --------------
Operations:
- ---------------------------------------------------- -------------- --------------
Net investment income $ 121,803,911 $ 247,857,277
- ---------------------------------------------------- -------------- --------------
Net realized gain (loss) on investment and foreign
currency transactions 69,464,349 (91,603,557)
- ---------------------------------------------------- -------------- --------------
Net unrealized appreciation (depreciation) of
investment transactions and assets and liabilities
in foreign currencies (36,574,428) 186,921,390
- ---------------------------------------------------- -------------- --------------
Net increase in net assets resulting from operations 154,693,832 343,175,110
- ---------------------------------------------------- -------------- --------------
Distributions to shareholders:
- ---------------------------------------------------- -------------- --------------
From net investment income
- ---------------------------------------------------- -------------- --------------
Class A (63,149,973) (103,443,301)
- ---------------------------------------------------- -------------- --------------
Class B (65,588,812) (103,501,273)
- ---------------------------------------------------- -------------- --------------
Class M (809,807) (306,880)
- ---------------------------------------------------- -------------- --------------
From return of capital (Note 1)
- ---------------------------------------------------- -------------- --------------
Class A -- (20,901,496)
- ---------------------------------------------------- -------------- --------------
Class B -- (20,913,210)
- ---------------------------------------------------- -------------- --------------
Class M -- (62,008)
- ---------------------------------------------------- -------------- --------------
Increase from capital share transactions (Note 4) 302,416,903 129,258,557
- ---------------------------------------------------- -------------- --------------
Total increase in net assets 327,562,143 223,305,499
- ---------------------------------------------------- -------------- --------------
Net assets
- ---------------------------------------------------- -------------- --------------
Beginning of period 3,407,241,553 3,183,936,054
- ---------------------------------------------------- -------------- --------------
End of period (including distributions in excess of
net investment income of $11,757,995 and $4,013,314,
respectively) $3,734,803,696 $3,407,241,553
- ---------------------------------------------------- -------------- --------------
</TABLE>
*Unaudited
The accompanying notes are an integral part of these financial statements.
29
<PAGE>
Financial highlights
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
For the period
December 1,1994
Six months (commencement Six months
ended of operations) to ended Year ended
March 31 September 30 March 31 September 30
---------- ----------------- --------- ------------------------
1996* 1995 1996* 1995 1994
---------- ----------------- --------- --------- -----------
Class M Class B
------------------------------ ---------------------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $11.97 $11.34 $11.95 $11.61 $12.79
- --------------------------------------------------------------------------------------------------------------
Investment operations
- --------------------------------------------------------------------------------------------------------------
Net investment income .42 .78 .39 .88 .72
- --------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) on investments .13 .63 .12 .33 (.91)
- --------------------------------------------------------------------------------------------------------------
Total from investment operations .55 1.41 .51 1.21 (.19)
- --------------------------------------------------------------------------------------------------------------
Distributions to shareholders
- --------------------------------------------------------------------------------------------------------------
From net investment income (.45) (.65) (.42) (.72) (.65)
- --------------------------------------------------------------------------------------------------------------
In excess of net investment income -- -- -- -- (.10)
- --------------------------------------------------------------------------------------------------------------
From net realized gain on
investments -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------
In excess of net realized gain on
investments -- -- -- -- (.08)
- --------------------------------------------------------------------------------------------------------------
Paid-in capital -- (.13) -- (.15) (.16)
- --------------------------------------------------------------------------------------------------------------
Total distributions (.45) (.78) (.42) (.87) (.99)
- --------------------------------------------------------------------------------------------------------------
Net asset value, end of period $12.07 $11.97 $12.04 $11.95 $11.61
- --------------------------------------------------------------------------------------------------------------
Total investment return at net
asset value (%) (c) 4.65(d) 12.90(d) 4.29(d) 11.01 (1.62)
- --------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $31,820 $14,751 $1,996,062 $1,795,456 $1,644,860
- --------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net
assets (%) (e) .62(d) 1.07(d) .87(d) 1.76 1.76
- --------------------------------------------------------------------------------------------------------------
Ratio of net investment income to
average net assets (%) 3.44(d) 6.30(d) 3.21(d) 7.46 8.05
- --------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 185.15(d) 235.88 185.15(d) 235.88 201.53
- --------------------------------------------------------------------------------------------------------------
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
For the period
March 1, 1993
(commencement Six months
of operations) to ended Year ended
September 30 March 31 September 30
---------------- ----------- --------------------------------------------------------------------------
1993 1996* 1995 1994 1993 1992 1991
---------------- ----------- ----------- ----------- ----------- ------------- -------------
Class B Class A
---------------- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$12.51 $11.99 $11.64 $12.82 $12.66 $11.85 $10.91
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
.49 .44 .95 .78 .96 1.04 1.05(a)
- -------------------------------------------------------------------------------------------------------------
.39 .12 .36 (.88) .56 .97 1.15
- -------------------------------------------------------------------------------------------------------------
.88 .56 1.31 (.10) 1.52 2.01 2.20
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
(.46) (.46) (.80) (.71) (.94) (1.01) (1.05)
- -------------------------------------------------------------------------------------------------------------
-- -- -- (.12) -- -- --
- -------------------------------------------------------------------------------------------------------------
(.14) -- -- -- (.42) (.19) (.21)
- -------------------------------------------------------------------------------------------------------------
-- -- -- (.08) -- -- --
- -------------------------------------------------------------------------------------------------------------
-- -- (.16) (.17) -- -- --
- -------------------------------------------------------------------------------------------------------------
(.60) (.46) (.96) (1.08) (1.36) (1.20) (1.26)
- -------------------------------------------------------------------------------------------------------------
$12.79 $12.09 $11.99 $11.64 $12.82 $12.66 $11.85
- -------------------------------------------------------------------------------------------------------------
7.21(d) 4.75(d) 11.89 (.93) 12.85 17.88 21.43
- -------------------------------------------------------------------------------------------------------------
$504,417 $1,706,922 $1,597,034 $1,539,076 $874,937 $365,253 $168,106
- -------------------------------------------------------------------------------------------------------------
1.91(d) .50(d) 1.01 1.01 1.21 1.36 1.47(a)
- -------------------------------------------------------------------------------------------------------------
5.80(d) 3.58(d) 8.22 7.96 6.80 8.27 9.18(a)
- -------------------------------------------------------------------------------------------------------------
243.73 185.15(d) 235.88 201.53 243.73 221.09(b) 481.06
- -------------------------------------------------------------------------------------------------------------
</TABLE>
* Unaudited
(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 period ended
September 30, 1995 and thereafter, includes amounts paid through
expense offset and brokerage service arrangements. Prior period ratios
exclude these amounts. (Note 2.)
31
<PAGE>
Notes to financial statements
March 31, 1996 (Unaudited)
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. Class A shares are sold
with a maximum front-end sales charge of 4.75%. Class B shares, which convert
to class A shares after approximately eight years, 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
preparation of financial statements is in conformity with generally accepted
accounting principles and requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities.
Actual results could differ from those estimates.
A) Security valuation Investments for which market quotations are readily
available are stated at market value, which is determined using the last
reported 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 bid
and asked prices. Market quotations are not considered to be readily
available for long term corporate bonds and notes; such investments are
stated at fair market value on the basis of valuations furnished by a pricing
service, approved by the Trustees. Short-term investments having remaining
maturities of 60 days or less are stated at amortized cost, which
approximates market value, and other investments are stated at fair market
value following procedures approved by the Trustees.
B) Joint trading account Pursuant to an exemptive order issued by the
Securities and Exchange Commission, the fund may transfer uninvested cash
balances into a joint trading account along with the cash of other registered
investment companies managed by Putnam Investment Management, Inc.
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<PAGE>
("Putnam Management"), the fund's Manager, a wholly-owned subsidiary of
Putnam Investments, Inc. and certain other accounts. These balances may be
invested in one or more repurchase agreements and/or short-term money market
instruments.
C) Repurchase agreements The fund, or any joint trading account, through its
custodian, receives delivery of the underlying securities, the market value
of which at the time of purchase is required to be in an amount at least
equal to 102% of the resale price, including accrued interest. Putnam
Management is responsible for determining that the value of these underlying
securities is at all times at least equal to 102% of the resale price,
including accrued interest.
D) Security transactions and related investment income Security transactions
are accounted for on the trade date (date the order to buy or sell is
executed). Interest income is recorded on the accrual basis. Dividend income
is recorded on the ex-dividend date except that certain dividends from
foreign securities are recorded as soon as the fund is informed of the
ex-dividend date. Discounts on zero coupon bonds, original issue,
stepped-coupon bonds and payment in kind bonds are accreted according to the
effective yield method.
E) 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.
F) Forward currency contracts The fund may engage in forward currency
contracts, which are agreements between two parties to buy and sell
currencies at a set price on a future date, to protect against a decline in
value relative to the U.S. dollar of the currencies in which its portfolio
securities are denominated or quoted (or an increase in the value of a
currency in which securities a fund intends to buy are denominated, when a
fund holds cash reserves and short-term investments). The U.S. dollar value
of forward currency contracts is determined using forward currency exchange
rates supplied by a quotation service. The market value of the contract will
fluctuate with changes in currency exchange rates. The contract is "marked to
market" daily and the change in market value is recorded as an unrealized
gain or loss. When the contract is closed, the fund records a realized gain
or loss equal to the difference between the value of the contract at the time
it was opened and the
33
<PAGE>
value at the time it was closed. The fund could be exposed to risk if the
value of the currency changes unfavorably, if the counterparties to the
contracts are unable to meet the terms of their contracts or if the fund is
unable to enter into a closing position.
G) Futures and options contracts The fund may use futures and options
contracts to hedge against changes in the values of securities the fund owns
or expects to purchase. The fund may also write options on securities it owns
or which it invests 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.
H) TBA purchase commitments The fund may enter into "TBA" (to be announced)
purchase commitments to purchase securities for a fixed unit price at a
future date beyond customary settlement time. Although the unit price has
been established, the principal value has not been finalized. However, the
amount of the commitments will not fluctuate more than 2.0% from the
principal amount. The fund holds, and maintains until settlement date, cash
or high-grade debt obligations in an amount sufficient to meet the purchase
price, or the fund may enter into offsetting contracts for the forward sale
of other securities it owns. Income on the securities will not be earned
until settlement date. TBA purchase commitments may be considered securities
in themselves, and involve a risk of loss if the value of the security to be
purchased declines prior to the settlement date, which risk is in addition to
the risk of decline in the value of the fund's other assets. Unsettled TBA
purchase commitments are valued at the current market value of the underlying
securities, 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 Putnam Management deems it appropriate to
do so.
I) 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 a 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
34
<PAGE>
underlying security. If the fund delivers securities under the commitment,
the fund realizes a gain or a loss from the sale of the securities based upon
the unit price established at the date the commitment was entered into.
J) Federal taxes It is the policy of the fund to distribute all of its
taxable 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.
K) 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. Reclassifications
are made to the fund's capital accounts to reflect income and gains available
for distribution (or available capital loss carryovers) under income tax
regulations.
Note 2
Management fee, administrative services, and other transactions
Compensation of Putnam Management, for management and investment advisory
services is paid quarterly based on the average net assets of the fund 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 reimburses Putnam Management 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 Trustees fee of $4,640 and an
additional fee for each Trustee's meeting attended. Trustees who are not
interested persons of Putnam Management and who serve on committees of the
Trustees receive additional fees for attendance at certain committee
meetings.
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 wholly-owned subsidiary of Putnam Investments, Inc.
Investor servicing agent functions are provided by Putnam Investor Services,
a division of PFTC.
For the six months ended March 31, 1996, fund expenses were reduced
35
<PAGE>
by $581,362 under expense offset arrangements with PFTC and brokerage service
arrangements. Investor servicing and custodian fees reported in the Statement
of operations exclude these credits. The fund could have invested the assets
utilized in connection with the expense 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, 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 six months ended March 31, 1996, Putnam Mutual Funds Corp., acting as
underwriter received net commissions of $648,003 and $24,501 from the sale of
class A and class M shares, respectively and received $1,836,356 in
contingent deferred sales charges from redemptions of class B shares. A
deferred sales charge of up to 1% is assessed on certain redemptions of class
A shares. For the six months ended March 31, 1996, Putnam Mutual Funds Corp.,
acting as underwriter received $2,028 on class A redemptions.
Note 3
Purchase and sales of securities
During the six months ended March 31, 1996, purchases and sales of investment
securities other than U.S. government obligations and short-
term investments aggregated $1,806,982,705 and $1,509,619,511, respectively.
Purchases and sales of U.S. government obligations aggregated $4,762,708,087
and $4,740,733,715, 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 during the period are summarized as follows:
36
<PAGE>
Contract Premiums
Amounts Received
- ---------------------------------------- ------------ ----------
Contracts outstanding at beginning of
period $ 80,260,000 $ 345,118
Options expired $(80,260,000) (345,118)
- ---------------------------------------- ------------ ----------
Written options outstanding at end of
period $ -- $ --
- ---------------------------------------- ------------ ----------
Note 4
Capital shares
At March 31, 1996, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
Six months ended March 31 Year ended September 30
-------------------------- -----------------------------
1996 1995
--------------------- -------------------------- -----------------------------
Class A Shares Amount Shares Amount
--------------------- ----------- ----------- ----------- --------------
<S> <C> <C> <C> <C>
Shares sold 19,425,099 $ 239,401,165 29,561,536 $ 343,042,280
Shares issued in
connection with
reinvestment of
distributions: 3,331,938 37,858,416 6,272,747 72,551,475
--------------------- ----------- ----------- ----------- --------------
22,757,037 277,259,581 35,834,283 415,593,755
Shares repurchased (14,757,186) (79,813,543) (34,850,799) (402,384,755)
--------------------- ----------- ----------- ----------- --------------
Net increase 7,999,851 $ 97,446,038 983,484 $ 13,209,000
--------------------- ----------- ----------- ----------- --------------
Six months ended March 31 Year ended September 30
-------------------------- -----------------------------
1996 1995
--------------------- -------------------------- -----------------------------
Class B Shares Amount Shares Amount
--------------------- ----------- ----------- ----------- --------------
Shares sold 27,617,786 $ 335,683,410 36,302,330 $ 421,020,169
Shares issued in
connection with
reinvestment of
distributions 3,282,562 39,681,404 6,462,302 74,500,296
--------------------- ----------- ----------- ----------- --------------
30,900,348 375,364,814 42,764,632 495,520,465
Shares repurchased (15,444,685) (187,514,780) (34,212,886) (393,928,631)
--------------------- ----------- ----------- ----------- --------------
Net increase 15,455,663 $ 187,850,034 8,551,746 $ 101,591,834
--------------------- ----------- ----------- ----------- --------------
For the period
December 1, 1994
(commencement operations)
Six months ended March 31 to September 30
-------------------------- -----------------------------
1996 1995
--------------------- -------------------------- -----------------------------
Class M Shares Amount Shares Amount
--------------------- ----------- ----------- ----------- --------------
Shares sold 1,650,629 $ 20,128,033 1,339,043 $ 15,723,397
Shares issued in
connection with
reinvestment of
distributions 50,577 612,927 24,234 286,016
--------------------- ----------- ----------- ----------- --------------
1,701,206 20,740,960 1,363,277 16,009,413
Shares repurchased (296,640) (3,620,129) (131,265) (1,551,690)
--------------------- ----------- ----------- ----------- --------------
Net increase 1,404,566 $ 17,120,831 1,232,012 $ 14,457,723
--------------------- ----------- ----------- ----------- --------------
</TABLE>
37
<PAGE>
Our commitment to quality service
[triangle] CHOOSE AWARD-WINNING SERVICE.
Putnam Investor Services has won the DALBAR Quality Tested Service Seal for
the past six years, through 1995. DALBAR, an independent research firm, ran
more than 146,000 tests of 56 shareholder service components. In every
category, Putnam outperformed the industry standard.
[triangle] HELP YOUR INVESTMENT GROW.
Set up a systematic program for investing with as little as $25 a month
from a Putnam fund or from your checking or savings account.*
[triangle] SWITCH FUNDS EASILY.
You can move money from one account to another with the same class of
shares without a service charge. (This privilege is subject to change or
termination.)
[triangle] ACCESS YOUR MONEY QUICKLY.
You can get checks sent regularly or redeem shares any business day the
then-current net asset value, which may be more or less than their original
cost.
For details about any of these or other services, contact your financial
advisor or call the toll-free number shown below and speak with a helpful
Putnam representative.
[triangle] To make an additional investment in this or any other Putnam fund,
contact your financial advisor or call our toll-free number: 1-800-225-1581.
*Regular investing, of course, does not guarantee a profit or protect
against a loss in a declining market. Investors should consider their
ability to continue purchasing shares during periods of low price levels.
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
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
John D. Hughes
Senior Vice President
and Treasurer
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
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.
39
<PAGE>
[PUTNAM INVESTMENTS LOGO]
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
Bulk Rate
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PAID
Putnam
Investments
24533-075/387/803 5/96
