Putnam
Diversified
Income
Trust
ANNUAL REPORT
September 30, 1996
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* According to Lipper Analytical Services, Putnam Diversified Income
Trust's class A share total return ranked 4 out of 43 general bond
funds for the one-year period ended September 30, 1996, placing the
fund in the top 10% in this category.*
* "Investors looking for a . . . bond fund with exposure to major
markets would be hard-pressed to find a more appealing offering."
-- Morningstar Mutual Funds, September 13, 1996
CONTENTS
4 Report from Putnam Management
9 Fund performance summary
13 Portfolio holdings
29 Financial statements
*Lipper Analytical Services, an independent research organization,
ranks funds according to total return performance. Their rankings
vary over time and do not reflect the effects of sales charges. For
periods ended 9/30/96, class A shares ranked 3 out of 11 funds for
5-year performance; class B shares ranked 7 out of 43 and 7 out of
21 funds for 1- and 3-year performance, respectively; class M shares
ranked 5 out of 43 funds for 1-year performance. Class B and class M
shares were not ranked over longer periods. Past performance is not
indicative of future results.
From the Chairman
[PHOTO OF GEORGE PUTNAM OMITTED]
(copyright) Karsh, Ottawa
Dear Shareholder:
During the 12 months ended September 30, 1996, Putnam Diversified
Income Trust's trisector approach to portfolio management once again
demonstrated the value of diversification across a wide spectrum of
the world's bond markets.
The U.S. high-yield bond market was the beneficiary of continued
economic strength, and the growth-oriented companies represented in
the fund's high-yield sector were among the best performing. The
international bond sector's focus on peripheral European and
emerging markets likewise proved advantageous. Even within the less
vibrant U.S. government sector, a shift in emphasis to mortgage-
backed securities away from Treasuries made a positive contribution.
In the following report, your fund's management team comments in
depth about fiscal 1996 performance and prospects for the coming
months. I am pleased to announce that Neil Powers, a 10-year Putnam
fixed-income analyst and co-manager of the fund since 1992, has been
elevated to lead manager and that Jin Ho has taken over leadership
of the fund's high-yield sector. Jin joined Putnam in 1983 and has
13 years of investment experience.
Respectfully yours,
/S/ George Putnam
Chairman of the Trustees
November 20, 1996
Report from the Fund Managers
Neil J. Powers, lead manager
Jin W. Ho
Michael Martino
D. William Kohli
Mark J. Siegel
While bond markets in the United States and abroad fluctuate, Putnam
Diversified Income Trust has continued to achieve its investment
objectives. Through much of the fiscal year ended September 30,
1996, U.S. economic growth remained strong, fueling continued growth
in corporate earnings. However, because the economy continued to
grow at a faster-than-expected pace, investors' fears of inflation
lingered, producing an unfriendly environment for U.S. Treasury
securities. Throughout this turbulence, your fund delivered exactly
what it is designed to deliver: positive performance from a
diversified investment portfolio that enables it to capitalize on
thriving sectors of the bond markets regardless of interest-rate
trends. Our strategy during the fiscal year of focusing on high-
yield and international bonds, and de-emphasizing U.S. government
securities, was essential to the fund's resilience. Complete
performance information appears on pages 9 and 10.
*HIGH-YIELD HOLDINGS LEAD THE CHARGE
During the period, we continued to reduce the fund's allocation to
core cyclical issues, a strategy we first implemented toward the
middle of 1995 as the U.S. economy showed signs of slackening
growth. Cyclical companies, such as chemical, paper, and automotive,
are so called because their performance typically shadows the
behavior of the economy, waxing and waning along with the pace of
economic growth. At the same time, we added to the fund's holdings
of more growth-oriented companies in sectors such as
telecommunications -- the industry with the largest representation
in the fund's portfolio -- and other media such as television and
radio.
In February of this year, Congress passed legislation to deregulate
the telecommunications and broadcasting industries. The new
telecommunications law loosens restrictions on radio stations, cable
television, and long distance telephone service. It will ultimately
allow a single company to offer services in more than one of these
areas (for example, a telephone company may provide cable television
service) or to own more than one provider of a particular service in
a certain region (a company may own several radio stations in one
city).
Among the fund's holdings, MFS Communications, Teleport, and Brooks
Fiber Properties, three competitive local exchange carriers, were
among the portfolio's strongest performers during the period. Each
of these companies issues high-yield securities to help finance the
construction of the fiber-optic network required to attract
corporate customers and compete with larger telephone service
providers. While these securities and others discussed in this
report were viewed favorably during the period, all portfolio
holdings are subject to review and adjustment in accordance with the
fund's investment strategy and may vary in the future.
Elsewhere in the high-yield sector, the fund prospered from its
investments in the banking industry. First Nationwide Holdings, one
of the fund's key holdings, merged with California Federal Bank
during the period; the consolidation gave the newly merged company a
substantial share of the California banking market. Among thrift
banks (those that lend to higher-risk customers), which make up a
large portion of the banks that issue high-yield securities, Chevy
Chase Savings Bank and Berkeley Federal also contributed to the
fund's performance.
[GRAPHIC OMITTED: horizontal bar chart TOP 5 COUNTRY ALLOCATIONS,
9/30/96*]
(international sector)
Germany 4.7%
Mexico 4.5%
Italy 3.7%
United Kingdom 3.0%
Denmark 2.3%
Footnote reads:
*Based on net assets as of 9/30/96. Allocations will vary over time.
*PERIPHERAL EUROPE AND EMERGING MARKETS OFFER OPPORTUNITIES
As with the high-yield sector, the fund's investments in
international bonds contributed substantially to its performance
during the period. While international bond markets generally
delivered positive returns, our emphasis on country selection and
currency management, rather than on duration management, allowed the
fund to derive superior returns from its international holdings.
In this sector, we focused on European government bonds. Early in
the fiscal year, we emphasized bonds in higher-yielding markets,
such as Italy and Spain, rather than the core market. Since that
time, these and most other European countries have focused their
efforts on reining in fiscal budgets in order to gain acceptance
into the European Monetary Union (EMU), which intends to create a
single currency to be used among member nations. As a result of
these efforts, Italy, Spain, and Sweden have driven down both
inflation and bond yields. As yields declined, the fund's holdings
in these markets benefited from price appreciation.
A similar trend took place among markets in Canada and Australia.
Here, yields at the outset of the fiscal period were considerably
higher than those in the United States. Interest rates have fallen
substantially since then, narrowing the yield spreads relative to
U.S. Treasuries.
We increased the fund's holdings in emerging markets securities,
which enjoyed robust gains through much of the period. Bond markets
in Russia and Poland benefited from upgraded credit ratings in
recent months, and our investments in these markets added to the
fund's total return. Similarly our investments in Mexico and
Argentina boosted performance.
Our currency strategy involved hedging international bonds back to
the U.S. dollar in an effort to protect the fund's value from losses
due to currency fluctuations. This helped protect the portfolio's
value as several European currencies declined in value against the
dollar. We underweighted the yen and deutschemark and capitalized on
other currency movements as European nations struggled to be
eligible for inclusion in the EMU.
TOP THREE HOLDINGS PER SECTOR*
HIGH-YIELD BONDS MARKET VALUE PERCENTAGE
Midland Funding Corp. 11.75%, 2005 $ 26,203,098 0.7%
First PV Funding 10.15%, 2016 19,398,000 0.5
TransTexas Gas Corp. 11.5%, 2002 18,434,375 0.5
FOREIGN BONDS
Italy (Government of) 9.5%, 2001 104,588,832 2.6
United Kingdom Treasuries 8.5%, 2007 77,577,742 1.9
Canada (Government of) 8.75%, 2005 73,230,136 1.8
U.S. GOVERNMENT OBLIGATIONS
GNMA 7.5%, 2023-2026 234,764,138 5.8
FNMA 7.5%, 2026 179,059,358 4.4
U.S. Treasury notes 7%, 2006 168,367,453 4.2
Footnote reads:
*Based on net assets as of 9/30/96. Holdings will vary over time.
*MORTGAGE-BACKED SECURITIES OUTPERFORM TREASURIES
When the bond market declined abruptly earlier this year, the market
for mortgage-backed securities was affected dramatically. The rise
in interest rates drove down the values of mortgage-backed
securities and reduced prepayment risk (because higher interest
rates made mortgage refinancing less attractive to mortgage
holders). At that time, we quickly swapped a considerable portion of
the fund's U.S. Treasury holdings for mortgage-backed securities
before the majority of the market adjusted to these developments.
As the year progressed, yields on Treasuries remained within a
limited range. As a result, the yield spread on mortgage-backed
securities relative to Treasuries narrowed, approaching the
historical average of one percentage point, and mortgage-backed
securities offered greater price appreciation and higher income than
Treasuries.
*CONTINUED MODERATE GROWTH ON THE HORIZON
Our outlook for the coming months reflects what we have seen during
much of this year: moderate economic growth, low inflation, and
interest rates that move within a relatively limited range. For this
reason, we anticipate that the sectors and securities that have
served the fund well in recent months may continue to do so into the
beginning of calendar 1997. In the event that economic growth slows,
we have positioned the fund to capitalize on the decline in the
interest rates that may occur.
We plan to maintain the fund's considerable weighting in high-yield
securities to take advantage of the atmosphere of robust corporate
earnings and allow the fund to grow while interest rates remain
stable. In this sector, we expect that the wave of consolidations
among radio stations, enabled by the more relaxed telecommunications
law, will gradually spread to the television industry. While the
guidelines for deregulation in the television industry are not as
liberal as those for radio stations, we nevertheless expect business
prospects to generally improve as deregulation enhances revenues and
consolidation strengthens cash flows and drives down operating
costs.
Among international bond markets, we expect to continue to invest in
countries whose inflation rates are declining. We will also look to
take advantage of European markets as progress toward the EMU
creates opportunities.
If, as some economists predict, the rate of U.S. economic growth
begins to slow in the coming months, interest rates will likely
decline once again. For this reason, we expect to maintain a longer-
than-average portfolio duration to enable the fund to participate in
any corresponding price appreciation among government bonds.
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 9/30/96, 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 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.
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 9/30/96
(most recent calendar quarter)
Class A Class B Class M
(inception date) (10/3/88) (3/1/93) (12/1/94)
NAV POP NAV CDSC NAV POP
- ------------------------------------------------------------------
1 year 10.35% 5.09% 9.47% 4.47% 10.12% 6.56%
- ------------------------------------------------------------------
5 years 62.71 55.00 -- -- -- --
Annual average 10.22 9.16 -- -- -- --
- ------------------------------------------------------------------
Life of Fund 114.24 104.10 28.16 25.22 24.33 20.30
Annual average 10.00 9.34 7.15 6.46 12.64 10.63
- ------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 9/30/96
Salomon Bros.
Lehman Bros. Non-U.S. First Boston Consumer
Aggregate World Govt. High Yield Price
Bond Index Bond Index Index Index
- ------------------------------------------------------------------
1 year 4.90% 4.03% 10.77% 3.00%
- ------------------------------------------------------------------
5 years 43.32 72.06 82.11 15.02
Annual average 7.46 11.46 12.73 2.84
- ------------------------------------------------------------------
Life of class A 98.96 119.05 139.82 31.72
Annual average 8.98 10.30 11.55 3.51
- ------------------------------------------------------------------
Life of class B 22.47 43.81 42.06 10.27
Annual average 5.81 10.66 10.28 2.76
- ------------------------------------------------------------------
Life of class M 20.02 21.91 27.73 5.41
Annual average 10.46 11.40 14.27 2.92
- ------------------------------------------------------------------
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%.
[GRAPHIC OMITTED: worm chart GROWTH OF A $10,000 INVESTMENT]
GROWTH OF A $10,000 INVESTMENT
Cumulative total return of a $10,000 investment since 10/3/88
Starting value (Insert ending Total)
$9,425 Fund's class A shares at POP $20,410
$10,000 Lehman Aggregate Bond Index $19,896
$10,000 Consumer Price Index $13,172
(plot points for 10-year total return mountain chart)
Date/year Fund at POP Lehman Agg Bond Index CPI
10/3/88 9425 10000 10000
9/30/89 10129 11126 10434
9/30/90 10331 11968 11077
9/30/91 12544 13882 11452
9/30/92 14786 15624 11795
9/30/93 16686 17183 12112
9/30/94 16530 16629 12471
9/30/95 18496 18967 12788
9/30/96 20411 19896 13172
Footnote reads:
Past performance is no assurance of future results. A $10,000
investment in the fund's class B shares at inception on 3/1/93 would
have been valued at $12816 on 9/30/96 at net asset value ($12522
with a redemption at the end of the period). A $10,000 investment
in the fund's class M shares at inception on 12/1/94 would have been
valued at $12,433 at net asset value on 9/30/96 $12030 at public
offering price.
PRICE AND DISTRIBUTION INFORMATION
12 months ended 9/30/96
Class A Class B Class M
- --------------------------------------------------------------------
Distributions (number) 12 12 12
- --------------------------------------------------------------------
Income $0.893 $0.802 $0.866
- --------------------------------------------------------------------
Total $0.893 $0.802 $0.866
- --------------------------------------------------------------------
Share value: NAV POP NAV NAV POP
- --------------------------------------------------------------------
9/30/95 $11.99 $12.59 $11.95 11.97 12.37
- --------------------------------------------------------------------
9/30/96 12.29 12.90 12.24 12.27 12.68
- --------------------------------------------------------------------
Current return
- --------------------------------------------------------------------
End of period
- --------------------------------------------------------------------
Current dividend
rate1 6.93% 6.60% 6.18% 6.75% 6.53%
- --------------------------------------------------------------------
Current 30-day
SEC yield2 7.28 6.93 6.53 7.02 6.79
- --------------------------------------------------------------------
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.
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.
Report of independent accountants
For the fiscal year ended September 30, 1996
To the Trustees and Shareholders of
Putnam Diversified Income Trust
We have audited the accompanying statement of assets and liabilities
of Putnam Diversified Income Trust, including the portfolio of
investments owned, as of September 30, 1996, and the related
statement of operations for the year then ended, the statement of
changes in net assets for each of the two years in the period then
ended, and the financial highlights for each of the periods
indicated therein. These financial statements and financial
highlights are the responsibility of the fund's management. Our
responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements.
Our procedures included confirmation of securities owned as of
September 30, 1996, by correspondence with the custodian and
brokers. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the
financial position of Putnam Diversified Income Trust as of
September 30, 1996, the results of its operations for the year then
ended, the changes in its net assets for each of the two years in
the period then ended, and the financial highlights for each of the
periods indicated therein, in conformity with generally accepted
accounting principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
November 13, 1996
<TABLE>
<CAPTION>
Portfolio of investments owned
September 30, 1996
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (30.4%) *
PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C>
U.S. Government Agency Mortgage Pass-Through Certificates (21.7%)
- ---------------------------------------------------------------------------------------------------------------
Federal National Mortgage Association
$ 147,177,000 8s, TBA, October 16, 2026 148,464,799
60,643,562 8s, with various due dates from May 1, 2026 to June 1, 2026 61,174,212
181,212,095 7 1/2s, with various due dates from January 1, 2026 to July 1, 2026 179,059,358
122,283,285 7s, with various due dates from August 1, 2024 to April 1, 2026 117,964,298
Government National Mortgage Association
237,721,536 7 1/2s, with various due dates from January 15, 2023 to September 15, 2026 234,764,138
139,422,867 7s, with various due dates from October 15, 2024 to July 15, 2026 134,194,558
-------------
875,621,363
U.S. Treasury Obligations (8.7%)
- ---------------------------------------------------------------------------------------------------------------
71,015,000 U.S. Treasury Bonds 7 7/8s, February 15, 2021 77,561,873
121,065,000 U.S. Treasury Interest Strips zero % May 15, 2004 73,124,471
U.S. Treasury Notes
29,285,000 9 1/8s, May 15, 1999 31,293,658
164,940,000 7s, July 15, 2006 168,367,453
-------------
350,347,455
-------------
Total U.S. Government and Agency Obligations (cost $1,229,797,506) 1,225,968,818
CORPORATE BONDS AND NOTES (30.5%) *
PRINCIPAL AMOUNT VALUE
Advertising (0.2%)
- ---------------------------------------------------------------------------------------------------------------
$ 500,000 Adams Outdoor Advertising sr. notes 10 3/4s, 2006 522,500
5,434,000 Universal Outdoor, Inc. sub. deb. 11s, 2003 6,086,080
-------------
6,608,580
Aerospace and Defense (0.6%)
- ---------------------------------------------------------------------------------------------------------------
4,400,000 Alliant Techsystems, Inc. sr. sub. notes 11 3/4s, 2003 4,763,000
9,350,000 BE Aerospace sr. notes 9 3/4s, 2003 9,677,250
1,000,000 BE Aerospace sr. sub. notes Ser. B, 9 7/8s, 2006 1,015,000
1,080,000 K & F Industries, Inc. 144A sr. sub. notes 10 3/8s, 2004 1,117,800
2,000,000 Sequa Corp. med. term notes 10s, 2001 2,061,180
2,800,000 UNC, Inc. sr. notes 9 1/8s, 2003 2,730,000
1,325,000 UNC, Inc. 144A sr. sub. notes 11s, 2006 1,391,250
-------------
22,755,480
Agriculture (0.4%)
- ---------------------------------------------------------------------------------------------------------------
7,096,000 PMI Holdings Corp. sub. disc. deb. stepped-coupon
Ser. B, zero % (11 1/2s, 9/1/00), 2005 ++ 4,328,560
10,791,586 Premium Standard Farms Inc. sr. secd. notes 11s, 2003 (2 double daggers) 10,521,797
-------------
14,850,357
Airlines (0.1%)
- ---------------------------------------------------------------------------------------------------------------
5,470,000 Greenwich Air Services, Inc. sr. notes 10 1/2s, 2006 5,620,425
Automotive Parts (0.7%)
- ---------------------------------------------------------------------------------------------------------------
4,150,000 A.P.S. Inc. company guaranty 11 7/8s, 2006 4,419,750
2,450,000 Aftermarket Technology Corp. sr. sub. notes 12s, 2004 2,670,500
1,540,000 Delco Remy International, Inc. 144A sr. sub. notes 10 5/8s, 2006 1,578,500
1,100,000 Harvard Industries Inc. sr. notes 11 1/8s, 2005 1,031,250
525,000 Harvard Industries Inc. sr. notes 12s, 2004 504,000
7,025,000 Key Plastics Corp. sr. notes 14s, 1999 7,235,750
5,700,000 Lear Corp. sub. notes 9 1/2s, 2006 5,899,500
3,900,000 Speedy Muffler King, Inc. company guaranty 10 7/8s, 2006 (Canada) 4,002,375
-------------
27,341,625
Banks (0.5%)
- ---------------------------------------------------------------------------------------------------------------
2,500,000 Banco del Sud S.A. sr. notes 10 1/8s, 1997 (Argentina) 2,518,750
5,000,000 Bancomext Trust Division 144A bank guaranteed 11 1/4s, 2006 (Mexico) 5,243,750
2,340,000 Berkeley Federal Bank & Trust sub. deb. 12s, 2005 2,538,900
1,425,000 Chevy Chase Savings Bank Inc. sub. deb. 9 1/4s, 2005 1,457,063
2,600,000 First Federal Financial Corp. notes 11 3/4s, 2004 2,652,000
5,150,000 First Nationwide Holdings sr. notes 12 1/2s, 2003 5,574,875
-------------
19,985,338
Broadcasting (2.0%)
- ---------------------------------------------------------------------------------------------------------------
5,875,000 Affinity Group sr. sub. notes 11 1/2s, 2003 6,051,250
7,250,000 Allbritton Communications sr. sub. deb. Ser. B, 9 3/4s, 2007 7,014,375
7,350,000 Argyle Television Corp. sr. sub. notes 9 3/4s, 2005 7,350,000
1,150,000 Chancellor Broadcasting Co. sr. sub. notes 9 3/8s, 2004 1,138,500
7,510,000 Commodore Media, Inc. sr. sub. notes stepped-coupon 7 1/2s,
(13 1/4s, 5/1/98), 2003 ++ 7,791,625
5,000,000 International Cabletel Inc. sr. notes stepped-coupon
Ser. A, zero % (12 3/4s, 4/15/00), 2005 ++ 3,300,000
13,710,000 International Cabletel Inc. sr. notes stepped-coupon
Ser. B, zero % (11 1/2s, 2/01/01), 2006 ++ 8,226,000
3,575,000 Park Broadcasting, Inc. 144A sr. notes 11 3/4s, 2006 4,084,438
7,250,000 Paxson Communications Corp. 144A sr. sub. notes 11 5/8s, 2002 7,576,250
1,900,000 Pegasus Media & Communications notes Ser. B, 12 1/2s, 2005 2,014,000
7,237,000 Petracom Holdings, Inc. notes stepped-coupon zero %
(17 1/2s, 8/1/98), 2003 ++ 6,160,496
9,900,000 SFX Broadcasting, Inc. sr. sub. notes Ser. B, 10 3/4s, 2006 10,296,000
10,266,000 Telemedia Broadcasting Corp. 144A deb. stepped-coupon 3.8s,
(16s, 6/15/99), 2004 ++ 9,316,395
-------------
80,319,329
Building and Construction (0.9%)
- ---------------------------------------------------------------------------------------------------------------
5,750,000 Inter-City Products sr. notes 9 3/4s, 2000 5,520,000
2,850,000 Miles Homes Services sr. notes 12s, 2001 2,280,000
3,065,000 NVR, Inc. sr. notes 11s, 2003 3,172,275
10,195,000 Presley Cos. sr. notes 12 1/2s, 2001 9,914,638
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 7,944,813
-------------
36,697,726
Building Products (0.3%)
- ---------------------------------------------------------------------------------------------------------------
5,000,000 Cemex S.A. 144A bonds 12 3/4s, 2006(Mexico) 5,450,000
1,960,000 Nortek, Inc. sr. sub. notes 9 7/8s, 2004 1,901,200
1,500,000 Southdown Inc. sr. sub. notes Ser. B, 10s, 2006 1,515,000
1,895,000 Waxman Industries Inc. sr. notes stepped-coupon Ser. B, zero %
(12 3/4s, 6/1/99), 2004 ++ 1,345,450
-------------
10,211,650
Buses (0.2%)
- ---------------------------------------------------------------------------------------------------------------
1,500,000 Blue Bird Body Co. sub. deb. Ser. B, 11 3/4s, 2002 1,552,500
9,740,000 MCII Holding (USA), Inc. bonds zero % 2002 7,889,400
-------------
9,441,900
Business Services (0.2%)
- ---------------------------------------------------------------------------------------------------------------
4,800,000 Corporate Express, Inc. sr. sub. notes Ser. B, 9 1/8s, 2004 4,800,000
960,000 Iron Mountain Inc. sr. sub. notes 10 1/8s, 2006 978,000
890,000 Muzak Inc. sr. notes 10s, 2003 895,563
2,125,000 Pierce Leahy Corp. 144A sr. sub. notes 11 1/8s, 2006 2,268,438
-------------
8,942,001
Cable Television (2.8%)
- ---------------------------------------------------------------------------------------------------------------
1,205,000 Adelphia Communications Corp. sr. notes 12 1/2s, 2002 1,271,275
19,687,371 Adelphia Communications Corp. sr. notes 9 1/2s, 2004 (2 double daggers) 17,718,634
11,820,000 American Telecasting, Inc. sr. disc. notes stepped-coupon zero %
(14 1/2s, 8/15/00), 2005 ++ 7,801,200
1,000,000 Benedek Communications 144A sr. disc. notes stepped-coupon zero %
(13 1/4s, 5/15/01), 2006 ++ 586,250
7,500,000 Cablevision Systems Corp. sr. sub. deb. 10 1/2s, 2016 7,612,500
1,750,000 CF Cable TV, Inc. sr. notes 11 5/8s, 2005 (Canada) 1,977,500
3,050,000 CF Cable TV, Inc. sr. notes 9 1/8s, 2007 (Canada) 3,141,500
6,150,000 Charter Communications International disc. notes stepped-coupon Ser. B,
zero % (14s, 3/15/01), 2007 ++ 3,720,750
3,450,000 Charter Communications International sr. notes 11 1/4s, 2006 3,553,500
7,750,000 Diamond Cable Communication Co. sr. disc. notes stepped-coupon zero %
(11 3/4s, 12/15/00), 2005 (United Kingdom)++ 4,998,750
7,445,406 Falcon Holdings Group, Inc. sr. sub. notes 11s, 2003 (2 double daggers) 6,887,001
5,250,000 Grupo Televisa S.A. 144A sr. disc. notes stepped-coupon zero %
(13 1/4s, 5/15/01), 2008 (Mexico) ++ 3,255,000
3,000,000 Grupo Televisa S.A. 144A sr. notes 11 7/8s, 2006 (Mexico) 3,202,500
1,040,000 Heartland Wireless Communication Inc. sr. notes 13s, 2003 1,112,800
950,000 Heartland Wireless Communication Inc.144A sr. notes 13s, 2003 1,016,500
6,045,000 Jones Intercable, Inc. sr. sub. deb. 10 1/2s, 2008 6,407,700
4,200,000 Lenfest Communications, Inc. 144A sr. sub. notes 10 1/2s, 2006 4,305,000
3,200,000 Lenfest Communications, Inc. sr. notes 8 3/8s, 2005 3,000,000
700,000 Marcus Cable Co. (L.P.) sr. deb. 11 7/8s, 2005 740,250
13,490,000 Marcus Cable Co. (L.P.) sr. disc. notes stepped-coupon zero %
(14 1/4s, 6/15/00), 2005 ++ 9,173,200
3,640,000 Marcus Cable Co. (L.P.) sr. sub. disc. notes stepped-coupon zero %
(13 1/2s, 8/1/99), 2004 ++ 2,839,200
5,650,000 Telewest Communications PLC deb. stepped-coupon zero % (11s, 10/1/00),
2007 (United Kingdom) ++ 3,587,750
14,235,000 UIH Australia/Pacific sr. disc. notes stepped-coupon Ser. B, zero %
(14s, 5/15/01), 2006 (Australia)++ 7,615,725
8,410,000 Videotron Holdings. sr. disc. notes stepped-coupon zero %
(11s, 8/15/00), 2005 (United Kingdom) ++ 5,571,625
-------------
111,096,110
Cellular Communications (1.6%)
- ---------------------------------------------------------------------------------------------------------------
8,910,000 Cencall Communications Corp. sr. disc. notes stepped-coupon zero %
(10 1/8s, 1/15/99), 2004 ++ 5,880,600
12,400,000 Comunicacion Celular bonds stepped-coupon zero %
(13 1/8s, 11/15/00), 2003 (Colombia)++ 7,626,000
6,500,000 Dial Call Communications, Inc. sr. disc. notes stepped-coupon Ser. B,
zero % (10 1/4s, 12/15/98), 2005 ++ 4,160,000
21,500,000 Dial Call Communications, Inc. sr. disc. notes stepped-coupon zero %
(12 1/4s, 4/15/99), 2004 ++ 14,835,000
8,500,000 Intercel, Inc. sr. disc. notes stepped-coupon zero % (12s, 5/1/01), 2006 ++ 4,675,000
15,300,000 Milicom International Cellular 144A sr. disc. notes stepped-coupon zero %
(13 1/2s, 6/01/00), 2006 (Luxembourg) ++ 8,740,125
6,500,000 NEXTEL Communications, Inc. sr. disc. notes stepped-coupon zero %
(9 3/4s, 2/15/99), 2004 ++ 4,192,500
5,600,000 NEXTEL Communications, Inc. sr. disc. notes stepped-coupon zero %
(11 1/2s, 9/1/98), 2003 ++ 4,144,000
9,000,000 Pricellular Wireless sr. disc. notes stepped-coupon Ser. B, zero %
(14s, 11/15/97), 2001 ++ 8,505,000
1,435,000 Sygnet Wireless, Inc. sr. notes 11 1/2s, 2006 1,467,288
-------------
64,225,513
Chemicals (0.9%)
- ---------------------------------------------------------------------------------------------------------------
6,650,000 Acetex Corp. sr. notes 9 3/4s, 2003 (Canada) 6,483,750
11,750,000 Arcadian Partner sr. notes 10 3/4s, 2005 12,925,000
8,000,000 G-I Holdings sr. notes Ser. B, 10s, 2006 8,000,000
6,550,000 Harris Chemical Corp. sr. secd. disc. notes 10 1/4s, 2001 6,681,000
2,400,000 IMC Fertilizer Group, Inc. deb. 9.45s, 2011 2,568,000
1,175,000 Texas Petrochemical 144A sr. sub. notes 11 1/8s, 2006 1,239,625
-------------
37,897,375
Computer Equipment (0.2%)
- ---------------------------------------------------------------------------------------------------------------
9,450,000 Computervision Corp. sr. sub. notes 11 3/8s, 1999 9,898,875
Conglomerates (0.2%)
- ---------------------------------------------------------------------------------------------------------------
2,300,000 MacAndrews & Forbes Holdings, Inc. sub. deb. notes 13s, 1999 2,300,000
5,927,000 Talley Industries, Inc. sr. disc. deb. stepped-coupon zero %
(12 1/4s, 10/15/98), 2005 ++ 5,085,366
-------------
7,385,366
Consumer Durable Goods (0.1%)
- ---------------------------------------------------------------------------------------------------------------
5,850,000 Remington Products Co. LLC 144A sr. sub. notes 11s, 2006 5,908,500
Consumer Services (0.1%)
- ---------------------------------------------------------------------------------------------------------------
2,747,000 Coinmach Corp. sr. notes Ser. B, 11 3/4s, 2005 2,939,290
Containers (0.8%)
- ---------------------------------------------------------------------------------------------------------------
5,000,000 Four M Corp. 144A sr. notes 12s, 2006 5,300,000
10,000,000 Ivex Holdings Corp. sr. disc. deb. stepped-coupon zero %
(13 1/4s, 3/15/00), 2005 ++ 6,325,000
9,250,000 Ivex Packaging Corp. sr. sub. notes 12 1/2s, 2002 9,758,750
4,500,000 Owens Illinois, Inc. deb. 11s, 2003 4,921,875
845,000 Printpack, Inc. 144A sr. notes 10 5/8s, 2006 870,350
1,685,000 Printpack, Inc. 144A sr. notes 9 7/8s, 2004 1,722,913
1,525,000 United States Can Co. sr. sub. notes 13 1/2s, 2002 1,647,000
-------------
30,545,888
Electric Utilities (1.5%)
- ---------------------------------------------------------------------------------------------------------------
3,000,000 El Paso Electric Co. 1st mtge. Ser. E, 9.4s, 2011 3,090,000
2,800,000 El Paso Electric Co. 1st mtge. Ser. D, 8.9s, 2006 2,833,796
18,300,000 First PV Funding deb. 10.15s, 2016 19,398,000
995,000 Hidroelectric Pierda Aguila 144A bonds 10 5/8s, 2001 (Argentina) 999,975
1,585,000 Midland Funding Corp. deb. Ser. B, 13 1/4s, 2006 1,805,505
24,320,000 Midland Funding Corp. deb. Ser. A, 11 3/4s, 2005 26,203,098
3,490,000 Niagara Mohawk Power Corp. med. term notes 9.99s, 2004 3,280,600
2,925,000 Niagara Mohawk Power Corp. 1st mtge. 8 3/4s, 2022 2,674,796
-------------
60,285,770
Electronics (0.4%)
- ---------------------------------------------------------------------------------------------------------------
5,050,000 Amphenol Corp. sr. sub. notes 12 3/4s, 2002 5,567,625
700,000 Moog Inc. 144A sr. sub. notes Ser. B, 10s, 2006 703,500
17,425,000 International Semi-Tech. Corp. sr. secd. disc. notes
stepped-coupon zero % (11 1/2s, 8/15/00), 2003 (Canada) ++ 10,585,688
-------------
16,856,813
Entertainment (0.4%)
- ---------------------------------------------------------------------------------------------------------------
1,695,000 Guitar Center Management 144A sr. notes 11s, 2006 1,775,513
5,000,000 Premier Parks, Inc. sr. notes Ser. A, 12s, 2003 5,350,000
750,000 Six Flags Corp. sr. sub. notes stepped-coupon zero %
(12 1/4s, 6/15/98), 2005 ++ 658,125
5,500,000 Trump Holdings & Funding Corp. sr. notes 15 1/2s, 2005 6,380,000
-------------
14,163,638
Financial Services (0.3%)
- ---------------------------------------------------------------------------------------------------------------
3,090,000 Contifinancial Corp. sr. notes 8 3/8s, 2003 3,082,275
5,800,000 Keystone Group, Inc. sr. secd. notes 9 3/4s, 2003 6,206,000
3,910,000 Owen Financial Corp. notes 11 7/8s, 2003 4,095,725
-------------
13,384,000
Food (0.2%)
- ---------------------------------------------------------------------------------------------------------------
3,000,000 Chiquita Brands sr. notes 9 5/8s, 2001 3,060,000
1,251,000 Del Monte Corp. notes 12 1/4s, 2002 (2 double daggers) 1,251,000
2,750,000 Mafco, Inc. sr. sub. notes 11 7/8s, 2002 2,970,000
-------------
7,281,000
Food Chains (0.6%)
- ---------------------------------------------------------------------------------------------------------------
2,402,000 Southland Corp. deb. 4s, 2004 1,640,566
10,750,000 Southland Corp. deb. Ser. A, 4 1/2s, 2004 7,928,125
12,500,000 Stater Brothers sr. notes 11s, 2001 13,250,000
-------------
22,818,691
Gaming (2.2%)
- ---------------------------------------------------------------------------------------------------------------
2,745,000 Alliance Gaming Corp. sr. notes 12 7/8s, 2003 2,841,075
965,000 Argosy Gaming Co. 144A 1st. mtge. 13 1/4s, 2004 960,175
6,370,000 Arizona Charlies Corp. 1st mtge. Ser. B, 12s, 2000 4,108,650
1,480,000 Capitol Queen Corp. 1st mtge. notes Ser. B, 12s, 2000 (In Default) + 925,000
2,410,000 Casino America, Inc. sr. notes 12 1/2s, 2003 2,521,463
2,475,000 Casino Magic Corp. 144A 1st mtge. 13s, 2003 2,512,125
7,100,000 Coast Hotels & Casino company guaranty Ser. B, 13s, 2002 7,685,750
1,190,000 Cobblestone Golf Group 144A sr. notes 11 1/2s, 2003 1,225,700
4,900,000 Colorado Gaming & Entertainment Co. sr. notes 12s, 2003 (2 double daggers) 4,704,000
2,000,000 Elsinore Corp. 1st mtge. 20s, 2000 (In Default) + 1,900,000
2,200,000 Empress River Casino sr. notes 10 3/4s, 2002 2,354,000
2,500,000 Grand Casinos, Inc. 1st mtge. 10 1/8s, 2003 2,459,375
12,750,000 Grate Bay Property Funding Corp. 1st mtge. 10 7/8s, 2004 11,092,500
1,680,000 Harveys Casino Resorts sr. sub. notes 10 5/8s, 2006 1,755,600
7,950,000 Hollywood Casino Corp. sr. notes 12 3/4s, 2003 7,870,500
13,575,000 Lady Luck Gaming 1st mtge. 11 7/8s, 2001 13,303,500
4,843,000 Louisiana Casino Cruises Corp. 1st mtge. 11 1/2s, 1998 3,922,830
6,200,000 Mohegan Tribal Gaming sr. notes Ser. B, 13 1/2s, 2002 7,750,000
1,500,000 PRT Funding Corp. sr. notes 11 5/8s, 2004 1,282,500
5,000,000 Trump A.C. 1st mtge. 11 1/4s, 2006 4,925,000
3,456,000 Trump Castle Funding notes 11 1/2s, 2000 3,499,200
-------------
89,598,943
Health Care (1.0%)
- ---------------------------------------------------------------------------------------------------------------
11,245,000 Columbia/HCA Healthcare med. term notes 7.58s, 2025 11,080,261
4,700,000 Healthsouth Rehablitaton sr. sub. notes 9 1/2s, 2001 4,911,500
3,200,000 Integrated Health Services sr. sub. notes 10 3/4s, 2004 3,372,000
3,800,000 Integrated Health Services sr. sub. notes 9 5/8s, 2002 3,885,500
7,250,000 Ivac Corp. sr. notes 9 1/4s, 2002 7,340,625
5,000,000 Merit Behavioral Care sr. sub. notes 11 1/2s, 2005 5,275,000
4,000,000 Paracelsus Healthcare sr. sub. notes 10s, 2006 4,140,000
-------------
40,004,886
Insurance (0.2%)
- ---------------------------------------------------------------------------------------------------------------
4,750,000 American Annuity Group, Inc. sr. notes 9 1/2s, 2001 4,999,375
3,000,000 Reliance Group Holdings, Inc. sr. sub. deb. 9 3/4s, 2003 3,030,000
-------------
8,029,375
Lodging (0.4%)
- ---------------------------------------------------------------------------------------------------------------
11,300,000 Host Marriott Corp. sr. notes Ser. B, 9 1/2s, 2005 11,356,500
4,550,000 John Q Hammons Hotels, Inc. 1st mtge. 9 3/4s, 2005 4,459,000
-------------
15,815,500
Media (--%)
- ---------------------------------------------------------------------------------------------------------------
690,000 Gray Communications System Inc. sr. sub. notes 10 5/8s, 2006 708,975
Medical Supplies and Devices (0.3%)
- ---------------------------------------------------------------------------------------------------------------
5,300,000 Dade International, Inc. 144A sr. sub. notes 11 1/8s, 2006 5,671,000
4,915,000 Wright Medical Technology, Inc. sr. secd. notes
Ser. B, 10 3/4s, 2000 4,902,713
-------------
10,573,713
Metals and Mining (0.2%)
- ---------------------------------------------------------------------------------------------------------------
800,000 Kaiser Aluminum & Chemical Corp. sr. sub. notes 12 3/4s, 2003 868,000
2,160,000 Renco Metals, Inc. sr. notes 11 1/2s, 2003 2,251,800
2,700,000 Royal Oak Mines, Inc. 144A sr. sub. notes 11s, 2006 (Canada) 2,764,125
-------------
5,883,925
Motion Picture Distribution (0.4%)
- ---------------------------------------------------------------------------------------------------------------
7,620,000 Act III Theatres, Inc. sr. sub. notes 11 7/8s, 2003 8,343,900
2,246,800 Cinemark Mexico notes Ser. B, 13s, 2003 (Mexico) (2 double daggers) 2,134,460
78,300 Cinemark Mexico notes Ser. D, 13s, 2003 (Mexico) (2 double daggers) 74,385
4,780,000 Cinemark USA, Inc. 144A sr. sub. notes 9 5/8s, 2008 4,780,000
-------------
15,332,745
Oil & Gas (1.6%)
- ---------------------------------------------------------------------------------------------------------------
2,200,000 Benton Oil & Gas Corp. sr. notes 11 5/8s, 2003 2,381,500
3,750,000 Chesapeake Energy Corp. sr. notes 10 1/2s, 2002 3,965,625
3,000,000 Chesapeake Energy Corp. sr. notes 9 1/8s, 2006 2,962,500
4,530,000 Cliffs Drilling Co. company guaranty Ser. B, 10 1/4s, 2003 4,711,200
5,290,000 Flores & Rucks, Inc. sr. notes 13 1/2s, 2004 6,215,750
1,380,000 Flores & Rucks, Inc. sr. sub. notes 9 3/4s, 2006 1,397,250
1,100,000 Maxus Energy Corp. deb. 11 1/4s, 2013 1,124,750
1,500,000 Maxus Energy Corp. deb. 8 1/2s, 2008 1,455,000
5,030,000 Maxus Energy Corp. notes 9 7/8s, 2002 5,105,450
950,000 Maxus Energy Corp. notes 9 1/2s, 2003 940,500
4,490,000 Maxus Energy Corp. notes 9 3/8s, 2003 4,490,000
9,250,000 Transamerican Refining Corp. 1st mtge.
variable rate Ser. 2, 16 1/2s, 2002 8,510,000
4,648,000 Transamerican Refining Corp. 1st. mtge. stepped-coupon
Ser. 1, zero % (18.5s 2/15/98), 2002 ++ 3,462,760
17,350,000 Transtexas Gas Corp. sr. secd. notes 11 1/2s, 2002 18,434,375
-------------
65,156,660
Paging (0.7%)
- ---------------------------------------------------------------------------------------------------------------
4,000,000 A+ Network Inc. sr. sub. notes 11 7/8s, 2005 3,890,000
8,520,000 Arch Communications Group sr. disc. notes stepped-coupon
zero % (10 7/8s, 3/15/01), 2008 ++ 4,771,200
9,650,000 Mobile Telecommunications Tech. sr. notes 13 1/2s, 2002 10,036,000
1,750,000 Mobilemedia Corp. sr. sub. notes 9 3/8s, 2007 1,400,000
9,450,000 Pagemart Nationwide, Inc. sr. disc. notes stepped-coupon
zero % (15s, 2/1/00), 2005 ++ 6,426,000
3,100,000 Pronet, Inc. sr. sub. notes 11 7/8s, 2005 2,821,000
-------------
29,344,200
Paper and Forest Products (1.1%)
- ---------------------------------------------------------------------------------------------------------------
4,000,000 APP International Finance Co. notes 11 3/4s, 2005 (Netherlands) 4,140,000
5,000,000 Domtar, Inc. deb. 9 1/2s, 2016 (Canada) 5,225,000
10,220,000 Florida Coast Paper LLC 144A 1st. mtge. 12 3/4s, 2003 11,012,050
10,700,000 Gaylord Container Corp. sr. sub. disc. deb. 12 3/4s, 2005 11,743,250
1,000,000 Rainy River Forest Products sr. notes 10 3/4s, 2001 (Canada) 1,076,250
9,900,000 Riverwood International company guaranty 10 7/8s, 2008 9,751,500
2,000,000 Riverwood International company guaranty 10 1/4s, 2006 2,010,000
1,000,000 Stone Consolidated Corp. sr. notes 10 1/4s, 2000 1,057,500
-------------
46,015,550
Pipelines (--%)
- ---------------------------------------------------------------------------------------------------------------
1,200,000 OPI International sr. notes 12 7/8s, 2002 1,320,000
Publishing (0.3%)
- ---------------------------------------------------------------------------------------------------------------
8,050,000 Marvel Holdings, Inc. sr. notes Ser. B, zero %, 1998 6,379,625
8,590,000 Marvel Parent Holdings, Inc. sr. secd. disc. notes zero %, 1998 6,743,150
-------------
13,122,775
Real Estate (0.3%)
- ---------------------------------------------------------------------------------------------------------------
5,615,000 Chelsea Piers 1st mtge. Ser. B, 12 1/2s, 2004 5,250,025
2,000,000 Prime Hospitality Corp. 1st mtge. 9 1/4s, 2006 1,990,000
5,900,000Tanger Properties (L.P.) gtd. notes 8 3/4s, 2001(R) 5,855,750
-------------
13,095,775
Restaurants (0.2%)
- ---------------------------------------------------------------------------------------------------------------
7,250,000 FRD Acquisition 144A sr. notes 12 1/2s, 2004 7,358,750
Retail (1.3%)
- ---------------------------------------------------------------------------------------------------------------
4,000,000 Brylane (L.P.) sr. sub. notes 10s, 2003 4,090,000
11,920,000 Finlay Enterprises, Inc. sr. disc. deb. stepped-coupon
zero % (12s, 5/1/98), 2005 ++ 9,774,400
2,910,000 Finlay Enterprises, Inc. sr. notes 10 5/8s, 2003 2,946,375
2,650,000 K Mart Corp. deb. 7 3/4s, 2012 2,053,750
4,065,000 K Mart Corp. med. term notes 7.9s, 2000 3,695,573
100,000 K Mart Corp. med. term notes 7.85s, 2002 88,677
250,000 K Mart Corp. med. term notes 7.55s, 2004 207,238
2,850,000 K Mart Funding Corp. notes 7.36s, 1998 2,821,500
3,710,000 Loehmanns, Inc. sr. notes 11 7/8s, 2003 3,932,600
2,900,000 Mothers Work, Inc. sr. notes 12 5/8s, 2005 3,066,750
4,400,000 Parisian, Inc. sr. sub. notes 9 7/8s, 2003 4,323,000
1,925,000 Phar-Mor, Inc. sr. notes 11.72s, 2002 1,997,188
5,000,000 Specialty Retailers, Inc. sr. sub. notes 11s, 2003 5,125,000
2,750,000 SRI Receivables Purchase 144A notes 12 1/2s, 2000 2,791,250
3,310,000 Waban, Inc. sr. sub. notes 11s, 2004 3,500,325
-------------
50,413,626
Satellite Services (0.1%)
- ---------------------------------------------------------------------------------------------------------------
3,645,000 Echostar Communications Corp. sr. disc. notes
stepped-coupon zero % (12 7/8s, 6/1/99), 2004 ++ 2,861,325
2,250,000 Net Sat Services Ltd. 144A sr. notes 12 3/4s, 2004 (Brazil) 2,390,625
-------------
5,251,950
Shipping (0.1%)
- ---------------------------------------------------------------------------------------------------------------
5,200,000 Viking Star Shipping sr. secd. notes 9 5/8s, 2003 5,291,000
Specialty Consumer Products (0.1%)
- ---------------------------------------------------------------------------------------------------------------
5,000,000 Apparel Retailers, Inc. deb. stepped-coupon Ser. B,
zero % (12 3/4s, 8/15/98), 2005 ++ 4,400,000
1,175,000 E&S Holdings Corp. 144A sr. sub. notes 10 3/8s, 2006 1,195,563
-------------
5,595,563
Steel (0.3%)
- ---------------------------------------------------------------------------------------------------------------
11,500,000 Ispat Mexicana S.A. 144A deb. 10 3/8s, 2001 (Mexico) 11,327,500
Supermarkets (0.1%)
- ---------------------------------------------------------------------------------------------------------------
3,600,000 Fleming Cos., Inc. sr. notes 10 5/8s, 2001 3,537,000
2,500,000 Food 4 Less Supermarkets, Inc. sr. sub. deb.
13 5/8s, 2007 (2 double daggers) 2,175,000
-------------
5,712,000
Telecommunication (2.9%)
- ---------------------------------------------------------------------------------------------------------------
5,230,000 American Communication Services, Inc. sr. disc. notes stepped-coupon
zero % (12 3/4s, 4/1/01), 2006 ++ 2,771,900
16,975,000 Brooks Fiber Properties sr. disc. notes stepped-coupon zero %
(10 7/8s, 3/1/01), 2006 ++ 10,439,625
22,256,000 GST Telecommunications,Inc. company guaranty stepped-coupon zero %
(13 7/8s, 15/15/00), 2005 ++ 12,073,880
4,165,000 Hyperion Telecommunication sr. disc. notes stepped-coupon Ser. B, zero %
(13s, 4/15/01), 2003 ++ 2,582,300
10,000,000 IntelCom Group Inc. company guaranty stepped-coupon zero %
(12 1/2s, 5/1/01), 2006 ++ 6,000,000
26,660,000 IntelCom Group Inc. sr. disc. notes stepped-coupon zero %
(13 1/2s, 9/15/00), 2005 ++ 17,862,200
9,400,000 Intermedia Communications of Florida, Inc. sr. disc. notes stepped-coupon
zero % (12 1/2s, 5/15/01), 2006 ++ 5,875,000
8,050,000 Intermedia Communications of Florida, Inc. sr. notes Ser. B, 13 1/2s, 2005 9,217,250
20,000,000 MFS Communications sr. disc. notes stepped-coupon zero %
(8 7/8s, 1/1/01), 2006 ++ 14,000,000
10,250,000 Nextlink Communications sr. notes 12 1/2s, 2006 10,506,250
4,560,000 Omnipoint Corp. 144A sr. notes 11 5/8s, 2006 4,742,400
18,500,000 Teleport Communications Group Inc. sr. disc. notes stepped-coupon zero %
(11 1/8s, 7/1/01), 2007 ++ 11,840,000
15,670,000 Winstar Communications, Inc. sr. disc. notes stepped-coupon zero %
(14s, 10/15/00), 2005 ++ 8,775,200
-------------
116,686,005
Telephone Services (0.1%)
- ---------------------------------------------------------------------------------------------------------------
1,990,000 Call-Net Enterprises sr. disc. notes stepped-coupon zero %
(13 1/4s, 12/1/99), 2004 ++ 1,547,225
1,500,000 Fonorola, Inc. sr. notes 12 1/2s, 2002 (Canada) 1,605,000
-------------
3,152,225
Textiles (0.2%)
- ---------------------------------------------------------------------------------------------------------------
4,885,000 Foamex (L.P.) Capital Corp. sr. disc. notes stepped-coupon
Ser. B, zero % (14s, 7/1/99), 2004 ++ 3,419,500
1,150,000 Polysindo International Eka company guaranty 13s, 2001 (Indonesia) 1,276,500
4,475,000 Polysindo International Finance company guaranty 11 3/8s, 2006 (Indonesia) 4,709,938
-------------
9,405,938
Transportation (0.1%)
- ---------------------------------------------------------------------------------------------------------------
5,775,000 Eletson Holdings, Inc. 1st pfd. mtge. notes 9 1/4s, 2003 (Greece) 5,601,750
-------------
Total Corporate Bonds and Notes (cost $1,191,583,357) 1,227,260,569
<CAPTION>
FOREIGN GOVERNMENT BONDS AND NOTES (23.0%)*
PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
AUD 19,005,000 Australia (Government of) bonds Ser. 803, 9 1/2s, 2003 16,526,644
CAD 38,330,000 Canada (Government of) bonds 7s, 2006 27,862,290
CAD 89,600,000 Canada (Government of) deb. 8 3/4s, 2005 73,230,136
CAD 15,115,000 Canada (Government of) deb. Ser. A-76, 9s, 2025 12,740,864
DKK 190,375,000 Denmark (Government of) bonds 8s, 2003 35,408,313
DKK 105,260,000 Denmark (Government of) bonds 7s, 2004 18,389,956
DKK 200,000,000 Denmark (Government of) bonds 9s, 2000 38,566,080
FRF 224,640,000 France Treasury bill 7s, 2000 46,843,534
FRF 148,610,000 France Treasury bill 4 1/2s, 1998 29,045,191
DEM 90,390,000 Germany (Federal Republic of) bonds 5 3/4s, 2000 61,494,835
DEM 16,925,000 Germany (Federal Republic of) bonds 5 5/8s, 1998 11,492,352
DEM 60,675,000 Germany (Federal Republic of) bonds Ser. 118, 5 1/4s, 2001 40,383,688
DEM 30,915,000 Germany (Federal Republic of) bonds Ser. 96, 6 1/4s, 2006 20,495,124
DEM 58,230,000 Germany (Federal Republic of) bonds 7 3/8s, 2005 41,562,856
DEM 19,525,000 Germany (Federal Republic of) bonds 6 7/8s, 2005 13,501,057
ITL 65,600,000,000 Italy (Government of) bonds 9 1/2s, 2001 45,614,265
ITL 150,770,000,000 Italy (Government of) bonds 9 1/2s, 2001 104,588,832
USD 6,465,000 Morocco (Government of) bonds 6.437s, 2009 5,054,822
USD 45,107,000 Russia (Government of) principal notes zero %, 2020 +## 22,327,965
USD 11,486,000 Russia (Government of) interest notes zero %, 2015 +## 7,351,040
ZAR 41,179,000 South Africa (Republic of) bonds Ser. 153, 13s, 2010 7,801,047
ESP 8,474,900,000 Spain (Government of) deb. 10.1s, 2001 72,829,731
SEK 183,000,000 Sweden (Government of) bonds 10 1/4s, 2000 31,020,698
SEK 167,100,000 Sweden (Government of) deb. 6s, 2005 23,132,457
GBP 9,870,000 United Kingdom Conversion stock 9s, 2000 16,470,356
GBP 46,985,000 United Kingdom Treasury bonds 8 1/2s, 2007 77,577,742
GBP 8,835,000 United Kingdom Treasury notes 7 3/4s, 2006 13,883,060
USD 12,925,000 United Mexican States bonds 11 1/2s, 2026 12,828,063
-------------
Total Foreign Government Bonds and Notes (cost $920,578,693) 928,022,998
BRADY BONDS (3.4%) *
PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------
$ 54,500,000 Argentina (Republic of) FRN Ser. L-GL, 6.438s, 2023 40,330,000
9,447,200 Argentina (Republic of) FRN 6.656s, 2005 7,900,221
39,454,000 Brazil (Republic of) annual reset bonds 6 1/2s, 2024 30,132,993
21,190,733 Brazil (Republic of) FRB 4 1/2s, 2014 14,886,490
11,717,000 Ecuador (Government of) FRN 6 1/2s, 2025 7,279,186
9,137,000 Poland (Government of) FRN 6.438s, 2024 8,702,993
18,604,000 United Mexican States deb. Ser. B, 6 1/4s, 2019 12,883,270
20,250,000 Venezuela (Government of) FRN Ser. DL, 6.625s, 2007 16,731,563
-------------
Total Brady Bonds (cost $128,606,806) 138,846,716
UNITS (2.2%) *
NUMBER OF UNITS VALUE
- ---------------------------------------------------------------------------------------------------------------
2,960 Australis Media units stepped-coupon zero % (14s, 5/15/00), 2003 (Australia) ++ 1,731,600
877 Celcaribe S.A. 144A units stepped-coupon zero % (13 1/2s, 3/15/98), 2004 ++ 9,559,300
21,575 Cellnet Data Systems Inc. units stepped-coupon zero % (13s, 6/15/00), 2005 ++ 16,828,500
2,170 Cobblestone Holdings, Inc. 144A units zero %, 2004 857,150
4,650 Diva Systems Corp. 144A units stepped-coupon zero % (13s, 5/15/01), 2006 ++ 2,650,500
14,200 Fitzgerald Gaming Co. units 13s, 2002 10,792,000
3,980 Health-O-Meter Product units 13s, 2002 4,328,250
6,030 Interact Systems, Inc. 144A units stepped-coupon zero % (14s, 8/1/99), 2003 ++ 4,160,700
910 Intercel, Inc. units stepped-coupon zero % (12s, 2/1/01), 2006 ++ 5,460,000
2,780 International Wireless Communications units zero %, 2001 1,473,400
5,650 RSL Communications LTD. 144A units 12 1/4s, 2003 5,650,000
2,160 Sterling Chemical Holdings units stepped-coupon zero %
(13 1/2s, 8/15/01), 2008 ++ 1,279,800
16,710 Terex Corp. 144A units 13 3/4s, 2002 17,587,275
8,155 Wireless One Inc. units stepped-coupon zero % (13 1/2s, 8/1/01), 2006 ++ 4,424,088
-------------
Total Units (cost $82,427,926) 86,782,563
PREFERRED STOCKS (1.9%) *
NUMBER OF SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------
5,000 Alliance Gaming Corp. Ser. B, $15.00 pfd. 450,000
97,262 Cablevision Systems Ser. M, $11.125 dep. shs. pfd. 9,483,045
152,500 California Federal Bank Ser. B, $10.625 exch. pfd. 16,775,000
109,800 Diva Systems Corp. Ser. C, $6.00 pfd. 960,750
25,000 El Paso Electric Co. $11.40 pfd. 2,875,000
152,000 First Nationwide Bank $11.50 pfd. 17,176,000
172,935 Fitzgeralds Gaming Co. $3.75 pfd. 3,977,505
11,950 Grand Union Holdings 144A Ser. C, $12.00 pfd. (acquired 11/05/93,
cost $1,380,225)(In Default) (double dagger)+ 120
5,000 Pantry Pride Inc. Ser. B, $14.875 pfd. 500,000
229,370 SD Warren Co. Ser. B, $3.50 pfd. 8,257,320
13,901 Time Warner, Inc. 144A Ser. K,$10.25 pfd. (2 double daggers) 14,596,050
-------------
Total Preferred Stocks (cost $72,553,662) 75,050,790
COMMON STOCKS (1.3%) *
NUMBER OF SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------
126,237 Chesapeake Energy Corp. + 7,905,592
82,812 Computervision Corp. + 724,605
62,775 Conseco Inc. 3,091,669
84,033 Elsinore Corp. + 18,382
250,000 Exide Corp. 6,468,750
7,795 Federated Department Stores Inc. + 261,133
3,026 Finlay Enterprises, Inc. 37,447
539,505 Grand Union Co. (acquired various dates from 6/14/93 to
3/14/95 cost $24,485,117) (double dagger)+ 3,439,344
7,541 IFINT Diversified Holdings 144A + 370,452
49,679 Lady Luck Gaming Corp. (acquired 10/1/93 cost $40,922) (double dagger)+ 133,512
118,831 Loehmanns' Holdings, Inc. + 2,867,541
480,000 NEXTEL Communications, Inc. Class A + 8,880,000
1,184 PMI Holdings Corp. 144A + 260,480
1,942 Premium Holdings L.P. 144A + 48,552
979,968 PSF Holding LLC Class A 14,699,520
7,500 Southdown, Inc. 184,688
1,480 Southland Corp. + 4,486
80,873 Total Renal Care Holdings, Inc. + 2,395,863
33,570 Total Renal Care Holdings, Inc. (acquired various dates from 8/4/94
to 1/25/95 cost $53,398)(double dagger)+ 1,334,408
-------------
Total Common Stocks (cost $79,319,318) 53,126,424
ASSET-BACKED SECURITIES (1.0%)*
PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------
$ 12,195,000 Chemical Master Credit Card Trust Ser. 95-2, Class A, 6.23s, 2003 11,996,831
29,845,000 Sears Credit Account Master Trust Ser. 95-5, Class A, 6.05s, 2004 28,427,363
-------------
Total Asset-Backed Securities (cost $42,310,278) 40,424,194
CONVERTIBLE BONDS AND NOTES (0.6%) *
PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------
$ 400,000 Argosy Gaming cv. sub. notes 12s, 2001 360,000
4,200,000 Exide Corp. 144A cv. sr. sub. notes 2.9s, 2005 2,541,000
2,782,000 GST Telecommunications, Inc. cv. sr. disc. notes
stepped-coupon zero % (13 7/8s, 15/15/00), 2005 ++ 2,587,260
9,500,000 Pricellular Wireless Corp. 144A cv. sub. notes stepped-coupon
zero % (10 3/4s, 8/15/00), 2004 ++ 9,025,000
2,750,000 Protection One Alarm cv. sr. sub. notes 6 3/4s, 2003 2,736,250
7,835,000 Winstar Communications. Inc. cv sr. disc. notes stepped-coupon
zero % (14s, 10/15/00), 2005 ++ 5,014,400
-------------
Total Convertible Bonds and Notes (cost $16,756,274) 22,263,910
PURCHASED OPTIONS OUTSTANDING (0.2%) *
NUMBER OF EXPIRATION DATE/
CONTRACTS STRIKE PRICE VALUE
- -------------------------------------------------------------------------------------------------------------------------------
ITL 54,200,000,000 Italian Government Bond Futures Contracts (Call) Nov. 96 / 119.6 861,223
JPY 16,082,000,000 Japanese Government Bond Futures Contracts (Call) Nov. 96/ 117.5 6,862,771
-------------
Total Purchased Options Outstanding (cost $6,643,217) 7,723,994
CONVERTIBLE PREFERRED STOCKS (0.4%) *
NUMBER OF SHARES VALUE
- ------------------------------------------------------------------------------------------------------------
50,272 Cablevision Systems Corp. Ser. H, $11.75 cv. pfd. (2 double daggers) 5,102,608
314,000 Cablevision Systems Corp. Ser. I, $8.50 cv. pfd. 7,732,250
31,300 Granite Broadcasting $1.938 cv. pfd. 2,363,150
75,000 Kelly Oil & Gas Corp. $2.625 cv. pfd. 1,856,250
-------------
Total Convertible Preferred Stocks (cost $15,454,571) 17,054,258
COLLATERALIZED MORTGAGE OBLIGATIONS (0.1%) *(cost $5,026,738)
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
$ 5,249,000 Citicorp Mortgage Securities, Inc. Ser. 92-14M, 7 1/2s, 2022 5,232,597
WARRANTS (0.1%) *+
NUMBER OF WARRANTS EXPIRATION DATE VALUE
- -------------------------------------------------------------------------------------------------------------------------------
185,000 Becker Gaming Corp. 144A 11/15/00 37,000
44,363 Capital Gaming International, Inc. 2/1/99 1,775
9,658 Casino America, Inc. 11/15/96 966
32,400 Casino Magic Finance Corp. 10/14/96 324
2,430 Commodore Media 144A 7/5/01 315,900
12,400 Comunicacion Celular 144A (Colombia) 11/15/03 620,000
9,350 County Seat Holdings, Inc. 10/15/98 9,350
47,500 Elsinore Corp. 10/8/98 4,750
6,850 Fitzgerald Gaming Co. 144A 3/15/99 685
4,885 Foamex (L.P.) Capital Corp. 144A 7/1/99 24,425
2,352 Grand Union Co. Ser. 1 (acquired various dates from 6/16/93 to
10/4/94, cost $941) (double dagger) 6/16/00 706
4,705 Grand Union Co. Ser. 2 (acquired various dates from 6/16/93 to
10/4/94, cost $471) (double dagger) 6/16/00 188
6,240 Heartland Wireless Communications 144A 4/15/00 31,200
4,165 Hyperion Telecommunications 144A 4/15/01 41,650
65,538 Intelcom Group 9/15/05 1,015,839
8,050 Intermedia Communications 144A 6/1/00 322,000
8,025 Louisiana Casino Cruises, Inc. 144A 12/1/98 120,375
72,000 Miles Homes, Inc. 4/1/97 7,200
21,500 NEXTEL Communications Inc. 1/1/98 430
10,030 NEXTEL Communications Inc. 1/1/99 201
13,800 Pagemart, Inc. 144A 12/31/03 113,850
17,500 Petracom Holdings, Inc. 8/1/05 124,688
37,527 President Riverboat Casinos, Inc. 9/30/99 33,774
215 Telemedia Broadcasting Corp. 144A 4/1/04 160,995
54,910 UCC Investor Holding, Inc. (acquired various dates from 3/16/94
to 5/2/95 cost $713,986)(double dagger) 7/1/04 713,830
6,375 Wireless One, Inc. 10/19/00 33,469
1,001 Wright Medical Technology, Inc. 144A 6/30/03 130,075
-------------
Total Warrants (cost $3,918,231) 3,865,645
SHORT-TERM INVESTMENTS (6.4%)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------
$ 25,000,000 Bellsouth Telecommunications Inc. effective yield of 5.32%, December 4, 1996 24,757,500
30,000,000 Federal Home Loan Mortgage Corp. effective yield of 5.285%, October 10, 1996 29,960,363
790,000 Federal Home Loan Mortgage Corp. effective yield of 5.23%, October 10, 1996 788,967
25,000,000 Federal National Mortgage Assn. effective yield of 5.25%, November 27, 1996 24,792,159
4,650,000 Federal National Mortgage Assn. effective yield of 5.23%, November 8, 1996 4,624,329
5,000,000 Federal National Mortgage Assn. effective yield of 5.225%, November 15, 1996 4,967,344
15,000,000 Ford Motor Credit Co. effective yield of 5.32%, October 7, 1996 14,986,700
25,000,000 Merrill Lynch & Co. Inc. effective yield of 5.30%, November 18, 1996 24,823,334
25,000,000 Merrill Lynch & Co. Inc. effective yield of 5.29%, October 15, 1996 24,948,569
MXP 52,290,870 Mexican T Bill zero %, June 5, 1997 6,092,949
MXP 12,187,110 Mexican T Bill zero %, January 9, 1997 1,592,978
$ 25,000,000 Morgan (J.P.) & Co. Inc. effective yield of 5.42%, October 28, 1996 24,898,375
17,215,000 National Rural Utilities Cooperative Finance Corp. effective
yield of 5.32%, October 2, 1996 17,212,455
25,000,000 Sheffield Receivables Corp. effective yield of 5.33%, October 16, 1996 24,944,479
25,000,000 Walt Disney Co. effective yield of 5.32%, December 9, 1996 24,738,750
2,466,000 Interest in $365,453,000 joint repurchase agreement dated
September 30, 1996 with Goldman, Sachs & Co. due October 1, 1996
with respect to various U.S. Treasury obligations -- maturity value
of $2,466,385 for an effective yield of 5.625%. 2,466,385
-------------
Total Short-Term Investments (cost $256,057,624) 256,595,636
- --------------------------------------------------------------------------------------------------------------
Total Investments (cost $4,051,034,201)*** 4,088,219,112
- --------------------------------------------------------------------------------------------------------------
* Percentages indicated are based on net assets of $4,030,038,395.
*** The aggregate identified cost on a tax basis is
$4,056,670,903, resulting in gross unrealized appreciation and
depreciation of $103,778,571 and $72,230,362, respectively,
or net unrealized appreciation of $31,548,209.
+ Non-income-producing security.
++ The interest rate and date shown parenthetically
represent the new interest rate to be paid and
the date the fund will begin receiving interest
income at this rate.
(double dagger) Restricted, excluding 144A securities, as to public resale.
The total market value of restricted securities held at
September 30, 1996 was $5,622,108 or 0.1% of net assets.
(2 double daggers) Income may be received in cash or additional securities at
the discretion of the issuer.
## When-issued securities (Note 1).
(R) Real Estate Investment Trust.
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.
TBA after the name of a security represents to be announced
securities. (Note 1)
The rates shown on Floating Rate Bonds (FRB) and Floating Rate Notes
(FRN) are the current interest rates shown at September 30, 1996,
which are subject to change based on the terms of the security.
Forward Currency Contracts to Buy at September 30, 1996
(aggregate face value $580,362,163)
<CAPTION> Unrealized
Market Aggregate Delivery Appreciation/
Value Face Value Date (Depreciation)
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Australian Dollars $52,076,818 $52,054,127 12/18/96 $22,691
British Pounds 36,780,797 36,724,184 12/18/96 56,613
Canadian Dollars 3,145,581 3,136,038 12/18/96 9,543
Deutschemarks 135,201,890 137,385,656 12/18/96 (2,183,766)
Euro Currency 21,309,601 21,557,343 12/18/96 (247,742)
French Francs 109,921,152 112,338,532 12/18/96 (2,417,380)
Italian Lira 17,171,195 17,211,838 12/18/96 (40,643)
Japanese Yen 191,104,956 197,306,639 12/18/96 (6,201,683)
Swedish Krona 2,648,568 2,647,806 12/18/96 762
- -----------------------------------------------------------------------------------
$(11,001,605)
- -----------------------------------------------------------------------------------
Forward Currency Contracts to Sell at September 30, 1996
(aggregate face value $746,674,914)
<CAPTION> Unrealized
Market Aggregate Delivery Appreciation/
Value Face Value Date (Depreciation)
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Canadian Dollars $ 21,669,577 $ 21,465,693 12/18/96 $ (203,884)
Danish Krone 61,425,599 62,698,994 12/18/96 1,273,395
Deutschemarks 199,799,336 203,854,807 12/18/96 4,055,471
French Francs 67,765,868 69,395,607 12/18/96 1,629,739
Italian Lira 70,591,797 70,512,440 12/18/96 (79,357)
Japanese Yen 206,774,165 209,546,192 12/18/96 2,772,027
Spanish Peseta 29,205,178 29,409,359 12/18/96 204,181
Swedish Krona 28,418,956 28,459,439 12/18/96 40,483
Swiss Francs 50,462,501 51,332,383 12/18/96 869,882
- ---------------------------------------------------------------------------------
$ 10,561,937
- ---------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statments.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
September 30, 1996
<S> <C>
Assets
- ------------------------------------------------------------------------------------------------
Investments in securities, at value (identified cost
$4,051,034,201) (Note 1) $4,088,219,112
- ------------------------------------------------------------------------------------------------
Cash 3,176,712
- ------------------------------------------------------------------------------------------------
Dividends and interest receivable 68,166,658
- ------------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 55,954,167
- ------------------------------------------------------------------------------------------------
Receivable for securities sold 189,648,134
- ------------------------------------------------------------------------------------------------
Receivable for open forward currency contracts 10,988,903
- ------------------------------------------------------------------------------------------------
Receivable for closed forward currency contracts 13,648,111
- ------------------------------------------------------------------------------------------------
Total assets 4,429,801,797
Liabilities
- ------------------------------------------------------------------------------------------------
Payable for securities purchased 364,027,426
- ------------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 5,040,676
- ------------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 5,297,532
- ------------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 779,762
- ------------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 8,726
- ------------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 10,375
- ------------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 2,871,903
- ------------------------------------------------------------------------------------------------
Payable for open forward currency contracts 11,428,571
- ------------------------------------------------------------------------------------------------
Payable for closed forward currency contracts 9,399,788
- ------------------------------------------------------------------------------------------------
Other accrued expenses 898,643
- ------------------------------------------------------------------------------------------------
Total liabilities 399,763,402
- ------------------------------------------------------------------------------------------------
Net assets $4,030,038,395
Represented by
- ------------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $4,031,172,575
- ------------------------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 6,926,338
- ------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments
and foreign currency transactions (Note 1) (44,513,096)
- ------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments and assets
and liabilities in foreign currencies 36,452,578
- ------------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $4,030,038,395
Computation of net asset value and offering price
- ------------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($1,845,900,972 divided by 150,222,899 shares) $12.29
- ------------------------------------------------------------------------------------------------
Offering price per class A share (100/95.25 of $12.29)* $12.90
- ------------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($2,135,148,395 divided by 174,433,130 shares)** $12.24
- ------------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($46,327,409 divided by 3,776,839 shares) $12.27
- ------------------------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $12.27)* $12.68
- ------------------------------------------------------------------------------------------------
Net asset value, offering and redemption price per class Y share
($2,661,619 divided by 216,560 shares) $12.29
- ------------------------------------------------------------------------------------------------
* 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.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Year ended September 30, 1996
<S> <C>
Investment Income:
- ----------------------------------------------------------------------------------------------------
Interest income (net of foreign tax of $1,292,140) $301,888,037
- ----------------------------------------------------------------------------------------------------
Dividends 6,183,802
- ----------------------------------------------------------------------------------------------------
Total investment income 308,071,839
Expenses:
- ----------------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 20,286,489
- ----------------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 6,086,760
- ----------------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 82,503
- ----------------------------------------------------------------------------------------------------
Administrative services (Note 2) 42,088
- ----------------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 4,242,445
- ----------------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 19,804,746
- ----------------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 153,347
- ----------------------------------------------------------------------------------------------------
Reports to shareholders 199,844
- ----------------------------------------------------------------------------------------------------
Registration fees 184,515
- ----------------------------------------------------------------------------------------------------
Auditing 172,043
- ----------------------------------------------------------------------------------------------------
Legal 218,851
- ----------------------------------------------------------------------------------------------------
Postage 1,258,318
- ----------------------------------------------------------------------------------------------------
Other 151,714
- ----------------------------------------------------------------------------------------------------
Total expenses 52,883,663
- ----------------------------------------------------------------------------------------------------
Expense reduction (Note 2) (1,145,458)
- ----------------------------------------------------------------------------------------------------
Net expense 51,738,205
- ----------------------------------------------------------------------------------------------------
Net investment income 256,333,634
- ----------------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 81,972,338
- ----------------------------------------------------------------------------------------------------
Net realized gain on written options (Note 1) 950,918
- ----------------------------------------------------------------------------------------------------
Net realized loss on foreign currency transactions (Note 1 and 3) (2,414,684)
- ----------------------------------------------------------------------------------------------------
Net unrealized appreciation of assets and liabilities
in foreign currencies during the year 4,010,565
- ----------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments, written
options and TBA sale commitments during the year 6,505,977
- ----------------------------------------------------------------------------------------------------
Net gain on investments 91,025,114
- ----------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $347,358,748
- ----------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Year ended Year ended
September 30 September 30
1996 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase in net assets
- -----------------------------------------------------------------------------------------------------------------
Operations:
- -----------------------------------------------------------------------------------------------------------------
Net investment income $256,333,634 $247,857,277
- -----------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments and foreign
currency transactions 80,508,572 (91,603,557)
- -----------------------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments and assets
and liabilities in foreign currency 10,516,542 186,921,390
- -----------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 347,358,748 343,175,110
- -----------------------------------------------------------------------------------------------------------------
Distributions to shareholders
- -----------------------------------------------------------------------------------------------------------------
From net investment income:
Class A (124,374,433) (103,443,301)
- -----------------------------------------------------------------------------------------------------------------
Class B (130,679,613) (103,501,273)
- -----------------------------------------------------------------------------------------------------------------
Class M (2,135,027) (306,880)
- -----------------------------------------------------------------------------------------------------------------
Class Y (57,653) --
- -----------------------------------------------------------------------------------------------------------------
From return of capital:
Class A -- (20,901,496)
- -----------------------------------------------------------------------------------------------------------------
Class B -- (20,913,210)
- -----------------------------------------------------------------------------------------------------------------
Class M -- (62,008)
- -----------------------------------------------------------------------------------------------------------------
Increase from capital share transactions (Note 4) 532,684,820 129,258,557
- -----------------------------------------------------------------------------------------------------------------
Total increase in net assets 622,796,842 223,305,499
- -----------------------------------------------------------------------------------------------------------------
Net assets
- -----------------------------------------------------------------------------------------------------------------
Beginning of year 3,407,241,553 3,183,936,054
- -----------------------------------------------------------------------------------------------------------------
End of year (including undistributed net investment income
and distributions in excessof net investment income of
$6,926,338 and $4,013,314, respectively) $4,030,038,395 $3,407,241,553
- -----------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
For the Period For the Period
July 1, 1996 December 1, 1994
(commencement (commencement
of operations) to Year Ended of operations) to
September 30 September 30 September 30
- --------------------------------------------------------------------------------------------------------------------------------
1996 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
Class Y Class M
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $12.07 $11.97 $11.34
- --------------------------------------------------------------------------------------------------------------------------------
Investment operations
- --------------------------------------------------------------------------------------------------------------------------------
Net investment income .24 .86 .78
- --------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments .20 .31 .63
- --------------------------------------------------------------------------------------------------------------------------------
Total from investment operations .44 1.17 1.41
- --------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders
- --------------------------------------------------------------------------------------------------------------------------------
From net investment income (.22) (.87) (.65)
- --------------------------------------------------------------------------------------------------------------------------------
In excess of net investment income -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
From net realized gain on investments -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
In excess of net realized gain on investments -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
From return of capital -- -- (.13)
- --------------------------------------------------------------------------------------------------------------------------------
Total distributions (.22) (.87) (.78)
- --------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $12.29 $12.27 $11.97
- --------------------------------------------------------------------------------------------------------------------------------
Total investment return at net asset value (%) (a) 3.70 * 10.12 12.90 *
- --------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $2,662 $46,327 $14,751
- --------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%)(b) .19 * 1.28 1.07 *
- --------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets (%) 1.95 * 7.09 6.30 *
- --------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 304.39 304.39 235.88
- --------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Financial highlights (continued)
(For a share outstanding throughout the period)
Year Ended September 30
- --------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------------
Class B
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $11.95 $11.61 $12.79
- --------------------------------------------------------------------------------------------------------------------------------
Investment operations
- --------------------------------------------------------------------------------------------------------------------------------
Net investment income .80 .88 .72
- --------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments .29 .33 (.91)
- --------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 1.09 1.21 (.19)
- --------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders
- --------------------------------------------------------------------------------------------------------------------------------
From net investment income (.80) (.72) (.65)
- --------------------------------------------------------------------------------------------------------------------------------
In excess of net investment income -- -- (.10)
- --------------------------------------------------------------------------------------------------------------------------------
From net realized gain on investments -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
In excess of net realized gain on investments -- -- (.08)
- --------------------------------------------------------------------------------------------------------------------------------
From return of capital -- (.15) (.16)
- --------------------------------------------------------------------------------------------------------------------------------
Total distributions (.80) (.87) (.99)
- --------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $12.24 $11.95 $11.61
- --------------------------------------------------------------------------------------------------------------------------------
Total investment return at net asset value (%) (a) 9.47 11.01 (1.62)
- --------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $2,135,148 $1,795,456 $1,644,860
- --------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%)(b) 1.77 1.76 1.76
- --------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets (%) 6.57 7.46 8.05
- --------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 304.39 235.88 201.53
- --------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Financial highlights (continued)
(For a share outstanding throughout the period)
For the Period
March 1, 1993
(commencement
of operations) to
Year Ended September 30
- --------------------------------------------------------------------------------------------------------------------------------
1993 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
Class A
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $12.51 $11.99 $11.64
- --------------------------------------------------------------------------------------------------------------------------------
Investment operations
- --------------------------------------------------------------------------------------------------------------------------------
Net investment income .49 .89 .95
- --------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments .39 .30 .36
- --------------------------------------------------------------------------------------------------------------------------------
Total from investment operations .88 1.19 1.31
- --------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders
- --------------------------------------------------------------------------------------------------------------------------------
From net investment income (.46) (.89) (.80)
- --------------------------------------------------------------------------------------------------------------------------------
In excess of net investment income -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
From net realized gain on investments (.14) -- --
- --------------------------------------------------------------------------------------------------------------------------------
In excess of net realized gain on investments -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
From return of capital -- -- (.16)
- --------------------------------------------------------------------------------------------------------------------------------
Total distributions (.60) (.89) (.96)
- --------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $12.79 $12.29 $11.99
- --------------------------------------------------------------------------------------------------------------------------------
Total investment return at net asset value (%) (a) 7.21 * 10.35 11.89
- --------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $504,417 $1,845,901 $1,597,034
- --------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%)(b) 1.91 * 1.02 1.01
- --------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets (%) 5.80 * 7.32 8.22
- --------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 243.73 304.39 235.88
- --------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Financial highlights (continued)
(For a share outstanding throughout the period)
Year ended September 30
- -------------------------------------------------------------------------------------------------------------------------------
1994 1993 1992
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $12.82 $12.66 $11.85
- -------------------------------------------------------------------------------------------------------------------------------
Investment operations
- -------------------------------------------------------------------------------------------------------------------------------
Net investment income .78 .96 1.04
- -------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (.88) .56 .97
- -------------------------------------------------------------------------------------------------------------------------------
Total from investment operations (.10) 1.52 2.01
- -------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders
- -------------------------------------------------------------------------------------------------------------------------------
From net investment income (.71) (.94) (1.01)
- -------------------------------------------------------------------------------------------------------------------------------
In excess of net investment income (.12) -- --
- -------------------------------------------------------------------------------------------------------------------------------
From net realized gain on investments -- (.42) (.19)
- -------------------------------------------------------------------------------------------------------------------------------
In excess of net realized gain on investments (.08) -- --
- -------------------------------------------------------------------------------------------------------------------------------
From return of capital (.17) -- --
- -------------------------------------------------------------------------------------------------------------------------------
Total distributions (1.08) (1.36) (1.20)
- -------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $11.64 $12.82 $12.66
- -------------------------------------------------------------------------------------------------------------------------------
Total investment return at net asset value (%) (a) (.93) 12.85 17.88
- -------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $1,539,076 $874,937 $365,253
- -------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%)(b) 1.01 1.21 1.36
- -------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets (%) 7.96 6.80 8.27
- -------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 201.53 243.73 221.09 (c)
- -------------------------------------------------------------------------------------------------------------------------------
* Not annualized
(a) Total investment return assumes dividend reinvestment
and does not reflect the effect of sales charges.
(b) The ratio of expenses to average net assets for periods ended September 30,
1995 and thereafter, includes amounts paid through expense offset
arrangements. Prior period ratios exclude these amounts. (Note 2)
(c) Portfolio turnover excludes the impact of assets received from the acquisition
of Putnam Diversified Premium Income Trust and subsequent sales to realign
the portfolio.
</TABLE>
Notes to financial statements
September 30, 1996
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, class M and class Y 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 may be 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 higher than class A shares but lower than class B shares.
Class Y shares, which are sold at net asset value, are generally
subject to the same expenses as class A, class B and class M shares,
but do not bear a distribution fee. Class Y shares are sold to
defined contribution plans that initially invest at least $250
million in a combination of Putnam Funds.
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
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. Securities quoted in foreign currencies are
translated into U.S. dollars at the current exchange rate. Short-
term investments having remaining maturities of 60 days or less are
stated at amortized cost, which approximates market value, and other
investments, including restricted securities, are stated at fair
market value following procedures approved by the Trustees. Market
quotations are not considered to be readily available for long-term
corporate bonds and notes; such investments are stated at fair value
on the basis of valuations furnished by a pricing service, approved
by the Trustees, or dealers which determine valuations for normal
institutional-size trading units of such securities using methods
based on market transactions for comparable securities and various
relationships between securities that are generally recognized by
institutional traders.
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 and certain other
accounts managed by Putnam Investment Management, Inc. ("Putnam
Management"), the fund's Manager, a wholly-owned subsidiary of
Putnam Investments, Inc.. These balances may be invested in one or
more repurchase agreements and/or short-term money market
instruments.
C) Repurchase agreements The fund, or any joint trading account,
through its custodian, receives delivery of the underlying
securities, the market value of which at the time of purchase is
required to be in an amount at least equal to the resale price,
including accrued interest. Putnam Management is responsible for
determining that the value of these underlying securities is at all
times at least equal to the resale price, including accrued
interest.
D) Security transactions and related investment income Security
transactions are accounted for on the trade date (date the order to
buy or sell is executed). Interest income is recorded on the accrual
basis. Dividend income is recorded on 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.
Securities purchased or sold on a when-issued basis may be settled a
month or more after the trade date; interest income is not accrued
until settlement date. Losses may arise due to changes in the market
value of the underlying securities or if the counterparty does not
perform under the contract.
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 value at the time it was closed. The fund could be
exposed to risk if the value of the currency changes unfavorably, if
the counterparties to the contracts are unable to meet the terms of
their contracts or if the fund is unable to enter into a closing
position.
G) Futures and options contracts The fund may use futures and
options contracts to hedge against changes in the values of
securities the fund owns or expects to purchase. The fund may also
write options on securities it owns or in which it may invest to
increase its current returns.
The potential risk to the fund is that the change in value of
futures and options contracts may not correspond to the change in
value of the hedged instruments. In addition, losses may arise from
changes in the value of the underlying instruments, if there is an
illiquid secondary market for the contracts, or if the counterparty
to the contract is unable to perform.
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 1.0% 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, according to the procedures described under security
valuation above.
Although the fund will generally enter into TBA purchase commitments
with the intention of acquiring securities for their portfolio or
for delivery pursuant to options contracts it has entered into, the
fund may dispose of a commitment prior to settlement if Putnam
Management deems it appropriate to do so.
I) 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.
At September 30, 1996, the fund had a capital loss carryover of
approximately $38,876,000 available to offset future net capital
gain, if any, which will expire on September 30, 2003.
J) Distributions to shareholders Distributions to shareholders are
recorded by the fund on the ex-dividend date. At certain times, the
fund may pay distributions at a level rate even though, as a result
of market conditions or investment decisions, the fund may not
achieve projected investment results for a given period. The amount
and character of income and gains to be distributed are determined
in accordance with income tax regulations which may differ from
generally accepted accounting principles. These differences include
treatment of losses on wash sale transactions, realized and
unrealized gains and losses on forward foreign currency contracts,
currency gains and losses on bonds, post-October loss deferrals,
market discount, interest on payment-in-kind securities and
amortization of bond premium.
Reclassifications are made to the fund's capital accounts to reflect
income and gains available for distribution (or available capital
loss carryovers) under income tax regulations. For the year ended
September 30, 1996, the fund reclassified $11,852,744 to increase
undistributed net investment income and $6,632,719 to decrease paid-
in-capital, with an increase to accumulated net realized loss on
investments of $5,220,025. The calculation of net investment income
per share in the financial highlights table excludes these
adjustments.
Note 2
Management fee, administrative
services and other transactions
Compensation of Putnam Management, for management and investment
advisory services is paid quarterly based on the average net assets
of the fund. Such fee is based on the following annual rates: 0.70%
of the first $500 million of average net assets, 0.60% of the next
$500 million, 0.55% of the $500 million and 0.50% of any amount over
$1.5 billion subject, under current law, to reduction in any year by
the amount of certain brokerage commissions and fees (less expenses)
received by affiliates of Putnam Management 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.
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 year ended September 30, 1996, fund expenses were reduced by
$1,145,458 under expense offset arrangements with PFTC. Investor
servicing and custodian fees reported in the Statement of operations
exclude these credits. The fund could have invested a portion of the
assets utilized in connection with the expense offset arrangements
in an income producing asset if it had not entered into such
arrangements.
Trustees of the fund receive an annual Trustees fee of $4,510 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 certain Putnam funds until
distribution in accordance with the Plan.
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 year ended September 30, 1996, Putnam Mutual Funds Corp.,
acting as underwriter received net commissions of $1,257,964 and
$43,472 from the sale of class A and class M shares, respectively
and received $4,048,165 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 year
ended September 30, 1996, Putnam Mutual Funds Corp., acting as
underwriter received $11,057 on class A redemptions.
Note 3
Purchase and sales of securities
During the year ended September 30, 1996, purchases and sales of
investment securities other than U.S. government obligations and
short-term investments aggregated $4,386,649,048 and $4,020,356,031,
respectively. Purchases and sales of U.S. government obligations
aggregated $6,756,483,424 and $6,678,325,804, 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 year are summarized as
follows:
Contract Premiums
Amounts Received
- ----------------------------------------------------
Written options
outstanding at
beginning of year $80,260,000 $345,118
- ----------------------------------------------------
Options opened 186,400,000 605,800
- ----------------------------------------------------
Options expired (266,660,000) (950,918)
- ----------------------------------------------------
Written options
outstanding at
end of year $ -- $ --
- ----------------------------------------------------
Note 4
Capital shares
At September 30, 1996, there was an unlimited number of shares of
beneficial interest authorized. Transactions in capital shares were
as follows:
Year ended
September 30, 1996
- ----------------------------------------------------
Class A Shares Amount
- ----------------------------------------------------
Shares sold 44,142,460 $538,311,863
- ----------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 6,502,010 75,921,259
- ----------------------------------------------------
50,644,470 614,233,122
Shares
repurchased (33,624,593) (407,240,413)
- ----------------------------------------------------
Net increase 17,019,877 $206,992,709
- ----------------------------------------------------
Year ended
September 30, 1995
- ----------------------------------------------------
Class A Shares Amount
- ----------------------------------------------------
Shares sold 29,561,536 $343,042,280
- ----------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 6,272,747 72,551,475
- ----------------------------------------------------
35,834,283 415,593,755
Shares
repurchased (34,850,799) (402,384,755)
- ----------------------------------------------------
Net increase 983,484 $13,209,000
- ----------------------------------------------------
Year ended
September 30, 1996
- ----------------------------------------------------
Class B Shares Amount
- ----------------------------------------------------
Shares sold 53,705,203 $649,134,362
- ----------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 6,652,677 80,011,461
- ----------------------------------------------------
60,357,880 729,145,823
Shares
repurchased (36,206,473) (436,896,456)
- ----------------------------------------------------
Net increase 24,151,407 $292,249,367
- ----------------------------------------------------
Year ended
September 30, 1995
- ----------------------------------------------------
Class B Shares Amount
- ----------------------------------------------------
Shares sold 36,302,330 $421,020,169
- ----------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 6,462,302 74,500,296
- ----------------------------------------------------
42,764,632 495,520,465
Shares
repurchased (34,212,886) (393,928,631)
- ----------------------------------------------------
Net increase 8,551,746 $101,591,834
- ----------------------------------------------------
Year ended
September 30, 1996
- ----------------------------------------------------
Class M Shares Amount
- ----------------------------------------------------
Shares sold 3,334,247 $40,396,232
- ----------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 136,559 1,643,817
- ----------------------------------------------------
3,470,806 42,040,049
Shares
repurchased (925,979) (11,197,879)
- ----------------------------------------------------
Net increase 2,544,827 $30,842,170
- ----------------------------------------------------
For the period
December 1, 1994
(commencement of
operations) to
September 30, 1995
- ----------------------------------------------------
Class M Shares Amount
- ----------------------------------------------------
Shares sold 1,339,043 $15,723,397
- ----------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 24,234 286,016
- ----------------------------------------------------
1,363,277 16,009,413
Shares
repurchased (131,265) (1,551,690)
- ----------------------------------------------------
Net increase 1,232,012 $14,457,723
- ----------------------------------------------------
For the period
July 1, 1996
(commencement of
operations) to
September 30, 1996
- ----------------------------------------------------
Class Y Shares Amount
- ----------------------------------------------------
Shares sold 381,251 $4,602,196
- ----------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 4,801 57,653
- ----------------------------------------------------
386,052 4,659,849
Shares
repurchased (169,492) (2,059,275)
- ----------------------------------------------------
Net increase 216,560 $2,600,574
- ----------------------------------------------------
Results of July 31, 1996 shareholder meeting
(Unaudited)
A meeting of shareholders of the fund was held on July 31, 1996. At
the meeting, each of the nominees for Trustees was elected, as
follows:
Votes
Votes for withheld
Jameson Adkins Baxter 196,678,903 6,630,706
Hans H. Estin 196,655,774 6,653,835
John A. Hill 196,706,244 6,603,365
R.J. Jackson 196,632,354 6,677,255
Elizabeth T. Kennan 196,645,451 6,664,158
Lawrence J. Lasser 196,687,296 6,622,313
Robert E. Patterson 196,693,165 6,616,444
Donald S. Perkins 196,633,989 6,675,620
William F. Pounds 196,652,469 6,657,140
George Putnam 196,638,577 6,671,032
George Putnam, III 196,628,626 6,680,983
Eli Shapiro 196,539,259 6,770,350
A.J.C. Smith 196,677,254 6,632,355
W. Nicholas Thorndike 196,663,998 6,645,611
A proposal to ratify the selection of Coopers & Lybrand L.L.P. as
auditors for the fund was approved as follows: 193,564,713 votes
for, and 1,714,449 votes against, with 8,030,447 abstentions and
broker non-votes.
A proposal to amend the fund's fundamental investment restriction
with respect to diversification of investments was approved as
follows: 172,060,716 votes for, and 8,159,219 votes against, with
23,089,676 abstentions and broker non-votes.
A proposal to amend the fund's fundamental investment restriction
with respect to investments in the securities of a single issuer was
approved as follows: 168,514,456 votes for, and 10,481,073 votes
against, with 24,314,080 abstentions and broker non-votes.
A proposal to amend the fund's fundamental investment restriction
with respect to making loans through purchases of debt obligations,
repurchase agreements and securities loans was approved as follows:
164,632,316 votes for, and 14,019,095 votes against, with 24,658,200
abstentions and broker non-votes.
A proposal to amend the fund's fundamental investment restriction
with respect to investments in real estate was approved as follows:
167,714,768 votes for, and 11,799,923 votes against, with 23,794,916
abstentions and broker non-votes.
A proposal to amend the fund's fundamental investment restriction
with respect to borrowing and senior securities was approved as
follows: 168,358,437 votes for, and 10,337,924 votes against, with
24,613,251 abstentions and broker non-votes.
A proposal to amend the fund's fundamental investment restriction
with respect to investments in commodities or commodity contracts
was approved as follows: 166,317,417 votes for, and 12,746,759 votes
against, with 24,245,433 abstentions and broker non-votes.
A proposal to eliminate the fund's fundamental investment
restriction with respect to investments in securities of issuers in
which management of the fund or Putnam Investment Management, Inc.
owns securities was approved as follows: 166,427,159 votes for, and
12,454,972 votes against, with 24,427,479 abstentions and broker
non-votes.
A proposal to eliminate the fund's fundamental investment
restriction with respect to margin transactions was approved as
follows: 163,497,568 votes for, and 14,759,802 votes against, with
25,052,240 abstentions and broker non-votes.
A proposal to eliminate the fund's fundamental investment
restriction with respect to short sales was approved as follows:
164,367,612 votes for, and 14,142,242 votes against, with 24,799,750
abstentions and broker non-votes.
A proposal to eliminate the fund's fundamental investment
restriction which limits the fund's ability to pledge assets was
approved as follows: 163,570,341 votes for, and 14,994,410 votes
against, with 24,744,863 abstentions and broker non-votes.
A proposal to eliminate the fund's fundamental investment
restriction with respect to investments in restricted securities was
approved as follows: 165,286,913 votes for, and 13,196,124 votes
against, with 24,826,569 abstentions and broker non-votes.
A proposal to eliminate the fund's fundamental investment
restriction with respect to investments in certain oil, gas an
mineral interests was approved as follows: 168,039,699 votes for,
and 11,364,305 votes against, with 23,905,611 abstentions and broker
non-votes.
A proposal to eliminate the fund's fundamental investment
restriction with respect to invest to gain control of a company's
management was approved as follows: 166,870,899 votes for, and
12,253,902 votes against, with 24,184,811 abstentions and broker
non-votes.
All tabulations are rounded to nearest whole number.
- --------------------------------------------------------------------
Federal tax information
(Unaudited)
The fund has designated 2.34% of the distributions from net
investment income as qualifying for the dividends received deduction
for corporations.
The Form 1099 you receive in January 1997 will show the tax status
of all distributions paid to your account in calendar 1996.
Fund information
INVESTMENT MANAGER
Putnam Investment
Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
INDEPENDENT
ACCOUNTANTS
Coopers & Lybrand L.L.P.
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
John A. Hill
Ronald J. Jackson
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
Neil J. Powers
Vice President and Fund Manager
Jin W. Ho
Vice President and Fund Manager
Michael Martino
Vice President and Fund Manager
D. William Kohli
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. You can also learn more
at Putnam Investments' website: http://www.putnaminv.com.
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.
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
- --------------
Bulk Rate
U.S. Postage
PAID
Putnam
Investments
- --------------
28363-075/387/803 11/96
PUTNAM INVESTMENTS [LOGO]
- -------------------------------------------------------------------------
Putnam Diversified Income Trust
Supplement to Annual Report dated September 30, 1996
The following information has been prepared to provide class Y shareholders
with a performance overview specific to their holdings. Class Y shares are
offered exclusively to defined contribution plans investing $250 million
or more in one or more of Putnam's funds or private accounts. Performance
of class Y shares, Which incur neither a front-end load, distribution
fee, nor contingent deferred sales charge, will differ from performance
of class A, B, and M shares, which are discussed more extensively in the
annual report.
ANNUAL RESULTS AT A GLANCE
- -------------------------------------------------------------------------
Total return: NAV
Life of class (since 7/1/96) 3.70%
- -------------------------------------------------------------------------
Share value: NAV
7/1/96 $12.07
9/30/96 12.29
- -------------------------------------------------------------------------
Distributions: No. Income Capital gains Total
3 $0.221 $0 $0.221
- -------------------------------------------------------------------------
Current return (end of period) Total
Current dividend rate 1 7.23%
Current 30-day SEC yield 2 7.53
1 Income portion of most recent distribution, annualized and divided
by NAV at end of period.
2 Based only on investment income, calculated using SEC guidelines.
Please note that past performance does not indicate future results.
Investment return and principal value will fluctuate so your shares,
when redeemed, may be worth more or less than their original cost.
See full report for information on comparative benchmarks. If you
have questions, please consult your fund prospectus or call Putnam
toll free at 1-800-752-9894.
