Putnam
Diversified
Income
Trust
ANNUAL REPORT
September 30, 1997
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* Morningstar Inc., an independent rating agency, awarded Putnam
Diversified Income Trust's class A shares a 4-star rating for overall
performance (based on the 3- and 5-year average annual returns) as of
September 30, 1997. Only 22.5% of the 1,309 funds in Morningstar's
fixed-income category receive 4 stars.*
CONTENTS
4 Report from Putnam Management
10 Fund performance summary
15 Portfolio holdings
39 Financial statements
* Morningstar rates a fund relative to other funds with similar investment
objectives based on the fund's 3-, 5-, and 10-year performance, adjusted
for risk factors and sales charges. Ratings are updated monthly: 10% of
funds receive 5 stars and 22.5% receive 4 stars. For the 3- and 5-year
periods ended September 30, 1997, there were 1,309 and 713 funds in the
fixed-income category; the fund received 4 stars for each respective
period. Past performance is not indicative of future results. Performance
of other share classes will vary.
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
Putnam Diversified Income Trust ended fiscal 1997 with gratifyingly positive
results derived from its globally diverse portfolio of fixed-income
securities. The fund's carefully selected high-yield bond holdings led the
charge during the period, but the protective role of the fund's more
conservative sectors should not be overlooked. It is this diversification
across a broad band of the risk/return spectrum that gives your fund's
investment strategy much of its appeal.
Your fund's management team, with expertise as varied as the securities in
which the fund invests, closely monitors the world's fixed-income markets,
continually fine-tuning the portfolio and seeking attractive investment
opportunities. In the following report, your fund's managers review
performance in the fiscal year just ended and discuss prospects for fiscal
1998.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
November 19, 1997
Report from the Fund Managers
Kenneth J. Taubes, lead manager
Robert M. Paine
Michael Martino
D. William Kohli
Gail S. Attridge
Although the backdrop for investing in fixed-income securities around the
world was generally favorable during the past 12 months, brief periods of
volatility on the interest-rate and currency fronts as well as persistent
inflation fears posed challenges for each of Putnam Diversified Income
Trust's three investment sectors -- U.S. taxable investment-grade
(formerly the U.S. government sector), foreign, and high-yield bonds.
Despite these episodes of turbulence, your fund was able to close fiscal
1997 with double-digit returns. For the 12 months ended September 30, 1997,
class A shares returned a total of 10.86% at net asset value and 5.62% at
public offering price. On pages 10 and 11 of this report, you'll find
full performance details for all share classes.
Throughout the period, maximizing yield potential was the name of the game. As
a result, we emphasized high-yield bonds and emerging-markets securities,
which provided the lion's share of performance. Mortgage-backed securities
proved the most worthwhile position in the U.S. investment-grade sleeve. Bonds
in Europe's core markets also produced respectable gains in local terms,
although conversion into U.S. dollars dampened the results.
* EXTENDING DURATION AND EMPHASIZING MORTGAGES WERE KEY STRATEGIES
Throughout the fiscal year, mortgage-backed securities were our primary focus
in the U.S. investment-grade portion of your fund's portfolio for several
reasons. To compensate investors for their prepayment risk -- which can dampen
performance of mortgage-backed securities in a falling-rate environment --
these securities carry higher yields than most other U.S. government issues.
This year, since interest rates remained relatively stable, prepayment risk
was not an issue. For this reason as well as because of the favorable
supply/demand dynamics, the fund's mortgage-backed holdings substantially
outperformed Treasury securities.
While it's true the mortgage market faltered a bit in late summer because of
declining interest rates and heightened prepayment fears, over the entire
period your fund's mortgage-backed holdings contributed significantly to
performance. Our concentration has been primarily in current-coupon mortgages,
those whose coupons reflect current market rates. We also had some
discount-coupon mortgages, which tend to experience less prepayment risk in a
falling-rate environment because their coupons are below current market rates.
Your fund's Treasury holdings also performed well, particularly over the
summer. We made a decision in the spring to extend duration and to position
for the likelihood of declining bond yields and rising prices. We did this by
emphasizing long-term Treasury bonds, a move that proved timely as the period
progressed.
* TELECOMMUNICATIONS, BROADCASTING, CABLE ARE TOP PERFORMERS IN HIGH-YIELD
SECTOR
The economic and business environment that prevailed during fiscal 1997 was
ideal for U.S. corporate high-yield bonds. Extremely low default rates,
powerful equity markets, steady demand, and continued brisk consolidation
activity that often leads to credit upgrades fueled the portfolio's
performance during the period.
Holdings in three industry sectors -- telecommunications, broadcasting, and
cable -- dominated the fund's high-yield assets and contributed substantially
to the fund's returns. Bonds of telecommunications companies in particular led
the charge, bouncing back from price declines suffered in March, when they
fell out of favor because of rising interest rates and investors' flight to
quality. Confident in our research and choice of companies, we bolstered the
fund's positions in many bonds during the weakness in this market sector.
Thus, when bond prices recovered, the fund's rewards were substantial.
[GRAPHIC OMITTED: horizontal bar chart TOP FIVE COUNTRY ALLOCATIONS]
TOP FIVE COUNTRY ALLOCATIONS*
Germany 5.2%
United Kingdom 4.5%
Mexico 4.2%
France 3.1%
Brazil 2.6%
Footnote reads:
*Based on net assets as of 9/30/97. Holdings will vary over time.
In addition to the ongoing positive effects of deregulation in these
industries, recent rulings favorable to competitive local exchange carriers
(CLECs) as well as continued industry consolidation caused many holdings to
appreciate substantially. Brooks Fiber Properties, which was recently
purchased by WorldCom, NEXTEL Communications, Hyperion Telecommunication
Corp., and American Communication Services Inc. have been notable performers.
While these securities and others discussed in this report were viewed
favorably during the period, all holdings are subject to review and adjustment
in accordance with the fund's investment strategy and may vary in the future.
In broadcasting, we increased the fund's position in Echostar Communications
and added several new issues such as Global Star that have proved their
potential. We also increased the weighting in broadcasting preferred stocks
such as SFX Broadcasting.
During the period's second half, we also increased exposure to foreign
cellular and foreign dollar-based corporate bonds, particularly paper
companies. Millicom International Cellular, Celcaribe, and McCaw are three
companies profiting from the exploding worldwide demand for wireless
communications. Paper companies are also presently experiencing a global rally
and we've added holdings in Indonesia, including APP International Finance
Company, and in the Philippines. We've also boosted the fund's position in
issues such as Repap New Brunswick.
[GRAPHIC OMITTED: TOP 3 HOLDINGS PER SECTOR]
TOP 3 HOLDINGS PER SECTOR *
HIGH-YIELD BONDS
Transamerican Energy 144A senior discount notes
stepped-coupon zero %, 2002
Midland Funding Corporation debentures, Series. A
11.75%, 2005
Cencall Communications Corporation senior discount
notes stepped-coupon zero %, 2004
FOREIGN BONDS
Federal Republic of Germany bonds Series 97, 6.0%, 2007
France Treasury bill notes 4.38%, 2002
United Kingdom Treasury bonds 7.5%, 2006
U.S. investment-grade securities
GNMA, 7.5%, 2024-2027
GNMA, 8.5%, 2026-2027
GNMA, 7.5%, TBA
Footnote reads:
*These holdings represent 19.9% of the fund's net assets as of
9/30/97. Portfolio holdings will vary over time.
* EMERGING MARKETS PRODUCE SIGNIFICANT GAINS; FORAY INTO JAPANESE MARKET
PROVES WORTHWHILE
On the international front, core European markets remained our area of
concentration since the fiscal year's midpoint, although their performance in
dollar terms has been a bit flat. Long-term bonds in Germany, Denmark, and
France were our primary interest mainly because of the attractively steep
yield curves present in these countries during this period. While our bond
holdings performed well, the surge in value of the U.S. dollar relative to
European currencies caused the fund's European holdings to provide low-to-flat
dollar-adjusted returns.
Performance of the core markets was further overshadowed by the dramatic
comeback staged by the higher-yielding peripheral markets of Spain, Italy, and
Sweden in response to budget improvements and the probability of a broader
European Economic and Monetary Union (EMU). We were not anticipating the
strength of the rallies and, consequently, had kept exposure to the peripheral
markets fairly low. On the currency front, we did employ hedging strategies in
the Italian lire and Swedish krona against the German deutschemark; all proved
effective.
We also maintained a significant weighting in the United Kingdom throughout
much of the period. The United Kingdom has turned out to be the
best-performing government bond market thus far in this calendar year. The
Bank of England's recent independence and tighter monetary policy as well as
further discussion of the possibility that the United Kingdom may enter EMU
after all provided the catalyst that U.K. bonds needed to rally. Other
positive dollar-bloc performance came from holding nondollar surrogates in
Australia and Canada.
During the period's second half, we reversed our negative view on Japanese
bonds and entered that market after a long period of avoidance. Signs of
continued economic weakness in Japan and currency difficulties in Southeast
Asia prompted our decision. By period's end, this foray had proved a
worthwhile endeavor. In early spring, our dollar/yen currency hedges dampened
the sleeve's returns, as the yen unexpectedly soared in value against the
dollar. The yen has since declined and our currency hedges have allowed the
fund to fully realize the positive results Japanese bonds recently posted in
local terms.
We've increased your fund's emerging-markets exposure considerably since the
outset of the fiscal year -- a strategy that has contributed substantially to
performance. Lower risk premiums worldwide, improving fundamentals, increased
global liquidity, and investors' appetite for yield have fueled the
performance of many holdings. Top performers included issues in South Africa,
Eastern Europe (including Russia and Bulgaria), Mexico, and Argentina.
* CAUTIOUS OPTIMISM PREVAILS ON ALL FRONTS
Going forward, we remain reasonably optimistic about the prospects for
fixed-income securities around the world. Moderate economic growth, low
inflation, relatively stable monetary policies, and increased fiscal
responsibility on the part of many governments appear to bode well for bond
investors in the months ahead. Of course, the sustainability of these ideal
conditions bears close watching. Should adverse market conditions arise in any
of the fund's investment sectors, we believe its broad charter will help us
pursue the best opportunities the world has to offer, which, in turn, can help
mitigate any volatility experienced by one or more sectors.
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 9/30/97, there is no guarantee the fund will continue to hold
these securities in the future. The lower credit ratings of high-yield
corporate bonds reflect a greater possibility that adverse changes in the
economy or their issuers may affect their ability to pay principal and
interest on the bonds. Investments in non-U.S. securities may be subject to
certain risks such as currency fluctuations, economic instability, and
political developments. Although the U.S. government guarantees the timely
payment of principal and interest on some of the underlying securities, the
value of the fund shares is not guaranteed and will fluctuate.
Performance summary
This section provides information about your fund's performance, which
should always be considered in light of its investment strategy. Putnam
Diversified Income Trust is designed for investors seeking high current
income consistent with capital preservation through U.S. government,
investment grade, high-yield, and international fixed-income securities.
TOTAL RETURN FOR PERIODS ENDED 9/30/97
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 10.86% 5.62% 10.08% 5.08% 10.59% 7.01%
- ------------------------------------------------------------------------------
5 years 53.02 45.77 47.39 45.40 50.98 46.06
Annual average 8.88 7.83 8.07 7.77 8.59 7.87
- ------------------------------------------------------------------------------
Life of fund 137.50 126.24 121.24 121.24 131.05 123.51
Annual average 10.10 9.51 9.23 9.23 9.76 9.36
- ------------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 9/30/97
Salomon Bros.
Lehman Bros. Non-U.S. First Boston Consumer
Aggregate World Govt. High Yield Price
Bond Index Bond Index Index Index
- ------------------------------------------------------------------------------
1 year 9.71% 12.24% 15.72% 2.15%
- ------------------------------------------------------------------------------
5 years 39.71 59.65 74.94 14.08
Annual average 6.92 9.81 11.84 2.67
- ------------------------------------------------------------------------------
Life of fund 118.29 106.42 177.53 34.56
Annual average 9.06 8.39 12.01 3.35
- ------------------------------------------------------------------------------
Returns for class A and class M shares reflect the current maximum initial
sales charges of 4.75% for class A shares and 3.25% for class M shares.
One-, five-, and ten-year (when available) and life-of-fund returns for
class B shares reflect the applicable contingent deferred sales charges
(CDSC), which is 5% in the first year, declines to 1% in the sixth year,
and is eliminated thereafter. Returns shown for class B and class M shares
for periods prior to their inception are derived from the historical
performance of class A shares, adjusted to reflect both the initial sales
charge or CDSC, if any, currently applicable to each class and, in the
case of class B and class M shares, the higher operating costs applicable
to such shares. All returns assume reinvestment of distributions at NAV
and represent past performance; they do not guarantee future results.
Investment return and principal value will fluctuate so that an investor's
shares when redeemed may be worth more or less than their original cost.
[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
Plot points read:
Fund's Lehman Bros.
class A shares Aggregate Consumer
Year at POP Bond Trust Price Index
10/3/88 9525 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
9/30/97 22624 21829 13456
Footnote reads:
Past performance is no assurance of future results. At the end of the
same time period, a $10,000 investment in the fund's class B shares
would have been valued at $22,124 and no contingent deferred sales
charges would apply; a $10,000 investment in the fund's class M shares
would have been valued at $23,105 ($22,351 at public offering price).
See first page of performance section for performance calculation method.
PRICE AND DISTRIBUTION INFORMATION
12 months ended 9/30/97
Class A Class B Class M
- ------------------------------------------------------------------------------
Distributions (number) 12 12 12
- ------------------------------------------------------------------------------
Income $0.869 $0.777 $0.846
- ------------------------------------------------------------------------------
Capital gains
- ------------------------------------------------------------------------------
Long-term -- -- --
- ------------------------------------------------------------------------------
Short-term -- -- --
- ------------------------------------------------------------------------------
Total $0.869 $0.777 $0.846
- ------------------------------------------------------------------------------
Share value: NAV POP NAV NAV POP
- ------------------------------------------------------------------------------
9/30/96 $12.29 $12.90 $12.24 $12.27 $12.68
- ------------------------------------------------------------------------------
9/30/97 12.70 13.33 12.65 12.67 13.10
- ------------------------------------------------------------------------------
Current return (end of period)
- ------------------------------------------------------------------------------
Current dividend rate1 6.71% 6.39% 5.98% 6.54% 6.32%
- ------------------------------------------------------------------------------
Current 30-day SEC yield2 6.69 6.36 5.98 6.42 6.21
- ------------------------------------------------------------------------------
1Income portion of most recent distribution, annualized and divided by
NAV or POP at end of period.
2Based on investment income, calculated using SEC guidelines.
TERMS AND DEFINITIONS
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.
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 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.
PUTNAM GROWTH FUNDS
Asia Pacific Growth Fund
Capital Appreciation Fund
Diversified Equity Trust
Europe Growth Fund
Global Growth Fund
Global Natural Resources Fund
Growth Opportunities Fund
Health Sciences Trust
International Growth Fund *
International New Opportunities Fund
Investors Fund
New Opportunities Fund +
OTC & Emerging Growth Fund [DBL. DAGGER]
Vista Fund
Voyager Fund
Voyager Fund II
PUTNAM GROWTH
AND INCOME FUNDS
Balanced Retirement Fund
Convertible Income-Growth Trust
Equity Income Fund
The George Putnam Fund of Boston
The Putnam Fund for Growth and Income
Growth and Income Fund II
International Growth and Income Fund
New Value Fund
Utilities Growth and Income Fund
PUTNAM INCOME FUNDS
American Government Income Fund
Diversified Income Trust
Diversified Income Trust II
Federal Income Trust
Global Governmental Income Trust
High Yield Advantage Fund
High Yield Total Return Fund
High Yield Trust +
Income Fund
Money Market Fund **
Intermediate U.S. Government
Income Fund
Preferred Income Fund
U.S. Government Income Trust
PUTNAM TAX-FREE
INCOME FUNDS
Municipal Income Fund
Tax Exempt Income Fund
Tax Exempt Money Market Fund**
Tax-Free High Yield Fund
Tax-Free Insured Fund
State tax-free income funds [SECTION MARK]
Arizona, California, Florida, Massachusetts, Michigan, Minnesota, New
Jersey, New York, Ohio and Pennsylvania
State tax-free money market funds [SECTION MARK]
California, New York
LIFESTAGESM FUNDS
Putnam Asset Allocation Funds--three investment portfolios that spread
your money across a variety of stocks, bonds, and money market
investments.
The three portfolios:
Asset Allocation: Balanced Portfolio
Asset Allocation: Conservative Portfolio
Asset Allocation: Growth Portfolio
* Formerly Overseas Growth Fund
+ Closed to new investors. Some exceptions may apply. Contact Putnam
for details.
[DBL. DAGGER] Formerly OTC Emerging Growth Fund
[SECTION MARK] Not available in all states.
** An investment in a money market fund is neither insured nor
guaranteed by the U.S. government. These funds are managed to maintain a
price of $1.00 per share, although there is no assurance that this price
will be maintained in the future.
Please call your financial advisor or Putnam at 1-800-225-1581 to obtain
a prospectus for any Putnam fund. It contains more complete information,
including charges and expenses. Please read it carefully before you
invest or send money.
Report of independent accountants
For the fiscal year ended September 30, 1997
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, 1997, and the related statement of operations for the year then
ended and the statements 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, 1997, 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, 1997, the results of its
operations for the year then ended and 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, 1997
Portfolio of investments owned
September 30, 1997
<TABLE>
<CAPTION>
CORPORATE BONDS AND NOTES (32.2%) *
PRINCIPAL AMOUNT VALUE
Advertising (0.2%)
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------
$ 1,425,000 Adams Outdoor Advertising sr. notes 10 3/4s, 2006 $ 1,560,375
6,090,000 Lamar Advertising Co. 144A sr. sub. notes
8 5/8s, 2007 6,074,775
1,130,000 Outdoor Comunications Inc. sr. sub. notes
9 1/4s, 2007 1,122,938
2,840,000 Universal Outdoor, Inc. sr. sub. notes 9 3/4s, 2006 3,038,800
--------------
11,796,888
Aerospace and Defense (0.6%)
- ------------------------------------------------------------------------------------------------------------
4,400,000 Alliant Techsystems, Inc. sr. sub. notes 11 3/4s, 2003 4,873,000
9,350,000 BE Aerospace sr. notes 9 3/4s, 2003 9,817,500
1,000,000 BE Aerospace sr. sub. notes Ser. B, 9 7/8s, 2006 1,075,000
4,080,000 K&F Industries, Inc. sr. sub. notes Ser. B,
10 3/8s, 2004 4,620,600
3,020,000 L-3 Communications Corp. 144A sr. sub. notes
10 3/8s, 2007 3,246,500
2,000,000 Sequa Corp. med. term notes 10s, 2001 2,081,660
2,405,000 Tracor, Inc. sr. sub. notes 8 1/2s, 2007 2,465,125
--------------
28,179,385
Agriculture (0.4%)
- ------------------------------------------------------------------------------------------------------------
7,046,000 PMI Holdings Corp. sub. disc. deb. stepped-coupon
Ser. B, zero % (11 1/2s, 9/1/00), 2005 ++ 5,460,650
11,378,517 Premium Standard Farms, Inc. sr. secd. notes
11s, 2003 [2 DBL. DAGGERS] 12,516,369
--------------
17,977,019
Apparel (0.2%)
- ------------------------------------------------------------------------------------------------------------
1,135,000 GFSI, Inc. sr. sub. notes Ser. B, 9 5/8s, 2007 1,163,375
2,500,000 Guess Jeans, Inc. sr. sub. notes 9 1/2s, 2003 2,581,250
4,955,000 Sassco Fashions Ltd. sr. notes 12 3/4s, 2004 5,252,300
2,215,000 William Carter Co. 144A sr. sub. notes 12s, 2008 2,358,975
--------------
11,355,900
Automotive Parts (0.5%)
- ------------------------------------------------------------------------------------------------------------
985,000 A.P.S Inc. company guaranty 11 7/8s, 2006 916,050
1,837,000 Aftermarket Technology Corp. sr. sub. notes
Ser. D, 12s, 2004 2,048,255
1,200,000 Cambridge Industries Inc. 144A sr. sub. notes
10 1/4s, 2007 1,254,000
3,700,000 Harvard Industries Inc. sr. notes 11 1/8s, 2005
(In default) + 1,406,000
1,145,000 Hawk Corp. sr. notes 10 1/4s, 2003 1,216,563
1,890,000 Hayes Wheels International, Inc. 144A
sr. sub. notes 9 1/8s, 2007 1,946,700
8,700,000 Hayes Wheels International, Inc. 144A
sr. sub. notes 9 1/8s, 2007 8,961,000
5,700,000 Lear Corp. sub. notes 9 1/2s, 2006 6,241,500
2,780,000 Safety Component International, Inc. 144A
sr. sub. notes 10 1/8s, 2007 2,877,300
--------------
26,867,368
Banks (0.8%)
- ------------------------------------------------------------------------------------------------------------
1,965,000 Albank Capital Trust 144A company guaranty
9.27s, 2027 2,072,879
6,425,000 Chevy Chase Savings Bank Inc. sub. deb.
9 1/4s, 2005 6,489,250
2,425,000 Delta Financial Corp. sr. notes 9 1/2s, 2004 2,455,313
1,315,000 Dime Capital Trust I bank guaranty Ser. A,
9.33s, 2027 1,420,871
3,420,000 Espirto Santo Centrais 144A sr. notes 10s, 2007
(Luxembourg) 3,420,000
5,150,000 First Nationwide Holdings sr. notes 12 1/2s, 2003 5,793,750
1,330,000 Greenpoint Capital Trust I 144A company guaranty
9.1s, 2027 1,403,150
2,145,000 North Fork Capital Trust I company guaranty
8.7s, 2026 2,243,992
1,355,000 Ocwen Capital Trust I company guaranty
10 7/8s, 2027 1,437,994
2,265,000 Ocwen Federal Bank FSB sub. deb. 12s, 2005 2,514,150
1,195,000 Onbank & Trust Co. company guaranty 9 1/4s, 2027 1,275,812
2,540,000 Peoples Heritage Capital Trust company guaranty
Ser. B, 9.06s, 2027 2,691,841
2,400,000 Provident Capital Trust company guaranty
8.6s, 2026 2,439,192
1,385,000 Riggs Capital Trust 144A bonds 8 5/8s, 2026 1,422,035
2,045,000 Sovereign Capital Trust 144A company guaranty
9s, 2027 2,140,788
1,845,000 Webster Capital Trust I 144A bonds 9.36s, 2027 2,002,415
--------------
41,223,432
Basic Industrial Products (0.3%)
- ------------------------------------------------------------------------------------------------------------
1,830,000 Astor Corp. 144A sr. sub. notes 10 1/2s, 2006 1,939,800
4,700,000 Roller Bearing Co. 144A sr. sub. notes 9 5/8s, 2007 4,805,750
8,474,000 Terex Corp. sr. notes Ser. B, 13 1/4s, 2002 9,745,100
--------------
16,490,650
Broadcasting (2.1%)
- ------------------------------------------------------------------------------------------------------------
3,565,000 Acme Television/Finance 144A sr. disc. notes
stepped-coupon zero % (10 7/8s 9/30/00), 2004 ++ 2,611,363
4,880,000 Affinity Group Holdings sr. notes 11s, 2007 5,233,800
5,875,000 Affinity Group Holdings sr. sub. notes 11 1/2s, 2003 6,300,938
2,800,000 Allbritton Communications sr. sub. deb.
Ser. B, 9 3/4s, 2007 2,800,000
2,385,000 Antenna TV S.A. 144A sr. notes 9s, 2007 (Greece) 2,396,925
1,800,000 Argyle Television Corp. sr. sub. notes 9 3/4s, 2005 1,953,000
1,945,000 Benedek Communications Corp. sr. disc. notes
stepped-coupon zero % (13 1/4s, 5/15/01), 2006 ++ 1,371,225
6,860,000 Capstar Broadcasting sr. disc. notes stepped-
coupon zero % (12 3/4s, 2/1/02), 2009 ++ 4,699,100
2,890,000 Capstar Broadcasting sr. sub. notes 9 1/4s, 2007 2,962,250
1,665,000 Central European Media Enterprises Ltd.
sr. notes 9 3/8s, 2004 1,669,163
214,720 Citadel Broadcasting Co. 144A sr. notes
10 1/4s, 2007 230,824
2,700,000 Citadel Broadcasting Inc. 144A 10 1/4s, 2007 2,902,500
15,257,000 Comcast UK Cable, Ltd. deb. stepped-coupon
zero % (11.2s, 11/15/00), 2007 (Bermuda) ++ 11,976,745
9,135,000 Commodore Media, Inc. sr. sub. notes
stepped-coupon 7 1/2s, (13 1/4s,
5/1/98), 2003 ++ 10,048,500
9,490,000 Fox/Liberty Networks LLC 144A sr. notes
8 7/8s, 2007 9,549,313
1,500,000 Granite Broadcasting Corp. sr. sub. notes
10 3/8s, 2005 1,552,500
7,237,000 Petracom Holdings, Inc. notes stepped-coupon
zero % (17 1/2s, 8/1/98), 2003 ++ 6,947,520
3,635,000 Radio One Inc. 144A sr. sub. notes stepped-coupon
7s, (12s, 5/1/00), 2004 ++ 3,489,600
7,375,000 SFX Broadcasting, Inc. sr. sub. notes Ser. B,
10 3/4s, 2006 8,038,750
7,000,000 Sinclair Broadcast Group, Inc. 144A
sr. sub. notes 9s, 2007 6,965,000
4,300,000 Spanish Broadcasting sr. notes Ser. B, 11s, 2004 4,697,750
2,840,000 TCI Satellite Entertainment 144A sr. sub. notes
10 7/8s, 2007 2,982,000
4,275,000 TV Azteca Sa De Cv sr. notes Ser. B,
10 1/2s, 2007 (Mexico) 4,552,875
970,000 TV Azteca Sa De Cv sr. notes Ser. A,
10 1/8s, 2004 (Mexico) 1,020,925
--------------
106,952,566
Building and Construction (0.4%)
- ------------------------------------------------------------------------------------------------------------
7,060,000 Atrium Companies Inc. sub. notes 10 1/2s, 2006 7,342,400
2,080,000 Cia Latino Americana 144A company guaranty
11 5/8s, 2004 (Argentina) 2,199,600
6,300,000 GS Superhighway Holdings 144A
sr. notes 10 1/4s, 2007 6,315,750
2,605,000 Presley Cos. sr. notes 12 1/2s, 2001 2,474,750
--------------
18,332,500
Building Products (0.2%)
- ------------------------------------------------------------------------------------------------------------
3,500,000 Cemex S.A. 144A bonds 12 3/4s, 2006 (Mexico) 4,226,250
2,960,000 Nortek, Inc. sr. sub. notes 9 7/8s, 2004 3,026,600
1,895,000 Waxman Industries Inc. sr. notes stepped-coupon
Ser. B, zero % (12 3/4s, 6/1/99), 2004 ++ 1,648,650
--------------
8,901,500
Buses (0.3%)
- ------------------------------------------------------------------------------------------------------------
810,000 Atlantic Express, Inc. 144A company guaranty
10 3/4s, 2004 858,600
4,115,000 Blue Bird Body Co. sr. sub. notes Ser. B,
10 3/4s, 2006 4,413,338
9,740,000 Consorcio/MCII Holdings sec. notes
stepped-coupon zero % (12s, 11/15/98),
2002 ++ 8,887,750
--------------
14,159,688
Business Services (0.2%)
- ------------------------------------------------------------------------------------------------------------
1,355,000 Axiohm Transactions Solutions 144A sr. sub.
notes 9 3/4s, 2007 1,371,938
4,800,000 Corporate Express, Inc. sr. sub. notes
Ser. B, 9 1/8s, 2004 4,896,000
1,505,000 Outsourcing Solutions, Inc. sr. sub. notes
Ser. B, 11s, 2006 1,670,550
1,380,000 Pierce Leahy Corp. sr. sub. notes 11 1/8s, 2006 1,552,500
1,655,000 Williams Scoutman Inc. 144A sr.notes 9 7/8s, 2007 1,667,413
--------------
11,158,401
Cable Television (2.0%)
- ------------------------------------------------------------------------------------------------------------
15,602,090 Adelphia Communications Corp. sr. notes 9 1/2s,
2004 [2 DBL. DAGGERS] 15,368,059
16,120,000 American Telecasting, Inc. sr. disc. notes stepped-coupon
zero % (14 1/2s, 8/15/00), 2005 ++ 5,480,800
6,500,000 Cablevision Systems Corp. sr. sub. deb.
10 1/2s, 2016 7,377,500
2,950,000 Charter Communications International, Inc. sr. notes
Ser. B, 11 1/4s, 2006 3,245,000
8,555,000 Diamond Cable Communication Co. sr. disc. notes
stepped-coupon zero % (10 3/4s, 2/15/02), 2007
(United Kingdom) ++ 5,571,444
12,000,000 Diamond Cable Communication Co. sr. disc. notes
stepped-coupon zero % (11 3/4s, 12/15/00), 2005
(United Kingdom) ++ 8,985,000
4,240,903 Falcon Holdings Group, Inc. sr. sub. notes
11s, 2003 [2 DBL. DAGGERS] 4,410,539
3,820,000 FrontierVision Holdings LP 144A sr. discount notes
stepped coupon zero % (11 7/8s, 9/15/01),
2007 ++ 2,597,600
16,600,000 Grupo Televisa S.A. sr. disc. notes stepped-coupon zero %
(13 1/4s, 5/15/01), 2008 (Mexico) ++ 12,367,000
9,475,000 Grupo Televisa S.A. 144A sr. notes 11 7/8s, 2006
(Mexico) 10,801,500
4,090,000 Heartland Wireless Communications, Inc. sr. notes
Ser. B, 14s, 2004 1,840,500
1,040,000 Heartland Wireless Communications, Inc.
sr. notes 13s, 2003 416,000
950,000 Heartland Wireless Communications, Inc. sr. notes
Ser. D, 13s, 2003 389,500
6,490,000 Marcus Cable Co. (L.P.) sr. disc. notes stepped-
coupon zero % (14 1/4s, 6/15/00), 2005 ++ 5,386,700
3,640,000 Marcus Cable Co. (L.P.) sr. sub. disc. notes stepped-
coupon zero % (13 1/2s, 8/1/99), 2004 ++ 3,280,550
14,235,000 UIH Australia/Pacific, Inc. sr. disc. notes stepped-
coupon Ser. B, zero % (14s, 5/15/01), 2006
(Australia) ++ 10,213,613
--------------
97,731,305
Cellular Communications (2.4%)
- ------------------------------------------------------------------------------------------------------------
5,540,000 Call-Net Enterprises, Inc. sr. disc. notes stepped-
coupon zero % (9.27s, 8/15/02), 2007
(Canada) ++ 3,691,025
24,685,000 Cencall Communications Corp. sr. disc.
notes stepped-coupon zero % (10 1/8s,
1/15/99), 2004 ++ 21,784,513
5,270,000 Comcast Cellular 144A sr. notes 9 1/2s, 2007 5,507,150
12,400,000 Comunicacion Cellular bonds stepped-coupon
zero % (13 1/8s, 11/15/00), 2003 (Colombia) ++ 9,610,000
6,500,000 Dial Call Communications, Inc. sr. disc. notes
stepped-coupon Ser. B, zero % (10 1/4s,
12/15/98), 2005 ++ 5,801,250
11,650,000 Dobson Communications Corp. sr. notes 11 3/4s, 2007 11,577,188
1,465,000 Grupo Iusacell S.A. 144A sr. notes
10s, 2004 (Mexico) 1,516,275
6,030,000 Interact Systems, Inc. 144A sr. disc. notes
stepped-coupon zero % (14s, 8/1/99), 2003 ++ 2,412,000
7,650,000 Intercel, Inc. sr. disc. notes stepped-coupon zero %
(12s, 5/1/01), 2006 ++ 5,221,125
9,000,000 Intercel, Inc. sr. disc. notes stepped-coupon zero %
(12s, 2/1/01), 2006 ++ 6,210,000
2,780,000 International Wireless Communications, Inc. sr. disc.
notes zero %, 2001 1,584,600
14,715,000 McCaw International Ltd sr. discount notes stepped
coupon zero % (13s, 4/15/02), 2007 ++ 8,865,788
24,590,000 Millicom International Cellular S.A. sr. disc. notes
stepped-coupon zero % (13 1/2s, 6/1/01), 2006
(Luxembourg) ++ 19,057,250
18,540,000 NEXTEL Communications, Inc. 144A sr. disc. notes
stepped-coupon zero % (10.65s, 9/15/02),
2007 ++ 11,425,275
2,400,000 Pricellular Wireless Corp. sr. disc. notes
stepped-coupon zero % (12 1/4s,
10/1/98), 2003 ++ 2,376,000
3,795,000 Sygnet Wireless, Inc. sr. notes 11 1/2s, 2006 4,041,675
1,500,000 Western Wireless Corp. sr. sub. notes 10 1/2s, 2007 1,571,250
--------------
122,252,364
Chemicals (1.0%)
- ------------------------------------------------------------------------------------------------------------
6,650,000 Acetex Corp. sr. notes 9 3/4s, 2003 (Canada) 6,882,750
1,500,000 Harris Chemical Corp. sr. sub. notes 10 3/4s, 2003 1,548,750
4,690,000 Huntsman Corp. 144A sr. sub. notes
FRN 9.187s, 2007 4,865,875
8,000,000 ISP Holdings, Inc. sr. notes Ser. B, 9 3/4s, 2002 8,640,000
3,630,000 NL Industries, Inc. sr. notes stepped-coupon
zero % (13s, 10/15/98), 2005 ++ 3,530,175
1,315,000 Pioneer Americas Acquisition 144A sr. notes
9 1/4s, 2007 1,308,425
13,505,000 Polytama International notes 11 1/4s, 2007 13,133,613
4,450,000 Sterling Chemicals Holdings sr. disc. notes
stepped-coupon zero % (13 1/2s, 8/15/01),
2008 ++ 3,137,250
2,710,000 Sterling Chemicals Inc. sr. sub. notes
Ser. A, 11 1/4s, 2007 2,960,675
2,900,000 Trikem S.A. 144A bonds 10 5/8s, 2007 (Brazil) 2,918,125
--------------
48,925,638
Computer Services (--%)
- ------------------------------------------------------------------------------------------------------------
1,635,000 DecisionOne Corp. sr. sub. notes 9 3/4s, 2007 1,708,575
Computer Software (--%)
- ------------------------------------------------------------------------------------------------------------
2,700,000 Computervision Corp. sr. sub. notes 11 3/8s, 1999 2,160,000
Conglomerates (--%)
- ------------------------------------------------------------------------------------------------------------
1,820,000 MacAndrews & Forbes Holdings, Inc. sub. deb.
notes 13s, 1999 1,826,825
Consumer Durable Goods (0.1%)
- ------------------------------------------------------------------------------------------------------------
1,325,000 Coleman Escrow Corp. 144A sr. disc.
notes zero %, 2001 798,313
4,030,000 Remington Products Co. sr. sub. notes
Ser. B, 11s, 2006 3,385,200
--------------
4,183,513
Consumer Non Durables (0.1%)
- ------------------------------------------------------------------------------------------------------------
3,285,000 Viasystems Inc. 144A sr. sub. notes 9 3/4s, 2007 3,416,400
Consumer Products (--%)
- ------------------------------------------------------------------------------------------------------------
1,315,000 Hedstrom Corp. 144A sr. sub. notes 10s, 2007 1,341,300
Consumer Services (0.1%)
- ------------------------------------------------------------------------------------------------------------
2,747,000 Coinmach Corp. sr. notes Ser. B, 11 3/4s, 2005 3,042,303
Containers (0.5%)
- ------------------------------------------------------------------------------------------------------------
3,490,000 Innova S De R.L. sr. notes 12 7/8s, 2007 (Mexico) 3,743,025
9,250,000 Ivex Packaging Corp. sr. sub. notes 12 1/2s, 2002 9,943,750
845,000 Printpack, Inc. sr. sub. notes Ser. B, 10 5/8s, 2006 911,544
1,400,000 Radnor Holdings Inc. sr. notes 10s, 2003 1,449,000
7,095,000 Vicap SA. 144A company guaranty 11 3/8s, 2007 7,875,450
--------------
23,922,769
Cosmetics (0.1%)
- ------------------------------------------------------------------------------------------------------------
1,225,000 French Fragrances, Inc. sr. notes Ser. B.,
10 3/8s, 2007 1,274,000
7,500,000 Revlon Worldwide Corp. sr. disc. notes
Ser. B, zero %, 2001 5,456,250
--------------
6,730,250
Electric Utilities (1.2%)
- ------------------------------------------------------------------------------------------------------------
7,075,000 AES China Generating Co. sr. notes
10 1/8s, 2006 (China) 7,446,438
2,800,000 El Paso Electric Co. 1st mtge. Ser. D, 8.9s, 2006 3,036,292
8,602,000 First PV Funding deb. 10.15s, 2016 9,155,453
24,320,000 Midland Funding Corp. deb. Ser. A, 11 3/4s, 2005 28,865,408
1,585,000 Midland Funding Corp. deb. Ser. B, 13 1/4s, 2006 2,003,408
3,490,000 Niagara Mohawk Power Corp. med. term
notes 9.99s, 2004 3,558,544
2,667,779 Northeast Utilities System notes Ser. A, 8.58s, 2006 2,644,837
2,653,846 Northeast Utilities System notes Ser. B, 8.38s, 2005 2,689,010
--------------
59,399,390
Electronics (0.6%)
- ------------------------------------------------------------------------------------------------------------
1,900,000 Argo-Tech Corp. 144A sr. sub. notes 8 5/8s, 2007 1,904,750
4,405,000 Celestica International Ltd. 144A sr. sub. notes
10 1/2s, 2006 (Canada) 4,762,906
1,966,313 Cirent Semiconductor sr. sub. notes 10.22s, 2002 2,008,097
2,086,788 Cirent Semiconductor 144A sr. sub. notes
10.14s, 2004 2,133,741
2,760,000 DII Group, Inc. 144A sr. sub. notes 8 1/2s, 2007 2,763,450
1,585,000 HCC Industries, Inc. 144A sr. sub. notes
10 3/4s, 2007 1,680,100
700,000 Moog, Inc. sr. sub. notes Ser. B, 10s, 2006 742,000
4,715,000 Motors and Gears, Inc. sr. notes Ser. B, 10 3/4s, 2006 5,045,050
2,465,000 Therma-Wave Inc. 144A sr. notes 10 5/8s, 2004 2,662,200
4,920,000 Wavetek Corp. 144A sr. sub. notes 10 1/8s, 2007 5,116,800
--------------
28,819,094
Energy-Related (0.2%)
- ------------------------------------------------------------------------------------------------------------
1,000,000 Calpine Corp. sr. notes 10 1/2s, 2006 1,087,500
1,900,000 Calpine Corp. sr. notes 9 1/4s, 2004 1,957,000
9,660,000 Panda Global Energy Co. 144A sr. notes
12 1/2s, 2004 9,418,500
--------------
12,463,000
Entertainment (0.1%)
- ------------------------------------------------------------------------------------------------------------
2,850,000 Six Flags Corp. sr. sub. notes stepped-coupon
zero % (12 1/4s, 6/15/98), 2005 ++ 2,971,125
Environmental Control (0.2%)
- ------------------------------------------------------------------------------------------------------------
3,645,000 Allied Waste Industries, Inc. company guaranty
10 1/4s, 2006 3,991,275
7,270,000 Allied Waste Industries, Inc. 144A sr. disc. notes
stepped-coupon zero % (11.3s, 6/1/02), 2007 ++ 4,925,425
--------------
8,916,700
Financial Services (1.0%)
- ------------------------------------------------------------------------------------------------------------
6,120,000 Aames Financial Corp. sr. notes 9 1/8s, 2003 6,242,400
1,500,000 Advanta Corp. med. term notes Ser. B, 7s, 2001 1,481,145
1,425,000 Colonial Capital I 144A company guaranty
8.92s, 2027 1,466,414
17,795,000 Federal National Mortgage Association
Ser. E, 6 3/8s, 2007 13,071,140
4,455,000 Imperial Credit Industries, Inc. sr. notes
9 7/8s, 2007 4,499,550
6,130,000 Imperial Credit Capital Trust I 144A company
guaranty 10 1/4s, 2002 6,252,600
2,335,000 Intertek Finance PLC 144A sr. sub. notes
10 1/4s, 2006 2,457,588
2,890,000 Investors Capital Trust I company guaranty
Ser. B, 9.77s, 2027 3,076,044
2,800,000 Local Financial Corp. 144A sr. notes 11s, 2004 2,940,000
4,055,000 Resource America Inc. 144A bonds 12s, 2004 4,247,613
2,750,000 SRI Receivables Purchase 144A 12 1/2s, 2000 2,887,500
--------------
48,621,994
Food Chains (0.6%)
- ------------------------------------------------------------------------------------------------------------
9,260,000 Ameriserve Food Co. 144A sr. sub. notes
10 1/8s, 2007 9,630,400
3,955,000 Fleming Companies, Inc. 144A sr. sub. notes
10 1/2s, 2004 4,093,425
2,640,000 Nebco Evans Holding Co. 144A sr. disc. notes
stepped-coupon zero % (12 3/8s, 7/15/02),
2007 ++ 1,663,200
12,475,000 Stater Brothers sr. notes 11s, 2001 13,722,500
--------------
29,109,525
Food and Beverages (0.1%)
- ------------------------------------------------------------------------------------------------------------
1,885,000 Canandaigua Wine Co. sr. sub. notes
Ser. C, 8 3/4s, 2003 1,913,275
3,000,000 Chiquita Brands cv. sr. notes 9 5/8s, 2004 3,127,500
660,000 Windy Hill Pet Food Co. 144A sr. sub. notes
9 3/4s, 2007 683,100
--------------
5,723,875
Gaming (2.0%)
- ------------------------------------------------------------------------------------------------------------
3,065,000 Argosy Gaming Co. 1st mtge. 13 1/4s, 2004 3,065,000
8,735,000 Autotote Corp. 144A sr. notes 10 7/8s, 2004 9,084,400
6,785,000 Coast Hotels & Casinos, Inc. company
guaranty Ser. B, 13s, 2002 7,650,088
8,804,200 Colorado Gaming & Entertainment Co.
sr. notes 12s, 2003 9,596,578
7,650,000 Hollywood Casino Corp. sr. notes 12 3/4s, 2003 8,376,750
2,085,000 Isle of Capri Black Hawk LLC 144A
1st mortgage 13s, 2004 2,105,850
11,875,000 Lady Luck Gaming Corp. 1st mtge. 11 7/8s, 2001 11,845,313
9,593,000 Louisiana Casino Cruises Corp. 1st mtge.
11 1/2s, 1998 9,688,930
9,250,000 Mohegan Tribal Gaming Auth. sr. notes
Ser. B, 13 1/2s, 2002 12,071,250
2,000,000 PRT Funding Corp. sr. notes 11 5/8s, 2004 1,640,000
6,000,000 Sun International Hotels Ltd. company
guaranty 9s, 2007 6,195,000
2,500,000 Trump A.C. 1st mtge. 11 1/4s, 2006 2,425,000
3,456,000 Trump Castle Funding Corp. notes 11 1/2s, 2000 3,490,560
11,475,000 Trump Holdings & Funding Corp. sr. notes
15 1/2s, 2005 13,397,063
--------------
100,631,782
Health Care (0.9%)
- ------------------------------------------------------------------------------------------------------------
4,305,000 Genesis Eldercare 144A sr. sub. notes 9s, 2007 4,283,475
1,235,000 Genesis Health Ventures, Inc. sr. sub.
notes 9 1/4s, 2006 1,262,788
4,395,000 IMED Corp. 144A sr. sub. notes 9 3/4s, 2006 4,526,850
7,000,000 Integrated Health Services, Inc. 144A
sr. sub. notes 9 1/4s, 2008 7,105,000
5,000,000 Merit Behavioral Care sr. sub. notes 11 1/2s, 2005 5,550,000
9,195,000 Paracelsus Healthcare sr. sub. notes 10s, 2006 9,493,838
5,105,000 Sun Healthcare Group Inc. 144A sr. sub. notes
9 1/2s, 2007 5,245,388
4,375,000 Tenet Healthcare Corp. sr. sub. notes 8 5/8s, 2007 4,528,125
2,105,000 Urohealth Systems, Inc. 144A sr. sub. notes
12 1/2s, 2004 2,089,213
--------------
44,084,677
Insurance (0.1%)
- ------------------------------------------------------------------------------------------------------------
3,000,000 Reliance Group Holdings, Inc. sr. sub. deb.
9 3/4s, 2003 3,174,180
Lodging (0.3%)
- ------------------------------------------------------------------------------------------------------------
6,300,000 Host Marriott Travel Plaza sr. notes Ser. B,
9 1/2s, 2005 6,662,250
4,500,000 John Q Hammons Hotels, Inc. 1st mtge.
9 3/4s, 2005 4,713,750
4,060,000 Prime Hospitality Corp. sub. notes 9 3/4s, 2007 4,293,450
--------------
15,669,450
Medical Supplies and Devices (0.2%)
- ------------------------------------------------------------------------------------------------------------
5,300,000 Dade International, Inc. sr. sub. notes Ser. B,
11 1/8s, 2006 5,969,125
4,915,000 Wright Medical Technology, Inc. 144A 11 3/4s, 2000 5,037,875
--------------
11,007,000
Metals and Mining (0.4%)
- ------------------------------------------------------------------------------------------------------------
1,140,000 Acindar Industria Argentina de Aceros S.A. bonds
11 1/4s, 2004 (Argentina) 1,238,325
2,925,000 Anker Coal Group, Inc. 144A sr. notes 9 3/4s, 1997 2,968,875
2,705,000 Continental Global Group sr. notes Ser. B, 11s, 2007 2,894,350
3,030,000 Maxxam Group Holdings Inc. sr. notes
Ser. B, 12s, 2003 3,272,400
9,100,000 Murrin Murrin Holdings 144A sr. notes
9 3/8s, 2007 (Australia) 9,191,000
650,000 Royal Oak Mines, Inc. company guaranty
Ser. B, 11s, 2006 (Canada) 627,250
--------------
20,192,200
Motion Picture Distribution (0.4%)
- ------------------------------------------------------------------------------------------------------------
7,620,000 Act III Theatres, Inc. sr. sub. notes 11 7/8s, 2003 8,153,400
4,515,000 AMC Entertainment, Inc. sr. sub. notes 9 1/2s, 2009 4,560,150
2,496,300 Cinemark Mexico USA notes Ser. B, 13s, 2003
(Mexico) [2 DBL. DAGGERS] 2,496,300
86,900 Cinemark Mexico USA notes Ser. D, 13s, 2003
(Mexico) [2 DBL. DAGGERS] 86,900
4,780,000 Cinemark USA, Inc. sr. sub. notes Ser. B, 9 5/8s, 2008 4,917,425
--------------
20,214,175
Oil and Gas (2.2%)
- ------------------------------------------------------------------------------------------------------------
10,930,000 Abraxas Petroleum Corp. 144A sr. notes
Ser. B, 11 1/2s, 2004 11,913,700
5,000,000 Benton Oil & Gas Co. sr. notes 11 5/8s, 2003 5,500,000
3,750,000 Chesapeake Energy Corp. sr. notes 10 1/2s, 2002 3,975,000
4,530,000 Cliffs Drilling Co. company guaranty
Ser. B, 10 1/4s, 2003 4,926,375
2,720,000 Coho Energy, Inc. sr. sub. notes 8 7/8s, 2007 2,713,200
6,230,000 Costilla Energy, Inc. sr. notes 10 1/4s, 2006 6,401,325
4,000,000 Dailey Petroleum Services Corp. 144A
company guaranty 9 3/4s, 2007 4,160,000
2,025,000 DI Industries Inc. sr. notes 8 7/8s, 2007 2,080,688
5,030,000 Maxus Energy Corp. notes 9 7/8s, 2002 5,280,293
950,000 Maxus Energy Corp. notes 9 1/2s, 2003 995,125
4,490,000 Maxus Energy Corp. notes 9 3/8s, 2003 4,844,845
2,100,000 Parker Drilling Corp. sr. notes Ser. B, 9 3/4s, 2006 2,236,500
1,950,000 Pride Petroleum Services, Inc. 9 3/8s, 2007 2,086,500
1,055,000 Texas Petrochemical Corp. sr. sub. notes
11 1/8s, 2006 1,149,950
36,475,000 Transamerican Energy 144A sr. disc. notes
stepped-coupon zero % (13s 6/01/99), 2002 ++ 28,997,625
14,465,000 Transamerican Energy 144A sr. notes 11 1/2s, 2002 14,356,513
5,152,000 TransTexas Gas Corp. 144A sr. sub. notes
13 3/4s, 2001 5,899,040
1,325,000 Wiser Oil Co. 144A sr. sub. notes 9 1/2s, 2007 1,278,625
--------------
108,795,304
Packaging and Containers (0.1%)
- ------------------------------------------------------------------------------------------------------------
3,290,000 Huntsman Packaging Corp. 144A sr. sub. notes
9 1/8s, 2007 3,364,025
Paging (0.6%)
- ------------------------------------------------------------------------------------------------------------
5,480,000 Arch Communications Group sr. disc. notes stepped-
coupon zero % (10 7/8s, 3/15/01), 2008 ++ 3,630,500
8,915,000 Mobile Telecommunications Tech. sr. notes
13 1/2s, 2002 10,118,525
9,450,000 Pagemart Nationwide, Inc. sr. disc. notes stepped-
coupon zero % (15s, 2/1/00), 2005 ++ 7,654,500
1,600,000 Paging Network, Inc. sr. sub. notes 10 1/8s, 2007 1,672,000
4,750,000 Paging Network, Inc. sr. sub. notes 10s, 2008 4,916,250
1,000,000 Pronet, Inc. sr. sub. notes 11 7/8s, 2005 1,060,000
--------------
29,051,775
Paper and Forest Products (1.7%)
- ------------------------------------------------------------------------------------------------------------
2,950,000 APP Finance II Mauritius Ltd. bonds 12s, 2049 stepped-
coupon zero % (12s, 2/14/04), 2049 (Indonesia) 3,001,625
10,500,000 APP International Finance Co. notes
11 3/4s, 2005 (Netherlands) 11,300,625
3,185,000 Domtar, Inc. deb. 9 1/2s, 2016 (Canada) 3,419,639
10,195,000 Florida Coast Paper LLC 1st mtge. Ser. B,
12 3/4s, 2003 11,087,063
14,410,000 Indah Kiat Financial Mauritius 144A company
guaranty 10s, 2007 (Indonesia) 14,085,775
5,295,000 Pindo Deli Finance Mauritius Ltd. 144A company
guaranty 11 3/4s, 2017 (India) 5,440,613
12,305,000 Pindo Deli Finance Mauritius Ltd. 144A company
guaranty 10 3/4s, 2007 (India) 12,551,100
10,660,000 PT Pabrik Kertas Tjiwi Kimia 144A company
guaranty 10s, 2004 (Indonesia) 10,446,800
5,540,000 Repap New Brunswick sr. notes
10 5/8s, 2005 (Canada) 5,456,900
2,000,000 Repap New Brunswick sr. notes
9 7/8s, 2000 (Canada) 2,040,000
3,750,000 Riverwood International Corp. company
guaranty 10 1/4s, 2006 3,843,750
2,800,000 Stone Container Corp. sr. notes 11 7/8s, 2016 3,094,000
--------------
85,767,890
Pharmaceuticals and Biotechnology (0.1%)
- ------------------------------------------------------------------------------------------------------------
4,020,000 ICN Pharmaceuticals, Inc. 144A sr. notes
9 1/4s, 2005 4,221,000
Publishing (0.2%)
- ------------------------------------------------------------------------------------------------------------
3,410,000 Garden State Newspapers 144A sr. sub. notes
8 3/4s, 2009 3,435,575
1,745,000 Hollinger International Publishing, Inc. company
guaranty 8 5/8s, 2005 1,797,350
2,925,000 Von Hoffman Press Inc. 144A sr. sub. notes
10 3/8s, 2007 3,100,500
--------------
8,333,425
REIT's (Real Estate Investment Trust) (0.1%)
- ------------------------------------------------------------------------------------------------------------
5,370,000 HMH Properties, Inc. 144A sr. notes 8 7/8s, 2007
(Canada) 5,517,675
Railroads (0.2%)
- ------------------------------------------------------------------------------------------------------------
4,420,000 TFM S.A. de C.V. 144A company guaranty 10 1/4s,
2007 (Mexico) 4,663,100
7,900,000 TFM S.A. de C.V. 144A company guaranty
stepped-coupon zero % (11 3/4s,6/15/02),
2009 (Mexico) ++ 5,214,000
--------------
9,877,100
Recreation (--%)
- ------------------------------------------------------------------------------------------------------------
2,570,621 Elsinore Corp. 144A exch. 1st mortgage
11 1/2s, 2000 2,467,797
Restaurants (--%)
- ------------------------------------------------------------------------------------------------------------
2,200,000 FRD Acquisition Co. sr. notes Ser. B, 12 1/2s, 2004 2,354,000
Retail (0.3%)
- ------------------------------------------------------------------------------------------------------------
4,000,000 Brylane (L.P.) sr. sub. notes 10s, 2003 4,260,000
2,900,000 Mothers Work, Inc. sr. notes 12 5/8s, 2005 3,161,000
1,680,000 NBTY, Inc. 144A sr. sub. notes 8 5/8s, 2007 1,671,600
4,900,000 Shoppers Food Warehouse 144A sr. notes
9 3/4s, 2004 5,022,500
--------------
14,115,100
Satellite Services (1.0%)
- ------------------------------------------------------------------------------------------------------------
11,000,000 Echostar DBS Corp. 144A company guaranty
12 1/2s, 2002 12,113,750
2,018,000 Echostar Communications Corp. sr. disc. notes stepped-
coupon zero % (12 7/8s, 6/1/99), 2004 ++ 1,826,290
3,200,000 Esat Holdings Ltd. sr. notes stepped-coupon
zero % (12 1/2s, 2/01/02), 2007 (Ireland) ++ 2,096,000
4,830,000 Globalstar L.P. Capital 144A sr. notes 11 1/4s, 2004 4,999,050
6,350,000 Globalstar L.P. Capital 11 3/8s, 2004 6,604,000
7,860,000 Iridium LLC/Capital Corp. 144A sr. notes
14s, 2005 8,488,800
3,500,000 Iridium LLC/Capital Corp. 144A sr. notes 13s, 2005 3,657,500
8,485,000 Orion Network Systems sr. disc. notes stepped-
coupon zero % (12 1/2s, 1/15/02), 2007 ++ 5,854,650
2,945,000 Pratama Datakom Asia BV 144A company
guaranty 12 3/4s, 2005 (Indonesia) 2,819,838
--------------
48,459,878
Semiconductors (0.2%)
- ------------------------------------------------------------------------------------------------------------
2,895,000 Fairchild Semiconductor Corp. 144A sr. sub.
notes 11.74s, 2008 2,923,950
6,335,000 Fairchild Semiconductor Corp. sr. sub. notes
10 1/8s, 2007 6,794,288
--------------
9,718,238
Shipping (0.1%)
- ------------------------------------------------------------------------------------------------------------
5,159,000 Viking Star Shipping sr. secd. notes 9 5/8s, 2003 5,404,053
Steel (0.4%)
- ------------------------------------------------------------------------------------------------------------
1,430,000 Altos Hornos De Mexico 144A bonds 11 7/8s,
2004 (Mexico) 1,590,875
2,040,000 Armco, Inc. 144A sr. notes 9s, 2007 2,065,500
6,190,000 Hylsa S.A. de C.V. 144A bonds 9 1/4s, 2007 (Mexico) 6,329,275
8,150,000 Ispat Mexicana, S.A. 144A bonds 10 3/8s,
2001 (Mexico) 8,689,938
--------------
18,675,588
Supermarkets (0.1%)
- ------------------------------------------------------------------------------------------------------------
2,852,254 Food 4 Less Supermarkets, Inc. sr. sub. deb.
13 5/8s, 2007 [2 DBL. DAGGERS] 3,551,056
3,485,000 Jitney-Jungle Stores 144A sr. sub. notes
10 3/8s, 2007 3,589,550
--------------
7,140,606
Telecommunications (2.6%)
- ------------------------------------------------------------------------------------------------------------
5,240,000 Advanced Radio Telecom Corp. sr. notes 14s, 2007 4,552,250
2,800,000 American Communication Services, Inc. 144A sr. notes
13 3/4s, 2007 3,248,000
5,230,000 American Communication Services, Inc. sr. disc. notes
stepped-coupon zero % (12 3/4s, 4/1/01),
2006 ++ 3,661,000
21,575,000 CellNet Data Systems, Inc. sr. disc. notes stepped-
coupon Ser. B, zero % (13s, 6/15/00), 2005 ++ 15,318,250
1,360,000 Consorcio Ecuatoriano 144A notes 14s,
2002 (Ecuador) 1,468,800
7,580,000 Frontiervision Operating Partners L.P. sr. sub.
notes 11s, 2006 8,262,200
5,395,000 GST Equipment Funding 144A sr. notes
13 1/4s, 2007 6,231,225
5,431,000 GST Telecommunications,Inc. company guaranty
stepped-coupon zero % (13 7/8s,
12/15/00), 2005 ++ 4,100,405
2,790,000 Hermes Europe Railtel 144a sr. notes 11 1/2s, 2007
(Netherlands) 3,020,175
5,870,000 Hyperion Telecommunication Corp. sr. disc. notes
stepped-coupon Ser. B, zero % (13s, 4/15/01), 2003 ++ 4,116,338
10,915,000 Hyperion Telecommunications, Inc. 144A sr. notes
12 1/4s, 2004 11,951,925
11,410,000 ICG Holdings, Inc. sr. disc. notes stepped-coupon
zero % (13 1/2s, 9/15/00), 2005 ++ 9,128,000
2,900,000 Intelcom Group (USA), Inc. company guaranty
stepped-coupon zero % (12 1/2s, 5/1/01),
2006 ++ 2,160,500
3,250,000 Intermedia Communication, Inc. sr. disc. notes
stepped-coupon zero % (12 1/2s, 5/15/01), 2006 ++ 2,551,250
10,275,000 Intermedia Communications, Inc. sr. disc. notes
stepped-coupon Ser. B, zero % (11 1/4s,
7/15/02), 2007 ++ 7,089,750
5,150,000 ITC Deltacom, Inc. 144A sr. notes 11s, 2007 5,652,125
2,250,000 Nextlink Communications, Inc. sr. notes
12 1/2s, 2006 2,587,500
5,385,000 Nextlink Communications sr. notes 9 5/8s, 2007 5,573,475
7,410,000 Omnipoint Corp. sr. notes 11 5/8s, 2006 7,632,300
6,100,000 Omnipoint Corp. sr. notes Ser. A, 11 5/8s, 2006 6,283,000
15,670,000 Winstar Communications, Inc. 144A sr. disc. notes
stepped-coupon zero % (14s, 10/15/00), 2005 ++ 10,969,000
2,750,000 Winstar Equipment Corp. company guaranty
12 1/2s, 2004 2,915,000
--------------
128,472,468
Telephone Services (1.1%)
- ------------------------------------------------------------------------------------------------------------
2,765,000 Brooks Fiber Properties, Inc. 144A sr. notes
10s, 2007 3,131,363
115,000 Brooks Fiber Properties, Inc. sr. disc. notes
stepped-coupon zero % (10 7/8s, 3/1/01),
2006 ++ 92,000
9,850,000 BTI Telecom Corp. 144A sr. notes 10 1/2s, 2007 10,194,862
1,220,000 Celcaribe S.A. sr. notes stepped-coupon zero %
(13 1/2s, 3/15/98), 2004 ++ 1,232,200
1,500,000 Fonorola, Inc. sr. notes 12 1/2s, 2002 (Canada) 1,680,000
3,325,000 Globo Communicacoes 144A company guaranty
10 1/2s, 2006 (Brazil) 3,441,375
11,495,000 McLeodUSA, Inc. sr. disc. notes stepped-coupon
zero % (10 1/2s, 3/1/02), 2007 ++ 8,391,350
7,100,000 NTL Inc. sr. notes Ser. B, 10s, 2007
(United Kingdom) 7,419,500
14,525,000 RSL Communications, Ltd. company guaranty
12 1/4s, 2006 15,541,750
3,115,000 Viatel, Inc. sr. disc. notes stepped-coupon zero %
(15s, 1/15/00), 2005 ++ 2,289,525
--------------
53,413,925
Telephone Utilities (--%)
- ------------------------------------------------------------------------------------------------------------
900,000 Sprint Spectrum L.P. sr. notes 11s, 2006 1,008,000
Textiles (0.2%)
- ------------------------------------------------------------------------------------------------------------
3,390,000 Polymer Group, Inc. 144A sr. sub. notes 9s, 2007 3,423,900
1,150,000 Polysindo Inernational Eka company guaranty
13s, 2001 (Indonesia) 1,286,563
7,125,000 Polysindo International Finance company guaranty
11 3/8s, 2006 (Indonesia) 7,739,531
--------------
12,449,994
Transportation (0.2%)
- ------------------------------------------------------------------------------------------------------------
955,000 Chemical Leaman Corp. 144A sr. notes
10 3/8s, 2005 1,000,363
1,820,000 Coach USA, Inc. 144A company guaranty
9 3/8s, 2007 1,824,550
6,775,000 Eletson Holdings, Inc. 1st pfd. mtge. notes
9 1/4s, 2003 (Greece) 6,944,375
3,290,000 Johnstown America Industries, Inc. 144A sr. sub. notes
11 3/4s, 2005 3,536,750
--------------
13,306,038
Total Corporate Bonds and Notes
(cost $1,530,731,566) $1,613,548,585
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (32.5%) *
PRINCIPAL AMOUNT VALUE
U.S. Government Agency Mortgage Obligations (21.8%)
- ------------------------------------------------------------------------------------------------------------
$ 6,639,912 Federal Home Loan Mortgage Association 7s,
February 15, 2027 $ 6,108,454
Federal Home Loan Mortgage Corp.
80,856,775 8 1/2s, with due dates from April 1, 2026
to June 15, 2027 84,495,348
40,227,237 6 1/2s, with due dates from October 1, 2011
to July 1, 2012 39,950,495
Federal National Mortgage Association
82,266,394 7 1/2s, with due dates from January 1, 2027
to June 1, 2027 83,628,756
43,245,163 7s, with due dates from August 1, 2024
to April 15, 2027 43,069,185
99,102,742 6 1/2s, with due dates from April 1, 2024
to September 15, 2027 96,501,364
Government National Mortgage Association
130,172,368 8 1/2s, with due dates from January 15, 2026
to August 15, 2027 136,192,936
80,745,000 8 1/2s, TBA, October 16, 2027 84,479,456
110,491,722 8s, with due dates from January 15, 2026
to August 15, 2027 114,220,921
238,224,735 7 1/2s, with due dates from January 15, 2024
to August 15, 2027 242,321,907
349,381 7 1/2s, July 15, 2025 355,383
129,420,000 7 1/2s, TBA, October 16, 2027 131,643,436
261,593 7s, October 15, 2024 261,593
26,620,000 5 1/2s, TBA, October 16, 2027 26,594,977
--------------
1,089,824,211
U.S. Treasury Obligations (10.7%)
- ------------------------------------------------------------------------------------------------------------
U.S. Treasury Bonds
66,270,000 8 1/8s, August 15, 2019 78,830,153
53,720,000 6 5/8s, February 15, 2027 55,004,445
116,445,000 6 1/2s, November 15, 2026 # 117,154,150
U.S. Treasury Notes
111,342,000 6 1/2s, October 15, 2006 113,725,832
7,485,000 6 1/2s, May 31, 2002 7,627,664
2,710,000 6 3/8s, April 30, 1999 2,734,146
28,850,000 6 1/4s, August 31, 2002 29,111,381
27,000,000 6 1/4s, June 30, 2002 27,248,940
15,785,000 6 1/4s, March 31, 1999 15,895,969
6,150,000 6 1/8s, August 15, 2007 6,152,891
77,440,000 6s, July 31, 2002 77,440,000
6,255,000 5 7/8s, July 31, 1999 6,259,879
--------------
537,185,450
--------------
Total U.S. Government and Agency
Obligations (cost $1,598,953,669) $1,627,009,661
FOREIGN GOVERNMENT BONDS AND NOTES (17.4%) *
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
ARP $37,912,000 Argentina (Republic of) bonds
9 3/4s, 2027 $ 38,177,384
AUD 42,905,000 Australia (Government of) bonds
Ser. 206, 10s, 2006 39,028,602
CAD 39,595,000 Canada (Government of) bonds
WB60, 7 1/4s, 2007 31,782,084
DKK 207,751,000 Denmark (Government of) bonds
7s, 2026 30,845,155
DEM 140,325,000 Germany (Federal Republic of) bonds
Ser. 97, 6 1/2s, 2027 83,310,497
DEM 32,455,000 Germany (Federal Republic of) bonds,
Ser. 92, 8s, 2002 20,862,612
DEM 258,630,000 Germany (Federal Republic of) bonds
Ser. 97, 6s, 2007 152,005,706
FRF 887,125,000 France Treasury Bill notes 4.384s, 2002 150,128,847
FRF 34,170,000 Ivory Coast -- FLIRB collateralized
FRB 2s, 2049 ## 2,216,862
FRF 34,170,000 Ivory Coast -- PDI bonds FRB
1.9s, 2049 ## 2,505,704
NZD 33,055,000 New Zealand (Government of)
bonds 10s, 2002 23,793,863
NZD 24,915,000 New Zealand (Government of)
bonds 8s, 2004 17,056,509
PEN 16,980,000 Peru (Government of) Ser. US, 4s, 2017 11,355,375
ZAR 29,392,000 South Africa (Republic of) bonds
Ser. 153, 13s, 2010 5,928,934
TRL 357,964,000 Turkey Treasury Bill zero %, 1998 9,409,356
GBP 16,925,000 United Kingdom Treasury bonds
8s, 2021, 2021 32,126,195
GBP 58,515,000 United Kingdom Treasury bonds
7 1/2s, 2006 101,257,824
GBP 25,255,000 United Kingdom Treasury bonds 7s, 2002 41,687,074
USD 50,525,000 Bank of Economic Affairs of Russia
(Vnesheconombank)
non performing loan + 52,356,531
USD 34,731,000 Bank of Foreign Economic Affairs of Russia
(Vnesheconombank) principal loan FRN
Libor plus 13/16s, 2020 +##+++ 25,874,595
--------------
Total Foreign Government Bonds and Notes
(cost $842,818,957) $ 871,709,709
BRADY BONDS (8.6%) *
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
$ 65,229,120 Argentina (Republic of) deb. FRB 6.688s, 2005 $ 62,130,737
74,989,538 Brazil (Government of) FRB 8s, 2006 63,741,108
66,651,750 Brazil (Government of) Ser. EI-L, FRB
6.875s, 2006 +++ 62,486,016
21,733,000 Bulgaria (Government of) deb. Ser. PDI, FRB
6.688s, 2011 17,495,065
26,864,000 Philippines (Government of) Ser. B, FRB
6 1/4s, 2017 23,640,320
130,851,000 United Mexican States Ser. B, 6 1/4s, 2019 108,442,766
1,730,000 United Mexican States Ser. C, FRB 6.820s, 2019 1,654,313
34,090,000 United Mexican States bonds Ser. D, FRB
6.813s, 2019 32,598,563
60,000,000 Venezuela (Government of) deb.
Ser. B, 4.313s, 2007 57,300,000
--------------
Total Brady Bonds (cost $416,733,546) $ 429,488,888
PREFERRED STOCKS (3.0%) *
NUMBER OF SHARES VALUE
- ------------------------------------------------------------------------------------------------------------
70,000 AmeriKing, Inc. $3.25 pfd. [2 DBL. DAGGERS] $ 1,977,500
122,767 Cablevision Systems Corp. Ser. M, $11.125
dep. shs. pfd. [2 DBL. DAGGERS] 13,473,678
62,000 California Federal Bancorp Inc. Ser. A, $2.281 pfd. 1,619,750
20,000 Capstar Broadcasting $12.00 pfd. 2,220,000
130,000 CGA Group Ltd. 144A Ser. A, 144A, 13.75% pfd. [2 DBL. DAGGERS] 3,315,000
99,570 Chevy Chase Capital Corp. Ser. A, $5.188 pfd. 5,190,086
39,580 Citadel Broadcasting Inc. 144A $13.25 4,522,015
109,800 Diva Systems Corp. Ser. C, $6.00 pfd. 1,262,700
2,700 Echostar Communications Corp. 144A
12.125% pfd. 2,808,000
29,489 El Paso Electric Co. $11.40 pfd [2 DBL. DAGGERS] 3,273,279
172,935 Fitzgeralds Gaming Co. $3.75 pfd. + 3,804,570
2,000 Fresenius Medical Care AG pfd.
Ser. D, $9.00 (Germany) 2,075,000
11,950 Grand Union Holdings 144A Ser. C, $12.00 pfd.
(acquired 11/5/93, cost $1,380,225)
(In Default) [DBL. DAGGER]+ 120
10,580 Granite Broadcasting 144A $1.938 pfd. [2 DBL. DAGGERS] 11,161,900
11,242 ICG Holdings, Inc. $14.00 pfd. [2 DBL. DAGGERS] 12,815,880
7,404 ICG Holdings, Inc. $14.25 pfd. (Canada) 8,514,600
9,179 Intermedia Communication Ser. B, 13.50% pfd. 10,968,905
5,500 IXC Communications, Inc. 144A $12.50 pfd. [2 DBL. DAGGERS] 6,380,000
16,000 Nextel Communications Inc. 144A 13.00% pfd. [2 DBL. DAGGERS] 18,400,000
181,802 Nextlink Communications, Inc. 144A $7.00 pfd. 11,635,328
6,722 NTL Inc. 144A Ser. B, $13.00 pfd. [2 DBL. DAGGERS] 7,663,080
5,000 Pantry Pride Inc. Ser. B, $14.875 pfd. 505,000
47,994 Public Service Co. of New Hampshire
$2.65 1st mtge. pfd. 1,223,847
50,080 SFX Broadcasting, Inc. Ser. E, $12.625 pfd. [2 DBL. DAGGERS] 5,784,240
16,500 Sinclair Capital $11.625 cum. pfd. 1,790,250
6,680 Spanish Broadcasting Systems 144A 14.25% pfd. [2 DBL. DAGGERS] 6,997,300
32,000 Von Hoffman Corp. 144A $13.50 pfd. 915,200
--------------
Total Preferred Stocks (cost $137,863,351) $ 150,297,228
UNITS (1.4%) *
NUMBER OF UNITS VALUE
- ------------------------------------------------------------------------------------------------------------
2,960 Australis Media, Ltd. units stepped-coupon zero %
(15 3/4s, 5/15/03), 2003 (Australia) ++ $ 2,456,800
877 Celcaribe S.A. 144A units stepped-coupon zero %
(13 1/2s, 3/15/98), 2004 ++ 17,540,000
16,395 Colt Telecommunications Group PLC units stepped-
coupon zero % (12s, 12/15/01), 2006
(United Kingdom) ++ 12,296,250
3,815 Conecel Holdings 144A units 14s, 2000 3,910,375
1,480 DecisionOne Corp. units stepped-coupon zero %
(11 1/2s, 8/01/02), 2008 ++ 984,200
4,650 Diva Systems Corp. 144A units stepped-coupon
zero % (13s, 5/15/01), 2006 ++ 4,074,563
10,155 Econophone Inc. 144A units 13 1/2s, 2007 11,170,500
2,460 GFSI, Inc 144A units stepped-coupon zero %
(11 3/8s, 9/15/2004), 2009 ++ 2,460,000
660 Hedstrom Holdings, Inc. 144A units stepped-coupon
zero % (12s, 6/01/02), 2009 ++ 415,800
1,550 Metronet Communications units sr. notes 12s, 2007 1,720,500
1,390 MGC Communications, Inc. 144A units 13s, 2004 1,435,175
3,980 Signature Brands USA Inc. units 13s, 2002 4,298,400
2,635 Stone Container Corp. units sr. sub. 12 1/4s, 2002 2,733,813
6,355 Wireless One, Inc. units stepped-coupon zero %
(13 1/2s, 8/1/01), 2006 ++ 1,334,550
3,945 XCL Ltd. units sr. sec. notes 13 1/2s, 2004 4,142,250
11,700 XCL Ltd. units cum. pfd. 9.50 % 1,053,000
--------------
Total Units (cost $60,877,856) $ 72,026,176
COMMON STOCKS (1.1%) *
NUMBER OF SHARES VALUE
- ------------------------------------------------------------------------------------------------------------
106,031 Advanced Radio Telecom Corp. + $ 974,163
1,750 AmeriKing, Inc. + 87,500
946 Anvil Holdings, Class B + 23,650
198,372 Celcaribe S.A. 144A + 1,265,613
172,600 CellNet Data Systems, Inc. + 2,168,288
252,474 Chesapeake Energy Corp. 2,871,892
82,812 Computervision Corp. + 305,369
45,000 Exide Corp. 1,020,938
3,026 Finlay Enterprises, Inc. + 58,251
32,500 French Fragrances Inc. + 379,844
539,505 Grand Union Co. (acquired various dates
from 6/14/93 to 3/14/95, cost $24,484,117) [DBL. DAGGER]+[SECTION MARK] 944,134
7,541 IFINT Diversified Holdings 144A + 75,410
49,679 Lady Luck Gaming Corp. (acquired 10/1/93,
cost $40,922) [DBL. DAGGER]+ 65,204
480,000 NEXTEL Communications, Inc. Class A + 13,860,000
69,400 NEXTEL Communications, Inc. 144A (acquired
9/12/97, cost $1,119,866) [DBL. DAGGER] 1,903,729
1,184 PMI Holdings Corp. 144A + 378,880
1,942 Premium Holdings (L.P.) 144A + 7,768
979,968 PSF Holdings LLC Class A [SECTION MARK]+ 29,399,040
66,840 Terex Corp. Rights expiration date 5/15/02 + 1,336,800
--------------
Total Common Stocks (cost $74,527,831) $ 57,126,473
ASSET-BACKED SECURITIES (0.8%) *
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
$12,195,000 Chemical Master Credit Card Trust Ser. 95-2,
Class A, 6.23s, 2003 $ 12,202,561
29,845,000 Sears Credit Account Master Trust Ser. 95-5,
Class A, 6.05s, 2004 29,387,775
--------------
Total Asset-Backed Securities (cost $42,310,278) $ 41,590,336
CONVERTIBLE BONDS AND NOTES (0.8%) *
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
$ 15,045,000 APP Global Finance (V) Ltd. 144A cv. sec. 2s, 2000
(United Kingdom) $ 16,286,213
4,200,000 Corporate Express, Inc. cv. notes 4 1/2s, 2000 4,021,500
2,782,000 GST Telecommunications, Inc. cv. sr. disc. notes
stepped-coupon zero % (13 7/8s, 12/15/00),
2005 ++ 2,837,640
2,310,000 Integrated Device Technology, Inc. cv. sub. notes
5 1/2s, 2002 1,983,713
1,500,000 National Semiconductor Corp. 144A cv. deb.
6 1/2s, 2002 1,721,250
9,500,000 Pricellular Wireless Corp. 144A cv. sub. notes
stepped-coupon zero % (10 3/4s, 8/15/00)
2004++ 8,146,250
7,835,000 Winstar Communications. Inc. 144A cv. sr. disc.
notes stepped-coupon zero % (14s, 10/15/00),
2005 ++ 5,935,013
--------------
Total Convertible Bonds and Notes
(cost $33,286,127) $ 40,931,579
PURCHASED OPTIONS OUTSTANDING (0.5%) * EXPIRATION DATE/
PRINCIPAL AMOUNT STRIKE PRICE VALUE
- ------------------------------------------------------------------------------------------------------------
DEM 42,695,000 U.S. Dollars in exchange for Nov. 97/1.78
Deutschemarks (Put) DEM $ 375,716
JPY 25,600,000 Japanese Government Bonds Nov. 97/118.0
Futures Contracts (call) JPY 22,580,737
USD 298,800,000 U.S. Treasury Bonds Futures
Contract (call) Nov. 97/$117.0 2,147,625
--------------
Total Purchased Options Outstanding
(cost $25,670,933) $ 25,104,078
COLLATERALIZED MORTGAGE OBLIGATIONS (0.5%) *
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
$ 4,214,255 Citicorp Mortgage Securities, Inc. Ser. 92-14,
Class M, 7 1/2s, 2022 $ 4,219,523
8,695,000 Government National Mortgage Association
Ser. 97-1, Class C, 7.5s, 2027 8,901,506
11,622,425 Rural Housing Trust Ser. 87-1, Class D, 6.33s, 2026 11,560,710
--------------
Total Collateralized Mortgage Obligations
(cost $24,304,972) $ 24,681,739
WARRANTS (0.2%) * +
NUMBER OF WARRANTS EXPIRATION DATE VALUE
- ------------------------------------------------------------------------------------------------------------
185,000 Becker Gaming Corp. 144A 11/15/00 $ 1,850
44,363 Capital Gaming International, Inc. 2/1/99 1,775
130,000 CGA Group Ltd. 144A 1/1/04 1,300
12,400 Comunicacion Cellular 144A (Colombia) 11/15/20 688,200
9,350 County Seat Holdings, Inc. 10/15/98 187
3,200 Esat Holdings, Inc. (Ireland) 2/1/07 88,000
6,850 Fitzgerald Gaming Co. 144A 3/15/99 685
4,885 Foamex (L.P.) Capital Corp. 144A 7/1/99 29,310
5,350 Globalstar Telecom 144A 2/15/04 642,000
4,705 Grand Union Co. ( acquired various dates
from 6/16/93 to 10/4/94, cost $471) [DBL. DAGGER] 6/16/00 47
2,352 Grand Union Co. (acquired various dates
from 6/16/93 to 10/4/94, cost $941) [DBL. DAGGER] 6/16/00 24
6,240 Heartland Wireless Communications Inc. 144A 4/15/00 62
11,465 Hyperion Telecommunications 144A 4/15/01 458,600
65,538 Intelcom Group 10/15/05 950,301
6,030 Interact Systems Inc. 8/1/03 1,508
8,050 Intermedia Communications 6/1/00 553,438
2,780 International Wireless Communications
Holdings 144A 8/15/01 236,300
6,500 Iridium World Com 144A 7/15/05 975,000
8,025 Louisiana Casino Cruises, Inc. 144A 12/1/98 401,250
14,715 McCaw International Ltd. 4/15/07 4,415
21,500 NEXTEL Communications Inc. Ser. 99-A 1/1/99 215
10,030 NEXTEL Communications Inc. Ser. 98-A 1/1/99 100
137,445 Nextlink Communications, Inc. 144A 2/1/09 1,374
8,485 Orion Network Systems 1/15/07 127,275
13,800 Pagemart, Inc. 144A 12/31/03 103,500
17,500 Petracom Holdings, Inc. 9/30/99 124,688
28,800 Powertel, Inc. 2/1/06 207,360
37,527 President Riverboat Casinos, Inc. 9/30/99 18,764
7,800 RSL Communications Ltd. 11/15/06 468,000
3,450 Spanish Broadcasting Systems 144A 6/30/99 655,500
2,160 Sterling Chemicals Holdings 8/15/08 82,080
WARRANTS
NUMBER OF WARRANTS EXPIRATION DATE VALUE
- ------------------------------------------------------------------------------------------------------------
54,910 UCC Investor Holding, Inc. (acquired
various dates from 3/16/94 to
5/2/95, cost $713,986) [DBL. DAGGER] 10/31/99 $ 686,375
2,105 Urohealth Systems Inc. 4/1/04 10,525
6,375 Wireless One, Inc. 10/19/00 638
1,001 Wright Medical Technology, Inc. 144A 6/30/03 100,058
--------------
Total Warrants (cost $7,246,096) $ 7,620,704
CONVERTIBLE PREFERRED STOCKS (0.1%) *
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
$31,300 Granite Broadcasting $1.938 cv. pfd. $ 1,815,400
11,498 XCL Ltd 144A $8.075 cv. pfd. 1,034,820
--------------
Total Convertible Preferred Stocks
(cost $2,893,737) $ 2,850,220
SHORT-TERM INVESTMENTS (0.5%) *
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
$50,000,000 Federal National Mortgage Association effective
yield of 5.43%, December 22, 1997 $ 49,381,583
50,000,000 Ford Motor Credit Co. effective yield of 5.50%,
October 6, 1997 49,961,810
25,000,000 Metlife Funding effective yield of 5.51%,
October 27, 1997 24,900,514
25,000,000 Wells Fargo Bank effective yield of 5.53%,
October 8, 1997 24,973,118
27,311,000 Interest in $565,867,000 joint repurchase
agreement dated September 30, 1997
with UBS Securities due October 1, 1997
with respect to various U.S. Treasury
obligations -- maturity value of $27,315,590
for an effective yield of 6.05% 27,315,590
--------------
Total Short-Term Investments (cost $176,532,615) $ 176,532,615
- ------------------------------------------------------------------------------------------------------------
Total Investments (cost $4,974,751,534) *** $5,140,517,991
- ------------------------------------------------------------------------------------------------------------
* Percentages indicated are based on net assets of $5,004,495,557.
*** The aggregate identified cost on a tax basis is $4,990,031,729,
resulting in gross unrealized appreciation and depreciation of
$202,192,435 and $51,706,173, respectively, or net unrealized
appreciation of $150,486,262.
+ Non-income-producing security.
++ The interest rate and date shown parenthetically represent the
new interest rate to be paid and the date the fund will begin receiving
interest at this rate.
+++ A portion of the income will be received in additional securities.
[DBL DAGGER] Restricted, excluding 144A securities, as to public resale. The
total market value of restricted securities held at September 30, 1997
was $3,599,633 or 0.1% of net assets.
[2 DBL DAGGERS] Income may be received in cash or additional securities at the
discretion of the issuer.
# A portion of this security was pledged and segregated with the
custodian to cover margin requirements for futures contracts at
September 30, 1997.
## When-issued securities (Note 1).
[SECTIONMARK] Affiliated companies (Note 5)
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 rate shown on Floating Rate Bonds and Floating Rate Notes
are the current interest rates shown at September 30, 1997, which are
subject to change based on the terms of the security.
Diversification by Country
Distribution of investments by country of issue at September 30,
1997: (as percentage of Market Value)
Argentina 2.0%
Australia 1.2
Brazil 2.6
Canada 1.3
France 3.0
Germany 5.0
Mexico 4.1
United Kingdom 4.4
United States 69.1
Venezuala 1.1
Other 6.2
----
Total 100.0%
=====
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
Forward Currency Contracts to Buy at September 30, 1997
(aggregate face value $958,970,553)
Unrealized
Aggregate Face Delivery Appreciation/
Market Value Value Date (Depreciation)
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Australian Dollars $ 11,229,452 $ 11,604,224 12/17/97 $ (374,772)
Canadian Dollars 11,539,457 11,447,760 12/17/97 91,697
Deutschemarks 172,075,740 168,093,858 12/17/97 3,981,882
Indonesian Rupiah 33,872,607 37,293,008 2/23/98 (3,420,401)
Italian Lira 225,894,683 221,002,436 12/17/97 4,892,247
Japanese Yen 332,758,298 332,711,442 12/17/97 46,856
Philippines Peso 6,268,491 6,553,000 3/25/97 (284,509)
Polish Zloty 12,570,223 13,120,733 6/5/98 (550,510)
Spanish Peseta 43,951,453 43,035,052 12/17/97 916,401
Swedish Krona 47,274,271 46,301,977 12/17/97 972,294
Swiss Francs 53,892,830 52,503,492 12/17/97 1,389,338
Venezuelan Bolivar 15,376,065 15,303,571 6/5/98 72,495
- ----------------------------------------------------------------------------------------
$ 7,733,018
- ----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Forward Currency Contracts to Sell at September 30, 1997
(aggregate face value $1,269,219,433)
Unrealized
Market Aggregate Face Delivery Appreciation/
Value Value Date (Depreciation)
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Australian Dollars $46,476,687 $46,244,166 12/17/97 $ (232,521)
British Pounds 73,048,692 72,475,404 12/17/97 (573,288)
Danish Krone 5,843,194 5,684,797 12/17/97 (158,397)
Deutschemarks 2,311,160 2,399,761 6/5/98 88,601
Deutschemarks 544,164,557 529,950,728 12/17/97 (14,213,829)
French Francs 156,505,270 155,070,093 12/17/97 (1,435,177)
Italian Lira 100,903,372 98,673,771 12/17/97 (2,229,601)
Japanese Yen 215,656,360 214,737,020 12/17/97 (919,340)
New Zealand Dollars 58,284,470 57,599,710 12/17/97 (684,760)
South African Rand 3,140,734 3,049,161 12/17/97 (91,573)
Swedish Krona 5,476,910 5,326,998 12/17/97 (149,912)
Swiss Francs 79,780,094 78,007,824 12/17/97 (1,772,270)
- ----------------------------------------------------------------------------------------
$(22,372,067)
- ----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Futures Contracts Outstanding at September 30, 1997
Unrealized
Aggregate Expiration Appreciation/
Market Value Face Value Date (Depreciation)
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
90 Day Gbp Libor Future
Mar 98 (Long) $ 55,896,644 $ 55,955,488 Mar. 98 $ (58,844)
- ----------------------------------------------------------------------------------------
Dec 97 10yr T-note
Future (Long) 159,461,000 156,791,250 Dec. 97 2,669,750
- ----------------------------------------------------------------------------------------
90 Day Gbp Libor Future
Mar 99 (Short) 56,228,895 56,090,324 Mar. 99 (138,571)
- ----------------------------------------------------------------------------------------
Dec 97 20yr T-bond Future
Dec 97 (Short) 121,967,563 122,298,188 Dec. 97 330,625
- ----------------------------------------------------------------------------------------
$2,802,960
- ----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
TBA Commitments Outstanding at September 30, 1997
(proceeds receivable $167,252,499)
- ----------------------------------------------------------------------------------------
Principal Settlement Market
Amount Date Value
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
FHLMC, 8.5s, October, 1999 $80,856,000 10/14/97 $ 84,494,520
FNMA, 7.5s, October 1999 82,266,000 10/14/97 83,628,325
- ----------------------------------------------------------------------------------------
$168,122,845
- ----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Written Options Outstanding at September 30, 1997
(premium received $531,553)
Contract Expiration Date/ Market
Amount Strike Price Value
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
$42,695,000 U.S. Dollars in exchange for Nov. 97/1.73 DEM $350,099
Deutschemarks (call)
- ----------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
September 30, 1997
<S> <C>
Assets
- ---------------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $4,974,751,534) (Note 1) $5,140,517,991
- ---------------------------------------------------------------------------------------------------
Cash 13,627,806
- ---------------------------------------------------------------------------------------------------
Foreign currency (cost $38,933) 38,933
- ---------------------------------------------------------------------------------------------------
Dividends, interest and other receivables 76,328,648
- ---------------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 47,124,961
- ---------------------------------------------------------------------------------------------------
Receivable for securities sold 397,728,834
- ---------------------------------------------------------------------------------------------------
Receivable for variation margin 146,941
- ---------------------------------------------------------------------------------------------------
Receivable for open forward currency contracts 13,302,840
- ---------------------------------------------------------------------------------------------------
Receivable for closed forward currency contracts 4,389,962
- ---------------------------------------------------------------------------------------------------
Total assets 5,693,206,916
Liabilities
- ---------------------------------------------------------------------------------------------------
Payable for securities purchased 471,413,696
- ---------------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 7,562,608
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 6,460,956
- ---------------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 886,079
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 67,034
- ---------------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 9,344
- ---------------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 3,694,564
- ---------------------------------------------------------------------------------------------------
Payable for open forward currency contracts 27,941,889
- ---------------------------------------------------------------------------------------------------
Payable for closed forward currency contracts 1,756,204
- ---------------------------------------------------------------------------------------------------
Written options outstanding, at value (premiums received $531,553) (Note 3) 350,099
- ---------------------------------------------------------------------------------------------------
TBA sales commitments, at value (proceeds receivable $167,252,499) 168,122,845
- ---------------------------------------------------------------------------------------------------
Other accrued expenses 446,041
- ---------------------------------------------------------------------------------------------------
Total liabilities 688,711,359
- ---------------------------------------------------------------------------------------------------
Net assets $5,004,495,557
Represented by
- ---------------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $4,853,625,981
- ---------------------------------------------------------------------------------------------------
Distributions in excess of net investment income (Note 1) (50,209,102)
- ---------------------------------------------------------------------------------------------------
Accumulated net realized gain on investments and
foreign currency transactions (Note 1) 47,392,102
- ---------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments and assets and liabilities
in foreign currencies 153,686,576
- ---------------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to capital shares outstanding $5,004,495,557
Computation of net asset value and offering price
- ---------------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($2,104,971,242 divided by 165,760,943 shares) $12.70
- ---------------------------------------------------------------------------------------------------
Offering price per class A share (100/95.25 of $12.70)* $13.33
- ---------------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($2,366,410,223 divided by 187,124,497 shares)** $12.65
- ---------------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($513,351,279 divided by 40,527,650 shares) $12.67
- ---------------------------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $12.67)* $13.10
- ---------------------------------------------------------------------------------------------------
Net asset value offering and redemption price per class Y share
($19,762,813 divided by 1,556,115 shares) $12.70
- ---------------------------------------------------------------------------------------------------
* 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, 1997
<S> <C>
Investment income:
- --------------------------------------------------------------------------------------------------
Interest (net of foreign tax of $731,861) $347,435,070
- --------------------------------------------------------------------------------------------------
Dividends 8,781,749
- --------------------------------------------------------------------------------------------------
Total investment income 356,216,819
- --------------------------------------------------------------------------------------------------
Expenses:
Compensation of Manager (Note 2) 23,670,223
- --------------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 7,401,942
- --------------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 133,048
- --------------------------------------------------------------------------------------------------
Administrative services (Note 2) 37,743
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 4,929,130
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 22,523,015
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 735,698
- --------------------------------------------------------------------------------------------------
Reports to shareholders 194,979
- --------------------------------------------------------------------------------------------------
Registration fees 226,106
- --------------------------------------------------------------------------------------------------
Auditing 117,355
- --------------------------------------------------------------------------------------------------
Legal 156,265
- --------------------------------------------------------------------------------------------------
Postage 110,132
- --------------------------------------------------------------------------------------------------
Other 315,197
- --------------------------------------------------------------------------------------------------
Total expenses 60,550,833
- --------------------------------------------------------------------------------------------------
Expense reduction (Note 2) (1,495,891)
- --------------------------------------------------------------------------------------------------
Net expenses 59,054,942
- --------------------------------------------------------------------------------------------------
Net investment income 297,161,877
- --------------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 31,432,153
- --------------------------------------------------------------------------------------------------
Net realized loss on futures contracts (Notes 1) (2,234,594)
- --------------------------------------------------------------------------------------------------
Net realized gain on written options (Notes 1 and 3) 2,055,069
- --------------------------------------------------------------------------------------------------
Net realized loss on foreign currency transactions (Note 1) (1,694,129)
- --------------------------------------------------------------------------------------------------
Net unrealized depreciation of assets and liabilities in foreign
currencies during the year (13,461,616)
- --------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments, futures,
written options, and TBA sale commitments during the year 130,695,614
- --------------------------------------------------------------------------------------------------
Net gain on investments 146,792,497
- --------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $443,954,374
- --------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Year ended September 30
----------------------------------
1997 1996
<S> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
Increase in net assets
- ----------------------------------------------------------------------------------------------------------------------
Operations:
- ----------------------------------------------------------------------------------------------------------------------
Net investment income $ 297,161,877 $ 256,333,634
- ----------------------------------------------------------------------------------------------------------------------
Net realized gain on investments and foreign
currencey transactions 29,558,499 80,508,572
- ----------------------------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments and assets
and liablilities in foreign currencies 117,233,998 10,516,542
- ----------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 443,954,374 347,358,748
Distributions to shareholders:
- ----------------------------------------------------------------------------------------------------------------------
From net investment income
Class A (138,128,131) (124,374,433)
- ----------------------------------------------------------------------------------------------------------------------
Class B (141,702,029) (130,679,613)
- ----------------------------------------------------------------------------------------------------------------------
Class M (9,536,880) (2,135,027)
- ----------------------------------------------------------------------------------------------------------------------
Class Y (768,670) (57,653)
- ----------------------------------------------------------------------------------------------------------------------
Increase from capital share transactions (Note 4) 820,638,498 532,684,820
- ----------------------------------------------------------------------------------------------------------------------
Total increase in net assets 974,457,162 622,796,842
Net assets
- ----------------------------------------------------------------------------------------------------------------------
Beginning of year 4,030,038,395 3,407,241,553
- ----------------------------------------------------------------------------------------------------------------------
End of year (including distributions in excess of
and undistributed net investment income of
$50,209,102 and $6,926,338, respectively) $5,004,495,557 $4,030,038,395
- ----------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS A
- -------------------------------------------------------------------------------------------------------------------------
Per-share
operating performance Year ended September 30
- -------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $12.29 $11.99 $11.64 $12.82 $12.66
- -------------------------------------------------------------------------------------------------------------------------
Investment operations
- -------------------------------------------------------------------------------------------------------------------------
Net investment income .89(c) .89 .95 .78 .96
- -------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .39 .30 .36 (.88) .56
- -------------------------------------------------------------------------------------------------------------------------
Total from
investment operations 1.28 1.19 1.31 (.10) 1.52
- -------------------------------------------------------------------------------------------------------------------------
Less distributions:
- -------------------------------------------------------------------------------------------------------------------------
From net
investment income (.87) (.89) (.80) (.71) (.94)
- -------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income -- -- -- (.12) --
- -------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- -- -- -- (.42)
- -------------------------------------------------------------------------------------------------------------------------
In excess of net realized
gain on investments -- -- -- (.08) --
- -------------------------------------------------------------------------------------------------------------------------
From return of capital -- -- (.16) (.17) --
- -------------------------------------------------------------------------------------------------------------------------
Total distributions (.87) (.89) (.96) (1.08) (1.36)
- -------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $12.70 $12.29 $11.99 $11.64 $12.82
- -------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- -------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 10.86 10.35 11.89 (.93) 12.85
- -------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $2,104,971 $1,845,901 $1,597,034 $1,539,076 $874,937
- -------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .99 1.02 1.01 1.01 1.21
- -------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 7.17 7.32 8.22 7.96 6.80
- -------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 250.93 304.39 235.88 201.53 243.73
- -------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* 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) Per share net investment income has been determined on the basis of the weighted average number of
shares outstanding during the period.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS B
- --------------------------------------------------------------------------------------------------------------------------
For the period
Per-share March 1, 1993+
operating performance Year Ended September 30 to Sept. 30
- --------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $12.24 $11.95 $11.61 $12.79 $12.51
- --------------------------------------------------------------------------------------------------------------------------
Investment operations
- --------------------------------------------------------------------------------------------------------------------------
Net investment income .79 (c) .80 .88 .72 .49
- --------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .40 .29 .33 (.91) .39
- --------------------------------------------------------------------------------------------------------------------------
Total from
investment operations 1.19 1.09 1.21 (.19) .88
- --------------------------------------------------------------------------------------------------------------------------
Less distributions:
- --------------------------------------------------------------------------------------------------------------------------
From net
investment income (.78) (.80) (.72) (.65) (.46)
- --------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income -- -- -- (.10) --
- --------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- -- -- -- (.14)
- --------------------------------------------------------------------------------------------------------------------------
In excess of net realized
gain on investments -- -- -- (.08) --
- --------------------------------------------------------------------------------------------------------------------------
From return of capital -- -- (.15) (.16) --
- --------------------------------------------------------------------------------------------------------------------------
Total distributions (.78) (.80) (.87) (.99) (.60)
- --------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $12.65 $12.24 $11.95 $11.61 $12.79
- --------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- --------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 10.08 9.47 11.01 (1.62) 7.21*
- --------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $2,366,410 $2,135,148 $1,795,456 $1,644,860 $504,417
- --------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.74 1.77 1.76 1.76 1.91*
- --------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 6.42 6.57 7.46 8.05 5.80*
- --------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 250.93 304.39 235.88 201.53 243.73
- --------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* 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) Per share net investment income has been determined on the basis of the weighted average number of
shares outstanding during the period.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS M
- -------------------------------------------------------------------------------------------------------------------
For the period
Per-share Dec. 1, 1994+
operating performance Year Ended September 30 to Sep. 30
- -------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value,
beginning of period $12.27 $11.97 $11.34
- -------------------------------------------------------------------------------------------------------------------
Investment operations
- -------------------------------------------------------------------------------------------------------------------
Net investment income .82 (c) .86 .78
- -------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .43 .31 .63
- -------------------------------------------------------------------------------------------------------------------
Total from
investment operations 1.25 1.17 1.41
- -------------------------------------------------------------------------------------------------------------------
Less distributions:
- -------------------------------------------------------------------------------------------------------------------
From net
investment income (.85) (.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 (.85) (.87) (.78)
- -------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $12.67 $12.27 $11.97
- -------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- -------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 10.59 10.12 12.90*
- -------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $513,351 $46,327 $14,751
- -------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.24 1.28 1.07*
- -------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 6.88 7.09 6.30*
- -------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 250.93 304.39 235.88
- -------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* 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) Per share net investment income has been determined on the basis of the weighted average number of
shares outstanding during the period.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS Y
- ----------------------------------------------------------------------------------------------------------
For the period
Per-share Year ended July 1, 1996+
operating performance Sept. 30 to Sept. 30
- ----------------------------------------------------------------------------------------------------------
1997 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net asset value,
beginning of period $12.29 $12.07
- ----------------------------------------------------------------------------------------------------------
Investment operations
- ----------------------------------------------------------------------------------------------------------
Net investment income .93(c) .24
- ----------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .38 .20
- ----------------------------------------------------------------------------------------------------------
Total from
investment operations 1.31 .44
- ----------------------------------------------------------------------------------------------------------
Less distributions:
- ----------------------------------------------------------------------------------------------------------
From net
investment income (.90) (.22)
- ----------------------------------------------------------------------------------------------------------
In excess of net
investment income -- --
- ----------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- --
- ----------------------------------------------------------------------------------------------------------
In excess of net realized
gain on investments -- --
- ----------------------------------------------------------------------------------------------------------
From return of capital -- --
- ----------------------------------------------------------------------------------------------------------
Total distributions (.90) (.22)
- ----------------------------------------------------------------------------------------------------------
Net asset value,
end of period $12.70 $12.29
- ----------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ----------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 11.14 3.70*
- ----------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $19,763 $2,662
- ----------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .74 .19*
- ----------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 7.29 1.95*
- ----------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 250.93 304.39
- ----------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* 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) Per share net investment income has been determined on the basis of the weighted average number of
shares outstanding during the period.
</TABLE>
Notes to financial statements
September 30, 1997
Note 1
Significant accounting policies
Putnam Diversified Income Trust (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.
taxable investment grade sector (formerly 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 shares, class B, and class M shares, but do not bear a
distribution fee. Class Y shares are sold to defined contribution plans that
invest at least $250 million in a combination of Putnam Funds and other
accounts managed by affiliates of Putnam Investment Management, Inc. ("Putnam
Management"), the fund's Manager, a wholly-owned subsidiary of Putnam
Investments, Inc.
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
that 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. Market quotations are not considered to be readily available
for long term corporate bonds and notes; such investments are stated at fair
market value on the basis of valuations furnished by a pricing service,
approved by the Trustees, or dealers, which determine valuations for normal,
institutional-size trading units of such securities using methods based on
market transactions for comparable securities and variable relationships
between securities that are generally recognized by institutional traders.
Short-term investments having remaining maturities of 60 days or less are
stated at amortized cost, which approximates market value. Other investments
including restricted securities are stated at fair market value following
procedures approved by the Trustees.
B) Joint trading account Pursuant to an exemptive order issued by the
Securities and Exchange Commission, the fund may transfer uninvested cash
balances into a joint trading account along with the cash of other registered
investment companies and certain other accounts managed by Putnam Management.
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 except that certain dividends from foreign
securities are recorded as soon as the fund is informed of the ex-dividend
date. Discounts on stepped-coupon bonds, original issue discount, zero coupon
bonds and payment in kind bonds are accreted according to the
yield-to-maturity method. Any premium resulting from the purchase of a stepped
coupon security is amortized on a yield-to-maturity basis.
Securities purchased or sold on a when-issued or delayed delivery basis may be
settled a month or more after the trade date; interest income is accrued based
on the terms of the security. 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 gains and losses 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 appreciation and
depreciation of assets and liabilities in foreign currencies 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 current 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) TBA sale commitments The fund may enter into TBA sale commitments to hedge
its portfolio positions or to sell mortgage-backed securities it owns under
delayed delivery arrangements. Proceeds of TBA sale commitments are not
received until the contractual settlement date. During the time a TBA sale
commitment is outstanding, equivalent deliverable securities, or an offsetting
TBA purchase commitment deliverable on or before the sale commitment date, are
held as "cover" for the transaction.
Unsettled TBA sale commitments are valued at the current market value of the
underlying securities, generally according to the procedures described under
"Security valuation" above. The contract is "marked-to-market" daily and the
change in market value is recorded by the fund as an unrealized gain or loss.
If the TBA sale commitment is closed through the acquisition of an offsetting
purchase commitment, the fund realizes a gain or loss. If the fund delivers
securities under the commitment, the fund realizes a gain or a loss from the
sale of the securities based upon the unit price established at the date the
commitment was entered into.
J) Line of credit The fund has entered into a committed line of credit with
certain banks. This line of credit agreement included restrictions that the
fund maintain an asset coverage ratio of at least 300% and borrowings must not
exceed prospectus limitations. For the period ended September 30, 1997, the
fund had no borrowings against the line of credit.
K) 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, as amended. Therefore, no provision has been made for federal taxes
on income, capital gains or unrealized appreciation on securities held nor for
excise tax on income and capital gains.
L) 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 temporary and permanent differences of losses on wash sales
transaction, realized and unrealized gains and losses on forward foreign
currency contracts, currency gains and losses on foreign bonds, post-October
foreign currency loss deferral, market discount, interest on payment-in-kind
securities, paydowns gains and losses on mortgage-backed securities.
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, 1997, the fund
reclassified $64,161,607 to decrease accumulated net investment income and
$1,814,908 to increase paid-in-capital, with a decrease to accumulated net
realized loss on investments of $62,346,699. 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 next $500
million, 0.50% the next $5 billion, 0.475% of the next $5 billion, 0.455% of
the next $5 billion, 0.44% of the next $5 billion and 0.43% thereafter. Prior
to January 20, 1997, any amount over $1.5 billion was based on 0.50%.
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, 1997, fund expenses were reduced by
$1,495,891 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 $3,868 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 has adopted a Trustee Fee Deferral Plan (the "Deferral 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
Deferral Plan.
The fund has adopted an unfunded noncontributory defined benefit pension plan
(the "Pension Plan") covering all Trustees of the fund who have served as
Trustee for at least five years. Benefits under the Pension Plan are equal to
50% of the Trustee's average total retainer and meeting fees for the three
years preceding retirement. Pension expense for the fund is included in
Compensation of trustees in the Statement of operations. Accrued pension
liability is included in Payable for compensation of Trustees in the Statement
of assets and liabilities.
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 currently limit payment by the fund to 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, 1997, Putnam Mutual Funds Corp., acting as
underwriter received net commissions of $934,691 and $1,094,426 from the sale
of class A and class M shares, respectively and received $4,597,547 in
contingent deferred sales charges from redemptions of class B and M shares. A
deferred sales charge of up to 1% is assessed on certain redemptions of class
A shares. For the year ended September 30, 1997, Putnam Mutual Funds Corp.,
acting as underwriter received $40,764 on class A redemptions.
Note 3
Purchase and sales of securities
During the year ended September 30, 1997, purchases and sales of investment
securities other than U.S. government obligations and short-term investments
aggregated $7,243,120,148 and $6,689,806,721, respectively. Purchases and
sales of U.S. government obligations aggregated $4,108,961,191 and
$3,921,158,206, respectively. In determining the net gain or loss on
securities sold, the cost of securities has been determined on the identified
cost basis.
Written option transactions during the period are summarized as follows:
Contract Premiums
Amounts Received
- ------------------------------------------------------------
Written
options
outstanding
at beginning
of year $-- $--
- ------------------------------------------------------------
Options
opened 39,414,904,600 3,272,617
- ------------------------------------------------------------
Options
expired (101,760,000) (806,448)
- ------------------------------------------------------------
Options
closed (39,270,449,600) (1,934,616)
- ------------------------------------------------------------
Written
options
outstanding
at end of
year $42,695,000 $531,553
- ------------------------------------------------------------
Note 4
Capital shares
At September 30, 1997, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
Year ended
September 30, 1997
- ------------------------------------------------------------
Class A Shares Amount
- ------------------------------------------------------------
Shares sold 50,428,499 $623,873,227
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 7,448,328 91,808,396
- ------------------------------------------------------------
57,876,827 715,681,623
Shares
repurchased (42,338,783) (523,016,705)
- ------------------------------------------------------------
Net increase 15,538,044 $192,664,918
- ------------------------------------------------------------
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, 1997
- ------------------------------------------------------------
Class B Shares Amount
- ------------------------------------------------------------
Shares sold 48,992,431 $603,519,098
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 7,385,800 90,713,708
- ------------------------------------------------------------
56,378,231 694,232,806
Shares
repurchased (43,686,864) (538,188,308)
- ------------------------------------------------------------
Net increase 12,691,367 $156,044,498
- ------------------------------------------------------------
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, 1997
- ------------------------------------------------------------
Class M Shares Amount
- ------------------------------------------------------------
Shares sold 38,634,020 $478,951,730
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 272,797 3,355,307
- ------------------------------------------------------------
38,906,817 482,307,037
Shares
repurchased (2,156,006) (26,629,199)
- ------------------------------------------------------------
Net increase 36,750,811 $455,677,838
- ------------------------------------------------------------
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
- ------------------------------------------------------------
Year ended
September 30, 1997
- ------------------------------------------------------------
Class Y Shares Amount
- ------------------------------------------------------------
Shares sold 1,357,348 $16,476,493
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 62,495 768,670
- ------------------------------------------------------------
1,419,843 17,245,163
Shares
repurchased (80,288) (993,919)
- ------------------------------------------------------------
Net increase 1,339,555 $16,251,244
- ------------------------------------------------------------
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
- ------------------------------------------------------------
Note 5
Transactions with Affiliated Companies
Transactions during the year with companies in which the fund
owns at least 5% of the voting securities were as follows:
Purchase Sales Dividend Market
Affiliates cost cost Income Value
- ------------------------------------------------------------
Name of affiliate
- ------------------------------------------------------------
Grand Union $-- -- -- $ 944,134
PSF Holdings L.L.C.
Class A -- -- -- 29,399,040
- ------------------------------------------------------------
Totals $-- -- -- $30,343,174
- ------------------------------------------------------------
Federal tax information
(Unaudited)
Pursuant to Section 852 of the Internal Revenue Code, as amended,
the Fund hereby designates $19,868,894 as capital gain for its
taxable year ended September 30, 1997.
The fund has designated 2.56% of the distributions from net
investment income as qualifying for the dividends received
deduction for corporations.
The Form 1099 you receive in January 1998 will show the tax
status of all distributions paid to your account in calendar 1997.
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
A.J.C. Smith
W. Thomas Stephens
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
William J. Curtin
Vice President
Kenneth J. Taubes
Vice President and Fund Manager
Robert M. Paine
Vice President and Fund Manager
Michael Martino
Vice President and Fund Manager
D. William Kohli
Vice President and Fund Manager
Gail S. Attridge
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 the principal amount
invested.
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
- --------------------
Bulk Rate
U.S. Postage
PAID
Putnam
Investments
- --------------------
075-36849 075/387/803/2BC 11/97
