Putnam
Diversified
Income
Trust
SEMIANNUAL REPORT ON PERFORMANCE AND OUTLOOK
3-31-99
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* "So where should you put your money? If interest rates remain relatively
stable, funds that invest in bonds with at least some risk attached to
them are the most attractive sector to be in, many experts say. In this
category are corporate bonds, both investment-grade and junk, or
high-yield as it is also known."
-- "Mutual Funds Quarterly Review,"
The Wall Street Journal, April 5, 1999
* "Calendar 1998 was a period of unprecedented volatility for fixed-income
markets worldwide. And while ongoing volatility remains a concern and
cannot be ruled out, there appear to be considerable opportunity and
current value in the traditional yield-enhanced fixed-income sectors. We
believe a risk-controlled approach to these sectors stands to be rewarded
in the long term."
-- Jennifer E. Leichter, manager
Putnam Diversified Income Trust
CONTENTS
4 Report from Putnam Management
9 Fund performance summary
12 Portfolio holdings
39 Financial statements
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
The world's securities markets experienced a dramatic change that was
generally for the better during the first half of Putnam Diversified
Income Trust's fiscal 1999. As moods brightened, investors began to
venture tentatively back to more aggressive securities than the U.S.
Treasury bonds to which they had fled in the wake of last year's sharp
market swings.
The result put somewhat of a damper on Treasuries, but it did raise
prospects for a host of other fixed-income securities from high-grade
corporates to lower-rated high-yield bonds. International bonds,
especially those in core European markets, also began to show stronger
results. Even emerging-markets issues attracted some new attention.
In the following report, your fund's management team reviews first-half
performance in this improved environment and takes a look at prospects for
the second half.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
May 19, 1999
Report from the Fund Managers
Jennifer E. Leichter, lead manager
D. William Kohli
David L. Waldman
Jeffrey A. Kaufman
After unprecedented volatility in the world's financial markets this past
summer, most fixed-income securities traveled a long rocky road back to
the status quo. Although virtually every sector except U.S. Treasury
securities experienced sharp declines in the fall of 1998, by the end of
1999's first calendar quarter, bonds carrying more credit risk once again
offered higher reward potential. In a market in which for many months the
only constant was the unexpected, the recent return to historical
risk/reward tradeoffs seemed welcome by investors the world over.
As markets regained their equilibrium, Putnam Diversified Income Trust's
multisector strategy -- with its emphasis on sectors offering a yield
advantage over U.S. Treasury securities -- enabled your fund's class A
shares to end the semiannual period in positive territory at net asset
value. Performance results for all share classes can be found on pages 9
and 10.
* FLIGHT TO QUALITY BECAME FLIGHT FROM QUALITY
The spectacular rally of the U.S. Treasury market for much of 1998 was
due, in large part, to investors' extreme aversion to risk as many of the
world's nations boiled over with political, economic, and financial
upheaval. A series of interest rate cuts by the Federal Reserve Board in
the final months of 1998 helped restore liquidity to global markets and
calm investors' fears. By the new year, strong U.S. and European economic
fundamentals and modest economic improvement in the Pacific Basin helped
to renew investors' interest further in the so-called spread sectors --
U.S. high-yield, high-grade corporate issues, mortgage-backed securities,
and emerging-markets debt.
Money that had poured into the U.S. Treasury market at a rapid-fire pace
began to flow back to higher-yielding fixed-income securities around the
world. Japanese investors, strong supporters of the U.S. government bond
market last year, also began to repatriate capital. As a result, the
Treasury rally came to a standstill in the fourth quarter of 1998 and then
reversed itself in the first quarter of 1999. By period's end, the overall
performance of your fund's Treasury holdings was flat.
Within the mortgage-backed sector, we emphasized securities that tend to
have lower prepayment sensitivity. Our focus for most of the period was on
intermediate-term current-coupon residential pass-through securities and
commercial mortgage-backed securities (CMBSs). The fund's CMBS holdings
did poorly for much of the period because of the ongoing rout in the real
estate sector and a historic halt in trading among CMBSs that occurred in
the fall. Given the favorable economic backdrop that continues to support
real estate fundamentals, we took advantage of the attractive prices that
CMBSs had to offer and slightly increased the fund's position in the final
months of the period. Our decision benefited performance by period's end
and we plan to maintain the fund's current exposure to CMBSs as we enter
the second half of fiscal 1999. Toward the end of the period, we also
began shifting our attention to higher-coupon and older mortgage-backed
issues in the residential sector as favorable opportunities arose.
[GRAPHIC OMITTED: horizontal bar chart TOP INDUSTRY SECTORS]
TOP INDUSTRY SECTORS*
Telecommunications 6.4%
Broadcasting 3.4%
Telephone
services 2.8%
Cable television 2.5%
Financial
services 2.1%
Footnote reads:
*Based on net assets as of 3/31/99. Holdings will vary over time.
* U.S. HIGH-YIELD BONDS SHINE ONCE AGAIN
One of the hardest-hit asset classes after last fall's global financial
debacle, U.S. high-yield bonds bounced off the ropes to become leading
contenders in the fixed-income universe once again. As investors recovered
their appetite for risk and recognized the outstanding value offered by
high-yield bonds, their return to the sector bid prices up. High-yield
bonds, in fact, posted the only positive returns in the U.S. fixed-income
market at the end of the first quarter of calendar 1999.
Throughout this sector's volatility, we held steady in our industry and
security selection, confident that a turnaround would soon be at hand. We
continued to favor bonds in telecommunications, media, and finance --
fast-growing industries with long-term growth potential regardless of
market swings.
With merger and acquisition activity continuing at a fast pace, there
exists a greater likelihood of credit upgrades and opportunities for price
appreciation. Telecommunications Inc. is one holding on which the fund
reaped profits during the period as its price appreciated in anticipation
of its purchase by AT&T. Other holdings worth mentioning include Covad,
Intermedia Communications, International Cable Tel, Allegiance Telecom,
and Global Crossing.
Among the cyclical sectors, Riverwood International Corporation in the
packaging and container industry is one holding that we believe holds
promise. Going forward, we expect to add selectively some high quality
cyclical holdings, given the current economic and market environments.
Should commodity prices improve, cyclical issues should stand to benefit
but are unlikely to be hurt otherwise. While the securities discussed in
this report were viewed favorably at the end of the period, all holdings
are subject to review in accordance with the fund's investment strategy
and may vary in the future.
Within the investment-grade corporate bond area, we favored the most
highly liquid large-capitalization issues, mainly in the finance and
industrial sectors. Associates Corporation is one finance holding that
contributed to performance over the period.
[GRAPHIC OMITTED: TOP THREE HOLDINGS PER SECTOR]
TOP THREE HOLDINGS PER SECTOR
HIGH-YIELD BONDS
Sprint Capital Corp. company guaranty, 5.7s, 2003
Global Crossing Holdings, Ltd. company guaranty, 9 5/8s, 2008
Chancellor Media Corp. 144A senior notes, 8s, 2008
FOREIGN BONDS
United Kingdom Treasury bonds, 8s 2000
United Mexican States, Sec. Series B, 6 1/4s, 2019
Brazil (Government of) disc. bonds FRB, 6 1/8s, 2024
U.S. INVESTMENT-GRADE SECURITIES
Government National Mortgage Association pass-through certificates, 7s,
with due dates from 2022-2028
U.S. Treasury notes, 4 1/4s, 2003
U.S. Treasury bonds, 5 1/4s, 2029
Footnote reads:
These holdings represent 19.6% of the fund's net assets as of 3/31/99.
Portfolio holdings will vary over time.
* INTERNATIONAL EMPHASIS IS CORE EUROPE; EMERGING MARKETS GET INCREASED
ATTENTION
We retained a focus on the core bond markets of Europe throughout the
semiannual period, primarily the Netherlands, Germany, France -- now
members of the European Economic and Monetary Union (EMU) -- and the
United Kingdom. Signs of slowing economic growth and repeated
interest-rate cuts were the catalysts for solid returns from European
holdings in 1998, particularly when performance was translated into a
weaker U.S. dollar. In the first three months of 1999, however, a stronger
U.S. dollar and a shaky start to the euro dampened bond returns so that
when all was said and done, the fund's European holdings produced
lackluster results.
Since the outset of the fiscal year, our team has incrementally increased
the fund's exposure to certain better-quality emerging markets that have
greater access to capital, such as Bulgaria and Mexico. We also
selectively invested in Brazil, whose bond market staged a remarkable
turnaround in the first quarter of 1999. Although Japan's bond market
experienced a recent rally, it performed quite poorly throughout 1998 and
its outlook remains murky. We therefore limited the fund's exposure to
Japanese government bonds.
* WORLD'S MARKETS HAVE ENTERED NEW ERA
The world today is quite different from the way it was only a few years
ago. There now exists a greater interdependence among nations and a
cross-pollination of market influences that require a comprehensive,
big-picture approach to fixed-income investing. Your fund's multisector
strategy exemplifies this type of approach, which we believe will benefit
shareholders in the long run.
While no assurances can be made, we enter the second half of fiscal 1999
with optimism about the continued resurgence of spread securities in the
face of stabilizing global economies, investors' renewed interest,
converging interest rates, and fairly dormant inflation worldwide.
However, we remain quite aware that greater volatility in the world's
financial markets cannot be ruled out as the euro begins to challenge the
U.S. dollar's status as the world's dominant reserve currency and emerging
markets remain a wild card. Conflicting signals about the direction of the
U.S. economy and therefore interest rates also bear watching. In-depth
research, selectivity, and broad diversification will remain the dominant
criteria for portfolio composition in the months ahead.
The views expressed here are exclusively those of Putnam Management. They
are not meant as investment advice. Although the described holdings were
viewed favorably as of 3/31/99, 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 current income
consistent with capital preservation through U.S. government, high-yield,
and international fixed-income securities.
TOTAL RETURN FOR PERIODS ENDED 3/31/99
Class A Class B Class C Class M
(inception date) (10/3/88) (3/1/93) (2/1/99) (12/1/94)
NAV POP NAV CDSC NAV CDSC NAV POP
- -------------------------------------------------------------------------------
6 months 1.36% -3.44% 0.98% -3.89% 0.99% 0.02% 1.25% -2.04%
- -------------------------------------------------------------------------------
1 year -3.56 -8.13 -4.23 -8.71 -4.22 -5.11 -3.81 -6.90
- -------------------------------------------------------------------------------
5 years 34.33 27.92 29.30 27.46 29.41 29.41 32.52 28.17
Annual average 6.08 5.05 5.27 4.97 5.29 5.29 5.79 5.09
- -------------------------------------------------------------------------------
10 years 129.27 118.30 112.22 112.22 112.94 112.94 122.77 115.56
Annual average 8.65 8.12 7.81 7.81 7.85 7.85 8.34 7.98
- -------------------------------------------------------------------------------
Life of fund 136.70 125.49 118.01 118.01 118.94 118.94 129.32 121.84
Annual average 8.56 8.06 7.71 7.71 7.76 7.76 8.23 7.89
- -------------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 3/31/99
Salomon Bros.
Lehman Bros. Non-U.S. First Boston Consumer
Aggregate World Govt. High Yield price
Bond Index Bond Index Index index
- ------------------------------------------------------------------------------
6 months -0.16% 0.17% 4.43% 0.98%
- ------------------------------------------------------------------------------
1 year 6.49 11.63 -0.75 1.73
- ------------------------------------------------------------------------------
5 years 45.52 38.83 52.09 12.09
Annual average 7.79 6.78 8.75 2.31
- ------------------------------------------------------------------------------
10 years 138.48 134.55 177.17 34.91
Annual average 9.08 8.90 10.73 3.04
- ------------------------------------------------------------------------------
Life of fund 143.02 140.06 188.32 37.73
Annual average 8.83 8.70 10.61 3.10
- ------------------------------------------------------------------------------
Past performance is no assurance of future results. More recent returns
may be more or less than those shown. Returns for class A and class M
shares reflect the current maximum initial sales charges of 4.75% and
3.25%, respectively. Class B share returns for the 1-, 5-, and 10-year and
life-of-fund periods reflect the applicable contingent deferred sales
charge (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
expenses applicable to such shares. For class C shares, returns for
periods prior to their inception are derived from the historical
performance of class A shares, adjusted to reflect both the CDSC currently
applicable to class C shares, which is 1% for the first year and is
eliminated thereafter, and the higher operating expenses applicable to
class C shares. All returns assume reinvestment of distributions at NAV.
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.
PRICE AND DISTRIBUTION INFORMATION
6 months ended 3/31/99
Class A Class B Class C Class M
- ----------------------------------------------------------------------------
Distributions (number) 6 6 2 6
- ----------------------------------------------------------------------------
Income $0.441 $0.398 $0.153 $0.428
- ----------------------------------------------------------------------------
Capital gains -- -- -- --
- ----------------------------------------------------------------------------
Total $0.441 $0.398 $0.153 $0.428
- ----------------------------------------------------------------------------
Share value: NAV POP NAV NAV NAV POP
- -----------------------------------------------------------------------------
9/30/98 $11.66 $12.24 $11.61 $ -- $11.62 $12.01
- -----------------------------------------------------------------------------
2/1/99* -- -- -- 11.51 -- --
- -----------------------------------------------------------------------------
3/31/99 11.37 11.94 11.32 11.36 11.33 11.71
- -----------------------------------------------------------------------------
Current return (end of period)
- -----------------------------------------------------------------------------
Current dividend rate1 8.23% 7.84% 7.53% 8.03% 8.05% 7.79%
- -----------------------------------------------------------------------------
Current 30-day SEC yield2 8.41 8.00 7.62 7.70 8.21 7.94
- -----------------------------------------------------------------------------
*Inception of class C shares.
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 C shares are not subject to an initial sales charge and are subject
to a contingent deferred sales charge only if the shares are redeemed
during the first year.
Class M shares have a lower initial sales charge and a higher 12b-1 fee
than class A shares and no sales charge on redemption.
Net asset value (NAV) is the value of all your fund's assets, minus any
liabilities, divided by the number of outstanding shares, not including
any initial or contingent deferred sales charge.
Public offering price (POP) is the price of a mutual fund share plus the
maximum sales charge levied at the time of purchase. POP performance
figures shown here assume the 4.75% maximum 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. The CDSC for class C shares is 1% for one year after purchase.
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.
<TABLE>
<CAPTION>
Portfolio of investments owned
March 31, 1999 (Unaudited)
CORPORATE BONDS AND NOTES (44.8%) (a)
PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C>
Advertising (0.6%)
- --------------------------------------------------------------------------------------------------------------------------
$ 7,275,000 Adams Outdoor Advertising sr. notes 10 3/4s, 2006 $ 7,929,750
7,390,000 Lamar Advertising Co. company guaranty
8 5/8s, 2007 7,777,975
9,715,000 Outdoor Communications Inc. sr. sub. notes
9 1/4s, 2007 10,467,913
--------------
26,175,638
Aerospace and Defense (0.8%)
- --------------------------------------------------------------------------------------------------------------------------
1,900,000 Argo-Tech Corp. company guaranty 8 5/8s, 2007 1,805,000
2,900,000 Argo-Tech Corp. 144A sr. sub. notes 8 5/8s, 2007 2,755,000
5,910,000 Aviation Sales Co. company guaranty 8 1/8s, 2008 5,924,775
1,000,000 BE Aerospace, Inc. sr. sub. notes Ser. B, 9 7/8s, 2006 1,055,000
1,870,000 BE Aerospace, Inc. sr. sub. notes 9 1/2s, 2008 1,996,225
4,620,000 BE Aerospace, Inc. sr. sub. notes Ser. B, 8s, 2008 4,596,900
130,000 Boeing Co. deb. 6 5/8s, 2038 123,547
2,500,000 Derlan Industries Ltd. sr. notes 10s, 2007 (Canada) 2,225,000
2,160,000 K&F Industries, Inc. sr. sub. notes Ser. B, 9 1/4s, 2007 2,211,300
13,925,000 Raytheon Co. 144A bonds 6.4s, 2018 13,241,840
2,000,000 Sequa Corp. med. term notes 10s, 2001 2,085,800
--------------
38,020,387
Agriculture (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
11,004,336 Premium Standard Farms, Inc. sr. secd. notes
11s, 2003 (PIK) 10,564,162
Airlines (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
3,400,000 Calair LLC 144A company guaranty 8 1/8s, 2008 3,230,000
4,020,000 Canadian Airlines Corp. sr. notes
12 1/4s, 2006 (Canada) 1,768,800
5,860,000 Canadian Airlines Corp. secd. notes
10s, 2005 (Canada) 4,395,000
3,630,000 Trans World Airlines, Inc. sr. notes 11 1/2s, 2004 2,776,950
7,970,000 Trans World Airlines, Inc. sr. notes 11 3/8s, 2006 4,383,500
--------------
16,554,250
Apparel (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
4,730,000 Fruit of the Loom 144A company guaranty
8 7/8s, 2006 4,741,825
2,190,000 GFSI, Inc. sr. disc. notes stepped-coupon, Ser. B,
zero % (11 3/8s, 9/15/04), 2009 (STP) 1,697,250
7,280,000 Guess Jeans, Inc. sr. sub. notes 9 1/2s, 2003 7,280,000
3,945,000 Sassco Fashions Ltd. sr. notes 12 3/4s, 2004 3,885,825
2,215,000 William Carter Holdings Co. sr. sub. notes
Ser. A, 12s, 2008 2,381,125
--------------
19,986,025
Automotive Parts (1.0%)
- --------------------------------------------------------------------------------------------------------------------------
2,030,000 Aftermarket Technology Corp. sr. sub. notes
12s, 2004 2,085,825
1,837,000 Aftermarket Technology Corp. sr. sub. notes
Ser. D, 12s, 2004 1,887,518
3,975,000 Cambridge Industries, Inc. company guaranty
Ser. B, 10 1/4s, 2007 3,279,375
800,000 Exide Corp. sr. notes 10s, 2005 792,000
6,700,000 Federal Mogul Corp. 144A notes 7 1/2s, 2009 6,537,458
850,000 Federal Mogul Corp. 144A notes 7 3/8s, 2006 833,034
2,070,000 Hayes Lemmerz International, Inc. 144A
company guaranty 8 1/4s, 2008 2,080,350
4,450,000 Hayes Wheels International, Inc. 144A sr. sub. notes
9 1/8s, 2007 4,639,125
980,000 Hayes Wheels International, Inc. company guaranty
Ser. B, 9 1/8s, 2007 1,021,650
165,000 Lear Corp. sub. notes 9 1/2s, 2006 180,881
7,295,000 Motors and Gears, Inc. sr. notes Ser. D, 10 3/4s, 2006 7,532,088
8,475,000 Navistar International Corp. sr. notes Ser. B, 8s, 2008 8,771,625
5,100,000 Oxford Automotive, Inc. company guaranty Ser. B,
10 1/8s, 2007 5,253,000
2,780,000 Safety Components International, Inc. sr. sub. notes
Ser. B, 10 1/8s, 2007 2,613,200
--------------
47,507,129
Banks (0.9%)
- --------------------------------------------------------------------------------------------------------------------------
6,425,000 Chevy Chase Savings Bank Inc. sub. deb. 9 1/4s, 2005 6,425,000
2,425,000 Delta Financial Corp. sr. notes 9 1/2s, 2004 1,818,750
2,000,000 Dime Capital Trust I bank guaranty Ser. A, 9.33s, 2027 2,125,460
13,770,000 Fuji JGB Inv. LLC 144A FLIRB 9.87s, 2049 (Japan) 12,324,150
2,700,000 Greenpoint Capital Trust I company guaranty
9.1s, 2027 2,818,827
2,145,000 North Fork Capital Trust I company guaranty
8.7s, 2026 2,244,292
1,355,000 Ocwen Capital Trust I company guaranty
10 7/8s, 2027 1,097,550
2,265,000 Ocwen Federal Bank FSB sub. deb. 12s, 2005 2,202,713
2,540,000 Peoples Heritage Capital Trust company guaranty
Ser. B, 9.06s, 2027 2,497,861
2,400,000 Provident Capital Trust company guaranty 8.6s, 2026 2,404,992
1,385,000 Riggs Capital Trust 144A bonds 8 5/8s, 2026 1,355,943
2,045,000 Sovereign Capital Trust company guaranty 9s, 2027 2,041,892
1,845,000 Webster Capital Trust I 144A bonds 9.36s, 2027 1,872,122
--------------
41,229,552
Basic Industrial Products (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
1,090,000 Koppers Industries, Inc. 144A company guaranty
9 7/8s, 2007 1,106,350
2,420,000 Paragon Corp. Holdings, Inc. company guaranty
Ser. B, 9 5/8s, 2008 1,887,600
4,700,000 Roller Bearing Co. company guaranty Ser. B,
9 5/8s, 2007 4,465,000
--------------
7,458,950
Broadcasting (3.4%)
- --------------------------------------------------------------------------------------------------------------------------
2,800,000 Allbritton Communications Co. sr. sub. deb.
Ser. B, 9 3/4s, 2007 2,971,500
6,740,000 Allbritton Communications Co. sr. sub. notes
Ser. B, 8 7/8s, 2008 6,857,950
856,252 Australis Media, Ltd. sr. sec. disc. notes zero %,
2000 (in default) (Australia) (NON) 666,849
50,635 Australis Media, Ltd. sr. disc. notes stepped-coupon
1 3/4s, (15 3/4s, 5/15/00), 2003 (In default)
(Australia) (STP) (PIK) (NON) 506
10,605,000 Benedek Communications Corp. sr. disc. notes stepped-
coupon zero % (13 1/4s, 5/15/01), 2006 (STP) 8,059,800
6,860,000 Capstar Broadcasting sr. disc. notes stepped-coupon
zero % (12 3/4s, 2/1/02), 2009 (STP) 5,796,700
8,055,000 Capstar Broadcasting sr. sub. notes 9 1/4s, 2007 8,457,750
9,949,937 Capstar Broadcasting bank term loan 4.999s, 2005 9,974,812
1,665,000 Central European Media Enterprises Ltd. sr. notes
9 3/8s, 2004 (Bermuda) 1,581,750
18,310,000 Chancellor Media Corp. 144A sr. notes 8s, 2008 19,065,288
2,914,720 Citadel Broadcasting Inc. sr. sub. notes 10 1/4s, 2007 3,206,192
4,960,000 Citadel Broadcasting Inc. company guaranty
9 1/4s, 2008 5,307,200
13,667,000 Comcast UK Cable, Ltd. deb. stepped-coupon zero %
(11.2s, 11/15/00), 2007 (Bermuda) (STP) 11,941,541
16,180,000 Echostar DBS Corp. 144A sr. notes 9 3/8s, 2009 16,746,300
5,585,000 Fox Family Worldwide, Inc. sr. notes 9 1/4s, 2007 5,291,788
9,660,000 Fox/Liberty Networks LLC sr. notes 8 7/8s, 2007 9,998,100
175,000 Granite Broadcasting Corp. sr. sub. notes
10 3/8s, 2005 182,875
7,940,000 Granite Broadcasting Corp. sr. sub. notes
8 7/8s, 2008 7,979,700
3,000,000 Jacor Communications, Inc. company guaranty
Ser. B, 8 3/4s, 2007 3,202,500
580,000 Lenfest Communications, Inc. sr. notes 8 3/8s, 2005 614,800
4,250,000 Lenfest Communications, Inc. sr. sub. notes
8 1/4s, 2008 4,377,500
1,420,000 Pegasus Communications Corp. 144A sr. notes
9 3/4s, 2006 1,476,800
7,826,000 PHI Holdings, Inc. sr. sub. notes 16s, 2001 6,451,754
3,635,000 Radio One Inc. company guaranty stepped-coupon
Ser. B, 7s, (12s, 5/15/00), 2004 (STP) 3,744,050
7,500,000 Sinclair Broadcast Group, Inc. company guaranty
9s, 2007 7,687,500
1,600,000 Sinclair Broadcast Group, Inc. sr. sub. notes
8 3/4s, 2007 1,632,000
2,000,000 Spanish Broadcasting Systems sr. notes
Ser. B, 11s, 2004 2,180,000
4,275,000 TV Azteca S.A. de C.V. sr. notes 10 1/2s,
2007 (Mexico) 3,526,875
970,000 TV Azteca S.A. de C.V. sr. notes Ser. A, 10 1/8s,
2004 (Mexico) 819,650
--------------
159,800,030
Building and Construction (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
2,040,000 American Architectural Products Corp. company
guaranty 11 3/4s, 2007 1,734,000
2,080,000 Cia Latino Americana 144A company guaranty
11 5/8s, 2004 (Argentina) 1,164,800
11,910,000 D.R. Horton, Inc. company guaranty 8s, 2009 11,642,025
6,300,000 GS Superhighway Holdings sr. notes 10 1/4s,
2007 (China) 3,024,000
1,870,000 GS Superhighway Holdings sr. notes 9 7/8s,
2004 (China) 953,700
2,030,000 Jackson Products, Inc. company guaranty
Ser. B, 9 1/2s, 2005 2,035,075
7,964,937 Terex bank term loan 8.18s, 2005 7,945,025
4,050,000 Toll Corp. company guaranty 8 1/8s, 2009 4,029,750
--------------
32,528,375
Building Products (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
4,170,000 Building Materials Corp. 144A sr. notes 8s, 2008 4,107,450
4,260,000 Morris Material Handling, Inc. company guaranty
9 1/2s, 2008 2,257,800
--------------
6,365,250
Buses (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
10,880,000 MCII Holdings sec. notes stepped-coupon 12s,
(15s, 11/18/99) 2002 (STP) 9,574,400
Business Equipment and Services (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
5,650,000 Cex Holdings, Inc. company guaranty Ser. B,
9 5/8s, 2008 5,311,000
1,475,000 Iron Mountain, Inc. med. term notes company
guaranty 10 1/8s, 2006 1,593,000
5,870,000 Iron Mountain, Inc. company guaranty 8 3/4s, 2009 6,016,750
996,377 Outsourcing Solutions, Inc. bank term loan
8 5/8s, 2003 966,486
1,505,000 Outsourcing Solutions, Inc. sr. sub. notes
Ser. B, 11s, 2006 1,482,425
1,040,000 United Stationer Supply, Inc. sr. sub. notes 8 3/8s, 2008 1,037,400
5,650,000 U.S. Office Products Co. company guaranty
9 3/4s, 2008 3,729,000
--------------
20,136,061
Cable Television (2.5%)
- --------------------------------------------------------------------------------------------------------------------------
590,000 21st Century Telecom Group, Inc. sr. disc. notes stepped-
coupon zero % (12 1/4s, 2/15/03), 2008 (STP) 218,300
6,735,000 Acme Television sr. disc. notes stepped-coupon zero %
(10 7/8s, 9/30/00), 2004 (STP) 5,691,075
733,537 Adelphia Communications Corp. sr. notes
9 1/2s, 2004 (PIK) 759,211
7,720,000 Adelphia Communications Corp. 144A sr. notes
8 3/8s, 2008 7,874,400
3,380,000 Century Communications Corp. sr. notes 8 7/8s, 2007 3,549,000
4,370,000 Century Communications Corp. sr. notes 8 3/4s, 2007 4,555,725
15,690,000 Charter Communications Holdings LLC 144A
sr. notes 8 5/8s, 2009 16,023,413
5,000,000 Charter Communications Term Loan B 7 1/2s, 2008 4,993,750
100,000 Comcast Corp. sr. sub. notes 9 1/2s, 2008 105,396
1,650,000 CSC Holdings, Inc. deb. 7 7/8s, 2018 1,691,184
1,323,000 CSC Holdings, Inc. deb. Ser. B, 8 1/8s, 2009 1,421,669
4,190,000 CSC Holdings, Inc. sr. notes 7 1/4s, 2008 4,247,319
5,750,000 CSC Holdings, Inc. sr. sub. deb. 10 1/2s, 2016 6,900,000
7,560,000 Diamond Cable Communication Co. sr. disc. notes
stepped-coupon zero % (11 3/4s, 12/15/00), 2005
(United Kingdom) (STP) 6,681,150
15,065,000 Diamond Cable Communication Co. sr. disc. notes
stepped-coupon zero % (10 3/4s, 2/15/02), 2007
(United Kingdom) (STP) 11,750,700
7,925,000 Grupo Televisa S.A. de C.V. 144A sr. notes
11 7/8s, 2006 (Mexico) 8,202,375
15,200,000 Grupo Televisa S.A. de C.V. sr. disc. notes
stepped-coupon zero % (13 1/4s, 5/15/01),
2008 (Mexico) (STP) 12,730,000
1,500,000 Jones Intercable, Inc. sr. notes 9 5/8s, 2002 1,578,750
4,670,000 NTL Inc. 144A sr. notes 11 1/2s, 2008
(United Kingdom) 5,265,425
3,925,000 NTL Inc. sr. notes, stepped-coupon Ser. B, zero %
(9 3/4s, 4/1/03), 2008 (United Kingdom) (STP) 2,669,000
1,270,000 Rogers Cablesystems Ltd. sr. notes Ser. B,
10s, 2005 (Canada) 1,431,925
4,170,000 Supercanal Holdings S.A. 144A sr. notes
11 1/2s, 2005 (Argentina) 1,668,000
1,550,000 TeleWest Communications PLC 144A sr. notes
11 1/4s, 2008 (United Kingdom) 1,801,875
5,950,000 United International Holdings sr. disc. notes Ser. B,
stepped-coupon Ser. B, zero % (10 3/4s, 2/15/03),
2008 (STP) 4,046,000
--------------
115,855,642
Cellular Communications (2.0%)
- --------------------------------------------------------------------------------------------------------------------------
11,140,000 Celcaribe S.A. sr. notes stepped-coupon zero %
(13 1/2s, 3/15/04), 2004 (Colombia) (STP) 9,469,000
19,177,000 CellNet Data Systems, Inc. sr. disc. notes stepped-
coupon zero % (14s, 10/1/02), 2007 (STP) 6,328,410
8,030,000 Cencall Communications Corp. sr. disc. notes
10 1/8s, 2004 8,270,900
3,815,000 Conecel Holdings 144A notes Ser. A, 14s, 2000 763,000
6,500,000 Dial Call Communications, Inc. sr. disc. notes Ser. B,
stepped-coupon 10 1/4s, 2005 6,695,000
9,625,000 Dobson Communications Corp. sr. notes
11 3/4s, 2007 10,310,781
14,200,000 McCaw International Ltd sr. disc. notes stepped-coupon
zero % (13s, 4/15/02), 2007 (STP) 8,378,000
5,750,000 MetroNet Communications Corp. sr. disc. stepped-
coupon notes zero % (9.95s, 6/15/03), 2008
(Canada) (STP) 4,441,875
22,850,000 Millicom International Cellular S.A. sr. disc. notes
stepped-coupon zero % (13 1/2s, 6/1/01),
2006 (Luxembourg) (STP) 16,994,688
3,370,000 NEXTEL Communications, Inc. sr. disc. notes stepped-
coupon zero % (12 1/8s, 4/15/03), 2008 (STP) 1,617,600
5,730,000 NEXTEL Communications, Inc. sr. disc. notes stepped-
coupon zero % (9.95s, 2/15/03), 2008 (STP) 4,011,000
2,610,000 NEXTEL Communications, Inc. sr. disc. notes stepped-
coupon zero % (9 3/4s, 10/31/02), 2007 (STP) 1,853,100
9,180,000 NEXTEL Communications, Inc. 144A
sr. notes 12s, 2008 10,648,800
5,640,000 Price Communications Wireless, Inc. 144A sr. notes
9 1/8s, 2006 5,865,600
--------------
95,647,754
Chemicals (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
775,000 Acetex Corp. sr. notes 9 3/4s, 2003 (Canada) 728,500
4,540,000 Geo Specialty Chemicals, Inc. 144A sr. sub. notes
10 1/8s, 2008 4,517,300
1,250,000 Huntsman Corp. 144A sr. sub. notes 9 1/2s, 2007 1,243,750
4,690,000 Huntsman Corp. 144A sr. sub. notes FRN 9.03s, 2007 4,314,800
7,000,000 ISP Holdings, Inc. sr. notes Ser. B, 9 3/4s, 2002 7,192,500
3,307,692 Lyondell Petrochem bank term loans Ser. D
7 1/4s, 2000 3,249,807
1,815,000 Pioneer Americas Acquisition 144A sr. notes
9 1/4s, 2007 1,524,600
5,221,554 Polytama International notes 11 1/4s, 2007 (Indonesia) 365,509
5,090,000 Scotts Co 144A sr. sub. notes 8 5/8s, 2009 5,255,425
4,450,000 Sterling Chemicals Holdings sr. disc. notes stepped-
coupon zero % (13 1/2s, 8/15/01), 2008 (STP) 1,891,250
4,790,000 Trikem S.A. 144A bonds 10 5/8s, 2007 (Brazil) 1,676,500
--------------
31,959,941
Computer Services and Software (0.6%)
- --------------------------------------------------------------------------------------------------------------------------
1,345,000 Concentric Network Corp. sr. notes 12 3/4s, 2007 1,553,475
9,490,000 IPC Information Systems sr. disc. notes stepped-
coupon zero % (10 7/8s, 11/1/01), 2008 (STP) 6,192,225
5,780,000 PSINet, Inc. sr. notes 11 1/2s, 2008 6,502,500
3,010,000 PSINet, Inc. sr. notes Ser. B, 10s, 2005 3,175,550
5,410,000 Unisys Corp. sr. notes 7 7/8s, 2008 5,680,500
2,790,000 Verio Inc. 144A sr. notes 11 1/4s, 2008 3,138,750
--------------
26,243,000
Conglomerates (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
5,890,000 Axia, Inc. company guaranty 10 3/4s, 2008 5,860,550
7,420,000 Cathay International Ltd. 144A sr. notes
13s, 2008 (China) 1,706,600
2,100,000 Dine S.A. de C.V. company guaranty
8 3/4s, 2007 (Mexico) 1,743,000
--------------
9,310,150
Consumer Durable Goods (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
4,460,000 Albecca Inc. company guaranty 10 3/4s, 2008 3,791,000
660,000 Hedstrom Holdings, Inc. 144A sr. disc. notes stepped-
coupon zero % (12s, 6/1/02), 2009 (STP) 244,200
1,440,000 Iron Age Corp. company guaranty 9 7/8s, 2008 1,051,200
1,750,000 Sealy Mattress Co. sr. sub. notes Ser. B, 9 7/8s, 2007 1,736,875
--------------
6,823,275
Consumer Services (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
7,156,000 Coinmach Corp. sr. notes Ser. D, 11 3/4s, 2005 7,871,600
2,190,000 Protection One, Inc. sr. disc. notes stepped-coupon
zero %, (13 5/8s, 6/30/00), 2005 (STP) 2,496,600
--------------
10,368,200
Cosmetics (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
1,225,000 French Fragrances, Inc. sr. notes Ser. B, 10 3/8s, 2007 1,215,813
1,800,000 French Fragrances, Inc. company guaranty Ser. D,
10 3/8s, 2007 1,836,000
2,900,000 Revlon Consumer Products sr. notes 9s, 2006 2,900,000
6,385,000 Revlon Consumer Products sr. sub. notes
8 5/8s, 2008 5,938,050
--------------
11,889,863
Electric Utilities (1.6%)
- --------------------------------------------------------------------------------------------------------------------------
7,625,000 AES China Generating Co. sr. notes 10 1/8s,
2006 (China) 5,185,000
2,030,000 Applied Power Inc. sr. sub. notes 8 3/4s, 2009 2,060,450
150,000 Calpine Corp. sr. notes 10 1/2s, 2006 165,000
1,900,000 Calpine Corp. sr. notes 9 1/4s, 2004 1,966,500
7,165,000 Calpine Corp. sr. notes 8 3/4s, 2007 7,313,316
5,150,000 Calpine Corp. sr. notes 7 7/8s, 2008 5,175,750
6,310,000 Cleveland Electric Illuminating Co. bonds 6.86s, 2008 6,338,584
2,385,000 Connecticut Light & Power Co. 1st mtge.
Ser. A, 7 7/8s, 2001 2,463,347
2,800,000 El Paso Electric Co. 1st mtge. Ser. D, 8.9s, 2006 3,128,076
2,985,000 Midland Funding II Corp. deb. Ser. B, 13 1/4s, 2006 3,680,595
15,670,000 Midland Funding II Corp. deb. Ser. A, 11 3/4s, 2005 17,761,945
2,810,000 Niagara Mohawk Power Corp. sr. notes Ser. E,
7 3/8s, 2003 2,946,088
2,860,000 Niagara Mohawk Power Corp. sr. notes Ser. F,
7 5/8s, 2005 2,947,916
1,210,000 Niagara Mohawk Power Corp. sr. notes Ser. G,
7 3/4s, 2008 1,299,189
2,313,202 Northeast Utilities System notes Ser. A, 8.58s, 2006 2,411,027
2,010,602 Northeast Utilities System notes Ser. B, 8.38s, 2005 2,074,378
9,535,000 Panda Global Energy Co. company guaranty
12 1/2s, 2004 (China) 4,767,500
5,260,000 York Power Funding 144A notes 12s, 2007
(Cayman Islands) 5,286,300
--------------
76,970,961
Electronics (0.8%)
- --------------------------------------------------------------------------------------------------------------------------
2,210,000 Celestica International Ltd. 144A sr. sub. notes
10 1/2s, 2006 (Canada) 2,436,525
1,200,000 Details, Inc. sr. discount notes stepped-coupon
Ser. B, zero %, (12 1/2s, 11/15/02), 2007 (STP) 600,000
1,500,000 Details, Inc. sr. sub. notes Ser. B, 10s, 2005 1,357,500
2,760,000 DII Group, Inc. (The) sr. sub. notes 8 1/2s, 2007 2,773,800
8,655,000 Flextronics International Ltd. sr. sub. notes
Ser. B, 8 3/4s, 2007 8,871,375
1,585,000 HCC Industries, Inc. company guaranty 10 3/4s, 2007 1,521,600
6,090,000 Metromedia Fiber Network, Inc. 144A sr. notes
10s, 2008 6,516,300
700,000 Moog, Inc. sr. sub. notes Ser. B, 10s, 2006 728,875
1,040,000 Samsung Electronics 144A company guaranty
9 3/4s, 2003 1,060,800
6,880,000 Viasystems, Inc. sr. notes Ser. B, 9 3/4s, 2007 6,432,800
915,000 Viasystems Inc. sr. sub notes 9 3/4s, 2007 861,244
4,920,000 Wavetek Corp. company guaranty 10 1/8s, 2007 4,575,600
--------------
37,736,419
Entertainment (1.2%)
- --------------------------------------------------------------------------------------------------------------------------
9,326,000 ITT Corp. notes 6 3/4s, 2005 8,457,190
6,175,000 Premier Parks, Inc. sr. notes 9 1/4s, 2006 6,391,125
5,270,000 SFX Entertainment, Inc. 144A company guaranty
Ser. B, 9 1/8s, 2008 5,329,288
3,940,000 SFX Entertainment, Inc. 144A sr. sub. notes
9 1/8s, 2008 3,979,400
4,410,000 Silver Cinemas Inc. sr. sub. notes 10 1/2s, 2005 2,337,300
2,850,000 Six Flags Corp. sr. sub. notes 12 1/4s, 2005 3,167,063
16,930,000 Time Warner, Inc. company guaranty 6 5/8s, 2029 16,140,554
4,975,000 United Artist bank term loan Ser. C 8.688s, 2007 4,726,250
6,790,000 United Artists Theatre 144A sr. sub. notes
9 3/4s, 2008 5,567,800
--------------
56,095,970
Environmental Control (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
12,650,000 Allied Waste Industries, Inc. company guaranty
Ser. B, 7 7/8s, 2009 12,270,500
Financial Services (2.1%)
- --------------------------------------------------------------------------------------------------------------------------
6,520,000 Aames Financial Corp. sr. notes 9 1/8s, 2003 4,433,600
9,995,000 Advanta Corp. med. term notes Ser. B, 7s, 2001 8,931,332
2,525,000 Advanta Corp. med. term notes Ser. D, 6.98s, 2002 2,196,750
4,645,000 Cellco Finance Corp. NV 144A sr. sub. notes
15s, 2005 (Netherlands) 4,494,038
10,465,000 Citicorp sub. notes 6 3/8s, 2008 10,390,489
1,425,000 Colonial Capital I 144A company guaranty
8.92s, 2027 1,348,758
4,650,000 Contifinancial Corp. sr. notes 8 1/8s, 2008 3,441,000
5,880,000 Contifinancial Corp. sr. notes 7 1/2s, 2002 4,468,800
16,940,000 Household Finance Corp. sr. unsub. 5 7/8s, 2009 16,132,809
7,355,000 Household Netherlands N.V. company guaranty
6.2s, 2003 (Netherlands) 7,396,114
5,405,000 Imperial Credit Capital Trust I 144A company guaranty
10 1/4s, 2002 4,215,900
4,410,128 Imperial Credit Industries, Inc. sr. notes 9 7/8s, 2007 3,792,710
2,040,000 Investors Capital Trust I company guaranty
Ser. B, 9.77s, 2027 2,009,400
2,800,000 Local Financial Corp. 144A sr. notes 11s, 2004 2,884,000
2,665,000 Nationwide Credit Inc. sr. notes Ser. A, 10 1/4s, 2008 1,159,275
12,520,000 RBF Finance 144A company guaranty 11s, 2006 13,146,000
4,055,000 Resource America Inc. 144A sr. notes 12s, 2004 3,608,950
2,750,000 SRI Receivables Purchase 144A notes 12 1/2s, 2000 2,695,000
2,900,000 Superior Financial 144A sr. notes 8.65s, 2003 2,711,500
--------------
99,456,425
Food and Beverages (0.8%)
- --------------------------------------------------------------------------------------------------------------------------
7,510,000 Ameriserve Food Co. company guaranty
10 1/8s, 2007 5,332,100
6,830,000 Ameriserve Food Co. company guaranty
8 7/8s, 2006 5,745,738
5,730,000 Aurora Foods, Inc. 144A ser. sub. notes
Ser. D, 9 7/8s, 2007 6,188,400
5,890,000 Doane Products Co. 144A sr. sub. notes
9 3/4s, 2007 6,206,588
3,705,129 Imperial Holly bank term loan Ser. A, 7.656s, 2003 3,631,026
2,640,000 Nebco Evans Holding Co. sr. disc. notes stepped-coupon
zero % (12 3/8s, 7/15/02), 2007 (STP) 1,003,200
6,900,000 RAB Enterprises, Inc. company guaranty 10 1/2s, 2005 3,450,000
4,620,000 Triarc Consumer Products, Inc. 144A sr. sub. notes
10 1/4s, 2009 4,608,450
--------------
36,165,502
Gaming (1.7%)
- --------------------------------------------------------------------------------------------------------------------------
6,970,000 Argosy Gaming Co. company guaranty 13 1/4s, 2004 7,876,100
4,785,000 Autotote Corp. company guaranty Ser. B,
10 7/8s, 2004 5,024,250
9,140,000 Boyd Gaming Corp. sr. sub. notes 9 1/2s, 2007 9,368,500
2,544,000 Circus Circus Enterprises, Inc. sr. notes 6.45s, 2006 2,323,333
7,804,200 Colorado Gaming & Entertainment Co. sr. notes
12s, 2003 (PIK) 8,038,326
6,040,000 Fitzgeralds Gaming Corp. company guaranty
Ser. B, 12 1/4s, 2004 3,171,000
2,300,000 Harrahs Entertainment, Inc. company guaranty
7 1/2s, 2009 2,293,698
7,650,000 Hollywood Casino Corp. sr. notes 12 3/4s, 2003 8,300,250
3,770,000 Hollywood Park Inc. 144A sr. sub. notes 9 1/4s, 2007 3,864,250
2,085,000 Isle of Capri Black Hawk LLC 1st mortgage
Ser. B, 13s, 2004 2,262,225
5,110,000 Mohegan Tribal Gaming, Auth. 144A sr. notes
8 1/8s, 2006 5,224,975
3,790,000 Park Place Entertainment sr. sub. notes 7 7/8s, 2005 3,723,675
2,550,000 PRT Funding Corp. sr. notes 11 5/8s, 2004
(In default) (NON) 1,144,313
775,000 Trump A.C. 1st mtge. 11 1/4s, 2006 689,750
10,820,000 Trump Castle Funding 144A sub. notes 10 1/4s, 2003 10,928,200
3,840,000 Trump Holdings & Funding Corp. sr. notes
15 1/2s, 2005 3,844,800
--------------
78,077,645
Health Care (1.7%)
- --------------------------------------------------------------------------------------------------------------------------
5,030,000 Columbia/HCA Healthcare Corp. med. term notes
8.85s, 2007 5,020,996
1,950,000 Columbia/HCA Healthcare Corp. med term notes
6.63s, 2045 1,842,146
1,850,000 Columbia/HCA Healthcare Corp. med term notes
6.63s, 2045 1,493,875
2,240,000 Columbia/HCA Healthcare Corp. notes 7 1/4s, 2008 2,045,344
1,750,000 Columbia/HCA Healthcare Corp. deb. 8.36s, 2024 1,602,405
2,930,000 Conmed Corp. company guaranty 9s, 2008 2,944,650
4,690,000 Extendicare Health Services, Inc. company guaranty
9.35s, 2007 3,752,000
4,850,000 Global Health Sciences company guaranty 11s, 2008 3,055,500
7,770,000 Integrated Health Services, Inc. sr. sub. notes
Ser. A, 9 1/2s, 2007 5,050,500
5,880,000 Integrated Health Services, Inc. sr. sub. notes
Ser. A, 9 1/4s, 2008 3,763,200
5,000,000 Magellan Health bank term loan 7 3/4s, 2004 4,650,000
4,520,000 Magellan Health Services, Inc. sr. sub. notes 9s, 2008 3,864,600
2,410,000 Mariner Post-Acute Network, Inc. sr. sub. notes
stepped-coupon Ser. B, zero % (10 1/2s, 11/1/02),
2007 (STP) 457,900
11,600,000 Mariner Post-Acute Network, Inc. sr. sub. notes
Ser. B, 9 1/2s, 2007 3,596,000
6,330,000 MedPartners, Inc. sr. notes 7 3/8s, 2006 4,937,400
3,180,000 MedPartners, Inc. sr. sub. notes 6 7/8s, 2000 2,802,375
12,585,000 Multicare Cos., Inc. sr. sub. notes 9s, 2007 8,431,950
9,195,000 Paracelsus Healthcare sr. sub. notes 10s, 2006 6,528,450
4,975,000 Sun Healthcare Group, Inc. sr. sub. notes Ser. B,
9 1/2s, 2007 1,498,719
2,860,000 Sun Healthcare Group, Inc. 144A sr. sub. notes
9 3/8s, 2008 858,000
1,188,000 Tenet Healthcare Corp. sr. notes 8 5/8s, 2003 1,211,760
2,560,000 Tenet Healthcare Corp. sr. sub. notes 8 5/8s, 2007 2,572,800
5,150,000 Tenet Healthcare Corp. 144A sr. sub. notes
8 1/8s, 2008 4,969,750
462,000 Tenet Healthcare Corp. sr. notes 8s, 2005 456,225
2,930,000 Tenet Healthcare Corp.144A sr. notes 7 5/8s, 2008 2,827,450
--------------
80,233,995
Lodging (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
3,640,000 Epic Resorts LLC company guaranty Ser. B, 13s, 2005 3,421,600
2,210,000 HMH Properties, Inc. company guaranty
Ser. B, 7 7/8s, 2008 2,121,600
1,615,000 HMH Properties, Inc. sr. notes Ser. C, 8.45s, 2008 1,602,888
6,300,000 Host Marriott Travel Plaza sr. notes Ser. B, 9 1/2s, 2005 6,607,125
3,855,000 Prime Hospitality Corp. sub. notes 9 3/4s, 2007 3,985,106
4,650,000 Sun International Hotels Ltd. company guaranty
9s, 2007 4,870,875
--------------
22,609,194
Machinery (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
3,750,000 Newcor, Inc. company guaranty Ser. B, 9 7/8s, 2008 3,318,750
Medical Supplies and Devices (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
4,395,000 ALARIS Medical Systems, Inc. company guaranty
9 3/4s, 2006 4,449,938
4,660,000 Dade International, Inc. sr. sub. notes Ser. B,
11 1/8s, 2006 5,207,550
2,155,000 Kinetic Concepts, Inc. company guaranty Ser. B,
9 5/8s, 2007 2,090,350
3,650,000 Leiner Health Products sr. sub. notes 9 5/8s, 2007 3,704,750
4,720,000 Mediq, Inc. company guaranty 11s, 2008 4,106,400
4,350,000 Mediq, Inc. deb. stepped-coupon zero %,
(13s, 6/1/03) 2009 (STP) 1,740,000
--------------
21,298,988
Metals and Mining (0.6%)
- --------------------------------------------------------------------------------------------------------------------------
4,500,000 Ameristeel Corp. company guaranty Ser. B,
8 3/4s, 2008 4,483,125
3,535,000 Anker Coal Group, Inc. sr. notes Ser. B, 9 3/4s, 2007 1,944,250
2,705,000 Continental Global Group sr. notes Ser. B, 11s, 2007 2,380,400
8,130,000 Lodestar Holdings, Inc. company guaranty
11 1/2s, 2005 6,504,000
3,630,000 Neenah Foundry Co. 144A sr. sub. notes
11 1/8s, 2007 3,829,650
5,791,000 Weirton Steel Co. sr. notes 11 3/8s, 2004 5,559,360
3,350,000 WHX Corp. sr. notes 10 1/2s, 2005 3,232,750
--------------
27,933,535
Motion Picture Distribution (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
4,560,000 AMC Entertainment, Inc. sr. sub. notes 9 1/2s, 2009 4,354,800
5,955,000 Cinemark USA, Inc. sr. sub. notes 9 5/8s,
2008 (Mexico) 6,148,538
475,000 Cinemark USA, Inc. sr. sub. notes Ser. D,
9 5/8s, 2008 (Mexico) 491,625
15,328,000 Diva Systems Corp. sr. disc. notes Ser. B, stepped-
coupon zero % (12 5/8s, 3/1/03), 2008 (STP) 4,521,760
--------------
15,516,723
Oil and Gas (1.8%)
- --------------------------------------------------------------------------------------------------------------------------
10,930,000 Abraxas Petroleum Corp. 144A company guaranty
Ser. D, 11 1/2s, 2004 6,558,000
4,120,000 Belco Oil & Gas Corp. company guaranty Ser. B,
10 1/2s, 2006 4,186,950
3,500,000 Benton Oil & Gas Co. sr. notes 11 5/8s, 2003 2,450,000
625,000 Benton Oil & Gas Co. sr. notes 9 3/8s, 2007 375,000
8,110,000 Chesapeake Energy Corp. company guaranty
Ser. B, 9 5/8s, 2005 6,731,300
1,025,000 CMS Energy Corp. pass-through certificates 7s, 2005 999,806
12,490,000 CMS Energy Corp. sr. notes 6 3/4s, 2004 12,310,893
3,180,000 Dailey Petroleum Services Corp. company guaranty
9 1/2s, 2008 1,272,000
3,490,000 Eagle Geophysical, Inc. company guaranty Ser. B,
10 3/4s, 2008 2,094,000
770,000 Gothic Energy Corp. sr. disc. notes stepped-coupon
Ser. B, zero % (14 1/8s, 5/1/03), 2006 (STP) 238,700
3,540,000 Gothic Production Corp. company guaranty
Ser. B, 11 1/8s, 2005 2,690,400
4,010,000 Gulf Canada Resources Ltd. sr. sub. notes
9 5/8s, 2005 (Canada) 4,100,225
3,550,000 Gulf Canada Resources, Ltd. sr. notes
8 3/8s, 2005 (Canada) 3,532,250
3,080,000 Michael Petroleum Corp. sr. notes Ser. B,
11 1/2s, 2005 2,248,400
3,800,000 Ocean Energy, Inc. company guaranty Ser. B,
8 7/8s, 2007 3,771,500
5,880,000 Ocean Energy, Inc. company guaranty Ser. B,
8 3/8s, 2008 5,586,000
6,830,000 Petro Geo-Services notes ADR 7 1/2s,
2007 (Norway) 7,045,350
2,710,000 RAM Energy Inc. sr. notes 11 1/2s, 2008 1,734,400
2,865,000 Seven Seas Petroleum sr. notes Ser. B, 12 1/2s, 2005 1,719,000
380,000 Transamerican Energy sr. disc. notes stepped-coupon
Ser. B, zero % (13s, 6/15/99), 2002 (STP) 95,475
19,465,000 Transamerican Energy sr. notes Ser. B, 11 1/2s, 2002 4,866,250
5,260,000 Transamerican Refining Corp. sr. sub. notes Ser. B,
16s, 2003 526,000
5,152,000 TransTexas Gas Corp. sr. sub. notes Ser. D,
13 3/4s, 2001 1,545,600
8,100,000 Vintage Petroleum 144A sr. sub. notes 9 3/4s, 2009 8,262,000
--------------
84,939,499
Packaging and Containers (0.9%)
- --------------------------------------------------------------------------------------------------------------------------
580,000 AEP Industries, Inc. sr. sub. notes 9 7/8s, 2007 594,500
2,250,000 Ball Corp. company guaranty 8 1/4s, 2008 2,328,750
960,000 Ball Corp. company guaranty 7 3/4s, 2006 988,800
3,290,000 Huntsman Packaging Corp. company guaranty
9 1/8s, 2007 3,290,000
2,740,000 Owens-Illinois, Inc. sr. notes 8.1s, 2007 2,865,602
5,110,000 Owens-Illinois, Inc. sr. notes 7.35s, 2008 5,063,499
8,440,000 Owens-Illinois, Inc. sr. notes 7.15s, 2005 8,309,771
6,120,000 Packaging Corp. 144A sr. sub. notes 9 5/8s, 2009 6,120,000
1,400,000 Radnor Holdings Inc. sr. notes 10s, 2003 1,442,000
11,680,000 Riverwood International Corp. company guaranty
10 7/8s, 2008 11,271,200
2,040,000 Riverwood International Corp. company guaranty
10 1/4s, 2006 2,111,400
--------------
44,385,522
Paper and Forest Products (0.8%)
- --------------------------------------------------------------------------------------------------------------------------
4,674,970 Alabama River Newsprint Co. bank term loan notes
7.562s, 2002 3,506,228
3,750,000 APP Finance II Mauritius Ltd. bonds stepped-coupon
12s, (16s, 2/15/04), 2049 (Indonesia) (STP) 1,575,000
5,280,000 Impac Group Inc. company guaranty Ser. B,
10 1/8s, 2008 5,227,200
8,760,000 Indah Kiat Financial Mauritius Ltd. company guaranty
10s, 2007 (Indonesia) 4,818,000
5,890,000 Pacifica Papers, Inc. 144A sr. notes 10s, 2009 (Canada) 6,022,525
12,305,000 Pindo Deli Finance Mauritius Ltd. company guaranty
10 3/4s, 2007 (Indonesia) 6,460,125
10,660,000 PT Pabrik Kertas Tjiwi Kimia company guaranty
10s, 2004 (Indonesia) 5,649,800
2,020,000 Republic Group Inc. sr. sub. notes 9 1/2s, 2008 2,040,200
--------------
35,299,078
Pharmaceuticals (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
4,020,000 ICN Pharmaceuticals, Inc. 144A sr. notes 9 1/4s, 2005 4,150,650
Photography (--%)
- --------------------------------------------------------------------------------------------------------------------------
1,550,000 PX Escrow Corp. sr. disc. notes stepped-coupon zero %
(9 5/8s, 2/1/02), 2006 (STP) 899,000
Publishing (0.8%)
- --------------------------------------------------------------------------------------------------------------------------
5,505,000 Affinity Group Holdings sr. notes 11s, 2007 5,505,000
4,150,000 American Media Operation, Inc. sr. sub. notes
11 5/8s, 2004 4,482,000
5,560,000 Garden State Newspapers 144A sr. sub. notes
8 5/8s, 2011 5,601,700
5,270,000 Garden State Newspapers, Inc. sr. sub. notes
Ser. B, 8 3/4s, 2009 5,270,000
50,000 Hollinger International Publishing, Inc.
company guaranty 9 1/4s, 2007 52,125
10,300,000 News America Inc. deb. 7 1/8s, 2028 10,230,784
4,520,000 Perry-Judd company guaranty 10 5/8s, 2007 4,678,200
973,821 Von Hoffman Press, Inc. 144A sr. sub. notes
13 1/2s, 2009 1,012,774
2,925,000 Von Hoffman Press Inc. 144A sr. sub. notes
10 3/8s, 2007 3,005,438
--------------
39,838,021
Railroads (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
7,900,000 TFM S.A. de C.V. company guaranty stepped-coupon
zero %, (11 3/4s, 6/15/02), 2009 (Mexico) (STP) 4,503,000
4,420,000 TFM S.A. de C.V. company guaranty 10 1/4s,
2007 (Mexico) 3,955,900
--------------
8,458,900
Real Estate (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
8,120,000 Host Marriott L.P. 144A sr. notes 8 3/8s, 2006 8,170,750
4,293,293 Patriot American Hospitality, Inc. bank term loan B
8 1/8s, 2003 4,277,193
--------------
12,447,943
Restaurants (--%)
- --------------------------------------------------------------------------------------------------------------------------
2,200,000 FRD Acquisition Co. sr. notes Ser. B, 12 1/2s, 2004 2,222,000
Retail (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
3,990,000 Fred Meyer, Inc. company guaranty 7.45s, 2008 4,204,263
2,080,000 Home Interiors & Gifts, Inc. company guaranty
10 1/8s, 2008 2,100,800
4,600,000 K mart Corp. pass-thru certificates Ser. 95K4,
9.35s, 2020 4,600,230
2,900,000 Mothers Work, Inc. sr. notes 12 5/8s, 2005 3,016,000
3,400,000 NBTY Inc. 144A sr. sub. notes 8 5/8s, 2007 3,179,000
7,715,000 North Atlantic Trading Co. company guaranty
Ser. B, 11s, 2004 7,792,150
--------------
24,892,443
Satellite Services (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
5,530,000 Golden Sky Systems 144A sr. sub. notes 12 3/8s, 2006 6,138,300
2,915,000 Satelites Mexicanos S.A. de C.V. 144A sr. notes
10 1/8s, 2004 (Mexico) 2,390,300
4,439,000 Satelites Mexicanos S.A. de C.V. 144A
company guaranty FRB 9.06s, 2004 (Mexico) 4,139,368
--------------
12,667,968
Semiconductors (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
1,806,704 Cirent Semiconductor sr. sub. notes 10.22s, 2002 1,858,647
1,729,548 Cirent Semiconductor 144A sr. sub. notes
10.14s, 2004 1,779,273
3,641,391 Fairchild Semiconductor Corp. 144A sr. sub. notes
11.74s, 2008 (PIK) 3,532,149
9,090,000 Fairchild Semiconductor Corp. sr. sub. notes
10 1/8s, 2007 8,999,100
5,365,000 Zilog, Inc. company guaranty Ser. B, 9 1/2s, 2005 4,452,950
--------------
20,622,119
Shipping (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
1,530,000 International Shipholding Corp. sr. notes 7 3/4s, 2007 1,468,800
4,760,000 Johnstown America Industries, Inc. company guaranty
Ser. C, 11 3/4s, 2005 5,164,600
2,430,000 MC Shipping, Inc. sr. notes Ser. B, 11 1/4s, 2008 1,543,050
1,000,000 Pegasus Shipping 144A 11 7/8s, 2004 700,000
--------------
8,876,450
Specialty Consumer Products (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
4,690,000 Decora Industries, Inc. sr. sec. notes Ser. B, 11s, 2005 4,525,850
Steel (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
9,440,000 AK Steel Corp. 144A sr. notes 7 7/8s, 2009 9,416,400
5,910,000 California Steel Industries 144A sr. notes 8 1/2s, 2009 5,969,100
3,690,000 National Steel Corp. 144A 1st mtge. 9 7/8s, 2009 3,791,475
2,675,000 National Steel Corp. 144A 1st mtge. Ser. B,
9 7/8s, 2009 2,748,563
--------------
21,925,538
Telecommunications (6.4%)
- --------------------------------------------------------------------------------------------------------------------------
4,590,000 Barak I.T.C. sr. disc. notes Ser. B, stepped-coupon zero %
(12 1/2s, 11/15/02), 2007 (Israel) (STP) 2,570,400
3,630,000 Bestel S.A.de C.V. sr. disc. notes stepped-coupon zero %
(12 3/4s, 5/15/03), 2005 (Mexico) (STP) 2,250,600
3,630,000 Birch Telecom, Inc. sr. notes 14s, 2008 3,321,450
3,630,000 CapRock Communications Corp. sr. notes
Ser. B, 12s, 2008 3,693,525
13,795,000 Colt Telecommunications Group PLC sr. disc. notes
stepped-coupon zero %, (12s, 12/15/01), 2006
(United Kingdom) (STP) 11,708,506
4,910,000 Covad Communications Group sr. disc. notes stepped-
coupon Ser. B, zero % (13 1/2s, 03/15/03), 2008 (STP) 2,725,050
10,260,000 Covad Communications Group Inc. 144A sr. notes
12 1/2s, 2009 10,311,300
22,355,000 DTI Holdings Inc. sr. disc. notes stepped-coupon
Ser. B, zero % (12 1/2s, 03/01/03), 2008 (STP) 6,147,625
8,555,000 Econophone Inc. company guaranty 13 1/2s, 2007 9,111,075
8,230,000 Econophone, Inc. 144A notes stepped-coupon zero %
(11s, 2/15/03), 2008 (STP) 4,526,500
2,420,000 Esprit Telecom Group PLC sr. notes 11 1/2s, 2007
(United Kingdom) 2,596,491
15,550,000 Firstworld Communication Corp. sr. disc. notes stepped-
coupon zero % (13, 4/15/03), 2008 (STP) 5,753,500
7,925,000 Focal Communications Corp. sr. disc. notes, stepped-
coupon Ser. B, zero % (12 1/8s, 02/15/03), 2008 (STP) 4,438,000
22,095,000 Global Crossing Holdings, Ltd. company guaranty
9 5/8s, 2008 24,608,306
6,165,000 GST Equipment Funding sr. notes 13 1/4s, 2007 6,450,131
5,931,000 GST Telecommunications, Inc. company guaranty stepped-
coupon zero % (13 7/8s, 12/15/00), 2005 (STP) 4,685,490
15,260,000 GST Telecommunications, Inc. 144A sr. disc. notes
stepped-coupon zero % (10 1/2s, 5/1/03), 2008 (STP) 7,935,200
210,000 Hermes Europe Railtel 144A sr. notes 11 1/2s,
2007 (Netherlands) 229,950
2,990,000 Hyperion Telecommunications, Corp. sr. disc. notes Ser. B,
stepped-coupon zero % (13s, 4/15/01), 2003 (STP) 2,466,750
5,835,000 Hyperion Telecommunications, Corp. sr. notes Ser. B,
12 1/4s, 2004 6,345,563
3,980,000 Hyperion Telecommunications, Corp. 144A sr. sub. notes
12s, 2007 4,149,150
9,350,000 ICG Communications, Inc. sr. disc. notes stepped-coupon
zero % (10s, 02/15/03), 2008 (STP) 5,715,188
5,700,000 ICG Holdings, Inc. sr. disc. notes stepped-coupon zero %
(13 1/2s, 9/15/00), 2005 (Canada) (STP) 5,044,500
17,320,000 ICG Services, Inc. sr. disc. notes stepped-coupon zero %
(9 7/8s, 5/1/03), 2008 (STP) 10,348,700
2,900,000 Intelcom Group (USA), Inc. company guaranty stepped-
coupon zero % (12 1/2s, 5/1/01), 2006 (STP) 2,370,750
6,030,000 Interact Systems, Inc. 144A stepped-coupon zero %
(14s, 8/1/99), 2003 (STP) 783,900
7,745,000 Intermedia Communications, Inc. sr. disc. notes
Ser. B, stepped-coupon zero % (11 1/4s, 7/15/02),
2007 (STP) 5,886,200
10,270,000 Intermedia Communications, Inc. sr. notes Ser. B,
8.6s, 2008 10,270,000
6,115,000 Intermedia Communications, Inc. sr. notes Ser. B,
8 1/2s, 2008 6,084,425
5,600,000 IXC Communications, Inc. sr. sub. notes 9s, 2008 5,824,000
16,430,000 KMC Telecom Holdings, Inc. sr. disc. notes stepped-
coupon zero % (12 1/2s, 2/15/03), 2008 (STP) 9,036,500
10,745,000 Knology Holdings, Inc. sr. disc. notes stepped-coupon
zero %, (11 7/8s, 10/15/02), 2007 (STP) 5,802,300
3,020,000 L-3 Communications Corp. sr. sub. notes Ser. B,
10 3/8s, 2007 3,329,550
1,870,000 L-3 Communications Corp. sr. sub. notes
8 1/2s, 2008 1,949,475
2,500,000 L-3 Communications Corp. company guaranty
Ser. B, 8s, 2008 2,531,250
4,730,000 Logix Communications Enterprises sr. notes
12 1/4s, 2008 4,257,000
2,150,000 MetroNet Communications Corp. sr. disc. notes
stepped-coupon zero % (10 3/4s, 11/1/02),
2007 (Canada) (STP) 1,730,750
1,550,000 MetroNet Communications Corp. sr. notes
12s, 2007 (Canada) 1,829,000
9,060,000 MetroNet Communications Corp. 144A sr. notes
10 5/8s, 2008 (Canada) 10,554,900
3,965,000 Microcell Telecommunications sr. disc. notes stepped-
coupon Ser. B, zero % (14s, 12/1/01), 2006
(Canada) (STP) 3,231,475
890,000 Netia Holdings B.V. 144A company guaranty
stepped-coupon zero % (11 1/4s, 11/1/01), 2007
(Poland) (STP) 574,050
1,570,000 Netia Holdings B.V. 144A company guaranty
10 1/4s, 2007 (Poland) 1,452,250
7,050,000 NorthEast Optic Network, Inc. sr. notes 12 3/4s, 2008 7,332,000
5,575,000 Qwest Communications International, Inc. sr. disc. notes
stepped-coupon zero % (9.47s, 10/15/02), 2007 (STP) 4,418,188
4,430,000 Qwest Communications International, Inc. sr. disc. notes
stepped-coupon zero % (8.29s, 2/1/03), 2008 (STP) 3,411,100
5,130,000 Qwest Communications International, Inc.
144A sr. notes 7 1/4s, 2008 5,271,075
10,080,000 Rhythms Netconnections, Inc. sr. disc. notes stepped-
coupon Ser. B, zero % (13 1/2s, 5/15/03), 2008 (STP) 5,544,000
8,690,000 Startec Global Communications Corp. sr. notes
12s, 2008 7,864,450
8,110,000 Telecommunications Techniques, Inc. company
guaranty 9 3/4s, 2008 8,191,100
2,980,000 Telehub Communications Corp. company guaranty
stepped-coupon zero % (13 7/8s, 7/31/02), 2005 (STP) 1,788,000
9,250,000 Teligent, Inc. sr. disc. notes stepped-coupon Ser. B,
zero % (11 1/2s, 3/1/03), 2008 (STP) 4,856,250
6,425,000 Teligent, Inc. sr. notes 11 1/2s, 2007 6,103,750
10,360,000 Time Warner Telecom Inc. sr. notes 9 3/4s, 2008 11,085,200
3,820,000 Versatel Telecom B.V. sr. notes 13 1/4s, 2008
(Netherlands) 4,020,550
1,690,000 Versatel Telecom B.V. sr. sec. notes 13 1/4s, 2008
(Netherlands) 1,778,725
2,340,000 WinStar Communications. Inc. sr. sub. notes 11s, 2008 1,357,200
5,610,000 WinStar Communications, Inc. sr. sub. notes stepped-
coupon zero % (15s, 3/1/02), 2007 (STP) 4,768,500
--------------
302,420,813
Telephone Services (2.9%)
- --------------------------------------------------------------------------------------------------------------------------
7,975,000 Allegiance Telecom, Inc. sr. disc. notes stepped-coupon
Ser. B, zero % (11 3/4s, 2/15/03), 2008 (STP) 4,964,438
1,840,000 Allegiance Telecom, Inc. sr. notes 12 7/8s, 2008 2,037,800
12,180,000 BTI Telecom Corp. sr. notes 10 1/2s, 2007 11,083,800
3,820,000 Call-Net Enterprises Inc. sr. notes 8s, 2008 (Canada) 3,781,800
10,150,000 Call-Net Enterprises, Inc. sr. disc. notes stepped-coupon
zero % (8.94s, 8/15/03), 2008 (Canada) (STP) 6,699,000
8,465,000 E. Spire Communications, Inc. sr. disc. notes stepped-
coupon zero % (12 3/4s, 4/1/01), 2006 (STP) 5,629,225
2,690,000 Facilicom International sr. notes Ser. B, 10 1/2s, 2008 2,078,025
3,840,000 Flag Ltd. 144A sr. notes 8 1/4s, 2008 (Bermuda) 3,724,800
1,610,000 Globo Communicacoes 144A sr. notes 10 5/8s,
2008 (Brazil) 1,030,400
3,325,000 Globo Communicacoes 144A company guaranty
10 1/2s, 2006 (Brazil) 2,161,250
3,343,000 ITC Deltacom, Inc. sr. notes 11s, 2007 3,681,479
2,120,000 Long Distance International, Inc. sr. notes
12 1/4s, 2008 1,484,000
8,960,000 McLeodUSA, Inc. 144A sr. notes 8 1/8s, 2009 8,937,600
2,090,000 OnePoint Communications, Corp. 144A sr. notes
14 1/2s, 2008 1,086,800
6,810,000 Pathnet, Inc. sr. notes 12 1/4s, 2008 3,677,400
9,930,000 Primus Telecommunications Group, Inc. sr. notes
Ser. B, 9 7/8s, 2008 9,582,450
1,430,000 RCN Corp. sr. disc. notes stepped-coupon zero %,
(11 1/8s, 10/15/02), 2007 (STP) 965,250
6,707,000 RSL Communications, Ltd. company guaranty
12 1/4s, 2006 7,327,398
3,430,000 RSL Communications, Ltd. 144A 10 1/2s, 2008 3,635,800
2,805,000 RSL Communications, Ltd. company guaranty
9 1/8s, 2008 2,790,975
920,000 RSL Communications, Ltd. company guaranty, stepped-
coupon zero % (10 1/8s, 3/1/03), 2008 (STP) 607,200
26,925,000 Sprint Capital Corp. company guaranty 5.7s, 2003 26,572,272
5,850,000 Sprint Spectrum L.P. sr. disc. notes stepped-coupon
zero % (12 1/2s, 8/15/01), 2006 (STP) 5,206,500
2,120,000 Sprint Spectrum L.P. sr. notes 11s, 2006 2,483,389
1,800,000 Transtel S.A. 144A pass-through certificates
12 1/2s, 2007 (Colombia) 756,000
2,980,000 US Xchange LLC sr. notes 15s, 2008 3,218,400
11,660,000 Viatel, Inc. sr. notes 11 1/4s, 2008 11,951,500
--------------
137,154,951
Textiles (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
8,130,000 Galey & Lord Inc. company guaranty 9 1/8s, 2008 6,341,400
1,725,000 Polymer Group, Inc. company guaranty Ser. B, 9s, 2007 1,763,813
2,560,000 Polymer Group, Inc. company guaranty Ser. B,
8 3/4s, 2008 2,592,000
--------------
10,697,213
Transportation (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
1,775,000 Eletson Holdings, Inc. 1st pfd. mtge. notes
9 1/4s, 2003 (Greece) 1,704,000
2,260,000 Kitty Hawk, Inc. company guaranty 9.95s, 2004 2,276,950
--------------
3,980,950
Utilities (--%)
- --------------------------------------------------------------------------------------------------------------------------
380,000 Public Service Co. of New Mexico sr. notes
Ser. A, 7.1s, 2005 381,509
Wireless Communications (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
5,955,000 American Mobile Satellite Corp. company guaranty
12 1/4s, 2008 2,739,300
2,470,000 Clearnet Communications, Inc. sr. disc. notes stepped-
coupon zero % (14 3/4s, 12/15/00), 2005 (STP) 2,263,138
4,250,000 Orbital Imaging Corp. sr. notes Ser. B, 11 5/8s, 2005 4,250,000
900,000 Paging Network Do Brasil sr. notes 13 1/2s,
2005 (Brazil) 378,000
2,085,000 Telesystem International Wireless Inc. sr. disc. notes
stepped-coupon Ser. C, zero %, (10 1/2s, 11/1/02),
2007 (Canada) (STP) 1,006,013
--------------
10,636,451
--------------
Total Corporate Bonds and Notes
(cost $2,298,689,904) $2,103,105,509
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (23.9%) (a)
PRINCIPAL AMOUNT VALUE
U.S. Government and Agency Mortgage Obligations (14.9%)
- --------------------------------------------------------------------------------------------------------------------------
Federal Home Loan Mortgage Corp.
$23,736,728 7 1/2s, with due dates from August 1, 2017
to September 1, 2028 $ 24,396,847
14,444,874 7s, with due dates from July 1, 2012 to July 1, 2012 14,765,261
Federal National Mortgage Association
Pass-through certificates
9,460,887 7s, Dwarf, with due dates from January 1, 2006 to
October 1, 2013 9,664,864
170,129,835 6 1/2s, with due dates from March 1, 2026 to
November 1, 2028 169,345,004
1,576,544 6 1/2s, Dwarf, with due dates from September 1, 2010
to July 15, 2013 1,590,826
39,798,587 6s, Dwarf, with due dates from April 1, 2011 to
October 1, 2013 39,500,098
Government National Mortgage Association
Pass-through Certificates
40,657,608 8s, with due dates from May 15, 2024 to
December 15, 2027 42,365,165
67,401,026 7 1/2s, with due dates from December 15, 2022 to
August 15, 2026 69,492,188
Government National Mortgage Association
Pass-through Certificates
193,567,754 7s, with due dates from March 15, 2022 to
November 15, 2028 196,625,942
132,747,348 6 1/2s, with due dates from August 15, 2027 to
March 15, 2029 132,166,290
--------------
699,912,485
U.S. Treasury Obligations (9.0%)
- --------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Bonds
38,700,000 6 1/8s, November 15, 2027 (SEG) 40,163,247
13,500,000 5 1/2s, August 15, 2028 12,919,905
159,535,000 5 1/4s, February 15, 2029 150,810,031
U.S. Treasury Notes
40,220,000 4 3/4s, November 15, 2008 38,743,122
167,630,000 4 1/4s, November 15, 2003 161,370,696
66,865,000 U.S. Treasury Strip, zero %, November 15, 2019 19,308,606
--------------
423,315,607
--------------
Total U.S. Government and Agency Obligations
(cost $1,127,569,130) $1,123,228,092
COLLATERALIZED MORTGAGE OBLIGATIONS (10.6%) (a)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
Criimi Mae Commercial Mortgage Trust
$52,655,000 Ser. 98-C1, Class A2, 7s, 2011 $ 48,047,688
21,110,000 Ser. 98-C1, Class B, 7s, 2011 17,046,325
Commercial Mortgage Acceptance Corp.
15,750,000 Ser. 97-ML1, Class D, 7.11s, 2030 15,430,078
189,897,932 Ser. 97-ML1, IO (Interest Only), 0.962s, 2017 10,028,985
17,000,000 Ser. 98-C2, Class D, 6.757s, 2009 16,229,688
11,914,010 Countrywide Home Loans Ser. 1998-3, Class A5, 6 3/4s, 2028 11,809,762
16,405,000 Countrywide Mortgage Backed Securities, Inc.
Ser. 93-C, Class A8, 6 1/2s, 2024 16,048,683
215,442,308 Deutsche Mortgage & Asset Receiving Corp.
Ser. 98-C1, Class X, IO, 1.254s, 2031 12,833,966
26,889,211 Fannie Mae Ser. 1993-251, Class Z, 6 1/2s, 2023 26,132,952
Fannie Mae Strip
64,131,125 Ser. 281, Class 2, IO, 9s, 2026 14,289,216
39,078,254 Ser. 299, Class 2, IO, 6 1/2s, 2028 10,392,373
Freddie Mac
6,450,668 Ser.1208, Class F, 9s, 2022 5,378,244
18,267 Ser. 1208, Class G, 9s, 2022 406,388
4,625,000 Ser. 1439, Class I, 7 1/2s, 2022 4,812,891
6,345,872 Ser. 1717, Class L, 6 1/2s, 2024 6,339,193
6,475,000 Ser. 2040, Class PE, 7 1/2s, 2028 6,851,133
Freddie Mac Strip
14,588,916 Ser. 176, Class PO (Principle Only), 7s, 2026 11,438,622
24,942,078 Ser. 177, Class PO, 7s, 2026 19,556,148
67,583,572 Ser. 2089, Class PI, IO, 7s, 2023 12,872,558
30,785,195 Ser. 188, Class IO, 7 1/2s, 2027 6,301,345
24,825,204 Ser. 192, Class IO, 6 1/2s, 2028 6,493,342
9,745,640 Ser. 199, Class IO, 6 1/2s, 2028 2,713,552
43,952,882 Ser. 200, Class IO, 6 1/2s, 2029 12,897,424
COLLATERALIZED MORTGAGE OBLIGATIONS (10.6%) (a)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
First Union-Lehman Brothers Commercial Mortgage Co.
$ 16,405,000 Ser. 97-C2, Class D, 7.12s, 2012 $ 15,572,574
5,445,000 Ser. 98-C2, Class D, 6.778s, 2013 5,006,635
108,361,838 Ser. 97-C2, IO, 1.092s, 2027 8,584,289
5,024,832 GE Capital Mortgage Services, Inc. Ser. 1998-11,
Class 2a4, 6 3/4s, 2028 5,013,627
GMAC Commercial Mortgage Securities Inc.
22,455,000 Ser. 98-C2, Class D, 6 1/2s, 2031 20,940,165
273,332,792 Ser. 98-C2, Class X, IO, 0.823s, 2031 11,413,779
7,443,000 Government National Mortgage Association
Ser. 1997-8, Class PE 7 1/2s, 2027 7,643,031
9,030,000 GS Mortgage Securities Corp. II Ser. 98-GLII,
Class D, 7.191s, 2031 8,694,197
6,468,422 Headlands Mortgage Securities, Inc. Ser. 1998-1,
Class X2, 6 1+F816/2s, 2028 1,026,862
Merrill Lynch Mortgage Investors, Inc.
7,476,000 Ser. 95-C3, Class D, 7.782s, 2025 7,577,627
4,196,000 Ser. 98-C2, Class D, 7.116s, 2030 4,054,385
30,886,280 Ser. 98-C2, Class IO, 1.587s, 2030 2,376,699
Morgan Stanley Capital I
5,190,000 Ser. 98-WF1, Class D, 7.12s, 2008 5,085,795
5,125,000 Ser. 98-XL1, Class E, 6.989s, 2030 4,996,875
135,983,749 Ser. 98-HF1, Class X, IO, 1.238s, 2018 7,776,571
Mortgage Capital Funding, Inc.
56,118,953 Ser. 97-MC2, Class X, IO, 1.368s, 2012 4,189,209
5,696,000 Ser. 98-MC1, Class A2, 6.663s, 2008 5,813,480
238,763,085 Ser. 98-MC1, Class X, IO, 0.722s, 2009 9,774,364
11,756,924 PNC Mortgage Securities Corp. Ser. 97-6,
Class A2, 6.6s, 2027 11,830,404
3,993,145 Prudential Home Mortgage Securities Ser. 93-57,
Class A4, 5.9s, 2023 4,002,289
8,520,805 Rural Housing Trust Ser. 87-1, Class D, 6.33s, 2026 8,506,916
10,535,712 Structured Asset Security Corp. 144A 8.712s, 2027 11,273,211
17,688,102 Structured Asset Security Corp. Ser. 98-Rf2, A
8.58s, 2028 18,846,120
74,164,463 Structured Asset Security Corp. Ser. 98-RF3,
Class IO, 6.1s, 2028 15,157,362
--------------
Total Collateralized Mortgage Obligations
(cost $513,179,955) $ 499,507,022
FOREIGN GOVERNMENT BONDS AND NOTES (9.7%) (a)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
CAD 45,085,000 Canada (Government of) bonds
Ser. WB60, 7 1/4s, 2007 $ 34,211,998
EUR 15,054,035 France (Government of) deb. 6s, 2025 18,545,818
EUR 42,175,935 France (Government of) bonds 5 1/2s, 2007 50,235,756
EUR 13,919,921 Germany (Federal Republic of) bonds
Ser. 97, 6 1/2s, 2027 18,300,869
EUR 9,324,613 Italy (Government of) bonds 7 1/4s, 2026 13,036,159
EUR 15,471,636 Netherlands (Government of) bonds
5 1/2s, 2028 17,871,093
EUR 11,645,691 Spain (Government of) bonds 6s, 2029 14,127,825
SEK 111,800,000 Sweden (Government of) bonds
Ser. 1035, 6 3/4s, 2014 16,396,287
SEK 98,100,000 Sweden (Government of) deb.
Ser. 1041, 6s, 2005 13,212,893
RUB 186,740,000 U.S. Dollar GKO Pass Through Structured
Note (Issued by Deutsche Bank. The
principal USD is linked to the bid price
for the Russian Treasury Bill at maturity,
and the change in the spot rate of the
Russian Ruble from issue date), zero %,
1999 (In default) (NON) 225,195
GBP 22,520,000 United Kingdom Treasury bonds Ser. 85,
9 3/4s, 2002 41,897,936
GBP 128,725,000 United Kingdom Treasury bonds 8s, 2000 218,227,235
--------------
Total Foreign Government Bonds and Notes
(cost $506,075,185) $ 456,289,064
BRADY BONDS (6.2%) (a)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$ 8,000,000 Brazil (Government of) Ser. L, FRB
6.938s, 2012 $ 4,660,000
114,045,000 Brazil (Government of) disc. bonds FRB
6.125s, 2024 71,141,263
10,000,000 Bulgaria (Government of) Ser. A, FRB
5.875s, 2024 6,700,000
77,400,000 Bulgaria (Government of) Ser. A, FRB,
2 1/2s, 2012 44,795,250
3,370,000 Colombia (Repub Of) unsub. 8.625, 2008 2,990,875
FRF 34,170,000 Ivory Coast -- 144A FLIRB collateralized
FRB 2s, 2018 1,371,968
FRF 33,742,875 Ivory Coast -- 144A PDI bonds FRB
1.9s, 2018 1,603,663
$ 34,220,000 United Mexican States bonds 10 3/8s, 2009 35,332,150
17,340,000 United Mexican States bonds 9 3/4s, 2005 17,357,340
8,000,000 United Mexican States Ser. D, FRB
6 3/4s, 2019 6,800,000
103,040,000 United Mexican States sec. Ser. B,
6 1/4s, 2019 80,886,400
26,425,000 Venezuela (Government of) deb. Ser. W-A,
6 3/4s, 2020 18,233,250
--------------
Total Brady Bonds (cost $294,901,588) $ 291,872,159
PREFERRED STOCKS (3.4%) (a)
NUMBER OF SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------------
1,503 21st Century Telecom Group 144A $13.75
cum. pfd. (PIK) $ 676,350
64,771 AmeriKing, Inc. $3.25 pfd. (PIK) 1,684,046
2 Anvil Holdings Ser. B, $3.25 pfd. (PIK) 2
121,400 California Federal Bancorp Inc. Ser. A, $2.281 pfd. 3,156,400
23,924 Capstar Broadcasting Inc. 144A $12.00 pfd. (PIK) 2,894,804
30,086 Capstar Communications, Inc. Ser. E, $12.625
cum. pfd. (PIK) 3,700,578
130,000 CGA Group Ltd. 144A Ser. A, $13.75 pfd. (PIK) 3,640,000
99,570 Chevy Chase Capital Corp. Ser. A, $5.188 pfd. 5,426,565
47,944 Citadel Broadcasting Inc. 144A $13.25 cum. pfd. (PIK) 5,669,378
3,028 Concentric Network Corp. Ser. B, 13.50% pfd. (PIK) 3,270,240
124,854 CSC Holdings, Inc. Ser. M, $11.125 cum. pfd. (PIK) 14,607,918
219,600 Diva Systems Corp. Ser. C, $6.00 pfd. 1,317,600
172,935 Fitzgeralds Gaming $3.75 cum. pfd. 345,870
37,250 Fresenius Medical Capital Trust I Ser. D, 9.00% pfd.
(Germany) 3,874,000
61,000 Fresenius Medical Capital Trust II $7.875 company
guaranty, pfd. (Germany) 6,000,875
112,770 Global Crossing Holdings 144A 10.50 pfd. 12,996,742
11,202 Granite Broadcasting 144A 12.75% pfd. (PIK) 11,426,040
9,132 ICG Holdings, Inc. $14.25 pfd. (Canada) 9,725,580
8,810 ICG Holdings, Inc., 144A $14.00 pfd. (Canada) (PIK) 9,162,400
9,436 Intermedia Communication Ser. B, 13.50% pfd. (PIK) 9,991,013
6,605 IXC Communications, Inc. 12.50% pfd. (PIK) 7,265,500
60,038 Nebco Evans Holding Co. 144A 11.25% pfd. (PIK) 2,101,330
4,192 NEXTEL Communications, Inc. Ser. D, 13.00%
cum. pfd. (PIK) 4,695,040
1,892 NEXTEL Communications, Inc. Ser. E,
11.125% pfd. (PIK) 1,929,840
190,903 Nextlink Communications, Inc. 144A $7.00
cum. pfd. (PIK) 10,213,311
912 Paxson Communications Corp. 13.25% cum. pfd. (PIK) 7,615,200
35,996 Public Service Co. of New Hampshire $2.65
1st mtge. pfd. 935,896
16,500 Sinclair Capital $11.625 cum. pfd. 1,798,500
7,765 Spanish Broadcasting Systems 14.25% cum. pfd. (PIK) 8,308,550
642,098 TCR Holding Corp. Series E, zero % pfd. 38,526
78,340 TCR Holding Corp. zero % pfd. 4,387
6,595 Viatel, Inc. Ser. A, $10.00 cv. pfd. (PIK) 956,275
6,080 WinStar Communications, Inc. 144A 14.25%
cum. pfd. (PIK) 4,864,000
--------------
Total Preferred Stocks (cost $163,618,411) $ 160,292,756
ASSET-BACKED SECURITIES (0.9%) (a)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$12,195,000 Chemical Master Credit Card Trust Ser. 95-2,
Class A, 6.23s, 2003 $ 12,328,291
15,877,880 First Plus Ser. 98-A, Class A, 8 1/2s, 2023 15,733,986
5,130,852 Green Tree Recreational Equipment & Cons.
Ser. 97-B, Class A1, 6.55s, 2028 5,189,977
10,000,000 Morgan Stanley Aircraft Finance Ser. 1, Class C1,
6.9s, 2023 9,537,891
--------------
Total Asset-Backed Securities (cost $43,547,749) $ 42,790,145
CONVERTIBLE BONDS AND NOTES (0.5%) (a)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$ 3,270,000 APP Global Finance Ltd. 144A cv. company guaranty
3 1/2s, 2003 (United Kingdom) $ 1,949,737
4,200,000 Corporate Express, Inc. cv. notes 4 1/2s, 2000 3,785,250
2,782,000 GST Telecommunications, Inc. cv. sr. disc. notes stepped-
coupon zero % (13 7/8s, 12/15/00), 2005 (STP) 3,032,380
3,660,000 HEALTHSOUTH Corp. cv. sub. deb. 3 1/4s, 2003 2,978,325
2,310,000 Integrated Device Technology, Inc. cv. sub. notes
5 1/2s, 2002 1,637,213
7,705,000 WinStar Communications. Inc. 144A cv. sr. disc. notes
stepped-coupon zero % (14s, 10/15/00), 2005 (STP) 12,328,000
--------------
Total Convertible Bonds and Notes
(cost $19,681,140) $ 25,710,905
WARRANTS (0.5%) (a) (NON) EXPIRATION
NUMBER OF WARRANTS DATE VALUE
- --------------------------------------------------------------------------------------------------------------------------
9,355 Allegiance Telecom, Inc. 2/3/08 $ 299,360
5,955 American Mobile Satellite Corp. 4/1/08 19,592
185,000 Becker Gaming Corp. 144A 11/15/00 19
3,630 Bestel SA de C.V. (Mexico) 5/15/05 3,630
3,630 Birch Telecommunications, Inc. 144A (PIK) 6/15/08 18,150
28,657 Cellnet Data Systems, Inc. 9/15/07 573,140
130,000 CGA Group Ltd. 144A 1/1/04 2,600
4,390 Club Regina, Inc. 144A 4/15/06 4,390
15,295 Colt Telecommunications Group PLC 12/31/06 8,029,870
12,400 Comunicacion Cellular 144A (Colombia) 11/15/03 868,000
1,345 Concentric Network Corp. 12/15/07 403,500
51,502 Consorcio Ecuatoriano 144A (Ecuador) 10/1/00 12,876
4,930 Covad Communications Group 144A
(acquired various dates from 7/7/98
to 8/26/98, cost $200,020) (RES) 3/15/08 4,441,930
4,650 Diva Systems Corp. 5/15/06 1,125,300
45,984 Diva Systems Corp. 3/1/08 597,792
111,775 DTI Holdings Inc. 3/1/08 1,118
70 E. Spire Communications, Inc. 11/1/05 350
10,155 Econophone, Inc. 144A 7/15/07 507,750
3,640 Epic Resorts 6/15/05 36
3,200 Esat Holdings, Inc. (Ireland) 2/1/07 232,000
15,550 Firstworld Communication 4/15/08 155,500
5,350 Globalstar Telecommunications 2/15/04 240,750
11,465 Hyperion Telecommunications 144A 4/15/01 589,874
65,538 ICG Communications 10/15/05 1,310,760
6,030 Interact Systems, Inc. 8/1/03 60
8,050 Intermedia Communications 6/1/00 726,513
2,780 International Wireless
Communications Holdings 144A 8/15/01 28
6,500 Iridium World Com 144A 7/15/05 130,000
9,460 KMC Telecom Holdings, Inc. 4/15/08 23,650
8,835 Knology Holdings, Inc. 144A 10/15/07 13,253
2,060 Long Distance International, Inc. 144A 4/13/08 5,150
14,715 McCaw International Ltd. 4/15/07 58,860
4,350 Mediq Inc. 144A 6/1/09 44
1,550 Metronet Communications 144A 8/15/07 77,500
1,390 MGC Communications, Inc. 144A 10/1/04 47,608
21,500 NEXTEL Communications Inc. 4/25/99 225,320
2,090 OnePoint Communications, Corp. 6/1/08 2,090
4,250 Orbital Imaging Corp. 144A 3/1/05 170,000
8,485 Orion Network Systems 1/15/07 97,578
13,800 Pagemart, Inc. 144A 12/31/03 110,400
6,810 Pathnet, Inc. 144A 4/15/08 68,100
7,360 Paxson Communications Corp. 144A 6/30/03 74
28,800 Powertel, Inc. 2/1/06 115,200
37,527 President Riverboat Casinos, Inc. 9/30/99 1,876
41,960 Rhythms Netcon 144A 5/15/08 1,678,400
3,450 Spanish Broadcasting Systems 144A 6/30/99 707,250
8,690 STARTEC Global Communications Corp. 5/15/08 8,690
2,160 Sterling Chemicals Holdings 8/15/08 43,200
2,980 Telehub Communications Corp. 7/31/05 2,980
5,260 Transamerican Refining Corp. 6/30/03 5
14,235 UIH Australia/Pacific, Inc. 144A 5/15/06 14,235
34,220 United Mexican States (Mexico) 2/18/00 131,063
5,510 Versatel 144A 5/15/08 385,700
6,375 Wireless One, Inc. 10/19/00 64
1,001 Wright Medical Technology, Inc. 144A 6/30/03 10
--------------
Total Warrants (cost $11,109,107) $ 24,283,188
COMMON STOCKS (0.4%) (a)
NUMBER OF SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------------
1,750 AmeriKing, Inc. (NON) $ 70,000
1,811,364 Celcaribe S.A. 144A (Colombia) (NON) 4,528,407
172,600 CellNet Data Systems, Inc. (NON) 992,450
252,474 Chesapeake Energy Corp. 362,931
223,713 Fitzgerald Gaming Corp. (NON) (AFF) 111,857
32,500 French Fragrances Inc. (NON) 186,875
40,032 Hedstrom Holdings, Inc. 144A (NON) 40,032
7,541 IFINT Diversified Holdings 144A (NON) 15,082
8,280 Lady Luck Gaming Corp. (NON) 41,399
844 Mothers Work, Inc. (NON) 8,862
900 Paging Do Brazil Holdings Co., LLC 144A
Class B, (Brazil) (NON) 9
1,942 Premium Holdings (L.P.) 144A 7,768
979,968 PSF Holdings LLC Class A (NON) (AFF) 12,494,592
31,004 RSL Communications, Ltd. Class A (NON) 1,114,206
--------------
Total Common Stocks (cost $38,969,725) $ 19,974,470
UNITS (0.4%) (a)
NUMBER OF UNITS VALUE
- --------------------------------------------------------------------------------------------------------------------------
2,960 Australis Media, Ltd. units stepped-coupon zero %,
(15 3/4s, 5/15/00), 2003 (In default)
(Australia) (STP) (NON) $ 29,600
5,620 Network Plus Corp. unit pfd. 13 1/4s, 2009 5,886,950
6,600 Pegasus Shipping 144A units company guaranty
stepped-coupon zero % (14 1/2s. 6/20/03),
2008 (Bermuda) (STP) 2,640,000
3,980 Signature Brands USA, Inc. units 13s, 2002 4,397,900
3,945 XCL Ltd. units sr. sec. notes 13 1/2s, 2004 3,234,900
23,198 XCL Ltd. 144A cum. cv. pfd. 9 1/2s, 2006 (PIK) 1,020,712
--------------
Total Units (cost $21,754,228) $ 17,210,062
CONVERTIBLE PREFERRED STOCKS (0.1%) (a)
NUMBER OF SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------------
29,800 Chancellor Media Corp. $3.00 cv. cum. pfd. $ 2,849,625
16,110 Chesapeake Energy Corp. $3.50 cum. cv. pfd. 205,403
241 Paxson Communications Corp. 144A $9.75 cv. pfd. (PIK) 2,313,600
3,327 XCL Ltd 144A Ser. A, 9.50% cv. cum. pfd. (PIK) 146,388
--------------
Total Convertible Preferred Stocks (cost $6,890,598) $ 5,515,016
SHORT-TERM INVESTMENTS (0.6%) (a) (cost $26,609,000)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$26,609,000 Interest in $500,000,000 joint repurchase agreement
dated March 31, 1999 with Salomon, Smith Barney Inc.
due April 1, 1999 with respect to various U.S. Treasury
obligations -- maturity value of $26,612,659 for an
effective yield of 4.95% $ 26,609,000
- --------------------------------------------------------------------------------------------------------------------------
Total Investments (cost $5,072,595,720) (b) $4,796,387,388
- --------------------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $4,695,667,411.
(b) The aggregate identified cost on a tax basis is $5,061,475,744, resulting in gross unrealized appreciation and
depreciation of $144,388,831 and $409,477,187, respectively, or net unrealized depreciation of $265,088,356.
(NON) Non-income-producing security.
(STP) 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.
(POR) A portion of the income will be received in additional securities.
(RES) Restricted, excluding 144A securities, as to public resale. The total market value of restricted securities
held at March 31, 1999 was $4,441,930 or less than 0.1% of net assets.
(PIK) Income may be received in cash or additional securities at the discretion of the issuer.
(AFF) Affiliated Companies (Note 5).
(SEG) A portion of these securities were pledged and segregated with the custodian to cover margin requirements for
futures contracts at March 31, 1999.
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).
FLIRB represents Front Loaded Interest Reduction Bond.
The rates shown on Floating Rate Bonds (FRB) and Floating Rate Notes (FRN) are the current interest rates
shown at March 31, 1999, which are subject to change based on the terms of the security.
Diversification by Country
Distribution of investments by country of issue at March 31, 1999: (as percentage of Market Value)
Brazil 1.1%
Bulgaria 1.7
Canada 2.5
France 1.4
Mexico 3.9
United Kingdom 6.4
United States 77.6
Others 5.4
-----
Total 100.0%
=====
- -------------------------------------------------------------------------------
Forward Currency Contracts to Buy at March 31, 1999 (Unaudited)
(aggregate face value $683,904,800)
Unrealized
Market Aggregate Face Delivery Appreciation/
Value Value Date (Depreciation)
- -------------------------------------------------------------------------------
Australian Dollars $ 22,928,360 $ 22,915,136 6/16/99 $ 13,224
Danish Krone 24,665,552 25,073,686 6/16/99 (408,134)
Euro Dollars 406,342,682 412,418,812 6/16/99 (6,076,130)
Japanese Yen 189,820,919 183,539,412 6/16/99 6,281,507
Swedish Krona 39,707,505 39,957,754 6/16/99 (250,249)
- -------------------------------------------------------------------------------
$ (439,782)
- -------------------------------------------------------------------------------
Forward Currency Contracts to Sell at March 31, 1999 (Unaudited)
(aggregate face value $1,012,936,776)
Unrealized
Market Aggregate Face Delivery Appreciation/
Value Value Date (Depreciation)
- -------------------------------------------------------------------------------
British Pounds $266,001,062 $265,895,364 6/16/99 $ (105,698)
Canadian Dollar 35,079,752 34,728,177 6/16/99 (351,575)
Euro Dollars 543,095,089 551,699,460 6/16/99 8,604,371
Japanese Yen 166,264,813 160,613,775 6/16/99 (5,651,038)
- -------------------------------------------------------------------------------
$2,496,060
- -------------------------------------------------------------------------------
Futures Contracts Outstanding at March 31, 1999 (Unaudited)
Aggregate Face Expiration Unrealized
Total Value Value Date Depreciation
- -------------------------------------------------------------------------------
U.S. Treasury Bond
20 yr. (Long) $382,906,500 $391,658,754 June-99 $(8,752,254)
- -------------------------------------------------------------------------------
TBA Sales Commitments at March 31, 1999 (Unaudited)
(Proceeds receivable $183,644,420)
Principal Settlement Market
Agency Amount Date Value
- -------------------------------------------------------------------------------
FNMA 6.5s, April 2029 $92,462,000 4/14/99 $ 92,028,353
GNMA 7s, April 2029 90,051,000 4/22/99 91,429,681
- -------------------------------------------------------------------------------
$183,458,034
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
March 31, 1999 (Unaudited)
<S> <C>
Assets
- -----------------------------------------------------------------------------------------------
Investments in securities, at value (identified cost $5,072,595,720) (Note 1) $4,796,387,388
- -----------------------------------------------------------------------------------------------
Cash 11,697,900
- -----------------------------------------------------------------------------------------------
Dividends, interest and other receivables 85,043,555
- -----------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 14,063,318
- -----------------------------------------------------------------------------------------------
Receivable for securities sold 230,298,189
- -----------------------------------------------------------------------------------------------
Receivable for open forward currency contracts 14,936,103
- -----------------------------------------------------------------------------------------------
Receivable for closed forward currency contracts 298,153
- -----------------------------------------------------------------------------------------------
Total assets 5,152,724,606
Liabilities
- -----------------------------------------------------------------------------------------------
Payable for variation margin 1,687,250
- -----------------------------------------------------------------------------------------------
Distributions payable to shareholders 49,297
- -----------------------------------------------------------------------------------------------
Payable for securities purchased 223,490,861
- -----------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 23,599,580
- -----------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 6,394,792
- -----------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 487,153
- -----------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 110,603
- -----------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 8,135
- -----------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 4,021,395
- -----------------------------------------------------------------------------------------------
Payable for open forward currency contracts 12,879,825
- -----------------------------------------------------------------------------------------------
Payable for closed forward currency contracts 661,865
- -----------------------------------------------------------------------------------------------
TBA sales commitments, at value (proceeds receivable $183,644,420) 183,458,034
- -----------------------------------------------------------------------------------------------
Other accrued expenses 208,405
- -----------------------------------------------------------------------------------------------
Total liabilities 457,057,195
- -----------------------------------------------------------------------------------------------
Net assets $4,695,667,411
Represented by
- -----------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $5,133,596,830
- -----------------------------------------------------------------------------------------------
Distribution in excess of net investment income (Note 1) (15,914,858)
- -----------------------------------------------------------------------------------------------
Accumulated net realized loss on investments and
foreign currency transactions (Note 1) (139,052,102)
- -----------------------------------------------------------------------------------------------
Net unrealized depreciation of investments and
assets and liabilities in foreign currencies (282,962,459)
- -----------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to capital shares outstanding $4,695,667,411
Computation of net asset value and offering price
- -----------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($1,737,514,522 divided by 152,823,408 shares) $11.37
- -----------------------------------------------------------------------------------------------
Offering price per class A share (100/95.25 of $11.37)* $11.94
- -----------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($1,987,861,631 divided by 175,594,453 shares)** $11.32
- -----------------------------------------------------------------------------------------------
Net asset value and redemption price per class C share
($1,955,594 divided by 172,163 shares)** $11.36
- -----------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($950,399,312 divided by 83,862,726 shares) $11.33
- -----------------------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $11.33)* $11.71
- -----------------------------------------------------------------------------------------------
Net asset value, offering and redemption price per class Y share
($17,936,352 divided by 1,575,788 shares) $11.38
- -----------------------------------------------------------------------------------------------
* 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
Six months ended March 31, 1999 (Unaudited)
<S> <C>
Investment income:
- -----------------------------------------------------------------------------------------------
Interest $178,367,682
- -----------------------------------------------------------------------------------------------
Dividends 38,333,738
- -----------------------------------------------------------------------------------------------
Total investment income 216,701,420
Expenses:
- -----------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 13,169,872
- -----------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 3,149,329
- -----------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 52,277
- -----------------------------------------------------------------------------------------------
Administrative services (Note 2) 16,254
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 2,276,028
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 10,385,446
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class C (Note 2) 1,237
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 2,515,324
- -----------------------------------------------------------------------------------------------
Reports to shareholders 76,782
- -----------------------------------------------------------------------------------------------
Registration fees 59,427
- -----------------------------------------------------------------------------------------------
Auditing 71,455
- -----------------------------------------------------------------------------------------------
Legal 51,590
- -----------------------------------------------------------------------------------------------
Postage 236,299
- -----------------------------------------------------------------------------------------------
Other 230,978
- -----------------------------------------------------------------------------------------------
Total expenses 32,292,298
- -----------------------------------------------------------------------------------------------
Expense reduction (Note 2) (446,318)
- -----------------------------------------------------------------------------------------------
Net expenses 31,845,980
- -----------------------------------------------------------------------------------------------
Net investment income 184,855,440
- -----------------------------------------------------------------------------------------------
Net realized loss on investments (Notes 1 and 3) (55,227,616)
- -----------------------------------------------------------------------------------------------
Net realized loss on futures contracts (Note 1) (8,440,800)
- -----------------------------------------------------------------------------------------------
Net realized gain on foreign currency transactions (Note 1) 10,767,679
- -----------------------------------------------------------------------------------------------
Net unrealized appreciation of assets and liabilities in
foreign currencies during the period 11,407,202
- -----------------------------------------------------------------------------------------------
Net unrealized depreciation of investments, futures
and TBA sale commitments during the period (88,020,964)
- -----------------------------------------------------------------------------------------------
Net loss on investments (129,514,499)
- -----------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $ 55,340,941
- -----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Six months ended Year ended
March 31 September 30
1999* 1998
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets
- ---------------------------------------------------------------------------------------------------------------
Operations:
- ---------------------------------------------------------------------------------------------------------------
Net investment income $ 184,855,440 $ 402,914,655
- ---------------------------------------------------------------------------------------------------------------
Net realized loss on investments and
foreign currency transactions (52,900,737) (153,894,588)
- ---------------------------------------------------------------------------------------------------------------
Net unrealized depreciation of investments and
assets and liabilities in foreign currencies (76,613,762) (360,035,273)
- ---------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 55,340,941 (111,015,206)
- ---------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ---------------------------------------------------------------------------------------------------------------
From net investment income
Class A (70,453,222) (114,992,046)
- ---------------------------------------------------------------------------------------------------------------
Class B (72,822,686) (113,025,405)
- ---------------------------------------------------------------------------------------------------------------
Class C (8,582) --
- ---------------------------------------------------------------------------------------------------------------
Class M (38,344,305) (53,202,027)
- ---------------------------------------------------------------------------------------------------------------
Class Y (638,857) (1,263,192)
- ---------------------------------------------------------------------------------------------------------------
From net realized gain
Class A -- (26,647,112)
- ---------------------------------------------------------------------------------------------------------------
Class B -- (29,842,995)
- ---------------------------------------------------------------------------------------------------------------
Class C -- --
- ---------------------------------------------------------------------------------------------------------------
Class M -- (8,746,851)
- ---------------------------------------------------------------------------------------------------------------
Class Y -- (238,299)
- ---------------------------------------------------------------------------------------------------------------
Increase (decrease) from
capital share transactions (Note 4) (302,035,063) 579,106,761
- ---------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets (428,961,774) 120,133,628
Net assets
- ---------------------------------------------------------------------------------------------------------------
Beginning of period 5,124,629,185 5,004,495,557
- ---------------------------------------------------------------------------------------------------------------
End of period (including distributions in excess of
net investment income of $15,914,858 and
$18,502,646, respectively) $4,695,667,411 $5,124,629,185
- ---------------------------------------------------------------------------------------------------------------
* Unaudited
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
- ------------------------------------------------------------------------------------------------------------------------------------
Six months
ended
Per-share March 31
operating performance (Unaudited) Year ended September 30
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $11.66 $12.70 $12.29 $11.99 $11.64 $12.82
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .45(c) .99(c) .89(c) .89 .95 .78
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.30) (1.17) .39 .30 .36 (.88)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .15 (.18) 1.28 1.19 1.31 (.10)
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.44) (.70) (.87) (.89) (.80) (.71)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income -- -- -- -- -- (.12)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- (.16) -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net realized
gain on investments -- -- -- -- -- (.08)
- ------------------------------------------------------------------------------------------------------------------------------------
From return of capital -- -- -- -- (.16) (.17)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.44) (.86) (.87) (.89) (.96) (1.08)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $11.37 $11.66 $12.70 $12.29 $11.99 $11.64
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 1.36* (1.67) 10.86 10.35 11.89 (.93)
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $1,737,515 $1,911,024 $2,104,971 $1,845,901 $1,597,034 $1,539,076
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .46* .97 .99 1.02 1.01 1.01
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 3.94* 7.88 7.17 7.32 8.22 7.96
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 69.26* 188.75 250.93 304.39 235.88 201.53
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total 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
- ------------------------------------------------------------------------------------------------------------------------------------
Six months
ended
Per-share March 31
operating performance (Unaudited) Year ended September 30
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $11.61 $12.65 $12.24 $11.95 $11.61 $12.79
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .41(c) .89(c) .79(c) .80 .88 .72
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.30) (1.17) .40 .29 .33 (.91)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .11 (.28) 1.19 1.09 1.21 (.19)
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.40) (.60) (.78) (.80) (.72) (.65)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income -- -- -- -- -- (.10)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- (.16) -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net realized
gain on investments -- -- -- -- -- (.08)
- ------------------------------------------------------------------------------------------------------------------------------------
From return of capital -- -- -- -- (.15) (.16)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.40) (.76) (.78) (.80) (.87) (.99)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $11.32 $11.61 $12.65 $12.24 $11.95 $11.61
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) .98* (2.42) 10.08 9.47 11.01 (1.62)
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $1,987,862 $2,174,770 $2,366,410 $2,135,148 $1,795,456 $1,644,860
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .84* 1.72 1.74 1.77 1.76 1.76
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 3.56* 7.13 6.42 6.57 7.46 8.05
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 69.26* 188.75 250.93 304.39 235.88 201.53
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total 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 C
- ------------------------------------------------------------------------------------------------------------------------------------
For the period
February 1, 1999+
Per-share to March 31
operating performance (Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
1999
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Net asset value,
beginning of period $11.51
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .09(c)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.09)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations --
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.15)
- ------------------------------------------------------------------------------------------------------------------------------------
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 (.15)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $11.36
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) .04*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $1,956
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .27*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 1.16*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 69.26*
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total 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
- ------------------------------------------------------------------------------------------------------------------------------------
Six months
ended For the period
Per-share March 31 Dec. 1, 1994+
operating performance (Unaudited) Year ended September 30 to Sept. 30
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $11.62 $12.67 $12.27 $11.97 $11.34
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .44(c) .96(c) .82(c) .86 .78
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.30) (1.18) .43 .31 .63
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .14 (.22) 1.25 1.17 1.41
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.43) (.67) (.85) (.87) (.65)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- (.16) -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net realized
gain on investments -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
From return of capital -- -- -- -- (.13)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.43) (.83) (.85) (.87) (.78)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $11.33 $11.62 $12.67 $12.27 $11.97
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 1.25* (1.97) 10.59 10.12 12.90*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $950,399 $1,019,477 $513,351 $46,327 $14,751
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .59* 1.22 1.24 1.28 1.07*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 3.82* 7.69 6.88 7.09 6.30*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 69.26* 188.75 250.93 304.39 235.88
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total 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
- ------------------------------------------------------------------------------------------------------------------------------------
Six months
ended For the period
Per-share March 31 July 1, 1996+
operating performance (Unaudited) Year ended September 30 to Sept. 30
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value,
beginning of period $11.66 $12.70 $12.29 $12.07
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .45(c) 1.03(c) .93(c) .24
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.28) (1.18) .38 .20
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .17 (.15) 1.31 .44
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.45) (.73) (.90) (.22)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- (.16) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net realized
gain on investments -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
From return of capital -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.45) (.89) (.90) (.22)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $11.38 $11.66 $12.70 $12.29
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 1.56* (1.40) 11.14 3.70*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $17,936 $19,358 $19,763 $2,662
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .34* .72 .74 .19*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 4.03* 8.15 7.29 1.95*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 69.26* 188.75 250.93 304.39
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total 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
March 31, 1999 (Unaudited)
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. government sector, high yield sector and international
sector of the fixed-income securities market.
The fund offers class A, class B, class C, class M and class Y shares. The
fund began offering class C shares on February 1, 1999. Class A shares are
sold with a maximum front-end sales charge of 4.75%. Class B shares, which
convert to class A shares after approximately eight years, do not pay a
front-end sales charge but pay a higher ongoing distribution fee than
class A shares, and are subject to a contingent deferred sales charge, if
those shares are redeemed within six years of purchase. Class C shares are
subject to the same fees and expenses as class B shares, except that class
C shares have a one year 1.00% contingent deferred sales charge and do not
convert to class A shares. Class M shares are sold with a maximum front
end sales charge of 3.25% and pay an ongoing distribution fee that is
higher than class A shares but lower than class B shares. Class Y shares,
which are sold at net asset value, are generally subject to the same
expenses as class A, class B, and class M shares, but do not bear a
distribution fee. Class Y shares are sold to defined contribution plans
that invest at least $150 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 consistently
followed by the fund in the preparation of its financial statements. The
preparation of financial statements is in conformity with generally
accepted accounting principles and requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities. Actual results could differ from those estimates.
A) Security valuation Investments for which market quotations are readily
available are stated at market value, which is determined using the last
reported sale price, or, if no sales are reported -- as in the case of
some securities traded over-the-counter -- the last reported bid price.
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 translations 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, and 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. Collateral
for certain tri-party repurchase agreements is held at the counterparty's
custodian in a segregated account for the benefit of the fund and the
counterparty. 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 zero coupon bonds, original
issue discount bonds, stepped-coupon bonds and payment in kind bonds are
accreted according to the yield-to-maturity basis.
E) Foreign currency translation The accounting records of the fund are
maintained in U.S. dollars. The market value of foreign securities,
currency holdings, and 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 realized 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. 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. Realized gains and
losses on purchased options are included in realized gains and losses on
investment securities.
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 includes restrictions
that the fund maintain an asset coverage ratio of at least 300% and
borrowings must not exceed prospectus limitations. For the six months
ended March 31, 1999, 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. At September 30, 1998, the fund had a capital loss carryover of
approximately $22,379,000 available to offset future net capital gain, if
any, which will expire on September 30, 2006.
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. Reclassifications are made to the fund's capital accounts to
reflect income and gains available for distribution (or available capital
loss carryovers) under income tax regulations.
Note 2
Management fee, administrative
services and other transactions
Compensation of Putnam Management, for management and investment advisory
services is paid quarterly based on the average net assets of the fund.
Such fee is based on the following annual rates: 0.70% of the first $500
million of 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.
The fund reimburses Putnam Management an allocated amount 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 subsidiary of Putnam Investments, Inc. Investor
servicing agent functions are provided by Putnam Investor Services, a
division of PFTC.
For the six months ended March 31, 1999, fund expenses were reduced by
$446,318 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.
Each Trustee of the fund receives an annual Trustee fee, of which $3,120
has been allocated to the fund, 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, class C 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%,
1.00% and 1.00% of the average net assets attributable to class A, class
B, class C and class M shares, respectively. The Trustees have approved
payment by the fund to an annual rate of 0.25%, 1.00%, 1.00% and 0.50% of
the average net assets attributable to class A, class B, class C and class
M shares respectively.
For the six months ended March 31, 1999, Putnam Mutual Funds Corp., acting
as underwriter received net commissions of $200,143 and $1,120,493 from
the sale of class A and class M shares, respectively and $2,212,824 and $0
in contingent deferred sales charges from redemptions of class B shares
and class C shares, respectively. A deferred sales charge of up to 1% is
assessed on certain redemptions of class A shares. For the six months
ended March 31, 1999, Putnam Mutual Funds Corp., acting as underwriter
received $15,718 on class A redemptions.
Note 3
Purchases and sales of securities
During the six months ended March 31, 1999, purchases and sales of
investment securities other than U.S. government obligations and
short-term investments aggregated $2,162,157,782 and $2,393,684,521,
respectively. Purchases and sales of U.S. government obligations
aggregated $1,154,630,840 and $1,005,552,784, respectively. In determining
the net gain or loss on securities sold, the cost of securities has been
determined on the identified cost basis.
Note 4
Capital shares
At March 31, 1999, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
Six months ended
March 31, 1999
- -----------------------------------------------------------------------------
Class A Shares Amount
- -----------------------------------------------------------------------------
Shares sold 13,263,087 $ 151,604,642
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 4,374,741 49,718,335
- -----------------------------------------------------------------------------
17,637,828 201,322,977
Shares
repurchased (28,686,361) (327,562,018)
- -----------------------------------------------------------------------------
Net decrease (11,048,533) $(126,239,041)
- -----------------------------------------------------------------------------
Year ended
September 30, 1998
- -----------------------------------------------------------------------------
Class A Shares Amount
- -----------------------------------------------------------------------------
Shares sold 36,293,097 $453,137,516
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 7,882,014 98,183,326
- -----------------------------------------------------------------------------
44,175,111 551,320,842
Shares
repurchased (46,064,113) (574,132,635)
- -----------------------------------------------------------------------------
Net decrease (1,889,002) $(22,811,793)
- -----------------------------------------------------------------------------
Six months ended
March 31, 1999
- -----------------------------------------------------------------------------
Class B Shares Amount
- -----------------------------------------------------------------------------
Shares sold 11,639,329 $ 132,494,673
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 4,309,250 48,770,170
- -----------------------------------------------------------------------------
15,948,579 181,264,843
Shares
repurchased (27,647,131) (314,312,943)
- -----------------------------------------------------------------------------
Net decrease (11,698,552) $(133,048,100)
- -----------------------------------------------------------------------------
Year ended
September 30, 1998
- -----------------------------------------------------------------------------
Class B Shares Amount
- -----------------------------------------------------------------------------
Shares sold 37,418,693 $466,071,389
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 7,604,144 94,361,790
- -----------------------------------------------------------------------------
45,022,837 560,433,179
Shares
repurchased (44,854,315) (557,097,611)
- -----------------------------------------------------------------------------
Net increase 168,522 $ 3,335,568
- -----------------------------------------------------------------------------
For the period
February 1, 1999
(commencement of
operations) to
March 31, 1999
- -----------------------------------------------------------------------------
Class C Shares Amount
- -----------------------------------------------------------------------------
Shares sold 172,561 $1,951,096
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 255 2,868
- -----------------------------------------------------------------------------
172,816 1,953,964
Shares
repurchased (653) (7,353)
- -----------------------------------------------------------------------------
Net increase 172,163 $1,946,611
- -----------------------------------------------------------------------------
Six months ended
March 31, 1999
- -----------------------------------------------------------------------------
Class M Shares Amount
- -----------------------------------------------------------------------------
Shares sold 37,987,293 $432,770,925
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 199,682 2,262,081
- -----------------------------------------------------------------------------
38,186,975 435,033,006
Shares
repurchased (42,023,346) (478,748,798)
- -----------------------------------------------------------------------------
Net decrease (3,836,371) $(43,715,792)
- -----------------------------------------------------------------------------
Year ended
September 30, 1998
- -----------------------------------------------------------------------------
Class M Shares Amount
- -----------------------------------------------------------------------------
Shares sold 82,461,493 $1,026,199,238
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 349,509 4,341,133
- -----------------------------------------------------------------------------
82,811,002 1,030,540,371
Shares
repurchased (35,639,555) (433,252,902)
- -----------------------------------------------------------------------------
Net increase 47,171,447 $ 597,287,469
- -----------------------------------------------------------------------------
Six months ended
March 31, 1999
- -----------------------------------------------------------------------------
Class Y Shares Amount
- -----------------------------------------------------------------------------
Shares sold 560,354 $6,357,663
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 54,572 638,857
- -----------------------------------------------------------------------------
614,926 6,996,520
Shares
repurchased (698,793) (7,975,261)
- -----------------------------------------------------------------------------
Net decrease (83,867) $ (978,741)
- -----------------------------------------------------------------------------
Year ended
September 30, 1998
- -----------------------------------------------------------------------------
Class Y Shares Amount
- -----------------------------------------------------------------------------
Shares sold 828,036 $10,404,282
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 120,519 1,501,491
- -----------------------------------------------------------------------------
948,555 11,905,773
Shares
repurchased (845,466) (10,610,256)
- -----------------------------------------------------------------------------
Net increase 103,089 $ 1,295,517
- -----------------------------------------------------------------------------
Note 5
Transactions with Affiliated Companies
Transactions during the year with companies in which the fund owned at
least 5% of the voting securities were as follows:
Purchase Sales Dividend Market
Affiliates cost cost Income Value
- ----------------------------------------------------------------------------
Name of affiliates
- ----------------------------------------------------------------------------
Fitzgeralds Gaming $110,600 $-- $-- $ 111,857
PSF Holdings L.L.C. CLA -- -- -- 12,494,592
- ----------------------------------------------------------------------------
Totals $110,600 $-- $-- $12,606,449
Fund information
INVESTMENT MANAGER
Putnam Investment
Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
John A. Hill, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
Ronald J. Jackson
Paul L. Joskow
Elizabeth T. Kennan
Lawrence J. Lasser
John H. Mullin III
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
Ian C. Ferguson
Vice President
Steven M. Oristaglio
Vice President
Bret C. Browchuk
Vice President
Edward H. D'Alelio
Vice President
Jennifer E. Leichter
Vice President and Fund Manager
D. William Kohli
Vice President and Fund Manager
David L. Waldman
Vice President and Fund Manager
Jeffrey A. Kaufman
Vice President and Fund Manager
Richard A. Monaghan
Vice President
John R. Verani
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' Web site:
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
www.putnaminv.com
- ---------------------
BULK RATE
U.S. POSTAGE PAID
PUTNAM
INVESTMENTS
- ---------------------
SA028-51872 075/387/803/2BC 5/99
PUTNAM INVESTMENTS [SCALE LOGO OMITTED]
- ---------------------------------------------------------------------------
Putnam Diversified Income Trust
Supplement to Semiannual Report dated 4/30/99
The following information has been prepared to provide class Y shareholders
with a performance overview specific to their holdings. Class Y shares are
offered exclusively to defined contribution plans investing $150 million or
more in one or more of Putnam's funds or private accounts. Performance of
class Y shares, which incur neither a front-end load, distribution fee, nor
contingent deferred sales charge, will differ from performance of class A,
B, and M shares, which are discussed more extensively in the annual report.
SEMIANNUAL RESULTS AT A GLANCE
- ---------------------------------------------------------------------------
Total return
for periods ended 4/30/99 NAV
1 year -1.83%
5 years 39.64
Annual average 6.91
10 years 134.64
Annual average 8.90
Life of fund (since class A inception, 10/3/88) 143.28
Annual average 8.77
- ---------------------------------------------------------------------------
Share value: NAV
10/31/98 $11.34
4/30/99 $11.52
- ---------------------------------------------------------------------------
Distributions: No. Income Capital gains Total
6 $0.464 -- $0.464
- ---------------------------------------------------------------------------
Please note that past performance does not indicate future results. Returns
shown for class Y shares for periods prior to their inception are derived
from the historical performance of class A shares, adjusted to reflect the
initial sales charge currently applicable to class A shares. These returns
have not been adjusted to reflect differences in operating expenses which,
for class Y shares, are lower than the operating expenses applicable to
class A shares. All returns assume reinvestment of distributions at net
asset value. Performance data reflects an expense limitation previously in
effect. Without the expense limitation, total returns would have been
lower. Investment return and principal value will fluctuate so your shares,
when redeemed, may be worth more or less than their original cost. See full
report for information on comparative benchmarks. If you have questions,
please consult your fund prospectus or call Putnam toll free at
1-800-752-9894.
