PUTNAM
DIVERSIFIED
INCOME
TRUST II
[GRAPHIC OMITTED:
art work]
ANNUAL REPORT
MARCH 31, 1996
[LOGO:
BOSTON O LONDON O TOKYO]
<PAGE>
FUND HIGHLIGHTS
O "THIS FUND'S STRATEGY ALLOWS US TO TAKE ADVANTAGE OF STRENGTHS IN CERTAIN
AREAS OF THE FIXED-INCOME MARKET WHILE LIMITING INVESTMENTS IN SECTORS THAT
MAY BE UNDERPERFORMING."
-- JENNIFER E. LEICHTER, LEAD FUND MANAGER
CONTENTS
3 FROM THE CHAIRMAN
6 PORTFOLIO HOLDINGS
14 FINANCIAL STATEMENTS
<PAGE>
FROM THE CHAIRMAN
[GRAPHIC OMITTED:
Photo of
George Putnam]
(C) Karsh, Ottawa
Dear Shareholder:
Putnam Diversified Income Trust II began operations on February 26, 1996. Its
objective is to seek high current income consistent with preservation of
capital. The fund's managers pursue this objective by investing in high-yield
securities, investment-grade bonds, U.S. government securities, and
international bonds. In the relatively brief period since your fund's inception,
Lead Manager Jennifer Leichter and her team have positioned the portfolio based
on their assessment of fixed-income market conditions and what they believe are
the strongest sectors within each asset class.
In the fund's high-yield bond sector, Jennifer has emphasized holdings in
telecommunications, cable television, and broadcasting, expecting that these
bonds' issuers will benefit from recently passed legislation to deregulate these
industries. Federal restrictions on which companies can enter specific
communications businesses have now been eliminated. For example, the bill allows
any long-distance provider or cable company to provide telephone service in
local markets. For broadcasters, the bill allows ownership of multiple
television or radio stations. It is expected that these changes will result in
increased competition, more mergers and acquisitions, and more capital
commitments to the industry as a whole, potentially enhancing your fund's
high-yield media holdings.
<PAGE>
International sector manager D. William Kohli is able to invest in bond markets
around the world to take advantage of changing global economies. Since the
fund's inception, Bill has sought opportunities in Europe, where bond markets
have begun to benefit from an economic slowdown. In particular, Bill has been
focusing on bonds in the higher-yielding European markets, such as Spain and
Italy.
Within the investment-grade bond sector, Neil Powers has sought to take
advantage of the asset classes that offer the greatest performance potential.
Thus far, Neil has been emphasizing corporate bonds in industries such as
insurance, media, utilities, and defense. His strategy is to build a
well-diversified portfolio of investment-grade corporate bonds that seek current
income with less risk than high-yield bonds. In addition, Neil began to focus on
mortgage-backed U.S. government securities, whose prices are becoming more
attractive.
The annual report that follows simply provides portfolio holdings and financial
statements. A detailed discussion from the fund managers will be included in the
semiannual report for the period ending September 30, 1996.
Respectfully yours,
/s/ George Putnam
George Putnam
Chairman of the Trustees
May 15, 1996
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
For the fiscal period February 26, 1996 (commencement of operations)
to March 31, 1996
To the Trustees and Shareholders of Putnam Diversified Income Trust II
We have audited the accompanying statement of assets and liabilities of Putnam
Diversified Income Trust II, including the portfolio of investments owned, as of
March 31, 1996, and the related statement of operations, the statement of
changes in net assets, and the financial highlights for the period February 26,
1996 (commencement of operations) to March 31, 1996. These financial statements
and financial highlights are the responsibility of the fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial highlights are
free from material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned as of March 31, 1996, by
correspondence with the custodian and brokers. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Putnam
Diversified Income Trust II as of March 31, 1996, the results of its operations,
the changes in its net assets and the financial highlights for the period
February 26, 1996 (commencement of operations) to March 31, 1996, in conformity
with generally accepted accounting principles.
Coopers & Lybrand L.L.P
Boston, Massachusetts
May 2, 1996
<PAGE>
PORTFOLIO OF INVESTMENTS OWNED
March 31, 1996
<TABLE>
<CAPTION>
CORPORATE BONDS AND NOTES (55.3%)*
PRINCIPAL AMOUNT VALUE
ADVERTISING (1.5%)
- -------------------------------------------------------------------------------------------
<C> <S> <C>
$ 100,000 Universal Outdoor, Inc. sub. deb. 11s, 2003 $ 101,500
50,000 Universal Outdoor, Inc. sr. notes stepped-coupon
zero % (14s, 7/1/99), 2004++ 35,500
----------
137,000
AEROSPACE AND DEFENSE (1.4%)
- -------------------------------------------------------------------------------------------
50,000 Coltec Industries Inc. sr. notes 9 3/4s, 1999 51,000
50,000 Howmet Corp. 144A sr. sub. notes 10s, 2003 52,750
25,000 McDonnell Douglas Corp. notes 9 1/4s, 2002 28,029
----------
131,779
AGRICULTURE (0.5%)
- -------------------------------------------------------------------------------------------
50,000 Agco Corp. 144A sr. sub. notes 8 1/2s, 2006 50,250
APPAREL (0.3%)
- -------------------------------------------------------------------------------------------
25,000 Guess Jeans, Inc. sr. sub. notes 9 1/2s, 2003 24,000
AUTOMOTIVE PARTS (0.1%)
- -------------------------------------------------------------------------------------------
10,000 A.P.S., Inc. 144A sr. sub. notes 11 7/8s, 2006 10,175
BANKS (1.0%)
- -------------------------------------------------------------------------------------------
70,000 Chevy Chase Savings Bank Inc. sub. deb. 9 1/4s, 2005 70,000
25,000 First Nationwide Holdings 144A sr. sub. notes 9 1/8s, 2003 24,750
----------
94,750
BASIC INDUSTRIAL PRODUCTS (0.1%)
- -------------------------------------------------------------------------------------------
5,000 PT Polysindo Eka sr. notes 13s, 2001 (Indonesia) 5,275
BROADCASTING (2.5%)
- -------------------------------------------------------------------------------------------
75,000 Commodore Media, Inc. sr. sub. notes stepped-coupon
7 1/2s (13 1/4s, 5/1/98), 2003++ 74,438
25,000 Paxson Communications Corp. 144A sr. sub. notes 11 5/8s, 2002 26,625
50,000 Pegasus Media & Communications Ser. B, notes 12 1/2s, 2005 52,000
75,000 SFX Broadcasting, Inc. sr. sub. notes 11 3/8s, 2000 81,000
----------
234,063
BUILDING AND CONSTRUCTION (3.1%)
- -------------------------------------------------------------------------------------------
150,000 Presley Co. sr. notes 12 1/2s, 2001 136,500
50,000 Scotsman Group, Inc. sr. secd. notes 9 1/2s, 2000 51,250
100,000 Terex Corp. (New) 144A sr. notes 13 3/4s, 2002 99,000
----------
286,750
BUSINESS SERVICES (0.1%)
- -------------------------------------------------------------------------------------------
10,000 Corporate Express, Inc. Ser. B, sr. sub. notes 9 1/8s, 2004 10,250
<PAGE>
CORPORATE BONDS AND NOTES
PRINCIPAL AMOUNT VALUE
CABLE TELEVISION (6.7%)
- -------------------------------------------------------------------------------------------
$ 5,000 Adelphia Communications Corp. sr. notes 12 1/2s, 2002 $ 5,263
75,000 Allbritton Communications Corp. 144A sr. sub. notes
9 3/4s, 2007 70,688
110,000 American Telecasting, Inc. Ser. B, sr. disc. notes stepped-
coupon zero % (14 1/2s, 8/15/00), 2005++ 72,050
55,000 American Telecasting, Inc. sr. disc. notes stepped-coupon
zero % (14 1/2s, 6/15/99), 2004++ 40,150
50,000 Cablevision Systems Corp. sr. sub. reset deb. 10 3/4s, 2004 52,750
150,000 Century Communications Corp. sr. sub. deb. 11 7/8s, 2003 160,500
50,000 Diamond Cable Communication Co. sr. disc. notes stepped-
coupon zero % (11 3/4s, 12/15/00), 2005++ 29,250
50,000 Heartland Wireless Communication Inc. 144A
sr. notes 13s, 2003 54,750
10,000 Lenfest Communications, Inc. sr. notes 8 3/8s, 2005 9,550
10,000 Marcus Cable Co. (L.P.) sr. disc. notes stepped-coupon zero %
(14 1/4s, 6/15/00), 2005++ 6,400
10,000 Marcus Cable Co. (L.P.) sr. sub. disc. notes stepped-coupon
zero % (13 1/2s, 8/1/99), 2004++ 7,250
185,000 Telewest Communications PLC deb. stepped-coupon zero %
(11s, 10/1/00), 2007 (United Kingdom)++ 112,850
----------
621,451
CELLULAR COMMUNICATIONS (1.4%)
- -------------------------------------------------------------------------------------------
25,000 360 Communications Co. sr. notes 7 1/2s, 2006 24,469
5,000 NEXTEL Communications, Inc. sr. disc. notes stepped-
coupon zero % (9 3/4s, 2/15/99), 2004++ 2,925
150,000 NEXTEL Communications, Inc. sr. disc. notes stepped-
coupon zero % (11 1/2s, 9/1/98), 2003++ 99,750
----------
127,144
CHEMICALS (1.6%)
- -------------------------------------------------------------------------------------------
50,000 Arcadian Partner sr. notes 10 3/4s, 2005 54,375
25,000 Coty Inc. gtd. sr. sub. notes 10 1/4s, 2005 26,438
10,000 G-I Holdings, Inc. Ser. B, sr. disc. notes zero %, 1998 7,975
50,000 Union Carbide Global Enterprises Ser. B, sr. sub. notes 12s, 2005 57,625
----------
146,413
COMPUTER SOFTWARE (0.1%)
- -------------------------------------------------------------------------------------------
5,000 Bell & Howell Operating Co. bonds 9 1/4s, 2000 5,050
CONGLOMERATES (0.5%)
- -------------------------------------------------------------------------------------------
50,000 MacAndrews & Forbes Group, Inc. deb. 12 1/4s, 1996 49,500
ELECTRIC UTILITIES (0.8%)
- -------------------------------------------------------------------------------------------
25,000 Commonwealth Edison Co. 1st mtge. 7s, 2005 24,590
15,000 Midland Funding II Ser. A, deb. 11 3/4s, 2005 16,050
10,000 Niagara Mohawk Power med. term notes 9.99s, 2004 9,250
25,000 Ohio Edison Co. 1st. mtge. 8 1/4s, 2002 26,374
----------
76,264
ELECTRONICS (0.2%)
- -------------------------------------------------------------------------------------------
25,000 International Semi-Tech. Corp. sr. disc. notes stepped-coupon
zero % (11 1/2s, 8/15/00), 2003 (Canada)++ 15,125
<PAGE>
CORPORATE BONDS AND NOTES
PRINCIPAL AMOUNT VALUE
ENTERTAINMENT (0.5%)
- -------------------------------------------------------------------------------------------
$ 15,000 Six Flags Corp. sr. sub. notes stepped-coupon zero %
(12 1/4s, 6/15/98), 2005++ $ 12,525
5,000 Time Warner Inc. deb. 9.15s, 2023 5,382
25,000 Time Warner Inc. deb. 9 1/8s, 2013 27,023
----------
44,930
ENVIRONMENTAL CONTROL (0.1%)
- -------------------------------------------------------------------------------------------
7,000 Ametek, Inc. sr. notes 9 3/4s, 2004 7,420
FINANCIAL SERVICES (0.8%)
- -------------------------------------------------------------------------------------------
50,000 AIM Management Group sr. secd. notes 9s, 2003 51,875
25,000 Primark Corp. sr. notes 8 3/4s, 2000 25,375
----------
77,250
FOOD (1.1%)
- -------------------------------------------------------------------------------------------
100,000 Chiquita Brands Intl. Inc. sub. deb. 11 1/2s, 2001 105,500
FOOD CHAINS (1.6%)
- -------------------------------------------------------------------------------------------
9,000 Southland Corp. 1st priority sr. sub. deb. 5s, 2003 7,245
150,000 Southland Corp. Ser. A, deb. 4 1/2s, 2004 115,500
25,000 Stater Brothers sr. notes 11s, 2001 25,750
----------
148,495
FOREST PRODUCTS (0.5%)
- -------------------------------------------------------------------------------------------
50,000 Doman Industries Ltd. sr. notes 8 3/4s, 2004 45,750
5,000 Stone Container Corp. sr. sub. notes 11 1/2s, 1999 4,900
----------
50,650
HEALTH CARE (2.4%)
- -------------------------------------------------------------------------------------------
100,000 Paracelsus Healthcare Corp. sr. sub. notes 9 7/8s, 2003 101,000
100,000 Quorum Health Group, Inc. sr. sub. notes 8 3/4s, 2005 100,500
25,000 Total Renal Care Holdings, Inc. sr. disc. notes stepped-coupon
zero % (12s, 8/15/97), 2004++ 24,750
----------
226,250
HOSPITAL MANAGEMENT AND MEDICAL SERVICES (1.1%)
- -------------------------------------------------------------------------------------------
100,000 Tenet Healthcare Corp. sr. sub. notes 10 1/8s, 2005 107,000
HOUSEHOLD PRODUCTS (0.5%)
- -------------------------------------------------------------------------------------------
50,000 Ekco Group, Inc. 144A sr. notes 9 1/4s, 2006 50,688
INSURANCE (2.4%)
- -------------------------------------------------------------------------------------------
50,000 American Life Holding Co. sr. sub. notes 11 1/4s, 2004 52,500
35,000 CCP Insurance, Inc. sr. notes 10 1/2s, 2004 39,856
75,000 Reliance Group Holdings, Inc. sr. notes 9s, 2000 75,750
50,000 Terra Nova Insurance Holdings sr. notes 10 3/4s, 2005
(United Kingdom) 56,063
----------
224,169
<PAGE>
CORPORATE BONDS AND NOTES
PRINCIPAL AMOUNT VALUE
LODGING (0.5%)
- -------------------------------------------------------------------------------------------
$ 50,000 Host Marriott Corp. Ser. B, sr. notes 91/2s, 2005 $ 48,500
MOTION PICTURE DISTRIBUTION (0.6%)
- -------------------------------------------------------------------------------------------
50,000 Cinemark USA, Inc. sr. sub. notes 12s, 2002 54,750
OFFICE EQUIPMENT (0.6%)
- -------------------------------------------------------------------------------------------
50,000 United Stationers, Inc. sr. sub. notes 12 3/4s, 2005 56,375
OIL AND GAS (3.4%)
- -------------------------------------------------------------------------------------------
25,000 Chesapeake Energy Corp. sr. notes 10 1/2s, 2002 26,250
95,000 Flores & Rucks, Inc. sr. notes 13 1/2s, 2004 109,250
15,000 Maxus Energy Corp. notes 9 3/8s, 2003 14,769
75,000 Plains Resources, Inc. 144A sr. sub. notes 10 1/4s, 2006 75,375
5,000 Trans Texas Gas Corp. sr. secd. notes 11 1/2s, 2002 4,925
100,000 Triton Energy sr. sub. notes zero %, 1997 87,000
----------
317,569
PAGING (0.6%)
- -------------------------------------------------------------------------------------------
10,000 A+ Network Inc. sr. sub. notes 11 7/8s, 2005 10,200
85,000 Arch Communications Group sr. disc. notes stepped-coupon
zero % (10 7/8s, 3/15/01), 2008++ 48,663
----------
58,863
PRINTING (0.2%)
- -------------------------------------------------------------------------------------------
15,000 News America Holdings, Inc. sr. notes 8 5/8s, 2003 (Australia) 16,213
PUBLISHING (1.4%)
- -------------------------------------------------------------------------------------------
10,000 American Media Operation, Inc. sr. sub notes 11 5/8s, 2004 10,150
5,000 Hollinger International Publishing, Inc. sr. sub. notes 9 1/4s, 2006 4,850
155,000 Marvel Holdings, Inc. Ser. B, sr. notes zero %, 1998 117,025
----------
132,025
REIT'S (REAL ESTATE INVESTMENT TRUST) (1.3%)
- -------------------------------------------------------------------------------------------
125,000 Tanger Properities Ltd. Partnership gtd. notes 8 3/4s, 2001 122,813
RECREATION (3.3%)
- -------------------------------------------------------------------------------------------
50,000 Casino America, Inc. 1st mtge. 11 1/2s, 2001 50,000
10,000 Coast Hotels & Casinos, Inc. 144A 1st. mtge. 13s, 2002 10,000
30,000 Lady Luck Gaming Corp. Ser. B, 1st mtge. 10 1/2s, 2001 27,300
54,000 Louisiana Casino Cruises Corp. 1st mtge. 11 1/2s, 1998 51,435
50,000 Showboat Marina Casino 144A 1st mtge. 13 1/2s, 2003 51,000
50,000 Stratosphere Corp. 1st mtge. 14 1/4s, 2002 60,875
5,000 Trump Plaza Funding, Inc. 1st mtge. notes 10 7/8s, 2001 5,550
50,000 Trump Taj Mahal Funding, Inc. Ser. A, deb. 11.35s, 1999 52,563
----------
308,723
<PAGE>
CORPORATE BONDS AND NOTES
PRINCIPAL AMOUNT VALUE
REFINING (0.8%)
- -------------------------------------------------------------------------------------------
$ 50,000 Transamerican Refining Corp. 1st. mtge. 16 1/2s, 2002 $ 43,500
50,000 Transamerican Refining Corp. 1st. mtge. stepped-coupon
zero % (18 1/2s, 8/15/98), 2002++ 30,750
----------
74,250
RETAIL (3.8%)
- -------------------------------------------------------------------------------------------
25,000 Federated Department Stores Inc. sr. notes 8 1/8s, 2002 24,563
50,000 Finlay Enterprises, Inc. sr. notes 10 5/8s, 2003 48,625
5,000 Finlay Enterprises, Inc. sr. disc. deb. stepped-coupon zero %
(12s, 5/1/98), 2005++ 3,475
50,000 K Mart Corp. deb. 7.95s, 2023 39,375
75,000 Loehmann's Holdings, Inc. sr. notes 10 1/2s, 1997 73,500
5,000 Specialty Retailers, Inc. sr. sub. notes 11s, 2003 4,875
150,000 Waban, Inc. sr. sub. notes 11s, 2004 156,000
----------
350,413
SPECIALTY CONSUMER PRODUCTS (0.6%)
- -------------------------------------------------------------------------------------------
50,000 Herff Jones, Inc. sr. sub. notes 11s, 2005 53,250
STEEL (0.5%)
- -------------------------------------------------------------------------------------------
50,000 WCI Steel Inc. sr. secd. notes 10 1/2s, 2002 50,250
TELECOMMUNICATION (2.2%)
- -------------------------------------------------------------------------------------------
75,000 Brooks Fiber Properties 144A sr. disc. notes stepped-coupon
zero % (10 7/8s, 3/1/01), 2006++ 43,781
250,000 Charter Communications Holdings 144A sr. disc. notes
stepped-coupon zero % (14s, 3/15/01), 2007++ 128,750
25,000 Intermedia Communications of Florida Ser. B, sr. notes
13 1/2s, 2005 29,000
5,000 Pricellular Wireless Corp. sr. disc. notes stepped-coupon
zero % (12 1/4s, 10/1/98), 2003++ 3,950
----------
205,481
TELEPHONE SERVICES (1.4%)
- -------------------------------------------------------------------------------------------
110,000 Fonorola, Inc. sr. notes 12 1/2s, 2002 (Canada) 119,900
15,000 MFS Communications sr. disc. notes stepped-coupon
zero % (9 3/8s, 1/15/99), 2004++ 11,400
----------
131,300
TEXTILES (1.2%)
- -------------------------------------------------------------------------------------------
50,000 Decorative Home Accents Ser. B, sr. notes 13s, 2002 49,000
50,000 Dominion Textile USA Inc. gtd. sr. notes 9 1/4s, 2006+++ 50,125
10,000 Reeves Industries Inc. bonds 11s, 2002 9,325
5,000 Tultex Corp. sr. notes 10.625s, 2005 5,188
----------
113,638
- -------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS AND NOTES (cost $5,295,468) $5,162,004
<PAGE>
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (23.4%)*
PRINCIPAL AMOUNT VALUE
- -------------------------------------------------------------------------------------------
$ 500,000 Government National Mortgage Association TBA pass
through certificates, 7 1/2s, April 16, 2026 $ 498,905
U.S. Treasury Notes
990,000 8s, August 15, 1999 1,049,558
590,000 7 1/2s, February 15, 2005 633,141
----------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS
(cost $2,197,529) $2,181,604
<CAPTION>
FOREIGN GOVERNMENT BONDS AND NOTES (15.9%)*
PRINCIPAL AMOUNT VALUE
- -------------------------------------------------------------------------------------------
<C> <C> <S> <C>
AUD 35,000 Australia (Government of) bonds 9s, 2004 $ 27,638
AUD 110,000 Australia (Government of) notes 8 3/4s, 2001 86,605
CAD 200,000 Canada (Government of) deb. 7 1/2s, 2001 150,121
DKK 1,025,000 Denmark (Kingdom of) bonds 9s, 2000 198,856
DEM 400,000 Germany (Federal Republic of) bonds 5 3/4s, 2000 276,684
DEM 385,000 Treuhandanstalt (Germany Republic of) 7 1/8s, 2003 276,210
ITL 110,000,000 Italy (Government of) bonds 10 1/2s, 2005 69,663
ESP 12,600,000 Spain (Government of) bonds 10.833s, 2000 111,595
GBP 75,000 United Kingdom Conversion stock 9s, 2000 120,237
GBP 100,000 United Kingdom Treasury bonds 9 3/4s, 2002 166,559
----------
TOTAL FOREIGN GOVERNMENT BONDS AND NOTES
(cost $1,355,896) $1,484,168
<CAPTION>
UNITS (3.7%)*
NUMBER OF UNITS VALUE
- -------------------------------------------------------------------------------------------
<C> <S> <C>
150 Fitzgerald Gaming Co. units 13s, 2002 $ 138,750
4 GST Telecommunications, Inc. 144A units stepped-coupon
zero % (13 7/8s, 12/15/00), 2005 (Canada)++ 23,100
125 Terex Corp. 144A units 13 3/4s, 2002 123,750
100,000 Winstar Communications, Inc. 144A units stepped-coupon
zero % (14s, 10/15/00), 2005++ 57,000
----------
TOTAL UNITS (cost $342,938) $ 342,600
<CAPTION>
CONVERTIBLE BONDS AND NOTES (0.3%)* (cost $30,063)
PRINCIPAL AMOUNT VALUE
- -------------------------------------------------------------------------------------------
<C> <S> <C>
$ 50,000 Winstar Communications. Inc. cv sr. disc. notes 14s, 2005 $ 30,000
PREFERRED STOCKS (0.3%)* (cost $25,875)
NUMBER OF SHARES VALUE
- -------------------------------------------------------------------------------------------
250 Cablevision Systems Corp. 144A Ser. L, $11.125 pfd. $ 25,000
<CAPTION>
WARRANTS (-%)*+ (cost $500)
EXPIRATION
NUMBER OF WARRANTS DATE VALUE
- -------------------------------------------------------------------------------------------
<C> <S> <C> <C>
25 Intermedia Communications 144A 6/1/00 $ 625
<PAGE>
<CAPTION>
PURCHASED OPTIONS OUTSTANDING (-%)* (cost $660)
EXPIRATION
CONTRACT DATE/STRIKE
AMOUNT PRICE VALUE
- -------------------------------------------------------------------------------------------
<C> <C> <S> <C> <C>
USD 100,000 US Dollar In Exchange for Swiss Francs Apr. 96/$1.21 $ 360
- -------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (cost $9,248,929)*** $9,226,361
<FN>
* Percentages indicated are based on net assets of $9,328,532.
*** The aggregate identified cost for federal income tax purposes is $9,251,673, resulting
in gross unrealized appreciation and depreciation of $24,669 and $49,981, respectively,
or net unrealized depreciation of $25,312.
+ Non-income-producing security.
++ The interest and date shown parenthetically represents the new interest rate to be paid
and the date the fund will begin receiving interest at this rate.
+++ Forward commitments (see Note 1 to financial statements).
</FN>
<CAPTION>
FORWARD CURRENCY CONTRACTS TO BUY AT MARCH 31, 1996
(aggregate face value $321,284)
UNREALIZED
MARKET AGGREGATE DELIVERY APPRECIATION/
VALUE FACE VALUE DATE (DEPRECIATION)
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Deutschemarks $ 71,027 $ 70,911 6/12/96 $ 116
French Francs 77,011 76,655 6/12/96 356
Japanese Yen 171,645 173,718 6/12/96 (2,073)
----------
$ (1,601)
FORWARD CURRENCY CONTRACTS TO SELL AT MARCH 31, 1996
(aggregate face value $974,061)
UNREALIZED
MARKET AGGREGATE DELIVERY APPRECIATION/
VALUE FACE VALUE DATE (DEPRECIATION)
- -------------------------------------------------------------------------------------------
Australian Dollars $ 94,862 $ 93,919 6/12/96 $ (943)
British Pounds 82,259 82,166 6/12/96 (93)
Canadian Dollars 103,106 102,772 6/12/96 (334)
Danish Krona 47,436 47,148 6/12/96 (288)
Deutschemarks 564,958 563,984 6/12/96 (974)
Italian Lira 26,895 26,923 6/12/96 28
Japanese Yen 56,424 57,149 6/12/96 725
----------
$ (1,879)
The accompanying notes are an integral part of these financial statements.
<PAGE>
<CAPTION>
FORWARD CROSS CURRENCY CONTRACTS OUTSTANDING AT MARCH 31, 1996
(aggregate face value $121,453)
UNREALIZED
CURRENCY MARKET CURRENCY MARKET DELIVERY APPRECIATION/
PURCHASED VALUE SOLD VALUE DATE (DEPRECIATION)
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Swiss Francs $42,244 Deutschemarks $42,173 12/6/96 $ (71)
Deutschemarks 78,603 Spanish Peseta 78,767 12/6/96 164
----------
$ 93
TBA after the name of a security represents to be announced securities (See Note 1 to
Financial Statements).
144A after the name of a security represents those exempt from registration under Rule 144A
of the Securities Act of 1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers.
DIVERSIFICATION BY COUNTRY (UNAUDITED)
Distribution of investment by country of issue at March 31, 1996:
Australia 1.4%
Canada 3.3
Denmark 2.1
Germany 6.0
Indonesia 0.1
Italy 0.8
Spain 1.2
United Kingdom 4.9
United States 80.2
TOTAL 100.0%
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
March 31, 1996
<S> <C>
ASSETS
- ----------------------------------------------------------------------------------------------------------
Investments in securities, at value (identified cost $9,248,929) (Note 1) $9,226,361
- ----------------------------------------------------------------------------------------------------------
Cash 1,720,171
- ----------------------------------------------------------------------------------------------------------
Dividends, interest and other receivables 190,513
- ----------------------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 1,071,652
- ----------------------------------------------------------------------------------------------------------
Receivable for securities sold 146,280
- ----------------------------------------------------------------------------------------------------------
Receivable for open forward currency contracts 1,389
- ----------------------------------------------------------------------------------------------------------
Receivable for closed forward currency contracts 1,708
- ----------------------------------------------------------------------------------------------------------
Receivable from Manager (Note 3) 8,162
- ----------------------------------------------------------------------------------------------------------
Unamortized organization expenses (Note 1) 46,360
- ----------------------------------------------------------------------------------------------------------
TOTAL ASSETS 12,412,596
LIABILITIES
- ----------------------------------------------------------------------------------------------------------
Distributions payable to shareholders 6,209
- ----------------------------------------------------------------------------------------------------------
Payable for securities purchased 3,014,718
- ----------------------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 3) 1,810
- ----------------------------------------------------------------------------------------------------------
Payable for administrative services (Note 3) 267
- ----------------------------------------------------------------------------------------------------------
Payable for distribution fees (Note 3) 2,958
- ----------------------------------------------------------------------------------------------------------
Payable for organization expense (Note 1) 46,575
- ----------------------------------------------------------------------------------------------------------
Payable for open forward currency contracts 4,776
- ----------------------------------------------------------------------------------------------------------
Payable for closed forward currency contracts 1,325
- ----------------------------------------------------------------------------------------------------------
Other accrued expenses 5,426
- ----------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 3,084,064
- ----------------------------------------------------------------------------------------------------------
NET ASSETS $9,328,532
REPRESENTED BY
- ----------------------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 5) $9,353,517
- ----------------------------------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 4,666
- ----------------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments and foreign currency transactions (Note 1) (3,746)
- ----------------------------------------------------------------------------------------------------------
Net unrealized depreciation of investments and assets and liabilities in foreign currencies (25,905)
- ----------------------------------------------------------------------------------------------------------
TOTAL--REPRESENTING NET ASSETS APPLICABLE TO CAPITAL SHARES OUTSTANDING $9,328,532
COMPUTATION OF NET ASSET VALUE AND OFFERING PRICE
- ----------------------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share ($3,798,560 divided by 453,304 shares) $8.38
- ----------------------------------------------------------------------------------------------------------
Offering price per class A share (100/95.25 of $8.38)* $8.80
- ----------------------------------------------------------------------------------------------------------
Net asset value and offering price per class B share ($5,047,566 divided by 602,236 shares)+ $8.38
- ----------------------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share ($482,406 divided by 57,575 shares) $8.38
- ----------------------------------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $8.38)* $8.66
- ----------------------------------------------------------------------------------------------------------
* 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.
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
STATEMENT OF OPERATIONS
For the period February 26, 1996 (commencement of operations) to March 31, 1996
INVESTMENT INCOME:
- -------------------------------------------------------------------------------
Interest $27,847
- -------------------------------------------------------------------------------
Dividends (net of foreign tax of $26) 329
- -------------------------------------------------------------------------------
TOTAL INVESTMENT INCOME 28,176
EXPENSES:
- -------------------------------------------------------------------------------
Compensation of Manager (Note 3) 2,986
- -------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 3) 2,010
- -------------------------------------------------------------------------------
Administrative services (Note 3) 267
- -------------------------------------------------------------------------------
Distribution fees-Class A (Note 3) 428
- -------------------------------------------------------------------------------
Distribution fees-Class B (Note 3) 2,425
- -------------------------------------------------------------------------------
Distribution fees-Class M (Note 3) 122
- -------------------------------------------------------------------------------
Amortization of organization expenses (Note 1) 215
- -------------------------------------------------------------------------------
Reports to shareholders 1,446
- -------------------------------------------------------------------------------
Registration fees 3,378
- -------------------------------------------------------------------------------
Auditing fees 2,500
- -------------------------------------------------------------------------------
Legal fees 2,676
- -------------------------------------------------------------------------------
Postage 151
- -------------------------------------------------------------------------------
Other 12
- -------------------------------------------------------------------------------
Fees waived by Manager (Note 3) (11,148)
- -------------------------------------------------------------------------------
TOTAL EXPENSES 7,468
- -------------------------------------------------------------------------------
Expense reduction (Note 3) (200)
- -------------------------------------------------------------------------------
NET EXPENSES 7,268
- -------------------------------------------------------------------------------
NET INVESTMENT INCOME 20,908
- -------------------------------------------------------------------------------
Net realized loss on investments (Notes 1 and 4) (3,746)
- -------------------------------------------------------------------------------
Net realized gain on forward currency contracts and
foreign currency translation (Note 1) 538
- -------------------------------------------------------------------------------
Net unrealized depreciation on forward currency contracts and foreign
currency translation during the period (3,338)
- -------------------------------------------------------------------------------
Net unrealized depreciation of investments during the period (22,567)
- -------------------------------------------------------------------------------
NET LOSS ON INVESTMENTS (29,113)
- -------------------------------------------------------------------------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(8,205)
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD
FEBRUARY 26, 1996
(COMMENCEMENT OF OPERATIONS) TO
MARCH 31, 1996
- -------------------------------------------------------------------------------
INCREASE IN NET ASSETS
- -------------------------------------------------------------------------------
Operations:
- -------------------------------------------------------------------------------
Net investment income $ 20,908
- -------------------------------------------------------------------------------
Net realized loss on investment and foreign currency transactions (3,208)
- -------------------------------------------------------------------------------
Net unrealized depreciation of investment transactions and assets
and liabilities in foreign currencies (25,905)
- -------------------------------------------------------------------------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS (8,205)
- -------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS:
- -------------------------------------------------------------------------------
From net investment income
- -------------------------------------------------------------------------------
Class A (7,673)
- -------------------------------------------------------------------------------
Class B (8,092)
- -------------------------------------------------------------------------------
Class M (1,000)
- -------------------------------------------------------------------------------
Increase from capital share transactions (Note 5) 9,251,502
- -------------------------------------------------------------------------------
TOTAL INCREASE IN NET ASSETS 9,226,532
- -------------------------------------------------------------------------------
NET ASSETS
- -------------------------------------------------------------------------------
Beginning of period (Note 2) 102,000
- -------------------------------------------------------------------------------
END OF PERIOD (including undistributed net investment
income of $4,666) $9,328,532
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
FOR THE PERIOD FOR THE PERIOD FOR THE PERIOD
FEBRUARY 26, 1996 FEBRUARY 26, 1996 FEBRUARY 26, 1996
(COMMENCEMENT (COMMENCEMENT (COMMENCEMENT
OF OPERATIONS) TO OF OPERATIONS) TO OF OPERATIONS) TO
MARCH 31 MARCH 31 MARCH 31
- ---------------------------------------------------------------------------------------------------------------------
1996* 1996* 1996*
- ---------------------------------------------------------------------------------------------------------------------
CLASS M CLASS B CLASS A
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $8.50 $8.50 $8.50
- ---------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
- ---------------------------------------------------------------------------------------------------------------------
Net investment income .04(d) .03(d) .04(d)
- ---------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain
on investments (.13) (.12) (.13)
- ---------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS (.09) (.09) (.09)
- ---------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
- ---------------------------------------------------------------------------------------------------------------------
Net investment income (.03) (.03) (.03)
- ---------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (.03) (.03) (.03)
- ---------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $8.38 $8.38 $8.38
- ---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN AT NET
ASSET VALUE (%) (a) (b) (1.41) (1.41) (1.41)
- ---------------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (in thousands) $482 $5,048 $3,799
- ---------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average
net assets (%) (a) (c) (d) 0.14 .20 .13
- ---------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) (a) .50 .44 .50
- ---------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) (a) 18.98 18.98 18.98
- ---------------------------------------------------------------------------------------------------------------------
<FN>
* Per share net investment income for the period ended February 26, 1996 (commencement of operations) to March 31,
1996 for class A, B and M has been determined on the basis of the weighted average number of shares outstanding
during the period.
(a) Not annualized.
(b) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(c) The ratio of expenses to average net assets for the period February 26, 1996 (commencement of operations) to
March 31, 1996 includes amounts paid through expense offset arrangements. (See Note 3.)
(d) Reflects an expense limitation applicable during the period. See Note 2 to the Financial Statements. As a result
of such limitation, expenses of the Fund for the period February 26, 1996 (commencement of operations) to March
31, 1996 reflects $.02, $.02 and $.02 per class A, B and M respectively.
</FN>
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
March 31, 1996
NOTE 1
SIGNIFICANT ACCOUNTING POLICIES
The fund is registered under the Investment Company Act of 1940, as amended, as
a diversified, open-end management company. The fund seeks high current income
consistent with the preservation of capital by investing its assets in debt
securities of domestic or foreign issuers, including government and corporate
obligations. The fund may also invest in preferred stocks, common stocks, and
other equity securities, as well as in cash or money market instruments.
The fund offers class A, class B, and class M shares. The fund commenced its
public offering of class A, B and M shares on February 26, 1996. Class A shares
are sold with a maximum front-end sales charge of 4.75%. Class B shares, which
convert to class A shares after approximately eight years, do not pay a
front-end sales charge, but pay a higher ongoing distribution fee than class A
shares, and may be subject to a contingent deferred sales charge, if those
shares are redeemed within six years of purchase. Class M shares are sold with a
maximum front-end sales charge of 3.25% and an ongoing distribution fee that is
lower than class B shares and higher than class A shares. Expenses of the fund
are borne pro-rata by the holders of each class of shares, except that each
class bears expenses unique to that class including the distribution fees
applicable to such class. Each class votes as a class only with respect to its
own distribution plan or other matters on which a class vote is required by law
or determined by the Trustees. Shares of each class would receive their pro-rata
share of the net assets of the fund, if the fund were liquidated. In addition,
the Trustees declare separate dividends on each class of shares.
The following is a summary of significant accounting policies followed by the
fund in the preparation of its financial statements. The preparation of
financial statements is in conformity with generally accepted accounting
principles and requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities. Actual results could differ from
those estimates.
A SECURITY VALUATION Investments for which market quotations are readily
available are stated at market value, which is determined using the last
reported sale price, or, if no sales are reported -- as in the case of some
securities traded over-the-counter -- the last reported bid price, except that
certain U.S. government obligations are stated at the mean between the last
reported bid and asked prices. Short-term invest-
<PAGE>
ments having remaining maturities of 60 days or less are stated at amortized
cost, which approximates market value, and other investments, including
restricted securities, are stated at fair value following procedures approved by
the Trustees. Market quotations are not considered to be readily available for
long-term corporate bonds and notes; such investments are stated at fair value
on the basis of valuations furnished by a pricing service, approved by the
Trustees, which determines valuations for normal, institutional-size trading
units of such securities using methods based on market transactions for
comparable securities and various relationships between securities that are
generally recognized by institutional traders.
B JOINT TRADING ACCOUNT Pursuant to an exemptive order issued by the Securities
and Exchange Commission, the fund may transfer uninvested cash balances into a
joint trading account, along with the cash of other registered investment
companies managed by Putnam Investment Management, Inc. ("Putnam Management"),
the fund's Manager, a wholly-owned subsidiary of Putnam Investments, Inc. and
certain other accounts. These balances may be invested in one or more repurchase
agreements and/or short-term money market instruments.
C REPURCHASE AGREEMENTS The fund, or any joint trading account, through its
custodian, receives delivery of the underlying securities, the market value of
which at the time of purchase is required to be in an amount at least equal to
102% of the resale price, including accrued interest. Putnam Management is
responsible for determining that the value of these underlying securities is at
all times at least equal to 102% of the resale price, including accrued
interest.
D SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are
accounted for on the trade date (date the order to buy or sell is executed).
Interest income is recorded on the accrual basis and 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.
Securities purchased or sold on a forward commitment or delayed delivery basis
may be settled a month or more after the trade date; interest income is not
accrued until settlement date. The fund instructs the custodian to segregate
assets in a separate account with a current value at least equal to the amount
of its forward commitment purchase commitment. Losses may arise due to changes
in the market value of the underlying securities or if the counterparty does not
perform under the contract.
E FOREIGN CURRENCY TRANSLATION The accounting records of the fund are maintained
in U.S. dollars. The market value of foreign securities, currency holdings,
other assets and liabilities are recorded in the books and records of the fund
after translation to U.S. dollars
<PAGE>
based on the exchange rates on that day. The cost of each security is determined
using historical exchange rates. Income and withholding taxes are translated at
prevailing exchange rates when accrued or incurred. The fund does not isolate
that portion of realized or unrealized gains or losses resulting from changes in
the foreign exchange rate on investments from fluctuations arising from changes
in the market prices of the securities. Such fluctuations are included with the
net realized and unrealized gain or loss on investments. Net realized gains and
losses on foreign currency transactions represent net exchange gains or losses
on closed forward currency contracts, disposition of foreign currencies and the
difference between the amount of investment income and foreign withholding taxes
recorded on the fund's books and the U.S. dollar equivalent amounts actually
received or paid. Net unrealized gains and losses on foreign currency
transactions arise from changes in the value of open forward currency contracts
and assets and liabilities other than investments at the period end, resulting
from changes in the exchange rate.
F FORWARD CURRENCY CONTRACTS The fund may engage in forward currency contracts,
which are agreements between two parties to buy and sell currencies at a set
price on a future date, to protect against a decline in value relative to the
U.S. dollar of the currencies in which its portfolio securities are denominated
or quoted (or an increase in the value of a currency in which securities a fund
intends to buy are denominated, when a fund holds cash reserves and short-term
investments). The U.S. dollar value of forward currency contracts is determined
using forward currency exchange rates supplied by a quotation service. The
market value of the contract will fluctuate with changes in currency exchange
rates. The contract is "marked to market" daily and the change in market value
is recorded as an unrealized gain or loss. When the contract is closed, the fund
records a realized gain or loss equal to the difference between the value of the
contract at the time it was opened and the value at the time it was closed. The
fund could be exposed to risk if the value of the currency changes unfavorably,
if the counterparties to the contracts are unable to meet the terms of their
contracts or if the fund is unable to enter into a closing position.
G FUTURES AND OPTIONS CONTRACTS The fund may use futures and options contracts
to hedge against changes in the values of securities the fund owns or expects to
purchase. The fund may also write options on securities it owns or which it
invests to increase its current returns.
The potential risk to the fund is that the change in value of futures and
options contracts may not correspond to the change in value of the hedged
instruments. In addition, losses may arise from changes in the value of the
underlying instruments, if there is an illiquid secondary market for the
contracts, or if the counterparty to the contract is unable to perform.
<PAGE>
Futures contracts are valued at the quoted daily settlement prices established
by the exchange on which they trade. Exchange traded options are valued at the
last sale price, or if no sales are reported, the last bid price for purchased
options and the last ask price for written options. Options traded
over-the-counter are valued using prices supplied by dealers.
H TBA PURCHASE COMMITMENTS The fund, may enter into "TBA" (to be announced)
purchase commitments to purchase securities for a fixed unit price at a future
date beyond customary settlement time. Although the unit price has been
established, the principal value has not been finalized. However, the amount of
the commitments will not fluctuate more than 2.0% from the principal amount. The
fund holds, and maintains until settlement date, cash or high-grade debt
obligations in an amount sufficient to meet the purchase price, or the fund may
enter into offsetting contracts for the forward sale of other securities it
owns. Income on the securities will not be earned until settlement date. TBA
purchase commitments may be considered securities in themselves, and involve a
risk of loss if the value of the security to be purchased declines prior to the
settlement date, which risk is in addition to the risk of decline in the value
of the fund's other assets. Unsettled TBA purchase commitments are valued at the
current market value of the underlying securities, generally according to the
procedures described under "Security valuation" above.
Although the fund will generally enter into TBA purchase commitments with the
intention of acquiring securities for its portfolio or for delivery pursuant to
options contracts it has entered into, the fund may dispose of a commitment
prior to settlement if Putnam Management deems it appropriate to do so.
I FEDERAL TAXES It is the policy of the fund to distribute all of its income
within the prescribed time and otherwise comply with the provisions of the
Internal Revenue Code applicable to regulated investment companies. It is also
the intention of the fund to distribute an amount sufficient to avoid imposition
of any excise tax under Section 4982 of the Internal Revenue Code of 1986.
Therefore, no provision has been made for federal taxes on income, capital gains
or unrealized appreciation on securities held and for excise tax on income and
capital gains.
J DISTRIBUTIONS TO SHAREHOLDERS Income dividends are recorded daily by the fund
and are distributed monthly. Capital gain distributions if any, are recorded on
the ex-dividend date and paid annually. 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. These differences include the treatment of losses on
wash sale transactions and realized and unrealized gains and losses on forward
foreign currency contracts. For the period ended March 31, 1996, the fund
reclassified $523 to increase undistributed net investment income and $15 to
increase paid-in-capital, with a decrease to accumulated net realized gains and
losses of $538. The calculation of net investment income per share in the
financial highlights table excludes these adjustments.
<PAGE>
K AMORTIZATION OF BOND PREMIUM AND DISCOUNT Any premium resulting from the
purchase of securities in excess of maturity value is amortized on a
yield-to-maturity basis. Discounts on zero coupon bonds, original issue,
stepped-coupon bonds and payment in kind bonds are accreted according to the
effective yield method.
L UNAMORTIZED ORGANIZATION EXPENSES Expenses incurred by the fund in connection
with its organization, its registration with the Securities and Exchange
Commission and with various states and the initial public offering of its shares
were $46,575. These expenses are being amortized on projected net asset levels
over a five-year period. The fund will reimburse Putnam Management for the
payment of these expenses.
NOTE 2
INITIAL CAPITALIZATION AND OFFERING OF SHARES
The fund was established as a Massachusetts business trust on October 5, 1994.
During the period October 5, 1994 to February 26, 1996 the fund had no
operations other than those related to organizational matters, including the
initial capital contribution of $100,000, $1,000 and $1,000 and the issuance of
11,765, 118 and 118 shares for class A, B and M shares, respectively to Putnam
Mutual Funds Corp., a wholly-owned subsidiary of Putnam Investments, Inc. on
February 26, 1996.
NOTE 3
MANAGEMENT FEE, ADMINISTRATIVE SERVICES, AND OTHER TRANSACTIONS
Compensation of Putnam Management, for management and investment advisory
services is paid quarterly based on the average net assets of the fund. Such fee
is based on the following annual rates: 0.70% of the first $500 million of
average net assets, 0.60% of the next $500 million, 0.55% of the next $500
million, and 0.50% of 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 to the
extent that expenses (exclusive of brokerage, interest and taxes) of the fund
exceed 2.5% of the first $30 million of average net assets, 2.0% of the next $70
million and 1.5% of any excess over $100 million and by the amount of certain
brokerage commissions and fees (less expenses) received by affiliates of the
Manager on the fund's portfolio transactions.
Through September 30, 1996, the fund's manager has agreed to limit the fund's
expenses to the extent that expenses (exclusive of interest, taxes, deferred
organizational, extraordinary expenses and credits from Putnam Fiduciary Trust
Company ("PFTC") a wholly-owned subsidiary of Putnam Investments Inc., if any)
exceed an annual rate of 1.00% of the fund's average net assets.
The fund reimburses Putnam Management for the compensation and related expenses
of certain officers of the fund and their staff who provide administra-
<PAGE>
tive services to the fund. The aggregate amount of all such reimbursements is
determined annually by the Trustees.
Custodial functions for the fund's assets are provided by Putnam Fiduciary Trust
Company (PFTC), a wholly-owned subsidiary of Putnam Investments, Inc. Investor
servicing agent functions are provided to the fund by Putnam Investor Services,
a division of PFTC.
For the period February 26, 1996 (commencement of operations) to March 31, 1996,
fund expenses were reduced by $200 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 the assets utilized in
connection with the expense offset arrangements in an income producing asset if
it had not entered into such arrangements.
Trustees of the fund receive an annual Trustee's fee of $100, and an additional
fee for each Trustees' meeting attended. Trustees who are not interested persons
of the Putnam Management and who serve on committees of the Trustees receive
additional fees for attendance at certain committee meetings.
The fund adopted a Trustee Fee Deferral Plan (the "Plan") which allows the
Trustees to defer the receipt of all or a portion of Trustees Fees payable on or
after July 1, 1995. The deferred fees remain in the fund and are invested in the
fund or in other Putnam funds until distribution in accordance with the Plan.
The fund has adopted distribution plans (the "Plans") with respect to its class
A, class B and class M shares pursuant to Rule 12b-1 under the Investment
Company Act of 1940. The purpose of the Plans is to compensate Putnam Mutual
Funds Corp., a wholly-owned subsidiary of Putnam Investments, Inc., for services
provided and expenses incurred by it in distributing shares of the fund. The
Plans provide for payments by the fund to Putnam Mutual Funds Corp. at an annual
rate up to 0.35%, 1.00% and 1.00% of the average net assets attributable to
class A, class B and class M shares, respectively. The Trustees have approved
payment by the fund at an annual rate of 0.25%, 1.00% and .50% of the average
net assets attributable to class A, class B and class M shares, respectively.
For the period February 26, 1996 (commencement of operations) to March 31, 1996,
Putnam Mutual Funds Corp., acting as underwriter received net commissions of
$3,693 and $80 from the sale of class A and class M shares, respectively and
received $0 in contingent deferred sales charges from redemptions of class B
shares. A deferred sales charge of up to 1% is assessed on certain redemptions
of class A shares. For the year ended March 31, 1996, Putnam Mutual Funds Corp.,
acting as underwriter received no monies on class A redemptions.
NOTE 4
PURCHASES AND SALES OF SECURITIES
During the period February 26, 1996 (commencement of operations) to March 31,
1996, purchases and sales of investment securities other than U.S. government
obligations and short-term investments aggregated $7,879,834 and $46,678,
respectively. Purchases and sales of U.S. government obligations aggregated
$2,197,528 and $782,288, respectively. In determining the net gain or loss on
securities sold, the cost of securities has been determined on the identified
cost basis.
<PAGE>
NOTE 5
CAPITAL SHARES
At March 31, 1996, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
FOR THE PERIOD FEBRUARY 26, 1996
(COMMENCEMENT OF OPERATIONS) TO
MARCH 31
1996
- -------------------------------------------------------------------------------
CLASS A SHARES AMOUNT
- -------------------------------------------------------------------------------
Shares sold 461,199 $3,876,904
- -------------------------------------------------------------------------------
Shares issued in connection with reinvestment
of distributions 611 5,124
- -------------------------------------------------------------------------------
461,810 3,882,028
- -------------------------------------------------------------------------------
Shares repurchased (20,271) (170,759)
- -------------------------------------------------------------------------------
NET INCREASE 441,539 $3,711,269
- -------------------------------------------------------------------------------
FOR THE PERIOD FEBRUARY 26, 1996
(COMMENCEMENT OF OPERATIONS) TO
MARCH 31
1996
- -------------------------------------------------------------------------------
CLASS B SHARES AMOUNT
- -------------------------------------------------------------------------------
Shares sold 618,364 $5,194,019
- -------------------------------------------------------------------------------
Shares issued in connection with reinvestment
of distributions 597 5,001
- -------------------------------------------------------------------------------
618,961 5,199,020
- -------------------------------------------------------------------------------
Shares repurchased (16,843) (141,112)
- -------------------------------------------------------------------------------
NET INCREASE 602,118 $5,057,908
- -------------------------------------------------------------------------------
FOR THE PERIOD FEBRUARY 26, 1996
(COMMENCEMENT OF OPERATIONS) TO
MARCH 31
1996
- -------------------------------------------------------------------------------
CLASS M SHARES AMOUNT
- -------------------------------------------------------------------------------
Shares sold 59,906 $502,851
- -------------------------------------------------------------------------------
Shares issued in connection with reinvestment
of distributions 51 424
- -------------------------------------------------------------------------------
59,957 503,275
- -------------------------------------------------------------------------------
Shares repurchased (2,500) (20,950)
- -------------------------------------------------------------------------------
NET INCREASE 57,457 $482,325
- -------------------------------------------------------------------------------
<PAGE>
FEDERAL TAX INFORMATION (unaudited)
The Form 1099 you receive in January 1997 will show the tax status of all
distributions paid to your account in calendar 1996.
<PAGE>
OUR COMMITMENT TO QUALITY SERVICE
O CHOOSE AWARD-WINNING SERVICE
Putnam Investor Services has won the DALBAR Quality Tested Service Seal for
the past six years. In 1995, over 146,000 tests of 56 shareholder service
components demonstrated that Putnam outperformed the industry standard in
every category.
O HELP YOUR INVESTMENT GROW
Set up a systematic program for investing with as little as $25 a month from
a Putnam money market fund or from your checking or savings account.*
O SWITCH FUNDS EASILY
You can move money from one account to another with the same class of shares
without a service charge. (This privilege is subject to change or
termination.)
O ACCESS YOUR MONEY QUICKLY
You can get checks sent regularly or redeem shares any business day at the
then-current net asset value, which may be more or less than the original
cost of the shares.
For details about any of these or other services, contact your financial
advisor or call the toll-free number shown below and speak with a helpful
Putnam representative.
O To make an additional investment in this or any other Putnam fund, contact
your financial advisor or call our toll-free number: 1-800-225-1581.
*Regular investing, of course, does not guarantee a profit or protect against
a loss in a declining market.
<PAGE>
FUND INFORMATION
INVESTMENT MANAGER OFFICERS
Putnam Investment George Putnam
Management, Inc. President
One Post Office Square
Boston, MA 02109 Charles E. Porter
Executive Vice President
MARKETING SERVICES
Putnam Mutual Funds Corp. Patricia C. Flaherty
One Post Office Square Senior Vice President
Boston, MA 02109
John D. Hughes
CUSTODIAN Senior Vice President and Treasurer
Putnam Fiduciary Trust Company
Lawrence J. Lasser
LEGAL COUNSEL Vice President
Ropes & Gray
Gordon H. Silver
INDEPENDENT AUDITORS Vice President
Coopers & Lybrand L.L.P.
Gary N. Coburn
TRUSTEES Vice President
George Putnam, Chairman
Jennifer E. Leichter
William F. Pounds, Vice Chairman Vice President and Fund Manager
Jameson Adkins Baxter D. William Kohli
Vice President and Fund Manager
Hans H. Estin
Michael Martino
John A. Hill Vice President and Fund Manager
Elizabeth T. Kennan Neil J. Powers
Vice President and Fund Manager
Lawrence J. Lasser
Mark J. Siegel
Robert E. Patterson Vice President and Fund Manager
Donald S. Perkins William N. Shiebler
Vice President
George Putnam, III
John R. Verani
Eli Shapiro Vice President
A.J.C. Smith Paul M. O'Neil
Vice President
W. Nicholas Thorndike
Beverly Marcus
Clerk and Assistant Treasurer
This report is for the information of shareholders of Putnam Diversified Income
Trust II. It may also be used as sales literature when preceded or accompanied
by the current prospectus, which gives details of sales charges, investment
objectives, and operating policies of the fund, and the most recent copy of
Putnam's Quarterly Performance Summary. For more information or to request a
prospectus, call toll-free: 1-800-225-1581.
SHARES OF MUTUAL FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY FINANCIAL INSTITUTION, ARE NOT INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION (FDIC), THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY,
AND INVOLVE RISK, INCLUDING THE POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
<PAGE>
[LOGO: PUTNAM INVESTMENTS] -------------
Bulk Rate
THE PUTNAM FUNDS U.S. Postage
One Post Office Square PAID
Boston, Massachusetts 02109 Putnam
Investments
-------------
24534-896/2BQ/2BR 5/96
