Putnam
Diversified
Income
Trust II
SEMIANNUAL REPORT
September 30, 1996
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* "Putnam Diversified Income Trust II's flexible strategy allows us
to capitalize on investment opportunities in a broad range of fixed-
income sectors while limiting the fund's exposure to sectors that
are underperforming."
-- Neil J. Powers, Lead Fund Manager
* "Recent years' bond markets clearly illustrate the advantage of
the mixed portfolio strategy. This year, the U.S. investment-grade
sectors have lost money...major European markets have been
lackluster...emerging markets have done well...and domestic high-
yield issues have soared..."
-- Morningstar Mutual Funds, September 13, 1996
CONTENTS
4 Report from Putnam Management
9 Fund performance summary
12 Portfolio holdings
25 Financial statements
(copyright) Karsh, Ottawa
[PHOTO OF GEORGE PUTNAM OMITTED]
From the Chairman
Dear Shareholder:
During the six months ended September 30, 1996, Putnam Diversified
Income Trust II's trisector approach to portfolio management
demonstrated the value of diversification across a wide spectrum of
the world's bond markets.
The U.S. high-yield bond market was the beneficiary of continued
economic strength, and the growth-oriented companies represented in
the fund's high-yield sector were among the best performing. The
international bond sector's focus on peripheral European, Anglo, and
emerging markets likewise proved advantageous. Even within the less
vibrant U.S. government sector, a shift in emphasis to mortgage-
backed securities away from Treasuries made a positive contribution.
In the following report, your fund's managers comment in depth about
the first half of fiscal 1996's performance and about the prospects
for the second half.
I am pleased to announce that Neil Powers, a 10-year Putnam fixed-
income analyst and a member of the fund's management team since
1992, has been elevated to lead manager.
Respectfully yours,
/S/George Putnam
George Putnam
Chairman of the Trustees
November 20, 1996
Report from the Fund Managers
Neil J. Powers, lead manager
Jennifer E. Leichter
D. William Kohli
Michael Martino
Mark J. Siegel
Although Putnam Diversified Income Trust II is a relative newcomer
to the multisector fund universe, it handled the recent bond market
turbulence with the composure of a seasoned veteran. Through much of
the semiannual period ended September 30, 1996, U.S. economic growth
remained firm, fueling continued growth in corporate earnings.
However, because the economy continued to grow at a faster-than-
expected pace, investors' fears of inflation lingered, producing an
unfriendly environment for U.S. Treasury securities.
Amid this uncertain environment, your fund provided exactly what it
is designed to deliver: a diversified investment strategy that
enables it to capitalize on thriving sectors of the bond markets
regardless of interest-rate trends. Our strategy of focusing on
corporate (high-yield and investment-grade) and international bonds,
and de-emphasizing U.S. government securities, was essential to the
fund's solid performance. Complete performance information appears
on pages 9 and 10.
*GROWTH COMPANIES PROPEL THE HIGH-YIELD SECTOR
From the start of the period, we concentrated the fund's high-yield
holdings in growth-oriented companies in telecommunications and
other media such as television and radio. Shortly before your fund
commenced operations in February 1996, Congress passed legislation
to deregulate the telecommunications and broadcasting industries.
The new telecommunications law loosened restrictions on radio
stations, cable television, and long-distance telephone service. In
practical terms, this legislation allows a single company to offer
services in more than one of these areas (for example, a telephone
company may provide cable television service) or to own more than
one provider of a particular service in a certain region (a company
may own several radio stations in one city).
Among the fund's holdings, MFS Communications, Teleport, and Brooks
Fiber Properties, three competitive local exchange carriers, were
among the portfolio's strongest performers during the period. Each
of these companies issues high-yield securities to help finance the
construction of the fiber-optic network required to attract
corporate customers and compete with larger telephone service
providers. While these securities and others discussed in this
report were viewed favorably during the period, all portfolio
holdings are subject to review and adjustment in accordance with the
fund's investment strategy and may vary in the future.
Elsewhere in the high-yield sector, the fund prospered from its
investments in the banking industry. First Nationwide Holdings, one
of the fund's key holdings, merged with California Federal Bank
during the period; the consolidation gave the newly merged company a
substantial share of the California banking market. Among thrift
banks, which make up a large portion of the banks that issue high-
yield securities, Chevy Chase Savings Bank and Berkeley Federal Bank
also contributed to the fund's performance.
[GRAPHIC OMITTED: horizontal bar chart TOP 5 COUNTRY ALLOCATIONS,
9/30/96*]
(international sector)
Canada 4.7%
Germany 3.6%
United Kingdom 2.5%
Italy 2.5%
Mexico 1.7%
Footnote reads:
*Based on net assets as of 9/30/96. Allocations will vary over time.
*AN EMPHASIS ON PERIPHERAL EUROPE
The fund's investments in international bonds also boosted its
performance during the period. While international bond markets
generally delivered positive returns, our emphasis on country
selection and currency management, rather than on duration
management, allowed the fund to derive solid returns from its
international holdings.
In the early months of the fund's existence, we emphasized bonds in
higher-yielding European markets, particularly those of Italy and
Spain, rather than the core market. Since then, these and most other
European countries have focused their efforts on reining in fiscal
budgets in order to gain acceptance into the European Monetary Union
(EMU), which intends to create a single currency to be used among
member nations. As a result of these efforts, Italy, Spain, Sweden,
and Finland have driven down both inflation and bond yields. As
yields declined, the fund's holdings in these markets benefited from
price appreciation.
A similar trend took place among markets in Canada and Australia.
Here, yields at the outset of the fiscal period were considerably
higher than those in the United States. Interest rates have fallen
considerably since then, narrowing the yield spreads relative to
U.S. Treasuries.
Our currency strategy involved hedging international bonds back to
the U.S. dollar in an effort to protect the fund's value from losses
due to currency fluctuations. This strategy proved particularly
beneficial as several European currencies declined in value against
the dollar. We underweighted the yen and deutschemark and
capitalized on other currency movements as European nations
struggled to be eligible for inclusion in the EMU.
*MORTGAGE-BACKED GOVERNMENT SECURITIES OFFER OPPORTUNITIES
In the U.S. government securities market, our emphasis from the
start has been in mortgage-backed securities. These securities began
to outperform Treasuries early in 1996 as the rally that propelled
the bond market through 1995 reversed course. At the time we first
purchased the fund's mortgage-backed holdings, yields on mortgage-
backed securities were significantly above those of comparable
Treasuries.
TOP THREE HOLDINGS PER SECTOR*
HIGH-YIELD BONDS MARKET VALUE PERCENTAGE
Guess Jeans, Inc. 9.5%, 2003 $ 661,375 1.04%
Metrocall, Inc. 10.375%, 2007 581,000 0.91
Coinmach Corp. 11.75%, 2005 535,000 0.84
FOREIGN BONDS
Germany (Federal Republic of)
5.25%, 2001 1,251,279 1.96
Italy (Government of) 9.5%, 2001 1,179,286 1.85
United Kingdom Treasury notes
7%, 2001 896,229 1.40
U.S. GOVERNMENT OBLIGATIONS
GNMAs 7.5%, 2025-2026 2,615,604 4.10
U.S. Treasury notes 7%, 2006 2,281,443 3.57
GNMAs 7%, 2026 1,601,407 2.51
Footnote reads:
*Based on net assets as of 9/30/96. Portfolio holdings will vary
over time.
As the year progressed, yields on Treasuries remained within a
limited range. As a result, the yield spread on mortgage-backed
securities relative to Treasuries narrowed, approaching the
historical average of one percentage point, and mortgage-backed
securities offered greater price appreciation and higher income than
Treasuries.
*OUTLOOK: MODERATE ECONOMIC CONDITIONS MAY ENDURE
In our view, the second half of the fund's fiscal year may offer the
same economic conditions that have prevailed since the fund's
inception: moderate economic growth, low inflation, and interest
rates that move within a relatively limited range. For this reason,
we anticipate that the sectors and securities that have served the
fund well in recent months will continue to do so into the early
part of calendar 1997. In the event that economic growth slows, we
have positioned the fund to capitalize on the decline in interest
rates that will likely occur.
We plan to maintain the fund's considerable weighting in high-yield
securities to take advantage of the atmosphere of robust corporate
earnings and allow the fund to grow while interest rates remain
stable.
Among international bond markets, we will continue to invest in
countries whose rates of inflation are declining. We will also look
to take advantage of European markets as progress toward the EMU
creates opportunities.
If, as some economists predict, the rate of U.S. economic growth
begins to slow in the coming months, interest rates will likely
decline once again. For this reason, we will maintain a longer-than-
average portfolio duration to enable the fund to participate in any
corresponding price appreciation among government bonds.
The views expressed here are exclusively those of Putnam Management.
They are not meant as investment advice. Although the described
holdings were viewed favorably as of 9/30/96, there is no guarantee
the fund will continue to hold these securities in the future. While
U.S. government backing of individual securities does not insure
principal, which will fluctuate, it does guarantee that the fund's
government backed holdings will make timely payments of interest and
principal. Mortgage-backed securities may be subject to prepayment
risk. Foreign investments are subject to certain risks, such as
currency fluctuations, economic instability and political
developments, that are not present with domestic investments. The
lower credit ratings of high-yield corporate and municipal bonds
reflect a greater possibility that adverse changes in the economy or
their issuers may affect the fund's ability to pay principal and
interest on the bonds.
Performance summary
Performance should always be considered in light of a fund's
investment strategy. Putnam Diversified Income Trust II is designed
for investors seeking high current income consistent with capital
preservation through U.S. government, high-yield, and international
fixed-income securities.
This section provides, at a glance, information about your fund's
performance. Total return shows how the value of the fund's shares
changed over time, assuming you held the shares through the entire
period and reinvested all distributions in the fund.
TOTAL RETURN FOR PERIODS ENDED 9/30/96
Class A Class B Class M
(inception date) (2/26/96) (2/26/96) (2/26/96)
NAV POP NAV CDSC NAV POP
- -------------------------------------------------------------------
6 months 5.18% 0.15% 4.78% -0.22% 5.04% 1.65%
- -------------------------------------------------------------------
Life of class 4.16 -0.74 3.68 -1.32 4.01 0.58
- -------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 9/30/96
Salomon Bros.
Lehman Bros. Non-U.S. First Boston Consumer
Aggregate World Govt. High Yield Price
Bond Index Bond Index Index Index
- -------------------------------------------------------------------
6 months 2.43% 3.67% 5.39% 1.35%
- -------------------------------------------------------------------
Life of fund 1.72 3.93 5.10 1.87
- -------------------------------------------------------------------
Performance data represent past results, do not reflect future
performance, and will differ for each share class. They do not take
into account any adjustment for taxes payable on reinvested
distributions. Investment returns and principal value will fluctuate
so that an investor's shares, when sold, may be worth more or less
than their original cost. POP assumes 4.75% maximum sales charge for
class A shares and 3.25% for class M shares. CDSC for class B shares
assumes the applicable sales charge, with the maximum being 5%.
Performance data reflect an expense limitation currently in effect.
Without the expense limitation, total returns would have been lower.
PRICE AND DISTRIBUTION INFORMATION
6 months ended 9/30/96
Class A Class B Class M
- --------------------------------------------------------------------
Distributions (number) 6 6 6
- --------------------------------------------------------------------
Income $0.294786 $0.262783 $0.284112
- --------------------------------------------------------------------
Capital gains -- -- --
- --------------------------------------------------------------------
Total $0.294786 $0.262783 $0.284112
- --------------------------------------------------------------------
Share value: NAV POP NAV NAV POP
- --------------------------------------------------------------------
3/31/96 $8.38 $8.80 $8.38 $8.38 $8.66
- --------------------------------------------------------------------
9/30/96 8.51 8.93 8.51 8.51 8.80
- --------------------------------------------------------------------
Current dividend rate1 7.24% 6.90% 6.50% 7.00% 6.77%
- --------------------------------------------------------------------
Current 30-day SEC yield2 7.13 6.79 6.36 6.87 6.65
- --------------------------------------------------------------------
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
Class A shares are generally subject to an initial sales charge.
Class B shares may be subject to a sales charge upon redemption.
Class M shares have a lower initial sales charge and a higher 12b-1
fee than class A shares and no sales charge on redemption.
Net asset value (NAV) is the value of all your fund's assets, minus
any liabilities, divided by the number of outstanding shares, not
including any initial or contingent deferred sales charge.
Public offering price (POP) is the price of a mutual fund share plus
the maximum sales charge levied at the time of purchase. POP
performance figures shown here assume the maximum 4.75% sales charge
for class A shares and 3.25% for class M shares.
Contingent deferred sales charge (CDSC) is a charge applied at the
time of the redemption of class B shares and assumes redemption at
the end of the period. Your fund's CDSC declines from a 5% maximum
during the first year to 1% during the sixth year. After the sixth
year, the CDSC no longer applies.
COMPARATIVE BENCHMARKS
Lehman Brothers Aggregate Bond Index* is composed of securities from
Lehman Brothers Government/Corporate Bond Index, Mortgage-Backed
Securities Index, and the Asset-Backed Securities Index. Total
return comprises price appreciation/depreciation and income as a
percentage of the original investment. Indexes are rebalanced
monthly by market capitalization.
Salomon Brothers Non-U.S. World Government Bond Index* is a market
capitalization-weighted benchmark that tracks the performance of the
government bond markets tracked by the Salomon Brothers World
Government Bond Index, excluding the United States.
First Boston High Yield Index* is an unmanaged index of lower-rated,
higher-yielding U.S. corporate bonds. It includes over 180 issues
with an average maturity range of 7 to 10 years.
Consumer Price Index (CPI) is a commonly used measure of inflation;
it does not represent an investment return.
*Securities indexes assume reinvestment of all distributions and
interest payments and do not take in account brokerage fees or
taxes. Securities in the fund do not match those in the indexes and
performance of the fund will differ. It is not possible to invest
directly in an index.
<TABLE>
<CAPTION>
Portfolio of investments owned
September 30, 1996 (Unaudited)
CORPORATE BONDS AND NOTES (56.7%) *
PRINCIPAL AMOUNT
VALUE
<S> <C> <C> <C>
Advertising (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
$25,000 Adams Outdoor Advertising sr. notes 10 3/4s, 2006 26,125
125,000 Lamar Advertising Co. sr. secd. notes 11s, 2003 130,938
100,000 Universal Outdoor, Inc. sub. deb. 11s, 2003 112,000
38,000 Universal Outdoor, Inc. sr. notes stepped-coupon zero %
(14s, 7/1/99), 2004 ++ 33,060
----------
302,123
Aerospace and Defense (1.7%)
- --------------------------------------------------------------------------------------------------------------------------
450,000 Alliant Techsystems, Inc. sr. sub. notes 11 3/4s, 2003 487,114
50,000 Coltec Industries, Inc. sr. notes 9 3/4s, 1999 51,750
50,000 Howmet Corp. sr. sub. notes 10s, 2003 53,750
95,000 K & F Industries, Inc. 144A sr. sub. notes 10 3/8s, 2004 98,325
80,000 Lockheed Martin Corp. company guaranty 7 1/4s, 2006 80,018
90,000 Moog Inc. sr. sub. notes Ser. B, 10s, 2006 90,450
215,000 UNC, Inc. 144A sr. sub. notes 11s, 2006 225,750
----------
1,087,157
Agriculture (0.8%)
- --------------------------------------------------------------------------------------------------------------------------
250,000 Agco Corp. sr. sub. notes 8 1/2s, 2006 250,000
450,000 PMI Holdings Corp. sub. disc. deb. stepped-coupon
Ser. B, zero % (11 1/2s, 9/1/00), 2005 ++ 274,500
----------
524,500
Airlines (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
40,000 Greenwich Air Services, Inc. sr. notes 10 1/2s, 2006 41,100
Automobiles (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
80,000 Daimler-Benz med. term notes 7 3/8s, 2006 80,696
Automotive Parts (1.6%)
- --------------------------------------------------------------------------------------------------------------------------
260,000 A.P.S. Inc. company guaranty 11 7/8s, 2006 276,900
100,000 Delco Remy International, Inc. 144A sr. sub. notes 10 5/8s, 2006 102,500
100,000 Harvard Indsutries Inc. sr. notes 11 1/8s, 2005 93,750
100,000 Key Plastics Corp. sr. notes 14s, 1999 103,000
90,000 Lear Corp. sub. notes 9 1/2s, 2006 93,150
415,000 MCII Holding, Inc. bonds zero % (15s, 12/1/99), 2002 ++ 336,150
25,000 Speedy Muffler King, Inc. company guaranty 10 7/8s, 2006 25,656
----------
1,031,106
Banks (2.2%)
- --------------------------------------------------------------------------------------------------------------------------
90,000 ABN Ambro Bank N.V. sub. notes 7.55s, 2006 (Netherlands) 91,690
40,000 Advanta National Bank sr. notes 7.02s, 2001 39,615
500,000 Bancomext Trust Division 144A bank guaranteed deb. 11 1/4s, 2006 (Mexico) 524,375
50,000 Banponce Financial Corp. med. term notes 6 3/4s, 2001 49,421
55,000 Berkeley Federal Bank & Trust sub. deb. 12s, 2005 59,975
170,000 Chevy Chase Savings Bank Inc. sub. deb. 9 1/4s, 2005 173,825
250,000 First Nationwide Holdings 144A sr. sub. notes 10 5/8s, 2003 261,250
25,000 First Nationwide Holdings sr. sub. notes 9 1/8s, 2003 24,563
60,000 First Union Corp. sub. notes 7s, 2006 58,405
95,000 Merita Bank Ltd. sub. notes 6 1/2s, 2006 (Finland) 88,683
35,000 Nationsbank Corp. sr. notes 7s, 2003 34,818
----------
1,406,620
Basic Industrial Products (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
275,000 Clark-Schwebel sr. notes 10 1/2s, 2006 287,375
Broadcasting (4.6%)
- --------------------------------------------------------------------------------------------------------------------------
100,000 Allbritton Communications sr. sub. deb. Ser. B, 9 3/4s, 2007 96,750
110,000 American Telecasting, Inc. sr. disc. notes stepped-coupon zero %
(14 1/2s, 8/15/00), 2005 ++ 72,600
55,000 American Telecasting, Inc. sr. disc. notes stepped-coupon zero %
(14 1/2s, 6/15/99), 2004 ++ 250,000
Benedek Communications sr. disc. notes 144A stepped-coupon zero %
(13 1/4s, 5/15/01), 2006 ++ 146,563
235,000 Chancellor Broadcasting Co. sr. sub. notes 9 3/8s, 2004 232,650
75,000 Commodore Media, Inc. sr. sub. notes stepped-coupon 7 1/2s,
(13 1/4s, 5/1/98), 2003 ++ 77,813
250,000 Granite Broadcasting Corp. sr. sub. notes 9 3/8s, 2005 240,000
15,000 Gray Communications System Inc. sr. sub. notes 10 5/8s, 2006 15,413
200,000 Heartland Wireless Communication Inc. sr. notes 13s, 2003 214,000
50,000 Heartland Wireless Communication Inc.144A sr. notes 13s, 2003 53,500
250,000 Jacor Communications, Inc. sr. sub. notes 10 1/8s, 2006 257,500
160,000 Net Sat Servicos Ltd. 144A sr. notes 12 3/4s, 2004 (Brazil) 170,000
225,000 Park Broadcasting, Inc. 144A sr. notes 11 3/4s, 2006 257,063
225,000 Paxson Communications Corp. 144A sr. sub. notes 11 5/8s, 2002 235,125
50,000 Pegasus Media & Communications notes Ser. B, 12 1/2s, 2005 53,000
200,000 Petracom Holdings, Inc. notes stepped-coupon zero % (17 1/2s, 8/1/98), 2003 ++ 500,000
SFX Broadcasting, Inc. sr. sub. notes Ser. B, 10 3/4s, 2006 520,000
100,000 Wireless One, Inc. sr. notes 13s, 2003 103,500
----------
2,956,702
Building Products (1.9%)
- --------------------------------------------------------------------------------------------------------------------------
145,000 Cemex S.A. 144A bonds 12 3/4s, 2006 (Mexico) 158,050
300,000 Southdown Inc. sr. sub. notes Ser. B, 10s, 2006 303,000
370,000 Presley Cos. sr. notes 12 1/2s, 2001 359,825
225,000 Schuller International Corp. sr. notes 10 7/8s, 2004 245,813
50,000 Scotsman Group, Inc. sr. secd. notes 9 1/2s, 2000 50,125
100,000 Waxman Industries Inc. sr. notes stepped-coupon Ser. B, zero %
(12 3/4s, 6/1/99), 2004 ++ 71,000
----------
1,187,813
Business Services (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
5,000 Bell & Howell Operating Co. bonds 9 1/4s, 2000 5,075
10,000 Corporate Express, Inc. sr. sub. notes Ser. B, 9 1/8s, 2004 10,000
25,000 Iron Mountain Inc. sr. sub. notes 10 1/8s, 2006 25,469
20,000 Muzak Inc. sr. notes 10s, 2003 20,125
35,000 Pierce Leahy Corp. sr. sub. notes 144A 11 1/8s, 2006 37,363
----------
98,032
Cable Television (2.2%)
- --------------------------------------------------------------------------------------------------------------------------
255,000 Adelphia Communications Corp. sr. notes 12 1/2s, 2002 269,025
50,000 Cablevision Systems Corp. sr. sub. reset deb. 10 3/4s, 2004 51,375
150,000 Century Communications Corp. sr. sub. deb. 11 7/8s, 2003 160,500
200,000 Charter Communications International disc. notes stepped-coupon
Ser. B, zero % (14s, 3/15/01), 2007 ++ 121,000
50,000 Diamond Cable Communication Co. sr. disc. notes stepped-coupon zero %
(11 3/4s, 12/15/00), 2005 ++ 32,250
400,000 Jones Intercable, Inc. sr. sub. deb. 10 1/2s, 2008 424,000
110,000 Lenfest Communications, Inc. sr. notes 8 3/8s, 2005 103,125
10,000 Marcus Cable Co. (L.P.) sr. disc. notes stepped-coupon zero %
(14 1/4s, 6/15/00), 2005 ++ 6,800
10,000 Marcus Cable Co. (L.P.) sr. sub. disc. notes stepped-coupon zero %
(13 1/2s, 8/1/99), 2004 ++ 7,800
185,000 Telewest Communications PLC deb. stepped-coupon zero %
(11s, 10/1/00), 2007 (United Kingdom) ++ 117,475
150,000 UIH Australia sr. disc. notes stepped-coupon Ser. B, zero %
(14s, 5/15/01), 2006 (Australia) ++ 80,250
----------
1,373,600
Cellular Communications (1.4%)
- --------------------------------------------------------------------------------------------------------------------------
40,000 360 Communications Co. sr. notes 7 1/2s, 2006 38,883
40,000 Airtouch Communications, Inc. notes 7 1/8s, 2001 40,258
150,000 Call-Net Enterprises sr. disc. notes stepped-coupon zero %
(13 1/4s, 12/1/99), 2004 ++ 116,625
200,000 Milicom International Cellular 144A sr. disc. notes stepped-coupon zero %
(13 1/2s, 6/01/00), 2006 (Luxembourg) ++ 114,250
255,000 NEXTEL Communications, Inc. sr. disc. notes stepped-coupon zero %
(9 3/4s, 2/15/99), 2004 ++ 150,000
NEXTEL Communications, Inc. sr. disc. notes stepped-coupon zero %
(11 1/2s, 9/1/98), 2003 ++ 111,000
300,000 Orbcomm Global Capital Corp. 144A sr. notes 14s, 2004 307,500
----------
892,991
Chemicals (2.4%)
- --------------------------------------------------------------------------------------------------------------------------
200,000 Acetex Corp. sr. notes 9 3/4s, 2003 (Canada) 195,000
400,000 Arcadian Partner sr. notes 10 3/4s, 2005 440,000
500,000 G-I Holdings, Inc. sr. notes Ser. B, 10s, 2006 500,000
10,000 G-I Holdings, Inc. sr. disc. notes Ser. B, zero %, 1998 8,625
200,000 IMC Fertilizer Group, Inc. deb. 9.45s, 2011 214,000
30,000 Sociedad Quimica Y Minera de Chile S.A. 144A bonds 7.7s, 2006 (Chile) 30,113
15,000 Texas Petrochemical 144A sr. sub. notes 11 1/8s, 2006 15,825
100,000 Union Carbide Global Enterprises sr. sub. Ser. B, 12s, 2005 114,125
----------
1,517,688
Computer Equipment (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
250,000 Computervision Corp. sr. sub. notes 11 3/8s, 1999 261,875
Consumer Durable Goods (0.6%)
- --------------------------------------------------------------------------------------------------------------------------
275,000 International Semi-Tech. Corp. sr. secd. disc. notes stepped-coupon zero %
(11 1/2s, 8/15/00), 2003 (Canada) ++ 167,063
200,000 Remington Products Co. LLC 144A sr. sub. notes 11s, 2006 202,000
----------
369,063
Consumer Non Durable Goods (0%)
- --------------------------------------------------------------------------------------------------------------------------
30,000 E&S Holdings Corp. 144A sr. sub. notes 10 3/8s, 2006 30,525
Consumer Services (0.8%)
- --------------------------------------------------------------------------------------------------------------------------
500,000 Coinmach Corp. sr. notes Ser. B, 11 3/4s, 2005 535,000
Containers (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
30,000 Ivex Packaging Corp. sr. sub. notes 12 1/2s, 2002 31,650
20,000 Printpack, Inc. 144A sr. notes 10 5/8s, 2006 20,600
35,000 Printpack, Inc. 144A sr. notes 9 7/8s, 2004 35,788
----------
88,038
Electric Utilities (1.2%)
- --------------------------------------------------------------------------------------------------------------------------
25,000 Commonwealth Edison Co. 1st mtge. 7s, 2005 24,213
25,000 Connecticut Light & Power 1st mtge. 7 7/8s, 2001 25,110
35,000 Connecticut Yankee 1st mtge. Ser. A, 12s, 2000 35,954
100,000 El Paso Electric Co. 1st mtge. Ser. E, 9.4s, 2011 103,000
75,000 El Paso Electric Co. 1st mtge. Ser. B, 7 3/4s, 2001 74,241
25,000 Hidroelectric Pierda Aguila 144A bonds 10 5/8s, 2001 (Argentina) 25,125
165,000 Midland Funding Corp. deb. Ser. A, 11 3/4s, 2005 177,776
10,000 Niagara Mohawk Power Corp. med. term notes 9.99s, 2004 9,400
250,000 Niagara Mohawk Power 1st mtge. 5 7/8s, 2002 214,873
25,000 Ohio Edison Co. 1st mtge. 8 1/4s, 2002 26,079
50,000 Southern California Edison 1st ref. mtge. 5 7/8s, 2004 46,282
----------
762,053
Energy-Related (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
250,000 Calpine Corp. 144A sr. notes 10 1/2s, 2006 251,250
Entertainment (1.4%)
- --------------------------------------------------------------------------------------------------------------------------
265,000 Guitar Center Management 144A sr. notes 11s, 2006 277,588
250,000 Premier Parks, Inc. sr. notes Ser. A, 12s, 2003 267,500
15,000 Six Flags Corp. sr. sub. notes stepped-coupon zero %
(12 1/4s, 6/15/98), 2005 ++ 13,163
30,000 Time Warner Entertainment Co. deb. 7 1/4s, 2008 28,449
40,000 Time Warner Inc. notes 8 7/8s, 2012 42,542
5,000 Time Warner, Inc. deb. 9.15s, 2023 5,275
250,000 Trump Holdings & Funding Corp. sr. notes 15 1/2s, 2005 290,000
----------
924,517
Enviromental Control (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
45,000 WMX Technologies Inc. notes 7.1s, 2026 45,594
Finance (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
140,000 Ford Motor Credit Corp. sr. notes 7s, 2001 140,788
35,000 Ocwen Financial Corp. notes 11 7/8s, 2003 36,663
100,000 Webster Financial Corp. sr. notes 8 3/4s, 2000 102,867
----------
280,318
Financial Services (1.1%)
- --------------------------------------------------------------------------------------------------------------------------
50,000 AIM Management Group sr. secd. notes 9s, 2003 51,500
265,000 Contifinacial Corp. sr. notes 8 3/8s, 2003 264,338
300,000 Keystone Group, Inc. sr. secd. notes 9 3/4s, 2003 321,000
70,000 Merrill Lynch & Co., Inc. notes 6s, 2001 67,665
25,000 Primark Corp. sr. notes 8 3/4s, 2000 25,094
----------
729,597
Food Chains (1.0%)
- --------------------------------------------------------------------------------------------------------------------------
225,000 Fleming Cos., Inc. sr. notes 10 5/8s, 2001 221,063
50,000 Kroger Co. sr. notes 8.15s, 2006 50,814
200,000 Ralphs Grocery sr. notes 10.45s, 2004 202,750
9,000 Southland Corp. 1st priority sr. sub. deb. 5s, 2003 7,065
150,000 Southland Corp. deb. Ser. A, 4 1/2s, 2004 110,625
25,000 Stater Brothers sr. notes 11s, 2001 26,500
----------
618,817
Gaming (4.5%)
- --------------------------------------------------------------------------------------------------------------------------
250,000 Alliance Gaming Corp. sr. notes 12 7/8s, 2003 258,750
230,000 Argosy Gaming Co. 144A 1st. mtge. 13 1/4s, 2004 228,850
45,000 Casino America, Inc. sr. notes 12 1/2s, 2003 47,081
50,000 Casino Magic Corp. 144A 1st mtge. 13s, 2003 50,750
260,000 Coast Hotels & Casino company guaranty Ser. B, 13s, 2002 281,450
350,000 Colorado Gaming & Entertainment Co. sr. notes 12s, 2003 (2 double daggers) 336,000
250,000 Empress River Casino sr. notes 10 3/4s, 2002 267,500
150,000 Grand Casinos, Inc. 1st mtge. 10 1/8s, 2003 147,563
75,000 Harveys Casino Resorts sr. sub. notes 10 5/8s, 2006 78,375
350,000 Hollywood Casino Corp. sr. notes 12 3/4s, 2003 346,500
150,000 Lady Luck Gaming 1st mtge. 11 7/8s, 2001 147,000
51,000 Louisiana Casino Cruises Corp. 1st mtge. 11 1/2s, 1998 41,310
250,000 Mohegan Tribal Gaming Auth. Rev. Bonds, Ser. B, 13 1/2s, 2002 312,500
250,000 Trump A.C. 1st. mtge. 11 1/4s, 2006 246,250
50,000 Showboat Marina Casino 1st mtge. Ser. B, 13 1/2s, 2003 54,250
----------
2,844,129
Health Care (1.5%)
- --------------------------------------------------------------------------------------------------------------------------
500,000 Ivac Corp. sr. notes 9 1/4s, 2002 506,250
80,000 Manor Care, Inc. sr. notes 7 1/2s, 2006 80,284
100,000 Quorum Health Group, Inc. sr. sub. notes 8 3/4s, 2005 100,250
85,000 Paracelsus Healthcare sr. sub. notes 10s, 2006 87,975
100,000 Tenet Healthcare Corp. sr. sub. notes 10 1/8s, 2005 108,500
75,000 Tenet Healthcare Corp. sr. notes 8 5/8s, 2003 78,000
----------
961,259
Household Products (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
50,000 Ekco Group Inc. sr. notes Ser. B, 9 1/4s, 2006 48,000
Insurance (1.3%)
- --------------------------------------------------------------------------------------------------------------------------
95,000 Aegon N.V. sub. notes 8s, 2006 (Netherlands) 99,353
200,000 American Life Holding Co. sr. sub. notes 11 1/4s, 2004 224,500
70,000 Conseco Inc. sr. notes 10 1/2s, 2004 80,839
75,000 Reliance Group Holdings, Inc. sr. notes 9s, 2000 75,750
300,000 Reliance Group Holdings, Inc. sr. sub. deb. 9 3/4s, 2003 303,000
35,000 Sampoerna International Finance Co. 144A company guaranty
8 3/8s, 2006 (Indonesia) 35,497
40,000 Travelers Group, Inc. sr. notes 7 3/4s, 2026 39,771
----------
858,710
Lodging (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
300,000 Host Marriott Corp. sr. notes Ser. B, 9 1/2s, 2005 301,500
Medical Supplies and Devices (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
175,000 Dade International, Inc. 144A sr. sub. notes 11 1/8s, 2006 187,250
60,000 Wright Medical Technology, Inc. sr. secd. notes Ser. B, 10 3/4s, 2000 59,850
----------
247,100
Metals and Mining (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
195,000 Renco Metals, Inc. sr. notes 11 1/2s, 2003 203,288
50,000 Royal Oak Mines, Inc. 144A sr. sub. notes 11s, 2006 (Canada) 51,188
254,476
Motion Picture Distribution (0.6%)
- --------------------------------------------------------------------------------------------------------------------------
250,000 Act III Theatres, Inc. sr. sub. notes 11 7/8s, 2003 273,750
95,000 Cinemark USA, Inc. 144A sr. sub. notes 9 5/8s, 2008 95,000
----------
368,750
Office Equipment (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
250,000 United Stationer Supply, Inc. sr. sub. notes 12 3/4s, 2005 270,000
Oil and Gas (2.1%)
- --------------------------------------------------------------------------------------------------------------------------
100,000 Benton Oil & Gas Corp. sr. notes 11 5/8s, 2003 108,250
25,000 Chesapeake Energy Corp. sr. notes 10 1/2s, 2002 26,438
100,000 Chesapeake Energy Corp. sr. notes 9 1/8s, 2006 98,750
15,000 Citgo Petroleum Corp. sr. notes 7 7/8s, 2006 15,012
20,000 Cliffs Drilling Co. company guaranty Ser. B, 10 1/4s, 2003 20,800
95,000 Flores & Rucks, Inc. sr. notes 13 1/2s, 2004 111,625
35,000 Flores & Rucks, Inc. sr. sub. notes 9 3/4s, 2006 35,438
50,000 Gulf Canada Resources Ltd. sr. notes 8.35s, 2006 (Canada) 49,438
50,000 Lasmo (USA) Inc. company guaranty 7 1/2s, 2006 50,353
15,000 Maxus Energy Corp. notes 9 3/8s, 2003 15,000
10,000 Norcen Energy Resources Inc. deb. 7 3/8s, 2006 (Canada) 9,884
75,000 Plains Resources, Inc. sr. sub. notes Ser. B, 10 1/4s, 2006 78,000
50,000 Transamerican Refining Corp. 1st mtge. variable rate Ser. 2, 16 1/2s,
(16s, 8/15/98), 2002 ++ 46,000
400,000 Transamerican Refining Corp. 1st. mtge. stepped-coupon Ser. 1, zero %
(18.5s, 2/15/98), 2002 ++ 298,000
255,000 Transtexas Gas Corp. sr. secd. notes 11 1/2s, 2002 270,938
100,000 Triton Energy sr. sub. notes zero %, 1997 92,000
----------
1,325,926
Paging (1.0%)
- --------------------------------------------------------------------------------------------------------------------------
10,000 A+ Network Inc. sr. sub. notes 11 7/8s, 2005 9,725
485,000 Arch Communications Group sr. disc. notes stepped-coupon zero %
(10 7/8s, 3/15/01), 2008 ++ 271,600
225,000 Mobilemedia Corp. sr. sub. notes 9 3/8s, 2007 180,000
200,000 Pronet, Inc. sr. sub. notes 11 7/8s, 2005 182,000
643,325
Paper and Forest Products (3.4%)
- --------------------------------------------------------------------------------------------------------------------------
250,000 Buckeye Cellulose Corp. sr. sub. notes 9 1/4s, 2008 250,000
50,000 Doman Industries Ltd. sr. notes 8 3/4s, 2004 (Canada) 46,500
100,000 Domtar, Inc. deb. 9 1/2s, 2016 (Canada) 104,500
300,000 Florida Coast Paper LLC 144A 1st. mtge. 12 3/4s, 2003 323,250
300,000 Four M Corp. 144A sr. notes 12s, 2006 318,000
200,000 Gaylord Container Corp. sr. sub. disc. deb. 12 3/4s, 2005 219,500
50,000 Gaylord Container Corp. sr. notes 11 1/2s, 2001 53,000
250,000 Rainy River Forest Products sr. notes 10 3/4s, 2001 (Canada) 269,063
225,000 Repap New Brunswick sr. notes 10 5/8s, 2005 (Canada) 226,688
250,000 Riverwood International company gtd. sr. sub. notes 10 7/8s, 2008 246,250
100,000 Stone Container Corp. 144A sr. notes 11 7/8s, 2016 101,750
----------
2,158,501
Pharmaceuticals (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
175,000 Phar-Mor, Inc. sr. notes 11.72s, 2002 181,563
Publishing (1.5%)
- --------------------------------------------------------------------------------------------------------------------------
200,000 Affinity Group sr. sub. notes 11 1/2s, 2003 206,000
285,000 American Media Operation, Inc. sr. sub. notes 11 5/8s, 2004 299,963
505,000 Marvel Holdings, Inc. sr. notes Ser. B, zero %, 1998 400,213
35,000 News America Hldgs, Inc. deb. 7.7s, 2025 32,716
----------
938,892
Real Estate Investment Trust (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
80,000 Rodamco N.V. notes 7.3s, 2005 (Netherlands) 79,713
125,000 Tanger Properties Ltd. Partnership guaranteed notes 8 3/4s, 2001 124,063
----------
203,776
Recreation (-%)
- --------------------------------------------------------------------------------------------------------------------------
10,000 Cobblestone Golf Group 144A sr. notes 11 1/2s, 2003 10,300
Restaurants (0.8%)
- --------------------------------------------------------------------------------------------------------------------------
500,000 FRD Acquisition 144A sr. notes 12 1/2s, 2004 507,500
Retail (2.1%)
- --------------------------------------------------------------------------------------------------------------------------
100,000 Brylane (L.P.) sr. sub. notes 10s, 2003 102,250
200,000 Federated Department Stores, Inc. sr. notes 8 1/2s, 2003 205,488
25,000 Federated Department Stores Inc. sr. notes 8 1/8s, 2002 25,266
5,000 Finlay Enterprises, Inc. sr. disc. deb. stepped-coupon zero %
(12s, 5/1/98), 2005 ++ 4,100
190,000 Finlay Enterprises, Inc. sr. notes 10 5/8s, 2003 192,375
50,000 K Mart Corp. deb. 7 3/4s, 2012 38,750
250,000 K Mart Corp. med. term notes 7.86s, 2002 221,793
25,000 Loehmanns, Inc. sr. notes 11 7/8s, 2003 26,500
250,000 Mothers Work, Inc. sr. notes 12 5/8s, 2005 264,375
105,000 Specialty Retailers, Inc. sr. sub. notes 11s, 2003 107,625
150,000 Waban, Inc. sr. sub. notes 11s, 2004 158,625
----------
1,347,147
Specialty Consumer Products (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
200,000 Apparel Retailers, Inc. deb. stepped-coupon Ser. B, zero %
(12 3/4s, 8/15/98), 2005 ++ 176,000
25,000 Coty Inc. gtd. sr. sub. notes 10 1/4s, 2005 26,438
50,000 Herff Jones, Inc. sr. sub. notes 11s, 2005 53,000
----------
255,438
Steel (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
200,000 Ispat Mexicana, S.A. deb. 10 3/8s, 2001 (Mexico) 197,000
Telecommunication (2.4%)
- --------------------------------------------------------------------------------------------------------------------------
110,000 Fonorola, Inc. sr. notes 12 1/2s, 2002 (Canada) 117,700
400,000 Hyperion Telecommunication sr. disc. notes stepped-coupon
Ser. B, zero % (13s, 4/15/01), 2003 ++ 248,000
400,000 International Cabletel, Inc. sr. notes stepped-coupon Ser. B, zero %
(11 1/2s, 2/1/01), 2006 ++ 240,000
700,000 Metrocall, Inc. sr. sub. notes 10 3/8s, 2007 581,000
50,000 Omnipoint Corp. 144A sr. notes 11 5/8s, 2006 52,000
5,000 Pricellular Wireless Corp. sr. disc. notes stepped-coupon zero %
(12 1/4s, 10/1/98), 2003 ++ 4,025
250,000 Rogers Cantel, Inc. deb. 9 3/8s, 2008 (Canada) 246,875
100,000 Winstar Communications, Inc. 144A units stepped-coupon sr. disc. notes
(14s, 10/15/00), 2005 ++ 56,000
----------
1,545,600
Telephone Services (2.9%)
- --------------------------------------------------------------------------------------------------------------------------
350,000 American Communication Services, Inc. sr. disc. notes
stepped-coupon zero % (12 3/4s, 4/1/01), 2006 ++ 185,500
275,000 Brooks Fiber Propertities sr. disc. notes stepped-coupon zero %
(10 7/8s, 3/1/01), 2006 ++ 169,125
382,000 GST Telecommunications, Inc. company guaranty stepped-coupon zero %
(13 7/8s, 15/15/00), 2005 ++ 207,235
260,000 ICG Holding Inc. company guaranty stepped-coupon zero %
(12 1/2s, 5/1/01), 2006 ++ 156,000
50,000 ICG Holding Inc. sr. disc. notes stepped-coupon zero %
(13 1/2s, 9/15/00), 2005 ++ 33,500
300,000 Intermedia Communications of Florida, Inc. sr. disc. notes
stepped-coupon zero % (12 1/2s, 5/15/01), 2006 ++ 187,500
25,000 Intermedia Communications of Florida, Inc. sr. notes Ser. B, 13 1/2s, 2005 28,620
350,000 MFS Communications sr. disc. notes stepped-coupon zero %
(8 7/8s, 1/1/01), 2006 ++ 245,000
15,000 MFS Communications sr. disc. notes stepped-coupon zero %
(9 3/8s, 1/15/99), 2004 ++ 12,600
250,000 Nextlink Communications sr. notes 12 1/2s, 2006 256,250
625,000 Teleport Communications Group Inc. sr. disc. notes stepped-coupon
zero % (11 1/8s, 7/1/01), 2007 ++ 400,000
-----------
1,881,335
Telephone Utility (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
60,000 Compania Telecom Chile notes 7 5/8s, 2006 (Chile) 60,361
Textiles and Apparel (1.7%)
- --------------------------------------------------------------------------------------------------------------------------
50,000 Dominion Textile USA Inc. gtd. sr. notes 9 1/4s, 2006 49,750
650,000 Guess Jeans, Inc. sr. sub. notes 9 1/2s, 2003 661,375
5,000 Polysindo Inernational Eka company guaranty 13s, 2001 (Indonesia) 5,550
150,000 Polysindo International Finance company guaranty 11 3/8s, 2006 (Indonesia) 157,875
205,000 Tultex Corp. sr. notes 10 5/8s, 2005 215,250
----------
1,089,800
Tobacco (-%)
- --------------------------------------------------------------------------------------------------------------------------
30,000 RJR Nabisco, Inc. notes 8 3/4s, 2005 29,441
----------
Total Corporate Bonds and Notes (cost $33,512,372) 36,213,979
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (18.5%) *
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY MORTGAGE PASS-THROUGH CERTIFICATES (10.6%) *
- --------------------------------------------------------------------------------------------------------------------------
Federal National Mortgage Association
$1,435,000 8s, TBA, October 16, 2026 1,447,556
232,800 pass-through certificates 8s, June 1, 2026 234,840
618,812 pass-through certificates 7 1/2s, July 1, 2026 611,460
271,605 7s, May 1, 2026 262,013
Government National Mortgage Association
2,648,709 7 1/2s, with various due dates from December 15, 2025 to September 15, 2026 2,615,604
1,663,798 7s, with various due dates from March 15, 2026 to June 15, 2026 1,601,407
----------
6,772,880
U.S. TREASURY OBLIGATIONS (7.9%)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Bonds
$65,000 8 1/8s, August 15, 2019 72,688
235,000 7 7/8s, February 15, 2021 256,665
U.S. Treasury Notes
1,430,000 7 1/2s, February 15, 2005 1,504,846
2,235,000 7s, July 15, 2006 2,281,443
1,490,000 U.S. Treasury STRIPS zero %, May 15, 2004 899,975
----------
5,015,617
----------
Total U.S. Government and Agency Obligations (cost $13,208,213) 11,788,497
FOREIGN GOVERNMENT BONDS AND NOTES (16.2%) *
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
AUD 185,000 Australia (Government of) bonds Ser. 803, 9 1/2s, 2003 160,875
CAD 385,000 Canada (Government of) bonds 7s, 2006 (Canada) 279,859
CAD 634,000 Canada (Government of) deb. 8 3/4s, 2005 518,169
CAD 770,000 Canada (Government of) deb. 7 1/2s, 2001 593,756
CAD 175,000 Canada (Government of) deb. Ser. A-76, 9s, 2025 147,512
DKK 4,030,000 Denmark (Government of) bonds 8s, 2003 749,550
DKK 1,690,000 Denmark (Kingdom of) bonds 9s, 2000 325,883
FRF 1,960,000 France Treasury bill 7s, 2000 408,713
FRF 1,160,000 France Treasury bill 4 1/2s, 1998 226,717
DEM 280,000 Germany (Federal Republic of) bonds 5 7/8s, 2000 191,410
DEM 570,000 Germany (Federal Republic of) bonds 5 3/4s, 2000 387,787
DEM 1,880,000 Germany (Federal Republic of) bonds Ser. 118, 5 1/4s, 2001 1,251,279
DEM 355,000 Germany (Federal Republic of) bonds Ser. 96, 6 1/4s, 2006 235,348
DEM 350,000 Germany ( Federal Republic of) bonds 7 3/8s, 2005 249,820
ITL 590,000 Italy (Government of) bonds 9 1/2s, 2001 410,250
ITL 1,700,000 Italy (Government of) bonds 9 1/2s, 2001 1,179,286
USD 80,000 Quebec (Province of) deb. Ser. NN, 7 1/8s, 2024 73,194
ESP 95,900,000 Spain (Government of) deb. 10.1s, 2001 824,124
SEK 2,100,000 Sweden (Government of) bonds 10 1/4s, 2000 355,975
SEK 1,900,000 Sweden (Government of) bonds 6s, 2005 263,026
GBP 55,000 United Kingdom Conversion stock 9s, 2000 91,780
GBP 215,000 United Kingdom Treasury bonds 8 1/2s, 2007 354,990
GBP 100,000 United Kingdom Treasury notes 7 3/4s, 2006 157,137
GBP 575,000 United Kingdom Treasury notes 7s, 2001 896,229
----------
Total Foreign Government Bonds and Notes (cost $10,724,830) 10,332,669
PREFERRED STOCKS (1.3%) *
NUMBER OF SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------------
1,000 California Federal Bank Ser. B, $10.625 exch. pfd. 110,000
1,750 Diva Systems Corp. Ser. C, $6.00 pfd. 15,313
2,500 El Paso Electric Co., $11.40 pfd. (2 double daggers) 287,500
1,000 First Nationwide Bank, $11.50 pfd. 113,000
304 Time Warner, Inc. 144A Ser. K, $10.25 pfd. 319,200
----------
Total Preferred Stocks (cost $811,454) 845,013
UNITS (1.2%) *
NUMBER OF UNITS VALUE
- --------------------------------------------------------------------------------------------------------------------------
20 Cobblestone Holdings, Inc. 144A units zero %, 2004 7,900
35 Diva Systems Corp. 144A units stepped-coupon zero % (13s, 5/15/01), 2006 ++ 19,950
150 Fitzgerald Gaming Co. units 13s, 2002 114,000
110 Interact Systems, Inc. 144A units stepped-coupon zero % (14s, 8/1/99), 2003 ++ 75,900
30 International Wireless Communications units zero %, 2001 15,900
180,000 RSL Communications Ltd. 144A units 12 1/4s, 2006 182,250
45 Sterling Chemical Holdings units stepped-coupon zero % (13 1/2s, 8/15/01), 2008 ++ 26,663
225 Terex Corp. 144A units 13 3/4s, 2002 236,813
155 Wireless One Inc. units stepped-coupon zero % (13 1/2s, 8/1/01), 2006 ++ 84,088
----------
Total Units (cost $943,121) 763,464
CONVERTIBLE BONDS AND NOTES (0.6%)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$105,000 Chiquita Brands cv. sr. notes 9 5/8s, 2001 107,100
250,000 Exide Corp. 144A cv. sr. sub. notes 2.9s, 2005 151,200
4,000 GST Telecommunications, Inc. cv. sr. disc. notes stepped-coupon zero %
(13 7/8s, 15/15/00), 2005 3,720
103,000 Pricellular Wireless Corp. 144A cv. sub. notes stepped-coupon zero %
(10 3/4s, 8/15/00), 2004 ++ 97,850
50,000 Winstar Communications. Inc. cv sr. disc. notes zero %, 2005 32,000
----------
Total Convertible Bonds and Notes (cost $273,305) 391,870
PURCHASED OPTIONS OUTSTANDING (0.1%) *
NUMBER OF EXPIRATION DATE/
CONTRACTS STRIKE PRICE VALUE
- --------------------------------------------------------------------------------------------------------------------------
ITL 600,000 Italian Government Bond Futures Contracts (Call) Nov. 96/$119.60 9,534
JPY 176,000 Japanese Government Bond Futures Contracts (Call) Nov. 96/$117.50 75,106
----------
Total Purchased Options Outstanding (cost $72,730) 84,640
ASSET-BACKED SECURITIES (0.1%) * (cost $69,847)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$70,000 Associates Manufactured Housing Ser. 96-1, Class A3, 7s, 2027 70,394
WARRANTS (-%) * + EXPIRATION
NUMBER OF WARRANTS DATE VALUE
- --------------------------------------------------------------------------------------------------------------------------
400 Hyperion Telecommunications 144A 4/15/01 4,000
25 Intermedia Communications 144A 6/1/00 1,000
----------
Total Warrants (cost $8,612) 5,000
SHORT-TERM INVESTMENTS (4.2%) * (cost $2,698,423)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$2,698,000 Interest in $374,793,000 joint repurchase agreement dated
September 30, 1996 with Morgan Stanley & Co. Inc. due
October 1, 1996 with respect to various U.S. Treasury
obligations -- maturity value of $2,698,423 for an
effective yield of 5.65% 2,698,423
- --------------------------------------------------------------------------------------------------------------------------
Total Investments (cost $62,322,907)*** 63,193,949
- --------------------------------------------------------------------------------------------------------------------------
* Percentages indicated are based on net assets of $63,817,094.
*** The aggregate identified cost on a tax basis is
$62,325,651, resulting in gross unrealized appreciation and
depreciation of $1,071,245 and $202,947, respectively,
or net unrealized appreciation of $868,298.
+ Non-income-producing security.
++ The interest rate and date shown parenthetically represent
the new interest rate to be paid and the date the fund will
begin receiving interest at this rate.
(2 double daggers) Income may be received in cash or additional securities at
the discretion of the issuer.
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).
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
Forward Currency Contracts to Buy at September 30, 1996
(aggregate face value $5,951,030
Unrealized
Aggregate Face Delivery Appreciation/
Market Value Value Date (Depreciation)
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Australian Dollars $ 640,699 $ 640,237 12/18/96 $ 462
British Pounds 176,389 176,118 12/18/96 271
Canadian Dollars 150,319 149,319 12/18/96 1,000
Deutshemarks 987,149 1,000,040 12/18/96 (12,891)
Euro Currency 251,042 253,960 12/18/96 (2,918)
French Francs 1,093,971 1,118,030 12/18/96 (24,059)
Italian Lira 473,429 474,550 12/18/96 (1,121)
Japanese Yen 1,832,535 1,890,970 12/18/96 (58,435)
Swedish Krona 247,878 247,806 12/18/96 72
- ---------------------------------------------------------------------------------------------
$(97,619)
- ---------------------------------------------------------------------------------------------
<CAPTION>
- ---------------------------------------------------------------------------------------------
Forward Currency Contracts to Sell at September 30, 1996
(aggregate face value $8,258,515
Unrealized
Market Value Aggregate Face Delivery Appreciation/
Value Date (Depreciation)
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Canadian Dollars $ 553,824 $ 549,871 12/18/96 $ (3,953)
Danish Krone 878,628 890,649 12/18/96 12,021
Deutshemarks 1,883,994 1,907,321 12/18/96 23,327
French Francs 388,146 397,480 12/18/96 9,334
Italian Lira 910,455 910,360 12/18/96 (95)
Japanese Yen 1,987,897 2,012,283 12/18/96 24,386
Spanish Peseta 453,746 456,838 12/18/96 3,092
Swedish Krona 530,153 530,622 12/18/96 469
Swiss Francs 592,955 603,091 12/18/96 10,136
- ---------------------------------------------------------------------------------------------
78,717
- ---------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<TABLE>
<CAPTION>
Statement of assets and liabilities
September 30, 1996 (Unaudited)
<S> <C>
Assets
- ------------------------------------------------------------------------------------------------------------------------
Investments in securities, at value (identified cost $62,322,907) (Note 1) $63,193,949
- ------------------------------------------------------------------------------------------------------------------------
Cash 210,500
- ------------------------------------------------------------------------------------------------------------------------
Dividends and interest receivable 1,325,163
- ------------------------------------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 656,203
- ------------------------------------------------------------------------------------------------------------------------
Receivable for securities sold 1,829,192
- ------------------------------------------------------------------------------------------------------------------------
Receivable for open forward currency contracts 84,570
- ------------------------------------------------------------------------------------------------------------------------
Receivable for closed forward currency contracts 66,514
- ------------------------------------------------------------------------------------------------------------------------
Unamortized organization expenses (Note 1) 45,654
- ------------------------------------------------------------------------------------------------------------------------
Total assets 67,411,745
Liabilities
- ------------------------------------------------------------------------------------------------------------------------
Distributions payable to shareholders 92,819
- ------------------------------------------------------------------------------------------------------------------------
Payable for securities purchased 3,164,045
- ------------------------------------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 66,521
- ------------------------------------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 19,948
- ------------------------------------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 19,813
- ------------------------------------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 1,294
- ------------------------------------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 44,355
- ------------------------------------------------------------------------------------------------------------------------
Payable for organization expenses (Note 1) 46,575
- ------------------------------------------------------------------------------------------------------------------------
Payable for open forward currency contracts 103,472
- ------------------------------------------------------------------------------------------------------------------------
Other accrued expenses 35,809
- ------------------------------------------------------------------------------------------------------------------------
Total liabilities 3,594,651
- ------------------------------------------------------------------------------------------------------------------------
Net assets $63,817,094
Represented by
- ------------------------------------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $62,733,518
- ------------------------------------------------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 136,463
- ------------------------------------------------------------------------------------------------------------------------
Accumulated net realized gain on investment and foreign currency transactions (Note 1) 97,402
- ------------------------------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments and assets and liabilities in foreign currencies 849,711
- ------------------------------------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to capital shares outstanding $63,817,094
Computation of net asset value and offering price
- ------------------------------------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share ($22,937,989 divided by 2,696,837 shares) $8.51
- ------------------------------------------------------------------------------------------------------------------------
Offering price per class A share (100/95.25 of $8.51)* $8.93
- ------------------------------------------------------------------------------------------------------------------------
Net asset value and offering price per class B share ($37,213,370 divided by 4,373,528 shares)** $8.51
- ------------------------------------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share ($3,665,735 divided by 430,977 shares) $8.51
- ------------------------------------------------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $8.51)* $8.80
- -----------------------------------------------------------------------------------------------------------------------
* 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 September 30,1996 (Unaudited)
<S> <C>
Investment Income:
- ---------------------------------------------------------------------------------------------------------------------
Interest income (net of foreign tax of $2,545) $1,644,879
- ---------------------------------------------------------------------------------------------------------------------
Dividends 23,123
- ---------------------------------------------------------------------------------------------------------------------
Total investment income 1,668,002
Expenses:
- ---------------------------------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 128,721
- ---------------------------------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 68,184
- ---------------------------------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 2,647
- ---------------------------------------------------------------------------------------------------------------------
Administrative services (Note 2) 2,321
- ---------------------------------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 16,454
- ---------------------------------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 108,206
- ---------------------------------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 5,464
- ---------------------------------------------------------------------------------------------------------------------
Amortization of organization expenses (Note 1) 706
- ---------------------------------------------------------------------------------------------------------------------
Reports to shareholders 41,851
- ---------------------------------------------------------------------------------------------------------------------
Registration fees 16,425
- ---------------------------------------------------------------------------------------------------------------------
Auditing 24,175
- ---------------------------------------------------------------------------------------------------------------------
Legal 5,899
- ---------------------------------------------------------------------------------------------------------------------
Postage 1,252
- ---------------------------------------------------------------------------------------------------------------------
Other 1,314
- ---------------------------------------------------------------------------------------------------------------------
Fees waived by Manager (Note 2) (108,773)
- ---------------------------------------------------------------------------------------------------------------------
Total expenses 314,846
- ---------------------------------------------------------------------------------------------------------------------
Expense reduction (Note 2) (19,963)
- ---------------------------------------------------------------------------------------------------------------------
Net expense 294,883
- ---------------------------------------------------------------------------------------------------------------------
Net investment income 1,373,119
- ---------------------------------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 109,627
- ---------------------------------------------------------------------------------------------------------------------
Net realized gain on written options (Notes 1 and 3) 650
- ---------------------------------------------------------------------------------------------------------------------
Net realized loss on foreign currency transactions (9,129)
- ---------------------------------------------------------------------------------------------------------------------
Net unrealized depreciation of assets and liabilities in foreign currencies during the period (21,331)
- ---------------------------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments during the period 896,947
- ---------------------------------------------------------------------------------------------------------------------
Net gain on investments 976,764
- ---------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $2,349,883
- ---------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
For the period
Six months February 26, 1996
ended (commencement of
September 30 operations) to
1996* March 31,1996
<S> <C> <C>
Increase in net assets
- --------------------------------------------------------------------------------------------------------------
Operations:
- --------------------------------------------------------------------------------------------------------------
Net investment income $1,373,119 $20,908
- --------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments and
foreign currency transactions 101,148 (3,208)
- --------------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of
investments and assets and liabilities in foreign currencies 875,616 (25,905)
- --------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations 2,349,883 (8,205)
- --------------------------------------------------------------------------------------------------------------
Distributions to shareholders
- --------------------------------------------------------------------------------------------------------------
From net investment income:
Class A (471,670) (7,673)
- --------------------------------------------------------------------------------------------------------------
Class B (693,872) (8,092)
- --------------------------------------------------------------------------------------------------------------
Class M (75,780) (1,000)
- --------------------------------------------------------------------------------------------------------------
Increase from capital share transactions (Note 4) 53,380,001 9,251,502
- --------------------------------------------------------------------------------------------------------------
Total increase in net assets 54,488,562 9,226,532
- --------------------------------------------------------------------------------------------------------------
Net assets
- --------------------------------------------------------------------------------------------------------------
Beginning of period 9,328,532 102,000
- --------------------------------------------------------------------------------------------------------------
End of period (including undistributed net investment income of
$136,463 and $4,666, respectively) $63,817,094 $9,328,532
- --------------------------------------------------------------------------------------------------------------
* Unaudited
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
For the period
Six months February 26, 1996 Six months
ended (commencement ended
September 30 of operations) to September 30
(unaudited) March 31 (unaudited)
- ------------------------------------------------------------------------------------------------------------------------------
1996 1996 1996
- ------------------------------------------------------------------------------------------------------------------------------
Class M Class B
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $8.38 $8.50 $8.38
- ------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------
Net investment income (d) .30 .04 (a) .28
- ------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments .11 (.13) .11
- ------------------------------------------------------------------------------------------------------------------------------
Total from investment operations .41 (.09) .39
- ------------------------------------------------------------------------------------------------------------------------------
Less distributions from:
- ------------------------------------------------------------------------------------------------------------------------------
Net investment income (.28) (.03) (.26)
- ------------------------------------------------------------------------------------------------------------------------------
Total distributions (.28) (.03) (.26)
- ------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $8.51 $8.38 $8.51
- ------------------------------------------------------------------------------------------------------------------------------
Total investment return at net asset value (%)(b)* 5.04 (1.41) 4.78
- ------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $3,666 $482 $37,213
- ------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%)(c)(d)* .76 0.14 1.00
- ------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets (%)(d)* 3.80 .50 3.56
- ------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%)* 82.59 18.98 82.59
- ------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Financial highlights (continued)
(For a share outstanding throughout the period)
For the period For the period
February 26, 1996 Six months February 26, 1996
(commencement ended (commencement
of operations) to September 30 of operations) to
March 31 (unaudited) March 31
- -------------------------------------------------------------------------------------------------------------------------------
1996 1996 1996
- -------------------------------------------------------------------------------------------------------------------------------
Class A
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $8.50 $8.38 $8.50
- -------------------------------------------------------------------------------------------------------------------------------
Investment operations
- -------------------------------------------------------------------------------------------------------------------------------
Net investment income (d) .03 (a) .31 .04 (a)
- -------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (.12) .11 (.13)
- -------------------------------------------------------------------------------------------------------------------------------
Total from investment operations (.09) .42 (.09)
- -------------------------------------------------------------------------------------------------------------------------------
Less distributions from:
- -------------------------------------------------------------------------------------------------------------------------------
Net investment income (.03) (.29) (.03)
- -------------------------------------------------------------------------------------------------------------------------------
Total distributions (.03) (.29) (.03)
- -------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $8.38 $8.51 $8.38
- -------------------------------------------------------------------------------------------------------------------------------
Total investment return at net asset value (%)(b)* (1.41) 5.18 (1.41)
- -------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $5,048 $22,938 $3,799
- -------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%)(c)(d)* .20 .63 .13
- -------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets (%)(d)* .44 3.95 .50
- -------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%)* 18.98 82.59 18.98
- -------------------------------------------------------------------------------------------------------------------------------
Not annualized.
(a) Per share net investment income has been
determined on the basis of the weighted average number of shares outsanding
during the period.
(b) Total investment return assumes dividend reinvestment and does not reflect the
effect of sales charges.
(c) Includes amounts paid through expense offset arrangements. (Note 2)
(d) Reflects an expense limitaiton applicable during the period. (Note 2).
As a result of such limitation, expenses of the Fund reflect a reduction of approximately
$.02 per share class for each of the periods February 26, 1996 (commencement of operations)
to March 31, 1996 and the six months ended September 30, 1996.
</TABLE>
Notes to financial statements
September 30, 1996 (Unaudited)
Note 1
Significant accounting policies
The fund is registered under the Investment Company Act of 1940, as
amended, as a diversified, open-end management 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. 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 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 higher than
class A shares and lower than class B 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 (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. 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. 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 value on the basis of valuations furnished by a pricing
service, approved by the Trustees, or dealers which determine
valuations for normal institutional-size trading units of such
securities using methods based on market transactions for comparable
securities and various relationships between securities that are
generally recognized by institutional traders.
B) Joint trading account Pursuant to an exemptive order issued by
the Securities and Exchange Commission, the fund may transfer
uninvested cash balances into a joint trading account, along with
the cash of other registered investment companies 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 the resale price,
including accrued interest. Putnam Management is responsible for
determining that the value of these underlying securities is at all
times at least equal to the resale price, including accrued
interest.
D) Security transactions and related investment income Security
transactions are accounted for on the trade date (date the order to
buy or sell is executed). Interest income is recorded on the accrual
basis. Dividend income is recorded on the ex-dividend date, except
that certain dividends from foreign securities are recorded as soon
as the fund is informed of the ex-dividend date. Discounts on zero
coupon bonds, original issue, stepped-coupon bonds and payment in
kind bonds are accreted according to the effective yield method.
E) Foreign currency translation The accounting records of the fund
are maintained in U.S. dollars. The market value of foreign
securities, currency holdings, other assets and liabilities are
recorded in the books and records of the fund after translation to
U.S. dollars based on the exchange rates on that day. The cost of
each security is determined using historical exchange rates. Income
and withholding taxes are translated at prevailing exchange rates
when accrued or incurred. The fund does not isolate that portion of
realized or unrealized gains or losses resulting from changes in the
foreign exchange rate on investments from fluctuations arising from
changes in the market prices of the securities. Such fluctuations
are included with the net realized and unrealized gain or loss on
investments. Net realized gains and losses on foreign currency
transactions represent net exchange gains or losses on closed
forward currency contracts, disposition of foreign currencies and
the difference between the amount of investment income and foreign
withholding taxes recorded on the fund's books and the U.S. dollar
equivalent amounts actually received or paid. Net unrealized gains
and losses on foreign currency transactions arise from changes in
the value of open forward currency contracts and assets and
liabilities other than investments at the period end, resulting from
changes in the exchange rate.
F) Forward currency contracts The fund may engage in forward
currency contracts, which are agreements between two parties to buy
and sell currencies at a set price on a future date, to protect
against a decline in value relative to the U.S. dollar of the
currencies in which its portfolio securities are denominated or
quoted (or an increase in the value of a currency in which
securities a fund intends to buy are denominated, when a fund holds
cash reserves and short-term investments). The U.S. dollar value of
forward currency contracts is determined using forward currency
exchange rates supplied by a quotation service. The market value of
the contract will fluctuate with changes in currency exchange rates.
The contract is "marked to market" daily and the change in market
value is recorded as an unrealized gain or loss. When the contract
is closed, the fund records a realized gain or loss equal to the
difference between the value of the contract at the time it was
opened and the value at the time it was closed. The fund could be
exposed to risk if the value of the currency changes unfavorably, if
the counterparties to the contracts are unable to meet the terms of
their contracts or if the fund is unable to enter into a closing
position.
G) Futures and options contracts The fund may use futures and
options contracts to hedge against changes in the values of
securities the fund owns or expects to purchase. The fund may also
write options on securities it owns or in which it may invest to
increase its current returns.
The potential risk to the fund is that the change in value of
futures and options contracts may not correspond to the change in
value of the hedged instruments. In addition, losses may arise from
changes in the value of the underlying instruments, if there is an
illiquid secondary market for the contracts, or if the counterparty
to the contract is unable to perform.
Futures contracts are valued at the quoted daily settlement prices
established by the exchange on which they trade. Exchange traded
options are valued at the last sale price, or if no sales are
reported, the last bid price for purchased options and the last ask
price for written options. Options traded over-the-counter are
valued using prices supplied by dealers.
H) TBA purchase commitments The fund may enter into "TBA" (to be
announced) purchase commitments to purchase securities for a fixed
unit price at a future date beyond customary settlement time.
Although the unit price has been established, the principal value
has not been finalized. However, the amount of the commitments will
not fluctuate more than 1.0% from the principal amount. The fund
holds, and maintains until settlement date, cash or high-grade debt
obligations in an amount sufficient to meet the purchase price, or
the fund may enter into offsetting contracts for the forward sale of
other securities it owns. Income on the securities will not be
earned until settlement date. TBA purchase commitments may be
considered securities in themselves, and involve a risk of loss if
the value of the security to be purchased declines prior to the
settlement date, which risk is in addition to the risk of decline in
the value of the fund's other assets. Unsettled TBA purchase
commitments are valued at the current market value of the underlying
securities, according to the procedures described under Security
valuation above.
Although the fund will generally enter into TBA purchase commitments
with the intention of acquiring securities for their portfolio or
for delivery pursuant to options contracts it has entered into, the
fund may dispose of a commitment prior to settlement if Putnam
Management deems it appropriate to do so.
I) Federal taxes It is the policy of the fund to distribute all of
its taxable income within the prescribed time and otherwise comply
with the provisions of the Internal Revenue Code applicable to
regulated investment companies. It is also the intention of the fund
to distribute an amount sufficient to avoid imposition of any excise
tax under Section 4982 of the Internal Revenue Code of 1986.
Therefore, no provision has been made for federal taxes on income,
capital gains or unrealized appreciation on securities held and for
excise tax on income and capital gains.
J) Distributions to shareholders Distributions to shareholders are
recorded by the fund on the ex-dividend date. At certain times, the
fund may pay distributions at a level rate even though, as a result
of market conditions or investment decisions, the fund may not
achieve projected investment results for a given period. The amount
and character of income and gains to be distributed are determined
in accordance with income tax regulations which may differ from
generally accepted accounting principles.
K) 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
Management fee, administrative
services, and other transactions
Compensation of Putnam Management, for management and investment
advisory services is paid quarterly based on the average net assets
of the fund. Such fee is based on the following annual rates: 0.70%
of the first $500 million of average net assets, 0.60% of the next
$500 million, 0.55% of the next $500 million, 0.50% 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 $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 agreed to limit the
fund's expenses to the extent that expenses (exclusive of interest,
taxes, deferred organizational, extraordinary expenses and credits
from PFTC, 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 administrative services to the fund. The aggregate amount of
all such reimbursements is determined annually by the Trustees.
Custodial functions for the fund's assets are provided by Putnam
Fiduciary Trust Company (PFTC), a wholly-owned subsidiary of Putnam
Investments, Inc. Investor servicing agent functions are provided to
the fund by Putnam Investor Services, a division of PFTC.
For the six months ended September 30, 1996 fund expenses were
reduced by $19,963 under expense offset arrangements with PFTC.
Investor servicing and custodian fees reported in the Statement of
operations exclude these credits. The fund could have invested a
portion of the assets utilized in connection with the expense offset
arrangements in an income producing asset if it had not entered into
such arrangements.
Trustees of the fund receive an annual Trustee's fee of $580, 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 six months ended September 30, 1996, Putnam Mutual Funds
Corp., acting as underwriter received net commissions of $37,489 and
$2,689 from the sale of class A and class M shares, respectively and
received $15,573 in contingent deferred sales charges from
redemptions of class B shares. A deferred sales charge of up to
1.00% is assessed on certain redemptions of class A shares. For the
six months ended September 30, 1996, Putnam Mutual Funds Corp.,
acting as underwriter received no monies on class A redemptions.
Note 3
Purchases and sales of securities
During the six months ended September 30, 1996, purchases and sales
of investment securities other than U.S. government obligations and
short-term investments aggregated $78,708,016 and $28,699,405,
respectively. Purchases and sales of U.S. government obligations
aggregated $13,963,589 and $13,914,690, respectively. In determining
the net gain or loss on securities sold, the cost of securities has
been determined on the identified cost basis.
Written option transactions during the year are summarized as
follows:
Contract Premiums
Amounts Received
- ----------------------------------------------------
Written options
outstanding at
beginning of period $ -- $ --
- ----------------------------------------------------
Options opened 200,000 650
Options expired (200,000) (650)
Options closed
- ----------------------------------------------------
Written options
outstanding at
end of period $ -- $ --
- ----------------------------------------------------
Note 4
Capital shares
At September 30, 1996, there was an unlimited number of shares of
beneficial interest authorized. Transactions in capital shares were
as follows:
For the six months
ended September 30, 1996
- ----------------------------------------------------
Class A Shares Amount
- ----------------------------------------------------
Shares sold 2,770,631 $23,157,240
- ----------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 41,322 346,818
- ----------------------------------------------------
2,811,953 23,504,058
Shares
repurchased (568,420) (4,760,720)
- ----------------------------------------------------
Net increase 2,243,533 $18,743,338
- ----------------------------------------------------
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 six months
ended September 30, 1996
- ----------------------------------------------------
Class B Shares Amount
- ----------------------------------------------------
Shares sold 4,299,767 $35,937,941
- ----------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 60,131 504,986
- ----------------------------------------------------
4,359,898 36,442,927
Shares
repurchased (588,606) (4,924,598)
- ----------------------------------------------------
Net increase 3,771,292 $31,518,329
- ----------------------------------------------------
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 six months
ended September 30, 1996
- ----------------------------------------------------
Class M Shares Amount
- ----------------------------------------------------
Shares sold 424,811 $3,546,510
- ----------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 6,545 54,908
- ----------------------------------------------------
431,356 3,601,418
Shares
repurchased (57,954) (483,084)
- ----------------------------------------------------
Net increase 373,402 $3,118,334
- ----------------------------------------------------
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
- ----------------------------------------------------
PUTNAM GROWTH FUNDS
Asia Pacific Growth Fund
Capital Appreciation Fund
Diversified Equity Trust
Europe Growth Fund
Global Growth Fund
Global Natural Resources Fund *
Health Sciences Trust
International Growth Fund +
International New Opportunities Fund
Investors Fund
New Opportunities Fund
OTC Emerging Growth Fund
Vista Fund
Voyager Fund
Voyager Fund II
PUTNAM GROWTH
AND INCOME FUNDS
Balanced Retirement Fund
Convertible Income-Growth Trust
Equity Income Fund
The George Putnam Fund of Boston
The Putnam Fund for Growth and Income
Growth and Income Fund II
International Growth and Income Fund
New Value Fund
Utilities Growth and Income Fund
PUTNAM INCOME FUNDS
American Government Income Fund
Diversified Income Trust
Diversified Income Trust II
Federal Income Trust
Global Governmental Income Trust
High Yield Advantage Fund
High Yield Trust
Income Fund
Intermediate U.S. Government
Income Fund
Preferred Income Fund
U.S. Government Income Trust
PUTNAM TAX-FREE
INCOME FUNDS
Municipal Income Fund
Tax Exempt Income Fund
Tax-Free High Yield Fund
Tax-Free Insured Fund
State tax-free income funds [DOUBLE DAGGER]
Arizona, California, Florida, Massachusetts, Michigan, Minnesota,
New Jersey, New York, Ohio and Pennsylvania
LIFESTAGESM FUNDS
Putnam Asset Allocation Funds--three investment portfolios that
spread your money across a variety of stocks, bonds, and money
market investments to help maximize your return and reduce your
risk.
The three portfolios:
Asset Allocation: Balanced Portfolio
Asset Allocation: Conservative Portfolio
Asset Allocation: Growth Portfolio
MOST CONSERVATIVE
INVESTMENTS [SECTION MARK]
Putnam money market funds: **
California Tax Exempt Money Market Fund
Money Market Fund
New York Tax Exempt Money Market Fund
Tax Exempt Money Market Fund
CDs and savings accounts++
* Formerly Natural Resources Fund
+ Formerly Overseas Growth Fund
[DOUBLE DAGGER]Not available in all states.
[SECTION MARK] Relative to above.
** An investment in a money market fund is neither
insured nor guaranteed by the U.S. government. These
funds are managed to maintain a price of $1.00 per
share, although there is no assurance that this
price will be maintained in the future.
++ Not offered by Putnam Investments. Certificates of
deposit offer a fixed rate of return and may be
insured up to certain limits by federal/state
agencies. Savings accounts may also be insured up
to certain limits. Please call your financial
advisor or Putnam at 1-800-225-1581 to obtain a
prospectus for any Putnam fund. It contains more
complete information, including charges and
expenses. Please read it carefully before you invest
or send money.
Our commitment to quality service
*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.
*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.*
*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.)
*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.
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.
Fund information
INVESTMENT MANAGER
Putnam Investment
Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
John A. Hill
Ronald J. Jackson
Elizabeth T. Kennan
Lawrence J. Lasser
Robert E. Patterson
Donald S. Perkins
George Putnam, III
Eli Shapiro
A.J.C. Smith
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
John D. Hughes
Senior Vice President and Treasurer
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Gary N. Coburn
Vice President
Neil J. Powers
Vice President and Fund Manager
Jennifer E. Leichter
Vice President and Fund Manager
D. William Kohli
Vice President and Fund Manager
Michael Martino
Vice President and Fund Manager
Mark J. Siegel
Vice President and Fund Manager
William N. Shiebler
Vice President
John R. Verani
Vice President
Paul M. O'Neil
Vice President
Beverly Marcus
Clerk and Assistant Treasurer
This report is for the information of shareholders of Putnam
Diversified Income Trust 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. You can also learn more
at Putnam Investments' website: http://www.putnaminv.com.
Shares of mutual funds are not deposits or obligations of, or
guaranteed or endorsed by, any financial institution, are not
insured by the Federal Deposit Insurance Corporation (FDIC), the
Federal Reserve Board or any other agency, and involve risk,
including the possible loss of principal amount invested.
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
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Bulk Rate
U.S. Postage
PAID
Putnam
Investments
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28364-896/2BQ/2BR 11/96
