Putnam
Diversified
Income
Trust II
SEMIANNUAL REPORT
September 30, 1997
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* "Through careful research and in-depth analysis of bond market
dynamics at home and abroad, we believed the best opportunities were in
both mortgage-backed securities and U.S. high-yield bonds and set our
allocations accordingly. Both sectors proved to be outstanding performers
for the fund."
-- Kenneth J. Taubes, manager
Putnam Diversified Income Trust II
CONTENTS
4 Report from Putnam Management
9 Fund performance summary
12 Portfolio holdings
34 Financial statements
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
Putnam Diversified Income Trust II reached the midpoint of fiscal 1998 with
gratifyingly positive results derived from its globally diverse portfolio of
fixed-income securities. The fund's carefully selected high-yield bonds led
the charge during the period, but the protective role of the fund's more
conservative sectors should not be overlooked. It is this diversification
across a broad band of the risk/return spectrum that gives your fund's
investment strategy much of its appeal.
Your fund's management team, with expertise as varied as the securities in
which the fund invests, closely monitors the world's fixed-income markets,
continually fine-tuning the portfolio and seeking attractive investment
opportunities. In the following report, your fund's managers review
performance so far in this fiscal year and discuss prospects for the remaining
half.
Respectfully yours,
/S/George Putnam
George Putnam
Chairman of the Trustees
November 19, 1997
Report from the Fund Managers
Jennifer E. Leichter
Kenneth J. Taubes
Michael Martino
D. William Kohli
Gail A. Attridge
The same positive trends that boosted Putnam Diversified Income Trust II's
performance in fiscal 1997 continued to influence results in the first half of
fiscal 1998. Due in large part to its emphasis on high-yield securities, your
fund delivered solid results for the six months ended September 30, 1997.
Taking full advantage of the fund's ability to diversify across the
fixed-income universe, we focused on what we believed were the most promising
areas of the market. The fund's relatively large position in U.S.
mortgage-backed securities and an increasing emphasis on emerging markets in
the international sector proved especially beneficial. For complete
performance information, refer to the summary that begins on page 9.
When the semiannual period began in April, U.S. bond market investors were
reacting -- and in some cases overreacting -- to the Federal Reserve Board's
March decision to raise short-term interest rates by a quarter of a percentage
point. Although this much-anticipated move was designed to keep inflation in
check, investor fears of an overheating economy caused most bonds to suffer
price declines. Since that time, however, the Fed has left rates unchanged
amid signs of moderate economic growth and few indications of inflationary
pressures. While some of our portfolio positioning strategies remained
unchanged during the period, other shifts were made to take advantage of this
market environment.
* MORTGAGE-BACKED SECURITIES CONTINUE TO DELIVER
Since your fund's inception, mortgage-backed securities have been a major
contributor to performance. In our first full report to shareholders, we
discussed our focus on these securities, which began to outperform U.S.
Treasury securities in early 1996. As their strong performance continued, we
maintained the fund's overweight position in this sector. Throughout the
period, mortgage-backed securities continued to provide higher yields than
other sectors of the U.S. investment-grade market, and were subject to reduced
prepayment risk because of the relatively steady interest rate environment.
Prepayment risk, which reduces the appreciation potential of mortgage-backed
securities, is greater during periods of declining interest rates, when
homeowners pay off their mortgages ahead of schedule to refinance. The fund's
mortgage-backed holdings made a positive contribution to returns and
represented approximately 12% of the portfolio's net assets at the fiscal
year's midpoint.
A notable change during the period was our decision to extend duration to take
advantage of price appreciation potential in the fund's investment-grade
holdings. An important tool for investment professionals, duration is managed
by changing the portfolio's mix of securities. Expressed in years, duration
measures a portfolio's sensitivity to changes in interest rates. While a
longer duration may allow the fund to take advantage of price appreciation, it
may dampen performance during periods of rising rates. Our duration strategy
proved effective, especially because of the favorable interest-rate
environment during the period.
* HIGH-YIELD CORPORATE BONDS: STARS OF SHOW
Non-investment-grade corporate bonds, along with emerging markets securities,
were the undisputed stars of the fixed-income market -- and your fund's
portfolio -- during the period. Continuing a trend that began in 1996, these
below-investment-grade securities delivered strong returns, despite a brief
downturn in March. The March decline was in response to the Fed's
interest-rate action and remarks by Chairman Alan Greenspan that the benign
economic environment appeared to be temporary. Interestingly, among the
hardest-hit high-yield sectors during this period were those that contributed
most to the fund's returns over the longer term. Our decision to stay the
course by maintaining a relatively large position in these industries -- and,
in fact, adding to many of them -- proved profitable.
[GRAPHIC OMITTED: horizontal bar chart TOP 5 COUNTRY ALLOCATIONS]
TOP 5 COUNTRY ALLOCATIONS* (INTERNATIONAL SECTOR)
Germany 4.8%
United Kingdom 4.5%
Mexico 3.4%
Brazil 2.6%
Canada 2.2%
Footnote reads:
*Based on net assets as of 9/30/97. Holdings will vary over time.
This list of stellar high-yield holdings is similar to that of a year ago, as
broadcasting, cable, radio, and long-distance telephone companies continue to
reap the rewards of deregulation. The Telecommunications Act of 1996 loosened
restrictions on these industries, allowing single companies to offer services
in more than one of these businesses and to own stations in more than
one market.
Once again, among the period's strongest performers were the bonds of
competitive local exchange carriers, or CLECs -- smaller telephone companies
that compete with the large telephone providers, such as the Bell operating
companies, within local markets. One example is WinStar Communications, Inc.,
which recently received authorization to provide service in Hawaii, its 28th
service area. WinStar now services 46 of the largest U.S. markets.
Just after the close of the period, CLEC bonds were given another boost when
WorldCom announced plans to purchase Brooks Fiber, another of your fund's
holdings. Merger and acquisition activity bodes well for high-yield corporate
bonds, since it often leads to credit upgrades. While these holdings, along
with others discussed in this report, were viewed favorably at the end of the
fiscal period, all portfolio holdings are subject to review and adjustment in
accordance with the fund's investment strategy and may vary in the future.
Broadcasting is another industry basking in the glow of the telecommunications
act. Jacor Communications, a holding that was increased during the period,
made a significant contribution to the portfolio and has taken advantage of
the deregulation, which allows ownership of multiple stations. Jacor owns and
operates 95 radio stations in 21 broadcast areas in the United States.
[GRAPHIC OMITTED: TOP 3 HOLDINGS PER SECTOR]
TOP 3 HOLDINGS PER SECTOR*
HIGH-YIELD BONDS
Transamerican Energy 144A senior discount notes, 2002 (zero coupon)
NEXTEL Communications, Inc.
Cencall Communications Corp.
FOREIGN BONDS
Federal Republic of Germany bonds, Series 97 6s 2007
United Kingdom Treasury bonds 7 1/2s, 2006
United Mexican States securities, Series B 6 1/4s, 2019
U.S. GOVERNMENT OBLIGATIONS
U.S. Treaury bonds, 6 5/8s, 2/15/27
Government National Mortgage Association , 7 1/2s, with due dates from
10/15/22 to 8/15/27
Federal National Mortgage Association, 7 1/2s, with due dates from
1/1/27 to 6/1/27
Footnote reads:
These holdings represent 20.1% of the fund's net assets as of 9/30/97.
Portfolio holdings will vary over time.
Two other broadcasting companies that have consistently boosted the fund's
performance are SFX Broadcasting, Inc. and Chancellor Broadcasting Company. At
the close of the period, other promising high-yield sectors included paper and
energy, satellite communications, and foreign cellular telephone services.
* FOCUS ON EMERGING MARKETS BOOSTS INTERNATIONAL HOLDINGS
Perhaps the most significant change to the fund's international bond holdings
was a shift of approximately 10% of net assets into emerging markets such as
Latin America and Eastern Europe. This move had a positive impact on
performance as these higher-yielding markets outperformed the more developed
markets during the period.
One example of a strong emerging market is Argentina, which has fully
recovered from the Mexican currency devaluation in 1994 and 1995 and has
established an environment of stable growth and low inflation. In fact,
according to The Wall Street Journal, Argentine government bonds now trade
nearly 30% higher than they did before the peso crisis began.
In Russia, the combination of aggressive political and economic reforms and a
booming stock market has contributed to a strong bond market.
Other positives among the fund's international holdings were the positions in
the United Kingdom, Canada, and Australia. At the close of the period, the
U.K. market was a top performer among core European markets. The strength of
this market is attributed to the perception that the Bank of England has
nearly finished tightening monetary policy and the expectation that the United
Kingdom will join Europe's Economic and Monetary Union.
* OUTLOOK: HIGH-YIELD FOCUS EXPECTED TO CONTINUE
At the close of the period, we remained optimistic about the future strength
of the corporate high-yield market. Merger and acquisition activity is
expected to continue, along with improved corporate earnings and cash flows,
which enable companies to pare down debt and pave the way for upgrades by
rating agencies. High-yield bonds should also remain a focus among our
international holdings, since we expect that emerging markets will continue to
benefit from moderate growth and low inflation. Among the fund's U.S.
investment-grade holdings, we will continue our focus on mortgage-backed
securities while carefully monitoring market conditions.
The views expressed here are exclusively those of Putnam Management. They are
not meant as investment advice. Although the described holdings were viewed
favorably as of 9/30/97, there is no guarantee the fund will continue to hold
these securities in the future. While U.S. government backing does not insure
principal, which will fluctuate, it does guarantee 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
This section provides information about your fund's performance, which
should always be considered in light of its investment strategy. Putnam
Diversified Income Trust II is designed for investors seeking high current
income consistent with capital preservation through U.S. government,
investment grade, high-yield, and international fixed-income securities.
TOTAL RETURN FOR PERIODS ENDED 9/30/97
Class A Class B Class M
(inception date) (2/26/96) (2/26/96) (2/26/96)
NAV POP NAV CDSC NAV POP
- ------------------------------------------------------------------------------
6 months 9.19% 3.96% 8.79% 3.79% 9.06% 5.52%
- ------------------------------------------------------------------------------
1 year 11.47 6.22 10.63 5.63 11.19 7.52
- ------------------------------------------------------------------------------
Life of fund 16.10 10.64 14.71 10.71 15.65 11.83
Annual average 9.84 6.57 9.01 6.61 9.58 7.29
- ------------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 9/30/97
Salomon Bros.
Lehman Bros. Non-U.S. First Boston Consumer
Aggregate World Govt. High Yield Price
Bond Index Bond Index Index Index
- ------------------------------------------------------------------------------
6 months 7.12% 4.34% 9.23% 0.75%
- -------------------------------------------------------------------------------
1 year 9.71 2.41 15.72 2.15
- -------------------------------------------------------------------------------
Life of fund 11.60 5.48 21.63 4.07
Annual average 7.17 3.42 13.15 2.55
- -------------------------------------------------------------------------------
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 9/30/97
Class A Class B Class M
- ------------------------------------------------------------------------------
Distributions (number) 6 6 6
- ------------------------------------------------------------------------------
Income $0.313936 $0.281777 $0.303171
- ------------------------------------------------------------------------------
Capital gains
- ------------------------------------------------------------------------------
Long term -- -- --
- ------------------------------------------------------------------------------
Short term -- -- --
- ------------------------------------------------------------------------------
Total $0.313936 $0.281777 $0.303171
- ------------------------------------------------------------------------------
Share value: NAV POP NAV NAV POP
- ------------------------------------------------------------------------------
3/31/97 $8.34 $8.76 $8.34 $8.34 $8.62
- ------------------------------------------------------------------------------
9/30/97 8.78 9.22 8.78 8.78 9.07
- ------------------------------------------------------------------------------
Current return (end of period)
- ------------------------------------------------------------------------------
Current dividend rate1 6.80% 6.47% 6.06% 6.55% 6.34%
- ------------------------------------------------------------------------------
Current 30-day SEC yield2 6.63 6.31 5.91 6.37 6.16
- ------------------------------------------------------------------------------
1 Income portion of most recent distribution, annualized and divided by
NAV or POP at end of period.
2 Based on investment income, calculated using SEC guidelines. Yields do
not reflect the expense limitation.
TERMS AND DEFINITIONS
Total return shows how the value of the fund's shares changed over time,
assuming you held the shares through the entire period and reinvested all
distributions in the fund.
Class A shares are generally subject to an initial sales charge.
Class B shares may be subject to a sales charge upon redemption.
Class M shares have a lower initial sales and a higher 12b-1 fee than
class A shares and no sales charge on redemption.
Net asset value (NAV) is the value of all your fund's assets, minus any
liabilities, divided by the number of outstanding shares, not including
any initial or contingent deferred sales charge.
Public offering price (POP) is the price of a mutual fund share plus the
maximum sales charge levied at the time of purchase. POP performance
figures shown here assume the maximum 4.75% sales charge for class A
shares and 3.25% for class M shares.
Contingent deferred sales charge (CDSC) is a charge applied at the time of
the redemption of class B shares and assumes redemption at the end of the
period. Your fund's CDSC declines from a 5% maximum during the first year
to 1% during the sixth year. After the sixth year, the CDSC no longer
applies.
COMPARATIVE BENCHMARKS
Lehman Brothers Aggregate Bond Index* is composed of securities from
Lehman Brothers Government/Corporate Bond Index, Mortgage-Backed
Securities Index, and the Asset-Backed Securities Index. Total return
comprises price appreciation/depreciation and income as a percentage of
the original investment. Indexes are rebalanced monthly by market
capitalization.
Salomon Brothers Non-U.S. World Government Bond Index* is a market
capitalization-weighted benchmark that tracks the performance of the
government bond markets tracked by the Salomon Brothers World Government
Bond Index, excluding the United States.
First Boston High Yield Index* is an unmanaged index of lower-rated,
higher-yielding U.S. corporate bonds. It includes over 180 issues with an
average maturity range of 7 to 10 years.
Consumer Price Index (CPI) is a commonly used measure of inflation; it
does not represent an investment return.
*Securities indexes assume reinvestment of all distributions and interest
payments and do not take in account brokerage fees or taxes. Securities in
the fund do not match those in the indexes and performance of the fund
will differ. It is not possible to invest directly in an index.
Portfolio of investments owned
September 30, 1997 (Unaudited)
<TABLE>
<CAPTION>
CORPORATE BONDS AND NOTES (45.8%) *
PRINCIPAL AMOUNT VALUE
Advertising (0.6%)
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------
$25,000 Adams Outdoor Advertising sr. notes 10 3/4s, 2006 $ 27,375
250,000 Katz Media Corp. company guaranty Ser. B,
10 1/2s, 2007 268,125
80,000 Lamar Advertising Co. sr. sub. notes 9 5/8s, 2006 84,200
200,000 Lamar Advertising Co. 144A sr. sub. notes 8 5/8s, 2007 199,500
40,000 Outdoor Communications Inc. sr. sub. notes 9 1/4s, 2007 39,750
100,000 Universal Outdoor, Inc. sr. sub. notes 9 3/4s, 2006 107,000
--------------
725,950
Aerospace and Defense (1.1%)
- ------------------------------------------------------------------------------------------------------------
450,000 Alliant Techsystems, Inc. sr. sub. notes 11 3/4s, 2003 498,375
50,000 Howmet Corp. sr. sub. notes 10s, 2003 54,500
65,000 L-3 Communications Corp. 144A sr. sub. notes
10 3/8s, 2007 69,875
40,000 Raytheon Co bonds 7.2s, 2027 39,925
260,000 Raytheon Co notes 6.45s, 2002 259,743
400,000 Sequa Corp. sr. sub. notes 9 3/8s, 2003 415,000
70,000 Tracor, Inc. sr. sub. notes 8 1/2s, 2007 71,750
--------------
1,409,168
Agriculture (0.7%)
- ------------------------------------------------------------------------------------------------------------
250,000 AGCO Corp. sr. sub. notes 8 1/2s, 2006 260,000
450,000 PMI Holdings Corp. sub. disc. deb. stepped-coupon
Ser. B, zero % (11 1/2s, 9/1/00), 2005 ++ 348,750
263,597 Premium Standard Farms, Inc. sr. secd. notes
11s, 2003 [2 DBL. DAGGERS]
289,957
--------------
898,707
Apparel (0.2%)
- ------------------------------------------------------------------------------------------------------------
30,000 GFSI, Inc. sr. sub. notes Ser. B, 9 5/8s, 2007 30,750
130,000 Sassco Fashions Ltd. sr. notes 12 3/4s, 2004 137,800
65,000 William Carter Co. 144A sr. sub. notes 12s, 2008 69,225
--------------
237,775
Automotive Parts (0.6%)
- ------------------------------------------------------------------------------------------------------------
30,000 A.P.S. Inc. company guaranty 11 7/8s, 2006 27,900
299,000 Aftermarket Technology Corp. sr. sub. notes 12s, 2004 333,385
200,000 Cambridge Industries Inc. 144A sr. sub. notes
10 1/4s, 2007 209,000
120,000 Harvard Industries Inc. sr. notes 11 1/8s, 2005
(In default) + 45,600
60,000 Hayes Wheels International, Inc. 144A sr. sub. notes
9 1/8s, 2007 61,800
90,000 Lear Corp. sub. notes 9 1/2s, 2006 98,550
--------------
776,235
Banks (1.5%)
- ------------------------------------------------------------------------------------------------------------
40,000 Advanta National Bank sr. notes 7.02s, 2001 39,540
65,000 Albank Capital Trust 144A company guaranty
9.27s, 2027 68,569
120,000 Banponce Financial Corp. med. term note 7 1/8s, 2002 123,041
170,000 Chevy Chase Savings Bank Inc. sub. deb. 9 1/4s, 2005 171,700
80,000 Delta Financial Corp. sr. notes 9 1/2s, 2004 81,000
45,000 Dime Capital Trust I bank guaranty Ser. A, 9.33s, 2027 48,623
110,000 Espirto Santo Centrais 144A sr. notes
10s, 2007 (Luxembourg) 110,000
250,000 First Nationwide Holdings sr. sub. notes 10 5/8s, 2003 275,000
25,000 First Nationwide Holdings sr. sub. notes 9 1/8s, 2003 26,000
60,000 First Union Corp. sub. notes 7s, 2006 60,854
45,000 Greenpoint Capital Trust I 144A company
guaranty 9.1s, 2027 47,475
95,000 Merita Bank Ltd. sub. notes 6 1/2s, 2006 (Finland) 92,531
200,000 Pioneer Americas Acquisition 144A sr. notes
9 1/4s, 2007 199,000
165,000 Polytama International notes 11 1/4s, 2007 160,463
60,000 Provident Capital Trust company guaranty 8.6s, 2026 60,980
40,000 Riggs Capital Trust 144A bonds 8 5/8s 41,070
105,000 Societe Generale 144A notes 7.85s, 2049 (France) 109,652
60,000 Sovereign Capital Trust 144A company guaranty
9s, 2027 62,810
105,000 Sparbanken Sverige AB (Swedbank) 144A sub.
7 1/2s, 2006 (Sweden) 108,120
50,000 State Development Bank of China notes
7 3/8s, 2007 (China) 50,536
50,000 Webster Capital Trust I 144A bonds 9.36s, 2027 54,266
--------------
1,991,230
Basic Industrial Products (0.3%)
- ------------------------------------------------------------------------------------------------------------
35,000 Astor Corp. 144A sr. sub. notes 10 1/2s, 2006 37,100
275,000 Clark-Schwebel sr. notes 10 1/2s, 2006 299,750
30,000 Roller Bearing Co. 144A sr. sub. notes 9 5/8s, 2007 30,675
--------------
367,525
Broadcasting (2.7%)
- ------------------------------------------------------------------------------------------------------------
120,000 Acme Television/Finance 144A sr. disc. notes stepped-
coupon zero % (10 7/8s, 9/30/00), 2004 ++ 87,900
200,000 Affinity Group sr. sub. notes 11 1/2s, 2003 214,500
140,000 Affinity Group Holdings sr. notes 11s, 2007 150,150
60,000 Azteca Holdings 144A sr. notes 11s, 2002 63,150
400,000 Benedek Communications Corp. sr. disc. notes stepped-
coupon zero % (13 1/4s, 5/15/01), 2006 ++ 282,000
215,000 Capstar Broadcasting sr. disc. notes stepped-coupon
zero % (12 3/4s, 2/1/02), 2009 ++ 147,275
95,000 Capstar Broadcasting sr. sub. notes 9 1/4s, 2007 97,375
55,000 Central European Media Enterprises Ltd. sr. notes
9 3/8s, 2004 55,138
90,000 Citadel Broadcasting Inc. 144A sr. sub. notes
10 1/4s, 2007 96,750
175,000 Commodore Media, Inc. sr. sub. notes stepped-
coupon 7 1/2s, (13 1/4s, 5/1/98), 2003 ++ 192,500
310,000 Fox/Liberty Networks LLC 144A sr. notes
8 7/8s, 2007 311,938
250,000 Granite Broadcasting Corp. sr. sub. notes 9 3/8s, 2005 246,250
40,000 Jacor Communications, Inc. company guaranty
9 3/4s, 2006 42,800
250,000 Jacor Communications, Inc. sr. sub. notes 10 1/8s, 2006 271,250
50,000 Pegasus Media & Communications notes Ser. B,
12 1/2s, 2005 55,875
200,000 Petracom Holdings, Inc. notes stepped-coupon
zero % (17 1/2s, 8/1/98), 2003 ++ 192,000
125,000 Radio One Inc. 144A sr. sub. notes stepped-coupon
7s, (12s, 5/1/00), 2004 ++ 120,000
235,000 SFX Broadcasting, Inc. sr. sub. notes Ser. B,
10 3/4s, 2006 256,150
250,000 Sinclair Broadcast Group, Inc. 144A sr. sub.
notes 9s, 2007 248,750
250,000 Turner Broadcasting Systems, Inc. sr. notes
8 3/8s, 2013 270,320
35,000 TV Azteca Sa De Cv sr. notes Ser. B,
10 1/2s, 2007 (Mexico) 37,275
--------------
3,439,346
Building and Construction (0.4%)
- ------------------------------------------------------------------------------------------------------------
35,000 Cia Latino Americana 144A company guaranty
11 5/8s, 2004 (Argentina) 37,013
200,000 GS Superhighway Holdings 144A sr. notes
10 1/4s, 2007 200,500
266,000 Terex Corp. sr. notes Ser. B, 13 1/4s, 2002 305,900
--------------
543,413
Building Products (0.7%)
- ------------------------------------------------------------------------------------------------------------
25,000 Building Materials Corp. sr. notes Ser. B, 8 5/8s, 2006 25,938
145,000 Cemex S.A. 144A bonds 12 3/4s, 2006 (Mexico) 175,088
160,000 Consumers International 144A sr. notes 10 1/4s, 2005 174,400
90,000 Presley Cos. sr. notes 12 1/2s, 2001 85,500
300,000 Southdown, Inc. sr. sub. notes Ser. B, 10s, 2006 333,000
100,000 Waxman Industries Inc. sr. notes stepped-coupon
Ser. B, zero % (12 3/4s, 6/1/99), 2004 ++ 87,000
--------------
880,926
Buses (0.3%)
- ------------------------------------------------------------------------------------------------------------
415,000 Consorcio/MCII Holdings sec. notes stepped-coupon
zero % (12s, 11/15/98), 2002 ++ 378,688
Business Equipment (0.1%)
- ------------------------------------------------------------------------------------------------------------
145,000 Axiohm Transactions Solutions 144A sr. sub. notes
9 3/4s, 2007 146,813
Business Services (0.1%)
- ------------------------------------------------------------------------------------------------------------
155,000 Bell & Howell Co. deb. stepped-coupon Ser. B,
zero % (11 1/2s, 3/1/00), 2005 ++ 129,425
5,000 Bell & Howell Operating Co. bonds 9 1/4s, 2000 5,231
10,000 Corporate Express, Inc. sr. sub. notes Ser. B,
9 1/8s, 2004 10,200
40,000 Outsourcing Solutions, Inc. sr. sub. notes Ser. B,
11s, 2006 44,400
--------------
189,256
Cable Television (2.6%)
- ------------------------------------------------------------------------------------------------------------
500,000 Adelphia Communications Corp. 144A sr. notes
9 7/8s, 2007 516,250
110,000 American Telecasting, Inc. sr. disc. notes stepped-
coupon zero % (14 1/2s, 8/15/00), 2005 ++ 37,400
55,000 American Telecasting, Inc. sr. disc. notes stepped-
coupon zero % (14 1/2s, 6/15/99), 2004 ++ 20,350
100,000 Australis Hldngs PTY Ltd. sr. disc, notes stepped-
coupon zero % (15s, 11/01/00), 2002 78,125
250,000 Century Communications Corp. sr. notes 8 7/8s, 2007 252,188
200,000 Charter Communications International, Inc. disc.
notes stepped-coupon Ser. B, zero %
(14s, 3/15/01), 2007 ++ 151,000
50,000 Comcast Corp. sr. sub. notes 9 3/8s, 2005 53,938
200,000 Comcast UK Cable, Ltd. deb. stepped-coupon zero %
(11.2s, 11/15/00), 2007 (Bermuda) ++ 157,000
210,000 Diamond Cable Communication Co. sr. disc. notes
stepped-coupon zero % (10 3/4s, 2/15/02), 2007
(United Kingdom) ++ 136,763
300,000 Diamond Cable Communication Co. sr. disc. notes
stepped-coupon zero % (11 3/4s, 12/15/00), 2005
(United Kingdom) ++ 224,625
90,000 Diamond Cable Communication Co. sr. disc. notes
stepped-coupon zero % (13 1/2s, 9/30/99), 2004
(United Kingdom) ++ 78,750
527,500 Falcon Holdings Group, Inc. sr. sub. notes 11s, 2003 [2 DBL. DAGGERS] 548,600
200,000 FrontierVision Holdings LP 144A sr. disc. notes stepped-
coupon zero % (11 7/8s, 9/15/01), 2007 ++ 136,000
50,000 Heartland Wireless Communications, Inc. sr. notes
Ser. D, 13s, 2003 20,500
200,000 Heartland Wireless Communications, Inc. 144A
sr. notes 13s, 2003 80,000
400,000 Jones Intercable, Inc. sr. sub. deb. 10 1/2s, 2008 438,000
100,000 Marcus Cable Co. (L.P.) sr. deb. 11 7/8s, 2005 109,375
10,000 Marcus Cable Co. (L.P.) sr. disc. notes stepped-
coupon zero % (14 1/4s, 6/15/00), 2005 ++ 8,300
245,000 UIH Australia/Pacific, Inc. 144A sr. disc. notes stepped-
coupon zero % (14s, 5/15/01), 2006 (Australia) ++ 175,788
150,000 UIH Australia/Pacific, Inc. sr. disc. notes stepped-
coupon Ser. B, zero % (14s, 5/15/01), 2006 (Australia) ++ 107,625
80,000 Wireless One, Inc. sr. notes 13s, 2003 38,400
--------------
3,368,977
Cellular Communications (2.7%)
- ------------------------------------------------------------------------------------------------------------
40,000 Airtouch Communications, Inc. notes 7 1/8s, 2001 40,875
1,020,000 Cencall Communications Corp. sr. disc. notes stepped-
coupon zero % (10 1/8s, 1/15/99), 2004 ++ 900,150
90,000 Comcast Cellular 144A sr. notes 9 1/2s, 2007 94,050
100,000 Dobson Communications Corp. sr. notes 11 3/4s, 2007 99,375
45,000 Grupo Iusacell S.A. 144A sr. notes 10s, 2004 (Mexico) 46,575
160,000 McCaw International Ltd sr. disc. notes stepped-
coupon zero % (13s, 4/15/02), 2007 ++ 96,400
450,000 Millicom International Cellular S.A. sr. disc. notes
stepped-coupon zero % (13 1/2s, 6/1/01), 2006
(Luxembourg) ++ 348,750
2,160,000 NEXTEL Communications, Inc. 144A sr. disc. notes
stepped-coupon zero % (10.65s, 9/15/02), 2007 ++ 1,331,100
275,000 Omnipoint Corp. sr. notes Ser. A, 11 5/8s, 2006 283,250
50,000 Omnipoint Corp. sr. notes 11 5/8s, 2006 51,500
5,000 Pricellular Wireless Corp. sr. disc. notes stepped-
coupon zero % (12 1/4s, 10/1/98), 2003 ++ 4,950
200,000 Pricellular Wireless Corp. sr. notes 10 3/4s, 2004 216,000
--------------
3,512,975
Chemicals (1.7%)
- ------------------------------------------------------------------------------------------------------------
200,000 Acetex Corp. sr. notes 9 3/4s, 2003 (Canada) 207,000
255,000 Harris Chemical Corp. sr. sub. notes 10 3/4s, 2003 263,288
150,000 Huntsman Corp. 144A sr. sub. notes 9 1/2s, 2007 157,500
150,000 Huntsman Corp. 144A sr. sub. notes FRN 9.187s, 2007 155,625
115,000 Huntsman Packaging Corp. 144A sr. sub. notes
9 1/8s, 2007 117,588
500,000 ISP Holdings, Inc. sr. notes Ser. B, 9 3/4s, 2002 540,000
30,000 Sociedad Quimica Y Minera de Chile S.A. 144A
bonds 7.7s, 2006 (Chile) 31,538
115,000 Sovereign Specialty Chemical 144A sr. sub. notes
9 1/2s, 2007 117,300
85,000 Sterling Chemicals Holdings sr. disc. notes stepped-
coupon zero % (13 1/2s, 8/15/01), 2008 ++ 59,925
210,000 Sterling Chemicals Inc. sr. sub. notes 11 3/4s, 2006 232,050
95,000 Trikem S.A. 144A bonds 10 5/8s, 2007 (Brazil) 95,594
200,000 Union Carbide Global Enterprises sr. sub. notes
Ser. B, 12s, 2005 227,750
--------------
2,205,158
Computer Services (0.2%)
- ------------------------------------------------------------------------------------------------------------
50,000 DecisionOne Corp. sr. sub. notes 9 3/4s, 2007 52,250
200,000 Unisys Corp. sr. notes 11 3/4s, 2004 226,000
--------------
278,250
Computer Software (0.2%)
- ------------------------------------------------------------------------------------------------------------
250,000 Computervision Corp. sr. sub. notes 11 3/8s, 1999 200,000
Consumer Durable Goods (0.7%)
- ------------------------------------------------------------------------------------------------------------
380,000 Coleman Escrow Corp. 144A sr. disc. notes
zero %, 2001 258,400
45,000 Coleman Escrow Corp. 144A sr. disc. notes
zero %, 2001 27,113
45,000 Foamex L.P. 144A sr. sub. notes 9 7/8s, 2007 46,575
115,000 Icon Fitness Corp. sr. disc. notes stepped-coupon
Ser. B, zero % (14s, 11/15/01), 2006 ++ 67,850
565,000 International Semi-Tech. Corp. sr. secd. disc. notes
stepped-coupon zero % (11 1/2s, 8/15/00), 2003
(Canada) ++ 353,125
130,000 Remington Products Co. sr. sub. notes Ser. B, 11s, 2006 109,200
--------------
862,263
Consumer Non Durables (0.1%)
- ------------------------------------------------------------------------------------------------------------
110,000 Viasystems Inc. 144A sr. sub. notes 9 3/4s, 2007 114,400
Consumer Products (0.2%)
- ------------------------------------------------------------------------------------------------------------
250,000 IHF Holdings, Inc. sr. disc. notes Ser. B, zero %
(15.0s,), 2004 ++ 217,500
110,000 Interact Systems, Inc. 144A sr. disc. notes stepped-
coupon zero % (14s, 8/1/99), 2003 ++ 44,000
--------------
261,500
Consumer Services (0.4%)
- ------------------------------------------------------------------------------------------------------------
500,000 Coinmach Corp. sr. notes Ser. B, 11 3/4s, 2005 553,750
Containers (0.1%)
- ------------------------------------------------------------------------------------------------------------
100,000 Innova S De R.L. 144A sr. notes 12 7/8s, 2007 (Mexico) 107,250
30,000 Ivex Packaging Corp. sr. sub. notes 12 1/2s, 2002 32,250
35,000 Radnor Holdings Inc. sr. notes 10s, 2003 36,225
--------------
175,725
Cosmetics (0.3%)
- ------------------------------------------------------------------------------------------------------------
40,000 French Fragrances, Inc. sr. notes Ser. B., 10 3/8s, 2007 41,600
550,000 Revlon Worldwide Corp. sr. disc. notes Ser. B,
zero %, 2001 400,125
--------------
441,725
Electric Utilities (1.2%)
- ------------------------------------------------------------------------------------------------------------
115,000 AES Corp. sr. sub. notes 8 3/8s, 2007 115,288
250,000 Calpine Corp. sr. notes 10 1/2s, 2006 271,875
100,000 Calpine Corp. sr. notes 9 1/4s, 2004 103,000
25,000 Commonwealth Edison Co. 1st mtge. 7s, 2005 25,217
85,000 Connecticut Light & Power Co. 1st mtge.
Ser. A, 7 7/8s, 2001 86,451
75,000 El Paso Electric Co. 1st mtge. Ser. B, 7 3/4s, 2001 76,943
60,000 Enersis S.A. notes 6.6s, 2026 (Chile) 59,682
60,000 Enersis S.A. ADR notes 7.4s, 2016 (Chile) 60,279
35,000 Illinova Corp. sr. notes 7 1/8s, 2004 35,386
45,000 Jersey Central Power & Light Co. 1st mtge.
med. term note 6.85s, 2006 44,978
165,000 Midland Funding Corp. deb. Ser. A, 11 3/4s, 2005 195,839
10,000 Niagara Mohawk Power Corp. med. term notes 9.99s, 2004 10,196
499,699 Northeast Utilities System notes Ser. A, 8.58s, 2006 495,401
--------------
1,580,535
Electronics (0.4%)
- ------------------------------------------------------------------------------------------------------------
60,000 Argo-Tech Corp. 144A sr. sub. notes 8 5/8s, 2007 60,150
45,000 Celestica International Ltd. 144A sr. sub. notes
10 1/2s, 2006 (Canada) 48,656
48,787 Cirent Semiconductor sr. sub. notes 10.22s, 2002 49,824
51,777 Cirent Semiconductor 144A sr. sub. notes
10.14s, 2004 52,942
90,000 DII Group, Inc. 144A sr. sub. notes 8 1/2s, 2007 90,113
50,000 HCC Industries, Inc. 144A sr. sub. notes 10 3/4s, 2007 53,000
90,000 Moog, Inc. sr. sub. notes Ser. B, 10s, 2006 95,400
45,000 Therma-Wave Inc. 144A sr. notes 10 5/8s, 2004 48,600
30,000 Wavetek Corp. 144A sr. sub. notes 10 1/8s, 2007 31,200
--------------
529,885
Energy-Related (0.4%)
- ------------------------------------------------------------------------------------------------------------
110,000 Arizona Public Service Co. sr. notes 6 3/4s, 2006 110,262
350,000 Panda Global Energy Co. 144A sr. notes 12 1/2s, 2004 341,250
--------------
451,512
Entertainment (0.2%)
- ------------------------------------------------------------------------------------------------------------
30,000 Time Warner Entertainment Inc. deb. 7 1/4s, 2008 30,487
40,000 Time Warner Entertainment Inc. notes 8 7/8s, 2012 45,663
140,000 Time Warner Entertainment sr. notes 8 3/8s, 2033 150,221
5,000 Time Warner, Inc. deb. 9.15s, 2023 5,786
--------------
232,157
Environmental Control (0.2%)
- ------------------------------------------------------------------------------------------------------------
80,000 Allied Waste Industries, Inc. company guaranty
10 1/4s, 2006 87,600
180,000 Allied Waste Industries, Inc. 144A sr. disc. notes
stepped-coupon zero % (11.3s, 6/1/02), 2007 ++ 121,950
90,000 WMX Technologies Inc. notes 7.1s, 2026 93,785
--------------
303,335
Finance (0.1%)
- ------------------------------------------------------------------------------------------------------------
100,000 Webster Financial Corp. sr. notes 8 3/4s, 2000 105,069
Financial Services (1.2%)
- ------------------------------------------------------------------------------------------------------------
150,000 Aames Financial Corp. sr. notes 9 1/8s, 2003 153,000
40,000 Allstate Financing II company guaranty 7.83s, 2045 39,966
100,000 Colonial Capital I 144A company guaranty 8.92s, 2027 102,906
135,000 Contifinancial Corp. sr. notes 8 3/8s, 2003 140,400
110,000 Dollar Financial Group Inc. sr. notes Ser. A,
10 7/8s, 2006 118,800
340,000 Federal National Mortgage Association Ser. E,
6 3/8s, 2007 249,744
35,000 First Financial Caribbean Corp. sr. notes 7.84s, 2006 36,201
80,000 Imperial Credit Capital Trust I 144A company
guaranty 10 1/4s, 2002 81,600
140,000 Imperial Credit Industries, Inc. sr. notes 9 7/8s, 2007 141,400
60,000 Intertek Finance PLC 144A sr. sub. notes
10 1/4s, 2006 63,150
135,000 Lehman Bros Holdings, Inc. med. term notes
6.4s, 1999 135,475
40,000 Ocwen Capital Trust I company guaranty
10 7/8s, 2027 42,450
55,000 Ocwen Federal Bank FSB sub. deb. 12s, 2005 61,050
35,000 Ocwen Financial Corp. notes 11 7/8s, 2003 39,550
25,000 Primark Corp. sr. notes 8 3/4s, 2000 25,844
55,000 Salomon, Inc. sr. notes 7s, 1999 55,658
60,000 Southern Investments Service Co. sr. notes
6.8s, 2006 (United Kingdom) 59,778
50,000 Travelers Capital Trust II bonds 7 3/4s, 2036 50,082
--------------
1,597,054
Food and Beverages (0.4%)
- ------------------------------------------------------------------------------------------------------------
95,000 Canandaigua Wine Co. sr. sub. notes Ser. C,
8 3/4s, 2003 96,425
105,000 Chiquita Brands cv. sr. notes 9 5/8s 109,463
30,000 Del Monte Corp. sr. sub. notes Ser. B, 12 1/4s, 2007 32,700
200,000 Doane Products Co. sr. notes 10 5/8s, 2006 215,500
25,000 MBW Foods, Inc. 144A sr. sub. notes 9 7/8s, 2007 25,875
60,000 Southern Foods Group 144A sr. sub. notes
9 7/8s, 2007 62,100
20,000 Windy Hill Pet Food Co. 144A sr. sub. notes
9 3/4s, 2007 20,700
--------------
562,763
Food Chains (0.6%)
- ------------------------------------------------------------------------------------------------------------
135,000 Ameriserve Food Co. 144A sr. sub. notes
10 1/8s, 2007 140,400
130,000 Fleming Companies, Inc. 144A sr. sub. notes
10 1/2s, 2004 134,550
200,000 Ralphs Grocery Co. sr. notes 10.45s, 2004 219,000
300,000 Nebco Evans Holding Co. 144A sr. disc. notes stepped-
coupon zero % (12 3/8s, 7/15/02), 2007 ++ 189,000
150,000 Southland Corp. deb. Ser. A, 4 1/2s, 2004 122,250
--------------
805,200
Gaming (2.2%)
- ------------------------------------------------------------------------------------------------------------
100,000 Argosy Gaming Co. 1st mtge. 13 1/4s, 2004 100,000
75,000 Casino America, Inc. sr. notes 12 1/2s, 2003 80,250
50,000 Casino Magic Finance Corp. 1st mtge. 11 1/2s, 2001 47,750
260,000 Coast Hotels & Casinos, Inc. company guaranty
Ser. B, 13s, 2002 293,150
370,000 Colorado Gaming & Entertainment Co. sr. notes
12s, 2003 [2 DBL. DAGGERS] 403,300
100,000 Grand Casinos, Inc. 1st mtge. 10 1/8s, 2003 106,000
75,000 Harveys Casino Resorts sr. sub. notes 10 5/8s, 2006 82,125
350,000 Hollywood Casino Corp. sr. notes 12 3/4s, 2003 383,250
70,000 Isle of Capri Black Hawk LLC 144A 1st mortgage
13s, 2004 70,700
550,000 Lady Luck Gaming Corp. 1st mtge. 11 7/8s, 2001 548,625
51,000 Louisiana Casino Cruises Corp. 1st mtge.
11 1/2s, 1998 51,510
250,000 PRT Funding Corp. sr. notes 11 5/8s, 2004 205,000
50,000 Showboat Marina Casino 1st mtge. Ser. B,
13 1/2s, 2003 57,500
250,000 Trump A.C. 1st mtge. 11 1/4s, 2006 242,500
125,000 Trump Holdings & Funding Corp. sr. notes
15 1/2s, 2005 145,938
--------------
2,817,598
Health Care (1.2%)
- ------------------------------------------------------------------------------------------------------------
140,000 Genesis Eldercare 144A sr. sub. notes 9s, 2007 139,300
30,000 Genesis Health Ventures, Inc. sr. sub. notes
9 1/4s, 2006 30,675
110,000 IMED Corp. 144A sr. sub. notes 9 3/4s, 2006 113,300
230,000 Integrated Health Services, Inc. 144A sr. sub. notes
9 1/4s, 2008 233,450
80,000 Manor Care, Inc. sr. notes 7 1/2s, 2006 81,958
385,000 Paracelsus Healthcare sr. sub. notes 10s, 2006 397,513
100,000 Quorum Health Group, Inc. sr. sub. notes 8 3/4s, 2005 104,250
170,000 Sun Healthcare Group Inc. 144A sr. sub. notes
9 1/2s, 2007 174,675
250,000 Urohealth Systems, Inc. 144A sr. sub. notes
12 1/2s, 2004 248,125
--------------
1,523,246
Hospital Management and Medical Services (0.1%)
- ------------------------------------------------------------------------------------------------------------
70,000 Tenet Healthcare Corp. sr. notes 8s, 2005 71,400
100,000 Tenet Healthcare Corp. sr. sub. notes 10 1/8s, 2005 109,500
--------------
180,900
Insurance (0.6%)
- ------------------------------------------------------------------------------------------------------------
95,000 Aegon NV sub. notes 8s, 2006 (Netherlands) 102,846
45,000 Conseco Inc. sr. notes 10 1/2s, 2004 53,710
100,000 Phoenix Home Life Mutual Insurance Co. 144A
notes 6.95s, 2006 100,100
125,000 Reliance Group Holdings, Inc. sr. notes 9s, 2000 130,745
300,000 Reliance Group Holdings, Inc. sr. sub. deb. 9 3/4s, 2003 317,418
75,000 Sampoerna International Finance Co. 144A company
guaranty 8 3/8s, 2006 (Indonesia) 75,049
--------------
779,868
Lodging (0.3%)
- ------------------------------------------------------------------------------------------------------------
300,000 Host Marriott Travel Plaza sr. notes Ser. B, 9 1/2s, 2005 317,250
120,000 Prime Hospitality Corp. sub. notes 9 3/4s, 2007 126,900
--------------
444,150
Medical Supplies and Devices (0.4%)
- ------------------------------------------------------------------------------------------------------------
275,000 Dade International, Inc. sr. sub. notes Ser. B,
11 1/8s, 2006 309,719
160,000 Wright Medical Technology, Inc. notes Ser. C
11 3/4s, 2000 164,000
--------------
473,719
Metals and Mining (0.4%)
- ------------------------------------------------------------------------------------------------------------
50,000 Acindar Industria Argentina de Aceros S.A. bonds
11 1/4s, 2004 (Argentina) 54,313
100,000 Anker Coal Group, Inc. 144A sr. notes 9 3/4s, 2007 101,500
80,000 Continental Global Group sr. notes Ser. B, 11s, 2007 85,600
50,000 Maxxam Group Holdings Inc. sr. notes Ser. B, 12s, 2003 54,000
75,000 Murrin Murrin Holdings 144A sr. notes 9 3/8s,
2007 (Australia) 75,750
150,000 NL Industries, Inc. sr. notes 11 3/4s, 2003 164,625
20,000 Royal Oak Mines, Inc. company guaranty Ser. B,
11s, 2006 (Canada) 19,300
--------------
555,088
Motion Picture Distribution (0.2%)
- ------------------------------------------------------------------------------------------------------------
130,000 AMC Entertainment, Inc. sr. sub. notes 9 1/2s, 2009 131,300
95,000 Cinemark USA, Inc. sr. sub. notes Ser. B 9 5/8s, 2008 97,731
--------------
229,031
Networking (0.1%)
- ------------------------------------------------------------------------------------------------------------
200,000 CellNet Data Systems, Inc. sr. disc. notes stepped-
coupon Ser. B, zero % (13s, 6/15/00), 2005 ++ 142,000
Office Equipment (0.2%)
- ------------------------------------------------------------------------------------------------------------
250,000 United Stationer Supply, Inc. sr. sub. notes
12 3/4s, 2005 283,750
Oil and Gas (3%)
- ------------------------------------------------------------------------------------------------------------
55,000 Abraxas Petroleum Corp. 144A sr. notes Ser. B,
11 1/2s, 2004 59,950
350,000 Benton Oil & Gas Co. sr. notes 11 5/8s, 2003 385,000
15,000 Citgo Petroleum Corp. sr. notes 7 7/8s, 2006 15,873
90,000 Coho Energy sr. sub. notes 8 7/8s, 2007 89,320
65,000 DI Industries Inc. sr. notes 8 7/8s, 2007 66,788
40,000 Daily Petroleum Service 144A company guaranty
9 3/4s, 2007 41,600
50,000 Gulf Canada Resources, Ltd. sr. notes 8.35s,
2006 (Canada) 54,166
250,000 Maxus Energy Corp. med. term notes 10.83s, 2004 285,703
65,000 Mesa Operating Co. company guaranty zero %
(11 5/8s, 7/01/01), 2006 ++ 52,000
150,000 Ocean Energy, Inc. 144A sr. sub. notes 8 7/8s, 2007 153,750
50,000 Pacalta Resources Ltd. sr. notes Ser. B, 10 3/4s,
2004 (Canada) 51,625
60,000 Parker Drilling Corp. sr. notes Ser. B, 9 3/4s, 2006 63,900
55,000 Petro Geo-Services AS ADR notes 7 1/2s,
2007 (Norway) 56,833
120,000 Pogo Producing Co. 144A notes 8 3/4s, 2007 122,400
65,000 Pride Petroleum Services, Inc. sr. notes 9 3/8s, 2007 69,550
100,000 Saga Petroleum ASA deb. 7 1/4s, 2027 (Norway) 99,271
45,000 Snyder Oil Corp. sr. sub. notes 8 3/4s, 2007 45,225
15,000 Texas Petrochemical Corp. sr. sub. notes 11 1/8s, 2006 16,350
1,810,000 Transamerican Energy 144A sr. disc. notes stepped-
coupon zero % (13s 6/01/99), 2002 ++ 1,438,950
480,000 Transamerican Energy 144A sr. notes 11 1/2s, 2002 476,400
180,000 TransTexas Gas Corp. 144A sr. sub. notes 13 3/4s, 2001 206,100
45,000 Wiser Oil Co. 144A sr. sub. notes 9 1/2s, 2007 43,425
--------------
3,894,179
Paging (0.5%)
- ------------------------------------------------------------------------------------------------------------
485,000 Arch Communications Group sr. disc. notes stepped-
coupon zero % (10 7/8s, 3/15/01), 2008 ++ 321,313
250,000 Mobile Telecommunications Tech. sr. notes
13 1/2s, 2002 283,750
--------------
605,063
Paper and Forest Products (1.9%)
- ------------------------------------------------------------------------------------------------------------
140,000 APP Finance II Mauritius Ltd. bonds 12s, 2049
(Indonesia) ++ 142,450
250,000 Buckeye Cellulose Corp. sr. sub. notes 9 1/4s, 2008 263,125
300,000 Florida Coast Paper LLC 1st mtge. Ser. B,
12 3/4s, 2003 326,250
300,000 Indah Kiat Financial Mauritius 144A company guaranty
10s, 2007 (Indonesia) 293,250
180,000 Pindo Deli Finance Mauritius Ltd. 144A company
guaranty 10 3/4s, 2007 (India) 183,600
200,000 PT Pabrik Kertas Tjiwi Kimia 144A company guaranty
10s, 2004 (Indonesia) 196,000
325,000 Repap New Brunswick sr. notes 10 5/8s,
2005 (Canada) 320,125
200,000 Riverwood International Corp. company guaranteed
sr. sub. notes 10 7/8s, 2008 199,500
50,000 Riverwood International Corp. 144A sr. notes
10 5/8s, 2007 52,250
250,000 Stone Container Corp. sr. notes 11 7/8s, 2016 276,250
160,000 Stone Container Corp. 144A company guaranty
11 1/2s, 2006 169,200
--------------
2,422,000
Pharmaceuticals and Biotechnology (0.2%)
- ------------------------------------------------------------------------------------------------------------
250,000 ICN Pharmaceuticals, Inc. 144a sr. notes 9 1/4s, 2005 262,500
Publishing (0.6%)
- ------------------------------------------------------------------------------------------------------------
285,000 American Media Operation, Inc. sr. sub. notes
11 5/8s, 2004 312,075
110,000 Garden State Newspapers 144A sr. sub. notes
8 3/4s, 2009 110,825
50,000 Hollinger International Publishing, Inc. company
guaranty 9 1/4s, 2007 52,125
50,000 Hollinger International Publishing, Inc. company
guaranty 8 5/8s, 2005 51,500
35,000 News America Holdings, Inc. deb. 7.7s, 2025 34,340
120,000 News America Holdings, Inc. deb. 7 3/4s, 2045 116,794
45,000 Von Hoffman Press Inc. 144A sr. sub. notes
10 3/8s, 2007 47,700
--------------
725,359
REIT's (Real Estate Investment Trust) (0.2%)
- ------------------------------------------------------------------------------------------------------------
180,000 HMH Properties, Inc. 144A sr. notes 8 7/8s, 2007
(Canada) 184,950
80,000 Rodamco N.V. notes 7.3s, 2005 (Netherlands) (R) 82,794
--------------
267,744
Railroads (0.1%)
- ------------------------------------------------------------------------------------------------------------
30,000 TFM S.A. de C.V. 144A company guaranty 10 1/4s,
2007 (Mexico) 31,650
170,000 TFM S.A. de C.V. 144A company guaranty
stepped-coupon zero % (11 3/4s,6/15/02), 2009 (Mexico) ++ 112,200
--------------
143,850
Restaurants (0.1%)
- ------------------------------------------------------------------------------------------------------------
100,000 FRD Acquisition Co. sr. notes Ser. B, 12 1/2s, 2004 107,000
Retail (1.3%)
- ------------------------------------------------------------------------------------------------------------
200,000 Federated Department Stores sr. notes 8 1/2s, 2003 217,046
25,000 Federated Department Stores, Inc. sr. notes
8 1/8s, 2002 26,614
177,000 Guitar Center Management Co. sr. notes
11s, 2006 196,470
225,000 Johns Manville International Group sr. notes
10 7/8s, 2004 253,688
200,000 K mart Corp. deb. 7 3/4s, 2012 190,000
250,000 K mart Corp. med. term notes 7.86s, 2002 248,143
250,000 Mothers Work, Inc. sr. notes 12 5/8s, 2005 272,500
60,000 NBTY, Inc. 144A sr. sub. notes 8 5/8s, 2007 59,700
50,000 Rite Aid Corp. notes 6.7s, 2001 50,318
125,000 Zale Corp. 144A sr. notes 8 1/2s, 2007 125,000
--------------
1,639,479
Satellite Services (1.4%)
- ------------------------------------------------------------------------------------------------------------
665,000 Echostar Satellite Broadcast Corp. sr. disc. notes stepped-
coupon zero % (13 1/8s, 3/15/00), 2004 ++ 556,106
150,000 Echostar DBS Corp. 144A company guaranty
12 1/2s, 2002 165,188
85,000 Esat Holdings Ltd. sr. notes stepped-coupon
zero % (12 1/2s, 2/01/02), 2007 (Ireland) ++ 55,675
120,000 Globalstar L.P. Capital 11 3/8s, 2004 124,800
100,000 Iridium LLC/Capital Corp. 144A sr. notes 13s, 2005 104,500
155,000 Iridium LLC/Capital Corp. 144A sr. notes 14s, 2005 167,400
300,000 Orbcomm Global Capital Corp. sr. notes Ser. B,
14s, 2004 312,000
160,000 Orion Network Systems sr. disc. notes stepped-
coupon zero % (12 1/2s, 1/15/02), 2007 ++ 110,400
95,000 Pratama Datakom Asia BV 144A company guaranty
12 3/4s, 2005 (Indonesia) 90,963
80,000 TCI Satellite Entertainment 144A sr. sub. notes
10 7/8s, 2007 84,000
--------------
1,771,032
Semiconductors (0.1%)
- ------------------------------------------------------------------------------------------------------------
85,000 Fairchild Semiconductor Corp. 144A sr. sub. notes
11.74s, 2008 85,850
80,000 Fairchild Semiconductor Corp. sr. sub. notes
10 1/8s, 2007 85,800
--------------
171,650
Shipping (0.1%)
- ------------------------------------------------------------------------------------------------------------
40,000 Newport News Shipbuilding sr. notes 8 5/8s, 2006 41,600
35,000 Newport News Shipbuilding sr. sub. notes
9 1/4s, 2006 36,750
--------------
78,350
Steel (0.5%)
- ------------------------------------------------------------------------------------------------------------
75,000 AK Steel Corp. sr. notes 9 1/8s, 2006 78,938
95,000 Altos Hornos de Mexico 144A bonds 11 3/8s,
2002 (Mexico) 102,956
70,000 Armco, Inc. 144A sr. notes 9s, 2007 70,875
210,000 Hylsa S.A. de C.V. 144A bonds 9 1/4s,
2007 (Mexico) 214,725
200,000 Northwestern Steel & Wire sr. notes 9 1/2s, 2001 194,500
--------------
661,994
Supermarkets (0.7%)
- ------------------------------------------------------------------------------------------------------------
100,000 Food 4 Less Supermarkets, Inc. deb. stepped-coupon
zero % (13 5/8s, 6/15/00), 2005 ++ 83,500
575,000 Jitney-Jungle Stores company guaranty 12s, 2006 648,313
120,000 Jitney-Jungle Stores 144A sr. sub. notes 10 3/8s, 2007 123,600
--------------
855,413
Telecommunications (2.9%)
- ------------------------------------------------------------------------------------------------------------
400,000 Advanced Radio Telecom Corp. sr. notes 14s, 2007 347,500
80,000 Antenna TV S.A. 144A sr. notes 9s, 2007 (Greece) 80,400
45,000 Consorcio Ecuatoriano 144A notes 14s, 2002
(Ecuador) 48,600
110,000 Fonorola, Inc. sr. notes 12 1/2s, 2002 (Canada) 123,200
90,000 Hermes Europe Railtel 144a sr. notes 11 1/2s, 2007
(Netherlands) 97,425
400,000 Hyperion Telecommunication Corp. sr. disc. notes
stepped-coupon Ser. B, zero % (13s, 4/15/01),
2003 ++ 280,500
175,000 Hyperion Telecommunications, Inc. 144A sr. notes
12 1/4s, 2004 191,625
250,000 ICG Holdings, Inc. sr. disc. notes stepped-coupon zero
% (13 1/2s, 9/15/00), 2005 ++ 200,000
300,000 Intermedia Communication, Inc. sr. disc. notes stepped-
coupon zero % (12 1/2s, 5/15/01), 2006 ++ 235,500
125,000 Intermedia Communications, Inc. sr. disc. notes stepped-
coupon Ser. B, zero % (11 1/4s, 7/15/02), 2007 ++ 86,250
375,000 International Cabletel, Inc. sr. notes stepped-coupon
Ser. B, zero % (11 1/2s, 2/01/01), 2006 ++ 280,313
115,000 ITC Deltacom, Inc. 144A sr. notes 11s, 2007 126,212
300,000 Metrocall, Inc. sr. sub. notes 10 3/8s, 2007 300,750
250,000 Nextlink Communications, Inc. sr. notes 12 1/2s, 2006 287,500
180,000 Nextlink Communications sr. notes 9 5/8s, 2007 186,300
250,000 Rogers Cantel, Inc. deb. 9 3/8s, 2008 (Canada) 267,500
195,000 Teleport Communications Group Inc. sr. disc. notes
stepped-coupon zero % (11 1/8s, 7/1/01), 2007 ++ 152,100
200,000 WinStar Communications, Inc. 144A sr. disc. notes
stepped-coupon zero % (14s, 10/15/00), 2005 ++ 140,000
30,000 WinStar Equipment Corp. company guaranty
12 1/2s, 2004 318,000
--------------
3,749,675
Telephone Services (1.7%)
- ------------------------------------------------------------------------------------------------------------
500,000 American Communication Services, Inc. sr. disc. notes
stepped-coupon zero % (12 3/4s, 4/1/01), 2006 ++ 350,000
90,000 American Communication Services, Inc. 144A sr. notes
13 3/4s, 2007 104,400
65,000 Brooks Fiber Properties, Inc. sr. disc. notes stepped-
coupon zero % (10 7/8s, 3/1/01), 2006 ++ 52,000
145,000 Brooks Fiber Properties, Inc. 144A sr. notes 10s, 2007 164,213
160,000 BTI Telecom Corp. 144A sr. notes 10 1/2s, 2007 165,600
60,000 Cia de Telecomunicaciones de Chile S.A. notes
7 5/8s, 2006 (Chile) 63,130
85,000 Globo Communicacoes 144A company guaranty
10 1/2s, 2006 (Brazil) 87,975
382,000 GST Telecommunications,Inc. company guaranty
stepped-coupon zero % (13 7/8s, 12/15/00),
2005 ++ 288,410
260,000 Intelcom Group (USA), Inc. company guaranty stepped-
coupon zero % (12 1/2s, 5/1/01), 2006 ++ 193,700
170,000 McLeodUSA, Inc. sr. disc. notes stepped-coupon
zero % (10 1/2s, 3/1/02), 2007 ++ 124,100
200,000 NTL Inc. sr. notes Ser. B, 10s, 2007 (United Kingdom) 209,000
180,000 RSL Communications, Ltd. company guaranty
12 1/4s, 2006 192,600
95,000 US West Capital Funding, Inc. company guaranty
6.95s, 2037 96,899
100,000 Viatel, Inc. sr. disc. notes stepped-coupon zero %
(15s, 1/15/00), 2005 ++ 73,500
--------------
2,165,527
Telephone Utilities (0.2%)
- ------------------------------------------------------------------------------------------------------------
300,000 WorldCom, Inc. notes 7 3/4s, 2007 314,502
Textiles (0.4%)
- ------------------------------------------------------------------------------------------------------------
50,000 Dominion Textile USA Inc. gtd. sr. notes 9 1/4s, 2006 52,500
40,000 Glenoit Corp. 144A sr. sub. notes 11s, 2007 42,800
110,000 Polymer Group, Inc. 144A sr, sub notes 9s, 2007 111,100
150,000 Polysindo International Finance company guaranty
11 3/8s, 2006 (Indonesia) 162,938
105,000 Tultex Corp. sr. notes 10 5/8s, 2005 116,025
--------------
485,363
Textiles and Apparel (0.3%)
- ------------------------------------------------------------------------------------------------------------
325,000 Guess Jeans, Inc. sr. sub. notes 9 1/2s, 2003 335,563
Tobacco (0.1%)
- ------------------------------------------------------------------------------------------------------------
25,000 Philip Morris Cos., Inc. deb. 7 3/4s, 2027 25,626
80,000 Philip Morris Cos., Inc. notes 7 1/2s, 2002 82,515
30,000 RJR Nabisco, Inc. notes 8 3/4s, 2005 31,714
--------------
139,855
Transportation (0.2%)
- ------------------------------------------------------------------------------------------------------------
30,000 Chemical Leaman Corp. 144A sr. notes 10 3/8s, 2005 31,425
150,000 Eletson Holdings, Inc. 1st pfd. mtge. notes 9 1/4s,
2003 (Greece) 153,750
110,000 Johnstown America Industries, Inc. 144A sr. sub.
notes 11 3/4s, 2005 118,250
--------------
303,425
Wireless Communications (0.1%)
- ------------------------------------------------------------------------------------------------------------
250,000 International Wireless Communications, Inc. sr. disc.
notes zero %, 2001 142,500
--------------
Total Corporate Bonds and Notes
(cost $56,426,923) $ 58,798,638
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (23.3%) *
PRINCIPAL AMOUNT VALUE
U.S. Government Agency Mortgage Obligations (14.5%)
- ------------------------------------------------------------------------------------------------------------
$ 808,653 Federal Home Loan Mortgage Corp. 8 1/2s, with due
dates from April 1, 2026 to January 1, 2027 $ 845,044
Federal National Mortgage Association
3,465,482 7 1/2s, with due dates from January 1, 2027 to
June 1, 2027 3,522,875
100,664 7s, January 1, 2027 100,254
969,598 6 1/2s, with due dates from February 1, 2027 to
August 1, 2027 944,148
Government National Mortgage Association
805,000 8 1/2s, TBA, October 16, 2027 842,231
2,196,616 8 1/2s, with due dates from February 15, 2026 to
August 15, 2027 2,298,212
1,736,631 8s, with due dates from January 15, 2026 to
February 15, 2027 1,795,244
3,460,000 7 1/2s, TBA, October 16, 2027 3,519,443
4,201,404 7 1/2s, with due dates from October 15, 2022 to
August 15, 2027 4,281,184
505,000 5 1/2s, TBA, October 16, 2027 504,525
--------------
18,653,160
U.S. Treasury Obligations (8.8%)
- ------------------------------------------------------------------------------------------------------------
U.S. Treasury Bonds
5,503,000 6 5/8s, February 15, 2027 5,634,577
1,690,000 6 1/2s, November 15, 2026 1,700,292
U.S. Treasury Notes
695,000 6 1/4s, August 31, 2002 701,297
710,000 6 1/4s, March 31, 1999 714,991
305,000 6 1/8s, August 15, 2007 305,143
1,155,000 6s, July 31, 2002 1,155,000
1,045,000 5 7/8s, July 31, 1999 1,045,815
--------------
11,257,115
--------------
Total U.S. Government and Agency Obligations (cost $29,435,965) $ 29,910,275
FOREIGN GOVERNMENT BONDS AND NOTES (15.4%) *
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
ARP 959,000 Argentina (Republic of) bonds 9 3/4s, 2027 $ 965,713
AUD 830,000 Australia (Government of) bonds Ser. 206, 10s, 2006 755,011
USD 1,195,000 Bank of Foreign Economic Affairs of Russia
(Vnesheconombank) non performing loan + 1,238,319
USD 1,024,000 Bank of Foreign Economic Affairs of Russia
(Vnesheconombank) principal loan FRN
Libor plus 13/16s, 2020 +##+++ 762,880
CAD 780,000 Canada (Government of) bonds Ser. WB60, 7 1/4s, 2007 626,090
DKK 6,083,000 Denmark (Government of) bonds 7s, 2026 903,154
FRF 10,665,000 France Treasury Bill notes 4 3/4s, 2002 1,804,846
DEM 3,165,000 Germany (Federal Republic of) bonds Ser. 97, 6 1/2s, 2027 1,614,855
DEM 1,825,000 Germany (Federal Republic of) bonds, Ser. 92, 2002 1,173,140
DEM 5,300,000 Germany (Federal Republic of) bonds Ser. 97, 6s, 2007 3,114,991
FRF 870,000 Ivory Coast -- FLIRB collateralized FRB 2s, 2049 ## 56,443
FRF 870,000 Ivory Coast -- PDIFRB bonds 1.9s, 2049 ## 63,798
NZD 670,000 New Zealand (Government of) bonds 10s, 2002 482,284
NZD 485,000 New Zealand (Government of) bonds 8s, 2004 332,025
PEN 430,000 Peru (Government of) Ser. US, 4s, 2017 287,563
USD 260,000 Quebec (Province of) deb. Ser. NN, 7 1/8s, 2024 255,671
ZAR 938,000 South Africa (Republic of) bonds Ser. 153, 13s, 2010 189,213
TRL 9,090,000 Turkey Treasury bill zero %, 1998 238,938
GBP 640,000 United Kingdom Treasury bonds 8s, 2021 1,214,816
GBP 1,655,000 United Kingdom Treasury bonds 7 1/2s, 2006 2,863,910
GBP 475,000 United Kingdom Treasury bonds 7s, 2002 784,057
--------------
Total Foreign Government Bonds and Notes (cost $20,606,141) $ 19,727,717
BRADY BONDS (8.5%) *
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
$ 1,668,480 Argentina (Republic of) deb. FRB 6.688s, 2005 $ 1,589,227
1,900,673 Brazil (Government of) Ser. EI-L, FRB 6.875s, 2006 1,615,572
1,706,760 Brazil (Government of) FRB 8s, 2014 +++ 1,600,088
558,000 Bulgaria (Government of) deb. Ser. PDI, FRB
6.688s, 2011 449,190
681,000 Philippines (Government of) Ser. B, FRB 6 1/4s,
2017 (Philippines) 599,280
960,000 United Mexican States Ser. D, 6.813s, 2019 918,000
3,334,000 United Mexican States sec. Ser. B, 6 1/4s, 2019 2,763,053
1,500,000 Venezuela (Government of) deb. Ser. DL, FRB
6 3/4s, 2007 1,432,500
--------------
Total Brady Bonds (cost $9,303,057) $ 10,966,910
PREFERRED STOCKS (4.3%) *
NUMBER OF SHARES VALUE
- ------------------------------------------------------------------------------------------------------------
2,000 AmeriKing, Inc. $3.25 pfd. [2 DBL. DAGGERS] $ 56,500
6,281 Cablevision Systems Corp. Ser. M, $11.125 dep.
shs. pfd. [2 DBL. DAGGERS] 689,340
4,000 California Federal Bancorp Inc. Ser. A, $2.281 pfd. 104,500
1,000 California Federal Bank Ser. B, $10.625 exch. pfd. 111,000
1,000 California Federated Bankcorp Inc. Ser. B, $11.50 pfd. 114,000
650 Capstar Broadcasting $12.00 pfd. 72,150
8,000 CGA Group Ltd. 144A Ser. A, 13.75% pfd. [2 DBL. DAGGERS] 204,000
2,575 Chevy Chase Capital Corp. Ser. A, $5.188 pfd. 134,222
1,150 Citadel Broadcasting Inc. 144A $13.25 131,388
10,750 Diva Systems Corp. Ser. C, $6.00 pfd. 123,625
90 Echostar Communications Corp. 144A 12.125% pfd. 93,600
2,947 El Paso Electric Co. $11.40 pfd [2 DBL. DAGGERS] 327,117
360 Fresenius Medical Care AG Ser. D, $9.00 pfd. (Germany) 373,500
267 ICG Holdings, Inc. $14.25 pfd. (Canada) 307,050
146 Intermedia Communication Ser. B, 13.50% pfd. 174,470
200 IXC Communications, Inc. 144A $12.50 pfd. [2 DBL. DAGGERS] 232,000
1,000 Nextel Communications Inc. 144A $13.00 pfd. [2 DBL. DAGGERS] 1,150,000
2,511 Nextlink Communications, Inc. 144A $7.00 pfd. 160,704
183 NTL Inc. 144A Ser. B, $13.00 pfd. [2 DBL. DAGGERS] 208,620
5,000 Public Service Co. of New Hampshire $2.65
1st mtge. pfd. 127,500
1,650 SFX Broadcasting, Inc. Ser. E, $12.625 pfd. [2 DBL. DAGGERS] 190,575
373 Spanish Broadcasting Systems 144A $14.25 pfd. [2 DBL. DAGGERS] 390,718
1,100 Von Hoffman Corp. 144A $13.50 pfd. 31,460
--------------
Total Preferred Stocks (cost $4,968,096) $ 5,508,039
UNITS (1.4%) *
NUMBER OF UNITS VALUE
- ------------------------------------------------------------------------------------------------------------
350 Australis Media, Ltd. units stepped-coupon zero %
(15 3/4s, 5/15/00), 2003 (Australia) ++ $ 290,500
4 Celcaribe S.A. 144A units stepped-coupon zero %
(13 1/2s, 3/15/98), 2004 ++ 80,000
335 Cellnet Data Systems, Inc. 144A units stepped-coupon
zero % (14s, 10/01/02), 2007 ++ 170,170
90 Colt Telecommunications Group PLC units
stepped-coupon zero % (12s, 12/15/01), 2006
(United Kingdom) ++ 67,500
120 Conecel Holdings Ltd. 144A units 14s, 2000 123,000
50 DecisionOne Corp. units stepped-coupon zero %
(11 1/2s, 8/01/02), 2008 ++ 33,250
35 Diva Systems Corp. 144A units stepped-coupon zero %
(13s, 5/15/01), 2006 ++ 30,669
200 Fitzgerald Gaming Co. units 13s, 2002 191,000
20 Hedstrom Holdings, Inc. units stepped-coupon zero %
(12s, 6/01/02), 2009 ++ 12,600
250 MGC Communications, Inc. 144A units 13s, 2004 258,125
60 Paging Network Do Brazil 144A units 13 1/2s,
2005 (Brazil) 58,950
55 Real Time Data 144A units stepped-coupon zero %
(13 1/2s, 8/15/09), 2006 ++ 32,175
90 Stone Container Corp. units sr. sub. 12 1/4s, 2002 93,375
155 Wireless One, Inc. units stepped-coupon zero %
(13 1/2s, 8/1/01), 2006 ++ 32,550
700 XCL Ltd. units cum. pfd. zero %, 2006 63,000
225 XCL Ltd. units sr. sec. notes 13 1/2s, 2004 236,250
--------------
Total Units (cost $1,661,240) $ 1,773,114
CONVERTIBLE BONDS AND NOTES (1.2%) *
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
$140,000 APP Global Finance (V) Ltd. 144A cv. sec. 2s, 2000
(United Kingdom) 151,550
150,000 Corporate Express, Inc. cv. notes 4 1/2s, 2000 143,625
250,000 Exide Corp. 144A cv. sr. sub. notes 2.9s, 2005 158,125
4,000 GST Telecommunications, Inc. cv. sr. disc. notes stepped-
coupon zero % (13 7/8s, 15/15/00), 2005 ++ 4,080
160,000 Integrated Device Technology, Inc. cv. sub. notes
5 1/2s, 2002 137,400
140,000 National Semiconductor Corp. 144A cv. deb.
6 1/2s, 2002 160,650
500,000 NovaCare, Inc. cv. sub. deb. 5 1/2s, 2000 480,313
103,000 Pricellular Wireless Corp. 144A cv. sub. notes stepped-
coupon zero % (10 3/4s, 8/15/00) 2004 ++ 88,323
60,000 VLSI Technology, Inc. cv. sub. notes 8 1/4s, 2005 62,925
150,000 WinStar Communications. Inc. 144A cv. sr. disc. notes
stepped-coupon zero % (14s, 10/15/00), 2005 ++ 113,625
--------------
Total Convertible Bonds and Notes (cost $1,378,914) $ 1,500,616
PURCHASE OPTIONS OUTSTANDING (0.5%) EXPIRATION
NUMBER OF DATE/
CONTRACTS STRIKE PRICE VALUE
- ------------------------------------------------------------------------------------------------------------
USD 835,000 U.S. Dollars in exchange for German Nov. 97/
Deutschemarks (put) 1.78 DEM $ 7,348
JPY 600,000 Japanese Government Bond futures contract Nov. 97/
(call) 118.0 JPY 529,236
USD 7,700,000 U.S. Treasury Bonds futures contract Nov. 10/
(call) $101.08 55,344
--------------
Total Purchased Options Outstanding (cost $519,240) $ 591,928
COMMON STOCKS (0.1%) *
NUMBER OF SHARES VALUE
- ------------------------------------------------------------------------------------------------------------
4,047 Advanced Radio Telecom Corp. + $ 37,182
50 AmeriKing, Inc. + 2,500
3,059 NEXTEL Communications, Inc. 144A (acquired
9/12/97, cost $49,361) [DBL. DAGGER] 83,912
900 Terex Corp. Rights 144A + 18,000
--------------
Total Common Stocks (cost $97,713) $ 141,594
COLLATERALIZED MORTGAGE OBLIGATIONS (0.4%) *
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
$193,436 Federal Home Loan Mortgage Association 7s,
February 15, 2027 $ 177,933
160,000 Government National Mortgage Association
Ser. 97-1, Class C, 7.5s, 2027 163,800
133,413 Rural Housing Trust Ser. 87-1, Class D, 6.33s,
April 1, 2026 132,705
--------------
Total Collateralized Mortgage Obligations (cost $460,375) $ 474,438
MUNICIPAL BONDS AND NOTES (0.1%) * (cost $ 120,000)
PRINCIPAL AMOUNT RATING VALUE
- ------------------------------------------------------------------------------------------------------------
$120,000 NJ Econ. Dev. Auth. MBIA Rev. Bonds, Ser. A,
7.425s, 2/15/29 Aaa $ 126,587
- ------------------------------------------------------------------------------------------------------------
ASSET-BACKED SECURITIES (0.1%) *
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
$50,000 Capita Equipment Receivables Trust Ser. 96-1,
Class A4, 6.28s, 2000 $ 50,242
70,000 Contimortgage Home Equity Loan Trust Ser. 97-1,
Class M2, 7.67s, 2025 71,334
--------------
Total Asset-Backed Securities (cost $119,977) $ 121,576
WARRANTS (0.1%) EXPIRATION
NUMBER OF WARRANTS DATE VALUE
- ------------------------------------------------------------------------------------------------------------
8,000 CGA Group Ltd. 144A 1/1/04 $ 80
85 Esat Holdings, Inc. (Ireland) 2/1/07 2,338
120 Globalstar Telecom 144A 2/15/04 14,400
400 Hyperion Telecommunications 4/15/01 16,000
110 Interact Systems Inc. 8/1/03 28
25 Intermedia Communications 6/1/00 1,719
30 International Wireless Communications
Holdings 144A 8/15/01 2,550
100 Iridium World Com 144A 7/15/05 15,000
160 McCaw International Ltd. 4/15/07 48
2,345 Nextlink Communications, Inc. 144A 2/1/09 23
160 Orion Network Systems 1/15/07 2,400
180 RSL Communications Ltd. 11/15/06 10,800
100 Spanish Broadcasting Systems 144A 6/30/99 19,000
45 Sterling Chemicals Holdings 8/15/08 1,710
250 Urohealth Systems Inc. 4/10/04 1,250
--------------
Total Warrants (cost $70,244) $ 87,346
SHORT-TERM INVESTMENTS (0.9%) * (cost $1,175,197)
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
$1,175,000 Interest in $226,927,000 joint repurchase agreement
dated September 30, 1997 with S.B.C Warburg Inc.
due October 1, 1997 with respect to various
U.S. Treasury obligations -- maturity value of
$1,175,197 for an effective yield of 6.05% $ 1,175,197
- ------------------------------------------------------------------------------------------------------------
Total Investments (cost $126,343,082) *** $ 130,903,975
- ------------------------------------------------------------------------------------------------------------
* Percentages indicated are based on net assets of $128,492,738.
*** The aggregate identified cost on a tax basis is $126,348,701,
resulting in gross unrealized appreciation and depreciation of
$6,114,882 and $1,559,608, respectively, or net unrealized appreciation
of $4,555,274.
+ Non-income-producing security.
++ The interest or dividend rate and date shown parenthetically
represent the new interest or dividend rate to be paid and the date the
fund will begin receiving interest or dividend income at this rate.
[2 DBL. DAGGERS] Income may be received in cash or additional securities at the
discretion of the issuer.
+++ A portion of the income will be received in additional securities.
[DBL. DAGGER] Restricted, excluding 144A securities, as to public resale. The
total market value of restricted securities held at September 30, 1997
was $83,912 or less than 0.1% of net assets.
## When-issued securities (Note 1).
(R) Real Estate Investment Trust.
144A after the name of a security represents those exempt from
registration under Rule 144A of the Securities Act of 1933. These
securities may be resold in transactions exempt from registration,
normally to qualified institutional buyers.
ADR, after the name of a foreign holding stands for American
Depository Receipts, representing ownership of foreign securities on
deposit with a domestic custodian bank.
TBA after the name of a security represents to be announced securities (Note 1).
The rate shown on Floating Rate Bonds (FRB) and Floating Rate Notes
(FRN) are the current interest rates shown at September 30, 1997 which
are subject to change based on the terms of the security.
Diversification by Country
Distribution of investments by country of issue at Report
September 30, 1997: (as percentage of Market Value)
Argentina 2.0% Mexico 3.4
Australia 1.1 Other 4.0
Brazil 2.6 United Kingdom 4.4
Canada 2.1 United States 72.9
France 1.6 Venezuela 1.1
Germany 4.8 ------
Total 100.0%
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
Forward Currency Contracts to Sell at September 30, 1997 (Unaudited)
(aggregate face value $26,432,558)
Unrealized
Market Aggregate Face Delivery Appreciation/
Value Value Date (Depreciation)
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------
Australian Dollars $ 948,383 $ 945,265 12/17/97 $ (3,118)
British Pounds 2,844,195 2,822,919 12/17/97 (21,276)
Danish Krone 402,280 397,654 12/17/97 (4,626)
Deutschemarks 11,858,553 11,622,773 12/17/97 (235,780)
Deutschemarks 58,681 60,931 6/5/98 2,250
French Francs 1,946,778 1,932,925 12/17/97 (13,853)
Italian Lira 1,724,555 1,686,449 12/17/97 (38,106)
Japanese Yen 4,481,248 4,466,042 12/17/97 (15,206)
New Zealand Dollars 1,155,399 1,141,920 12/17/97 (13,479)
South African Rand 100,236 97,315 12/17/97 (2,921)
Swedish Krona 142,408 138,510 12/17/97 (3,898)
Swiss Francs 1,143,896 1,119,855 12/17/97 (24,041)
- ----------------------------------------------------------------------------------------
$(374,054)
- ----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Forward Currency Contracts to Buy at September 30, 1997 (Unaudited)
(aggregate face value $18,983,739)
Unrealized
Aggregate Face Delivery Appreciation/
Market Value Value Date (Depreciation)
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------
Australian Dollars $ 276,992 $ 286,237 12/17/97 $ (9,245)
Canadian Dollars 204,162 202,540 12/17/97 1,622
Deutschemarks 3,655,075 3,575,352 12/17/97 79,723
Indonesian Rupiah 830,184 914,015 02/23/98 (83,831)
Italian Lira 4,190,301 4,099,705 12/17/97 90,596
Japanese Yen 6,631,366 6,629,388 12/17/97 1,978
Philippines Peso 153,627 160,600 3/25/98 (6,973)
Polish Zolty 319,006 332,977 6/5/98 (13,971)
Spanish Peseta 866,854 848,780 12/17/97 18,074
Swedish Krona 966,541 945,566 12/17/97 20,975
Swiss Francs 629,656 613,424 12/17/97 16,232
Venezuelan Bolivar 376,937 375,155 6/5/98 1,782
- ----------------------------------------------------------------------------------------
$116,962
- ----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
Futures Contracts Outstanding at September 30, 1997 (Unaudited)
Aggregate Expiration Unrealized
Total Value Face Value Date Appreciation
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------
DEC 97 10yr $3,118,511 $3,112,595 Dec. 97 $5,916
(Short)
- ----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
TBA Commitments Outstanding at September 30, 1997 (Unaudited)
(proceeds receivable $4,335,533)
Principal Settlement Market
Amount Date Value
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------
FHLMC 8 1/2s, October 1999 $ 807,000 10/14/97 $ 843,315
FNMA 7 1/2s, October 1999 3,522,380 10/14/97 3,522,380
- ----------------------------------------------------------------------------------------
$4,365,695
- ----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
Written Options Outstanding at September 30, 1997 (Unaudited)
(premium received $10,396)
Contract Expiration Date/ Market
Amount Strike Price Value
<S> <C> <C>
- ----------------------------------------------------------------------------------------
$835,000 U.S. Dollars in exchange for
Deutschemarks (call) Nov. 97/1.73 DEM $6,847
- ----------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
September 30, 1997 (Unaudited)
<S> <C>
Assets
- ---------------------------------------------------------------------------------------------------
Investments in securities, at value (identified cost $126,343,082) (Note 1) $130,903,975
- ---------------------------------------------------------------------------------------------------
Cash 2,415,422
- ---------------------------------------------------------------------------------------------------
Dividends, interest, and other receivables 2,145,158
- ---------------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 661,376
- ---------------------------------------------------------------------------------------------------
Receivable for securities sold 7,672,891
- ---------------------------------------------------------------------------------------------------
Receivable for variation margin 5,916
- ---------------------------------------------------------------------------------------------------
Receivable for open forward currency contracts 250,858
- ---------------------------------------------------------------------------------------------------
Receivable for closed forward currency contracts 85,051
- ---------------------------------------------------------------------------------------------------
Unamortized organization expenses (Note 1) 38,442
- ---------------------------------------------------------------------------------------------------
Total assets 144,179,089
Liabilities
- ---------------------------------------------------------------------------------------------------
Distributions payable to shareholders 205,711
- ---------------------------------------------------------------------------------------------------
Payable for securities purchased 9,927,733
- ---------------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 66,746
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 318,027
- ---------------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 36,585
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 3,288
- ---------------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 3,751
- ---------------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 95,713
- ---------------------------------------------------------------------------------------------------
Payable for open forward currency contracts 507,950
- ---------------------------------------------------------------------------------------------------
Payable for closed forward currency contracts 116,733
- ---------------------------------------------------------------------------------------------------
TBA sale commitments, at value (proceeds receivable $4,335,533) 4,365,695
- ---------------------------------------------------------------------------------------------------
Written options outstanding, at value (premiums received $10,396) (Note 3) 6,847
- ---------------------------------------------------------------------------------------------------
Other accrued expenses 31,572
- ---------------------------------------------------------------------------------------------------
Total liabilities 15,686,351
- ---------------------------------------------------------------------------------------------------
Net assets $128,492,738
Represented by
- ---------------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $123,622,817
- ---------------------------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 66,410
- ---------------------------------------------------------------------------------------------------
Accumulated net realized gain on investments and
foreign currency transactions (Note 1) 512,429
- ---------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments and assets and
liabilities in foreign currencies 4,291,082
- ---------------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to capital shares outstanding $128,492,738
Computation of net asset value and offering price
- ---------------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($49,277,175 divided by 5,610,132 shares) $8.78
- ---------------------------------------------------------------------------------------------------
Offering price per class A share (100/95.25 of $8.78)* $9.22
- ---------------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($70,936,522 divided by 8,076,009 shares)** $8.78
- ---------------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($8,279,041 divided by 942,422 shares) $8.78
- ---------------------------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $8.78)* $9.07
- ---------------------------------------------------------------------------------------------------
* 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, 1997 (Unaudited)
<S> <C>
Investment income:
- --------------------------------------------------------------------------------------------------
Dividends $ 150,627
- --------------------------------------------------------------------------------------------------
Interest 4,759,771
- --------------------------------------------------------------------------------------------------
Total investment income 4,910,398
- --------------------------------------------------------------------------------------------------
Expenses:
Compensation of Manager (Note 2) 402,627
- --------------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 182,949
- --------------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 6,619
- --------------------------------------------------------------------------------------------------
Administrative services (Note 2) 6,158
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 55,083
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 318,895
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 18,127
- --------------------------------------------------------------------------------------------------
Amortization of organization expenses (Note 1) 7,212
- --------------------------------------------------------------------------------------------------
Reports to shareholders 7,587
- --------------------------------------------------------------------------------------------------
Registration fees 7,835
- --------------------------------------------------------------------------------------------------
Auditing 23,308
- --------------------------------------------------------------------------------------------------
Legal 9,962
- --------------------------------------------------------------------------------------------------
Postage 9,407
- --------------------------------------------------------------------------------------------------
Other 7,545
- --------------------------------------------------------------------------------------------------
Fees waived by Manager (Note 2) (83,440)
- --------------------------------------------------------------------------------------------------
Total expenses 979,874
- --------------------------------------------------------------------------------------------------
Expense reduction (Note 2) (55,877)
- --------------------------------------------------------------------------------------------------
Net expenses 923,997
- --------------------------------------------------------------------------------------------------
Net investment income 3,986,401
- --------------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 58,803
- --------------------------------------------------------------------------------------------------
Net realized gain on written options (Notes 1 and 3) 38,320
- --------------------------------------------------------------------------------------------------
Net realized loss on foreign currency transactions (Note 1) (101,386)
- --------------------------------------------------------------------------------------------------
Net unrealized depreciation of assets and liabilities in
foreign currencies during the period (158,614)
- --------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments, futures, written options,
and TBA sale commitments during the period 6,182,918
- --------------------------------------------------------------------------------------------------
Net gain on investments 6,020,041
- --------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $10,006,442
- --------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Six months ended Year ended
September 30 March 31
1997* 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase in net assets
- ----------------------------------------------------------------------------------------------------------------------
Operations:
- ----------------------------------------------------------------------------------------------------------------------
Net investment income $ 3,986,401 $ 4,407,634
- ----------------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments and
foreign currency transactions (4,263) 622,841
- ----------------------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of investments
and assets and liabilities in foreign currencies 6,024,304 (1,707,317)
- ----------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 10,006,442 3,323,158
- ----------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ----------------------------------------------------------------------------------------------------------------------
From net investment income
Class A (1,611,601) (1,689,156)
- ----------------------------------------------------------------------------------------------------------------------
Class B (2,091,314) (2,371,438)
- ----------------------------------------------------------------------------------------------------------------------
Class M (255,377) (253,993)
- ----------------------------------------------------------------------------------------------------------------------
From net realized gain on investments
Class A -- (65,289)
- ----------------------------------------------------------------------------------------------------------------------
Class B -- (97,835)
- ----------------------------------------------------------------------------------------------------------------------
Class M -- (9,432)
- ----------------------------------------------------------------------------------------------------------------------
Increase from capital share transactions (Note 4) 20,413,299 93,866,742
- ----------------------------------------------------------------------------------------------------------------------
Total increase in net assets 26,461,449 92,702,757
Net assets
- ----------------------------------------------------------------------------------------------------------------------
Beginning of period 102,031,289 9,328,532
- ----------------------------------------------------------------------------------------------------------------------
End of period (including undistributed net investment
income of $66,410 and $38,301, respectively) $128,492,738 $102,031,289
- ----------------------------------------------------------------------------------------------------------------------
* Unaudited
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS A
- ------------------------------------------------------------------------------------------------------------------------------------
Six months
ended Year For the period
Per-share Sept. 30 ended Feb. 26, 1996+
operating performance (Unaudited) March 31 to March 31
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value,
beginning of period $8.34 $8.38 $8.50
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income (d) .31 .63 .04 (c)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .44 (.02) (.13)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .75 .61 (.09)
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.31) (.63) (.03)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- (.02) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.31) (.65) (.03)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $8.78 $8.34 $8.38
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 9.19* 7.36 (1.41)*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $49,277 $39,178 $3,799
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b)(d) .64* 1.25 .13*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%)(d) 3.68* 7.74 .50*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 116.37 169.27 18.98*
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) Includes amounts paid through expense offset arrangements (Note 2).
(c) Per share net investment income has been determined on the basis of the
weighted average number of shares outsanding during the period.
(d) Reflects an expense limitaton in effect during the period (Note 2). As a result of such limitation,
expenses of the fund reflect a reduction of approximately $0.01, $0.01, and $0.02 per share class for
the period ended September 30, 1997, the year ended March 31, 1997, and the period February 26, 1996
(commencement of operations) to March 31, 1996, respectively.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS B
- ------------------------------------------------------------------------------------------------------------------------------------
Six months
ended Year For the period
Per-share Sept. 30 ended Feb. 26, 1996+
operating performance (Unaudited) March 31 to March 31
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value,
beginning of period $8.34 $8.38 $8.50
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income (d) .28 .57 .03 (c)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .44 (.03) (.12)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .72 .54 (.09)
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.28) (.56) (.03)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- (.02) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.28) (.58) (.03)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $8.78 $8.34 $8.38
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 8.79* 6.56 (1.41)*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $70,937 $57,052 $5,048
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b)(d) 1.01* 2.00 .20*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%)(d) 3.32* 6.99 .44*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 116.37 169.27 18.98*
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) Includes amounts paid through expense offset arrangements (Note 2).
(c) Per share net investment income has been determined on the basis of the
weighted average number of shares outsanding during the period.
(d) Reflects an expense limitaton in effect during the period (Note 2). As a result of such limitation,
expenses of the fund reflect a reduction of approximately $0.01, $0.01, and $0.02 per share class for
the period ended September 30, 1997, the year ended March 31, 1997, and the period February 26, 1996
(commencement of operations) to March 31, 1996, respectively.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS M
- ------------------------------------------------------------------------------------------------------------------------------------
Six months
ended Year For the period
Per-share Sept. 30 ended Feb. 26, 1996+
operating performance (Unaudited) March 31 to March 31
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value,
beginning of period $8.34 $8.38 $8.50
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income (d) .30 .61 .04 (c)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .44 (.03) (.13)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .74 .58 (.09)
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.30) (.60) (.03)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- (.02) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.30) (.62) (.03)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $8.78 $8.34 $8.38
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 9.06* 7.09 (1.41)*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $8,279 $5,802 $482
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b)(d) .76* 1.50 .14*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%)(d) 3.58* 7.48 .50*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 116.37 169.27 18.98*
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) Includes amounts paid through expense offset arrangements (Note 2).
(c) Per share net investment income has been determined on the basis of the
weighted average number of shares outsanding during the period.
(d) Reflects an expense limitaton in effect during the period (Note 2). As a result of such limitation,
expenses of the fund reflect a reduction of approximately $0.01, $0.01, and $0.02 per share class for
the period ended September 30, 1997, the year ended March 31, 1997, and the period February 26, 1996
(commencement of operations) to March 31, 1996, respectively.
</TABLE>
Notes to financial statements
September 30, 1997
Note 1
Significant accounting policies
Putnam Diversified Income Trust II (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 approximately eight years, do not pay a front-end
sales charge, but pay a higher ongoing distribution fee than class A shares,
and are subject to a contingent deferred sales charge, if those shares are
redeemed within six years of purchase. Class M shares are sold with a maximum
front-end sales charge of 3.25% and pay an ongoing distribution fee that is
lower than class B shares and higher than class A shares.
Expenses of the fund are borne pro-rata by the holders of each class of
shares, except that each class bears expenses unique to that class (including
the distribution fees applicable to such class). Each class votes as a class
only with respect to its own distribution plan or other matters on which a
class vote is required by law or determined by the Trustees. Shares of each
class would receive their pro-rata share of the net assets of the fund, if the
fund were liquidated. In addition, the Trustees declare separate dividends on
each class of shares.
The following is a summary of significant accounting policies consistently
followed by the fund in the preparation of its financial statements. The
preparation of financial statements is in conformity with generally accepted
accounting principles and requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities. Actual
results could differ from those estimates.
A) Security valuation Investments for which market quotations are readily
available are stated at market value, which is determined using the last
reported sale price, or, if no sales are reported -- as in the case of some
securities traded over-the-counter -- the last reported bid price. Securities
quoted in foreign currencies are translated into U.S. dollars at the current
exchange rate. 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 value
following procedures approved by the Trustees. Market quotations are not
considered to be readily available for long-term corporate bonds and notes;
such investments are stated at fair value on the basis of valuations furnished
by a pricing service, approved by the Trustees, which determines valuations
for normal, institutional-size trading units of such securities using methods
based on market transactions for comparable securities and various
relationships between securities that are generally recognized by
institutional traders.
B) Joint trading account Pursuant to an exemptive order issued by the
Securities and Exchange Commission, the fund may transfer uninvested cash
balances into a joint trading account along with the cash of other registered
investment companies and certain other accounts managed by Putnam Investment
Management, Inc. ("Putnam Management"), the fund's Manager, a wholly-owned
subsidiary of Putnam Investments, Inc.. These balances may be invested in one
or more repurchase agreements and/or short-term money market instruments.
C) Repurchase agreements The fund, or any joint trading account, through its
custodian, receives delivery of the underlying securities, the market value of
which at the time of purchase is required to be in an amount at least equal to
the resale price, including accrued interest. Putnam Management is responsible
for determining that the value of these underlying securities is at all times
at least equal to the resale price, including accrued interest.
D) Security transactions and related investment income Security transactions
are accounted for on the trade date (date the order to buy or sell is
executed). Interest income is recorded on the accrual basis. Dividend income
is recorded on the ex-dividend date 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 discounts, stepped-coupon
bonds, and payment in kind bonds are accreted according to the
yield-to-maturity method. Any premium resulting from the purchase of a
step-coupon is amortized on a yield-to-maturity basis.
Securities purchased or sold on a when-issued or delayed delivery basis may be
settled a month or more after the trade date; interest income is accrued based
on the terms of the security. Losses may arise due to changes in the market
value of the underlying securities or if the counterparty does not perform
under the contract.
E) Foreign currency translation The accounting records of the fund are
maintained in U.S. dollars. The market value of foreign securities, currency
holdings, other assets and liabilities are recorded in the books and records
of the fund after translation to U.S. dollars based on the exchange rates on
that day. The cost of each security is determined using historical exchange
rates. Income and withholding taxes are translated at prevailing exchange
rates when accrued or incurred. The fund does not isolate that portion of
realized or unrealized gains or losses resulting from changes in the foreign
exchange rate on investments from fluctuations arising from changes in the
market prices of the securities. Such gains and losses are included with the
net realized and unrealized gain or loss on investments. Net realized gains
and losses on foreign currency transactions represent net exchange gains or
losses on closed forward currency contracts, disposition of foreign currencies
and the difference between the amount of investment income and foreign
withholding taxes recorded on the fund's books and the U.S. dollar equivalent
amounts actually received or paid. Net unrealized appreciation and
depreciation of assets and liabilities in foreign currencies arise from
changes in the value of open forward currency contracts and assets and
liabilities other than investments at the period end, resulting from changes
in the exchange rate.
F) Forward currency contracts The fund may engage in forward currency
contracts, which are agreements between two parties to buy and sell currencies
at a set price on a future date, to protect against a decline in value
relative to the U.S. dollar of the currencies in which its portfolio
securities are denominated or quoted (or an increase in the value of a
currency in which securities a fund intends to buy are denominated, when a
fund holds cash reserves and short-term investments). The U.S. dollar value of
forward currency contracts is determined using current forward currency
exchange rates supplied by a quotation service. The market value of the
contract will fluctuate with changes in currency exchange rates. The contract
is "marked to market" daily and the change in market value is recorded as an
unrealized gain or loss. When the contract is closed, the fund records a
realized gain or loss equal to the difference between the value of the
contract at the time it was opened and the value at the time it was closed.
The fund could be exposed to risk if the value of the currency changes
unfavorably, if the counterparties to the contracts are unable to meet the
terms of their contracts or if the fund is unable to enter into a closing
position.
G) Futures and options contracts The fund may use futures and options
contracts to hedge against changes in the values of securities the fund owns
or expects to purchase. The fund may also write options on securities it owns
or in which it may invest to increase its current returns.
The potential risk to the fund is that the change in value of futures and
options contracts may not correspond to the change in value of the hedged
instruments. In addition, losses may arise from changes in the value of the
underlying instruments, if there is an illiquid secondary market for the
contracts, or if the counterparty to the contract is unable to perform.
Futures contracts are valued at the quoted daily settlement prices established
by the exchange on which they trade. Exchange traded options are valued at the
last sale price, or if no sales are reported, the last bid price for purchased
options and the last ask price for written options. Options traded
over-the-counter are valued using prices supplied by dealers.
H) TBA purchase commitments The fund may enter into "TBA" (to be announced)
purchase commitments to purchase securities for a fixed unit price at a future
date beyond customary settlement time. Although the unit price has been
established, the principal value has not been finalized. However, the amount
of the commitments will not fluctuate more than 1.0% from the principal
amount. The fund holds, and maintains until settlement date, cash or
high-grade debt obligations in an amount sufficient to meet the purchase
price, or the fund may enter into offsetting contracts for the forward sale of
other securities it owns. Income on the securities will not be earned until
settlement date. TBA purchase commitments may be considered securities in
themselves, and involve a risk of loss if the value of the security to be
purchased declines prior to the settlement date, which risk is in addition to
the risk of decline in the value of the fund's other assets. Unsettled TBA
purchase commitments are valued at the current market value of the underlying
securities, according to the procedures described under "Security valuation"
above.
Although the fund will generally enter into TBA purchase commitments with the
intention of acquiring securities for their portfolio or for delivery pursuant
to options contracts it has entered into, the fund may dispose of a commitment
prior to settlement if Putnam Management deems it appropriate to do so.
I) TBA sale commitments The fund may enter into TBA sale commitments to hedge
its portfolio positions or to sell mortgage-backed securities it owns under
delayed delivery arrangements. Proceeds of TBA sale commitments are not
received until the contractual settlement date. During the time a TBA sale
commitment is outstanding, equivalent deliverable securities, or an offsetting
TBA purchase commitment deliverable on or before the sale commitment date, are
held as "cover" for the transaction.
Unsettled TBA sale commitments are valued at the current market value of the
underlying securities, generally according to the procedures described under
"Security valuation" above. The contract is "marked-to-market" daily and the
change in market value is recorded by the fund as an unrealized gain or loss.
If the TBA sale commitment is closed through the acquisition of an offsetting
purchase commitment, the fund realizes a gain or loss. If the fund delivers
securities under the commitment, the fund realizes a gain or a loss from the
sale of the securities based upon the unit price established at the date the
commitment was entered into.
J) Line of credit The fund has entered into a committed line of credit with
certain banks. This line of credit agreement included restrictions that the
fund maintain an asset coverage ratio of at least 300% and borrowings must not
exceed prospectus limitations. For the period ended September 30, 1997, the
fund had no borrowings against the line of credit.
K) Federal taxes It is the policy of the fund to distribute all of its taxable
income within the prescribed time and otherwise comply with the provisions of
the Internal Revenue Code applicable to regulated investment companies. It is
also the intention of the fund to distribute an amount sufficient to avoid
imposition of any excise tax under Section 4982 of the Internal Revenue Code
of 1986, as amended. Therefore, no provision has been made for federal taxes
on income, capital gains or unrealized appreciation on securities held nor for
excise tax on income and capital gains.
L) Distributions to shareholders The fund declares a distribution each day
based upon the projected net investment income, for a specified period,
calculated as if earned prorata throughout the period on a daily basis. Such
distributions are recorded daily and paid monthly. Capital gain distributions,
if any, are recorded on the ex-dividend date and paid at least annually. The
amount and character of income and gains to be distributed are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles. Reclassifications are made to the fund's
capital accounts to reflect income and gains available for distribution (or
available capital loss carryovers) under income tax regulations.
M) 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.
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, and 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, 0.43% thereafter.
Putnam Management has agreed to limit its compensation (and, to the extent
necessary, bear other expenses) through March 31, 1998, to the extent that
expenses of the fund (exclusive of brokerage, interest, taxes, deferred
organizational and extraordinary expense, credits from Putnam Fiduciary Trust
Company (PFTC), a wholly-owned subsidiary of Putnam Investments, Inc. and
payments under the Trust's distribution plan) would 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 PFTC. Investor
servicing agent functions are provided by Putnam Investor Services, a division
of PFTC.
For the six months ended September 30, 1997, fund expenses were reduced by
$55,877 under expense offset arrangements with PFTC. Investor servicing and
custodian fees reported in the Statement of operations exclude these credits.
The fund could have invested a portion of the assets utilized in connection
with the expense offset arrangements in an income producing asset if it had
not entered into such arrangements.
Trustees of the fund receive an annual Trustees fee of $628 and an additional
fee for each Trustee's meeting attended. Trustees who are not interested
persons of Putnam Management and who serve on committees of the Trustees
receive additional fees for attendance at certain committee meetings.
The fund has adopted a Trustee Fee Deferral Plan (the "Deferral Plan") which
allows the Trustees to defer the receipt of all or a portion of Trustees Fees
payable on or after July 1, 1995. The deferred fees remain in the fund and are
invested in certain Putnam funds until distribution in accordance with the
Deferral Plan.
The fund has adopted an unfunded noncontributory defined benefit pension plan
(the "Pension Plan") covering all Trustees of the fund who have served as
Trustee for at least five years. Benefits under the Pension Plan are equal to
50% of the Trustee's average total retainer and meeting fees for the three
years preceding retirement. Pension expense for the fund is included in
Compensation of trustees in the Statement of operations. Accrued pension
liability is included in Payable for compensation of Trustees in the Statement
of assets and liabilities.
The fund has adopted distribution plans (the "Plans") with respect to its
class A, class B and class M shares pursuant to Rule 12b-1 under the
Investment Company Act of 1940. The purpose of the Plans is to compensate
Putnam Mutual Funds Corp., a wholly-owned subsidiary of Putnam Investments
Inc., for services provided and expenses incurred by it in distributing shares
of the fund. The Plans provide for payments by the fund to Putnam Mutual Funds
Corp. at an annual rate up to 0.35%, 1.00% and 1.00% of the average net assets
attributable to class A, class B and class M shares, respectively. The
Trustees currently limit payment by the fund to an annual rate of 0.25%, 1.00%
and 0.50% of the average net assets attributable to class A, class B and class
M shares respectively.
For the six months ended September 30, 1997, Putnam Mutual Funds Corp., acting
as underwriter received net commissions of $28,551 and $1,143 from the sale of
class A and class M shares, respectively and $62,837 in contingent deferred
sales charges from redemptions of class B shares. A deferred sales charge of
up to 1% is assessed on certain redemptions of class A shares. For the six
months ended September 30, 1997, Putnam Mutual Funds Corp., acting as
underwriter received $618 on class A redemptions.
Note 3
Purchase and sales of securities
During the six months ended September 30, 1997, purchases and sales of
investment securities other than U.S. government obligations and short-term
investments aggregated $125,022,485 and $106,647,995, respectively. Purchases
and sales of U.S. government obligations aggregated $28,581,382 and
$21,231,356, 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 835,000 10,396
- ------------------------------------------------------------
Options expired -- --
- ------------------------------------------------------------
Options closed -- --
- ------------------------------------------------------------
Written options
outstanding at
end of period 835,000 $10,396
- ------------------------------------------------------------
Note 4
Capital shares
At September 30, 1997, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
Six months ended
September 30, 1997
- ------------------------------------------------------------
Class A Shares Amount
- ------------------------------------------------------------
Shares sold 1,750,873 $14,894,891
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 136,029 1,166,081
- ------------------------------------------------------------
1,886,902 16,060,972
Shares
repurchased (972,624) (8,272,139)
- ------------------------------------------------------------
Net increase 914,278 $7,788,833
- ------------------------------------------------------------
Year ended
March 31, 1997
- ------------------------------------------------------------
Class A Shares Amount
- ------------------------------------------------------------
Shares sold 5,212,882 $44,031,671
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 150,568 1,278,981
- ------------------------------------------------------------
5,363,450 45,310,652
Shares
repurchased (1,120,900) (9,487,014)
- ------------------------------------------------------------
Net increase 4,242,550 $35,823,638
- ------------------------------------------------------------
Six months ended
September 30, 1997
- ------------------------------------------------------------
Class B Shares Amount
- ------------------------------------------------------------
Shares sold 2,334,832 $19,928,691
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 169,348 1,451,376
- ------------------------------------------------------------
2,504,180 21,380,067
Shares
repurchased (1,271,056) (10,841,045)
- ------------------------------------------------------------
Net increase 1,233,124 $10,539,022
- ------------------------------------------------------------
Year ended
March 31, 1997
- ------------------------------------------------------------
Class B Shares Amount
- ------------------------------------------------------------
Shares sold 7,538,742 $63,653,797
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 210,529 1,788,543
- ------------------------------------------------------------
7,749,271 65,442,340
Shares
repurchased (1,508,622) (12,784,744)
- ------------------------------------------------------------
Net increase 6,240,649 $52,657,596
- ------------------------------------------------------------
Six months ended
September 30, 1997
- ------------------------------------------------------------
Class M Shares Amount
- ------------------------------------------------------------
Shares sold 399,680 $3,386,027
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 22,125 189,683
- ------------------------------------------------------------
421,805 3,575,710
Shares
repurchased (175,057) (1,490,266)
- ------------------------------------------------------------
Net increase 246,748 $2,085,444
- ------------------------------------------------------------
Year ended
March 31, 1997
- ------------------------------------------------------------
Class M Shares Amount
- ------------------------------------------------------------
Shares sold 776,371 $6,554,558
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 23,144 196,556
- ------------------------------------------------------------
799,515 6,751,114
Shares
repurchased (161,416) (1,365,606)
- ------------------------------------------------------------
Net increase 638,099 $5,385,508
- ------------------------------------------------------------
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
A.J.C. Smith
W. Thomas Stephens
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
John D. Hughes
Senior Vice President and Treasurer
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Gary N. Coburn
Vice President
William J. Curtin
Vice President
Kenneth J. Taubes
Vice President and Fund Manager
Jennifer E. Leichter
Vice President and Fund Manager
Michael Martino
Vice President and Fund Manager
D. William Kohli
Vice President and Fund Manager
Gail A. Attridge
Vice President and Fund Manager
William N. Shiebler
Vice President
John R. Verani
Vice President
Paul M. O'Neil
Vice President
Beverly Marcus
Clerk and Assistant Treasurer
This report is for the information of shareholders of Putnam Diversified
Income Trust 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 the principal amount
invested.
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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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SA029 36850-896/2BQ/2BR 11/97
